Improper Payments: Federal and State Coordination Needed to
Report National Improper Payment Estimates on Federal Programs
(14-APR-06, GAO-06-347).
Over the past several years, GAO has reported that federal
agencies are not well positioned to meet requirements of the
Improper Payments Information Act of 2002 (IPIA). For fiscal year
2005, estimated improper payments exceeded $38 billion but did
not include some of the highest risk programs, such as Medicaid
with outlays exceeding $181 billion for fiscal year 2005.
Overall, state-administered programs and other nonfederal
entities receive over $400 billion annually in federal funds.
Thus, federal agencies and states share responsibility for the
prudent use of these funds. GAO was asked to determine actions
taken at the state level to help federal agencies estimate
improper payments for state-administered federal programs and
assistance needed from the federal level to support the
respective federal agencies' implementation of IPIA.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-06-347
ACCNO: A51637
TITLE: Improper Payments: Federal and State Coordination Needed
to Report National Improper Payment Estimates on Federal Programs
DATE: 04/14/2006
SUBJECT: Erroneous payments
Federal/state relations
Financial management
Internal controls
Reporting requirements
State-administered programs
Strategic planning
******************************************************************
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GAO-06-347
* Report to the Chairman, Subcommittee on Government Management,
Finance, and Accountability, Committee on Government Reform, House of
Representatives
* April 2006
* IMPROPER PAYMENTS
* Federal and State Coordination Needed to Report National Improper
Payment Estimates on Federal Programs
* Contents
* Results in Brief
* Background
* Estimating Improper Payments at the State Level Is Limited
* Programs with Federal Requirements
* Federal Programs with Pilots
* State Initiatives to Estimate Improper Payments
* States Reported Using Various Techniques to Detect, Prevent, or
Reduce Improper Payments
* States Frequently Use Risk Assessments and Computer- Related
Techniques to Prevent or Detect Improper Payments
* States Have Implemented Recovery Auditing Efforts
* Few State-Administered Programs Receive Incentives or
Penalties regarding Improper Payments
* Federal Action Needed to Help States Report Improper Payment
Information
* Selected States Want Federal Assistance
* Actions Initiated at the Federal Level to Involve States in
Measuring Improper Payments
* Conclusions
* Recommendations for Executive Action
* Agency Comments
* Objectives, Scope, and Methodology
* States and Programs Included in Our Review
* Food Stamp Quality Control System
* UI Benefit Accuracy Measurement and National Directory of New Hires
Database
* Highway Planning and Construction Pilot to Estimate Improper Payments
* Medicaid Payment Accuracy and Payment Error Rate Measurement Project
* Comments from the Office of Management and Budget
* GAO Contact and Staff Acknowledgments
* Related GAO Products
Report to the Chairman, Subcommittee on Government Management, Finance,
and Accountability, Committee on Government Reform, House of
Representatives
April 2006
IMPROPER PAYMENTS
Federal and State Coordination Needed to Report National Improper Payment
Estimates on Federal Programs
Contents
Tables
Figures
April 14, 2006Letter
The Honorable Todd R. Platts Chairman Subcommittee on Government
Management, Finance, and Accountability Committee on Government Reform
House of Representatives
Dear Mr. Chairman:
Each year federal agencies expend more than $2 trillion through thousands
of programs and activities to address the needs of the American people. Of
this amount, over $400 billion in federal funds are distributed to states
and other nonfederal entities. These funds, typically issued through
grants, are used to implement over 1,000 individual programs from 26
federal grant-making agencies.1 As the steward of taxpayer dollars, the
federal government is accountable for how its agencies and grantees spend
this money, including the safeguarding of federal funds from improper
payments. Grantees are also responsible for ensuring that funds are used
for the purposes for which the funds were provided.
Our work over the past several years has demonstrated that improper
payments are a significant and widespread problem in the federal
government, with agencies reporting improper payments over $38 billion in
their fiscal year 2005 performance and accountability reports (PAR). This
estimate, however, does not include all programs. In our review of
agencies' fiscal year 2005 PARs,2 we noted that some agencies still have
not instituted systematic methods of reviewing all programs and
activities, have not identified all programs susceptible to significant
improper payments, or have not annually estimated improper payments for
their high-risk programs. For example, seven state-administered3 federal
programs with outlays totaling about $228 billion still have not been
annually estimated for improper payments, even though the Office of
Management and Budget (OMB) required them to report such information about
4 years ago in their fiscal year 2003 budget submissions.
The Improper Payments Information Act of 2002 (IPIA)4 prompted all
executive branch agencies to systematically address improper payment
activity annually. While states do not have a direct role in meeting IPIA
requirements, they do play an important role in federal fund stewardship.
In particular, states are responsible for the proper administration of
federal awards through using sound management practices and maintaining
internal control.5 Payments, as defined under IPIA, include payments made
by a governmental or other organization administering a federal program or
activity. An improper payment is defined by IPIA as any payment that
should not have been made or that was made in an incorrect amount, a
duplicate payment, and payment for services not rendered or rendered to
ineligible beneficiaries. OMB's implementing guidance for IPIA6 requires
that estimates of improper payments, and if applicable, a corrective
action report, be included in all federal executive branch agencies' PARs
beginning with fiscal year 2004.
Because of the Subcommittee's continued interest in addressing the
governmentwide improper payments issue, you asked us to determine (1) what
actions are being taken by states to assist federal agencies in estimating
improper payments; (2) what techniques related to detecting, preventing,
or reducing improper payments have states employed to ensure the proper
administration of federal awards; and (3) what assistance can be provided
by OMB that state program administrators would find helpful in supporting
the respective federal agencies with the implementation of IPIA.
To identify states' actions and assistance needed, we conducted a survey
of all 50 states and the District of Columbia regarding actions to
estimate improper payments for state-administered federal programs for
fiscal years 2003 and 2004. Statewide surveys were completed by state
officials with knowledge of statewide administration of operations. We
received 50 of the 517 statewide surveys for a response rate of 98
percent. In addition, program-specific surveys were completed by state
program administrators or directors for the major programs in each state.
We received 227 of 240 program-specific surveys for a response rate of 95
percent. The high response rates for the variety of state-administered
programs provided a wide range of survey responses regarding actions to
address improper payments.
For the purposes of this review, we defined major programs as those
state-administered programs that expended the largest amounts of federal
funds in decreasing order, which in aggregate covered at least 60 percent
of the total federal portion of state-administered expenditures in each
state. Together, the states identified 25 programs as major (see table 3
in app. I). The 5 most common major programs were Medicaid (all 51
states), Highway Planning and Construction (44 states), Food Stamp (36
states), Temporary Assistance for Needy Families (28 states), and
Unemployment Insurance (26 states). As shown in table 4 in appendix I, the
number of major programs varied from 1 to 12 programs per state, and in
total, added up to the 240 program-specific surveys we sent. We also
visited selected states that had ongoing initiatives already in place to
estimate improper payments for certain programs, conducted interviews with
OMB and other federal officials as well as state officials regarding state
efforts to estimate improper payments, and reviewed federal agencies'
fiscal year 2005 PARs and prior GAO and office of inspector general (OIG)
reports. We conducted our work from April 2005 through December 2005 in
accordance with generally accepted government auditing standards. See
appendix I for more details on our scope and methodology.
Results in Brief
To date, states have been subject to limited requirements to assist
federal agencies in estimating improper payments. For the 25 major
programs surveyed, only 2 programs-the Department of Agriculture's (USDA)
Food Stamp Program and the Department of Labor's (Labor) Unemployment
Insurance (UI) Program-have federal requirements for all states to
estimate improper payments. A limited number of federal agencies are
conducting pilots to estimate improper payments for certain
state-administered programs, but state participation is voluntary. Where
no federal requirement or pilot is in place, 11 states estimated improper
payments involving 5 programs during fiscal years 2003 or 2004.
States have a fundamental responsibility to ensure the proper
administration of federal awards by using sound management practices and
maintaining internal controls. To ensure proper administration of federal
funds, states reported using a variety of techniques to prevent, detect,
and reduce improper payments. All states, except for 1, responded that
they use computer-related techniques, such as fraud and abuse detection
programs or data matching for this purpose. Twenty-one of the 51 states in
our survey responded that they have performed a statewide assessment of
their programs to identify those that may be at risk for improper
payments.
In addition, 15 states reported that they conducted recovery audits in
fiscal year 2003, fiscal year 2004, or both, collectively recovering over
$335 million for the 2 fiscal years. Thirty-two states reported receiving
federal incentives, such as enhanced funding or reduced reporting
requirements, for reducing improper payments, and 17 states reported
receiving federal penalties, such as decreased funding and increased
reporting requirements, for failing to reduce improper payments. Most of
these actions related to the Food Stamp Program, which applies incentives
and penalties to states having error rates below and above the national
error rate, respectively.
Of the 227 program surveys received, 100 of the state program
administrators or their designees responded that guidance or resources
from OMB, cognizant federal agencies, or both were needed if the states
were to assist the federal agencies in meeting the requirements of IPIA.
Specifically, state program officials requested guidance on estimating
improper payments and performing risk assessments. Selected states also
asked for additional funding to subsidize efforts, if they were required
to estimate improper payments; requested that OMB and federal agencies
share best practices and available guidance; and requested that their
input be considered prior to any state IPIA program reporting requirement
taking effect.
OMB has recognized the important role that states have in assisting
federal agencies to meet the requirements of IPIA. In August 2005, OMB
issued Circular No. A-136, Financial Reporting Requirements, to
consolidate, clarify, and update existing guidance relating to agency and
govermentwide financial reporting. Among other things, OMB specifically
requires federal agencies with grant-making programs to report in their
fiscal year 2005 PARs accomplishments in the area of funds stewardship
beyond the primary recipient8 and the status of projects under way and
results of any reviews. Our review of the fiscal year 2005 PARs showed
that in general federal agencies either did not report on their
grant-making activities, did not clearly identify grant programs, or did
not address fund stewardship beyond the primary recipient.
OMB has continued to conduct its improper payments work through the Chief
Financial Officers Council (CFOC) and President's Council on Integrity and
Efficiency's (PCIE) Erroneous and Improper Payments Workgroup. The
workgroup, consisting of federal agency chief financial officers, OMB
officials, and inspectors general, periodically convenes to discuss and
develop best practices and other methods to reduce or eliminate improper
payments. It has issued reports and other products to CFOC/PCIE,
reflecting workgroup deliberations and determinations. One of these
products was a report on initial considerations regarding state and
grantee involvement in the process of developing methodologies for federal
agencies to estimate improper payments.
In November 2005, OMB issued draft revisions to its IPIA implementing
guidance. This implementing guidance, together with recovery auditing
guidance, is to be consolidated into future Parts I and II of Appendix C
to OMB Circular No. A-123, Management's Responsibility for Internal
Controls (Dec. 21, 2004).9 While this guidance begins the process to
further address the complexities related to reporting improper payment
information for federally funded, state-administered programs, additional
enhancements could be made that address how federal agencies define
state-administered programs and the methodology to be employed for
generating a national estimate. Specifically, we found that the proposed
changes do not clearly define the term state-administered programs.
Without a clear definition, OMB is at risk of receiving inconsistent
improper payment reports because agencies could define programs
differently. In addition, we noted that the draft guidance did not provide
basic criteria, such as the nature and extent of data and documentation
that agencies should consider when developing a plan or methodology to
calculate a national improper payment error rate for these
state-administered programs.
We are making four recommendations to OMB to help ensure successful
implementation of IPIA requirements for federally funded,
state-administered programs. Specifically, we recommend that OMB (1)
clearly define in its IPIA guidance the term state-administered programs
so that federal agencies can consistently identify all such programs; (2)
provide criteria in its IPIA guidance that address the nature and extent
of data and documentation needs to calculate a national improper payment
estimate; (3) communicate and make available to states guidance on
conducting risk assessments and estimating improper payments for federally
funded, state-administered programs; and (4) share ideas, concerns, and
best practices with federal agencies and states regarding improper payment
reporting requirements for these programs.
In commenting on a draft of this report, OMB agreed with our
recommendations and highlighted several initiatives under way to ensure
that accurate improper payment rates can be generated without creating an
undue cost and burden on federal agencies or state partners that manage
federally funded programs. OMB also provided technical comments that we
incorporated, as appropriate. OMB's written comments are reprinted in
appendix VII.
