UPDATE ON IMPROPER PAYMENTS

MAY 8, 2014

BERYL H. “BERRI” DAVISCGFM, CPA, CIA, CGAP, CGMA, CCSADIRECTOR, FINANCIAL MANAGEMENT AND ASSURANCEDAVISBH@GAO.GOV

2014 CIGIE/GAO Financial Statement Audit Conference

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Discussion Points

Improper payments definition and causes

Laws and authoritative guidance

Fiscal year 2013 improper payment estimates

Annual Inspector General reports

What is needed going forward

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What Are Improper Payments? An improper payment is any payment that should not

have been made or was made in an incorrect amount (including overpayments and underpayments).

For example, improper payments include: duplicate payments to a contractor; payments to an ineligible recipient; and incorrect payment amounts paid to a beneficiary. Office of Management and Budget (OMB) guidance also

instructs agencies to report as improper payments any payments for which insufficient or no documentation was found.

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Causes of Improper Payments

There are many root causes for improper payments. OMB has grouped the causes into 3 error categories: Documentation and administrative Authentication and medical necessity Verification

OMB plans to create more granular categories of improper payments in its revision to Appendix C of Circular A-123.

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Laws Related to Improper Payments The Improper Payments Information Act of 2002

(IPIA) required agencies to annually review programs, estimate improper payments, and report on actions to reduce them.

The Improper Payments Elimination and Recovery Act of 2010 (IPERA) expanded on IPIA by: Providing more guidance on risk assessment; Requiring estimates to be statistically valid; Lowering the threshold for programs that must perform

recovery audits to $1 million in annual outlays; and Requiring IGs to annually determine compliance with key

criteria listed in IPERA.

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Improper Payments Elimination and Recovery Improvement Act of 2012 (IPERIA) Among other things, this law:

Amends IPIA to require OMB to annually designate a list of “high-priority programs,” which will be subject to additional reporting requirements and oversight by agency Inspectors General;

Clarifies that payments to federal employees are subject to IPIA risk assessment and, where appropriate, improper payment estimation;

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Improper Payments Elimination and Recovery Improvement Act of 2012 (IPERIA)

Requires agencies to include all identified improper payments in the reported estimate, regardless of whether the improper payment in question has been or is being recovered;

Requires OMB to determine current and historical rates of recovery of improper payments, as well as targets for improper payment recovery; and

Gives statutory authority for the Do Not Pay Initiative.

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Do Not Pay Initiative

IPERIA requires agencies to ensure that a thorough review of available databases (through the Do Not Pay Initiative) occurs to determine program or award eligibility and prevent improper payments before the release of any Federal funds.

OMB issued guidance on the use of the Do Not Pay Initiative through memorandum M-13-20 .

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Do Not Pay Initiative

IPERIA lists five databases that shall be included in the DNP Initiative and provides that OMB may designate additional databases for inclusion in consultation with the appropriate agencies. SSA’s Death Master File GSA’s System for Award Management (formerly the

Excluded Parties List System) Treasury’s Debt Check Database HUD’s Credit Alert System or Credit Alert Interactive

Voice Response System HHS OIG’s List of Excluded Individuals/Entities

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Disaster Relief Appropriations Act of 2013

The Disaster Relief Appropriations Act of 2013 provided approximately $50 billion, before sequestration, to select federal agencies for expenses related to the consequences of Hurricane Sandy.

The act requires that all funds provided through the act be deemed “susceptible to significant improper payments.”

Therefore, agencies must estimate improper payments for all funding received through the act.

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Office of Management and Budget’s Role in Managing Improper Payments OMB plays a key role in the oversight of the

governmentwide improper payments problem.

OMB has established guidance for federal agencies on reporting, reducing, and recovering improper payments. OMB issued its implementing IPERA guidance on April

14, 2011 – Parts I and II, Appendix C of OMB Circular A-123.

OMB listed reducing improper payments as one of 14 cross-cutting goals under the GPRA Modernization Act.

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Administration’s Goals for Reducing Improper Payments OMB’s current goal is to reach a

governmentwide improper payment error rate of 3 percent or less by fiscal year 2016.

OMB reported plans to revise Appendix C to Circular A-123, conduct a comprehensive analysis of agency-specific corrective actions, and improve the completeness of government-wide improper payment testing of all high-risk programs.

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Fiscal Year 2013 Improper Payment Estimates For fiscal year 2013, the governmentwide error rate

reported by OMB included the improper payment estimate for DOD’s Defense Finance and Accounting Service (DFAS) Commercial Pay program.

In May 2013, GAO reported on major deficiencies in DOD’s process for estimating fiscal year 2012 improper payments, including deficiencies in identifying a complete and accurate population of payments and developing a statistically valid sampling methodology.

According to its fiscal year 2013 Agency Financial Report, DOD is reevaluating its sampling methodology for fiscal year 2014 for the DFAS Commercial Pay program based on GAO’s recommendation. Consequently, the fiscal year 2013 estimate for the DFAS Commercial Pay program may not be reliable.

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Fiscal Year 2013 Improper Payment Estimates Without the DFAS Commercial Pay program,

OMB and federal agencies reported improper payment estimates totaling $105.8 billion in fiscal year 2013, a decrease of $1.3 billion from the prior year revised estimate of $107.1 billion.

Fiscal Year 2013 Fiscal Year 2012

Excluding DFAS Commercial Pay

4.0 percent / $105.8 billion

4.3 percent / $107.1 billion

Including DFAS Commercial Pay

3.5 percent / $105.9 billion

3.7 percent / $107.2 billion

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Fiscal Year 2013 Improper Payment Estimates The $105.8 billion in estimated federal improper

payments reported for fiscal year 2013 was attributable to 84 programs across 18 agencies.

