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United States Government Accountability Office: 
GAO: 

Testimony: 

Before the Subcommittee on Federal Financial Management, Government 
Information, Federal Services, and International Security, Committee 
on Homeland Security and Governmental Affairs, U.S. Senate: 

For Release on Delivery: 
Expected at 2:30 p.m. EDT:
Wednesday, March 28, 2012: 

Improper Payments: 

Remaining Challenges and Strategies for Governmentwide Reduction 
Efforts: 

Statement of Beryl H. Davis, Director: 
Financial Management and Assurance: 

GAO-12-573T: 

GAO Highlights: 

Highlights of GAO-12-573T, a testimony before the Subcommittee on 
Federal Financial Management, Government Information, Federal 
Services, and International Security, Committee on Homeland Security 
and Governmental Affairs, U.S. Senate. 

Why GAO Did This Study: 

Over the past decade, GAO has issued numerous reports and testimonies 
highlighting improper payment issues across the federal government as 
well as at specific agencies. Fiscal year 2011 marked the eighth year 
of implementation of the Improper Payments Information Act of 2002 
(IPIA), as well as the first year of implementation for the Improper 
Payments Elimination and Recovery Act of 2010 (IPERA). IPIA requires 
executive branch agencies to annually identify programs and activities 
susceptible to significant improper payments, estimate the amount of 
improper payments for such programs and activities, and report these 
estimates along with actions taken to reduce them. IPERA amended IPIA 
and expanded requirements for recovering overpayments across a broad 
range of federal programs. 

This testimony addresses (1) federal agencies’ reported progress in 
estimating and reducing improper payments; (2) challenges in meeting 
current requirements to estimate and evaluate improper payments, 
including the results of GAO’s case study of the estimation 
methodology and corrective actions for the Foster Care program; and 
(3) possible strategies that can be taken to move forward in reducing 
improper payments. This testimony is primarily based on prior GAO 
reports, including the report released today on improper payment 
estimates in the Foster Care program. It also includes unaudited 
improper payment information recently presented in federal entities’ 
fiscal year 2011 performance and accountability reports and agency 
financial reports. 

What GAO Found: 

Federal agencies reported an estimated $115.3 billion in improper 
payments in fiscal year 2011, a decrease of $5.3 billion from the 
prior year reported estimate of $120.6 billion. According to the 
Office of Management and Budget (OMB), the $115.3 billion estimate was 
attributable to 79 programs spread among 17 agencies. Ten programs 
accounted for about $107 billion or 93 percent of the total estimated 
improper payments agencies reported. The reported decrease in fiscal 
year 2011 was primarily related to 3 programs—decreases in program 
outlays for the Unemployment Insurance program, and decreases in 
reported error rates for the Earned Income Tax Credit program and the 
Medicare Advantage program. Further, OMB reported that agencies 
recaptured $1.25 billion in improper payments to contractors and 
vendors. 

The federal government continues to face challenges in determining the 
full extent of improper payments. Some agencies have not reported 
estimates for all risk-susceptible programs, while other agencies’ 
estimation methodologies were found to be not statistically valid. For 
example, GAO’s recently completed study of Foster Care improper 
payments found that the Administration for Children and Families (ACF) 
had established a process to calculate a national improper payment 
estimate for the Foster Care program, which totaled about $73 million 
for fiscal year 2010, the year covered by GAO’s review. However, the 
estimate was not based on a statistically valid methodology and 
consequently did not provide a reasonably accurate estimate of the 
extent of Foster Care improper payments. Further, GAO found that ACF 
could not reliably assess the extent to which corrective actions 
reduced Foster Care improper payments. 

A number of strategies are under way across government to help advance 
improper payment reduction goals. For example, 

* Additional information and analysis on the root causes of improper 
payment estimates will assist agencies in targeting effective 
corrective actions and implementing preventive measures. Although 
agencies were required to report the root causes of improper payments 
in three categories beginning in fiscal year 2011, of the 79 programs 
with improper payment estimates that year, 42 programs reported the 
root cause information using the required categories. 

* Implementing strong preventive controls can help defend against 
improper payments, increasing public confidence and avoiding the 
difficult “pay and chase” aspects of recovering improper payments. 
Preventive controls involve activities such as up-front validation of 
eligibility using data sharing, predictive analytic technologies, and 
training programs. Further, addressing program design issues, such as 
complex eligibility requirements, may also warrant further 
consideration. 

* Effective detection techniques to quickly identify and recover 
improper payments are also important to a successful reduction 
strategy. Detection activities include data mining and recovery 
auditing. Another area for further exploration is the broader use of 
incentives to encourage states in efforts to implement effective 
detective controls. 

Continuing work to implement and enhance these strategies will be 
needed to effectively reduce federal government improper payments. 

View [hyperlink, http://www.gao.gov/products/GAO-12-573T]. For more 
information, contact Beryl H. Davis at (202) 512-2623 or 
davisbh@gao.gov. 

[End of section] 

Chairman Carper, Ranking Member Brown, and Members of the Subcommittee: 

Thank you for the opportunity to be here today to discuss the issue of 
improper payments in federal programs and activities, including 
efforts by federal agencies to identify and reduce improper 
payments.[Footnote 1] As the steward of taxpayer dollars, the federal 
government is accountable for how its agencies and grantees spend 
hundreds of billions of taxpayer dollars annually, including 
safeguarding those expenditures against improper payments, and 
establishing mechanisms to recover any overpayments. It is important 
to note that not all of the reported improper payment estimates 
represent a loss to the government. For example, such estimates 
include payments where there is insufficient documentation or a lack 
of documentation. Over the past decade, we have issued numerous 
reports and testimonies highlighting improper payment issues across 
the federal government as well as at specific agencies.[Footnote 2] As 
requested by the Subcommittee, we recently completed our study of the 
improper payment estimation methodology and related corrective actions 
for the Department of Health and Human Services' (HHS) Foster Care 
program administered by the Administration for Children and Families 
(ACF).[Footnote 3] 

Today, my testimony will focus on: 

* federal agencies' reported progress in estimating and reducing 
improper payments; 

* challenges in meeting current requirements to estimate and evaluate 
improper payments, including those identified through our case study 
of the estimation methodology used by HHS's Foster Care program; 
[Footnote 4] and: 

* possible improper payment reduction strategies. 

In preparing this statement, we drew primarily upon previously issued 
work related to (1) our fiscal year 2011 audit of the Financial Report 
of the United States Government,[Footnote 5] (2) our report released 
today on improper payment estimates at HHS's Foster Care program, 
[Footnote 6] and (3) our other previously issued products dealing with 
improper payments. Our previous products are listed at the end of this 
statement. That work was conducted in accordance with generally 
accepted government auditing standards. We are also including 
unaudited improper payment information that federal entities reported 
in their fiscal year 2011 performance and accountability reports 
(PAR), agency financial reports (AFR), or other annual reporting. 

Background: 

Improper Payments Information Act of 2002: 

Fiscal year 2011 marked the eighth year of implementation of the 
Improper Payments Information Act of 2002 (IPIA),[Footnote 7] as well 
as the first year of implementation for the Improper Payments 
Elimination and Recovery Act of 2010 (IPERA).[Footnote 8] IPIA 
requires executive branch agencies to annually review all programs and 
activities to identify those that are susceptible to significant 
improper payments, estimate the annual amount of improper payments for 
such programs and activities, and report these estimates along with 
actions taken to reduce improper payments for programs with estimates 
that exceed $10 million. IPERA, enacted July 22, 2010, amended IPIA by 
expanding on the previous requirements for identifying, estimating, 
and reporting on programs and activities susceptible to significant 
improper payments and expanding requirements for recovering 
overpayments across a broad range of federal programs.[Footnote 9] 
IPERA included a new, broader requirement for agencies to conduct 
recovery audits, where cost effective, for each program and activity 
with at least $1 million in annual program outlays. This IPERA 
provision significantly lowers the threshold for required recovery 
audits from $500 million[Footnote 10] to $1 million and expands the 
scope for recovery audits to all programs and activities. Another 
IPERA provision calls for federal agencies' inspectors general to 
annually determine whether their respective agencies are in compliance 
with key IPERA requirements and to report on their determinations. 
Under Office of Management and Budget (OMB) implementing guidance, 
federal agencies are required to complete these reports within 120 
days of the publication of their annual PARs or AFRs, with the fiscal 
year 2011 reports for most agencies due on March 15, 2012. 

OMB continues to play a key role in the oversight of the 
governmentwide improper payments issue. OMB has established guidance 
for federal agencies on reporting, reducing, and recovering improper 
payments[Footnote 11] and has established various work groups 
responsible for developing recommendations aimed at improving federal 
financial management activities related to reducing improper payments. 

