    [House Hearing, 106 Congress]
    [From the U.S. Government Publishing Office]

            H.R. 1827, THE GOVERNMENT WASTE CORRECTIONS ACT OF 1999

    =======================================================================

                                    HEARING

                                   before the

                     SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
                          INFORMATION, AND TECHNOLOGY

                                     of the

                         COMMITTEE ON GOVERNMENT REFORM
                            HOUSE OF REPRESENTATIVES

                           ONE HUNDRED SIXTH CONGRESS

                                 FIRST SESSION

                                       ON

                                   H.R. 1827

       TO IMPROVE THE ECONOMY AND EFFICIENCY OF GOVERNMENT OPERATIONS BY
            REQUIRING THE USE OF RECOVERY AUDITS BY FEDERAL AGENCIES

                                   __________

                                 JUNE 29, 1999

                                   __________

                               Serial No. 106-104

                                   __________

           Printed for the use of the Committee on Government Reform

      Available via the World Wide Web: http://www.gpo.gov/congress/house
                         http://www.house.gov/reform
                                     ______

                        U.S. GOVERNMENT PRINTING OFFICE
    63-548 CC                    WASHINGTON : 2000

                         COMMITTEE ON GOVERNMENT REFORM

                         DAN BURTON, Indiana, Chairman
    BENJAMIN A. GILMAN, New York         HENRY A. WAXMAN, California
    CONSTANCE A. MORELLA, Maryland       TOM LANTOS, California
    CHRISTOPHER SHAYS, Connecticut       ROBERT E. WISE, Jr., West Virginia
    ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
    JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
    STEPHEN HORN, California             PAUL E. KANJORSKI, Pennsylvania
    JOHN L. MICA, Florida                PATSY T. MINK, Hawaii
    THOMAS M. DAVIS, Virginia            CAROLYN B. MALONEY, New York
    DAVID M. McINTOSH, Indiana           ELEANOR HOLMES NORTON, Washington,
    MARK E. SOUDER, Indiana                  DC
    JOE SCARBOROUGH, Florida             CHAKA FATTAH, Pennsylvania
    STEVEN C. LaTOURETTE, Ohio           ELIJAH E. CUMMINGS, Maryland
    MARSHALL ``MARK'' SANFORD, South     DENNIS J. KUCINICH, Ohio
        Carolina                         ROD R. BLAGOJEVICH, Illinois
    BOB BARR, Georgia                    DANNY K. DAVIS, Illinois
    DAN MILLER, Florida                  JOHN F. TIERNEY, Massachusetts
    ASA HUTCHINSON, Arkansas             JIM TURNER, Texas
    LEE TERRY, Nebraska                  THOMAS H. ALLEN, Maine
    JUDY BIGGERT, Illinois               HAROLD E. FORD, Jr., Tennessee
    GREG WALDEN, Oregon                  JANICE D. SCHAKOWSKY, Illinois
    DOUG OSE, California                             ------
    PAUL RYAN, Wisconsin                 BERNARD SANDERS, Vermont
    HELEN CHENOWETH, Idaho                   (Independent)
    DAVID VITTER, Louisiana

                          Kevin Binger, Staff Director
                     Daniel R. Moll, Deputy Staff Director
               David A. Kass, Deputy Counsel and Parliamentarian
                          Carla J. Martin, Chief Clerk
                     Phil Schiliro, Minority Staff Director

       Subcommittee on Government Management, Information, and Technology

                       STEPHEN HORN, California, Chairman
    JUDY BIGGERT, Illinois               JIM TURNER, Texas
    THOMAS M. DAVIS, Virginia            PAUL E. KANJORSKI, Pennsylvania
    GREG WALDEN, Oregon                  MAJOR R. OWENS, New York
    DOUG OSE, California                 PATSY T. MINK, Hawaii
    PAUL RYAN, Wisconsin                 CAROLYN B. MALONEY, New York

                                   Ex Officio

    DAN BURTON, Indiana                  HENRY A. WAXMAN, California
              J. Russell George, Staff Director and Chief Counsel
                    Bonnie Heald, Director of Communications
                              Grant Newman, Clerk
              Mark Stephenson, Minority Professional Staff Member

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on June 29, 1999....................................     1
        Text of H.R. 1827............................................     3
    Statement of:
        Dinkins, Paul, executive vice president, Profit Recovery
          Group International, accompanied by Jack Kenny, the
          director for government, Profit Recovery Group
          International, Inc.; Douglas R. Wilwerding, chief executive
          officer and president, Omnium Worldwide Inc.; Terrence
          Lyons, director of accounting, Walgreen Co.; Stephen R.
          Booma, health care consultant; and Robert Koehler,
          attorney-at-law, Patton Boggs, on behalf of the American
          Logistics Association......................................   210
        Lee, Deidre, Acting Deputy Director for Management, Office of
          Management and Budget; George H. Allen, Deputy Commander,
          Defense Supply Center of Philadelphia; Gerald R. Peterson,
          Chief, Accounts Payable Division, Army-Air Force Exchange
          Service; and Michelle Snyder, Director, Financial
          Management Office, Chief Financial Officer of the Health
          Care Financing Administration..............................    50
        Walker, David D., Comptroller General, General Accounting
          Office.....................................................    19
    Letters, statements, et cetera, submitted for the record by:
        Allen, George H., Deputy Commander, Defense Supply Center of
          Philadelphia, prepared statement of........................    58
        Booma, Stephen R., health care consultant, prepared statement
          of.........................................................   237
        Burton, Hon. Dan, a Representative in Congress from the State
          of Indiana:
            Prepared statement of....................................    17
            Regulatory News article..................................    15
        Dinkins, Paul, executive vice president, Profit Recovery
          Group International, prepared statement of.................   213
        Horn, Hon. Stephen, a Representative in Congress from the
          State of California, prepared statement of.................     8
        Koehler, Robert, attorney-at-law, Patton Boggs, on behalf of
          the American Logistics Association, prepared statement of..   244
        Lee, Deidre, Acting Deputy Director for Management, Office of
          Management and Budget:
            BEA scoring obstacle to implementing gainsharing.........   102
            Information concerning a pilot study.....................    82
            Prepared statement of....................................    52
        Lyons, Terrence, director of accounting, Walgreen Co.,
          prepared statement of......................................   231
        Peterson, Gerald R., Chief, Accounts Payable Division, Army-
          Air Force Exchange Service, prepared statement of..........    67
        Snyder, Michelle, Director, Financial Management Office,
          Chief Financial Officer of the Health Care Financing
          Administration:
            DOJ's guidelines.........................................    89
            HHS Y2K quarterly reports................................   106
            Information concerning dollar amounts....................    86
            June 1999 program memorandum.............................   205
            Prepared statement of....................................    77
        Turner, Hon. Jim, a Representative in Congress from the State
          of Texas, prepared statement of............................    10
        Walker, David D., Comptroller General, General Accounting
          Office:
            Information concerning overpayments......................39, 45
            Prepared statement of....................................    23
        Wilwerding, Douglas R., chief executive officer and
          president, Omnium Worldwide Inc., prepared statement of....   221

            H.R. 1827, THE GOVERNMENT WASTE CORRECTIONS ACT OF 1999

                                  ----------

                             TUESDAY, JUNE 29, 1999

                      House of Representatives,
    Subcommittee on Government Management, Information,
                                        and Technology,
                                Committee on Government Reform,
                                                        Washington, DC.
        The subcommittee met, pursuant to notice, at 2:01 p.m., in
    room 2247, Rayburn House Office Building, Hon. Stephen Horn
    (chairman of the subcommittee) presiding.
        Present: Representatives Horn, Walden, Ose, Burton, and
    Turner.
        Staff present: J. Russell George, staff director; Randy
    Kaplan, counsel; Bonnie Heald, communications director; Matthew
    Ebert, policy advisor; Jane Cobb, professional staff member,
    Committee on Government Reform; Grant Newman, clerk; Justin
    Schleuter, Paul Wicker, Lauren Lefton, and John Phillips,
    interns; Michelle Ash and Faith Weiss, minority counsels; Mark
    Stephenson, minority professional staff member; and Earley
    Green, minority staff assistant.
        Mr. Horn. The Subcommittee on Government Management,
    Information, and Technology will come to order.
        Fraud, waste, and error in Federal programs and activities
    are costing taxpayers billions of dollars each year. Earlier
    this session, the Subcommittee on Government Management,
    Information, and Technology held its annual series of hearings
    on the Federal Government's financial management practices. On
    March 31, 1999, this subcommittee held a hearing examining the
    Governmentwide Consolidated Financial Statement. The audit of
    this governmentwide financial statement, performed by the
    General Accounting Office, illustrated the broad array of
    financial management problems faced by the Federal Government.
        The report confirmed that tens of billions of taxpayer
    dollars are being lost each year to waste, abuse, and
    mismanagement in hundreds of programs within the executive
    branch of the Federal Government. Improper payments made to
    vendors and others supplying goods and services to Federal
    departments and agencies is one of the most serious areas of
    waste and error. According to the General Accounting Office,
    Federal departments and agencies were unable to determine the
    full extent of improper payments in major programs, estimated
    to involve billions of dollars each year.
        At the Department of Defense, the General Accounting Office
    reported that among the most serious financial management
    weaknesses was the Department's inability to determine the full
    extent of improper payments. The Health Care Financing
    Administration's Medicare Program was cited by the General
    Accounting Office as a high-risk area for fraud, waste, and
    abuse. In 1998, there was an estimated $12.6 billion in
    Medicare overpayments.
        Today we will examine H.R. 1827, the Government Waste
    Corrections Act of 1999, introduced by my colleague and the
    chairman of this full committee, the Committee on Government
    Reform, Representative Dan Burton of Indiana. This legislation
    offers a potential solution to address the billions of dollars
    of erroneous overpayments made each year. This bill would
    require executive branch departments and agencies to use a
    process called, ``recovery auditing,'' to review Federal
    payment transactions to identify and recover erroneous
    overpayments.
        Recovery auditing is a process of reviewing payment
    transactions to identify and recover incorrect payments.
    Payments for goods and services can be processed incorrectly
    for a variety of reasons. Vendors can make pricing errors on
    their invoices. They may forget to award discounts. Or they can
    neglect to offer allowances and rebates. Recovery auditors
    review payment transactions to identify three types of errors.
        For decades, private sector companies have successfully
    used recovery auditing to identify and collect erroneous
    overpayments. Recovery auditing is currently used to a limited
    extent in the Federal Government. H.R. 1827 would expand the
    use of recovery auditing to all executive branch departments
    and agencies for payment activities of at least $10 million
    annually.
        Recovery audits could be conducted in house or contracted
    out to a private recovery audit firm. The bill would require
    recovery auditors to report on the factors causing overpayments
    and steps that can be taken to reduce such overpayment. To
    encourage agencies to participate in recovery auditing, the
    bill would allow agencies to be reimbursed for costs they incur
    for their recovery audit efforts. Additional amounts collected
    could be used by the agency to carry out management improvement
    programs.
        The subcommittee will hear from a variety of public and
    private sector witnesses who will discuss the provisions of
    H.R. 1827, including the application of recovery auditing to
    the Federal Government. I welcome our witnesses. We look
    forward to their testimony. And I am delighted now to yield for
    an opening statement to Mr. Turner of Texas, the ranking member
    on this committee. And we are delighted to have you here, Jim.
    It is all yours.
        [The text of H.R. 1827 and the prepared statement of Hon.
    Stephen Horn follow:]
    106th CONGRESS
    1st Session
                                   H. R. 1827

       To improve the economy and efficiency of Government operations by
           requiring the use of recovery audits by Federal agencies.

                                     ______

                        IN THE HOUSE OF REPRESENTATIVES

                                  May 17, 1999

    Mr. Burton of Indiana (for himself, Mr. Armey, and Mr. Ose) introduced
     the following bill; which was referred to the Committee on Government
                                     Reform

                                     ______

                                     A BILL

       To improve the economy and efficiency of Government operations by
           requiring the use of recovery audits by Federal agencies.

        Be it enacted by the Senate and House of Representatives of the
    United States of America in Congress assembled,

    SECTION 1. SHORT TITLE.

        This Act may be cited as the ``Government Waste Corrections Act of
    1999''.

    SEC. 2. FINDINGS AND PURPOSES.

        (a) Findings.--The Congress finds the following:
                (1) In private industry, overpayments to providers of goods
            and services occur for a variety of reasons, including
            duplicate payments, pricing errors, and missed cash discounts,
            rebates, or other allowances. The identification and recovery
            of such overpayments, commonly referred to as ``recovery
            auditing'', is an established private sector business practice
            with demonstrated large financial returns. On average, recovery
            audits in the private sector identify payment error rates of
            0.1 percent of purchases audited and result in the recovery of
            $1,000,000 for each $1,000,000,000 of purchases.
                (2) Overpayments are a serious problem for Federal
            agencies, given the magnitude and complexity of Federal
            operations and documented and widespread financial management
            weaknesses. Federal agency overpayments waste tax dollars and
            detract from the efficiency and effectiveness of Federal
            operations by diverting resources from their intended uses.
                (3) Recovery auditing already has been employed
            successfully in limited areas of Federal activity. It has great
            potential for expansion to many other Federal agencies and
            activities, thereby resulting in the recovery of substantial
            amounts of overpayments annually. Limited recovery audits
            conducted to date have identified errors averaging 0.4 percent
            of Federal payments audited, or $4,000,000 for every
            $1,000,000,000 of payments. If fully implemented within the
            Federal Government, recovery auditing has the potential to
            recover billions of dollars in Federal overpayments annually.
        (b) Purposes.--The purposes of this Act are the following:
                (1) To require the use of recovery audits by Federal
            agencies.
                (2) To provide incentives and resources to improve Federal
            management practices with the goal of significantly reducing
            Federal overpayment rates and other waste and error in Federal
            programs.

    SEC. 3. ESTABLISHMENT OF RECOVERY AUDITS REQUIREMENT.

        (a) Establishment of Requirement.--Chapter 35 of title 31, United
    States Code, is amended by adding at the end the following:

                        ``SUBCHAPTER VI--RECOVERY AUDITS

    ``Sec. 3561. Definitions

        ``In this subchapter, the following definitions apply:
                ``(1) Director.--The term `Director' means the Director of
            the Office of Management and Budget.
                ``(2) Payment activity.--The term `payment activity' means
            an executive agency activity that entails making payments to--
                        ``(A) vendors or other entities that provide
                    property or services for the direct benefit or use of
                    an executive agency; or
                        ``(B) entities that provide services or make
                    payments on behalf of the Federal Government pursuant
                    to contractual arrangements with an executive agency.
                ``(3) Recovery audit.--The term `recovery audit' means an
            auditing process to identify overpayments made by executive
            agencies to vendors and other commercial entities in connection
            with a payment activity, including overpayments that result
            from duplicate payments, pricing errors, failure to provide
            applicable discounts, rebates, or other applicable allowances,
            or charges or payments that are not authorized by law,
            regulation, or other applicable requirements.

    ``Sec. 3562. Recovery audit requirement

        ``(a) In General.--Except as provided in subsection (d), the head
    of each executive agency--
                ``(1) shall conduct recovery audits with respect to each
            payment activity of the executive agency that expends
            $10,000,000 or more annually; and
                ``(2) may conduct recovery audits for any other payment
            activity of the executive agency.
        ``(b) Procedures.--In conducting recovery audits under this
    section, the head of an executive agency--
                ``(1) shall give priority to the most recent payments;
                ``(2) shall implement this section in a manner designed to
            ensure the greatest financial benefit to the Government; and
                ``(3) may conduct recovery audits directly, by procuring
            performance of recovery audits by contract (subject to the
            availability of appropriations), or by any combination thereof.
        ``(c) Recovery Audit Contracts.--
                ``(1) Executive agency authorities.--With respect to
            recovery audits procured by an executive agency by contract--
                        ``(A) notwithstanding section 3302(b) of this
                    title, the executive agency head may pay the contractor
                    an amount not to exceed 25 percent of the total amount
                    recovered by the executive agency, through setoff and
                    otherwise, solely on the basis of information obtained
                    as a result of audits performed by the contractor under
                    the contract;
                        ``(B) the executive agency head may authorize the
                    contractor (subject to subparagraph (C)) to notify
                    entities of potential overpayments, to respond to
                    questions concerning potential overpayments, and to
                    take other administrative actions with respect to
                    overpayment claims; and
                        ``(C) subject to section 3711 of this title, the
                    executive agency head shall have final authority to
                    resolve disputes, to compromise or terminate
                    overpayment claims, to collect by setoff, and to
                    initiate litigation or referrals for litigation.
                ``(2) Contract terms and conditions.--The head of an
            executive agency shall include in each contract for procurement
            of performance of a recovery audit a requirement that the
            contractor shall--
                        ``(A) provide to the executive agency periodic
                    reports on conditions giving rise to overpayments
                    identified by the contractor and any recommendations on
                    how to mitigate such conditions; and
                        ``(B) notify the executive agency of any
                    overpayments identified by the contractor pertaining to
                    the executive agency or to another executive agency
                    that are beyond the scope of the contract.
                ``(3) Executive agency action following notification.--The
            head of an executive agency shall take prompt and appropriate
            action in response to a notification by a contractor under
            subparagraph (A) or (B) of paragraph (2), including forwarding
            to other executive agencies any information that applies to
            them.
        ``(d) Exemptions.--The Director may exempt any executive agency
    payment activity from the requirement of subsection (a)(1) if the
    Director determines that conducting recovery audits for that payment
    activity would not be practical or cost-effective.

    ``Sec. 3563. Recovery audit model programs

        ``(a) In General.--The Director, after consulting with executive
    agency heads, shall designate not less than five recovery audit model
    programs. The designated model programs shall--
                ``(1) reflect a representative range of executive agencies,
            program activities, and payment practices; and
                ``(2) continue for a period of at least one year.
        ``(b) Purpose.--The purpose of the model programs designated under
    this section is to stimulate and enhance recovery audits in the Federal
    Government by developing best practices and otherwise identifying ways
    to make recovery audits more effective. In designating the model
    programs, the Director shall ensure that the designated programs
    complement, and in no way preempt or delay, other Federal recovery
    audit activities.

    ``Sec. 3564. Disposition of amounts collected

        ``(a) In General.--Notwithstanding section 3302(b) of this title,
    amounts an executive agency collects, by setoff and otherwise, each
    fiscal year through recovery audits conducted under this subchapter
    shall be treated in accordance with this section.
        ``(b) Use for Recovery Audit Costs.--Not more than one quarter of
    the amounts collected by an executive agency through recovery audits
    shall be available to meet obligations to recovery audit contractors
    and to reimburse applicable appropriations for other recovery audit
    costs incurred by the executive agency.
        ``(c) Use for Management Improvement Program.--Not more than one
    half of the amounts collected by an executive agency through recovery
    audits--
                ``(1) shall be available to the head of the executive
            agency to carry out the management improvement program of the
            agency under section 3565 of this title;
                ``(2) may be credited for that purpose by the agency head
            to any agency appropriations and funds that are available for
            obligation at the time of collection; and
                ``(3) shall remain available for the same period as the
            appropriation or fund to which credited.
        ``(d) Use for Original Purpose.--Not more than one quarter of the
    amounts collected--
                ``(1) shall be credited to the appropriation or fund, if
            any, available for obligation at the time of collection for the
            same general purposes as the appropriation or fund from which
            the overpayment was made; and
                ``(2) shall remain available for the same period and
            purposes as the appropriation or fund to which credited.
        ``(e) Remainder.--Amounts collected that are not applied in
    accordance with subsection (b), (c), or (d) shall be deposited in the
    Treasury as miscellaneous receipts.
        ``(f) Limitation of Amounts.--In accordance with section 1512(d) of
    this title, the Director may reserve amounts made available to an
    executive agency under subsections (b) through (d) to the extent the
    Director determines that the full amounts otherwise available cannot be
    used productively for the purposes for which they are made available.

