Jan 24 2011

Payment Integrity

Solving the improper payments challenge will demand partnerships within government, help from industry and technology innovation.

Improper payments have been a significant challenge for federal agencies. That’s a statement no one would deny.

Improper payments have been a significant challenge for federal agencies. That’s a statement no one would deny.

The Office of Management and Budget estimates that agencies made more than $125 billion in improper payments in fiscal 2010, up from $110 billion in 2009 — despite a drop in the governmentwide improper payment rate from 5.65 to 5.49 percent. Given those figures, it’s no wonder that reducing improper payments has become a high priority for the Obama administration.

The Challenge

According to OMB, improper payments occur when federal funds go to the wrong recipient, a recipient receives an incorrect amount of funds, documentation is unavailable to support a payment, or a recipient uses funds improperly.

By one rough estimate, a third of improper payments result from poor documentation, making it impossible to verify whether the payments were accurate. Another third result from failure to confirm that recipients are eligible to receive the payments, and the final third consist of program errors and fraud.

But a few programs, deemed by OMB as “high error,” account for the bulk of improper payments. The high-error programs tend to have several things in common:

  • They transfer large amounts of funds.
  • They involve multiple layers of government.
  • They have transactions that are paid through many intermediaries.
  • They serve recipients whose eligibility can be difficult to establish.

Several factors have intensified interest in improper payments over the past few years. First, the government significantly increased its payments to external parties following Hurricane Katrina and, more recently, because of federal economic recovery efforts. Second, given the sharp focus on the size and cost of government as a factor in the slow recovery from the recession, these payments have been acknowledged as totally unacceptable because the lost funds could go to other priority initiatives.

Prepayment Approaches

It’s clear that the best long-term solution is to prevent erroneous payments in the first place. The government has certainly been moving in this direction. Many presidential actions taken by the Obama administration push agencies to use increased transparency and accountability to better establish program eligibility before payments are made.

Many of the eligibility standards for federal programs are highly complex, and the sources of information from which agencies make or verify decisions are not widely available on a timely basis. For instance, the combination of complex eligibility requirements and well-organized efforts to defraud Medicaid and Medicare lead to those programs’ relatively high improper payment rates. This remains a vexing problem that requires new solutions.

Technology’s Role

There are private-sector analogies for government’s improper payment problems. Companies construct buildings and infrastructure, banks make loans, credit card companies manage huge volumes of transactions, insurance companies pay claims, and so on. And the private sector has experienced many of the same issues as the government with respect to payment integrity.

Illustration: Elizabeth Hinshaw
“It’s clear that the best long-term solution is to prevent erroneous payments in the first place. The government has certainly been moving in this direction.”

— Paul Wohlleben

Although we can learn many lessons from how the private sector addresses payment integrity, let’s focus on the use of technology. We all can cite personal examples of being party to active monitoring of eligibility and identity using technology while conducting financial transactions. Government needs to learn from industry and incorporate more industry best practices and technology into its payment processes. Agencies should consider using existing private-sector capabilities, such as those used by banks, credit card companies and insurance companies, to address similar payment integrity issues.

The government cannot adequately address the payment challenge without significant use of technology. It knows this, and already invests heavily in IT to address these challenges, but much more needs to be done. Agencies need to think more broadly about how to acquire technology solutions to help with their payment integrity problems and should openly engage the private sector to assist or provide solutions.

Leadership Opportunity

The improper payment problem demands innovation and a willingness to adopt proven processes and technologies used elsewhere.

CIOs and chief technology officials should be directly involved with their agencies’ chief financial officers in addressing improper payments as an administration priority. Together, they must reach out to their industry counterparts to understand how like problems are being addressed and seek assistance in bringing to government the technology tools used in the private sector.

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