HHS's Foster Care Program: 

Each year, hundreds of thousands of our nation's most vulnerable 
children are removed from their homes and placed in foster care, often 
because of abuse or neglect. While states are primarily responsible 
for providing safe and stable out-of-home care for these children 
until they are returned safely home, placed with adoptive families, or 
placed in other arrangements, Title IV-E of the Social Security Act 
provides states some federal financial support in this area.[Footnote 
12] ACF under HHS is responsible for administering this program and 
overseeing Title IV-E funds. HHS's reported fiscal year 2010 outlays 
to states for their Foster Care programs under Title IV-E totaled more 
than $4.5 billion, serving over 408,000 children, as of September 30, 
2010, the most recent data available at the time of our study. 

Past work by the HHS Office of Inspector General (OIG), GAO, and 
others have identified numerous deficiencies in state claims 
associated with the Title IV-E Foster Care program. In particular, the 
HHS OIG found hundreds of millions of dollars in unallowable claims 
associated with Title IV-E funding.[Footnote 13] A 2006 GAO report 
also found variations in costs states claimed under the Title IV-E 
program and recommended a number of actions HHS should take to better 
safeguard federal resources.[Footnote 14] In addition, annual state-
level audits have identified weaknesses in states' use of federal 
funds, such as spending on unallowed activities or costs and 
inadequate state monitoring of federal funding.[Footnote 15] 

As required under IPIA, as amended, HHS has identified the Foster Care 
program as susceptible to significant improper payments, and has 
reported annually on estimated improper payment amounts for the 
program since 2005.[Footnote 16] For fiscal year 2010, HHS reported 
estimated improper payments for Foster Care of about $73 million. The 
reported estimate slightly decreased to about $72 million for fiscal 
year 2011. 

OMB and Agencies Reported Progress in Estimating and Reducing Improper 
Payments: 

Federal agencies reported improper payment estimates totaling $115.3 
billion in fiscal year 2011, a decrease of $5.3 billion from the 
revised prior year reported estimate of $120.6 billion.[Footnote 17] 
Based on the agencies' estimates, OMB estimated that improper payments 
comprised about 4.7 percent of the $2.5 trillion in fiscal year 2011 
total spending for the agencies' related programs (i.e., a 4.7 percent 
error rate). The decrease in the fiscal year 2011 estimate--when 
compared to fiscal year 2010--is attributed primarily to decreases in 
program outlays for the Department of Labor's (Labor) Unemployment 
Insurance program, and decreases in reported error rates for fiscal 
year 2011 for the Department of the Treasury's (Treasury) Earned 
Income Tax Credit program, and HHS's Medicare Advantage program. 

According to OMB, the $115.3 billion in estimated federal improper 
payments reported for fiscal year 2011 was attributable to 79 programs 
spread among 17 agencies. Ten of these 79 programs account for most of 
the $115.3 billion of reported improper payments. Specifically, these 
10 programs accounted for about $107 billion or 93 percent of the 
total estimated improper payments agencies reported for fiscal year 
2011. Table 1 shows the reported improper payment estimates and the 
reported primary cause(s) for the estimated improper payments for 
these 10 programs. 

Table 1: Improper Payment Dollar Estimates: 10 Programs with the 
Highest Reported Amounts in Fiscal Year 2011: 

Program: Medicare Fee-for-Service; 
Agency: Department of Health and Human Services; 
Reported improper payment estimates: $28.8 billion; 
Reported improper payment estimates: Error rate: 8.6%; 
Reported primary cause(s): Medically unnecessary services and 
insufficient documentation. 

Program: Medicaid; 
Agency: Department of Health and Human Services; 
Reported improper payment estimates: $21.9 billion; 
Reported improper payment estimates: Error rate: 8.1%; 
Reported primary cause(s): Ineligible or indeterminable eligibility 
status for Medicaid beneficiaries. 

Program: Earned Income Tax Credit; 
Agency: Department of the Treasury; 
Reported improper payment estimates: $15.2 billion; 
Reported improper payment estimates: Error rate: 23.5%; 
Reported primary cause(s): Complexity of the tax law, structure of the 
program, confusion among eligible claimants, high turnover of eligible 
claimants, and unscrupulous return preparers. 

Program: Unemployment Insurance; 
Agency: Department of Labor; 
Reported improper payment estimates: $13.7 billion; 
Reported improper payment estimates: Error rate: 12.0%; 
Reported primary cause(s): Overpayment to claimants who continue to 
claim benefits after they return to work, ineligibility, and claimants 
who failed to meet active work search requirements. 

Program: Medicare Advantage; 
Agency: Department of Health and Human Services; 
Reported improper payment estimates: $12.4 billion; 
Reported improper payment estimates: Error rate: 11.0%; 
Reported primary cause(s): Insufficient documentation, errors in the 
transfer and interpretation of data, and payment calculations. 

Program: Supplemental Security Income; 
Agency: Social Security Administration; 
Reported improper payment estimates: $4.6 billion; 
Reported improper payment estimates: Error rate: 9.1%; 
Reported primary cause(s): Recipients failed to provide accurate and 
timely reports of new or increased wages. 

Program: Old Age Survivors' and Disability Insurance; 
Agency: Social Security Administration; 
Reported improper payment estimates: $4.5 billion; 
Reported improper payment estimates: Error rate: 0.6%; 
Reported primary cause(s): Computation errors, eligibility errors, non-
verification of earnings, and incorrect processing of applications or 
payments. 

Program: Supplemental Nutrition Assistance; 
Agency: Department of Agriculture; 
Reported improper payment estimates: $2.5 billion; 
Reported improper payment estimates: Error rate: 3.8%; 
Reported primary cause(s): Incomplete or inaccurate reporting of 
income by participant and incorrect eligibility determination by 
caseworkers. 

Program: National School Lunch; 
Agency: Department of Agriculture; 
Reported improper payment estimates: $1.7 billion; 
Reported improper payment estimates: Error rate: 16.0%; 
Reported primary cause(s): Verification errors related to benefit 
calculation error, duplicate payments, insufficient documentation, and 
fraud or misrepresentation by program participants or others. 

Program: Medicare Prescription Drug Benefit; 
Agency: Department of Health and Human Services; 
Reported improper payment estimates: $1.7 billion; 
Reported improper payment estimates: Error rate: 3.2%; 
Reported primary cause(s): Payment errors, payment adjustment errors, 
and complexity of program. 

Source: GAO analysis of agencies' PARs and AFRs for fiscal year 2011. 

[End of table] 

While the programs identified in the table above represented the 
largest dollar amounts of improper payments, 4 of these programs also 
had some of the highest program improper payment error rates.[Footnote 
18] As shown in table 2, the 10 programs with the highest error rates 
accounted for $45 billion, or 39 percent of the total estimated 
improper payments, and had rates ranging from 11.0 percent to 28.4 
percent for fiscal year 2011. 

Table 2: Improper Payment Error Rates: 10 Programs with the Highest 
Reported Rates in Fiscal Year 2011: 

Program: Disaster Assistance Loans; 
Agency: Small Business Administration; 
Reported improper payment estimates: Error rate: 28.4%; 
Reported improper payment estimates: $96.3 million; 
Reported primary cause(s): Loan documentation errors. 

Program: School Breakfast; 
Agency: Department of Agriculture; 
Reported improper payment estimates: Error rate: 25.0%; 
Reported improper payment estimates: $705.0 million; 
Reported primary cause(s): Authentication and administrative errors, 
including authenticating the accuracy of qualifying for program 
specific requirements, criteria, or conditions. 

Program: Earned Income Tax Credit; 
Agency: Department of the Treasury; 
Reported improper payment estimates: Error rate: 23.5%; 
Reported improper payment estimates: $15.2 billion; 
Reported primary cause(s): Complexity of the tax law, structure of the 
program, confusion among eligible claimants, high turnover of eligible 
claimants, and unscrupulous return preparers. 

Program: National School Lunch; 
Agency: Department of Agriculture; 
Reported improper payment estimates: Error rate: 16.0%; 
Reported improper payment estimates: $1.72 billion; 
Reported primary cause(s): Verification errors related to benefit 
calculation error, duplicate payments, insufficient documentation, and 
fraud or misrepresentation by program participants or others. 

Program: State Home Per Diem Grants; 
Agency: Department of Veterans Affairs; 
Reported improper payment estimates: Error rate: 13.7%; 
Reported improper payment estimates: $97.6 million; 
Reported primary cause(s): Documentation and administrative errors 
related to ineligible recipients, noncompliance with policies and 
procedures, incorrect amounts, ineligible goods, and lack of 
documentation. 

Program: Supplies and Materials; 
Agency: Department of Veterans Affairs; 
Reported improper payment estimates: Error rate: 13.6%; 
Reported improper payment estimates: $221.1 million; 
Reported primary cause(s): Documentation and administrative errors 
related to noncompliance with policies and procedures, lack of 
documentation, ineligible goods, incorrect amounts, and discounts not 
taken. 