    ``Sec. 3565. Management improvement program

        ``(a) In General.--
                ``(1) Requirement.--The head of each executive agency shall
            conduct a management improvement program, consistent with rules
            prescribed by the Director.
                ``(2) Program features.--In conducting the program, the
            head of the executive agency--
                        ``(A) shall, as the first priority of the program,
                    address problems that contribute directly to agency
                    overpayments; and
                        ``(B) may seek to reduce errors and waste in other
                    executive agency programs and operations by improving
                    the executive agency's staff capacity, information
                    technology, and financial management.
                ``(3) Integration with other activities.--The head of an
            executive agency--
                        ``(A) subject to subparagraph (B), may integrate
                    the program under this section, in whole or in part,
                    with other executive agency management improvement
                    programs and activities; and
                        ``(B) must retain the ability to account
                    specifically for the use of amounts made available
                    under section 3465(b) of this title.
        ``(b) Awards.--
                ``(1) In general.--The head of an executive agency may,
            under the program under this section and subject to the
            availability of appropriations, pay cash awards to career
            employees of the executive agency who have made extraordinary
            contributions to improving the executive agency's operations in
            a way that demonstrably and substantially reduces waste and
            error by the executive agency.
                ``(2) Terms and conditions.--An award under this subsection
            shall be subject to the following terms and conditions:
                        ``(A) An award may be granted to an individual
                    employee or to a group of employees, in any amount not
                    exceeding $150,000 for any individual.
                        ``(B) The award must be based on a written
                    determination by the executive agency head that the
                    awardee (or the group of awardees, collectively) was
                    directly and primarily responsible for actions that
                    result in tangible cost savings to the executive agency
                    of at least double the amount of the award.
                        ``(C) The Director must concur in any award that
                    exceeds $50,000 to any individual.
                        ``(D) The awards shall be in addition to any pay
                    and allowances to which an employee is otherwise
                    entitled, and shall not affect an employee's
                    eligibility for other bonuses and awards.
                        ``(E) The award shall be subject to such additional
                    terms and conditions as may be prescribed by the
                    Director.
                ``(3) Career employee defined.--In this subsection the term
            `career employee' means any employee of an executive agency,
            other than--
                        ``(A) a noncareer appointee, limited term
                    appointee, or limited emergency appointee (as such
                    terms are defined in section 3132(a) of title 5) in the
                    Senior Executive Service; and
                        ``(B) an employee in a position that has been
                    excepted from the competitive service by reason of its
                    confidential, policy-determining, policy-making, or
                    policy-advocating character.

    ``Sec. 3566. Responsibilities of the Office of Management and Budget

        ``(a) In General.--The Director shall be responsible for
    coordinating and overseeing the implementation of this subchapter.
        ``(b) Guidance.--In addition to the Director's specific
    responsibilities under this subchapter, the Director shall issue rules
    and provide support to agencies in implementing the subchapter. The
    Director shall issue initial rules not later than 90 days after the
    date of enactment of this subchapter.
        ``(c) Reports.--
                ``(1) In general.--Not later than one year after the date
            of the enactment of this subchapter, and annually for each of
            the two years thereafter, the Director shall submit a report on
            implementation of the subchapter to the President, the
            Committee on Government Reform of the House of Representatives,
            the Committee on Governmental Affairs of the Senate, and the
            Committee on Appropriations of the House of Representatives and
            of the Senate.
                ``(2) Contents.--Each report shall include--
                        ``(A) a general description and evaluation of the
                    steps taken by executive agencies to conduct recovery
                    audits, including an inventory of the programs and
                    activities of each executive agency that are subject to
                    recovery audits;
                        ``(B) a description of any exemptions from recovery
                    audits made under section 3562(d) of this title;
                        ``(C) a description and evaluation of the recovery
                    audit model programs conducted under section 3563 of
                    this title, that shall include--
                                ``(i) an assessment of the benefits of the
                            programs;
                                ``(ii) an identification of best practices
                            from the programs that could be applied to
                            other recovery audit activities; and
                                ``(iii) an identification of any
                            significant problems or barriers to more
                            effective recovery audits that were experienced
                            in the model programs;
                        ``(D) a description of executive agency management
                    improvement programs under section 3565 of this title,
                    including a description of any awards under section
                    3565(b) of this title; and
                        ``(E) any recommendations for changes in executive
                    agency practices or law or other improvements that the
                    Director believes would enhance the effectiveness of
                    executive agency recovery auditing.

    ``Sec. 3567. General Accounting Office reports

        ``Not later than 60 days after issuance of each report under
    section 3566(c) of this title, the Comptroller General of the United
    States shall submit a report on the implementation of this subchapter
    to the Committee on Government Reform of the House of Representatives,
    the Committee on Governmental Affairs of the Senate, the Committee on
    Appropriations of the House of Representatives and of the Senate, and
    the Director.''.
        (b) Application to All Executive Agencies.--Section 3501 of title
    31, United States Code, is amended by inserting ``and subchapter VI of
    this chapter'' after ``section 3513''.
        (c) Deadline for Initiation of Recovery Audits.--The head of each
    executive agency shall begin the first recovery auditing under section
    3562 of title 31, United States Code, as amended by this section, by
    not later than 6 months after the date of the enactment of this Act.
        (d) Clerical Amendment.--The analysis at the beginning of chapter
    35 of title 31, United States Code, is amended by adding at the end the
    following:

                        ``SUBCHAPTER VI--RECOVERY AUDITS

    ``3561. Definitions.
    ``3562. Recovery audit requirement.
    ``3563. Recovery audit model programs.
    ``3564. Disposition of amounts collected.
    ``3565. Management improvement program.
    ``3566. Responsibilities of the Office of Management and Budget.
    ``3567. General Accounting Office reports.

                                       -

        [GRAPHIC] [TIFF OMITTED] T3548.001

        Mr. Turner. Thank you, Mr. Chairman. This hearing, of
    course, is focused on a piece of legislation that the chairman
    of this committee, Mr. Burton, introduced last year which seeks
    to make recovery auditing mandatory for Federal agencies. I
    appreciate Chairman Horn's interest in this issue and his
    willingness to focus on it by holding this hearing.
        As we know, the Federal Government erroneously pays vendors
    and contractors billions of dollars each year and, through a
    series of financial management hearings held by this
    subcommittee, we have learned, for example, that the Medicare
    system made approximately $12 billion in erroneous payments in
    fiscal year 1998 revealing an error rate of 7 percent.
    Obviously, these kinds of errors and mistakes do not need to
    exist in our Federal agencies and I commend Chairman Burton as
    well as Chairman Horn for focusing on this problem, continuing
    to search for solutions such as recovery auditing.
        Mr. Chairman, thank you again for the opportunity to be a
    part of this very important hearing.
        [The prepared statement of Hon. Jim Turner follows:]

        [GRAPHIC] [TIFF OMITTED] T3548.002

        [GRAPHIC] [TIFF OMITTED] T3548.003

        [GRAPHIC] [TIFF OMITTED] T3548.004

        Mr. Horn. I thank the gentleman. And we are waiting for
    Chairman Burton. He should be here in a minute or so. So we
    will be in recess for a minute or so. When Mr. Burton arrives,
    we will have the statement read into the record.
        In the meantime, let me note, this is for some of you that
    have been here before, before this subcommittee or any
    subcommittee of the Government Reform Committee, we swear in
    all witnesses. And when we have you at the table, such as panel
    two where there are four witnesses, when we call on you in that
    sequence, the document you have given us in writing, we have
    read. And that automatically goes into the record without any
    additional motions. And we would like you to summarize those
    statements so there is more dialog with the committee members
    on both sides of the aisle to ask questions and get to the core
    of the matter.
        And we are now delighted to introduce the gentleman from
    Indiana, the chairman of the Committee on Government Reform,
    for an opening statement.
        Mr. Burton. I want to thank you, Mr. Chairman. And you will
    see, first of all, I am out of breath because I am out of
    shape. And, second, I am wearing sunglasses because I forgot to
    change these. So I don't want you to think I am a movie star or
    think I am.
        Thank you, Chairman Horn, for holding this hearing on H.R.
    1827, the Government Waste Corrections Act.
        One of my highest priorities as chairman of the Committee
    on Government Reform is to attack the widespread fraud, waste,
    and error in Federal programs and activities that cost
    taxpayers billions of dollars every year. One area where we
    bleed millions of dollars every day is in overpayments for
    contractors that often go undetected and almost never get
    repaid. Many agencies could benefit from the use of recovery
    auditing. Several of these could see substantial gains.
        The Department of Defense, the Environmental Protection
    Agency, NASA, and the Department of Energy have all been on
    GAO's high-risk list for almost 10 years for contract
    management problems. These agencies represent about $140
    billion worth of contracts yearly. DOD alone represents about
    $100 billion of this spending. How much of this is wasted in
    overpayments has not been calculated, but with the problems
    associated with these contracting operations, I would bet that
    the figures are pretty high.
        Another high-dollar, high-risk area is Medicare. Of about
    $200 billion it pays out annually, overpayments in Medicare's
    fee for service claims last year were estimated at $12.6
    billion. That is $12.6 billion in just 1 year. Over the past 3
    years, this figure is estimated at over $56 billion. This
    needless waste of money year after year significantly distorts
    the true costs of Medicare. Mr. Chairman, if nothing else,
    recovery auditing should be mandated to recoup Medicare
    overpayments.
        I just hope that when the bill passes and these
    overpayments start coming back, the checks won't be returned as
    is the current practice. And I would like to say that, Mr.
    Chairman, that I read an article that was in the Regulatory
    News and it indicated that some of these checks are being
    returned because they don't know what to do with them. And we
    certainly want to make sure that that is corrected, because if
    people are sending overpayments back to the Treasury and to the
    government----
        Mr. Horn. Without objection, that article will be put in
    the record at this point.
        [The information referred to follows:]

        [GRAPHIC] [TIFF OMITTED] T3548.005

        Mr. Burton. Thank you, Mr. Chairman. And this is even when
    providers voluntarily return the money, their checks are still
    returned. Mr. Chairman, I hope your subcommittee will try to
    get some answers from the representatives from HCFA today on
    that very problem.
        Let me briefly describe what my bill does. The bill
    requires agencies to conduct recovery auditing to identify and
    collect overpayments for programs that spend $10 million or
    more annually. Up to 25 percent of the money collected back can
    be used to pay the recovery audit firm, so there is no payment
    to the contractor unless the overpayments are returned. The
    bill also allows agencies to put 25 percent of collections back
    into the programs and activities from which the overpayments
    originated. Mr. Chairman, this is to provide agencies that need
    an incentive to commit to this activity.
        Requiring agencies to identify and recover overpayments is
    only one of the bill's key objectives. The other is to remedy
    the root causes that gave rise to the overpayments in the first
    place. To this end, the bill also allows for some of the money
    recovered to be available to the agency to make improvements to
    their financial and other internal systems in order to prevent
    overpayments and reduce other problems of waste and error in
    the future. Recovered moneys not used for these purposes will
    get returned to the Treasury.
        Mr. Chairman, this bill holds great promise. In places
    where recovery auditing has been tested in government, it has
    proven effective. For instance, the Army-Air Force exchange
    program [AAFES] has 16 years of experience with recovery
    auditing, having begun the practice in 1983. With purchases of
    approximately $6.5 billion annually, over $100 million has been
    recovered over the past 5 years.
        In another example, the Defense Department has been
    conducting a recovery auditing demonstration program at its
    supply center in Philadelphia. Looking at purchase transactions
    from fiscal years 1993 to 1995, over $27 million in
    overpayments have been identified. Given the billions of
    dollars we spend to procure goods and services annually and the
    magnitude of the overpayment problem in our current programs,
    this bill has enormous potential to achieve substantial cost
    savings and benefits for the government and the American
    taxpayer.
        Mr. Chairman, I stand ready to work with you, our
    Democratic colleagues, and this administration to make whatever
    improvements that are necessary to get the best bill possible.
    I want to thank you again for moving forward with the
    subcommittee consideration of this very important bill. And I
    apologize, once again, for my tardiness.
        [The prepared statement of Hon. Dan Burton follows:]

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        Mr. Horn. We thank you for putting in this bill. We think
    it has a lot of merit.
        Now if the Comptroller General will stand and raise his
    right hand?
        [Witness sworn.]
        Mr. Horn. The clerk will note that the witness affirmed the
    oath.
        And we are delighted to have you with us. It is an honor.
    And we hope you have enjoyed your first few months on the job,
    which is one of the most important in the United States. So
    welcome.

      STATEMENT OF DAVID D. WALKER, COMPTROLLER GENERAL, GENERAL
                           ACCOUNTING OFFICE

        Mr. Walker. Thank you. Chairman Horn, Chairman Burton,
    Ranking Member Turner, I appreciate the opportunity to discuss
    H.R. 1827, the Government Waste Corrections Act of 1999 and its
    relationship to the longstanding issues of government
    accountability for use of public moneys, overpayments, and the
    role of recovery auditing in identifying and recovering
    overpayments.
        One of the most important issues facing the government
    today is the need for greater accountability in managing the
    finances of our national government. It is a significant
    problem at many agencies and one that has been the subject of
    frequent reports by us and others. One key aspect of the
    problem is the difficulty the government has in assuring proper
    payment of all of its bills while avoiding overpayments. My
    testimony today will discuss the dimensions of the overpayment
    problem, our past work on the DOD recovery auditing
    demonstration program, and the Government Waste Corrections Act
    of 1999.
        My comments on the bill reflect my belief that there are
    three principles that should guide any recovery auditing
    program. First, there should be meaningful incentives for
    agencies to want to participate in the program and to make it
    work. Second, there should be adequate safeguards to ensure
    that the program is implemented in a manner intended by
    Congress and that it preserves the integrity of the
    congressional appropriations process. And, third, there should
    be transparency in the conduct of the program. That is, there
    should be evaluation reporting on program implementation, to
    include the amounts recovered under the program and how they
    are used. In the context of these three principles, I will
    suggest opportunities to strengthen the bill.
        Significant financial systems' weaknesses, problems with
    fundamental recordkeeping and financial reporting, incomplete
    documentation, and weak internal controls continue to prevent
    the government from effectively managing its operations.
    Significant among these problems is the inability of Federal
    agencies to determine the full extent of improper payments that
    occur in major programs estimated to involve billions of
    dollars annually.
        Within the estimated billions of dollars of improper
    payments, the amount of exact overpayments that are involved is
    unknown. Given the poor state of the financial accounting
    record at many agencies, neither the Federal agencies nor we
    have a very good estimate of the extent of overpayments that
    occur each year, yet we expect that they are significant. We
    know, for example, that between the years 1994 and 1998,
    contractors returned about $4.6 billion in overpayments to the
    Department of Defense alone.
        Across government, improper payments, which includes
    overpayments, occur in a variety of programs and activities,
    including those related to contract management, Federal
    financial assistance, and tax refunds. Reported estimates of
    improper payments total billions of dollars annually. Such
    payments can result from incomplete or inaccurate data used to
    make payment decisions, insufficient monitoring or oversight,
    and other deficiencies in agency information systems and
    controls.
        The risk of improper payments is increased in programs
    involving one of three criteria: first, complex criteria for
    computing payments; second, a significant volume of
    transactions; and, third, an emphasis on expediting payments.
    The reasons for improper payments range from inadvertent errors
    to fraud and abuse.
        Recovery auditing offers the potential to identify and
    recover some of these overpayments. Recovery auditing started
    about 30 years ago and it is used in several industries
    including the automotive, retail, and food service industries.
    The DOD, the Army and Air Force Exchange Service, and the Navy
    exchange service, use recovery auditing. An external audit
    recovery group may be the only group used by an organization or
    it may be used in combination with internal resources that
    examine invoices for overpayments prior to an external group's
    review.
        Recognizing its potential to the government, in fiscal year
    1996, the National Defense Authorization Act required the
    Secretary of Defense to conduct a demonstration project to
    evaluate the feasibility of using recovery auditing and to
    identify overpayments made to vendors by DOD. Authority to
    expand the program was provided in fiscal year 1998 under the
    National Defense Authorization Act.
        The DOD demonstration project began in September 1996 when
    the Defense supply center in Philadelphia competitively
    contracted with Profit Recovery Group International [PRGI]. The
    contract covers purchases made during fiscal years 1993 to 1995
    and requires PRGI to identify and document overpayments and to
    make recommendations to reduce future overpayments. PRGI
    receives a fee of 20 percent of net collected funds. The focus
    of the demonstration program is on purchases of subsistence,
    medical, and clothing items, items that are typically found in
    retail merchandising establishments.
        We have reviewed the demonstration program and concluded
    that recovery auditing offers the potential to identify
    overpayments, but implementation problems hindered DOD from
    fully realizing the benefits of the program. As of June 1999,
    according to PRGI, it had completed 90 percent of its work and
    identified $29.3 million in overpayments made to suppliers on
    purchases of roughly $6 billion. However, collections by DOD,
    as of June 1999, only amounted to approximately $2.6 million.
        DOD has been slow to embrace recovery auditing. For
    example, in House Report 105-532, which related to a bill
    providing for fiscal year 1999 DOD authorizations, DOD was
    directed to expand the use of recovery auditing. We found,
    however, that DOD had not done so. While DOD issued an August
    1998 memorandum encouraging the use of recovery auditing and
    some activities within DOD have expressed interest in this
    concept, no contracts had been awarded at the time we completed
    our work in March 1999. We subsequently ascertained, however,
    that in June 1999, earlier this month, one of the recipients of
    the 1998 memorandum, the U.S. Transportation Command, had
    entered into such a contract and that it should be awarded in
    the near future.
        The Government Waste Corrections Act of 1999 would require
    the use of recovery auditing by Federal agencies and provide
    incentives to improve Federal management practices with the
    goal of reducing overpayments. We believe the bill is a
    positive step in the government's effort to reduce overpayments
    and to obtain timely identification and recovery of
    overpayments when they occur. The act addresses recommendations
    we made in our recent report on DOD's demonstration program.
    This includes giving the head of the executive agency the
    option to perform recovery auditing with internal staff, by
    contract, or through a combination of internal staff and
    contract resources.
        We believe it is very important that heads of agencies
    perform a sound evaluation of the applicability of recovery
    auditing to their operations and the related cost and benefits
    of undertaking internal recovery auditing before asking an
    external audit group to do such auditing. Simply stated, we
    believe that it is important to pick the low-hanging fruit
    before turning to contingency fee arrangements on the outside.
    Where recovery auditing can be cost-effectively used across
    government and whether that is the case remains somewhat of an
    open question that needs to be carefully thought through.
        We also support the bill's requirement that recovery
    auditing contractors provide periodic reports with
    recommendations on how to mitigate overpayment problems and
    that, as part of the agency's management improvement program,
    the agency is to give first priority to addressing problems
    that contribute to overpayments.
        Finally, the bill allows applicable appropriations to be
    reimbursed for costs incurred by government activities in
    supporting recovery audit efforts and to provide other
    incentives to support the use of recovery auditing. These
    features should eliminate some of the implementation problems
    we saw in the demonstration program at DOD.
        While we are positive toward the concept of recovery
    auditing and its potential for application to the Federal
    Government, the government's experience with recovery auditing
    has been limited. Thus, we think it is a good idea to further
    mandate additional model programs in Federal agencies to
    determine the applicability of recovery auditing and to develop
    best practices for their use governmentwide. In conducting the
    mandated model programs--at least five are currently provided
    for in the bill--there should be sufficient diversity in where
    recovery auditing is modeled to adequately test the concept
    among the different types of payment activities. Beyond the
    mandate of the model programs, we believe that the use of
    recovery auditing should be, at least for the time being,
    available but not mandated for other Federal agencies.
        The committee may also want to reexamine the bill's
    provisions relating to the use of recoveries made under the
    program. While financial incentives are critical to the
    program's success, incentives that are too great are
    unnecessary and may undermine the program by creating
    inappropriate disincentives to making accurate and timely
    payments in the first instance. The committee may want to
    provide for a more substantial portion of the recoveries to be
    returned to the Treasury, therefore creating a win-win
    situation whereby the agency benefits and the taxpayers benefit
    as a result of this effort, more than just the recoveries.
        We will be happy to discuss further technical comments with
    the committee staff.
        In summary, Mr. Chairman, Federal agency managers have a
    fiduciary responsibility relating to and are accountable for
    the proper use of Federal funds. Our work has shown that in
    certain cases, these responsibilities are not being exercised
    adequately and the result is billions of dollars a year in
    improper payments, a substantial portion of which represent
    overpayments that may never be recovered.
        Federal agencies need to achieve more effective control
    over their payment processes. The causes of the payment
    problems are varied and many are longstanding. The solutions
    can be found in the effective use of technology, the
    establishment of sound internal control and payment processes,
    and the wise use of human capital.
        If Federal agencies do not effectively tackle these
    challenges, they will continue to risk erroneously paying
    contractors billions of dollars and perpetuating other
    financial management problems. Effectively addressing these
    challenges, however, will require investment and sustained
    commitment by top-level management. Recovery auditing, which
    has a longstanding track record in the private sector, offers a
    low-risk opportunity to identify and recover some of these
    overpayments.
        We strongly support the provisions of H.R. 1827 providing
    for model recovery auditing programs. In this way, the
    government can assess the applicability of recovery auditing to
    different types of payments and develop the best practices for
    its use on a wider scale. In our view, with the use of model
    programs plus strong monetary incentives, it would be
    unnecessary to mandate recovery auditing across the government.
    There may also be opportunities to employ novel servicing
    arrangements, such as creating a center of excellence in a
    Federal agency to provide leadership to other agencies in
    implementing recovery auditing.
        The keys to the successful execution of governmentwide
    recovery auditing programs are: one, meaningful incentives for
    agencies to want to participate in the program and to make it
    work; two, adequate safeguards to ensure that achieving
    congressional intent is attained and that the proper use of
    appropriations is maintained; and, three, assuring transparency
    in the conduct of the program.
        Mr. Chairman, this concludes my statement. I would be happy
    to answer any questions that you or Chairman Burton may have at
    the present time.
        [The prepared statement of Mr. Walker follows:]