Background
In November 2002, the Congress passed IPIA. The major objective of IPIA is
to enhance the accuracy and integrity of federal payments. The law
requires executive branch agency heads to annually review all programs and
activities that they administer, identify those that may be susceptible to
significant improper payments, and estimate and report annually on the
amount of improper payments in those programs and activities. IPIA also
requires the agencies to report annually to the Congress on the actions
they are taking to reduce erroneous payments for programs for which
estimated improper payments exceed $10 million.
IPIA further requires OMB to prescribe guidance for federal agencies to
use in implementing the act. OMB issued this guidance in Memorandum
M-03-13 in May 2003. It requires use of a systematic method to annually
review and identify those programs and activities that are susceptible to
significant improper payments. OMB guidance defines significant improper
payments as annual improper payments in any particular program exceeding
both 2.5 percent of program payments and $10 million. The OMB guidance
then requires agencies to estimate the annual amount of improper payments
using statistically valid techniques for each susceptible program or
activity. For those agency programs, including state-administered
programs, determined to be susceptible to significant improper payments
and with estimated annual improper payments greater than $10 million, IPIA
and related OMB guidance require each agency to report the results of its
improper payment efforts. OMB guidance requires the reporting to be in the
Management Discussion and Analysis section of the agency's PAR for each
fiscal year ending on or after September 30, 2004. IPIA requires the
following information to be reported to the Congress:
o a discussion of the causes of the improper payments identified, actions
taken to correct those causes, and results of the actions taken to address
those causes;
o a statement of whether the agency has the information systems and other
infrastructure it needs to reduce improper payments to minimal
cost-effective levels;
o if the agency does not have such systems and infrastructure, a
description of the resources the agency has requested in its most recent
budget submission to the Congress to obtain the necessary information and
infrastructure; and
o a description of the steps the agency has taken and plans to take to
ensure that agency mangers are held accountable for reducing improper
payments.
OMB's guidance in M-03-13 requires that three additional things be
included in the PAR:
o a discussion of the amount of actual erroneous payments that the agency
expects to recover and how it will go about recovering them;
o a description of any statutory or regulatory barriers that may limit the
agency's corrective actions in reducing improper payments; and
o provided the agency has estimated a baseline improper payment rate for
the program, a target for the program's future improper payment rate that
is lower than the agency's most recent estimated error rate.
In August 2004, OMB established Eliminating Improper Payments as a new
program-specific initiative in the President's Management Agenda (PMA).
The separate improper payments PMA program initiative began in the first
quarter of fiscal year 2005. Previously, agency efforts related to
improper payments were tracked along with other financial management
activities as part of the Improving Financial Performance initiative. The
objective of establishing a separate initiative for improper payments was
to ensure that agency managers are held accountable for meeting the goals
of IPIA and are therefore dedicating the necessary attention and resources
to meeting IPIA requirements. This program initiative establishes an
accountability framework for ensuring that federal agencies initiate all
necessary financial management improvements for addressing this
significant and widespread problem. Specifically, agencies are to measure
their improper payments annually, develop improvement targets and
corrective actions, and track the results annually to ensure the
corrective actions are effective.
Estimating Improper Payments at the State Level Is Limited
State responses to our survey show that the number of state-administered
federal programs (state programs) estimating improper payments
significantly decreases if there is no federal requirement to estimate or
if the states are not participating in a federally administered pilot to
estimate. For the 25 major programs reviewed for fiscal years 2003 and
2004, all 51 states estimated improper payments where there was a federal
requirement to do so. For the federally administered improper payment
pilots, the number decreased to 29 states. Where there was no federal
requirement or pilot in place, only 11 states reported estimating improper
payments on their own initiative, as shown in figure 1.
Figure 1: Number of States in Our Survey Estimating Improper Payments
Note: The 51 states are the 50 states and the District of Columbia.
Programs with Federal Requirements
Only 2 of the 25 major programs in our review had federal requirements for
all the states to annually estimate improper payments-the Food Stamp and
UI programs. In total, 47 states reported estimating improper payments for
one or more major programs, which represented 97 program surveys for
fiscal year 2003, fiscal year 2004, or both. More than half of the
reported estimates were for the Food Stamp and UI programs.10 Food Stamp
and UI program outlays expended by the states totaled about $61 billion
for fiscal year 2004. This constitutes about 15 percent of the total
federal funds that are estimated to be annually distributed to states and
other nonfederal entities for redistribution to eligible parties. Both of
these programs are benefit programs, have a history of measuring improper
payments through established systems, and can calculate a national error
rate.
o The purpose of the Food Stamp Program is to help low-income individuals
and families obtain a more nutritious diet by supplementing their incomes
with benefits to purchase food. As reported in USDA's fiscal year 2005
PAR, the causes of improper payments in the Food Stamp Program include
client errors, such as incomplete or inaccurate reporting of income,
assets, or both by participants at the time of certification or by not
reporting subsequent changes. Causes can also be provider based, such as
errors in determining eligibility or benefit amounts or delays in action
or inaction on client reported changes. The Food Stamp quality control
system11 measures payment accuracy and monitors how accurately states
determine food stamp eligibility and calculate benefits. USDA reports a
rate and dollar amount of estimated improper payments for the Food Stamp
Program in its annual PAR based on the quality control system. In its
fiscal year 2005 PAR, USDA reported a national improper payment error rate
of 5.88 percent, or $1.4 billion, for the Food Stamp Program. A national
error rate is calculated and incentives and penalties are applied to the
states that have rates lower or higher than the national rate. Recent
initiatives reported in USDA's fiscal year 2005 PAR include the agency's
fiscal year 2004 nationwide implementation of an electronic benefit
transfer (EBT) system for the delivery of food stamp benefits. The EBT
card, which replaced paper coupons, creates an electronic record for each
transaction that makes fraud easier to detect. Other USDA efforts include
Partner Web, which is an intranet for state food stamp agencies, and the
National Payment Accuracy Workgroup, which consists of representatives
from USDA headquarters and regional offices who meet to discuss best
practice methods and strategies. (See app. III for more details on the
Food Stamp Program.)
o The UI Program provides temporary cash benefits to workers who lose
their jobs through no fault of their own. Labor reported in its fiscal
year 2005 PAR that the principal cause of improper payments was claimants
who continue to claim benefits despite having returned to work. Pursuant
to Part 602 of Title 20, Code of Federal Regulations, Labor implemented
the Benefit Accuracy Measurement system to measure state payment accuracy
in the UI Program.12 Labor also reports a rate and dollar amount of
estimated improper payments for the UI Program in its annual PAR. In its
fiscal year 2005 PAR, Labor reported an annual error rate of 10.13
percent, or $3.2 billion, for the UI Program. Labor's initiatives to
reduce improper payments in the UI Program include implementing new
cross-matching technologies like the National Directory of New Hires
database and funding states' data-sharing efforts with federal agencies,
such as the Social Security Administration, and other state agencies, such
as the state departments of motor vehicles. Further, Labor is instilling
additional performance measures for states to detect and recover
overpayments of benefits and continuing analyses of the causes, costs, and
benefits of improper payment prevention or establishing recovery
operations. (See app. IV for more details on the UI Program.)
Federal Programs with Pilots
Twenty-nine states in our review responded in our surveys or during
interviews that they voluntarily participated in federally administered
pilot projects to estimate improper payments. We visited the state
participating in the Department of Transportation's (DOT) Highway Planning
and Construction Program and one of the states participating in the
Department of Health and Human Services' (HHS) Medicaid program and
discussed the states' efforts to measure improper payments. These pilots
serve as models for the federal agencies on obtaining improper payment
information and establishing a methodology for other states to estimate
improper payments for those programs. Neither of the two pilots was
sufficiently comprehensive to allow the responsible federal agency to
project an error rate with statistical precision to all of the states.
o DOT provides funding to the state departments of transportation to
administer the nation's federal Highway Planning and Construction Program.
During our review, DOT had a pilot in place to estimate improper payments
for two construction projects in Tennessee. The sampled transactions
reviewed to identify improper payments for these two projects were
selected from a population of almost $35 million, which represented a
small portion of DOT's fiscal year 2005 outlays totaling $31 billion for
the Highway Planning and Construction Program.13 For one of these
projects, DOT reported that the estimated improper payments amount was
statistically insignificant. For the other project, DOT reported an
improper payment estimate of $111,671. The methodology and testing
procedures that resulted from DOT's pilot project will be used to extend
the methodology nationwide. In its fiscal year 2005 PAR, DOT reported a
zero-dollar improper payment estimate for this program. However, the DOT
OIG also reported that detecting improper payments for several grant
programs, including the Highway Planning and Construction Program, was a
top management challenge for the agency. In particular, the OIG reported
that the DOT pilot project was too limited and that OIG investigators
continue to identify instances of improper payments. The OIG cited two
improper payment examples totaling over $1.3 million, which was reimbursed
to DOT as a result of OIG investigations. In response, DOT is reorganizing
and redesigning its procedures to better improve oversight of research
agreements. This includes creating a new division within DOT's Office of
Acquisition Management devoted to the award and administration of
cooperative agreements. (See app. V for more details on the improper
payment pilot for the Highway Planning and Construction Program.)
o In coordination with the states, HHS finances health care services to
low-income individuals and families through the Medicaid program. Medicaid
improper payments are caused by medical review, eligibility review, or
data-processing review errors.14 In fiscal year 2002, HHS began a pilot to
estimate improper payments for its Medicaid program. The number of states
voluntarily participating in the pilot has increased each year, and in the
second year of the pilot, fiscal year 2003, 12 states participated. In the
third year, fiscal year 2004, 24 states participated in the pilot. Because
HHS had not fully implemented a statistically valid methodology, the
agency did not report an improper payment estimate for the Medicaid
program in its fiscal year 2005 PAR. According to agency officials, HHS is
in the process of implementing a methodology for estimating payment error
rates for Medicaid in all states. HHS stated that it expects to be fully
compliant with the IPIA requirements for the Medicaid program by fiscal
year 2008. Other initiatives HHS is undertaking for the Medicaid program
are the hiring of additional staff to do prospective reviews of state
Medicaid operations and the Medicare/Medicaid data match program designed
to identify improper payments and areas in need of improved payment
accuracy. (See app. VI for more details on the Medicaid program.)
We identified other improper payment pilot initiatives during our review
of agencies' fiscal year 2005 PARs. Specifically, HHS reported that
improper payment pilots are being conducted for three other
state-administered programs to assist HHS in its efforts to report a
national improper payment estimate in the future. For HHS's State
Children's Health Insurance Program (SCHIP), 15 states participated in a
payment accuracy measurement pilot in fiscal year 2004. The states
performed a combination of medical, eligibility, or data-processing
reviews of claims and applicable payments for the period October 1, 2003,
to December 31, 2003. Using a standard methodology, those states computed
a payment accuracy error rate for their programs. Based on these results,
HHS has adopted a national strategy using federal contractors to obtain a
national error rate for SCHIP with expected implementation in fiscal year
2006. In fiscal year 2007, HHS expects to begin measuring SCHIP error
rates nationwide for its fee-for-service component. HHS expects to report
SCHIP error rates for its fee-for-service, managed care, and eligibility
components in its fiscal year 2008 PAR.
For HHS's Child Care and Development Fund (CCDF) Program, 11 states
participated in an improper payment pilot in fiscal year 2004 to assess
states' efforts to prevent and reduce improper payments. The states worked
with HHS to assess the adequacy of state systems, databases, policy, and
administrative structures. In fiscal year 2005, HHS expanded pilot
participation to 18 states. HHS also conducted an error rate study in 4
states to assess those states' ability to verify information received from
clients during the initial eligibility process or to establish eligibility
correctly. In addition, HHS conducted interviews in 5 other states to
gather information about improper payment activities. HHS reported that it
will continue to work with states during fiscal year 2006 to identify an
appropriate strategy for determining estimates of payment errors in the
CCDF Program.
For HHS's Temporary Assistance for Needy Families (TANF) Program, one
state participated in a pilot to undergo a more in-depth review of TANF
expenditures as part of its single audit requirement.15 The objective of
the pilot was to explore the viability of estimating improper payments in
the single audit process. Using statistical sampling, the auditors
reviewed 208 cases to test controls. According to HHS, the auditors
reported an overall case error rate of 20 percent and a payment error rate
of 3.9 percent from their review of the 208 cases. In addition to this
pilot, state-led initiatives involving the TANF Program were also under
way, as described below.
