[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]
H.R. 1827, THE GOVERNMENT WASTE CORRECTIONS ACT OF 1999
=======================================================================
HEARING
before the
SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
INFORMATION, AND TECHNOLOGY
of the
COMMITTEE ON GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
ON
H.R. 1827
TO IMPROVE THE ECONOMY AND EFFICIENCY OF GOVERNMENT OPERATIONS BY
REQUIRING THE USE OF RECOVERY AUDITS BY FEDERAL AGENCIES
__________
JUNE 29, 1999
__________
Serial No. 106-104
__________
Printed for the use of the Committee on Government Reform
Available via the World Wide Web: http://www.gpo.gov/congress/house
http://www.house.gov/reform
______
U.S. GOVERNMENT PRINTING OFFICE
63-548 CC WASHINGTON : 2000
COMMITTEE ON GOVERNMENT REFORM
DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut ROBERT E. WISE, Jr., West Virginia
ILEANA ROS-LEHTINEN, Florida MAJOR R. OWENS, New York
JOHN M. McHUGH, New York EDOLPHUS TOWNS, New York
STEPHEN HORN, California PAUL E. KANJORSKI, Pennsylvania
JOHN L. MICA, Florida PATSY T. MINK, Hawaii
THOMAS M. DAVIS, Virginia CAROLYN B. MALONEY, New York
DAVID M. McINTOSH, Indiana ELEANOR HOLMES NORTON, Washington,
MARK E. SOUDER, Indiana DC
JOE SCARBOROUGH, Florida CHAKA FATTAH, Pennsylvania
STEVEN C. LaTOURETTE, Ohio ELIJAH E. CUMMINGS, Maryland
MARSHALL ``MARK'' SANFORD, South DENNIS J. KUCINICH, Ohio
Carolina ROD R. BLAGOJEVICH, Illinois
BOB BARR, Georgia DANNY K. DAVIS, Illinois
DAN MILLER, Florida JOHN F. TIERNEY, Massachusetts
ASA HUTCHINSON, Arkansas JIM TURNER, Texas
LEE TERRY, Nebraska THOMAS H. ALLEN, Maine
JUDY BIGGERT, Illinois HAROLD E. FORD, Jr., Tennessee
GREG WALDEN, Oregon JANICE D. SCHAKOWSKY, Illinois
DOUG OSE, California ------
PAUL RYAN, Wisconsin BERNARD SANDERS, Vermont
HELEN CHENOWETH, Idaho (Independent)
DAVID VITTER, Louisiana
Kevin Binger, Staff Director
Daniel R. Moll, Deputy Staff Director
David A. Kass, Deputy Counsel and Parliamentarian
Carla J. Martin, Chief Clerk
Phil Schiliro, Minority Staff Director
Subcommittee on Government Management, Information, and Technology
STEPHEN HORN, California, Chairman
JUDY BIGGERT, Illinois JIM TURNER, Texas
THOMAS M. DAVIS, Virginia PAUL E. KANJORSKI, Pennsylvania
GREG WALDEN, Oregon MAJOR R. OWENS, New York
DOUG OSE, California PATSY T. MINK, Hawaii
PAUL RYAN, Wisconsin CAROLYN B. MALONEY, New York
Ex Officio
DAN BURTON, Indiana HENRY A. WAXMAN, California
J. Russell George, Staff Director and Chief Counsel
Bonnie Heald, Director of Communications
Grant Newman, Clerk
Mark Stephenson, Minority Professional Staff Member
C O N T E N T S
----------
Page
Hearing held on June 29, 1999.................................... 1
Text of H.R. 1827............................................ 3
Statement of:
Dinkins, Paul, executive vice president, Profit Recovery
Group International, accompanied by Jack Kenny, the
director for government, Profit Recovery Group
International, Inc.; Douglas R. Wilwerding, chief executive
officer and president, Omnium Worldwide Inc.; Terrence
Lyons, director of accounting, Walgreen Co.; Stephen R.
Booma, health care consultant; and Robert Koehler,
attorney-at-law, Patton Boggs, on behalf of the American
Logistics Association...................................... 210
Lee, Deidre, Acting Deputy Director for Management, Office of
Management and Budget; George H. Allen, Deputy Commander,
Defense Supply Center of Philadelphia; Gerald R. Peterson,
Chief, Accounts Payable Division, Army-Air Force Exchange
Service; and Michelle Snyder, Director, Financial
Management Office, Chief Financial Officer of the Health
Care Financing Administration.............................. 50
Walker, David D., Comptroller General, General Accounting
Office..................................................... 19
Letters, statements, et cetera, submitted for the record by:
Allen, George H., Deputy Commander, Defense Supply Center of
Philadelphia, prepared statement of........................ 58
Booma, Stephen R., health care consultant, prepared statement
of......................................................... 237
Burton, Hon. Dan, a Representative in Congress from the State
of Indiana:
Prepared statement of.................................... 17
Regulatory News article.................................. 15
Dinkins, Paul, executive vice president, Profit Recovery
Group International, prepared statement of................. 213
Horn, Hon. Stephen, a Representative in Congress from the
State of California, prepared statement of................. 8
Koehler, Robert, attorney-at-law, Patton Boggs, on behalf of
the American Logistics Association, prepared statement of.. 244
Lee, Deidre, Acting Deputy Director for Management, Office of
Management and Budget:
BEA scoring obstacle to implementing gainsharing......... 102
Information concerning a pilot study..................... 82
Prepared statement of.................................... 52
Lyons, Terrence, director of accounting, Walgreen Co.,
prepared statement of...................................... 231
Peterson, Gerald R., Chief, Accounts Payable Division, Army-
Air Force Exchange Service, prepared statement of.......... 67
Snyder, Michelle, Director, Financial Management Office,
Chief Financial Officer of the Health Care Financing
Administration:
DOJ's guidelines......................................... 89
HHS Y2K quarterly reports................................ 106
Information concerning dollar amounts.................... 86
June 1999 program memorandum............................. 205
Prepared statement of.................................... 77
Turner, Hon. Jim, a Representative in Congress from the State
of Texas, prepared statement of............................ 10
Walker, David D., Comptroller General, General Accounting
Office:
Information concerning overpayments......................39, 45
Prepared statement of.................................... 23
Wilwerding, Douglas R., chief executive officer and
president, Omnium Worldwide Inc., prepared statement of.... 221
H.R. 1827, THE GOVERNMENT WASTE CORRECTIONS ACT OF 1999
----------
TUESDAY, JUNE 29, 1999
House of Representatives,
Subcommittee on Government Management, Information,
and Technology,
Committee on Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 2:01 p.m., in
room 2247, Rayburn House Office Building, Hon. Stephen Horn
(chairman of the subcommittee) presiding.
Present: Representatives Horn, Walden, Ose, Burton, and
Turner.
Staff present: J. Russell George, staff director; Randy
Kaplan, counsel; Bonnie Heald, communications director; Matthew
Ebert, policy advisor; Jane Cobb, professional staff member,
Committee on Government Reform; Grant Newman, clerk; Justin
Schleuter, Paul Wicker, Lauren Lefton, and John Phillips,
interns; Michelle Ash and Faith Weiss, minority counsels; Mark
Stephenson, minority professional staff member; and Earley
Green, minority staff assistant.
Mr. Horn. The Subcommittee on Government Management,
Information, and Technology will come to order.
Fraud, waste, and error in Federal programs and activities
are costing taxpayers billions of dollars each year. Earlier
this session, the Subcommittee on Government Management,
Information, and Technology held its annual series of hearings
on the Federal Government's financial management practices. On
March 31, 1999, this subcommittee held a hearing examining the
Governmentwide Consolidated Financial Statement. The audit of
this governmentwide financial statement, performed by the
General Accounting Office, illustrated the broad array of
financial management problems faced by the Federal Government.
The report confirmed that tens of billions of taxpayer
dollars are being lost each year to waste, abuse, and
mismanagement in hundreds of programs within the executive
branch of the Federal Government. Improper payments made to
vendors and others supplying goods and services to Federal
departments and agencies is one of the most serious areas of
waste and error. According to the General Accounting Office,
Federal departments and agencies were unable to determine the
full extent of improper payments in major programs, estimated
to involve billions of dollars each year.
At the Department of Defense, the General Accounting Office
reported that among the most serious financial management
weaknesses was the Department's inability to determine the full
extent of improper payments. The Health Care Financing
Administration's Medicare Program was cited by the General
Accounting Office as a high-risk area for fraud, waste, and
abuse. In 1998, there was an estimated $12.6 billion in
Medicare overpayments.
Today we will examine H.R. 1827, the Government Waste
Corrections Act of 1999, introduced by my colleague and the
chairman of this full committee, the Committee on Government
Reform, Representative Dan Burton of Indiana. This legislation
offers a potential solution to address the billions of dollars
of erroneous overpayments made each year. This bill would
require executive branch departments and agencies to use a
process called, ``recovery auditing,'' to review Federal
payment transactions to identify and recover erroneous
overpayments.
Recovery auditing is a process of reviewing payment
transactions to identify and recover incorrect payments.
Payments for goods and services can be processed incorrectly
for a variety of reasons. Vendors can make pricing errors on
their invoices. They may forget to award discounts. Or they can
neglect to offer allowances and rebates. Recovery auditors
review payment transactions to identify three types of errors.
For decades, private sector companies have successfully
used recovery auditing to identify and collect erroneous
overpayments. Recovery auditing is currently used to a limited
extent in the Federal Government. H.R. 1827 would expand the
use of recovery auditing to all executive branch departments
and agencies for payment activities of at least $10 million
annually.
Recovery audits could be conducted in house or contracted
out to a private recovery audit firm. The bill would require
recovery auditors to report on the factors causing overpayments
and steps that can be taken to reduce such overpayment. To
encourage agencies to participate in recovery auditing, the
bill would allow agencies to be reimbursed for costs they incur
for their recovery audit efforts. Additional amounts collected
could be used by the agency to carry out management improvement
programs.
The subcommittee will hear from a variety of public and
private sector witnesses who will discuss the provisions of
H.R. 1827, including the application of recovery auditing to
the Federal Government. I welcome our witnesses. We look
forward to their testimony. And I am delighted now to yield for
an opening statement to Mr. Turner of Texas, the ranking member
on this committee. And we are delighted to have you here, Jim.
It is all yours.
[The text of H.R. 1827 and the prepared statement of Hon.
Stephen Horn follow:]
106th CONGRESS
1st Session
H. R. 1827
To improve the economy and efficiency of Government operations by
requiring the use of recovery audits by Federal agencies.
______
IN THE HOUSE OF REPRESENTATIVES
May 17, 1999
Mr. Burton of Indiana (for himself, Mr. Armey, and Mr. Ose) introduced
the following bill; which was referred to the Committee on Government
Reform
______
A BILL
To improve the economy and efficiency of Government operations by
requiring the use of recovery audits by Federal agencies.
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Government Waste Corrections Act of
1999''.
SEC. 2. FINDINGS AND PURPOSES.
(a) Findings.--The Congress finds the following:
(1) In private industry, overpayments to providers of goods
and services occur for a variety of reasons, including
duplicate payments, pricing errors, and missed cash discounts,
rebates, or other allowances. The identification and recovery
of such overpayments, commonly referred to as ``recovery
auditing'', is an established private sector business practice
with demonstrated large financial returns. On average, recovery
audits in the private sector identify payment error rates of
0.1 percent of purchases audited and result in the recovery of
$1,000,000 for each $1,000,000,000 of purchases.
(2) Overpayments are a serious problem for Federal
agencies, given the magnitude and complexity of Federal
operations and documented and widespread financial management
weaknesses. Federal agency overpayments waste tax dollars and
detract from the efficiency and effectiveness of Federal
operations by diverting resources from their intended uses.
(3) Recovery auditing already has been employed
successfully in limited areas of Federal activity. It has great
potential for expansion to many other Federal agencies and
activities, thereby resulting in the recovery of substantial
amounts of overpayments annually. Limited recovery audits
conducted to date have identified errors averaging 0.4 percent
of Federal payments audited, or $4,000,000 for every
$1,000,000,000 of payments. If fully implemented within the
Federal Government, recovery auditing has the potential to
recover billions of dollars in Federal overpayments annually.
(b) Purposes.--The purposes of this Act are the following:
(1) To require the use of recovery audits by Federal
agencies.
(2) To provide incentives and resources to improve Federal
management practices with the goal of significantly reducing
Federal overpayment rates and other waste and error in Federal
programs.
SEC. 3. ESTABLISHMENT OF RECOVERY AUDITS REQUIREMENT.
(a) Establishment of Requirement.--Chapter 35 of title 31, United
States Code, is amended by adding at the end the following:
``SUBCHAPTER VI--RECOVERY AUDITS
``Sec. 3561. Definitions
``In this subchapter, the following definitions apply:
``(1) Director.--The term `Director' means the Director of
the Office of Management and Budget.
``(2) Payment activity.--The term `payment activity' means
an executive agency activity that entails making payments to--
``(A) vendors or other entities that provide
property or services for the direct benefit or use of
an executive agency; or
``(B) entities that provide services or make
payments on behalf of the Federal Government pursuant
to contractual arrangements with an executive agency.
``(3) Recovery audit.--The term `recovery audit' means an
auditing process to identify overpayments made by executive
agencies to vendors and other commercial entities in connection
with a payment activity, including overpayments that result
from duplicate payments, pricing errors, failure to provide
applicable discounts, rebates, or other applicable allowances,
or charges or payments that are not authorized by law,
regulation, or other applicable requirements.
``Sec. 3562. Recovery audit requirement
``(a) In General.--Except as provided in subsection (d), the head
of each executive agency--
``(1) shall conduct recovery audits with respect to each
payment activity of the executive agency that expends
$10,000,000 or more annually; and
``(2) may conduct recovery audits for any other payment
activity of the executive agency.
``(b) Procedures.--In conducting recovery audits under this
section, the head of an executive agency--
``(1) shall give priority to the most recent payments;
``(2) shall implement this section in a manner designed to
ensure the greatest financial benefit to the Government; and
``(3) may conduct recovery audits directly, by procuring
performance of recovery audits by contract (subject to the
availability of appropriations), or by any combination thereof.
``(c) Recovery Audit Contracts.--
``(1) Executive agency authorities.--With respect to
recovery audits procured by an executive agency by contract--
``(A) notwithstanding section 3302(b) of this
title, the executive agency head may pay the contractor
an amount not to exceed 25 percent of the total amount
recovered by the executive agency, through setoff and
otherwise, solely on the basis of information obtained
as a result of audits performed by the contractor under
the contract;
``(B) the executive agency head may authorize the
contractor (subject to subparagraph (C)) to notify
entities of potential overpayments, to respond to
questions concerning potential overpayments, and to
take other administrative actions with respect to
overpayment claims; and
``(C) subject to section 3711 of this title, the
executive agency head shall have final authority to
resolve disputes, to compromise or terminate
overpayment claims, to collect by setoff, and to
initiate litigation or referrals for litigation.
``(2) Contract terms and conditions.--The head of an
executive agency shall include in each contract for procurement
of performance of a recovery audit a requirement that the
contractor shall--
``(A) provide to the executive agency periodic
reports on conditions giving rise to overpayments
identified by the contractor and any recommendations on
how to mitigate such conditions; and
``(B) notify the executive agency of any
overpayments identified by the contractor pertaining to
the executive agency or to another executive agency
that are beyond the scope of the contract.
``(3) Executive agency action following notification.--The
head of an executive agency shall take prompt and appropriate
action in response to a notification by a contractor under
subparagraph (A) or (B) of paragraph (2), including forwarding
to other executive agencies any information that applies to
them.
``(d) Exemptions.--The Director may exempt any executive agency
payment activity from the requirement of subsection (a)(1) if the
Director determines that conducting recovery audits for that payment
activity would not be practical or cost-effective.
``Sec. 3563. Recovery audit model programs
``(a) In General.--The Director, after consulting with executive
agency heads, shall designate not less than five recovery audit model
programs. The designated model programs shall--
``(1) reflect a representative range of executive agencies,
program activities, and payment practices; and
``(2) continue for a period of at least one year.
``(b) Purpose.--The purpose of the model programs designated under
this section is to stimulate and enhance recovery audits in the Federal
Government by developing best practices and otherwise identifying ways
to make recovery audits more effective. In designating the model
programs, the Director shall ensure that the designated programs
complement, and in no way preempt or delay, other Federal recovery
audit activities.
``Sec. 3564. Disposition of amounts collected
``(a) In General.--Notwithstanding section 3302(b) of this title,
amounts an executive agency collects, by setoff and otherwise, each
fiscal year through recovery audits conducted under this subchapter
shall be treated in accordance with this section.
``(b) Use for Recovery Audit Costs.--Not more than one quarter of
the amounts collected by an executive agency through recovery audits
shall be available to meet obligations to recovery audit contractors
and to reimburse applicable appropriations for other recovery audit
costs incurred by the executive agency.
``(c) Use for Management Improvement Program.--Not more than one
half of the amounts collected by an executive agency through recovery
audits--
``(1) shall be available to the head of the executive
agency to carry out the management improvement program of the
agency under section 3565 of this title;
``(2) may be credited for that purpose by the agency head
to any agency appropriations and funds that are available for
obligation at the time of collection; and
``(3) shall remain available for the same period as the
appropriation or fund to which credited.
``(d) Use for Original Purpose.--Not more than one quarter of the
amounts collected--
``(1) shall be credited to the appropriation or fund, if
any, available for obligation at the time of collection for the
same general purposes as the appropriation or fund from which
the overpayment was made; and
``(2) shall remain available for the same period and
purposes as the appropriation or fund to which credited.
``(e) Remainder.--Amounts collected that are not applied in
accordance with subsection (b), (c), or (d) shall be deposited in the
Treasury as miscellaneous receipts.
``(f) Limitation of Amounts.--In accordance with section 1512(d) of
this title, the Director may reserve amounts made available to an
executive agency under subsections (b) through (d) to the extent the
Director determines that the full amounts otherwise available cannot be
used productively for the purposes for which they are made available.
``Sec. 3565. Management improvement program
``(a) In General.--
``(1) Requirement.--The head of each executive agency shall
conduct a management improvement program, consistent with rules
prescribed by the Director.
``(2) Program features.--In conducting the program, the
head of the executive agency--
``(A) shall, as the first priority of the program,
address problems that contribute directly to agency
overpayments; and
``(B) may seek to reduce errors and waste in other
executive agency programs and operations by improving
the executive agency's staff capacity, information
technology, and financial management.
``(3) Integration with other activities.--The head of an
executive agency--
``(A) subject to subparagraph (B), may integrate
the program under this section, in whole or in part,
with other executive agency management improvement
programs and activities; and
``(B) must retain the ability to account
specifically for the use of amounts made available
under section 3465(b) of this title.
``(b) Awards.--
``(1) In general.--The head of an executive agency may,
under the program under this section and subject to the
availability of appropriations, pay cash awards to career
employees of the executive agency who have made extraordinary
contributions to improving the executive agency's operations in
a way that demonstrably and substantially reduces waste and
error by the executive agency.
