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The Problem

“Improper payments” can be:

  • Incorrect amounts paid to eligible recipients,
  • Payments made to ineligible recipients,
  • Payments for goods or services not received,
  • Duplicate payments, or
  • Payments for which insufficient or no documentation was found.

Although not all improper payments are fraud, and not all improper payments represent a loss to the government, all improper payments degrade the integrity of government programs and compromise citizens’ trust in government. In fiscal year (FY) 2015, federal agencies reported a government-wide improper payment rate of 4.39%, a decrease from the high-water mark of 5.42% reported in FY 2009. Improper payments totaled approximately $137 billion in FY 2015.

Under the direction of the Office of Management and Budget (OMB), agencies have identified the programs that are susceptible to significant improper payments, and measured, or are putting in place measurement plans, to determine the estimated amount of improper payments.  By identifying and measuring the problem, and determining the root causes of error, the government is able to focus its resources so that corrective action plans can be thoughtfully developed and successfully carried out. 

What Causes Improper Payments?

An improper payment can happen for a number of reasons. Knowing the causes of program error is essential. By understanding the causes of improper payments, agencies can better implement policies and procedures to reduce errors without negatively impacting the people who should be receiving payments from the government.

Prior to FY 2015 reporting, agencies were required to categorize their improper payment estimates into three categories: (1) documentation and administrative errors; (2) authentication and medical necessity errors; and (3) verification errors. However, those categories proved to be limited value in determining the root causes of improper payments in most programs. Therefore, OMB—in consultation with agencies—developed new improper payment categories that expanded on the existing categories and created a more meaningful and useful way to break out root cases for each agency. These new categories (1) prove more pertinent to the vast array of programs across the Federal landscape; (2) help agencies better present the different categories of improper payments in their programs and the percentage of the total improper payment estimate that each category represents; and (3) provide more granularity on improper payment estimates—leading to more effective corrective actions at the program level and more focused strategies for reducing improper payments at the government-wide level. OMB provided thirteen pre-defined categories for agencies, with the additional option of allowing an agency to create their own category if the thirteen pre-defined categories did not suit their needs. These new categories were released on October 20, 2014 and agencies were encouraged to implement these new categories immediately in their FY 2014 reporting. However, FY 2015 marked the first year that the new OMB root causes reporting was required. The FY 2015 breakout can be found here:

  • 1. Program Design or Structural Issue: A situation in which improper payments are the result of the design of the program or a structural issue. For example, a scenario in which a program has a statutory (or regulatory) requirement to pay benefits when due, regardless of whether or not all the information has been received to confirm payment accuracy.
  • 2. Inability to Authenticate Eligibility: A situation in which an improper payment is made because the agency is unable to authenticate eligibility criteria. Though other scenarios are also possible, here we discuss three likely ways in which this can happen. First, the inability to authenticate eligibility can happen because no databases or other resources exist to help the agency make a determination of eligibility (for example, the inability to establish that a child lived with a family for a certain amount of time—for the purpose of determining that a family is eligible for a tax credit—because no database exists to do so). Second, a beneficiary has failed to report information to an agency that is needed for determining eligibility (for example, a beneficiary failing to provide an agency with information on earnings, and the agency does not have access to databases containing the earnings information). Finally, statutory constraints prevent a program from being able to access information that would help prevent improper payments (for example, not confirming a recipient’s earnings or work status through existing databases due to statutory constraints).
  • 3. Failure to Verify Data: A situation where the agency (Federal, State, or local), or another party administering Federal dollars, fails to verify appropriate data to determine whether or not a recipient should be receiving a payment, even though such data exist in government or third-party databases. For reporting purposes, the kind of data in question would include, but are not limited to, the following:
    • a. Death Data—failure to verify that an individual is deceased, and the agency pays that individual)
    • b. Financial Data—failure to verify that an individual’s or household’s financial resources (for example, current income or assets) do not meet the threshold to qualify him or her for a benefit, and the agency makes a benefit payment to that individual or household.
    • c. Excluded Party Data—failure to verify that an individual or entity has been excluded from receiving Federal payments, and the agency pays that individual or entity.
    • d. Prisoner Data—failure to verify that an individual is incarcerated and ineligible for receiving a payment, and the agency pays that individual.
    • e. Other Eligibility Data—any other type of data not already listed above, causing the agency to make an improper payment as a result.
  • 4. Administrative or Process Errors: Errors caused by incorrect data entry, classifying, or processing of applications or payments. For example, an eligible beneficiary receives a payment that is too high or too low due to a data entry mistake, or an agency enters an incorrect invoice amount into its financial system. These types of errors can be made by:
    • a. Federal Agency
    • b. State or Local Agency
    • c. Other Party —for example, a participating lender, or any other type of organization
  • 5. Medical Necessity: A situation in which a medical provider delivers a service or item that does not meet coverage requirements for medical necessity (for example, providing a power wheelchair to a patient whose medical record does not support meeting coverage requirements for a power wheelchair).
  • 6. Insufficient Documentation to Determine: A situation where there is a lack of supporting documentation necessary to verify the accuracy of a payment identified in the improper payment testing sample. For example, a program does not have documentation to support a beneficiary’s eligibility for a benefit (in this case, the beneficiary may have been eligible, but the documentation is not present to confirm it during the review period).
  • 7. Other Reason: If none of the above categories apply, include any other reasons for the improper payment under this category—and please explain the reasons in more detail either in footnotes or in the narrative below the table. In instances where agencies are able to identify improper payments resulting from fraud, they should report those dollar amounts in this row—unless they already report fraud through a mechanism outside of the annual improper payment process (e.g., an annual report to Congress).

Are All Improper Payments Fraud?

No.  Contrary to common perception, not all improper payments are fraud (i.e., an intentional misuse of funds).  In fact, the vast majority of improper payments are due to unintentional errors.  For example, an error may occur because a program does not have documentation to support a beneficiary’s eligibility for a benefit, or an eligible beneficiary receives a payment that is too high—or too low—due to a data entry mistake.

Also, many of the overpayments are payments that may have been proper, but were labeled improper due to a lack of documentation confirming payment accuracy. We believe that if agencies had this documentation, it would show that many of these overpayments were actually proper and the amount of improper payments actually lost by the government would be even lower than the estimated net loss discussed above.

Do All Improper Payments Represent a Loss to the Government?

No. Another prevalent misunderstanding is that all improper payments are a loss to the government, but that is not always the case. For example, although most of the $137 billion in improper payments was caused by overpayments (payments that are higher than they should have been), a significant chunk of that total amount was caused by underpayments (payments that are lower than they should have been). The difference between these two amounts (that is, overpayments minus underpayments) equals the net amount of payments that improperly went out the door.

Also, many of the overpayments are payments that may have been proper, but were labeled improper due to a lack of documentation confirming payment accuracy.  We believe that if agencies had this documentation, it would show that many of these overpayments were actually proper and the amount of improper payments actually lost by the government would be even lower than the estimated net loss discussed above.

Do Programs Administered by the States Make Improper Payments?

Yes. In general, state-administered programs are partially or fully funded by the Federal government, but each state sets its own guidelines regarding eligibility and services. Just like federally-administered programs, state-administered programs also make improper payments. For example, state-administered programs are responsible for about a third of the billions of dollars in improper payments made by high-error programs.

High-error state-administered programs include:

High-error federally-administered programs include: