Improper Payments:

Federal and State Coordination Needed to Report National Improper Payment Estimates on Federal Programs

GAO-06-347: Published: Apr 14, 2006. Publicly Released: Apr 14, 2006.

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Over the past several years, GAO has reported that federal agencies are not well positioned to meet requirements of the Improper Payments Information Act of 2002 (IPIA). For fiscal year 2005, estimated improper payments exceeded $38 billion but did not include some of the highest risk programs, such as Medicaid with outlays exceeding $181 billion for fiscal year 2005. Overall, state-administered programs and other nonfederal entities receive over $400 billion annually in federal funds. Thus, federal agencies and states share responsibility for the prudent use of these funds. GAO was asked to determine actions taken at the state level to help federal agencies estimate improper payments for state-administered federal programs and assistance needed from the federal level to support the respective federal agencies' implementation of IPIA.

To date, states have been subject to limited requirements to assist federal agencies in estimating improper payments. For the 25 major state-administered federal programs surveyed, only 2 programs--the Food Stamp and Unemployment Insurance programs--have federal requirements for all states to estimate improper payments. A limited number of federal agencies are conducting pilots to estimate improper payments in other programs, but state participation is voluntary. Where no federal requirement or pilot is in place, 5 programs involving 11 states had estimated improper payments during fiscal years 2003 or 2004. States have a fundamental responsibility to ensure the proper administration of federal awards by using sound management practices and maintaining internal controls. To do this, states reported using a variety of techniques to prevent and detect improper payments. All states, except for one, responded that they use computer-related techniques, such as fraud and abuse detection programs or data matching, to prevent or detect improper payments. Other techniques selected states used included performing statewide assessments and recovery auditing methods. States also reported receiving federal incentives and penalties to assist with reducing improper payments, although most of these actions related to the Food Stamp Program, which gives incentives and penalties to states having error rates below and above the program's national error rate. Of the 240 state program officials surveyed, 100 identified tools that would be needed to estimate improper payments and help federal agencies meet various IPIA requirements, including guidance on estimating improper payments and performing risk assessments. OMB has begun planning for increased state involvement in measuring and reporting improper payments via the Erroneous and Improper Payments Workgroup and IPIA guidance. However, much work remains at the federal level to identify and estimate improper payments for state-administered federal programs, including determining the nature and extent of states' involvement to assist federal agencies with IPIA reporting requirements.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: On August 10, 2006, OMB issued its revised guidance to implement the Improper Payments Information Act of 2002 (IPIA)--OMB Circular No. A-123, Appendix C "Requirements for Effective Measurement and Remediation of Improper Payments." Section H of this guidance (p.9) provides a definition of federally funded state-administered programs as those programs that "receive at least part of their funding from the Federal Government, but are administered, managed, and operated at the State or local level." OMB's action to define state-administrated programs in its revised guidance provides federal agencies sufficient criteria for consistently identifying all such programs.

    Recommendation: To help further the progress toward meeting the goals of IPIA and determining states' role in assisting federal agencies to report a national improper payment estimate on federal programs, the Director, Office of Management and Budget, should revise IPIA policy guidance to clearly define state-administered programs so that federal agencies can consistently identify all such programs.

    Agency Affected: Executive Office of the President: Office of Management and Budget

  2. Status: Open

    Comments: On August 10, 2006, OMB issued its revised guidance to implement the Improper Payments Information Act of 2002 (IPIA)--OMB Circular No. A-123, Appendix C "Requirements for Effective Measurement and Remediation of Improper Payments." OMB expanded its guidance to define federally funded state-administered programs and provided that federal agencies, upon the approval of OMB, could implement alternative methodologies for generating a national improper payment estimate for state-administered programs such as a systematic selection of States each year. The IPIA guidance provides that as part of the justification for using an alternative methodology, the federal agency must include a description of the States selected each year, the methodology for generating annual national estimates, and basis for using an alternative approach rather than the required methodology to calculate the national estimate based on a random statistical sample. While this revision, if fully and effectively implemented, may improve OMB's ability to carry out its oversight responsibilities with respect to determining appropriate methodologies to be employed in generating a program's improper payment estimate, these revisions did not include criteria that agencies should consider in developing plans or methodologies for estimating a national improper payment estimate for state-administered programs--the essence of our recommendation.