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        Mr. Horn. Well, I thank the gentleman for that very
    thoughtful statement and now yield for questioning to the
    chairman of the full committee, Mr. Burton of Indiana.
        Mr. Burton. The first thing that comes to my mind, which I
    alluded to in my statement, is that you said that--and I think
    about the DOD--that there was $29 million, in overpayments and
    only $2.6 million of that has been recovered? Is that correct?
        Mr. Walker. That is correct, sir.
        Mr. Burton. Well, why is that?
        Mr. Walker. There are a number of reasons, Mr. Chairman. I
    would be happy to provide more for the record, but first the
    contractor identifies the alleged overpayment and then there
    has to be actions taken on behalf of DOD in order to actually
    recover those moneys.
        Mr. Burton. What kinds of actions?
        Mr. Walker. Well----
        Mr. Burton. They have to send a bill out or a letter out
    saying there was an overpayment made and we want you to
    respond?
        Mr. Walker. Well, they would have to have some type of
    correspondence interaction. But, they typically would want to
    satisfy themselves that they agree that, in fact, there is an
    overpayment. I would be more than happy, Mr. Chairman, for the
    record, to provide some specific details if you would like.
        [The information referred to follows:]
        [GRAPHIC] [TIFF OMITTED] T3548.023

        Mr. Burton. Well, you know, for instance, with the
    Department of Defense, if a contractor wants to do business
    with the Department of Defense in the future on future
    contracts, if he has been overpaid to the tune of $29 million,
    it would appear to me that he would check that out pretty
    quickly and make restitution. Otherwise, he might not be able
    to be a primary bidder on a contract in the future. I don't
    know why in the world it should take a long period of time once
    you find out there are $29 million in overpayments to get it
    back and $2.6 million is not even a tenth of that. It just
    doesn't make any sense.
        Mr. Walker. Mr. Chairman, clearly it should have been
    handled more expeditiously than it has. The only thing that we
    note in my full statement that I would like to add now is
    that--it is interesting--there are actually some provisions in
    the law right now I think that also need to be looked at,
    beyond what we are addressing here.
        For example, right now the government can be required to
    pay interest if it does not make its payments on a timely
    basis. However, if contractors knowingly received overpayments,
    they are not required to pay any interest on those
    overpayments, even if they knowingly hold onto those payments
    for an extended period of time--potentially years--waiting for
    the Department of Defense to ask them.
        Mr. Burton. Well, that might be something we could even
    incorporate into this bill. If there is an overpayment made
    with the knowledge of the contractor and the contractor doesn't
    return that in a timely fashion, he pays an interest penalty.
    That is something I think our staff ought to write down and
    look at to the feasibility of putting in this bill.
        The other thing I wanted to ask you about is you said that
    you want to have these audits done internally rather than
    externally. Why? It seems to me that if it had been handled--if
    the auditing process had been handled properly in the first
    place within the agency, the overpayment would have been caught
    initially. And if the overpayment wasn't caught, what is the
    incentive for the interior auditor to correct the mistake that
    was made?
        Mr. Walker. Mr. Chairman, actually I believe what is
    important is that efforts be taken to try to capture the low-
    hanging fruit.
        Mr. Burton. Well----
        Mr. Walker. Either through internal resources or external
    contractors. Either one or a combination thereof, before
    entering into contingent fee arrangements. My point is if we
    don't do that, then we can end up paying fairly significant
    contingent fees to recover overpayments that could more cost-
    effectively be obtained even potentially through contractor
    resources, but not under a contingent fee arrangement.
        Mr. Burton. Well, that might drag out for a long period of
    time. I mean, the overpayments have been known for a long time.
    The agencies involved have not been collecting those
    overpayments. The reauditing after the payments have been made
    hasn't been done very effectively. And the incentive for an
    outside auditing firm to do it will stimulate them to get the
    job done. And I am not sure that stimulation would be there on
    the inside of the agency.
        Mr. Walker. I think it is facts and circumstances. Let me
    give you an example----
        Mr. Burton. And, besides, wouldn't you have to have more
    funds expended in that agency to be able to provide for this
    reauditing?
        Mr. Walker. Not necessarily. I think there could be an
    impact on the appropriations process that would have to be
    examined. Let me give you one example, Mr. Chairman. HCFA had
    about $24 billion in overpayments. They have gotten it down to
    about $12 billion. Still too high. No question about it.
        One of the things that we have been encouraging HCFA to do
    for some time, and they have adopted our recommendation, is to
    make use of commercially available software to help identify
    some of these overpayments. Such software is used widely in the
    private sector. That is something that HCFA has done, which is
    one of the reasons they found a lot of these recoveries. In
    that case, the government gets 100 cents on the dollar for all
    of the savings.
        Mr. Burton. Well, hasn't GAO reported regarding this
    reduction you are talking about that this decrease was
    attributable to better documentation provided to the auditors,
    rather than to a substantive reduction in improper payments?
        Mr. Walker. Much of it has been attributable to
    documentation, that is true. There has been some reduction in
    improper payments. But a lot of it was the documentation issue.
        Mr. Burton. Yes. Does this mean that the earlier figures
    were not accurate? I mean the higher figures there? You know,
    you said it was reduced from----
        Mr. Walker. I would say that we had better clarity as to
    the nature of what that number was. It wasn't exactly what was
    thought initially.
        Mr. Burton. But they may have been inaccurate.
        Mr. Walker. That is true. They could have been, Mr.
    Chairman.
        Mr. Burton. Have there been specific actions taken by HCFA
    over the last years or so that can be attributed to the decline
    in the overpayment estimates?
        Mr. Walker. They are taking actions now. For example, they
    have adopted our recommendation to use commercially available
    software in order to try to identify possible improper
    payments. It was a while in coming, but they have done it now.
        Mr. Burton. What is HCFA doing right now, specifically, to
    try to recover these overpayments?
        Mr. Walker. Well, they are taking a number of steps with
    both internal and external resources, including their normal
    contractual relationships to try to identify double payments;
    to try to identify payments for services that were not
    rendered; to try to identify payments where there may have been
    some upcoding with regard to the nature of the services that
    were rendered. Mr. Chairman, it is my understanding they are
    actually going to appear here after me and they would probably
    be in a better position to tell you exactly what they are
    doing.
        Mr. Burton. Well, I don't want to belabor my questioning
    because I know the chairman has questions, but I still can't
    see where these overpayments being handled within an agency
    with a reaudit would be that beneficial. I mean, if the problem
    hasn't been corrected by now, it seems like to me an exterior
    auditing firm with an incentive to really get at it would be
    more accurate and more effective. Then, of course, the problem,
    once it is identified, is getting the money in. And I still
    can't understand why, with $29 million-plus in overpayments to
    DOD, only $2.6 million has been recovered and that is something
    else we need to look into.
        Mr. Chairman, I thank you very much for yielding to me.
        Mr. Horn. Well, you are certainly welcome to continue your
    line of questioning. Because you and I have it here, we can
    take all afternoon. [Laughter.]
        Mr. Burton. Well----
        Mr. Horn. Go ahead.
        Mr. Burton. OK, sure. I mean, if you don't mind. You say
    that between fiscal years 1994 and 1998, contractors returned
    about $4.6 billion in overpayments to DOD. Were these
    overpayments voluntarily identified and returned by the
    vendors?
        Mr. Walker. It is my understanding that most of them were
    identified by the contractors.
        Mr. Burton. Was DOD even aware of the overpayments, in many
    cases?
        Mr. Walker. Not all of them, no. Their financial records--
    --
        Mr. Burton. Well, that brings up this question again about
    interior auditing. I mean, if you have got auditors--don't they
    have auditors at DOD?
        Mr. Walker. They do, Mr. Burton.
        Mr. Burton. And payments are made and $4.6 billion is
    returned in overpayments and much of that was returned without
    the knowledge of the people in DOD that they were overpayments?
    And you want to have these reaudits done internally?
        Mr. Walker. Not necessarily by the same people, Mr.
    Chairman. Let me clarify. We don't oppose the use of external
    contractors. Let me make it clear. We are not saying that at
    all. We are saying that an agency may decide on day one that it
    wants to use external contractors as a means to deal with this
    issue. We don't have a problem with that.
        Mr. Burton, my only point is that one should consider,
    based upon individual facts and circumstances, if agencies
    haven't done anything to try to get the low-hanging fruit,
    whether you should go to a contingent fee arrangement on day
    one or whether you ought to try to consider another fee
    arrangement with external contractors and then go to contingent
    fees. It is just facts and circumstances.
        Mr. Burton. It seems to me that right now the auditing
    departments of all these agencies ought to be going through the
    billing records on a regular basis and finding out if
    overpayments were made. That is their job. And if they are not
    doing it now, I can't for the life of me figure out why they
    would do it if we hired some more people and put them in there.
        Mr. Walker. As you know, Mr. Chairman, we are, on record,
    for several years, as saying that many aspects of DOD's
    financial management system are a high-risk to the government.
    They don't have adequate internal controls. They don't have
    adequate accountability mechanisms. And we are trying to shine
    the light on that to try to get them to improve it.
        Mr. Burton. Well, in the short run, an exterior audit firm
    might light a fire under them. Congress can always restructure
    the auditing process. But, as far as I am concerned, there
    needs to be a strong incentive for there to be corrections in
    the auditing process. And that incentive, I think, is not going
    to come from an interior restructuring.
        Mr. Horn. Would the gentleman yield on this topic?
        Mr. Burton. Be happy to yield.
        Mr. Horn. A few years ago, I held a hearing entitled, ``The
    Defense Department: What did you do with the $25 billion we
    can't find?'' And what it seemed to get down to was what we are
    noting in some of our questions here. The Defense Finance and
    Accounting Service in Columbus, OH. Did the General Accounting
    Office go out and look at that operation or did they leave it
    to Defense? Do you know, offhand whether they took a careful
    look at it?
        Mr. Walker. Yes, we have been out there. The primary
    responsibility is with the IG but we do work at DFAS in various
    locations.
        Mr. Horn. Well, we let 2 years go by to see if they could
    clean it up. And then, presumably, they have got it down to $10
    billion we can't find. So $15 billion was accounted for.
        Now how come we got to the $25 billion? It seemed to be the
    following: No. 1, they were having GS-1s--and I hadn't heard of
    those since the first world war. I wasn't around then, but I
    read it. And apparently GS-1s were staffing some of that. And
    contractors were getting checks from the government out of that
    center and they would phone up and say, I don't have a contract
    with the government. And the Defense group there would say,
    ``oh, yes, you do. Our records show you do.''
        One guy, I am told--and I don't think it is just
    apocryphal--put the check in interest earning. And he knew they
    would get around to it some day. And they did. And he paid them
    back the amount of overpayment, but he kept the interest. And
    apparently he was pretty well paid by that little thing.
        So one of the problems is the man power at what level of
    brains and knowledge. And, No. 2, the type of training that
    goes on in a center like that. It seems to me you have got to
    build in the blocks before those checks go out. And that is
    where an internal auditor ought to be working and picking
    randomly some of these checks to see if the paper matches.
        Well, what the problem was on the $25 billion is they had
    ordered $25 billion. The acquisition documents never quite
    related to the inventory documents. So you would find it if you
    could. And I just wondered the degree to which GAO is looking
    at some of it or are you taking the Inspector General's word
    for it?
        Mr. Walker. No, we are.
        Mr. Horn. Because we have great faith in the Inspector
    General over there.
        Mr. Walker. Several things, Mr. Chairman. Three things are
    really key in this area. First, people; second, process; third,
    technology. On the people front, you have mentioned two of the
    key ingredients. You have got to have people with the right
    kind of skills doing this work. They may or may not exist
    within the current organization. You may have to go out to the
    outside. And you need training for the people that are doing
    this work, if they are internal.
        Second, concerning the process, among other things, you
    need internal controls. You need solid internal controls.
        Third, concerning technology, we have to automate much of
    this and we have to integrate systems. There are so many
    different systems at DOD.
        But, you know, those are three key elements. And, in many
    cases, you are going to have to turn to contractors because you
    don't have the resources internally in order to get it done.
        Mr. Horn. OK. Go ahead. I yield back.
        Mr. Burton. Yes. My very able staff assistant just
    mentioned that, I guess in the correspondence we have had on
    this issue, the various agencies including DOD say that the
    reauditing is not a core function of the Department. And, with
    the lack of adequately trained personnel, it seems that the
    prudent thing would be to use exterior auditors until you were
    able to bring your staff up to snuff.
        Now when these overpayments voluntarily came back to the
    DOD, was that money credited back to the government or did it
    go back to the programs? Where did it go?
        Mr. Walker. I am not sure, Mr. Chairman. I can try to
    provide some more information for the record.
        Mr. Horn. Without objection, the answer of GAO will be put
    in the record at this point.
        [The information referred to follows:]

        [GRAPHIC] [TIFF OMITTED] T3548.024

        Mr. Walker. Thank you.
        Mr. Burton. OK. And my understanding is that in the case of
    Medicare overpayments voluntarily returned to HCFA, checks were
    returned because there was no systematic way to deal with this
    money coming back to the government. You know, that just
    boggles my mind. Somebody sends a check back to HCFA saying,
    ``Hey, listen, this is an overpayment that we didn't deserve,''
    and they sent it back him, saying, ``We are sorry. You are
    going to have to just keep the money because we don't know what
    to do with it.'' That boggles my mind--how can that happen?
        Mr. Walker. It is mind-boggling, Mr. Chairman. You are
    right there. It does happen.
        Mr. Burton. I mean, people want to do the right thing and
    send money back to the government for an overpayment and you
    say, gosh, you are just going to have to keep it because we
    don't know what to do with it?
        Mr. Walker. Well, it is mind-boggling that it would happen.
    But, there are many circumstances I mentioned earlier where,
    actually, people know it is an overpayment. They don't send it
    back because, under current law, they take the position that
    they don't have to until they are notified. And, in fact, there
    is no economic incentive for them to send it back.
        Mr. Burton. Yes, I understand. But I don't want to change
    the subject.
        Mr. Walker. Sure.
        Mr. Burton. We are talking about payments that are
    voluntarily sent back and it boggles the mind to send a check
    back to somebody just because you don't know how to enter it.
    And you are worried about reauditing? I mean, if they don't
    know how to--I mean, I took bookkeeping in college, you know.
    And it is not that hard to put it in the bank and mark it down,
    you know? I don't understand that.
        Mr. Walker. The people that actually process the payments
    that are supposed to put those in the bank aren't the ones that
    would be doing the auditing. But I hear you, Mr. Chairman.
        Mr. Burton. I understand that the places in government now
    using recovery auditing are not funded on annual appropriations
    but are set up on revolving funds or no-year accounts. In other
    words, they are attuned to a monetary bottom line like
    businesses in the private sector. In order to create this kind
    of incentive for regularly appropriated agencies, my bill would
    allow 25 percent of the moneys or up to 25 percent of the
    moneys to go back to the program that it originated from. Do
    you see any problem with that kind of an incentive?
        Mr. Walker. Mr. Chairman, we think it is essential that you
    have an incentive for the agencies to want to play and to
    participate in this program. And, in fact, what we had
    suggested was something along the lines of 50 percent of the
    money being able to go back to the agency and 50 percent going
    for the taxpayer. So I think it is crucial that you have an
    incentive for the agencies.
        Mr. Burton. OK. Finally, you said that if we required the
    use of model programs and provide the right incentives, it
    would not be necessarily to mandate the use of recovery
    auditing across the government. I think you have elaborated on
    that, but is there anything further you would like to add to
    that?
        Mr. Walker. I think it is critical that we have some
    additional model programs that look at different aspects of
    where recovery auditing might be applied. And, at least five of
    those should be required. I think, beyond that, if you provide
    the kind of incentives that we are talking about, that should
    go a long way to encouraging people to do this. And if they
    don't, you can always go to a mandate system.
        Mr. Burton. OK. Let me ask just one more question.
        Mr. Walker. Sure.
        Mr. Burton. To put a recovery auditing system in these
    agencies where it does not now exist would take time, right?
        Mr. Walker. That is correct.
        Mr. Burton. Do you have any idea what kind of time?
        Mr. Walker. Well, it depends on the program, Mr. Chairman.
        Mr. Burton. Well, it would take some time. The outside
    recovery auditing companies are ready to go right now. They
    have got the auditors there. They have done it. They have got
    the experience. Why should we wait when we know that these
    overpayments are made? We know that the waste is there. We know
    that they should be recovered. Why should we wait for a model
    program when it is going to take time to put it in place when
    we already have an outside entity that can do it?
        Mr. Walker. I guess my only point, Mr. Chairman, would be
    if you take a number like $10 million--which is what the bill
    currently proposes--if you look at the number of Federal
    entities and agencies that would be affected by that, it would
    be a significant number. The types of purchases they end up
    making are fundamentally different and I think that there would
    be a lot of time and energy spent on the contracting aspect of
    it. So it is really just a cost-benefit question, frankly, from
    a different perspective, Mr. Chairman.
        Mr. Burton. What if the threshold were raised to $50
    million or $100 million or $500 million?
        Mr. Walker. Obviously, we would have to take a look at how
    that would affect the number of entities that would potentially
    be impacted by it.
        Mr. Burton. OK. OK. Thank you, Mr. Chairman.
        Mr. Horn. Thank you. Some of this has been covered, but let
    me just ask it for the record's sake. According to your
    testimony, the General Accounting Office supports the
    provisions of the bill with Mr. Burton providing for model
    programs for recovery auditing. What are the Federal programs
    you suggest using for these model programs? Which ones would
    you say we ought to apply that to?
        Mr. Walker. Well, we don't speak to specific programs. I
    would be happy to provide something for the record if you would
    like. I do think that what we need to do is we need to analyze
    what are the different types of purchasing activities that the
    Federal Government engages in. Also, we ought to make sure that
    we have at least one program for each major type of purchasing
    activity.
        One area that is more problematic, but I think we ought to
    explore is how recovery auditing can be applied. But, there are
    some unique issues that need to be explored in the health area.
    Contractors give a lot of money in overpayments, but there are
    also some peculiarities in dealing in the health area, because
    many of these overpayments have to do with medical decisions,
    medical necessity, and the nature of the services that are
    being provided. I think that might be an example where you
    might need to take a look at it because there are specific
    things that have to be looked at that would be different than,
    for example, how it has been applied at DOD where they are
    purchasing, clothing and supplies. Recovery auditing has been
    used for decades in the private sector for those types of
    activities.
        I might add, recovery auditing has been used in health care
    as well in certain circumstances in the private sector.
        Mr. Horn. Well, would GAO say, let us start on the ones
    with the largest amount of money that are overpayments and deal
    with that?
        Mr. Walker. There is clearly a logic to that, Mr. Chairman.
        Mr. Horn. OK. Now you mentioned the purchasing models. Give
    me an idea. What are the purchasing models that you are
    thinking of?
        Mr. Walker. When you are contracting for things that are
    readily commercially available on the outside. Obviously, in
    this instance, there is clearly an application. When you are
    contracting for major weapons systems or other things that are
    customized, obviously, there is potential application there
    too, but one would have to approach it a different way.
        When you are dealing in the health care area, there is
    potential application, but there are a number of special
    considerations, given the nature of how overpayments might
    occur. Obviously, if it is a double payment or if it is for
    service that wasn't rendered, that is easier than if a judgment
    call has to be made as to whether the service that was provided
    was appropriate under the circumstances, based upon the nature
    of the illness?
        So those would be three examples, Mr. Chairman.
        Mr. Horn. OK. Another question for the record. The
    Government Waste Corrections Act of 1999 currently provides
    that of the amounts collected through recovery auditing, up to
    50 percent can be applied for management improvement programs.
    Up to 25 percent can be applied for the payment of the
    contractor and to reimburse the fund from which overpayments
    were made. You testified that you would reexamine the
    allocation of overpayment recoveries and provide for a
    substantial portion to be returned to the Department of the
    Treasury. Why do you suggest these changes and how would you
    restructure the allocations?
        Mr. Walker. Our view is that if you say that 50 percent of
    the recoveries would go to the agency either to pay for the
    contractor and/or to reinvest in their systems and programs to
    prevent this from happening in the future or to minimize it,
    that that should be enough of an incentive and should provide
    enough funding for the agencies to engage in this activity,
    especially if it is on a contingent basis where they only have
    to pay if the amounts are actually recovered.
        Mr. Horn. Well, if that is at the 50 percent mark, does
    that mean we simply apply that money to better cost recovery?
    Or do we let the agency do anything with it?
        Mr. Walker. No. I think you want to target it, as has been
    contemplated in this bill, to the types of initiatives that are
    designed to improve the systems, the controls, and the recovery
    mechanisms that the bill is intended to address.
        Mr. Horn. OK. In other words, this would relate to getting
    new human resources in auditing.
        Mr. Walker. Either systems or human capital or enhanced
    processes.
        Mr. Horn. Right. Or investment in computing.
        Mr. Walker. Correct. Technology, for example. I agree, Mr.
    Chairman.
        Mr. Horn. OK.
        Mr. Walker. One of the three: People, process, technology
    focused in this area.
        Mr. Horn. Do you feel the current ratios may create
    inappropriate incentives, which is from the bill?
        Mr. Walker. We think there clearly ought to be something
    directly in this for taxpayers. The taxpayers ought to get part
    of this recovery. And we are a little concerned, Mr. Chairman,
    that the agencies not be in a circumstance where they get 100
    cents directly or indirectly of every dollar that is recovered
    because that might create a perverse incentive for them to
    overpay in the first instance.
        Mr. Horn. Right.
        Mr. Walker. We don't want to do that.
        Mr. Horn. OK. Does the gentleman from Indiana have any
    other----
        Mr. Burton. Mr. Chairman, unfortunately I have to depart
    for another meeting. But I want to thank Mr. Walker for his
    candor and you for holding this hearing. And I hope we can work
    out any differences we might have so we can get this bill
    moving as rapidly as possible. I think we have got a little
    difference on the exterior rather than interior auditing, but
    maybe we can work that out and get a bill that we can all live
    with and save the taxpayers a lot of money.
        Mr. Walker. Thank you, Mr. Burton.
        Mr. Burton. Thank you. Thank you, Mr. Chairman.
        Mr. Horn. Thank you. And thank you, Mr. Comptroller
    General. We will now go to panel two.
        Mr. Walker. Thank you, Mr. Chairman.
        Mr. Horn. Thanks for coming.
        Panel two has the Honorable Deidre Lee, Acting Deputy
    Director for Management, Office of Management and Budget; Mr.
    George H. Allen, Deputy Commander, Defense Supply Center of
    Philadelphia; Mr. Gerald R. Peterson, Chief, Accounts Payable
    Division, Army-Air Force Exchange Service; and Ms. Michelle
    Snyder, Director, Financial Management Office, Chief Financial
    Officer of the Health Care Financing Administration.
        If you would stand and raise your right hands. And are
    there any assistants in back of you that might be talking? If
    they are, get them to stand, too. I only like these baptisms
    once. All right. Fine. We have one. Anybody else? Two. So we
    have got six witnesses to be sworn. Do you affirm--there are a
    few back there somewhere? OK. So we have got seven, then. Is
    that it? All right.
        [Witnesses sworn.]
        Mr. Horn. OK. It seems the lips were moving. Yes, it is
    eight. It was eight. OK.
        So that is taken care of and we now start with Ms. Lee. And
    we are glad to see you here. And, as you know, your statement
    is in the record. We would like you to summarize it and then we
    will have more time for questions.