State Initiatives to Estimate Improper Payments
During our review of survey responses, we also noted that 11 states, on
their own initiative, were estimating improper payments related to 5
separate programs for fiscal year 2003, fiscal year 2004, or both. For
example, 6 of the 11 states indicated in their survey responses that they
were estimating improper payments for HHS's TANF Program.16 Among the
varying methods the 11 states used to estimate amounts, error rates, or
both were statistically representative samples of payments and findings
from states' single audits.17 Other techniques respondents reported using
included Food Stamp Program quality control reviews to ascertain the
accuracy of TANF payments, which would be reasonable to do if the
eligibility requirements of the two programs were similar.
States Reported Using Various Techniques to Detect, Prevent, or Reduce
Improper Payments
As part of their funds stewardship responsibilities for federal awards,
states are required to establish and maintain internal control designed to
provide reasonable assurance that funds are administered in compliance
with federal laws, regulations, and program requirements. This includes
maintaining accountability over assets and safeguarding funds against loss
from unauthorized use or disposition. To ensure proper administration of
federal funds, states reported using a variety of prepayment and
postpayment mechanisms. For example, states reported the use of
computer-related techniques to identify and prevent improper payments as
well as recovery audits to collect overpayments. In addition, selected
programs reported that federal incentives and penalties are in place to
help reduce improper payments. These types of actions contribute to a
strong internal control structure that helps mitigate the risk and
occurrence of improper payments.
Generally, improper payments result from a lack of or an inadequate system
of internal control, but some result from program design issues. Our
Standards for Internal Control in the Federal Government18 provides a road
map for entities to establish control for all aspects of their operations
and a basis against which entities' control structures can be evaluated.
Also, our executive guide on strategies to manage improper payments
focuses on internal control standards as they relate to reducing improper
payments.19 The five components of internal control-control environment,
risk assessment, control activities, information and communication, and
monitoring-are defined in the executive guide in relation to improper
payments as follows:
o Control environment-creating a culture of accountability by establishing
a positive and supportive attitude toward improvement and the achievement
of established program outcomes.
o Risk assessment-analyzing program operations to determine if risks exist
and the nature and extent of the risks identified.
o Control activities-taking actions to address identified risk areas and
help ensure that management's decisions and plans are carried out and
program objectives are met.
o Information and communication-using and sharing relevant, reliable, and
timely financial and nonfinancial information in managing activities
related to improper payments.
o Monitoring-tracking improvement initiatives over time, and identifying
additional actions needed to further improve program efficiency and
effectiveness.
For this engagement, we focused on two of these internal control
components-risk assessments and control activities, which are discussed in
more detail in the following sections.
States Frequently Use Risk Assessments and Computer-Related Techniques to
Prevent or Detect Improper Payments
All states except 1 acknowledged using computer-related techniques to
prevent or detect improper payments, while 21 states reported having
performed some type of statewide assessments to determine what programs
are at risk of improper payments. Strong systems of internal control
provide reasonable assurance that programs are operating as intended and
are achieving expected outcomes. A key step in the process of gaining this
assurance is conducting a risk assessment, an activity that entails a
comprehensive review and analysis of program operations to determine where
risks exist and what those risks are, and then measuring of the potential
or actual impact of those risks on program operations. In performing a
risk assessment, management should consider all significant interactions
between the entity and other parties, as well as all internal factors at
both the organizationwide and program levels.
IPIA requires agencies to review all of their programs to identify those
that may be susceptible to significant improper payments. Since the
programs in our review were state administered, we asked the states if
they performed statewide reviews to assess if their programs may be at
risk of improper payments. Twenty-one states responded that they had
performed some type of statewide assessment of their programs. Some of the
states' risk assessment processes included internal control assessments,
which were generally self-assessments performed by the states' program
agencies and entities. Two states noted that these self-assessments can be
used as a tool by state auditors to evaluate weaknesses or to plan work to
be performed. Regular evaluation of internal control systems is
statutorily required by at least 2 states. Other risk assessment methods
states reported using included single audits and other audits or reviews
performed by state auditors or by state agencies.
Survey respondents also cited using control activities, such as
computer-related techniques, to aid in the detection and prevention of
improper payments. Computer-related techniques play a significant role not
only in identifying improper payments, but also in providing data on why
these payments were made and, in turn, highlighting areas that need
strengthened prevention controls. The adoption of technology allows states
to have effective detection techniques to quickly identify and recover
improper payments. Data sharing, data mining, smart technology, data
warehousing, and other techniques are powerful internal control tools that
provide more useful and timely access to information. The use of these
techniques can achieve potentially significant savings by identifying
client-related reporting errors and misinformation during the eligibility
determination process-before payments are made-or by detecting improper
payments that have been made. Fifty of the 51 states representing 21
different programs reported in their surveys that they used
computer-related techniques to prevent or detect improper payments. Table
1 shows the number of programs that reported using each technique.
Table 1: Program Use of Computer-Related Techniques
Program Fraud Data Data Smart Data Other
detectiona matchingb miningc technologyd warehousee techniquesf
1 Abandoned Mine 1 1 0 0 1 0
Land
Reclamation
Program
2 Airport 0 1 0 0 1 0
Improvement
Program
3 Appalachian 0 0 0 0 0 1
Development
Highway System
4 Child Care and 0 0 1 0 0 1
Development
Block Grant
5 Child Care and 1 0 0 0 0 1
Development
Fund
6 Capitalization 0 0 0 0 0 1
Grants for
Drinking Water
State
Revolving
Funds
7 Emergency 1 1 1 0 1 0
Preparedness
Funding
8 Food Stamp 18 13 13 1 16 12
Program
9 Foster Care 0 0 0 0 1 1
Title IV-E
10 Highway 10 6 9 1 19 12
Planning and
Construction
11 Home 0 0 1 0 1 0
Investment
Partnerships
Program
12 Medicaid 35 43 42 16 43 23
13 National 1 1 0 0 3 2
School Lunch
Program
14 Special 1 1 1 0 5 2
Education
State Grants
15 Special 1 1 1 0 1 0
Supplemental
Nutrition
Program for
Women,
Infants, and
Children
16 Temporary 13 9 9 2 12 7
Assistance for
Needy Families
17 Technology 0 0 0 0 1 0
Transfer
18 Title I Grants 3 3 3 0 7 3
to Local
Educational
Agencies
19 Improving 0 0 0 0 1 0
Teacher
Quality State
Grants
20 Unemployment 21 9 9 2 9 6
Insurance
21 Federal 0 0 0 0 0 1
Transit
Formula Grants
Total 106 89 90 22 122 73
Source: GAO analysis.
aFraud systems. Help detect fraud and abuse in programs.
bData matching. The process in which information from one source is
compared with information from another to identify any inconsistencies.
cData mining. Offers a tool to review and analyze diverse data for
relationships that have not previously been discovered. Applying data
mining to a data warehouse allows an organization to efficiently query the
system to identify questionable activities.
dSmart technology. Software that analyzes patterns in claim data and feeds
the information back into the system to identify new patterns.
eData warehouse. Stores historical and current data and consist of tables
of information that are logically grouped together. The warehouse allows
program and financial data from different nonintegrated systems throughout
an organization to be captured and placed in a single database where users
can query the system for information.
fOther computer-related techniques. Various.
As table 1 shows, for the state programs that reported using a
computer-related technique, 106 state program administrators reported
using some sort of fraud detection system. One example is the
Transportation Software Management Solution, a fraud detection system used
by several states for the Highway Planning and Construction Program. This
software contains a Bid Analysis Management System that allows highway
agencies to analyze bids for collusion. Also, a limited number of states
in our survey reported using smart technology. For example, the Medicaid
Fraud, Abuse and Detection System is designed to structure, store,
retrieve, and analyze management information. It has the ability to detect
fraud patterns, and it works with the Medicaid Management Information
System, which contains a data warehouse that can be queried for
information to be used in a variety of analyses. Other techniques include
one state's use of a Web-based system that allows National School Lunch
Program participants to enter monthly claims by site. System checks are in
place to ensure that sites do not overclaim meals based on days served and
eligible students.
States Have Implemented Recovery Auditing Efforts
Recovery auditing is another method that states can use to recoup detected
improper payments. Recovery auditing focuses on the identification of
erroneous invoices, discounts offered but not received, improper late
payment penalties, incorrect shipping costs, and multiple payments for
single invoices. Recovery auditing can be conducted in-house or by
recovery audit firms.
Section 831 of the National Defense Authorization Act for Fiscal Year
200220 contains a provision that requires all executive branch agencies
entering into contracts with a total value exceeding $500 million in a
fiscal year to have cost-effective programs for identifying errors in
paying contractors and for recovering amounts erroneously paid. The
legislation further states that a required element of such a program is
the use of recovery audits and recovery activities. The law authorizes
federal agencies to retain recovered funds to cover in-house
administrative costs as well as to pay contractors, such as collection
agencies. OMB guidance21 suggests that federal agencies awarding grants
may extend their recovery audit programs to cover significant contract
activity by grant recipients (e.g., states). States may engage in their
own recovery audit programs.
As shown in table 2, based on our review of survey responses, 15 states
reported conducting recovery audits in fiscal year 2003, fiscal year 2004,
or both. In fiscal year 2003, states reported recovering over $180
million, compared to $155 million for fiscal year 2004.
Table 2: Amount of Improper Payments Collected through State Recovery
Auditing Efforts
State Fiscal year 2003 Fiscal year 2004
Delaware $0a $66,397
District of Columbia 13,057,400 15,561,561
Florida 44,354,018 45,142,905
Idaho 10,501,900 10,535,500
Michigan 15,865,807 11,804,269
New Jersey 73,939 37,356
New York 31,656,087 28,693,436
Ohio 21,517,996 14,386,026
Utah 71,285 189,107
Virginia 12,730,919 7,495,281
West Virginia 30,380,716 21,532,950
Total recoveredb $180,210,067 $155,444,788
Source: GAO analysis.
aDid not perform a recovery audit in fiscal year 2003.
bWe noted four additional states-Colorado, Connecticut, Kentucky, and
Tennessee-that performed recovery auditing in fiscal year 2003 or fiscal
year 2004; however, the respondents did not report an amount for our
survey because the information is reported at the state agency level and
not reported in aggregate at the statewide level.
In survey responses, states reported using either outside contractors to
perform recovery audits or establishing in-house fraud and detection units
to recover improperly paid amounts. One state noted that it passed
legislation requiring the use of recovery auditors in its state agencies.
In June 2005, Texas enacted legislation that directs the state's
Comptroller of Public Accounts to contract to conduct recovery audits of
payments made by state agencies to vendors and to recommend improved state
agency accounting operations.22 The law requires state entities with more
than $100 million in biennial expenditures to undertake annual recovery
audits.23 The state expects to recover up to $4.5 million annually
starting in state fiscal year 2007.24
Few State-Administered Programs Receive Incentives or Penalties regarding
Improper Payments
Viewed broadly, agencies have applied limited incentives and penalties for
encouraging improved state administration to reduce improper payments.
Incentives and penalties can be helpful to create management reform and to
ensure adherence to performance standards. The IPIA implementing guidance
requires that each federal agency report on steps it has taken to ensure
that agency managers are held accountable for reducing and recovering
improper payments. When a culture of accountability over improper payments
is instilled in an organization, everyone in the organization, including
the managers and day-to-day program operators, have an incentive to reduce
fraud and errors. Transparency, through public communication of
performance results, also acts as an incentive for agencies to be vigilant
in their efforts to address the wasteful spending that results from lapses
in controls that lead to improper payments.
In the survey, we asked the state program administrators to identify any
incentives they have received from the federal government to encourage
them to reduce improper payments. We also asked them to identify any
penalties they have received from the federal government for not doing so.
Thirty-two states reported incentives such as enhanced funding and reduced
reporting requirements for 5 of the 25 major programs. Most incentives
were related to the Food Stamp Program, largely because of a statutory
requirement that USDA assess penalties and provide financial incentives to
the states. As we previously reported on the Food Stamp Program,25 the
administration of the quality control process and its system of
performance bonuses and sanctions is a large motivator of program behavior
and has assisted in increasing payment accuracy. Examples of other
incentives identified by the state programs included reduced reporting
requirements for benefit recipients and additional funding received for a
fraud and abuse detection system.
