Veterans Affairs: Improper Payment Estimates and Ongoing Efforts for Reduction

For several years, GAO has reported in its audit reports on the consolidated financial statements of the U.S. government that the federal government is unable to determine the full extent to which improper payments occur and reasonably assure that actions are taken to reduce them.

Strong financial management practices, including effective internal control, are important for federal agencies to better detect and prevent improper payments. VA faces significant financial management challenges. In 2015, GAO designated VA health care as a high-risk area because of concern about VA's ability to ensure that its resources are being used cost effectively and efficiently to improve veterans' timely access to health care and to ensure the quality and safety of that care. Further, improving and modernizing federal disability programs has been on GAO's high-risk list since 2003, in part because of challenges that VA has faced in providing accurate, timely, and consistent disability decisions related to disability compensation. In addition, in VA's fiscal year 2016 agency financial report, the independent auditor cited material weaknesses in internal control over financial reporting.

This statement discusses improper payments on both the government-wide level and at VA. The statement also discusses certain actions that VA has taken and other actions that VA can take to reduce improper payments. This statement is based on GAO's recent work on improper payments and its analysis of agency financial reports and VA's Office of Inspector General reports.

Improper payments, which generally include payments that should not have been made, were made in the incorrect amount, or were not supported by sufficient documentation, remain a significant and pervasive government-wide issue. Since fiscal year 2003—when certain agencies began reporting improper payments as required by the Improper Payments Information Act of 2002—cumulative improper payment estimates have totaled over $1.2 trillion. For fiscal year 2016, agencies reported improper payment estimates totaling $144.3 billion, an increase of about $7.6 billion from the prior year's estimate of $136.7 billion.

For fiscal year 2016, the Department of Veterans Affairs' (VA) reported improper payment estimate totaled $5.5 billion. VA's Community Care and Purchased Long-Term Services and Support programs accounted for reported improper payment estimates of $3.6 billion and $1.2 billion, respectively, or about 87 percent of VA's reported improper payment estimate for fiscal year 2016. VA's reported improper payment estimates increased significantly from $1.6 billion for fiscal year 2014 to $5.0 billion for fiscal year 2015. According to the VA Office of Inspector General, this increase was primarily due to a change in VA's evaluation procedures, which resulted in more improper payments being identified.

In accordance with Office of Management and Budget guidance, to reduce improper payments, VA can use detailed root cause analysis to identify why improper payments are occurring and to develop corrective actions. For example, according to VA, the root cause for over 75 percent of VA's reported improper payments for fiscal year 2016 was program design or structural issues. Most of these errors occurred in VA's health care area. To reduce these improper payments, VA stated that it will make its procurement practices compliant with Federal Acquisition Regulation provisions. GAO has also recommended steps that VA can take to reduce the risk of improper payments related to disability benefits. For example, in November 2014, GAO reported that VA had shortcomings in quality review practices that could reduce its ability to ensure accurate and consistent processing of disability compensation claim decisions, and GAO made eight related recommendations to improve the program. To date, VA has implemented six of the report's eight recommendations and expects to implement the other two recommendations related to the effectiveness of quality assurance activities later this summer.

As the steward of taxpayer dollars, the federal government is accountable  for how it spends hundreds of billions of taxpayer dollars annually.  However, improper payments remain a significant and pervasive  government-wide issue. For several years, we have reported improper  payments as a material weakness in our audit reports on the  consolidated financial statements of the U.S. government because the  federal government is unable to determine the full extent to which  improper payments occur and reasonably assure that actions are taken to  reduce them. In addition, agency auditors continued to report internal  control deficiencies over financial reporting in their 2016 financial  statement audit reports, such as financial system limitations and  information system control weaknesses. Such deficiencies could  significantly increase the risk that improper payments may occur and not  be detected promptly.

