Improper payments

What Are Improper Payments?

Improper payments refer to any disbursement of funds that should not have been made or that was made in an incorrect amount under statutory, contractual, administrative, or other legally applicable requirements. This broad category in government finance encompasses a range of errors, from payments to ineligible recipients or for ineligible goods and services to duplicate payments, payments for services not received, or those that fail to account for applicable discounts. The issue of improper payments is a significant concern for public entities, as it directly impacts taxpayer money and the efficient allocation of public funds.

History and Origin

The concept of addressing improper payments within the U.S. federal government gained formal legislative attention in the early 2000s. A series of laws were enacted to identify, measure, and reduce these erroneous expenditures. The Improper Payments Information Act (IPIA) of 2002 established an initial framework for agencies to review programs and estimate improper payments. This was followed by the Improper Payments Elimination and Recovery Act (IPERA) of 2010, which expanded requirements, and the Improper Payments Elimination and Recovery Improvement Act (IPERIA) of 2012, which further refined the scope and reporting. These earlier statutes were later consolidated and replaced by the Payment Integrity Information Act of 2019 (PIIA)¹², ¹³. The PIIA aimed to create a more coherent and comprehensive legislative framework to mitigate the risk of improper payments and enhance accountability among federal agencies¹¹.

Key Takeaways

• Improper payments are disbursements made incorrectly or to the wrong party, including overpayments and underpayments.
• They represent a significant challenge in financial management for governmental and large organizations.
• U.S. federal agencies have reported cumulative improper payment estimates totaling approximately $2.7 trillion since fiscal year 2003, highlighting the scale of the problem.¹⁰
• Legislation like the Payment Integrity Information Act of 2019 (PIIA) mandates agencies to identify, estimate, and report on improper payments and implement corrective actions.
• Effective internal controls and ongoing auditing are crucial for prevention and detection.

Interpreting Improper Payments

Interpreting improper payments involves understanding their causes and implications. These payments are not necessarily indicative of fraud; they often result from administrative errors, insufficient documentation, or complex program rules. The U.S. Government Accountability Office (GAO) annually reports on improper payment estimates across federal programs, identifying high-risk areas. For example, in fiscal year 2023, six programs—Medicare, Medicaid, Unemployment Insurance, Paycheck Protection Program, Earned Income Tax Credit, and Supplemental Security Income—accounted for a significant portion of the total improper payments. Un⁹derstanding the root causes, such as data matching issues or beneficiary eligibility errors, is critical for developing effective corrective action plans and improving program efficiency. This analysis forms a core part of performance measurement for government agencies.

Hypothetical Example

Consider a hypothetical state agency, the Department of Social Services (DSS), which administers welfare benefits. A common improper payment scenario might involve an individual receiving benefits despite no longer meeting eligibility criteria due to an unreported increase in income.

Scenario: Sarah, a recipient of DSS benefits, gets a new job that pushes her income above the program's threshold. She is required to report this change within 30 days but fails to do so. For three months, DSS continues to send her benefit payments of $500 per month, totaling $1,500.

Analysis:

1. Detection: An annual review of recipient eligibility, or a data match with state employment records, eventually flags Sarah's unreported income.
2. Identification: DSS confirms that Sarah was ineligible for the three months she received payments. The $1,500 disbursed during this period constitutes an improper payment.
3. Action: DSS initiates a process to recover the $1,500 overpayment. This process involves notifying Sarah, arranging a repayment plan, or deducting the amount from future eligible benefits if she becomes eligible again.

This example illustrates how a lack of timely information and breakdowns in verification processes can lead to improper payments, highlighting the importance of robust program management.

Practical Applications

Improper payments are a critical focus in various sectors, particularly within government and large organizational financial reporting. Their identification and reduction are central to ensuring the integrity of financial systems and prudent use of resources.

• Government Agencies: Federal, state, and local governments actively work to reduce improper payments in programs like social security, healthcare, and unemployment benefits. The U.S. Office of Management and Budget (OMB) provides guidance, such as OMB Circular A-123, Appendix C, which outlines requirements for federal agencies to identify risks, estimate improper payments, and implement preventative measures.
• ⁷, ⁸ Auditing and Compliance: Compliance officers and auditors utilize forensic analysis and data analytics to detect patterns indicative of improper payments. This often involves cross-referencing databases, verifying recipient eligibility, and scrutinizing documentation.
• Risk Management: Organizations, especially those handling significant financial flows, integrate the prevention of improper payments into their broader risk management frameworks. This proactive approach aims to design systems that minimize errors from the outset.
• Contract Management: In large-scale procurement, ensuring proper payments to contractors is vital. This involves rigorous contract clauses, invoice verification, and the use of recovery audits to recoup any overpayments. A KPMG analysis of the Payment Integrity Information Act of 2019 emphasizes that the legislation aims to encourage collaboration and transparency between OMB and federal agencies to mitigate the risk of improper payments.

#⁶# Limitations and Criticisms

While the effort to reduce improper payments is crucial for fiscal responsibility, several limitations and criticisms exist. One challenge is the inherent complexity of large government programs, which makes eliminating all improper payments nearly impossible. So⁵me critics argue that the sheer volume and intricacy of regulations can inadvertently contribute to errors. Additionally, agencies sometimes face technical challenges in accessing or analyzing information necessary to prevent or identify improper payments effectively.

A⁴nother point of contention is the difficulty in balancing strict payment integrity controls with timely service delivery, especially for critical social programs. Overly burdensome controls might deter eligible beneficiaries from receiving the funds they are entitled to, or delay essential support. The definition of "improper" itself can sometimes be ambiguous, particularly in cases of insufficient documentation where the propriety of a payment cannot be definitively determined. Th³ese "unknown payments" add to the complexity of accurate reporting and remediation. Addressing improper payments requires a continuous effort to refine processes, improve data quality, and strike a balance between control and operational efficiency.

Improper Payments vs. Fraud

While often discussed together, improper payments and fraud are distinct concepts in financial oversight.

Improper payments include a wide range of errors, only a subset of which may involve fraud. For instance, a payment made to an ineligible recipient because of an administrative oversight is an improper payment, but only becomes fraud if the recipient actively and knowingly misrepresented their eligibility. Both contribute to waste, fraud, and abuse, but fraud specifically implies criminal intent.

FAQs

What are the main types of improper payments?

Improper payments include overpayments (too much paid), underpayments (too little paid), payments to ineligible recipients, payments for ineligible goods or services, duplicate payments, and payments for goods or services not received. They also include payments where documentation is insufficient to determine if the payment was proper.

##²# Why are improper payments a concern?

They represent a significant loss of federal funds and taxpayer money, eroding public trust in government efficiency and potentially diverting resources from intended purposes. Large-scale improper payments can also indicate weaknesses in an organization's financial controls and management systems.

Who is responsible for reducing improper payments in the U.S. federal government?

Federal agencies are primarily responsible for identifying, estimating, and reporting improper payments within their programs and implementing corrective actions. The Office of Management and Budget (OMB) provides guidance and oversight, while the Government Accountability Office (GAO) conducts audits and provides recommendations for improvement.

##¹# Can improper payments be fully eliminated?

While complete elimination is challenging given the scale and complexity of federal programs, the goal is to significantly reduce them through continuous improvement of internal controls, data analytics, and robust oversight. The focus is on preventing improper payments from occurring in the outset and recovering those that do.