    [House Hearing, 108 Congress]
    [From the U.S. Government Publishing Office]

      SHOW ME THE TAX DOLLARS--HOW MUCH IS LOST TO IMPROPER PAYMENTS EACH
                                     YEAR?

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

                                    HEARING

                                   before the

                     SUBCOMMITTEE ON GOVERNMENT EFFICIENCY
                            AND FINANCIAL MANAGEMENT

                                     of the

                                  COMMITTEE ON
                               GOVERNMENT REFORM

                            HOUSE OF REPRESENTATIVES

                          ONE HUNDRED EIGHTH CONGRESS

                                 FIRST SESSION

                                   __________

                                  MAY 13, 2003

                                   __________

                               Serial No. 108-39

                                   __________

           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

                                     ______

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                                WASHINGTON : 2003
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                         COMMITTEE ON GOVERNMENT REFORM

                         TOM DAVIS, Virginia, Chairman
    DAN BURTON, Indiana                  HENRY A. WAXMAN, California
    CHRISTOPHER SHAYS, Connecticut       TOM LANTOS, California
    ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
    JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
    JOHN L. MICA, Florida                PAUL E. KANJORSKI, Pennsylvania
    MARK E. SOUDER, Indiana              CAROLYN B. MALONEY, New York
    STEVEN C. LaTOURETTE, Ohio           ELIJAH E. CUMMINGS, Maryland
    DOUG OSE, California                 DENNIS J. KUCINICH, Ohio
    RON LEWIS, Kentucky                  DANNY K. DAVIS, Illinois
    JO ANN DAVIS, Virginia               JOHN F. TIERNEY, Massachusetts
    TODD RUSSELL PLATTS, Pennsylvania    WM. LACY CLAY, Missouri
    CHRIS CANNON, Utah                   DIANE E. WATSON, California
    ADAM H. PUTNAM, Florida              STEPHEN F. LYNCH, Massachusetts
    EDWARD L. SCHROCK, Virginia          CHRIS VAN HOLLEN, Maryland
    JOHN J. DUNCAN, Jr., Tennessee       LINDA T. SANCHEZ, California
    JOHN SULLIVAN, Oklahoma              C.A. ``DUTCH'' RUPPERSBERGER,
    NATHAN DEAL, Georgia                     Maryland
    CANDICE S. MILLER, Michigan          ELEANOR HOLMES NORTON, District of
    TIM MURPHY, Pennsylvania                 Columbia
    MICHAEL R. TURNER, Ohio              JIM COOPER, Tennessee
    JOHN R. CARTER, Texas                CHRIS BELL, Texas
    WILLIAM J. JANKLOW, South Dakota                 ------
    MARSHA BLACKBURN, Tennessee          BERNARD SANDERS, Vermont
                                             (Independent)

                           Peter Sirh, Staff Director
                     Melissa Wojciak, Deputy Staff Director
                          Rob Borden, Parliamentarian
                           Teresa Austin, Chief Clerk
                  Philip M. Schiliro, Minority Staff Director

         Subcommittee on Government Efficiency and Financial Management

                  TODD RUSSELL PLATTS, Pennsylvania, Chairman
    MARSHA BLACKBURN, Tennessee          EDOLPHUS TOWNS, New York
    STEVEN C. LaTOURETTE, Ohio           PAUL E. KANJORSKI, Pennsylvania
    JOHN SULLIVAN, Oklahoma              MAJOR R. OWENS, New York
    CANDICE S. MILLER, Michigan          CAROLYN B. MALONEY, New York
    MICHAEL R. TURNER, Ohio

                                   Ex Officio

    TOM DAVIS, Virginia                  HENRY A. WAXMAN, California
                         Mike Hettinger, Staff Director
                     Larry Brady, Professional Staff Member
                              Amy Laudeman, Clerk
              Mark Stephenson, Minority Professional Staff Member

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on May 13, 2003.....................................     1
    Statement of:
        Springer, Linda M., Controller, Office of Federal Financial
          Management, Office of Management and Budget................     5
        Weems, Kerry N., Acting Assistant Secretary for Budget,
          Technology and Finance, Department of Health and Human
          Services...................................................    29
        Williams, McCoy, Director, Financial Management and Assurance
          Team, U.S. General Accounting Office.......................    14
    Letters, statements, etc., submitted for the record by:
        Platts, Hon. Todd Russell, a Representative in Congress from
          the State of Pennsylvania, prepared statement of...........     3
        Springer, Linda M., Controller, Office of Federal Financial
          Management, Office of Management and Budget, prepared
          statement of...............................................     8
        Weems, Kerry N., Acting Assistant Secretary for Budget,
          Technology and Finance, Department of Health and Human
          Services, prepared statement of............................    31
        Williams, McCoy, Director, Financial Management and Assurance
          Team, U.S. General Accounting Office, prepared statement of    16

      SHOW ME THE TAX DOLLARS--HOW MUCH IS LOST TO IMPROPER PAYMENTS EACH
                                     YEAR?

                                  ----------

                             TUESDAY, MAY 13, 2003

                      House of Representatives,
    Subcommittee on Government Efficiency and Financial
                                            Management,
                                Committee on Government Reform,
                                                        Washington, DC.
        The subcommittee met, pursuant to notice, at 2 p.m., in
    room 2247, Rayburn House Office Building, Hon. Todd R. Platts
    (chairman of the subcommittee) presiding.
        Present: Representatives Platts and Blackburn.
        Staff present: Mike Hettinger, staff director; Dan Daly,
    counsel; Larry Brady, Kara Galles, and Tabetha Mueller,
    professional staff members; Amy Laudeman, clerk; Mark
    Stephenson, minority professional staff member; and Cecelia
    Morton, minority office manager.
        Mr. Platts. We are going to get under way. Our vice chair,
    Marsha Blackburn, apparently is en route in the building and we
    will go ahead and get started, rather than waiting any further.
        This hearing of the Subcommittee on Government Efficiency
    and Financial Management will come to order. I believe all of
    us here today can readily agree that taxpayers have a
    fundamental right to know how their tax dollars are being
    spent. Improper payments by Federal agencies are a serious and
    growing problem which costs taxpayers billions of dollars each
    year. We have seen some estimates that put the improper payment
    figure as high as $35 billion. As I said prior to the start of
    the hearing to a couple of you, coming from a community in
    which we still have 99 cents breakfast specials, when we start
    to talk billions of dollars, we pay close attention.
        I cannot help but comment that as I sat down here with my
    Diet Pepsi, and on the front is a campaign promotional piece
    about $1 billion live on TV that you could win, so we are
    talking about 35 live winnings every year of $1 billion when we
    are talking about improper payments.
        Commendably, President Bush has made the reduction of
    improper payments a significant part of his management agenda.
    A lack of consistency in calculating, defining and accounting
    for erroneous payments further complicates agencies' efforts to
    combat this problem. The Improper Payments Information Act
    signed into law just last November is designed to address these
    concerns and requires OMB to issue guidance by the end of this
    month which will establish governmentwide procedures for
    dealing with erroneous payments.
        An improper payment is any payment that should not have
    been made. It can be an incorrect payment, an over-or under-
    payment, and include among other things a payment to an
    ineligible recipient; a payment for an ineligible service; or a
    duplicate payment, as well as a payment for service not
    received at all.
        While we do not yet have our arms around the total extent
    of this problem, what we do know is that these mistakes, which
    occur throughout government, are made because agencies do not
    have adequate internal financial controls and business process
    systems in place to protect against these types of errors. As
    we have pointed out time and time again during our last three
    hearings, agencies can get clean audit opinions, unfortunately
    without having sound internal financial controls that would
    prevent improper payments--what we described as heroic end of
    the year efforts to get that clean opinion, even though
    throughout the year their financial controls were not well
    planned or well implemented.
        Over the years, various agencies have estimated the amount
    of improper payments, but many believe that these estimates
    represent only the tip of the iceberg. Last year, my esteemed
    former colleague, Congressman Steve Horn, who served as
    chairman of this subcommittee, was successful in securing the
    enactment of the Improper Payments Information Act of 2002.
    This law has helped bring to the forefront the need to address
    this issue more aggressively. Now, agencies will be required to
    make estimates of erroneous payments, and if those estimates
    are more than $10 million, to develop plans to reduce or
    eliminate these errors.
        Today, we look forward to exploring the draft guidance from
    OMB and learning from GAO about strategies to identify and
    reduce improper payments. We are also eager to hear from HHS on
    the challenges they faced and the successes they have had in
    dealing with this problem.
        [The prepared statement of Hon. Todd Russell Platts
    follows:]

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    [GRAPHIC] [TIFF OMITTED] T8736.002

        Mr. Platts. Today, we are pleased to have with us the
    Honorable Linda Springer, Controller of the Office of Federal
    Financial Management in the Office of Management and Budget;
    Mr. McCoy Williams, Director of the Financial Management and
    Assurance Team in the General Accounting Office; and Mr. Kerry
    Weems, Acting Assistant Secretary for Budget, Technology and
    Finance in the Department of Health and Human Services. Thank
    you for coming and we look forward to your testimonies here
    today.
        We will give our vice chair a second to catch her breath. I
    understand you do not wish to make an opening statement?
        Ms. Blackburn. No, Mr. Chairman.
        Mr. Platts. OK. We will then proceed to our witnesses. I
    would ask each witness if you would stand, and anyone who will
    be advising you during your testimony to also stand, and take
    the oath together.
        [Witnesses sworn.]
        Mr. Platts. Thank you. The clerk will note that all
    witnesses, as well as others who will be advising them, have
    affirmed the oath. We now would like to proceed directly to the
    testimonies. Ms. Springer, we will begin with you, followed by
    Mr. Williams and Mr. Weems. The subcommittee appreciates the
    substantive written testimonies that each of you have provided
    for the record. We would ask that you keep your verbal
    testimonies here today to less than 5 minutes.
        Ms. Springer, please proceed with your testimony.