Under the Improper Payments Information Act of 2002 (IPIA), as  amended, an improper payment is defined as any payment that should  not have been made or that was made in an incorrect amount (including  overpayments and underpayments) under statutory, contractual,  administrative, or other legally applicable requirements. Among other  things, an improper payment includes payment to an ineligible recipient,  payment for an ineligible good or service, and any duplicate payment. In  addition, Office of Management and Budget (OMB) guidance instructs  agencies to report as improper payments any payments for which  insufficient or no documentation was found. Reducing improper payments  is critical to safeguarding federal funds and could help achieve cost  savings and improve the government’s fiscal position.

Strong financial management practices, including effective internal  controls, are important for federal agencies to better detect and prevent  improper payments. The Department of Veterans Affairs (VA) faces  significant financial management challenges. In 2015, we designated VA  health care as a high-risk area because of our concern about VA’s ability  to ensure that its resources are being used cost-effectively and efficiently  to improve veterans’ timely access to health care, and to ensure the  quality and safety of that care. Further, improving and modernizing  federal disability programs has been on GAO’s high-risk list since 2003, in  part because of challenges that VA has faced in providing accurate,  timely, and consistent decisions related to disability compensation. In  addition, in VA’s fiscal year 2016 agency financial report, the independent  auditor reported material weaknesses and significant deficiencies in  internal control over financial reporting. Finally, the VA Office of Inspector  General (OIG) has reported that VA has been noncompliant with the  criteria listed in Section 3 of the Improper Payments Elimination and  Recovery Act of 2010 (IPERA) since fiscal year 2011, the first year that  the OIG reported on the agency’s compliance under that provision.

Today, my statement will discuss improper payments on both the  government-wide level and at VA. It will also discuss certain actions that  VA has taken and other actions that VA can take to reduce improper  payments. My statement is primarily based on VA’s financial reports, VA  OIG reports, and our recent improper payments related work at VA. The  products cited throughout this statement include details on the scope and  methodology used to conduct that work. The work upon which this  statement is based was conducted in accordance with all sections of  GAO’s Quality Assurance Framework that are relevant to our objectives.  The framework requires that we plan and perform the engagement to  obtain sufficient and appropriate evidence to meet our stated objectives  and to discuss any limitations in our work. We believe that the information  and data obtained, and the analysis conducted, provide a reasonable  basis for any findings and conclusions in this product.

VA’s mission is to promote the health, welfare, and dignity of all veterans  in recognition of their service to the nation by ensuring that they receive  medical care, benefits, social support, and lasting memorials. It is the  second largest federal department and, in addition to its central office  located in Washington, D.C., has field offices throughout the United  States, as well as the U.S. territories and the Philippines.

The department has three major components that are primarily  responsible for carrying out its mission:  the Veterans Benefits Administration (VBA), which provides a variety  of benefits to veterans and their families, including disability  compensation, educational opportunities, assistance with home  ownership, and life insurance;  the Veterans Health Administration (VHA), which provides health care  services, including primary care and specialized care, and performs  research and development to serve veterans’ needs; and  the National Cemetery Administration (NCA), which provides burial  and memorial benefits to veterans and their families.

Collectively, the three components rely on approximately 340,000  employees to provide services and benefits. These employees work in  167 VA medical centers, approximately 800 community-based outpatient  clinics, 300 veterans centers, 56 regional offices, and 131 national and 90  state or tribal cemeteries.

For fiscal year 2016, VA reported about $176 billion in net outlays, an  increase of about $16 billion from the prior fiscal year. VBA and VHA  account for about $102 billion (about 58 percent) and $72 billion (about  41 percent) of VA’s reported net outlays, respectively. The remaining net  outlays were for NCA and VA’s administrative costs. The fiscal year 2017  appropriations act that covered VA provided approximately $177 billion to  the agency, about a $14 billion increase from the prior fiscal year.

Improper Payments Remain a Significant and Pervasive Government-Wide Issue

As we recently reported, improper payments remain a significant and  pervasive government-wide issue. Since fiscal year 2003—when certain  agencies began reporting improper payments as required by IPIA— cumulative reported improper payment estimates have totaled over $1.2  trillion, as shown in figure 1.