Penalties such as decreased funding, increased reporting, and client
sanctions were reported by 17 states for four different programs. As with
incentives, most of the penalties identified related to the Food Stamp
Program. States can get approval from USDA to reinvest portions of their
penalties toward corrective actions to reduce the error rate as opposed to
USDA recovering the penalty from the state; thus the distinction between
incentives and penalties is somewhat blurred. Our survey results showed
that some states believed that being able to reinvest a portion of their
food stamp penalty toward corrective action plans to improve payment
accuracy was actually an incentive, while other states considered it a
penalty. For another program, one state noted in its survey response that
it was penalized by the federal government for not applying applicable
reductions to TANF beneficiaries for noncompliance with child support
enforcement regulations. In lieu of paying a penalty of over $1 million,
the state submitted a corrective action plan to address the problems.
Certain states perceive limitations in their ability to adequately address
improper payments. For example, 37 states reported in their survey
responses that federal legislative and program design barriers hinder
their ability to detect, prevent, and reduce improper payments for one or
more programs. Legislative barriers relate to an agency's ability to take
actions to reduce improper payments. Program design barriers relate to the
complexity and variety of programs.
From our review of survey responses, several state program officials,
representing multiple programs, reported that they encountered legislative
barriers related to due process. Specifically, states are not permitted to
stop or adjust payments until the due process hearing or appeals processes
are complete, even though they know the payment is improper. For example,
one state reported that it has a state superior court ruling that requires
paying UI benefits conditionally under certain circumstances, and that the
recovery of the paid benefits can only take place once the courts have
determined the payments were incorrect. Another state program response
said that lack of authority to mandate the submission of Social Security
numbers for those applying for benefits was a barrier that limited the
ability to identify and prevent improper payments. Additionally, 23 state
programs identified statutory restrictions over the use of certain data as
a barrier to improved accuracy. For example, three state programs noted
that because of security policies, they were restricted from accessing and
using information from the Internal Revenue Service.
Program design barriers have also contributed to states' inability to
reduce improper payments. Generally, states receive broad statutory and
regulatory program guidelines from the responsible federal agency. States
then issue state-specific guidelines to manage day-to-day operations,
which may vary among the states. A few survey respondents indicated that
inconsistent requirements between programs hindered their ability to
reduce improper payments. For example, four state programs noted that
efforts to manage improper payments are hindered because of the different
eligibility requirements among the federal programs that they administer.
The survey responses of the state programs also indicated that they
encountered resource barriers, such as lack of funding for additional
personnel or information technology. For example, one state program
responded that the lack of funding needed to identify eligible
beneficiaries through data matching was a barrier.
Federal Action Needed to Help States Report Improper Payment Information
Minimizing improper payments is often most efficiently and effectively
achieved through the exchange of relevant, reliable, and timely
information between individuals and units within an organization and with
external entities that have oversight and monitoring responsibilities. For
state-administered programs, assistance from the federal agencies and OMB
may be needed in order for the states and state programs to successfully
assist the federal agencies in implementing IPIA requirements. The types
of communication and information that may be necessary at both the state
and federal levels include (1) a determination of what information is
needed by managers to meet and support initiatives aimed at reducing
improper payments; (2) adequate means of communicating with, and obtaining
information from, external stakeholders that may have a significant impact
on improper payment initiatives, such as periodic meetings with oversight
bodies; and (3) working relationships with other organizations to share
information on improper payments.
Of the 227 state program surveys received, 100 identified one or more
areas where guidance or resources from the federal government would be
helpful. OMB can play an important role in encouraging and coordinating
efforts between the state programs and federal agencies. OMB, as part of
its responsibilities, develops and implements budget, program, management,
and regulatory policies. As such, OMB can set the tone at the top by
creating a general framework and setting expectations for federal agencies
in meeting the requirements of IPIA.
Selected States Want Federal Assistance
Additional resources and guidance would be needed for increased state
involvement. As noted above, 100 state program officials26 requested
various tools cited as needed in their efforts to estimate improper
payments and to help the federal agencies in meeting various IPIA
requirements, including guidance on estimating improper payments,
additional funding for staffing and various projects, sharing of best
practices and available guidance, and guidance on performing risk
assessments. State programs also indicated that they would want an
opportunity to comment on any proposed regulations prior to implementation
that would require state actions to estimate and report improper payment
information.
In our survey, we asked the state program officials what types of guidance
and resources from the federal agencies or OMB would be beneficial to
better estimate improper payments. State program officials identified one
or more types of guidance or resources that would be helpful to assist the
federal agencies in meeting the requirements of IPIA. We classified these
responses into the following areas:
o Guidance on estimating improper payments. Forty-four of the state
programs asked for general procedures, program-specific procedures, or
both for identifying and detecting improper payments, calculating error
rates, and establishing sampling methodologies. One state program
suggested that guidance related to training for detecting improper
payments and on how to design controls to facilitate improper payment
detection be made available.
o Additional funding. Forty-three of the state programs indicated a need
for additional funding to train and support the additional staff levels
they believe would be necessary to estimate improper payments. Additional
funding also was requested for automation projects. One state requested
enhanced funding to update its eligibility system to include fraud
detection. Another state requested additional funding for developing an
automated Quality Management System to capture data from all levels of
reviews and programs.
o Sharing of best practices and available guidance. Fifteen of the state
programs also expressed interest in the creation of groups to discuss
trends and best practices in improper payment-related areas, while other
states wanted general information on IPIA and the states' roles.
o Assessing risk/risk assessment instruments. Thirteen of the state
programs requested procedures for assessing risk of improper payments,
including items to take into consideration when assessing their programs
for risk susceptibility.
o Recognition of state input. Seven of the state programs want an
opportunity to comment on any proposed regulations prior to implementation
of any requirements to estimate or report improper payment information.
For example, one state responded in its survey that the state, in
coordination with its cognizant federal agency, should determine its own
plans to detect improper payments. Additionally, another state program
inquired as to the purpose of involving the states, particularly those
that have had little occurrence of audit findings, and another wanted
clarification on what sanctions would be assessed for those that
identified improper payments.
o Other guidance and resources. Forty-eight of the state programs
requested other types of guidance and resources relating to enhancing the
use of information technology, overcoming legislative barriers, and
establishing incentives and penalties for subrecipients, among others. For
example, one state program wanted the creation of a national database to
track the activity of medical providers that operate in multiple states.
Actions Initiated at the Federal Level to Involve States in Measuring
Improper Payments
OMB has continued to conduct its improper payments work through CFOC and
PCIE's Erroneous and Improper Payments Workgroup. The workgroup
periodically convenes to discuss and develop best practices and other
methods to reduce or eliminate, where possible, improper payments made by
federal government agencies. It has issued reports and other products to
CFOC/PCIE, reflecting workgroup deliberations and determinations. OMB
officials have told us that they have started to draft a plan on
developing and maintaining partnerships with states to facilitate state's
estimating and reporting information to the federal agencies. For federal
agencies' fiscal year 2005 PAR reporting, OMB included a new requirement
in Circular No. A-136, Financial Reporting Requirements, that federal
agencies were to report on their actions and results at the grantee level.
However, based on our review of selected federal agencies' fiscal year
2005 PARs, reporting of fund stewardship at the grantee level was limited.
The CFOC and PCIE Erroneous and Improper Payments Workgroup created the
Grants Subgroup in March 2004 to explore the feasibility of using various
tools to measure and report improper payments, including evaluating
currently available policies and guidance and modifying OMB single audit
guidance to fulfill IPIA reporting requirements. Specifically, the Grants
Subgroup's work focused on developing cost-effective approaches for
tracking improper payments at each stage of the payment cycle, including
(1) evaluating existing policies and guidance that could be used to
measure and report improper payments and (2) examining the possibilities
of measuring improper payments using the audits conducted under the Single
Audit Act of 1996, as amended; OMB's Circular No. A-133 Single Audit
Compliance Supplement; and the Federal Single Audit Clearinghouse.
In March 2005, the subgroup issued a report27 reflecting the results of
its work. Specifically, the subgroup identified issues with (1) the
current structure and design of grant programs' distribution of funding,
which hinders determining a national payment error rate; (2) little
incentive for states to assist federal agencies with IPIA reporting; (3)
lack of funding to perform IPIA compliance activities; and (4) awareness
and commitment from all levels of management within an agency to address
the causes of improper payments. Further, in an effort to foster working
relationships among federal agencies and the states, OMB has begun work to
clarify state and federal roles in estimating and reporting improper
payments information and planning the development of state partnerships
for certain state-administered programs.
Additionally, beginning with fiscal year 2005 PARs, OMB included three
reporting requirements for those agencies with grant-making programs: (1)
agency's accomplishments in the area of funds stewardship past the primary
recipient, (2) status of projects, and (3) results of any reviews. Our
preliminary review of these PARs showed that in general agencies either
did not report on their grant-making activities, did not clearly identify
grant programs, or did not address fund stewardship beyond the primary
recipient. However, we noted that some agencies provided partial
information on the three reporting requirements. For example, eight
agencies reported on the status of their projects, including one that
discussed linking grants management and financial data to produce better
information to ensure that projects funded by grants achieve program
objectives and grant recipients are technically competent to carry out the
work.
In November 2005, OMB issued draft revisions to its IPIA implementing
guidance. This implementing guidance, together with recovery auditing
guidance, is to be consolidated into future Parts I and II of Appendix C
to OMB Circular No. A-123, Management's Responsibility for Internal
Controls (Dec. 21, 2004). Among the proposed changes, OMB provides that
for state-administered programs, federal agencies may provide state-level
estimates either for all states or a sample of states to generate a
national improper payment rate for that program. Also, OMB proposes to
allow modifications to agency-specific compliance supplements28 to enhance
implementation of IPIA for federal grant-making agencies, such as the ones
discussed in this report. While OMB has taken steps to begin addressing
the complexities related to reporting improper payment information for
federally funded, state-administered programs, additional enhancements
could be made that address how federal agencies define state-administered
programs and the methodology to be employed for generating a national
estimate. Specifically, we found that the proposed changes do not clearly
define the term state-administered programs. Without a clear definition,
OMB is at risk of receiving inconsistent improper payment reports because
agencies could define programs differently. In addition, we noted that the
draft guidance did not provide basic criteria, such as the nature and
extent of data and documentation that agencies should consider when
developing a plan or methodology to calculate a national improper payment
error rate for these state-administered programs.
Conclusions
Federal agencies continue to make progress toward meeting the requirements
of IPIA, in response to the PMA and other key initiatives to eliminate
improper payments. However, measuring improper payments and designing and
implementing actions to reduce or eliminate them are not simple tasks,
particularly for grant programs that rely on quality administration
efforts at the state level. With budgetary pressures rising across the
federal government, agencies are under constant and increasing pressure to
do more with less. Preventing improper payments and identifying and
recouping those that occur become an even higher priority in this
environment. States have a fundamental responsibility to ensure the proper
administration of federal awards by using sound management practices and
maintaining internal controls to ensure distribution of federal funding to
subrecipients or beneficiaries in accordance with federal and state laws
and regulations. Given their involvement in determining eligibility and
distributing benefits, states are in a position to assist federal agencies
in reporting on IPIA requirements. In fact, the success of several
existing programs and pilots in estimating improper payment rates
indicates that such efforts could logically be expanded. Communication,
coordination, and cooperation among federal agencies and the states will
be critical factors in estimating national improper payment rates and
meeting IPIA reporting requirements for state-administered programs.
Recommendations for Executive Action
We are making four recommendations to help further the progress toward
meeting the goals of IPIA and determining states' role in assisting
federal agencies to report a national improper payment estimate on federal
programs. Specifically, we recommend that the Director, Office of
Management and Budget,
o revise IPIA policy guidance to clearly define state-administered
programs so that federal agencies can consistently identify all such
programs;
o expand IPIA guidance to provide criteria that federal agencies should
consider when developing a plan or methodology for estimating a national
improper payment estimate for state-administered programs, such as
criteria that address the nature and extent of data and documentation
needed from the states to calculate a national improper payment estimate;
o require federal agencies to communicate, and make available to the
states, guidance on conducting risk assessments and estimating improper
payments for federally funded, state-administered programs; and
o share ideas, concerns, and best practices with federal agencies and
states regarding improper payment reporting requirements for federally
funded, state-administered programs.
Agency Comments
We received written comments on a draft of this report from OMB and
reprinted them in appendix VII. OMB agreed with our recommendations and
highlighted several initiatives under way to ensure that accurate improper
payment rates can be generated without creating undue cost and burden on
federal agencies or state partners that manage federally funded programs.