     STATEMENT OF LINDA M. SPRINGER, CONTROLLER, OFFICE OF FEDERAL
         FINANCIAL MANAGEMENT, OFFICE OF MANAGEMENT AND BUDGET

        Ms. Springer. Thank you, Mr. Chairman. I appreciate the
    opportunity to be before this subcommittee again. One of the
    reasons I am glad to be here is to continue the partnership
    that exists between the administration and the subcommittee in
    advancing many of the President's initiatives to improve
    management in the executive branch. This partnership is
    critical to the success of our efforts, particularly in the
    area of erroneous payments. We will need changes in law, some
    of which have already been proposed, to improve our payment
    processes. I ask for your help to get those tools which I will
    address in more detail in a moment.
        Today, we are discussing the President's initiative to
    reduce erroneous payments made with Federal dollars. This
    committee is more familiar than most with the status of efforts
    in the government to address this critical problem. Not long
    ago, based on GAO compilations of erroneous payment estimates
    reported in agency financial statements, the estimate of
    governmentwide erroneous payments was said to be around $20
    billion. GAO also said as significant as this amount is, the
    actual extent of improper payments governmentwide is unknown,
    and is likely to be billions of dollars more and will likely
    grow in the future without concerted and concentrated efforts
    by agencies, the administration and the Congress.
        That statement is as true now as it was when GAO made it
    last summer. What we can say is that we know a lot more and we
    are doing a lot more than ever before about the extent and
    cause of erroneous payments made by the Federal Government.
        As you know, Mr. Chairman, the President announced as part
    of his management agenda a renewed effort to reduce erroneous
    payments. Initially, the initiative focused on the government's
    major benefit programs. The administration identified programs
    that make in excess of $2 billion in payments annually and
    require those agencies to assess the risk, the extent, and to
    put in place a strategy to reduce erroneous payments. Based on
    the estimates of erroneous payments made in programs making
    almost $1 trillion in payments annually, erroneous payments
    exceed $35 billion a year. Error rates for those programs range
    from almost zero to more than 30 percent. That is obviously an
    unacceptable situation. We have an urgent duty to the American
    taxpayer to improve our stewardship over their resources.
        There are agencies that we should commend, like the Office
    of Personnel Management, which manages the Federal Employees
    Health Benefits Program, with an error rate of just over 1
    percent; Federal Retirement Benefit programs, less than 1
    percent; and the Department of Defense which manages military
    retirement, 0.05 percent error rate, for keeping those error
    rates low. We should also commend Medicare and food stamps,
    which have shown remarkable progress in bringing their
    erroneous payment rates down.
        Other programs for which we have estimated the rate of
    erroneous payments have not yet shown progress. I want to
    emphasize that the administration's initiative to reduce EITC,
    that is Earned Income Tax Credit payments, is one that we are
    also focused on. It has an error rate of almost 30 percent. Our
    initiative is not happening at the expense of the IRS's efforts
    to pursue other enforcement priorities, so there is a global
    effort with respect to tax issues. I am assured that the IRS is
    increasing its efforts to pursue with vigor those in upper-
    income brackets who would evade their taxpaying obligations.
        Another area where the error rate is unacceptably high is
    in housing subsidies. The Department of Housing and Urban
    Development overpays more than $2 billion annually in low-
    income rent subsidies. The causes include incomplete reporting
    of tenant income and improper calculation of tenant rent
    contributions. HUD has committed to a goal of 50 percent
    reduction in these erroneous payments by 2005, but it needs a
    tool to achieve this goal. HUD needs access to the national
    directory of new hires so it can verify tenant income.
    Congressman Sessions has recently introduced legislation, H.R.
    1030, to grant HUD this authority. If enacted, this legislation
    is expected to potentially garner up to $5 billion in savings
    over 10 years.
        It is remarkable that we now have error rates for programs
    that make up almost $1 trillion in payments annually, but those
    programs targeted as part of the President's Management Agenda
    make an additional $300 billion in annual payments. With the
    passage of the Improper Payments Information Act, we are
    targeting even more programs that make hundreds of billions of
    dollars in payments annually for which we have no adequate
    measure of erroneous payments. As a result of legislation
    proposed by this committee, portions of recovered erroneous
    contract payments can now be used for recovery audit
    activities. Agencies are using this tool to identify erroneous
    payments made, reveal why they were made, and most importantly,
    prevent erroneous contract payments in the future.
        Of course, this subcommittee also authored the recently
    enacted Improper Payments Information Act in 2002. That law
    will require agencies to identify programs and activities in
    which there is a risk of erroneous payments, estimate the
    extent of the erroneous payments, and report to Congress all
    such programs and activities that make erroneous payments in
    excess of $10 million a year.
        I am pleased to report that the administration's guidance,
    required by law to be issued by the end of May, will be
    distributed to agencies around the end of this week. We would
    like to hold that up and get the benefit of any information
    that comes out of this hearing as well, and reflect it. The
    result of the law and the guidance will be greater uniformity
    in the estimation and reporting of erroneous payments. For
    example, agencies will be required to estimate the extent of
    erroneous payments based on a statistical sample, with a 90
    percent confidence level and 5 percent precision. That is 2.5
    percent around either side, plus or minus, of the estimated
    rate. They will be required to report the extent of their
    payments in their annual performance and accountability
    reports.
        Through all these activities, we are improving the payment
    accuracy of government programs and activities. The urgent duty
    I spoke of earlier is to ensure that America's taxpayer dollars
    are administered with the greatest integrity possible. Where we
    identify problems in payment processes, we are working
    diligently to address them. Where we do not know the extent of
    the problem, we will find it out. The end result will be
    better-administered programs and fewer wasted dollars. We are
    at the beginning of this process to reduce erroneous payments,
    but we could win this race with your continued support.
        I would be glad to answer any questions. Thank you.
        [The prepared statement of Ms. Springer follows:]

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        Mr. Platts. Thank you, Ms. Springer.
        Mr. Williams.

    STATEMENT OF MCCOY WILLIAMS, DIRECTOR, FINANCIAL MANAGEMENT AND
             ASSURANCE TEAM, U.S. GENERAL ACCOUNTING OFFICE

