October 3, 2002

I am pleased to be able to provide the Subcommittee on Government Efficiency my testimony on the problem of erroneous payments made by the government. This is a longstanding problem that has demanded appropriate attention for some time. As you know, the President campaigned on a promise to bring financial discipline to the Federal government. Reducing erroneous payments is a big part of that and a key component of his management agenda. Although this testimony focuses on the Administration’s efforts to reduce erroneous payments, the Office of Management and Budget also has an aggressive approach to ensuring the integrity of travel and purchase cards used by Federal employees. Other Administration witnesses will testify before your Subcommittee on these efforts.

Reports by the General Accounting Office, agency Inspectors General, and agencies’ own financial statements show that erroneous payments are a government-wide problem. We are making every effort to track and reduce them in order to save the taxpayers billions of wasted tax dollars. Agencies are taking concrete steps to ensure that the right payments go to the right beneficiary. To make dramatic reductions in erroneous payments, it will take a combination of administrative and legislative actions, as well as the cooperation of the innumerable third parties, our partners in administering many Federal programs.

In August 2001, President Bush released his management agenda. In that agenda, it was announced that OMB would establish a baseline of erroneous payments and work with agencies to establish policies and practices to reduce them. We asked every Federal program that made more than $2 billion in benefit payments to submit with their budget an estimate of their erroneous payments and goals for reducing them.

Chairman Horn, you are one of the chorus of people who have been asking agencies to report their erroneous payments. Senator Fred Thompson also consistently asked that agencies report estimates of payments made improperly. This is the first Administration to require agencies to do this. I am proud of the progress we have made.

The General Accounting Office has reported that in the past, just a few agencies bothered to report estimated erroneous payment rates in their financial statements. Since we asked agencies to begin submitting erroneous payment rates with their budgets, the number of programs that can report this information has more than tripled.

Following is a chart showing the major agencies that have established erroneous payment rates and the most recent data they have reported:

I caution you not to aggregate these figures. In the past, agencies reported in their financial statements a mixture of estimated erroneous payment rates and actual erroneous payments. We are now requiring agencies to provide an erroneous payment rate based on a statistical sample projected to the universe of payments made. For the FY 2004 budget process underway, we have further refined our guidance to agencies, requiring them to distinguish between overpayments, underpayments, and total erroneous payments, as well as to define the methodology they used to come up with their error rate, in their budget submissions. This will assure consistency in the error rates reported by agencies.

GAO has reported erroneous payments of around $20 billion for each of the past three years. But as you can see, these figures confirm that government-wide erroneous payments are much greater than just those reported in agency financial statements. And we’ve only begun to get a handle on what erroneous payments are at agencies that have a harder time coming up with estimates.

For those agencies that have measured erroneous payments before, the Bush Administration is requiring that they get serious about preventing erroneous payments from going out on the front end. One example is Medicare. Medicare reported a continued decrease in its erroneous payment rate from 6.8 percent in 2000 to 6.3 percent in 2001. In 1996, the error rate was 14 percent.

The Department of Health and Human Services (HHS) Inspector General credits the Centers for Medicare and Medicaid Services (CMS) for their efforts. “CMS has worked with provider groups . . . to clarify reimbursement rules and to impress upon health care providers the importance of fully documenting services. . . . In addition, due to efforts by [the Centers for Medicare and Medicaid Services] and the provider community, the overwhelming majority of health care providers follow Medicare reimbursement rules and bill correctly.” ^1/ But even 6.3 percent is $12.1 billion a year, Mr. Chairman. So we must do better.

The Centers for Medicare and Medicaid Services are undertaking a new project, the Medicare Comprehensive Error Rate Testing (CERT) program, to refine its estimate of erroneous payments in the Medicare program. The CERT program will produce national, contractor specific, provider type, and benefit category specific paid claim error rates. The results from this effort will be used not only to calculate the paid claim error rates, but also to help the Centers for Medicare and Medicaid Services formulate corrective action. It promises to improve the administration of the Medicare program by both improving customer service and reducing waste.

The Food Stamps program is also one where we have a good historical baseline with which to measure progress to reduce erroneous Food Stamps payments. And again, the error rate is declining. The national Food Stamps error rate fell from 8.91 percent in FY 2000 to 8.66 percent in FY 2001. This is the lowest error rate ever. Even with this decline, this still represents $1.3 billion in over and under payments. So, the Food and Nutrition Service, under the able leadership of Eric M. Bost, Under Secretary for Food, Nutrition, and Consumer Services, is taking an aggressive approach to reducing erroneous payments in the Food Stamps program.