Program: Non-VA Care Fee; 
Agency: Department of Veterans Affairs; 
Reported improper payment estimates: Error rate: 12.4%; 
Reported improper payment estimates: $522.9 million; 
Reported primary cause(s): Verification and documentation and 
administrative errors related to incorrect application of payment 
methodologies, lack of documentation, lack of authorization, and data 
entry errors. 

Program: Unemployment Insurance; 
Agency: Department of Labor; 
Reported improper payment estimates: Error rate: 12.0%; 
Reported improper payment estimates: $13.7 billion; 
Reported primary cause(s): Overpayment to claimants who continue to 
claim benefits after they return to work, ineligibility, and claimants 
who failed to meet active work search requirements. 

Program: Child Care and Development Fund; 
Agency: Department of Health and Human Services; 
Reported improper payment estimates: Error rate: 11.2%; 
Reported improper payment estimates: $638.0 million; 
Reported primary cause(s): Documentation and administrative errors 
caused by missing or insufficient documentation. 

Program: Medicare Advantage; 
Agency: Department of Health and Human Services; 
Reported improper payment estimates: Error rate: 11.0%; 
Reported improper payment estimates: $12.39 billion; 
Reported primary cause(s): Insufficient documentation, errors in the 
transfer and interpretation of data, and payment calculation errors. 

Source: GAO analysis of agencies' PARs and AFRs for fiscal year 2011. 

[End of table] 

Since the implementation of IPIA in 2004, federal agencies have worked 
to identify new programs or activities as risk-susceptible and report 
estimated improper payment amounts. The fiscal year 2011 
governmentwide estimate of $115.3 billion included improper payment 
estimates for nine additional programs that did not report an estimate 
in fiscal year 2010, with the HHS Medicare Prescription Drug Benefit 
(Part D) program having the highest dollar estimate of the newly 
included programs. We view these agencies' efforts as a positive step 
toward increasing the transparency of the magnitude of improper 
payments across the federal government. However, OMB did not include 
three additional programs providing estimates in fiscal year 2011 in 
the governmentwide totals because their estimation methodologies were 
still under development. The three excluded programs were the 
Department of Education's (Education) Direct Loan, Department of 
Defense's (DOD) Defense Finance and Accounting Service Commercial Pay, 
and DOD's U.S. Army Corps of Engineers Commercial Pay. 

A number of federal agencies have reported progress in reducing 
improper payment error rates in some of their programs and activities. 
For example, we identified 40 federal agency programs, or about 50 
percent of the total programs reporting improper payment estimates in 
fiscal year 2011, that reported a reduction in the error rate of 
estimated improper payments in fiscal year 2011 when compared to 
fiscal year 2010 error rates. However, these rates have not been 
independently verified or audited. The following are examples of 
agencies that reported reductions in program error rates and estimated 
improper payment amounts (along with corrective actions to reduce 
improper payments) in their fiscal year 2011 PARs, AFRs, or annual 
reports. 

* Treasury reported that the fiscal year 2011 Earned Income Tax Credit 
(EITC) program's estimated improper payment amount decreased from the 
fiscal year 2010 amount of $16.9 billion to $15.2 billion, which 
represented a decrease in the error rate from 26.3 percent to 23.5 
percent. Treasury reported that corrective actions taken to reduce 
improper payments primarily focused on completing examinations of tax 
returns that claimed the EITC before issuing the EITC portion of the 
refund, identifying math or other statistical irregularities in 
taxpayer returns, and comparing income information provided by the 
taxpayer with matching information from employers to identify 
discrepancies. 

* HHS reported that the fiscal year 2011 estimated improper payment 
amount for the Medicare Advantage (Part C) program decreased from the 
fiscal year 2010 reported amount of $13.6 billion to $12.4 billion, 
which represented a decrease in the error rate from 14.1 percent to 
11.0 percent. HHS reported that it reduced payment errors by 
continuing to routinely implement controls in its payment system to 
ensure accurate and timely payments, and implementing three key 
initiatives--contract-level audits, physician outreach, and Medicare 
Advantage organization guidance and training. 

In addition, agencies have further developed the use of recovery 
audits to recapture improper payments. In 2010, the President set 
goals, as part of the Accountable Government Initiative, for federal 
agencies to reduce overall improper payments by $50 billion, and 
recapture at least $2 billion in improper contract payments and 
overpayments to healthcare providers, by the end of fiscal year 2012. 
For fiscal year 2011, OMB reported that governmentwide agencies 
recaptured $1.25 billion in improper payments to contractors and 
vendors. Over half of this amount, $797 million, can be attributed to 
the Medicare recovery audit contractor program, which identifies 
improper Medicare payments--both overpayments and underpayments--in 
all 50 states. Cumulatively, OMB reported $1.9 billion recaptured from 
improper payments to contractors, vendors, and healthcare providers 
for fiscal years 2010 and 2011 towards the President's goal of 
recapturing at least $2 billion by the end of fiscal year 2012. 

Governmentwide Challenges to Estimating and Evaluating Improper 
Payments: 

Despite reported progress in reducing estimated improper payment 
amounts and error rates for some programs and activities during fiscal 
year 2011, the federal government continues to face challenges in 
determining the full extent of improper payments. Specifically, some 
agencies have not yet reported estimates for all risk-susceptible 
programs, and some agencies' estimating methodologies need to be 
refined. Until federal agencies are able to implement effective 
processes to completely and accurately identify the full extent of 
improper payments and implement appropriate corrective actions to 
effectively reduce improper payments, the federal government will not 
have reasonable assurance that the use of taxpayer funds is adequately 
safeguarded. In this regard, at the request of this Subcommittee, we 
recently completed our review of the improper payment estimation 
methodology used by HHS's Foster Care program. As discussed in our 
report released today,[Footnote 19] we found that the Foster Care 
program's improper payment estimation methodology was deficient in all 
three key areas--planning, selection, and evaluation--and consequently 
did not result in a reasonably accurate estimate of the extent of 
Foster Care improper payments. Further, the validity of the reporting 
of reduced Foster Care program error rates was questionable, and we 
found that several weaknesses impaired ACF's ability to assess the 
effectiveness of corrective actions to reduce improper payments. 

Challenges in Developing Improper Payment Estimates: 

We found that not all agencies have developed improper payment 
estimates for all of the programs and activities they identified as 
susceptible to significant improper payments. Specifically, three 
federal entities did not report fiscal year 2011 estimated improper 
payment amounts for four risk-susceptible programs.[Footnote 20] In 
one example, HHS's fiscal year 2011 reporting cited statutory 
limitations for its state-administered Temporary Assistance for Needy 
Families (TANF) program,[Footnote 21] that prohibited it from 
requiring states to participate in developing an improper payment 
estimate for the TANF program. Despite these limitations, HHS 
officials stated that they will continue to work with states and 
explore options to allow for future estimates for the program. For 
fiscal year 2011, the TANF program reported outlays of about $17 
billion. For another program, HHS cited the Children's Health 
Insurance Program Reauthorization Act of 2009[Footnote 22] as 
prohibiting HHS from calculating or publishing any national or state-
specific payment error rates for the Children's Health Insurance 
Program (CHIP) until 6 months after the new payment error rate 
measurement rule became effective on September 10, 2010. According to 
its fiscal year 2011 agency financial report, HHS plans to report 
estimated improper payment amounts for CHIP in fiscal year 2012. For 
fiscal year 2011, HHS reported federal outlays of about $9 billion for 
CHIP. 

As previously mentioned, OMB excluded estimated improper payment 
amounts for two DOD programs from the governmentwide total because 
those programs were still developing their estimating methodologies--
Defense Finance and Accounting Service (DFAS) Commercial Pay,[Footnote 
23] with fiscal year 2011 outlays of $368.5 billion, and U.S. Army 
Corps of Engineers Commercial Pay, with fiscal year 2011 outlays of 
$30.5 billion. In DOD's fiscal year 2011 agency financial report, DOD 
reported that improper payment estimates for these programs were based 
on improper payments detected through various pre-payment and post-
payment review processes rather than using methodologies similar to 
those used for DOD's other programs, including statistically valid 
random sampling or reviewing 100 percent of payments. 

Both GAO[Footnote 24] and the DOD Inspector General (IG)[Footnote 25] 
have previously reported on weaknesses in DOD's payment controls, 
including weaknesses in its process for assessing the risk of improper 
payments and reporting estimated amounts. DOD's payment controls are 
hindered by inadequate payment processing controls, poor financial 
systems, and inadequate supporting documentation. The DOD IG reported 
in March 2011 that deficiencies in a key component of this process 
could lead to erroneously categorizing a high percentage of potential 
improper payments as proper.[Footnote 26] Further, the DOD IG reported 
that DOD's risk of making improper payments was high and identified 
deficiencies in DOD's estimate of high-dollar overpayments that caused 
it to underreport its improper payments.[Footnote 27] Until DOD fully 
and effectively implements a statistically valid estimating process 
for its commercial payments and addresses the known control 
deficiencies in its commercial payment processes, the governmentwide 
improper payment estimates will continue to be incomplete. We are 
currently working on an engagement related to improper payment 
reporting at DOD. 

