Managerial Cost Accounting Practices: Department of Health and	 
Human Services and Social Security Administration (18-APR-06,	 
GAO-06-599R).							 
                                                                 
Authoritative bodies have promulgated laws, accounting standards,
information system requirements, and related guidance to	 
emphasize the need for cost information and cost management in	 
the federal government. For example, the Chief Financial Officers
(CFO) Act of 1990, contains several provisions related to	 
managerial cost accounting, one of which states that an agency's 
CFO should develop and maintain an integrated accounting and	 
financial management system that provides for the development and
reporting of cost information. Statement of Federal Financial	 
Accounting Standards No. 4, Managerial Cost Accounting Concepts  
and Standards for the Federal Government, and the Joint Financial
Management Improvement Program's (JFMIP) Framework for Federal	 
Financial Management Systems established accounting standards and
system requirements for managerial cost accounting (MCA)	 
information at federal agencies. The Federal Financial Management
Improvement Act of 1996 built on this foundation and required,	 
among other things, CFO Act agencies to comply substantially with
federal accounting standards and federal financial management	 
systems requirements. In light of the requirements for federal	 
agencies to prepare MCA information, Congress asked us to	 
determine the extent to which federal agencies develop cost	 
information and use it for managerial decision making. The	 
objectives of our review were to determine how federal agencies  
generate MCA information as well as how governmental managers use
cost information to support managerial decision making and	 
provide accountability. This report summarizes information	 
provided during our briefing to Congressional staff concerning	 
our review of MCA practices at the Department of Health and Human
Services (HHS) and the Social Security Administration (SSA). This
was our third in a series of briefings concerning the status of  
MCA activities at large government agencies. Our first briefing  
covered the status of MCA activities at the Department of	 
Veterans Affairs and the Department of Labor. Our second briefing
covered the status of MCA activities at the Departments of	 
Education, Transportation, and the Treasury.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-599R					        
    ACCNO:   A51837						        
  TITLE:     Managerial Cost Accounting Practices: Department of      
Health and Human Services and Social Security Administration	 
     DATE:   04/18/2006 
  SUBJECT:   Accountability					 
	     Accounting standards				 
	     Cost accounting standards compliance		 
	     Data collection					 
	     Financial management systems			 
	     Internal controls					 
	     Management information systems			 
	     Performance measures				 
	     Systems evaluation 				 
	     Financial management				 

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GAO-06-599R

     

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April 18, 2006

The Honorable Todd R. Platts

Chairman, Subcommittee on Government Management,

Finance, and Accountability

Committee on Government Reform

House of Representatives

Subject: Managerial Cost Accounting Practices: Department of Health and
Human Services and Social Security Administration

Dear Mr. Chairman:

Authoritative bodies have promulgated laws, accounting standards,
information system requirements, and related guidance to emphasize the
need for cost information and cost management in the federal government.
For example, the Chief Financial Officers (CFO) Act of 1990,1 contains
several provisions related to managerial cost accounting, one of which
states that an agency's CFO should develop and maintain an integrated
accounting and financial management system that provides for the
development and reporting of cost information. Statement of Federal
Financial Accounting Standards No. 4, Managerial Cost Accounting Concepts
and Standards for the Federal Government, and the Joint Financial
Management Improvement Program's (JFMIP) Framework for Federal Financial
Management Systems2 established accounting standards and system
requirements for managerial cost accounting (MCA) information at federal
agencies. The Federal Financial Management Improvement Act of 19963 built
on this foundation and required, among other things, CFO Act agencies to
comply substantially with federal accounting standards and federal
financial management systems requirements.

In light of the requirements for federal agencies to prepare MCA
information, you asked us to determine the extent to which federal
agencies develop cost information and use it for managerial decision
making. The objectives of our review were to determine how federal
agencies generate MCA information as well as how governmental managers use
cost information to support managerial decision making and provide
accountability.

1 Pub. L. No. 101-576, 104 Stat. 2838 (Nov. 15, 1990).

2 In 2005, JFMIP's responsibilities for financial management and policy
oversight were realigned to the Office of Management and Budget, the
Office of Personnel Management, and the Chief Financial Officer's Council.

3 Pub. L. No. 104-208, div. A., S: 101 (f), title VIII, 110 Stat. 3009,
3009-389 (Sept. 30, 1996).

This report summarizes information provided during our briefing to your
staff today concerning our review of MCA practices at the Department of
Health and Human Services (HHS) and the Social Security Administration
(SSA). This was our third in a series of briefings concerning the status
of MCA activities at large government agencies. Our first briefing covered
the status of MCA activities at the Department of Veterans Affairs and the
Department of Labor.4 Our second briefing covered the status of MCA
activities at the Departments of Education, Transportation, and the
Treasury.5 The slides from today's briefing are presented in enclosure I.

MCA involves the accumulation and analysis of financial and nonfinancial
data, resulting in the allocation of costs to organizational pursuits such
as performance goals, programs, activities, and outputs. The data analyzed
depend on the operations and needs of the organization. Nonfinancial data
measure the occurrences of activities and can include, for example, the
number of hours worked, units produced, claims paid, grants managed, or
time needed to perform individual activities.

