Netting Gold in Overpayments

Agencies' payments to vendors may be sprinkled with gold. Overpayments, duplicate payments missed discounts and other errors abound. For example, between fiscal 1994 and fiscal 1998, defense contractors returned about $4.6 billion in erroneous payments to the Defense Finance and Accounting service. A complete cure of payment problems would require untying badly knotted government computer and accounting systems. A quicker fix may be to hire private companies to audit agency transactions in exchange for a share of whatever they recover. The method-in use for 30 years by private-sector companies-is making inroads in federal agencies.

Profit Recovery Group International (PRGI), a recovery audit firm based in Atlanta, has been mining past transactions at the Army and Air Force Exchange Service (AAFES) since 1991. In June hearings, Paul Dinkins, PRGI executive vice president, told two House Government Reform subcommittees about PRGI's federal engagements. On AAFES purchases of about $5 billion a year, PRGI recovers approximately 0.49 percent, which amounts to more than $100 million since 1991, Dinkins said. Other PRGI clients include the Navy Exchange Service and, under a demonstration program, the Defense Supply Center, Philadelphia (DSCP). Between September 1996 and June 1999, PRGI identified $29 million in overpayments on purchases worth about $6 billion-an average error rate of 0.48 percent. DSCP has collected $2.6 million of what it is owed. "I consider the demonstration program a success. Recoveries exceed the cost of the program," says Michael Hoffman, director of contracting at the center.

In 1998, Congress ordered DoD to expand recovery auditing beyond DSCP, and in May of this year, the Defense Logistics Agency solicited bids to add its other four supply centers. Other Defense agencies plan to have contracts in place this summer. Dinkins predicted an average error rate of 0.3 percent for DoD as a whole. Based on $710 billion DoD purchases per year, Dinkins predicted the annual benefits of recovery auditing would be $510 million. At DoD agencies, PRGI is receiving 20 percent of net collected funds, a percentage set in PRGI's General Services Administration supply schedule contract. Private firms' recovery audit fees average 30 percent, according to Dinkins, whose company has served more than half the Fortune 1000 U.S. firms.

PRGI won a contract with a Veterans Affairs Department program in May and is in talks with the U.S. Postal Service, General Services Administration, Health Care Financing Administration, and the Interior and Energy Departments, Dinkins told the national security panel. "We believe the largest single opportunity for recovery of overpayments is within HCFA," he said. For fiscal 1998, the Health and Human Services Department estimated improper payments at $12.6 billion, or more than 7 percent, in Medicare fee-for-service benefits administered by HCFA, Comptroller General David Walker said at the same hearing.

In May, Rep. Dan Burton, R-Ind., chairman of the House Government Reform Committee, introduced a bill to require recovery auditing governmentwide in operations with transactions worth $10 million or more a year.

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