Medicare Financial Management: Clerical Errors in the Medicare Hospital
Insurance and Supplementary Medical Insurance Trust Funds
(Correspondence, 10/31/2000, GAO/GAO-01-39R).

In a fiscal year 1999 accountability report to Congress, the Health Care
Financing Administration (HCFA) made several clerical errors in the
accounting of Medicare trust funds, which caused the Hospital Insurance
(HI) Trust Fund to be overinvested by about $14 billion and the
Supplementary Medical Insurance (SMI) Trust Fund to be underinvested by
about $18 billion. Because of these errors, the HI Trust Fund earned
excess interest and the SMI Trust Fund lost interest. GAO found that
these errors went undetected for a year because of internal control
weaknesses. Inadequate training and supervision and ineffective
reconciliations were key factors that allowed the errors to go
undetected. HCFA took corrective action, however, as soon as the errors
were discovered.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GAO-01-39R
     TITLE:  Medicare Financial Management: Clerical Errors in the
	     Medicare Hospital Insurance and Supplementary Medical
	     Insurance Trust Funds
      DATE:  10/31/2000
   SUBJECT:  Internal controls
	     Health insurance
	     Trust funds
	     Accounting errors
	     Accounting procedures
	     Interest
IDENTIFIER:  Medicare Hospital Insurance Trust Fund
	     Supplementary Medical Insurance Trust Fund
	     Medicare Program
	     Medicaid Program

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GAO-01-39R

Clerical Errors in the Medicare HI and SMI Trust Funds

United States General Accounting Office Washington, DC 20548

October 31, 2000 The Honorable Bill Archer Chairman Committee on Ways and
Means House of Representatives

Subject: Medicare Financial Management: Clerical Errors in the Medicare
Hospital Insurance and Supplementary Medical Insurance Trust Funds

Dear Mr. Chairman: The Department of Health and Human Services (HHS)
reported to Congress in its Accountability Report for fiscal year 1999 that
the Health Care Financing Administration (HCFA) had made several clerical
errors in accounting for the Medicare trust funds that caused the Hospital
Insurance (HI) Trust Fund to be overinvested by approximately $14 billion
and the Supplementary Medical Insurance (SMI) Trust Fund to be underinvested
by approximately $18 billion. You asked us to determine (1) what errors were
made and how they occurred, (2) what effect the errors had on the financial
status of the General Fund, the HI Trust Fund, and the SMI Trust Fund, (3)
whether similar errors have occurred in other trust funds, and (4) whether
the Departments of HHS and Treasury have acted to ensure that similar errors
will not occur in the future. This letter summarizes the results of our
review to address your questions and provides recommendations to HCFA and
Treasury to further ensure that similar errors do not occur in the future.

Results in Brief

During fiscal year 1999, an inexperienced HCFA staff person inadvertently
submitted incorrect documentation to the Bureau of the Public Debt (BPD) for
adjusting the HI and SMI Trust Funds and the noninterest- bearing accounts
related to the HI and SMI Trust Funds. The clerical errors in the HI and SMI
Trust Funds resulted in the HI Trust Fund being overinvested by
approximately $14 billion and the SMI Trust Fund being underinvested by
approximately $18 billion. The HCFA Office of the Actuary estimated that, as
a result, the HI Trust Fund realized excess interest earnings of about $112
million and the SMI Trust Fund suffered a loss of about $232 million in
interest earnings. The net interest lost by the Medicare trust funds was
about $120 million. During the fiscal year, the general fund of the Treasury
benefited from the error by not paying the $120 million of net lost interest
earnings to the trust funds.

