[Senate Hearing 109-473]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 109-473
 
    IMPROPER PAYMENTS: WHERE ARE TRUTH AND TRANSPARENCY IN FEDERAL 
                          FINANCIAL REPORTING?

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

                                HEARING

                               before the

                FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT
                     INFORMATION, AND INTERNATIONAL
                         SECURITY SUBCOMMITTEE

                                 of the

                              COMMITTEE ON
                         HOMELAND SECURITY AND
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE


                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 12, 2005

                               __________


       Printed for the use of the Committee on Homeland Security
                        and Governmental Affairs



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        COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS

                   SUSAN M. COLLINS, Maine, Chairman
TED STEVENS, Alaska                  JOSEPH I. LIEBERMAN, Connecticut
GEORGE V. VOINOVICH, Ohio            CARL LEVIN, Michigan
NORM COLEMAN, Minnesota              DANIEL K. AKAKA, Hawaii
TOM COBURN, Oklahoma                 THOMAS R. CARPER, Delaware
LINCOLN D. CHAFEE, Rhode Island      MARK DAYTON, Minnesota
ROBERT F. BENNETT, Utah              FRANK LAUTENBERG, New Jersey
PETE V. DOMENICI, New Mexico         MARK PRYOR, Arkansas
JOHN W. WARNER, Virginia

           Michael D. Bopp, Staff Director and Chief Counsel
   Joyce A. Rechtschaffen, Minority Staff Director and Chief Counsel
                      Trina D. Tyrer, Chief Clerk


FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT INFORMATION, AND INTERNATIONAL 
                         SECURITY SUBCOMMITTEE

                     TOM COBURN, Oklahoma, Chairman
TED STEVENS, Alaska                  THOMAS CARPER, Delaware
GEORGE V. VOINOVICH, Ohio            CARL LEVIN, Michigan
LINCOLN D. CHAFEE, Rhode Island      DANIEL K. AKAKA, Hawaii
ROBERT F. BENNETT, Utah              MARK DAYTON, Minnesota
PETE V. DOMENICI, New Mexico         FRANK LAUTENBERG, New Jersey
JOHN W. WARNER, Virginia             MARK PRYOR, Arkansas

                      Katy French, Staff Director
                 Sheila Murphy, Minority Staff Director
            John Kilvington, Minority Deputy Staff Director
                       Liz Scranton, Chief Clerk


                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Coburn...............................................     1
    Senator Carper...............................................     4

                               WITNESSES
                         Tuesday, July 12, 2005

McCoy Williams, Director, Financial Management and Assurance, 
  U.S. Government Accountability Office..........................     6
Hon. Linda M. Combs, Controller, Office of Federal Financial 
  Management, U.S. Office of Management and Budget...............     7
Timothy Hill, Director, Office of Financial Management, Centers 
  for Medicare and Medicaid Services, U.S. Department of Health 
  and Human Services.............................................     9
Kate Coler, Deputy Under Secretary, Food, Nutrition, and Consumer 
  Services, U.S. Department of Agriculture.......................    11

                     Alphabetical List of Witnesses

Coler, Kate:
    Testimony....................................................    11
    Prepared statement...........................................    60
Combs, Hon. Linda M.:
    Testimony....................................................     7
    Prepared statement...........................................    48
Hill, Timothy:
    Testimony....................................................     9
    Prepared statement...........................................    52
Williams, McCoy:
    Testimony....................................................     6
    Prepared statement...........................................    39

                                APPENDIX

Chart entitled ``$45 Billion =,'' submitted for the Record by 
  Senator Coburn.................................................    37
Article from The Washington Post, July 12, 2005, entitled 
  ``Medicare's Spinal Tap: A Checkup on Health Care Costs and 
  Coverage''.....................................................    38
Questions and responses for the Record from:
    Mr. Williams.................................................    64
    Ms. Combs....................................................    69
    Mr. Hill.....................................................    74


    IMPROPER PAYMENTS: WHERE ARE TRUTH AND TRANSPARENCY IN FEDERAL 
                          FINANCIAL REPORTING?

                              ----------                              


                         TUESDAY, JULY 12, 2005

                                     U.S. Senate,  
            Subcommittee on Federal Financial Management,  
        Government Information, and International Security,
                          of the Committee on Homeland Security    
                                        and Governmental Affairs,  
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2:02 p.m., in 
room SD-562, Dirksen Senate Office Building, Hon. Tom Coburn, 
Chairman of the Subcommittee, presiding.
    Present: Senators Coburn and Carper.

              OPENING STATEMENT OF CHAIRMAN COBURN

    Senator Coburn. Good afternoon. The hearing will come to 
order.
    The Federal Financial Management Subcommittee of the 
Homeland Security and Government Affairs Committee has been 
holding numerous hearings. I am going to ask unanimous consent 
that my written testimony be put in the record, if that is OK 
with my friend from Delaware, reserving the right to object.
    Senator Carper. I won't object.
    Senator Coburn. Would you care to state your reservation?
    Senator Carper. No, no, I am fine.
    Senator Coburn. And I want to welcome our panelists here.
    I have to tell you, as a grandfather and also someone who 
spent the majority of his time taking care of people in a 
medical practice, most of whom were Medicaid patients, that the 
findings that this Subcommittee has uncovered are atrocious. 
And I asked my staff last night, I said, I want you to go to 
every accounting firm in the country and find out what the 
proper rate of improper payments is. Do you know what we heard? 
Zero is the amount of improper payments. And to think that we 
have, I believe, 17 of all of the government agencies in 
compliance in terms of reporting and those at 3.9 percent 
improper payments, and if you extrapolate that at all across 
the government, we are talking about $110 to $125 billion a 
year that this government is spending and paying for things 
improperly, things that we have not received, overpayments, 
which says, in effect, that we are terrible managers.
    The whole purpose for this Subcommittee hearing is to try 
to establish the transparency and bring it to light. 
Unfortunately, this Subcommittee hearing won't get the 
coverage, the press coverage in Washington and throughout the 
country that it deserves, and I would tell you that if the 
American people truly understood that four to five cents out of 
every dollar that is spent is paid out for something we did not 
receive, they would be up in arms. And if they personalized 
that with four to five percent of their tax money coming back 
to them because it was wasted and that they could spend that 
four to five percent on their grandchildren or their children, 
or to make a downpayment on a home, or to buy a car because 
they don't have adequate transportation, or to buy just 
sustenance to live every day in this country, they would ask 
for that.
    And so I think the tone of the hearing ought to be, how do 
we get out of this mess? How do we start on the track for 
transparency in this government? Transparency--the problems are 
so great that agencies don't even comply and the standards that 
have been set, that if you don't spend $2 billion, it doesn't 
apply to you. Well, $2 billion is 40 percent of the State of 
Oklahoma's budget, and for us to set a standard of $2 billion 
to me seems ludicrous.
    So I will tell you, I am not going to let go of this issue. 
I am going to be here for 6 years, whether I am in the Majority 
or Minority. I am going to work to make sure that the 
transparency and the accountability in government agencies 
comes into line with what the American people deserve and 
expect.
    We must have an environment committed to creating the 
culture of accountability. That is not just in our finances, 
that is in every aspect of our government. Creating the culture 
starts from the top. It starts with the President and some of 
the great things he has done, but more is required. Today, we 
just went over the numbers. Tomorrow, the White House will 
announce the deficit is $75 billion less than what it was going 
to be. That is a meaningless number. The fact is that $460 
billion is going to be added to the Federal debt this year 
based on what we spend versus what we get in. And if you divide 
that out, that is about $1,850 per man, woman, and child in 
this country, $1,850 per man, woman, and child that we are 
going to spend more than we have.
    So the obligation is on you as leaders, or those people 
testifying, you testifying before us today, but also on the 
Senate to start doing its job and to do the oversight, to do 
the accountability, the questioning that is going to be 
required to get us to the level that we expect of every other 
area.
    The other thing I think is important is Congress passed 
Sarbanes-Oxley and is requiring every corporation in this 
country to meet a new standard of professional financial 
accounting, openness, and transparency, and to think that the 
very government that is forcing that on the private sector 
today can't even come close to the same standards themselves, 
to me this is tremendously ironic and should not be in any way 
acceptable to anybody in the Congress, regardless of their 
political stripe.
    [The prepared statement of Chairman Coburn follows:]

                  PREPARED STATEMENT OF SENATOR COBURN

    In Fiscal Year 2004, the Federal Government spent $2.5 trillion. At 
least $45 billion of those dollars were paid improperly, mostly in 
overpayments--$45 billion. This dollar amount could go to pay for much 
needed resources for Americans. As you can see, $45 billion would 
provide 300,000 up-armored humvees, at $150,000 per vehicle. This 
figure equates to two humvees per American Soldier--$45 billion dollars 
could also go to pay for seniors world-wide, to get flu vaccinations 
for the next 6 years. As you can see, it's difficult to even equate $45 
billion to things needed by Americans.
    Many of these payments were made without adequately supported 
claims, or for services not provided, or provided to ineligible 
beneficiaries in programs like Medicare, Social Security, Food Stamps, 
and Medicaid. I am still astounded by the lack of reporting for 
programs in the Department of Defense. So far, they have only reported 
for the Military Retirement Fund and Military Health Benefits programs.
    In recent years,the Bush Administration and Congress have made the 
reduction of improper payments a priority, both through the President's 
Management Agenda, and the passage of the Improper Payments Information 
Act in November 2002. The first line of the President's Management 
Agenda reads: ``The President's Management Agenda strives to instill 
first class financial management practices in departments and agencies 
throughout the Executive Branch.''
    I applaud the Administration and the Office of Management and 
Budget for making Eliminating Improper Payments a major focus of the 
President's Management Agenda. This initiative is a big step in helping 
to ensure that each taxpayer dollar is accounted for, and I look 
forward today to discussing ways in which agencies can continue to 
improve the integrity of their payments.
    In Comptroller General Walker's manuscript, ``Saving Our Nation's 
Future: An Intergovernmental Challenge,'' he estimates that ``if we do 
nothing by 2040 we may have to cut Federal spending by more than half 
or raise Federal taxes by more than two and a half times to balance the 
budget.'' Walker contends that a crucial step in turning this dismal 
outlook around is ``insisting on truth and transparency in government 
operations, including Federal financial report.''
    I couldn't agree more with Mr. Walker's comments, and believe that 
the Federal Government should be able to provide an explanation for 
each and every dollar it spends--this means dollars spent properly and 
improperly. Today's reality is that we have a current budget deficit of 
$462 billion.
    According to the Office of Management and Budget, errors made by 
the Federal Government compose a total of at least $45 billion in 
improper payments for FY 2004. We must have ``truth,'' and 
``transparency'' in government operations to combat these billions of 
dollars in payments that are in no way justifiable.
    The astounding figure--$45 billion--did not even include 12 
programs with outlays of about $249 billion that were required to 
report previously under OMB Circular A-11; and required to report at 
the end of Fiscal Year 2004 pursuant to OMB's implementation guidance 
to the Improper Payments Information Act of 2002. This amount is just 
the tip of an iceberg of an unknown size.
    Furthermore, there were three agencies, NASA, DOJ, and DHS, who had 
reported they had performed risk assessments to see whether or not 
their programs could make improper payments. When outside auditors came 
in to check on this, they could not confirm that risk assessments had 
even been done. This is deplorable that agencies have allegedly 
reported assessments. I will look into this potential deceit to uncover 
the whole story.
    I am also interested to hear why agencies that have been required 
to report improper payment information for several years are still 
unable to do so. Medicaid is one program that does not report improper 
payment information, though it has been required to do so since July 
2001. Some have argued that because Medicaid is a state-based program, 
it is too hard to report improper payments. That argument is refuted by 
the progress the Food Stamp Program has made.
    While the Food Stamp Program made payment errors totaling about 
$1.4 billion in Fiscal Year 2003, the national dollar payment error 
rate for the program has declined by almost one-third over the last 5 
years to a record low rate of 6.63 percent. The decline in their error 
rate has been widespread, and I look forward to examining the reasons 
for their success, and remaining challenges in eliminating improper 
payments. An improper payment rate of 6.63 percent is still way too 
high considering any improper payment rate in the private sector would 
be intolerable.
    Americans will not tolerate one more year where $45 billion of 
their hard-earned money is squandered. This problem is inexcusable, no 
matter how complex and labrynthine the government is. I cannot go back 
with a number like this to Oklahoma, where my patients and neighbors 
are struggling to make ends meet, while the government takes up to 40 
percent of their income.
    I know the witnesses share my outrage and commitment to ending this 
abuse of the taxpayer trust. Thank you for appearing today.