The 5 programs with the highest dollar estimates accounted for about $82.9 billion, or 78% of the total estimated improper payments agencies reported for fiscal year 2013.

The 5 highest error rates reported for fiscal year 2013 ranged from 15.7% to 25.3%.

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Percentage Distribution of Improper Payments in Fiscal Year 2013

Medicare Fee-for-Service

34%

Earned Income Tax Credit

14%Medicaid

14%

Medicare Advantage

(Part C)11%

Unemployment Insurance

6%

All Other Programs

22%

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Fiscal Year 2013 Improper Payment Estimates While the specific programs included in the

government-wide improper payment estimate may change from year to year, a net of 10 additional programs were included when compared to fiscal year 2012.

Most notably, the Department of Education’s improper payment estimate for the Direct Loan program, approximately $1.1 billion, was included in the government-wide improper payment estimate for the first time in fiscal year 2013.

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Fiscal Year 2013 Improper Payment Estimates

The estimated decrease in fiscal year 2013 is attributed primarily to three major programs: Decreases in program outlays for Labor’s

Unemployment Insurance program, and Decreases in error rates for Health and

Human Services’ Medicaid and Medicare Advantage (Part C) programs.

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Fiscal Year 2013 Top 5 Improper Payment Estimates by Dollar Amount

Program Agency

Reported Improper Payment Estimates

Dollars (in billions)

Error Rate (percent of

outlays)

Medicare Fee-for-Service

Health and Human Services

$36.0 10.1%

Earned Income Tax Credit

Treasury $14.5 24.0%

Medicaid Health and Human Services

$14.4 5.8%

Medicare Advantage (Part C)

Health and Human Services

$11.8 9.5%

Unemployment Insurance

Labor $6.2 9.3%

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Fiscal Year 2013 Reported Improper Payment Root Causes – Top 5 by Amount Medicare Fee-for-Service – Insufficient

documentation, medically unnecessary services, and incorrect diagnosis coding.

Earned Income Tax Credit – Improper income reporting and inability to authenticate qualifying child eligibility requirements, filing status, and eligibility in nontraditional and complex living situations.

Medicaid – Eligibility errors, system pricing errors, insufficient documentation, diagnosis coding errors.

Medicare Advantage (Part C) – Insufficient documentation to support diagnoses submitted by plans.

Unemployment Insurance – Verification errors not detectable by agency procedures or that agency did not resolve properly.

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Fiscal Year 2013 Top 5 Improper Payment Estimates by Error Rate

Program Agency

Reported Improper Payment Estimates

Error Rate(percent of

outlays)Dollars

(in millions)

School Breakfast Agriculture 25.3% $831.0

Earned Income Tax Credit

Treasury 24.0% $14,500.0

Disaster Assistance Loans

Small Business Administration

18.4% $121.1

State Home Per Diem Grants

Veterans Affairs 15.9% $135.2

School Lunch Agriculture 15.7% $1,774.0

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Fiscal Year 2013 Reported Improper Payment Root Causes – Top 5 by Rate School Breakfast - Misclassification by schools of meal eligibility

status of participating students and improper meal counting and claiming by schools and school districts.

Earned Income Tax Credit - Improper income reporting and inability to authenticate qualifying child eligibility requirements, filing status, and eligibility in nontraditional and complex living situations.

Disaster Assistance Loans – Failure to confirm eligibility of nonreal property included in business loan files and failure to justify economic injury eligibility determinations.

State Home Per Diem Grants – Use of a paper-based manual, decentralized claims processing system and the lack of compliance with internal policies.

School Lunch – Misclassification by schools of meal eligibility status of participating students and improper meal counting and claiming by schools and school districts.

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Not All Susceptible Programs Report Improper Payment Estimates 4 risk-susceptible programs/activities did

not report improper payment estimates for fiscal year 2013: HHS’s Temporary Assistance for Needy

Families (TANF); NSF’s Research and Related Activities and

Education and Human Resources; FCC’s Universal Service Fund – Lifeline; and USDA’s Loan Deficiency Payments.

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Not All Susceptible Programs Included in Governmentwide Estimate Estimates reported for 2 programs were

not included in OMB’s fiscal year 2013 governmentwide estimate because the estimation methodologies were not OMB-approved: DOT’s Federal Railroad Administration’s

High-Speed Intercity Passenger Rail RRB’s Railroad Unemployment Insurance

Program

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Annual Inspector General Reviews under IPERA The six criteria for compliance listed in IPERA are

that an agency has: Published a PAR or AFR for the most recent fiscal year; Conducted a program-specific risk assessment for

each program; Published improper payment estimates for all

programs; Published programmatic corrective action plans in the

PAR or AFR; Published, and met, annual reduction targets for each

program assessed to be at risk and measured for improper payments; and

Reported a gross improper payment rate of less than 10 percent for each program or activity.

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Annual Inspector General Reviews under IPERA Appendix C of Circular A-123 adds one

additional criterion for the IGs’ annual reviews. It requires IGs to review that an agency has Reported information on its efforts to recapture

improper payments.

The most recent set of annual IG reports, which pertain to fiscal year 2013, were due in April 2014. They are the third set of annual IG reports required by IPERA.

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Annual Inspector General Reviews under IPERA In their annual reports, various

inspectors general reported deficiencies for fiscal year 2012 at their respective federal entities, including risk-susceptible programs that did not

report improper payment estimates, estimation methodologies that were not

statistically valid, and risk assessments that may not accurately

assess the risk of improper payment.

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What Is Needed?

To determine the full extent of improper payments government-wide and to more effectively recover and reduce them, continued agency attention is needed to: identify programs susceptible to improper

payments; develop reliable improper payment estimation

methodologies; report on improper payments as required; and implement effective corrective actions based on

root cause analysis.