For fiscal year 2016, agencies reported improper payment estimates  totaling $144.3 billion, an increase of over $7 billion from the prior year’s  estimate of $136.7 billion. The reported estimated government-wide  improper payment error rate was 5.1 percent of related program outlays.  As shown in figures 2 and 3, the government-wide reported improper  payment estimates—both dollar estimates and error rates—have  increased over the past 3 years, largely because of increases in  Medicaid’s reported improper payment estimates.

For fiscal year 2016, overpayments accounted for approximately 93  percent of the government-wide reported improper payment estimate,  according to www.paymentaccuracy.gov, with underpayments accounting  for the remaining 7 percent.

Although primarily concentrated in three areas (Medicare, Medicaid, and  the Earned Income Tax Credit), the government-wide reported improper  payment estimates for fiscal year 2016 were attributable to 112 programs  spread among 22 agencies. (See fig. 4.)

We found that not all agencies had developed improper payment  estimates for all of the programs they identified as susceptible to  significant improper payments. Eight agencies did not report improper  payment estimates for 18 risk-susceptible programs. (See table 1.)

As we have previously reported, the federal government faces multiple  challenges that hinder its efforts to determine the full extent of and reduce  improper payments. These challenges include potentially inaccurate risk  assessments, agencies that do not report improper payment estimates for  risk-susceptible programs or report unreliable or understated estimates,  and noncompliance issues.

Changes in VA’s Evaluation Procedures Caused Significant Increases in Reported Improper Payment Estimates since Fiscal Year 2013

For fiscal year 2016, VA’s reported improper payment estimate totaled  $5.5 billion, an increase of about $500 million from the prior year. The  reported VA improper payment error rate was 4.5 percent of related  program outlays for fiscal year 2016, a slight increase from the 4.4  percent reported error rate for fiscal year 2015. As shown in table 2, VA’s  Community Care and Purchased Long-Term Services and Support  programs accounted for the majority of VA’s estimated improper  payments. Specifically, for fiscal year 2016, VA’s reported improper  payment estimate for VA’s Community Care was approximately $3.6  billion (about 65 percent of VA’s total reported improper payments  estimate) and for VA’s Purchased Long-Term Services and Support was  approximately $1.2 billion (about 22 percent of VA’s total reported  improper payments estimate).

As shown in figures 5 and 6, VA’s reported improper payment estimates  have increased over the past 3 years, and the reported improper payment  error rates have increased over the past 2 years.

The significant increase in VA’s reported improper payment estimates  and error rates primarily occurred, according to the VA OIG, because VA  changed its sample evaluation procedures in fiscal year 2015, which  resulted in more improper payments being identified. In response to a  finding by the VA OIG, VA began classifying every payment as improper  when it made a payment that did not follow all applicable Federal  Acquisition Regulation (FAR) and Veterans Affairs Acquisition Regulation  (VAAR) provisions. The OIG reported that when those purchases do not  follow applicable legal requirements, such as having FAR-compliant  contracts in place, the resulting payments are improper because they  “should not have been made or were made in an incorrect amount under  statutory, contractual, administrative, or other legally applicable  requirements, according to the definition of improper payments set forth in  OMB Circular A-123, Appendix C.” As a result of the change in its sample  evaluation procedures, VA reported significant increases in estimated  improper payments for both its Community Care and Purchased Long- Term Services and Support programs.

As shown in table 3, VA’s Community Care and Purchased Long-Term  Services and Support programs’ reported improper payment error rates  are the two highest reported error rates government-wide for fiscal year  2016. Specifically, VA’s Community Care and Purchased Long-Term  Services and Support programs had reported improper payment error  rates of about 75.9 percent and 69.2 percent, respectively. The reported  improper payment error rates for these two programs were each over 45  percentage points higher than the reported improper payment error rate  for the next highest federal program—the Department of the Treasury’s  Earned Income Tax Credit program.