    Senator Coburn. I am very happy that our Ranking Member is 
here. We first heard things on improper payments on our first 
Subcommittee hearing. At this time, I would like to recognize 
him for an opening statement.

              OPENING STATEMENT OF SENATOR CARPER

    Senator Carper. Thanks, Mr. Chairman. During our caucus 
luncheon, I was saying earlier to our witnesses, and we welcome 
each of you today and the folks that are present at the hearing 
today, that we were just wrapping up our respective caucus 
luncheons, and I don't know what you guys talked about today, 
but one of the things we focused on was the number for the 
budget deficit and just an update as to how we are doing as we 
come to three-quarters through the year. The good news is that 
the deficit, as you suggest, is going to be a little bit lower 
this fiscal year than had earlier been projected. The bad news 
is this will still be, I believe, the third-largest budget 
deficit in the history of our country, and as you suggest, add 
over $400 billion to our Nation's debt.
    In our earlier hearings, one of the things we have learned 
is that about an amount equal to roughly about 10 percent of 
the anticipated new debt that we will take on this year can be 
attributed to improper payments, and a lot of times, my 
dealings in the private sector have been that the improper 
payments that are made there are oftentimes underpayments as 
opposed to overpayments. We are not very good in the government 
at making underpayments, but we are very good in making 
overpayments. Maybe we can learn how to make those 
underpayments and that will help a little bit.
    But budget deficits, clearly, if we are overpaying, we 
ought to do something about it and that is our full intent. We 
are not the first people who made this call. If you go back 4 
or 5 years, you will find that this was something that the 
Congress and President not just talked about, but actually 
enacted legislation in 2002 and we are seeing in 2004 the first 
fruits of that work.
    It is important for us today not to shoot the messenger. 
What is the old saying, rate the sin, not the sinner? You are 
not sinners, but the message that we are going to hear today, I 
think, is that we recognize and identified a whole lot of areas 
where we can make progress, and that is, I think, the beginning 
of actually making progress.
    The other thing is while we are concerned about 
overpayments, Mr. Chairman, I am also concerned about taxes 
that are owed that ought to be collected by the Federal 
Government. Before we think about cutting programs, talking 
about raising taxes for people, we want to make sure that the 
folks who owe money are actually paying the dollars that are 
owed.
    I have a statement I would also like to enter for the 
record, Mr. Chairman. I am just glad that we are here. I thank 
you for your willingness to have this hearing today. This is 
valuable for this Subcommittee, but even more valuable, I 
think, for the people of this country. Thank you.
    Senator Coburn. Without objection.
    [The prepared statement of Senator Carper follows:]

                  PREPARED STATEMENT OF SENATOR CARPER

    Thank you, Mr. Chairman, for holding this important and timely 
hearing. At a time when our Federal budget deficit is near historic 
levels, it's vital that we do all we can to reduce the number of 
accidental or fraudulent payments agencies made each year.
    As my colleagues are aware, Federal agencies officially make about 
$45 billion in improper payments each year. Most of these are 
overpayments. We'll learn today, however, that this is likely only the 
tip of the iceberg. Some agencies are not doing all they need to do to 
determine whether or not programs they administer are at risk for 
improper payments. There are other programs that we know are at risk 
for improper payments but that aren't figured into the $45 billion 
tally at all.
    Our predecessors on this subcommittee, Mr. Chairman, worked back in 
2002 to enact the Improper Payments Information Act--legislation that 
is clearly helping us get a better sense of the magnitude of the 
improper payments problem. In addition, OMB has now made the 
elimination of improper payments a top management priority. It is my 
hope that the new attention this problem is seeing now will lead to 
some dramatic improvements in the coming months.
    We're just embarking on another appropriations season here in 
Congress where we'll be called on to make some very difficult decisions 
about what to do with scarce Federal dollars. I don't need to remind 
anyone here that every time a dollar is spent improperly, a worthy 
program is cheated of much-needed funding that could be use to help 
people.
    Freeing up the tens of billions of dollars wasted every year on 
improper payments wouldn't solve our nation's fiscal problems, Mr. 
Chairman, but it would probably make our jobs in that area a lot 
easier. There will always be mistakes made here and there but it seems 
to me that the key to solving this problem is to find a way to get 
agencies to abide by the basics of sound financial management.
    I think it's inexcusable that an agency is unable to look at its 
balance sheet and report to OMB on the areas that they think are at 
risk for improper payments. I understand that GAO will testify today, 
however, that some agencies simply aren't complying with the 2002 
legislation and letting us know where they're vulnerable.
    And it's shocking to me that many agencies don't have the ability 
to detect things like double payments or benefits going out to 
individuals who don't quality. It's clear however, that too many of 
these kinds of mistakes are still slipping past agencies' internal 
controls.
    It sounds like we're making progress on this issue, Mr. Chairman, 
but we probably have a long way left to go. I look forward to hearing a 
progress report from our witnesses today and to learning what, if 
anything, we need to do to help agencies further.

    Senator Coburn. I would like for you to put up the poster 
on the $45 billion, if you would.\1\
---------------------------------------------------------------------------
    \1\ The chart referred to appears in the Appendix on page 37.
---------------------------------------------------------------------------
    We have before us today four very distinguished individuals 
and I will not go into extreme detail on your bios, but I do 
want to thank you for coming. I want to thank you for the work 
that you are doing.
    Ms. Coler, I want to particularly commend you on the work 
that you have done with the Federal Food Stamp Program. It is 
still way too high, but you have demonstrated that if an effort 
is made, things can change, and I think it is a great example 
of where we start. I also think it is great because it is a 
State-run program and people are giving us the statements that, 
in fact, State-run programs can't be accountable, and, in fact, 
they can, and I think you have proven that through your efforts 
at the Department of Agriculture.
    On our witness list today is McCoy Williams, who is 
Director of the Financial Management and Assurance Team of the 
Government Accountability Office.
    We also have Linda Combs. She has been with us before. We 
thank you for being here.
    Senator Carper. I think the last time Ms. Combs was before 
us, I think she was here for----
    Senator Coburn. Maybe for a hearing on her nomination.
    Senator Carper. She has since been confirmed.
    Senator Coburn. We are very pleased to have you here.
    The bios are about five pages long, so I am going to skip 
through those. Timothy Hill, thank you----
    Senator Carper. Ms. Combs, does it say where she went to 
undergraduate school?
    Senator Coburn. Yes, it did, and we went through that 
again, but would you care to elaborate?
    Senator Carper. For the folks in the audience who never 
heard this, her undergraduate math teacher at Appalachian State 
University was my father-in-law, and he is deceased now, but he 
would be so proud to see----
    Senator Coburn. Now you get the connection of why he is on 
this Subcommittee.
    Senator Carper. He would be so pleased to see one of his 
students sitting at the table accomplishing all the things that 
you have accomplished.
    Ms. Combs. Thank you so much.
    Senator Coburn. Timothy Hill is the Centers for Medicare & 
Medicaid Services Chief Financial Officer and Director of the 
Office of Financial Management.
    And Kate Coler was appointed Deputy Under Secretary for 
Food, Nutrition, and Consumer Services on December 1, 2003, and 
that is my comment in relationship to the work that you have 
done at the Department of Agriculture. I appreciate it.
    We would love to have your testimony. Your full testimony 
will be made a part of the record. Would you please limit your 
comments to 5 minutes.
    Mr. Williams, please begin.

TESTIMONY OF McCOY WILLIAMS,\1\ DIRECTOR, FINANCIAL MANAGEMENT 
      AND ASSURANCE, U.S. GOVERNMENT ACCOUNTABILITY OFFICE

    Mr. Williams. Thank you, Mr. Chairman. Mr. Chairman and 
Senator Carper, I am pleased to be here today to discuss the 
government-wide problem of improper payments in Federal 
programs and activities.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Williams appears in the Appendix 
on page 39.
---------------------------------------------------------------------------
    Fiscal Year 2004 marked the first year that Federal 
agencies government-wide were required to report improper 
payment information under the Improper Payments Information Act 
of 2002. OMB has continued to provide strong emphasis on the 
Act through the President's Management Agenda and Federal 
agencies' response to fulfilling the requirements of the Act 
has generally been positive. My testimony today is based on our 
March 31, 2005, report that focused on the extent to which 
agencies have performed the required assessments to identify 
programs and activities that are susceptible to significant 
improper payments, and the annual amount of improper payments 
estimated by the reporting agencies for Fiscal Year 2004.
    Mr. Chairman, we found that agencies made progress in 
identifying programs susceptible to the risk of improper 
payments. At the same time, our findings suggest that even with 
enhanced emphasis on improper payment reporting, certain 
agencies had not yet performed risk assessments of all their 
programs and their estimated improper payments for their 
respective programs.
    Specifically, 6 of the 29 agencies we reviewed reported 
that they had not assessed all programs. We also found that 29 
agency programs did not report improper payment estimates. Mr. 
Chairman, 12 of these programs had prior improper payment 
reporting requirements under OMB Circular A-11.
    I will now focus on the amount of government-wide improper 
payments reported for Fiscal Year 2004. Mr. Chairman, while 17 
agencies reported improper payment estimates totalling more 
than $45 billion for 41 programs, the magnitude of the 
government-wide improper payment problem is still unknown 
because, as I mentioned earlier, some agencies have not yet 
prepared estimates of significant improper payments for all of 
their programs.
    The $45 billion represents almost a $10 billion, or 27 
percent, increase in the amount of improper payments reported 
by agencies in Fiscal Year 2003. This increase was primarily 
attributable to changes in the method for estimating and 
reporting improper payments in the Medicare program.
    In closing, Mr. Chairman, we recognize that measuring 
improper payments and designing and implementing actions to 
reduce or eliminate them are not simple tasks and will not be 
easily solved. The level of importance each agency, the 
Administration, and the Congress place on the efforts to 
implement the Act will determine its overall effectiveness in 
assuring that Federal funds are used efficiently and for their 
intended purposes.
    This concludes my statement, Mr. Chairman. I would be 
pleased to respond to any questions that you or other Members 
of the Subcommittee may have. Thank you.
    Senator Coburn. Thank you. Controller Combs.

  TESTIMONY OF HON. LINDA M. COMBS,\1\ CONTROLLER, OFFICE OF 
  FEDERAL FINANCIAL MANAGEMENT, U.S. OFFICE OF MANAGEMENT AND 
                             BUDGET