``(2) Terms and conditions.--An award under this subsection
shall be subject to the following terms and conditions:
``(A) An award may be granted to an individual
employee or to a group of employees, in any amount not
exceeding $150,000 for any individual.
``(B) The award must be based on a written
determination by the executive agency head that the
awardee (or the group of awardees, collectively) was
directly and primarily responsible for actions that
result in tangible cost savings to the executive agency
of at least double the amount of the award.
``(C) The Director must concur in any award that
exceeds $50,000 to any individual.
``(D) The awards shall be in addition to any pay
and allowances to which an employee is otherwise
entitled, and shall not affect an employee's
eligibility for other bonuses and awards.
``(E) The award shall be subject to such additional
terms and conditions as may be prescribed by the
Director.
``(3) Career employee defined.--In this subsection the term
`career employee' means any employee of an executive agency,
other than--
``(A) a noncareer appointee, limited term
appointee, or limited emergency appointee (as such
terms are defined in section 3132(a) of title 5) in the
Senior Executive Service; and
``(B) an employee in a position that has been
excepted from the competitive service by reason of its
confidential, policy-determining, policy-making, or
policy-advocating character.
``Sec. 3566. Responsibilities of the Office of Management and Budget
``(a) In General.--The Director shall be responsible for
coordinating and overseeing the implementation of this subchapter.
``(b) Guidance.--In addition to the Director's specific
responsibilities under this subchapter, the Director shall issue rules
and provide support to agencies in implementing the subchapter. The
Director shall issue initial rules not later than 90 days after the
date of enactment of this subchapter.
``(c) Reports.--
``(1) In general.--Not later than one year after the date
of the enactment of this subchapter, and annually for each of
the two years thereafter, the Director shall submit a report on
implementation of the subchapter to the President, the
Committee on Government Reform of the House of Representatives,
the Committee on Governmental Affairs of the Senate, and the
Committee on Appropriations of the House of Representatives and
of the Senate.
``(2) Contents.--Each report shall include--
``(A) a general description and evaluation of the
steps taken by executive agencies to conduct recovery
audits, including an inventory of the programs and
activities of each executive agency that are subject to
recovery audits;
``(B) a description of any exemptions from recovery
audits made under section 3562(d) of this title;
``(C) a description and evaluation of the recovery
audit model programs conducted under section 3563 of
this title, that shall include--
``(i) an assessment of the benefits of the
programs;
``(ii) an identification of best practices
from the programs that could be applied to
other recovery audit activities; and
``(iii) an identification of any
significant problems or barriers to more
effective recovery audits that were experienced
in the model programs;
``(D) a description of executive agency management
improvement programs under section 3565 of this title,
including a description of any awards under section
3565(b) of this title; and
``(E) any recommendations for changes in executive
agency practices or law or other improvements that the
Director believes would enhance the effectiveness of
executive agency recovery auditing.
``Sec. 3567. General Accounting Office reports
``Not later than 60 days after issuance of each report under
section 3566(c) of this title, the Comptroller General of the United
States shall submit a report on the implementation of this subchapter
to the Committee on Government Reform of the House of Representatives,
the Committee on Governmental Affairs of the Senate, the Committee on
Appropriations of the House of Representatives and of the Senate, and
the Director.''.
(b) Application to All Executive Agencies.--Section 3501 of title
31, United States Code, is amended by inserting ``and subchapter VI of
this chapter'' after ``section 3513''.
(c) Deadline for Initiation of Recovery Audits.--The head of each
executive agency shall begin the first recovery auditing under section
3562 of title 31, United States Code, as amended by this section, by
not later than 6 months after the date of the enactment of this Act.
(d) Clerical Amendment.--The analysis at the beginning of chapter
35 of title 31, United States Code, is amended by adding at the end the
following:
``SUBCHAPTER VI--RECOVERY AUDITS
``3561. Definitions.
``3562. Recovery audit requirement.
``3563. Recovery audit model programs.
``3564. Disposition of amounts collected.
``3565. Management improvement program.
``3566. Responsibilities of the Office of Management and Budget.
``3567. General Accounting Office reports.
-
[GRAPHIC] [TIFF OMITTED] T3548.001
Mr. Turner. Thank you, Mr. Chairman. This hearing, of
course, is focused on a piece of legislation that the chairman
of this committee, Mr. Burton, introduced last year which seeks
to make recovery auditing mandatory for Federal agencies. I
appreciate Chairman Horn's interest in this issue and his
willingness to focus on it by holding this hearing.
As we know, the Federal Government erroneously pays vendors
and contractors billions of dollars each year and, through a
series of financial management hearings held by this
subcommittee, we have learned, for example, that the Medicare
system made approximately $12 billion in erroneous payments in
fiscal year 1998 revealing an error rate of 7 percent.
Obviously, these kinds of errors and mistakes do not need to
exist in our Federal agencies and I commend Chairman Burton as
well as Chairman Horn for focusing on this problem, continuing
to search for solutions such as recovery auditing.
Mr. Chairman, thank you again for the opportunity to be a
part of this very important hearing.
[The prepared statement of Hon. Jim Turner follows:]
[GRAPHIC] [TIFF OMITTED] T3548.002
[GRAPHIC] [TIFF OMITTED] T3548.003
[GRAPHIC] [TIFF OMITTED] T3548.004
Mr. Horn. I thank the gentleman. And we are waiting for
Chairman Burton. He should be here in a minute or so. So we
will be in recess for a minute or so. When Mr. Burton arrives,
we will have the statement read into the record.
In the meantime, let me note, this is for some of you that
have been here before, before this subcommittee or any
subcommittee of the Government Reform Committee, we swear in
all witnesses. And when we have you at the table, such as panel
two where there are four witnesses, when we call on you in that
sequence, the document you have given us in writing, we have
read. And that automatically goes into the record without any
additional motions. And we would like you to summarize those
statements so there is more dialog with the committee members
on both sides of the aisle to ask questions and get to the core
of the matter.
And we are now delighted to introduce the gentleman from
Indiana, the chairman of the Committee on Government Reform,
for an opening statement.
Mr. Burton. I want to thank you, Mr. Chairman. And you will
see, first of all, I am out of breath because I am out of
shape. And, second, I am wearing sunglasses because I forgot to
change these. So I don't want you to think I am a movie star or
think I am.
Thank you, Chairman Horn, for holding this hearing on H.R.
1827, the Government Waste Corrections Act.
One of my highest priorities as chairman of the Committee
on Government Reform is to attack the widespread fraud, waste,
and error in Federal programs and activities that cost
taxpayers billions of dollars every year. One area where we
bleed millions of dollars every day is in overpayments for
contractors that often go undetected and almost never get
repaid. Many agencies could benefit from the use of recovery
auditing. Several of these could see substantial gains.
The Department of Defense, the Environmental Protection
Agency, NASA, and the Department of Energy have all been on
GAO's high-risk list for almost 10 years for contract
management problems. These agencies represent about $140
billion worth of contracts yearly. DOD alone represents about
$100 billion of this spending. How much of this is wasted in
overpayments has not been calculated, but with the problems
associated with these contracting operations, I would bet that
the figures are pretty high.
Another high-dollar, high-risk area is Medicare. Of about
$200 billion it pays out annually, overpayments in Medicare's
fee for service claims last year were estimated at $12.6
billion. That is $12.6 billion in just 1 year. Over the past 3
years, this figure is estimated at over $56 billion. This
needless waste of money year after year significantly distorts
the true costs of Medicare. Mr. Chairman, if nothing else,
recovery auditing should be mandated to recoup Medicare
overpayments.
I just hope that when the bill passes and these
overpayments start coming back, the checks won't be returned as
is the current practice. And I would like to say that, Mr.
Chairman, that I read an article that was in the Regulatory
News and it indicated that some of these checks are being
returned because they don't know what to do with them. And we
certainly want to make sure that that is corrected, because if
people are sending overpayments back to the Treasury and to the
government----
Mr. Horn. Without objection, that article will be put in
the record at this point.
[The information referred to follows:]
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Mr. Burton. Thank you, Mr. Chairman. And this is even when
providers voluntarily return the money, their checks are still
returned. Mr. Chairman, I hope your subcommittee will try to
get some answers from the representatives from HCFA today on
that very problem.
Let me briefly describe what my bill does. The bill
requires agencies to conduct recovery auditing to identify and
collect overpayments for programs that spend $10 million or
more annually. Up to 25 percent of the money collected back can
be used to pay the recovery audit firm, so there is no payment
to the contractor unless the overpayments are returned. The
bill also allows agencies to put 25 percent of collections back
into the programs and activities from which the overpayments
originated. Mr. Chairman, this is to provide agencies that need
an incentive to commit to this activity.
Requiring agencies to identify and recover overpayments is
only one of the bill's key objectives. The other is to remedy
the root causes that gave rise to the overpayments in the first
place. To this end, the bill also allows for some of the money
recovered to be available to the agency to make improvements to
their financial and other internal systems in order to prevent
overpayments and reduce other problems of waste and error in
the future. Recovered moneys not used for these purposes will
get returned to the Treasury.
Mr. Chairman, this bill holds great promise. In places
where recovery auditing has been tested in government, it has
proven effective. For instance, the Army-Air Force exchange
program [AAFES] has 16 years of experience with recovery
auditing, having begun the practice in 1983. With purchases of
approximately $6.5 billion annually, over $100 million has been
recovered over the past 5 years.
In another example, the Defense Department has been
conducting a recovery auditing demonstration program at its
supply center in Philadelphia. Looking at purchase transactions
from fiscal years 1993 to 1995, over $27 million in
overpayments have been identified. Given the billions of
dollars we spend to procure goods and services annually and the
magnitude of the overpayment problem in our current programs,
this bill has enormous potential to achieve substantial cost
savings and benefits for the government and the American
taxpayer.
Mr. Chairman, I stand ready to work with you, our
Democratic colleagues, and this administration to make whatever
improvements that are necessary to get the best bill possible.
I want to thank you again for moving forward with the
subcommittee consideration of this very important bill. And I
apologize, once again, for my tardiness.
[The prepared statement of Hon. Dan Burton follows:]
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Mr. Horn. We thank you for putting in this bill. We think
it has a lot of merit.
Now if the Comptroller General will stand and raise his
right hand?
[Witness sworn.]
Mr. Horn. The clerk will note that the witness affirmed the
oath.
And we are delighted to have you with us. It is an honor.
And we hope you have enjoyed your first few months on the job,
which is one of the most important in the United States. So
welcome.
STATEMENT OF DAVID D. WALKER, COMPTROLLER GENERAL, GENERAL
ACCOUNTING OFFICE
Mr. Walker. Thank you. Chairman Horn, Chairman Burton,
Ranking Member Turner, I appreciate the opportunity to discuss
H.R. 1827, the Government Waste Corrections Act of 1999 and its
relationship to the longstanding issues of government
accountability for use of public moneys, overpayments, and the
role of recovery auditing in identifying and recovering
overpayments.
One of the most important issues facing the government
today is the need for greater accountability in managing the
finances of our national government. It is a significant
problem at many agencies and one that has been the subject of
frequent reports by us and others. One key aspect of the
problem is the difficulty the government has in assuring proper
payment of all of its bills while avoiding overpayments. My
testimony today will discuss the dimensions of the overpayment
problem, our past work on the DOD recovery auditing
demonstration program, and the Government Waste Corrections Act
of 1999.
My comments on the bill reflect my belief that there are
three principles that should guide any recovery auditing
program. First, there should be meaningful incentives for
agencies to want to participate in the program and to make it
work. Second, there should be adequate safeguards to ensure
that the program is implemented in a manner intended by
Congress and that it preserves the integrity of the
congressional appropriations process. And, third, there should
be transparency in the conduct of the program. That is, there
should be evaluation reporting on program implementation, to
include the amounts recovered under the program and how they
are used. In the context of these three principles, I will
suggest opportunities to strengthen the bill.
Significant financial systems' weaknesses, problems with
fundamental recordkeeping and financial reporting, incomplete
documentation, and weak internal controls continue to prevent
the government from effectively managing its operations.
Significant among these problems is the inability of Federal
agencies to determine the full extent of improper payments that
occur in major programs estimated to involve billions of
dollars annually.
Within the estimated billions of dollars of improper
payments, the amount of exact overpayments that are involved is
unknown. Given the poor state of the financial accounting
record at many agencies, neither the Federal agencies nor we
have a very good estimate of the extent of overpayments that
occur each year, yet we expect that they are significant. We
know, for example, that between the years 1994 and 1998,
contractors returned about $4.6 billion in overpayments to the
Department of Defense alone.
Across government, improper payments, which includes
overpayments, occur in a variety of programs and activities,
including those related to contract management, Federal
financial assistance, and tax refunds. Reported estimates of
improper payments total billions of dollars annually. Such
payments can result from incomplete or inaccurate data used to
make payment decisions, insufficient monitoring or oversight,
and other deficiencies in agency information systems and
controls.
The risk of improper payments is increased in programs
involving one of three criteria: first, complex criteria for
computing payments; second, a significant volume of
transactions; and, third, an emphasis on expediting payments.
The reasons for improper payments range from inadvertent errors
to fraud and abuse.
Recovery auditing offers the potential to identify and
recover some of these overpayments. Recovery auditing started
about 30 years ago and it is used in several industries
including the automotive, retail, and food service industries.
The DOD, the Army and Air Force Exchange Service, and the Navy
exchange service, use recovery auditing. An external audit
recovery group may be the only group used by an organization or
it may be used in combination with internal resources that
examine invoices for overpayments prior to an external group's
review.
Recognizing its potential to the government, in fiscal year
1996, the National Defense Authorization Act required the
Secretary of Defense to conduct a demonstration project to
evaluate the feasibility of using recovery auditing and to
identify overpayments made to vendors by DOD. Authority to
expand the program was provided in fiscal year 1998 under the
National Defense Authorization Act.
The DOD demonstration project began in September 1996 when
the Defense supply center in Philadelphia competitively
contracted with Profit Recovery Group International [PRGI]. The
contract covers purchases made during fiscal years 1993 to 1995
and requires PRGI to identify and document overpayments and to
make recommendations to reduce future overpayments. PRGI
receives a fee of 20 percent of net collected funds. The focus
of the demonstration program is on purchases of subsistence,
medical, and clothing items, items that are typically found in
retail merchandising establishments.
We have reviewed the demonstration program and concluded
that recovery auditing offers the potential to identify
overpayments, but implementation problems hindered DOD from
fully realizing the benefits of the program. As of June 1999,
according to PRGI, it had completed 90 percent of its work and
identified $29.3 million in overpayments made to suppliers on
purchases of roughly $6 billion. However, collections by DOD,
as of June 1999, only amounted to approximately $2.6 million.
DOD has been slow to embrace recovery auditing. For
example, in House Report 105-532, which related to a bill
providing for fiscal year 1999 DOD authorizations, DOD was
directed to expand the use of recovery auditing. We found,
however, that DOD had not done so. While DOD issued an August
1998 memorandum encouraging the use of recovery auditing and
some activities within DOD have expressed interest in this
concept, no contracts had been awarded at the time we completed
our work in March 1999. We subsequently ascertained, however,
that in June 1999, earlier this month, one of the recipients of
the 1998 memorandum, the U.S. Transportation Command, had
entered into such a contract and that it should be awarded in
the near future.
The Government Waste Corrections Act of 1999 would require
the use of recovery auditing by Federal agencies and provide
incentives to improve Federal management practices with the
goal of reducing overpayments. We believe the bill is a
positive step in the government's effort to reduce overpayments
and to obtain timely identification and recovery of
overpayments when they occur. The act addresses recommendations
we made in our recent report on DOD's demonstration program.
This includes giving the head of the executive agency the
option to perform recovery auditing with internal staff, by
contract, or through a combination of internal staff and
contract resources.
We believe it is very important that heads of agencies
perform a sound evaluation of the applicability of recovery
auditing to their operations and the related cost and benefits
of undertaking internal recovery auditing before asking an
external audit group to do such auditing. Simply stated, we
believe that it is important to pick the low-hanging fruit
before turning to contingency fee arrangements on the outside.
Where recovery auditing can be cost-effectively used across
government and whether that is the case remains somewhat of an
open question that needs to be carefully thought through.
We also support the bill's requirement that recovery
auditing contractors provide periodic reports with
recommendations on how to mitigate overpayment problems and
that, as part of the agency's management improvement program,
the agency is to give first priority to addressing problems
that contribute to overpayments.
Finally, the bill allows applicable appropriations to be
reimbursed for costs incurred by government activities in
supporting recovery audit efforts and to provide other
incentives to support the use of recovery auditing. These
features should eliminate some of the implementation problems
we saw in the demonstration program at DOD.
While we are positive toward the concept of recovery
auditing and its potential for application to the Federal
Government, the government's experience with recovery auditing
has been limited. Thus, we think it is a good idea to further
mandate additional model programs in Federal agencies to
determine the applicability of recovery auditing and to develop
best practices for their use governmentwide. In conducting the
mandated model programs--at least five are currently provided
for in the bill--there should be sufficient diversity in where
recovery auditing is modeled to adequately test the concept
among the different types of payment activities. Beyond the
mandate of the model programs, we believe that the use of
recovery auditing should be, at least for the time being,
available but not mandated for other Federal agencies.
The committee may also want to reexamine the bill's
provisions relating to the use of recoveries made under the
program. While financial incentives are critical to the
program's success, incentives that are too great are
unnecessary and may undermine the program by creating
inappropriate disincentives to making accurate and timely
payments in the first instance. The committee may want to
provide for a more substantial portion of the recoveries to be
returned to the Treasury, therefore creating a win-win
situation whereby the agency benefits and the taxpayers benefit
as a result of this effort, more than just the recoveries.
We will be happy to discuss further technical comments with
the committee staff.
In summary, Mr. Chairman, Federal agency managers have a
fiduciary responsibility relating to and are accountable for
the proper use of Federal funds. Our work has shown that in
certain cases, these responsibilities are not being exercised
adequately and the result is billions of dollars a year in
improper payments, a substantial portion of which represent
overpayments that may never be recovered.
Federal agencies need to achieve more effective control
over their payment processes. The causes of the payment
problems are varied and many are longstanding. The solutions
can be found in the effective use of technology, the
establishment of sound internal control and payment processes,
and the wise use of human capital.
If Federal agencies do not effectively tackle these
challenges, they will continue to risk erroneously paying
contractors billions of dollars and perpetuating other
financial management problems. Effectively addressing these
challenges, however, will require investment and sustained
commitment by top-level management. Recovery auditing, which
has a longstanding track record in the private sector, offers a
low-risk opportunity to identify and recover some of these
overpayments.
We strongly support the provisions of H.R. 1827 providing
for model recovery auditing programs. In this way, the
government can assess the applicability of recovery auditing to
different types of payments and develop the best practices for
its use on a wider scale. In our view, with the use of model
programs plus strong monetary incentives, it would be
unnecessary to mandate recovery auditing across the government.
There may also be opportunities to employ novel servicing
arrangements, such as creating a center of excellence in a
Federal agency to provide leadership to other agencies in
implementing recovery auditing.
