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From fiscal years 2008 through 2011, the typical participant in the IL track was a male Vietnam-era veteran. Of the 9,215 veterans who entered the IL track in these years, most (67 percent) were male and 50 years old or older. Most women in the IL track were in their 40s or 50s. Most of the 9,215 IL track veterans served in the Vietnam War; relatively few served in the Global War on Terrorism as part of Operation Enduring Freedom or Operation Iraqi Freedom.veterans served in the U.S. Army, and less than 1 percent served in the National Guard or Reserves. More than three-quarters of IL track veterans had a combined service-connected disability rating of at least 60 In addition, most (60 percent) IL track percent, and 34 percent had a disability rating of 100 percent. Regardless of disability rating level, the most prevalent disabilities among this group were post-traumatic stress disorder (PTSD), tinnitus ("ringing in the ears"), and hearing loss. Furthermore, our review of the case files of 182 randomly selected IL track veterans in fiscal year 2008 shows that they were provided a wide range of goods and services, from individual counseling and the installation of ramps to a boat, camping gear, and computers. The most common type of goods or services were related to counseling, education and training, and computer and camera equipment. For all veterans who entered the IL track in fiscal year 2008, we estimated that VR&E purchased a total of almost $14 million in goods and services. The average spent per IL track case that year was nearly $6,000. We found that most (about 89 percent) of IL track veterans who began only one plan during fiscal year 2008 were classified by VR&E as "rehabilitated"--i.e., successfully reaching and maintaining the goals identified in their IL plan--by the end of fiscal year 2011. At the same time, about 11 percent of cases were either "discontinued"--i.e., closed by VR&E because the rehabilitation goals in the veteran's IL plan were not completed--or were still active cases. Of the IL cases that had been discontinued, the reasons included the veteran declining benefits, not responding to VA's attempts to contact them, worsening medical conditions, and death. We also found that some IL plans were easier to close as rehabilitated than others, due to the varied nature and complexity of IL plans, which are based on veterans' individual disabilities and needs. For example, one IL plan we reviewed for a veteran with rheumatoid arthritis only called for the purchase and installation of eight door levers and a grab rail for the bathtub to facilitate his independence. However, another IL plan we reviewed called for providing a veteran who used a wheel-chair with medical, dental, and vision care as needed, and about $24,000 in modifications to the veteran's home, including modifying the veteran's bathroom, widening doors and modifying thresholds, and installing an emergency exit ramp in a bedroom. While the overall IL rehabilitation rate nationwide was 89 percent for veterans who started an IL plan in fiscal year 2008, the rate varied by regional office, from 49 to 100 percent. About two-thirds of regional offices rehabilitated 80 percent or more of their 2008 IL track veterans by the end of fiscal year 2011. In addition, VR&E's IL rehabilitation rate was higher in regional offices with larger IL caseloads. Among veterans who entered the IL track in fiscal year 2008, an average of 90 percent were rehabilitated at offices with more than 25 IL entrants, compared to an average of 79 percent at offices with 25 or fewer IL entrants. Furthermore, in fiscal year 2008 IL veterans nationwide completed their IL plans in an average of 384 days (about 13 months); however, we found that the length of time to rehabilitate these veterans varied by regional office from a low of 150 days at the St. Paul Regional Office to a high of At most regional offices (49 895 days at the Roanoke Regional Office. of 53), however, the average number of days to complete veterans' IL plans ranged from 226 to 621 days (8 to 21 months). To control for various factors that could influence rehabilitation time frames, we used a statistical model to estimate the amount of time it would take certain groups of IL track veterans to complete their IL plans.model show differences across regional offices in the amount of time it takes for veterans to become rehabilitated based on caseload. More specifically, the chance of rehabilitation within 2 years was less than 50 percent at 4 offices, between 50 and 90 percent at 18 offices, and 90 The results of our percent or higher at 16 offices. Veterans served by regional offices with large IL caseloads generally had a higher probability of completing an IL plan more quickly than a veteran served by an office with a small IL caseload (see fig 1). We identified four key areas where VR&E's oversight of the IL track was limited: (1) ensuring compliance with case management requirements, (2) monitoring regional variation in IL track caseload and benefits provided, (3) adequacy of policies and procedures for approving expenditures on goods and services for IL track veterans, and (4) availability of critical program management information. Certain VR&E case management requirements were not being met by some regional offices. For example, based on our review of VR&E's site visit monitoring reports, we found that some Vocational Rehabilitation Counselors (VRCs) were not fulfilling VR&E's requirement to meet in- person each month with IL track veterans to monitor progress in completing their IL plans. VRCs told us that this requirement is a challenge due to the size of their caseloads and the distances that they may have to travel to meet with veterans. Furthermore, while VR&E and the Veterans Health Administration (VHA) both have policies that require them to coordinate on the provision of goods and services for IL track veterans, we found that some VRCs experience challenges in doing so. Several VRCs in the regions we interviewed indicated that when they refer IL track cases to VHA physicians, the physicians do not respond or they respond too late. As a result, services for IL track veterans are delayed or purchased by VR&E instead of VHA. In our review of 182 IL track case records, we found some instances where VR&E purchased goods and services that appear to be medically related, such as ramps and grab bars, which could have been provided by VHA. In response, we recommended VA explore options for enhancing coordination to ensure IL track veterans' needs are met by VHA, when appropriate, in a timely manner. VA concurred and stated that it was piloting an automated referral system that would allow VR&E staff to make referrals to VHA providers and check on their status electronically. VR&E does not systematically monitor variation in IL track caseload size and benefits across its regional offices. We found that the total IL track caseload for fiscal years 2008 through 2011 ranged from over 900 cases in the Montgomery, Alabama Regional Office to 4 cases in the Wilmington, Delaware Regional Office. In addition, we found that some regions developed IL plans that addressed a broad range of needs while others elected to develop more focused plans that provided fewer benefits to achieve VR&E's rehabilitation goal. VR&E has relied on the information provided through its general quality assurance (QA) activities and a series of periodic ad hoc studies to oversee the administration of the IL track. Because these activities are limited in scope, frequency, and how the information is used, we noted that they may not ensure consistent administration of the IL track across regions. In response, VR&E officials commented that QA results are analyzed to determine trends, and make decisions about training content and frequency. VR&E's current policy for approving IL track expenditures may not be adequate, considering the broad discretion VR&E provides to regions in determining and purchasing goods and services. While officials told us that VRCs are required to include all cost estimates when they submit veterans' IL plans to be reviewed and approved by the region's VR&E Officer, VR&E's written policy and guidance do not explicitly require this for all IL expenditures. Thus, regional offices have the ability to purchase a broad range of items without any Central Office approval, resulting in some offices purchasing goods and services that may be questionable or costly. (See table 1 for the level of approval required for IL expenditures.) In one case we reviewed, VR&E Central Office approval was not required for the purchase of a boat, motor, trailer, and the boat's shipping cost, among other items, totaling about $17,500. In another case we reviewed, VR&E Central Office was not required to approve total expenditures of $18,829 for a riding lawn mower--which VR&E's current policy prohibits--and other IL goods and services including a bed, bed frame, desktop computer, and woodworking equipment. Without appropriate approval levels, VR&E's IL track may be vulnerable to potential fraud, In our report, we recommended that VA reassess waste, and abuse.and consider enhancing its current policy concerning the required level of approval for IL track expenditures. VA concurred with our recommendation and said it will use the results of an internal study to determine if changes are needed to its existing cost-review policies or procedures. VA stated that any necessary changes should be implemented by March 2014. VR&E's case management system--commonly referred to as --does not collect or report critical program management "CWINRS"information that would help the agency in its oversight responsibilities. More specifically, this system does not collect and maintain information on: Costs of IL goods and service purchased: The system does not collect information on the total amount of funds VR&E expends on IL benefits. VR&E aggregates costs across all its tracks, despite VA's managerial cost accounting policies that require the costs of products and services to be captured for management purposes. Federal financial accounting standards also recommend that costs of programs be measured and reported. According to VA officials, cost information is not collected on the IL track alone because they view the five tracks within VR&E as a single program with the same overarching goal--to help veterans achieve their employment goals. We previously reported on this issue in 2009. At that time, we found that VR&E's five tracks do not share the same overarching goal. Therefore, we concluded that VR&E should not combine track information. Types of IL benefits provided: The system does not collect information on the types of IL benefits provided to veterans in a standardized manner that can be easily aggregated and analyzed for oversight purposes. In several of the IL track cases we reviewed, the goods and services purchased were grouped together under a general description, such as "IL equipment" or "IL supplies," without any further details. In addition, we found that controls for data entry were not adequate to ensure that all important data were recorded. For example, we estimated that the service provider field was either missing or unclear for one or more services in about 15 percent of all IL cases that began in fiscal year 2008. Number of IL veterans served: The system does not provide VR&E with the information it needs to monitor its statutory entrant cap and program operations. The law allows VR&E to initiate "programs" of independent living services and assistance for no more than a specified number of veterans each year, which, as of 2012, was set at 2,700. In analyzing VR&E's administrative data, we found that VR&E counts the number of IL plans developed annually rather than the number of individual veterans admitted to the track. Because multiple IL plans can be developed for an individual veteran during the same fiscal year, veterans with multiple plans may be counted more than once toward the statutory cap. As a result, VR&E lacks complete information on the number of veterans it is serving through the IL track at any given time--information it could use to better manage staff, workloads, and program resources, and ensure that it can effectively manage its cap. Similar to our report's findings, VR&E's 2012 evaluation of CWINRS has shown that the system limits VR&E's oversight abilities and does not capture all important data elements to support the agency's "evolving business needs."that the new system modifications will enable them to individually track veterans served through the IL track. However, we found that the CWINRS redesign will not enable VR&E to obtain data on IL track expenditures or the types of goods and services provided. At the time of our review, no specific time frames were provided for the CWINRS redesign, but officials noted it could take up to 3 years to obtain funding for this effort. In our report, we recommended that VA implement an oversight approach that enables VR&E to better ensure consistent administration of the IL track across regions. This approach would include ensuring that CWINRS (1) tracks the types of goods and services provided and their costs, (2) accounts for the number of IL track veterans being served, and (3) contains stronger data entry controls. VA concurred with our recommendation and stated that discussions of system enhancements and the development of ad hoc reports are ongoing. The agency also will be considering a new oversight approach as part of an internal study. Officials told us that they plan to modify CWINRS, and In conclusion, strengthening oversight of VR&E's IL track is imperative given the wide range of goods and services that can be provided under the law to help veterans with service-connected disabilities improve their ability to live independently when employment is not feasible. More attention at the national level can help ensure that IL track case management requirements are met, the track is administered consistently across regions, expenditures for goods and services are appropriate, and critical information is collected and used to ensure veterans' IL needs are sufficiently addressed. Chairman Flores, Ranking Member Takano, and Members of the Subcommittee, this concludes my prepared remarks. I would be happy to answer any questions that you or other members of the subcommittee may have. For further information regarding this testimony, please contact Daniel Bertoni at (202) 512-7215, or at [email protected]. Contact points for our Office of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals who made key contributions to this testimony include Clarita Mrena (Assistant Director), James Bennett, David Chrisinger, David Forgosh, Mitch Karpman, Sheila McCoy, James Rebbe, Martin Scire, Ryan Siegel, Almeta Spencer, Jeff Tessin, Jack Warner, and Ashanta Williams. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Of the 9,215 veterans who entered the Department of Veterans Affairs' (VA) Independent Living (IL) track within the Vocational Rehabilitation and Employment (VR&E) program from fiscal years 2008 to 2011, most were male Vietnam era veterans in their 50s or 60s. The most prevalent disabilities among these veterans were post-traumatic stress disorder and tinnitus ("ringing in the ears"). GAO's review of 182 IL cases from fiscal year 2008 shows that VR&E provided a range of IL benefits to veterans; the most common benefits being counseling services and computers. Less common benefits included gym memberships, camping equipment, and a boat. GAO estimates that VR&E spent nearly $14 million on benefits for veterans entering the IL track in fiscal year 2008--an average of almost $6,000 per IL veteran. About 89 percent of fiscal year 2008 IL veterans were considered by VR&E to be "rehabilitated" by the end of fiscal year 2011; that is, generally, to have completed their IL plans. These plans identify each veteran's independent living goals and the benefits VR&E will provide. The remaining 11 percent of cases were either closed for various reasons, such as the veteran declined benefits, or were still active. Rehabilitation rates across regions varied from 49 to 100 percent, and regions with larger IL caseloads generally rehabilitated a greater percentage of IL veterans. On average, IL plans nationwide were completed in 384 days; however, completion times varied by region, from 150 to 895 days. GAO identified four key areas where VR&E's oversight was limited. First, some regions may not be complying with certain case management requirements. For instance, while VR&E is required to coordinate with the Veterans Health Administration (VHA) on IL benefits, VR&E counselors have difficulty obtaining timely responses from VHA. This has resulted in delayed benefits or VR&E providing the benefits instead of VHA. Second, VR&E does not systematically monitor regional variation in IL caseloads and benefits provided. Instead, it has relied on its quality assurance reviews and ad hoc studies, but these are limited in scope. Third, VR&E's policies for approving IL expenditures may not be appropriate as regions were permitted to purchase a range of items without Central Office approval, some of which were costly or questionable. In one case GAO reviewed, Central Office review was not required for expenditures of $17,500 for a boat, motor, trailer, and the boat's shipping, among other items. Finally, VR&E's case management system does not collect information on IL costs and the types of benefits purchased. VR&E also lacks accurate data on the number of IL veterans served. While the law currently allows up to 2,700 veterans to enter the IL track annually, data used to monitor the cap are based on the number of IL plans developed, not on the number of individual veterans admitted. Since veterans can have more than one IL plan in a fiscal year, one veteran could be counted multiple times towards the cap. VA plans to make modifications to its case management system to address this, but officials noted that it could take up to 3 years to obtain funding for this project. The IL track--one of five tracks within VA's VR&E program--provides a range of non-employment related benefits to help veterans with service-connected disabilities live more independently when employment is not considered feasible at the time they enter the VR&E program. These benefits can include counseling, assistive devices, and other services or equipment. This testimony is based on GAO's report issued in June 2013, and describes (1) the characteristics of veterans in the IL track, and the types and costs of benefits provided; (2) the extent to which their IL plans were completed, and the time it took to complete them; and (3) the extent to which the IL track has been administered appropriately and consistently across regional offices. GAO analyzed VA administrative data from fiscal years 2008 to 2011, and reviewed a random, generalizable sample of 182 veterans who entered the IL track in fiscal year 2008. In addition, GAO visited five VA regional offices; interviewed agency officials and staff; and reviewed relevant federal laws, regulations, and agency policies, procedures, studies, and other documentation. In its June 2013 report, GAO recommended that VR&E explore options to enhance coordination with VHA, strengthen its oversight of the IL track, and reassess its policy for approving benefits. VA agreed with these recommendations.

In 1995, we reported on management and technical weaknesses with IRS' tax systems modernization that jeopardized its successful completion and made over a dozen recommendations to correct the weaknesses. Because of the seriousness of the weaknesses, we placed the modernization on our 1995 list of high-risk federal programs. In June 1996, we reported that IRS had made progress in implementing our recommendations. However, to minimize the risk of IRS investing in systems before the recommendations were fully implemented, we suggested that the Congress limit IRS' information technology (IT) spending to certain cost-effective categories. These spending categories were those that (1) support ongoing operations and maintenance, (2) correct pervasive management and technical weaknesses, such as a lack of requisite systems life cycle discipline, (3) are small, represent low technical risk, and can be delivered in a relatively short time frame, or (4) involve deploying already developed systems that have been fully tested, are not premature given the lack of a complete systems architecture, and produce a proven, verifiable business value. The act providing IRS' fiscal year 1997 appropriations limited IRS' IT spending to efforts consistent with these categories. In 1997, we again included the modernization on our high-risk list because IRS had not yet implemented our recommendations. However, we also reported that IRS had made progress on the recommendations. For example, in May 1997, IRS issued its modernization blueprint. This blueprint consisted of four principal components: (1) a systems life cycle, (2) business requirements, (3) functional and technical architectures, and (4) a sequencing plan. We briefed IRS appropriations and authorizing committees on the results of our assessment of IRS' Modernization Blueprint in September 1997. In those briefings and in a subsequent report, we concluded that the Modernization Blueprint was a good first step that provided a solid foundation from which to define the level of detail and precision needed to effectively and efficiently build a modernized system of interrelated systems. However, we also noted that the blueprint was not yet complete and did not provide enough detail for building and acquiring new systems. As a result, IRS' fiscal year 1998 appropriations act again limited IRS' fiscal year spending to efforts that were consistent with the aforementioned spending categories. The act providing IRS' fiscal year 1999 appropriations continued these spending limitations. In its fiscal year 1998 and 1999 budget requests, IRS requested over $1 billion for its ITIA account, and the Congress provided $506 million for the account. Specifically, it appropriated $325 million in fiscal year 1998, $30 million of which was rescinded in May 1998 for urgent Year 2000 requirements. The Congress also provided $211 million in fiscal year 1999. In providing these sums, the Congress limited IRS' ability to obligate them until IRS and the Treasury submitted to the Congress for approval an expenditure plan that, as stated in the law, (1) implements the IRS Modernization Blueprint, (2) meets OMB investment guidelines, (3) is reviewed and approved by IRS' Investment Review Board, OMB, and Treasury's IRS Management Board and is reviewed by GAO, (4) meets requirements of IRS' life cycle program, and (5) is in compliance with acquisition rules, requirements, guidelines, and systems acquisition management practices of the federal government. IRS is not requesting any ITIA funds for fiscal year 2000 but is asking for $325 million for fiscal year 2001. In our April 1999 testimony, we reported this request was not adequately justified and suggested that the Congress not provide the funds until IRS provided the support. In December 1998, IRS awarded its Prime Systems Integration Services (PRIME) contract for systems modernization. According to IRS, it planned to "partner" with the PRIME contractor, among other things, to (1) complete the modernization blueprint, as we recommended, and (2) account for changes in systems requirements and priorities caused by IRS' organizational restructuring, new technology, and IRS Restructuring and Reform Act of 1998 requirements. In addition, IRS stated that it planned to establish disciplined life cycle management processes and structures and mature software development and acquisition capabilities before it begins building modernized systems. Because of the modernization's high cost and importance, we continued in 1999 to categorize it as a high-risk federal program. To comply with its statutory mandate to submit an expenditure plan to the Congress before obligating ITIA funds, IRS has developed a strategy where, in lieu of a single plan, it intends to develop and provide to the Congress a series of expenditure plans over the life of the modernization. This expenditure plan strategy is a by-product of the Commissioner's overall approach to the modernization, which is to incrementally invest in modernized systems in accordance with (1) rigorous systems and software life cycle management processes and (2) a revised sequencing plan for migrating from IRS' legacy systems and master file environment to the target systems and relational database environment specified in the blueprint. The initial plan requests $35 million for IRS modernization initiatives to be delivered by October 31, 1999. This plan proposes three categories of modernization investments that IRS calls (1) supporting business goals, (2) building management capability, and (3) planning a modern infrastructure, and is requesting for each category $17 million, $11.6 million, and $6.5 million, respectively. The supporting business goals initiatives include the early phases of selected systems development efforts that are intended to improve taxpayer service by the year 2001 tax filing season. The building management capability initiatives provide for defining and beginning the institutionalization of mature modernization management and systems engineering processes that are to permit effective blueprint implementation. The planning modern infrastructure initiatives refer to the first steps in establishing the technology foundation (e.g., networks, operating platforms, system security, etc.) upon which to build, interconnect, and operate modernized system applications. IRS' stated intention is to submit to the Congress a series of expenditure plans in the future, the next being in October 1999. According to IRS, the October 1999 plan will define follow-on modernization initiatives, deliverables, and funding requirements into the year 2000. Leading public and private sector organizations use an incremental approach to investing in systems modernization efforts. In addition, the Clinger-Cohen Act and OMB policy endorse this approach to funding large system development investments. Using this approach, organizations take large, complex modernization efforts and break them into projects that are narrow in scope and brief in duration. This enables organizations to determine whether a project delivers promised benefits within cost and risk limitations and allows them to correct problems before significant dollars are expended, which in turn mitigates the risk of program failure. IRS' initial expenditure plan is an appropriate first step to successful systems modernization and, with regard to the $35 million being requested for this increment, satisfies the conditions that the Congress placed on the use of ITIA funds. The key to IRS' success is now to effectively implement the initiatives described in its initial expenditure plan and fulfill its commitment to incrementally request and expend future modernization funds. IRS' initial expenditure plan lays the foundation for blueprint implementation on an incremental basis and begins the implementation process for selected modernization initiatives. For example, the expenditure plan only requests funds to establish and selectively implement an Enterprise Life Cycle (ELC). This ELC is to provide IRS with a disciplined and institutional approach for managing its IT investments throughout their life cycle--from conception, development, and deployment through maintenance and operation. This ELC is to be an adaptation of the PRIME contractor's commercially available and proven systems life cycle management approach and associated automated tools, incorporating IRS- unique needs such as key investment decision points. Once in place at IRS, the service plans to begin implementing the ELC on its ongoing modernization initiatives. According to IRS, future expenditure plans will provide for ELC implementation on all future project initiatives. As another example, the initial expenditure plan requests funds to add missing system architecture precision and detail to selected system initiatives. In our February 1998 report, we concluded that while the architecture in IRS' May 15, 1997, blueprint provided a solid foundation from which to build a complete architecture, it did not provide sufficient detail and precision for building or acquiring new systems. For example, the architecture did not allocate business requirements to specific configuration items (i.e., actual hardware and software components). As part of its initial expenditure plan, however, IRS plans to validate existing business requirements and develop preliminary hardware and software design specifications for IRS' ongoing projects. Additionally, IRS intends for future expenditure plans to incrementally provide for architectural specificity for future system initiatives. The initial expenditure plan also requests funds for IRS to perform business system planning, which is to result in a revised modernization sequencing plan by October 31, 1999. This initiative is necessary because the May 15, 1997, blueprint sequencing plan does not recognize, for example, the need to introduce electronic tax administration technologies and capabilities early in the modernization to respond to the electronic filing requirements in the IRS Restructuring and Reform Act of 1998. This revised sequencing plan is to define the general timing, costs, and benefits of future modernization projects, and is to be incrementally updated in future expenditure plans with more specific cost and benefit information as projects are initiated and business case justifications are developed. If properly implemented, the ELC that IRS' initial expenditure plan is to establish and selectively implement, should meet OMB information system investment guidelines. These guidelines call for agencies to adopt a data- driven, analytically based approach to selecting, controlling, and evaluating investments in information technology. The overriding objective is to ensure that investment decisions are made in a disciplined and rigorous manner on the basis of established criteria, such as return-on-investment and architectural compliance, and that system investments be broken into a series of increments. Consistent with these guidelines, IRS' ELC is to include processes for identifying alternative solutions, calculating their projected returns-on-investment, and requiring that selected solutions be architecturally compliant. Through its ELC, IRS also plans to require that systems be acquired and implemented in phased segments that are narrow in scope and brief in duration. According to IRS, system initiatives in future expenditure plans will be conducted in accordance with the ELC. IRS' blueprint included a high-level system life cycle framework that could be used to define a disciplined set of processes for managing modernization investments. In lieu of using the system life cycle overview contained in the blueprint as the framework for developing life cycle management processes, IRS' initial expenditure plan provides for establishing the aforementioned ELC. IRS decided to do this because it concluded that adapting the PRIME contractor's commercially available methodology to meet its needs would be less costly and faster than completing its own unique system life cycle contained in its May 15, 1997, blueprint. IRS officials also stated that the PRIME contractor's methodology offered more capability than the blueprint system life cycle overview, such as processes for managing business process reengineering. We reviewed the PRIME contractor's commercially available methodology, and found that it both meets the requirements specified in the blueprint's system life cycle overview and is consistent with the approaches that successful private and public sector organizations use to manage large IT investments. If implemented correctly, it should provide IRS with effective processes and tools for, among other things, planning, controlling, developing, and deploying information systems based on defined activities, events, milestones, reviews, and products. As described above, the initial expenditure plan provides for implementing the ELC on ongoing projects, and, according to IRS officials, future expenditure plans will provide for implementing it on follow-on projects. IRS' Core Business Systems Executive Steering Committee, which replaced IRS' Investment Review Board, approved the $35 million expenditure plan on April 20, 1999. Treasury's IRS Management Board and OMB approved the plan on June 9, 1999, and June 10, 1999, respectively. On May 13, 1999, IRS provided us with a copy of its initial expenditure plan it submitted to the Congress, and the results of our review are contained in this report. As described in its expenditure plan, IRS plans to establish, through its ELC, the life cycle management processes and practices for acquiring modernized systems. If implemented effectively, these processes should meet federal acquisition rules and management practices. According to federal acquisition laws, rules, and regulations, agencies should, among other things, use disciplined, decision-making processes for planning, managing, and controlling the acquisition of IT. By doing so, agencies mitigate the risks of acquiring systems that are not delivered on time and on budget and do not work as intended. IRS' expenditure plan requests funds to continue IRS' efforts to strengthen its capability to effectively manage its contractors. For example, as part of its building management capability initiatives, IRS plans to implement mature software/systems acquisition management practices within the IRS organization responsible for managing the PRIME contractor and other modernization contractors. IRS intends to build the capability in accordance with the Software Engineering Institute's (SEI) software/system acquisition capability maturity model requirements, and plans to have this capability in place by October 31, 1999. Among these maturity models' requirements are disciplined and rigorous processes and approaches for measuring and tracking progress of contracts and acting to correct problems quickly, which will be a key to IRS' ability to effectively manage the PRIME contractor and successfully modernize. In 1995, we first made recommendations to correct serious and pervasive modernization management and technical weaknesses. Since then, IRS has taken actions to address our recommendations. We have monitored these actions and have made follow-up recommendations that recognize IRS' progress and define the residual steps that IRS needs to take to ensure that it is ready and capable to effectively modernize its systems. Currently, our open recommendations fall into three categories: (1) completing the modernization blueprint, (2) developing the management and engineering capability to effectively modernize systems, and (3) until the first two recommendations are implemented, limiting modernization spending to certain small, cost-effective, low-risk efforts. IRS' initial expenditure plan is consistent with these recommendations. Specifically, of the $35.1 million being requested, IRS plans to use approximately $14.6 million for initiatives relating to completing the blueprint. For example, IRS plans to develop a 5-year "core business systems" modernization strategy that leverages new IT and recognizes IRS' recent organizational restructuring and business process reengineering efforts prompted by the IRS Restructuring and Reform Act of 1998. The result is intended to be a revised, business risk-based sequencing plan that defines the general timing, cost, and benefits of new modernization projects over the next 3 to 5 years. In addition, IRS plans to spend about $11.6 million to develop the management and engineering capability to build and implement modernized systems. Specifically, IRS has designated about $2.2 million for PRIME and other contractor support to help IRS implement mature program management practices that are to (1) strengthen IRS' ability to manage and control modernization initiatives and (2) ready IRS for an evaluation by SEI against relevant software/system acquisition capability maturity model requirements. IRS has earmarked $9.4 million for defining, documenting, and implementing its ELC, including training staff in its use, on ongoing modernization projects. Last, IRS plans to spend the remaining $8.9 million on selected relatively small, low-risk efforts. For example, IRS is seeking $5.1 million to, among other things, validate system requirements and update cost-effectiveness (i.e., business case) justifications for two ongoing projects intended to provide near-term customer service improvements via better routing of taxpayers telephone inquiries. In addition, IRS seeks to spend $3.2 million on defining the network and platform technology infrastructure needed to support the above two customer service initiatives and to provide the foundation for secure future electronic commerce between employees, tax practitioners, and taxpayers. Our review disclosed several additional relevant items concerning IRS' management of the modernization. First, IRS has established a modernization "governance" structure that provides for extensive involvement by IRS' top executives, including the Commissioner. This structure is an effective way to mitigate the risks associated with the various modernization initiatives that IRS has underway and planned. Second, although IRS plans to do so by July 1999, it has yet to adequately define respective systems modernization roles and responsibilities for itself, the PRIME contractor, and other support contractors. Given that IRS' modernization approach provides for an unprecedented "partnership" with its contractors, ensuring that these roles and responsibilities are defined, understood, and enforced is of particular importance. Last, IRS can strengthen its incremental approach to investing in modernized systems by regularly disclosing to the Congress in its planned future expenditure plans IRS' progress against the modernization expectations that it defined in the preceding expenditure plan. IRS has established a governance structure for managing its modernization initiatives and providing its top executives, including the Commissioner, direct and frequent visibility into and control over all initiatives/projects. This organizational structure is headed by the Core Business Systems Executive Steering Committee, which is chaired by IRS' Commissioner and includes Treasury's Assistant Secretary for Management and Chief Financial Officer, IRS' Chief Information Officer, the Chief Operating Officer, key operating division heads, the PRIME contractor, and other key business officials. The Executive Steering Committee meets at least monthly to review modernization progress and direct future work. Under this process, projects are not initiated and do not progress to the next phase without the Steering Committee's approval, thus mitigating the risk of modernization missteps and failures. Effective program/project and contract management requires a clear delineation of the respective roles and responsibilities of the agency management team and the contractors supporting the agency. In the case of IRS and its tax systems modernization program, this is particularly important because IRS' stated intention in its solicitation and award documentation is to "partner" with the PRIME contractor and the supporting contractors. However, the nature of such a "partnership" is not defined in federal acquisition regulations, and thus is an ambiguous concept to implement and requires clear definition by IRS. In its efforts to date, however, IRS has yet to adequately define the respective roles of the service and its contractors. In January 1999, IRS tasked the PRIME contractor with (1) defining the roles and responsibilities of IRS, itself, and the other contractors and (2) explaining the structure and processes for managing the "partnership" between the service and itself. This task was to be completed by April 30, 1999. According to IRS officials, this task was not adequately completed for several reasons. First, the PRIME contractor's tasking was not adequately defined and thus resulted in a deliverable that was too narrow in scope. Second, IRS subsequently became concerned that the PRIME contractor was not sufficiently independent enough to be defining roles and responsibilities for itself and IRS. Last, funding for the PRIME contractor began to run low. Consequently, IRS recently tasked one of its other support contractors to develop a "Concept of Operations document by July 1999 that defines the roles, responsibilities, authorities, structure, and rules of engagement for the PRIME contractor, IRS, and other IRS support contractors." When employing an incremental approach to investing in systems modernization efforts, leading public and private sector organizations track and monitor whether each increment is producing promised benefits and meeting cost and schedule baselines, and report this information to executive decisionmakers. By doing so, these organizations can address variances from expectations incrementally, before significant dollars are expended. This is a proven way to effectively manage investment risks. To effectively employ incremental investment management on its modernization, IRS recognizes that it needs to incrementally measure and track progress and results. Accordingly, its governance structure and its ELC provide for doing so. In particular, its ELC is to incorporate SEI process maturity model requirements that, among other things, define key processes and approaches for measurement, analysis, and verification of activities. However, IRS has yet to define whether its planned future expenditure plans will provide for disclosure of this information. Such disclosure would provide the Congress with the kind of regular and valuable information that is needed to effectively oversee IRS' modernization efforts. IRS' initial expenditure plan lays the foundation for successful systems modernization; satisfies, for this $35 million increment, the conditions that the Congress placed on the use of ITIA funds; and is consistent with our past recommendations. IRS' stated intention is to fully implement this expenditure plan and to submit to the Congress for approval future expenditure plans that incrementally build on this modernization foundation. Such an incremental approach to investing in modernized systems is an effective way to minimize the inherent risk in large, complex, multiyear modernization programs. The next step for IRS is to effectively implement the plan and fulfill its commitment to incrementally request and expend future modernization funds. A key factor in implementing its plans will be IRS' success in establishing mature and disciplined measurement and tracking capabilities so that it can effectively analyze progress against incremental goals, deliverables, and benefit expectations and reliably report this information to congressional decisionmakers. By including this information in future expenditure plans submitted to the Congress, IRS can strengthen modernization management and oversight. Accordingly, we recommend that the Commissioner of Internal Revenue ensure that future expenditure plans fully disclose IRS' progress against incremental goals, deliverables, and benefit expectations and that the expenditure plan that IRS plans to submit in October 1999 fully explain the nature and functioning of IRS' "partnership" with its contractors, including the respective roles and responsibilities of IRS and its contractors. In commenting on a draft of this report, IRS agreed with our findings and recommendations and stated that it would ensure that future expenditure plans would address progress against expectations established in previous requests. IRS also commented on the effectiveness of our evaluation efforts and stated that our timely observations and comments have allowed IRS to move quickly to implement our recommendations. We are sending copies of this report to Senator Ted Stevens, Senator Robert C. Byrd, Senator William V. Roth, Jr., Senator Daniel Patrick Moynihan, Senator Orrin G. Hatch, Senator Max Baucus, Senator Fred Thompson, Senator Joseph I. Lieberman, Representative C.W. Bill Young, Representative David R. Obey, Representative Bill Archer, Representative Charles B. Rangel, Representative Amo Houghton, Representative William J. Coyne, Representative Dan Burton, Representative Henry A. Waxman, Representative Stephen Horn, and Representative Jim Turner in their capacities as Chairmen or Ranking Minority Members of Senate and House Committees and Subcommittees. We are also sending copies to Honorable Charles O. Rossotti, Commissioner of Internal Revenue, Honorable Robert E. Rubin, Secretary of the Treasury, Honorable Lawrence H. Summers, Deputy Secretary of the Treasury, and the Honorable Jacob J. Lew, Director of the Office of Management and Budget. Copies will also be made available to others upon request. If you or your staff have any questions about this report please contact me at (202) 512-6240 or by e-mail at [email protected]. Other key contributors to this report are listed in appendix III. Pursuant to the Department of the Treasury's fiscal year 1998 and 1999 appropriations acts, the Congress limited IRS' ability to obligate ITIA funds until the service and Treasury submitted to the Congress for approval an expenditure plan that per the acts, (1) implements the IRS Modernization Blueprint, (2) meets OMB's investment guidelines for information systems, (3) is reviewed and approved by IRS' Investment Review Board, OMB, and Treasury's IRS Management Board and is reviewed by GAO, (4) meets the requirements of IRS system life cycle management program, and (5) is in compliance with acquisition rules, requirements, guidelines, and system acquisition management practices of the federal government. Accordingly, IRS provided us with the expenditure plan that it submitted to the Congress (i.e., the Senate on May 25, 1999, and the House on June 2, 1999). We reviewed the plan to determine whether (1) the plan satisfied the conditions specified in the acts, (2) the plan was consistent with our past modernization recommendations, and (3) we had any other observations on IRS' systems modernization efforts. To determine whether IRS' expenditure plan satisfied the conditions specified in appropriations acts, we first identified and reviewed the relevant IRS and federal documents referenced in the statutory conditions, such as the Modernization Blueprint, OMB information systems investment guidelines (e.g., Raines Rules), and the Federal Acquisition Regulation. We then documented IRS' completed, ongoing, and planned modernization initiatives. To do this, we reviewed IRS' ITIA Expenditure Plan; Initial Request for Funds; and other supporting documentation, such as the individual initiatives' project plans and descriptions, briefing presentations (e.g., expenditure plan briefing to IRS Management Board), the PRIME contract and associated task orders, and Executive Steering Committee agendas and decision papers proposing courses of action. We also interviewed IRS' Chief Information Officer and other service officials working on the modernization program to gain an understanding of what IRS is doing to satisfy the legislative conditions. This included receiving weekly briefings and reports on how IRS and contractor teams were progressing on ongoing initiatives, such as efforts to improve customer service, build capability to effectively acquire systems, establish a new system development life cycle methodology (i.e., ELC), and define IRS and contractor roles and responsibilities. We also reviewed the business and systems development life cycle methodology that IRS is modifying to develop its ELC and were briefed by IRS and its contractors involved in this effort. We also attended IRS' Executive Steering Committee meetings to observe how IRS top management was directing and controlling the modernization program and to understand IRS' strategic modernization approach and progress. Last, we analyzed each of IRS' modernization initiatives vis-a-vis the statutory conditions to identify any variances or inconsistencies. To determine whether IRS' expenditure plan is consistent with our past recommendations on the tax systems modernization, we extracted from our inventory of open recommendations those pertaining to IRS' modernization and grouped them into the following three categories: (1) completing the Modernization Blueprint, (2) developing the management and engineering capability to effectively modernize systems, and (3) limiting modernization spending to certain small, cost-effective, low-risk efforts until the first two recommendations are implemented. We then compared IRS' efforts on its completed, ongoing, and planned initiatives with the intent of our open recommendations to identify any variances or inconsistencies. To develop other observations on IRS' systems modernization efforts, we analyzed IRS' overall modernization governance structure to determine whether it provided for top management involvement and analyzed contractor deliverables against task order requirements and the December 9, 1998, contract awarded to the PRIME contractor. We also attended Executive Steering Committee meetings to observe how the Commissioner and committee members functioned with respect to established structures and processes, and to understand IRS' plans for submitting future expenditure plans. In addition, we met with and interviewed the Chief Information Officer and IRS officials responsible for the day-to-day management and control of the program and the PRIME contractor, for development of the expenditure plan, and for definition of IRS and contractor roles and responsibilities. We performed our work at IRS headquarters in Washington, D.C., and its facility in Lanham, Maryland, from January 1999 through May 1999 in accordance with generally accepted government auditing standards. In addition to the above contact, Keith Rhodes, Agnes Spruill, Karen Richey, Lorne Dold, Sherrie Russ, Charles Roney, and Frank Maguire made key contributions to this report. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary, VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a legislative requirement, GAO reviewed the Internal Revenue Service's (IRS) initial Information Technology Investments Account (ITIA) expenditure plan, focusing on whether: (1) the plan satisfies the conditions specified in IRS' fiscal year 1998 and 1999 appropriations acts; (2) the plan is consistent with GAO's past recommendations on IRS' systems modernization; and (3) GAO's observations on the modernization efforts. GAO noted that: (1) IRS' initial expenditure plan is the first in a series of incremental expenditure plans that IRS plans to prepare over the life of the modernization; (2) the initial plan specifies IRS' modernization initiatives through October 31, 1999, and it seeks approval to obligate about $35 million to complete these initiatives; (3) such an incremental approach to investing in systems modernization efforts is a recognized best practice that leading public and private sector organizations use to mitigate the risk of program failure on large, complex, multiyear modernization programs; (4) IRS' initial expenditure plan is an appropriate first step toward successful systems modernization and, with regard to the $35 million being requested for this increment, satisfies the conditions that Congress placed on the use of ITIA funds; (5) the plan is consistent with GAO's past recommendations; (6) the initial expenditure plan provides for additional blueprint precision and specificity; (7) it provides for definition of system infrastructure specifications and a revised plan for sequencing the introduction of the new technology needed to achieve the target systems architecture over the next 3 to 5 years; (8) these initiatives are consistent with GAO's past recommendations for completing the blueprint and collectively they represent the first steps needed to satisfy the legislative condition to implement the blueprint; (9) the initial expenditure plan provides for definition and targeted implementation of an Enterprise Life Cycle, which is consistent with GAO's past recommendations for instituting project management rigor, software process maturity, and investment management discipline; (10) if implemented properly, this effort should satisfy the legislative condition for an IRS system life cycle and investment management program that meets the Office of Management and Budget guidelines; (11) building on its initial expenditure plan, IRS plans to define in subsequent expenditure plans the follow-on efforts and funding requirements needed to incrementally: (a) add needed architectural precision and project-specific management discipline; and (b) implement its Enterprise Life Cycle, and its target systems architecture; and (12) if IRS effectively implements the initiatives described in its initial expenditure plan and fulfills its commitment to incrementally request and expend future modernization funds, IRS would be acting in a manner that is consistent with the legislative conditions and GAO's past recommendations.

Within DHS's Immigration and Customs Enforcement (ICE) organization, the Student and Exchange Visitor Program (SEVP) is responsible for certifying schools to accept foreign students in academic and vocational programs and for managing SEVIS. Schools and exchange programs were required to start using SEVIS for new students and exchange visitors beginning February 15, 2003, and for all continuing students and exchange visitors beginning August 1, 2003. The following tables show the number of active students, exchange visitors, and institutions registered in SEVIS as of February 28, 2005. SEVP is also responsible for providing program policies and plans; performing program analysis; and conducting communications, outreach, and training. Regarding SEVIS, SEVP is responsible for identifying and prioritizing system requirements, performing system release management, monitoring system performance, and correcting data errors. The Office of Information Resource Management, also part of ICE, manages the information technology infrastructure (that is, hardware and system software) on which the SEVIS application software is hosted. It also manages the SEVIS Help Desk and the systems life cycle process for the system, including system operations and maintenance. The software for the SEVIS application runs on a system infrastructure that supports multiple DHS Internet-based applications. The infrastructure includes common services, such as application servers, Web servers, database servers, and network connections. SEVIS shares five application servers and two Web servers with two other applications. To assist system users, the SEVIS Help Desk was established, which provides three levels of support, known as tiers: * Tier 1 provides initial end-user troubleshooting and resolution of technical problems. * Tier 2 provides escalation and resolution support for Tier 1, and makes necessary changes to the database (data fixes). * Tier 3 addresses the resolution of policy and procedural issues, and also makes data fixes. SEVP uses a contractor to operate Tiers 1 and 2. Both the contractor and the program office operate Tier 3. According to an SEVP official, contactor staff for Tiers 1 through 3 include the following: Tier 1 has 21 staff, Tier 2 has 6 staff, and Tier 3 has 13 staff. Data are entered into SEVIS through one of two methods: * Real-time interface (i.e., an individual manually enters a single student/exchange visitor record) or * Batch processing (i.e., several student/exchange visitor records are uploaded to SEVIS at one time using vendor-provided software or software created by the school/exchange visitor program). SEVIS collects a variety of data that are used by schools, exchange visitor programs, and DHS and State Department organizations to oversee foreign students, exchange visitors, and the schools and exchange visitor programs themselves. Data collected include information on students, exchange visitors, schools, and exchange visitor programs. For example, biographical information (e.g., student or exchange visitor's name, place and date of birth, and dependents' information), academic information (e.g., student or exchange visitor's status, date of study commencement, degree program, field of study, and institution disciplinary action), school information (e.g., campus address, type of education or degrees offered, and session dates); exchange visitor program information (e.g., status and type of program, responsible program officials, and program duration). SEVIS data are also used by a variety of users. Table 3 provides examples of users and how each uses the data. In 2002 and 2003, when SEVIS first began operating and was first required to be used, significant problems were reported. For example, colleges, universities, and exchange programs could not gain access to the system, and when access was obtained, these users' sessions would "time out" before they could complete their tasks. In June 2004, we reported that several performance indicators showed that SEVIS performance was improving. These indicators included system performance reports, requests for system changes to address problems, and feedback from educational organizations representing school and exchange programs. Each indicator is discussed below. Whether defined system requirements are being met is one indicator of system performance. In June 2004, we reported that performance reports showed that some, but not all, key system requirements were being measured, and that these measured requirements were being met. Table 4 shows examples of key system performance requirements. However, we also reported that not all key performance requirements were being adequately measured. For example, reports used to measure system availability measured the time that the system infrastructure was successfully connected to the network. While these reports can be used to identify problems that could affect the system availability, they do not fully measure SEVIS availability. Instead, they measure the availability of the communications software on the application servers. This means that the SEVIS application could still be unavailable even though the communications software is available. Similarly, program officials stated that they used a central processing unit activity report to measure resource usage. However, this report focuses on the shared infrastructure environment, which supports SEVIS and two other applications, and does not specifically measure SEVIS-related central processing performance. Program officials did not provide any reports that measured performance against other resource usage requirements, such as random access memory and network usage. Program officials acknowledged that some key performance requirements were not formally measured and stated that they augmented these formal performance measurement reports with other, less formal measures, such as browsing the daily Help Desk logs to determine if there were serious performance problems requiring system changes or modifications, as well as using the system themselves on a continuous basis. According to these officials, a combination of formal performance reports and less formal performance monitoring efforts gave them a sufficient picture of how well SEVIS was performing. Further, program officials stated that they were exploring additional tools to monitor system performance. For example, they stated that they were in the process of implementing a new tool to capture the availability of the SEVIS application, and that they planned to begin using it by the end of April 2004. However, unless DHS formally monitored and documented all key system performance requirements, we concluded that the department could not adequately assure itself that potential system problems were identified and addressed early, before they had a chance to become larger problems that could affect the DHS mission objectives that SEVIS supports. Another indicator of how well a system is performing is the number and significance of reported problems or requests for system enhancements. For SEVIS, a system change request (SCR) is created when a change is required to the system. Each of the change requests is assigned a priority of critical, high, medium, or low, as defined in table 5. Each change request is also categorized by the type, such as changes to correct system errors, enhance or modify the system, or improve system performance. In June 2004, we reported that the number of critical or high priority change requests that were created between January 2003 and February 2004 was decreasing. Similarly, we reported that the trends in the number of new change requests that were to correct system errors had decreased for that same period. Over this period, the number of corrective fixes requested each month between January 2003 and February 2004 decreased, with the most dramatic decrease in the first 7 months. Figure 1 shows the decreasing trend in SEVIS new corrective change requests between January 2003 and February 2004. A third indicator of performance is user feedback. According to representatives of educational organizations, overall SEVIS performance at the time of our report had improved since the system began operating and its use was required, and the program's outreach and responsiveness were good. In addition, these representatives told us that they were no longer experiencing earlier reported problems, which involved user access to the system, the system's timing out before users could complete their tasks, and merging data from one school or exchange visitor program with data from another. However, seven new problem types were identified by at least 3 of the 10 organizations, and three of the seven problems were related to Help Desk performance. Table 6 shows the problems and the number of organizations that identified them. At the time of our report, DHS had taken a number of steps to identify and solve system problems, including problems identified by educational organizations. In particular, DHS steps to identify problems included * holding biweekly internal performance meetings and weekly technical meetings, * holding biweekly conference calls with representatives from * establishing special e-mail accounts to report user problems, and * having user groups test new releases. Further, DHS cited actions intended to address six of the seven types of problems identified by the educational organizations. These included releases of new versions of SEVIS and increases in Help Desk training and staffing. These officials also stated that they were evaluating potential solutions to the remaining problem. Table 7 shows the problem types, the number of organizations that identified them, and DHS's actions taken to address each. Despite DHS actions, educational organizations told us that some problems persisted. For example: * Although the program office increased Help Desk staffing in March 2003, representatives from seven organizations stated that slow Tier 2 and 3 Help Desk responses were still a problem. In response, program officials stated that the majority of calls handled by Tiers 2 and 3 involve data fixes that are a direct result of end-user error, and that fixing them is sometimes delayed until end-users submit documentation reflecting the nature of the data fix needed and the basis for the change. * Although the program office began in June 2002 providing training to Help Desk staff each time a new SEVIS release was implemented, representatives from 5 of the 10 organizations stated that the quality of the Help Desk's response to technical and policy questions remained a problem. According to program officials, Help Desk response is complicated by variations in user platforms and end- user knowledge of computers. The officials added that the program office is working to educate SEVIS users on the distinction between platform problems and problems resulting from SEVIS. Further, they said that Help Desk responses may be complicated by the caller's failure to provide complete information regarding the problem. Program officials also stated that supervisors frequently review Help Desk tickets to ensure the accuracy of responses, and these reviews had not surfaced any continuing problems in the quality of the responses. Various legislation requires that a fee be collected from each foreign student and exchange visitor to cover the costs of administering and maintaining SEVIS, as well as SEVP operations. In 2004, we reported that 7 years had passed since collection of the fee was required, and thus millions of dollars in revenue had been and would continue to be lost until the fee was actually collected. We also reported that representatives of the educational organizations were concerned with the fee payment options being considered because the options were either not available to all students in developing countries, or they would result in significant delays to an already lengthy visa application and review process, and increase the risk that paper receipts would be lost or stolen. As we then reported, DHS's submission of its fee collection rule went to the Office of Management and Budget in February 2004, and it received final clearance in May 2004. The final rule, which was effective on September 1, 2004, (1) set the fee at $100 for nonimmigrant students and exchange visitors and no more than $35 for those J-1 visa-holders who are au pairs, camp counselors, or participants in a summer work/travel program, and (2) identified options for students and exchange visitors to pay the fee, including * by mail using a check or money order drawn on a U.S. bank and payable in U.S. dollars or * electronically through the Internet using a credit card. According to DHS officials, another option for paying the SEVIS fee permits exchange visitor programs to make bulk payments to DHS on behalf of J visa-holders. To help strengthen SEVIS performance and address educational organizations' concerns, our report recommended that DHS * assess the extent to which defined SEVIS performance requirements are still relevant and are being formally managed; * provide for the measurement of key performance requirements that are not being formally measured; * assess educational organization Help Desk concerns and take appropriate action to address these concerns; and * provide for the expeditious implementation of the results of the SEVIS fee rulemaking process. According to program officials, a number of steps have been taken relative to our recommendations, and other steps are under way. For example, program officials stated that they have established a working group to assess the relevance of the requirements in the SEVIS requirements document. The working group is expected to provide its recommendations for changing this document by the end of March 2005. The changed requirements will then form the basis for measuring system performance. Program officials also stated that they are in the process of selecting tools for monitoring system performance and have established a working group to define ways to measure SEVIS's satisfaction of its two main objectives, relating to oversight and enforcement of relevant laws and regulations and to improvement in port of entry processing of students and visitors. In this regard, they said that they have begun to monitor the number of false positives between SEVIS and the Arrival Departure Information System to target improvements for future system releases. Program officials also reported that they are taking steps to address Help Desk concerns. For example, they said that they continue to hold bi-weekly meetings with educational organizations and directly monitor select Help Desk calls. They also said that Tier 1 Help Desk staffing recently increased by five staff, and the knowledge-based tool used by the Help Desk representatives to respond to caller inquiries had been updated, including ensuring that the tool's response scripts are consistent with SEVP policy. Additionally, these officials stated that they are reaching out to the Department of State to more quickly resolve certain system data errors (commonly referred to as data fixes), and said that a process has been established to ensure that high-priority change requests are examined to ensure correct priority designation and timely resolution. As of January 1, 2005, SEVP also established new performance level agreements with its Help Desk contractor, and it has been receiving weekly Help Desk reports to monitor performance against these agreements. DHS also began collecting the SEVIS fee in September 2004. Additionally, it introduced another payment option, effective November 1, 2004, whereby students can pay the fee using Western Union. This method allows foreign students to pay in local currency, rather than U.S. dollars. Program officials also stated that DHS has developed a direct interface between the payment systems and SEVIS and the State Department's Consolidated Consular Database (CCD). According to these officials, this allows the consular officer to verify without delay that the visa applicant has, in fact, paid the SEVIS fee before completing the visa issuance process. According to representatives of educational organizations, overall SEVIS performance continues to improve. We contacted 6 of the 10 organizations that were part of our 2004 report on SEVIS performance, and representatives for all six organizations told us that SEVIS performance has generally continued to improve. In addition, five of the organizations stated that there were no new system performance problems. All of the organizations stated that they did not have any concerns with the SEVIS fee implementation. However, most representatives stated that some previously reported problems still exist. For example, representatives from five of the six organizations stated that slow Tier 2 and 3 Help Desk responses in correcting errors in student and exchange visitor records were still a problem. Three representatives stated that these corrections can take months, and in some cases even years, to fix. Two of the three stated that this has a major impact on the individuals involved. One organization reported that some exchange visitors' records have been erroneously terminated, and as a result, the visitors' families are unable to join them in the United States until a data fix occurs. According to the representative, this creates a very difficult situation for the individuals and makes it difficult to retain them in their academic programs. A representative for another organization reported that two participants' records erroneously indicate that they have violated their status as exchange visitors. Were these individuals to leave the country to visit their families before a data fix is made, they would be denied re-entry. In addition, representatives from three organizations stated that they were still experiencing problems with downloading and manipulating data from SEVIS. For example, one representative reported an inability to pull reports on the exact number of exchange visitors in its program and their status. This person expressed concern because DHS holds schools and programs accountable for tracking exchange visitors, but then does not give them the tools necessary to do so. Further, representatives from two organizations stated that they were still experiencing problems with incorrect Help Desk responses. For example, one representative reported that he was erroneously told by a Help Desk employee that there was no need to correct an individual's record of training, yet another Help Desk employee correctly stated that a fix was needed and gave detailed instructions on how to make the correction. Last, representatives from all six organizations stated that there have been declines in international students and exchange visitors coming to the United States. However, representatives from four of the six stated that SEVIS was not a factor, while representatives from the remaining two stated that SEVIS was just one of many factors. Other factors cited as contributing to this decline, which are discussed in the following section, were a lengthy visa application process and increased competition by other countries for students and exchange visitors. A recent Council of Graduate Schools report indicates that foreign graduate student applications, admissions, and enrollments are declining. According to the report, international graduate applications to U.S. colleges and universities declined 28 percent from 2003 to 2004, resulting in an 18 percent fall in admissions and a 6 percent drop in enrollments for the same period. In addition, while 2005 data on admissions and enrollments were not yet available, the report cited a 5 percent decline in applications between 2004 and 2005. According to the report, the declines in 2004 and in 2005 were most prominent for students from China and India. It also noted that between 2004 and 2005 applications were unchanged from Korea and up 6 percent from the Middle East. The report attributes this decline to two factors: increasing capacity abroad and visa restrictions at home. According to the report, countries in Europe and Asia are expanding their capacity at the graduate level through government policy changes and recruitment of international students. At the same time, the report says that the U.S. government has tightened the visa process since September 11, 2001, inadvertently discouraging international graduate students through new security procedures and visa delays. The Council of Graduate Schools also recognized recent federal actions to improve the student visa process. These actions are directly related to our work on the State Department's Visas Mantis program--an interagency security check aimed at identifying those visa applicants who may pose a threat to our national security by illegally transferring sensitive technology. The program often affects foreign science students and visiting scholars whose background or proposed activity in the United States could involve exposure to technologies that, if used against the United States, could potentially be harmful. In February 2004, we reported and testified that there were delays in the Visas Mantis program and interoperability problems between the State Department and the FBI that contributed to these delays and allowed Mantis cases to get lost. We determined that it took an average of 67 days for Mantis checks to be processed and for State to notify consular posts that the visa could be issued, and that many Visas Mantis cases had been pending 60 days or more. We also determined that consular staff at posts we visited were unsure whether they were contributing to waits because they lacked clear program guidance. Accordingly, we recommended that the State Department, in coordination with DHS and the FBI, develop and implement a plan to improve the Visas Mantis process. In February 2005, we reported that Visas Mantis processing times had declined significantly. For example, in November 2004, the average time was about 15 days, far lower than the average of 67 days that we reported previously. We also found that the number of Mantis cases pending more than 60 days has dropped significantly. Our report recognized a number of actions that contributed to these improvements and addressed other issues that science students and scholars face in traveling to the United States. These actions included adding staff to process Mantis cases; defining a procedure to expedite certain cases; providing additional guidance and feedback to consular posts; developing an electronic tracking system for Mantis cases; clarifying the roles and responsibilities of agencies involved in the Mantis process; reiterating State's policy of giving students and scholars priority scheduling for interview appointments; and extending the validity of Mantis clearances. Although we also identified opportunities for further refinements to the Visas Mantis program, we believe that the actions outlined above should allow foreign science students and scholars to obtain visas more quickly and to travel more freely. We did not determine the effect of these actions on the overall volume of international students traveling to the United States. However, representatives from the academic and international scientific community have indicated that they also believe the actions will have a positive impact. For example, the Association of American Universities identified the extension of Mantis clearances as "a common-sense reform that removes an unnecessary burden that caused enormous inconvenience for thousands of international students and discouraged many more from coming here to study." In closing, indications are that SEVIS performance has improved and continues to improve, as has visa processing for foreign science students and scholars. Moreover, recent SEVIS-related initiatives demonstrate program officials' commitment to future improvements. This commitment is important because educational organizations continue to report some persistent system problems, primarily with respect to Help Desk responsiveness in making certain "data fixes." These problems can create hardships for foreign students and exchange visitors that can potentially have unintended consequences relative to these foreign students and exchange visitors applying to and enrolling in U.S. learning institutions. Therefore, it is important for DHS to effectively manage SEVIS performance against mission objectives and outcomes, as well as against system requirements. To this end, we have made several recommendations to DHS concerning SEVIS performance management. Messrs. Chairmen, this concludes our statement. We would be happy to answer any questions that you or members of the subcommittees may have at this time. If you should have any questions about this testimony, please contact Randolph C. Hite at (202) 512-3439 or [email protected], or Jess T. Ford at (202) 512-4128 or [email protected]. Other major contributors to this testimony included John Brummet, Barbara Collier, Deborah Davis, Jamelyn Payan, and Elizabeth Singer. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The Student and Exchange Visitor Information System (SEVIS) is an Internet-based system run by the Department of Homeland Security (DHS) to collect and record information on foreign students, exchange visitors, and their dependents--before they enter the United States, when they enter, and during their stay. GAO has reported (GAO-04-690) that although the system had a number of performance problems during the first year that its use was required, several SEVIS performance indicators were positive at that time (June 2004). Nonetheless, some problems were still being reported by educational organizations. In addition, concerns have been raised that the number of international students and exchange visitors coming to the United States has been negatively affected by the U.S. visa process. Accordingly, the Congress asked GAO to testify on its work on SEVIS and related issues. This testimony is based on its June 2004 report, augmented by more recent GAO work, reports that we issued in February 2004 and 2005 on student and visiting scholar visa processing, and related recent research by others. Indications are that SEVIS performance has improved and continues to improve. In June 2004, GAO reported improvement based on several indicators, including reports showing that certain key system performance requirements were being met, trends showing a decline in new requests for system corrections, and the views of officials representing 10 educational organizations. DHS attributed this performance improvement to a number of actions, such as installation of a series of new software releases and increased Help Desk staffing and training. However, GAO also reported that several key system performance requirements were not being formally measured, so that DHS might not be able to identify serious system problems in time to address them before they could affect the successful accomplishment of SEVIS objectives. Further, some educational organizations were still experiencing problems, particularly with regard to Help Desk support. GAO also reported that educational organizations were concerned about proposed options for collecting SEVIS fees. Accordingly, it made recommendations aimed at improving system performance measurement and resolving educational organizations' Help Desk and fee concerns. Since June 2004, DHS reports that it has taken steps to address GAO recommendations, and in particular it has taken a number of actions to strengthen Help Desk support. Moreover, educational organizations generally agree that SEVIS performance has continued to improve, and that their past fee collection concerns have been alleviated. However, these educational organizations still cite residual Help Desk problems, which they believe create hardships for students and exchange visitors. Most of these organizations, however, do not believe that SEVIS is the reason for the declining number of international students and exchange visitors coming to the United States. These declining numbers were cited in a recent report by the Council of Graduate Schools, which describes declines in foreign graduate student applications, admissions, and enrollments between 2003 and 2004, and further declines in these applications between 2004 and 2005. The report attributes the decline to increased global competition and changed visa policies. In this regard, GAO recently reported on the State Department's efforts to address its prior recommendations for improving the Visas Mantis program (under which interagency security checks are performed to identify applicants who may pose a threat to national security by illegally transferring sensitive technology). According to this report, a combination of federal agency steps resulted in a significant decline in Visas Mantis processing times and in the number of cases pending more than 60 days. The Council of Graduate Schools' report also recognizes the recent Visas Mantis program changes as positive steps.

Broadband speeds are described in upload and download capabilities measured by the number of bits of data transferred per second and include kilobits (1 thousand bits per second), megabits (1 million bits per second), and gigabits (1 billion bits per second). Download speed refers to the speed at which data is transferred from the Internet to the consumer. Upload speed refers to the speed at which data is transferred from the consumer to the Internet. FCC currently considers speeds of 4 megabits per second (Mbps) download and 1 Mbps upload or greater to be broadband. The speeds required by small businesses vary depending on how the business uses its Internet connection, the number of users, and the number of applications running concurrently, among other factors. Examples of uses supported by different download speeds are described in table 1. Broadband service is provided through a variety of technologies, including: Digital subscriber line (DSL). This service is delivered by local telephone companies over their copper-wire telephone networks used by traditional voice service. Cable modem. This service is delivered by cable operators through the same coaxial cables that deliver sound and pictures to television sets. Fiber optic. Fiber optic technology converts electrical signals carrying data to light and sends the light through transparent glass fibers about the diameter of a human hair. Satellite. This wireless service transmits data to and from subscribers through a receiver dish to a satellite in a fixed position above the equator, eliminating the need for a copper wire or coaxial cable connection. Wireless. Land-mobile or terrestrial broadband service that connects a business or home to the Internet using a radio link. Broadband access can be shared or dedicated. Shared access means users share the connection to the Internet, and thus speeds can be variable based on the number of users accessing the network at one time. Dedicated access provides a reliable point-to-point connection with guaranteed speeds. For some small businesses with the need to send sensitive or large amounts of data, such as financial institutions or medical centers, a dedicated connection or special access line may be beneficial. However, most small businesses do not need such a connection. Broadband Internet access is widely available throughout the United States to both residences and businesses. According to the National Broadband Map, which measures national access to broadband, as of December 2012, approximately 98 percent of the U.S. population had access to wireline or wireless broadband service of 3 Mbps download and 768 kilobits per second (kbps) upload.Office of Advocacy in 2010 similarly found that over 96 percent of urban A study completed for SBA's small businesses and approximately 92 percent of rural small businesses reported access to wireline or wireless broadband. Still, some areas of the United States remain underserved or unserved by broadband infrastructure. areas. For example, according to data used in the National Broadband Map, nearly 100 percent of urban residents have access to 3 Mbps or higher download speeds, and about 94 percent of nonurban residents have access to such speeds. Likewise, wireline broadband access is available to 99 percent of urban populations and 82 percent of nonurban populations. The unserved and underserved areas that remain in the United States tend to be where conditions increase the cost of broadband deployment, and the difficulty in recouping deployment costs makes it less likely that a service provider will build out or maintain a network. These conditions include: Service gaps exist primarily in nonurban Low population. The limited number of potential subscribers in an area makes it difficult for providers to recoup the costs of building a network. The definitions of unserved and underserved were part of a Notice of Funds Availability announced by NTIA and designed to implement grant programs under the American Recovery and Reinvestment Act of 2009 (74 Fed. Reg. 33104, July 9, 2009). The speeds in these definitions are much lower than the FCC's broadband benchmark of 4 Mbps download and 1 Mbps upload. According to the Notice of Funds Availability, an unserved area is one in which at least 90 percent of households cannot subscribe to the minimum broadband speed and service, defined as advertised speeds of at least 768 Kbps download and at least 200 Kpbs upload. An underserved area is one in which (1) 50 percent or less of households have access to the minimum broadband speed, (2) no provider offers service speeds of at least 3 Mbps, or (3) 40 percent or less of the households choose to subscribe to a broadband service. The availability of, or adoption rates for, satellite broadband service are not considered in determining whether an area is unserved or underserved. Difficult terrain. Challenging terrain, such as mountains, may increase construction costs for wireline service and can affect wireless service by creating physical barriers or otherwise limiting the ability to transmit data. Natural Disasters. Areas that experience severe weather or natural disasters may lose broadband access temporarily, which increases costs because of the need to repeatedly repair or replace infrastructure. For instance, Hurricane Sandy took down a service provider's copper lines that provided DSL service for Fire Island, New York. The service provider decided to replace the copper lines with a more costly but resilient fiber network. SBA does not provide funding for broadband deployment. However, it does provide funding to nonprofit Small Business Development Centers (SBDC). SBDCs provide training and education to encourage greater use of broadband. SBA also supports research by its Office of Advocacy on the use and availability of broadband. Congress appropriated funds for the BTOP and BIP programs under the American Recovery and Reinvestment Act of 2009 (Pub. L. No. 111-5, 123 Stat. 115 (2009)). All funds were obligated prior to the end of fiscal year 2010. In the joint Notice of Funds Availability, NTIA and RUS provided that projects should be completed within 3 years of receiving an award. 74 Fed. Reg. 33104, July 9, 2009. As part of BTOP, in support of broadband adoption, NTIA awarded grants to public computing centers and sustainable broadband adoption projects that funded access to broadband, computer equipment, and job training. The Connect America Fund is part of ongoing Universal Service Fund reform aimed at eventually replacing existing high-cost support mechanisms. The high-cost program within the Universal Service Fund (USF) provides subsidies to telecommunications carriers that serve rural and other remote areas with high costs of providing telephone service. GAO has ongoing work on the USF reforms and their impact on broadband deployment and other issues. Some municipalities also support broadband deployment by funding, building, and operating networks to provide broadband access to their communities, much as some cities offer utilities such as water and electricity. The municipal entity providing this service may be, for example, a department within the city government, or a cooperative formed among several communities. Communities have used federal funds, issued bonds, and taken out loans to fund the construction of municipal broadband networks. In some instances, voter referendums have been required for the city to take out loans or bonds for this purpose. Municipal networks have achieved varying degrees of public acceptance and financial success. In some communities, these networks have been welcomed because they are the only broadband service provider. In other communities, the municipality functions as a competitor to cable and DSL providers and lawsuits have been filed by incumbent service providers to prevent municipalities from building networks. Some states have passed legislation to prevent communities from becoming service providers. Nevada, for instance, prohibits cities with a population of 25,000 or more from selling telecommunications services to the general public. Nebraska prohibits any political subdivision that is not a public power supplier from providing broadband or Internet services. Financially, some municipal networks have been successful while others have struggled to pay off bonds or loans used for capital investment. Federal broadband programs do not target deployment to small businesses. As previously discussed, federal programs target deployment to areas that are unserved or underserved. Many programs do, however, have requirements that can result in networks maximizing the number of small businesses and residences served. For example, USDA's Community Connect grants require that the service provider offer broadband services to all residences and businesses in the proposed service area. To be eligible for the Rural Broadband Access Loan and Loan Guarantee Program at least 25 percent of the households in an area must currently be underserved. Thus, the program's funding supports providers who will serve residences and small businesses in areas of need. Table 3 shows selected federal funding requirements related to eligibility and infrastructure deployment for the six federal programs previously described. Since these programs do not focus on deployment to small businesses, they do not measure their impact on small businesses, including the broadband speeds and prices available to them. However, each program has broader goals and measures, some of which encompass the impact on businesses. For example, BIP supports USDA's goal to increase the number of rural Americans with access to broadband service and provide the speeds needed by business, health care, public safety, and others. Consistent with this goal, RUS reported in August 2013 that more than 5,800 businesses had received new or improved service as a result of BIP funding since passage of the Recovery Act in 2009, even though BIP does not have specific performance targets regarding services to businesses. BTOP supports NTIA's strategic goal of driving innovation through policies that enable broadband growth and support e-commerce. Accordingly, NTIA measures the number of community anchor institutions, such as schools and libraries, that received broadband connections through BTOP and the miles of broadband network deployed. NTIA also collected data on interconnection agreements that allow small internet service providers to provide broadband service. According to service providers we spoke with, federal funding was instrumental in their network expansion or upgrade. For example, officials from Monroe Telephone Company in Oregon stated that without the federal support they received through BIP, they would not have expanded their network due to the area's low population density and mountainous terrain. Monroe officials stated that they used the loan of $1.4 million and grant of $4.2 million, both from BIP, to expand broadband access to 1,200 households and small businesses in two counties that previously only had dial-up or satellite service. In another example, officials at Paul Bunyan Telephone Cooperative in Minnesota stated that the RUS loan they received enabled them to expand their broadband service years earlier than otherwise would have been possible. Federal programs have supported improvements to broadband networks through grants and loans for expansions, upgrades, and building of new networks, according to the service providers we spoke with. Providers expanded their existing networks by laying new fiber optic lines or using other technologies to make broadband available in areas that were previously unserved or underserved. For example, Intermountain Cable in eastern Kentucky used a Community Connect grant to expand its broadband network to Hurley, Virginia. According to officials at Intermountain Cable, Hurley previously only had satellite broadband service. SandyNet, a municipal broadband provider in Sandy, Oregon, used BIP funding to build fiber optic lines, allowing SandyNet to expand its wireless service further into rural areas. Providers also used federal funds to upgrade and improve the reliability and speed of their existing networks. For example, in northwest Minnesota, Garden Valley Telephone Company used an RUS Telecommunications Infrastructure loan to upgrade the copper lines in the rural areas it serves with fiber optic lines, which provide a faster and more reliable connection. For homes and small businesses in these areas, speeds have gone from approximately 1 Mbps download to a top advertised speed of 30 Mbps. In other areas it serves, Garden Valley used portions of the loan to make smaller scale improvements, loan to make smaller scale improvements, changing some of the hardware attached to existing copper lines to increase speeds. Finally, federal funds or, in the cases of some communities, other sources of funding such as municipal bonds, have been used to build new broadband networks. The North Georgia Network used a $33 million BTOP grant to build a 260-mile fiber optic network that provided broadband to businesses and residences. MiNet, a municipal network operated by the cities of Monmouth and Independence, Oregon, used city funds and a loan from the state of Oregon to build a fiber optic network that provides download speeds of up to 1 Gbps. According to some providers, these federal and municipal investments have stimulated competition. In some areas that received federal funds or where a municipal network was built, other broadband providers took steps to improve the speed and reliability of their service. For example, following the construction of a fiber-to-the-home municipal network in Monticello, Minnesota, the two other broadband providers in the area made investments in their infrastructure to improve their broadband speeds. One of these providers stated that all of its networks undergo periodic upgrades to improve service, but upgrade schedules can change in order to stay competitive when there is a new service provider in a particular market. We found that more service providers in funded communities offered service at higher speed ranges than providers in comparison communities, as shown in figure 1. For example, twice as many funded communities as comparison communities have a provider that offers speeds of 51 Mbps or higher. However, among the 14 funded communities and 14 comparison communities included in our analysis, all have at least one service provider that offers download speeds of at least 4 Mbps, which is FCC's current benchmark for broadband. We also compared the highest speed offered by service providers. Our analysis found that federally funded and municipal networks most often had the highest advertised top speed when compared with top speeds offered by nonfederally funded and non-municipal networks in the same community, and networks in nearby comparison communities. In 9 of the 14 sets of communities included in this analysis, federally funded or municipal networks had the highest advertised top speeds, as shown in figure 2. For example, a federally funded network in a community in northeast Georgia advertised a top download speed of 100 Mbps, while the highest speed advertised by other providers in the same community and in the nearby comparison community was 40 Mbps. In the five other cases, networks in nonfederally funded communities offered speeds that were equal to or higher than speeds available in funded communities. We found that prices offered by federally funded and municipal networks were slightly lower than prices offered by nonfederally funded networks in the same community and networks in comparison communities. For example, for speeds of 4 to 6 Mbps, federally funded and municipally operated networks charged prices that were on average about $11 per month less than nonfederally funded networks in the same community and about $20 less per month than networks in comparison communities. The price differences are greater in the 7 to 10 Mbps download range, where federally funded and municipally operated networks' prices were on average about $30 less per month than nonfederally funded networks in the same community and about $35 less per month than networks in comparison communities. There were some cases where federally funded or municipal networks offered substantially lower prices than networks in comparison towns, such as the municipal network in Windom, Minnesota, which offered 10 Mbps download service for approximately $38 a month, while two networks in a comparison town offered the same speed for about $100 to $110 per month. Figure 3 illustrates the prices for selected speed ranges offered by all the providers included in our analysis and is broken out by federally funded and municipal networks, nonfederally funded networks in the same community as a federally funded or municipal network, and networks in comparison communities. As this figure shows, prices in all the ranges are generally lower for federally funded or municipal networks, and at the 4 to 6 Mbps and 7 to 10 Mbps download ranges, networks in comparison communities tend to have higher prices than both federally funded and municipal networks and nonfederally funded networks located in the same community. We also compared broadband speeds and prices in the nonurban funded and comparison communities with the speeds and prices in urban areas. For download speeds below 10 Mbps, average prices in nonurban areas were lower than average prices in urban areas. For example, for speeds of 4 to 6 Mbps, the average price was about $23 less in nonurban areas than in urban areas, and for speeds of 7 to 10 Mbps the average price was about $9 less. The lower prices offered by networks in nonurban communities could be due to providers having lower costs to recoup because some receive federal or municipal support or due to the limits imposed by weak market demand, typical of many nonurban areas. In this analysis it is difficult to identify the exact reason for the lower prices in the nonurban communities. For speeds of 11 to 25 Mbps, urban areas offered prices that were on average $21 less than nonurban areas. Furthermore, nonurban communities with federally funded or municipal networks tended to have lower prices than nonurban comparison communities and urban communities. For example, in the 4 to 6 Mbps download range, nonurban networks in funded communities offered average prices that were about $16 less than the prices offered by networks in comparison communities and $32 less than networks in urban communities, and $20 and $19 less, respectively, in the 7 to 10 Mbps speed range. In the 11 to 25 Mbps range, nonurban funded communities offered lower average prices than comparison communities, but urban areas offered lower average prices than both the nonurban funded and comparison communities. Figure 4 illustrates the prices that service providers offer for selected speed ranges in urban and nonurban areas. We found that providers in urban areas generally offer higher speeds than those in nonurban areas. Among the locations included in our analysis, providers in all 8 of the urban areas offered download speeds of 100 Mbps or higher, whereas providers in only 7 of the 28 nonurban areas offered download speeds of 100 Mbps or higher. Six of the 7 nonurban areas were funded communities with speeds of 100 Mbps provided by a federally funded or municipal network. However, in one funded community one competitor also offered speeds of 100 Mbps. Cities of Monmouth and Independence, Oregon, MINET Fiber Network MINET is a fiber optic network in Monmouth and Independence, Oregon. The two cities decided in 2004 to build their own fiber network for economic development purposes. City officials believed that availability of broadband services would help to keep existing jobs and attract new employers. The fiber network was built with city funds and a state loan. MINET passes 6,400 businesses and homes at the curb. In June 2013, MINET's customers included about 500 local, mostly small businesses, according to MINET officials, a number that comprises about 90 percent of local businesses. Most businesses subscribe to download speeds of 7 Mbps or 10 Mbps, although MINET can offer download speeds up to 1 Gbps. Minnesota, a farm equipment sales and service company reported that it switched from its previous broadband provider because the provider's service could not supply the desired broadband speeds. Now the farm equipment company has broadband speeds nearly twenty times its previous speeds. Similarly, 18 of 27 small businesses we spoke with told us that their new service is more reliable than the service of their previous provider. These small businesses said they experienced less network downtime and no significant slowdowns in speed at points in the day when usage increased. Many service providers told us that they used fiber optics for their expansions or upgrades, contributing to greater reliability and speed. While reliability and speed were reported as improving, small businesses we spoke to reported that the effect of the new network on price varied. Several reported the price of broadband service went down, particularly a few businesses that previously relied on satellite service for broadband. However, some small businesses we spoke with reported that the price for the new service was similar to or more than their previous service. For example, an information technology company in northeast Georgia told us that it pays approximately $20 more per month but stated it was worth the additional cost because of the increased reliability and additional speed. Small business owners we met with who use the services of federally funded or municipal networks told us that they made improvements to their business operations, often because the speed of online applications was improved, which allowed them to operate more efficiently. Table 4 describes some of the improvements that small businesses told us they experienced due to the enhancements to their broadband service. Small business owners we spoke with said that the operational efficiencies they experienced as a result of better broadband service have not yet resulted in increased revenues. Only one small business we met with sought to improve their revenue potential by relocating to an area with better Internet service. Rather than relocate, a different small business owner stated he would pay more to get a dedicated line for faster or more reliable service. Other small businesses stated that broadband service would not alone determine where they set up their business but might be one of many factors considered. Similarly, the communities that built high speed broadband networks did so to attract some new businesses, as well as retain existing businesses. We provided a draft of this report to NTIA and EDA within the Department of Commerce, USDA, SBA, and FCC for review and comment. NTIA and FCC provided technical comments, which were incorporated, as appropriate. The other agencies reviewed the draft but had no comments. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from the date of his letter. At that time, we will send copies of this report to the Secretary of Commerce, the Secretary of Agriculture, the Administrator of the U.S. Small Business Administration, and the Chairman of the Federal Communications Commission. We will also make copies available to others on request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any question, please contact me at (202) 512- 2834 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff that made major contributions to this report are listed in appendix III. This report describes: (1) the federal government's efforts to ensure the availability of broadband services for small businesses, and (2) the effect of federally funded and municipal networks on broadband service and small businesses. To address both reporting objectives, we reviewed documents from and interviewed officials at the U.S. Department of Agriculture's (USDA) Rural Utilities Service (RUS), the Department of Commerce's (Commerce) National Telecommunications and Information Administration (NTIA) and Economic Development Administration (EDA), and the Federal Communications Commission (FCC) about their efforts to ensure the availability of broadband services for small businesses. We also reviewed documents and interviewed officials at the Office of Advocacy within the Small Business Administration (SBA) about its research on the availability and use of broadband by small businesses. We reviewed program rules regarding funding applicability and eligibility for FCC, RUS, NTIA, and EDA programs that provide funding for broadband infrastructure; status reports for the Broadband Technology Opportunities Program (BTOP) and the Broadband Infrastructure Program (BIP); SBA's Office of Advocacy's study on small business access to broadband; and reports from FCC and NTIA on broadband deployment and availability. We also reviewed reports and surveys from academic institutions, think tanks, and trade associations on the topics of broadband deployment, economic development, and small business. We interviewed representatives of a telecommunications trade association, representatives of small business interests, and large and small broadband service providers in an effort to obtain a variety of viewpoints on issues related to small business and broadband services. To identify the strategic objectives, goals, and performance measures of federal broadband infrastructure programs, we reviewed budget summaries and performance plans, performance and accountability reports, and other agency documents for these programs from USDA, NTIA, RUS, and FCC. To describe the effect of federally funded and municipal networks on broadband service and small businesses, we obtained and analyzed information from a variety of sources. We visited towns in Oregon, Minnesota, Tennessee, and Georgia, where we interviewed a nongeneralizable selection of Internet service providers that received federal funds, municipally operated network providers, and small businesses that use the services of these providers. We selected these states and the specific locations within the states on the basis of the presence of at least one project that received federal funding for broadband infrastructure in the last 5 years; the presence of a municipally operated broadband network, which also may have received federal funding; and geographic diversity, i.e., sites were in different regions of the county. The locations were chosen to collectively include at least one project from each of the major federal broadband infrastructure programs. We selected small businesses to interview that were users of the federally funded or municipal networks and that had fewer than 500 employees, based on FCC's National Broadband Plan, which addresses support for broadband growth in small and medium enterprises of this size. While the results of our interviews cannot be projected to all service providers and small businesses because they were selected using a nonprobability approach, they illustrate a range of possible views and experiences. We collected information on broadband speeds and prices offered by all wireline providers in the locations we visited where federally funded or municipal networks were present. We only included wireline broadband service in our analysis because unlike some wireless service (e.g., satellite and mobile broadband), wireline broadband generally offers higher speeds and greater reliability that businesses require. For comparison purposes, we also collected speed and pricing information for all wireline providers in nearby towns that were similar to these locations in terms of population, income levels, and number of wireline service providers, but where federally funded or municipal networks were not present; and in two urban areas in each of the same states. Table 5 lists the locations visited, the nearby towns, and the urban areas visited in each state. In total we collected pricing information on fourteen nonurban towns that received federal funding or have a municipal network, 14 nonurban comparison towns, and 8 urban areas. We used the National Broadband Map, a joint effort of NTIA and FCC to analyze and map broadband speeds, and comparable efforts managed by the states to identify wireline service providers in these locations. For each service provider identified, we collected information on advertised download and upload speeds offered to small businesses and the monthly rate charged. We collected unbundled, month-to-month pricing when available. Some service providers required a customer to have a telephone line and some required a contract ranging from 2 months to 2 years. If the service provider did not provide separate pricing for small businesses, we collected residential speed and pricing information. We obtained this information from service providers' websites or if not available online by calling the company directly. We requested speed and pricing for each city and town in the sample--either by the town's name or by a specific address if the service provider required one. We analyzed the information collected to identify difference in speeds and prices between the locations with federally funded or municipal networks and similar towns without such networks, as well as between urban and nonurban locations. Because this information is drawn from a nonprobability sample, it cannot be generalized to all locations with federally funded or municipal networks, all urban locations, or all nonurban locations. We conducted this performance audit from February 2013 to February 2014 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings based on our audit objectives. Appendix II: Speeds and Prices Offered by Federally Funded and Municipal Broadband Service Providers That Were Part of GAO's Analysis, as of September 30, 2013 Top available advertised speed (Mbps) Most common speed subscribed to by businesses (Mbps) Information for broadband speed and pricing is reported here only for the Georgia Communications Cooperative, a member of the North Georgia Network. Other cooperatives belonging to the North Georgia Network may offer different speeds and prices. In addition to the individual named above, Heather Halliwell, Assistant Director; Namita Bhatia Sabharwal; Sharon Dyer; Laura Erion; Eric Hudson; Dave Hooper; Josh Ormond; Amy Rosewarne; and Andrew Stavisky made key contributions to this report.

Increasingly, small businesses rely on Internet-based applications to improve efficiencies and expand market access. Although broadband Internet access is widely available to businesses, areas of the country remain that still have little or no access. Since 2008, federal programs have provided over $15 billion in funding to help deploy broadband to these areas. Additionally, some municipal governments have begun to build and operate networks to provide broadband access to their communities. GAO was asked to describe issues related to broadband availability for small businesses. This report addresses (1) the federal government's efforts to ensure the availability of broadband services for small businesses, and (2) the effect of selected federally funded and municipal networks on broadband service and small businesses. GAO reviewed documents and interviewed officials from five federal agencies that support broadband deployment and research on broadband availability. GAO interviewed service providers that received federal funding, municipal network operators, and small businesses in four states, and collected speeds and prices for broadband services in selected communities in these states. The states, communities, and businesses were selected based on the presence and use of a federally funded or municipal network. GAO is not making any recommendations. In commenting on this report, the agencies provided technical comments, which GAO incorporated as appropriate. Federally funded programs to expand broadband access encompass but do not specifically target small businesses. These programs--the Broadband Initiatives Program (BIP), Broadband Technologies Opportunities Program, Community Connect Grants, Connect America Fund, Rural Broadband Access Loan and Loan Guarantee Program, and Telecommunications Infrastructure Loan Program--have eligibility requirements based on the need of an area, as well as deployment requirements that can maximize the number of businesses served. For example, the Community Connect grants require providers to serve all businesses and residences in deployment areas. Since these federal programs do not target deployment to small businesses, they do not measure the impact on small businesses. However, BIP has a specific goal to increase access to rural Americans and provide broadband speeds to businesses, and in August 2013, the United States Department of Agriculture reported BIP's funding had resulted in over 5,800 businesses' receiving new or improved broadband service since 2009. Other programs have broader goals and measures related to the program's purpose, such as serving schools and libraries. Improvements to broadband service have resulted from federal funding and the existence of municipally operated networks. Service providers have used federal funding for expansions and upgrades, such as building out to previously unserved areas and replacing old copper lines with fiber optic cable, resulting in faster and more reliable broadband connections. GAO examined broadband services for 14 federally funded and municipal networks and found they tended to have higher speeds than other networks. For example, in 9 of the 14 communities where GAO collected information on broadband speeds and prices, federally funded or municipal networks offered higher top speeds than other networks in the same community and networks in nearby communities. Additionally, prices charged by federally funded and municipal networks were slightly lower than the comparison networks' prices for similar speeds. Prices for lower to mid-range speed tiers available from federally funded and municipal networks in nonurban areas also compared favorably to prices in urban areas in the same state. However, providers in urban areas were more likely than those in nonurban areas to offer higher speeds. According to small businesses GAO met with, the speed and reliability of their broadband service improved after they began using federally funded or municipal networks. Furthermore, according to small business owners, the improvements to broadband service have helped the businesses improve efficiency and streamline operations. Small businesses that use the services of these networks reported a greater ability to use bandwidth-intensive applications for inventory management, videoconferencing, and teleworking, among other things.

When considering areas in which to locate, RDA directs the heads of all executive departments and agencies of the government to establish and maintain departmental policies and procedures giving first priority to the location of new offices and other facilities in rural areas. Any move by an agency to new office space in another location would be considered a new office or facility covered by RDA. Two primary executive orders on federal facility location decisions are Executive Order 12072, Federal Space Management, dated August 16, 1978; and Executive Order 13006, Locating Federal Facilities on Historic Properties, dated May 21, 1996. Executive Order 12072 specifies that when the agency mission and program requirements call for federal facilities to be located in urban areas, agencies must give first consideration to locating in a central business area and adjacent areas of similar character. Executive Order 13006 requires the federal government to utilize and maintain, wherever operationally appropriate and economically prudent, historic properties and districts, especially those located in the central business area. In 1990, we reviewed whether federal agencies give rural areas first priority in location decisions as required by RDA and whether any changes in federal location policies were warranted. We reported that RDA had not been an important factor in federal facility location decisions. In fiscal year 1989, about 12 percent of federal civilian workers were located in nonmetropolitan statistical areas. Agency officials attributed mission requirements, the need to be in areas where the populations they serve are located, political considerations, and budget pressures as reasons why urban areas received more facilities than rural areas. Those agencies that did locate in rural areas said it was more because they served rural populations than because they were following the requirements of RDA. We also reported that a growing number of private sector corporations were moving to suburban and rural settings to take advantage of incentives offered by localities to attract jobs and the ability to separate functions resulting from changes in telecommunications technology. We concluded that there were multiple laws and regulations guiding federal agencies in selecting facility locations, but they do not always provide for consideration of the best financial interest of the government as a factor in the decision-making process. We recommended that GSA develop a more consistent and cost-conscious governmentwide location policy that would require agencies, in meeting their needs, to maximize competition and select sites that offer the best overall value considering such factors as real estate and labor costs. In 2001, we performed follow-up work on our 1990 report including identifying what functions lend themselves to being located in rural areas. We reported that since our 1990 study, federal agencies continued to locate for the most part in higher cost, urban areas. The percentage of federal employees located in nonmetropolitan statistical areas in 2000 remained virtually unchanged from 1989, at about 12 percent. Eight of the 13 cabinet agencies we surveyed had no formal RDA policy, and there was little evidence that agencies considered RDA's requirements when locating new federal facilities. Further, GSA had not developed a cost-conscious, governmentwide location policy as we recommended in 1990 and the definition of rural used in RDA was unclear. We reported in 2001 that agencies chose urban areas for most (72 percent) of the 115 federal sites acquired from fiscal year 1998 through fiscal year 2000. Agencies said they selected urban areas primarily because of the need to be near agency clients and related government and private sector facilities to accomplish their missions. The agencies that selected rural areas said they did so because of lower real estate costs. Agencies that relocated operations tended to relocate within the same areas where they were originally located, which were mainly urban areas; newly established locations were almost equally divided between urban and rural areas. Private sector companies surveyed said they select urban areas over rural areas largely because of the need to be near a skilled labor force. Agencies said the benefits of locating in urban areas were efficiency in agency performance as a result of the ability to share existing facilities, close proximity to other agency facilities and employees, and accessibility to public transportation. Agencies that chose rural sites said that benefits included close proximity to agency support facilities, improved building and data security, and better access to major transportation arteries, such as interstate highways. Barriers reported for urban sites included the lack of building security and expansion space. For rural areas, barriers included the lack of public transportation, location far from other agency facilities, and insufficient infrastructure for high-speed telecommunications. The functions that were located predominantly at urban sites during 1998 through 2000 were loans/grants/benefits administration processing, inspection and auditing, and health and medical services. The functions that were located predominantly in rural areas in that period were research and development, supply and storage, automated data processing, and finance and accounting. Some functions, such as law enforcement, were placed in both urban and rural areas, although this particular function was located more often at urban sites. For our 2001 study, we contracted with a private sector consultant, John D. Dorchester, Jr., of The Dorchester Group, L.L.C., to assist us in a number of tasks. One task was to identify functions the private sector might locate in rural areas. The consultant identified the following functions: Accounting Account representative Appraisal/market research Clerical/secretarial Data processing Distribution/warehousing Education/training Enforcement and quality control Field service operations Human resources and social services Information technologies services Legal support Logistical support Manufacturing and assembly offices Operations centers Printing and publishing Records archiving Repairs and servicing Scientific studies and research and development Technical functions and support Telemarketing, order processing, and communications We also asked our consultant to identify the benefits and challenges associated with rural areas for selected functions. (See table 1.) Our July 2001 report suggested that Congress consider enacting legislation to (1) require agencies to consider real estate, labor, and other operational costs and local incentives when making a location decision; and (2) clarify the meaning of "rural area" in RDA. We also recommended that GSA revise its guidance to agencies to require agencies making location decisions to consider real estate, labor, and other costs and local incentives. In addition, we recommended that GSA require agencies subject to its authority to provide a written statement that they had given first priority to locating in a rural area and to justify their decision if they did not select a rural area. We also recommended that GSA define rural area until Congress amended RDA to define the term. Subsequent to our report, GSA took action on our recommendations; actions which are described in greater detail below. The Fiscal Year 2002 Treasury and General Government Appropriations Act, Public Law 107-67, required the inspectors general (IG) of departments and agencies to submit to the appropriations committees a report detailing what policies and procedures are in place requiring them to give first priority to the location of new offices and other facilities in rural areas, as directed by RDA. These reports were due in May 2002. A similar requirement was included in the Consolidated Appropriations Resolution for Fiscal Year 2003, Public Law 108-7. However, because the IGs had until August 20, 2003, to report on this, we did not have the opportunity to review those reports required by Public Law 108-7 for this testimony. GSA's May 2, 2002, response to the Public Law 107-67 requirement described the policies that GSA had in place to give first priority to the location of new offices and other facilities in rural areas, as well as what actions GSA had taken in response to our July 2001 recommendations. GSA took the following actions: The Federal Management Regulation, section 102-83.30, was revised to require federal agencies to also consider real estate, labor, and other operational costs and applicable incentives in addition to mission and program requirements when locating space, effective December 13, 2002. The Public Buildings Service Customer Guide to Real Property was revised to require agencies to provide GSA with a written statement affirming that they have given first priority to locating in a rural area as required by RDA when requesting space from GSA. The Federal Management Regulation, section 102-83.55, effective December 13, 2002, was revised to define "rural area" as a city, town, or unincorporated area that has a population of 50,000 inhabitants or fewer, other than an urban area immediately adjacent to a city, town, or unincorporated area that has a population in excess of 50,000 inhabitants. GSA published a recommendation in the Federal Register on January 21, 2003, that federal agencies with their own statutory authority to acquire real property use the above definition of rural area and demonstrate compliance with RDA by including a written statement in their files affirming that they have given first priority to the location of new offices and other federal facilities in rural areas. These actions responded to all of our July 2001 recommendations with the exception of one. We had recommended that GSA require agencies, when selecting a new facility location, to provide a written statement that they had given first priority to locating in a rural area. If a rural area was not selected, agencies were to provide a justification for the decision. GSA's new guidance does not require agencies not selecting a rural area to justify their decision. We also reviewed the IG reports detailing the policies and procedures in place regarding giving first priority to rural areas as required by Public Law 107-67 for the Departments of Energy, the Interior, Justice, Transportation, and Veterans Affairs. According to GSA data, these agencies, along with the Department of Defense and the United States Postal Service, have the largest amount of owned and leased building square footage in the federal government. We excluded sites acquired by the Defense Department because it has so much vacant space available at its bases nationally that it has no choice but to give priority consideration to its existing vacant space when locating new or existing operations. We excluded Postal Service sites because the Postal Service advised us it had little or no discretion in deciding where to locate most of its facilities in that they needed to be in specific locations to serve customers or near airports. In addition, the Postal Service is exempt from federal laws relating to contracts and property and it has authority to acquire space independently of GSA. The IG reports for the five departments said that only two departments had written policies regarding RDA, and only one of these two had issued procedures. However, the departments said that in spite of not having written policies or procedures, they had located many of their facilities in rural areas. The Energy IG reported that Energy had no specific policies or procedures, but it reported that a preponderance of the department's activities are located in remote parts of the United States. The Interior IG reported that Department of the Interior and the U.S. Geological Survey, 1 of 35 bureaus and offices in the Department of the Interior, had policies regarding RDA. However, neither the department nor any of the bureaus and offices had procedures to ensure compliance with the policies. The IG reported that of the 270 locations established in the last 5 years, 197 (73 percent) were located in rural areas. The IG said that the decision to place facilities in rural areas was influenced by Interior's mission rather than by the requirements of RDA. The Justice IG said Justice had no specific policy or procedures on RDA, but department bureaus, offices, boards, and divisions were instructed to implement all applicable federal regulations. The Justice IG cited the GSA regulation requiring agencies to give first priority to the location of new offices and other facilities in rural areas. The IG said it relies upon GSA for most of its space needs, and GSA is responsible for compliance with RDA. Further, the IG said the locations of its facilities are ultimately determined by mission and operational requirements, which predominantly require locations in major metropolitan areas. For example, U.S. Attorneys Offices and the U.S. Marshals Service need to be located near federal courthouses to accomplish their missions. The Bureau of Prisons is located in rural areas to decrease land costs and increase security. The Immigration and Naturalization Service is stationed in both urban and rural areas along the borders of the United States. The Federal Bureau of Investigation and the Drug Enforcement Administration are law enforcement agencies, and their missions and operational requirements determine the location of facilities. The IG also pointed out that the Federal Bureau of Investigation's data center is located in a rural part of West Virginia. The Department of Transportation policy on RDA was the most complete of the agencies we reviewed in that Transportation has procedures that require a discussion of the considerations given to rural areas and requires an explanation if a rural location is not selected. However, the Transportation IG said the department does not provide any guidance on decision criteria or factors to be considered, such as cost-benefit analysis, access to public transportation, or effects of relocation on the workforce. Of 33 site location decisions made from October 1997 through February 2002, the Transportation IG found that 24 had no documentation in the files to indicate compliance with RDA. According to the Veterans Affairs IG, the department had no written policy or procedures regarding RDA. The IG said priority is given to locating new Veterans Health Administration medical care facilities in locations convenient to veteran patients and to collocating Veterans Benefits Administration regional offices on Veterans Affairs medical center grounds. Telework could be used to allow federal workers who live in rural areas to work in or near their homes, at least on a part-time basis. For over a decade, telework, also called telecommuting or flexiplace, has gained popularity because it offers the potential to benefit employers, including the federal government, by reducing traffic congestion and pollution, improving the recruitment and retention of employees, increasing productivity, and reducing the need for office space. Employees can benefit from reduced commuting time; lower costs for transportation, parking, food, and clothing; and a better balance of work and family demands, which could improve morale and quality of life. Other benefits might include removing barriers for those with disabilities who want to be part of the work force and helping agencies maintain continuity of operations in emergency operations. Congress has enacted legislation that has promoted the use of telework in several ways, including authorizing GSA telework centers, requiring each agency to consider using alternate workplace arrangements when considering whether to acquire space for use by employees, requiring each agency to establish a policy under which eligible employees may participate in telecommuting to the maximum extent possible, and encouraging the deployment of high-speed Internet access in rural areas. Congress has provided both GSA and OPM with lead roles and shared responsibilities for advancing telework in the federal government. Under the telework centers program, GSA supports 15 centers located in the Washington, D.C., metropolitan area. These centers make alternative office environments available to federal employees to perform their work at a site closer to their homes. According to a recent OPM report, federal agencies reported in November 2002 that about 90,000 employees, or about 5 percent of the workforce, were teleworking, compared with about 74,500, or 4.2 percent, reported in 2001. OPM reported that about 625,300 employees, or 35 percent of the federal workforce, were eligible to telework in 2002, and 68.5 percent of the total eligible federal workforce had been offered the opportunity to telework. In 2002, 14.4 percent of eligible employees teleworked. OPM reported that the rise in the number of teleworkers was due to a number of factors, including intensified efforts by agencies to encourage telework and a decline in management resistance to telework after training and education efforts. OPM did not report on the number of federal workers who resided in rural areas who were able to telework. We did not verify the accuracy of the OPM data. OPM reported a change in the ranking of major barriers to telework from an April 2001 survey of agencies to the November 2002 survey. As shown in table 2, security became the main barrier in 2002, replacing management resistance, which had been the main barrier in 2001. In July 2003 we reported on the federal government's progress in implementing telework programs. We found that although OPM and GSA offer services and resources to encourage telework in the government, they have not fully coordinated their efforts and have had difficulty in resolving their conflicting views on telework-related matters. As a result, agencies have not always received consistent, inclusive, unambiguous support and guidance related to telework. We recommended that OPM and GSA improve the coordination of their efforts to provide federal agencies with enhanced support and guidance related to telework and to assist agencies in implementing 25 key practices we identified. After we discussed the issues created by the lack of coordination between GSA and OPM, a GSA official indicated that GSA and OPM would commit to improved coordination. The 25 key practices we identified by reviewing telework-related literature and guidelines that federal agencies should implement in developing telework programs are listed in table 3. We found that the four agencies we reviewed for that report, the Departments of Education and Veterans Affairs, GSA, and OPM, had implemented 7 of the 25 practices and had generally implemented the 5 practices relating to technology. Nevertheless, technological issues, such as not being able to access to high-speed Internet connections, could have a detrimental effect on the ability of some federal workers in rural areas to take advantage of telework. CRS reported this year on the ability of users to take advantage of high- speed, or broadband, Internet access. CRS reported that although many, but not all, offices and businesses now have Internet broadband access, a remaining challenge is providing broadband over "the last mile" to consumers in their homes. Congress has required the Federal Communications Commission (FCC) to determine whether advanced telecommunications capability is being deployed to all Americans in a reasonable and timely fashion and, if not, to take immediate action to accelerate deployment by removing barriers to infrastructure investment and by promoting competition in the telecommunications market. In August 2000, FCC concluded that advanced telecommunications capability was being deployed in a reasonable and timely fashion overall, although rural, minority, low-income, inner city, tribal, and U.S. territory consumers were particularly vulnerable to not receiving service in a timely fashion. In February 2002, FCC concluded that the deployment of advanced telecommunications capability to all Americans was reasonable and timely and investment in infrastructure for most markets remained strong, even though the pace of investment trends had slowed. According to CRS, about 85 percent of households have access to broadband. CRS also reported that the President's Council of Advisors on Science and Technology concluded in December 2002 that although government should not intervene in the telecommunications marketplace, it should apply existing policies and promote government broadband applications and telework, among other actions. CRS also noted that much broadband legislation introduced in the 107th Congress sought to provide tax credits, grants, and/or loans for broadband deployment, primarily in rural and/or low income areas. It also noted that Public Law 107-171, the Farm Security and Rural Investment Act of 2002, authorized a loan and loan guarantee program to entities for facilities and equipment providing broadband service in eligible rural communities. The purpose of this legislation is to accelerate broadband deployment in rural areas. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions you or other Members of the Committee may have at this time. For further information on this testimony, please contact Bernard L. Ungar on (202) 512-2834 or at [email protected]. Key contributions to this testimony were made by John Baldwin, Frederick Lyles, Susan Michal- Smith, and Bill Dowdal. 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The location of an organization's facilities has far reaching and long-lasting impacts on its operational costs and ability to attract and retain workers. The Rural Development Act of 1972 has required federal agencies to give first priority to locating new offices and other facilities in rural areas. Rural areas generally have lower real estate and labor costs, but agency missions often require locations in urban areas. Telework, also called telecommunicating or flexiplace, is a tool that allows employees to work at home or another work location other than a traditional office. Benefits of telework include reducing traffic congestion, improving the recruitment and retention of workers, and reducing the need for office space. Telework could allow federal workers who live in rural areas to work in or near their homes, at least some of the time. This testimony summarizes and updates work GAO has previously done on the progress in and barriers to the federal government's efforts to locate its operations and workers, when possible, in rural areas. Even though federal agencies have been required since 1972 to develop policies and procedures to give priority to locating new offices and other facilities in rural areas, this requirement has not been an important factor in location decisions. In September 1990 we reported that there were multiple laws and regulations to guide federal agencies in selecting facility locations, but they did not always provide for consideration of the best financial interest of the government as a factor in the decision-making process. In July 2001 we reported that many agencies had not issued policies and procedures to give rural areas priority when considering the location of new facilities. Only about 12 percent of federal workers were located in nonmetropolitan statistical areas, a percentage that remained unchanged from 1989 to 2000. Agencies said the need to be near clients, primarily in urban areas, dictated the location of most operations in urban areas. In spite of not having policies to give priority to rural areas, agencies sometimes locate their operations in rural areas to serve clients in those areas. Also, some functions, such as research and development, supply and storage, automated data processing, and finance and accounting, can be located in rural areas. Rural areas can offer lower real estate costs, improved security, reduced parking and traffic congestion problems, and better access to major transportation arteries. Potential barriers to locating in rural areas include the lack of public transportation, lack of available labor, location far from some other agency facilities, and sometimes insufficient infrastructure for high-speed telecommunications. In our July 2001 report, we made several recommendations to the General Services Administration and Congress to improve location decisionmaking. Congress and the General Services Administration subsequently took action to stress the requirements of the Rural Development Act. Congress has promoted telework in several ways, including authorizing of telework centers in the Washington, D.C., area, requiring agencies to establish a policy under which employees may participate in telecommuting to the maximum extent possible, and encouraging the development of high-speed Internet access in rural areas. However, only about 5 percent of the federal workforce is currently teleworking. In our July 2003 report, we recommended that the General Services Administration and the Office of Personnel Management improve their coordination and provide agencies with more consistent guidance on telework and assist agencies in implementing key practices we identified. The agencies generally agreed with our recommendations and committed to implement them. In addition, the Congressional Research Service reported in July 2003 that about 85 percent of U.S. households have broadband access, although rural, minority, low-income, inner city, tribal, and U.S. territory consumers are particularly vulnerable to not receiving this service. Technological barriers, such as the lack of access to high-speed Internet connections, could have a detrimental effect on the ability of some federal workers in rural areas to take advantage of telework.

In July 2002 President Bush issued the National Strategy for Homeland Security. The strategy set forth overall objectives to prevent terrorist attacks within the United States, reduce America's vulnerability to terrorism, and minimize the damage and assist in the recovery from attacks that occur. The strategy further identified a plan to strengthen homeland security through the cooperation and partnering of federal, state, local, and private sector organizations on an array of functions. It also specified a number of federal departments, as well as nonfederal organizations, that have important roles in securing the homeland, with DHS having key responsibilities in implementing established homeland security mission areas. This strategy was updated and reissued in October 2007. In November 2002 the Homeland Security Act of 2002 was enacted into law, creating DHS. The act defined the department's missions to include preventing terrorist attacks within the United States; reducing U.S. vulnerability to terrorism; and minimizing the damages and assisting in the recovery from attacks that occur within the United States. The act further specified major responsibilities for the department, including the analysis of information and protection of infrastructure; development of countermeasures against chemical, biological, radiological, and nuclear, and other emerging terrorist threats; securing U.S. borders and transportation systems; and organizing emergency preparedness and response efforts. DHS began operations in March 2003. Its establishment represented a fusion of 22 federal agencies to coordinate and centralize the leadership of many homeland security activities under a single department. We have evaluated many of DHS's management functions and programs since the department's establishment and have issued over 400 related products. In particular, in August 2007 we reported on the progress DHS had made since its inception in implementing its management and mission functions. We also reported on broad themes that have underpinned DHS's implementation efforts, such as agency transformation, strategic planning, and risk management. Over the past 5 years, we have made approximately 900 recommendations to DHS on ways to improve operations and address key themes, such as to develop performance measures and set milestones for key programs and implement internal controls to help ensure program effectiveness. DHS has implemented some of these recommendations, taken actions to address others, and taken other steps to strengthen its mission activities and facilitate management integration. DHS has made progress in implementing its management and mission functions in the areas of acquisition, financial, human capital, information technology, and real property management; border security; immigration enforcement; immigration services; aviation, surface transportation, and maritime security; emergency preparedness and response; critical infrastructure and key resources protection; and science and technology. Overall, DHS made more progress in implementing its mission functions than its management functions, reflecting an initial focus on implementing efforts to secure the homeland. DHS has had to undertake these critical missions while also working to transform itself into a fully functioning cabinet department--a difficult undertaking for any organization and one that can take, at a minimum, 5 to 7 years to complete even under less daunting circumstances. As DHS continues to mature as an organization, we have reported that it will be important that it works to strengthen its management areas since the effectiveness of these functions will ultimately impact its ability to fulfill its mission to protect the homeland. Acquisition Management. DHS's acquisition management efforts include managing the use of contracts to acquire goods and services needed to fulfill or support the agency's missions, such as information systems, new technologies, aircraft, ships, and professional services. Overall, DHS has made progress in implementing a strategic sourcing program to increase the effectiveness of its buying power and in creating a small business program. However, DHS's progress toward creating a unified acquisition organization has been hampered by various policy decisions. In September 2007 we reported on continued acquisition oversight issues at DHS, identifying that the department had not fully ensured proper oversight of its contractors providing services closely supporting inherently government functions. For example, we found that DHS program officials did not assess the risk that government decisions may be influenced by, rather than independent from, contractor judgments. Federal acquisitions policy requires enhanced oversight of contractors providing professional and management support services that can affect government decision making, support or influence policy development, or affect program management. However, most of the DHS program officials and contracting officers we spoke with were unaware of this requirement, and, in general, did not believe that their professional and management support service contracts required enhanced oversight. We made several recommendations to DHS to address these issues, including that DHS establish strategic-level guidance for determining the appropriate mix of government and contractor employees to meet mission needs; assess program office staff and expertise necessary to provide sufficient oversight of selected contractor services; and review contracts for selected services as part of the acquisition oversight program. Financial Management. DHS's financial management efforts include consolidating or integrating component agencies' financial management systems. In general, since its establishment, DHS has been unable to obtain an unqualified or "clean" audit opinion on its financial statements. For fiscal year 2007, the independent auditor issued a disclaimer on DHS's financial statements and identified eight significant deficiencies in DHS's internal controls over financial reporting, seven of which were so serious that they qualified as material weaknesses. DHS has taken steps to prepare corrective action plans for its internal control weaknesses by, for example, developing and issuing a departmentwide strategic plan for the corrective action plan process and holding workshops on corrective action plans. Until these weaknesses are resolved, DHS will not be in a position to provide reliable, timely, and useful financial data to support day-to-day decision making. Human Capital Management. DHS's key human capital management areas include pay, performance management, classification, labor relations, adverse actions, employee appeals, and diversity management. Congress provided DHS with significant flexibility to design a modern human capital management system, and in October 2004 DHS issued its human capital strategic plan. DHS and the Office of Personnel Management jointly released the final regulations on DHS's new human capital system in February 2005. Although DHS intended to implement the new personnel system in the summer of 2005, court decisions enjoined the department from implementing certain labor management portions of the system. DHS has since taken actions to implement its human capital system. In July 2005 DHS issued its first departmental training plan, and in April 2007, it issued its Fiscal Year 2007 and 2008 Human Capital Operational Plan. However, more work remains for DHS to fully implement its human capital system, including developing a market-based and performance-oriented pay system. corporate process for informed decision making by senior leadership about competing information technology investment options; applying system and software development and acquisition discipline and rigor when defining, designing, developing, testing, deploying, and maintaining systems; establishing a comprehensive, departmentwide information security program to protect information and systems; having sufficient people with the right knowledge, skills, and abilities to execute each of these areas now and in the future; and centralizing leadership for extending these disciplines throughout the organization with an empowered Chief Information Officer. DHS has undertaken efforts to establish and institutionalize the range of information technology management controls and capabilities noted above that our research and past work have shown are fundamental to any organization's ability to use technology effectively to transform itself and accomplish mission goals. However, the department has significantly more to do before each of its management controls and capabilities is fully in place and is integral to how each system investment is managed. For example, in September 2007 we reported on our assessment of DHS's information technology human capital plan. We found that DHS's plan was largely consistent with federal guidance and associated best practices. In particular, the plan fully addressed 15 and partially addressed 12 of 27 practices set forth in the Office of Personnel Management's human capital framework. However, we reported that DHS's overall progress in implementing the plan had been limited. We recommended, among other things, that roles and responsibilities for implementing the information technology human capital plan and all supporting plans be clearly defined and understood. Moreover, DHS has not fully implemented a comprehensive information security program. While it has taken actions to ensure that its certification and accreditation activities are completed, the department has not shown the extent to which it has strengthened incident detection, analysis, and reporting and testing activities. Real Property Management. DHS's responsibilities for real property management are specified in Executive Order 13327, "Federal Real Property Asset Management," and include the establishment of a Senior Real Property Officer, development of an asset inventory, and development and implementation of an asset management plan and performance measures. In June 2006, the Office of Management and Budget (OMB) upgraded DHS's Real Property Asset Management Score from red to yellow after DHS developed an Asset Management Plan, developed a generally complete real property data inventory, submitted this inventory for inclusion in the governmentwide real property inventory database, and established performance measures consistent with Federal Real Property Council standards. DHS also designated a Senior Real Property Officer. Border Security. DHS's border security mission includes detecting and preventing terrorists and terrorist weapons from entering the United States; facilitating the orderly and efficient flow of legitimate trade and travel; interdicting illegal drugs and other contraband; apprehending individuals who are attempting to enter the United States illegally; inspecting inbound and outbound people, vehicles, and cargo; and enforcing laws of the United States at the border. DHS has made some progress in, for example, refining the screening of foreign visitors to the United States and providing training and personnel necessary to fulfill border security missions. In particular, as of December 2006 DHS had a pre-entry screening capability in place in overseas visa issuance offices and an entry identification capability at 115 airports, 14 seaports, and 154 of 170 land ports of entry. Furthermore, in November 2007 we reported on traveler inspections at ports of entry and found that U.S. Customs and Border Protection (CBP) had some success in identifying inadmissible aliens and other violators. However, we also identified weaknesses in CBP's operations at ports of entry and have reported on challenges DHS faced in implementing its comprehensive border protection system, called SBInet, and in leveraging technology, personnel, and information to secure the border. For example, in our November 2007 report on traveler inspections, we identified weaknesses in CBP's operations, including not verifying the nationality and admissibility of each traveler, which could increase the potential that terrorists and inadmissible travelers could enter the United States. In July 2007, CBP issued detailed procedures for conducting inspections, including requiring field office managers to assess compliance with these procedures. However, CBP had not established internal controls to ensure that field office managers share their assessments with CBP headquarters to help ensure that the new procedures were consistently implemented across all ports of entry and reduced the risk of failed traveler inspections. We recommended that DHS implement internal controls to help ensure that field office directors communicate to agency management the results of their monitoring and assessment efforts and formalize a performance measure for the traveler inspection program that identifies CBP's effectiveness in apprehending inadmissible aliens and other violators. Immigration Enforcement. DHS's immigration enforcement mission includes apprehending, detaining, and removing criminal and illegal aliens; disrupting and dismantling organized smuggling of humans and contraband as well as human trafficking; investigating and prosecuting those who engage in benefit and document fraud; blocking and removing employers' access to undocumented workers; and enforcing compliance with programs to monitor visitors. Over the past several years, DHS has strengthened some aspects of immigration enforcement. For example, since fiscal year 2004 U.S. Immigration and Customs Enforcement (ICE) has reported increases in the number of criminal arrests and indictments for worksite enforcement violations. ICE also has begun to introduce principles of risk management into the allocation of its investigative resources. However, ICE has faced challenges in ensuring the removal of criminal aliens from the United States. The agency has also lacked outcome-based performance goals and measures for some its programs, making it difficult for the agency and others to fully determine whether its programs are achieving their desired outcomes. 2007, we reported on USCIS's transformation efforts, noting that USCIS's transformation plans partially or fully addressed most key practices for organizational transformations. For example, USCIS had taken initial steps in addressing problems identified during past efforts to modernize by establishing a Transformation Program Office that reports directly to the USCIS Deputy Director to ensure leadership commitment; dedicating people and resources to the transformation; establishing a mission, vision, and integrated strategic goals; focusing on a key set of priorities and defining core values; and involving employees. However, we found that more attention was needed in the areas of performance management, strategic human capital management, communications, and information technology management. We recommended that DHS document specific performance measures and targets, increase focus on strategic human capital management, complete a comprehensive communications strategy, and continue developing sufficient information technology management practices. Aviation Security. DHS's aviation security mission includes strengthening airport security; providing and training a screening workforce; prescreening passengers against terrorist watch lists; and screening passengers, baggage, and cargo. Since the Transportation Security Administration (TSA) was established in 2001, it has focused much of its effort on aviation security and has developed and implemented a variety of programs and procedures to secure commercial aviation. For example, TSA has undertaken efforts to strengthen airport security; hire and train a screening workforce; prescreen passengers against terrorist watch lists; and screen passengers, baggage, and cargo. TSA has implemented these efforts in part to meet numerous mandates for strengthening aviation security placed on the agency following the September 11, 2001, terrorist attacks. However, DHS has faced challenges in developing and implementing a program to match domestic airline passenger information against terrorist watch lists; fielding needed technologies to screen airline passengers for explosives; and fully integrating risk-based decision making into some of its programs. In November 2007, we reported that TSA continued to face challenges in preventing unauthorized items from being taken through airport checkpoints. Our independent testing identified that while in most cases transportation security officers appeared to follow TSA's procedures and used technology appropriately, weaknesses and other vulnerabilities existed in TSA's screening procedures. Surface Transportation Security. DHS's surface transportation security mission includes establishing security standards and conducting assessments and inspections of surface transportation modes, including passenger and freight rail, mass transit, highways, commercial vehicles, and pipelines. Although TSA initially focused much of its effort and resources on meeting legislative mandates to strengthen commercial aviation security after September 11, 2001, TSA has more recently placed additional focus on securing surface modes of transportation, including establishing security standards and conducting assessments and inspections of surface transportation modes such as passenger and freight rail. However, more work remains for DHS in developing and issuing security standards for all surface transportation modes and in more fully defining the roles and missions of its inspectors in enforcing security requirements. Maritime Security. DHS's maritime security responsibilities include port and vessel security, maritime intelligence, and maritime supply chain security. DHS has developed national and regional plans for maritime security and response and a national plan for recovery, and it has ensured the completion of vulnerability assessments and security plans for port facilities and vessels. DHS has also developed programs for collecting information on incoming ships and working with the private sector to improve and validate supply chain security. However, DHS has faced challenges in implementing certain maritime security responsibilities including, for example, a program to control access to port secure areas and to screen incoming cargo for radiation. In October 2007, we testified on DHS's overall maritime security efforts as they related to the Security and Accountability for Every (SAFE) Port Act of 2006. In that testimony we noted that DHS had improved security efforts by establishing committees to share information with local port stakeholders and taking steps to establish interagency operations centers to monitor port activities, conducting operations such as harbor patrols and vessel escorts, writing port-level plans to prevent and respond to terrorist attacks, testing such plans through exercises, and assessing security at foreign ports. We further reported that DHS had strengthened the security of cargo containers through enhancements to its system for identifying high-risk cargo and expanding partnerships with other countries to screen containers before they are shipped to the United States. However, we reported on challenges faced by DHS in its cargo security efforts, such as CBP's requirement to test and implement a new program to screen 100 percent of all incoming containers overseas--a departure from its existing risk-based programs. Among our recommendations were that DHS develop strategic plans, better plan the use of its human capital, establish performance measures, and otherwise improve program operations. Emergency Preparedness and Response. DHS's emergency management mission, now primarily consolidated in the Federal Emergency Management Agency (FEMA), includes prevention, mitigation, preparedness for, response to, and immediate recovery from major disasters and emergencies of all types, whether the result of nature or acts of man. The goal is to minimize damage from major disasters and emergencies by working with other federal agencies, state and local governments, nongovernment organizations, and the private sector to plan, equip, train, and practice needed skills and capabilities to build a national, coordinated system of emergency management. The Post-Katrina Emergency Management Reform Act of 2006 specifies a number of responsibilities for FEMA and DHS in the area of emergency preparedness and response designed to address many of the problems identified in the various assessments of the preparation for and response to Hurricane Katrina. It addresses such issues as roles and responsibilities, operational planning, capabilities assessments, and exercises to test needed capabilities. DHS has taken some actions intended to improve readiness and response based on our work and the work of congressional committees and the Administration. For example, in January 2008 DHS issued a revised National Response Framework intended to further clarify federal roles and responsibilities and relationships among federal, state, and local governments and responders, among others. However, these revisions have not yet been tested. DHS has also made structural changes in response to the Post-Katrina Emergency Management Reform Act that, among other things, are designed to strengthen FEMA. DHS has also announced a number of other actions to improve readiness and response. However, until states and first responders have an opportunity to train and practice under some of these changes, it is unclear what impact, if any, they will have on strengthening DHS's emergency preparedness and response capabilities. stakeholders and information sharing and warning capabilities, and identifying and reducing threats and vulnerabilities. DHS has developed a national plan for critical infrastructure and key resources protection and undertaken efforts to develop partnerships and to coordinate with other federal, state, local and private sector stakeholders. DHS has also made progress in identifying and assessing critical infrastructure threats and vulnerabilities. For example, in July and October 2007 we reported on critical infrastructure sectors' sector-specific plans. We reported that although nine of the sector-specific plans we reviewed generally met National Infrastructure Protection Plan requirements and DHS's sector- specific plan guidance, eight plans did not address incentives the sectors would use to encourage owners to conduct risk assessments, and some plans were more comprehensive than others when discussing their physical, human, and cyber assets, systems, and functions. We recommended that DHS better (1) define its critical infrastructure information needs and (2) explain how the information will be used to attract more users. We also reported that the extent to which the sectors addressed aspects of cyber security in their sector-specific plans varied and that none of the plans fully addressed all 30 cyber security-related criteria. DHS officials said that the variance in the plans can primarily be attributed to the levels of maturity and cultures of the sectors, with the more mature sectors--sectors with preexisting relationships and a history of working together--generally having more comprehensive and complete plans than more newly established sectors without similar prior relationships. Regarding cyber security, we recommended a September 2008 deadline for sector-specific agency plans to fully address cyber- related criteria. Although DHS has made progress in these areas, it has faced challenges in sharing information and warnings on attacks, threats, and vulnerabilities and in providing and coordinating incident response and recovery planning efforts. For example, we identified a number of challenges to DHS's Homeland Security Information Network, including its coordination with state and local information sharing initiatives. Science and Technology. DHS's science and technology efforts include coordinating the federal government's civilian efforts to identify and develop countermeasures to chemical, biological, radiological, nuclear, and other emerging terrorist threats. DHS has taken steps to coordinate and share homeland security technologies with federal, state, local, and private sector entities. However, DHS has faced challenges in assessing threats and vulnerabilities and developing countermeasures to address those threats. With regard to nuclear detection capabilities, in September 2007 we reported on DHS's testing of next generation radiation detection equipment. In particular, we reported that the Domestic Nuclear Detection Office (DNDO) used biased test methods that enhanced the performance of the next generation equipment and that, in general, the tests did not constitute an objective and rigorous assessment of this equipment. We recommended that DNDO delay any purchase of this equipment until all tests have been completed, evaluated, and validated. Our work has identified cross-cutting issues that have hindered DHS's progress in its management and mission areas. We have reported that while it is important that DHS continue to work to strengthen each of its core management and mission functions, it is equally important that these key issues be addressed from a comprehensive, departmentwide perspective to help ensure that the department has the structure and processes in place to effectively address the threats and vulnerabilities that face the nation. These issues are: (1) transforming and integrating DHS's management functions; (2) engaging in effective strategic and transition planning efforts and establishing baseline performance goals and measures; (3) applying and improving a risk management approach for implementing missions and making resource allocation decisions; (4) sharing information with key stakeholders; and (5) coordinating and partnering with federal, state, local, and private sector agencies entities. In addition, accountability and transparency are critical to the department effectively integrating its management functions and implementing its mission responsibilities. DHS has faced an enormous management challenge in its transformation efforts as it works to integrate 22 component agencies. Each component agency brought differing missions, cultures, systems, and procedures that the new department had to efficiently and effectively integrate into a single, functioning unit. At the same time it has weathered these growing pains, DHS has had to fulfill its various homeland security and other missions. DHS has developed a strategic plan, is working to integrate some management functions, and has continued to form necessary partnerships to achieve mission success. Nevertheless, in 2007 we reported that DHS's implementation and transformation remained high-risk because DHS had not yet developed a comprehensive management integration strategy and its management systems and functionsespecially related to acquisition, financial, human capital, and information managementwere not yet fully integrated and wholly operational. We identified that this array of management and programmatic challenges continued to limit DHS's ability to carry out its roles under the National Strategy for Homeland Security in an effective, risk-based way. We have recommended, among other things, that agencies on the high-risk list produce a corrective action plan that defines the root causes of identified problems, identifies effective solutions to those problems, and provides for substantially completing corrective measures in the near term. Such a plan should include performance metrics and milestones, as well as mechanisms to monitor progress. OMB has stressed to agencies the need for corrective action plans for individual high-risk areas to include specific goals and milestones. GAO has said that such a concerted effort is critical and that our experience has shown that perseverance is critical to resolving high-risk issues. In the spring of 2006, DHS provided us with a draft corrective action plan that did not contain key elements we have identified as necessary for an effective corrective action plan, including specific actions to address identified objectives. As of February 2008, DHS had not yet completed a corrective action plan. According to DHS, the department plans to use its revised strategic plan, which is at OMB for final review, as the basis for its corrective action plan. The significant challenges DHS has experienced in integrating its disparate organizational cultures and multiple management processes and systems make it an appropriate candidate for a Chief Operating Officer/Chief Management Officer (COO/CMO) as a second deputy position or alternatively as a principal undersecretary for management position. Designating the Undersecretary for Management at DHS as the CMO at an Executive Level II is a step in the right direction, but this change does not go far enough. A COO/CMO for DHS with a limited term that does not transition across administrations will not help to ensure the continuity of focus and attention needed to protect the security of our nation. A COO/CMO at the appropriate organizational level at DHS, with a term appointment, would provide the elevated senior leadership and concerted and long-term attention required to marshal its transformation efforts. As part of its transformation efforts, it will be especially important for the department to effectively manage the approaching transition between administrations and sustain its transformation through this transition period. Due to its mission's criticality and the increased risk of terror attacks during changes in administration as witnessed in the United States and other countries, it is important that DHS take steps to help ensure a smooth transition to new leadership. According to the Homeland Security Act of 2002, as amended, DHS is required to develop a transition and succession plan to guide the transition of management functions to a new Administration by December 2008. DHS is working to develop and implement plans and initiatives for managing the transition. Moreover, the Homeland Security Advisory Council issued a report in January 2008 on the pending transition, making recommendations in the broad categories of threat awareness, leadership, congressional oversight/action, policy, operations, succession, and training. DHS is taking action to address some challenges of the approaching transition period, including filling some leadership positions traditionally held by political appointees with career professionals. The department is also undertaking training and cross- training of senior career personnel that would address the council's concerns for leadership and operational continuity. However, some other Homeland Security Advisory Council recommendations, such as building a consensus among current DHS officers regarding priority policy issues, could prove more difficult for DHS to implement, particularly in light of the need to clarify roles and responsibilities across the department and its ongoing transformation efforts. Strategic planning is one of the critical factors necessary for the success of new organizations. This is particularly true for DHS, given the breadth of its responsibility and the need to clearly identify how stakeholders' responsibilities and activities align to address homeland security efforts. However, DHS has not always implemented effective strategic planning efforts and has not yet fully developed performance measures or put into place structures to help ensure that the agency is managing for results. DHS has developed performance goals and measures for some of its programs and reports on these goals and measures in its Annual Performance Report. However, some of DHS's components have not developed adequate outcome-based performance measures or comprehensive plans to monitor, assess, and independently evaluate the effectiveness of their plans and performance. Since the issuance of our August 2007 report, DHS has begun to develop performance goals and measures for some areas in an effort to strengthen its ability to measures its progress in key management and mission areas. We commend DHS's efforts to measure its progress in these areas and have agreed to work with the department to provide input to help strengthen established measures. DHS cannot afford to protect everything against all possible threats. As a result, the department must make choices about how to allocate its resources to most effectively manage risk. Risk management has been widely supported by the President and Congress as a management approach for homeland security, and the Secretary of Homeland Security has made it the centerpiece of departmental policy. A risk management approach can help DHS make decisions more systematically and is consistent with the National Strategy for Homeland Security and DHS's strategic plan, which have all called for the use of risk-based decisions to prioritize DHS's resource investments regarding homeland security-related programs. DHS and several of its component agencies have taken steps toward integrating risk-based principles into their decision-making processes. On a component agency level, the Coast Guard, for example, has developed security plans for seaports, facilities, and vessels based on risk assessments. TSA has also incorporated risk-based decision making into a number of its programs, such as programs for securing air cargo, but has not yet completed these efforts. risk management to homeland security and suggested a number of ways to use risk communication practices to better educate and inform the public. The participants also proposed a number of steps that could be taken in the near future to strengthen risk management practices and to stimulate public discussion and awareness of risk management concepts. We are working with the department to share ideas raised at the forum to assist them as they work to strengthen their risk-based efforts. We will be issuing a summary of this forum in the coming months. In 2005, we designated information sharing for homeland security as high- risk and continued that designation in 2007. In doing so, we reported that the nation had not implemented a set of governmentwide policies and processes for sharing terrorism-related information but had issued a strategy on how it would put in place the overall framework, policies, and architecture for sharing with all critical partners--actions that we and others have recommended. The Intelligence Reform and Terrorism Prevention Act of 2004, as amended, requires that the President create an "information sharing environment" to facilitate the sharing of terrorism- related information, yet this environment remains in the planning stage. An implementation plan for the environment, which was released in November 2006, defines key tasks and milestones for developing the information sharing environment, including identifying barriers and ways to resolve them, as we recommended. We have noted that completing the information sharing environment is a complex task that will take multiple years and long-term administration and congressional support and oversight and will pose cultural, operational, and technical challenges that will require a collaborated response. DHS has taken some steps to implement its information sharing responsibilities and support other information sharing efforts. For example, states and localities are creating their own information fusion centers, some with DHS support. In October 2007 we reported that some state and local fusion centers had DHS personnel assigned to them; access to DHS's unclassified information networks or systems, such as the Homeland Security Information Network; and support from DHS grant programs. However, some state and local fusion centers reported challenges to accessing DHS's information systems and identified issues in understanding and using federal grant funds. To improve efforts to create a national network of fusion centers, we recommended that the federal government determine and articulate its role in, and whether it expects to provide resources to, fusion centers over the long term to help ensure their sustainability. To secure the nation, DHS realizes it must form effective and sustained partnerships among its component agencies and with a range of other entities, including other federal agencies, state and local governments, private and nonprofit sectors, and international partners. The National Strategy for Homeland Security recognizes the importance of partnerships as the foundation for establishing a shared responsibility for homeland security among stakeholders. We have reported on difficulties faced by DHS in its coordination efforts. For example, in September 2005 we reported that TSA did not effectively involve private sector stakeholders in its decision-making process for developing security standards for passenger rail assets. We recommended that DHS develop security standards that reflect industry best practices and can be measured, monitored, and enforced by TSA rail inspectors and, if appropriate, rail asset owners. DHS agreed with these recommendations. DHS has worked to strengthen partnerships and has undertaken a number of coordination efforts with public and private-sector entities. These include, for example, partnering with the Department of Transportation to strengthen the security of surface modes of transportation, airlines to improve aviation passenger and cargo screening, the maritime shipping industry to facilitate containerized cargo inspection, and the chemical industry to enhance critical infrastructure protection at such facilities. In addition, FEMA has worked with other federal, state, and local entities to improve planning for disaster response and recovery. Although DHS has taken action to strengthen partnerships and improve coordination, we found that more work remains to support the leveraging of resources and the effective implementation of its homeland security responsibilities. Accountability and transparency are critical to the department effectively integrating its management functions and implementing its mission responsibilities. We have reported that it is important that DHS make its management and operational decisions transparent enough so that Congress can be sure that it is effectively, efficiently, and economically using the billions of dollars in funding it receives annually. We have encountered delays at DHS in obtaining access to needed information, which has impacted our ability to conduct our work in a timely manner. Since we highlighted this issue last year to this subcommittee, our access to information at DHS has improved. For example, TSA has worked with us to improve their process for providing us with access to documentation. DHS also provided us with access to its national level preparedness exercise. However, we continue to experience some delays in obtaining information from DHS, and we continue to believe that DHS needs to make systematic changes to its policies and procedures for how DHS officials are to interact with GAO. We appreciate the Subcommittee's assistance in helping us seek improved access to DHS information and support the provision in the Consolidated Appropriations Act, 2008, that restricts a portion of DHS's funding until DHS reports on revisions to its guidance for working with GAO and the DHS IG. We look forward to collaborating with the department on proposed revisions to its GAO guidance. Next month DHS will be 5 years old, a key milestone for the department. Since its establishment, DHS has had to undertake actions to secure the border and the transportation sector and defend against, prepare for, and respond to threats and disasters while simultaneously working to transform itself into a fully functioning cabinet department. Such a transformation is a difficult undertaking for any organization and can take, at a minimum, 5 to 7 years to complete even under less daunting circumstances. Nevertheless, DHS's 5-year anniversary provides an opportunity for the department to review how it has matured as an organization. As part of our broad range of work reviewing DHS management and mission programs, we will continue to assess in the coming months DHS's progress in addressing high-risk issues. In particular, we will continue to assess the progress made by the department in its transformation and information sharing efforts. Further, as DHS continues to evolve and transform, we will review its progress and performance and provide information to Congress and the public on its efforts. This concludes my prepared statement. I would be pleased to answer any questions you and the Subcommittee Members may have. For further information about this testimony, please contact Norman J. Rabkin, Managing Director, Homeland Security and Justice, at 202-512- 8777 or [email protected]. Other key contributors to this statement were Jason Barnosky, Cathleen A. Berrick, Kathryn Bolduc, Anthony Cheesebrough, Rebecca Gambler, Kathryn Godfrey, Christopher Keisling, Thomas Lombardi, Octavia Parks, and Sue Ramanathan. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The Department of Homeland Security (DHS) began operations in March 2003 with missions that include preventing terrorist attacks from occurring within the United States, reducing U.S. vulnerability to terrorism, minimizing damages from attacks that occur, and helping the nation recover from any attacks. GAO has reported that the implementation and transformation of DHS is an enormous management challenge and that the size, complexity, and importance of the effort make the challenge especially daunting and critical to the nation's security. GAO's prior work on mergers and acquisitions found that successful transformations of large organizations, even those faced with less strenuous reorganizations than DHS, can take at least 5 to 7 years to achieve. This testimony is based on GAO's August 2007 report evaluating DHS's progress between March 2003 and July 2007, selected reports issued since July 2007, and our institutional knowledge of homeland security issues. Since its establishment, DHS has made progress in implementing its management and mission functions in the areas of acquisition, financial, human capital, information technology, and real property management; border security; immigration enforcement and services; aviation, surface transportation, and maritime security; emergency preparedness and response; critical infrastructure protection; and science and technology. In general, DHS has made more progress in its mission areas than in its management areas, reflecting an initial focus on protecting the homeland. While DHS has made progress in implementing its functions in each management and mission area, we identified challenges remaining in each of these areas. These challenges include providing appropriate oversight for contractors; improving financial management and controls; implementing a performance-based human capital management system; implementing information technology management controls; balancing trade facilitation and border security; improving enforcement of immigration laws, enhancing transportation security; and effectively coordinating the mitigation and response to all hazards. Key issues that have affected DHS's implementation efforts are agency transformation, strategic planning and results management, risk management, information sharing, partnerships and coordination, and accountability and transparency. For example, GAO designated DHS's implementation and transformation as high-risk. While DHS has made progress in transforming its component agencies into a fully functioning department, it has not yet addressed key elements of the transformation process, such as developing a comprehensive transformation strategy. The Homeland Security Act of 2002, as amended, requires DHS to develop a transition and succession plan to guide the transition of management functions to a new Administration; DHS is working to develop and implement its approach for managing the transition. DHS has begun to develop performance goals and measures in some areas in an effort to strengthen its ability to measure its progress in key areas. We commend DHS's efforts and have agreed to work with the department to provide input to help strengthen established measures. DHS also has not yet fully adopted and applied a risk management approach in implementing its mission functions. Although some DHS components have taken steps to do so, this approach has not yet been implemented departmentwide. DHS's 5-year anniversary provides an opportunity for the department to review how it has matured as an organization. As part of our broad range of work reviewing DHS's management and mission programs, GAO will continue to assess DHS's progress in addressing high-risk issues. In particular, GAO will continue to assess the progress made by the department in its transformation and information sharing efforts.

AOC and its major construction contractors have moved the CVC project forward since the Subcommittee's June 14 hearing, although the majority of the selected milestones scheduled for completion by today's hearing have not been completed on time. According to the construction management contractor, the base project's construction was about 70 percent complete as of June 30, compared with about 65 percent as of May 31. The sequence 1 contractor, Centex Construction Company, which was responsible for the project's excavation and structural work, has continued to address punch-list items, such as stopping water leaks. Although AOC had expected the sequence 1 contractor to complete the punch-list work and be off-site by June 30, some of this work remains to be done. The sequence 1 contractor has closed its on-site project office and plans to send workers back to the site to complete the remaining work. AOC has retained funds from the sequence 1 contractor that it believes will be sufficient to cover the cost of the remaining work. Furthermore, the sequence 2 contractor, which is responsible for the mechanical, electrical, plumbing, and finishing work, has continued to make progress in these areas, including erecting masonry block, placing concrete, and installing finish stone, drywall framing, plaster, and granite pavers. Many of the granite pavers that were installed on the plaza deck for the inauguration have to be replaced because of problems with quality or damage after installation. The sequence 2 contractor plans to replace these pavers when the plaza deck will no longer be needed for deliveries of construction materials. The sequence 2 contractor has also continued work on the utility tunnel, and in June, AOC executed a sequence 2 contract modification to construct the House connector tunnel. AOC expects this work to begin soon. As the Subcommittee requested, we worked with AOC to select sequence 2 milestones that the Subcommittee can use to help track the project's progress from the Subcommittee's May 17 hearing to July 31. We and AOC selected 22 milestones, of which 11 were scheduled for completion before June 14, 6 others before July 14, and 5 others before July 31. These milestones are shown in appendix 1 and include activities on the project's critical path, as well as other activities that we and AOC believe are important for the project's timely completion. As we reported during the Subcommittee's June 14 hearing, AOC's sequence 2 contractor completed 6 of the 11 selected activities scheduled for completion before that date--3 were completed on time and 3 were late. The remaining 5 activities had not been completed as of June 14. Of these 5, 4 have now been completed and as of July 12, 1 remained incomplete. In addition, as of July 12, the contractor was late in completing 1 of the 6 selected activities scheduled for completion between June 14 and July 14 and had not yet completed the remaining 5. AOC does not expect these delays to extend the project's scheduled September 2006 completion date because it believes that the sequence 2 contractor can recover the lost time. A few months ago, AOC expected the utility tunnel to be operational in October 2005, but it extended that date to March 20, 2006, before the June hearing. The June schedule shows the tunnel being operational on March 7. The sequence 2 contractor has indicated that the impact of the October- to-March delay on CVC construction could be mitigated by using temporary dehumidification equipment, adding more workers to certain utility tunnel activities, or both. However, this mitigation approach would increase the government's costs. We previously identified the utility tunnel as a project schedule and cost risk because of possible unforeseen conditions associated with underground work, and AOC and the sequence 2 contractor believe that such risk still exists with respect to the remaining tunnel work. Given this risk and the importance to the rest of the project of having the utility tunnel operational as soon as possible, AOC has asked the project team to explore options for accelerating the completion of the work necessary to begin the tunnel's operations. We agree with AOC that delays in making this tunnel operational could have significant adverse effects on other project elements and that priority attention should be given to this area. Accelerating work may be cost-beneficial in this case. Since the June 14 hearing, the sequence 2 contractor has also encountered unforeseen conditions that, according to AOC's construction management contractor, could delay the installation of stone on the Capitol's East Front. Unless mitigated, this delay, in turn, could delay AOC's estimated September 15, 2006, opening date. In fact, the June schedule shows a 24- day delay for this work, which is on the project's critical path, and therefore pushes AOC's scheduled date for opening CVC to the public to October 19, 2006. AOC and its construction management contractor are assessing the situation and expect to have more information on this problem within the next month. However, they believe that they will be able to recover the lost time by resequencing work, although they acknowledge that their mitigation approach would require sufficient stone to be available. The project has not been receiving stone in the quantities set forth in the delivery schedule--a risk that we previously identified-- and AOC and its contractors have been taking action to address this problem, but have not yet resolved it. Mitigating this potential delay in East Front stone installation could increase the government's costs if the mitigation involves, among other actions, expediting the installation to recover lost time. Our May 17 and June 14 statements contained several observations on AOC's management of the project's schedules, including our view that problems in this area contributed to slippage in the project's scheduled completion date and additional project costs associated with delays. The statements also discussed recommendations we had already made to AOC to enhance its schedule management. AOC had agreed with these recommendations and had generally begun to implement them, but we believed that it still needed to give priority attention to them to keep the project on track and as close to budget as possible. An updated discussion follows of the issues that need AOC's priority attention, along with current information on the status of AOC's actions to address these issues. Having realistic time frames for completing work and obtaining fully acceptable schedules from contractors. Over the course of the project, AOC's schedules have shown dates for completing tasks that project personnel themselves considered optimistic or unlikely to be met. In addition, the master project schedule (prepared by AOC's construction management contractor) that AOC was using in May 2005 (the April schedule that AOC said it would use as a baseline for measuring progress on the project) did not tie all interrelated activities together and did not identify the resources to be applied for all the activities, as AOC's contract requires. During the Subcommittee's June 14 hearing, AOC said that it would reassess the time scheduled for tasks by today's hearing. Since the Subcommittee's June 14 hearing, AOC's construction management and sequence 2 contractors reviewed the reasonableness of the time scheduled for 14 critical or near-critical activities and determined that, in general, the time shown in the May 2005 schedule reasonably reflected the time required to perform 11 of these activities. In addition, the sequence 2 contractor agreed to provide more detail about the 3 remaining activities so that the reasonableness of the time scheduled for them could be reviewed later. Although the contractors' review did not involve a detailed, data-based analysis of the time scheduled for activities using such information as crew size and worker productivity, AOC's construction management contractor said that it would do such analyses in the future, as appropriate. The construction management contractor said it has not yet done such an analysis for stonework because, to date, less stone has been delivered to the site than was expected and more stone workers have been available than could be used, given the shortage of stone. In AOC's view, this stone shortage has begun to delay important activities, and as we previously indicated, AOC is working with its contractors to resolve the problem. According to AOC's construction management contractor, both the project's May and June 2005 master schedules (1) reflect significant improvement in the linkage of interrelated tasks, although the contractor recognizes that more work needs to be done in this area and (2) generally provide sufficient information to manage the project's resources. However, the contractor also recognizes the need for the sequence 2 and other contractors to continue adding more detail to the activities scheduled for some project elements, such as the exhibit and expansion spaces, so that more of the interrelated activities will be linked in the schedule. The contractor also said that it will be continuously reassessing the extent to which construction contractors identify the resources they plan to apply to meet scheduled completion dates, as contractually required. Both adding detail to activities and identifying the resources to be applied are helpful in assessing the reasonableness of the time scheduled and in managing contractors' performance. The sequence 2 contractor has provided a separate schedule showing its target dates for adding more detail to 30 project tasks. On July 8, AOC's construction management contractor accepted the April project schedule, subject to several conditions. Because the May 2005 master schedule for the CVC project contains additional detail on activities and information on resources to be applied, we agree with AOC's construction management contractor that this schedule represents an improvement over earlier schedules. However, we still have concerns about the extent to which the schedule links related activities, which the construction management contractor has agreed to address, and about whether AOC's September 15, 2006, target date for opening the facility to the public is realistic. For the following reasons, we continue to believe that the project is more likely to be substantially completed in the December 2006 to March 2007 time frame than by September 2006: Because of unforeseen site conditions and other problems, AOC's construction contractors have had difficulty meeting a number of milestones. The project still faces risks and uncertainties that could adversely affect its schedule. As we noted in our June 14 testimony, the number of critical and near-critical paths the construction management contractor has identified complicates schedule management and increases the risk of problems that could lead AOC to miss the scheduled completion date. Like the project's May 2005 schedule, the June schedule shows seven paths that are critical or near critical. Among the critical paths are East Front stonework and some interior stonework, which slipped by 24 days and 3 days in June, respectively. In addition, some other interior stonework that is not generally on a critical path, such as the installation of wall stone in the Great Hall, has slipped by about 4 months since April because of stone shortages according to AOC. Continued slippages in interior stonework could make it difficult for the sequence 2 contractor to meet the September 15, 2006, completion date. Although the CVC project team believes that it can recover this time, its ability to do so is not yet clear, given the stone supply problem facing the project. Furthermore, although work on the utility tunnel progressed during June, the tunnel work continues to face risks and uncertainties that could delay the project, and the May and June schedules show that the start and finish dates for a number of activities have continued to slip. Although it is possible for AOC to recover this time, continued slippage could push so many activities to later dates that the contractors may not be able to complete all the work in the remaining available time. In our opinion, AOC lacks reasonable assurance that its contractors have accurately estimated the time necessary to complete work for a number of activities in the schedule. Although the construction management contractor's recent review of how much time is needed to complete schedule activities was helpful, we are still concerned about the reasonableness of the time allowed for a number of the activities. For example, one of the activities reviewed in June whose scheduled duration was found to be generally reasonable was final occupancy inspections. Although AOC's Fire Marshal Division is to do critical work associated with this activity, the duration review that took place since the June 14 hearing occurred without any input from that division, which is to conduct fire safety and occupancy inspections for the project and approve its opening to the public. The Chief Fire Marshal told us that although coordination has improved between his office and the CVC project team, he has not always had an opportunity to review project documentation early in the process and has not yet received the project schedule. As a result, he was uncertain whether the schedule provided enough time for his office to do its work. For example, as of July 8, he had not yet received documentation for the fire protection systems, which his office needs to examine before it can observe tests of these systems as the CVC team has already requested. The Fire Marshal Division will also be involved in fire alarm testing; the construction management contractor plans to assess the duration of this activity later after more detail is added to the schedule. In addition, at the time the construction management contractor performed its duration reassessment of East Front stonework, the project was experiencing difficulty getting stone deliveries on time. It is unclear to us how the duration of the stonework could have been determined to be reasonable given this problem and the lack of a clear resolution at the time. The May 2005 schedule includes a number of base project activities that could be completed after September 15, 2006, even though their completion would seem to be important for CVC to be open to the public. Such activities include installing security systems, kitchen equipment, and theater seating. According to the schedule, the late finish dates for these activities are after September 15. The late finish date is the latest date that an activity can be completed without delaying the scheduled completion date for the entire project. According to the construction management contractor, a number of activities in the schedule that are important to CVC's opening were not linked to the September 15 opening date in the schedule. The contractor agreed to address this issue. Last week, we began to update our risk assessment of the project's schedule and plan to have this update completed in September. AOC has also engaged a consultant to perform a risk assessment of the project's schedule and expects the assessment to be done by mid-September. We believe that better information on the likelihood of AOC's meeting its September 15, 2006, opening date will be available after our update and AOC's schedule risk assessment are done. Aggressively monitoring and managing contractors' adherence to the schedule, including documenting and addressing the causes of delays, and reporting accurately to Congress on the status of the project's schedule. We noted in our May 17 testimony that neither AOC nor its construction management contractor had previously (1) adhered to contract provisions calling for monthly progress review meetings and schedule updates and revisions, (2) systematically tracked and documented delays and their causes as they occurred or apportioned their time and costs to the appropriate parties on an ongoing basis, and (3) always accurately reported on the status of the project's schedule. On June 7 and July 8, AOC, its construction management contractor, the sequence 2 contractor, and AOC's schedule consultant conducted the first and second monthly reviews of the schedule's status using a newly developed approach that we discussed during the Subcommittee's June 14 hearing. Additionally, on June 28, we met with AOC and its construction management contractor to discuss how delays are to be analyzed and documented in conjunction with the new approach to schedule management. During that meeting, AOC's construction management contractor agreed to have its field supervisors document delays and their causes on an ongoing basis and its project control engineer summarize this information for discussion at the monthly schedule reviews. After assessing the new approach and observing the first two review sessions, we believe that, if effectively implemented and sustained, this approach should generally resolve the schedule management concerns we previously raised, including how delays will regularly be handled and how better information on the status of the project will be provided to Congress. As we indicated on June 14, we are encouraged by the construction management contractor's addition of a full-time project control engineer to the project and have seen noteworthy improvements in schedule management since his arrival. Nevertheless, we plan to closely monitor the implementation of this new approach, including the resources devoted to it, the handling of delays, and the accuracy of the information provided to Congress. Developing and implementing risk mitigation plans. While monitoring the CVC project, we have identified a number of risks and uncertainties that could have significant adverse effects on the project's schedule and costs. Some of these risks, such as underground obstructions and unforeseen conditions, have already materialized and have had the anticipated adverse effects. We believe the project continues to face risks and uncertainties, such as unforeseen conditions associated with the project's remaining tunnels, the East Front, and other work; scope gaps or other problems associated with the segmentation of the project between two major contractors; and shortages in the supply of stone and skilled stone workers. As discussed during the Subcommittee's June 14 hearing, AOC has not yet implemented our recommendations that it develop risk mitigation plans for these types of risks and uncertainties, but it has agreed to do so by mid-September. On July 1, AOC added assistance in risk mitigation to the scope of its contract with its schedule consultant. Preparing a master schedule that integrates the major steps needed to complete CVC construction and the steps necessary to prepare for operations. A number of activities, such as obtaining operators' input into the final layouts of retail and food service areas, hiring and training staff, procuring supplies and services, and developing policies and procedures, need to be planned and carried out on time for CVC to open to the public when construction is complete. Although AOC has started to plan and prepare for CVC operations, as we indicated in our May 17 and June 14 testimonies, it has not yet developed a schedule that integrates the construction activities with the activities that are necessary to prepare for operations. The Subcommittee requested such a schedule during its April 13, 2005, hearing on AOC's fiscal year 2006 budget request. Because it lacked funds, AOC had not been able to extend the work of a contractor that had been helping it plan and prepare for operations. During the week of June 6, AOC received authority to spend the funds needed to re-engage this contractor, and on June 30, AOC awarded a contract for the continued planning and preparation for CVC operations. Now that AOC has re-engaged its operations planning contractor, we believe that close coordination between AOC staff working with this contractor and the CVC project's construction team will be especially important for at least two reasons. First, the operations planning contractor's scope of work includes both the design of certain space within the CVC project and the wayfinding signs that are to be used within the project, and the timing and content of this work needs to be coordinated with CVC construction work. Second, about $7.8 million is available for either CVC construction or operations, and it will be important for AOC to balance the need for both types of funding to ensure optimal use of the funds. Moreover, it is not clear to us who in AOC will be specifically responsible for integrating the construction and operations schedules and for overseeing the use of the funds that are available for either construction or operations. As we said during the Subcommittee's May 17 and June 14 hearings, we estimate that the cost to complete the construction of the CVC project, including proposed revisions to its scope, will range from about $522 million without provision for risks and uncertainties to about $559 million with provision for risks and uncertainties. As of July 11, 2005, about $483.7 million had been provided for CVC construction. In its fiscal year 2006 budget request, AOC asked Congress for an additional $36.9 million for CVC construction. AOC believes this amount will be sufficient to complete construction and, if approved, will bring the total funding provided for the project's construction to $520.6 million. Adding $1.7 million to this amount for additional work related to the air filtration system that we believe will likely be necessary brings the total funding needed to slightly more than the previously cited $522 million. AOC believes that it could obtain this $1.7 million, if needed, from the Department of Defense, which provided the other funding for the air filtration system. AOC's $36.9 million budget request includes $4.2 million for potential additions to the project's scope (e.g., congressional seals, an orientation film, and storage space for backpacks) that Congress will have to consider when deciding on AOC's fiscal year 2006 CVC budget request. AOC has not asked Congress for an additional $37 million (the difference between $559 million and $522 million) that we believe will likely be needed to address the risks and uncertainties that continue to face the project. These include, but are not limited to, shortages in the supply of stone, unforeseen conditions, scope gaps, further delays, possible additional requirements or time needed because of life safety or security changes or commissioning, unknown operator requirements, and contractor coordination issues. These types of problems have been occurring, and as of June 30, 2005, AOC had received proposed sequence 2 change orders whose costs AOC now estimates exceed the funding available in fiscal year 2005 for sequence 2 changes by about $1.3 million. AOC's estimate of these change order costs has grown by about $900,000 during the past 4 weeks. AOC plans to cover part of this potential shortfall by requesting approval from the House and Senate Committees on Appropriations to reprogram funds that AOC does not believe will be needed for other project elements. At this time, AOC does not believe that it will need additional funds in fiscal year 2005, assuming it receives reprogramming authority for sequence 2 changes, unless it reaches agreement with the sequence 2 contractor on the costs associated with 10 months' worth of delays that have already occurred. If AOC needs funds for this purpose or for other reasons, it can request approval from the Appropriations Committees to use part of the $10.6 million that Congress approved for transfer to the CVC project from funds appropriated for Capitol Buildings operations and maintenance. For several reasons, we believe that AOC may need additional funds for CVC construction in the next several months. These reasons include the pace at which AOC is receiving change order proposals for sequence 2 work, the problems AOC has encountered and is likely to encounter in finishing the project, the uncertainties associated with how much AOC may have to pay for sequence 2 delays, and uncertainty as to when AOC will have fiscal year 2006 funds available to it. For example, AOC is likely to incur additional costs for dehumidification or for additional workers to mitigate the expected delay in the utility tunnel. AOC may also incur more costs than it expects for certain activities, such as those necessary to support security during the remainder of the project's construction. AOC may be able to meet these needs as well as the other already identified needs by obtaining approval to use some of the previously discussed $10.6 million and by additional reprogramming of funds. However, these funds may not be sufficient to address the risks and uncertainties that may materialize from later this fiscal year through fiscal year 2007. Thus, while AOC may not need all of the $37 million we have suggested be allowed for risks and uncertainties, we believe that, to complete the construction of CVC's currently approved scope, AOC is likely to need more funds in fiscal years 2006 and 2007 than it has already received and has requested. Although the exact amount and timing of AOC's needs are not clear, we believe that between $5 million and $15 million of this $37 million may be required in fiscal year 2006. Effective implementation of our recommendations, including risk mitigation, could reduce AOC's funding needs. Since the Subcommittee's June 14 hearing, three issues related to the project's costs have emerged that we believe should be brought to your attention. Discussion of these issues follows. First, coordination within the CVC project team and between the team and AOC's Fire Marshal Division has been an issue, especially with respect to the project's fire protection systems. Although the CVC project team established biweekly meetings with Fire Marshal Division staff in March 2005 to enhance coordination, gaps in coordination have, as discussed, already led to uncertainty about whether enough time has been scheduled for fire alarm testing and for building occupancy inspections. Such gaps have also increased the costs associated with the fire protection system. For example, AOC recently took contractual action costing over $90,000 to redesign the mechanical system for the Jefferson Building connection to the Library of Congress tunnel to meet the Fire Marshal Division's fire safety requirements. According to the Chief Fire Marshal, he was not given the opportunity to participate in the planning process before the design of the Jefferson Building connection was substantially completed. In addition, several fire-safety-related contract modifications and proposed change orders for additional work now total over $3.5 million. With better coordination between the CVC project team and the Fire Marshal Division, the need for some of this work might have been avoided or identified sooner, and had this work been identified during the original competition, the price would have been subject to competitive pressures that might have resulted in lower costs. Because of the fire protection system's increasing costs, disagreements within the CVC team and between the team and the Fire Marshal Division over fire safety requirements, problems in scheduling fire safety activities, and other related issues, we suggested that AOC take appropriate steps to address the coordination of fire protection activities related to the CVC project. AOC agreed and has taken action. For example, starting this week, AOC's Fire Marshal Division agreed to have a staff member work at the CVC site 2 days a week, and AOC CVC staff recently agreed to provide the necessary documentation to the Fire Marshal Division before its inspections or observations were needed. Second, as we indicated earlier in our testimony, we are concerned about the integration of planning, scheduling, and budgeting for CVC construction and operations. While the CVC project team has been overseeing CVC construction, other AOC staff have been assisting the operations planning contractor in planning and budgeting for CVC operations. Close coordination between the two groups will be especially important in the next few months, when decisions will likely have to be made on how to use the $7.8 million remaining from the $10.6 million that Congress made available to the CVC project for either operations or construction. The Architect of the Capitol agreed to give this issue priority attention. Finally, we are concerned that AOC may incur additional costs for interim measures, such as temporary walls that it may have to construct to open CVC to the public in September 2006. Such interim measures may be needed to make the project safe for visitors if some other construction work has not been completed. For example, AOC may have to do additional work to ensure adequate fire protection for CVC, since the House and Senate expansion spaces are not scheduled to be done until March 2007. In addition, AOC may have to accelerate some work to have it completed by September 15, 2006. While it is not necessarily unusual to use a facility for its intended purpose before all construction work is complete, we believe that it will be important for Congress to know what additional costs AOC expects to incur to open CVC by September 15, 2006, so that Congress can weigh the costs and benefits of opening the facility then rather than at a later date, such as March 2007, when AOC plans to complete the House and Senate expansion spaces. To ensure that (1) Congress has sufficient information for deciding when to open CVC to the public and (2) planning and budgeting for CVC construction and operations are appropriately integrated, we recommend that the Architect of the Capitol take the following two actions: In consultation with other appropriate congressional organizations, provide Congress with an estimate of the additional costs that it expects will be incurred to open CVC to the public by September 15, 2006, rather than later, such as after the completion of the House and Senate expansion spaces. Promptly designate who is responsible for integrating planning and budgeting for CVC construction and operations and give this activity priority attention. AOC agreed to take the actions we are recommending. According to AOC, information on the estimated costs of the additional work necessary to open CVC to the public in September 2006 may not be available until this fall. In addition, AOC said that the recent re-engagement of the contractor assisting AOC in planning for CVC operations and the hiring of an executive director for CVC, which AOC plans to do in the next few months, are critical steps for integrating CVC construction and operations. Mr. Chairman, this completes our prepared statement. We would be happy to answer any questions that you or other Subcommittee Members may have. For further information about this testimony, please contact Bernard Ungar at (202) 512-4232 or Terrell Dorn at (202) 512-6923. Other key contributors to this testimony include Shirley Abel, Maria Edelstein, Elizabeth Eisenstadt, Brett Fallavollita, Jeanette Franzel, Jackie Hamilton, Bradley James, Scott Riback, and Kris Trueblood. Scheduled for completion between 5/17/05 and 6/14/05 Wall Stone Area 3 Base Support Wall Stone Layout Area 4 Saw Cut Road at 1st Street Wall Stone Area 4 Base Support Wall Stone Layout Area 5 Masonry Wall Lower Level East Wall Stone Area 5 Base Support Wall Stone Layout Area 6 Drill/Set Soldier Piles at 1st Street Wall Stone Area 6 Base Support Scheduled for completion between 6/15/05 and 7/31/05 Wall Stone Layout Area 8 Wall Stone Layout Area 9 Wall Stone Area 9 Base Support Wall Stone Installation Area 2 Wall Stone Installation Area 3 Wall Stone Installation Area 4 Wall Stone Area 9 Base Concrete Working Slab 1st Street Waterproof Working Slab Station 0-1 Utility Tunnel 7/29/05 This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

This testimony discusses the Architect of the Capitol's (AOC) progress in achieving selected project milestones and in managing the Capitol Visitor Center (CVC) project's schedule since Congress's June 14 hearing on the project. We will also discuss the project's costs and funding, including the potential cost impact of schedule-related issues. Our observations today are based on our review of schedules and financial reports for the CVC project and related records maintained by AOC and its construction management contractor, Gilbane Building Company; our observations on the progress of work at the CVC construction site; and our discussions with AOC's Chief Fire Marshal and CVC project staff, including AOC, its major CVC contractors, and representatives of an AOC schedule consultant, McDonough Bolyard Peck (MBP). We did not perform an audit; rather, we performed our work to assist Congress in conducting its oversight activities. AOC and its major construction contractors have made progress on the project since Congress's June 14 hearing, but work on some of the selected milestones scheduled for completion by today's hearing is incomplete; some work has been postponed; and some new issues have arisen that could affect the project's progress. Largely because of past problems, remaining risks and uncertainties, and the number of activities that are not being completed on time, we continue to believe that the project is more likely to be completed in the December 2006 to March 2007 time frame than in September 2006. AOC and its construction management contractor have continued their efforts to respond to two recommendations we made to improve the project's management--having a realistic, acceptable schedule and aggressively monitoring and managing adherence to that schedule. However, we still have some concerns about the amount of time scheduled for some activities, the extent to which resources can be applied to meet dates in the schedule, the linkage of related activities in the schedule, and the integration of planning for completing construction and starting operations. Since Congress's last CVC hearing, AOC has engaged contractors to help it respond to two other recommendations we made--developing risk mitigation plans and preparing a master schedule that integrates the major steps needed to complete construction with the steps needed to prepare for operations. AOC has also been taking a number of actions to improve coordination between the CVC project team and AOC's Fire Marshal Division. Insufficient coordination in this area has already affected the project's schedule and cost, and could do so again if further improvements are not made. We continue to believe that the project's estimated cost at completion will be between $522 million and $559 million, and that, as we have previously indicated, AOC will likely need as much as $37 million more than it has requested to cover risks and uncertainties to complete the project. At this time, we believe that roughly $5 million to $15 million of this $37 million is likely to be needed in fiscal year 2006, and the remainder in fiscal year 2007. In the next 2 to 3 months, AOC plans to update its estimate of the project's remaining costs. We will review this estimate and provide Congress with our estimate together with information on when any additional funding is likely to be needed. During the next several months, AOC is likely to face competing demands for funds that can be used for either CVC construction or operations, and it will be important for AOC to ensure that the available funds are optimally used. Finally, we are concerned that AOC may incur costs to open the facility to the public in September 2006 that it would not incur if it postponed the opening until after the remaining construction work is more or fully complete--that is, in March 2007, according to AOC's estimates.

