Actions and Guidance Could Help Address Issues and Inconsistencies in Estimation Processes
GAO-18-377: Published: May 31, 2018. Publicly Released: May 31, 2018.
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What GAO Found
The six agencies GAO reviewed reported taking various approaches related to key components of estimating improper payments—shown in the figure below—for 10 selected programs, which collectively reported outlays of over $2.5 trillion for fiscal year 2017.
Key Components in the Development of Improper Payment Estimates
Sample selection. Eight of the 10 programs GAO reviewed reported using statistically valid approaches, and the remaining 2 reported using alternative methodologies approved by the Office of Management and Budget (OMB). The sampled data elements varied, including payments, medical claims, and tax returns. The age of the data used to develop fiscal year 2017 improper payment estimates also varied, ranging from calendar year 2013 to fiscal year 2017.
Identification of improper payments. Some of the six agencies reported using processes designed specifically to estimate improper payments, whereas others reported leveraging existing reviews. These agencies' policies and procedures include a review of aspects of eligibility, except for those related to the Department of Defense's (DOD) Military Pay and the Office of Personnel Management's (OPM) Retirement overpayments. DOD and OPM have not fully assessed whether their estimation processes effectively consider key program risks. OMB guidance does not specifically address how agencies are to test to identify improper payments, such as using a risk-based approach to help ensure that key risks of improper payments are addressed.
The six agencies also varied in the treatment of insufficient documentation, both in identifying and in reporting the root causes of improper payments. For the agencies that contact entities outside the agency to estimate improper payments, the treatment of nonresponse differed, with one agency including nonresponses as improper payments and another generally excluding the nonresponse cases from review. Although OMB guidance states that agencies should treat cases of insufficient documentation as improper payments, it does not specifically address the treatment of nonresponse cases.
Calculation of the improper payment estimate. The six agencies generally reported using law and OMB guidance to calculate improper payment estimates for the selected programs, except for the Earned Income Tax Credit (EITC). The Internal Revenue Service (IRS) removed overpayments that were recovered when developing its estimate. OMB guidance requires agencies to include recovered amounts in their estimates. Removing these overpayments understates the EITC improper payment estimate and may limit IRS's ability to develop corrective actions to prevent improper payments.
Why GAO Did This Study
Improper payments—which include payments that should not have been made or were made in an incorrect amount—are a long-standing, significant problem in the federal government, estimated at almost $141 billion for fiscal year 2017. Executive branch agencies are required to annually estimate improper payments for certain programs. Estimation of improper payments is key to understanding the extent of the problem and to developing effective corrective actions. Relevant laws and guidance provide agencies flexibility in developing estimates.
This report describes agencies' processes to estimate improper payments in selected programs for fiscal year 2017 and the extent to which certain differences in these processes can affect the usefulness of the resulting estimates. GAO selected 10 programs across six agencies with the largest reported program outlays in fiscal years 2015 and 2016. For these programs, GAO reviewed relevant laws and guidance, analyzed agencies' policies and procedures, and interviewed officials at relevant agencies and OMB staff.
What GAO Recommends
GAO recommends that OMB develop guidance on treatment of nonresponse cases and testing to identify improper payments, that DOD and OPM assess their estimation processes, and that IRS revise its methodology to not exclude recovered payments from its estimate. All of the agencies either agreed or partially agreed with the specific recommendations to them. GAO believes that the actions are warranted, as discussed in the report.
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Recommendations for Executive Action
Comments: OMB partially concurred with this recommendation. On July 31, 2019, we met with the Office of Management and Budget (OMB). At the meeting, OMB officials indicated that OMB's position has not changed since the issuance of the GAO report and what OMB had already communicated to GAO at the exit conference. Specifically, OMB stated that it should not have to develop more specific guidance as each program and activity has its own risks. Instead, inspectors general are better equipped and positioned to review the sampling and estimation plans as part of their annual Improper Payments Elimination and Recovery Act of 2010 compliance audits and that agencies, their statisticians, and inspectors general should work out the best testing procedures for their agencies. We continue to believe that OMB could provide suggestions during OMB's annual town meeting related to improper payments for areas that inspectors general may consider. Further, although we agree that programs and activities may face different risks of improper payment, we continue to believe that guidance from OMB on how agencies test to identify improper payments, such as using a risk-based approach, could help ensure that agencies address the specific risks they identify when developing improper payment estimates. In February 2020, OMB informed us that it had no status updates to provide at this time. We will continue to monitor agency's actions to address this recommendation.