        Mr. Williams. Thank you, Mr. Chairman and vice chairwoman.
    Thanks for the opportunity to discuss the governmentwide
    improper payment problems.
        In general, improper payments are payments the government
    made in error or in the wrong amount and often result from
    weaknesses in systems of internal control. As we testified
    before this subcommittee last month, improper payment estimates
    disclosed in agency financial statements totaled approximately
    $20 billion each year for both fiscal years 2002 and 2001. OMB
    recently estimated the amount of improper payments at about $35
    billion annually.
        However, the scope of the problem is likely greater because
    most agencies have not yet estimated or publicly reported the
    magnitude of improper payments in their programs and
    activities. In October 2001, we issued an executive guide that
    provided information on strategies used successfully by public
    and private sector organizations to address their improper
    payment problems. We found that entities using these best
    practices shared a common focus of improving their systems of
    internal control.
        Most recently, in a report issued last August, we pointed
    out that existing guidance did not require all Federal agencies
    to estimate the improper payments in their programs and
    activities, or offer agencies a comprehensive approach to
    measuring improper payments, developing and implementing
    corrective actions, or reporting on the results of actions
    taken. Today, we are seeing important leadership action, both
    from the Congress and from the administration, to address the
    improper payments problem.
        I would like to highlight two areas and provide my
    perspective as to their potential impact. First, on the
    legislative side, two recent pieces of legislation, the
    Improper Payments Information Act of 2002 and Section 831 of
    the National Defense Authorization Act for Fiscal Year 2002,
    provided an impetus for all agencies to systematically address
    improper payments activities annually, and to identify and
    recover contract over-payments. To illustrate this, the
    Improper Payments Information Act of 2002, that this
    subcommittee sponsored, requires agency heads to annually
    review all programs and activities that they administer, and
    identify those susceptible to improper payments. For those with
    estimates of significant improper payments, the legislation
    requires further analysis and reporting. The law also requires
    OMB to prescribe agency guidance to implement the requirements
    of the act.
        The National Defense Authorization Act for Fiscal Year 2002
    contains a provision that requires agencies entering into
    sizable contracts to carry out a cost recovery program for
    improper payments made to contractors. With the passage of this
    law, the Congress removed multiple barriers and granted
    agencies a much-needed incentive for identifying and reducing
    their improper payments.
        Second, on the administrative side, the President's
    Management Agenda has identified improper payments as a key
    element in the administration's initiative to improve financial
    performance throughout the Federal Government. As described in
    the agenda, OMB will work with agencies to establish goals to
    reduce improper payments for each program over $2 billion. In
    addition, OMB recently issued draft guidance on the
    implementation of the Improper Payments Information Act of 2002
    for agency comment. The guidance should help ensure
    transparency in reporting for those agencies with programs and
    activities with significant risk for improper payments. As I
    stated earlier, recent legislation and other actions have
    brought the government's improper payment problems to the
    forefront. Implementing the legislative provisions and other
    actions I have discussed today is a shared responsibility. It
    will require continued strong support and active and
    cooperative involvement from the Congress, the administration
    and agency management.
        In closing, I want to emphasize our commitment to
    continuing our work with the Congress, the administration and
    Federal agencies to ensure that improper payments are fully
    addressed governmentwide, and that actions are taken to reduce
    or eliminate the government's vulnerabilities to the
    significant problem of improper payments.
        Mr. Chairman, this concludes my prepared statement. I would
    be happy to respond to any questions.
        [The prepared statement of Mr. Williams follows:]

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        Mr. Platts. Thank you, Mr. Williams.
        Mr. Weems.

      STATEMENT OF KERRY N. WEEMS, ACTING ASSISTANT SECRETARY FOR
    BUDGET, TECHNOLOGY AND FINANCE, DEPARTMENT OF HEALTH AND HUMAN
                                SERVICES

        Mr. Weems. Good afternoon, Mr. Chairman, Madam Vice
    Chairwoman. Thank you for inviting me before you today. It is a
    pleasure and an honor for me to have the opportunity to speak
    about the Department of Health and Human Services' efforts to
    reduce improper payments in the programs it administers.
        One of the Department's foremost strategic goals is
    achieving excellence in its management practices. In meeting
    this objective, the Department is committed to ensuring the
    highest measure of accountability to the American people. The
    Department was accountable for more than $493 billion in gross
    outlays in fiscal year 2002. Reducing improper payments and
    improving the related methods and systems is critical to
    achieving the excellence we seek.
        The Department consists of 12 operating divisions that
    manage more than 300 programs with diverse missions. However,
    seven of those programs--Medicare, Medicaid, SCHIP, TANF, Child
    Care, Foster Care and Head Start--account for close to 90
    percent of the total outlays of HHS. The Department expects to
    be reporting erroneous payment rates for these seven programs
    in the future, and is presently evaluating whether other
    programs would be covered under the Improper Payment
    Information Act of 2002.
        The success of HHS's improper payment efforts can be traced
    to five fundamental efforts. First and foremost, our leadership
    is committed to this initiative. Publicly identifying and
    correcting errors is not without political risk, but the public
    benefits are enormous. Second, creating partnerships with all
    the parties with an interest in the program is critical for
    developing successful corrective actions. For instance, HHS
    works with the States across a number of programs, including
    Medicaid, SCHIP, and Child Care, just to name a few. Third, the
    Department has benefited from having one of the strongest
    Inspectors General in the Federal Government, and maintains a
    close relationship between the Office of the Inspector General
    and my Office of the Chief Financial Officer. Our two offices
    work closely together to monitor programs and reduce errors.
        Fourth, we actively work with all parties to educate them
    on proper payment and program procedures, especially our
    clients and our intermediaries such as States, as well as our
    contractors, who in turn work with the ultimate client or
    beneficiary. Fifth, where there is a history of noncompliance
    with statutory and regulatory authority, we have sought civil
    and other legal remedies. Between the effort to educate and
    legal remedies, there is a wide spectrum of corrective actions
    the Department uses to identify and reduce improper payments.
    Finally, in the case of fraud, as opposed to innocent error,
    parties are prosecuted.
        The Department's largest program, Medicare, accounts for
    close to 50 percent of the Department's outlays. For the
    Medicare program, HHS has been a leader in monitoring and
    mitigating improper payments. We began measuring errors in the
    Medicare program in 1996 and have made progressive strides in
    reducing errors. The fiscal year 2002 rate of 6.3 percent is
    less than half of the 13.8 percent reported in fiscal year
    1996. However, we have determined that substantially more
    detailed data are necessary to bring the error rate down
    further. HHS will be deploying a Comprehensive Error Rate
    Testing program to calculate improper Medicare payments. The
    CERT program, as it is called, will allow the Department to
    estimate specific error rates for individual contractors and
    provider types, in addition to a national error rate. It is our
    intention to publish contractor-specific error rates, as well
    as rates by provider type. We will keep this committee informed
    of our progress in this area.
        Building on Medicare's success in measuring error, HHS is
    well into the process of creating a payment accuracy measure in
    the Medicaid program. Medicaid is a substantial program,
    accounting for over 30 percent of departmental outlays, but
    unlike Medicare, it is administered primarily by State
    governments. Each of the 56 State and territorial governments
    run their own unique program. To account for program variation,
    we are taking an incremental approach in the development of a
    national Medicaid error rate. Nine States entered the program
    in the first year; 12 states will participate this year; 25
    States are targeted in 2004, and the program will be
    implemented nationwide in 2005. This collaborative approach
    will create a measure that is accurate and useful to the
    Federal Government, as well as State governments.
        The Department administers a number of State-based programs
    that promote the economic and social well-being of children,
    families and communities. Those programs account for about $48
    billion of outlays in the President's fiscal year 2004 budget.
    The Department closely monitors improper payments in these
    programs through the Single Audit Act, reviews of financial
    data, and program-specific mechanisms. Through the Single Audit
    Act, the vast majority of programs are audited at least once
    every 3 years, if not more frequently. In addition to the audit
    and the other mechanisms, HHS is taking steps to establish
    erroneous payments for the several State-based programs and we
    expect to be reporting on those soon.
        Mr. Chairman, in conclusion, HHS has a robust program for
    identifying improper payments, taking appropriate management
    actions to reduce the incidence of improper payments, and
    exploring and developing innovative ways to increase
    compliance. We attribute our success to a strong commitment of
    our leadership, the focus on building and maintaining close
    relationships with the Inspectors General of the States and our
    contractors.
        I hope that the information that I have provided today will
    be of value, and I am happy to answer any questions you might
    have.
        [The prepared statement of Mr. Weems follows:]

