Improper Payments Information Act of 2002: Background, Implementation, and Assessment

Improper Payments Information Act of 2002:
Background, Implementation, and Assessment
Updated September 10, 2008
Garrett L. Hatch
Analyst in Government Organization and Management
Government and Finance Division
Virginia A. McMurtry
Specialist in American National Government
Government and Finance Division

Improper Payments Information Act of 2002:
Background, Implementation, and Assessment
Summary
On November 26, 2002, the Improper Payments Information Act (IPIA) was
signed into law as P.L. 107-300 (116 Stat. 2350). Augmenting previous financial
management reform laws, the IPIA seeks to increase financial accountability in the
federal government, and thus reduce wasteful spending. The law requires agencies
to identify each year programs and activities vulnerable to significant improper
payments, to estimate the amount of overpayments or underpayments, and to report
to Congress on steps being taken to reduce such payments.
In May 2003, the Office of Management and Budget (OMB) issued guidance
to agencies on the implementation of the IPIA, which was revised and incorporated
into OMB Circular A-123 as Appendix C in August 2006. OMB’s guidance, while
consistent with some provisions of the IPIA, has been criticized on several counts.
Whereas the statute requires agencies to report to Congress on all programs with
more than $10 million in estimated improper payments, OMB added an additional
threshold, such that agencies must only report on programs with improper payments
that exceed both $10 million and 2.5% of total program payments. Critics have
identified a number of examples of programs with improper payments over $10
million that are not reported to Congress because they do not also meet the 2.5%
threshold. In the 2006 update of its guidance, OMB stated that it may determine on
a case-by-case basis that some programs are to be subject to annual Performance and
Accountability Report requirements, even if they do not meet the 2.5% threshold.
OMB’s guidance has also been criticized for permitting agencies to exempt
some programs from the IPIA’s annual requirement for risk assessment. Under the
act, every program and activity is to be reviewed each year. OMB’s guidance,
however, now allows agencies to review a program once every three years if it has
been deemed low-risk. Critics say this runs counter to the language and intent of the
IPIA, and that it leaves open the possibility that improper payments might go
undetected during the exemption period.
For FY2007, OMB reported a government-wide error rate of 3.5%. This figure
does not cover an estimated 16% of at-risk outlays — about $292 billion — which
lack improper payment estimates and are not yet reflected in the error rate, including
a number of major programs. Until valid estimates become available for all risk-
susceptible programs, the full extent of the improper payments problem will remain
unknown.
On January 31, 2008, S. 2583, the Improper Payments Elimination and
Recovery Act of 2008, was introduced. On July 30, 2008, the Senate Committee on
Homeland Security and Governmental Affairs by voice vote ordered that S. 2583,
with a substitute amendment, be reported favorably. A companion bill, H.R. 5467,
was introduced on February 14, 2008, but no further action has occurred.
This report will be updated as events may warrant.

Contents
Background ......................................................1
Legislative History and Intent....................................1
Major Provisions..............................................2
Previous Improper Payment Efforts................................3
Implementation ...................................................3
Initial Guidance From OMB.....................................3
Revision of OMB Circular A-123.................................4
Scorecard Standards and Ratings..................................5
Trends in Improper Payments........................................9
Error Rate....................................................9
Amount of Improper Payments..................................10
Federal Outlays..............................................11
Continuing Concerns..............................................11
Reporting Threshold..........................................11
Annual Review Exemption.....................................13
Federal Government’s Use of Recovery Auditing....................14
Congressional Oversight.......................................15
Hearings in the 110^th Congress..............................15^th
Legislation to Amend the IPIA in the 110 Congress.............17
List of Figures
Figure 1. Eliminating Improper Payments Initiative’s Quarterly Scorecards,
FY2004-FY2008 ..............................................8
List of Tables
Table 1. Improper Payment Trends, FY2004-FY2007.....................9
Table 2. Cohort Error Rates, FY2004-FY2007..........................10

Improper Payments Information Act of 2002:
Background, Implementation, and
Assessment
Background
Legislative History and Intent
On November 26, 2002, the Improper Payments Information Act (IPIA) was
signed into law as P.L. 107-300 (116 Stat. 2350). Augmenting previous financial
management reform laws, the IPIA is intended to increase financial accountability
in the federal government, and thereby reduce wasteful spending. The law requires
agencies to identify each year programs and activities vulnerable to significant
improper payments, to estimate the overpayments or underpayments exposure, and
to report on steps taken to reduce such payments. As explained more fully below,
improper payments generally include any payment that should not have been made
or was made for an incorrect amount.
Previously, there was no government-wide requirement for agencies to estimate
or report in any systematic way on improper payments, although it is generally
acknowledged that billions of dollars are involved. The Office of Management and
Budget (OMB) estimated, for example, that in FY2005, improper payments under 47
federal programs totaled approximately $37.3 billion.¹
The IPIA was introduced in the 107^th Congress as H.R. 4878 on June 6, 2002,
by Representative Stephen Horn, with a group of bipartisan cosponsors, and referred
to the House Committee on Government Reform. The Subcommittee on
Government Efficiency, Financial Management, and Intergovernmental Relations
held a markup on the measure on June 18, 2002, and approved the bill, as amended,
by unanimous voice vote. On July 9, 2002, H.R. 4878 was considered under a
suspension of the rules and passed the House, as amended, by voice vote. On
October 9, 2002, the Senate Committee on Governmental Affairs ordered H.R. 4878
to be reported favorably, with a substitute amendment. On October 17, 2002, the
bill, as amended, passed the Senate by unanimous consent, and on November 12,
under a suspension of the rules, the House agreed to the Senate amendment by voice

¹ Testimony of Clay Johnson III, Deputy Director for Management, Office of Management
and Budget, U.S. Congress, Statement before Senate Subcommittee on Federal Financial
Management, Government Information, and International Security, An Assessment of^th^nd
Improper Payment Information Act of 2002, hearings, 109 Cong., 2 sess., December 5,
2006, at [http://hsgac.senate.gov/_files/ClayJohnsonTestimony05Dec2006Improper
Payments.pdf].

vote. The President signed H.R. 4878 into law on November 26, 2002 (P.L. 107-

300).