National default and foreclosure rates rose sharply from 2005 through 2009 to the highest level in 29 years (fig. 1). Default rates climbed from 1.09 percent to 5.09 percent, and foreclosure start rates--representing the percentage of loans that entered the foreclosure process each quarter-- grew almost threefold, from 0.42 percent to 1.2 percent. Put another way, over half a million mortgages entered the foreclosure process in the fourth quarter of 2009, compared with about 174,000 in the fourth quarter of 2005. Finally, foreclosure inventory rates rose over 350 percent over the 4-year period, increasing from 0.99 percent to 4.58 percent, with most of that growth occurring after the second quarter of 2007. As a result, over 2 million loans were in the foreclosure inventory as of the end of 2009. Foreclosure starts declined in the last quarter of 2009, but the number of defaults continued to climb. Foreclosure is a legal process that a mortgage lender initiates against a homeowner who has missed a certain number of payments. The foreclosure process has several possible outcomes but generally means that the homeowner loses the property, typically because it is sold to repay the outstanding debt or repossessed by the lender. The foreclosure process is usually governed by state law and varies widely by state. Foreclosure processes generally fall into one of two categories--judicial foreclosures, which proceed through courts, and nonjudicial foreclosures, which do not involve court proceedings. The legal fees, foregone interest, property taxes, repayment of former homeowners' delinquent obligations, and selling expenses can make foreclosure extremely costly to lenders. Options to avoid foreclosure include forbearance plans, short sales, deeds in lieu of foreclosure, and loan modifications. With forbearance plans and loan modifications, the borrower retains ownership of the property. With short sales and deeds in lieu of foreclosure, the borrower does not. In March 2009, Treasury issued the first HAMP guidelines for modifying first lien mortgages in an effort to help homeowners avoid foreclosure. The goal of the first-lien mortgage modification program is to reduce the monthly payments of struggling homeowners to more affordable levels-- specifically 31 percent of household income. According to Treasury, HAMP was intended to offer reduced monthly payments to up to 3 to 4 million homeowners. Under the first-lien modification program, Treasury shares the cost of reducing the borrower's monthly mortgage payments with mortgage holders/investors and provides various financial incentives to servicers, borrowers, and mortgage holders/investors for loans modified under the program for 5 years. To be eligible for a first-lien loan modification: the property must be owner occupied and the borrower's primary residence; the property must be a single-family property (1 to 4 units) with a maximum unpaid principal balance on the unmodified first-lien mortgage that is equal to or less than $729,750 for a 1-unit property; the loan must have been originated on or before January 1, 2009; and the monthly first-lien mortgage payment must be more than 31 percent of the homeowner's gross monthly income. Borrowers have until December 31, 2012, to be accepted into the first-lien modification program. HAMP also includes other subprograms that, for example, offer incentives to modify or pay off second-lien loans of borrowers whose first mortgages were modified under HAMP and to pursue foreclosure alternatives when a HAMP modification cannot be offered. The HAMP first-lien modification program has four main features: 1. Cost sharing - Mortgage holders/investors will be required to take the first loss in reducing the borrower's monthly payments to no more than 38 percent of the borrower's income. Treasury will then use TARP funds to match further reductions on a dollar-for-dollar basis, down to the target of 31 percent of the borrower's gross monthly income. The modified monthly payment is fixed for 5 years or until the loan is paid off, whichever is earlier, as long as the borrower remains in good standing with the program. After 5 years, the payment may increase by 1 percent a year to a cap of the Freddie Mac rate for 30-year fixed rate loans as of the date that the modification agreement is prepared. 2. Standardized net present value (NPV) test - The NPV test compares expected cash flows from a modified loan to the same loan with no modification. If the expected cash flow with a modification is greater than the expected cash flow without a modification, the loan servicer is required to modify the loan. According to Treasury, the NPV test increases mortgage holder/investor confidence and helps ensure that borrowers are treated consistently under the program by providing a transparent and externally derived objective standard for all loan servicers to follow. 3. Standardized waterfall - Servicers must follow a sequential modification process to reduce payments to 31 percent of gross monthly income. Servicers must first capitalize accrued interest and expenses paid to third parties. Next, interest rates must be reduced to the higher of 2 percent or a level that achieves the 31 percent debt-to- income target. If the debt-to-income ratio is still over 31 percent, servicers must then extend the amortization period of the loan up to 40 years. Finally, if the debt-to-income ratio is still over 31 percent, the servicer must forbear--defer--principal until the payment is reduced to the 31 percent target. Servicers may also forgive mortgage principal at any step of the process to achieve the target monthly payment ratio of 31 percent. 4. Incentive payment structure - Treasury will use HAMP funds to provide both one-time and ongoing ("pay-for-success") incentives to loan servicers, mortgage holders/investors, and borrowers to increase the likelihood that the program will produce successful modifications over the long term and help cover the servicers' and investors' costs of modifying a loan. Prior to HAMP, many servicers offered their own loan modification programs, but the vast majority of these loan modifications increased or did not change the borrower's monthly mortgage payment. Rather, the focus of these programs was on bringing delinquent loans current by adding past due interest, advances for taxes or insurance, and other fees to the loan balance. Some of these loan modifications changed the interest rate or remaining term of the loan but typically focused on reducing payments to 38 rather than 31 percent of the borrower's gross monthly income. For example, FDIC's IndyMac Federal Bank loan modification program, on which HAMP is partially based, initially reduced payments to 38 percent of the borrower's gross monthly income before subsequently revising the payment target to 31 percent. Many servicers continue to offer non-HAMP loan modifications for borrowers who do not qualify for HAMP. Appendix I provides examples of non-HAMP loan modification programs and an overview of other federal foreclosure prevention programs. Treasury first announced HAMP in February 2009 and issued the first implementation guidelines in March 2009. Since then, Treasury has issued 11 supplemental directives for the HAMP program, 8 of them for the first- lien modification program (fig. 2). The early supplemental directives tended to focus on basic implementation issues, but the later directives resulted in significant changes to the program--for example, requiring servicers to send written denial notices to borrowers, streamlining the process used by servicers for evaluating borrowers, and requiring that servicers verify borrowers' income before initiating trial modifications. As of March 9, 2010, 113 servicers had signed HAMP Servicer Participation Agreements to modify loans not owned or guaranteed by the government sponsored enterprises (GSE) Fannie Mae and Freddie Mac. Roughly $36.9 billion in TARP funds have been allocated to these servicers for modification of non-GSE loans. These servicers include national financial institutions such as Bank of America, Wells Fargo, and JP Morgan Chase and national servicing organizations such as GMAC Mortgage and Ocwen. Fannie Mae and Freddie Mac required all servicers of loans that they owned or guaranteed to participate in the GSE HAMP program. Treasury reported that through February 2010 servicers had offered nearly 1.4 million HAMP trial modifications to borrowers of GSE and non-GSE loans, and roughly 1.1 million of these had begun HAMP trial modifications. Of the trial modifications begun, about 0.8 million were in active trial modifications, fewer than 0.2 million were in active permanent modifications, and the remaining had been canceled. As shown in figure 3, the number of trial modifications started generally increased until October 2009 but then decreased. In part, the decrease in new trial modifications may be the result of a shift in focus on the part of Treasury and the servicers from starting new modifications to making existing trial modifications permanent. In July 2009, Treasury announced a goal of 500,000 trial modifications started by November 1, 2009. In November, however, Treasury announced a campaign to increase the number of conversions to permanent modifications. Although the first trial modifications started nearly a year ago, servicers are completing permanent modifications at a rate slower than Treasury expected, with 32 percent of loans that have been in trial for 3 months or more approved for conversion. Servicers we spoke with cited several challenges in making trial modifications permanent, including obtaining all the required documentation and borrowers who missed trial period payments. To date, Treasury has reported limited information on the number of borrowers who have been denied trial modifications under HAMP. The 10 HAMP servicers that we spoke with reported a wide range of denial rates. The reasons for denying trial modifications varied by servicer--for example, one servicer reported high proportions of investors prohibiting HAMP modifications and another servicer reported insufficient or excessive borrower income as the most common reasons for denial. Additionally, Treasury has provided limited data on the performance of HAMP modifications, both trial and permanent. According to program administrators, servicers are not required to report trial period payments on a monthly basis, and these payments may not be reported until the trial modification becomes official. Thus, it is difficult to determine the number of borrowers in trial modifications who may be delinquent in their trial payments. Limited information is available on the performance of permanent modifications because few trials have become permanent. According to Treasury, through the end of February 2010, 1,473 of the 170,207 permanent modifications made had defaulted, and 26 had paid off their loans. HAMP payments are contingent upon trial modifications becoming permanent, and given the small number of permanent modifications to date, Treasury has made relatively few incentive payments to investors, servicers, and borrowers. According to Treasury, through the end of February 2010, a total of $58 million had been disbursed to servicers and investors. Roughly 78 percent of these payments went to servicers and 22 percent to investors. As of March 1, 2010, no incentive payments had been made on borrowers' behalf because no borrowers had reached the first anniversary of their trial modification, as the program requires before making the incentive payment. Overall, non-GSE borrowers participating in HAMP had their mortgage interest rates on their loans reduced by approximately 5.5 percentage points (from 7.5 percent to 2.0 percent on average) and for nearly half of these borrowers had seen their loan terms extended to 40 years (an increase of 13 years beyond the original remaining term of the loan). To show the payments that Treasury might make for a typical modification, we developed an example of first-lien cost-sharing and incentive payments based on median loan and borrower characteristics of non-GSE borrowers entering trial modifications through February 17, 2010. For a borrower with a loan of about $222,000 who is paying 44 percent of his gross monthly income toward monthly housing payments, a HAMP modification would reduce the monthly housing payment by $520, from $1,760 to $1,240. Excluding the Home Price Decline Protection (HPDP) incentive, over 5 years Treasury would pay an investor $9,900 for the difference in mortgage payments and other incentives. A servicer would receive $4,500, and a borrower $5,000. In total, the borrower would receive $36,200 in the form of reduced payments and incentives. Appendix II elaborates on this example. In our July 2009 report on HAMP, we noted that Treasury's projection that 3 to 4 million borrowers could be offered loan modifications was based on several uncertain assumptions and might be overly optimistic. Specifically, we reported that some of the key assumptions and calculations regarding the number of borrowers whose loans would be successfully modified under HAMP using TARP funds were necessarily based on limited analyses and data. According to Treasury, projections for the number of non-GSE borrowers who will participate in HAMP are updated quarterly through the revised allocation of TARP funds for HAMP servicers. Nonetheless, according to Treasury's Web site, Treasury continues to expect that HAMP will offer reduced monthly payments to up to 3 to 4 million borrowers. We also reported that while HAMP is the cornerstone effort under TARP to meet the act's goals of preserving homeownership and protecting home values, a number of HAMP programs remained largely undefined. Since that time, additional details of the HPDP incentives, second-lien modification program, and foreclosure alternatives program have been announced, but the number of homeowners who can be helped under these programs remains unclear. In July, we noted that Treasury had not estimated the number of additional modifications that would be made as a result of HPDP incentive payments, even though the potential exists for the incentive payments to use up to $10 billion in TARP funds. To date, Treasury has not prepared any such estimate. In addition, while Treasury has attempted to improve the targeting of these incentive payments by incorporating the size of the unpaid principal balance and the loan-to- value ratio in the payment calculations, HPDP incentives continue to be available for loans that would have passed the NPV test without them. Similarly, although the second-lien and foreclosure alternatives programs were included in the March 2009 program guidelines, no funds have yet been disbursed under either of these programs to date. According to Treasury, as of March 1--over a year after the first announcement of HAMP--details of the second-lien program had not yet been finalized, and only two servicers had signed an agreement to participate in the program. Finally, we reported in July that Treasury had not finalized a comprehensive system of internal control for HAMP. We noted that important parts of a comprehensive system of internal control include, among other things, implementing a system for determining compliance, having sufficient numbers of staffing with the right skills, and establishing and reviewing performance measures and indicators. According to Treasury, it was working with its financial agents to implement such a system and we continue to assess Treasury's efforts in this area. While the Chief of the Homeownership Preservation Office (HPO)--the office within Treasury that is responsible for administering HAMP--consulted with staff and reduced staffing levels from 36 to 29 full-time positions, Treasury has not yet formally assessed whether HPO has staff with the skills needed to govern the program effectively. In addition, Treasury has not yet finalized remedies, or penalites, for servicers who are not in compliance with HAMP guidelines. According to Treasury, these remedies will be complete in April 2010 and a HAMP compliance committee has been established to review issues related to servicers' compliance with program guidelines and to enforce appropriate remedies. Furthermore, while Treasury has put in place some performance metrics for HAMP, it has not developed benchmarks, or goals, to measure these metrics against, limiting its ability to determine the success of the program. We continue to assess Treasury's efforts to establish a comprehensive system of internal control as part of our ongoing oversight of the implementation of TARP and our annual audit of TARP's financial statements. Appendix III provides more detail on the recommendations we made in July and Treasury's responses to them. The servicers we interviewed told us that a major challenge they faced in implementing the HAMP first-lien modification program was the number of changes to the program. Each major program change often required servicers to adjust their business practices, update their systems, and retrain their servicing staff. An example of a significant program change that servicers brought to our attention was Treasury's recent requirement that borrowers fully document their income before they can be evaluated for a trial modification. According to servicers we contacted, Treasury told servicers in July 2009 that it was a "best practice" to use stated income information to evaluate borrowers for trial modifications in order to offer modifications more quickly. As a result, some servicers that had been requiring fully documented income before offering a trial modification switched to using stated income, a change that involved altering business processes, including updating company policies and retraining employees. However, as Treasury became concerned about the number of trial modifications that were not converting to permanent modifications due to difficulty obtaining income documentation from borrowers after the trial period began, Treasury subsequently reversed the policy. In January 2010, Treasury announced that effective June 1, 2010, servicers would be required to evaluate borrowers for trial modifications based on fully documented income. Servicers that switched to or had been using stated income will again have to alter their processes and policies to meet the new standards. Servicers also told us that the instability of Treasury's NPV model presented another implementation challenge. Although the NPV test is a key element in evaluating borrowers for HAMP, servicers told us that they experienced problems accessing and using the NPV model on Treasury's Web portal. According to Treasury, servicers were allowed to use their own NPV models until September 1, but some servicers told us that the lack of a Treasury model made it difficult for them to begin offering trial modifications. One servicer told us that in the first few months of the program, it was otherwise ready to start making trial modifications but it was unable to effectively use Treasury's Web-based NPV model. As a result, it had to keep borrower applications on hold for several months. In addition, although one of HAMP's goals is to create clear, consistent, and uniform guidance for loan modifications across the industry, we found inconsistencies and wide variations among the HAMP servicers that we contacted with respect to communication with borrowers about HAMP, the criteria used to evaluate borrowers for imminent default, and the tracking of HAMP complaints. Communications with borrowers - Although Treasury guidelines state that servicers must provide borrowers with information designed to help them understand the modification process and must respond to HAMP inquiries in a timely and appropriate manner, the HAMP servicers we contacted differed widely in the timeliness and content of their initial communications with borrowers about HAMP. For example, while some servicers contacted borrowers about HAMP as soon as payment was 30 days delinquent, other servicers did not inform borrowers about HAMP until payments were at least 60 days delinquent. Treasury has not developed standards to evaluate servicers' performance in communicating with borrowers or penalties for servicers that do not meet Treasury's requirements. We reviewed the Web sites of the 20 HAMP servicers with the largest program allocations and found that 3 did not provide any information about HAMP and that 3 others had posted inaccurate information about the program. The inaccuracies included statements implying that the program had not yet started and that only loans owned by Fannie Mae or Freddie Mac were eligible for HAMP. After we notified Treasury of these issues, two of the servicers updated their Web sites to include accurate program information. However, one continued to contain inaccurate information, and three continued to have minimal information about the program, but, according to Treasury, the level of information cannot be mandated. Criteria for imminent default - According to HAMP guidelines, borrowers in danger of imminently defaulting on their mortgages may be eligible for HAMP modifications. Although Treasury's goal is to create uniform guidance for loan modifications across the industry, Treasury has not provided specific guidance on how to evaluate non-GSE borrowers for imminent default, leading to inconsistent practices among servicers. Among the 10 servicers we contacted, there were 7 different sets of criteria for determining imminent default. While some servicers do not impose any requirements beyond the basic HAMP eligibility criteria, others do. For example, four servicers aligned their imminent default criteria for their non-GSE portfolios with the imminent default criteria that the GSEs required for their loans prior to March 1, 2010. These criteria required borrowers to have cash reserves equal to less than 3 months' worth of monthly housing payments and a ratio of disposable net income to monthly housing payments (debt coverage ratio) of less than 1.20. One servicer had begun using the new GSE criteria for its non-GSE loans, which impose a maximum cash reserves limit of $25,000 and have no debt coverage ratio requirement, for its non-GSE loans. In addition, four servicers implemented additional criteria for imminent default: including a sliding scale for the borrower's front-end debt-to-income ratio (e.g., borrowers in the highest income category had to have a front-end debt-to-income ratio of at least 40 percent); an increase in expenses or decrease in income that is more than a certain percentage of income; a ratio of the remaining loan balance to the current house value that is above a certain percentage; and a "hardship" situation lasting more than 12 months. As a result of the differences in criteria used to assess imminent default, borrowers with the same financial situation and loan terms could be approved for a HAMP loan modification by one servicer and denied by another. Tracking of HAMP complaints - While Treasury has directed HAMP servicers to have procedures and systems in place to respond to HAMP inquiries and complaints and to ensure fair and timely resolutions, some servicers are not systematically tracking HAMP complaints or their resolutions. For example, according to Treasury a compliance review conducted by Freddie Mac in fall 2009 cited a servicer for not tracking, monitoring, or reporting HAMP-specific complaints. In the absence of an effective tracking system, the compliance agent could not determine whether the complaints had been resolved. Similarly, several of the servicers we interviewed indicated that they tracked resolutions only to certain types of complaints. For example, several servicers told us that they tracked only written HAMP complaints and that they handled these written complaints differently depending on the addressee. In one case, letters that were addressed to the president of the company were directed to an "escalation team" that tracked the resolution of the complaint, and required weekly updates to the borrower until the complaint was resolved. In comparison, complaint letters that were not addressed to a company executive were routed through a business unit without specific response time requirements. We have shared our preliminary observations about inconsistencies in servicers' implementation of HAMP with Treasury so that these inconsistencies can be addressed in a timely manner. As we continue our work evaluating servicers' implementation of the program, we plan to develop specific recommendations for Treasury as they are needed and appropriate to ensure that HAMP borrowers are treated consistently. While HAMP has offered some relief to over a million borrowers struggling to make their mortgage payments, the program may face several additional challenges going forward. These include problems converting trial to permanent modifications, the growing issue of negative equity, redefaults among borrowers with modifications, and program stability and management. Conversions - Treasury has taken some steps to address the challenge of converting trial modifications to permanent modifications, but conversions may continue to be an issue. During December 2009 and January 2010, Treasury held a HAMP Conversion Campaign to help borrowers who were in HAMP trial modifications convert to permanent modifications. This effort included a temporary review period lasting through January 31, which did not allow canceling trial modifications for any reason other than failure to meet HAMP property requirements and a requirement that the eight largest servicers submit conversion action plans. Since the announcement of the Conversion Campaign, the number of new conversions each month has increased from roughly 26,000 in November to roughly 35,000 in December and nearly 50,000 in January. However, as noted above, relatively few trial modifications have been made permanent. Negative Equity - As we reported in July 2009, HAMP may not address the growing number of foreclosures among borrowers with negative equity in their homes (so-called "underwater" borrowers). While HAMP's overriding policy objective is to make mortgages more affordable for struggling homeowners, factors other than affordability may influence a borrower's decision to default, including the degree to which the borrower is underwater. As we reported in July, many states with high foreclosure rates also have high proportions of mortgages with negative equity. To help address this issue, in February 2010 Treasury announced the Housing Finance Agency Innovation Fund for the Hardest-Hit Housing Markets program, which will allocate $1.5 billion in HAMP funds to five states that have suffered an average home price drop of at least 20 percent from the state's price peak, based on a seasonally adjusted home price index. However, the details of this program and the extent to which it will be able to address defaults and foreclosures among this group of borrowers still remain to be seen. Redefaults - Some borrowers who receive a permanent HAMP modification are likely to redefault on their modified mortgages. Because few permanent modifications have been made to date, the redefault rate for HAMP remains to be seen, but HAMP alone may not address the needs of all borrowers. In particular, while HAMP lowers borrowers' monthly first-lien payments to 31 percent of their gross monthly income, some borrowers may have high amounts of other debt, such as monthly payments on second mortgages or cars. These borrowers may have difficulty making even modified payments. In our July report, we noted that while Treasury requires borrowers with high levels of total debt to agree to obtained counseling, Treasury was not tracking whether borrowers obtain this counseling. We therefore recommended that Treasury consider methods of monitoring whether or not borrowers were obtaining the required counseling. Treasury officials told us that they considered methods of monitoring compliance but concluded that the processes would be too burdensome. As a result, it remains difficult to determine whether this program feature is likely to meet its purpose of reducing redefaults among high debt-burdened borrowers. We continue to believe that Treasury should seek cost-efficient methods to assess the extent to which the counseling requirement is reducing redefaults. Furthermore, the second-lien program, which could help reduce borrowers' total debt, has yet to be fully specified and, to date, only two servicers have signed up for this program. Program Stability and Management - HAMP continues to undergo significant program changes, including the recently announced shift to upfront income verification and the implementation of the second-lien modification program, the foreclosure alternatives program, and the Hardest-Hit Housing Markets program. Treasury will be challenged to successfully implement these programs while also continuing to put in place the controls and resources needed to continue the first-lien modification program. Given the magnitude of the investment of public funds in HAMP and the fact that the program represents direct outlays of taxpayer dollars rather than investments that may yield a return (as in other TARP programs), it is imperative that Treasury continue to improve HAMP's transparency and accountability. As we have noted, HAMP is Treasury's cornerstone effort under TARP to meet the act's purposes of preserving homeownership and protecting home values. As the number of delinquent loans and foreclosures continues to climb and home values continue to fall in many areas of the country, Treasury will need to ensure that borrowers receive consistent access to and treatment from servicers. Treasury also needs to make sure that it has the information, controls, and resources to successfully implement a still-developing program. We will continue to evaluate the implementation of HAMP as part of our ongoing oversight of the activities and performance of TARP. Mr. Chairman and Members of the Committee, I appreciate this opportunity to discuss this critically important program and would be happy to answer any questions that you may have. Thank you. For further information on this testimony, please contact Richard J. Hillman at (202) 512-8678 or [email protected], Thomas J. McCool at (202) 512-2642 or [email protected], or Mathew J. Scire at (202) 512-8678 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. GAO staff who made major contributions to this statement are listed in appendix IV. Borrowers with loans owned or guaranteed by Fannie Mae or Freddie Mac can refinance into a fixed rate loan at the current market rate Eligible borrowers are current on their loans, the owner occupant of a one- to four-unit property, and have a loan-to-value ratio (LTV) of less than 125 percent Between February 2009 and February 2010, over 190,000 borrowers were refinanced through HARP Borrowers can refinance into an affordable loan insured by FHA Eligible borrowers are those who, among other factors, have a monthly mortgage debt-to-income ratio above 31 percent Servicers provided incentive payments; lenders required to write down the existing mortgage amount depending on the borrower's monthly mortgage debt-to-income ratio and total household debt. Borrowers must agree to share the equity created at the beginning of their new Hope for Homeowners mortgage Between October 2008 and January 2010, 96 loans were refinanced under Hope for Homeowners Eligible borrowers can get monthly mortgage payments reduced to 31 percent of gross monthly income. Programs vary, but include modification programs aimed at reducing monthly payments. For example, one bank has a program to modify pay option adjustable rate mortgages. Another bank modifies loans to decrease monthly payments to between 31 and 40 percent of the borrower's monthly gross income. Term (month) Interet rate (fixed) House value of $246,667. House value decreases 20%. Reduction in payment of 0%. Payment for Monthly Reduction (from % to 1%) Pay for Performance Success ($1,000/yr for 5 yrs) Pay for Success ($1,000/yr for yrs) Home Price Decline Protection (HPDP) Pay for Performance Success ($1,000/yr for 5 yrs) Invetore eligile to receive HPDP incentive pyment depending on where the property i locted. For thi exmple, if the tril modifiction were rted in Septemer 2009, invetore eligile for HPDP incentive tht rnge from $0 to $16,200. If the trirted dring Octoer, Novemer, nd Decemer 2009, the mont cold rnge from $0 to $10,800. If the trirted dring the firt 3 month of 2010, the incentive pyment cold asch as $5,880. According to Treasury, it considered options for monitoring what proportion of borrowers is obtaining counseling, but determined that it would be too burdensome to implement. Treasury does not plan to assess the effectiveness of counseling in limiting redefaults because it believes that the benefits of counseling on the performance of loan modifications is well documented and the assessment of the benefits to HAMP borrowers is not needed. Reevaluate the basis and design of the HPDP program to ensure that HAMP funds are being used efficiently to maximize the number of borrowers who are helped under HAMP and to maximize overall benefits of utilizing taxpayer dollars. On July 31, 2009, Treasury announced detailed guidance on HPDP that included changes to the program's design that, according to Treasury, improve the targeting of incentive payments to mortgages that are at greater risk because of home price declines. Treasury does not plan to limit HPDP incentives to modifications that would otherwise not be made without the incentives, due to concerns about potential manipulation of inputs by servicers to maximize incentive payments and the additional burden of re-running the NPV test for many loans. Institute a system to routinely review and update key assumptions and projections about the housing market and the behavior of mortgage-holders, borrowers, and servicers that underlie Treasury's projection of the number of borrowers whose loans are likely to be modified under HAMP and revise the projection as necessary in order to assess the program's effectiveness and structure. According to Treasury, on a quarterly basis it is updating its projections on the number of non-GSE first-lien modifications expected when it revises the amount of TARP funds allocated to each servicer under HAMP. Treasury is gathering data on servicer performance in HAMP and housing market conditions in order to improve and build upon the assumptions underlying its projections about mortgage market behavior. Place a high priority on fully staffing vacant positions in the Homeownership Preservation Office (HPO)-- including filling the position of Chief Homeownership Preservation Officer with a permanent placement--and evaluate HPO's staffing levels and competencies to determine whether they are sufficient and appropriate to effectively fulfill its HAMP governance responsibilities. A permanent Chief Homeownership Preservation Officer was hired on November 9, 2009. According to Treasury, staffing levels for HPO have been revised from 36 full-time equivalent positions to 29. According to Treasury, as of March 2010, HPO had filled 27 of the total of 29 full-time positions. Expeditiously finalize a comprehensive system of internal control over HAMP, including policies, procedures, and guidance for program activities, to ensure that the interests of both the government and taxpayer are protected and that the program objectives and requirements are being met once loan modifications and incentive payments begin. According to Treasury, it will work with Fannie Mae and Freddie Mac to build and refine the internal controls within these financial agents' operations as new program components are implemented. Treasury expects to finalize a list of remedies for servicers not in compliance with HAMP guidelines by April 2010. Expeditiously develop a means of systematically assessing servicers' capacity to meet program requirements during program admission so that Treasury can understand and address any risks associated with individual servicers' abilities to fulfill program requirements, including those related to data reporting and collection. According to Treasury, a servicer self-evaluation form, which provides information on the servicer's capacity to implement HAMP, has been implemented beginning with servicers who started signing Servicer Participation Agreements in December 2009. In addition to the contacts named above, Lynda Downing, Harry Medina, John Karikari (Lead Assistant Directors); and Tania Calhoun, Emily Chalmers, Heather Latta, Rachel DeMarcus, Karine McClosky, Marc Molino, Mary Osorno, Winnie Tsen, and Jim Vitarello made important contributions to this testimony. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Mortgage loan defaults and foreclosures are key factors behind the current economic downturn. In response, Congress passed and the President signed the Emergency Economic Stabilization Act of 2008, which authorized the Department of the Treasury to establish the Troubled Asset Relief Program (TARP). Under TARP, Treasury created the Home Affordable Modification Program (HAMP) as its cornerstone effort to meet the act's goal of protecting home values and preserving homeownership. This statement focuses on (1) HAMP's program activities to date, (2) status of GAO's July 2009 recommendations to strengthen HAMP's transparency and accountability, (3) preliminary findings from GAO's current work evaluating servicers' implementation of HAMP, and (4) additional challenges HAMP faces going forward. GAO obtained information from 10 HAMP servicers of various sizes that accounted for 71 percent of the TARP funds allocated to participating servicers. GAO reviewed their policies and procedures, interviewed management and quality assurance staff, and observed a sample of phone calls between borrowers and servicers. GAO is also reviewing samples of loan files for borrowers offered and denied HAMP trial modifications. Finally, GAO spoke with officials at Treasury and its financial agents--Fannie Mae and Freddie Mac--and is analyzing program information and data from these sources. When Treasury announced the program in March 2009, it estimated that HAMP could help 3 to 4 million borrowers. Through February 2010, including both the portion funded by TARP and the portion funded by Fannie Mae and Freddie Mac: (1) about 1.1 million borrowers had begun trial modifications; of which (2) about 800,000 were in active trial modifications, and (3) fewer than 200,000 permanent modifications had been made. As of early March 2010, the TARP-funded portion of the program had 113 participating servicers, and about $36.9 billion of the $50 billion in TARP funds for HAMP had been allocated to these servicers. A typical TARP-funded modification could result in a monthly mortgage payment reduction of about $520. Treasury has taken some steps, but has not fully addressed concerns that GAO raised in its July 2009 report on HAMP's transparency and accountability. For example, Treasury has yet to finalize some key components of its internal controls over the first-lien program, including establishing metrics and benchmarks for servicers' performance. In addition, Treasury has not finalized remedial actions, or penalties, for servicers not in compliance with HAMP guidelines. According to Treasury, these remedies will be completed in April 2010. Lastly, GAO reported that Treasury's projection that 3 to 4 million borrowers could be helped by HAMP was based on several uncertain assumptions and might be overly optimistic, and GAO recommended that Treasury update this estimate, but the Department has not yet done so. Preliminary results of GAO's ongoing work show inconsistencies in some aspects of program implementation. Although one of HAMP's goals was to ensure that mortgage modifications were standardized, Treasury has not issued specific guidelines for all program areas, allowing inconsistencies in how servicers treat borrowers. For example, the 10 servicers GAO contacted had 7 different sets of criteria for determining whether borrowers who were not yet 60 days delinquent qualified for HAMP. Also, some servicers were not systematically tracking all HAMP complaints and, in some cases, tracked only resolutions to certain types of complaints, such as written complaints addressed to the company president. GAO also found that servicers faced challenges implementing HAMP because of the number of changes to the program, some of which have required servicers to readjust their business practices, update their systems, and retrain staff. HAMP is likely to face additional challenges going forward, including successfully converting trial modifications, addressing the needs of borrowers who have substantial negative equity, limiting redefaults for those who receive modifications, and achieving program stability. While GAO's study is not yet completed, GAO shared preliminary findings with Treasury to allow it to address these issues in a timely manner.

The radio frequency spectrum is the resource that makes possible wireless communication and supports a vast array of commercial and government services. Federal, state, and local agencies use spectrum to fulfill a variety of government missions, such as national defense, air- traffic control, weather forecasting, and public safety. DOD uses spectrum to transmit and receive critical voice and data communications involving military tactical radio, air combat training, precision-guided munitions, unmanned aerial systems, and aeronautical telemetry and satellite control, among others. The military employs these systems for training, testing, and combat operations throughout the world. Commercial entities use spectrum to provide a variety of wireless services, including mobile voice and data, paging, broadcast television and radio, and satellite services. In the United States, responsibility for spectrum management is divided between two agencies: FCC and NTIA. FCC manages spectrum for nonfederal users, including commercial, private, and state and local government users, under the Communications Act. NTIA manages spectrum for federal government users and acts for the President with respect to spectrum management issues as governed by the National Telecommunications and Information Administration Organization Act. FCC and NTIA manage the spectrum through a system of frequency allocation and assignment. Allocation involves segmenting the radio spectrum into bands of frequencies that are designated for use by particular types of radio services or classes of users. (Fig. 1 illustrates examples of allocated spectrum uses, including DOD systems using the 1755-1850 MHz band.) In addition, spectrum managers specify service rules, which include the technical and operating characteristics of equipment. Assignment, which occurs after spectrum has been allocated for particular types of services or classes of users, involves providing users, such as commercial entities or government agencies, with a license or authorization to use a specific portion of spectrum. FCC assigns licenses within frequency bands to commercial enterprises, state and local governments, and other entities. Since 1994, FCC has used competitive bidding, or auctions, to assign certain licenses to commercial entities for their use of spectrum. Auctions are a market- based mechanism in which FCC assigns a license to the entity that submits the highest bids for specific bands of spectrum. NTIA authorizes spectrum use through frequency assignments to federal agencies. More than 60 federal agencies and departments combined have over 240,000 frequency assignments across all spectrum bands, although 9 departments, including DOD, hold 94 percent of all frequency assignments for federal use. Pub. L. No. 103-66, SS 6001,107 Stat. 312 (1993) (OBRA-93) amended by Pub. L. No. 105-33, SS 3002, 111 Stat. 251(1997) (BBA-97), codified as amended at 47 U.S.C. SS 923. enforcement purposes, may not be compatible with commercial technology, and therefore agencies have to work with vendors to develop equipment that meets mission needs and operational requirements. In 2004, the Commercial Spectrum Enhancement Act (CSEA) established a Spectrum Relocation Fund, funded from auction proceeds, to cover the costs incurred by federal entities that relocate to new frequency assignments or transition to alternative technologies. OMB administers the Spectrum Relocation Fund in consultation with NTIA. CSEA streamlined the process by which federal agencies are reimbursed for relocation costs and requires FCC to notify NTIA at least 18 months in advance of beginning an auction of new licenses of spectrum identified for reallocation from federal to nonfederal use. It also requires NTIA to provide estimated cost and transition timing data to FCC, Congress, and GAO at least 6 months prior to the auction, and requires that auctions recover at least 110 percent of these estimated costs. CSEA was amended by the Middle Class Tax Relief and Job Creation Act of 2012, further easing relocation by (1) allowing agencies to use some of the funding for advance planning and system upgrades, (2) extending the reimbursement scheme to sharing as well as relocation expenses, and (3) requiring agencies to submit transition plans for relocation (or sharing) for interagency management review of the costs and timelines associated with the relocation. The auction of spectrum licenses in the 1710-1755 MHz band was the first with relocation costs to take place under CSEA. CSEA designated 1710-1755 MHz as "eligible frequencies" for which federal relocation costs could be paid from the Spectrum Relocation Fund, which is funded Twelve federal agencies by the proceeds from the auction of the band.previously operated communications systems in this band, including DOD. NTIA and FCC jointly reallocated the 1710-1755 MHz band for nonfederal use, and FCC designated the spectrum for Advanced Wireless Services (AWS). In September 2006, FCC concluded the AWS-1 auction of licenses in the 1710-1755 MHz band. In accordance with CSEA, a portion of the auction proceeds associated with the 1710-1755 MHz band is currently being used to pay spectrum relocation expenses. In addition to the 1710-1755 MHz band, the wireless industry has expressed interest in the 1755-1850 MHz band, largely because the band offers excellent radio wave propagation, enabling mobile communication links. The federal government has studied the feasibility of relocating federal agencies from the 1755-1850 MHz band on several occasions. For example, in March 2001, NTIA issued a report examining the potential to accommodate mobile wireless services in the broader 1710- 1850 MHz band. The report was largely based on input from other federal agencies, including a DOD study. NTIA found that unrestricted sharing of the 1755-1850 MHz band was not feasible and that considerable coordination between industry and DOD would be required before any wireless systems could operate alongside federal systems in the band. In August 2001, we also found that more analysis was needed to support spectrum use decisions in the 1755-1850 MHz band, largely because major considerations either were not addressed or were not adequately addressed in DOD's study. These considerations included complete technical and operation analyses of anticipated spectrum interference; cost estimates supporting DOD reimbursement claims; spectrum requirements supporting future military operations; programmatic, budgeting, and schedule decisions needed to guide analyses of alternatives; and potential effects of U.S. reallocation decisions upon international agreements and operations. At the end, a decision was made to reallocate just the 1710-1755 MHz band to minimize the impact on federal capabilities. Activity surrounding the rest of the band (i.e., the 1755-1850 MHz band) did not resurface until October 2010 when NTIA's Fast Track study identified the band for possible reallocation. In June 2010, the administration issued a presidential memorandum titled "Unleashing the Wireless Broadband Revolution" directing NTIA to collaborate with FCC to make a total of 500 MHz of federal and nonfederal spectrum available for wireless broadband within 10 years. Responding to the President's initiative, in October 2010, NTIA published a plan and timetable to make available 500 MHz of spectrum for wireless broadband. This plan and timetable specified that candidate bands would be prioritized for detailed evaluation to determine the feasibility of vacating the bands to accommodate wireless services. In January 2011, NTIA selected the 1755-1850 MHz band as the priority band for detailed evaluation for relocation. DOD and other affected agencies provided NTIA their input on the spectrum feasibility study for the 1755-1850 MHz band, and NTIA subsequently issued its assessment of the viability for accommodating commercial wireless broadband in the band in March 2012. Most recently, the President's Council of Advisors on Science and Technology published a report in July 2012 recommending specific steps to ensure the successful implementation of the President's 2010 memorandum. The report found, for example, that clearing and vacating federal users from certain bands was not a sustainable basis for spectrum policy largely because of the high cost to relocate federal agencies and disruption to federal missions. The report recommended new policies to promote the sharing of federal spectrum. The sharing approach has been questioned by CTIA-The Wireless Association and its members, which argue that cleared spectrum and an exclusive-use approach to spectrum management has enabled the U.S. wireless industry to invest hundreds of billions of dollars to deploy mobile broadband networks resulting in economic benefits for consumers and businesses. Actual costs to relocate communications systems for 12 federal agencies from the 1710-1755 MHz band have exceeded original estimates by about $474 million, or 47 percent, as of March 2013. Table 1 compares estimated relocation costs with the actual costs based on funds transferred to federal agencies in support of the 1710-1755 MHz band relocation effort. OMB and NTIA officials expect the final relocation cost to be about $1.5 billion compared with the original estimate of about $1 billion. In addition, NTIA expects agencies to complete the relocation effort between 2013 and 2017. The original transfers from the Spectrum Relocation Fund to agency accounts were made in March 2007. Subsequently, some agencies requested additional monies from the Spectrum Relocation Fund to cover relocation expenses. Agencies requesting the largest amounts of subsequent transfers include the Department of Justice ($294 million), the Department of Homeland Security ($192 million), and the Department of Energy ($35 million). Total actual costs for the 1710-1755 MHz transition exceeded estimated costs, as reported to Congress in 2007, for many reasons, including: Unforeseen challenges: Agencies encountered various unforeseen challenges when relocating systems out of the 1710-1755 MHz band. For example, according to NTIA officials, one agency needed to upgrade its radio towers to comply with new standards adopted after the towers were built. The agency requested additional monies from the Spectrum Relocation Fund to cover the cost of upgrading its towers, which had not been part of the agency's original relocation estimate. Unique issues posed by specific equipment location: According to NTIA, some federal government communications systems are located in remote areas. One agency requested additional monies from the Spectrum Relocation Fund to use a helicopter to replace a fixed microwave system located on a mountain-top, which exceeded its original cost estimate. Administrative issues associated with transition time frame: NTIA officials told us that some agencies experienced higher than expected labor costs during the transition period, partly to accommodate auction winners' requests to vacate the spectrum as quickly as possible. Costs associated with achieving comparable capability: Some communications systems are unique to federal agencies, making them difficult to upgrade or relocate. In some instances, agencies were using analog radio systems throughout the 1710-1755 MHz band and the digital technology needed to achieve comparable capability was not available prior to vacating the band. When the technology did become available, some agencies found they needed additional funds to procure it, according to OMB officials. For example, we previously reported that the Department of Justice requested funds exceeding its estimate to develop new technology that would operate using the new spectrum and match its current capabilities. Some agencies might not have followed guidance: Some agencies may not have properly followed OMB and NTIA guidance in preparing their original cost estimates. For instance, Immigration and Customs Enforcement (ICE) did not detail its estimated costs by equipment, location, systems, or frequency as suggested by NTIA's guidance. Instead, the agency provided a lump sum estimate for its spectrum relocation costs. We previously reported that ICE officials did not identify a significant number of relocation expenses in the agency's original transfer request, including costs associated with additional equipment, offices, and systems, among other items. Moreover, according to OMB staff, the agency's initial estimate was based on an inadequate inventory of deployed systems. To date, the Department of the Navy has initiated the process to return about $65 million to the Spectrum Relocation Fund, as its relocation costs may end up being less than expected. The Department of the Navy is still in the process of finalizing relocation of its systems, and the exact amount of any money that may be returned will not be known until the relocation is complete. re-tune fixed microwave systems from the 1710-1755 MHz band into the adjacent 1755-1850 MHz band, and it assumed exclusion zones-- geographic areas where commercial licensees could not operate--around 16 DOD sites to prevent interference from commercial users. DOD also estimated a cost of an additional $100 million if precision guided munitions operations needed to be relocated from the 1755-1850 MHz band. Subsequently, in 2001, NTIA reported additional cost estimates reflecting several other options under consideration. One option, which was not evaluated by DOD, included a preliminary cost figure of $1.6 billion. This estimate was based on eliminating some of the 16 exclusion zones around DOD sites and, therefore, relocating additional systems that were not included in the original estimate of $38-138 million, according to NTIA. In December 2006, NTIA reported that DOD's estimate to relocate systems would be about $355.4 million. This estimate reflected a new set of assumptions, such as maintaining exclusion zones at 2 of the 16 DOD sites and relocating fixed microwave systems to the 1755-1850 MHz portion of the band or to other federal bands. Both NTIA and OMB are taking steps to ensure that agencies improve their cost estimates for a future relocation from the 1755-1850 MHz band. For example, according to NTIA and OMB officials, the agencies prepared a cost estimation template and guidelines for reimbursable costs as part of the process to estimate relocation costs for the 1755- 1850 MHz band. The Middle Class Tax Relief and Job Creation Act of 2012 expanded the types of costs for which federal agencies can receive payments from the Spectrum Relocation Fund. The act permits agencies to receive funds for costs associated with planning for FCC auctions and studies or analyses conducted in connection with relocation or sharing of spectrum, including coordination with auction winners. In November 2012, OMB issued guidance to federal agencies to clarify allowable pre- auction costs and other requirements that are eligible to receive payments from the Spectrum Relocation Fund.stated that they are optimistic that by providing pre-auction planning funds to agencies, future cost estimates will improve. The Advanced Wireless Services auction of the 1710-1755 MHz band raised almost $6.9 billion in gross winning bids from the sale of licenses to use these frequencies.actual relocation costs suggests that the auction of the 1710-1755 MHz band raised $5.4 billion for the U.S. Treasury. This number reflects the difference between the $6.9 billion auction revenue and the approximately $1.5 billion estimated final federal relocation cost. As mentioned above, NTIA reports that it expects agencies to complete the relocation effort between 2013 and 2017; therefore the final net revenue amount may change. For example, some agencies have returned or plan to return excess relocation funds to the Spectrum Relocation Fund. To prepare the preliminary cost estimate portion of its study to determine the feasibility of relocating DOD's 11 major radio systems from the 1755- 1850 MHz band, DOD officials said the agency implemented the following methodology: DOD's Cost Assessment and Program Evaluation (CAPE) groupthe effort and provided guidance to management at the respective military services regarding the data needed to support each system's relocation cost estimate and how they should be gathered to maintain consistency across the services. The guidance used by CAPE was based on guidance and assumptions provided by NTIA. Certified cost estimators at each of the services' Cost Centers worked closely with the various program offices to collect the necessary technical and cost data. The cost estimators compiled and reviewed the program data, identified the appropriate program content affected by each system's relocation, developed cost estimates under the given constraints and assumptions, and internally reviewed the estimates consistent with their standard practices before providing them to CAPE to include in the overall estimate. CAPE staff reviewed the services' estimates to ensure they adhered to the provided guidelines for accuracy and consistency, and obtained DOD management approval on its practices and findings. According to DOD officials, CAPE based this methodology on the cost estimation best practices it customarily employs, revising those practices to suit the study requirements as outlined by NTIA. We reviewed DOD's preliminary cost estimation methodology and evaluated it against GAO's Cost Estimating and Assessment Guide (Cost Guide), which also identifies cost estimating best practices, including those used throughout the federal government and industry. The best practices identified in the Cost Guide help ensure that cost estimates are comprehensive, well-documented, accurate, and credible. These characteristics of cost estimates help minimize the risk of cost overruns, missed deadlines, and unmet performance targets: A comprehensive cost estimate ensures that costs are neither omitted nor double counted. A well-documented estimate is thoroughly documented, including source data and significance, clearly detailed calculations and results, and explanations for choosing a particular method or reference. An accurate cost estimate is unbiased, not overly conservative or overly optimistic, and based on an assessment of most likely costs. A credible estimate discusses any limitations of the analysis from uncertainty or biases surrounding data or assumptions. When applying GAO's identified best practices to DOD's methodology, we took into account that DOD officials developed the preliminary cost estimate for relocation as a less rigorous, "rough order of magnitude" cost estimate, not a budget-quality cost estimate. The nature of a rough- order-of-magnitude estimate means that it is not as robust as a detailed, budget quality life-cycle estimate and its results should not be considered or used with the same level of confidence. Because of this, we performed a high-level analysis of DOD's preliminary cost estimate and methodology, and did not review all supporting data and analysis. When we reviewed DOD's preliminary cost estimation methodology and evaluated it against the Cost Guide's best practices, we found that DOD's methodology substantially met the comprehensive and well-documented characteristics of reliable cost estimates, and partially met the accurate and credible characteristics, as shown in table 2. Overall, we found that DOD's cost estimate was consistent with the purpose of the feasibility study, which was to inform the decision making process to reallocate 500 MHz of spectrum for commercial wireless broadband use. Additionally, we found that DOD's preliminary cost- estimation methodology substantially met both the comprehensive and well-documented characteristics. As noted in the table above, we observed that DOD's estimate included complete information about systems' life cycles and was generally well-documented. However, these characteristics were not fully met because we found that information on the tasks required to relocate some systems was incomplete, and that documentation for some programs was not sufficient to support a rough- order-of-magnitude estimate. We also determined that DOD's preliminary cost-estimation methodology partially met the accurate and credible characteristics. We found that DOD properly applied appropriate inflation rates and made no apparent calculation errors, and that the estimated costs agree with DOD's prior relocation cost estimate for this band conducted in 2001. However, DOD did not fully or substantially meet the accurate and credible characteristics because it was not clear if the estimate considered the most likely costs and because some sensitivity analyses and risk assessments were only completed at the program level for some programs, and not at all at the summary level. Even though DOD's preliminary cost estimate substantially met some of our best practices, as the assumptions supporting the estimate change over time, costs may also change. According to DOD officials, any change to key assumptions about the bands to which systems would move and the relocation start date could substantially change relocation costs. Because decisions about the spectrum bands to which the various systems would be reassigned and the time frame for relocation have not been made yet, DOD based its current estimate on the most likely assumptions, provided by NTIA, some of which have already been proven inaccurate or are still undetermined. For example: Relocation bands: Decisions about which comparable or alternate spectrum bands federal agencies, including DOD, should relocate to are still unresolved. According to DOD officials, equipment relocation costs vary significantly depending on the relocation band's proximity to the current band. Moving to bands further away than the assumed relocation bands could increase costs relative to moving to closer bands with similar technical characteristics. In addition, congestion, in both the 1755-1850 MHz band and some of the potential alternate spectrum bands to which federal systems might be moved, complicates relocation planning. According to DOD officials, many of the federal radio systems relocated from the 1710-1755 MHz band were simply re-tuned or compressed into the 1755-1850 MHz band, adding to the complexity of systems and equipment requiring relocation from this band since 2001. Also, DOD officials said that some of the potential spectrum bands to which DOD's systems could be relocated are themselves either already congested or the systems are incompatible unless other actions are also taken. For example, cost estimates for several of DOD's systems assumed that these systems would be relocated into the 2025-2110 MHz band, and operate within this band on a primary basis. However, this band is currently allocated to commercial electronic news gathering systems and other commercial and federal systems, and while the band is not currently congested, it does not support compatible coexistence between DOD systems and commercial electronic news gathering systems. To accommodate military systems within this band, FCC would need to withdraw this spectrum from commercial use to allow NTIA to provide DOD primary status within this band, or FCC would have to otherwise ensure that commercial systems operate on a non- interference basis with military systems. FCC has not initiated a rulemaking procedure to begin such processes. Relocation start date: DOD's cost estimate assumed relocation would begin in fiscal year 2013, but no auction has been approved, so relocation efforts have not begun. According to DOD officials, a change in the start date creates uncertainty in the cost estimate because new equipment and systems continue to be deployed in and designed for this band, and older systems are retired. This changes the overall profile of systems in the band, a change that can alter the costs of relocation. For example, a major driver of the cost increase between DOD's 2001 and 2011 relocation estimates for the 1755- 1850 MHz band was the large increase in the use of the band, including unmanned aerial systems. DOD deployed these systems very little in 2001, but their numbers had increased substantially by 2011. Conversely, equipment near the end of its life cycle when DOD's 2011 relocation cost estimate was completed may be retired or replaced outside of relocation efforts, which could decrease relocation costs. Inflation: DOD appropriately used 2012 inflation figures in its estimate, assuming that relocation would begin in fiscal year 2013. As more time elapses before the auction occurs, the effect of inflation will increase the relocation costs each year. According to DOD, the preliminary cost estimate is not as robust as a detailed, budget-quality lifecycle estimate. A budget-quality estimate is based on more fully formed assumptions for specific programs. DOD officials said that for a spectrum relocation effort, a detailed, budget- quality cost estimate would normally be done during the transition- planning phase once a spectrum auction has been approved and would be based on the requirements for the specific auction and relocation decisions. No official government revenue forecast has been prepared for a potential auction of 1755-1850 MHz band licenses, but some estimates might be prepared once there is a greater likelihood of an auction. Officials we spoke with at CBO, FCC, NTIA, and OMB confirmed that none of these agencies has produced a revenue forecast thus far. Officials at these agencies knowledgeable about estimating spectrum-license auction revenue said that because the value of licensed spectrum varies greatly over time and the information on factors that might influence the spectrum auction revenues is not yet available, it is too early to produce meaningful forecasts for a potential auction of the 1755-1850 MHz band. Moreover, CBO only provides written estimates of potential receipts when a congressional committee reports legislation invoking FCC auctions. OMB would estimate receipts and relocation costs as part of the President's Budget; OMB analysts would use relocation cost information from NTIA to complete OMB's estimate of receipts. The potential for large differences between CBO and OMB forecasts exist, as well. For example, in the past, CBO and OMB have produced very different estimates of potential FCC auction receipts at approximately the same time with access to the same data, underscoring how differing assumptions can lead to different results. Although no official government revenue forecast exists, an economist with the Brattle Group, an economic consulting firm, published a revenue forecast in 2011 for a potential auction of the 1755-1850 MHz band that We did not evaluate forecasted revenues of $19.4 billion for the band. the accuracy of this revenue estimate. Like all forecasts, the Brattle Group study was based on certain assumptions. For example, it assumed that the band would generally be cleared of federal users. It also assumed the AWS-1 average nationwide price of $1.03 per "MHz-pop" as a baseline price for spectrum allocated to wireless broadband services.In addition, the study adjusts the price of spectrum based on the following considerations: Increase in the quantity of spectrum using elasticity of demand. As the supply of spectrum for commercial wireless broadband services increases, the price and value of spectrum is expected to fall. The elasticity of demand is used to make adjustments for the increased supply of spectrum. Differences in capacity and quality of spectrum using value weights. According to the study, wireless broadband spectrum is generally thought to have a price elasticity of around -1.2, which implies that a 1 percent increase in the base supply of spectrum should result in a 1.2 percent decrease in its price. because traditional, two-way communications, such as mobile phone services, are typically provided over paired bands of spectrum. Similarly, a greater value weight is given to bands of spectrum with no restrictions on use, or encumbrances. Fewer restrictions would increase the capacity or the types of services for a given spectrum band. The study also assumes that the 1755-1780 MHz portion of the band is paired with the 2155-2180 MHz band, which various industry stakeholders currently support. For spectrum services that require two- way communications, pairing bands allows them to be used more efficiently by diminishing interference from incompatible adjacent operations. In addition, the study assumed the 95 MHz of spectrum between 1755 and 1850 MHz would be auctioned as part of a total of 470 MHz of spectrum included in six auctions sequenced 18 months apart and spread over 9 years with total net receipts of $64 billion. Thus, the forecast also took into account when the spectrum would be reallocated for commercial services. Like all goods, the price of licensed spectrum, and ultimately the auction revenue, is determined by supply and demand. This fundamental economic concept helps to explain how the price of licensed spectrum could change depending on how much spectrum is available now and in the future, and how much licensed spectrum is demanded by the wireless industry for broadband applications. Government agencies can influence the supply of spectrum available for licensing and the characteristics of those licenses, whereas expectations about profitability determine demand for spectrum in the marketplace. Supply. FCC and NTIA, with direction from Congress and the President, jointly influence the amount of spectrum allocated for federal and nonfederal users, including the amount to be shared by federal and nonfederal users. In 2010, the President directed NTIA to work with FCC to make 500 MHz of spectrum available for use by commercial broadband services within 10 years. This represents a significant increase in the supply of spectrum available for licensing in the marketplace. As with all economic goods, with all other things being equal, the price and value of spectrum licenses are expected to fall as additional supply is introduced. However, at this time, the answers to key questions about the reallocation of the 1755-1850 MHz band are unknown. Expectations about exactly how much spectrum is available for licensing now and how much will be available in the future would influence how much wireless companies would be willing to pay for spectrum licensed today. Demand. The expected, potential profitability of a spectrum license influences the level of demand for it. As with all assets, companies base their capital investment decisions on the expected net return, or profit, over time of their use. The same holds true for spectrum. Currently, the demand for licensed spectrum is increasing, and a primary driver of this increased demand is the significant growth in the use of commercial- wireless broadband services, including third and fourth generation technologies that are increasingly used for smart phones and tablet computers. Below are some of the factors that would influence the demand for licensed spectrum: Clearing versus Sharing: Spectrum is more valuable, and companies will pay more to license it, if it is entirely cleared of incumbent federal users, giving them sole use of licensed spectrum; spectrum licenses are less valuable if access must be shared. Sharing could potentially have a big impact on the price of spectrum licenses, especially if a sharing agreement does not guarantee service when the licensee would need it most. For example, knowing in advance that service would be unavailable once a month at 3 a.m. may not significantly influence price, but if the times when the service will be unavailable are unknown, the effect on price could be significant. In 2012, the President's Council of Advisors on Science and Technology advocated that sharing between federal and commercial users become the new norm for spectrum management, especially given the high cost and lengthy time it takes to relocate federal users and the disruptions to agencies' missions. Certainty and Timing: Another factor that affects the value of licensed spectrum is the certainty about when it becomes available. Seven years after the auction of the 1710-1755 MHz band, federal agencies are still relocating systems. According to an economist with whom we met, one lesson from the 1710-1755 MHz relocation effort is that uncertainty about the time frame for availability reduces the value of the spectrum. Any increase in the probability that the spectrum would not be cleared on time would have a negative impact on the price companies are willing to pay to use it. As such, the estimated 10-year timeframe to clear federal users from the entire 1755-1850 MHz band, and potential uncertainty around that time frame, could negatively influence demand for the spectrum. The 2012 amendments to the CSEA include changes designed to reduce this uncertainty by requiring federal agencies that will be relocating (or sharing spectrum) to submit transition plans with timelines for specific geographic locations, with interagency review of those plans aimed at ensuring timely relocation (or sharing) arrangements. Available Wireless Services: Innovation in the wireless broadband market is expected to continue to drive demand for wireless services. For example, demand continues to increase for smart phones and tablets as new services are introduced in the marketplace. These devices can connect to the Internet through regular cellular service using commercial spectrum, or they can use publicly available (unlicensed) spectrum via Wi-Fi networks to access the Internet. The value of the spectrum, therefore, is determined by continued strong development of and demand for wireless services and devices, and the profits that can be realized from them. We provided a draft of this report to the Department of Commerce (Commerce), DOD, FCC, and OMB for review and comment. FCC agreed with the report's findings, and Commerce, DOD, and FCC provided technical comments that we incorporated as appropriate. FCC's written comments appear in appendix II. OMB did not provide comments. We are sending copies of this report to the Secretary of Commerce, the Secretary of Defense, the Chairman of the Federal Communications Commission, the Director of the Office of Management and Budget, and the appropriate congressional committees. In addition, the report will be available at no charge on GAO's website at http://www.gao.gov. If you or members of your staff have any questions about this report, please contact me at (202) 512-2834 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Major contributors to this report are listed in appendix III. The objectives of this report were to examine (1) the differences, if any, between estimated and actual federal relocation costs and auction revenues from the 1710-1755 MHz band; (2) the extent to which the Department of Defense (DOD) followed best practices to prepare its preliminary cost estimate for vacating the 1755-1850 MHz band, and any limitations of its analysis; and (3) what government or industry revenue forecasts for the 1755-1850 MHz band auction exist, if any, and what factors, if any, could influence actual auction revenue. To examine the differences, if any, between estimated and actual federal relocation costs and auction revenues from the 1710-1755 MHz band, we reviewed spectrum auction data published by the Federal Communications Commission (FCC) and federal relocation cost data from the National Telecommunication and Information Administration's (NTIA) annual 1710-1755 MHz band relocation progress reports, published yearly since 2008. We narrowed our review of past spectrum auctions to the 1710-1755 MHz relocation after reviewing FCC auction data and NTIA reports describing other spectrum relocations and auctions involving federal agencies, and interviews with knowledgeable FCC, NTIA, Office of Management and Budget (OMB), and Congressional Budget Office (CBO) officials. The Advanced Wireless Services-1 (AWS- 1) auction involving the 1710-1755 MHz band is the only spectrum auction involving federal agencies with significant, known relocation costs. In addition, it is the only relocation involving DOD radio communication systems. To assess the reliability of FCC auction and NTIA relocation cost data, we reviewed documentation related to the data; compared it to other sources, including other government reports; and discussed the data with FCC and NTIA officials. We did not evaluate the accuracy of individual agencies' relocation cost data, as this was outside the scope of our review. Based on this review, we determined that the FCC and NTIA data were sufficiently reliable for the purposes of our report. To determine the extent to which DOD followed best practices to prepare its preliminary cost estimate for vacating the 1755-1850 MHz band, we assessed DOD's preliminary cost estimate against the best practices in GAO's Cost Estimating and Assessment Guide (Cost Guide), which has been used to evaluate cost estimates across the government. These best practices help ensure cost estimates compiled at different stages in the cost estimating process are comprehensive, well-documented accurate, and credible. To develop our assessment, we interviewed DOD officials, including in the agency's Cost Assessment and Program Evaluation (CAPE) group that led the cost estimation effort, regarding their data collection and cost estimation methodologies and the findings reported in DOD's feasibility study. We also reviewed electronic source documentation supporting the estimate with a CAPE official. After completing this review, a GAO cost analyst developed an assessment using our 5-point scale (not met, minimally met, partially met, substantially met, and met) and a second analyst verified the assessment. DOD's preliminary cost estimate was a rough-order-of-magnitude estimate; consequently, it did not contain all the information expected of a complete, budget-quality cost estimate. Therefore, we performed a high- level analysis to determine whether DOD's reported estimated costs considered all the potential factors that could influence those relocation costs. To identify any limitations affecting DOD's estimate, we interviewed DOD officials responsible for developing the department's preliminary cost estimate. We also interviewed NTIA and OMB officials knowledgeable about the intended purpose of the estimate to discuss how the estimate should be used and any factors that would affect the reliability of the estimate. Bazelon, Expected Receipts From Proposed Spectrum Auctions (July 2011). the sale of spectrum licenses, and (3) relocation costs. We discussed factors affecting spectrum auction revenue with CBO and OMB officials, industry and policy experts, and obtained input from CTIA--The Wireless Association, the association representing the wireless industry. We conducted this performance audit from September 2012 to May 2013 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient appropriate evidence and provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, Michael Clements, Assistant Director; Stephen Brown; Jonathan Carver; Leia Dickerson; Jennifer Echard; Emile Ettedgui; Colin Fallon; Bert Japikse; Elke Kolodinski; Joshua Ormond; Jay Tallon; and Elizabeth Wood made key contributions to this report.

Allocating radio-frequency spectrum is a challenging task because of competing commercial and government demands. In 2006, FCC auctioned spectrum licenses in the 1710-1755 MHz band that had previously been allocated for federal use. To meet the continued demand for commercial wireless services, NTIA assessed the viability of reallocating the 1755-1850 MHz band to commercial use; this band is currently assigned to more than 20 federal users, including DOD. In March 2012, NTIA reported that it would cost $18 billion over 10 years to relocate most federal operations from the band, raising questions about whether relocating federal users is a sustainable approach. GAO was directed to review the costs to relocate federal spectrum users and revenues from spectrum auctions. This report addresses (1) estimated and actual relocation costs, and revenue from the previously auctioned 1710-1755 MHz band; (2) the extent to which DOD followed best practices to prepare its preliminary cost estimate for vacating the 1755-1850 MHz band; and (3) existing government or industry forecasts for revenue from an auction of the 1755-1850 MHz band. GAO reviewed relevant reports; interviewed DOD, FCC, NTIA, and OMB officials and industry stakeholders; and analyzed the extent to which DOD's preliminary cost estimate met best practices as identified in GAO's Cost Estimating and Assessment Guide (Cost Guide). FCC agreed with the report's findings and DOD, FCC, and NTIA provided technical comments that were incorporated as appropriate. Some federal agencies underestimated the costs to relocate communication systems from the 1710-1755 megahertz (MHz) band, although auction revenues appear to exceed relocation costs by over $5 billion. As of March 2013, actual relocation costs have exceeded estimated costs by about $474 million, or 47 percent. The National Telecommunications and Information Administration (NTIA) expects agencies to complete the relocation effort between 2013 and 2017, with a final relocation cost of about $1.5 billion. Actual relocation costs have exceeded estimated costs for various reasons, including unforeseen challenges and some agencies not following NTIA's guidance for developing cost estimates. However, the Department of Defense (DOD) expects to complete its relocation for about $71 million less than its estimate of about $355 million. NTIA and the Office of Management and Budget (OMB) are taking steps to ensure that agencies improve their cost estimates by, for example, preparing a cost estimation template and guidelines for reporting reimbursable costs. The auction of spectrum licenses in the 1710-1755 MHz band raised almost $6.9 billion. DOD's preliminary cost estimate for relocating systems out of the 1755-1850 MHz band substantially or partially met GAO's best practices for cost estimates, but changes in key assumptions may affect future costs. Adherence with GAO's Cost Guide reduces the risk of cost overruns and missed deadlines. GAO found that DOD's preliminary estimate of $12.6 billion substantially met the comprehensive and well-documented best practices. For instance, it included complete information about systems' life cycles, and the baseline data were consistent with the estimate. However, GAO found that some information on the tasks required to relocate some systems was incomplete. GAO also determined that DOD's estimate partially met the accurate and credible best practices. For example, DOD applied appropriate inflation rates and made no apparent calculation errors. However, DOD did not complete some sensitivity analyses and risk assessments at the program level, and not at all at the summary level. DOD officials said that changes to key assumptions could substantially change relocation costs. Most importantly, decisions about which spectrum band DOD would relocate to are still unresolved, and relocation costs vary depending on the proximity to the 1755-1850 MHz band. Nevertheless, DOD's preliminary cost estimate was consistent with its purpose--informing the decision-making process to make additional spectrum available for commercial wireless services. No government revenue forecast has been prepared for a potential auction of the 1755-1850 MHz band, and a variety of factors could influence auction revenues. One private sector study in 2011 forecasted $19.4 billion in auction revenue for the band, assuming that federal users would be cleared and the nationwide spectrum price from a previous auction, adjusted for inflation, would apply to this spectrum. Like for all goods, the price of spectrum, and ultimately the auction revenue, is determined by supply and demand. The Federal Communications Commission (FCC) and NTIA jointly influence the amount of spectrum allocated to federal and nonfederal users (the supply). The potential profitability of a spectrum license influences its demand. Several factors would influence profitability and demand, including whether the spectrum is cleared of federal users or must be shared.

The Great Lakes Basin covers approximately 300,000 square miles, encompassing Michigan and parts of Illinois, Indiana, Minnesota, New York, Ohio, Pennsylvania, Wisconsin, and the Canadian province of Ontario (see fig. 1), as well as lands that are home to more than 40 Native American tribes. It includes the five Great Lakes and a large land area that extends beyond the Great Lakes, including their watersheds, tributaries, and connecting channels. Numerous environmental stressors threaten the health of the Great Lakes and adjacent land within the Great Lakes Basin. Decades of industrial activity in the region have left a legacy of contamination, such as from polychlorinated biphenyls (PCB), in the sediments that make up the beds of rivers and harbors in the Great Lakes Basin. In 1987, the United States and Canada identified a list of 43 severely degraded locations in the Great Lakes Basin as Areas of Concern--26 of which are located entirely in the United States; 5, shared by the United States and Canada; and 12, located entirely in Canada. As of May 2015, 4 of the Areas of Concern located entirely in the United States had been delisted, or removed, from the binational list. In addition, the fertile soil in the surrounding states makes them highly productive agricultural areas, resulting in large amounts of nutrients such as phosphorus and nitrogen--as well as sediment, pesticides, and other chemicals--running off into the Great Lakes. Moreover, large population centers on both sides of the U.S. and Canadian border use the Great Lakes to discharge wastewater from treatment plants, which also introduces nutrients into the Great Lakes. Even with progress in reducing the amount of phosphorus in the lakes in the 1970s, harmful algal blooms are once again threatening the Great Lakes Basin. The United States has long recognized the threats facing the Great Lakes and has developed agreements and programs to support restoration actions. For example, in 1972, the United States and Canada signed the Great Lakes Water Quality Agreement to restore, protect, and enhance the water quality of the Great Lakes to promote the ecological health of the Great Lakes Basin. In addition, in 2002, the Great Lakes Legacy Act authorized EPA to carry out sediment remediation projects in the 31 Areas of Concern located entirely or partially in the United States, among other things. In 2004, the Task Force agencies collaborated with governors, mayors, tribes, and nongovernmental organizations in the Great Lakes region in an effort referred to as the Great Lakes Regional Collaboration, which led to the development in 2005 of the Great Lakes Regional Collaboration Strategy to Restore and Protect the Great Lakes. More than 1,500 individuals participated in this effort. In 2009, the President created the Asian Carp Regional Coordinating Committee to coordinate efforts to prevent Asian carp from spreading and becoming established. Even with these actions, the Great Lakes are environmentally vulnerable. In 2009, the President proposed $475 million in his fiscal year 2010 budget request for a new interagency initiative to accelerate the restoration of the Great Lakes. Specifically, the President requested that EPA and its federal partners coordinate state, tribal, local, and industry actions to protect, maintain, and restore the integrity of the Great Lakes. Most recently, in 2015, multiple bills to authorize the GLRI were introduced in the House and Senate. Some of these bills, if enacted, would authorize $300 million to be appropriated annually to carry out the GLRI for fiscal years 2016 through 2020. When Congress made funds available for the GLRI in fiscal year 2010, the conference report accompanying the appropriations act directed EPA to develop a comprehensive, multiyear restoration action plan for fiscal years 2011 through 2014, to establish a process to ensure monitoring and reporting on the progress of the GLRI, and to provide detailed, yearly program accomplishments beginning in 2011. As discussed in our July 2015 report, in fiscal years 2010 through 2014, $1.68 billion of federal funds was made available for the GLRI, and as of January 2015, EPA had allocated nearly all of the funds, about $1.66 billion. Also, as of January 2015, Task Force agencies had expended $1.15 billion for 2,123 projects (see fig. 2). GLRI funds are available for obligation for the fiscal year the appropriation was made and the successive fiscal year. After these 2 fiscal years of availability, GLRI funds can be used for 7 additional years to expend and adjust those obligations. Task Force agencies conduct GLRI work themselves or by awarding funds to recipients through financial agreements, such as grants, cooperative agreements, or contracts. Potential recipients of GLRI funds include federal entities; state, local, or tribal entities; nongovernmental organizations; academic institutions; and others, such as for-profit entities, agricultural producers, or private landowners. A single GLRI project can involve multiple funding recipients. Table 1 shows the number of projects funded with GLRI funds made available in fiscal years 2010 through 2013 by the five agencies we reviewed in our 2015 report and type of recipient, as of July 2014. The type of GLRI funding recipients vary depending on the agency and financial agreements involved. For example, NOAA has entered into agreements with a variety of recipient types, with the exception of private landowners and agricultural producers. Funding recipients are responsible for reporting information to their funding agencies about the progress of their GLRI projects. As discussed in our September 2013 and July 2015 reports, in response to the conference report's direction to develop a multiyear restoration action plan, in February 2010, the Task Force published the Fiscal Years 2010 to 2014 Great Lakes Restoration Initiative Action Plan (2010-2014 Action Plan) to guide the activities of the GLRI for those years. The 2010-2014 Action Plan was organized into five focus areas that, according to the Task Force agencies, encompassed the most significant environmental problems in the Great Lakes: (1) toxic substances and Areas of Concern; (2) invasive species; (3) nearshore health and nonpoint source pollution; (4) habitat and wildlife protection and restoration; and (5) accountability, education, monitoring, evaluation, communication, and partnerships. For each focus area, the 2010-2014 Action Plan included long-term goals, objectives to be completed within the 5-year period covered by the plan, and measures of progress--28 in total--that were designed to ensure that efforts are on track to meet the long-term goals. Each of the 28 measures included annual targets for fiscal years 2010 to 2014. The Task Force issued an updated Action Plan for 2015 to 2019 (2015-2019 Action Plan) in September 2014 to guide the GLRI for those years. The updated plan retains four of the focus areas of the 2010-2014 Action Plan, and the fifth focus area was modified and called "foundations for future restoration actions." As we reported in September 2013, EPA assesses GLRI progress primarily by evaluating performance toward meeting the annual targets for the 28 measures of progress in the Action Plan. In our 2013 report, we found that the 2010-2014 Action Plan did not identify the links between a focus area's goals, objectives, and measures of progress. That is, some of the goals and objectives in the Action Plan were not linked with any measures. We recommended that the EPA Administrator, in coordination with the Task Force as appropriate, identify linkages between long-term goals, objectives, and measures in the Action Plan for 2015 to 2019. In response to our recommendation, each focus area in the updated Action Plan is associated with two or three objectives and several measures of progress, clearly identifying the links between each objective and measure of progress. In response to the conference report's direction to establish a process to ensure monitoring and reporting on the progress of the GLRI, EPA created the Great Lakes Accountability System (GLAS) in 2010 to collect information for monitoring GLRI projects and progress. In cooperation with the Task Force, EPA also created a GLRI website, to provide information to both the public and funding recipients about the GLRI program and GLRI projects. In September 2013, we found that the information on GLRI projects in GLAS may not be complete, which may prevent EPA from producing sufficiently comprehensive or useful assessments of GLRI progress. For example, GLAS limited users to submitting information about progress using a single measure of progress, while GLRI projects may directly address multiple measures. This prevented EPA from collecting and reporting complete progress information on each of the measures addressed by GLRI projects. As a result, we recommended that the EPA Administrator, in coordination with the Task Force, capture complete information about progress for each of the measures that are addressed by a project. In response to this recommendation, EPA modified GLAS to allow GLAS users to report information in GLAS about more than one measure of progress, beginning in January 2014. In July 2015, we found that some GLAS data were inaccurate, in part because recipients entered information inconsistently due to inconsistent interpretation of guidance, unclear guidance, or data entry errors. In May 2015, while we were completing our work for that report, EPA stopped using GLAS and began using the Environmental Accomplishments in the Great Lakes (EAGL) information system to collect GLRI project information and issued initial guidance for using EAGL. EPA officials told us that the agency created EAGL and, after consulting with Task Force agencies, conducted pilot tests of the system while we were completing our review of GLAS. After the pilot tests, in May 2015, EPA officials decided to use EAGL to collect information to monitor and report on GLRI progress, and they made the system available to Task Force agencies for an initial period of data entry. In our July 2015 report, we said that this is a good first step to resolving the data inconsistencies that we identified in GLAS, which resulted, in part, because of unclear or undocumented definitions, data requirements, and guidance about entering important data. However, as of that date, EPA had not yet established data control activities or other edit checks, although in commenting on a draft of the report, EPA stated that it planned to establish data control activities, such as verifications and documented procedures, for ensuring the reliability of the EAGL information system. Fully implementing the actions needed to address the reliability of GLRI project data should ensure that EPA and the Task Force agencies can have confidence that EAGL can provide complete and accurate information. EPA officials told us that the agency plans to use the initial data entry period to solicit feedback from the Task Force agencies in order to make changes to EAGL and the user guidance. The officials said their goal is to have EAGL ready for data entry at the beginning of fiscal year 2016. As we reported in July 2015, in response to the conference report's direction to provide detailed, yearly program accomplishments beginning in 2011, EPA and the Task Force released two accomplishment reports in 2013 and one in 2014 that provided overviews of progress under the GLRI for fiscal years 2010 through 2012. These reports included summary accomplishment statements for each of the five focus areas from the 2010-2014 Action Plan, as well as specific performance information for many of the 28 measures of progress in the 2010-2014 Action Plan. The process for identifying each agency's GLRI work and share of GLRI funding has evolved since fiscal year 2010 to emphasize interagency discussion. As discussed in our July 2015 report, EPA officials described four steps that Task Force agencies generally followed to identify GLRI work and funding, and the five agencies we reviewed followed these steps. The steps are as follows: Agency identification of GLRI work. EPA officials said that during the first step, each agency conducted an internal analysis to identify GLRI work that they wanted to conduct, either themselves or through other entities, within a fiscal year. Task Force agreement on scope and funding for agencies' work. In the second step, the five agencies we reviewed held discussions with the Task Force and agreed on the work that would be done in a given fiscal year, as well as the amount of GLRI funds that would be needed to conduct that work. In general, once the agencies made a final determination of the work they would conduct in a fiscal year, and the GLRI funds that would be made available, each agency entered into an interagency agreement with EPA to transfer GLRI funds from EPA to the agency. Solicitation of proposals for projects designed to carry out agencies' GLRI work. In the third step, agencies solicited project proposals from potential recipients to conduct the work identified in the second step. Project proposals were generally solicited through an announcement, such as a request for applications, posted on an agency's website or in other ways, such as by e-mail. Requests for applications included criteria that the agency would use to rank applications and select projects, among other things. Selection of projects. In the fourth step, agency officials evaluated project proposals and selected the projects they would fund. Officials from the Task Force agencies we reviewed generally described similar processes for evaluating project proposals. Specifically, they said that agency officials with the appropriate expertise reviewed and ranked proposals against information in the request for applications and selected the best scoring projects for funding. The process for identifying each agency's annual GLRI work and share of GLRI funding has evolved from one in which project and funding decisions were made on an agency-by-agency basis to one in which subgroups formed of multiple agency officials discuss and decide on what work should be done. According to EPA officials, for fiscal years 2010 and 2011, the Task Force and the five agencies agreed on work that each agency would do on an agency-by-agency basis. Officials from the agencies said that they identified work based on existing plans and worked with the Task Force to determine the work the agencies would do and the funds the agencies should receive. Beginning with fiscal year 2012, the Task Force began emphasizing interagency discussions as it created three subgroups made up of federal agency members, one subgroup for each of three priority issues. The three priority issues, which aligned with three of the five focus areas in the 2010-2014 Action Plan, were (1) cleaning up and delisting Areas of Concern located entirely or partially in the United States, (2) preventing and controlling invasive species, and (3) reducing phosphorus runoff that contributes to harmful algal blooms. For example, the Areas of Concern subgroup considered how close each Area was to being delisted and what cleanup actions were needed for delisting, as identified by the Area of Concern managers, among other things. Overall, the Task Force set aside a total of $180 million of the available GLRI funds to address the priority issues for fiscal years 2012 through 2014: $52.2 million in fiscal year 2012, $63.4 million in fiscal year 2013, and $64.7 million in fiscal year 2014. For 2015, EPA officials said that the Task Force began creating additional subgroups to identify work and funding for all five of the focus areas in the 2015-2019 Action Plan, not just the three priority issues. According to EPA officials, the focus on priority issues for fiscal years 2012 through 2014 accelerated restoration results for one of the three priority issues. Specifically, two of the Areas of Concern targeted for accelerated cleanup by the relevant subgroup were delisted in 2014. EPA announced in October 2014 that the White Lake and Deer Lake Areas of Concern had been delisted--both had been identified by the Areas of Concern subgroup for accelerated cleanup with priority issue funds--and EPA officials told us that they expect cleanup work to be completed at four other Areas of Concern in fiscal year 2015 as a result of receiving priority issues funds. In the 25 years before the three priority issues were identified, only one Area of Concern located entirely in the United States had been delisted. In addition, EPA officials said that identifying and funding the three priority issues for fiscal years 2012 through 2014 also allowed for continued success in invasive species prevention and resulted in some progress in reducing phosphorus runoff that contributes to harmful algal blooms. However, restoration results in those two priority issues are less clear than in the Areas of Concern priority issue, in large part because the factors contributing to those priority issues persist and are likely to continue into the future. In July 2015, we reported that the Task Force, as part of its oversight of GLRI, makes some information on GLRI projects available for Congress and the public in two ways: annual accomplishment reports and the GLRI website. The annual accomplishment reports included information about some, but not all, project activities and results. Specifically, we found that the accomplishment report for progress in fiscal year 2011 identified 10 GLRI projects, (2 projects in each of the five focus areas in the 2010-2014 Action Plan) and included some information about project activities and results for each project. For example, the report noted that the "Milwaukee River (Wisconsin)--restoring fish passage" project removed a dam, opening 14 miles of the river and 13.5 miles of tributaries to allow fish to move more freely, and reconnected the lower reach of the river with 8,300 acres of wetlands, improving water quality. The report provided similar information about nine additional projects. The accomplishment reports about GLRI progress in fiscal years 2010 and 2012 also included information about project activities and results, although most information was not associated with individual projects. For example, a statement from the accomplishment report for fiscal year 2012, "GLRI partners are implementing strategic invasive species control efforts that establish or take advantage of partnerships that will continue invasive species monitoring, maintenance, and stewardship beyond the duration of individual projects," does not identify the specific projects where these efforts are taking place. EPA also made some information available on GLRI projects on the GLRI website, including a project's funding agency, title, funding amount and year, recipient identification, focus area, and description. This information does not include GLRI project activities and results because the website is not designed to include it. Each of the five Task Force agencies we reviewed collected information on its projects, including activities and results of the projects they funded, although this information is not collected and reported by EPA. Overall, for the 19 projects we reviewed, recipients reported a variety of project activities, including applying herbicide, conducting training and workshops, and collecting data. In addition, we found that recipients reported a range of results. For example, funding recipients from 8 projects reported results that can be directly linked to restoration, such as increasing lake trout production, removing acres of invasive plant species, and protecting acres of marshland. For one of these projects, the Buffalo Audubon Society reported results needed to restore critical bird habitat, such as planting 3,204 plants and removing invasive species, among other results. For another project, the Great Lakes Fishery Commission reported results in the form of improved methods for capturing sea lamprey, an invasive species, which is a parasite that was a major cause of the collapse of lake trout, whitefish, and chub populations in the Great Lakes during the 1940s and 1950s. According to a Great Lakes Fishery Commission official, the results from this project will help to further suppress sea lamprey production in the Great Lakes, thereby reducing the damage they cause to native and desirable species. For example, a single lamprey can kill up to about 40 pounds of fish in its lifetime. For the 11 remaining projects, recipients reported results that can be indirectly linked to restoration; that is, the results may contribute to restoration over time. These included results such as simulations and data for helping decision makers make better restoration decisions in light of climate change, as well as education and outreach tools to increase awareness of invasive species. In addition, a University of Wisconsin- Madison representative told us that the university's project to improve applied environmental literacy, outreach, and action in Great Lakes schools and communities through train-the-trainer professional development institutes can contribute to restoration. Progress reports for the university's project noted that the project resulted in more than 110 school teams that guided students in restoration, service learning, inquiry, and citizen science monitoring during the 2013-2014 school year, among other things. The representative said that this contributed to restoration because participating students have implemented conservation practices, such as building rain gardens that slow stormwater runoff and remove contaminants from polluted runoff. Chairman Gibbs, Ranking Member Napolitano, and Members of the Subcommittee, this concludes my prepared statement. I would be pleased to answer any questions you may have at this time. If you or your staff members have any questions about this testimony, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. Susan Iott (Assistant Director), Mark Braza, John Delicath, Carol Henn, Kimberly McGatlin, Jeanette Soares, Kiki Theodoropoulos, and Michelle K. Treistman also made key contributions to this testimony. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The Great Lakes, which contain much of North America's freshwater supply, provide economic and recreational benefits to millions of people. They face significant stresses, however, that have caused ecological and economic damage. Decades of industrial activity in the region, for example, left a legacy of contamination that resulted in the United States and Canada identifying, since 1987, 43 Areas of Concern. The GLRI was created in 2010 to, according to EPA, accelerate efforts to protect and restore the Great Lakes. It is overseen by a Task Force of 11 federal agencies that is chaired by the EPA. EPA was directed, in a conference report, to develop a restoration action plan, establish a process to ensure monitoring and reporting on progress, and provide detailed yearly accomplishments. This testimony is based on GAO reports issued in September 2013 and July 2015. It focuses on (1) GLRI funding, action plans, and reports; (2) the process used to identify GLRI work and funding; and (3) information available about GLRI project activities and results. For the 2015 report, GAO reviewed a sample of 19 GLRI projects funded by the five Task Force agencies that received the majority of GLRI funds, among other things. As GAO reported in July 2015, of the $1.68 billion in federal funds made available for the Great Lakes Restoration Initiative (GLRI) in fiscal years 2010 through 2014, nearly all had been allocated as of January 2015. Of the $1.66 billion allocated, the Environmental Protection Agency (EPA) and the other 10 Great Lakes Interagency Task Force (Task Force) agencies expended $1.15 billion for 2,123 projects (see fig.). ____________________________________________________________________ Status of GLRI Funds, FY 2010-2014 Task Force agencies can either conduct work themselves or enter into financial agreements, such as grants, cooperative agreements, or contracts with others, such as federal entities; state, local, and tribal entities; nongovernmental organizations; and academic institutions. To guide restoration work, EPA and the Task Force have developed two consecutive multiyear restoration action plans. EPA also created a process to ensure monitoring and reporting on the progress of the GLRI, and EPA and the Task Force issued three accomplishment reports. The process to identify each agency's GLRI work and funding has evolved to emphasize interagency discussion. In fiscal year 2012, the Task Force created subgroups to discuss and identify work on three issues: cleaning up severely degraded locations, called Areas of Concern; preventing and controlling invasive, aquatic species that cause extensive ecological and economic damage; and reducing nutrient runoff from agricultural areas. EPA officials said that the Task Force created additional subgroups to identify all GLRI work and funding in 2015. In July 2015, GAO found that the Task Force has made some information about GLRI project activities and results available to Congress and the public in three accomplishment reports and on its website. In addition, the individual Task Force agencies collect information on activities and results, although this information is not collected and reported by EPA. Of the 19 projects GAO reviewed, 8 reported results directly linked to restoration, such as improved methods for capturing sea lamprey, an invasive species that can kill up to about 40 pounds of fish in its lifetime. The remaining 11 reported results that can be indirectly linked to restoration; that is, the results may contribute to restoration over time. These included results such as simulations and data for helping decision makers make better restoration decisions in light of climate change, as well as education and outreach tools to increase awareness of invasive species. GAO recommended in 2013 that EPA improve assessments of GLRI progress, among other things. EPA agreed and has taken several actions. GAO is not making any recommendations in this testimony.

The DHP budget estimates submitted to the Congress consist of all the O&M and procurement resources needed to support DOD's consolidated medical activities. According to DOD, the budget estimates are based on the continued refinement and application of a managed care strategy and methodology used to produce DOD's health care services for eligible beneficiaries. Operating under the Assistant Secretary of Defense (Health Affairs), TMA is responsible for formulating the DHP budget request and for managing DOD's CHAMPUS and MCS contracts. The Surgeons General of the Army, Navy, and Air Force are responsible for the budget execution of decentralized medical activities such as direct MTF patient care. The DHP O&M budget request consists of a single budget activity--administration and servicewide activities. Each year, DOD provides detailed DHP budget information to the Congress in "justification materials" that show amounts requested for each of the 7 subactivities that encompass 34 program elements (see table 1). While the Congress appropriates DHP O&M funds as a single lump sum, its budget decision is based on the DHP budget request presented at the subactivity and program element levels. Since 1994, the Congress has generally appropriated more for DHP O&M expenses than DOD requested (see fig. 1). Committee reports may specify relatively small amounts of funding for such items as breast cancer and ovarian cancer research, which DOD then obligates through the appropriate account in accordance with congressional direction. Other than the funds specifically earmarked by the Congress, DOD has the latitude to allocate its congressional appropriation as needed to meet estimated subactivity and program element requirements. Between 1994 and 1999, DOD allocated most appropriations to direct care (primarily MTF patient care) and to purchased care (primarily CHAMPUS and MCS contracts). Table 2 shows the allocation of DHP appropriations by subactivity (see tables I.1 and I.2 for detailed information on DHP budget requests, budget allocations, and actual or currently estimated obligations between fiscal years 1994 and 1999). The Congress appropriated $48.9 billion for DHP O&M expenses between fiscal years 1994 and 1998. During budget execution, DOD obligated about $4.8 billion differently--as either increases or decreases--from its budget allocations for the various subactivities (see table 3). Obligations differed particularly for the direct care and purchased care subactivities. However, the magnitude of the funding adjustments has diminished in recent years, dropping to about $283 million in fiscal year 1998 from a peak of almost $1.5 billion in fiscal year 1995. Because the Congress makes a lump-sum appropriation, under DOD regulations and informal arrangements with the Congress, these adjustments did not require congressional notification or approval. The largest funding adjustments occurred in the direct care and purchased care subactivities. Between 1994 and 1998, DOD allocated $21.2 billion from the final DHP appropriation for purchased care but obligated only $19.1 billion, allowing DOD to reallocate $2.0 billion into such areas as direct patient care, information management, and base operations. For example, between 1994 and 1995, DOD increased obligations for direct care at MTFs by $876.3 million above the allocation. Between 1994 and 1996, DOD obligated about $289.5 million more than it had allocated for the information management subactivity. Also, funding for the base operations subactivity--which includes such items as repairs and maintenance on MTF facilities--received an increase of $479.6 million over the budget allocation between 1994 and 1997. (Table I.4 details the funding increases and decreases for each subactivity and program element between fiscal years 1994 and 1998.) In each year between 1994 and 1998, DOD's budget allocation for purchased care--which provided funds for CHAMPUS, the now-terminated CHAMPUS Reform Initiative contracts, and MCS contracts--exceeded obligations, as shown in figure 2. At the program element level, the largest adjustments within the purchased care subactivity occurred between 1994 and 1996, when DOD obligated $1.4 billion less than the budget allocation for the CHAMPUS program element (see table I.4 and fig. 3). In contrast, MCS contract budget allocations more closely matched obligations through 1996, when DOD implemented two of the then four awarded MCS contracts on time. In 1997 and 1998, however, when implementation of the last three contracts was delayed, MCS budget allocations exceeded obligations by $990 million. Because of the delays in starting up these contracts, most of the unobligated MCS contract funds were used to defray higher than anticipated CHAMPUS program obligations. According to DOD officials, between 1994 and 1998, DOD-wide budget pressures and major program changes--such as downsizing and the rollout of TRICARE managed care reforms--made it difficult to estimate and allocate resources between direct care and purchased care budgets. They emphasized that while they are directly responsible for appropriation amounts at the lump-sum level, they have flexibility to manage the health care delivery system. Therefore, in executing the DHP appropriation funds for patient care, such funds may flow from direct care to purchased care and vice versa. They believe this flexibility is critical to efficiently managing the military health care delivery system. DOD officials cited several interrelated reasons why DHP obligations differed from DOD's budget allocations between fiscal years 1994 and 1998. These reasons also suggest why "shortfalls" in recent DHP budget requests have prompted congressional concerns about the process DOD uses to estimate and allocate the DHP budget. TMA, Health Affairs, and service budget officials made various internal budget policy choices that included a DHP budget strategy to fully fund purchased care activities within available funding levels. This strategy, coupled with general budget pressures, left less money with which to budget direct care and other DHP subactivity requirements (such as information management and base operations). To keep within the DOD-wide spending caps, the officials intentionally understated requirements for direct care and other subactivities in the DHP budget requests submitted to the Congress. This pattern of policy choices, which led budget officials to underestimate direct care budget requirements, is underscored by the congressional testimonies by the Assistant Secretary of Defense (Health Affairs) and the service Surgeons General--all of whom identified shortfalls in the past 3 years of DHP budget requests, 1997 through 1999. The shortfalls--that is, the difference between the Assistant Secretary's and the Surgeons General's views of their needs and the President's budget submission--have raised congressional concerns over DHP budget requests and prompted both DOD and the Congress to offset the shortfalls in various ways (see table 4). In addition, TMA and service officials told us they have relied on DHP's flexibility during budget execution to fund direct patient care with funds available and not needed for CHAMPUS and MCS contracts. TMA officials told us that forecasting health care costs for budgeting purposes is inherently challenging because the budget year starts about 18 months after DOD starts preparing DHP budget estimates and 8 months after the President submits the DHP budget request to the Congress. They commented that many conditions change, affecting their direct and purchased care estimates over these protracted periods. In our view, however, these comments do not explain the often large differences that have occurred between budget allocations--which are established after the congressional appropriation is actually received--and obligations, which follow almost immediately thereafter. DOD has the flexibility to allocate most of its congressional appropriations as needed among the various DHP subactivities. Despite this flexibility and even taking into account the minor impacts of other adjustments to DHP's allocated budget amounts such as supplemental appropriations or reprogrammings, DHP obligations still varied significantly from the budget allocations reported to the Congress, calling into question DOD's methods for estimating DHP budget requirements. TMA and Health Affairs budget officials told us that the DHP beneficiary population is largely undefined, leading to budget uncertainty. According to these officials, DOD has little control over where beneficiaries go to get their health care because MTFs and MCS contractors do not enroll most beneficiaries. TMA officials stated that, in formulating the DHP budget request, separate cost estimates for MTFs and MCS contracts are based on the best available information at the time. Although service officials told us they had developed higher direct care budget estimates--which TMA nonetheless chose to underfund in the final DHP budget requests--one official told us that the nonenrolled beneficiary population is a major impediment to submitting realistic DHP budget requests. Moreover, DOD's capitation method (allocating MTF budgets on the basis of the number of estimated users of the military health system) has not kept pace with MTF cost increases for space-available care to nonenrolled beneficiaries for medical services and outpatient prescription drugs. Others have noted similar concerns about the lack of a clearly defined beneficiary population and the effect on DHP budgeting uncertainties. For example, in a 1995 report, the Congressional Budget Office (CBO) raised concerns that, even with TRICARE Prime's lower cost-sharing features providing incentives, not enough beneficiaries would enroll, and DOD would continue to have difficulties planning and budgeting. For DOD to effectively predict costs and efficiently manage the system, CBO concluded that DOD would need a universal beneficiary enrollment system to clearly identify the population for whom health care is to be provided. CBO concluded that even under TRICARE, beneficiaries can move in and out of the system as they please, relying on it for all, some, or none of their care. DOD would have to continue its reliance on surveys to estimate how many beneficiaries use direct care and purchased care and to what extent DOD is their primary or secondary source of coverage. In previous reports, we also raised concerns about the budgetary uncertainties caused by less-than-optimal enrollment. Moreover, at the end of fiscal year 1998, we estimate that less than half of the 8.2 million DOD-eligible beneficiaries were enrolled. Thus, DOD's budgeting uncertainties stem, in large measure, from its lack of a universal enrollment requirement. Higher than expected MTF costs in fiscal years 1994 and 1995 were given as another reason that DHP obligations differed from budget allocations, according to TMA, Health Affairs, and service officials. The budget savings projected to result from base closures (and reflected in their requests) were not achieved. Therefore, although the number of MTFs decreased by 9.5 percent between 1994 and 1998, DOD wound up obligating $726 million more for direct care than the amount allocated (see fig. 4). One service official told us that despite MTF downsizing, the number of beneficiaries going to MTFs has not dropped, thus sustaining a high level of demand for MTF health care. But MTF inpatient and outpatient workload data reported to the Congress in DOD's annual justification materials indicate that MTF inpatient and outpatient workload declined by a respective 54.5 percent and 26 percent between 1994 and 1998. However, DOD and TMA officials cautioned us that the MTF workload data are not accurate. Yet, a May 1998 DOD Inspector General audit report (on the extent to which managed care utilization management savings met Health Affairs' expectations as reflected in its DHP budgets found a significant reduction in inpatient and outpatient workload at 15 large MTFs from fiscal year 1994 through 1996, but no corresponding decrease in operating costs. DOD's Inspector General attributed the cause to MTFs generally increasing their military medical staffing and infrastructure costs (real property maintenance, minor construction, and housekeeping). And, according to the Inspector General, it is especially difficult to reduce operating costs when workload is reducing without decreasing military medical staffing. TMA, Health Affairs, and service officials also told us that several interrelated factors had made purchased care obligations significantly lower than the allocated amounts between 1994 and 1998. First, they did not fully account for savings from rate changes in the CHAMPUS maximum allowable charge (CMAC) for physician payments. DOD officials told us that during this period, CHAMPUS budget requests and allocations did not account for $408 million to $656 million in estimated 3-year CMAC savings between 1994 and 1996. For fiscal years 1997 to 1998, DOD has estimated that CMAC saved $1.5 billion in CHAMPUS and TRICARE contract costs. Given that DHP purchased care budget requests and allocations track more closely with obligations in 1997 and 1998, it appears TMA better accounted for CMAC savings. Second, DOD officials cited a factor related to their budget strategy of conservatively estimating purchased care costs. After an earlier history of CHAMPUS budget shortfalls, DOD changed its budget strategy from not fully funding CHAMPUS to ensuring CHAMPUS was fully funded. However, they noted that an actuarial model for projecting CHAMPUS costs, which was used to formulate the budget requests for fiscal years 1994 through 1996, greatly overestimated CHAMPUS requirements. Finally, with the CHAMPUS phase-out and the switch to MCS contracts, TMA and Health Affairs officials cited the need to fully fund these contracts in their budget request. According to these officials, their MCS budgeting strategy was essentially driven by the concern that if there were not enough funds allocated for the MCS contracts, an Antideficiency Act violation could occur. We do not see, however, how requesting the amount of funds DOD anticipates the contracts will actually cost could trigger an Antideficiency Act violation. Budget requests, even where they fail to fully fund an activity, do not cause such violations. One of the ways an Antideficiency Act violation could occur is if DOD continued to pay additional amounts under the contract and overobligated or overexpended the appropriation or fund account related to the contract. In such a case, the proper response would be to reprogram funds and/or seek additional appropriations in advance of any such potential deficiency. In other words, should funds allocated for the MCS contracts appear to be inadequate, DOD would find itself in essentially the same position as any agency that anticipates running short of funds. Only if DOD officials continued to make additional payments under the contract knowing that appropriations for them were not available would there be an Antideficiency Act violation. Looking ahead, DOD officials pointed out that the amount of funds shifted between DHP subactivities had fallen in 1997 and 1998, and they anticipated that volatility within the purchased care subactivity would also decrease now that all seven MCS contracts have been implemented. Officials also stated that TMA has established new resource management controls. A quarterly workgroup process, for example, refines CHAMPUS and MCS contract requirements and identifies associated DHP-wide adjustments that can be used to formulate future budget estimates. They stated that these procedures represent significant improvements in their ability to precisely project direct care and purchased care requirements. They acknowledged, however, that the next round of MCS contracts will be awarded and administered differently than the first round and that their integrated care system, with its largely nonenrolled beneficiary population, is inherently difficult to budget for. Thus, funding changes during budget execution are nearly inevitable. The movement of DHP funds between subactivities does not require prior congressional notification or approval. While the Congress must be notified in many cases when DOD transfers or reprograms appropriated funds, these reporting rules do not apply to the movement of funds among DHP subactivities. As a result, sizeable funding changes have occurred without specific notification. Refinements to the reporting process would put the Congress in a better position to be aware of funding changes. Under procedures agreed upon between congressional committees and DOD, funds can be obligated for purposes other than originally proposed through transfers and reprogrammings. Reprogramming shifts funds from one program to another within the same budget account, while a transfer shifts funds from one account to another. According to the Congressional Research Service, DOD uses the term "reprogramming" for both kinds of transactions. DOD budgetary regulations, reflecting instructions from the appropriations committees, distinguish among three types of reprogramming actions: 1. Actions requiring congressional notification and approval, including (a) all transfers between accounts, (b) any change to a program that is a matter of special interest to the Congress, and (c) increases to congressionally approved procurement quantities; 2. Actions requiring only notification of the Congress, including reprogramming that exceeds certain threshold amounts; and 3. Actions not requiring any congressional notification, including reprogramming below certain threshold amounts and actions that reclassify amounts and actions within an appropriation without changing the purpose for which the funds were appropriated. For example, DOD is required to notify the Congress if it shifts funds from the DHP O&M to the DHP procurement component. But the notification requirements do not apply when funds move from one DHP subactivity to another (such as from purchased care to direct care) or between DHP program elements (such as from MCS contracts to CHAMPUS, both within the purchased care subactivity) because such movements are within the same budget activity (administration and servicewide activities). Thus, the movements do not represent a change in the purpose for which the funds were appropriated and fit under the third type of reprogramming procedures. To help increase the visibility of DOD funding changes, the reports accompanying recent defense appropriations acts have directed DOD to provide congressional defense committees with quarterly budget execution data on certain other O&M accounts. For example, in fiscal year 1999, DOD is directed to provide data for each budget activity, activity group, and subactivity not later than 45 days past the close of each quarter. These reports are to include the budget request and actual obligations and the DOD distribution of unallocated congressional adjustments to the budget request, as well as various details on reprogramming actions. This type of timely information supports congressional oversight of DOD O&M budget execution and shows the extent to which DOD is obligating O&M funds for purposes other than the Congress had been made aware of. Under current procedures, DHP obligations are reported at the subactivity and program element levels in the prior-year column when DOD submits its budget request justification material to the Congress. However, such information is not reported in a manner that allows easy comparison with the prior year's budget allocations, and thus does not facilitate oversight of funding changes that took place during budget execution. Reprogramming notification regulations do not apply when funds shift from one DHP subactivity to another, and congressional committees have not directed DOD to report DHP O&M budget execution data in the same manner as other O&M accounts. The information needed to support congressional notification or quarterly budget execution reports is now readily available because DOD officials have instituted their own internal reviews to better track DHP budget execution. For example, DOD now requires internal quarterly budget execution reports from the services to document the shift of funds between subactivities. Therefore, we discussed with DOD officials potential reporting changes that would facilitate congressional oversight of DHP funding adjustments during budget execution. DOD officials told us that subjecting the lump-sum DHP appropriation to the reprogramming procedures that require prior approval from the Congress would eliminate flexibility, making it very difficult to manage the finances of the integrated MTF and MCS contract health care system. However, in our view, subjecting the DHP appropriation to reprogramming procedures for notification, but not prior approval, to the Congress whenever funds above a certain threshold shift from one DHP subactivity to another would not diminish DOD's flexibility. DOD officials agreed that congressional oversight would be enhanced by quarterly budget execution reports on DHP obligations by subactivity and program element. Depending on where the threshold was set and the extent to which special interest DHP subactivities were designated for reporting, notification could involve fewer reports than a quarterly reporting process for DHP subactivities and program elements. Thus, in our view, notification may well offer a less burdensome means of facilitating congressional oversight of DHP funding changes during budget execution. DOD officials expect future DHP obligations to track more closely with budget requests and allocations, while acknowledging that some movement of funds is inevitable given the lack of a universally enrolled beneficiary population for direct and purchased care. Although DOD is not required to adhere to its own budget requests or reported budget allocations when it obligates funds, in our view, a repeated failure to do so without providing sufficient justification could cause the Congress to question the validity of DHP budget requests. The Congress, however, will not be made aware of improvements or continuing funding adjustments unless DOD begins to either notify or report to congressional committees on how it obligates DHP appropriations. In our view, and DOD agrees, additional information on how obligations differ from budget requests and allocations would improve oversight by the Congress and DOD. Since TMA officials already require quarterly budget execution reports to improve their internal budget oversight and budget decisionmaking, DOD would not be burdened by notifying or reporting similar information to the Congress. Such notification or reporting could provide the Congress with a basis for scrutinizing DHP budget request justifications and determining whether additional program controls--such as a universal requirement that all beneficiaries enroll in direct care or purchased care components--are needed. The Congress may wish to consider requiring DOD, consistent with current notification standards and procedures, to notify the congressional defense committees of its intent to shift funds among subactivities (such as direct care, purchased care, and base operations). Such notification, while not requiring congressional approval of the funding shift itself, could be initiated whenever the amount of the funding shift exceeded a certain threshold to be determined by the Congress. The notification would specify where funds are being deducted and where they are being added, and the justification for such reallocation. Also, or alternatively, the Congress may wish to consider requiring DOD to provide congressional defense committees with quarterly budget execution data on DHP O&M accounts. These data could be provided in the same manner and under the same time frames as DOD currently provides data for non-DHP O&M accounts. In its comments on a draft of the report, DOD concurred with the report and its focus of making the DHP funding more visible to the Congress. DOD further agreed that providing additional budget execution data to the Congress, on a regular basis, would be a valuable step toward keeping congressional members informed about the military health care system's financial status. Finally, DOD agreed to modify its current process for internally reporting DHP obligations to report DHP O&M budget execution data to the Congress in the same manner as the non-DHP O&M accounts. However, DOD did not support requiring it to notify congressional defense committees of its intent to shift funds among DHP subactivities. DOD stated that such notification could potentially limit its ability to obligate DHP funds and affect beneficiaries' timely access to health care. We disagree. As we point out, such notification would not require prior approval of the funding shift itself, but would be initiated whenever the funding shift exceeded a certain amount to be determined by the Congress. These and other details of the notification procedure could be worked out between congressional committees and DOD to further ensure that DOD's ability to obligate funds for the timely delivery of health care services was not impaired. Further, as the report points out, notification could involve fewer reports than a quarterly reporting process for DHP subactivities. Thus, in our view, notification may well offer a less burdensome means of facilitating congressional oversight of DHP funding changes during budget execution. DOD also suggested several technical changes to the draft, which we have incorporated where appropriate. DOD's comments are presented in their entirety in appendix II. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from its date. At that time, we will send copies to Senator Wayne Allard, Senator Robert C. Byrd, Senator Max Cleland, Senator Daniel K. Inouye, Senator Carl Levin, Senator Ted Stevens, Senator John Warner, Representative Neil Abercrombie, Representative Steve Buyer, Representative John P. Murtha, Representative David Obey, Representative Ike Skelton, Representative Floyd Spence, and Representative C.W. Bill Young in their capacities as chairman or ranking minority member of Senate and House committees and subcommittees. We will also send copies at that time to the Honorable William S. Cohen, Secretary of Defense; the Honorable William J. Lynn, III, Under Secretary of Defense (Comptroller); the Honorable Sue Bailey, Assistant Secretary of Defense (Health Affairs); and the Honorable Jacob J. Lew, Director, Office of Management and Budget. Copies will be made available to others upon request. If you or your staff have any questions concerning this report, please contact Stephen P. Backhus, Director, Veterans' Affairs and Military Health Care Issues, on (202) 512-7101 or Daniel Brier, Assistant Director, on (202) 512-6803. Other contributors to this report include Carolyn Kirby (Evaluator-in-Charge), Jon Chasson, Craig Winslow, and Mary Reich. Table I.1: Defense Health Program Budget Requests, Budget Allocations, and Actual Obligations, Fiscal Years 1994-96 $2,583,114 $2,592,596 $3,062,708 $2,706,329 $2,658,394 $2,988,546 $3,035,259 $3,026,670 $2,954,594 $2,923,325 $2,933,625 $3,453,467 $3,098,704 $3,056,769 $3,413,238 $3,454,685 $3,452,996 $3,412,121 $4,325,682 $4,378,006 $3,771,326 $4,478,287 $4,508,287 $3,781,168 $4,267,097 $4,267,097 $3,720,333 (continued) (continued) $9,080,538 $9,326,635 $9,344,210 $9,613,331 $9,591,331 $9,625,162 $9,865,525 $9,886,961 $9,867,636 The TRICARE Support Office program element incorporated only Office of CHAMPUS costs in these years. Medical centers, hospitals, and clinics--CONUS Medical centers, hospitals and clinics--OCONUS Armed Forces Institute of Pathology 79,457 (continued) Following congressional approval of funds for Defense Health Program (DHP) operations and maintenance (O&M) expenses enacted through the annual appropriations act, various other actions by DOD or the Congress result in further adjustments. These adjustments can increase or decrease the total obligational authority available to DOD for DHP O&M expenses. Table I.3 details the other adjustments. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. 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Pursuant to a congressional request, GAO reviewed the apparent discrepancies between the Department of Defense's (DOD) budget allocations and the actual obligations for direct and purchased care, focusing on: (1) the extent to which the Defense Health Program (DHP) obligations have differed from DOD's budget allocations; (2) the reasons for any such differences; and (3) whether congressional oversight of DHP funding changes could be enhanced if DOD provided notification or budget execution data. GAO noted that: (1) between fiscal years 1994 and 1998, Congress appropriated $48.9 billion for DHP operations and maintenance (O&M) expenses; (2) during that period, DHP obligations at the subactivity level, particularly for direct and purchased care, differed in significant ways from DOD's budget allocations; (3) in total, about $4.8 billion was obligated differently--as either increases to or decreases from the budget allocations DOD had developed for the 7 DHP subactivities; (4) these funding changes occurred because of internal DOD policy choices and other major program changes; (5) according to DOD, its strategy was to fully fund purchased care activities within available funding levels; (6) this strategy left less to budget for direct care and other DHP subactivities; (7) TRICARE Management Activity officials also told GAO that because the DHP has both direct and purchased care components, whereby many beneficiaries can access either system to obtain health care, it is difficult to reliably estimate annual demand and costs for each component; (8) between 1994 and 1996, purchased care obligations were $1.9 billion less than allocated because of faulty physician payment rate and actuarial assumptions; (9) between 1994 and 1998, direct patient care obligations amounted to $1 billion more than DOD had allocated--during a period of base closures and military treatment facility downsizing--largely because DOD understated estimated direct care requirements; (10) also, between 1996 and 1998, DOD overestimated TRICARE managed care support (MCS) contract costs, believing that contract award prices would be higher and implementation would begin sooner than what occurred; (11) thus, most of the unobligated MCS contract funds were used to defray higher than anticipated Civilian Health and Medical Program of the Uniformed Services obligations; (12) the movement of DHP funds from one subactivity to another does not require prior congressional notification or approval; (13) as a result, these sizable funding changes have generally occurred without congressional awareness; (14) now that the MCS contracts are implemented nationwide, DOD officials expect future DHP obligations to track more closely with budget allocations; and (15) current law and regulations will continue to allow DOD the latitude to move funds between subactivities with little or not congressional oversight.

One of the most significant challenges facing the District is to maintain the financial viability of the city. Earlier this year, District officials sounded the alarm that the District faces an imbalance between its long-term expenditure needs for program services and capital investment, and its capacity to generate revenues over the long run. In contrast with a cyclical imbalance caused by temporary economic downturns, the District suggests its imbalance is more fundamental in nature. These officials assert that the District faces a fiscal structural imbalance as the result of several factors, many stemming from the federal government's presence in the city, the absence of a state to provide funding for the state-like services provided by the District, and restrictions on the District's tax base. District officials have stated that the factors contributing to a fiscal structural imbalance have existed for years but that their effects had been masked during recent years of national and regional economic growth and increased tax revenues. As shown in figure 1, the District has projected operating budget shortfalls ranging from $67 million to $139 million between anticipated revenues and estimated baseline expenditures for each year during fiscal years 2002 through 2006 if corrections are not made. These projections assume a continuation of current tax policies and service levels into the future, without implementing changes to address the projected fiscal shortfalls. The operating deficit projections in figure 1 include the operating budget only and exclude the capital expenditure budget. Therefore, certain probable expenditures are not included in the above budget estimates, such as public schools' infrastructure needs, needed repair of public roads, and Washington Metropolitan Area Transit Authority (WMATA) capital needs. District officials have expressed concern that if the fiscal structural imbalance issue is not addressed, it will cripple the city's efforts to maintain financial viability and require the city to make drastic cuts in its budgets and related services to avoid future deficits. In addition, a March 14, 2002, study commissioned by the Federal City Council (FCC) concluded that the District is on a path leading to budget deficits. The study estimated that without corrective action, the District could face budget deficits of at least $500 million by fiscal year 2005 due to a substantial decrease in revenue growth and unbudgeted spending increases in several key areas. The study cited spending for public schools (including spending for special education), Medicaid, and WMATA as the most significant drivers of the growth in projected expenditure levels. The District's definition of fiscal structural imbalance is premised on an imbalance between projected expenditures necessary to maintain the current level of services and revenues that will be raised under current tax and other revenue policies. Under the District's definition, a current services analysis assumes the current level of services and revenue structure as the baseline for concluding whether a fiscal structural imbalance exists. A current services imbalance can develop for a variety of reasons, including expenditures growing more rapidly than expected revenues due to increasing workloads such as number of program recipients, a rapid growth rate in health care costs, or a decline in tax revenues. The District also points to its uniqueness and the fiscal issues stemming from its being the nation's capital and having the federal presence, as well as its responsibility for services ordinarily provided by state government. Some current services imbalances are cyclical, rather than structural, in that revenues become insufficient to support existing levels of services during periods of economic decline but then return to sufficiency when the economy rebounds. In its August 2001 study, the Center on Budget and Policy Priorities (CBPP) notes that it is extremely difficult to determine the degree to which a fiscal imbalance in any state is structural, rather than cyclical. The CBPP reported that states are currently facing their worst financial crisis in 20 years, and they are responding to their budget shortfalls in a variety of ways. Some are using short-term fixes, such as tapping into rainy day funds or imposing temporary tax increases or spending cuts; others are using long-term fixes, such as imposing permanent tax increases or spending cuts. The revenue shortfalls projected by District officials for fiscal years 2002 through 2006, if accurate, would represent recurring deficits in the District's current services budget position if corrective action is not taken. These projected shortfalls are premised on the continuation of current budget policy over a long-term period spanning economic cycles. They do not contemplate changes in budget policy, nor do they compare the District's current budget policy with other jurisdictions. However, District officials also suggest that their current environment constrains their ability to respond to the projected imbalance through spending cuts, tax increases, or borrowing. For example, District officials point to deferred infrastructure improvements in public schools, roads, and utilities as the legacy of the long-term presence of a structural imbalance, low levels of service delivery in some programs, such as public education, and high tax rates in comparison to other states and local jurisdictions. Although District officials have not formally estimated the size of their reported fiscal imbalance, they have cited the following expenditure responsibilities as the primary factors contributing to such an imbalance: the District is not directly compensated for services provided to the federal government such as public works and public safety, which the District values at $240 million annually; the District is responsible for state-like services such as human services, mental health services, Medicaid, and the University of the District of Columbia, which the District values at $487 million annually; and the District estimates that approximately 400,000 out-of-state vehicles travel on city roads per day and do not pay for road repair the District values at $150 million per year. District officials also cite the following factors as contributing to limited revenue-raising capacity: 66 percent of the income earned by employees working in the District cannot be taxed by the District because the employees are nonresidents; 42 percent of the real property (or 27 percent of assessed property value) in the District is owned by the federal government and is thus exempt from taxation; an additional 11 percent of real property (excludes District-owned property, but includes nonprofit organizations and embassies) also is tax exempt; District buildings have congressionally imposed height restrictions that have reduced the population and the economic density; and District tax rates and burdens on households and businesses are high in comparison to Virginia and Maryland and its tax base is limited, thus making it difficult to expand the tax base. The District faces some real constraints on revenue. The District, like all state and local governments, is unable to tax property owned by the federal government. District officials say they face a particular hardship because a larger proportion of their property is owned or specifically exempted by the federal government than is the case with most jurisdictions. The District has stated that, according to its real property tax records, 42 percent of its property is federal property. It is difficult to estimate the net fiscal impact of the presence of the federal government or other tax- exempt entities because of the wide variety of indirect contributions that these entities have on District revenues and the lack of information on the services they use. The presence of tax-exempt entities generates revenues for the District, even though they do not pay income or property taxes directly. For example, these tax-exempt entities attract residents, tourists, and businesses to the District. In addition, employees of the tax-exempt entities and employees of businesses that provide services to these entities pay sales taxes to the District. We have found no comprehensive estimates of these revenue contributions; however, studies of individual tax-exempt entities suggest that the amounts could be significant. Further, given the large portion of the private sector activity in the District that is linked to the presence of the federal government and other tax-exempt entities, it is unclear whether commercial property would fill the void if federally owned property were reduced to the average seen in other cities. In addition to the amount of nontaxable property in the District, the District government, unlike state governments, is prohibited by federal law from taxing the income earned in the District by nonresident individuals. States that have income taxes typically tax the income of nonresidents, although some states have voluntarily entered into reciprocity agreements with neighbor states in which they agree not to tax the incomes of each other's residents. States that impose income taxes also typically provide tax credits to their residents for income taxes paid to other states. In addition, some cities that have income taxes tax the incomes of commuters who work within their boundaries. These taxes are typically levied at a low flat rate (most of the ones we identified were between 1 and 2 percent) on city-source earnings. Other cities are not authorized to levy commuter taxes by their state governments. However, in cases where cities are not authorized to levy commuter taxes, the state governments are able to compensate, if they so choose, by redistributing some of the state tax revenues collected from residents of suburbs to central cities in the form of grants to the city governments, or in the form of direct state spending within the cities. District officials believe that it is unfair for the federal government to apply a restriction on their income tax base that does not also apply to the 50 states. Another argument that is commonly made in favor of removing this particular restriction on the District's taxing authority is that it would enable the District government to defray the costs of providing public services, such as road maintenance and fire and police protection, that benefit commuters. A recent study estimated that the average commuter increased total District expenditures by $3,016 per year, of which about $90 was for police and fire protection. Some local economists that we interviewed noted that commuters already contribute to the financing of a portion of these services, even without a tax on their income. One recent study estimates that a typical daily commuter to the District pays about $250 per year in sales and excise taxes, parking taxes, and purchases of lottery tickets. Another study suggests that spending by commuters supports many jobs for District residents who are subject to the city's income tax. We were unable to find data on the amount of taxes paid directly by commuters, the tax revenues attributable to jobs supported by them, or the amount of money that the District must spend to extend services to them, nor have we assessed the accuracy of the estimates cited above. Consequently, we cannot determine conclusively whether the net fiscal impact of commuters in the absence of a commuter income tax is negative or positive. Regardless of the current net fiscal impact of commuters, the District's finances clearly would benefit considerably from a tax on nonresidents' incomes. The ultimate burden of a nonresident income tax for the District would not necessarily be borne by commuters into the District. The distribution of the burden would depend on the nature of the crediting mechanism that would be established under such a tax. For example, if the District's tax were made fully creditable against the federal income tax liabilities of the commuters, as is proposed in the District of Columbia Fair Federal Compensation Act of 2002, then the federal government would bear the cost and would have to either reduce spending or make up for this revenue loss by other means. However, if the federal income tax credit was not available, and instead the states of Maryland and Virginia allowed their residents to fully credit any tax paid to the District against their state income tax liabilities, then those two states would suffer a revenue loss (relative to the current situation). The two states could respond to a District commuter tax by taxing the income of District residents who work within their jurisdictions or increasing the tax rates on all of their residents. If the District's tax were not fully creditable against either the federal or state taxes, then the commuters themselves would bear additional tax burden. Although the District's overall warning that it faces structural challenges in balancing revenues and spending requirements should be taken seriously, the District's estimates of its spending requirements have serious limitations. The District does absorb certain costs associated with supporting services typically provided at the state level as well as with providing services to the federal government. However, the District's estimates of its costs to provide services to the federal government and its costs of providing state-like services are not supported with detailed data or analysis. Also, the District's estimates do not reflect municipal-type services provided directly by the federal government. In addition, the District's estimates of its fiscal structural imbalance do not include potential cost savings from improving management efficiency. Further, the District has developed its budget estimates based on the current level of services as the baseline going forward. According to District officials, no studies have been done to determine the level of services necessary, and the District continues to struggle to determine the level of services to provide, given the perceived political barriers to achieving structural changes in large programs such as public schools, Medicaid, and human services. Finally, the District has not considered potential savings in its estimates of its fiscal structural imbalance. According to District officials, the District government performs state-like functions that contribute to what it considers a structural imbalance. Although the District has costs associated with certain state-like functions, it is important to note that the District also collects and retains state-like income and sales tax revenues to fund these functions and support the activities of some agencies. The District estimated the cost of state-like functions to be $487 million in fiscal year 2002. However, this estimate is based on very limited analytic support. Broad assumptions were made and the analysis was made based on a review of only one jurisdiction. To arrive at its cost estimate, the District has identified state-like functions in 10 different District agencies for fiscal year 2002. To identify the state- like functions, District officials reviewed the State of Maryland's fiscal year 2002 operating budget to identify state funding to local governments and compared this information with the District's fiscal year 2002 operating budget. Based on this review and comparison, District officials identified the following 10 District agencies that provide some state-like functions: Department of Mental Health, Department of Human Services, Child and Family Services Agency, University of the District of Columbia, Department of Motor Vehicles, Office of Tax and Revenue, Department of Insurance and Securities Regulation, Office of Cable and Television Communications, and District of Columbia National Guard. Using the Maryland state budget as a guide, District officials used their judgment to assign a "state allocation ratio" to each function in the 10 identified District agencies. For example, if a function, such as Temporary Assistance to Needy Families, received more than half of its funding from the state, then District officials assigned that function a 100 percent state allocation percentage. If a function received less than half of its funding from the state, the District did not consider it a state-like function and gave it a zero state allocation ratio. District officials considered the Office of Tax and Revenue both a state and local function and assigned it a 50 percent state allocation ratio. Two other District agencies, the Department of Human Services and the Child and Family Services Agency, also had a combination of state and local functions and therefore had a weighted state allocation ratio. District officials acknowledged that the state allocation ratios used to create their cost estimates were primarily based on their own judgment and knowledge of state and local programs. Other than providing a summary of Maryland's state budget, District officials were unable to provide additional documentation to support these decisions. District officials emphasized that, as with any of the cost estimates the District produced to illustrate what it considers a fiscal structural imbalance, these were only estimates. They cautioned that these estimates should not be added together to represent an aggregate cost resulting in a fiscal structural imbalance. A District official said that these estimates were meant only to illustrate different ways of understanding the structural imbalance issues that face the District. The services identified by the District as being provided to support the federal government's presence are primarily administered by the District's public works and public safety and justice agencies and include: police protection for federal employees and for federally sponsored or sanctioned events in the District, fire suppression for federal buildings, emergency medical treatment for federal employees, and snow removal and street repairs on streets used by federal vehicles and by federal workers commuting to work in the District. District officials estimated the services provided to the federal government cost the District up to $240 million annually. However, the District did not have a detailed list of actual services provided to the federal government to support its cost estimate. District officials estimated that 27 percent of the total assessed value of property in the District is owned by the federal government. As such, District officials have estimated that the cost of services provided to support the federal government's presence in the District is based on 27 percent of the proposed budgets for all of the District's public works and public safety and justice agencies. However, these budgets include functions, such as the Department of Motor Vehicles, that provide minimal services to the federal government. The District's cost estimate for services provided to the federal government does not consider the services provided by the federal government to the District or expenditures made by the federal government for its own property, when in fact, many federal agencies and properties provide for their own public safety and security and public works services. The National Park Service, for example, provides an extensive network of historical, educational, and recreational opportunities within the District. The federal government provides upkeep, maintenance, and restoration of facilities including not only well-known national sites such as the National Mall or Ford's Theatre, but also parks such as those on Capitol Hill, including inner city medians, squares, and traffic circles, as well as other areas that provide urban green space within the city. According to the U.S. Department of Interior's fiscal year 2003 budget request, operating costs for these parks will be $59 million. Federal law enforcement agencies operating within the District include large forces, such as the U.S. Capitol Police with more than 1,400 officers, and smaller forces, such as the Smithsonian Institution Protective Services with an estimated 600 officers. In addition, the General Services Administration's Federal Protective Service provides law enforcement services to some federal properties throughout the District. These services include a share of police protection from disruptions by major demonstrations, perimeter security for federal buildings, criminal investigations to reduce crime, and training of security personnel. The District's estimates of its fiscal structural imbalance are premised on the maintenance of the existing level and costs of services now provided into the future. The District's estimates did not address potential cost savings that could be achieved by improving management efficiency at the agency level. Reducing expenditures by improving efficiency could reduce any imbalance between the District's revenues and expenditures without negatively impacting program service delivery to its citizens. For example, the March 2002 McKinsey & Company, Inc. study on the District's financial position concluded that approximately $110 million to $160 million in annual cost savings could be achieved in health, human services, public safety, transportation, and the District of Columbia Public Schools (DCPS) by fiscal year 2005. If achieved, these potential savings could mitigate a fiscal structural imbalance in the District. However, considerable uncertainty exists about these estimates. Potentially the District could also achieve cost savings by correcting problems that have resulted in disallowed Medicaid costs for the District. The District will not be receiving over $100 million of Medical Assistance Administration cost reimbursements for costs incurred in prior years. These cost reimbursements were disallowed for reasons including failure to file timely claims or provide adequate support for claims submitted. Nonreimbursed costs are paid out of local funds, not federal funds. Another example where potential cost savings could be achieved is the DCPS. In the DCPS' fiscal year 2001 Comprehensive Annual Financial Reports (CAFRs), District officials reported a $64.5 million deficit in locally appropriated funds. During the fiscal year 2001 audit, the District's financial statement auditors identified material weaknesses within the DCPS accounting and financial reporting processes, such as the monitoring of expenditures and accounting for Medicaid expenditures related to services provided to special education students. DCPS could become more efficient by improving its internal controls over financial accounting and reporting and reducing the risk of overspending within the DCPS programs. Public education has been a large driver of expenditures in the District, representing $1.1 billion of expenditures in fiscal year 2001. Since 1999, the annual increase in the District's spending for public education has ranged between 19.4 and 21.9 percent. Clearly, such spending increases are difficult to sustain. On August 5, 1997, the Congress passed the National Capital Revitalization and Self-Government Improvement Act, referred to as the Revitalization Act. The Revitalization Act made substantial changes in the financial relationship between the federal government and the District of Columbia as well as in the management of the District government. The District and several nonprofit public interest organizations have stated that the Revitalization Act, while not fully addressing the District's fiscal challenges, is an excellent first step in helping the District to move towards long-term financial stability. The Revitalization Act made the following adjustments in the financial relationship between the District and the federal government: eliminated the federal government's annual federal payment to the shifted to the federal government the financial responsibilities and, in some instances, administrative responsibilities, for the following justice functions in the District: incarceration of sentenced adult felons (the Federal Bureau of Prisons assumed responsibility, and the District's Lorton Correctional Complex was recently closed); the Superior Court, Appeals Court, and Court System (the Pretrial Services Agency and Public Defender Service functions, and the D.C. Parole Board were abolished); and the District Retirement Program covering judges. Also under the Revitalization Act, the federal government assumed financial and administrative responsibilities for one of the District's largest fiscal burdens, which it inherited from the federal government as part of the transition to Home Rule in 1973--its unfunded pension liability for vested teachers, police, firefighters, and judges. In 1998, the federal government assumed the accrued pension cost of $3.5 billion that existed at the close of 1997. The District remains responsible for funding benefits for services rendered after June 30, 1997, and continues the plan under substantially the same terms. In addition, the Revitalization Act was part of a larger act-- the Balanced Budget Act of 1997--that increased the federal share of District Medicaid payments from 50 to 70 percent. Prior to the Revitalization Act, the District had been receiving a federal payment since the mid-1800s due to the District's unique relationship with the federal government. The Congress recognized that the District's ability to raise revenues was affected by a number of legal and practical limitations on its authority--the immunity of federal property from taxation; the building height restriction, which has a limiting effect on commercial property values; the prohibition on the District from passing a law to tax the income of nonresidents; and the restriction on imposing sales taxes on military and diplomatic purchases. Although the Revitalization Act repealed the federal payment to the District of Columbia, it also authorized a federal contribution. The Revitalization Act does not present a formula or methodology for translating the generalized notion of compensating the District for the federal government's presence into a predictable dollar amount, nor does it require that a contribution be made. The changes to the District's finances resulting from the Revitalization Act impacted both the District's revenues and expenditures. The District estimates that the net benefit of the Revitalization Act has ranged from a net positive low of $79.1 million to a high of $203 million per year during the period 1998 through 2002. A detailed breakout of the estimated financial impact of the act on the District's revenues and expenditures is presented in appendix II. The District's estimates of its fiscal structural imbalance point to many specific factors but do not constitute a comprehensive assessment of underlying imbalances between its expenditures and revenue capacity. The District has not yet determined whether even under the constraints they assert, it has the capacity to provide a level of services comparable to those provided by other cities with similar needs and costs. The District's estimates essentially use a current services approach to analyzing its fiscal structural imbalance. Even if the District is able to resolve the measurement and analytical problems discussed in this report, this approach would be limited because it assumes the desirability and continuation of current service levels and tax policies. An alternative approach would measure the existence of a fiscal structural imbalance by comparing the District's spending and revenue capacity to levels in comparable jurisdictions. This approach assesses the ability of the District to provide at least an average level of services adjusted for its unique demographic profile and costs at an average tax burden. The main advantage of this approach is that the measure of fiscal structural imbalance reflects the underlying social and economic conditions affecting the cost of providing public services as well as the underlying strength of the tax base. For instance, this measure takes into account the specific factors influencing the demand for public services (e.g., a large number of school age children, road infrastructure) and its ability to fund these services with a tax burden on local residents that is comparable to other jurisdictions providing comparable services. Under this framework, the structural position of a jurisdiction is not tied to current service levels, or spending or tax policies. From the perspective of this more comprehensive, comparative approach, a jurisdiction could suffer from a fiscal structural imbalance even if its current budget were balanced--in this case, the imbalance would be reflected in lower services, higher taxes, or deterioration of infrastructure when compared to averages in other communities. On the other hand, a jurisdiction with chronic current deficits may not have a fiscal structural imbalance if its deficits were prompted by spending levels or tax rates out of line with comparable jurisdictions with similar needs. At the present time, however, comprehensive data are not readily available to do such a comparative assessment. Preliminary indications suggest that the District would have to sustain a high level of expenditures compared to other state and local areas to provide an average level of services adjusted for its unique demographic profile and costs. However, when compared to other entities, the city also has among the highest revenue capacity, or ability to raise revenue from its own sources, even accounting for the federally imposed constraints on the city's revenue-raising authority. The most recent comprehensive comparison that we found uses the Representative Expenditure System (RES) to estimate the relative expenditure needs of states together with their localities, or in the terms used in this report, the benchmarked expenditures of the states and localities. This study indicates that, in 1996, the District's per capita relative expenditures were higher than those of any state. However, this measure has certain shortcomings that could result in understatements of the District's relative expenditures. The two most recent cross-state comparisons of revenue capacity indicate that the District's revenue capacity per capita compares favorably to that of most states. These studies use two fundamentally different measures of revenue capacity, both of which largely take into account the fact that the District is prohibited from taxing the District-source incomes of nonresidents. For 1999, the most recent year for which the Department of the Treasury has estimated the Total Taxable Resources (TTR) of states, the District's value for this particular measure of revenue capacity exceeded that of every state, except Connecticut. In 1997 and 1998, the District's value was higher than that of every state. The most recent available study that uses the Representative Tax System (RTS) methodology for estimating revenue capacity indicates that, in 1996, the District's revenue capacity per capita exceeded that of 46 states. However, results of these studies are imprecise and do not allow for conclusions on whether the District has a structural imbalance. The measures of the benchmarked expenditures and revenue capacity used in these studies are out of date. Moreover, as acknowledged by the author of the referenced study on expenditures, the estimates of the spending needed to realize average levels of service do not reflect certain relevant workload and cost differences across jurisdictions. Ultimately, the revenue capacity and expenditure needs would have to be put together to address whether the District has the revenue capacity to provide for at least average levels of services for its unique workload and costs with an average tax burden. Such a comparative analysis would need to adjust for the fact that the District may not directly compare to any current jurisdiction in the nation, owing to its unique combination of state and city functions and revenues. GAO is currently undertaking such an assessment and will report the results of our study next year. While it has made significant progress over the past several years, the District, similar to many other jurisdictions, continues to face a series of substantial, long-term challenges to its financial viability. Addressing these challenges requires continued dedicated leadership to make the difficult decisions and trade-offs among competing needs and priorities. Presently, insufficient data or analysis exist to discern whether or to what extent the District is, in fact, facing a fiscal structural imbalance. On the revenue side, the District clearly has constraints in its ability to increase its tax base. However, the District's estimates of its possible fiscal structural imbalance have limitations and did not address the levels or costs of services for its citizens in the long term, whether such services could be supported by its present tax structure or tax base, or cost savings that can be achieved from management efficiencies. The available studies comparing revenue capacity and expenditures across jurisdictions are imprecise and some may not be applicable to the District. As such, the Congress would benefit from more systematic information about the District as it considers proposals for addressing the fiscal structural imbalance that the District is currently asserting exists. A fundamental analysis of the District's underlying capacity to finance at least an average service level in relation to its needs can help determine if there is a fiscal structural imbalance. Such an analysis would provide a stronger foundation for decision makers at all levels to address the District's financial condition. We currently have ongoing work in this area and plan to issue a future report with a more comprehensive analysis of the District's long-term financial condition. Therefore, we are not making any recommendations at this time. In responding to a draft of this report, both the Mayor and the Chief Financial Officer of the District stated their belief that the District faces a fiscal structural imbalance, but agreed that further analysis of the District's fiscal situation is needed because existing data and analysis are not sufficient to discern the degree to which the District is, in fact, facing a structural imbalance. The District reiterated the general areas it believes are drivers of the reported fiscal imbalance, and, in the District CFO's response, suggested that the annual imbalance was roughly twice the amount reported earlier this year. However, as we stated in our report, we concluded that insufficient data and analysis exist to substantiate the District's earlier estimates of its reported structural imbalance. In addition, as stated in our report, the District's estimates of its costs for providing services to the federal government and state-like services lack detailed support and have limitations. We have work ongoing in this area and plan to issue a future report with a more comprehensive analysis of the District's long-term financial condition. Our future analysis will consider the extent to which the components of the District CFO's estimates and other important factors, including those where the District has advantages and disadvantages relative to other jurisdictions, impact the District's overall fiscal situation. The Mayor and the District's CFO stated that the District will support our efforts by providing necessary information and assistance. We are sending copies of this report to the Ranking Minority Member of the Subcommittee on the District of Columbia, House Committee on Appropriations, and to other interested congressional committees. We are also sending copies to the Mayor of the District of Columbia, the Chair, DC Council, City Administrator/Deputy Mayor for Operations, Chief Financial Officer, and Inspector General. Copies of this report will also be made available to others upon request. Please contact me at (202) 512-9471 or Patricia Dalton at (202) 512-6737 or by e-mail at [email protected] or [email protected] if you or your staff have any questions concerning this report. To determine how the District and other jurisdictions define fiscal structural imbalance, including the factors that contribute to the District's reported imbalance, we interviewed and obtained information about fiscal structural balance and imbalance from officials in various District offices, analyzed reports and information received to define a fiscal structural analyzed the District's general fund revenue and expenditures in fiscal year 2001 and prior years to identify significant fluctuations and programs that were driving costs. To provide information on the constraints on the District's revenues, we interviewed officials from the office of the District's CFO and several local experts on the District's economy and finances. We also reviewed a number of studies prepared by the District, independent commissions, and other researchers that contained information, evaluations, and estimates relating to these constraints. To provide information on the District's estimates of its spending requirements, we interviewed District officials and analyzed District budget documents and financial statements. To analyze the services provided by the District to support the federal government, we interviewed District officials and analyzed relevant supporting information, such as budgets and financial plans. We also reviewed relevant information from the General Services Administration and other federal agencies on the costs and the types of services the federal government provides to its own property in the District. To identify and analyze the functions that the District contends are state- like functions, we interviewed District officials and requested and analyzed pertinent supporting information. We also reviewed an April 15, 1997, study by the D.C. Financial Control Board entitled, "Toward A More Equitable Relationship: Structuring the District of Columbia's State Functions." This study compared the District's governmental functions to eight similar cities that were selected based on population size, degree of urbanization, the ratio of employed persons to total population, and other factors. In addition, we interviewed several local experts on the District's economy and finances to obtain their perspective on the state-like functions performed by the District and the expenditures the District makes related to the federal presence. To address the question of the financial adjustments to the District of Columbia's finances as a result of the Revitalization Act, we reviewed relevant provisions of the Balanced Budget Act of 1997; relevant provisions of the Revitalization Act; relevant provisions of the District of Columbia Home Rule Act; the District of Columbia Appropriations Acts for fiscal years 1998 analyses of the impact of the Revitalization Act on the District's budget prepared by the Congressional Research Service; the Operating Budget and Financial Plans of the District of Columbia for fiscal years 1998 through 2002 and the Proposed Operating and Financial Plan for fiscal year 2003; prior GAO reports on District government financial operations; and the Department of the Treasury Accountability Report, Fiscal Years 1998 through 2001. We also met with District officials and obtained their documentation related to their projected net savings from the Revitalization Act. To provide information on the District's revenue capacity compared to other jurisdictions, we reviewed and summarized studies from the District's CFO's Office, the U.S. Department of the Treasury, and the relevant economic literature. We conducted the work used to prepare this report from February to July 2002 in accordance with generally accepted government auditing standards. As stated previously, our work on this matter is ongoing. The Mayor and the CFO of the District of Columbia provided comments on a draft of this report. Those comments are reprinted in appendixes III and IV, respectively, and have been incorporated in the report as appropriate. Tables 1, 2, and 3 present the District's calculations of the projected net benefits from the Revitalization Act on the District's budget for fiscal years 1998 through 2002. As shown in table 1, the District estimates that the net benefit of the Revitalization Act has ranged from a net positive low of $79.1 million to a high of $203 million a year during the period 1998 through 2002. The General Accounting Office, the investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO's commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through the Internet. 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The District of Columbia has historically faced many challenges due to its unique circumstances and role as the nation's capital. After several years of struggling with financial crises and insolvency in the early 1990s, the District has significantly improved its financial condition by achieving five consecutive balanced budgets, an upgraded bond rating, and unqualified or "clean" opinions on its financial statements. More recently, however, District officials have asserted that the District faces a fiscal structural imbalance as a result of several factors, some stemming from the federal government's presence in the city, the absence of a state to provide funding for the state-like services provided by the District, and restrictions on the District's tax base. The District argues that it faces a fiscal structural imbalance between revenues and its expenditures that undermines its capacity to meet its current responsibilities. In contrast with a cyclical fiscal imbalance caused by temporary economic downturns, the District suggests that its imbalance is longer term and more fundamental and, therefore, structural in nature. The District's estimated measures of fiscal structural imbalance are based on the continuation of current budget policy over a longer term period spanning economic cycles, but do not consider the results of policy alternatives. District officials have cited constraints they face in raising revenues as well as what they assert are unique expenditure responsibilities stemming from the District's position as a federal city that must also provide state-like functions. On the revenue side, unlike state governments, the District is prohibited by federal law from taxing the incomes of nonresidents working in the District. On the spending side, the District officials state that they are uniquely burdened by the responsibilities of a state and by requirements to provide services to the federal establishment. However, the District's estimated costs associated with providing state-like services are not supported by detailed analysis and data, and they are derived from cost allocation formulas largely based on the judgment of District officials. The District received some federal relief through the National Capital and Self-Government Improvement Revitalization Act of 1997, which required the federal government to take over certain services in such areas as criminal justice, transferring their financing from D.C. taxpayers as a whole. In addition, the federal government assumed financial and administrative responsibilities for one of the District's largest fiscal burdens, which it inherited from the federal government as part of the transition to Home Rule in 1973--its unfunded pension liability for vested teachers, police, firefighters, and judges. Also, the federal government's share of the District's Medicaid payments was increased from 50 to 70 percent. Although the District's estimates point to many specific factors, they do not constitute a comprehensive assessment of imbalances between expenditures and revenue capacity. The District has not performed the analysis to determine whether it has the capacity to provide a level of services comparable to those provided by other cities with similar needs and costs. As a practical matter, such an analysis is key to determining the presence of an underlying structural imbalance in the District's finances.

SBA was established in 1953, but its basic mission dates to the 1930s and 1940s when a number of predecessor agencies assisted small businesses affected by the Great Depression and, later, by wartime competition. The first of these, the Reconstruction Finance Corporation, was abolished in the early 1950s; SBA was established by the Small Business Act of 1953, to continue the functions of the previous agencies. By 1954, SBA was making business loans directly to small businesses and guaranteeing loans banks made, making loans directly to victims of disasters, and providing a wide range of technical assistance to small businesses. Today, SBA's stated purpose is to promote small business development and entrepreneurship through business financing, government contracting, and technical assistance programs. SBA also serves as a small business advocate, working with other federal agencies to, among other things, reduce regulatory burdens on small businesses. Most SBA financial assistance is now provided in the form of guarantees for loans made by private and other institutions, but the agency's disaster program remains a direct loan program and is available to homeowners and renters that are affected by disasters of any kind; and to all businesses, regardless of their size, to cover physical damages. At the end of fiscal year 2005, SBA had authority for over 4,000 full-time employees and budgetary resources of approximately 1.1 billion. Providing small businesses with access to credit is a major avenue through which SBA strives to fulfill its mission. The 7(a) loan program, which is SBA's largest business loan program, is intended to serve small business borrowers who cannot obtain credit elsewhere. Because SBA guarantees up to 85 percent of each 7(a) loan made by its lending partners, there is risk to SBA if the loans are not repaid. SBA is to ensure that lenders provide loans to borrowers who are eligible and creditworthy. Therefore, strong oversight of lenders by SBA is needed to ensure that qualified borrowers get 7(a) loans and to protect SBA from financial risk. As of September 30, 2005, SBA's portfolio of 7(a) loans totaled $43 billion. In administering the 7(a) program, SBA has evolved from making loans directly to depending on lending partners, primarily banks that make SBA guaranteed loans. SBA's other lending partners are Small Business Lending Companies (SBLC)--privately owned and managed, non-depository lending institutions that are licensed and regulated by SBA and make only 7(a) loans. Unlike SBA's bank lending partners, SBLCs are not generally regulated by financial institution regulators. Since the mid-1990s, when SBA had virtually no oversight program for its 7(a) guaranteed loan program, the agency has established a program and developed some enhanced monitoring tools. We have conducted four studies of SBA's oversight efforts since 1998 and made numerous recommendations related to establishing a lender oversight function and improving it. Although we sometimes repeated recommendations in more than one report because SBA had not acted to address them, SBA has now addressed many of the outstanding recommendations and is in the process of addressing others. Prior to December 1997, SBA's procedures required annual on-site reviews of lenders with more than three outstanding guaranteed loans. But in a June 1998 study, we could not determine from the district offices' files which lenders met this criterion and should have been reviewed. In the five SBA district offices we visited, we found that about 96 percent of the lenders had not been reviewed in the past 5 years and that some lenders participating in the program for more than 25 years had never been reviewed. When we did our study, SBA was implementing a central review program for its "preferred" lenders (those SBA certifies to make loans without preapproval). The Small Business Programs Improvement Act of 1996 required SBA to review preferred lenders either annually or more frequently. In our 1998 report, we recommended that SBA establish a lender review process for all of its 7(a) lenders, including the SBLCs. In 1999, SBA established OLO and charged it with, among other duties, managing lender reviews, including safety and soundness examinations of SBLCs. In the same year, SBA contracted with the Farm Credit Administration--the safety and soundness regulator of the Farm Credit System--to perform examinations of SBLCs. Numerous deficiencies were identified in those first examinations, but the SBLCs and SBA responded positively to address the recommendations. SBA continues its contracting arrangement with FCA. It was during our 2000 study on oversight of SBLCs that we first recommended that SBA clarify its authority to take enforcement actions, if necessary, against SBLCs, and to seek any statutory authority it might need to do so. We made this recommendation again in 2002 and in 2004 and included a call to clarify procedures for taking actions against preferred lenders as well. We recommended that SBA provide, through regulation, clear policies and procedures for taking enforcement actions against preferred lenders or SBLCs in the event of continued noncompliance with its regulations. During this time, SBA sought appropriate authority from Congress to take enforcement actions against SBLCs similar to those of other regulators of financial institutions, such as cease-and-desist and civil money penalty powers. Congress provided SBA enforcement authority over non-bank lenders in late 2004, and SBA announced related delegations of authority in the Federal Register in April 2005 to clarify responsibilities within the agency. SBA officials have told us that they will issue related regulations in 2006. Our 2002 study focused more broadly on the relatively new OLO and found that the agency had made more progress in developing its lender oversight program. OLO had developed guidance, centralized the lender review processes, and was performing more reviews of its lenders. We did, however, find some shortcomings in the program and made recommendations for improving it. For example: While elements of the oversight program touched on the financial risk posed by preferred lenders, weaknesses limited SBA's ability to focus on, and respond to, current and future financial risk to its portfolio. Neither the lender review process nor SBA's off-site monitoring adequately focused on the financial risk lenders posed. The reviews used an automated checklist to focus on lenders' compliance with SBA's 7(a) processing, servicing, and liquidation standards. The reviews did not provide adequate assurance that lenders were sufficiently assessing borrowers' eligibility and creditworthiness. We recommended that SBA incorporate strategies into its review process to adequately measure the financial risk lenders pose to SBA, develop specific criteria to apply to the "credit elsewhere" standard, and perform qualitative assessments of lenders' performance and lending decisions. By 2004, as I will discuss in a moment, we found that SBA had made progress in its ability to monitor and measure the financial risk lenders pose but had not developed criteria for its credit elsewhere standard. Although SBA had taken a number of steps to develop its lender oversight function, the placement of its OLO within the Office of Capital Access (OCA) did not give OLO the necessary organizational independence it needed to accomplish its goals. OCA has other objectives, including promoting the lending program to appropriate lenders. We recommended that SBA make lender oversight a separate function and establish clear authority and guidance for OLO. SBA has taken several steps to address this recommendation but has not made OLO an independent office. In the 2005 delegations of authority published in the Federal Register, SBA specified that a Lender Oversight Committee (comprised of a majority of senior SBA officials outside of OCA) would have responsibilities for reviewing reports on lender-oversight activities; OLO recommendations for enforcement action; and OLO's budget, staffing, and operating plans. SBA officials believe that these and other measures will ensure sufficient autonomy and authority for OLO to independently perform its duties. These measures appear to provide the opportunity for more independence for OLO, but we have not evaluated how the measures are actually working. Our most recent review of SBA's oversight efforts, completed in June 2004, focused on the agency's risk management needs and its acquisition and use of a new loan monitoring service. Using an assessment of best practices, we determined that SBA would need to base its capabilities for monitoring its loan portfolio and lender partners on a credit risk management program. Largely because SBA relies on lenders to make its guaranteed loans, it needs a loan and lender monitoring capability that will enable it to efficiently and effectively analyze various aspects of its overall portfolio of loans, its individual lenders, and their portfolios. While SBA must determine the level of credit risk it will tolerate, it must do so within the context of its mission and its programs' structures. Since SBA is a public agency, its mission obligations will drive its credit risk management policies. For example, different loan products in the 7(a) program have different levels of guarantees. These and other differences influence the mix of loans in SBA's portfolio and, consequently, would impact how SBA manages its credit risk. Such a credit risk management program would likely include a comprehensive infrastructure--including, skilled personnel, strong management information systems, and functioning internal controls related to data quality--along with appropriate methodologies and policies that would ensure compliance with SBA criteria. In 2003, SBA contracted with Dun and Bradstreet for loan monitoring services. These services could enable the agency to conduct the type of monitoring and analyses typical of "best practices" among major lenders, and are recommended by financial institution regulators. The services SBA obtained reflect many best practices, particularly those related to infrastructure and methodology, and can facilitate a new level of sophistication in SBA's oversight efforts. The services also give SBA a way to measure the financial risk posed by its lending partners, and analyze loan and lending patterns efficiently and effectively. However, SBA did not develop the comprehensive policies it needed to implement the best practices as we recommended. SBA officials have told us that they have taken steps to address this recommendation. For example, the management plan governing the agency's relationship with Dun and Bradstreet addresses a process for continuous improvement. SBA has also established the Lender Oversight Committee and a Portfolio Analysis Committee to review portfolio performance. SBA officials told us that these committees meet frequently. They also described the type of analyses of the loan portfolio and individual lenders made available for review and discussion by the committees, and provided examples of these analyses. Although these developments could provide the tools for risk management that we envisioned, we have not evaluated them. Since the late 1990s, SBA has taken steps to address other management challenges that affect its ability to manage its business loan program and the technical assistance it provides small businesses. Information technology, human capital, and financial management have posed challenges for SBA, as we have noted in special reports to Congress. SBA has now acquired the ability to monitor its portfolio of business loans through its arrangement with Dun and Bradstreet, as mentioned earlier. SBA took this positive step after an unsuccessful attempt to establish a risk management database as required by the Small Business Programs Improvement Act of 1996. We monitored the agency's progress as it attempted to meet this challenge on its own. When we reviewed SBA's plans in 1997, we found that it had not undertaken the essential planning needed to develop the proposed system. We periodically reported on SBA's progress in planning and developing the loan monitoring system since 1997. From 1998 to 2001, SBA's estimate for implementing the system grew from $17.3 million to $44.6 million. By 2001, SBA had spent $9.6 million for developmental activities, but had never completed the mandated planning activities or developed a functioning loan monitoring system. In 2001, Congress did not appropriate funds for the loan monitoring system and instead permitted SBA to use reprogrammed funds, provided that SBA notify Congress in advance of SBA's use of the reprogrammed funds. Congress also directed SBA to develop a project plan to serve as a basis for future funding and oversight of the loan monitoring system. As a result, SBA suspended the loan monitoring system development effort. Of the $32 million appropriated for the loan monitoring system effort, about $14.7 million remained. In 2002, SBA contracted for assistance to identify alternatives and provide recommendations for further developing a loan monitoring system. This effort led to SBA awarding a contract to Dun and Bradstreet in April 2003 to obtain loan monitoring services, including loan and lender monitoring and evaluation; and risk management tools. The contract includes four 1-year options at an average cost of approximately $2 million a year. In 2001 we reported on SBA's organizational structure and the challenges it presented for SBA to deliver services to small businesses. We reviewed how well SBA's organization was aligned to achieve its mission. We found a field structure that did not consistently match with SBA's mission requirement. This was caused by past realignment efforts during the mid- 1990s that changed how SBA performed its functions, but left some aspects of the previous structure in place. Among the other weaknesses we identified were: ineffective lines of communication; confusion over the mission of district offices; and complicated, overlapping organizational relationships. SBA began realigning its organization, operations, and workforce to better serve its small-business customers in the 1990's. With less responsibility for direct lending and a declining operating budget, SBA streamlined its field structure by downsizing its 10 regional offices, moving the workload to district or headquarters offices, and eliminating most of the regional offices' role as the intermediate management layer between headquarters and the field. SBA created the Office of Field Operations, largely to represent the field offices in headquarters and to provide guidance and oversight to field office management. In 2002, the agency planned to approach its 5-year transformation efforts in phases, testing a number of initiatives in order to make refinements before implementing the initiatives agencywide. These efforts are ongoing. SBA's current transformation objectives are to: streamline ODA by realigning offices, employees, and space to better serve disaster victims and leverage use of the new disaster loan processing system; centralize all 7(a) loan processing in two centers to standardize procedures and reduce the workforce required for this program; centralize all 504 loan liquidations in two centers to standardize processing and increase efficiency; centralize disaster loan liquidations in one center to standardize processing and increase efficiency; and transform the regional and district offices by standardizing their size and function. In October 2003, when we reported on SBA's transformation, SBA was near completion of the first phase of its transformation process. This initial phase aimed to transform the role of the district office to focus on outreach to small businesses about SBA's products and services, and link these businesses to the appropriate resources, including lenders; and centralize some of its loan functions to improve efficiency and the consistency of its loan approval and liquidation processes. We found that the agency had applied some key practices important to successful organizational change, but had overlooked aspects that emphasize transparency and communication. For example, SBA had top leadership support and a designated transformation-implementation team, but the makeup of the team was not communicated to employees and stakeholders, and the team's leadership was not always consistent. Also, SBA had developed a transformation plan that contained goals, anticipated results, and an implementation strategy--but the plan was not made public, and employees and stakeholders were not apprised of the details of the plan. Also, certain aspects of the plan were revised, causing further confusion among non-management employees. Further, SBA had developed strategic goals to guide its transformation, but these goals were not linked with measurable performance goals that would demonstrate the success of the agency's plan to expand the focus of the district offices on marketing and outreach. Based on our findings and the possibility that further progress could be impeded by budget and staff realignment challenges, we recommended that SBA: ensure that implementation leadership is clearly identified to employees finalize its transformation plan and share it with employees and stakeholders; develop performance goals that reflect the strategic goals for transformation, and budget requests that clearly link resource needs to achieving strategic goals; use the new performance management system to define responsibilities; develop a communication strategy that promotes two-way communication; solicit ideas and feedback from employees and the union, and ensure that their concerns were considered. SBA officials have told us of the Administrator's increased efforts to communicate with staff by holding agencywide meetings with employees, for example. In addition, the agency plans to finalize a transformation plan and share it with employees in June. These actions could address some of the recommendations we made to SBA, but we have not documented or evaluated the efforts. SBA has made good progress towards addressing financial management issues that for several years prevented it from obtaining an unqualified audit opinion on its financial statements. We reported on some of these issues in our January 2003 report on SBA's loan sales. Specifically, we found that SBA lacked reliable data to determine the overall financial results of its loan sales. Further, because SBA did not analyze the effect of loan sales on its remaining portfolio, we reported that its credit program cost estimates for the budget and financial statements may have contained significant errors. In addition, SBA could not explain unusual account balances related to the disaster loan program, which indicated that the subsidized program was expected to generate a profit. These issues raised concerns about SBA's ability to properly account for loan sales and to make reasonable estimates of program costs. In response to our findings and several recommendations, SBA conducted an extensive analysis to resolve the issues we identified and implemented a number of corrective actions. For example, SBA developed a new cash- flow model to estimate the costs of its disaster loan program, and implemented standard operating procedures for annually revising the cost estimates for its credit programs. SBA also revised its approach to determine the results of loan sales and found that loans were sold at losses, which was contrary to the original determination that the sales generated gains. These findings prompted SBA to eventually discontinue its loan sales program. We reviewed the improvements made by SBA and reported in April 2005 that the loan accounting issues we previously identified were resolved, and that the new cash-flow model improved its ability to prepare more reliable cost estimates and to determine the results of prior loan sales. However, we recommended additional steps that would improve the long-term reliability of the cost estimates, such as routine testing of the model. According to SBA officials, steps have been taken to address each of our recommendations, including the development of policies and procedures on how to operate and test the model. These improvements helped SBA achieve an unqualified audit opinion on its fiscal year 2005 financial statements, which represents significant progress from prior years. However, for fiscal year 2005 SBA's auditor continued to note weaknesses in SBA's overall internal controls. The auditor noted three areas involving internal controls that are considered to be weaknesses. The first area, which the auditor considered to be a significant weakness, related to financial management and reporting controls. Specifically, the auditor found that SBA needed to improve its funds management (i.e., canceling loan amounts not disbursed and closing out grants), its review process for accounting transactions, and its financial statement preparation process. The other two less significant control weaknesses related to SBA's ODA administrative expenditure controls and agencywide information system controls. While these internal control weaknesses were not severe enough to impact SBA's audit opinion for fiscal year 2005, it is important for SBA to address them to help ensure that SBA continues to be able to generate reliable financial data. Disaster assistance has been part of SBA since its inception, and SBA's physical disaster loan program is the only form of assistance not limited to small businesses. Through the ODA, SBA provides low-interest, long-term loans to individuals and businesses to assist them with disaster recovery. Unlike the 7(a) program, the disaster loan program provides loans directly to disaster victims. Businesses can apply for "physical loans" to repair or replace business property to pre-disaster conditions, as well as economic injury disaster loans (EIDLs) to obtain working capital funds to meet their normal operating expenses. The maximum loan amount for both physical business loans and EIDLs is $1.5 million, but SBA was given federal authority and supplemental appropriations to increase the amount for 9/11 disaster loans. Homeowners and renters can also apply for loans to cover their uninsured losses. The maximum amount available for home loans is $200,000, and personal property loans to replace items such as automobiles, clothing, and furniture are available up to $40,000. SBA offers terms of up to 30 years for repayment. According to SBA, although ODA aims to provide loan funds to disaster victims as quickly as possible, its focus is on long-term recovery, and not on emergency relief. Since SBA provides low-interest loans, the agency is required to determine whether each applicant is able to obtain financial assistance at reasonable rates and terms from non-government sources prior to assigning an interest rate. A higher rate applies for physical loan applicants if they are determined to have other credit available, and economic injury loan applicants are ineligible if they have other credit available. Physical business loans--where the applicant has credit available from other sources--are also subject to a maximum 3-year term for repayment. SBA also has standard procedures and requirements for disaster loans, including verification of losses claimed, verification of repayment ability, and collateral to secure loans for economic injury loans over $5,000 or for home loans or physical disaster business loans over $10,000. SBA verifies losses for physical loans and also deducts certain forms of compensation, including insurance recoveries, from the eligible loan amount. Federal Emergency Management Agency (FEMA) is the coordinating agency for presidential disaster declarations, and most disaster victims register with FEMA initially before receiving a referral to SBA. SBA can review FEMA's information to determine if an applicant has already received federal assistance or insurance proceeds to avoid duplication of benefits. If insurance reimbursement is undetermined at the time of application, SBA can approve a loan for the total replacement cost, but any insurance proceeds must be assigned to SBA to reduce the loan balance. In considering any loan, SBA must have reasonable assurance that the loan can be repaid. To make this determination, SBA examines federal tax returns and income information and reviews credit reports to verify the manner in which an applicant's obligations, including federal debts, have been met. One of the reasons that SBA may decline a loan application is unsatisfactory history on a federal obligation. The law does not require collateral for disaster loans, but SBA policy establishes collateral requirements in order to balance the agency's disaster recovery mission with its responsibility as a lender of federal tax dollars. For example, for physical disaster loans over $10,000, applicants are required to provide collateral that will best secure the loan, and multiple loans totaling over $10,000 also require collateral to secure each loan. Real estate is the preferred form of collateral, but SBA will not automatically decline an application if the best available collateral is insufficient in value to secure the loan. Following the terrorist attacks of September 11th, SBA provided approximately $1 billion in loans to businesses and individuals in the federally declared disaster areas and to businesses nationwide that suffered related economic injury. Home and business owners in the federally declared disaster areas received just under half of the disbursed loans; the remainder went to eligible businesses around the country. Congress and SBA made several modifications to the programs in response to complaints from small businesses. For example, the EIDL program was expanded to the entire country and to industries that had not previously been covered, size standards for some eligible business were changed, and loan approval and disbursement were expedited. In 2004, in response to concerns that about half of the loan applications submitted by small businesses were declined or withdrawn, we reviewed a representative sample of these applications and found that SBA had followed the appropriate policies and procedures in making loan decisions. We compared SBA's loan requirements to those of selected nonprofit agencies in the New York area that provided financial assistance to local small businesses following the disaster. Generally, we found that SBA had loan requirements that were similar to these nonprofits, but the nonprofits' programs allowed some additional flexibility to address the particular needs of their small business constituents. We also currently have work under way to identify and assess the factors that have affected the SBA's ability to respond to victims of Hurricane Katrina and the other 2005 Gulf Coast hurricanes in a timely manner. As part of our work, we are evaluating how SBA's new Disaster Credit Management System, which has been in use since January 2005, affected SBA's response. As the primary federal lender to disaster victims, including individual homeowners, renters, and businesses, SBA's ability to process and disburse loans in a timely manner is critical to the recovery of the Gulf Coast region. As of February 25, 2006, SBA faced a backlog of about 103,300 applications in loan processing pending a final decision, and the average time these applications had been in process was about 94 days. During the month of March, SBA continued to process applications. By March 25, 2006, SBA had mailed out more than 1.6 million loan applications, received over 350,000 completed applications, processed more than 290,000 applications, and disbursed about $600 million in disaster loan funds. Although SBA's current goal is to process loan applications within 7 to 21 days, as of March 25, 2006, SBA faced a backlog of about 55,000 applications in loan processing pending a final decision and the average age of these loan applications was about 88 days. SBA also has more than 43,000 loan applications that have been approved but have not been closed or fully disbursed. As a result, disaster victims in the Gulf Region have not received timely assistance in recovering from this disaster and rebuilding their lives. Based on our preliminary analysis of SBA's disaster loan origination process, we have identified several factors that have affected SBA's ability to provide a timely response to Gulf Coast disaster victims. First, the volume of loan applications SBA mailed out and received has far exceeded any previous disaster. Compared with the Florida hurricanes of 2004 or the 1994 Northridge earthquake, the hurricanes that hit the Gulf Coast in 2005 resulted in the issuance of roughly two to three times as many loan applications. Second, although SBA's new disaster-loan processing system provides opportunities to streamline the loan origination process, initially it experienced numerous outages and slow response times in accessing information. However, we have not yet determined the duration and impact of these outages on processing. SBA officials have attributed many of these problems to a combination of hardware-and telecommunications- capacity limitations as well as the level of service SBA has received from its contractors. Third, SBA's planning efforts to address a disaster of this magnitude appear to have been inadequate. Although SBA's disaster planning efforts focused primarily on responding to a disaster the size of the Northridge earthquake, SBA officials said that it initially lacked the critical resources such as office space, staff, phones, computers, and other resources to process loans for this disaster. SBA has participated in disaster simulations on a limited basis only and it is unclear whether previous disaster simulations of category 4 hurricanes hitting the New Orleans area were considered. We are also assessing other factors that have affected SBA's ability to provide timely loans to disaster victims in the Gulf region including: workforce transformation, the exercise of its regulatory authority to streamline program requirements and delivery to meet the needs of disaster victims, coordination with state and local government agencies, SBA's efforts to publicize the benefits offered by the disaster loan program, and the limits that exist on the use of disaster loan funds. Mr. Chairman, this concludes my prepared statement. I would be happy to answer any questions at this time. For further information on this testimony, please contact William B. Shear at (202) 512-8678. Individuals making key contributions to this testimony included Katie Harris, Assistant Director, and Bernice Benta. SBA Disaster Loan Program: Accounting Anomalies Resolved but Additional Steps Would Improve Long-Term Reliability of Cost Estimates. GAO-05-409. Washington, D.C.: April 14, 2005. Small Business Administration: SBA Followed Appropriate Policies and Procedures for September 11 Disaster Loan Applications. GAO-04-885. Washington, D.C.: August 31, 2004. Small Business Administration: New Service for Lender Oversight Reflects Some Best Practices, but Strategy for Use Lags Behind. GAO-04- 610. Washington, D.C.: June 8, 2004. Small Business Administration: Model for 7(a) Program Subsidy Had Reasonable Equations, but Inadequate Documentation Hampered External Reviews. GAO-04-9. Washington, D.C.: March 31, 2004. Small and Disadvantaged Businesses: Most Agency Advocates View Their Roles Similarly. GAO-04-451. Washington, D.C.: March 22, 2004. Small Business Administration: Progress Made, but Transformation Could Benefit from Practices Emphasizing Transparency and Communication. GAO-04-76. Washington, D.C.: October 31, 2003. Small and Disadvantaged Businesses: Some Agencies' Advocates Do Not Report to the Required Management Level. GAO-03-863. Washington, D.C.: September 4, 2003. Small Business Administration: Observations on the Disaster Loan Program. GAO-03-721T. Washington, D.C.: May 1, 2003. Small Business Administration: Progress Made but Improvements Needed in Lender Oversight. GAO-03-720T. Washington, D.C.: April 30, 2003. Small Business Administration: Response to September 11 Victims and Performance Measures for Disaster Lending. GAO-03-385. Washington, D.C.: January 29, 2003. Small Business Administration: Accounting Anomalies and Limited Operational Data Make Results of Loan Sales Uncertain. GAO-03-87. Washington, D.C.: January 3, 2003. Major Management Challenges and Program Risks: Small Business Administration. GAO-03-116. Washington, D.C.: January 1, 2003. Small Business Administration: Progress Made but Improvements Needed in Lender Oversight. GAO-03-90. Washington, D.C.: December 9, 2002. September 11: Small Business Assistance Provided in Lower Manhattan in Response to the Terrorist Attacks. GAO-03-88. Washington, D.C.: November 1, 2002. Small Business Administration: Workforce Transformation Plan Is Evolving. GAO-02-931T. Washington, D.C.: July 16, 2002. Loan Monitoring System: SBA Needs to Evaluate the Use of Software. GAO-02-188. Washington, D.C.: November 30, 2001. Small Business Administration: Current Structure Presents Challenges for Service Delivery. GAO-02-17. Washington, D.C.: October 26, 2001. Small Business Administration: Actions Needed to Strengthen Small Business Lending Company Oversight. GAO-01-192. Washington, D.C.: November 17, 2000. SBA Loan Monitoring System: Substantial Progress Yet Key Risks and Challenges Remain. GAO/AIMD-00-124. Washington, D.C.: April 25, 2000. Small Business Administration: Planning for Loan Monitoring System Has Many Positive Features but Still Carries Implementation Challenges. GAO/T-AIMD-98-233. Washington, D.C.: July 16, 1998. Small Business Administration: Mandated Planning for Loan Monitoring System Is Not Complete. GAO/AIMD-98-214R. Washington, D.C.: June 30, 1998. Small Business Administration: Few Reviews of Guaranteed Lenders Have Been Conducted. GAO/GGD-98-85. Washington, D.C.: June 11, 1998. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The Small Business Administration's (SBA) purpose is to promote small business development and entrepreneurship through business financing, government contracting, and technical assistance programs. SBA's largest business financing program is its 7(a) program, which provides guarantees on loans made by private-sector lenders to small businesses that cannot obtain financing under reasonable terms and conditions from the private sector. In addition, SBA's Office of Disaster Assistance makes direct loans to households to repair or replace damaged homes and personal property and to businesses to help with physical damage and economic losses. This testimony, which is based on a number of reports that GAO issued since 1998, discusses (1) changes in SBA's oversight of the 7(a) business loan program; (2) steps SBA has taken to improve its management of information technology, human capital, and financial reporting for business loans; and (3) SBA's administration of its disaster loan program. Since the mid-1990s, when GAO found that SBA had virtually no oversight program for its 7(a) guaranteed loan program, SBA has, in response to GAO recommendations, established a program and developed some enhanced monitoring tools. The oversight program is led by its Office of Lender Oversight, which was established in 1999. Strong oversight of SBA's lending partners is needed to protect SBA from financial risk and to ensure that qualified borrowers get 7(a) loans. In addition to its bank lending partners, loans are made by Small Business Lending Companies (SBLC)--privately owned and managed, non-depository lending institutions that are licensed and regulated by SBA. Since SBLCs are not subject to safety and soundness oversight by depository institution regulators, SBA has developed such a program under a contract with the Farm Credit Administration. Over the years, SBA has implemented many GAO recommendations for lender oversight and continues to make improvements toward addressing others. Since the late 1990s, SBA has experienced mixed success in addressing other management challenges that affect its ability to manage the 7(a) loan program. With respect to using information technology to monitor loans made by 7(a) lenders, between 1997 and 2002, SBA was unsuccessful in developing its own system to establish a risk management database as required by law. However, SBA awarded a contract in April 2003 to obtain loan monitoring services. Regarding SBA's most recent workforce transformation efforts begun in 2002, GAO found that SBA applied some key practices important to successful organizational change but overlooked aspects that emphasize transparency and communication. SBA has implemented some related GAO recommendations for improvements in those areas. SBA has also made good progress in response to GAO recommendations addressing financial management issues. With respect to SBA's administration of its disaster loan program after the September 11, 2001, terrorist attacks, GAO found that SBA followed appropriate policies and procedures for disaster loan applications in providing approximately $1 billion in loans to businesses and individuals in the disaster areas, and to businesses nationwide that suffered economic injury. GAO's preliminary findings from ongoing evaluations of SBA's response to the 2005 Gulf Coast hurricanes indicate that SBA's workforce and new loan processing system have been overwhelmed by the volume of loan applications. GAO identified three factors that have affected SBA's ability to provide a timely response to the Gulf Coast disaster victims: (1) the volume of loan applications far exceeded any previous disaster; (2) although SBA's new disaster loan processing system provides opportunities to streamline the loan origination process, it initially experienced numerous outages and slow response times in accessing information; and (3) SBA's planning efforts to address a disaster of this magnitude appear to have been inadequate.

Natural gas gathering is the collection of gas from the wellhead for delivery to the processing plant or transportation pipeline. Compared with transportation pipelines, gathering lines are generally smaller in diameter and shorter in length, and require relatively lower pressure to push the gas through the line. According to a recent report, over 2,100 companies perform gathering services in the states that produce natural gas. Natural gas storage involves the transfer of natural gas from the production field to a depleted underground reservoir or other holding facility for later use. Gas is generally injected into storage facilities during warmer months, when demand is lower, and withdrawn during winter months. Traditionally, pipeline companies use storage to manage and balance the movement of gas throughout their systems. Local distribution companies--the companies that deliver gas from the interstate pipeline to the ultimate end-user--have a critical need for storage because they must provide gas on demand to residential end-users and other customers who lack the ability to switch to another fuel when gas is not available. According to the Energy Information Administration, as of December 31, 1993, a total of 103 operators were providing storage service in the United States. These operators included pipeline companies, local distribution companies, and independent marketers. Market hubs are areas where several pipelines connect, generally near a production area, storage field, or major market area. A relatively new phenomenon in the industry, hubs create central points where many buyers and sellers can come together to obtain natural gas and a variety of services. These services can be physical, such as transportation, storage, or the transfer of gas from one pipeline to another, or they can be contractual, such as the trading of titles to gas supplies. In theory, market hubs can improve the efficiency and flexibility of the interstate gas market by increasing producers' and end-users' access to each other and by reducing transaction costs when they make deals. According to FERC, as of July 1994, there were 19 market centers operating in the United States, and another 11 are scheduled to be opened by the end of 1995. Each of these hubs has an administrator who oversees its operation and performs a variety of functions, such as tracking the exchange of titles to gas supplies, invoicing customers for services, and allocating pipeline capacity and services at the hub when they are in short supply. In May 1994, FERC announced its policy on interstate pipeline companies' gathering affiliates. In a series of seven orders, the Commission concluded that it does not have the authority to regulate the rates charged by affiliates. However, FERC added that it could use its authority to regulate the rates charged by interstate pipeline companies for gathering, transportation, and other services to regulate a gathering affiliate if the affiliate and its parent pipeline company act together in a collusive and anticompetitive manner. This policy has generally been accepted by pipeline companies, local distribution companies, and end-users. While producers are generally reserving judgment on the new policy, several are concerned about its effect on their ability to negotiate fair agreements with gathering affiliates. FERC has traditionally included the costs of gathering services provided by interstate pipeline companies in the rates it approves for such companies. FERC does not regulate the rates for gathering services provided by other entities, such as producers. Most of these unregulated gatherers, who provide almost 70 percent of the gathering services in the United States, are free to negotiate with their customers on the rates, terms, and conditions of service. Since the early 1990s, several interstate pipeline companies have created affiliates to provide their gathering services. These pipeline companies asked FERC for permission to sell their gathering facilities to the new affiliates. The requests created a need for FERC to clarify its policy on gathering affiliates. On May 27, 1994, FERC issued a series of seven orders that, taken together, define its new policy on gathering. In these orders, FERC elaborating that it does not have the authority to regulate the rates, terms, and conditions of the gathering services provided by interstate pipeline companies' affiliates. As a result, when pipeline companies sell their gathering facilities to their affiliates, the rates these affiliates charge will no longer be under FERC's regulation. However, FERC also said it would do the following: Require pipeline companies, before they sell their gathering facilities to an affiliate or unregulated third party, to negotiate new contracts with existing customers. If the pipeline company is unable to reach agreement with a customer, it must offer a "default contract" that reflects the rates, terms, and conditions of service offered by the independent gatherers in the region. If the customer refuses the default contract, it loses its guarantee of continued service. FERC imposed this condition to protect existing customers that had entered into arrangements with pipeline companies for gathering services expecting that these services would be regulated by FERC. Assert jurisdiction over gathering affiliates if it finds, upon a customer's complaint, that the affiliate and its parent pipeline company have acted together in a collusive and anticompetitive manner. For example, FERC could assert its jurisdiction, as part of its regulation of the pipeline company, if a gathering affiliate requires a customer to transport gas on the parent company's pipeline. Under the new policy, FERC will regulate a gathering affiliate only if the affiliate acts with its parent company in an anticompetitive manner. In analyzing its jurisdiction, FERC asserted that sections 4 and 5 of the Natural Gas Act give it the authority to regulate gathering performed by natural gas companies (i.e., interstate pipeline companies) "in connection with" interstate transportation. Gathering affiliates, because they perform only a gathering function, are not natural gas companies as defined by the act. Thus, FERC reasoned that gathering affiliates are not under its jurisdiction. FERC determined, however, that it may assert jurisdiction when the pipeline company and its gathering affiliate act together to discriminate because they are then effectively acting as a single natural gas company involved in the interstate transportation of natural gas. The Interstate Natural Gas Association of America, the trade association that represents interstate pipeline companies, has stated that it is pleased with FERC's new policy and believes the policy will promote competition and regulatory certainty. As a result of this policy, pipeline companies will be able to sell their gathering facilities to affiliates, which, in turn, can set rates that are competitive with those set by unregulated gatherers. According to an association official responsible for policy issues, many pipeline companies plan to sell their gathering facilities to either affiliates or independent third parties in response to the new policy. The representatives of local distribution companies and end-users we interviewed expressed little concern about FERC's new policy on gathering. An official of the American Gas Association, which represents, among others, larger distribution companies, stated that the association has received no complaints from the local distribution companies among its members about the new policy. According to a representative of municipal distributors, smaller distribution companies have little interest in the issue of gathering. Distribution companies and the residential, commercial, and industrial end-users to whom they deliver gas are more concerned about the price of gas supplies, which is determined by the market. Because gathering rates affect the division of proceeds from gas sales, they concern only producers and gatherers. In contrast to other segments of the industry, producers generally believe that it is too early to determine the effects of FERC's new policy. According to a representative of the Natural Gas Supply Association, the trade association representing major producers, several producers are concerned that they will not be able to get fair rates, terms, and conditions of service in their negotiations with pipeline companies or in default contracts. Although producers are generally pleased that FERC will review the sale of gathering facilities to affiliates on a case-by-case basis, several believe that unless FERC establishes clearer guidelines on the terms of the default contracts, the affiliates that have market power could impose significantly higher rates for gathering services for existing wells. In cases in which a producer and a gathering affiliate cannot reach a new agreement, producers would like to continue the rates, terms, and conditions of service that existed when they originally drilled the well. Some producers have asked FERC to reconsider its new gathering policy. A group of six major producers, known as the "Indicated Parties," and the Independent Petroleum Association of America have filed motions with FERC objecting to the new policy and requesting a new hearing. In the grounds for rehearing, the Indicated Parties and the association contend, among other things, that (1) FERC should regulate gathering affiliates, (2) FERC erred in approving pipeline companies' sale of gathering facilities to their affiliates without showing that the relevant gathering markets were competitive, and (3) the provision requiring default contracts needs reconsideration or clarification. In addition, the Indicated Parties provided FERC with an offer of settlement in one of the seven cases. In this offer, the Indicated Parties agree to accept the sale of gathering facilities by the pipeline company to its affiliates if, among other things, FERC retracts its determination that it lacks jurisdiction over gathering affiliates. On November 30, 1994, FERC denied the requests for rehearing, but it also amended the requirements of default contracts. According to the new guidelines, when a pipeline company sells its gathering facilities to an affiliate or independent gatherer, existing customers will be able to purchase gathering services from the new provider at the current cost-of-service rates for a period of up to 2 years. FERC's jurisdiction over storage is limited to the storage of gas transported in the interstate market. As a result, FERC has regulatory authority primarily over storage facilities owned by interstate pipeline companies. According to the Energy Information Administration, these facilities hold about 61 percent of the total gas stored in the United States. As in the case of gathering and transportation, FERC has traditionally set the rates for storage according to a storage operator's cost of providing service. Since 1992, however, FERC has approved the use of market-based rates for storage services in six orders. In each case, FERC has required the storage provider to show that it lacks the power to set rates above competitive levels in the local storage market. To do so, the storage provider must demonstrate that there are good alternatives to its service. FERC has defined a "good alternative" as one that "is available soon enough, has a price that is low enough, and has a quality high enough to permit customers to substitute the alternative" for the storage provider's service. None of the industry representatives we interviewed expressed concern over FERC's use of market-based rates in areas where the storage market is competitive. According to a FERC official, storage customers expressed no objections in the six cases in which FERC has approved market-based rates. FERC currently has no regulations specifically aimed at market hubs. FERC regulates the rates charged by an interstate pipeline company for the services, such as transportation and storage, that it provides at a hub. However, the rates for these services are set in the same way--on the basis of a company's cost of providing the service--as the rates for the services the pipeline company provides outside the market hub. According to an official with FERC's Office of Pipeline Regulation, as of October 1994, a few pipeline companies have asked FERC to let them vary from these rates so that they can compete more effectively at market hubs. However, the rates they seek to use are not market-based. Instead, these rates, known as "market center rates," are still derived from the existing cost-of-service rates. However, they are generally lower than the full cost-of-service rates. FERC officials believe that it is too early in the development of hubs to determine what, if any, regulatory role the Commission should play or what rates it should approve. The structure and workings of market hubs are still evolving. As a result, according to FERC's Director of the Office of Pipeline Regulation, FERC has not dealt with the issue. Most of the industry representatives with whom we spoke agreed that it is too early to determine how market hubs should be regulated, if at all. According to an official with the American Gas Association, none of its members have voiced complaints about operations at the hubs. Moreover, the association maintains that FERC should generally rely on market forces unless it finds compelling evidence of market failures. However, some marketers have expressed concern that some hubs are being administered by competing marketers. According to those concerned, these hub administrators may have an incentive to use their access to information about competitors' deals at hubs to their competitive advantage. Others in the industry believe that conflicts of interest may not be a problem. They contend that the hub administrators will be reluctant to exploit their access to information because, if they do, no one will be willing to use their hub. As part of an overall strategy to work in a more collaborative manner in developing energy policy, DOE plans to participate in FERC and state regulatory proceedings. DOE officials say they will be sensitive to the states' authority when interacting with state governments. Although DOE has not participated in a proceeding involving natural gas issues, it has participated in several FERC and state proceedings involving electric utility issues. DOE has other ongoing efforts, including sponsorship of conferences and workshops, intended to contribute to its overall strategy. DOE and FERC have also established a working group to increase mutual understanding on natural gas and oil issues. In October 1993, DOE established the Utility Commission Proceedings Participation Program as a mechanism through which it can participate in FERC and state regulatory proceedings on energy. This program provides for DOE's participation when DOE's technical and policy expertise could lead to a greater understanding of the available policy options. DOE's participation in regulatory proceedings will consist primarily of submitting written comments and testimony and, in some cases, having DOE officials testify as expert witnesses. DOE announced in February 1994 that it would use its participation program as a means to implement its Domestic Natural Gas and Oil Initiative. This initiative, announced in December 1993, includes proposals for, among other things, reforming regulatory structures at both the federal and state level that may be inhibiting a more efficient use of natural gas and electric power. At the federal level, the initiative targets improving the use of gas pipeline capacity and encouraging the full use of the electric power transmission system. At the state level, the initiative focuses on potential regulatory reforms, such as revising pricing strategies for natural gas and electric power and ending subsidies for specific fuels. DOE officials responsible for the Department's participation in regulatory proceedings say that they do not intend to be prescriptive or adversarial in their interactions with federal or state agencies. Rather, they stated that they want to draw on their technical expertise and act as advocates of particular policies on energy. DOE officials also pointed out that several of the Department's key executive-level staff involved in this effort have extensive experience in federal and state energy regulation and thus have an appreciation of the issues of federal and state authority that frequently arise in the energy arena. Although DOE has yet to participate in a regulatory proceeding involving natural gas issues, it has participated in several FERC and state regulatory proceedings involving electric utilities. DOE officials explained that they have not yet decided on a strategy for participating in proceedings involving natural gas. DOE has participated in several FERC proceedings within the past year. For example, it submitted comments in two electric utility cases before FERC involving cost recovery issues resulting from the decommissioning of nuclear power plants. The state proceedings in which DOE has participated primarily involved states' efforts to examine proposed changes to the regulation of electric utility companies. In some cases, DOE submitted written comments; in other cases, DOE officials appeared as expert witnesses before state utility commissions. In addition to its strategy for participating in regulatory proceedings, DOE's other ongoing efforts may also help the Department work in a more collaborative manner with federal and state regulators in developing energy policy. These efforts include sponsoring annual conferences and participating in industry meetings and workshops. For example, since 1992 DOE has cosponsored an annual conference with the National Association of Regulatory Utility Commissioners to discuss issues facing the natural gas industry. To carry out the goals of its Domestic Natural Gas and Oil Initiative, DOE established a working group with FERC intended to facilitate discussions between the two agencies and allow a better understanding of the goals and objectives of each other's programs and policies. However, because FERC is responsible for regulating electric and gas utilities, the working group will be restricted from discussing any proceedings ongoing before FERC. The working group has had one meeting at which the two agencies mainly provided status reports on their current and planned efforts involving electric, gas, and hydropower issues. Officials from both agencies who participated in the meeting expressed satisfaction with the working group and agreed that it should continue to meet. As requested, we did not obtain written agency comments on this report. However, we discussed the information in the report with various FERC officials, including the Director of the Office of Pipeline Regulation, the Director of the Office of Economic Policy, and the General Counsel. We also discussed the information in the report with DOE's Director of Natural Gas Policy and officials responsible for DOE's participation in FERC and state regulatory proceedings. To ensure that we characterized industry's views accurately, we also discussed information in the report with officials from the industry associations mentioned in this letter. FERC, DOE, and industry officials all agreed with the factual material presented; they suggested minor technical changes that we incorporated where appropriate. We performed our work between March and November 1994 in accordance with generally accepted government auditing standards. Appendix III describes the scope and methodology of our review in detail. Unless you publicly announce its contents earlier, we plan no further distribution of this report until 15 days after the date of this letter. At that time, we will send copies to congressional energy committees and other interested parties. We will also make copies available to others on request. If you or your staff have any questions or need additional information, please call me at (202) 512-3841. Major contributors to this report are listed in appendix IV. Under sections 4 and 5 of the Natural Gas Act, as amended, the Federal Energy Regulatory Commission (FERC) has traditionally regulated the rates, terms, and conditions of all services provided by interstate pipeline companies in connection with the interstate transportation of natural gas. In Northern Natural Gas Company v. FERC, a federal appeals court interpreted the act so that FERC's authority extends to regulating the gathering services provided by interstate pipeline companies if the gathering is performed in connection with the interstate transportation of natural gas. According to a report sponsored by the Interstate Natural Gas Association of America, interstate pipeline companies and their affiliates provide about 30 percent of all the gathering services in the United States. FERC sets the rates for transportation and gathering services on the basis of a pipeline company's cost of providing those services, which consists of the cost of facilities, expenses for operation and maintenance, and a reasonable return on investment. This approach is known as cost-of-service regulation. Before FERC's Order 636 (described below), the costs of gathering services were incorporated into the rates that pipeline companies charged for sales and transportation service. In contrast, the rates charged for the gathering services provided by producers and other entities are not under FERC's regulation. Generally, these providers can negotiate contracts with customers that state the rates, terms, and conditions of their gathering services. Unregulated gatherers provide most of the remaining 70 percent of the gathering services performed in the United States. In a 1992 order, FERC articulated a policy on pipeline companies' gathering affiliates. In Northwest Pipeline Corporation, the Commission relied on an interpretation by the federal appeals court in Northern Natural Gas Company v. FERC to assert that its jurisdiction extended to pipeline companies' gathering affiliates if the affiliates perform the services in connection with the interstate transportation of natural gas. However, the Commission added that it would not exercise its jurisdiction to regulate the rates charged by gathering affiliates except in response to a customer's complaint that an affiliate was acting in an anticompetitive manner. This approach was referred to in the industry as "light-handed" regulation. According to an official representing pipeline companies, as a result of this decision, many pipeline companies petitioned FERC to be allowed to sell their gathering operations to affiliates so that they could set their own rates and better compete with unregulated gatherers. However, some pipeline companies were reluctant to sell their gathering facilities because they believed FERC did not clearly define when it would assert jurisdiction under its new policy of light-handed regulation. Pipeline companies and their affiliates could not be sure what rates and practices would be acceptable to FERC. In addition, gas producers that purchased gathering services from pipeline companies were concerned that, under light-handed regulation, pipeline companies would transfer their gathering facilities to affiliates to escape FERC's regulation and then raise their rates substantially. In contrast to pipeline companies, which support the deregulation of gathering, producers wanted FERC to regulate the rates charged by affiliates in the same manner as it regulates pipeline companies' transportation and gathering rates. Also in 1992, FERC announced Order 636, which required all pipeline companies to separate, or "unbundle," the rates they charge for various services, including gathering. This separation was designed to increase competition and efficiency in the industry by enabling customers to purchase only the services they desire. As a result of this order, pipeline companies for the first time began to charge rates for gathering services that were independent of the rates they charged for interstate transportation. This heightened the pipeline companies' desire to sell their gathering operations to affiliates that could set their own rates. According to industry officials, because of Order 636 and concerns about FERC's Northwest Pipeline decision, both pipeline companies and producers wanted FERC to review and clarify its regulatory authority over gathering affiliates. On May 27, 1994, FERC restated its policy on gathering affiliates in a series of seven orders. In these orders, FERC consistently stated that it regulates the rates charged for gathering services only for gathering performed by pipeline companies or when the pipeline company and its affiliate engage in collusive and anticompetitive practices. As stated above, Order 636 separated the rates charged by pipeline companies for gathering and interstate transportation services. In this new context, FERC elaborated in the orders that it does not ordinarily have regulatory authority over pipeline companies' gathering affiliates. Williams Natural Gas Co., 67 FERC P 61,252 (1994) Superior Offshore Pipeline Co., 67 FERC P 61,253 (1994) Amerada Hess Corp., 67 FERC P 61,254 (1994) Mid-Louisiana Gas Co., 67 FERC P 61,255 (1994) Trunkline Gas Co., 67 FERC P 61,256 (1994) Arkla Gathering Services Co., 67 FERC P 61,257 (1994) Eastern American Energy Co., 67 FERC P 61,258 (1994). Richfield Gas Storage System, 59 FERC P 61,316 (1992) Petal Gas Storage Company, 64 FERC P 61,190 (1993) Transok, Inc., 64 FERC P 61,095 (1993) Bay Gas Storage Company, Ltd., 66 FERC P 61,354 (1994) Koch Gateway Pipeline Company, 66 FERC P 61, 385 (1994) Avoca Natural Gas Storage, 68 FERC P 61,045 (1994) The Chairman, Environment, Energy, and Natural Resources Subcommittee, House Committee on Government Operations, requested that we assess recent regulatory changes affecting three aspects of the industry: gathering, storage, and market hubs. In addition, the Chairman asked us to review the Department of Energy's (DOE) plans to intervene in energy-related regulatory proceedings in the states and the extent to which DOE plans to interact with FERC in carrying out such interventions. To obtain information on FERC's policies on gathering, storage, and market hubs, we reviewed existing industry literature and relevant FERC orders and documents. We also interviewed FERC and industry officials about these policies. To learn the opinions of various industry segments on FERC's regulatory approaches, we reviewed comments filed by industry officials with FERC. We also spoke to various FERC officials and representatives of several natural gas trade associations, including the American Gas Association, the American Public Gas Association, the Independent Petroleum Association of America, the Interstate Natural Gas Association of America, the Natural Gas Supply Association, and the National Association of Utility Consumer Advocates. To examine how DOE plans to intervene in state regulatory proceedings, we reviewed various DOE documents and spoke to DOE officials and officials from several state utility commissions. We also spoke to DOE and FERC officials about how DOE may interact with FERC in implementing its strategy on participation. Jackie A. Goff, Senior Counsel The first copy of each GAO report and testimony is free. 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Pursuant to a congressional request, GAO reviewed how producers, pipeline companies, and end-users view the regulatory changes affecting the collection, storage, and marketing of natural gas, focusing on the: (1) Department of Energy's (DOE) plans to intervene in energy-related regulatory proceedings; and (2) extent to which DOE plans to interact with the Federal Energy Regulatory Commission (FERC) in such interventions. GAO found that: (1) FERC will use its authority over pipeline companies to regulate an affiliate if the parent company and the affiliate act together in a collusive manner; (2) interstate pipeline companies, local distribution companies, and end-users find the new FERC policy acceptable, while producers believe that it is too early to determine the effectiveness of the new policy; (3) FERC has determined that competition is sufficient to allow storage operators to charge market-based rates; (4) no segment of the industry has objected to the use of market-based rates in locations where the storage market is competitive; (5) while FERC sets the rates for the services that interstate pipeline companies provide, FERC has agreed to allow some pipeline companies to vary their rates to compete better; (6) according to FERC officials and industry analysts, market hubs are still in the early stages of development, and it is still too early to determine what, if any, regulatory role FERC will have; (7) DOE plans to intervene or participate in energy-related regulatory proceedings when it believes its participation can result in a more comprehensive assessment of energy policy options; and (8) although FERC does not coordinate its regulatory activities with DOE, the two agencies have established a working group to ensure that their staffs interact and are aware of the goals and objectives of each other's programs and policies.