         STATEMENTS OF DEIDRE LEE, ACTING DEPUTY DIRECTOR FOR
     MANAGEMENT, OFFICE OF MANAGEMENT AND BUDGET; GEORGE H. ALLEN,
    DEPUTY COMMANDER, DEFENSE SUPPLY CENTER OF PHILADELPHIA; GERALD
     R. PETERSON, CHIEF, ACCOUNTS PAYABLE DIVISION, ARMY-AIR FORCE
      EXCHANGE SERVICE; AND MICHELLE SNYDER, DIRECTOR, FINANCIAL
     MANAGEMENT OFFICE, CHIEF FINANCIAL OFFICER OF THE HEALTH CARE
                        FINANCING ADMINISTRATION

        Ms. Lee. Thank you very much. Good afternoon, Chairman
    Horn, Mr. Ose. I am here today to discuss the administration's
    view on H.R. 1827, the Government Waste Corrections Act of
    1999. This bill would mandate that agencies use the technique
    of recovery auditing to identify and collect overpayment to
    vendors and contractors.
        At the outset, let me clearly state that we share the
    committee's desire to eliminate overpayments. Our goal is to
    make all payments correctly and on time. When we pay correctly
    the first time and on time, we prevent errors and eliminate the
    need and expense of correction and collection. Making the right
    payment at the right time is the most cost-effective approach
    for reducing erroneous payments whether the payment is made to
    a contractor, a food stamp recipient, or a Medicare provider.
        In conjunction with the Congress, the administration has
    made progress in improving overall financial management, yet
    there is more to be done. We will continue to make improving
    financial management systems and modernizing payments a high
    priority. This priority is reflected in this year's financial
    management status report and 5-year plan, which will be
    transmitted to the Congress soon.
        Progress has been made and significant initiatives are
    underway. For example, use of technology. Agencies are updating
    their financial systems, including electronic payment systems.
    These systems automate document matching, reduce errors
    associated with paper payment systems, and provide automated
    checks and edits to prevent the occurrence of duplicate
    payments, pricing errors, and missed cash discounts, rebates,
    or other allowances.
        We are also simplifying small transactions paying
    processes. The 80-20 rule applies here; 80 percent of the
    transactions equate to 20 percent of the dollars. Use of
    purchase cards also simplifies the buying process. And, as you
    know, Chairman Horn, that is near and dear to my heart as we
    talk about acquisition reform.
        By using purchase cards, we streamline the payment process
    and save the cost, both in terms of dollars and labor
    resources, for most small purchases, or the 80 percent. We are
    also revising circular 8125. You had hearings on this just a
    few weeks ago. We are focusing on ways to facilitate electronic
    payments and improve implementation of the Debt Collection Act.
        Specifically, in recovery auditing, we are working with the
    DOD to evaluate the results of their demonstration project in
    recovery auditing. In recognition of recovery auditing as a
    tool for other agencies, GSA established a multiple award
    schedule to provide Federal agencies with easy access to
    private sector experts in recovery auditing who can tailor
    techniques to meet specific agency requirements.
        We are working with the users of this schedule to gain
    additional insight into the uses and benefits of recovery
    audits. As you can see, we are focusing on paying correctly.
    H.R. 1827 includes some promising provisions: Paying for audit
    recovery services out of proceeds; gainsharing for our
    financial management improvement; identifying management
    improvement opportunities; and rewarding employee performance.
        We also have some issues with H.R. 1827, which I would like
    to highlight today. Specifically, thresholds: Requiring
    recovery audits for payment activities that expend $10 million
    or more annually. Using the industry recovery standard of $1
    million recovered for every $1 billion audited, a threshold of
    $10 million would result in gross collections of $10,000. While
    this is not insignificant, based upon work that is already done
    to certify accurate payments, as well as the cost of setting up
    the program, requiring or mandating recovery audits may not be
    cost effective at this threshold.
        Payment activity. This term may be read to include benefit
    and entitlement payments. Most major benefit and entitlement
    programs have statutory provisions for identifying and
    recovering overpayments. HCFA will address this today in their
    testimony. We need to clarify the proposed applicability and
    retain appropriate tailoring of recovery audits to specific
    programs.
        And, last, but not least, congressional appropriations. I
    think it was discussed at length with Mr. Walker, but this bill
    allows agencies to return up to 25 percent of collections to
    programs. We need to ensure that this return process is
    consistent with congressional intent and the appropriations
    process. And, also, be sure we emphasize the correct incentives
    for reaction to recovery audits.
        Mr. Chairman and members of the subcommittee, the
    administration is committed to good financial management and
    making the right payment on time. We will continue our efforts,
    working with the CFOs, to identify and address ways to improve
    accountability, specifically, payment accuracy, including
    exploring the use of recovery audits. We welcome the
    opportunity to work with you in exploring the most effective
    means of using recovery audits. And I will be pleased to answer
    any questions you may have.
        [The prepared statement of Ms. Lee follows:]

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        Mr. Horn. Thank you. We will have the questions deferred
    until after the four witnesses have testified.
        Mr. George H. Allen is the Deputy Commander, Defense Supply
    Center of Philadelphia. Welcome.
        Mr. Allen. Good afternoon, Mr. Chairman, distinguished
    members.
        I will just summarize my remarks. On behalf of the
    Department of Defense, I want to thank you for the opportunity
    to appear here before the subcommittee to describe our
    experience with recovery auditing. The 1996 Defense
    Authorization Act directed the Defense Personnel Support
    Center, which has since been renamed the Defense Supply Center
    of Philadelphia or later referred to as DSCP, to be the test
    site for demonstration of private-sector recovery auditing.
        In September 1996, DSCP competitively contracted with
    Profit Recovery Group International [PRGI] as I will refer to
    them. Although the pilot program is not complete, I can say
    with certainty, the commercial recovery auditing has proven to
    be a cost-effective practice for our center.
        Let me describe briefly how we demonstrated this commercial
    practice. As law directed, we required PRGI to audit available
    accounting and procurement records from fiscal years 1993
    through 1995. The audit base was $7.2 billion in payments to
    vendors over that 3 year period. Thus far, PRGI has identified
    potential overpayments of about $27.3 million. The overpayment
    arose from a variety of reasons, including duplicate payments,
    interest paid in error, discounts offered but not taken,
    overcharges, and breeches of the price warranty provisions in
    our contracts.
        Of the amount identified, we have collected $2.6 million,
    leaving a potential uncollected balance of $24.7 million. We
    have moved forward to issue claims to collect about $10.4
    million in those overpayments and another $2 million in
    dispersing errors. We have not yet approved $12.3 million of
    potential overpayments.
        In addition to the numerical data just reviewed, I believe
    the demonstration project has benefited our operation in three
    other ways. First, recovery auditing has allowed us to
    continuously encourage vendors to comply with contract terms
    and conditions. The additional scrutiny of recovery auditing
    has provided and will continue to provide more assurance that
    overpayments will be identified and collected promptly.
        Second, the auditing process has uncovered systemic
    problems, including the need to fine tune our automated
    payments systems to assure that we comply with all statutory
    requirements.
        And, third, dispersing errors uncovered by the auditing
    program have highlighted the need for closer oversight of the
    payment function itself and should result in the reduction of
    these types of errors in the future.
        Mr. Chairman, I would like to now briefly discuss our
    expansion plans with NDLA. The 1998 Defense Authorization Act
    directed the recovery auditing be expanded to all Defense
    Working Capital Fund activities. However, under this
    legislation, the program will be self-funding. That is, the
    audit contractor's fee will be paid from the amounts recovered.
    As with the original demonstration program, fees may not exceed
    25 percent of the total recovered. DSCP is serving as the lead
    center for expansion to other DLA agency activities. A
    competitive solicitation has been issued and we anticipate an
    award by the end of next month.
        In closing, Mr. Chairman, let me say the recovery audit
    programs have been successful at DSCP and they have become an
    integral part of our business practices in Philadelphia. And I
    am prepared to answer any questions at the appropriate time.
        [The prepared statement of Mr. Allen follows:]

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        [GRAPHIC] [TIFF OMITTED] T3548.035

        Mr. Horn. Thank you very much, Mr. Allen.
        Our next presenter is Gerald R. Peterson, Chief, Accounts
    Payable Division of the Army and Air Force Exchange Service.
    Mr. Peterson.
        Mr. Peterson. Mr. Chairman and honorable members of the
    subcommittee, on behalf of the Army and Air Force Exchange
    Service [AAFES], thank you for the opportunity to appear before
    your committee to relate our experience with recovery audits.
        Although AAFES has over 25 businesses, our principal
    business is retail sales. We follow commercial retail best
    practices to the extent possible. Employing professional audit
    recovery firms is a best practice we adopted many years ago.
        AAFES signed its first contract with a commercial audit
    recovery firm in 1983. We currently have audit recovery
    contracts with two firms, a primary and a secondary. Firm A has
    the primary contract at a rate of 21.75 percent. It recovered
    $24.4 million last year. Firm B has the secondary contract with
    a rate of 35 percent. It recover $1.1 million last year. In
    September 1994, AAFES instituted its first in-house recovery
    effort to detect duplicate payments. The in-house group now
    recovers missed discounts and outstanding credits on supplier
    statements in addition to duplicate payments.
        We have learned that a successful audit program involves
    the following. First, partner with both suppliers and audit
    recovery firms. The relationship with a recovery firm is a
    partnership in which each provides a benefit to the other.
    Similarly, suppliers must be viewed with respect to maintain a
    long-term relationship built upon trust.
        Second, develop an in-house recovery program to augment the
    commercial recovery. During the last 5 years, AAFES' in-house
    team recovered $33.3 million at a total cost of approximately
    $465,000.
        Third, compress the audit cycle. Suppliers know most
    retailers employ audit recovery firms and getting claims after
    the fact is a part of doing business. To avoid straining a
    supplier relationship, it is important to find payment errors
    in a timely manner. No supplier appreciates having to go back
    into records that are 4 or 5 years old.
        And, fourth, learn from the recovery firm. Review what the
    commercial recovery firm is finding and determine if it is the
    result of a systemic flaw in the accounts payable process. It
    is much cheaper to fix the source of the program or to recover
    the funds through an in-house group than to pay a commercial
    firm.
        AAFES has greatly benefited from audit recovery services
    during the last 16 years. And many government agencies could
    benefit from their services as well. As presently written,
    however, there are several aspects of H.R. 1827 which will have
    a negative impact on AAFES.
        The first one is the recovery audit requirements. This
    section states, ``The executive agency head may pay the
    contractor an amount not to exceed 25 percent of the total
    amount recovered by the executive agency.'' Twenty-five percent
    may be acceptable for primary audits, but the fee paid for
    secondary audits will exceed this amount. If the bill isn't
    amended to provide higher fees for secondary audits, AAFES will
    have to cancel its contract with Firm B and lose the $700,000
    in net earnings that contributed to our bottom last year. So,
    ideally, AAFES would like to be exempted from this provision.
        The second area is disposition of amounts collected. This
    section states how funds recovered may be used. If amounts
    recovered aren't applied in accordance with this section, the
    funds revert to the Treasury. Non-appropriated funds,
    instrumentalities, NAFEs, should be totally excluded from this
    section as we generate our own operating funds. The bill should
    be amended to allow recovered funds to remain within the NAFE,
    in accordance with its operating rules.
        And, third, responsibilities of the Office of Management
    and Budget. This section sets forth the reporting requirements
    from the individual agencies. NAFEs should be totally excluded
    from this reporting requirement, especially entities such as
    ours. We work continually with our commercial recovery firms to
    maximize the recovery potential.
        For the reasons just mentioned, AAFES requests favorable
    consideration for the requested changes to the bill.
        Mr. Chairman, the Army and Air Force Exchange Service
    appreciates the opportunity to testify before this
    subcommittee. The use of audit recovery firms has been a
    success story for us. The millions of dollars recouped through
    audit recovery efforts have helped improve the quality of life
    of our stakeholders; the soldiers and airmen serving around the
    world. We support your initiative to bring best practices to
    government agencies. At the appropriate time, I will be happy
    to answer any questions you might have.
        [The prepared statement of Mr. Peterson follows:]

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        Mr. Horn. Thank you very much.
        The next presenter has one of the toughest jobs in the U.S.
    Government, and that is Ms. Snyder, being the Chief Financial
    Officer for the Health Care Financing Administration. Welcome.
        Ms. Snyder. Thank you, Mr. Horn. I have been CFO now for 4
    months and I am beginning to appreciate just how difficult this
    job is.
        Chairman Horn and distinguished subcommittee members, thank
    you for inviting us to testify about the Government Waste
    Corrections Act and our extensive efforts to prevent and recoup
    improper payment. As you know, we reduced Medicare's payment
    error rate from 14 percent to 7 percent in just 2 years. We are
    working diligently to build on this success and we are very
    grateful for this subcommittee's support in these efforts.
        We have had good success with the kind of recovery audit
    efforts described in the proposed legislation. And we believe
    that they may well have value for other government agencies as
    well.
        We, of course, have pursued a different kind of strategy in
    addition to recovery audit efforts. And that is to prevent
    improper payments from occurring in the first place. We are
    making solid progress on that front, in large part due to
    increased efforts by providers to document and file claims
    correctly. We also use nearly 100,000 computerized edits that
    detect and automatically deny payment for improper claims as
    well as manual medical record reviews and cost report audits.
    We are making solid progress in identifying and collecting
    overpayments as well.
        As you know, the HHS Inspector General audits have found
    that most Medicare claims are correct on their face. Finding
    most of our remaining payment errors requires going beyond what
    is on the claim to look at documentation and medical necessity.
    These activities are now primarily performed by our claims
    processing contractors. We recently held an open competition to
    establish a pool of new program safeguard contractors to
    augment these efforts. And the President is proposing
    legislation to further increase competition for Medicare work
    among qualified entities.
        However, the act's authorization to compensate recovery
    auditors on a contingency basis may have only limited value for
    Medicare. We recoup most overpayments by making deductions from
    future payments to providers who have been overpaid. And paying
    on a contingency basis for error identification could be
    perceived as a bounty system by health care providers. The vast
    majority of Medicare providers, we have found, make only honest
    errors and their good will and cooperation are key to much of
    our success in preventing improper payment in the first place.
        Furthermore, a financial incentive to identify errors could
    well lead to inappropriate denials and thus create errors
    instead. Our obligation is to pay correctly. And we do not want
    to deny proper payment any more than we want to make improper
    payment. Inappropriate denials resulting from contingency
    payment also could backfire on the bottom line due to increased
    costs for appeals filed by beneficiaries and providers denied
    proper payment. So while we would be willing to consider use of
    the contingency fee option, we would need to take extreme
    caution in ensuring that any use of it would, indeed, be
    constructive.
        We also generally endorse the idea of increasing funding
    for program management improvement activities that could reduce
    overpayment. We have greatly benefited from the stable source
    of program for program integrity activities provided to us
    under the Health Insurance Portability and Accountability Act,
    which totaled $560 million in fiscal year 1999 and $630 million
    in fiscal year 2000. However, we generally believe that
    recouped overpayments should be returned to the trust fund or
    general revenue fund as is now the case.
        I would also just like to take a few seconds to address the
    remarks made by Mr. Burton earlier. I have not seen the article
    to which he refers about the returned checks, but I would like
    to assure this subcommittee that we have instructed our fiscal
    intermediaries and carriers to cash checks that are returned
    and to properly credit them to the Medicare account.
        We have had some experiences in the past where people
    returning checks wanted us to say that, in cashing the check,
    that satisfied their full liability, which we have not, of
    course, been willing to do. And our instruction has been we
    will cash the check and make it clear that this does not
    necessarily release them of their liability until further
    investigation might be completed. But we would be very happy to
    work with Mr. Burton's staff to make sure that we are
    responsive, indeed, to the article that he mentioned.
        We also look forward to continuing to work with the
    subcommittee on efforts to improve Medicare program integrity.
    I thank you for holding the hearing. And would be happy to
    answer any questions you might have.
        [The prepared statement of Ms. Snyder follows:]

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        Mr. Horn. We thank you.
        And I am now going to yield to the time for questioning to
    Mr. Ose, the gentleman from California.
        Mr. Ose. Thank you, Mr. Chairman. I am going to work as
    procedurally as I can here. Ms. Lee, on your statement here the
    5-year plan will be transmitted to Congress soon?
        Ms. Lee. Yes, sir. It is in final sign-off.
        Mr. Ose. When can we expect it? I mean, is soon next week,
    next month, what is it?
        Ms. Lee. I was hoping next week, but let us say when you
    get back from recess.
        Mr. Ose. August? Or Fourth of July?
        Ms. Lee. In July.
        Mr. Ose. OK. Now, secondarily, you talked about, under the
    National Defense Authorization Act. In a pilot study four-
    tenths of 1 percent of the payments sampled were incorrect. The
    pilot study must have used a sample. Again, Ms. Lee, there must
    have been a sample size or something that you looked at. It is
    on page 2 of your testimony at the bottom. I am wondering about
    the sample size.
        Ms. Lee. Can I get that for you, for the record?
        Mr. Ose. Certainly. That would be fine.
        Mr. Horn. Without objection, the response of the Deputy
    Director for Management will be put in the record at this
    point.
        [The information referred to follows:]

        I have confirmed with the Department of Defense and the
    contractor that the pilot covered $7.2 billion in payments from
    1993, 1994 and 1995 made by the Defense Supply Center in
    Philadelphia.