The problem of improper payments had received attention in previous
Congresses. During House floor debate on H.R. 4878, Representative Horn noted
that hearings held in the past “clearly demonstrated the need” for such legislation.
Since the 104^th Congress, the subcommittees I have chaired have held
approximately 100 hearings on wasteful spending within the Federal
Government. Time and again witnesses from the General Accounting Office and
agency inspectors general have told the subcommittee that poor accounting
systems and procedures have contributed to the government’s serious and long-²
term problems involving improper payments.
In the written report of the Senate Committee on Governmental Affairs to
accompany H.R. 4878, the provisions of the bill were explicitly linked to GAO
recommendations offered in a best practices guide for agencies in managing improper
payments, prepared at the request of the committee chairman, Senator Joseph
Lieberman. The guide suggested that determining the nature and extent of risks for
improper payments was a crucial step; H.R. 4878 would begin the process of
improving the management of improper payments, following GAO’s guidance, “by
requiring that agencies annually estimate the amount of improper payments, and
report on the steps they are taking to reduce the amounts of those payments in the³
largest programs.”
Major Provisions
The IPIA directs each executive branch agency, in accordance with OMB
guidance, to review all its programs and activities each year, identify those
susceptible to significant improper payments, and estimate the amount of improper
payment exposure. Agencies are then to report annually to Congress on improper
payments, using a standardized methodology determined by OMB.⁴
With respect to any program or activity with estimated annual improper
payments exceeding $10 million, each agency is also required to provide a report on
agency actions to reduce such improper payments, including (1) the causes of the

² Rep. Stephen Horn, “Debate on H.R. 4878,” remarks in the House, Congressional Record,
daily edition, vol. 148 (July 9, 2002), p. H4379.
³ See General Accounting Office, Strategies to Manage Improper Payments, GAO-02-69G,
October 2001. Cited in U.S. Congress, Senate Committee on Governmental Affairs,^th
Improper Payments Information Act of 2002, report to accompany H.R. 4878, 107 Cong.,^nd

2 sess., S.Rept. 107-333 (Washington: GPO, 2002), p. 2.

⁴ The IPIA originally set a deadline of March 31 for agencies to report to Congress on their
improper payments in the prior fiscal year. The improper payments reports are now included
in the performance and accountability reports, or PARs, due to the President (via OMB) and
Congress 45 days after the close of an agency’s fiscal year, generally November 15. See
OMB Circular A-136, “Form and Content of the Performance and Accountability Report
(PAR),” at [http://www.whitehouse.gov/OMB/bulletins/b01-09.pdf].

improper payments and the results of the actions taken to address them; (2) whether
the agency has information systems and other necessary infrastructure to reduce such
payments to “minimal cost-effective levels”; (3) if not, budgetary resources requested
to accomplish needed changes in information systems and infrastructure; and (4)
steps the agency has taken to ensure that managers are held accountable for reducing
improper payments.
Improper payment is defined as any payment that should not have been made
or that was made in an incorrect amount. This includes duplicate payments,
payments to ineligible recipients or for ineligible services, or for services not
received or that do not reflect applicable discounts. The act covers payments made
by a federal agency, a federal contractor, or a governmental or other organization
administering a federal program or activity.
Previous Improper Payment Efforts
The IPIA codified and expanded efforts already underway in the executive
branch to reduce improper payments. In 2001, the Bush Administration designated
improving financial performance as one of five government-wide initiatives in the
President’s Management Agenda (PMA). The establishment of a baseline on the
extent of erroneous (improper) payments for major federal benefit programs was a
key component of the financial management initiative.⁵ Agencies were to include
information on erroneous payment rates for benefit and assistance programs over $2
billion as part of their FY2003 budget submissions. In July 2001, revisions to OMB
Circular A-11 in Section 57 implemented this objective, requiring 15 federal agencies
to include improper payment information with their initial FY2003 budget materials
to OMB. Enactment of the IPIA extended improper payment reporting requirements
to all executive branch departments and agencies, lowered the threshold from $2
billion to $10 million, and designated Congress (as well as OMB) to receive the
annual agency reports.
Implementation
Initial Guidance From OMB
In May 2003, OMB distributed a guide to instruct agencies on the
implementation of the IPIA.⁶ The guide provided detailed definitions of “improper”
or “erroneous” payments and of “program” and “activity,” and then outlined four

⁵ See U.S. Office of Management and Budget (OMB), The President’s Management Agenda
— FY2002 (Washington: OMB, 2001), pp. 19-21. For an overview of the PMA, see CRS
Report RS21416, The President’s Management Agenda: A Brief Introduction, by Virginia
A. McMurtry.
⁶ OMB, “Improper Payments Information Act of 2002 (Public Law 107-300),”
Memorandum for Heads of Executive Departments and Agencies from Mitchell E. Daniels,
May 21, 2003, M-03-13. IPIA guidance was subsequently revised and incorporated into
Appendix C of OMB Circular A-123.

steps to be taken by the agencies. First, agencies were required to review
systematically all their programs and activities and identify those which are
susceptible to significant erroneous payments, defined as “annual erroneous
payments in the program exceeding both 2.5% of the program payments and $10
million.” Second, agencies were to determine an annual estimated amount of
erroneous payments made in those programs and activities found susceptible to
significant errors; this calculation was to be based on a statistical random sample
sufficiently large “to yield an estimate with a 90 percent confidence interval” within
5% precision. The third step was to determine why the particular programs were at
risk, and then put in place a plan to reduce the erroneous payments. The last step was
agency reporting to the President (via OMB) and Congress on the estimates of the
annual amount of erroneous payments in its programs and activities and on progress
in reducing them.
Revision of OMB Circular A-123
In the summer of 2006, OMB issued a new appendix to OMB Circular A-123,⁷
updating the guidance in M-03-13. Appendix C, titled “Requirements for Effective
Measurement and Remediation of Improper Payments,”⁸ contained two parts; the first
addressed IPIA reporting and the second, recovery auditing.⁹ It began with new
language, expanding and clarifying the definition of an improper payment:
An improper payment is any payment that should not have been made or
that was made in an incorrect amount under statutory, contractual,
administrative, or other legally applicable requirements. Incorrect amounts are
overpayments and underpayments (including inappropriate denials of payment
or services). An improper payment includes any payment that was made to an
ineligible recipient or for an ineligible service, duplicate payments, payments for
services not received, and payments that are for the incorrect amount. In
addition, when an agency’s review is unable to discern whether a payment was
proper as a result of insufficient or lack of documentation, this payment must¹⁰
also be considered in error.
Other noteworthy features in the update included provisions for alternative
sampling methodologies, reporting requirements for certain low risk programs, and
guidance for federal agencies that fund state-administered programs. The revision
also contained a best practices listing for preventing, identifying, detecting, and
recovering improper payments. Finally, while the definition of “significant erroneous