    Ms. Combs. Thank you, Dr. Coburn, Senator Carper, and 
Members of the Subcommittee. I am certainly pleased to be here 
with you today for the first time since being confirmed to the 
position of Controller and I certainly look forward to working 
with you on this very important Subcommittee.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Combs appears in the Appendix on 
page 48.
---------------------------------------------------------------------------
    There are many significant financial issues facing our 
government today and certainly the financial reporting that we 
are talking about today and making our reporting more 
transparent, improving internal controls processes, and the 
very important topic which we are here to discuss today of 
eliminating improper payments.
    Let me say I stand with you in creating a culture of 
accountability in the Federal Government and I think this 
Administration is saying by the actions that we have put 
forward in response to the legislation that we continue to make 
the elimination of improper payments a very high priority. 
There is simply no more important undertaking than the 
efficient stewardship of our taxpayer dollars. The Federal 
Government should be accurate and transparent, as we have 
talked about before, in its financial reporting. Our citizens 
deserve to know that their money is being spent appropriately 
for the purpose that it was intended and legislated.
    Be assured that we are hard at work to ensure that these 
things are happening, continue to happen, and I agree, we have 
much more to do. The bar needs to be set higher and I stand 
here ready to help you set that bar higher.
    When the President's Management Agenda was first announced 
in 2001, the elimination of improper payments was indeed a key 
part of the improving financial performance initiative, 
initially focusing on those Federal programs making annual 
payments in excess of $2 billion, and the 2002 enactment of the 
Improper Payments Information Act broadened the review of all 
these programs and activities.
    In May 2003, the agencies began to comply with the Act, and 
in 2004, last year's Performance and Accountability Reports 
that were issued on November 15, we saw further evidence of 
this compliance.
    In Fiscal Year 2004, as we just heard Mr. Williams talk 
about, that marked the first full year of the implementation of 
the Improper Payments Act by agencies, and agencies reported 
their improper payment elimination efforts in their November 
PAR reports. It was soon after that, in January 2005, that OMB 
issued a report called ``Improving the Accuracy and Integrity 
of Federal Programs.'' That served one purpose, and that was to 
aggregate the results of these agency-specific reports into a 
single comprehensive document. This provided the clearest 
picture that we have to date on the extent of the government-
wide improper payments as well as the significant efforts that 
continue to be underway to eliminate them.
    What we learned from that report was that, indeed, Federal 
agencies reported a collective total at that time of $45.1 
billion in improper payments in 2004, and that represented a 
3.9 government-wide improper payment rate. Approximately 92 
percent of the Federal improper payments are overpayments. 
There are seven programs alone that account for 95 percent of 
the improper payments that were reported in Fiscal Year 2004. 
If the agencies are successful in meeting their reduction 
targets, the overall improper payments total measured and 
reported in Fiscal Year 2004 is expected to decline when the 
reports come in November 2005, of this year.
    A significant and specific PMA program initiative, 
Eliminating Improper Payments initiative, is also adding 
further agency focus on eliminating improper payments. As you 
recall, under the President's Management Agenda, agencies are 
required to meet a ``green'' standard, and as agencies continue 
to move forward toward the completion of the necessary steps 
for the Improving Financial Management Initiative, improper 
payments is definitely one of the areas that we track during 
that.
    I think with the tools of the Improper Payments Information 
Act, and this Administration's efforts that are currently in 
place, we are building upon our successes. The Federal 
Government is in a very strong position right now to continue 
the efforts that we have already identified and eliminate 
improper payments throughout agency and program activities.
    With our goal of ensuring that each taxpayer dollar is 
spent wisely, efficiently, and for the purpose of which it was 
originally intended, we remain committed to eliminating Federal 
improper payments. We look forward to working with Congress to 
see that this objective is truly accomplished.
    Thank you for the opportunity to speak before you today, 
and I am pleased to answer any questions.
    Senator Coburn. Thank you. Mr. Hill.

  TESTIMONY OF TIMOTHY HILL,\1\ DIRECTOR, OFFICE OF FINANCIAL 
  MANAGEMENT, CENTERS FOR MEDICARE & MEDICAID SERVICES, U.S. 
            DEPARTMENT OF HEALTH AND HUMAN SERVICES

    Mr. Hill. Dr. Coburn, Senator Carper, other distinguished 
Subcommittee Members, thank you for inviting me here to discuss 
the CMS's initiatives to reduce improper payments in the 
Medicare and the Medicaid programs.
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    \1\ The prepared statement of Mr. Hill appears in the Appendix on 
page 52.
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    In Fiscal Year 2005, the Medicare and Medicaid programs 
will spend $658 billion on health care benefits for nearly 85 
million beneficiaries. By any measure, this is an awesome 
fiduciary responsibility and one that the agency as a whole and 
I, in particular, as the Chief Financial Officer (CFO), take 
very seriously. Given the staggering size of the expenditures 
for these programs, even small amounts of payment error can 
represent a significant impact to both Federal and State 
treasuries and taxpayers. I recognize that Medicare makes up a 
significant portion of that $45 billion.
    Thus, CMS, as part of our overall financial management 
strategy, has a long history of using improper payment 
calculations as a tool to preserve the fiscal integrity of the 
programs that we administer. As a general matter, we look to 
our improper payment activities to help us identify improper 
payments, to identify and study their root causes, and to help 
strengthen internal controls to prevent improper payments from 
occurring in the future. However, because Medicare and Medicaid 
vary in terms of their financing and their Administration, our 
specific approaches to measuring and eliminating improper 
payments for each program are slightly different.
    We began reporting a national improper payment rate for 
Medicare in Fiscal Year 1996 as part of our annual CFO audit. 
Beginning in Fiscal Year 2003, we expanded on that process to 
include a national rate, as well as rates that produce data at 
much lower levels of aggregation to allow us better management 
information for our program by assessing how well our claims 
processors process claims as well as assessing broad categories 
of providers and benefit types. In 2002, when the Improper 
Payments Information Act (IPIA) was enacted, CMS needed to make 
only minor modifications to our ongoing processes to come into 
compliance with the OMB-issued guidance.
    Calculating the error rates is only one step in the 
process. Remediation is the key to CMS's IPIA compliance 
activities. The cornerstone of our remediation efforts in 
Medicare is our error rate reduction plan, which includes 
agency-level strategies to clarify our policies and implement 
new initiatives to reduce improper payments. It also lays out 
how we use the improper payment information to evaluate the 
performance of our contractors that process our claims and to 
target billing education for particularly error-prone benefit 
areas or provider types.
    While we have a long way to go, our efforts to date have 
shown promise. Our goal is to lower the national Medicare rate, 
which currently stands at 10.1 percent, to 7.9 percent by 
November 2005. I am happy to report that our preliminary data 
indicate that we are on track to meet this 2005 goal.
    Let me now turn to compliance for Medicaid and SCHIP. CMS, 
along with the States, has a strong interest in strengthening 
financial management and oversight payment accuracy in the 
Medicaid and SCHIP programs. Thus, our IPIA compliance strategy 
rests on a policy of joint Federal-State cooperation to achieve 
the intended outcomes of the statute. Our strategy has evolved 
since Fiscal Year 2000, when we first initiated a payment 
accuracy measurement demonstration project to test various 
methods and strategies for measuring improper payments at the 
State level. By the end of Fiscal Year 2005, 38 States will 
have participated in this program.
    Last August, based on our experiences with this program, we 
published a proposed rule that would require States to measure 
and report IPIA compliant payment accuracy rates for Medicaid 
and SCHIP. We hope to finalize this rule later this summer 
using the assessment of our pilots as well as industry and 
beneficiary comments on our proposed rule. Our goal is to have 
full IPIA compliance in Medicaid and SCHIP in time for 
reporting in the Fiscal Year 2008 Performance and 
Accountability Report.
    In addition to becoming IPIA compliant for Medicaid, a key 
challenge facing CMS in the coming years will be assessing IPIA 
compliance with the new drug benefit and expanded Medicare 
Advantage programs. We conducted a risk assessment of the 
Medicare Advantage program this year, and we will be outlining 
a strategy for IPIA compliance for Fiscal Year 2006. For the 
drug benefit, which begins in January, we will be conducting a 
risk assessment in the next calendar year, in time to lay out a 
strategy for compliance in 2007.
    Mr. Chairman, CMS maintains a strong commitment to 
protecting taxpayer dollars and ensuring the sound financial 
management of our programs. We have taken significant actions 
to both meet and exceed the IPIA standards in Medicare and we 
are taking a number of proactive steps to become IPIA compliant 
in Medicaid. We have made a great deal of progress, but we look 
forward to continuing to work with you to move forward.
    I look forward to answering any questions the Subcommittee 
may have.
    Senator Coburn. Thank you very much, Mr. Hill. Secretary 
Coler.

   TESTIMONY OF KATE COLER,\1\ DEPUTY UNDER SECRETARY, FOOD, 
     NUTRITION, AND CONSUMER SERVICES, U.S. DEPARTMENT OF 
                          AGRICULTURE

