Government Waste - Fiscal 2014 Improper Payments

The Government Accountability Office (GAO) has recently released its annual review of the federal government's ongoing issue with improper payments, an issue that affects a wide section of government.  Across 22 agencies and 124 programs, the improper payment estimate for fiscal 2014 was $124.7 billion, up from $105.8 billion in fiscal 2013.  This is a record amount of improper payments since reporting began in fiscal 2003, exceeding the $120.6 billion mark set in fiscal 2010.  The increase of $19 billion on a year-over-year basis was primarily due to three programs; Medicare, Medicaid  and the Earned Income Tax Credit (EITC) program.  Overpayments account for approximately 90 percent of all improper payments by the federal government.  Interestingly, the government-wide payment error rate increased from 4.0 percent in fiscal 2013 to 4.5 percent in fiscal 2014.

The GAO defines an improper payment as any payment that should not have been made or that was made in an incorrect amount (either over- or under-payments) under statutory, contractual, administrative or other legally applicable requirements.  It includes payments made to ineligible recipients, payments for ineligible goods and services as well as duplicate payments for the same goods or services.

Here is a pie chart showing the government-wide improper payment estimates for fiscal 2014:

Let's look at a breakdown:

1.) Medicare: In fiscal 2014, Medicare financed health services for a total of 54 million elderly and disabled beneficiaries at a cost of $603 billion.  Medicare reported an estimated $60 billion in improper payments, nearly 10 percent of its total budget.  For fiscal 2014, the Department of Health and Human Services reported an estimated error rate of 12.7 percent for Medicare Fee-for-Service.  Some of the components of this estimate have error rates in excess of 50 percent, particularly for durable medical equipment and home health claims. The GAO estimates that about 22 percent of Medicare providers' and suppliers' practice location addresses were potentially ineligible with 46 out of 496 practice location addresses being located inside a mailing store (i.e. UPS Store).  As well, 147 physicians listed as eligible to bill Medicare had received an adverse action from a state medical board for criminal activity were not either not removed from the Medicare program or were removed months after their eligibility to bill Medicare had been cancelled.  One of the great concerns is that Medicaid may not be able to cope with the rapid growth in the number of elderly Americans in the coming decades, resulting in a significant growth in the number and size of improper payments

2.) Medicaid:  The federal share of Medicaid outlays in fiscal 2014 was $304 billion with Health and Human Services reporting approximately $17.5 billion improper payments.  The massive size and diversity of the Medicaid program make it vulnerable to improper payments, particularly to people who are not eligible for Medicaid.

3.) Earned Income Tax Credit:  In fiscal 2014, the IRS reported that there were EITC program payments of $65.2 billion.  The IRS estimated that $17.7 billion or 27.2 percent of these EITC program payments were improper.  This rate of improper payments has remained relatively static since fiscal 2003.  A root cause of ETIC non-compliance is that eligibility for the program is determined by taxpayers themselves or by firms that prepare individuals' tax returns and that the IRS is unable to determine eligibility prior to issuing funds.

Let's look at a few causes of improper payments:

1.) Administrative and documentation errors.

2.) Authentication and medical necessity errors

3.) Verification of income errors for EITC.

Fraud is another concern.  There are a significant number of improper payments that have been fraudulently obtained.  In June 2015, the Department of Justice announced charges against 243 individuals including 46 doctors, nurses and other medical professionals for approximately $712 million in false Medicare billings.  In fiscal 2014, HHS and DOJ reported that they had won or had negotiated over $2.3 billion in health care fraud judgements.

While these improper payments figures look bad enough, the situation could be far worse.  Some programs and departments do not provide reliable improper payments estimates.  For example, because of long-term weak financial management, the Department of Defense reported in 2014 that it could not demonstrate that all payments subject to improper payment estimation requirements were included in their database.  

Let's close with a list of major federal government programs that are considered "non-compliant" with improper payment requirements for three consecutive years and why they are non-compliant:

Obviously, if Washington seriously addressed the issue of improper payments, it would go a long way to helping it to achieve a semblance of fiscal balance.  With the cumulative amount of improper payments nearing the $1 trillion mark since fiscal year 2003 as shown on this graphic:

...these erroneous payments have basically added a substantial sum to the nation's overall federal debt.