Improper Payments Information Act of 2002: A Brief Introduction

Improper Payments Information Act of 2002: A Brief Introduction

Order Code RS22587
January 30, 2007
Improper Payments Information Act of 2002:
A Brief Introduction
Virginia A. McMurtry
Specialist in American National Government
Government and Finance Division
Garrett Hatch
Analyst in Government Organization and Management
Government and Finance Division
Summary
The intent of the Improper Payments Information Act (IPIA) is to improve
accountability in administering federal tax dollars and to reduce wasteful spending.
IPIA provisions require federal agencies to identify programs that are susceptible to
significant improper payments, to estimate the amount of overpayments, and to report
annually to Congress on those figures and on the steps being taken to reduce such
payments. Oversight hearings on the IPIA have been held in both the House and the
Senate, and some Members have expressed concern that implementation guidance
issued by the Office of Management and Budget (OMB) inappropriately limits the scope
of the legislation. This report will be updated as events warrant.
Legislative History and Intent
On November 26, 2002, the Improper Payments Information Act (IPIA) was signed
into law as P.L. 107-300 (116 Stat. 2350). Augmenting previous financial management
reform laws, the IPIA is intended to increase financial accountability in the federal
government, and thereby reduce wasteful spending. The law requires agencies each year
to identify programs and activities that may be vulnerable to significant improper
payments, to estimate the amount of overpayments or underpayments, and to report on the
steps they are taking to reduce such payments. As explained more fully below, improper
payments generally include any payments by the federal government that should not have
been made or were made in an incorrect amount.
Previously, there was no government-wide requirement for agencies to estimate or
report in any systematic way on improper payments, although it is generally
acknowledged that billions of dollars are involved. The Office of Management and

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Budget (OMB) estimated that in FY2005, improper payments under 47 federal programs
totaled approximately $37.3 billion, an estimate the Government Accountability Office
(GAO, formerly the General Accounting Office) has suggested is too conservative.1
The IPIA was introduced in the 107th Congress as H.R. 4878 on June 6, 2002, by
Representative Stephen Horn, with a group of bipartisan cosponsors, and referred to the
House Committee on Government Reform. The Subcommittee on Government
Efficiency, Financial Management and Intergovernmental Relations held markup on the
measure on June 18, 2002, and approved the bill, as amended, by unanimous voice vote.
On July 9, 2002, H.R. 4878 was considered under suspension of the rules and passed the
House, as amended, by voice vote. On October 9, 2002, the Senate Committee on
Governmental Affairs ordered H.R. 4878 to be reported favorably, with a substitute
amendment. On October 17, 2002, the bill, as amended, passed the Senate by unanimous
consent, and on November 12, under suspension of the rules, the House agreed to the
Senate amendment by voice vote. The President signed H.R. 4868 into law on November
26, 2002 (P.L. 107-300).
The problem of improper payments had received attention in previous Congresses.
During House floor debate on H.R. 4878, Representative Horn noted that hearings held
in the past “clearly demonstrated the need” for such legislation:
Since the 104th Congress, the subcommittees I have chaired have held approximately
100 hearings on wasteful spending within the Federal Government. Time and again
witnesses from the General Accounting Office and agency inspectors general have
told the subcommittee that poor accounting systems and procedures have contributed
to the government’s serious and long-term problems involving improper payments.2
In the written report of the Senate Committee on Governmental Affairs to
accompany H.R. 4878, the provisions of the bill were explicitly linked to GAO
recommendations offered in a best practices guide for agencies in managing improper
payments, prepared at the request of the committee chairman, Senator Joseph Lieberman.
The guide suggested that determining the nature and extent of risks for improper
payments was a crucial step; H.R. 4878 would begin the process of improving the
management of improper payments, following GAO’s guidance, “by requiring that
agencies annually estimate the amount of improper payments, and report on the steps they
are taking to reduce the amounts of those payments in the largest programs.”3
1 U.S. Congress, Senate Subcommittee on Federal Financial Management, Government
Information, and International Security, An Assessment of Improper Payment Information Act of
2002, hearings, 109th Cong., 2nd sess., Dec. 5, 2006, at [http://hsgac.senate.gov/_files/
ClayJohsonTestimony05Dec2006ImproperPayments.pdf].
2 Rep. Stephen Horn, remarks in the House, Congressional Record, daily edition, vol. 148, July
9, 2002, H4379.
3 See GAO Report GAO-02-69G, Strategies to Manage Improper Payments, Oct. 2001. Cited in
U.S. Congress, Senate Committee on Governmental Affairs, Improper Payments Information Act
of 2002, report to accompany H.R. 4878, 107th Cong., 2nd sess., S.Rept. 107-333 (Washington:
GPO, 2002), p. 2.