GAO- 01- 39R Clerical Errors in the Medicare HI and SMI Trust Funds Page 2
Therefore, the aggregate net effect on the trust funds and the general fund
after full

implementation of the corrective actions was zero. These errors went
undetected throughout the year due to weaknesses in the internal control
structure at HCFA. Specifically, inadequate training and supervision
compounded by inconsistent and ineffective reconciliations were the key
factors that allowed these clerical errors to occur without being detected
in a timely manner. However, once the errors were identified, HCFA took
immediate action to correct the errors and address the internal control
weaknesses that contributed to the errors. The corrective actions included
restoring the Medicare trust funds to the financial positions that would
have existed had the errors not occurred, in accordance with recent
legislation, and developing and implementing actions to correct HCFA's
internal control weaknesses. Our review of selected financial reporting
documentation related to nine other major trust funds administered by other
government agencies did not identify similar errors.

Although HCFA has taken steps to help prevent similar errors from occurring
in the future, we are recommending that HCFA further enhance monthly benefit
adjustment procedures, formally include these procedures in HCFA policy
guidance, and develop training for the adjustment process. In addition,
Treasury has begun informally performing procedures to review and analyze
HCFA's requests adjusting trust fund balances. We are recommending that
Treasury formalize its procedures for reviewing and analyzing HCFA requests
to adjust trust fund account balances. In written comments on a draft of
this letter, BPD and HCFA agreed with our findings and recommendations and
stated that they have begun taking steps to implement our recommendations.

Background

HCFA, an HHS agency, is responsible for administering Medicare, Medicaid,
and other programs that address the nation's health care needs. In this
role, HCFA is responsible for ensuring that Medicare program benefits are
provided to eligible beneficiaries, 1 and safeguarding the fiscal integrity
of the Medicare programs, which reported over $200 billion in payments in
fiscal year 1999. Funds for the two largest Medicare programs administered
by HCFA, the HI and SMI programs, are held in the federal HI Trust Fund and
SMI Trust Fund. The HI program is financed primarily by payroll taxes paid
by employees and employers. The SMI program is financed primarily by
transfers from the general fund and by monthly premiums paid by
beneficiaries. Payroll tax revenues held in the HI Trust Fund that are not
currently needed to pay HI benefits and expenses are invested in interest-
bearing Treasury securities. Similarly, premiums and matching contributions
not needed to pay current SMI benefits, held in the SMI Trust Fund are
invested in interest- bearing special Treasury securities.

HCFA, like other program agencies that direct BPD's actions, is responsible
for the ultimate disposition of the trust fund assets. To transfer funds to
and from the trust

1 At the end of fiscal year 1999, there were 39. 5 million beneficiaries
enrolled in Medicare.

GAO- 01- 39R Clerical Errors in the Medicare HI and SMI Trust Funds Page 3
funds, BPD, acting upon directions from HCFA, submits to the Treasury's
Financial

Management Service (FMS) a nonexpenditure transfer authorization form
requesting the transfer of the funds. BPD, as trust funds manager, is
responsible for processing certain receipt, investment, redemption, and
transfer transactions for 15 trust funds, including the Medicare HI and SMI
Trust Funds, and for reporting the results of these transactions as
processed to FMS and the program agencies.

Each month, HCFA and BPD execute the necessary transactions to (1) transfer
assets to and from the trust funds, maintaining minimum balances in the
accounts, (2) administer current HI and SMI benefits and expenses, and (3)
record these transactions in their respective financial systems. Each day,
BPD redeems securities from the trust funds based on the total amount of
funds drawn by Medicare contractors the day before to pay Medicare benefit
payments. BPD then determines how to allocate this amount between HI and SMI
using allocation percentages provided monthly from HCFA. 2 BPD then
transfers these amounts into noninterestbearing accounts administered by
HCFA, referred to as the HI and SMI transfer accounts, from which payments
are made to health care providers and suppliers. BPD then reports the
transfer amounts to Treasury's FMS and to HCFA.