⁷ See OMB, Management’s Responsibility for Internal Controls, Circular No. A-123
revised, December 21, 2004, at [http://www.whitehouse.gov/omb/circulars/a123/
a123_rev.pdf].
⁸ See OMB, “Requirements for Effective Measurement and Remediation of Improper
Payments,” Appendix C to OMB Circular A-123, August 10, 2006, available at
[http://www.whitehouse.gov/omb/circulars/a123/a123_appx-c.pdf]. Hereafter, Appendix C.
⁹ Recovery auditing is designed to identify and then recoup erroneous payments by
reviewing large volumes of purchase and contract records using ongoing, systematic
procedures for data analysis.
¹⁰ Appendix C, p. 2.

payments” found in the previous OMB guidance was retained, A-123 Appendix C
provided elaboration: “OMB may determine on a case-by-case basis that certain
programs that do not meet the threshhold requirements...may still be subject to the
annual PAR reporting requirement. This would most likely occur in programs with
relatively high annual outlays.”¹¹
Scorecard Standards and Ratings
The Bush Administration designated Eliminating Improper Payments (EIP) as
a separate program initiative in the PMA in 2004.¹² Under the EIP initiative, which
is ongoing, 15 federal agencies receive quarterly scorecard ratings from OMB for
their efforts to identify, eliminate, and recover improper payments.¹³ The scorecard
uses a stoplight rating system of green for success, yellow for mixed results, and red
for unsatisfactory. Agencies are rated against six EIP “standards for success,” or core
criteria (listed below). If an agency meets all six of the criteria, it receives a “green”
rating; if it meets the first four criteria, but not the fifth and sixth, it is rated “yellow;”
and if an agency fails to meet any one of the first four criteria it is rated “red.” The
criteria an agency must meet to “get to green” in the EIP initiative include the
following:
^!Have a risk assessment in place that identifies all programs that are
at significant risk of improper payments;
^!Have an OMB-approved plan for measuring improper payments on
an annual basis and meet milestones established in the plan;
^!Have an OMB-approved corrective action plan that includes
reduction targets;
^!Be in compliance with improper payments reporting requirements;
^!Demonstrate that improper payments are being reduced consistent
with reduction targets; and
^!Have established improper payment recovery targets, and show it is
actively meeting these targets.¹⁴

¹¹ Ibid., p. 4. An example is given of a program with $10 billion in annual outlays and a 1%
error rate (below the 2.5% error rate threshhold ), yet resulting in $100 million in improper
payments. In such an instance, OMB may require that the program be designated as high
risk and included in the agency’s annual PAR (as a part of IPIA reporting).
¹² See discussion in Fiscal Year 2006 Budget of the U.S. Government (Washington: GPO,

2005), p. 54. OMB, Improving the Accuracy and Integrity of Federal Payments, January 25,

2005, p. i, at [http://www.whitehouse.gov/results/agenda/ipia_govt_wide_report.pdf].

¹³ The 15 agencies that receive scorecard ratings for Eliminating Improper Payments are: the
Departments of Agriculture, Defense, Education, Health and Human Services (HHS),
Homeland Security (DHS), Housing and Urban Development (HUD), Labor, Transportation
(DOT), Treasury, and Veterans Affairs (VA); and the Environmental Protection Agency
(EPA), the National Science Foundation (NSF), the Office of Personnel Management
(OPM), the Small Business Administration (SBA), and the Social Security Administration
(SSA). Acronyms cited are used in Figure 1.
¹⁴ The White House, Scorecard Standards for Success, available at
[ ht t p: / / www.whi t e house.gov/ r e sul t s / a ge nda/ s t a ndar dsf or success08-2007.pdf ] .

As indicated in Figure 1, results in the initial round for the EIP scorecards,
released December 31, 2004, indicated that no agencies received “green,” five were¹⁵
“yellow,” and 10 were “red.” By June 30, 2008, the scorecard showed that five
agencies were “green” in status, eight agencies were “yellow,” and two were “red.”
In three and a half years, the number of agencies receiving green increased from zero
to five, and the number of agencies receiving red declined from 10 to two. The first
agency to attain green was the Department of Housing and Urban Development
(HUD) on the June 2005 scorecard, joined the next quarter by the Department of
Labor. The only agency to receive red grades throughout the period depicted was the
Department of the Treasury.
Further examination of the data in Figure 1, however, discloses a more
complicated picture. For example, the first three quarters in FY2007 had the same
totals for the red (two), yellow (nine), and green (four) grades. Yet, there were
noteworthy changes from the March to June 2007 ratings: HHS advanced from red
to yellow, while DHS slipped from yellow back to red.
With respect to the most recent scorecards depicted in Figure 1, the grades
recorded for June 30, 2007, and September 30, 2007, were identical, as were the
grades for December 31, 2007, and March 31, 2008. During the last four quarters,
HUD slipped from green to yellow for December 2007 and March 2008, but had
returned to green by June 30, 2008. The only other change during this period was the
movement of SBA from yellow to green. One might arguably suggest that many of
the agencies (8 out of 15) are experiencing some difficulty in progressing from
yellow to green in the scorecards.
The up and down arrows in Figure 1 indicate a change in grade from the
previous quarter. During the 15 quarters covered, there were 19 instances where an
agency’s grade changed from one quarter to the next. Most of the changes (16)
reflect an improvement in rating, with the National Science Foundation (NSF)
jumping from red to green in the final quarter of 2005 (hence the double arrows). On
the other hand, there were four instances when an agency’s grade was lowered from
one quarter to the next. The Department of Veterans Affairs (VA) received four
yellows followed by four greens and then slipped back to yellow for the last three
quarters. The Small Business Administration (SBA) started with red, advanced to
yellow for four quarters and then to green for three quarters, but slipped back to
yellow for the three quarters, before returning to green. The DHS went from four
reds to six yellows, and then, for the last five quarters entered in the chart, regressed
back to red.
In addition to the “current status” grades (provided in Figure 1), OMB, since