The keys to the successful execution of governmentwide
recovery auditing programs are: one, meaningful incentives for
agencies to want to participate in the program and to make it
work; two, adequate safeguards to ensure that achieving
congressional intent is attained and that the proper use of
appropriations is maintained; and, three, assuring transparency
in the conduct of the program.
Mr. Chairman, this concludes my statement. I would be happy
to answer any questions that you or Chairman Burton may have at
the present time.
[The prepared statement of Mr. Walker follows:]
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Mr. Horn. Well, I thank the gentleman for that very
thoughtful statement and now yield for questioning to the
chairman of the full committee, Mr. Burton of Indiana.
Mr. Burton. The first thing that comes to my mind, which I
alluded to in my statement, is that you said that--and I think
about the DOD--that there was $29 million, in overpayments and
only $2.6 million of that has been recovered? Is that correct?
Mr. Walker. That is correct, sir.
Mr. Burton. Well, why is that?
Mr. Walker. There are a number of reasons, Mr. Chairman. I
would be happy to provide more for the record, but first the
contractor identifies the alleged overpayment and then there
has to be actions taken on behalf of DOD in order to actually
recover those moneys.
Mr. Burton. What kinds of actions?
Mr. Walker. Well----
Mr. Burton. They have to send a bill out or a letter out
saying there was an overpayment made and we want you to
respond?
Mr. Walker. Well, they would have to have some type of
correspondence interaction. But, they typically would want to
satisfy themselves that they agree that, in fact, there is an
overpayment. I would be more than happy, Mr. Chairman, for the
record, to provide some specific details if you would like.
[The information referred to follows:]
[GRAPHIC] [TIFF OMITTED] T3548.023
Mr. Burton. Well, you know, for instance, with the
Department of Defense, if a contractor wants to do business
with the Department of Defense in the future on future
contracts, if he has been overpaid to the tune of $29 million,
it would appear to me that he would check that out pretty
quickly and make restitution. Otherwise, he might not be able
to be a primary bidder on a contract in the future. I don't
know why in the world it should take a long period of time once
you find out there are $29 million in overpayments to get it
back and $2.6 million is not even a tenth of that. It just
doesn't make any sense.
Mr. Walker. Mr. Chairman, clearly it should have been
handled more expeditiously than it has. The only thing that we
note in my full statement that I would like to add now is
that--it is interesting--there are actually some provisions in
the law right now I think that also need to be looked at,
beyond what we are addressing here.
For example, right now the government can be required to
pay interest if it does not make its payments on a timely
basis. However, if contractors knowingly received overpayments,
they are not required to pay any interest on those
overpayments, even if they knowingly hold onto those payments
for an extended period of time--potentially years--waiting for
the Department of Defense to ask them.
Mr. Burton. Well, that might be something we could even
incorporate into this bill. If there is an overpayment made
with the knowledge of the contractor and the contractor doesn't
return that in a timely fashion, he pays an interest penalty.
That is something I think our staff ought to write down and
look at to the feasibility of putting in this bill.
The other thing I wanted to ask you about is you said that
you want to have these audits done internally rather than
externally. Why? It seems to me that if it had been handled--if
the auditing process had been handled properly in the first
place within the agency, the overpayment would have been caught
initially. And if the overpayment wasn't caught, what is the
incentive for the interior auditor to correct the mistake that
was made?
Mr. Walker. Mr. Chairman, actually I believe what is
important is that efforts be taken to try to capture the low-
hanging fruit.
Mr. Burton. Well----
Mr. Walker. Either through internal resources or external
contractors. Either one or a combination thereof, before
entering into contingent fee arrangements. My point is if we
don't do that, then we can end up paying fairly significant
contingent fees to recover overpayments that could more cost-
effectively be obtained even potentially through contractor
resources, but not under a contingent fee arrangement.
Mr. Burton. Well, that might drag out for a long period of
time. I mean, the overpayments have been known for a long time.
The agencies involved have not been collecting those
overpayments. The reauditing after the payments have been made
hasn't been done very effectively. And the incentive for an
outside auditing firm to do it will stimulate them to get the
job done. And I am not sure that stimulation would be there on
the inside of the agency.
Mr. Walker. I think it is facts and circumstances. Let me
give you an example----
Mr. Burton. And, besides, wouldn't you have to have more
funds expended in that agency to be able to provide for this
reauditing?
Mr. Walker. Not necessarily. I think there could be an
impact on the appropriations process that would have to be
examined. Let me give you one example, Mr. Chairman. HCFA had
about $24 billion in overpayments. They have gotten it down to
about $12 billion. Still too high. No question about it.
One of the things that we have been encouraging HCFA to do
for some time, and they have adopted our recommendation, is to
make use of commercially available software to help identify
some of these overpayments. Such software is used widely in the
private sector. That is something that HCFA has done, which is
one of the reasons they found a lot of these recoveries. In
that case, the government gets 100 cents on the dollar for all
of the savings.
Mr. Burton. Well, hasn't GAO reported regarding this
reduction you are talking about that this decrease was
attributable to better documentation provided to the auditors,
rather than to a substantive reduction in improper payments?
Mr. Walker. Much of it has been attributable to
documentation, that is true. There has been some reduction in
improper payments. But a lot of it was the documentation issue.
Mr. Burton. Yes. Does this mean that the earlier figures
were not accurate? I mean the higher figures there? You know,
you said it was reduced from----
Mr. Walker. I would say that we had better clarity as to
the nature of what that number was. It wasn't exactly what was
thought initially.
Mr. Burton. But they may have been inaccurate.
Mr. Walker. That is true. They could have been, Mr.
Chairman.
Mr. Burton. Have there been specific actions taken by HCFA
over the last years or so that can be attributed to the decline
in the overpayment estimates?
Mr. Walker. They are taking actions now. For example, they
have adopted our recommendation to use commercially available
software in order to try to identify possible improper
payments. It was a while in coming, but they have done it now.
Mr. Burton. What is HCFA doing right now, specifically, to
try to recover these overpayments?
Mr. Walker. Well, they are taking a number of steps with
both internal and external resources, including their normal
contractual relationships to try to identify double payments;
to try to identify payments for services that were not
rendered; to try to identify payments where there may have been
some upcoding with regard to the nature of the services that
were rendered. Mr. Chairman, it is my understanding they are
actually going to appear here after me and they would probably
be in a better position to tell you exactly what they are
doing.
Mr. Burton. Well, I don't want to belabor my questioning
because I know the chairman has questions, but I still can't
see where these overpayments being handled within an agency
with a reaudit would be that beneficial. I mean, if the problem
hasn't been corrected by now, it seems like to me an exterior
auditing firm with an incentive to really get at it would be
more accurate and more effective. Then, of course, the problem,
once it is identified, is getting the money in. And I still
can't understand why, with $29 million-plus in overpayments to
DOD, only $2.6 million has been recovered and that is something
else we need to look into.
Mr. Chairman, I thank you very much for yielding to me.
Mr. Horn. Well, you are certainly welcome to continue your
line of questioning. Because you and I have it here, we can
take all afternoon. [Laughter.]
Mr. Burton. Well----
Mr. Horn. Go ahead.
Mr. Burton. OK, sure. I mean, if you don't mind. You say
that between fiscal years 1994 and 1998, contractors returned
about $4.6 billion in overpayments to DOD. Were these
overpayments voluntarily identified and returned by the
vendors?
Mr. Walker. It is my understanding that most of them were
identified by the contractors.
Mr. Burton. Was DOD even aware of the overpayments, in many
cases?
Mr. Walker. Not all of them, no. Their financial records--
--
Mr. Burton. Well, that brings up this question again about
interior auditing. I mean, if you have got auditors--don't they
have auditors at DOD?
Mr. Walker. They do, Mr. Burton.
Mr. Burton. And payments are made and $4.6 billion is
returned in overpayments and much of that was returned without
the knowledge of the people in DOD that they were overpayments?
And you want to have these reaudits done internally?
Mr. Walker. Not necessarily by the same people, Mr.
Chairman. Let me clarify. We don't oppose the use of external
contractors. Let me make it clear. We are not saying that at
all. We are saying that an agency may decide on day one that it
wants to use external contractors as a means to deal with this
issue. We don't have a problem with that.
Mr. Burton, my only point is that one should consider,
based upon individual facts and circumstances, if agencies
haven't done anything to try to get the low-hanging fruit,
whether you should go to a contingent fee arrangement on day
one or whether you ought to try to consider another fee
arrangement with external contractors and then go to contingent
fees. It is just facts and circumstances.
Mr. Burton. It seems to me that right now the auditing
departments of all these agencies ought to be going through the
billing records on a regular basis and finding out if
overpayments were made. That is their job. And if they are not
doing it now, I can't for the life of me figure out why they
would do it if we hired some more people and put them in there.
Mr. Walker. As you know, Mr. Chairman, we are, on record,
for several years, as saying that many aspects of DOD's
financial management system are a high-risk to the government.
They don't have adequate internal controls. They don't have
adequate accountability mechanisms. And we are trying to shine
the light on that to try to get them to improve it.
Mr. Burton. Well, in the short run, an exterior audit firm
might light a fire under them. Congress can always restructure
the auditing process. But, as far as I am concerned, there
needs to be a strong incentive for there to be corrections in
the auditing process. And that incentive, I think, is not going
to come from an interior restructuring.
Mr. Horn. Would the gentleman yield on this topic?
Mr. Burton. Be happy to yield.
Mr. Horn. A few years ago, I held a hearing entitled, ``The
Defense Department: What did you do with the $25 billion we
can't find?'' And what it seemed to get down to was what we are
noting in some of our questions here. The Defense Finance and
Accounting Service in Columbus, OH. Did the General Accounting
Office go out and look at that operation or did they leave it
to Defense? Do you know, offhand whether they took a careful
look at it?
Mr. Walker. Yes, we have been out there. The primary
responsibility is with the IG but we do work at DFAS in various
locations.
Mr. Horn. Well, we let 2 years go by to see if they could
clean it up. And then, presumably, they have got it down to $10
billion we can't find. So $15 billion was accounted for.
Now how come we got to the $25 billion? It seemed to be the
following: No. 1, they were having GS-1s--and I hadn't heard of
those since the first world war. I wasn't around then, but I
read it. And apparently GS-1s were staffing some of that. And
contractors were getting checks from the government out of that
center and they would phone up and say, I don't have a contract
with the government. And the Defense group there would say,
``oh, yes, you do. Our records show you do.''
One guy, I am told--and I don't think it is just
apocryphal--put the check in interest earning. And he knew they
would get around to it some day. And they did. And he paid them
back the amount of overpayment, but he kept the interest. And
apparently he was pretty well paid by that little thing.
So one of the problems is the man power at what level of
brains and knowledge. And, No. 2, the type of training that
goes on in a center like that. It seems to me you have got to
build in the blocks before those checks go out. And that is
where an internal auditor ought to be working and picking
randomly some of these checks to see if the paper matches.
Well, what the problem was on the $25 billion is they had
ordered $25 billion. The acquisition documents never quite
related to the inventory documents. So you would find it if you
could. And I just wondered the degree to which GAO is looking
at some of it or are you taking the Inspector General's word
for it?
Mr. Walker. No, we are.
Mr. Horn. Because we have great faith in the Inspector
General over there.
Mr. Walker. Several things, Mr. Chairman. Three things are
really key in this area. First, people; second, process; third,
technology. On the people front, you have mentioned two of the
key ingredients. You have got to have people with the right
kind of skills doing this work. They may or may not exist
within the current organization. You may have to go out to the
outside. And you need training for the people that are doing
this work, if they are internal.
Second, concerning the process, among other things, you
need internal controls. You need solid internal controls.
Third, concerning technology, we have to automate much of
this and we have to integrate systems. There are so many
different systems at DOD.
But, you know, those are three key elements. And, in many
cases, you are going to have to turn to contractors because you
don't have the resources internally in order to get it done.
Mr. Horn. OK. Go ahead. I yield back.
Mr. Burton. Yes. My very able staff assistant just
mentioned that, I guess in the correspondence we have had on
this issue, the various agencies including DOD say that the
reauditing is not a core function of the Department. And, with
the lack of adequately trained personnel, it seems that the
prudent thing would be to use exterior auditors until you were
able to bring your staff up to snuff.
Now when these overpayments voluntarily came back to the
DOD, was that money credited back to the government or did it
go back to the programs? Where did it go?
Mr. Walker. I am not sure, Mr. Chairman. I can try to
provide some more information for the record.
Mr. Horn. Without objection, the answer of GAO will be put
in the record at this point.
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Mr. Walker. Thank you.
Mr. Burton. OK. And my understanding is that in the case of
Medicare overpayments voluntarily returned to HCFA, checks were
returned because there was no systematic way to deal with this
money coming back to the government. You know, that just
boggles my mind. Somebody sends a check back to HCFA saying,
``Hey, listen, this is an overpayment that we didn't deserve,''
and they sent it back him, saying, ``We are sorry. You are
going to have to just keep the money because we don't know what
to do with it.'' That boggles my mind--how can that happen?
Mr. Walker. It is mind-boggling, Mr. Chairman. You are
right there. It does happen.
Mr. Burton. I mean, people want to do the right thing and
send money back to the government for an overpayment and you
say, gosh, you are just going to have to keep it because we
don't know what to do with it?
Mr. Walker. Well, it is mind-boggling that it would happen.
But, there are many circumstances I mentioned earlier where,
actually, people know it is an overpayment. They don't send it
back because, under current law, they take the position that
they don't have to until they are notified. And, in fact, there
is no economic incentive for them to send it back.
Mr. Burton. Yes, I understand. But I don't want to change
the subject.
Mr. Walker. Sure.
Mr. Burton. We are talking about payments that are
voluntarily sent back and it boggles the mind to send a check
back to somebody just because you don't know how to enter it.
And you are worried about reauditing? I mean, if they don't
know how to--I mean, I took bookkeeping in college, you know.
And it is not that hard to put it in the bank and mark it down,
you know? I don't understand that.
Mr. Walker. The people that actually process the payments
that are supposed to put those in the bank aren't the ones that
would be doing the auditing. But I hear you, Mr. Chairman.
Mr. Burton. I understand that the places in government now
using recovery auditing are not funded on annual appropriations
but are set up on revolving funds or no-year accounts. In other
words, they are attuned to a monetary bottom line like
businesses in the private sector. In order to create this kind
of incentive for regularly appropriated agencies, my bill would
allow 25 percent of the moneys or up to 25 percent of the
moneys to go back to the program that it originated from. Do
you see any problem with that kind of an incentive?
Mr. Walker. Mr. Chairman, we think it is essential that you
have an incentive for the agencies to want to play and to
participate in this program. And, in fact, what we had
suggested was something along the lines of 50 percent of the
money being able to go back to the agency and 50 percent going
for the taxpayer. So I think it is crucial that you have an
incentive for the agencies.
Mr. Burton. OK. Finally, you said that if we required the
use of model programs and provide the right incentives, it
would not be necessarily to mandate the use of recovery
auditing across the government. I think you have elaborated on
that, but is there anything further you would like to add to
that?
Mr. Walker. I think it is critical that we have some
additional model programs that look at different aspects of
where recovery auditing might be applied. And, at least five of
those should be required. I think, beyond that, if you provide
the kind of incentives that we are talking about, that should
go a long way to encouraging people to do this. And if they
don't, you can always go to a mandate system.
Mr. Burton. OK. Let me ask just one more question.
Mr. Walker. Sure.
Mr. Burton. To put a recovery auditing system in these
agencies where it does not now exist would take time, right?
Mr. Walker. That is correct.
Mr. Burton. Do you have any idea what kind of time?
Mr. Walker. Well, it depends on the program, Mr. Chairman.
Mr. Burton. Well, it would take some time. The outside
recovery auditing companies are ready to go right now. They
have got the auditors there. They have done it. They have got
the experience. Why should we wait when we know that these
overpayments are made? We know that the waste is there. We know
that they should be recovered. Why should we wait for a model
program when it is going to take time to put it in place when
we already have an outside entity that can do it?
Mr. Walker. I guess my only point, Mr. Chairman, would be
if you take a number like $10 million--which is what the bill
currently proposes--if you look at the number of Federal
entities and agencies that would be affected by that, it would
be a significant number. The types of purchases they end up
making are fundamentally different and I think that there would
be a lot of time and energy spent on the contracting aspect of
it. So it is really just a cost-benefit question, frankly, from
a different perspective, Mr. Chairman.
Mr. Burton. What if the threshold were raised to $50
million or $100 million or $500 million?
Mr. Walker. Obviously, we would have to take a look at how
that would affect the number of entities that would potentially
be impacted by it.
Mr. Burton. OK. OK. Thank you, Mr. Chairman.
Mr. Horn. Thank you. Some of this has been covered, but let
me just ask it for the record's sake. According to your
testimony, the General Accounting Office supports the
provisions of the bill with Mr. Burton providing for model
programs for recovery auditing. What are the Federal programs
you suggest using for these model programs? Which ones would
you say we ought to apply that to?
Mr. Walker. Well, we don't speak to specific programs. I
would be happy to provide something for the record if you would
like. I do think that what we need to do is we need to analyze
what are the different types of purchasing activities that the
Federal Government engages in. Also, we ought to make sure that
we have at least one program for each major type of purchasing
activity.
One area that is more problematic, but I think we ought to
explore is how recovery auditing can be applied. But, there are
some unique issues that need to be explored in the health area.
Contractors give a lot of money in overpayments, but there are
also some peculiarities in dealing in the health area, because
many of these overpayments have to do with medical decisions,
medical necessity, and the nature of the services that are
being provided. I think that might be an example where you
might need to take a look at it because there are specific
things that have to be looked at that would be different than,
for example, how it has been applied at DOD where they are
purchasing, clothing and supplies. Recovery auditing has been
used for decades in the private sector for those types of
activities.
I might add, recovery auditing has been used in health care
as well in certain circumstances in the private sector.
Mr. Horn. Well, would GAO say, let us start on the ones
with the largest amount of money that are overpayments and deal
with that?
Mr. Walker. There is clearly a logic to that, Mr. Chairman.
Mr. Horn. OK. Now you mentioned the purchasing models. Give
me an idea. What are the purchasing models that you are
thinking of?
Mr. Walker. When you are contracting for things that are
readily commercially available on the outside. Obviously, in
this instance, there is clearly an application. When you are
contracting for major weapons systems or other things that are
customized, obviously, there is potential application there
too, but one would have to approach it a different way.
When you are dealing in the health care area, there is
potential application, but there are a number of special
considerations, given the nature of how overpayments might
occur. Obviously, if it is a double payment or if it is for
service that wasn't rendered, that is easier than if a judgment
call has to be made as to whether the service that was provided
was appropriate under the circumstances, based upon the nature
of the illness?
So those would be three examples, Mr. Chairman.
Mr. Horn. OK. Another question for the record. The
Government Waste Corrections Act of 1999 currently provides
that of the amounts collected through recovery auditing, up to
50 percent can be applied for management improvement programs.
Up to 25 percent can be applied for the payment of the
contractor and to reimburse the fund from which overpayments
were made. You testified that you would reexamine the
allocation of overpayment recoveries and provide for a
substantial portion to be returned to the Department of the
Treasury. Why do you suggest these changes and how would you
restructure the allocations?
