Report: States need better guidance on improper payments

Both states and federal agencies would benefit from enhanced guidance to reduce mistaken payments in federally funded, state-administered programs, government auditors said in a report last week.

The Government Accountability Office report (GAO-06-347) on federal and state coordination in estimating erroneous payments also found that few agencies used incentives or penalties to prompt state cooperation in meeting reporting obligations under the 2002 Improper Payments Information Act.

That legislation requires federal agencies to estimate improper payments -- defined as those made mistakenly to ineligible applicants or as a result of fraud or other error -- in programs with a high risk of under- or overpayment.

GAO auditors conducted a survey of state officials responsible for programs with large federal funding components, obtaining comments from more than 200 officials involved with 25 federal programs. The majority of responses came from officials in the Medicaid, Highway Planning and Construction, Temporary Assistance to Needy Families, Unemployment Insurance and Food Stamp programs.

Almost half of respondents indicated that greater guidance from the Office of Management and Budget and the federal agencies providing them with funding would be needed if they were to play a larger role in meeting Improper Payments Information Act obligations, and some said additional money would be necessary.

Almost all states already use some form of computer-based review for fraud detection, eligibility checks or other improper payment controls, reviewers found, and some perform recovery audits to systematically address improper payments.

Only the Agriculture Department's Food Stamp and the Labor Department's Unemployment Insurance programs require that all states provide improper payment estimates, the reviewers said. Those figures assist oversight agencies both in meeting their reporting requirements and in taking steps to reduce improper payments.

The Food Stamp program, which rewards states with improper payment rates below the national average with increased funding or reduced reporting requirements, and penalizes those with above-average errors with decreased funding and increased reporting, obtained reports from every state and has been successful in improving payment accuracy, auditors said.

By contrast, voluntary reporting through pilot projects was much less successful, with just over half the states reporting participation in such an arrangement estimating erroneous payments. Only five programs in 11 states estimated improper payments where there were no federal requirements or pilots.

Based on the survey results and previous work, GAO recommended that OMB review guidance on the nature and extent of data and documentation needed from the states, and require agencies to provide guidance to states on risk assessments and improper payment estimates. OMB also should take a more active role in spreading ideas and best practices among the parties, reviewers said.

OMB, in responding to the report, generally agreed with the auditors' suggestions. OMB Controller Linda Combs said the budget office is working with the Chief Financial Officers Council to address improper payments in grants programs, and is in the early stages of launching a broad federal-state partnership that would address these and other issues.

OMB reported an almost $7 billion reduction in improper payments in fiscal 2005, but some have noted that the improvement resulted largely from better Medicare reporting. Programs out of compliance with the statutory improper payments requirements spent almost $269 billion in fiscal 2005. Much of that was in programs like Medicaid -- with $181 billion in spending -- that are difficult to track because of state-to-state differences in their administration.