2005, also has given the agencies a grade for “progress in implementation.”¹⁶ These

¹⁵ Ibid., Scorecard - December 31, 2004, at [http://www.whitehouse.gov/results/agenda/

200412scorecard.pdf].

¹⁶ Since the quarter ending December 31, 2004, was the first quarter for which agency
efforts in the eliminating improper payments initiative were rated, there were no progress
scores given. Electronic versions of scorecards for progress in implementation grades are
(continued...)

ratings have been predominantly green from the outset (for the quarter ending March

31, 2005, 11 green and four yellow). For the quarters ending December 31, 2005,

and March 31, 2006, all agencies included in the scorecard received green, except for
the Department of the Treasury.¹⁷ For the next six quarters, either two, three, or four
agencies received a yellow grade, but the group of agencies not receiving green
varied somewhat from quarter to quarter. By June 30, 2007, there was just one yellow
(Treasury), but for the first time, an agency (DHS) received a red grade for progress
in implementation. In the September 2007 scorecard, DHS had moved back up to
green; the only yellow was for Treasury. The same ratings (14 green and 1 yellow)
appeared in the December 2007 scorecard. By March 2008, two more agencies
(Education and DHS) were back in the yellow category, and the scorecard for June

30, 2008, remained unchanged from the previous quarter.

It is not clear that how useful scorecard ratings are as indicators of agency
results in eliminating improper payments. While OMB’s standards for success
overlap with IPIA objectives, the scorecard ratings themselves do not appear to be
tightly linked to improper payments rates or amounts. The Department of Labor
(DOL), for example, improved from a “yellow” rating at the start of FY2005 to a
“green” by the end of that fiscal year, even though its error rate increased during that
time.¹⁸ Similarly, the Department of Housing and Urban Development (HUD),
received a “green” rating in each quarter of FY2006, despite reporting nearly $1.5
billion in improper payments that year.¹⁹ Under the present scorecard grading system,
then, an agency may receive the highest rating even when its error rate increases, or
when the dollar value of its improper payments reaches into the billions. As
discussed in more detail below, an apparent increase in error rate or total amount of
improper payments due an agency may actually reflect “progress” in identifying risk-
susceptible programs and achieving viable estimates for more programs.

¹⁶ (...continued)
available at [http://www.whitehouse.gov/results/agenda/scorecard.html].
¹⁷ The Department of the Treasury did receive a grade of green for progress in
implementation for the quarter ending March 31, 2005, but subsequently has consistently
been rated as yellow.
¹⁸ OMB, Improving the Accuracy and Integrity of Federal Payments, January 31, 2007 at
[ ht t p: / / www.whi t e house.gov/ omb/ f i nanci a l / r epor t s / 2007_i pi a_r e por t .pdf ] .
¹⁹ Ibid.

CRS-8
Figure 1. Eliminating Improper Payments Initiative’s Quarterly Scorecards, FY2004-FY2008

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Trends in Improper Payments
Since IPIA reporting began for FY2004, OMB has published aggregate
improper payments data in an annual report titled “Improving the Accuracy and
Integrity of Federal Payments.”²⁰ Table 1 shows government-wide improper
payments rates and totals for the first four years of IPIA reporting.
Table 1. Improper Payment Trends, FY2004-FY2007
(in millions)
Federal Outlays^aImproper PaymentsError Rate
F Y 2004 $1,035,308 $45,077 4.4%
F Y 2005 $1,224,920 $38,472 3.1%
F Y 2006 $1,394,027 $40,588 2.9%
F Y 2007 $1,561,752 $54,984 3.5%
^Source:^Of^fⁱ^{ce of}^Man^a^g^e^m^eⁿ^t^an^{d B}^u^dg^et,^Im^pr^ovi^{ng t}^h^{e Accur}^a^{cy and Int}^e^g^rⁱ^t^y^o^f^Feder^a^l
^Payments^{, Jan}^u^a^ry^{31, 2008.}
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^sectioⁿ^f^o^r^m^o^r^eⁱⁿ^f^o^r^m^atioⁿ^.
Error Rate
The data in Table 1 show that the error rate declined in each of the two fiscal
years after the government-wide baseline for improper payments was established in
FY2004, then increased in FY2007. In its 2007 report, OMB suggested that the
declining error rate between FY2004 and FY2006 was largely due to two factors: a
reduction in improper payments reported under the Medicare Fee-for-Service
program, and low improper payment rates among the programs that reported for the²¹
first time in either FY2005 or FY2006. GAO has argued that, while improper
payments have declined significantly under the fee-for-service component of
Medicare, that was not necessarily a consequence of improved accountability of
program dollars, but rather was due largely to “refinements” in the way HHS²²
calculated the program’s improper payments estimate.

²⁰ OMB’s annual improper payments report is issued in the January or February following
the end of the fiscal year that it covers. It is made available to the public through OMB’s
website, at [http://www.whitehouse.gov/omb/financial/fia_improper.html].
²¹ Medicare is comprised of a fee-for-service component (Parts A and B), a managed care
component (Part C), and a prescription drug benefit component (Part D).
²² Testimony of McCoy Williams, GAO Director of Financial Management and Assurance,
Improper Payments: Agencies’ Efforts to Address Improper Payment and Recovery Auditing
Requirements Continue, U.S. Congress, Senate Subcommittee on Federal Financial
Management, Government Information, Federal Services, and International Security,
(continued...)

