[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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                     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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    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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