Despite a reduction in the national Food Stamps error rate, certain states in 2001 had exorbitantly high error rates. For instance, California had an error rate of 17.37 percent, and Michigan had an error rate of 13.9 percent. Under Secretary Bost is working with those states to ensure they put policies and practices in place to prevent erroneous payments from being made in the first place. But he is also holding all states with high error rates accountable, levying cash sanctions authorized by law to recover Federal dollars erroneously paid. If implemented properly, the Food Stamps Quality Control program can improve the administration of Food Stamps. Unfortunately, the recently enacted Farm Bill inhibits the ability of the Food and Nutrition Service to hold accountable those states with high error rates. This is an example of Congressional action working against our goal to improve the integrity of Federal program payments. In the past, the Department of Agriculture could simply take the rate at which a state makes erroneous Food Stamps payments, compare it to the national average erroneous food stamps error rate, and assess cash sanctions against states that were above the national average. But unfortunately, past Administrations failed to do this, neglecting to establish accountability. Still worse, the Farm Bill artificially lowers the statistically determined error rate for each state, and it only allows the Department of Agriculture to assess penalties against a state when it has exceeded the national error rate by 5 percent for two years in a row. And it reduces the penalties that can be assessed.

We are requiring all agencies to implement erroneous payment reduction programs like those at Medicare and Food Stamps. But for agencies that have traditionally not bothered to check whether they were disbursing Federal funds appropriately, an estimate of erroneous payments can be a difficult thing to come up with.

Although the Department of Health and Human Services has a mature method for estimating erroneous payments in the Medicare program, the same is not true for Medicaid, Temporary Assistance for Needy Families, State Children’s Health Program, or other programs it administers. Unlike Medicare, Medicaid is a program that is financed with and administered by the states. Under broad Federal guidelines, each state establishes a Medicaid plan that outlines eligibility standards, provider methods, and benefit packages tailored to the needs of its citizens. Because Medicaid encompasses more than $225 billion in payments each year, assessing the risk of erroneous payments is critical.

The Centers for Medicare and Medicaid Services are currently administering a pilot program to test core methodologies for measuring erroneous payments in the Medicaid program. HHS plans to expand the pilot from 12 states in FY 2003 up to 25 states in FY 2004. Following these pilots, the Centers for Medicare and Medicaid Services expects to have a tested Medicaid methodology (for both fee-for-service and managed care payments) that the Federal government could mandate for use by every state. That methodology could then be modified, as appropriate, for use in other programs.

Even without an erroneous payment rate, HHS is taking steps to prevent erroneous payments in most of the benefit programs it administers. To assess risks to its programs, HHS reviews audits conducted by the HHS Inspector General and the General Accounting Office. In addition, the Department reviews audits conducted pursuant to the Single Audit Act. With this information, the Department is developing strategies to prevent erroneous payments and enforce program requirements.

The School Lunch Program is another program not administered directly by the Federal government. The Food and Nutrition Service administers the School Lunch Program through grants to state agencies. Each state agency, in turn, enters into agreements with school districts for local level program operation and delivery of needed food benefits to eligible children. Although there is no national error rate, data from a variety of sources analyzed by the Food and Nutrition Service indicates that the number of ineligible recipients could exceed 20 percent. Therefore, the Food and Nutrition Service has recently proposed that schools report the results of activities undertaken under current regulations to verify the eligibility of program applicants. State agencies would then consolidate, analyze, and report such information to the Food and Nutrition Service. This first ever nationwide analysis of the eligibility verification process in the School Lunch Program will provide valuable assistance to the Food and Nutrition Service and the states to address weaknesses in program eligibility certification, a concern for the School Lunch Program, as well as for the many education programs that use free and reduced price meal data to target a much larger pool of resources. Additionally, the agency has initiated pilot projects to test alternative procedures for establishing program eligibility that may be helpful in preparing legislative proposals for improving program integrity for Congressional consideration during the reauthorization of this important nutrition program.