Mr. Walker. Our view is that if you say that 50 percent of
the recoveries would go to the agency either to pay for the
contractor and/or to reinvest in their systems and programs to
prevent this from happening in the future or to minimize it,
that that should be enough of an incentive and should provide
enough funding for the agencies to engage in this activity,
especially if it is on a contingent basis where they only have
to pay if the amounts are actually recovered.
Mr. Horn. Well, if that is at the 50 percent mark, does
that mean we simply apply that money to better cost recovery?
Or do we let the agency do anything with it?
Mr. Walker. No. I think you want to target it, as has been
contemplated in this bill, to the types of initiatives that are
designed to improve the systems, the controls, and the recovery
mechanisms that the bill is intended to address.
Mr. Horn. OK. In other words, this would relate to getting
new human resources in auditing.
Mr. Walker. Either systems or human capital or enhanced
processes.
Mr. Horn. Right. Or investment in computing.
Mr. Walker. Correct. Technology, for example. I agree, Mr.
Chairman.
Mr. Horn. OK.
Mr. Walker. One of the three: People, process, technology
focused in this area.
Mr. Horn. Do you feel the current ratios may create
inappropriate incentives, which is from the bill?
Mr. Walker. We think there clearly ought to be something
directly in this for taxpayers. The taxpayers ought to get part
of this recovery. And we are a little concerned, Mr. Chairman,
that the agencies not be in a circumstance where they get 100
cents directly or indirectly of every dollar that is recovered
because that might create a perverse incentive for them to
overpay in the first instance.
Mr. Horn. Right.
Mr. Walker. We don't want to do that.
Mr. Horn. OK. Does the gentleman from Indiana have any
other----
Mr. Burton. Mr. Chairman, unfortunately I have to depart
for another meeting. But I want to thank Mr. Walker for his
candor and you for holding this hearing. And I hope we can work
out any differences we might have so we can get this bill
moving as rapidly as possible. I think we have got a little
difference on the exterior rather than interior auditing, but
maybe we can work that out and get a bill that we can all live
with and save the taxpayers a lot of money.
Mr. Walker. Thank you, Mr. Burton.
Mr. Burton. Thank you. Thank you, Mr. Chairman.
Mr. Horn. Thank you. And thank you, Mr. Comptroller
General. We will now go to panel two.
Mr. Walker. Thank you, Mr. Chairman.
Mr. Horn. Thanks for coming.
Panel two has the Honorable Deidre Lee, Acting Deputy
Director for Management, Office of Management and Budget; Mr.
George H. Allen, Deputy Commander, Defense Supply Center of
Philadelphia; Mr. Gerald R. Peterson, Chief, Accounts Payable
Division, Army-Air Force Exchange Service; and Ms. Michelle
Snyder, Director, Financial Management Office, Chief Financial
Officer of the Health Care Financing Administration.
If you would stand and raise your right hands. And are
there any assistants in back of you that might be talking? If
they are, get them to stand, too. I only like these baptisms
once. All right. Fine. We have one. Anybody else? Two. So we
have got six witnesses to be sworn. Do you affirm--there are a
few back there somewhere? OK. So we have got seven, then. Is
that it? All right.
[Witnesses sworn.]
Mr. Horn. OK. It seems the lips were moving. Yes, it is
eight. It was eight. OK.
So that is taken care of and we now start with Ms. Lee. And
we are glad to see you here. And, as you know, your statement
is in the record. We would like you to summarize it and then we
will have more time for questions.
STATEMENTS OF DEIDRE LEE, ACTING DEPUTY DIRECTOR FOR
MANAGEMENT, OFFICE OF MANAGEMENT AND BUDGET; GEORGE H. ALLEN,
DEPUTY COMMANDER, DEFENSE SUPPLY CENTER OF PHILADELPHIA; GERALD
R. PETERSON, CHIEF, ACCOUNTS PAYABLE DIVISION, ARMY-AIR FORCE
EXCHANGE SERVICE; AND MICHELLE SNYDER, DIRECTOR, FINANCIAL
MANAGEMENT OFFICE, CHIEF FINANCIAL OFFICER OF THE HEALTH CARE
FINANCING ADMINISTRATION
Ms. Lee. Thank you very much. Good afternoon, Chairman
Horn, Mr. Ose. I am here today to discuss the administration's
view on H.R. 1827, the Government Waste Corrections Act of
1999. This bill would mandate that agencies use the technique
of recovery auditing to identify and collect overpayment to
vendors and contractors.
At the outset, let me clearly state that we share the
committee's desire to eliminate overpayments. Our goal is to
make all payments correctly and on time. When we pay correctly
the first time and on time, we prevent errors and eliminate the
need and expense of correction and collection. Making the right
payment at the right time is the most cost-effective approach
for reducing erroneous payments whether the payment is made to
a contractor, a food stamp recipient, or a Medicare provider.
In conjunction with the Congress, the administration has
made progress in improving overall financial management, yet
there is more to be done. We will continue to make improving
financial management systems and modernizing payments a high
priority. This priority is reflected in this year's financial
management status report and 5-year plan, which will be
transmitted to the Congress soon.
Progress has been made and significant initiatives are
underway. For example, use of technology. Agencies are updating
their financial systems, including electronic payment systems.
These systems automate document matching, reduce errors
associated with paper payment systems, and provide automated
checks and edits to prevent the occurrence of duplicate
payments, pricing errors, and missed cash discounts, rebates,
or other allowances.
We are also simplifying small transactions paying
processes. The 80-20 rule applies here; 80 percent of the
transactions equate to 20 percent of the dollars. Use of
purchase cards also simplifies the buying process. And, as you
know, Chairman Horn, that is near and dear to my heart as we
talk about acquisition reform.
By using purchase cards, we streamline the payment process
and save the cost, both in terms of dollars and labor
resources, for most small purchases, or the 80 percent. We are
also revising circular 8125. You had hearings on this just a
few weeks ago. We are focusing on ways to facilitate electronic
payments and improve implementation of the Debt Collection Act.
Specifically, in recovery auditing, we are working with the
DOD to evaluate the results of their demonstration project in
recovery auditing. In recognition of recovery auditing as a
tool for other agencies, GSA established a multiple award
schedule to provide Federal agencies with easy access to
private sector experts in recovery auditing who can tailor
techniques to meet specific agency requirements.
We are working with the users of this schedule to gain
additional insight into the uses and benefits of recovery
audits. As you can see, we are focusing on paying correctly.
H.R. 1827 includes some promising provisions: Paying for audit
recovery services out of proceeds; gainsharing for our
financial management improvement; identifying management
improvement opportunities; and rewarding employee performance.
We also have some issues with H.R. 1827, which I would like
to highlight today. Specifically, thresholds: Requiring
recovery audits for payment activities that expend $10 million
or more annually. Using the industry recovery standard of $1
million recovered for every $1 billion audited, a threshold of
$10 million would result in gross collections of $10,000. While
this is not insignificant, based upon work that is already done
to certify accurate payments, as well as the cost of setting up
the program, requiring or mandating recovery audits may not be
cost effective at this threshold.
Payment activity. This term may be read to include benefit
and entitlement payments. Most major benefit and entitlement
programs have statutory provisions for identifying and
recovering overpayments. HCFA will address this today in their
testimony. We need to clarify the proposed applicability and
retain appropriate tailoring of recovery audits to specific
programs.
And, last, but not least, congressional appropriations. I
think it was discussed at length with Mr. Walker, but this bill
allows agencies to return up to 25 percent of collections to
programs. We need to ensure that this return process is
consistent with congressional intent and the appropriations
process. And, also, be sure we emphasize the correct incentives
for reaction to recovery audits.
Mr. Chairman and members of the subcommittee, the
administration is committed to good financial management and
making the right payment on time. We will continue our efforts,
working with the CFOs, to identify and address ways to improve
accountability, specifically, payment accuracy, including
exploring the use of recovery audits. We welcome the
opportunity to work with you in exploring the most effective
means of using recovery audits. And I will be pleased to answer
any questions you may have.
[The prepared statement of Ms. Lee follows:]
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Mr. Horn. Thank you. We will have the questions deferred
until after the four witnesses have testified.
Mr. George H. Allen is the Deputy Commander, Defense Supply
Center of Philadelphia. Welcome.
Mr. Allen. Good afternoon, Mr. Chairman, distinguished
members.
I will just summarize my remarks. On behalf of the
Department of Defense, I want to thank you for the opportunity
to appear here before the subcommittee to describe our
experience with recovery auditing. The 1996 Defense
Authorization Act directed the Defense Personnel Support
Center, which has since been renamed the Defense Supply Center
of Philadelphia or later referred to as DSCP, to be the test
site for demonstration of private-sector recovery auditing.
In September 1996, DSCP competitively contracted with
Profit Recovery Group International [PRGI] as I will refer to
them. Although the pilot program is not complete, I can say
with certainty, the commercial recovery auditing has proven to
be a cost-effective practice for our center.
Let me describe briefly how we demonstrated this commercial
practice. As law directed, we required PRGI to audit available
accounting and procurement records from fiscal years 1993
through 1995. The audit base was $7.2 billion in payments to
vendors over that 3 year period. Thus far, PRGI has identified
potential overpayments of about $27.3 million. The overpayment
arose from a variety of reasons, including duplicate payments,
interest paid in error, discounts offered but not taken,
overcharges, and breeches of the price warranty provisions in
our contracts.
Of the amount identified, we have collected $2.6 million,
leaving a potential uncollected balance of $24.7 million. We
have moved forward to issue claims to collect about $10.4
million in those overpayments and another $2 million in
dispersing errors. We have not yet approved $12.3 million of
potential overpayments.
In addition to the numerical data just reviewed, I believe
the demonstration project has benefited our operation in three
other ways. First, recovery auditing has allowed us to
continuously encourage vendors to comply with contract terms
and conditions. The additional scrutiny of recovery auditing
has provided and will continue to provide more assurance that
overpayments will be identified and collected promptly.
Second, the auditing process has uncovered systemic
problems, including the need to fine tune our automated
payments systems to assure that we comply with all statutory
requirements.
And, third, dispersing errors uncovered by the auditing
program have highlighted the need for closer oversight of the
payment function itself and should result in the reduction of
these types of errors in the future.
Mr. Chairman, I would like to now briefly discuss our
expansion plans with NDLA. The 1998 Defense Authorization Act
directed the recovery auditing be expanded to all Defense
Working Capital Fund activities. However, under this
legislation, the program will be self-funding. That is, the
audit contractor's fee will be paid from the amounts recovered.
As with the original demonstration program, fees may not exceed
25 percent of the total recovered. DSCP is serving as the lead
center for expansion to other DLA agency activities. A
competitive solicitation has been issued and we anticipate an
award by the end of next month.
In closing, Mr. Chairman, let me say the recovery audit
programs have been successful at DSCP and they have become an
integral part of our business practices in Philadelphia. And I
am prepared to answer any questions at the appropriate time.
[The prepared statement of Mr. Allen follows:]
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Mr. Horn. Thank you very much, Mr. Allen.
Our next presenter is Gerald R. Peterson, Chief, Accounts
Payable Division of the Army and Air Force Exchange Service.
Mr. Peterson.
Mr. Peterson. Mr. Chairman and honorable members of the
subcommittee, on behalf of the Army and Air Force Exchange
Service [AAFES], thank you for the opportunity to appear before
your committee to relate our experience with recovery audits.
Although AAFES has over 25 businesses, our principal
business is retail sales. We follow commercial retail best
practices to the extent possible. Employing professional audit
recovery firms is a best practice we adopted many years ago.
AAFES signed its first contract with a commercial audit
recovery firm in 1983. We currently have audit recovery
contracts with two firms, a primary and a secondary. Firm A has
the primary contract at a rate of 21.75 percent. It recovered
$24.4 million last year. Firm B has the secondary contract with
a rate of 35 percent. It recover $1.1 million last year. In
September 1994, AAFES instituted its first in-house recovery
effort to detect duplicate payments. The in-house group now
recovers missed discounts and outstanding credits on supplier
statements in addition to duplicate payments.
We have learned that a successful audit program involves
the following. First, partner with both suppliers and audit
recovery firms. The relationship with a recovery firm is a
partnership in which each provides a benefit to the other.
Similarly, suppliers must be viewed with respect to maintain a
long-term relationship built upon trust.
Second, develop an in-house recovery program to augment the
commercial recovery. During the last 5 years, AAFES' in-house
team recovered $33.3 million at a total cost of approximately
$465,000.
Third, compress the audit cycle. Suppliers know most
retailers employ audit recovery firms and getting claims after
the fact is a part of doing business. To avoid straining a
supplier relationship, it is important to find payment errors
in a timely manner. No supplier appreciates having to go back
into records that are 4 or 5 years old.
And, fourth, learn from the recovery firm. Review what the
commercial recovery firm is finding and determine if it is the
result of a systemic flaw in the accounts payable process. It
is much cheaper to fix the source of the program or to recover
the funds through an in-house group than to pay a commercial
firm.
AAFES has greatly benefited from audit recovery services
during the last 16 years. And many government agencies could
benefit from their services as well. As presently written,
however, there are several aspects of H.R. 1827 which will have
a negative impact on AAFES.
The first one is the recovery audit requirements. This
section states, ``The executive agency head may pay the
contractor an amount not to exceed 25 percent of the total
amount recovered by the executive agency.'' Twenty-five percent
may be acceptable for primary audits, but the fee paid for
secondary audits will exceed this amount. If the bill isn't
amended to provide higher fees for secondary audits, AAFES will
have to cancel its contract with Firm B and lose the $700,000
in net earnings that contributed to our bottom last year. So,
ideally, AAFES would like to be exempted from this provision.
The second area is disposition of amounts collected. This
section states how funds recovered may be used. If amounts
recovered aren't applied in accordance with this section, the
funds revert to the Treasury. Non-appropriated funds,
instrumentalities, NAFEs, should be totally excluded from this
section as we generate our own operating funds. The bill should
be amended to allow recovered funds to remain within the NAFE,
in accordance with its operating rules.
And, third, responsibilities of the Office of Management
and Budget. This section sets forth the reporting requirements
from the individual agencies. NAFEs should be totally excluded
from this reporting requirement, especially entities such as
ours. We work continually with our commercial recovery firms to
maximize the recovery potential.
For the reasons just mentioned, AAFES requests favorable
consideration for the requested changes to the bill.
Mr. Chairman, the Army and Air Force Exchange Service
appreciates the opportunity to testify before this
subcommittee. The use of audit recovery firms has been a
success story for us. The millions of dollars recouped through
audit recovery efforts have helped improve the quality of life
of our stakeholders; the soldiers and airmen serving around the
world. We support your initiative to bring best practices to
government agencies. At the appropriate time, I will be happy
to answer any questions you might have.
[The prepared statement of Mr. Peterson follows:]
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Mr. Horn. Thank you very much.
The next presenter has one of the toughest jobs in the U.S.
Government, and that is Ms. Snyder, being the Chief Financial
Officer for the Health Care Financing Administration. Welcome.
Ms. Snyder. Thank you, Mr. Horn. I have been CFO now for 4
months and I am beginning to appreciate just how difficult this
job is.
Chairman Horn and distinguished subcommittee members, thank
you for inviting us to testify about the Government Waste
Corrections Act and our extensive efforts to prevent and recoup
improper payment. As you know, we reduced Medicare's payment
error rate from 14 percent to 7 percent in just 2 years. We are
working diligently to build on this success and we are very
grateful for this subcommittee's support in these efforts.
We have had good success with the kind of recovery audit
efforts described in the proposed legislation. And we believe
that they may well have value for other government agencies as
well.
We, of course, have pursued a different kind of strategy in
addition to recovery audit efforts. And that is to prevent
improper payments from occurring in the first place. We are
making solid progress on that front, in large part due to
increased efforts by providers to document and file claims
correctly. We also use nearly 100,000 computerized edits that
detect and automatically deny payment for improper claims as
well as manual medical record reviews and cost report audits.
We are making solid progress in identifying and collecting
overpayments as well.
As you know, the HHS Inspector General audits have found
that most Medicare claims are correct on their face. Finding
most of our remaining payment errors requires going beyond what
is on the claim to look at documentation and medical necessity.
These activities are now primarily performed by our claims
processing contractors. We recently held an open competition to
establish a pool of new program safeguard contractors to
augment these efforts. And the President is proposing
legislation to further increase competition for Medicare work
among qualified entities.
However, the act's authorization to compensate recovery
auditors on a contingency basis may have only limited value for
Medicare. We recoup most overpayments by making deductions from
future payments to providers who have been overpaid. And paying
on a contingency basis for error identification could be
perceived as a bounty system by health care providers. The vast
majority of Medicare providers, we have found, make only honest
errors and their good will and cooperation are key to much of
our success in preventing improper payment in the first place.
Furthermore, a financial incentive to identify errors could
well lead to inappropriate denials and thus create errors
instead. Our obligation is to pay correctly. And we do not want
to deny proper payment any more than we want to make improper
payment. Inappropriate denials resulting from contingency
payment also could backfire on the bottom line due to increased
costs for appeals filed by beneficiaries and providers denied
proper payment. So while we would be willing to consider use of
the contingency fee option, we would need to take extreme
caution in ensuring that any use of it would, indeed, be
constructive.
We also generally endorse the idea of increasing funding
for program management improvement activities that could reduce
overpayment. We have greatly benefited from the stable source
of program for program integrity activities provided to us
under the Health Insurance Portability and Accountability Act,
which totaled $560 million in fiscal year 1999 and $630 million
in fiscal year 2000. However, we generally believe that
recouped overpayments should be returned to the trust fund or
general revenue fund as is now the case.
I would also just like to take a few seconds to address the
remarks made by Mr. Burton earlier. I have not seen the article
to which he refers about the returned checks, but I would like
to assure this subcommittee that we have instructed our fiscal
intermediaries and carriers to cash checks that are returned
and to properly credit them to the Medicare account.
We have had some experiences in the past where people
returning checks wanted us to say that, in cashing the check,
that satisfied their full liability, which we have not, of
course, been willing to do. And our instruction has been we
will cash the check and make it clear that this does not
necessarily release them of their liability until further
investigation might be completed. But we would be very happy to
work with Mr. Burton's staff to make sure that we are
responsive, indeed, to the article that he mentioned.
We also look forward to continuing to work with the
subcommittee on efforts to improve Medicare program integrity.
I thank you for holding the hearing. And would be happy to
answer any questions you might have.
[The prepared statement of Ms. Snyder follows:]
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Mr. Horn. We thank you.
And I am now going to yield to the time for questioning to
Mr. Ose, the gentleman from California.
Mr. Ose. Thank you, Mr. Chairman. I am going to work as
procedurally as I can here. Ms. Lee, on your statement here the
5-year plan will be transmitted to Congress soon?
Ms. Lee. Yes, sir. It is in final sign-off.
Mr. Ose. When can we expect it? I mean, is soon next week,
next month, what is it?
Ms. Lee. I was hoping next week, but let us say when you
get back from recess.