As illustrated in figure 1, throughout each month, as Medicare contractors
make payments to providers for beneficiary services and supplies, the
outlays reduce the amounts in the transfer accounts. In managing the
transfer accounts, HCFA attempts to maintain a daily balance close to but
not less than zero in these accounts, as they do not earn interest. At the
beginning of every month, HCFA staff determine whether an adjustment is
needed in the transfer accounts. This process is known as the monthly
benefit adjustment. HCFA staff compare the actual Medicare benefit outlays
for the prior month to the amounts that BPD transferred into the
noninterest- bearing transfer accounts in the prior month 3 and calculates
the differences for each transfer account. HCFA then prepares the necessary
documentation directing BPD to either return excess amounts to the trust
funds or transfer additional amounts into the transfer accounts. When
amounts deposited in a transfer account exceed the actual Medicare benefit
outlays in a month, HCFA instructs BPD to return the surplus amounts to the
trust funds to be reinvested in interest- bearing Treasury securities.
Conversely, when amounts in a transfer account are insufficient to cover
actual outlays, HCFA requests that BPD transfer additional amounts to the
trust fund transfer account. In this case, BPD redeems interest- bearing
securities from the Medicare trust funds, transfers the amounts, and reports
the amount transferred to HCFA and FMS.

2 HCFA's allocation percentages fluctuate from month to month and are based
on HCFA's budget estimates of monthly Medicare outlays. For example, the
July 1999 outlay percentages were 53.3 percent for HI outlays and 46.7
percent for SMI. In the previous month, the percentages were 58. 4 percent
and 41.6 percent for HI and SMI, respectively.

3 These amounts will normally differ each month because the amounts
deposited by BPD are estimated payments, not actual payments. Medicare
contractors report actual payment amounts each month for the previous month.

GAO- 01- 39R Clerical Errors in the Medicare HI and SMI Trust Funds Page 4

Figure 1: Overview of HCFA's Monthly Benefit Adjustment Process

Medicare contractors draw funds from transfer account to make payments to

providers BPD invests appropriated

amounts, taxes, premiums and excess funds in Treasury securities

HCFA compares funds deposited to

payments Request additional

funds BPD redeems securities

and deposits funds in transfer account

Payments higher/ lower than

deposits? Higher Lower Request excess funds be returned

and invested Medicare Transfer Accounts

+ Deposits $$$ - Payments $$$

Difference $$$ Healthcare

Providers Submit claims Pay claims Appropriated

amounts Employment taxes Premiums

HCFA is responsible for ensuring that its staff properly execute the monthly
benefit adjustment procedure and that the balances in the Medicare transfer
accounts are reconciled each month. HCFA is expected to use the Undisbursed
Appropriation Account Ledger (FMS- 6653) that FMS supplies each month for
both the HI and SMI transfer accounts in its reconciliation process. The FMS
6653 provides the opening fund balance for the month, amounts transferred
into and out of the transfer accounts during the month by BPD, the actual
amount of Medicare benefit outlays that were reported, and the closing
balance at the end of the month. HCFA is

GAO- 01- 39R Clerical Errors in the Medicare HI and SMI Trust Funds Page 5
responsible for reconciling the ending fund balances on the FMS- 6653s with
its

official records.

Scope and Methodology

To identify the errors that were made and how they occurred, their effects
on the HI and SMI Trust Funds and the General Fund, and the corrective
actions taken by HHS and Treasury, we interviewed BPD and HCFA officials and
staff and reviewed Treasury and HCFA documents. In addition, we reviewed the
legislation for correcting the clerical errors. We also included the final
estimates of the interest effects on the HI and SMI Trust Funds as
determined by HCFA's Office of the Actuary, but we did not test, or
recalculate the interest estimates.

To identify whether similar significant errors have been made in other trust
funds, we interviewed BPD officials and GAO staff responsible for reviewing
financial data for those agencies. We also reviewed the fiscal year 1999
financial reports and/ or fiscal year 1999 accountability reports for those
agencies responsible for administering nine of the largest federal trust
funds to determine whether similar errors had been reported for those trust
funds. The trust funds reviewed were the Federal Old Age and Survivors
Insurance (OASI) and Disability Insurance (DI) Trust Funds, the Unemployment
Trust Fund, the Hazardous Substance Superfund, the Highway Trust Fund, the
Airport and Airway Trust Fund, the Civil Service Retirement and Disability
Fund, the Military Retirement Fund, and the Railroad Retirement Trust Fund.
4 We conducted our review from May 2000 through August 2000 in accordance
with generally accepted government auditing standards. We requested comments
on a draft of this report from the HCFA Administrator and the Commissioner
of the Public Debt. Their comments along with technical suggestions have
been incorporated as appropriate and reprinted in enclosures I and II.