    Ms. Coler. Good afternoon, Dr. Coburn and Senator Carper. I 
am pleased to be here to share with you some of what USDA and 
our State partners have been doing over the years to improve 
the payment accuracy rate in the Food Stamp Program.
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    \1\ The prepared statement of Ms. Coler appears in the Appendix on 
page 60.
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    The Food Stamp Program ensures access to a nutritious, 
healthful diet for households through nutrition assistance and 
nutrition education. The Federal Government pays the full cost 
of the benefits, which is $24.6 billion for Fiscal Year 2004, 
and funds approximately half of the expenses incurred by the 
States to administer the program.
    The Office of Management and Budget recently completed a 
Program Assessment Rating Tool, or PART, review of the Food 
Stamp Program in 2003. The review showed that food stamp 
benefits are well targeted to low-income beneficiaries and are 
virtually always spent for their intended purpose. The program 
achieves its annual performance goals to reduce payment error 
while still keeping the program accessible to eligible people.
    Also, in May of this year, the Government Accountability 
Office issued a report on error reduction efforts in the Food 
Stamp Program. This report noted the significant recent decline 
in the error rates and suggests that continued attention from 
top USDA leadership as well as continuing efforts of the Food 
and Nutrition Service will likely continue to be important 
factors in further reductions.
    There has also been an increase in the participation rates 
of the Food Stamp Program over the last 4 years. Increasing 
caseloads can make it quite challenging for State agencies to 
calculate eligibility with accuracy, and yet I am proud to 
report that our State partners are doing a better job than ever 
in accurately determining benefits.
    Just 3 weeks ago, on June 24, Agriculture Secretary Mike 
Johanns announced that the Food Stamp Program has achieved an 
historic 94.12 percent overall payment accuracy rate, the best 
performance since the inception of the Food Stamp Program and a 
34 percent improvement from just 5 years ago. The result of the 
combined error rate reduction from Fiscal Year 2000 to 2004 is 
an aggregate decrease in erroneous benefits of $1.4 billion.
    The improvement in payment accuracy is a result of strong 
partnerships with States who administer the program as well as 
implementation of program changes from the 2002 Farm Bill. The 
new Farm Bill has enabled States to better simplify shelter 
cost deductions and reporting requirements, align food stamp 
income and resource policy with State TANF and Medicaid 
programs, and employ other new options to streamline 
eligibility determinations.
    The food stamp payment accuracy rate is developed from a 
longstanding process called quality control, a system which is 
mandated by the Food Stamp Act to ensure program integrity. 
Each State selects and reviews a statistical sample of its 
participating food stamp households each year and reports the 
findings to the Food and Nutrition Service, where those 
findings are then validated. Those results are used to 
calculate an error rate for each State and then weighed to 
determine a national average.
    Erroneous payments, as I mentioned, are at a record low. 
Fewer than 4.5 percent of payments are overissued and fewer 
than 1.5 percent are underissued, for a combined total of 5.88 
percent. We regard both of these errors, overissuances and 
underissuances, as equally important. It is critical that 
payments are given in the proper amount. We want to make sure 
people are receiving the proper amount to which they are 
entitled.
    It is also important to note with the Food Stamp Program 
that over 98 percent of the people who participate are, indeed, 
eligible for some level of benefit. What we are measuring is, 
are we getting it exactly right?
    State agencies are required to do corrective action 
planning whenever their payment error rate is at 6 percent or 
greater. The Food and Nutrition Service regional offices work 
closely with States to assist them in developing effective 
correction strategies as well as provide them with technical 
assistance for data analysis, policy interpretation, and 
training. Additionally, the Food and Nutrition Service enters 
into settlement agreements that require poor performing States 
subject to liabilities to undertake targeted error reduction 
actions and to commit to specific improvement goals.
    The Food Stamp Program also has a system in place to 
recover erroneously issued benefits from food stamp recipients. 
A little over 12 years ago, FNS approached State agencies and 
encouraged them to participate in the Treasury Offset Program. 
That partnership has grown over the years, and as a result, we 
have collected more than $800 million in delinquent food stamp 
recipient claims.
    We are very proud of our efforts and the progress that we 
have made to ensure that food stamp benefits provide nutrition 
assistance and that they are well targeted to the Nation's 
needy families.
    I would also like to point out that in the last Farm Bill, 
the 2002 Farm Bill, there were legislative changes to the 
quality control system that may impact our ability to ensure 
continued improvement in payment accuracy. Those changes reduce 
the penalties associated with payment errors as well as the 
incentives that we provide to States that excel in payment 
accuracy. However, we are working closely with our State 
partners--from the top all the way through the front-line 
eligibility workers--to ensure that this mutual commitment to 
reduce the error rate is still in place even with the new 
quality control system.
    We continue to seek opportunities and strategies to share 
best practices and information critical to ensuring that the 
program is administered properly. As we look toward the next 
Farm Bill in 2007 which authorizes our program, we are going to 
be holding listening sessions early this fall across the 
country to get input from our State partners as well as 
advocates on new ways to improve the program. We are committed 
to maintaining public confidence in this nutrition assistance 
program and ensuring that these Federal dollars are used for 
the purpose for which they were intended.
    With that, I will be happy to answer any questions.
    Senator Coburn. Thank you all.
    I intend on spending quite a bit of time on asking 
questions. I wanted to give you a heads up on that.
    I also would like to put into the record an article \1\ in 
The Washington Post 7/12/05, ``Medicare's Spinal Tap.'' I don't 
know if you saw that. One group of providers, the 
chiropractors, received $285 million in improper payments in 
2001, according to the Inspector General's Office of the 
Department of Health and Human Services. That amounts to two of 
every three dollars paid to chiropractors. Medicare is supposed 
to cover chiropractic care only when there is a reasonable 
chance of correcting the problem or improving the patient's 
ability to function. That is from 2001. We are just now hearing 
about it, 4 years later. So there is a timeliness problem.
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    \1\ The article appears in the Appendix on page 38.
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    Let me just start with some questions, and then I will go 
to Senator Carper.
    Why was 6 percent chosen as an error rate?
    Ms. Coler. That is part of the legislation. Historically, 
the rate that Congress recognized that a State was entitled to 
enhanced funding or a bonus if they were able to achieve 6 
percent. This is the first time that we have actually had a 
national error rate below that, and so----
    Senator Coburn. So it would be your recommendation that the 
next Farm Bill have something significantly lower than that?
    Ms. Coler. Well, we are all working to continue to lower 
the error rate. I think that is something that Congress will 
consider.
    Senator Coburn. And your net on food stamps, the net 
overpayment was about 3.3 percent?
    Ms. Coler. It was--yes, just a little bit over.
    Senator Coburn. And 3.3 percent times the total amount 
spent on food stamps is how much?
    Ms. Coler. The net over-issuance is about $1.1 billion.
    Senator Coburn. One-point-one billion dollars----
    Ms. Coler. And then the under-issuance is about $350----
    Senator Coburn. So it would be $1.4 billion over, and the 
net being $1.1.
    Ms. Coler. Yes.
    Senator Coburn. So there is $1.1 billion right there, just 
right there in one program.
    As you can see on the left side, improper payments reported 
in fiscal 2004, 35 agencies reported improper payments. These 
programs are considered ``significant'' to the U.S. 
consolidated financial statements.
    Mr. Williams, can you explain how the distinction is made 
on ``significant''? What makes an agency significant to the 
U.S. consolidated financial statements?
    Mr. Williams. Mr. Chairman, we basically look at the 
numbers as far as assets and liabilities and budgets, etc., and 
based on those numbers, we are looking at the issue from a 
materiality standpoint. There are certain criteria that we use 
2 or 3 percent of total assets, etc. And when we look at all 
the agencies and we look at how much they contribute, when you 
are looking at the financial reports, such as the balance sheet 
and the statement of net costs, that is how we come up with 
those agencies that have major contributions and consider----
    Senator Coburn. So if I run an agency that is not 
significant, I don't have to worry about you?
    Mr. Williams. That is not true.
    Senator Coburn. OK. Explain that to us.
    Mr. Williams. If you are running an agency that we have 
determined at the government level that may not be significant 
to the statements overall, those numbers still could be 
significant and would be significant to the audit report that 
is being done at that particular agency level.
    Senator Coburn. Is that if it meets the $2 billion?
    Mr. Williams. No. It does not have to meet the $2 billion. 
It would be significant to the auditors that are looking at 
that particular entity. In other words, we are looking at the 
government operations as a whole. While we are looking at it as 
a whole, there are other auditors down at the various agency or 
component levels that are looking at government operations, and 
while it might not be significant to the numbers that we are 
looking at, those numbers that those individual agencies are 
producing have some significance or are significant to the 
auditors that are looking at them at the lower level.
    Senator Coburn. Where does the criteria come from? Who 
developed the criteria to say something is significant or not 
significant in terms of this legislation?
    Mr. Williams. In terms of this legislation, as far as 
significant, we at GAO had an opportunity to comment on the 
draft in the early stages and the issue came up, what should be 
considered significant when we are talking about an improper 
payment? I think when the legislation was initially drafted, it 
had a number of about $1 million as being the point of 
significance. In various discussions, it was eventually settled 
on to be $10 million, and the thinking there was every dollar 
that is an overpayment is significant, but just looking at it 
from a practical standpoint, when you are talking about an 
operation that has outlays of over $1 trillion at the time----
    Senator Coburn. That is the very point I want to get to.
    Mr. Williams. Right.
    Senator Coburn. If you create a culture that says there is 
significance and non-significance, what I believe you are doing 
is undermining those that aren't within that frame.
    Mr. Williams. Right.
    Senator Coburn. And the President's management plan, I 
believe, was $2 billion. Wasn't that his criteria, under the 
President's Management Agenda, was $2 billion? And I guess the 
question I am asking is, why shouldn't the same standard apply 
for every agency, every functioning agency of the Federal 
Government, and why shouldn't a zero improper payment rate be 
the goal for the entire Federal Government?
    Mr. Williams. That should be the goal----
    Senator Coburn. But it is not. That is a point I want to 
get across. That is not the goal for the Federal Government.
    Mr. Williams. Right.
    Senator Coburn. And a goal something less than, and I 
know--Senator Carper, I am not trying to shoot the messenger. I 
am trying to make the point--expectations of performance are 
the most important thing you all can do in your positions. And 
if it is not expected, it won't happen except in very rare 
instances.
    So can the average taxpayer decide in their own budget what 
is significant and what is non-significant? Can they waste in a 
non-significant area and not waste in a significant area? It 
just doesn't fly.
    So the message I want to send back is maybe we need to 
rethink and relook both at the President's area and the GAO in 
terms of what you are looking at and what you are accepting 
for, as well as OMB, is nobody should be off the radar screen. 
If they are wasting a dollar, they are stealing it from the 
next generation and we need to be asking, how do we get this 
plan all the way out? How does everyone become accountable? It 
is not just becoming accountable. Having the expectation of 
accountability changes behavior, and then the follow-up, the 
auditing.
    On this placard over here, what you can see is the total 
number of agencies that do not even--this doesn't even cover 
all agencies. This is 70 agencies. It is clearly stated in the 
IPIA that all Federal agencies must report improper payment 
information. Where are we? Does anybody care to answer that? We 
just have 70 programs considered up there. Does the $45 
billion, for example, cover the Department of Defense? General 
Walker testified, I think it was $45 billion in overpayments 
and $5 billion in underpayments just for the Department of 
Defense alone. Is that in this $45 billion that you all are 
reporting, the Department of Defense?
    Mr. Williams. The $45 billion that we are reporting 
includes the Department of Defense, but it is basically not 
including those numbers that you just mentioned----
    Senator Coburn. So basically, we are really at $94 billion, 
or $90 billion?
    Mr. Williams. Agencies have reported in the PARs for those 
that we have on the board there--$45 billion for those 17 
agencies under the reporting requirements of the Act.
    Senator Coburn. Can anybody on the panel give me the number 
of total Federal programs? It is in the thousands. That is $45 
billion on 70 programs. And if we take and look--if we limit it 
to significant only--and as you testified--we don't know what 
the real number is, and we know part of the reason the number 
of percentage is growing is because we have more accurate 
reporting. But if we have 70--and we have 35 of the agencies 
out of that 70 programs reporting and we have $45 billion, is 
the problem not a great deal larger?
    Ms. Combs. Let me just add that the 70 programs that you 
are referring to in the improper payments area here, every 
department and agency is required to work through their 
internal control mechanism and those are reported through the 
PAR every year. So it is not like we are giving some of these 
other programs a pass, so to speak, on these reporting 
relationships. They are using other mechanisms rather than this 
particular report. They are reporting it through the PAR, in 
essence. So I think maybe that might deserve some thought, as 
well.
    Senator Coburn. But I believe these are considered. Seventy 
were considered, right? Does that mean they are actually 
reporting, out of these 70? The 70 did not report, is that 
correct? Thirty-five reported out of these 70 programs.
    Ms. Combs. Let me get this right----
    Senator Coburn. OK.
    Ms. Combs [continuing]. So you can be clear.
    Senator Coburn. The IPIA requires every government program 
to report. We all agree on that, right?
    Ms. Combs. Correct.
    Senator Coburn. What percentage report to Congress? That is 
what it requires. What percentage of the government programs 