Mr. Ose. August? Or Fourth of July?
Ms. Lee. In July.
Mr. Ose. OK. Now, secondarily, you talked about, under the
National Defense Authorization Act. In a pilot study four-
tenths of 1 percent of the payments sampled were incorrect. The
pilot study must have used a sample. Again, Ms. Lee, there must
have been a sample size or something that you looked at. It is
on page 2 of your testimony at the bottom. I am wondering about
the sample size.
Ms. Lee. Can I get that for you, for the record?
Mr. Ose. Certainly. That would be fine.
Mr. Horn. Without objection, the response of the Deputy
Director for Management will be put in the record at this
point.
[The information referred to follows:]
I have confirmed with the Department of Defense and the
contractor that the pilot covered $7.2 billion in payments from
1993, 1994 and 1995 made by the Defense Supply Center in
Philadelphia.
Mr. Ose. Thank you, Mr. Chairman. And then on page 3, I am
a little bit confused about something. On page 2, when we talk
about the sample or my question about the sample sizes there is
a statement about four-tenths of 1 percent of the payments
sampled were incorrect, which is remarkable. And then when the
discussion gets to the issue of the threshold, the $10 million
threshold, there is a comment about the threshold of $10
million would result in a gross collection of $10,000 under
this bill if a overpayment was found. That is one-tenth of 1
percent, if I understand.
Ms. Lee. That is the industry standard, as we understand
it.
Mr. Ose. In private industry.
Ms. Lee. In private industry.
Mr. Ose. OK. That is not bad either.
And then, finally, in the last page of your testimony, when
you talked about the provisions in the middle of your--right
above conclusion--``The bill would allow agencies to return up
to 25 percent of collections to programs and activities from
which the overpayment arose. These provisions could be used to
bypass the normal Congressional Appropriations process.'' I am
not quite sure I understood your explanation.
Ms. Lee. We would propose that we structure the bill to
make sure that when we returned those moneys to a program, it
was, in fact, Congress' intent to spend the funds. For example,
sometimes we recover after a period of time and if the program
has been eliminated or is completed or finished, we want to
make sure the moneys go back where you originally intended the
moneys to be spent.
Mr. Ose. The flaw being that if a program is terminated,
there is no point in returning the money back to it.
Ms. Lee. To that program, right.
Mr. Ose. If the program is continuing, you would not have
an objection to returning the money to that program.
Ms. Lee. Correct.
Mr. Ose. OK. Thank you.
I have got more questions.
Mr. Horn. Yes. Go ahead.
Mr. Ose. OK. Let us see. Mr. Allen, on page 3 of your
testimony, the fourth paragraph, you talked about DSCP's
recoveries to date being $2 million. That is for audit work
begun in June 1997. And what I am curious about is I don't see
much point in spending $5 million if you only recover $2
million. My question would be the cost of recovering the $2
million is roughly----
Mr. Allen. By the contract we have with PRGI, we pay them I
believe it is 20 percent of whatever we collect.
Mr. Ose. OK.
Mr. Allen. We have up to $5 million under that initial
legislative proposal to pay them, at a rate of 20 percent of
whatever we collect.
Mr. Ose. So, potentially, in anticipation of finding $25
million in overpayment, you are authorized to spend up to $5
million?
Mr. Allen. That is correct.
Mr. Ose. These aren't my words, as a bounty?
Mr. Allen. That is correct.
Mr. Ose. OK. Thank you.
Mr. Allen. The subsequent legislation authorizes us to pay
from the proceeds, that is, from the amounts collected.
Mr. Ose. At the outset, there was an appropriation to pay
the reward?
Mr. Allen. That is correct.
Mr. Ose. OK.
Now, Mr. Peterson, I got the first two points on AAFES's
request for exemption. Those being the threshold on the
secondary audits and the reversion to Treasury of the recovered
funds. But you lost me on the third one. You had three points
there that you were seeking an exemption under this legislation
for.
Mr. Peterson. Yes. Since our program has been undergoing
for 16 years, we feel that we have already demonstrated that we
are following industry best practices in that we are working
continually with our recovery firms to bring best practices to
bear. And so for that reason, we don't feel that we should be
reporting back to the OMB.
Mr. Ose. Is it your rationale that as this is essentially
self-funded----
Mr. Peterson. Yes.
Mr. Ose [continuing]. That these funds should stay in
AAFES's jurisdiction?
Mr. Peterson. That is correct. We are a non-appropriated
fund instrumentality. We generate our own revenues through our
sales.
Mr. Ose. All right. On the methodology that you used for
contractor A in your example and contractor B, I would
presume--and maybe that is not safe to presume and you can
correct me if it is appropriate, certainly--the methodologies
at the outset that contractor A used generated X amount of
recoveries. And the secondary audit firm, contractor B, used a
slightly different methodology, I presume, that generated
around, your example, $1.1 million.
Mr. Peterson. Yes. We have only had the secondary audit for
a little over 1 year.
Mr. Ose. Well, my question really is when you have
contractor B who uses a slightly different methodology than
contractor A, over time do those two methodologies get merged
so that we are continually improving the larger portion, if you
will, of the audit work? That being, we merge methodology A and
B in the subsequent or successive contract?
Mr. Peterson. Sir, the two firms don't really get together
as far as how they perform their audits. And I don't know that
they use different techniques. I believe that the secondary
firm probably is quite familiar with the primary and looks for
areas where the primary has thought it wasn't beneficial to
look. The secondary has a higher recovery rate, you know, 35
percent versus 21 percent, so they can afford to perhaps delve
into some areas that may not have been efficient or economical
for the primary to do.
Mr. Ose. My point is, as Congress looks out into the future
and considers these challenges, not in this round of audit
awards, if you will, but maybe the next round, is there any
rationale for us thinking that, on an RFP or RFQ or whatever it
is we use to enter into these contracts, that we would merge
the methodologies?
Mr. Peterson. Well, I don't know that those are different
methodologies, Congressman.
Mr. Ose. OK. You think the added result might be
attributable to the 13.25 percent extra in the bounty, if you
will?
Mr. Peterson. It is that and then just looking for areas--
they may approach something--use a little different computer
program than the first one used that might detect something
that the first one missed.
Mr. Ose. All right. Finally--let me make sure that is
finally--on page 5, I think you touched on something that is
very important to business people and that is the reach-back,
if you will, 4 or 5 years. I can't imagine somebody coming into
my affairs and asking me to substantiate something that
happened in 1994. I see that the audit competition and target
would be 30 months. Is there any possibility of even
compressing that further?
Mr. Peterson. Not within our industry. We approach things
from the viewpoint of a commercial retailer, rather than that
of a government agency because that is our primary business is
retailing.
Mr. Ose. Right.
Mr. Peterson. And many of the items that our audit recovery
tracks are year-to-date purchases and so to compress an
internal review cycle, a primary and a secondary, into much
less than 30 months would really be pressing the audit
companies.
Mr. Ose. Is the 30 months an industry standard? Or is that
just what you have come to as fitting the----
Mr. Peterson. That is what we have come to.
Mr. Ose. OK.
Mr. Peterson. That is our goal.
Mr. Ose. Do we support--or to what degree are we providing
resources to outside firms to do these audits? In other words,
we have got a certain clerical staff. Are we, in effect,
providing support staff for audit firms? Or is this a totally
arms-length, third-party transaction where they come into
AAFES. We are not providing or AAFES isn't providing or some of
these other agencies isn't providing committed staff to support
the audit done by a third party?
Mr. Peterson. OK. We provide no people. We do provide space
in our facility for them and we provide access to our
computerized records.
Mr. Ose. All right. Finally--Mr. Chairman, you are being
very patient with me and I appreciate that.
Mr. Horn. We have all afternoon, my friend.
Mr. Ose. Oh, lordy, lordy. [Laughter.]
I appreciate HCFA being----
Mr. Horn. No, no. Forget the bells. [Laughter.]
That is to keep us alert. [Laughter.]
Mr. Ose. I appreciate the opportunity to visit with Ms.
Snyder. The reason I do is that Medicare remains one of the
largest programs we have and 14 percent, 7 percent, 5 percent
of Medicare's number is a huge number. Which begs the
question--and you are going to have to take me through it--you
have got the payment error rate down in 2 years from 14 to 7
percent. The other testimony we have heard indicates somewhat
less than that in a payment error rate. Is it possible to get
to the payment error rate that these other agencies are
experiencing by their samples? And what is the relationship
between getting to it and the cost we are likely to incur?
Ms. Snyder. When we first started out trying to drive down
the payment error rate, it was based off of a statistically
valid sample and an extrapolation, if you will, of the error
rate and the dollar amount established by the IG. And we have
continued to use that methodology to try to measure what the
error rate is for Medicare payments. And I would also like to
point out that that is a measure of error. It is not a measure
of fraud or abuse.
Mr. Ose. I understand. I understand.
Ms. Snyder. It is just a measure of our total due to error.
Mr. Ose. Believe me, I know. I have had lots of
constituents come in and talk to me about this.
Ms. Snyder. OK. What we have found is we do believe that we
can drive the error rate lower, since we have had such good
success in the last 2 years. A large part of the dollars that
we use for that came out of the MIP program, the Medicare
Integrity Program, which was authorized under HIPPA. So we
fully expect to spend those dollars on continuing to drive down
the error rate. And that dollar amount does increase from year
to year. We were at $560 million this year and it eventually
increases to $720 million.
I am cautiously optimistic that we can drive the error rate
much lower than 7 percent. I think the fact that in 2 years we
have seen good results from our corrective action plans and
corrective activities that we have undertaken will help us
reduce that even lower. And our goal is to get to 5 percent.
We do recognize that in a program this large, there will
always be some error. We don't know yet where that bottom line
is or what that bottom line percentage is. Right now, as I
said, we are pushing to get to 5 percent and then to evaluate
where we can go from there. Again, I would like to point out
that it is sort of like the old--if you will allow me--the diet
analogy. That first 10 pounds is easy to lose. It is that last
5 that is the killer. And we are starting to move into that
last 5 pound range.
So I do believe we can drive it lower. I believe that the
funds that are available to us through the MIP program will
help with that. The return on investment for all of our program
integrity activities is 15 to 1, so we still have a good return
on investment. So I am cautiously optimistic.
Mr. Ose. So the 7 percent, again, is the rate at which we
are able to identify the errors. And then, in terms of
recovery, you are suggesting a 15 to 1 pay-back in terms of the
cost that HCFA incurs in doing the identification. But how much
or what is the--I don't even know what the----
Ms. Snyder. The recovery.
Mr. Ose. Yes. The recovery rate. Thank you.
Ms. Snyder. It would be the recovery. Right. OK.
Mr. Ose. It's my bill and I don't even know the darned
phrase. [Laughter.]
Ms. Snyder. We believe that we are going to recover the
bulk of those overpayments. And, in fact, again, if you will
remember, this is an extrapolated sample, if we look at our
yearly activity and we look at our accounts receivable and look
behind that, which may be a better place to look in terms of
recoveries, what we find is that we capture back approximately
$12 billion to $13 billion annually through offsetting
collections and other receipts. And, of course, many of those
dollars never show up. And I can submit the exact dollars to
you for the record.
Mr. Ose. I think that would be helpful, Mr. Chairman.
Mr. Horn. Without objection, it will be put in the record
at this point.
[The information referred to follows:]
The dollar amounts are: 1) new receivables for FY 1998
total $15.4 billion; collections on receivables total $12.6
billion; and, 3) the amount which is offset is $7.7 billion.
Mr. Ose. My final inquiry is, Ms. Lee, Mr. Allen, and Mr.
Peterson, if I understand correctly, you have third parties
coming in and doing the audits in your agencies. And they are
doing it for a fee that is negotiated and, if the pattern as
identified by Mr. Peterson is correct, basically all we are
providing is a desk and a phone and they bring their own
personnel in and do the analysis. Is that correct?
Mr. Allen. That might be more true in AAFES, who has 16
years of experience in doing that. In case of us, within DOD,
there is a little bit more effort than that, for a wide variety
of reasons. Again, we are in a pilot program in DOD. We have
not compressed our audit cycle. We are dealing with auditing
contracts that are, in some cases, 4 years old. We have to go
find that documentation. There is some effort associated with
that.
We have the Defense Finance Accounting Service in Columbus,
OH, who makes the payments for us. They have records. They have
to provide those records and they have to go through some
effort to make the records available to the auditing firm for
the audit. So I would say, initially, there is probably a lot
more work, effort, in starting up an internal government effort
to make records available to an outside auditing firm, but over
time, one of the systemic things we would learn is we would be
able to figure out how to get that effort down to next to
nothing. And we might, then, in 16 years or in some period of
time be somewhere close to where AAFES is.
Mr. Ose. Let me introduce you to Mr. Peterson. He has got a
model, I think, we ought to make----
Mr. Allen. Well, absolutely. We benchmarked with AAFES when
we started out the program and you are absolutely right. And we
are doing the same thing with some other agencies today.
Mr. Ose. Ms. Lee, is that consistent with your experience?
Ms. Lee. We at OMB don't employ the auditors, but it
certainly sounds very logical. And, of course, the specific
contract terms and conditions are things that you would want
the auditors to have access to to make sure that they have the
right baseline.
Mr. Ose. It is timely, Mr. Chairman, that we have these
discussions since we are struggling with our appropriations
and, granted, we are going to deal with it, but I daresay that
if you were able to take Mr. Peterson's model, for instance,
and apply it to Ms. Synder's organization and reduce not only
the identification rate, but increase the recovery rate to
reflect AAFES's, we would have substantially greater resources
to commit to serving the people of this country and that is the
underlying purpose of this bill.
While I very much appreciate the gaps that we have not
addressed, in terms of recovery and, if you will, the
entitlement nature of some of your organizations, you know, we
are going to try and fix this, subject to your testimony, and
we are going to go forward. And I appreciate the opportunity to
visit with you today. So, thank you. Thank you, Mr. Chairman.
Mr. Horn. The gentleman is absolutely correct on the impact
that it would make in a program such as Medicare. The gentleman
from Oregon, Mr. Walden.
Mr. Walden. Thank you, Mr. Chairman. I had a question for
Ms. Snyder, I guess. Reading through your testimony, on page 3
you talked about how most providers who make billing errors
have no intent to do anything wrong, simply make honest
mistakes, which I would tend to agree with.
I guess what troubles me, having served 5 years on a
community hospital board, I have seen the letters come out from
the Department of Justice that allege just the opposite. And I
believe it is the Fraudulent Claims Act that is invoked by the
Justice Department on behalf of your agency, chasing claims
that go back 8 or 9 years in some cases. Are you still using
those tactics?
Ms. Snyder. What we have tried to do, also, as part of our
program integrity strategic plan, is to work to have more of a
partnership with our providers, because we recognize some of
the same concerns that you just raised. And we think that is
partly why we have been so successful in pushing down the error
rate. But through provider education, making sure that people
understand the right way to bill, what the requirements are,
what the right codes are, that, indeed, they are paid
correctly, then, from the beginning. We still use the False
Claims Act when it is appropriate. But I believe that it is
more of a partnership effort, these days, to try to make sure
we are paying claims correctly.
Mr. Walden. So I guess I----
Mr. Horn. If you could move the microphone a little closer
to you, Ms. Snyder.
Mr. Walden. So I guess I would say, Ms. Snyder, is, again,
I have met with a lot of people and I represent a district with
lots of small rural hospitals and all and reading those letters
are extraordinarily intimidating. They say you either admit
that you--on what is I think you have correctly recognized here
probably a simple honest mistake, but they are being told
either admit to false claims and fraud or we are going to come
do major damage to your bottom line, taking a $2,000 error in
billing and turn it into a $100,000 issue. And I thought it was
overkill and I thought if I ever got in a position where I
could say that, I would. Well, here I am. [Laughter.]
And I guess----
Ms. Snyder. And I certainly appreciate your guidance, sir.
Mr. Walden. I also wanted to be in a position to say, in
reverse, however--I am a bit off-topic here, but I think,
because we are going to be putting pressure on you to go do
this and, yet, there is this balance. And I always wondered how
often does Medicare make payment errors on the other way? And,
you know, what if the Fraudulent Claims False Claims Act was
used in reverse? What is good for the goose ought to be good
for the gander. And I am glad to see that you are kind of
taking this a different direction.
Not to say there isn't fraud out there. I realize there is.
Ms. Snyder. I would just like to mention that the
Department of Justice just recently issued new guidelines to
try to take care of that overkill problem that you reference.
Mr. Walden. Good.
Mr. Horn. Can you get us those regulations?
Ms. Snyder. Certainly.
Mr. Horn. We will save a part at this point in the record,
without objection, so they are spread out in this document.
[The information referred to follows:]
A copy of the Department of Justice's guidelines is
provided here as an attachment to the transcript.
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Ms. Snyder. Yes, sir.
Mr. Horn. Thank you very much.
Mr. Walden. I think that would be helpful because I know
there was a lot of pressure brought in both directions.
Ms. Snyder, in a letter back in December, I guess, of last
year to Senator Kennedy, the administrator of HCFA stated that
HCFA was unable to consider using private recovery specialists
because we don't have the statutory authority to pay
contractors a contingency fee basis. H.R. 1827 would provide
that statutory authority. Is that something you would welcome?
Ms. Snyder. Actually, one of the things that we are looking
at is whether or not we would actually need a different kind of
authority or a new authority. We believe that the authority
that we have under the Medicare Integrity Program allows us to
look at a variety of fee arrangements, if you will, including
incentive payments or incentive fees with contractors. Our
concern with that is that we would have a performance measure
with the contractor that accounts not only for the
identification of overpayments, but the fact that those
overpayments are sustained through the appeals process and are,
indeed, overpayments when we get to the end of the process.
So we have been looking at our current authorities. There
may be a slightly different interpretation since we responded
to that letter. We don't believe that we need additional
authority for recovery auditing.
Mr. Walden. You don't. OK. All right. Thank you, Mr.
Chairman.
Mr. Horn. Well, that is a very important point, the
contractor relationship within Medicare. How much control
actually under the law do you have with the contractors on,
say, a program such as this? On both error recovery and what
not? Can you really get them to do it or are they just there
and defy you?
Ms. Snyder. No, sir. I think that, again, this is another
relationship that has been over a very long period of time. We
have been in business for 30 years with our fiscal
intermediaries and carriers. We do give them direct instruction
about activities to undertake. They have been involved in
overpayment identification recovery audits. They do that work
for us now. It is part of our contract agreement and budget
agreements with them. They are paid to do that.
We are, however, very interested--and I know that we have
spoken about this before, about contracting reform and our
ability to encourage competition among entities that might also
be able to do Medicare work in addition to the insurance
companies.
Mr. Horn. How often does the Health Care Financing
Administration take a look at contractors? And is there a fixed
point in time for each contractor or how do you handle that?
Ms. Snyder. There is a requirement that we do yearly
contractor performance evaluations. HCFA has not been as
diligent about that in terms of our contractor oversight, as we
should be. Part of our performance evaluation expectations are
around overpayment collections, financial controls, and those
kinds of evaluation activities. We renew those contracts yearly
and we do look at their performance.