OMB also provided technical comments that we incorporated, as appropriate.
We are sending copies of this report to the Director, Office of Management
and Budget; Secretaries of Agriculture, Health and Human Services, Labor,
and Transportation; appropriate congressional committees; and other
interested parties. We will also make copies available to others upon
request. In addition, the report is available at no charge on GAO's Web
site at http://www.gao.gov .
Please contact me at (202) 512-9095 or [email protected] if you have any
questions about this report. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last page
of this report. Major contributors to this report are listed in appendix
VIII.
Sincerely yours,
McCoy Williams Director, Financial Management and Assurance
Objectives, Scope, and Methodology Appendix I
The objectives of this report were to determine (1) what actions are being
taken by states to assist federal agencies in estimating improper
payments; (2) what techniques, related to detecting, preventing, or
reducing improper payments, have states employed to ensure proper
administration of federal awards; and (3) what assistance can be provided
by the Office of Management and Budget (OMB) that state program
administrators would find helpful in supporting the respective federal
agencies with the implementation of the Improper Payments Information Act
of 2002 (IPIA).
To address each of these objectives, we
o conducted a statewide survey in all 50 states and the District of
Columbia1 regarding actions to estimate improper payments for
state-administered federal programs for fiscal years 2003 and 2004,
o conducted a program-specific survey of the major programs in each of the
states,
o performed site visits to selected states,
o conducted interviews with federal and state officials, and
o reviewed federal agencies' fiscal year 2005 performance and
accountability reports (PAR) and prior GAO and office of inspector general
(OIG) reports.
More detailed information on each of these aspects of our research is
presented in the following sections. We conducted our work from April 2005
through December 2005 in accordance with generally accepted government
auditing standards.
The surveys were developed based on IPIA, the National Defense
Reauthorization Act for Fiscal Year 2002, and our executive guide on
managing improper payments,2 and included questions about
o state-issued policies or guidance on internal controls or on estimating
improper payments;
o statewide risk assessments for improper payments;
o state recovery auditing efforts;
o state program efforts to prevent, detect, and reduce improper payments;
o state program participation in improper payment pilots; and
o additional assistance needed by state programs to support efforts in
measuring and reporting improper payments.
The surveys were pretested with state officials in two states. Revisions
to the survey were made based on comments received during the pretests.
To determine the state programs that would receive the program-specific
survey, we designed a spreadsheet for each state containing its major
programs, which we defined as those programs for which federal funds
covered at least 60 percent of total state-administered expenditures. To
do this, we used the Federal Audit Clearinghouse single audit database to
identify a universe of federally funded, state-administered programs for
each state. We sorted the programs from largest to smallest expenditure
amount and identified the major programs in decreasing order until we
obtained, in aggregate, at least 60 percent of the total federal portion
of state-administered expenditures in each state. We provided this
spreadsheet to states so they could confirm it with their state records.
Table 3 lists the 25 major programs and the number of states in which each
major program was included. The number of states identified for each major
program ranged from 1 to 51.
Table 3: Number of States for Which Each of the 25 Programs Was Defined as
Major
Major program name Number
1 Medicaid 51
2 Highway Planning and Construction 44
3 Food Stamp Program 36
4 Temporary Assistance for Needy Families 28
5 Unemployment Insurance 26
6 Title I Grants to Local Educational Agencies 15
7 Special Education State Grants 10
8 National School Lunch Program 5
9 Child Care and Development Block Grant 4
10 Foster Care Title IV-E 3
11 Home Investment Partnerships Program 2
12 Capitalization Grants for Clean Water State Revolving Funds 2
13 Capitalization Grants for Drinking Water State Revolving Funds 2
14 Special Supplemental Nutrition Program for Women, Infants, and 1
Children
15 Emergency Preparedness Funding 1
16 Lower Income Housing Assistance Program Section 8 Moderate 1
Rehabilitation
17 Abandoned Mine Land Reclamation Program 1
18 Airport Improvement Program 1
19 Federal Transit Formula Grants 1
20 Appalachian Development Highway System 1
21 Technology Transfer 1
22 Surveys, Studies, Investigations, and Special Purpose Grants 1
23 Improving Teacher Quality State Grants 1
24 Child Support Enforcement 1
25 Child Care and Development Fund 1
Total programs 240
Source: GAO.
As shown in table 4, the number of major programs identified for each
state ranged from 1 to 12.
Table 4: Number of Major Programs in Each State
State Number of programs
1 Alabama 3
2 Alaska 8
3 Arizona 4
4 Arkansas 3
5 California 3
6 Colorado 10
7 Connecticut 3
8 Delaware 12
9 District of Columbia 4
10 Florida 4
11 Georgia 5
12 Hawaii 5
13 Idaho 3
14 Illinois 3
15 Indiana 3
16 Iowa 8
17 Kansas 7
18 Kentucky 4
19 Louisiana 3
20 Maine 3
21 Maryland 7
22 Massachusetts 7
23 Michigan 1
24 Minnesota 3
25 Mississippi 3
26 Missouri 3
27 Montana 6
28 Nebraska 3
29 Nevada 4
30 New Hampshire 5
31 New Jersey 3
32 New Mexico 5
33 New York 3
34 North Carolina 4
35 North Dakota 5
36 Ohio 6
37 Oklahoma 4
38 Oregon 4
39 Pennsylvania 3
40 Rhode Island 4
41 South Carolina 1
42 South Dakota 6
43 Tennessee 2
44 Texas 4
45 Utah 5
46 Vermont 3
47 Virginia 10
48 Washington 7
49 West Virginia 6
50 Wisconsin 7
51 Wyoming 8
Total programs 240
Source: GAO.
We e-mailed the surveys in June 2005 and followed up with subsequent
mailings and telephone communications. The collection of survey data ended
in October 2005 with a response rate of 98 percent for the statewide
surveys (50 of the 51 states) and a 95 percent response rate for the
program-specific surveys (227 of the 240 programs).
We conducted follow-up phone calls to clarify responses where there
appeared to be discrepancies; however, we did not independently verify the
responses or information obtained through the surveys.
Although no sampling errors were associated with our survey results, the
practical difficulties of conducting any survey may introduce certain
types of errors, commonly referred to as nonsampling errors. For example,
differences in how a particular question is interpreted or differences in
the sources of information that participants use to respond can introduce
unwanted variability into the survey results. We included steps in both
the data collection and data analysis stages to reduce such nonsampling
errors. Specifically, social science survey specialists designed draft
questionnaires, we pretested two versions of the questionnaire, and we
performed reviews to identify inconsistencies and other indications of
error prior to analysis of data. The data were keyed and verified after
data entry. We conducted our survey work from June 2005 through December
2005.
We visited two states and interviewed state agency officials and other
relevant parties about initiatives in place to estimate improper payments
for the Highway Planning and Construction, Medicaid, and Unemployment
Insurance (UI) programs. The two states were selected based on our
knowledge of actions under way for programs in Tennessee and Texas. We
went to Tennessee to obtain information about the Department of
Transportation's (DOT) implementation of a pilot project to estimate
improper payments related to the Highway Planning and Construction
Program. The pilot was the first that DOT's Federal Highway Administration
had conducted to estimate improper payments in a state and covered two
construction projects.
We went to Texas to obtain information about the Department of Health and
Human Services's (HHS) Medicaid program and the Department of Labor's
(Labor) UI Program. One reason for selecting Texas was that HHS's Center
for Medicare and Medicaid Services had identified Texas as having a
leadership role in estimating improper payments for its Medicaid program.
In addition, Texas was one of three states participating in a new pilot
project organized by Labor to begin data-matching work using the National
Directory of New Hires. More information about these states' efforts in
these three programs is provided in appendixes IV, V, and VI. Detailed
information regarding the Department of Agriculture's Food Stamp Program
and its efforts in estimating and reporting improper payments is presented
in appendix III. Improper payment estimates and references from agencies'
PARs are used for background purposes. We did not assess the reliability
of these data.
States and Programs Included in Our Review Appendix II
Source: GAO.
aNo survey received.
Food Stamp Quality Control System Appendix III
The Food Stamp Program is intended to help low-income individuals and
families obtain a more nutritious diet by supplementing their incomes with
benefits to purchase food. The Department of Agriculture's (USDA) Food and
Nutrition Service (FNS) administers the program in partnership with the
states. FNS pays the full cost of Food Stamp benefits and shares the
states' administrative costs and is responsible for promulgating program
regulations and ensuring that state officials administer the program in
compliance with program rules. States handle day-to-day operation and
management, including certifying eligibility of participants, delivering
the benefits, and monitoring recipients' compliance. The states usually
administer the program out of local assistance offices that determine
whether households meet the program's eligibility requirements, calculate
monthly benefits for qualified households, and issue benefits to
participants. The local assistance offices often administer other benefit
programs as well, including Temporary Assistance for Needy Families
(TANF), Medicaid, and child care assistance.
To measure the accuracy of Food Stamp payments, FNS and the states have an
extensive quality control (QC) system from which the Food Stamp Program
payment error rate is developed. The QC system, established in 1970,
reviews and measures the accuracy of household certifications using a
statistically valid methodology to calculate improper payment estimates
for the Food Stamp Program for all 50 states, Guam, the Virgin Islands,
and the District of Columbia. The system is mandated by the Food Stamp
Act, as amended, and further defined in program regulations and agency
guidance.1
The QC process uses a systematic random sampling of Food Stamp Program
participants. State agencies select cases monthly that are reviewed to
determine the accuracy of the eligibility and benefit-level determination.
The review includes a client interview, verification of all elements of
eligibility, and the basis of issuance of food stamp benefits. The states
report the findings of all QC reviews to FNS. FNS reviewers validate a
sample of the states' reviews by conducting a second review. The results
of the federal validation and state findings are used to calculate a final
error rate for each state agency.
As reported in USDA's fiscal year 2005 PAR, the causes of improper
payments in the Food Stamp Program include client errors, such as
incomplete or inaccurate reporting of income, assets, or both by
participants at the time of certification or by not reporting subsequent
changes. Causes can also be provider based, such as errors in determining
eligibility or benefits by caseworkers or eligibility worker delays in
action or inaction on client-reported changes. In its fiscal year 2005
PAR, USDA reported a national error rate of 5.88 percent, or $1.4 billion,
for the Food Stamp Program. The estimate is based on fiscal year 2004
data, the most current data available for this measure.
Statistically valid state error rates are weighted annually to determine a
national average error rate for the Food Stamp Program. Once the error
rates are finalized, FNS compares each state's performance with the
national error rate and imposes penalties or provides incentives according
to specifications in the law.
OMB's implementing guidance requires that agencies report overpayments and
underpayments in their programs if the figures are available. USDA reports
these amounts in its PAR for the Food Stamp Program. Table 5 provides the
overpayment and underpayment amount for each state. In fiscal year 2003,
overpayments ranged from $454,636 to $103,236,074 while underpayments
ranged from $126,288 to $40,679,714. In fiscal year 2004, overpayments
ranged from $756,935 to $94,118,074 and underpayments ranged from $151,016
to $46,714,340.