are actually compliant with reporting?
    Ms. Combs. We don't have that percentage, but we will get 
that.
    Senator Coburn. If you would. I think that is really 
important, because to get a handle on this $45 billion. We 
know, for example, Medicaid, you don't have a handle on yet. It 
is $178 billion, I think, this year. We don't know what that 
is, but if it is 3 or 4 percent of that, you are talking $7, 
$8, or $10 billion.
    I just think one of the things we have to do is--and I am 
not demeaning the start. We had to start somewhere. But I think 
that the culture that needs to be created is that everybody is 
accountable. Everybody has to report under IPIA and everybody 
ought to do that on a timely basis.
    I am going to defer to Senator Carper now and let him ask 
some questions. Senator Carper.
    Senator Carper. Thanks, Mr. Chairman.
    I want to go back to a question that is a follow-up to what 
the Chairman was asking in referring to the poster over here, 
the chart to my right. It is different than the question he was 
asking. What percentage of Federal spending do the 70 programs 
that are represented on this chart, what percentage of Federal 
spending do these 70 programs represent? Is it half? Is it less 
than half? Is it more than half?
    Ms. Combs. It is approximately $2.3 trillion, 
approximately.
    Senator Carper. All right. And my follow-up question would 
be, roughly what percentage of spending does that reflect, $2.3 
trillion? Is it half? Is it more than half?
    Ms. Combs. The $2.3 trillion I referred to is the outlays. 
That is the corpus that I think you were referring to. But you 
are referring to the 70 programs and what part of that $2.3 
trillion that----
    Senator Carper. I guess my point is 70 programs doesn't 
sound like a lot, but, however, it is possible that those 70 
programs represent a whole lot of our spending.
    Ms. Combs. Well, that is----
    Senator Carper. That is what I am trying to get to.
    Ms. Combs. We don't have that. We can supply that for you.
    Senator Carper. Can anybody give me a feel for that? Mr. 
Williams.
    Mr. Williams. We do not have that information. And 
expanding on that, one of the things that we attempted to do 
was to identify the universe of all the Federal programs, and 
that turns out to be a difficult task because of definitional 
reasons--how do you define this program, is this a program, 
etc.? But as far as the percentage, we were not able to get 
that number.
    Senator Carper. All right. I wrote down as someone was 
testifying, seven programs alone account for 95 percent of 
improper payments. Who said that?
    Ms. Combs. I did.
    Senator Carper. Would you just elaborate on that, please?
    Ms. Combs. As the assessments were done that Mr. Williams 
is referring to, there were actually seven programs that were 
identified that represented 95 percent of all the improper 
payments that were identified at that time. That was for the 
2004 time period.
    Senator Carper. Could you just tell us, what were those 
seven, do you recall?
    Ms. Combs. Medicare, Earned Income Tax Credit, Unemployment 
Insurance, Supplemental Security Income, Old Age Survivors' and 
Disability Insurance, Public Housing/Rental Assistance, and 
Food Stamps. And might I just say, while I have the microphone 
here, that those seven programs, I would consider to be the 
higher-risk areas. And, of course, that is where we wanted to 
start, with the understanding of our partners and the auditing 
community, as well as in the IG community, those were some very 
large areas that we wanted to start with. And so I would 
consider that those, being as high-risk as they were because of 
the dollar value, gave us the best opportunity to get that 
money back to the American people.
    Senator Carper. Would you call them the low-hanging fruit?
    Ms. Combs. I would say this is the greatest opportunity we 
have at the present time to bring some additional transparency 
and to bring some additional dollars, in essence, back to the 
American people.
    Senator Carper. Thank you. A question for anyone on the 
panel, just a really basic question, but why do improper 
payments, overpayments or underpayments, why are they occurring 
in such numbers? Why is this happening?
    Mr. Williams. I will take that. One of the things that we 
have found in our reviews over the years is that if you look 
for a root cause for an improper payment, it is a lack of good 
internal controls. I think that is a common theme that you can 
find throughout this whole process, is that where you have a 
breakdown or a lack of internal controls, you have a higher 
risk for having improper payments.
    Senator Carper. Anyone else?
    Ms. Combs. I would agree with that, and I would also agree 
that there are probably some timing opportunities, as well. In 
other words, some of the payments, because people do not have 
accurate enough financial information at the time that the 
payment is being made in order to make that payment, something 
may have happened, and my friends who deal with that all the 
time are probably best to answer that, but I would expect that 
may have a large portion to do with what we are trying to deal 
with here, as well.
    Senator Carper. Mr. Hill.
    Mr. Hill. I was also going to suggest that internal control 
is clearly an issue. It is also important to focus on the 
complexity and the nature of the programs themselves. Speaking 
for Medicare and Medicaid, while internal controls are an 
issue, they are also highly complex programs. Health insurance 
benefits for providers on behalf of beneficiaries involve a 
multitude of payment systems and coverage criteria that some 
would say are hard to understand and----
    Senator Coburn. It is designed to be defrauded.
    Mr. Hill. It is certainly where the money is and there is a 
certain opportunity that folks take to use the system to try 
and get money to which they are not entitled.
    Senator Carper. Secretary Coler--well, go ahead and then I 
have a question for you, as well.
    Ms. Coler. I was just going to agree that the complexities 
of the programs do have an impact on the improper payments. One 
of the nice things we saw with the 2002 Farm Bill, where States 
could align some of the income eligibility requirements in the 
Food Stamp Program with other State programs like TANF and 
Medicaid, it could help because the States could make 
determinations and streamline those programs, and therefore, we 
have seen a reduction in some----
    Senator Carper. I think that is a good point. Make that 
point again for us. That is a good point.
    Ms. Coler. As the States have been able to streamline the 
criteria and eligibility requirements of various programs--many 
times, often, the eligibility is determined by the same 
caseworker--it has improved the ability of the States to 
perform in accurately determining benefits.
    Senator Carper. Thank you. In my last job, I was Governor 
of Delaware and I have recollections of working with the U.S. 
Department of Agriculture to try to reduce our error rates, and 
all the States were trying to do that, as well. One of the 
things we are trying to do is to go to a paperless system and 
there was a fair amount of encouragement, some financial 
incentives, some carrots and sticks that were involved. But I 
think you have seen a migration in the last decade in virtually 
every State now to more of a paperless system. Just talk about 
that transformation, if you will, and how it may have had some 
positive effect on the better results that we are seeing today 
with respect to improper payments.
    Ms. Coler. Well, with the Food Stamp Program moving to 
electronic benefit payments, or EBT, we have eliminated paper 
currency and that is a whole different----
    Senator Carper. Explain how it works now.
    Ms. Coler. Sure. It is a debit transaction, just like a 
commercial debit transaction. The card draws money down from 
the household's food stamp account to purchase their groceries 
at an authorized retailer. We have been able to lower the 
amount of trafficking significantly through EBT, because we are 
able to use it to monitor transactions. We can better analyze 
where there might be some suspicious activity and better target 
our investigative efforts to go after that. So we are 100 
percent EBT now. There are no stamps anymore, or at least they 
are not being issued. It is an item in the President's budget 
to possibly rename the program to better reflect that it is a 
nutrition program and to bring it into the 21st Century. EBT 
has provided a tremendous benefit on the trafficking end and 
our abilities to reduce those instances.
    Senator Carper. What lessons might we learn from what the 
Department of Agriculture has gone through in managing and 
really overhauling this program? And are any of those lessons 
applicable to other agencies, particularly the six or seven 
which have the greatest prospect for reducing improper 
payments?
    Ms. Coler. Well, we see our ability to interact with our 
State partners, to share the commitment to improve the 
performance of this program from the top leadership at USDA to 
the top leadership within the States, but then also encouraging 
and rewarding performance through our county offices and with 
eligibility workers. You really need the entire chain to be 
committed to this. I think program simplifications have helped. 
We do have a quality control system in place under the law. 
Because we are a federally-funded program, but State 
administered, there aren't the incentives for a State to 
necessarily watch how they are determining eligibility as much 
as if they were required to have a match on the benefits. So I 
think that is why we are somewhat unique with this legislated 
quality control system.
    But it has helped. I think efforts to collect liabilities 
when States were not performing and to be serious that we need 
all levels to be committed to this has had a significant 
impact, and so we are pleased with the progress. We recognize 
that there is always improvement.
    Senator Carper. Continuous improvement.
    Mr. Chairman, I have another Subcommittee, Clean Air 
Chaired by Senator Voinovich, that I need to slip off to. 
Before I slip out on you, could I just ask two questions of Ms. 
Combs----
    Senator Coburn. Sure, absolutely.
    Senator Carper [continuing]. And then I will be on my way.
    To Ms. Combs, let me just ask, it seems to me that maybe 
the best strategy for addressing the improper payments problem 
would be to build on agencies' capacity to prevent erroneous or 
fraudulent payments before they are made. Let me just ask, and 
I know you are new in this particular position, but what has 
OMB been doing that you are aware of to help agencies to build 
up the internal controls that we talked about here earlier that 
are necessary to prevent improper payments?
    Ms. Combs. Thank you for asking that, because I do look on 
what has happened thus far as a phase one approach. We are not 
there yet, but we certainly have come a long way. I think that 
in the phase one approach, we had a lot of attention and added 
attention being paid to, in essence, 15 departments that 
encompassed about 40-some programs. I know you have 70 on your 
chart here, and that was reflected in the GAO report, and it 
certainly says how much we have to work on. But just 
concentrating on those top 15 departments, when we meet with 
these people on a regular basis and the CFOs in each one of 
these departments know that they are responsible for doing the 
risk assessments, they are responsible for coming up with a 
plan, they are responsible for coming to us and showing us how 
they are progressing along the way of reducing their improper 
payments, and the accountability is there at the top levels in 
each one of these departments and agencies and it does go, 
then, all the way down.
    But it has to start at those top levels. So to answer your 
question more specifically, that is one of the things that we 
believe at OMB we can help departments and agencies with. We 
can showcase the Kate Colers of the world and the best 
practices that have taken place in the Food Stamp arena. We can 
understand better with our CFO Council members, where we get 
together every couple of months, and then individually, we will 
have seven or eight of them come in individually and talk about 
these things.
    So, in essence, being a willing helper, and because I have 
done a CFO job in several departments and agencies, I feel like 
a lot of people will look to me for some leadership in that 
regard, as well.
    Senator Carper. One last question, if I could, Mr. 
Chairman. Ms. Combs indicates she has been CFO, as we know, in 
a couple of other agencies, I think EPA and DOT, as I recall, 
are those agencies. I believe you have also had a chance to 
work on improper payment issues, not just in the public sector, 
but I think in the private sector, as well. I am wondering what 
lessons you might share with us briefly that the business 
community can teach those of us in Federal agencies about 
building internal controls and reducing, maybe eliminating, 
improper payments and what efforts, if any, has OMB taken, to 
your knowledge, to help agencies learn from businesses or even 
other agencies that have done a good job in those areas, as Ms. 
Coler has referred to.
    Ms. Combs. I think one of the other things that we have 
recently done at OMB was to have an industry day where we could 
bring industry in and let them share with us some of the best 
practices that they have, have a basic sit-down meeting to say, 
here are some of our problems. Where have you addressed this in 
an industry-wide level?
    And I think Dr. Coburn mentioned it earlier, the 
expectation of a zero percent improper payment rate is the 
right approach. We have to put that out there as our ultimate 
goal, to be zero percent, because the best possible internal 
control that you can possibly have is to not let the error 
occur to begin with.
    Yes, you are right, it was very important in the banking 
business. It was very important in the private sector where I 
was. And putting the expectation out there, both at the EPA as 
well as Department of Transportation, certainly helped us to 
come to the realization that we can do a whole lot better, and 
we can use some newer technology now that we and many of the 
other CFOs are exploring to see if some of the newer technology 
will help us to identify the correct payer before we are 
actually making the payment. So I think particularly in Mr. 
Hill's area, that they are looking at some new ways to do that, 
and I think that, too, will help.
    Senator Carper. Mr. Chairman, I am sorry I have to slip 
out. Again, to our witnesses, thank you very much for being 
here and to help us as we try to get our arms around this 
challenge. I think some good work is being done in this area 
and I think maybe part of our job is to put a spotlight on the 
good work, but also to put a spotlight on the areas where we 
still need a fair amount of work to take place. Thanks very 
much.
    Senator Coburn. Thanks, Senator Carper.
    Let us go back to the chart that is up for a minute. There 
are 35 agencies that are considered significant. Twenty-three 
agencies assess some programs, not all their programs, but some 
programs for improper payment, and that is not exactly the same 
number. Agencies that did not even identify problems for all 
programs, that is six of them. In other words, they are not 
compliant at all. And then there are another three agencies who 
said they did an assessment, but when they were audited by GAO, 
there was found no evidence that they did an assessment. Could 
you comment on that, Mr. Williams?
    Mr. Williams. Actually, there were three agencies that had 
previous reporting requirements that we identified in the 
review that did not report. There were also three agencies that 
did not have the previous reporting requirement. But in 
addition to that, there were three agencies--NASA, Homeland 
Security, and Justice--whose auditors questioned the overall 
assessment that had been performed, and in their opinion, as 
they reviewed the process, they concluded that the Act had not 
been complied with. So it was those three agencies.
    Senator Coburn. So the demand for internal controls in 