The overall error rate increased from 2.9% in FY2006 to 3.5% in FY2007. The
increase was driven by the relatively high error rate — 12.4% — of the 14 programs
reported for the first time in FY2007. Programs in the FY2007 cohort issued $128
billion in risk-susceptible payments, of which $15.9 billion were deemed improper.
Just one of these programs, the Medicaid Fee-for-Service program, with $70 billion
outlays and an error rate of 18.4%, accounted for $12.9 billion in improper payments.
Error rate reductions are evident, however, when one compares the rates for
programs reporting in FY2004 with the rates for this same group of programs in
subsequent years. Table 2 shows how the error rates for programs first reported in
previous fiscal years declined in FY2007.
Table 2. Cohort Error Rates, FY2004-FY2007
Year FirstFY2004FY2005FY2006FY2007
ReportedError RateError Rate Error RateError Rate
FY2004 4.4% 3.4% 3.2% 3.1%
FY2005 1.0% 2.0% 1.1%
FY20061.4%0.5%
FY200712.4%
Overall 4.4%3.1%2.9%3.5%
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^Payments^{, Jan}^u^a^ry^{31, 2008.}
According to OMB’s assessment in the January 2008 report, the majority of
improper payment errors reduced in the last four years resulted from agencies
“ensuring the availability of supporting documentation necessary to verify benefit
accuracy. This type of improvement provides greater confidence in the accuracy of
Federal payments.” With respect to the remaining payment errors, they resulted from
“challenges when verifying recipient eligibility in means-tested programs.” While
documentation errors generally are not associated with incorrect payments,
“eligibility errors result in beneficiaries receiving an incorrect amount of funds.”²³
Amount of Improper Payments
The data in Table 1 also show that the dollar amount of the government’s
improper payments declined in FY2005, and then increased in FY2006 and FY2007.
The initial decrease was the result of reductions in improper payments under
Medicare, and the increase in FY2006 was largely due to the $1.57 billion jump in

²² (...continued)
hearings, 110^th Cong., 1^st sess, March 29, 2007, GAO-07-635T.
²³ OMB, Improving the Accuracy and Integrity of Federal Payments, January 31, 2008, p.
ii, at [http://www.whitehouse.gov/omb/financial/reports/2008_ipia_report.pdf].

estimated improper payments under USDA’s Marketing Loan Assistance Program.²⁴
In FY2007, the amount of improper payments grew by $14.4 billion, with two newly
reported programs accounting for most of the increase: Medicaid Fee-for-Service
($12.9 billion in improper payments) and National School Lunch ($1.4 billion in
improper payments). That the fluctuation of improper payments can be driven by
changes in individual programs is indicative of the concentrated nature of the
problem. In FY2007, for example, nine programs accounted for 90.2% of reported
improper payments, and just three programs — Medicare Fee-for-Service, Medicaid
Fee-for-Service, and the Earned Income Tax Credit — accounted for 63.7% of all
reported improper payments that year.²⁵
Federal Outlays
The federal outlays data in Table 1 represent the amount of risk-susceptible
dollars for which federal agencies have developed improper payments estimates. In
FY2007, agencies had estimates in place for approximately $1.56 trillion out of $1.85
trillion (84%) in total at-risk outlays. Compared to FY2004, this represents a $526
billion increase in risk-susceptible expenditures with estimates in place. It also
indicates, however, that 16% of at-risk outlays — about $292 billion — lacked
improper payment estimates. A number of major programs are among those lacking
estimates, including the State Child Health Insurance Program (SCHIP), Temporary
Assistance for Needy Families (TANF), and Medicare Prescription Drug Benefit
(Part D). In the 2008 report, OMB noted that delays in reporting error measurement
in remaining programs occur because “many State-administered programs are subject
to complex regulatory guidelines that need to be followed before conducting error
measurements.” For example, agencies need to receive feedback from program
recipients about “viable alternatives for measuring error. Consequently, development
of a national and statistically valid error measurement can take months and even
years to complete.”²⁶ Until all these programs have estimates, however, the full
extent of the improper payments problem will remain unknown.
Continuing Concerns
Reporting Threshold
There has been criticism of OMB’s definition of “significant [emphasis added]
improper payments.” In addition to the $10 million threshold in estimated improper
spending established by the statute, OMB required that the improper payments
represent at least 2.5% of total program payments. The Chairman and Ranking

²⁴ Ibid.
²⁵ Ibid. The nine programs that accounted for 90.2% of FY2007 reported improper
payments were Medicare Fee-for-Service, Medicaid Fee-for-Service, Earned Income Tax
Credit, Unemployment Insurance, Supplemental Security Income, Food Stamps, Public
Housing/Rental Assistance, National School Lunch, and Old-Age, Survivors, and Disability
Insurance.
²⁶ OMB, Improving the Accuracy and Integrity of Federal Payments, January 31, 2008.