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        Mr. Platts. Thank you, Mr. Weems, and all of our panelists
    for your testimonies, and again, the efforts of you and your
    staffs in preparing your even more substantive written
    testimonies.
        We will proceed to questions, with just two members. While
    we will alternate, we will not worry about being that strict
    with the 5-minute rule as far as alternating back and forth as
    we proceed through the questions.
        Ms. Springer, one, I would like to commend OMB as you
    prepare to issue the guidance as required under the Improper
    Payments Information Act in a timely fashion, and your sharing
    some of where you stand with that. Could you give us a little
    more detail on what the agencies and all of us can expect to
    see from the guidance you are going to issue--for example, some
    of the things, how you are going to define improper or
    erroneous payments, will fraud be included in the definition,
    what are some of the more detailed specifics of the guidance,
    what will it be?
        Ms. Springer. I would be glad to do that, Mr. Chairman.
        First of all, the guidance is almost final. It has been
    vetted over the past several months throughout the
    administration, partly through the partnership with the CFO
    Council and its subcommittee on erroneous payments, which is
    jointly made up of the Inspectors General community, as well as
    the financial community in the agencies. We have gotten very
    good feedback there, and have a process that really includes
    four steps. The first step is the requirement for agencies to
    inventory their programs and their activities.
        The second step, then, based on that inventory, is to
    assess the risk of erroneous payments in those programs and
    activities. That risk assessment is really the key first
    activity point. Based on that, where the risk is high, we will
    ask the agencies to estimate based on the formula--and I will
    go over that formula with you in a moment--to actually do a
    statistically valid estimate of the amount of erroneous
    payments. That, as well as plans for remediation will be
    reported each year in the performance and accountability
    reports that are due back from the agencies. The first
    reporting period where that will be included will be in the
    November 2004 performance and accountability report. That is
    the first one where it will be required under the act.
        We will continue to ask for information on erroneous
    payments, consistent with the directive that went out under the
    President's budget, under the A-11 guidance. So in the interim
    until we get to November 2004, we will continue to get that
    information and obviously I would be glad to share that with
    you and with the committee.
        As far as the definition of erroneous and improper
    payments, to answer the question about fraud, yes, fraud is
    included in that definition. You mentioned earlier in your
    opening statement, Mr. Chairman, some of the types of erroneous
    payments. Certainly, it includes the very obvious ones of
    incorrect amounts, both over-and under-payments. We will be
    getting information very specifically about over-and under-
    payments that will not be a net amount. It will be the absolute
    value, if you will, or gross amounts, and we will be able to
    have those separately identified.
        Of the $35 billion figure that we currently have for the
    $900 billion amount of programs, the $35 billion is made up
    roughly of $30 billion of over-payments and $5 billion of
    under-payments. So we will be able to continue to identify
    those separately.
        Other categories in that definition would include
    inappropriate denials of payments for services. It would
    include payments made to ineligible recipients or for
    ineligible services; duplicate payments; payments that do not
    include the proper accounting for discounts that may be
    applicable. ``Payment'' means any payment that is derived from
    Federal funds or Federal sources, or down the line, from a
    Federal entity. So for example, Federal funds that go to a
    State and then from the State to an ultimate recipient, if that
    was made improperly, that would count and should be in the
    universe of what is reviewed under the guidance.
        It also includes Federal awards that are subject to the
    Single Audit Act, and the Single Audit Act, obviously, and
    recovery auditing all provide additional tools, in addition to
    the very explicit guidance that we will be issuing later this
    week.
        I could go on for a while, but maybe you have some very
    specific questions.
        Mr. Platts. Actually, I have a couple of followups of
    things that you did highlight. One is, you mentioned that the
    first reporting under the act will actually be November 2004.
    It sounded like from what you said that while that is the first
    time we will actually see the reports pursuant to the new act,
    that there will be a constant oversight between now and then.
    So in some of our previous hearings where we have talked about
    where we would get to the end of the year, and where we have
    the financial accounting requirements, and we have these heroic
    efforts to get the books in order at the last minute. It sounds
    like OMB is going to be day-in and day-out, or month-in and
    month-out, between now and November 2004, working with the
    agencies, that they are moving forward pursuant to the guidance
    being offered to ensure that they are putting in place those
    internal controls, that when we get to the November 2004,
    deadline, that we have accurate information readily available.
        Ms. Springer. Yes, that is a good characterization. We
    certainly are not in the business of just issuing guidance and
    then being inactive. We expect to meet as soon as the guidance
    itself is issued, and hear about the plans; make sure there is
    a good understanding of the guidance, first of all, at the
    agency level and hear some feedback from the standpoint of its
    first assessment. Do we need to provide outside authorities,
    make them available, because these do involve some statistical
    formulas that need to be met and statistical standards. We
    believe that agencies will need to get some assistance from
    some outside parties that have been involved in this activity.
    So we will be involved in that respect.
        We will want to get the plans. Similar to what we are doing
    on the financial reporting side, we will actually get from each
    agency the plan. The reporting in 2004 is just the culmination
    of the execution of that plan.
        Additionally, we will continue to get information for a
    broad number of agencies that cover roughly half of Federal
    payments that were targeted under the President's Management
    Agenda. So that will not stop. That will be replaced by the act
    and the new guidance requirements, but up until that 2004 first
    reporting, we will continue to get the reporting that was
    required under the President's Management Agenda. So there will
    not be a lapse in information coming or a lapse in our
    involvement.
        Mr. Platts. OK. You touched also on guidance related to our
    Federal programs, but administered by the States. Mr. Weems
    also referenced them, such as Medicaid. How detailed, how
    involved will your guidance be in trying to get agencies to
    work with States who are really on the front lines of improper
    payments relating to those State-run, but federally funded
    programs?
        Ms. Springer. Right. The dollars associated there are not
    small, either. We have done several things. The guidance will
    certainly address that. We make reference to audits performed
    under the Single Audit Act, and that is probably the key focal
    point of activity, that Single Audit Act, in dealing with
    integrity issues in programs that involve the States. My staff
    and I have attended and worked with the State and local
    auditors, controllers and treasurers. We have been to their
    meetings. We have shared the guidance with them. I was on the
    phone as recently as yesterday with one of the State auditors
    general.
        As a matter of fact, OMB just clarified where there was a
    point of confusion in recovery auditing, where the States had
    actually instructed contractors to not audit programs that were
    funded with Federal dollars because they felt--there was some
    misinterpretation out there--that the dollars that would be
    found could not be available to help pay for the cost of the
    audit, which was totally wrong. The Federal Government was not
    getting the attention it deserved from these audits. We have
    issued late last week, I believe, clarification, so we are
    making calls. So we are actively engaged is the message I am
    trying to give to you, and we have shared the guidance with
    them and gotten their input.
        Mr. Platts. Let me yield to our vice chair, Ms. Blackburn.
    But just to put it in perspective, when we talk about these
    numbers--$35 billion--and we talk about Medicare and adding
    prescription drug benefits, over 10 years of spending $400
    billion for that new plan. If even these conservative estimates
    of the erroneous payments are accurate, it would in essence be
    the cost of that new benefit being added, if we totaled it over
    10 years. So we truly are dealing with some significant sums of
    money that can be put to much better use for our taxpayers.
        Ms. Springer. Right.
        Mr. Platts. Ms. Blackburn.
        Ms. Blackburn. Thank you, Mr. Chairman.
        Mr. Williams, I want to just tag onto what he was saying,
    and come back to you. The $35 billion estimate, from your
    testimony, I was unclear as to whether you included what you
    thought may be erroneous payments in Medicaid in that amount or
    not, from your written testimony?
        Mr. Williams. The $35 billion is the amount that OMB has
    estimated. What we are saying at GAO is that you have to put
    the procedures in place to have all agencies in the Federal
    Government go through the process of identifying where they
    have weaknesses and where they have improper payments, and, at
    that particular point in time, have all of those agencies
    report that information. We have recommended that reporting be
    transparent so that the Congress and the American people will
    have some idea as to what the improper payment number is
    governmentwide. Until you establish that base, we are saying
    that you do not know what the total picture of this problem is.
        Ms. Blackburn. OK. Thank you for that clarification. I
    appreciate that.
        So basically what you are saying is that until we get to
    November 2004, with some procedures in place, you think we do
    not have a solid estimate? Would that be correct?
        Mr. Williams. Until we get to that point where we have the
    entire government, that will be the first step, because this
    process is going to take some time for some agencies. Some
    agencies are already estimating their improper payments, and
    they have procedures in place where they can do a good job. For
    other agencies, this will be the first time, so it will
    probably take them some time to get up to speed with this
    particular process. So we will be getting closer to it at that
    particular point in time.
        Ms. Blackburn. Thank you, sir.
        Ms. Springer, we thank you for being back with us. Looking
    at the private sector, I know that GAO had an executive guide
    in October 2001 that provided some information on strategies
    used by private sector organizations. Now, how much of those
    private sector solutions have you incorporated into the draft
    guidelines that you had mentioned, for the Improper Payments
    Act?
        Ms. Springer. We have drawn from the GAO study. We have