        Mr. Ose. Thank you, Mr. Chairman. And then on page 3, I am
    a little bit confused about something. On page 2, when we talk
    about the sample or my question about the sample sizes there is
    a statement about four-tenths of 1 percent of the payments
    sampled were incorrect, which is remarkable. And then when the
    discussion gets to the issue of the threshold, the $10 million
    threshold, there is a comment about the threshold of $10
    million would result in a gross collection of $10,000 under
    this bill if a overpayment was found. That is one-tenth of 1
    percent, if I understand.
        Ms. Lee. That is the industry standard, as we understand
    it.
        Mr. Ose. In private industry.
        Ms. Lee. In private industry.
        Mr. Ose. OK. That is not bad either.
        And then, finally, in the last page of your testimony, when
    you talked about the provisions in the middle of your--right
    above conclusion--``The bill would allow agencies to return up
    to 25 percent of collections to programs and activities from
    which the overpayment arose. These provisions could be used to
    bypass the normal Congressional Appropriations process.'' I am
    not quite sure I understood your explanation.
        Ms. Lee. We would propose that we structure the bill to
    make sure that when we returned those moneys to a program, it
    was, in fact, Congress' intent to spend the funds. For example,
    sometimes we recover after a period of time and if the program
    has been eliminated or is completed or finished, we want to
    make sure the moneys go back where you originally intended the
    moneys to be spent.
        Mr. Ose. The flaw being that if a program is terminated,
    there is no point in returning the money back to it.
        Ms. Lee. To that program, right.
        Mr. Ose. If the program is continuing, you would not have
    an objection to returning the money to that program.
        Ms. Lee. Correct.
        Mr. Ose. OK. Thank you.
        I have got more questions.
        Mr. Horn. Yes. Go ahead.
        Mr. Ose. OK. Let us see. Mr. Allen, on page 3 of your
    testimony, the fourth paragraph, you talked about DSCP's
    recoveries to date being $2 million. That is for audit work
    begun in June 1997. And what I am curious about is I don't see
    much point in spending $5 million if you only recover $2
    million. My question would be the cost of recovering the $2
    million is roughly----
        Mr. Allen. By the contract we have with PRGI, we pay them I
    believe it is 20 percent of whatever we collect.
        Mr. Ose. OK.
        Mr. Allen. We have up to $5 million under that initial
    legislative proposal to pay them, at a rate of 20 percent of
    whatever we collect.
        Mr. Ose. So, potentially, in anticipation of finding $25
    million in overpayment, you are authorized to spend up to $5
    million?
        Mr. Allen. That is correct.
        Mr. Ose. These aren't my words, as a bounty?
        Mr. Allen. That is correct.
        Mr. Ose. OK. Thank you.
        Mr. Allen. The subsequent legislation authorizes us to pay
    from the proceeds, that is, from the amounts collected.
        Mr. Ose. At the outset, there was an appropriation to pay
    the reward?
        Mr. Allen. That is correct.
        Mr. Ose. OK.
        Now, Mr. Peterson, I got the first two points on AAFES's
    request for exemption. Those being the threshold on the
    secondary audits and the reversion to Treasury of the recovered
    funds. But you lost me on the third one. You had three points
    there that you were seeking an exemption under this legislation
    for.
        Mr. Peterson. Yes. Since our program has been undergoing
    for 16 years, we feel that we have already demonstrated that we
    are following industry best practices in that we are working
    continually with our recovery firms to bring best practices to
    bear. And so for that reason, we don't feel that we should be
    reporting back to the OMB.
        Mr. Ose. Is it your rationale that as this is essentially
    self-funded----
        Mr. Peterson. Yes.
        Mr. Ose [continuing]. That these funds should stay in
    AAFES's jurisdiction?
        Mr. Peterson. That is correct. We are a non-appropriated
    fund instrumentality. We generate our own revenues through our
    sales.
        Mr. Ose. All right. On the methodology that you used for
    contractor A in your example and contractor B, I would
    presume--and maybe that is not safe to presume and you can
    correct me if it is appropriate, certainly--the methodologies
    at the outset that contractor A used generated X amount of
    recoveries. And the secondary audit firm, contractor B, used a
    slightly different methodology, I presume, that generated
    around, your example, $1.1 million.
        Mr. Peterson. Yes. We have only had the secondary audit for
    a little over 1 year.
        Mr. Ose. Well, my question really is when you have
    contractor B who uses a slightly different methodology than
    contractor A, over time do those two methodologies get merged
    so that we are continually improving the larger portion, if you
    will, of the audit work? That being, we merge methodology A and
    B in the subsequent or successive contract?
        Mr. Peterson. Sir, the two firms don't really get together
    as far as how they perform their audits. And I don't know that
    they use different techniques. I believe that the secondary
    firm probably is quite familiar with the primary and looks for
    areas where the primary has thought it wasn't beneficial to
    look. The secondary has a higher recovery rate, you know, 35
    percent versus 21 percent, so they can afford to perhaps delve
    into some areas that may not have been efficient or economical
    for the primary to do.
        Mr. Ose. My point is, as Congress looks out into the future
    and considers these challenges, not in this round of audit
    awards, if you will, but maybe the next round, is there any
    rationale for us thinking that, on an RFP or RFQ or whatever it
    is we use to enter into these contracts, that we would merge
    the methodologies?
        Mr. Peterson. Well, I don't know that those are different
    methodologies, Congressman.
        Mr. Ose. OK. You think the added result might be
    attributable to the 13.25 percent extra in the bounty, if you
    will?
        Mr. Peterson. It is that and then just looking for areas--
    they may approach something--use a little different computer
    program than the first one used that might detect something
    that the first one missed.
        Mr. Ose. All right. Finally--let me make sure that is
    finally--on page 5, I think you touched on something that is
    very important to business people and that is the reach-back,
    if you will, 4 or 5 years. I can't imagine somebody coming into
    my affairs and asking me to substantiate something that
    happened in 1994. I see that the audit competition and target
    would be 30 months. Is there any possibility of even
    compressing that further?
        Mr. Peterson. Not within our industry. We approach things
    from the viewpoint of a commercial retailer, rather than that
    of a government agency because that is our primary business is
    retailing.
        Mr. Ose. Right.
        Mr. Peterson. And many of the items that our audit recovery
    tracks are year-to-date purchases and so to compress an
    internal review cycle, a primary and a secondary, into much
    less than 30 months would really be pressing the audit
    companies.
        Mr. Ose. Is the 30 months an industry standard? Or is that
    just what you have come to as fitting the----
        Mr. Peterson. That is what we have come to.
        Mr. Ose. OK.
        Mr. Peterson. That is our goal.
        Mr. Ose. Do we support--or to what degree are we providing
    resources to outside firms to do these audits? In other words,
    we have got a certain clerical staff. Are we, in effect,
    providing support staff for audit firms? Or is this a totally
    arms-length, third-party transaction where they come into
    AAFES. We are not providing or AAFES isn't providing or some of
    these other agencies isn't providing committed staff to support
    the audit done by a third party?
        Mr. Peterson. OK. We provide no people. We do provide space
    in our facility for them and we provide access to our
    computerized records.
        Mr. Ose. All right. Finally--Mr. Chairman, you are being
    very patient with me and I appreciate that.
        Mr. Horn. We have all afternoon, my friend.
        Mr. Ose. Oh, lordy, lordy. [Laughter.]
        I appreciate HCFA being----
        Mr. Horn. No, no. Forget the bells. [Laughter.]
        That is to keep us alert. [Laughter.]
        Mr. Ose. I appreciate the opportunity to visit with Ms.
    Snyder. The reason I do is that Medicare remains one of the
    largest programs we have and 14 percent, 7 percent, 5 percent
    of Medicare's number is a huge number. Which begs the
    question--and you are going to have to take me through it--you
    have got the payment error rate down in 2 years from 14 to 7
    percent. The other testimony we have heard indicates somewhat
    less than that in a payment error rate. Is it possible to get
    to the payment error rate that these other agencies are
    experiencing by their samples? And what is the relationship
    between getting to it and the cost we are likely to incur?
        Ms. Snyder. When we first started out trying to drive down
    the payment error rate, it was based off of a statistically
    valid sample and an extrapolation, if you will, of the error
    rate and the dollar amount established by the IG. And we have
    continued to use that methodology to try to measure what the
    error rate is for Medicare payments. And I would also like to
    point out that that is a measure of error. It is not a measure
    of fraud or abuse.
        Mr. Ose. I understand. I understand.
        Ms. Snyder. It is just a measure of our total due to error.
        Mr. Ose. Believe me, I know. I have had lots of
    constituents come in and talk to me about this.
        Ms. Snyder. OK. What we have found is we do believe that we
    can drive the error rate lower, since we have had such good
    success in the last 2 years. A large part of the dollars that
    we use for that came out of the MIP program, the Medicare
    Integrity Program, which was authorized under HIPPA. So we
    fully expect to spend those dollars on continuing to drive down
    the error rate. And that dollar amount does increase from year
    to year. We were at $560 million this year and it eventually
    increases to $720 million.
        I am cautiously optimistic that we can drive the error rate
    much lower than 7 percent. I think the fact that in 2 years we
    have seen good results from our corrective action plans and
    corrective activities that we have undertaken will help us
    reduce that even lower. And our goal is to get to 5 percent.
        We do recognize that in a program this large, there will
    always be some error. We don't know yet where that bottom line
    is or what that bottom line percentage is. Right now, as I
    said, we are pushing to get to 5 percent and then to evaluate
    where we can go from there. Again, I would like to point out
    that it is sort of like the old--if you will allow me--the diet
    analogy. That first 10 pounds is easy to lose. It is that last
    5 that is the killer. And we are starting to move into that
    last 5 pound range.
        So I do believe we can drive it lower. I believe that the
    funds that are available to us through the MIP program will
    help with that. The return on investment for all of our program
    integrity activities is 15 to 1, so we still have a good return
    on investment. So I am cautiously optimistic.
        Mr. Ose. So the 7 percent, again, is the rate at which we
    are able to identify the errors. And then, in terms of
    recovery, you are suggesting a 15 to 1 pay-back in terms of the
    cost that HCFA incurs in doing the identification. But how much
    or what is the--I don't even know what the----
        Ms. Snyder. The recovery.
        Mr. Ose. Yes. The recovery rate. Thank you.
        Ms. Snyder. It would be the recovery. Right. OK.
        Mr. Ose. It's my bill and I don't even know the darned
    phrase. [Laughter.]
        Ms. Snyder. We believe that we are going to recover the
    bulk of those overpayments. And, in fact, again, if you will
    remember, this is an extrapolated sample, if we look at our
    yearly activity and we look at our accounts receivable and look
    behind that, which may be a better place to look in terms of
    recoveries, what we find is that we capture back approximately
    $12 billion to $13 billion annually through offsetting
    collections and other receipts. And, of course, many of those
    dollars never show up. And I can submit the exact dollars to
    you for the record.
        Mr. Ose. I think that would be helpful, Mr. Chairman.
        Mr. Horn. Without objection, it will be put in the record
    at this point.
        [The information referred to follows:]

        The dollar amounts are: 1) new receivables for FY 1998
    total $15.4 billion; collections on receivables total $12.6
    billion; and, 3) the amount which is offset is $7.7 billion.

        Mr. Ose. My final inquiry is, Ms. Lee, Mr. Allen, and Mr.
    Peterson, if I understand correctly, you have third parties
    coming in and doing the audits in your agencies. And they are
    doing it for a fee that is negotiated and, if the pattern as
    identified by Mr. Peterson is correct, basically all we are
    providing is a desk and a phone and they bring their own
    personnel in and do the analysis. Is that correct?
        Mr. Allen. That might be more true in AAFES, who has 16
    years of experience in doing that. In case of us, within DOD,
    there is a little bit more effort than that, for a wide variety
    of reasons. Again, we are in a pilot program in DOD. We have
    not compressed our audit cycle. We are dealing with auditing
    contracts that are, in some cases, 4 years old. We have to go
    find that documentation. There is some effort associated with
    that.
        We have the Defense Finance Accounting Service in Columbus,
    OH, who makes the payments for us. They have records. They have
    to provide those records and they have to go through some
    effort to make the records available to the auditing firm for
    the audit. So I would say, initially, there is probably a lot
    more work, effort, in starting up an internal government effort
    to make records available to an outside auditing firm, but over
    time, one of the systemic things we would learn is we would be
    able to figure out how to get that effort down to next to
    nothing. And we might, then, in 16 years or in some period of
    time be somewhere close to where AAFES is.
        Mr. Ose. Let me introduce you to Mr. Peterson. He has got a
    model, I think, we ought to make----
        Mr. Allen. Well, absolutely. We benchmarked with AAFES when
    we started out the program and you are absolutely right. And we
    are doing the same thing with some other agencies today.
        Mr. Ose. Ms. Lee, is that consistent with your experience?
        Ms. Lee. We at OMB don't employ the auditors, but it
    certainly sounds very logical. And, of course, the specific
    contract terms and conditions are things that you would want
    the auditors to have access to to make sure that they have the
    right baseline.
        Mr. Ose. It is timely, Mr. Chairman, that we have these
    discussions since we are struggling with our appropriations
    and, granted, we are going to deal with it, but I daresay that
    if you were able to take Mr. Peterson's model, for instance,
    and apply it to Ms. Synder's organization and reduce not only
    the identification rate, but increase the recovery rate to
    reflect AAFES's, we would have substantially greater resources
    to commit to serving the people of this country and that is the
    underlying purpose of this bill.
        While I very much appreciate the gaps that we have not
    addressed, in terms of recovery and, if you will, the
    entitlement nature of some of your organizations, you know, we
    are going to try and fix this, subject to your testimony, and
    we are going to go forward. And I appreciate the opportunity to
    visit with you today. So, thank you. Thank you, Mr. Chairman.
        Mr. Horn. The gentleman is absolutely correct on the impact
    that it would make in a program such as Medicare. The gentleman
    from Oregon, Mr. Walden.
        Mr. Walden. Thank you, Mr. Chairman. I had a question for
    Ms. Snyder, I guess. Reading through your testimony, on page 3
    you talked about how most providers who make billing errors
    have no intent to do anything wrong, simply make honest
    mistakes, which I would tend to agree with.
        I guess what troubles me, having served 5 years on a
    community hospital board, I have seen the letters come out from
    the Department of Justice that allege just the opposite. And I
    believe it is the Fraudulent Claims Act that is invoked by the
    Justice Department on behalf of your agency, chasing claims
    that go back 8 or 9 years in some cases. Are you still using
    those tactics?
        Ms. Snyder. What we have tried to do, also, as part of our
    program integrity strategic plan, is to work to have more of a
    partnership with our providers, because we recognize some of
    the same concerns that you just raised. And we think that is
    partly why we have been so successful in pushing down the error
    rate. But through provider education, making sure that people
    understand the right way to bill, what the requirements are,
    what the right codes are, that, indeed, they are paid
    correctly, then, from the beginning. We still use the False
    Claims Act when it is appropriate. But I believe that it is
    more of a partnership effort, these days, to try to make sure
    we are paying claims correctly.
        Mr. Walden. So I guess I----
        Mr. Horn. If you could move the microphone a little closer
    to you, Ms. Snyder.
        Mr. Walden. So I guess I would say, Ms. Snyder, is, again,
    I have met with a lot of people and I represent a district with
    lots of small rural hospitals and all and reading those letters
    are extraordinarily intimidating. They say you either admit
    that you--on what is I think you have correctly recognized here
    probably a simple honest mistake, but they are being told
    either admit to false claims and fraud or we are going to come
    do major damage to your bottom line, taking a $2,000 error in
    billing and turn it into a $100,000 issue. And I thought it was
    overkill and I thought if I ever got in a position where I
    could say that, I would. Well, here I am. [Laughter.]
        And I guess----
        Ms. Snyder. And I certainly appreciate your guidance, sir.
        Mr. Walden. I also wanted to be in a position to say, in
    reverse, however--I am a bit off-topic here, but I think,
    because we are going to be putting pressure on you to go do
    this and, yet, there is this balance. And I always wondered how
    often does Medicare make payment errors on the other way? And,
    you know, what if the Fraudulent Claims False Claims Act was
    used in reverse? What is good for the goose ought to be good
    for the gander. And I am glad to see that you are kind of
    taking this a different direction.
        Not to say there isn't fraud out there. I realize there is.
        Ms. Snyder. I would just like to mention that the
    Department of Justice just recently issued new guidelines to
    try to take care of that overkill problem that you reference.
        Mr. Walden. Good.
        Mr. Horn. Can you get us those regulations?
        Ms. Snyder. Certainly.
        Mr. Horn. We will save a part at this point in the record,
    without objection, so they are spread out in this document.
        [The information referred to follows:]

        A copy of the Department of Justice's guidelines is
    provided here as an attachment to the transcript.