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Major Provisions
The IPIA directs each executive branch agency, in accordance with OMB guidance,
to review all its programs and activities each year, identify those that may be susceptible
to significant improper payments, and estimate the amount of improper payments.
Agencies are then to report annually to Congress on improper payments, using a
standardized methodology determined by OMB.4
With respect to any program or activity with estimated annual improper payments
exceeding $10 million, each agency is also required to provide a report on agency actions
to reduce such improper payments, including (1) the causes of the improper payments and
the results of the actions taken to address them; (2) whether the agency has information
systems and other necessary infrastructure to reduce such payments to “minimal cost-
effective levels”; (3) if not, budgetary resources requested to accomplish needed changes
in information systems and infrastructure; and (4) steps the agency has taken to ensure
that managers are held accountable for reducing improper payments.
Improper payment is defined as any payment that should not have been made or that
was made in an incorrect amount. This includes duplicate payments, payments to
ineligible recipients or for ineligible services, or for services not received or that do not
reflect applicable discounts. The act covers payments made by a federal agency, a federal
contractor, or a governmental or other organization administering a federal program or
activity.
Discussion
The IPIA codified and expanded efforts already underway in the executive branch
to reduce improper payments. In 2001, the Bush Administration designated improving
financial performance as one of five government-wide initiatives in the President’s
Management Agenda (PMA). The establishment of a baseline on the extent of erroneous
(improper) payments in major federal benefit programs was a key component of the
financial management initiative.5 Agencies were to include available information on
erroneous payment rates for benefit and assistance programs over $2 billion as a part of
their FY2003 budget submissions. In July 2001, revisions to OMB Circular A-11 in
Section 57 implemented this objective, requiring 15 federal agencies to include improper
payment information with their initial FY2003 budget materials to OMB. Enactment of
the IPIA extended improper payment reporting requirements to all executive branch
departments and agencies, lowered the threshold from $2 billion to $10 million, and
designated Congress (as well as OMB) to receive the annual agency reports.
4 The IPIA originally set a deadline of March 31 for agencies to report to Congress on their
improper payments in the prior fiscal year. The improper payments reports are now included in
the performance and accountability reports or PARs, due to the President (via OMB) and
Congress 45 days after the close of an agency’s fiscal year, generally November 15. See OMB
Circular A-136, “Form and Content of the Performance and Accountability Report (PAR),” at
[http://www.whitehouse.gov/OMB/bulletins/b01-09.pdf].
5 See U.S. Office of Management and Budget, The President’s Management Agenda — FY2002
(Washington: OMB, 2001), pp. 19-21. For an overview of the PMA, see CRS Report RS21416,
The President’s Management Agenda: A Brief Introduction, by Virginia A. McMurtry.