    reviewed it, and we have looked at the techniques and the
    plans. There are really four or five main principles that are
    in that document. We have incorporated those. We believe that
    what we have in the guidance is very consistent with what GAO
    has put out in that August 2002 report.
        If I may, may I just add one other piece to round out the
    scope of the problem that might be helpful to you as well. If
    you--and I did not bring a pie chart; if I had a little more
    time, I should have--but if you view the total government's
    budget as the universe of expenditures--a little bit in excess
    of $2 trillion--there is $900 billion of that that has been
    measured. Out of that, we had the $20 billion that was
    originally estimated from GAO and another $15 billion or so
    that surfaced as a result of the President's Management Agenda.
    So that is $900 billion. Another close to $200 billion,
    rounding off numbers, would be related to Medicaid, which has
    not yet been reviewed. Then there is another $100 billion or so
    that would take us up to the total encompassed by the existing
    original OMB guidance. That really leaves another roughly $1
    trillion that would be picked up as a result of the act from
    last year. Included in that other $1 trillion is about $250
    billion that is already covered by recovery auditing, to some
    degree. So there is another $750 billion or so that really has
    not been looked at. That makes up the full pie chart. So we
    have roughly covered half of that, between recovery auditing in
    the $900 billion that we have looked at so far.
        Ms. Blackburn. OK. Thank you. That makes it come together a
    little bit better. Sometimes as we read testimonies and review,
    you guys know the total picture and we are trying to pull that
    together. It does get confusing with different testimonies and
    different numbers used as those benchmarks in those references,
    so I appreciate that.
        Ms. Springer, going back, you mentioned the guidance on
    improper payments, with the inventories and the risk
    assessments in those four items. Now, other than that, or prior
    to issuing those guidances, what have you all done with the
    agencies in helping them address improper payments?
        Ms. Springer. I would say to a large degree we have worked
    with the agencies and identified for them which programs we
    think they should be looking at. We have talked with them about
    contractors that they can use that we understand from the
    private sector have done a good job. We have not put out any
    one single formula prior to this guidance. I think in
    anticipating that the act was moving along at a good pace that
    we did not actually sit down and put out a formula and then
    have to go back and modify to be consistent with the act. So we
    have worked with the agencies to just understand their own
    formulas, but now with this guidance we will actually be
    putting out something that is more directive, as opposed to
    just reacting to what they were doing.
        Ms. Blackburn. Mr. Weems, looking at Medicaid specifically,
    is there anything that you all are doing to reduce erroneous
    payments with that program?
        Mr. Weems. Yes. We began a pilot project last year with
    nine States where we asked them to develop their own method for
    calculating error. We expect to expand that to 12 States this
    year; 25 States in 2004; and then by 2005 be able to produce a
    national error rate.
        Ms. Blackburn. To followup, OK, so you are letting the
    States take the lead in designing their program for the
    tracking?
        Mr. Weems. Not entirely.
        Ms. Blackburn. Not entirely, OK.
        Mr. Weems. With the nine that we have begun with, we gave
    them, within a framework, the ability to do that. We are going
    to take that now and analyze it; look at the methods they used
    and make sure that what we do in the next round will have a
    higher degree of consistency and a higher degree of rigor; then
    in the next round, an even higher degree of consistency and a
    higher degree of rigor so that we can come to a point where all
    of the States will be using a method that will accurately give
    us a measure that is valid for the State, and also a national
    Medicaid error rate. We are proceeding in this fashion because
    States are an important partner in the Medicaid program. Right
    now, the funds are not quite evenly divided. I believe we spend
    about $160 billion and the States spend about $122 billion of
    their own money in the program. So, it is important for us to
    proceed with them as a partner. Their interest in this, given
    the state of State budgets right now, is obvious, but we want
    to proceed in a way that it is not just the Federal Government
    telling the States how to do it, when in fact we have
    significant variation across the States in the way that they
    run their own programs.
        Ms. Blackburn. Mr. Chairman, may I continue on?
        Mr. Platts. Yes.
        Ms. Blackburn. OK. Thank you very much.
        Do you have a budget? What is it costing you to run the
    pilot programs--just the implementation and the oversight of
    those?
        Mr. Weems. I believe we expect to spend $10 million this
    next year to do that, and then we will have to look at it again
    when we phase it up to the 25 States.
        Ms. Blackburn. OK. So basically, you are going through it--
    the nine States, you will develop a list of learned lessons and
    best practices, and use those with the 12, and then on with the
    25.
        Mr. Weems. Yes, that is correct. Yes, ma'am.
        Ms. Blackburn. OK. Alright. Thank you very much.
        Mr. Chairman.
        Mr. Platts. I am going to continue, Mr. Weems, on the
    Medicaid issue. The nine States came on board in 2002?
        Mr. Weems. Yes.
        Mr. Platts. Are there any initial results from those nine
    States, or is it too early because of it being a new pilot
    program?
        Mr. Weems. There are results, but I would be reluctant to
    characterize them right now because of the diversity of the way
    that the States approached it, and also the amount of rigor
    with which the States might have approached it. So it is
    possible that one State could have ended up reporting a very
    low error rate, when the degree of rigor they applied might not
    have been the same. So I would be reluctant to characterize. I
    would say that there is some variation. We are going to look at
    that, use the lessons learned from those 9 States, then as we
    proceed with the 12, apply more rigor.
        Mr. Platts. But am I understanding correctly that as you go
    from the 9 to the 12, and the 25 and then ultimately to all
    States, that at some point you envision having a uniform system
    for every State to take the same approach so that you are
    comparing apples and apples, one State to the other?
        Mr. Weems. Yes, for precisely the reason that you state,
    Mr. Chairman--for the sake of consistency so that if we say
    there is a national error rate and then one State has a certain
    error rate, it should be comparable to another State.
        Mr. Platts. Is that something that is going to take
    legislative change to require States to implement this uniform
    plan? Or is it something that you believe you have the
    authority to require already?
        Mr. Weems. We believe that we have the authority to do it
    now. If we discover that we need additional authority, we will
    be right back with you. Also, as we have proceeded so far, it
    has been a 100 percent federally funded effort. Whether or not
    we will sustain that through the future also remains a
    question.
        Mr. Platts. Do you envision with recovery audits, where
    there is an ability to use some of the funds recovered for
    costs under the program, that you will have something similar
    for States, so there is an incentive to be more diligent and
    more of their costs are offset?
        Mr. Weems. Absolutely, Mr. Chairman. That is the incentive
    for States to be our partner, as we have discussed.
        Mr. Platts. OK. A question maybe for all three of you--the
    disparity between error rates is pretty significant from the 30
    percent in the EITC to some of the ones, Ms. Springer, in your
    written testimony you highlight the Federal Employees Health
    Benefits Program--1.4 percent; DOD when it comes to the
    military retirement, 0.05 percent error rate. Is it simple--I
    don't know if ``simple'' is the right word--but simply the
    internal controls in place that results in a 30 percent, which
    is a huge error rate compared to 1 percent or 0.05 percent
    rate. What would be your best estimates from the three of you
    why the great disparity that one program is doing such a great
    job and another program is doing such a horrific job?
        Ms. Springer. I will open with a couple of thoughts on
    that. I think some of it is the nature of the program. I think
    there is a certain amount that may be related to controls, and
    I will talk about controls in a minute. But I think some of it
    is the nature of the program. Ones like Federal employee
    benefits programs I think are going to be less prone to the
    types of verification--it would be easier to verify
    eligibility, to demonstrate that you are the right recipient;
    and the amount might be clearer to assess the right amount to
    pay. I think there are certain programs that just by their
    construct are more easily dealt with and it is easier to be
    accurate about the process of payment and to test it and to
    ascertain in fact that things are being executed properly.
        Mr. Platts. Excuse me for interrupting--so would that be an
    example like with HUD, where Congressman Sessions is proposing
    legislation to give access to more information that would allow
    that control to be more significant of the decision of whether
    this is a valid payment or not?
        Ms. Springer. That is right. That would be a tool there.
    The information is available, in the case of the better
    players, the better actors, to make the assessment, as well as
    the construct of the program. HUD, and in some other
    situations--the Department of Education is another one for
    verifying direct student loans, where the administration would
    like to be able to provide the Education Department with access
    to information from the IRS, to be able to validate income
    levels and eligibility there. They do not have that tool yet.
    So where the tools exist, you will see lower rates; where the
    tools are not there and the construct of the program is a
    little bit more challenging, you will tend to see higher rates.
        Mr. Williams. I would like to add to that. It is probably a
    combination of issues. As stated earlier, certain programs have
    inherent risks of improper payments. You might have one
    particular program in which the improper payment rate is 10
    percent, and you would have another program in which the
    improper payment rate might be 4 percent. It might turn out
    that, when you do a total assessment that the 10 percent rate,
    people at that agency are doing a better job than the one that
    has 4 percent. So you have to look at the overall picture as
    far as what are the inherent risks in the particular program.
    You have to look at the commitment from management to address
    the program. Some programs might have a higher number because
    the agency is doing a better job of identifying its improper
    payments. Other agencies might have low numbers because their
    methodology of identifying the improper payments could be
    improved. So it is a combination of factors that you have to
    look at. That is why you want to get procedures in place that
    you can look at across the government, and you can make some
    comparisons and say that this particular program is doing a