In its fiscal year 2016 agency financial report, VA did not report improper  payment estimates for four programs it identified as susceptible to  significant improper payments. These four programs were

Communications, Utilities, and Other Rent;

VA Community Care Choice payments made from the Veterans  Choice Fund.

Because VA did not report improper payment estimates for these risk- susceptible programs, VA’s improper payment estimate is understated  and the agency is hindered in its efforts to reduce improper payments in  these programs. In its fiscal year 2016 agency financial report, VA stated  that it will report improper payment estimates for these programs in its  fiscal year 2017 agency financial report.

Ongoing Efforts for Reducing Improper Payments at VA

According to OMB guidance, to reduce improper payments, VA can use  root cause analysis to identify why improper payments are occurring and  develop effective corrective actions to address those causes. In addition,  our two prior reports identified problems with how VA processed its claims  to reasonably assure the accuracy of or eligibility for the disability  benefits, increasing the risk of improper payments. VA can implement our  recommendations from these two reports to better ensure the accuracy of  or eligibility for disability benefits.

Root cause analysis is key to understanding why improper payments  occur and to developing and implementing corrective actions to prevent  them. In 2014, OMB established new guidance to assist agencies in  better identifying the root causes of improper payments and assessing  their relevant internal controls. Agencies across the federal government  began reporting improper payments using these more detailed root cause  categories for the first time in their fiscal year 2015 financial reports.  Figure 7 shows the root causes of VA’s estimated improper payments for  fiscal year 2016, as reported by VA.

According to VA’s fiscal year 2016 agency financial report, the root cause  for over three-fourths of VA’s reported fiscal year 2016 improper payment  estimates was program design or structural issues. As noted above, most  of the improper payments occurred in VA’s Community Care and  Purchased Long-Term Services and Support programs. In the fiscal year  2016 agency financial report, VA provided details on how it plans to  correct some program design issues by making its procurement practices  compliant with relevant laws and regulations. The agency stated that it  has made certain changes, such as issuing of new policies that can  reduce the amount of improper payments in this area. For example, in  VA’s fiscal year 2016 agency financial report, VA stated that it issued  guidance in May 2015 to appropriately purchase care, such as hospital  care or medical services, in the community through the use of VAAR- compliant contracts. VA stated that the implementation of this guidance is  ongoing with full impact and compliance anticipated during fiscal year  2017.

According to VA’s fiscal year 2016 agency financial report, the second  largest root cause for VA’s reported improper payments was  administrative or process errors made by the federal agency. VA reported  that most of these errors occurred in its Compensation program. These  errors, such as failure to reduce benefits appropriately, affected the  payment amounts that veterans and beneficiaries received. To address  this root cause, VA stated in its fiscal year 2016 agency financial report  that it is updating procedural guidance to reflect such things as changes  in legislation and policy. In addition, VA stated that it will train employees  on specific subjects related to errors found during improper payment  testing and quality reviews.

VA Has Implemented Steps to Improve the Accuracy of and Eligibility Determinations for its Disability Benefits

Accurate claim decisions help ensure that VA is paying disability benefits  only to those eligible for such benefits and in the correct amounts. Thus, it  is critical that VA follows its claims processes accurately and consistently.  However, we previously reported problems with how VA processed its  claims to reasonably assure the accuracy of or eligibility for the disability  benefits, increasing the risk of improper payments.

In November 2014, we reported that while VA pays billions of dollars to  millions of disabled veterans, there were problems with VA’s ability to  ensure that claims were processed accurately and consistently by its  regional offices. VA measures the accuracy of disability compensation  claim decisions mainly through its Systematic Technical Accuracy Review  (STAR). Specifically, for each of the regional offices, completed claims  are randomly sampled each month and the data are used to produce  estimates of the accuracy of all completed claims.