Recommendation: The Director of OMB should develop guidance on how agencies test to identify improper payments, such as using a risk-based approach to help ensure that key risks of improper payments, such as eligibility, are addressed through testing processes. (Recommendation 1)
Agency Affected: Executive Office of the President: Office of Management and Budget
Comments: OMB concurred with this recommendation. On July 31, 2019, we met with the Office of Management and Budget (OMB). At the meeting, OMB officials indicated that OMB's position has not changed since the issuance of the GAO report and what OMB had already communicated to GAO at the exit conference. At the meeting, OMB officials stated that OMB will "consider" updating guidance in OMB Circular A-123, Appendix C, to direct agencies to treat nonresponse cases such as improper payments and to include a new category for tracking such cases but only after assessing the impact such guidance would have on the agencies testing and reporting of improper payments. OMB has not taken action to develop this guidance. In February 2020, OMB informed us that it had no status updates to provide at this time. We will continue to monitor agency's actions to address this recommendation.
Recommendation: The Director of OMB should develop guidance clarifying the appropriate treatment of nonresponse cases during improper payment testing. (Recommendation 2)
Agency Affected: Executive Office of the President: Office of Management and Budget
Status: Closed - Implemented
Comments: The Department of Defense (DOD) concurred with this recommendation. In fiscal year 2019, DOD updated its Standard Operating Procedures (SOP) for post payment reviews of Military Pay accounts. We confirmed that the SOPs require reviewers to verify that Service members are eligible for special pay and allowances by validating the information included in pay accounts with supporting documentation. Further, we confirmed that DOD updated its processes to review documentation that supports the Service members' eligibility for special pay and allowances and to include as an improper payment instances where no evidence of documentation exists. Finally, we have reviewed DOD's fiscal year 2019 agency financial report and confirmed that DOD reflected therein that, beginning in fiscal year 2019, its post-payment review procedures related to Military Pay included verification of Military Service members pay and allowances with sufficient supporting documentation. We believe DOD's corrective actions address the recommendation.
Recommendation: The Under Secretary of Defense (Comptroller) should assess the processes for estimating Military Pay improper payments to determine whether they effectively address key risks of improper payments--including eligibility for different types of pay and allowances--and take steps to update the processes to incorporate key risks that are not currently addressed. (Recommendation 3)
Agency Affected: Department of Defense
Comments: The Office of Personnel Management (OPM) partially concurred with this recommendation. Prior to 2006, the improper payment estimate sampling methodology used by OPM included both new and old adjudicated claims. After analyzing several years of data using this methodology, OPM found that including older claims in the sample could result in claimant's records being sampled multiple times. In addition, OPM also found that the variance in the number of errors detected in new claims versus old claims was very low. OPM also looked at the resources used in performing the audit of old and new claims and based on these factors, management determined that it was not an efficient use of resources to include both old and new claims in the review. The methodology was updated to make the process more efficient. By using new claims only, OPM was able to provide feedback to program managers more timely. As a result, management can address issues negatively impacting the improper payment rate and prevent improper payments promptly. OPM agrees with the intent of our recommendation; however, OPM does not agree with our recommendation regarding a risk assessment on eligibility. Eligibility is determined before annuity/survivor benefits are fully adjudicated. As part of its correction plan, OPM stated that it will conduct an audit of older claims to determine if there are different risks to new claims. In February 2020, OPM indicated that it is currently in the process of pulling/gathering the cases that should be in the universe of this audit. OPM plans to complete the corrective action by end of 4th quarter of fiscal year 2020. We will continue to monitor the agency's actions to address this recommendation.
Recommendation: The Director of OPM should assess the processes to estimate Retirement improper payments to determine whether they effectively address key risks of improper payments--including eligibility and whether older claims face different risks of improper payments than new claims--and take steps to update the processes to incorporate key risks that are not currently addressed. (Recommendation 4)
Agency Affected: Office of Personnel Management
Status: Closed - Implemented
Comments: The Internal Revenue Service (IRS) concurred with this recommendation. To address the recommendation, IRS updated its estimation methodology to add back overclaims recovered through the IRS post-refund activities to the total overclaims amount in deriving its Earned Income Tax Credit (EITC) improper payment rate for fiscal year 2018. IRS's updated estimation methodology now conforms to the section of the Office of Management and Budget (OMB) guidance, which requires agencies to include all improper payments in their improper payment estimates, regardless of whether they have been or are being recovered. We have reviewed the fiscal year 2018 Treasury Agency Financial Report (AFR) and verified that it discloses that IRS's improper payment estimate and no longer subtracts projected recovered improper payments prior to calculating the improper payment rate. We believe that IRS's actions meet the intent of our recommendation and therefore, we consider this recommendation closed.
Recommendation: The Commissioner of IRS should update IRS's improper payment estimation methodology to not exclude recovered overpayments from its EITC improper payment estimate. (Recommendation 5)
Agency Affected: Department of the Treasury: Internal Revenue Service