    great job and getting a handle on its improper payments and
    doing a great job in trying to reduce that number, but you
    should not expect to see where every department or agency
    within the Federal Government would have the same number or the
    same percentage, just because of the variations in the
    programs.
        Mr. Platts. That is a point well taken, that goes into the
    many variables. It is something that I, until reading some of
    the testimony, assumed that access to information, like the
    student aid applications, access to the income data, was
    available. As one who is about to pay my last student loan
    payment after many years, for law school and undergrad, I want
    people who either have it to pay it back, or not get it if they
    are not eligible. I assume that that information was part of
    the review, to verify. Obviously, I have learned that it was
    not, and we need to correct some of those challenges that
    should not be challenges, but should be just readily shared
    between agencies.
        Mr. Williams. That is correct.
        Mr. Platts. Would you like to add anything, Mr. Weems?
        Mr. Weems. Mr. Chairman, our experience in the Medicare
    program--Medicare has both a risk and it is a complex program.
    In a lot of ways, Medicare is an honor program in that we are
    billed for services. We do not have Federal employees go and
    check with beneficiaries and see if in fact those services are
    rendered. It is only through the audits or looking back through
    claims that we are able to actually discover some of those
    kinds of errors. We do have pre-payment gates in effect where
    we can look at a claim and determine, is this person a Medicare
    beneficiary, and does the service look valid. The classic one
    is, is this a male and is the procedure a hysterectomy--we
    would not pay that claim, for instance.
        In our first experience, we found that many of the claims
    that we looked behind did not have proper documentation. That
    is, when we asked for the medical record, the medical record
    was improperly documented or there was not any documentation at
    all. So we called that a payment error. Now, it could quite
    possibly have been a correct payment, we were just not in a
    position to determine that. So given the complexity of the
    Medicare program, we have spent an awful lot of time and money
    educating our providers through the contractors on how to
    properly submit a Medicare claim; how to code them correctly;
    and how to properly document a procedure. As a result, our
    error rate has fallen and also the proportion of the error rate
    that is explained by improper documentation has fallen even
    more dramatically.
        We understand those risks and I think from our experience
    we would say working with our clients and providing good
    education is a good way of mitigating both the inherent risk in
    the program and the complexity.
        Mr. Platts. Maybe I would describe it as a kinder and
    gentler approach to not having wrongful payments in the first
    place, with that cooperation. It kind of goes to the internal
    controls of the provider. We are talking here about the
    internal controls of the agencies, because that is something
    when one of my work days I spent in an emergency room for about
    12 hours with emergency department doctors and nurses,
    administrative staff. One of the things that was a little
    overwhelming was the paper documentation that went with
    treating any patient, including or maybe even especially, a
    Medicare patient. What came through to me is that they
    understand that they need to be very thorough so that if after
    the fact there is a review of what has been paid to determine
    whether it was a proper or improper payment, that the
    documentation--the ducks are all in a line as need be.
        Mr. Weems. That is very important to us, because looking
    across all of the programs in HHS, we administer very few
    directly. Most we administer either through the States or
    through contractors. So it is very important that the States
    and the contractors have in place proper controls.
        Mr. Platts. And that highlights a point that while the
    estimates may be as high as--using Secretary Rumsfeld, I think
    he has been on record that as much as 5 percent of the payments
    by the DOD are improper in some fashion--correlating that to
    the whole budget and appropriations, would be as much as $80
    billion a year; that some of that is intentional deception or
    fraud, but a lot of it is just not properly documented. It
    might be a legitimate payment, but we are not dotting the I's
    and crossing the T's, and we need to do a better job internally
    with the government and with the providers or contractors out
    there.
        Mr. Weems. That is exactly right.
        Mr. Platts. Ms. Blackburn, did you have further questions?
        Ms. Blackburn. Yes. I think I want to go back to the point
    the chairman had made about incentivizing some of the agencies
    and the levels of government through the recovery audit. In
    doing that for a job well done, what kind of penalties are we
    looking at for the agencies who still have high rates of error
    payments, or is there any thought to that?
        Ms. Springer. My recollection is in the act as they are set
    out now, both the recovery audit guidance, and also the new
    guidance, I do not know that there is specifically a penalty
    that is laid out. It is an interesting thought. Certainly, one
    thing that does come into play here is that we have the
    performance assessment rating tool, the PART process that we
    have, that is meant to tie performance to the budget. In a
    certain sense, I would expect to see the erroneous payment rate
    become a part of those assessments of programs.
        To the extent that there is not progress in bringing that
    rate down to a targeted rate, I would expect that to be a
    factor in the appropriations and the budget submission process.
    That could work in two ways. It could manifest itself in saying
    we could do more--even somebody who is making progress, but
    slowly could say, well, we would like to do more, but we would
    like to get some funding. If you can demonstrate progress, then
    maybe that could work as an additional amount. It could also
    work in the opposite direction as more of a penalty. So I think
    there is an opportunity through the PART process for that to
    have some consequence for agencies that are not making
    progress.
        Ms. Blackburn. Thank you.
        Mr. Williams, you spoke just a moment ago about the
    different rates, and where 10 percent can be a good rate at
    one, and 4 percent at another one.
        Mr. Williams. Yes.
        Ms. Blackburn. Now, when you know that there are these
    improper payments that are out there, and we know it is never
    going to hit zero all across the board, what do you think is
    more or less a benchmark of an acceptable rate, or do you have
    a set rate that you are looking to get these down? And what is
    your timeline for getting these down? Is it November 2004 or
    where are we on that?
        Mr. Williams. There is no specific number right now that I
    could give you for the various agencies in the Federal
    Government. The first thing that you have to do is to get a
    handle on the process. I think the legislation has gone a long
    way by requiring agencies to go through the process of
    assessing their operations. What you have to do at that
    particular point in time is make your assessment and form a
    baseline. Then you are in a position to set targets and goals,
    and look at your operations and say, this is where I would like
    to get to. So at this particular point in time, it is very
    difficult to say what a good number would be for the various
    agencies.
        There are some that, as I said earlier, have been doing
    this process. They have a good feel for what is going on. But
    across the government, to get this issue addressed
    governmentwide, you need to have all of the agencies go through
    this process. What might be a good number for one agency would
    not be for another. So you have to take it on an agency-by-
    agency basis and take it from there.
        As far as the timeline, one of the things that you have to
    consider in this area is that some agencies are further along
    than others in this particular process. Just getting in the
    information in fiscal year 2004 might be good for some, but it
    could take some additional time before agencies get to the
    point where they really do have a good handle on what those
    numbers should be.
        Ms. Blackburn. I know. I think it is just troublesome to
    some of us who watch this process to think of how many years
    this has gone on, and how many billions of dollars have been
    improperly tracked and unaccounted for. There has seemingly
    been no recourse or no change of activity. I think that does
    make it difficult.
        Mr. Williams. Yes.
        Ms. Blackburn. In that vein, what specific recommendations
    for action do you all have on making the information on
    improper payments per agency more readily available and more
    transparent?
        Mr. Williams. I think the Congress has taken the action
    that we suggested in our August 2002 report, and, with the
    passage of the legislation, to require the agencies to report
    this information, to go through the process. That is the first
    step. I think if you look at this from a root cause of these
    problems, most times it can be traced back to the lack of good
    internal controls in place. As we talk about our framework for
    establishing a good internal control system, the first thing
    that we talk about is the control environment. We talk about
    setting the tone at the top. I think the President's Management
    Agenda and the Congress passing legislation requiring agencies
    to take these various steps to identify and to report improper
    payments all point to us heading in the right direction. So I
    think the Congress has taken the step that we need to get this
    process under way to do more than just talk about it, but to
    have some accountability here in which agency management is
    responsible for identifying and addressing the improper payment
    issue.
        Ms. Blackburn. Yes, I think you are right. The public has a
    tendency to get tired of talk, and they want to see some
    action.
        One more question.
        Mr. Williams. OK.
        Ms. Blackburn. Mr. Weems, I am new to Congress this year. I
    came from a State Senate. We were always tackling and working
    through TANF and Child Care, and some of the problems that
    surrounded that. Now, you have spoken of Medicaid, the work
    there with the audits and the improper payments. What are you
    doing specifically looking at Child Care dollars and improper
    payments there?
        Mr. Weems. Child Care--we are at the point of evaluating
    that program and doing our initial risk assessment on it. That
    is one that I would say is farther back in the queue for us. It
    is on our list of seven. We are just not as far along on it as
    we are for the others. With respect to TANF, as you know, in
    the TANF legislation, the Federal Government does not have a
    substantial ability to review data and information from that
    program. One of the tools that we will need in the TANF program
    is legislation to open that up a bit so that we can get that
    information. We are currently in discussions to craft that
    legislation correctly and get it up to the Congress.
        Ms. Blackburn. Will you review that basically more than in
    a macro sense, I would assume?
        Mr. Weems. Because of the variation in the States, we will
    have to look a little farther in. At initial blush, the thing
    that we are going to concentrate on is the actual cash