The United States has assisted the Mexican government in its counternarcotics efforts since 1973, providing about $350 million in aid. Since the late 1980s, U.S. assistance has centered on developing and supporting Mexican law enforcement efforts to stop the flow of cocaine from Colombia, the world's largest supplier, into Mexico and onward to the United States. According to U.S. estimates, Mexican narcotics-trafficking organizations facilitate the movement of between 50 and 60 percent of the almost 300 metric tons of cocaine consumed in the United States annually. In the early 1990s, the predominant means of moving cocaine from Colombia to Mexico was by aircraft. However, a shift to the maritime movement of drugs has occurred over the past few years. In 1998, only two flights were identified as carrying cocaine into Mexico. According to U.S. law enforcement officials, most drugs enter Mexico via ship or small boat through the Yucatan peninsula and Baja California regions. Additionally, there has been an increase in the overland movement of drugs into Mexico, primarily through Guatemala. Since 1996, most U.S. assistance has been provided by the Department of Defense to the Mexican military, which has been given a much larger counternarcotics and law enforcement role. On the other hand, the Department of State's counternarcotics assistance program has been concentrating on supporting the development of specialized law enforcement units, encouraging institutional development and modernizing and strengthening training programs. Table 1 provides additional information on U.S. counternarcotics assistance to the government of Mexico since 1997. The Foreign Assistance Act of 1961, as amended, requires the President to certify annually that major drug-producing and -transit countries are fully cooperating with the United States in their counternarcotics efforts. As part of this process, the United States established specific objectives for evaluating the performance of these countries. According to State Department officials, as part of the March 1999 certification decision, the United States will essentially use the same objectives it used for evaluating Mexico's counternarcotics cooperation in March 1998. These include (1) reducing the flow of drugs into the United States, (2) disrupting and dismantling narcotrafficking organizations, (3) bringing fugitives to justice, (4) making progress in criminal justice and anticorruption reform, (5) improving money-laundering and chemical diversion control, and (6) continuing improvement in cooperation with the United States. Although there have been some difficulties, the United States and Mexico have undertaken some steps to enhance cooperation in combating illegal drug activities. Mexico has also taken actions to enhance its counternarcotics efforts and improve law enforcement capabilities. There have been some positive results from the new initiatives, such as the arrest of two major drug traffickers and the implementation of the currency and suspicious transaction reporting requirements. Overall, the results show: drugs are still flowing across the border at about the same rate as 1997, there have been no significant increases in drug eradication and no major drug trafficker has been extradited to the United States, money-laundering prosecutions and convictions have been minimal, corruption remains a major impediment to Mexican counternarcotics most drug trafficking leaders continue to operate with impunity. The United States and Mexico have cooperated in the development of a binational counternarcotics drug strategy, which was released in February 1998. This strategy contains 16 general objectives, such as reducing the production and distribution of illegal drugs in both countries and focusing law enforcement efforts against criminal organizations. Since the issuance of the binational strategy, a number of joint working groups, made up of U.S. and Mexican government officials, have been formed to address matters of mutual concern. A primary function of several of these working groups was to develop quantifiable performance measures and milestones for assessing progress toward achieving the objectives of the strategy. The performance measures were released during President Clinton's February 15, 1999, visit to Mexico. A binational law enforcement plenary group was also established to facilitate the exchange of antidrug information. Despite these cooperative efforts, information exchange remains a concern by both governments because some intelligence and law enforcement information is not shared in a timely manner, which impedes drug trafficking operations. Operation Casablanca created tensions in relations between the two countries because information on this undercover operation was not shared with Mexican officials. In the aftermath of Operation Casablanca, the United States and Mexico have taken action to strengthen communications between the two countries. An agreement reached by the U.S. and Mexican Attorneys General (commonly referred to as the "Brownsville Letter") calls for (1) greater information-sharing on law enforcement activities; (2) providing advance notice of major or sensitive cross-border activities of law enforcement agencies; and (3) developing training programs addressing the legal systems and investigative techniques of both countries. Data for 1998 show that Mexico has, for the most part, not significantly increased its eradication of crops and seizures of illegal drugs since 1995. While Mexico did increase its eradication of opium poppy, eradication of other crops and seizures have remained relatively constant. Cocaine seizures in 1998 were about one-third lower than in 1997. However, the large seizure amount in 1997 was attributable, in part, to two large cocaine seizures that year. Last year I testified that the government of Mexico took a number of executive and legislative actions, including initiating several anticorruption measures, instituting extradition efforts, and passing various laws to address illegal drug-related activities. I also said that it was too early to determine their impact, and challenges to their full implementation remained. While some progress has been made, implementation challenges remain. I testified last year that corruption was pervasive and entrenched within the justice system--that has not changed. According to U.S. and Mexican law enforcement officials, corruption remains one of the major impediments affecting Mexican counternarcotics efforts. These officials also stated that most drug-trafficking organizations operate with impunity in parts of Mexico. Mexican traffickers use their vast wealth to corrupt public officials and law enforcement and military personnel, as well as to inject their influence into the political sector. For example, it is estimated that the Arelleno-Felix organization pays $1 million per week to Mexican federal, state, and local officials to ensure the continued flow of drugs to gateway cities along Mexico's northwest border with the United States. A recent report by the Attorney General's Office of Mexico recognized that one basic problem in the fight against drug trafficking has been "internal corruption in the ranks of the federal judicial police and other public servants of the Attorney General's Office." As we reported last year, the President of Mexico publicly acknowledged that corruption is deeply rooted in the nation's institutions and general social conduct, and he began to initiate reforms within the law enforcement community. These include (1) reorganizing the Attorney General's office and replacing the previously discredited drug control office with the Special Prosecutor's Office for Crimes Against Health; (2) firing or arresting corrupt or incompetent law enforcement officials; (3) establishing a screening process to filter out corrupt law enforcement personnel; and (4) establishing special units within the military, the Attorney General's Office, and the Secretariat of Hacienda--the Organized Crime Unit, the Bilateral Task Forces and Hacienda's Financial Analysis Unit--to investigate and dismantle drug-trafficking organizations in Mexico and along the U.S.-Mexico border and investigate money-laundering activities. Additionally, the President expanded the counternarcotics role of the military. The Organized Crime Unit and the Bilateral Task Force were involved in several counternarcotics operations in 1998, for example, the capture of two major narcotics traffickers and the recent seizure of properties belonging to alleged drug traffickers in the Cancun area, as well as the seizure of money, drugs, and precursor chemicals at the Mexico City Airport. However, many issues still need to be resolved--some of them the same as we reported last year. For example, there continues to be a shortage of Bilateral Task Force field agents as well as inadequate Mexican government funding for equipment, fuel, and salary supplements for the agents. (Last year the Drug Enforcement Administration provided almost $460,000 to the Bilateral Task Forces to overcome this lack of support); the Organized Crime Unit remains significantly short of fully screened there have been instances of inadequate coordination and communications between Mexican law enforcement agencies, and Mexico continues to face difficulty building competent law enforcement institutions because of low salaries and the lack of job security. Additionally, increasing the involvement of the Mexican military in law enforcement activities and establishing screening procedures have not been a panacea for the corruption issues facing Mexico. A number of senior Mexican military officers have been charged with cooperating with narcotics traffickers. One of the most notable of these was General Jesus Gutierrez Rebollo, former head of the National Institute for Combat Against Drugs--the Mexican equivalent of the U.S. Drug Enforcement Administration. In addition, as we reported last year, some law enforcement officials who had passed the screening process had been arrested for illegal drug-related activities. In September 1998, four of the Organized Crime Unit's top officials, including the Unit's deputy director, were re-screened and failed. Two are still employed by the Organized Crime Unit, one resigned, and one was transferred overseas. Since my testimony last year, no major Mexican national drug trafficker has been surrendered to the United States. In November 1998, the government of Mexico did surrender to the United States a Mexican national charged with murdering a U.S. Border Patrol officer while having about 40 pounds of marijuana in his possession. However, U.S. and Mexican officials agree that this extradition involved a low-level trafficker who, unlike other traffickers, failed to use legal mechanisms to slow or stop the extradition process. According to the Justice Department, Mexico has approved the extradition of eight other Mexican nationals charged with drug-related offenses. They are currently serving criminal sentences, pursuing appeals, or are being prosecuted in Mexico. U.S. and Mexican officials expressed concern that two recent judicial decisions halting the extradition of two major traffickers represented a setback for efforts to extradite Mexican nationals. The U.S. officials stated that intermediate courts had held that Mexican nationals cannot be extradited if they are subject to prosecution in Mexico. U.S. officials believe that these judicial decisions could have serious consequences for the bilateral extradition relationship between the two countries In November 1997, the United States and Mexico signed a temporary extradition protocol. The protocol would allow suspected criminals who are serving sentences in one country and are charged in the other to be temporarily surrendered for trial while evidence is current and witnesses are available. To become effective, the protocol required approval by the congresses of both countries. The U.S. Senate approved the protocol in October 1998; however, the protocol has not yet been approved by the Mexican congress. According to U.S. and Mexican officials, the 1996 organized crime law has not been fully implemented, and its impact is not likely to be fully evident for some time. According to U.S. law enforcement officials, Mexico has made some use of the plea bargaining and wiretapping provisions of the law. However, U.S. and Mexican law enforcement officials pointed to judicial corruption as slowing the use of the wiretapping provision and have suggested the creation of a corps of screened judges, who would be provided with extra money, security, and special arrangements to hear cases without fear of reprisals. Additionally, results of Mexico's newly created witness protection program are not encouraging--two of the six witnesses in the program have been killed. U.S. and Mexican officials continue to believe that more efforts need to be directed toward the development of a cadre of competent and trustworthy judges and prosecutors that law enforcement organizations can rely on to effectively carry out the provisions of the organized crime law. U.S. agencies continue to provide assistance in this area. Mexico has begun to successfully implement the currency and suspicious transaction reporting requirements, resulting in what U.S. law enforcement officials described as a flood of currency and suspicious transaction reporting. Mexican officials also indicated that Operation Casablanca resulted in a greater effort by Mexican banks to adhere to anti- money-laundering regulations. However, U.S. officials remain concerned that there is no requirement to obtain and retain account holders' information for transactions below the $10,000 level. No data is available on how serious this problem is and there is no reliable data on the magnitude of the money-laundering problem. Between May 1996 and November 1998, the Mexican government issued 35 indictments and/or complaints on money-laundering charges; however, only one case has resulted in a successful prosecution. The remaining 34 cases are still under investigation or have been dismissed. Last year we reported that the new chemical control law was not fully implemented due to the lack of an administrative infrastructure for enforcing its provisions. This is still the case. Mexico is currently in the process of developing this infrastructure as well as the guidelines necessary to implement the law. However, U.S. officials remain concerned that the law does not cover the importation of finished products, such as over-the-counter drugs that could be used to make methamphetamines. Over the past year, Mexico has announced a new drug strategy and instituted a number of new counternarcotics initiatives. The government of Mexico also reported that it has channeled significant funds--$754 million during 1998--into its ongoing campaign against drug trafficking. Mexico also indicated that it will earmark about $770 million for its 1999 counternarcotics campaign. During 1998 and 1999, the government of Mexico announced a number of new initiatives. For example, a federal law for the administration of seized, forfeited and abandoned goods that will allow authorities to use proceeds and instruments seized from crime organizations for the benefit of law enforcement is being considered, a federal law that will establish expedited procedures to terminate corrupt law enforcement personnel is also being considered, and the government of Mexico recently announced the creation of a new national police force. In addition, the government of Mexico has initiated an operation to seal three strategic points in Mexico. The purpose of the program is to prevent the entry of narcotics and diversion of precursor chemicals in the Yucatan peninsula, Mexico's southern border, and the Gulf of California. Furthermore, the Mexican government recently announced a counternarcotics strategy to crack down on drug traffickers. Mexico indicated that it plans to spend between $400 million and $500 million over the next 3 years to buy new planes, ships, radar and other military and law enforcement equipment. In addition to the new spending, Mexico reported that its new antidrug efforts will focus on improving coordination among law enforcement agencies and combating corruption more efficiently. A senior Mexican government official termed this new initiative a "total war against the scourge of drugs." Last year we noted that while U.S.-provided assistance had enhanced the counternarcotics capabilities of Mexican law enforcement and military organizations, the effectiveness and usefulness of some assistance were limited. For example, two Knox-class frigates purchased by the government of Mexico lacked the equipment needed to ensure the safety of the crew, thus making the ships inoperative. We also reported that the 73 UH-1H helicopters provided to Mexico to improve the interdiction capability of Mexican army units were of little utility above 5,000 feet, where significant drug-related activities and cultivation occur. In addition, we noted that four C-26 aircraft were provided to Mexico without the capability to perform intended surveillance missions and without planning for payment for the operation and maintenance of the aircraft. Mr. Chairman, let me bring you up to date on these issues. The two Knox-class frigates have been repaired and are in operation. According to U.S. embassy officials, the government of Mexico is considering the purchase of two additional frigates. However, other problems remain. For example, in late March 1998, the U.S. Army grounded its entire UH-1H fleet until gears within the UH-1H engines could be examined and repairs could be made. The government of Mexico followed suit and grounded all of the U.S.-provided UH-1H helicopters until they could be examined. The helicopters were subsequently tested, with 13 of the Attorney General's 27 helicopters and 40 of the military's 72 helicopters receiving passing grades. According to Department of Defense officials, the helicopters that passed the engine tests could be flown on a restricted basis. U.S. embassy officials told us that the Office of the Attorney General has been flying its UH-1H helicopters on a restricted basis, but the Mexican military has decided to keep its entire fleet grounded until all are repaired. Finally, the four C-26 aircraft still are not being used for counternarcotics operations. This concludes my prepared remarks. I would be happy to respond to any questions you may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary, VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a congressional request, GAO discussed the counternarcotics efforts of the United States and Mexico, focusing on: (1) Mexico's efforts in addressing the drug threat; and (2) the status of U.S. counternarcotics assistance provided to Mexico. GAO noted that: (1) while some high-profile law enforcement actions were taken in 1998, major challenges remain; (2) new laws passed to address organized crime, money laundering, and the diversion of chemicals used in narcotics manufacturing have not been fully implemented; (3) moreover, during 1998, opium poppy eradication and drug seizures remained at about the same level as in 1995; (4) in addition, no major Mexican drug trafficker was surrendered to the United States on drug charges; (5) Mexican government counternarcotics activities in 1998 have not been without positive results; (6) one of its major accomplishments was the arrest of two major drug traffickers commonly known as the Kings of Methamphetamine; (7) although all drug-related charges against the two have been dropped, both are still in jail and being held on extradition warrants; (8) the Mexican foreign ministry has approved the extradition of one of the traffickers to the United States, but he has appealed the decision; (9) in addition, during 1998 the Organized Crime Unit of the Attorney General's Office conducted a major operation in the Cancun area where four hotels and other large properties allegedly belonging to drug traffickers associated with the Juarez trafficking organization were seized; (10) Mexico also implemented its currency and suspicious reporting requirements; (11) the Mexican government has proposed or undertaken a number of new initiatives; (12) it has initiated an effort to prevent illegal drugs from entering Mexico, announced a new counternarcotics strategy and the creation of a national police force; (13) one of the major impediments to U.S. and Mexican counternarcotics objectives is Mexican government corruption; (14) recognizing the impact of corruption on law enforcement agencies, the President of Mexico: (a) expanded the role of the military in counternarcotics activities; and (b) introduced a screening process for personnel working in certain law enforcement activities; (15) since these initiatives, a number of senior military and screened personnel were found to be either involved in or suspected of drug-related activities; (16) since 1997, the Departments of State and Defense have provided Mexico with over $92 million worth of equipment, training, and aviation spare parts for counternarcotics purposes; and (17) the major assistance included UH-1H helicopters, C-26 aircraft, and two Knox-class frigates purchased by the government of Mexico through the foreign military sales program.

Airports are a linchpin in the nation's air transportation system. Adequate and predictable funding is needed for airport development. The National Civil Aviation Review Commission--established by Congress to determine how to fund U.S. civil aviation--reported in December 1997 that more funding is needed to develop the national airport system's capacity, preserve small airports' infrastructure, and fund new safety and security initiatives. Funding is also needed to mitigate the noise and other negative environmental effects of airports on nearby communities. Airports provide important economic benefits to the nation and their communities. Air transportation accounted for $63.2 billion, or 0.8 percent, of U.S. Gross Domestic Product in 1996, according to the Department of Transportation's statistics. 1.6 million people are employed at airports in 1998, according to the Airports Council International-North America. In our own study of airport privatization in 1996, we found that the 69 largest U.S. airports had 766,500 employees (686,000 private and 80,500 public employees). In 1996, tax-exempt bonds, the Airport Improvement Program (AIP), and passenger facility charges (PFC) together provided about $6.6 billion of the $7 billion in airport funding. State grants and airport revenue contributed the remaining funding for airports. Table 1 lists these sources of funding and their amounts in 1996. The amount and type of funding varies with airports' size. The nation's 71 largest airports (classified by FAA as large hubs and medium hubs), which accounted for almost 90 percent of all passenger traffic, received more than $5.5 billion in funding in 1996, while the 3,233 other national system airports received about $1.5 billion. As shown in figure 1, large and medium hub airports rely most heavily on private airport bonds, which account for roughly 62 percent of their total funding. By contrast, the 3,233 smaller national system airports obtained just 14 percent of their funding from bonds. For these smaller airports, AIP funding constitutes a much larger portion of their overall funding--about half. Airports' planned capital development over the period 1997 through 2001 may cost as much as $10 billion per year, or $3 billion more per year than in 1996. Figure 2 compares airports' total funding for capital development in 1996 with their annual planned spending for development. Funding for 1996, the bar on the left, is shown by source (AIP, PFCs, state grants, and operating revenues). Planned spending for future years, the bar on the right, is shown by the relative priority FAA has assigned to the projects, as follows: Reconstruction and mandated projects, FAA's highest priorities, total $1.4 billion per year and are for projects to maintain existing infrastructure (reconstruction) or to meet federal mandates, including safety, security, and environmental requirements, including noise mitigation requirements. Other high-priority projects, primarily adding capacity, account for another $1.4 billion per year. Other AIP-eligible projects, a lower priority for FAA, such as bringing airports up to FAA's design standards, add another $3.3 billion per year for a total of $6.1 billion per year. Finally, airports anticipate spending another $3.9 billion per year on projects that are not eligible for AIP funding, such as expanding commercial space in terminals and constructing parking garages. Other high-priority projects $1,360 Reconstruction & mandates $1,414 Planned development 1997 through 2001 (annualized) Within this overall picture of funding and planned spending for development, it is difficult to develop accurate estimates of the extent to which AIP-eligible projects are deferred or canceled because some form of funding cannot be found for them. FAA does not maintain information on whether eligible projects that do not receive AIP funding are funded from other sources, deferred, or canceled. We were not successful in developing an estimate from other information sources, mainly because comprehensive data are not kept on the uses to which airport and special facility bonds are put. But even if the entire bond financing available to smaller airports were spent on AIP-eligible projects, these airports would have, at a minimum, about $945 million a year in AIP-eligible projects that are not funded. Conversely, if none of the financing from bonds were applied to AIP-eligible projects, then the full $3 billion funding shortfall would apply to these projects. The difference between current and planned funding for development is bigger, in percentage terms, for smaller airports than for larger ones. Funding for the 3,233 smaller airports in 1996 was a little over half of the estimated cost of their planned development, producing a difference of about $1.4 billion (see fig. 3). This difference would be even greater if it were not for $250 million in special facility bonding for a single cargo/general aviation airport. For this group of airports, the $782 million in 1996 AIP funding exceeds the annual estimate of $750 million for FAA's highest-priority projects--those involving reconstruction, noise mitigation, and compliance with federal mandates. However, there is no guarantee that the full amount of AIP funding will go only to the highest-priority projects, because one-third of AIP funds are awarded to airports on the basis of the number of passengers boarding commercial flights and not necessarily on the basis of projects' priority. Planned development 1997 through 2001 (annualized) As a proportion of total funding, the potential funding difference between 1996 funding and planned development for the 71 large and medium hub airports is comparatively less than for their smaller counterparts (see fig. 3 and fig. 4). Larger airports potential shortfall of $1.5 billion represents 21 percent of their planned development costs, while smaller airports' potential shortfall of $1.4 billion represents 48 percent of their development costs. Therefore, while larger and smaller airports' respective shortfalls are similar in size, the greater scale of larger airports' planned development causes them to differ considerably in proportion. Figure 4 also indicates that $590 million in AIP funding falls $74 million short of the estimated cost to meet FAA's highest priorities for development--reconstruction, noise mitigation, and compliance with federal mandates. Planned development 1997 through 2001 (annualized) Proposals to increase airport funding or make better use of existing funding vary in the extent to which they would help different types of airports and close the gap between funding and the costs of planned development. For example, increasing AIP funding would help smaller airports more because current funding formulas would channel an increasing proportion of AIP to smaller airports. Conversely, any increase in PFC funding would help larger airports almost exclusively because they handle more passengers and are more likely to have a PFC in place. Changes to the current design of AIP or PFCs could, however, lessen the concentration of benefits to one group of airports. FAA has also used other mechanisms to better use and extend existing funding sources, such as letters of intent, state block grants, and pilot projects to test innovative financing. So far, these mechanisms have had mixed success. Under the existing distribution formula, increasing total AIP funding would proportionately help smaller airports more than large and medium hub airports. Appropriated AIP funding for fiscal year 1998 was $1.7 billion; large and medium hub airports received nearly 40 percent and all other airports about 60 percent of the total. We calculated how much funding each group would receive under the existing formula, at funding levels of $2 billion and $2.347 billion. We chose these funding levels because the National Civil Aviation Review Commission and the Air Transport Association (ATA), the commercial airline trade association, have recommended that future AIP funding levels be stabilized at a minimum of $2 billion annually, while two airport trade groups--the American Association of Airport Executives and the Airports Council International-North America--have recommended a higher funding level, such as AIP's authorized funding level of $2.347 billion for fiscal year 1998. Table 2 shows the results. As indicated, smaller airports' share of AIP would increase under higher funding levels if the current distribution formula were used to apportion the additional funds. Increasing PFC-based funding, as proposed by the Department of Transportation and backed by airport groups, would mainly help larger airports, for several reasons. First, large and medium hub airports, which accounted for nearly 90 percent of all passengers in 1996, have the greatest opportunity to levy PFCs. Second, such airports are more likely than smaller airports to have an approved PFC in place. Finally, large and medium hub airports would forego little AIP funding if the PFC ceiling were raised or eliminated. Most of these airports already return the maximum amount that must be turned back for redistribution to smaller airports in exchange for the opportunity to levy PFCs. If the airports currently charging PFCs were permitted to increase them beyond the current $3 ceiling, total collections would increase from the $1.35 billion that FAA estimates was collected during 1998. Most of the additional collections would go to larger airports. For every $1 increase in the PFC ceiling, we estimate that large and medium hub airports would collect an additional $432 million, while smaller airports would collect an additional $46 million (see fig. 5). In total, a $4 PFC ceiling would yield $1.9 billion, a $5 PFC would yield $2.4 billion, and a $6 PFC would yield $2.8 billion in total estimated collections. Increased PFC funding is likely to be applied to different types of projects than would increased AIP funding. Most AIP funding is applied to "airside" projects like runways and taxiways. "Landside" projects, such as terminals and access roads, are lower on the AIP priority list. However, for some airports, congestion may be more severe at terminals and on access roads than on airfields, according to airport groups. The majority of PFCs are currently dedicated to terminal and airport access projects and interest payments on debt, and any additional revenue from an increase in PFCs may follow suit. In recent years, the Congress has directed FAA to undertake other steps designed to allow airports to make better use of existing AIP funds. Thus far, some of these efforts, such as letters of intent and state block grants, have been successful. Others, such as pilot projects to test innovative financing and privatization, have received less interest from airports and are still being tested. Finally, one idea, using AIP grants to capitalize state revolving loan funds, has not been attempted but could help small airports. Implementing this idea would require legislative changes. Letters of intent are an important source of long-term funding for airport capacity projects, especially for larger airports. These letters represent a nonbinding commitment from FAA to provide multiyear funding to airports beyond the current AIP authorization period. Thus, the letters allow airports to proceed with projects without waiting for future AIP grants and provide assurance that allowable costs will be reimbursed. Airports may also be able to receive more favorable interest rates on bonds that are sold to finance a project if the federal government has indicated its support for the project in a letter of intent. For a period, FAA stopped issuing letters of intent, but since January 1997, it has issued 10 letters with a total funding commitment of $717.5 million. Currently, FAA has 28 open letters committing a total of $1.180 billion through 2010. Letters of intent for large and medium airports account for $1.057 billion, or 90 percent, of that total. Airports' demand for the letters continues--FAA expects at least 10 airports to apply for new letters of intent in fiscal year 1999. In 1996, we testified before this Subcommittee that FAA's state block grant pilot program was a success. The program allows FAA to award AIP funds in the form of block grants to designated states, that, in turn, select and fund AIP projects at small airports. States then decide how to distribute these funds to small airports. In 1996, the program was expanded from seven to nine states and made permanent. Both FAA and the participating states believe that they are benefiting from the program. In recent years, FAA, with congressional urging and direction, has sought to expand airports' available capital funding through more innovative methods, including the more flexible application of AIP funding and efforts to attract more private capital. The 1996 Federal Aviation Reauthorization Act gave FAA the authority to test three new uses for AIP funding--(1) projects with greater percentages of local matching funds, (2) interest costs on debt, and (3) bond insurance. In all, these three innovative uses could be tested on up to 10 projects. Another innovative financing mechanism that we've recommended--using AIP funding to help capitalize state airport revolving funds--while not currently permitted, may hold some promise. FAA is testing 10 innovative uses of AIP funding totaling $24.16 million, all at smaller airports. Five projects tested the benefits of the first innovative use of AIP funding--allowing local contributions in excess of standard matching amount, which for most airports and projects is otherwise fixed at 10 percent of the AIP grant. FAA and state aviation representatives generally support the concept of flexible matching because it allows projects to begin that otherwise might be postponed for lack of sufficient FAA funding; in addition, flexible funding may ultimately increase funding to airports. The latter five projects test the other two mechanisms for innovative financing. Applicants have generally shown less interest in the latter two options, which, according to FAA officials, warrant further study. Some federal transportation, state aviation, and airport bond rating and underwriting officials believe using AIP funding to capitalize state revolving loan funds would help smaller airports obtain additional financing. Currently, FAA cannot use AIP funds for this purpose because AIP construction grants can go only to designated airports and projects. However, state revolving loan funds have been successfully employed to finance other types of infrastructure projects, such as wastewater projects and, more recently, drinking water and surface transportation projects. While loan funds can be structured in various ways, they use federal and state moneys to capitalize the funds from which loans are then made. Interest and principal payments are recycled to provide additional loans. Once established, a loan fund can be expanded through the issuance of bonds that use the fund's capital and loan portfolio as collateral. These revolving funds would not create any contingent liability for the U.S. government because they would be under state control. Declining airport grants and broader government privatization efforts spurred interest in airport privatization as another innovative means of bringing more capital to airport development, but thus far efforts have shown only limited results. As we previously reported, the sale or lease of airports in the United States faces many hurdles, including legal and economic constraints. As a way to test privatization's potential, the Congress directed FAA to establish a limited pilot program under which some of these constraints would be eased. Starting December 1, 1997, FAA began accepting applications from airports to participate in the pilot program on a first-come, first-served basis for up to five airports. Thus far, two airports have applied to be part of the program. Mr. Chairman, this concludes our prepared statement. We would be happy to respond to any questions that you or Members of the Subcommittee may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a congressional request, GAO discussed airport funding issues, focusing on: (1) the amount airports are spending on capital development and the sources of those funds; (2) comparing airports' plans for development with current funding levels; and (3) what effect will various proposals to increase or make better use of existing funding have on airports' ability to fulfill their capital development plans. GAO noted that: (1) 3,304 airports that make up the federally supported national airport system obtained about $7 billion from federal and private sources for capital development; (2) more than 90 percent of this funding came from three sources: tax-exempt bonds issued by states and local airport authorities, federal grants from the Federal Aviation Administration (FAA) Airport Improvement Program (AIP), and passenger facility charges paid on airline tickets; (3) the magnitude and type of funding varies with airports' size; (4) the nation's 71 largest airports accounted for nearly 80 percent of the total funding; (5) airports planned to spend as much as $10 billion per year for capital development for the years 1997 through 2001, or $3 billion per year more than they were able to fund in 1996; (6) the difference between funding and the costs of planned development is greater for smaller commercial and general aviation airports than for their larger counterparts; (7) smaller airports' funding would cover only about half the costs of their planned development, while larger airports' funding would cover about 4/5 of their planned development; (8) airports' planned development can be divided into four main categories based on the funding priorities of AIP; (9) about $1.4 billion per year was planned for safety, security, environmental, and reconstruction projects, FAA's highest priorities for AIP funding; (10) another $1.4 billion per year was planned for projects FAA regards as the next highest priority, primarily adding airport capacity; (11) other projects FAA considers to be lower in priority, such as bringing airports up to FAA's design standards, add another $3.3 billion per year; (12) airports anticipated spending another $3.9 billion per year on projects that are not eligible for AIP funding, such as expanding commercial space in terminals and constructing parking garages; (13) several proposals to increase or make better use of existing funding have emerged in recent years, including the amount of AIP funding and raising the maximum amount airports can levy in passenger facility charges; (14) under current formulas, increasing the amount of AIP funding would help small airports more than larger airports, while raising passenger facility charges would help larger airports more; and (15) other initiatives, such as AIP block grants to states, have had varied success, but none appears to offer a major breakthrough in reducing the shortfall between funding and airports' plans for development.

VA employs approximately 10,000 physicians in its 158 medical centers. To help ensure that the care these physicians provide meets accepted professional standards, VA uses several systems to monitor and evaluate physician practice. These systems include surgical case review, external peer review, credentialing and privileging, malpractice claim analysis, and occurrence screens. An integral part of VA's process is physician peer review--physicians evaluating the medical care provided by other physicians. Peer review in VA is used by medical centers to determine if practitioner care is less than optimal and is initiated when an occurrence screen identifies potential quality of care problems. Peer review is also used to establish the basis for the granting of privileges to physicians and to examine malpractice claims made against health care professionals in the medical center. No disciplinary action is taken against a physician's privileges after a peer review following an occurrence screen. This is because quality assurance information, such as occurrence screen peer review data, is confidential and cannot be used in disciplinary proceedings. However, peer review findings can be used by medical center management to initiate a formal investigation of a physician's performance or conduct after which disciplinary action can be taken. VA guidance, issued in April 1994, presents various methods for conducting peer review but does not mandate a specific peer review technique. Specifically, the guidance discusses the disadvantages of the single reviewer approach and presents three types of multiple reviewer techniques: (1) committee review, (2) multiple independent review, and (3) discussion to consensus. At the six medical centers we visited, two methods of peer review were being utilized: multiple independent review and committee review. (See app. II for a discussion of these approaches.) Regardless of the approach used, the result of any peer review is an evaluation of the care provided by a practitioner and a preliminary determination as to how, in the reviewer's opinion, other physicians would have handled the case. Cases rated as a level 1 (most experienced, competent practitioners would handle case similarly) usually receive no further action. Cases rated as a level 2 (most experienced, competent practitioners might handle the case differently) or a level 3 (most experienced, competent practitioners would handle the case differently) receive a supervisory review by the responsible clinical service chief, such as the chief of surgery. All physicians and dentists employed by VA are subject to privileging procedures. Privileging is the process by which a practitioner is granted permission by the institution to provide medical or other patient care services within defined limits on the basis of an individual's clinical competence as determined by peer references. Privileging is done at the time of employment and every 2 years thereafter. However, a physician's privileges can be examined at any time if a question about his or her performance or competence is raised. The National Practitioner Data Bank was created under Title IV of Public Law 99-660, the Health Care Quality Improvement Act of 1986. The act calls for (1) insurance companies and certain self-insured health care entities to report malpractice payments made for the benefit of a physician, dentist, or other licensed health care practitioner to the Data Bank and (2) hospitals and other authorized health care entities, licensing boards, and professional societies to report professional review actions relating to possible incompetence or improper professional conduct adversely affecting the clinical privileges, licensure, or membership in a professional society of a practitioner for longer than 30 days to the Data Bank. The intent of the act is to improve the quality of medical care by encouraging physicians, dentists, and other health care practitioners to identify and discipline those who engage in unprofessional behavior and to restrict the ability of incompetent physicians, dentists, and other health care practitioners to move from state to state without disclosure or discovery of their previous damaging or incompetent performance. The Data Bank acts as a clearinghouse for information about licensed practitioners' paid malpractice claims and adverse actions on licensure, clinical privileges, and professional society membership. It has two main functions: (1) responding to queries about practitioners from authorized health care entities and hospitals and (2) collecting and storing adverse actions and malpractice payment information. Although the act does not require VA medical centers to participate in the Data Bank, it directs the Secretary of Health and Human Services (HHS) to enter into a memorandum of understanding with the Administrator of the Veterans Administration (now VA) to apply the reporting requirements of the act to health care facilities under VA's jurisdiction. Accordingly, a memorandum of understanding was signed in November 1990, followed by interpretive rules effective October 1991. VA's physician peer review process is identifying cases needing management attention at the six medical centers that we visited. Specifically, in fiscal year 1993, peer reviewers at these locations reviewed a total of 563 cases referred from the occurrence screen process involving potential quality of care problems. In 373 of these cases, peer reviewers decided that most experienced, competent practitioners would have handled the case similarly; in 136 cases, the peer reviewers believed that most experienced, competent practitioners might have handled the case differently; and in 54 cases, the peer reviewers believed that most experienced, competent practitioners would have handled the case differently. Each of the VA medical centers that we visited uses occurrence screens to identify potential physician performance problems that may warrant a peer review. Under this process, cases are screened against a predetermined list of criteria, usually by nurses. Those cases that involve one or more of the occurrences will be reviewed to identify possible problems in patient care. Occurrences that are reviewed include, but are not limited to, the following: readmittance within 10 days of an inpatient stay; readmittance within 3 days of an outpatient visit; return to special care unit, such as intensive care; return to operating room; and death. Any case for which the occurrence screen results show that a potential quality of care problem may exist is referred to the cognizant service chief for medical peer review. Table 1 shows, by medical center, how the peer reviewers rated the 563 cases. VA guidance governing peer review of potential quality of care problems identified through occurrence screens states that when peer review indicates that practitioner care is less than optimal, the cases are sent to the service chief for a determination regarding corrective action. The actions chosen by the service chief will be communicated in writing to the chief of staff and the occurrence screen program coordinator. If no action is considered necessary, a notation to that effect should be made by the service chief. However, VA guidance does not explicitly state the extent to which (1) discussions with a practitioner should be documented or (2) the reasons for no action being taken should be justified. As a result, the worksheets provided to the occurrence screen coordinator generally contained no elaboration on the action taken. Of the 50 cases we reviewed where peer reviewers believed that most experienced, competent practitioners would have handled the case differently than the physician under review, 32 resulted in a discussion with the physician, 4 resulted in no action, 8 resulted in a policy change, and 6 resulted in counseling. Table 2 shows how the service chiefs at the medical centers we visited dealt with cases that their peer reviewers believed most experienced, competent practitioners would have handled differently. Service chiefs clearly favored a discussion of problems over any other type of action. But in 32 of the 50 level 3 cases in which a discussion took place, when we asked for documentation about what was actually discussed with the practitioner about the peer review findings or what, if any, corrective actions were agreed upon, we were told by staff that they could not find information in either the occurrence screen worksheets or minutes of the service meetings. Further, in the 4 cases we reviewed in which no action was taken by a service chief on peer reviewers' findings, there was no indication in the occurrence screen worksheets as to why a decision to take no action was justified. VA regulations require cases meeting the occurrence screen criteria to be entered into an ongoing occurrence screen database, which is reviewed and analyzed regularly to identify patterns that may be problematic. However, when actions taken by the service chiefs are not being documented for future reference, corrective actions, if taken, cannot be identified and trends cannot be established to point the way for improvement. In 14 cases, evidence was present that action was taken on the peer reviewer's findings. Specifically, in 8 cases, medical center management revised certain policies and procedures to ensure that the problems identified by peer reviewers would not recur. In 6 cases, physicians were provided counseling on the basis of the peer reviewer's findings and a record of the incident was placed in the physician's privileging file. The incidents triggering formal counseling included inappropriate medical management of a patient with diabetes; failure to diagnose, monitor, and treat patients; failure to communicate resuscitation plans for a terminally ill patient; failure to monitor patient response to medication and take appropriate action; and failure to assess a patient and order the correct dose of medication. Experts believe that a significant impediment to effective peer review is the inherent subjectivity involved in determining whether a potential quality of care problem exists. The development of practice guidelines that peer reviewers can use to make performance judgments is one method suggested by experts to reduce the subjectivity. For example, practice guidelines could reduce the tendency on the part of some peer reviewers to focus on the effect of a bad patient outcome rather than whether the standard of care was met. In a 1992 Journal of the American Medical Association article, an official in VA's Office of Quality Management stated that the development of practice guidelines would be a great aid to improve peer review. In a corroborating article, the physician writing about peer review states that peer judgments regarding appropriateness of care are strongly influenced by perceived outcomes. This suggests that the standard of care is often unclear to reviewers. Practice guidelines are being developed with increasing frequency in both VA and the medical community as a whole. However, at least one expert does not believe that it will be possible to design guidelines that will take into account every possible factor that might constitute an exception to the standard. "picking skilled physician-reviewers may be the central and critical step. Simply choosing a peer physician may not be the best strategy; rather, identifying an expert in both the condition under study and in quality assessment purposes and techniques may be required." At the six medical centers we visited, we found that classification of peer review findings is a highly subjective activity because no systemwide clinical criterion exists for peer reviewers to determine whether physicians would or would not have performed in the same manner as the physician under review. As indicated above, such a situation is not unique to VA and will be resolved only when a complete set of practice guidelines is used routinely. Until such criteria are generally available, a case that might be a level 1 in VA medical center A might be a level 3 in VA medical center F. Levels assigned to cases may also vary among the specialty services within the medical center. The degree to which the concept of peer review is accepted or embraced by physicians depends to a great extent on how the results of peer review are utilized by medical center management. Although we found differences among services within medical centers, four of the six VA medical centers we visited are using peer review primarily to evaluate physician performance and identify physicians who may have contributed to adverse patient outcomes. This approach is resulting in negative perceptions of the peer review process and is impeding its acceptance among physicians. At these facilities, several physicians questioned the usefulness of the peer review process and did not view it as having an important role in identifying opportunities for improving care. These physicians contend that peer review duplicates other quality assurance monitors. For example, the medical service units at each of the VA medical centers we visited hold morbidity and mortality conferences to discuss all deaths and clinical complications that occurred during the week preceding the meeting. Some of these cases are later selected for peer review. But, according to physicians involved in peer review, the peer reviews do not identify any issues that are not identified and discussed in the morbidity and mortality conferences. Physicians also told us that peer review committee findings have more credibility than the findings of a single peer reviewer because the subjectivity inherent in determining quality of care is reduced. Other benefits of the committee approach include identifying the underlying problem that led to an adverse outcome and greater physician acceptance of peer review. Physicians told us that by focusing on the identification of system issues, they are better able to identify the underlying cause of an adverse outcome and prevent it from occurring again. Physicians who are members of peer review committees also told us that the anonymity associated with peer review committees allows them to be open and honest in their evaluations. Officials from one VA medical center that switched from using a single reviewer to a peer review committee stated that the number of cases rated level 2 or 3 rose when they began using a peer review committee. Specifically, during the first 5 months of 1994, the committee assigned more level 3 designations to cases than did individual reviewers in all of 1993. At another medical center that began using peer review committees, the number of cases rated level 2 or 3 by a committee increased by more than 60 percent. The Health Care Quality Improvement Act of 1986 requires that all malpractice claims paid on the behalf of a practitioner be reported to the Data Bank. However, under rules setting forth VA's policy for participation in the Data Bank, VA will file a report with the Data Bank regarding any malpractice payment for the benefit of a physician, dentist, or other licensed practitioner only when the director of the facility at which the act or omission occurred affirms the conclusion of a peer review panel that payment was related to substandard care, professional incompetence, or professional misconduct. Thus, before reporting a practitioner to the Data Bank after a malpractice payment is made, VA is in effect requiring the peer review panel to make a determination that either the standard of care was not met or that a practitioner was guilty of professional incompetence or misconduct. Adherence to these procedures results in VA medical centers' not reporting to the Data Bank all malpractice payments made on behalf of their practitioners. The process followed by VA medical centers to deal with malpractice claims is as follows: Within 30 days of a claim being filed, the appropriate VA district counsel notifies the medical center involved in providing the medical care identified in the allegations that a claim has been filed. Medical center personnel then conduct a peer review to determine if the appropriate standards of care were met. These standards can relate to any part of the system (for example, hospital, outpatient care, equipment, systems in place, and practitioners). The medical center forwards the results of the peer review along with a copy of the Tort Claim Information System data and a copy of the patient's medical record to both the Armed Forces Institute of Pathology and the appropriate VA district counsel. Upon receipt of the results of the initial peer review, the district counsel can make a request for the medical opinion of an external expert. Finally, the VA district counsel can settle or deny a claim. If a payment is made on the claim, the responsible medical center director will convene a second peer review panel to determine if an identifiable licensed health care practitioner is involved in the case. During this review, a determination is made as to whether the acts or omission of the practitioners in relation to the patient injury for which the settlement or judgment was made constituted care that did not meet generally accepted standards of professional competence or conduct. The recommendations of this panel should determine whether the practitioner involved in the incident is reported to the Data Bank. However, before approving the report, the director will notify the practitioner to be reported and provide him or her with an opportunity to discuss the situation with appropriate medical center officials, including the director. At the six medical centers we visited, we reviewed 53 paid claim files in which the claim alleged that an adverse patient outcome was caused by a licensed practitioner(s). We found that it was possible to determine the practitioner(s) associated with the adverse patient outcome in each of the 53 claims. However, only four of these individuals were reported to the Data Bank. The remaining practitioners were not reported for a variety of reasons, including determination by the panel that the standard of care was met (13); inability to identify the practitioner responsible for the patient (3); problem was considered to be a system failure (4); belief that the resident rather than the attending physician was to blame for the incident (3); patient was at fault (2); no evidence of misconduct, negligence, or malpractice (6); panel split on the need to report (1); and practitioner behavior was not clearly outside the standards of practice (1). Further, from October 28, 1991, to September 30, 1994, only 73 practitioners from 1,047 paid claims for all VA medical centers were reported to the Data Bank. (See app. III.) In his response to this report, VA's Under Secretary for Health stated that there is not necessarily an identifiable practitioner associated with every malpractice claim because (1) malpractice claims involving VA are filed against the United States of America and typically do not name practitioners, (2) payments made are on behalf of care provided at a VA facility, and (3) the act or omission for which payment was made is not necessarily practitioner-related. The Under Secretary concluded that (1) the VA peer review process is necessary to determine if there is an identifiable licensed health care provider for whom it can be said that payment was made and (2) only if there is an identifiable practitioner can it be said that the payment was on his or her behalf. We agree that malpractice claims are filed against the United States of America and not against individual practitioners. We found, however, that identifying practitioners involved in a malpractice claim and on whose behalf it can be said payment was made is not difficult. Our review of 558 malpractice claims involving VA that were paid during fiscal years 1992 and 1993 shows that 422, or 76 percent, involved claims in which it was alleged that an adverse patient outcome was caused by a licensed practitioner(s). Of these practitioners, 409 were physicians. Under its memorandum of understanding with HHS, VA has agreed to report to the Data Bank through state licensing boards any action that for longer than 30 days reduces, restricts, suspends, or revokes the clinical privileges of a physician or dentist due to incompetence or improper professional conduct. However, regardless of the length of time an individual's privileges have been affected, VA will not report adverse actions, including suspensions lasting longer than 30 days, to the Data Bank until all internal appeals have been satisfied. Such a policy is not required by the act and can delay reporting for a considerable time. For example, one VA medical center we visited suspended the privileges of two physicians in 1993 and terminated their employment in 1994. One of these physicians was reinstated in March 1995 with a formal reprimand. As of April 4, 1995, the other was still involved in the internal appeals process. Neither has been reported to the Data Bank. VA's privileging process includes, among other things, evaluation of a physician's relevant experience and current competence. It also includes consideration of any information related to medical malpractice allegations or judgments, loss of medical staff membership, loss or reduction of clinical privileges, or challenges to licensure. In addition, the evaluation must be determined using evidence of an individual's current competence. Initial privileging is done at the time of employment and every 2 years thereafter. However, a physician's privileges can be examined at any time if the situation requires it; for example, when there is a question of physician competency or professional conduct. From October 28, 1991, through September 30, 1994, nine medical centers reported 11 adverse actions to the Data Bank. However, our analysis shows that the adverse reporting rate for VA medical centers is lower than the adverse reporting rate of community hospitals. For example, in California, VA has 4,008 beds and reported 2 adverse actions for an average reporting rate of 0.50 reports per 1,000 beds. Conversely, community hospitals in California have 105,270 beds and reported 390 adverse actions for an average reporting rate of 3.7 reports per 1,000 beds. (See app. IV for a complete reporting comparison by state.) The Under Secretary for Health, in responding to this report, stated that VA reporting rates are not comparable with community hospital rates because VA practitioners are employees of VA, not independent entrepreneurs. The Under Secretary believes that through appropriate supervision, service chiefs at the medical centers are identifying problems and through supervision and progressive discipline, if necessary, issues are handled before formal privileging actions occur. Conversely, in a community hospital, practitioners are not typically employees of the organization, and the formal privileging review process is the only legitimate process for review. The Under Secretary noted, however, that VA policy requires that licensed health care practitioners who leave VA employment while under investigation be reported to the Data Bank immediately. Service chiefs at the medical centers we visited told us that they use formal and informal processes to deal with physicians who have performance problems. Formal procedures require due process hearings that (1) take time to administer, (2) require much documentation, and (3) involve extensive understanding of the regulations and guidelines governing such actions. For example, in fiscal years 1993 and 1994, action was taken to officially remove three physicians at the medical centers we visited. The time involved from the initiation of disciplinary action to ultimate removal ranged from 5-1/2 months to a little over 1 year. Reasons for the varying time frames include complexity of the issues involved (such as professional misconduct versus quality of care), multiple independent peer reviews necessary in two cases and not in the other, and the extent to which the physicians fought the disciplinary actions. In each case, the physician's privileges were restricted for more than 30 days; however, only one of the three cases was reported to the Data Bank. VA policy requires that the appeals process be completed before any case is reported to the Data Bank, and these physicians had appealed the suspension and revocation of their privileges and the termination of their employment. Service chiefs at the medical centers we visited also used an informal process to remove physicians who had performance problems. However, the effect is that physicians who may have performance problems are not reported to the Data Bank. Further, one service chief told us that he tends to hire part-time physicians to avoid having to adhere to the formal procedures for dealing with problem physicians. The following is an example of a situation that resulted in the removal of a problem physician through informal means. A service chief reduced a physician's privileges and personally supervised the physician for 6 months to determine the physician's competence level. The service chief concluded that the physicians' medical skills did not improve during the time of observation and recommended to the physician that he resign. The physician took this advice and resigned from the medical center. But no documentation of restricted privileges or other problems appeared in the physician's credentialing and privileging file. Although physician peer review is performed at the VA medical centers that we visited and cases of questionable quality of care are identified, actions taken by service chiefs as the result of peer review findings are seldom made a matter of record in peer review files. Such information could allow management to track the performance of practitioners over time and help ensure that any pattern of less than optimal care is quickly identified. Documentation also establishes the degree to which management addressed the issues raised by peer reviewers. From an organizational perspective, this establishes accountability on the part of service chiefs, increases practitioner awareness of the importance that the medical center places on the delivery of quality care, and is a good risk-management tool because it requires managers to go on record as to how a potential problem was addressed. By establishing restrictive Data Bank reporting procedures, VA has shielded its physicians from the professional accountability that is required of private sector practitioners. In so doing, VA could be facilitating the delivery of substandard care outside the VA health care system by allowing practitioners with poor performance records to leave its employment with no record of having been involved in a malpractice claim or an adverse action. Conversely, failure to report also allows some physicians who provide patients with less than optimal care to remain in the VA system without any indication on their record that problems may exist with their performance. We recommend that the Secretary of Veterans Affairs direct the Under Secretary for Health to require service chiefs to fully document all discussions held with practitioners involved in cases that peer reviewers conclude that most experienced, competent practitioners might or would have handled differently, and revise the criteria now being used by medical centers to report VA practitioners to the National Practitioner Data Bank so that they are more consistent with the reporting practices now used in the private sector. VA's Under Secretary for Health concurred with our recommendation that service chiefs fully document all discussions held with practitioners and stated that VA will reinforce, on a systemwide basis, the requirement that service chiefs must fully document appropriate actions taken in response to peer review conclusions. The Under Secretary also concurred in principle with our recommendation relating to reporting to the National Practitioner Data Bank. While he does not believe that a change in policy is needed for the reporting of malpractice payments, he does agree that more timely reporting of initial summary suspensions of physician privileges lasting longer than 30 days is an option. In this regard, he said that a group of knowledgeable program staff will explore all policy options and report their recommendations to him by the end of September 1995. Under VA's current procedures, the postpayment peer review is made to determine if there is an identifiable licensed health care practitioner responsible for a breach in care. The Under Secretary stated that effective May 19, 1995, these reviews will be completed outside of the medical center for which payment was made (for example, in another medical center). This is an interim measure, and VA is in the process of pursuing peer review options that are external to the VA system, such as utilization of the clinical reviewers participating in VA's External Peer Review Program. We disagree with the Under Secretary's contention that no policy change is needed with respect to the reporting of malpractice payments. VA's policy of reporting only those malpractice payments involving practitioners who have been determined to have breached the standard of care remains more restrictive than required under Public Law 99-660. The law requires only that all malpractice payments made on behalf of a physician or licensed health care practitioner be reported to the Data Bank. In addition, the law states that payment of a claim should not be construed as creating a presumption that medical malpractice has occurred. Thus, any post-payment peer review need only determine that the payment was for the benefit of a practitioner, not that it results from a breach in care. We also believe that reporting initial summary suspensions rather than only final actions should be viewed as more than an option. VA's memorandum of understanding with HHS clearly states that it will report to the Data Bank any action that for longer than 30 days reduces, restricts, suspends, or revokes the clinical privileges of a physician or dentist due to incompetence or improper professional conduct. As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from its issue date. At that time, copies will be sent to appropriate congressional committees; the Secretary of Veterans Affairs; the Director, Office of Management and Budget; and other interested parties. We will also make copies available to others upon request. If you have questions on this report, please contact James Carlan, Assistant Director, Federal Health Care Delivery Issues, on (202) 512-7120. Other staff contributing to this report were team coordinators Patrick Gallagher and Patricia Jones and team members Deena M. El-Attar, Barbara Mulliken, and George Bogart. To accomplish our review, we interviewed VA's medical inspector and officials in VA's Professional Affairs Office, Quality Management Planning and Evaluation Office, Office of Personnel and Labor Relations, and Office of General Counsel. The objective of these interviews was to obtain information on (1) the role of peer review in evaluating physicians and reporting to the National Practitioner Data Bank and state licensing boards and (2) how VA's Tort Claim Information System (TCIS) was developed and is being utilized. We also visited six VA medical centersselected on the basis of the number of paid malpractice claims made on behalf of these facilities. At each location, we (1) interviewed quality assurance personnel, physicians who served as peer reviewers, and service chiefs to obtain their perspectives on the peer review process and (2) reviewed policies and procedures for peer review quality assurance programs, minutes of any meetings that dealt with potential quality of care issues, and documentation pertaining to 191 peer reviews made as a result of an occurrence screen. We also reviewed peer review documentation for 80 tort claims paid and pending for practitioners in 1992 and 1993 at the six medical centers we visited. In addition, we obtained the Armed Forces Institute of Pathology analysis of VA tort claim information for fiscal year 1993 for all VA medical centers and reviewed HHS information on VA's participation in reporting to the Data Bank. Under the multiple independent reviewer approach, which is being used at the Cleveland, Hines, and Martinsburg medical centers, physicians selected by the service chief individually review the work of a colleague within the same service; for example, surgeons review the work of other surgeons. During this review, the medical records associated with a case are examined and any physicians or others involved in the case may be interviewed. Each peer reviewer independently evaluates the quality of care involved in the case and makes a preliminary determination as to how, in his or her opinion, other physicians would have handled the case. In those cases where the service chief and a peer reviewer disagree, the service chief's opinion will prevail. The service chief also determines the extent to which follow-up action will be taken on the case. The Fayetteville, Houston, and St. Louis medical centers use a committee approach to peer review. While each committee is multidisciplinary and comprised of elected or appointed representatives from the major medical services such as surgery and medicine, each committee conducts peer reviews somewhat differently. In Fayetteville, the peer review committee, which consists of all the service chiefs, performs the peer review as a group and determines what action to take. The Houston peer review committee selects individual members of the peer review committee to review cases and present their findings to the entire committee for discussion and level determination. While the committee makes the final peer review level determination, the service chiefs determine what action to take. In St. Louis, all service level peer reviews are submitted to a Quality Assurance/Quality Improvement Committee, which then performs another peer review to validate the original review. The committee has the final decision-making authority regarding the level assigned and will often recommend what action should be taken and then follow up to ensure that the recommended action occurs. East Orange, New Jersey (continued) This appendix presents a comparison of VA's and community hospitals' reported adverse actions per 1,000 hospital beds. This analysis shows that VA hospitals are not reporting at the same rate as other hospitals in the same state. The analysis used information from an HHS Inspector General's report that concluded that most hospitals are underreporting to the Data Bank. VA's adverse action reports are from its first 3 years' participation in the Data Bank, October 28, 1991, through September 30, 1994. The community hospitals' adverse action reports are from the first 3-1/2 years of the Data Bank's operation, September 1, 1990, through December 31, 1993. Only nine VA medical centers in seven states reported adverse actions. Hospitals in all states reported adverse actions. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (301) 258-4097 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a congressional request, GAO examined the relationship between problem identification and problem resolution in the Department of Veterans Affairs' (VA) physician peer review process, focusing on: (1) how the results of VA peer review are being used in disciplining physicians with performance problems; (2) the impediments to effective peer review; and (3) whether VA is taking action against physicians who are not performing in accordance with professional standards. GAO found that: (1) actions taken by VA to address quality of care problems are often limited to undocumented discussions with the physicians involved; (2) there is generally no record of the extent to which quality of care problems are addressed or the actions taken to deal with the problems identified; (3) VA is developing practice guidelines and using peer review to help reduce heavy reliance on professional judgment in peer review; and (4) VA medical centers are not reporting many actions taken against physicians to the National Practitioner Data Bank because of their restrictive reporting procedures.

The tens of thousands of individuals who responded to the September 11, 2001, attack on the WTC experienced the emotional trauma of the disaster and were exposed to a noxious mixture of dust, debris, smoke, and potentially toxic contaminants, such as pulverized concrete, fibrous glass, particulate matter, and asbestos. A wide variety of health effects have been experienced by responders to the WTC attack, and several federally funded programs have been created to address the health needs of these individuals. Numerous studies have documented the physical and mental health effects of the WTC attacks. Physical health effects included injuries and respiratory conditions, such as sinusitis, asthma, and a new syndrome called WTC cough, which consists of persistent coughing accompanied by severe respiratory symptoms. Almost all firefighters who responded to the attack experienced respiratory effects, including WTC cough. One study suggested that exposed firefighters on average experienced a decline in lung function equivalent to that which would be produced by 12 years of aging. A recently published study found a significantly higher risk of newly diagnosed asthma among responders that was associated with increased exposure to the WTC disaster site. Commonly reported mental health effects among responders and other affected individuals included symptoms associated with post-traumatic stress disorder (PTSD), depression, and anxiety. Behavioral health effects such as alcohol and tobacco use have also been reported. Some health effects experienced by responders have persisted or worsened over time, leading many responders to begin seeking treatment years after September 11, 2001. Clinicians involved in screening, monitoring, and treating responders have found that many responders' conditions--both physical and psychological--have not resolved and have developed into chronic disorders that require long-term monitoring. For example, findings from a study conducted by clinicians at the NY/NJ WTC Consortium show that at the time of examination, up to 2.5 years after the start of the rescue and recovery effort, 59 percent of responders enrolled in the program were still experiencing new or worsened respiratory symptoms. Experts studying the mental health of responders found that about 2 years after the WTC attack, responders had higher rates of PTSD and other psychological conditions compared to others in similar jobs who were not WTC responders and others in the general population. Clinicians also anticipate that other health effects, such as immunological disorders and cancers, may emerge over time. There are six key programs that currently receive federal funding to provide voluntary health screening, monitoring, or treatment at no cost to responders. The six WTC health programs, shown in table 1, are (1) the FDNY WTC Medical Monitoring and Treatment Program; (2) the NY/NJ WTC Consortium, which comprises five clinical centers in the NY/NJ area; (3) the WTC Federal Responder Screening Program; (4) the WTC Health Registry; (5) Project COPE; and (6) the Police Organization Providing Peer Assistance (POPPA) program. The programs vary in aspects such as the HHS administering agency or component responsible for administering the funding; the implementing agency, component, or organization responsible for providing program services; eligibility requirements; and services. The WTC health programs that are providing screening and monitoring are tracking thousands of individuals who were affected by the WTC disaster. As of June 2007, the FDNY WTC program had screened about 14,500 responders and had conducted follow-up examinations for about 13,500 of these responders, while the NY/NJ WTC Consortium had screened about 20,000 responders and had conducted follow-up examinations for about 8,000 of these responders. Some of the responders include nonfederal responders residing outside the NYC metropolitan area. As of June 2007, the WTC Federal Responder Screening Program had screened 1,305 federal responders and referred 281 responders for employee assistance program services or specialty diagnostic services. In addition, the WTC Health Registry, a monitoring program that consists of periodic surveys of self-reported health status and related studies but does not provide in- person screening or monitoring, collected baseline health data from over 71,000 people who enrolled in the Registry. In the winter of 2006, the Registry began its first adult follow-up survey, and as of June 2007 over 36,000 individuals had completed the follow-up survey. In addition to providing medical examinations, FDNY's WTC program and the NY/NJ WTC Consortium have collected information for use in scientific research to better understand the health effects of the WTC attack and other disasters. The WTC Health Registry is also collecting information to assess the long-term public health consequences of the disaster. Beginning in October 2001 and continuing through 2003, FDNY's WTC program, the NY/NJ WTC Consortium, the WTC Federal Responder Screening Program, and the WTC Health Registry received federal funding to provide services to responders. This funding primarily came from appropriations to the Department of Homeland Security's Federal Emergency Management Agency (FEMA), as part of the approximately $8.8 billion that the Congress appropriated to FEMA for response and recovery activities after the WTC disaster. FEMA entered into interagency agreements with HHS agencies to distribute the funding to the programs. For example, FEMA entered into an agreement with NIOSH to distribute $90 million appropriated in 2003 that was available for monitoring. FEMA also entered into an agreement with ASPR for ASPR to administer the WTC Federal Responder Screening Program. A $75 million appropriation to CDC in fiscal year 2006 for purposes related to the WTC attack resulted in additional funding for the monitoring activities of the FDNY WTC program, NY/NJ WTC Consortium, and the Registry. The $75 million appropriation to CDC in fiscal year 2006 also provided funds that were awarded to the FDNY WTC program, the NY/NJ WTC Consortium, Project COPE, and the POPPA program for treatment services for responders. An emergency supplemental appropriation to CDC in May 2007 included an additional $50 million to carry out the same activities provided for in the $75 million appropriation made in fiscal year 2006. The President's proposed fiscal year 2008 budget for HHS includes $25 million for treatment of WTC-related illnesses for responders. In February 2006, the Secretary of HHS designated the Director of NIOSH to take the lead in ensuring that the WTC health programs are well coordinated, and in September 2006 the Secretary established a WTC Task Force to advise him on federal policies and funding issues related to responders' health conditions. The chair of the task force is HHS's Assistant Secretary for Health, and the vice chair is the Director of NIOSH. The task force reported to the Secretary of HHS in early April 2007. HHS's WTC Federal Responder Screening Program has had difficulties ensuring the uninterrupted availability of services for federal responders. First, the provision of screening examinations has been intermittent. (See fig. 1.) After resuming screening examinations in December 2005 and conducting them for about a year, HHS again placed the program on hold and suspended scheduling of screening examinations for responders from January 2007 to May 2007. This interruption in service occurred because there was a change in the administration of the WTC Federal Responder Screening Program, and certain interagency agreements were not established in time to keep the program fully operational. In late December 2006, ASPR and NIOSH signed an interagency agreement giving NIOSH $2.1 million to administer the WTC Federal Responder Screening Program. Subsequently, NIOSH and FOH needed to sign a new interagency agreement to allow FOH to continue to be reimbursed for providing screening examinations. It took several months for the agreement between NIOSH and FOH to be negotiated and approved, and scheduling of screening examinations did not resume until May 2007. Second, the program's provision of specialty diagnostic services has also been intermittent. After initial screening examinations, responders often need further diagnostic services by ear, nose, and throat doctors; cardiologists; and pulmonologists; and FOH had been referring responders to these specialists and paying for the services. However, the program stopped scheduling and paying for these specialty diagnostic services in April 2006 because the program's contract with a new provider network did not cover these services. In March 2007, FOH modified its contract with the provider network and resumed scheduling and paying for specialty diagnostic services for federal responders. In July 2007 we reported that NIOSH was considering expanding the WTC Federal Responder Screening Program to include monitoring examinations--follow-up physical and mental health examinations--and was assessing options for funding and delivering these services. If federal responders do not receive this type of monitoring, health conditions that arise later may not be diagnosed and treated, and knowledge of the health effects of the WTC disaster may be incomplete. In February 2007, NIOSH sent a letter to FEMA, which provides the funding for the program, asking whether the funding could be used to support monitoring in addition to the one-time screening currently offered. A NIOSH official told us that as of August 2007 the agency had not received a response from FEMA. NIOSH officials told us that if FEMA did not agree to pay for monitoring of federal responders, NIOSH would consider using other funding. According to a NIOSH official, if FEMA or NIOSH agrees to pay for monitoring of federal responders, this service would be provided by FOH or one of the other WTC health programs. NIOSH has not ensured the availability of screening and monitoring services for nonfederal responders residing outside the NYC metropolitan area, although it recently took steps toward expanding the availability of these services. Initially, NIOSH made two efforts to provide screening and monitoring services for these responders, the exact number of which is unknown. The first effort began in late 2002 when NIOSH awarded a contract for about $306,000 to the Mount Sinai School of Medicine to provide screening services for nonfederal responders residing outside the NYC metropolitan area and directed it to establish a subcontract with AOEC. AOEC then subcontracted with 32 of its member clinics across the country to provide screening services. From February 2003 to July 2004, the 32 AOEC member clinics screened 588 nonfederal responders nationwide. AOEC experienced challenges in providing these screening services. For example, many nonfederal responders did not enroll in the program because they did not live near an AOEC clinic, and the administration of the program required substantial coordination among AOEC, AOEC member clinics, and Mount Sinai. Mount Sinai's subcontract with AOEC ended in July 2004, and from August 2004 until June 2005 NIOSH did not fund any organization to provide services to nonfederal responders outside the NYC metropolitan area. During this period, NIOSH focused on providing screening and monitoring services for nonfederal responders in the NYC metropolitan area. In June 2005, NIOSH began its second effort by awarding $776,000 to the Mount Sinai School of Medicine Data and Coordination Center (DCC) to provide both screening and monitoring services for nonfederal responders residing outside the NYC metropolitan area. In June 2006, NIOSH awarded an additional $788,000 to DCC to provide screening and monitoring services for these responders. NIOSH officials told us that they assigned DCC the task of providing screening and monitoring services to nonfederal responders outside the NYC metropolitan area because the task was consistent with DCC's responsibilities for the NY/NJ WTC Consortium, which include data monitoring and coordination. DCC, however, had difficulty establishing a network of providers that could serve nonfederal responders residing throughout the country--ultimately contracting with only 10 clinics in seven states to provide screening and monitoring services. DCC officials said that as of June 2007 the 10 clinics were monitoring 180 responders. In early 2006, NIOSH began exploring how to establish a national program that would expand the network of providers to provide screening and monitoring services, as well as treatment services, for nonfederal responders residing outside the NYC metropolitan area. According to NIOSH, there have been several challenges involved in expanding a network of providers to screen and monitor nonfederal responders nationwide. These include establishing contracts with clinics that have the occupational health expertise to provide services nationwide, establishing patient data transfer systems that comply with applicable privacy laws, navigating the institutional review board process for a large provider network, and establishing payment systems with clinics participating in a national network of providers. On March 15, 2007, NIOSH issued a formal request for information from organizations that have an interest in and the capability of developing a national program for responders residing outside the NYC metropolitan area. In this request, NIOSH described the scope of a national program as offering screening, monitoring, and treatment services to about 3,000 nonfederal responders through a national network of occupational health facilities. NIOSH also specified that the program's facilities should be located within reasonable driving distance to responders and that participating facilities must provide copies of examination records to DCC. In May 2007, NIOSH approved a request from DCC to redirect about $125,000 from the June 2006 award to establish a contract with a company to provide screening and monitoring services for nonfederal responders residing outside the NYC metropolitan area. Subsequently, DCC contracted with QTC Management, Inc., one of the four organizations that had responded to NIOSH's request for information. DCC's contract with QTC does not include treatment services, and NIOSH officials are still exploring how to provide and pay for treatment services for nonfederal responders residing outside the NYC metropolitan area. QTC has a network of providers in all 50 states and the District of Columbia and can use internal medicine and occupational medicine doctors in its network to provide these services. In addition, DCC and QTC have agreed that QTC will identify and subcontract with providers outside of its network to screen and monitor nonfederal responders who do not reside within 25 miles of a QTC provider. In June 2007, NIOSH awarded $800,600 to DCC for coordinating the provision of screening and monitoring examinations, and QTC will receive a portion of this award from DCC to provide about 1,000 screening and monitoring examinations through May 2008. According to a NIOSH official, QTC's providers have begun conducting screening examinations, and by the end of August 2007, 18 nonfederal responders had completed screening examinations, and 33 others had been scheduled. In fall 2006, NIOSH awarded and set aside funds totaling $51 million from its $75 million appropriation for four WTC health programs in the NYC metropolitan area to provide treatment services to responders enrolled in these programs. Of the $51 million, NIOSH awarded about $44 million for outpatient services to the FDNY WTC program, the NY/NJ WTC Consortium, Project COPE, and the POPPA program. NIOSH made the largest awards to the two programs from which almost all responders receive medical services, the FDNY WTC program and NY/NJ WTC Consortium (see table 2). In July 2007 we reported that officials from the FDNY WTC program and the NY/NJ WTC Consortium expected that their awards for outpatient treatment would be spent by the end of fiscal year 2007. In addition to the $44 million it awarded for outpatient services, NIOSH set aside about $7 million for the FDNY WTC program and NY/NJ WTC Consortium to pay for responders' WTC-related inpatient hospital care as needed. The FDNY WTC program and NY/NJ WTC Consortium used their awards from NIOSH to continue providing treatment services to responders and to expand the scope of available treatment services. Before NIOSH made its awards for treatment services, the treatment services provided by the two programs were supported by funding from private philanthropies and other organizations. According to officials of the NY/NJ WTC Consortium, this funding was sufficient to provide only outpatient care and partial coverage for prescription medications. The two programs used NIOSH's awards to continue to provide outpatient services to responders, such as treatment for gastrointestinal reflux disease, upper and lower respiratory disorders, and mental health conditions. They also expanded the scope of their programs by offering responders full coverage for their prescription medications for the first time. A NIOSH official told us that some of the commonly experienced WTC conditions, such as upper airway conditions, gastrointestinal disorders, and mental health disorders, are frequently treated with medications that can be costly and may be prescribed for an extended period of time. According to an FDNY WTC program official, prescription medications are now the largest component of the program's treatment budget. The FDNY WTC program and NY/NJ WTC Consortium also expanded the scope of their programs by paying for inpatient hospital care for the first time, using funds from the $7 million that NIOSH had set aside for this purpose. According to a NIOSH official, NIOSH pays for hospitalizations that have been approved by the medical directors of the FDNY WTC program and NY/NJ WTC Consortium through awards to the programs from the funds NIOSH set aside for this purpose. By August 31, 2007, federal funds had been used to support 34 hospitalizations of responders, 28 of which were referred by the NY/NJ WTC Consortium's Mount Sinai clinic, 5 by the FDNY WTC program, and 1 by the NY/NJ WTC Consortium's CUNY Queens College program. Responders have received inpatient hospital care to treat, for example, asthma, pulmonary fibrosis, and severe cases of depression or PTSD. According to a NIOSH official, one responder is now a candidate for lung transplantation and if this procedure is performed, it will be covered by federal funds. If funds set aside for hospital care are not completely used by the end of fiscal year 2007, he said they could be carried over into fiscal year 2008 for this purpose or used for outpatient services. After receiving NIOSH's funding for treatment services in fall 2006, the NY/NJ WTC Consortium ended its efforts to obtain reimbursement from health insurance held by responders with coverage. Consortium officials told us that efforts to bill insurance companies involved a heavy administrative burden and were frequently unsuccessful, in part because the insurance carriers typically denied coverage for work-related health conditions on the grounds that such conditions should be covered by state workers' compensation programs. However, according to officials from the NY/NJ WTC Consortium, responders trying to obtain workers' compensation coverage routinely experienced administrative hurdles and significant delays, some lasting several years. Moreover, according to these program officials, the majority of responders enrolled in the program either had limited or no health insurance coverage. According to a labor official, responders who carried out cleanup services after the WTC attack often did not have health insurance, and responders who were construction workers often lost their health insurance when they became too ill to work the number of days each quarter or year required to maintain eligibility for insurance coverage. According to a NIOSH official, although the agency had not received authorization as of August 30, 2007, to use the $50 million emergency supplemental appropriation made to CDC in May 2007, NIOSH was formulating plans for use of these funds to support the WTC treatment programs in fiscal year 2008. Officials involved in the WTC health programs implemented by government agencies or private organizations--as well as officials from the federal administering agencies--derived lessons from their experiences that could help with the design of such programs in the future. Lessons include the need to quickly identify and contact responders and others affected by a disaster, the value of a centrally coordinated approach for assessing individuals' health, and the importance of addressing both physical and mental health effects. Officials involved in WTC monitoring efforts discussed with us the importance of quickly identifying and contacting responders and others affected by a disaster. They said that potential monitoring program participants could become more difficult to locate as time passed. In addition, potential participants' ability to recall the events of a disaster may decrease over time, making it more difficult to collect accurate information about their experiences and health. However, the time it takes to design, fund, approve, and implement monitoring programs can lead to delays in contacting the people who were affected. For example, the WTC Health Registry received funding in July 2002 but did not begin collecting data until September 2003--2 years after the disaster. From July 2002 through September 2003, the program's activities included developing the Registry protocol, testing the questionnaire, and obtaining approval from institutional review boards. Our work on Hurricane Katrina found that no one was assigned responsibility for collecting data on the total number of response and recovery workers deployed to the Gulf and no agency collected it. Furthermore, officials from the WTC health programs told us that health monitoring for future disasters could benefit from additional centrally coordinated planning. Such planning could facilitate the collection of compatible data among monitoring efforts, to the extent that this is appropriate. Collecting compatible data could allow information from different programs to be integrated and contribute to improved data analysis and more useful research. In addition, centrally coordinated planning could help officials determine agency roles so important aspects of disaster response efforts are not overlooked. For example, as we reported in March 2007, federal agencies involved in the response to the Hurricane Katrina disaster disagreed over which agency should fund the medical monitoring of responders. We recommended that the relevant federal agencies involved clearly define their roles and resolve this disagreement so that the need may be met in future disasters. In general, there has been no systematic monitoring of the health of responders to Hurricane Katrina. Officials also told us that efforts to address health effects should be comprehensive--encompassing responders' physical and mental health. Officials from the NY/NJ WTC Consortium told us that the initial planning for their program had focused primarily on screening participants' physical health and that they originally budgeted only for basic mental health screening. Subsequently, they recognized a need for more in-depth mental health screening, including greater participation of mental health professionals, but the program's federal funding was not sufficient to cover such screening. By collaborating with the Mount Sinai School of Medicine Department of Psychiatry, program officials were able to obtain philanthropic funding to develop a more comprehensive mental health questionnaire, provide in-person psychiatric screening, and, when necessary, provide more extensive evaluations. Our work on Hurricane Katrina found problems with the provision of mental health services during the response to the disaster. Not all responders who needed mental health services received them. For example, it was difficult to get mental health counselors to go to the base camps where workers lived during the response and to get counselors to provide services during off-hours to workers who did not have standard work schedules. Screening and monitoring the health of the people who responded to the September 11, 2001, attack on the World Trade Center are critical for identifying health effects already experienced by responders or those that may emerge in the future. In addition, collecting and analyzing information produced by screening and monitoring responders can give health care providers information that could help them better diagnose and treat responders and others who experience similar health effects. While some groups of responders are eligible for screening and follow-up physical and mental health examinations through the federally funded WTC health programs, other groups of responders are not eligible for comparable services or may not always find these services available. Federal responders have been eligible only for the initial screening examination provided through the WTC Federal Responder Screening Program. NIOSH, the administrator of the program, has been considering expanding the program to include monitoring but has not done so. In addition, many responders who reside outside the NYC metropolitan area have not been able to obtain screening and monitoring services because available services are too distant. Moreover, HHS has repeatedly interrupted the programs it established for federal responders and nonfederal responders outside of NYC, resulting in periods when no services were available to them. HHS continues to fund and coordinate the WTC health programs and has key federal responsibility for ensuring the availability of services to responders. HHS and its agencies have recently taken steps to move toward providing screening and monitoring services to federal responders and to nonfederal responders living outside of the NYC area. However, these efforts are not complete, and the stop-and-start history of the department's efforts to serve these groups does not provide assurance that the latest efforts to extend screening and monitoring services to these responders will be successful and will be sustained over time. Therefore we recommended in July 2007 that the Secretary of HHS take expeditious action to ensure that health screening and monitoring services are available to all people who responded to the attack on the WTC, regardless of who their employer was or where they reside. As of September 2007 the department has not responded to this recommendation. Finally, important lessons have been learned from the WTC disaster. These include the need to quickly identify and contact responders and others affected by a disaster, the value of a centrally coordinated approach for assessing individuals' health, and the importance of addressing both physical and mental health effects. Consideration of these lessons by federal agencies is important in planning for the response to future disasters. Mr. Chairman, this completes my prepared remarks. I would be happy to respond to any questions you or other members of the committee may have at this time. For further information about this testimony, please contact Cynthia A. Bascetta at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Helene F. Toiv, Assistant Director; Hernan Bozzolo; Frederick Caison; Anne Dievler; and Roseanne Price made key contributions to this statement. September 11: HHS Needs to Ensure the Availability of Health Screening and Monitoring for All Responders. GAO-07-892. Washington, D.C.: July 23, 2007. Disaster Preparedness: Better Planning Would Improve OSHA's Efforts to Protect Workers' Safety and Health in Disasters. GAO-07-193. Washington, D.C.: March 28, 2007. September 11: HHS Has Screened Additional Federal Responders for World Trade Center Health Effects, but Plans for Awarding Funds for Treatment Are Incomplete. GAO-06-1092T. Washington, D.C.: September 8, 2006. September 11: Monitoring of World Trade Center Health Effects Has Progressed, but Program for Federal Responders Lags Behind. GAO-06-481T. Washington, D.C.: February 28, 2006. September 11: Monitoring of World Trade Center Health Effects Has Progressed, but Not for Federal Responders. GAO-05-1020T. Washington, D.C.: September 10, 2005. September 11: Health Effects in the Aftermath of the World Trade Center Attack. GAO-04-1068T. Washington, D.C.: September 8, 2004. 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Six years after the attack on the World Trade Center (WTC), concerns persist about health effects experienced by WTC responders and the availability of health care services for those affected. Several federally funded programs provide screening, monitoring, or treatment services to responders. GAO has previously reported on the progress made and implementation problems faced by these WTC health programs, as well as lessons learned from the WTC disaster. This testimony is based on previous GAO work, primarily September 11: HHS Needs to Ensure the Availability of Health Screening and Monitoring for All Responders ( GAO-07-892 , July 23, 2007). This testimony discusses (1) status of services provided by the Department of Health and Human Services' (HHS) WTC Federal Responder Screening Program, (2) efforts by the Centers for Disease Control and Prevention's National Institute for Occupational Safety and Health (NIOSH) to provide services for nonfederal responders residing outside the New York City (NYC) area, and (3) lessons learned from WTC health programs. For the July 2007 report, GAO reviewed program documents and interviewed HHS officials, grantees, and others. In August and September 2007, GAO updated selected information in preparing this testimony. In July 2007, following a reexamination of the status of the WTC health programs, GAO recommended that the Secretary of HHS take expeditious action to ensure that health screening and monitoring services are available to all people who responded to the WTC attack, regardless of who their employer was or where they reside. As of September 2007 the department has not responded to this recommendation. As GAO reported in July 2007, HHS's WTC Federal Responder Screening Program has had difficulties ensuring the uninterrupted availability of screening services for federal responders. From January 2007 to May 2007, the program stopped scheduling screening examinations because there was a change in the program's administration and certain interagency agreements were not established in time to keep the program fully operational. From April 2006 to March 2007, the program stopped scheduling and paying for specialty diagnostic services associated with screening. NIOSH, the administrator of the program, has been considering expanding the program to include monitoring--that is, follow-up physical and mental health examinations--but has not done so. If federal responders do not receive monitoring, health conditions that arise later may not be diagnosed and treated, and knowledge of the health effects of the WTC disaster may be incomplete. NIOSH has not ensured the availability of screening and monitoring services for nonfederal responders residing outside the NYC area, although it recently took steps toward expanding the availability of these services. In late 2002, NIOSH arranged for a network of occupational health clinics to provide screening services. This effort ended in July 2004, and until June 2005 NIOSH did not fund screening or monitoring services for nonfederal responders outside the NYC area. In June 2005, NIOSH funded the Mount Sinai School of Medicine Data and Coordination Center (DCC) to provide screening and monitoring services; however, DCC had difficulty establishing a nationwide network of providers and contracted with only 10 clinics in seven states. In 2006, NIOSH began to explore other options for providing these services, and in May 2007 it took steps toward expanding the provider network. However, as of September 2007 these efforts are incomplete. Lessons have been learned from the WTC health programs that could assist in the event of a future disaster. Lessons include the need to quickly identify and contact responders and others affected by a disaster, the value of a centrally coordinated approach for assessing individuals' health, and the importance of addressing both physical and mental health effects. Consideration of these lessons by federal agencies is important in planning for the response to future disasters.

Medicare is the nation's largest health insurance program, covering about 39 million elderly and disabled beneficiaries at a cost of more than $193 billion. Between 1990 and 1997, Medicare experienced spending increases averaging 9.8 percent per year to make it one of the fastest growing parts of the federal budget. This growth has slowed somewhat in the past 2 years. The Congressional Budget Office projects that Medicare's share of gross domestic product will rise almost one-third by 2009. This substantial growth in Medicare spending will continue to be fueled by demographic and technological changes. Medicare's rolls are expanding and are projected to increase rapidly with the retirement of the baby boom generation. For example, today's elderly make up about 13 percent of the total population; by 2030, they will comprise 20 percent as the baby boom generation ages. Individuals aged 85 and older make up the fastest growing group of beneficiaries. So, in addition to the increased demand for health care services due to sheer numbers, the greater prevalence of chronic health conditions associated with aging will further boost utilization. medical insurance," or part B, which covers physician and outpatient hospital services, diagnostic tests, ambulance services, and other services and supplies. A BBA provision that shifted the financing of some home health services from part A to part B helped extend the HI trust fund's solvency. Other BBA reforms, designed to slow program spending, address both Medicare's managed care and fee-for-service components. Medicare's managed care program covers the growing number of beneficiaries who have chosen to enroll in prepaid health plans, where a single monthly payment is made for all necessary covered services. About 6.8 million people--about 17 percent of all Medicare beneficiaries--were enrolled in more than 450 managed care plans as of December 1, 1998. Most of Medicare's beneficiaries, however, receive health care on a fee-for-service basis, whereby providers are reimbursed for each covered service they deliver to beneficiaries. One way in which the BBA seeks to restructure Medicare is by encouraging greater managed care participation. Under the Medicare+Choice program, a broader range of health plans, such as preferred provider organizations and provider-sponsored organizations, are permitted to participate in Medicare. BBA's emphasis on Medicare+Choice reflects the perspective that increased managed care enrollment will help slow Medicare spending while expanding beneficiaries' health plan options. Our recent work has examined two aspects of the Medicare+Choice program--payments and consumer information initiatives. BBA provisions dealing with payments to Medicare+Choice plans acknowledge that Medicare's prior managed care payment method for health maintenance organizations (HMO) and other risk plans failed to save the government money and created wide disparities in payment rates across counties. The BBA establishes a new rate-setting methodology for 1998 and future years, incorporating adjustment rates for the health and expected service use of managed care enrollees to avoid overpayment. It also guarantees health plans a minimum payment level to encourage them to locate in areas that previously had lower rates and few, if any, Medicare participating health plans. Other provisions addressing consumer information needs are designed to raise beneficiary participation in Medicare+Choice and promote more effective quality-based competition among plans. Context for BBA's rate-setting provisions: BBA modifications to Medicare's health plan payment method acknowledge the problem of flawed capitation rates that, historically, have been paid to HMOs. Our work has demonstrated that these rates have produced billions of dollars in aggregate excess payments and inappropriate payment disparities across counties. The fundamental problem we found was that HMO payment rates were based on health care spending for the average nonenrolled beneficiary, while the plans' enrollees tended to be healthier than average nonenrollees, a phenomenon known as favorable selection. Some analysts expected excess payments to diminish with increased enrollment. Instead, the excess continued to grow, since rates were based on the rising concentrations of higher-cost beneficiaries remaining in fee-for-service. Risk adjustment is a tool for setting capitation rates so that they reflect enrollees' expected health costs as accurately as possible. This tool is particularly important given Medicare's growing use of managed care and the potential for favorable selection, which, if not taken into account, generates excess payments. Medicare's current risk adjuster--based only on demographic factors such as age and sex--cannot sufficiently lower rates to be consistent with the expected costs of managed care's healthier population. For example, a senior who was relatively healthy and another who suffered from a chronic condition--even if they were of the same age and sex--would have very different expected health care needs; but the current risk adjuster does not take those differences into account. To correct this problem, the BBA requires HCFA to devise a new risk adjuster that incorporates patient health status factors. HCFA had to develop and report on the new risk adjuster by March 1 of this year and is required to put the method in place by January 2000. Design, implementation, and impact issues: HCFA's proposed interim risk adjuster--to be implemented in 2000--relies exclusively on hospital inpatient data to measure health status. While not perfect, the proposed risk adjuster does link the rates paid more closely to projections of Medicare enrollees' medical costs. Ideally, the risk adjuster would measure health status with complete and reliable data from other settings, such as physicians' offices, but these data are not currently available. Given the reliance on only hospital data, HCFA has taken steps to avoid rewarding plans that hospitalize patients unnecessarily or, conversely, penalizing efficient plans that provide care in less costly settings. A "next generation" of risk adjustment based on the services beneficiaries receive in all settings is scheduled for 2004. HCFA plans to phase in the use of the interim risk adjuster and, in so doing, will avoid sharp payment changes that could adversely affect beneficiaries and plans. Such changes could be detrimental to beneficiaries if plans, in response, substantially scaled back their benefit packages or reconsidered their commitment to the Medicare+Choice program. Currently, there is concern about a recent surge in plan drop-outs from Medicare+Choice. As of January 1999, 99 of the capitated plans in operation during 1998 had withdrawn or reduced their Medicare service areas. Industry representatives have stated that plans may have dropped out partially in anticipation of reduced payments, which could result when the interim risk adjuster is implemented. Plans have also cited the administrative burden associated with some of the new Medicare+Choice regulations as a significant reason for their withdrawal decisions. while some plans are dropping out of the program, others are interested in signing new contracts. In fact, 16 applications for new or expanded service areas have recently been approved and 44 more are pending. Context for BBA's information campaign provisions: Capitalizing on changes in the delivery of health care, BBA's introduction of new health plan options is intended to create a market in which different types of health plans compete to enroll and serve Medicare beneficiaries. The BBA reflects the idea that consumer information is an essential component of a competitive market. From the beneficiary's viewpoint, information on available plans needs to be accurate, comparable, accessible, and user-friendly. Informed choices are particularly important as the BBA phases out the beneficiary's opportunity to disenroll from a plan on a monthly basis and moves toward the private sector practice of annual reconsideration of plan choice. The BBA mandated that, as part of a national information campaign, HCFA undertake several activities that could help beneficiaries make enrollment decisions regarding Medicare+Choice. Each October, prior to a mandated annual, coordinated enrollment period, HCFA must distribute to beneficiaries an array of general information on, among other things, enrollment procedures, rights, and the potential for Medicare+Choice contract termination by a participating plan. The BBA also required HCFA to provide beneficiaries with a list of available participating plans and a comparison of these plans' benefits. The agency must also maintain a toll-free telephone number and an Internet site as general sources of information about plan options, including traditional fee-for-service Medicare. Design, implementation, and impact issues: The BBA-mandated information campaign is a first-time and massive undertaking for HCFA. The effort is well under way, but relative to the ideal--a market in which informed consumers prod competitors to offer the best value--many challenges lie ahead. comparisons difficult for beneficiaries. Standardized language on benefit and coverage definitions would facilitate (1) HCFA's oversight functions to ensure accurate information, (2) plans' compliance with reporting requirements, and (3) beneficiary decisionmaking. HCFA intends to require plans to begin using a standardized format for some information in anticipation of the November 1999 enrollment period. HCFA is also in the process of making summary data available through several sources. In 1998, as part of a five-state pilot project, HCFA provided beneficiaries with a handbook containing comparative information on the Medicare+Choice plans available in their area and access to a toll-free telephone line. It also established an Internet site with similar information about plans available nationwide. These efforts made important strides, but because of plan pull-outs late in the year, some of the information beneficiaries received was inaccurate. Critical now is a thorough evaluation of these efforts to ensure that the information provided is clear, sufficient, and helpful to beneficiaries' decisionmaking. Assessing how to make these efforts cost-effective--that is, targeting the right amounts and types of information to different groups of beneficiaries--is also of vital importance. The BBA also makes fundamental changes to Medicare's fee-for-service component, which represents about 87 percent of program outlays and covers about 33 million beneficiaries. Mandated PPSs will alter how reimbursements are made to SNFs, HHAs, hospital outpatient departments, and rehabilitation facilities. Instead of generally paying whatever costs providers incur, HCFA's mandate is to establish rates that give providers incentives to deliver care and services more efficiently. Our work on SNF and home health benefits shows the importance of the design and implementation details of PPSs to achieving expected BBA savings and ensuring that Medicare beneficiaries have access to appropriate services. administrative overhead. Payments for ancillary services, such as physical, occupational, or speech therapy, however, were virtually unlimited. These unchecked ancillary service payments have been a major contributor to significant increases in daily reimbursements to SNFs. Because providing more of these services generally triggered higher payments, facilities had no incentive to deliver services efficiently or only when necessary. The BBA called for phasing in a PPS for SNF care beginning after July 1, 1998, to bring program spending under control. Design, implementation, and impact issues: Under the PPS, SNFs receive a payment for each day of care provided to a Medicare beneficiary. The payment, called a per diem rate, is based on the average daily cost of providing all Medicare-covered SNF services, as reflected in facilities' 1995 costs. Since not all patients require the same amount of care, the per diem rate is "case-mix" adjusted to take into account the nature of each patient's condition and expected care needs. Facilities that can care for beneficiaries for less than this case-mix-adjusted per diem amount will benefit financially, whereas SNFs with costs higher than the adjusted per diem rate will be at risk for the difference between their costs and the payments. The SNF PPS is expected to control Medicare spending because the per diem rate covers all services, so SNFs have an incentive to provide services efficiently and judiciously. Moreover, since payments vary with patient needs, the PPS is intended to ensure access to these services. We are concerned, however, that the design of the case-mix adjuster preserves the opportunity for providers to increase their compensation by supplying potentially unnecessary services. As stated, the SNF PPS divides beneficiaries into case-mix groups to reflect differences in patient needs that affect the cost of care. Each group is intended to define clinically similar patients who are expected to incur similar costs. An adjustment is associated with each group to account for these cost differences. A facility then receives a daily payment that is the same for each patient within a group. Since the payments do not vary with the actual costs incurred, a SNF has an incentive to reduce the costs of caring for the patients in each case-mix group. level of services required for placement in a particular group. This reduces the average cost for the SNF's patients in that case-mix group but does not reduce the Medicare payments for these patients. Thus, expected Medicare savings may not be achieved. We are also concerned that the data underlying the SNF rates overstate the reasonable costs of providing services and may not appropriately reflect costs for patients with different care needs. Most of the cost data used to set the SNF rates were not audited. Of particular concern are therapy costs, which are likely inflated because there have been few limits on these payments. Even if additional audits were to uncover significant inappropriate costs, HCFA maintains that it has no authority to adjust the base rates after the implementation of the new system. Furthermore, the case-mix adjusters are based on cost information on about 4,000 patients. This sample may simply be too small to reliably estimate these adjusters, particularly given the substantial variation in treatment patterns among SNFs. As a result, the case-mix-adjusted rates may not vary appropriately to account for the services facilities are expected to provide--rates will be too high for some types of patients and too low for others. Under the SNF PPS, whether a SNF patient is deemed eligible for Medicare coverage and how much will be paid are based on a facility's assessment of its patients and its judgment. Monitoring these assessments and determinations is key to realizing expected savings from the system. Texas, which implemented a similar reimbursement system for Medicaid, conducts on-site reviews to monitor the accuracy of patient assessments and finds a continuing error rate of about 20 percent. HCFA has no plans to undertake as extensive a monitoring effort. However, without adequate vigilance, inaccurate, inappropriate, and even fraudulent assessments could compromise the benefits of the PPS. Context for home health provisions: Medicare spending for home health care rose even more rapidly than spending for SNF services--at an average annual rate of 27.9 percent between 1990 and 1996. Several factors accounted for this spending growth, particularly relaxed coverage requirements that, over time, have made home health care available to more beneficiaries, for less acute conditions, and for longer periods of time. Essentially, Medicare's home health benefit gradually has been transformed from one that focused on patients needing short-term care after hospitalization to one that serves chronic, long-term-care patients as well. To control spending while ensuring the appropriate provision of services, the BBA mandated important changes in the payment method and provider requirements for home health services. HCFA is required to establish a PPS for HHAs by fiscal year 2001. Designing an appropriate system for HHAs will be particularly challenging because of certain characteristics of the benefit. Home health care is a broad benefit that covers a wide variety of patients, many of whom have multiple health conditions; and the standards for care are not well defined. Consequently, the case-mix adjuster and payment rates must account for substantial variation in the number, type, and duration of visits. Further, the wide geographic variation in the use of home health care makes it difficult to determine appropriate treatment patterns that must be accounted for in the overall level of payment. A final concern has to do with the quality and adequacy of services. Since the services are delivered in beneficiaries' homes, oversight is particularly critical when payment changes are implemented to constrain program outlays. Recognizing the difficulty of developing and implementing a PPS, the BBA required HCFA to pay HHAs under an interim system. The interim system builds on payment limits already in place by making them more stringent and by providing incentives for HHAs to control the number and mix of visits to each beneficiary. Design, implementation, and impact issues: Under the interim payment system, which took effect October 1, 1997, HHAs are paid their costs subject to the lower of two limits. The first limit builds on the existing aggregate per-visit cost limits but makes them more stringent. The second limit caps total annual Medicare payments on the basis of the number of beneficiaries served and an annual per-beneficiary amount. The annual per-beneficiary amount is based on agency-specific and regional average, per-beneficiary payments, and the limit aims to control the number of services provided to users. The blending of agency-specific and regional amounts is intended to account for the significant differences in service use across agencies and geographic areas. historic growth in the home health industry has been such that there were still over 9,000 HHAs--more than there were in October 1995--to provide services to Medicare beneficiaries. Further, half of the closures were in just four states--California, Louisiana, Oklahoma, and Texas--three of which had experienced agency growth well above the national average. The closures could be a market correction for overexpansion in light of the BBA's signal that Medicare would not support the double-digit increases in spending of the previous few years. The closures alone are not a measure of any impact on access for Medicare beneficiaries to home health services--which is the predominant concern. Since home health agencies require little physical capital, other agencies may be able to quickly absorb the staff and patients of closing agencies. We have attempted to monitor the impact of the interim payment system on access for this Committee as well as for the House Committees on Commerce and Ways and Means. Last fall, we reported that interviews with hospital discharge planners and local aging organization representatives in seven states with high numbers of closures had not indicated a change over the past year in the willingness or ability of HHAs in their areas to serve Medicare beneficiaries. We are continuing this work, expanding the number of areas examined. Recently available claims information will allow us to extend this monitoring further--pinpointing areas where there has been a decline or leveling off of home health utilization. We will provide the Committee a report next month and another this summer on our ongoing work to assess access to home health care. The brief experience with some of the major Medicare provisions of the BBA demonstrates the challenges to implementing meaningful reform. HCFA has fallen behind in instituting some changes and has had difficulty implementing others because of constrained resources, lack of experience, or inadequate data. At the same time, various provider groups have increasingly come to the Congress for relief. We believe that any significant alterations to key BBA provisions should be based on thorough analysis or sufficient experience to fully understand their effects. Mr. Chairman, this concludes my statement. I will be happy to answer any questions you or the Committee Members may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a congressional request, GAO discussed the implementation and impact of the Medicare provisions in the Balanced Budget Act of 1997 (BBA), focusing on: (1) the Medicare Choice program, particularly the payment method and consumer information efforts; and (2) prospective payment systems (PPS) for skilled nursing facilities (SNF) and home health agencies (HHA) in Medicare's traditional fee-for-service program. GAO noted that: (1) changes of the magnitude of those in the BBA require significant efforts to implement well and are subject to continual scrutiny; (2) GAO recently reported that the efforts of the Health Care Financing Administration (HCFA) to put the BBA provisions in place have been extensive and noteworthy, and the agency has made substantial progress in implementing the majority of the Medicare-related BBA mandates; (3) at the same time, it has encountered obstacles; (4) intense pressure to resolve year 2000 computer compliance issues has slowed HCFA's efforts; (5) in undertaking certain major initiatives, the agency has had to cope with inadequate experience and insufficient information; (6) thus, achieving the objectives of the BBA will require HCFA to refine and build on its initial efforts; (7) reforms of the payment methods for Medicare Choice plans are under way; (8) the withdrawal of some managed care plans has raised questions about how to maintain desired access for beneficiaries while implementing needed changes to plan payments and participation requirements; (9) HCFA has also initiated an information campaign to provide beneficiaries with new tools to make informed health plan choices and create stronger, quality-based competition; (10) some aspects of the campaign have only been piloted and certain problems did develop; refining these efforts to make them more useful and effective for beneficiaries is now critical; (11) the BBA's mandate to replace cost-based reimbursement methods with PPS constitutes another major program reform; (12) the phase-in of the PPS for SNFs began on schedule on July 1, 1998; (13) design flaws and inadequate underlying data used to establish the payment rates may compromise the system's ability to meet the twin objectives of slowing spending growth while promoting appropriate beneficiary care; (14) GAO has not found evidence that the closures or the interim payment system has significantly affected beneficiary access to home health care; (15) GAO's monitoring of potential access problems is continuing as more data on any effects of the interim system become available; (16) the impact of BBA's significant transformations of Medicare could generate pressure to undo many of the act's provisions; (17) in this environment, Congress will face difficult decisions that could pit particular interests against a more global interest in preserving Medicare for the long term; and (18) GAO believes that it would be a mistake to significantly modify BBA's provisions without thorough analysis or giving them a fair trial over a reasonable period of time.

The AIM-9 family of air-to-air missiles has protected U.S. fighter aircraft for over 40 years, but now there are more modern foreign missiles that may present a threat to U.S. aircraft. The U.S. Navy and Air Force considered buying a foreign missile but determined that the best solution to meet U.S. requirements was to extensively upgrade the current AIM-9M missile. The services selected Hughes Missile Systems Company (now the Raytheon Corporation) to develop and produce a very maneuverable missile that, together with a new helmet-mounted cueing system, is expected to be the best in the world. The AIM-9 Sidewinder family of air-to-air missiles is carried on all tactical fighter aircraft and is used at short ranges when target aircraft are too close for radar-guided missiles to be effective. The Sidewinder was first deployed in the 1950s--as the AIM-9B. Over the years, improvements were made as new models were introduced. The missiles have been sold to many friendly countries. The current missile, the AIM-9M, evolved in 1978. U.S. fighter aircraft equipped with the AIM-9M missile, however, are facing modern foreign-built missiles and advanced cueing/targeting systems. The rules of engagement for U.S. pilots require that, in many situations, they make a positive identification before firing on an adversary. This results in the pilot's not being able to fire until the target aircraft is well within visual range. At combat speeds such an encounter can quickly evolve into a close-in fight, during which a short-range missile is required. A joint Navy and Air Force study predicts that a significant percentage of air-to-air encounters will result in a close-in flight. In April 1996, the Air Force Chief of Staff testified that U.S. pilots have the fourth best short-range missile in the world. Modern short-range missile systems with their cueing/targeting systems can engage targets throughout the forward hemisphere of the aircraft, providing a decisive advantage in a close-in fight. The services are trying to develop tactics and countermeasures to neutralize these threats, but there is general agreement that a more capable U.S. short-range missile system is needed as soon as possible. In the 1970s, the United States and several European countries signed a Memorandum of Agreement that specified that the Europeans would develop a new short-range missile to replace the AIM-9 Sidewinder series. That missile became the Advanced Short-Range Air-to-Air Missile (ASRAAM). In the late 1980s, however, the European consortium dissolved. When the consortium dissolved, the Navy and the Air Force reexamined U.S. requirements and determined that the ASRAAM did not have the capability they required. The United States subsequently left the ASRAAM program. The two services then worked on separate upgrades to the AIM-9M. After false starts with their separate programs, a joint Navy and Air Force program with the Navy as lead service was started to extensively upgrade the AIM-9M. The upgraded missile is the AIM-9X. As a part of the alternative evaluation process before starting the AIM-9X program, the services considered acquiring one of the modern foreign missiles such as the Russian AA-11, the Israeli PYTHON 4, or the British ASRAAM as an alternative to developing a new U.S. missile. DOD determined, however, that none of these missiles was able to meet all of the U.S. requirements. The services conducted an evaluation of the ASRAAM, including a 6-month Foreign Comparison Test that included firing the missile from a U.S. F-16 aircraft. The ASRAAM is electrically and physically compatible with U.S. aircraft and uses the same infrared sensor as the AIM-9X. The evaluation, however, showed that ASRAAM does not meet all of the U. S. performance requirements. Also, the evaluation showed that, because of the additional time and cost that would be needed to upgrade, test, and integrate ASRAAM for U.S. aircraft, it offered no advantage over the proposed AIM-9X missile. During the 2-year AIM-9X concept development phase, the services analyzed user needs, current and future threats, and available technology to determine the requirements for the new missile. The resulting AIM-9X system requirement has five key performance parameters: the ability to operate during the day or at night; the ability to operate over land and at sea in the presence of infrared countermeasures; weight, size, and electrical compatibility with all current U.S. fighters and the F-22; the ability to acquire, track, and fire on targets over a wider area than the AIM-9M; and a high probability that a missile launched will reach and kill its target. The analyses showed that user requirements could be met and that technical risk could be reduced, by modifying the existing AIM-9M and developing a new targeting/cueing system. The AIM-9X missile is planned to have increased resistance to countermeasures and improved target acquisition capability over the AIM-9M. It will have a new infrared seeker, a tracker to interpret what the seeker sees, a streamlined missile body, and rocket motor thrust vectoring for improved maneuvering. It will be carried on all U.S. fighter aircraft, including the F/A-18, F-15, F-16, and F-22. An 18-month AIM-9X competitive demonstration and validation program began in 1994 with the Hughes Missile Systems Company and the Raytheon Corporation as the competing contractors. Both companies demonstrated, among other things, how they would reduce the technical risk of developing the AIM-9X missile. Examples of demonstration and validation work include trade studies, simulating missile performance, analyzing missile compatibility with Navy and Air Force aircraft, and flight testing target-tracking capability. Additionally, the contractors were required to plan for manufacturing the missile, including identifying new or unique processes and special tooling and facilities requirements. Hughes was selected as the AIM-9X missile contractor in December 1996. Hughes has total performance responsibility, including development, production, and maintenance support for the missile. Engineering and manufacturing development began in January 1997 and is planned to end in 2001. The services plan to buy a total of 10,000 missiles at an average unit cost of $264,000 (then-year dollars). The AIM-9X missile is shown in figure 1.1. A separate, parallel program is developing a helmet-mounted cueing system that would allow U.S. pilots to aim the AIM-9X missile seeker toward a target aircraft by turning their heads and looking at the target. The pilot can then fire the missile without having to turn the aircraft toward the target, increasing the probability of killing a hostile aircraft before it can launch a missile. Another effort is developing the necessary hardware and software modifications to integrate the missile and helmet into the aircraft. All three elements of the AIM-9X weapon system--the missile, helmet, and aircraft modifications--are seen as critical to countering the capabilities of modern threat missiles. The Chairman, Subcommittee on Military Research and Development, House Committee on National Security, requested that we provide an independent assessment of the AIM-9X program's status. Our objectives were to determine (1) the services' efforts to reduce missile development risk, (2) the missile program's plan to transition from development to production, and (3) the importance of separately managed but essential supporting systems. To evaluate the missile's development risk, we visited the program office and the contractor where we discussed technology and schedule risk. We reviewed the program acquisition and test plans. We visited the Naval Air Weapons Center at China Lake, California, where we discussed the missile program's technology and schedule with the government short-range missile experts. We reviewed reports prepared by the contractors during the program demonstration and validation phase. We also reviewed several studies of foreign missiles, including the Senior Review Team analysis of the ASRAAM program. To assess the missile program's plan to transition from development to production, we examined the planned development and operational test schedules and production plans. We considered the amount and type of testing that is planned to be accomplished before the first and subsequent production decisions. We discussed test plans and potential risks with program, contractor, and DOD officials charged with managing and overseeing missile flight testing. We also reviewed our previous reports on other major acquisition systems with regard to readiness to enter low-rate initial production. We reviewed the helmet-mounted cueing system, a separately managed but essential supporting system, to determine its importance to the AIM-9X system. We discussed program technical issues with program managers. We also compared schedule plans for the AIM-9X missile, helmet-mounted cueing system, and associated aircraft modifications. During the course of this review, we met with representatives from the DOD Inspector General, Naval Air Systems Command, and Air Force Headquarters, Washington, D.C.; Commander in Chief, Atlantic Fleet, Norfolk, Virginia; Naval Air Weapons Center, China Lake, California; Air Combat Command, Langley Air Force Base, Virginia; Aeronautical Systems Center and National Air Intelligence Center, Wright-Patterson Air Force Base, Ohio; ASRAAM Senior Review Team, Baltimore, Maryland; and Hughes Missile Systems Company, Tucson, Arizona. We performed our audit between July 1996 and October 1997 in accordance with generally accepted government auditing standards. The AIM-9X missile development program is designed to balance the requirements for a more capable short-range missile with the users' limited resources and the need to field the new missile as soon as possible. Key elements of the approved development plan are strategies to reduce technical risk and incentives to lower cost and ensure schedule performance. By early 1999, when the AIM-9X missile design is expected to be finalized and flight tests are underway, a more accurate assessment of the program status can be made. Technology problems are often the cause of cost growth and schedule delays in development programs. To help ensure a successful AIM-9X missile development program, the services have adopted several strategies to minimize technical risk. Among these are: using existing subsystems, components, and items not requiring conducting a competitive demonstration and validation of new technology; combining government and contractor technical expertise through integrated product teams. The AIM-9X missile will use some existing subsystems that do not require development. For example, several key components are identical to those used in the AIM-9M missile, including the warhead, rocket motor, and fuze. These components satisfy user requirements and can be obtained either from existing inventory missiles or from new production. In either case, the design and production processes for these items are tested and proven. The winning Hughes missile design also includes many nondevelopmental items. For example, Hughes will use fins, an airframe, and an engine control system previously developed and tested by the Air Force. The cryoengine, which cools the missile sensor, is a modified version of a similar device used in other systems. These components do not require lengthy development and testing but will require some modification for the AIM-9X. Hughes officials told us that over 70 percent of the missile design uses parts that do not require development. The company also estimates that 66 percent of AIM-9X missile software can be obtained from existing programs. To help anticipate, identify, and solve technical problems, the government's technical experts in short-range missile development have been added to the Hughes AIM-9X development team as a part of the integrated product teams concept. Technical experts from the Naval Air Warfare Center at China Lake, California, and the Aeronautical Systems Center at Eglin Air Force Base, Florida, are now a part of the AIM-9X team. Under this teaming approach, the combined knowledge and efforts of both contractor and government are focused on the development process. Hughes has also implemented a comprehensive technical risk assessment system that identifies and tracks all known technical risks in the program. Each risk is described, quantified, monitored, and reported. For example, Hughes has assessed the guidance and control and thrust vectoring system as moderate to low-risk items. The company has developed management plans to address these risks. Affordability is a central objective of the AIM-9X missile program. The emphasis on cost began during the requirements definition process, continued through the demonstration and validation phase, was a factor in the selection of the development contractor, and is an integral part of the program acquisition strategy. As a DOD flagship program for the Cost as an Independent Variable Initiative--under which cost is considered more as a constraint and less as a variable--the AIM-9X program has incorporated a series of acquisition reforms to focus both government and contractor efforts to reduce and control program costs. As a program objective, AIM-9X affordability is second only to achieving the missile's key performance characteristics. Low cost was and remains one of the users' critical requirements for the system. During the concept development phase, an assessment of needed capabilities and anticipated cost considered the projected threat, available and emerging technologies, and projected resources. Performance and cost trade studies identified the minimum essential performance requirements and determined they could be obtained at an acceptable cost if the AIM-9M was upgraded with a new sensor and airframe instead of developing an entirely new missile. Reducing AIM-9X missile development and production cost and obtaining high confidence in the contractors' cost estimates and cost management approach were key objectives of the 18-month demonstration phase. Under the competitive pressure of the winner-take-all development contract, the government required the contractors to establish design-to-cost goals and implementation plans, conduct affordability and producibility studies, and propose a production quantity and price structure. According to the program manager, this emphasis on cost control and cost management both reduced the expected cost of the program and increased the program office's confidence that the contractor's development and production cost proposal was sound and likely to be achieved. Eight initiatives were pursued during the demonstration phase to reduce program costs with only minor changes to the system's performance requirements resulting in an estimated cost avoidance of $1.2 billion. Examples of successful reductions include relaxing computer processing time requirements (which eliminated one circuit board) and standardizing missile seeker cooling methods (which eliminated the need for two different cooling systems). The AIM-9X missile program has adopted several strategies to establish a realistic and achievable development schedule that provides the first missiles to Navy and Air Force fighter units as soon as possible. Principal among these strategies is the requirement that Hughes develop and follow a detailed integrated master plan and master schedule. The program manager told us that the government strategy for reducing schedule risk on the AIM-9X program has been to encourage the contractor to develop and follow soundly based development plans. Accordingly, both contractors were required to develop and submit integrated master plans and schedules for development and low-rate initial production during the demonstration phase. Following the successful demonstration phase, Hughes and the missile program office reexamined the proposed development schedule. On the bases of that reexamination, they agreed to reduce the development schedule from 68 to 61 months and to begin low-rate initial production a year earlier, thereby lowering development cost by $35 million. This reduction, according to the program manager, was made possible by the Hughes comprehensive development and test schedule. The AIM-9X missile development program contains a series of strategies to reduce technical risk and incentives to lower cost and ensure schedule performance. Whether program efforts to reduce technical, cost, and schedule risk will succeed will not be known for at least another year. Both program and contractor officials told us that most of the AIM-9X missile development will be completed by the spring of 1999. At that time, the AIM-9X design will be finalized, assembly of engineering development missiles underway, and development flight testing in process. The missile program manager believes any remaining development risk will be well understood at that time. In an effort to initiate AIM-9X missile production as soon as practical, the services plan to make the low-rate initial production decision in early 2000. This production decision is to be made before completing development flight tests, before adequately testing production representative missiles, and before full operational testing begins. This plan risks later discovery of problems requiring design changes and the associated cost, schedule, and performance impacts. We believe initiating low-rate initial production before developmental flight testing is complete and before there is some operational testing with production representative missiles adds unnecessary risk to the production program. The services plan to begin AIM-9X missile low-rate initial production in early 2000 by exercising the first production contract option for 150 missiles. A year later, the second production contract option for 250 missiles is to be exercised. Figure 3.1 shows the program's planned test and production decision schedule. As figure 3.1 shows, the low-rate initial production decision for the AIM-9X missile is to be made about 1 year before completion of the planned developmental flight test program. All of the flight tests to be conducted before the missile low-rate initial production decision, including those to be conducted as part of the preliminary operational testing, will use engineering development missiles. These missiles are manufactured early in the development program and represent the contractor's design before any significant flight testing begins. These flight tests will also use development level software and may not incorporate the helmet until the last several flights. Later in the development program, changes to the missile design are likely as the test results and manufacturing improvements are incorporated in production representative missiles. These test missiles are intended to be very close in physical configuration and performance to the AIM-9X production missile. They are to be used during the last phase of the developmental flight tests and for all of the operational flight tests. Developmental and independent operational flight testing using production representative missiles is scheduled to begin at about the same time as the low-rate initial production decision and continue for about 2 years. These tests expand upon earlier developmental testing, verify design changes incorporated in the production representative missiles, and focus on the system's operational effectiveness and suitability. These test results, however, will not be available until after low-rate initial missile production begins, with most operational flight tests occurring after the second missile production contract is exercised. Indeed, the first low-rate initial production missiles are expected to be delivered before the operational testing is complete. The significant body of developmental and operational flight testing planned after the low-rate initial production decision point is important to realistically demonstrate and assess the AIM-9X weapon system's ability to meet its minimum acceptable requirements for performance and suitability without major or costly design changes. Should problems be disclosed in these tests necessitating changes to the missile design, the missile cost, schedule, and performance may be adversely affected. Moreover, because the low-rate initial production missiles are to be deployed directly to operational units, such changes would directly affect operating units. We recommend that the Secretary of Defense direct the Secretaries of the Navy and the Air Force to revise the AIM-9X missile's acquisition strategy to allow for the completion of all developmental flight tests and enough operational flight tests with production representative missiles to demonstrate that the missile can meet its minimum performance requirements before low-rate initial production begins. DOD did not concur with the recommendation, stating that adequate testing is planned prior to the low-rate initial production decision for an informed decision. The performance data to support the low-rate initial production decision will be based on incomplete testing of developmental missiles and software. Flight testing of the production representative missiles and associated systems is scheduled to begin more than a year after the planned production decision. As we have reported previously, many of the weapon systems that start production without performing operational tests to gain assurance that the systems will perform satisfactorily later experience significant operational effectiveness and/or suitability problems. All three elements of the AIM-9X weapon system--the missile, the helmet-mounted cueing system, and the associated aircraft modifications--must be present and properly working together to ensure that U.S. fighters can prevail against modern threat missiles. The services are closely coordinating the separate development programs and plan to test all of the elements together during AIM-9X flight testing. However, there is no requirement that production representative versions of the missile, helmet, and associated aircraft modifications be successfully demonstrated together before the AIM-9X missile goes into low-rate initial production. Moreover, helmets and associated aircraft modifications are not linked to the approved AIM-9X missile production and funding plans. By not requiring that the missile, helmet, and aircraft modifications be tested, produced, and deployed together, as a "system of systems," DOD risks fielding a missile unable to prevail in aerial combat. To help them prevail in the close-in air battle, U.S. pilots are going to need not only the AIM-9X missile, but also the helmet and associated aircraft modifications. The Russians and Israelis have already developed, produced, and deployed short-range missile systems with helmet-mounted cueing systems. The Russian AA-11 missile and helmet system have been widely exported. The British, French, and other nations are also developing modern missiles. While the AIM-9X missile with the helmet is expected to be superior to all of them, the missile alone is not. Figure 4.1 illustrates the relative capabilities of the AIM-9X system of systems, the AA-11, and the AIM-9M, which is currently operational. Service officials told us that the rules for engaging enemy aircraft and the requirement for positive identification of targets increase the likelihood of close-in air battles in the future. While the AIM-9X and other missiles can be used at longer ranges, the positive identification requirement, together with the speed and agility of modern fighter aircraft, can quickly transform the fight into a close-in air battle where the advantage is held by the aircraft that can lock-on to its adversary and shoot first. As figure 4.1 shows, the AIM-9X missile without a helmet is expected to have greater lethal range than the AIM-9M and the AA-11. Without the helmet, however, a U.S. pilot would be unable to take full advantage of the AIM-9X capability to take the critical first shot that often determines the survivor in a close-in air battle. This first shot capability is achieved by the combination of the (1) helmet and the missile sensor acquiring a target well off to the side of the aircraft, as well as in front of it and (2) computer software that links the pilot's helmet, the missile, and the aircraft fire control system. As shown in the figure, the AIM-9X system (missile, helmet, and aircraft modifications) is expected to have a distinct advantage over the AA-11 missile. In commenting on a draft of this report, DOD stated that the projected range and sensor tracking capability of AIM-9X without the helmet-mounted cueing system is equivalent to the capability of the AA-11 threat missile in azimuth and exceeds the capability of the AA-11 in range. DOD's position is based on using the fighter aircraft radar to cue the AIM-9X missile to the target of interest when it is beyond the view of the aircraft's heads-up display. Using the radar to cue the missile, however, will take more time and be less certain than with the helmet and will require DOD to train pilots in yet to be developed procedures and tactics that would be considerably different than current practices for aerial combat. Moreover, DOD officials we spoke with agreed that it is questionable whether DOD can meet its own positive identification requirement using the aircraft radar for cueing purposes. The AIM-9X missile, helmet, and associated aircraft modifications are being developed under separate but closely coordinated programs. The missile and helmet contractors have negotiated detailed working agreements to ensure the missile, helmet, and aircraft modifications are developed to operate together and to be fully compatible with both Navy and Air Force aircraft. While each development program will test its system independently, the missile, helmet, and aircraft modifications are also planned to be tested together as a part of AIM-9X missile flight testing. An early operational assessment of the combined system, including five flight tests, is planned prior to the AIM-9X low-rate initial production decision. Then, for the next 2 years, production representative missiles, helmets, and aircraft software are to be tested under both developmental and realistic operating conditions. While plans are in place to perform total system testing with the missile, helmet, and aircraft modifications prior to the initial AIM-9X missile low-rate initial production decision, those tests will not be done using production representative hardware and software. Moreover, there is no formal requirement that sufficient total system testing take place prior to starting missile low-rate initial production to demonstrate that the AIM-9X weapon system can meet its key performance parameters. We are concerned about this because of the criticality that all three elements work together to ensure that the AIM-9X system will prevail against modern threat missiles. If technical problems delay development of the helmet or aircraft modifications, missile testing will proceed to support the low-rate initial production decision. At that time, the ability of the AIM-9X system to achieve its performance parameters will not be known. There is an approved and funded AIM-9X production plan to acquire 10,000 missiles over 18 years beginning in 2000; however, no such production plan or approved funding exists for the helmet or for the associated aircraft modifications. We were told by the helmet program manager that each of the aircraft program offices must plan and budget for helmets and associated modifications consistent with their needs and resources. All elements of the AIM-9X weapon system must be in place to achieve the program's objective, which is to ensure that Navy and Air Force fighters prevail in close-in aerial combat. Without a requirement that all elements of this system of systems be tested together, produced together, and deployed together, the full capability of the system will not be realized. Until the weapon system is tested and evaluated using production representative missiles and helmets, DOD decisionmakers will not have information on whether the AIM-9X weapon system's key performance parameters are achievable. We recommend that the Secretary of Defense direct the Secretaries of the Navy and the Air Force to revise the AIM-9X missile acquisition strategy to allow for enough operational testing of the missile, helmet, and associated aircraft modifications to be accomplished, using production representative hardware and software, to demonstrate that the AIM-9X system can meet its minimum performance requirements before low-rate initial production begins. We also recommend that the Secretary of Defense direct the services to provide a coordinated production, deployment, and funding plan for all three elements of the system. On the first recommendation, DOD did not concur and stated that significant improvement over the current operational system is possible with just the AIM-9X missile only. DOD added that it would not be prudent to delay the missile development and testing to provide concurrent development and test demonstration with the helmet and aircraft modifications. On the second recommendation, DOD partially concurred and stated that it would continue to coordinate all three elements of the system but would not formally tie the three elements together. DOD expressed concern that insisting that the schedules for the missile, helmet, and aircraft modifications remain synchronized risks burdening it with higher costs if one element falls behind schedule and the other elements have to proceed at a reduced, inefficient level. The objective of the AIM-9X program has been to develop a system that will provide the capability to prevail in aerial combat against modern threat missiles. Using the missile without the helmet will not provide that capability and will require DOD to train pilots in yet to be developed procedures and tactics that would be considerably different than current practices for aerial combat. Although there are risks in continuing to synchronize the helmet and missile schedules, we believe that DOD would be accepting more risk than necessary by committing to low-rate initial production of the missiles before demonstrating, using production representative hardware and software, that the total AIM-9X system can meet its minimum performance requirements. Following are our comments on the Department of Defense's (DOD) letter dated January 16, 1998. 1. The last AIM-9X schedule that we reviewed indicated that one test firing of a production representative missile is planned to occur within days of the low-rate initial production decision. Should these two development (vice operational) tests be accomplished as DOD now proposes, the detailed assessment of the test results will not be available to decisionmakers. 2. Figure 4.1 has been modified to indicate the potentially greater level of lethal azimuth of the AIM-9X when the missile is cued by the aircraft radar. However, that radar cueing of the missile is neither as fast nor as certain as with the helmet. Also, procedures and tactics for using the radar cueing capability with the AIM-9X would have to be developed and pilots would have to be trained. 3. Our recommendation addresses only those aircraft modifications needed to integrate the AIM-9X missile and the new helmet into each aircraft. Other aspects of the operational flight program should not be affected. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. 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Pursuant to a congressional request, GAO reviewed the development status of the AIM-9X missile program and its concerns about the testing and production of all elements of the AIM-9X weapon system, focusing on the: (1) services' efforts to reduce missile development risk; (2) missile program's plan to transition from development to production; and (3) importance of separately managed but essential supporting systems. GAO noted that: (1) the AIM-9X missile program includes many initiatives to reduce the risk of technical, cost, and schedule problems; (2) it uses many existing subsystems, components, and items not requiring development, and government and contractor technical experts have joined together in integrated product teams; (3) in addition, the services conducted a competitive demonstration and validation of new technologies to reduce technical risk; (4) GAO is concerned, however, about two situations; (5) the plan to start missile low-rate initial production about 1 year before completing development flight testing and before operational testing of production-representative missiles will risk later discovery of technical or operational suitability problems; (6) accordingly, at this critical juncture, Department of Defense (DOD) decisionmakers will not have enough verifiable information on the system's key performance parameters in an operational environment to make an informed production decision; (7) GAO is concerned that the helmet-mounted cueing system is being developed under a separate program from the missile even though U.S. fighter pilots need both the AIM-9X missile and the helmet-mounted cueing system to ensure that they can prevail in air-to-air combat against modern threat missiles; (8) while the separate development programs are being coordinated, there is no requirement that the missile, helmet, and aircraft modifications be thoroughly and realistically tested and evaluated together as a system of systems prior to initiating AIM-9X missile production; (9) until the weapon system is tested and evaluated using production-representative missiles and helmets, DOD decisionmakers will not have information on whether the AIM-9X weapon system's key performance parameters--such as the ability to acquire, track, and fire on targets over a wider area than the AIM-9M--are achievable; and (10) further, if all elements of the system are not produced and deployed together, the AIM-9X may not be able to prevail in aerial combat against modern threat missiles.

To best understand Medicare's fiscal plight, we should also understand the broader health care context in which it operates. Total health care spending from all sources--public and private--continues to increase at a breathtaking pace. From 1990 through 2000, spending nearly doubled from about $696 billion to about $1.3 trillion (see fig. 1). From 2000 through 2010, the rate of spending growth is expected to accelerate somewhat, resulting in an estimated $2.7 trillion in total annual health care spending by the end of the period. Increases in medical prices account for a little more than half of the 20-year spending increase, while increases in the use of services--owing to population growth and rise in the number of services used per person--and more expensive services account for the rest. The rapid growth in health care spending means that an increasing share of the nation's output, as measured by GDP, will be devoted to the production of health care services and goods. In 1970, spending on health care represented about 7 percent of GDP (see fig. 2). By 2010, health care spending's share of GDP is expected to rise to about 17 percent. At the same time that health care spending has increased, consumers have become more insulated from these costs. In 1962, nearly half--46 percent--of health care spending was financed by individuals out of their own pockets (see fig. 3). The remaining 54 percent was financed by a combination of private health insurance and public programs. By 2002, the amount of health care spending financed by individuals out of their own pockets was estimated to have dropped to 14 percent. Tax considerations encourage employers to offer health insurance to their employees, as the value of the premium is excluded from the calculation of employees' taxable earnings. Moreover, the value of the insurance coverage does not figure into the calculation of payroll taxes. These tax exclusions represent a significant source of foregone federal revenue, currently amounting to about 1 percent of GDP. Today the Medicare program faces a long-range and fundamental financing problem driven by known demographic trends and projected escalation of health care spending beyond general inflation. The lack of an immediate crisis in Medicare financing affects the nature of the challenge, but it does not eliminate the need for change. Within the next 10 years, the first baby boomers will begin to retire, putting increasing pressure on the federal budget. From the perspectives of the program, the federal budget, and the economy, Medicare in its present form is not sustainable. Acting sooner rather than later would allow changes to be phased in so that the individuals who are most likely to be affected, namely younger and future workers, will have time to adjust their retirement planning while helping to avoid related "expectation gaps." Since there is considerable confusion about Medicare's current financing arrangements, I would like to begin by describing the nature, timing, and extent of the financing problem. As you know, Medicare consists of two parts--HI and SMI. HI, which pays for inpatient hospital stays, skilled nursing care, hospice, and certain home health services, is financed by a payroll tax. Like Social Security, HI has always been largely a pay-as-you-go system. SMI, which pays for physician and outpatient hospital services, diagnostic tests, and certain other medical services, is financed by a combination of general revenues and beneficiary premiums. Beneficiary premiums pay for about one-fourth of SMI benefits, with the remainder financed by general revenues. These complex financing arrangements mean that current workers' taxes primarily pay for current retirees' benefits except for those financed by SMI premiums. As a result, the relative numbers of workers and beneficiaries have a major impact on Medicare's financing. The ratio, however, is changing. In the future, relatively fewer workers will be available to shoulder Medicare's financial burden. In 2002 there were 4.9 working-age persons (18 to 64 years) per elderly person, but by 2030, this ratio is projected to decline to 2.8. For the HI portion of Medicare, in 2002 there were nearly 4 covered workers per HI beneficiary. Under the Trustees' intermediate 2003 estimates, the Medicare Trustees project that by 2030 there will be only 2.4 covered workers per HI beneficiary. (See fig. 4.) The demographic challenge facing the system has several causes. People are retiring early and living longer. As the baby boom generation ages, the share of the population age 65 and over will escalate rapidly. A falling fertility rate is the other principal factor underlying the growth in the elderly's share of the population. In the 1960s, the fertility rate was an average of 3 children per woman. Today it is a little over 2, and by 2030 it is expected to fall to 1.95--a rate that is below replacement. The combination of the aging of the baby boom generation, increased longevity, and a lower fertility rate will drive the elderly as a share of total population from today's 12 percent to almost 20 percent in 2030. Taken together, these trends threaten both the financial solvency and sustainability of this important program. Labor force growth will continue to decline and by 2025 is expected to be less than a third of what it is today. (See fig. 5.) Relatively fewer workers will be available to produce the goods and services that all will consume. Without a major increase in productivity, low labor force growth will lead to slower growth in the economy and slower growth of federal revenues. This in turn will only accentuate the overall pressure on the federal budget. This slowing labor force growth is not always recognized as part of the Medicare debate, but it is expected to affect the ability of the federal budget and the economy to sustain Medicare's projected spending in the coming years. The demographic trends I have described will affect both Medicare and Social Security, but Medicare presents a much greater, more complex, and more urgent challenge. Unlike Social Security, Medicare spending growth rates reflect not only a burgeoning beneficiary population, but also the escalation of health care costs at rates well exceeding general rates of inflation. The growth of medical technology has contributed to increases in the number and quality of health care services. Moreover, the actual costs of health care consumption are not transparent. Third-party payers largely insulate covered consumers from the cost of health care decisions. These factors and others contribute to making Medicare a greater and more complex fiscal challenge than even Social Security. Current projections of future HI income and outlays illustrate the timing and severity of Medicare's fiscal challenge. Today, the HI Trust Fund takes in more in taxes than it spends. Largely because of the known demographic trends I have described, this situation will change. Under the Trustees' 2003 intermediate assumptions, program outlays are expected to begin to exceed program tax revenues in 2013 (see fig. 6). To finance these cash deficits, HI will need to draw on the special-issue Treasury securities acquired during the years of cash surpluses. For HI to "redeem" its securities, the government will need to obtain cash through some combination of increased taxes, spending cuts, and/or increased borrowing from the public (or, if the unified budget is in surplus, less debt reduction than would otherwise have been the case). Neither the decline in the cash surpluses nor the cash deficits will affect the payment of benefits, but the negative cash flow will place increased pressure on the federal budget to raise the resources necessary to meet the program's ongoing costs. This pressure will only increase when Social Security also experiences negative cash flow and joins HI as a net claimant on the rest of the budget. The gap between HI income and costs shows the severity of HI's financing problem over the longer term. This gap can also be expressed relative to taxable payroll (the HI Trust Fund's funding base) over a 75-year period. This year, under the Trustees 2003 intermediate estimates, the 75-year actuarial deficit is projected to be 2.40 percent of taxable payroll--a significant increase from last year's projected deficit of 2.02 percent. This means that to bring the HI Trust Fund into balance over the 75-year period, either program outlays would have to be immediately reduced by 42 percent or program income immediately increased by 71 percent, or some combination of the two. These estimates of what it would take to achieve 75-year trust fund solvency understate the extent of the problem because the program's financial imbalance gets worse in the 76th and subsequent years. Every year that passes we drop a positive year and add a much bigger deficit year. The projected exhaustion date of the HI Trust Fund is a commonly used indicator of HI's financial condition. Under the Trustees 2003 intermediate estimates, the HI Trust Fund is projected to exhaust its assets in 2026. This solvency indicator provides information about HI's financial condition, but it is not an adequate measure of Medicare's sustainability for several reasons. HI Trust Fund balances do not provide meaningful information on the government's fiscal capacity to pay benefits when program cash inflows fall below program outlays. As I have described, the government would need to come up with cash from other sources to pay for benefits once outlays exceeded program tax income. In addition, the HI Trust Fund measure provides no information on SMI. SMI's expenditures, which account for about 43 percent of total Medicare spending, are projected to grow even faster than those of HI in the near future. Moreover, Medicare's complex structure and financing arrangements mean that a shift of expenditures from HI to SMI can extend the solvency of the HI Trust Fund, creating the appearance of an improvement in program's financial condition. For example, the Balanced Budget Act of 1997 modified the home health benefit, which resulted in shifting a portion of home health spending from the HI Trust Fund to SMI. Although this shift extended HI Trust Fund solvency, it increased the draw on general revenues and beneficiary SMI premiums while generating little net savings. Ultimately, the critical question is not how much a trust fund has in assets, but whether the government as a whole and the economy can afford the promised benefits now and in the future and at what cost to other claims on scarce resources. To better monitor and communicate changes in future total program spending, new measures of Medicare's sustainability are needed. As program changes are made, a continued need will exist for measures of program sustainability that can signal potential future fiscal imbalance. Such measures might include the percentage of program funding provided by general revenues, the percentage of total federal revenues or gross domestic product devoted to Medicare, or program spending per enrollee. As such measures are developed, questions would need to be asked about actions to be taken if projections showed that program expenditures would exceed the chosen level. Taken together, Medicare's HI and SMI expenditures are expected to increase dramatically, rising from about 12 percent of federal revenues in 2002 to more than one-quarter by midcentury. The budgetary challenge posed by the growth in Medicare becomes even more significant in combination with the expected growth in Medicaid and Social Security spending. This growth in spending on federal entitlements for retirees will become increasingly unsustainable over the longer term, compounding an ongoing decline in budgetary flexibility. Over the past few decades, spending on mandatory programs has consumed an ever-increasing share of the federal budget. In 1962, prior to the creation of the Medicare and Medicaid programs, spending for mandatory programs plus net interest accounted for about 32 percent of total federal spending. By 2002, this share had almost doubled to approximately 63 percent of the budget. (See fig. 7.) In much of the past decade, reductions in defense spending helped accommodate the growth in these entitlement programs. Even before the events of September 11, 2001, however, this ceased to be a viable option. Indeed, spending on defense and homeland security will grow as we seek to combat new threats to our nation's security. GAO prepares long-term budget simulations that seek to illustrate the likely fiscal consequences of the coming demographic tidal wave and rising health care costs. These simulations continue to show that to move into the future with no changes in federal retirement and health programs is to envision a very different role for the federal government. Assuming, for example, that the tax reductions enacted in 2001 do not sunset and discretionary spending keeps pace with the economy, by midcentury federal revenues may be inadequate to pay Social Security and interest on the federal debt. Spending for the current Medicare program--without any additional new benefits--is projected to account for more than one- quarter of all federal revenues. To obtain budget balance, massive spending cuts, tax increases, or some combination of the two would be necessary. (See fig.8). Neither slowing the growth of discretionary spending nor allowing the tax reductions to sunset eliminates the imbalance. In addition, while additional economic growth would help ease our burden, the projected fiscal gap is too great for us to grow our way out of the problem. Indeed, long-term budgetary flexibility is about more than Social Security and Medicare. While these programs dominate the long-term outlook, they are not the only federal programs or activities that bind the future. The federal government undertakes a wide range of programs, responsibilities, and activities that obligate it to future spending or create an expectation for spending. Our recent report describes the range and measurement of such fiscal exposures--from explicit liabilities such as environmental cleanup requirements to the more implicit obligations presented by life- cycle costs of capital acquisition or disaster assistance. Making government fit the challenges of the future will require not only dealing with the drivers--entitlements for the elderly--but also looking at the range of other federal activities. A fundamental review of what the federal government does and how it does it will be needed. At the same time, it is important to look beyond the federal budget to the economy as a whole. Figure 9 shows the total future draw on the economy represented by Medicare, Medicaid, and Social Security. Under the 2003 Trustees' intermediate estimates and the Congressional Budget Office's (CBO) most recent long-term Medicaid estimates, spending for these entitlement programs combined will grow to 14 percent of GDP in 2030 from today's 8.4 percent. Taken together, Social Security, Medicare, and Medicaid represent an unsustainable burden on future generations. Although real incomes are projected to continue to rise, they are expected to grow more slowly than has historically been the case. At the same time, the demographic trends and projected rates of growth in health care spending I have described will mean rapid growth in entitlement spending. Taken together, these projections raise serious questions about the capacity of the relatively smaller number of future workers to absorb the rapidly escalating costs of these programs. As HI trust fund assets are redeemed to pay Medicare benefits and SMI expenditures continue to grow, the program will constitute a claim on real resources in the future. As a result, taking action now to increase the future pool of resources is important. To echo Federal Reserve Chairman Alan Greenspan, the crucial issue of saving in our economy relates to our ability to build an adequate capital stock to produce enough goods and services in the future to accommodate both retirees and workers in the future. The most direct way the federal government can raise national saving is by increasing government saving, that is, as the economy returns to a higher growth path, a balanced fiscal policy that recognizes our long- term challenges can help provide a strong foundation for economic growth and can enhance our future budgetary flexibility. It is my hope that we will think about the unprecedented challenge facing future generations in our aging society. Putting Medicare on a sustainable path for the future would help fulfill this generation's stewardship responsibility to succeeding generations. It would also help to preserve some capacity for future generations to make their own choices for what role they want the federal government to play. As with Social Security, both sustainability and solvency considerations drive us to address Medicare's fiscal challenges sooner rather than later. HI Trust Fund exhaustion may be more than 20 years away, but the squeeze on the federal budget will begin as the baby boom generation begins to retire. This will begin as early as 2008, when the leading edge of the baby boom generation becomes eligible for early retirement. CBO's current 10-year budget and economic outlook reflects this. CBO projects that economic growth will slow from an average of 3.2 percent a year from 2005 through 2008 to 2.7 percent from 2009 through 2013 reflecting slower labor force growth. At the same time, annual rates of growth in entitlement spending will begin to rise. Annual growth in Social Security outlays is projected to accelerate from 5.2 percent in 2007 to 6.6 percent in 2013. Annual growth in Medicare enrollees is expected to accelerate from 1.1 percent today to 2.9 percent in 2013. Acting sooner rather than later is essential to ease future fiscal pressures and also provide a more reasonable planning horizon for future retirees. We are now at a critical juncture. In less than a decade, the profound demographic shift that is a certainty will have begun. Despite a common awareness of Medicare's current and future fiscal plight, pressure has been building to address recognized gaps in Medicare coverage, especially the lack of a prescription drug benefit and protection against financially devastating medical costs. Filling these gaps could add massive expenses to an already fiscally overburdened program. Under the Trustees 2003 intermediate assumptions, the present value of HI's actuarial deficit is $6.2 trillion. This difficult situation argues for tackling the greatest needs first and for making any benefit additions part of a larger structural reform effort. The Medicare benefit package, largely designed in 1965, provides virtually no outpatient drug coverage. Beneficiaries may fill this coverage gap in various ways. All beneficiaries have the option to purchase supplemental policies--Medigap--when they first become eligible for Medicare at age 65. Those policies that include drug coverage tend to be expensive and provide only limited benefits. Some beneficiaries have access to coverage through employer-sponsored policies or private health plans that contract to serve Medicare beneficiaries. In recent years, coverage through these sources has become more expensive and less widely available. Beneficiaries whose income falls below certain thresholds may qualify for Medicaid or other public programs. According to one survey, in the fall of 1999, more than one-third of beneficiaries reported that they lacked drug coverage altogether. Medicare also does not limit beneficiaries' cost-sharing liability. The average beneficiary who obtained services had a total liability for Medicare-covered services of $1,700, consisting of $1,154 in Medicare copayments and deductibles in addition to the $546 in annual part B premiums in 1999, the most recent year for which data are available on the distribution of these costs. The burden can, however, be much higher for beneficiaries with extensive health care needs. In 1999, about 1 million beneficiaries were liable for more than $5,000, and about 260,000 were liable for more than $10,000 for covered services. In contrast, employer- sponsored health plans for active workers typically limited maximum annual out-of-pocket costs for covered services to less than $2,000 per year for single coverage. Modernizing Medicare's benefit package will require balancing competing concerns about program sustainability, federal obligations, and the hardship faced by some beneficiaries. In particular, the addition of a benefit that has the potential to be extremely expensive--such as prescription drug coverage--should be focused on meeting the needs deemed to be of the highest priority. This would entail targeting financial help to beneficiaries most in need--those with catastrophic drug costs or low incomes--and, to the extent possible, avoiding the substitution of public for private insurance coverage. As I continue to maintain, acting prudently means making any benefit expansions in the context of overall program reforms that are designed to make the program more sustainable over the long term instead of worsening the program's financial future. One reform to help improve Medicare's financial future would be to modify Medicare's cost-sharing rules and provide beneficiaries with better incentives to use care appropriately. Health insurers today commonly design cost-sharing requirements--in the form of deductibles, coinsurance, and copayments--to ensure that enrollees are aware that there is a cost associated with the provision of services and to use them prudently. Ideally, cost-sharing should encourage beneficiaries to evaluate the need for discretionary care but not discourage necessary care. Coinsurance or copayments would be required generally for services considered to be discretionary and potentially overused and would aim to steer patients to lower cost or better treatment options. Care must be taken, however, to avoid setting cost-sharing requirements so high as to create financial barriers to care. Medicare fee-for-service cost-sharing rules diverge from these common insurance industry practices in important ways. For example, Medicare imposes a relatively high deductible of $840 for hospital admissions, which are rarely optional. In contrast, Medicare has not increased the part B deductible since 1991. For the last 12 years, the deductible has remained constant at $100 and has thus steadily declined as a proportion of beneficiaries' real incomes. Adjusted for inflation, the deductible has fallen to $74.39 in 1991 dollars. In recent years, leading proposals have been made to restructure Medicare that have included greater reliance on private health plans and reforms to the traditional fee-for-service program. The weaknesses identified in these two components of the current program suggest several lessons regarding such restructuring. Experience with Medicare's private health plan alternative, called Medicare+Choice, suggests that details matter if competition is to produce enhanced benefits for enrollees and savings for the program. In addition, the traditional program must not be left unattended because it will be an important part of Medicare for years to come. The strategies needed to address either structural component must incorporate sufficient incentives to achieve efficiency, adequate transparency to reveal the cost of health care, and appropriate accountability mechanisms to ensure that the promised care and level of quality are actually delivered. If the inclusion of private health plans is to produce savings for Medicare, private incentives and public goals must be properly aligned. This means designing a program that will encourage beneficiaries to select health plan options most likely to generate program savings. This is not the case in the current Medicare+Choice program. For example, incentives for health plan efficiency exist, but any efficiency gains achieved do not produce Medicare savings. Payments to private health plans that participate in Medicare+Choice are not set through a competitive process. Instead, plans receive a fixed payment from Medicare as prescribed by statute and in return must provide all Medicare-covered services with the exception of hospice. Efficient health plans are better able to afford to provide extra benefits, such as outpatient prescription drug benefits; charge a lower monthly premium; or both and may do so to attract beneficiaries and increase market share. Until recently, however, these efficiency and market share gains were advantageous to beneficiaries and health plans but generated no savings for Medicare. Even today, the opportunity for the program to realize savings from competition among Medicare+Choice health plans remains extremely limited. This experience has shown that savings are not automatic from simply enrolling beneficiaries in private health plans. The Medicare+Choice experience offers another lesson about private plans and program savings. That is, as we recommended in 1998, payments to health plans must be adequately risk-adjusted for the expected health care costs of the beneficiaries they enroll. Otherwise, the government can inadequately compensate health plans that enroll less healthy beneficiaries with higher expected health care costs or will overpay health plans that enroll relatively healthy beneficiaries with low expected health care costs. Moreover, health plans will have an incentive to avoid enrolling less healthy beneficiaries with higher expected health care costs. In 2000, we reported that the failure to adequately adjust Medicare's payments to private health plans for beneficiaries' expected health care costs unnecessarily increased Medicare spending by $3.2 billion in 1998. A third lesson is that the use of private plans to serve Medicare beneficiaries may not be feasible in all locations nationwide. In Medicare+Choice, it has been difficult and expensive to encourage private health plans to serve rural areas. Payment rates have been substantially raised in rural areas since 1997, yet by 2003 nearly 40 percent of beneficiaries living in rural areas lack access to a private health plan; in contrast, 15 percent of beneficiaries in urban areas lack access to a plan. Finally, the Medicare+Choice experience underscores the importance of beneficiaries having user-friendly, accurate information to compare their health plan options and of holding private health plans appropriately accountable for the services they have promised to deliver. Leading Medicare reform proposals have included traditional Medicare as a component in their design. Traditional Medicare is likely to have a significant role for years to come, as any fundamental structural reforms would take considerable time before plan and beneficiary participation becomes extensive. Therefore, addressing flaws in the traditional program should be part of any plan to steer Medicare away from insolvency and improve its sustainability for future generations. The experience of other health insurers' use of cost-containment strategies, including some incentives for beneficiaries to make value-based choices, suggests a strategy for modernizing the program's design. In the current program, the lack of insurance-type protections and difficulty in setting payment rates keep Medicare from achieving greater efficiencies and thus from improving its balance sheet. Coverage through Medigap--policies that meet federally established standards and are sold by private insurers--helps to fill in some of Medicare's gaps, but Medigap plans also have shortcomings. As required by law, Medigap plans must conform to 1 of 10 standard benefit packages, which vary in levels of coverage. Medigap offers beneficiaries stop-loss protections that are lacking in traditional Medicare, but these policies diminish important program protections by covering required deductibles and coinsurance. The most popular Medigap plans are fundamentally different from employer-sponsored health insurance policies for retirees in that they do not require individuals to pay deductibles, coinsurance, and copayments. Such cost-sharing requirements are intended to make beneficiaries aware of the costs associated with the use of services and encourage them to use these services prudently. In contrast, Medigap's first-dollar coverage--the elimination of deductibles or coinsurance associated with the use of covered services--undermines this objective. Although such coverage reduces financial barriers to health care, it diminishes beneficiaries' sensitivity to costs and likely increases beneficiaries' use of services, adding to total Medicare spending. Traditional Medicare needs the tools that other insurers use to achieve better value for the protection provided. Instead of working at cross- purposes to the traditional program, Medigap should be better coordinated with it. Insurance-type reforms to Medicare and Medigap--namely, the preservation of cost-sharing requirements in conjunction with stop-loss provisions--could help improve beneficiaries' sensitivity to the cost of care while better protecting them against financially devastating medical costs. Medicare too often pays overly generous rates for certain services and products, preventing the program from achieving a desirable degree of efficiency. For example, for certain services, our work has shown substantially higher Medicare payments relative to providers' costs--35 percent higher for home health care in the first six months of 2001 and 19 percent higher for skilled nursing facility care in 2000. Similarly, Medicare has overpaid for various medical products. Last year, we reported that, in 2000, Medicare paid over $1 billion more than other purchasers for certain outpatient drugs that the program covers. Earlier findings that have since been addressed by the Congress following our recommendations showed Medicare paying over $500 million more than another public payer for home oxygen equipment. Excessive payments hurt not only the taxpayers but also the program's beneficiaries or their supplemental insurers, as beneficiaries are liable for copayments equal to 20 percent of Medicare's approved fee. For certain outpatient drugs, Medicare's payments to providers were so high that the beneficiaries' copayments exceeded the price at which providers could buy the drugs. In 2001, we recommended that, for covered outpatient prescription drugs, Medicare establish payment levels more closely related to actual market transaction costs, using information available to other public programs that pay at lower rates. Over the past two decades, at the Congress' direction, Medicare has implemented a series of payment reforms designed to promote the efficient delivery of services and control program spending. Some reforms required establishing set fees for individual services; others required paying a fixed amount for a bundle of services. The payment methods introduced during this time were designed to include--in addition to incentives for efficiencies--a means to calibrate payments to ensure beneficiary access and fairness to providers. A major challenge in administering these methods--whether based on fee schedules or prospective payment systems using bundled payments-- involves adjusting the payments to better account for differences in patients' needs and providers' local markets to ensure that the program is paying appropriately and adequately. Payment rates that are too low can impair beneficiary access to services and products, while rates that are too high add unnecessary financial burdens to the program. As a practical matter, Medicare is often precluded from using market forces--that is, competition--to determine appropriate rates. In many cases, Medicare's size and potential to distort market prices makes it necessary to use means other than competition to set a price on services and products. Most of Medicare's rate-setting methods are based on formulas that use historical data on providers' costs and charges. Too often, these data are not recent or comprehensive enough to measure the costs incurred by efficient providers. At the same time, data reflecting beneficiaries' access to services are also lacking. When providers contend that payments are not adequate, typically information is not readily available to provide the analytical support needed to determine whether these claims are valid. I have noted in the past the essential need to monitor the impact of program policy changes so that distinguishing between desirable and undesirable consequences can be done systematically and in a timely manner. To that end, I have also noted the importance of investing adequate resources in the agency that runs Medicare to ensure that the capacity exists to carry out these policy-monitoring activities. Under some circumstances, competition may be feasible and practical for setting more appropriate rates. Medicare has pilot tested "competitive bidding" in a few small markets. According to program officials, these test projects have shown that, for selected medical products, Medicare has saved money on items priced competitively. As part of these competitive bidding tests, steps were taken to monitor beneficiary access and product quality. To use competitive bidding on a broader scale, Medicare would require not only new authority but would need to make substantial administrative preparations, as competing with a larger number of products nationally would entail bidding in multiple markets and monitoring access and quality once prices had been set. Medicare's financial challenge is very real. The 21st century has arrived and the demographic tidal wave is on the horizon. Within 5 years, individuals in the vanguard of the baby boom generation will be eligible for Social Security and 3 years after that they will be eligible for Medicare. The future costs of serving the baby boomers are already becoming a factor in CBO's short-term cost projections. Clearly the issue before us is not whether to reform Medicare but how. I feel the greatest risk lies in doing nothing to improve Medicare's long-term sustainability. It is my hope that we will think about the unprecedented challenge of facing future generations in our aging society. Engaging in a comprehensive effort to reform the program and put it on a sustainable path for the future would help fulfill this generation's stewardship responsibility to succeeding generations. Medicare reform would be done best with considerable lead time to phase in changes and before the changes that are needed become dramatic and disruptive. Given the size of Medicare's financial challenge, it is only realistic to expect that reforms intended to bring down future costs will have to proceed incrementally. We should begin this now, when retirees are still a far smaller proportion of the population than they will be in the future. The sooner we get started, the less difficult the task will be. As we contemplate the forecast for Medicare's fiscal condition and its implications, we must also remember that the sources of some of its problems--and its solutions--are outside the program and are universal to all health care payers. Some tax preferences mask the full cost of providing health benefits and can work at cross-purposes to the goal of moderating health care spending. Therefore, it may be important to reexamine the incentives contained in current tax policy and consider potential reforms. Advances in medical technology are also likely to keep raising the price tag of providing care, regardless of the payer. Although technological advances unquestionably provide medical benefits, judging the value of those benefits--and weighing them against the additional costs--is more difficult. Consumers are not as informed about the cost of health care and its quality as they may be about other goods and services. Thus, while the greater use of market forces may help to control cost growth, it will undoubtedly be necessary to employ other cost control methods as well. We must also be mindful that health care costs compete with other legitimate priorities in the federal budget, and their projected growth threatens to crowd out future generations' flexibility to decide which competing priorities will be met. In making important fiscal decisions for our nation, policymakers need to consider the fundamental differences between wants, needs, and what both individuals and our nation can afford. This concept applies to all major aspects of government, from major weapons system acquisitions to issues affecting domestic programs. It also points to the fiduciary and stewardship responsibility that we all share to ensure the sustainability of Medicare for current and future generations within a broader context of providing for other important national needs and economic growth. A major challenge policymakers face in considering health care reforms is the dearth of timely, accurate information with which to make decisions. Medicare's size and impact on the nation's health care economy means that its payment methods and rate adjustments, no matter how reasonable, often produce opposition. Recent experience with the payment reforms established in the BBA illustrates this point. In essence, these reforms changed Medicare's payment methods to establish incentives for providers to deliver care efficiently. BBA's changes were enacted in response to continuing rapid growth in Medicare spending that was neither sustainable nor readily linked to demonstrated changes in beneficiary needs. Nonetheless, affected provider groups conducted a swift, intense campaign to roll back the BBA changes. In the absence of solid, data- driven analyses, affected providers' anecdotes were used to support contentions that Medicare payment changes were extreme and threatened their financial viability. This and similar reactions to mandated Medicare payment reforms underscore how difficult it is, without prompt and credible data, to defend against claims that payments changes have resulted in insufficient compensation that could lead to access problems. The public sector can play an important role in educating the nation about the limits of public support. Currently, there is a wide gap between what patients and providers expect and what public programs are able to deliver. Moreover, there is insufficient understanding about the terms and conditions under which health care coverage is actually provided by the nation's public and private payers. In this regard, GAO is preparing a health care framework that includes a set of principles to help policymakers in their efforts to assess various health financing reform options. This framework will examine health care issues systemwide and identify the interconnections between public programs that finance health care and the private insurance market. The framework can serve as a tool for defining policy goals and ensuring the use of consistent criteria for evaluating changes. By facilitating debate, the framework can encourage acceptance of changes necessary to put us on a path to fiscal sustainability. I fear that if we do not make such changes and adopt meaningful reforms, future generations will enjoy little flexibility to fund discretionary programs or make other valuable policy choices. Mr. Chairman, this concludes my prepared statement. I will be happy to answer any questions you or other committee members may have. For future contacts regarding this testimony, please call William J. Scanlon, Director, Health Care Issues, at (202) 512-7114. Other individuals who made key contributions include Linda Baker, James Cosgrove, Jessica Farb, Hannah Fein, James McTigue, Yorick F. Uzes, and Melissa Wolf.

We are pleased to be here today as Congress examines Medicare's financial health and consider the budgetary and economic challenges presented by an aging society. The Comptroller General has been particularly attentive to the sustainability challenges faced by the nation's two largest entitlement programs--Medicare and Social Security--for more than a decade since he served as a public trustee for these programs in the early 1990s. The recent publication of the 2003 Trustees' annual report reminds us, once again, that the status quo is not an option for Medicare. If the program stays on its present course, in 10 years Hospital Insurance (HI) Trust Fund outlays will begin to exceed tax receipts, and by 2026 the HI trust fund will be exhausted. It is important to note that trust fund insolvency does not mean the program will cease to exist; program tax revenues will continue to cover a portion of projected expenditures.1 However, Medicare is only part of the broader health care financing problem that confronts both public programs and private payers. The unrelenting growth in health care spending is producing a health care sector that continues to claim an increasing share of our gross domestic product (GDP). Despite the grim outlook for Medicare's financial future, fiscal discipline imposed on Medicare through the Balanced Budget Act of 1997 (BBA) continues to be challenged, and interest in modernizing the program's benefit package to include prescription drug coverage and catastrophic protection continues to grow. Such unabated pressures highlight the urgency for meaningful reform. As we deliberate on the situation, we must be mindful of several key points. The traditional measure of HI Trust Fund solvency is a misleading gauge of Medicare's financial health. Long before the HI Trust Fund is projected to be insolvent, pressures on the rest of the federal budget will grow as HI's projected cash inflows turn negative and grow as the years pass. Moreover, a focus on the financial status of HI ignores the increasing burden Supplemental Medical Insurance (SMI)--Medicare part B--will place on taxpayers and beneficiaries. GAO's most recent long-term budget simulations continue to show that demographic trends and rising health care spending will drive escalating federal deficits and debt, absent meaningful entitlement reforms or other significant tax or spending actions. To obtain budget balance, massive spending cuts, tax increases, or some combination of the two would be necessary. Neither slowing the growth of discretionary spending nor allowing the tax reductions to sunset will eliminate the imbalance. In addition, while additional economic growth will help ease our burden, the potential fiscal gap is too great to grow our way out of the problem. Since the cost of a drug benefit would boost spending projections even further, adding drug coverage when Medicare's financial future is already bleak will require difficult policy choices that will mean trade-offs for both beneficiaries and providers. Just as physicians take the Hippocratic oath to "do no harm," policymakers should avoid adopting reforms that will worsen Medicare's long-term financial health. Our experience with Medicare--both the traditional program and its private health plan alternative--provides valuable lessons that can guide consideration of reforms. For example, we know that proposals to enroll beneficiaries in private health plans must be designed to encourage beneficiaries to join efficient plans and ensure that Medicare shares in any efficiency gains. We also recognize that improvements to traditional Medicare are essential, as this program will likely remain significant for some time to come.