For fiscal year 2011, two agency auditors reported on compliance 
issues with IPIA and IPERA as part of their 2011 financial statement 
audits. Specifically, the Department of Agriculture (USDA) auditors 
identified noncompliance with the requirements of IPERA regarding the 
design of program internal controls related to improper payments. In 
the other noncompliance issue, while for fiscal year 2011 HHS 
estimated an annual amount of improper payments for some of its risk-
susceptible programs, a key requirement of IPIA, it did not report an 
improper payment estimate for its TANF program and CHIP. Fiscal year 
2011 marked the eighth consecutive year that auditors for HHS reported 
noncompliance issues with IPIA. 

We recognize that measuring improper payments for federal programs and 
designing and implementing actions to reduce or eliminate them are not 
simple tasks, particularly for grant programs that rely on 
administration efforts at the state level. The estimation 
methodologies for these types of programs may vary considerably 
because of differences in program designs across the states. For 
example, as I will discuss in more detail later in this statement, the 
Foster Care program leveraged an existing process to estimate improper 
payments that included a review of a child's eligibility for Title IV-
E federal funding as claimed by the states administering the program. 
In another example, the improper payment estimate for HHS's Medicaid 
program is based on the results of three different reviews--
eligibility, fee-for-service, and managed care--of claims payments 
made by states to health care providers. The fee-for-service and 
managed care reviews both include a data processing review to validate 
that claims were processed correctly. The fee-for-service review also 
includes a medical necessity determination. The eligibility review 
identifies payments made for services to beneficiaries that were 
improperly paid because of erroneous eligibility decisions. We are 
currently working on an engagement related to improper payment 
reporting for the Medicaid program. Because of these state differences 
and complexities within programs, as we previously reported,[Footnote 
28] communication, coordination, and cooperation among federal 
agencies and the states will be critical to effectively estimate 
national improper payment rates and meet IPIA reporting requirements 
for state-administered programs. 

Case Study: Foster Care Program Faces Challenges in Estimating 
Improper Payments and Evaluating Corrective Actions: 

The results of our recently completed study of the improper payment 
estimation methodology used by HHS's Foster Care program serve to 
provide a more detailed perspective on the challenges one federal 
agency faced in attempting to develop a complete and accurate 
nationwide estimate for a program largely administered at the state 
level. Further, this case study provides an example of the types of 
problems that may exist but go undetected because of the lack of 
independent assessments of the reported information. As we previously 
testified before this Subcommittee,[Footnote 29] separate assessments 
conducted by agency auditors provide a valuable independent validation 
of agencies' efforts to report reliable information under IPIA. 
Independent assessments can also enhance an agency's ability to 
identify sound performance measures, monitor progress against those 
measures, and help establish performance and results expectations. 
Without this type of validation or other types of reviews performed by 
GAO or agency OIGs, it is difficult to reliably determine the full 
magnitude of deficiencies that may exist governmentwide in agencies' 
IPIA implementation efforts. For example, our case study of the Foster 
Care program found that although ACF had established a process to 
calculate a national improper payment estimate, the estimate was not 
based on a statistically valid methodology and consequently did not 
reflect a reasonably accurate estimate of the extent of Foster Care 
improper payments. Further, without accurate data, the validity of the 
Foster Care program's reported reductions in improper payments was 
questionable, and ACF's ability to reliably assess the effectiveness 
of its corrective actions was impaired. 

Deficiencies in Foster Care's Estimation Methodology: 

For programs administered at the state level such as Foster Care, OMB 
guidance provides that statistically valid annual estimates of 
improper payments may be based on either data for all states or on 
statistical data from a sample to generate a national dollar estimate 
and improper payment rate. In this case, ACF took its existing Title 
IV-E Foster Care program eligibility review process, already in place 
under the Social Security Act, and also used it for IPIA estimation. 
ACF provides a national estimated error rate based on a rolling 
average of error rates identified in states examined on a 3-year 
cycle. As a result, ACF's IPIA reporting for each year is based on new 
data for about one-third of the states and previous years' data for 
the remaining two-thirds of the states. To calculate a national 
estimate of improper payments, ACF uses error rates that span a 3-year 
period of Title IV-E eligibility reviews in the 50 states, the 
District of Columbia, and Puerto Rico. ACF applies the percentage 
dollar error rate from the sample to the total payments for the period 
under review for each state. 

ACF's methodology for estimating Foster Care improper payments was 
approved by OMB in 2004 with the understanding that continuing efforts 
would be taken to improve the accuracy of ACF's estimates of improper 
payments in the ensuing years. ACF, however, has since continued to 
generally follow its initial 2004 methodology. When compared to 
federal statistical guidance and internal control standards, we found 
it to be deficient in all three phases of its fiscal year 2010 
estimation methodology--planning, selection, and evaluation--as 
summarized in table 3. These deficiencies impaired the accuracy and 
completeness of the Foster Care program improper payment estimate of 
$73 million reported for fiscal year 2010. 

Table 3: Deficiencies in ACF's Methodology to Estimate Foster Care 
Improper Payments: 

Estimation methodology phase: Planning; 
Deficiencies by phase: 
* Methodology is limited to identifying improper payments for only one-
third of the total federal share of foster care expenditures--
maintenance payments; 
* The case-level population data used to derive the foster care 
improper payment estimate does not contain the associated payment data 
needed for a direct estimate of the payment error rate and the total 
amount of dollars that were improperly paid. 

Estimation methodology phase: Selection; 
Deficiencies by phase: 
* ACF has not established up-front data quality procedures over the 
case-level population data, self-reported by states, prior to sample 
selection; 
* Sample selection process includes a high percentage of replacement 
cases due to inaccurate information contained in the case-level 
population data. 

Estimation methodology phase: Evaluation; 
Deficiencies by phase: 
* Methodology does not include procedures on how to identify payment 
errors related to underpayments and duplicate payments during the 
review of sampled cases across states; 
* Methodology used to aggregate state-level improper payment data does 
not take into account each state's margin of error, which is needed to 
calculate an overall program improper payment estimate with a 90 
percent confidence level generally required by OMB guidance. 

Source: GAO analysis of ACF's methodology to estimate Foster Care 
improper payments. 

[End of table] 

Planning. ACF's annual IPIA reporting for the Foster Care program did 
not include about two-thirds of program expenditures, as shown in 
figure 1. Specifically, the estimate included improper payments for 
only one type of program payment activity--maintenance payments--
which, for fiscal year 2010, represented 34 percent of the total 
federal share of expenditures for the Foster Care program. 
Administrative and other payments, such as those related to the 
operation and development of the Statewide Automated Child Welfare 
Information System (SACWIS), were not considered in ACF's IPIA 
estimation process and thus were not included in the Foster Care 
program improper payment estimate. OMB's December 2004 approval of 
ACF's proposed methodology included an expectation that ACF would 
develop a plan and timetable to test administrative expenses by April 
2005. ACF has conducted various pilots in this area since 2007 with 
the goal of ensuring that improper payment data for administrative 
costs are sufficiently reliable and valid without imposing undue 
burden on states. Although ACF expects to estimate for administrative 
improper payments and recognizes the importance of doing so, it has 
not yet taken action to augment its existing methodology. 

Figure 1: Foster Care Program Outlays for Fiscal Year 2010 Covered 
under IPIA Reporting: 

[Refer to PDF for image: horizontal bar graph] 

2010 Total program outlays: $4.5 billion; 

Portion of 2010 total subjected to IPIA reporting (34%): 
Maintenance costs: $1.5 billion; 

Portion of 2010 total not subjected to IPIA reporting (68%): 
Administrative costs: $2.0 billion; 
SACWIS costs: $0.1 billion; 
Training costs: $0.2 billion; 
Demonstration project costs: $0.7 billion. 

Source: GAO analysis of Foster Care expenditure data for fiscal year 
2010. 

[End of figure] 

Selection. The population of data from which ACF selected its sample--
the Adoption and Foster Care Analysis and Reporting System 
(AFCARS)[Footnote 30]--were not reliable because ACF's sampling 
methodology did not provide for up-front data quality control 
procedures to (1) ensure that the population of cases was complete 
prior to its sample selection and (2) identify inaccuracies in the 
data field used for sample selection. Specifically, ACF had to replace 
a high percentage of cases sampled from the database of Foster Care 
cases for the fiscal year 2010 reporting period because of inaccurate 
information in AFCARS. 