    payments, rather than some of the other things that are
    possible under the TANF program.
        Ms. Blackburn. Thank you very much.
        Thank you, Mr. Chairman.
        Mr. Platts. Thank you.
        The followup on that with specific suggestions--you had
    identified the administration of the foster care program I
    believe as well. Is there specific legislation that you have in
    mind, or is that still in the draft stage?
        Mr. Weems. It is still in the draft stage. We are still
    discussing our needs with our colleagues, but we expect to be
    able to provide the Congress something soon.
        Mr. Platts. Because as I stated earlier, one of the
    benefits of these hearings is not just for the general public
    and for Members to understand how agencies hands are tied in
    some ways, with Congressman Sessions addressing the issue at
    HUD and access to information there. We talked about student
    loans, foster care, TANF--that we can all be on the same page
    and working diligently if there are legislative changes needed,
    that we identify them and try to move forward as quickly as
    possible to give the agencies that information. Because we are
    putting the onus on developing the internal controls, but if
    there is information outside of their ability to acquire that
    is still going to hinder their efforts, then it is something
    that we should not really be holding them responsible for--our
    inability to get them that additional information.
        The question--and Mr. Williams, you talked about a baseline
    and the Improper Payments Information Act will help establish
    that now by requiring all the agencies to identify their
    improper payments--and that coming forth in the 2004
    performance and accountability standards report. As a general
    taxpayer, sometimes watching the various TV broadcasts or
    reading the paper about this improper payment that comes to
    light, I will be watching a show at night at home and my wife
    will say, ``Is that really happening? Why don't you stop it
    from happening?''
        Why so long? Even though the guidance is just coming out
    now, the agencies have known since November when it was signed
    into law that this was going to be a requirement, why the 2004?
    Although not required to be in the 2003 reports, what would
    hinder us from getting it in the 2003 report, a year sooner, so
    we get on track and get that baseline established a year
    earlier?
        Mr. Williams. Yes. I would support any early reporting of
    this information because the sooner that we start reporting
    this information and put as much transparency in the reporting
    process as we can, the better, in my opinion. I would say also
    that there are some things that you have to look at when you
    are talking about an issue like this, and using this internal
    control framework. I will repeat what I said earlier, and that
    is, in order to address these issues, you have to have a
    control environment. I am not just talking about at the
    agencies, but I am talking about you need a control environment
    that collectively involves the Congress, the administration,
    agency management--the entire government. So it is going to
    take a coordinated effort of everyone working toward addressing
    this issue. You are going to have to continue to hold hearings
    like this to hold people accountable for what they are doing. I
    think it all gets back to accountability as to what needs to be
    the focus in this particular process.
        I have worked on other issues. I have seen longstanding
    problems. But one of the things that I have observed in a lot
    of the issues that I have addressed over the years is that you
    have to have things like this. You have to have these hearings
    to hold people accountable, to make sure that they are aware
    that the Congress is looking at this process. It should result
    in getting some action. You need to get progress reports. This
    is where we are at this particular point in time. This is where
    we are trying to get to.
        So that is what needs to be done--that tone at the top,
    which as I stated in my opening statement--I am beginning to
    see that. I think that is going to result in some positive
    events as we move down the road in addressing this problem.
        Mr. Platts. Maybe that leads into a followup question, Mr.
    Weems. You mentioned about the tone at the top of HHS that has
    really helped to put a focus within that agency. Can you share
    some examples of the actions at the leadership of HHS that have
    helped to set that tone on the right track, that this is a
    serious issue and we are really going to dive into it in all
    ways possible?
        Mr. Weems. Absolutely. In this case, certainly Secretary
    Thompson is an extremely energetic boss that demands an awful
    lot of accountability from his employees, as he should. He also
    is from Elroy, WI, where I am sure one can still get a 99 cent
    breakfast. [Laughter.]
        These are large numbers to him. So he sets that tone, and
    we do a number of things. First of all, the management
    agreement that we have with our colleagues with OMB and with
    the President is reflective of that commitment. We have been
    and our colleagues have been very aggressive in coming to that
    commitment and to that arrangement. Also, once a month we have
    management meetings with the senior management leadership in
    the Department where we are expected to report on our results,
    where we are on the management plan. This is part of it. And
    then quarterly, the entire leadership of the Department meets
    to go over where we are on our management objectives. It is
    something that is with us night and day.
        Mr. Platts. And with the Secretary being a big fan of
    Harley-Davidson, and his District is home to a large
    manufacturer of Harley-Davidson, a plant, we think well of the
    Secretary as well.
        Ms. Springer, how about--and realizing that the agencies
    are heading in the right direction and HHS is an example of
    that, trying to bring more scrutiny and more focus and energy
    to this issue, is OMB considering--you mentioned how you are
    going to have this information being shared in a more voluntary
    sense, or part of the management plan between now and 2004.
    Would OMB consider strongly encouraging it being in the 2003
    reports as opposed to waiting until 2004?
        Ms. Springer. Certainly for the programs that reflect that
    $900 billion--that roughly half--there is no question that we
    have requested that, and we could make that available, and we
    can ask them to put that in their plans. That covers 15
    agencies. So even though it is only roughly half of the total
    Federal outlays, most agencies will have some piece that they
    are already required to do, and we can certainly make that a
    requirement for 2003 for those plans.
        Mr. Platts. OK. I am checking my notes here. As we share
    questions and in your opening statements, you covered a lot of
    the issues I wanted to explore a little further, but I want to
    see if I missed anything.
        I want to come back to a final question. We kind of touched
    on this earlier when we talked about the EITC program and
    trying to get our arms around that 30 percent error rate. If I
    remember my numbers correctly, the administration has asked for
    about $100 million of additional funds to get our arms around
    it, to try to reduce that; that if we spend that $100 million,
    we will save a lot more than that if we can get a better plan.
    Can you give more detail what you envision that $100 million
    being used for, and what the cost-benefit analysis is if we
    spend that $100 million, we estimate we will maybe save X
    dollars or reduce our error percentage of X amount?
        Ms. Springer. Yes. Well, just to put the full perspective
    on it, the EITC program has been under review by various
    consultants that the IRS has brought in. They estimate the
    total erroneous payments to be in excess of $9 billion. That is
    one of the largest single program amounts in the $35 billion
    total--close to one-third of it; I guess one-quarter. So in any
    event, out of $9 billion, I do not know the exact percentage. I
    could find that out for you. They actually came to OMB and
    asked last fall for even more money than the $100 million. We
    thought $100 million was a good amount--they could get a lot
    accomplished with $100 million and then based on the
    accomplishments associated with that, how much they could bring
    back in the way of improvements, then they could in effect re-
    up for additional funding.
        There are three basic causes of erroneous payments in the
    EITC area. There are income reporting errors; there are
    taxpayers that claim that they have a qualifying child, and
    they do not always; and then there are also taxpayers that will
    claim the wrong status. They will claim that they are married
    when they are really single, and that affects it as well.
    Sometimes you also get a child being claimed more than once. So
    there are a variety of things there and it can be done at the
    front end.
        In most cases, it will not involve any additional paperwork
    or effort on the part of the applicant. It is just that we will
    be able to verify that the information is correct, and then if
    there is a followup, we would need to get some additional
    information to support what they have requested. Again, I do
    not know the exact percentage of the $9 billion, but it is not
    an insignificant number and I could get back to you with that.
        Mr. Platts. If you could followup on this in maybe a little
    more detail on what that $100 million is proposed to actually
    do--how you are going to go about trying to reform the program
    and what that projected benefit is.
        Ms. Springer. Right. I would be glad to do that. I do know
    that again, there was a study done in advance. It was not, give
    us $100 million and we will try and figure something out. They
    actually have had a consultant on board and are doing an
    assessment, so we will be able to get that for you.
        Mr. Platts. Mr. Williams, in one of GAO's previous reports,
    there was acknowledgement of departments or agencies changing
    their goals and objectives, which perhaps has had an impact on
    ability to really assess the level of improper payments.
        Mr. Williams. Yes.
        Mr. Platts. I assume that with the new law in place that we
    will overcome that because of establishing more of a uniform
    approach to evaluating improper payments. Is it your sense, or
    was it in that statement in the report, that there was an
    intentional effort to try to hide that level of error rate, or
    to reorganize and start over because we will see if we can do
    better? What is your read on that effort?
        Mr. Williams. My sense is that this was agencies' attempt
    to better report their performance in the GPRA. I do not think
    it was an attempt to hide what the amount of their improper
    payments were, but we have been critical of agencies in their
    GPRA reporting over the years. I think you see these changes as
    agencies attempt to better report how well they performed over
    the years. So I think that is what the focus would be more on.
        Mr. Platts. Not just presenting their information in a more
    positive light under GPRA?
        Mr. Williams. That is correct.
        Mr. Platts. A question for all three of you, and I think
    maybe my final question is on having more accountability and
    internal controls. As part of the Sarbanes-Oxley financial
    reforms regarding publicly traded companies, we required audit
    opinions on their internal controls. I would be interested in
    each of your opinions on whether we should require audit
    opinions on the internal controls of each of our departments