Mr. Horn. Anything anybody in the panel would like to state
and comment on, based on any dialog that has gone on up here?
Often we hear people halfway home say, gee, I wish I had said
something about that. That isn't the way I look at it. So
anything to add to this dialog, Mr. Peterson, based on the
exchanges you have heard between Members and witnesses?
Mr. Peterson. Well, I would just second the gentleman from
GAO's comments about picking the low-hanging fruit. That is
essentially what our internal staff does. And you notice that
we recovered $33.8 million at a cost of less than $500,000 in
personnel costs. So that is a very cost-effective way of
recouping duplicate payments and missed discounts and so forth
and displays that you can do it in-house instead of paying a
contractor to do it. But that does not take the place of a
commercial audit recovery firm because they possess the
expertise that we don't have and audit recovery is not one of
our core businesses. That is not what we are in business to do.
We try to pay accurately the first time, but we do make
mistakes. People make mistakes. But we try to catch them
internally, if we can. Then, if we can't, what we miss, we pay
the audit recovery firms to find and that is money that we
wouldn't have if we didn't employ them.
Mr. Horn. Is that done by an audit firm that is internally
involved on a random sample basis? Or is that a total universe
examined?
Mr. Peterson. That is the total universe. They examine all
of our records.
Mr. Horn. What have you done as a result of their findings
and recommendations that has lowered the amount of errors that
have been had within the agency? Is it just a matter of
training and getting more auditors on your own payroll? Or
what?
Mr. Peterson. Well, it is partly that. And it is learning
to develop programs internally to find duplicate payments. We
have found out that there are commercial auditors running
computer programs looking for these. Two of our internal
auditors wrote programs for us that we can learn ourselves,
that our small internal staff runs on an ad hoc basis every
month to look for these errors. We have found that they were
finding a lot of credits on vendor statements. So we have added
people to our internal staff to do that. And that has been very
cost-effective.
So we are constantly learning from them. We meet quarterly
to see what they have found, who they are finding it from, what
firms. We go back and look at it and find out why the errors
occurred and try to correct them. We are not as good as what we
would like to be, but we certainly make every conscious effort
to improve.
Mr. Horn. Well, I thank you for that remark. Mr. Allen.
Mr. Allen. We want to be like AAFES. [Laughter.]
Mr. Horn. It depends on which AAFES you are talking about,
I think.
Ms. Lee, any comments on this?
Ms. Lee. Chairman Horn, one of the beauties of having this
opportunity at OMB is to see the broad management issues. It
struck me, in preparing for this hearing, that I saw in several
cases where there were discussions of the contractors not, for
whatever reason, feeling an affirmative requirement to notify
the government if they had been or suspected they had been
overpaid. And so I have made an action item to talk to the
CFO's. I have pulled out the payment clauses myself and was
reading them and saying, you know, perhaps this is something we
ought to explore. So I have got a self-action item from this
hearing.
Mr. Horn. Good. Well, when you have a self-action item, I
am sure it is completed. So thank you. Ms. Lee, on this point,
you will recall our Debt Collection Improvement Act of 1996
that we tucked into the Omnibus Appropriations Bill of that
year. There was a provision in there called gainsharing that
would allow agencies to retain a portion of delinquent debts
collected and this provision was designed to be an incentive
for agencies to collect delinquent debt, both in terms of human
resources and in terms of up-to-date computing capability.
As far as I know, no Federal department or agency is
presently using the gainsharing program for debt collection. Do
you know why this is?
Ms. Lee. Chairman Horn, my understanding is we at OMB have
some more work to do regarding budget authority and how that
gainsharing activity plays. And we look forward to working with
the Congressional Budget Office to sort through those issues.
Mr. Horn. When are we going to sort it out?
Ms. Lee. Soon.
Mr. Horn. How soon? Next month?
Ms. Lee. Could I try after recess, again?
Mr. Horn. Next week? Well, after the July recess, I am all
with you.
Ms. Lee. I will do that.
Mr. Horn. OK. And because there is an analogy here. And
when you return that money, to what degree will it be used? Or
will OMB be sitting on it to try and say the deficit is less
than it is? I don't know what pot you put that in. Does it just
sit in the agency accounts and they can't touch it?
Ms. Lee. I owe you an answer.
Mr. Horn. Pardon?
Ms. Lee. I owe you an answer.
Mr. Horn. OK. Without objection, Ms. Lee's answer will be
in after the end of the July recess.
[The information referred to follows:]
[GRAPHIC] [TIFF OMITTED] T3548.059
Mr. Horn. Very good.
Now, Mr. Peterson, according to your statement, over the
last 5 years, the Army-Air Force Exchange Service recovered
about $130 million through recovery auditing and I congratulate
you on that. What was the total amount that was audited? Was it
all of the $130 or did you just miss some or how did it work?
Mr. Peterson. Well, the total amount audited would have
been, sir, approximately $5.5 or $6 billion times 5, over the 5
years.
Mr. Horn. Did you pick any goal when you started the
internal function, down the line? Did you say, gee, if we get
10 percent out of this we will be lucky and paying the bills
and so forth? Or how did you go about it in terms of a
strategic plan that related to how you target the--one, reduce
the errors; two, get the recovery.
Mr. Peterson. For the commercial audit recovery, sir, or
the internal?
Mr. Horn. Well, I would like to hear about both. I am
trying to get experiences in the record here.
Mr. Peterson. Well, I wasn't there in 1983 when we started,
but, I guess, at that point, we knew that private industry was
using commercial recovery firms and that we knew that we must
have some erroneous payments, overpayments. And so we started
our first contract back then. I don't know that we really had a
specific goal as far as what we were going to recoup. The
percentage in that first contract was very high. It was 35 to
40 percent and, as we have gone forward, the percentages have
gone down with each contract that we have administered. And
that is due both to the competition within the recovery
business and also the ease with which they can audit records.
But I can't give you an answer, sir.
Mr. Horn. Well, in other words, you used the private sector
as the model in your business, which is sort of like the
private sector.
Mr. Peterson. Yes. Yes, we have applied private business
practices whenever we can.
Mr. Horn. Did you get a higher level of return than
business? How close was it to----
Mr. Peterson. No, we recover probably 95 to 98 percent of
the claims that are validated. Now perhaps 80 percent of our
claims that are issued are validated. So out of 100 percent, 80
percent are valid. And, of that, we probably collect 95 to 98
percent.
Mr. Horn. So your cost-benefit ratio is very high, then, on
recovery.
Mr. Peterson. Oh, yes.
Mr. Horn. Well, that is very helpful and I would ask both
Mr. Peterson and Mr. Allen, of the amounts identified through
recovery audits, how much was disputed?
Mr. Peterson. Well, 20 percent of ours was disputed and 20
percent is what our contracting officer agrees with, when a
supplier comes back and says, well, this is the deal.
Mr. Horn. And is that, essentially, how vendor disputes are
resolved? By the actual contract officer involved?
Mr. Peterson. Yes, it is our internal procurement or
purchasing person who listens to the response and that person
decides whether or not the claim is valid or not. And if it is
valid, then we deduct from the next payments. So we get a very
high percentage of the money. If the contracting officer feels
that the vendor's claim rebuttal is valid, then the commercial
recovery firm will abide by our wishes.
Mr. Horn. Mr. Allen, does your system work the same way
with the role of the contracting officer?
Mr. Allen. Yes, sir, it does. Our statistics as to how much
is initially identified as potential overpayment, how much of
that potential overpayment is sustained as a legitimate claim
by the contracting officer, and then, subsequently, how much of
that claim is collected would differ because we are in the
pilot program. I can give you those numbers if you would like.
Mr. Horn. What are some of the most common complaints by
vendors who are charged with overpayments?
Mr. Allen. During our initial pilot program, I think the
most common complaint is the one that Mr. Walden would have
raised. He said, I am not sure I would want anybody coming into
my records 4 years after the fact and then changing our
business relationship, in effect. Having gotten past that,
because there is the contract language which allows us to do
that, we needed to get through a number of issues with regard
to what is the proper interpretation of the contract warranty
clause as to what discounts should have been offered and were
not offered. A whole variety of different things.
Because part of our business was, with regard to the
grocery business, if you will, that is, contracts awarded on
behalf of the Defense Commissary Agency. Some of the business
practices in the grocery business were not typical of
government contracting, that is, contractors would come into a
grocery store, if you would, and issue vendor credit memos. The
contractor said that amounts to a discount offered to you. We
needed to go get that documentation and verify as to whether or
not that was true. So it was the different areas of dispute
arose first from old documents and, second, from different
business practices within the commodities we audited.
And I would think that might hold within virtually any
marketplace. It would vary substantially by marketplace by
commodity.
Mr. Horn. Mr. Allen, the Profit Recovery Group has made
recommendations to the Defense Supply Center of Philadelphia on
ways to reduce future overpayments. Do you know to what degree
these recommendations have been implemented?
Mr. Allen. Some of them have been implemented, some of them
have not. The ones where we will find it most difficult to
implement are the instances where there are changes to the
Prompt Payment Act. And, as you know, there were hearings by
this committee earlier on that subject.
The second area where it would be most difficult would be
changes to systems. You have to get a certain information
technology to make those changes, in order to accommodate
better recordkeeping and then better audit recovery.
We will seriously consider one of those recommendations
because one of the prime benefits out of the recovery auditing
is the ability to make systemic decisions. That is how you get
from an initial identification of four-tenths of 1 percent
overpayments down to one-tenth of 1 percent on the recurring
basis. It is by identifying those systemic issues. And we are
very interested in doing that.
Mr. Horn. While we have you on systemic issues, let me ask
the three of you here, and Ms. Lee has certainly got her right
to get into this, and that is the year 2000 situation. To what
degree have the more businesslike operations such as Mr. Allen
and Mr. Peterson, to what degree are you on and how far along
are you on year 2000 compliance?
Mr. Peterson. Sir, we are 100 percent.
Mr. Horn. 100?
Mr. Peterson. Yes.
Mr. Horn. Good. And how about you, Mr. Allen?
Mr. Allen. I would have to provide that answer for the
record, sir.
Mr. Horn. Since we are looking now, Ms. Snyder, on the sort
of quarterly basis, looking at programs, not just departments
and their systems, and you are part of HHS, you are a big part
of it, you are the tail that makes the dog move in one
direction or the other, what is happening on your front with
the year 2000?
Ms. Snyder. The last report that I saw that was provided to
the Deputy Secretary is that HCFA systems, mission critical
systems, are 100----
Mr. Horn. All right, these are your self-applied and self-
reported mission critical. But we are now saying we don't
really care about the rest of HHS, we care can they deliver on
Medicare?
Ms. Snyder. We believe we are going to be there 100
percent. The Medicare contractor systems have gone through
their first round of certification and passed. They are now in
recertification and testing. And the HCFA internal systems are
in the same place. The system that I own as the business owner
is the Financial Accounting System that has gone through its
second round of testing and passed. We believe we are ready.
Mr. Horn. Great. And, that will show in your next quarterly
report? Will it? Or was it in this one?
Ms. Snyder. Sir, I don't know. That is submitted by the
Chief Information Officer, but I can certainly provide that for
the record. I know those reports lag behind a little bit.
[The information referred to follows:]
We are pleased to submit to you the two most recent HHS Y2K
quarterly progress resports, dated May 15, 1999, and August 13,
1999. Both make it clear that all of HCFA's mission-critical
internal systems and external claims processing systems were
renovated, tested, and certified as compliant by April 1999.
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Mr. Horn. Well, you are right. They do. We only had two
major programs that were 100 percent and that was Social
Security and the Weather Service. So you can get your Social
Security check down in Miami and the weather will be nice, so--
[laughter.]
Ms. Snyder. OK.
Mr. Horn. Except if you have been in Miami in the summer,
you know there is no weather nice down there.
Ms. Snyder, in your statement you say you are currently
using commercial off-the-shelf software to identify many of the
same payment errors that would be identified by a recovery
auditor. What benefits are you deriving from this software and
how would a private recovery audit firm impact your efforts?
Ms. Snyder. We have delivered a benefit from our correct
coding initiative we started in 1996. I believe the cumulative
savings have been identified at around $830 million, about $280
million annually. We also recently purchased or leased, if you
will, some additional software edits which we are just now
working through to make sure they satisfy Medicare policy
before implementing them. So we don't yet know what the return
on that particular investment will be, although we anticipate
that it will be a good return on the investment.
It is an interesting question in how would recovery audit
affect that. I think it is two different parts of the
continuum, if you will. Most of these edits are focused at a
pre-pay review and so they are to catch the error before it
actually happens. So those edits are aimed at pre-payment. The
post-pay audit would be looking at payments that got through
that edit screen and went out the door and that we would need,
then, to recover.
So I think they are two different parts of overpayment
reduction.
Mr. Horn. Now has any of this been discussed with your
authorizing committee or your Appropriations subcommittee, in
terms of the systems you have developed and the attempt to
remove the errors on overpayments? Has that question come up
before either your authorizers or your appropriators?
Ms. Snyder. I know that there have been discussions with
them, certainly, over time. I haven't been party to any of
those discussions, but I know that there have been questions
about automated edit savings, recoveries, and that sort of
question.
Mr. Horn. To improve a particular computer system and their
human resources that go with that, do you have to go to the
Appropriation subcommittees? Or do you have the authority,
long-range, within Medicare, to do that?
Ms. Snyder. There are really two types of funding
authorities that we have. One, our administrative accounts are
subject to the general appropriations process, which is where
most of our software development would occur, would be in that
annual appropriations process. We also have the mandatory
funding and the Medicare Integrity Program, which is an
appropriation that is funded for a period of time, for a
continuing, indefinite, authorization.
Mr. Horn. Now, as I understand your filing here in your
written statement, you note that in fiscal year 1998, the
Department of Health and Human Services reported estimated
improper payments of $12.6 billion. This amount was down from
$20.3 billion in fiscal year 1997 and $23.2 billion in fiscal
year 1996. What initiatives, just for the record, were used by
the Department of Health and Human Services to reduce the
estimated amounts of improper payments? How would you sum that
up?
Ms. Snyder. I would say that it was a combination of
efforts. As you know, our error rate and our payments are a
series of complicated kind of computations. I think probably,
in terms of importance, probably the correct documentation and
billing, talking to providers to get them to understand how to
bill certainly had, we think, a huge impact. We did a number of
seminars. We went out to medical schools and talked to
residents who were getting ready to establish practices about
how to bill. So a lot of those kinds of educational efforts. We
also----
Mr. Horn. Well, that is a very important point. Has any
software ever been provided by Medicare for medical school
graduates? Or do they just leave that to the private sector and
go find your own?
Ms. Snyder. There are two answers to that question. One, we
provide billing software free of charge so that people will
know how to bill through billing agents and to our
intermediaries and carriers. But one of the things that we have
done that I think is really innovative and it is going to have
a pay-off is to put what is essentially computer-based
instruction online for people to be trained in, again, how to
bill claims, what are the right codes to use, and how do you
get into the Medicare system.
I think we have reached over 10,000 people at hundreds of
sites in hospitals. We have done 44 live seminars to work on
this problem. We have reached more than 19,000 people this year
alone. And if you look at our website, you might find it
interesting. There is a pre-test and a post-test. We have
actually been able to measure knowledge increase from taking
it. And if you are interested in the pre-test or the post-test,
you can find it at www.Medicaretraining.com. And this is----
Mr. Horn. Mr. Kaplan will write that down and will give me
a thorough analysis of that. You want to give him that again?
Ms. Snyder. It is www.Medicaretraining--one word--.com. And
it has been a very successful web location. People are going
into it and using it, physicians and hospitals.
Mr. Horn. Well, that is very helpful. In your statement,
you said that you currently use commercial off-the-shelf
software to identify many of the same payment errors that would
be identified by a recovery auditor. And I guess the question
would be what benefits are you deriving from the software and
how would a private recovery audit firm impact them? As I
mentioned earlier that do we need a new development for this
particular audit approach or is it satisfactory in the private
sector already and being used by people?
Ms. Snyder. My assumption would be that recovery auditors
would have their own software tools to apply to a recovery
audit and would not need special development. What would be
important is that recovery auditors understand the use of the
definitions of medical necessity and how Medicare claims are
treated for purposes of payment, which would be different than
just applying software to that evaluation. That is to look
behind the face of the claim.
Mr. Horn. My last question to you, Ms. Snyder, is,
according to the April 1999 article in the Bureau of National
Affairs Medicare report, the Health Care Financing
Administration has yet to issue guidance for health care
providers to return funds they inappropriately received from
Medicare. According to the article, providers that voluntarily
identify overpayments attempt to send checks back to HCFA, only
to have them returned. So, can you give us a sense of how vast
that particular situation is in terms of dollars at stake? Or,
how many people are involved in that?
Ms. Snyder. I would need to get back with more specifics.
Mr. Horn. OK, without objection, it would be put at this
point in the record.
[The information referred to follows:]
A copy of our June 1999 Program Memorandum, that gives
instructions on tracking and reporting procedures for
unsolicited/voluntary refund checks from providers/suppliers,
is provided here as an attachment to the transcript.
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Mr. Horn. And then has the Health Care Financing
Administration developed guidance for the acceptance of these
returned overpayments?
Ms. Snyder. Yes, sir. We have. We have issued those
instructions to our contractors.
Mr. Horn. And, so that has already gone out, that guidance?
There is nothing else to do on that part?
Ms. Snyder. I believe that there will be more to do and
that we need to followup to make sure that the guidance is,
indeed, being followed. We have given the instructions.
Mr. Horn. OK, so we will hold the record open to get your
response as to the degree to which it has been passed on to the
contractors and the degree of achievement of the guidance that
has been to-date.
Ms. Lee, do you have any comments, listening to this
dialog?
Ms. Lee. No, sir.
Mr. Horn. OK. Well, you have all been fine witnesses and we
appreciate you coming. I think we have got a lot of detail in
the record to give us a feel about how this system might work
should it become law, so thank you very much for coming.
We now go to the last panel of the day, panel three. And
most of the audience has already left, so panel three, we can
stay here for hours. OK, we have Mr. Dinkins, Mr. Kenny. Let us
see. What happened to Mr. Kenny. He is accompanying you. OK.
And Mr. Wilwerding is OK. Mr. Lyons, Mr. Booma, and Mr.
Koehler. Good. Anybody behind you that needs to be sworn in
besides Mr. Kenny? Anyone behind you? We might as well get them
on the record. Clerk will get their names.
Anyhow, raise your right hands, please.
[Witnesses sworn.]
Mr. Horn. OK, the clerk will note that the six prime
witnesses and their back-up of three are sworn in. So we will
start with Mr. Dinkins, the executive vice president of the
Profit Recovery Group International. And he is accompanied by
Mr. Jack Kenny, the director for government of the Profit
Recovery Group International. So, Mr. Dinkins, we are delighted
to have you here.