* Of the original 4,570 sample cases ACF selected for testing in its 
primary and secondary reviews for fiscal year 2010, 298 cases (almost 
7 percent) had to be replaced with substitutes because the selected 
cases had not received Title IV-E Foster Care maintenance payments 
during the period under review. 

* Of the 298 over-sampled cases used to replace the cases initially 
selected, 63 cases (more than 21 percent) then had to be replaced 
again because those cases had also not received Title IV-E Foster Care 
maintenance payments during the period under review. 

* Further, although we were able to determine how many sampled (or 
over-sampled) cases had to be replaced because available records 
showed no Title IV-E payment was received during the reporting period, 
neither GAO nor ACF were able to determine the extent to which the 
opposite occurred--cases that had received a payment (and therefore 
should have been included in the sample population) had not been coded 
as receiving Title IV-E payments. 

Without developing a statistically valid sampling methodology that 
incorporates up-front data quality controls to ensure complete and 
accurate information on the population, including payment data, ACF 
cannot provide assurance that its reported improper payment estimate 
accurately and completely represents the extent of improper 
maintenance payments in the Foster Care program. 

Evaluation. Although ACF's methodology identified some errors related 
to underpayments and duplicate or excessive payments, it did not 
include procedures to reliably determine the full extent of such 
errors. In its fiscal year 2010 agency financial report, ACF reported 
that underpayments and duplicate or excessive payments represented 19 
percent and 6 percent, respectively, or 25 percent of the errors that 
caused improper payments.[Footnote 31] However, the extent of 
underpayments and duplicate or excessive payment errors identified 
varied widely by state, and in some instances were not identified at 
all. For example, ACF did not identify underpayments in 31 of 51 state 
eligibility reviews and did not identify duplicate or excessive 
payments in 36 of 51 state eligibility reviews.[Footnote 32] We did 
not assess the validity of the reported data. However, the absence of 
such errors for some states seems inconsistent with the general 
distribution of errors reported elsewhere. Further, the lack of 
detailed procedures for identifying any such payment errors may have 
contributed to the variation or to whether the teams found any errors. 
The purpose of the eligibility reviews is to validate the accuracy of 
a state's claim for reimbursement of payments made on behalf of 
eligible children or the accuracy of federal financial assistance 
provided to states. Without detailed procedures to guide review teams 
in the identification of underpayments and duplicate or excessive 
payments, ACF cannot provide assurance that it has identified the full 
extent of any such errors in its Foster Care program. 

Validity of Reported Foster Care Program Improper Payment Reductions 
Is Questionable: 

The weaknesses we identified in ACF's methodology to estimate improper 
payments in the Foster Care program also impaired its ability to 
reliably assess the extent to which its corrective actions reduced 
Foster Care program improper payments. For example, although ACF has 
reported significantly reduced estimated improper maintenance 
payments, from a baseline error rate of 10.33 percent for 2004 to a 
4.9 percent error rate for 2010, the validity of ACF's reporting of 
reduced improper payment error rates is questionable because the 
previously discussed weaknesses in its estimation methodology impaired 
the accuracy and completeness of the reported estimate and error rate. 
In addition, we found that ACF's ability to reliably assess the extent 
to which its corrective actions reduced improper payments was impaired 
by weaknesses in its requirements for state-level corrective actions. 
For example, ACF used the number of cases found in error rather than 
the dollar amount of improper payments identified to determine whether 
a state was required to implement corrective actions. ACF required 
states to implement corrective actions through a program improvement 
plan, if during the Title IV-E primary eligibility review, a state was 
found to have an error rate exceeding 5 percent of the number of cases 
reviewed. We identified six states that were found substantially 
compliant in their primary eligibility reviews as their case error 
rates were below the established 5 percent threshold. However, the 
dollar-based improper payment rates for those six states ranged from 
5.1 percent to 19.8 percent--based on the percentage of improper 
payment dollars found in the sample. Because dollar-based improper 
payment rates are not used in applying the corrective action strategy, 
ACF's method cannot effectively measure states' progress over time in 
reducing improper payments. It also cannot effectively help determine 
whether further action is needed to minimize future improper payments. 
This limits the extent to which states are held accountable for the 
reduction of improper payments in the Foster Care program. 

Our report released today includes seven recommendations to help 
improve ACF's methodology for estimating improper payments for the 
Foster Care program and its corrective action process.[Footnote 33] In 
commenting on our draft report, HHS agreed that its improper payment 
estimation efforts can and should be improved, generally concurred 
with four of our recommendations, and agreed to continue to study the 
remaining three recommendations. We reaffirm the need for all seven 
recommendations. 

Current and Possible Strategies to Move Forward in Reducing Improper 
Payments: 

A number of actions are under way across the federal government to 
help advance improper payment reduction goals. Completing these 
initiatives, as well as designing and implementing enhanced strategies 
in the future, will be needed to effectively reduce the federal 
government's improper payments. Identifying and analyzing the root 
causes of improper payments is key to developing effective corrective 
actions and implementing the controls needed to reduce and prevent 
improper payments. In this regard, implementing strong preventive 
controls are particularly important as these controls can serve as the 
front-line defense against improper payments. Proactively preventing 
improper payments increases public confidence in the administration of 
benefit programs and avoids the difficulties associated with the "pay 
and chase"[Footnote 34] aspects of recovering improper payments. For 
example, addressing program design issues that are a factor in causing 
improper payments may be an effective preventive strategy. Effective 
monitoring and reporting will also be important to help detect any 
emerging improper payment issues. In addition, agencies' actions to 
enhance detective controls to identify and recover overpayments could 
help increase the attention to preventing, identifying, and recovering 
improper payments. For instance, agency strategies to enhance 
incentives for grantees, such as state and local governments, will be 
important. 

Identifying and Analyzing Root Causes of Improper Payments: 

Agencies cited a number of causes for the estimated $115.3 billion in 
reported improper payments, including insufficient documentation; 
incorrect computations; changes in program requirements; and, in some 
cases, fraud. Beginning in fiscal year 2011, according to OMB's 
guidance,[Footnote 35] agencies were required to classify the root 
causes of estimated improper payments into three general categories 
for reporting purposes: (1) documentation and administrative errors, 
(2) authentication and medical necessity errors, and (3) verification 
errors.[Footnote 36] Reliable information on the root causes of the 
current improper payment estimates is necessary for agencies to target 
effective corrective actions and implement preventive measures. 

While agencies generally reported some description of the causes of 
improper payments for their respective programs in their fiscal year 
2011 reports, many agencies did not use the three categories 
prescribed by OMB to classify the types of errors and quantify how 
many errors can be attributed to that category. Of the 79 programs 
with improper payment estimates in fiscal year 2011, we found that 
agencies reported the root cause information using the required 
categories for 42 programs in their fiscal year 2011 PARs and AFRs. 
Together, these programs represented about $46 billion, or 40 percent 
of the total reported $115.3 billion in improper payment estimates for 
fiscal year 2011. Of the $46 billion, the estimated improper payments 
amounts were spread across the three categories, with documentation 
and administrative errors being cited most often. We could not 
calculate the dollar amounts associated with each category because the 
narratives included in some of the agencies' reporting of identified 
causes were not sufficiently detailed or documented. Thorough and 
properly documented analysis regarding the root causes is critical if 
federal agencies are to effectively identify and implement corrective 
and preventive actions across their various programs. 

Implementing Effective Preventive Controls to Avoid Improper Payments: 

Many agencies and programs are in the process of implementing 
preventive controls to avoid improper payments, including overpayments 
and underpayments. Preventive controls may involve a variety of 
activities, such as up-front validation of eligibility, predictive 
analytic tests, training programs, and timely resolution of audit 
findings, as described below. Further, addressing program design 
deficiencies that have caused improper payments may be considered as 
part of an effective preventive strategy. 

* Up-front eligibility validation through data sharing. Data sharing 
allows entities that make payments--to contractors, vendors, 
participants in benefit programs, and others--to compare information 
from different sources to help ensure that payments are appropriate. 
When effectively implemented, data sharing can be particularly useful 
in confirming initial or continuing eligibility of participants in 
benefit programs and in identifying any improper payments that have 
already been made. Also, in June 2010, the President issued a 
presidential memorandum, titled Enhancing Payment Accuracy Through a 
"Do Not Pay List", to help prevent improper payments to ineligible 
recipients.[Footnote 37] This memorandum also directs agencies to 
review prepayment and reward procedures and ensure that a thorough 
review of available databases with relevant information on eligibility 
occurs before the release of any federal funds. Analyses and reporting 
on the extent to which agencies are participating in data sharing 
activities, and additional data sharing efforts that agencies are 
currently pursuing or would like to pursue, are other important 
elements that merit consideration as part of future strategies to 
advance the federal government's efforts to reduce improper payments. 