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        Ms. Snyder. Yes, sir.
        Mr. Horn. Thank you very much.
        Mr. Walden. I think that would be helpful because I know
    there was a lot of pressure brought in both directions.
        Ms. Snyder, in a letter back in December, I guess, of last
    year to Senator Kennedy, the administrator of HCFA stated that
    HCFA was unable to consider using private recovery specialists
    because we don't have the statutory authority to pay
    contractors a contingency fee basis. H.R. 1827 would provide
    that statutory authority. Is that something you would welcome?
        Ms. Snyder. Actually, one of the things that we are looking
    at is whether or not we would actually need a different kind of
    authority or a new authority. We believe that the authority
    that we have under the Medicare Integrity Program allows us to
    look at a variety of fee arrangements, if you will, including
    incentive payments or incentive fees with contractors. Our
    concern with that is that we would have a performance measure
    with the contractor that accounts not only for the
    identification of overpayments, but the fact that those
    overpayments are sustained through the appeals process and are,
    indeed, overpayments when we get to the end of the process.
        So we have been looking at our current authorities. There
    may be a slightly different interpretation since we responded
    to that letter. We don't believe that we need additional
    authority for recovery auditing.
        Mr. Walden. You don't. OK. All right. Thank you, Mr.
    Chairman.
        Mr. Horn. Well, that is a very important point, the
    contractor relationship within Medicare. How much control
    actually under the law do you have with the contractors on,
    say, a program such as this? On both error recovery and what
    not? Can you really get them to do it or are they just there
    and defy you?
        Ms. Snyder. No, sir. I think that, again, this is another
    relationship that has been over a very long period of time. We
    have been in business for 30 years with our fiscal
    intermediaries and carriers. We do give them direct instruction
    about activities to undertake. They have been involved in
    overpayment identification recovery audits. They do that work
    for us now. It is part of our contract agreement and budget
    agreements with them. They are paid to do that.
        We are, however, very interested--and I know that we have
    spoken about this before, about contracting reform and our
    ability to encourage competition among entities that might also
    be able to do Medicare work in addition to the insurance
    companies.
        Mr. Horn. How often does the Health Care Financing
    Administration take a look at contractors? And is there a fixed
    point in time for each contractor or how do you handle that?
        Ms. Snyder. There is a requirement that we do yearly
    contractor performance evaluations. HCFA has not been as
    diligent about that in terms of our contractor oversight, as we
    should be. Part of our performance evaluation expectations are
    around overpayment collections, financial controls, and those
    kinds of evaluation activities. We renew those contracts yearly
    and we do look at their performance.
        Mr. Horn. Anything anybody in the panel would like to state
    and comment on, based on any dialog that has gone on up here?
    Often we hear people halfway home say, gee, I wish I had said
    something about that. That isn't the way I look at it. So
    anything to add to this dialog, Mr. Peterson, based on the
    exchanges you have heard between Members and witnesses?
        Mr. Peterson. Well, I would just second the gentleman from
    GAO's comments about picking the low-hanging fruit. That is
    essentially what our internal staff does. And you notice that
    we recovered $33.8 million at a cost of less than $500,000 in
    personnel costs. So that is a very cost-effective way of
    recouping duplicate payments and missed discounts and so forth
    and displays that you can do it in-house instead of paying a
    contractor to do it. But that does not take the place of a
    commercial audit recovery firm because they possess the
    expertise that we don't have and audit recovery is not one of
    our core businesses. That is not what we are in business to do.
        We try to pay accurately the first time, but we do make
    mistakes. People make mistakes. But we try to catch them
    internally, if we can. Then, if we can't, what we miss, we pay
    the audit recovery firms to find and that is money that we
    wouldn't have if we didn't employ them.
        Mr. Horn. Is that done by an audit firm that is internally
    involved on a random sample basis? Or is that a total universe
    examined?
        Mr. Peterson. That is the total universe. They examine all
    of our records.
        Mr. Horn. What have you done as a result of their findings
    and recommendations that has lowered the amount of errors that
    have been had within the agency? Is it just a matter of
    training and getting more auditors on your own payroll? Or
    what?
        Mr. Peterson. Well, it is partly that. And it is learning
    to develop programs internally to find duplicate payments. We
    have found out that there are commercial auditors running
    computer programs looking for these. Two of our internal
    auditors wrote programs for us that we can learn ourselves,
    that our small internal staff runs on an ad hoc basis every
    month to look for these errors. We have found that they were
    finding a lot of credits on vendor statements. So we have added
    people to our internal staff to do that. And that has been very
    cost-effective.
        So we are constantly learning from them. We meet quarterly
    to see what they have found, who they are finding it from, what
    firms. We go back and look at it and find out why the errors
    occurred and try to correct them. We are not as good as what we
    would like to be, but we certainly make every conscious effort
    to improve.
        Mr. Horn. Well, I thank you for that remark. Mr. Allen.
        Mr. Allen. We want to be like AAFES. [Laughter.]
        Mr. Horn. It depends on which AAFES you are talking about,
    I think.
        Ms. Lee, any comments on this?
        Ms. Lee. Chairman Horn, one of the beauties of having this
    opportunity at OMB is to see the broad management issues. It
    struck me, in preparing for this hearing, that I saw in several
    cases where there were discussions of the contractors not, for
    whatever reason, feeling an affirmative requirement to notify
    the government if they had been or suspected they had been
    overpaid. And so I have made an action item to talk to the
    CFO's. I have pulled out the payment clauses myself and was
    reading them and saying, you know, perhaps this is something we
    ought to explore. So I have got a self-action item from this
    hearing.
        Mr. Horn. Good. Well, when you have a self-action item, I
    am sure it is completed. So thank you. Ms. Lee, on this point,
    you will recall our Debt Collection Improvement Act of 1996
    that we tucked into the Omnibus Appropriations Bill of that
    year. There was a provision in there called gainsharing that
    would allow agencies to retain a portion of delinquent debts
    collected and this provision was designed to be an incentive
    for agencies to collect delinquent debt, both in terms of human
    resources and in terms of up-to-date computing capability.
        As far as I know, no Federal department or agency is
    presently using the gainsharing program for debt collection. Do
    you know why this is?
        Ms. Lee. Chairman Horn, my understanding is we at OMB have
    some more work to do regarding budget authority and how that
    gainsharing activity plays. And we look forward to working with
    the Congressional Budget Office to sort through those issues.
        Mr. Horn. When are we going to sort it out?
        Ms. Lee. Soon.
        Mr. Horn. How soon? Next month?
        Ms. Lee. Could I try after recess, again?
        Mr. Horn. Next week? Well, after the July recess, I am all
    with you.
        Ms. Lee. I will do that.
        Mr. Horn. OK. And because there is an analogy here. And
    when you return that money, to what degree will it be used? Or
    will OMB be sitting on it to try and say the deficit is less
    than it is? I don't know what pot you put that in. Does it just
    sit in the agency accounts and they can't touch it?
        Ms. Lee. I owe you an answer.
        Mr. Horn. Pardon?
        Ms. Lee. I owe you an answer.
        Mr. Horn. OK. Without objection, Ms. Lee's answer will be
    in after the end of the July recess.
        [The information referred to follows:]

        [GRAPHIC] [TIFF OMITTED] T3548.059

        Mr. Horn. Very good.
        Now, Mr. Peterson, according to your statement, over the
    last 5 years, the Army-Air Force Exchange Service recovered
    about $130 million through recovery auditing and I congratulate
    you on that. What was the total amount that was audited? Was it
    all of the $130 or did you just miss some or how did it work?
        Mr. Peterson. Well, the total amount audited would have
    been, sir, approximately $5.5 or $6 billion times 5, over the 5
    years.
        Mr. Horn. Did you pick any goal when you started the
    internal function, down the line? Did you say, gee, if we get
    10 percent out of this we will be lucky and paying the bills
    and so forth? Or how did you go about it in terms of a
    strategic plan that related to how you target the--one, reduce
    the errors; two, get the recovery.
        Mr. Peterson. For the commercial audit recovery, sir, or
    the internal?
        Mr. Horn. Well, I would like to hear about both. I am
    trying to get experiences in the record here.
        Mr. Peterson. Well, I wasn't there in 1983 when we started,
    but, I guess, at that point, we knew that private industry was
    using commercial recovery firms and that we knew that we must
    have some erroneous payments, overpayments. And so we started
    our first contract back then. I don't know that we really had a
    specific goal as far as what we were going to recoup. The
    percentage in that first contract was very high. It was 35 to
    40 percent and, as we have gone forward, the percentages have
    gone down with each contract that we have administered. And
    that is due both to the competition within the recovery
    business and also the ease with which they can audit records.
    But I can't give you an answer, sir.
        Mr. Horn. Well, in other words, you used the private sector
    as the model in your business, which is sort of like the
    private sector.
        Mr. Peterson. Yes. Yes, we have applied private business
    practices whenever we can.
        Mr. Horn. Did you get a higher level of return than
    business? How close was it to----
        Mr. Peterson. No, we recover probably 95 to 98 percent of
    the claims that are validated. Now perhaps 80 percent of our
    claims that are issued are validated. So out of 100 percent, 80
    percent are valid. And, of that, we probably collect 95 to 98
    percent.
        Mr. Horn. So your cost-benefit ratio is very high, then, on
    recovery.
        Mr. Peterson. Oh, yes.
        Mr. Horn. Well, that is very helpful and I would ask both
    Mr. Peterson and Mr. Allen, of the amounts identified through
    recovery audits, how much was disputed?
        Mr. Peterson. Well, 20 percent of ours was disputed and 20
    percent is what our contracting officer agrees with, when a
    supplier comes back and says, well, this is the deal.
        Mr. Horn. And is that, essentially, how vendor disputes are
    resolved? By the actual contract officer involved?
        Mr. Peterson. Yes, it is our internal procurement or
    purchasing person who listens to the response and that person
    decides whether or not the claim is valid or not. And if it is
    valid, then we deduct from the next payments. So we get a very
    high percentage of the money. If the contracting officer feels
    that the vendor's claim rebuttal is valid, then the commercial
    recovery firm will abide by our wishes.
        Mr. Horn. Mr. Allen, does your system work the same way
    with the role of the contracting officer?
        Mr. Allen. Yes, sir, it does. Our statistics as to how much
    is initially identified as potential overpayment, how much of
    that potential overpayment is sustained as a legitimate claim
    by the contracting officer, and then, subsequently, how much of
    that claim is collected would differ because we are in the
    pilot program. I can give you those numbers if you would like.
        Mr. Horn. What are some of the most common complaints by
    vendors who are charged with overpayments?
        Mr. Allen. During our initial pilot program, I think the
    most common complaint is the one that Mr. Walden would have
    raised. He said, I am not sure I would want anybody coming into
    my records 4 years after the fact and then changing our
    business relationship, in effect. Having gotten past that,
    because there is the contract language which allows us to do
    that, we needed to get through a number of issues with regard
    to what is the proper interpretation of the contract warranty
    clause as to what discounts should have been offered and were
    not offered. A whole variety of different things.
        Because part of our business was, with regard to the
    grocery business, if you will, that is, contracts awarded on
    behalf of the Defense Commissary Agency. Some of the business
    practices in the grocery business were not typical of
    government contracting, that is, contractors would come into a
    grocery store, if you would, and issue vendor credit memos. The
    contractor said that amounts to a discount offered to you. We
    needed to go get that documentation and verify as to whether or
    not that was true. So it was the different areas of dispute
    arose first from old documents and, second, from different
    business practices within the commodities we audited.
        And I would think that might hold within virtually any
    marketplace. It would vary substantially by marketplace by
    commodity.
        Mr. Horn. Mr. Allen, the Profit Recovery Group has made
    recommendations to the Defense Supply Center of Philadelphia on
    ways to reduce future overpayments. Do you know to what degree
    these recommendations have been implemented?
        Mr. Allen. Some of them have been implemented, some of them
    have not. The ones where we will find it most difficult to
    implement are the instances where there are changes to the
    Prompt Payment Act. And, as you know, there were hearings by
    this committee earlier on that subject.
        The second area where it would be most difficult would be
    changes to systems. You have to get a certain information
    technology to make those changes, in order to accommodate
    better recordkeeping and then better audit recovery.
        We will seriously consider one of those recommendations
    because one of the prime benefits out of the recovery auditing
    is the ability to make systemic decisions. That is how you get
    from an initial identification of four-tenths of 1 percent
    overpayments down to one-tenth of 1 percent on the recurring
    basis. It is by identifying those systemic issues. And we are
    very interested in doing that.
        Mr. Horn. While we have you on systemic issues, let me ask
    the three of you here, and Ms. Lee has certainly got her right
    to get into this, and that is the year 2000 situation. To what
    degree have the more businesslike operations such as Mr. Allen
    and Mr. Peterson, to what degree are you on and how far along
    are you on year 2000 compliance?
        Mr. Peterson. Sir, we are 100 percent.
        Mr. Horn. 100?
        Mr. Peterson. Yes.
        Mr. Horn. Good. And how about you, Mr. Allen?
        Mr. Allen. I would have to provide that answer for the
    record, sir.
        Mr. Horn. Since we are looking now, Ms. Snyder, on the sort
    of quarterly basis, looking at programs, not just departments
    and their systems, and you are part of HHS, you are a big part
    of it, you are the tail that makes the dog move in one
    direction or the other, what is happening on your front with
    the year 2000?
        Ms. Snyder. The last report that I saw that was provided to
    the Deputy Secretary is that HCFA systems, mission critical
    systems, are 100----
        Mr. Horn. All right, these are your self-applied and self-
    reported mission critical. But we are now saying we don't
    really care about the rest of HHS, we care can they deliver on
    Medicare?
        Ms. Snyder. We believe we are going to be there 100
    percent. The Medicare contractor systems have gone through
    their first round of certification and passed. They are now in
    recertification and testing. And the HCFA internal systems are
    in the same place. The system that I own as the business owner
    is the Financial Accounting System that has gone through its
    second round of testing and passed. We believe we are ready.
        Mr. Horn. Great. And, that will show in your next quarterly
    report? Will it? Or was it in this one?
        Ms. Snyder. Sir, I don't know. That is submitted by the
    Chief Information Officer, but I can certainly provide that for
    the record. I know those reports lag behind a little bit.
        [The information referred to follows:]

        We are pleased to submit to you the two most recent HHS Y2K
    quarterly progress resports, dated May 15, 1999, and August 13,
    1999. Both make it clear that all of HCFA's mission-critical
    internal systems and external claims processing systems were
    renovated, tested, and certified as compliant by April 1999.

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        Mr. Horn. Well, you are right. They do. We only had two
    major programs that were 100 percent and that was Social
    Security and the Weather Service. So you can get your Social
    Security check down in Miami and the weather will be nice, so--
    [laughter.]
        Ms. Snyder. OK.
        Mr. Horn. Except if you have been in Miami in the summer,
    you know there is no weather nice down there.
        Ms. Snyder, in your statement you say you are currently
    using commercial off-the-shelf software to identify many of the
    same payment errors that would be identified by a recovery
    auditor. What benefits are you deriving from this software and
    how would a private recovery audit firm impact your efforts?
        Ms. Snyder. We have delivered a benefit from our correct
    coding initiative we started in 1996. I believe the cumulative
    savings have been identified at around $830 million, about $280
    million annually. We also recently purchased or leased, if you
    will, some additional software edits which we are just now
    working through to make sure they satisfy Medicare policy
    before implementing them. So we don't yet know what the return
    on that particular investment will be, although we anticipate
    that it will be a good return on the investment.
        It is an interesting question in how would recovery audit
    affect that. I think it is two different parts of the
    continuum, if you will. Most of these edits are focused at a
    pre-pay review and so they are to catch the error before it
    actually happens. So those edits are aimed at pre-payment. The
    post-pay audit would be looking at payments that got through
    that edit screen and went out the door and that we would need,
    then, to recover.
        So I think they are two different parts of overpayment
    reduction.
        Mr. Horn. Now has any of this been discussed with your
    authorizing committee or your Appropriations subcommittee, in
    terms of the systems you have developed and the attempt to
    remove the errors on overpayments? Has that question come up
    before either your authorizers or your appropriators?
        Ms. Snyder. I know that there have been discussions with
    them, certainly, over time. I haven't been party to any of
    those discussions, but I know that there have been questions
    about automated edit savings, recoveries, and that sort of
    question.
        Mr. Horn. To improve a particular computer system and their
    human resources that go with that, do you have to go to the
    Appropriation subcommittees? Or do you have the authority,
    long-range, within Medicare, to do that?
        Ms. Snyder. There are really two types of funding
    authorities that we have. One, our administrative accounts are
    subject to the general appropriations process, which is where
    most of our software development would occur, would be in that
    annual appropriations process. We also have the mandatory
    funding and the Medicare Integrity Program, which is an
    appropriation that is funded for a period of time, for a
    continuing, indefinite, authorization.
        Mr. Horn. Now, as I understand your filing here in your
    written statement, you note that in fiscal year 1998, the
    Department of Health and Human Services reported estimated
    improper payments of $12.6 billion. This amount was down from
    $20.3 billion in fiscal year 1997 and $23.2 billion in fiscal
    year 1996. What initiatives, just for the record, were used by
    the Department of Health and Human Services to reduce the
    estimated amounts of improper payments? How would you sum that
    up?
        Ms. Snyder. I would say that it was a combination of
    efforts. As you know, our error rate and our payments are a
    series of complicated kind of computations. I think probably,
    in terms of importance, probably the correct documentation and
    billing, talking to providers to get them to understand how to
    bill certainly had, we think, a huge impact. We did a number of
    seminars. We went out to medical schools and talked to
    residents who were getting ready to establish practices about
    how to bill. So a lot of those kinds of educational efforts. We
    also----
        Mr. Horn. Well, that is a very important point. Has any
    software ever been provided by Medicare for medical school
    graduates? Or do they just leave that to the private sector and
    go find your own?
        Ms. Snyder. There are two answers to that question. One, we
    provide billing software free of charge so that people will
    know how to bill through billing agents and to our
    intermediaries and carriers. But one of the things that we have
    done that I think is really innovative and it is going to have
    a pay-off is to put what is essentially computer-based
    instruction online for people to be trained in, again, how to
    bill claims, what are the right codes to use, and how do you
    get into the Medicare system.
        I think we have reached over 10,000 people at hundreds of
    sites in hospitals. We have done 44 live seminars to work on
    this problem. We have reached more than 19,000 people this year
    alone. And if you look at our website, you might find it
    interesting. There is a pre-test and a post-test. We have
    actually been able to measure knowledge increase from taking
    it. And if you are interested in the pre-test or the post-test,
    you can find it at www.Medicaretraining.com. And this is----
        Mr. Horn. Mr. Kaplan will write that down and will give me
    a thorough analysis of that. You want to give him that again?
        Ms. Snyder. It is www.Medicaretraining--one word--.com. And
    it has been a very successful web location. People are going
    into it and using it, physicians and hospitals.
        Mr. Horn. Well, that is very helpful. In your statement,
    you said that you currently use commercial off-the-shelf
    software to identify many of the same payment errors that would
    be identified by a recovery auditor. And I guess the question
    would be what benefits are you deriving from the software and
    how would a private recovery audit firm impact them? As I
    mentioned earlier that do we need a new development for this
    particular audit approach or is it satisfactory in the private
    sector already and being used by people?
        Ms. Snyder. My assumption would be that recovery auditors
    would have their own software tools to apply to a recovery
    audit and would not need special development. What would be
    important is that recovery auditors understand the use of the
    definitions of medical necessity and how Medicare claims are
    treated for purposes of payment, which would be different than
    just applying software to that evaluation. That is to look
    behind the face of the claim.
        Mr. Horn. My last question to you, Ms. Snyder, is,
    according to the April 1999 article in the Bureau of National
    Affairs Medicare report, the Health Care Financing
    Administration has yet to issue guidance for health care
    providers to return funds they inappropriately received from
    Medicare. According to the article, providers that voluntarily
    identify overpayments attempt to send checks back to HCFA, only
    to have them returned. So, can you give us a sense of how vast
    that particular situation is in terms of dollars at stake? Or,
    how many people are involved in that?
        Ms. Snyder. I would need to get back with more specifics.
        Mr. Horn. OK, without objection, it would be put at this
    point in the record.
        [The information referred to follows:]

        A copy of our June 1999 Program Memorandum, that gives
    instructions on tracking and reporting procedures for
    unsolicited/voluntary refund checks from providers/suppliers,
    is provided here as an attachment to the transcript.
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        Mr. Horn. And then has the Health Care Financing
    Administration developed guidance for the acceptance of these
    returned overpayments?
        Ms. Snyder. Yes, sir. We have. We have issued those
    instructions to our contractors.
        Mr. Horn. And, so that has already gone out, that guidance?
    There is nothing else to do on that part?
        Ms. Snyder. I believe that there will be more to do and
    that we need to followup to make sure that the guidance is,
    indeed, being followed. We have given the instructions.
        Mr. Horn. OK, so we will hold the record open to get your
    response as to the degree to which it has been passed on to the
    contractors and the degree of achievement of the guidance that
    has been to-date.
        Ms. Lee, do you have any comments, listening to this
    dialog?
        Ms. Lee. No, sir.
        Mr. Horn. OK. Well, you have all been fine witnesses and we
    appreciate you coming. I think we have got a lot of detail in
    the record to give us a feel about how this system might work
    should it become law, so thank you very much for coming.
        We now go to the last panel of the day, panel three. And
    most of the audience has already left, so panel three, we can
    stay here for hours. OK, we have Mr. Dinkins, Mr. Kenny. Let us
    see. What happened to Mr. Kenny. He is accompanying you. OK.
    And Mr. Wilwerding is OK. Mr. Lyons, Mr. Booma, and Mr.
    Koehler. Good. Anybody behind you that needs to be sworn in
    besides Mr. Kenny? Anyone behind you? We might as well get them
    on the record. Clerk will get their names.
        Anyhow, raise your right hands, please.
        [Witnesses sworn.]
        Mr. Horn. OK, the clerk will note that the six prime
    witnesses and their back-up of three are sworn in. So we will
    start with Mr. Dinkins, the executive vice president of the
    Profit Recovery Group International. And he is accompanied by
    Mr. Jack Kenny, the director for government of the Profit
    Recovery Group International. So, Mr. Dinkins, we are delighted
    to have you here.