During the 1960s, in an effort to address the decline in demand for cotton brought on by competition from synthetic fibers, cotton industry organizations proposed legislation to create a federally authorized, industry-funded program aimed at expanding consumers' demand for cotton. Subsequently, the Cotton Research and Promotion Act of 1966 authorized the creation of the Cotton Board and charged it with increasing cotton's share of the textile and apparel market through a research and promotion program. The 1966 act gives the Cotton Board the primary responsibility for administering the cotton check-off program, including developing program plans and budgets. The act also directs the Cotton Board to contract with an organization, governed by cotton producers, to carry out its research and promotion activities. Since 1967, that organization has been a nonprofit corporation called Cotton Incorporated. From 1967 to 1991, all domestic producers had to pay cotton assessments. However, the act allowed producers who were not in favor of supporting the program to request a refund. In the late 1980s, about one-third of the assessments collected were refunded. In November 1990, the Congress enacted the Cotton Research and Promotion Act Amendments of 1990, which was included under title XIX, subtitle G, of the Food, Agriculture, Conservation, and Trade Act of 1990 (known as the 1990 Farm Bill). These amendments authorized two fundamental changes in the funding procedures for the cotton check-off program: (1) the imposition of assessments on imported cotton and cotton-containing products and (2) the elimination of refunds. To become effective, however, these revisions had to be approved in a referendum by at least half of the domestic producers and importers voting. About 60 percent of those voting approved these revisions in July 1991. In effect, the approved changes made the program mandatory for both domestic producers and importers. After the final regulation was issued and other administrative procedures were completed, import assessments on cotton products began to be collected on July 31, 1992. The assessments are collected by Customs and remitted to the Cotton Board through AMS on a monthly basis. Domestic producers pay an assessment when they sell their raw cotton. The current cotton assessment is a fixed rate of $1 per 500-pound-bale plus 0.5 percent of the market value. Based on a market value of 60 cents per pound, the total assessment per pound of raw cotton is about one-half cent. Importers pay an assessment on the raw cotton equivalent of imported textiles and apparel. To calculate the assessment rate for imported cotton products, USDA has established procedures for estimating the amount of raw cotton used to manufacture about 700 different cotton products. (See app. I for examples of how AMS calculates rates for an imported cotton product.) Because the check-off program is federally authorized, the Secretary of Agriculture and AMS have certain oversight responsibilities. The Secretary must approve the Cotton Board's recommended program plans and budgets before they can become effective. AMS' responsibilities include (1) developing regulations to implement the check-off program, in consultation with the cotton industry, and (2) ensuring compliance with the authorizing legislation and AMS' orders and regulations. Generally, the act and AMS' regulations specify allowable activities, such as the type of promotion or research activities, the level and collection of assessments, the composition of the Board, and the types of allowable expenditures. To ensure compliance, AMS reviews the Board's budgets and projects to, for example, prevent the Board from engaging in prohibited activities, such as lobbying. However, AMS' oversight role does not include reviewing the program's effectiveness. AMS is reimbursed by the Cotton Board for its oversight costs. The assessment on cotton imports and the elimination of refunds have contributed, in large part, to the substantial growth in the Cotton Board's check-off revenues since 1990. In 1990, the Cotton Board received check-off revenues from producers of about $27.6 million after refunds. In fiscal year 1994, the Cotton Board's check-off assessment revenues totaled about $56.8 million--$43.2 million, or 76 percent, from domestic producers and $13.6 million, or 24 percent, from importers. The imposition of the cotton import assessment has not prevented increases in the U.S. consumption of cotton. Between 1984 and 1991, the U.S. consumption of raw cotton and cotton products grew from 4 billion pounds to 6.2 billion pounds, an average annual growth rate of 6.6 percent. Following the imposition of the cotton import assessment in 1992, the U.S. market continued to grow at about the same rate through June 1995. The U.S. consumption of cotton may exceed 8 billion pounds in 1995. (See fig. 1.) Government and other experts knowledgeable about the U.S. textile and apparel industry agreed that the imposition of the cotton import assessment beginning in July 1992 has had no significant impact on the long-term growth in U.S. consumption of domestic cotton. They pointed out that the relatively small size of the cotton import assessment--about one-half cent per pound of raw cotton equivalent--is likely to have little effect on retail prices. According to these experts, the primary factor explaining the growth in cotton consumption since 1984 is consumers' increasing preference for cotton apparel--per capita consumption increased from 17 pounds to 30 pounds between 1984 and 1994. They also said that technological developments, such as wrinkle-resistant cotton fabric and different denim finishes, have further enhanced consumers' preference for cotton apparel. In addition, these experts said that the cotton check-off program has contributed to consumers' preference for cotton, although they could not cite any study measuring the extent of the program's contribution. According to USDA's Chief Economist, a positive correlation generally exists between increased promotion and increased sales of a particular product. However, he also said that researchers measuring this positive correlation have found that it can vary from small to large, depending on the product, the time period involved, and other factors. As discussed in the conference report on the 1990 Farm Bill, some lawmakers were concerned that while importers would be contributing to the check-off program on an equal footing with domestic producers, they would be denied equivalent access to the U.S. cotton market because of tariffs and quotas. According to the USTR, in 1992 the United States maintained quotas for about 67 percent of imported cotton products. Despite these concerns, quotas and tariffs have not prevented cotton imports from sharing in the growth in the U.S. market. Cotton imports have grown even faster than U.S. consumption, increasing from 1.5 billion pounds in 1984 to about 3.8 billion pounds in 1994, an average annual growth rate of about 10 percent. In addition, imported cotton products accounted for 48 percent of U.S. cotton consumption in 1994, up from 37 percent in 1984. Industry experts attribute the growth in these imports primarily to the growing U.S. market for cotton products and lower-priced apparel manufactured in developing countries with low wages. These experts also pointed out that in the absence of quotas and tariffs, cotton imports would probably have increased at an even higher rate, although they could not say by how much. The experts cited several reasons for the increase in cotton imports, even with quotas. First, not all countries are subject to U.S. quotas. Second, countries subject to these quotas vary in the amount of their quota, and the United States has generally agreed to annual increases in the quotas. Third, not all countries fill their quotas. And fourth, when countries do fill their quotas, U.S. retailers and major textile and apparel exporters have become adept at finding alternative sources of supply in countries that have not filled their quotas. The experts also pointed out that current bilateral quotas negotiated under the Multi-fiber Arrangement will be phased out over 10 years under the Uruguay Round agreement, negotiated under the General Agreement on Tariffs and Trade (GATT). Similarly, as a result of the Uruguay Round agreement, the United States has agreed to slightly reduce textile and apparel tariffs to an average of 15 percent over 10 years. However, experts note that tariffs--currently an average of 17 percent of the value of imported apparel--have not prevented cotton imports from increasing even faster than domestic consumption. This increase has occurred because imported apparel apparently has a substantial cost advantage over domestic apparel. According to USTR's Assistant U.S. Trade Representative for Agricultural and Commodity Policy and officials from the Foreign Agricultural Service's Tobacco, Cotton, and Seed Division in USDA, the assessment on cotton imports complies with the requirements of U.S. trade agreements. The primary guiding principle of these agreements for imports is that of "national treatment," which is established in the GATT, Article III, National Treatment on Internal Taxation and Regulation. This principle holds that imports (1) shall not be subject to internal charges that are higher than those applied to like domestic products and (2) shall be treated, under national laws and regulations, as favorably as like domestic products. According to USDA documents and our discussions with officials from the Foreign Agricultural Service and the USTR, the implications of the cotton import assessment were discussed during USDA's rule-making process for cotton imports in 1991 and during GATT negotiations during 1992. Officials concluded that the cotton import assessment complies with the principle of national treatment because the assessment imposed on importers is the same as the assessment imposed on domestic cotton producers and the assessment is mandatory for both importers and producers. Furthermore, importers have shared in the growth of U.S. cotton consumption as much as domestic producers, as measured by the increasing import share of the U.S. market. During 1991 and 1992, some major importers and foreign countries objected to the U.S. imposition of the check-off assessment on cotton imports. They contended that such an assessment is a nontariff trade barrier, which is contrary to the GATT's overall objective of reducing trade barriers and liberalizing trade. Some importers also questioned whether they received benefits from the program comparable to those received by domestic producers. However, the USTR and USDA officials said that they were not aware of any country that had filed a formal challenge to the import assessment with the USTR or the World Trade Organization, the arbiter of international trade disputes. Some experts we talked with suggested that challenges may not have been filed because the amount of money involved is insignificant compared with the value of the trade taking place. Import assessments collected in 1994 totaled about $14 million, compared with an estimated value of $19 billion for cotton imports. USDA and USTR officials also told us that they are not concerned about the possibility that other countries could impose check-off assessments on U.S. exports. They pointed out that check-off programs expand market demand within a country, which can increase U.S. exports to that country. Therefore, as long as countries impose such assessments in line with the principle of national treatment, such assessments could have long-term benefits for U.S. exporters. USDA has put in place the necessary framework for administering the cotton check-off program as it relates to assessing imports. However, two significant administrative issues concerning the assessment on imported cotton are unresolved. First, importers are paying assessments on products containing U.S. cotton for which assessments have already been paid. To get an exemption from this assessment, importers must document the U.S. cotton content of imported products, as USDA requires. However, because importers find it difficult to provide such documentation, they rarely use this exemption. Second, importers and producers on the Cotton Board disagree over whether the Board has adequately carried out its responsibility to oversee the activities of Cotton Incorporated. USDA has carried out the activities specified in the 1990 legislation to assess imported cotton products. For example, USDA held a referendum on whether to assess imports and eliminate refunds of assessments. A majority of producers and importers who voted approved assessing imports and eliminating the refund provision. Working with Customs, USDA established procedures for calculating, collecting, and remitting assessments on imported cotton products. USDA also established equivalent assessment rates for imported cotton products; issued relevant orders and regulations governing the program's operations; established procedures for exempting imports containing U.S. cotton; and provided for the representation of cotton importers on the Cotton Board. Appendix II contains detailed information on the administrative requirements for imports set forth in the 1990 amendments and on the actions taken by USDA to implement them. The 1990 act required USDA to establish procedures to ensure that the domestic cotton used in imported products has been subject only to the one assessment provided for by law and that the assessment has not been paid twice--once when the raw U.S. cotton was sold and again when the same cotton was used in imported textiles and apparel. In response to the statute, USDA and the Cotton Board have developed procedures under which importers can be exempted from the assessment if they can document the domestic cotton content of the articles they import. However, generally cotton importers cannot readily obtain the information needed to document the amount of U.S. cotton in imported products because U.S. cotton is not easily identifiable in imported products. For example, foreign mills may import U.S. cotton and combine it with cotton from other countries to produce cotton products. These products may then be shipped to factories and mixed with other cotton textiles before the final product is exported to the United States. With this complicated flow of cotton products, importers generally cannot document at a reasonable cost which products contain U.S. cotton. Importers, who are primarily retailers, note that the country of origin of the raw cotton contained in their products has generally not been of interest to them and therefore they do not collect such information. Consequently, some importers are paying more in assessments than they should. Using USDA's Economic Research Service data on the U.S. cotton content in imported cotton products, we estimated that importers are paying import assessments of about $2.1 million annually on cotton products containing U.S. cotton, which should be exempt from the assessment. USDA considered alternatives to use in place of requiring documentation during the rule-making process but decided that they were either inequitable or not practicable. One alternative proposed was an across-the-board reduction in the import assessment rate. USDA believes this alternative disproportionately benefits countries that manufacture cotton products with little U.S. cotton. The other alternative was to adjust the import assessment rate for each country on the basis of the estimated amount of U.S. cotton used in manufacturing cotton products exported to the United States. Customs believes that maintaining different assessment rates for each exporting country is not administratively practicable. Recognizing that the current approach results in double assessments on U.S. cotton, the Cotton Board is exploring the possibility of identifying which foreign mills use mostly U.S. cotton as a way to help learn which imported products contain significant amounts of U.S. cotton. While producers are generally satisfied with the Cotton Board's efforts to oversee Cotton Incorporated, importers are more critical. In fact, one importer who was a member of the Board's executive committee resigned from the Board in February 1995, charging that its oversight was inadequate. Importers we spoke with contend that the Cotton Board has relinquished its fundamental oversight responsibility and left important management decisions to Cotton Incorporated. However, by statute, importers are excluded from Cotton Incorporated's board of directors, thereby leaving importers' interests unrepresented. More specifically, importers argue that the Cotton Board's current procedures for approving Cotton Incorporated's proposed budget amount to "rubber stamping." They contend that budget submissions do not contain sufficient detail for adequate review. For example, they cite an event that came to their attention only by accident--an annual, one-night public relations event costing an estimated $370,000, which was not identified in the 1995 budget. Importers questioned whether the budget contains other such unidentified items that the Cotton Board should be aware of. Furthermore, these importers said that the Cotton Board's meetings to review the budget are not conducive to raising "tough-minded, business-oriented" questions about the budget. They attributed this situation, in part, to the fact that the members of both Cotton Incorporated's board of directors and the Cotton Board are producers nominated by the same state associations. Therefore, producers on both boards know each other. Also, over the course of a few years, former members of Cotton Incorporated's board of directors may serve on the Cotton Board and vice versa. Equally important, the expertise and experience needed to carry out the cotton check-off program reside primarily with the staff of Cotton Incorporated. For these reasons, the Cotton Board is inclined to accept the plans and budgets submitted and approved by Cotton Incorporated. Producers we spoke with are generally satisfied with the Cotton Board's oversight and do not see the need to "micromanage" the check-off program, which they believe has had a clear record of success. However, producers also recognize that the Board's oversight could be strengthened. Therefore, as suggested by the importers, the Cotton Board has agreed to have an outside contractor conduct an overall evaluation of the program. The Board has also agreed to hold a 1-day meeting to begin developing a long-term plan that sets out goals and priorities to guide Cotton Incorporated's activities. While importers are willing to participate in these efforts, they still believe that producers have not addressed the need for the Cotton Board to play a more assertive role in carrying out its oversight responsibility. In addition to an improved planning process, importers would like to see the Board develop a budget process that allows more time and opportunity to ask in-depth questions about budget expenditures. "(6) the producers and importers that pay assessments to support the programs must have confidence in, and strongly support, the checkoff programs if these programs are to continue to succeed; and "(7) the checkoff programs cannot operate efficiently and effectively, nor can producer confidence and support for these programs be maintained, unless the boards and councils faithfully and diligently perform the functions assigned to them under the authorizing legislation." Because the cotton check-off program is industry-funded and -operated, AMS has found it to be more effective for the industry than for AMS to assume primary responsibility for deciding how to strengthen the Cotton Board's oversight role. AMS officials said that they have consciously decided to focus on guiding rather than prescribing the efforts of the Cotton Board to strengthen its oversight. For example, AMS program officials met with the Cotton Board and Cotton Incorporated to discuss the need for more useful and detailed budget information. This approach resulted in an improved budget report for fiscal year 1995. In addition, consistent with its approach of guiding the industry's efforts, AMS, in October 1995, called for a meeting of the Cotton Board, including staff and representatives of producers and importers, to help resolve the conflict between importers and producers. AMS envisions this meeting, which may be held in early 1996 at the start of the annual budget process, as an opportunity to chart a course of action to better integrate importers into the check-off program. Even if the Cotton Board exerts more oversight, finding common ground between the producers and importers will be difficult. The major importers are large retailers who do extensive brand-name advertising and see little benefit from the research and promotion program's generic advertising. Importers generally did not want to participate in the program--61 percent of the importers voting in the 1991 referendum opposed the assessment on cotton imports. Also, importers, who are outnumbered 5 to 1 on the Cotton Board and are not represented at all on Cotton Incorporated's board of directors, find it difficult to influence the program's direction. Nevertheless, importers told us that they are willing to work with producers to develop an efficient and effective cotton program. However, importers also told us that they would have more influence over the program's direction and their interests would be better served if they were represented on the board of directors of Cotton Incorporated. AMS officials, producers, the president of the Cotton Board, and the president of Cotton Incorporated told us that they would have no objection to having importers on Cotton Incorporated's board of directors, but they noted that the authorizing legislation would have to be revised to allow this representation. The cotton check-off program's promotion efforts have probably contributed to cotton's growth in the U.S. market. In addition, the U.S. consumption of cotton and the import share of the U.S. cotton market continued to increase following the imposition of the assessment on imported textiles and apparel. The value of this assessment--about one-half cent for a man's cotton shirt--is not likely to slow consumer demand for cotton. Furthermore, this assessment is in accordance with U.S. international trade agreements, according to USDA and USTR officials. While USDA has established an administrative framework for assessing imported cotton, two major issues raised by importers have yet to be resolved. The first of these issues--double payments on assessments--may be addressed to some extent by current efforts to identify foreign mills that use a significant amount of U.S. cotton. The second issue, however, is more difficult to resolve--the extent of the Cotton Board's oversight over Cotton Incorporated. While the Cotton Board and AMS are taking steps to address this issue, these efforts do not deal with importers' lack of representation on Cotton Incorporated's board of directors. Neither producers nor AMS officials object to including importers on Cotton Incorporated's board of directors. However, the legislation authorizing the program must be amended to allow such representation. But even if this issue is resolved, developing a cooperative working relationship between producers and importers will be difficult, given their fundamentally different perspectives on the program. To conduct this review, we analyzed data from USDA's Economic Research Service on U.S. cotton consumption and imports of textiles and apparel for 1984-95. We discussed the results of our analysis and related issues with knowledgeable officials, including USDA's Chief Economist and the president of the Cotton Board. We also spoke with staff from the International Cotton Advisory Committee, the Department of Commerce's Office of Textiles and Apparel, and the U.S. International Trade Commission. We discussed U.S. international trade obligations with staff of USDA's Foreign Agricultural Service and the USTR. Furthermore, we reviewed the relevant legislation and USDA's orders and regulations pertaining to the cotton check-off program and other relevant documents and studies. To provide information on the administration of the cotton check-off program for imports, we discussed the program's administration and related issues with officials of USDA's Agricultural Marketing Service and Customs. We also discussed the program's administration with the president, the chairman, and the treasurer of the Cotton Board; the president of Cotton Incorporated and the chairman of its board of directors; and representatives of importers on the Cotton Board. We reviewed relevant legislation, regulations, orders, the memorandum of understanding between USDA and Customs, and studies of the cotton check-off program. We also discussed various legal issues with USDA's Assistant General Counsel for Marketing. We performed our work between July 1995 and December 1995 in accordance with generally accepted government auditing standards. We provided copies of a draft of this report to AMS for its review and comment. We met with AMS' Cotton Division officials, including the Director, Deputy Director, and Chief of the Research and Promotion Staff. These officials generally agreed with the information discussed and provided some clarifying comments that we have incorporated into the report where appropriate. As agreed with your offices, unless the contents of this report are publicly announced earlier, we plan no further distribution of this report until 7 days from the date of this letter. At that time, we will send copies of this report to the Secretary of Agriculture and other interested parties. Copies will also be made available to others upon request. Please contact me at (202) 512-5138 if you or your staff have any questions. Major contributors to this report are listed in appendix III. This appendix contains two examples of how (1) the import cotton assessment is calculated (including the conversion from pounds to kilograms) and (2) an assessment on a sample cotton import shipment is calculated. The per-kilogram assessment represents the sum of the assessment and the supplemental assessment. An example of how the assessment is calculated follows: One bale = 500 pounds One kilogram = 2.2046 pounds One pound = 0.453597 kilograms The $1-per-bale assessment is converted to kilograms: A 500-pound bale = 226.8 kilograms (500 x 0.453597) The $1-per-bale assessment = $0.002000 per pound (1/500) or $0.004409 per kilogram (1/226.8) The supplemental assessment of 5/10 of 1 percent of the value of the cotton is converted to kilograms: Average price received = $0.683 per pound or $1.5057 per kilogram (0.683 x 2.2046) 5/10 of 1 percent of the average price in kilograms = $0.007529 per kilogram (1.5057 x 0.005) The Cotton Research and Promotion Act Amendments of 1990 set forth administrative implementing procedures for the U.S. Department of Agriculture (USDA) to extend the research and promotion program to cotton imports. Table II.1 lists these procedures and the actions USDA took to implement them. Section 1993 (2) --The Secretary of Agriculture shall, within a period not to exceed 8 months after the date of enactment of the act, conduct a referendum among cotton producers and persons that are cotton importers to ascertain if a majority of those voting approve the proposed amendment to the order. USDA held an implementing referendum during July 17-26, 1991. The proposed amendment was approved by a majority (60 percent) of the importers and producers voting in the referendum. Results were announced in a nationally distributed press release on August 2, 1991. Assessment on imported cotton products Section 1992 (3)-- If the proposed amendment of the order implementing the Cotton Research and Promotion Act Amendments of 1990 is approved in the referendum, each importer shall pay assessments on imported cotton products. USDA's final rule was published in the Federal Register (57 FR 29181) on July 1, 1992. The rule provided for Customs to collect assessments on cotton and cotton products imported into the United States on or after July 31, 1992. Section 1996 (2)--The right of a producer to demand a refund shall terminate if the proposed amendment of the order implementing the Cotton Research and Promotion Act Amendments of 1990 is approved in the referendum. Such right shall terminate 30 days after the date the Secretary of Agriculture announces the results of such referendum if such amendment is approved. Such right shall be reinstated if the amendment should be disapproved in any subsequent referendum. The actual elimination of assessment refunds to cotton producers became effective on September 1, 1991, 30 days after USDA announced the results of the July 1991 referendum. (continued) Importers' representation on the Cotton Board Section 1992 (2)(B)--An appropriate number of representatives, as determined by the Secretary of Agriculture, of importers of cotton on which assessments are paid, will serve on the Cotton Board. The importers' representatives shall be appointed by the Secretary of Agriculture after consultation with organizations representing importers, as determined by the Secretary. USDA's final rule amending the regulations for Cotton Board membership was published in the Federal Register (56 FR 65929) on December 20, 1991. The rule provided for an initial representation on the Cotton Board of four importers. In addition, the rule stated that additional importer members could be added to the Cotton Board after consultation by the Secretary with importer organizations and after consideration of the average annual volume of imported cotton that would be subject to assessment for 5 preceding years. In June 1995, four organizations represented importers: (1) United States Association of Importers of Textiles and Apparel, (2) United States Apparel Industry Council, (3) American Association of Exporters and Importers, and (4) American Import Shippers Association. Import assessment rate comparable to domestic producer rate Section 1992 (3)--The rate of assessment on imports of cotton shall be determined in the same manner as the rate of assessment per bale of cotton handled, and the value to be placed on cotton imports for the purpose of determining the assessment on such imports shall be established by the Secretary of Agriculture in a fair and equitable manner. USDA' s final rule, published in the Federal Register (57 FR 29181) on July 1, 1992, established a rate of assessment for imported cotton and cotton products that is the same, on a raw-cotton-equivalent basis, as the rate imposed on domestically produced cotton. De minimis amount not subject to assessment Section 1997 (1)(B)--Imported cotton shall not be assessed for any entry having a weight or value less than any de minimis figure as established by regulations. The de minimis figure that is established should minimize the burden in administering the import assessment but still provide for the maximum participation of imports of cotton in the assessment provisions of the act. Section 1205.510 (b)(3) of USDA's final rule established a de minimis value of $220.99 per line item on Customs entry documentation. Any line item entry in which the value of the cotton contained therein is less than $220.99 is not subject to the assessment. Procedures to ensure cotton content of imported products is not subject to more than one assessment Section 1992 (3)--The Secretary shall establish procedures to ensure that the upland cotton content of imported products is not subject to more than one assessment. Section 1205.510 (b)(5) and (9) of USDA's final rule (FR 29181, July 1, 1992) automatically exempts textile articles assembled abroad in whole or in part of fabricated components, produced in the United States and articles imported into the United States after being exported from the United States for alterations or repairs. Section 1205.510 (b)(6) of USDA's final rule allows imported cotton and cotton products, which contain U.S.-produced cotton or cotton other than upland cotton, to be exempted by the Cotton Board. Section 1205.520 of USDA's final rule allows each importer of cotton or cotton-containing products to obtain a reimbursement on that portion of the assessment that was collected on cotton produced in the United States or cotton other than upland cotton. (continued) Reimbursement of federal agencies' costs Section 1992 (3)--The order shall provide for reimbursing the Secretary of Agriculture for up to $300,000 in expenses incurred in connection with any referendum, and for up to 5 employee years in administrative costs after an order or amendment thereto has been issued and made effective. The order shall also include a provision for reimbursing any agency in the federal government that assists in administering the import provisions of the order for a reasonable amount of the expenses incurred by that agency. In 1993, USDA billed the Cotton Board for about $128,000 in reimbursable costs (which included first year start-up costs of almost $45,000) associated with collecting import assessments on cotton products. In November 1995, Customs reported costs of about $56,000 for fiscal years 1994 and 1995. Required reports from USDA and Customs Section 1998--Not later than 1 year after imported cotton products are subject to assessment, (1) the Secretary of Agriculture was required to prepare a report concerning the implementation and enforcement of the cotton check-off program and any problems that may have arisen in the implementation and enforcement as it relates to imports and (2) the Customs Service was required to prepare a report concerning its role in the implementation and enforcement as it relates to imports. In August 1993, USDA submitted its report to the Congress. Customs officials were not able to determine whether the agency had prepared such a report. Section 1993 (2)--After the implementing referendum is held, the Secretary of Agriculture will conduct a review once every 5 years to ascertain whether another referendum is needed to determine whether producers and importers favor continuation of the amendment provided for in the Cotton Research and Promotion Act Amendments of 1990. The Secretary is required to make a public announcement of the results of the review within 60 days after each fifth anniversary date of the referendum. Results of Secretary of Agriculture's review are scheduled to be announced by September 1996. Juliann M. Gerkens, Assistant Director Louis J. Schuster, Project Leader Carol Bray James L. Dishmon, Jr. John F. Mitchell Carol Herrnstadt Shulman The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. 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Pursuant to a legislative requirement, GAO assessed the: (1) growth in the U.S. market for cotton and cotton products; (2) extent to which import restrictions have affected importers' ability to take advantage of any growth in the U.S. market; and (3) relevant U.S. international trade obligations and the compliance factors for imported cotton and cotton products. GAO found that: (1) the cotton import assessment has not affected the growth rate of cotton imports; (2) the volume of imported cotton products has increased from 1.5 billion pounds in 1984 to 3.8 billion pounds in 1994; (3) the assessment is in compliance with U.S. trade obligations and is based on the principle of national treatment; (4) the Department of Agriculture (USDA) established an administrative framework for assessing cotton products, held a referendum for cotton producers and importers on whether to assess imports, set an assessment rate equivalent to domestic producer rates, and established collection procedures for cotton products with the Customs Service; (5) cotton importers frequently pay duplicative assessments on cotton products containing U.S. cotton because they have difficulty meeting the exemption criteria; and (6) producers and importers disagree on the management and oversight functions of the Cotton Board.

Although jointly financed by the states and the federal government, Medicaid is administered directly by the states and consists of 56 distinct state-level programs. Within broad federal guidelines, each program establishes its own eligibility standards; determines the type, amount, duration, and scope of covered services; and sets payment rates. In general, the federal government matches state Medicaid spending for medical assistance according to a formula based on each state's per capita income. In fiscal year 2004, the federal contribution ranged from 50 to 77 cents of every state dollar spent on medical assistance. For most state Medicaid administrative costs, the federal match rate is 50 percent. As program administrators, states have primary responsibility for conducting program integrity activities that address provider enrollment, claims review, and case referrals. Specifically, federal statute or CMS regulations require states to collect and verify basic information on potential providers, including whether the providers meet state licensure requirements and are not prohibited from participating in federal health care programs; have an automated claims payment and information retrieval system-- intended to verify the accuracy of claims, the correct use of payment codes, and patients' Medicaid eligibility--and a claims review system-- intended to develop statistical profiles on services, providers, and beneficiaries to identify potential improper payments; and refer suspected overpayments or overutilization cases to other units in the Medicaid agency for corrective action and potential fraud cases, generally, to the state's Medicaid Fraud Control Unit for investigation and prosecution. As noted in our 2004 report, states use a variety of controls and safeguards to stem improper provider payments. For example, states target high-risk providers seeking to bill Medicaid with on-site facility inspections, criminal background checks, and probationary or time-limited enrollment. States also reported using information technology to integrate databases containing provider, beneficiary, and claims information and to increase the effectiveness of their utilization reviews. Various states individually attributed cost savings or recoupments to these efforts valued in the millions of dollars. In contrast, CMS's role in curbing fraud and abuse in the Medicaid program is largely one of support to the states. As we reported last year, CMS administers two pilot projects--one focused on measuring the accuracy of a state's Medicaid claims payments (Payment Accuracy Measurement (PAM)) and the other focused on improper billing detection and utilization patterns by linking Medicare and Medicaid claims information (Medi-Medi). CMS also sponsors general technical assistance and information-sharing through its Medicaid fraud and abuse technical assistance group (TAG). In addition, CMS performs oversight of states' Medicaid fraud and abuse control activities. (See table 1.) A wide disparity exists between the level of resources CMS expends to support and oversee states' fraud and abuse control activities and the amount of federal dollars at stake in Medicaid benefit payments. In addition, CMS's organizational placement of staff and lack of strategic planning suggest a limited commitment to improving states' Medicaid fraud and abuse control efforts. The resources CMS devotes to working with states to fight Medicaid fraud and abuse do not appear to be commensurate with the size of the program's financial risk. In fiscal year 2005, CMS's Medicaid staff resources allocated to supporting or overseeing states' anti-fraud and abuse operations was an estimated 8.1 FTEs--3.6 FTEs at headquarters and 4.5 FTEs in the regional offices. Staff at headquarters are engaged in arranging and conducting the on-site compliance reviews of states' fraud and abuse control efforts and in information-sharing activities. Staff at the regional offices also participate in the state compliance reviews and respond to state inquiries. Canvassing the 10 regional CMS offices, we found that 7 regions each have a fraction of an FTE and the rest each have less than 2 FTEs devoted to providing assistance on fraud and abuse issues. For example, Region IV--which covers eight states and accounted for $33 billion of federal funds for Medicaid benefits in fiscal year 2004-- reported having 1 FTE devoted to Medicaid fraud and abuse control activities. (See table 2.) For fiscal year 2006, CMS's budget has no line item devoted to Medicaid fraud and abuse control activities. The project to estimate payment error rates known as PAM/PERM (required by statute) and the Medi-Medi pilot project (with benefits accruing to both programs) are financed through a statutorily established fund--the Health Care Fraud and Abuse Control (HCFAC) account. (See table 3.) The HCFAC monies from which these two projects are largely financed are known as "wedge" funds. As CMS's distribution of these funds varies from year to year, the level of support for fraud and abuse control initiatives is uncertain and depends on the priorities set by the agency. For example, fiscal year 2005 funds allocated from the HCFAC account for PAM/PERM and Medi-Medi were less than half the funds allocated in fiscal year 2004. In contrast, Medicare fraud and abuse control activities at CMS are financed primarily through earmarked funds from another HCFAC component--the Medicare Integrity Program. CMS's Medicaid compliance reviews are funded through a different source--HHS's budget appropriation. In fiscal year 2004, the budget for this activity was $26,000, down from $40,000 in fiscal year 2003 and $80,000 in fiscal year 2002. The placement of Medicaid's antifraud and abuse function in CMS's organizational structure and a lack of stated goals and objectives suggests a limited institutional commitment to Medicaid fraud and abuse control activities. Currently, two different headquarters offices are charged with working with states on fraud and abuse issues. CMS's Office of Financial Management staffs the PAM/PERM and Medi-Medi initiatives, while the Center for Medicaid and State Operations (CMSO) staffs the state compliance reviews and TAG functions. Under this organizational structure, the Medicaid fraud and abuse staff in CMSO are not in an optimal position to leverage the resources allocated to the office with responsibility for developing tools and strategies for combating fraud and abuse. As further evidence of the low priority assigned to Medicaid fraud and abuse control, the planning, outreach, and building of staff expertise lacks leadership continuity. From 1997 to 2003, the leadership and funding of CMS's support for states' antifraud and abuse efforts resided in a consortium of two regional offices. The consortium led a network of regional fraud and abuse coordinators and state Medicaid representatives, sponsoring telephone conferences and workshops, seminars, and training sessions aimed at sharing best practices for fighting fraud and abuse. Medicaid staff based at headquarters reported to a national network coordinator located at one of the consortium's regional offices. With the retirement of the national coordinator in 2003, the consortium relinquished its leadership and funding role and the Medicaid antifraud and abuse activities were reassigned to CMSO without additional resources. Since then, no nationwide meetings with state program integrity officials have been held. At the same time, CMS lacks a strategic plan to drive its Medicaid antifraud and abuse operations. Goals for the long term, as well as plans on how to achieve them, have not been specified in any public department or agency planning documents. For example, HHS's fiscal year 2004 performance and accountability report cited Medicaid's high risk of payment errors as the department's management challenge for fighting Medicaid fraud and abuse. To address this challenge, the report cited the PAM/PERM initiative for estimating payment error rates, as this activity is required in federal statute. But there was no mention of any other fraud and abuse support or oversight activities or goals. Similarly, the discussion of Medicaid program integrity in the Administration's Budget for Fiscal Year 2006 covers activities to curb states' inappropriate financing mechanisms but makes no mention of federal support or oversight of states' fraud and abuse efforts. At the agency level, CMS officials were unable to provide any publicly available planning documents specifying short- or long-term Medicaid program goals that target fraud and abuse. The low priority given to CMS activities in support of states' fraud and abuse control efforts is having serious consequences for current projects. CMS's distribution of resources may require some activities to be scaled back and others to be eliminated. Specifically, the expansion of the Medi-Medi data match project has been slow, leaving potentially millions of dollars in cost avoidance and cost savings unrealized. This project enables claims data analysts to detect patterns that may not be evident when providers' billings for either Medicare or Medicaid are viewed in isolation. For example, by combining data from each program, analysts can identify "time bandits," or providers who bill for more than 24 hours in a single day. As of March 31, 2005, seven states with fully operational projects reported returns to the Medicaid and Medicare programs of $133.1 million in provider payments under investigation, $59.7 million in program vulnerabilities identified, and $2.0 million in overpayments to be recovered. In addition, 240 investigations had been initiated and 28 cases referred to law enforcement agencies. Two additional states, Ohio and Washington, have begun Medi- Medi projects that are expected to be operational later this year. Because of anticipated unmet funding needs, existing Medi-Medi data match activities are in jeopardy of being scaled back considerably. As CMS stated in its fiscal year 2005 second quarter report on Medi-Medi projects, "Eliminating certain Medi-Medi projects in their entirety and/or dramatically reducing the level of effort across all of the projects are among the approaches under consideration. Beyond FY 2006, the entire project will terminate if additional funding is not identified." Agency officials noted that several additional states have expressed interest in participating but expanding the program to more states will not occur without a new allocation or realignment of resources. Plans for additional activities that involve coordination with Medicare have been put on hold, pending budget decisions. These include enhanced oversight of prescription drug fraud when Medicare begins covering Medicaid beneficiaries' drug benefits in 2006 and the use of a unified provider enrollment form instead of separate forms for Medicare and Medicaid. Similarly, CMS's role as provider of technical assistance and disseminator of states' best practices has been severely limited because of competing priorities. At a health care fraud and abuse conference sponsored by HHS and the Department of Justice in 2000, participants from states and CMS regional offices articulated their common unmet needs with regard to fraud and abuse technology. The top three areas cited were information- sharing and access to data; training in data analysis and use of technology; and staffing, hardware, and software resources. CMS has not sponsored a national conference with state program integrity officials since 2003 and has not sponsored any fraud and abuse workshops or training since 2000. According to a CMS official, such information-sharing and technical assistance activities would not be expensive to support--less than $100,000 annually--and could result in returns that would exceed this relatively low amount. Resource shortages also account for CMS's limited oversight of states' Medicaid prevention, detection, and referral activities for improper payments. Since January 2000, CMS's Medicaid staff from headquarters and regional offices have been conducting compliance reviews of about seven to eight states a year. The reviews are aimed at ensuring that states have processes and procedures in place, in compliance with federal requirements for enrolling providers, reviewing claims, and referring cases. These compliance reviews have been effective at identifying weaknesses in states' efforts to combat fraud and abuse. For example, in the course of these reviews, CMS has found instances in which a state had no process in place to prevent payments to excluded providers, states did not use their authority to evaluate providers' professional or criminal histories as part of the provider enrollment process, and a state did not follow appropriate procedures for referring a case to state law enforcement authorities. States have reported making positive modifications in their programs as a result of the CMS compliance reviews. Nevertheless, at the currently scheduled pace, states' programs will be reviewed once in 7 years at the earliest. Because the compliance reviews are infrequent, CMS's knowledge of states' fraud and abuse activities is, for many states, substantially out- of-date at any given time. Relatively few and questionably aligned resources and an absence of strategic planning underscore the limited commitment CMS has made to strengthening states' ability to curb fraud and abuse. Despite the millions of dollars CMS receives annually from a statutorily established fund for fraud and abuse control, the agency has not allocated these resources to sufficiently fund initiatives that can help states increase the effectiveness of their Medicaid fraud and abuse control efforts. Developing a strategic plan for Medicaid fraud and abuse control activities would give CMS a basis for providing resources that reflect the financial risk to the federal government. We discussed facts in this statement with a relevant CMS official. He noted that CMS does not view fraud and abuse control activities as separate from its financial management responsibilities. He indicated that CMS has invested substantial resources in program integrity activities that focus on the financial oversight of the Medicaid program. While we agree that financial oversight of Medicaid is a key component of program integrity, we maintain that the other component--fraud and abuse control activities--warrants a greater commitment than it currently receives. Mr. Chairman, this concludes my prepared remarks. I would be happy to answer any questions that you or other Members of the Committee may have. For further information regarding this testimony, please contact Leslie G. Aronovitz at (312) 220-7600. Hannah Fein, Sandra Gove, and Janet Rosenblad contributed to this statement under the direction of Rosamond Katz. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Today's hearing addresses fraud and abuse control in Medicaid, a program that provides health care coverage for eligible low-income individuals and is jointly financed by the federal government and the states. In fiscal year 2003, Medicaid covered nearly 54 million people and the program's benefit payments totaled roughly $261 billion, of which the federal share was about $153 billion. States are primarily responsible for ensuring appropriate payments to Medicaid providers through provider enrollment screening, claims review, overpayment recoveries, and case referrals. At the federal level, the Centers for Medicare & Medicaid Services (CMS) is responsible for supporting and overseeing state fraud and abuse control activities. Last year, GAO reported that CMS had initiatives to assist states, but the dollar and staff resources allocated to oversight suggested that CMS's level of effort was disproportionately small relative to the risk of federal financial loss. Concerned about the stewardship of federal Medicaid funds, Congress has raised questions about CMS's commitment to Medicaid fraud and abuse control. This statement focuses on (1) the level of resources CMS currently applies to helping states prevent and detect fraud and abuse in the Medicaid program and (2) the implications of this level of support for CMS fraud and abuse control activities. Since GAO reported last year, the resources CMS expends to support and oversee states' Medicaid fraud and abuse control activities remain out of balance with the amount of federal dollars spent annually to provide Medicaid benefits. In fiscal year 2005, CMS's total staff resources allocated to these activities was about 8.1 full-time equivalent (FTE) staffing units--approximately 3.6 FTEs at headquarters and 4.5 FTEs in the regional offices. Among CMS's 10 regional offices--each of which oversees states whose Medicaid outlays include billions of federal dollars--7 offices each have a fraction of an FTE and the rest each have less than 2 FTEs allocated to Medicaid fraud and abuse control efforts. Moreover, the placement of the Medicaid fraud and abuse control staff at headquarters--apart from the agency's office responsible for other antifraud and abuse activities--as well as a lack of specified goals for Medicaid fraud and abuse control raise questions about the agency's level of commitment to improve states' activities in this area. CMS's support and oversight initiatives include a pilot project for states to enhance claims scrutiny activities by coordinating with the Medicare program. Despite the project's positive results in several states, less than one-fifth of the states currently participate in the project and resource constraints may require CMS to scale back these efforts instead of expanding them to additional states that are seeking to participate. Similarly, CMS's support activities--such as conducting national conferences, regional workshops, and training--have been terminated altogether. The frequency of CMS's on-site reviews of states' fraud and abuse control activities--about seven to eight visits a year--has not changed since GAO reported on this last year. This means that federal oversight of a state's Medicaid program safeguards will not occur, at best, more than once every 7 years. Relatively few and questionably aligned resources and an absence of strategic planning underscore the limited commitment CMS has made to strengthening states' ability to curb fraud and abuse. Despite the millions of dollars CMS receives annually from a statutorily established fund for fraud and abuse control, the agency has not allocated these resources to sufficiently fund initiatives that can help states increase the effectiveness of their Medicaid fraud and abuse control efforts. Developing a strategic plan for Medicaid fraud and abuse control activities would give CMS a basis for providing resources that reflect the financial risk to the federal government. In discussing the facts in this statement with a CMS Medicaid official, he stated that the agency does not view antifraud and abuse initiatives as separate from financial oversight, an area that has received substantial resources in recent years. While we agree that financial management is important to program integrity, we believe that an increased commitment to helping states fight fraud and abuse is warranted.

Early in the 2000 Census cycle, the U.S. Census Bureau was researching coverage measurement options for the 2000 Census, including the Post Enumeration Survey (PES) methods used in past decennial censuses. The bureau explored a number of design options aimed at improving data accuracy while controlling costs. In 1993, the bureau was also evaluating the feasibility of conducting a one-number census, which combines the features of both the traditional head count and statistical methods to produce a single count before the mandated deadlines. In May 1995, the bureau announced that it would conduct a sample survey of 750,000 housing units, called Integrated Coverage Measurement (ICM), to estimate how many housing units and people it would miss or count more than once in the 2000 Census. In this initial design for the 2000 Census, the bureau planned to use statistical methods to integrate the results of this survey with the traditional census enumeration to provide a one-number census by December 31, 2000. The U.S. Supreme Court ruled in January 1999 that 13 U.S.C. 195 prohibited the use of statistical sampling to generate population data for reapportioning the U.S. House of Representatives. However, the court's ruling did not prohibit the use of statistical sampling for other purposes, such as adjusting formulas to distribute billions of dollars of federal funding to state and local governments. Following the Supreme Court ruling, the bureau abandoned certain statistical aspects of the ICM program, and announced the A.C.E. program to assess the quality of the population data collected in the 2000 Census, using a smaller sample of 300,000 housing units. The bureau conducted A.C.E., which corresponded to the PES in past censuses and the ICM in the original 2000 Census Plan, to measure and correct the overall and differential coverage of the U.S. resident population in the 2000 Census. Although A.C.E. was generally implemented as planned, the bureau found that A.C.E. overstated the census net undercount. This was due, in part, to errors introduced during matching operations and from other remaining uncertainties. The bureau has reported that additional review and analysis would be necessary before any potential uses of A.C.E. data could be considered. Due to uncertainties or errors in the A.C.E. survey results, the acting director of the bureau decided in separate decisions in March 2001 and October 2001 that the 2000 Census tabulations would not be adjusted for any purpose, including distribution of billions of dollars in federal funding. These decisions were consistent with those for the 1990 Census, which was not adjusted due to other problems. According to senior bureau officials, the bureau is continuing to evaluate issues related to A.C.E. and the census, and the results of its evaluation are expected to influence the bureau's planning for the 2010 Census. The bureau receives two appropriations from the Congress: (1) salaries and expenses and (2) periodic censuses and programs. The salaries and expenses appropriation provides 1-year funding for a broad range of economic, demographic, and social statistical programs. The periodic censuses and programs appropriation includes primarily no-year funding to plan, conduct, and analyze the decennial censuses every decade and for other authorized periodic activities. Since fiscal year 1996, the bureau has prepared its annual budget request for the 2000 Census in eight broad frameworks of effort that were submitted to the Office of Management and Budget (OMB) and the Congress. For management, program, financial, staffing, and performance purposes, frameworks are further divided by the bureau into activities and then projects within these activities. The bureau accounts for the costs of conducting the ICM/A.C.E. programs in its Commerce Administrative Management System (CAMS), which became operational in fiscal year 1997. Bureau financial management reports generated by CAMS have provided appropriated amounts, expended and obligated amounts, and variances to a project level from fiscal year 1997 to the current period. The ICM/A.C.E. programs are an activity comprised of eight projects contained within three frameworks. Fiscal year 1996 was the first year the bureau set up a specific project code to identify ICM program costs through fiscal year 1999. However, it was difficult to identify the change to the A.C.E. program beginning in fiscal year 2000 because the bureau did not change many of the project descriptions in CAMS from the ICM program. As discussed in our December 2001 report, we identified specific control weaknesses for fiscal year 2000 related to the lack of controls over financial reporting and financial management systems. To meet the objective of responding to seven questions concerning ICM/A.C.E. program life cycle costs, we reviewed and analyzed budget and program data for all coverage measurement programs that existed during the 2000 Census (for fiscal years 1991 to 2003), which included the ICM and A.C.E. programs. We did not audit budget and other financial data provided by the bureau. We also reviewed planning and methodology documents and other available information in order to determine the history of the programs. Also, we identified ICM and A.C.E. project accounts and analyzed amounts by fiscal year using the financial management reports generated by CAMS. We discussed the results of our analysis with senior bureau officials and interviewed bureau officials to obtain their views and observations regarding the ICM and A.C.E. programs. It was not our objective to assess the efficiency of expenditures and obligations against planned budget appropriations. We encountered several limitations in the scope of our work on this assignment as follows. We were unable to determine the complete life cycle costs of the ICM/A.C.E. programs because the bureau considered any ICM/A.C.E. related costs from fiscal years 1991 through 1995 as part of its general research and development programs and thus did not separately track these costs. Although some costs were tracked in fiscal year 1996, the bureau still considered these costs as research and development and did not include these costs as ICM/A.C.E. program costs. We were further unable to identify ICM/A.C.E. portions of costs, such as evaluations and data processing, which the bureau included with other 2000 Census programs. Our work was performed in Washington, D.C. and at U.S. Census Bureau headquarters in Suitland, Maryland, from February 2002 through July 2002. Our work was done in accordance with U.S. generally accepted government auditing standards. On November 17, 2002, the Department of Commerce provided written comments on a draft of this report and we have reprinted the comments in appendix II. Technical comments were also provided by the department and incorporated into the report where appropriate, but have not been reprinted. Although the bureau tracked some costs of conducting the ICM/A.C.E. programs, we found that the bureau did not identify the complete life cycle costs of the programs due to the following three factors. First, the bureau only tracked the costs of conducting the ICM/A.C.E. programs, which covers the period from fiscal year 1997 through 2003. Although life cycle costs for the 2000 Census cover a 13-year period from fiscal years 1991 through 2003, senior bureau officials said that the ICM/A.C.E. program was not viable for implementation until fiscal year 1997. Therefore, the bureau considered costs from earlier years as part of its general research and development programs and the bureau did not assign unique project codes to identify ICM/A.C.E. programs and related costs in its financial management system. Second, although $3.6 million of fiscal year 1996 obligated costs were identifiable in the bureau's financial management system as an ICM special test, the bureau did not consider these costs as part of the ICM/A.C.E. programs. Instead, these costs were considered general research and development. However, because the bureau separately identified these costs as ICM program costs, we have included the $3.6 million as part of the ICM/A.C.E. program costs we could identify in this report. Finally, we were unable to identify the ICM/A.C.E. portions of costs, such as evaluations and data processing, which the bureau included with other 2000 Census programs. For example, in late fiscal year 2000 and after, the bureau did not separate A.C.E. evaluations from its other 2000 Census evaluations in its financial management system. Bureau officials stated that the contracts for evaluations included overall 2000 Census and A.C.E. evaluations, and did not have a separate code identifying A.C.E. costs. Similarly, the bureau did not capture all costs for items such as data processing by programs like ICM/A.C.E. These type of operations were conducted for the 2000 Census overall, were budgeted by framework, were not separated by program in the bureau's financial management system, and were not allocated back to individual projects. Therefore, we were unable to identify these types of costs for the ICM/A.C.E. programs. Due to the limitations in the bureau's data, our responses to the seven specific questions identified in your request do not include all ICM/A.C.E. life cycle costs and are limited to available cost information covering fiscal years 1996 through 2003, except where indicated, and exclude such costs as A.C.E. evaluations and some data processing. The following sections include our responses to the seven questions on ICM/A.C.E. program life cycle costs. 1. What were the original estimated life cycle costs for the ICM/A.C.E. programs? The bureau originally estimated the costs of conducting the ICM program to be about $400 million when it planned to use statistical methods to integrate the results of a survey based on 750,000 housing units with the traditional census enumeration to provide a one-number census. This original estimate included fiscal years 1997 through 2003. However, this estimate was incomplete, as the bureau did not include program costs prior to fiscal year 1997 because it considered them as general research and development costs. The bureau also combined costs for A.C.E. evaluation and data processing with other program costs in different frameworks. The U.S. Supreme Court ruled in January 1999 that statistical sampling could not be used to generate population data for reapportioning the House of Representatives. As a result of the ruling, in June 1999, as part of its amended fiscal year 2000 budget request, the bureau decreased the ICM/A.C.E. program by about $214 million, due to a reduction in the sample size from 750,000 to 300,000 housing units. We could not identify from bureau records an original estimate for only A.C.E. life cycle costs for completing the scaled-back survey. 2. What was the source and support for $400 million in life cycle costs reported by the bureau for the ICM/A.C.E. programs? In 1995, the bureau estimated life cycle costs for the 2000 Census in 13 frameworks; however, bureau documents did not break out the frameworks into activities and projects. The first evidence for the $400 million cost estimate for conducting the ICM/A.C.E. program for the 2000 Census was submitted as part of the original fiscal year 2000 budget justification for overall census operations to the Congress in February 1999. This original budget was prepared based on the initial design for ICM, which planned to incorporate statistical methods to integrate the results of a survey based on 750,000 housing units with the traditional census enumeration to provide a one-number census. 3. How were ICM/A.C.E. program costs estimated? According to bureau officials, estimates of ICM/A.C.E. costs are based on assumptions about the needs for headquarters and support staff and related benefits, contractual services, travel, office space, and equipment costs necessary to conduct and support operations of the program. The bureau used an electronic cost model to calculate many of the estimates for the ICM/A.C.E. programs. For personnel costs, the A.C.E. program costs were divided into costs for data collection and costs for headquarters full-time equivalent (FTE) staff and support staff as follows. The A.C.E. field staff needed to conduct each A.C.E. data collection operation included enumerators, crew leaders, field operations supervisors, and assistants. The cost model was designed to estimate the number of field staff positions, hours, FTEs, salary costs, and mileage costs. In the cost model, each operation had its own distinct production assumptions based on the data collection needs for that operation. Based on operational needs, the bureau determined the assumptions for production rates, mileage rates, production and training days, and hours worked per day. The magnitude of the A.C.E field production labor was determined by the A.C.E. field operation workload. Based on the workload, the number of A.C.E. enumerators was calculated for each operation. Then, based on the number of enumerators, the bureau determined the number of crew leaders, field operations supervisors, and assistants needed. The number of production positions became the bureau's basis for the number of staff to be trained. The number of positions, both production and trainee, was then used to estimate the salary cost as a function of the total production and trainee hours and applicable labor rates. Once labor rates were determined, a percentage was used to calculate benefit costs. For nonpersonnel costs, the bureau estimated the costs based on the following. Contract costs were estimated based upon procurement needs for goods and services, including contractors hired to assess the feasibility of A.C.E. operations and to evaluate the results of the program. Travel costs were estimated using the numbers of production and trainee positions to calculate the average miles per case and the mileage reimbursement rate. Office space estimates were based on the number of people who needed space, the number of square feet per person, and the cost per square foot. Equipment and supply costs were based on the needs of each employee and the specific needs of each A.C.E. operation. This included laptop computers that were provided to field data collection staff to conduct interviews and to monitor the operational progress of the program. 4. How much did Census budget for the ICM/A.C.E. programs? As shown in figure 1, we identified from bureau records budgeted amounts of $276.5 million for conducting the ICM/A.C.E. programs. Of this amount, $64.2 million was for the ICM program from fiscal year 1996 through 1999, and $212.3 million was for the A.C.E. program from fiscal year 2000 through 2003. Also, see table 1 in appendix I for additional details of ICM/A.C.E. budgeted costs by framework and project. 5. What were the obligated life cycle costs for the ICM/A.C.E. programs? As shown in figure 2, we identified from bureau records obligated amounts of $206.9 million, of which $58.4 million was for the ICM program from fiscal year 1996 through 1999, and $148.5 million was for the A.C.E. program for fiscal years 2000 and 2001. We did not include obligated costs for fiscal year 2002 as they are not yet final and fiscal year 2003 obligations have yet to be incurred. Also, see table 2 in appendix I for additional details of obligated costs for the ICM/A.C.E. programs. As shown in figure 3, of the $206.9 million of obligated ICM/A.C.E. program costs through fiscal year 2001, 65 percent or about $135 million were for salaries and benefits. The next largest category was for contractual services, which constituted about $22.3 million or 11 percent of ICM/A.C.E. program costs. The third largest category was for equipment, which constituted about $22 million, or 11 percent of ICM/A.C.E. program costs. Other costs - including office space, travel, and supplies - made up about $27.6 million or 13 percent of program costs. 6. Were there any budgeted funds for the ICM/A.C.E. programs not used as of the end of fiscal year 2001, and if so, how much? About $57.7 million of budgeted funds that we identified from bureau records for the ICM/A.C.E. programs were not obligated through fiscal year 2001. For fiscal years 1996 and 1997, there were no unused funds for the ICM program. For fiscal year 1998, about $2.7 million remained unobligated for the ICM program because of the following reasons. $1.5 million was due to the dress rehearsal housing unit follow-up workload being smaller than anticipated; a bureau bonus program not being implemented although budgeted; and less mileage reimbursement than budgeted under project code 6205 (ICM Dress Rehearsal). $400,000 was due to unused budgeted funds for salaries related to project code 6352 (ICM Coverage Measurement). $400,000 was due to unused budgeted funds for salaries and a delay in awarding contract services under project code 6444 (ICM Procedures and Training). $400,000 was due to unused budgeted funds for regional office manager and assistant manager salaries and travel costs due to delays in hiring under project code 6480 (ICM Collection). For fiscal year 1999, about $3.6 million budgeted for the ICM program remained unobligated due to the following reasons. About $2.3 million related to project code 6480 (ICM Collection) was not used, including $1.6 million due to unspent salaries related to hiring delays, hiring fewer staff than authorized for selected positions, and hiring qualified candidates at less than budgeted levels. Another $0.7 million was due to less mileage reimbursement than budgeted. About $1.2 million was due to equipment costs and hardware for 2000 being less than budgeted under project code 6608 (ICM Processing). For fiscal year 2000, about $42.5 million remained unobligated for the A.C.E. program, consisting of almost $40 million for project code 6480 (A.C.E. Collection), which was budgeted for the program but was not used primarily because of the following reasons. About $32 million was due to unspent salaries and benefits for office staff in field offices from hiring fewer positions and hiring at lower grades than budgeted and from lower data collection costs due to a reduction in cases requiring personal visits. About $4 million was due to the fact that contract obligations for laptop computers and support services were less than budgeted. About $2 million resulted from lower GSA rents than budgeted. For fiscal year 2001, about $8.9 million of unobligated funds remained for the A.C.E. program, consisting mostly of $6.4 million for project code 6480 (A.C.E., Collection), which was budgeted for the program but was not used. 7. What were the ICM/A.C.E. program-related costs for the bureau dress rehearsal in fiscal year 1998? As shown in appendix I, the ICM program-related costs for the 1998 dress rehearsal were captured under project code 6205 (ICM Dress Rehearsal). Of the total $10.8 million budgeted, we were able to identify obligations of $9.4 million from bureau records. Most of these obligations were incurred in fiscal year 1998, with some follow-up amounts in the first quarter of fiscal year 1999. According to bureau officials, the dress rehearsal project activities included data collection and case management, data processing, and implementation of estimation operations. This project also covered the implementation of ICM and some elements of A.C.E. at the Sacramento, California, and Menominee County, Wisconsin dress rehearsal sites. The Department of Commerce comments expressed disagreement with how we presented answers to the seven questions in the report, but did not comment on the substance of our answers. It said that our report's conclusions imply financial management or reporting failures and suggest specific control weaknesses in the bureau's financial management systems. It also said we inferred an inability to properly manage from large unexplained discrepancies between budgeted and obligated amounts for the ICM/A.C.E. programs. Our answers were not prepared with the intent of drawing conclusions beyond the information presented and we did not make interpretive conclusions or qualitative judgments about the ICM/A.C.E. programs. Although not within the scope of this report, our December 2001 report identified internal control weaknesses for fiscal year 2000 related to the bureau's lack of controls over financial reporting and financial management systems. The department's written comments and our more detailed evaluation of its concerns are presented in appendix II. As agreed with your offices, unless you announce its contents earlier, we plan no further distribution of this report until 7 days after its issuance date. At that time, we will send copies to the Chairman and Ranking Minority Member of the Senate Committee on Governmental Affairs, the House Committee on Government Reform, and the House Subcommittee on Civil Service, Census, and Agency Organization. We will also send copies to the Director of the U.S. Census Bureau, the Secretary of Commerce, the Director of the Office of Management and Budget, the Secretary of the Treasury, and other interested parties. This report will also be available on GAO's home page at http://www.gao.gov. If you or your staffs have any questions concerning this report, please contact me at (202) 512-9095 or by e-mail at [email protected] or Roger R. Stoltz, Assistant Director, at (202) 512-9408 or by e-mail at [email protected]. A key contributor to this report was Cindy Brown-Barnes. The following are GAO's comments on the letter dated October 17, 2002, from the Department of Commerce. 1. Our report does not make interpretive conclusions or qualitative judgments about the ICM/A.C.E. programs. With bureau assistance, we compiled unaudited budgeted and obligated amounts for projects that the bureau reported in its financial management system as being ICM/A.C.E. related. Our review of these reported costs indicated that life cycle costs of the ICM/A.C.E. programs were not complete due to three factors as discussed in the body of our report. One of the factors we cited that contributed to incomplete life cycle costs was $3.6 million of fiscal year 1996 obligated costs for an ICM special test. In its comments, the bureau pointed out that prior to fiscal year 1996 it had not defined the coverage measurement program, did not allocate any expenditures to the ICM project codes, and could not identify any costs prior to fiscal year 1996. Thus, it was the bureau's decision to not track specific costs during this time period and to consider them as general research. We also stated that $57.7 million of budgeted funds were not obligated or spent through fiscal year 2001, and, with input from bureau officials, we obtained reasons why these funds were not spent. The bureau did not take exception to these facts in its response and we noted no improprieties in this report. Regarding a reference to specific control weaknesses in its financial management systems, the scope of this report did not include an assessment of internal control weaknesses in the bureau's financial management systems. However, in a December 2001 report, we identified specific internal control weaknesses for fiscal year 2000 related to the bureau's lack of controls over financial reporting and financial management systems.2. We still disagree with the bureau on this point, as we stated in the draft report. Because these costs were separately tracked by a specific ICM project code in the bureau's financial management system, we included them in the costs of the ICM/A.C.E. programs that we could identify. 3. We did not cite discrepancies between the $400 million original cost estimate of the ICM/A.C.E. programs provided in early 1999 and the $277 million budgeted amount we identified for fiscal years 1996 through 2003. An objective of our report was to determine what were the original estimated life cycle costs for the ICM/A.C.E. programs. The earliest amount that we could identify from bureau records was $400 million and in our report we explained that this amount was estimated by the bureau before the January 1999 Supreme Court decision. As a result of this decision and as disclosed in our report, the bureau decreased the ICM/A.C.E. program by about $214 million due to a reduction in the sample size from 750,000 to 300,000 housing units. 4. We did not suggest that the difference between $277 million of budgeted life cycle costs and $207 million of obligated life cycle costs demonstrated the bureau's inability to properly manage and record expenditures relating to the ICM/A.C.E. programs. As presented in our report, the budgeted amount of $277 million included fiscal years 1996 through 2003 and the obligated amount of $207 million included amounts for 2 fewer fiscal years (1996 through 2001). As the bureau pointed out in its response, it is too soon to determine obligated amounts for fiscal years 2002 and 2003 that were budgeted for $12.5 million. Variances for the remaining $57.7 million of unspent funds are discussed in comment 1. 5. The bureau agreed that it did not capture the life cycle costs of evaluations for the ICM/A.C.E. programs because evaluations for all 2000 Census programs were charged to one project code. However, the bureau believes that data processing costs were included in the life cycle costs of the ICM/A.C.E. programs and stated that not being able to identify portions of these costs is not demonstrative of a financial management or reporting failure. We agree with the bureau that some data processing costs were captured in the life cycle costs of the ICM/A.C.E. programs as evidenced by project codes for ICM/A.C.E. data processing for procedures, training, and processing as part of Framework 5. However, we do not believe that all data processing costs were included. Similar to evaluation costs, the bureau attributed much of its computer hardware and support costs to overall 2000 Census programs, and did not allocate costs to specific projects or programs. 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To assess the quality of the population data collected in the 2000 Census, the U.S. Census Bureau conducted the Accuracy and Coverage Evaluation (A.C.E.) program, which focused on a survey of housing units designed to estimate the number of people missed, counted more than once, or otherwise improperly counted in the census. GAO reviewed the life cycle costs of the A.C.E. program and its predecessor, the Integrated Coverage Measurement (ICM) program. GAO found that the original estimated cycle costs of conducting the ICM/A.C.E. programs were $400 million. The first evidence for the original $400 million estimate is in the original budget justifications for fiscal year 2000. The bureau based its estimates of ICM/A.C.E. costs on assumptions about the needs for personnel and benefits, contractual services, travel, office space, equipment, and other costs necessary to conduct and support operations of the programs. The budgeted amounts that GAO identified from bureau records for conducting the ICM/A.C.E. programs are $277 million through fiscal year 2003. The obligated costs that GAO identified from bureau records for conducting the ICM/A.C.E. programs are $207 million through fiscal year 2001. $58 million of budgeted funds for the ICM/A.C.E. programs that GAO identified from bureau records were not obligated through fiscal year 2001. The ICM/A.C.E. program-related costs that GAO identified from bureau records for the 1998 dress rehearsal were $11 million budgeted and $9 million obligated.

The Countering Iran in the Western Hemisphere Act of 2012 directed the Secretary of State to conduct an assessment of the threats posed to the United States by Iran's growing presence and activity in the Western Hemisphere, and to submit a strategy to address Iran's growing hostile presence and activity in the Western Hemisphere. We identified 12 broad elements in the act that should be included in the strategy, such as descriptions of the presence, activities, and operations of Iran and its proxy actors in the Western Hemisphere; a description of the federal law enforcement capability and military forces in the Western Hemisphere that may organize to counter the threat posed by Iran and its proxy actors; and a plan to address any efforts by foreign persons, entities, and governments in the region to assist Iran in evading United States and international sanctions. In June 2013 State submitted a seven-page classified strategy report, an unclassified annex that summarizes policy recommendations, and an Intelligence Community Assessment at a higher security classification level, to fulfill the requirement in the act. State's seven-page classified strategy report is an overview of Iran's activities in the Western Hemisphere, its relationships with countries in the area, and U.S. efforts to address any concerns. It includes a summary of diplomatic and economic ties with the Western Hemisphere countries, noting that the key to Iran's activities in the region has been Venezuela. The strategy report notes that the economic relationship between Iran and the Western Hemisphere is limited, with only 0.2 percent of Latin American exports going to Iran. It also describes the effect of U.S. economic sanctions and diplomatic pressure, which it says have been successful in preventing further Iranian involvement in the Western Hemisphere. In addition, the strategy broadly describes Iranian activities in the Western Hemisphere. The strategy report also describes five areas of focus for continuing to address Iranian threats in the Western Hemisphere. The areas of focus are to (1) expand existing efforts to share intelligence and information; (2) identify, disrupt, and dismantle criminal networks to enhance border security and strengthen law enforcement; (3) continue to take actions on sanctions and implementation of the Iran Freedom and Counter- Proliferation Act of 2012; (4) improve rule of law capacity-building initiatives in the Western Hemisphere; and (5) continue diplomatic pressure, including at the multilateral level in the United Nations and the International Atomic Energy Agency. In addition to the seven-page strategy report, State submitted two annexes. Annex A is an unclassified summary of policy recommendations and addresses a requirement in the act to submit an unclassified summary of policy recommendations. Annex A defines the desired end state of U.S. efforts in this area to be a decrease in Iranian presence and influence in the Western Hemisphere. It makes the assumption that Iran will continue its outreach to the Western Hemisphere but also concludes that Iranian influence in the Western Hemisphere is waning. Annex B is an Intelligence Community Assessment that was developed by ODNI at the request of State. According to ODNI, the Intelligence Community Assessment includes, among other things, a discussion of Iran's presence in the Western Hemisphere, funding of cultural and religious centers, military-to-military activities, economic engagements, trade relationships, and diplomatic relations. In accordance with the act, officials in State's Bureau of Western Hemisphere Affairs developed the strategy based on consultations with officials representing DOD, DHS, DOJ, Treasury, ODNI, and USTR in headquarters and also conducted some outreach to overseas posts and partner governments. The Countering Iran in the Western Hemisphere Act of 2012 required the Secretary of State to consult with the heads of all appropriate U.S. departments and agencies, including the Secretaries of Defense, Homeland Security, and Treasury, and the Attorney General, the Director of National Intelligence, and the U.S. Trade Representative. Officials we interviewed at headquarters representing all of these agencies noted that State sought their input into the strategy and requested their review prior to issuing the strategy. State also consulted with components of the intelligence community. According to an official at the Bureau of Western Hemisphere Affairs who helped draft the strategy, State did not conduct a specific data call to all of the U.S. posts in the Western Hemisphere to seek the posts' input into the strategy. Instead, the official said State alerted embassies through e- mails from State leadership informing them of the development of the strategy. In addition, State reviewed information in cable reports from posts in the Western Hemisphere. Embassy officials at the four posts we visited were generally aware of the U.S. strategy on addressing Iranian activities in the Western Hemisphere. However, most of the embassy officials we interviewed were not at the embassy when State was developing the strategy and did not know if their predecessors had contributed to the strategy's development. State officials reported meeting with officials from foreign embassies in Washington, D.C., including the embassies of Argentina, Canada, Mexico, and Brazil. Foreign government officials we met with during fieldwork in Mexico and Colombia said that they had not provided input into the U.S. strategy. Figure 1 provides a timeline of State's collaboration efforts. According to State officials, the strategy represents a consensus view of key agencies, including DOD, DHS, DOJ, and the Intelligence Community. Of note, while DOD as a whole joined in this consensus, one part of DOD--the Southern Command--disagreed with the strategy's characterization of the Iranian threat in the hemisphere at the time the strategy was prepared. In addition to collaboration regarding its strategy, State also collaborates with other key agencies (DOD, DHS, DOJ, ODNI, and Treasury) in headquarters about issues related to Iranian activities in the Western Hemisphere through interagency working groups and informal mechanisms. Officials representing all four U.S. embassies we visited (Argentina, Brazil, Colombia, and Mexico) also reported effective formal and informal collaboration efforts were in place to share information that could include activities of Iran and its proxies; the following are examples. Country team meetings: All four embassies we visited hold weekly country team meetings in which agencies and sections share information. Working groups: The Law Enforcement Working Group is the main venue for coordinating efforts to monitor and address potential Iranian activity in all four embassies we visited. The law enforcement working groups in all four locations included, at a minimum, all the relevant law enforcement and intelligence agencies (DOD, DHS, DOJ, and others in the Intelligence Community) at the embassy. At some embassies, these meetings also included components not traditionally associated with law enforcement, such as State's Political and Economic sections. Other working groups also played important roles in addressing threats, sometimes including those emanating from Iran and its proxies. Informal collaboration and communication: Officials representing all different sections and agencies of all four embassies also reported that informal communications (e-mails, phone calls, in-person visits) or ad hoc meetings are sometimes the most important means to collaborate effectively and efficiently as issues arise. The three documents constituting the strategy contain information on Iranian activities in the Western Hemisphere; however, they do not contain all of the information identified in the act. We identified 12 distinct elements that the act states should be included in the strategy. Half of these elements request a description of specific Iranian activities and relationships, as well as foreign and U.S. capabilities to counter the threat posed by Iran in the Western Hemisphere. The other half request plans to address potential threats to the United States. As shown in figure 2, the strategy fully addresses 2 elements, partially addresses 6 elements, and does not address the remaining 4 elements. For the 12 strategy elements shown in table 1: of the 6 that the act states should include a description of Iranian activities or Latin American government capabilities to address Iranian activities, the strategy fully addresses 2 and partially addresses 4; of the 6 that the act states should include plans to address potential threats to U.S. interests, the strategy partially addresses 2 and does not address 4. State and ODNI officials reported four reasons why the strategy does not fully address the information that the act stated should have been included. First, State officials informed us that they only included information on threats posed by Iran and Hizballah to the United States, based on State's interpretation of the act. According to State officials, State interpreted the law to mean that if the Secretary of State deemed the Iranian or Hizballah activity a threat to the United States, State would be required to address it in its submission to the relevant congressional committees; if the Secretary of State did not deem it to be a threat to the United States, State would not be required to address it. ODNI officials also told us that they did not report on elements for which they had no information or for which the information available to them indicated there was no relevant Iranian activity. In the strategy, State and ODNI did not note elements for which they sought but did not find relevant information. Second, ODNI officials reported several reasons why the Intelligence Community Assessment only partially addressed some of the elements. The officials noted that Intelligence Community analysts regularly provide a range of products to policymakers on the topic, including more tactical information than is included in Intelligence Community Assessments, which have helped policymakers as they developed the broader strategy. Third, State officials informed us that State's February 2010 Executive requires all reports to Congress to be Secretariat Memorandumlimited to five pages and that State therefore issued its classified strategy and unclassified summary of policy recommendations to meet this five-page reporting limitation. According to State officials, this requirement limited their ability to include information to comprehensively address all of the elements identified in the act. Fourth, ODNI officials informed us that the Intelligence Community Assessment did not respond to some of the elements identified in the law because these elements were related to policy matters and thus were not appropriate for the Intelligence Community Assessment to address. While State was not required to include GAO's six desirable characteristics for national strategies in its strategy to address Iran's activity in the Western Hemisphere, it included some but not all of these characteristics. These desirable characteristics are (1) purpose, scope, and methodology; (2) problem definition and risk assessment; (3) goals, subordinate objectives, activities, and performance measures; (4) resources, investments, and risk management; (5) organizational roles, responsibilities, and coordination; and (6) integration and implementation. Ideally, a national strategy should contain all of these characteristics. Including these characteristics in a national strategy also enhances its usefulness as guidance for resource and policy decision makers to better ensure accountability. As shown in table 2, we found that the strategy for addressing Iranian activities in the Western Hemisphere fully addresses one desirable characteristic of national strategies, partially addresses three more, and does not address the remaining two. The strategy fully addresses problem definition and risk assessment. According to ODNI officials, the Intelligence Community Assessment goes into significant detail describing Iranian activities and assessing the risks to U.S. interests. The strategy partially addresses three other desirable characteristics of national strategies: purpose, scope, and methodology; goals, subordinate objectives, activities, and performance measures; and organizational roles, responsibilities, and coordination. The classified strategy report discusses the purpose of the strategy as a response to the act and a multiagency effort to address Iranian activities in Latin America, and the strategy also briefly discusses the various agencies consulted in its development. However, the information contained in the strategy is too general to be considered to fully address its methodology. The strategy discusses an ideal "end-state," major goals, subordinate objectives, and specific activities to address Iranian activities in the Western Hemisphere. However, it does not set clear desired results and priorities, specific milestones, and outcome-related performance measures. It also does not discuss any limitations on performance measures that may exist, nor does it address plans to obtain better data or measurements. The strategy identifies organizations involved with achieving the desirable result and mechanisms for coordinating their efforts to address Iranian activities in the Western Hemisphere, but it does not clarify organizations' specific roles and responsibilities to address Iranian activities in the Western Hemisphere. The strategy does not address two desirable characteristics of national strategies: resources, investments, and risk management; and integration and implementation. When asked, State officials said that the strategy outlines ongoing initiatives and programs that address Iranian activities and does not require any additional investments or plans to implement these initiatives. The United States continues to face a range of threats to its national security, among them threats emanating overseas from terrorist organizations and their state sponsors--including Iran. Congress has expressed serious concerns about Iranian activities in the Western Hemisphere, including reported involvement in the attempt to assassinate the Saudi Ambassador to the United States. To more fully understand the nature and extent of Iranian activities in the Western Hemisphere, Congress required State to assess and report on the threat posed to the United States by Iran's presence and activity in the Western Hemisphere, and to develop a strategy for addressing Iran's hostile presence and activity. While State's strategy report and the accompanying Intelligence Community Assessment include information about Iranian activities in the Western Hemisphere, some information that Congress stated should be included was either partially addressed or not addressed. State and ODNI officials provided to us reasons why they did not fully address some of the information Congress called for in the strategy. However, the strategy did not include State's explanation, which may have contributed to some of the concerns expressed by Members of Congress. Providing additional information that addresses the topics not covered by the strategy-- including the plans outlining interagency and multilateral coordination of targeted security efforts--could help Congress understand the basis for State's conclusions and better inform policymakers as they continue to monitor the potential threats posed by Iranian activities in the Western Hemisphere. For elements identified in the Countering Iran in the Western Hemisphere Act of 2012 that were not fully addressed in the strategy, we recommend that the Secretary of State provide the relevant congressional committees with information that would fully address these elements. In the absence of such information, State should explain to the congressional committees why it was not included in the strategy. We provided a draft of this report to State, DOD, DHS, DOJ, ODNI, Treasury, and USTR for comment. DOD, DOJ, ODNI, Treasury, and USTR had no comments. DHS provided a technical comment, which we addressed as appropriate. In its written comments, reproduced in appendix II along with our responses to specific points, State generally disagreed with our assessment of the extent to which the strategy addressed the elements in the act. State indicated that it has provided information and briefed Congress on these matters on a regular basis and agreed to continue to do so. In support of its position, State noted that our report catalogued matters that Congress stated should be included in the strategy but that these were not specific reporting requirements. In addition, State explained that it did not address matters where the consensus of the intelligence community was that there was not an identifiable threat to counter. According to State, most of the elements we identified as not being adequately addressed in the strategy fell into this category. We acknowledge that State did not report on elements for which they had no information or for which available information indicated there was no relevant Iranian threat, and that providing all relevant existing guidance, plans, and initiatives in its strategy would have made the report longer than the five pages allowed under State's guidance for reports to Congress. However, we maintain that the strategy does not include all of the elements that the law stated should be included. Specifically, it does not discuss nor provide Congress with an explanation for the exclusion of elements called for by the act for which State and ODNI did not find relevant threat information. It also does not include summaries of existing agency documents that State officials mentioned would address some elements in the act. Providing such information could have more fully informed Congress regarding State's assessment of the threat posed by Iranian activities in the Western Hemisphere and U.S. government efforts to address the threat. We are sending copies of this report to the appropriate congressional committees, the Secretaries of State, Defense, Homeland Security, and Treasury; the Attorney General; the U.S. Trade Representative; and the Director of National Intelligence. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-7331 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. In December 2012, Congress enacted the Countering Iran in the Western Hemisphere Act of 2012, which, among other things, required the Department of State (State) to assess the threats posed to the United States by Iran's activities in the Western Hemisphere and submit to the relevant congressional committees the results of the assessment and a strategy to address these threats. In this report, we examine (1) State's collaboration with other key U.S. agencies and foreign partners to address Iranian activities in the Western Hemisphere, (2) the extent to which the strategy on addressing Iranian activities in the Western Hemisphere included elements identified in the act, and (3) the extent to which the strategy on addressing Iranian activities in the Western Hemisphere included desirable characteristics of national strategies. To analyze State's collaboration with key U.S. agencies and foreign partners to address Iranian activities in the Western Hemisphere, we reviewed agency documents and interviewed U.S. and foreign officials. We interviewed officials from the Departments of State (State), Defense (DOD), Homeland Security (DHS), Justice (DOJ), and the Treasury (Treasury); the Office for the Director of National Intelligence (ODNI); and the Office of the U.S. Trade Representative (USTR). We also interviewed officials at the U.S. embassies in Argentina, Brazil, Colombia, and Mexico and host government officials in Colombia and Mexico regarding input they may have provided regarding the strategy. We chose these countries based on a number of factors including whether they had experienced instances of Iran-linked terrorist attacks, their bilateral relationship with the United States, and our ability to meet with host governments. The results of our interviews with officials at these four locations are not generalizable to all countries in the Western Hemisphere. To examine the extent to which the strategy to address Iranian activities in the Western Hemisphere included elements identified in the Countering Iran in the Western Hemisphere Act of 2012, we analyzed State's submission of the strategy document, including the classified strategy report, the unclassified summary of policy recommendations, and the Intelligence Community Assessment. We identified 12 elements that Congress requested in the act, as the act had noted specific matters that should be included in the strategy. We analyzed documents and interviewed State and ODNI officials to determine how, if at all, the strategy addressed the elements in the act. To do so, two analysts conducted separate assessments of all three strategy documents against the 12 elements we identified in the act. They reached agreement on the extent to which the measures fully addressed, partially addressed, or did not address the attributes. A manager reviewed the analysis, and the three individuals reached a final consensus. A senior methodologist reviewed the analysis for completeness and balance. Coding worked as follows: the strategy "fully addresses" an element when it explicitly cites all characteristics of an element, even if it lacks further details. The strategy "partially addresses" an element when it explicitly cites some but not all characteristics of an element. Within our designation of "partially addresses," there is a wide variation between addressing most of the characteristics of an element and addressing few of the characteristics of an element. The strategy "does not address" an element when it does not explicitly cite or discuss any characteristics of an element and/or when any implicit references are either too vague or general. For some instances in which we could not review portions of the documents that make up the strategy, we used the testimonial information provided by agency officials; we noted such instances. We asked to review the entire Intelligence Community Assessment but were unable to do so because of concerns over its security classification. We reviewed some excerpts and interviewed the ODNI officials who prepared the assessment regarding its contents. In three instances, ODNI officials told us information addressing an element included in the act was included in the Intelligence Community Assessment, but they did not provide supporting documentation. In those instances, we have reflected the information provided by ODNI officials but noted that we were not able to independently verify their statements because of a lack of documentation. We also examined the strategy to determine the extent to which the strategy incorporated desirable characteristics of national strategies previously identified by GAO. Similar to our analysis of the extent to which the strategy addressed elements identified in the act, we analyzed all three documents that make up the strategy and assessed how, if at all, the strategy addressed the elements in the act. Two analysts conducted separate assessments of all three strategy documents against the six desirable characteristics of national strategies. They reached agreement on the extent to which the measures fully addressed, partially addressed, or did not address the attributes. A manager reviewed the analysis and the three individuals came together to reach a final consensus. A senior methodologist reviewed the analysis for completeness and balance. Coding worked as follows: the strategy "fully addresses" a desirable characteristic of a national strategy when it explicitly cites all aspects of a characteristic, even if it lacks further details. The strategy "partially addresses" a desirable characteristic when it explicitly cites some but not all aspects of a characteristic. Within our designation of "partially addresses," there is a wide variation between addressing most of the elements of a characteristic and addressing few of the elements of a characteristic. The strategy "does not address" an element when it does not explicitly cite or discuss any aspect of a characteristic, and/or when any implicit references are either too vague or general. As discussed above, for some instances in which we could not review portions of the documents that make up the strategy, we used the testimonial information provided by agency officials; we noted such instances. We conducted this performance audit from January 2014 to September 2014 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. 1. Our report notes that Congress requested that the strategy include "a plan to address resources, technology, and infrastructure to create a secure United States border." Therefore, we evaluated the extent to which the information sought by Congress was included in the strategy. While other documents may contain the information sought by Congress, it was not included or summarized in State's strategy report. 2. We agree with State that its report does not contain a plan, as sought by Congress, to address any efforts by foreign persons, entities, and governments in the region to assist Iran in evading U.S. and international sanctions. While State provided information regarding past activities to enforce sanctions, a plan was not included in the strategy. 3. While we have included some information on security initiatives and assistance programs in our report based on meetings with State officials, State's original strategy report to Congress did not contain the plan sought by Congress. 4. As we discuss in our report, State and the Office of the Director of National Intelligence (ODNI) did not address elements for which State and ODNI sought but did not find relevant information. However, State's original strategy report did not indicate that the plan sought by Congress was not provided because there was a lack of a clear threat. Explicitly indicating why the plan sought by Congress was not included could have helped better inform Congress. 5. ODNI--which was responsible for drafting the Intelligence Community Assessment referred to by State--informed us that the Intelligence Community Assessment included only some but not all of the various descriptions identified in the act. As such, our finding is based in part on the views of ODNI. 6. We maintain that the strategy only partially addresses 5(b)(6)(B) of the act, acknowledging it includes a reference to some citizen security initiatives. The act stated that the strategy should include a plan, but State did not provide the citizen security initiatives' documents or a summary of its plan in the strategy. 7. Our report states that the language in the act requested "a plan to support United States efforts to designate persons and entities in the Western Hemisphere for proliferation activities and terrorist activities relating to Iran." Therefore, we evaluated the extent to which the information sought by Congress was included in the strategy report submitted to Congress, not whether it was publicly available on State's or Treasury's web site. While other documents may contain the information sought by Congress, it was not included in the strategy. In addition to the contact named above, Jason Bair (Assistant Director), Victoria Lin (Analyst-in-Charge), Brian Hackney, Ashley Alley, David Dayton, and David Dornisch made key contributions to this report. Oziel Trevino and Sarah Veale provided technical assistance.

The activities of Iranian government elements, such as a 2011 attempt to assassinate the Saudi Ambassador in the United States, could pose a threat to U.S. national security. Congress enacted the Countering Iran in the Western Hemisphere Act of 2012, requiring State to assess the threats posed to the United States by Iran's presence and activity in the Western Hemisphere and to develop a strategy to address those threats. This report examines (1) State's collaboration with other key U.S. agencies and foreign partners to address Iranian activities in the Western Hemisphere, (2) the extent to which the strategy addresses elements identified in the act, and (3) the extent to which the strategy includes desirable characteristics of national strategies. GAO analyzed agency documents and interviewed agency officials in Washington, D.C.; Argentina; Brazil; Colombia; and Mexico. GAO chose these countries based on factors such as past instances of Iran-linked terrorist attacks and their bilateral relationships with the United States. The Department of State (State) uses a variety of mechanisms to collaborate with interagency partners and host governments to address activities of Iran in the Western Hemisphere. In developing the strategy, which includes an Intelligence Community Assessment developed by the Office of the Director of National Intelligence (ODNI), State's Bureau of Western Hemisphere Affairs worked with other U.S. agencies at the headquarters level and relied on cable reporting from posts. According to State officials, the strategy represents a consensus view of key agencies. While the Department of Defense (DOD) as a whole joined in this consensus, one part of DOD--the Southern Command--disagreed with the strategy's characterization of the Iranian threat at the time the strategy was prepared. State also uses venues such as country team meetings and law enforcement working groups to address Iranian activities. While the strategy contains information on Iranian activities in the Western Hemisphere, it does not contain all the information that the Countering Iran in the Western Hemisphere Act of 2012 stated it should include. GAO identified 12 distinct elements that the act stated should be included in the strategy. As shown in the figure, the strategy fully addresses 2, partially addresses 6, and does not address 4 of 12 elements. For example, the strategy contains information describing the operations of Iran, but does not include a plan to address U.S. interests to ensure energy supplies from the Western Hemisphere are free from foreign manipulation. State and ODNI officials reported several reasons why the strategy may not fully address the information identified in the law. For example, State said it only included information in the strategy if it deemed the activity identified in the law to be a threat to the United States. Note: ODNI officials did not provide documentation for three of the elements that were fully or partially addressed in the Intelligence Community Assessment. State is not legally required to address the six desirable characteristics of effective national strategies GAO has identified, but the strategy does include some of them. The strategy fully addresses problem definition and risk assessment. It partially addresses purpose, scope, and methodology; goals, subordinate objectives, activities, and performance measures; and organizational roles, responsibilities, and coordination. The strategy does not, however, address resources, investments, and risk management; and integration into other strategies and implementation by other levels of government. GAO recommends that the Secretary of State provide the relevant congressional committees with additional information that would fully address the elements in the act. In the absence of such information, State should explain why it was not included in the strategy. State generally disagreed with our assessment of the extent to which the strategy addressed the elements in the act but agreed to continue to provide Congress with information regarding Iranian activities in the Western Hemisphere.

Prior to the fall of 2005, the U.S. stabilization and reconstruction effort in Iraq lacked a clear, comprehensive, and integrated U.S. strategy. State assessments and other U.S. government reports noted that this hindered the implementation of U.S. stabilization and reconstruction plans. A review of the U.S. mission completed in October 2005 found, among other things, that (1) no unified strategic plan existed that effectively integrated U.S. government political, military, and economic efforts; (2) multiple plans in Iraq and Washington had resulted in competing priorities and funding levels not proportional to the needs of overall mission objectives; (3) focused leadership and clear roles were lacking among State, DOD, and other agencies in the field and in Washington, D.C.; and ( 4) a more realistic assessment of the capacity limitations of Iraq's central and local government was needed. In November 2005, the National Security Council (NSC) issued the National Strategy for Victory in Iraq (NSVI) to clarify the President's existing strategy for achieving U.S. political, security, and economic goals in Iraq. According to this document, prevailing in Iraq is a vital U.S. national interest because it will help win the war on terror and make America safer, stronger, and more certain of its future. To achieve victory, the strategy requires the United States to maintain troops in Iraq until its objectives are achieved, adjusting troop strength as conditions warrant. The strategy reorganized U.S. government stabilization and reconstruction efforts along three broad tracks--political, security, and economic--and eight strategic objectives (see fig. 1). Overall, officials in DOD and State identified seven documents that describe the U.S. government strategy for Iraq in addition to the NSVI. Figure 2 shows the NSVI and key supporting documents. The U.S. government uses these documents to plan, conduct, and track efforts at the strategic, operational, and implementation levels. Our work has identified six characteristics of an effective national strategy. National strategies with these characteristics offer policymakers and implementing agencies a management tool that can help ensure accountability and more effective results. The six characteristics are (1) a clear purpose, scope, methodology; (2) a detailed discussion of the problems, risks, and threats the strategy intends to address; (3) the desired goals and objectives, and outcome-related performance measures; (4) a description of the U.S. resources needed to implement the strategy; (5) a clear delineation of the U.S. government's roles, responsibilities, and mechanisms for coordination; and (6) a description of how the strategy is integrated internally (that is, among U.S. agencies) and externally (in this case, with the Iraqi government and international organizations). These six characteristics can be subdivided into 27 separate elements. For a more detailed assessment, see appendix I. The NSVI aims to improve U.S. strategic planning for Iraq; however, the NSVI and supporting documents do not fully address all of the six desirable characteristics of effective national strategies that GAO has identified through its prior work. We used these six characteristics to evaluate the strategy--that is, the NSVI and supporting documents that DOD and State officials said encompassed the U.S. strategy for rebuilding and stabilizing Iraq. As figure 3 shows, the strategy generally addresses three of the six characteristics but only partially addresses three others, limiting its usefulness to guide agency implementation efforts and achieve desired results. Moreover, since the strategy is dispersed among several documents instead of one, its effectiveness as a planning tool for implementing agencies and for informing Congress about the pace, costs, and intended results of these efforts is limited. Although the June 2006 Camp David fact sheet provides additional detail on recent U.S. and Iraqi actions, it does not address the key shortfalls we identified in the three areas. The strategy provides (1) a clear statement of its purpose and scope; (2) a detailed discussion of the problems, risks, and threats; and (3) an explanation of its goals, subordinate objectives, and activities but a limited discussion of outcome-oriented performance measures. This characteristic addresses why the strategy was produced, the scope of its coverage, and the process by which it was developed. A complete description of purpose, scope, and methodology makes the document more useful to organizations responsible for implementing the strategies, as well as to oversight organizations such as Congress. The NSVI and supporting documents generally address this characteristic by identifying U.S. government efforts to rebuild and stabilize Iraq in terms of these three overarching objectives and address the assumptions that guided the strategy's development. For example, to help Iraq achieve the strategic goal of forging a national compact for democratic government, the strategy's subordinate objectives state that the United States would help promote transparency in the executive, legislative, and judicial branches of government, and help build national institutions that transcend regional and sectarian interests, among other activities. This characteristic addresses the particular problems, risks, and threats the strategy is directed at, as well as risk assessment of the threats to and vulnerabilities of critical assets and operations. Specific information on both risks and threats helps responsible parties better implement the strategy by ensuring that priorities are clear and focused on the greatest needs. The NSVI and supporting documents generally address some of the problems, risks, and threats found in Iraq. For example, the NSVI identifies the risks posed by the insurgency and identifies three basic types of insurgents--rejectionists, supporters of former Iraqi President Saddam Hussein, and terrorists affiliated with or inspired by al Qaeda--and the different actions needed to confront each one. In addition, various supporting documents provide additional information on the threats of the Shi'a militias and the corruption that could affect the Iraqi government's ability to become self-reliant, deliver essential services, reform its economy, strengthen rule of law, maintain nonsectarian political institutions, and increase international support. This characteristic addresses the goals of the national strategy and the steps needed to attain those goals, as well as the priorities, milestones, and outcome-related performance measures to enable more effective oversight and accountability. The NSVI generally addresses goals and subordinate objectives by identifying 8 strategic objectives (pillars), 46 subordinate objectives, or "lines of action," and numerous project activities, but only partially addresses outcome-related performance measures. The supporting strategy documents also provide information on how progress will be monitored and reported. In addition, the NSVI identifies the process for monitoring and reporting on progress via interagency working groups. It also identifies some metrics to assess progress, such as the number of Iraqis willing to participate in the political process, the quality and quantity of the Iraqi units trained, and barrels of oil produced and exported. However, the metrics the strategy uses to report progress make it difficult to determine the impact of the U.S. reconstruction effort. We reported previously that in the water resources and sanitation sector, little was known about how U.S. efforts were improving the amount and quality of water reaching Iraqi households or their access to the sanitation services because the U.S. government only tracked the number of projects completed or under way. For instance, as of March 2006, Iraq had the capacity to produce 1.1 million cubic meters of water per day, but this level overestimated the amount of potable water reaching Iraqi households. U.S. officials estimate that 60 percent of water treatment output is lost due to leakage, contamination, and illegal connections. The U.S. mission in Iraq reported in December 2005 that it had developed a set of metrics to better estimate the potential impact that U.S. water and sanitation reconstruction efforts were having on Iraqi households, but acknowledges it is difficult to measure how much water Iraqis are actually receiving or whether the water is potable. The mission report notes that without such comprehensive data, mission efforts to accurately assess the impact of U.S. reconstruction efforts on water and sanitation services is seriously limited. The NSVI and supporting documents only partially (1) delineate the roles and responsibilities of key U.S. government agencies; (2) describe how the strategy will be integrated among U.S. entities, the Iraqi government, international organizations and the mechanisms for coordination; and (3) identify what the strategy will cost and the sources of financing. This characteristic addresses which U.S. organizations will implement the strategy as well as the roles, responsibilities, and mechanisms for coordinating their efforts. The NSVI and the supporting documents partially address the roles and responsibilities of specific U.S. government agencies and offices and the process for coordination. For example, National Security Presidential Directive 36 makes the Department of State responsible for the non-security aspects of reconstruction and lays out key roles for the U.S. Chief of Mission in Baghdad and CENTCOM. It directs that the Commander of CENTCOM will, under the guidance of the Chief of Mission, oversee all U.S. government efforts to train and equip Iraq security forces. However, it is not clear which agency is responsible for implementing the overlapping activities listed under the NSVI's eight strategic objectives. For instance, one activity is to promote transparency in the executive, legislative, and judicial branches of the Iraqi government; however, the NSVI and supporting documents do not indicate which agency is responsible for implementing this activity, or who is to be held accountable for results. Moreover, little guidance is provided to assist implementing agencies in resolving conflicts among themselves, as well as with other entities. In our prior work, we found that delays in reconstruction efforts sometimes resulted from lack of agreement among U.S. agencies, contractors, and Iraqi authorities about the scope and schedule for the work to be performed. This characteristic addresses both how a national strategy relates to the goals and activities of other strategies, to other entities, and to documents from implementing organizations to help these entities understand their roles and responsibilities. The NSVI and supporting documents partially address how the strategy relates to other international donors and Iraqi government goals, objectives, and activities. For instance, the NSVI and supporting documents identify the need to integrate the efforts of the coalition, the Iraqi government, and other nations but do not discuss how the U.S. goals and objectives will be integrated. In addition, the strategy does not address what it expects the international community or the Iraqi government to pay to achieve future objectives. This characteristic addresses what the strategy will cost; where resources will be targeted to achieve the end-state; and how the strategy balances benefits, risks, and costs. The November 2005 National Strategy for Victory in Iraq and related supporting documents do not clearly identify the costs of U.S. military operations, including the costs to repair and replace equipment used during operations. The strategy does not identify other key related costs, including the costs of training, equipping, and supporting Iraq's security forces; the costs of rebuilding, maintaining, and protecting critical oil and electricity infrastructure; or the costs of building management capacity in Iraq's central ministries and 18 provincial governments. In addition to these costs, the new Iraqi government will need significant help in building the procurement, financial management, accountability, and other key systems needed to govern and provide basic services to its citizens. U.S. government agencies have reported significant costs associated with the global war on terror (GWOT), which includes military operations in Iraq. However, we have serious concerns about the reliability of DOD's reported cost data. GAO's prior work found numerous problems with DOD's processes for recording and reporting GWOT costs, including long- standing deficiencies in DOD's financial management systems and businesses processes, the use of estimates instead of actual cost data, and the lack of supporting documentation. As a result, neither DOD nor Congress knows how much the war on terror is costing or how appropriated funds are being used. The current financial picture is complicated by the extensive use of emergency supplemental funds to pay for the costs of U.S. activities in Iraq. While this funding mechanism might have been appropriate in the early months of the war, use of the regular budget process would promote greater transparency and accountability and better management of the stabilization and reconstruction effort. I will further address issues related to GWOT costs at subsequent hearings before this subcommittee. The dispersion of information across several documents limits the strategy's overall coherence and effectiveness as a planning tool for implementing agencies and as an oversight tool for informing Congress about the pace, costs, and results of these efforts. Since the NSVI's supporting documents were written by different agencies at different points in time, the information in the documents is not directly comparable, which diminishes their value. The June 2006 Camp David fact sheet provides some additional detail on recent U.S. government plans to help Iraq's new national unity government achieve some of its short-term security, economic, and political objectives. However, it does not redress identified shortfalls in the U.S. strategy such as the lack of information on costs. Although the NSC and the Departments of Defense and State did not comment on the recommendation made in the report we are issuing today, State noted that we misrepresented the NSVI's purpose--to provide the public with a broad overview of the U.S. strategy for Iraq. However, our analysis was not limited to the NSVI but was based on all of the classified and unclassified documents that collectively define the U.S. strategy for Iraq: (1) the National Security Presidential Directive 36 (May 2004), (2) Multinational Forces-Iraq (MNF-I) Campaign Plan (August 2004), (3) the MNF-I/ U.S. Embassy Baghdad Joint Mission Statement on Iraq (December 2005), (4) the Multinational Corps-Iraq Operation Order 05-03 (December 2005), (5) the National Strategy for Supporting Iraq (updated January 2006), (6) the quarterly State Section 2207 reports to Congress (through April 2006), and (7) the April 2006 Joint Campaign Plan issued by the Chief of Mission and the Commander of the MNF-I. We also reviewed appropriations and budget documents. Collectively, these documents still lack all of the key characteristics of an effective national strategy. However, we refined our recommendation to focus on the need to improve the U.S. strategy for Iraq, not just the NSVI. Other GAO work shows that security, political, and economic factors have and will continue to hamper U.S. efforts to stabilize Iraq and achieve key U.S. goals. First, increases in attacks against the coalition and its Iraqi partners, growing sectarian violence, and the influence of militias have adversely affected U.S. and Iraqi efforts to secure Baghdad and other strategic cities. Second, sectarian control over ministries and the lack of skilled employees hinder efforts to improve Iraq's governance by building the capacity of ministries and reconciling differences among sectarian interests. Third, security, corruption, and fiscal problems limit U.S. and Iraqi plans to revitalize Iraq's economy and restore essential services in the oil and electricity sectors. A linchpin of the current U.S. strategy is that, as Iraqi forces "stand up," U.S. forces will "stand down." According to the NSVI, putting capable Iraqis forward in the fight against the enemy would increase the overall effectiveness of U.S.-Iraqi operations, as Iraqis are better able to collect intelligence and identify the threats in neighborhoods. The Secretaries of Defense and State have reported progress in developing Iraqi army and police units. According to State Department reports, the number of trained army and police forces has increased from about 174,000 in July 2005 to about 268,000 as of June 2006. This represents about 82 percent of the planned security force strength of 326,000. DOD has also reported that Iraqi army units are becoming increasingly capable of leading counterinsurgency operations with coalition support. Although the number of Iraqi security forces is increasing, these forces still lack the logistical, command and control, and intelligence capabilities to operate independently. Even as the number and capabilities of Iraqi security forces have increased, overall security conditions have deteriorated, as evidenced by attack trends, sectarian violence, and the growth and influence of militias. Enemy-initiated attacks against the coalition, its Iraqi partners, and infrastructure have continued to increase over time (see fig. 4). Overall, attacks increased by 23 percent from 2004 to 2005. After declining in the fall of 2005, the number of attacks rose to the highest ever in April 2006. The monthly attacks data for May and June remain classified. However, DOD publicly reported in May 2006 that the average number of weekly attacks was higher for the February to May 2006 time period than for any previous period. Further, in late June 2006 the MNF-I Commanding General publicly stated that attack levels in Iraq had increased. Moreover, a senior U.S. military officer said that the recent security operation in Baghdad had led to an increase in the number of attacks in the area. I recently asked the Secretary of Defense to routinely declassify monthly attacks data in a timely manner. The enemy-initiated attacks data help inform Congress and the American public on progress in improving Iraq's security situation, an important consideration in any decision to reduce the U.S. military presence in Iraq. While attacks data alone may not provide a complete picture of Iraq's security situation, we believe they provide a sound depiction of general security trends in the country. According to a June 2006 United Nations (UN) report, an increasingly complex armed opposition continues to be capable of maintaining a consistently high level of violent activity across Iraq. Baghdad, Ninewa, Salahuddin, Anbar, and Diyala have been experiencing the worst of the violence. Other areas, particularly Basra and Kirkuk, have recently witnessed increased tension and a growing number of violent incidents. Sectarian tensions and violence increased after the bombing of a holy Shi'a shrine in Samarra in February 2006. A June 2006 UN report states that, in recent months, much of the violence was committed by both sides of the Sunni-Shi'a sectarian divide. Groups that are specifically targeted included prominent Sunni and Shi'a Iraqis, government workers and their families, members of the middle class (such as merchants and academics), people working for or associated with MNF-I, and Christians. The presence of militia groups in Iraq has become more prominent in recent months and threatens Iraq's stability. Although the total number of militias is unknown, a DOD report said that more than a dozen militias have been documented in Iraq, varying in size, extent of organizational structure, and area of influence. The largest of the known militias include (1) the Badr Organization, a militia group of the Supreme Council for the Islamic Revolution in Iran, (2) the Mahdi Army, a militia group of radical Shi'a cleric Muqtada al-Sadr, and (3) the Kurdish Peshmerga, the primary security force for the Kurdish regional government, in the northern region of Iraq. The Coalition Provisional Authority developed a strategy for disbanding or controlling militias in May 2004, and the Iraqi Constitution prohibits the formation of militias outside the framework of the armed forces. Many militias, however, remain present in Iraq and threaten the country's stability. Since the February 2006 Samarra bombing, the number of attacks by militia groups increased. According to the MNF-I Commanding General, Iran has increased its support of a variety of Shi'a extremist groups in southern Iraq since the beginning of this year. Iraq's new government is addressing two critical issues--how to foster national reconciliation and how to strengthen government so it can deliver essential services and provide security to all Iraqis. However, Iraqi efforts to foster reconciliation are primarily confronted by sectarian divisions between Shi'a and Sunni groups. Moreover, U.S. and Iraqi efforts to strengthen government ministries face the daunting task of developing the ability of Iraq's ministries to govern after 30 years of autocratic rule. On June 25, 2006, a few weeks after the formation of Iraq's first permanent government, Iraq's Prime Minister proposed a 24-point reconciliation plan for the nation. The plan's provisions include initiating a national dialogue with all parties, including those opposed to the government; providing amnesty for detainees and others not involved in terrorist acts; and ensuring that Iraqi security forces do not intervene in politics. The Iraqi government has taken several steps to foster national reconciliation and implement the provisions of this plan. For example, Iraq's Foreign Minister met with the UN Security Council in mid-June. At that meeting, the UN agreed to support the League of Arab States in planning to convene a conference on Iraqi national accord. The Iraqi government also announced that it would release 2,500 detainees. As of mid-May, the Ministry of Human Rights reported that there are about 28,700 detainees throughout Iraq. As of late June, the Iraqi government had released more than 1,000 detainees. Finally, the Iraqi Prime Minister confirmed that he had contacted groups through a third party which had been responsive to the reconciliation plan. He planned to hold direct talks with seven resistance groups. He also clarified that amnesty would not be granted to insurgents who killed Iraqis or coalition troops. In addition, following the February 22 bombing of the Golden Mosque in Samara, the U.S. Embassy reported that it called upon Iraqi leaders to join together in unity and turn away from sectarian violence. Although the Iraqi government has taken positive steps, national reconciliation faces a long and difficult course because of sectarian divisions within Iraq. According to a June 2006 UN report, much of the violence in recent months stemmed from acts perpetrated by both sides of the Sunni-Shi'a sectarian divide. The report states that Iraqis are threatened by revenge attacks, the use of force by military and security forces, and militia activities, among other threats. In a prior report, the UN stated that militia power in Southern Iraq has resulted in systematic acts of violence against the Sunni community. The UN report concluded that unless there is progress towards national reconciliation soon, increased polarization and even civil war could occur. In addition, on June 7, 2006, the coalition killed al-Zarqawi, the operational commander of the al-Qaeda movement in Iraq, who tried to incite civil war. According to the President of the United States, his death is an opportunity for the new government to succeed. However, the President also cautioned that sectarian violence will continue. The U.S. government faces significant challenges in improving the capability of national and provincial governments to provide security and deliver services to the Iraqi people. According to State, the Iraqi capacity for self-governance was decimated after nearly 30 years of autocratic rule. In addition, Iraq lacked competent existing Iraqi governmental organizations. According to an Inter-Agency Strategy for Iraqi Stability (ISIS) Working Group draft paper, the Baathist regime had let governmental infrastructure organizations deteriorate since the first Gulf War, and employment in these organizations had been based on cronyism and political correctness rather than managerial competence. Since 2003, the United States has provided Iraqis with various training and technical assistance to improve their capacity to govern. U.S. agencies provided senior advisers to Iraqi ministries to help in the reconstruction of Iraq. For example, the Multinational Security Transition Command-Iraq continues to develop the ministerial abilities of the Ministries of Interior and Defense. In January 2006, State reported a new initiative--the National Capacity Development Program--to improve the capabilities of key Iraqi ministries. In partnership with coalition allies and others, the program provides technical assistance and training for 3 years to help the government of Iraq improve managerial capacity. The program focuses on improving core ministry functions, such as leadership and communication, financial and human resource management, and information technology, among others. It also includes extensive anti-corruption activities, such as standardized auditing and procurement reform and policies and practices that aim to eliminate patronage. Reforming Iraqi ministries will face challenges. According to a recent State Department report, corruption remains a critical impediment to the successful governance of Iraq. The report also stated that Iraq needs training in modern civil service policies. Another State assessment found that non-security ministries face challenges and have limited capabilities to carry out core functions, such as budgeting, procurement, and human resource management. U.S. officials recognize that increased technical assistance and training is important and the United States is working with the UN, the World Bank, and allies such as Italy, Denmark, and the United Kingdom in efforts to partner with staff from Iraqi ministries and provincial governments. Another important complement to these efforts is increased U.S. agency and international partnering with Iraqi officials in areas such as planning, financial management, budgeting and procurement, and human resource management. These efforts are aimed at providing the Iraqis with the essential management skills to govern effectively. GAO is also involved in these efforts and is taking steps to partner with Iraq's Commission on Public Integrity and the Board of Supreme Audit. The U.S. and Iraqi governments are trying to revitalize Iraq's economy and restore essential services in the oil and electricity sectors. However, these efforts have been hindered by security, corruption, fiscal, and management challenges. According to the U.S. Army Corps of Engineers Gulf Regional Division, DOD has added or restored more than 1,400 megawatts of potential generating capacity to the Iraq national electricity grid, as of June 2006. According to agency reporting, average daily hours of electricity across most of Iraq remained at 12 hours per day during the last two weeks of June 2006. Available power for Baghdad averaged 8 hours per day for the same period. In the oil sector, DOD has completed or is working on a number of projects to boost Iraq's oil production, refining, and export capacity. However, key reconstruction goals have yet to be achieved (see table 1). As of June 25, 2006, oil and electricity sectors were below the planned U.S. end-state. In June 2006, State reported that oil production was about 2.29 million barrels per day (mbpd), which was below the desired goal of 3 mbpd. In June 2006, electricity generation capacity was about 4,832 megawatts--above its prewar level but below the post-war peak of about 5,400 megawatts and the planned U.S goal of 6,000 megawatts. In addition, it is unclear whether the current capacity can be sustained. A combination of insurgent attacks on crude oil and product pipelines, dilapidated infrastructure, and poor operations and maintenance have hindered domestic refining and have required Iraq to import significant portions of liquefied petroleum gas, gasoline, kerosene, and diesel. Both the oil and electricity sectors face a number of challenges to meeting Iraq's needs. Improving infrastructure security. The insurgency has destroyed key infrastructure, severely undermining progress. U.S. officials reported that major oil pipelines continue to be sabotaged, shutting down oil exports and resulting in lost revenues. Major electrical transmission lines have been repeatedly sabotaged, cutting power to other parts of the country. Current U.S. assistance is focused on strengthening the Strategic Infrastructure Battalions, which are Ministry of Defense forces that protect oil fields and pipelines. Security conditions in Iraq have, in part, led to project delays and increased costs for security services. Although it is difficult to quantify the costs and delays resulting from poor security conditions, both agency and contractor officials acknowledged that security costs have diverted a considerable amount of reconstruction resources and have led to canceling or reducing the scope of some reconstruction projects. Deterring corruption. U.S. and international officials reported increased concerns about pervasive corruption in Iraq. Transparency International ranked Iraq 137th of 159 countries in 2005 in terms of corruption. To combat corruption, U.S. and international officials reported that the Iraqi government established the Commission on Public Integrity, which is charged with the criminal investigation of corruption cases, and the independent Inspectors General within individual Iraqi ministries, and revived the existing Board of Supreme Audit (BSA). The U.S. government, including GAO, is working directly with these institutions. The oil and electricity sectors remain particularly vulnerable to corruption. Corruption in the oil sector presents a special problem, particularly because of the sector's importance to the economy. According to State officials and reporting, about 10 percent of refined fuels are diverted to the black market, and about 30 percent of imported fuels are smuggled out of Iraq and sold for a profit. According to U.S. Embassy documents, the insurgency has been partly funded by corrupt activities within Iraq and from skimming profits from black marketers. Moreover, according to one analysis, corruption diverted much of Iraq's oil revenue from reconstruction to government officials and their accomplices in organized crime. Corruption in the electricity sector is also a problem. According to State's Iraq Reconstruction Management Office (IRMO) officials, the Ministry of Electricity contracts with tribal chiefs, paying them about $60 to $100 per kilometer, to protect transmission lines running through their areas. However, IRMO officials reported that the protection system is flawed and encourages corruption. According to U.S. and UN Development Program officials, some of these tribes are also selling materials from downed lines and extracting tariffs for access to repair the lines. The lack of metering facilitates opportunities for corruption in the oil and electricity sectors. Despite a 2004 audit recommendation made by the International Advisory and Monitoring Board for the Development Fund for Iraq, and initial steps to install meters in accordance with standard oil industry practices, the Iraqi government still lacks an effective system of metering to measure production and export levels. According to U.S. officials in the electricity section, about 30 percent of the meters in Iraq are damaged. Most meters are old mechanical meters that need to be replaced with electronic ones so that the system may be better monitored. Addressing fiscal challenges. Iraq's ability to contribute to its own rebuilding is dependent on addressing key fiscal challenges, particularly in the oil and electricity sectors. Current government subsidies constrain opportunities for growth and investment and have kept prices for oil and electricity low. Domestic fuel prices in Iraq are among the lowest in the world. U.S. and international officials report that these low prices have led to a rampant black market and fuel smuggling out of the country; inadequate maintenance and improvements; and over-consumption. According to U.S. and international officials, the Iraqi budget is directly affected, since state- owned refineries cover less than half the domestic demand, and the Iraqi government has to import the rest at world market prices. As part of its Stand-By Arrangement with the International Monetary Fund (IMF), Iraq must reduce government subsidies of petroleum products. By the end of 2006, the Iraqi government plans to complete a series of adjustments to bring fuel prices closer to those of other Gulf countries. According to State reporting, a new round of price increases for diesel, kerosene, and propane began to take effect in Baghdad and other areas the week of June 19, 2006, and is being extended countrywide. The Iraqi government committed itself to bring fuel prices closer to regional prices as part of its IMF reform program. Iraqis currently pay about $.44 per gallon for regular gasoline compared with about $.90 per gallon in neighboring countries. According to U.S. and international officials, the negative effects of the electricity subsidy are similar to those for fuels. The national grid is currently unable to satisfy the demand, and Iraqis must buy electricity from privately-operated small diesel generators which are inefficient sources of electricity. Moreover, according to World Bank reporting, increasing tariffs is complicated by the desire to preserve wide access to the grid and subsidize low-income groups. Iraq faces other fiscal challenges, such as generous wage and pension benefits, increased defense spending, and high external debt. Our April 2006 testimony before this committee provides additional details on these other challenges. Managing and sustaining new and rehabilitated infrastructure. The U.S. reconstruction program has encountered difficulties with Iraq's ability to sustain the new and rehabilitated infrastructure and address maintenance needs. A June 2006 Congressional Research Service report noted that as more large-scale construction projects have been completed with U.S. assistance, there has been increasing concern regarding the financial, organizational, and technical capacity of Iraqis to maintain the projects in the long run. More specifically, our prior reports and testimony note that the Iraqis' capacity to operate and maintain the power plant infrastructure and equipment provided by the United States remains a challenge at both the plant and ministry levels. As a result, the infrastructure and equipment remain at risk of damage following their transfer to the Iraqis. U.S. officials have acknowledged that more needs to be done to train plant operators and ensure that advisory services are provided after the turnover date. In January 2006, State reported that it has developed a strategy with the Ministry of Electricity to focus on rehabilitation and sustainment of electricity assets. The November 2005 NSVI and supporting documents represent the results of efforts to improve the strategic planning process for the challenging and costly U.S. mission in Iraq. Although the strategy is an improvement over earlier efforts, it is incomplete even when considered in the context of all supporting documents, both classified and unclassified. Without additional information on roles and responsibilities, future contributions and costs, and outcome-based metrics, the strategy does not provide the Congress with a clear road map for achieving victory in Iraq. The formation of the new Iraqi government provides an opportunity for the United States government to re-examine its strategy and more closely align its efforts and objectives with those of the Iraqi people and other donors. Based on our other ongoing and completed work, additional actions could be taken to achieve U.S. objectives in Iraq. The United States, Iraq, and the international community should consider the following: Focusing more attention on the capabilities of the Iraqi security forces rather than the number of forces. Although the number of the Iraqi security forces is increasing, these forces lack the logistical, command and control, and intelligence capabilities to operate independently. Improving national and provincial governance. The Iraqis will need technical assistance, training, and more partnering opportunities with the United States, other countries, and international organizations to strengthen their national and provincial governments and provide results that matter to the Iraqi people, for example, safe streets, good jobs, reliable electricity, clean water, education, and health care. Addressing the root causes of corruption. Strong and immediate measures must be taken to address Iraq's pervasive corruption problems. An anti- corruption strategy should establish a sound economic policy framework, reduce subsidies, strengthen accountability organizations, and enhance investment opportunities and job creation. Ultimately, the stability of Iraq hinges on reducing violence and establishing a capable, credible, and transparent system of government that is accountable to the Iraqi people. Mr. Chairman and Members of the Subcommittee, this concludes my prepared statement. At this time, I would be happy to answer any questions that you may have. For questions regarding this testimony, please call Joseph Christoff at (202) 512-8979. Other key contributors to this statement were Stephen Lord, Judith McCloskey, Tetsuo Miyabara, Lynn Cothern, Tracey Cross, B. Patrick Hickey, Rhonda Horried, Kathleen Monahan, Amy Sheller, and Nanette Barton. 4b. Identifies the sources, e.g., federal, international, and private, and types of resources or investments needed, e.g., budgetary, human capital, information technology, research and development, and contracts. 4c. Addresses where resources or investments should be targeted to balance risks and costs. 4e. Identifies risk management principles and how they help implementing parties prioritize and allocate resources. 5b. Addresses lead, support, and partner roles and responsibilities of specific federal agencies, departments, or offices, e.g., who is in charge during all phases of the strategy's implementation. 5c. Addresses mechanisms and/or processes for parties to coordinate efforts within agencies and with other agencies. 6a. Addresses how the strategy relates to the strategies of other institutions and organizations' and their goals, objectives, and activities (horizontal). 6b. Addresses integration with relevant documents from other agencies and subordinate levels (vertical). This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

In November 2005, the National Security Council (NSC) issued the National Strategy for Victory in Iraq (NSVI) to clarify the President's strategy for achieving U.S. political, security, and economic goals in Iraq. The U.S. goal is to establish a peaceful, stable, and secure Iraq. In addition, in June 2006, the administration issued a fact sheet at Camp David discussing current progress and goals in Iraq. This testimony (1) discusses the extent to which the NSVI and its supporting documents address the six characteristics of an effective national strategy, and (2) assesses how security, political, and economic factors will affect achieving the U.S. strategy for Iraq. In this testimony, the NSVI and supporting documents are collectively referred to as the U.S. strategy for Iraq. The NSVI is an improvement over previous U.S. planning efforts for stabilizing and rebuilding Iraq. However, the NSVI and supporting documents are incomplete as they do not fully address all the characteristics of an effective national strategy. Among its positive attributes, the strategy's purpose and scope is clear; it identifies U.S. involvement in Iraq as a "vital national interest and the central front in the war on terror." Also, the strategy generally addresses the threats and risks facing the coalition forces and provides a comprehensive description of U.S. political, security, and economic objectives in Iraq. However, the discussion of outcome-related performance measures to assess progress in achieving these goals and objectives is limited. Moreover, the strategy falls short in at least three areas. First, it only partially identifies the agencies responsible for implementing key aspects of the strategy. Second, it does not fully address how the U.S. will integrate its goals with those of the Iraqis and the international community, and it does not detail Iraq's anticipated contribution to its future needs. Third, it only partially identifies the current and future costs of U.S. involvement in Iraq, including maintaining U.S. military operations, building Iraqi government capacity, and rebuilding critical infrastructure. Furthermore, the June 2006 Camp David fact sheet provides additional detail but does not address these key shortfalls. Security, political, and economic factors will hamper U.S. efforts to stabilize Iraq and achieve key U.S. goals. First, the U.S. and Iraq are trying to stabilize Iraq by training and equipping additional Iraqi security forces and securing Baghdad and other strategic cities. However, increases in attacks against the coalition and its Iraqi partners and the growing influence of militias will adversely affect U.S. and Iraqi efforts. Second, the U.S. and Iraq are trying to improve Iraq's capacity to govern by reconciling sectarian groups and building the capacity of national and provincial governments to provide security and services. However, sectarian conflicts, the lack of capacity in the ministries, and corruption serve to hinder these efforts. Third, the U.S. and Iraqi governments are trying to revitalize Iraq's economy and restore the oil, electricity, and other key sectors. However, these efforts have been impeded by security, corruption, fiscal, and other challenges. The formation of a permanent Iraqi government gives the U.S. an opportunity to re-examine its strategy for Iraq and align its efforts with Iraq and the international community. As a first step, NSC should complete the strategy by defining and disseminating performance metrics, articulating clear roles and responsibilities, specifying future contributions, and identifying current costs and future resources. In addition, the United States, Iraq, and the international community should (1) enhance support capabilities of the Iraqi security forces, (2) improve the capabilities of the national and provincial governments, and (3) develop a comprehensive anti-corruption strategy.

In 2008, FDA inspected 153 foreign food facilities out of an estimated 189,000 such facilities registered with FDA and estimated that it would conduct 200 inspections in 2009 and 600 in 2010. In 2007, FDA inspected 95 facilities. Table 1 shows the number of FDA inspections of foreign food facilities, by country, from fiscal years 2001 through 2008. As the table shows, FDA conducted 1,186 inspections in 56 countries from fiscal years 2001 through 2008; the majority of FDA inspections were in Mexico, followed by Ecuador, Thailand, and Chile. FDA conducted a total of 46 inspections in China during this period. For fiscal year 2009, FDA allocated 272 full-time employees to examine imported food shipments at U.S. ports of entry and estimated a budget of approximately $93.1 million for field import activities. The total estimated 2009 FDA budget for all FDA products and programs, including food, drugs, medical devices, and other products, was $2.7 billion. In 2008, we testified that if FDA were to inspect each of the 189,000 registered foreign facilities--at the FDA Commissioner's estimated cost of $16,700 per inspection--it would cost FDA approximately $3.2 billion to inspect all of these facilities once. Since November 2008, FDA has opened overseas offices to help prevent food that violates U.S. standards from reaching the United States. These offices are expected to provide FDA with direct access to information about foreign facilities' food manufacturing practices so that its staff at U.S. ports of entry can make more informed decisions about which food imports to examine. For example, FDA's overseas staff are working with staff at counterpart regulatory agencies overseas, as well as with other stakeholders who may be knowledgeable about certain industries. Overseas staff are also educating local exporters to make sure they understand U.S. food safety laws and regulations and FDA expectations. FDA opened offices in China (Beijing, Guangzhou, and Shanghai); in Europe (Brussels, London, and soon in Parma, Italy); in Latin America (San Jose, Costa Rica; Santiago, Chile; and Mexico City, Mexico); and in India (New Delhi and Mumbai). The FDA Middle East Office is operating out of FDA headquarters because the Department of State denied its request to locate in Amman, Jordan, due to security concerns. In addition to having overseas offices assist FDA's oversight of imported food, the agency is developing PREDICT. PREDICT is intended to assist FDA's oversight of imported food and uses FDA-developed criteria to estimate the risk of imported food shipments. These criteria are to incorporate, among other things, the violative histories of the product, importer, manufacturer, consignee, and country of origin; the results of laboratory analyses and foreign facility inspections; and general intelligence on recent world events--such as natural disasters, foreign recalls, and disease outbreaks--that may affect the safety of a particular imported food product. In addition, agency officials stated that PREDICT will assign higher risk scores to firms for which the system does not have historical data. PREDICT generates a numerical risk score for all FDA-regulated products. According to FDA, PREDICT is to present the shipment's risk score to FDA reviewers if the score is above an FDA-specified threshold. Shipments that are below the threshold are to receive a system "may proceed" (cleared) message unless other conditions are present, such as an FDA import alert. FDA intends that reviewers using PREDICT will also be able to view the specific risk factors that contributed to the shipment's risk score, such as whether the product or importer has a history of FDA violations. FDA expects reviewers to use PREDICT to supplement, rather than replace, their professional judgment when deciding what food products to inspect. A 2007 pilot test of PREDICT in Los Angeles for seafood products indicated that the system could enhance FDA's risk-based import screening efforts. When compared with baseline data from FDA's existing import screening system, the Operational and Administrative System for Import Support (OASIS), PREDICT improved FDA's ability to target imports that the agency considers to be high risk for further examinations and allowed a greater percentage of products the agency considers to be low risk to enter U.S. commerce without requiring a reviewer's intervention. Specifically, PREDICT nearly doubled the percentage of field examinations--and increased by approximately one-third the percentage of laboratory examinations--that resulted in violations, relative to baseline OASIS data. In addition, according to FDA, the violations in shipments that reviewers targeted using PREDICT, on average, posed a greater risk to human health than the violations that OASIS detected. FDA told us on April 12, 2010, that PREDICT is fully operational in the Los Angeles and New York districts, but due to technical problems, FDA has not determined when the system will be deployed in the Seattle district. In addition, FDA officials stated that a scheduled nationwide rollout of PREDICT this summer has been delayed, primarily because of technical problems, such as server crashes and overloads, which are affecting FDA's field data systems nationwide. Although the PREDICT pilot produced positive results and demonstrated the system's potential to improve import screening efforts, we reported that further agency actions were needed to help ensure that the system is effective. For example, FDA had not yet developed a performance measurement plan to evaluate, among other things, PREDICT's ability to identify high-risk shipments for manual review while simultaneously returning "may proceed" messages for low-risk shipments and enabling them to enter U.S. commerce. We recommended FDA develop such a plan. According to agency officials, since our report was issued in September 2009, FDA had completed a draft performance measurement plan. However, we have not reviewed this draft plan. We identified specific gaps in enforcement that could allow violative food products to enter U.S. commerce: (1) FDA's limited authority to assess civil penalties on certain violators; (2) lack of unique identifiers for firms exporting FDA-regulated products; (3) lack of information-sharing between agencies' computer systems and (4) FDA's not sharing product distribution information during a recall. Importers can retain possession of their food shipments until FDA approves their release into U.S. commerce. However, FDA and CBP officials do not believe that CBP's current bonding procedures for FDA- regulated food effectively deter importers from introducing violative food products into U.S. commerce. Specifically, importers post a monetary bond for formal entries (i.e., all shipments exceeding $2,000 and certain shipments valued below that amount) to provide assurance that these shipments meet U.S. requirements. According to these officials, many importers still consider the occasional payment of forfeited bonds as part of the cost of doing business. Indeed, as we reported in 1998, forfeiture of the shipment's maximum bond value is often not sufficient to deter the sale of imported goods that FDA has not yet released. In its response to our September 2009 report, FDA agreed with this finding. According to FDA's regulatory procedures manual, the bond penalty is intended to make the unauthorized distribution of articles unprofitable, but liquidated damages incurred by importers are often so small that they, in effect, encourage future illegal distribution of imported shipments. Even though the bond may be up to three times the value of the shipment, for a large importer, this sum may be negligible, especially when the importer successfully petitions CBP to reduce the amount. We recommended that the FDA Commissioner seek authority from Congress to assess civil penalties on firms and persons who violate FDA's food safety laws and that the Commissioner determine what violations should be subject to this new FDA civil penalties authority, as well as the appropriate nature and magnitude of the penalties. FDA agreed with this recommendation and was working with Congress to include civil penalty authority in food safety legislation. FDA officials also told us that if the agency had the authority to impose civil penalties on importers, which is also provided for in H.R. 2749, FDA might be better able to deter violations. High-risk foods may enter U.S. commerce because the identification numbers that FDA uses to target manufacturers that have violated FDA standards in the past are not unique, and therefore these manufacturers and their shipments, may evade FDA review. Importers generate a manufacturer identification number at the time of import, when, among other things, they electronically file entry information with CBP. (CBP is responsible for validating the manufacturer identification numbers and ensuring they are unique.) CBP electronically sends this information to FDA's computer system. From this new manufacturer identification number, FDA's computer system automatically creates an FDA firm identification number--called the FDA establishment identifier. Officials told us that a single firm may often have multiple CBP manufacturer identification numbers--and therefore multiple FDA establishment identifiers. FDA officials told us that because CBP has multiple identification numbers for many firms, FDA has an average of three "unique" identifiers per firm, and one firm had 75 identifiers. The creation of multiple identifiers can happen in a number of ways. For example, if information about an establishment--such as its name--is entered by importers incorrectly at the time of filing with CBP, a new manufacturer identification number, and therefore a new FDA establishment identifier, could be created for an establishment that already has an FDA number. In this scenario, an importer may-- intentionally or unintentionally--enter a firm's name or address slightly differently from the way it is displayed in FDA's computer system. This entry would lead to the creation of an additional FDA number for that firm. If an import alert was set using the original FDA establishment identifier, a shipment that should be subject to the import alert may be overlooked because the new number does not match the one identified in the alert. In addition, foreign facilities that manufacture, process, pack, or hold food for consumption in the United States, with some exceptions, are required to register with FDA. Upon registration, FDA assigns a registration number. FDA calculated that in 2008, 189,000 foreign firms were registered under this requirement. However, some of the firms included in that total may be duplicates because the facility may have been reregistered without the cancellation of the original registration; consequently FDA may not know the precise number of foreign firms registered. As we previously reported, FDA officials told us they are working to address the unique identifier problem by establishing an interactive process in which FDA's systems recognize when a product's identifier does not match its manufacturer's registration number. As we reported, FDA could consider requiring food manufacturers to use a unique identification number that FDA or a designated private sector firm provides at the time of import. However, the use of this unique number would necessitate collaboration with CBP, since importers would use such a number each time they file with CBP to ship goods to the United States. That is, CBP's computer system would need to be programmed to accept an FDA unique identification number. According to CBP officials, it is unknown if or when CBP's system will have this capability. To improve FDA's and CBP's ability to identify foreign firms with violative histories, we recommended that the FDA Commissioner explore ways to improve the agency's ability to identify foreign firms with a unique identifier and that the CBP Commissioner ensure that its computer system is able to accept a unique identification number for foreign firms that export FDA- regulated foods. Both FDA and CBP agreed with our recommendation, and CBP officials told us that the agency has developed a plan for implementing a unique identifier. However, we have not reviewed this plan. We observe that H.R. 2749 contains a provision that may allow the Secretary of Health and Human Services, in consultation with the Commissioner of CBP, to specify the unique numerical identifier system to be used, taking into account compatibility with CBP's automated systems. Such actions would help prevent high-risk foods from entering U.S. commerce. When we issued our report in September 2009, we reported that CBP's computer system did not notify FDA's or FSIS's systems when imported food shipments arrive at U.S. ports, which increases the risk that potentially unsafe food may enter U.S. commerce, particularly at truck ports. If FDA chooses to examine a shipment as part of its admissibility review, the agency notifies both CBP and the importer through its computer system, OASIS. However, once the shipment arrives at the port and clears CBP's inspection process, the importer is not required to wait at the port for FDA to conduct its examination. Instead, the importer may choose to transport the shipment to the consignee's warehouse or other facility within the United States. The importer might choose to do so because, for example, CBP and FDA do not have the same hours of operation at some ports, and FDA's port office may be closed when the shipment arrives. In such cases, as a condition of the bond with CBP, the importer agrees to hold the shipment intact and not distribute any portion of it into U.S. commerce until FDA has examined it. CBP and FDA officials told us that, occasionally, an importer will transport the shipment to the consignee's warehouse without first notifying FDA. If this occurs, FDA will not quickly know that the shipment has arrived and been transported to a U.S. warehouse because CBP's computer system does not notify FDA's OASIS computer system when the shipment arrives at the port. Instead, from the perspective of an FDA reviewer using OASIS, it will appear as if the shipment's arrival is still pending. FDA port officials told us that it could be 2 or 3 days before FDA reviewers become suspicious and contact CBP to inquire about the shipment's arrival status. By this time, an unscrupulous importer could have distributed the shipment's contents into U.S. commerce without FDA's approval. As we reported, if CBP communicated time-of-arrival information directly to OASIS, then FDA would be able to quickly identify shipments that are transported into the United States without agency notification and arrange to examine them before they are distributed to U.S. markets. Since our report was issued in September 2009, CBP told us that it had modified its software to notify FDA of a shipment's time of arrival. However, we have not reviewed the effectiveness of these modifications. We are still waiting to see whether CBP has an agreement with FSIS regarding time of arrival modifications. One key issue of concern, according to officials we spoke with from several states, is that FDA does not always share with states certain distribution-related information, such as a recalling firm's product distribution lists, which impedes the states' efforts to quickly remove contaminated products from grocery stores and warehouses. According to one state official, because FDA does not provide this information, the state has to spend time tracking it down on its own. Public health may be at risk during the time it takes for the states to independently track distribution information when a product is found to be contaminated. FDA told us that it usually considers such information to be confidential commercial information, the disclosure of which is subject to statutory restrictions, such as the Trade Secrets Act. However, FDA's regulations allow for sharing of confidential commercial information with state and local government officials if, for example, the state has provided a written statement that it has the authority to protect the information from public disclosure and that it will not further disclose the information without FDA's permission, and FDA has determined that disclosure would be in the interest of public health, if such sharing is necessary to effectuate a recall, or the information is shared only with state and local officials who are duly commissioned to conduct examinations or investigations under the Federal Food, Drug, and Cosmetic Act. In certain circumstances, FDA may also seek a firm's consent to disclose its market distribution information. In our past work, we have pointed out that mandatory recall--the authority to require a food company to recall a contaminated product-- would help ensure that unsafe food does not remain in the food supply. We also reported that FDA should strengthen its oversight of food ingredients determined to be generally recognized as safe for their intended use and to seek the authority if the agency deems necessary. Likewise, we reported that FDA has identified a need for explicit authority from Congress to issue regulations to require preventive measures by firms producing foods that have been associated with repeated instances of serious health problems or death. We have reported that food recalls are largely voluntary and that federal agencies responsible for food safety, including FDA, have no authority to compel companies to recall contaminated foods, with the exception of FDA's authority to require a recall for infant formula. FDA does have authority, through the courts, to seize, condemn, and destroy adulterated or misbranded food under its jurisdiction and to disseminate information about foods that are believed to present a danger to public health. However, government agencies that regulate the safety of other products, such as toys and automobile tires, have recall authority not available to FDA for food and have had to use their authority to ensure that recalls were conducted when companies did not cooperate. We have noted that limitations in the FDA's food recall authorities heighten the risk that unsafe food will remain in the food supply and have proposed that Congress consider giving FDA similar authorities. H.R. 2749 authorizes the Secretary of Health and Human Services to request that a person recall an article of food if the Secretary has reason to believe it is adulterated, misbranded, or otherwise in violation of the Federal Food, Drug, and Cosmetic Act and to require a person to cease distribution if the Secretary has reason to believe the article of food "may cause serious adverse health consequences or death to humans or animals." It also requires the Secretary to order a recall of such an article of food if the Secretary determines (after an informal hearing opportunity) it is necessary. Finally, it authorizes the Secretary to proceed directly to a mandatory recall order if the Secretary has credible evidence that an article of food subject to an order to cease distribution presents an imminent threat of serious adverse health consequences or death to humans or animals. As our previous work has shown, mandatory recall authority would allow FDA to ensure that unsafe food does not remain in the food supply. We have reported that FDA should strengthen its oversight of food ingredients determined to be generally recognized as safe (GRAS) for their intended use. Manufacturers add these substances--hundreds of spices and artificial flavors, emulsifiers and binders, vitamins and minerals, and preservatives--to enhance a food's taste, texture, nutritional content, or shelf life. Currently, companies may conclude a substance is GRAS without FDA's approval or knowledge. We reported that FDA only reviews those GRAS determinations that companies submit to the agency's voluntary notification program. The agency generally does not have information about other GRAS determinations companies have made because companies are not required to inform FDA of them. Among other things, we recommended to FDA that it develop a strategy to require any company that conducts a GRAS determination to provide the agency with basic information about this determination, and to incorporate such information into its public Web site. We also reported that FDA is not systematically ensuring the continued safety of current GRAS substances. According to FDA regulations, the GRAS status of a substance must be reconsidered as new scientific information emerges, but the agency has not systematically reconsidered GRAS substances since the 1980s. Rather, FDA officials said, they keep up with new developments in the scientific literature and, on a case-by-case basis, information brought to the agency's attention could prompt them to reconsider the safety of a GRAS substance. We recommended that FDA develop a strategy to conduct reconsiderations of the safety of GRAS substances in a more systematic manner. We also recommended that, if FDA determines that it does not have the authority to implement one or more of our recommendations, the agency should seek the authority from Congress. FDA generally agreed with the report's findings and recommendations. In addition, we reported that FDA has taken steps to make information about its GRAS notification program available to the public by posting its inventory of all GRAS notices FDA has received on its Web site. By placing information about the GRAS notice and its response on its Web site, FDA enhances the ability of Congress, stakeholders, and the general public to be better informed about GRAS substances. H.R. 2749 contains provisions on GRAS substances, including a requirement that the Secretary post on FDA's Web site information about GRAS notices submitted to FDA within 60 days of receipt of the notice. We have also reported that FDA should strengthen its oversight of fresh produce. For example, we noted that FDA has identified a need for explicit authority from Congress to issue regulations requiring preventive controls (risk-based safety regulations) by firms producing foods that have been associated with repeated instances of serious health problems or death. FDA already has preventive regulations for seafood and juice, which require firms to analyze safety hazards and implement plans to address those hazards. According to FDA, such authority would strengthen the agency's ability to implement risk-based processes to reduce illnesses from high-risk foods. FDA officials told us that issuing preventive regulations may be one of the most important things they can do to enhance their oversight of fresh produce. We therefore recommended that the Commissioner of FDA seek authority from Congress to make explicit FDA's authority to adopt preventive controls for high-risk foods. FDA agreed with this recommendation and has sought authority to issue additional preventive controls for high-risk foods. Furthermore, H.R. 2749 requires FDA to create preventive controls for produce and certain raw agricultural commodities. Such measures could help the agency reduce illnesses from these high-risk foods. In conclusion, food imports from around the world constitute a substantial and increasing volume of imported foods. Our work has shown that FDA could strengthen its oversight of imported food by improving its enforcement, such as by assessing civil penalties and providing unique identification numbers to firms. Additional statutory authorities, such as mandatory recall authority, could also help FDA oversee food safety. FDA generally agreed with our recommendations and has some taken actions to address them. Mr. Chairman, this concludes my statement. I would be pleased to answer any questions that you or other Members of this Subcommittee may have. For further information about this testimony, please contact Lisa Shames at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Key contributors to this statement were Jose Alfredo Gomez, Assistant Director; Kevin Bray; Candace Carpenter; Anne Johnson; Carol Herrnstadt Shulman; Nico Sloss; and Rebecca Yurman. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Food imported from around the world constitutes a substantial and increasing percentage of the U.S. food supply. Ensuring the safety of imported food challenges the Food and Drug Administration (FDA) to better target its resources on the foods posing the greatest risks to public health and to coordinate efforts with the Department of Homeland Security's Customs and Border Protection (CBP) so that unsafe food does not enter U.S. commerce. This testimony focuses on (1) FDA's overseas inspections, (2) identified gaps in agencies' enforcement efforts to ensure the safety of imported food, and (3) statutory authorities that GAO has identified that could help FDA's oversight of food safety. This testimony is principally based on GAO's September 2009 report, Food Safety: Agencies Need to Address Gaps in Enforcement and Collaboration to Enhance Safety of Imported Food (GAO-09-873) and has been updated with information from FDA. While the number of FDA overseas inspections has fluctuated, FDA has opened up several overseas offices to address the safety of imported food at the point of origin, and is testing a computer-based system to target high-risk imports for additional inspection when they arrive at ports of entry. Specifically, in 2008, FDA inspected 153 foreign food facilities out of an estimated 189,000 such facilities registered with FDA; in 2007, FDA inspected 95 facilities. FDA estimated that it would conduct 200 inspections in 2009 and 600 in 2010. In addition, FDA opened offices in China, Costa Rica, and India and expects to open offices in Mexico and Chile and to post staff at European Union agencies. Furthermore, FDA's testing of a new computer screening system--the Predictive Risk-Based Evaluation for Dynamic Import Compliance Targeting (PREDICT)--indicates that the system could enhance FDA's risk-based screening efforts at ports of entry, but the system is not yet fully operational. PREDICT is to generate a numerical risk score for all FDA-regulated products by analyzing importers' shipment information using sets of FDA-developed risk criteria and to target for inspection products that have a high risk score. GAO previously identified several gaps in enforcement that could allow food products that violate safety laws to enter U.S. commerce. For example, FDA has limited authority to assess penalties on importers who introduce such food products, and the lack of a unique identifier for firms exporting food products may allow contaminated food to evade FDA's review. In addition, FDA's and CBP's computer systems do not share information. FDA does not always share certain distribution-related information, such as a recalling firm's product distribution lists with states, which impedes states' efforts to quickly remove contaminated products from grocery stores and warehouses. GAO identified certain statutory authorities that could help FDA in its oversight of food safety. Specifically, GAO previously reported that FDA currently lacks mandatory recall authority for companies that do not voluntarily recall food products identified as unsafe. Limitations in FDA's food recall authorities heighten the risk that unsafe food will remain in the food supply. In addition, under current FDA regulations, companies may conclude a food ingredient is generally recognized as safe without FDA's approval or knowledge. GAO recommended that if FDA determines that it does not have the authority to implement one or more recommendations, the agency should seek the authority from Congress. Finally, GAO reported that FDA has identified a need for explicit authority from Congress to issue regulations requiring preventive controls by firms producing foods that have been associated with repeated instances of serious health problems or death. FDA already has preventive regulations for seafood and juice, which require firms to analyze safety hazards and implement plans to address those hazards.

Medicaid and SCHIP are joint federal-state programs that finance health care coverage for certain categories of low-income individuals. To qualify for Medicaid or SCHIP, individuals must meet specific eligibility requirements related to their income, assets, and other personal characteristics such as age. Each state operates its program under a CMS- approved state plan. Almost immediately after Hurricane Katrina, CMS announced in a State Medicaid Director's letter on September 16, 2005, that states could apply for Medicaid demonstration projects authorized under section 1115 of the SSA, through which the federal government would fund its share of expenditures for health care services for certain individuals affected by the hurricane. These demonstration projects provided for (1) time-limited Medicaid and SCHIP services to allow states to quickly enroll eligible individuals who were affected by the hurricane, and (2) time-limited uncompensated care services--allowing states to pay providers rendering services for individuals affected by the hurricane who do not have an alternative method of payment or insurance. Interested states could apply to CMS to offer demonstration projects for either or both categories, and those receiving CMS approval were permitted to seek reimbursement for the federal share of allowable expenditures for covered beneficiaries under the demonstrations. To assist states in applying for these demonstration projects, CMS convened a conference call with all state Medicaid agencies to brief them on the agency's September 16, 2005, letter, discuss the application process, and provide information on other implementation issues, such as benefits for evacuees and relevant federal regulations regarding Medicaid eligibility. For time-limited Medicaid and SCHIP services under the demonstrations, states received approval to provide Medicaid and SCHIP coverage to certain evacuees and affected individuals. In establishing eligibility for this type of demonstration, states primarily used simplified eligibility criteria that CMS developed to determine if affected individuals and evacuees could enroll to receive time-limited Medicaid and SCHIP services (see table 1). States with approved demonstrations for time-limited uncompensated care services could pay providers who delivered services to affected individuals and evacuees who either did not have any other coverage for health care services (such as private or public health insurance), or who had Medicaid or SCHIP coverage but required services beyond those covered under either program. On February 8, 2006, the DRA appropriated $2 billion to be available until expended for four funding categories--two categories associated with the demonstration projects, and two additional categories of funding. DRA applied time limits on the first two categories that were linked to the demonstration projects--that is, services must have been provided by certain dates. The DRA did not specify time limits for the two remaining funding categories. (See table 2.) States could receive allocations from CMS based on certain criteria identified in the DRA, including whether they were directly affected by the hurricane or hosted evacuees. States directly affected by the hurricane-- Alabama, Louisiana, and Mississippi--and states that hosted evacuees could receive DRA funding through Categories I and II, the nonfederal share of expenditures for time-limited Medicaid and SCHIP services and expenditures for time-limited uncompensated care services. In contrast, as specified by DRA, funds for Category III, the nonfederal share of expenditures for existing Medicaid and SCHIP beneficiaries, were available only to certain areas in the directly affected states. These areas were counties or parishes designated under the Robert T. Stafford Disaster Relief and Emergency Assistance Act as areas eligible to receive federal disaster assistance. According to a CMS official, shortly after Hurricane Katrina, 10 counties in Alabama, 31 parishes in Louisiana, and 47 counties in Mississippi were identified as eligible to receive such assistance and were declared individual assistance areas. (See fig. 1.) States receive reimbursement for their expenditures in each of the funding categories through the submission of claims to CMS. To obtain reimbursement of claims for services, providers first submit claims to states for health care services provided to affected individuals and evacuees. States then submit claims to CMS for DRA-covered expenditures made for health care services provided to affected individuals and evacuees under each of the DRA funding categories. In addition, although the DRA was not enacted until February 8, 2006, CMS allowed funding to be retroactive to August 24, 2005. As of September 30, 2006, CMS had allocated approximately $1.9 billion of the total $2 billion in DRA funds to states that were directly affected by Hurricane Katrina or that hosted evacuees in the aftermath of the storm. CMS allocated funds to the first three categories: Category I--the nonfederal share of expenditures for time-limited Medicaid and SCHIP services; Category II--expenditures for time-limited uncompensated care services; and Category III--the nonfederal share of expenditures for existing Medicaid and SCHIP beneficiaries from designated areas of the directly affected states. CMS chose not to allocate any DRA funding to Category IV, for restoring access to health care in impacted communities. CMS allocated the majority of DRA funding (78.3 percent of the $1.9 billion allocated) to Category III, the nonfederal share of expenditures for existing Medicaid and SCHIP beneficiaries, which, by law, was limited to the three directly affected states (Alabama, Louisiana, and Mississippi). CMS allocated funds to states on two occasions--an initial allocation of $1.5 billion on March 29, 2006, and a subsequent allocation on September 30, 2006. Both of these allocations were based on states' estimates of their DRA expenditures. In the second allocation on September 30, 2006, no state received less funding than it received in the March 29, 2006, allocation, but allocations shifted among the DRA categories. As of September 30, 2006, CMS had allocated approximately $1.9 billion of DRA funds to three DRA funding categories to 32 states. The majority of the $1.9 billion allocation--about $1.5 billion (78.3 percent)--is for Category III, existing Medicaid and SCHIP beneficiaries, which is limited to the three directly affected states (Alabama, Louisiana, and Mississippi). For Category I, time-limited Medicaid and SCHIP services, and Category II, time-limited uncompensated care services, states received about $102 million (5.5 percent of the total allocation) and about $302 million (16.2 percent of the total allocation), respectively. (See fig. 2.) With regard to Category I, 32 states received approval to extend time-limited Medicaid and SCHIP coverage to individuals affected by Hurricane Katrina; however, no states actually enrolled individuals in SCHIP. Therefore, only Medicaid services were covered through this DRA funding category. Of these 32 states, 8 states also received approval for Category II to pay providers for rendering extend time-limited uncompensated care services to individuals affected by the hurricane. CMS officials stated that the agency approved the majority of states' applications for demonstration projects within 45 days of the hurricane. Of the 32 states that received allocations totaling $1.9 billion, Louisiana received the largest amount--44.6 percent (about $832 million) of the total allocation. Combined, the 3 directly affected states--Louisiana, Alabama, and Mississippi--received approximately 90 percent ($1.7 billion) of the $1.9 billion allocated to states. While not a directly affected state, Texas hosted a large number of evacuees and received about 7.6 percent ($142 million) of the allocation. These 4 selected states together received approximately 97.5 percent ($1.8 billion) of the $1.9 billion allocation. (See table 3.) CMS provided DRA allocations on two occasions, and both allocations were based on states' estimated DRA expenditures. CMS first allocated $1.5 billion to 32 states on March 29, 2006. After the DRA was enacted in February 2006, CMS requested states' estimated fiscal year 2006 expenditures for three of the four DRA funding categories: Category I--the nonfederal share of expenditures for time-limited Medicaid services; Category II--expenditures for time-limited uncompensated care services; and Category III--for directly affected states, the nonfederal share of expenditures for existing Medicaid and SCHIP beneficiaries. CMS did not request that the three directly affected states estimate expenditures for Category IV--restoring access to health care in impacted communities. CMS officials told us that they viewed restoring access to care as discretionary in nature and not associated with direct service expenditures. In the March 29, 2006, allocation, CMS fully funded 32 states' estimated expenditures for DRA funding for Categories I and II, and also provided the three directly affected states with allocations to approximately half of their estimated expenditures for Category III. Because allocations were based on states' estimates, CMS withheld $500 million of the $2 billion available for the initial allocation, anticipating that allocations would need to be realigned. In July 2006, CMS requested updated estimates of DRA expenditures for fiscal year 2006 for the same three categories: the two time-limited categories for Medicaid and uncompensated care services (Categories I and II) and the existing Medicaid and SCHIP beneficiaries (Category III). On September 30, 2006, CMS allocated an additional amount of about $364 million to states, which, combined with the initial March 29, 2006, allocation of $1.5 billion, provided a total allocation of approximately $1.9 billion. This allocation was based on states' updated estimated expenditures for each of the three DRA categories for which CMS provided funding. For the second allocation, each of the three directly affected states received allocations of 100 percent of their updated estimated expenditures for all three funding categories. While CMS did not decrease any state's allocation as a result of the July 2006 request for updated estimates, it did shift allocation amounts among DRA funding categories when necessary for the September 30, 2006, allocation. Therefore, each state received its allocation amount from March 29, 2006, plus any additional funding included in the updated estimated expenditures. As a result, some states that lowered their subsequent estimates received more than they requested. For example, Texas lowered its initial estimated expenditures from $142 million (its March 29, 2006, estimate) to approximately $36 million. CMS did not change Texas' allocation from the amount the state received on March 29, 2006; thus, Texas retained an allocation of $142 million. Other states received more than they were initially allocated. For example, Alabama requested about $181 million initially, but gave CMS an updated estimate of $248 million. CMS initially allocated Alabama approximately $97 million, but increased its allocation to $248 million on September 30, 2006. (See table 4.) As of September 30, 2006, $136 million in DRA funding remained available for allocation. CMS officials stated that, during the first quarter of fiscal year 2007, they plan to reconcile states' expenditures submitted to CMS with the allocation amounts provided to states on September 30, 2006. After this reconciliation is completed, CMS will determine how to allocate the remaining $136 million of available DRA funds and any unexpended funds of the approximately $1.9 billion previously allocated to states. As of October 2, 2006, states had submitted to CMS claims for services-- including associated administrative costs--totaling about $1 billion (or 54 percent) of the $1.9 billion in DRA funds allocated to them. The amount of claims submitted and the number of states that submitted claims varied by DRA category. Of the 32 states that received allocations from CMS, 22 states have submitted claims, including the 3 directly affected states. Some state officials said they faced obstacles processing DRA-related claims. While DRA-related expenditures varied by state, claims were concentrated in nursing facilities, inpatient hospital care, and prescription drugs. Of the 32 states that received DRA allocations, about two-thirds (22) had submitted claims for expenditures to CMS as of October 2, 2006. The submitted claims accounted for about 54 percent of CMS's $1.9 billion allocated to states. States that submitted claims for reimbursement did so for amounts that ranged from about 7 percent to approximately 96 percent of their allocations. (See table 5.) Each of the 4 selected states we reviewed--Alabama, Louisiana, Mississippi, and Texas--had submitted claims by this time. Of the claims submitted for the two time-limited funding categories, 22 of 32 states submitted claims for Medicaid services (Category I) and 6 of 8 states submitted claims for uncompensated care services (Category II). The claims submitted constituted approximately 20 percent of total allocations to Medicaid and about 42 percent of total allocations to uncompensated care services. Of the 4 selected states, 3 states--Alabama, Mississippi, and Texas--submitted claims for Medicaid services, while all 4 selected states submitted claims for uncompensated care services. (See table 6.) Only the three directly affected states--Alabama, Louisiana, and Mississippi--were eligible to receive DRA funding for existing Medicaid and SCHIP beneficiaries (Category III). The claims submitted by the directly affected states constituted approximately 58 percent of total allocations to Category III. (See table 7.) In addition, claims from the three directly affected states for existing Medicaid and SCHIP beneficiaries accounted for about 85 percent of all DRA claims filed. While funds for existing Medicaid and SCHIP beneficiaries were available for both programs, about 98 percent of claims submitted were for Medicaid expenditures. It has taken longer than usual for states--both those directly affected by the hurricane as well as states that hosted evacuees--to submit claims. Typically, Medicaid expenditure reports are due the month after the quarter ends. CMS officials estimated that about 75 percent of states submit their Medicaid expenditures within 1 to 2 months after the close of a quarter. However, data are not finalized until CMS and states ensure the accuracy of claims. The process of states submitting claims for DRA- related expenditures has been more prolonged. As with other Medicaid claims, states are permitted up to 2 years after paying claims to seek reimbursement from CMS. Therefore, these initial results are likely to change as states continue to file claims for services. As of October 2, 2006, 10 of 32 states that received allocations of DRA funding had not submitted any claims even though fiscal year 2006 ended on September 30, 2006. Some state officials told us that they were having difficulties submitting claims because of various obstacles related to processing claims or receiving claims from providers, including needing to manually process claims or adapt computer systems to accommodate the new types of claims being submitted. For example, Mississippi officials explained that they were manually processing claims for time-limited uncompensated care services because they did not have an electronic system for processing such claims. Georgia officials reported that the state's claims processing system had to be adjusted in order to properly accept claims for time-limited uncompensated care services. After such adjustments were made, Georgia officials anticipated accepting these claims from mid- July through the end of August 2006. Alabama officials noted that they had to specifically request that providers submit claims for the costs of providing uncompensated care services they may have assumed would not be reimbursable. Claims that the four selected states submitted for Medicaid expenditures in the three categories of DRA funding we reviewed varied, but were typically concentrated in three service areas: nursing facilities, inpatient hospital care, and prescription drugs. For example, all four selected states had nursing facility services as one of their top four services for which they submitted claims, while only Alabama had home and community- based services as one of its services with the highest expenditures. Of the claims submitted by states, the proportions attributed to specific services varied across the states. (See table 8.) Alabama, Louisiana, and Mississippi submitted claims for the nonfederal share of expenditures for SCHIP services to existing SCHIP beneficiaries. Overall, the dollar amount of claims for SCHIP represented approximately 2 percent of the total value of claims submitted. As of October 2, 2006, the top four SCHIP expenditures in Alabama were for physician services (22.8 percent), prescription drugs (20.7 percent), inpatient hospital services (13.4 percent), and dental services (12.1 percent). The top four SCHIP expenditures in Louisiana were for prescription drugs (45.4 percent), physician services (22.4 percent), outpatient hospital services (12.5 percent), and inpatient hospital services (9.8 percent). For Mississippi, all of the claims for DRA funds were for expenditures associated with paying SCHIP premiums for certain enrollees. Two of our four selected states raised concerns about their ability to meet the future health care needs of those affected by the hurricane once DRA funds have been expended: Louisiana, which is eligible for DRA funding for Category III services that may be provided beyond June 30, 2006; and Texas, which is not eligible for such ongoing assistance. Of the three directly affected states--Alabama, Louisiana, and Mississippi--only Louisiana raised concerns that it would need additional funds to provide coverage for individuals affected by the hurricane who evacuated the state yet remain enrolled in Louisiana Medicaid. Alabama and Mississippi officials did not anticipate the need for additional funding beyond what was already allocated by CMS. In contrast, because Texas is eligible only for the time-limited DRA funds from Category I and Category II, state officials expressed concern about future funding needs in light of the many evacuees remaining in the state. To learn more about this population, the state commissioned a survey that indicated that evacuees responding to the survey continue to have a high need for services, including health care coverage under Medicaid and SCHIP. Only the three directly affected states--Alabama, Louisiana, and Mississippi--are eligible for DRA funds for Category III services, which were designated to compensate states for the state share of expenditures associated with services provided to existing Medicaid and SCHIP beneficiaries from certain areas of directly affected states beyond June 30, 2006. This additional DRA funding could potentially be available from any unused funds of the $1.9 billion allocated on September 30, 2006, and the $136 million remaining from the $2 billion appropriated. It is unclear how much of the $1.9 billion allocation will be unused and thus available for redistribution. Additionally, it is not yet known how the remaining $136 million will be distributed, but CMS will make that determination after reconciling states' claims submitted during the first quarter of fiscal year 2007 with the allocations. Of the three states eligible for ongoing DRA funding, only Louisiana raised concerns that additional funds will be necessary; Alabama and Mississippi did not anticipate additional funding needs beyond those CMS already allocated. Louisiana's funding concerns were associated with managing its program across state borders as evacuees who left the state continue to remain eligible for Louisiana Medicaid. State officials acknowledged that their immediate funding needs have been addressed by the September 30, 2006, allocation; however, they remain concerned that they do not have the financial or administrative capacity to serve their Medicaid beneficiaries across multiple states. Louisiana officials also cited the difficulty of maintaining what they characterized as a national Medicaid program for enrolled individuals and providers living in many different states. Louisiana has submitted claims for DRA funding for Category III for existing Medicaid and SCHIP beneficiaries (individuals enrolled in Louisiana Medicaid) who resided in 1 of the 31 affected parishes in Louisiana prior to Hurricane Katrina, but evacuated to another state after the hurricane, and who continue to reside in that state. Because many of these evacuated individuals have expressed intent to return to Louisiana, they have not declared residency in the state where they have been living since Hurricane Katrina. Under these circumstances, these individuals have continued to remain eligible for Louisiana Medicaid. However, Louisiana officials were uncertain how long the state would be expected to continue this coverage on a long-distance basis. While DRA funds cover the nonfederal (Louisiana state) share of service expenditures for these Medicaid and SCHIP beneficiaries (Category III), they are not designated to include reimbursement for the administrative costs associated with serving Louisiana Medicaid beneficiaries living in other states. In particular, Louisiana officials noted the following difficulties, which were also outlined in a May 15, 2006, letter to HHS and a May 26, 2006, letter to CMS. These letters requested specific direction from CMS on the issues presented as well as permission to waive certain federal Medicaid requirements that Louisiana believes it has been unable to comply with. In commenting on a draft of our report, Louisiana officials stated that as of November 30, 2006, they had not received the written guidance that they requested from CMS on the following issues: Managing and monitoring a nationwide network of providers. Covering individuals who have evacuated from the state but remain eligible for Louisiana Medicaid requires the state to identify, enroll, and reimburse providers from other states. According to Louisiana officials, the state has enrolled more than 16,000 out-of-state providers in Louisiana Medicaid since August 28, 2005. The state does not believe that it can manage and monitor a nationwide network of providers indefinitely. Therefore, Louisiana is seeking guidance from CMS to ensure that the state is continuing to comply with federal Medicaid requirements for payments for services furnished to out-of-state Medicaid beneficiaries. Redetermining eligibility. Federal Medicaid regulations require that states redetermine eligibility at least annually as well as when they receive information about changes in individuals' circumstances. Louisiana officials indicated that they had received approval through its demonstration project to defer redetermination processes through January 31, 2006. Officials noted that they have more than 100,000 individuals from affected areas whose eligibility had not yet been redetermined as of May 26, 2006. Officials say they do not want to take beneficiaries who need coverage off the state's Medicaid rolls for procedural reasons, and thus would prefer to conduct mail-in renewals and have a process for expedited reenrollment upon return to the state. According to Louisiana officials, the state's redetermination processes are currently on hold while CMS examines the possibility of granting a waiver for redetermining eligibility for individuals from the most severely affected parishes around New Orleans. Maintaining program integrity. Louisiana officials explained that running a Medicaid program in multiple states raises issues of program integrity. While some providers have contacted Louisiana Medicaid to report that they have received payment from more than one state, Louisiana officials believe that other providers are not reporting overpayments. State officials indicated that they will conduct postpayment claims reviews to ensure that double billing and other fraudulent activities have not occurred. These officials estimated that this effort to review claims could be time consuming, taking approximately 3 to 8 years to complete. Because Louisiana believes that it is unable to ensure the integrity of the program as long as it continues enrolling out-of-state providers, the state requested specific direction from CMS on whether to continue such enrollment efforts. Ensuring access to services. Louisiana officials expressed a concern about the state's ability to ensure access to home and community-based services in other states. Officials noted that some states have long waiting lists for this type of long-term care, making it difficult for them to provide services that assist in keeping individuals in the community rather than in an institution. Additionally, as a requirement of providing home and community-based services, measures are needed to protect the health and welfare of beneficiaries. However, officials stated that Louisiana is not in the position to assure the health and safety of individuals requiring these services out of the state. Thus, the state asked CMS for direction on how to continue operating its Medicaid program without violating the federal requirement to assure the health and welfare of beneficiaries receiving home and community-based services. While Texas is not a directly affected state and therefore not eligible for DRA funding for any Medicaid or SCHIP services provided beyond June 30, 2006, it has been significantly affected by the number of evacuees seeking services, thus prompting concern among state officials regarding the state's future funding needs. To address the health needs of evacuees entering the state, Texas enrolled these individuals into Medicaid under Category I--providing time-limited Medicaid services for evacuees who were eligible under an approved demonstration project. In comparison to Alabama and Mississippi, which also enrolled evacuees into time-limited Medicaid services, Texas enrolled the largest number of evacuees-- peaking at nearly 39,000 individuals in January 2006. (See table 9). Texas also submitted claims for Category II DRA funds for time-limited uncompensated care services to evacuees, shortly after the hurricane. Enrollment into this category grew steadily from 2,224 individuals in October 2005 to 9,080 individuals in January 2006. Figure 3 shows the enrollment patterns for the Texas Medicaid program, as well as Category I and Category II services provided for the period following Hurricane Katrina. To better understand the characteristics, needs, and future plans of the evacuee population, the Texas Health and Human Services Commission contracted with the Gallup Organization to survey Hurricane Katrina evacuees in Texas. Data from survey respondents indicated that, as of June 2006, evacuees remaining in the state were predominantly adult women who lived in low-income households with children and had increasing rates of uninsurance since the hurricane. Despite the loss of insurance coverage, the survey indicated that fewer evacuees received Medicaid than previously expected and the loss of insurance primarily affected children's health coverage. Evacuees appear to be turning to hospital emergency departments to meet their health care needs, as survey respondents reported an increase in emergency room visits in the past 6 months. Texas officials confirmed that evacuees who were previously eligible for the two DRA categories for time-limited coverage (Medicaid and uncompensated care services) are beginning to present themselves to local county facilities for their health care needs, thus straining local resources to provide care for all Texas residents. Based on this survey, Texas officials said they are concerned that they will continue to host an evacuee population with high needs who do not have immediate plans to leave the state. In particular, over half of the survey respondents believe they will continue to reside in Texas in the next 6 months and half believe they will still be there in 1 year. Texas was not a directly affected state and is therefore not eligible for ongoing assistance through the DRA; funding for Category I only covers services provided as of June 30, 2006, and funding for Category II only covers services provided as of January 31, 2006. We provided copies of a draft of this report to CMS and the four states we reviewed: Alabama, Louisiana, Mississippi, and Texas. We received written general and additional comments from CMS (see app. II) and from Louisiana and Texas (see apps. III and IV, respectively). Alabama provided technical comments, while Mississippi did not comment on the draft report. In commenting on the draft report, CMS provided information on an initiative it took to respond to Hurricane Katrina. The agency indicated that HHS, which oversees CMS, worked closely with Louisiana's Department of Health and Hospitals to assist the state in convening the Louisiana Health Care Redesign Collaborative, which will work to rebuild Louisiana's health care system. We did not revise the text of the report to include information on this effort because it was beyond the scope of this report. However, we have earlier reported on HHS efforts to help rebuild Louisiana's health care system. CMS also commented on three issues: our characterization of the categories of funding provided through DRA, our description of CMS's reconciliation process, and criticism it faced in communicating with the states, particularly Louisiana and Texas, regarding program implementation, coverage for out-of-state evacuees, and other issues. These comments are addressed below. CMS commented that we mischaracterized the categories of DRA funding by specifying them in the report as Categories I, II, III, and IV. We developed these four descriptive categories, which were derived from provisions of the DRA, in order to simplify report presentation. However, to respond to CMS's comment, we included additional legal citations in the report to better link the statutory language of the DRA with the categories of funding presented in this report. We did not, however, adopt all of CMS's descriptions of DRA provisions as CMS presented some of the descriptions inaccurately. In particular, CMS presented DRA sections 6201(a)(3) and 6201(a)(4) as providing federal funding under an approved section 1115 demonstration project, but as stated in the report, such approval is irrelevant to this funding. CMS also commented that the report was misleading because it did not fully describe the reconciliation process that will be used to allocate remaining and unused DRA funds. Specifically, the agency indicated that we did not explain that additional DRA allocations would be made to states not only from the remaining $136 million in unallocated funds but also from any unspent funds already allocated to states. The draft report did contain a full explanation of the reconciliation process. However, to address CMS's comment, we clarified this process in the report's Highlights and Results in Brief. Finally, CMS disagreed with statements in the draft report that Louisiana had not received the requested direction detailed in letters written to HHS on May 15, 2006, and CMS on May 26, 2006. Louisiana's letters included concerns and questions that arose after the state implemented its section 1115 demonstration project. CMS indicated that it provided and continues to provide technical assistance to all states with section 1115 demonstration projects for Hurricane Katrina assistance beyond the states reviewed in this report. In particular, immediately following the hurricane CMS provided guidance to states through a conference call and a September 16, 2005, letter sent to all state Medicaid directors that explained the process of applying for the section 1115 demonstration project, the benefits and eligibility criteria for evacuees, the uncompensated care pool, and other pertinent information. We revised the report to reflect the guidance that CMS provided to the states immediately following the hurricane. CMS also commented that it worked with Louisiana and the other hurricane-affected states on redetermining eligibility through a conference call, and provided information to Louisiana several times regarding regulations that the state should follow for redetermining eligibility on an annual basis. Further, CMS indicated that it provided technical assistance to Louisiana in its efforts to ensure program integrity and access to health care services. While CMS may have provided such assistance, from Louisiana's perspective, it was not sufficient to address the many issues the state is facing. In Louisiana's written comments, state officials maintained that as of November 30, 2006, they had not received written guidance from CMS regarding the issues outlined in their May 15, 2006, letter. Comments from Louisiana and Texas centered on each state's efforts to assist those affected by the hurricane and the ongoing challenges that exist as a result of Hurricane Katrina. In particular, Louisiana emphasized the lack of response from HHS regarding its concerns about running its Medicaid program in many states and related difficulties to ensuring the program's integrity. Texas commented on its continued need to provide health care services to Hurricane Katrina evacuees given the results of a survey conducted by the Gallup Organization, which indicated that most of the evacuees still residing in Texas were uninsured as of June 2006. Additional technical and editorial comments from CMS and the states were incorporated into the report as appropriate. We are sending a copy of this report to the Secretary of Health and Human Services and the Administrator of CMS. We will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7118 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix V. Under the authority of the Deficit Reduction Act of 2005, the Centers for Medicare & Medicaid Services (CMS) allocated funding totaling approximately $1.9 billion to 32 states, as of September 30, 2006. The agency allocated funds to all 32 states for the time-limited Medicaid category of demonstration projects, to 8 of those 32 states for the time- limited uncompensated care category of demonstration projects, and to the 3 directly affected states--Alabama, Louisiana, and Mississippi--for the nonfederal share of expenditures for existing Medicaid and SCHIP beneficiaries. The 4 states selected for this study--Alabama, Louisiana, Mississippi, and Texas--received approximately 97.5 percent of the $1.9 billion allocation. All allocations were based on estimates states submitted for each of the funding categories in response to CMS's July 2006 request for updated estimates. (See table 10.) In addition to the contact named above, Carolyn Yocom, Assistant Director; Jennie Apter; Laura M. Mervilde; JoAnn Martinez-Shriver; Sari B. Shuman; and Hemi Tewarson made key contributions to this report. Hurricane Katrina: Status of Hospital Inpatient and Emergency Departments in the Greater New Orleans Area. GAO-06-1003. Washington, D.C.: September 29, 2006. Catastrophic Disasters: Enhanced Leadership, Capabilities, and Accountability Controls Will Improve the Effectiveness of the Nation's Preparedness, Response, and Recovery System. GAO-06-618. Washington, D.C.: September 6, 2006. Hurricane Katrina: Status of the Health Care System in New Orleans and Difficult Decisions Related to Efforts to Rebuild It Approximately 6 Months After Hurricane Katrina. GAO-06-576R. Washington, D.C.: March 28, 2006. Hurricane Katrina: GAO's Preliminary Observations Regarding Preparedness, Response, and Recovery. GAO-06-442T. Washington, D.C.: March 8, 2006. Statement by Comptroller General David M. Walker on GAO's Preliminary Observations Regarding Preparedness and Response to Hurricanes Katrina and Rita. GAO-06-365R. Washington, D.C.: February 1, 2006.

In February 2006, the Deficit Reduction Act of 2005 (DRA) appropriated $2 billion for certain health care costs related to Hurricane Katrina through Medicaid and the State Children's Health Insurance Program (SCHIP). The Centers for Medicare & Medicaid Services (CMS) was charged with allocating the $2 billion in funding to states directly affected by the hurricane or that hosted evacuees. GAO performed this work under the Comptroller General's statutory authority to conduct evaluations on his own initiative. In this report, GAO examined: (1) how CMS allocated the DRA funds to states, (2) the extent to which states have used DRA funds, and (3) whether selected states--Alabama, Louisiana, Mississippi, and Texas--anticipate the need for additional funds after DRA funds are expended. To conduct this review, GAO reviewed CMS's allocations of DRA funds to all eligible states, focusing in particular on the four selected states that had the highest initial allocation (released by CMS on March 29, 2006). GAO obtained data from Medicaid offices in the four selected states regarding their experiences enrolling individuals, providing services, and submitting claims; collected state Medicaid enrollment data; and analyzed DRA expenditure data that states submitted to CMS. As of September 30, 2006, CMS allocated $1.9 billion of the $2 billion in DRA funding to states. CMS allocated funds to: Category I--the nonfederal share of expenditures for time-limited Medicaid and SCHIP services for eligible individuals affected by the hurricane (32 states); Category II--expenditures for time-limited uncompensated care services for individuals without a method of payment or insurance (8 of the 32 states); and Category III--the nonfederal share of expenditures for existing Medicaid and SCHIP beneficiaries (Alabama, Louisiana, and Mississippi). CMS did not allocate funds to Category IV--for restoration of access to health care. After CMS reconciles states' expenditures with allocations, it will determine how to allocate the unallocated $136 million and unexpended funds from the $1.9 billion allocated to states. Of the $1.9 billion in allocated DRA funds, almost two-thirds of the 32 states that received these funds submitted claims totaling about $1 billion as of October 2, 2006. Claims from Alabama, Louisiana, and Mississippi for Category III accounted for about 85 percent of all claims filed. These initial results are likely to change as states continue to file claims for services. Of the four selected states, Louisiana and Texas raised concerns about their ability to meet future health care needs once the DRA funds are expended. Louisiana's concerns involved managing its Medicaid program across state borders as those who left the state remain eligible for the program. Texas was significantly affected by the number of evacuees seeking services, thus raising concerns among state officials about the state's future funding needs. CMS, Alabama, Louisiana, and Texas commented on a draft of this report. CMS suggested the report clarify the DRA funding categories, reallocation process, and communication strategy with states, especially Louisiana. Louisiana and Texas commented on their ongoing challenges, and Alabama provided technical comments. The report was revised as appropriate.

In part to improve the information available and management of DOD's acquisition of services, in 2001 Congress enacted section 2330a of title 10 of the U.S. Code, which required the Secretary of Defense to establish a data collection system to provide management information on each purchase of services by a military department or defense agency. Congress amended section 2330a in 2008 to add a requirement for the Secretary of Defense to submit an annual inventory of the activities performed pursuant to contracts for services on behalf of DOD during the preceding fiscal year. The inventory is to include a number of specific data elements for each identified activity, including the function and missions performed by the contractor; the contracting organization, the component of DOD administering the contract, and the organization whose requirements are being met through contractor performance of the function; the funding source for the contract by appropriation and operating agency; the fiscal year the activity first appeared on an inventory; the number of contractor employees (expressed as FTEs) for direct labor, using direct labor hours and associated cost data collected from contractors; a determination of whether the contract pursuant to which the activity is performed is a personal services contract; and a summary of the information required by subsection 2330a(a) of title 10 of the U.S. Code. Within DOD, USD(AT&L), USD(P&R), and the Office of the Under Secretary of Defense (Comptroller) have shared responsibility for issuing guidance for compiling and reviewing the inventory. USD(P&R) compiles the inventories prepared by the components, and USD(AT&L) is to submit a consolidated DOD inventory to Congress no later than June 30 of each fiscal year. DOD has submitted annual, department-wide inventories for fiscal years 2008 through 2015, the most recent submitted on September 20, 2016 (see table 1). Since DOD began reporting on the department-wide inventory of contracted services in fiscal year 2008, the primary source used by most DOD components to compile their inventories, with the exception of the Army, has been FPDS-NG. The Army developed its CMRA system in 2005 to collect information on labor-hour expenditures by function, funding source, and mission supported on contracted efforts, and has used its CMRA as the basis for its inventory. The Army's CMRA is intended to capture data directly reported by contractors on services performed at the contract line item level, including information on the direct labor dollars, direct labor hours, total invoiced dollars, the functions performed, and the organizational unit for which the services are being performed. In instances where contractors are providing different services under the same contract action, or are providing services at multiple locations, contractors can enter additional records in CMRA to capture information associated with each type of service or location. It also allows for the identification of services provided under contracts for goods. Subsection 2330a(e) of title 10 of the U.S. Code requires the secretaries of the military departments or heads of the defense agencies to complete a review of the contracts and activities in the inventory for which they are responsible within 90 days of the inventory being submitted to Congress. USD(P&R), as supported by the Comptroller, is responsible for, among other things, developing guidance for the conduct and completion of this review. As part of this review, the military departments and defense agencies are to ensure that any personal services contracts in the inventory were properly entered into and performed appropriately; the activities on the list do not include any inherently governmental functions; and to the maximum extent practicable, the activities in the inventory do not include any functions closely associated with inherently governmental functions. This review also requires the secretaries of the military departments and heads of defense agencies to identify activities that should be considered for conversion to government performance, or insourced, pursuant to section 2463 of title 10 of the U.S. Code, or to a more advantageous acquisition approach. Section 2463 specifically requires the Secretary of Defense to make use of the inventory to identify critical functions, acquisition workforce functions, and closely associated with inherently governmental functions performed by contractors--and to give special consideration to converting those functions to DOD civilian performance. In addition, subsection 2330a(f) of title 10 of the U.S. Code requires the secretaries of the military departments or heads of the defense agencies responsible for contracted services in the inventory to develop a plan, including an enforcement mechanism and approval process, for using the inventory to inform management decisions (see figure 1). Collectively, these statutory requirements mandate the use of the inventory and the associated review process to enhance the ability of DOD to identify and track services provided by contractors, achieve accountability for the contractor sector of DOD's total workforce, help identify contracted services for potential conversion from contractor performance to DOD civilian performance, support DOD's determination of the appropriate workforce mix, and project and justify the number of contractor FTEs included in DOD's annual budget justification materials. Over the past five years, we have issued several reports on DOD's efforts to compile and review its inventory of contracted services and made recommendations on a variety of issues related to the inventories. For example, in January 2011, we found that the military departments had differing approaches to reviewing the activities performed by contractors, and the department stated it had a goal of collecting manpower data from contractors for future inventories. We recommended that the department develop a plan of action to facilitate the department's intent of collecting manpower data and address other limitations to its current approach to meeting inventory requirements. The department concurred with our recommendation but had not addressed it as of August 2016. In November 2015, we found that the lack of documentation on whether a proposed contract includes closely associated with inherently governmental functions may result in inventory review processes incorrectly reporting these functions, and recommended that DOD require acquisition officials to document, prior to contract award, whether the proposed contract action includes activities that are closely associated with inherently governmental functions. DOD concurred with our recommendation, but has not yet implemented it. A full list of our prior reports on DOD's inventory of contracted services, the recommendations from those reports, and the current status of those recommendations-- including eight that remain open--is included in appendix I. Our prior work has also consistently found that the absence of a complete and accurate inventory of contracted services hinders DOD's ability to improve its management of these services. For example, in a June 2016 report on DOD headquarters personnel reduction efforts, we found that DOD does not have reliable data for assessing headquarters functions and associated costs, including those performed by contractor personnel. We concluded that without reliable information, DOD may not be able to accurately assess specific functional areas or identify potential streamlining and cost savings opportunities. In a December 2015 report on civilian and contractor personnel reductions, we found that limitations in the methodology for contractor FTE estimates in the inventory may hinder efforts to implement statutorily mandated reporting on reductions in contractor personnel. Further, in a February 2016 report on DOD efforts to forecast service contract requirements, we found that existing data on DOD's future spending for contracted service requirements was not fully captured by DOD's programming and budget processes, an effort the inventory of contracted services is intended to support. We noted that critical to being more strategic is knowing what DOD is spending today and what DOD intends to spend in the future. More DOD components conducted and certified the completion of an inventory review as required by subsection 2330a(e) of title 10 of the U.S. Code and DOD's guidance, respectively, in fiscal year 2014 as compared to previous years. Overall, we found that the 40 components' certification letters addressed more of DOD's required elements in comparison to prior years, with over half of the components including all six of the required elements. In some areas, however, we continued to find limitations with the information provided in the certification letters. For example, the level of detail and input provided on the use of the inventory to inform annual program reviews and budget processes varied. In addition, we continued to find significant differences and potential underreporting in the extent to which components identified instances of contractors providing services that are closely associated with inherently governmental functions in their inventories. For example, through its review process, the Army identified $8.1 billion in invoiced dollars for contracts that include closely associated with inherently governmental functions, nearly three times the amount identified by the Navy, Air Force, and other defense agencies collectively for similar types of contracts. USD(AT&L) and USD(P&R)'s December 29, 2014, guidance governing the fiscal year 2014 inventory of contracted services required the military departments and defense agencies to certify--through submission of a certification letter to the USD(P&R)--that their review was conducted in accordance with subsection 2330a(e) of title 10 of the U.S. Code. As of July 2016, 40 DOD components reporting for fiscal year 2014 certified that they had reviewed their inventories. Notably, the Air Force, which represented close to 18 percent of DOD's contract obligations for services in fiscal year 2014, submitted a review certification letter for the first time since the fiscal year 2011 inventory. The Army submitted an interim certification letter in April 2016 based on a review of the contracted functions performed by 73 percent of its contractor FTEs from its fiscal year 2014 inventory. DOD's guidance for fiscal year 2014, among other things, requires components to include six elements in their certification letters. DOD components' certification letters have generally improved each year since 2011 in terms of the number of elements addressed. See figure 2 for the list of required elements and the percentage of components that addressed each element in their certification letters for fiscal years 2011 to 2014. Overall, in fiscal year 2014 components addressed more of DOD's required elements in comparison to prior years, as 21 of the 40 components--or over half--addressed all required elements in their certification letters (see figure 3). While these findings demonstrate that improvements have been made in terms of compliance with the review requirements, review results reported in certification letters varied in terms of the level of detail and insights provided on certain elements, in particular for the element that requires components to provide input on actions being taken or considered with regard to annual program review and budget processes based on the inventory review results. For example, of the 23 components that we found addressed this requirement in their fiscal year 2014 certification letters, the Navy and one other component discussed specific actions taken or plans based on the inventory review results to inform existing or future program and budget processes; nine components, including the Air Force, discussed their existing or planned program review or budget processes, but did not explicitly state how the review results would be used to inform those processes; ten components, including the Army, described the inventory as one source of information available to inform programming and budget matters, but did not provide input on whether specific actions were taken or considered based on those review results; and in two cases, components reiterated language from DOD's review guidance in their certification letters to affirm that they had addressed the required element, but did so without adding any component- specific information. Of the 17 components that we found did not address the requirement in their fiscal year 2014 certification letters, 12 did not include any narrative related to the required element and therefore it is not clear whether the component had considered the use of the inventory in program reviews and budget processes. Three components' certification letters stated explicitly that no actions were taken or considered based on the fiscal year 2014 review results, nor did they provide additional narrative to indicate whether the inventory review information is used generally to inform programming and budget matters. Two components each submitted a consolidated inventory and certification letter consisting of the collective review results and responses for the components under their purview, in which not all of the individual responses addressed the requirement. Similar to our November 2015 report, we found that components may continue to be underreporting instances of contractors providing services that are closely associated with inherently governmental functions in their inventory review. In this regard, our analysis indicates that DOD obligated about $28 billion for contracts in the 17 product service codes that OFPP and GAO identified as more likely to include closely associated with inherently governmental functions. In comparison, of the 40 components reporting for fiscal year 2014, 25 components identified a total of $10.8 billion in obligations or dollars invoiced for contracts that included work identified as closely associated with inherently governmental functions--either within the 17 product service codes or for any other category of service. We also found significant disparity among the components' reporting of these functions (see figure 4). Specifically, through its review process, the Army identified $8.1 billion in invoiced dollars for contracts that include closely associated with inherently governmental functions. In comparison, our analysis of Army's inventory data identified $10.2 billion in invoiced dollars for Army contracts in the 17 product service codes. In contrast, the Navy, Air Force, and other defense agencies collectively identified only about $2.7 billion in obligations and invoiced dollars for contracts that include closely associated with inherently governmental functions in their inventories, while our analysis of each component's inventory data identified $17.9 billion in collective obligations for contracts in the 17 product service codes. We previously found shortcomings with DOD's annual inventory review guidance, such as a lack of specific guidance on how to identify or review contract functions, and concluded that, as a result, components may be missing opportunities to properly identify contractors performing closely associated with inherently governmental functions. In November 2014, we recommended, in part, that DOD revise its guidance to clearly identify the basis for selecting contracts to review and to provide approaches the components may use to conduct inventory reviews to ensure that the nature of how the contract is being performed is adequately considered. In November 2015, we reported that DOD's December 2014 guidance for the fiscal year 2014 inventory did not address our recommendation to provide such clarification; however, DOD officials noted that a risk-based approach to select which contracts to review may be appropriate. As such, we recommended that DOD ensure that components review, at a minimum, those contracts within the product service codes identified as requiring heightened management attention and as more likely to include closely associated with inherently governmental functions. DOD's March 2016 guidance for the review of the fiscal year 2015 inventory--the first issued after our recommendation--requires components to review those contracts; however, it is too soon to determine what effect the revised guidance will have on the components' forthcoming inventory reviews. In addition to the lack of specific inventory review guidance, our November 2015 review also identified other factors that may also contribute to components incorrectly identifying contracts that may include closely associated with inherently governmental functions during the pre-contract award process. Specifically, we concluded that the lack of a requirement for acquisition officials to document, during the pre- award process, whether a proposed contract includes closely associated with inherently governmental functions hinders a component's ability to both identify and report on contractors performing such functions. The Army's pre-award process, specifically the Request for Services Contract Approval form, requires documentation of a determination whether a contract includes closely associated with inherently governmental functions; however, the Air Force and Navy do not have department-wide requirements to document this determination in their contract files. DOD concurred with both of our November 2015 recommendations to require acquisition officials to document, prior to contract award, whether contract actions include such activities, and to provide clear instructions on how the service requirement review boards will be used to identify whether contracts contain such functions. Officials from the Office of Defense Procurement and Acquisition Policy--the office within USD(AT&L) responsible for contracting and acquisition policy--indicated at that time that a forthcoming DOD Instruction on service acquisitions would include direction to consider planned activities under a contract during the service requirement review boards. DOD Instruction 5000.74, issued in January 2016, includes discussion related to identifying closely associated with inherently governmental functions in the inventory, but not in the context of the service requirement review boards. The military departments generally have not developed plans to use the inventory of contracted services to inform workforce mix, strategic workforce planning, and budget decision-making processes, as required by the National Defense Authorization Act for Fiscal Year 2012. DOD has recently made progress in identifying accountable officials to develop plans and establish processes for using the inventories in decision making, a step we recommended in November 2014 to help ensure the inventory is integrated into key management decisions. Despite this effort, DOD faces continued delays to key steps in the implementation of the inventory process, including choosing the path forward for its underlying inventory data collection system, staffing its inventory management support office, and formalizing the roles and responsibilities of that office and its relationship to the military departments and other stakeholders. Collectively, these persistent delays hinder the department's ability to use the inventory of contracted services as intended. The military departments generally have not developed plans and enforcement mechanisms as required by subsection 2330a(f) of title 10 of the U.S. Code to use the inventory of contracted services to inform workforce mix, strategic workforce planning, and budget decision-making processes. Our November 2014 report on the fiscal year 2012 inventory found that the military departments--with the exception of the Army, which used the inventory to inform decisions about workforce mix and insourcing--lacked plans and processes to incorporate the inventory into decision making. While DOD's December 2014 guidance for the fiscal year 2014 inventory more explicitly required components to use the inventory reviews to inform programming and budget matters, and to inform their strategic workforce planning efforts--which carried through to their fiscal year 2015 guidance--our current work found that the military departments generally continue to lack plans and processes to do so. Appendix II presents the findings of the November 2014 report on these plans and processes, with updates, where appropriate. At the department level, in January 2016, USD(AT&L) issued DOD Instruction 5000.74, Defense Acquisition of Services, which establishes policy, assigns responsibilities, and provides direction for the acquisition of contracted services. In commenting on our November 2015 report, DOD stated that this instruction would provide guidance on identifying closely associated with inherently governmental activities. The instruction notes that DOD components will submit an annual inventory of contracted services, and that the inventory and associated review are to be used to inform acquisition planning and workforce shaping decisions, but does not provide any specific guidance as to how the inventories are to contribute to such decisions, including guidance for identifying closely associated with inherently governmental activities. DOD officials more recently stated that this instruction is intended as policy for acquisition officials, not as a document on workforce planning. We previously found that the responsibility for developing plans and enforcement mechanisms to use the inventory for decision-making processes was not clearly assigned and was divided across multiple offices. In our November 2014 report, we recommended that the secretaries of the military departments identify an accountable official to lead and coordinate efforts across the functional communities to develop plans and establish processes for using the inventory for decision making. DOD concurred with this recommendation. No components identified an accountable official with their fiscal year 2014 inventory submission. However, DOD's March 2016 guidance for the fiscal year 2015 inventory explicitly required the identification of an accountable official to help ensure that the inventory is integrated into key management decisions. As of July 2016, 41 components had submitted their fiscal year 2015 inventories, of which 30 identified an accountable official in their transmittal letter. However, none of the three military departments, which represent 73 percent of service contract obligations reported in the fiscal year 2014 inventory, have yet identified an accountable official. In its transmittal letter for fiscal year 2015, the Air Force stated that it first needs to better understand the roles and responsibilities of the inventory management support office. The Army's fiscal year 2015 transmittal letter states that it is in the process of identifying an appropriate official. As of July 2016, the Navy has not yet submitted its fiscal year 2015 transmittal letter. DOD has twice conducted reviews in the past two years to assess its approach to conducting the inventory. DOD officials noted that, to some degree, these reviews have contributed to delays in choosing the path forward for its underlying inventory data collection system, staffing the support office, and formalizing the roles and responsibilities of that office and its relationship to the military departments and other stakeholders. These delays may, in turn, hinder the development and implementation of plans and enforcement mechanisms for using inventory data to inform workforce and budget decision-making processes. As shown in figure 5, DOD has struggled since 2011 to determine the best way forward for collecting data for the inventories. In September 2014, DOD undertook an internal review of strategic options to identify, develop, and consider all reasonable options, in both the short and long terms, and propose courses of action for appropriate enterprise solutions to facilitate data collection for the inventory. However, DOD's strategic review of options in 2014 did not lead to a definitive way forward. In November 2014, we found that DOD's strategic review of options raised questions as to whether DOD will continue to implement ECMRA--a DOD-wide inventory data collection system modeled after the Army's CMRA system--or attempt to develop a new system. We concluded that, until such time as DOD components are able to collect the required data for their inventories, the utility of the inventory for making workforce decisions will be hindered. We recommended that, should a decision be made to use or develop a system other than the ECMRA system currently being fielded, USD(P&R) should document the rationale for doing so and ensure that the new approach provides data that satisfies the statutory requirements for the inventory. In 2015, the Joint Explanatory Statement to the National Defense Authorization Act for Fiscal Year 2016 mandated that DOD report on the approach the department is taking to comply with the inventory requirement and whether it is producing a product that enhances oversight of service contracting activities. DOD contracted with the RAND National Defense Research Institute in December 2015 to assess the methods used by DOD to produce the inventory of contracted services and to recommend improvements, including alternative methods of collecting, processing, and reporting data on contracted services. RAND provided preliminary briefings to DOD in March and May of 2016, and its final report is expected to be delivered later this year. While awaiting the results of its internal review and, subsequently, the RAND review, DOD delayed fully staffing its support office and defining its specific roles, authorities, and relationships to the military departments and other stakeholders, as shown in figure 6. In 2014, a USD(P&R) official told us that DOD would defer the use of additional resources for the support office until such time as there had been a decision whether to pursue a new approach or continue forward with implementation of ECMRA. Similarly, in 2016, USD(P&R) officials told us that they wanted to be more confident of the planned direction for the inventories before committing to additional hiring. Further, more than two years since the support office was funded, DOD has yet to define the roles and responsibilities of the office. In November 2015, we recommended that USD(P&R) clearly identify these longer term relationships between the support office, military departments, and other stakeholders with respect to collection and use of inventory data. DOD concurred and told us that the release of a memorandum of agreement between the Assistant Secretary of Defense for Manpower and Reserve Affairs and the Director of the Defense Human Resource Activity on short term roles and responsibilities for the support office would do so, but as of August 2016, the memorandum of agreement had yet to be formalized. Additionally, DOD officials indicated that the memorandum of agreement will not address the roles to be played by the support office, the military departments, and other stakeholders in exploring the longer term solution to collecting contractor manpower data and integrating inventory data within the military departments' decision-making processes. Supplemental agreements will be necessary to formalize these relationships. The absence of clearly identified relationships between the support office and other stakeholders has hindered efforts to implement ECMRA and integrate the data into decision-making processes that will meet user needs and expectations. In addition to these uncertainties about finalizing an approach to the inventory, our review found that DOD components' reliance on data captured in their CMRA systems for their inventories has varied. DOD's March 2014 guidance for the fiscal year 2013 inventory, as well as guidance for subsequent inventories, required components to include the percentage of their total contracts that were reported by contractors in their CMRA system and the extent to which reported data were used to support their inventory submission. Contractors are required to report labor hour data by the end of October for work executed during the period of performance within the one year period beginning October 1 of the prior year and ending September 30. DOD components are then supposed to use this contractor-reported data from CMRA to help develop their inventories. We found that 22 out of the 40 components, comprising about 96 percent of total FTEs reported in the DOD inventory, reported using CMRA data for the fiscal year 2014 inventory submission. In contrast, only nine components reported using CMRA to do so in the fiscal year 2013 inventory. Table 2 identifies changes in use of CMRA data by the military departments from fiscal year 2013 to fiscal year 2015. Air Force and Navy both continue to rely heavily on FPDS-NG data to derive the contractor FTEs for those contracts not entered into CMRA. Navy officials stated that they do not view all contractor-reported CMRA data to yet be robust enough to support consistent, reliable use for the inventory. However, as we have previously reported, the FPDS-NG system has several limitations that limit its utility for purposes of compiling a complete and accurate inventory, including not being able to identify and record more than one type of service purchased for each contracting action entered into the system, not being able to capture any services performed under contracts that are predominantly for supplies, not being able to identify the requiring activity specifically, not capturing service contracts awarded on behalf of DOD by non- not being able to determine the number of contractor FTEs used to perform each service. Since 2011, we have made 13 recommendations to help improve how DOD collects, reviews, and uses the data from the inventory of contracted services (see appendix I for a complete list and the status of DOD's actions to address them). We are not making any new recommendations in this report, but rather we underscore the need to address the 8 recommendations that remain open. In particular, DOD needs to resolve the long-standing delays and uncertainties regarding implementation of the ECMRA system--or an alternative to that system--which have hindered efforts to provide reliable and accurate data. Over five years ago, we recommended that DOD develop a plan of action with timeframes and necessary resources to measure DOD's progress in implementing a common data system and we offered a similar recommendation two years ago when it began to explore options for an appropriate enterprise solution to facilitate data collection. Delays in making that decision have had a cascading effect on fully staffing its management support office, as well as defining the roles, responsibilities, and relationships between this office, the military departments, and other stakeholders. Continued delays in making a decision increase the risk that DOD will remain unable to collect and analyze service contract data and develop associated business processes in a manner that supports workforce and budget planning. Conversely, choosing a path forward, providing a rationale for that choice, and developing a plan of action with implementation timeframes and milestones could help the department move toward an environment in which it can stop endlessly agonizing on whether to use ECMRA or an alternative system and focus on what data to collect and how best to use that data once collected. As we concluded in January 2011, the real benefit of the inventory will ultimately be measured by its ability to inform decision making. We further noted that the absence of a way forward was hindering the achievement of this objective. More than five years later, those conclusions remain unchanged. We are not making new recommendations in this report. We provided a draft of this report to the Department of Defense for comment. In its written comments, which are reprinted in appendix III, DOD stated that it is committed to improving its processes surrounding the inventory and to working to close the eight open recommendations discussed in the report. DOD also provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees, the Secretary of Defense; the Secretaries of the Army, Air Force, and Navy; the Under Secretary of Defense for Personnel and Readiness; and the Under Secretary of Defense for Acquisition, Technology, and Logistics. In addition the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-4841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV. In November 2014, GAO reported on the status of efforts by the military departments to develop plans with enforcement mechanisms to use the inventory of contracted services to inform management decisions in three primary areas: strategic workforce planning; workforce mix; and budgeting. In November 2015, we updated these findings. In those reports, we determined that the military departments generally had not developed plans and enforcement mechanisms to use the inventory to inform these decisions, as required by subsection 2330a(f) of title 10 of the U.S. Code. Our current work found minimal updates to these guidance with specific reference to use of the inventory of contracted services for management decisions. The primary exception relates to budgeting, where the Army's Command Program Guidance memorandum for the Fiscal Years 2018-2022 Program Objective Memorandum requires the Army to use the inventory review when formulating budget requests for contracted services. The following summarizes the degree to which the Department of Defense (DOD) and the military departments' guidance currently require the use or consideration of the inventory in these areas and identifies where DOD or the military departments have updated their guidance since our November 2015 report. Updates since our November 2015 report are italicized in the following tables. The Under Secretary of Defense for Personnel and Readiness (USD(P&R)) has overall responsibility for developing and implementing DOD's strategic workforce plan to shape and improve DOD's civilian workforce, including an assessment of the appropriate total force mix. USD(P&R) issued guidance that designated responsibility for the development of the strategic workforce plan to the Deputy Assistant Secretary of Defense for Civilian Personnel Policy, but did not require use of the inventory. The guidance pre-dates the statutory requirement to use the inventory to inform strategic workforce planning. For example, the Fiscal Years 2013-2018 Strategic Workforce Plan, the most recent plan available at the time of our November 2014 and 2015 reviews, stated that DOD's plans for identifying and assessing workforce mix will leverage the inventory of contracted services, but did not provide any additional details on using the inventory. None of the three military departments had developed a statutorily required plan or enforcement mechanism to use the inventory of contracted services for strategic workforce planning and generally they had not developed guidance or processes for these purposes (see table 4). DOD has two department-wide policies for determining workforce mix-- DOD Directive 1100.4 and DOD Instruction 1100.22--but neither currently requires the use of the inventory to inform workforce mix planning. DOD Directive 1100.4, dated February 2005, provides general guidance concerning determination of manpower requirements, managing resources, and manpower affordability. According to USD(P&R) officials, revisions to this directive, which are currently under review, will explicitly require use of the inventory to inform budgeting and total force management decisions. DOD Instruction 1100.22, dated April 2010, provides manpower mix criteria and guidance for determining how individual positions should be designated based on the work performed. This instruction does not direct the military departments to develop a plan to use the inventory to inform management decisions, as DOD issued it before the enactment of the requirement for developing such plans. DOD's primary insourcing guidance is reflected in April 4, 2008, and May 28, 2009, memorandums. These memorandums reiterate statutory requirements by calling for DOD components and the military departments to use the inventory of contracted services to identify functions for possible insourcing and to develop a plan for converting these functions within a reasonable amount of time. Among the military departments, however, only Army has guidance and a process that requires use of the inventory of contracted services for insourcing. However, the military departments have not issued guidance for managing workforce mix that requires the use of the inventory of contracted services (see table 5). DOD's Financial Management Regulation provided, among other things, guidance to the military departments on budget formulation and presentation; however, these regulations did not require the military departments to use the inventory in formulating and presenting their budgets. At the military department level, the Air Force had issued additional instructions in terms of budget formulation and presentation. However, the Air Force's guidance did not require the use of the inventory. More recently, the Army's February 2016 guidance, Command Program Guidance Memorandum for the Fiscal Years 2018-2022 Program Objective Memorandum, requires the use of the inventory review certification in budget formulation. The Comptroller issued supplemental guidance requiring, among other things, that the military departments and defense components provide information on the number of FTEs as required under section 235 of title 10 of the U.S. Code, but this guidance did not require reporting the amount of funding requested for contracted services. The Comptroller guidance for budget submissions from all components instructed DOD components to ensure that contractor FTEs reported in the budget exhibit were consistent with those in DOD's inventory of contracted services. Both Navy and Air Force officials reported that they used the inventory of contracted services to estimate the number of contractor FTEs for inclusion in their budget request. The Army budget office could not identify how the Army estimated FTEs in the Army's budget submission (see table 6). In addition to the contact named above, Janet McKelvey (Assistant Director); Emily Bond; Virginia Chanley; Mackenzie Doss; Kristine Hassinger; Julia Kennon; Scott Purdy; and Roxanna Sun made significant contributions to this review.