Minority Member of the House Subcommittee on Government Efficiency and
Financial Management, Representative Todd Platts and Representative Marsha
Blackburn, sent a letter to OMB in August 2003 questioning the 2.5% minimum
threshold. Likewise, according to a news article, Senators Charles Grassley and Max
Baucus, then the Chairman and Ranking Minority Member of the Senate Finance
Committee, stated in a January 9, 2004, letter to then OMB Director Joshua Bolten
that OMB should not have established the 2.5% threshold and should have simply
required that agencies report all programs generating estimated improper payments
of more than $10 million. The Senators reportedly observed that, by adding the 2.5%
threshold, “The improper payments figures that will eventually be reported to the
public will look better and feel better than they really are....”²⁷
According to GAO, the 2.5% threshold could mask the extent of the improper
payments problem. In a 2006 report reviewing agency PARs from FY2005, GAO
identified many examples of agency programs with estimated improper payments
over $10 million that were not included in the agency’s improper payments estimate
because they did not meet the 2.5% threshold.²⁸ For example, GAO said that the
Department of Education did not report on three programs that each had estimated
improper payments exceeding $10 million — $155 million in total — because in
each case those payments represented less than 2.5% of program outlays.²⁹ If the
2.5% criterion were applied to large programs, GAO concluded, billions of dollars
in improper payments could go unreported.³⁰ OMB has defended the 2.5% threshold,
stating it was established “to ensure that agencies were focusing their resources on
programs with the highest levels of risk for improper payments.”³¹
As noted above, revised IPIA guidance, issued by OMB in 2006 as Appendix
C to Circular A-123, addressed this issue to some extent. Language in the updated
version stated explicitly that OMB could require a large program with relatively high
annual outlays, but that failed to meet the 2.5% criteria, to be considered as high risk
and included in the agency’s annual IPIA reporting. Such a determination, however,
would be done by OMB on a case-by-case, nonmandatory basis. The clarification in
Appendix C, arguably, thus may be viewed as not going far enough by some in
Congress who in the past have taken issue with OMB’s addition of the 2.5%
prerequisite.

²⁷ Cited by Amelia Gruber, “OMB Defends Actions on Improper Payments,” GovExec.com,
January 14, 2004.
²⁸ GAO, Improper Payments: Agencies’ Fiscal Year 2005 Reporting Under the Improper
Payments Information Act Remains Incomplete, GAO-07-92, December 2006, pp. 41-45.
²⁹ Ibid., p. 44.
³⁰ Ibid., p. 54.
³¹ Letter from Linda Combs, OMB Controller, to McCoy Williams, GAO Director of
Financial Management and Assurance, October 26, 2006.

Annual Review Exemption
As previously described, the IPIA requires agencies to review all their programs
and activities each year to determine whether they are at risk for significant improper
payments. OMB’s 2006 revised guidance, however, permits agencies to exempt
programs from the annual review requirement (which OMB refers to as a risk
assessment) for two years if a program is determined not to be risk susceptible. Thus,
if a program were reviewed in 2007 and deemed not at risk, then the program would
not have to be reviewed again until 2010.³² At a hearing on improper payments held
in March 2007, McCoy Williams, Director of Financial Management and Assurance
at GAO, testified that OMB had discussed the proposed changes with GAO prior to
issuing the revised guidance. According to the witness, “We [at GAO] advised OMB
that the provision to perform risk assessments every 3 years for those programs not
deemed risk-susceptible was inconsistent with the IPIA requirement for agencies to
review all programs and activities annually.”³³
OMB’s exemption from the IPIA’s annual review requirement might exacerbate
the consequences of inaccurate risk assessments. Agencies are still refining their
procedures for identifying risk-susceptible programs. In some cases, improvements
in risk assessment methods have resulted in programs being designated as risk
susceptible that previously had been considered low-risk. The Department of
Agriculture (USDA), for example, enhanced its risk assessment methodology in
FY2006, and, as a consequence, it determined that four programs were susceptible
to significant improper payments that year which had been considered low-risk the
previous year.³⁴ USDA reported that those four programs had total outlays of $12.8
billion and had issued a combined $804 million in improper payments.³⁵ While
OMB praised the agency for identifying “previously undetected” improper payments,
USDA could have claimed OMB’s annual review exemption for the four programs
after determining they were low-risk in FY2005.³⁶ Had it done so, USDA would not
have been required to re-assess those programs until FY2008, and hundreds of
millions of dollars in improper payments might have gone undetected for another two
years.
In addition, the exemption has been applied not just to individual programs, but,
to entire agencies. In FY2007, four agencies reported that they did not conduct new

³² OMB’s guidance would require a program to be re-assessed if it experienced a significant
legislative change or a major increase in funding, even if that assessment would occur less
than three years from the last risk assessment.
³³ Testimony of McCoy Williams, March 29, 2007, GAO-07-635T, p. 6.
³⁴ The four programs were Direct and Counter-Cyclical Payments, Conservation Reserve
Program, Farm Service Agency (FSA) Disaster Programs, and the Non-insured Assistance
Program. U.S. Department of Agriculture, “Improper Payment and Recovery Auditing
Details,” FY2006 Performance and Accountability Report, November 15, 2006, at
[http://www.ocfo.usda.gov/usdarpt/pdf/par09.pdf].
³⁵ Ibid.
³⁶ OMB, Improving the Accuracy and Integrity of Federal Payments, January 31, 2007, p.

risk assessments, on the grounds that previous risk assessments had determined no
new programs were risk-susceptible, and therefore they could claim OMB’s three-
year exemption for the entire agency.³⁷ In this way, agencies might use OMB
guidance to declare themselves exempt from certain IPIA requirements.
Federal Government’s Use of Recovery Auditing
In 2002, Congress included in Section 831 of the National Defense
Authorization Act (P.L. 107-107) provisions requiring agencies to identify, and
attempt to recover, overpayments to contractors. These provisions — commonly
referred to as the Recovery Auditing Act — apply to agencies that enter into
contracts valued at $500 million or more in a fiscal year. Agencies are allowed to use
recovered funds to offset the cost of recovery activities, including the use of private
sector firms or other agencies. Any remaining recovered funds are to be credited
back to the original appropriation, or deposited in the Treasury as miscellaneous
receipts, if the appropriation is no longer available.
OMB’s guidance on recovery auditing requires agencies to establish policies and
procedures (internal controls) that prevent, detect, and recover overpayments to
contractors resulting from payment errors.³⁸ OMB also requires agencies to report
on their recovery auditing efforts in their PARs. In addition to data on the amount
of contracts reviewed, the amount of improper payments identified, and the amounts
recovered, agency reporting must include a description of recovery audit activities,
a corrective action plan to address the root causes of payment error, and a description
of any management improvement program carried out by the agency. OMB, in turn,
includes data on agency recovery audit efforts in its annual IPIA report.
The data provided by OMB show that since recovery auditing activities began
in FY2004, federal agencies have recovered only half of the $1.699 billion in
improper payments identified for recovery. To put it another way, the government
has yet to recover almost $850 million in erroneous payments to contractors. The
recovery rate varies widely among the agencies, ranging from a high of 100% at the
Environmental Protection Agency and the Department of Commerce, to a low of
0.5% at the Department of Homeland Security (DHS). The low recovery rate at DHS
is significant, as the department has only recovered $2.4 million out of $506.0
million in erroneous payments. Moreover, GAO has raised concerns about the
quality of recovery efforts to date at DHS, and has called for DHS management to
increase its oversight and monitoring of recovery auditing efforts across the

