1. 2014 CIGIE/GAO Financial Statement Audit Conference
Update on Improper payments May 8, Beryl H. “Berri” Davis CGFM, CPA, CIA, CGAP, CGMA, CCSA Director, Financial Management and Assurance
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.
Improper payment estimates reported by federal agencies are not intended to be an estimate of fraud in federal agencies’ programs and activities.

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.
Documentation and Administrative Errors - 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: inability to authenticate eligibility criteria through third-party databases or other resources because no databases or other resources exist
- Verification errors: the inability to verify may arise due to legal or other restrictions that effectively deny access to an existing database or resource

5. Laws Related to Improper Payments
The Improper Payments Information Act of (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
- Do Not Pay Initiative mandate: sets up centralized access to databases such as SSA’s Death Master File and GSA’s Excluded Parties List and, beginning in June of 2013, requires agencies to utilize this access to review all payments and awards.
- Mandated changes to OMB improper payment estimation guidance: setting standards for determining the underlying correctness of sampled payments, inclusion of already-recovered payments in reported estimates, and other areas

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
IPERIA, page 5 (yellow)

10. Disaster Relief Appropriations Act of 2013
The Disaster Relief Appropriations Act of 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.
The Government Performance and Results Act of 1993 (GPRA) was updated with the GPRA Modernization Act of 2010.
Among other things, the GPRA Modernization Act of 2010 requires OMB, in consultation with the Congress, to develop federal government goals for a limited number of crosscutting policy areas and for management improvement areas.

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.
- If the FY 2009 rate of 5.4 percent had been in effect in FY 2010, 2011, and 2012, the Government would have reported in total $47 billion more in estimated improper payments during the three-year period. This figure can be compared with the President's ambitious goal of reducing improper payments during the same period by $50 billion.

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 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.
Fiscal Year 2013
Fiscal Year 2012
Excluding DFAS Commercial Pay
4.0 percent / $105.8 billion
4.3 percent / $107.1 billion
Including DFAS Commercial Pay
3.5 percent / $105.9 billion
3.7 percent / $107.2 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 ranged from 15.7% to 25.3%.

16. Percentage Distribution of Improper Payments in Fiscal Year 2013
- HHS programs account for about 62% of the OMB total.

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.
- Unemployment Insurance also had rate reductions, but outlay reduction was the more significant factor.
- 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 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.

19. Fiscal Year 2013 Top 5 Improper Payment Estimates by Dollar Amount
Program
Agency
Reported Improper Payment Estimates
Dollars
(in billions)
Error Rate
(percent of outlays)
Medicare Fee-for-Service
Health and Human Services
$36.0
10.1%
Earned Income Tax Credit
Treasury
$14.5
24.0%
Medicaid
$14.4
5.8%
Medicare Advantage (Part C)
$11.8
9.5%
Unemployment Insurance
Labor
$6.2
9.3%
3 of the top 5 estimates reported error rate reductions from 2012 to 2013 (all except Medicare Fee-for-Service and EITC).

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
Program
Agency
Reported Improper Payment Estimates
Error Rate
(percent of outlays)
Dollars
(in millions)
School Breakfast
Agriculture
25.3%
$831.0
Earned Income Tax Credit
Treasury
24.0%
$14,500.0
Disaster Assistance Loans
Small Business Administration
18.4%
$121.1
State Home Per Diem Grants
Veterans Affairs
15.9%
$135.2
School Lunch
15.7%
$1,774.0
- All 5 programs with the highest error rates reported increases from 2012 to 2013.

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.
VA State Home Per Diem Grants: grant program that provides Federal assistance to States by participating in a percentage of the cost of construction and paying per diem for providing care to eligible Veterans in the facility when VA recognizes the home as a State Veterans Home.

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.
TANF outlays are $17 B, USDA’s Loan Deficiency Payments has very small outlays.

24. Not All Susceptible Programs Included in Governmentwide Estimate
Estimates reported for 2 programs were not included in OMB’s fiscal year 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 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 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.