DOD is the government's largest purchaser of contractor-provided services. In 2008, Congress required DOD to compile and review an annual inventory of its contracted services to identify the number of contractors performing services and the functions contractors performed. In 2011, Congress required DOD to use that inventory to inform certain decision-making processes, including workforce planning and budgeting. GAO has previously reported on the challenges DOD faces in compiling, reviewing, and using the inventory. Since 2011, GAO made 13 recommendations intended to improve DOD's use of the inventory. Of these, DOD has yet to fully address 8 open recommendations. Congress included a provision in statute for GAO to report on DOD's required reviews and plans to use the inventory. This report assesses the extent to which DOD components (1) reviewed contracts and activities in the fiscal year 2014 inventory of contracted services, and (2) developed plans to use the inventory for decision making. GAO reviewed relevant laws and guidance and 40 components' inventory review certification letters, and interviewed DOD acquisition, manpower, and programming officials. In fiscal year 2014, 40 Department of Defense (DOD) components in total certified that they had conducted an inventory review. Components are required by DOD guidance to address six elements in their certification letters, including, for example, identifying any inherently governmental functions and unauthorized personal services contracts. More components--21 out of 40--addressed all of the required review elements compared to prior years. However, DOD components may continue to underreport the extent to which contractors were providing services that are closely associated with inherently governmental functions, a key review objective to help ensure that DOD has proper oversight in place. For example, GAO's analysis indicates that DOD obligated about $28 billion for contracts in 17 categories--such as professional and management support services--that the Office of Federal Procurement Policy and GAO identified as more likely to include closely associated with inherently governmental functions. In comparison, components identified a total of $10.8 billion in obligations or dollars invoiced for contracts that included work identified as closely associated with inherently governmental functions--either within the 17 categories or for any other category of service. Most of these functions were identified by the Army using its long-standing review process. The military departments have not yet developed plans to use the inventory to inform workforce mix, strategic workforce planning, and budget decision-making processes, as statutorily required. DOD has made some recent progress on requiring components to identify an accountable official to lead efforts to develop plans and establish processes for using their inventories in decision making, a step GAO recommended in November 2014. However, DOD faces continued delays in deciding on the path forward for its underlying inventory data collection system, staffing its inventory management support office, and formalizing the roles and responsibilities of that office and stakeholders (see figure). GAO previously recommended that DOD address these issues to improve the usefulness of the inventory. DOD concurred with these recommendations but has not yet addressed them. These continued delays hinder DOD's ability to use the inventory of contracted services as intended, including using the inventory data to inform workforce and budget decision-making processes. GAO is not making new recommendations in this report. In its comments, DOD noted that it intends to address GAO's eight open recommendations, including those related to determining its approach for compiling the inventory and defining the roles and responsibilities of a key support office and stakeholders.

Job Corps was established as a national employment and training program in 1964 to address employment barriers faced by severely disadvantaged youths. Job Corps enrolls youths aged 16 to 24 who are economically disadvantaged, in need of additional education or training, and living under disorienting conditions such as a disruptive homelife. In program year 1996, nearly 80 percent of the participants were high school dropouts and almost two-thirds had never been employed full-time. Participating in Job Corps can lead to placement in a job or enrollment in further training or education. It can also lead to educational achievements such as attaining a high school diploma and improving reading or mathematics skills. Job Corps currently operates 113 centers throughout the United States, including Alaska, Hawaii, the District of Columbia, and Puerto Rico. Major corporations and nonprofit organizations manage and operate 85 Job Corps centers under contractual agreements with Labor. Contract center operators are selected through a competitive procurement process that takes into account proposed costs, an operator's expertise, and prior program performance. In addition, the U.S. Department of the Interior and the U.S. Department of Agriculture operate 28 Job Corps centers, called civilian conservation centers, on public lands under interagency agreements with Labor. Each center provides participants with a wide range of services, including basic education, vocational skills training, social skills instruction, counseling, health care, room and board, and recreational activities. One feature that makes Job Corps unique is that, for the most part, it is a residential program. About 90 percent of the youths enrolled each year live at Job Corps centers and are provided services 24 hours a day, 7 days a week. The premise for boarding participants is that most come from a disruptive environment and, therefore, can benefit from receiving education and training in a different setting where a variety of support services is available around the clock. The comprehensive services Job Corps provides make it a relatively expensive program. According to Labor's program year 1996 figures, the average cost per Job Corps participant was more than $15,000. Cost varies according to how long Job Corps participants remain in the program. Participants stay in the program for an average of about 7 months but may stay as long as 2 years. Labor estimates the cost for a participant who remains in the program for a year to be about $25,000. Vocational training is a critical element of the Job Corps program. This training is designed to offer individualized, self-paced, and open entry-open exit instruction to allow participants to progress at their own pace. Vocational training can be provided in any combination of three ways. Most vocational training is offered by instructors who are Job Corps center staff. Other vocational courses are taught by private providers under contract to the center. These private providers typically include vocational schools and community colleges. About a third of the vocational training expenditure is provided by national labor unions and business organizations under sole source contracts with Labor. In program year 1996, Job Corps' operating costs totaled about $986 million, of which $144 million, or about 15 percent, was for vocational training (see table 1). Overall, Job Corps offers training in 100 different vocations. Although the number of vocations offered at any one Job Corps center varies, most centers offer training in 7 to 10 different vocations. Some centers, however, offer training in as few as 5 vocations while others offer training in as many as 31 different vocations. Some vocations are available at most centers, while others are available at only a single center. For example, more than 80 percent of the centers offer training in business clerical, culinary arts, building and apartment maintenance, and carpentry. Thirty-one vocations, including computer programmer, asphalt paving, barber, teacher aide, and cable TV installer, are offered only at a single center. Many centers also offer off-site advanced career training at such institutions as vocational schools, community colleges, and universities for participants who have been in the program for at least 6 months. Regardless of who provides the training, Job Corps policy requires that all vocational training programs use competency-based curricula that contain a series of skills, or competencies, that participants must attain. According to Labor officials, each vocational training program's curriculum and set of required skills are regularly reviewed and updated by industry advisory groups consisting of business, industry, and training providers. Labor uses a series of nine measures to report on the performance of the program nationally and to assess the performance of individual Job Corps centers. The measures relate to placement--in a job, in education, or in military service--learning gains in mathematics and reading, earning a general equivalency diploma certificate, completing vocational training, placement in a job related to the training received, and placement wage. In program year 1996, Job Corps reported that 80 percent of the participants leaving the program were placed--70 percent in jobs or the military and 10 percent enrolled in education--and 62 percent of those who were placed in jobs or the military obtained a job related to their training. Job Corps also reported that 48 percent of those who left the program completed vocational training. Labor has several activities to improve Job Corps' employer and community linkages to ensure that vocational training is appropriate for local labor markets and relevant to employers' needs. These efforts include initiatives enacted by Job Corps' national office and regional offices, as well as efforts by individual Job Corps centers. Since 1984, Labor has used industry advisory groups to review vocational course curricula to ensure that course content is relevant to the job market. Each year, Labor selects a number of vocational offerings for review by an Industry Advisory Group consisting of Job Corps instructors and academic program representatives as well as industry representatives from each vocational offering being reviewed. For example, recent industry representatives included computer operators and repair technicians, electronic assemblers, diesel and heavy equipment mechanics, health occupation workers, material handlers, tile setters, and clerical workers. The Industry Advisory Group recommends to Labor changes to Job Corps' vocational training curricula, materials, and equipment. Vocational offerings are evaluated and updated on a 3-to-5-year cycle dictated by industry changes and the number of students participating in each vocational training program. In program year 1995, Labor introduced a school-to-work initiative at three Job Corps centers combining center-based training with actual worksite experience related to it. Labor expanded this initiative to an additional 30 centers in program year 1996 and to 30 more centers in program year 1997. Labor provided financial incentives and supportive services to encourage centers to participate in the school-to-work initiative. According to Labor officials, the school-to-work initiatives have resulted in extensive partnerships being established between the centers, area businesses, and local school systems. Through these partnerships, employers are providing worksite learning experiences, suggesting approaches for integrating curricula, developing assessment criteria for documenting skill mastery, and participating in career exposure activities. At one school-to-work Job Corps center that we visited, 35 participants from program year 1996 were involved in this initiative and all were placed--32 had jobs, 2 returned to school, and 1 joined the military. Furthermore, 70 percent of the jobs were directly related to the vocational training received in Job Corps. Labor also involves local business and community leaders in deciding which vocational training programs are to be offered at newly established Job Corps centers. For example, at the new center we visited, we found that 2 years prior to the awarding of the center's contract, decisions on the vocations to be offered were made with input from local business and community leaders, including representatives of the mayor's office, the private industry council, the school department, and local businesses. The result was that this center does not offer many of the traditional Job Corps vocational programs, such as clerical, culinary arts, landscaping, and building and apartment maintenance. Instead, it has nine vocational areas in such high-demand occupations as medical assistant, phlebotomy and EKG technician, and computer repair. At another new center, Labor officials stated that local labor market information along with input from local community and business leaders, including the local private industry council, union representatives, local school system, health groups, and chamber of commerce, ensured that the vocational training courses offered at that center would be appropriate and current given the local economy. Labor officials also informed us that changes to vocational training offerings at existing centers result from changes in labor market demand or poor performance of a particular vocational training program. Centers obtain approval for a change by completing the appropriate paperwork for a request for change and submitting it to either the regional office (if the change involves a center-operated or center-contracted vocational offering) or the national office (if the change involves a vocational course offered by a national labor union or business organization). Labor then assesses the request to change course offerings and reviews the placement analyses, wages reported, female participation rate in the course, local labor market information, and facility requirements. In addition, Labor requires the center to obtain statements from three employers stating that the vocational change is appropriate and relevant. All five of the centers we visited had recently made changes to their vocational course offerings. For example, one center added a physical therapy course after receiving numerous requests from clinics and hospitals within the community. The center was able to add this course by dropping a cosmetology course. Another center identified a local demand for qualified workers in retail sales and tourism. The center added training in these vocations while reducing the size of its clerical training program. In addition to national efforts, three of Labor's regional offices have developed their own initiatives to improve linkages between Job Corps centers and employers. In one region, business leaders representing a variety of industries met with Labor and center staff to provide observations of the program and the participants they hire. The group--a business roundtable--set up a framework for obtaining employer input into the operation of the Job Corps program for the benefit of young people, employers, community leaders, and the Job Corps system nationwide. In an effort to bridge the gap between the needs of private industry and vocational training, the roundtable recommended actions and supported the implementation of new strategies to resolve employer issues that it identified and prioritized. As a direct result of this roundtable, concrete linkages were established. For example, a bank involved as a school-to-work program participant provided equipment and instructors to incorporate bank telling into the center's clerical program. According to Labor officials, the initiative was successful, and the regional office is currently exploring the possibility of duplicating this effort in several other Job Corps centers. At another center within the region, an electronics firm reviewed the center's electronics curriculum and suggested additional skills allowing program participants to qualify for higher-paying jobs. Another region has endorsed a major initiative between a Job Corps center and the Q-Lube Corporation whereby a building at the center was renovated to exactly meet the specifications of a Q-Lube facility. The renovation used student painters and carpenters from other vocational training courses and Job Corps provided additional funding for this course. Q-Lube donated the equipment to the center and also provided a trained instructor. The course offering is identical to the program curriculum Q-Lube teaches at non-Job Corps sites. According to Labor officials, since the implementation of this initiative, Q-Lube has become a major employer and training link within the region. The same regional office contacted a shipbuilding company advertising for 500 shipbuilders and worked with the company to develop a vocational training program in welding for Job Corps students that would be appropriate and relevant to the company's needs. The company provided the two pieces of equipment needed for training purposes. Students were trained at the Job Corps center under conditions similar to those in the shipbuilding environment, tested by the company, and then provided additional training at the shipbuilding site. In addition, the company provided low-cost housing and full salary to students who passed the test before graduating from the center. The company was pleased with the students' qualifications, attitudes, and work ethics and requested that the Job Corps program train another 100 students. The region is currently recruiting and training students for this vocation in an attempt to further meet the needs of the shipbuilding industry. A third regional office is involved in a project to increase the involvement of employers in all facets of Job Corps operations in their region, including curriculum development, customized training, work-based learning, mentoring, identifying workforce needs, and donating staff resources and equipment. The goal of this outreach campaign is to build substantial relationships between Job Corps and the employer community at several different but mutually supportive levels: center, state, regional, and national. Labor selected a contractor through a competitive process, assisted by several national groups, to research, test, and revise its proposed strategy for increasing employer involvement within the region. Initially, the project concentrated on three centers in different states within the region. The project will soon expand to include all states and Job Corps centers within the region. If successful, the project will be expanded throughout the Job Corps system. Job Corps centers have also independently established linkages with employers. These linkages include negotiating with employers to provide furniture and vocational training equipment and contracting with employers to train and hire program participants. For example, at one center a national employer has donated computers, copy machines, desks, chairs, and conference tables valued at approximately $50,000. At another center, an automobile maker has donated a four-wheel-drive sport utility vehicle for students in the auto repair vocational training course in an attempt to make the training more relevant to the vehicles that students would actually be working on. The center is currently working with the automobile maker to donate a car for the same purpose. Local automobile dealers are familiar with the center's linkages to the national automobile maker and also have donated cars needing repair. In addition, local automobile dealers have trained students through the school-to-work program and have hired many of the Job Corps program participants. Another center holds monthly employer relations meetings in which approximately 200 local employers and community representatives attend a luncheon catered by the center's culinary arts students. Speakers discuss local employment opportunities and donate funds to benefit Job Corps participants. The funds, which are managed by the center's Community Relations Council, are used to provide tuition scholarships for program graduates continuing their education upon completion from the center. The scholarships range from $500 to $1,000 each and are awarded to program graduates who have pursued excellence and attained a higher measure of success than their fellow program participants. To date, about $10,000 has been raised for scholarships. A fourth center established an effective business relationship with a computer graphics firm in California. According to center officials, 31 Job Corps students enrolled in various vocational training programs, including building and apartment maintenance, clerical, electrical, and landscaping; participated in 12-week internships at the computer firm; and attended an anger management course that had been developed for the firm's employees. These students earned $10 per hour within a work-based environment in which the firm's staff provided on-the-job training and mentoring. The center placement official claims that the success of the internship program is evidenced by the 28 students who obtained primarily training-related jobs after terminating from the Job Corps program. Two performance indicators that Labor uses to evaluate Job Corps' success are misleading, overstating the extent to which vocational training is completed and job placements are training-related. Labor reports that nationwide about 48 percent of all program participants complete their vocational training and that about 62 percent of the jobs obtained by program participants are related to the training they received. However, we found that nationally only about 14 percent of the program participants satisfied all their vocational training requirements and that about 41 percent of the reported training-related job placements at the five centers we visited were questionable. Having complete and accurate program performance information is important to evaluating program success and being able to identify areas needing improvement. Nationally, Job Corps reported that in program year 1996, 48 percent of its participants completed vocational training. This information is misleading. We found that only about 14 percent of the program year 1996 participants actually completed all the required tasks of their vocational training programs. Job Corps' national data system uses three categories to identify a participant's level of vocational training progress: trainee, completer, and advanced completer. A trainee is a participant who has not completed any vocational training component, a completer has accomplished at least one component of a vocational program, and an advanced completer has fully satisfied all required components of a vocational training program. Labor considers participants in the last two categories to be vocational training completers. Thus, Job Corps vocational completion statistics include participants who have only partially completed the required skills of a vocational training program. Each Job Corps vocational training program has a comprehensive list of duties and tasks that participants are expected to perform. For example, the clerical vocational training program has 140 duties and tasks that must be mastered to fully complete the program, food service has 109, building and apartment maintenance has 123, and carpentry has 75. Vocational training programs, however, can be divided into several components. For example, in food service, the first component entails making a sandwich and preparing a salad (covering 39 of the 109 tasks). The second component adds preparing breakfast dishes; heating convenience foods; preparing meats, poultry, fish, and pasta; and cooking vegetables. The final component adds preparing soups, sauces, and appetizers as well as food management skills, such as preparing a menu, setting a table, developing a food preparation schedule, and conducting safety inspections. Vocational training instructors assess participants' performance for each duty and task, and Job Corps policy permits participants to be classified as vocational completers if they accomplish the duties and tasks associated with any one component of the vocational training program--regardless of whether they can perform all the duties and tasks required in the entire vocational training curriculum. Depending on the vocation, the percentage of tasks that a participant must accomplish to be considered a completer range from virtually all, as in the health occupations program, to about a quarter, as in the welding program (see table 2). Thus, Job Corps policy allows participants to be classified as vocational completers if they can perform some portion of a required curriculum. For example, in the food service vocational training program, accomplishing just the tasks associated with the salad and sandwich making component would qualify a participant as a vocational completer. At the centers that we visited that had a food service program, nearly half of the reported vocational completers had completed only this first component. Similarly, nearly 80 percent of the vocational completers in the carpentry program at five centers completed only the first of three components. In contrast, about 15 percent of the vocational completers of the centers' health occupations program completed only the first of two components (see fig. 1). Overall at the five centers, 43 percent of the vocational completers completed only the first component of their vocational training programs. The reported percentage of vocational completers at the five centers we visited substantially overstated the percentage of participants who fully completed their vocational training programs. At these centers, about 51 percent of the 3,500 participants were considered to be vocational completers. However, only about 18 percent completed all their vocational training requirements. As shown in figure 2, the percentage of program year participants fully completing vocational training programs ranged from about 11 percent at one center to about 27 percent at another center. Nonetheless, these two centers had reported vocational completion rates of 65 percent and 73 percent, respectively. Closer examination of the participants who completed only the first component of their vocational training program showed that many spent a short period of time--less than 90 days--enrolled in vocational training. At the five centers that we visited, nearly 15 percent of the participants who had completed the first component of their vocational training spent fewer than 90 days in training. This ranged from about 9 percent at one center to about 20 percent at another center. Labor reported that in program year 1996, 62 percent of participants placed in employment found jobs that matched the training they received in Job Corps. Our review of this information at the five centers we visited, however, suggests that this report substantially overstates the program's accomplishments. We found that the validity of about 41 percent of the reported job training matches at these centers was questionable. In a previous report, we expressed concern with Labor's methodology for identifying training-related placements. We concluded that Labor gave its placement contractors wide latitude in deciding whether a job was a job training match and identified many jobs that appeared to bear little, if any, relationship to the training received. We also noted that placement contractors used some creativity when reporting job titles in order to obtain a job training match. Labor questioned the accuracy of claims made by placement contractors that job training matches could be obtained for participants trained as bank tellers, secretaries, and welders who obtained jobs in fast food restaurants. In checking reported job training match information, we reviewed all reported training-related job placements at the five centers we visited to assess the validity of reported job training matches. We verified the results by contacting a representative sample of employers who had hired the Job Corps participants. In this process, we questioned a significant number of the claimed matches. We questioned job training matches because either a job title did not seem appropriate for the employer listed (such as bank teller at a fast food restaurant) or the job title did not seem to relate to the vocational training (such as a job as an information clerk at a car rental agency after training as a home health aide). We then interviewed a random sample of 183 employers who hired Job Corps participants whose job placement was listed as related to the vocational training they received but that we questioned. Table 3 shows additional questionable examples of jobs reported as being training-related. At the five centers we visited, we questioned 598 of the 1,306 reported job training matches. The percentages of these questionable job training matches ranged from about 30 percent at one center to about 64 percent at another center (see fig. 3). Our discussions with employers yielded examples of jobs that, on the surface, were related to the training received, based on the reported job title, but were actually quite unrelated to this training. For example, one participant trained in welding was reported as obtaining a job as a welding machine operator at a temporary agency, but the employer informed us that this individual was actually hired to shuttle vehicles between airports. Another participant trained in auto repair was reportedly hired as a petroleum and gas laborer but was actually hired to clean residential homes. A third participant received clerical training and was reportedly hired as a sales correspondent but actually sorted bad tomatoes from good ones on a conveyor belt. All three of these Job Corps participants, therefore, were erroneously reported as having been placed in jobs related to their training. Labor's monitoring of reported job training matches appears to be inadequate. Labor officials stated that Job Corps' regional offices are responsible for monitoring all aspects of placement contractor performance but that there is no fixed schedule for such monitoring. They stated that regular desk reviews of all placement forms, for both accuracy and completeness, takes place as part of the process for paying vouchers submitted by placement contractors. Our findings suggest that there is reason to question whether this procedure is adequate to ensure that reported information is accurate. Labor has contracted with national labor and business organizations under sole source arrangements for more than 30 years. About a third of Job Corps' vocational training is provided by such organizations contracted under sole source arrangements. Although Labor has failed to provide adequate support to justify sole source procurement for vocational training, it has nine sole source contracts with national labor and business organizations, totaling about $46 million (see table 4). Federal procurement regulations require several conditions to be met for an agency to award a noncompetitive contract. These include (1) establishing the need for services that can be provided by only one source, (2) documenting through a market survey or on some other basis that no other known entity can provide the required services, and (3) stating a plan of action the agency may take for removing barriers to competition in the future. Labor has offered three broad considerations in justifying its sole source awards rather than using competitive procedures in contracting with the national training contractors. The first is the contractors' past relationship with Job Corps--that is, experience with Labor's Employment and Training Administration, in general, and with Job Corps specifically and thorough knowledge of Job Corps' procedures and operations. The second is organizational structure--that is, a large nationwide membership related to a trade and their strong relationship with national and local apprenticeship programs. The third is instructional capability--that is, a sufficiency of qualified and experienced instructors, the ability to provide training specifically developed for the learning level of Job Corps students, and the ability to recognize training as credit toward meeting the requirements of becoming a journey-level worker. In addition, Labor officials stated that a main reason it contracts on a sole source basis is that the contractors maintain an extensive nationwide placement network. With regard to Labor's long-standing practice of awarding sole source contracts for a portion of Job Corps' vocational training, our review of Labor's current and proposed justification for its sole source contracts and our previous work on this issue raise questions about their use. Labor's sole source justification essentially lists the qualities Labor expects in a contractor. It does not establish that the services contracted for can be provided by only one source. Furthermore, Labor acknowledged that its national data system has no information to indicate the extent to which national training contractors are directly responsible for placing Job Corps participants in jobs. Labor's proposed justification for upcoming contracts has many of the weaknesses of the current justification. Job Corps is an expensive job training program that provides comprehensive services to a severely disadvantaged population. For more than 30 years, Job Corps has been assisting young people who need and can benefit from an unusually intensive program, operated primarily in a residential setting. Labor and the Congress need meaningful and accurate information if they are to effectively manage and oversee the Job Corps program. However, our work raises serious questions regarding Labor's claims about Job Corps' achievements. Labor's reporting on the percentage of participants who are vocational completers includes many who have not actually completed their training; many have completed only one component of a vocational training program. Similarly, Labor's reported statistics on the percentage of jobs obtained by participants that were related to the training they received are inaccurate. Reported job training matches include a significant number of jobs that have no apparent relationship to the training received and whose job titles have no apparent relationship to the employers' business. In addition, Labor has continued its long-standing practice of awarding sole source contracts for a substantial portion of Job Corps' vocational training--a practice we suggested it re-evaluate in 1995. To date, Labor has not provided adequate support to justify sole source procurement for vocational training services provided by the nine national labor and business organizations. Labor's justification for sole source procurement does not explain or demonstrate the basis for Labor's determination of need. Improvements are needed to ensure that the information used to assess Job Corps program performance is accurate and meaningful. Specifically, two of the measures used to judge the success of the Job Corps program--vocational completion and job training match--provide misleading information that overstates program outcomes. Therefore, we recommend that the Secretary of Labor more accurately define and report information on the extent to which program participants complete vocational training and develop a more accurate system of reporting training-related jobs and effectively monitor its implementation. In addition, because Labor has not presented adequate justification for its long-standing practice of contracting on a sole source basis with nine national labor and business organizations for vocational training, we recommend that the Secretary of Labor properly justify its use of noncompetitive procedures if it is to continue to award contracts for vocational training services. In so doing, the agency should assess whether vocational training could be served as well through contracts competed for locally or regionally. In comments on a draft of this report, Labor expressed concern about our conclusion that two performance measures--vocational training completion and job training matches--overstated Job Corps' success and misrepresented its accomplishments. Nevertheless, Labor agreed to implement our recommendations for improving the information provided by these two measures. Labor emphasized that it did not intend to overstate Job Corps program performance in any area. Labor further noted that it places strong emphasis on performance results and data integrity and is therefore concerned about the findings contained in the report. With regard to vocational training completion, Labor stated that it was never its intention that all students master all competencies on an occupation's training achievement record. Instead, a set of competencies for each occupational area was developed by Labor, together with industry groups, to identify appropriate competency levels needed to qualify for particular occupations. For example, Labor noted that to qualify as a full mechanic would require completion of all competencies in the automotive area, but a participant could qualify as a mechanic's helper or brake repair mechanic by completing a subset of the full automotive training achievement record. Labor also noted that even though vocational completion may be an imperfect measure, it is a good predictor of placement, job training match, and wages. However, Labor stated that it understood and shared our concern that the terminology used to report this information may be subject to misinterpretation. Therefore, Labor said that it would take immediate action to clarify the definition of vocational completion in all subsequent Job Corps publications. In addition, Labor noted that because of the perspective gained through the recent oversight hearings and our report, it would review the extent to which the current definition may provide insufficient incentive to some students to obtain the maximum amount of training within the vocational training program. Labor noted that in direct response to these issues, it has initiated a comprehensive and detailed analysis of vocational completion and stated that it will develop a more precise and comprehensive description of student completion levels. We believe that the actions Labor is taking to more clearly identify what it means by a vocational training completer will avoid future confusion about what is being reported. The actions will also clarify that it is not Labor's intent to have all Job Corps participants complete all aspects of a vocational curriculum but, rather, to complete to a level that is appropriate for each individual. Such levels, as Labor noted, would correspond to industry-agreed competencies that would qualify a participant for a specific job. In addition, as Labor clarifies and refines its measures, it is likely that more will be learned about the relationship between completing various levels of a vocational program and the degree of success a participant achieves. This is an important aspect of monitoring performance and could lead to program improvements. Regarding job training matches, Labor stated that it shares our concern about the validity of some of the matches identified in the report. Labor noted that it is currently changing to a different system for determining job training matches that will make the determination more manageable and easier to oversee. This new system is expected to be fully implemented by the close of this calendar year. In addition, Labor stated that it is developing more stringent quality control and oversight procedures to preclude questionable matches. We believe Labor's proposed improvements to its assessment of whether job placements are related to the participants' training and the monitoring of the reporting of these data will improve the validity and utility of this information. Regarding Labor's use of sole source contracting with nine national labor unions and business organizations, Labor disagreed that it needed to do more to properly justify its use of noncompetitive procedures and expressed its belief that Job Corps' training programs could not be served as well through locally or regionally competed procurements. Labor asserts that participants leaving national training contractor programs consistently achieve better outcomes, such as higher wages, than other participants. Labor also points out that it has received negligible responses to the last two invitations for interested organizations to submit capability statements for the administration and operation of vocational training programs and placement activities currently operated by national organizations. Labor contends that the continued strong performance of its sole source contracts and the lack of response to its attempts to solicit other qualified providers properly justify its decision to use noncompetitive procedures. Labor identified some changes, however, including that it will require the national contractors to report monthly on the number of participants who are placed directly into jobs and apprenticeships, and it has established higher performance standards for national training contractors. We continue to believe that Labor has not adequately justified its use of sole source contracts. Labor has been unable to determine the extent to which national training contractors are responsible for placing participants and thus for their reported better performance. However, Labor's new requirement for these contractors to report on their placements should improve Labor's ability to assess their performance. From our review of Labor's last two invitations for organizations to submit capability statements for the administration and operation of vocational training programs and placement activities, we conclude that the agency did not clearly state the goods and services required and was overly restrictive with respect to contractor qualifications. Thus, we believe that the two published invitations Labor cites were inadequate to inform potentially capable entities of an opportunity to compete or to afford them a reasonable opportunity to provide credible responses. As a result, Labor has not determined the availability of other potential sources and, therefore, has not properly justified its use of noncompetitive procedures. In addition, Labor suggested two points of technical clarification regarding the approval process that Job Corps centers use to change vocational offerings and the involvement of the national office in an employment initiative in one Job Corps region. We modified the report where appropriate. (Labor's entire comments are printed in app. III.) We are sending copies of this report to the Secretary of Labor, the Director of the Office of Management and Budget, relevant congressional committees, and others who are interested. Copies will be made available to others on request. If you or your staff have any questions concerning this report, please call me at (202) 512-7014 or Sigurd R. Nilsen at (202) 512-7003. Major contributors to this report are listed in appendix IV.

Pursuant to a congressional request, GAO reviewed Job Corps' vocational training component to describe the program's contracting policies and to assess contractor performance, focusing on: (1) how Job Corps ensures that vocational training is appropriate and relevant to employers' needs and the extent to which participants are completing vocational training and obtaining training-related jobs; and (2) Job Corps' process for contracting with vocational training providers. GAO noted that: (1) the Department of Labor has several activities to foster Job Corps' employer and community linkages to ensure the appropriateness of its vocational training to local labor markets and its relevance to employers' needs; (2) Labor has industry advisory groups that regularly review vocational course curricula to ensure their relevance to today's job market; (3) Labor has also introduced a school-to-work initiative designed to link Job Corps with local employers combining center-based training with actual worksite experience at more than half the Job Corps centers; (4) complementing these national efforts, three of Labor's regional offices have developed their own initiatives to improve linkages between Job Corps and local labor markets; (5) despite Labor's efforts to increase the effectiveness of its vocational training through employer and community linkages, Job Corps data on the extent to which participants complete vocational training and obtain training-related jobs are misleading and overstate the program's results; (6) although Job Corps reported that 48 percent of its program year 1996 participants completed their vocational training, GAO found that only 14 percent of the program participants actually completed all the requirements of their vocational training curricula; (7) the rest of the participants whom Job Corps considered to be vocational completers had performed only some of the duties and tasks of a specific vocational training program; (8) Labor also reported that 62 percent of the participants nationwide who obtained employment found jobs that matched the vocational training received in Job Corps; (9) at the five centers GAO visited, however, the validity of about 41 percent of the job placements reported by Labor to be training-related was questionable; (10) in looking at how training providers are selected, GAO found that about a third of Job Corps' vocational training has been provided under sole source contracts awarded to national labor and business organizations for more than 30 years, but in GAO's opinion, Labor has not adequately justified procuring these training services noncompetitively; (11) a principal reason Labor has cited for awarding these contracts on a sole source basis is that these organizations maintain an extensive nationwide placement network and are better able than nonnational organizations to place Job Corps participants who complete their training; and (12) Labor has provided no data, however, to show the extent to which these sole source contractors actually place Job Corps participants nationwide.

The International Space Station program has three key goals: (1) maintain a permanent human presence in space, (2) conduct world-class research in space, and (3) enhance international cooperation and U.S. leadership through international development and operations of the space station. Each of the partners is to provide hardware and crew, and each is expected to share operating costs and use of the station. On-orbit assembly of the space station began in November 1998 and, since October 2000, two to three crew members, who maintain and operate the station and conduct hands-on scientific research, have permanently occupied the space station. The space station is composed of numerous modules, including solar arrays for generating electricity, remote manipulator systems, and research facilities. The station is being designed as a laboratory in space for conducting experiments in near-zero gravity. Life sciences research on how humans adapt to long durations in space, biomedical research, and materials-processing research on new materials or processes are under way or planned. In addition, the station will be used for various earth observation activities. Figure 1 shows the International Space Station on-orbit. Since its inception, the station program has been plagued with cost and schedule overruns. When the space station's current design was approved in 1993, NASA estimated that its cost would be $17.4 billion. By 1998, that estimate had increased to $26.4 billion. In January 2001, NASA announced that an additional $4 billion in funding over a 5-year period would be required to complete the station's assembly and sustain its operations. By May 2001, that estimated cost growth increased to $4.8 billion. Since fiscal year 1985, the Congress has appropriated about $32 billion for the program. In an effort to control space station costs, the administration announced in its February 2001 Budget Blueprint, that it would cancel or defer some hardware and limit construction of the space station at a stage the administration calls "core complete." The administration said that enhancements to the station might be possible if NASA demonstrates improved cost-estimating and program management, but the administration is only committed to the completion of the core complete configuration. In July 2001, the NASA Administrator appointed an independent International Space Station Management and Cost Evaluation Task Force to assess the financial management of the station program and make recommendations to get costs under control. The task force published its report in November 2001 and recommended that the program (1) extend crew rotations from 4 to 6 months and reduce the number of shuttle flights to 4 per year; (2) consolidate the number of contracts and reduce government staff in station operations and sustaining engineering; (3) establish an Associate Administrator for space station at NASA Headquarters, with total responsibility for engineering and research; and (4) prioritize research to maximize limited resources. NASA implemented most of the recommendations, and the task force reported in December 2002 that significant progress had been made in nearly all aspects of the program, including establishing a new management structure and strategy, program planning and performance monitoring processes, and metrics. NASA was postured to see results of this progress and to verify the sufficiency of its fiscal year 2003 budget to provide for the core complete version of the station when the Columbia accident occurred. In response to the task force's recommendations, the Office of Management and Budget (OMB) imposed a 2-year "probation" period on NASA to provide time to reestablish the space station program's credibility. Activities that are to take place during this period include establishing a technical baseline and a life-cycle cost estimate for the remainder of the program, prioritizing the core complete science program, and reaching agreement with the international partners on the station's final configuration and capabilities. OMB, with input from NASA, is developing criteria that are to be used for measuring progress toward achieving a credible program. NASA provided its input to OMB in June 2003, but as of August 2003, OMB and NASA had not reached agreement on the success criteria. The grounding of the U.S. shuttle fleet has presented a number of operational challenges for the space station program. With the fleet grounded, NASA is heavily dependent on its international partners-- especially Russia--for operations and logistics support for the space station. However, due to the limited payload capacity of the Russian space vehicles, on-orbit assembly has been halted. The program's priority has shifted from station construction to maintenance and safety, but these areas have also presented significant challenges and could further delay assembly of the core complete configuration. While some on-board research is planned, it will be curtailed by the limited payload capacity of the Russian vehicles. The space shuttle fleet has been the primary means to launch key hardware to the station because of the shuttle's greater payload capacity. At about 36,000 pounds, the shuttle's payload capacity is roughly 7 times that of Russia's Progress vehicle and almost 35 times the payload capacity of its Soyuz vehicle. With the shuttle fleet grounded, current space station operations are solely dependent on the Soyuz and Progress vehicles.Because the Soyuz and Progress vehicles' payloads are significantly less than that of the U.S. shuttle fleet, operations are generally limited to transporting crew, food, potable water, and other items, as well as providing propellant resupply and reboosting the station to higher orbits. On-orbit assembly of the station has effectively ceased. Maintaining the readiness of ready-to-launch space station components has also presented a number of operational challenges, as in the following examples: A logistics module, which carries research facilities and life support items to the station, that was scheduled and ready for launch in March 2003 had to be opened and unpacked (see fig. 2). Several racks were removed to provide the proper preventative maintenance of the contents until they can be rescheduled on a future flight. In addition, crew-specific items had to be removed in anticipation of crew changes for the next shuttle flight. This module requires more than 2 months to be repacked and tested prior to launch. One of the solar array wings scheduled for launch in May 2003 was approaching its 45-month prelaunch storage limit. Due to the launch delay, the wing had to be removed from the truss section and replaced with a new wing (see fig. 3). The removed wing was shipped to the contractor for deployment testing, which NASA hoped would result in a lengthening of the prelaunch storage limit to at least 60 months. However, according to NASA officials, preliminary results were very positive, and the storage life certification could be extended to as much as 8 years or more. The performance of the batteries on the truss sections that were ready for launch has also raised concerns. Prolonged storage at ambient temperatures could shorten the overall life of the battery. According to NASA officials, a process has been developed to charge the batteries periodically without removing them from the trusses during storage, then to provide a charge capability on the launch pad just prior to launch. This process, however, will require a new device to be developed and expending resources not previously planned for this function. Station program managers are resolved to meet these challenges and have station components ready for flight when the next shuttle is ready for launch. In addition, NASA is using this longer storage time to determine the feasibility of adding new testing procedures. For example, NASA is developing tests to apply power to some elements and may also perform additional leak tests. The grounding of the shuttle fleet has also hampered NASA's ability to correct known safety concerns on-board the station. For example, NASA has had to delay plans to fly additional shielding to the space station to adequately protect the on-orbit Russian Service Module from space debris. NASA's analysis of the problem shows the probability of orbital space debris penetrating the module increases by 1.6 percent each year the shielding is not installed. NASA accepted this risk by issuing a waiver for the noncompliance with a safety requirement, but planned to have the shielding installed within 37 months of the module's launch in July 2000. Six of the required 23 panels have been installed on the module, and NASA is negotiating with the Russian Aviation and Space Agency to manufacture the 17 remaining panels. NASA officials told us that they are studying alternatives for launching and installing the debris protection panels earlier than originally planned. In addition, there will be delays in analyzing the failure of an on-orbit gyro--one of four that maintain the station's orbital stability and control. According to NASA, a shuttle flight planned for March of this year was to carry a replacement gyro to the station and return the failed unit for detailed analysis. Because the shuttle flight was canceled, the failed unit was not returned. Consequently, NASA is unable at this time to provide a definitive analysis of the reasons for the failure of the unit or to know if the problem applies to the remaining units. NASA had planned to assemble the core complete configuration of the station by February 2004. NASA officials have maintained that assembly delays will be at least a "month for month" slip from the previous schedule, depending on the frequency of flights when the shuttles resume operations. At best, then, the core complete configuration would not be assembled before sometime in fiscal year 2005. While the space station crew's current responsibility is primarily to perform routine maintenance, the two-crew members will conduct some research on-board the station. An interim space station research plan developed by NASA details the amount and type of research that will be conducted. Further, NASA states that although the crew has been reduced from three to two members, more crew time will be available to carry out research tasks because no assembly or space walks are planned. Regardless, the limited payload capability of the Russian vehicles directly affects the extent of research that can be conducted, as illustrated in the following examples: Outfitting of U.S. research facilities halted: Lacking the shuttle fleet's greater lift capability, the amount of research hardware transported to and from the station has been significantly limited. With the fleet grounded, three major research facilities--which, according to NASA, complete the outfitting of the U.S. laboratory--could not be launched in March of this year, as planned. As of August 2003, 7 of the 20 planned research facilities are on orbit. NASA had planned to add 7 more facilities by January 2008. At this time, it is unknown when the full configuration of the 20 research facilities will be on-board the station. Existing hardware failures: Because new and additional hardware cannot be transported, NASA has to rely more heavily on existing on-orbit science facilities--facilities that have already experienced some failures. For example, in November 2002, the Microgravity Science Glovebox-- which provides an enclosed and sealed workspace for conducting experiments--failed and did not become operational until late March 2003. NASA officials state there also have been failures of the existing refrigerator-freezers on-board the station, which serve as the main cold storage units until a larger space station cold temperature facility becomes available. The larger cold temperature facility was one of three facilities that had been planned for launch in March 2003. Limited science material: Currently, there are no allocations for science materials to be transported to or from the space station by the Russian Soyuz and Progress vehicles. Based on the payload planning for these flights, however, there will be limited opportunities to launch small research projects. NASA officials state that the next two Progress flights could carry up to 40 kilograms and 100 kilograms, respectively, based on continuous payload planning. This would be much greater than the April 2003 Soyuz flight, which was able to carry 2.5 kilograms (about 5.5 pounds) of science material to the station for experiments in the current increment. As a result, research experiments for the current flight increment have been reduced. Specifically, only about two-thirds of new investigations and about three-quarters of ongoing investigations from previous increments will be accomplished on the current increment. Further, returning samples from these investigations will be delayed until the U.S. shuttle fleet returns to flight because of the Soyuz's limited storage capacity. The investigations on the next increment are also in jeopardy as there is no planned up mass allocation for science material. Delays in transporting needed hardware and materials for research to the space station could be further constrained, depending on any safety modifications to the shuttle fleet based on recommendations of the Columbia Accident Investigation Board. If safety modifications to the shuttle increase the vehicle's weight, the payload carrying capability for research could be adversely affected. For example, if NASA determines that the shuttle's robotic arm is needed on future flights to address safety concerns, approximately 1,000 pounds of weight would be added, which would reduce the shuttle's payload capacity for research equipment and other hardware. Since the program's inception, we have repeatedly reported on the challenges NASA has faced in maintaining goals and objectives for the space station program. And while NASA has conducted reassessments and independent reviews of the program in efforts to institute corrective actions that would ensure proper cost controls, difficulties in controlling costs have persisted. NASA budgets and funds the space station program at essentially a fixed annual average level of about $1.7 billion a year based on full cost accounting. To date, NASA officials stated they have not completely estimated the potential increased costs and future budget impact incurred due to the grounding of the space shuttle fleet. However, they have identified a number of factors that will likely result in increased costs--including the continued maintenance and storage of ready-to- launch station components as well as the testing and recertification of some components and the need to extend contracts to complete development and assembly of the station. NASA officials told us that the agency is assessing these potential cost and schedule impacts and how to mitigate the impacts within existing resources. In fiscal year 2003, NASA received $1.85 billion in appropriated funds for the space station and has requested $1.71 billion for fiscal year 2004 (see table 1). The funding reduction in fiscal year 2004 was based on near completion of the hardware development for the U.S. core configuration and the transition to on-orbit operations. NASA estimates that after the last year of development, the annual cost to operate the station will average $1.5 billion over a 10-year useful life. This estimate does not include all funding requirements, such as costs associated with necessary upgrades to preclude on-orbit hardware obsolescence, launch costs, and other support costs that are captured in other portions of NASA's budget. NASA officials told us that soon after the Columbia accident, they published ground rules and assumptions that stated there would be no significant changes to the station's budget execution and would maintain budget requests at current levels until the shuttle returns to flight. At that point, NASA program officials stated they will begin to evaluate the impact that new developments, enhancements, inventories, and staffing needed to sustain and operate the space station will have on future budget submissions, including requests for supplemental appropriations, and the execution of the station funding, including program reserves. NASA's strategy for the station program following the Columbia accident has been to continue developing hardware as planned, to deliver these components to Kennedy Space Center as scheduled, and to prepare them for launch when the shuttle fleet returns to flight. Through contingency planning efforts, NASA has identified additional costs to be incurred by the space station program office as a result of these continuing developmental operations. However, these additional costs are based on an assumption that the shuttle will return to flight within 12 months of the Columbia accident, an assumption that is subject to change based on more definitive information concerning the status of the shuttle fleet's operations. NASA officials state they have not finalized plans or risk assessments for continued assembly and operation of the space station if the shuttle fleet is grounded for a longer period of time. NASA has also implemented a management decision analysis that anticipates additional costs to be incurred in keeping a crew on-board the station while the shuttle fleet is grounded. The analysis is based primarily on management decisions regarding crew rotation and payload issues that involve shifting cargo and the use of consumables, such as potable water. Other factors, according to NASA officials, that the station program office identified could also result in cost increases, but it has not fully quantified these costs: disassembly and reassembly of component parts; unpacking and repacking equipment from the logistics module that was storage of station components that are ready for launch; maintaining battery life; unfurling and testing solar array wings, which could be affected by additional travel to Russia to facilitate discussions on Soyuz and Progress vehicles' schedules and payloads and export controls issues; additional resupply flights; and retention of some critical skills necessary to complete development and assembly of the station. In addition to the operational challenges facing NASA, funding and partner agreements present significant challenges. While long-term plans are not well defined at this time, alternative funding may be needed to sustain the station, let alone achieve the station's intended goals. At the same time, NASA and its partners must develop a plan for assembling the partners' modules and reaching agreement on the final station configuration. In addition, since the final on-orbit configuration is likely to be different from the configuration when the Intergovernmental Agreements were signed in 1998, NASA officials state the partners may have to adjust agreements that cover the partners' responsibility for shared common operations costs. Depending on the duration of the shuttle fleet's grounding, the space station program may need to consider funding alternatives to sustain the station. International agreements governing the space station partnership specify that the United States, Canada, Europe, and Japan are responsible for funding the operations and maintenance of the elements each contributes, the research activities it conducts, and a share of common operating costs. Under current planning, NASA will fund the entire cost of common supplies and ground operations, then be reimbursed by the other partners for their shares. Depending on contributions made by the partners while the shuttle fleet is grounded, the share that each partner contributes to the common operations costs may have to be adjusted and could result in NASA's paying a larger share of those costs. For example, the European Automated Transfer Vehicle is scheduled to begin flying in September 2004. If that vehicle takes on a larger role in supporting the station than currently planned, the European's share of common operations costs could be reduced with the other partners paying more. Station requirements dictate that some Progress launches be accelerated and, depending on how long the shuttle fleet is grounded, could require additional flights. Russia maintains that it can provide additional launches, and the Russian Aviation and Space Agency is negotiating with its government in an effort to obtain the necessary funding. If those negotiations are unsuccessful, the other partners may have to provide the needed funding. However, the U.S. may be prohibited from making certain payments due to a statutory restriction. NASA is engaged in discussions with the other partners on how to sustain operations if additional flights are required. Further, following the release of the Columbia Accident Investigation Board's report and recommendations, NASA and the partnership must agree on a final configuration of the on-orbit station that will be acceptable to all parties. Prior to the Columbia accident, options for the final on-orbit configuration were being studied, and a decision was planned for December 2003. NASA officials told us the process has been delayed, and NASA now expects the partners to agree on a program action plan in October 2003 that will lead to an agreement on the final on-orbit configuration. During a July 2003 meeting, international partner space agency leaders from the U.S., Europe, Canada, Japan, and Russia expressed support of the space station program. The leaders recognized the Russian Aviation and Space Agency for its support of station operations, logistics, crew transportation, and crew rescue while the shuttle fleet is grounded. The partners also expressed their support of NASA's return to flight strategy, the resumption of station assembly, and the opportunity to enhance the use of the station for conducting world-class research. This is one of the most challenging periods in the history of the international space station program. NASA officials acknowledge that the loss of the space shuttle Columbia poses cost and schedule risks that have direct implications on completing the development and assembly of the station and the research that is to be conducted on-board as well as on NASA's budgets for fiscal year 2004 and beyond. However, NASA officials told us that that it is too soon to determine the magnitude and costs of delayed assembly and implications of any recommendations from of Columbia Accident Investigation Board to the space station. Until the shuttle return-to-flight date is known, it is difficult to determine how and when potential cost and schedule increases will impact the station program or the agency as a whole. In written comments on a draft of this report, NASA's Deputy Administrator said that the agency agrees with the content and conclusions in the report. He said that the space station program is taking the steps necessary to be ready to resume assembly immediately upon the space shuttle's return-to-flight and to eliminate or offset cost impacts. He also pointed out that the international partners continue to collaborate on how to best support near-term space station on-orbit operations until the space shuttle returns to flight. NASA offered some technical comments on the report, which have been incorporated as appropriate. To describe the current status of the space station program in terms of on- orbit assembly and research, we reviewed NASA's plans for completing station assembly prior to the Columbia accident and compared those plans to the agency's actions following the accident to continue on-board operations while the shuttle fleet is grounded. To assess the planned research program, we reviewed NASA's efforts to prioritize research on- board the station as well as plans to continue research while the shuttle fleet is grounded. We also interviewed NASA officials regarding the agency's efforts to maintain the station and continue research following the Columbia accident. To determine the cost implications for the program with the grounding of the shuttle fleet, we reviewed NASA's fiscal year 2003 budget amendment and appropriations as well as the agency's fiscal year 2004 budget request. We also reviewed NASA's assessments of potential cost impacts to the program and plans for mitigating those potential impacts. In addition, we reviewed NASA's plans/interactions with its international partners to secure support for the station while the shuttle fleet is grounded and to reach agreement on a final station configuration that will be acceptable to all partners. We interviewed NASA officials with responsibility for estimating and controlling space station costs, managing space station research, and dealing with the international partners. To identify program challenges facing the space station program, we reviewed actions being taken by NASA to ensure continued safe operations of the station, toured the Space Station Processing Facility to view flight-ready hardware in storage, and reviewed NASA's actions in response to the International Space Station Management and Cost Evaluation task force report. We interviewed space station program officials to obtain their views on the challenges facing the program. To accomplish our work, we visited NASA headquarters, Washington, D.C.; Johnson Space Center, Texas; and Kennedy Space Center, Florida. We also attended two meetings of the NASA Advisory Council. We conducted our work from November 2002 through August 2003 in accordance with generally accepted government standards. Unless you publicly announce the contents earlier, we plan no further distribution of this report until 30 days from its issue date. At that time, we will send copies to the NASA Administrator; the Director, Office of Management and Budget; and other interested parties. We will also make copies available to others on request. In addition, the report will be available on the GAO Web site at http://www.gao.gov. Please contact me at (202) 512-4841 if you or your staff have any questions about this report. Major contributors to this report are listed in appendix III. NASA: Major Management Challenges and Program Risks. GAO-03-114. Washington, D.C.: January 2003. Space Station: Actions Under Way to Manage Cost, but Significant Challenges Remain. GAO-02-735. Washington, D.C.: July 17, 2002. NASA: Compliance With Cost Limits Cannot Be Verified. GAO-02-504R. Washington, D.C.: April 10, 2002. NASA: Leadership and Systems Needed to Effect Financial Management Improvements. GAO-02-551T. Washington, D.C.: March 20, 2002. NASA: International Space Station and Shuttle Support Cost Limits. GAO-01-100R. Washington, D.C.: August 31, 2001. Space Station: Inadequate Planning and Design Led to Propulsion Module Project Failure. GAO-01-633. Washington, D.C.: June 20, 2001. Space Station: Russian-Built Zarya and Service Module Compliance With Safety Requirements. GAO/NSIAD-00-96R. Washington, D.C.: April 28, 2000. Space Station: Russian Compliance with Safety Requirements. GAO/TNSIAD-00-128. Washington, D.C.: March 16, 2000. Space Station: Russian Commitment and Cost Control Problems. GAO/NSIAD-99-175. Washington, D.C.: August 17, 1999. Space Station: Cost to Operate After Assembly Is Uncertain. GAO/NSIAD-99-177. Washington, D.C.: August 6, 1999. Space Station: Status of Russian Involvement and Cost Control Efforts. GAO/T-NSIAD-99-117. Washington, D.C.: April 29, 1999. Space Station: U.S. Life-Cycle Funding Requirements. GAO/T-NSIAD-98-212. Washington, D.C.: June 24, 1998. International Space Station: U.S. Life-Cycle Funding Requirements. GAO/NSIAD-98-147. Washington, D.C.: May 22, 1998. Space Station: Cost Control Problems. GAO/T-NSIAD-98-54. Washington, D.C.: November 5, 1997. Space Station: Deteriorating Cost and Schedule Performance Under the Prime Contract. GAO/T-NSIAD-97-262. Washington, D.C.: September 18, 1997. Space Station: Cost Control Problems Are Worsening. GAO/NSIAD-97-213.Washington, D.C.: September. 16, 1997. NASA: Major Management Challenges. GAO/T-NSIAD-97-178. Washington, D.C.: July 24, 1997. Space Station: Cost Control Problems Continue to Worsen. GAO/T-NSIAD-97-177. Washington, D.C.: June 18, 1997. Space Station: Cost Control Difficulties Continue. GAO/T-NSIAD-96-210.Washington, D.C.: July 24, 1996. Space Station: Cost Control Difficulties Continue. GAO/NSIAD-96-135. Washington, D.C.: July 17, 1996. Space Station: Estimated Total U.S. Funding Requirements. GAO/NSIAD-95-163. Washington, D.C.: June 12, 1995. Space Station: Update on the Impact of the Expanded Russian Role. GAO/NSIAD-94-248. Washington, D.C.: July 29, 1994. Space Station: Impact of the Expanded Russian Role on Funding and Research. GAO/NSIAD-94-220. Washington, D.C.: June 21, 1994. Individuals making key contributions to this report included Jerry Herley, James Beard, Fred Felder, Lynn LaValle, Rick Cederholm, Josh Margraf, and Karen Sloan.

In 1998, the National Aeronautics and Space Administration (NASA) and its international partners--Canada, Europe, Japan, and Russia--began on-orbit assembly of the International Space Station, envisioned as a permanently orbiting laboratory for conducting scientific research under nearly weightless conditions. Since its inception, the program has experienced numerous problems, resulting in significant cost growth and assembly schedule slippages. Following the loss of Columbia in February 2003, NASA grounded the U.S. shuttle fleet, putting the immediate future of the space station in doubt, as the fleet, with its payload capacity, has been key to the station's development. If recent discoveries about the cause of the Columbia's disintegration require that the remaining shuttles be redesigned or modified, delays in the fleet's return to flight could be lengthy. In light of these uncertainties, concerns about the space station's cost and progress have grown. This report highlights the current status of the program in terms of on-orbit assembly and research; the cost implications for the program with the grounding of the shuttle fleet; and identifying significant program management challenges, especially as they relate to reaching agreements with the international partners. Although the effects of the Columbia accident on the space station are still being explored, it is clear that the station will cost more, take longer to complete, and have further delay in the achievement of key research objectives. Due to the limited payload capacity of Russia's Soyuz and Progress vehicles--which the program must now rely on to rotate crew and provide logistics support--the station is currently in a survival mode. Onorbit assembly is at a standstill, and the on-board crew has been reduced from three to two members. NASA officials maintain that delays in on-orbit assembly will be at least a "month for month" slip from the previous schedule. However, these delays have presented a number of operational challenges. For example, several key components that were ready for launch when the Columbia accident occurred have been idle at Kennedy Space Center and now require additional maintenance or recertification before they can be launched. Moreover, certain safety concerns on-board the station cannot be addressed until the shuttle fleet's return to flight. The grounding of the shuttle fleet has also further impeded the advancement of the program's science investigations. Specifically, the limited availability of research facilities and new science materials has constrained on-board research. NASA has yet to estimate the potential costs and future budget impacts that will result from the grounding of the shuttle fleet. Throughout the life of the program, however, maintaining goals and objectives for the space station has been a challenge for NASA. NASA has analyzed anticipated costs that the program will incur to keep a limited crew on board the station until the U.S. shuttles resume flight, and officials have stated that there would not be significant changes to the execution of the current budget and that the fiscal year 2004 budget request would remain at current levels. NASA plans to continue to develop hardware and deliver station elements to Kennedy Space Center to be prepared for launch as previously scheduled. However, a number of factors will likely result in increased costs, including costs to maintain and store station components and costs for extending contracts. Important decisions regarding funding and partner agreements still need to be made. For example, agreements that cover the partners' responsibility for shared common operations costs may need to be adjusted, an adjustment that could result in NASA's paying a larger share of these costs. In addition, logistics flights using Russian vehicles may need to be accelerated to ensure continued operations on-board the station. Russia has stated that additional flights are possible, but it could need additional funding from the other partners. However, the United States may be prohibited from providing certain payments due to a statutory restriction. NASA and its partners must also develop a plan for assembling the partners' modules and reaching agreement on the final station configuration. The partners were on a path to agree on final configuration by December 2003, but this process has been delayed by the Columbia accident.

The operation of the Medicare program is extremely complex and requires close coordination between CMS and its contractors. CMS is an agency within HHS but has responsibilities for expenditures that are larger than those of most other federal departments. Under Medicare's fee-for-service system--which accounts for over 80 percent of program beneficiaries-- physicians, hospitals, and other providers submit claims to receive reimbursement for services they provide to Medicare beneficiaries. In fiscal year 2000, fee-for-service Medicare made payments of $176 billion to hundreds of thousands of providers who delivered services to over 32 million beneficiaries. About 50 Medicare claims administration contractors carry out the day-to- day operations of the program and are responsible not only for paying claims but also for providing information and education to providers and beneficiaries that participate in Medicare. Contractors that process and pay part A claims (i.e., for inpatient hospital, skilled nursing facility, hospice care, and certain home health services) are known as fiscal intermediaries and those that administer part B claims (i.e., for physician, outpatient hospital services, laboratory, and other services) are known as carriers. Contractors periodically issue bulletins that outline changes in national and local Medicare policy, inform providers of billing system changes, and address frequently asked questions. To enhance communications with providers, the agency recently required contractors to maintain toll-free telephone lines to respond to provider inquiries. It also directed them to develop Internet sites to provide another reference source. While providers look to CMS' contractors for help in interpreting Medicare rules, they remain responsible for properly billing the program. In congressional hearings held earlier this year, representatives of physician groups testified that they felt overwhelmed by the volume of instructional materials sent to them by CMS and its contractors. Following up on these remarks, we contacted 7 group practices served by 3 carriers in different parts of the country to determine the volume of Medicare- related documents they receive from the CMS central office, carriers, other HHS agencies, and private organizations. Together, these physician practices reported that, during a 3-month period, they received about 950 documents concerned with health care regulations and billing procedures. However, a relatively small amount--about 10 percent--was sent by CMS or its contractors. The majority of the mail reportedly received by these physician practices was obtained from sources such as consulting firms and medical specialty or professional societies. Congress has also held hearings on management challenges facing the Medicare program. We recently testified that HHS contracts for claims administration services in ways that differ from procedures for most federal contracts. Specifically: there is no full and open competition for these contracts, contracts generally must cover the full range of claims processing and related activities, contracts are generally limited to reimbursement of costs without consideration of performance, and CMS has limited ability to terminate these contracts. Since 1993, HCFA has repeatedly proposed legislation that would increase competition for these contracts and provide more flexibility in how they are structured. In June 2001, the Secretary of HHS again submitted a legislative proposal that would modify Medicare's claims administration contracting authority. CMS relies on its 20 carriers to convey accurate and timely information about Medicare rules and program changes to providers who bill the program. However, our ongoing review of the quality of CMS' communications with physicians participating in the Medicare program shows that the information given to providers is often incomplete, confusing, out of date, or even incorrect. MRCRA provisions establish new requirements and funding for CMS and its contractors that could enhance the quality of provider communication. We found that carriers' bulletins and Web sites did not contain clear or timely enough information to solely rely on those sources. Further, the responses to phone inquiries by carrier customer service representatives were often inaccurate, inconsistent with other information they received, or not sufficiently instructive to properly bill the program. Our review of the quarterly bulletins recently issued by 10 carriers found that they were often unclear and difficult to use. Bulletins over 50 pages in length were the norm, and some were 80 or more pages long. They often contained long articles, written in dense language and printed in small type. Many of the bulletins were also poorly organized, making it difficult for a physician to identify relevant or new information. For example, they did not always present information delineated by specialty or clearly identify the states where the policies applied. Moreover, information in these bulletins about program changes was not always communicated in a timely fashion, so that physicians sometimes had little or no advance notice prior to a program change taking effect. In a few instances, notice of the program change had not yet appeared in the carriers' bulletin by its effective date. To provide another avenue for communication, carriers are required to develop Internet Web sites. However, our review of 10 carrier Web sites found that only 2 complied with all 11 content requirements that CMS has established. Also, most did not contain features that would allow physicians and others to readily obtain the information they need. For example, we found that the carrier Web sites often lacked logical organization, navigation tools (such as search functions), and timely information--all of which increase a site's usability and value. Five of the nine sites that had the required schedule of upcoming workshops or seminars were out of date. Call centers supplement the information provided by bulletins and Web sites by responding to the specific questions posed by individual physicians. To assess the accuracy of information provided, we placed approximately 60 calls to the provider inquiry lines of 5 carriers' call centers. The three test questions, all selected from the "frequently asked questions" on the carriers' Web sites, concerned the appropriate way to bill Medicare under different circumstances. The results of our test, which were verified by a CMS coding expert, showed that only 15 percent of the answers were complete and accurate, while 53 percent were incomplete and 32 percent were entirely incorrect. We found that CMS has established few standards to guide the contractors' communication activities. While CMS requires contractors to issue bulletins at least quarterly, they require little else in terms of content or readability. Similarly, CMS requirements for web-based communication do little to promote the clarity or timeliness of information. Instead, they generally focus on legal issues--such as measures to protect copyrighted material--that do nothing to enhance providers' understanding of, or ability to correctly implement, Medicare policy. In regard to telecommunications, contractor call centers are instructed to monitor up to 10 calls per quarter for each of their customer service representatives, but CMS' definition of what constitutes accuracy and completeness in call center responses is neither clear nor specific. Moreover, the assessment of accuracy and completeness counts for only 35 percent of the total assessment score, with the representative's attitude and helpfulness accounting for the rest. CMS conducts much of its oversight of contractor performance through Contractor Performance Evaluations (CPEs). These reviews focus on contractors that have been determined to be "at risk" in certain program areas. To date, CMS has not conducted CPE reviews focusing on the quality or usefulness of contractors' bulletins or Web sites, but has begun to focus on call center service to providers. Again, the CPE reviews of call centers focus mainly on process--such as phone etiquette--rather than on an assessment of response accuracy. CMS officials, in acknowledging that provider communications have received less support and oversight than other contractor operations, noted the lack of resources for monitoring carrier activity in this area and providing them with technical assistance. Under its tight administrative budget, the agency spends less than 2 percent of Medicare benefit payments for administrative expenses. Provider communication and education activities currently have to compete with most other contractor functions in the allocation of these scarce Medicare administrative dollars. CMS data show that there are less than 26 full-time equivalent CMS staff assigned to oversee all carrier provider relations efforts nationwide, representing a just over 1 full-time equivalent staff for each Medicare carrier. This low level of support for provider communications leads to poorly informed providers who are therefore less likely to correctly bill the Medicare program for the services they provide. Despite the scarcity of resources, CMS has begun work to expand and consolidate some provider education efforts, develop venues to obtain provider feedback, and improve the way some information is delivered. These initiatives--many in the early stages of planning or implementation--are largely national in scope, and are not strategically integrated with similar activities by contractors. Nevertheless, we believe that these outreach and education activities will enhance some physicians' ability to obtain timely and important information, and improve their relationships with CMS. For example, CMS is working to expand and consolidate training for providers and contractor customer service representatives. Its Medlearn Web site offers providers computer-based training, manual, and reference materials, and a schedule of upcoming CMS meetings and training opportunities. CMS has produced curriculum packets and conducted in- person instruction to the contractor provider education staff to ensure contractors present more consistent training to providers. CMS has also arranged several satellite broadcasts on Medicare topics every year to hospitals and educational institutions. In addition, CMS established the Physicians' Regulatory Issues Team to work with the physician community to address its most pressing problems with Medicare. Contractors are also required to form Provider Education and Training Advisory groups to obtain feedback on their education and communication activities. We believe that the provisions in Section 5 of MRCRA can help develop a system of information dissemination and technical assistance. MRCRA's emphasis on contractor performance measures and the identification of best practices squarely places responsibility on CMS to upgrade its provider communications activities. For example, it calls on CMS to centrally coordinate the educational activities provided through Medicare contractors, to appoint a Medicare Provider Ombudsman, and to offer technical assistance to small providers through a demonstration program. We believe it would be prudent for CMS to implement these and related MRCRA provisions by assigning responsibility for them to a single entity within the agency dedicated to issues of provider communication. Further, MRCRA would channel additional financial resources to Medicare provider communications activities. It authorizes additional expenditures for provider education and training by Medicare contractors ($20 million over fiscal years 2003 and 2004), the small provider technical assistance demonstration program ($7 million over fiscal years 2003 and 2004), and the Medicare Provider Ombudsman ($25 million over fiscal years 2003 and 2004). This would expand specific functions within CMS' central office, which would help to address the lack of administrative infrastructure and resources targeted to provider communications at the national level. Although we have not determined the specific amount of additional funding needed for these purposes, our work has shown that the current level of funding is insufficient to effectively inform providers about Medicare payment rules and program changes. MRCRA also establishes contractor responsibility criteria to enhance the quality of their responses to provider inquiries. Specifically, contractors must maintain a toll-free telephone number and put a system in place to identify who on their staff provides the information. They must also monitor the accuracy, consistency, and timeliness of the information provided. Current law and long-standing practice in Medicare contracting limit CMS' options for selecting claims administration contractors and frustrate efforts to manage Medicare more effectively. We have previously identified several approaches to contracting reform that would give the program additional flexibility necessary to promote better performance and accountability among claims administration contractors. CMS faces multiple constraints in its options for selecting claims administration contractors. Under these constraints, the agency may not be able to select the best performers to carry out Medicare's claims administration and customer service functions. Because the Medicare statute exempts CMS from competitive contracting requirements, the agency does not use full and open competition for awarding fiscal intermediary and carrier contracts. Rather, participation has been limited to entities with experience processing these types of claims, which have generally been health insurance companies. Provider associations, such as the American Hospital Association, select fiscal intermediaries in a process called "nomination" and the Secretary of HHS chooses carriers from a pool of qualified health insurers. CMS program management options are also limited by the agency's reliance on cost-based reimbursement contracts. This type of contract reimburses contractors for necessary and proper costs of carrying out Medicare activities, but does not specifically provide for contractor profit or other incentives. As a result, CMS generally has not offered contractors the fee incentives for performance that are used in other federal contract arrangements. Medicare could benefit from various contracting reforms. Perhaps most importantly, directing the program to select contractors on a competitive basis from a broader array of entities would allow Medicare to benefit from efficiency and performance improvements related to competition. A full and open contracting process will hopefully result in the selection of stronger contractors at better value. Broadening the pool of entities allowed to hold Medicare contracts beyond health insurance companies will give CMS more contracting options. Also, authorizing Medicare to pay contractors based on how well they perform rather than simply reimbursing them for their costs could result in better contractor performance. We also believe that the program could benefit from efficiencies by having contractors perform specific functions, called functional contracting. The traditional practice of expecting a single Medicare contractor in each region to perform all claims administration functions has effectively ruled out the establishment of specialized contracts with multiple entities that have substantial expertise in certain areas. Moving to specialized contracts for the different elements of claims administration processing would allow the agency to more efficiently use its limited resources by taking advantage of the economies of scale that are inherent in some tasks. An additional benefit of centralizing carrier functioning in each area is the opportunity for CMS to more effectively oversee carrier operations. Functional contracting would also result in more consistency for Medicare-participating providers. Several key provisions of MRCRA would address these elements of contracting reform. MRCRA would establish a full and open procurement process that would provide CMS with express authority to contract with any qualified entity for claims administration, including entities that are not health insurers. MRCRA would also encourage CMS to use incentive payments to encourage quality service and efficiency. For example, a cost- plus-incentive-fee contract adjusts the level of payment based on the contractor's performance. Finally, MRCRA would modify long-standing practice by specifically allowing for contracts limited to one component of the claims administration process, such as processing and paying claims, or conducting provider education and technical assistance activities. The scope and complexity of the Medicare program make complete, accurate, and timely communication of program information necessary to help providers comply with Medicare requirements and appropriately bill for their services. The backers of MRCRA recognize the need for more resources devoted to provider communications and outreach activities, and we believe the funding provisions in the bill will help assure that more attention is paid to these areas. MRCRA also contains provisions that would provide a statutory framework for Medicare contracting reform. We believe that CMS can benefit from this increased flexibility, and that many of these reform provisions will assist the agency in providing for more effective program management. Madam Chairman, this concludes my prepared statement. I would be happy to answer any questions that you or other Subcommittee Members may have. For further information regarding this testimony, please contact me at (312) 220-7767. Jenny Grover, Rosamond Katz, and Eric Peterson also made key contributions to this statement.

Complete, accurate, and timely communication of program information is necessary to help Medicare providers comply with program requirements and appropriately bill for their services. Information provided to physicians about billing and payment policies is often incomplete, confusing, out of date, or even incorrect. GAO found that the rules governing Centers for Medicare and Medicaid Services (CMS) contracts with its claims processors lack incentives for efficient operations. Medicare contractors are chosen without full and open competition from among health insurance companies, rather from a broad universe of potential qualified entities, and CMS almost always uses cost-only contracts, which pay contractors for costs incurred but generally do not offer any type of performance incentives. To improve Medicare contractors' provider communications, CMS must develop a more centralized and coordinated approach consistent with the provisions of the Medicare Regulatory and Contracting Reform Act (MRCRA) of 2001. MRCRA would require that CMS (1) centrally coordinate contractors' provider education activities, (2) establish communications performance standards, (3) appoint a Medicare Provider Ombudsman, and (4) create a demonstration program to offer technical assistance to small providers. MRCRA would also broaden CMS authority so that various types of contractors would be able to compete for claims administration contracts and their payment would reflect the quality of the services they provide.

The transfer of defense items to friendly nations and allies is an integral component in both U.S. national security and foreign policy. The U.S. government authorizes the sale or transfer of military equipment, including spare parts, to foreign nations either through government-to-government agreements or through direct sales from U.S. manufacturers. The Arms Export Control Act and Foreign Assistance Act of 1961, as amended, authorize the DOD foreign military sales program. The Department of State sets the overall policy concerning which countries are eligible to participate in the foreign military sales program. DOD, through the military services, enters into foreign military sales agreements with individual countries. The Air Force Security Assistance Center, which is an activity of the Air Force Materiel Command, is responsible for the administration of the Air Force's foreign military sales program. The center's responsibilities start with the initial negotiation of the foreign military sale and end with the delivery of parts and completion of all financial aspects of the agreements. The center uses an automated management information system, the Security Assistance Management Information System, to support its management of the program with accurate and timely information. For blanket order cases, the system uses criteria such as an item's national item identification number, a federal supply class, or a federal supply group to restrict the parts available to foreign military sales customers. Once the system has verified a country's eligibility and approved a requisition, the requisition is sent to a supply center to be filled and shipped. The overall foreign military sales process, as it applies to the Air Force, is shown in figure 1. This report addresses the portion of the process relating to the Air Force's approval or disapproval of foreign countries' requisitions for classified and controlled spare parts under blanket order cases. Blanket orders are for a specific dollar value and generally cover classes of parts that a country may need rather than a specific item within a class. Under blanket orders, the Air Force restricts classes of items, such as munitions and nuclear spare parts, from being requisitioned. The Air Force's internal controls for foreign military sales using blanket orders are not adequate to prevent countries from ordering and receiving classified and controlled spare parts that they are not eligible to receive. We found that (1) controls based on supply class restrictions were ineffective and resulted in erroneously approved requisitions for shipment, and that written policies for recovering the erroneously shipped items did not exist; (2) the Air Force did not validate modifications to its Security Assistance Management Information System related to blanket orders or test the system's logic for restricting requisitions, and (3) command country managers did not always document reasons for overriding either the Security Assistance Management Information System or foreign military sales case manager recommendations not to ship classified spare parts. As a result of these inadequate internal controls, classified and controlled spare parts were shipped to countries not authorized to receive them. The Air Force Security Assistance Center has taken or plans to take actions to correct these issues. Foreign country requisitions for classified and controlled spare parts were erroneously validated, as a result of an incorrect federal supply class, by the Air Force's Security Assistance Management Information System. The Air Force attempts to prevent countries from obtaining classified and controlled spare parts by restricting them from receiving spare parts that belong to selected federal supply classes. Included in the national stock number is a four-digit federal supply class (see fig. 2), which may be shared by thousands of items. The national stock number also contains a nine-digit national item identification number that is unique for each item in the supply system. A country can obtain a classified or controlled spare part by using an incorrect, but unrestricted, supply class with an item's correct national item identification number. We found that because the Security Assistance Management Information System was not properly programmed, it erroneously validated 35 blanket order requisitions (of the 123 in our review), even though an incorrect supply class number was used, because the countries used supply classes that were not restricted. For example, in one case, the Air Force restricted countries from requisitioning parts belonging to the 1377 federal supply class (cartridge- and propellant-actuated devices and components) on blanket orders. The restriction included an outline sequencer (national stock number -1377010539320) used on ejection seats for various aircraft. The country ordered the sequencer using national stock number 1680010539320. Because supply class 1680 (miscellaneous aircraft accessories and components) was not restricted and the Security Assistance Management Information System did not verify that 1680 was the correct supply class for national item identification number 010539320, the system approved the requisition. Had the system validated the entire 13-digit national stock number, it would have found that the number was incorrect and would not have approved the requisition. Subsequently, the item manager recognized that 1680 was not the correct federal supply class and corrected the supply class to 1377 before the part was shipped. This example is summarized in figure 3. Air Force officials were unaware of this situation until our review identified the problem. In another case, involving the restricted 1377 federal supply class, a country ordered a restricted battery power supply for the F-16 aircraft using national stock number 6130013123511. Because supply class 6130 (nonrotating electrical converters) was not restricted and the Security Assistance Management Information System did not verify the entire 13- digit national stock number, the requisition was approved. The Air Force shipped the restricted battery power supply to the country. Neither the Air Force nor the center had written policies or procedures in place for recovering the items erroneously shipped. Without these types of policies and procedures, the Air Force cannot be assured that appropriate steps will be taken to recover the parts. Air Force Security Assistance Center officials agreed that the supply class restrictions alone were ineffective and could be bypassed by use of inaccurate supply class information. The Air Force has not validated modifications to the Security Assistance Management Information System that restrict parts that countries can requisition, and has not tested the system's logic for restricting requisitions since 1998 to ensure that it is working properly. As a result, modifications that were not properly made went undetected, and foreign countries were able to requisition and obtain controlled spare parts that the Air Force was trying to restrict. For example, the Air Force instructed programmers to modify a table of restrictions in the Security Assistance Management Information System to prevent certain countries from using blanket orders to requisition controlled bushings in the 5365 supply class. Although Air Force Security Assistance Center officials subsequently told us that the bushings had been improperly restricted, we found that, for 18 of the 123 requisitions we reviewed, countries had ordered and received the bushings, because the Security Assistance Management Information System was incorrectly programmed and did not identify the requisitions as requiring a review by command country managers. After we brought the transactions to the attention of Air Force Security Assistance Center officials, they investigated and found that programmers had entered the restrictions in the wrong area of the system. Because the Air Force had not validated that system modifications were properly made, the system had approved the requisitions. Although the Air Force later determined that the bushings should not have been restricted, this example nevertheless demonstrates the need to validate system changes. The Air Force does not periodically test the Security Assistance Management Information System to ensure that it accurately reviews requisitions for compliance with restrictions. For example, when the system is working correctly, it will identify restrictions relating to parts, such as ammunition or nuclear spare parts, and will disapprove requisitions from countries that are ineligible to order these parts. Air Force Security Assistance Command officials said that the system had not been tested since 1998 to ensure that it accurately reviews requisitions for compliance with restrictions. When we tested the system's ability to restrict items based on their federal supply class, we found that the system did not always perform as intended. As discussed earlier, the system did not perform as intended because countries could requisition and obtain classified and controlled spare parts using an incorrect, but unrestricted, federal supply class with an item's correct national item identification number. In the Federal Information System Controls Audit Manual, which lists internal control activities for information systems, one of the control activities listed involves the testing of new and revised software to ensure that it is working correctly. In addition, management of federal information resources rules require agencies to establish information system management oversight mechanisms that provide for periodic reviews to determine how mission requirements might have changed and whether the information system continues to fulfill ongoing and anticipated mission requirements. Further, DOD's ADP Internal Control Guidelineat the time stated that periodic reviews of systems should be conducted to determine if they operate as intended. According to Air Force Security Assistance Center officials, there have been few changes to the table of restrictions in the system. However, they did agree that existing changes need to be validated and were working to accomplish this. Based on our observations, the Air Force's failure to validate modifications and test model logic is in part due to an unquestioning confidence in the Security Assistance Management Information System's ability to correctly restrict the requisitioning of classified and controlled spare parts. Command country managers did not always document reasons for overriding Security Assistance Management Information System or foreign military sales case manager recommendations not to ship classified spare parts. According to the Standards for Internal Control in the Federal Government, all transactions and other significant events need to be clearly documented. The standards state that such documentation should be properly managed and maintained and should be readily available for examination. Of the 123 requisitions we reviewed, the Security Assistance Management Information System identified 36 requisitions for command country manager review. For 19 of the requisitions, command country managers overrode the system recommendations and shipped classified and controlled spare parts without documenting the reasons for overriding the system. For example, the command country manager overrode the system and shipped four classified target-detecting devices, but the case file did not contain any documentation explaining why the command country manager did so, and managers we queried could not provide an explanation for the override. Similarly, a command country manager authorized the shipment of a controlled communications security part that the Security Assistance Management Information System and foreign military sales case manager recommended not be shipped. The case file contained no documentation explaining why the spare part was shipped. According to Air Force officials, there were no written policies or procedures for documenting decisions to override the system or foreign military sales case manager recommendations. The Air Force Security Assistance Center plans to issue guidance to command country managers to document system bypass authorizations. The Air Force has not established nor does it maintain effective internal controls over foreign military sales sold under blanket orders. Specifically, internal controls involving use of the federal supply class to restrict requisitions, the modification of tables restricting the access to classified and controlled spare parts in the Air Force's system, testing of the system, and documentation of system overrides were inadequate. Without adequate internal controls, classified and controlled spare parts may be released to countries that are ineligible to receive them, thereby providing military technology to countries that might use it against U.S. national interests. Further, without written policies detailing the steps to be taken when the Air Force becomes aware of an erroneous shipment, the Air Force's ability to recover erroneously shipped classified or controlled parts is lessened. To improve internal controls over the Air Force's foreign military sales program and to minimize countries' abilities to obtain classified or controlled spare parts under blanket orders for which they are not eligible, we are recommending that the Secretary of Defense instruct the Secretary of the Air Force to require the appropriate officials to take the following steps: Modify the Security Assistance Management Information System so that it validates country requisitions based on the requisitioned item's complete national stock number. Establish policies and procedures for recovering classified or controlled items that are erroneously shipped. Establish polices and procedures for validating modifications made to the Security Assistance Management Information System to ensure that the changes were properly made. Periodically test the Security Assistance Management Information System to ensure that the system's logic for restricting requisitions is working correctly. Establish a policy for command country managers to document the basis for their decisions to override Security Assistance Management Information System or foreign military sales case manager recommendations. In commenting on a draft of this report, DOD fully concurred with four of our recommendations and cited corrective actions that had been taken or were planned, and it partially concurred with another recommendation. Specifically, with regard to our recommendation to modify the Security Assistance Management Information System to validate country requisitions based on the requisitioned item's national stock number, the department said that it has had a change in place since January 2003 to validate requisitions based on an item's national stock number. We believe that the department's change is responsive to findings that we brought to the Air Force's attention in December 2002. However, because our audit work was completed when the Air Force brought this change to our attention, we did not have an opportunity to validate the change. The department also stated that the Air Force (1) will write a policy memorandum on procedures for recovering classified or controlled items that are erroneously shipped, (2) will issue a policy memorandum directing that all modifications to the system be validated in accordance with existing policies and procedures, and (3) has issued a policy memorandum specifying those staff who can input transactions for overriding restrictions and requiring that waiver approvals for using the bypasses be documented. With regard to our recommendation to periodically test the system to ensure that its logic for restricting requisitions is working correctly, DOD partially concurred. The department said that a program is being implemented to test new modifications placed in the system and that the testing of old modifications would be an ongoing effort. Testing the modifications placed in the system will ensure that they were made correctly. However, just testing the modifications will not ensure that the system is correctly applying its logic to the modifications in order to restrict requisitions for items that countries are not eligible to receive. For example, testing modifications may not identify logic problems, such as the one we identified involving the approval of requisitions based on an item's federal supply class. Thus, we continue to believe that the system's logic for restricting requisitions should be periodically tested to ensure that it is working correctly. Otherwise, classified and controlled spare parts that are requisitioned may continue to be erroneously released. DOD's comments appear in appendix I. To determine the adequacy of the Department of the Air Force's key internal control activities aimed at preventing countries from requisitioning and receiving classified and controlled spare parts that they are ineligible to receive, we held discussions with officials from the Under Secretary of Defense (Policy Support) International Security Program Directorate; Deputy Under Secretary of the Air Force (International Affairs); and the Air Force Materiel Command's Security Assistance Center, Dayton, Ohio. We discussed the officials' roles and responsibilities, the criteria and guidance they used in performing their duties, and the controls used to restrict countries from receiving parts that they are not eligible to requisition. At the Air Force Security Assistance Center and Air Logistics Centers at Warner Robins Air Force Base, Macon, Georgia, and Tinker Air Force Base, Oklahoma City, Oklahoma, we interviewed military and civilian officials to obtain an overview of the requisitioning and approval processes applicable to classified and controlled spare parts. To test the adequacy of the internal controls, we obtained records from the Air Force Security Assistance Center on all classified and controlled spare parts that were purchased under blanket orders and approved for shipment to foreign countries for the period October 1, 1997, through July 31, 2002. We limited our study to blanket orders because defined orders and Cooperative Logistics Supply Support Agreements specified the parts that countries were entitled to requisition by national stock number. In contrast, only Security Assistance Management Information System restrictions limited the parts that countries were entitled to order under blanket orders. The records covered 444 blanket orders that resulted in 72,057 requisitions for classified and controlled spare parts. Specifically, we took the following steps: We tested the Security Assistance Management Information System by applying the system's restrictions that applied to classified and controlled spare parts that were shipped under blanket orders, and identified 525 requisitions that appeared to violate the restrictions. We obtained satisfactory explanations from the Air Force Security Assistance Command for all except 200 of the requisitions, which were shipped despite restrictions. We reviewed case files for 123 requisitions, including 87 requisitions for which the Security Assistance Management Information System had approved the shipment of classified and controlled spare parts without referring the requisitions to command country managers to determine if the requisitions should be approved. We followed up on these requisitions by consulting with command country managers. The case files that we reviewed included 36 requisitions that the Security Assistance Management Information System had referred to command country managers for review to determine if they had documented their decisions to override the system's decisions. We followed up on these reviews through discussions with command country managers. We conducted our review from May 2002 through May 2003 in accordance with generally accepted government auditing standards. As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from the date of this letter. At that time, we will send copies of this report to the Secretary of Defense; the Secretary of the Air Force; the Director, Office of Management and Budget; and interested congressional committees. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. Please contact me on (202) 512-8365, if you or your staff have any questions concerning this report. Key contributors to this report were Lawson (Rick) Gist, Jr.; Jennifer Thomas; Arthur James, Jr.; Lou Modliszewski; Susan Woodward; John Lee; and Kristy Lehmann.

From 1990 through 2001, the Department of Defense delivered over $138 billion in services and defense articles--including classified and controlled parts--to foreign governments through its foreign military sales programs. Classified spare parts are restricted for national security reasons, while controlled parts contain technology that the military does not want to release. GAO was asked to review the Air Force's internal controls aimed at preventing countries from requisitioning and receiving classified or controlled spare parts that they are ineligible to receive. The Air Force's internal controls for its foreign military sales program using blanket orders are not adequate, placing classified and controlled spare parts at risk of being shipped to countries not authorized to receive them. The Air Force's system has erroneously approved foreign country requisitions for classified and controlled spare parts based on incorrect federal supply classes. The system approves items for shipment based in part on an item's federal supply class--not the item's entire national stock number, which is a combination of the supply class number and a part number unique to the item. GAO found that because the system was not properly programmed and countries used unrestricted supply class numbers, the system erroneously approved 35 of 123 selected requisitions reviewed. For example, one country ordered a controlled outline sequencer used on various aircraft by using a supply class that was unrestricted, but incorrect for the part it requisitioned. Because supply class 1680 was not restricted and the system did not verify that 1680 was the correct supply class for national item identification number 010539320, the system approved the requisition. Had the system validated the entire 13-digit national stock number, it would have found that the number was incorrect and would not have approved the requisition. In addition, the Air Force has no written policies or procedures in place for recovering items that have been shipped in error. The Air Force has not validated modifications to the Security Assistance Management Information System that restrict parts available to foreign countries and has not tested the system since 1998 to ensure that it is working properly. Because modifications were not validated, the Air Force did not detect improperly made modifications to the system, and foreign countries were able to requisition and obtain controlled spare parts that, at the time, the Air Force was trying to restrict. GAO identified 18 instances in which countries requisitioned and received a controlled part for which they were not eligible because programmers had entered the restrictions in the wrong area of the system. Although Air Force officials subsequently told us that the part was improperly restricted, this example nevertheless demonstrates the need to validate system changes. Air Force command country managers did not always document reasons for overriding the recommendations of the system or the foreign military sales case manager. For 19 of the 123 requisitions GAO reviewed, command country managers overrode the system recommendations and shipped classified and controlled spare parts without documenting the reasons for overriding the system. For example, a command country manager overrode the system and shipped four classified target-detecting devices without documenting the reasons for overriding the system.

Enacted in 1988, the Exon-Florio amendment to the Defense Production Act authorized the President to investigate the effects of foreign acquisitions of U.S. companies on national security and to suspend or prohibit acquisitions that might threaten national security. The President delegated investigative authority to the Committee on Foreign Investment in the United States, an interagency group responsible for monitoring and coordinating U.S. policy on foreign investment in the United States. Since the Committee's establishment in 1975, membership has doubled, with the Department of Homeland Security being the most recently added member. In addition to the Committee's 12 standing members, other agencies may be called on when their particular expertise is needed. In 1991, the Treasury Department, as Chair of the Committee, issued regulations to implement Exon-Florio. The law and regulations establish a four-step process for reviewing foreign acquisitions of U.S. companies: (1) voluntary notice by the companies; (2) a 30-day review to identify whether there are any national security concerns; (3) a 45-day investigation period to determine whether those concerns require a recommendation to the President for possible action; and (4) a presidential decision to permit, suspend, or prohibit the acquisition (see fig. 1). In most cases, the Committee completes its review within the initial 30 days because there are no national security concerns or concerns have been addressed, or the companies and the government agree on measures to mitigate identified security concerns. In cases where the Committee is unable to complete its review within 30 days, it may initiate a 45-day investigation or allow companies to withdraw their notifications. The Committee generally grants requests to withdraw. When the Committee concludes a 45-day investigation, it is required to submit a report with recommendations to the President. If Committee members cannot agree on a recommendation, the regulations require that the report to the President include the differing views of all Committee members. The President has 15 days after the investigation is completed to decide whether to prohibit or suspend the proposed acquisition, order divestiture of a completed acquisition, or take no action. Table 1 provides a breakdown of notifications and committee actions taken from 1997 through 2004 (the latest date for which data were available at the time of our 2005 review). Over the past decade, GAO has conducted several reviews of the Committee's process and actions and has found areas where improvements were needed. In 2000, we found that gaps in the notification process raised concerns about the Committee's ability to ensure transactions are notified. Our 2002 review, prompted by a lack of congressional insight into the process, again found weaknesses in the process. Specifically, we reported that member agencies could improve the agreements they negotiated with companies under Exon-Florio to mitigate national security concerns. We also questioned the use of withdrawals to provide additional time for reviews. While our most recent work indicated that member agencies had begun to take action to respond to some of our recommendations, concerns remained about the extent to which the Committee's implementation of Exon-Florio had provided the safety net envisioned by the law. In 2005, we reported that a lack of agreement among Committee members on what defines a threat to national security and what criteria should be used to initiate an investigation may have limited the Committee's analyses of proposed and completed foreign acquisitions. From 1997 through 2004, the Committee received a total of 470 notices of proposed or completed acquisitions, yet it initiated only 8 investigations. While neither the statute nor the implementing regulation defines "national security," the statute provides a number of factors that may be considered in determining a threat to national security (see fig. 2). Some Committee member agencies argued for a more traditional and narrow definition of what constitutes a threat to national security--that is, (1) the U.S. company possesses export-controlled technologies or items; (2) the company has classified contracts and critical technologies; or (3) there is specific derogatory intelligence on the foreign company. Other members, including the Departments of Defense and Justice, argued that acquisitions should be analyzed in broader terms. According to officials from these departments, vulnerabilities could result from foreign control of critical infrastructure, such as control of or access to information traveling on networks. Vulnerabilities can also result from foreign control of critical inputs to defense systems, such as weapons system software development or a decrease in the number of innovative small businesses researching and developing new defense-related technologies. While these vulnerabilities may not pose an immediate threat to national security, they may create the potential for longer term harm to U.S. national security interests by reducing U.S. technological leadership in defense systems. For example, in reviewing a 2001 acquisition of a U.S. company, the Departments of Defense and Commerce raised several concerns about foreign ownership of sensitive but unclassified technology, including the possibility of this sensitive technology being transferred to countries of concern or losing U.S. government access to the technology. However, Treasury argued that these concerns were not national security concerns because they did not involve classified contracts, the foreign company's country of origin was a U.S. ally, or there was no specific negative intelligence about the company's actions in the United States. In one proposed acquisition, disagreement over the definition of national security resulted in an enforcement provision being removed from a mitigation agreement between the foreign company and the Departments of Defense and Homeland Security. Defense had raised concerns about the security of its supply of specialized integrated circuits, which are used in a variety of defense technologies that the Defense Science Board had identified as essential to our national defense--technologies found in unmanned aerial vehicles, the Joint Tactical Radio System, and cryptography and other communications protection devices. However, Treasury and other Committee members argued that the security of supply issue was an industrial policy concern and, therefore, was outside the scope of Exon-Florio's authority. As a result of removing the provision, the President's authority to require divestiture under Exon-Florio was eliminated as a remedy in the event of non-compliance. Committee members also disagreed on the criteria that should be applied to determine whether a proposed or completed acquisition should be investigated. While Exon-Florio provides that the "President or the President's designee may make an investigation to determine the effects on national security" of acquisitions that could result in foreign control of a U.S. company, it does not provide specific guidance for the appropriate criteria for initiating an investigation of an acquisition. At the time of our work, Treasury, as Committee Chair, applied essentially the same criteria established in the law for the President to suspend or prohibit a transaction, or order divestiture: (1) there is credible evidence that the foreign controlling interest may take action to threaten national security and (2) no laws other than Exon-Florio and the International Emergency Economic Powers Act are adequate and appropriate to protect national security. However, the Defense, Justice, and Homeland Security Departments argued that applying these criteria at this point in the process is inappropriate because the purpose of an investigation is to determine whether or not credible evidence of a threat exists. Notes from a policy- level discussion of one particular case further corroborated these differing views. Committee guidelines required member agencies to inform the Committee of national security concerns by the 23rd day of a 30-day review--further compressing the limited time allowed by legislation to determine whether a proposed or completed foreign acquisition posed a threat to national security. According to one Treasury official, the information is needed a week early to meet the legislated 30-day requirement. While most reviews are completed in the required 30 days, some Committee members have found that completing a review within such short time frames can be difficult--particularly in complex cases. One Defense official said that without advance notice of the acquisition, time frames are too short to complete analyses and provide input for the Defense Department's position. Another official said that to meet the 23-day deadline, analysts have only 3 to 10 days to analyze the acquisition. In one instance, Homeland Security was unable to provide input within the 23-day time frame. If a review cannot be completed within 30 days and more time is needed to determine whether a problem exists or identify actions that would mitigate concerns, the Committee can initiate a 45-day investigation of the acquisition or allow companies to withdraw their notifications and refile at a later date. According to Treasury officials, the Committee's interest is to ensure that the implementation of Exon-Florio does not undermine U.S. open investment policy. Concerned that public knowledge of investigations could devalue companies' stock, erode confidence of foreign investors, and ultimately chill foreign investment in the United States, the Committee has generally allowed and often encouraged companies to withdraw their notifications rather than initiate an investigation. While an acquisition is pending, companies that have withdrawn their notification have an incentive to resolve any outstanding issues and refile as soon as possible. However, if an acquisition has been concluded, there is less incentive to resolve issues and refile, extending the time during which any concerns remain unresolved. Between 1997 and 2004, companies involved in 18 acquisitions withdrew their notification and refiled 19 times. In four cases, the companies had already concluded the acquisition before filing a notification. One did not refile until 9 months later and another did not refile for 1 year. Consequently, concerns raised by Defense and Commerce about potential export control issues in these two cases remained unresolved for as much as a year--further increasing the risk that a foreign acquisition of a U.S. company would pose a threat to national security. For the other two cases, neither company had refiled at the time we completed our work. In one case, the company had previously withdrawn and refiled more than a year after completing the acquisition. The Committee allowed it to withdraw the notification to provide more time to answer the Committee's questions and provide assurances concerning export control matters. The company refiled, and was permitted to withdraw a second time because there were still unresolved issues. When we issued our report in 2005, 4 years had passed since the second withdrawal without a refiling. In the second case, the company--which filed with the Committee more than 6 months after completing its acquisition--was also allowed to withdraw its notification. At the time we issued our report, 2 years had passed without a refiling. In response to concerns about the lack of transparency in the Committee's process, the Congress passed the Byrd Amendment to Exon-Florio in 1992, requiring a report to the Congress if the President made any decision regarding a proposed foreign acquisition. In 1992, another amendment also directed the President to report every 4 years on whether there was credible evidence of a coordinated strategy by one or more countries to acquire U.S. companies involved in research, development, or production of critical technologies for which the United States is a leading producer, and whether there were industrial espionage activities directed or assisted by foreign governments against private U.S. companies aimed at obtaining commercial secrets related to critical technologies. While the Byrd Amendment expanded required reporting on Committee actions, few reports have been submitted to the Congress because withdrawing and refiling notices to restart the clock has limited the number of cases that result in a presidential decision. Between 1997 and 2004, only two cases--both involving telecommunications systems-- resulted in a presidential decision and a subsequent report to the Congress. Infrequent reporting of Committee deliberations on specific cases provides little insight into the Committee's process to identify concerns raised during investigations and determine the extent to which the Committee has reached consensus on a case. Further, despite the 1992 requirement for a report on foreign acquisition strategies every 4 years, at the time of our work there had been only one report--in 1994. However, another report, in response to this requirement, was recently delivered to the Congress. In conclusion, the effectiveness of Exon-Florio as a safety net depends on how the broad scope of its authority is implemented in today's globalized world--where identifying threats to national security has become increasingly complex. While Exon-Florio provides the Committee on Foreign Investment in the United States the latitude to define what constitutes a threat to national security, the more traditional interpretation fails to fully consider factors currently embodied in the law. Further, the Committee guidance requiring reviews to be completed within 23 days to meet the 30-day legislative requirement, along with the reluctance to proceed to an investigation, limits agencies' ability to complete in-depth analyses. However, the alternative--allowing companies to withdraw and refile their notifications--increases the risk that the Committee, and the Congress, could lose visibility over foreign acquisitions of U.S. companies. The criterion for reporting specific cases to the Congress only after a presidential decision contributes to the opaque nature of the Committee's process. Our 2005 report laid out several matters for congressional consideration to (1) help resolve the differing views as to the extent of coverage of Exon- Florio, (2) address the need for additional time, and (3) increase insight and oversight of the process. Further, we suggested that, when withdrawal is allowed for a transaction that has been completed, the Committee establish interim protections where specific concerns have been raised, specific time frames for refiling, and a process for tracking any actions being taken during a withdrawal period. We have been told that some of these steps are now being taken. Madam Chairwoman, this concludes my prepared statement. I will be happy to answer any questions you or other Members of the Subcommittee may have. For information about this testimony, please contact Ann M. Calvaresi- Barr, Director, Acquisition and Sourcing Management, at (202) 512-4841 or [email protected]. Other individuals making key contributions to this product include Thomas J. Denomme, Gregory K. Harmon, Paula J. Haurilesko, John J. Marzullo, Russell Reiter, Karen Sloan, and Marie Ahearn. Our understanding of the Committee's process is based on our 2005 work but built on our review of the process and our discussions with agency officials for our 2002 report. For our 2005 review, and to expand our understanding of the Committee's process for reviewing foreign acquisitions of U.S. companies, we met with officials from the Departments of Commerce, Defense, Homeland Security, Justice, and the Treasury--the agencies that are most active in the review of acquisitions-- and discussed their involvement in the process. Further, we conducted case studies of nine acquisitions that were filed with the Committee between June 28, 1995, and December 31, 2004. We selected acquisitions based on recommendations by Committee member agencies and the following criteria: (1) the Committee permitted the companies to withdraw the notification; (2) the Committee or member agencies concluded agreements to mitigate national security concerns; (3) the foreign company had been involved in a prior acquisition notified to the Committee; or (4) GAO had reviewed the acquisition for its 2002 report. We did not attempt to validate the conclusions reached by the Committee on any of the cases we reviewed. To determine whether the weaknesses in provisions to assist agencies in monitoring agreements that GAO had identified in its 2002 report had been addressed, we analyzed agreements concluded under the Committee's authority between 2003 and 2005. We conducted our review from April 2004 through July 2005 in accordance with generally accepted government auditing standards. 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The Exon-Florio amendment to the Defense Production Act of 1950, enacted in 1988, authorized the President to suspend or prohibit foreign acquisitions of U.S. companies that pose a threat to national security. The Committee on Foreign Investment in the United States--chaired by the Department of Treasury with 11 other members, including the Departments of Commerce, Defense, and Homeland Security--implements Exon-Florio through a four-step review process: (1) voluntary notice by the companies of pending or completed acquisitions; (2) a 30-day review to determine whether the acquisition could pose a threat to national security; (3) a 45-day investigation period to determine whether concerns require possible action by the President; and (4) a presidential decision to permit, suspend, or prohibit the acquisition. Over the past decade, GAO has conducted several reviews of the Committee's process and has found areas where improvements were needed. GAO's most recent work, conducted in 2005, indicated concerns remained. Exon-Florio reviews are meant to serve as a safety net when other laws may be inadequate to protect national security. GAO found that several aspects of the review process may have weakened the law's effectiveness. First, member disagreement about what defines a threat to national security may have limited the Committee's analyses. Some argued that reviews should be limited to concerns about export-controlled technologies or items, classified contracts, or specific derogatory intelligence concerning the company. Others argued for a broader scope, one that considers potential threats to U.S. critical infrastructure, defense supply, and technology superiority. Committee members also differed on the criteria that should be used to determine when an investigation is warranted. Some applied essentially the criteria in the law for a presidential decision--that is, there is credible evidence that the foreign controlling interest may take action that threatens national security and that no other laws other than the International Emergency Economic Powers Act are adequate to protect national security. Others argued that these criteria are inappropriate because the purpose of an investigation is to determine if credible evidence of a threat exists. While most cases can be completed within the 30-day review period, complex acquisitions may require more time. Concerned that an investigation could discourage foreign investment, the Committee allowed companies to withdraw notifications rather than proceed to investigation. While this practice can provide additional review time without chilling foreign investment, it may also heighten the risk to national security in transactions where there are concerns and the acquisition has been completed or is likely to be completed during the withdrawal period. Finally, because few cases are investigated, few require a presidential decision, giving Congress little insight into the Committee's process.

The federal-aid highway program provides nearly $30 billion annually to the states, most of which are formula grant funds that FHWA distributes through annual apportionments according to statutory formulas; once apportioned, these funds are generally available to each state for eligible projects. The responsibility for choosing which projects to fund generally rests with state departments of transportation and local planning organizations. The states have considerable discretion in selecting specific highway projects and in determining how to allocate available federal funds among the various projects they have selected. For example, section 145 of title 23 of the United States Code describes the federal-aid highway program as a federally assisted state program and provides that the authorization of the appropriation of federal funds or their availability for expenditure, "shall in no way infringe on the sovereign rights of the States to determine which projects shall be federally financed." A major highway or bridge construction or repair project usually has four stages: (1) planning, (2) environmental review, (3) design and property acquisition, and (4) construction. While FHWA approves state transportation plans, environmental impact assessments, and the acquisition of property for highway projects, its role in approving the design and construction of projects varies. The state's activities and FHWA's corresponding approval actions are shown in figure 1. Given the size and significance of the federal-aid highway program's funding and projects, a key challenge for this program is overseeing states' expenditure of public funds to ensure that state projects are well managed and successfully financed. Our work--as well as work by the DOT Inspector General and by state audit and evaluation agencies--has documented cost growth on numerous major highway and bridge projects. Let me provide one example. In January 2001, Virginia's Joint Legislative Audit and Review Commission found that final project costs on Virginia Department of Transportation projects were well above their cost estimates and estimated that the state's 6-year, $9 billion transportation development plan understated the costs of projects by up to $3.5 billion. The commission attributed these problems to several factors, including, among other things, not adjusting estimates for inflation and expanding the scope of projects. Our work has identified weaknesses in FHWA's oversight of projects, especially in controlling costs. In 1997, we reported that cost containment was not an explicit statutory or regulatory goal of FHWA's oversight. While FHWA influenced the cost-effectiveness of projects when it reviewed and approved plans for their design and construction, we found it had done little to ensure that cost containment was an integral part of the states' project management. According to FHWA officials, controlling costs was not a goal of their oversight, and FHWA had no mandate in law to encourage or require practices to contain the costs of major highway projects. More recently, an FHWA task force concluded that changes in the agency's oversight role since 1991--when the states assumed greater responsibility for overseeing federal-aid projects--had resulted in conflicting interpretations of the agency's role in overseeing projects, and that some of the field offices were taking a "hands off" approach to certain projects. In June 2001, FHWA issued a policy memorandum, in part to clarify that FHWA is ultimately accountable for all projects financed with federal funds. As recently as last month, a memorandum posted on FHWA's Web site discussed the laws establishing FHWA and the federal- aid highway program, along with congressional and public expectations that FHWA "ensure the validity of project cost estimates and schedules." The memorandum concluded, "These expectations may not be in full agreement with the role that has been established by these laws." In addition, we have found that FHWA's oversight process has not promoted reliable cost estimates. While there are many reasons for cost increases, we have found, on projects we have reviewed, that initial cost estimates were not reliable predictors of the total costs and financing needs of projects. Rather, these estimates were generally developed for the environmental review--whose purpose is to compare project alternatives, not to develop reliable cost estimates. In addition, FHWA had no standard requirements for preparing cost estimates, and each state used its own methods and included different types of costs in its estimates. We have also found that costs exceeded initial estimates on projects we have reviewed because (1) initial estimates were modified to reflect more detailed plans and specifications as projects were designed and (2) the projects' costs were affected by, among other things, inflation and changes in scope to accommodate economic development over time. We also found that highway projects take a long time to complete, and that the amount of time spent on them is of concern to the Congress, the federal government, and the states. Completing a major, new, federally funded highway project that has significant environmental impacts typically takes from 9 to 19 years and can entail as many as 200 major steps requiring actions, approvals, or input from a number of federal, state, and other stakeholders. Finally, we have noted that in many instances, states construct a major project as a series of smaller projects, and FHWA approves the estimated cost of each smaller project when it is ready for construction, rather than agreeing to the total cost of the major project at the outset. In some instances, by the time FHWA considers whether to approve the cost of a major project, a public investment decision may, in effect, already have been made because substantial funds have been spent on designing the project and acquiring property, and many of the increases in the project's estimated costs have already occurred. Since 1998, FHWA has taken a number of steps to improve the management and oversight of major projects in order to better promote cost containment. For example, FHWA implemented TEA-21's requirement that states develop an annual finance plan for any highway or bridge project estimated to cost $1 billion or more and established a major projects team that currently tracks and reports each month on 15 such projects. FHWA has also moved to incorporate greater risk-based management into its oversight in order to identify areas of weakness within state transportation programs, set priorities for improvement, and work with the states to meet those priorities. The administration's May 2001 reauthorization measure contains additional proposed actions. It would introduce more structured FHWA oversight requirements, including mandatory annual reviews of state transportation agencies' financial management and "project delivery" systems, as well as periodic reviews of states' practices for estimating costs, awarding contracts, and reducing project costs. To improve the quality and reliability of cost estimates, it would introduce minimum federal standards for states to use in estimating project costs. The measure would also strengthen reporting requirements and take new actions to reduce fraud. Many elements of the administration's proposal are responsive to problems and options we have described in past reports and testimony. Should the Congress determine that enhancing federal oversight of major highway and bridge projects is needed and appropriate, options we have identified in prior work remain available to build on the administration's proposal during the reauthorization process. However, adopting any of these options would require balancing the states' right to select projects and desire for flexibility and more autonomy with the federal government's interest in ensuring that billions of federal dollars are spent efficiently and effectively. Furthermore, the additional costs of each of these options would need to be weighed against its potential benefits. Options include the following: Have FHWA develop and maintain a management information system on the cost performance of selected major highway and bridge projects, including changes in estimated costs over time and the reasons for such changes. Such information could help define the scope of the problem with major projects and provide insights needed to fashion appropriate solutions. Clarify uncertainties concerning FHWA's role and authority. As I mentioned earlier, the federal-aid highway program is by law a federally assisted state program, and FHWA continues to question its authority to encourage or require practices to contain the costs of major highway and bridge projects. Should uncertainties about FHWA's role and authority continue, another option would be to resolve the uncertainties through reauthorization language. Have the states track the progress of projects against their initial baseline cost estimates. The Office of Management and Budget requires federal agencies, for acquisitions of major capital assets, to prepare baseline cost and schedule estimates and to track and report the acquisitions' cost performance. These requirements apply to programs managed by and acquisitions made by federal agencies, but they do not apply to the federal- aid highway program, a federally assisted state program. Expanding the federal government's practice to the federally assisted highway program could improve the management of major projects by providing managers with information for identifying and addressing problems early. Establish performance goals and strategies for containing costs as projects move through their design and construction phases. Such performance goals could provide financial or other incentives to the states for meeting agreed-upon goals. Performance provisions such as these have been established in other federally assisted grant programs and have also been proposed for use in the federal-aid highway program. Requiring or encouraging the use of goals and strategies could also improve accountability and make cost containment an integral part of how states manage projects over time. Consider methods for improving the time it takes to plan and construct major federal-aid highway projects--a process that we reported can take up to 19 years to complete. Major stakeholders suggested several approaches to improving the timeliness of these projects, including (1) improving project management, (2) delegating environmental review and permitting authority, and (3) improving agency staffing and skills. We have recommended that FHWA consider the benefits of the most promising approaches and act to foster the adoption of the most cost-effective and feasible approaches. Reexamine the approval process for major highway and bridge projects. This option, which would require federal approval of a major project at the outset, including its cost estimate and finance plan, would be the most far- reaching and the most difficult option to implement. Potential models for such a process include the full funding grant agreement used by FTA for the New Starts program, and, as I testified last year, a DOT task force's December 2000 recommendation calling for the establishment of a separate funding category for initial design work and a new decision point for advancing highway projects. Over the last 25 years, more than 1.2 million people have died as a result of traffic crashes in the United States--more than 42,000 in 2002. Since 1982, about 40 percent of traffic deaths were from alcohol-related crashes. In addition, traffic crashes are the leading cause of death for people aged 4 though 33. As figure 2 shows, the total number of traffic fatalities has not significantly decreased in recent years. To improve safety on the nation's highways, NHTSA administers a number of programs, including the core federally funded highway safety program, Section 402 State and Community Grants, and several other highway safety programs that were authorized in 1998 by TEA-21. The Section 402 program, established in 1966, makes grants available for each state, based on a population and road mileage formula, to carry out traffic safety programs designed to influence drivers' behavior, commonly called behavioral safety programs. The TEA-21 programs include seven incentive programs, which are designed to reduce traffic deaths and injuries by promoting seatbelt use and reducing alcohol-impaired driving, and two transfer programs, which penalize states that have not complied with federal requirements for enacting repeat-offender and open container laws to limit alcohol-impaired driving. Under these transfer programs, noncompliant states are required to shift certain funds from federal-aid highway programs to projects that concern or improve highway safety. In addition, subsequent to TEA-21, the Congress required that, starting later this year, states that do not meet federal requirements for establishing 0.08 blood alcohol content as the state level for drunk driving will have a percentage of their federal aid highway funds withheld. During fiscal years 1998 through 2002, over $2 billion was provided to the states for highway safety programs. NHTSA, which oversees the states' highway safety programs, adopted a performance-based approach to oversight in 1998. Under this approach, the states and the federal government are to work together to make the nation's highways safer. Each state sets its own safety performance goals and develops an annual safety plan that describes projects designed to achieve the goals. NHTSA's 10 regional offices review the states' annual plans and provide technical assistance, advice, and comments. NHTSA has two tools available to strengthen its monitoring and oversight of the state programs--improvement plans that states not making progress towards their highway safety goals are to develop, which identify programs and activities that a state and NHTSA regional office will undertake to help the state meet its goals; and management reviews, which generally involve sending a team to a state to review its highway safety operations, examine its projects, and determine that it is using funds in accordance with requirements. Among the key challenges in this area are (1) evaluating how well the federally funded state highway safety programs are meeting their goals and (2) determining how well the states are spending and controlling their federal highway safety funds. In April 2003, we issued a report on NHTSA's oversight of state highway safety programs in which we identified weaknesses in NHTSA's use of improvement plans and management reviews. Evaluating how well state highway safety programs are meeting their goals is difficult because, under NHTSA's performance-based oversight approach, NHTSA's guidance does not establish a consistent means of measuring progress. Although the guidance states that NHTSA can require the development and implementation of an improvement plan when a state fails to make progress toward its highway safety performance goals, the guidance does not establish specific criteria for evaluating progress. Rather, the guidance simply states that an improvement plan should be developed when a state is making little or no progress toward its highway safety goals. As a result, NHTSA's regional offices have made limited and inconsistent use of improvement plans, and some states do not have improvement plans, even though their alcohol-related fatality rates have increased or their seat-belt usage rates have declined. Without a consistent means of measuring progress, NHTSA and state officials lack common expectations about how to define progress, how long states should have to demonstrate progress, how to set and measure highway safety goals, and when improvement plans should be used to help states meet their highway safety goals. To determine how well the states are spending and controlling their federal highway safety funds, NHTSA's regional offices can conduct management reviews of state highway safety programs. Management reviews completed in 2001 and 2002 identified weaknesses in states' highway safety programs that needed correction; however, we found that the regional offices were inconsistent in conducting the reviews because NHTSA's guidance does not specify when the reviews should be conducted. The identified weaknesses included problems with monitoring subgrantees, poor coordination of programs, financial control problems, and large unexpended fund balances. Such weaknesses, if not addressed, could lead to inefficient or unauthorized uses of federal funds. According to NHTSA officials, management reviews also foster productive relationships with the states that allow the agency's regional offices to work with the states to correct vulnerabilities. These regions' ongoing involvement with the states also creates opportunities for sharing and encouraging the implementation of best practices, which may then lead to more effective safety programs and projects. To encourage more consistent use of improvement plans and management reviews, we made recommendations to improve the guidance to NHTSA's regional offices on when it is appropriate to use these oversight tools. In commenting on a draft of the report, NHTSA officials agreed with our recommendations and said they had begun taking action to develop criteria and guidance for using the tools. The administration's recent proposal to reauthorize TEA-21 would make some changes to the safety programs that could also have some impact on program efficiencies. For example, the proposal would somewhat simplify the current grant structure for NHTSA's highway safety programs. The Section 402 program would have four components: core program formula grants, safety belt performance grants, general performance grants, and impaired driving discretionary grants. The safety belt performance grants would provide funds to states that had passed primary safety belt laws or achieved 90 percent safety belt usage. In addition, the general performance grant would provide funds based on overall reductions in (1) motor vehicle fatalities, (2) alcohol-related fatalities, and (3) motorcycle, bicycle, and pedestrian fatalities. Finally, the Section 402 program would have an impaired driving discretionary grant component, which would target funds to up to 10 states that had the highest impaired driving fatality numbers or fatality rates. In addition to changing the Section 402 program, the proposal would expand grants for highway safety information systems and create new emergency medical service grants. The proposal leaves intact existing penalties related to open container, repeat offender, and 0.08 blood-alcohol content laws, and establishes a new transfer penalty for states that fail to pass a primary safety belt law and have safety belt use rates lower than 90 percent by 2005. The proposal would also give the states greater flexibility in using their highway safety funds. A state could move up to half its highway safety construction funds from the Highway Safety Improvement Program into the core Section 402 program. A state would also be able to use 100 percent of its safety belt performance grants for construction purposes if it had a primary safety belt law, or 50 percent if the grant was based on high safety belt use. States could also use up to 50 percent of their general performance grants for safety construction purposes. The New Starts transit program identifies and funds fixed guideway projects, including rail, bus rapid transit, trolley, and ferry projects. The New Starts program provides much of the federal government's investment in urban mass transportation. TEA-21 and subsequent amendments authorized approximately $10 billion for New Starts projects for fiscal years 1998 through 2003. The administration's proposal for the surface transportation reauthorization, known as the Safe, Accountable, Flexible, and Efficient Transportation Equity Act of 2003 (SAFETEA), requests that about $9.5 billion be made available for the New Starts program for fiscal years 2004 through 2009. Unlike the federal highway program and certain transit programs, under which funds are automatically distributed to states on the basis of formulas, the New Starts program requires local transit agencies to compete for New Starts project funds on the basis of specific financial and project justification criteria. To obtain New Starts funds, a project must progress through a regional review of alternatives, develop preliminary engineering plans, and meet FTA's approval for final design. FTA assesses the technical merits of a project proposal and its finance plan and then notifies the Congress that it intends to commit New Starts funding to certain projects through full funding grant agreements. The agreement establishes the terms and conditions for federal participation in the project, including the maximum amount of federal funds--no more than 80 percent of the estimated net cost of the project. While the grant agreement commits the federal government to providing the federal contributions to the project over a number of years, these contributions are subject to the annual appropriations process. State or local sources provide the remaining funding. The grantee is responsible for all costs exceeding the federal share, unless the agreement is amended. To meet the nation's transportation needs, many states and localities are planning or building large New Starts projects to replace aging infrastructure or build new capacity. They are often costly and require large commitments of public resources, which may take several years to obtain from federal, state, and local sources. The projects can also be technically challenging to construct and require their sponsors to resolve a wide range of social, environmental, land-use, and economic issues before and during construction. It is critical that federal and other transportation officials meet two particular challenges that stem from the costly and lengthy federal funding commitment associated with New Starts projects. First, they must have a sound basis for evaluating and selecting projects. Because many transit projects compete for limited federal transit dollars--there are currently 52 projects in the New Starts "pipeline"--and FTA awards relatively few full funding grant agreements each year, it is crucial that local governments choose the most promising projects as candidates for New Starts funds and that FTA uses a process that effectively selects those projects that most clearly meet the program's goals. Second, FTA, like FHWA, has the challenge of overseeing the planning, development, and construction of selected projects to ensure they remain on schedule and within budget, and deliver their expected performance. In the early 1990s, we designated the transit grants management oversight program as high risk because it was vulnerable to fraud, waste, abuse, and mismanagement. While we have removed it from the high-risk designation because of improvements FTA has made to this program, we have found that major transit projects continue to experience costs and schedule problems. For example, in August, 1999, we reported that 6 of the 14 transit projects with full funding grant agreements had experienced cost increases, and 3 of those projects had experienced cost increases that were more than 25 percent over the estimates approved by FTA in grant agreements. The key reasons for the increases included (1) higher than anticipated contract costs, (2) schedule delays, and (3) project scope changes and system enhancements. A recent testimony by the Department of Transportation's Inspector General indicates that major transit projects continue to experience significant problems including cost increases, financing problems, schedule delays, and technical or construction difficulties. FTA has developed strategies to address the twin challenges of selecting the right projects and monitoring their implementation costs, schedule, and performance. First, in response to direction in TEA-21, FTA developed a systematic process for evaluating and rating potential New Starts projects competing for federal funding. Under this process, FTA assigns individual ratings for a variety of financial and project justification criteria and then assigns an overall rating of highly recommended, recommended, not recommended, or not rated. These criteria reflect a broad range of benefits and effects of the proposed projects, including capital and operating finance plans, mobility improvements, environmental benefits, operating efficiencies, cost-effectiveness, land use, and other factors. According to FTA's New Starts regulations, a project must have an overall rating of at least "recommended" to receive a grant agreement. FTA also considers a number of other "readiness" factors before proposing funding for a project. For example, FTA proposes funding only for projects that are expected to enter the final design phase and be ready for grant agreements within the next fiscal year. Figure 3 illustrates the New Starts evaluation and ratings process. While FTA has made substantial progress in establishing a systematic process for evaluating and rating potential projects, our work has raised some concerns about the process. For example, to assist FTA in prioritizing projects to ensure that the relatively few full funding grant agreements go to the most important projects, we recommended in March 2000 that FTA further prioritize the projects that it rates as highly recommended or recommended and ready for New Starts funds. FTA has not implemented this recommendation. We believe that this recommendation is still valid because the funding requested for the many projects that are expected to compete for grant agreements over the next several years is likely to exceed the available federal dollars. A further concern about the ratings process stems from FTA's decision during the fiscal year 2004 cycle to propose a project for a full funding grant agreement that had been assigned an overall project rating of "not rated," even though FTA's regulations require that projects have at least a "recommended" rating to receive a grant agreement. Finally, we found that FTA needs to provide clearer information and additional guidance about certain changes it made to the evaluation and ratings process for the fiscal year 2004 cycle. In work that addressed the challenge of overseeing ongoing projects once they are selected to receive a full funding grant agreement, we reported in March and September 2000 that FTA had improved the quality of the transit grants management oversight program through strategies that included upgrading its guidance and training of staff and grantees, developing standardized oversight procedures, and employing contractor staff to strengthen its oversight of grantees. FTA also expanded its oversight efforts to include a formal and rigorous assessment of a grantee's financial capacity to build and operate a new project and of the financial impact of that project on the existing transit system. These assessments, performed by independent accounting firms, are completed before FTA commits funds for construction and are updated as needed until projects are completed. For projects that already have grant agreements, FTA focuses on the grantee's ability to finish the project on time and within the budget established by the grant agreement. The administration's fiscal year 2004 budget proposal contains three New Starts initiatives--reducing the maximum federal statutory share to 50 percent, allowing non-fixed-guideway projects to be funded through New Starts, and replacing the "exempt" classification with a streamlined ratings process for projects requesting less than $75 million in New Starts funding. These proposed initiatives have advantages and disadvantages, with implications for the cost-effectiveness and performance of proposed projects. First, the reduced federal funding would require local communities to increase their funding share, creating more incentive for them to propose the most cost-effective projects; however, localities might have difficulties generating the increased funding share, and this initiative could result in funding inequities for transit projects when compared with highway projects. Second, allowing non-fixed guideway projects to be funded under New Starts would give local communities more flexibility in choosing among transit modes and might promote the use of bus rapid transit, whose costs compare favorably with those of light rail systems; however, this initiative would change the original fixed guideway emphasis of New Starts, which some project sponsors we interviewed believe might disadvantage traditional New Starts projects. Finally, replacing the "exempt" classification with a streamlined rating process for all projects requesting less than $75 million might promote greater performance-oriented evaluation since all projects would receive a rating. However, this initiative might reduce the number of smaller communities that would participate in the New Starts program. The Congress established the Essential Air Service (EAS) program as part of the Airline Deregulation Act of 1978. The act guaranteed that communities served by air carriers before deregulation would continue to receive a certain level of scheduled air service. Special provisions guaranteed service to Alaskan communities. In general, the act guaranteed continued service by authorizing DOT to require carriers to continue providing service at these communities. If an air carrier could not continue that service without incurring a loss, DOT could then use EAS funds to award that carrier a subsidy. Subsidies are to cover the difference between a carrier's projected revenues and expenses and to provide a minimum amount of profit. Under the Airline Deregulation Act, the EAS program was intended to sunset, or end, after 10 years. In 1987, the Congress extended the program for another 10 years, and in 1998, it eliminated the sunset provision, thereby permanently authorizing EAS. To be eligible for subsidized service, a community must meet three general requirements. It must have received scheduled commercial passenger service as of October 1978, may be no closer than 70 highway miles to a medium- or large-hub airport, and must require a subsidy of less than $200 per person (unless the community is more than 210 highway miles from the nearest medium- or large-hub airport, in which case no average per- passenger dollar limit applies). Funding for the EAS program comes from a combination of permanent and annual appropriations. Part of its funding comes from the Federal Aviation Reauthorization Act of 1996 (P.L. 104-264), which authorized the collection of user fees for services provided by the Federal Aviation Administration (FAA) to aircraft that neither take off nor land in the United States, commonly known as overflight fees. The act also permanently appropriated the first $50 million of such fees for EAS and safety projects at rural airports. In fiscal year 2003, total EAS program appropriations were $113 million. As the airline industry has evolved since the industry was deregulated in 1978, the EAS program has faced increasing challenges to remain viable. Since fiscal year 1995, the program's costs have tripled, rising from $37 million to $113 million, and they are likely to continue escalating. Several factors are likely to affect future subsidy requirements. First, carriers' operating costs have increased over time, in part because of the costs associated with meeting federal safety regulations for small aircraft beginning in 1996. Second, carriers' revenues have been limited because many individuals traveling to or from EAS-subsidized communities choose not to fly from the local airport, but rather to use other larger nearby airports, which generally offer more service at lower airfares. On average, in 2000, each EAS flight operated with just over 3 passengers. Finally, the number of communities eligible for EAS subsidies has increased over time, rising from a total of 106 in 1995 to 114 in July 2002 (79 in the continental United States and 35 in Alaska, Hawaii, and Puerto Rico) and again to 133 in April 2003 (96 in the continental United States and 37 in Alaska, Hawaii, and Puerto Rico). The number of subsidy-eligible communities may continue to grow in the near term. Figure 4 shows the increase in the number of communities eligible for EAS-subsidized service between 1995 and April 2003. Over the past year, the Congress, the administration, and we have each identified a number of potential strategies generally aimed at enhancing the EAS program's long-term sustainability. These strategies broadly address challenges related to the carriers' cost of providing service and the passenger traffic and revenue that carriers can hope to accrue. In August 2002, in response to a congressional mandate, we identified and evaluated four major categories of options to enhance the long-term viability of the EAS program. In no particular order, the options we identified were as follows: Better match capacity with community use by increasing the use of smaller (i.e., less costly) aircraft and restricting little-used flight frequencies. Target subsidized service to more remote communities (i.e., those where passengers are less likely to drive to another airport) by changing eligibility criteria. Consolidate service to multiple communities into regional airports. Change the form of the federal assistance from carrier subsidies to local grants that would allow local communities to match their transportation needs with individually tailored transportation options. Each of these options could have positive and negative effects, such as lowering the program's costs but possibly adversely affecting the economies of the communities that would lose some or all of their direct scheduled airline service. This year's House-passed version of the FAA reauthorization bill, H.R. 2115, also includes various options to restructure air service to small communities now served by the EAS program. The bill proposes an alternative program (the "community and regional choice program"), which would allow communities to opt out of the EAS program and receive a grant that they could use to establish and pay for their own service, whether scheduled air service, air taxi service, surface transportation, or another alternative. The complementary Senate FAA reauthorization bill (also H.R. 2115) also includes specific provisions designed to restructure the EAS program. This bill would set aside some funds for air service marketing to try to attract passengers and create a grant program under which up to 10 individual communities or a consortium of communities could opt out of the existing EAS program and try alternative approaches to improving air service. In addition, the bill would preclude DOT from terminating, before the end of 2004, a community's eligibility for an EAS subsidy because of decreased passenger ridership and revenue. The administration's proposal would generally restrict appropriations to the $50 million from overflight fees and would require communities to help pay the costs of funding their service. The proposal would also allow communities to fund transportation options other than scheduled air service, such as on-demand "air taxis" or ground transportation. Mr. Chairman, this concludes my prepared statement. I would be pleased to answer any questions you or other members of the Committee may have. For future contacts regarding this testimony, please contact JayEtta Hecker at (202) 512-2834. Individuals making key contributions to this testimony included Robert Ciszewski, Steven Cohen, Elizabeth Eisenstadt, Rita Grieco, Steven Martin, Katherine Siggerud, Glen Trochelman, and Alwynne Wilbur. Federal-Aid Highways: Cost and Oversight of Major Highway and Bridge Projects--Issues and Options. GAO-03-764T. Washington, D.C.: May 8, 2003. Transportation Infrastructure Cost and Oversight Issues on Major Highway and Bridge Projects. GAO-02-673. Washington, D.C.: May 1, 2002. Surface Infrastructure: Costs, Financing, and Schedules for Large-Dollar Transportation Projects. GAO/RCED-98-64. Washington, D.C.: February 12, 1998. DOT's Budget: Management and Performance Issues Facing the Department in Fiscal Year 1999. GAO/T-RCED/AIMD-98-76. Washington, D.C.: February 12, 1998. Transportation Infrastructure: Managing the Costs of Large-Dollar Highway Projects. GAO/RCED-97-27. Washington, D.C.: February 27, 1997. Transportation Infrastructure: Progress on and Challenges to Central Artery/Tunnel Project's Costs and Financing. GAO/RCED-97-170. Washington, D.C.: July 17, 1997. Transportation Infrastructure: Central Artery/Tunnel Project Faces Financial Uncertainties. GAO/RCED-96-1313. Washington, D.C.: May 10, 1996. Central Artery/Tunnel Project. GAO/RCED-95-213R. Washington, D.C.: June 2, 1995. Highway Safety: Research Continues on a Variety of Factors That Contribute to Motor Vehicle Crashes. GAO-03-436. Washington, D.C.: March 31, 2003. Highway Safety: Better Guidance Could Improve Oversight of State Highway Safety Programs. GAO-03-474. Washington, D.C.: April 21, 2003. Highway Safety: Factors Contributing to Traffic Crashes and NHTSA's Efforts to Address Them. GAO-03-730T. Washington, D.C.: May 22, 2003. Federal Transit Administration: Bus Rapid Transit Offers Communities a Flexible Mass Transit Option. GAO-03-729T. Washington, D.C.: June 24, 2003. Mass Transit: FTA Needs to Provide Clear Information and Additional Guidance on the New Starts Ratings Process. GAO-03-701. Washington, D.C.: June 23, 2003. Mass Transit: FTA's New Starts Commitments for Fiscal Year 2003. GAO-02-603. Washington, D.C.: April 30, 2002. Mass Transit: FTA Could Relieve New Starts Program Funding Constraints. GAO-01-987. Washington, D.C.: August 15, 2001. Mass Transit: Project Management Oversight Benefits and Future Funding Requirements. GAO/RCED-99-240. Washington, D.C.: August 19, 1999. Mass Transit: Implementation of FTA's New Starts Evaluation Process and FY 2001 Funding Proposals. GAO/RCED-00-149. Washington, D.C.: April 28, 2000. Mass Transit: Challenges in Evaluating, Overseeing, and Funding Major Transit Projects. GAO/T-RCED-00-104. Washington, DC: Mar. 8, 2000. Mass Transit: Status of New Starts Transit Projects With Full Funding Grant Agreements, GAO/RCED-99-240. Washington, D.C.: Aug. 19, 1999. Mass Transit: FTA's Progress in Developing and Implementing a New Starts Evaluation Process. GAO/RCED-99-113. Washington, D.C.: April 26, 1999. Commercial Aviation: Issues Regarding Federal Assistance for Enhancing Air Service to Small Communities. GAO-03-540T. Washington, D.C.: March 11, 2003. Commercial Aviation: Factors Affecting Efforts to Improve Air Service at Small Community Airports. GAO-03-330. Washington, D.C.: January 17, 2003. Commercial Aviation: Financial Condition and Industry Responses Affect Competition. GAO-03-171T. Washington, D.C.: October 2, 2002. Options to Enhance the Long-term Viability of the Essential Air Service Program. GAO-02-997R. Washington, D.C.: Aug. 30, 2002. Commercial Aviation: Air Service Trends at Small Communities Since October 2000. GAO-02-432. Washington, D.C.: August 30, 2002. Essential Air Service: Changes in Passenger Traffic, Subsidy Levels, and Air Carrier Costs. T-RCED-00-185. Washington, D.C.: May 25, 2000. Essential Air Service: Changes in Subsidy Levels, Air Carrier Costs, and Passenger Traffic. RCED-00-34. Washington, D.C.: April 14, 2000. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

It is important to ensure that longterm spending on transportation programs meets the goals of increasing mobility and improving transportation safety. In this testimony, GAO discusses what recently completed work on four transportation programs suggests about challenges and strategies for improving the oversight and use of taxpayer funds. These four programs are (1) the federal-aid highway program, administered by the Federal Highway Administration (FHWA); (2) highway safety programs, administered by the National Highway Traffic Safety Administration (NHTSA); (3) the New Starts program, administered by the Federal Transit Administration (FTA); and (4) the Essential Air Service (EAS) program, administered out of the Office of the Secretary of Transportation. Differences in the structure of these programs have contributed to the challenges they illustrate. The federal-aid highway program uses formulas to apportion funds to the states, the highway safety programs use formulas and grants, the New Starts program uses competitive grants, and the EAS program provides subsidies. For each program, GAO describes in general how the program illustrates a particular challenge in managing or overseeing long-term spending and in particular what challenges and strategies for addressing the challenges GAO and others have identified. The federal-aid highway program illustrates the challenge of ensuring that federal funds (nearly $30 billion annually) are spent efficiently when projects are managed by the states. GAO has raised concerns about cost growth on and FHWA's oversight of major highway and bridge projects. Recent proposals to strengthen FHWA's oversight are responsive to issues and options GAO has raised. Options identified in previous GAO work provide the Congress with opportunities to build on recent proposals by, among other things, clarifying uncertainties about FHWA's role and authority. NHTSA's highway safety programs illustrate the challenge of evaluating how well federally funded state programs are meeting their goals. Over 5 years, the Congress provided about $2 billion to the states for programs to reduce traffic fatalities, which numbered over 42,000 in 2002. GAO found that NHTSA was making limited use of oversight tools that could help states better implement their programs and recommended strategies for improving the tools' use that NHTSA has begun to implement. The administration recently proposed performance-based grants in this area. FTA's New Starts program illustrates the challenge of developing effective processes for evaluating grant proposals. Under the New Starts program, which provided about $10 billion in mass transit funding in the past 6 years, local transit agencies compete for project funds through grant proposals. FTA has developed a systematic process for evaluating these proposals. GAO believes that FTA has made substantial progress by implementing this process, but our work has raised some concerns, including the extent to which the process is able to adequately prioritize the projects. The Essential Air Service (EAS) program illustrates the challenge of considering modifications to statutorily defined programs in response to changing conditions. Under the EAS program, many small communities are guaranteed to continue receiving air service through subsidies to carriers. However, the program has faced increasing costs and decreasing average passenger levels. The Congress, the administration, and GAO have all proposed strategies to improve the program's efficiency by better targeting available resources and offering alternatives for sustainable services.

We recently issued several reports on acquisition spending and workforce trends. These reports show that spending on services acquisitions is increasing at a time when the acquisition workforce is decreasing. Our report on spending and workforce trends in federal procurement shows that federal agencies continue to buy far more services than goods. Since 1997, spending on services has grown 11 percent. In fiscal year 2001, over 60 percent of the more than $220 billion in goods and services purchased by the federal government was for services. At six agencies, procurement of services exceeded 75 percent of their total spending on contracts; at one agency, the Department of Energy, nearly 100 percent of total spending via contracts was for services (see fig. 1). Spending on services could increase even further, at least in the short term, given the President's recent request for additional funds for defense and homeland security. The degree to which individual agencies are currently contracting for services and the growth of services spending underscore the importance of ensuring that service acquisitions are managed properly. Industry and government experts alike recognize that the key to a successful transformation toward a more effective acquisition system is having the right people with the right skills. To increase the efficiency and effectiveness of acquiring goods and services, the government is relying more on judgment and initiative versus rigid rules to make purchasing decisions. Agencies have to address governmentwide reductions in the acquisition workforce. At the same time, government contract actions exceeding $25,000 have increased significantly--by 26 percent between fiscal years 1997 and 2001 (see table 1). Over the past year, GAO issued four reports on the management and training of the government's acquisition workforce. While the agencies we reviewed are taking steps to address their future acquisition workforce needs, each is encountering challenges in their efforts. In particular, shifting priorities, missions, and budgets have made it difficult for agencies to predict, with certainty, the specific skills and competencies the acquisition workforce may need. Training is critical in ensuring that the acquisition workforce has the right skills. To deliver training effectively, leading organizations typically prioritize and set requirements for those in need of training to ensure their training reaches the right people. Agencies we reviewed had developed specific training requirements for their acquisition workforce and had efforts underway to make training available and raise awareness of major acquisition initiatives. However, they did not have processes for ensuring that training reaches all those who need it. And while agencies had also developed a variety of systems to track the training of their personnel, they experienced difficulties with these systems. We have issued a number of reports on key provisions of SARA. These reports address the areas of acquisition leadership, workforce, contract innovations, as well as other proposals. Our discussions with officials from leading companies, which we reported on last year, indicate that a procurement executive or Chief Acquisition Officer plays a critical role in changing an organization's culture and practices. In response to many of the same challenges faced by the federal government--such as a lack of tools to ensure they receive the best value over time--each of the companies we studied changed how they acquired services in significant ways. For example, each elevated or expanded the role of the company's procurement organization; designated "commodity" managers to oversee key services; and/or made extensive use of cross- functional teams. Taking a strategic approach paid off. One official, for example, estimated that his company saved over $210 million over a recent 5-year period by pursuing a more strategic approach. Bringing about these new ways of doing business, however, was challenging. To overcome these challenges, the companies found they needed to have sustained commitment from their senior leadership--first, to provide the initial impetus to change, and second, to keep up the momentum. Section 201 of SARA would create a Chief Acquisition Officer (CAO) within each civilian executive agency. We support this provision. By granting the CAO clear lines of authority, accountability, and responsibility for acquisition decision-making, SARA takes a similar approach as leading companies in terms of the responsibility and decision-making authority of these individuals. Comptroller General David Walker testified earlier this month that strategic human capital management must be the centerpiece of any serious government transformation effort and that federal workers can be an important part of the solution to the overall transformation effort. In July 2001, he recommended that Congress explore greater flexibilities to allow federal agencies to enhance their skills mix by leveraging the expertise of private sector employees through innovative fellowship programs. The acquisition professional exchange program proposed in section 103 of SARA could enhance the ability of federal workers to successfully transform the way the federal government acquires services. The program, which is modeled after the Information Technology Exchange Program included in the recently passed E-Government Act of 2002, would permit the temporary exchange of high-performing acquisition professionals between the federal government and participating private-sector entities. We support this provision, which begins to address a key question we face in the federal government: Do we have today, or will we have tomorrow, the ability to manage the procurement of the increasingly sophisticated services the government needs? Following a decade of downsizing and curtailed investments in human capital, federal agencies currently face skills, knowledge, and experience imbalances that, without corrective action, will worsen. The program established by section 103 would allow federal agencies to gain from the knowledge and expertise of private- sector professionals and entities. Section 102 of SARA would establish an acquisition workforce training fund using five percent of the fees generated by governmentwide contract programs. We recently completed a review of fees charged on governmentwide contracts--covering all five designated executive agencies for governmentwide acquisition contracts and the General Services Administration's Schedules program. The Office of Management and Budget's guidance directs agencies operating governmentwide information technology contracts to transfer fees in excess of costs to the miscellaneous receipts account of the U.S. Treasury's General Fund. Further, some of these contracts operate under revolving fund statutes that limit the use of fees to the authorized purposes of the funds. Quality training is important, and we recognize the need for adequate funds for training. In our view, however, the procuring agencies should ensure that adequate funding is available through the normal budgeting process to provide the training the acquisition workforce needs. We are concerned about relying on contract program fees-which can vary from year to year and which are intended to cover other requirements-as a source of funding for such an important priority as workforce training. Several sections of SARA would encourage the use of innovative contract types that could provide savings to the government. For example, performance-based contracts can offer significant benefits, such as encouraging contractors to find cost-effective ways of delivering services. Share-in-savings contracting, one type of performance-based contracting, is an agreement in which a client compensates a contractor from the financial benefits derived as a result of the contract performance. Share-in-savings contracting can motivate contractors to generate savings and revenues for their clients. We issued a report earlier this year in response to your request that we determine how the commercial sector uses share-in-savings contracting. We examined four commercial share- in-savings contracts and identified common characteristics that made them successful. In the commercial share-in-savings contracts we reviewed, we found four conditions that facilitated success: An expected outcome is clearly specified. By outcomes, we mean such things as generating savings by eliminating inefficient business practices or identifying new revenue centers. It is critical that a client and contractor have a clear understanding of what they are trying to achieve. Incentives are defined. Both the client and contractor need to strike a balance between the level of risk and reward they are willing to pursue. Performance measures are established. By its nature, share-in-savings cannot work without having a baseline and good performance measures to gauge exactly what savings or revenues are being achieved. Agreement must be reached on how metrics are linked to contractor intervention. Top management commitment is secured. A client's top executives need to provide contractors with the authority needed to carry out solutions, since change from the outside is often met with resistance. They also need to help sustain a partnership over time since relationships between the contractor and client can be tested in the face of changing market conditions and other barriers. The companies in our study found that successful arrangements have generated savings and revenues. In one case highlighted in our report, $980,000 was realized in annual energy savings. We have not found share-in-savings contracting to be widespread in the commercial sector or the federal government. Excluding the energy industry, we found limited references to companies or state agencies that use or have used the share-in-savings concept. In addition, there are few documented examples of share-in-savings contracting in the federal government. Officials in federal agencies we spoke with noted that such arrangements may be difficult to pursue given potential resistance and the lack of good baseline performance data. In addition, in previous work, Department of Energy headquarters officials told us they believe such contracts can be best used when federal funding is unavailable. To achieve the potential benefits from the use of share-in-savings contracting, it may be worthwhile to examine ways to overcome potential issues. For example, in a letter to the Office of Federal Procurement Policy in March of this year, we recognized that share-in-savings contracting represents a significant change in the way the federal government acquires services. To address this challenge, we underscored the need for the Office of Federal Procurement Policy to develop guidance and policies that could ensure that (1) appropriate data are collected and available to meet mandated reporting requirements regarding the effective use of share-in-savings contracting, and (2) members of the federal acquisition workforce understand and appropriately apply this new authority. Section 401 authorizes agencies to treat a contract or task order as being for a commercial item if it is performance-based--that is, it describes each task in measurable, mission-related terms, and identifies the specific outputs--and the contractor provides similar services and terms to the public. This provision, which would only apply if the contract or task order were valued at $5 million or less, would provide another tool to promote greater use of performance-based contracting. Our spending and workforce trends report shows that in fiscal year 2001, agencies reported that 24 percent of their eligible service contracts, by dollar value, were performance-based. However, there was wide variation in the extent to which agencies used performance-based contracts. As figure 2 shows, 3 of the 10 agencies in our review fell short of the Office of Management and Budget's goal that 10 percent of eligible service contracts be performance-based. In our September 2002 report, we recommended that the Administrator of the Office of Federal Procurement Policy clarify existing guidance to ensure that performance-based contracting is appropriately used, particularly when acquiring more unique and complex services that require strong government oversight. If section 401 is enacted, we believe that clear guidance will be needed to ensure effective implementation. The Office of Federal Procurement Policy might be assisted in developing and updating meaningful guidance by establishing a center for excellence to identify best practices in service contracting, as required by section 401. A center for excellence may help federal agencies learn about successful ways to implement performance-based contracting. Section 501 would authorize those civilian agencies approved by the Office of Management and Budget to use so-called "other transactions" for projects related to defense against or recovery from terrorism, or nuclear, biological, chemical, or radiological attacks. Other transactions are agreements that are not contracts, grants, or cooperative agreements. This authority would be similar to that currently available to the Departments of Homeland Security and Defense. Because statutes that apply only to procurement contracts do not apply to other transactions, this authority may be useful to agencies in attracting firms that traditionally decline to do business with the government. In fact, our work shows that the Department of Defense has had some success in using other transactions to attract nontraditional firms to do business with the government. Our work also has shown, however, that there is a critical need for guidance on when and how other transactions may best be used. The guidance developed by the Department of Defense may prove helpful to other agencies should the Congress decide to expand the availability of other transaction authority. Section 211 provides for a streamlined payment process under which service contractors could submit invoices for payment on a biweekly or a monthly basis. Biweekly invoices would be required to be submitted electronically. While we support the intent of this proposal--to make payments to government contractors more timely--implementation of this provision could result in increased improper payments and stress already weak systems and related internal controls. Agency efforts to address improper payment problems have been hampered by high payment volume, speed of service, inadequate payment systems and processes, internal control weaknesses, and downsizing in the acquisition and financial management community. Until federal agencies make significant progress in eliminating their payment problems, requirements to accelerate service contract payments would likely increase the risk of payment errors, backlogs, and late payment interest. Section 213 would provide for agency-level protests of acquisition decisions alleged to violate law or regulation. An agency would have 20 working days to issue a decision on a protest, during which time the agency would be barred from awarding a contract or continuing with performance if a contract already had been awarded. If an agency-level protest were denied, a subsequent protest to GAO that raised the same grounds and was filed within 5 days would trigger a further stay pending resolution of that protest. We believe that a protest process that is effective, expeditious, and independent serves the interests of all those involved in or affected by the procurement system. Section 213 appears to address each of these criteria. First, although protests currently may be filed with the procuring agencies, section 213 would provide for a more effective agency-level protest process by requiring that an agency suspend, or "stay," the procurement until the protest is resolved. Second, the process would be relatively expeditious because decisions would be required within 20 working days. Having an expeditious process at the agency is especially important because section 213 would provide for a stay both during the agency-level protest and then during any subsequent GAO protest. It should be noted, though, that 20 working days may not be adequate for a thorough review, particularly in complex procurements. Finally, requiring protests to be decided by the head of the agency may help to mitigate longstanding concerns about a perceived lack of independence when decisions on agency-level protests are issued by officials closely connected with the decision being protested. Section 402 would provide for a change to the Federal Acquisition Regulation to include the use of time-and-materials and labor-hour contracts for commercial services commonly sold to the general public. This change would make it clear that such contracts are specifically authorized for commercial services. The Federal Acquisition Regulation states that a time-and-materials contract may be used only when it is not possible to estimate accurately the extent or duration of the work or to anticipate costs with any reasonable degree of confidence. Therefore, adequate surveillance is required to give reasonable assurance that the contractor is using efficient methods and effective cost controls. Section 404 would designate as a commercial item any product or service sold by a commercial entity that over the past 3 years made 90 percent of its sales to private sector entities. We are concerned that the provision allows for products or services that had never been sold or offered for sale in the commercial marketplace to be considered a commercial item. In such cases, the government may not be able to rely on the assurances of the marketplace in terms of the quality and pricing of the product or service. The growth in spending on service contracts, combined with decreases in the acquisition workforce and an increase in the number of high-dollar procurement actions, create a challenging acquisition environment. It is important that agencies have the authorities and tools they need to maximize their performance in this new environment. The initiatives contained in SARA address a number of longstanding issues in contracting for services, and should enable agencies to improve their performance in this area. Mr. Chairman, this concludes my statement. I will be happy to answer any questions you may have. Contact and Acknowledgments For further information, please contact William T. Woods at (202) 512-4841. Individuals making key contributions to this testimony include Blake Ainsworth, Christina Cromley, Timothy DiNapoli, Gayle Fischer, Paul Greeley, Oscar Mardis, and Karen Sloan.

Since 1997, federal spending on services has grown 11 percent and now represents more than 60 percent of contract spending governmentwide. Several significant changes in the government--including funding for homeland security--are expected to further increase spending on services. Adjusting to this new environment has proven difficult. Agencies need to improve in a number of areas: sustaining executive leadership, strengthening the acquisition workforce, and encouraging innovative contracting approaches. Improving these areas is a key goal of the proposed Services Acquisition Reform Act (SARA). The growth in spending on service contracts, combined with decreases in the acquisition workforce and an increase in the number of high-dollar procurement actions, create a challenging acquisition environment. It is important that agencies have the authorities and tools they need to maximize their performance in this new environment. The initiatives contained in SARA address a number of longstanding issues in contracting for services, and should enable agencies to improve their performance in this area. For example: (1) Section 201: Chief Acquisition Officers: Appointing a Chief Acquisition Officer would establish a clear line of authority, accountability, and responsibility for acquisition decisionmaking; and (2) Section 103: Government-Industry Exchange Program: A professional exchange program would allow federal agencies to gain from the knowledge and expertise of the commercial acquisition workforce. At the same time, GAO is concerned about some provisions in SARA. For example: (1) Section 211: Ensuring Efficient Payment: While GAO supports the intent of this proposal to make payments to government contractors more timely, GAO has reservations concerning its implementation. GAO's work shows that agencies have been hampered by problems such as high payment volume, inadequate payment systems, and weak controls.

As shown in figure 1, each of the 16 parts we purchased was either suspect counterfeit or bogus. Specifically, all 12 of the parts we received after requesting authentic part numbers (either with valid or invalid date codes) were suspect counterfeit, according to SMT Corp. In addition, vendors provided us with 4 bogus parts after we requested invalid part numbers, which demonstrates their willingness to sell parts that do not technically exist. The following sections detail our findings for each of the three categories of parts we purchased. Under our selection methodology, the 16 parts we purchased were provided by 13 vendors in China. After submitting requests for quotes on both platforms, we received responses from 396 vendors, of which 334 were located in China; 25 in the United States; and 37 in other countries, including the United Kingdom and Japan. All 40 of the responses we received for the bogus part numbers were from vendors located in China (6 of these vendors also offered to sell us parts for the authentic part numbers we requested). We selected the first of any vendor among those offering the lowest prices that provided enough information to purchase a As such, 3 vendors each supplied 2 given part, generally within 2 weeks.parts and 10 vendors each supplied 1 part. We sent 13 payments to Shenzhen, 2 payments to Shantou, and 1 payment to Beijing. Despite operating under different company names, 2 vendors provided us with identical information for sending payment (name of representative and contact information). There could be a number of explanations for this, ranging from legitimate (the vendors handle payments through the same banker or accountant) to potentially deceptive (same individuals representing themselves as multiple companies). Thirteen parts were then shipped from Shenzhen and 3 from Hong Kong. All seven of the obsolete or rare parts that SMT Corp. tested were suspected counterfeits. Each part failed multiple component authentication analyses, including visual, chemical, X-ray, and microscopic testing. The parts were purchased from five different vendors. Figure 2 provides photos and detailed test results for each part. DAA6 (two parts purchased). Both purchases made using part number DAA6 contained samples that failed multiple authentication analyses, leading SMT Corp. to conclude that the parts were suspect counterfeit. Both parts were purchased from different vendors using the same part number, but were not identical, as shown in figure 2. An authentic part with this part number is an operational amplifier that may be commonly found in the Army and Air Force's Joint Surveillance and Target Attack Radar System; the Air Force's F-15 Eagle fighter plane; and the Air Force, Navy, and Marine Corps's Maverick AGM-65A missile. If authentic, this part converts input voltages into output voltages that can be hundreds to thousands of times larger. Failure can lead to unreliable operation of several components (e.g., integrated circuits) in the system and poses risks to the function of the system where the parts reside. The part we received from one vendor failed four of seven authentication analyses. Visual inspection found inconsistencies, including different or missing markings and scratches, which suggested that samples were re- marked. Scanning electron microscopy (SEM) analysis revealed further evidence of re-marking. X-ray fluorescence (XRF) testing of the samples revealed that the leads contain no lead (Pb) instead of the 3 percent lead (Pb) required by military specifications. Five samples were chosen for delidding, which exposes parts' die, because of their side marking inconsistencies. While all five samples had the same die, the die markings were inconsistent. According to SMT Corp., die markings in components manufactured within the same date and lot code should be consistent. Finally, the devices found in the first lot tested went into "last time buy" status in 2001, meaning that the parts were misrepresented as newer than they actually were. The manufacturer confirmed this status and added that the part marking did not match its marking scheme, meaning that the date code marked on the samples would not be possible. The part received from the second vendor failed five of seven authentication analyses. Visual inspection again found inconsistencies, including additional markings on about half the samples. Further, scratches and reconditioned leads indicated that the parts were removed from a working environment--that is, not new as we requested. SEM analysis corroborated these findings. As with the other DAA6 part, XRF testing revealed that the leads contain no lead (Pb). X-rays revealed different sized die, and delidding revealed that the die were differently marked. IHH1 (one part purchased). The purchase made using part number IHH1 contained samples that failed five of nine authentication analyses, leading SMT Corp. to conclude that the part was suspect counterfeit. An authentic part with this part number is a multiplexer, which allows electronic signals from several different sources to be checked at one location. It has been used in at least 63 different DOD weapon systems, including the Air Force Special Operations Forces' AC-130H Gunship aircraft, the Air Force's B-2B aircraft, and the Navy's E-2C Hawkeye aircraft. If at least one of the specific signals is critical to the successful operation of the system, then failure could pose a risk to the system overall. Visual inspection revealed numerous issues, including color differences in the top and bottom of the part's surfaces, suggesting resurfacing and re- marking. Large amounts of scuffs and scratches, foreign debris, and substandard leads were also found. The part also failed resistance to solvents (RTS) testing when it resulted in removal of resurfacing material. Further, Dynasolve testing (additional RTS testing) revealed remnants of a completely different manufacturer and part number. SEM showed evidence of lapping, which is the precise removal of a part's material to produce the desired dimensions, finish, or shape. Finally, delidding showed die that were similar but insufficiently marked to determine whether they matched the authentic part number. However, because of the failure of the Dynasolve testing, the die cannot be correct. MLL1 (two parts purchased). Both purchases made using part number MLL1 contained a number of samples that failed three of seven authentication analyses, leading SMT Corp. to conclude that the parts were suspect counterfeit. Both parts were purchased from different vendors using the same part number, but were not identical, as shown in figure 2. An authentic part with this number is a voltage regulator that may be commonly found in military systems such as the Air Force's KC-130 Hercules aircraft, the Navy's F/A-18E Super Hornet fighter plane, the Marine Corps's V-22 Osprey aircraft, and the Navy's SSN-688 Los Angeles Class nuclear-powered attack submarine. If authentic, these parts provide accurate power voltage to segments of the system they serve. Failure can lead to unreliable operation of several components (e.g., integrated circuits) in the system and poses risks to the function of the system where the parts reside. The parts received from both vendors failed the same authentication analyses. Visual inspection was performed on all evidence samples from both purchases. Different color epoxy seals were noted within both lots, according to SMT Corp., which is common in suspect counterfeit devices because many date and lot codes are re-marked to create a uniform appearance. Moreover, XRF testing of the samples revealed that the leads contain no lead (Pb); according to military performance standards, leads should be alloyed with at least 3 percent of lead (Pb). Further, XRF data between the top and bottom of the lead revealed inconsistencies in chemical composition, leading SMT Corp. to conclude that the leads were extended with the intention to deceive. Microscopic inspection revealed that different revision numbers of the die and differences in various die markings were found even though the samples were advertised to be from the same lot and date code. Commonly, components manufactured within the same date and lot code will have the same die revisions. According to SMT Corp.'s report, the manufacturer also stated that "it is very unusual to have two die runs in a common assembly lot. This is suspicious." Finally, the devices found in the first lot tested went into "last time buy" status--an end-of-life designation--on September 4, 2001, meaning that the parts were misrepresented as newer than they actually were. The manufacturer confirmed this status and added that the part marking did not match its marking scheme, meaning that the date code marked on the samples would not be possible. YCC7 (two parts purchased). Both purchases made using part number YCC7 contained samples that failed several authentication analyses, leading SMT Corp. to conclude that the parts were suspect counterfeit. Both parts were purchased from different vendors using the same part number. An authentic part with this part number is a memory chip that has been used in at least 41 different DOD weapons systems, including the ballistic missile early warning system, the Air Force's Peacekeeper missile and B-1B aircraft, the Navy's Trident submarine and Arleigh Burke class of guided missile destroyer, and the Marine Corps's Harrier aircraft. Failure of the chip, if not redundant, could pose risk to the overall system. The part we received from one vendor failed four of seven authentication analyses. Visual inspection identified numerous issues, including bent or misshapen leads and lead ends and deformed, less-detailed logos of the claimed manufacturer. X-ray analysis revealed that various parts in the samples contained different sized die. SEM analysis showed that surface material had been precisely removed to allow for re-marking. Finally, delidding of two samples revealed die that were marked from a competitor manufacturer with a different part number than the one we requested. In addition, one die was marked with a 1986 copyright, while the other was labeled 1992. The part received from the second vendor failed four of nine authentication analyses. Visual inspection showed evidence of re- marking, with the color of the top surfaces of samples not matching the color of the bottom surfaces. Some samples displayed faded markings while others were blank and had heavy scuff marks to suggest resurfacing. The markings were also not as clear and consistently placed as manufacturer-etched markings would be. Leads were substandard in quality, had been refurbished, and were not as thick as specified. Further, SEM showed evidence of lapping. Finally, the samples responded inconsistently to Dynasolve testing. Similarly, all five of the parts we received and tested after requesting legitimate part numbers but specifying postproduction date codes were also suspected counterfeit, according to SMT Corp. By fulfilling our requests, the four vendors that provided these parts represented them as several years newer than the date the parts were last manufactured, as verified by the part manufacturers. Figure 3 provides photos and detailed test results. DAA6 (one part purchased). The purchase made using part number DAA6 contained samples that failed four of seven authentication analyses, leading SMT Corp. to conclude that the part was suspect counterfeit. Surfaces on the parts in the evidence lots were found to have scratches similar to suspect counterfeit devices that have been re- marked, as confirmed by both visual inspection and SEM analysis. In addition, the quality of exterior markings, including a lack of consistency between the manufacturer's logo, was lower than would be expected for authentic devices. Tooling marks were also found on the bottom of all components within the evidence lot; these marks suggest that the components were pulled from a working environment. Further inspection led SMT Corp. to conclude that many samples with refurbished leads were extended with the intention to deceive. Moreover, XRF analysis revealed the leads contain no lead (Pb) instead of the 3 percent lead (Pb) required by military specifications. Delidding revealed that the die, while correct for this device, were inconsistent. As previously stated, multiple die runs are considered suspicious. Finally, some of the samples went into "last time buy" status in 2001, despite the fact that we requested parts from 2005 or later and the vendor agreed to provide parts from 2010 or later. IHH1 (one part purchased). The purchase made using part number IHH1 contained samples that failed seven of nine authentication analyses, leading SMT Corp. to conclude that the part was suspect counterfeit. The part we received was supplied by a different vendor than the one that supplied the IHH1 part shown in figure 2. Visual inspection revealed numerous issues, including mismatching surface colors, many scratches and scuffs, foreign debris, and leads that were not uniformly aligned. SEM also showed evidence of lapping. RTS testing resulted in removal of resurfacing material, and surfaces faded when exposed to Dynasolve, which should not occur. Further, samples did not solder properly. Finally, X-rays indicated that different die were used within the samples. This was confirmed in delidding, which revealed inconsistencies in size, shape, and date markings. Of the two types of die found in the sample, one does not match the authentic part number. MLL1 (one part purchased). The purchase made using part number MLL1 contained samples that failed four of seven authentication analyses, leading SMT Corp. to conclude that the part was suspect counterfeit. The part we received was supplied by a different vendor than the ones who supplied the MLL1 parts shown in figure 2. Visual inspection revealed scuffs and scratches indicative of re-marking, which was also seen in SEM analysis. Different colored epoxy seals and variegated sizes and colors of the center mounting slug were also seen. Leads also showed evidence of being refurbished with the intent to deceive. XRF testing of the samples revealed that the leads contain no lead (Pb); according to military performance standards, leads should be alloyed with at least 3 percent of lead (Pb). Delidding revealed that die, though similar, had markings indicating different revisions, which is uncommon for die manufactured in the same date code. Finally, the devices went into "last time buy" status in 2001, whereas the tested parts showed a date code indicating they were made in 2008. The manufacturer confirmed this status. YCC7 (two parts purchased). The two purchases made from different vendors using part number YCC7 contained samples that failed several authentication analyses, leading SMT Corp. to conclude that they were suspect counterfeit. The part we received from one vendor failed three of eight authentication analyses. Visual inspection identified numerous issues, including different colored surfaces that suggest re-marking and unknown residues that indicate improper handling or storage. SEM analysis showed that surface material had been precisely removed to allow for re-marking, similarly to a YCC7 part with legitimate date codes tested above. Further, according to the manufacturer, the legitimate version of this part was last shipped in 2003, whereas the tested part showed a manufacturing date code of 2006. RTS testing resulted in removal of the part marking. The part received from the second vendor failed three of nine authentication analyses. Visual inspection detected numerous issues, including different colored surfaces that suggest re-marking. The markings were also substandard, lacking clarity and consistency in placement. RTS testing removed part markings, further suggesting re- marking. SEM showed evidence of lapping. Delidding revealed die that were consistent with the authentic part, but the date code showed evidence of re-marking to make them appear as if they had come from a homogenous lot. Finally, the manufacturer verified that it last shipped this part in 2003, whereas our samples were marked 2007, which according to SMT Corp., could not be possible. We received offers from 40 vendors in China to supply parts using invalid part numbers, and we purchased four parts from four vendors to determine whether they would in fact supply bogus parts. (See fig. 4.) These were different vendors than the ones that supplied us with the suspect counterfeit parts. The invalid numbers were based on actual part numbers, but certain portions that define a part's performance specifications were changed. For example, one of our invalid numbers was for an actual voltage regulator but that operated at bogus specifications. None of the invalid part numbers were listed in DLA's Federal Logistics Information System and, according to selected manufacturers, none are associated with parts that have ever been manufactured. As such, we did not send the parts to SMT Corp. for authentication analysis. We received the four bogus parts after requesting invalid part numbers DAA5, GDD4, and 3MM8. We made two orders using DAA5, one from each Internet purchasing platform, which were fulfilled by different vendors. The parts we received from each vendor appeared similar, as shown in figure 4. The similarity may be due to a number of factors. For example, the vendors could have simply ignored the invalid portion of the part numbers we requested (they did not contact us to inform us that the numbers were invalid). Another possible explanation could be that the parts happened to be fulfilled by the same vendor operating under two different names. In furtherance of our investigation to determine the willingness of firms to provide us bogus parts, we created a totally fictitious part number that was not based on an actual part number and requested quotations over one Internet platform. We received an offer to supply the part from one vendor, but did not invest the resources to purchase the bogus part. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the appropriate congressional committees, the Acting Under Secretary of Defense for Acquisition, Technology, and Logistics, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report or need additional information, please contact Richard Hillman at (202) 512-6722 or [email protected] or Timothy Persons at (202) 512-6522 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Other key contributors to this report are listed in appendix II. This appendix provides details on each of the tests that constitute the authentication analysis SMT Corp. conducted for the parts we purchased. Visual inspection: Visual inspection is performed on a predetermined number of samples (usually 100 percent) to look for legitimate nonconformance issues as well as any red flags commonly found within suspect counterfeit devices. Resistance to solvents (RTS): A mixture of mineral spirits and isopropyl alcohol is used to determine the part marking resistance and pure acetone is used to remove any resurface material. This test is not performed on all parts. In some cases, resurfacing material would not be used by counterfeiters to re-mark a part; in others, the solvents would remove markings even on legitimate parts. X-ray florescence (XRF) elemental analysis: The XRF gathers and measures the elements within a target area. This is used specifically for testing components for RoHS or Hi-Rel conformance, which refer to dangerous substances such as lead (Pb), cadmium (Cd), and mercury (Hg) that are commonly used in electronics manufacturing. For suspect counterfeit devices, it helps determine if a component has the correct plating for the specification it supposed to adhere to. Package configuration and dimensions: This test measures key areas of the device to see if they fall within industry specifications. Real-time X-ray analysis: X-ray analysis is performed on a predetermined number of samples (usually 100 percent). The internal construction of components is inspected (depending on the component package type) for legitimate issues such as broken/taut bond wires, electrostatic discharge damage, broken die, and so forth. For suspect counterfeit devices, the differences in die size/shape, lead frames, bond wire layout, and so forth are inspected. Scanning electron microscopy: A scanning electron microscope is used to perform an exterior visual inspection--more in depth than the previous visual inspection. This is usually performed on a two-piece sample from the evidence lot. Depending on the package type, indications of suspect counterfeit devices are sought, including surface lapping, sandblasting, and sanding with regard to part marking removal. Solderability: This test is usually for legitimate components to determine if they will solder properly when they are used in production. Dynasolve: Dynasolve is a chemical used to break down epoxies in an effort to remove resurfacing material that is impervious to the standard RTS test. Decapsulation/delidding and die verification: The die of a component is exposed with either corrosive materials or a cutting apparatus. This is done to inspect the die or "brain" of a component to determine its legitimacy. This process is performed on numerous samples to look for differences between samples, such as die metallization layout, revisions, part numbers, and so forth--all of which are red flags for suspect counterfeit parts. Cindy Brown Barnes, Assistant Director; Gary Bianchi, Assistant Director; Virginia Chanley; Dennis Fauber; Barbara Lewis; Jeffery McDermott; Maria McMullen; Kimberly Perteet, Analyst in Charge; Ramon Rodriguez; and Timothy Walker made key contributions to this report.