In our November 2014 report, we reported that VA had not always  followed generally accepted statistical practices when calculating  accuracy rates through STAR reviews, resulting in imprecise performance  information. We also identified shortcomings in quality review practices  that could reduce their effectiveness. We made eight recommendations to  VA to review the multiple sources of policy guidance available to claims  processors and evaluate the effectiveness of quality assurance activities,  among other things. In response to the draft report, VA agreed with each  of our recommendations and identified steps it planned to take to  implement them.

To date, VA has implemented six of the report’s eight recommendations.  For example, VA has revised its sampling methodology and has made its  guidance more accessible. VA has initiated action on the remaining two  recommendations related to quality review of the claims processes. VA  reported that it is in the process of making systems modifications to its  electronic claims processing system that will allow VA to identify  deficiencies during the claims process. In addition, VA is developing a  new quality assurance database that will capture data from all types of  quality reviews at various stages of the claims process. VA stated that  this new database will support increased data analysis capabilities and  allow the agency to evaluate the effectiveness of quality assurance  activities through improved and vigorous error rate trend analysis. VA  stated that it anticipates deploying the systems modifications and the new  quality assurance database by July 2017.

In June 2015, we reported that VA’s procedures did not ensure that  Total Disability Individual Unemployability (TDIU) benefit decisions were  well-supported. To begin receiving and remain eligible for TDIU  benefits, veterans must meet the income eligibility requirements. VA first  determines a claimant’s income by requesting information on the last 5  years of employment on the claim form and subsequently requires  beneficiaries to annually attest to any income changes. VA uses the  information provided by claimants to request additional information from  employers and, when possible, verifies the claimant’s reported income,  especially for the year prior to applying for the benefit. In order to receive  verification, VA sends a form to the employers identified on the veteran’s  benefit claim and asks them to provide the amount of income earned by  the veteran. However, VA officials indicated that employers provided the  requested information only about 50 percent of the time.

In our 2015 report, we reported that VA previously conducted audits of  beneficiaries’ reported income by obtaining income verification matches  from Internal Revenue Service (IRS) earnings data through an agreement  with the Social Security Administration (SSA), but was no longer doing so  despite the standing agreement. In 2012, VA suspended income  verification matches in order to develop a new system that would allow for  more frequent, electronic information sharing. VA officials told us that they  planned to roll out a new electronic data system that would allow for  compatibility with SSA data sources in fiscal year 2015. They noted that  they planned to use this system to conduct more frequent and focused  income verifications to help ensure beneficiaries’ continued entitlement.

VA officials also anticipated being able to use the system to conduct  income verifications for initial TDIU applicants. However, at the time of  our 2015 report, VA could not provide us with a plan or timeline for  implementing this verification system. In the 2015 report, we  recommended that VA verify the self-reported income provided by  veterans (1) applying for TDIU benefits and (2) undergoing the annual  eligibility review process by comparing such information against IRS  earnings data, which VA currently has access to for this purpose.

To date, VA is developing processes to use IRS earnings data from SSA  in verifying income eligibility requirements. According to VA, in February  2016, it launched a national workload distribution tool within its  management system to improve its overall production capacity and assist  with reaching claims processing goals that will be used in implementing  our recommendation. To determine if new beneficiaries are eligible for  TDIU benefits, VA stated that it is expanding the data-sharing agreement  with SSA to develop an upfront verification process. Specifically, when VA  receives a TDIU claim, it will electronically request the reported IRS  income information from SSA and receive a response within 16 days. In  addition, according to VA, it is also planning to begin a process for  checking incomes of veterans to determine whether they remain eligible  for TDIU benefits. Specifically, VA has reinstituted the data match  agreement with SSA that was set to expire in December 2016 to allow VA  to compare reported income earnings of TDIU beneficiaries to earnings  actually received. According to VA, it also has drafted a new guidance  manual for the annual eligibility review process. VA stated that it planned  to fully implement the upfront and annual eligibility verification processes  by the summer of 2017.