For example, Labor reported that its Unemployment Insurance program 
utilizes HHS's National Directory of New Hires database[Footnote 38] 
to improve the ability to detect overpayments caused by individuals 
who claim benefits after returning to work--the largest single cause 
of overpayments reported in the program. In June 2011, Labor 
established the mandatory use of the database for state benefit 
payment control no later than December 2011. Labor also recommended 
operating procedures for cross-matching activity for national and 
state directories of new hires. 

In another case, to address the issue of inaccuracy of self-reported 
financial income on applications for student aid, Education, in 
conjunction with the Internal Revenue Service (IRS), implemented a 6-
month pilot version of an IRS data retrieval tool in January 2010 for 
its Pell Grant Program. The tool allows student aid applicants or 
their parents to transfer certain tax return information from IRS 
directly to Education's online application. Education reported that 
nearly 3.5 million students used the data exchange tool, representing 
approximately 21 percent of the applications submitted for the 2011-
2012 academic year. 

* Predictive analytic technologies. In ongoing work, GAO is assessing 
HHS's Centers for Medicare and Medicaid Services' (CMS) use of 
technologies that are intended to support the agency's efforts to 
prevent payment of fraudulent claims. The Small Business Jobs Act of 
2010 requires CMS to use predictive modeling and other analytic 
techniques--known as predictive analytic technologies--both to 
identify and to prevent improper payments under the Medicare Fee-for-
Service program.[Footnote 39] These predictive analytic technologies 
are to be used to analyze and identify Medicare provider networks, 
billing patterns, and beneficiary utilization patterns and detect 
those that represent a high risk of fraudulent activity. Through such 
analysis, CMS expects to more effectively identify unusual or 
suspicious patterns or abnormalities that may provide information that 
could be useful in prioritizing additional review of suspicious 
transactions before payment is made. The 2010 act required that CMS's 
program integrity analysts and contractors begin using these 
technologies on July 1, 2011, in the 10 states identified by CMS as 
having the highest risk of fraud, waste, or abuse in Medicare Fee-for-
Service payments. CMS began using these technologies, available 
through CMS's new Fraud Prevention System, to screen all Fee-for-
Service claims nationwide prior to payment as of June 30, 2011. 

* Training programs for providers, staff, and beneficiaries. Training 
can be a key element in any effort to prevent improper payments from 
occurring. This can include both training staff on how to prevent and 
detect improper payments and training providers or beneficiaries on 
program requirements. For example, the Medicaid Integrity Institute, 
an initiative of CMS's Medicaid Integrity Group (MIG), trains state-
level staff and facilitates networking by sponsoring free workshops 
for states. In addition, the MIG sponsors education programs for 
beneficiaries and providers, such as pharmacy providers, to promote 
best prescribing practices and appropriate prescribing guidelines 
based on Food and Drug Administration labeling, potentially reducing 
improper payments.[Footnote 40] 

* Timely resolution of audit findings. Standards for Internal Control 
in the Federal Government[Footnote 41] requires that the findings of 
audits and other reviews be promptly resolved. Managers are to (1) 
evaluate findings from audits and other reviews promptly, including 
those showing deficiencies and recommendations reported by auditors 
and others who evaluate agencies' operations; (2) determine proper 
actions in response to findings and recommendations from audits and 
reviews; and (3) complete, within established time frames, all actions 
that correct or otherwise resolve the matters brought to management's 
attention. 

* Program design review and refinement. To the extent that provider 
enrollment and eligibility verification problems are identified as a 
significant root cause in a specific program, agencies may look to 
establish enhanced controls in this area. For example, CMS has taken 
steps to strengthen standards and procedures for Medicare provider 
enrollment to help reduce the risk of providers intent on defrauding 
or abusing the program.[Footnote 42] Further, exploring whether 
certain complex program requirements, inconsistent program 
requirements, or both, such as eligibility criteria and requirements 
for provider enrollment, contribute to improper payments could be used 
to lend insight to developing effective strategies for enhancing 
compliance and in identifying opportunities for streamlining or 
changing the eligibility or other program control requirements. 

Implementing Effective Detective Controls to Identify and Recover 
Overpayments: 

Although strong preventive controls remain the frontline defense 
against improper payments, agencies' improper payment reduction 
strategies could also consider actions to establish additional 
effective detection techniques to quickly identify and recover those 
improper payments that do occur. Detection activities 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 could benefit from strengthened prevention 
controls. The following are examples of key detection activities to be 
considered. 

* Data mining. Data mining is a computer-based control activity that 
analyzes diverse data for relationships that have not previously been 
discovered. The central repository of data commonly used to perform 
data mining is called a data warehouse. Data warehouses store tables 
of historical and current information that are logically grouped. As a 
tool in detecting improper payments, data mining of a data warehouse 
can enable an organization to efficiently identify potential improper 
payments, such as multiple payments for an individual invoice to an 
individual recipient on the same date, or to the same address. For 
example, in the Medicare and Medicaid program, data on claims are 
stored in geographically disbursed systems and databases that are not 
readily available to CMS's program integrity analysts. Over the past 
decade, CMS has been working to consolidate program integrity data and 
analytical tools for detecting fraud, waste, and abuse. The agency's 
efforts led to the initiation of the Integrated Data Repository (IDR) 
program, which is intended to provide CMS and its program integrity 
contractors with a centralized source that contains Medicaid and 
Medicare data from the many disparate and dispersed legacy systems and 
databases. CMS subsequently developed the One Program Integrity (One 
PI) program,[Footnote 43] a web-based portal and set of analytical 
tools by which these data can be accessed and analyzed to help 
identify any cases of fraudulent, wasteful, and abusive payments based 
on patterns of paid claims.[Footnote 44] 

* Recovery auditing. While internal control should be maintained to 
help prevent improper payments, recovery auditing could be included as 
a part of agencies' strategy for identifying and recovering contractor 
overpayments. The Tax Relief and Health Care Act of 2006 required CMS 
to implement a national Medicare recovery audit contractor (RAC) 
program by January 1, 2010.[Footnote 45] In fiscal year 2011, HHS 
reported that the Medicare Fee-for-Service recovery audit program 
identified $961 million in overpayments and recovered $797 million 
nationwide. Further, the Medicaid RAC program was established by the 
Patient Protection and Affordable Care Act.[Footnote 46] Under this 
program, each state is to contract with a RAC to identify and recover 
Medicaid overpayments and identify any underpayments. The final 
regulations provided that state Medicaid RACs were to be implemented 
by January 1, 2012. Similar to the Medicare RACs, Medicaid RACs will 
be paid on a contingency fee basis--a percentage of any recovered 
overpayments plus incentive payments for the detection of 
underpayments. 

It is important to note that some agencies have reported statutory or 
regulatory barriers that affect their ability to pursue recovery 
auditing. For example, in fiscal year 2011, the Office of Personnel 
Management (OPM) reported that it faces regulatory barriers that 
restrict its ability to recover improper payments for its Retirement 
Program. OPM reported that based on current law and Treasury's 
regulations, financial institutions are barred from providing OPM with 
the information necessary to recover various improper payments. Only 
the Social Security Administration, Railroad Retirement Board, and the 
Department of Veterans Affairs have been authorized to receive the 
information necessary to identify the withdrawer to attempt to recover 
any improper payments. According to OPM, Treasury has drafted language 
to address the issue and is working to publish a notice of proposed 
rule making to amend its regulation. 

In another instance, USDA reported that Section 281 of the Department 
of Agriculture Reorganization Act of 1994[Footnote 47] precluded the 
use of recovery auditing techniques because Section 281 provides that 
90 days after the decision of a state, county, or an area committee is 
final, no action may be taken to recover the amounts found to have 
been erroneously disbursed as a result of the decision unless the 
participant had reason to believe that the decision was erroneous. 
This statute is commonly referred to as the Finality Rule. As part of 
its annual improper payments reporting, USDA did not cite an 
alternative approach for implementing a recovery auditing strategy. 

* Federal-state incentives. Another area for further exploration for 
agencies' improper payment reduction strategies is the broader use of 
incentives for states to implement effective detective 
controls.[Footnote 48] 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. 

Chairman Carper, Ranking Member Brown, and Members of the 
Subcommittee, this completes my prepared statement. I would be pleased 
to respond to any questions that you may have at this time. 

GAO Contacts and Staff Acknowledgments: 

If you or your staff have any questions about this testimony, please 
contact me at (202) 512-2623 or DavisBH@gao.gov. Contact points for 
our Offices of Congressional Relations and Public Affairs may be found 
on the last page of this testimony. Individuals making key 
contributions to this testimony included Carla Lewis, Assistant 
Director; Sophie Brown; Francine DelVecchio; Gabrielle Fagan; and 
Kerry Porter. 