HCFA Made Errors in the HI and SMI Trust Fund Adjustment Process

During fiscal year 1999, HCFA made systematic errors in its monthly benefit
adjustment process. The monthly benefit adjustment amounts were calculated
correctly. However, the memorandums prepared by HCFA staff detailing the
adjustments to be made between the trust funds and the transfer accounts
were prepared incorrectly. The transfers called for in the memorandums were
the reverse of what was actually required. For example, during July 1999,
SMI benefit payments equaled $7,078,151,311. The total funds deposited in
the SMI transfer account equaled $7,739,943,000. As a result, a surplus of
$661,791,688 remained in the SMI transfer account at month- end and should
have been returned to the SMI Trust Fund. However, the memorandum prepared
and submitted by HCFA staff requested that an

4 The Federal Old- Age and Survivors Insurance and Disability Insurance
trust funds are administered by the Social Security Administration; the
Unemployment Trust Fund, by the Department of Labor; the Hazardous Substance
Superfund, by the Environmental Protection Agency; the Highway Trust Fund
and Airport and Airway Trust Fund, by Department of Transportation; the
Civil Service Retirement and Disability Fund, by the Office of Personnel
Management; the Military Retirement Fund, by the Department of Defense; and
the Railroad Retirement Trust Fund, by the Railroad Retirement Board.

GAO- 01- 39R Clerical Errors in the Medicare HI and SMI Trust Funds Page 6
additional $661,791,688 be transferred from the SMI Trust Fund to the SMI
transfer

account. Beginning with the April 1999 adjustments and continuing through
the September 1999 adjustments, HCFA incorrectly requested that Treasury
transfer funds into the SMI transfer account that actually should have been
returned to the SMI Trust Fund for investment. These transfers resulted in a
large surplus in the SMI transfer account at year- end. During the same
period, HCFA incorrectly requested that Treasury transfer funds from the HI
transfer account to the HI Trust Fund that actually should have remained in
the transfer account. These transfers resulted in a large deficit in the HI
transfer account at year- end. An additional result of HCFA's errors was
that the amounts available for investment in interest- bearing securities
were less for SMI (underinvested) and more for HI (overinvested) than should
have been had the errors not occurred.

The errors were detected by HCFA's Office of the Actuary, which is
responsible for monitoring the trends and activities of the Medicare trust
funds through a periodic analysis of the HI and SMI Trust Fund transactions,
and brought to the attention of HCFA officials. Upon discovery of the
errors, as discussed in detail later in this letter, the trust fund balances
were corrected.

Internal Control Weaknesses Contributed to the Errors

The Comptroller General's Standards for Internal Control in the Federal
Government states that an agency's control environment is significantly
affected by the competence of its personnel and the agency's ability to (1)
identify appropriate knowledge and skills needed for various jobs and (2)
provide needed training to maintain skill levels for particular jobs. In
addition, the standards state that all transactions and other significant
events need to be clearly documented and that the documentation should be
properly managed and maintained.

Several internal control weaknesses in HCFA's Medicare trust fund adjustment
process contributed to the errors that affected the trust funds. After an
employee who previously prepared the adjustments left the agency, HCFA
assigned an inexperienced employee responsibility for calculating
adjustments to the trust funds and the related transfer accounts. HCFA
officials did not sufficiently train the new employee, and there were no
documented procedures of the adjustment process to assist the new employee
in performing the monthly adjustment. As a result, there was a lack of
understanding of how to properly adjust the transfer account balances. In
addition, the employee did not understand that the growing month- end
balances for the transfer accounts (positive and negative) were indicative
of problems in the adjustment process.

