The steps include the following:  1.  reviewing all programs and activities and identifying those that may be  susceptible to significant improper payments (commonly referred to as  a risk assessment),  2.  developing improper payment estimates for those programs and  activities that the agency identified as being susceptible to significant  improper payments,  3.  analyzing the root causes of improper payments and developing  corrective actions to reduce them for those programs and activities  that the agency identified as being susceptible to significant improper  payments, and  4.  reporting on the results of addressing the foregoing requirements. Agency Processes to Estimate Improper Payments Varied, and Some Differences May Hinder the Usefulness of the Resulting Estimates

		Aspects of Sample Selection, Including Sampling Approach and Age of Data, Varied

			Sampling Approach

IPIA, as amended, requires agencies to develop statistically valid  improper payment estimates or estimates that are otherwise appropriate  using a methodology approved by the Director of OMB. Age of Data

To estimate improper payments for fiscal year 2017, the six agencies we  reviewed reported sampling and testing data that varied in age from  calendar year 2013 to fiscal year 2017. Figure 2 shows the range of data  used. Testing processes varied among the 10 programs,  with some of the six agencies using processes designed specifically to  estimate improper payments and others leveraging existing processes  designed for other purposes. For example, according to their policies and procedures  for Medicare Fee-for-Service, reviewers examine the medical  necessity, compliance with documentation requirements, and coding  of services provided, among other things;  for the Earned Income Tax Credit (EITC), auditors examine whether  the taxpayer properly reported income and whether the taxpayer  meets eligibility criteria, including income and qualifying child  requirements, and auditors examine, among other things, whether the  taxpayer is subject to a disallowance period on receiving EITC;  for Medicaid, reviewers examine fee-for-service claims and managed  care payments to determine the eligibility status of the beneficiary and  the provider, as well as support for the medical necessity of fee-for- service claims, among other things;  for Old-Age, Survivors, and Disability Insurance (OASDI), reviewers  examine factors to support the beneficiary’s eligibility, including,  among other things, citizenship, relationship (in the case of survivor  benefits), and receipt of other government benefits; and although Education’s Direct Loan program reviews can vary in scope,  they may include, among other things, steps to verify educational  institution eligibility (such as licensing and accreditation) and student  eligibility (such as enrollment status and satisfactory academic  progress). DOD Military Pay. OPM Retirement. OMB guidance. HHS’s programs were the only ones we reviewed that reported improper  payments in the insufficient documentation root cause category for fiscal  years 2016 or 2017, as shown in table 6. Treatment of cases of nonresponse. Among the six agencies we reviewed,  treatment of cases of nonresponse differed. For EITC improper payment estimation purposes, the Internal  Revenue Service (IRS) stated that the agency does not consider the  sampled payment associated with a nonresponse case to be proper  or improper. Except for IRS, Selected Agencies Generally Reported Using Law and OMB Guidance to Calculate Improper Payment Estimates

			Calculation of Improper Payment Estimates

When agencies identify improper payments, they must determine the  amount of the payment that was improperly made. The six agencies we  reviewed generally reported using the definition of improper payment in  relevant laws and OMB guidance to determine the amount of improper  payments identified. Conclusions

Improper payments are a long-standing, significant problem in the federal  government. Estimation of improper payments is key to understanding the  extent of the problem and to developing effective corrective actions to  address it. Specifically, policies and procedures for DOD’s Military Pay and OPM’s  Retirement programs’ improper payment estimation methodologies do not  address certain key risks, like eligibility, in part because these agencies  have not fully assessed their processes. OMB guidance does not specifically address the  appropriate treatment of nonresponse cases for improper payment  estimation purposes. (Recommendation 4)
The Commissioner of IRS should update IRS’s improper payment  estimation methodology to not exclude recovered overpayments from its  EITC improper payment estimate. Although we agree that programs and activities may face different  risks of improper payment, we continue to believe that guidance from  OMB on how agencies test to identify improper payments—such as  directing agencies to take a risk-based approach in developing their  testing procedures—could help ensure that agencies address the  specific risks they identify when developing improper payment  estimates. However,  OPM did not agree with the part of the recommendation to assess the risk  of improper payments related to eligibility in the estimation process. GAO staff who made key contributions to this report  are listed in appendix V.

