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June 29, 1999

Chairman Horn, Congressman Turner, and Members of the Subcommittee, I am pleased to be here today to discuss the Administration's views on H.R. 1827, "The Government Waste Corrections Act of 1999." This bill would require that agencies use the technique of recovery auditing to identify and collect overpayment to vendors and contractors.


At the outset, let me state that we strongly share the Committee's desire to eliminate our overpayments to the providers of goods and services purchased for the Federal Government. Overpayments detract from agencies ability to carry out their missions by diverting resources from their intended uses.


Our goal is to make all payments correctly and on time. When we pay correctly and on time, we prevent errors and eliminate the need and expense of 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.


The Administration 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 Five-Year Plan" which will be transmitted to Congress soon.


Ongoing Activities

Significant initiatives are underway to ensure that we pay correctly and on time.


Agencies are installing modern electronic payment systems. These systems automate document matching, reduce the errors associated with paper payment systems and free up valuable staff time for other workload priorities. Modern payment systems provide automated checks and edits to prevent the occurrence of duplicate payments, pricing errors, and missed cash discounts, rebates or other allowances.


Federal agencies are increasing their purchase card use for Government purchases below $2,500. In 1999, government purchases through the use of the purchase card have reached 60 percent and are expected to increase to over 80 percent of all purchases below $2,500 in 2000. This means that we are effectively streamlining our payment process for most small purchases.


OMB in close consultation with Treasury and the major payment agencies is revising the OMB Prompt Payment Circular (A-125) to facilitate electronic payments and to implement the requirements of the Debt Collection Improvement Act such as the requirement that agencies collect the Tax Identification Number (TIN) which is useful for matching vendors against our delinquent debtor files.


Specific action we have underway in audit recovery include the following:


(1) The National Defense Authorization Act of 1998 required the Secretary of Defense to conduct a demonstration program to evaluate the use of recovery auditing. Based on the pilot study, about four tenths of one percent of the payments sampled were incorrect. According to industry experts, the private sector runs an error rate of about one tenth of one percent. So far of the over $25 million identified $2.6 million has been collected excluding the cost of the contractor's fees. OMB will monitor this pilot in order to better gauge the cost-effectiveness of recovery auditing.


(2) Several of the major payment agencies are ready to acquire recovery auditing services. In March of 1998, the General Services Administration (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. These contracts are priced on a contingency basis B that is, firms are only paid when money is recovered. The commission is 20 percent (as opposed to the 25 percent cap proposed in H.R. 1827). Contracts are in place at the U.S. Transportation Command and the Department of Veterans Affairs.


As you can see, significant efforts are underway to ensure that we make the right payment on time.


Specific Issues with H.R. 1827

H.R. 1827 includes some promising provisions on paying for audit recovery services out of proceeds, gainsharing for financing management improvement, and rewarding employee performance. While we support the aims of these provisions, these concepts need additional refinement.


We also have several issues regarding H.R. 1827 that we would like to highlight today, specifically:


-- The bill requires that agencies conduct recovery audits for payment activities that expend $10 million or more annually. Considering that the private sector recovery standard is $1 million for every $1 billion audited, a threshold of $10 million would result in gross collections of $10,000 dollars. Because of the work that is already done to certify accurate payments as well as the additional cost of setting up the program and the cost of the audit, recovery audits may not be cost-effective at a low threshold.


-- The term "payment activity" in H.R. 1827 may be read to include benefit and entitlement payments. Most major benefit and entitlement programs already have statutory provisions for identifying and recovering overpayments which may be inconsistent with the requirements of H.R. 1827. For example, the Medicare program currently contracts with entities to identify and collect overpayments made from the Medicare Trust Fund. These overpayments are returned to the Trust Fund to ensure that Medicare can continue to pay for services provided to beneficiaries. Our contractors are already paid to perform this function, and thus should not receive an additional payment for doing this work.

-- 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.


Mr. Chairman and Members of the Subcommittee, as I hope you can see, the Administration is committed to making the right payment on time. We will continue our efforts to be diligent in authorizing payments correctly up front, improving our financial management, and exploring the use of recovery audits.


We will continue to review the bill and welcome the opportunity to work with you in further exploring the most effective means of using recovery audits. This concludes my prepared remarks. I would be pleased to answer any question you or any Member of the Subcommittee might have.