Further, HCFA staff did not reconcile account balances affected by the
adjustment process as required by Treasury regulations. This resulted in the
error going unnoticed for several months. Lastly, HCFA officials did not
provide adequate supervisory review and approval of the monthly adjustment
procedures, although such procedures are a critical internal control.

GAO- 01- 39R Clerical Errors in the Medicare HI and SMI Trust Funds Page 7
The Comptroller General's Standards for Internal Control in the Federal
Government

states that ongoing monitoring activities should include comparisons and
reconciliations to identify inaccuracies or exceptions that alert management
to any internal control problems. In addition, other important control
activities included in the standards are (1) assigning authority and
responsibility in a manner that ensures each individual knows how his or her
actions interrelate and contribute to meeting the agency objectives and (2)
requiring supervisors to continually review and approve the assigned work of
their staff.

Errors Affected the Medicare Trust Funds and the General Fund

As a result of HCFA's internal control weaknesses and resulting adjustment
errors, the holdings and interest income for both Medicare trust funds were
affected. Approximately $18 billion of the SMI Trust Fund's interest-
bearing securities was unnecessarily redeemed and the amounts transferred to
HCFA's noninterest- bearing SMI transfer account. Consequently, the SMI
Trust Fund lost interest earnings on the securities redeemed of
approximately $232 million as of August 1, 2000. 5 Approximately $14 billion
in additional interest- bearing securities were purchased for the HI Trust
Fund due to the error. The HI Trust Fund earned approximately $112 million
in excess interest on these additional securities as of August 1, 2000. The
difference between the amount of interest lost by the SMI Trust Fund and the
excess interest earned by the HI Trust Fund is approximately $120 million.
This difference is primarily due to the difference between the interest
rates of the securities incorrectly redeemed and those purchased to
initially correct the error.

After the error was discovered, HCFA's first corrective action was to
instruct BPD to redeem the $14 billion in excess HI securities purchased and
to acquire $18 billion in SMI securities to replace the securities redeemed
in error. HCFA acquired and sold the respective securities in October 1999.
The interest rate on the newly acquired SMI securities was 6.50 percent,
while the securities that they replaced had been earning interest at rates
ranging from 5.875 percent to 8.75 percent. This meant that the SMI Trust
Fund was in effect earning up to 2.25 percent less interest on a portion of
the $18 billion of newly acquired securities than if the error had not
occurred. As illustrated in figure 2, the HCFA actuary determined that the
total loss of interest to the SMI Trust Fund from October 1998 through July
2000 was $232 million, and the total excess interest earned by the HI Trust
Fund was approximately $112 million.

5 HCFA's Office of the Actuary calculated the interest effects of the
clerical errors through July 31, 2000. In August of this year, BPD made the
appropriate adjustments to the HI and SMI Trust Funds, effective August 1,
2000.

GAO- 01- 39R Clerical Errors in the Medicare HI and SMI Trust Funds Page 8

Figure 2: Interest Earned on HI and SMI Investments

GAO- 01- 39R Clerical Errors in the Medicare HI and SMI Trust Funds Page 9

Table 1: HCFA Corrective Action Plan to Correct the Trust Fund Errors

Weakness Corrective action a Analyze the condition of the trust funds as of
October 1999 and determine the corrective action necessary to eliminate the
cause and internal control weaknesses of the inappropriate account balances.
Determine the impact on the interest earnings of the trust funds account.
The HI Trust Fund has earned excess interest and

the SMI Trust Fund has not earned interest due in fiscal year 1999 as a
result of clerical errors.