Related GAO Products: 

Foster Care Program: Improved Processes Needed to Estimate Improper 
Payments and Evaluate Related Corrective Actions. [hyperlink, 
http://www.gao.gov/products/GAO-12-312]. Washington, D.C.: March 7, 
2012. 

Improper Payments: Moving Forward with Governmentwide Reduction 
Strategies. [hyperlink, http://www.gao.gov/products/GAO-12-405T]. 
Washington, D.C.: February 7, 2012. 

For our report on the U.S. government's consolidated financial 
statements for fiscal year 2011, see Department of the Treasury. 2011 
Financial Report of the United States Government. Washington, D.C.: 
December 23, 2011, pp. 211-231. 

Medicaid Program Integrity: Expanded Federal Role Presents Challenges 
to and Opportunities for Assisting States. [hyperlink, 
http://www.gao.gov/products/GAO-12-288T]. Washington, D.C.: December 
7, 2011. 

DOD Financial Management: Weaknesses in Controls over the Use of 
Public Funds and Related Improper Payments. [hyperlink, 
http://www.gao.gov/products/GAO-11-950T]. Washington, D.C.: September 
22, 2011. 

Improper Payments: Reported Medicare Estimates and Key Remediation 
Strategies. [hyperlink, http://www.gao.gov/products/GAO-11-842T]. 
Washington, D.C.: July 28, 2011. 

Fraud Detection Systems: Centers for Medicare and Medicaid Services 
Needs to Ensure More Widespread Use. [hyperlink, 
http://www.gao.gov/products/GAO-11-475]. Washington, D.C.: June 30, 
2011. 

Improper Payments: Recent Efforts to Address Improper Payments and 
Remaining Challenges. [hyperlink, 
http://www.gao.gov/products/GAO-11-575T]. Washington, D.C.: April 15, 
2011. 

Status of Fiscal Year 2010 Federal Improper Payments Reporting. 
[hyperlink, http://www.gao.gov/products/GAO-11-443R]. Washington, 
D.C.: March 25, 2011. 

Opportunities to Reduce Potential Duplication in Government Programs, 
Save Tax Dollars, and Enhance Revenue. [hyperlink, 
http://www.gao.gov/products/GAO-11-318SP]. Washington, D.C.: March 1, 
2011. 

High-Risk Series: An Update. [hyperlink, 
http://www.gao.gov/products/GAO-11-278]. Washington, D.C.: February 
2011. 

Improper Payments: Significant Improvements Needed in DOD's Efforts to 
Address Improper Payment and Recovery Auditing Requirements. 
[hyperlink, http://www.gao.gov/products/GAO-09-442]. Washington, D.C.: 
July 29, 2009. 

Improper Payments: Progress Made but Challenges Remain in Estimating 
and Reducing Improper Payments. [hyperlink, 
http://www.gao.gov/products/GAO-09-628T]. Washington, D.C.: April 22, 
2009. 

Improper Payments: Status of Agencies' Efforts to Address Improper 
Payment and Recovery Auditing Requirements. [hyperlink, 
http://www.gao.gov/products/GAO-08-438T]. Washington, D.C.: January 
31, 2008. 

Improper Payments: Federal Executive Branch Agencies' Fiscal Year 2007 
Improper Payment Estimate Reporting. [hyperlink, 
http://www.gao.gov/products/GAO-08-377R]. Washington, D.C.: January 
23, 2008. 

Improper Payments: Weaknesses in USAID's and NASA's Implementation of 
the Improper Payments Information Act and Recovery Auditing. 
[hyperlink, http://www.gao.gov/products/GAO-08-77]. Washington, D.C.: 
November 9, 2007. 

Improper Payments: Agencies' Efforts to Address Improper Payment and 
Recovery Auditing Requirements Continue. [hyperlink, 
http://www.gao.gov/products/GAO-07-635T]. Washington, D.C.: March 29, 
2007. 

Improper Payments: Incomplete Reporting under the Improper Payments 
Information Act Masks the Extent of the Problem. [hyperlink, 
http://www.gao.gov/products/GAO-07-254T]. Washington, D.C.: December 
5, 2006. 

Improper Payments: Agencies' Fiscal Year 2005 Reporting under the 
Improper Payments Information Act Remains Incomplete. [hyperlink, 
http://www.gao.gov/products/GAO-07-92]. Washington, D.C.: November 14, 
2006. 

Improper Payments: Federal and State Coordination Needed to Report 
National Improper Payment Estimates on Federal Programs. [hyperlink, 
http://www.gao.gov/products/GAO-06-347]. Washington, D.C.: April 14, 
2006. 

[End of section] 

Footnotes: 

[1] It is important to recognize that improper payment estimates 
reported by federal agencies in fiscal year 2011 are not intended to 
be an estimate of fraud in federal agencies' programs and activities. 
An improper payment is defined as any payment that should not have 
been made or that was made in an incorrect amount (including 
overpayments and underpayments) under statutory, contractual, 
administrative, or other legally applicable requirements. It includes 
any payment to an ineligible recipient, any payment for an ineligible 
good or service, any duplicate payment, payment for a good or service 
not received (except for such payments where authorized by law), and 
any payment that does not account for credit for applicable discounts. 
Office of Management and Budget guidance also instructs agencies to 
report as improper payments any payments for which insufficient or no 
documentation was found. 

[2] See the Related GAO Products list at the end of this statement for 
a selection of the products related to these issues. 

[3] GAO, Foster Care Program: Improved Processes Needed to Estimate 
Improper Payments and Evaluate Related Corrective Actions, [hyperlink, 
http://www.gao.gov/products/GAO-12-312] (Washington, D.C.: Mar. 7, 
2012). 

[4] [hyperlink, http://www.gao.gov/products/GAO-12-312]. 

[5] Department of the Treasury, 2011 Financial Report of the United 
States Government (Washington, D.C.: Dec. 23, 2011), 211-231. 

[6] [hyperlink, http://www.gao.gov/products/GAO-12-312]. 

[7] Pub. L. No. 107-300, 116 Stat. 2350 (Nov. 26, 2002). 

[8] Pub. L. No. 111-204, 124 Stat. 2224 (July 22, 2010). 

[9] IPERA defines "significant improper payments" as gross annual 
improper payments in the program exceeding (1) both 2.5 percent of 
program outlays and $10 million of all program or activity payments 
during the fiscal year reported or (2) $100 million (regardless of the 
improper payment error rate). Further, the threshold for "significant 
improper payments" will be reduced for fiscal year 2014 and each year 
thereafter to gross annual improper payments in the program exceeding 
(1) both 1.5 percent of program outlays and $10 million of all program 
or activity payments during the fiscal year reported or (2) $100 
million (regardless of the improper payment error rate). 

[10] Section 831 of the National Defense Authorization Act for Fiscal 
Year 2002, Pub. L. No. 107-107, div. A, 115 Stat. 1012, 1186 (Dec. 28, 
2001), required that agencies that enter into contracts with a total 
value in excess of $500 million in a fiscal year carry out a cost-
effective program for identifying and recovering amounts erroneously 
paid to contractors. IPERA repealed these requirements. 

[11] OMB Circular No. A-136 Revised, Financial Reporting Requirements 
(Oct. 27, 2011); OMB Memorandum M-11-16, Issuance of Revised Parts I 
and II to Appendix C of OMB Circular A-123 (Apr. 14, 2011); OMB 
Memorandum M-11-04, Increasing Efforts to Recapture Improper Payments 
by Intensifying and Expanding Payment Recapture Audits (Nov. 16, 
2010); and OMB Memorandum M-10-13, Issuance of Part III to OMB 
Circular A-123, Appendix. C (Mar. 22, 2010). 

[12] Codified, as amended, at 42 U.S.C. §§ 670-679c. 

[13] Examples of HHS OIG reports include the following: HHS OIG, Audit 
of Allegheny County Title IV-E Foster Care Claims From October 1997 
Through September 2002, A-03-08-00554 (Jan. 4, 2011); Review of Title 
IV-E Foster Care Costs Claimed on Behalf of Delinquent Children in 
Georgia, A-04-07-03519 (June 17, 2010); Review of California's Title 
IV-E Claims for Payments Made by Los Angeles County to Foster Homes of 
Relative Caregivers, A-09-06-00023 (Oct. 2, 2009); and Philadelphia 
County's Title IV-E Claims Based on Contractual Per Diem Rates of $300 
or Less for Foster Care Services from October 1997 Through September 
2002, A-03-07-00560 (May 19, 2008). 

[14] GAO, Foster Care and Adoption Assistance: Federal Oversight 
Needed to Safeguard Funds and Ensure Consistent Support for States' 
Administrative Costs, [hyperlink, 
http://www.gao.gov/products/GAO-06-649] (Washington, D.C.: June 15, 
2006). 