Table 5: Food Stamp Improper Payment Amounts by State for Fiscal Years
2003 and 2004
State FY 2003 FY 2003 FY 2004 FY 2004
overpayment underpayment overpayment underpayment
amount amount amount amount
Alabama $32,022,705 $5,313,811 $36,036,075 $5,023,521
Alaska 7,124,955 1,998,142 3,207,363 1,275,217
Arizona 23,438,760 5,623,312 29,586,835 8,205,724
Arkansas 10,712,762 1,521,699 14,118,057 4,370,701
California 103,236,074 40,679,714 94,118,074 31,836,981
Colorado 12,361,379 2,683,720 5,893,540 1,517,650
Connecticut 11,572,762 2,884,948 7,150,599 2,607,401
Delaware 1,945,107 626,066 2,425,654 1,102,570
District of 6,380,065 1,703,153 4,631,618 877,570
Columbia
Florida 54,335,945 24,006,609 66,471,972 11,670,652
Georgia 31,296,436 9,075,967 48,592,664 8,776,242
Hawaii 5,388,605 2,077,346 5,237,425 1,366,285
Idaho 6,049,789 2,611,365 5,576,573 2,656,377
Illinois 43,162,302 8,106,091 56,449,466 11,507,938
Indiana 38,405,811 9,964,228 23,903,276 8,132,609
Iowa 6,163,775 1,641,683 8,781,450 2,116,012
Kansas 11,287,114 3,383,327 6,573,509 1,501,162
Kentucky 24,797,796 5,932,022 25,346,127 5,210,339
Louisiana 30,220,286 9,456,688 27,819,108 8,519,131
Maine 12,605,513 3,883,391 12,467,964 2,848,225
Maryland 13,154,521 5,421,102 12,614,597 4,099,744
Massachusetts 9,059,608 3,603,542 9,071,744 5,418,693
Michigan 64,603,806 22,317,679 43,193,936 21,238,512
Minnesota 13,604,820 4,497,086 12,399,691 4,880,200
Mississippi 10,286,766 3,350,738 15,557,052 5,703,049
Missouri 30,479,379 7,832,690 42,591,976 6,634,264
Montana 3,392,350 592,972 2,843,188 799,894
Nebraska 5,063,401 1,402,035 4,608,506 1,478,200
Nevada 7,278,706 2,016,855 7,362,460 1,625,478
New Hampshire 2,500,909 498,586 2,517,133 574,847
New Jersey 6,200,425 2,032,926 7,663,778 3,737,507
New Mexico 8,918,362 2,385,570 9,479,693 2,674,317
New York 61,527,878 37,050,848 60,972,532 46,714,340
North Carolina 25,429,487 6,454,185 16,269,128 7,607,324
North Dakota 1,394,697 381,706 1,079,676 588,182
Ohio 44,728,801 13,357,127 70,446,518 14,735,232
Oklahoma 28,380,204 4,168,229 19,769,506 3,699,324
Oregon 40,765,571 8,762,693 25,082,127 7,599,386
Pennsylvania 49,012,613 15,473,533 26,691,625 10,639,319
Rhode Island 4,843,564 1,307,212 7,686,034 2,096,191
South Carolina 18,709,605 3,147,825 27,716,610 3,658,793
South Dakota 454,636 126,288 911,490 151,016
Tennessee 44,246,038 7,723,207 40,427,562 13,881,753
Texas 41,942,991 19,937,027 65,743,403 29,296,183
Utah 3,474,989 1,635,289 3,361,379 1,268,213
Vermont 2,630,295 575,730 1,631,109 424,810
Virginia 15,124,786 4,870,694 24,760,618 6,618,704
Washington 19,798,026 4,969,226 26,770,075 7,921,757
West Virginia 10,371,097 3,068,116 12,721,487 2,548,932
Wisconsin 15,828,776 5,929,954 13,040,841 4,876,844
Wyoming 728,845 288,651 756,935 414,691
Total $1,076,443,893 $338,352,603 $1,100,129,758 $344,728,006
Source: USDA FNS.
Since fiscal year 1999, the combined Food Stamp error rate has continued
to decline. Figure 2 displays the error rates for the 6-year period from
fiscal years 1999 to 2004.
Figure 2: Food Stamp National Payment Error Rate, Fiscal Years 1999-2004
Actions taken by both the states and FNS contributed to the declining
error rates. For example, the state of Arizona has completed a statewide
implementation of a fingerprint imaging system. The state is using the
system as a means of positive identification of welfare applicants and
clients to ensure that participants do not use false identities to receive
benefits to which they are not entitled; the system is also used in the
eligibility determination process. The state reported that cost avoidance
savings resulted from welfare fraud reduction achieved through the
identification and prevention of duplicate enrollments in the Food Stamp
and TANF programs.
Recent initiatives reported in USDA's fiscal year 2005 PAR include FNS's
nationwide implementation of an electronic benefit transfer (EBT) system
for the delivery of food stamp benefits. EBT recipients use a plastic
card, much like debit cards, to pay for their food at authorized retail
stores. Funds are transferred from a Food Stamp benefits account to a
retailer's account. With EBT cards, food stamp customers pay for groceries
without any paper coupons changing hands. By eliminating paper coupons,
EBT creates an electronic record for each transaction that precludes
certain types of fraudulent claims and makes other attempted frauds easier
to detect.
Other FNS efforts include Partner Web, a Web-based system to facilitate
communication and information exchange between USDA and its nutrition
assistance program partners. Another initiative, the National Payment
Accuracy Workgroup, consists of representatives from USDA headquarters and
regional offices who meet to discuss best practice methods and strategies.
The practices the states are promoting include
o preparing reports detailing causes and sources of errors for the local
offices and publishing and distributing monthly error rates for all local
offices;
o transmitting the results of statewide error review panels on the source
and causes of errors to local offices, along with suggested corrective
actions;
o sponsoring statewide QC meetings and state best practices conferences
for local offices to discuss error rate actions taken and common problems;
and
o sponsoring local office participation in FNS regional conferences.
Table 6 summarizes these and other factors contributing to the declining
error rate.
Table 6: Summary of Factors Contributing to Declining Food Stamp Improper
Payment Error Rates and Amounts
Factor Description
USDA FNS - general
actions
FNS monitors and FNS approves sampling plans and state samples to
validates states' QC determine improper payment rates and amounts.
reviews
FNS is responsible for FNS establishes an opinion on efficiency and
determining efficiency effectiveness of the state based on (1) reports
and effectiveness of submitted to FNS by the state; (2) FNS reviews of
state agency state agency operations; (3) state performance
reporting systems and corrective action efforts;
and (4) other available information, such as
federal audits and investigations, civil rights
reviews, administrative cost data, complaints, and
pending litigation.
FNS imposes penalties FNS compares state error rates to the national
and incentives on state error rate to determine incentives and penalties
Food Stamp programs for state Food Stamp programs.
FNS promotes knowledge FNS provides funding to state and local food stamp
sharing of good officials to promote knowledge sharing. States are
practices using information from the QC system to track the
results of their policy and program changes over
time and communicate timely operational
information to local offices.
USDA FNS - specific
actions
USDA Partner Web FNS has established an intranet Web site for state
Food Stamp agencies.
National Payment The workgroup is an information-sharing tool
Accuracy Workgroup across regions and states that consists of
representatives from USDA headquarters and
regional offices.
Payment Accuracy Branch This national level group works with the FNS
regions to suggest policy and program changes and
to monitor state performance.
USDA Early Detection This system targets states that may be
System experiencing a higher incidence of errors based on
preliminary QC data.
Technological
EBT EBT electronically transfers funds from a food
stamp benefits account to a retailer's account.
GovBenefits GovBenefits is a citizen-centered guide to
government assistance and benefits, including food
stamps; school lunch and breakfast; Women,
Infants, and Children; and nutrition assistance.
It includes a new prescreening tool that enables
anyone with access to the Internet to determine
his or her eligibility for food stamps.
Data matches Income Eligibility and Verification System. This
is a tool for state agencies to use in comparing
income reported by program applicants and
recipients with income reported on six databases
containing information on earnings reported to the
state by in-state employers; earned and unearned
income reported to the Internal Revenue Service;
and the receipt of Social Security, unemployment
insurance, and supplementary security income
benefits.
Systematic Alien Verification Eligibility system
matches. This program enables federal, state, and
local government agencies to obtain immigration
status information for determining
applicant's/recipient's eligibility for public
benefits.
Fingerprint imaging This is an automated fingerprint imaging system
system used by certain states as a means of positive
identification of welfare applicants and clients.
Legislation and
oversight
Farm Security and Rural The act has allowed states to adopt simplified
Investment Act of 2002 reporting requirements, which require food stamp
households to report interim changes in their
income only when they rise to a level that would
make them ineligible for benefits.
Congress Congress passed IPIA and has held congressional
hearings.
OMB OMB issued guidance to federal agencies for IPIA
reporting.
External auditors GAO and USDA OIG audited and reviewed the Food
Stamp Program.
GAO has issued reports on governmentwide improper
payment reporting.
Source: GAO.
UI Benefit Accuracy Measurement and National Directory of New Hires
Database Appendix IV
The UI Program was established by Title III of the Social Security Act in
1935 and is a key component in ensuring the financial security of
America's workforce. The program, which is administered by the states with
oversight from Labor's Employment and Training Administration, provides
temporary cash benefits to workers who lose their jobs through no fault of
their own. Although Labor provides oversight and guidance to ensure that
each state operates its program consistent with federal guidelines, the
federal-state structure of UI places primary responsibility for
administering the program on the states. The states can administer their
UI programs in ways that best suit their needs within the guidelines
established by federal law. Eligibility for UI, benefit amounts, and the
length of time benefits are available are determined by the state law
under which UI claims are established. In the majority of states, benefit
funding is based solely on a tax imposed on employers.
Labor has two initiatives in place to identify, estimate, and prevent
improper payments-the Benefit Accuracy Measurement (BAM) program and the
National Directory of New Hires (NDNH). Labor's BAM program is designed to
determine the accuracy of paid and denied claims in the UI Program. It
does this by reconstructing the UI claims process from samples of weekly
payments and denied claims using data verified by trained investigators.
For claims that were overpaid, underpaid, or improperly denied, the BAM
program determines the cause of and the party responsible for the error,
the point in the UI claims process at which the error was detected, and
actions taken by the agency and employers prior to the error. For
erroneously paid claims, the BAM program determines the amount of benefits
the claimants should have received, which becomes the basis for subsequent
recovery efforts.
The NDNH is a database, maintained by HHS's Office of Child Support
Enforcement (OCSE), that contains information on all newly hired
employees, quarterly wage reports for all employees, and UI claims
nationwide. The NDNH enhances states' ability to detect unreported work
violations by UI claimants working in other states or for certain
employers that operate in multiple states.1 In addition, the NDNH can help
improve the accuracy of Labor's error estimates. Output files from the
NDNH cross-match can be easily integrated into Labor's BAM program by
cross-matching the Social Security numbers of the claimants against the
NDNH results.
Since 1988, Labor has reported a national improper payment estimate for
its UI Program. As part of the BAM program's quality control, each state
is responsible for selecting representative samples and investigating the
accuracy of the benefit determinations, benefit payments, and recoveries.
The results of these reviews are integrated with the BAM system to
identify erroneously paid claims.
UI overpayments at a national level have fluctuated over the past 16
years. The lowest reported national error rate occurred in 1991 at 7.5
percent while the highest national error rate occurred in 1988 with 10.1
percent, as shown in figure 3.
Figure 3: UI Overpayment National Error Rates, Calendar Years 1988-2004
We also noted that since 2001, UI's national error rate has steadily
increased. Labor attributes the rise in error rates to an increase in
payments to claimants who improperly continue to claim benefits despite
having returned to work. Although when combined, the dollar amounts of
overpayments and underpayments decreased between calendar years 2003 and
2004, the national error rate increased from 9.9 percent in calendar year
2003 to 10.6 percent in calendar year 2004.
At the state level, the improper payment overpayments in calendar year
2003 ranged from $2,829,017 to $450,073,624, while underpayments ranged
from $100,263 to $37,825,338. In calendar year 2004, overpayments ranged
from $2,250,919 to $317,991,985 and underpayments ranged from $20,184 to
$40,330,046. Table 7 lists the UI improper payment overpayments and
underpayments by state.