    and agencies within the Federal Government, as we are now
    requiring these publicly held companies to do.
        Mr. Williams. We at GAO have always supported having an
    opinion on the internal controls. We think that this would be,
    at least we consider this to be a best practice. We think it
    would provide more information on the various control
    weaknesses in an organization. The current reporting basically
    is one in which the auditor talks about those areas in which
    they look at and which they consider material, but we think it
    would be much better to have the auditor look at the entire
    control process. Without getting too technical, there is a
    process that we as auditors go through in identifying the
    controls. We use that information for various reasons. I am of
    the belief that in order to get to the point where you would be
    in a position to issue an opinion, there would be additional
    testing that would be required to put you, as an auditor, in
    the position to do that. We think that would be much better
    information under a control environment at an agency than the
    current report model.
        Mr. Platts. Ms. Springer.
        Ms. Springer. Yes, it is a good question. It is a timely
    question. Let me just provide you with an understanding of what
    is done today, versus what is not done today, that would be
    contemplated under expressing an opinion. It is very consistent
    with what Mr. Williams just mentioned.
        Today, as far as the internal control environment goes, the
    independent auditor gets an understanding of the control
    environment. They assess the risk of any kind of material
    weakness. They will test the internal controls and report any
    findings. They stop short of expressing an opinion. So there is
    a lot of work that is done, but it is a testing type of review,
    as opposed to an opinion level review. There is a difference.
    But the fact that they do not express an opinion does not mean
    that there is no testing or risk assessment or review for
    material weaknesses.
        It is my understanding that the IG community estimates that
    it would cost an additional 20 to 30 percent of existing audit
    fees to go from that testing review up to signing an opinion.
    What we would need to do--and I am not prepared to say that it
    is worth that or not; I have not seen a cost-benefit
    assessment--but that is the assessment that would need to be
    made to determine whether or not that additional rigor, and
    there would be some additional, is warranted and what the
    benefit is. We believe that within the context of this
    discussion of erroneous payments that there is a lot of ground
    that we can get by just instituting these practices that we
    talked about today, over and above just what we would get from
    this extra 20 or 30 percent cost.
        So it is not as if there is nothing, and that is the point
    that I want to make.
        Mr. Platts. Yes.
        Ms. Springer. The fair amount of review today just stops
    short of rendering an actual opinion. It is not inappropriate
    to look at the merits of that, but I am not sure where we come
    out.
        Mr. Weems.
        Mr. Weems. I agree with Ms. Springer. Our audits do
    significant testing on internal controls and doing risk
    assessments of those controls. We are concerned about the cost.
    Without a cost-benefit analysis, and this is certainly
    something that we need to pursue, some of our instincts tell us
    that marginal dollar might be spent on correcting identified
    weaknesses, rather than seeking an audit opinion on the
    internal controls themselves.
        Mr. Platts. Ms. Springer, I was not sure, is there a cost-
    benefit being done to look at that? Or are you just saying that
    you would want that to be done before moving to that level?
        Ms. Springer. The latter.
        Mr. Platts. OK. Because I am not certain of that total cost
    of that testing level of audit that is done today, and what 20
    or 30 percent equates to, and then to make a comparison when we
    are talking $35 billion or as much as $70 billion or $80
    billion in erroneous payments, and whether there is an added
    benefit to the level to make that worthwhile. But for those in
    scrutinizing from somebody from the outside, that audit opinion
    of the internal controls would certainly help OMB in looking at
    all the departments and agencies, or Congress in looking at
    just not it has been tested, but here is our opinion of how it
    is working or not--that would give some added information to
    assess who is being thorough and doing a good job, and who is
    doing something, but not necessarily as good a job as they
    could otherwise do.
        Ms. Springer. There is no question that being able to have
    an opinion to point to is like having that Good Housekeeping
    seal of approval, and that answers any questions.
        Mr. Platts. You know that is going to be public, so there
    is maybe more pressure to fine-tune your controls.
        Ms. Springer. Right. And it is indisputable. I agree with
    you 100 percent. The only question that I would still need to
    have answered for me is the cost-benefit--proving that there
    really is an added-value to it; a cost-justified value. I will
    tell you that it is an issue that has come up. You are
    familiar, I think, with the fact that the principals--the
    Director of OMB, Comptroller General Walker and Secretary Snow,
    and OPM Director James and I and some others meet at least
    quarterly and review financial management issues within the
    government. We met last week and this was an issue that we
    discussed. We will not lose track of this.
        Mr. Platts. I was wondering what you are doing with
    Medicaid in 9 States and 12, to pick a small department, maybe
    a large agency, to pilot it to see in actual implementation
    whether there is a benefit worth the investment? Is that part
    of the discussion?
        Ms. Springer. It is possible. We have not specifically had
    that teed up, but that is a possible way.
        Mr. Platts. OK.
        Mr. Williams. Could I add a point to that? One of the
    things that you have to take into consideration in that process
    of looking at it from a cost-benefit standpoint. If you never
    look at those areas that you have not tested, it might be
    difficult in coming up with the benefits you would gain because
    you do not know what the control weaknesses may be. You also do
    not know how much those weaknesses could be costing you from
    the standpoint of not identifying what those weaknesses are and
    having agencies put procedures in place to plug those
    weaknesses. So it might be a difficult challenge to look at
    what is the cost-benefit of having auditors issue an opinion on
    internal controls.
        One thing that you would know for sure by having that
    opinion is that the auditors have looked at the whole operation
    and assessed the controls of the entire agency or component
    that you are looking at. But how much do you save by not
    looking at an area? If you have not looked at that area, you do
    not know what those weaknesses are. It might be difficult to
    determine.
        Ms. Springer. And I guess it is the issue of beyond just
    looking at it, to actually rendering the opinion.
        Mr. Platts. Right.
        I do have one final question, Ms. Springer. With your final
    guidance about to be issued, I assume that there will be for
    each of the departments and agencies, I will call him an
    ombudsman or a point person at OMB that will be responsible for
    working with each department or agency as you move forward and
    the guidance being actually acted on and implemented?
        Ms. Springer. Yes, that is absolutely right, in several
    ways. OMB, as you know, on the budget side is already
    constructed with focal points for each agency, but within my
    office, the Federal Financial Management Office, there is a
    person that is dedicated for each agency, so they will also be
    charged with the erroneous payments review. I expect
    personally, as well as with one of my associates who has been
    leading this effort, to meet with all of them as well. So, yes.
        Mr. Williams. Mr. Platts.
        Mr. Platts. Sure.
        Mr. Williams. We at GAO would strongly support that. We
    think it would be a great idea for OMB to take a very active
    role in that particular process. We have had an opportunity to
    look at the guidance. One of the things that is mentioned in
    the guidance is it recommends that agencies take a look at our
    best practices report that we issued a couple of years ago and
    use that as a tool. One of the things that we would encourage
    OMB to do is to work very closely with the agencies to develop
    additional tools--tools that would be specific to the
    individual agency. Individuals that will be working with the
    various agencies on this issue should consider what additional
    tools can we come up with to help address this improper payment
    problem.
        Mr. Platts. So the guidance being kind of a broad floor on
    which you build, depending on the individual needs of that
    agency?
        Mr. Williams. That is correct. In addition to that, we have
    begun some work in which we are following up on the
    recommendations that we made in our August 2002 report. We will
    continue to look at this process to see what agencies are
    doing, and, as part of that process, what is OMB doing in
    working with the individual agencies, as well as the various
    councils in the Federal Government in the overall coordinated
    effort that we have stated is needed to address this improper
    payment issue.
        Mr. Platts. OK.
        I want to thank each of you for your testimony, and the
    partnership that is clear between the executive branch with
    OMB, congressional efforts with GAO, and then the agencies out
    on the front lines. I think that is an important message we
    want to come out of this hearing is that there is a coordinated
    and very dedicated effort that we get to the bottom of these
    erroneous payments. I would again highlight my predecessor,
    Chairman Horn, in his great work in getting the legislation
    enacted into law that we are now talking about and moving
    forward with. Cooperatively, we can do right by the taxpayers.
        Thanks for your efforts here today and in your respective
    agencies day in and day out.
        In closing, I also want to thank our staff, both majority
    and minority staff, who do an exceptional job and once again
    have been great in putting together this hearing. As this
    hearing has demonstrated, improper payments are unfortunately a
    widespread problem across our Federal agencies. Although it may
    be unrealistic to expect a perfect system with no erroneous
    payments, the American taxpayer deserves far better than the
    current situation. We must have internal controls and financial
    management systems that work to prevent this kind of
    unacceptable handling of the taxpayer's hard-earned dollars.
    Since improper payments occur across all agencies, establishing
    sound internal controls, providing guidance to agencies, and
    working together to learn from each other's successes and
    failures will ensure that taxpayer dollars are being used in
    the most efficient way possible.
        We will certainly welcome the additional information that
    will be provided as we discussed in the hearing, and we will
    hold the record open for 2 weeks from this date for those who
    may want to forward submissions for possible inclusion.
        This meeting is adjourned.
        [Whereupon, at 3:35 p.m., the subcommittee was adjourned,
    to reconvene at the call of the Chair.]
        [Additional information submitted for the hearing record
    follows:]

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