³⁷ Testimony of McCoy Williams, GAO Director of Financial Management and Assurance,
Improper Payments: Agencies’ Efforts to Address Improper Payment and Recovery Auditing
Requirements, U.S. Congress, Senate Subcommittee on Federal Financial Management,^th
Government Information, Federal Services, and International Security, hearings, 110^nd
Cong., 2 sess., Jan. 31, 2008, GAO-08-438T. The agencies were the General Services
Administration, the Department of Health and Human Services (HHS), the Department of
the Interior, and the National Science Foundation.
³⁸ OMB, “Requirements for Effective Measurement and Remediation of Improper
Payments,” Appendix C to OMB Circular A-123, August 10, 2006.

department.³⁹ The Department of Defense (DOD) had a recovery rate of 69.5% in
FY2007, but because of the prodigious value of its contracts (totaling $723 billion
from FY2004-FY2007), it has $262 million in erroneous payments it has yet to
recover.⁴⁰ Thus, DOD and DHS account for 90% of the $850 million in erroneous
payments to contractors that the government has identified, but not recovered.
Congressional Oversight
The House Subcommittee on Government Efficiency and Financial
Management held oversight hearings on improper payments in May and July 2003,
as did the House Subcommittee on Government Management, Finance, and
Accountability in July 2005 and April 2006.⁴¹ In the Senate, the Subcommittee on
Federal Financial Management, Government Information, and International Security
held improper payments hearings in July 2005, and in March and December 2006.⁴²
Hearings in the 110^th Congress. On March 29, 2007, the Senate
Subcommittee on Federal Financial Management, Government Information, Federal
Services, and International Security, reformulated after the 2006 elections, held a
hearing titled “Eliminating and Recovering Improper Payments.”⁴³ In addition to
testimony from McCoy Williams of GAO, referred to above, three other witnesses
appeared at the hearing.⁴⁴ On January 31, 2008, the subcommittee held another

³⁹ GAO, Department of Homeland Security: Challenges in Implementing the Improper
Payments Information Act and Recovering Improper Payments, GAO-07-013, Sept. 2007,
pp. 28-32, at [http://www.gao.gov/new.items/d07913.pdf].
⁴⁰ OMB, Improving the Accuracy and Integrity of Federal Payments, Jan. 31, 2008, p. 34.
⁴¹ U.S. Congress, House Committee on Government Reform, Subcommittee on Government
Efficiency and Financial Management, Show Me the Tax Dollars — How Much Is Lost to^th^st
Improper Payments Each Year?, hearing, 108 Cong., 1 sess., May 13, 2003 (Washington:
GPO, 2003); and ibid., Show Me the Tax Dollars Part II — Improper Payments and the
Tenncare Program, July 14, 2003 (Washington: GPO, 2003); and ibid., Subcommittee on
Government Management, Finance, and Accountability, Implementing the Improper^th^st
Payment Information Act - Are We Making Progress? 109 Cong., 1 sess., July 20, 2005,
at [http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=109_house_
hearings&docid=f:26655.pdf]; and ibid., The Improper Payments Information Act — Are
Agencies Meeting the Requirements of the Law?, April 5, 2006.
⁴² U.S. Congress, Senate Subcommittee on Federal Financial Management, Government
Information, and International Security, Improper Payments: Where Are Truth and^th^st
Transparency in Federal Financial Reporting?, hearing, 109 Cong., 1 sess., July 12, 2005
(Washington: GPO, 2005); and Reporting Improper Payments: A Report Card on Agencies’
Progress, hearing, March 9, 2006, at [http://hsgac.senate.gov/index.cfm?Fuseaction=
Hearings.Detail&HearingID=329]; and An Assessment of the Improper Payments
Information Act of 2002, hearing, December 5, 2006.
⁴³ U.S. Congress, Senate Subcommittee on Federal Financial Management, Government
Information, Federal Services, and International Security, Eliminating and Recovering^th^st
Improper Payments, hearing, 110 Cong., 1 sess., March 29, 2007, at
[http://hsgac.senate.gov/index.cfm?Fuseaction=Hearings .Detail&HearingID=431].
⁴⁴ The other witnesses were David Norquist, Chief Financial Officer, Department of
(continued...)

hearing focused on “Eliminating Agency Payment Errors.” McCoy Williams again
appeared for GAO, and Daniel Werfel, Acting Controller, testified for OMB.⁴⁵
Mr. Williams indicated that his testimony was based on a GAO report sent to
the subcommittee the previous week, ⁴⁶ and that, despite the improvements to date,
challenges continue with respect to IPIA implementation. Mr. Williams outlined five
specific problems. One issue is the comprehensiveness of agencies’ risk
assessments. Despite the IPIA requirement for an annual review of all agency
programs that may be susceptible to significant improper payments, the review of
2007 PARs by GAO indicated that not all agencies reported conducting risk
assessments. Some agencies reported that they did not conduct a risk assessment of
all their programs, since “OMB guidance allows agency programs deemed not risk-
susceptible to conduct a risk assessment generally every three years.”⁴⁷
A second problem, according to GAO, relates to the inclusiveness of improper
payment estimates. GAO found that estimates have not been developed for all of the
programs identified as risk-susceptible for improper payments. The $55 billion
improper payment estimate for FY2007 did not cover 14 programs with FY2007
outlays totaling approximately $170 billion. A third challenge cited by GAO involves
IPIA noncompliance issues. A few auditors reported on IPIA compliance problems
as a part of their audits of an agency’s FY2007 financial statements. According to
GAO, these noncompliance issues “related to the key requirements of the act,
including risk assessments, sampling methodologies, implementing corrective
actions, recovering improper payments, and inadequate documentation.”⁴⁸ Another
omission in some of the agency reports involved the absence of discussion on
possible statutory or regulatory barriers impeding agencies’ ability to reduce
improper payments. The fifth problem relates to management challenges in the
design or implementation of necessary internal controls, which are critical in efforts
to identify improper payments and prevent them in the future.
Daniel Werfel, OMB’s Acting Controller, also testified at this 2008 Senate
subcommittee hearing. He noted three important trends in the IPIA data from
FY2004 through FY2007. First, agencies are expanding the universe of high-risk