Counterfeit parts--generally the misrepresentation of parts' identity or pedigree--can seriously disrupt the Department of Defense (DOD) supply chain, harm weapon systems integrity, and endanger troops' lives. In a November testimony (GAO-12-213T), GAO summarized preliminary observations from its investigation into the purchase and authenticity testing of selected, military-grade electronic parts that may enter the DOD supply chain. As requested, this report presents GAO's final findings on this issue. The results are based on a nongeneralizable sample and cannot be used to make inferences about the extent to which parts are being counterfeited. GAO created a fictitious company and gained membership to two Internet platforms providing access to vendors selling military-grade electronic parts. GAO requested quotes from numerous vendors to purchase a total of 16 parts from three categories: (1) authentic part numbers for obsolete and rare parts; (2) authentic part numbers with postproduction date codes (date code after the last date the part was manufactured); and (3) bogus, or fictitious, part numbers that are not associated with any authentic parts. To determine whether the parts received were counterfeit, GAO contracted with a qualified, independent testing lab for full component authentication analysis of the first two categories of parts, but not the third (bogus) category. Part numbers have been altered for reporting purposes. GAO is not making recommendations in this report. Suspect counterfeit and bogus--part numbers that are not associated with any authentic parts--military-grade electronic parts can be found on Internet purchasing platforms, as none of the 16 parts vendors provided to GAO were legitimate. "Suspect counterfeit," which applies to the first two categories of parts that were tested, is the strongest term used by an independent testing lab, signifying a potential violation of intellectual property rights, copyrights, or trademark laws, or misrepresentation to defraud or deceive. After submitting requests for quotes on both platforms, GAO received responses from 396 vendors, of which 334 were located in China; 25 in the United States; and 37 in other countries, including the United Kingdom and Japan. Of the 16 parts purchased, vendors usually responded within a day. GAO selected the first of any vendor among those offering the lowest prices that provided enough information to purchase a given part, generally within 2 weeks. Under GAO's selection methodology, all 16 parts were provided by vendors in China. Specifically, all 12 of the parts received after GAO requested rare part numbers or postproduction date codes were suspect counterfeit, according to the testing lab. Multiple authentication tests, ranging from inspection with electron microscopes to X-ray analysis, revealed that the parts had been re-marked to display the part numbers and manufacturer logos of authentic parts. Other features were found to be deficient from military standards, such as the metallic composition of certain pieces. For the parts requested using postproduction date codes, the vendors also altered date markings to represent the parts as newer than when they were last manufactured, as verified by the parts' makers. Finally, after submitting requests for bogus parts using invalid part numbers, GAO purchased four parts from four vendors, which shows their willingness to supply parts that do not technically exist.

MMA enacted and affected a number of activities that SSA identified as related to its responsibilities. Listed are six provisions enumerated in MMA affecting SSA, and the Medicare-related functions and activities undertaken by SSA as a result. Prescription Drug Program (Part D) and Low Income Subsidy (LIS)-In addition to establishing a beneficiary outreach demonstration project for this provision, SSA is responsible for developing forms and procedures for LIS including a simplified application, conducting education and outreach activities, and processing LIS appeals. In addition, SSA will use computer matching data for verification of attestations, process subsidy-changing events, periodically redetermine LIS eligibility, and deduct Part D premiums when the beneficiary chooses to have their premium withheld from their Title II benefit payment and the Centers for Medicare and Medicaid Services (CMS) notifies SSA of this. SSA was also responsible for transferring premiums withheld from Title II benefit payments to CMS. Medicare Prescription Drug Discount Card Program-SSA will support CMS administration of this program by providing data from SSA's records and data obtained from other federal agencies on potentially eligible Medicare beneficiaries for transitional assistance. TRICARE-SSA will be responsible for enrolling TRICARE beneficiaries into Medicare Part B, calculating their premiums, and refunding excess premiums paid. Medicare Part B Premium-SSA is tasked with implementing Medicare Part B income-based premium subsidy reductions for beneficiaries with income above a stipulated level. SSA will also collect the income- related monthly amount from the Title II benefit payment and transfer the premiums withheld from Title II benefit payments to CMS, and process appeals of the initial determination. Medicare Advantage (MA) Part C-SSA will compute and collect Part C premiums when the beneficiary chooses to have premiums deducted from his or her Title II benefit payment and transfer premiums withheld from Title II benefit payments to CMS. Health Savings Accounts-SSA will obtain information from employer reports, record the information on SSA's records, and pass the information to the Internal Revenue Service. As a result of the enactment of MMA, SSA conducts outreach efforts to identify individuals entitled to benefits or enrolled under the Medicare program under Title 18 of the Social Security Act, who may be eligible for transitional assistance under the Medicare Prescription Drug Discount Card Program and premium and cost-sharing subsidies under the Prescription Drug Card Part D Program. SSA continues to have a role in the outreach to low-income Medicare beneficiaries for payment of Medicare cost-sharing under the Medicaid program. SSA is also required to verify the eligibility of applicants for the subsidy under MMA who self- certify their income, resources, and family size. To determine whether a Medicare beneficiary is eligible for a subsidy, SSA collects information on whether the individual has income up to 150 percent of the federal poverty guidelines. SSA has established a database to maintain the information it collects and shares information on those eligible and ineligible for subsidies with CMS. To implement the new responsibilities under MMA, SSA established a Medicare Prescription Drug Planning and Implementation Task Force in December 2003. The objectives of the task force included identifying the potentially eligible population, the number and locations of potential workloads and staff and material resource needs, and agreeing on specific responsibilities with other federal government agencies. SSA also identified the specific tasks to carry out the implementation of the activities for each of the provisions under MMA, including designing and managing the planning and implementation processes; issuing regulations; and developing and implementing communication strategies, budget, appeals process, subsidy-changing event process, redetermination process, and strategies for service delivery. Under MMA, the Congress provided SSA with a $500 million appropriation to fund SSA's start-up administrative costs to implement MMA, during fiscal years 2004 and 2005, but later extended this budget authority to fiscal year 2006. SSA reported that the $500 million for these administrative costs was exhausted in January 2006, and MMA costs are now funded using the LAE. LAE is SSA's basic administrative account and is an annual appropriation financed from the Social Security and Medicare trust funds. The total amount of SSA administrative costs covered by the Medicare Trust Funds to fund SSA's Medicare responsibilities has increased with the enactment of MMA. Prior to the establishment of Part D under MMA, Medicare did not generally pay for outpatient prescription drugs, but it did provide health insurance to individuals who are either 65 or older or disabled. Table 1 reflects SSA's reported administrative cost outlays covered by the Medicare Trust Funds for implementing MMA activities and other Medicare activities. SSA reported spending the $500 million MMA funds from December 2003 through January 2006 on activities to implement the provisions specified in MMA. SSA's financial reports showed that almost all of the funding reported was used for personnel-related expenses, contractors, and indirect costs (see table 2). More than half of the funds were spent on personnel-related expenses for staff hours used on MMA activities at SSA's headquarters and field offices. Once the $500 million was spent, MMA costs were funded by SSA's LAE appropriation. SSA used its financial accounting and reporting system, SSOARS, and its cost analysis system (CAS) to track overall costs related to the implementation of MMA legislation. SSA did not separately track the administrative costs incurred to implement the individual provisions under MMA legislation because the act did not specifically require SSA to do so and it was not cost effective to do so. SSA reported that it spent approximately $261 million on personnel-related expenses, which consisted of salaries and related benefits for both newly hired and existing SSA employees. As a result of MMA, SSA hired and trained more than 2,200 new employees at its field offices and 500 at headquarters to handle the additional workload created by SSA's new responsibilities under MMA. Personnel-related expenses included salaries for current SSA employees who were also involved in activities related to implementing MMA, including the new Medicare Part D responsibilities. Many of these employees may have been engaged in work on other SSA programs during the same time. SSA used CAS to prorate these employees' salaries and related expenses based on the amount of time employees charged to MMA and various other SSA responsibilities. SSA reported indirect costs of approximately $117 million for MMA implementation. During each year, SSA incurred administrative costs in support of the various programs. For example, SSA makes rental payments for most of the approximately 1,300 regional field offices it has located around the country and staff in these offices perform duties related to all of the programs administered by SSA, including MMA. In order to allocate these administrative costs to each of its programs, SSA used its cost analysis system, CAS, to charge certain types of costs either proportionally or in full against the MMA appropriation. SSA charges both direct and indirect costs to its programs either by directly charging specific program- related amounts to the affected program in SSOARS or using CAS to allocate personnel-related and general administrative costs that apply to more than one SSA program. CAS accounts for work-years and costs for each program administered by SSA by specific subfunctions within the SSA programs. It is a centralized, computer-based system that uses data from the financial reporting system to break out costs at SSA by program and major functions. The main objective of CAS is to distribute costs equitably across programs and among the various trust funds and general funds. However, SSA stated that systems modifications to enable tracking MMA administrative costs by each of the MMA provisions were not required by the legislation and that it would not have been cost effective to modify the system. SSA reported that $119.6 million in MMA funds went to contractors, vendors, and other government agencies that provided various goods and services necessary for SSA to meet its responsibilities under MMA. Some of the largest reported expenditures included $34.2 million paid to one contractor for software systems development $23 million paid to one contractor for telephone-based beneficiary outreach and information distribution; $18.6 million to the United States Postal Service for mass mailings and other paper-based information distribution; $11.4 million to one contractor for computer hardware and software $6.5 million to the Government Printing Office for the design and production of informational mailings, posters, and other printed materials. The remaining expenditures to other contractors, vendors, and government agencies for goods and services charged to the MMA implementation appropriation included additional computer hardware, software development, and information systems support, as well as installation and reconfiguration of MMA service centers workstations. As of February 2007, SSA reported it had completed 16 of the 22 tasks for implementing six provisions of MMA. SSA is continuing its implementation of the remaining six tasks using LAE funding. Table 3 provides a breakdown of the 22 tasks by major MMA provision. SSA had agencywide policies and procedures in place over its cost tracking and allocation, asset accountability, and invoice review and approval processes. SSA also established specific guidance to charge and allocate its costs to implement MMA. However, those policies and procedures were not always complied with consistently. We found that SSA did not effectively communicate the specific MMA-related guidance to all relevant staff. This ineffective communication resulted in millions of dollars of costs being misallocated to MMA. Some of these misallocations were subsequently detected by SSA and corrected during SSA's review process. In the area of purchase card transactions, which represented 0.5 percent of the $500 million, we found some instances where credit card purchases had not yet been correctly allocated to MMA. In addition, we found that some purchases made with credit cards were not properly supported or reviewed and may not have been a proper use of MMA funds. Finally, noncompliance with SSA policies and procedures over asset accountability resulted in inadequately tracked accountable assets that were purchased with MMA funds. In order to track costs associated with the development and implementation of SSA's MMA-related activities, SSA used existing processes and applications, such as CAS, expanded existing processes, such as establishing unique common accounting numbers (CAN) for MMA- related costs, and implemented new processes, such as the online time recording system for MMA-related time spent by administrative staff. In addition, SSA developed specific cost accounting principles for each of its major offices which, when appropriately applied, would enable the offices to allocate nonpersonnel costs among MMA-related activities and across other SSA operating activities. However, the lack of a formal process to ensure that this critical information was communicated to the appropriate level within the SSA offices resulted in misallocation of costs to MMA. In January 2004, SSA initiated a process to expand on its cost accounting process to track and report the cost of implementing the MMA-related activities. The Deputy Commissioner for Finance, Assessment, and Management issued a series of three memoranda to senior officials containing policies and procedures for reporting time spent and updating cost accounting principles associated with MMA planning and implementation efforts. These memoranda included accounting codes and procedures for tracking costs specific to implementing MMA activities, reporting formats for MMA-related costs, and updated cost accounting principles for LAE and MMA allocations. In May 2005 the Deputy Commissioner for Finance, Assessment, and Management issued a memorandum to the deputy commissioners and other key officers for all SSA offices, which reemphasized the need to properly account for MMA-related costs, provided updated cost accounting principles for costs associated with the planning and implementation of MMA, and requested SSA-wide assistance in accurately applying these principles. The updated cost accounting principles were included in a table that was attached to the memorandum. The table provided specific guidance for each office on the cost principle methodology to apply for specific types of costs in order to allocate the costs between the component's regular resource allocations and the MMA funding. In addition, the memorandum requested that each component identify an individual who would aid in ensuring these principles were appropriately applied. We met with SSA staff to discuss the policies and procedures in place to disseminate these critical memoranda within SSA. We found that not all staff responsible for MMA activities were aware of the guidance. We were told that there was no specific guidance related to the dissemination of key management memoranda. The May 2005 memorandum was addressed to the deputy commissioners of each of SSA's major offices, and it clearly stated the importance of applying the principles described. We obtained information and documentation from the individuals identified as the contact employee for each component to aid in the effort. We found that there was no mechanism in place to help ensure that all memoranda were disseminated to all relevant staff at SSA's headquarters and field offices. Timely and thorough communication of operational procedures is critical in ensuring that an agency is able to perform its responsibilities effectively. Our Standards for Internal Control in the Federal Government state that for an entity to run and control its operations, it must have relevant, reliable, and timely communications relating to internal as well as external events. Information is needed throughout the agency to achieve its internal control objectives. Operating information is also needed to determine whether the agency is achieving its compliance requirements under various laws and regulations. Pertinent information should be identified, captured, and distributed in a form and time frame that permits people to perform their duties efficiently. Effective communications should occur in a broad sense with information flowing down, across, and up through the organization. As a result of the ineffective communication of MMA-related guidance, at least $4.6 million of costs were initially incorrectly allocated to MMA. SSA's offices went through a process to review the allocation of the charges between MMA and LAE appropriation activities, and make appropriate adjustments. The offices identified numerous transactions and adjusted the transaction amounts to reflect the appropriate allocation of costs between MMA and the LAE appropriation. In total they identified transactions totaling more than $4.6 million that had not initially been properly allocated to LAE. However, SSA officials agreed that they had probably not identified all of the transactions that had not been properly allocated and should have been adjusted, such as purchase card purchases. In addition, during our review of the supporting documentation of MMA purchase card transactions, we found 48 purchases totaling $375,313 that had been charged entirely to MMA when a portion of those costs should have been allocated to other SSA programs. The purchases included more than 160 digital projectors, furniture, and other IT equipment such as routers, servers, and tape libraries. While some of these items were initially purchased to carry out MMA-related activities, such as beneficiary outreach, SSA realized that they would also be used for SSA programs other than MMA in the future. Therefore, according to the guidance on accounting for MMA-related expenses, the offices should have charged only one-sixth of the costs for equipment to MMA, with the remainder of the cost charged to the LAE appropriation account to be further allocated across other SSA programs. However, these costs were not allocated as described above and as a result; SSA over-allocated these costs against the MMA appropriation by approximately $313,000. SSA had policies and procedures for purchasing assets and for maintaining accountability for those assets. Included were definitions of the types of assets for which SSA required the requestor to affix bar codes for identification and record in SSA's asset inventory system. In addition, SSA issued an acquisition alert on the purchase of accountable sensitive and personal government property, which reminded purchase card holders that they were required to provide information to the requestor to ensure that the purchases were reported to their property management or custodial officers so that the property was properly bar-coded and entered into SSA's property system. However, we found in our review of accountable property purchases that for 21 of 36 transactions that we tested, the purchasers were not aware of their responsibility to provide the requestor of the property with information on the property purchased. The 36 transactions we reviewed included a total of 3,254 accountable property items with a total cost of approximately $4.2 million. As of May 25, 2007, SSA had not properly identified 317 of these items with bar codes or included these assets in the asset inventory system. These items included assets such as information technology network servers and switches, digital projectors, and other electronic equipment. These items had a total cost of approximately $1.3 million. As a result, hundreds of assets purchased with MMA funds were not properly accounted for and SSA was unable to provide us with bar codes or evidence of inclusion of those assets in SSA's asset inventory system. SSA also has guidance for credit card purchases applicable to micropurchases and purchases made by contracting officers. According to SSA policy on micro-purchasing, credit card purchases are limited to $2,500, must have funds pre-approved, and may not be used to split purchases into more than one transaction to avoid purchase limits. In addition, all credit card purchases must be documented, including written requests, approvals, and proof of purchase and delivery, and maintained by the cardholders for 3 years. Over the last several years, inspectors general and we have reported that some federal agencies do not have adequate internal control over their purchase card programs. Without effective internal control, management does not have adequate assurance that fraudulent, improper, and abusive purchases are being prevented or, if occurring, are being promptly detected with appropriate corrective actions taken. Supervisory approval of purchase requests is a principal means of ensuring that only valid transactions are initiated or entered into by persons acting within the scope of their authority, and the proper amounts are paid to contractors and appropriately charged. A supervisory review of purchase requests is also critical because a supervisor or approving official may be the only person other than the purchaser who would be in a position to identify an inappropriate purchase. Therefore, the supervisor's or approving official's review is a critical internal control for ensuring that purchases are appropriate and comply with agency regulations. However, we identified invoices that were paid for questionable amounts without the appropriate supervisory review and approval. Of the 147 purchase card transactions we reviewed, we found 45 transactions totaling $63,828 that did not have proper approval or did not have adequate support for the propriety of the purchase. While SSA's micro-purchase card policy requires the purchaser to receive an approved purchase request before acquiring goods or services, we noted instances in which the supervisory review or approval was inadequate. We identified the following 18 transactions totaling $31,914 that were initiated and completed by cardholders without proper prior approval. For 8 transactions totaling $17,454, the approvals on the request authorization form occurred after the items had already been purchased by the cardholders. For 2 transactions totaling $2,163, the authorizing signatures were provided on the request authorization form before the request was signed by the requestor. For 2 transactions totaling $3,984, SSA could not provide evidence that the electronic signatures on the purchase requests represented valid authorizations. For 6 transactions totaling $8,313, SSA did not provide evidence that the purchase requests, which authorize the purchase of goods to be made, were approved. We also found instances where the supporting documentation did not provide evidence to support that the costs were related to SSA's implementation of MMA. We found the following 27 transactions totaling $31,914 for which sufficient supporting evidence was not provided. For 6 transactions totaling $7,077, SSA did not provide any documentation to support the purchases. For 21 transactions totaling $24,837, SSA could not provide sufficient evidence of any relationship between the goods and services purchased and implementation of MMA. The items purchased included five wireless headsets, one big-screen television, remote control devices for PowerPoint presentations, and engraved items. In addition to being unable to relate these purchases to the implementation of MMA, we found no evidence these items were necessary purchases for SSA. In addition, we found evidence that one cardholder circumvented the $2,500 per transaction purchase authority by submitting four purchase requests for the purchase of audio and video media (CDs, DVDs, and VHS tapes) from a single vendor on the same day. As a result, the cardholder ultimately paid a total of $4,365 for four invoices, which was $1,865 above the $2,500 purchase authority limit. SSA had existing policies and procedures in place to track and report the total costs it incurred to implement MMA provisions and to maintain accountability and control over its MMA-related activities. However, procedures and controls over purchase card transactions and asset accountability could be improved. Although purchase card transactions and accountable asset purchases represented a small percentage of the total MMA administrative costs that were paid with MMA funds, having effective controls in place to ensure the proper approval, support, and accountability for these transactions is essential to reduce the risk of improper purchases and improperly accounted for assets. To enhance SSA's (1) ability to track the costs of program activities including MMA administrative costs, (2) controls over its review and approval processes for purchase card payments, and (3) tracking of its accountable assets, we recommend that the Commissioner of Social Security establish procedures to ensure better dissemination of policies and procedures to all relevant offices and staff; establish additional detailed procedures for a purchase card supporting documentation review and approval process to help ensure that purchase card payments are properly supported, allowable, and allocated; and reinforce existing policies and procedures for the purchase of accountable assets to ensure that accountable assets are bar coded, recorded in SSA's asset inventory system, and inventoried periodically. In written comments reprinted in appendix II, SSA generally agreed with two of our recommendations, but disagreed with one recommendation. SSA also stated its belief that our report title, SSA Policies and Procedures Were in Place over MMA Spending, but Some Instances of Noncompliance Occurred, did not accurately reflect the findings in the report since it believed there was compliance with its policies and procedures. SSA also believes our characterization of the cause of SSA's misallocation of costs to MMA as ineffective communication needs to be modified, and pointed out that there was no mention of the remaining misallocated credit card transactions representing only 0.06 percent of the total amount appropriated. SSA suggested the change in the report title because SSA had identified and corrected the $4.6 million initially incorrectly allocated to MMA and the remaining uncorrected instances were insignificant to the total amount appropriated. However, the areas where policies and procedures were not complied with also included misallocated credit card purchases not corrected (which represented more than 10 percent of the dollar value of the credit card purchases charged to MMA), and maintaining accountability over assets purchased with MMA funds. Therefore, we continue to believe that the title of our report accurately characterizes our findings. SSA agreed in theory with our recommendation to establish procedures to better disseminate policies and procedures, but stated its belief that the recommendation was too broad and did not accurately reflect what needed to be done. SSA stated that it will provide more specific instructions for distribution of costs in future guidance. SSA also believed that it had sufficient dissemination methods for acquisition related issues. Our recommendation was intentionally broad to provide SSA management flexibility to determine the most appropriate steps it should take to ensure the complete dissemination of future guidance. To that end, SSA including more specific instructions in future memoranda guidance would provide a corrective action that would be sufficient to address our recommendation. SSA disagreed with our recommendation to establish additional detailed procedures for reviewing and approving supporting documentation for credit card purchases to help ensure that purchase card payments are properly supported, allowable, and allocated. SSA stated its belief that our recommendation was too broad and its guidance for contracting officers and micro-purchasers is sufficient. While SSA stated its belief that its guidance is sufficient and that its contracting officers are already aware of the file documentation required for purchases, we found that 45 of 147 (30 percent) credit card purchases we reviewed did not have proper authorization or complete documentation. This is an unacceptable error rate. We agree that our recommendation is broad, but it is intended to allow SSA the flexibility to determine the most appropriate actions needed to help ensure that there is sufficient evidence available to determine that all credit card purchases are properly approved, supported, allowable, and allocable. SSA pointed out that its current "remote" reviews of micropurchases made in the regions do not include a full file review, and that SSA is considering changing this process to include such reviews. SSA agreed with our recommendation to reinforce existing policies and procedures for accountable asset purchases to help ensure that those assets are bar coded, recorded in SSA's asset inventory system, and inventoried periodically. SSA also identified its plan to include an acquisition topics website on one of its intranet pages by September 2007 and listed several actions undertaken since December 2006 to reinforce existing policies and procedures and to implement an improvement work plan. SSA also provided additional technical comments, which have been included in the report as appropriate. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from its date. At that time, we will send copies of this report to the Commissioner of SSA, and other interested parties. Copies will also be made available at no charge on GAO's Web site at http://www.gao.gov. If you have questions concerning this report, please call me on (202) 512-9471. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made contributions to this report are listed in appendix III. To review the costs of the Social Security Administration's (SSA) implementation of MMA activities, we reviewed the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 and discussed its impact with SSA to obtain an understanding of SSA's responsibilities under the act. We also reviewed the policies and regulations SSA established to track and report MMA-related costs and other information pertaining to its program activities, as well as additional guidance provided to SSA officials so that they could track the costs of new MMA- related activities. We obtained cost and other information on SSA's implementation activities from SSA officials in the agency's headquarters in Baltimore, Maryland. In addition, we discussed specific cost information with various officials and staff in headquarters and field offices who were responsible for specific transactions. To obtain specific cost and program information, as well as information related to specific financial statement issues, we reviewed our reports and reports from SSA's independent financial statement auditors. To determine how SSA expended the MMA funds to implement MMA activities, we obtained annual schedules of amounts charged to MMA for fiscal years 2004 (starting in December 2003), 2005, and 2006. We analyzed the expenditure data, sorted it by object class, and segregated the amounts charged to the Limitation on Administrative Expenses appropriation after the $500 million of MMA funding had been used by SSA. We discussed our sorted detailed analysis with SSA budget and finance officials. We also compared expenditure data to audited Social Security Online Accounting and Reporting System (SSOARS) data and determined that the data were sufficiently reliable for the purposes of this report. To determine what procedures SSA had in place over the MMA funds, we reviewed MMA and SSA policies, procedures, and other guidance and interviewed key SSA officials for information on the contract procurement, payroll, cost accounting, budget, and payment processes to obtain a thorough understanding of each process. We also conducted follow-up discussions to verify our understanding of all key processes related to spending MMA funds. We reviewed SSA's independent financial statement auditors' reports and audit documentation to determine the level of audit coverage provided in the payroll; property, plant, and equipment; and cost accounting areas, plus any internal control weaknesses identified. On the basis of the clean audit opinion on SSA's financial statements and no related findings, we did not perform testing on the payroll and cost accounting areas. As a result, we focused our testing of transactions on contractor and vendor payments. To determine whether SSA's contractor expenditures were properly supported as valid uses of MMA funds, we selected and tested a monetary unit sample of 59 transactions totaling $82.6 million from a population of 20,736 transactions totaling $123.5 million paid from January 2004 through February 2006. We found no exceptions during testing. We also used various nonstatistical sampling methods (data mining, document analysis, and other forensic techniques) to nonstatistically select 208 transactions to test adequate supporting documentation of requests, authorization, evidence of purchase and receipt, and applicability to MMA. We discussed all testing exceptions with the appropriate SSA officials and staff involved with the specific transaction. We conducted our work in Washington, D.C., and Baltimore, Md., from March 2006 through April 2007 in accordance with generally accepted government auditing standards. Appendix II: Comments from the Social Security Administration COMMENTS ON THE GOVERNMENT ACCOUNTABILITY OFFICE (GAO) DRAFT REPORT, "SOCIAL SECURITY ADMINISTRATION: POLICIES AND PROCEDURES WERE IN PLACE OVER MMA SPENDING, BUT INSTANCES OF NONCOMPLIANCE OCCURRED" (GAO-07-986) Thank you for the opportunity to review and comment on the draft report. We feel that the title "Policies and Procedures Were in Place Over MMA Spending, but Instances of Noncompliance Occurred," does not accurately reflect the findings in the report and would recommend that it be changed to "Policies and Procedures Were In Place Over MMA Spending And There Was Compliance". Also, the summary page and pages 3, 12 and 13 of the report state that "SSA subsequently identified and corrected at least $4.6 million of amounts misallocated between MMA and other SSA program activities, but had not corrected approximately $313,000 misallocated credit card purchase transactions." The fact is that $4.6 million was initially not correctly allocated to MMA. However, the original plan on allocation was to review the ongoing transactions to assure policy consistency. That being said, the $4.6 million was correctly allocated as planned. As a result, the statement on page 10 that the "ineffective communications resulted in millions of dollars of costs being misallocated to MMA" needs to be appropriately modified. Also, no mention is made that the $313,000 in misallocated credit card purchase transactions represents only 0.06 percent of the total amount appropriated. Our comments on the draft report recommendations, along with technical revisions to assist in the clarity of the report, are as follows: Establish procedures to ensure better dissemination of policies and procedures to all relevant offices and staff. We agree in theory. As the recommendation exists, we do not feel it accurately reflects what needs to be done and find it too broad. In reference to memoranda regarding accounting for costs, rather than establishing specific procedures, which would require interpretation by staff, future memorandum providing guidance similar to that issued for MMA implementation will contain specific instructions for distribution. With respect to acquisition policy, we believe that we have already established sufficient dissemination methods for acquisition related issues. Our Office of Acquisition and Grants (OAG) uses Acquisition Alerts to disseminate policy related to micro-purchasers (and, when noted, to all persons with delegated acquisition authority). Additionally, we have established an email distribution list consisting of project officers, who are requestors for purchases at various dollar levels, in order to better disseminate policies and procedures applicable to them. Establish additional detailed procedures for purchase card supporting documentation review and approval process to help ensure that purchase card payments are properly supported, allowable, and allocated. We disagree. With respect to the policies and procedures directed to micro-purchasers and contracting officers (not requestors), we do not concur with this recommendation and find it too broad. Contracting officers (COs) are already aware of the file documentation required for their purchases, whether paid with the purchase card or otherwise. We believe that our current guidance, "Micro-purchasing in SSA," contains sufficient information for micro- purchasers and their approving officials regarding file documentation and retention. Micro- purchasers and approving officials must take this course prior to being appointed and, beginning in fiscal year 2008, they will be required to take refresher training every three years. Additionally, OAG and regional COs conduct acquisition management reviews (AMRs) of micro-purchase activity. When OAG conducts reviews of purchases made by micro- purchasers in Headquarters, and when regional COs conduct on-site AMRs within their regions, we review the purchase log and the file documentation associated with the purchases. OAG also conducts "remote" AMRs of purchases made in the regions. These remote reviews currently do not entail a review of an entire contract file. We are currently considering altering this process to request, for select cases, that the cardholder under review send us a copy of all the file documentation related to the purchase being reviewed. Regarding the issue of proper allocation of purchase card transactions, we will review this area with the appropriate component officials. Reinforce existing policies and procedures for accountable assets purchased to help ensure that accountable assets are bar coded, recorded in SSA's asset inventory system, and inventoried periodically. We agree. As previously stated, we will add this policy to the "Acquisition Special Topics" webpage on the OAG intranet page. A notice and other cross-references to this permanent location of the policy will be disseminated via Acquisition Alerts and Acquisition Updates. We anticipate completing this by the end of September 2007. With regard to accountable assets and related policies, since December 2006, our Office of Publications and Logistics Management have undertaken actions to reinforce existing policies and procedures and to implement an improvement work plan. These include: Entering into collaborative agreements with our Operations and Systems components to establish mechanisms for correcting Property Management issues and policies; Developing a new User's Guide for the Sunflower Asset System (SFA), our Property Management System. The new guide contains not only the "how" but also the "why" to give users a better understanding of Property Management; Reviewing and revising internal policy guides, Administrative Instructions Manual Systems (AIMS Guides); Developing stronger lines of communication with employees responsible for property management (e.g., established a Quarterly Property Management Teleconference, updated and distributed news letters on Property Management, offered Sunflower training sessions, website updates, etc.); Updating and clarifying the listing of "Items to be Bar-coded"; and Continuing to reinforce the importance of asset accountability and management. Finally, for the 317 assets noted on page 13 of the report, we have requested GAO provide us specific asset details to assure our inventory system includes the required information. The following team members made key contributions to this report: Steven R. Haughton, Assistant Director; William (Ed) Brown; Sharon Byrd; Rich Cambosos; Marcia Carlsen; Lisa Crye; Leslie C. Jones; Brent J. LaPointe; Margaret Mills; and Robert Martin.

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) created a voluntary outpatient prescription drug benefit as part of the Medicare program, and appropriated up to $500 million for the Social Security Administration (SSA) to fund the start-up administrative costs in meeting its responsibilities to implement MMA. SSA was given a great deal of discretion in how to use the funds and the act provided little detail on how the funds were to be spent. You asked us to review SSA's costs for implementing MMA to determine (1) how the MMA funds were expended, (2) what procedures SSA has in place over the use of those funds, and (3) how SSA complied with those procedures related to contractor and vendor payments. SSA spent the $500 million in MMA funds from December 2003 through January 2006 to implement activities outlined in MMA. The majority of costs paid with MMA funds consisted of personnel-related expenses, contractors, and indirect costs. More than half of the funds were spent on payroll for staff hours used on MMA activities in SSA headquarters and field offices. Once the $500 million was spent, SSA began to use its general appropriation to fund the remaining costs of implementing MMA activities. SSA used its cost analysis system to track the total costs of its implementation of MMA activities. As of February 20, 2007, SSA had completed implementation of 16 of the 22 tasks for the six provisions under the act. SSA had agencywide policies and procedures in place for its cost tracking and allocation, asset accountability, and invoice review processes. It also established specific guidance to assign and better allocate SSA's costs in implementing MMA. There were some instances though where SSA did not comply with these policies and procedures. SSA did not effectively communicate the specific MMA-related guidance to all affected staff. SSA subsequently identified and corrected at least $4.6 million of costs that initially were incorrectly allocated to MMA, but had not corrected approximately $313,000 misallocated credit card purchase transactions. In addition, GAO found instances where accountable assets purchased with MMA funds, such as electronic and computer equipment, were not being properly tracked by SSA in accordance with its policies and instances where purchase card transactions were not properly supported. Although purchase card transactions and accountable asset purchases represented a small percentage of total MMA costs, proper approval and support for these types of transactions is essential to reduce the risk of improper payments.

In 1996, the United Nations and Iraq established the Oil for Food program to address growing concerns about the humanitarian situation in Iraq after international sanctions were imposed in 1990. The program's intent was to allow the Iraqi government to use the proceeds of its oil sales to pay for food, medicine, and infrastructure maintenance, and at the same time prevent the regime from obtaining goods for military purposes. From 1997 through 2002, Iraq sold more than $67 billion in oil through the program and issued $38 billion in letters of credit to purchase commodities. The Oil for Food program initially permitted Iraq to sell up to $1 billion worth of oil every 90 days to pay for humanitarian goods. Subsequent U.N. resolutions increased the amount of oil that could be sold and expanded the humanitarian goods that could be imported. In 1999, the Security Council removed all restrictions on the amount of oil Iraq could sell to purchase civilian goods. The United Nations and the Security Council monitored and screened contracts that the Iraqi government signed with commodity suppliers and oil purchasers, and Iraq's oil revenue was placed in a U.N.-controlled escrow account. In May 2003, U.N. resolution 1483 requested the U.N. Secretary General to transfer the Oil for Food program to the Coalition Provisional Authority by November 2003. The United Nations allocated 59 percent of the oil revenue for the 15 central and southern governorates, which were controlled by the central government; 13 percent for the 3 northern Kurdish governorates; 25 percent for a war reparations fund for victims of the Iraq invasion of Kuwait in 1990; and 3 percent for U.N. administrative costs, including the costs of weapons inspectors. In central and southern Iraq, the Iraqi government used the proceeds from its oil sales to purchase food, medicines, and infrastructure supplies and equipment. The Iraqi government negotiated directly with suppliers and distributed food in accordance with its Public Distribution System, a food ration basket for all Iraqis. In northern Iraq, nine U.N. agencies implemented the program, primarily through constructing or rehabilitating schools, health clinics, power generation facilities, and houses. Local authorities submitted project proposals to the United Nations to consider and implement. The Iraqi government in Baghdad procured bulk food and medicines for the northern region, but the World Food Program and the World Health Organization were responsible for ensuring the delivery of these items. From 1997 to 2002, the Oil for Food program was responsible for more than $67 billion of Iraq's oil revenue. Through a large portion of this revenue, the United Nations provided food, medicine, and services to 24 million people and helped the Iraqi government supply goods to 24 economic sectors. In February 2002, the United Nations reported that the Oil for Food program had considerable success in sectors such as agriculture, food, health, and nutrition by arresting the decline in living conditions and improving the nutritional status of the average Iraqi citizen. Prior to the creation of OIOS, the United States and other member states had expressed concern about the ability of the United Nations to conduct internal oversight. In 1994, the General Assembly established OIOS to conduct audits, evaluations, inspections, and investigations of U.N. programs and funds. Its mandate reflects many characteristics of U.S. inspector general offices in purpose, authority, and budget. Since its inception, OIOS has submitted its audit reports to the head of the unit being audited for action and only forwarded to the Secretary General those reports in which program officials disagreed with audit recommendations. It also provided certain reports to the General Assembly. However, in December 2004, the General Assembly passed a resolution requiring OIOS to publish the titles and summaries of all audit reports and provide member states with access to these reports on request. Before the OIOS was created in July 1994, the United States and other U.N. member states, the U.S. Congress, and the Government Accountability Office (GAO) had expressed concern about the United Nations' management of its resources and had criticized the inadequacies of its internal oversight mechanisms. In response, the Secretary General established the Office for Inspections and Investigations in August 1993 under the leadership of an Assistant Secretary General. However, member states--primarily the United States--wanted a more autonomous oversight body with greater authority. In November 1993, the U.S. Permanent Representative to the United Nations proposed the establishment of an "office of inspector general" to the General Assembly. The office would be headed by an "inspector general" who, although an integral part of the Secretariat, would carry out his/her responsibilities independently of the Secretariat and all U.N. governing bodies. According to the proposal, the office would support member states and the Secretary General by providing independent advice based on an examination of all activities carried out at all U.N. headquarters and field locations financed by the regular budget, peacekeeping budgets, and voluntary contributions. At the same time, the new office would have external reporting responsibilities. In April 1994, Congress enacted Public Law 103-236, which required certain funds to be withheld from the United Nations until the President certified that it had established an independent office of inspector general to conduct and supervise objective audits, investigations, and inspections. The legislation stated, among other things, that the inspector general should have access to all records, documents, and offices related to U.N. programs and operations. The legislation also called for the United Nations to have procedures to (1) ensure compliance with the inspector general office's recommendations and (2) protect the identity of, and prevent reprisals against, any staff members making a complaint, disclosing information, or cooperating in any investigation or inspection by the inspector general's office. After a series of negotiations among member states, including the United States, a compromise was reached. The General Assembly, in July 1994, approved a resolution creating OIOS within the U.N. Secretariat. OIOS' mandate reflects many of the characteristics of U.S. inspector general offices in purpose, authority, and budget. For example, OIOS staff have access to all records, documents, or other material assets necessary to fulfill their responsibilities. OIOS' reporting mandate calls for it to submit reports to the Secretary General and the General Assembly. Since its inception, OIOS has generally submitted its reports to the head of the unit audited. If program officials disagreed with the report's recommendations, the report was submitted to the Secretary General. However, beginning in 1997, OIOS began listing all its reports in its annual reports to the General Assembly and briefing representatives of member states interested in a particular report. It also provided certain reports of interest to the General Assembly. Further transparency over OIOS audit reports occurred in December 2004 when the General Assembly approved a resolution calling for OIOS to include in its annual and semi-annual reports the titles and brief summaries of all OIOS reports issued during the reporting period. OIOS was also directed to provide member states with access to original versions of OIOS reports upon request. As of June 2004, OIOS had 180 posts, including 124 professional staff and 56 general service staff. Staff work in four operational divisions: Internal Audit Divisions I and II; the Monitoring, Evaluation, and Consulting Division; and the Investigations Division. The 58 audit reports released on January 9, 2005, reflect the work of Internal Audit Division I, which contained a separate unit for Iraq-related work. For 2004, OIOS' resources totaled $23.5 million. OIOS generally conducts four types of activities: audits, evaluations, inspections, and investigations. Audits determine if internal controls provide reasonable assurance of the integrity of financial and operational information and whether rules are followed and resources are safeguarded. Audits also identify ways to improve the efficient use of resources and the effectiveness of program management. OIOS' internal audit divisions adhere to the Standards for the Professional Practice of Internal Auditing in the United Nations. These standards regulate issues related to independence, objectivity, proficiency, management, and the code of ethics and rules of conduct for auditors. Inspections address mandates, management issues, or areas of high risk, make recommendations, and are generally submitted through the Secretary General to the General Assembly. Evaluations assess the relevance, efficiency, effectiveness, and impact of a program's outputs and activities against its objectives. These reports are addressed to the intergovernmental body--normally the Committee for Program and Coordination or the General Assembly--that requested the evaluation. Investigations staff follow up on reports of possible violations of rules or regulations, mismanagement, misconduct, waste of resources, or abuses of authority. OIOS also monitors program performance and prepares the Program Performance Report of the Secretary General, which is submitted to the General Assembly every 2 years. The complexity and diversity of the U.N. Oil for Food program and associated risks called for adequate oversight coverage. In 2000, OIOS established the Iraq Program Audit Section within the Internal Audit Division. The Independent Inquiry Committee report stated that the number of auditors assigned to Oil for Food audits increased from 2 in 1996 to 6 in 2002 and 2003. OIOS' audit responsibilities extended to the following entities involved in Iraq operations: Office of the Iraq Program (OIP) in New York; U.N. Office of the Humanitarian Coordinator in Iraq; U.N. Compensation Commission (UNCC); U.N. Monitoring, Verification, and Inspection Commission; U.N. Human Settlement Program (U.N.-Habitat) Settlement Rehabilitation Program in northern Iraq; U.N. Guards Contingent in Iraq; and U.N. Department of Management. The OIOS audits revealed a number of deficiencies in the management of the Oil for Food program and its assets and made numerous recommendations to correct these deficiencies. The audits focused primarily on Oil for Food activities in northern Iraq and at the U.N. Compensation Commission. OIOS also conducted audits of the three U.N. contracts for inspecting commodities coming into Iraq and for independent experts to monitor Iraq's oil exports. We identified a total of 702 findings contained in the reports across numerous programs and sectors. Weaknesses and irregularities were common in planning and coordination, procurement, and asset and cash management. Appendix I contains the summary data of our analysis and a description of our scope and methodology. Our summary below focuses on key findings for the areas that received the most audit coverage-- activities in northern Iraq and the U.N. Compensation Commission. We also highlight findings from the audits of the inspections contracts. The OIOS audits that reviewed U.N. activities in northern Iraq found problems with planning and coordination, procurement, and asset and cash management. In 2004, OIOS reported that U.N.-Habitat had not adequately coordinated with other U.N. agencies in providing essential services for its housing projects. For example, U.N.-Habitat provided high-capacity generators but had not contacted the U.N. Development Program--the entity responsible for the power sector--to provide electric power connections. OIOS also found that about 3,200 houses were unoccupied for extended periods due to a lack of coordination with agencies providing complementary services. An August 2000 report noted a lack of planning that resulted in the questionable viability of some Oil for Food projects in northern Iraq. For example, six diesel generators were procured in an area where diesel fuel was not readily available. In addition, local authorities would not accept a newly constructed health facility subject to flooding. A December 2000 report also noted that highways and a sports stadium were built in violation of criteria established by the Security Council and the Iraqi government. In November 2002, OIOS reported that almost $38 million in procurement of equipment for the U.N.-Habitat program was not based on a needs assessment. As a result, 51 generators went unused from September 2000 to March 2002, and 12 generators meant for project-related activities were converted to office use. In addition, OIOS reported that 11 purchase orders totaling almost $14 million showed no documentary evidence supporting the requisitions. In 2002, OIOS found that the U.N-Habitat program lacked a proper asset inventory system and that no policies and procedures governing asset management were evident. As a result, the value of assets was not readily available. In one case, $1.6 million in excess construction material remained after most projects were complete. OIOS also reported that a lack of effective cash management policies meant that project funds were misused or put at risk. In a March 2000 audit, OIOS reported that the U.N. Development Program's country office used $500,000 in project funds for office expenses without authorization or proper documentation. A February 2002 audit found that the office in Erbil put at risk $600,000 to $800,000 in cash due to a lack of cash management policies. The U.N. Compensation Commission (UNCC), a subsidiary unit of the Security Council, was established in 1991 to process claims and provide compensation for losses resulting from Iraq's invasion and occupation of Kuwait. Compensation is payable from a special fund that initially received 30 percent of the proceeds from Iraqi oil sales. The claims are resolved by panels, each of which is made up of three commissioners who are experts in law, accounting, loss adjustment, assessment of environmental damage, and engineering, according to UNCC. The UNCC received more than 2.6 million claims for death, injury, loss of or damage to property, commercial claims, and claims for environmental damage resulting from Iraq's invasion of Kuwait in 1991. As of December 2004, all but about 25,000 of these claims had been resolved, and almost $19 billion had been paid in compensation, according to UNCC. In a July 2002 risk assessment of UNCC, OIOS found that controls to prevent employee fraud were marginal, operations required close monitoring to prevent possible collusion, possibilities existed for illegal activities, and payment processing controls were inadequate. The report concluded that the overcompensation of claims and irregular or fraudulent activities could lead to significant financial risks. OIOS audits identified weaknesses in UNCC's management of claims processing and payments resulting in recommended downward adjustments of more than $500 million. For example, in a September 2002 audit, OIOS found potential overpayments of $419 million in compensation awarded to Kuwait. OIOS identified duplicate payments, calculation errors, insufficient evidence to support losses, and inconsistent application of claims methodology. In a December 2004 audit, OIOS found that using the exchange rate against the U.S. dollar on the date of the claimed loss, rather than the date of payment as consistent with U.N. financial rules and regulations, had resulted in substantial overpayments. OIOS estimated that the likely overpayments were about $510 million. Previously in 2002, UNCC had challenged OIOS' audit authority. In a legal opinion on OIOS' authority requested by UNCC, the U.N. Office of Legal Affairs noted that the audit authority extended to computing the amounts of compensation but did not extend to reviewing those aspects of the panels' work that constitute a legal process. However, OIOS disputed the legal opinion, noting that its mandate was to review and appraise the use of financial resources of the United Nations. OIOS believed that the opinion would effectively restrict any meaningful audit of the claims process. As a result of the legal opinion, UNCC did not respond to many OIOS observations and recommendations, considering them beyond the scope of an audit. According to OIOS, UNCC accepted about $3.3 million of the more than $500 million in recommended claims reductions. On the audit of $419 million in potential overpayments to Kuwait, OIOS noted that it received the workpapers to conduct the audit 8 days after the award was made. To help ensure that the proceeds of Iraq's oil sales were used for humanitarian and administrative purposes, the United Nations contracted with companies to monitor Iraq's oil exports and commodity imports. OIOS audits of these contracts revealed procurement problems and poor contract management and oversight by OIP. The United Nations contracted with Saybolt Eastern Hemisphere B.V. to oversee the export of oil and oil products from Iraq through approved export points. At the time of the audit report in July 2002, the estimated total value of the contract was $21.3 million, with an annual contract value of $5.3 million. OIOS found that OIP had made no inspection visits to Iraq and posted no contract management staff in Iraq. However, OIP had certified that Saybolt's compliance with the contract was satisfactory and approved extensions to the contract. In addition, OIOS estimated that the United Nations paid $1 million more than was necessary because equipment costs were already built into the inspectors' daily fee structure. OIOS asserted that these costs should have been charged as a one-time expenditure. OIOS recommended that OIP recover the $1 million paid for equipment and that future contracts provide for equipment purchases as one-time expenditures. OIP did not respond to the auditors' first recommendation and did not agree with the second recommendation. The first contract for inspecting imported commodities was with Lloyds' Register Inspection Ltd.; the initial 6-month contract was for $4.5 million, and the total value of the contract increased to more than $25 million by July 1999. Lloyds' agents were to monitor, verify, inspect, test, and authenticate humanitarian supplies imported into Iraq at three entry points. In July 1999, OIOS found deficiencies in OIP's oversight of Lloyds' contract. OIP had certified Lloyd's invoices for payment without any on- site verification or inspection reports. OIOS reported that Lloyds' used suppliers' manifests to authenticate the weight of bulk cargo and did not independently test the quality of medicines and vaccines supplied. In responding to the audit's findings, OIP rejected the call for on-site inspections and stated that any dissatisfaction with Lloyds' services should come from the suppliers or their home countries. OIP awarded a new contract to Cotecna Inspection S.A. Similar to Lloyd's, Cotecna was to verify that the description, value, quantity, and quality of supplies arriving in Iraq were in accordance with the criteria established by the sanctions committee. In April 2003, OIOS cited concerns about procurement issues and amendments and extensions to Cotecna's original $4.9 million contract. Specifically, OIOS found that, 4 days after the contract was signed, OIP increased Cotecna's contract by $356,000. The amendment included additional costs for communication equipment and operations that OIOS asserted were included in the original contract. OIP agreed to amend future contracts to ensure that procurement documents include all requirements, thus eliminating the need to amend contracts. OIOS' audits and summary reports revealed a number of deficiencies in the management and internal controls of the Oil for Food program, particularly in northern Iraq. The reports also identified problems in UNCC's claims processing resulting in significant overpayments. However, OIOS did not examine certain headquarters functions responsible for overseeing the humanitarian commodity contracts for central and southern Iraq. Limitations on OIOS' resources and reporting hampered its coverage of the Oil for Food program and its effectiveness as an oversight tool. OIOS did not examine certain headquarters functions--particularly OIP's oversight of the contracts for central and southern Iraq that accounted for 59 percent or almost $40 billion in Oil for Food proceeds. The Iraqi government used these funds to purchase goods and equipment for central and southern Iraq and food and medical supplies for the entire country. As we reported in 2004, the Iraqi government's ability to negotiate contracts directly with the suppliers of commodities was an important factor in enabling Iraq to levy illegal commissions. OIP was responsible for examining contracts for price and value at its New York headquarters. In addition, the U.N. sanctions committee reviewed contracts primarily to remove dual-use items that Iraq could use in its weapons programs. However, it remains unclear which U.N. entity reviewed Iraq contracts for price reasonableness. OIOS did not assess the humanitarian contracts or OIP's roles and responsibilities and its relationship with the sanctions committee. OIOS believed that these contracts were outside its purview because the sanctions committee was responsible for their approval. OIP management also steered OIOS toward program activities in Iraq rather than headquarters functions where OIP reviewed the humanitarian contracts. Even when OIOS requested funds to conduct an assessment of OIP operations, the funds were denied. For example, in May 2002, OIP's executive director did not approve a request to conduct a risk assessment of OIP's Program Management Division, citing financial reasons. The Committee also noted that the practice of allowing the heads of programs the right to fund internal audit activities leads to excluding high-risk areas from internal audit examination. The Committee therefore recommended that the Internal Audit Division's budgets and staffing levels for all activities be submitted directly to the General Assembly. In addition, OIOS assigned only 2 to 6 auditors to cover the Oil for Food program. The Committee found that this level of staffing was low compared to OIOS' oversight of peacekeeping operations. In addition, the U.N. Board of Auditors indicated that 12 auditors were needed for every $1 billion in U.N. expenditures. The Committee concluded that the Oil for Food program should therefore have had more than 160 auditors at its height in 2000. However, the Committee found no instances in which OIOS communicated broad concerns about insufficient staff levels to U.N. management. OIOS also encountered problems in its efforts to widen the distribution of its reporting beyond the head of the agency audited. In August 2000, OIOS proposed to send its reports to the Security Council. However, the Committee reported that the OIP director opposed this proposal, stating that it would compromise the division of responsibility between internal and external audit. In addition, the U.N. Deputy Secretary General denied the request and OIOS subsequently abandoned any efforts to report directly to the Security Council. The internal audits provide important information on the management of the Oil for Food program, particularly in the north, and on the management of the commission that compensates claims for war damages with proceeds from Iraq's oil sales--two areas that have received little public attention. The reports also broaden the findings of the Independent Inquiry Committee's report, particularly with respect to the inadequacies in the award of the oil and customs inspections contracts. However, many unanswered questions remain about the management and failings of the Oil for Food program, particularly the oversight roles of OIP and the Security Council's sanctions committee. Mr. Chairman, this concludes my prepared statement. I will be happy to answer any questions you or the other Subcommittee members may have. We reviewed the 58 reports released by the Independent Inquiry Committee to determine the scope of the audits and the issues addressed in the reports' findings and recommendations. We created a data base of information from 50 reports to identify the program elements that the audits reviewed, the findings of each audit, and the recommendations for improvement. To identify audit scope, we identified the extent to which the audits addressed Oil for Food headquarters operations, U.N. Secretariat Treasury operations in New York, U.N. operations in the northern Iraq, and the U.N. Compensation Commission for disbursing claims for damage caused by the 1991 Persian Gulf War. To determine the range of issues addressed by the audits, we identified the kinds of issues raised by the findings and determined that the audits addressed the following issues: (1) procurement and contract management and oversight; (2) financial management, including financial controls, management of funds, and procedures for payments; (3) asset management, including inventory, and the management of fixed assets such as vehicles, buildings, and supplies; (4) personnel and staffing; (5) project planning, coordination, and oversight; (6) security; and (7) information technology. We established a protocol to identify findings for data input, and we identified specific recommendations in the audit reports. To ensure consistency of data input, a data base manager reviewed all input, and all data input was independently validated. Table 1 presents the summary of overall findings and recommendations in OIOS reports. Table 2 presents these findings by area of U.N. operation.

The Oil for Food program was established by the United Nations and Iraq in 1996 to address concerns about the humanitarian situation after international sanctions were imposed in 1990. The program allowed the Iraqi government to use the proceeds of its oil sales to pay for food, medicine, and infrastructure maintenance. Allegations of fraud and corruption have plagued the Oil for Food program. As we have testified and others have reported, the former regime gained illicit revenues through smuggling and through illegal surcharges and commissions on Oil for Food contracts. The United Nations' Independent Inquiry Committee was established in April 2004 to investigate allegations of corruption and misconduct within the Oil for Food program and its overall management of the humanitarian program. In January 2005, the Committee publicly released 58 internal audit reports conducted by the United Nations' Office of Internal Oversight Services (OIOS). GAO (1) provides information on OIOS' background, structure, and resources; (2) highlights the findings of the internal audit reports; and (3) discusses limitations on the audits' coverage. Before the United Nations established OIOS, the United States and other member states had criticized its lack of internal oversight mechanisms. In 1993, the United States proposed the establishment of an inspector general position within the United Nations and withheld U.S. funds until such an office was established. In 1994, the General Assembly created OIOS and tasked it with conducting audits, investigations, inspections, and evaluations of U.N. programs and funds. OIOS has generally provided audit reports to the head of the U.N. agency or program subject to the audit but also provided certain reports of interest to the General Assembly. However, this limited distribution hampered member states' efforts to oversee important U.N. programs. In December 2004, the General Assembly directed OIOS to publish the titles and summaries of all audit reports and provide member states with access to these reports on request. The audit reports released in January 2005 found deficiencies in the management of the Oil for Food program and made numerous recommendations. We identified 702 findings in these reports. Most reports focused on U.N. activities in northern Iraq, the operations of the U.N. Compensation Commission, and the implementation of U.N. inspection contracts. In the north, OIOS audits found problems with coordination, planning, procurement, asset management, and cash management. For example, U.N. agencies had purchased diesel generators in an area where diesel fuel was not readily available and constructed a health facility subject to frequent flooding. An audit of U.N.-Habitat found $1.6 million in excess construction material on hand after most projects were complete. OIOS audits of the U.N. Compensation Commission found poor internal controls and recommended downward adjustments totaling more than $500 million. The United Nations asserted that OIOS had limited audit authority over the Commission. Finally, OIOS audits of the contractors inspecting Iraq's oil exports and commodity imports found procurement irregularities and limited U.N. oversight. OIOS' audits and summary reports revealed deficiencies in the management and internal controls of the Oil for Food program. However, OIOS did not examine certain headquarters functions--particularly OIP's oversight of the contracts for central and southern Iraq that accounted for 59 percent or almost $40 billion in Oil for Food proceeds. The Independent Inquiry Committee noted several factors that limited OIOS' scope and authority. First, OIOS did not believe it had purview over the humanitarian contracts because the sanctions committee approved the contracts. Second, the U.N. Office of the Iraq Program steered OIOS toward programs in the field rather than at headquarters. Third, the Office of the Iraq Program refused to fund an OIOS risk assessment of its program management division. Finally, U.N. management and the Office of the Iraq Program prevented OIOS from reporting its audit results directly to the Security Council.

The JCP and the GPO have prominent roles in federal government printing. The oldest joint committee in Congress, the JCP was established in 1846 and is comprised of five Representatives and five Senators. It oversees the operation of GPO, which by law is the principal printing organization for federal agencies. The JCP exercises oversight over government printing, and is authorized to "use any measure it considers necessary to remedy neglect, delay, duplication or waste in the public printing and binding, and the distribution of Government publications." To assist in carrying out its responsibilities, in 1990 the JCP updated the Government Printing and Binding Regulations, which require agencies to report semi-annually to the JCP any in-house printing and any printing that exceeds 5,000 production units of a single page or 25,000 production units in the aggregate of multiple pages. GPO was established in 1861 to print government documents and disseminate them to the public. Title 44 of the U.S Code, Public Printing and Documents, provides that all printing for Congress, the executive branch, and the judiciary (except the Supreme Court) is to be done by or contracted by GPO, unless otherwise exempted. GPO prints at its in- house plant in Washington, D.C., and one other secure facility for passports and smart cards only, but it contracts with private printers to produce the majority of printing for the federal government. At its in-house plant, GPO prints primarily congressional documents, such as the Congressional Record. GPO offers different programs and services such as GPO Express, which allows agencies to print directly to FedEx Office and other private sector vendors, and the GPO Simplified Purchase Agreement Program, which provides a list of pre-approved private printers and stated prices for federal agencies to use when selecting a printer. GPO receives funding through direct appropriations ($126 million in fiscal year 2012), collection of an approved fee-for-service from other federal agencies for print procurement, and the sale of publications to the public. GPO's activities also include providing public access to official government documents though the FDLP and GPO's Federal Digital System (FDsys) website. The Superintendent of Documents, who heads GPO's Information Dissemination division, is responsible for collecting government products and disseminating them to the public through a network of approximately 1200 depository libraries and online catalogues. GPO evaluates documents to identify those that contain information on U.S. government activities or are important reference publications, and should therefore be disseminated to a depository library. Title 44 requires that federal agencies make their publications available to the Superintendent of Documents for cataloging and distribution though the FDLP. With the onset of digital publishing, the FDLP has been transformed into a primarily electronic program, obtaining and distributing federal documents digitally. GPO's FDsys website, which offers an online catalogue of official government digital documents, also aids in the collection and preservation of government publications and provides access to the public. Federal government printing definitions are outlined in statute and regulation. Title 44 at Section 501 Note defines printing as the processes of composition, platemaking, presswork, duplicating, silkscreen processes, and binding. The 1990 JCP Regulations include the definitions of key printing terms applicable at that time. Prior to 1994, Title 44 did not include duplicating in the definition of printing, but in 1994, the Title 44 definition was updated to include duplicating (i.e., printing done on high- speed duplication machines) as a printing process. However, the 1990 JCP Regulations were not updated to include duplicating. In our review, we identified two main categories of agency printing used today-- ink-based, and toner-based or ink-jet-based: Ink-Based Printing (also referred to as conventional printing) is a water and ink-based process that uses machines called printing presses to produce material such as publications and other documents. Presses use plates to transfer images onto a final paper document. Conventional presses are relatively costly to set up, making the first impression of a document expensive, but costs decline as the volume of copies increases, which makes it cost- effective for high volume print jobs. Ink-based printing uses offset or digital printing presses. Offset printing presses typically have many open areas where the machinery can be manually adjusted, and can take up a large amount of space (see fig. 1). A digital printing press also uses plates to transfer images and ink, but the process is computerized and the press is mostly closed because it does not need the same level of manual adjustments (see fig. 2). Toner-Based Printing (also referred to as duplication) is a process on machines that use either heat to transfer an image on paper or toner or ink-jet to transfer an image to paper. Toner-based printing is typically done on one type of equipment, a high-speed duplication machine, also referred to as a high-speed copier. This refers to a high capacity toner-based machine, typically capable of 100 or more black and white images per minute with some finishing capabilities (e.g., staples, collating, limited binding, etc.) (see fig. 3). These machines typically have a higher printing speed and capacity than typical "walk- up" office copiers. Since the JCP Regulations were updated in 1990, agencies' printing operations have changed in scale and type. Printing industry and government data suggest that the total volume of printed material has been declining for at least the past 10 years. A major factor in this decline is the use of electronic media options, such as digital publishing. As such, federal agencies publish more documents directly to the Internet where the public can access them, bypassing the need for the agency to print hard copies. At the same time that digital publishing was increasing, digital printer/copier technology was developing. In circumstances where agencies still needed hard copies to be printed, digital printers and copiers allowed federal agencies to produce documents themselves that formerly would have required professional printing expertise from outside vendors such as GPO or private printers. Based on definitions we developed in conjunction with GPO and the Interagency Council on Printing and Publication Services, among the agencies in our survey universe, we measured 64 percent fewer in-house printing plants than the number included in the 1990 JCP Regulations. The 1990 JCP Regulations listed 231 authorized in-house printing plants; agencies we surveyed reported operating 84 in-house plants. Although there was an overall decline in the number of printing plants, there was not a decline across all agencies--9 of the surveyed agencies reported a decrease in the number of plants, 14 agencies reported no change in the number of in-house plants, and 8 agencies reported an increase in the number of in-house plants. DOD accounted for the greatest decline in in-house printing plants. For example, the 1990 JCP Regulations listed 142 in-house printing plants for the armed services and the Defense Logistics Agency (DLA), which currently manages the majority of DOD's printing infrastructure. DLA officials reported managing 17 in-house plants in our survey (see fig. 4). Other agencies that reported declines showed less dramatic reductions, such as the Department of Energy, which had 18 plants on the 1990 list, and reported 5 plants in our 2013 survey. A decline in the number of in- house plants could be due to some agencies reducing their printing and focusing more on digital publications. One factor that could have influenced the increased emphasis on digital publications is a November 9, 2011, executive order promoting efficient spending. This executive order included a provision encouraging agencies "to limit the publication and printing of hard copy documents and to presume that information should be provided in an electronic form, whenever practicable, permitted by law, and consistent with applicable records retention requirements." The vast majority of agencies that currently operate in-house printing plants reported operating duplication equipment. That is, most agencies reported operating high-speed duplication machines, and fewer reported operating conventional printing presses. Of the 32 agencies operating in- house printing plants, 17 reported that all of their in-house printing was duplication, and another 14 agencies reported operating some duplication equipment in addition to ink-based conventional printing presses. The remaining agency did not report its type of equipment (see fig. 5). No agency reported having only ink-based conventional printing presses at its in-house plants. In addition to agencies operating fewer printing plants and conducting more duplication, interviews with selected agencies showed declines in printing volumes in recent years. We interviewed six agencies that, according to OMB budget data, accounted for about 80 percent of total federal printing and reproduction obligations. Of those six agencies, five reported declines in total printing volumes between fiscal year 2009 and fiscal year 2011, ranging from 6 percent to 59 percent. One agency reported an 11 percent increase in printing volumes and told us it was due in part to opening an additional in-house plant in 2009. All six agencies estimated a decrease in total spending on printing and reproduction between fiscal year 2009 and fiscal year 2011. Decreases ranged from as little as 0.1 percent to over 90 percent. All six agencies also reported greater spending on printing sent to GPO and private printers than on in-house printing or duplication. For example, in fiscal year 2011, USPS reported spending $5.8 million on in-house printing and spending $108.3 million on printing sent to private printers. Similarly, HHS reported spending $0.4 million on in-house printing, and $50.2 million on printing sent to GPO or private printers in fiscal year 2011. Agencies told us that they use a number of factors such as sensitivity, cost, volume, turnaround time, and in-house capabilities to determine if they will print in-house or externally through GPO or private printers. For example, DLA officials told us DLA produces some documents, such as those printed for the President, at in-house facilities to accommodate the short turnaround time and possible sensitive nature of the documents. VA officials said they send large volume print orders or documents requiring special finishing to private printers. For example, VA officials told us they used GPO and its approved private printers to print 2.9 million copies of its 2011 federal benefits booklet for veterans, survivors, and dependents because private printers could better handle this quantity than VA could in-house. Even with these changes in agencies' printing, the definition of "printing" has not been updated in the 1990 JCP Regulations, which outline printing-related definitions and list authorized agency in-house printing plants. In 1994, Title 44 was updated to include "duplicating" in the definition of "printing," so that it read "... 'printing' includes the processes of composition, platemaking, presswork, duplicating, silk screen processes, binding, microform, and the end items of such processes." However, the 1990 JCP Regulations have not been updated to include duplicating in the definition of printing, and duplicating is not separately defined in either authority. For example, Title 44 does not separately define duplicating, and the 1990 JCP Regulations include a definition for "duplicating/copying," such that it is not distinguished from "copying." Some agencies had difficulty using the definitions we created or identifying the number of their in-house facilities that performed duplication and qualified as printing plants. As mentioned above, to facilitate consistent data gathering from federal agencies on their printing activities, we worked with GPO and the Interagency Council on Printing and Publication Services to establish working definitions that included the Title 44 definition of printing and an updated definition of duplicating. In our survey, three agencies told us their definition of printing differed from ours. Two of those reported using the 1990 JCP Regulations printing definition, which does not include "duplicating". Similarly, VA officials believed their agency operated one in-house printing plant, but in our discussion officials noted that the facility does not typically produce work that exceeds the volume limits of "duplication" and as such would not qualify as a printing plant. Postal Service officials reported that its 67 district offices do not track printing volumes, and thus could not determine if those offices' printing operations would qualify as printing plants. We excluded these VA and Postal Service plants in our tally. Some agencies also had difficulty providing volumes and spending data under these definitions. For instance, printing officials from Commerce's bureaus told us that they each tracked printing differently--some tracked pages while others tracked the number of jobs. Regarding spending, some printing officials told us they combined in-house printing and printing through GPO and its contractors in their spending estimates while others were able to report these amounts separately. For example, DLA officials said that they do not typically track volumes by our duplication volume limits, and as such would not track spending at facilities (i.e., printing plants) that may exceed those volumes. However, at our request, DLA officials reviewed production at the agency's in-house facilities and identified plants that met our definitions, and then estimated spending at these plants. Other agencies we interviewed, such as the Postal Service and the State Department, provided total spending for all jobs printed at their in-house printing plants. As such, this data could include jobs printed at volumes below those in the provided duplication definition. Agencies may also have had difficulty providing volumes and spending data because of decentralized printing practices. For instance, five agencies reported that their printing operations were dispersed across the agency, which meant that officials responsible for printing operations did not have readily available information on agency-wide printing operations. One was the Department of Commerce, which houses 12 bureaus and agencies that operate independently and differently. Commerce officials told us that because printing is dispersed, there was not a single official who could report on printing across the agency. Health and Human Services' four divisions with printing operations also reported operating with their own distinct printing officials and practices. In these cases, each division provided its own volume and spending information, which could lead to inconsistencies in data across bureaus or sub-agencies. In addition, the 1990 JCP Regulations provide that federal agencies report on their print operations to the JCP, but the requirements do not address duplication. The 1990 JCP Regulations state that agencies shall report printing operations semi-annually to the JCP, on information such as the total cost of printing and an inventory of plant equipment at in- house printing plants. Officials from four of the six agencies we interviewed reported that they did not recently send reports on their printing operations to the JCP, and JCP staff told us they received only a few reports in the last 5 years. Discussions with officials from one agency suggested a reason for this may be that some agency officials believed they are only required to report on printing plants with offset or conventional printing equipment, not those with duplication equipment. Since the reporting requirements date back to 1990, before Title 44 was updated to include duplicating in the definition of printing, neither the 1990 JCP Regulations nor the JCP report forms specify that agencies are required to submit reports for printing plants that agencies may consider duplication plants. Officials from one agency told us they did not report to JCP because they did not have any in-house facilities, and officials from another agency noted that they were exempt from the reporting requirements. Additionally, officials from a bureau at one agency told us they send JCP reports to an in-house printing officer, suggesting some confusion regarding reporting requirements. JCP staff told us they recognize the 1990 JCP Regulations do not include duplication in the definition of printing, and are working to revise this guidance. Specifically, JCP staff are in the process of developing printing definitions that more closely reflect current printing practices, particularly for "duplication" activities. JCP staff also told us that they are working to streamline reporting requirements for agency printing officials. The majority of government documents are published digitally (electronically produced and then disseminated over the Internet); however, the provisions in the law that require agencies to submit documents to the Federal Depository Library Program (FDLP) do not reference digital publishing. GPO estimates that more than 90 percent of all government information is published digitally. Title 44 outlines the types of documents that are required to be submitted to the FDLP, upon request, but does not reference digital documents explicitly. Currently, Title 44 defines a "government publication" as "... informational matter which is published as an individual document at Government expense, or as required by law." Title 44 does not specify if "published" includes digitally published documents. Officials from selected agencies told us they do not submit digital documents to FDLP, and two reported that they do not have any policies or procedures for submitting documents to the FDLP regardless of whether the documents were printed at their in- house printing plants or published electronically. For documents printed through GPO, agencies are not required to make a determination about whether a document should be submitted to FDLP, as GPO typically identifies documents that could be of interest to the FDLP and then, if FDLP request them, sends them directly to the FDLP. Some agencies' officials told us they rely on GPO for this service, and do not submit digital documents to the FDLP. FDLP staff have taken a number of steps to address this challenge, and to obtain digital documents from agencies. FDLP staff told us they focus on educating agencies about document submission requirements, and searching for and locating possible "fugitive documents"--documents that agencies published and FDLP staff believe should have been submitted to the FDLP. In a January 2013 report, the National Academy of Public Administration (NAPA) recommended that GPO work with depository libraries and other library groups to develop a comprehensive plan for preserving the print collection of government documents, including a process for ingesting digitized copies into FDsys, GPO's online system that provides free access to government publications. In response to NAPA's recommendation, GPO noted that GPO and the depository library community have long recognized the need to catalog and preserve the tangible collections that GPO has distributed to federal depository libraries since 1861, and that implementing this recommendation will be incorporated into GPO's national plan for the future of the FDLP. Because NAPA's review was ongoing and GPO was outside the scope of our review, we do not make recommendations regarding FDLP submissions to GPO in this report (see app. I for more information on our scope and methodology). We provided copies of our draft report to GPO and DOD for their review and comment. GPO generally agreed with our findings and provided a letter and technical comments, which we incorporated as appropriate. DOD did not provide comments. We are sending copies of this report to the appropriate congressional committees. The report will also be available at no charge on the GAO Website at https://www.gao.gov If you or your staff have any questions about this report, please contact me at 202-512-2834 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix V. To address our objectives, we developed working definitions of key printing terms--"printing", "duplication", and "printing plant"--to use when surveying and interviewing agencies on their current printing practices. To do this we used existing statutory language for "printing" and "printing plant" from Title 44 of U.S. Code, Public Printing and Documents, and the Joint Committee on Printing's 1990 Printing and Binding Regulations (1990 JCP Regulations). To define "duplication" we worked with GPO and the Interagency Council on Printing and Publication Services to update the definition of duplication in the 1990 JCP Regulations. We considered volumes above 500 copies of a single page and 2,500 copies in the aggregate of multiple pages "duplication," and volumes below that "copying". This allowed us to identify agencies' printing operations that qualified as printing plants rather than lower volume copying operations, sometimes referred to as "copy centers". In interviews with selected agencies, printing officials expressed confusion over this definition of "duplication", in part due to the volume limits distinguishing duplication from copying. The volume limits we used were similar but not the same as limits outlined in the 1990 JCP Regulations on the number of pages agencies are permitted to produce in-house without prior authority of the JCP (5,000 copies of a single page or 25,000 in the aggregate of multiple pages). We clarified our definitions when possible, but it is possible that agency officials' confusion could have affected the number of printing plants reported in our survey. See table below for a list of how each printing term was defined in the 1990 JCP Regulations, Title 44, and by GAO with assistance from GPO and the Interagency Council on Printing and Publication Services. To identify agencies that could be operating in-house printing plants, we developed a universe consisting of agencies authorized in the 1990 JCP Regulations and agencies that had obligated funds to the "printing and reproduction" object class in at least 2 years between fiscal years 2009 and 2011. Agencies report printing and related obligations in this object class. Data in the various volumes of the President's budget request, including object class data, undergo rigorous review by the OMB, and accordingly, are generally considered sufficiently reliable for most of GAO's purposes. This includes using this data to select agencies to survey. For the purposes of our review we made a number of adjustments to the 1990 JCP Regulations list of 36 agencies. First, we combined the armed forces and their plants, which were listed separately in the 1990 JCP Regulations, under the Defense Logistics Agency (DLA) since DLA took over all printing plants for the armed forces. Second, we excluded the Administrative Office of U.S. Courts, due to its being outside the executive branch; GPO, as it was outside the scope of our review, and the National Academy of Public Administration since it had ongoing related work on GPO; and the Panama Canal Commission, as it was de- commissioned in 1999. Finally we separated the Social Security Administration from Health and Human Services. In 1990 the Social Security Administration was a sub-agency with an in-house printing plant within Health and Human Services, but it became an independent agency in 1994. With these exceptions, 31 of the agencies from the 1990 list remained in our universe. Through budget obligations data we identified 16 additional agencies with at least 2 years of printing and reproduction obligations for fiscal years 2009 through 2011. This resulted in a total universe of 47 agencies with possible in-house printing plants. To describe how federal printing regulations and statutes reflect current printing practices, we reviewed legal documents such as Title 44 of the U.S. Code and the 1990 JCP Regulations, administered a survey to the universe of agencies described above, and interviewed officials from the printing industry, GPO, and other federal agencies. To describe agencies' printing volumes and spending, we interviewed the six agencies from our survey universe whose printing and reproduction obligations in fiscal years 2009, 2010, and 2011 together constituted the majority--roughly 80 percent--of total federal obligations to printing and reproduction. Those agencies were the Department of Commerce, the Department of Defense, Health and Human Services, Department of State, U.S. Postal Service, and Veterans Affairs. We interviewed printing and budget officials from these agencies, and obtained information on their printing operations, including data on printing volumes and spending. Findings from our interviews with selected agencies cannot be used to generalize results to the entire population. To describe agencies' in-house printing spending, we relied on data provided by selected agencies since federal printing and reproduction obligations may not reliably describe agencies' in-house printing spending. This is partially due to challenges with obligations data we have previously reported, such as that obligations categories are not mutually exclusive (e.g., it is possible for some printing and duplication obligations to be categorized under a different object class, and vice versa). We also found that the printing and reproduction object class includes printing done through GPO or external private printers as well as that done at agencies' in-house printing plants. As such, we relied on interviews with agencies to describe their in-house printing operations and collected spending information from agencies for analysis. We also asked agencies to provide spending information on the printing that they sent out to GPO and private printers. Some agencies provided printing expenses and others provided obligations, but for the purposes of this report, we refer to both as "spending." Obligations and expenditures capture different aspects of the budgeting process - obligations are the legal commitment to pay for a good or service while expenditures are the actual disbursement of money. For the purposes of this report we assume that there is a relatively short time lag between obligation and expenditure for printing and reproduction activities, and therefore that the difference is not material. As such, we refer to both obligations and expenditures as a single "spending" category. To describe agencies' current printing practices, such as operation of in- house printing plants, we administered the survey described above to the 47 agencies in our universe from January through March 2013. Results from that survey are presented in this report, and the questions asked in our survey instrument can be found in appendix III. We received a 100 percent response rate on the survey and analyzed the information obtained. We developed a questionnaire using Microsoft Excel to obtain information about federal agencies in-house printing operations. We identified potential survey recipients from a list of agency print contacts provided by GPO and the Interagency Council on Printing and Publication Services. We tested the questionnaire with print officials from five agencies included on our list of potential respondents. We selected these agencies to represent different printing and reproduction obligations and to provide a mix of agencies we identified through obligations data and those listed in the 1990 JCP Regulations. We conducted these survey pretests to determine if the questions were understandable and measured what we intended, and to ensure that the survey was not overly burdensome. On the basis of feedback from the pretests we modified the questionnaire as appropriate. In late January 2013, we sent an email alerting agency contacts to the upcoming survey; the survey was delivered to recipients via email message a few days later. Using the questionnaire, we requested contact information for print officials; feedback on the definitions used in the survey, each agency's cited authority to operate in- house printing plants, and information on in-house printing plants such as location and equipment used. We did not independently verify if the information in the surveys was accurate. For agencies in the JCP 1990 Regulations, we provided a list of plants that were authorized in 1990 and asked them to verify if a listed plant was operational or not operational. We also asked that the agencies identify any additional plants that were not included in the 1990 list. For agencies that were not included in the 1990 list but were added to our survey population using obligations data, we asked that they provide plant information. To help increase our response rate, we sent two follow-up emails and called agency officials from January through March 2013. The practical difficulties of conducting any survey may introduce some types of errors, commonly referred to as nonsampling errors. For example, differences in how a particular question is interpreted or the sources of information available to respondents can introduce unwanted variability into the survey results. As we discussed previously, some of our survey respondents reported having difficulty with the definitions of printing, duplication, and printing plant that we included in our survey. We included steps in the design of the questionnaire, such as testing the instrument, and followed-up with agencies to clarify responses during the data collection for the purpose of minimizing such nonsampling errors. We took the following steps to increase the response rate: pretesting the questionnaires with agency officials with print operation knowledge, conducting multiple follow-up calls and emails to encourage responses to the survey, and contacting respondents to clarify unclear responses. We conducted this performance audit from August 2012 through July 2013, in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. GAO surveyed 47 agencies to determine if they operated in-house printing plants. To identify agencies that could be operating in-house printing plants, we developed a universe consisting of agencies authorized in the 1990 Government Printing and Binding Regulations and agencies that had obligated funds to the "printing and reproduction" object class in at least 2 years between fiscal years 2009 and 2011. The tables below contain the agencies in this universe and the number of plants authorized in the 1990 Printing and Binding Regulations and/or plants reported in 2013 in the GAO Government Printing Survey. We administered a survey focused on government printing operations to print officials at 47 agencies we determined could be operating in-house printing plants. We provided questions to identified agency print officials using Microsoft Excel to obtain information about federal agencies' in- house printing operations. This appendix contains the questions from the survey questionnaire. We provided the following definitions for agencies to use when answering our questions: Printing includes the processes of composition, platemaking, presswork, duplicating, silkscreen processes, binding, microform, and the end items of such processes. Duplicating includes high-speed duplicating. (Title 44 Sec. 503 Note) Duplication (a) by automatic copy-processing or copier-duplicating machines, producing copies by electrostatic, thermal, or other copying processes, and using exclusively toner or ink-jet type inks instead of ink; and (b) in volumes that exceed either 500 copies of a single page or 2,500 production units in the aggregate of multiple pages, per job. We asked officials from all surveyed agencies the following questions regarding the definitions of key print terms: 1. Does your agency have official definitions of "printing", "duplication," or "printing plant" that differ from any of the three definitions above? 2. If yes, please provide your agency's definitions below: 3. What authority are the definition(s) from? (Please include statute or other citation(s).) We asked agency officials the following questions, with specific instruction, to determine how many in-house printing plants each agency operates: 4. What is the total number of in-house printing plants (including duplication plants) operated by your agency, across all departments and bureaus within the agency? When completing your answer, please include the following types of facilities: Any plant that produces printing (including duplicating), owned or Duplication plants and high speed duplication plants that use toner or ink-jet machines and typically produce more than 500 copies of a single page or 2500 production units in the aggregate, per job. When completing your answer, please exclude the following types of facilities: Any small plants or "copy centers" that do NOT produce more than 500 single/2500 in aggregate production units, per job. 5. Which of the following is the source of your statutory authority to operate in-house printing plants (including duplication plants)? 1990 Government Printing and Binding Regulations Some other statutory authority Don't know a. If you selected "Some other statutory authority" in Q5, please specify that authority in the space provided here. We asked only print officials from agencies authorized to operate in- house plants listed in the JCP 1990 Government Printing and Binding Regulations the following questions to determine the operating status and additional information on those listed in-house plants: 6. The table provided contains information on printing plants operated by your agency, as indicated in the 1990 Government Printing and Binding Regulations. Please indicate the current status of each plant (Q6a), and complete the requested information for all operational plants (Q6b - Q6f). a. What is the current status of this plant? o Operational o Not Operational b. Does this plant produce the following types of products? (Yes, No, Don't Know) o Toner or Ink Jet on Paper: o Ink on Paper: o Other products (i.e. other substrates): If you answered "yes" to other products, please provide two examples of other products below: c. Does this plant contain any of the following types of equipment? (Yes, No, Don't Know) If yes, how many? o Offset printing press (ink): o Digital printing press (ink): o High speed duplication machine (ink-jet or toner): d. Approximately how much of this plant's printing volume is offset printing? (All, More than half, About half, Less than half, None) e. Approximately how much of this plant's printing volume is digital printing? (All, More than half, About half, Less than half, None) f. Approximately how much of this plant's printing volume is duplication? (All, More than half, About half, Less than half, None) We asked all survey participants the following questions about any in-house printing plants not listed in the JCP 1990 Printing and Binding Regulations: 7. If your agency operates any in-house printing plants (including duplication plants) that were NOT included in the previous question (Q6), please list the name and location of the plant and complete the requested information using the table below. If you do not have any in-house printing plants (including duplication plants) to enter on this tab, please check this box and proceed to the next tab: a. Name of Plant: b. Location of Plant (City and State): c. Does this plant produce the following types of products? (Yes, No, Don't Know) o Toner or Ink Jet on Paper: o Ink on Paper: o Other products (i.e. other substrates): If you answered "yes" to other products, please provide two examples of other products below: d. Does this plant contain any of the following types of equipment? (Yes, No, Don't Know) o Offset printing press (ink): o Digital printing press (ink): o High speed duplication machine (ink-jet or toner): e. Approximately how much of this plant's printing volume is offset printing? (All, More than half, About half, Less than half, None) f. Approximately how much of this plant's printing volume is digital printing? (All, More than half, About half, Less than half, None) g. Approximately how much of this plant's printing volume is duplication? (All, More than half, About half, Less than half, None) In addition to the contact named above, Sharon Silas (Assistant Director), Melissa Bodeau, Leia Dickerson, Sarah Farkas, Kathleen Gilhooly, Leigh Ann Haydon, Carol Henn, Hannah Laufe, John Mingus, Jr., Betsey Ward- Jenks, Elizabeth Wood, and William T. Woods made significant contributions to this report.

Federal law requires that, with limited exceptions, all federal printing be performed by or through GPO. The JCP authorizes exemptions to specific agencies to operate in-house printing plants. In its 1990 JCP Regulations, the JCP included a list of authorized federal in-house printing plants. Some agency documents, once published, are required to be submitted to the FDLP, a GPO program designed to preserve government documents and make them available to the public. GAO was asked to examine how federal printing practices had changed since the JCP Regulations were updated in 1990. This report describes (1) agencies' current printing practices--including the number of in-house printing plant and selected agencies' volumes and spending--and (2) how agencies' current printing practices are reflected in federal printing regulations and statutes. GAO surveyed agencies that might be operating in-house printing plants, interviewed GPO and agency officials, analyzed agency data on printing volumes and spending, and reviewed printing regulations and statutes. GAO also selected six agencies from those surveyed to interview, based on their printing and reproduction obligations. Findings from these interviews cannot be generalized to other federal agencies. GAO is not making recommendations in this report. GAO provided copies of the draft report to GPO and DOD for review and comment. GPO generally agreed with the findings and provided a letter and technical comments which were incorporated as appropriate. DOD did not provide comments. Agencies GAO surveyed reported operating fewer in-house printing plants than in 1990. Specifically, surveyed agencies reported operating 64 percent fewer plants than the number listed in the Congress's Joint Committee on Printing's (JCP) Government Printing and Binding Regulations, updated in 1990 (1990 JCP Regulations). The Department of Defense (DOD) accounted for the greatest decline in in-house printing plants. The 1990 JCP Regulations listed 142 DOD printing plants; however, the Defense Logistics Agency, which currently manages the majority of DOD's printing infrastructure, reported 17 in-house printing plants in GAO's survey. In addition, most agencies reported operating toner-based high-speed duplication machines, and fewer reported operating ink-based conventional printing presses. Of the 32 agencies operating in-house printing plants, 17 reported that all of their in-house printing was conducted on high-speed duplication machines; another 14 agencies reported operating some duplication equipment in addition to conventional printing presses (the remaining agency did not report its type of equipment). No agency reported having only ink-based conventional printing presses at its in-house plants. In addition, interviews with selected agencies showed declines in printing volumes and total spending, and suggested that agencies spent more on printing sent to the Government Printing Office (GPO) and its contracted private printers than on printing done at in-house printing plants. Agencies' printing practices have changed, but existing authorities have not been updated. For example, in 1994, Title 44 of the U.S Code was updated to include "duplicating" in the definition of "printing," but the 1990 JCP Regulations do not include this definition. According to JCP staff, the Committee is aware that the 1990 JCP Regulations do not include duplicating in the definition of printing, and the Committee is working to revise the guidance. Also, the majority of government documents are now published digitally, but provisions in Title 44 that require agencies to submit documents to the Federal Depository Library Program (FDLP) do not reference digital publishing. Selected agencies GAO interviewed reported that they do not submit digital documents to FDLP. FDLP staff have taken a number of steps to address this, including educating agencies about FDLP requirements. In addition, the National Academy of Public Administration recently recommended that GPO develop a plan to preserve and collect government documents, and include a process for ingesting digitized copies into GPO's online government publications system, and GPO reported that it would incorporate this recommendation into its national plan for the future of the FDLP.

Advocates of biennial budgeting often point to the experience of individual states. In looking to the states it is necessary to disaggregate them into several categories. First, 8 states have biennial legislative cycles and hence necessarily have biennial budget cycles. Second, as the table below shows, the 42 states with annual legislative cycles present a mixed picture in terms of budget cycles: 27 describe their budget cycles as annual, 12 describe their budget cycles as biennial and 3 describe their budget cycles as mixed. The National Association of State Budget Officers (NASBO) reports that those states that describe their system as "mixed" have divided the budget into two categories: that for which budgeting is annual and that for which it is biennial. Connecticut has changed its budget cycle from biennial to annual and back to biennial. In the last 3 decades, 17 other states have changed their budget cycles: 11 from biennial to annual, 3 from annual to mixed, and 3 from annual to biennial. Translating state budget laws, practices, and experiences to the federal level is always difficult. As we noted in our review of state balanced budget practices, state budgets fill a different role, may be sensitive to different outside pressures, and are otherwise not directly comparable. In addition, governors often have more unilateral power over spending than the President does. However, even with those caveats, the state experience may offer some insights for your deliberations. Perhaps significant is the fact that most states that describe their budget cycles as biennial or mixed are small and medium sized. Of the 10 largest states in terms of general fund expenditures, Ohio is the only one with an annual legislative cycle and a biennial budget. According to a State of Ohio official, every biennium two annual budgets are enacted, and agencies are prohibited from moving funds across years. In addition, the Ohio legislature typically passes a "budget corrections bill." A few preliminary observations can be made from looking at the explicit design of those states which describe their budget cycle as "mixed" and the practice of those which describe their budget cycle as "biennial." Different items are treated differently. For example, in Missouri the operating budget is on an annual cycle while the capital budget is biennial. In Arizona "major budget units"--the agencies with the largest budgets--submit annual requests; these budgets are also the most volatile and the most dependent on federal funding. In Kansas the 20 agencies that are on a biennial cycle are typically small, single-program or regulatory-type agencies that are funded by fees rather than general fund revenues. In general, budgeting for those items which are predictable is different than for those items subject to great volatility whether due to the economy or changes in federal policy. S. 1434, like a number of previous bills, proposes that the entire budget cycle be shifted from annual to biennial. Under this system, the President would submit budgets every 2 years. Authorizations would be for 2 years or longer. Budget resolutions would be adopted, and appropriations enacted, every 2 years. We believe that this need not be seen as an all-or-nothing proposal. Budget agreements, authorizations, budget resolutions, and appropriations need not cover the same time period. Multiyear fiscal policy agreements and multiyear authorizations make a great deal of sense, but they do not require changing the appropriations decision cycle from annual to biennial. While biennial appropriations could save time for agencies, they would result in a shift in congressional control and oversight. Proposals to change the process should be viewed partly in the context of their effect on the relative balance of power in this debate. We have previously supported the use of multiyear authorizations for federal programs. There seems to be little reason to reexamine and reauthorize programs more often than they might actually be changed. Furthermore, multiyear authorizations help both the Congress and the executive branch by providing a longer term perspective within which a program may operate and appropriations can be determined. This is the normal practice for most of the nondefense portion of the budget. We also agree that a 2-year budget resolution is worth considering. Especially in an era of multiyear spending caps and multiyear reconciliation instructions, a 2-year budget resolution may not be a major change. However, a way would have to be found to update the Congressional Budget Office's (CBO) forecast and baseline against which legislative action is "scored." As you know, CBO scores legislation on the economic assumptions in effect at the time of the budget resolution. Even under the current system there are years when this practice presents problems: in 1990 the economic slowdown was evident during the year, but consistent practice meant that bills reported in compliance with reconciliation instructions were scored on the assumptions in the budget resolution. If budget resolutions were biennial, this problem of outdated assumptions would be greater--some sort of update in the "off year" would be necessary. We have also said that we believe that at a time when major efforts are under way to reduce the deficit, there should be some way to look back and track progress against any multiyear fiscal policy plan. Such a formal "lookback" would be even more critical under a biennial budget resolution. Traditionally, biennial budgeting has been advocated as a way to advance several objectives: (1) to shift the allocation of agency officials' time from the preparation of budgets and justifications to improved financial management and analysis of program effectiveness, (2) to reduce the time Members of the Congress must spend on seemingly repetitive votes, and hence permit increased oversight, and (3) to reduce uncertainty about longer-term funding levels and allocations and hence improve program management and results. However, shifting the entire cycle--authorizations, budget resolutions, and appropriations--to a biennial one may not be necessary to achieve these objectives. As I noted earlier, biennial appropriations can be considered separate from biennial budget resolutions because the two raise quite different questions. Let me turn now specifically to that issue. In considering whether the federal government should shift to a biennial budget, it is important to recognize the critical distinction between how often budget decisions are made and how long the money provided for agency use is available. That is the difference between the periodicity of decisions and the periodicity of funds. Biennial budgeting proposals seek to change the frequency with which decisions are made--from annual to biennial budget decisions. Too often, however, the idea is discussed as though it were necessary to change the frequency of decisions in order to change the length of time funds are available. However, as you know, this is a misconception. The federal budget today is not composed entirely of annually enacted appropriations of 1-year moneys. Not all funds expire on September 30 of each year. First, because budget decisions about mandatory programs and entitlements--which constitute nearly two-thirds of federal spending--are not made annually, the debate about annual versus biennial appropriations deals with less than half of the budget. Annually enacted appropriations apply to that portion of the budget known as discretionary spending--about 36 percent of federal outlays in fiscal year 1995. Even within that 36 percent of the budget on an annual appropriation cycle, not all appropriations were for 1-year funds. The Congress has routinely provided multiple-year or no-year appropriations for accounts or for projects within accounts when it seemed to make sense to do so. Indeed, about two-thirds of the accounts on an annual appropriation cycle contained some multiple-year or no-year funds. For these accounts, some prior year and/or current year authority was available for obligation beyond September 30, 1995, without further congressional action. To the extent that biennial budgeting is proposed as a way to ease a budget execution problem, the Congress has shown itself willing and able to meet that need under the current annual cycle. The federal government has had some experience with biennial budgets. The 1986 Defense Authorization Act directed the Department of Defense (DOD) to submit a biennial budget for fiscal years 1988 and 1989 and every 2 years thereafter. DOD submitted 2-year budgets for a number of fiscal years. However, the authorization committees have not approved a full 2-year budget, and thus the appropriation committees have not provided appropriations for the second year. We have previously reported that if the Congress decides to implement a 2-year budget at the appropriation account level, it should proceed cautiously by testing it on a limited basis. Good candidates for a limited test would be organizations or programs which are relatively stable and for which there are no obvious impediments. Impediments would be activities that hamper the forecasting of budgetary needs for the 2-year period, such as a major reorganization, major changes in financial management or IRM systems, or major changes in mission. In its efforts to bring the budget into balance, the Congress is currently considering major changes in the scope and methods of delivering government services. The very magnitude of these changes raises questions about whether a shift to biennial appropriations could or should be made at the same time. For agency officials--both agency budget officers and program managers--the arguments for biennial budgeting may seem quite strong. Currently, agency budget officers spend several months every year preparing a "from-the-ground-up" budget with voluminous written justifications. Much of this work is repetitious. In contrast, requests for supplemental appropriations are handled on an exception basis. Only those agencies requesting supplemental appropriations prepare and present justifications, and those justifications are less complex than for the annual budget. If, under a biennial appropriations process, the "off-year" updates, amendments, or adjustments were treated like supplemental appropriations, the savings in agency time could be significant, even if the Congress required--as seems reasonable--that agencies submit audited financial and spending reports every year. Would agency time and energy be shifted to improved financial management or better program evaluation? I suspect that would depend on the President's and the agency's leadership and on what the Congress demanded of the agencies. For agency program managers, the interest in biennial budgets is slightly different. Although preparation and analysis for the annual budget preparation and submission process is time-consuming and burdensome for program managers, they are likely to have a greater interest in how long money is available for use. Especially in some programs, such as defense procurement and education programs, multiyear appropriations tend to smooth program functioning. However, as noted above, the Congress has already addressed this budget execution problem for many of these programs by giving them some multiyear funding. While a shift of the entire cycle would ease planning and increase predictability for all program managers, multiyear or advance funding can be provided for those programs for which 1-year money seriously impairs program effectiveness without that shift. Regardless of the potential benefits to agencies, the decision on biennial budgeting will depend on how the Congress chooses to exercise its constitutional authority over appropriations and its oversight functions. Annually enacted appropriations have long been a basic means of exerting and enforcing congressional policy. Oversight has often been conducted in the context of agency requests for funds. A 2-year appropriation cycle could lessen congressional influence or control over program and spending matters, largely because the process would afford fewer scheduled opportunities to affect agency programs and budgets. Although it could be argued that the existence of fixed-dollar caps on discretionary spending mean that multiyear decisions have already been made, that is so only at the aggregate level. The Congress has retained the right to rearrange priorities within those caps. A shift to a biennial appropriations cycle could lessen that flexibility. We have long advocated regular and rigorous congressional oversight of federal programs. Such oversight should examine both the design and effectiveness of federal programs and the efficiency and skill with which they are managed. Through the Chief Financial Officers Act and the Government Performance and Results Act, the Congress has put in place the building blocks to improved accountability--both for the taxpayer's dollar and for results. Congressional involvement in reviewing agency strategic plans and in develop performance indicators will be critical to the success of these efforts. However, it is not necessary to change the budget and appropriations cycle to have effective congressional oversight. Indeed, as I mentioned before, the regular appearance before Appropriations committees historically has provided one vehicle for oversight. This brings me back to my main point: the decision on whether the budget and appropriations cycle should be annual or biennial is fundamentally a decision about the form and forum the Congress wishes to use to affect agency programs and operations. We believe that multiyear fiscal policy agreements and multiyear authorizations make a great deal of sense, but they do not require changing the appropriations decision cycle from annual to biennial. While biennial appropriations could save time for agencies, they would also result in a shift in congressional control and oversight. Proposals to change the process should be viewed partly in the context of their effect on the relative balance of power in this debate. While budgeting always involves forecasting, which itself is uncertain, the longer the period of the forecast, the greater the uncertainty. Increased difficulty in forecasting was one of the primary reasons states gave for shifting from biennial to annual cycles. Dramatic changes in program design or agency structure, such as those the Congress is considering in many areas, will make budget forecasting more difficult. Moving from an annual to a biennial appropriations cycle at the same time may not be wise, given that there may be program changes which could in turn create the need for major budgeting changes in the second year of a biennium. If this happens, biennial budgeting would exist only in theory. Biennial appropriations would be neither the end of congressional control nor the solution to many budget problems. The questions for the Congress are, how does it wish to exercise its constitutional authority over appropriations and in what forum will it conduct its oversight responsibilities? Mr. Chairman, this concludes my prepared statement. I would be happy to answer any questions you or Members of the Subcommittee may have. Budget Process: Evolution and Challenges (GAO/T-AIMD-96-129, July 11, 1996). Correspondence to Chairman Horn, Information on Reprogramming Authority and Trust Funds (GAO/AIMD-96-102R, June 7, 1996). Correspondence to Chairman Kasich, Budgeting for Federal Insurance (GAO/AIMD-96-73R, March 22, 1996). Budget Process: Issues Concerning the Reconciliation Act (GAO/AIMD-95-3, October 7, 1995). Budget Issues: Earmarking in the Federal Government (GAO/AIMD-95-216FS, August 1, 1995). Budget Issues: History and Future Directions (GAO/T-AIMD-95-214, July 13, 1995). Budget Structure: Providing an Investment Focus in the Federal Budget (GAO/T-AIMD-95-178, June 29, 1995). Correspondence to Chairman Wolf, Transportation Trust Funds (GAO/AIMD-95-95R, March 15, 1995). Budget Policy: Issues in Capping Mandatory Spending (GAO/AIMD-94-155, July 18, 1994). Budget Process: Biennial Budgeting for the Federal Government (GAO/T-AIMD-94-112, April 28, 1994). Budget Process: Some Reforms Offer Promise (GAO/T-AIMD-94-86, March 2, 1994). Budget Policy: Investment Budgeting for the Federal Government (GAO/T-AIMD-94-54, November 9, 1993). Budget Issues: Incorporating an Investment Component in the Federal Budget (GAO/AIMD-94-40, November 9, 1993). Correspondence to Chairmen and Ranking Members of House and Senate Committee on the Budget Committees and Chairman of Former House Committee on Government Operations (B-247667, May 19, 1993). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

GAO discussed several proposals to change the budget process from an annual to a biennial cycle. GAO noted that: (1) many congressional members believe a biennial budget cycle would streamline the budget process, provide longer-term funding levels, enhance agencies' ability to manage their programs, and provide more time for congressional oversight; (2) preparation and analysis for the annual budget process is time-consuming and burdensome for program managers; (3) although eight states have biennial budget cycles, state budgets fill a different role and are sensitive to different outside pressures; (4) the state agencies with the largest budgets submit annual budget requests, since these budgets are the most volatile and dependent on federal funding; (5) the state agencies that are on biennial budget cycles are typically small, single-program agencies that are funded by fees rather than general fund revenues; (6) budget agreements, authorizations, and budget resolutions do not have to cover the same time period; (7) Congress has routinely provided multiyear appropriations for those programs on the annual appropriation cycle; and (8) a 2-year budget cycle could lessen congressional control over program and spending matters.

Many foreign physicians who enter U.S. graduate medical education programs do so as participants in the Department of State's Exchange Visitor Program--an educational and cultural exchange program aimed at increasing mutual understanding between the peoples of the United States and other countries. Participants in the Exchange Visitor Program enter the United States with J-1 visas. More than 6,100 foreign physicians with J-1 visas took part in U.S. graduate medical education programs during academic year 2004-05. This number was about 40 percent lower than a decade earlier, when about 10,700 foreign physicians with J-1 visas were in U.S. graduate medical education programs. Physicians participating in graduate medical education on J-1 visas are required to return to their home country or country of last legal residence for at least 2 years before they may apply for an immigrant visa, permanent residence, or certain nonimmigrant work visas. They may, however, obtain a waiver of this requirement from the Department of Homeland Security at the request of a state or federal agency, if the physician has agreed to practice in, or work at a facility that treats residents of, an underserved area for at least 3 years. States were first authorized to request J-1 visa waivers on behalf of foreign physicians in October 1994. Initially, states were authorized to request waivers for up to 20 physicians each fiscal year; in 2002, the annual limit was increased to 30 waivers per state. Physicians who receive waivers may work in various practice settings, including federally funded health centers and private hospitals, and they may practice both primary care and nonprimary care specialties. States and federal agencies may impose additional limitations on their programs beyond federal statutory requirements, such as limiting the number of requests they will make for physicians to practice nonprimary care specialties. Obtaining a J-1 visa waiver through a state request involves multiple steps. A physician must first secure a bona fide offer of employment from a health care facility that is located in, or that treats residents of, an underserved area. The physician, the prospective employer, or both then submit an application to a state to request the waiver. The state submits a request for the waiver to the Department of State. If the Department of State recommends the waiver, it forwards its recommendation to the Department of Homeland Security's U.S. Citizenship and Immigration Services (USCIS). USCIS is responsible for making the final determination and notifying the physician when a waiver is granted. According to officials involved in recommending and approving waivers at the Department of State and USCIS, after review for compliance with statutory requirements and security issues, nearly all states' waiver requests are recommended and approved. Once physicians are granted waivers, they must work at the site specified in their waiver applications for a minimum of 3 years. During this period, although states do not have explicit responsibility for monitoring physicians' compliance with the terms and conditions of their waivers, states may conduct monitoring activities at their own initiative. For purposes of J-1 visa waivers, HHS has specified two types of underserved areas in which waiver physicians may practice: health professional shortage areas (HPSAs) and medically underserved areas and populations (MUA/Ps). In general, HPSAs are areas, population groups within areas, or facilities that HHS has designated as having a shortage of primary care health professionals and are identified on the basis of, among other factors, the ratio of population to primary care physicians. MUA/Ps are areas or populations that HHS has designated as having shortages of health care services and are identified using several factors in addition to the availability of primary care providers. In 2004, Congress gave states the flexibility to use up to 5 of their 30 waiver allotments each year-- which we call "flexible waivers"--for physicians to work in facilities that serve patients who reside in a HPSA or MUA/P, regardless of the facilities' location. No one federal agency is responsible for managing or tracking states' and federal agencies' use of J-1 visa waivers to place physicians in underserved areas. Further, no comprehensive data are available on the total number of waivers granted for physicians to practice in underserved areas. HHS's Health Resources and Services Administration is the primary federal agency responsible for improving access to health care services, both in terms of designating underserved areas and in administering programs-- such as the NHSC programs--to place physicians and other providers in them. However, HHS's oversight of waiver physicians practicing in underserved areas has generally been limited to those physicians for whom HHS has requested J-1 visa waivers. J-1 visa waivers continue to be a major means of supplying physicians to underserved areas in the United States, with states and federal agencies reporting that they requested more than 1,000 waivers in each of fiscal years 2003 through 2005. We estimated that, at the end of fiscal year 2005, the number of physicians practicing in underserved areas through the use of J-1 visa waivers was roughly one and a half times the number practicing there through NHSC programs. In contrast to our findings a decade ago, states are now the primary source of waiver requests for physicians to practice in underserved areas. In fiscal year 2005, more than 90 percent of the waiver requests for physicians were initiated by the states, compared with fewer than 10 percent in 1995. (See fig. 1.) Every state except Puerto Rico and the U.S. Virgin Islands reported requesting waivers for physicians in fiscal year 2005, for a total of 956 waiver requests. In 1995--the first full year that states had authority to request waivers--nearly half of the states made a total of 89 waiver requests. During the past decade, the two federal agencies that requested the most waivers for physicians to practice in underserved areas in 1995--the Department of Agriculture and the Department of Housing and Urban Development--have discontinued their programs. These federal agencies together requested more than 1,100 waivers for physicians to practice in 47 states in 1995, providing a significant source of waiver physicians for some states. For example, these federal agencies requested a total of 149 waivers for physicians to practice in Texas, 134 for New York, and 105 for Illinois in 1995. In fiscal year 2005, the three federal agencies that requested waivers for physicians to practice in underserved areas--the Appalachian Regional Commission, the Delta Regional Authority, and HHS--requested a total of 56 waivers for physicians to practice in 15 states. With diminished federal participation, states now obtain waiver physicians primarily through the 30 waivers they are allotted each year. The number of waivers states actually requested, however, varied considerably among the states in fiscal years 2003 through 2005. For example, in fiscal year 2005, about one-quarter of the states requested the maximum of 30 waivers, while slightly more than a quarter requested 10 or fewer (see fig. 2). Collectively, the 54 states requested 956 waivers, or roughly 60 percent of the maximum of 1,620 waivers that could have been granted at their request. Of the waivers states requested in fiscal year 2005, about 44 percent were for physicians to practice exclusively primary care, while about 41 percent were for physicians to practice exclusively in nonprimary care specialties, such as anesthesiology or cardiology. An additional 7 percent were for physicians to practice psychiatry. A small proportion of requests (5 percent) were for physicians to practice both primary and nonprimary care--for example, for individual physicians who practice both internal medicine and cardiology (see fig. 3). More than 90 percent of the states that requested waivers in fiscal year 2005 reported that, under their policies in place that year, nonprimary care physicians were eligible to apply for waiver requests. Some of these states limited these requests. For example, some states restricted the number of hours a physician could practice in a nonprimary care specialty. Further, two states reported that they accepted applications from, and requested waivers for, primary care physicians only. Regarding practice settings, more than three-fourths of the waivers requested by states in fiscal year 2005 were for physicians to practice in hospitals and private practices, including group practices. In addition, 16 percent were for physicians to practice in federally qualified health centers--facilities that provide primary care services in underserved areas--or rural health clinics--facilities that provide outpatient primary care services in rural areas (see fig. 4). More than 80 percent of the states requesting waivers in fiscal year 2005 reported requiring facilities where the physicians worked--regardless of practice setting--to accept some patients who were uninsured or covered by Medicaid. Although states do not have explicit responsibility for monitoring physicians' compliance with the terms and conditions of their waivers, in fiscal year 2005, more than 85 percent of the states reported conducting at least one monitoring activity. The most common activity--reported by 40 states--was to require periodic reports by the physician or the employer (see table 1). Some states required these reports to specify the number of hours the physician worked or the types of patients--for example, whether they were uninsured--whom the physician treated. Not all states that requested waivers conducted monitoring activities. Six states, which collectively accounted for about 13 percent of all state waiver requests in fiscal year 2005, reported that they conducted no monitoring activities in that year. The majority of the states reported that the annual limit of 30 waivers per state was at least adequate to meet their needs for J-1 visa waiver physicians. When asked about their needs for additional waiver physicians, however, 11 states reported needing more. Furthermore, of the 44 states that did not request their 30-waiver limit in each of fiscal years 2003 through 2005, more than half were willing, at least under certain circumstances, to have their unused waiver allotments redistributed to other states in a given year. Such redistribution would require legislation. Fourteen states reported that they would not be willing to have their states' unused waiver allotments redistributed. About 80 percent of the states reported that the annual limit of 30 waivers per state was adequate or more than adequate to meet their needs for J-1 visa waiver physicians. However, 13 percent of the states reported that the 30-waiver limit was less than adequate (see fig. 5). Among the 16 states that requested 29 or 30 waivers in fiscal year 2005, 10 states reported that the annual limit was at least adequate for their needs. The other 6 states that requested all or almost all of their allotted waivers that year reported that the 30-waiver limit was less than adequate. As mentioned earlier, states can use up to 5 of their waiver allotments for physicians to work in facilities located outside of HPSAs and MUA/Ps, as long these facilities serve patients who live in these underserved areas. While we inquired about states' views on the adequacy of the annual limit on these flexible waivers, fewer than half of the states reported requesting flexible waivers in fiscal year 2005--the first year they were authorized to do so. When asked about the annual limit of 5 flexible waivers, half of the states (27 states) reported that this limit was at least adequate, but nearly one-third (17 states) did not respond or reported that they were unsure of their need for flexible waivers. The remaining 10 states reported that the annual limit of 5 flexible waivers was less than adequate (see fig. 6). Of these 10 states, 8 had also reported that the annual limit of 30 waivers per state was at least adequate for their needs, suggesting that some states may be more interested in increasing the flexibility with which waivers may be used than in increasing the overall number of waivers each year. In addition to commenting on the adequacy of the annual waiver limits, states estimated their need for additional physicians under their J-1 visa waiver programs. Specifically, 11 states (20 percent) estimated needing between 5 and 50 more waiver physicians each. Collectively, these 11 states reported needing 200 more waiver physicians (see table 2). Although 10 states reported requesting the annual limit of 30 waivers in each of fiscal years 2003 through 2005, the large majority (44 states) did not. When asked to provide reasons why they did not use all 30, many of these states reported that they received fewer than 30 applications that met their requirements for physicians seeking waivers through their state J-1 visa waiver programs. Some states, however, offered further explanations, which touched upon difficulties attracting physicians to the state, low demand for waiver physicians among health care facilities or communities, and mismatches between the medical specialties communities needed and those held by the physicians seeking waivers. For example: Difficulties attracting waiver physicians: One state commented that the increase in the annual limit on waivers from 20 to 30 in 2002 opened more positions in other states, contributing to a decrease in interest among physicians seeking waivers to locate in that state. Two states suggested that because they had no graduate medical education programs or a low number of them, fewer foreign physicians were familiar with their states, affecting their ability to attract physicians seeking J-1 visa waivers. Low demand for waiver physicians: Many states noted low demand for foreign physicians among health care facilities or communities in the states. Two of these states commented that they had relatively few problems recruiting U.S. physicians. Another state commented that health care facilities--particularly small facilities and those located in rural areas--may be reluctant to enter into the required 3-year contracts with waiver physicians because of their own budget uncertainties. Lack of physicians with needed specialties: One state commented that most communities in the state need physicians trained in family medicine and that few physicians with J-1 visas have that training. Similarly, another state noted a lack of demand among the health care facilities in the state for the types of medical specialties held by physicians seeking waivers. In response to a question about whether they had observed any significant changes in the number of physicians seeking J-1 visa waivers, 15 states reported seeing less interest from physicians, or fewer applications, since 2001. Some states suggested that the decline might be due to an overall reduction in the number of physicians with J-1 visas who were in graduate medical education programs. Three states mentioned the possibility that more physicians may be opting to participate in graduate medical education on an H-1B visa, which does not have the same foreign residence requirement as a J-1 visa. Of the 44 states that did not use all of their waiver allotments in each of fiscal years 2003 through 2005, slightly over half (25 states) reported that they would be willing, at least under certain circumstances, to have their unused waiver allotments redistributed to other states. In contrast, about one-third of the states with unused waiver allotments (14 states) reported that they would not be willing to have their unused waiver allotments redistributed. (See table 3 and, for further details on states' responses, see app. I.) The 14 states that reported they would be willing under certain circumstances to have their unused waiver allotments redistributed listed a variety of conditions under which they would be willing to do so, if authorized by law. These conditions centered around the timing for redistribution, the approach for redistribution, and the possibility for compensation. Timing of redistribution: Seven states reported that their willingness to have their unused waiver allotments redistributed depended in part on when the redistribution would occur in a given year. Their comments suggested concerns about states being asked to give up unused waiver allotments before having fully determined their own needs for them. For example, three states reported that they would be willing to release at least a portion of their unused waiver allotments midway through the fiscal year. One state reported that it would be willing to have its unused waiver allotments redistributed once the state reached an optimal physician-to-population ratio. Finally, two states specified that states benefiting from any redistribution should be required to use the redistributed waivers within the same fiscal year. Approach for redistribution: Three states reported that their willingness to have their unused waiver allotments redistributed depended on how the redistribution would be accomplished. Two states reported a willingness to do so if the allotments were redistributed on a regional basis--such as among midwestern or southwestern states. Another state reported that it would be willing to have its unused waiver allotments redistributed to states with high long-term vacancy rates for physicians. This state was also willing to have its unused waiver allotments redistributed in emergency relief situations, such as Hurricane Katrina's aftermath, to help attract physicians to devastated areas. Possibility for compensation: Two states stated that they would be willing to have their unused waiver allotments redistributed if they were somehow compensated. One state remarked that it would like more flexible waiver allotments, equal to the number of unused waiver allotments that were redistributed. The other state did not specify the form of compensation. Other issues: One state commented that it would be willing to have its unused waiver allotments redistributed as long as redistribution did not affect the number of waivers it could request in future years. Another state responded that any provision to have unused waiver allotments redistributed would need to be pilot-tested for 2 years so that its effect could be evaluated. The 14 states that reported that they would not be willing to have their unused waiver allotments redistributed to other states cited varied concerns. Several states commented that, because of physicians' location preferences and differences in states' J-1 visa waiver program requirements, a redistribution of unused waiver allotments could possibly reduce the number of physicians seeking waivers to practice in certain states. Physician location preferences: Three states commented that physicians seeking J-1 visa waivers might wait until a redistribution period opened so that they could apply for waivers to practice in preferred states. As one state put it, if additional waivers were provided to certain states, a physician might turn down the "number 15 slot" in one state to accept the "number 40 slot" in another. This concern was also raised by four states that reported they were willing to have their unused waiver allotments redistributed under certain circumstances; two of these states specifically mentioned the possible negative impact that redistribution could have on rural areas. Differences in state program requirements: One state commented that until state requirements for waivers were made consistent among states, having unused waiver allotments redistributed would benefit states with more lenient requirements or force states with more stringent requirements to change their policies. While this state did not specify what it considered to be stringent or lenient requirements, substantial differences in state programs do exist. For example, some states restrict their waiver requests solely to primary care physicians, while others place no limits on the number of allotted waivers they request for nonprimary care physicians. In another example, four states require 4- or 5-year contracts for all physicians or for physicians in certain specialties. One state commented that if it lost an unused waiver allotment to a state with more lenient requirements, it would have given away to another state a potential resource that it had denied its own communities. Mr. Chairman, this concludes my prepared statement. I will be happy to answer any questions that you or Members of the Subcommittee may have. For information regarding this testimony, please contact Leslie G. Aronovitz at (312) 220-7600 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Kim Yamane, Assistant Director; Ellen W. Chu; Jill Hodges; Julian Klazkin; Linda Y.A. McIver; and Perry G. Parsons made key contributions to this statement. Much less than adequate No States that requested 30 waivers in each of fiscal years 2003 through 2005 were not asked about their willingness to have unused waiver allotments redistributed to other states. State Department: Stronger Action Needed to Improve Oversight and Assess Risks of the Summer Work Travel and Trainee Categories of the Exchange Visitor Program. GAO-06-106. Washington, D.C.: October 14, 2005. Health Workforce: Ensuring Adequate Supply and Distribution Remains Challenging. GAO-01-1042T. Washington, D.C.: August 1, 2001. Health Care Access: Programs for Underserved Populations Could Be Improved. GAO/T-HEHS-00-81. Washington, D.C.: March 23, 2000. Foreign Physicians: Exchange Visitor Program Becoming Major Route to Practicing in U.S. Underserved Areas. GAO/HEHS-97-26. Washington, D.C.: December 30, 1996. Health Care Shortage Areas: Designations Not a Useful Tool for Directing Resources to the Underserved. GAO/HEHS-95-200. Washington, D.C.: September 8, 1995. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Many U.S. communities face difficulties attracting physicians to meet their health care needs. To address this problem, states and federal agencies have turned to foreign physicians who have just completed their graduate medical education in the United States under J-1 visas. Ordinarily, these physicians are required to return home after completing their education, but this requirement can be waived at the request of a state or federal agency if the physician agrees to practice in, or work at a facility that treats residents of, an underserved area. In 1996, GAO reported that J-1 visa waivers had become a major means of providing physicians for underserved areas, with over 1,300 requested in 1995. Since 2002, each state has been allotted 30 J-1 visa waivers per year, but some states have expressed interest in more. GAO was asked to report on its preliminary findings from ongoing work on (1) the number of J-1 visa waivers requested by states and federal agencies and (2) states' views on the 30-waiver limit and on their willingness to have unused waiver allotments redistributed. Such redistribution would require legislative action. GAO surveyed the 50 states, the District of Columbia, 3 U.S. insular areas--the 54 entities that are considered states for purposes of requesting J-1 visa waivers--and federal agencies about waivers they requested in fiscal years 2003-05. The use of J-1 visa waivers remains a major means of placing physicians in underserved areas of the United States. States and federal agencies reported requesting more than 1,000 waivers in each of the past 3 years. In contrast to a decade ago, states are now the primary source of waiver requests for physicians to practice in underserved areas, accounting for more than 90 percent of such waiver requests in fiscal year 2005. The number of waivers individual states requested that year, however, varied considerably. For example, about one-quarter of the states requested the maximum of 30 waivers, while slightly more than a quarter requested 10 or fewer. Regarding the annual limit on waivers, about 80 percent of the states--including many of those that requested the annual limit or close to it--reported the 30-waiver limit to be adequate for their needs. About 13 percent reported that this limit was less than adequate. Of the 44 states that did not always request the limit, 25 reported that they would be willing to have their unused waiver allotments redistributed, at least under certain circumstances. In contrast, another 14 states reported that they would not be willing to have their unused waiver allotments redistributed. These states cited concerns such as the possibility that physicians seeking waivers would wait until a redistribution period opened and apply to practice in preferred locations in other states.

Under the Federal Meat Inspection Act, the Poultry Products Inspection Act, and the Egg Products Inspection Act, USDA, through FSIS, is responsible for ensuring the safety of meat, poultry, and certain egg products. Under the Federal Food, Drug, and Cosmetic Act and the Public Health Service Act, FDA is responsible for all other foods, including fruits and vegetables; dairy products; seafood; and certain canned, frozen, and packaged foods. The food-processing sector is generally described as the middle segment of the farm-to-table continuum--it extends from the time livestock and crops leave the farm for slaughter and processing into food until it reaches retail establishments. FDA and FSIS work to ensure the safety of food products processed in the United States through a regulatory system of preventive controls that identifies hazards early in the production process to minimize the risk of contamination. Known as the Hazard Analysis and Critical Control Point (HACCP) system, it makes food-processing facilities responsible for developing a plan that identifies harmful microbiological, chemical, and physical hazards that are reasonably likely to occur and establishes critical control points to prevent or reduce contamination. Through their inspection programs, FDA and FSIS verify that food processors are implementing their HACCP plans. FDA inspects over 57,000 food facilities every 5 years on average, and USDA inspects over 6,000 meat and poultry slaughter and processing facilities daily. Individual states also conduct yearly inspections of about 300,000 food-processing facilities, including small firms with fewer than 10 employees and large corporations with thousands of employees and multiple processing plants located in many states. Both FDA and FSIS have the authority to take enforcement actions as necessary to ensure that facilities meet the agencies' safety and sanitation regulatory requirements. As we reported in 2001, in fiscal year 1999, the latest year for which such information was available, FDA, FSIS, and the states spent a total of about $1.3 billion on food safety activities. Following the events of September 11, 2001, the federal government intensified its efforts to address the potential for deliberate contamination of agriculture and food products. On October 8, 2001, the President issued an executive order establishing the Office of Homeland Security, which added the agriculture and food industries to the list of critical infrastructure systems needing protection from terrorist attack. In addition, the Congress provided FDA and USDA with emergency funding to prevent, prepare for, and respond to potential bioterrorist attacks through the Department of Defense Appropriation Act of 2002: $97 million for FDA and $15 million for FSIS. For the most part, FDA has used the emergency funds to enhance the security of imported food by hiring new inspectors and increasing inspections at U.S. ports of entry. FSIS has used its emergency funds to support its food security activities, which include, among other things, providing educational and specialized training. FDA's fiscal year 2003 budget builds upon funding received from the fiscal year 2002 appropriation plus the fiscal year 2002 emergency supplemental funding of $97 million to counter terrorism. FDA plans to seek additional funding in the future for food safety activities and security activities related to terrorism. FSIS is asking for an additional $28 million. The Congress also enacted the Public Health Security and Bioterrorism Preparedness and Response Act of 2002, which contains numerous provisions designed to enhance the safety and security of the food, drug, and water industries. In addition, both FDA and USDA have taken many actions to better protect the food supply against deliberate contamination. For example, FDA has hired 655 new food safety investigators and laboratory personnel in the field. In addition, it has participated in several exercises at the federal and state levels to enhance emergency response procedures. Furthermore, FDA is working with CDC to initiate and implement a nationwide Laboratory Response Network for foods to identify laboratory capacity for testing agents that could be used to deliberately contaminate food. It has also provided additional laboratory training for food safety personnel and sought stakeholders' input to develop regulations that are required by the new bioterrorism legislation. Moreover, FDA worked with the Office of the Surgeon General, U.S. Air Force, to adapt a version of the Operational Risk Management approach to examine the relative risks of intentional contamination during various stages of food production and distribution. Within the Department of Health and Human Services, both FDA and CDC have worked closely with federal, state, and local agencies to enhance their surveillance of diseases caused by foodborne pathogens. FDA's efforts to reduce food security risks also include working with other federal agencies, trade associations, and the Alliance for Food Security. USDA has formed a Homeland Security Council to develop a Department- wide plan to coordinate efforts between all USDA agencies and offices. The Department has also established the FSIS Office of Food Security and Emergency Preparedness to centralize the Department's work on security matters. USDA has also coordinated with other government agencies, such as the Office of Homeland Security, the Federal Bureau of Investigation (FBI), and FDA, to develop prevention, detection, and response procedures to better protect the nation's food supply. USDA will be increasing the number of import inspectors by 20. These inspectors will place special emphasis on food security in addition to their traditional food safety role. In addition, USDA has participated in several exercises at the federal and state levels to enhance response procedures and has conducted risk assessments for domestic and imported food. Since this review began, USDA has conducted three simulation exercises at the Department and agency level to test the Department's response to a terrorist attack and is planning three additional simulations for the spring of 2003. USDA has also conducted preparedness-training sessions for veterinarians and circuit supervisors. (Circuit supervisors supervise the work of in-plant inspection personnel and discuss the security guidelines with them.) Experts from government and academia generally agree that terrorists could use food products as a vehicle for introducing harmful agents into the food supply. Just recently, the National Academies reported that terrorists could use toxic chemicals or infectious agents to contaminate food production facilities and that, although much attention has been paid to ensuring safety and purity throughout the various stages of processing and distribution, protecting the food supply from intentional contamination has not been a major focus of federal agencies. Among other things, the report says that FDA should act promptly to extend its HACCP methodology so that it could be used to deal effectively with the deliberate contamination of the food supply. In February 2002, CDC reported that although the food and water systems in the United States are among the safest in the world, the nationwide outbreaks due to unintentional food or water contamination demonstrate the ongoing need for vigilance in protecting food and water supplies. All of the bioterrorism experts whom we consulted from academia agreed that the food supply is at risk. The food safety statutes do not specifically authorize FDA or USDA to require food processors to implement any type of security measures designed to prevent the intentional contamination of the foods they produce. While these agencies' food safety statutes can be interpreted to provide authority to impose certain security requirements, as opposed to food safety requirements, neither agency believes it has the authority to regulate all aspects of security. Counsel in the Department of Health and Human Service's Office of the Assistant Secretary for Legislation advised that FDA's authorities under the Federal Food, Drug, and Cosmetic Act and the Public Health Service Act provide FDA with tools to adopt measures to control insanitary preparation, packing, and holding conditions that could lead to unsafe food; detect contamination of food; and control contaminated food. However, Counsel also advised that FDA's food safety authorities do not extend to the regulation of physical facility security measures. FDA's counsel provided a similar assessment, telling us that, to the extent that food safety and security overlap, FDA might be able to require the industry to take precautionary steps to improve security but observed that there is little overlap between safety and security. One area where safety and security do overlap is in the handling of hazardous materials. FDA's existing safety regulations specify that hazardous chemicals should be stored so that they cannot contaminate food products. This requirement overlaps with FDA's food security guidelines advising that hazardous chemicals be stored in a secure area and that access to them be limited. USDA, on the other hand, has a somewhat more expansive view of the extent to which its statutory authority allows it to require food processors to adopt certain security measures. USDA's general counsel concluded that to the extent that security precautions pertain to activities closely related to sanitary conditions in the food preparation process, FSIS has the authority to require food processors to implement certain security measures. The general counsel concluded that FSIS could require facilities to develop and maintain a food security management plan concerning their response to an actual threat involving product tampering, since this is directly related to food adulteration. Such a plan could be added to a current HACCP plan or it could be entirely separate. USDA also believes that FSIS has authority to mandate its "inside security" guidelines, such as controlling or restricting access to certain areas, monitoring the operation of equipment to prevent tampering, and keeping accurate inventories of restricted ingredients and hazardous chemicals. Similarly, USDA believes that many of its security measures that address shipping and receiving food products or protecting water and ice used in processing products also could be made mandatory. These measures include putting tamper-proof seals on incoming and outgoing shipments and controlling access to water lines and ice storage. On the other hand, USDA believes that the "outside security" measures included in its guidelines, such as securing plant boundaries and providing guards, alarms, and outside lighting, have little to do with sanitation in the facility or the immediate food-processing environment and, therefore, could not be made mandatory under existing authorities. With respect to the guidelines' personnel security measures, USDA noted that FSIS has limited authority over personnel matters at food-processing facilities and could not require facilities to perform personnel background checks before hiring. In response to the nation's growing concerns regarding the potential for deliberate contamination of the food supply, FDA and USDA issued guidelines to the food-processing industry suggesting measures to enhance security at their facilities. Among other things, the guidelines suggests conducting a risk assessment, developing a plan to address security risks at plants, and adopting a wide range of security measures inside and outside the premises. Food-processing facilities are not required to adopt any of the security measures but are encouraged to adopt those that they feel are best suited for their operations. Although both agencies have alerted their field inspection personnel to be vigilant about security issues, they have also told the inspectors that they are not authorized to enforce these measures and have instructed them not to document their observations regarding security because of the possible release of this information under the Freedom of Information Act and the potential for the misuse of this information. As a result, FDA and USDA currently do not know the extent to which food security measures are being implemented at food-processing facilities. In contrast, the Congress directed medium-size and large-size community water systems, which are privately or publicly owned, to assess their vulnerability to terrorist attacks and to develop an emergency response plan to prepare for such an event. The act also authorized funding to be used for basic security enhancements, such as the installation of fencing, gating, lighting, or security cameras. This approach enables the Environmental Protection Agency (EPA) to monitor the water industry's security efforts and could be a possible model for the food safety agencies. In 2002, FDA and FSIS each issued voluntary security guidelines to the food-processing industry to help federal- and state-inspected plants identify ways to enhance their security. The agencies encouraged food processors, among others, to review their current operations and adopt those security measures suggested in the guidelines that they believed would be best suited for their facilities. Officials from both FDA and FSIS told us that there was little or no coordination between the two agencies in developing these guidelines. The FDA guidance contains over 100 recommended security measures covering seven areas of plant operation, such as managing food security, physical (outside) security, and computer security. FSIS's guidelines contain 68 security measures and cover seven areas of plant operation. Figure 1 summarizes key aspects of both agencies' voluntary security guidelines for industry. FDA and FSIS have made the guidelines available on the Internet. These guidelines are very similar--one difference is that FSIS's contain security measures for slaughter facilities. Some state governments have also acted to protect food products from deliberate contamination. We learned from 11 state auditing offices that food safety regulatory officials from most of these states are providing industry or state inspectors with guidelines, either in the form of the FDA and FSIS guidelines or guidelines developed by the state officials themselves. In addition, three states have enacted new legislation or regulations addressing the security of food products. Although FDA and FSIS do not assess the extent to which food processors are implementing security measures, the agencies have asked their field inspection personnel to be on heightened alert and to discuss, but not interpret, the security guidance with facility officials during their routine food safety inspections. However, both FDA and USDA have instructed their field inspection personnel to refrain from enforcing any aspects of the security guidelines because the agencies generally believe that they lack such authority. They have also instructed their field personnel not to document plants' security measures because they are concerned that such information would be subject to Freedom of Information Act requests. More specifically, FDA's instructions to its field personnel specify that they should neither perform a comprehensive food security audit of the establishment nor conduct extensive interviews to determine the extent to which preventive measures suggested in the guidelines have been adopted. The goals, according to FDA, are to heighten industry's awareness of food security practices, facilitate an exchange of information between FDA and industry on the subject of food security, and encourage plant management to voluntarily implement those preventive measures that they believe are most appropriate for their operation. In short, FDA inspectors are encouraged to discuss food security concerns with plant management and to provide them with copies of the guidelines. Although the exact details of such discussions are not to be recorded, inspectors are required to document in their inspection reports that such discussions took place and that they gave a copy of the guidelines to facility management. Similarly, FSIS has informed its field inspectors that they have no regulatory duties regarding the enforcement of the guidelines. Initially, the agency instructed its inspectors to refer any questions from facility managers to USDA's Technical Service Center in Omaha, Nebraska. Recently the agency modified its position regarding direct discussions of food security and now allows inspectors to discuss, but not interpret, security with facility management. Inspectors are still instructed not to document these conversations or enforce the adoption of any security measure. Officials from both agencies expressed concerns about gathering security information from facilities because it could be subject to public disclosure through Freedom of Information Act requests. If terrorists gained access to this information, it could give them a road map to target the most vulnerable areas in a food-processing plant. Recent congressional efforts to better protect the nation's drinking water from terrorist acts may offer a model for FDA and USDA to help monitor security measures adopted at food-processing facilities as well as to identify any security gaps that may exist at these facilities. Although there are differences in how the government regulates drinking water and food, food and water are essential daily consumption elements, and both are regulated to ensure their safety. In June 2002, the Congress enacted the Public Health Security and Bioterrorism Preparedness and Response Act of 2002, which, among other things, amended the Safe Drinking Water Act. The Bioterrorism Act requires medium-size and large-size community water systems (those serving over 3,300 people), which are privately and publicly owned, to certify to EPA that they have assessed their vulnerability to a terrorist attack and developed emergency plans to prepare for and respond to such an attack. These water systems serve 91 percent of the United States' population. Each community's water system is required to conduct a vulnerability assessment and submit a copy of the assessment to EPA. The act specifies that the vulnerability assessment is exempt from disclosure under the Freedom of Information Act, except for the identity of the community water system and the date on which it certifies compliance. Community water systems are also required to prepare an emergency response plan that incorporates the results of their vulnerability assessments. In addition, the act authorizes funding for financial assistance to community water systems to support the purchasing of security equipment, such as fencing, gating, lighting, or security cameras. FDA and FSIS lack comprehensive information on the extent to which food-processing companies are adopting security measures. However, officials from the majority of the food trade associations that we contacted believe that their members are implementing a range of measures to enhance security at their facilities. We found that the five food-processing facilities we visited in various geographic regions around the country are also implementing an array of security measures that range from developing risk assessment plans to hiring security contractors. Furthermore, our survey of FDA and FSIS inspectors indicates that, generally, food-processing facilities are implementing a range of security measures. The survey responses indicate, however, that the inspectors were more aware of those security measures that were the most visible to them during the course of their regular food safety inspections. According to trade association officials, food processors are voluntarily taking steps to prevent the deliberate contamination of their products, including adopting many of the measures suggested by FDA and FSIS, such as installing fences, requiring that employees wear identification, and restricting access to certain plant areas. Association officials told us that most large food-processing facilities already have ample security plans that include many of the recommendations made by FDA and FSIS. One trade association recently conducted a survey of its members and asked for their opinions about FSIS's Guidelines. Most of the respondents indicated that they were aware of the guidelines; they believed the guidelines were for the most part practical and workable; and they used them in their security plans. However, these officials were unable to provide data on the extent to which the food-processing industry is implementing security measures to prevent or mitigate the potential deliberate contamination of food products. Trade association officials also said that they provided FDA and FSIS with comments on the voluntary guidelines and, in some cases, have also issued their own food security guidelines to their members. Although the officials generally believe that the agencies' guidelines are reasonable, they do not want the government to regulate food security. They also feel that some companies, especially small facilities with limited resources, are unable to implement all the measures in the guidelines. Therefore, these officials believe it is important for the guidelines to remain voluntary. The industry is involved in improving food security in other ways as well. For example, the food industry associations formed the Alliance for Food Security to facilitate the exchange of information about food security issues. The Alliance is composed of trade associations representing the food chain, from commodity production through processing, packaging, distribution, and retail sale, as well as government agencies responsible for food and water safety, public health, and law enforcement. Similarly, led by the Food Marketing Institute, the food industry and FBI established the Information Sharing and Analysis Center (ISAC), which serves as a contact point for gathering, analyzing, and disseminating information among companies and the multiagency National Infrastructure Protection Center based at FBI headquarters. Through ISAC, FBI officials have notified food manufacturers of warnings and threats that the Center deems to be credible. ISAC also provides a voluntary mechanism for reporting suspicious activity in a confidential manner and for developing solutions. We visited five food-processing facilities, including a slaughter plant and facilities that produce beverages and ready-to-eat products. Although these facilities are not in any way representative of all food-processing plants nationwide, they provide some information about the types of security measures that some facilities are implementing. All five facilities had conducted risk analyses and, on the basis of the results, had implemented a number of security measures similar to those suggested in the FDA and FSIS guidelines. For example, all five facilities limited access to the facility through such means as requiring visitors to enter through a guard shack and to provide identification. In addition, employees at three of the facilities could enter the facility only by using magnetic cards. However, managers at the five facilities offered differing opinions about personnel security. Although all of the facilities we visited performed background checks on their employees that included verification of social security numbers, only some verified prior work experience, criminal history, and level of education. One company also required that its contractors, such as construction companies working in the facility, perform employment, education, and criminal checks of their own employees. The facilities also used different protocols for employee access to different areas within the plant. For example, at four of the facilities, employees were limited to those areas of the plant in which they worked. While the managers at these facilities generally complimented FDA's and USDA's security guidelines, they said that they do not want the agencies to regulate security. Rather, they believe that the agencies should develop a nonprescriptive framework or strategy for industry and then leave them to decide how to meet their individual requirements. One manager believes that food security responsibilities should be moved to the Department of Homeland Security. Finally, our discussions with trade association officials and food- processing industry officials revealed that the industry is very concerned about sharing security information with federal agencies because of the possibility that it could provide a road map for terrorist groups if it were released under the Freedom of Information Act. Although the act exempts from public release certain national security, trade secret, and commercial or financial information, industry officials are generally skeptical about the government's ability to prevent the release of sensitive security information at food-processing facilities. FBI officials told us that they have cited these exemptions when assuring ISAC members that security information shared with them will be protected from public release. These officials explained that the courts have generally ruled that the commercial information exemption protects those who voluntarily provide the government with information if the information is of a kind that the provider would not ordinarily release to the public. However, the FBI officials we interviewed believe that the government should find some way of assuring industry that sensitive security information is protected from public release. FDA and FSIS survey respondents observed a range of security measures being implemented at food-processing facilities, although both FDA and FSIS respondents were able to provide more information about those security measures that were most visible during the course of their normal inspection duties. Figure 2 shows selected categories of security measures recommended in the FDA and FSIS security guidelines that were most visible to inspectors. The majority of the FDA survey respondents said they were able to observe security measures, such as fencing around the plants' perimeter, limiting access to restricted areas, securing hazardous materials, and providing adequate interior and exterior lighting. Likewise, most of FSIS's circuit supervisors were able to observe outside security measures including alarmed emergency exits, plant perimeter protection, positive employee identification, and the inspection of incoming and outgoing vehicles. Survey respondents provided fewer observations regarding other types of security measures included in the FDA and FSIS guidelines--in some instances because these measures were less visible to them. For example, FDA respondents were less able to comment on whether they noticed or knew of the presence of security measures designed to account for missing stock or for other finished product irregularities. (See fig. 3.) Similarly, FSIS respondents were less unable to comment on the extent to which facilities were performing background checks on new employees or implementing proper mail-handling practices. More than half of FSIS's survey respondents stated that large plants-- those with at least 500 employees--had implemented a range of security measures, including the areas of outside security, storage, slaughter and processing, and personnel security. Fewer of these respondents observed these security measures at smaller plants. Some FDA and FSIS respondents provided additional comments that the very small firms typically lack the financial resources to implement many of the security measures suggested in the government guidelines. Similarly, some respondents commented that many of the security measures might not be necessary at smaller establishments. Additionally, most of the FDA respondents reported that they had not received training on food security; while nearly all of the FSIS respondents reported that they had recently received such training. Some of the FSIS respondents further stated that although they had received food security training, further training was greatly needed in the field. Such training would be beneficial because field personnel are encouraged to discuss security measures with managers at the facilities they inspect. Finally, responses to our survey showed that FDA and FSIS respondents have different levels of "satisfaction" with or "confidence" in the efforts of the processing facilities they inspect to ensure the protection of food from acts of deliberate contamination. While nearly half of the FSIS respondents said they were somewhat or very confident of the efforts made by the food processors they inspect, slightly over one-fourth of the FDA respondents were satisfied or very satisfied with the efforts made by the food processors they inspect. Thirty-seven food regulatory officials interviewed by state auditors in 11 states provided opinions on their overall level of satisfaction with federal, state, and industry efforts to protect food from intentional contamination. Table 1 shows that nearly half of the state regulatory officials interviewed expressed satisfaction with the efforts made by federal, state, and industry to safeguard food products--though these results cannot be generalized to all state regulatory officials. Finally, most of the state officials interviewed by state auditors believed it was either "important" or "very important" for states to monitor whether companies have adopted security measures to prevent acts of deliberate contamination; 3 of the 11 states are already requiring their inspectors to do so. The vulnerability of the food supply to potential acts of deliberate contamination is a national concern. The President addressed this concern in the October 8, 2001, executive order establishing the Office of Homeland Security and adding the agriculture and food industries to the list of critical infrastructure systems needing protection from terrorist attack. The National Academies have also concluded in a recently released report that infectious agents and toxic chemicals could be used by terrorists to contaminate food-processing facilities. Among other things, the report says that FDA should act promptly to extend its Hazard Analysis and Critical Control Point methodology so it might be used to deal effectively with deliberate contamination of the food supply. The Centers for Disease Control and Prevention also reported recently on the need to better protect our nation's food and water supplies. These assessments underscore the need to enhance security at food- processing facilities. Although FDA and FSIS recognize that need and have taken action to encourage food processors to voluntarily adopt security measures, these actions may be insufficient. Because the agencies believe that they generally lack authority to mandate security measures and are concerned that such information would be subject to Freedom of Information Act requests, they do not collect information on industry's voluntary implementation of security measures. The agencies are, therefore, unable to determine the extent to which food processors have voluntarily implemented such measures. Both FDA and USDA have completed risk assessments. However, without the ability to require food- processing facilities to provide information on their security measures, these federal agencies cannot fully assess industry's efforts to prevent or reduce the vulnerability of the nation's food supply to deliberate contamination. Similarly, they cannot advise processors on needed security enhancements. Furthermore, lacking baseline information on the facilities' security condition, the agencies would be unprepared to advise food-processing facilities on any additional actions needed if the federal government were to go to a higher threat alert. Finally, the lack of security training for FDA food inspectors on the voluntary security guidelines issued for food processors and the limited number of FSIS inspectors that have so far received training on the voluntary security guidelines hamper the inspectors' ability to conduct informed discussions regarding security measures with facility personnel as they are currently instructed to do. In order to reduce the risk of deliberate contamination of food products, we are recommending that the Secretary of Health and Human Services and the Secretary of Agriculture study their agencies' existing statutes and identify what additional authorities they may need relating to security measures at food-processing facilities. On the basis of the results of these studies, the agencies should seek additional authority from the Congress, as needed. To increase field inspectors' knowledge and understanding of food security issues and facilitate their discussions about the voluntary security guidelines with plant personnel, we are also recommending that the Secretary of Health and Human Services and the Secretary of Agriculture provide training for their agencies' field staff on the security measures discussed in the voluntary guidelines. We provided FDA and USDA with a draft of this report for their review and comment. We received written and clarifying oral comments from each agency. The agencies also provided technical comments, which we incorporated into the report as appropriate. FDA agreed with our recommendation that it provide all food inspection personnel with training on security measures. Subsequently, FDA officials told us that the agency did not have an opinion on our recommendation that it study what additional authorities it may need relating to security measures at food- processing facilities. In its written comments, FDA stated that the report is factual and describes accurately the events and actions that FDA has taken on food security. FDA also commented that one of the goals of its voluntary guidance to industry is to heighten awareness of food security practices and that the role of its investigators is first and foremost food safety. FDA also said that it does not have sufficient security expertise to provide industry with consultation in this area. FDA further commented that although HACCP and other preventive controls are appropriate measures to enhance food safety, HACCP does not afford similar advantages for addressing deliberate contamination, tampering, and/or terrorist actions related to the food supply. Our report underscores that the role of FDA's investigators is primarily one of food safety. Nevertheless, we believe that it is also crucial for cognizant agencies to have information about industry's security efforts so that they can assess the extent to which the risk of deliberate contamination is being mitigated. We also believe that possessing such information is important if it becomes necessary to advise food processors on needed security enhancements. With regard to HACCP, our report does not take a position on the feasibility of using HACCP as a means to control deliberate contamination; instead, we report on the opinion of the National Academies. FDA's comments are presented in appendix V. In its written comments, USDA agreed with the contents of our report. Subsequently, USDA's food safety officials confirmed that the agency also agrees with the report's recommendations. In its letter, USDA commented that it has already conducted a comprehensive risk assessment of the food supply without plant security information and that knowing whether a plant employed one or several security measures was not needed to assess the risk. Our report acknowledges that USDA has conducted a comprehensive risk assessment, but we believe that it is crucial for cognizant agencies to have information about industry's security efforts so that they can assess the extent to which the risk of deliberate contamination is being mitigated. USDA's comments are presented in appendix IV. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretaries of Agriculture and Health and Human Services; the Director of the Federal Bureau of Investigation; the Director, Office of Management and Budget; and other interested parties. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you have any questions about this report, please contact Maria Cristina Gobin or me at (202) 512-3841. Key contributors to this report are listed in appendix VI. To determine the extent to which the current federal food safety statutes can be effectively used to regulate security at food-processing facilities, we analyzed the Food and Drug Administration's (FDA) and the U.S. Department of Agriculture's (USDA) existing statutory authorities. We discussed these authorities with FDA and USDA counsel and requested a legal opinion to determine the extent to which each agency believes its existing authorities allow it to regulate food security. We then independently reviewed these authorities to draw our own conclusions. To describe the actions that FDA and USDA have taken to help food processors prevent or reduce the risk of deliberate food contamination, we met with staff from FDA and FSIS to review the voluntary guidelines issued by each agency. To better understand the provisions of the guidelines, we met with agency program staff responsible for issuing the guidelines and for receiving industry comments on it. To learn how the guidelines would be implemented, we met with FDA and USDA's Food Safety and Inspection Service (FSIS) officials responsible for field operations and with staff from field offices in Atlanta, Georgia, and Beltsville, Maryland. Finally, to gather additional information about the vulnerability of the food supply to acts of deliberate contamination, we contacted nine experts from academia, including experts in food safety and in bioterrorism. To describe how the government is determining the extent to which food- processing companies are implementing security procedures, we asked FDA and FSIS program officials about the nature of the information they are collecting about industry security measures. We also conducted surveys of agency field personnel to obtain their observations about and knowledge of food security measures taken at facilities they regularly inspect for food safety. Our FDA survey, which was Web-based, was administered to all 150 field investigators who recorded 465 or more hours for domestic food inspection from June 1, 2001 to May 31, 2002. Our survey of FSIS staff was a telephone survey of a randomly selected stratified sample of 50 circuit supervisors. Our response rate for these surveys was higher than 85 percent for FDA and 90 percent for FSIS, and respondents included participants from all the agencies' geographic regions. Before administering the surveys, we discussed with and obtained input from FDA and FSIS program officials. We also pretested the surveys at field locations to ensure that our questions were valid, clear, and precise and that responding to the survey did not place an undue burden on the respondents. In addition, we contacted state audit offices in all 50 states to collect information about state government actions designed to prevent the deliberate contamination of food products. Of the 50 state audit offices we contacted, only 11 agreed to help us collect this information: Arizona, Florida, Maryland, Michigan, New York, North Carolina, Oklahoma, Oregon, Pennsylvania, Tennessee, and Texas. To determine the extent to which the food-processing industry is implementing security measures to better protect its products against deliberate contamination, we contacted officials from 13 trade associations representing, among others, the meat and poultry, dairy, egg, and fruits and vegetables industries and the food-processing industry. We discussed the guidelines that their organizations have issued, and they described what actions their constituents are taking to protect their products. We also visited five food-processing facilities in various geographic regions to ask corporate and plant officials about the actions they have taken to protect their products and facilities against intentional contamination. These facilities included a slaughter plant as well as facilities that produce beverages and ready-to-eat products. We recognize that the efforts of these five facilities are not necessarily representative of the whole food-processing industry. To identify the concerns that the industry has about sharing sensitive information with federal agencies, we spoke with industry representatives as well as officials from the Federal Bureau of Investigation's National Infrastructure Protection Center. We conducted our review from February through December 2002 in accordance with generally accepted government auditing standards. In addition to those named above, John Johnson, John Nicholson, Jr., Stuart Ryba, and Margaret Skiba made key contributions to this report. Nancy Crothers, Doreen S. Feldman, Oliver Easterwood, Evan Gilman, and Ronald La Due Lake also made important contributions.

The events of September 11, 2001, have placed added emphasis on ensuring the security of the nation's food supply. GAO examined (1) whether FDA and USDA have sufficient authority under current statutes to require that food processors adopt security measures, (2) what security guidelines FDA and USDA have provided to industry, and (3) what security measures food processors have adopted. Federal food safety statutes give the Food and Drug Administration (FDA) and the U.S. Department of Agriculture (USDA) broad authority to regulate the safety of the U.S. food supply but do not specifically authorize them to impose security requirements at food-processing facilities. However, these agencies' food safety statutes can be interpreted to provide authority to impose certain security measures. FDA believes that its statutes authorize it to regulate food security to the extent that food security and safety overlap but observes that there is little overlap between security and safety. USDA believes that it could require food processors to adopt certain security measures that are closely related to sanitary conditions inside the facility. USDA also believes that the statutes, however, cannot be interpreted to authorize the regulation of security measures that are not associated with the immediate food-processing environment, such as requiring fences, alarms, and outside lighting. Neither agency believes that it has the authority to regulate all aspects of security at food-processing facilities. Both FDA and USDA issued voluntary security guidelines to help food processors identify measures to prevent or mitigate the risk of deliberate contamination. Because these guidelines are voluntary, neither agency enforces, monitors, or documents their implementation. Both FDA and USDA have asked their inspectors to be vigilant and to discuss security with managers at food-processing facilities, but the agencies have stressed that inspectors should not enforce the implementation of security measures or document any observations because of the possible release of this information under the Freedom of Information Act and the potential for the misuse of this information. Since FDA and USDA do not monitor and document food processors' implementation of security guidelines, the extent of the industry's adoption of security measures is unknown. According to officials of trade associations and the five facilities we visited, however, food processors are implementing a range of security measures. In addition, the FDA and USDA field inspectors we surveyed indicated that most facilities have implemented some security measures, such as installing fences. However, the inspectors were less able to comment on security measures that were not as obvious, such as accounting for missing stock and implementing proper mail-handling practices. The inspectors also noted that while USDA has provided some of its field supervisory personnel with security training on the voluntary security guidelines it issued, it has not provided most of its inspectors with such training. FDA has not provided its staff with any training on the security guidelines. Without training on the security guidelines, inspectors are limited in their ability to conduct informed discussions regarding security with managers at food-processing facilities.

As of September 2007, the Iraqi government included 34 ministries responsible for providing security and essential government services. U.S. capacity development programs target 12 key ministries: State and USAID focus on 10 civilian ministries while DOD is responsible for the Ministries of Defense and Interior. These 12 ministries employ 67 percent of the Iraqi government workforce and are responsible for 74 percent of the 2007 budget (see table 1). U.S. efforts to help build the capacity of the Iraqi national government are characterized by (1) multiple U.S. agencies leading individual efforts without overarching direction from a lead entity or a strategic approach that integrates their efforts with Iraqi government priorities and (2) shifting time frames and priorities in response to deteriorating conditions in Iraq. As of May 2007, six U.S. agencies were implementing about 53 projects at individual ministries and other national Iraqi agencies. State, USAID, and DOD lead the largest number of programs and provide about 384 U.S. military, government, and contractor personnel to work with the ministries. DOD provides over half (215) of the personnel to the Ministries of Defense and Interior to advise Iraqi staff in developing plans and policies, building ministry budgets, and managing personnel and logistics. State and USAID together provide an additional 169 advisors to the 10 key civilian ministries. Although State, USAID, and DOD have improved the coordination of their capacity-building efforts since early 2007, there is no lead agency or strategic plan to provide overarching guidance. Two factors explain the lack of a lead agency. First, from their inception in 2003, U.S. ministry capacity-building efforts evolved without an overall plan or the designation of a lead entity. U.S. agencies provided distinct assistance to four successive governments in response to Iraq's immediate needs, according to U.S. officials. This approach first began under the Coalition Provisional Authority whereby U.S. advisors ran the ministries using U.S. and Iraqi funds and made personnel and budget decisions. Attempts to create an overall capacity development plan were dropped in late 2003 after the United States decided to transfer control of the ministries to an interim government. A second factor has been the delay in implementing recommendations from a 2005 State assessment that characterized U.S. capacity development programs as uncoordinated, fragmented, duplicative and disorganized. State recommended a unified effort among State, DOD, and USAID, with the latter providing overall coordination and leadership. The recommendations were not implemented. However, in July 2007, State named an ambassador to direct civilian capacity-building programs, including USAID efforts. Shifting priorities also have affected U.S. capacity development efforts, particularly in response to continued security problems. In early 2007, the U.S. mission refocused its capacity development program as part of the surge strategy associated with the administration's New Way Forward. Rather than focusing on 12 civilian and security ministries, State and DOD targeted 6 key ministries (Interior, Defense, Planning, Finance, Oil, and Electricity) and focused on short-term improvements to address immediate problems with budget execution, procurement, and contracting. Accordingly, U.S. capacity development efforts shifted from long-term institution building to immediate efforts to help Iraqi ministries spend their capital budgets and deliver better services to the Iraqi people. Improvements were expected by September 2007. U.S. efforts to develop Iraqi ministerial capacity face four key challenges that pose a risk to their success and long-term sustainability. First, Iraqi government institutions have significant shortages of personnel with the skills to perform the vital tasks necessary to provide security and deliver essential services to the Iraqi people. When the Coalition Provisional Authority (CPA) removed Ba'athist party leaders and members from upper-level management in government, universities, and hospitals in 2003, most of Iraq's technocratic class was forced out of government. A September 2006 U.S. embassy assessment noted that the government had significant human resource shortfalls in most key civilian ministries. The majority of staff at all but 1 of the 12 ministries surveyed was inadequately trained for their positions, and a quarter of them relied heavily on foreign support to compensate for their human and capital resource shortfalls. The lack of trained staff has particularly hindered the ability of ministries to develop and execute budgets. For example, in 2006, the Iraqi government spent only 22 percent of its capital budget. For January through July 2007, spending levels have improved with about 24 percent of capital budgets spent. However, as we reported in early September 2007, it is unlikely that Iraq will spend the $10 billion it allocated for 2007 for capital budgets by the end of this year. Second, Iraq's government confronts significant challenges in staffing a nonpartisan civil service and addressing militia infiltration of key ministries. In June 2007, DOD reported that militias influenced every component of the Ministry of Interior. In particular, the Ministry has been infiltrated by members of the Supreme Islamic Council of Iraq and its Badr Organization, as well as Muqtada al-Sadr's Mahdi Army. Furthermore, the Iraqi civil service remained hampered by staff whose political and sectarian loyalties jeopardized the civilian ministries' abilities to provide basic services and build credibility among Iraqi citizens, according to U.S. government reports and international assessments. DOD further found that government ministries and budgets were sources of power for political parties, and staff ministry positions were rewarded to party cronies. The use of patronage hindered capacity development because it led to instability in the civil service as many staff were replaced whenever the government changed or a new minister was named, according to U.S. officials. Third, according to State, widespread corruption undermines efforts to develop the government's capacity by robbing it of needed resources, some of which are used to fund the insurgency; by eroding popular faith in democratic institutions seen to be run by corrupt political elites; and by spurring capital flight and reducing economic growth. According to a State assessment, one-third of the 12 civilian ministries surveyed had problems with "ghost employees" (that is, nonexistent staff listed on the payroll). In addition, the procedures to counter corruption adopted at all but one of the civilian ministries surveyed were partly effective or ineffective. Similar problems existed in the security ministries, according to DOD. Finally, the security situation remains a major obstacle to developing capacity in areas vital to the government's success. The high level of violence hinders U.S. advisors' access to their counterparts in the ministries, increases absenteeism among ministry employees, and contributes to "brain drain" as ministry employees join the growing number of Iraqis leaving the country. According to a UN report, between March 2003 and June 2007, about 2.2 million Iraqis left the country and 2 million were internally displaced. According to U.S. and international officials, the flow of refugees exacerbates Iraqi ministry capacity shortfalls because those fleeing tend to be disproportionately from the educated and professional classes. A November 2006 UN report stated that an estimated 40 percent of Iraq's professional class had left since 2003. In February 2007, State officials provided GAO with a three-page, high- level outline proposing a U.S. strategy for strengthening Iraqi ministerial capacity. This document was a summary with few details and no timeline. A senior USAID official indicated that it is uncertain whether the high-level summary will be developed into a strategy, although the administration received $140 million in funding for its capacity development efforts in fiscal year 2007 and requested $255 million for fiscal year 2008. GAO has previously identified the desirable elements of a strategy: a clear purpose, scope, and methodology; a delineation of U.S. roles, responsibilities, and coordination; desired goals, objectives, and activities tied to Iraqi priorities; performance measures; and a description of costs, resources needed, and risks. Table 2 summarizes the key elements of a strategy and provides examples of the status of the U.S. approach as of September 2007. As table 2 shows, U.S. agencies have developed some of these elements in their programs for capacity building at individual ministries, but not as part of an overall U.S. strategy. For example: We found little evidence that the U.S. government has clearly defined the purpose, scope, and methodology for developing an overall strategy. Agencies have provided some limited information on why an overall strategy is needed, what it will cover, and how it will be developed. A Joint Task Force on Capacity Development, established in October 2006, has helped U.S. agencies better delineate roles and responsibilities and coordinate their efforts. However, we found no plans on how the capacity development programs of State, USAID, and DOD will be unified and integrated. While U.S. agencies have clearly identified the overall goals of capacity development at the Iraqi ministries, most U.S. efforts lack clear ties to Iraqi priorities for all ministries. While DOD is developing measures to assess progress at the security ministries, such measures have not been developed for Iraqi civilian ministries. U.S. agencies have not identified the costs and resources needed to complete capacity development programs beyond the budget for fiscal year 2007 and the 2008 budget request. Agencies have not provided information on how future resources will be targeted to achieve the desired end-state or how the risks we identified will be addressed. In addition, efforts to improve cooperation with the UN and other international donor nations and organizations have encountered difficulties. For example, U.S. efforts are to be coordinated with the Iraqi government and the international donor community through the Capacity Development Working Group. However, the group did not meet for about a year after forming in late 2005 and did not meet from February through May 2007. Current U.S. efforts to build the capacity of the Iraqi government involve multiple U.S. agencies working with Iraqi counterparts on many issues. GAO, for example, is working with the Iraqi Board of Supreme Audit to enhance its auditing skills and capacity. However, U.S. efforts to improve the capacity of Iraq's ministries must address significant challenges if they are to achieve their desired outcomes. U.S. efforts lack an overall strategy, no lead agency provides overall direction, and U.S. priorities have been subject to numerous changes. Finally, U.S. efforts confront shortages of competent personnel at Iraqi ministries, and sectarian ministries contend with pervasive corruption. The risks are further compounded by the ongoing violence in Iraq as U.S. civilian advisors have difficulties meeting with their Iraqi counterparts and skilled Iraqi professionals leave the country. Congress appropriated $140 million in May 2007 for capacity building and the administration requested up to $255 million for fiscal year 2008. We believe that future U.S. investments must be conditioned on the development of an overall integrated U.S. strategy that clearly articulates agency roles and responsibilities, establishes clear goals, delineates the total costs needed, and assesses the risk to U.S. efforts. The strategy would also need to consider any expanded role of multilateral organizations, including the United Nations and World Bank. GAO recommends that State, in consultation with the Iraqi government, complete an overall integrated strategy for U.S. capacity development efforts. Key components of an overall capacity development strategy should include a clear purpose, scope, and methodology; a clear delineation of U.S. roles, responsibilities, and coordination, including the designation of a lead agency; goals and objectives based on Iraqi-identified priorities; performance measures based on outcome metrics and milestones; and a description of how resources will be targeted to achieve the desired end- state. Given the absence of an integrated capacity development strategy, it is unclear how further appropriations of funding for ministry capacity development programs will contribute to the success of overall U.S. efforts in Iraq. Congress should consider conditioning future appropriations on the completion of an overall integrated strategy. In commenting on a draft of the report accompanying this testimony, State and USAID noted (1) their concern over our recommendation to condition future appropriations for capacity development on the completion of a strategy; (2) the recent appointment of an ambassador to supervise all short- and medium-term capacity development programs; and (3) the need to tailor capacity development needs to each Iraqi ministry. In response to the agencies' first comment, we do not recommend stopping U.S. investment in capacity development; the $140 million in supplemental funding appropriated in fiscal year 2007 remains available for the agencies to continue their efforts. Rather, we recommend that Congress condition future funding on the development of an overall integrated strategy. We acknowledge that State named an ambassador to coordinate the embassy's economic and assistance operations. However, this action occurred in July 2007, underscoring our point that U.S. capacity development efforts have lacked overall leadership and highlighting the need for an overall integrated strategy. Finally, our recommendation does not preclude U.S. agencies from tailoring capacity development efforts to meet each ministry's unique needs. A strategy ensures that a U.S.-funded program has consistent overall goals, clear leadership and roles, and assessed risks and vulnerabilities. Mr. Chairman, this concludes my statement. I would be pleased to answer any questions that you or other Members have at this time. For questions regarding this testimony please me on (202) 512-5500, or Mr. Joseph A. Christoff, Director, International Affairs and Trade, on (202) 512-8979 or [email protected]. Other key contributors to this statement were Tetsuo Miyabara, Patrick Hickey, Lynn Cothern, Lisa Helmer, Stephen Lord, and Judith McCloskey. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The development of competent and loyal government ministries is critical to stabilizing and rebuilding Iraq. The ministries are Iraq's largest employer, with an estimated 2.2 million government workers. U.S. efforts to build the capacity of Iraqi ministries include programs to advise and help Iraqi government employees develop the skills to plan programs, execute budgets, and effectively deliver services. The administration received $140 million in fiscal year 2007 to fund U.S. capacity-building efforts and requested an additional $255 million for fiscal year 2008. This testimony discusses (1) U.S. efforts to develop ministry capacity, (2) the key challenges to these efforts, and (3) the extent to which the U.S. government has an overall integrated strategy. This statement is based on GAO-08-117 . To accomplish our report objectives, we reviewed reports from and interviewed officials of U.S. agencies, the Iraqi government, the United Nations, and the World Bank. We conducted fieldwork in Washington, D.C.; New York City; Baghdad, Iraq; and Amman, Jordan. Over the past 4 years, U.S. efforts to help build the capacity of the Iraqi national government have been characterized by (1) multiple U.S. agencies leading efforts without overarching direction from a lead agency or a strategic plan that integrates their efforts; and (2) shifting timeframes and priorities in response to deteriorating conditions in Iraq. As of May 2007, six U.S. agencies were implementing about 53 projects at individual ministries and other national Iraqi agencies. Although the Departments of State and Defense and the U.S. Agency for International Development (USAID) have improved the coordination of their capacity-building efforts, there is no lead agency or strategic plan to provide overarching guidance. U.S. efforts to develop Iraqi ministerial capacity face four key challenges that pose risks to their success and long-term sustainability. First, Iraqi government institutions have significant shortages of personnel with the skills to perform the vital tasks necessary to provide security and deliver essential services to the Iraqi people. Second, Iraq's government confronts significant challenges in staffing a nonpartisan civil service and addressing militia infiltration of key ministries. Third, widespread corruption undermines efforts to develop the government's capacity by robbing it of needed resources, some of which are used to fund the insurgency. Finally, violence in Iraq hinders U.S. advisors' access to Iraqi minstries, increases absenteeism among minstry employees, and contributes to the growing number of professional Iraqis leaving the country. The U.S. government is beginning to develop an overall strategy for ministerial capacity development, although agencies have been implementing separate programs since 2003. GAO's work in this area shows that an overall strategy for capacity development should include (1) a clear purpose, scope, and methodology; (2) a delineation of U.S. roles and responsibilities and coordination with other donors including the United Nations; (3) goals and objectives linked to Iraqi priorities; (4) performance measures and milestones; and (5) costs, resources needed, and assessment of program risks. U.S. ministry capacity efforts have included some but not all of these components. For example, agencies are working to clarify roles and responsibilities. However, U.S. efforts lack clear ties to Iraqi-identified priorities at all ministries, clear performance measures, and information on how resources will be targeted to achieve the desired end-state. State and USAID noted concerns over our recommendation to condition further appropriations and cited the appointment of an ambassador to supervise civilian capacity development programs. GAO does not recommend stopping U.S. investment in capacity development. The $140 million in fiscal year 2007 funds remains available to continue efforts while developing an integrated strategy. In addition, the U.S. ambassador arrived in Iraq in July 2007 underscoring our point that U.S. efforts lacked overall leadership and highlighting the need for an overall integrated strategy.