STATEMENTS OF PAUL DINKINS, EXECUTIVE VICE PRESIDENT, PROFIT
RECOVERY GROUP INTERNATIONAL, ACCOMPANIED BY JACK KENNY, THE
DIRECTOR FOR GOVERNMENT, PROFIT RECOVERY GROUP INTERNATIONAL,
INC.; DOUGLAS R. WILWERDING, CHIEF EXECUTIVE OFFICER AND
PRESIDENT, OMNIUM WORLDWIDE INC.; TERRENCE LYONS, DIRECTOR OF
ACCOUNTING, WALGREEN CO.; STEPHEN R. BOOMA, HEALTH CARE
CONSULTANT; AND ROBERT KOEHLER, ATTORNEY-AT-LAW, PATTON BOGGS,
ON BEHALF OF THE AMERICAN LOGISTICS ASSOCIATION
Mr. Dinkins. Thank you, Mr. Chairman, for the opportunity
to testify before this committee.
Profit Recovery Group provides a unique perspective because
we are the largest and only public company in recovery
auditing. We audit several trillion dollars in transactions
annually; serve over 3,000 clients, including over half of the
Fortune 1,000 here in the United States; and we have over 2,300
employees in 23 countries.
Recovery auditing is a professional service pioneered by my
company roughly 28 years ago to identify and recover
overpayments made to suppliers of goods and services. This
practice has recovered billions of dollars in the private
sector that would otherwise have remained undetected. The
service is risk-free. Professional fees are paid from the
proceeds of the recovered funds. The contingency fee basis for
payment is the best possible approach we think because it
focuses on performance and puts all of the risk on the
contractor.
It is a fact that every organization experiences
overpayments. Overpayments typically occur as a result of human
and systemic errors. Recovery auditing is most commonly applied
by PRG in large environments. Error rates are typically small,
however a small error rate becomes very meaningful in a large
environment. For example, most large, private-sector
organizations have an accuracy level of 99.9 percent in the
private sector. The error rate of 0.1 percent becomes
meaningful as it represents $1 million of loss for every $1
billion of purchase.
As you have heard from prior testimony, government has
already been benefiting from recovery auditing. The Army-Air
Force Exchange System has employed recovery audit services
since the early 1980's. AAFES makes purchases of roughly $5
billion per year and the most recently completed audit of 1998
produced $25 million in recovered moneys. To date, PRG has
recovered over $114 million for AAFES.
We are now finalizing a recovery audit demonstration
program for the Department of Defense. Approximately $25
million in overpayments have been identified to date with over
$4 million of this amount recovered or in the process of being
offset. The balance is in various stages of recovery. This
represents a rate of recovery of 0.40 percent or roughly $4
million per $1 billion of purchase. And, Mr. Chairman, this
rate of recovery is pretty much synonymous with what we
experienced at AAFES.
The program within DOD is now being expanded to the balance
of the Defense Working Capital Fund. In our view, the expansion
was limited to the Defense Working Capital Fund because it is a
revolving fund and all recovered moneys go back to the fund. We
recommend expansion of the program to the balance of the
appropriated fund areas quickly to optimize benefits. Prior to
the bill under review, there has been no incentive for an
agency to conduct recovery audits in appropriated fund areas
because moneys recovered would otherwise go back to Treasury.
Summarizing the benefits to government, everyone wins.
Agencies will have money returned. General government, through
the Treasury, will recover funds. The taxpayer sees his money
well-spent. And the Congress improves executive management.
Hence, it seems impossible to question the value of expanding
the process.
Mr. Chairman, while we have suggestions to improve the
language in this legislation, let me say at the outset that we
very strongly support this bill. We believe that the concept
has been well-tested over decades in the private sector--
roughly 9 years at AAFES and in the current demonstration
program.
There are several recommendations in my written testimony
and I would like to focus on only two of them. First, in
section 3562, we suggest changes to section 3. We respectfully
submit that where the private sector has attempted to implement
internally its own recovery audit programs, it is done only
after years of experience with a professional service. Even
private sector companies that have developed some internal
capability have done so in conjunction with ongoing external
professional services.
Next, in section 3564. This section is written with
recoveries of appropriated funds in mind. Revision is suggested
and required to specify how moneys from revolving funds would
be treated, such as the Defense Working Capital Fund; AAFES,
which is not an appropriated fund; or HCFA, which is a trust
fund. It is our understanding that all moneys, less contractor
fees, should go back to these revolving funds.
In summary, Mr. Chairman, we believe this legislation is
both well-crafted and well-intentioned. With the incorporation
of the recommendations proposed in our testimony, this bill
will provide a powerful tool for all segments of government to
recover overpayments, correct problems, enhance payment
processes, and adopt private sector business practices. Thank
you, Mr. Chairman.
[The prepared statement of Mr. Dinkins follows:]
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Mr. Horn. Well, I thank you. I am very impressed by the
detailed recommendations you have made and that is going to be
very helpful to us when we offer a manager's amendment, namely
mine, to the markup. And so thank you very much for delving
into that. I appreciate it. And we always welcome any of you
that have some comments on the specific language of the bill.
That is most helpful to us.
We now go to Mr. Wilwerding. Thank you very much for
coming. He is the chief executive officer and president of
Omnium Worldwide Inc.
Mr. Wilwerding. Thank you, Mr. Chairman, and good
afternoon. On behalf of all the people at Omnium Worldwide,
founded 30 years ago, I want to offer into testimony our
suggestions and our analysis of this legislation and the
important impact it can have on the Federal Government.
Omnium Worldwide is both a domestic and international
specialist in cost containment and receivable management
issues. Omnium has offices in nine States as well as in Sao
Paulo and Rio de Janeiro, Brazil, and Mexico City, Mexico. We
operate on issues from overpaid insurance claims to precharge
often delinquent accounts. Omnium recovers hundreds of millions
of dollars each year for our clients.
I have been asked to speak today because of my 14 years of
experience in this industry. I commend the committee's desire
to address the problem of overpayments within Federal agencies.
My objectives today are as follows. First of all, to testify on
the need for overpayment identification and recovery within
Federal agencies. Second, to outline the size and potential of
the overpayment market, specifically in the private health care
industry, and the purpose of extending this potential to
Federal agencies. Third, to speak on everyday practices of
overpayment recovery in the private sector. And, finally, to
offer some suggested changes to the language of H.R. 1827 that
may enhance the effectiveness of the legislation.
Our company's existence and that of the industry
specifically formed around the identification and recovery of
medical benefit overpayments is a testament to the problem in
the marketplace and the need for this legislation. As defined,
overpayments are not fraud, but common administrative and
clerical errors, as I believe Ms. Snyder pointed out earlier
today. One of our companies, Accent Insurance Recovery
Solutions is the leading provider of overpayment identification
and recovery for commercial insurers, managed care, and self-
funded organizations.
Health care benefit overpayments occur when funds are paid
out errantly. Numerous reasons exist for these overpayments,
including duplicate payments, payments to ineligible
beneficiaries, calculation errors, and payments to wrong
providers. The vast majority of these dollars do not deal with
medical necessity. These types of overpayments are a large
percentage of the estimated $12.6 billion overpaid by Medicare
in 1998.
Private overpayment recovery firms employ state-of-the-art
proprietary technology to identify, validate, and recover claim
overpayments. Commercial payers outsource these functions
because they are not the competency of the payor, pursuing
these claims is not a cost-effective allocation of resource of
the payor, and the capital investment to develop the technology
infrastructure to carry out these functions is not a primary
investment. Given that private payers use these services on a
contingency fee basis, there is no fund outlay to realize the
benefits of the service. The entire burden of the function
falls on the vendor or contractor.
In the majority of cases, Accent is asking the provider of
service, physician, hospital or clinic for the refund. Both
expertise and professionalism are mandatory as we work with the
largest providers across the country daily, resolving both
clear-cut and complicated overpayment situations. These
cooperative relationships are of paramount importance to the
provider, the payor, and our company. The result is a very high
recovery rate and no provider complaints.
Estimates are that 4 percent of total claims paid by the
private health insurance sector are overpaid. This results in
nearly $7.6 billion in overpayments for commercial payers.
Contrast this with the reported 7 to 16.5 percent error rate
for Medicare. The dollars available for identification and
recovery are staggering. And, at this point, Mr. Chairman, I
would like to offer in that I do state the 7.5 to 16.5 percent.
There is record of 16.5 percent being the actual error rate
when Medicare includes not just claims that are entirely
overpaid, but also those that are partially overpaid, which
does raise the estimate of dollars being lost to overpayment
annually.
Private recovery firms average recovery rates between 50
and 70 percent of dollars validated as overpaid. We believe the
success in the private sector can be mirrored in the public
sector. Private recovery firms recover from the same providers
that are being overpaid by Medicare. The claims payment errors
are being made by fiscal intermediaries and carriers hired by
HCFA to administer the claims. These contractors are the very
same carriers who hire private recovery firms to recover their
overpaid dollars on their commercial insurance portfolio.
Over the last 3 years, the estimate is that HCFA has
overpaid some $56 billion in both fraud and waste. In that same
time period, recoveries from fines and restitutions have
dropped 65 percent from 1997 to 1998, down to $321 million.
Recoveries for the first half of 1999 are estimated at $176
million. By employing private recovery firms, the Medicare
Trust could realize conservatively billions in savings in the
next 3 years.
H.R. 1827 is an important step toward implementing the
mandatory use of auditing firms. A few areas of emphasis would
enhance the legislation and ensure success of this most
important effort this committee is now undertaking. First, we
suggest that both auditing and the recovery function be
mandated. As the legislation currently reads, the recovery
function is assumed, but not specifically stated. Auditing
without recovery will not yield the results desired.
Second, timeframe should be added to specify the
appropriate lapse between the audit findings and the beginning
of the recovery activity. This critical element determines the
recovery success.
Third, set-offs, while effective, are an extreme burden on
providers and their accounting systems and I wish Mr. Walden
was here with his experience in the hospital board. I am sure
he would attest to the fact that the accounting of set-offs is
very difficult for the provider to handle.
Fourth, the committee should be very cautious in allowing
agencies to opt out of the program. Deferrals will greatly
reduce the recoveries and available benefits from this prudent
legislative act.
Fifth, some types of overpayment, audit, and recovery may
incur expense that exceeds the 25 percent fee cap. And here I
echo Mr. Peterson's testimony.
Finally, the committee should consider the financial net
benefit and allow some fee arrangements to exceed the cap where
appropriate.
H.R. 1827 is a very important step in the pursuit of
merging the private sector efficiency and expertise with the
government improvement opportunities. I appreciate the chance
to address the committee and welcome any questions.
[The prepared statement of Mr. Wilwerding follows:]
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Mr. Horn. Thank you very much for that helpful statement.
Mr. Terrence Lyons is director of accounting, the Walgreen Co.
Mr. Lyons. Mr. Chairman, thank you for the opportunity to
appear before this committee. My name is Terry Lyons and I am a
director at the Walgreen Co. Walgreen's is a leading drug and
general merchandise retailer with fiscal year sales for 1998 of
$15.3 billion. My responsibilities include the management of
our outsourced recovery audit process. My testimony provides a
private sector view of recovery audit benefits and how the
Walgreen Co. uses the process.
Walgreen's recognized long ago the benefits of using a
professional service provider to identify and recover
overpayments. Purchasing and payment systems used by any volume
intensive organization like Walgreen's are designed to be cost-
effective and to provide for maximum through-put to ensure
timely payment of supplier invoices. However, mistakes occur,
whether through human error or systemic breakdowns.
Our experience has indicated that human error is the most
common contributing factor in payment errors. Human error can
never be entirely eliminated. Therefore, the need exists for a
safety net to audit payment transactions for accuracy and
validity, recover any overpayments, and to identify why
overpayments occur.
The most attractive advantage for utilizing a recovery
auditing service is that there is no risk or investment
required. The development of internal controls and/or programs
to conduct comprehensive recovery auditing is simply not 100
percent cost-effective. We use the largest service provider,
the Profit Recovery Group International who has broad
experience in many operating environments.
The value of recovery auditing to us is apparent in the
dollars recovered from the two most recent audit years. The
audit of our 1996 purchases was completed in October 1998 and
we recovered $16.9 million in overpayments on a purchase volume
of $8.5 billion. The audit of our 1997 purchases is just now
being completed and we expect to recover approximately $17.5
million in overpayments against a purchase base of $9.7
billion. Although the numbers are large, nearly $35 million
just over the past 2 audit years, they actually indicate an
error rate of only about 0.19 percent. Meaning that 99.8
percent of our payable transactions were processed and paid
correctly.
The success of our recovery audit activity is based on a
set of mutually identified duties and expectations from both
parties. We, as the client, must fully support the process. We
must provide our service provider with the access to all
required media, both electronic and paper, needed to research,
identify, and document any instances of overpayments and/or
underdeductions. Points of contact are established within the
purchasing, transportation, accounts payable, accounting, and
finance areas to liaison with contractor personnel to provide
whatever support is required.
Our recovery audit firm has responsibilities and duties to
ensure the success of their effort. They gain a full
understanding of our purchasing and payment systems for both
electronic and paper transactions. They meet and develop good
working relationships with all of the designated points of
contact within our organization and they protect our vendor
relationships. In short, we expect our contractor to function
in a fully outsourced manner that represents the interests of
the Walgreen Co.
The question of why Walgreen's would employ an outside firm
to do recovery auditing rather than doing it internally has
certainly occurred to you. The answer is simple. As a company,
we have chosen to invest our developmental dollars in what we
do best: systems and technology that provides improved
productivity within our stores and improved customer service.
Also the investment in technology and resources needed to
develop this kind of capability in-house could be cost-
prohibitive. We find it attractive to outsource this function
to a professional recovery audit firm. They have the
technology, the resources, and the expertise to do what they do
best.
In summary, Mr. Chairman, we have found the use of
professional recovery audit services to be invaluable in both
recovering passed-over payments and improving internal
controls. Among the major benefits: We recover millions of
dollars each year, we incur no financial burden, the process is
not disruptive to our normal operations, and the nature of the
service is ongoing with benefits, year after year. As a private
sector user of audit recovery services, I believe recovery
auditing services for the government is a terrific idea. It
will result in the recovery of a great deal of money and
further demonstrate how government can benefit from private
sector business practices. Thank you, Mr. Chairman.
[The prepared statement of Mr. Lyons follows:]
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Mr. Horn. Well, we thank you for that very thorough
statement. Our next witness is Mr. Stephen Booma, health care
consultant who has had quite a rich experience with the
Travelers Insurance Co. and Mutual of Omaha Insurance Co. We
are glad to have you here.
Mr. Booma. Thank you, Mr. Chairman. And I would like to
thank the subcommittee for allowing me to discuss this with
you.
As you said, I do have quite a history with the health
insurance industry. I am 27 years in this business. I have 24
years with the Travelers. At the Travelers, I was president of
their regional home office in Chicago. I also ran other
strategic business units. At Mutual of Omaha most recently, I
headed up their managed care area, president of their HMO
subsidiary, and I was also responsible for all of their claim
payment. So, in short, I was the one who had to make the
decision to use an outside vendor or to do it in-house. And I
will explain my comments on that. Right now I am operating as
an insurance consultant working in mergers and acquisitions,
but also working with companies in the managed care arena to
improve their performance.
Today, I would really like to address my comments as a
private administrator of health plans. And I would say, from
the outset, that we chose to go outside and use private
recovery firms. I also believe strongly, at the outset, that
the Federal Government, as the largest purchaser of health
plans, should also use outside recovery firms.
The reasons why. They are really pretty simple and we are
at the point today, this afternoon, where I think we have
discussed them enough where almost everyone is in agreement. So
it is wonderful. But I will just maybe emphasize a couple of
points. First, and foremost, recovery firms have the expertise
and have the highest level of professionalism in handling this
type of work. That is their only business. That is not the core
business of anyone other than the recovery firms. So it makes
perfect sense to allow the experts to do it.
If you have someone like HCFA start to use outside recovery
firms, you will actually see competition within other firms to
do that work and the expertise will grow. If that expertise is
tried to develop inside, I can almost guarantee you that I
wouldn't see that type of growth in this level of business.
The amount of money in overpayments is staggering. And I
think we all agree that they can occur simply from human error.
To me, it doesn't make any sense to have the folks that are
making the human errors try to go get the money they made the
errors on. Human nature tells you that if you make an error,
there is a strong inclination not to point that out. That would
be one of the primary reasons that we chose to go to outside,
because we wanted people that were not attached to the process
to make those decisions.
In the health care business, doctors, hospitals, and health
care providers of all kinds and insurance companies are very
familiar with this process. And, in fact, it is not an
adversarial process, at least on this particular process.
Oftentimes, insurance companies, Managed Care Organizations are
at opposite ends with providers, but providers really look for
help in solving overpayment situations. They know, most of the
time, that they have made overpayments. It is important to work
with them to try to correct those overpayments and they are
pleased when they can do that in a logical and orderly manner.
And the recovery firms are best positioned to do that.
Our customers understand, especially the larger ones within
the private insurance world, that errors occur. And they are
most interested in making sure that those errors are corrected
and that it is done in an orderly manner. If you don't employ
recovery firms, then the process and the length of time is
difficult and oftentimes very burdensome. Insurance companies
who take on the full risk of contracts for individuals or small
groups understand the use of this too and benefit directly from
using outside recovery firms. That was another primary reason
why we chose to do it.
So I would, in summary, strongly recommend that this bill
specifically allow for insurance claims recovery for HCFA as
well as other Federal plans. I would also emphasize that I
think it should be mandatory. I don't think there should be
ways to opt-out. Because if you allow them to opt-out, the
people who are running the plans will probably want to continue
to try to self-police themselves and that won't work. Thank
you.
[The prepared statement of Mr. Booma follows:]
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Mr. Horn. Thank you. That is very helpful. Mr. Robert
Koehler is attorney-at-law, Patton Boggs here in Washington and
the American Logistics Association. Have we got a little room
for you there at the table, finally? Thank you.
Mr. Koehler. I moved from the end of the dug-out to take
the clean-up spot. My name is Robert Koehler. I am a senior
partner in the Washington, DC, law firm of Patton Boggs. And I
have specialized in government contract law for the past 30
years. I am here on behalf of the American Logistics
Association, a trade association of some 600 manufacturers,
brokers, and distributors who sell brand or trade-name items to
the Federal Government. And this involves both the commissary
systems, the Defense Supply System, as well as the non-
appropriated fund activities such as AAFES and NEXCOM.
Because of the limit of 5 minutes, I will only highlight
the more critical issues that we think we should address in
this bill. Mr. Chairman, by way of background, I have been
involved with the recovery audit associated with DSCP and PRGI
for the past 2 years. In this regard, I represent 10 companies:
Frito Lay, Fort James, Hunt Wesson, Johnson and Johnson,
Kellogg, Mars, Nabisco, Pillsbury, Reckitt and Colman,
Tropicana, and General Mills. In my past, I have worked
extensively on the issues of price warranty as far as GSA is
concerned; as far as this agency, DSCP, is concerned; and with
the AAFES.
As we look at this legislation, I think it is fair to make
comment on what was learned--at least what we, from our
perspective, learned--from the demonstration program. From our
perspective, as we look at the demonstration program, it was
envisioned to take the basic concepts that are used in the
commercial world and apply them at the DOD level. Very simple.
Unfortunately, it isn't that simple.