     STATEMENTS OF PAUL DINKINS, EXECUTIVE VICE PRESIDENT, PROFIT
     RECOVERY GROUP INTERNATIONAL, ACCOMPANIED BY JACK KENNY, THE
     DIRECTOR FOR GOVERNMENT, PROFIT RECOVERY GROUP INTERNATIONAL,
       INC.; DOUGLAS R. WILWERDING, CHIEF EXECUTIVE OFFICER AND
     PRESIDENT, OMNIUM WORLDWIDE INC.; TERRENCE LYONS, DIRECTOR OF
        ACCOUNTING, WALGREEN CO.; STEPHEN R. BOOMA, HEALTH CARE
    CONSULTANT; AND ROBERT KOEHLER, ATTORNEY-AT-LAW, PATTON BOGGS,
            ON BEHALF OF THE AMERICAN LOGISTICS ASSOCIATION

        Mr. Dinkins. Thank you, Mr. Chairman, for the opportunity
    to testify before this committee.
        Profit Recovery Group provides a unique perspective because
    we are the largest and only public company in recovery
    auditing. We audit several trillion dollars in transactions
    annually; serve over 3,000 clients, including over half of the
    Fortune 1,000 here in the United States; and we have over 2,300
    employees in 23 countries.
        Recovery auditing is a professional service pioneered by my
    company roughly 28 years ago to identify and recover
    overpayments made to suppliers of goods and services. This
    practice has recovered billions of dollars in the private
    sector that would otherwise have remained undetected. The
    service is risk-free. Professional fees are paid from the
    proceeds of the recovered funds. The contingency fee basis for
    payment is the best possible approach we think because it
    focuses on performance and puts all of the risk on the
    contractor.
        It is a fact that every organization experiences
    overpayments. Overpayments typically occur as a result of human
    and systemic errors. Recovery auditing is most commonly applied
    by PRG in large environments. Error rates are typically small,
    however a small error rate becomes very meaningful in a large
    environment. For example, most large, private-sector
    organizations have an accuracy level of 99.9 percent in the
    private sector. The error rate of 0.1 percent becomes
    meaningful as it represents $1 million of loss for every $1
    billion of purchase.
        As you have heard from prior testimony, government has
    already been benefiting from recovery auditing. The Army-Air
    Force Exchange System has employed recovery audit services
    since the early 1980's. AAFES makes purchases of roughly $5
    billion per year and the most recently completed audit of 1998
    produced $25 million in recovered moneys. To date, PRG has
    recovered over $114 million for AAFES.
        We are now finalizing a recovery audit demonstration
    program for the Department of Defense. Approximately $25
    million in overpayments have been identified to date with over
    $4 million of this amount recovered or in the process of being
    offset. The balance is in various stages of recovery. This
    represents a rate of recovery of 0.40 percent or roughly $4
    million per $1 billion of purchase. And, Mr. Chairman, this
    rate of recovery is pretty much synonymous with what we
    experienced at AAFES.
        The program within DOD is now being expanded to the balance
    of the Defense Working Capital Fund. In our view, the expansion
    was limited to the Defense Working Capital Fund because it is a
    revolving fund and all recovered moneys go back to the fund. We
    recommend expansion of the program to the balance of the
    appropriated fund areas quickly to optimize benefits. Prior to
    the bill under review, there has been no incentive for an
    agency to conduct recovery audits in appropriated fund areas
    because moneys recovered would otherwise go back to Treasury.
        Summarizing the benefits to government, everyone wins.
    Agencies will have money returned. General government, through
    the Treasury, will recover funds. The taxpayer sees his money
    well-spent. And the Congress improves executive management.
    Hence, it seems impossible to question the value of expanding
    the process.
        Mr. Chairman, while we have suggestions to improve the
    language in this legislation, let me say at the outset that we
    very strongly support this bill. We believe that the concept
    has been well-tested over decades in the private sector--
    roughly 9 years at AAFES and in the current demonstration
    program.
        There are several recommendations in my written testimony
    and I would like to focus on only two of them. First, in
    section 3562, we suggest changes to section 3. We respectfully
    submit that where the private sector has attempted to implement
    internally its own recovery audit programs, it is done only
    after years of experience with a professional service. Even
    private sector companies that have developed some internal
    capability have done so in conjunction with ongoing external
    professional services.
        Next, in section 3564. This section is written with
    recoveries of appropriated funds in mind. Revision is suggested
    and required to specify how moneys from revolving funds would
    be treated, such as the Defense Working Capital Fund; AAFES,
    which is not an appropriated fund; or HCFA, which is a trust
    fund. It is our understanding that all moneys, less contractor
    fees, should go back to these revolving funds.
        In summary, Mr. Chairman, we believe this legislation is
    both well-crafted and well-intentioned. With the incorporation
    of the recommendations proposed in our testimony, this bill
    will provide a powerful tool for all segments of government to
    recover overpayments, correct problems, enhance payment
    processes, and adopt private sector business practices. Thank
    you, Mr. Chairman.
        [The prepared statement of Mr. Dinkins follows:]
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        Mr. Horn. Well, I thank you. I am very impressed by the
    detailed recommendations you have made and that is going to be
    very helpful to us when we offer a manager's amendment, namely
    mine, to the markup. And so thank you very much for delving
    into that. I appreciate it. And we always welcome any of you
    that have some comments on the specific language of the bill.
    That is most helpful to us.
        We now go to Mr. Wilwerding. Thank you very much for
    coming. He is the chief executive officer and president of
    Omnium Worldwide Inc.
        Mr. Wilwerding. Thank you, Mr. Chairman, and good
    afternoon. On behalf of all the people at Omnium Worldwide,
    founded 30 years ago, I want to offer into testimony our
    suggestions and our analysis of this legislation and the
    important impact it can have on the Federal Government.
        Omnium Worldwide is both a domestic and international
    specialist in cost containment and receivable management
    issues. Omnium has offices in nine States as well as in Sao
    Paulo and Rio de Janeiro, Brazil, and Mexico City, Mexico. We
    operate on issues from overpaid insurance claims to precharge
    often delinquent accounts. Omnium recovers hundreds of millions
    of dollars each year for our clients.
        I have been asked to speak today because of my 14 years of
    experience in this industry. I commend the committee's desire
    to address the problem of overpayments within Federal agencies.
    My objectives today are as follows. First of all, to testify on
    the need for overpayment identification and recovery within
    Federal agencies. Second, to outline the size and potential of
    the overpayment market, specifically in the private health care
    industry, and the purpose of extending this potential to
    Federal agencies. Third, to speak on everyday practices of
    overpayment recovery in the private sector. And, finally, to
    offer some suggested changes to the language of H.R. 1827 that
    may enhance the effectiveness of the legislation.
        Our company's existence and that of the industry
    specifically formed around the identification and recovery of
    medical benefit overpayments is a testament to the problem in
    the marketplace and the need for this legislation. As defined,
    overpayments are not fraud, but common administrative and
    clerical errors, as I believe Ms. Snyder pointed out earlier
    today. One of our companies, Accent Insurance Recovery
    Solutions is the leading provider of overpayment identification
    and recovery for commercial insurers, managed care, and self-
    funded organizations.
        Health care benefit overpayments occur when funds are paid
    out errantly. Numerous reasons exist for these overpayments,
    including duplicate payments, payments to ineligible
    beneficiaries, calculation errors, and payments to wrong
    providers. The vast majority of these dollars do not deal with
    medical necessity. These types of overpayments are a large
    percentage of the estimated $12.6 billion overpaid by Medicare
    in 1998.
        Private overpayment recovery firms employ state-of-the-art
    proprietary technology to identify, validate, and recover claim
    overpayments. Commercial payers outsource these functions
    because they are not the competency of the payor, pursuing
    these claims is not a cost-effective allocation of resource of
    the payor, and the capital investment to develop the technology
    infrastructure to carry out these functions is not a primary
    investment. Given that private payers use these services on a
    contingency fee basis, there is no fund outlay to realize the
    benefits of the service. The entire burden of the function
    falls on the vendor or contractor.
        In the majority of cases, Accent is asking the provider of
    service, physician, hospital or clinic for the refund. Both
    expertise and professionalism are mandatory as we work with the
    largest providers across the country daily, resolving both
    clear-cut and complicated overpayment situations. These
    cooperative relationships are of paramount importance to the
    provider, the payor, and our company. The result is a very high
    recovery rate and no provider complaints.
        Estimates are that 4 percent of total claims paid by the
    private health insurance sector are overpaid. This results in
    nearly $7.6 billion in overpayments for commercial payers.
    Contrast this with the reported 7 to 16.5 percent error rate
    for Medicare. The dollars available for identification and
    recovery are staggering. And, at this point, Mr. Chairman, I
    would like to offer in that I do state the 7.5 to 16.5 percent.
    There is record of 16.5 percent being the actual error rate
    when Medicare includes not just claims that are entirely
    overpaid, but also those that are partially overpaid, which
    does raise the estimate of dollars being lost to overpayment
    annually.
        Private recovery firms average recovery rates between 50
    and 70 percent of dollars validated as overpaid. We believe the
    success in the private sector can be mirrored in the public
    sector. Private recovery firms recover from the same providers
    that are being overpaid by Medicare. The claims payment errors
    are being made by fiscal intermediaries and carriers hired by
    HCFA to administer the claims. These contractors are the very
    same carriers who hire private recovery firms to recover their
    overpaid dollars on their commercial insurance portfolio.
        Over the last 3 years, the estimate is that HCFA has
    overpaid some $56 billion in both fraud and waste. In that same
    time period, recoveries from fines and restitutions have
    dropped 65 percent from 1997 to 1998, down to $321 million.
    Recoveries for the first half of 1999 are estimated at $176
    million. By employing private recovery firms, the Medicare
    Trust could realize conservatively billions in savings in the
    next 3 years.
        H.R. 1827 is an important step toward implementing the
    mandatory use of auditing firms. A few areas of emphasis would
    enhance the legislation and ensure success of this most
    important effort this committee is now undertaking. First, we
    suggest that both auditing and the recovery function be
    mandated. As the legislation currently reads, the recovery
    function is assumed, but not specifically stated. Auditing
    without recovery will not yield the results desired.
        Second, timeframe should be added to specify the
    appropriate lapse between the audit findings and the beginning
    of the recovery activity. This critical element determines the
    recovery success.
        Third, set-offs, while effective, are an extreme burden on
    providers and their accounting systems and I wish Mr. Walden
    was here with his experience in the hospital board. I am sure
    he would attest to the fact that the accounting of set-offs is
    very difficult for the provider to handle.
        Fourth, the committee should be very cautious in allowing
    agencies to opt out of the program. Deferrals will greatly
    reduce the recoveries and available benefits from this prudent
    legislative act.
        Fifth, some types of overpayment, audit, and recovery may
    incur expense that exceeds the 25 percent fee cap. And here I
    echo Mr. Peterson's testimony.
        Finally, the committee should consider the financial net
    benefit and allow some fee arrangements to exceed the cap where
    appropriate.
        H.R. 1827 is a very important step in the pursuit of
    merging the private sector efficiency and expertise with the
    government improvement opportunities. I appreciate the chance
    to address the committee and welcome any questions.
        [The prepared statement of Mr. Wilwerding follows:]

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        Mr. Horn. Thank you very much for that helpful statement.
    Mr. Terrence Lyons is director of accounting, the Walgreen Co.
        Mr. Lyons. Mr. Chairman, thank you for the opportunity to
    appear before this committee. My name is Terry Lyons and I am a
    director at the Walgreen Co. Walgreen's is a leading drug and
    general merchandise retailer with fiscal year sales for 1998 of
    $15.3 billion. My responsibilities include the management of
    our outsourced recovery audit process. My testimony provides a
    private sector view of recovery audit benefits and how the
    Walgreen Co. uses the process.
        Walgreen's recognized long ago the benefits of using a
    professional service provider to identify and recover
    overpayments. Purchasing and payment systems used by any volume
    intensive organization like Walgreen's are designed to be cost-
    effective and to provide for maximum through-put to ensure
    timely payment of supplier invoices. However, mistakes occur,
    whether through human error or systemic breakdowns.
        Our experience has indicated that human error is the most
    common contributing factor in payment errors. Human error can
    never be entirely eliminated. Therefore, the need exists for a
    safety net to audit payment transactions for accuracy and
    validity, recover any overpayments, and to identify why
    overpayments occur.
        The most attractive advantage for utilizing a recovery
    auditing service is that there is no risk or investment
    required. The development of internal controls and/or programs
    to conduct comprehensive recovery auditing is simply not 100
    percent cost-effective. We use the largest service provider,
    the Profit Recovery Group International who has broad
    experience in many operating environments.
        The value of recovery auditing to us is apparent in the
    dollars recovered from the two most recent audit years. The
    audit of our 1996 purchases was completed in October 1998 and
    we recovered $16.9 million in overpayments on a purchase volume
    of $8.5 billion. The audit of our 1997 purchases is just now
    being completed and we expect to recover approximately $17.5
    million in overpayments against a purchase base of $9.7
    billion. Although the numbers are large, nearly $35 million
    just over the past 2 audit years, they actually indicate an
    error rate of only about 0.19 percent. Meaning that 99.8
    percent of our payable transactions were processed and paid
    correctly.
        The success of our recovery audit activity is based on a
    set of mutually identified duties and expectations from both
    parties. We, as the client, must fully support the process. We
    must provide our service provider with the access to all
    required media, both electronic and paper, needed to research,
    identify, and document any instances of overpayments and/or
    underdeductions. Points of contact are established within the
    purchasing, transportation, accounts payable, accounting, and
    finance areas to liaison with contractor personnel to provide
    whatever support is required.
        Our recovery audit firm has responsibilities and duties to
    ensure the success of their effort. They gain a full
    understanding of our purchasing and payment systems for both
    electronic and paper transactions. They meet and develop good
    working relationships with all of the designated points of
    contact within our organization and they protect our vendor
    relationships. In short, we expect our contractor to function
    in a fully outsourced manner that represents the interests of
    the Walgreen Co.
        The question of why Walgreen's would employ an outside firm
    to do recovery auditing rather than doing it internally has
    certainly occurred to you. The answer is simple. As a company,
    we have chosen to invest our developmental dollars in what we
    do best: systems and technology that provides improved
    productivity within our stores and improved customer service.
    Also the investment in technology and resources needed to
    develop this kind of capability in-house could be cost-
    prohibitive. We find it attractive to outsource this function
    to a professional recovery audit firm. They have the
    technology, the resources, and the expertise to do what they do
    best.
        In summary, Mr. Chairman, we have found the use of
    professional recovery audit services to be invaluable in both
    recovering passed-over payments and improving internal
    controls. Among the major benefits: We recover millions of
    dollars each year, we incur no financial burden, the process is
    not disruptive to our normal operations, and the nature of the
    service is ongoing with benefits, year after year. As a private
    sector user of audit recovery services, I believe recovery
    auditing services for the government is a terrific idea. It
    will result in the recovery of a great deal of money and
    further demonstrate how government can benefit from private
    sector business practices. Thank you, Mr. Chairman.
        [The prepared statement of Mr. Lyons follows:]
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        Mr. Horn. Well, we thank you for that very thorough
    statement. Our next witness is Mr. Stephen Booma, health care
    consultant who has had quite a rich experience with the
    Travelers Insurance Co. and Mutual of Omaha Insurance Co. We
    are glad to have you here.
        Mr. Booma. Thank you, Mr. Chairman. And I would like to
    thank the subcommittee for allowing me to discuss this with
    you.
        As you said, I do have quite a history with the health
    insurance industry. I am 27 years in this business. I have 24
    years with the Travelers. At the Travelers, I was president of
    their regional home office in Chicago. I also ran other
    strategic business units. At Mutual of Omaha most recently, I
    headed up their managed care area, president of their HMO
    subsidiary, and I was also responsible for all of their claim
    payment. So, in short, I was the one who had to make the
    decision to use an outside vendor or to do it in-house. And I
    will explain my comments on that. Right now I am operating as
    an insurance consultant working in mergers and acquisitions,
    but also working with companies in the managed care arena to
    improve their performance.
        Today, I would really like to address my comments as a
    private administrator of health plans. And I would say, from
    the outset, that we chose to go outside and use private
    recovery firms. I also believe strongly, at the outset, that
    the Federal Government, as the largest purchaser of health
    plans, should also use outside recovery firms.
        The reasons why. They are really pretty simple and we are
    at the point today, this afternoon, where I think we have
    discussed them enough where almost everyone is in agreement. So
    it is wonderful. But I will just maybe emphasize a couple of
    points. First, and foremost, recovery firms have the expertise
    and have the highest level of professionalism in handling this
    type of work. That is their only business. That is not the core
    business of anyone other than the recovery firms. So it makes
    perfect sense to allow the experts to do it.
        If you have someone like HCFA start to use outside recovery
    firms, you will actually see competition within other firms to
    do that work and the expertise will grow. If that expertise is
    tried to develop inside, I can almost guarantee you that I
    wouldn't see that type of growth in this level of business.
        The amount of money in overpayments is staggering. And I
    think we all agree that they can occur simply from human error.
    To me, it doesn't make any sense to have the folks that are
    making the human errors try to go get the money they made the
    errors on. Human nature tells you that if you make an error,
    there is a strong inclination not to point that out. That would
    be one of the primary reasons that we chose to go to outside,
    because we wanted people that were not attached to the process
    to make those decisions.
        In the health care business, doctors, hospitals, and health
    care providers of all kinds and insurance companies are very
    familiar with this process. And, in fact, it is not an
    adversarial process, at least on this particular process.
    Oftentimes, insurance companies, Managed Care Organizations are
    at opposite ends with providers, but providers really look for
    help in solving overpayment situations. They know, most of the
    time, that they have made overpayments. It is important to work
    with them to try to correct those overpayments and they are
    pleased when they can do that in a logical and orderly manner.
    And the recovery firms are best positioned to do that.
        Our customers understand, especially the larger ones within
    the private insurance world, that errors occur. And they are
    most interested in making sure that those errors are corrected
    and that it is done in an orderly manner. If you don't employ
    recovery firms, then the process and the length of time is
    difficult and oftentimes very burdensome. Insurance companies
    who take on the full risk of contracts for individuals or small
    groups understand the use of this too and benefit directly from
    using outside recovery firms. That was another primary reason
    why we chose to do it.
        So I would, in summary, strongly recommend that this bill
    specifically allow for insurance claims recovery for HCFA as
    well as other Federal plans. I would also emphasize that I
    think it should be mandatory. I don't think there should be
    ways to opt-out. Because if you allow them to opt-out, the
    people who are running the plans will probably want to continue
    to try to self-police themselves and that won't work. Thank
    you.
        [The prepared statement of Mr. Booma follows:]