Adjust the trust funds to correct the miscalculations and make the trust
funds whole.

a Detailed steps for implementing the corrective actions were included in
the Corrective Action Plan. Source: HCFA's fiscal year 1999 - Medicare Trust
Fund Investment Adjustment Process Corrective Action Plan

In consultation with Treasury, HCFA developed more precise corrective action
plan steps that addressed making the trust funds whole. Specifically, to
correct the most significant effect of the errors on the HI and SMI Trust
Funds holdings, BPD was instructed to purchase Treasury securities for the
SMI Trust Fund using the underinvested amount ($ 18 billion) and redeem
Treasury securities held by the HI Trust Fund in the amount of the deficit
in the HI transfer account ($ 14 billion). Further, to completely restore
the trust funds to where they would have been in the absence of the errors
required transferring the amount of excess interest income earned by the HI
Trust Fund to the SMI Trust Fund and reestablishing for both trust funds the
security holdings that would have been held by the trust funds if the
clerical errors had never happened. Lastly, the difference in interest lost
to the SMI Trust Fund and the excess interest earned by the HI Trust Fund
needed to be transferred from the General Fund of the Treasury.

In October 1999, BPD purchased approximately $18 billion in securities for
the SMI Trust Fund and redeemed approximately $14 billion of HI securities
to correct the most significant effect of the errors. The remaining
corrective actions required congressional approval.

Legislation to correct the interest earnings and restore the status of the
trust fund holdings was signed into law by the President on July 13, 2000.
Specifically, section 2703 of Public Law 106- 246 required that within 120
days after the effective date of the act, the following actions would be
taken:

(1) Correct the holdings of the trust funds by replicating, to the extent
practicable, the holdings of the trust funds that would have been held by
the trust funds if the clerical errors had not occurred. (2) Correct the
trust fund interest income, by transferring the amount of excess

interest income from the HI Trust Fund to the SMI Trust Fund that would not
have been earned if the errors had not occurred. (3) Appropriate to the SMI
Trust Fund the difference between the interest income

lost by the SMI Trust Fund and the amount transferred from the HI Trust
Fund. The actions required by the legislation were completed by BPD in
August 2000, with an effective date of August 1, 2000. Specifically, BPD
adjusted the HI and SMI Trust

GAO- 01- 39R Clerical Errors in the Medicare HI and SMI Trust Funds Page 10
Fund holdings as of July 31, 2000, through redemptions and acquisitions
resulting in

a net reduction in the holdings of the HI Trust Fund of approximately $112
million and an increase in the holdings of the SMI Trust Fund of
approximately $232 million on August 1, 2000. Further, effective August 1,
the trust funds' portfolios of securities were restored, as to principal and
interest rate, to the state that they would have been had the clerical
errors never occurred.

HCFA's corrective action plan also included actions to strengthen the
internal controls to prevent further errors. HCFA's approach to correcting
the internal control weaknesses, as shown in table 2, included identifying
the key weaknesses contributing to the clerical errors at HCFA and the
corresponding corrective action step.

Table 2: HCFA Corrective Action Plan to Address Internal Control Weaknesses
Internal control weaknesses Corrective action a

The Medicare trust fund adjustment process had the following internal
control weaknesses that caused the clerical errors:

(1) Inadequate verification and reconciliation of transactions to ensure
accuracy.

Implement the monthly use of the benefit adjustment spreadsheet for use in
the calculation and verification of the monthly adjustment. (2) Inadequate
analysis of monthly financial account balances.

The Treasury income statement is received monthly in the Accounting Systems
Management Branch (ASMB) and is distributed to the Financial Reporting &
Oversight Branch (FROB). An accountant in FROB will analyze for
reasonableness the Treasury income statement amounts for fund balance and
investments, including comparing the current month with the prior month and
years. ASMB will also distribute the Treasury income statement to the Office
of the Actuary (OACT). OACT will also review the amounts for reasonableness.
(3) Inadequately trained staff. Staff responsible for the preparation of
certain Treasury

forms used to transfer funds and report fund transactions will receive
detailed training on the preparation of these forms and the use of the
benefit adjustment spreadsheet.

(4) Lack of detailed written procedures for the monthly adjustment process.
Develop written detailed procedures on use of the

Benefit Adjustment Spreadsheet and the preparation of certain Treasury forms
used to transfer funds and report fund transactions.