Our ongoing efforts to reduce erroneous are bearing fruit. In many Federal programs, when citizens apply for benefits, the information is verified by checking the information against numerous sources of information. The Department of Labor – each week – draws small random samples of paid claims, verifies all information pertinent to eligibility, and determines whether the payment amount accorded with state law and policy. The Social Security Administration is increasing the number of cases it reviews to ensure that the nondisability factors of eligibility continue to be met, and that payments to beneficiaries are correct. This increase -- by 9 percent in FY 2003 -- is expected to lead to substantial improvements in payment accuracy rates.

No matter how hard we try administratively to address erroneous payments in many Federal programs, Mr. Chairman, the solution is often a statutory one. Programs are sometimes created with such cumbersome parameters that it would be impossible to administer without substantial risk of erroneous payments. Agencies could benefit from added to tools to prevent erroneous payments, which they are often precluded by statute from using.

The Department of Housing and Urban Development (HUD) program provides rental subsidies to millions of Americans. But HUD overpays hundreds of millions of dollars in low-income rent subsidies due to the incomplete reporting of tenant income, the improper calculation of tenant rent contributions, and the failure to fully collect all outstanding rent. HUD has committed to a goal of a 50 percent reduction in these erroneous payments by 2005. HUD has developed a comprehensive strategy to address this issue, including updated program guidance and training, as well as automated tools for tenant interviews and rent calculations. But HUD needs tools to meet its aggressive goals to reduce erroneous rental subsidy payments.

HUD needs access to more information so that it can verify tenant income. One such source of information is the New Hires Database, which provides timely information that can be used to corroborate what applicants are telling housing officials is their actual income. But HUD needs statutory authority to gain access to this information, which is in the custody of HHS, and the Administration will propose that such authority be enacted.

The Administration has also proposed similar statutory authority for the Department of Labor to allow it to verify on a more timely basis when recipients of unemployment benefits have returned to work. With erroneous unemployment insurance payments at approximately $2.3 billion, this new data sharing tool is likely to save the American taxpayer hundreds of millions of dollars annually.

One longstanding barrier to improving a program’s payment integrity lies with Financial Student Aid at the Department of Education, which is unable to access tax information to verify the income of applicants for Federal financial aid. Congress already enacted this explicit authority of the Department of Education to access tax information to verify the income of applicants for Federal financial aid. However, because there was no amendment to the Internal Revenue Code, officials at the Department of the Treasury and the Department of Education couldn’t share the required information. So this Administration has submitted legislation to cure this problem and give the Department of Education this critical data-sharing tool.

These are just a few of the statutory proposals that either have already been transmitted by the Administration to Congress or are under active consideration. As we identify statutory barriers to reducing erroneous payments, we will work to have them removed. It will take Congress’ active cooperation to remove them.

Benefit programs aren’t the only ones that make erroneous payments. The General Accounting Office and agency Inspectors General identify billions in contract overpayments annually. The Administration was pleased to sign into law the authority to implement recovery auditing government-wide. This common sense private sector technique examines all contract payments to determine the extent of things like duplicate payments; errors on invoices; payments for items not received; mathematical or other errors in determining payment amounts and executing payments; and the failure to obtain credit for returned merchandise.

This week, the Administration released draft guidance to agencies on how we recommend they implement this new law. If done correctly, recovery auditing can be a tool that can help agencies identify erroneous payments made, reveal why they were made, and prevent erroneous contract payments in the future. In addition to just employing recovery auditing, however, the Administration’s guidance instructs agencies to implement management improvement programs, the purpose of which is to take the information gleaned from a recovery audit program, as well as other audits, reviews, or information that identify weaknesses in an agency’s internal controls, and ensure that actions are undertaken to improve the agency’s contract payment process.

Erroneous payments are a major weakness in program administration across the Federal government. We are making an overall effort to improve the government’s financial management. But this Administration is making every effort to ensure that we track them and work to reduce erroneous payments. The FY 2004 budget process will be just the second time we’ve asked agencies to provide us with erroneous payment estimates. The information submitted with the budget will show the many programs where we are making progress tracking and reducing erroneous payments. With our persistence and the continued cooperation of the Congress, this is one area where we will be able to demonstrate that we saved the American people some of their hard-earned dollars.

^1/ “Improper Fiscal Year 2001 Medicare Fee-for-Service Payments,” Health and Human Services Inspector General, Report Number A-17-01-02002, February 15, 2002.