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        Mr. Horn. Thank you. That is very helpful. Mr. Robert
    Koehler is attorney-at-law, Patton Boggs here in Washington and
    the American Logistics Association. Have we got a little room
    for you there at the table, finally? Thank you.
        Mr. Koehler. I moved from the end of the dug-out to take
    the clean-up spot. My name is Robert Koehler. I am a senior
    partner in the Washington, DC, law firm of Patton Boggs. And I
    have specialized in government contract law for the past 30
    years. I am here on behalf of the American Logistics
    Association, a trade association of some 600 manufacturers,
    brokers, and distributors who sell brand or trade-name items to
    the Federal Government. And this involves both the commissary
    systems, the Defense Supply System, as well as the non-
    appropriated fund activities such as AAFES and NEXCOM.
        Because of the limit of 5 minutes, I will only highlight
    the more critical issues that we think we should address in
    this bill. Mr. Chairman, by way of background, I have been
    involved with the recovery audit associated with DSCP and PRGI
    for the past 2 years. In this regard, I represent 10 companies:
    Frito Lay, Fort James, Hunt Wesson, Johnson and Johnson,
    Kellogg, Mars, Nabisco, Pillsbury, Reckitt and Colman,
    Tropicana, and General Mills. In my past, I have worked
    extensively on the issues of price warranty as far as GSA is
    concerned; as far as this agency, DSCP, is concerned; and with
    the AAFES.
        As we look at this legislation, I think it is fair to make
    comment on what was learned--at least what we, from our
    perspective, learned--from the demonstration program. From our
    perspective, as we look at the demonstration program, it was
    envisioned to take the basic concepts that are used in the
    commercial world and apply them at the DOD level. Very simple.
    Unfortunately, it isn't that simple.
        And the difficulty, Mr. Chairman, that occurs is two
    factors. One, there are affinity contract terms and conditions
    that must be adhered to by the government in conducting either
    audits or seeking to recover claims. And, two, and most
    importantly, there are well-established Federal acquisition
    regulations that both the government and the contractor must
    comport with in these audit activities. And from our
    perspective, when DSCP and PRGI initiated their activities in
    the demonstration program, this was totally ignored.
        For example, the first thing that happened in 1996 was the
    PRGI and DSCP issuing thousands and thousands of collection
    letters to companies demanding payment, giving them 30 days to
    pay and also advising them that if the situation arose, it was
    going to withhold the funds on any outstanding invoice. And,
    fortunately, this violated the Federal Acquisition Regulation.
    We brought this to their attention and everyone of those
    letters had to be withdrawn. Six months later, new letters were
    issued. And during this time period, when we began to look at
    the process that they were going about, it became clear that
    what they were attempting to do was to develop a system that
    they relied on in the commercial activity that can't be done in
    the government sector.
        For example, they had two types of claims. What they call a
    unit price claim, which was a claim that asserted that the
    companies were not paying the most favored customer price to
    the government. The second type of claim was what they called
    the prompt payment claim. That meant that if the company was
    providing a commercial entity a prompt payment discount let us
    say of 2 percent if you pay it in 10 days, not 30 and the
    government wasn't getting that, they demanded equal treatment.
        In the commercial world, that might be appropriate. In
    government contracts, the essential thing is you have to adhere
    to the terms of the contract. And, unfortunately for the
    government and PRGI, the price warranty clause is a very
    specific document that details what is the basis upon which the
    contractor warrants his price, the average price, being most
    favorable to the government. And in our judgment, that was
    totally ignored. Now we are working now through the process of
    trying to rectify that.
        The second part was the DSCP contracting activity was
    associated with all the commissaries overseas. DSCP and PRGI
    issued claim letters and failed to look at their own
    documentation that existed in the government at the local
    commissaries levels in Europe. The industry brought this to
    their attention and, quite frankly, Mr. Chairman, raised hell
    about it. After a considerable period of time, DSCP finally got
    the funding to go over to Europe to look at these documents and
    that was done just January of this year. We are now advised
    that a significant amount of those claims that they had made
    against the companies on the unit prices may be withdrawn.
        Now the second part relates to the prompt payment discount.
    Again, we believe that the price warranty clause specifically
    requires you to consider what is an average price. What DSCP
    and PRGI have done is extracted this one element called billing
    advantage, assumed that that was not part of the average price,
    and that is where a majority of the claims are that have not
    been recovered. And the reason is because the contractors want
    the government to adhere to the terms of the contract and these
    claims, we don't think, represent that term.
        Now with this as background, we now have to look at the new
    bill. And let me say, Mr. Chairman, on behalf of all the
    companies that ALA represents, we have absolutely no objection
    to outside audit function. None whatsoever. We recognize that
    it is done throughout the government.
        But I think the key difference of what is being proposed
    here versus what exists now and what PRGI contract is even
    right now is what I think is an extremely dangerous move by
    allowing the agency to delegate extremely core responsibilities
    from the contracting officer to the audit company. And I think
    that if you will ask any government contractor, if you ask any
    government representative who has been a government contractor,
    this particular provision is of great, great concern to them.
        It is very simple, the reason. The bill establishes giving
    authority to individuals to find the claims, process the
    claims, pursue the claims, and settle them. And if you looked
    at PRGI's testimony that they gave back on June 12, that is
    exactly what they were talking about. You are also giving them
    20 percent of what they recover. That is not incentive fee,
    that is a headhunter's fee. And that, to me, is extremely
    dangerous.
        One of the principles, I think, that is lost in a lot of
    this is that government contracting under the Federal
    Acquisition Regulation is extremely different. I might note
    that Mr. Peterson, who is from AAFES here this afternoon,
    testified about their great results. Make no mistake about it,
    AAFES regulations are entirely different than DOD's. AAFES is a
    non-appropriated fund activity. It is not governed by the
    Federal Acquisition Regulation. DSCP, the commissaries, all the
    activities that you are referring to are. And that is a
    significant difference. So I think we have to analyze the
    success one might have, based upon the atmosphere that the
    regulations allow them to exist.
        Finally, ALA believes that providing the private contractor
    auditor with such a broad authority and then to receive 20
    percent presents a clear and unmistakable conflict of interest,
    violating one of the government's bedrock contracting
    principles. And I read just a portion of the Federal
    Acquisition Regulation, ``Transactions relating to the
    expenditure of public funds require the highest degree of
    public trust and impeccable standards of conduct. The general
    rule is to avoid, strictly, any conflict of interest or even
    the appearance of a conflict of interest in government
    contracting relationships.''
        And, again, the idea of giving the contractor a combination
    of the authority that the contracting officer has and the
    percentage presents, I think, a conflict that cannot be
    overcome. ALA does not have any difficulty with a continuation
    of the program. Where we have the difficulty is trying to allow
    the contractor to have that contracting responsibility. And
    that is where the major conflict arises.
        I also think that one of the issues that has arisen in our
    dealings, in discussions with the contracting officer and other
    government representatives is we have talked about attempting
    to resolve some of these issues, settle them. One of the issues
    that always comes up is, well, I might agree with you, but I
    have PRGI on the other side of me who has a contract and is
    entitled to 20 percent recovery. I have a conflict with him
    because if I settle at one level, he might assert that he is
    entitled to a higher percentage. I think the bill ought to have
    a provision that makes it very clear that the government is not
    liable in any way, shape, or form to the contractor for any
    type of offset or settlement or decision that the contracting
    officer makes in reaching that settlement vis-a-vis that 20
    percent.
        Bottom line, we support the bill only if--only if--you
    exclude from this bill the contracting officer delegation to
    the outside auditor. If it is just really a continuation, we
    have no difficulty with the bill. Thank you, Mr. Chairman.
        [The prepared statement of Mr. Koehler follows:]

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        Mr. Horn. Thank you very much. We appreciate that
    comprehensive testimony.
        Mr. Dinkins, in your testimony, you say that the government
    will benefit from recovery auditing even more than the private
    sector. However, you also state that you do not have a broad
    enough sampling of results within the government to accurately
    project the benefit of the program. What factors support your
    conclusion that the government would realize a greater benefit
    from recovery auditing than the private sector?
        Mr. Dinkins. Well, I would say to begin with, the long
    experience that we have with AAFES at just under one-half of
    one-tenth of 1 percent and the current experience in the
    demonstration program, those numbers are roughly synonymous. So
    I wouldn't venture to state at this point--and I would say that
    the opportunity within HCFA is significantly higher than that.
    It would be billions of dollars a year and also a higher
    recovery percent. But somewhere between the private sector
    average rate of one-tenth of a percent and one-half of one-
    tenth of 1 percent and probably closer to that one-half of one-
    tenth of 1 percent number is the real opportunity within
    government.
        Mr. Horn. In your testimony, you recommend raising the
    threshold for payment activity, subject to recovery audits,
    from $10 million to $500 million. You stated that the amounts
    recovered from an audit of the $10 million payment program
    would not justify the costs and administrative burdens. What
    are the costs associated with performing recovery audits?
        Mr. Dinkins. That statement is probably more self-serving
    for us the contractor in the sense that we have a huge
    investment at the beginning of any effort to access all of the
    relevant media, process it through a data center, prepare and
    deploy staff, technology, hardware, et cetera. And in a smaller
    environment, those investments would not bear fruit. And I
    would point you to a corollary in the private sector.
    Typically, we looked at environments that are in excess of $500
    million. That is not to say that there wouldn't be multiple
    segments within any particular agency that would add up to $500
    million. That would obviously be well worthwhile looking at, in
    terms of the benefits to both parties.
        Mr. Horn. Well, you noted that since September 1996, when
    the Defense Supply Center of Philadelphia contracted with the
    Profit Recovery Group to perform these recovery audits, more
    than $20 million in overpayments had been identified. Only $2
    million has been recovered. Now, according to Mr. Dinkins
    statement, I guess the balance is in various stages of recovery
    and I would be curious--and Mr. Wilwerding might want to get in
    on this--what is the status of recovery of the identified by
    uncollected overpayments?
        Mr. Dinkins. Our experience in the private sector ranges in
    the high 80 percent range in terms of what is collected, as
    compared with what is identified. And, typically, the
    difference is that there is some piece of information that was
    not resident within the client's files that the supplier may
    have access to that helps to create a better understanding of
    the situation. I think that the reason for--first of all, let
    me correct a couple of figures. Where we are today is about $4
    million: $2.5 million of which is identified, another $1.5
    million which has been approved by the contracting officer and
    ready for deduction through DFAS's systems.
        I think you heard prior testimony from Mr. Allen at DSCP
    saying that there was another $10 million that was ready to go
    on top of that. I don't recall the exact numbers. There is
    about $12 million today that is identified and writing final
    determination from the contracting officer.
        Now, obviously, we don't affect collections with the
    suppliers. That is the Department of Defense's role and
    responsibility as part of the program. We identify the
    overpayments and then they pursue their normal course of action
    in terms of how to first notify the supplier that there is a
    potential overpayment, ask for their comment before anything
    further happens, and then, at an appropriate time, make an
    offset on a future payment.
        Mr. Horn. Mr. Wilwerding, do you have anything to add to
    that?
        Mr. Wilwerding. Yes, Mr. Chairman. I believe also an
    important part of that recovery percentage--and I agree with
    Mr. Dinkins that the private sector recovery percentages do
    range up toward 80 percent in some cases. A great deal of that
    is a result of the working relationship between the recovery
    vendor and the payees in these points and, on the health care,
    being the providers. In that there is a system in place to
    forward information, substantiate claims, and facilitate
    payment back and forth. That would take some time to develop on
    behalf of the government agencies, but it is very realistic to
    believe that that would be in place and would create a very
    synergistic environment to work together in that recovery
    effort.
        Mr. Horn. Well, we asked the last panel about the following
    and how are disputed over payments handled by your companies,
    when that is a dispute? Is there an organized process or an
    appeals group? Or how does it work? Is it the contract officer?
    Yes, Mr. Dinkins.
        Mr. Dinkins. That is actually not our role. That is handled
    through normal scenarios within the government and it is
    primarily a contracting officer makes the final disposition of
    any claim.
        Mr. Horn. So it works very much like in our debt collection
    legislation. If it is turned over to a private collector, why
    they simply go get the amount and if there is a problem with
    the IRS, fine, talk to the people at IRS. OK, I understand
    that. Does anybody have any other thoughts on the appeal
    process in any way? Yes, Mr. Koehler.
        Mr. Koehler. Mr. Chairman, under the Federal Acquisition
    Regulation that governs all contracts, there is no debt under
    the regulation until the contracting officer issues a
    contracting officer's final decision. At that point, when the
    contracting officer issues a decision, that then constitutes a
    debt and the government then has the option to withhold payment
    or offset, but not until that point in time. It is also the
    point in time when interest begins to run.
        I think earlier one of the panelists was talking about that
    months and months would go by with interest or years would go
    by with interest. Well, that is not true. If the government
    identifies a claim and the contracting officer issues that
    decision, that interest begins to run on those amounts at the
    Treasury rate. So I think that we have to keep that in mind as
    we move forward on this project.
        Mr. Horn. Mr. Dinkins, the Government Waste Corrections Act
    of 1999 recognizes that the identification of overpayments to
    providers of goods and services through recovery auditing has
    been used successfully in the private sector. Accordingly, the
    proposed legislation generally requires each executive branch
    agency to conduct recovery audits for its payment activities
    that expend at least $10 million annually. Although the Federal
    Government buys many of the same items as does the private
    sector, the Federal Government is also the sole buyer of other
    items, such as major weapons systems.
        With that as a preface, does the--you pronounce the
    initials here PRGI--does that Profit Recovery Group perform or
    have the capability to perform recovery audits for private
    sector companies such as United Airlines that buy from the
    aerospace industry?
        Mr. Dinkins. Yes. As a matter of fact, we do provide
    services to major airlines today.
        Mr. Horn. Major weapons systems manufacturers such as
    Boeing or Lockheed-Martin do not offer cash discounts and other
    overpayment type claims typically found in retail businesses.
    What are some of the examples of the type of overpayment claims
    you anticipate finding in major weapons systems acquisitions?
        Mr. Dinkins. Most of the identified overpayments in that
    arena would be contract compliance related issues. You still
    have incidences of duplicate payments and other types of
    errors. Contract compliance will be the key area of that
    investigation.
        Mr. Horn. We have heard from the chief financial officer of
    Medicare. I am just curious, how applicable is recovery
    auditing to health care, be it Federal level or the State
    level, or just plain old hospital level?
        Mr. Wilwerding. Mr. Chairman, we would feel that it is
    extremely applicable. Going back to my testimony, Medicare
    program is utilizing the private sector carriers to administer
    these health benefits. Those carriers are currently using
    private sector recovery firms to audit, identify, validate, and
    recover overpaid claims. They are using very similar, if not
    the same, claim systems, the same training techniques on their
    claim analysts, and the same internal audit techniques they use
    on their private sector insurance claims.
        Therefore, it would be apparent that the ability to audit
    and identify these claims and recover those claims on behalf of
    Medicare would be similar to that of the private sector.
        Mr. Lyons. I think I can speak on that issue also, Mr.
    Horn.
        Mr. Horn. Sure.
        Mr. Lyons. I was the chief operations administrator for our
    company's health insurance programs in the late 1980's and
    early 1990's. Walgreen's is self-insured and self-administered.
    And, we employed outside audit recovery firms to review health
    insurance claim payments with about a 4 percent recovery rate,
    if I recall.
        Mr. Dinkins. I would add to that, Mr. Horn, that that
    represents about 10 times the level of recovery demonstrated in
    government and other programs today. So health care typically
    offers a larger area of opportunity.
        Mr. Horn. I don't doubt that. There are big dollars at
    stake there. Mr. Wilwerding, the majority of claims deemed
    erroneous stemmed from issues of lack of medical necessity,
    incorrectly coded claims, and services paid for that were
    actually uncovered or unallowable. Given that you do not get
    involved in making medical judgments, could you describe the
    methodology you use and the type of errors you identify?
        Mr. Wilwerding. Certainly, Mr. Chairman. Our process is to
    identify errors that are primarily based on a set of data facts
    that determine the eligibility and the appropriateness of the
    claim. That may be associated with the beneficiary's
    eligibility for the program, the contract allowances, what the
    insurance policy or benefit policy covers and what it does not
    cover. They could identify things such as duplicate payments or
    payments that are not customarily made or over a certain
    program maximum amount. The validity of those claims tends to
    run very high. Of the claims we identify as potential
    overpayments, we acknowledge that some 80 percent of those
    claims will be accurately overpaid.
        We will only pursue--and I think it is an important issue
    to bring out here under contingency fees and I would assume Mr.
    Dinkins would support this--those of us that are operating on
    getting paid on successful recoveries will only pursue those
    claims that are valid overpayments. We have no incentive to
    pursue claims that we know are not valid and will not likely be
    reimbursed by the payee. It is, in the health claim area
    especially, since we deal with fairly low-balance claims and a
    high volume of those claims, extra effort is given to make sure
    that the claims we are pursuing are accepted by the provider
    and we have the data in-house to present to the provider the
    valid request for the reimbursement.
        Mr. Horn. Mr. Wilwerding, in your testimony, you state that
    it would not be efficient for the Federal departments and
    agencies to collect overpayments by offsetting future payments.
    Why would this process not be efficient?
        Mr. Wilwerding. Perhaps that testimony needs to be revised.
    It is not necessarily inefficient, but I do believe that it is
    burdensome upon the provider community and we could, at some
    point, and I could submit a statement into the testimony that
    would give an example of why this would be burdensome if you
    would prefer that.
        Mr. Horn. Mr. Lyons, does the Walgreen Co. do any of its
    recovery auditing internally?
        Mr. Lyons. We do have a small initiative, Mr. Horn.
    Frankly, we are trying to put our dollars into developing
    systems that will eliminate the post-audit recovery issues. So
    we are looking at new billing systems and new accounts payable
    systems that will tend to probably not eliminate completely,
    but at least minimize post-audit recovery activities.
        Mr. Horn. H.R. 1827, which is before us, would require a
    recovery audit contractor to provide departments and agencies
    with periodic reports on conditions giving rise to overpayments
    and recommendations on how to mitigate such conditions. What
    recommendations has the Profit Recovery Group International
    provided to the Walgreen Co. on ways to improve its payment
    processes and reduce the incidences of overpayments?
        Mr. Lyons. Well, I am not sure that I can be very specific
    in that area, although various audit recovery firms in the past
    have made specific recommendations. Typically, these are
    recommendations having to do with system changes and/or manual
    procedure changes. Some of which we have made. It is easy to
    make a manual procedure change. It is very difficult to make a
    systems change when it is tied into a fully integrated process.
        Mr. Horn. We noted earlier that the Defense Department
    contracting officer in most Federal departments deal with the
    vendor-supplier disputes over the validity of an overpayment
    identified by a recovery auditor. How does Walgreen handle
    this?
        Mr. Lyons. Well, I think the first point that I want to
    make is that the Walgreen Co. controls the audit activities.
    So, when a dispute arises, the facts typically speak for
    themselves. Is there a purchase contract? And is there the
    supporting documentation to validate the claim? Usually, if
    there is, we proceed. If there is not, we don't. And I should
    say in that respect, that I see very few post-audit recovery
    claims that do not have a tremendous amount of documentation,
    supporting documentation.
        Mr. Horn. Mr. Koehler, as I understand it, the Profit
    Recovery Group International identified overpayments, sent
    letter of indebtedness to vendors, and many vendors protested
    through their trade association, the American Logistics
    Association, for which you are counsel. Have vendors complained
    to the American Logistics Association about recovery auditing
    performed for private sector companies? And, if so, what are we
    talking about in terms of complaints?
        Mr. Koehler. Well, Mr. Chairman, the answer is no, because
    the American Logistics Association is associated just for sales
    to the Federal Government so that the association itself would
    not have access to that. I know on a personal level the
    companies that we do represent that there are two different
    types of, if you will, issues that arise on the commercial
    side. One is the ministerial or billing errors. And Mr. Lyons
    is correct. That type of documentation is relatively easy to
    see and there is very little difficulty with getting those
    resolved.
        The other area, though, is in relation to the government
    contracting, is in the application, not of those type of
    ministerial or billing errors, but rather in the interpretation
    of the price warranty clause and the attempt to enforce it. I
    think George Allen, for DECA, stated that with regard to the
    price warranty issue, that those were breech issues. Well, if
    that is the case, then that clearly is an area that should
    never be delegated to an outside contractor for resolution.
    Because only that area is the responsibility of the contracting
    officer.
        Mr. Horn. Now I gave the last panel the chance to have
    anything to say that they haven't said in the dialog either
    between the Chair and the panel or within the panel. So anybody
    want to get something off their chest now into the record? Any
    takers on that?
        Well, we thank you very much for coming. We appreciate the
    knowledge you bring to this and the experience. And that will
    be very helpful in marking up the bill.
        I would now like to thank the following people for setting
    up this particular hearing: The Government Management,
    Information, and Technology Subcommittee staff is headed by its
    staff director, Russell George, and chief counsel--I don't see
    him right now. The person to my left, to your right, who has
    put most of the effort into this particular hearing, is Randy
    Kaplan; who is also counsel to the subcommittee and a
    professional staff member. Matthew Ebert, policy advisor, is
    back here on the bench. Jane Cobb of the full committee, is
    liaison on this bill, with Mr. Burton's interest. And we have
    Bonnie Heald, director of communications, probably with
    somebody in the media here. And Grant Newman, our clerk,
    against the wall over there. We have John Phillips, intern. And
    then Paul Wicker, intern; Justin Schlueter, intern; Lauren
    Lefton, intern.
        And, for the Democratic side, Faith Weiss, the minority
    counsel; Earley Green, minority staff assistant. And Yon Lupu,
    the court reporter.
        So thank you all. And, with that, this hearing is
    adjourned.
        [Whereupon, at 5:01 p.m., the subcommittee was adjourned.]
        [Additional information submitted for the hearing record
    follows:]

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