(5) Inadequate supervision, review, and approval of work.

All supporting documentation will be reviewed and approved at least monthly
by an accountant, the ASMB Chief, Division of Accounting Director, and the
Deputy Director of the Financial Services group. (6) The allocation
percentages for HI and SMI were not updated on a regular basis.

The Division of Budget will supply the Division of Accounting with the
updated Budget Outlay Plan each quarter.

a Detailed steps for implementing the corrective actions were included in
the Corrective Action Plan. Source: HCFA's Fiscal Year 1999 - Medicare Trust
Fund Investment Adjustment Process Corrective Action Plan.

Although progress has been made, HCFA has not implemented all corrective
actions outlined above. HCFA has developed and implemented a benefit
adjustment spreadsheet to use in performing analyses, calculations, and
verification of the monthly trust fund account adjustment. Further, HCFA has
provided detailed

GAO- 01- 39R Clerical Errors in the Medicare HI and SMI Trust Funds Page 11
training to staff on preparing the accounting adjustment and documentation
and

using the benefit adjustment spreadsheet. In addition, HCFA developed
procedures specifying the supervisory review steps for all supporting
documentation related to the monthly adjustment to the trust funds transfer
accounts. However, HCFA has only developed a draft of written detailed
procedures for completing the benefit adjustment spreadsheet and preparing
the required Treasury accounting documentation.

Treasury officials at BPD, who act as managers of the Medicare trust funds,
stated that they were not aware of the errors because they are not
responsible for reviewing the balances of the Medicare noninterest- bearing
transfer accounts. HCFA has responsibility for monitoring the transfer
accounts. Although not required to do so under Treasury regulations,
Treasury officials at BPD have begun reviewing certain reports and related
documentation for the Medicare transfer accounts to ensure that requests
from HCFA to adjust the balances of the transfer accounts and trust funds
are reasonable.

Similar Errors Were Not Reported by Other Trust Funds

Our review of fiscal year 1999 financial reporting documentation for nine
other major trust funds did not identify any reported errors similar in
nature to the errors reported for the HI and SMI Trust Funds. The errors
affecting the HI and SMI Trust Funds and related transfer accounts were the
result of internal operational mistakes made by HCFA and appear to be unique
to HCFA. In our review of other major trust funds, such as the OASI and the
DI Trust Funds, we did not look at the extent to which errors may have
resulted from activities such as the allocation of gross tax receipts 6
since it was outside of the scope of this review.

During our review, we did not identify evidence that the other trust funds
use transfer accounts similar to HCFA to pay program expenditures or require
monthly trust fund adjustments similar to HCFA's. For example, monthly
program expenditures are paid from the OASI and DI Trust Funds administered
by the Social Security Administration. However, SSA does not perform a
month- end adjustment process similar to the one performed by HCFA. This is
due to the fact that expenditure amounts for the programs funded by the OASI
and DI Trust Funds are normally fixed and known amounts, and therefore the
amount transferred to cover the expenditures is the same as the expenditure
level. Conversely, Medicare benefit payments fluctuate from month to month,
and the deposits made for these payments are, of necessity estimates.

Conclusions

As more and more beneficiaries rely on Medicare to provide health coverage
and health care security, it is imperative that the finances of the program
are properly accounted for. HCFA, responsible for the fiscal integrity of
the Medicare programs,

6 Excise Taxes: Internal Control Weaknesses Affect Accuracy of Distributions
to the Trust Funds (GAO/ AIMD- 99- 17, November 1998).

GAO- 01- 39R Clerical Errors in the Medicare HI and SMI Trust Funds Page 12
and Treasury, trust fund manager, must ensure that adequate controls are in
place to

safeguard Medicare assets. The errors that occurred in accounting for the
trust funds during fiscal year 1999 demonstrate how weak internal controls
and limited oversight can affect Medicare program assets. It will be
important that HCFA and Treasury develop and implement formal procedures to
ensure that the activities related to accounting for the Medicare trust
funds are properly managed.

