Agencies Must Address Billions Lost Through Erroneous Payments

Founders in the News

November 15, 2022

Total improper payments have steadily increased since 2013 by $100 billion, from $106 billion to $206 billion.

In October, the Office of Management and Budget published a guide for federal agencies to help them determine where to focus their efforts to reduce improper payments. The guide provides a complicated framework for calculating the extent that an agency’s improper payments are within its control and a method for conducting a quantitative analysis of the cost-benefit tradeoffs of mitigation activities.

OMB’s intentions are laudable and its approach reflects sound economic principles. However, an environment where agencies struggle with sufficient resources to even estimate their improper payment rates and implement basic remediation activities, coupled with the complexity of the OMB model, make the feasibility of implementing it questionable.

While the cost-benefit analysis may be too complex and time-consuming for most agencies to undertake, the guide does offer some important policy considerations that must be addressed. Specifically, OMB’s guide identifies several categories of improper payments that can be inferred as “potentially tolerable.” These include:

• Improper payments caused by factors outside the agency’s control, including statutory or regulatory design, lack of budget or the structure of the program.
• Improper payments for which mitigation efforts may “cost more than the amount those expenditures would save in prevented or recovered improper payments.”
• “Unavoidable” improper payments that result from legal requirements agencies cannot alter.
• One of the questions OMB directs agencies to answer as part of this evaluation is whether a statute (e.g., the Privacy Act of 1974) bars the agency from adding internal controls that target the root cause of the problem. If an agency is barred by statute from adding internal controls, OMB requires agencies to estimate the magnitude of the impact.

This specific part of the guide is a vitally important exercise for agencies to undertake. More than half of the reported improper payments in “high-risk” programs tracked by OMB on PaymentAccuracy.gov report inability to verify information as the key root cause. The reasons for this inability range from direct statutory limitations to restrictions imposed by the Privacy Act that create significant barriers to agencies sharing information they could use to reduce improper payments.

OMB provides an Education Department example that illustrates this point. Prior to 2019, Education had no statutory ability to verify tax information systematically, as the limits set in law prevented the department or colleges from correcting errors in tax and income information. As a result, one of the data elements Education needed to verify eligibility—“expected family contribution”—sometimes contained erroneous data that the department simply had to tolerate. In 2019, Congress amended the statute to permit data sharing of tax information, which enabled Education to mitigate those improper payments.

It’s clear the improper payments laws and regulations are simply not working. Legislation requiring agencies to report on their improper payments and identify corrective actions has been in place since 2002, yet from 2013 to 2020, total improper payments have steadily increased by $100 billion from $106 billion to $206 billion.

The issues causing this increase are manifold. Agencies have not prioritized the reduction of improper payments because there is simply no real incentive to do so. Being non-compliant with improper payments requirements brings no real consequences. Naturally, with significant resource limitations, agency leaders relegate improper payments efforts to a check-the-box compliance exercise. They suffer the occasional unflattering report from the Government Accountability Office highlighting deficiencies, rather than invest in data collection and analytics efforts that could truly address problems.

What’s more, the real elephant in the room is that most agencies lack the ability to access data they need to verify that a payment is, in fact, proper. Federal data privacy laws and a deep aversion to sharing data across agencies means most will continue to report that they are “unable” to verify data, report their increased improper payment rate to OMB and continue on, unchanged.

Congress and OMB must decide if they really want to reduce improper payments to reform the systemically anemic response to the problem across government. Congress must provide additional funding for those agencies with consistently large proportions of total improper payments estimates. Real consequences must be established for failure to reduce improper payments (both carrots and sticks should be considered). And OMB should require high-risk programs to undertake the effort outlined in its new guide to determine what is outside of an agency’s control with regard to improper payments, so that together OMB and Congress can once and for all remove those systemic data-related barriers that keep agencies from addressing the rising rates of improper payments.