How does the federal government know how much money it's spending improperly?

How does the federal government know how much money it's spending improperly?

How does the federal government know how much money it's spending improperly?

Answers to your questions about the news.
Nov. 18 2009 5:55 PM

Funder's Remorse

If the government knows how much it's spending improperly, why doesn't it stop?

Illustration by Mark Alan Stamaty. Click image to expand.

The federal government made $98 billion in improper payments this fiscal year, according to an announcement Tuesday by the White House Office of Management and Budget. That's a 37.5 percent increase from the $72 billion improperly spent in 2008. How does the government know exactly how much it's misspending?

It audits itself. Every year, various federal agencies review programs that have a high risk of improper spending—that is, programs that historically misspend more than 2.5 percent of their budgets and more than $10 million total. Kind of like the IRS during tax season, agents don't pore over every last high-risk dollar. Instead, they take random samples and investigate those. For example, the federal food stamps program might examine just a few thousand of its 28 million or so payments. If 5.6 percent of the money spent in those payments includes errors—as it did in 2008—then that rate is extrapolated to the rest of the spending program.

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There are three basic reasons a payment can be considered "improper." First: no documentation—no existing paperwork confirming that, say, John Smith paid $400 for an MRI. A payment might also be considered erroneous if the agency can't verify the recipient's eligibility. For example, if a public housing program doesn't have access to a tenant's income statement, they can't prove he falls below the cutoff. A third reason to classify a payment as "improper" is if it's impossible to verify eligibility. Say a tax credit requires that a recipient lives with a child for more than six months of the year. Federal agencies have no way of verifying that conclusively. In such cases, the payment's propriety is often a judgment call by the agency.

When an agency conducts a random audit and finds an individual—a Pell grant recipient, say, or a retiree who gets Social Security—who was paid improperly, it can take the money back. The government also does a thorough annual review of spending that goes to contractors—whether they build planes or set up telecommunications systems or conduct defense research—and tries to recoup any misspent funds.

If the government knows how much it's spending improperly, why doesn't it stop those payments in the first place? It tries to. Every year, the agencies use information from previous audits to better catch erroneous payments. For example, when handing out Pell grants, the Department of Education has long had trouble verifying a student's income because IRS documents are protected. Starting in 2010, the department will have better access to those numbers, saving an estimated $400 million annually.

This year, Medicare's fee-for-service program and Medicare Advantage—private insurance programs offered through Medicare—accounted for $36 billion, or more than a third of total improper spending. Last year, Medicaid and Medicare Advantage accounted for more than 85 percent of misspending in newly measured programs.

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The 2009 spike in improper spending is likely due to new, more sensitive methodologies for sussing out errors. An illegible doctor's signature, for example, is now treated as a red flag. Plus, 2009 has seen more federal spending than ever before, thanks to the stimulus package and the ballooning budget. So even if the error rate stayed the same, there would be more dollars misspent.

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Explainer thanks Kenneth Baer and Danny Werfel of the Office of Management and Budget.

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