Status of Efforts to Implement Managerial Cost Accounting at HHS and SSA

Similar to issues that surfaced in our earlier reports, we found a need
for stronger leadership at HHS to promote and monitor the implementation
of MCA departmentwide. SSA took a strong leadership role in implementing
MCA and promoting the use of MCA information departmentwide.

Department of Health and Human Services

According to an HHS official, MCA at the department level was limited to
aggregating costs from its operating divisions (OPDIV) to prepare the
Statement of Net Cost (SNC) and did not focus on preparing MCA information
for managerial decision making. Furthermore, HHS assigned responsibility
for MCA implementation at the component level to its 11 OPDIVs, which are
disparate in mission and focus, but HHS did not take an active leadership
role to promote MCA or monitor its implementation at its OPDIVs. As a
result, department officials did not have information about which
components had and used MCA, and they had to refer to component officials
to obtain information on the status and application of MCA for their major
programs and activities.

Neither of the two components we reviewed-the Centers for Medicare and
Medicaid Services (CMS), and the Centers for Disease Control and
Prevention (CDC)-had an MCA system in place at the component level to
routinely allocate costs to activities, services, and outputs in support
of managerial decision making. At the CMS Medicare Program division, an
activity-based cost system was developed for Medicare contractors to
report their costs for reimbursement. CMS officials used that cost
information to compare contractor costs and seek corrective actions when
costs were significantly different than anticipated. CDC officials had not
yet completed an assessment of their MCA needs.

4 GAO, Managerial Cost Accounting Practices: Leadership and Internal
Controls Are Key to Successful Implementation, GAO-05-1013R (Washington,
D.C.: Sept. 2, 2005).

5 GAO, Managerial Cost Accounting Practices: Departments of Education,
Transportation, and the Treasury, GAO-06-301R (Washington, D.C.: Dec. 19,
2005).

In the absence of strong leadership to promote and monitor MCA
implementation across its OPDIVs, HHS management lacks routine access to
reliable cost information to inform management decisions. This absence
also contributed to a difference between HHS expectations and the plans of
two OPDIVS for implementing an Oracle Projects cost accounting module. HHS
officials told us that the Unified Financial Management System (UFMS),
currently under development with implementation expected by fiscal year
2008, is to include an Oracle Projects cost accounting module, and that
the OPDIVs and the Program Support Center (PSC) will incorporate Oracle
Projects in their planned UFMS implementation and tailor it to meet their
needs. However, a CMS official said that CMS had not yet analyzed Oracle
Projects to determine if it will meet CMS's MCA needs and was uncertain
whether CMS would use the module. Similarly, a CDC official said that CDC,
a pilot site for implementation of UFMS, had no plans to use the module
for MCA and had not yet completed a full assessment of its MCA needs.
Without appropriate evaluation of its MCA needs and the Oracle Projects
cost accounting module, HHS will not know whether the module can provide
the necessary MCA information.

Social Security Administration

SSA's strong leadership promoting MCA and monitoring its usage and
implementation, aided by a centrally managed organizational structure and
fostered by legislative requirements, has resulted in routine use of MCA
information for management decision making. Further, management focused on
establishing a system of controls to help ensure the reliability of the
data used. SSA reported that it started using cost information to manage
its programs 30 years ago and is continuing to improve and expand its
financial management efforts. Enhancements to SSA's MCA system, planned
for completion in September 2008, are intended to improve the quality,
consistency, and accessibility of information used by managers and
analysts throughout SSA.

SSA officials said that cost information was used for budgeting, resource
allocation, and managing operations by determining unit costs and
production rates, as well as SNC preparation. They also said SSA uses MCA
information to allocate administrative expenses to the Social Security and
Medicare trust funds as required by law.

We identified an opportunity for SSA to use MCA to determine the full
costs related to fees that SSA collects from some states. In 2005, SSA
collected $276 million in fees from the states for processing claims to
state programs that supplement SSA's Supplemental Security Income (SSI)
benefits. The original fees were established by law with later provisions
permitting yearly increases based on the Consumer Price Index or other
rates for each state as determined appropriate by the SSA Commissioner.
SSA had not analyzed the costs related to these fees to determine whether
the states might be under- or overcharged for full SSA costs incurred.

Recommendations for Executive Action

We are making three recommendations to the Secretary of Health and Human
Services and one recommendation to the Commissioner of the Social Security
Administration.

Recommendations to the Secretary of Health and Human Services

To help ensure that HHS and its OPDIVS and PSC implement and use reliable
MCA methodologies, we recommend that the Secretary of HHS

           o  take an active leadership role to promote the benefits and uses
           of MCA;

           o  direct appropriate department-level officials to develop
           procedures to monitor the implementation of its MCA policy at its
           OPDIVs and PSC; and

           o  direct appropriate officials to evaluate whether the Oracle
           Projects module will provide MCA information to support decision
           making at HHS, its OPDIVs, and PSC.