⁴⁴ (...continued)
Homeland Security; Timothy B. Hill, Chief Financial Officer, Centers for Medicare and
Medicaid Services; and Lee White, Executive Vice President, PRG-Schultz, Inc.
⁴⁵ A second panel at the hearing consisted of four officials from federal agencies, including
the Chief Financial Officer from the Department of Agriculture, and witnesses from the
Federal Communications Commission, the Department of Health and Human Services, and
the Social Security Administration. Testimony available at [http://hsgac.senate.gov/
public/index.cfm?Fuseaction=Hearings.Detail&HearingID=07ef1211-d286-4e99-87fb-b

67deaf9debf], visited Aug. 2008.

⁴⁶ GAO-08-377R
⁴⁷ Eliminating Agency Payment Errors, p. 7. This matter has been a point of continuing
disagreement between OMB and GAO since the addition of Appendix C to OMB Circular
A-123 in 2006.
⁴⁸ Ibid., p. 14.

programs that are measured each year. Second, agencies are moving forward toward
“closing all reporting gaps so that the full extent of government-wide improper
payments” will be known within a few years. Third, after an agency “has identified
and reported payment errors, it is able to implement corrective actions and reduce
those errors in subsequent years.” Mr. Werfel, in reviewing these trends, stated that
after four years of IPIA implementation, “agencies generally have the tools in place
to ensure that all high risk activities are identified and measured.” Agencies do not,
however, “currently have the full complement of tools they need” to eliminate
improper payments.⁴⁹
Mr. Werfel then suggested three strategies to address this deficiency. First,
maximize the impact of program integrity dollars. In other words, concentrate
efforts on the higher risk, larger dollar amount programs; nine programs account for
90% of the FY2007 government-wide improper payment total. Second, address
challenges in eligibility verification. Such errors accounted for about 80% of total
improper payment errors in FY2007. Third, Mr. Werfel supported enactment of
specific program reforms recommended by the Administration, most recently being
re-proposed in the President’s FY2009 budget.⁵⁰
There has not been an oversight hearing focused exclusively on the IPIA in the
House during the 110^th Congress. On June 3, 2008, however, the Subcommittee on
Government Management, Organization, and Procurement, held a hearing titled
“Oversight of Federal Financial Management.”⁵¹ Testimony provided by OMB
reviewed the status of financial reporting government-wide, as well as at the agency
level. Mr. Werfel then referred to other improvement initiatives, including reducing
improper payments. He praised Congress for taking a step toward enacting some
reforms supported by OMB, “including discretionary funding (above the cap) for
activities with a proven track record of reducing error and generating program
savings” in the FY2009 budget resolution (S.Con.Res. 70). ⁵²
Legislation to Amend the IPIA in the 110^th Congress. On the same day
as the hearing mentioned above, Senator Tom Carper, chairman of the subcommittee,⁵³

introduced S. 2583, the Improper Payments Elimination and Recovery Act of 2008.
⁴⁹ Testimony of Daniel Werfel before the Senate Subcommittee on Federal Financial
Management, Government Information, and International Security, Jan. 31, 2008, p. 2.
Statement at [http://hsgac.senate.gov/public/_files/WerfelFINAL.pdf], visited Aug. 2008.
⁵⁰ Ibid., pp. 2-4. The program reforms supported by the Administration were included as an
attachment to this OMB testimony. A measure incorporating these reforms has yet to be^th
introduced in the 110 Congress.
⁵¹ With respect to other witnesses at the hearing, a witness from GAO addressed the FY2007
U.S. Government Financial Statements, and a DOD spokesman testified on the department’s
efforts in financial management modernization. Statements available at
[http://governmentmanagement.oversight.house.gov/ story.asp?ID=1982]
⁵² Statement of Daniel Werfel before the House Subcommittee on Government Management,
Organization, and Procurement, June3, 2008, p. 4.
⁵³ Sen. Tom Carper, “Statement on Introduction of S. 2583,” remarks in the Senate,
(continued...)

On July 30, 2008, the Senate Committee on Homeland Security and Governmental
Affairs by voice vote ordered that S. 2583, with an amendment in the nature of a
substitute, be reported favorably.
S. 2583, as reported, would amend the IPIA to expand and strengthen ongoing
efforts to identify, reduce, and recover improper payments due the federal
government. For example, the threshhold for agency heads to identify programs as
“susceptible to significant improper payments” would be broadened, creating the
likelihood that more agencies would have to report on additional programs, while the
floor for program expenditures subject to recovery auditing would be lowered.
Expanded reporting requirements regarding corrective action to be taken would be
placed on the agencies and OMB. Agency inspectors general would be newly tasked
with the responsibility of preparing annual compliance reports, and these would be
included with the annual financial statements. A time-tiered approach for
remediation of an agency’s noncompliance status would be established, ranging from
submission of a corrective action plan to Congress to mandatory submission of
reauthorization proposals, which, if not approved by Congress, would trigger a
freeze in level of authorizations. S. 2583 as reported also would allow the OMB
director to establish pilot programs on compliance enforcement to test potential
accountability mechanisms along with incentives or penalties to ensure statutory
compliance with law and, ultimately, elimination of improper payments.
In the House, a companion bill, H.R. 5467, was introduced on February 14,

2008, but no further action has occurred.

⁵³ (...continued)
Congressional Record, daily edition, vol. 154 (Jan. 31, 2008), pp. S544-S547.