In conclusion, in light of VA’s significant financial management  challenges, we continue to be concerned about VA’s ability to reasonably  ensure its resources are being used cost-effectively and efficiently.  Because VA’s payment amounts are likely to increase with the increase in  appropriations for fiscal year 2017, it is critical that VA takes actions to  reduce the risks of improper payments. While VA has taken several  actions to help prevent improper payments, further efforts are needed to  help minimize the risks of improper payments across its programs.

Chairman Bergman, Ranking Member Kuster, and Members of the  Subcommittee, this completes my prepared statement. I would be  pleased to respond to any questions that you may have at this time.

If you or your staff have any question about this testimony, please contact  Beryl H. Davis, Director, Financial Management and Assurance, at (202)  512-2623 or davisbh@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this statement. GAO staff who made key contributions to this testimony  are Matthew Valenta (Assistant Director), Daniel Flavin (Analyst in  Charge), Marcia Carlsen, Francine Delvecchio, Robert Hildebrandt,  Melissa Jaynes, Jason Kelly, and Jason Kirwan.

This is a work of the U.S. government and is not subject to copyright protection in the  United States. The published product may be reproduced and distributed in its entirety  without further permission from GAO. However, because this work may contain  copyrighted images or other material, permission from the copyright holder may be  necessary if you wish to reproduce this material separately.

Question: How pervasive are improper payments?

Answer: Improper payments, which generally include payments that should not have been made, were made in the incorrect amount, or were not supported by sufficient documentation, remain a significant and pervasive government-wide issue.

Question: How large is the scale of improper payments have been made since FY2003?

Answer: Since fiscal year 2003—when certain agencies began reporting improper payments as required by the Improper Payments Information Act of 2002—cumulative improper payment estimates have totaled over $1.2 trillion.

Question: How does this compare to FY2016 improper payments?

Answer: For fiscal year 2016, agencies reported improper payment estimates totaling $144.3 billion, an increase of about $7.6 billion from the prior year's estimate of $136.7 billion.

Question: How does the VA identify why improper payments are occurring?

Answer: In accordance with Office of Management and Budget guidance, to reduce improper payments, VA can use detailed root cause analysis to identify why improper payments are occurring and to develop corrective actions.

Question: What was a major source of improper VA payments?

Answer: For example, according to VA, the root cause for over 75 percent of VA's reported improper payments for fiscal year 2016 was program design or structural issues. Most of these errors occurred in VA's health care area.

Question: How does the VA plan to reduce improper payments?

Answer: To reduce these improper payments, VA stated that it will make its procurement practices compliant with Federal Acquisition Regulation provisions.

Question: How did GAO recommend the VA reduce improper payments?

Answer: GAO has also recommended steps that VA can take to reduce the risk of improper payments related to disability benefits. For example, in November 2014, GAO reported that VA had shortcomings in quality review practices that could reduce its ability to ensure accurate and consistent processing of disability compensation claim decisions, and GAO made eight related recommendations to improve the program.

Question: To what extent has the VA implemented GAO's recommendations?

Answer: To date, VA has implemented six of the report's eight recommendations and expects to implement the other two recommendations related to the effectiveness of quality assurance activities later this summer.

Question: How can agencies prevent improper payments?

Answer: Strong financial management practices, including effective internal control, are important for federal agencies to better detect and prevent improper payments.

Question: Why did GAO designate VA healthcare as high-risk?

Answer: In 2015, GAO designated VA health care as a high-risk area because of concern about VA's ability to ensure that its resources are being used cost effectively and efficiently to improve veterans' timely access to health care and to ensure the quality and safety of that care.

Question: How does this compare to GAO recommendations about other federal health programs?

Answer: Further, improving and modernizing federal disability programs has been on GAO's high-risk list since 2003, in part because of challenges that VA has faced in providing accurate, timely, and consistent disability decisions related to disability compensation.

Question: How have independent reports confirmed GAO's concerns?

Answer: In addition, in VA's fiscal year 2016 agency financial report, the independent auditor cited material weaknesses in internal control over financial reporting.