those three agencies needs to be reinstituted and emphasized.
    Mr. Williams. There needs to be a little bit more emphasis 
on the overall process, based on what the auditors reported for 
those three agencies, to make sure that additional steps, 
additional procedures are being performed to make sure that the 
agency is in compliance in the eyes of the auditors when they 
are looking at the compliance issue on their annual audit.
    Senator Coburn. Then you go to the other side of this. 
Seventy total programs were considered for improper payments, 
that is correct, and 41 of them that estimated out of the 70, 
but 29 didn't even give an estimate of those 70 programs. Is 
that correct?
    Mr. Williams. That is the information that we were able to 
obtain by reviewing the PAR reports for those particular 
agencies. There was no explanation given in some cases as to 
why the assessment was not done. In some cases, there were 
explanations as far as the complexity of the program, etc., and 
some additional guidelines that we plan to assess these 
programs in future years. I think we put a chart in the 
testimony that lays out when each one of the agencies plan to 
be in compliance.
    Senator Coburn. Controller Combs, what is the incentive to 
have the CFOs at these agencies who didn't comply, what is the 
up-side, what is the down-side? How do we get them into 
compliance?
    Ms. Combs. Well, one of the things I think we will notice 
in the 2005 PARs, which are coming up in just a few months, 
will be that some of these agencies who did not comply last 
year will be in compliance this year. And I think the carrot 
and the stick approach that you have continued to either talk 
about or allude to is certainly something we have to continue 
to look at, because we are continuing in our oversight role at 
OMB to look at the agencies and departments who have special 
situations such as the ones we just talked about, and see how 
we can help them become more compliant. I think they are making 
significant progress, so I think we will see that as we present 
the November PARs in November 2005.
    Senator Coburn. Let me follow up. What are the carrots that 
you are using, or what are the sticks? You obviously have six 
programs that didn't do anything. You have three programs that 
actually demonstrated that they did the assessment, but when 
they were audited, there was no evidence that they had done 
this. What are those carrots and what are the sticks? What are 
you actually doing at OMB to bring them into compliance?
    Ms. Combs. One of the things that we are doing is to have 
them come in on a quarterly basis and show us their plans, or 
more frequently, if we feel like the need is there. But we have 
some dedicated staff. We have some resources that are dedicated 
specifically to working with agencies and departments for their 
internal controls reviews, and the assessments have to be done, 
the plan has to be laid out very carefully with deadlines and 
responsibilities. We review those with them. We help them. We 
share some best practices with them to help them through their 
specific situation.
    Senator Coburn. Should there be any connection between 
performance and internal controls and what their budget is the 
next year?
    Ms. Combs. Well, I think that----
    Senator Coburn. I mean, that is how the real world works.
    Ms. Combs [continuing]. There is. There is a lot of that 
anyway. I think that is done through the PART, the Program 
Assessment Rating Tools. You heard Ms. Coler talk about being 
assessed by the Program Assessment Rating Tool. There were many 
of those programs that were assessed, as you recall, that were 
recommended for sunset.
    Senator Coburn. But what I am talking about is with the 
CFOs of the individual agencies and the programs who don't come 
into compliance with IPIA or the PART assessment rating or your 
own directions through your own Administration of internal 
controls. Where is the consequences there if there is not 
performance?
    Ms. Combs. Well, they don't get a clean audit, for one 
thing, because if their internal controls are not sufficient, 
they would have that consequence.
    Senator Coburn. OK. So if I am the CFO of one of these 
agencies and I don't do that, what happens to me?
    Ms. Combs. I, fortunately, have never had that happen to 
me.
    Senator Coburn. I think that is a realistic question that 
the American people ought to be able to ask. Here is the law, 
here is OMB's directions, and here is nonperformance. Is there 
no consequence to the person who is responsible for that 
nonperformance in relationship to that?
    Ms. Combs. That is a good question.
    Senator Coburn. I want the answer. [Laughter.]
    Has there even been an agency that has had its budget cut 
by not getting a clean audit?
    Ms. Combs. I don't know.
    Senator Coburn. The answer is no, and that is the question 
that ought to be out there on the minds of the people 
responsible.
    I don't have an argument with people who work for our 
Federal Government. They are all committed and want to do the 
right thing. The fact is, we have to put a culture of financial 
management and transparency into every program, not just those 
deemed ``significant.'' I have real problems with what OMB did 
in terms of their definition of significance because I think it 
sends the wrong signal, even though you may be looking at them. 
But that culture has to be implemented.
    The other question I want to ask, where is DOD on all this? 
I mean, you listed seven programs--you correct me if I am 
wrong--Social Security, Medicare, Medicaid, then DOD in terms 
of order of expenditures other than interest. Why isn't DOD on 
that list? Where are we? What are we going to spend, $500 
billion, $480 billion on defense this year, and we have already 
had testimony from the GAO that there are real problems over 
there in improper payments. I mean, they are not sacrosanct. If 
anywhere today we ought to insist that they be more efficient 
than ever, because every dollar they waste is a dollar we can't 
use to defend this country. Where are we on DOD?
    Ms. Combs. DOD, I believe, will report this year. I think 
they were probably one of the ones that didn't report last 
year.
    Mr. Williams. I can respond to that.
    Senator Coburn. Sure, please.
    Mr. Williams. Basically, there were two programs under the 
old Circular A-11 report requirement from OMB. It was the 
military retirement fund and military health benefits. And 
going through the 2004 Performance and Accountability Report 
for DOD, they basically assessed those two programs and there 
was a statement in the PAR that it was actually reported for 
those two programs because, in OMB's implementation guidance, 
it basically stated that for all the programs that were 
included under Circular A-11 would continue to report under the 
Improper Payments Act. But if you looked at those programs, 
they did not meet the criteria using OMB's guidance of $10 
million and 2.5 percent.
    So those were the only two programs that reported, and I 
looked further in the PAR report and DOD's statement basically 
said that those were the only programs, that they had no other 
programs that were susceptible to significant improper 
payments.
    Senator Coburn. So that comes back to the definition of 
``significant.'' Here, the Department of Defense has decided 
that the rest of the Department of Defense except those two are 
not significant, except it is the third-leading expenditure in 
our country, defending our country. What is going to happen 
this next year on DOD as far as reporting?
    Ms. Combs. One of the opportunities we have, I think, is, 
as we have talked about before, we have looked at phase one. 
That is my term for where we are now. I think we have an 
opportunity to look again at where we are with the program 
itself and see if we have got it right. And I know that there 
is a committee of the CFO Council, the CFOs themselves, that is 
looking at improper payments. After a year's worth of looking 
at and seeing how it is shaping up, it is probably an 
opportunity for the CFO Council to step up and take a look and 
see whether or not we have got it right.
    Senator Coburn. Is the Department of Defense outside the 
IPIA requirements?
    Ms. Combs. I don't think so.
    Senator Coburn. So then why would they not be reporting? 
Why can they rely on OMB's guidance to not report under the 
PARs assessment but then totally exclude what the IPIA says in 
terms of reporting? How do we explain that?
    Ms. Combs. They should be accountable and be----
    Senator Coburn. And they should be reporting, correct? They 
should be reporting the improper payments----
    Ms. Combs. They should be reporting----
    Senator Coburn [continuing]. At every level in the 
Department of Defense, isn't that correct?
    Ms. Combs. To comply with the law.
    Senator Coburn. With IPIA. So let me ask Mr. Williams this. 
Can you give me, or you don't have to today, but could you get 
back to me, under the GAO's guidelines--under the OMB's 
guidelines, implementation guidelines, what programs do you all 
consider outside of their implementation guidance, based on the 
guidelines that we have today, nonsignificant, 2.5 percent, $10 
million? Can you give us a list of the programs that under 
those guidelines would be presumed to be outside of them?
    Mr. Williams. Yes, we can provide you with that 
information.
    Senator Coburn. I would like to have that, because I think 
it is--I will go back. I think the guidelines need to be 
tightened up.
    I also would ask, do we need to change the statute in terms 
of the language? Do we need to have additional Federal 
legislation that changes the statute that will require 
individuals to have to report improper payments? In other 
words, I guess the question I am astounded at is here is a 
Federal law that is required, and I understand since 2000, we 
are starting to get Federal financial accountability and 
transparency and controls in. But here we have one large 
department that, in essence, is reporting nothing, either 
through IPIA or your guidelines under the PARs program. Do we 
need to change the statute? Is there something that needs to be 
done by Congress to bring that group, or all those groups, not 
just the Defense Department, but all those others that have not 
complied into compliance? Do you need more legislation or do 
you just need better implementation?
    Ms. Combs. I think that is one of the things that we, as 
the CFO Council's Subcommittee on Improper Payments, could look 
at, to see whether or not we feel like we have within our own 
purview of responsibility the strength we need to make that 
determination and make it work, or do we need to look and work 
with you folks to see if there is additional legislation that 
we need to have required. But I think we have--certainly I 
have, being as new as I am in my position, I know I need a 
little bit more opportunity to look at some of the things you 
have brought to our attention today, and Mr. Williams has 
agreed to come forward with to see exactly where we are with 
this.
    Senator Coburn. Do you have any comments on that?
    Mr. Williams. Mr. Chairman, there are two or three points I 
would like to make. I was paraphrasing the PAR report for DOD, 
but I have the specific language here. Basically, when they 
talk about the Improper Payments Information Act, the statement 
is DOD's Fiscal Year 2004 survey did not identify any programs 
or activities where erroneous payments exceeded the established 
threshold, that is an error rate greater than 2.5 percent and 
erroneous payments in excess of $10 million, and that is in 
parentheses, nor were any found to be susceptible to 
significant risk. So that was basically what DOD reported----
    Senator Coburn. I just find that almost laughable, as that 
is----
    Mr. Williams [continuing]. For 2004.
    Senator Coburn. They meet the word of the law, but not the 
intent.
    Mr. Williams. Now, one of the things that I have had an 
opportunity to look at is that when the original legislation 
was drafted, I think the Congressional intent was that anything 
greater than $10 million would be reported. In looking at 
correspondence between the Congress and the Director of OMB, 
OMB's position at the time was that the legislation did not 
define the word ``significant'' and in OMB's implementation 
guidelines ``significant'' was defined as this 2.5 percent and 
$10 million. So the correspondence that I saw back from 
Congress was basically that it was not the Congressional intent 
of the original legislation, that the Congressional intent was 
basically $10 million and not the 2.5 percent that was included 
in the implementation guidelines.
    I guess one way that it could be addressed, if the Congress 
is concerned about the definition of ``significant,'' is maybe 
``significant'' could be dropped from the legislation and just 
basically spelled out as $10 million is what we are interested 
in as being the amount they would like to have reports on.
    Senator Coburn. Let me just stop you there for a second.
    Mr. Williams. OK.
    Senator Coburn. I want you to think about this. If you are 
a factory worker at Georgia Pacific in Muskogee, Oklahoma, and 
you hear somebody say $10 million isn't significant, I think 
about the cultural difference of what we are saying with that. 
So basically, we need to clarify that.
    Mr. Williams. The Congress has interpreted it one way and 
the Administration has interpreted it another way, based on the 
correspondence that I have seen. Congress basically stated that 
this was our intent. OMB has basically stated that in passing 
the legislation, you were silent, that you did not define 
``significant'' and we define ``significant'' in our 
implementation guidelines, so----
    Senator Coburn. Is there any hope to see that change, 
Controller Combs?
    Ms. Combs. As I mentioned a while ago, I am very happy to 
look at where we are right now after the year of----
    Senator Coburn. And we get all those programs, the list of 
the programs that don't fall into this.
    Ms. Combs. Correct, and we have a mechanism within the CFO 
community through the CFO Council to look at that and to help 
us together assess whether or not that is the appropriate 
avenue.
    Senator Coburn. I want to touch on another area, and 
anybody, feel free to jump in on this one. There is variability 
in the options on the part of the Administration in terms of 
OMB, in terms of how they implement things. But if you really 
think about the financial controls and operational controls of 
any organization, whether it be a government agency or a 
private agency or a charitable foundation, those basic 
principles are the same in terms of being able to have an audit 
track, balancing books, knowing where your assets are, knowing 
what your liabilities are, knowing what your exposure is. Those 
are all the same.
    Should it not be that we fix this so that this doesn't 
change as administrations change? In other words, Generally 
Accepted Accounting Principles ought to be the guide no matter 
who is in charge of the White House. Transparency ought to be 
the guide no matter who is in charge of the White House. 
Accountability for performance standards based on the internal 
controls and financial accounting standards ought to be the 
guide.
    How do we do that as a Congress, because we have seen this 
Administration has chosen to interpret this one way. If we are 
going to have Sarbanes-Oxley on the business community in terms 
of transparency, accountability, timeliness, etc., then why 
should we not apply those same standards, regardless of the 
political drift of one administration or the other, to all the 
government agencies?
    Ms. Combs. Well, I think that is certainly why you have 
legislation, because that in statute does go from one 
administration to the other.
    Senator Coburn. Well, but it is wide open for 
interpretation, as OMB has already made. What if the next 
administration comes in and says significant is this? That is 
the point I am making. In other words, there shouldn't be a 
variability, and again, I will go back. We talked to all the 
major auditing firms in this country and their standard is zero 