Recommendation to the Commissioner of the Social Security Administration

To better understand the relationship of costs and revenues related to
fees SSA collects for administering state SSI supplementation programs,
the Commissioner of SSA should direct appropriate officials to study those
costs to determine the full cost, including the cost of services provided
by other entities for the benefit of SSA.

Agency Comments and Our Evaluation

We requested comments on a draft of our briefing presentation from the
Secretary of Health and Human Services and the Commissioner of SSA or
their designees. We considered and incorporated, as appropriate, the
comments we received by e-mail from HHS and by letter from SSA. The
comment letter from SSA is reprinted in enclosure II.

Comments from the Department of Health and Human Services

HHS provided technical comments and did not respond to our conclusions and
recommendations to promote MCA, develop procedures for monitoring MCA
implementation, and evaluate whether the Oracle Projects module will
provide MCA information to support decision making at HHS.

HHS suggested we include information about the "green plan" it is
developing, stating that it will provide better financial information to
managers and that the effort will include leveraging UFMS projects to
provide MCA data. The HHS green plan initiative was undertaken in response
to the President's Management Agenda, which outlined five governmentwide
goals to improve federal management, including improved financial
performance and budget and performance integration. At the time of our
review, an HHS contractor had interviewed OPDIV representatives and
conducted benchmarking research to recommend an approach for developing
HHS's green plan. The contractor's plan for HHS, however, did not identify
how UFMS would be leveraged to provide MCA data. Accordingly, we did not
modify our report to address this comment.

Comments from the Social Security Administration

SSA generally agreed with our findings, conclusions, and recommendation to
analyze the full cost SSA incurs for processing state SSI supplementation
claims in order to better understand the relationship of those costs to
related fee revenues. SSA agreed to consider our recommendation when
improvements to its workload system for employee time, the Time Allocation
System (TAS), is implemented, making it easier to perform a detailed
analysis to determine the full cost SSA incurs for the state SSI
supplementation programs.

SSA also stated that the elements of cost in the state SSI supplementation
program fee and the impact of imputed costs on that fee cannot be readily
determined. These kinds of determinations, however, are the essence of
cost accounting and, as suggested by SSA, may be facilitated by
implementation of TAS.

Scope and Methodology

Our methodology was consistent with the one employed in our prior reviews
of MCA practices.6 To obtain an understanding of how MCA systems at HHS
and SSA generate cost information, we interviewed officials and reviewed
documentation on the status of MCA system implementation and the related
obstacles to managerial costing. We also examined departmental guidance
and looked for evidence of leadership and commitment to the implementation
of entitywide cost management practices. Using the Standards for Internal
Control in the Federal Government7 as a guide, we identified internal
controls over the reliability of financial and nonfinancial information
used in MCA. To determine how managers use cost information to support
managerial decision making and provide accountability, we obtained an
understanding of how HHS and SSA use cost accounting data for budgeting,
costing services or products, preparation of the Statement of Net Cost,
managing contractors' reimbursable costs, and other managerial uses
through interviews of agency officials and a review of documentation
provided by the agencies.

During our review, we visited HHS headquarters in Washington, D.C., and
the SSA headquarters in Baltimore. We also visited the headquarters of
HHS's largest component-CMS-in Baltimore, and held teleconferences with
officials at CDC, a pilot site for implementation of HHS's new
departmentwide financial management system, in Atlanta. When possible, we
corroborated information obtained in interviews with agency documents such
as policies, procedures, system descriptions, and flowcharts. We also
reviewed prior Office of Inspector General, independent public accountant,
and GAO reports regarding MCA activities, systems, and data. The agencies
provided comments on a draft of this report, which we considered and
incorporated as appropriate. We performed this work from September 2005
through March 2006 in accordance with U.S. generally accepted government
auditing standards.

6 GAO-05-1013R, 12; GAO-06-301R, 7.

7 GAO, Standards for Internal Control in the Federal Government,
GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999).

                                   - - - - -

We are sending copies of this report to the Secretary of Health and Human
Services and the Commissioner of the Social Security Administration; the
Director of the Office of Management and Budget; and other interested
parties. Should you or your staff have any questions on the matters
discussed in this correspondence, please contact me at (202) 512-6131 or
[email protected] . Contact points for our Offices of Congressional
Relations and Public Affairs can be found on the last page of this report.
GAO staff who made major contributions to this report are listed in
enclosure III.

Sincerely yours,

Robert E. Martin

Director, Financial Management and Assurance

Enclosure I

                            April 18, 2006, Briefing

Enclosure II

                Comments from the Social Security Administration

Enclosure III

                     GAO Contact and Staff Acknowledgments

GAO Contact

Robert E. Martin (202) 512-6131 or [email protected]

Acknowledgments

In addition to the contact named above, key contributors to this
assignment were Jack Warner, Assistant Director; Lisa Crye; Dan Egan; Fred
Evans; Barry Grinnell; Tom Hackney; Barbara House; Paul Kinney; Lisa
Knight; James Moses; and Glenn Slocum.

(197009)

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