Federal agencies reported improper payments of an estimated $125.4 billion in fiscal year 2010. This estimate represents about 5.5 percent of the $2.3 trillion of reported outlays for the related programs in fiscal year 2010. The $125.4 billion estimate is an increase of $16.2 billion from federal agencies’ prior year reported estimate of $109.2 billion. Estimated improper payment amounts for both of these years may include estimates based on prior years’ data, if current reporting year data were not available, as allowed by OMB guidance. The $125.4 billion in estimated federal improper payments reported for fiscal year 2010 was attributable to over 70 programs spread among 20 agencies. As shown in table 1, the highest reported improper payment estimated amounts were associated with 10 programs. Specifically, the 10 programs accounted for about $118 billion or 94 percent of the total estimated improper payments reported for fiscal year 2010. It is important to recognize that the $125.4 billion in improper payments federal agencies reported in fiscal year 2010 is not intended to be an estimate of fraud in federal agencies’ programs and activities. Rather, reported improper payment estimates include many types of overpayments, underpayments, and payments that were not adequately documented. Agencies cited a number of causes for the estimated $125.4 billion in reported improper payments, including insufficient documentation, incorrect computations, changes in program requirements, and in some cases fraud. Increases in the estimated amounts of improper payments reported for fiscal year 2010 were primarily attributable to increases in estimated improper payments related to four major programs: (1) Department of Labor’s Unemployment Insurance program, (2) Department of the Treasury’s Earned Income Tax Credit program, (3) Department of Health and Human Services’ (HHS) Medicaid program, and (4) HHS’ Medicare Advantage program. Agencies reported that the increases in the estimates for these programs were primarily attributable to an increase in program outlays. That was the case for the Medicaid and Medicare Advantage programs even though these two programs reported lower error rates. Both Unemployment Insurance and Earned Income Tax Credit programs reported higher program outlays and higher error rates for fiscal year 2010 when compared to fiscal year 2009. Since the implementation of IPIA in 2004, federal agencies have consistently identified new programs or activities as risk-susceptible and reported estimated improper payment amounts. fiscal year 2005—17 new programs or activities, fiscal year 2006—15 new programs or activities, fiscal year 2007—19 new programs or activities, fiscal year 2008—10 new programs or activities, fiscal year 2009—5 new programs or activities, and fiscal year 2010—2 new programs or activities. In addition, federal agencies have reported progress since 2004 in reducing improper payment amounts and payment error rates in some programs and activities. From the initial implementation of IPIA in 2004 through 2010, 28 programs have consistently reported estimated improper payment error rates for each year. Of these 28, 17 agency programs reported reduced error rates in comparison with their initial or baseline error rates reported in fiscal year 2004. Following are examples of agencies reporting reductions in program error rates and estimated improper payment amounts (along with corrective actions to reduce improper payments) in their fiscal year 2010 PARs, AFRs, or annual reports. HHS reported that the fiscal year 2010 Head Start program’s estimated improper payment amount decreased from the fiscal year 2009 amount of $213 million to $123 million, which represented a decrease in the error rate of 1.3 percentage points to a 1.7 percent error rate. HHS reported that it reduced payment errors by issuing additional guidance for employees on verifying income eligibility and a standard template form to help guide grantees in the enrollment process. The U.S. Department of Agriculture (USDA) reported that the fiscal year 2010 estimated improper payment amount for the Marketing Assistance Loan program decreased from the fiscal year 2009 reported amount of $85 million to $35 million, which represented a decrease in the error rate of 1.75 percentage points to a 0.81 percent error rate. USDA reported that corrective actions taken to reduce improper payments included providing additional training and instruction on improper payment control procedures, and integrating employees’ individual performance results related to reducing improper payments into annual performance ratings. Despite reported progress in reducing estimated improper payment amounts and error rates for some programs and activities during fiscal year 2010, federal agencies’ reporting indicates the federal government still faces challenges in this area. Agency reporting highlighted challenges that remain in meeting the requirements of IPIA, including determining the full extent of improper payments across the federal government and in reasonably assuring that effective actions are taken to reduce improper payments. Specifically, some federal agencies’ fiscal year 2010 reporting did not include information demonstrating that (1) risk assessments were conducted on all of their programs and activities, and (2) improper payment estimates were developed and reported for all risk-susceptible programs. IPIA required agencies to annually review all of their programs and activities to identify their