Since the early 1980s, roughly half of the private-sector work force has participated in either a defined benefit (DB) retirement plan, commonly known as a pension, or a defined contribution (DC) plan, such as a 401(k) plan. In 2006, approximately 79 million--or about half of all workers-- worked for an employer or union sponsoring either a DB or DC plan, and about 62 million workers participated in such a plan. Congress created IRAs, in part, to help those individuals not covered by a DB or DC plan save for retirement. Employees of small firms, for example, are unlikely to work for an employer that sponsors either a DB or DC retirement plan. Almost half of all U.S. private sector workers in 2006 were employed by firms with fewer than 100 employees, and only 1 in 4 of these workers worked for an employer sponsoring a retirement plan. Currently there are several types of IRAs for individuals and small employers and their employees. Congress created two types of employer-sponsored IRAs with fewer regulatory requirements than DB and DC plans to encourage small employers to offer IRAs to their employees: Savings Incentive Match Plans for Employees (SIMPLE). SIMPLE IRAs, available only to employers with 100 or fewer employees, allow eligible employees to direct a portion of their salary, within limits, to a SIMPLE IRA. Employers sponsoring SIMPLE IRAs must either match the employee's contributions up to 3 percent of his or her compensation or make 2 percent contributions of each employee's salary to the SIMPLE IRAs for all employees making at least $5,000 for the year. Simplified Employee Pensions (SEP). SEP IRAs allow employers to make tax-deductible contributions to their own and each eligible employee's traditional IRA at higher contribution limits than other IRAs. SEP IRAs do not permit employee contributions, and annual employer contributions are not mandatory. IRS and Labor share oversight responsibilities for IRAs. Labor's Employee Benefits Security Administration (EBSA) enforces ERISA Title I, which specifies the standards for employer-sponsored retirement plans, including applicable fiduciary reporting and disclosure requirements. EBSA also oversees the fiduciary standards for employer-sponsored IRAs, and seeks to ensure that fiduciaries, such as employers, operate their plans in the best interest of plan participants. While Labor does not have direct oversight of payroll-deduction IRA programs, it has provided "safe harbor" guidance to employers, which sets the conditions by which employers may offer payroll-deduction IRA programs without becoming subject to ERISA Title I requirements. IRS enforces Title II of ERISA for all types of IRAs, which provides tax benefits for retirement plan sponsors and participants and details participant eligibility, vesting, and funding requirements. IRS also enforces various tax rules for IRAs, including rules for eligibility, contributions, distributions, and rolling assets into IRAs or converting assets from a traditional IRA into a Roth IRA. (See table 1 for annual contribution limits for IRAs.) Labor and IRS work together to oversee IRA prohibited transactions. In general, prohibited transactions include any improper use of an IRA by the account holder or others. Labor generally has interpretive jurisdiction over prohibited transactions and IRS has certain enforcement authority. Both ERISA and the Internal Revenue Code contain various statutory exemptions from the prohibited transaction rules, and Labor has authority to grant administrative exemptions and establish exemption procedures. Labor may grant administrative exemptions on a class or individual basis for a wide variety of proposed transactions in a plan. IRS has responsibility for imposing an excise tax on parties that engage in a prohibited transaction. (See fig. 1 for a description of IRS and Labor responsibilities regarding IRAs.) Most assets flowing into IRAs come not from direct contributions, but from transfers, or rollovers, of retirement assets from other retirement plans, including 401(k) plans. These rollovers allow individuals to preserve their retirement savings when they change jobs or retire. As shown in figure 2, from 1998 to 2004, more than 80 percent of funds flowing into IRAs came from rollovers, demonstrating that IRAs play a significantly smaller role in building retirement savings than in preserving them. In addition, IRA accounts with rollover assets were larger than those without rollover assets. For example the median amount in a traditional IRA with rollover assets in 2007 was $61,000, while the median amount in a traditional IRA without rollover assets was $30,000. Since 1998, IRA assets have comprised the largest portion of the retirement market. As shown in figure 3, IRA assets in 2004 totaled about $3.5 trillion compared to DC assets of $2.6 trillion and DB assets of $1.9 trillion. More households own traditional IRAs, which were the first IRAs established, than Roth IRAs or employer-sponsored IRAs. In 2007, nearly 33 percent of all households owned traditional IRAs, and about 15 percent owned Roth IRAs. In contrast, about 8 percent of households participated in employer-sponsored IRAs. Ownership of traditional and Roth IRAs is associated with higher education and income levels. In 2004, 59 percent of IRA households were headed by an individual with a college degree, and only about 3 percent were headed by an individual with no high school diploma. Over one- third of these IRA households earned $100,000 or more; about 2 percent earned less than $10,000. Households with IRAs also tend to own their homes. Research shows that higher levels of education and household income correlate with a greater propensity to save. Therefore, it is not surprising that IRA ownership increases as education and income levels increase. However, despite the association of IRA ownership to individuals with higher incomes, data show that lower- and middle-income individuals also own IRAs. A study by the Congressional Budget Office (CBO) found that in 2003, 4 percent of workers earning $20,000 to $40,000 (in 1997 dollars) contributed to traditional IRAs and 3 percent of these workers contributed to Roth IRAs. In the same year, 7 percent of workers earning between $120,000 and $160,000 contributed to a traditional IRA and 8 percent contributed to a Roth IRA. The study also found that 33 percent of individuals earning $20,000 to $40,000 who contributed to a traditional IRA contributed the maximum amount allowed, and 35 percent made maximum contributions to their Roth IRAs. By contrast, 87 percent of individuals earning $120,000 to $160,000 who contributed to a traditional IRA made the maximum contribution, and 61 percent made the maximum contribution to their Roth IRAs. A study by the Investment Company Institute (ICI) that included data on contributions by IRA owners shows that more households with Roth IRAs or employer-sponsored IRAs contribute to their accounts than households with traditional IRAs. For example more than half of households with Roth, SIMPLE, or Salary Reduction Simplified Employee Pension IRA (SAR-SEP IRA) contributed to their accounts in 2004, but less than one- third of households with traditional IRAs did so. This, again, may be partly attributed to the emerging role of traditional IRAs as a means to preserve rollover assets rather than build retirement savings. The ICI study also stated that the median household contribution to traditional IRAs was $2,300 compared to the median contribution to Roth IRAs of $3,000. The median contribution to SIMPLE and SAR-SEP IRAs was $5,000. The study noted that this difference may be related to higher contribution limits for employer-sponsored IRAs than for traditional and Roth IRAs. According to experts and available government data, worker access to employer-sponsored and payroll-deduction IRAs appears limited. To address the issue of low retirement plan sponsorship among small employers, Congress created SEP and SIMPLE employer-sponsored IRAs. Labor issued a regulation under which an employer could maintain a payroll-deduction program for employees to contribute to traditional and Roth IRAs without being considered a pension plan under ERISA. Although employer-sponsored IRAs have few reporting requirements to encourage small employers to offer them, and payroll-deduction IRAs have none, worker access to these IRAs appears limited. Increased access to payroll-deduction IRAs could help many workers to save for retirement, but several barriers, including costs to employers, may discourage employers from offering these IRAs to their employees. Retirement and savings experts offer several proposals to encourage employers to offer and employees to participate in payroll-deduction IRAs. The majority of employers with fewer than 100 employees do not offer an employer-sponsored retirement plan for their employees. In 2006, almost half of all U.S. private sector workers were employed by firms with fewer than 100 employees, and only 1 in 4 of these employees worked for an employer sponsoring a retirement plan. To address the issue of low retirement plan sponsorship among small employers, Congress created SIMPLE and SEP employer-sponsored IRAs with less burdensome reporting requirements than 401(k) plans to encourage their adoption by small employers. In addition, under a regulation issued by Labor, employers may also provide payroll-deduction IRA programs, which allow employees to contribute to traditional or Roth IRAs through payroll- deductions by their employer, without employers being considered a pension plan sponsor under ERISA and becoming subject to various ERISA fiduciary and reporting requirements. In order to encourage their adoption, employer-sponsored and payroll-deduction IRAs offer a variety of features designed to appeal to small employers (see table 2). Data on the number of employers offering employees employer-sponsored IRAs and payroll-deduction IRAs is limited. However, based on available data, employee access to SIMPLE and SEP IRAs appears limited. Under ERISA Title I, there is no reporting requirement for SIMPLE IRAs, and there is an alternative method available for reporting of employer- sponsored SEP IRAs. Payroll-deduction IRA programs are not subject to ERISA requirements for employer-sponsored retirement plans and have no reporting requirements. Because there are very limited reporting requirements for employer-sponsored IRAs and none for payroll-deduction IRAs, information on employers who offer these IRAs is limited and we were unable to determine how many employers actually do so. For example, the Bureau of Labor Statistics provides some data on the percentage of employees participating in employer-sponsored IRAs, but no data on the percentage of employers sponsoring them. The Bureau of Labor Statistics reported that 8 percent of private sector workers in firms with fewer than 100 employees participated in a SIMPLE IRA in 2005, and 2 percent of these workers participated in a SEP IRA. An IRS evaluation of employer-filed W-2 forms estimated that 190,000 employers sponsored SIMPLE IRAs in 2004. IRS did not provide an estimate of the number of employers sponsoring SEP IRAs, and we were unable to determine how many employers make these IRAs available to employees. Few employers appear to offer their employees the opportunity to contribute to IRAs through payroll deductions, but data are insufficient to make this determination. Through payroll-deduction IRA programs, employees may contribute to traditional or Roth IRAs by having their employer withhold an amount determined by the employee and forwarded directly to the employee's IRA. Although any employer can provide payroll-deduction IRAs to their employees, regardless of whether or not they offer another retirement plan, retirement and savings experts told us that very few employers do so. Because employers are not required to report this activity to the federal government, neither Labor nor IRS is able to determine how many employers offer payroll-deduction IRAs. According to experts and economics literature that we reviewed, individuals are more likely to save for retirement through payroll deductions than they are without payroll deductions. Both SIMPLE IRAs and payroll-deduction IRA programs allow workers to contribute to their retirement through payroll deductions. Payroll deductions are a key feature in 401(k) and other DC plans. Economics literature that we reviewed identifies payroll deduction as a key factor in the success of 401(k) plans, and participation in these plans is much higher than in IRAs, which do not typically use payroll deduction. The Congressional Budget Office reported that 29 percent of all workers contributed to a DC plan in 2003--where payroll deductions are the norm--while only 7 percent of all workers contributed to an IRA. Saving for retirement in the workplace through payroll deductions helps workers save by providing a "commitment device" to make automatic contributions to retirement savings before wages are spent. Such a commitment device helps some workers overcome a common tendency to procrastinate or not take action to save based on the choices associated with investing or selecting a retirement savings vehicle. Payroll deductions allow workers to contribute to retirement savings automatically before wages are spent, relieving them of making ongoing decisions to save. According to Labor's guidance on payroll-deduction IRAs and several experts we interviewed, individuals are more likely to save in IRAs through payroll deductions than they are without these automatic deposits. Payroll-deduction IRA programs could provide a retirement savings opportunity at work for the millions of workers without an employer- sponsored retirement plan. In theory, all workers under age 70 1/2 who lack an employer-sponsored retirement plan could be eligible to contribute to a traditional IRA through payroll deduction, should their employer offer such a program. Further, based on the contribution rules for traditional and Roth IRAs, many of these individuals would be eligible to claim a tax deduction for their traditional IRA contributions, and most low- and middle-income workers would be eligible to contribute to Roth IRAs. Experts told us payroll-deduction IRAs are the easiest way for small employers to offer their employees a retirement savings vehicle. Payroll- deduction IRAs have fewer requirements for employee communication than SIMPLE and SEP IRAs, and employers are not subject to ERISA fiduciary responsibilities as long as they meet the conditions in Labor's regulation and guidance for managing these plans. Employer-sponsored IRAs may also help employees of small firms save for their retirement. For example, the higher contribution limits for SIMPLE and SEP IRAs offer greater savings benefits than payroll-deduction IRAs. In 2007, individuals under age 50 were able to contribute up to $10,500 to SIMPLE IRAs--more than twice the amount allowed in 2007 for payroll- deduction IRAs. Since SIMPLE IRAs require employers to either match the contributions of participating employees or make nonelective contributions to all employee accounts, employees are able to save significantly more per year in SIMPLE IRAs than they are in payroll- deduction IRAs. As we previously reported, we found that several factors may discourage employers from establishing employer-sponsored SIMPLE and SEP IRAs. For example, small business groups told us that the costs of managing SIMPLE and SEP IRAs may be prohibitive for small employers. Experts also pointed out that certain contribution requirements for these plans may, in some cases, limit employer sponsorship of these plans. For example, because SIMPLE IRAs require employers to make contributions to employee accounts, some small firms may be unable to commit to these IRAs. Small business groups and IRA providers told us that small business revenues are inconsistent and may fluctuate greatly from year to year, making required contributions difficult for some firms. In addition, employers offering SIMPLE IRAs must determine before the beginning of the calendar year whether they will match employee contributions or make nonelective contributions to all employees' accounts. According to IRA providers, this requirement may discourage some small employers from offering these IRAs, and if employers had the flexibility to make additional contributions to employee accounts at the end of the year, employers may be encouraged to contribute more to employee accounts. With regard to SEP IRAs, two experts said small firms may be discouraged from offering these plans because of the requirement that employers must set up a SEP IRA for all employees performing service for the company in 3 of the past 5 years and with more than $500 in compensation for 2007. These experts stated that small firms are likely to hire either seasonal employees or interns who may earn more than $500, and these employers may have difficulty finding an IRA provider willing to open an IRA small enough for these temporary or low-earning participants. We also found that several barriers may discourage small employers even from offering payroll-deduction IRAs, including: (1) costs to employers for managing payroll deductions, (2) a perceived lack of flexibility to promote payroll-deduction IRAs to employees, (3) lack of incentives to employers, and (4) lack of awareness about how these IRAs work. Costs to employers. Additional administrative costs associated with setting up and managing payroll-deduction IRAs may be a barrier for small employers, particularly those without electronic payroll processing. Small business groups told us that costs are influenced by the number of employees participating in the program and whether an employer has a payroll processing system in place for automatic deductions and direct deposits to employee accounts. Several experts told us many small employers lack electronic, or automatic, payroll systems, and these employers would be subject to higher management costs for offering payroll-deduction IRAs. According to Labor, costs to employers also are significantly influenced by the number of IRA providers to which an employer must remit contributions on behalf of employees. Although experts reported that payroll-deduction IRAs represent costs to employers, we found varied opinions on the significance of those costs. Experts advocating for expanded payroll-deduction IRAs reported that most employers would incur little or no costs since they already make payroll deductions for Social Security and Medicare, as well as federal, state, and local taxes. According to these experts, payroll-deduction IRAs function like existing payroll tax withholdings, and adding another deduction would not be substantial. However, other experts and one report we reviewed indicated that employer costs may be significant, particularly for employers without electronic payrolls. The report did not estimate actual costs to employers on a per account basis. In our review, we were unable to identify reliable government data on actual costs to small employers. Flexibility to promote payroll-deduction IRAs. According to IRA providers, some employers are hesitant to offer a payroll-deduction IRA program because they find Labor's guidance limits their ability to effectively publicize the program to employees for fear of being subject to ERISA requirements. IRA providers told us employers need greater flexibility in Labor's guidance on payroll-deduction IRAs if they are to encourage employees to save for retirement. However, Labor told us that it has received no input from IRA providers as to what that flexibility would be, and Labor officials note that Interpretive Bulletin 99-1 specifically provides for flexibility. Lack of savings incentives for small employers. Small business member organizations and IRA providers said contribution limits for payroll-deduction IRAs do not offer adequate savings incentives to justify the effort in offering these IRAs. Because the contribution limits for these IRAs are significantly lower than those that apply to SIMPLE and SEP IRAs, employers seeking to provide a retirement plan to their employees would be more likely to choose other options. Those options also allow business owners to contribute significantly more to their own retirement account than payroll-deduction IRAs. Lack of awareness. Representatives from small business groups said many small employers are unaware that payroll-deduction IRAs are available or that employer contributions are not required. However, Labor has produced educational materials describing the payroll-deduction and employer-sponsored IRA options available to employers and employees. Retirement and savings experts told us that several legislative proposals could encourage employers to offer and employees to participate in IRAs. Several bills have been introduced in Congress to expand worker access to payroll-deduction IRAs. Employer incentives to offer IRAs. Several retirement and savings experts said additional incentives should be in place to increase employer sponsorship of IRAs. For example, experts suggested tax credits should be made available to defray start-up costs for small employers of payroll- deduction IRAs, particularly for those without electronic or automatic payroll systems. These credits should be lower than the credits available to employers for starting SIMPLE, SEP, and 401(k) plans to avoid competition with those plans, these experts said. IRA providers and small business groups said increasing contribution limits for SIMPLE IRAs to levels closer to those for 401(k) plans would encourage more employers to offer these plans. Other experts said doing so could provide incentives to employers already offering 401(k) plans to switch to SIMPLE IRAs, which have fewer reporting requirements. Employee incentives to participate in IRAs. Experts offered several proposals to encourage workers to participate in IRAs, including: (1) expanding existing tax credits for moderate- and low-income workers, (2) offering automatic enrollment in payroll-deduction IRAs, and (3) increasing public awareness about the importance of saving for retirement and how to do so. Several experts said expanding the scope of the Retirement Savings Contribution Credit, commonly known as the "saver's credit," could encourage IRA participation among workers who are not covered by an employer-sponsored retirement plan. They said expanding the saver's credit to include more middle-income earners and making the credit refundable--available to tax filers even if they do not owe income tax--could encourage more moderate- and low-income individuals to participate in IRAs. However, an expanded and refundable tax credit would have revenue implications for the federal government. Other experts told us that automatically enrolling workers into payroll-deduction and SIMPLE IRAs could increase employee participation; however, small business groups and IRA providers said that mandatory automatic enrollment could be burdensome to small employers. In addition, given the lack of available income for some, several experts told us that low- income workers may opt out of automatic enrollment programs or be more inclined to make early withdrawals. Experts also said increasing public awareness of the importance of saving for retirement and educating individuals about how to do so could increase IRA participation. Earlier this month, we reported that changes at IRS and Labor could encourage employers to offer IRAs and improve IRA information and oversight. We found that regulators lack information about employer- sponsored and payroll-deduction IRAs that could help determine whether these vehicles help workers without employer-sponsored pension plans build retirement savings. For example, IRS collects information on employer-sponsored IRAs but does not share the information collected with Labor, which has oversight responsibility for employer-sponsored IRAs. We also found that certain oversight vulnerabilities need to be improved. Currently, Labor has no process in place to monitor employer- sponsored IRAs, and has no jurisdiction over payroll-deduction IRAs. As a result of our findings, we made recommendations to Labor and IRS to improve IRA information and oversight and suggested that Congress may wish to consider whether payroll-deduction IRAs should have some direct oversight. Because employer-sponsored IRAs have few employer reporting requirements and payroll-deduction IRAs have none, regulators lack information on these IRAs. Under Title I of ERISA, there is no reporting requirement for SIMPLE IRAs, and there is an alternative method available for reporting employer-sponsored SEP IRAs. Employers who offer payroll-deduction IRAs have no reporting requirements, and consequently, there is no reporting mechanism that captures how many employers offer payroll-deduction IRAs. Although IRS receives information reports for all traditional and Roth IRAs, those data do not show how many were for employees using payroll-deductions. In our discussions with Labor and IRS officials, they explained that the limited reporting requirements for employer-sponsored IRAs were put in place to try to encourage small employers to offer their employees retirement plan coverage by reducing their administrative and financial burdens. Although the reporting requirements for employer-sponsored IRAs are limited, IRS does collect some information on these IRAs through several "information" forms provided by financial institutions and employers. These forms provide information on salary-reduction contributions to employer-sponsored IRAs, as well as information on IRA contributions, fair market value, and distributions. For example, information on retirement plans are reported annually by employers and others to IRS on its Form W-2. The Form W-2 contains details on the type of plan offered by the employer, including employer-sponsored IRAs, and the amounts deducted from wages for contributions to these plans. According to agency officials, IRS cannot share the information it receives on employer-sponsored IRAs with Labor because it is confidential tax information. Labor also does not receive relevant information from employers, such as annual financial reports, as it does from private pension plan sponsors. For example, pension plan sponsors must file Form 5500 reports with Labor on an annual basis, which provide Labor with valuable information about the financial health and operation of private pension plans. Although Labor's Bureau of Labor Statistics National Compensation Survey surveys employee benefit plans in private establishments, receiving information on access, participation, and take- up rates for DB and DC plans, the survey does not collect information on the number of employers sponsoring employer-sponsored IRAs. Consequently, Labor does not receive important information on employers who have established employer-sponsored IRAs, over which it has oversight responsibilities. Ensuring that regulators obtain information about employer-sponsored and payroll-deduction IRAs is one way to help them and others determine the status of these IRAs and whether those individuals who lack employer- sponsored pension plans are able to build retirement savings through employer-sponsored and payroll-deduction IRAs. However, key information on IRAs is currently not reported, such as information that identifies employers offering payroll-deduction IRAs and the distribution by employer of the number of employees that contribute to payroll- deduction IRAs. Experts that we interviewed said that, without such information, they are unable to determine how many employers and employees participate in payroll-deduction IRAs and the extent to which these IRAs have contributed to the retirement savings of participants. In addition, the limited reporting requirements prevent information from being obtained about the universe of employers that offer employer- sponsored and payroll-deduction IRAs, which affects Labor's ability to monitor employer-sponsored IRAs. This information also can be useful when determining policy options to increase IRA participation among uncovered workers because it provides a strong foundation to assess the extent to which these IRAs are being utilized. Although IRS does publish some of the information it receives on IRAs through its Statistics of Income program, IRS does not produce IRA reports on a consistent basis. IRS officials told us that they are currently facing several challenges that affect their ability to publish IRA information more regularly. First, IRS relies, in part, on information returns to collect data on IRAs: such returns are not due until the following year after the filing of the tax return. IRS officials said that these returns have numerous errors, making it difficult and time-consuming for IRS to edit them for statistical analysis. They also said that the IRA rules, and changes to those rules, are difficult for some taxpayers, employers, and trustees to understand, which contributes to filing errors. Also, in the past, one particular IRS employee, who has recently retired, took the lead in developing a statistical analysis on IRAs. Since IRS does not have a process in place to train another employee to take over this role, a knowledge gap was created that IRS is trying to fill. IRS officials told us that they recognize this problem and are in the early stages of determining ways to correct it. In addition, IRS officials told us they had problems with the IRA data for tax year 2003, which prevented them from issuing a report for that year. The result has been that IRS has published IRA data for tax years 2000, 2001, 2002 and 2004, but none for tax year 2003. Labor officials and retirement and savings experts told us that without the consistent reporting of IRA information by IRS, they use studies by financial institutions and industry associations for research purposes, which include assessing the current state of IRAs and future trends. These experts said that although these studies are helpful, some may double- count individuals because one person may have more than one IRA at different financial institutions. They also said that more consistent reporting of IRA information could help them ensure that their analyses reflect current and accurate information about retirement assets, such as the fair market value of IRAs. Since IRS is the only agency that has data on all IRA participants, consistent reporting of these data could give policymakers and others a more comprehensive view of the IRA landscape. Given the limited reporting requirements for employer-sponsored IRAs and the absence of requirements for payroll-deduction IRAs, as well as Labor's role in overseeing employer-sponsored IRAs, a minimum level of oversight is important to ensure that employers are acting in accordance with the law and within Labor's guidance on payroll-deduction IRAs. Yet, Labor officials said that they are unable to monitor (1) whether all employers are in compliance with the prohibited transaction rules and fiduciary standards, such as by making timely and complete employer- sponsored IRA contributions or by not engaging in self-dealing; and (2) whether all employers who offer a payroll-deduction IRA are meeting the conditions of Labor's guidance. Employer-sponsored IRAs. Labor officials said that they do not have a process for actively seeking out and determining whether employer- sponsored IRAs are engaging in prohibited transactions or not abiding by their fiduciary responsibilities, such as by having delinquent or unremitted employer-sponsored IRA contributions. Instead, as in the case of Labor's oversight of pension plans, Labor primarily relies on participant complaints as sources of investigative leads to detect employers that are not making the required contributions to their employer-sponsored IRA. Payroll-deduction IRAs. Payroll-deduction IRAs are not under Labor's jurisdiction; however, Labor does provide guidance regarding the circumstances under which an employer may provide a payroll-deduction IRA program without being subject to the Title I requirements of ERISA. As long as employers meet the conditions in Labor's regulation and guidance, employers are not subject to the fiduciary requirements in ERISA Title I that apply to employer-sponsored retirement plans, such as 401(k) plans. IRS, also, does not have direct oversight over payroll- deduction IRA programs. IRS oversees the rules associated with the traditional and Roth IRAs that payroll-deduction programs may fund through employee contributions. However, IRS does not have oversight over employer management of these programs. Labor officials told us that they are not aware of employers improperly relying on the safe harbor regarding payroll-deduction IRAs. However, without a process to monitor payroll-deduction IRAs, Labor cannot be certain of the extent or nature of certain employer activities that may fall outside of the guidance provided by Labor. In order to improve oversight and information available on IRAs, we recently made several recommendations to Congress, Labor, and IRS, which are summarized in table 3. We reported that neither IRS nor Labor have direct oversight of payroll- deduction IRAs and that Congress may wish to consider whether payroll- deduction IRAs should have some direct oversight. Although Labor provides guidance regarding the circumstances under which employers may offer payroll-deduction programs without being subject to the Title I requirements of ERISA, Labor does not have jurisdiction to monitor whether employers are managing such programs within the bounds of Labor's safe harbor. Similarly, IRS has responsibility over tax rules for establishing and maintaining traditional and Roth IRAs that may be funded through employee contributions from payroll-deduction programs; however, IRS also does not have authority to monitor employers offering these programs. We have reported that without direct oversight of payroll- deduction IRAs, employees may lack confidence that payroll-deduction IRAs will provide them with adequate protections to participate in such programs, which is particularly important given the increasing role that IRAs have in retirement savings. As such, we have suggested that Congress consider whether payroll-deduction IRAs should have some direct oversight. We have also reported that it is important for Labor to have an accurate accounting of the costs to employers for managing payroll-deduction IRAs. In our review, we were unable to determine the actual costs to employers for managing a payroll-deduction IRA program. Some experts reported that such costs were significant, while others reported that they were minimal. Further, under Labor's guidance on payroll-deduction IRAs, employers may receive reasonable compensation for the cost of operating payroll-deduction IRA programs as long as such compensation does not represent a profit to employers. However, because the information on costs of managing such programs is lacking, Labor may be unable to readily determine if employers are receiving excessive compensation and if such programs fall outside the safe harbor and may be considered to have become ERISA Title I programs. Furthermore, without accurate cost estimates and a determination of what constitutes "reasonable compensation" to employers, employers may be reluctant to seek compensation from IRA service providers to defray the costs of operating a payroll-deduction IRA program. Currently, IRAs play a major role in preserving retirement assets but a very small role in creating them. Although studies show that individuals find it difficult to save for retirement on their own, millions of U.S. workers have no retirement savings plan through their employer. Employer-sponsored and payroll-deduction IRAs afford an easier way for workers, particularly those who work for small employers, to save for retirement. They also offer employers less burdensome reporting and legal responsibilities than defined benefit pension plans and defined contribution plans, such as 401(k) plans. Yet, barriers exist, such as administrative costs, that may discourage employers from offering payroll-deduction IRAs. As federal agencies begin to determine the true cost of establishing payroll-deduction IRAs, employers will have a better understanding of the costs and will be in a better position to evaluate whether they will be able to offer payroll- deduction IRAs to their employees. Encouraging employers to offer IRAs to their employees can be much more productive if Congress and regulators ensure that there is adequate information on employer-sponsored IRAs and payroll-deduction IRAs. Although the limited reporting requirements for employer-sponsored IRAs and the absence of reporting requirements for payroll-deduction IRAs were meant to encourage small employers to offer retirement savings vehicles to employees, there is also a need for agencies that are responsible for overseeing retirement savings vehicles to have the information necessary to do so. Providing complete and consistent data on IRAs would help ensure that regulators have the information they need to make informed decisions about how to increase coverage and facilitate retirement savings. In addition, ensuring that Labor has a process in place to monitor employer-sponsored IRAs will help ensure that there is a structure in place to help protect individuals' retirement savings if they choose employer-sponsored IRAs. If current oversight vulnerabilities are not addressed, future problems could emerge as more employers and workers participate in employer-sponsored IRAs. Steps must also be taken to improve oversight of payroll-deduction IRAs and determine whether direct oversight is needed. Without direct oversight, employees may lack confidence that payroll-deduction IRAs will provide them with adequate protections to participate in these programs, which is particularly important given the current focus in Congress on expanding payroll-deduction IRAs. However, any direct oversight of payroll-deduction IRAs should be done in a way that does not pose an undue burden on employers or their employees. We are continuing our work on IRAs, and are beginning to examine the fees that are charged IRA participants. We are pleased that the Committee on Ways and Means and this subcommittee are interested in retirement savings, particularly IRAs, and look forward to continuing our work with you. Mr. Chairman and Members of the subcommittee, this completes my prepared statement and I would be happy to respond to any questions the subcommittee may have at this time. For further information regarding this testimony, please contact Barbara D. Bovbjerg, Director, Education, Workforce, and Income Security Issues at (202) 512-7215 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony include Tamara Cross (Assistant Director), Matt Barranca, Susan Pachikara, Raun Lazier, Joseph Applebaum, Susan Aschoff, Doreen Feldman, Edward Nannenhorn, MaryLynn Sergent, Roger Thomas, Walter Vance, and Jennifer Wong. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Congress created individual retirement accounts (IRAs) with two goals: (1) to provide a retirement savings vehicle for workers without employer-sponsored retirement plans, and (2) to preserve individuals' savings in employer-sponsored retirement plans when they change jobs or retire. Questions remain about IRAs' effectiveness as a vehicle to facilitate new, or additional, retirement savings. GAO was asked to report on (1) the role of IRAs in retirement savings, (2) the prevalence of employer-sponsored and payroll-deduction IRAs and barriers discouraging employers from offering these IRAs, and (3) changes that are needed to improve IRA information and oversight. GAO reviewed published reports from government and financial industry sources and interviewed retirement and savings experts, small business representatives, IRA providers, and federal agency officials. Although Congress created IRAs to allow individuals to build and preserve their retirement savings, IRAs are primarily used to preserve savings through rollovers rather than build savings through contributions. Over 80 percent of assets that flow into IRAs come from assets rolled over, or transferred, from other accounts and not from direct contributions. Assets in IRAs now exceed assets in the most common employer-sponsored retirement plans: defined contribution plans, including 401(k) plans, and defined benefit, or pension plans. Payroll-deduction IRA programs, which allow employees to contribute to IRAs through deductions from their paychecks, and employer-sponsored IRAs, in which an employer establishes and contributes to IRAs for employees, were established to provide more options for retirement savings in the workplace. Experts GAO interviewed said that several factors may discourage employers from offering these IRAs to employees, including administrative costs and concerns about employer fiduciary responsibilities. Information is lacking on how many employers offer employer-sponsored and payroll-deduction IRAs and the actual costs to employers for administering payroll-deduction IRAs. Earlier this month, GAO reported on the role that federal agencies can have in helping employers provide IRAs to employees and in improving oversight of these savings vehicles. GAO made several recommendations to the Department of Labor (Labor) and the Internal Revenue Service to provide better information and oversight, but in the course of the review, GAO found that Labor does not have jurisdiction over payroll-deduction IRAs. Consequently, GAO also suggested that Congress may wish to consider whether payroll-deduction IRAs should have some direct oversight. A clear oversight structure could be critical if payroll-deduction IRAs become a more important means to provide a retirement savings vehicle for workers who lack an employer-sponsored retirement plan.

Transplants are performed for organs such as kidney, liver, heart, intestine, pancreas, heart-lung, and kidney-pancreas. However, the kidney, liver, and heart are the most commonly transplanted organs. In 2000, doctors performed 13,333 kidney, 4,950 liver, and 2,197 heart transplants. Of these, children made up 617 of the kidney recipients, 569 of the liver recipients, and 274 of the heart recipients. Organ transplants were performed at 261 centers, which had one or more specific organ transplant programs, in 1998. Some of these centers accept both adults and children, and others are for children only. In 1998, pediatric kidney transplants were performed at 129 of the 241 centers that performed kidney transplants; pediatric liver transplants were performed at 77 of the 116 centers that transplanted livers; and pediatric heart transplants were performed at 54 of the 134 centers that transplanted hearts. In 1984, Congress enacted the National Organ Transplant Act (P.L. 98-507), which requires HHS to establish the OPTN. In 1986, HHS awarded the OPTN contract to UNOS, which operates the network under HRSA's oversight. The OPTN develops national transplantation policy, maintains the list of patients waiting for transplants, and fosters efforts to increase the nation's organ supply. OPTN members include all transplant centers, organ procurement organizations, and tissue-typing laboratories. Only a small fraction of those who die are considered for organ donation. Most cadaveric organs derive from donors who have been pronounced brain-dead as a result of a motor vehicle collision, stroke, violence, suicide, or severe head injury. When an organ becomes available, staff from the local organ procurement organization typically identify potential recipients from the OPTN computerized waiting list. Patients are ranked on the OPTN waiting list according to points assigned on the basis of time waiting, medical urgency, organ size, and the quality of the tissue-type match between the donor and the potential recipient, as determined by antigen matching. The criteria that determine the order of candidates on the list are applied or defined differently for each type of organ and for pediatric versus adult patients. With certain limitations, organs from pediatric donors can be transplanted into adults, and vice versa. The UNOS computer matches each patient in the OPTN database against a donor's characteristics and then generates a different ranked list of potential recipients for each transplantable organ from the donor. Organs are generally allocated first to patients waiting in the local organ procurement organization's service area, with priority based on a patient's severity of illness. If a matching recipient is not found locally, the organ is offered regionally and then nationally. Organ allocation policies are revised from time to time to reflect advancements in medical science and technology. Title XXI of the Children's Health Act of 2000 (P.L. 106-310, October 17, 2000) requires the OPTN to recognize the differences in organ transplantation needs between children and adults and adopt criteria, policies, and procedures that address the unique health care needs of children. In addition, the OPTN is to carry out studies and demonstration projects for improving procedures for organ procurement and allocation, including projects to examine and to increase transplantation among populations with special needs, such as children and racial or ethnic minority groups. Finally, the act requires the Secretary of HHS to conduct a study and make recommendations regarding the (1) special growth and developmental issues that children have before and after transplant; (2) extent of denials by medical examiners and coroners to allow donation of organs; (3) other special health and transplantation needs of children; and (4) costs of the immunosuppressive drugs that children must take after receiving a transplant and the extent of their coverage by health plans and insurers. (For a discussion of children's access to these necessary medications, see app. I.) The Secretary must report to the Congress by December 31, 2001. Pediatric patients in need of an organ transplant continue to face a shortage of donated organs. From 1991 through 2000, the number of pediatric organ donors each year has remained relatively constant, even though the number of potential pediatric donors decreased. The number of adult donors has increased significantly during the same period, in large part because donor eligibility criteria have been expanded to include older donors and donors with certain diseases that were not accepted in the past. Simultaneously, the demand for organs for pediatric patients has grown substantially, with the number of children on waiting lists for organ transplants more than doubling. However, compared to adults, children account for a small number of transplant candidates. Several factors can prevent the recovery of organs from a potential donor. Refusal by the family to give consent for donation is the primary reason for nonrecovery of an organ, but failure by health professionals to identify potential donors or approach families and refusal by medical examiners and coroners to release the body also account for significant losses of transplantable organs. Nonetheless, organs are recovered from a higher proportion of potential pediatric donors than potential adult donors. The number of pediatric donors has held relatively steady despite a drop in the number of potential donors. Our analysis of 1989 through 1997 mortality data for children showed a 20-percent decline in deaths of the kinds that are most likely to result in organ donation, such as those resulting from head trauma, motor vehicle collisions, and violence. (See app. II for a complete list of these causes of death.) Mortality for potential donors up to age 19 years declined from 24,069 deaths in 1989 to 19,327 in 1997, the latest data available at the time of our analysis (see table 1). OPTN data show that from 1991 through 2000, while the number of pediatric donors remained relatively constant, the number of adult donors increased 45 percent (see fig. 1). The large increase in the number of adult donors is primarily due to changes in the criteria for accepting organs from a donor. At one time, organs were accepted only from someone who had been declared brain-dead and was relatively young and free from diseases that could affect organ quality. However, because of the continuing shortage of transplantable organs, transplant professionals have gradually expanded the criteria for acceptable organs. Older individuals and persons with certain medical conditions who previously would have been excluded from donating organs can now be donors.From 1991 through 2000, the number of cadaveric donors aged 50 to 64 increased 108 percent, and the number of cadaveric donors aged 65 or older increased 272 percent. The number of children waiting for a transplant has increased over time, but not as much as for adults (see fig. 2). OPTN data show that the number of pediatric patients awaiting transplants increased from 1,010 in 1991 to 2,299 in 2000, a 128-percent increase. The number of adults on the waiting list has increased even faster, from 23,709 in 1991 to 77,047 in 2000, a 225- percent increase. These increases have been spurred by advances in medical science and technology, which have made transplantation a more acceptable medical procedure; improvements in immunosuppressive medications, which have increased survival rates; and an increase in the incidence of certain diseases that lead to end stage organ failure. Despite these increases, the proportion of patients awaiting transplant who are children has remained fairly constant from 1991 through 2000, at between 3 and 4 percent overall. Several factors can prevent the recovery of organs from potential pediatric and adult donors and thus contribute to the continuing shortage of transplantable organs for both children and adults. For example, for many potential donors, families refuse to give consent for organ donation. For others, health care professionals may fail to offer the families the opportunity to donate. Further, some medical examiners and coroners believe that the need to preserve forensic evidence in certain types of cases, such as suspected child abuse and sudden infant death syndrome, makes it impossible for them to allow organ donation to proceed. The Association of Organ Procurement Organizations (AOPO) recently conducted a study at 31 organ procurement organizations on the reasons why potential adult and pediatric donors do not become organ donors. The study found that consent was not given for 39 percent of potential donors and only 41 percent of suitable individuals actually become organ donors. AOPO provided us with the survey data from the referral, request, and organ recovery processes for the pediatric patients. As our analysis shows in table 2, of the 2,420 potential pediatric donors, organs were recovered in 1,230 cases, or about 51 percent of pediatric cases, a rate higher than the overall donation rate. Family refusal (25 percent) was the most common obstacle to organ recovery, but this occurred less frequently for potential pediatric donors than for the entire group of potential donors. Most pediatric organs are transplanted into adults because adults make up the vast majority of patients waiting for an organ transplant and therefore are more likely to be at a higher status on local organ waiting lists than children. However, the degree to which pediatric organs are transplanted into adults varies by organ. In particular, adult patients receive more pediatric kidneys than pediatric patients do, partly because of the importance of tissue-type matching criteria in the allocation of kidneys.While most pediatric kidneys are transplanted into adults, adult kidneys are sometimes transplanted into children. The situation is different for livers and hearts, where organ size is an important determinant of suitability. Livers and hearts from children under 10 are usually transplanted into pediatric patients, whereas those from children aged 11 to 17 are usually transplanted into adults. Figure 3 shows the distribution of pediatric kidneys, livers, and hearts to pediatric and adult recipients. (See app. III for a detailed listing of the distribution of kidneys, livers, and hearts by age of donor and recipient.) Pediatric livers and hearts that are given to adults have sometimes been refused beforehand for a pediatric patient by the patient's physician for various medical or logistical reasons. Adult organs are also transplanted into children, but in much smaller numbers. Although the majority of pediatric kidneys are transplanted into adults, some adult kidneys are transplanted into children. From 1994 through 1999, adult donors provided 81 percent of the kidneys procured and pediatric donors provided 19 percent (see table 4 in app. III). Of the adult kidneys, 4 percent were transplanted into children. Of the pediatric kidneys, 93 percent were transplanted into adults. Figure 4 shows the distribution of pediatric kidneys by age of donor and recipient. During that period, 32 percent of the kidneys given to pediatric recipients came from children, and 68 percent came from adults. Kidneys from pediatric donors are most often transplanted into adults because children make up only a small portion of the kidney waiting listand because of the importance of antigen matching as a ranking factor for this organ. Also, the matching criteria for kidneys generally do not include the size (weight and height) of the donor and recipient. When kidneys from small children are given to adults, they are typically transplanted en bloc, meaning that both kidneys are transplanted into the recipient. Transplant center representatives told us that adult kidneys are often preferred for children because of the larger kidney mass. If complications occur, the larger kidney is more apt to continue functioning than a small, pediatric kidney. For liver transplants, the sizes of the donor and the recipient are factors that are considered to obtain an organ of compatible size. From 1994 through 1999, adult donors provided 78 percent of the livers procured and pediatric donors provided 22 percent (see table 5 in app. III). Of the adult livers, 4 percent were transplanted into children. Of the pediatric livers, 63 percent were transplanted into adults, but this varied greatly by age of the donor. Most livers (81 percent) from donors aged 5 years or younger went to recipients in the same age group, and 4 percent went to adults. For the 6- to 10-year-old donors, 47 percent of the livers went to adult recipients, and for the 11- to 17-year-old donors, 89 percent of the livers went to adult recipients. Figure 5 shows the distribution of pediatric livers by age of donor and recipient from 1994 through 1999. During that period, 72 percent of the livers given to pediatric recipients came from children, and 28 percent came from adults. Unlike kidneys and hearts, livers can be reduced in size or split to accommodate the size of the recipient. A reduced-size liver from an adult donor can be transplanted into a pediatric patient. A split liver can yield a portion for an adult and a portion for a child. However, the number of livers that are either reduced or split is small. From 1994 through 1999, fewer than 2 percent of donor livers were reduced for transplantation, and about 1 percent were split for transplantation. Although using reduced or split livers can provide a needed transplant for children, initial studies found that survival rates were lower for pediatric recipients of these types of liver transplants. However, a recent OPTN analysis of 1997-99 transplants has shown similar 1-year survival rates for whole and split-liver transplants. Sometimes an organ from a pediatric donor is transplanted into an adult even though there is a higher-ranking pediatric patient waiting. This only occurs if the transplant center refuses the organ for the higher-ranked patient. According to OPTN data, 1,122 liver transplants occurred during 1997 and 1998 in which an adult recipient received a pediatric organ. Of these, 222 livers were each refused for at least one potential pediatric recipient who was ranked higher on the waiting list than the adult recipient. The most common reasons for refusing the pediatric liver for a pediatric patient involved administrative reasons (e.g., medical judgment, transportation, logistics, and distance concerns) (33 percent), donor size and/or weight (26 percent), and poor donor quality (18 percent). From 1994 through 1999, adult donors provided 75 percent of the hearts procured and pediatric donors provided 25 percent (see table 6 in app. III). Of the adult hearts, 3 percent were transplanted into children. Of the pediatric hearts, 39 percent were transplanted into adults, but this varied greatly by age of donor. For heart transplants, organ size is critically important both to proper functioning and to proper fit into the chest cavity. Hearts from small children, aged 5 years or younger, are therefore likely to be transplanted into children of the same age group. Of the hearts recovered from donors aged 5 years and younger, 93 percent were transplanted into recipients in the same age group, and 1 percent went to adults. During the same period, adults received about 24 percent of the hearts from donors aged 6 through 10 years, and 89 percent from donors aged 11 through 17 years. Figure 6 shows the distribution of pediatric hearts by age of donor and recipient. During that period, 83 percent of the hearts given to pediatric recipients came from children, and 17 percent came from adults. OPTN data indicate that 664 heart transplants occurred during 1997 and 1998 in which a pediatric organ was transplanted into an adult. Of these, 75 hearts were each refused for at least one pediatric patient who was ranked higher on the waiting list than the adult recipient. In these instances, the most common refusal reasons were donor quality (17 percent), donor size and/or weight (17 percent), administrative reasons (14 percent), and abnormal echocardiogram (14 percent). Although the patterns vary by organ and present a complex picture, pediatric patients appear to be faring as well as or better than adult patients, both while on the waiting list and after transplantation. Data from the OPTN and HHS on four key measures--time on the waiting list, deaths while waiting for a transplant, and 1- and 5-year post-transplant survival-- show that children appear to fare as well as or better than adults, with some exceptions for very young patients and heart transplant patients. Other measures of importance for pediatric patients, such as growth and development, are not routinely part of the current OPTN data collection. Pediatric patients wait fewer days on average than adults for transplants. With the exception of infants under 1 year of age and heart transplant patients, death rates for pediatric patients on the waiting list are lower than those for adults. Again with the exception of infants under 1 year old, post-transplant survival rates for children generally appear to be equivalent to or better than those for adult patients at the 1- and 5-year post-transplant points. However, because the number of pediatric patients is small, variation across time by even a few pediatric patients on any of these measures could result in relatively large changes in the percentages. We report on the most current data available. In general, pediatric patients wait fewer days than adults for transplants (see fig. 7). Adults are likely to wait about twice as long as children for a kidney transplant. For patients added to the waiting list for a transplant in 1997, the median waiting time for pediatric kidney recipients ranged from 389 days for 6- to 10-year-olds to 548 days for 11- to 17-year-olds, while for adults the range was from 1,044 days for 18- to 34-year-olds to 1,150 days for 50- to 64-year-olds. For livers and hearts, the median waiting time for adult candidates was two to three times as long as it was for children. For livers, median waiting times for patients added to the waiting list in 1999 ranged across age subgroups from 182 to 318 days for children through age 10. For children aged 11 to 17 years, however, the waiting time was similar to waiting times for adults. Candidates aged 11 through 17 years waited 746 days, whereas adult waiting times ranged across age subgroups from 636 to 795 days. Across all age groups, waiting times for hearts were much shorter than they were for kidneys and livers because survival is lower without a transplant. Among heart transplant candidates added to the waiting list in 2000, median waiting times for children ranged from 52 to 86 days and for adults from 137 to 242 days across the different age subgroups. The death rates for pediatric patients on the waiting list vary considerably by organ, with pediatric patients having slightly lower rates than adults for kidneys and livers, but higher rates than adults for hearts (see fig. 8). In 2000, death rates for children waiting for a kidney transplant ranged from 0 to 92 per 1,000 patient risk years (i.e., years on the waiting list), whereas for adults they ranged from 36 to 104. Infants under 1 year old who were awaiting liver or heart transplants had considerably higher death rates than other pediatric or adult age groups; however, pediatric patients aged 1 year or older waiting for a liver transplant had lower death rates than adults. For patients waiting for a heart transplant, pediatric patients of all age groups had higher death rates than did adults. With the exception of infants under 1 year old, post-transplant survival rates (i.e., the percentage of patients alive at 1 and 5 years after transplant) for children generally appear to be as good as or better than those for adults (see figs. 9 and 10). In general, 1-year survival rates vary more by type of organ than they do by age group, with kidney transplant recipients having the highest survival rates and heart transplant patients having the lowest survival rates. Overall, survival rates for children at 5 years after transplant are better than adult survival for kidneys and livers. Children 5 years old and younger have lower 5-year survival rates for heart transplants. Organ allocation policies provide a number of protections for children awaiting transplants. The organ transplant community has recognized the distinctive needs of children waiting for a transplant, and the OPTN has revised organ allocation policies over time to consider the pediatric patient. The priority a child receives takes into account differences between children and adults in the progression and treatment of end stage organ disease. Prolonged waiting times can be more harmful for children than for adults because disease progression in children can be faster and their growth and development can be compromised without timely transplantation. The policies differ for each organ. For example, waiting time requirements for kidney transplants are less stringent for pediatric patients than for adult patients because of the unique problems children experience with end stage renal disease, including difficulties with dialysis. For livers, research showing better survival for pediatric patients who received a pediatric liver led to a policy change giving priority for pediatric livers to pediatric patients. For hearts, medical urgency status is determined differently for pediatric patients because pretransplant treatments appropriate for adults, such as heart assist devices, cannot always be used for children who are waiting for transplants. Current kidney allocation policy provides several protections for pediatric kidney patients because of the unique problems they experience in association with end stage renal disease. These problems include dialysis difficulties and disruption of growth and development due to renal failure. Early transplantation can avoid or ameliorate many of the effects of end stage renal disease experienced by pediatric patients. One advantage the allocation policy gives to pediatric patients concerns waiting time, one factor in determining priority for obtaining a transplant. Waiting time for children is measured from when they are placed on the waiting list, whereas, since changes to the adult kidney allocation policy in January 1998, waiting time for adults begins when they reach a certain stage of disease. Therefore pediatric patients can begin moving up in priority on the waiting list at an earlier point in their disease progression than can adult patients. In addition, pediatric patients receive higher priority for kidney allocation at the time of listing and until they reach 18 years of age, based on their age at listing. The criteria for granting this priority were first implemented by the OPTN in 1990 and have been altered several times, most recently in November 1998. Kidney transplant candidates less than 11 years of age at listing are assigned four additional points, and candidates aged 11 through 17 years are assigned three additional points. Another advantage was introduced by the OPTN in November 1998. It provides that patients who are less than 18 years old at listing, and have not received a transplant within a specified amount of time, must be the first in line to receive available kidneys, except for those that must be allocated to a patient with a perfect antigen match, to a patient needing a kidney plus a nonrenal organ, or to a patient whose immune system makes it difficult to receive organs. These specified times are within 6 months of listing for candidates up to and including 5 years of age, 12 months for those from 6 to 10 years, and 18 months for those from 11 to 17 years. The liver allocation policy for pediatric patients has been revised several times since 1994 to address conditions and challenges unique to pediatric patients. Children with chronic liver disease may deteriorate rapidly and unpredictably. Their growth and development may also be affected. The policy revisions redefine medical urgency criteria, focus on disease progression in children, and recognize factors distinctive to pediatric liver candidates. In June 2000, the OPTN approved a policy to give pediatric liver transplant patients preference over adult patients for livers from pediatric donors. Prior to the implementation of this change, the age of the donor was not a factor. Now, a pediatric liver is offered to a pediatric patient before an adult patient with the same medical urgency within the same organ distribution area. If no local matches occur in a given medical urgency category, the pediatric liver will be offered to a pediatric patient before an adult patient with the same medical urgency at the regional level. This change was made in response to the finding that pediatric liver transplant recipients have higher survival rates and better graft survival if they are transplanted with a pediatric liver rather than an adult liver. A study showed that pediatric patients receiving livers from pediatric donors during 1992 through 1997 had a 3-year graft survival rate of 81 percent, compared to 63 percent for children receiving an adult liver. Adults, however, had similar 3-year graft survival rates regardless of donor age. The OPTN policy also provides an advantage for pediatric patients with chronic liver failure. The policy places these patients at the highest medical urgency level when their condition worsens, a provision that is not in place for adult patients with chronic liver failure. Moving pediatric patients to the highest category provides the advantage of access to donated organs locally and regionally before all patients in lower categories. The heart allocation criteria have also been revised recently to reflect differences in treatment and progression of heart disease between children and adults. Before these revisions, the use of certain mechanical assist devices or other monitoring and treatment therapies was required for any patient to be included in the highest medical urgency categories. However, because some of these devices and therapies are generally not used with pediatric patients, the OPTN removed this requirement for pediatric patients in January 1999. The OPTN implemented two further revisions in May 2000. One change allows pediatric patients on the waiting list for a heart to retain their medical urgency status when they turn 18 rather than being subject to adult criteria. Another revision gives priority to pediatric heart transplant candidates, within each medical urgency category, for hearts recovered from 11- to 17-year-old donors. Children constitute a small proportion of patients in need of an organ transplant, but organ allocation policies have been designed to provide this vulnerable population with some special protections. Our examination of transplantation patterns across age groups and recent data on waiting times and death and survival rates indicates that pediatric patients do not appear to be at a disadvantage in the competition for scarce organs. These data show comparable or better outcomes for pediatric patients even before the most recent policy changes, such as the change to prioritize pediatric livers for pediatric recipients. We provided HHS with the opportunity to comment on a draft of this report. HHS provided technical comments, which we have incorporated where appropriate. We also provided a draft of the report to UNOS, and it provided technical comments, which we have incorporated where appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from the date of this letter. We will then send copies to others who are interested and make copies available to others who request them. If you or your staffs have any questions about this report, please call me at (202) 512-7119. Another contact and key contributors to this report are listed in appendix IV. Coverage for immunosuppressive medications may be extended to children under Medicare, Medicaid, and private insurance. Pediatric patients may also gain access to prescription drug coverage through special state insurance programs for children. However, both adults and children may have difficulty in obtaining and retaining insurance coverage for the expensive immunosuppressive medications necessary for survival following transplantation. Further, gaps in coverage may occur during a transition from one type of insurance to another. For example, if a parent loses Medicaid eligibility, a child's eligibility status could also be affected. In addition, coverage problems can arise for both Medicaid- and private- insurance-covered pediatric patients when they reach adulthood. Transplant recipients covered by Medicaid as children may become ineligible for continued coverage if they are able to obtain employment as they reach adulthood. Children covered by private insurance under a parent's policy may be unable to afford coverage, given their expensive preexisting medical condition, when they grow too old to be covered by a parent's policy. Data on the costs of immunosuppressive medications, actual payments, and patient cost-sharing by the various insurers are not readily available, so the level of the coverage cannot be specified with certainty. The proportion of transplant patients covered by different insurance programs can be used to derive an indication of coverage for immunosuppressive medications. Data from the Organ Procurement and Transplantation Network (OPTN) on the expected sources of payment for the pediatric transplants performed from 1997 through 1999 may serve as a general estimate of the share of immunosuppressive medications for children paid for by Medicare, Medicaid, and private insurance. OPTN data show that 4,835 transplants were performed on children up to age 17 from 1997 to 1999. Of these, 2,775 transplants were for livers and hearts, and 2,060 were for kidneys. As figure 11 shows, private insurance paid for almost half of the pediatric transplants for these three organs performed from 1997 through 1999, while Medicaid paid for 25 percent and Medicare paid for 14 percent of these transplants. For the same period, Medicare paid for an estimated 30 percent of pediatric kidney transplants because of its special coverage for kidney patients under the End-Stage Renal Disease (ESRD) program. Medicare coverage for transplants and the associated medications is provided to children either under a special entitlement to the Medicare program created by the Congress for those diagnosed with ESRD or by virtue of a parent's enrollment as an eligible Medicare beneficiary. The Medicare program has special entitlement rules for patients with ESRD, the stage of kidney impairment that is considered irreversible and requires either regular dialysis or a kidney transplant to maintain life. To be eligible for Medicare entitlement as an ESRD patient, the patient generally must have been on dialysis for 3 months and must be (1) entitled to a monthly insurance benefit under title II of the Social Security Act (or an annuity under the Railroad Retirement Act), (2) fully or currently insured under Social Security, or (3) the spouse or dependent child of a person who meets at least the first 2 requirements. Currently, ESRD patients' entitlement to Medicare--and thus coverage for immunosuppressive medications--ends 36 months after a transplant is performed. In contrast, individuals who are eligible for Medicare under other entitlement rules--that is, age 65 or disabled, and eligible for Social Security or Railroad Retirement benefits--currently receive unlimited coverage for immunosuppressive drug medications for the life of the transplant under Part B. Originally, Medicare limited immunosuppressive drug coverage to 1 year. However, the Omnibus Budget Reconciliation Act of 1993 (P.L. 103-66) expanded this coverage with a series of annual 6- month increases beginning in 1995. As a result, by 1998, Medicare patients received immunosuppressive medication coverage for 36 months after a transplant operation. In 1999, the Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999 (P.L. 106-113) extended this immunosuppressive drug coverage benefit for an additional 8 months. Most recently, the Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of 2000 (P.L. 106-554) eliminated all time limits for immunosuppressive drug coverage under Part B of Medicare. Medicaid is a joint federal/state entitlement that annually finances health care coverage for more than 40 million low-income individuals, over half of whom are children. Medicaid coverage for children is comprehensive, offering a wide range of medical services and mandating coverage based upon family income in relation to the federal poverty level (FPL). Federal law requires states to cover children up to age 6 from families with incomes up to 133 percent of the FPL, and children ages 6 to 15 for incomes up to 100 percent of the FPL. Medicaid benefits are particularly important for children because of Medicaid's Early and Periodic Screening, Diagnostic, and Treatment (EPSDT) Program. EPSDT, which is mandatory for categorically needy children, provides comprehensive, periodic evaluations of health and developmental history, as well as vision, hearing, and dental screening services to most Medicaid-eligible children.Under EPSDT, states are required to cover any service or item that is medically necessary to correct or ameliorate a condition detected through an EPSDT screening, regardless of whether the service is otherwise covered under a state Medicaid program. This would include immunosuppressive drugs. Private insurance, such as employer-sponsored health plans, generally covers all aspects of organ transplants, including follow-up care and necessary medications. Information is not readily available on private insurance coverage specifically for immunosuppressive medications. However, according to a 1998 national survey of employer-sponsored health plans, nearly all employers that offer health benefits include benefits for outpatient prescription drugs. In addition, a Kaiser Family Foundation survey of employer health benefits found that 96 percent of all firms with conventional fee-for-service plans and 99 percent of those with managed care plans cover prescription drugs. Privately insured organ transplant patients most likely will incur additional expenses for medications, however, such as out-of-pocket expenses for deductibles and copayments, because of limits on coverage. A recent survey of employers with 1,000 or more employees on strategies to control prescription drug expenditures found that 6 percent of employers cap annual benefits and 10 percent are considering doing so. The study also found that 41 percent of employers limit the quantities of prescription drugs and 7 percent are considering it. Moreover, 40 percent of employers now require higher copayments than previously, and 39 percent are considering it. The causes and circumstances of death that could reasonably result in a declaration of brain death and from which organ donation might be possible are listed in table 3. We used the International Classification of Diseases, 9th Revision, Clinical Modification (ICD-9-CM) codes to classify deaths by causes and circumstances. The following tables show the distribution of kidneys, livers, and hearts procured from all donors from 1994 to 1999, by age of donor and recipient. In addition to the above, Donna Bulvin, Charles Davenport, Roy Hogberg, Behn Miller, and Roseanne Price made key contributions to this report.

Pediatric patients in need of an organ transplant face a shortage of donated organs. The number of pediatric organ donors has remained relatively constant from 1991 to 2000, despite a drop in potential donors. The number of adult donors rose 45 percent during the same period, in large part because donor eligibility criteria have been expanded to include older donors and donors with diseases that have been prohibited in the past. Organ waiting lists for pediatric patients have more than doubled. Compared to adults, however, children account for a small number of transplant candidates. The degree to which pediatric organs are transplanted into adults varies by organ. Pediatric patients appear to be faring as well as or better than adult patients, both while on the waiting list and after transplantation. Allocation policies for kidneys, livers, and hearts provide several protections for children awaiting transplants. The priority a child receives takes into account differences between children and adults in the progression and treatment of end stage organ disease, with the policies differing for each organ.

Since 2014, we have reported multiple times on the progress CBP has made deploying technologies under the ATP. We reported in May 2016 that CBP had initiated or completed deployment of technology to Arizona for six programs under the ATP. In addition to deploying technologies under the ATP, CBP's 2014 Southwest Border Technology Plan extended technology deployments to the remainder of the southwest border, beginning with selected areas in Texas and California. As of July 2017, CBP completed deployment of select technologies to sectors in Arizona, Texas, and California. For example, in our April 2017 assessment of DHS's major acquisitions programs, we reported that CBP completed deployments of 7 Integrated Fixed Tower (IFT) systems to the Nogales Border Patrol station within the Tucson sector in Arizona, and was working to deploy the remaining 46 towers to other sectors in Arizona. As of July 2017, CBP reported deploying an additional 8 IFT systems, for a total of 15 of 53 planned towers. CBP has also made changes to the IFT program. Specifically, rather than expanding IFT capabilities to the Wellton Border Patrol station within the Yuma sector in Arizona as originally planned, CBP now plans to replace 15 existing SBInet fixed- tower systems with IFT systems. CBP also reported that it had completed Remote Video Surveillance System (RVSS) and Mobile Surveillance Capability (MSC) deployments to Arizona as planned under the ATP, and deployed 32 MSC systems to Texas and California. Additionally, CBP completed contract negotiations with the RVSS program for follow-on contract option periods to deploy RVSS to two stations in the Rio Grande Valley sector in Texas. The deployment status of the IFT, RVSS, and MSC technologies is shown below in table 1. We will plan to report on the deployment status of southwest border surveillance technology, among other topics, in a forthcoming report. In March 2014, we assessed CBP's efforts to develop and implement the ATP. Specifically, we recommended that CBP, among other things, (1) apply scheduling best practices; (2) develop an integrated schedule; and (3) verify life-cycle cost estimates. DHS concurred with some of our recommendations and has taken actions to address some of them, which we discuss below. Program Schedules. In March 2014, we found that CBP had a schedule for deployment for each of the ATP's seven programs, and that four of the programs would not meet their originally planned completion dates. Specifically, we found that the three highest-cost programs (IFT, RVSS, and MSC) had experienced delays relative to their baseline schedules, as of March 2013. We also reported that CBP had at least partially met the four characteristics of reliable schedules for the IFT and RVSS schedules and partially or minimally met the four characteristics for the MSC schedule. Scheduling best practices are summarized into four characteristics of reliable schedules--comprehensive, well-constructed, credible, and controlled (i.e., schedules are periodically updated and progress is monitored). We assessed CBP's schedules as of March 2013 for the three highest-cost programs and reported in March 2014 that schedules for two of the programs at least partially met each characteristic (i.e., satisfied about half of the criterion), and the schedule for the other program at least minimally met each characteristic (i.e., satisfied a small portion of the criterion). For example, the schedule for the IFT program partially met the characteristic of being credible in that CBP had performed a schedule risk analysis for the program, but the risk analysis did not include the risks most likely to delay the program or how much contingency reserve was needed. For the MSC program, the schedule minimally met the characteristic of being controlled in that it did not have valid baseline dates for activities or milestones by which CBP could track progress. We recommended that CBP ensure that scheduling best practices are applied to the IFT, RVSS, and MSC program schedules. DHS concurred with the recommendation and stated that CBP planned to ensure that scheduling best practices would be applied, as outlined in our schedule assessment guide, when updating the three programs' schedules. In response to our March 2014 recommendation regarding applying scheduling best practices, CBP provided us with updated program schedules for the IFT, RVSS, and MSC programs. Based on our assessment of updated program schedules for the IFT, RVSS, and MSC that CBP had completed as of January 2017, CBP has made significant improvements in the quality of the programs' schedules, but the programs' schedules had not met all characteristics of a reliable schedule. For example, CBP has improved the quality of its products for analyzing and quantifying risk to the programs' schedules; however, CBP could improve the documentation of these analyses and the prioritization of the programs' risks. While CBP has taken positive steps, we continue to believe that by ensuring that all scheduling best practices are applied, CBP could help ensure the reliability of its programs' schedules and better position itself to identify and address any potential delays in its programs' commitment dates. Integrated Master Schedule. In March 2014, we also found that CBP had not developed an Integrated Master Schedule for the ATP in accordance with best practices. Rather, CBP had used separate schedules for each program to manage implementation of the ATP, as CBP officials stated that the ATP contained individual acquisition programs rather than integrated programs. However, collectively these programs are intended to provide CBP with a combination of surveillance capabilities to be used along the Arizona border with Mexico, and resources are shared among the programs. We recommended in March 2014 that CBP develop an Integrated Master Schedule for the ATP. CBP did not concur with this recommendation and maintained that an Integrated Master Schedule for the ATP in one file undermines the DHS- approved implementation strategy for the individual programs making up the ATP, and that the implementation of this recommendation would essentially create a large, aggregated program, and effectively create an aggregated "system of systems." DHS further stated at the time that a key element of its plan has been the disaggregation of technology procurements. As we reported in March 2014, this recommendation was not intended to imply that DHS needed to re-aggregate the ATP's seven programs into a "system of systems" or change its procurement strategy in any form. The intent of the recommendation was for DHS to insert the individual schedules for each of the ATP's programs into a single electronic Integrated Master Schedule file in order to identify any resource allocation issues among the programs' schedules. We continue to believe that developing and maintaining an Integrated Master Schedule for planned technologies could allow CBP insight into current or programmed allocation of resources for all programs as opposed to attempting to resolve any resource constraints for each program individually. Life-cycle Cost Estimates. In March 2014, we also reported that the life- cycle cost estimates for the technology programs under the ATP reflected some, but not all, best practices. Cost-estimating best practices are summarized into four characteristics--well documented, comprehensive, accurate, and credible. Our analysis of CBP's estimate for the ATP and estimates completed at the time of our March 2014 review for the two highest-cost programs--the IFT and RVSS programs--showed that these estimates at least partially met three of these characteristics: well documented, comprehensive, and accurate. In terms of being credible, these estimates had not been verified with independent cost estimates in accordance with best practices. We concluded that verifying life-cycle cost estimates with independent estimates in accordance with cost- estimating best practices could help better ensure the reliability of the cost estimates, and we recommended that CBP verify the life-cycle cost estimates for the IFT and RVSS programs with independent cost estimates and reconcile any differences. DHS concurred with this recommendation, but stated then that it did not believe that there would be a benefit in expending funds to obtain independent cost estimates and that if the costs realized to date continued to hold, there may be no requirement or value added in conducting full program updates with independent cost estimates. We recognize the need to balance the cost and time to verify the life-cycle cost estimates with the benefits to be gained from verification with independent cost estimates. As part of our updates on CBP's efforts to implement our 2014 recommendations, CBP officials told us that in fiscal year 2016, DHS's Cost Analysis Division (CAD) would begin piloting DHS's independent cost estimate capability on the RVSS program. According to CBP officials, this pilot is an opportunity to assist DHS in developing its independent cost estimate capability. CBP selected the RVSS program for the pilot because the program was at a point in its planning and execution process where it can benefit most from having an independent cost estimate performed, as these technologies are being deployed along the southwest border beyond Arizona. According to CBP officials, DHS's Cost Analysis Division completed its independent cost estimate for the RVSS program in August 2016, and in February 2017 CBP had completed its efforts to verify the RVSS program cost estimate with CAD's independent cost estimate, which is part of the CAD pilot. However, as of July 2017, CBP has not yet provided us with the final reconciliation of the independent cost estimate and the RVSS program cost estimate, as we recommended in 2014. CBP officials have not detailed similar plans for the IFT. We continue to believe that independently verifying the life-cycle cost estimates for the IFT and RVSS programs and reconciling any differences, consistent with best practices, could help CBP better ensure the reliability of the estimates. We reported in March 2014 that CBP had identified mission benefits of its surveillance technologies to be deployed along the southwest border, such as improved situational awareness and agent safety. However, the agency had not developed key attributes for performance metrics for all surveillance technologies to be deployed, as we recommended in November 2011. Further, we also reported in March 2014 that CBP did not capture complete data on the contributions of these technologies, which in combination with other relevant performance metrics or indicators, could be used to better determine the impact of CBP's surveillance technologies on CBP's border security efforts and inform resource allocation decisions. We found that CBP had a field within its Enforcement Integrated Database for data on whether technological assets, such as SBInet surveillance systems, and non-technological assets, such as canine teams, assisted or contributed to the apprehension of illegal entrants and seizure of drugs and other contraband; however, according to CBP officials, Border Patrol agents were not required to record these data. This limited CBP's ability to collect, track, and analyze available data on asset assists to help monitor the contribution of surveillance technologies, including its SBInet system, to Border Patrol apprehensions and seizures and inform resource allocation decisions. We recommended that CBP require data on asset assists to be recorded and tracked within its database, and once these data were required to be recorded and tracked, that it analyze available data on apprehensions and technological assists--in combination with other relevant performance metrics or indicators, as appropriate--to determine the contribution of surveillance technologies to CBP's border security efforts. CBP concurred with our recommendations and has implemented one of them. Specifically, in June 2014, CBP issued guidance informing Border Patrol agents that the asset assist data field within its database was now a mandatory data field. Therefore, agents are required to enter any assisting surveillance technology or other equipment. Further, as part of our updates on CBP's efforts to implement our 2014 recommendations, we found that in May 2015, CBP had identified a set of potential key attributes for performance metrics for all technologies to be deployed under the ATP. However, CBP officials stated at that time that this set of performance metrics was under review as the agency continued to refine the key attributes for metrics to assess the contributions and impacts of surveillance technology on its border security mission. In our April 2016 update on the progress made by agencies to address our findings on duplication and cost savings across the federal government, we reported that CBP had modified its time frame for developing baselines for each performance measure and that additional time would be needed to implement and apply key attributes for metrics. According to CBP officials, CBP expected these performance measure baselines to be developed by the end of calendar year 2015, at which time the agency planned to begin using the data to evaluate the individual and collective contributions of specific technology assets deployed under the ATP. Moreover, CBP planned to use the baseline data to establish a tool that explains the qualitative and quantitative impacts of technology and tactical infrastructure on situational awareness in specific areas of the border environment by the end of fiscal year 2016. Although CBP had initially reported it had expected to complete its development of baselines for each performance measure by the end of calendar year 2015, as of March 2016, it was adjusting the actual completion date, pending test and evaluation results for recently deployed technologies to the southwest border. In our April 2017 update on the progress made by agencies to address our findings on duplication and cost savings across the federal government, we reported that CBP had provided us a case study that assessed technology assist data, along with other measures such as field-based assessments of capability gaps, to determine the contributions of surveillance technologies to its mission. This is a helpful step in developing and applying performance metrics. However, the case study was limited to one border location and the analysis was limited to select technologies. To fully implement our recommendation, CBP should complete its efforts to fully develop and apply key attributes for performance metrics for all technologies deployed and begin using the data to evaluate the individual and collective contributions of specific technologies, fully assess its progress in implementing planned technologies, and determine when mission benefits have been fully realized. Until CBP completes this effort it will not be well positioned to fully assess its progress in implementing the ATP and determining when mission benefits have been fully realized. Chairwoman McSally, Ranking Member Vela, and Members of the Subcommittee, this concludes my prepared statement. I will be happy to answer any questions you may have. For further information about this testimony, please contact Rebecca Gambler at (202) 512-8777 or [email protected]. In addition, contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Key contributors to this testimony are Jeanette Espinola (Assistant Director), Yvette Gutierrez (Analyst in Charge), Charlotte Gamble, Ashley Davis, Claire Peachey, Marycella Mierez, and Sasan J. "Jon" Najmi. 2017 Annual Report: Additional Opportunities to Reduce Fragmentation, Overlap, and Duplication and Achieve Other Financial Benefits. GAO-17-491SP. Washington, D.C.: April 26, 2017. 2017 Homeland Security Acquisitions: Earlier Requirements Definition and Clear Documentation of Key Decisions Could Facilitate Ongoing Progress. GAO-17-346SP. Washington, D.C.: April 6, 2017. Border Security: DHS Surveillance Technology, Unmanned Aerial Systems and Other Assets. GAO-16-671T. Washington, D.C.: May 24, 2016. 2016 Annual Report: Additional Opportunities to Reduce Fragmentation, Overlap, and Duplication and Achieve Other Financial Benefits. GAO-16-375SP. Washington, D.C.: April 13, 2016. Homeland Security Acquisitions: DHS Has Strengthened Management, but Execution and Affordability Concerns Endure. GAO-16-338SP. Washington, D.C.: March 31, 2016. Southwest Border Security: Additional Actions Needed to Assess Resource Deployment and Progress. GAO-16-465T. Washington, D.C.: March 1, 2016. GAO Schedule Assessment Guide: Best Practices for Project Schedules. GAO-16-89G. Washington, D.C.: December 2015. Border Security: Progress and Challenges in DHS's Efforts to Implement and Assess Infrastructure and Technology. GAO-15-595T. Washington, D.C.: May 13, 2015. Homeland Security Acquisitions: Addressing Gaps in Oversight and Information is Key to Improving Program Outcomes. GAO-15-541T. Washington, D.C.: April 22, 2015. Homeland Security Acquisitions: Major Program Assessments Reveal Actions Needed to Improve Accountability. GAO-15-171SP. Washington, D.C.: April 22, 2015. 2015 Annual Report: Additional Opportunities to Reduce Fragmentation, Overlap, and Duplication and Achieve Other Financial Benefits. GAO-15-404SP. Washington, D.C.: April 14, 2015. Arizona Border Surveillance Technology Plan: Additional Actions Needed to Strengthen Management and Assess Effectiveness. GAO-14-411T. Washington, D.C.: March 12, 2014. Arizona Border Surveillance Technology Plan: Additional Actions Needed to Strengthen Management and Assess Effectiveness. GAO-14-368. Washington, D.C.: March 3, 2014. Border Security: Progress and Challenges in DHS Implementation and Assessment Efforts. GAO-13-653T. Washington, D.C.: June 27, 2013. Border Security: DHS's Progress and Challenges in Securing U.S. Borders. GAO-13-414T. Washington, D.C.: March 14, 2013. U.S. Customs and Border Protection's Border Security Fencing, Infrastructure and Technology Fiscal Year 2011 Expenditure Plan. GAO-12-106R. Washington, D.C.: November 17, 2011. Arizona Border Surveillance Technology: More Information on Plans and Costs Is Needed before Proceeding. GAO-12-22. Washington, D.C.: November 4, 2011. GAO Cost Estimating and Assessment Guide: Best Practices for Developing and Managing Capital Program Costs. GAO-09-3SP. Washington, D.C.: March 2009. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

CBP deploys land-based surveillance technologies to help monitor and secure the border and apprehend individuals who attempt to cross the border illegally. GAO has reported on the progress and challenges DHS and its components have faced implementing its border security efforts. This statement addresses (1) the status of CBP efforts to deploy land-based surveillance technologies along the southwest border and (2) CBP's efforts to measure the effectiveness of these technologies. This statement is based on GAO reports and testimonies from 2011 through 2016, selected updates conducted in 2017, and ongoing work for this subcommittee related to border surveillance technology. For ongoing work and updates, GAO analyzed technology program documents; interviewed DHS, CBP, and U.S. Border Patrol officials; and conducted site visits to Arizona and Texas to observe technologies. U.S. Customs and Border Protection (CBP), a component of the Department of Homeland Security (DHS), has made progress deploying surveillance technology along the southwest U.S. border under its 2011 Arizona Technology Plan (ATP) and 2014 Southwest Border Technology Plan. The ATP called for deployment of a mix of radars, sensors, and cameras in Arizona, and the 2014 Plan incorporates the ATP and includes deployments to the rest of the southwest border, beginning with areas in Texas and California. As of July 2017, CBP completed deployment of select technologies to areas in Arizona, Texas, and California. For example, CBP deployed all planned Remote Video Surveillance Systems (RVSS) and Mobile Surveillance Capability (MSC) systems, and 15 of 53 Integrated Fixed Tower (IFT) systems to Arizona. CBP also deployed all planned MSC systems to Texas and California and completed contract negotiations to deploy RVSS to Texas. CBP has made progress implementing some, but not all of GAO's recommendations related to managing deployments of its technology programs. In 2014, GAO assessed CBP's implementation of the ATP and recommended that CBP: (1) apply scheduling best practices; (2) develop an integrated schedule; and (3) verify cost estimates for the technology programs. DHS concurred with some, but not all of the recommendations and has taken actions to address some of them, such as applying best practices when updating schedules, but has not taken action to address others, such as developing an integrated master schedule and verifying cost estimates with independent estimates for the IFT program. GAO continues to believe that applying schedule and cost estimating best practices could better position CBP to strengthen its management efforts of these programs. CBP has also made progress toward assessing performance of surveillance technologies. GAO reported in 2014 that CBP identified some mission benefits, such as improved situational awareness and agent safety, but had not developed key attributes for performance metrics for all technologies, as GAO recommended (and CBP concurred) in 2011. GAO has ongoing work examining DHS's technology deployments and efforts to assess technology performance, which GAO plans to report on later this year. GAO has made recommendations to DHS to improve its management of plans and programs for surveillance technologies. DHS has generally agreed. DHS has taken actions or described planned actions to address some of these recommendations. GAO continues to believe that these recommendations could strengthen CBP's management efforts and will continue to monitor CBP's efforts.

the University of California had inadequate work controls at one of its laboratory facilities, resulting in eight workers being exposed to airborne plutonium and five of those workers receiving detectable intakes of plutonium. This was identified as one of the 10 worst radiological intake events in the United States in over 40 years. DOE assessed, but cannot collect, a penalty of $605,000 for these violations. University of Chicago had violated the radiation protection and quality assurance rules, leading to worker contamination and violations of controls intended to prevent an uncontrolled nuclear reaction from occurring. DOE assessed, but cannot collect, a penalty of $110,000 for these violations. DOE has cited two other reasons for continuing the exemption, but as we indicated in our 1999 report, we did not think either reason was valid: DOE said that contract provisions are a better mechanism than civil penalties for holding nonprofit contractors accountable for safe nuclear practices. We certainly agree that contract mechanisms are an important tool for holding contractors accountable, whether they earn a profit or not. However, since 1990 we have described DOE's contracting practices as being at high risk for fraud, waste, abuse, and mismanagement. Similarly, in November 2000, the Department's Inspector General identified contract administration as one of the most significant management challenges facing the Department. We have noted that, recently, DOE has been more aggressive in reducing contractor fees for poor performance in a number of areas. However, having a separate nuclear safety enforcement program provides DOE with an additional tool to use when needed to ensure that safe nuclear practices are followed. Eliminating the exemption enjoyed by the nonprofit contractors would strengthen this tool. DOE said that its current approach of exempting nonprofit educational institutions is consistent with Nuclear Regulatory Commission's (NRC) treatment of nonprofit organizations because DOE issues notices of violation to nonprofit contractors without collecting penalties but can apply financial incentives or disincentives through the contract. However, NRC can and does impose monetary penalties for violations of safety requirements, without regard to the profit-making status of the organization. NRC sets lower penalty amounts for nonprofit organizations than for- profit organizations. The Secretary could do the same, but does not currently take this approach. Furthermore, both NRC and other regulatory agencies have assessed and collected penalties or additional administrative costs from some of the same organizations that DOE exempts from payment. For example, the University of California has made payments to states for violating environmental laws in California and New Mexico because of activities at Lawrence Livermore and Los Alamos National Laboratories. The enforcement program appears to be a useful and important tool for ensuring safe nuclear practices. Our 1999 review of the enforcement program found that, although it needed to be strengthened, the enforcement program complemented other contract mechanisms DOE had to help ensure safe nuclear practices. Advantages of the program include its relatively objective and independent review process, a follow-up mechanism to ensure that contractors take corrective action, and the practice of making information readily available to the contractor community and the public. Modifications to H.R. 723 Could Help Clarify and Strengthen the Penalty Provisions H.R. 723 eliminates both the exemption from paying the penalties provided by statute and the exemption allowed at the Secretary's discretion. While addressing the main problems we discussed in our 1999 report, we have several observations about clarifications needed to the proposed bill. The "discretionary fee" referred to in the bill is unclear. H.R. 723, while eliminating the exemption, limits the amount of civil penalties that can be imposed on nonprofit contractors. This limit is the amount of "discretionary fees" paid to the contractor under the contract under which the violation occurs. The meaning of the term "discretionary fee" is unclear and might be interpreted to mean all or only a portion of the fee paid. In general, the total fee--that is, the amount that exceeds the contractor's reimbursable costs--under DOE's management and operating contracts consists of a base fee amount and an incentive fee amount. The base fee is set in the contract. The amount of the available incentive fee paid to the contractor is determined by the contracting officer on the basis of the contractor's performance. Since the base fee is a set amount, and the incentive fee is determined at the contracting officer's discretion, the term "discretionary fee" may be interpreted to refer only to the incentive fee and to exclude the base fee amount. However, an alternate interpretation also is possible. Certain DOE contracts contain a provision known as the "Conditional Payment of Fee, Profit, Or Incentives" clause. Under this contract provision, on the basis of the contractor's performance, a contractor's entire fee, including the base fee, may be reduced at the discretion of the contracting officer. Thus, in contracts that contain this clause, the term "discretionary fee" might be read to include a base fee. If the Congress intends to have the entire fee earned be subject to penalties, we suggest that the bill language be revised to replace the term "discretionary fee" with "total amount of fees." If, on the other hand, the Congress wants to limit the amount of fee that would be subject to penalties to the performance or incentive amount, and exclude the base fee amount, we suggest that the bill be revised to replace the term "discretionary fee" with "performance or incentive fee." Limiting the amount of any payment for penalties made by tax-exempt contractors to the amount of the incentive fee could have unintended effects. Several potential consequences could arise by focusing only on the contractor's incentive fee. Specifically: Contractors would be affected in an inconsistent way. Two of the nonprofit contractors--University Research Associates at the Fermi National Accelerator Laboratory and Princeton University--do not receive an incentive fee (they do receive a base fee). Therefore, depending on the interpretation of the term "discretionary fee" as discussed above, limiting payment to the amount of the incentive fee could exempt these two contractors from paying any penalty for violating nuclear safety requirements. Enforcement of nuclear safety violations would differ from enforcement of security violations. The National Defense Authorization Act for Fiscal Year 2000 established a system of civil monetary penalties for violations of DOE regulations regarding the safeguarding and security of restricted data. The legislation contained no exemption for nonprofit contractors but limited the amount of any payment for penalties made by certain nonprofit contractors to the total fees paid to the contractor in that fiscal year. In contrast, these same contractors could have only a portion of their fee (the "discretionary fee") at risk for violations of nuclear safety requirements. It is not clear why limitations on the enforcement of nuclear safety requirements should be different than existing limitations on the enforcement of security requirements. Disincentives could be created if the Congress decides to limit the penalty payment to the amount of the incentive fee. We are concerned that contractors might try to shift more of their fee to a base or fixed fee and away from an incentive fee, in order to minimize their exposure to any financial liability. Such an action would have the effect of undermining the purpose of the penalty and DOE's overall emphasis on performance-based contracting. In fact, recent negotiations between DOE and the University of California to extend the laboratory contracts illustrate this issue. According to the DOE contracting officer, of the total fee available to the University of California, more of the fee was shifted from incentive fee to base fee during recent negotiations because of the increased liability expected from the civil penalties associated with security violations. If a nonprofit contractor's entire fee was subject to the civil penalty, the Secretary has discretion that should ensure that no nonprofit contractor's assets are at risk because of having to pay the civil penalty. This is because the Secretary has considerable latitude to adjust the amount of any civil penalty to meet the circumstances of any specific situation. The Secretary can consider factors such as the contractor's ability to pay and the effect of the penalty on the contractor's ability to do business. Preferential treatment would be expanded to all tax-exempt contractors. Under the existing law, in addition to the seven contractors exempted by name in the statute, the Secretary was given the authority to exempt nonprofit educational institutions. H.R. 723 takes a somewhat different approach by exempting all tax-exempt nonprofit contractors whether or not they are educational institutions. This provision would actually reduce the liability faced by some contractors. For example, Brookhaven Science Associates, the contractor at Brookhaven National Laboratory, is currently subject to paying civil penalties for nuclear safety violations regardless of any fee paid because, although it is a nonprofit organization, it is not an educational institution. Under the provisions of H.R. 723, however, Brookhaven Science Associates would be able to limit its payments for civil penalties. This change would result in a more consistent application of civil penalties among nonprofit contractors. Some contractors might not be subject to the penalty provisions until many years in the future. As currently written, H.R. 723 would not apply to any violation occurring under a contract entered into before the date of the enactment of the act. Thus, contractors would have to enter into a new contract with DOE before this provision takes effect. For some contractors that could be a considerable period of time. The University of California, for example, recently negotiated a 4-year extension of its contract with DOE. It is possible, therefore, that if H.R. 723 is enacted in 2001, the University of California might not have to pay a civil penalty for any violation of nuclear safety occurring through 2005. In contrast, when the Congress set up the civil penalties in 1988, it did not require that new contracts be entered into before contractors were subject to the penalty provisions. Instead, the penalty provisions applied to the existing contracts. In reviewing the fairness of this issue as DOE prepared its implementing regulations, in 1991 DOE stated in the Federal Register that a contractor's obligation to comply with nuclear safety requirements and its liability for penalties for violations of the requirements are independent of any contractual arrangements and cannot be modified or eliminated by the operation of a contract. Thus, DOE considered it appropriate to apply the penalties to the contracts existing at the time.

This testimony discusses GAO's views on H.R. 723, a bill that would modify the Atomic Energy Act of 1954 by changing how the Department of Energy (DOE) treats nonprofit contractors who violate DOE's nuclear safety requirements. Currently, nonprofit contractors are exempted from paying civil penalties that DOE assesses under the act. H.R. 723 would remove that exemption. GAO supports eliminating the exemption because the primary reason for instituting it no longer exists. The exemption was enacted in 1988 at the same time the civil monetary penalty was established. The purpose of the exemption was to ensure that the nonprofit contractors operating DOE laboratories who were being reimbursed only for their costs, would not have their assets at risk for violating nuclear safety requirements. However, virtually all of DOE's nonprofit contractors have an opportunity to earn a fee in addition to payments for allowable costs. This fee could be used to pay the civil monetary penalties. GAO found that DOE's nuclear safety enforcement program appears to be a useful and important tool for ensuring safe nuclear practices.

Linking efficiency to physician payment policy has been a subject of interest among policymakers and health policy analysts. For example, the Institute of Medicine has recently recommended that Medicare payment policies should be reformed to include a system for paying health care providers differentially based on how well they meet performance standards for quality or efficiency or both. In April 2005, CMS initiated a demonstration mandated by the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA) to test this approach. Under the Physician Group Practice demonstration, 10 large physician group practices, each comprising at least 200 physicians, are eligible for bonus payments if they meet quality targets and succeed in keeping the total expenditures of their Medicare population below annual targets. Several studies have found that Medicare and other purchasers could realize substantial savings if a portion of patients switched from less efficient to more efficient physicians. The estimates vary according to assumptions about the proportion of beneficiaries changing physicians. In 2003, the Consumer-Purchaser Disclosure Project, a partnership of consumer, labor, and purchaser organizations, asked actuaries and health researchers to estimate the potential savings to Medicare if a small proportion of beneficiaries started using more efficient physicians. The Project reported that Medicare could save between 2 and 4 percent of total costs if 1 out of 10 beneficiaries moved to more efficient physicians. This conclusion is based on information received from one actuarial firm and two academic researchers. One researcher concluded, based on his simulations, that if 5 to 10 percent of Medicare enrollees switched to the most efficient physicians, savings would be 1 to 3 percent of program costs--which would amount to about $5 billion to $14 billion in 2007. The Congress has also recently expressed interest in approaches to constrain the growth of physician spending. The Deficit Reduction Act of 2005 required the Medicare Payment Advisory Commission (MedPAC) to study options for controlling the volume of physicians' services under Medicare. One approach for applying volume controls that the Congress directed MedPAC to consider is a payment system that takes into account physician outliers. In our report on which this statement is based, we sought information about other purchasers' profiling efforts designed to encourage physicians to practice efficiently. We selected 10 health care purchasers that profiled physicians in their networks--that is, compared physicians' performance to an efficiency standard to identify those who practiced inefficiently. To measure efficiency, the purchasers we spoke with generally compared actual spending for physicians' patients to the expected spending for those same patients, given their clinical and demographic characteristics. Most purchasers said they also evaluated physicians on quality. The purchasers linked their efficiency profiling results and other measures to a range of physician-focused strategies to encourage the efficient provision of care. Some of the purchasers said their profiling efforts produced savings. Having considered the efforts of other health care purchasers in profiling physicians for efficiency, we conducted our own profiling analysis of physician practices in Medicare and found individual physicians who were likely to practice medicine inefficiently in each of 12 metropolitan areas studied. We selected areas that were diverse geographically and in terms of Medicare spending per beneficiary. We focused our analysis on generalists--physicians who described their specialty as general practice, internal medicine, or family practice. Although we did not include specialists in our analysis, our method does not preclude profiling specialists, as long as enough data are available to make meaningful comparisons across physicians. Under our methodology, we computed the percentage of overly expensive patients in each physician's Medicare practice. To identify overly expensive patients, we grouped the Medicare beneficiaries in the 12 areas according to their health status, using diagnostic and demographic information. We classified beneficiaries as overly expensive if their total Medicare expenditures--for services provided by all health providers, not just physicians--ranked in the top fifth of their health status cohort for 2003 claims. Within each health status cohort, we observed large differences in total Medicare spending across beneficiaries. For example, in one cohort of beneficiaries whose health status was about average, overly expensive beneficiaries--the top fifth ranked by expenditures--had average total expenditures of $24,574, as compared with the cohort's bottom fifth, averaging $1,155. (See fig. 1.) This variation may reflect differences in the number and type of services provided and ordered by these patients' physicians as well as factors not under the physicians' direct control, such as a patient's response to and compliance with treatment protocols. Holding health status constant, overly expensive beneficiaries accounted for nearly one-half of total Medicare expenditures even though they represented only 20 percent of beneficiaries in our sample. Once these patients were identified and linked to the physicians who treated them, we were able to determine which physicians treated a disproportionate share of these patients compared with their generalist peers in the same location. We classified these physicians as outliers--that is, physicians whose proportions of overly expensive patients would occur by chance less than 1 time in 100. Notably, all physicians had some overly expensive patients in their Medicare practice, but outlier physicians had a much higher percentage of such patients. We concluded that these outlier physicians were likely to be practicing medicine inefficiently. Based on 2003 Medicare claims data, our analysis found outlier generalist physicians in all 12 metropolitan areas we studied. The Miami area had the highest percentage--almost 21 percent--of outlier generalists, followed by the Baton Rouge area at about 11 percent. (See table 1.) Across the other areas, the percentage of outliers ranged from 2 percent to about 6 percent. In 2003, outlier generalists' Medicare practices were similar to those of other generalists, but the beneficiaries they treated tended to experience higher utilization of certain services. Outlier generalists and other generalists saw similar average numbers of Medicare patients (219 compared with 235) and their patients averaged the same number of office visits (3.7 compared with 3.5). However, after taking into account beneficiary health status and geographic location, we found that beneficiaries who saw an outlier generalist, compared with those who saw other generalists, were 15 percent more likely to have been hospitalized, 57 percent more likely to have been hospitalized multiple times, and 51 percent more likely to have used home health services. By contrast, they were 10 percent less likely to have been admitted to a skilled nursing facility. Medicare's data-rich environment is conducive to identifying physicians who are likely to practice medicine inefficiently. Fundamental to this effort is the ability to make statistical comparisons that enable health care purchasers to identify physicians practicing outside of established standards. CMS has the tools to make statistically valid comparisons, including comprehensive medical claims information, sufficient numbers of physicians in most areas to construct adequate sample sizes, and methods to adjust for differences in patient health status. Among the resources available to CMS are the following: Comprehensive source of medical claims information. CMS maintains a centralized repository, or database, of all Medicare claims that provides a comprehensive source of information on patients' Medicare-covered medical encounters. Using claims from the central database, each of which includes the beneficiary's unique identification number, CMS can identify and link patients to the various types of services they received and to the physicians who treated them. Data samples large enough to ensure meaningful comparisons across physicians. The feasibility of using efficiency measures to compare physicians' performance depends, in part, on two factors: the availability of enough data on each physician to compute an efficiency measure and numbers of physicians large enough to provide meaningful comparisons. In 2005, Medicare's 33.6 million FFS enrollees were served by about 618,800 physicians. These figures suggest that CMS has enough clinical and expenditure data to compute efficiency measures for most physicians billing Medicare. Methods to account for differences in patient health status. Because sicker patients are expected to use more health care resources than healthier patients, the health status of patients must be taken into account to make meaningful comparisons among physicians. Medicare has significant experience with risk adjustment, a methodological tool that assigns individuals a health status score based on their diagnoses and demographic characteristics. For example, CMS has used increasingly sophisticated risk adjustment methodologies over the past decade to set payment rates for beneficiaries enrolled in managed care plans. On the related topic of measuring resource use, CMS noted in comments on a draft of our report that emerging "episode grouper" technology was a promising approach to measuring resource use associated with a given episode of care. We agree, but we also consider our measurement of resource use on a per capita basis, capturing total health care expenditures for a given period of time, equally promising. To conduct profiling analyses, CMS would likely make methodological decisions similar to those made by the health care purchasers we interviewed. For example, the health care purchasers we spoke with made choices about whether to profile individual physicians or group practices; which risk adjustment tool was best suited for a purchaser's physician and enrollee population; whether to measure costs associated with episodes of care or the costs, within a specific time period, associated with the patients in a physician's practice; and what criteria to use to define inefficient practice patterns. As for ways CMS could use profiling results, actions taken by other health care purchasers we interviewed may be instructive in suggesting future directions for Medicare. For example, all purchasers in our study used physician education as part of their strategy to change behavior. Educational outreach to physicians has been a long-standing and widespread activity in Medicare as a means to change physician behavior based on profiling efforts to identify improper billing practices and potential fraud. Outreach includes letters sent to physicians alerting them to billing practices that are inappropriate. In some cases, physicians are given comparative information on how the physician varies from other physicians in the same specialty or locality with respect to use of a certain service. A physician education effort based on efficiency profiling would therefore not be a foreign concept in Medicare. For example, CMS could provide physicians a report that compares their practice's efficiency with that of their peers. This would enable physicians to see whether their practice style is outside the norm. In its March 2005 report to the Congress, MedPAC recommended that CMS measure resource use by physicians and share the results with them on a confidential basis. MedPAC suggested that such an approach would enable CMS to gain experience in examining resource use measures and identifying ways to refine them while affording physicians the opportunity to change inefficient practices. In commenting on a draft of our report, CMS noted that the agency would incur significant recurring costs in developing reports on physician resource use and disseminating them nationwide. We agree that any such undertaking would need to be adequately funded. Another application of profiling results used by the purchasers we spoke with entailed sharing comparative information with enrollees. CMS has considerable experience comparing certain providers on quality measures and posting the results to a Web site. Currently, Medicare Web sites with comparative information exist for hospitals, nursing homes, home health care agencies, dialysis facilities, and managed care plans. In its March 2005 report to the Congress, MedPAC noted that CMS could share results of physician performance measurement with beneficiaries once the agency gained sufficient experience with its physician measurement tools. Several structural features of the Medicare program would appear to pose challenges to the use of other strategies designed to encourage efficiency. These features include a beneficiary's freedom to choose any licensed physician permitted to be paid by Medicare; the lack of authority to exclude physicians from participating in Medicare unless they engage in unlawful, abusive, or unprofessional practices; and a physician payment system that does not take into account the efficiency of the care provided. Under these provisions, CMS would not likely be able--in the absence of additional legislative authority--to assign physicians to tiers associated with varying beneficiary copayments, tie fee updates of individual physicians to meeting performance standards, or exclude physicians who do not meet practice efficiency and quality criteria. In commenting on our draft report, CMS was silent with regard to the need for legislative authority. The agency noted that it is studying and implementing initiatives that link assessment of physician performance to financial and other incentives, such as public reporting. Regardless of the use made of physician profiling results, the involvement of, and acceptance by, the physician community and other stakeholders of any actions taken is critical. Several purchasers described how they had worked to get physician buy-in. They explained their methods to physicians and shared data with them to increase physicians' familiarity with and confidence in the purchasers' profiling. CMS has several avenues for obtaining the input of the physician community. Among them is the federal rule-making process, which generally provides a comment period for all parties affected by prospective policy changes. In addition, CMS forms federal advisory committees--including ones composed of physicians and other health care practitioners--that regularly provide it with advice and recommendations concerning regulatory and other policy decisions. Having considered the tools CMS has available and the structural challenges the agency would likely face in seeking to implement certain incentives used by other purchasers, we recommended in our April 2007 report that the Administrator of CMS develop a profiling system--seeking legislative authority, as necessary--that includes the following elements: total Medicare expenditures as the basis for measuring efficiency, adjustments for differences in patients' health status, empirically based standards that set the parameters of efficiency, a physician education program that explains to physicians how the profiling system works and how their efficiency measures compare with those of their peers, financial or other incentives for individual physicians to improve the efficiency of the care they provide, and methods for measuring the impact of physician profiling on program spending and physician behavior. Policymakers have expressed interest in linking physician performance to Medicare payment so that incentives under FFS for physicians to practice inefficiently can be reversed. In our view, Medicare should adopt an approach that relies not only on physician education but also financial or other incentives--such as discouraging patients from obtaining care from physicians who are determined to be inefficient. A primary virtue of profiling is that, coupled with incentives to encourage efficiency, it can create a system that operates at the individual physician level. In this way, profiling can address a principal criticism of the SGR system, which only operates at the aggregate physician level. Although any savings from physician profiling alone would clearly not be sufficient to correct Medicare's long-term fiscal imbalance, it could be an important part of a package of reforms aimed at future program sustainability. Mr. Chairman, this concludes my prepared remarks. I will be pleased to answer any questions you or the Subcommittee Members may have. For future contacts regarding this testimony, please contact A. Bruce Steinwald at (202) 512-7101 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Other individuals who made key contributions include Phyllis Thorburn, Assistant Director; Todd Anderson; Hannah Fein; Richard Lipinski; and Eric Wedum. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

GAO was asked to discuss--based on Medicare: Focus on Physician Practice Patterns Can Lead to Greater Program Efficiency, GAO-07-307 (Apr. 30, 2007)--the importance in Medicare of providing feedback to physicians on how their use of health care resources compares with that of their peers. GAO's report discusses an approach to analyzing physicians' practice patterns in Medicare and ways the Centers for Medicare & Medicaid Services (CMS) could use the results. In a related matter, Medicare's sustainable growth rate system of spending targets used to moderate physician spending growth and annually update physician fees has been problematic, acting as a blunt instrument and lacking in incentives for physicians individually to be attentive to the efficient use of resources in their practices. GAO's statement focuses on (1) the results of its analysis estimating the prevalence of inefficient physicians in Medicare and (2) the potential for CMS to profile physicians in traditional fee-for-service Medicare for efficiency and use the results in ways that are similar to other purchasers' efforts to encourage efficiency. Having considered efforts of 10 private and public health care purchasers that routinely evaluate physicians for efficiency and other factors, GAO conducted its own analysis of physician practices in Medicare. GAO focused the analysis on generalists--physicians who described their specialty as general practice, internal medicine, or family practice--and selected metropolitan areas that were diverse geographically and in terms of Medicare spending per beneficiary. Although GAO did not include specialists in its analysis, its method does not preclude profiling specialists, as long as enough data are available to make meaningful comparisons across physicians. Based on 2003 Medicare claims data, GAO's analysis found outlier generalist physicians--physicians who treat a disproportionate share of overly expensive patients--in all 12 metropolitan areas studied. Outlier generalists and other generalists saw similar numbers of Medicare patients and their respective patients averaged the same number of office visits. However, after taking health status and location into account, GAO found that Medicare patients who saw an outlier generalist--compared with those who saw other generalists--were more likely to have been hospitalized, more likely to have been hospitalized multiple times, and more likely to have used home health services. By contrast, they were less likely to have been admitted to a skilled nursing facility. GAO concluded that outlier generalists were likely to practice medicine inefficiently. CMS has tools available to evaluate physicians' practices for efficiency, including a comprehensive repository of Medicare claims data to compute reliable efficiency measures and substantial experience adjusting for differences in patients' health status. The agency also has wide experience in conducting educational outreach to physicians with respect to improper billing practices and potential fraud--providing individual physicians, in some cases, comparative information on how the physician varies from other physicians in the same specialty or in other ways. A physician education effort based on efficiency profiling would therefore not be a foreign concept in Medicare. For example, CMS could provide physicians a report that compares their practice's efficiency with that of their peers, enabling physicians to see whether their practice style is outside the norm. As for implementing other strategies to encourage efficiency, such as the use of certain financial incentives, CMS would likely need additional legislative authority. CMS agreed with the need to measure physician resource use in Medicare but raised concerns about the costs involved in reporting the results and was silent on other strategies discussed beyond physician education. GAO concurs that resource use measurement and reporting activities would require adequate funding; however, GAO is concerned that efforts to achieve efficiency that rely solely on physician education without financial or other incentives for physicians to curb inefficiencies will be suboptimal.

In 1956, Congress established the Judgment Fund--a permanent, indefinite appropriation--to pay judgments against federal agencies that are not otherwise provided for in agency appropriations. Among other things, the fund is intended to allow for more prompt payments to claimants, thereby reducing the assessment of interest against federal agencies (where allowed by law) during the period between the rendering and payment of an award. In 1961, legislation was enacted allowing the fund to pay Department of Justice settlements of ongoing or imminent lawsuits against federal agencies. The No FEAR Act requires federal agencies to reimburse the Judgment Fund for payments of judgments, awards, or settlements that the fund makes to employees, former employees, or job applicants in connection with litigation alleging violation of certain federal laws. The Senate committee report accompanying the No FEAR Act explains that the act is intended to prompt federal agencies to pay more attention to their equal employment opportunity and whistleblower complaint activities and act more expeditiously to resolve complaints before they get to court. Accordingly, No FEAR Act cases include those brought before federal courts under discrimination statutes and certain cases brought before the Merit Systems Protection Board (MSPB), including discrimination and whistleblower protection claims. These latter cases, however, typically result in either a settlement while the case is pending at MSPB or an award issued by MSPB, both of which are paid out of agency funds, not the Judgment Fund. As provided for under the No FEAR Act, the President designated OPM to issue regulations to carry out the agency reimbursement provisions of the law. OPM's interim final regulations issued earlier this year state that the procedures that agencies must use to reimburse the Judgment Fund are those prescribed by FMS. Under procedures prescribed by Treasury, FMS Judgment Fund branch analysts, in consultation with FMS's Office of the Chief Counsel, certify whether a judgment, award, or settlement is appropriate for payment and whether the agency on whose behalf payment was made must reimburse the fund. FMS does not review the merits underlying the claim nor certify the merits of the judgment or award. FMS estimates that in fiscal year 2003 it spent about $334,000 to certify, pay, and seek reimbursement for CDA claim payments and about $240,000 to certify and pay discrimination claims (see tables 1 and 2). FMS estimates that it will have to allocate approximately $171,500 for personnel costs to seek reimbursement for discrimination claims under the No FEAR Act in fiscal year 2004 (see table 3). This estimate includes about $119,500 in costs to set up and administer accounts receivable and seek reimbursement for No FEAR Act payments. FMS estimates that it will also incur a one-time start-up cost of about $52,000 for its information technicians to upgrade computer systems to create and track No FEAR Act accounts receivable. FMS expects no increase in either the number of personnel or budgeted funds to handle No FEAR Act reimbursements. FMS's estimates assume that it will pay the same number of discrimination claim payments under the No FEAR Act in fiscal year 2004 as it paid the previous year. FMS estimates also assume there will be no increase in the cost for processing discrimination claim payments in fiscal year 2004. Treasury's estimate of fiscal year 2004 costs for No FEAR Act claim payments also assumed that agency compliance with the No FEAR Act would be similar to that under CDA. According to the Judgment Fund branch, actual costs to Treasury may vary from the estimate because of differences in the nature of the claims under the two laws. Although the certification, payment, and accounting mechanisms that FMS uses for No FEAR Act and CDA payments are virtually the same, some of Treasury's current and anticipated procedures to seek reimbursement from federal agencies for claims paid under the two laws differ. For both No FEAR Act and CDA payments, the Judgment Fund branch analysts ensure that all documents submitted by the agency and other parties have (1) the proper signatures and court seals, (2) contact name and telephone number, and (3) an appropriate address. Payment from the Judgment Fund is then certified by FMS and made through Treasury's Philadelphia Financial Center by check or electronic funds transfer. Once payment is made, FMS reduces the fund's balance, records an expense by the fund, and records an account receivable in its recoveries account for the federal agency on whose behalf the payment was made. The debtor federal agency is required to record an account payable to the Judgment Fund. Those amounts remain a receivable on FMS's books and a payable on the agency's books until it reimburses the fund. FMS sends letters to agencies to verify account balances quarterly. The agencies must also review their balances and confirm them to FMS. According to FMS, on the basis of the cash receipts history for federal agencies and the age of some of the Judgment Fund's accounts receivable, it expects that a percentage of the money owed by federal agencies will probably not be paid back. To allow for this, FMS calculates a percentage, which it calls an allowance factor, based on the age of the receivable and the agency's payment history. According to FMS, it applies the allowance factor to an agency's outstanding accounts receivable to arrive at a dollar amount that FMS puts into an allowance account, which is used by FMS to report on the status of the Judgment Fund in its financial statement. According to FMS, although it records the debt in the allowance account as an uncollectible loss, the debt is not written off. FMS expects each agency to record the amount of unreimbursed debt as a liability, which will remain until the agency repays Treasury or Congress provides write-off authority. For CDA reimbursements, FMS sends a letter to the head of the agency contracting unit or budget officer seeking reimbursement for payments made either the same day or the day after payment is made from the fund. If the agency fails to contact FMS within 30 business days of this letter, a follow-up letter is sent to the agency. If the agency fails to respond within 60 business days of the initial contact letter, FMS sends a letter to the agency's Chief Financial Officer (CFO). The agency CFO has 30 business days to contact FMS. For No FEAR Act reimbursements, as provided under the OPM regulations, FMS provides notice to the agency's CFO within 15 business days after payment for the No FEAR Act claim from the Judgment Fund. It further requires an agency to either reimburse the Judgment Fund or work out a payment arrangement with FMS within 45 business days of being notified by FMS. Under OPM's No FEAR Act regulations, FMS is required to annually post on Treasury's public Web site those agencies that either fail to make reimbursements or fail to contact FMS within 45 business days of notice to make arrangements in writing for reimbursement. There is no similar posting requirement for CDA reimbursements, and FMS said it has no plans to post CDA reimbursement information on Treasury's public Web site. Reimbursement rates for CDA payments were low for the 3 years we examined and, despite promises of repayment, at least 18 agencies had not repaid amounts owed to the fund by the end of each of these years. According to Treasury, while its No FEAR Act collection efforts are just beginning, reimbursement rates under the act may be as low as under CDA because the No FEAR Act, like CDA, does not impose reimbursement deadlines on agencies, and Treasury has very little authority to enforce reimbursement. The Judgment Fund was reimbursed for fewer than one of every five dollars agencies owed for each of the 3 fiscal years (see table 4). Further, the total unpaid amounts to the Judgment Fund increased as of each fiscal year end. The total amount and percentage collected was at its highest in fiscal year 2001 and was lowest in fiscal year 2002. While the total amount and percentage collected increased in fiscal year 2003, they remained less than in fiscal year 2001. Our review of a sample of agencies' correspondence in response to the Judgment Fund branch's requests for CDA reimbursement showed that agencies most often deferred payment because of the adverse effect they said it would have on their programs and mission-critical activities. The agencies promised to continue to seek opportunities to provide repayment through the budget and appropriation process. Neither CDA nor the No FEAR Act set deadlines for reimbursement. We have acknowledged that agencies are allowed to exercise reasonable discretion in determining the timing of CDA reimbursements so as not to cause the disruption of ongoing programs or activities. Similar flexibility exists under the No FEAR Act. While the No FEAR Act states that "agencies are expected to reimburse the within a reasonable time," the statute also states that an agency may need to extend reimbursement over several years to avoid reductions in force, furloughs, other reductions in compensation or benefits for the agency workforce, or an adverse effect on the mission of the agency. Recognizing that agencies are often confronted with practicalities of this sort, we have suggested that while an agency may not be in a position to make CDA reimbursements during the year in which the fund made payment, we would expect the agency to manage its budgetary resources to accommodate reimbursement of the fund before the beginning of the second fiscal year following the fiscal year in which the award is paid. According to FMS, the lack of a reimbursement deadline under CDA and the No FEAR Act may be one reason that reimbursement rates under the No FEAR Act may be as low as they have been under CDA. Another key reason that FMS officials cite for this possibility is that Treasury has very little authority to enforce reimbursement. Like CDA, the No FEAR Act provides no sanctions that would compel agencies to reimburse the Treasury, and no Treasury authority to take money owed directly from the agency. FMS officials recognize that the requirement for FMS to annually post the names of agencies that fail to make No FEAR Act reimbursements or make arrangements for reimbursement may provide an incentive for agencies to comply with the regulations. Because posting has yet to begin, it remains to be seen what impact this requirement will have. On March 18, 2004, we provided a draft of this report to Treasury for review and comment. Treasury officials had no official comment on this report, but provided technical and clarifying comments, which we have incorporated as appropriate. We will send copies to Representative James F. Sensenbrenner, Representative John Conyers, other interested congressional committees, the Secretary of the Treasury, and the Commissioner, Financial Management Service. We will also make copies available to others upon request. In addition, the report will be available at no charge on GAO's Web site at http://www.gao.gov. If you or your staff have questions about this report, please call me at (202) 512-6806 or Belva Martin, Assistant Director, on (202) 512-4285. Key contributors to this report are listed in appendix II. To address our objectives, we reviewed relevant laws, procedures, and guidelines, and interviewed officials in FMS, its Judgment Fund branch, and FMS's Office of the Chief Counsel. Judgment Fund officials provided us with the number and amount of CDA and discrimination claims paid from the Judgment Fund from fiscal year 2001 through 2003. Since FMS does not track the cost of processing Judgment Fund claim payments, agency officials could only provide us with estimates of the costs for processing payments and reimbursements for CDA and discrimination payments and the estimated increase in costs for fiscal year 2004 for processing discrimination and any other No FEAR Act claim payments. The Judgment Fund's cost estimates do not include costs for processing payments of whistleblower protection claims because the fund generally does not pay these claims. To arrive at their estimate of the personnel costs involved, Judgment Fund officials used the percentage of staff time spent processing CDA and discrimination payments. To determine the extent of federal agencies' compliance with CDA's reimbursement requirement, we obtained data through FMS from Treasury's central accounting system on the amount of money sought and received from agencies in fiscal years 2001, 2002, and 2003. We interviewed Judgment Fund and FMS officials to obtain their views of how effective the reimbursement collection efforts allowed under the No FEAR Act may be. To assess the reliability of the data from Treasury's financial system, we reviewed available supporting documentation and interviewed Judgment Fund officials and the FMS accountant. In addition, we tested the reasonableness of the fiscal year 2003 estimated personnel costs of processing CDA and discrimination claims by calculating the percentage of personnel costs in the fund's total fiscal year 2003 estimate and comparing this to the percentage of CDA and discrimination claims in fiscal year 2003 to determine if they were disproportionately large when compared to the total number of claims processed. On the basis of our test of the reasonableness of the personnel cost estimates provided by FMS and our assessment of the reliability of the data generated by the accounting system used by FMS and the Judgment Fund branch database, we determined that the data for fiscal years 2001 through 2003 were sufficiently reliable for the purposes of our report. In addition to the person named above, Karin Fangman, Amy Friedlander, Domingo Nieves, and Michael Rose made key contributions to this report. The General Accounting Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. 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The Notification and Federal Employee Antidiscrimination and Retaliation (No FEAR) Act, which took effect October 1, 2003, requires agencies to repay discrimination settlements and judgments paid on their behalf. The No FEAR Act is similar to the Contract Disputes Act (CDA) of 1978, which holds agencies accountable for payment in contract disputes. Under both laws, federal agencies must reimburse the Judgment Fund, which is administered by the Treasury Department. Before the No FEAR Act, agencies did not have to repay the fund. The No FEAR Act requires GAO to review the financial impact on Treasury of administering that law and CDA. Based on this requirement, this report provides information on (1) Treasury's estimates of its costs to process discrimination claim payments and CDA payments in fiscal year 2003 and its costs to process and seek reimbursement for claim payments under lawsuits covered by the No FEAR Act beginning in fiscal year 2004, (2) differences in claims processing and reimbursement efforts under CDA and the No FEAR Act, and (3) the extent of federal agency compliance with CDA's reimbursement requirements and Treasury's view of how effective its No FEAR Act collection efforts may be. We make no recommendations in this report. Treasury officials had no official comment on the report. Treasury estimates that it cost about $334,000 to certify, pay, and seek reimbursement for CDA claim payments in fiscal year 2003, and about $240,000 to certify and pay discrimination claims that year. For fiscal year 2004, assuming relatively constant case and processing cost levels, and agency compliance with reimbursement requirements similar to that experienced under CDA, Treasury estimates that it will incur about $171,500 in personnel costs in order to seek reimbursements for No FEAR claim payments. These include recurring costs to set up and administer accounts receivable and seek reimbursement from agencies for claims paid out of the Judgment Fund and a one-time cost for in-house personnel to upgrade computer systems. Although the certification, payment, and accounting processes that Treasury uses for the No FEAR Act are virtually the same as those used for CDA, the procedures Treasury is required to use to seek reimbursement for claims paid under the No FEAR Act will differ. For example, as part of Treasury's effort to seek reimbursement for No FEAR Act claims paid, No FEAR Act regulations require Treasury to record on its public Web site the failure of agencies to make reimbursement or arrange to make reimbursement within a specified time limit. There is no similar requirement under CDA claims. During fiscal years 2001, 2002, and 2003, federal agencies reimbursed Treasury for fewer than one of every five dollars owed under CDA, with at least 18 agencies having unpaid amounts at the end of each fiscal year. According to Treasury, while its No FEAR Act collection efforts are just beginning, reimbursement rates under the act may be as low as under CDA because the No FEAR Act, like CDA, does not impose reimbursement deadlines on agencies, and Treasury has very little authority to enforce reimbursement.

Under the existing, or "legacy" system, the military's disability evaluation process begins at a military treatment facility when a physician identifies a condition that may interfere with a servicemember's ability to perform his or her duties. On the basis of medical examinations and the servicemember's medical records, a medical evaluation board (MEB) identifies and documents any conditions that may limit a servicemember's ability to serve in the military. The servicemember's case is then evaluated by a physical evaluation board (PEB) to make a determination of fitness or unfitness for duty. If the servicemember is found to be unfit due to medical conditions incurred in the line of duty, the PEB assigns the servicemember a combined percentage rating for those unfit conditions, and the servicemember is discharged from duty. Depending on the overall disability rating and number of years of active duty or equivalent service, the servicemember found unfit with compensable conditions is entitled to either monthly disability retirement benefits or lump sum disability severance pay. In addition to receiving disability benefits from DOD, veterans with service-connected disabilities may receive compensation from VA for lost earnings capacity. VA's disability compensation claims process starts when a veteran submits a claim listing the medical conditions that he or she believes are service-connected. In contrast to DOD's disability evaluation system, which evaluates only medical conditions affecting servicemembers' fitness for duty, VA evaluates all medical conditions claimed by the veteran, whether or not they were previously evaluated in DOD's disability evaluation process. For each claimed condition, VA must determine if there is credible evidence to support the veteran's contention of a service connection. Such evidence may include the veteran's military service records and treatment records from VA medical facilities and private medical service providers. Also, if necessary for reaching a decision on a claim, VA arranges for the veteran to receive a medical examination. Medical examiners are clinicians (including physicians, nurse practitioners, or physician assistants) certified to perform the exams under VA's Compensation and Pension program. Once a claim has all of the necessary evidence, a VA rating specialist evaluates the claim and determines whether the claimant is eligible for benefits. If so, the rating specialist assigns a percentage rating. If VA finds that a veteran has one or more service-connected disabilities with a combined rating of at least 10 percent, the agency will pay monthly compensation. In November 2007, DOD and VA began piloting the IDES, a joint disability evaluation system, to eliminate duplication in their separate systems and expedite receipt of VA benefits for wounded, ill, and injured servicemembers. The IDES merges DOD and VA processes, so that servicemembers begin their VA disability claim while they undergo their DOD disability evaluation, rather than sequentially, making it possible for them to receive VA disability benefits shortly after leaving military service (see fig. 1). Specifically, the IDES merges DOD and VA's separate exam processes into a single exam process conducted to VA standards. This single exam (which may involve more than one medical examination, for example, by different specialists), in conjunction with the servicemembers' medical records, is used by military service PEBs to make a determination of servicemembers' fitness for continued military service, and by VA as evidence of service-connected disabilities. The exam may be performed by medical staff working for VA, DOD, or a private provider contracted with either agency. consolidates DOD and VA's separate rating phases into one VA rating phase. If the PEB has determined that a servicemember is unfit for duty, VA rating specialists prepare two ratings--one for the conditions that DOD determined made a servicemember unfit for duty, which DOD uses to provide military disability benefits, and the other for all service-connected disabilities, which VA uses to determine VA disability benefits. provides VA case managers to perform outreach and nonclinical case management and explain VA results and processes to servicemembers. In August 2010, DOD and VA officials issued an interim report to Congress summarizing the results of their evaluation of the IDES pilot as of early 2010. In that report, the agencies concluded that, as of February 2010, servicemembers who went through the IDES pilot were more satisfied than those who went through the legacy system, and that the IDES process met the agencies' goals of delivering VA benefits to active duty servicemembers within 295 days and to reserve component servicemembers within 305 days. Furthermore, they concluded that the IDES pilot has achieved a faster processing time than the legacy system, which they estimated to be 540 days. While our review of DOD and VA's data and reports generally confirm DOD and VA's findings, as of early 2010, we also found that not all of the service branches were achieving the same results, case processing times have increased since February, and other agency goals have not been met. Servicemember satisfaction: Our reviews of the survey data indicate that, on average, servicemembers in the IDES pilot have had higher satisfaction levels than those who went through the legacy process. However, Air Force members--who represented a small proportion (7 percent) of pilot cases--were less satisfied. We reviewed the agencies' survey methodology and generally found their survey design and conclusions to be sound. Average case processing times: The agencies have been meeting their 295- day and 305-day timeliness goals for much of the past 2 years, but the average case processing time for active duty servicemembers has steadily increased from 274 days in February 2010 to 296 days, as of August 2010. While still an improvement over the 540-day estimate for the legacy system, the agencies missed their timeliness goal by 1 day. Among the military service branches, only the Army--which comprised about 60 percent of cases that had completed the pilot process--met the agencies' timeliness goals in August, while average processing times for each of the other services exceeded 330 days. Across all military service branches, processing times for individual pilot sites have generally increased as their caseloads have increased. We reviewed the reliability of the case data upon which the agencies based their analyses and generally found these data to be sufficiently reliable for purposes of these analyses. Goals to process 80 percent of cases in targeted time frames: DOD and VA had indicated in their planning documents that they had goals to deliver VA benefits to 80 percent of servicemembers within the 295-day and 305-day targets. As of February 2010, these goals were not met. For both active duty and reserve cases, about 60 percent (rather than 80 percent) of cases were meeting the targeted time frames. By service branch, the Army had the highest rate of active duty cases (66 percent) meeting the goal, and the Air Force had the lowest (42 percent). Although DOD and VA's evaluation results indicate promise for the IDES, the extent to which the IDES is an improvement over the legacy system cannot be known because of limitations in the legacy data. DOD and VA's estimate of 540 days for the legacy system was based on a small, nonrepresentative sample of cases. DOD officials told us that they planned to use a broader sample of legacy cases to compare against pilot cases with respect to processing times and appeal rates. However, significant gaps in the legacy case data precluded such comparisons. Specifically, DOD compiled the legacy case data from each of the military services and the VA, but the military services did not track the same information. In addition, VA was not able to provide data on the date VA benefits were delivered for legacy cases, which are needed to determine the full processing time from referral to final delivery of VA benefits. Limited comparisons of pilot and legacy timeliness are possible with Army data, which appears to be reliable on some key processing dates. Our analysis of Army legacy data suggests that active duty cases took on average 369 days to complete the DOD legacy process and reach the VA rating phase--which does not include time to complete the VA rating and deliver the VA benefits to servicemembers. In comparison, it took on average 266 days to deliver VA benefits to soldiers in the pilot, according to the agencies' August data. However, Army comparisons cannot be generalized to the other services. As DOD and VA tested the IDES at different facilities and added cases to the pilot, they encountered several challenges that led to delays in certain phases of the process. Staffing: Most significantly, most of the 10 sites we visited reported experiencing staffing shortages and related delays to some extent, in part due to workloads exceeding the agencies' initial estimates. The IDES involves several different types of staff across several different DOD and VA offices, some of which have specific caseload ratios set by the agencies, and we learned about insufficient staff in many key positions. With regard to VA positions, officials cited shortages in examiners for the single exam, rating staff, and case managers. With regard to DOD positions, officials cited shortages of physicians who serve on the MEBs, PEB adjudicators, and DOD case managers. In addition to shortages cited at pilot sites, DOD data indicate that 19 of the 27 pilot sites did not meet DOD's caseload target of 30 cases per manager. Local DOD and VA officials attributed staffing shortages to higher than anticipated caseloads and difficulty finding qualified staff, particularly physicians, in rural areas. These staffing shortages contributed to delays in the IDES process. Two of the sites we visited--Fort Carson and Fort Stewart--were particularly challenged to provide staff in response to surges in caseload, which occurred when Army units were preparing to deploy to combat zones. Through the Army's predeployment medical assessment process, large numbers of servicemembers were determined to be unable to deploy due to a medical condition and were referred to the IDES within a short period of time, overwhelming the staff. These two sites were unable to quickly increase staffing levels, particularly of examiners. As a result, at Fort Carson, it took 140 days on average to complete the single exam for active duty servicemembers, as of August 2010, far exceeding the agencies' goal to complete the exams in 45 days. Exam summaries: Issues related to the completeness and clarity of single exam summaries were an additional cause of delays in the VA rating phase of the IDES process. Officials from VA rating offices said that some exam summaries did not contain information necessary to determine a rating. As a result, VA rating office staff must ask the examiner to clarify these summaries and, in some cases, redo the exam. VA officials attributed the problems with exam summaries to several factors, including the complexity of IDES pilot cases, the volume of exams, and examiners not receiving records of servicemembers' medical history in time. The extent to which insufficient exam summaries caused delays in the IDES process is unknown because DOD and VA's case tracking system for the IDES does not track whether an exam summary has to be returned to the examiner or whether it has been resolved. Medical diagnoses: While the single exam in the IDES eliminates duplicative exams performed by DOD and VA in the legacy system, it raises the potential for there to be disagreements about diagnoses of servicemembers' conditions. For example, officials at Army pilot sites informed us about cases in which a DOD physician had treated members for mental disorders, such as major depression. However, when the members went to see the VA examiners for their single exam, the examiners diagnosed them with posttraumatic stress disorder (PTSD). Officials told us that attempting to resolve such differences added time to the process and sometimes led to disagreements between DOD's PEBs and VA's rating offices about what the rating should be for purposes of determining DOD disability benefits. Although the Army developed guidance to help resolve diagnostic differences, other services have not. Moreover, PEB officials we spoke with noted that there is no guidance on how disagreements about servicemembers' ratings between DOD and VA should be resolved beyond the PEBs informally requesting that the VA rating office reconsider the case. While DOD and VA officials cited several potential causes for diagnostic disagreements, the number of cases with disagreements about diagnoses and the extent to which they have increased processing time are unknown because the agencies' case tracking system does not track when a case has had such disagreements. Logistical challenges integrating VA staff at military treatment facilities: DOD and VA officials at some pilot sites we visited said that they experienced logistical challenges integrating VA staff at the military facilities. At a few sites, it took time for VA staff to receive common access cards needed to access the military facilities and to use the facilities' computer systems, and for VA physicians to be credentialed. DOD and VA staff also noted several difficulties using the agencies' multiple information technology (IT) systems to process cases, including redundant data entry and a lack of integration between systems. Housing and other challenges posed by extended time in the military disability evaluation process: Although many DOD and VA officials we interviewed at central offices and pilot sites felt that the IDES process expedited the delivery of VA benefits to servicemembers, several also indicated that it may increase the amount of time servicemembers are in the military's disability evaluation process. Therefore, some DOD officials noted that servicemembers must be cared for, managed, and housed for a longer period. The military services may move some servicemembers to temporary medical units or to special medical units such as Warrior Transition Units in the Army or Wounded Warrior Regiments in the Marine Corps, but at a few pilot sites we visited, these units were either full or members in the IDES did not meet their admission criteria. Where servicemembers remain with their units while going through the IDES, the units cannot replace them with able-bodied members. In addition, officials at two sites said that members are not gainfully employed by their units and, left idle, are more likely to be discharged due to misconduct and forfeit their disability benefits. However, DOD officials also noted that servicemembers benefit from continuing to receive their salaries and benefits while their case undergoes scrutiny by two agencies, though some also acknowledged that these additional salaries and benefits create costs for DOD. DOD and VA plan to expand the IDES to military facilities worldwide on an ambitious timetable--to 113 sites during fiscal year 2011, a pace of about 1 site every 3 days. Expansion is scheduled to occur in four stages, beginning with 28 sites in the southeastern and western United States by the end of December 2010. In preparing for IDES expansion military-wide, DOD and VA have many efforts under way to address challenges experienced to date, though their efforts have yet to be implemented or tested. For example, the agencies have completed a significant revision of their site assessment matrix--a checklist used by local DOD and VA officials to ascertain their readiness to begin the pilot--to address areas where prior IDES sites had experienced challenges. In addition, local senior-level DOD and VA officials will be expected to sign the site assessment matrix to certify that a site is ready for IDES implementation. This differs from the pilot phase where, according to DOD and VA officials, some sites implemented the IDES without having been fully prepared. Through the new site assessment matrix and other initiatives, DOD and VA are addressing several of the challenges identified in the pilot phase. Ensuring sufficient staff: With regard to VA staff, VA plans to increase the number of examiners by awarding a new contract through which sites can acquire additional examiners. To increase rating staff, VA has filled vacant rating specialist positions and anticipates hiring a small number of additional staff. With regard to DOD staff, Air Force and Navy officials told us they have added adjudicators for their PEBs or are planning to do so. Both DOD and VA indicated they plan to increase their numbers of case managers. Meanwhile, sites are being asked in the assessment matrix to provide longer and more detailed histories of their caseloads, as opposed to the 1-year history that DOD and VA had based their staffing decisions on during the pilot phase. The matrix also asks sites to anticipate any surges in caseloads and to provide a written contingency plan for dealing with them. Ensuring the sufficiency of single exams: VA has begun the process of revising its exam templates to better ensure that examiners include the information needed for a VA disability rating decision and to enable them to complete their exam reports in less time. VA is also examining whether it can add capabilities to the IDES case tracking system that would enable staff to identify where problems with exams have occurred and track the progress of their resolution. Ensuring adequate logistics at IDES sites: The site assessment matrix asks sites whether they have the logistical arrangements needed to implement the IDES. In terms of information technology, DOD and VA are developing a general memorandum of agreement intended to enable DOD and VA staff access to each other's IT systems. DOD officials also said that they are developing two new IT solutions--one currently being tested is intended to help military treatment facilities better manage their cases, while another still at a preliminary stage of development would reduce multiple data entry. However, in some areas, DOD and VA's efforts to prepare for IDES expansion do not fully address some challenges or are not yet complete. Ensuring sufficient DOD MEB physician staffing: DOD does not yet have strategies or plans to address potential shortages of physicians to serve on MEBs. For example, the site assessment matrix does not include a question about the sufficiency of military providers to handle expected numbers of MEB cases at the site, or ask sites to identify strategies for ensuring sufficient MEB physicians if there is a caseload surge or staff turnover. Ensuring sufficient housing and organizational oversight for IDES participants: Although the site assessment matrix asks sites whether they will have sufficient temporary housing available for servicemembers going through the IDES, the matrix requires only a yes or no response and does not ensure that sites will have conducted a thorough review of their housing capacity. In addition, the site assessment matrix does not address plans for ensuring that IDES participants are gainfully employed or sufficiently supported by their organizational units. Addressing differences in diagnoses: According to agency officials, DOD is currently developing guidance on how staff should address differences in diagnoses. However, since the new guidance and procedures are still being developed, we cannot determine whether they will aid in resolving discrepancies or disagreements. Significantly, DOD and VA do not have a mechanism for tracking when and where disagreements about diagnoses and ratings occur and, consequently, may not be able to determine whether the guidance sufficiently addresses the discrepancies. As DOD and VA move to implement the IDES worldwide, they have some mechanisms in place to monitor challenges that may arise in the IDES, such as regular reporting of data on caseloads, processing times, and servicemember satisfaction, and preparation of an annual report on challenges in the IDES. However, DOD and VA do not have a system-wide monitoring mechanism to help ensure that steps they took to address challenges are sufficient and to identify problems in a more timely basis. For example, they do not collect data centrally on staffing levels at each site relative to caseload. As a result, DOD and VA may be delayed in taking corrective action, since it takes time to assess what types of staff are needed at a site and to hire or reassign staff. DOD and VA also lack mechanisms or forums for systematically sharing information on challenges, as well as best practices between and among sites. For example, DOD and VA have not established a process for local sites to systematically report challenges to DOD and VA management and for lessons learned to be systematically shared system-wide. During the pilot phase, VA surveyed pilot sites on a monthly basis about challenges they faced in completing single exams. Such a practice has the potential to provide useful feedback if extended to other IDES challenges. By merging two duplicative disability evaluation systems, the IDES shows promise for expediting the delivery of VA benefits to servicemembers leaving the military due to a disability. However, piloting of the system has revealed several significant challenges that require careful management attention and oversight. DOD and VA are currently taking steps to address many of these challenges. However, given the agencies' ambitious implementation schedule--more than 100 sites in a year--it is unclear whether these steps will be completed before DOD and VA deploy the IDES to additional military facilities. Ultimately, the success or failure of the IDES will depend on DOD and VA's ability to sufficiently staff the various offices involved in the IDES and to resolve challenges not only at the initiation of the transition to IDES, but also on an ongoing, long-term basis. Because they do not have a mechanism for routinely monitoring staffing and other risk factors, DOD and VA may not be able to know whether their efforts to address these factors are sufficient or to identify new problems as they emerge, so that they may take immediate steps to address them before they become major problems. We have draft recommendations aimed at helping DOD and VA further address challenges surfaced during the pilot, which we plan to finalize in our forthcoming report after fully considering agency comments. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions that you or other Members of the Committee may have at this time. For further information about this testimony, please contact Daniel Bertoni at (202) 512-7215 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. In addition to the individual named above, key contributors to this testimony include Michele Grgich, Yunsian Tai, Jeremy Conley, and Greg Whitney. Key advisors include Bonnie Anderson, Rebecca Beale, Mark Bird, Brenda Farrell, Valerie Melvin, Patricia Owens, Roger Thomas, Walter Vance, and Randall Williamson. Veterans' Disability Benefits: Further Evaluation of Ongoing Initiatives Could Help Identify Effective Approaches for Improving Claims Processing. GAO-10-213. Washington, D.C.: January 29, 2010. Recovering Servicemembers: DOD and VA Have Jointly Developed the Majority of Required Policies but Challenges Remain. GAO-09-728. Washington, D.C.: July 8, 2009. Recovering Servicemembers: DOD and VA Have Made Progress to Jointly Develop Required Policies but Additional Challenges Remain. GAO-09-540T. Washington, D.C.: April 29, 2009. Military Disability System: Increased Supports for Servicemembers and Better Pilot Planning Could Improve the Disability Evaluation Process. GAO-08-1137. Washington, D.C.: September 24, 2008. DOD and VA: Preliminary Observations on Efforts to Improve Care Management and Disability Evaluations for Servicemembers. GAO-08-514T. Washington, D.C.: February 27, 2008. DOD and VA: Preliminary Observations on Efforts to Improve Health Care and Disability Evaluations for Returning Servicemembers. GAO-07-1256T Washington, D.C.: September 26, 2007. Military Disability System: Improved Oversight Needed to Ensure Consistent and Timely Outcomes for Reserve and Active Duty Service Members. GAO-06-362. Washington, D.C.: March 31, 2006. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Since 2007, the Departments of Defense (DOD) and Veterans Affairs (VA) have been pilot testing a new disability evaluation system designed to integrate their separate processes and thereby expedite veterans' benefits for wounded, ill, and injured servicemembers. Having piloted the integrated disability evaluation system (IDES) at 27 military facilities, they are now planning for its expansion military-wide. This testimony is based on GAO's ongoing review of the IDES pilot and draft report, which is currently with DOD and VA for agency comment. GAO conducted this review pursuant to the National Defense Authorization Act for Fiscal Year 2008. This review specifically examined: (1) the results of the agencies' evaluation of the IDES pilot, (2) challenges in implementing the IDES pilot to date, and (3) whether the agencies' plans to expand the IDES adequately address potential future challenges. To address these questions, GAO analyzed data from DOD and VA, conducted site visits at 10 military facilities, and interviewed DOD and VA officials. In their evaluation of the IDES pilot, DOD and VA concluded that, as of February 2010, the pilot had (1) improved servicemember satisfaction relative to the existing "legacy" system and (2) met their established goal of delivering VA benefits to active duty and reserve component servicemembers within 295 and 305 days, respectively, on average. While these results are promising, average case processing times have since steadily increased--for example, for active duty servicemembers, the average has increased from 274 days in February 2010 to 296 days in August 2010. At 296 days, processing time for the IDES is still an improvement over the 540 days that DOD and VA estimated the legacy process takes to deliver VA benefits to servicemembers. However, the full extent of improvement of the IDES over the legacy system is unknown because (1) the 540-day estimate was based on a small, nonrepresentative sample of cases and (2) limitations in legacy case data prevent a comprehensive comparison of processing times, as well as appeal rates. In piloting the IDES, DOD and VA have run into several implementation challenges that have contributed to delays in the process. The most significant challenge was insufficient staffing by DOD and VA. Staffing shortages and process delays were particularly severe at two pilot sites we visited where the agencies did not anticipate caseload surges. For example, at one of these sites, due to a lack of medical examiners, it took 140 days on average to complete one of the key features of the pilot--the single exam--compared with the agencies' goal to complete this step of the process in 45 days. The single exam posed other challenges that contributed to process delays, such as disagreements between DOD and VA medical staff about diagnoses for servicemembers' medical conditions. Cases involving such disagreements often required further attention, adding time to the process. Pilot sites also experienced logistical challenges, such as incorporating VA staff at military facilities and housing and managing personnel going through the process. As DOD and VA move forward with plans to expand the IDES worldwide, they have taken steps to address a number of these challenges; however, these mitigation efforts have yet to be tested, and not all challenges have been addressed. For example, to address staffing shortages and ensure timely processing, VA is developing a contract for additional medical examiners, and DOD and VA are requiring local staff to develop written contingency plans for handling surges in caseloads. On the other hand, the agencies have not yet developed strategies for ensuring sufficient military physicians to handle anticipated workloads. Significantly, DOD and VA do not have a comprehensive monitoring plan for identifying problems as they occur--such as staffing shortages and disagreements about diagnoses--in order to take remedial actions as early as possible. GAO has draft recommendations aimed at helping DOD and VA, as they move forward with IDES expansion plans, to further address challenges surfaced during the pilot, which GAO plans to finalize in the forthcoming report after fully considering agency comments.

The FLSA requires that workers who are covered by the act and not specifically exempt from its provisions be paid at least the federal minimum wage (currently $7.25 per hour) and 1.5 times their regular rate of pay for hours worked over 40 in a workweek. The act also regulates the employment of youth under the age of 18 and establishes recordkeeping requirements for employers, among other provisions. There are a number of exceptions to the requirements of the FLSA; for example, independent contractors are not covered by the FLSA, and certain categories of workers, such as those in bona fide executive, administrative, or professional positions, are exempt from the minimum wage requirements, overtime requirements, or both. WHD has issued regulations implementing the FLSA that further define these exemptions and other requirements of the FLSA. The mission pursued by DOL through its WHD is to promote and achieve compliance with labor standards to protect and enhance the welfare of the nation's workforce. The FLSA authorizes DOL to enforce its provisions by, for example, conducting investigations, assessing penalties, supervising payment of back wages, and bringing suit in court on behalf of employees. DOL's WHD also conducts a range of compliance assistance activities to support employers in their efforts to understand and meet the requirements of the law. WHD's enforcement and compliance assistance activities are conducted by staff in its 52 district offices, which are located throughout the country and managed by staff in its five regional offices and Washington, D.C. headquarters. In response to complaints of alleged FLSA violations it receives from workers or their representatives, WHD conducts several types of enforcement activities. These range from comprehensive investigations covering all laws under the agency's jurisdiction to conciliations, a quick remediation process generally limited to a single alleged FLSA violation such as a missed paycheck for a single worker. Before WHD initiates an investigation of a complaint, it screens the complaint to determine, among other factors, whether the allegations, if true, would violate the law, and to ensure the statute of limitations has not expired. If WHD identifies a violation through an enforcement activity, but the employer refuses to pay the back wages or penalties assessed, DOL's Office of the Solicitor may sue the employer on behalf of the affected workers. In fiscal year 2012, WHD conducted investigations or conciliations in response to about 20,000 FLSA complaints and DOL's Office of the Solicitor filed about 200 federal lawsuits to enforce the requirements of the FLSA on behalf of workers. In addition to responding to complaints, WHD enforces the requirements of the FLSA by initiating investigations of employers by targeting industries it believes have a high probability of violations but a low likelihood that workers will file a complaint. In fiscal year 2012, WHD concluded about 7,000 targeted FLSA investigations. WHD encourages compliance with the FLSA by providing training for employers and workers and creating online tools and fact sheets that explain the requirements of the law and related regulations, among other efforts. The agency refers to these efforts collectively as compliance assistance. One form of FLSA compliance assistance WHD provides is written interpretive guidance that attempts to clarify the agency's interpretation of a statutory or regulatory provision. WHD disseminates this guidance to those who request it--such as employers and workers-- and posts it on the WHD website for public use. WHD's interpretive guidance includes opinion letters which apply to a specific situation. However, in 2010, WHD stopped issuing opinion letters and indicated that it would instead provide administrator interpretations, which are more broadly applicable. As a result of the Portal-to-Portal Act of 1947, which established a "safe harbor" from liability under the FLSA for employers that rely in good faith on a written interpretation from WHD's administrator, certain WHD written guidance could potentially provide a "safe harbor" in FLSA litigation. The FLSA also grants workers the right to file a private lawsuit to recover wages they claim they are owed because of their employer's violation of the act's minimum wage or overtime pay requirements. WHD cannot investigate all of the thousands of complaints it receives each year because of its limited capacity. Therefore, the agency informs workers whose complaints of FLSA violations are not investigated or otherwise resolved by WHD of their right to file a lawsuit. Workers filing an FLSA lawsuit may file in one of the 94 federal district courts, which are divided into 12 regional circuits across the country. FLSA lawsuits may be brought individually or as part of a collective action. A collective action is a single lawsuit filed by one or more representative workers on behalf of multiple workers who claim that an employer violated the FLSA in similar ways. The court will generally certify whether an action meets the requirements to proceed as a collective; in some cases, the court may decertify a collective after it is formed if the court subsequently determines that the collective does not meet those requirements. In such cases, the court may permit the members of the decertified collective to individually file private FLSA lawsuits. Over the last two decades, the number of FLSA lawsuits filed nationwide in federal district courts has increased substantially, with most of this increase occurring in the last decade. Since 1991, the number of FLSA lawsuits filed has increased by 514 percent, with a total of 8,148 FLSA lawsuits filed in fiscal year 2012. Since 2001, when 1,947 FLSA lawsuits were filed, the number of FLSA lawsuits has increased sharply (see fig. 1). Not only has the number of FLSA lawsuits increased, but they also constitute a larger proportion of all federal civil lawsuits than they did in past years. In 1991, FLSA lawsuits made up less than 1 percent (.6 percent) of all civil lawsuits, but by 2012, FLSA lawsuits accounted for almost 3 percent of all civil lawsuits, an increase of 383 percent. These increases, however, were not evenly distributed across all states. In fact, while federal district courts in most states saw increases in both the number of FLSA lawsuits filed and the percentage of all civil lawsuits filed that were FLSA lawsuits, increases in a small number of states were substantial and contributed significantly to the overall trends. In each of three states--Florida, New York, and Alabama--more than 1,000 more FLSA lawsuits were filed in fiscal year 2012 than in fiscal year 1991 (see fig. 2). Since 2001, more than half of all FLSA lawsuits were accounted for by filings in those three states. About 43 percent of FLSA lawsuits filed nationwide during this period were filed in either Florida (33 percent) or New York (10 percent). At the same time, the percentage of all federal civil cases that were FLSA cases in those three states also increased significantly. In both Florida and New York, growth in the number of FLSA lawsuits filed was generally steady, while changes in Alabama involved sharp increases in fiscal years 2007 and 2012 with far fewer lawsuits filed in other years. Each spike in Alabama coincided with the decertification of at least one large collective action, which likely resulted in multiple individual lawsuits. From 1991 to 2012, while most states experienced increases in the number of FLSA lawsuits filed, the proportion of civil lawsuits that were FLSA lawsuits, or both, these trends were not universal. In 14 states, the number of FLSA lawsuits filed in 2012 was less than or the same as the number of FLSA lawsuits filed in 1991, and in 10 states the proportion of civil lawsuits FLSA cases made up was smaller in 2012 than in 1991. While many factors have likely contributed to the overall increase in FLSA lawsuits and stakeholders we interviewed cited multiple factors, they most frequently cited increased awareness about FLSA cases and activity on the part of plaintiffs' attorneys as a significant contributing factor. Many stakeholders, including two plaintiffs' attorneys, told us that financial incentives, combined with the fairly straightforward nature of many FLSA cases, made attorneys receptive to taking these cases. In some states, specifically Florida, where nearly 30 percent of all FLSA lawsuits were filed from 1991 to 2012, several stakeholders, including federal judges, WHD officials, and a defense attorney, told us that plaintiffs' attorneys advertise for wage and hour cases via billboards, radio, foreign language press, and other methods. Two stakeholders we spoke with also said that some plaintiffs' attorneys, when consulted by potential clients about other employment issues, such as wrongful termination, will inquire about potential wage and hour claims; a plaintiffs' attorney we interviewed also said that it is generally easier to evaluate the potential merits of wage and hour cases than of wrongful termination and employment discrimination cases. While a few stakeholders said they did not view increased interest among plaintiffs' attorneys to be a significant factor in the increase in FLSA lawsuits, most did, including some plaintiffs' attorneys. Two stakeholders, including an academic and a representative of an organization that works on behalf of low wage workers, told us that this increased interest was beneficial because it served to counterbalance DOL's limited FLSA enforcement capacity. In addition, several stakeholders told us that evolving case law may have contributed to the increased awareness and activity on the part of plaintiffs' attorneys. In particular, they mentioned the 1989 Supreme Court decision Hoffmann-La Roche, Inc. v. Sperling, which held that federal courts have discretion to facilitate notice to potential plaintiffs of ongoing collective actions. Historically, according to several stakeholders, the requirement that plaintiffs must "opt in" to a collective action had created some challenges to forming collectives because the plaintiffs' attorneys had to identify potential plaintiffs and contact them to get them to join the collective. Stakeholders we interviewed said the Hoffmann-La Roche decision, which made it easier for plaintiffs' attorneys to identify potential plaintiffs, reduced the work necessary to form collectives. In addition, according to several stakeholders we interviewed, case law in other areas of employment litigation, such as employment discrimination, has evolved, making FLSA cases relatively more attractive for plaintiffs' attorneys who specialize in employment litigation and large multi-plaintiff cases. For example, one attorney cited two Supreme Court decisions in the late 1990s that made it more difficult for plaintiffs in employment- based sex discrimination lawsuits to prevail, and led plaintiffs' attorneys to consider other types of employment litigation such as FLSA cases. Stakeholders also cited other factors that may have contributed to the increase in FLSA litigation over the last two decades; however, these factors were endorsed less consistently than the role played by plaintiffs' attorneys. First, a number of stakeholders said that economic conditions, such as the recent recession, may have played a role in the increase in FLSA litigation. Workers who have been laid off face less risk when filing FLSA lawsuits against former employers than workers who are still employed and may fear retaliation as a result of filing lawsuits. In addition, some stakeholders said that, during difficult economic times, employers may be more likely to violate FLSA requirements in an effort to reduce costs, possibly resulting in more FLSA litigation. Moreover, one judge we interviewed noted that the recent recession has also been difficult for attorneys and may be a factor in the types of lawsuits and clients they choose to accept. In addition, ambiguity in applying the FLSA statute or regulations--particularly the exemption for executive, administrative, and professional workers--was cited as a factor by a number of stakeholders. In 2004, DOL issued a final rule updating and revising its regulations in an attempt to clarify these exemptions and provided guidance about the changes, but a few stakeholders told us there is still significant confusion among employers about which workers should be classified as exempt under these categories. Finally, the potentially large number of wage and hour violations was given as a possible reason for the increase in FLSA litigation. Federal judges in New York and Florida attributed some of the concentration of such litigation in their districts to the large number of restaurants and other service industry jobs in which wage and hour violations are more common than in some other industries. An academic who focuses on labor and employment relations told us that centralization in the management structure of businesses in retail, restaurant, and similar industries has contributed to FLSA lawsuits in these industries because frontline managers who were once exempt have become nonexempt as their nonmanagerial duties have increased as a portion of their overall duties. Service jobs, including those in the leisure and hospitality industry, increased from 2000 to 2010, while most other industries lost jobs during that period. Many stakeholders also told us that the prevalence of FLSA litigation by state is influenced by the variety of state wage and hour laws. For example, while the federal statute of limitations for filing an FLSA claim is 2 years (3 years if the violation is "willful"), New York state law provides a 6-year statute of limitations for filing state wage and hour lawsuits. A longer statute of limitations may increase potential financial damages in cases because more pay periods are involved and because more workers may be involved. Adding a New York state wage and hour claim to an FLSA lawsuit in federal court may expand the potential damages, which, according to several stakeholders, may influence decisions about where and whether to file a lawsuit. In addition, according to multiple stakeholders we interviewed, because Florida lacks a state overtime law, those who wish to file a lawsuit seeking overtime compensation generally must do so under the FLSA. Our review of a representative sample of FLSA lawsuits filed in federal district court in fiscal year 2012 showed that approximately half were filed against private sector employers in four industries. Almost all FLSA lawsuits (97 percent) were filed against private sector employers. An estimated 57 percent of the FLSA lawsuits filed in fiscal year 2012 were filed against employers in four broad industry areas: accommodations and food services; manufacturing; construction; and "other services" which, in our sample, included services such as laundry services, domestic work, and nail salons. Almost one-quarter of all lawsuits filed (an estimated 23 percent) were filed by workers in the accommodations and food service industry, which includes hotels, restaurants, and bars. This concentration of lawsuits is consistent with what several stakeholders, including DOL officials, told us about the large number of FLSA violations in the restaurant industry. At the same time, almost 20 percent of FLSA lawsuits were filed by workers in the manufacturing industry. In our sample, most of these lawsuits were filed by workers in the automobile manufacturing industry in Alabama, and most were individual lawsuits filed by workers who were originally part of one of two collective actions that had been decertified. It is important to note that, because of the presence of collective actions, the number of lawsuits filed against an industry's employers may understate the number of plaintiffs involved in these suits. FLSA lawsuits filed in fiscal year 2012 included a variety of alleged FLSA violations in addition to at least one of the three types of claims-- overtime, minimum wage, and retaliation--that each private FLSA lawsuit must at minimum contain. Allegations of overtime violations were the most common type among those explicitly stated in the documents we reviewed (see fig. 3). An estimated 95 percent of the FLSA lawsuits filed in fiscal year 2012 alleged violations of the FLSA's overtime provision, which requires certain types of workers to be paid at one and a half times their regular rate for any hours worked over 40 during a workweek. Thirty-two percent of the FLSA lawsuits filed in fiscal year 2012 contained allegations that the worker or workers were not paid the federal minimum wage, another main provision of the FLSA, while a smaller percentage of lawsuits included allegations that the employer unlawfully retaliated against workers (14 percent). In addition, the majority of lawsuits contained other FLSA allegations, most often that the employer failed to keep proper records of hours worked by the employees (45 percent); failed to post or provide information about the FLSA, as required (7 percent); or violated requirements pertaining to tipped workers such as restaurant wait staff (6 percent). We also identified more specific allegations about how workers claimed their employers violated the FLSA. Nearly 30 percent of the FLSA lawsuits filed in fiscal year 2012 contained allegations that workers were required to work "off-the-clock" so that they would not need to be paid for that time, and 16 percent alleged that workers were not paid appropriately because they were employees who were misclassified as being exempt from FLSA protections. In a similar proportion of cases (13 percent), alleged overtime violations were claimed to be the result of the miscalculation of the wage rate a worker was entitled to as overtime pay. Such miscalculations could be the result, for example, of an employer not factoring in bonuses paid to workers when determining their regular rate of pay, which is used for the calculation of the overtime pay rate. Other lawsuits included allegations that a worker was misclassified as an independent contractor rather than an employee (4 percent). Independent contractors are generally not covered by the FLSA, including its minimum wage and overtime provisions. In our review of FLSA lawsuits filed in fiscal year 2012, we found that a majority of them were filed as individual actions, but collective actions also composed a substantial proportion of these lawsuits. Collective actions can serve to reduce the burden on courts and protect plaintiffs by reducing costs for individuals and incentivizing attorneys to represent workers in pursuit of claims under the law. They may also protect employers from facing the burden of many individual lawsuits; however, they can also be costly to employers because they may result in large amounts of damages. We found that an estimated 58 percent of the FLSA lawsuits filed in federal district court in fiscal year 2012 were filed individually, and 40 percent were filed as collective actions. An estimated 16 percent of the FLSA lawsuits filed (about a quarter of all individually- filed lawsuits), however, were originally part of a collective action that was decertified (see fig. 4). For example, 14 of the 15 lawsuits in our sample filed in Alabama were filed by individuals who had been members of one of two collectives that were decertified in fiscal year 2012. Consistent with its stated mission of promoting and achieving compliance with labor standards, WHD has an annual process for planning how it targets its FLSA enforcement resources. Each year, WHD's national office plans the share of its enforcement resources that will be used for targeted investigations versus responding to complaints it receives from workers or their representatives about potential FLSA violations. To plan the deployment of its resources for targeted investigations, WHD identifies broad initiatives that focus on industries it determines have a high likelihood of FLSA violations and where workers may be particularly vulnerable. For example, WHD has targeted industries where workers may be less likely to complain about violations or where the employment relationship is splintered because of models such as franchising or subcontracting. WHD's regional and district offices then refine the list of priority industries to develop plans that focus on the most pressing issues in their areas. Each year, with input and ultimate approval from the national office, WHD's regional and district offices use these plans to target their enforcement resources. In developing their enforcement plans, WHD considers various inputs. For example, WHD officials consider the nature and prevalence of FLSA violations by using historical enforcement data to study trends in FLSA complaints and investigation outcomes in particular areas. University- based researchers under contract with DOL have also used the agency's historical enforcement data to help it plan for and strategize its FLSA enforcement efforts. In addition, WHD considers data from external sources, such as reports from industry groups, advocacy organizations, and academia. Although WHD's national office is aware of significant FLSA lawsuits through its monitoring of FLSA issues in court decisions, WHD's national, regional, and district offices do not analyze data on the number of FLSA lawsuits filed or use the results of such analyses to inform their enforcement plans. WHD officials noted that data on the number of FLSA lawsuits filed may not provide an accurate or sensitive gauge of FLSA violations because the number of workers involved and the outcomes of these lawsuits are not readily available. In developing their annual enforcement plans, WHD regional and district offices identify approaches to achieving compliance given the industry structure and the nature of the FLSA violations that they seek to address. According to WHD internal guidance, strategic enforcement plans should not only include targeted investigations of the firms that employ workers potentially experiencing FLSA violations, but they should also contain strategies to engage related stakeholders in preventing such violations. For example, if a WHD office plans to investigate restaurants to identify potential violations of the FLSA, it should also develop strategies to engage restaurant trade associations about FLSA-related issues so that these stakeholders can help bring about compliance in the industry. Our prior reports and DOL's planning and performance documents have emphasized the need for WHD to help employers comply with the FLSA. In documenting best practices about planning and performance management, we have suggested that agencies "involve regulated entities in the prevention aspect of performance." In the case of WHD, this best practice means helping employers voluntarily comply with the FLSA, among other laws. Similarly, DOL's planning and performance documents have emphasized the importance of WHD promoting "sustained and corporate-wide compliance among employers" as a strategic priority. According to federal standards for internal control, program managers need operational data to determine whether they are meeting their agencies' strategic and annual performance plans as well as their goals for effective and efficient use of resources. In addition, according to our guidance on the Government Performance and Results Act of 1993 (GPRA), for planning and performance measures to be effective, federal managers need to use performance information to identify problems and look for solutions and approaches that improve results. WHD expects staff in its regional and district offices to play a key role in delivering some forms of compliance assistance. For example, staff in the district offices respond directly to employers' questions about laws such as the FLSA by providing informal guidance, most of which is offered over the phone but is sometimes provided in writing when the guidance is particularly technical. In addition, in each of WHD's five regions, there are three or more staff who specialize in community outreach and planning. These specialists are involved in planning meetings and developing outreach efforts and other forms of compliance assistance as part of the annual, district-specific enforcement plans. Finally, WHD investigators in the field are responsible for providing information and education to employers during their enforcement actions. At the national level, WHD publishes FLSA-related guidance including notably its interpretive guidance, though this guidance is not informed by systematic analysis of data on requests for assistance. To develop and assess its interpretive guidance about the FLSA, WHD's national office considers input from its regional offices, but it does not have a data-based approach that is informed by objective input, such as data on areas which employers and workers have indicated the need for additional guidance. Officials from WHD's Office of Policy, which is responsible for publishing interpretive guidance about the FLSA, told us they meet with WHD regional and national office leadership weekly to discuss ongoing initiatives and emerging issues. While WHD collects some data on the inquiries it receives from the public via its call center, the Office of Policy does not analyze these data to help guide its development of interpretive guidance. According to WHD officials, the call center frequently refers callers with technical questions to a WHD district office, but WHD does not compile data on FLSA-related questions received by its district offices. In addition, WHD does not use advisory panels to gather input about areas of confusion that might be addressed with the help of additional or clarified interpretive guidance on the FLSA. WHD officials cited the administrative burdens associated with the Federal Advisory Committee Act as a deterrent to using such panels to inform its guidance. At the same time, despite the issuance of several FLSA-related fact sheets, WHD's publication of FLSA-related interpretive guidance has declined in recent years. From 2001 to 2009, WHD published on its website, on average, about 37 FLSA interpretive guidance documents annually. However, in the last 3 years (2010 to 2012), WHD published seven FLSA interpretive guidance documents. WHD officials cited various reasons for this decline, including the resource-intensive nature of developing the guidance; WHD's finite resources; and other priorities, such as promoting compliance with the Family and Medical Leave Act of 1993. In addition, WHD cited its issuance of several FLSA-related fact sheets, which WHD posts separately from interpretive guidance on its website. For example, in September 2013, WHD published several fact sheets about domestic service employment under the FLSA, and, in July 2013, it revised a fact sheet about ownership of tips under the FLSA. According to WHD officials, there is no backlog of requests for FLSA interpretive guidance; however, WHD does not maintain a system for tracking requests for such guidance. Because WHD does not have a systematic approach for identifying areas of confusion about the FLSA or assessing the guidance it has published, WHD may not be providing the guidance that employers and workers need. Of the nine wage and hour attorneys we interviewed, seven indicated that more interpretive guidance on the FLSA would be helpful to them. The attorneys cited determining whether workers qualify for exemptions and calculating workers' regular rate of pay for purposes of overtime compensation as examples of FLSA topics on which more guidance would be useful. Some policymakers have raised questions about the effect that an increasing number of FLSA lawsuits might have on employers' finances and their ability to hire workers or offer flexible work schedules and other benefits, but it is difficult to isolate the effect of these lawsuits from the effects of other influences such as changes in the economy. On the other hand, the ability of workers to bring such suits is an integral part of FLSA enforcement because WHD does not have the capacity to ensure that all employers are in compliance with the FLSA. While there has been a significant increase in FLSA lawsuits over the last decade, the reason for this increase is difficult to determine: it could suggest that FLSA violations have become more prevalent, that FLSA violations have been reported and pursued more frequently than before, or a combination of the two. Improved guidance from WHD might not affect the number of FLSA lawsuits filed, but it could increase the efficiency and effectiveness of WHD's efforts to help employers voluntarily comply with the law. Without a precise understanding of the areas of the law and related regulations that are not clear to employers and workers, WHD may not be able to improve the guidance and outreach it provides in the most appropriate or efficient manner. A clearer picture of the needs of employers and workers would allow WHD to more efficiently design and target its compliance assistance efforts, which may, in turn, result in fewer FLSA violations. Moreover, using data about the needs of employers and workers in understanding the requirements of the FLSA would provide WHD greater confidence that the guidance and outreach it provides to employers and workers are having the maximum possible effect. Such data could, for example, serve as a benchmark WHD could use to assess the impact of its efforts. To help inform its compliance assistance efforts, the Secretary of Labor should direct the WHD Administrator to develop a systematic approach for identifying areas of confusion about the requirements of the FLSA that contribute to possible violations and improving the guidance it provides to employers and workers in those areas. This approach could include compiling and analyzing data on requests for guidance on issues related to the FLSA, and gathering and using input from FLSA stakeholders or other users of existing guidance through an advisory panel or other means. We provided a draft of this report to DOL for review and comment. DOL's WHD provided written comments, which are reproduced in appendix II. WHD agreed with our recommendation that the agency develop a systematic approach for identifying and considering areas of confusion that contribute to possible FLSA violations to help inform the development and assessment of its guidance. WHD stated that it is in the process of developing systems to further analyze trends in communications received from stakeholders such as workers and employers and will include findings from this analysis as part of its process for developing new or revised guidance. WHD also emphasized that it is difficult to determine with sufficient certainty that any particular action contributed to the described increase in FLSA lawsuits. In addition, WHD provided technical comments, which we incorporated as appropriate. We also provided a draft of this report to the Administrative Office of the United States Courts and the Federal Judicial Center. These agencies had no comments--technical or otherwise--on the report. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretary of Labor, the Director of the Administrative Office of the United States Courts, and the Director of the Federal Judicial Center. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7215 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. To describe what is known about trends in the number of lawsuits filed under the Fair Labor Standards Act of 1938, as amended (FLSA), we analyzed federal district court data provided by the Federal Judicial Center. The data included case-specific information for all FLSA lawsuits filed in federal district court during fiscal years 1991 through 2012. We analyzed these data by year, circuit, state, and district. The Federal Judicial Center also provided data on the number of civil lawsuits filed during this time period, which we used to analyze the percentage of civil cases that were FLSA cases. We did not review FLSA lawsuits filed in state courts because data on these cases were not available in a consistent way. To provide context about identified trends such as the increase in FLSA lawsuits, we interviewed a range of FLSA stakeholders, including Department of Labor (DOL) officials, attorneys who specialize in wage and hour cases, federal district court and magistrate judges, officials from organizations representing workers and employers, and academics. To ensure balance, we interviewed both attorneys who represent plaintiffs and those who represent defendants. We identified some of these attorneys through organizations that represent workers, such as labor unions and advocacy organizations such as the National Employment Law Project, and industry organizations such as the National Small Business Association. In selecting judges to interview, we chose from districts with a significant increase in FLSA litigation in recent years as well as districts that had not seen such increases to ensure a variety of perspectives. To provide information on selected characteristics of FLSA lawsuits filed, we reviewed a nationally representative random sample of complaints from FLSA lawsuits filed in federal district court during fiscal year 2012. The sample of 97 complaints from FLSA lawsuits was drawn from the case-specific FLSA lawsuit data provided by the Federal Judicial Center. The filing date was determined by the "filing date" field, which records the date a case was docketed in federal court. Cases that were initially filed in federal court, cases removed from state court to federal court, cases transferred from another federal court, and cases for which a new federal docket was otherwise created during fiscal year 2012 (e.g., an individual docket created in fiscal year 2012 after a previously filed collective action was decertified) could be in our sample. We did not review cases from the federal courts of appeals because data linking appeals to their corresponding cases filed in district court were not readily available. All estimates from our sample have a 95 percent confidence interval of within plus or minus 10 percentage points. Because we followed a probability procedure based on random selections, our sample is only one of a large number of samples that we might have drawn. Since each sample could have provided different estimates, we express our confidence in the precision of our particular sample's results as a 95 percent confidence interval (e.g., plus or minus 10 percentage points). This is the interval that would contain the actual population value for 95 percent of the samples we could have drawn. After the sample was drawn, we used the docket number associated with each lawsuit in the sample to retrieve the complaint from the Public Access to Court Electronic Records (PACER) database and review and record information about the lawsuit. In cases where multiple complaints were associated with a docket, such as amended complaints, we used information from the first available complaint in the docket. We selected this approach to ensure that we recorded information for each individual case at approximately the same stage of litigation. We relied solely on information that could be ascertained from the complaint; we did not do additional research to confirm the accuracy of the information. With respect to our analysis of the specific types of violations alleged in our sample of complaints, our estimates include only those cases in which an allegation was explicitly made in the complaint. It is possible that a larger percent of FSLA litigation involved specific issues that were not alleged explicitly in the complaint and instead were described more generically as overtime or minimum wage violations. In addition, we did not review subsequent documents filed in the case beyond the initial complaint. Therefore, our review does not provide any information about how these lawsuits were ultimately resolved. Information on the number of plaintiffs taking part in a collective action was neither consistently available in the complaints nor was it precise when it was available. Our analysis with regard to the industries in which FLSA lawsuits are filed is based on the number of FLSA lawsuits filed, not the number of plaintiffs included in those lawsuits. A single collective action represents multiple plaintiffs. Therefore, the number of FLSA lawsuits filed against employers in a specific industry may not accurately reflect the number of workers or relative frequency of workers claiming FLSA violations by industry. The complaint from each lawsuit was reviewed by a GAO analyst and a GAO attorney to identify the FLSA violation(s) it alleged and other information, such as whether the lawsuit was a collective action, whether there were associated allegations of state wage and hour law violations, and the industry of the worker or workers who filed the lawsuit. In cases in which the two reviewers recorded information about the lawsuit differently, a discussion between them was held to resolve the difference. We assessed the reliability of the data received from the Federal Judicial Center by interviewing officials at the Administrative Office of the U.S. Courts and the Federal Judicial Center and by reviewing documentation related to the collection and processing of the data. In addition, we conducted electronic testing to identify any missing data, outliers, and obvious errors. We determined that certain data fields were not sufficiently reliable, and therefore did not use them. For example, we could not analyze data about judgments such as the amount of monetary awards in FLSA lawsuits because, for a large percentage of the cases, the information on the judgment was missing. We determined that the data included in our report were sufficiently reliable for our purposes. To describe how DOL's Wage and Hour Division (WHD) plans its FLSA enforcement and compliance assistance efforts, we reviewed the agency's planning and performance documents, as well as its published guidance on the FLSA. In addition, we interviewed DOL officials in WHD's Office for Planning, Performance, Evaluation, and Communications; Office of Policy; two regional WHD offices; and DOL's Office of the Solicitor about the agency's enforcement and compliance assistance activities. In addition, we asked the other stakeholders we interviewed about their views of WHD's enforcement and compliance assistance efforts. To provide context throughout the report, we also reviewed relevant federal laws and regulations. Finally, we compared WHD's planning process to internal control standards (see GAO, Standards for Internal Control in The Federal Government, GAO/AIMD-00-21.3, Washington, D.C.: November 1999) and best practices that we have previously identified (see GAO, Managing for Results: Enhancing Agency Use of Performance Information for Management Decision Making, GAO-05-927, Washington, D.C.: Sept. 9, 2005; and Managing for Results: Strengthening Regulatory Agencies' Performance Management Practices, GAO/GGD-00-10, Washington, D.C.: Oct. 28, 1999). We did not assess WHD's implementation of its enforcement and compliance assistance plans. We conducted this performance audit from November 2012 to December 2013 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, Betty Ward-Zukerman (Assistant Director), David Barish, James Bennett, Ed Bodine, David Chrisinger, Sarah Cornetto, Justin Fisher, Joel Green, Ying Long, and Walter Vance made significant contributions to this report. Also contributing to the report were Jessica Botsford, Susanna Clark, Melinda Cordero, Ashley McCall, Sheila McCoy, Drew Nelson, Catherine Roark, Sabrina Streagle, Anjali Tekchandani, and Kimberly Walton.

The FLSA sets federal minimum wage and overtime pay requirements applicable to millions of U.S. workers and allows workers to sue employers for violating these requirements. Questions have been raised about the effect of FLSA lawsuits on employers and workers and about WHD's enforcement and compliance assistance efforts as the number of lawsuits has increased. This report (1) describes what is known about the number of FLSA lawsuits filed, and (2) examines how WHD plans its FLSA enforcement and compliance assistance efforts. To address these objectives, GAO analyzed federal district court data from fiscal years 1991 to 2012 and reviewed selected documents from a representative sample of lawsuits filed in federal district court in fiscal year 2012. GAO also reviewed DOL's planning and performance documents and interviewed DOL officials, as well as stakeholders, including federal judges, plaintiff and defense attorneys who specialize in FLSA cases, officials from organizations representing workers and employers, and academics about FLSA litigation trends and WHD's enforcement and compliance assistance efforts. Substantial increases occurred over the last decade in the number of civil lawsuits filed in federal district court alleging violations of the Fair Labor Standards Act of 1938, as amended (FLSA). Federal courts in most states experienced increases in the number of FLSA lawsuits filed and the percentage of total civil lawsuits filed that were FLSA cases, but large increases were concentrated in a few states, including Florida and New York. The number of workers involved in FLSA lawsuits is unknown because the courts do not collect data on the number of workers represented. Many factors may contribute to this general trend; however, the factor cited most often by stakeholders, including attorneys and judges, was attorneys' increased willingness to take on such cases. In fiscal year 2012, an estimated 97 percent of FLSA lawsuits were filed against private sector employers, often from the accommodations and food services industry, and 95 percent of the lawsuits filed included allegations of overtime violations. The Department of Labor's (DOL) Wage and Hour Division (WHD) has an annual process for planning how it will target its enforcement and compliance assistance resources to help prevent and identify potential FLSA violations, but it does not compile and analyze relevant data to help determine what guidance is needed, as recommended by best practices previously identified by GAO. In planning its enforcement efforts, WHD targets industries it determines have a high likelihood of FLSA violations. Although WHD does not analyze data on FLSA lawsuits when planning its enforcement efforts, it does use information on its receipt and investigation of complaints about possible FLSA violations. In developing its guidance on FLSA, WHD considers input from its regional offices, but it does not have a systematic approach that includes analyzing relevant data, nor does it have a routine, data-based process for assessing the adequacy of its guidance. For example, WHD does not analyze trends in the types of FLSA-related questions it receives. Since 2009, WHD has reduced the number of FLSA-related guidance documents it has published. According to plaintiff and defense attorneys GAO interviewed, more FLSA guidance from WHD would be helpful, such as guidance on how to determine whether certain types of workers are exempt from overtime pay and other requirements. GAO recommends that the Secretary of Labor direct the WHD Administrator to develop a systematic approach for identifying and considering areas of confusion that contribute to possible FLSA violations to help inform the development and assessment of its guidance. WHD agreed with the recommendation, and described its plans to address it.

In April 2002, following a yearlong study, the Commercial Activities Panel reported its findings on competitive sourcing in the federal government. The report lays out 10 sourcing principles and several recommendations, which provide a road map for improving sourcing decisions across the federal government. Overall, the new Circular is generally consistent with these principles and recommendations. The Commercial Activities Panel held 11 meetings, including three public hearings in Washington, D.C.; Indianapolis, Indiana; and San Antonio, Texas. At these hearings, the Panel heard repeatedly about the importance of competition and its central role in fostering economy, efficiency, and continuous performance improvement. Panel members heard first-hand about the current process--primarily the cost comparison process conducted under OMB Circular A-76--as well as alternatives to that process. Panel staff conducted extensive additional research, review, and analysis to supplement and evaluate the public comments. Recognizing that its mission was complex and controversial, the Panel agreed that a supermajority of two-thirds of the Panel members would have to vote for any finding or recommendation in order for it to be adopted. Importantly, the Panel unanimously agreed upon a set of 10 principles it believed should guide all administrative and legislative actions in competitive sourcing. The Panel itself used these principles to assess the government's existing sourcing system and to develop additional recommendations. A supermajority of the Panel agreed on a package of additional recommendations. Chief among these was a recommendation that public-private competitions be conducted using the framework of the Federal Acquisition Regulation (FAR). Although a minority of the Panel did not support the package of additional recommendations, some of these Panel members indicated that they supported one or more elements of the package, such as the recommendation to encourage high-performing organizations (HPO) throughout the government. Importantly, there was a good faith effort to maximize agreement and minimize differences between Panel members. In fact, changes were made to the Panel's report and recommendations even when it was clear that some Panel members seeking changes were highly unlikely to vote for the supplemental package of recommendations. As a result, on the basis of Panel meetings and my personal discussions with Panel members at the end of our deliberative process, I believe the major differences between Panel members were few in number and philosophical in nature. Specifically, disagreement centered primarily on (1) the recommendation related to the role of cost in the new FAR-type process and (2) the number of times the Congress should be required to act on the new FAR-type process, including whether the Congress should authorize a pilot program to test that process for a specific time period. As I noted previously, the new Circular A-76 is generally consistent with the Commercial Activities Panel's sourcing principles and recommendations and, as such, provides an improved foundation for competitive sourcing decisions in the federal government. In particular, the new Circular permits: greater reliance on procedures contained in the FAR, which should result in a more transparent, simpler, and consistently applied competitive process, and source selection decisions based on trade-offs between technical factors and cost. The new Circular also suggests the potential use of alternatives to the competitive sourcing process, such as public-private and public-public partnerships and high-performing organizations. It does not, however, specifically address how and when these alternatives might be used. If effectively implemented, the new Circular should result in increased savings, improved performance, and greater accountability, regardless of the service provider selected. However, this competitive sourcing initiative is a major change in the way government agencies operate, and successful implementation of the Circular's provisions will require that adequate support be made available to federal agencies and employees, especially if the time frames called for in the new Circular are to be achieved. Implementing the new Circular A-76 will likely be challenging for many agencies. Our prior work on acquisition, human capital, and information technology management--in particular, our work on the Department of Defense's (DOD) efforts to implement competitive sourcing--provides a strong knowledge base from which to anticipate challenges as agencies implement this initiative. Foremost among the challenges that agencies face is setting and meeting appropriate goals that are integrated with other priorities. Quotas and arbitrary goals are inappropriate. Sourcing goals and targets should contribute to mission requirements and improved performance and be based on considered research and sound analysis of past activities. Agencies will need to consider how competitive sourcing relates to the strategic management of human capital, improved financial performance, expanded reliance on electronic government, and budget and performance integration, consistent with the President's Management Agenda. At the request of Senator Byrd and this subcommittee, we recently initiated work to look at how agencies are implementing their competitive sourcing programs. Our work is focused on goal setting and implementation strategies at several large agencies. DOD has been at the forefront of federal agencies in using the A-76 process and, since the mid-to-late 1990s, we have tracked DOD's progress in implementing its A-76 program. The challenges we have identified hold important lessons that civilian agencies should consider as they implement their own competitive sourcing initiatives. Notably: competitions took longer than initially projected, costs and resources required for the competitions were underestimated, selecting and grouping functions to compete were problematic, and determining and maintaining reliable estimates of savings were difficult. DOD's experience also indicates that agencies will have difficulties in meeting the time frames set out in the new Circular for completing the standard competition process. Those time frames are intended to respond to complaints from all sides about the length of time taken to conduct A-76 cost comparisons--complaints that the Panel repeatedly heard in the course of its review. The new Circular states that standard competitions shall not exceed 12 months from public announcement (start date) to performance decision (end date), with certain preliminary planning steps to be completed before a public announcement. Under certain conditions, there may be extensions of no more than 6 months. We welcome efforts to reduce the time required to complete these studies. Even so, our studies of DOD's competitive sourcing have found that competitions can take much longer than the time frames outlined in the new Circular. Specifically, DOD's most recent data indicate that competitions have taken, on average, 25 months. It is not clear, however, how much of this time was needed for any planning that may now be outside the revised Circular's time frame. In commenting on OMB's November 2002 draft proposal, we recommended that the time frame be extended to perhaps 15 to 18 months overall, and that OMB ensure that agencies provide sufficient resources to comply with Circular A-76. In any case, we believe that additional financial and technical support and incentives will be needed for agencies as they attempt to meet these ambitious time frames. Finally, federal agencies and OMB will be challenged to effectively share lessons learned and establish sufficient guidance to implement certain A-76 requirements. For example, calculating savings that accrue from A-76 competitions, as required by the new Circular, will be difficult or may be done inconsistently across agencies without additional guidance, which will contribute to uncertainties over savings. The prior version of Circular A-76 provided for a streamlined cost comparison process for activities with 65 or fewer full-time equivalent (FTE) employees. Although the revised Circular also provides for a streamlined process at comparable FTE levels, the revised streamlined process lacks a number of key features designed to ensure that agencies' sourcing decisions are sound. First, the prior version of the Circular contained an express prohibition on dividing functions so as to come under the 65-FTE limit for using a streamlined process. The revised Circular contains no such prohibition. We are concerned that in the absence of an express prohibition, agencies could arbitrarily split activities, entities, or functions to circumvent the 65-FTE ceiling applicable to the streamlined process. Second, the 10 percent conversion differential under the prior Circular has been removed for streamlined cost comparisons. The Panel viewed this differential as a reasonable way to account for the disruption and risk entailed in converting between the public and private sectors. Third, the streamlined process requires an agency to certify that its performance decision is cost-effective. It is not clear from the revised Circular, however, whether the term "cost-effective" means the low-cost provider or whether other factors may be taken into account (such as the disruption and risk factors previously accounted for through the 10 percent conversion differential). Finally, the revised Circular has created an accountability gap by prohibiting all challenges to streamlined cost comparisons. Under the prior Circular, both the public and the private sectors had the right to file appeals to ad hoc agency appeal boards. That right extended to all cost comparisons, no matter how small or large (and to decisions to waive the A-76 cost comparison process). The new Circular abolishes the ad hoc appeal board process and instead relies on the FAR-based agency-level protest process for challenges to standard competitions, which are conducted under a FAR-based process. While we recognize that streamlined cost comparisons are intended to be inexpensive, expeditious processes for relatively small functions, we are nonetheless concerned that the absence of an appeal process may result in less transparency and accountability. Another accountability issue relates to the right of in-house competitors to challenge sourcing decisions in favor of the private sector--an issue that the Commercial Activities Panel addressed in its report. While both the public and the private sectors could file appeals to the ad hoc agency appeal boards under the prior Circular, only the private sector had the right, if dissatisfied with the ruling of the agency appeal board, to file a bid protest at GAO or in court. Under the previous version of the Circular, both GAO and the Court of Appeals for the Federal Circuit held that federal employees and their unions were not "interested parties" with the standing to challenge the results of A-76 cost comparisons. The Panel heard many complaints from federal employees and their representatives about this inequality in protest rights. The Panel recommended that, in the context of improving the federal government's process for making sourcing decisions, a way be found to level the playing field by allowing in-house entities to file a protest at GAO, as private-sector competitors have been allowed to do. The Panel noted, though, that if a decision were made to permit the public-sector competitor to protest A-76 procurements, the question of who would have representational capacity to file such a protest would need to be carefully considered. An important legal question is whether the shift from the cost comparisons under the prior Circular to the FAR-like standard competitions under the new one means that the in-house most-efficient organization (MEO) should now be found eligible to file a bid protest at GAO. If the MEO is allowed to protest, there is a second question: Who will speak for the MEO and protest in its name? To ensure that our legal analysis of these questions benefits from input from everyone with a stake in this important area, GAO posted a notice in the Federal Register on June 13, 2003, seeking public comment on these and several related questions. Responses were due July 16, and we are currently reviewing the more than 50 responses that we received from private individuals, Members of Congress, federal agencies, unions, and other organizations. We intend to reach a conclusion on these important legal questions in the coming weeks. For many agencies, effective implementation of the new Circular will depend on their ability to understand that their workforce is their most important organizational asset. Recognizing this, the Panel adopted a principle stipulating that sourcing and related policies be consistent with human capital practices that are designed to attract, motivate, retain, and reward a high-performing workforce. Conducting competitions as fairly, effectively, and efficiently as possible requires sufficient agency capacity--that is, a skilled workforce and adequate infrastructure and funding. Agencies will need to build and maintain capacity to manage competitions, to prepare the in-house MEO, and to oversee the work--regardless of whether the private sector or MEO is selected. Building this capacity is important, particularly for agencies that have not been heavily invested in competitive sourcing previously. Agencies must manage this effort while addressing high-risk areas, such as human capital and contract management. In this regard, GAO has listed contract management at DOD, the National Aeronautics and Space Administration, the Department of Housing and Urban Development, and the Department of Energy as an area of high risk. With a likely increase in the number of public-private competitions and the requirement to hold accountable whichever sector wins, agencies will need to ensure that they have an acquisition workforce sufficient in numbers and abilities to manage the cost, quality, and performance of the service provider. In our prior work--notably in studying the lessons that state and local governments learned in conducting competitions and in private-sector outsourcing of information technology services--we found that certain strategies and practices can help ensure the success of workforce transitions when deciding who should provide the services they perform. In general, these strategies recognized that the workforce defines an organization's character, affects its capacity to perform, and represents its knowledge base. When an agency's leadership is committed to effective human capital management, they view people as assets whose value can be enhanced through investments. Agencies can aid their workforce in transitioning to a competitive sourcing environment if they: ensure employee involvement in the transition process; for example, by clearly communicating to employees what is going to happen and when it is going to happen; provide skills training for either competing against the private sector or create a safety net for displaced employees to bolster their support for the changes as well as to aid in the transition to a competitive environment, such as offering workers early retirement, severance pay, or a buyout; facilitate the transition of staff to the private sector or reimbursable provider when that is their choice and assist employees who do not want to transfer to find other federal jobs; and develop employee retention programs and offer bonuses to keep people where appropriate. Recognizing the workforce as an asset also requires agency officials to view competitive sourcing--whether it results in outsourcing, insourcing, or cosourcing--as a tool to help ensure we have the right people providing services in an effective and efficient manner. The Panel recommended that employees should receive technical and financial assistance, as appropriate, to structure the MEO, to conduct cost comparisons, and to create HPOs. However, it is unclear whether agencies will have adequate financial and technical resources to implement effective competitive sourcing programs or make needed improvements. The administration has proposed the creation of a governmentwide fund for performance-based compensation. However, most federal agencies lack modern, effective, credible, and validated performance management systems to effectively implement performance-based compensation approaches. Importantly, a clear need exists to provide assistance both to government employees to create MEOs that can compete effectively and to agencies to promote HPOs throughout the federal government, especially in connection with functions, activities, and entities that will never be subject to competitive sourcing. Assistance is also needed in helping to create the systems and structures needed to support the effective and equitable implementation of more performance-based compensation approaches. As a result, we believe consideration should be given to establishing a governmentwide fund that would be available to agencies, on the basis of a business case, to provide technical and financial assistance to federal employees to develop MEOs and for creating HPOs, including the creation of modern, effective, and credible performance management systems. While the new Circular provides an improved foundation for competitive sourcing decisions, implementing this initiative will undoubtedly be a significant challenge for many federal agencies. The success of the competitive sourcing program will ultimately be measured by the results achieved in terms of providing value to the taxpayer, not the size of the in-house or contractor workforce or the number of positions competed to meet arbitrary quotas. Successful implementation will require adequate technical and financial resources, as well as sustained commitment by senior leadership to establish fact-based goals, make effective decisions, achieve continuous improvement based on lessons learned, and provide ongoing communication to ensure that federal workers know and believe that they will be viewed and treated as valuable assets. Mr. Chairman, this concludes my statement. I will be happy to answer any questions you or other Members of the subcommittee may have. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

In May 2003, the Office of Management and Budget (OMB) released a revised Circular A-76, which represents a comprehensive set of changes to the rules governing competitive sourcing--one of five governmentwide items in the President's Management Agenda. Determining whether to obtain services in-house or through commercial contracts is an important economic and strategic decision for agencies, and the use of Circular A-76 is expected to grow throughout the federal government. In the past, however, the A-76 process has been difficult to implement, and the impact on the morale of the federal workforce has been profound. Concerns in the public and private sectors were also raised about the timeliness and fairness of the process for public-private competitions. It was against this backdrop that the Congress enacted legislation mandating a study of the A-76 process, which was carried out by the Commercial Activities Panel, chaired by the Comptroller General of the United States. This testimony focuses on how the new Circular addresses the Panel's recommendations reported in April 2002, the challenges agencies may face in implementing the new Circular A-76, and the need for effective workforce practices to help ensure the successful implementation of competitive sourcing in the federal government. The revised Circular A-76 is generally consistent with the Commercial Activities Panel's principles and recommendations, and should provide an improved foundation for competitive sourcing decisions in the federal government. In particular, the new Circular permits greater reliance on procedures in the Federal Acquisition Regulation--which should result in a more transparent and consistently applied competitive process--as well as source selection decisions based on trade-offs between technical factors and cost. The new Circular also suggests the potential use of alternatives to the competitive sourcing process, such as public-private and public-public partnerships. However, implementing the new Circular will likely be challenging for many agencies. Foremost among the challenges that agencies face is setting and meeting appropriate goals integrated with other priorities, as opposed to arbitrary quotas. Additionally, there are potential issues with the streamlined cost comparison process and protest rights. The revised streamlined process lacks a number of key features designed to ensure that agency sourcing decisions are sound, including the absence of an appeal process. Finally, the right of in-house competitors to file a bid protest at GAO challenging the sourcing decisions in favor of the private sector remains an open question. For many agencies, effective implementation will depend on their ability to understand that their workforce is their most important organizational asset. Agencies will need to aid their workforce in transitioning to a competitive sourcing environment. For example, agencies will need a skilled workforce and adequate infrastructure and funding to manage competitions; to prepare the in-house offer; and to oversee the cost, quality, and performance of whichever service provider is selected.