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In May 2003, OMB distributed a guide to instruct agencies on the implementation
of the IPIA.6 The guide provided detailed definitions of “improper” or “erroneous”
payments and of “program” and “activity,” and then outlined four steps to be taken by the
agencies. First, agencies were required to review systematically all their programs and
activities and identify those which are susceptible to significant erroneous payments,
defined as “annual erroneous payments in the program exceeding both 2.5% of the
program payments and $10 million.” Second, agencies were to determine an annual
estimated amount of erroneous payments made in those programs and activities found
susceptible to significant errors; this calculation was to be based on a statistical random
sample sufficiently large “to yield an estimate with a 90 percent confidence interval”
within 5% precision. The third step was to determine why the particular programs were
at risk, and then put in place a plan to reduce the erroneous payments. The last step was
agency reporting to the President (via OMB) and Congress on the estimates of the annual
amount of erroneous payments in its programs and activities and on progress in reducing
them.
There has been criticism of OMB’s guidance to the agencies for implementing the
IPIA, particularly regarding the definition of “significant [emphasis added] improper
payments.” In addition to the $10 million threshold in estimated improper spending
established by the statute, OMB required that the payment represent at least 2.5% of total
program payments. The Chairman and Ranking Minority Member of the House
Subcommittee on Government Efficiency and Financial Management, Representative
Todd Platts and Representative Marsha Blackburn, sent a letter to OMB in August 2003
questioning the 2.5% minimum threshold. Likewise, according to a news article, Senators
Charles Grassley and Max Baucus, the Chairman and Ranking Minority Member of the
Senate Finance Committee, stated in a January 9, 2004, letter to OMB Director Joshua
Bolten that OMB should not have established the 2.5% threshold and should have simply
required that agencies report all programs generating estimated improper payments of
more than $10 million. The Senators reportedly observed that by adding the 2.5%
threshold, “The improper payments figures that will eventually be reported to the public
will look better and feel better than they really are....”7
GAO has also argued that the 2.5% threshold could mask the extent of the improper
payments problem. In a recent report, GAO identified many examples of agency
programs with estimated improper payments over $10 million that were not included in
the agency’s improper payments estimate because they did not meet the 2.5% threshold.8
For example, GAO said that the Department of Education did not report on three
programs that each had estimated improper payments exceeding $10 million — $155
million in total — because in each case those payments represented less than 2.5% of
program outlays (p. 44). If the 2.5% criterion were applied to large programs, GAO
concluded, billions of dollars in improper payments could go unreported (p. 54). OMB
6 OMB, “Improper Payments Information Act of 2002 (Public Law 107-300),” Memorandum for
Heads of Executive Departments and Agencies from Mitchell E. Daniels, May 21, 2003, M-03-
13. IPIA guidance was subsequently incorporated into Appendix C of OMB Circular A-123.
7 Cited by Amelia Gruber, “OMB Defends Actions on Improper Payments,” GovExec.com, Jan.
14, 2004.
8 GAO Report GAO-07-92, Improper Payments: Agencies’ Fiscal Year 2005 Reporting Under
the Improper Payments Information Act Remains Incomplete, Dec. 2006, pp. 41-45.

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has defended the 2.5% threshold, stating it was established “to ensure that agencies were
focusing their resources on programs with the highest levels of risk for improper
payments.”9
As noted above, OMB requires estimates of improper payments to be provided by
agencies in their annual PARs. Not all high-risk programs and activities, however, had
estimates in place by the time agencies submitted their FY2005 PARs. Agencies
conducted a risk assessment of all federal spending ($2.5 trillion) in FY2005, and
concluded that 60% of government outlays ($1.5 trillion) were at risk for significant levels
of improper payments.10 Agencies reported error rates for 47 programs in their FY2005
PARs, encompassing $1.3 trillion, or 85%, of the outlays identified as high-risk.11 A
number of major programs, including Medicaid, National School Lunch/Breakfast, and
the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC),
were among those lacking estimates. OMB Controller Linda Combs, in testimony before
the House Subcommittee on Government Management, Finance, and Accountability on
April 5, 2006, said the difficulty in developing error rates in these cases lay in the “size
and complexity” of the programs, many of which are administered by state governments.12
Combs also said that OMB is working with states to collect the information necessary to
produce valid estimates for these programs in the next two years.
In 2004, the Bush Administration designated “Eliminating Improper Payments” as
a separate program initiative under the PMA.13 Fifteen agencies have been graded at the
end of each quarter by OMB on their efforts to identify, eliminate, and recover improper
payments. The most recent scorecard showed that four agencies were “green” in status,
indicating full compliance with OMB’s improper payments standards; eight agencies were
“yellow,” meaning they were actively “putting the tools in place” to achieve green; and
three agencies were “red,” reflecting noncompliance in one or more areas.14 In the initial
ratings for improper payments at the end of 2004, no agencies received “green,” five were
“yellow,” and 10 were “red.”15 Thus in less than two years, four agencies achieved green,
and the number of agencies receiving red declined from 10 to three.
9 Letter from Linda Combs, OMB Controller, to McCoy Williams, GAO Director of Financial
Management and Assurance, Oct. 26, 2006.
10 OMB, Improving the Accuracy and Integrity of Federal Payments, Feb. 2, 2006, at
[http://www.whitehouse.gov/omb/financial/fia/improv_accuracy_fed_payments.pdf].
11 Ibid.
12 Testimony of OMB Controller Linda Combs, U.S. Congress, House Subcommittee on
Government Management, Finance, and Accountability, hearings, The Improper Payments
Information Act — Are Agencies Meeting the Requirements of the Law? 109th Cong., 2nd sess.,
Apr. 5, 2006.
13 See discussion in Fiscal Year 2006 Budget of the U.S. Government (Washington: GPO, 2005),
p. 54.
14 The White House, Scorecard - September 30, 2006, at [http://www.whitehouse.gov/results/
agenda/scorecard.html].
15 Ibid., Scorecard - December 31, 2004.

