2014 CIGIE/GAO Financial Statement Audit Conference

1. Update on Improper paymentsMay 8, 2014Beryl H. “Berri” DavisCGFM, CPA, CIA, CGAP, CGMA, CCSADirector, Financial Management and Assurancedavisbh@gao.gov 2014 CIGIE/GAO Financial Statement Audit Conference

2. 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

3. 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.

4. 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.

5. 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.

6. 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;

7. 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.

8. 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 .

9. 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

10. 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.

11. 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.

12. 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.

13. 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.

14. 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.

15. 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%.

16. Percentage Distribution of Improper Payments in Fiscal Year 2013

17. 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.

18. 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.

19. Fiscal Year 2013 Top 5 Improper Payment Estimates by Dollar Amount

20. 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.

21. Fiscal Year 2013 Top 5 Improper Payment Estimates by Error Rate

22. 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.

23. 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.

24. 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

25. 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.

26. 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.

27. 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.

28. 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.