Table 7: UI Overpayments and Underpayments by State for Calendar Years
2003 and 2004
State CY 2003 CY 2003 CY 2004 CY 2004
overpayment underpayment overpayment underpayment
amount amount amount amount
Alabama $35,105,972 $584,587 $32,171,531 $554,682
Alaska 11,162,449 1,596,636 17,821,095 946,371
Arizona 72,804,546 431,189 86,486,204 395,947
Arkansas 29,215,897 949,596 36,479,866 1,261,552
California 414,858,548 37,825,338 317,991,985 16,002,843
Colorado 41,184,047 2,164,869 39,215,471 2,695,087
Connecticut 30,687,056 2,247,107 27,402,585 6,134,051
Delaware 15,302,193 1,561,448 14,709,043 1,312,533
District of 11,165,946 910,817 8,798,087 731,650
Columbia
Florida 57,582,448 4,465,578 39,949,285 3,886,117
Georgia 39,528,066 3,311,252 25,628,425 4,440,834
Hawaii 7,389,037 484,995 4,588,132 377,273
Idaho 32,543,779 1,635,577 26,574,852 854,074
Illinois 198,225,860 21,203,264 258,873,508 7,863,974
Indiana 81,364,624 3,517,644 72,745,986 1,504,146
Iowa 49,946,856 4,540,623 35,151,973 4,695,390
Kansas 105,514,650 453,015 95,028,141 115,817
Kentucky 12,066,382 2,912,575 19,653,481 2,591,230
Louisiana 43,613,878 3,371,922 53,374,181 2,799,155
Maine 10,618,736 489,105 8,639,827 197,681
Maryland 69,819,363 1,637,991 40,050,308 418,379
Massachusetts 59,951,206 22,975,313 81,028,654 25,012,542
Michigan 171,063,097 11,938,973 169,804,248 13,363,398
Minnesota 74,342,318 5,950,738 61,201,839 6,762,257
Mississippi 14,667,566 737,159 11,691,476 777,317
Missouri 37,829,265 455,774 42,021,818 1,322,721
Montana 19,084,853 357,651 10,666,139 554,886
Nebraska 28,983,959 442,606 16,286,657 559,465
Nevada 27,517,223 647,102 24,515,908 596,053
New Hampshire 8,914,628 723,087 5,895,778 595,850
New Jersey 237,090,931 27,525,068 222,110,349 40,330,046
New Mexico 3,734,779 100,263 15,847,493 956,518
New York 234,778,623 18,566,677 228,731,314 10,745,766
North Carolina 120,614,563 2,535,441 61,128,148 3,182,783
North Dakota 3,787,405 120,433 2,830,433 84,326
Ohio 155,256,162 17,731,594 251,668,448 22,282,432
Oklahoma 5,296,937 1,000,533 6,485,106 495,540
Oregon 76,283,709 2,087,765 71,048,437 3,265,205
Pennsylvania 211,443,998 24,573,951 177,952,460 12,198,354
Rhode Island 11,154,488 870,796 13,413,248 1,161,938
South Carolina 34,591,337 910,298 35,610,338 803,766
South Dakota 2,963,279 147,069 2,413,427 20,184
Tennessee 46,661,937 1,903,459 20,595,851 1,455,381
Texas 450,073,624 3,038,105 271,753,213 9,491,381
Utah 18,988,138 1,804,303 11,817,023 1,366,489
Vermont 2,829,017 887,148 2,250,919 388,363
Virginia 127,967,956 2,610,323 107,088,844 2,392,156
Washington 167,103,334 3,326,944 118,052,534 2,052,148
West Virginia 3,630,150 1,264,231 6,652,142 1,222,713
Wisconsin 64,602,987 2,345,646 86,624,141 3,788,730
Wyoming 5,360,715 151,887 5,662,231 360,752
Total $3,796,268,517 $254,025,465 $3,404,182,582 $227,368,246
Source: Labor.
In addition to its leadership role in producing improper payment estimates
on a national level, Labor has initiated the NDNH pilot for the UI Program
to further assist in identifying, detecting, and preventing improper
payments. In fiscal year 2005, three states (Texas, Utah, and Virginia)
participated in the pilot. Labor initiated the NDNH pilot to determine how
a cross-match between NDNH and state UI claimant data would help identify
and reduce improper payments. For further review of Labor's pilot project,
we visited the state of Texas.
Texas's participation in the NDNH pilot was through its Texas Workforce
Commission (TWC). During this pilot, TWC conducted three matches of the
state UI claimant data against the NDNH's new hire data, UI claimant data,
and quarterly wage data to identify potential overpayments. Generally, to
perform these matches, TWC electronically transmitted state UI claimant
data to HHS's OCSE. OCSE then compared the state UI claimant data to data
in the NDNH. Potential matches of claimants who may have improperly
received unemployment benefits were then transmitted to TWC. TWC
investigated all matches to determine the validity and amount of
overpayment. According to TWC, using the national cross-match along with
the statewide cross-match helped detect 50 percent more cases of potential
fraud in one quarter than it would have detected otherwise.
Besides the NDNH pilot, Texas also communicated to us that it had several
other actions in place to manage UI improper payments. In July 2004, the
Texas governor issued an executive order2 for each state agency to report
on efforts to assess risk in the agency; identify best practices for
eliminating fraud in contracting, contract management, and procurement;
and describe common components for fraud prevention and elimination
programs. Each agency was also to develop a fraud prevention program.
Additionally, the executive order required TWC to prioritize prevention,
detection, and elimination of fraud and abuse in the UI Program by
o identifying any state policies, weaknesses in computer cross-matching
systems, and other appropriate factors that are ineffective in preventing
fraud and abuse;
o developing strategies to address benefit fraud and claims overpayments;
and
o identifying and implementing national best practices for detecting and
prosecuting fraudulent schemes, identifying cost-effective strategies
designed to eliminate fraud, and increasing recovery of overpayments.
Further, TWC has been educating employers on their responsibilities to
provide TWC with information to make benefit determinations. For example,
TWC sent letters to those employers that have a history of not providing
complete or timely information during the initial claims investigation.
These letters reiterated employers' responsibilities and TWC's
expectations for receiving timely information during an investigation.
Based on its NDNH pilot results, Labor reported in its fiscal year 2005
PAR that a substantial amount of additional overpayments could be detected
using the database. In addition, Labor reported that it is already moving
ahead with full implementation of the NDNH cross-match with 5 states
(Connecticut, Texas, Utah, Virginia, and Washington). Labor expects 29
states to use NDNH by the end of fiscal year 2006.
In addition to funding initiatives related to the new hire cross-matches,
Labor has announced that states will be given an additional incentive to
prevent and detect overpayments by implementing core measures in states'
performance budget plans based on the level of overpayments the states
have detected. Labor's fiscal year 2006 budget request contained a
legislative proposal that is designed to give states the means to obtain
funding for integrity activities, including additional staff, to enhance
recovery and prevent overpayments. Also, to reduce overpayments and
facilitate reemployment, Labor awarded Reemployment and Eligibility
Assessments grants to 21 states during fiscal year 2005. The grants have
been used to conduct in-person claimant interviews to assess UI
beneficiaries' need for reemployment services and their continued
eligibility for benefits and to ensure that beneficiaries understand that
they must stop claiming benefits upon their return to work. Further, Labor
continues to promote data sharing with other agencies, such as the Social
Security Administration, to identify, detect, and prevent improper
payments.
Highway Planning and Construction Pilot to Estimate Improper
Payments Appendix V
The objective of the Highway Planning and Construction Program is to
assist state transportation agencies in the planning and development of an
integrated, interconnected transportation system. The program is also
called the Federal-Aid Highway Program since federal funding for highways
is provided to the states mostly through a series of formula grant
programs collectively known by that name. The Federal Highway
Administration under DOT administers the Highway Planning and Construction
Program and distributes most highway funds, which can be used for a
variety of projects, such as capital improvement and development of
transportation management systems. Most projects are administered by or
through state transportation departments, and the states have considerable
discretion in selecting specific highway projects and in determining how
to allocate available federal funds among the various projects they have
selected.
In fiscal year 2004, DOT conducted a review of its programs and
activities, as required by IPIA. As a result of this review, DOT found
that data did not exist at the department level to adequately estimate the
amount of improper payments for its grant programs. To address this issue,
DOT contracted with an outside firm and initiated a research and
development project to develop a methodology to estimate improper payments
in its grant programs. The Highway Planning and Construction Program was
selected as the test pilot program. The pilot project had two objectives:
(1) develop a testing methodology for grantees and (2) test the developed
methodology.
The pilot was conducted on two construction projects in Tennessee. Samples
were selected from payment transaction files using statistical sampling.
For items selected, documentation that supported payment was requested and
reviewed. The contractor developed a comprehensive document that described
the planning and construction phases of projects and a methodology to
determine whether the goods and services received were in accordance with
contractual terms and conditions. Figure 4 is an example of the testing
procedures for asphalt, one component of the construction project.
Figure 4: Example of Test Procedures for Asphalt
In its fiscal years 2004 and 2005 PARs, DOT reported a zero-dollar amount
for its improper payment estimate for the Highway Planning and
Construction Program. To enhance its reporting of improper payments, DOT
conducted a pilot in the state of Tennessee. DOT completed this project in
the summer of 2005. Testing disclosed three underpayments, one of which
was determined by DOT to be statistically insignificant. An extrapolation
of the other two errors to the population of payments for that
construction project resulted in an improper payment estimate of $111,671.
The sample was not designed to produce an estimate for the Tennessee
statewide Highway Planning and Construction Program.
DOT noted in its fiscal year 2005 PAR that the Tennessee pilot resulted in
a methodology and testing procedures that will be used nationwide, but
that the testing procedures may need to be modified based on each state's
grant management policies. DOT plans to pilot the project in more
volunteer states in fiscal year 2006 and extend the process nationwide in
fiscal year 2007. In addition to participating in the pilot, states work
to reduce improper payments by implementing computer software to detect
fraud and abuse. One such tool is the Transportation Software Management
Solution, which was used by several state programs in their Highway
Planning and Construction programs and contains a Bid Analysis Management
System that allows highway agencies to analyze bids for collusion. At the
federal level, DOT improper payment initiatives for the future include
citing the inherent higher risk of improper payments because of
concentrated and accelerated spending related to Hurricanes Katrina and
Rita. Fiscal year 2006 Highway Planning and Construction Program testing
will be focused on these hurricane regions. In its fiscal year 2006 PAR,
DOT will provide interim information on the amounts and causes of improper
payments and control procedures that can be used to prevent or detect
improper payments in national emergency situations.
Medicaid Payment Accuracy and Payment Error Rate Measurement
Project Appendix VI
Title XIX of the Social Security Act authorizes states to provide health
care services to low-income individuals and families through the Medicaid
program. Although jointly financed by the states and the federal
government, Medicaid is administered directly by the states. Within broad
federal guidelines, each state establishes its own eligibility standards;
determines the type, amount, duration, and scope of covered services; and
sets payment rates.
The Centers for Medicare and Medicaid Services (CMS), an agency under HHS,
has the role of facilitating states' program integrity efforts and seeing
that states have the necessary processes in place to prevent and detect
improper payments. In July 2001, CMS began soliciting states to
participate in Year 1 of the Medicaid Payment Accuracy Measurement (PAM)
pilot project. CMS continued to administer the PAM pilot until its Year 3
study in fiscal year 2004. For fiscal year 2005, CMS modified the pilot to
measure improper payment error rates rather than payment accuracy, and
changed the name of the pilot from PAM to Payment Error Rate Measurement
(PERM). Table 8 shows the number of states that participated in the pilot
each year.
Table 8: Number of States Participating in CMS's Medicaid Pilots to
Estimate Improper Payments
Pilot name Number of states participating
PAM Year 1 (FY 2002) 9
PAM Year 2 (FY 2003) 12
PAM Year 3 (FY 2004) 24
PERM Year 1 (FY 2005) 26
Source: CMS.
In Year 2 of the pilot, CMS adopted a standard methodology for the states
to use. Specifically, sampling strata consisting of Medicaid services were
identified and states could perform sampling for the fee-for-service
(FFS)1
component, the managed care2 component, or both. The methodology was
refined for Year 3 to include a subsample for eligibility review. For the
fiscal year 2005 PERM pilot, CMS set the sample size and provided states
the following general methodology:
1.Plan the project, including assembling and training staff and collecting
policies and procedures for reviews.
2.Select a sample of payments and validate the sample. For FFS, the sample
is a claim or line item, which is a request for payment for services
rendered relating to the care and treatment of a disease or injury. For
managed care, the sample is a capitation payment, which is a payment based
on a predetermined agreement rather than on actual cost of care, services
delivered, or both.3
3.Conduct a processing review on each claim.
4.Conduct a medical record review on each FFS claim.
5.Conduct an eligibility review on a subsample of claims.
6.Calculate the overall error rate as well as error rates for the FFS and
managed care components.
7.Develop a final report.
Because of the variations in the states' Medicaid programs, CMS provided
states the option of either testing for the FFS or managed care
components, including testing eligibility for the two components. The
rates4 for the 12 states that participated in the PAM pilot for Year 2
(fiscal year 2003) ranged from 0.3 percent to 18.6 percent for the FFS
component and 0 percent to 2.5 percent for the managed care component. The
rates for the 24 states that participated in the Year 3 PAM pilot (fiscal
year 2004) ranged from 0.80 percent to 54.3 percent for the FFS component
and 0 percent to 7.45 percent for the managed care component. Rates for
the Year 1 PERM pilot (fiscal year 2005) had not been published at the
conclusion of our fieldwork.
Although all states used a standard methodology to produce the rates, CMS
noted that these rates should not be compared among states. Specifically,
states applied different administrative standards that resulted in a lack
of a common approach to the reviews among states. For medical reviews,
states have different policies against which the reviews are conducted.