Recommendations for Executive Action

To ensure that adequate controls are in place to safeguard Medicare assets,
we recommend that the HCFA Chief Financial Officer take the following
actions:

ï¿½ Further enhance the monthly Medicare benefit adjustments procedures to
include monthly analysis of the transfer account ending balances to detect
anomalies.

ï¿½ Formalize the written procedures for preparing the monthly Medicare
benefit adjustment spreadsheet and incorporate them in official HCFA policy
guidance.

ï¿½ Conduct training for those staff responsible for preparing, processing,
and reviewing the monthly benefit adjustment and any staff whose job
performance is directly related to the daily transfer account transactions.

In addition, to further strengthen the controls in place to safeguard
Medicare assets, we recommend that the Commissioner of the Public Debt
formalize BPD's informal procedures for reviewing certain reports and
related documents for the Medicare transfer accounts to ensure that HCFA's
requests to adjust the balances of the transfer accounts and trust funds are
reasonable.

Agency Comments and Our Evaluation

BPD and HCFA agreed with our findings, conclusions, and recommendations. BPD
stated that it has already implemented a reasonableness review of HCFA
requests and that it will formally document this procedure by December 31,
2000. In its comments, HCFA discussed the steps it has taken to improve the
benefit adjustment process and strengthen internal controls. The Acting
Administrator described some of these steps, such as developing and
implementing procedures for preparation of the monthly benefit adjustments
and providing training to staff on these procedures. In addition, HCFA
stated that one of its key initiatives will be the development and
implementation of a HCFA accounting manual that will detail the procedures
for significant activities, including the benefit adjustment process. The
steps that HCFA and BPD have outlined in their comments appear reasonable.
Formalizing and institutionalizing these procedures should improve financial
accountability over the Medicare trust funds.

---- We are sending copies of this report to Representative Charles Rangel,
Ranking Minority Member, Committee on Ways and Means, and appropriate
congressional committees. We are also sending copies to Michael M. Hash,
Acting Administrator of

GAO- 01- 39R Clerical Errors in the Medicare HI and SMI Trust Funds Page 13
the Health Care Financing Administration, and the Honorable Van Zeck,

Commissioner of the Bureau of the Public Debt. Copies will be available to
others on request. This report was prepared under the direction of Gloria
Jarmon, Director, who may be reached at (202) 512- 4476 or by email at
jarmon. aimd@ gao. govif you or your staff have any questions . Kim Brooks,
Ed Brown, Kay Daly and Meg Mills were key contributors to this letter.

Sincerely yours, Jeffrey C. Steinhoff Managing Director Financial Management
and Assurance

Enclosures

Enclosure I GAO- 01- 39R Clerical Errors in the Medicare HI and SMI Trust
Funds Page 14

Comments From the Health Care Financing Administration

Note: GAO comment supplementing those in the report text appears at the end
of this enclosure.

Enclosure I GAO- 01- 39R Clerical Errors in the Medicare HI and SMI Trust
Funds Page 15

See comment 1.

Enclosure I GAO- 01- 39R Clerical Errors in the Medicare HI and SMI Trust
Funds Page 16

Enclosure I GAO- 01- 39R Clerical Errors in the Medicare HI and SMI Trust
Funds Page 17

Enclosure I GAO- 01- 39R Clerical Errors in the Medicare HI and SMI Trust
Funds Page 18

Enclosure I GAO- 01- 39R Clerical Errors in the Medicare HI and SMI Trust
Funds Page 19 The following is GAO's comment on HCFA's letter dated October
25, 2000.

GAO's Comment

1. Our review focused on fiscal year 1999 activity in other trust funds.
Although errors in other trust funds may have occurred, as discussed in the
report, errors similar to those reported for the HI and SMI Trust Funds were
not reported in the agencies' financial reports.

Enclosure II GAO- 01- 39R Clerical Errors in the Medicare HI and SMI Trust
Funds Page 20

Comments From the Bureau of the Public Debt

(916376)
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