Appendix I: Reported Improper Payment Estimates by Agency and Program for Fiscal Year 2017

Table 7 lists the fiscal year 2017 improper payment estimates by agency  and program, as reported by agencies in their fiscal year 2017 agency  financial reports and compiled on the Office of Management and Budget’s  payment integrity website, paymentaccuracy.gov.
Why GAO Did This Study

Improper payments—which include payments that should not have been made or were made in an incorrect amount—are a long-standing, significant problem in the federal government, estimated at almost $141 billion for fiscal year 2017. Executive branch agencies are required to annually estimate improper payments for certain programs. Estimation of improper payments is key to understanding the extent of the problem and to developing effective corrective actions. Relevant laws and guidance provide agencies flexibility in developing estimates.
This report describes agencies' processes to estimate improper payments in selected programs for fiscal year 2017 and the extent to which certain differences in these processes can affect the usefulness of the resulting estimates. GAO selected 10 programs across six agencies with the largest reported program outlays in fiscal years 2015 and 2016. For these programs, GAO reviewed relevant laws and guidance, analyzed agencies' policies and procedures, and interviewed officials at relevant agencies and OMB staff.

What GAO Found

The six agencies GAO reviewed reported taking various approaches related to key components of estimating improper payments—shown in the figure below—for 10 selected programs, which collectively reported outlays of over $2.5 trillion for fiscal year 2017.
Sample selection. Eight of the 10 programs GAO reviewed reported using statistically valid approaches, and the remaining 2 reported using alternative methodologies approved by the Office of Management and Budget (OMB). The sampled data elements varied, including payments, medical claims, and tax returns. The age of the data used to develop fiscal year 2017 improper payment estimates also varied, ranging from calendar year 2013 to fiscal year 2017.
Identification of improper payments. Some of the six agencies reported using processes designed specifically to estimate improper payments, whereas others reported leveraging existing reviews. These agencies' policies and procedures include a review of aspects of eligibility, except for those related to the Department of Defense's (DOD) Military Pay and the Office of Personnel Management's (OPM) Retirement overpayments. DOD and OPM have not fully assessed whether their estimation processes effectively consider key program risks. OMB guidance does not specifically address how agencies are to test to identify improper payments, such as using a risk-based approach to help ensure that key risks of improper payments are addressed.
The six agencies also varied in the treatment of insufficient documentation, both in identifying and in reporting the root causes of improper payments. For the agencies that contact entities outside the agency to estimate improper payments, the treatment of nonresponse differed, with one agency including nonresponses as improper payments and another generally excluding the nonresponse cases from review. Although OMB guidance states that agencies should treat cases of insufficient documentation as improper payments, it does not specifically address the treatment of nonresponse cases.
Calculation of the improper payment estimate. The six agencies generally reported using law and OMB guidance to calculate improper payment estimates for the selected programs, except for the Earned Income Tax Credit (EITC). The Internal Revenue Service (IRS) removed overpayments that were recovered when developing its estimate. OMB guidance requires agencies to include recovered amounts in their estimates. Removing these overpayments understates the EITC improper payment estimate and may limit IRS's ability to develop corrective actions to prevent improper payments.

What GAO Recommends

GAO recommends that OMB develop guidance on treatment of nonresponse cases and testing to identify improper payments, that DOD and OPM assess their estimation processes, and that IRS revise its methodology to not exclude recovered payments from its estimate. All of the agencies either agreed or partially agreed with the specific recommendations to them. GAO believes that the actions are warranted, as discussed in the report.