improper payments. So why should we have anything less than 
that and why should we implement any standard less than that? 
The Congress sets it as a goal to start, but why shouldn't the 
goal be reduced to zero? That is the goal, isn't it?
    Ms. Combs. That is my goal.
    Senator Coburn. The farm bill's goal is 6 percent. Is zero 
possible?
    Ms. Combs. Of course, it is possible. If there are 
departments now who have close to that, it is certainly 
possible. I think that we have an opportunity here to, as Mr. 
Williams mentioned, the original legislation was not as clear, 
but I think we do have an opportunity to look at it and tell 
whether or not, after the experience we have had, whether we do 
need to clarify any of the terms of that legislation.
    Senator Coburn. So can I have the commitment from you that 
we will do that, that we will come back and do that in terms of 
the communication back to Congress, what do we need to change 
to put this on a financial standard rather than a political 
standard?
    Ms. Combs. Yes, and I think that one of the things that Mr. 
Williams mentioned earlier relative to the materiality is what 
we are probably going to find out, but we are certainly more 
than happy to work with you on that, because materiality for a 
program, as Mr. Williams mentioned, is certainly going to be 
different than it would be for an entire department or 
certainly government-wide. But with those considerations, the 
CFO Council, I think, is the appropriate group of people to 
work and gather the information and look through our successes 
and look through where you feel like we have some difficulties 
that we need to work through and see if there are ways we can 
work through those together.
    Senator Coburn. Mr. Hill, let me visit with you for a 
minute. You have a very tough job. I have been on the other 
side of this. The fact is, there is nobody in CMS who 
understands Medicare. Not one person understands every aspect 
of Medicare, so your job is made particularly difficult. The 
same is true of Medicaid. You testified that you hope to have 
this in place by 2008. What are you finding from your pilot 
program and what are you seeing?
    Mr. Hill. The 2008 commitment that we are making is to 
produce reportable rates that are IPIA compliant. That in no 
way means that we are not trying to take action right now.
    Senator Coburn. I understand.
    Mr. Hill. So we have pilots underway and we are doing as 
much as we can.
    In Medicaid, unlike Medicare, where we have had a lot of 
history, there are four sets of issues that challenge us. One, 
unlike in food stamps, is just the diversity of programs. If 
you have seen one State Medicaid program, you have seen only 
one State Medicaid program. There are 50 different Medicaid 
programs, and that causes both methodological as well as 
logistical issues in terms of determining improper payment 
rates.
    Also, the needs basis of the program where eligibility can 
vary from State to State, subject to Federal waivers, results 
in a logistical set of issues.
    In adition, a significant portion of the beneficiaries, are 
in managed care instead of fee-for-service. While the 
predominance of the benefits are paid on a fee-for-service 
basis, the fact that a huge portion of the beneficiaries are in 
managed care, again leads to a challenge.
    And the States will tell you as they have told us--that 
there is a cost issue. They believe they have incentives to 
keep the error rates down because it is a shared program. They 
have skin in the game, so to speak, and so they do all that 
they can to keep their error rates down. What we have heard at 
the State level is that IPIA compliance, including key 
requiring a statically valid sample of claims is a Federal 
requirement, not a State requirement, and that the States have 
trouble bearing the added costs with their current budget 
situations.
    And so those are the challenges we confront. We think we 
are going to have, as I noted in my testimony, by the end of 
the summer, a plan that we can roll out much more publicly in 
response to our regulations from last year that will address 
these issues. But those are the issues that we are finding the 
biggest challenges in the Medicaid program.
    Senator Coburn. GAO was kind of critical saying that you 
weren't putting enough money into your program to develop this. 
Do you have any answer?
    Mr. Hill. One of the GAO criticisms we have heard most 
recently has to do with our program integrity efforts on 
Medicaid across the board, which are somewhat separate and 
distinct from the financial management IPIA activities. The 
Department and CMS in particular have instituted and 
implemented a longstanding process working with the States and 
our regional offices to be very aggressive in helping the 
States understand what their program integrity issues are and 
providing the technical assistance and feedback that they want.
    Again, as a shared Federal-State partnership, our role, the 
Federal role, is as much guidance and technical assistance as 
it is boots on the ground, if you will, much different than 
Medicare in terms of fighting fraud and addressing the issues 
that the States are addressing.
    Senator Coburn. A lot of corporations have to deal with 
multiple State regulatory environments. If, in fact, Federal 
matching grants were dependent on compliance, don't you think 
things would turn around pretty fast?
    Mr. Hill. I will tell you that coming back from the beach 
reading the report on the Food Stamp Program and the incentive 
pieces of the Food Stamp Program, clearly has a lot of things 
to tell us about not just Medicaid but Medicare in terms of 
things that we can think about to incent States or contractors 
who process claims to do a better job.
    Historically in Medicaid, there was a program on the 
eligibility side where the error rates varied against a set 
norm, and there were penalties assessed on States and we 
withheld State matching. Not surprisingly, much litigation 
ensued from that activity and the benefits of the stick, so to 
speak, were somewhat limited by getting caught up in that 
litigation.
    So the lesson for us as we go forward is to be very 
deliberate and careful about how we pick the methodologies and 
how we go about creating the incentives or disincentives.
    Senator Coburn. Are a large percentage of the improper 
payments in Medicare associated with durable medical equipment?
    Mr. Hill. Because it is a weighted average, the vast 
percentage of our overpayments are for Part A hospital 
inpatient services. That is where most of the payments are. I 
will tell you, we have ongoing problems, improper payments, 
fraud, and the whole range of issues in the durable medical 
equipment (DME) world. The general notion that I have had is 
whenever we have situations, whether it is DME or unlicensed 
providers who are providing services for our beneficiaries, 
that seems to be where we can always kick over stones and find 
problems. So DME has always been an issue for us.
    Senator Coburn. Is FMAP not a big stick for you to use on 
States in terms of compliance with this?
    Mr. Hill. It certainly could be, to the extent that----
    Senator Coburn. Don't you have broad discretion there?
    Mr. Hill. We do.
    Senator Coburn. Very broad discretion of which to force 
compliance on Medicaid?
    Mr. Hill. Right. And again, I think that is where we need 
to be deliberate with the States in terms of looking at our 
history with the eligibility quality control program where we 
imposed FMAP disallowances. We held back on FMAP to the extent 
error rates went above or below a mean. And again, the States 
complained and sued and said, the methodologies you used 
weren't appropriate or weren't valid and we got ourselves hung 
up in litigation. I think moving forward, to the extent we want 
to use FMAP or withholding State payments, we need to be sure 
that the methodologies and the approach we use can withstand 
that test.
    Senator Coburn. Thank you. Well, my hat is off to you. You 
have got a tough job over there.
    Mr. Hill. This is a long hearing. I was kind of hoping I 
would get away without having questions, but I guess----
    Senator Coburn. You are not going to make it. [Laughter.]
    I actually have about ten more pages of questions----
    Mr. Hill. I am sure you do. [Laughter.]
    Senator Coburn. Ms. Combs, the 2001 version of Circular A-
11 included the U.S. Agency for International Development in 
Section 57. GAO reports that in June 2002, a revision to the A-
11 Circular reduced the number of CFO Act agencies required to 
submit erroneous payment data from 15 to 14, removing the 
Agency for International Development from this list. Can you 
explain the reasoning for this change, and are they required to 
report improper payments under the IPIA?
    And I would tell you that since we have just had one 
hearing in this Subcommittee on one program in which we were 
appalled at not necessarily improper payments, but the lack of 
attention by this one subpart of U.S. AID, and that is the 
malaria program, in terms of the money not going where it was 
supposed to go, and I would just like to know why that was 
exempted. Where is their reporting and are they required to 
report under the IPIA?
    Ms. Combs. Yes, they are required to report under the 
IPIA--and they report through the PAR, the Performance and 
Accountability Report.
    Senator Coburn. Well, they were exempted in 2002 from the 
A-11 Circular, so explain to me why they were in it and why 
they are out all of a sudden.
    Ms. Combs. Well, I think there was a--what I understand 
between the correspondence that I have seen from OMB at the 
time, it looks like that there might have been a certain 
threshold that was being looked at at the time and that their 
annual outlays for their grants and their cooperative 
agreements didn't meet that threshold at the time. But OMB 
required U.S. AID to reassess its program inventory as part of 
the government-wide IPIA implementation in February 2004 and--
--
    Senator Coburn. So they will report this year?
    Ms. Combs. Yes.
    Senator Coburn. And they are required to report under the 
PARs this year?
    Ms. Combs. They are required to report.
    Senator Coburn. One of their quotes was, for Fiscal Year 
2004, they had assessed all programs and found no risk. Can you 
explain that?
    Ms. Combs. I believe that--I am not sure I can explain that 
because I wasn't there then, but I will be glad to get that 
information.
    Senator Coburn. Well, a couple of things, if you would get 
for the Subcommittee, I would appreciate. Why were they dropped 
for the 2 years? Why were they not required to report? And why, 
when they reported in 2004, they assessed all programs and 
found a risk, actually, and probably, Mr. Williams, I would 
like for you all to look at that and see if, in fact, they did 
assess, since we have three agencies who supposedly assessed 
and the audit trail would say they didn't have a good 
assessment. If you would do that for us, I would appreciate it.
    Mr. Williams. We will be more than glad to take a look at 
those.
    Mr. Chairman, you have raised two or three points that, if 
it is OK----
    Senator Coburn. Please feel free to comment.
    Mr. Williams [continuing]. I would like to make some points 
on. There has been discussion about the progress in bringing 
down the rate in the Food and Nutrition Service, Food Stamp 
Program.
    I would like to add, I testified on this particular area 
about five times now and I always put a plug in that we at GAO 
have put together a guide that basically talks about best 
practice strategies in addressing improper payments. We had an 
opportunity to talk to the private sector. We had an 
opportunity to talk to governments of a couple other countries. 
We had a chance to talk to a couple of State governments, also, 
to get their input. I would strongly encourage OMB and the 
agencies to take a look at that particular guideline. There are 
some pretty good best practices in there as far as things that 
can be done.
    There was also some discussion about the goal of getting 
improper payments down----
    Senator Coburn. Let me stop you for a second.
    Mr. Williams. OK.
    Senator Coburn. Controller Combs, have you seen those best 
practices? I know you know what best practices are. You have 
proven that. You have implemented them in a lot of places. Have 
you looked at those, and is that a part of what OMB is doing?
    Ms. Combs. I have seen and am aware of this--you are 
talking about the report, the recent report?
    Mr. Williams. No, this is a guide that we put out a few 
years ago. It is called, ``Strategies for Addressing Improper 
Payments,'' and it is basically a document that goes through 
various things that other countries have done, other States 
have done, and things that have been done at various agencies 
in the Federal Government that have been classified as best 
practices----
    Senator Coburn. And have been successful----
    Mr. Williams [continuing]. And have been successful in 
addressing the issue, and it has got all kinds of techniques 
from where we were talking earlier about how the Food Stamp 
Program has gone from one in which you are issuing stamps to 
all EBT, and there are techniques in there where we talk about 
how you can perform various procedures to try to identify where 
there are areas that you might have a high risk or high 
incident of improper payments and just across the gamut. These 
are just best practices, and I have always encouraged at every 
hearing that I have participated in that this is a guide that 
we recommend that people take a look at. This is just one more 
tool in the process.
    Senator Coburn. To your knowledge, have the CFOs of all--do 
you call it CFO Roundtable, is that what you call it?
    Ms. Combs. Council.
    Senator Coburn. Council. Have they looked at this?
    Ms. Combs. I am sure, individually, they probably have. As 
a collective group, the subgroup that I mentioned, the CFO 
Council subgroup that is looking into improper payments, they 
were actually instrumental in helping to set up the industry 
day.
    Mr. Williams. Yes, that is correct.
    Ms. Combs. I think that Mr. Williams or some of your 
people----
    Mr. Williams. Staff.
    Ms. Combs [continuing]. Actually worked with. But the more 
of those things that we can continue to do together, and we 
will look at this particular one together.
    Senator Coburn. Continue, Mr. Williams.
    Mr. Williams. The next area that was discussed earlier, you 
had focused in on the issue of making sure that you have 
requirements in statute. I go back to 1990 when I was detailed 
to the Hill to assist in the drafting of the CFO Act of 1990. 
The big issue that came up at that particular point in time was 
the current Administration had administratively required 
agencies to have financial statement audits, and the issue back 
then, and that issue continues until today, is that the reason 
why you want to get this financial management in the statute is 
because administrations change and you want to make sure that 
years from now, that you have these procedures in place and you 
don't have another administration to come in down the road and 
say, I don't think that that is worth the time of the day.
    But by having it in statute and having it clear, it gives--
it should give the taxpayers some comfort that years from now, 
we will still have these procedures in place and there will 
still be these requirements to make sure that things are being 
done to increase and improve accountability throughout the 
Federal Government.
    The other area that I want to talk a little bit about is 
internal controls. It was mentioned earlier from one aspect, 
but internal controls basically have two components. You have 
what is called preventive internal controls and you have what 
is called detective internal controls.
    Preventive internal controls are those controls that are 
put in place to prevent an improper payment from occurring in 
the first place. Detective internal controls are those controls 
that are put in place to detect after the improper payment has 
been made.
    We, at GAO, have always pushed for more emphasis on the 
preventive controls because, as the old saying goes, once the 