    Recommendation: To help further the progress toward meeting the goals of IPIA and determining states' role in assisting federal agencies to report a national improper payment estimate on federal programs, the Director, Office of Management and Budget, should expand IPIA guidance to provide criteria that federal agencies should consider when developing a plan or methodology for estimating a national improper payment estimate for state-administered programs, such as criteria that address the nature and extent of data and documentation needed from the states to calculate a national improper payment estimate.

    Agency Affected: Executive Office of the President: Office of Management and Budget

  3. Status: Closed - Implemented

    Comments: On August 10, 2006, OMB issued its revised guidance to implement the Improper Payments Information Act of 2002 (IPIA)--OMB Circular No. A-123, Appendix C "Requirements for Effective Measurement and Remediation of Improper Payments." Section L of this guidance (pp.11-12) lists several program integrity activities that federal agencies can use to enhance their improper payment reporting requirements, including conducting risk assessments and estimating improper payments, as well as efforts to reduce and recover improper payments such as pre- and postpayment audits and data mining. Further, for state-administered programs, the guidance provides that federal agencies should evaluate which States have the most effective methods for utilizing an automated process to identify select transactions that are deemed high risk, based on a set of established criteria, that would receive increased focus both pre- and postpayment. OMB guidance also provides that federal agencies ensure that best practices in this area be disseminated to other States. While the OMB guidance only governs federal agencies, because it is made publicly available, States and other entities can also utilize this information to enhance efforts to identify and reduce improper payments. The inclusion of these and other program integrity activities included in OMB's revised IPIA guidance as well as the availability of this guidance to the public, sufficiently addresses the intent of our recommendation.

    Recommendation: To help further the progress toward meeting the goals of IPIA and determining states' role in assisting federal agencies to report a national improper payment estimate on federal programs, the Director, Office of Management and Budget, should require federal agencies to communicate, and make available to the states, guidance on conducting risk assessments and estimating improper payments for federally funded, state-administered programs.

    Agency Affected: Executive Office of the President: Office of Management and Budget

  4. Status: Closed - Implemented

    Comments: On August 10, 2006, OMB issued its revised guidance to implement the Improper Payments Information Act of 2002 (IPIA)--OMB Circular No. A-123, Appendix C "Requirements for Effective Measurement and Remediation of Improper Payments." Section L of this guidance (pp.11-12) lists several program integrity activities that federal agencies can use to enhance their improper payment reporting requirements and efforts to identify, eliminate, and recover improper payments such as pre- and postpayment audits and data mining. Because the OMB guidance is made publicly available, States and other entities can also utilize this information to enhance efforts to identify and reduce improper payments. Further, the program integrity initiatives listed in the OMB guidance align with the best practices outlined in our executive guide to reduce improper payments, "Strategies to Manage Improper Payments: Learning from Public and Private Sector Organizations" (GAO-02-69G). Further, other OMB initiatives are also aligned with the intent of our recommendation. For example, Executive Order #13520, "Reducing Improper Payments and Eliminating Waste in Federal Programs" (signed by the President on 11/20/09), provides that the Director of OMB shall establish, within 30 days of the date of the order, a working group consisting of federal and elected State and local officials to make recommendations for administrative actions designed to improve the incentives and accountability of State and local governments as well as other entities receiving federal funds for reducing improper payments. The Executive Order also requires that within 180 days of the date of the order, the Secretary of Treasury and Director of OMB (in consultation with others) are to recommend to the President actions designed to reduce improper payments by improving information sharing among agencies and programs, State and local governments, and other stakeholders. These actions sufficiently address the intent of our recommendation.

    Recommendation: To help further the progress toward meeting the goals of IPIA and determining states' role in assisting federal agencies to report a national improper payment estimate on federal programs, the Director, Office of Management and Budget, should share ideas, concerns, and best practices with federal agencies and states regarding improper payment reporting requirements for federally funded, state-administered programs.

    Agency Affected: Executive Office of the President: Office of Management and Budget

 

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