For eligibility reviews, states had two review options under the PAM Year
3 pilot for verifying program eligibility. Other differences include the
level of provider cooperation in submitting information and whether states
conducted reviews in-house or contracted with vendors to perform the
reviews.
CMS identified Texas as having a leadership role in estimating improper
payments for its Medicaid program. Texas was estimating improper payments
prior to implementing the CMS pilots. Under state statute, effective 1997,
Texas was required to biennially estimate improper payments for its
Medicaid program. In September 2003, the state of Texas passed another
statute, among other things, to fund 200 additional positions to
investigate Medicaid fraud. Texas has also initiated a Medicaid Integrity
Pilot (MIP) project to assist in preventing improper payments. The MIP
project incorporates the use of biometric technology, such as fingerprint
imaging and smart cards,5 as eligibility verification tools. For example,
Texas issues smart cards to Medicaid clients participating in the pilot
and smart card and biometric readers to medical providers. When a client
obtains services, he or she inserts the card into the smart card reader
and positions his or her finger on the biometric reader, which compares
the print to the fingerprint image contained on the card. The use of this
type of technology promotes positive identification, incorporates
automated eligibility determination, and assists in an electronic billing
process.
Furthermore, Texas has performed a feasibility study to consolidate
multiple program benefits onto a single card called an Integrated Benefits
Card (IBC). This study has identified four primary benefit programs for
consolidation-Medicaid; TANF; Food Stamps; and Women, Infants, and
Children. Texas believes that the IBC may facilitate the needs of the
Medicaid program by preventing fraud, making payments to medical providers
more quickly, and offering a means for providers to quickly and accurately
verify the eligibility of a client.
In addition to the above initiatives, CMS has taken additional steps
programwide to estimate improper payments at the national level. See table
9 for a detailed description of actions taken.
Table 9: Timeline of CMS Regulations and Initiatives to Estimate Medicaid
Improper Payments
Date Medicaid improper payment regulation/initiative
Fiscal year 2000 Established payment accuracy Government Performance
Results Act goals
July 2001 CMS formally solicited states to participate in the PAM
Year 1 pilot
May 2002 CMS solicited states to participate in the PAM Year 2
pilot
November 2002 Enactment of IPIA
December 2002 Issued PAM Year 1 pilot final report (FY 2002)
June 2003 CMS solicited states to participate in the PAM Year 3
pilot
April 2004 Issued PAM Year 2 pilot final report (FY 2003)
July 2004 CMS solicited states to participate in the PERM Year
1pilot
August 27, 2004 Medicaid Program and SCHIP: Payment Error Rate
Measurement, 69 Fed. Reg. 52620-32 (Aug. 27, 2004) (to
be codified at 42 C.F.R. pts. 431 and 457)
December 13, 2004 Results of the Year 2 PAM pilot (FY 2003) reported in
the FY 2004 PAR
June 15, 2005 Issued PAM Year 3 pilot final report (FY 2004)
July 22, 2005 Agency Information Collection Activities: Proposed
Collection; Comment Request, 70 Fed. Reg.
42324-CMS-10166
August 26, 2005 Agency Information Collection Activities: Submission for
OMB Review; Comment Request, 70 Fed. Reg.
50357-CMS-10166
October 5, 2005 Medicaid Program and SCHIP: Payment Error Rate
Measurement, 70 Fed. Reg. 58260-77 (Oct. 5, 2005) (to be
codified at 42 C.F.R. pts. 431 and 457)
November 15, 2005 Results from Year 3 PAM pilot (FY 2004) were reported in
the FY 2005 PAR
Fiscal year 2006 Results of the PERM pilot will be reported in the FY
2006 PAR
Fiscal year 2007 Results of the FY 2006 national Medicaid FFS error rate
will be reported in the FY 2007 PAR, based on a
statistically valid sample of states and claims within
those states
Fiscal year 2008 Results of the FY 2007 federal contractor estimate of a
national error rate for Medicaid's FFS, managed care,
and eligibility components will be reported in the FY
2008 PAR
Sources: GAO and CMS.
Note: Shading represents future actions.
In October 2005, CMS published an interim final rule, with plans to
publish a final rule that would include responses to comments received.
According to the interim final rule, states would be stratified based on
the states' annual FFS Medicaid expenditures from the previous year, and a
random sample of up to 18 states would be reviewed. States would only be
selected once every 3 years. The interim final rule also outlines the
strategy for conducting medical and data-processing reviews on claims made
for FFS only. CMS will address estimating improper payments for Medicaid's
managed care and eligibility components at a later time. In November 2005,
CMS sent a memo to the states selected for review during fiscal year 2006.
Subsequent to the publication of the October 2005 interim final rule, CMS
stated that it anticipates the number of states selected each year will be
17 to ensure that each state and the District of Columbia would only be
selected once every 3 years. This approach would exclude any U.S.
territories or possessions that receive Medicaid funds. In a discussion
with CMS's consultant firm, it communicated to us that the sampling
approach to be employed was statistically valid since every state was
selected by strata, for each of the 3 years, in year 1 of this process,
and thus, each state had an equal chance of being selected for years 1
through 3. Because CMS's sampling methodology, including sampling plans,
had not been fully documented by the conclusion of our fieldwork, we were
unable to independently assess the statistical validity of CMS's approach
to obtain a national improper payment estimate for its Medicaid program.
In its fiscal year 2005 PAR, HHS also identified efforts to detect and
reduce improper payments through activities other than the pilot project.
For example, HHS's Health Care Fraud and Abuse Control Office has two
projects under way that will assist in reporting improper payments. The
office plans to hire 100 staff to conduct prospective reviews of state
Medicaid operations and the Medicare/Medicaid data match program6 to
identify areas where efficiencies could be made to enhance payment
accuracy. Additionally, HHS expects to improve its data match capabilities
to detect improper payments for Medicaid, as well as other programs,
through the use of its Public Assistance Reporting Information System
(PARIS). PARIS is a voluntary project that enables the 33 participating
states' public assistance data to be matched against several databases to
help maintain program integrity and to detect and deter improper payments.
CMS expects to be fully compliant with the IPIA requirements for its
Medicaid program by fiscal year 2008.
Comments from the Office of Management and Budget Appendix VII
GAO Contact and Staff Acknowledgments Appendix VIII
McCoy Williams, (202) 512-9095 or [email protected]
In addition to the contact named above, Carla Lewis, Assistant Director;
Verginie Amirkhanian; Francine DelVecchio; Louis Fernheimer; Danielle
Free; Wilfred Holloway; Stuart Kaufman; Donell Ries; and Bill Valsa made
important contributions to this report.
Related GAO Products
Financial Management: Challenges Continue in Meeting Requirements of the
Improper Payments Information Act. GAO-06-581T . Washington, D.C.: April
5, 2006.
Financial Management: Challenges Remain in Meeting Requirements of the
Improper Payments Information Act. GAO-06-482T . Washington, D.C: March 9,
2006.
Financial Management: Challenges in Meeting Governmentwide Improper
Payment Requirements. GAO-05-907T . Washington, D.C.: July 20, 2005.
Financial Management: Challenges in Meeting Requirements of the Improper
Payments Information Act. GAO-05-605T . Washington, D.C.: July 12, 2005.
Food Stamp Program: States Have Made Progress Reducing Payment Errors, and
Further Challenges Remain. GAO-05-245 . Washington, D.C.: May 5, 2005.
Financial Management: Challenges in Meeting Requirements of the Improper
Payments Information Act. GAO-05-417 . Washington, D.C.: March 31, 2005.
Medicaid Program Integrity: State and Federal Efforts to Prevent and
Detect Improper Payments. GAO-04-707 . Washington D.C.: July 16, 2004.
TANF and Child Care Programs: HHS Lacks Adequate Information to Assess
Risk and Assist States in Managing Improper Payments. GAO-04-723 .
Washington, D.C.: June 18, 2004.
Financial Management: Fiscal Year 2003 Performance and Accountability
Reports Provide Limited Information on Governmentwide Improper Payments.
GAO-04-631T . Washington, D.C.: April 15, 2004.
Financial Management: Status of the Government Efforts to Address Improper
Payment Problems. GAO-04-99 . Washington, D.C.: October 17, 2003.
Financial Management: Effective Implementation of the Improper Payments
Information Act of 2002 Is Key to Reducing the Government's Improper
Payments. GAO-03-991T . Washington, D.C.: July 14, 2003.
Financial Management: Challenges Remain in Addressing the Government's
Improper Payments. GAO-03-750T . Washington, D.C.: May 13, 2003.
Financial Management: Coordinated Approach Needed to Address the
Government's Improper Payments Problems. GAO-02-749 . Washington, D.C.:
August 9, 2002.
Unemployment Insurance: Increased Focus on Program Integrity Could Reduce
Billions in Overpayments. GAO-02-697 . Washington, D.C.: July 12, 2002.
Financial Management: Improper Payments Reported in Fiscal Year 2000
Financial Statements. GAO-02-131R . Washington, D.C.: November 2, 2001.
Strategies to Manage Improper Payments: Learning From Public and Private
Sector Organizations. GAO-02-69G . Washington, D.C.: October 2001.
Financial Management: Billions in Improper Payments Continue to Require
Attention. GAO-01-44 . Washington, D.C.: October 27, 2000.
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www.gao.gov/cgi-bin/getrpt? GAO-06-347 .
To view the full product, including the scope
and methodology, click on the link above.
For more information, contact McCoy Williams at (202) 512-9095 or
[email protected].
Highlights of GAO-06-347 , a report to the Chairman, Subcommittee on
Government Management, Finance, and Accountability, Committee on
Government Reform, House of Representatives
April 2006
IMPROPER PAYMENTS
Federal and State Coordination Needed to Report National Improper Payment
Estimates on Federal Programs
Over the past several years, GAO has reported that federal agencies are
not well positioned to meet requirements of the Improper Payments
Information Act of 2002 (IPIA). For fiscal year 2005, estimated improper
payments exceeded $38 billion but did not include some of the highest risk
programs, such as Medicaid with outlays exceeding $181 billion for fiscal
year 2005. Overall, state-administered programs and other nonfederal
entities receive over $400 billion annually in federal funds. Thus,
federal agencies and states share responsibility for the prudent use of
these funds. GAO was asked to determine actions taken at the state level
to help federal agencies estimate improper payments for state-administered
federal programs and assistance needed from the federal level to support
the respective federal agencies' implementation of IPIA.
What GAO Recommends
GAO is making four recommendations to the Office of Management and Budget
(OMB) to better assist federal agencies' implementation of IPIA
requirements for state-administered federal programs, including
determining states' role in assisting federal agencies to report national
improper payment estimates on federal programs. OMB agreed with GAO's
recommendations.
To date, states have been subject to limited requirements to assist
federal agencies in estimating improper payments. For the 25 major
state-administered federal programs surveyed, only 2 programs-the Food
Stamp and Unemployment Insurance programs-have federal requirements for
all states to estimate improper payments. A limited number of federal
agencies are conducting pilots to estimate improper payments in other
programs, but state participation is voluntary. Where no federal
requirement or pilot is in place, 5 programs involving 11 states had
estimated improper payments during fiscal years 2003 or 2004.
Number of States in GAO Survey Estimating Improper Payments
Note: The 51 states are the 50 states and the District of Columbia.
States have a fundamental responsibility to ensure the proper
administration of federal awards by using sound management practices and
maintaining internal controls. To do this, states reported using a variety
of techniques to prevent and detect improper payments. All states, except
for one, responded that they use computer-related techniques, such as
fraud and abuse detection programs or data matching, to prevent or detect
improper payments. Other techniques selected states used included
performing statewide assessments and recovery auditing methods. States
also reported receiving federal incentives and penalties to assist with
reducing improper payments, although most of these actions related to the
Food Stamp Program, which gives incentives and penalties to states having
error rates below and above the program's national error rate.
Of the 240 state program officials surveyed, 100 identified tools that
would be needed to estimate improper payments and help federal agencies
meet various IPIA requirements, including guidance on estimating improper
payments and performing risk assessments. OMB has begun planning for
increased state involvement in measuring and reporting improper payments
via the Erroneous and Improper Payments Workgroup and IPIA guidance.
However, much work remains at the federal level to identify and estimate
improper payments for state-administered federal programs, including
determining the nature and extent of states' involvement to assist federal
agencies with IPIA reporting requirements.
*** End of document. ***