horse gets out of the barn, sometimes it is kind of difficult 
to get it back in. A lot of these programs that we talk about, 
when you look at them, if there is an improper payment made, it 
is usually made to a group of our society that cannot afford in 
a lot of cases to repay that money, and we are not talking 
millions of dollars, we are talking smaller amounts, but just a 
huge number of people that might be involved in this process. 
So you want to put as many preventive controls in place as you 
possibly can to make sure that the improper payment does not 
occur in the first place.
    The other point about the improper payment issue and 
looking at it from an internal control standpoint is that it 
should be the goal of every agency to get their improper 
payments down to zero. That should definitely be the goal. And 
there should be internal control procedures put in place to try 
to make sure that an agency is able to attain that goal.
    But from a practical standpoint, you have to look at 
various programs throughout the Federal Government and there 
are just some inherent risks in certain programs that you will 
probably end up with some improper payments, and I think we 
might have had an example of that over the weekend when you 
might want to look at a FEMA program where you are talking 
about a hurricane coming through and people need help right 
then. In the process of providing that help right then, there 
is always the inherent risk that someone is going to make a 
duplicate payment or someone is going to get a payment that 
should not receive a payment.
    But what you want to look at in those situations where you 
have those inherent risks is you want to look at the internal 
controls that you have put in place and you want to follow a 
concept of I am going to put an internal control in place. I 
don't want to put an internal control in place that is going to 
cost me $1.01 that is going to result in me getting back $1. So 
it should be cost beneficial when you are looking at those 
internal controls.
    Senator Coburn. But I also would tell you that this 
Subcommittee has had hearings on FEMA, for example, on the last 
hurricane where we paid for four times as many funerals as the 
people that actually died----
    Mr. Williams. Exactly.
    Senator Coburn. So the compassionate side of the argument, 
I understand, and food stamps, we are not ever going to get it 
to zero percent. I understand that, because if we do, we might 
harm someone, but one percent or half of one percent. Those are 
all achievable. But in other areas, whether it is defense 
procurement or----
    Mr. Williams. Yes.
    Senator Coburn [continuing]. Benefit payments on people who 
actually are not due, you are paying for somebody who does not 
have something, we should have a zero error rate----
    Mr. Williams. That is the point that I have made in 
previous testimonies, is that there is no standard number 
across the government. What might be an error rate of 2 percent 
at one agency might be a real good number. At another agency, 
it might be that is ridiculous. It should be zero. So you have 
to look at it on a program-by-program basis when you are 
setting your goals for what you think your improper payments 
rate should be.
    Senator Coburn. Well, I would propose that the improper 
payment rate for every agency ought to be zero percent, 
accepting something less than that in humanitarian regards. But 
if you set the goal higher than that, you are going to get 
higher than that.
    Mr. Williams. Exactly.
    Senator Coburn. Controller Combs, I want to come back to 
you for a minute, and again, you are answering questions when 
you weren't there, but I want to ask as a position. I also 
would let the panel know--you may not know this--my first 
degree is I am an accountant. I have a degree in accounting and 
production management from Oklahoma State University and I did 
a lot of accounting for the first 10 years of my business 
career. So it is not something that I am not attuned to, 
although I will admit auditing was my least favorite subject. 
[Laughter.]
    The second step to comply with IPIA is to develop a 
statistically valid estimate of improper payments for all 
programs and all activities identified as susceptible to 
improper payments and the risk assessment. In the guidance that 
OMB issued, the statistical estimate must be based on a sample 
size sufficient to yield an estimate of 90 percent confidence 
level. Well, I don't know anything that uses a 90 percent 
confidence level that is worth anything. Every one that I have 
ever looked at in statistics, in medicine, in science, and in 
business is a 95 percent confidence interval.
    Why in the world would we choose less than a standard that 
is accepted across industry, across the government, across 
science, across engineering, as an acceptable level of a 
confidence level that is meaningful? Why did the OMB put 
something in less than something that is--actually, you can't 
even use 90 percent statistical confidence because what it is 
saying is 10 percent of the time, it is going to happen by 
chance alone and you don't know what the ``R'' factor is on it 
and it is probably going to be, like, 0.25, which means it 
doesn't mean anything. So where did we come up with 90 percent?
    Ms. Combs. I don't know where that came from, but I will be 
glad to----
    Senator Coburn. I would love to know that, because the 
minimum it ought to be is at 95 percent confidence level. Then 
it is statistically meaningful. Less than that, it is not. And 
I found it really ironic in looking that they would set a 
confidence interval that you can't trust statistically.
    Ms. Combs. I will be glad to look into that.
    Senator Coburn. All right. We are getting there.
    What happens in the future if CMS doesn't have a program 
for improper payments developed by 2008? What should Congress 
do?
    Mr. Hill. This comes back to the issue you were raising 
earlier about accountability, and from HHS's perspective, we 
can't lose sight of the President's Management Agenda and the 
scorecards that are developed there. The agencies are taking 
these quite seriously. Now, I don't think in a mandatory 
program, a benefit program like Medicare, an issue of reducing 
a budget is a logical outcome of the rate. I mean, you are 
looking at more management-related actions.
    I can tell you, from the CFO of HHS on down through my 
boss, the Administrator of CMS, to me, the accountability is 
quite clear for achieving the milestones that are set out in 
the PMA and it includes achieving the error rate by 2008, and 
so I can be fairly certain that there will be some quite harsh 
personal consequences of not meeting that objective.
    Now, whether or not that leads to the agency being 
punished, so to speak, or consequences therein I cannot tell 
you, but I can tell you from the performance plans and from 
having to sit before Secretary Levitt and say why we did or did 
not achieve a yellow or a green or what we achieved is a 
culture of accountability in HHS.
    Senator Coburn. When was CMS first asked to have improper 
payments data on Medicaid?
    Mr. Hill. I believe the first time that it came out was in 
the Circular A-11 in 2000 or 2001.
    Senator Coburn. OK, and so we are going to have that 7 
years later?
    Mr. Hill. Well, to be clear, sir, we began collecting that 
data in 2002----
    Senator Coburn. I understand, but I am looking at this 
perspective as a citizen, not somebody from inside Washington.
    Mr. Hill. Right.
    Senator Coburn. Here is a requirement that comes in 2001, 
and in 2008, we are going to have it.
    Mr. Hill. Correct.
    Senator Coburn. I understand the enormity of the problem 
that you face. If I had my best wish in the world tomorrow, it 
would be to change all of Medicare and Medicaid to a much 
simpler system that would work and make your job easier and 
make actually the delivery of it better. But the fact is, is 7 
years from the time a request is made to an agency to become 
accountable on improper payments to the actual implementation 
of that, what would you tell the average common citizen in this 
country why 7 years is an appropriate amount of time to do 
that?
    Mr. Hill. Well, 7 years is certainly not an appropriate 
amount of time to do it if we were not making good progress. We 
have been committed and are committed in working with the 
States. We have gone in and calculated individual State-level 
error rates in 38 States since 2002.
    As I said in the testimony, the way we approach our 
improper payment calculations is two-fold. First, it is a 
performance assessment, meeting IPIA requirements, assessing 
and saying for reporting purposes what our rates are. It is 
also a management tool, and in that respect, the most important 
piece there then would be to tell each individual State, 
whether it is Oklahoma or whether it is Kansas or Delaware, 
here is your----
    Senator Coburn. Oklahoma needs it, by the way.
    Mr. Hill. Right, so I think we could work on that. We have 
been focusing on working with the States to do that.
    Now, it is true for the national Medicaid program, we won't 
have a rate. this year. That is a meaningful number and one 
that is important, but it is also as important that each 
individual State has a rate, and far before 2008, we will be 
there.
    Senator Coburn. Great. Let us just play with the numbers 
here for a minute. Over the last 7 years, including this year, 
Medicaid will spend a trillion and 50 billion dollars. And if 
their improper payment rate was 3.9 percent, or 4 percent, that 
is $45 billion. And the growth is going to grow, to $39 billion 
over the next 5 years, so we are going to be well over $200 
billion. So you are talking about over the 7 years of having 
another $9 billion had we had appropriate improper payments, if 
we assume the average is what the nationwide government--and it 
is probably going to be higher than that.
    But if we had it at 4 percent and we saved that money, how 
many more lives would we impact? How many more lives would have 
better care? How many more people would not be caught in the 
crux of making a choice between a pill and supper? I want us to 
bring it down to real people and how it impacts. So if we had 
that $40-some billion that wasn't improperly paid out through 
lots of things, it is not just that we cut the deficit. It is 
that we impact people's lives the way the programs were 
intended.
    Mr. Hill. Dr. Coburn, that is exactly how we think about 
the improper payments we make in terms of the benefits that are 
being denied to the people we serve. We think just because the 
measurement won't be in place on a national basis until 2008, 
in no way, shape, or form are we not doing all we can between 
now and then to eliminate improper payments. This is a high-
risk program. Measurement is important, but I can tell you, 
even without measuring, it is a high-risk program and we have a 
robust program and both in Medicare and Medicaid, we are 
working with the States, at the Federal level, to do all we can 
to stop inappropriate payment from happening.
    I won't be able to tell you 7 years from now how much we 
saved, because we are doing it as we go. But just because we 
haven't measured and assessed doesn't mean that we are not 
taking corrective actions because we know that there are risks 
and we are putting our resources where those risks are.
    Senator Coburn. How often are States' Medicaid programs 
audited?
    Mr. Hill. The single-state audit occurs every year.
    Senator Coburn. Every year, every Medicaid program is 
audited?
    Mr. Hill. There is a single-state audit, yes, sir.
    Senator Coburn. OK. Am I correct in assuming that under 
IPIA, every agency is required to submit improper payments to 
Congress every year? Mr. Williams.
    Mr. Williams. You are correct in assuming that under IPIA, 
every agency is required to do the assessment and determine if 
they have programs that are significant to or susceptible to 
improper payments and report that information to the Congress, 
is the way that the statute--so that would be every agency is 
required to report.
    Senator Coburn. Are they compliant?
    Mr. Williams. I can't say every agency because I really 
don't know every agency. We have reviewed the ones that we 
identified on the board. I do not have the information as to 
whether those reports have actually made it up to the Congress 
or not. We have talked about it in terms of these particular 
agencies that we were able to look at, and we looked at those 
because those were the ones that had the Performance and 
Accountability Reports available that we could get access to at 
the particular point in time that we were doing this particular 
job. But whether every agency actually complied, I cannot say--
--
    Senator Coburn. OK.
    Mr. Williams [continuing]. As far as providing that 
information to the Congress.
    Senator Coburn. Well, I want to thank each of you for being 
here. This is a big problem, and it is a problem, if you all 
solve correctly, you won't have to solve again. It is one of 
the few problems in government that if you fix the first time, 
you don't have to fix it again.
    So the hope is great that as we implement good financial 
controls with transparency of those controls--one of the 
biggest problems we have as Members of Congress is getting 
information from Federal Government agencies. The American 
public may not believe that, but we have to fight, beg, plead, 
claw to get information. And I will tell you, on average, for 
example, U.S. AID is 4 years behind on transparency, just 
having available their information for the Congress.
    So what you all are doing is tremendously important in 
terms of improper payments. But the financial controls and the 
transparency and accountability that goes with those isn't just 
about improper payments. It is about making us get through the 
problems.
    And I know most of you have read this, and if you haven't, 
you should. David Walker is right on. We are on an 
unsustainable path, and every day that goes by that we don't 
correct these problems, the people in this room probably aren't 
going to feel, but your grandchildren are.
    I thought it ironic a minute ago, I was looking at the 
iceberg and I am thinking about the Titanic. This country is 
about to hit a bigger iceberg than that. And so I would applaud 
your efforts. I want to thank you for being here. But every 
minute, every day counts in terms of reforming the financial 
operations of the Federal Government, and what each of you can 
do, whether it is in your leadership at GAO, leadership in 
changing the Office of Management and Budget--and I will say it 
again, the worst performing under the PAR program is OMB. That 
needs to be said so we can eventually embarrass them to be the 
best, because they should be the best under this program.
    Medicare and Medicaid, the largest percentage of our 
dollars that are going out, the financial management of that is 
critical, and we can see what has happened in terms of 30 
percent reduction in terms of improper payments at the 
Department of Agriculture just through one program, $1 billion. 
But it also means that there is another billion we can save 
there. There is another billion that doesn't have to be spent 
if we can improve it and refine it better.
    So I would congratulate you on the job you are doing. I 
think I would again just want to say, from Controller Combs, I 
really want a real assessment of what ``significant'' is and I 
want you to look at that. I really want to know why the U.S. 
AID is not in that program. I think there is more fraud and 
waste and abuse in that program as a percentage of the total 
budget than there is any other aspect of the Federal Government 
in terms of waste, and I am going to find it, I promise you 
that, and I will expose it.
    This will not be the last hearing. I am going to call you 
back in 6 months. We are going to talk about it again. We are 
going to see where we are and see what the programs are. We 
will have had 2005's numbers then and we will go from there. 
Thank you all very much for being here.
    The hearing is adjourned.
    [Whereupon, at 3:58 p.m., the Subcommittee was adjourned.]


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