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Data from the first two years of IPIA implementation show that in both FY2004 and
FY2005, the same seven programs accounted for approximately 95% of all reported
erroneous payments.16 The data also reflect a decline in the government-wide improper
payments rate from 3.9% in FY2004 to 3.1% in FY2005, although there is disagreement
as to why this occurred. OMB has stated that the decrease was the result of corrective
actions taken by agencies, while GAO attributed it primarily to a change in the way HHS
estimated improper payments under Medicare.17 An upward trend in the scope of IPIA
coverage is evident as well. In FY2004, agencies had established improper payment rates
for programs that accounted for approximately 80% of risk-susceptible dollars, and in
FY2005, as agencies developed error rates for 17 additional programs, that figure
increased to 85%. Further analysis of these trends will be possible following the release
of OMB’s report on government-wide improper payment activities during FY2006.
Meanwhile, several oversight hearings on implementation of the IPIA have been
held. The House Subcommittee on Government Efficiency and Financial Management
held oversight hearings on improper payments in May and July 2003, as did the House
Subcommittee on Government Management, Finance, and Accountability in July 2005
and April 2006.18 In the Senate, the Subcommittee on Federal Financial Management,
Government Information, and International Security held improper payments hearings in
July 2005, and in March and December 2006.19 Congressional interest in reducing the
number and amount of improper payments seems likely to continue.

16 OMB, Improving the Accuracy and Integrity of Federal Payments, Jan. 25, 2005, at
[http://www.whitehouse.gov/omb/financial/fia/ipia_gov-wide_report.pdf]; and Improving the
Accuracy and Integrity of Federal Payments, Feb. 2, 2006. The seven programs identified in the
reports are Medicare; Earned Income Tax Credit; Old Age, Survivors and Disability Insurance;
Unemployment Insurance; Supplemental Security Income; combined Public Housing/Rental
Assistance/Section 8 programs; and Food Stamps.
17 OMB, Improving the Accuracy and Integrity of Federal Payments, Feb. 2, 2006, p. i; and
Testimony of David Walker, GAO Comptroller General, An Assessment of the Improper
Payments Information Act of 2002, Dec. 5, 2006, p. 4.
18 U.S. Congress, House Committee on Government Reform, Subcommittee on Government
Efficiency and Financial Management, Show Me the Tax Dollars — How Much Is Lost to
Improper Payments Each Year? hearing, 108th Cong., 1st sess., May 13, 2003, (Washington: GPO,
2003); and Show Me the Tax Dollars Part II — Improper Payments and the Tenncare Program,
July 14, 2003, (Washington: GPO, 2003). Subcommittee on Government Management, Finance,
and Accountability, Implementing the Improper Payment Information Act - Are We Making
Progress? 109th Cong., 1st sess., July 20, 2005, at [http://reform.house.gov/GMFA/Hearings/
EventSingle.aspx?EventID=30182]; and The Improper Payments Information Act — Are
Agencies Meeting the Requirements of the Law? Apr. 5, 2006.
19 U.S. Congress, Senate Subcommittee on Federal Financial Management, Government
Information, and International Security, Improper Payments: Where Are Truth and Transparency
in Federal Financial Reporting? hearing, 109th Cong., 1st sess., July 12, 2005, (Washington:
GPO, 2005); and Reporting Improper Payments: A Report Card on Agencies’ Progress, hearing,
M a r . 9 , 2 0 0 6 , a t [ h t t p : / / h s g a c . s e n a t e . g o v / i n d e x . c f m ? F u s e a c t i o n =
Hearings.Detail&HearingID=329]; and An Assessment of the Improper Payments Information
Act of 2002, hearing, Dec. 5, 2006.