[15] Examples of state-level audit reports include the following: 
California State Auditor, State of California Internal Control and 
State and Federal Compliance Audit Report for the Fiscal Year Ended 
June 30, 2010 (Sacramento, Calif.: Mar. 29, 2011); KPMG, Government of 
the District of Columbia Schedule of Expenditures of Federal Awards 
and Reports Required by Government Auditing Standards and OMB Circular 
A-133, Year Ended September 30, 2010 (Washington, D.C.: Jan. 27, 
2011); and State of Indiana, State Board of Accounts, State of Indiana 
Single Audit Report July 1, 2009 to June 30, 2010 (Indianapolis, Ind.: 
Feb. 25, 2011). 

[16] In its fiscal year 2005 PAR, HHS reported an improper payment 
estimate for the Foster Care program for fiscal years 2004 and 2005. 
According to HHS, the fiscal year 2004 error rate had not been 
finalized prior to the issuance of its fiscal year 2004 PAR, and thus 
was not reported in that publication. 

[17] In their fiscal year 2011 PARs and AFRs, select federal entities 
updated their fiscal year 2010 improper payment estimates to reflect 
changes since issuance of their fiscal year 2010 reports. These 
updates decreased the governmentwide improper payment estimate for 
fiscal year 2010 from $125.4 billion to $120.6 billion. Estimated 
improper payment amounts for fiscal years 2011 and 2010 may include 
estimates based on prior years' data, if current reporting year data 
were not available, as allowed by OMB guidance. 

[18] The four programs with both the highest dollar estimates and 
highest error rates were the Earned Income Tax Credit, Unemployment 
Insurance, Medicare Advantage, and National School Lunch programs. 

[19] [hyperlink, http://www.gao.gov/products/GAO-12-312]. 

[20] The four risk-susceptible programs that did not report a required 
improper payments estimate for fiscal year 2011 were the Department of 
Education's Federal Family Education Loan, Federal Communications 
Commission's Interstate Telecommunications Relay Services Fund, and 
HHS's Children's Health Insurance Program and Temporary Assistance for 
Needy Families programs. 

[21] The term state-administered refers to federal programs that are 
managed on a day-to-day basis at the state level to carry out program 
objectives. 

[22] Pub. L. No. 111-3, 123 Stat. 8 (Feb. 4, 2009). 

[23] DOD refers to payments to contractors and vendors collectively as 
commercial payments. 

[24] GAO, DOD Financial Management: Weaknesses in Controls over the 
Use of Public Funds and Related Improper Payments, [hyperlink, 
http://www.gao.gov/products/GAO-11-950T] (Washington, D.C.: Sept. 22, 
2011), and Improper Payments: Significant Improvements Needed in DOD's 
Efforts to Address Improper Payment and Recovery Auditing 
Requirements, [hyperlink, http://www.gao.gov/products/GAO-09-442] 
(Washington, D.C.: July 29, 2009). 

[25] DOD Inspector General, DOD Needs to Improve High Dollar 
Overpayment Review and Reporting, D-2011-050 (Arlington, Va.: Mar. 16, 
2011). 

[26] DOD Inspector General, DOD Needs to Improve High Dollar 
Overpayment Review and Reporting. 

[27] DOD Inspector General, DOD Needs to Improve High Dollar 
Overpayment Review and Reporting. The IG report stated that DFAS and 
the Army Corps of Engineers did not review all payment systems for 
high-dollar overpayments. DFAS did not review approximately $2.2 
billion in payments from five entitlement systems and the Corps of 
Engineers did not complete a timely review of $7.3 billion of 
commercial payments. 

[28] GAO, Improper Payments: Federal and State Coordination Needed to 
Report National Improper Payment Estimates on Federal Programs, 
[hyperlink, http://www.gao.gov/products/GAO-06-347] (Washington, D.C.: 
Apr. 14, 2006). 

[29] GAO, Improper Payments: Progress Made but Challenges Remain in 
Estimating and Reducing Improper Payments, [hyperlink, 
http://www.gao.gov/products/GAO-09-628T] (Washington, D.C.: Apr. 22, 
2009), and Improper Payments: Status of Agencies' Efforts to Address 
Improper Payment and Recovery Auditing Requirements, [hyperlink, 
http://www.gao.gov/products/GAO-08-438T] (Washington, D.C.: Jan. 31, 
2008). 

[30] AFCARS is the federal information system that collects and 
processes data on children in foster care and those who have been 
adopted under the auspices of state child welfare agencies. AFCARS 
serves as the central depository of various nationwide data on the 
foster care program, as required by the Title IV-E legislation. ACF 
uses this system for, among other purposes, determining and assessing 
outcomes for children and families, budget planning and projections, 
and targeting areas for greater or potential technical assistance 
efforts. The data in AFCARS are self-reported and maintained by the 
states, and are subject to information system assessment reviews and 
federally mandated edit checks by ACF. 

[31] The other types of errors identified related to eligibility. 
These included providers not licensed or approved, ineligible payments 
(e.g., therapy), a child not being eligible under the Aid to Families 
with Dependent Children program at the time of removal, criminal 
records check not completed, judicial determination regarding 
reasonable efforts to finalize permanency plan not timely, and no 
judicial determination of reasonable efforts to prevent removal. 

[32] This analysis was based on the Title IV-E eligibility reviews 
that comprised the fiscal year 2010 Foster Care program improper 
payment estimate. 

[33] [hyperlink, http://www.gao.gov/products/GAO-12-312]. 

[34] "Pay and chase" refers to the labor-intensive and time-consuming 
practice of trying to recover overpayments once they have already been 
made rather than preventing improper payments in the first place. 

[35] OMB Circular No. A-136 Revised, Financial Reporting Requirements, 
and OMB Memorandum M-10-13, Issuance of Part III to OMB Circular A-
123, Appendix C. 

[36] OMB defines these error types as: Documentation and 
Administrative Errors - Errors caused by the absence of supporting 
documentation necessary to verify the accuracy of a payment or errors 
caused by incorrect inputting, classifying, or processing of 
applications or payments by a relevant Federal agency, State agency, 
or third party who is not the beneficiary; Authentication and Medical 
Necessity Errors - Errors caused by an inability to authenticate 
eligibility criteria through third-party databases or other resources 
because no databases or other resources exist, or providing a service 
that was not medically necessary given the patient's condition; and 
Verification Errors - Errors caused by the failure or inability to 
verify recipient information, including earnings, income, assets, or 
work status, even though verifying information does exist in third-
party databases or other resources (in this situation, as contrasted 
with "authentication" errors, the "inability" to verify may arise due 
to legal or other restrictions that effectively deny access to an 
existing database or resource), or errors due to beneficiaries failing 
to report correct information to an agency. 

[37] 75 Fed. Reg. 35953 (June 23, 2010). 

[38] The National Directory of New Hires database, maintained by HHS, 
contains information on all newly hired employees, quarterly wage 
reports for all employees, and unemployment insurance claims 
nationwide. 

[39] Pub. L. No. 111-240, § 4241, 124 Stat. 2504, 2599 (Sept. 27, 
2010). 

[40] GAO, Medicaid Program Integrity: Expanded Federal Role Presents 
Challenges to and Opportunities for Assisting States, [hyperlink, 
http://www.gao.gov/products/GAO-12-288T] (Washington D.C.: Dec. 7, 
2011). 

[41] GAO, Standards for Internal Control in the Federal Government, 
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1] 
(Washington, D.C: November 1999). 

[42] GAO, Improper Payments: Reported Medicare Estimates and Key 
Remediation Strategies, [hyperlink, 
http://www.gao.gov/products/GAO-11-842T] (Washington, D.C.: July 28, 
2011). 

[43] The One PI program portal is a web-based user interface that 
enables a single log-in through centralized, role-based access to the 
system. 

[44] We reported in June 2011 that IDR includes most types of Medicare 
claims data, but not the Medicaid data needed to help analysts detect 
improper payments of Medicaid claims. See GAO, Fraud Detection 
Systems: Centers for Medicare and Medicaid Services Needs to Ensure 
More Widespread Use, [hyperlink, 
http://www.gao.gov/products/GAO-11-475] (Washington D.C.: June 30, 
2011). 

[45] Pub. L. No. 109-432, div. B., title III, § 302, 120 Stat. 2922, 
2991-92 (Dec. 20, 2006), codified at 42 U.S.C. § 1395ddd(h). 

[46] Pub. L. No. 111-148, § 6411, 124 Stat. 119, 773 (Mar. 23, 2010). 

[47] Pub. L. No. 103-354, § 281, 108 Stat. 3178, 3233 (Oct. 13, 1994), 
codified, as amended, at 7 U.S.C. § 7001. 

[48] OMB's implementing guidance for IPERA allows agencies to use up 
to 25 percent of funds recovered under a payment recapture audit 
program for a financial management improvement program, including 
providing a portion of funding to state and local governments. 

[End of section] 

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