And the difficulty, Mr. Chairman, that occurs is two
factors. One, there are affinity contract terms and conditions
that must be adhered to by the government in conducting either
audits or seeking to recover claims. And, two, and most
importantly, there are well-established Federal acquisition
regulations that both the government and the contractor must
comport with in these audit activities. And from our
perspective, when DSCP and PRGI initiated their activities in
the demonstration program, this was totally ignored.
For example, the first thing that happened in 1996 was the
PRGI and DSCP issuing thousands and thousands of collection
letters to companies demanding payment, giving them 30 days to
pay and also advising them that if the situation arose, it was
going to withhold the funds on any outstanding invoice. And,
fortunately, this violated the Federal Acquisition Regulation.
We brought this to their attention and everyone of those
letters had to be withdrawn. Six months later, new letters were
issued. And during this time period, when we began to look at
the process that they were going about, it became clear that
what they were attempting to do was to develop a system that
they relied on in the commercial activity that can't be done in
the government sector.
For example, they had two types of claims. What they call a
unit price claim, which was a claim that asserted that the
companies were not paying the most favored customer price to
the government. The second type of claim was what they called
the prompt payment claim. That meant that if the company was
providing a commercial entity a prompt payment discount let us
say of 2 percent if you pay it in 10 days, not 30 and the
government wasn't getting that, they demanded equal treatment.
In the commercial world, that might be appropriate. In
government contracts, the essential thing is you have to adhere
to the terms of the contract. And, unfortunately for the
government and PRGI, the price warranty clause is a very
specific document that details what is the basis upon which the
contractor warrants his price, the average price, being most
favorable to the government. And in our judgment, that was
totally ignored. Now we are working now through the process of
trying to rectify that.
The second part was the DSCP contracting activity was
associated with all the commissaries overseas. DSCP and PRGI
issued claim letters and failed to look at their own
documentation that existed in the government at the local
commissaries levels in Europe. The industry brought this to
their attention and, quite frankly, Mr. Chairman, raised hell
about it. After a considerable period of time, DSCP finally got
the funding to go over to Europe to look at these documents and
that was done just January of this year. We are now advised
that a significant amount of those claims that they had made
against the companies on the unit prices may be withdrawn.
Now the second part relates to the prompt payment discount.
Again, we believe that the price warranty clause specifically
requires you to consider what is an average price. What DSCP
and PRGI have done is extracted this one element called billing
advantage, assumed that that was not part of the average price,
and that is where a majority of the claims are that have not
been recovered. And the reason is because the contractors want
the government to adhere to the terms of the contract and these
claims, we don't think, represent that term.
Now with this as background, we now have to look at the new
bill. And let me say, Mr. Chairman, on behalf of all the
companies that ALA represents, we have absolutely no objection
to outside audit function. None whatsoever. We recognize that
it is done throughout the government.
But I think the key difference of what is being proposed
here versus what exists now and what PRGI contract is even
right now is what I think is an extremely dangerous move by
allowing the agency to delegate extremely core responsibilities
from the contracting officer to the audit company. And I think
that if you will ask any government contractor, if you ask any
government representative who has been a government contractor,
this particular provision is of great, great concern to them.
It is very simple, the reason. The bill establishes giving
authority to individuals to find the claims, process the
claims, pursue the claims, and settle them. And if you looked
at PRGI's testimony that they gave back on June 12, that is
exactly what they were talking about. You are also giving them
20 percent of what they recover. That is not incentive fee,
that is a headhunter's fee. And that, to me, is extremely
dangerous.
One of the principles, I think, that is lost in a lot of
this is that government contracting under the Federal
Acquisition Regulation is extremely different. I might note
that Mr. Peterson, who is from AAFES here this afternoon,
testified about their great results. Make no mistake about it,
AAFES regulations are entirely different than DOD's. AAFES is a
non-appropriated fund activity. It is not governed by the
Federal Acquisition Regulation. DSCP, the commissaries, all the
activities that you are referring to are. And that is a
significant difference. So I think we have to analyze the
success one might have, based upon the atmosphere that the
regulations allow them to exist.
Finally, ALA believes that providing the private contractor
auditor with such a broad authority and then to receive 20
percent presents a clear and unmistakable conflict of interest,
violating one of the government's bedrock contracting
principles. And I read just a portion of the Federal
Acquisition Regulation, ``Transactions relating to the
expenditure of public funds require the highest degree of
public trust and impeccable standards of conduct. The general
rule is to avoid, strictly, any conflict of interest or even
the appearance of a conflict of interest in government
contracting relationships.''
And, again, the idea of giving the contractor a combination
of the authority that the contracting officer has and the
percentage presents, I think, a conflict that cannot be
overcome. ALA does not have any difficulty with a continuation
of the program. Where we have the difficulty is trying to allow
the contractor to have that contracting responsibility. And
that is where the major conflict arises.
I also think that one of the issues that has arisen in our
dealings, in discussions with the contracting officer and other
government representatives is we have talked about attempting
to resolve some of these issues, settle them. One of the issues
that always comes up is, well, I might agree with you, but I
have PRGI on the other side of me who has a contract and is
entitled to 20 percent recovery. I have a conflict with him
because if I settle at one level, he might assert that he is
entitled to a higher percentage. I think the bill ought to have
a provision that makes it very clear that the government is not
liable in any way, shape, or form to the contractor for any
type of offset or settlement or decision that the contracting
officer makes in reaching that settlement vis-a-vis that 20
percent.
Bottom line, we support the bill only if--only if--you
exclude from this bill the contracting officer delegation to
the outside auditor. If it is just really a continuation, we
have no difficulty with the bill. Thank you, Mr. Chairman.
[The prepared statement of Mr. Koehler follows:]
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Mr. Horn. Thank you very much. We appreciate that
comprehensive testimony.
Mr. Dinkins, in your testimony, you say that the government
will benefit from recovery auditing even more than the private
sector. However, you also state that you do not have a broad
enough sampling of results within the government to accurately
project the benefit of the program. What factors support your
conclusion that the government would realize a greater benefit
from recovery auditing than the private sector?
Mr. Dinkins. Well, I would say to begin with, the long
experience that we have with AAFES at just under one-half of
one-tenth of 1 percent and the current experience in the
demonstration program, those numbers are roughly synonymous. So
I wouldn't venture to state at this point--and I would say that
the opportunity within HCFA is significantly higher than that.
It would be billions of dollars a year and also a higher
recovery percent. But somewhere between the private sector
average rate of one-tenth of a percent and one-half of one-
tenth of 1 percent and probably closer to that one-half of one-
tenth of 1 percent number is the real opportunity within
government.
Mr. Horn. In your testimony, you recommend raising the
threshold for payment activity, subject to recovery audits,
from $10 million to $500 million. You stated that the amounts
recovered from an audit of the $10 million payment program
would not justify the costs and administrative burdens. What
are the costs associated with performing recovery audits?
Mr. Dinkins. That statement is probably more self-serving
for us the contractor in the sense that we have a huge
investment at the beginning of any effort to access all of the
relevant media, process it through a data center, prepare and
deploy staff, technology, hardware, et cetera. And in a smaller
environment, those investments would not bear fruit. And I
would point you to a corollary in the private sector.
Typically, we looked at environments that are in excess of $500
million. That is not to say that there wouldn't be multiple
segments within any particular agency that would add up to $500
million. That would obviously be well worthwhile looking at, in
terms of the benefits to both parties.
Mr. Horn. Well, you noted that since September 1996, when
the Defense Supply Center of Philadelphia contracted with the
Profit Recovery Group to perform these recovery audits, more
than $20 million in overpayments had been identified. Only $2
million has been recovered. Now, according to Mr. Dinkins
statement, I guess the balance is in various stages of recovery
and I would be curious--and Mr. Wilwerding might want to get in
on this--what is the status of recovery of the identified by
uncollected overpayments?
Mr. Dinkins. Our experience in the private sector ranges in
the high 80 percent range in terms of what is collected, as
compared with what is identified. And, typically, the
difference is that there is some piece of information that was
not resident within the client's files that the supplier may
have access to that helps to create a better understanding of
the situation. I think that the reason for--first of all, let
me correct a couple of figures. Where we are today is about $4
million: $2.5 million of which is identified, another $1.5
million which has been approved by the contracting officer and
ready for deduction through DFAS's systems.
I think you heard prior testimony from Mr. Allen at DSCP
saying that there was another $10 million that was ready to go
on top of that. I don't recall the exact numbers. There is
about $12 million today that is identified and writing final
determination from the contracting officer.
Now, obviously, we don't affect collections with the
suppliers. That is the Department of Defense's role and
responsibility as part of the program. We identify the
overpayments and then they pursue their normal course of action
in terms of how to first notify the supplier that there is a
potential overpayment, ask for their comment before anything
further happens, and then, at an appropriate time, make an
offset on a future payment.
Mr. Horn. Mr. Wilwerding, do you have anything to add to
that?
Mr. Wilwerding. Yes, Mr. Chairman. I believe also an
important part of that recovery percentage--and I agree with
Mr. Dinkins that the private sector recovery percentages do
range up toward 80 percent in some cases. A great deal of that
is a result of the working relationship between the recovery
vendor and the payees in these points and, on the health care,
being the providers. In that there is a system in place to
forward information, substantiate claims, and facilitate
payment back and forth. That would take some time to develop on
behalf of the government agencies, but it is very realistic to
believe that that would be in place and would create a very
synergistic environment to work together in that recovery
effort.
Mr. Horn. Well, we asked the last panel about the following
and how are disputed over payments handled by your companies,
when that is a dispute? Is there an organized process or an
appeals group? Or how does it work? Is it the contract officer?
Yes, Mr. Dinkins.
Mr. Dinkins. That is actually not our role. That is handled
through normal scenarios within the government and it is
primarily a contracting officer makes the final disposition of
any claim.
Mr. Horn. So it works very much like in our debt collection
legislation. If it is turned over to a private collector, why
they simply go get the amount and if there is a problem with
the IRS, fine, talk to the people at IRS. OK, I understand
that. Does anybody have any other thoughts on the appeal
process in any way? Yes, Mr. Koehler.
Mr. Koehler. Mr. Chairman, under the Federal Acquisition
Regulation that governs all contracts, there is no debt under
the regulation until the contracting officer issues a
contracting officer's final decision. At that point, when the
contracting officer issues a decision, that then constitutes a
debt and the government then has the option to withhold payment
or offset, but not until that point in time. It is also the
point in time when interest begins to run.
I think earlier one of the panelists was talking about that
months and months would go by with interest or years would go
by with interest. Well, that is not true. If the government
identifies a claim and the contracting officer issues that
decision, that interest begins to run on those amounts at the
Treasury rate. So I think that we have to keep that in mind as
we move forward on this project.
Mr. Horn. Mr. Dinkins, the Government Waste Corrections Act
of 1999 recognizes that the identification of overpayments to
providers of goods and services through recovery auditing has
been used successfully in the private sector. Accordingly, the
proposed legislation generally requires each executive branch
agency to conduct recovery audits for its payment activities
that expend at least $10 million annually. Although the Federal
Government buys many of the same items as does the private
sector, the Federal Government is also the sole buyer of other
items, such as major weapons systems.
With that as a preface, does the--you pronounce the
initials here PRGI--does that Profit Recovery Group perform or
have the capability to perform recovery audits for private
sector companies such as United Airlines that buy from the
aerospace industry?
Mr. Dinkins. Yes. As a matter of fact, we do provide
services to major airlines today.
Mr. Horn. Major weapons systems manufacturers such as
Boeing or Lockheed-Martin do not offer cash discounts and other
overpayment type claims typically found in retail businesses.
What are some of the examples of the type of overpayment claims
you anticipate finding in major weapons systems acquisitions?
Mr. Dinkins. Most of the identified overpayments in that
arena would be contract compliance related issues. You still
have incidences of duplicate payments and other types of
errors. Contract compliance will be the key area of that
investigation.
Mr. Horn. We have heard from the chief financial officer of
Medicare. I am just curious, how applicable is recovery
auditing to health care, be it Federal level or the State
level, or just plain old hospital level?
Mr. Wilwerding. Mr. Chairman, we would feel that it is
extremely applicable. Going back to my testimony, Medicare
program is utilizing the private sector carriers to administer
these health benefits. Those carriers are currently using
private sector recovery firms to audit, identify, validate, and
recover overpaid claims. They are using very similar, if not
the same, claim systems, the same training techniques on their
claim analysts, and the same internal audit techniques they use
on their private sector insurance claims.
Therefore, it would be apparent that the ability to audit
and identify these claims and recover those claims on behalf of
Medicare would be similar to that of the private sector.
Mr. Lyons. I think I can speak on that issue also, Mr.
Horn.
Mr. Horn. Sure.
Mr. Lyons. I was the chief operations administrator for our
company's health insurance programs in the late 1980's and
early 1990's. Walgreen's is self-insured and self-administered.
And, we employed outside audit recovery firms to review health
insurance claim payments with about a 4 percent recovery rate,
if I recall.
Mr. Dinkins. I would add to that, Mr. Horn, that that
represents about 10 times the level of recovery demonstrated in
government and other programs today. So health care typically
offers a larger area of opportunity.
Mr. Horn. I don't doubt that. There are big dollars at
stake there. Mr. Wilwerding, the majority of claims deemed
erroneous stemmed from issues of lack of medical necessity,
incorrectly coded claims, and services paid for that were
actually uncovered or unallowable. Given that you do not get
involved in making medical judgments, could you describe the
methodology you use and the type of errors you identify?
Mr. Wilwerding. Certainly, Mr. Chairman. Our process is to
identify errors that are primarily based on a set of data facts
that determine the eligibility and the appropriateness of the
claim. That may be associated with the beneficiary's
eligibility for the program, the contract allowances, what the
insurance policy or benefit policy covers and what it does not
cover. They could identify things such as duplicate payments or
payments that are not customarily made or over a certain
program maximum amount. The validity of those claims tends to
run very high. Of the claims we identify as potential
overpayments, we acknowledge that some 80 percent of those
claims will be accurately overpaid.
We will only pursue--and I think it is an important issue
to bring out here under contingency fees and I would assume Mr.
Dinkins would support this--those of us that are operating on
getting paid on successful recoveries will only pursue those
claims that are valid overpayments. We have no incentive to
pursue claims that we know are not valid and will not likely be
reimbursed by the payee. It is, in the health claim area
especially, since we deal with fairly low-balance claims and a
high volume of those claims, extra effort is given to make sure
that the claims we are pursuing are accepted by the provider
and we have the data in-house to present to the provider the
valid request for the reimbursement.
Mr. Horn. Mr. Wilwerding, in your testimony, you state that
it would not be efficient for the Federal departments and
agencies to collect overpayments by offsetting future payments.
Why would this process not be efficient?
Mr. Wilwerding. Perhaps that testimony needs to be revised.
It is not necessarily inefficient, but I do believe that it is
burdensome upon the provider community and we could, at some
point, and I could submit a statement into the testimony that
would give an example of why this would be burdensome if you
would prefer that.
Mr. Horn. Mr. Lyons, does the Walgreen Co. do any of its
recovery auditing internally?
Mr. Lyons. We do have a small initiative, Mr. Horn.
Frankly, we are trying to put our dollars into developing
systems that will eliminate the post-audit recovery issues. So
we are looking at new billing systems and new accounts payable
systems that will tend to probably not eliminate completely,
but at least minimize post-audit recovery activities.
Mr. Horn. H.R. 1827, which is before us, would require a
recovery audit contractor to provide departments and agencies
with periodic reports on conditions giving rise to overpayments
and recommendations on how to mitigate such conditions. What
recommendations has the Profit Recovery Group International
provided to the Walgreen Co. on ways to improve its payment
processes and reduce the incidences of overpayments?
Mr. Lyons. Well, I am not sure that I can be very specific
in that area, although various audit recovery firms in the past
have made specific recommendations. Typically, these are
recommendations having to do with system changes and/or manual
procedure changes. Some of which we have made. It is easy to
make a manual procedure change. It is very difficult to make a
systems change when it is tied into a fully integrated process.
Mr. Horn. We noted earlier that the Defense Department
contracting officer in most Federal departments deal with the
vendor-supplier disputes over the validity of an overpayment
identified by a recovery auditor. How does Walgreen handle
this?
Mr. Lyons. Well, I think the first point that I want to
make is that the Walgreen Co. controls the audit activities.
So, when a dispute arises, the facts typically speak for
themselves. Is there a purchase contract? And is there the
supporting documentation to validate the claim? Usually, if
there is, we proceed. If there is not, we don't. And I should
say in that respect, that I see very few post-audit recovery
claims that do not have a tremendous amount of documentation,
supporting documentation.
Mr. Horn. Mr. Koehler, as I understand it, the Profit
Recovery Group International identified overpayments, sent
letter of indebtedness to vendors, and many vendors protested
through their trade association, the American Logistics
Association, for which you are counsel. Have vendors complained
to the American Logistics Association about recovery auditing
performed for private sector companies? And, if so, what are we
talking about in terms of complaints?
Mr. Koehler. Well, Mr. Chairman, the answer is no, because
the American Logistics Association is associated just for sales
to the Federal Government so that the association itself would
not have access to that. I know on a personal level the
companies that we do represent that there are two different
types of, if you will, issues that arise on the commercial
side. One is the ministerial or billing errors. And Mr. Lyons
is correct. That type of documentation is relatively easy to
see and there is very little difficulty with getting those
resolved.
The other area, though, is in relation to the government
contracting, is in the application, not of those type of
ministerial or billing errors, but rather in the interpretation
of the price warranty clause and the attempt to enforce it. I
think George Allen, for DECA, stated that with regard to the
price warranty issue, that those were breech issues. Well, if
that is the case, then that clearly is an area that should
never be delegated to an outside contractor for resolution.
Because only that area is the responsibility of the contracting
officer.
Mr. Horn. Now I gave the last panel the chance to have
anything to say that they haven't said in the dialog either
between the Chair and the panel or within the panel. So anybody
want to get something off their chest now into the record? Any
takers on that?
Well, we thank you very much for coming. We appreciate the
knowledge you bring to this and the experience. And that will
be very helpful in marking up the bill.
I would now like to thank the following people for setting
up this particular hearing: The Government Management,
Information, and Technology Subcommittee staff is headed by its
staff director, Russell George, and chief counsel--I don't see
him right now. The person to my left, to your right, who has
put most of the effort into this particular hearing, is Randy
Kaplan; who is also counsel to the subcommittee and a
professional staff member. Matthew Ebert, policy advisor, is
back here on the bench. Jane Cobb of the full committee, is
liaison on this bill, with Mr. Burton's interest. And we have
Bonnie Heald, director of communications, probably with
somebody in the media here. And Grant Newman, our clerk,
against the wall over there. We have John Phillips, intern. And
then Paul Wicker, intern; Justin Schlueter, intern; Lauren
Lefton, intern.
And, for the Democratic side, Faith Weiss, the minority
counsel; Earley Green, minority staff assistant. And Yon Lupu,
the court reporter.
So thank you all. And, with that, this hearing is
adjourned.
[Whereupon, at 5:01 p.m., the subcommittee was adjourned.]
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