risk of susceptibility to significant improper payments. However, two agencies—the United States Postal Service and the Department of Transportation—did not report on risk assessments of their programs and activities. The agencies either did not report any information on risk assessments in their PARs, AFRs, or annual reports, or included some risk assessment-related information (such as listing risk factors), but not on the results of any assessments of risk for all of their programs and activities. Further, IPIA required agencies to estimate improper payments for each program identified as susceptible to significant improper payments during the risk assessment process. However, three agencies did not report estimated improper payment amounts for fiscal year 2010 for seven risk- susceptible programs with significant amounts of outlays. Most notably, HHS has yet to report a comprehensive improper payment estimate amount for the Medicare Prescription Drug Benefit program, which had about $59 billion in outlays in fiscal year 2010. However, HHS expects to report a comprehensive estimate for this program in fiscal year 2011. While none of the seven risk-susceptible programs reported an improper payment estimated amount in fiscal year 2010 or 2009, all but one— Medicare Prescription Drug Benefit program—reported an improper payment estimated amount for fiscal year 2008. During fiscal year 2010, a number of actions were taken intended to strengthen the framework for reducing and reporting improper payments. First, in November 2009, the President issued Executive Order 13520, Reducing Improper Payments. This order was intended to focus on increasing transparency and accountability for reducing improper payments and creating incentives for reducing improper payments. Under the Executive Order, OMB established a Web site (www.PaymentAccuracy.gov) and designated 14 high-error programs to focus attention on the programs that significantly contribute to the federal government’s improper payments. The Web site provides information on (1) the programs’ senior accountable officials responsible for efforts to reduce improper payments; (2) current, targeted, and historical estimated rates of improper payments; (3) why improper payments occur in the programs; and (4) what federal agencies are doing to reduce improper payments and recover overpayments. The President also issued two memoranda in March and June 2010, intended to expand agency efforts to recapture improper overpayments using recapture audits, and directing the establishment of a Do Not Pay List to help prevent improper payments to ineligible recipients, respectively. In addition, in 2010, the President set goals, as part of the Accountable Government Initiative, for federal agencies to reduce overall improper payments by $50 billion, and recapture at least $2 billion in improper contract payments and overpayments to health providers, by the end of fiscal year 2012. In July 2010, Congress passed and the President signed IPERA. This legislation was intended to enhance reporting and the reduction of improper payments. In addition to amending the IPIA improper payment estimation requirements, IPERA established additional requirements related to (1) federal agency management accountability; (2) recovery auditing aimed at identifying and reclaiming payments made in error; (3) compliance and noncompliance determinations based on an inspector general’s assessment of an agency’s adherence to IPERA requirements and reporting that determination; and (4) an opinion on internal controls over improper payments. For example, regarding management accountability, IPERA requires agency managers, programs, and, where appropriate, states and localities, to be held accountable for achieving the law’s goals. This includes management’s use of the annual performance appraisal process to assess whether improper payment reduction targets were met and whether sufficient internal controls were established and maintained. In addition, IPERA included a new, broader requirement for agencies to conduct recovery audits, where cost-effective, for each program and activity with at least $1 million in annual program outlays. This IPERA provision significantly reduces the threshold requirement for conducting recovery audits from $500 million to $1 million and expands the scope for required recovery audits to all programs and activities. Previously, recovery audits were only required for agencies whose annual contract obligations exceeded the threshold. Another new IPERA provision calls for federal agencies’ inspectors general to annually determine whether their respective agencies are in compliance with key IPERA requirements and to report on their determinations. In closing, given the pressures resulting from today’s fiscal environment, the need to ensure that federal dollars are spent as intended is critical. While the increase in governmentwide improper payment estimates is alarming, federal agencies’ efforts to more comprehensively report on estimated improper payments represent a positive step to improve transparency over the full magnitude of federal improper payments for which corrective actions are necessary. With more federal dollars flowing into risk-susceptible programs, establishing effective accountability measures to prevent and reduce improper payments, and to recover overpayments, becomes an even higher priority. However, measuring improper payments and designing and implementing actions to reduce and prevent them are not simple tasks.