Enlisted servicemembers can be separated from the military when they are found to be unsuitable for continued military service. If a servicemember is diagnosed with a non-disability mental condition that interferes with the servicemember's ability to function in the military, a commanding officer may initiate the separation process. Separated servicemembers may appeal their separation to a discharge review board within 15 years after separation from the military. Further, separated servicemembers may appeal the discharge review board's decision by applying to a board for the correction of military records. Once enlisted servicemembers have been separated from military service, they receive a certificate of release from the military-- Department of Defense Form 214 (DD Form 214)--that includes dates of service, last duty assignment, pay grade and rank, awards received, and a characterization of their service--such as honorable or general under honorable conditions.entities, such as the applicable military service, VA, and the servicemember. Servicemembers receive two copies of the DD Form 214--a copy that includes the characterization of their service and the reason for the separation and one that does not. The reason for the separation is noted by a separation code, as well as a narrative that explains the reason for the separation. According to DOD policy, separation codes are to be used by the military services so that data on the cause of separations can be collected and trends in separations analyzed, which may, in turn, influence changes in DOD separation policy. DOD established six separation codes that the military services may use for non-disability mental conditions on the DD Form 214, but the military services have discretion as to which codes they choose to use. Five of these separation codes pertain only to non- disability mental conditions. They are (1) acute adjustment disorder, (2) disruptive behavior disorder, (3) impulse control disorder, (4) personality disorder, and (5) other non-disability mental disorder. The sixth code available for use by the military services, "condition, not a disability," is a broader separation code that includes both non-disability physical and mental conditions. DOD's separation policy, dated January 27, 2014, contains eight separation requirements that the military services must follow when separating enlisted servicemembers for non-disability mental conditions. Of the eight separation requirements, five apply to all enlisted servicemembers and three more apply only to enlisted servicemembers who served in an imminent danger pay (IDP) area, such as Iraq or Afghanistan. 1. The servicemember must be notified in writing that a non-disability mental condition is the basis of the proposed separation, 2. the servicemember must be formally counseled concerning deficiencies and afforded an opportunity to overcome those deficiencies, 3. evidence must demonstrate that the servicemember is unable to function effectively because of a non-disability mental condition, 4. the servicemember must receive a non-disability mental condition diagnosis by a authorized mental health provider,5. the servicemember must be counseled in writing that the diagnosis of a non-disability mental condition does not qualify as a disability. For servicemembers who served in an IDP area, the non-disability mental condition diagnosis must 6. be corroborated by a peer- or higher-level mental health professional, 7. be endorsed by the military service's surgeon general, and 8. include an assessment to determine whether the servicemember has symptoms of PTSD or other mental illness co-morbidity. Over time, DOD has expanded its separation requirements. In 2011 and 2014 DOD revised its policy by extending its separation requirements to apply to servicemembers being separated for any non-disability mental condition. See table 1 for an explanation of the policy changes since 2008. DOD and three of the four military services--Army, Navy, and Marine Corps--cannot identify the number of enlisted servicemembers separated for non-disability mental conditions because, for most separations, they do not use available codes to specifically designate the reason why servicemembers were separated. Instead, they use the broad separation code, "condition, not a disability," that mixes non-disability mental conditions with non-disability physical conditions, making it difficult to distinguish one from the other without a time-consuming and resource- intensive record review. In contrast, the Air Force is able to track the specific reasons for its servicemember separations because it uses the full array of separation codes available. DOD policy requires a separation code to be used by the military services so that DOD can track and analyze the reason for separations and evaluate DOD's separation policy to determine if changes are needed. However, according to DOD officials, the military services can choose to use any of the six available codes that DOD provides the military services to record non-disability mental conditions, including the "condition, not a disability" code. Moreover, under the internal control standard for control activities, all transactions--such as separations of enlisted servicemembers--need to be clearly and accurately documented so they can be examined when needed; for example, to monitor trends in the reasons for servicemembers' separations. The three military services had varying reasons for using the broad separation code, "condition, not a disability." Navy and Marine Corps officials stated that they have historically used this code for most separations but Navy officials could not explain why they use this broad code instead of using one of the separation codes specific to non- disability mental conditions. Marine Corps officials cited concerns with potential stigma the servicemember may face if a more specific code is used. Army officials had a similar concern, stating that they use the broad separation code for most non-disability mental condition separations to protect enlisted servicemembers after they leave the service. Army and Marine Corps officials told us they were concerned that employers may request the servicemember's copy of the DD Form 214 that has the separation code on it, and having a code specific to a mental condition might stigmatize the servicemember. Army officials stated that this issue has been discussed in media articles for several years. In contrast, both Air Force and DOD officials told us that they do not have evidence that including the separation code on the DD Form 214 has caused problems for servicemembers, as suggested by the Army. An Air Force official said that, unlike the Army, the Air Force does not have information that using these codes has caused problems for separated Air Force servicemembers. Likewise, DOD officials told us that they have not heard that this is a problem. According to DOD officials, characterization of service, such as honorable or dishonorable, is usually the piece of information that employers want from the form. By including the characterization of service on both of the servicemember's copies of the DD Form 214, DOD believes that the servicemember could provide an employer with the copy that does not contain the reason for the separation and the employer will be satisfied because the characterization of service is indicated. Because the three military services are using the broad separation code "condition, not a disability" for most separations, the resulting data cannot be used to identify the number of servicemembers separated for non- disability mental conditions. There is no other systematic way to track these separations; that is, without a tedious and time-consuming manual review. In one instance for example, in response to a request from DOD for information on the number of separations for non-disability mental conditions, the Army undertook a 6-month manual review of over 2,000 servicemember files--all because it does not delineate separations for non-disability mental versus non-disability physical conditions in any data system. If DOD and the military services cannot systematically identify or periodically evaluate the number of enlisted servicemembers separated for non-disability mental conditions, they cannot assess how well the separation policy and process is working or respond specifically to key stakeholders, including the Congress, about trends in or concerns about separations for non-disability mental conditions. From fiscal years 2008 through 2012, when the services were filing compliance reports, most services did not report full compliance with DOD separation requirements for separations for personality disorder. We also found that the reports contained incomplete and inconsistent data, and DOD conducted limited review of these reports. Further, based on a review of separation policies, we found that none of the services' policies address all DOD requirements for non-disability mental condition separations. Additionally, DOD and the military services do not have oversight processes in place to ensure compliance with DOD requirements in this regard. From fiscal years 2008 through 2012, DOD required the military services to monitor and report to DOD on their compliance with DOD requirements for separating servicemembers for personality disorders; however, while the services generally reported improved compliance over the 5 years of reporting, we found in the 2012 compliance reports that three of the services had not yet achieved full compliance with all of DOD's 2008 separation requirements. For each of the 20 compliance reports the services submitted for fiscal years 2008 through 2012, the military services were required to review a sample of at least 10 percent of their personality disorder separations for the fiscal year and assess the service's compliance with DOD's 2008 separation requirements. Compliance, according to DOD, was achieved if the sample reviewed met a 90 percent compliance threshold for each requirement. According to DOD officials, the annual compliance reports were discontinued in 2013 because the military services' 2012 compliance reports indicated that the services were compliant with all of DOD's 2008 requirements. However, it is unclear how DOD came to this conclusion when our review of the 2012 compliance reports found that the Air Force, Marine Corps, and Navy did not report compliance with all DOD requirements. Specifically, the Marine Corps reported compliance below 90 percent with one requirement and the Air Force was below this compliance rate for two requirements. Further, the Navy did not report on its compliance with three of the eight separation requirements, so DOD could not have known the Navy's level of compliance in those areas. Among the 20 compliance reports submitted during fiscal years 2008 through 2012, the services reported the most difficulty meeting the requirement to notify all servicemembers that a personality disorder diagnosis does not constitute a disability. For example, the Marine Corps reported 78 percent or less compliance with this requirement in 3 of its 5 reports. finding itself noncompliant with this DOD requirement, the Air Force acknowledged that its policy incorrectly stated that servicemember notification was only required for servicemembers who served in an IDP area. However, even after the Air Force updated its policy in September 2010 and made a correction in this regard, the Air Force's compliance with this requirement was 81 percent in fiscal year 2011 and 89 percent in fiscal year 2012. Because three of the four services were noncompliant with at least one requirement in their 2012 reports, DOD's discontinuation of these reports was premature. The federal internal control standard for monitoring states that there should be reasonable assurance that ongoing monitoring occurs in the course of normal operations. Further, it requires reasonable assurance that deficiencies are identified and corrected or otherwise resolved. Our review of the services' compliance reports found examples of incomplete and inconsistent information in many of the 20 compliance reports submitted by the military services to DOD between fiscal years 2008 and 2012. The Marine Corps reported 90 percent compliance in its fiscal year 2008 report and 100 percent compliance in its fiscal year 2011 report. Compliance information for reservists and National Guard members was missing. Nineteen of the 20 compliance reports did not assess compliance with separation requirements for reservists and National Guard members who were separated while not on active duty. Some military service officials stated that they did not provide information on these reservists and National Guard members because DOD did not specifically ask for them to be included in the reports. However, DOD instructed the Secretaries of the Army, the Air Force, and the Navy and the Commandant of the Marine Corps to include a random sampling of all personality disorder separations for each military department, in which reservists and National Guard members are included as part of their respective departments. Compliance information for servicemembers who served in an IDP area was missing. Eight of the 20 compliance reports did not indicate how many of the servicemembers in their review sample had served in an IDP area, if any. As a result, it is not clear the extent to which compliance was assessed in these reports for the three separation requirements that apply only to servicemembers who served in an IDP area. Further, in its fiscal year 2011 report, Navy reported that its review sample did not include any servicemembers who served in an IDP area. Therefore, Navy could not have assessed compliance with the three separation requirements that apply to these servicemembers, even though Navy reported 100 percent compliance with them. While DOD did not explicitly state that servicemembers that served in an IDP area should be included in the sample reviewed by the military services, three of the eight separation requirements only apply to such servicemembers, so the need to include these types of servicemembers in the review sample in order for DOD to gauge compliance should have been clear. The Navy had incomplete information in its fiscal year 2010 compliance report. The Navy failed to complete the reporting requirement for its fiscal year 2010 compliance report because its findings were based on a 4 percent sample of the total number of servicemembers separated for a personality disorder in that fiscal year--not the 10 percent required by DOD. In its compliance report, Navy stated that additional separations would be reviewed to fulfill DOD's sample size requirement, but according to DOD and Navy officials, the results of this review were never reported to DOD. When asked about these additional reviews, Navy officials could not offer an explanation regarding whether the reviews were conducted. In addition to incomplete information in the compliance reports, we found that two of the four services--Army and Navy--reported inconsistent numbers in several of their compliance reports. Specifically, DOD required the services to include in each annual compliance report the total number of personality disorder separations. However, the Army's and the Navy's reports of these numbers were not consistent across the 5 years, as demonstrated in table 2. According to DOD officials, DOD could not find documentation of follow-up with the services regarding these inconsistencies. Based on interviews with officials from DOD and the military services, we found that almost no follow-up was conducted by DOD with the military services regarding the compliance reports even though the services reported noncompliance with separation requirements across the 5 years of reports. DOD officials stated that they received the annual compliance reports from the military services and assumed that the information provided in these reports was accurate, given that they were signed by each of the three military service secretaries and a representative of the Commandant of the Marine Corps. By not reviewing the information provided, DOD did not know that the reports contained inconsistent and incomplete information, and the agency made the decision to end the compliance reports based on what we found to be faulty assurances of compliance. To discontinue compliance reporting and not institute any other type of oversight is inconsistent with the standards for internal control in the federal government, which states that there should generally be assurance that ongoing monitoring occurs in the course of normal operations. In addition to problems we identified with compliance reports focusing on personality disorder separations, we also found that the Army, the Navy, the Marine Corps, and components of the Air Force--namely, the Reserves and National Guard--have been separating servicemembers for non-disability mental conditions according to policies that are not consistent with all DOD requirements. Each of the services has policies for separating servicemembers for non-disability mental conditions; however, we found these policies to be inconsistent with DOD policy because they have not been updated to include all of the changes in DOD requirements over time. Specifically, we found the following. The Army active duty separation policy is not consistent with one of DOD's separation requirements. not been expanded to apply to servicemembers separated for all non- disability mental conditions. In addition, the Army Reserves and National Guard separation policy was updated in March 2014 yet does not contain all of DOD's separation requirements, such as the requirement that servicemembers be counseled in writing that their diagnosis does not qualify as a disability. Army Regulation 635-200 Personnel Separations Active Duty Enlisted Administrative Separations (Washington, D.C.: Sep. 6, 2011) and Army OTSG/MEDCOM Policy Memo 14-049 Administrative Separation of Soldiers for Personality Disorder (PD) under Chapters 5-13 and 5-17, or Other Designated Physical or Mental Conditions under Chapter 5-17 (Fort Sam Houston, T.X.: Jun. 23, 2014). The Navy's separation policy has not been updated to be fully The Navy officials stated they were consistent with DOD policy.unaware that DOD had revised its separation policy in 2011, and again in 2014, until we discussed this with them in May 2014 during the course of our review. The Marine Corps' separation policy has not been updated to be fully consistent with DOD policy, since the Navy is responsible for revising and implementing such policies for the Marine Corps. The Air Force Reserves and National Guard separation policy was created in 2005 and has not been updated over time as DOD has updated its separation requirements for non-disability mental conditions. For example, the policy does not contain the separation requirements applicable to servicemembers who served in an IDP area. Because the services have been separating servicemembers based on outdated DOD policy, some servicemembers may not have been afforded the protections intended by DOD's updated separation requirements. For example, servicemembers who served in an IDP area may not have had their diagnosis endorsed by the military services' Office of the Surgeon General as required by DOD and have been separated without the benefit of a confirmation of their diagnosis by this senior medical entity. During the course of our review, we also found that the Air Force National Guard does not have a process to separate National Guard members for non-disability mental conditions. In 2013, Air Force National Guard reported that it had not been separating Guard members for non-disability mental conditions because it did not have a process to get a mental health assessment or diagnosis for National Guard members. National Guard members believed to have non-disability mental conditions were either returned to duty or separated for another reason such as misconduct or unsatisfactory performance of duty. According to DOD policy, when separation for unsatisfactory performance or misconduct is warranted, separating a servicemember for a non-disability mental condition is not appropriate. Under federal internal control standards, control activities should be established to help ensure that performance is correctly assessed and transactions are accurately recorded. Accordingly, there should be processes in place so that, if a servicemember is identified as potentially having a non-disability mental condition that affects the member's ability to perform military duties, that servicemember can be separated for such a condition in accordance with DOD requirements, if appropriate. The Air Force developed a corrective action plan to address the National Guard's inability to separate National Guard members for non-disability mental conditions; however, this plan was never implemented. According to officials, the biggest challenge in implementing the plan was that the Air Force National Guard does not have authorized mental health providers who can diagnose non-disability mental conditions. Without a mental condition diagnosis by an authorized mental health provider, a servicemember cannot be separated for a non-disability mental condition, according to Air Force policy. According to officials, the Air Force National Guard would need to be tasked and provided related funding to have these providers available. The officials could not provide any further information on why no further action was taken to correct this identified problem. Further, Air Force officials stated that they could not identify the number of servicemembers potentially affected by this problem without conducting a comprehensive file review. Air Force National Guard members that are thought to have a non-disability mental condition but are separated for another reason, such as misconduct, risk not receiving the protections of DOD's separation requirements. Beyond the limited review DOD conducted of the military services' compliance reports conducted for personality disorder separations, which was discontinued after fiscal year 2012, DOD and military service officials stated they do not conduct any oversight of all non-disability mental condition separations. In September 2011, DOD revised its separation policy by expanding the three requirements that apply to servicemembers who served in an IDP area to include servicemembers separated for any non-disability mental conditions, not just for personality disorders. In January 2014, DOD again revised this policy and expanded the separations requirements so that all eight requirements apply to servicemembers separated for any non-disability mental condition. However, DOD officials stated that they have not required the military services to conduct any review of their compliance with DOD's separation requirements for all non-disability mental conditions to determine whether they are being followed. As noted previously, the internal control standard for monitoring states that controls should be designed to assure that ongoing monitoring occurs in the course of normal operations. According to DOD officials, the military services are responsible for conducting oversight of their separation processes, not DOD. However, while some of the military services have review steps within their process for separating servicemembers for non-disability mental conditions, none of the services have an entity-wide oversight process, such as conducting an annual review, to oversee separations and provide reasonable assurance that the review steps they have in place are effective at ensuring DOD separation requirements are met. Specifically, we found their review processes are the following: The Air Force separation process includes reviews of separation packages--which is prepared by a commanding officer--by the Air Force central personnel office and a Judge Advocate General (JAG) Corps attorney prior to separation. Officials from these offices told us that the purpose of the reviews is to ensure that the appropriate documentation is present to support the separation. The Army's JAG Corps also reviews all separation packages prior to separation to ensure documentation is present and is consistent with law and policy, according to Army officials. While this is the current practice, Army officials also told us that they have plans in place to start conducting oversight of separations for non-disability mental conditions. Specifically, Army officials stated that separations for non- disability mental conditions will be included as part of the Army Organizational Inspection Program, which will review a sample of active duty servicemember separations at local commands to see if documentation is present that indicates that DOD separation requirements have been met. These inspections will not include reserve and National Guard member separations. Army officials stated they plan to conduct the first inspection in January 2015. The Marine Corps Judge Advocates review the separation packages for personality disorder separations--but not for other non-disability mental conditions separations--to ensure documentation is present and is consistent with law and policy, according to Marine Corps officials. The Navy does not conduct any review of the separation package prepared by a commanding officer prior to the servicemember's separation. The absence of a routine and comprehensive entity-wide oversight mechanism--such as an annual compliance review--prevents the military services from knowing if they are complying with all of DOD requirements and appropriately separating servicemembers with non-disability mental conditions. The inability to easily identify the number of enlisted servicemembers separated for non-disability mental conditions hinders oversight by DOD and the military services to ensure that servicemembers are being separated appropriately. For example, without such data, DOD cannot determine how many separated servicemembers have served in IDP areas--who may be at greater risk of having a service-related mental condition, such as PTSD--or determine if these servicemembers have been afforded the protections intended by the separation requirements, such as ensuring they are assessed for service-related mental conditions prior to being separated for a non-disability mental condition. Further, lack of such data prevents DOD from being able to conduct analyses--such as trends in non-disability mental condition separations over time--that are important for determining whether the separation policy is working, and if not, how it should be changed. Absent an effective process for monitoring and reporting compliance, DOD and the military services cannot assure that the military services are complying with DOD requirements for separating servicemembers with non-disability mental conditions. The fact that some military services were not aware of or had not yet aligned their policies or processes with updated DOD requirements for separating servicemembers with non- disability mental conditions is of particular concern. Because the services have been separating servicemembers based on outdated DOD policy, the military services may not have been affording all servicemembers with the protections that DOD intended through its recent updates of separation requirements for non-disability mental conditions. As a result, some servicemembers may have been separated for non-disability mental conditions inappropriately. It is also of concern that, although the Air Force reported its inability to separate National Guard members for non-disability mental conditions in 2013, it has made no progress in correcting this issue. Meanwhile, these members risk not receiving the protections intended by DOD's separation requirements. To improve identification of enlisted servicemembers separated for non- disability mental conditions, and to provide reasonable assurance that enlisted servicemembers, including Air Force National Guard members, are separated for non-disability mental conditions as appropriate and in accordance with DOD requirements, we recommend that the Secretary of Defense take the following six actions: Direct the Under Secretary of Defense for Personnel and Readiness and the Secretaries of the Army and the Navy and the Commandant of the Marine Corps to use the separation codes specific to a non- disability mental condition or develop another uniform method to track servicemembers who have been separated for specific non-disability mental conditions so that this information can be easily retrieved. Direct the Under Secretary of Defense for Personnel and Readiness and the Secretary of the Air Force to take steps to ensure there is an appropriately staffed process to identify and administratively separate enlisted National Guard members who are unable to function effectively in the National Guard because of a non-disability mental condition. Direct the Secretaries of the Army, the Air Force, and the Navy and the Commandant of the Marine Corps to update their services' administrative separation policies to be consistent with DOD regulations for those servicemembers separated for all non-disability mental conditions. Direct the Secretaries of the Air Force and the Navy and the Commandant of the Marine Corps to implement processes to oversee separations for non-disability mental conditions, such as reinstituting the requirement of annual compliance reporting of a sample of administrative separations, using current DOD policy requirements as review criteria for servicemembers of all military services and their Reserve components. Direct the Secretary of the Army to ensure that Army's planned oversight of separations for non-disability mental conditions is implemented and incorporates reservists and National Guard members separated for such conditions, or that Army implement another process to oversee such administrative separations using current DOD policy requirements as review criteria for all servicemembers, including reservists and National Guard members. Direct the Under Secretary of Defense for Personnel and Readiness to review any processes used by the military services to oversee such administrative separations to ensure compliance with DOD requirements. We provided DOD and VA a draft of this report for advance review and comment. DOD provided written comments, which we have reprinted in appendix II. DOD generally concurred with our six recommendations. Regarding our recommendation that DOD direct the Secretaries and Commandant to use the existing separation codes specific to a non- disability mental condition or develop another uniform method to track such servicemember separations, DOD provided several reasons why it would not use the existing separation codes specific to non-disability mental conditions, including the possible stigmatization of the servicemember, but DOD agreed with the need to develop a method to uniformly track such separations. In its comments, DOD did not outline how it would develop a method to track these servicemember separations, nor when it would implement this or other of our recommendations. DOD and VA also provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees; the Secretary of Defense; the Secretaries of the Army, the Air Force, and the Navy; the Commandant of the Marine Corps; the Under Secretary of Defense for Personnel and Readiness; the Secretary of Veterans Affairs; and other interested parties. In addition, this report is available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. Like any veteran separated from military service under other than dishonorable conditions, veterans separated for non-disability mental conditions are eligible to receive Department of Veterans Affairs (VA) health care benefits, if they meet certain service requirements. Generally, servicemembers must have served 24 continuous months, or the full period for which they were called or ordered to active duty, in order to be eligible to receive VA health care benefits. Once VA determines the eligibility of veterans who have applied for VA health care, it assigns them to an enrollment priority group. Generally, VA assigns veterans separated for non-disability mental conditions to priority groups 5 through 8. VA assigns the veterans as follows: If the veteran has served in an imminent danger pay (IDP) area: the veteran is afforded what is known as enhanced enrollment status and is generally assigned to priority group 6. The veteran is not subject to copayments for visits or medications for conditions potentially related to their service in an IDP area, such as physical The veteran remains enrolled as injuries incurred while in service.priority group 6 for 5 years after discharge from the military. If during this 5-year, post-discharge period an eligibility status is gained that affords enrollment in a higher priority group, such as the finding of a compensable service-related medical condition, the veteran is immediately moved to the higher priority group. Once the 5-year term has ended, the veteran remains enrolled in the VA health care system but his priority for enrollment is reassessed and the veteran may be shifted to priority group 5, 7, or 8 depending on his household income. If the veteran has not served in an IDP area: the veteran is assigned to priority group 5, 7, or 8 based on income level. Veterans enrolled in these priority groups must agree to pay applicable copayments. Veterans remain enrolled in the VA health care system but are reassessed annually, and placed in a priority group based on the veteran's household income. (See fig. 1) Once assigned a priority group and enrolled in VA's health care system, the veteran is eligible to receive VA's medical benefits package, which covers most of VA's medical services such as preventive care, and outpatient and inpatient diagnostic and treatment services, and includes services for mental health conditions. In addition to the contact named above, Marcia A. Mann (Assistant Director), Zhi Boon, Deirdre Brown, Cathleen J. Hamann, Lisa Opdycke, Vikki Porter, and Laurie F. Thurber were major contributors to this report. Jacquelyn Hamilton provided legal support.

Non-disability mental conditions, such as personality disorders, can render a servicemember unsuitable for military service and can lead to an administrative separation. GAO was mandated to report on non-disability mental condition separations. This report examines the extent to which (1) DOD and the military services are able to identify the number of enlisted servicemembers separated for non-disability mental conditions, and (2) the military services are complying with DOD requirements when separating enlisted servicemembers for non-disability mental conditions, including personality disorders, and how DOD and the military services oversee such separations. GAO analyzed DOD and the military services' separation policies, policies related to tracking separations, reports the military services submitted to DOD regarding compliance with separation requirements, and interviewed DOD and military service officials. The Department of Defense (DOD) and three of the four military services--Army, Navy, and Marine Corps--cannot identify the number of enlisted servicemembers separated for non-disability mental conditions--mental conditions that are not considered service-related disabilities. For most non-disability mental condition separations, these services use the broad separation code, "condition, not a disability," which mixes non-disability mental conditions with non-disability physical conditions, such as obesity, making it difficult to distinguish one type of condition from the other. In contrast, the Air Force is able to identify such servicemembers because it uses all five of the separation codes specific to non-disability mental conditions. DOD policy requires the military services to use a separation code so that DOD can track and analyze separations. Moreover, federal standards for internal control state that all transactions need to be clearly and accurately documented and readily available for examination when needed. The three services had varying reasons as to why they use the broad separation code. For example, Army officials believed that stating in servicemembers' discharge papers that they were discharged for non-disability mental conditions might stigmatize them with future employers. However, DOD stated that there are ways to protect servicemembers in this regard by providing them with discharge papers that are more general and that do not disclose specific reasons for discharge. By not systematically identifying or periodically evaluating the number of separations for non-disability mental conditions, DOD and the services cannot assess how well the separation policy and process are working or inform key stakeholders, including the Congress, about separation frequency, trends, and other data. The military services lack separation policies that address all of DOD's eight requirements for separating servicemembers with non-disability mental conditions; both DOD and the services also lack oversight over such separations. From fiscal years 2008 through 2012, DOD required the services to report on their compliance with DOD requirements for personality disorder separations, one of the non-disability mental conditions. Most of the services reported by fiscal year 2012 that they were not compliant with all eight requirements and many of the 20 reports contained incomplete and inconsistent information. For example, 19 reports were missing information on reserve members. DOD discontinued these reports and did not institute any other oversight, which is inconsistent with the internal control standard for monitoring. GAO also found, based on a review of the services' separation policies, that the services have not updated their policies to meet all DOD requirements for non-disability mental condition separations. For example, Navy officials stated that they were unaware that DOD separation policies had changed since 2008 until GAO's review. DOD officials stated that the military services are responsible for conducting oversight of their separation processes; however, GAO found that the military services do not have processes to oversee non-disability mental condition separations. Without up-to-date and consistent policies and oversight processes, DOD and the military services cannot ensure that servicemembers separated for non-disability mental conditions have been afforded the protections intended by DOD's separation requirements and that servicemembers have been appropriately separated for such conditions. GAO recommends that DOD and the military services develop a method to identify the number of servicemembers separated for non-disability mental conditions and take a number of actions to ensure that their policies and processes can ensure that servicemembers are appropriately separated for non-disability mental conditions in accordance with DOD's separation requirements. DOD generally concurred with GAO's recommendations, but did not provide information on how or when it plans to implement the recommendations.

In 1995, DOD's TMA introduced TRICARE's purchased care system. Since then, TMA has implemented three generations of contracts to support that system. The first generation of TRICARE contracts included seven MCSCs that covered 11 geographic health care regions nationwide. In 2001, GAO testified about the acquisition process for TRICARE's first generation of MCSCs, reporting that TMA's approach to the acquisition process for these contracts resulted in administrative challenges and contributed to funding shortfalls. In 2002, TMA made changes to its second generation of TRICARE MCSCs, consolidating the number of regions from 11 to 3, and reducing the number of MCSCs from seven to three. TMA also changed the management and oversight of TRICARE's purchased care and direct care systems through the development of a governance plan. The plan established a new, regional governance structure, including the creation of TRICARE regional offices to manage the three newly established U.S. regions: North, South, and West. TMA retained the three regions for the third generation of TRICARE MCSCs. In 2008, TMA issued a request for proposals (RFP) and six offerors submitted seven proposals--two proposals in the North region, three in the South region, and two in the West region. One offeror submitted a proposal in both the South and West regions. The RFP provided that an offeror could not receive an award for more than one of the three U.S. regions. Therefore, TMA awarded one regional contract to three different offerors. TMA initially awarded a contract to Aetna Government Health Plan (Aetna) in the North region, UnitedHealth Military & Veterans Services (UnitedHealth) in the South region, and TriWest Healthcare Alliance Corporation (TriWest) in the West region. Each award decision was protested; protests were filed with GAO in the North and South regions, and an agency-level protest was filed in the West region. As a result of sustained decisions in all three regions, TMA implemented corrective actions to address the recommendations in the post-award bid protest decisions and announced different awards in all three regions. Specifically, Health Net Federal Services (Health Net), the incumbent contractor, was awarded the North region MCSC; Humana Military Healthcare Services (Humana), also an incumbent contractor, received the South region MCSC; and UnitedHealth, a non-incumbent contractor, received the West region MCSC. The award decisions in the South and West region were protested, but withstood these challenges when the protests were denied. Federal regulations--the FAR and DFARS--largely defined the acquisition process TMA used to obtain health care services through TRICARE's third generation MCSCs. This acquisition process included steps necessary to plan for, develop, and award these contracts. TMA policy provided further guidance on the acquisition planning and process steps beyond what was required in the federal regulations. This included developing additional documentation and obtaining additional approvals from senior acquisition officials within TMA, as well as conducting peer reviews of the acquisition process. TMA's acquisition staff conducted a three-phased approach to the contract award process--(1) planning the acquisition, (2) issuing the RFP and soliciting responses, and (3) awarding the contracts--for TRICARE's third generation MCSCs. (See fig. 1.) Acquisition planning. According to a senior TRICARE acquisition official, staff in the former TMA Requirements Branch developed requirements for TRICARE's third generation MCSCs during the acquisition planning phase. This senior official explained that the Requirements Branch was disbanded in 2009 because TMA leadership officials determined that the responsibility for developing requirements should be located within the program management office requiring the services and not TMA's acquisition office. An official who participated in the third generation MCSCs' acquisition process told us that the Requirements Branch reviewed the contract requirements of the second generation MCSCs, as well as any modifications, as a starting point for developing the requirements for the third generation MCSCs. TRICARE acquisition officials developed one document that combined the acquisition strategy and plan for the third generation MCSCs. The document outlined a statement of need that identified why health care services were being acquired and the objectives to be achieved. The document also specified activities, such as market research, TMA would undertake prior to issuing an RFP. Market research was accomplished by publishing requests for information, which led to meetings between TMA and companies in the health care industry to collect information and feedback about the acquisition. TMA conducted further market research by sharing the draft RFP with companies in the industry to solicit feedback on the RFP, which included the proposed contract requirements. TMA also developed a source selection plan, which defined the evaluation factors and subfactors, and how much weight or importance should be assigned to each factor and subfactor when making a source selection. In addition, the plan identified the source selection team--key individuals participating in the evaluation and source selection process, as well as the procedures to be followed. Request for proposals. Following the acquisition planning phase, TMA issued an RFP. The RFP documented TMA's requirements, including the contract type, significant contract dates, pricing arrangements, and the criteria to be used to assess offerors' proposals. The RFP also documented information presented in both the acquisition and the source selection plans. Award. Once proposals were received, the proposals were evaluated by the source selection team consisting of four primary entities: the teams that comprised the Source Selection Evaluation Board (Evaluation Board), the group that made up the Source Selection Advisory Council (Advisory Council), an individual serving as the Source Selection and an individual serving as the Authority (Selection Authority),Procuring Contracting Officer (Contracting Officer). Each entity had specific tasks to complete during the award phase and performed these in a specific order. (See fig. 2.) TMA used a process established in the source selection plan to evaluate offerors' proposals. To accomplish this, Evaluation Board teams reviewed offerors' proposals against the three RFP evaluation factors and their relevant subfactors. The evaluation factors, in descending order of importance, were: (1) technical approach, (2) past performance, and (3) price/cost. These evaluation factors were developed to target critical aspects of the program for review and evaluation. The Evaluation Board evaluated each proposal against these factors. Ratings were assigned to each of the offerors' proposals under the technical and past performance evaluation factors, and each offeror's total proposal price was determined during the price/cost evaluation. The source selection team used a best- value tradeoff process to compare the relative merits of the offerors' proposals under the various evaluation factors. The RFP provided that the technical approach and past performance factors, combined, were significantly more important than the price/cost factor, which allowed TMA to accept other than the lowest priced proposal in favor of a technically superior proposal in the best-value tradeoff decision. The technical approach factor was used to evaluate the offerors' proposed approach--how the offeror intended to deliver services to fulfill contract requirements. Under this factor, the RFP identified seven evaluation subfactors, including network development and maintenance (which encompassed the consideration of network provider discounts), and claims processing.rating and the subfactors were equally weighted during the evaluation. The technical evaluation team's responsibility was to evaluate how well an offeror's proposed approach met or exceeded TMA's minimum requirements for each subfactor. The past performance factor was used to evaluate an offeror's ability to supply services based on a demonstrated record of performance. If an offeror did not have relevant past performance, the Evaluation Board's past performance evaluation team was allowed to consider information from a predecessor company or parent organization. The subsequent ratings assigned to past performance considered each offeror's demonstrated recent and relevant record of performance to predict the offeror's likelihood of success in meeting the current contract requirements. The price/cost factor was used to evaluate whether the prices and costs in each offeror's proposal were reasonable and realistic. In evaluating proposals under the RFP's price/cost factor, the Evaluation Board was to arrive at a total evaluated price for each of the proposals and could also use the results of a price realism analyses in assessing performance risks. An official who participated in the third generation MCSC acquisition process told us that offerors were able to ask the Contracting Officer clarifying questions about the RFP and adjust their proposals based on those discussions. According to this official, after the Contracting Officer received the final proposal revisions, the Evaluation Board teams completed their evaluation and the Chair prepared the report. The Selection Authority considered information provided in the Evaluation Board report, as well as the recommendations presented in the Advisory Council report, and then selected the offeror whose proposal represented the best-value to the government. The final source selection decisions represented the Selection Authority's independent judgment, which in some instances deviated from the judgments made during the underlying evaluations. For example, in the 2009 award decision in the South region, the Selection Authority disagreed with the judgment of the Evaluation Board that the proposal of one offeror was more advantageous than the awardee's proposal under one of the technical subfactors, finding instead that the two proposals were equally advantageous under that subfactor. After TMA announced the awards to the selected offerors, post-award bid protests were filed by unsuccessful offerors. Peer reviews of the acquisition process for certain contracts became TMA policy in September 2008 after the issuance of the RFP for TRICARE's third generation MCSCs. Following bid protests in 2009, the Selection Authority requested that, as a best business practice, a peer review of the acquisition process for these contracts be conducted. The Deputy Director of Defense Procurement and Acquisition Policy documented in a memorandum the peer review team's findings related to the acquisition process, identifying some of the same issues that were raised in the bid protests, such as the adequacy of discussions during TMA's evaluation. The memorandum also included TMA's responses to the peer review team's concerns, citing whether TMA agreed or disagreed with each finding and why. If TMA agreed with a finding, it also identified how the issue would be addressed. According to a senior TRICARE acquisition official, post-award peer reviews are expected to be conducted before the exercise of each option- year period for each MCSC. This official explained that two independent post-award peer reviews of TRICARE's third generation MCSCs have been conducted. The first review conducted in March 2012 and the second in March 2013 found no significant issues or concerns regarding the performance of any of the MCSC contractors. Subsequent post-award peer reviews of the third generation MCSCs will be conducted concurrently on an annual basis prior to the exercise of future option-year periods. Documentation from the peer reviews is to be included as part of the acquisition file for TRICARE's third generation MCSCs. Bid protests were filed by unsuccessful offerors in all three TRICARE regions. Most of the bid protests raised issues related to TMA's evaluation of offerors' proposals under the three RFP evaluation factors: technical approach, past performance, and price/cost. There were six bid protests from offerors across the three TRICARE regions. Four offerors filed five separate bid protests with GAO, and one offeror filed an agency-level protest with TMA. Out of the six bid protests filed across the three TRICARE regions, two protests were sustained by GAO, one protest was sustained by TMA, and the remaining three protests were denied by GAO. In response to decisions and recommendations made in the sustained bid protest decisions, TMA implemented corrective actions that resulted in new award decisions in each of the three TRICARE regions. The new award decisions withstood subsequent bid protest challenges, which were filed in two of the three TRICARE regions, the South and the West. For TRICARE's third generation MCSCs, the offerors that filed the six bid protests raised various issues and each protest varied in the number of issues raised. However, a common theme cited by all offerors was TMA's evaluation of proposals under the three evaluation factors: technical approach, past performance, and price/cost. Of the three evaluation factors, offerors that filed bid protests most frequently challenged TMA's evaluation of proposals under the technical approach factor and, in particular, the subfactor under which TMA evaluated network provider discounts. Network provider discounts may result in reduced health care costs, and TMA was to consider an offeror's proposed network provider discounts, if any, during the evaluation of technical proposals under the network development and maintenance subfactor. Offerors challenged TMA's evaluation of network provider discounts in four protests, two of which were sustained and two of which were denied. In general, the issue concerned whether TMA properly evaluated offerors' proposed network provider discounts in evaluating the relative merit of competing technical proposals under the network development and maintenance subfactor. Offerors that filed bid protests also raised issues related to TMA's evaluation of proposals under the past performance and price/cost factors. For example, in one bid protest, the offeror that filed the protest claimed that TMA improperly evaluated the awardee's past performance based on the past performance of its affiliated companies. Additionally, in the same protest, the offeror that filed the bid protest also alleged that TMA conducted a flawed price realism analysis in evaluating the awardee's proposal under the price/cost factor. Offerors that filed bid protests sometimes raised issues that went beyond TMA's evaluation of proposals under specific evaluation factors. Other issues raised by offerors that filed bid protests included improper business practices, unfair competitive advantage, conflict of interest, improper source selection, inadequate discussions to resolve proposal weaknesses, and TMA's alleged failure to penalize offerors for not following RFP instructions regarding right of first refusal, page limits, and Medicare rate uncertainty. (See table 1.) Appendix I includes additional details on each of the six bid protests. TRICARE acquisition officials reported they have identified several areas where changes could be made to improve the acquisition process for future TRICARE MCSC acquisitions, including those scheduled to be awarded in 2018. According to TRICARE acquisition officials, preliminary lessons learned from the third generation acquisition process and resulting bid protests include (1) improvements in communication and documentation to increase transparency during the evaluation of the proposals and (2) increases to the length of the acquisition process to allow for additional time to evaluate proposals and for the transition from one MCSC to another. For TRICARE's third generation MCSCs, TRICARE acquisition officials told us the sustained bid protest decisions in all three TRICARE regions prompted them to take corrective actions and evaluate revised proposals. According to TRICARE acquisition officials, among the issues they considered was whether TMA had clearly communicated to offerors through the RFP how it would evaluate the technical approach factor, specifically the subfactor related to network provider discounts, and whether TMA had adequately documented discussions during its evaluation of the proposals. In response to the sustained bid protests, TRICARE acquisition officials told us they were able to identify some preliminary lessons learned, which they implemented during their evaluation of revised proposals in the South and West regions. TMA accomplished this in two ways. Communication: To more clearly communicate how TMA would evaluate proposals, TMA issued an amended RFP for the South and West regions and allowed offerors to submit proposal revisions. In the amended RFP, TMA added language to clarify how network provider discounts would be considered as part of the technical evaluation and the subsequent best value analysis. Documentation: To address the need for adequate documentation of discussions during the evaluation process, TRICARE acquisition officials who participated in the MCSC evaluation process told us they improved their documentation during the reevaluation of proposals in the South and West regions. Specifically, these officials said that they were more thorough in their evaluation of the revised proposals and more rigorous in documenting their discussions. Adequate documentation of discussions during the evaluation process ensured that the documentation accurately reflected the evaluation process that occurred and that all evaluations were conducted in accordance with the RFP. Additionally, one of these officials told us that TMA had incorporated these preliminary lessons learned from the third generation MCSC acquisition process in subsequent acquisitions. For example, TMA incorporated these preliminary lessons learned into the RFPs for TRICARE's three dental plans. Specifically, this official told us that in drafting the RFP for one of TRICARE's dental plans--the TRICARE Dental Program--officials made sure to clearly define how TMA planned to assess the evaluation factors in the RFP to ensure that potential offerors understood the scope and magnitude of how the evaluation factors would be considered for awarding the contract. TRICARE acquisition officials told us they also learned from the TRICARE third generation MCSC awards that more time may be required for the acquisition process. Specifically, officials said that additional time may be required to conduct proposal evaluations. In addition, officials said that the transition period may need to be longer to accommodate a change in contractors. TRICARE acquisition officials who participated in the evaluation of TRICARE's third generation MCSCs told us that TMA underestimated how much time was needed to evaluate proposals. Specifically, these officials told us that more time might be needed to conduct the evaluation of proposals under the technical approach factor because of the multiple evaluation subfactors that must also be considered. Out of the three evaluation factors--technical approach, past performance, and price/cost--the technical approach factor had the most subfactors. According to one TRICARE acquisition official, the number of technical subfactors made it more difficult to conduct the evaluation in the time allotted. This official suggested that for future MCSC acquisitions, DHA should consider whether all seven technical approach subfactors are Furthermore, the official stated that since some of these necessary.subfactors encompassed required administrative functions of the TRICARE Program and are laid out in its Operations Manual and other policy and guidance documents, offerors who are awarded the contract are expected to perform the required administrative functions. A senior TRICARE acquisition official told us that DHA is considering adding 2 or 3 months to the transition-in period for the fourth generation MCSCs to accommodate delays that may occur when responding to any bid protests that may be filed and transitioning from one contract to the next. This official explained that delays in initiating the contract performance periods for TRICARE's third generation MCSCs could potentially increase costs if option periods are added to align the MCSCs' end dates. The official explained that this is because terms for these option periods would be negotiated in a non-competitive environment, which may affect the government's ability to get the best value in terms of price and quality. Other factors can also add time to the transition from one generation of MCSCs to the next, according to TRICARE acquisition officials. For example, the start of the performance period for TRICARE's third generation MCSC in the West region was delayed because a decision on the bid protest in that region could not be made until TMA made a new source selection decision in the South region following a sustained bid protest. In particular, the agency held UnitedHealth's July 2009 West region protest in abeyance while TMA took corrective action following a sustained bid protest in the South region, where UnitedHealth was also an offeror. Because the same offeror could not win contract awards in more than one region, UnitedHealth's West region protest would have become moot if it received the South region award following TMA's evaluation of the revised proposals. After TMA awarded the South region contract to Humana in February 2011, UnitedHealth's agency-level protest in the West region was revived. A senior TRICARE acquisition official also told us that transition delays may affect the beneficiaries who rely upon the services provided by the MCSC contractor. Specifically, the official said that more time may be required to transition from an incumbent contractor to a new contractor. A new contractor may need additional time to implement services for TRICARE beneficiaries, whereas the incumbent contractor essentially provides a continuation of services. For example, beneficiaries reported problems with referral authorization as well as customer service when UnitedHealth assumed management of the TRICARE West region contract on April 1, 2013. Despite the implementation of lessons learned from TRICARE's third generation acquisition process and the related bid protests, TRICARE acquisition officials told us that they cannot confirm which, if any, of these lessons will be incorporated into the acquisition process for TRICARE's fourth generation MCSCs scheduled for 2018. However, these officials noted that the acquisition process for previous TRICARE MCSCs, including lessons learned from related bid protests, are generally considered when initiating the acquisition process for the next generation of TRICARE MCSCs. DHA began developing an acquisition plan for TRICARE's fourth generation MCSCs during the first quarter of fiscal year 2014, according to a TRICARE program official. We requested comments from DOD, but none were provided. We are sending copies of this report to the appropriate congressional committees, the Secretary of Defense, and other interested parties. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7114 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contribution to this report are listed in appendix II. There were six bid protests filed by unsuccessful offerors across the three TRICARE regions. Out of the six bid protests filed across the three TRICARE regions, two protests were sustained by GAO, one protest was sustained by the TRICARE Management Activity (TMA), and the remaining three protests were denied by GAO. In response to decisions and recommendations made in the sustained bid protest decisions, TMA implemented corrective actions that resulted in new award decisions in each of the three TRICARE regions.subsequent bid protest challenges that were filed in two of the three TRICARE regions, the South and the West. The new award decisions withstood This appendix provides summary information regarding the issues raised in the six bid protests. With respect to sustained bid protests, we describe only the issues sustained and not the issues denied, which did not form the basis for the ultimate decision in the case. In addition, we categorized protest issues at the level of evaluation factors, which were (1) technical approach, (2) past performance, and (3) price/cost. In some protests, unsuccessful offerors raised issues that went beyond the evaluation of proposals. We used the term "other" to encompass any protest issue that was not specific to the evaluation of a proposal under one of the three request for proposal (RFP) evaluation factors. Health Net Federal Services (Health Net) filed two bid protests challenging the award to Aetna Government Health Plans (Aetna) in the North region in July 2009. GAO sustained one of the two protests and recommended that TMA reevaluate proposals and take other actions consistent with the bid protest decision.award to Aetna based on GAO's decision sustaining the protest and made an award to Health Net, the incumbent contractor, which is currently performing in the North region. (See fig. 3.) In the first bid protest, Health Net contended that TMA violated federal procurement law by improperly disclosing Health Net's proprietary pricing information prior to the award of the contract, which, for purposes of this report, we have classified in the category of "other" protest issues that go beyond the evaluation of proposals. GAO denied the bid protest as follows. Other. Health Net alleged that TMA posted Health Net's pricing and proposal information on a public website, and also provided the information to Congress without disclosing that the information was competitively sensitive. GAO recognized that serious errors had occurred, but determined that the Contracting Officer had reasonably concluded that the competition was not compromised, in part because the website disclosure did not occur until after final proposals were due. Therefore, Aetna--Health Net's competitor--could not have used the information to its advantage. In the second protest, Health Net successfully challenged the award of the contract to Aetna on the basis of a number of issues including TMA's evaluation of proposals and possible conflicts of interest. GAO sustained the bid protest based on the following reasons. Technical approach. Health Net argued that TMA failed in its evaluation to adequately account for the network provider discounts associated with its existing TRICARE network. GAO agreed and sustained this protest issue because TMA had not properly accounted for the potentially significant cost savings to the government that would result from Health Net's proposed network provider discounts. Past performance. Health Net contended that TMA improperly assigned the highest past performance rating to Aetna's proposal based on the past performance of its affiliated companies. GAO agreed and sustained this protest issue because TMA did not establish which of these affiliated companies were involved in the prior contracts or the roles, if any, that each of the affiliated companies would play in performing the TRICARE contract. In addition, GAO found that TMA failed to consider the fact that the contracts previously performed by the affiliates--evaluated as part of the past performance factor--were not comparable in size to the TRICARE managed care support contract (MCSC). Price/cost. Health Net contended that TMA's evaluation of Aetna's proposal and subsequent price realism analysis were flawed. GAO agreed and sustained this protest issue because TMA did not reasonably evaluate whether Aetna's staffing plan, as related to its price/cost proposal, reflected a lack of technical understanding or proposal risk. GAO also found that TMA had not reasonably considered whether Aetna's proposal to hire a high percentage of incumbent staff at reduced wages was realistic. Other. Health Net contended that Aetna gained an unfair competitive advantage in competing for TRICARE's MCSC in the North region because Aetna had retained a former senior TMA official to assist with the preparation of its proposal. GAO found that the official had access to proprietary information related to Health Net's performance of its incumbent contract and that this created at least the appearance of impropriety. GAO sustained the protest on the grounds that the Contracting Officer should have reviewed the matter, but did not do so because it was not brought to his attention. There were two bid protests in the South region. The first protest was filed by Humana Military Healthcare Services (Humana) in July 2009 challenging TMA's award to UnitedHealth Military & Veterans Services (UnitedHealth). GAO sustained this protest and recommended that TMA reevaluate proposals consistent with its bid protest decision and make a new source selection decision. In implementing GAO's recommendations, TMA issued an amended RFP and allowed offerors to submit revised proposals. TMA then reviewed the revised proposals and, based on this evaluation of revised proposals, awarded the contract to Humana, a different offeror than was initially awarded the contract. After TMA announced this award, a second protest was filed in the South region by UnitedHealth in March 2011. GAO denied this second protest. Humana--the incumbent contractor--is the current contractor for the South region. (See fig. 4.) In its protest, Humana contended that TMA failed in its evaluation to adequately account for the network provider discounts associated with its existing TRICARE network. GAO agreed and sustained the protest as follows. Technical approach. Humana claimed that TMA, during its technical evaluation, did not adequately account for the potentially significant cost savings to the government that would result from Humana's network provider discounts. GAO recommended that TMA reevaluate the proposals consistent with GAO's decision and make a new source selection decision. Following the sustained GAO decision in the Humana bid protest, TMA amended and reissued the RFP in the South region and provided the offerors an opportunity to revise their proposals, including providing more information about network provider discounts. After evaluating the revised proposals, TMA selected Humana for the contract award. In its protest filed with GAO of TMA's contract award to Humana, UnitedHealth raised a number of issues involving TMA's technical evaluation of network provider discounts, as well as other issues related to its analysis of the price/cost evaluation factor and its failure to penalize offerors for not following RFP instructions. GAO determined that none of these issues had merit and denied the bid protest for the following reasons. Technical approach. UnitedHealth contended that TMA failed to consider the substantial risk related to Humana's ability to achieve its proposed network provider discounts. GAO found that TMA reasonably evaluated Humana's proposed network provider discounts and denied this aspect of UnitedHealth's protest. Price/cost. In challenging TMA's price realism evaluation, UnitedHealth argued that TMA should have assigned a greater risk level to Humana's revised proposal based on Humana's plan to significantly reduce underwriting fees during the revision process.reasonably assessed the risk associated with Humana's revised GAO found that TMA had underwriting fees and denied this issue. In addition, UnitedHealth argued that TMA failed to assign additional risk to Humana's proposal based on the reduced staffing level of its claims processing subcontractor. GAO found that TMA adequately reviewed the subcontractor's proposal and factored it into its overall assessment. Other. UnitedHealth alleged that Humana failed to follow the RFP requirements regarding the following issues: Right of first refusal: UnitedHealth argued that Humana's proposal deviated from the RFP requirement that military treatment facilities be given a right of first refusal to patient referrals and that TMA should have rejected the proposal or deemed it a significant weakness. GAO declined to consider UnitedHealth's claim that Humana improperly deviated from these requirements because UnitedHealth had made a contradictory argument in the first South region bid protest. Page limits: UnitedHealth contended that Humana failed to adhere to a page limit on proposal revisions. GAO denied UnitedHealth's argument, finding that Humana met the page limit in revisions to its technical proposal. Medicare rates: UnitedHealth alleged that Humana did not comply with an RFP requirement to acknowledge and discuss the linkage between TRICARE reimbursement rates and Medicare rates, which are uncertain and subject to change. In denying this issue, GAO rejected UnitedHealth's interpretation of the RFP as requiring Humana to assume that Medicare rates would decline. There were two bid protests in the West region. The first protest was an agency-level protest filed by UnitedHealth in July 2009 challenging the award to TriWest Healthcare Alliance Corporation (TriWest). This protest was sustained and included a recommendation that TMA reevaluate proposals and make a new source selection decision that was reasonable and consistent with the RFP. In implementing this recommendation, TMA issued an amended RFP and allowed offerors to submit revised proposals. TMA then reviewed the revised proposals and, based on this evaluation of revised proposals, awarded the contract to UnitedHealth, a different offeror than was initially awarded the contract. After TMA announced the new award, a second West region protest was filed by TriWest in March 2012. GAO denied the second protest and UnitedHealth is the current contractor for the West region. (See fig. 5). In the first West region bid protest, an agency-level protest filed with the Contracting Officer, UnitedHealth claimed that TMA did not conduct meaningful discussions that would have enabled UnitedHealth to correct a documented weakness in its technical proposal and that this weakness unreasonably tipped the source selection decision in favor of TriWest. For purposes of this report, we have classified this issue as "other" rather than a proposal evaluation issue, which TMA sustained as follows. Other. UnitedHealth alleged that TMA failed to conduct meaningful discussions to alert UnitedHealth to a weakness assigned to its proposal under one of the technical approach evaluation subfactors involving claims processing. Under this subfactor, TMA had assessed a weakness in UnitedHealth's plan for dealing with claims submitted by providers that were outside the West region. After reviewing the record of discussions between TMA and UnitedHealth during the contract evaluation process, TMA's Contracting Officer determined that TMA had not conducted meaningful discussions in the area of claims processing. In addition to TMA's failure to identify the proposal weakness through meaningful discussions, the Contracting Officer also found that the weakness was so minor it should not have been the tipping factor in selecting TriWest for the award. As a result, the Contracting Officer sustained the protest. Following the sustained agency-level decision in the UnitedHealth bid protest, TMA issued a series of amendments to the RFP in the West region and allowed offerors to submit revised proposals. After evaluating the revised proposals, TMA selected UnitedHealth for the contract award. After the award was made to UnitedHealth in the West region, TriWest-- the other remaining competitor--filed a protest with GAO. TriWest raised a number of issues involving TMA's evaluation of proposals and source selection decision. GAO determined that none of these issues had merit and denied the bid protest for the following reasons. Technical approach. TriWest contended that TMA did not give its proposal sufficient credit for its network provider discounts, and that the discounts offered by UnitedHealth were overstated. GAO found no basis to question TMA's evaluation of either offerors' network provider discounts. Past performance. TriWest challenged the past performance rating TMA assigned to UnitedHealth on several grounds, including the relevance of its past work and the scope of the past performance information TMA considered. TriWest also challenged its own past performance rating. GAO found no merit to these allegations. Price/cost. TriWest asserted that TMA's evaluation of UnitedHealth's labor rates and subsequent price realism analysis was based on outdated information. GAO concluded that TMA conducted a proper price realism analysis of UnitedHealth's proposal. Other. TriWest argued that TMA's Selection Authority gave undue weight to some of the evaluation subfactors, even though the RFP said that all subfactors would be weighted equally. GAO found, however, that the Selection Authority properly relied on those subfactors thought to be key discriminators in selecting UnitedHealth for the award. In addition to the contact name above, Marcia A. Mann, Assistant Director; Jacob L. Beier; Kathryn A. Black; Sarah C. Cornetto; Victoria C. Klepacz; Deitra H. Lee; Laurie L. Pachter; and William T. Woods made key contributions to this report.

DOD provides certain health care services through its TRICARE Program, which complements the health care services provided in military treatment facilities. DOD acquires these health care services through MCSCs with private sector companies. As of October 1, 2013, DOD's Defense Health Agency is responsible for awarding, administering, and overseeing TRICARE's MCSCs. Prior to this date TMA handled these duties. DOD's health care costs have more than doubled from $19 billion in fiscal year 2001 to its fiscal year 2014 budget request of more than $49 billion. Senate Report 112-173, which accompanied a version of the National Defense Authorization Act for Fiscal Year 2013, cited concerns with the growth of DOD's health care costs and identified private sector health care contracts as an area for potential savings and efficiencies. The Senate report mandated that GAO review DOD's process for acquiring TRICARE's MCSCs. This report examines: (1) TMA's acquisition process to award TRICARE's third generation MCSCs; (2) the extent to which issues were raised in the bid protests involving these MCSCs, including identifying any common themes; and (3) lessons learned from the acquisition process to award these MCSCs and how these lessons may be used in future acquisitions. GAO reviewed relevant federal statutes, regulations, policy documentation, and the bid protest decisions for TRICARE's third generation MCSCs. GAO also interviewed TRICARE officials about the acquisition process and lessons learned. The TRICARE Management Activity (TMA) within the Department of Defense (DOD) used the acquisition process prescribed by federal regulations to acquire health care services for the TRICARE Program through the third generation of TRICARE's managed care support contracts (MCSC). This process included a three-phased contract award process outlined in the figure below. TMA policy also defined steps for the acquisition process beyond what was required in the federal regulations, including developing additional documentation and obtaining additional approvals from senior TRICARE acquisition officials. For example, peer reviews of the acquisition process are conducted and documented for certain DOD contracts, including TRICARE's MCSCs. TMA awarded a contract for each TRICARE region (North, South, and West), but challenges (bid protests) to the agency's award decisions were filed by unsuccessful offerors in all three regions. Of the six bid protests filed, three were sustained and three were denied. Following the resolution of the bid protests, the MCSCs in all three regions were awarded to a different offeror than was initially awarded the contract. The offerors who filed the bid protests cited various issues, most frequently TMA's evaluation of proposals. For example, four bid protests challenged TMA's evaluation of offerors' proposed network provider discounts, which are discounts of provider payment rates negotiated by offerors to reduce overall health care costs to the government. TRICARE acquisition officials said that sustained bid protests and TMA's implementation of corrective actions prompted them to identify lessons learned where changes could be made to improve the acquisition process for subsequent TRICARE MCSCs. Lessons learned included (1) improvements in communication and documentation to increase transparency during the evaluation of proposals and (2) increases to the length of the acquisition process to allow for more time to evaluate proposals and for the transition from one MCSC to another. TRICARE acquisition officials also said that some of these lessons have been applied in other contracting activities; however, they could not confirm which, if any, of these lessons will be incorporated into the acquisition process for the next generation of TRICARE MCSCs, scheduled for 2018. GAO requested comments from DOD on the draft report, but none were provided.

Responding to the massive and expensive failure of federally insured savings and loans in the mid-1980s, Congress and the administration examined government-sponsored enterprises to ensure that they were operating in a manner that protected the taxpayers' interest and minimized the risk that these entities would fail. Prior GAO reports noted that the enterprises' ties to the government had weakened private market discipline to the point that creditors believed the government would likely assist an enterprise through financial difficulties, even though the government has no legal obligation to do so. This expectation is not without foundation; in 1987, Congress approved $4 billion to help the ailing Farm Credit System. According to a report from the Senate Committee on Banking, Housing, and Urban Affairs, this perception is based on the structure and privileges of the enterprises and the special treatment of their securities. The enterprises were created by statute, are exempt from state and local income taxes, and each has a line of credit with the Treasury of $2.25 billion. Their securities are issued and paid through the facilities of the Federal Reserve Banks and are eligible for purchase by the Federal Reserve, for unlimited investment by Federal Reserve member banks and federally insured thrifts and as collateral for public deposits of the U.S. government and most state and local governments. As a result, the enterprises' debt trades at yields only marginally above those on Treasury debt of comparable maturity. This implicit credit enhancement allows the enterprises to operate with relatively little capital. The enterprises' federally established charters set out specific purposes that they are to address. They are to provide stability in the secondary market of residential mortgages, respond appropriately to the private capital market, and provide ongoing assistance to the secondary market for residential mortgages. They are also to promote access to mortgage credit throughout the nation by increasing the liquidity of mortgage investments and improving the distribution of investment capital available for residential mortgage financing. For these reasons, the government has an interest in seeing that these enterprises are managed and operated in a prudent and financially sound manner. Both enterprises have been highly profitable for several years,but Congress recognized that both may not always remain as profitable and well managed as they are today. Consequently, Congress reformed the enterprises' regulatory structure and established capital requirements by passing the Federal Housing Enterprises Financial Safety and Soundness Act of 1992. According to the Senate report accompanying the bill, the capital provisions are designed to ensure that the enterprises are financially sound. The primary emphasis of these provisions is on a risk-based capital standard that reflects risks the enterprises assume. The new regulatory structure was designed to address concerns over HUD's inadequate regulation and supervision of the enterprises. The act established OFHEO as an independent entity within HUD. The act reserved for the Secretary of HUD certain authorities relating to HUD's responsibility to oversee the enterprises' efforts to meet housing goals.But the act also clarified that the duty to ensure that Fannie Mae and Freddie Mac are adequately capitalized and operate in a safe and sound manner, consistent with the achievement of their public purposes, belongs to OFHEO. Consequently, the act specifically delegated other responsibilities and authorities to the Director of OFHEO. OFHEO was intended to operate separately from HUD and be staffed with experts in financial management or financial institution oversight. OFHEO is under the management of a presidentially appointed and Senate-confirmed Director. The act provided the Director with numerous exclusive authorities (i.e., without the review and approval of the Secretary of HUD), such as powers to examine the operations of the enterprises, determine capital levels, assign the enterprises capital classifications, and take certain enforcement actions. The act also gave the Director exclusive authority to manage OFHEO, including establishing and implementing annual budgets and hiring personnel. Thus, the Director leads and directs OFHEO's activities by setting internal and external policy, managing overall operations, and serving as the chief spokesperson for the organization. As of February 1995, OFHEO's six components reported to the Director and Deputy Director. Figure 1 illustrates OFHEO's organizational structure. Three line functions are directly responsible for carrying out OFHEO's mission: The Office of Examination and Oversight (OEO) is responsible for designing and conducting annual on-site examinations of Fannie Mae and Freddie Mac, as required by law, and performing additional examinations as determined by the Director. Research, Analysis and Capital Standards (RACS) is responsible for developing and implementing financial "stress tests," which use interest rate and credit risk scenarios prescribed in the act to determine the enterprises' risk-based capital requirements. This unit is responsible for conducting research and financial analysis on issues related to the enterprises' activities, such as simulating Treasury yields and associated interest rate indices. The General Counsel has responsibility for preparing the regulations required by the act and advising the Director on legal issues, including financial institution regulatory issues, applicable securities and corporate law principles, and administrative and general legal matters. Three staff functions support OFHEO's mission: Finance and Administration is responsible for ensuring that OFHEO has the infrastructure to function independently. This unit is to provide human resources management, budget formulation and execution, financial and strategic planning, contracting and purchasing, office automation, travel, records and document security, and related administrative support services. Finance and Administration is also responsible for developing annual budgets and serving as the liaison with the Office of Management and Budget. The Office of Chief Economist is responsible for providing and coordinating economic and policy advice to the Director on all issues related to the regulation and supervision of the enterprises. This office is also to direct and conduct research to assess the impact of issues and trends in the housing and mortgage markets on OFHEO's regulatory responsibilities. The Office of Congressional and Public Affairs is responsible for handling public and press inquiries, briefing Members of Congress and staff on matters relating to OFHEO, monitoring legislative development, and bringing congressional concerns to the attention of the Director. OFHEO's staffing has grown slowly but steadily since the Director, its first employee, was sworn in on June 1, 1993. At the end of fiscal year 1993, five other employees were on board. According to testimony from the Director in October 1993, recruiting specialized staff was slowed somewhat by OFHEO's need to first do such fundamental things as obtain hiring authority, develop procedures, and obtain office space. By September 1994, however, OFHEO had 37 staff on board. And in February 1995, OFHEO's staff had grown to 53. OFHEO's budget projects filling 69 positions in fiscal year 1996. Table 1 compares the distribution of positions among OFHEO's different units at the end of fiscal year 1994 with that projected for fiscal year 1996. Relative to other federal financial regulatory agencies, OFHEO is a small organization. In testimony before the House Banking Committee in October 1993, OFHEO's Director spoke about the unique challenge facing OFHEO in regulating two entities as large, complex, and sophisticated as Fannie Mae and Freddie Mac. She compared OFHEO's regulatory task with that of other federal financial regulatory agencies. For example, OFHEO's fiscal year 1994 budget funded 45 positions to oversee the enterprises (1 employee for every $23.1 billion in regulated assets). As a point of comparison, 2,500 Office of Thrift Supervision (OTS) employees oversaw institutions with $800 billion in assets (1 employee per $0.3 billion in assets). To address that challenge, OFHEO's philosophy was to create a lean and flat organization that would attract and retain a highly qualified, diverse staff with sophisticated financial, legal, and supervisory expertise. Most OFHEO expenses cover personnel and contractor services. For fiscal year 1996, OFHEO estimates that it will spend $7.9 million (53.3 percent of its $14.9 million total) on personnel services (i.e., expenses related to personnel compensation and benefits, but exclusive of contractors). According to OFHEO, it bases salaries and benefits on market rates for the required technical expertise comparably with those of other federal banking regulatory agencies. The second largest category of expenses ("Other services") generally covers OFHEO's contractor services. In fiscal year 1996, OFHEO expects to spend $4.4 million (29.7 percent) on specialized technical services associated with developing and maintaining its research capability and computer models, examination services, and specialized legal services. All other expenses constitute a smaller, but growing, proportion of OFHEO's total obligations. These expenses cover such fundamental but crucial items as computer acquisition, travel, and rent, which fluctuate with changing numbers of staff and contractors on location. Table 2 shows actual and estimated OFHEO obligations for fiscal years 1994 through 1996. Although OFHEO's financial plans and forecasts are to be included in the budget of the United States and in HUD's congressional justifications, it is not funded with tax dollars through the congressional appropriations process. Rather, the act requires the enterprises to pay annual assessments to cover OFHEO's costs. OFHEO's fiscal year 1996 budget estimated that it would obligate nearly $0.6 million less than was estimated for operations in fiscal year 1995. That estimate reflects a diminished reliance on other contractor services, especially in support areas, partially offset by increases in rent associated with the need for additional space and in personnel expenditures associated with four additional OFHEO positions. Because OFHEO continues to develop its major management systems, we limited the scope of our work for this report to the planning and initial implementation of those systems. As of February 1995, none of OFHEO's major management systems had been completely implemented. Consequently, we did not evaluate their ultimate implementation or effectiveness. To develop our information, we interviewed OFHEO's senior management and HUD officials and reviewed OFHEO management systems documentation, focusing on the policies and procedures relating to OFHEO's human resource management and accounting and financial control systems. We reviewed changes in these plans and systems that OFHEO made over time. We also reviewed OFHEO's plans for its organizational development, particularly its examinations and capital adequacy functions, along with its completed examinations of the enterprises and the advance notice of proposed rulemaking on the risk-based capital regulation. OFHEO provided written comments on a draft of this report. The comments are summarized on page 22 and reprinted in appendix I. We did our work at OFHEO and HUD in Washington, D.C., between September 1994 and February 1995. This review was done according to generally accepted government auditing standards. Before OFHEO's Director was sworn in on June 1, 1993, OFHEO had no employees, no structure, no physical location, no policies or procedures, and no plan. Much has changed since then. OFHEO has made steady progress toward establishing administrative and financial management systems and controls designed to enable it to operate independently of HUD. OFHEO has nearly finished designing its human resource management system, worked with HUD to meet its initial financial and accounting needs, and begun exploring alternative arrangements for "cross-servicing," through which OFHEO would contract with another agency to provide administrative and financial management services. According to its September 1994 operational workplan, OFHEO is basically on schedule developing and installing its infrastructure. OFHEO now faces the challenge of implementing its systems and resolving unforeseen difficulties. By February 1995, OFHEO had substantially completed the design of its human resource management system (called the Performance Evaluation Management System, or PEMS) and established milestones for pilot testing the system. OFHEO anticipates full implementation of PEMS at the beginning of fiscal year 1996. Rather than adopting HUD's or another agency's human resource management system, OFHEO developed its own. Based on recommendations of two consulting firms, OFHEO's performance management system is intended to enable it to respond to changing regulatory needs and ease its developmental operations. PEMS' broad pay band structure reflects three general design elements: (1) salaries to help OFHEO recruit technical expertise, (2) pay ranges to provide management flexibility to make pay decisions that reflect labor market pay while providing internal equity, and (3) occupational levels to be significantly and recognizably different. OFHEO classifies personnel by occupation and assigns them to one of seven pay bands. Occupations are based in part on the type of work done relative to OFHEO's mission, the nature and subject matter of the work, and the fundamental qualifications required. Pay levels and ranges are based on comparisons with similar occupations in other federal financial regulatory agencies. An individual's pay also depends on the complexity of the work, scope of responsibility, and supervisory content of the job. Changes in pay are to occur once a year, at the end of the review cycle. Individuals may receive pay increases within each pay band, unless they are at the band's ceiling. Those staff meeting qualifications for other occupations and demonstrating the ability to perform the relevant duties and responsibilities may also be promoted. In 1994, pay could range from $15,000 to $135,000. In March 1995, OFHEO was preparing to implement PEMS. Having obtained official approval of PEMS from the Office of Personnel Management (OPM) on February 23, 1995, OFHEO planned to implement PEMS in April 1995. OFHEO will abbreviate PEMS' initial performance cycle and begin regular, full-year cycles in fiscal year 1996. Compared to the progress made with PEMS, OFHEO has experienced greater difficulty in establishing its accounting and financial systems and controls. OFHEO has worked with HUD to meet its immediate needs, but OFHEO is still uncertain as to whether HUD can meet its accounting and financial systems requirements. As of February 1995, OFHEO was still considering either establishing its own systems or arranging for cross-servicing with another federal agency. OFHEO has established general requirements for its accounting and financial management system. According to OFHEO, the system must support all personnel and procurement components within an integrated automated accounting system and accommodate its classification and compensation system. In addition, the system must produce auditable financial statements. The system must maintain accounting records that accurately reflect expenses and income; provide monthly budget, accounting, and exception reports; and pay approved invoices. OFHEO has used HUD's accounting and financial systems since its inception but experienced various difficulties. In the procurement area, for example, OFHEO used the services of HUD's Office of Procurement and Contracts. According to OFHEO, HUD's office was not staffed to provide the expedited procurement processing OFHEO's start-up mode of operation required. OFHEO eventually hired its own procurement contracting officer and exercised independent contracting authority. To date, HUD has handled OFHEO's payroll and other personnel processing actions. OFHEO inputs its time and attendance data directly but uses HUD's contract with the National Finance Center in New Orleans to process its payroll. HUD has serviced OFHEO's other personnel processing needs (such as processing tax forms, health benefits enrollments, and direct deposit forms), but not, according to OFHEO, without problems. During OFHEO's early months of existence, HUD did not understand or appreciate the significance of OFHEO's Schedule A hiring authority and its authority to make independent appointments. This added considerable time to the processing of personnel actions, since individuals unfamiliar with OFHEO's exemptions subjected those actions to HUD's own internal review procedures. According to OFHEO, this processing relationship smoothed out over time. Senior OFHEO officials expressed dissatisfaction with HUD's accounting and financial management systems. For example, OFHEO experienced substantial delays in how HUD recorded OFHEO obligations and expenses. Additionally, HUD restricted access to its accounting system, limiting the ability of OFHEO's finance and administration staff to retrieve their data to support budget formulation and financial management activities. HUD staff also confused OFHEO with another HUD agency, the Office of Fair Housing and Equal Opportunity (FHEO), causing them to confuse financial transactions and misdirect financial reports. OFHEO had procedures and controls in place that enabled it to detect such problems. Consequently, HUD's errors were corrected and OFHEO ultimately was able to reconcile its fiscal year 1994 accounts. However, the lack of current accurate data during the year made it difficult for OFHEO to determine its unobligated balances on a monthly basis. In turn, this hampered OFHEO's ability to notify the enterprises with certainty what the next semiannual assessment would be. Over time, OFHEO has recognized improvements in the data provided by HUD's accounting system. Senior OFHEO officials told us that they have noted fewer errors and that HUD has been able to provide information in a more timely manner. According to the Director of Finance and Administration, OFHEO had a great degree of confidence in the accounting data on which it based its March 1, 1995, assessment of the enterprises. HUD officials acknowledged that some problems existed with the accounting system that processed OFHEO's financial data. They told us that HUD is replacing the system that generated many of the problems, and OFHEO is to be switched to the new system later in fiscal year 1995. According to those officials, the new system should fully meet OFHEO's needs and requirements, allowing OFHEO to access its financial data and generate its own unique reports. As of February 1995, OFHEO had not yet decided how it would meet its future administrative and accounting needs. OFHEO has not determined whether to continue using HUD systems, create and maintain its own, or contract those functions out to another federal agency. Initially, OFHEO had decided against devoting its own staff to these functions, believing that it would not be a cost-effective use of its limited resources. It approached nine other federal agencies, focusing on financial regulators because they have similar missions and compensation systems. OFHEO eventually determined that none of them would fully meet its needs. In some cases, OFHEO questioned the agencies' capacity. In other cases, the agencies responded that entering into a cross-servicing arrangement would not be practicable or cost-effective. According to a senior OFHEO official, the biggest problem involved the particular systems OFHEO had implemented because of exemptions in its statute, such as that exempting OFHEO from certain provisions of Title 5 of the U.S. Code, relating to classification and General Schedule pay rates. Resolving the cross-servicing issue is a priority for OFHEO's Director of Finance and Administration. Because OFHEO has been unable to identify another agency that has the resources to meet its unique accounting system needs, and because the quality of the accounting information from HUD has improved significantly, OFHEO is considering continued use of HUD accounting and financial management systems. OFHEO officials have also been encouraged by HUD's willingness to work with them to ensure that the new accounting system meets OFHEO's requirements and needs. OFHEO has made considerable progress in establishing its key functions--examining the enterprises' financial condition to ensure their financial safety and soundness as well as developing and implementing the required risk-based test to determine how much capital the enterprises need (the "stress test"). After having hired its key professional staff and establishing working relationships with the enterprises, OFHEO conducted its first examinations, purchased and installed the computer system needed to run the stress test, and obtained the data needed for the financial modeling and research that underlie the test. Additionally, OFHEO established plans to guide its work at least through the end of fiscal year 1995. OFHEO has met most of its legislated requirements, including making determinations of the enterprises' capital adequacy during the transition period prior to the release of the risk-based capital standards. Despite this progress, OFHEO has experienced delays, causing some important activities to fall behind schedule. For example, OFHEO did not meet the legislatively mandated deadline for issuing final regulations establishing the risk-based test of the enterprises' capital adequacy.OFHEO has established intermediate milestones and now expects to publish proposed stress test regulations in late 1995 and final regulations in 1996. These delays, while unexpected, are not unusual; most, such as hiring qualified staff and creating internal processes, seem related to establishing a new organization. OFHEO has taken steps to address each problem encountered. OFHEO has established its examination function, adopting a general examination methodology and setting out a 2-year workplan. In 1994, OFHEO completed its first examinations and began its second, along with some off-site supervisory monitoring activities. OFHEO has experienced some unexpected delays that are related to establishing a new organization. As a result of these setbacks, some activities scheduled to be done by the end of 1994 are behind schedule. The act gave OFHEO broad authority to examine the enterprises. The act requires OFHEO to do an annual on-site examination of each enterprise to evaluate its financial condition for ensuring financial safety and soundness. In addition, the act authorizes OFHEO to do other examinations necessary to ensure the financial safety and soundness of the enterprises. OFHEO plans to meet its mandate by doing a combination of on-site examinations and off-site monitoring. Examinations are to assess the safety and soundness of the enterprises and the adequacy of their books and records. Supervisory monitoring is the ongoing assessment of the enterprises' financial condition and performance. Monitoring projects include special studies of enterprise activities, quarterly company analyses, and the development of a call report. OFHEO uses a "top down" examination approach to identify the risks inherent in the enterprises' activities and to determine whether risks are prudently managed and controlled. This approach has three levels. First, OFHEO examiners are to meet and evaluate senior management, analyze strategic and business plans, determine the quality of internal and external audits, and verify records and control systems. Second, the examiners are to expand the examination to include further testing, statistical sampling, and analyses of the enterprises' systems. If the second-level review raises any questions, a team of examiners is to do a detailed third-level review of these concerns. By September 1994, OEO had planned its activities through calendar year 1995. According to this schedule, OEO would have seven or more projects ongoing at all times--at least two examinations at each of the enterprises, along with at least three supervisory monitoring projects. OEO's director characterized this workplan as "ambitious." Table 3 summarizes OEO's workplan from July 1994 through the end of 1995. It shows, for example, that during the first half of 1995, OEO staff are to complete "general," "specialty," and books and records examinations of both enterprises. In the general examination, OEO staff will (1) examine each enterprise's risk management by assessing the adequacy of management processes to identify, measure, monitor, and control the risk exposure of the enterprise; (2) examine a functional area of each enterprise's secondary market operations, such as its marketing or mortgage securitization; or (3) assess the adequacy of some aspect of each enterprise's business or product lines, such as its single- or multifamily guarantee programs. The specialty examination is to cover the enterprises' electronic data processing (EDP). The objective of these examinations is to ensure that EDP systems used by the enterprises are adequate, reliable, accurate, and operated within a secure environment. OFHEO plans to test major systems to verify the data and report integrity. In the books and records examination, OEO staff are to evaluate the accounting and auditing to determine the reliability of the enterprises' financial information. OEO's small staff has not been able to keep up with its workplan. OFHEO completed its first on-site examinations, focusing on the enterprises' use of off-balance sheet financial derivatives, in November 1994. OFHEO reported that the enterprises used derivatives for sound business purposes and that derivatives activities were consistent with the enterprises' objectives. OEO began its second examination of both enterprises, the corporate examinations, in October 1994 and anticipates completing those reports in April 1995, 4 months behind its original schedule. OEO has completed one part of its planned supervisory monitoring activities (an analysis of the enterprises' strategic and business plans). But two other activities that were scheduled to be done by the end of 1994--the development of OFHEO's call report and the third quarter company analysis of the enterprises--are also behind schedule. All activities planned for 1995 are also behind schedule. The reasons OFHEO has fallen behind seem related to complications in establishing a new organization. First, according to the director of OEO, OFHEO had trouble hiring qualified examination staff. Occasionally, OFHEO found it hard to attract qualified candidates, because it was new and not well known. According to OFHEO's Director, there are a limited number of individuals with the particular skills that OFHEO needs, forcing it to compete with other financial regulators for qualified staff. OFHEO also noted that it had difficulty competing with private salary offers. In addition, some employees who accepted employment with OFHEO were unable to begin as early as OFHEO management wanted. Second, OFHEO needed to establish its internal review processes to help ensure quality reporting. Upon completing its first examinations, the draft report was reviewed by key OFHEO management officials while developing a review procedure. OFHEO hopes to streamline its review process in the future. Finally, senior OFHEO officials told us that the amount of information from the enterprises that its staff needs to review is voluminous. OFHEO may have underestimated the time needed for its small examination staff (five staff examiners and regulatory specialists at the end of the calendar year) to review and understand such large amounts of information. On the other hand, according to the director of OEO, the initial examination activities have proven to be valuable exercises in building OFHEO's overall knowledge and expertise, which should help focus subsequent work. The act requires OFHEO to establish a risk-based capital test for the enterprises (the stress test) to determine the amount of capital the enterprises must hold. That amount must be adequate to last during a 10-year period (the stress period), which the act defines with specific parameters relating to credit risk, interest rate risk, new business, and other activities. The act defines an enterprise's required risk-based capital level as equal to the amount calculated by applying the stress test, along with an additional 30 percent to allow for management and operations risks. Using this test, OFHEO is then to determine the enterprises' capital adequacy, using classifications established in the act. Further, the act also required the Director to issue final regulations establishing the stress test within 18 months of the Director's appointment (i.e., by December 1, 1994). The Research, Analysis and Capital Standards section (RACS) is responsible for developing and implementing the stress test. By the end of fiscal year 1994, OFHEO had hired the majority of its RACS staff and completed the design, purchase, and installation of the computer hardware and software (called the Research Systems Environment, or RSE) needed to establish the financial simulation modeling capability to run the stress test. OFHEO has also begun developing the computer programs and databases that will allow it to simulate the enterprises' businesses for purposes of the stress test and other tasks, such as the analysis of various economic scenarios, new financial products, proposed policy initiatives, and new business scenarios. As of October 1994, RACS had received all historical data requested from the enterprises. Among other things, RACS staff has transformed the data into a form necessary for simulation modeling, created historical data sets, begun building the algorithms, and has started drafting parts of the description of the stress test. Despite these accomplishments, OFHEO did not meet the December 1, 1994, deadline imposed by its authorizing legislation regarding the development of the stress test. OFHEO published the Advanced Notice of Proposed Rulemaking in the Federal Register on February 8, 1995, announcing its intention to develop the regulation and soliciting public comment on a variety of issues. Following a 90-day comment period, OFHEO will consider those comments and incorporate them as appropriate into a proposed rule to be published later in 1995. OFHEO expects to publish the final regulations in 1996. The enterprises will then have 1 year to bring their capital levels into compliance. Although not meeting the legislatively mandated deadline for issuing final regulations establishing the stress test of the enterprises' capital adequacy and slightly behind on its internal examinations workplan, OFHEO has met other important operational and reporting requirements. For example, OFHEO submitted annual written reports to the Senate and House Banking Committees as required by the act, covering such topics as actions taken by OFHEO and descriptions of the financial safety and soundness of each enterprise. In addition, OFHEO submitted its annual report to the President and Congress, as required by the Federal Managers' Financial Integrity Act of 1982 (FIA), on December 20, 1994. The report noted that OFHEO as a whole complied with FIA. Perhaps most important, OFHEO made quarterly determinations of the enterprises' capital adequacy. During the 18-month period following enactment (i.e., from October 28, 1992, through April 27, 1994), OFHEO was to classify the enterprises as "adequately capitalized" if they maintained an amount of core capital that equaled or exceeded certain minimum capital levels that were to apply only during that "transition" period. OFHEO determined the enterprises to be adequately capitalized for the second, third, and fourth quarters of 1993 and for the first quarter of 1994, applying those transitional minimum capital standards. For the second and third quarters of 1994, OFHEO determined the enterprises to be adequately capitalized, applying other minimum capital standards contained in the act. The transition minimum capital levels are lower than those effective following the transition period. Table 4 summarizes the act's deadlines, other major requirements, and actions taken by OFHEO through the end of calendar year 1994. We requested comments on a draft of this report from the Director of OFHEO. In its written comments, OFHEO agreed with the content and conclusions. OFHEO's comments are reprinted in appendix I. We are sending copies of this report to the Director, OFHEO; the Secretary, HUD; and other interested parties. We will also make copies available to others on request. This report was prepared under the direction of William J. Kruvant, Assistant Director, Financial Institutions and Markets Issues. Other major contributors are shown in Appendix II. Please contact either Mr. Kruvant on (202) 942-3837 or me on (202) 512-8678 if you have any questions about this report. Herbert I. Dunn, Senior Attorney The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. 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Pursuant to a legislative requirement, GAO reviewed the status of the Office of Federal Housing Enterprise Oversight's (OFHEO) development, focusing on OFHEO progress in designing and instituting key management systems. GAO found that: (1) OFHEO has made considerable progress toward setting up its key management systems; (2) as of February 1995, OFHEO had most of its administrative structure in place with 53 of its 65 authorized staff, and had prepared for the implementation of its human resource management system; (3) although OFHEO has defined its financial and accounting system requirements and has worked with the Department of Housing and Development (HUD) to meet its immediate accounting and administrative needs, it is having difficulties using HUD systems; (4) OFHEO has not decided whether to continue to use HUD systems, create and maintain its own systems, or contract out its accounting and administrative functions to another federal agency; (5) OFHEO has begun its mission-related programs, established the fundamentals of its examination function, adopted an overall examination framework, and set a 2-year workplan; (6) OFHEO has completed its first on-site examination of the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation and the design, purchase, and installation of computer software to support its financial research; (7) OFHEO has not met its legislative deadline to complete final regulations establishing the enterprises' risk-based capital stress test, but it has adopted intermediate milestones and expects to publish the regulations in 1996; and (8) although OFHEO staff is having difficulties meeting its 2-year workplan, OFHEO has generally met its legislative reporting requirements.

FPS was established in 1971 as the uniformed protection force of GSA government-occupied facilities. The mission of FPS is to render federal properties safe and secure for federal employees, officials, and visitors in a professional and cost-effective manner by deploying a highly trained and multi-disciplined police force. FPS was originally located within GSA's Public Buildings Service (PBS). As part of PBS, FPS was responsible for providing law enforcement and security services to GSA's tenants and the public at federal buildings nationwide. The Homeland Security Act of 2002 established DHS to prevent and mitigate the damage from terrorist attacks within the United States, which includes terrorism directed at federal facilities. Under the act, FPS was transferred from the GSA to DHS. DHS later placed it within ICE. The President's fiscal year 2010 budget requested the transfer of FPS from ICE to NPPD. Language in the budget request stated that FPS responsibilities, such as providing physical security and policing of federal buildings, establishing building security policy, and ensuring compliance, are outside the scope of ICE's immigration and customs enforcement mission and are better aligned with NPPD's mission. The transfer of FPS to NPPD became effective when the fiscal year 2010 DHS appropriations act was signed into law on October 28, 2009. Figure 1 shows FPS's move within DHS from ICE to NPPD. To accomplish its mission, in 2011 FPS has a total budget authority of about $1 billion, currently employs 1,225 federal staff, and about 13,000 contract guard staff to secure over 9,000 GSA owned or leased facilities. FPS conducts law enforcement activities as well as risk assessments to reduce facility vulnerability to criminal and terrorist threats and helps to ensure that facilities are secure and occupants are safe. For the transition, FPS, NPPD, ICE, and DHS headquarters components formed a Senior Working Group, co-chaired by the Senior Counselor to the Under Secretary of NPPD, the ICE Deputy Assistant Secretary for Management, and the FPS Director. DHS developed a transition plan, the August 2009 FPS-NPPD Transition Plan, which describes DHS's overall transition planning process and milestones for completing the transition, among other things. The plan shifted FPS's mission and responsibility for all of its mission-support functions, with the exception of financial accounting services and firearms and tactical training, from ICE to NPPD or other DHS components. While FPS has its own law enforcement personnel to perform its mission responsibilities, it does not perform all of its mission-support functions such as payroll, travel services, and contracting. For this reason, FPS has traditionally relied on GSA and ICE to carry out these functions. For example, while under GSA, FPS's contracting functions were handled by the contracting component of GSA's Public Buildings Service, and under ICE, by its Office of Acquisition. The transition plan noted that most transition tasks would be completed by October 2010. In addition, the transition plan noted staff-level working groups were formed that consisted of subject matter experts from each of the agencies, FPS, NPPD, and ICE, to plan in detail the transfer of FPS's mission and each mission-support function. The working groups were tasked with planning, tracking issues related to the FPS transition, and reporting progress on the transition. Initially, 16 working groups were formed to carry out the transition in 18 mission-support functions, as reflected in figure 2. According to the transition plan, until the transition is complete, ICE is to continue to provide necessary management and operational services through continued agreements in support of FPS or until individual MOAs, MOUs, or SLAs are concluded with NPPD and other DHS headquarters components. For example, for fiscal year 2010, FPS and NPPD signed 12 SLAs with ICE, covering services such as training and development, security management, and IT services, 1 MOA for legal services, and 1 MOU for financial services. These agreements were meant to ensure that there were no lapses in services while mission-support functions were being transferred to either NPPD or DHS headquarters components. In October 2009, FPS's facility protection mission transferred and its reporting channels were shifted from ICE to NPPD. The Under Secretary of NPPD--through delegation from the Secretary of Homeland Security-- assumed operational control of FPS and its mission from ICE with the enactment of the fiscal year 2010 DHS appropriations act. Similarly, the Under Secretary delegated the authority and responsibility to the Director of FPS to continue FPS's physical security and law enforcement services mission, consistent with the law enforcement authority for the protection of federal property. Upon its transition to NPPD, FPS became a component within the directorate. Figure 3 shows the location of FPS within NPPD's organizational structure. According to FPS headquarters and regional officials we interviewed, the transition of FPS's mission from ICE to NPPD occurred without degradation to the mission, and there has been minimal, if any, disruption to FPS's field operations. Moreover, the regional officials said that the transition has not had an impact on the way FPS performs its mission on a daily basis. FPS officials stated that FPS continued to lead DHS's security and law enforcement services at more than 9,000 GSA facilities nationwide, and its operational activities, such as conducting facility security assessments, conducting criminal investigations, and responding to critical incidents, continued uninterrupted during and after the transition. Since taking operational control of FPS in October 2009, NPPD and other DHS components have assumed responsibility for 13 of 18 FPS mission- support functions, but the transfer of the remaining 5 mission-support functions from ICE to NPPD or other DHS components has been delayed. In August 2009, DHS reported to Congress that the transition would be completed by October 2010 and estimated it would cost $14.6 million. However, DHS now reports that the transfer of 4 functions will not be completed until the end of fiscal year 2011 or start of fiscal year 2012 and one of these functions will not be transferred until October 2012. For the delayed functions, ICE continues to provide mission support to FPS, and new or revised SLAs were developed to articulate the continuing time frames and services that ICE would provide to FPS. The 18 mission- support functions and their transfer status are presented in table 1. According to DHS officials responsible for executing the FPS transition, the transfer of the 5 mission-support functions will take longer than originally reported to Congress due to a number of factors, including unanticipated costs associated with building the infrastructure within NPPD and other DHS components to support areas such as IT services. As reflected in table 2, the delays in the transition schedule for the delayed mission-support functions range from almost 1 to 2 years. DHS officials explained that the transfer of four mission-support functions-- business continuity and emergency preparedness, personnel security, facilities, and Equal Employment Opportunity (EEO)--are on track to transfer by the end of fiscal year 2011 or start of fiscal year 2012. Specifically, DHS officials explained the following All activities for the transfer of business continuity and emergency preparedness have been completed but are waiting on NPPD to complete the building of a continuity of operations site, which according to NPPD officials, will be complete by October 2011. NPPD has moved a Senior Executive Service (SES)-level director into position, and is in the process of establishing an Office of Compliance and Security, which will provide compliance investigations, program review, personnel security, interior physical security, information security, and special security program services throughout NPPD. According to the Acting Director of the Office of Compliance and Security, the goal is to establish this office by October 2011. NPPD has hired three of the five positions that were created to support FPS facilities management. These personnel, according to the officials, are working with ICE to transfer projects and all of them are expected to transfer by the end of fiscal year 2011. The only activity required for the transfer of EEO services is to hire staff needed to support FPS within NPPD, which should be completed by the end of fiscal year 2011. While DHS has successfully transferred FPS's mission and the majority of its mission-support functions, deficiencies in the transition schedule for the transfer of IT services could limit DHS's ability to ensure the timely transition of this important function. DHS's transition plan called for working groups to develop comprehensive project management plans (i.e., detailed schedules) with detailed tasks and end dates for the individual mission-support functions to ensure critical path activities were identified, managed, and resourced. DHS did not develop these schedules for all the mission-support functions since, according to DHS officials, in some cases the transfer of a function was relatively easy and did not need a schedule, such as public affairs and legislative affairs. However, the transfer of FPS's nationwide IT infrastructure and field support is more complex. Because of the complexity of transferring IT services, DHS developed a detailed schedule to manage the transfer of IT services, as called for in the transition plan. As we have previously reported, the success of fielding any program depends in part on having a reliable schedule that defines, among other things, when work activities will occur, how long they will take, and how they are related to one another. As such, the schedule not only provides a road map for systematic execution of a program, but also provides a means by which to gauge progress, identify and address potential problems, and promote accountability. Among other things, best practices and related federal guidance cited in our cost estimation guide call for a program schedule to be program-wide in scope, meaning that it should include the integrated breakdown of the work to be performed, and expressly identify and define relationships and dependencies among work elements and the constraints affecting the start and completion of work elements. Table 3 presents a summary of best practices we have identified for applying a schedule as part of program management. Our analysis of the IT schedule found that it did not reflect our best practices for scheduling, as seen in table 4. We shared the results of our analysis with responsible DHS IT transition officials, who stated that they have taken note of the deficiencies and are taking steps to improve the schedule using the scheduling practices. According to these officials, they plan to work closely with staff in another NPPD component agency with the expertise necessary to improve the IT transition schedule. Nevertheless, if the schedule does not fully and accurately reflect the project, it will not serve as an appropriate basis for analysis and may result in unreliable completion dates, time extension requests, and delays. With regard to the transfer of the IT services function, it would be difficult for DHS to accurately predict the completion date for the IT transition without a more reliable schedule. Moreover, completing projects within projected time frames helps ensure agencies do not incur additional costs, which is especially important in a fiscally constrained environment. Ultimately, incorporating scheduling best practices into the IT transition schedule could help DHS better manage the completion of the transition and help provide reasonable assurance that the transfer is complete within its projected timeframe. According to best practices for cost estimates, in addition to a reliable schedule, a reliable cost estimate is critical to the success of any program. A reliable cost estimate provides the basis for informed investment decision making, realistic budget formulation and program resourcing, meaningful progress measurement, proactive course correction when warranted, and accountability for results. Such an estimate is important for any agency, but especially an agency like FPS that is solely fee funded and has faced projected shortfalls in fee collections to cover operational costs. Federal financial accounting standards state that reliable information on the costs of federal programs and activities is crucial for effective management of government operations and recommend that full costs of programs or activities be reported so that decision makers have information necessary to make informed decisions on resources for programs, activities, and outputs, and to help ensure that they get expected and efficient results. Drawing from federal cost-estimating organizations and industry, our cost estimation best practices list four characteristics of a high-quality and reliable cost estimate that management can use for making informed decisions--comprehensive, well-documented, accurate, and credible. In July 2008, the DHS Under Secretary for Management signed a memorandum stating DHS will standardize its cost-estimating process by using the best practices we identified. To implement the FPS transition, DHS, in 2009, estimated it would cost $14.6 million to complete the transition of FPS from ICE to NPPD. DHS's estimate provided for costs into three categories--personnel, financial management, and IT services. In 2011, the department revised the estimate for each of the three categories, which totaled $18.5 million. At the time of our review, FPS had spent about $1.9 million of its operating revenue for transition-related expenses. Table 5 reflects estimated and actual costs for personnel, financial management services, and IT services associated with the FPS transition. DHS has successfully transferred the majority of mission-support functions, which includes oversight of financial management services, and, according to DHS officials, is on track to hire most of the remaining new personnel by the beginning of fiscal year 2012 to provide services previously provided by ICE. However, DHS has not yet transferred IT services and does not expect to complete the transfer until October 2012. Having a reliable and valid cost estimate is important for enabling managers to make informed decisions and facilitate tracking progress against estimates to effectively manage the transfer of IT services. While DHS committed to using GAO's best practices in preparing cost estimates in July 2008, our analysis of the cost estimate for the transfer of IT services found that it only partially met one of the four characteristics of a reliable cost estimate and minimally met the other three, as table 6 illustrates. DHS officials stated that there are no plans to revise the IT transition estimate. According to DHS officials, rather than revising the estimate, the department plans to report actual costs once the transition is complete. However, incorporating cost estimating best practices into the IT transition cost estimate could provide an improved basis for remaining IT transition investment decisions and could facilitate tracking of actual costs against estimates, both of which are fundamental to effectively managing the transfer of IT services. Since 2007, we have reported that FPS faces significant challenges with protecting federal facilities, and in response, FPS has started to take steps to address some of them. For example, our July 2009 and April 2010 reports on FPS's contract guard program identified a number of challenges that the agency faces in managing its contract guard program, including ensuring that the 15,000 guards that are responsible for helping to protect federal facilities have the required training and certification to be deployed at a federal facility. In response to our July 2009 report, FPS took a number of immediate actions with respect to contract guard management, including increasing the number of guard inspections it conducts at federal facilities in some metropolitan areas and revising its guard training. Further, in our April 2010 report, we recommended, among other things, that the Secretary of Homeland Security direct the Under Secretary of NPPD and the Director of FPS to develop a mechanism to routinely monitor guards at federal facilities outside metropolitan areas and provide building-specific and scenario-based training and guidance to its contract guards. As of August 2010, FPS was in the process of implementing this recommendation. Additionally, in July 2009 we reported that FPS did not have a strategic human capital plan to guide its current and future workforce planning efforts. Among other things, we recommended that FPS develop and implement a long-term strategic human capital plan that will enable the agency to recruit, develop, and retain a qualified workforce. DHS concurred with our recommendation and is taking action to address it. In June 2008, we reported on FPS's funding challenges, and the adverse implications its actions taken to address them had on its staff, such as low morale among staff, increased attrition, and the loss of institutional knowledge. We recommended that FPS evaluate whether its use of a fee-based system or alternative funding mechanism was the most appropriate manner to fund the agency. FPS concurred with our recommendation; however, as of May 2011, FPS had not begun such an analysis. Finally, in our 2009 High-Risk Series, and again in 2011, we designated federal real property as a high-risk area, in part, because FPS has made limited progress and continues to face challenges in securing real property. If successfully managed, the transfer of FPS to NPPD could provide DHS the opportunity to better advance progress towards addressing FPS's challenges. The Under Secretary of NPPD and the former FPS Director, in written statements for the November 2009 congressional hearing on the FPS transfer, noted that the transition to NPPD would better leverage and align infrastructure protection resources and competencies to maximize their value. Further, the transition plan noted that the transfer would improve the mission effectiveness of both FPS and NPPD. According to NPPD officials, the agency has undertaken actions that serve as a foundation for integrating FPS into NPPD. First, NPPD officials explained that efforts undertaken by the senior working group and the staff working groups have served to move the transition forward, and integrate the FPS organization into the larger NPPD structure. These officials explained that FPS has been established as a component within NPPD, thereby aligning FPS's infrastructure protection mission within NPPD's critical infrastructure protection mission. As noted in the transition plan, NPPD chairs the operations of the Interagency Security Committee, a group that includes the physical security leads for all major federal agencies and whose key responsibility is the establishment of governmentwide security policies for federal facilities. As further noted in the transition plan, these missions are complementary and mutually supportive, and the alignment resulting from the transfer improves and advances the mission effectiveness of both FPS and NPPD. Second, NPPD officials stated that FPS has begun to develop a new strategic plan to align FPS's activities and resources to support NPPD mission-related outcomes. Our work has shown that in successful organizations, strategic planning is used to determine and reach agreement on the fundamental results the organization seeks to achieve, the goals and measures it will set to assess programs, and the resources and strategies needed to achieve its goals. Third, NPPD officials noted that NPPD has monthly meetings with FPS to review open GAO recommendations and is assisting FPS in closing out these recommendations. For example, in consultation with NPPD, FPS is developing a human capital strategic plan. A human capital strategic plan, flowing out of a new strategic plan, could help facilitate efforts to address previously identified challenges. Further, as we have previously reported, strategic human capital planning that is integrated with broader organizational strategic planning is critical to ensuring agencies have the talent they need for future challenges. Finally, according to the Senior Counselor to the Under Secretary of NPPD, NPPD has established a Field Force Integration Working Group among a set of five other integration working groups to pursue integration activities across the new and larger NPPD, and across DHS as a whole. In addition, the Senior Counselor noted that the purpose of the group is to examine capabilities and resources from across the NPPD components to gain efficiencies and economies of scale in support of all NPPD field operations. The official further noted that the FPS's workforce and regional structure is by far the largest and most established of the NPPD components. FPS's field structure and capabilities will be used as comparative models and resources as NPPD works toward continued integration of its operating entities. While these are encouraging steps, it is too early to tell if these planned actions will help address the challenges we have previously identified. With its critical role in protecting federal facilities against the threat of terrorism and other criminal activity, it is important that FPS's transfer to NPPD and its related integration are successful. DHS has implemented a number of scheduling and cost estimating best practices in the FPS transition and has successfully transferred 13 of the 18 mission support functions. Nevertheless, DHS could better manage the transfer of the IT services mission-support function, and help inform DHS, NPPD, FPS, and congressional investment decision making. Establishing a reliable schedule and incorporating cost estimation best practices in the estimate for the transfer of IT services could help provide DHS enhanced assurance that this delayed function will be transferred in accordance with its projected time frames. To help ensure that DHS and Congress have reliable, accurate information on the timeframes and costs of transferring FPS from ICE to NPPD, we recommend that the Secretary of Homeland Security direct the Under Secretary for NPPD, in consultation with the Director of FPS and the Director of ICE, to improve the schedule for transferring IT services, in accordance with the transition plan, and to reflect scheduling best practices, and update the IT transition cost estimate, in accordance with cost- estimating best practices. We received written comments on a draft of this report from DHS. DHS concurred with our recommendations and stated that it is currently taking actions to implement them. With respect to improving the schedule for transferring IT services, DHS indicated that NPPD held working sessions with subject matter experts from DHS, ICE, and FPS Chief Information Officer (CIO) teams to capture all transition activities in greater detail and identify areas for implementation of best practices into schedule updates. DHS also noted that NPPD consulted with NPPD/United States Visitor and Immigrant Status Indicator Technology (US-VISIT) and adopted recommendations for schedule improvements, leveraging US-VISIT's lessons learned toward better alignment with GAO best practices, acquisition of scheduling expertise, and acquisition of specific software tools, among other things. Regarding updating the IT transition cost estimate, DHS noted that NPPD is researching and resolving cost- estimating deficiencies identified in the GAO report in collaboration with the DHS CIO. The department also noted that NPPD plans to identify an alternative network design solution that may reduce transition cost, and will refine the cost estimate after discussing network design discussions with subject matter experts and incorporating cost-estimating best practices. Written comments from DHS are reprinted in appendix II. As agreed with your office, unless you publicly announce the contents of the report, we plan no further distribution for 30 days from the report date. At that time, we will send copies of this report to the Secretary of Homeland Security, the Under Secretary of the National Protection and Programs Directorate, the Director of the Federal Protective Service, the Director of the Immigration and Customs Enforcement, and appropriate congressional committees. In addition, this report will be available at no charge on the GAO web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact David C. Maurer at (202) 512-9627 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix III. We examined the transition of the Federal Protective Service (FPS) from Immigration and Customs Enforcement (ICE) to the National Protection and Programs Directorate (NPPD). We address the following questions: (1) to what extent has the FPS transition been implemented and what related challenges, if any, did FPS and NPPD face in implementing the transition and (2) to what extent will the transition help address previously identified challenges to protecting federal facilities? To determine the extent to which the FPS transition has been implemented and what challenges, if any, FPS and NPPD faced in implementing the transition, we reviewed documents related to the transition, including the August 2009 FPS-NPPD Transition Plan, all transition plan updates, DHS delegations of authority related to the execution and administration of FPS, and Memorandum of Agreement, Memorandum of Understanding, and all service level agreements signed among FPS, NPPD, and ICE. We interviewed FPS officials directly affected by the transition--including the FPS Deputy Director and Chief of Staff headquartered in Washington, D.C., and in each of 6 of FPS's 11 regional offices, the Regional Director, Deputy Director for Operations, and Mission Support Chief. We chose these offices on the basis of geographical dispersion. They included: the Northwest/Arctic Region (Federal Way, Washington); the Greater Southwest Region (Grand Prairie, Texas); the Heartland Region (Kansas City, Missouri); the Great Lakes Region (Chicago, Illinois); the National Capital Region (Washington, D.C.); and the New England Region (Boston, Massachusetts). Among other things, we asked questions about their experiences regarding the transition of FPS's mission and mission- support functions from ICE to NPPD. While the results of these interviews provided examples of FPS officials' experiences and perspectives, they cannot be generalized beyond those we interviewed because we did not use statistical sampling techniques in selecting the regional offices, headquarters officials, and regional staff. Additionally, we met with members of the transition senior working group, including the NPPD Senior Counselor to the Under Secretary and the FPS Director, as well as interviewed members of all 16 staff-level working groups to discuss the extent to which FPS's 18 mission-support functions had transferred from ICE to NPPD. The working groups included officials from FPS, NPPD, ICE, and in some groups, DHS headquarters. We compared the FPS information technology (IT) transition schedule, the IT transition cost estimate, and related documents to the practices in our Cost Estimating and Assessment Guide. We focused on the IT mission- support function because it required a significant commitment of resources, oversight, and time by DHS to complete the transition. For the IT transition schedule and the cost estimate, we scored each best practice as either being Not met--DHS provided no evidence that satisfies any of the criterion; Minimally met--DHS provided evidence that satisfies a small portion of the criterion; Partially met--DHS provided evidence that satisfies about half of the criterion; Substantially met--DHS provided evidence that satisfies a large portion of the criterion; and Met-- DHS provided complete evidence that satisfies the entire criterion. We provided the results of our schedule and cost analyses to DHS officials and met with them to confirm the results. Based on the interviews and additional documentation provided by DHS officials, we updated the results of our analyses, as needed. We reviewed financial documentation provided by all three components reflecting transition costs such as salaries, benefits, and expenses for new personnel hired to support the FPS transition, financial management services provided by ICE, and IT deployment. To assess the reliability of this documentation, we (1) performed electronic testing for obvious errors in accuracy and completeness; (2) compared the data with other sources of information, such as payroll reports to payroll data, cost data from the ICE Office of Financial Management and documentation from the Intra- Governmental Payment and Collection (IPAC) system; and (3) interviewed agency officials knowledgeable about financial management and budgeting at all three agencies to discuss transition-related expenses incurred at the time of our review, and to identify any data problems. When we found discrepancies (such as data entry errors) we brought them to the officials' attention and worked with them to correct discrepancies before concluding our analysis. We found the cost data to be sufficiently reliable for the purposes of this review. To determine the extent to which the transition will help address previously identified challenges to protect federal facilities, we reviewed prior GAO reports and testimonies related to FPS's facility protection efforts, and spoke with NPPD officials about FPS's ongoing challenges in this regard. We also reviewed and analyzed documentation, such as the transition plan, testimony from key senior leaders in NPPD and FPS provided for a hearing on the FPS transition, FPS's strategic plan, and NPPD's strategic activities report. Finally, we interviewed the Senior Counselor to the Under Secretary of NPPD, and FPS Deputy Director for Operations and Chief of Staff, and discussed actions underway or planned to further integrate FPS into NPPD. We conducted this performance audit from October 2010 through July 2011 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, Sandra Burrell, Assistant Director, and Valerie Kasindi, Analyst-in-Charge, managed this assignment. Don Kiggins made significant contributions to the work. Gary Mountjoy provided expertise on IT issues and Jack Warner provided expertise on financial management issues. Tracey King provided legal support. Michele Fejfar assisted with design and methodology and Karen Richey provided expertise on cost estimation and scheduling best practices. Katherine Davis provided assistance in report preparation and Robert Robinson developed the report's graphics.

Events such as the February 2010 attack on the Internal Revenue Service offices in Texas, and the shooting in the lobby of the Nevada federal courthouse, demonstrate the vulnerabilities of federal facilities and the safety of the federal employees who occupy them. The Federal Protective Service (FPS) is the primary agency responsible for the security of over 9,000 federal government facilities across the country. The fiscal year 2010 DHS appropriations act transferred FPS from Immigration and Customs Enforcement (ICE) to the National Protection and Programs Directorate (NPPD), within the Department of Homeland Security (DHS). This report addresses (1) the extent to which the FPS transition has been implemented and any remaining related challenges, and (2) the extent to which the transition will help address previously identified challenges to protecting federal facilities. GAO reviewed the 2009 FPS-NPPD transition plan; agreements between FPS, NPPD, and ICE, and best practices for scheduling and cost estimating; and interviewed DHS officials. Since October 2009, FPS's facility protection mission and 13 of 18 mission-support functions have transferred from ICE to NPPD; however, the transition schedule for the 5 remaining mission-support functions has been delayed. For example, while functions such as human capital and budget formulation have been transferred, information technology (IT) services, business continuity and emergency preparedness, facilities, personnel security, and equal employment opportunity have not. In August 2009, DHS reported to Congress that the transition of these functions would be completed by October 2010. DHS now reports that it plans to complete the transfer of 4 of the 5 remaining mission-support functions by September or October 2011, and estimates that the transfer of IT services will not be complete until October 2012. DHS developed a transition plan to guide the planning and execution of the transfer. Among other things, the plan called for schedules with detailed tasks and end dates to be developed for all mission-support functions to ensure critical path activities were identified, managed, and resourced. DHS also developed a detailed schedule to manage the transfer of IT services, as called for in the transition plan. However, GAO's analysis of the schedule found that it did not reflect GAO's best practices for scheduling such as capturing, sequencing, and assigning resources to all activities necessary to accomplish the work. When a schedule does not accurately reflect the project, it will not serve as an appropriate basis for analysis and may result in unreliable completion dates and delays. As of May 2011, DHS estimated that it would cost $6.2 million to complete the IT transition. GAO's analysis of this cost estimate found it did not meet all the characteristics of a reliable cost estimate. For example, the estimate was not well documented because it was not supported by detailed explanation describing how the estimate was derived and did not include sufficient detail so that GAO could corroborate it. By incorporating cost estimation best practices for the IT transition cost estimate, DHS could enhance the estimate's reliability and better inform decisions about the cost to complete the transition. The transfer of FPS to NPPD could provide DHS the opportunity to better advance progress towards addressing FPS's challenges to protecting federal facilities that have been previously identified by GAO. Since 2007, GAO has reported that FPS faces significant challenges with protecting federal facilities. The transition plan noted that the transfer of FPS to NPPD would improve the mission effectiveness of both agencies. NPPD officials explained that the agency has undertaken actions that serve as a foundation for integrating FPS into NPPD. For example, FPS has begun to develop a new strategic plan to align FPS's activities and resources to support NPPD mission-related outcomes. Additionally, NPPD is assisting FPS in developing a human capital strategic plan, as recommended by GAO in July 2009. These steps are encouraging, but it is too early to tell if these planned actions will help address challenges previously identified by GAO. GAO recommends that DHS improve the schedule for transferring IT services to reflect scheduling best practices, and update the IT transition cost estimate, in accordance with cost-estimating best practices. DHS concurred with GAO's recommendations.

The largest of the interagency contracting vehicles is the MAS program (also known as the Federal Supply Schedule or the schedules program). GSA directs and manages the MAS program. MACs and GWACs are also interagency contracts. Government buyers usually pay a fee for using other agencies' GWACs, MACs, and schedule contracts. These fees are usually a percentage of the value of the procurement, which are paid to the sponsoring agency and are expected to cover the costs of administering the contract. Along with using interagency contracts to leverage their buying power, a number of large departments--DOD and DHS in particular--are turning to enterprisewide contracts as well to acquire goods and services. Enterprisewide contracts are similar to interagency contracts in that they can leverage the purchasing power of the federal agency but generally do not allow purchases from the contract outside of the original acquiring activity. Enterprisewide contracting programs can be used to reduce contracting administrative overhead, provide information on agency spending, support strategic sourcing initiatives, and avoid the fees charged for using interagency contracts. All of these contracts are indefinite delivery/indefinite quantity (ID/IQ) contracts. ID/IQ contracts are established to buy goods and services when the exact times and exact quantities of future deliveries are not known at the time of award. Once the times and quantities are known, agencies place task and delivery orders against the contracts for goods and services. In fiscal year 2008, federal agencies spent at least $60 billion through GWACs, MACs, the MAS program, and enterprisewide contracts to buy goods and services to support their operations: about $46.8 billion was spent on the MAS program; about $5.3 billion was spent on GWACs; at least $2.5 billion was spent on MACs although the actual amount could be much higher; and at least $4.8 billion was spent on the three enterprisewide contracts we reviewed, although, like MACs, the actual amount spent on all enterprisewide contracts could be higher. Sales under the MAS program have been relatively flat in recent years, and obligations under GWACs have declined slightly in recent years. However, the total amount of money spent in fiscal year 2008 using the three enterprisewide contracting programs included in our review is approaching the amount spent for GWACs during the same period. In addition, as OMB recently reported, numerous agencies are planning to increase their use of enterprisewide contracts as a means of addressing the administration's goal of reducing the amount agencies spend on contracting by 7 percent through fiscal year 2011. Nevertheless, GSA's MAS program is still the primary governmentwide buying program aimed at helping the federal government leverage its significant buying power when buying commercial goods and services. As the largest interagency contracting program, the MAS program provides advantages to both federal agencies and vendors. Agencies, using the simplified methods of procurement of the schedules, can avoid the time, expenditures, and administrative costs of other methods. And vendors receive wider exposure for their commercial products and expend less effort in selling these products. Interagency and enterprisewide contracts should provide an advantage to government agencies when buying billions of dollars worth of goods and services, yet OMB and agencies lack reliable and comprehensive data to effectively leverage, manage, and oversee these contracts. More specifically, The total number of MACs and enterprisewide contracts currently approved and in use by agencies is unknown because the federal government's official procurement database is not sufficient or reliable for identifying these contracts, Departments and agencies cite a variety of reasons to establish, justify, and use their own MACs and enterprisewide contracts rather than use other established interagency contracts--reasons that include avoiding fees paid for the use of other agencies' contracts, gaining more control over procurements made by organizational components, and allowing for the use of cost reimbursement contracts, Concerns remain about contract duplication--vendors and agency officials expressed concerns about duplication of effort among these contracts, and in our review we found many of the same vendors provided similar products and services on many different contract vehicles. This could be resulting in duplication of products and services being offered, increased costs to both the vendor and the government, and missed opportunities to leverage the government's buying power, Limited governmentwide policy is in place for establishing and overseeing MACs and enterprisewide contracts. Recent legislation and OFPP initiatives are expected to strengthen oversight and management of MACs, but no similar initiatives are underway to strengthen oversight of enterprisewide contracts. In April 2010, we made five recommendations to OMB to improve data, strengthen policy, and better coordinate agencies' awards of MACs and enterprisewide contracts, and OMB concurred with all of our recommendations. Prior attempts by the acquisition community to identify interagency and enterprisewide contracts have not resulted in a reliable database useful for identifying or providing governmentwide oversight on those contracts. In 2006, OFPP started the Interagency Contracting Data Collection Initiative to identify and list the available GWACs, MACs, and enterprisewide contracts. However, the initiative was a one-time effort and has not been updated since. In conducting our review, we were not able to identify the universe of MACs and enterprisewide contracts because the data available in the official government contracting data system, the Federal Procurement Data System-Next Generation (FPDS-NG), were insufficient and unreliable. For instance, FPDS-NG includes a data field that is intended to identify GWACs but we found a number of instances where known GWACs were coded incorrectly. We also searched the system by contract number for MACs that we were aware of and found similar issues, with some contracts coded properly as MACs and some not. Despite its critical role, we have consistently reported on problems with FPDS-NG data quality over a number of years. Most of the senior procurement executives, acquisition officials, and vendors we spoke with as part of our review believed a publicly available source of information on these contracts is necessary. For example, senior procurement executives from DHS and DOD stressed the usefulness of a governmentwide clearinghouse of information on existing contracts. Agency officials we spoke with said that if agencies could easily find an existing contract, which they cannot do, they would avoid unnecessary administrative time to enter into a new contract, which they said could be significant. The report of the Acquisition Advisory Panel--often referred to as the SARA panel-- previously noted some of these concerns, stating that too many choices without information related to the performance and management of these contracts make the cost-benefit analysis and market research needed to select an appropriate acquisition vehicle impossible. To improve the transparency of and data available on these contracts, we made three recommendations to OFPP: 1. Survey departments and agencies to update its 2006 data collection initiative to identify the universe of MACs and enterprisewide contracts in use and assess their utility for maximizing procurement resources across agencies. 2. Ensure that departments and agencies use the survey data to accurately record these contracts in FPDS-NG. 3. Assess the feasibility of establishing and maintaining a centralized database to provide sufficient information on GWACs, MACs, and enterprisewide contracts for contracting officers to use to conduct market research and make informed decisions on the availability of using existing contracts to meet agencies' requirements. Agencies cited several reasons for establishing their own MACs and enterprisewide contracts including cost avoidance through lower prices, fewer fees compared to other vehicles, mission specific requirements, and better control over the management of contracts. For example: The Army cited several reasons for establishing their MACs for information technology hardware and services in 2005 and 2006. The Army wanted to standardize its information technology contracts so each contract would include the required Army and DOD security parameters. According to the Army, GSA contracts do not automatically include these security requirements and using a GSA contract would require adding these terms to every order. The Army also cited timeliness concerns with GSA contracts and GSA fees as reasons for establishing their own contracting vehicles. In 2005, DHS established the EAGLE and FirstSource contracting programs. Both involve enterprisewide contracts used for information technology products and services. Officials stated the main reason these programs were established was to avoid the fees associated with using other contract vehicles and save money through volume pricing. In addition, the programs centralized procurements for a wide array of mission needs among DHS' many agencies. Furthermore, DHS officials stated they wanted to be able to coordinate the people managing the contracts, which did not happen when using GSA contracts. We found the same vendors on many different contract vehicles providing information technology goods or services, which may be resulting in duplication of goods and services being offered. Table 1 below shows that the top 10 GWAC vendors, based on sales to the government, offer their goods and services on a variety of government contracts that all provide information technology goods and services. For example, of the 13 different contract vehicles listed in Table 1, 5 of the 10 vendors were on 10 or more of these. Vendors and agency officials we met with expressed concerns about duplication of effort among the MACs, GWACs, and enterprisewide contracts across government. A number of vendors we spoke with told us they offer similar products and services on multiple contract vehicles and that the effort required to be on multiple contracts results in extra costs to the vendor, which they pass to the government through the prices they offer. The vendors stated that the additional cost of being on multiple contract vehicles ranged from $10,000 to $1,000,000 due to increased bid and proposal and administrative costs. Interestingly, we found one vendor offering the exact same goods and services on both their GSA schedule and the NASA's GWAC and offering lower prices on the GWAC. Another vendor stated that getting on multiple contract vehicles can be cost-prohibitive for small businesses and forces them to not bid on a proposal or to collaborate with a larger business in order to be on a contract vehicle. Government procurement officials expressed additional concerns. For example, an official from OFPP has stated that such duplication of effort only complicates the problem of an already strained acquisition workforce. The GSA Federal Acquisition Service Deputy Commissioner stated that while the agencies cite GSA fees as a reason for creating their own vehicles, agencies fail to consider the duplication of effort and cost of doing these procurements. Federal agencies operate with limited governmentwide policy that addresses the establishment and use of MACs and enterprisewide contracts. Federal regulations generally provide that an agency should consider existing contracts to determine if they might meet its needs. The six federal agencies and the three military departments we reviewed have policies that require approval and review for acquisition planning involving large dollar amount contracts which would generally include the establishment of MACs and enterprisewide contracts. The review process varies from agency to agency. For example, an official from the Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics told us that any new DOD contract estimated at over $100 million would be required to go through a review process to ensure that no other contract exists that could fulfill the new requirement. As another example, DHS requires that the senior procurement executive approve the establishment of each enterprisewide contract. In contrast, GWAC creation and management have governmentwide oversight, as OFPP exercises statutory approval authority regarding establishment of a GWAC. The senior procurement executives we spoke with had mixed views on the proper role of OFPP in providing clarification and oversight to agencies establishing their own contract vehicles. For example, Army senior acquisition officials representing the senior procurement official told us that the policy on interagency contracting is not cohesive. In their view, OFPP should provide policy and guidance that agencies would be required to follow. In contrast, the Senior Procurement Executive for the Department of the Navy pointed to agency-specific circumstances or requirements that create uncertainty about the utility of broad OFPP guidance. Furthermore, agencies have issued guidance encouraging the use of enterprisewide contracts rather than using interagency contracts. For example, DOD guidance advises that contracting officers consider the use of internal DOD contract vehicles to satisfy requirements for services prior to placing an order against another agency's contract vehicle. Moreover, OMB recently reported that 20 of the 24 largest procuring activities are planning on reducing procurement spending by using enterprise contracting to leverage their buying power, as part of the administration's goal of reducing contract spending by 7 percent over the next 2 years. To provide a more coordinated approach in awarding MACs and enterprisewide contracts, we recommended that OFPP take steps to establish a policy and procedural framework in conjunction with agencies for establishing, approving, and reporting on new MACs and enterprisewide contracts on an ongoing basis. The framework should stress the need for a consistent approach to leveraging governmentwide buying power while allowing agencies to continue to use their statutory authorities for buying goods and services. Recent legislation and OFPP initiatives are expected to strengthen oversight and management of MACs, but these initiatives do not address enterprisewide contracts. The 2009 National Defense Authorization Act required, 1 year after its enactment, that the FAR be amended to require that any MAC entered into by an executive agency after the amendment's effective date be supported by a business case analysis. The business case is to include an analysis of all direct and indirect costs to the federal government of awarding and administering a contract and the impact it would have on the ability of the federal government to leverage its buying power. However, the Act is silent on what steps an agency should take to examine the effect a new contract will have on the ability of the government to leverage its buying power. Additionally, the Act does not address similar requirements for enterprisewide contracts. Under the Act, the pending FAR rule relating to this legislation was required to be issued by October 15, 2009; however, the rule was still in progress as of June 11, 2010. A business case analysis approach for MACs has the potential to provide a consistent governmentwide approach to awarding MACs as was pointed out by the SARA panel. The panel noted that the OFPP review and approval process for GWACs could serve as a good business model for approving MACs. Using the GWAC process as a model, the full business case analysis as described by the SARA panel would need to include measures to track direct and indirect costs associated with operating a MAC. It would also include a discussion about the purpose and scope, and the amount and source of demand. Further, the business case would need to identify the benefit to the government along with metrics to measure this benefit. We recommended that as OFPP develops the pending FAR rule to implement the business case analysis requirement above, it ensures that departments and agencies complete a comprehensive business case analysis as described by the SARA panel, and include a requirement to address potential duplication with existing contracts, before new MACs and enterprisewide contracts are established. Our work identified a number of challenges GSA faces in effectively managing the MAS program, the federal government's largest interagency contracting program. More specifically, GSA Lacks transactional data about its customers' use of MAS contracts, which would provide GSA insight to facilitate more effective management of the program; Makes limited use of selected pricing tools that make it difficult for GSA to determine whether the program achieves its goal of obtaining the best prices for customers and taxpayers; Uses a decentralized management structure for the MAS program in conjunction with deficient program assessment tools, which create obstacles for effective program management. In April 2010, we made a number of recommendations to GSA to improve MAS program management and pricing, with which GSA concurred. GSA lacks data about the use of the MAS program by customer agencies that it could use to determine how well the MAS program meets its customers' needs and to help its customers obtain the best prices in using MAS contracts. GSA officials told us that because agency customers generally bypass GSA and place their orders directly with MAS vendors, they lack data on the orders placed under MAS contracts; as a result, GSA also lacks data on the actual prices paid relative to the MAS contract prices. While GSA does have a spend analysis reporting tool through its GSA Advantage system that provides agencies with sales and statistical data on their orders, it accounts for a very small percentage of overall MAS program sales, thus restricting the amount of data available. There are two drawbacks to the lack of available transactional data on the goods and services ordered under the MAS program and the prices paid: The lack of data hinders GSA's ability to evaluate program performance and manage the program strategically. Several GSA officials acknowledged that it is difficult for GSA to know whether the MAS program meets their customers' needs without data on who uses MAS contracts and what they are buying. The GSA Inspector General has recommended that GSA take steps to collect these data to use in evaluating customer buying patterns and competition at the order level in order to adopt a more strategic management approach. We have made similar observations in prior reports going back several decades. The lack of data could limit the ability of GSA and its customers to achieve the best prices through the MAS program. Some GSA officials informed us that they could possibly use transactional data to negotiate better prices on MAS contracts. Several agency contracting officers we spoke with cited benefits of having additional transactional data on MAS orders to improve their negotiating position when buying goods and services, and increasing visibility over the purchases their respective agency makes. In addition, a number of the senior acquisition officials at agencies in our review said that they considered the prices on MAS contracts to be too high, and without additional data from GSA, it was difficult to see the value in the MAS program and the prices that GSA negotiates. GSA officials told us that they have initiated a process improvement initiative to collect more transactional data in the future, as they make improvements to information systems that support the MAS program. However, this initiative is currently in its early stages. We recommended that GSA take steps to collect transactional data on MAS orders and prices paid and provide this information to contract negotiators and customer agencies, potentially through the expanded use of existing electronic tools or through a pilot data collection initiative for selected schedules. GSA uses several tools and controls in the contract award and administration process to obtain and maintain best prices for its contracts. These tools include: pre-award audits of MAS contracts by the GSA Inspector General, clearance panel reviews of contract negotiation objectives, and Procurement Management Reviews. However, it applies these tools to a small number of contracts, which hinders GSA's ability to determine whether it achieves the program's goal of obtaining best prices. For example, the GSA Inspector General performs pre-award audits of MAS contracts, which enable contract negotiators to verify that vendor- supplied pricing information is accurate, complete, and current before contract award. These audits can also result in lower prices for MAS customers by identifying opportunities for GSA to negotiate more favorable price discounts prior to award. From fiscal year 2004 through 2008, the GSA Inspector General identified almost $4 billion in potential cost avoidance through pre-award audits. However, we found that GSA could be missing additional opportunities for cost savings on MAS contracts by not targeting for review more contracts that are eligible for audit. While GSA guidance instructs contract negotiators to request audit assistance for new contract offers and extensions as appropriate when a contract's estimated sales exceed $25 million for the 5-year contract period, more than 250 contracts that exceeded this threshold were not selected for audit for the 2-year period of 2009 through 2011 due to resource constraints. In addition, the 145 contracts that were selected for audit represent only 2 percent of the total award dollars for all MAS contracts. GSA uses other tools to improve the quality of contract negotiations, but we found that their effectiveness was limited by incomplete implementation and a narrow scope. GSA established a prenegotiation clearance panel process to ensure the quality of GSA's most significant contract negotiations by reviewing the contract's negotiation objectives with an emphasis on pricing, prior to contract award for contracts that meet certain defined dollar thresholds. However, we found several instances where clearance panel reviews were not held for contracts that met these thresholds, and GSA officials said that they do not check whether contracts that met the appropriate threshold received a panel review, thus limiting the effectiveness of this tool. GSA has begun the process of updating its prenegotiation clearance panel guidance to address this issue. GSA also conducts Procurement Management Reviews to assess contracts' compliance with statutory requirements and internal policy and guidance. However, GSA only selects a small number of contracts for review and at the time of our fieldwork did not use a risk-based selection methodology, which does not permit GSA to derive any trends based on the review findings. A subsequent update to GSA's PMR methodology to focus on attempting to select a statistical sample of contracts for review could address this issue. We recommended that GSA, in coordination with its Inspector General, target the use of pre-award audits to cover more contracts that meet the audit threshold. In addition, we recommended that GSA fully implement the process that has been initiated to ensure that vendors who require a prenegotiation clearance panel receive a panel review. The decentralized management structure for the MAS program and shortcomings in assessment tools also create MAS program management challenges. GSA established the MAS Program Office in July 2008 to provide a structure for consistent implementation of the MAS program. The program office's charter provides it broad responsibility for MAS program policies and strategy. Responsibility, however, for managing the operation of individual schedules resides with nine different acquisition centers under three business portfolios. None of these business portfolios or the MAS acquisition centers that award and manage MAS contracts are under the direct management of the MAS Program Office. In addition, the program office's charter does not specifically provide it with direct oversight of the business portfolios' and acquisition centers' implementation of the MAS program. GSA officials and program stakeholders we spoke with had varying opinions about this management structure, with some noting that the program is still not managed in a coordinated way and that there is a lack of communication and consistency among MAS acquisition centers which impairs the consistent implementation of policies across the program and the sharing of information between business portfolios. The GSA Inspector General has expressed similar concerns, noting in a recent report that a lack of clearly defined responsibilities within the new FAS organization has harmed national oversight of the MAS program and may have affected the sharing of best practices between acquisition centers. We also found that performance measures were inconsistent across the GSA organizations that manage MAS contracts, including inconsistent emphasis on competitiveness of pricing, making it difficult to have a programwide perspective of MAS program performance. Finally, GSA's MAS customer satisfaction survey has had a response rate of one percent or less in recent years that limits its utility as a means for evaluating program performance. We recommended that GSA clarify and strengthen the MAS Program Office's charter and authority so that it has clear roles and responsibilities to consistently implement guidance, policies, and best practices across GSA's acquisition centers , establish more consistent performance measures across the MAS program to include measures for pricing, and take steps to increase the MAS customer survey response rate. Billions of taxpayer dollars flow through interagency and enterprisewide contracts; however, the federal government does not have a clear and comprehensive view of who is using these contracts and if they are being used in an efficient and effective manner--one that minimizes duplication and advantages the government's buying power by taking a more strategic approach to buying goods and services. Long-standing problems with the quality of FPDS-NG data on these contracts and the lack of consistent governmentwide policy on the creation, use, and costs of awarding and administering some of these contracts are hampering the government's ability to realize the strategic value of using these contracts. Furthermore, departments and agencies may be unknowingly contracting for the same goods and services across a myriad of contracts--MACs, GWACs, the MAS program, and enterprisewide contracts. In addition, GSA's shortcomings in data, program assessment tools, and use of pricing tools create oversight challenges that prevent GSA from managing the MAS program more strategically and knowing whether the MAS program provides best prices. In agreeing with our recommendations, OMB and GSA recognize the importance of addressing these problems, but until they are resolved, we believe the government will continue to miss opportunities to minimize duplication and take advantage of the government's buying power through more efficient and more strategic contracting. Madam Chairman, this concludes my prepared statement. I would be happy to respond to any questions you or the other members of the subcommittee may have at this time. For further information regarding this testimony, please contact John Needham at (202) 512-4841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this product. Individuals making key contributions to this statement were James Fuquay (Assistant Director); Marie Ahearn; Lauren Heft; and Russ Reiter. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Agencies can use several different types of contracts to leverage the government's buying power for goods and services. These include interagency contracts--where one agency uses another's contract for its own needs--such as the General Services Administration (GSA) and the Department of Veterans Affairs multiple award schedule (MAS) contracts, multiagency contracts (MAC) for a wide range of goods and services, and governmentwide acquisition contracts (GWAC) for information technology. Agencies spent at least $60 billion in fiscal year 2008 through these contracts and similar single-agency enterprisewide contracts. GAO was asked to testify on the management and oversight of interagency contracts, and how the government can ensure that interagency contracting is efficient and transparent. GAO's testimony is based on its recent report, Contracting Strategies: Data and Oversight Problems Hamper Opportunities to Leverage Value of Interagency and Enterprisewide Contracts ( GAO-10-367 , April 2010). In that report, GAO made recommendations to the Office of Management and Budget (OMB) to strengthen policy, improve data, and better coordinate agencies' awards of MACs and enterprisewide contracts, and to GSA to improve MAS program pricing and management. Both agencies concurred with GAO's recommendations. Interagency and enterprisewide contracts should provide an advantage to government agencies when buying billions of dollars worth of goods and services, yet OMB and agencies lack reliable and comprehensive data to effectively leverage, manage, and oversee these contracts. More specifically, the total number of MACs and enterprisewide contracts currently approved and in use by agencies is unknown because the federal government's official procurement database is not sufficient or reliable for identifying these contracts. Departments and agencies cite a variety of reasons to establish, justify, and use their own MACs and enterprisewide contracts rather than use other established interagency contracts--reasons that include avoiding fees paid for the use of other agencies' contracts, gaining more control over procurements made by organizational components, and allowing for the use of cost reimbursement contracts. However, concerns remain about contract duplication--under these conditions, many of the same vendors provided similar products and services on multiple contracts, which increases costs to both the vendor and the government and can result in missed opportunities to leverage the government's buying power. Furthermore, limited governmentwide policy is in place for establishing and overseeing MACs and enterprisewide contracts. Recent legislation and OMB's Office of Federal Procurement Policy initiatives are expected to strengthen oversight and management of MACs, but no initiatives are underway to strengthen approval and oversight of enterprisewide contracts. GSA faces a number of challenges in effectively managing the MAS program, the federal government's largest interagency contracting program. GSA lacks data on orders placed under MAS contracts that it could use to help determine how well the MAS program meets its customers' needs and help its customers obtain the best prices in using MAS contracts. In addition, GSA makes limited use of selected pricing tools, such as pre-award audits of MAS contracts, which make it difficult for GSA to determine whether the program achieves its goal of obtaining the best prices for customers and taxpayers. In 2008, GSA established a program office with broad responsibility for MAS program policy and strategy, but the program continues to operate under a decentralized management structure that some program stakeholders are concerned has impaired the consistent implementation of policies across the program and the sharing of information among the business portfolios. In addition, performance measures were inconsistent across the GSA organizations that manage MAS contracts, including inconsistent emphasis on pricing, making it difficult to have a programwide perspective of MAS program performance. Finally, GSA's MAS customer satisfaction survey has had a response rate of 1 percent or less in recent years that limits its utility as a means for evaluating program performance.

Leadership in agencies across the federal government is essential to providing the accountable, committed, consistent, and sustained attention needed to address human capital and related organization transformation issues. Leaders must not only embrace reform, they must integrate the human capital function into their agencies' core planning and business activities. Senior executive leadership is especially key today as the federal government faces significant reform challenges. OPM's 2006 Federal Human Capital Survey (FHCS) results showed that the government needs to establish a more effective leadership corps. For example, slightly less than half of employees responding to the survey reported a high level of respect for their senior leaders or are satisfied with the information they receive from management on what is going on in the organization. Similarly, only 38 percent of respondents agreed or strongly agreed with the statement that leaders in their organization generate high levels of motivation and commitment in the workforce. This represents little change from the 2004 survey when 37 percent of respondents had positive responses to this question. However, a majority of respondents, 58 percent, agreed or strongly agreed that managers communicate the goals and priorities of the organization. This level of response is essentially the same as the 2004 survey when 59 percent of respondents provided a positive response to this item. OPM plays a key role in fostering and guiding improvements in all areas of strategic human capital management in the executive branch. As part of its key leadership role, OPM can assist--and as appropriate, require--the building of the infrastructures within agencies needed to successfully implement and sustain human capital reforms and related initiatives. OPM can do this in part by encouraging continuous improvement and providing appropriate assistance to support agencies' efforts. For example, OPM has exerted human capital leadership through its Human Capital Scorecard of the President's Management Agenda to assist agencies in improving strategic management of their human capital. Also, OPM has developed the governmentwide FHCS to assist agencies and OPM in better understanding specific and governmentwide agency workforce management conditions and practices in the areas of leadership, performance culture, and talent. Most recently, OPM began a television campaign to promote federal employment and has undertaken a greater focus on succession planning to respond to the forthcoming federal retirement wave. However, in leading governmentwide human capital reform, OPM has itself faced challenges in its capacity to assist, guide, and certify agencies' readiness to implement reforms. We recently reported that OPM has made commendable efforts in transforming itself from less a rulemaker, enforcer, and independent agent to more a consultant, toolmaker and strategic partner in leading and supporting executive agencies' human capital management systems. We also reported on OPM's leadership of transformation efforts. Using the new senior executive performance-based pay system and other recent human capital reform initiatives as a model for understanding OPM's capacity to lead and implement future human capital reforms, we identified seven key lessons learned, which are (1) ensure internal OPM capacity to lead and implement reform, (2) ensure that executive branch agencies' infrastructures support reform, (3) collaborate with the Chief Human Capital Officer (CHCO) council, (4) develop clear and timely guidance, (5) share best practices, (6) solicit and incorporate feedback, and (7) track progress to ensure accountability. In addition to the lessons learned that can be applied to future human capital reforms, we recommended, among other things, that OPM (1) improve its capacity for future reforms by reexamining its own agencywide skills and (2) address issues specific to senior executive pay systems, such as sharing best practices and tracking progress towards goals. OPM has said that it has made progress toward achieving its operational and strategic goals. Equally important is OPM's leadership in federal workforce diversity and oversight of merit system principles. In our review of how OPM and the Equal Employment Opportunity Commission (EEOC) carry out their mutually shared responsibilities for helping to assure a fair, inclusive, and nondiscriminatory federal workplace, we found limited coordination between the two agencies in policy and oversight matters. The lack of a strategic partnership between the two agencies and an insufficient understanding of their mutual roles, authority, and responsibilities can result in a lost opportunity to realize consistency, efficiency, and public value in federal equal employment opportunity and workplace diversity human capital management practices. We recommended that OPM and EEOC regularly coordinate in carrying out their responsibilities under the equal employment opportunity policy framework and seek opportunities for streamlining like reporting requirements. Both agencies acknowledged that their collaborative efforts could be strengthened but took exception to the recommendation to streamline requirements. We continue to believe in the value of more collaboration. As of August of last year, the two agencies had begun discussions on ways to increase coordination. Strategic human capital planning is the centerpiece of federal agencies' efforts to transform their organizations to meet the governance challenges of the 21st century. Generally, strategic workforce planning addresses two critical needs: (1) aligning an organization's human capital program with its current and emerging mission and programmatic goals and (2) developing long-term strategies for acquiring, developing, motivating, and retaining staff to achieve programmatic goals. The long-term fiscal outlook and challenges to governance in the 21st century are prompting fundamental reexaminations of what government does, how it does it, and who does it. Strategic human capital planning that is integrated with broader organizational strategic planning is critical to ensuring agencies have the talent they need for future challenges. An agency's strategic human capital plan should address the demographic trends that the agency faces with its workforce, especially pending retirements. In 2006, OPM reported that approximately 60 percent of the government's 1.6 million white-collar employees and 90 percent of about 6,000 federal executives will be eligible for retirement over the next 10 years. We have found that leading organizations go beyond a succession planning approach that focuses on simply replacing individuals and engage in broad, integrated succession planning and management efforts that focus on strengthening both current and future organizational capacity to obtain or develop the knowledge, skills, and abilities they need to meet their missions. For example, about one third of the Nuclear Regulatory Commission's (NRC) workforce with mission-critical skills will be eligible to retire by 2010. At the same time, NRC's workforce needs to expand because NRC expects to receive applications for new nuclear power reactors beginning in October 2007. Although there is room for further improvement, we found that NRC's human capital planning framework is generally aligned with its strategic goals and coherently identifies the activities needed to achieve a diverse, skilled workforce and an infrastructure that fully supports the agency's mission and goals. The agency's framework included using its human capital authorities, developing a critical skills and gaps inventory tool, and using targets and measures to monitor the composition of its hires and separations. NRC has been effective in recruiting, developing, and retaining a critically skilled workforce, though it is unclear if this trend will continue in the next few years. We also have reported in recent years on a number of human capital issues that have hampered the Department of State's ability to carry out U.S. foreign policy priorities and objectives, particularly at posts central to the war on terror. For example, the department initiated a number of efforts to improve its foreign language capabilities. However, it has not systematically evaluated the effectiveness of these efforts, and it continues to experience difficulties filling its language-designated positions with language proficient staff. We reported that these gaps in language proficiency can adversely affect the department's ability to communicate with foreign audiences and execute critical duties. Another example of the government's strategic human capital planning challenges involves its acquisition workforce. The government increasingly relies on contractors for roles and missions previously performed by government employees. Acquisition of products and services from contractors consumes about a quarter of discretionary spending governmentwide and is a key function in many federal agencies. We reported in 2003 that because of a more sophisticated business environment, most acquisition professionals would need to acquire a new set of skills focusing on business management. In a forum hosted by the Comptroller General in July 2006, acquisition experts reported that agency leaders have not recognized or elevated the importance of the acquisition profession within their organizations, and a strategic approach has not been taken across government or within agencies to focus on workforce challenges, such as creating a positive image essential to successfully recruit and retain a new generation of talented acquisition professionals. Faced with a workforce that is becoming more retirement-eligible and finding gaps in talent because of changes in the knowledge, skills, and competencies in occupations needed to meet their missions, agencies need to strengthen their efforts and use of available flexibilities to acquire, develop, motivate, and retain talent. A chronic complaint about the federal hiring process is its lengthy procedures, which puts the federal government at a competitive disadvantage. In recent years, Congress, OPM, and agencies have taken significant steps to streamline the hiring process. For example, Congress has provided agencies with flexibilities such as the use of categorical rating and exemptions from the pay and classification restrictions of the General Schedule. OPM's efforts included improvements to the USAJOBS Web site as well as other measures, such as job fairs and television commercials, to make the public more aware of the work federal employees do. OPM has also established a model 45-day hiring program-- the time-to-hire period from the date a vacancy announcement closes to the date a job offer is extended. In addition, OPM has developed a Hiring Tool Kit on its website to help agencies improve their hiring processes. Moreover, OPM assists agencies on the use of student employment program flexibilities, which can expedite the hiring process and lead to noncompetitive conversion to permanent employment. Our work, however, has found that agencies' use of the tools and flexibilities that Congress has provided has been uneven. OPM has made some progress in assessing how agencies are using their hiring flexibilities and authorities. For example, in January of this year, we reported that OPM began working with a contractor in 2005 to review hiring flexibilities and authorities to determine which ones are used and not used, who is using them, and when and how they are being used. As a result of its work with the contractor, OPM plans to survey eight CHCO Council agencies to evaluate the use and effectiveness of hiring authorities and flexibilities and use the results to improve policies in these areas. This is a positive step on OPM's part as we continue to believe that more needs to be done to provide information to help agencies meet these human capital needs. Developing and maintaining workforces that reflect all segments of society and our nation's diversity is a key part of agencies' recruitment challenge. For example, the National Aeronautics and Space Administration (NASA) said it must compete with the private sector for the pool of Hispanics qualified for aerospace engineering positions, which is often attracted by more-lucrative employment opportunities in the private sector in more preferable locations. To address the situation, part of NASA's strategy in recruiting Hispanics focuses on increasing educational attainment, beginning in kindergarten and continuing into college and graduate school, with the goal of attracting students into the NASA workforce and aerospace community. NASA centers sponsor, and its employees participate in, mentoring, tutoring, and other programs to encourage Hispanic and other students to pursue careers in science, engineering, technology, and math. NASA also developed a scholarship program designed to stimulate a continued interest in science, technology, engineering, and mathematics. Another example is the U.S. Air Force "Grow Your Own" aircraft maintenance program at three of its Texas bases. In partnership with vocational-technical schools, the program includes both on-the-job training and classroom education to provide a pool of trained candidates, including Hispanics, to replace retiring federal civilian aircraft maintenance workers. In addition to hiring, agencies need to have effective training and development programs to address gaps in the skills and competencies that they identified in their workforces. We have issued guidance that introduces a framework, consisting of a set of principles and key questions that federal agencies can use to ensure that their training and development investments are targeted strategically and are not wasted on efforts that are irrelevant, duplicative, or ineffective. Training and developing new and current staff to fill new and different roles will play a crucial part in the federal government's endeavors to meet its transformation challenges. Of some concern, however, is the 2006 FHCS, which showed about half, or 54 percent, of respondents were very satisfied or satisfied with the training they receive on their current jobs, little change from the 2004 survey, which showed 55 percent had positive responses to this question. High-performing organizations have found that to successfully transform themselves they must often fundamentally change their cultures so that they are more results-oriented, customer-focused, and collaborative in nature. An effective performance management system is critical to achieving this vital cultural transformation. Effective performance management systems are not merely used for once- or twice-yearly individual expectation setting and rating processes, but are tools to help the organization manage on a day-to-day basis. These systems are used to achieve results, accelerate change, and facilitate two-way communication throughout the year so that discussions about individual and organizational performance are integrated and ongoing. Moreover, leading public sector organizations both in the United States and abroad create a clear linkage--line of sight--between individual performance and organizational success and, thus, transform their cultures to be more results-oriented, customer-focused, and collaborative in nature. The government's senior executives need to lead the way in transforming their agencies' cultures. Credible performance management systems that align individual, team, and unit performance with organizational results can help manage and direct this process. The performance-based pay system that Congress established in November 2003 for members of the senior executive service (SES) seeks to provide a clear and direct linkage between performance and pay for the government's senior executives and is an important step toward governmentwide transformation. Under this performance based pay system, senior executives no longer receive annual across-the-board pay increases or locality-pay adjustments. Executive branch agencies are to now base pay adjustments for senior executives on individual performance and contributions to agency performance through an evaluation of their skills, qualifications, or competencies as well their current responsibilities. Just as it has for senior executives, the federal government needs to fundamentally rethink its current approach to paying nonexecutive employees by better linking their pay to individual and organizational performance. Today's jobs in knowledge-based organizations require a much broader array of tasks that may cross the narrow and rigid boundaries of job classifications of the General Schedule system. Since being exempted from the General Schedule system, DOD and DHS have been moving toward occupational clusters and pay bands that better define occupations and facilitate movement toward performance management systems that create a line of sight between performance and organizational results, make meaningful differences in performance, and appropriately reward those who perform at the highest levels. The results of the 2006 FHCS underscore the need for serious attention to the way federal employees are assessed and compensated. About a third, or 34 percent, of the respondents strongly agreed or agreed with the statement that promotions in their work units are based on merit. When respondents were asked if pay raises in their work units depend on how well employees perform their jobs, only 22 percent responded positively. These responses are consistent with past survey results. Further, somewhat less than a third of the survey respondents had a positive response to the question about whether their leadership and management recognized differences in performance in a meaningful way. High- performing organizations have found that actively involving employees and key stakeholders, such as unions and other employee associations, helps gain ownership of new performance management systems and improves employees' confidence and belief in the fairness of the systems. In addition, adequate safeguards need to be built into the performance management system to ensure fairness and to guard against abuse. Using safeguards, such as having an independent entity conduct reasonableness reviews of performance management decisions can help allay concerns and build a fair, credible, and transparent system. In summary, Mr. Chairman, we need to continue to move forward with appropriate human capital reforms. But how reform is done, when it is done, and the basis on which it is done can make all the difference in whether such efforts are successful. Before implementing significant human capital reforms, especially reforms that make stronger links between employee pay and performance, executive branch agencies should follow a phased approach that meets a "show me" test. That is, each agency should be authorized to implement reform only after it has shown that it has met certain conditions, including having the institutional infrastructure to effectively and fairly implement any new authorities. Mr. Chairman and Members of the Subcommittee, this completes my prepared statement. I would be pleased to respond to any questions you or others may have at this time. For further information regarding this statement, please contact J. Christopher Mihm, Managing Director, Strategic Issues, at (202) 512- 6806, or [email protected]. Individuals making key contributions to this testimony include Anthony P. Lofaro, Assistant Director; Ami J. Ballenger; Thomas M. Beall; Crystal M. Bernard; William Doherty; Karin K. Fangman; and Anthony R. Patterson. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The federal government is facing new and more complex challenges in the 21st century because of long-term fiscal constraints, changing demographics, evolving governance models, and other factors. Strategic human capital management, which remains on GAO's high-risk list, must be the centerpiece of any serious change management and transformation effort to meet these challenges. However, federal agencies do not consistently have the modern, effective, economical, and efficient human capital programs, policies, and procedures needed to succeed in their transformation efforts. In addition, the Office of Personnel Management (OPM) must have the capacity to successfully guide human capital transformations. This testimony, based on a large body of GAO work over many years, focuses on strategic human capital management challenges that many federal agencies continue to face. Federal agencies continue to face strategic human capital challenges in several areas. Leadership--Top leadership in agencies across the federal government must provide committed and inspired attention needed to address human capital and related organizational transformation issues. However, slightly less than half of respondents to the 2006 Federal Human Capital Survey reported a high level of respect for senior leaders while only 38 percent agreed or strongly agreed that leaders in their organizations generate high levels of motivation and commitment in the workforce. Strategic Human Capital Planning--Strategic human capital planning that is integrated with broader organizational strategic planning is critical to ensuring agencies have the talent they need for future challenges, especially as the federal government faces a retirement wave. Too often, agencies do not have the components of strategic human capital planning needed to address their current and emerging human capital challenges. Acquiring, Developing, and Retaining Talent--Faced with a workforce that is becoming more retirement eligible and finding gaps in talent, agencies need to strengthen their efforts and use of available flexibilities to acquire, develop, motivate, and retain talent. Agencies are not uniformly using available flexibilities to recruit and hire top talent and to address the current and emerging demographic challenges facing the government. (4) Results-Oriented Organizational Culture--Leading organizations create a clear linkage--"line of sight"--between individual performance and organizational success and, thus, transform their cultures to be more results-oriented, customer-focused, and collaborative. However, in many cases, the federal government does not have these linkages and has not transformed how it classifies, compensates, develops, and motivates its employees to achieve maximum results within available resources and existing authorities. Agencies are facing strategic human capital challenges in a period of likely sustained budget constraints. Budget constraints will require agencies to plan their transformations more strategically, prioritize their needs, evaluate results, allocate their resources more carefully, and react to workforce challenges more expeditiously in order to achieve their missions economically, efficiently, and effectively. OPM will continue to play a key role in fostering and guiding strategic human capital management improvements in the executive branch and in helping agencies meet transformation challenges. Although making commendable efforts in transforming itself to more a consultant, toolmaker, and strategic partner in leading and supporting agencies' human capital management systems, OPM has itself faced challenges in its capacity to assist, guide, and certify agencies' readiness to implement reforms.

Anesthesia services are generally administered by anesthesia practitioners, such as anesthesiologists and CRNAs. In 2004, there were approximately 42,000 anesthesiologists and 30,000 CRNAs in the United States. Anesthesiologists are physicians who have completed a bachelor's degree, medical school, and an anesthesiology residency, typically 4 years in length. CRNAs are licensed as registered professional nurses and have completed a bachelor's degree and a 2- or 3-year nurse anesthesia graduate program. In our prior work, we showed that physician specialists, who include anesthesiologists, tend to locate in metropolitan areas. Anesthesia services can be provided in several ways. Anesthesia services can be provided by anesthesiologists alone, by anesthesiologists working with CRNAs or other practitioners, or by CRNAs alone. In 2004, proportionally more anesthesia services provided to Medicare beneficiaries were provided by anesthesiologists working as the sole anesthesia practitioner and by anesthesiologists working with another practitioner, such as a CRNA, compared to the proportion of anesthesia services provided by CRNAs as the sole anesthesia practitioner. CRNAs can directly bill Medicare for the provision of anesthesia services. In order to receive Medicare payment for anesthesia services, CRNAs generally are required to practice under the supervision of a physician or an anesthesiologist, except in states that have obtained an exemption from this requirement from CMS. As of May 2007, CMS reports that 14 states had requested and obtained this exemption, which would allow CRNAs to practice independently without physician supervision in a variety of inpatient and outpatient settings. Anesthesiologists derive approximately 28 percent of their income from Medicare. CRNAs derive approximately 35 percent of their patient mix from Medicare. In the Omnibus Budget Reconciliation Act of 1989, Congress required the establishment of a national Medicare physician fee schedule which sets payment rates for services provided by physicians and other practitioners. Under the Medicare physician fee schedule, Medicare payments for anesthesia services are generally the lesser of the actual charge for the service or the anesthesia fee schedule amount. Payments for anesthesia services are subject to the same annual updates as all other services paid under the physician fee schedule. However, Medicare payments for anesthesia services are calculated differently than payments for other services covered by the physician fee schedule. Specifically, Medicare fee schedule payments for anesthesia services are calculated using both "base" and "time" units. The relative complexity of an anesthesia service is measured by base units; the more activities that are involved, the more base units assigned by Medicare. The time spent performing an anesthesia service is measured continuously from when the anesthesia practitioner begins preparing the patient for services and ends when the patient may be safely placed in postoperative care and is measured by 15-minute units of time with portions of time units rounded to one decimal place. The sum of the base and time units are converted into a dollar payment amount by multiplying the sum by an anesthesia service-specific conversion factor, which also accounts for regional differences in the cost of providing services. As such, each Medicare payment locality has a unique anesthesia conversion factor assigned by CMS. The calculation of the Medicare payment for an anesthesia service associated with a lens surgery--the most common anesthesia service provided to Medicare beneficiaries in 2004--performed by an anesthesiologist or a CRNA working without another anesthesia practitioner is shown in figure 1. Subject to certain exceptions, Medicare payments for anesthesia services provided by anesthesiologists and CRNAs are equal in most situations. For illustrative purposes, we assumed that the service was provided in the Connecticut payment locality and took 21 minutes to perform. In 2004, the total Medicare payment for this service would have been $99.31, which was equal to the product of the anesthesia service conversion factor specific to the locality ($18.39) and the sum of the base and time units associated with the anesthesia service (5.4 total units). In contrast, Medicare payments for other physician services are calculated using relative value units (RVUs) that correspond to the different resources required to provide physician services. The RVUs are each adjusted to account for geographic differences in the cost of providing services, summed, and then multiplied by a general fee schedule conversion factor, which is applicable across all Medicare payment localities. Physicians who bill Medicare for services can accept Medicare's payment as payment in full (with the exception of the ability to bill a Medicare beneficiary for 20 percent coinsurance plus any unmet deductible). This is known as accepting assignment. Or they may exercise an option to bill a Medicare beneficiary for the difference between Medicare's payment and its limiting charge. This is known as balance billing. High rates of assignment may serve as an indicator of physicians' willingness to serve Medicare beneficiaries. In April 2004, 99.4 percent of the anesthesia services provided by anesthesiologists to Medicare beneficiaries were provided by anesthesiologists who accepted Medicare payment as payment in full. The anesthesiologists' assignment rate for anesthesia services was comparable to rates for other hospital-based specialists, such as pathologists (99.4 percent) and radiologists (99.6 percent), and was higher than the rate for all other physicians (98.8 percent). In addition to anesthesia services, anesthesiologists and CRNAs can also provide other nonanesthesia types of physician services covered by Medicare. Payments for these other physician services--which can include medical services such as office visits, and procedures such as pain management services--represented approximately 31 percent of anesthesiologists' and 2 percent of CRNAs' revenue from Medicare in 2004. Because payment for these services is determined by a different formula than anesthesia services, a significant portion of these Medicare payments are closer to private payments levels for the same services, in contrast to the difference in payments for anesthesia services. According to a MedPAC-sponsored analysis, the average difference between Medicare and private payments for medical services such as office visits and for procedures provided in 2001 was 5 percent and 25 percent, respectively. Most private payers, like Medicare, determine payments for anesthesia services using base units, time units, and anesthesia-specific conversion factors. Unlike the Medicare program, however, private payers can set their fees in response to market forces such as managed care prevalence and the extent of competition among providers. For example, private anesthesia conversion factors are generally negotiated between payers and anesthesia practitioners. In addition, some private payers use different methods to determine time units, such as rounding up fractional time units to the next whole number or using 10-minute increments for each time unit, which can result in higher anesthesia payments. When setting payment rates, some private payers also allow higher payments for certain patient-related factors such as extremes in age. In our prior work we found that private payments for physician services, excluding anesthesia and some other services, differed by about 100 percent between the lowest- and the highest-priced metropolitan areas and were responsive to market forces, such as regional differences in the extent of competition among hospitals and health maintenance organizations' (HMOs) ability to leverage prices. For example, we found that areas with less competition and lower levels of HMO price leverage had higher payments than areas with more competition and greater levels of HMO price leverage. We have also reported that because private payers can adjust their payment levels to account for market forces, their payment levels vary more than Medicare payments across geographic areas. We found that average Medicare payments for a set of seven anesthesia services provided by anesthesiologists alone were lower than average private payments in 41 Medicare payment localities in 2004, and ranged, on average, from 51 percent lower to 77 percent lower than private payments (see fig. 2). For all 41 payment localities, Medicare payments were lower than private payments by an average of 67 percent. In 2004, the average Medicare payment for a set of seven anesthesia services was $216, and the average private payment for the same set of anesthesia services was $658. Medicare payments varied less than private payments across the 41 payment localities. In 2004, average Medicare payments for the set of seven anesthesia services ranged from $177 to $303 across the 41 payment localities, a range of 71 percent. In contrast, average private payments for the same set of seven anesthesia services in that same year ranged from $472 to over $1,300 across these localities, a range of 177 percent. In 2004, there was no correlation between the overall supply of anesthesia practitioners--that is, the total number of both anesthesiologists and CRNAs per 100,000 people--and either the difference between Medicare and private payments for anesthesia services or the concentration of Medicare beneficiaries in the Medicare payment localities included in our analyses. However, when we examined the supply of anesthesiologists and CRNAs separately, we found correlations between practitioner supply and payment differences and practitioner supply and beneficiary concentration. Specifically, we found that in 2004, the supply of CRNAs tended to decrease as the difference between Medicare and private payments for anesthesia services increased in 41 Medicare payment localities. We also found that in 2004, the supply of anesthesiologists tended to decrease as the concentration of Medicare beneficiaries increased across 87 Medicare payment localities, while the supply of CRNAs tended to increase as the concentration of Medicare beneficiaries increased across these Medicare payment localities. We found no correlation between the overall supply of anesthesia practitioners per 100,000 people and the difference in Medicare and private payments for anesthesia services across 41 of Medicare's payment localities in 2004. The supply of anesthesia practitioners varied across the 41 localities independent of the payment differences in these localities and the payment differences varied independently of the supply of anesthesia practitioners in the localities. When we considered anesthesiologists and CRNAs separately, we found a relationship between the supply of CRNAs and the payment differences for anesthesia services across the 41 Medicare payment localities in 2004. Specifically, there tended to be fewer CRNAs in the localities with the larger differences between Medicare and private payments for anesthesia service. For example, on average, there were about 11.5 CRNAs per 100,000 people in the localities where private payments exceeded Medicare payments by about 59 percent, while there were fewer CRNAs--on average, about 7.5 per 100,000 people--in the localities where private payments exceeded Medicare payments by about 73 percent. In contrast, we did not find an association between the supply of anesthesiologists and the differences between Medicare and private payments for anesthesia services across the same 41 localities. We found no correlation between the overall supply of anesthesia practitioners and the concentration of Medicare beneficiaries across 87 Medicare payment localities in 2004. The overall supply of anesthesia practitioners--the number of both anesthesiologists and CRNAs combined per 100,000 people--varied across the 87 localities independent of the number of Medicare beneficiaries in these localities. We found that the supply of anesthesiologists and the supply of CRNAs were each correlated with the concentration of Medicare beneficiaries across 87 payment localities in 2004. However, we found the opposite relationship between the concentration of Medicare beneficiaries and the supply of anesthesiologists and the supply of CRNAs. We generally found fewer anesthesiologists in localities with a greater concentration of Medicare beneficiaries. For example, in 2004, in localities where on average 17 percent of the population was made up of Medicare beneficiaries, there were 13 anesthesiologists per 100,000 people. For localities where, on average, 11 percent of the population was made up of Medicare beneficiaries, the supply of anesthesiologists was relatively higher at 16 per 100,000 people. In contrast, we generally found more CRNAs in localities with higher concentrations of Medicare beneficiaries. For example, in 2004, on average, there were 14 CRNAs per 100,000 people in localities where the proportion of Medicare beneficiaries was 17 percent, on average, but half that supply--7 CRNAs per 100,000 people--in localities where 11 percent of the population was Medicare beneficiaries. The larger supply of CRNAs in localities with greater concentrations of Medicare beneficiaries appeared to offset the smaller anesthesiologist supply in these localities so that, in total, there was no relationship between the overall supply of anesthesia practitioners and the concentration of Medicare beneficiaries across the 87 localities in 2004. For 2005, compensation for anesthesia practitioners was reported to compare favorably to that of other physicians and nonphysician practitioners, according to information from medical group practices from across the country that responded to a survey of MGMA member organizations. The 2005 median annual compensation for general anesthesiologists--approximately $354,240--was over 10 percent higher than the median annual compensation for specialists and over twice the compensation for generalists. When compared to other hospital-based specialists, the MGMA-reported median annual compensation for general anesthesiologists was higher than that for three categories of pathologists and less than that for three categories of radiologists. For example, the MGMA-reported median annual compensation for general anesthesiologists was approximately 10 percent higher than the MGMA- reported median annual compensation for anatomic and clinical pathologists. MGMA data also showed that the median annual compensation for pain management anesthesiologists and pediatric anesthesiologists exceeded the median annual compensation for general anesthesiologists and all categories of pathologists and radiologists. Similarly, for 2005, the MGMA-reported median annual compensation for CRNAs--approximately $131,400--was higher than the MGMA-reported median annual compensation for other nonphysician practitioners such as nurse practitioners, nurse midwives, and physician assistants. For example, the MGMA-reported median annual compensation for CRNAs was over 40 percent higher than the MGMA-reported median annual compensation for either nurse midwives or nurse practitioners and over 35 percent higher than the MGMA-reported median annual compensation for physician assistants. The number of anesthesiology residency positions offered through the NRMP and the number of nurse anesthesia graduates have increased in recent years. From 2000 to 2006 the number of residency positions available in anesthesiology through the NRMP increased from 1,005 to 1,311, and the number of these positions that were filled increased from 802 to 1,287. By 2006, the anesthesiology residency match rate--the percentage of positions that have been filled--was 98 percent. This rate was higher than the rate for pathologists, radiologists, and all physicians in 2006. In addition, there has been a significant increase in the number of newly graduated nurse anesthetists. According to the Council on Certification of Nurse Anesthetists (CCNA), in 1999, nurse anesthesia programs produced 948 new graduates; in 2005, that number had increased to 1,790, an overall increase of 89 percent. We provided a draft of this report to CMS and to two external commenters that represent anesthesia service practitioners; the AANA and the American Society of Anesthesiologists (ASA). CMS's written comments are reprinted in appendix II. CMS stated that our study provides a good summary of information collected from a variety of sources on anesthesia payments and the supply of anesthesia practitioners but was concerned that our analysis of payment differences for anesthesia services did not include four of the top five Medicare anesthesia services in terms of Medicare payments. CMS noted that private payer rates are not a criterion under the law to determine whether Medicare physician payments are reasonable and stated that the Medicare and private payment differences for anesthesia services do not necessarily indicate a deficiency in Medicare payment rates. CMS also suggested that the report should mention that the services of CRNAs in most rural hospitals and critical access hospitals are paid on a reasonable cost basis--not under the physician fee schedule--and that payments based on reasonable costs could affect Medicare and private payment differences for anesthesia services in these areas. One of the external commenters generally agreed with our findings. The other external commenter agreed with our finding regarding payment differences for anesthesia services, but like CMS questioned our choice of the anesthesia services included in our analysis of payment differences. This external commenter was also concerned regarding our finding related to supply of anesthesia practitioners and believed that we overestimated the supply of anesthesiologists based on analysis of its own association membership counts. Both external commenters stated that we should have addressed aspects of payments to anesthesia service practitioners that were not included in our analysis. Specifically, one external commenter stated we should have examined the use of stipends by hospitals to augment anesthesiologists' compensation. The other external commenter stated we should have included analysis of Medicare and private anesthesia service payments to CRNAs, including analysis of anesthesia services during which CRNAs work with anesthesiologists or provide the services as the sole anesthesia practitioner. We carefully considered which anesthesia services to include in our analysis of Medicare and private payment differences for anesthesia services, but were not able to include all of the high-volume Medicare anesthesia services. In order to calculate the difference between Medicare and private payments for anesthesia services and include the maximum number of localities in our analysis, it was essential to include anesthesia services that were high volume for both Medicare and the private sector. Some anesthesia services that were high volume for Medicare beneficiaries, for example anesthesia for lens surgery, were not as high volume for private patients and were not included for that reason. We agree with CMS that differences between Medicare and private payments for anesthesia services are not a statutory criterion for determining Medicare payments for these services and added this clarification to our report. We also clarified that Medicare payments for CRNA anesthesia services provided in rural and critical access hospitals could be paid on a reasonable cost basis and added a statement to the report stating this fact. However, we did not determine the extent to which Medicare and private payments to CRNAs practicing in rural and critical access hospitals differed as this was beyond the scope of our study. In response to the external commenter's concern regarding the accuracy of our estimate of the supply of anesthesiologists, we believe the AMA data that we used to calculate the supply of anesthesiologists represent the most complete and accurate data source for analyzing physician supply, and that the external commenter estimates of supply based on association membership counts may underestimate supply because it is likely that some anesthesiologists do not belong to the association. Additionally, we checked our calculations regarding the supply of anesthesiologists and verified that we had removed inactive and nonpracticing anesthesiologists from our supply estimates. We did not include a discussion of stipends paid by hospitals to anesthesia service practitioners. Stipends are reported to be paid to a variety of specialists, including anesthesiologists, for several reasons, including to compensate specialists for treating a high proportion of Medicare beneficiaries, 24- hour coverage of trauma units, and to help cover costs associated with treating uninsured patients. As our study focused on Medicare and private payments for anesthesia services and overall compensation for anesthesia practitioners, it was beyond the scope of our study to examine this issue in further detail. We agree with the external commenter that it would have been preferable to include payments for CRNA anesthesia services in our analysis, but were not able to do this due to data limitations. The external commenters provided us with technical comments and clarifications, which we incorporated as appropriate. As arranged with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from the date of this letter. We are sending copies of this report to the Administrator of CMS and interested congressional committees. We will also make copies available to others upon request. The report is available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have any questions, please contact me at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Staff members that made major contributions to this report are listed in appendix III. This appendix describes in detail the data and methods we used to calculate differences in Medicare and private anesthesia service payments, anesthesia practitioner supply, and Medicare beneficiary concentration. It also describes the correlation analyses we conducted to determine the relationship between anesthesia practitioner supply measures, differences in anesthesia service payments, and Medicare beneficiary concentration. Finally, this appendix addresses data reliability issues and limitations related to our studies. To examine the extent to which Medicare payments for anesthesia services were lower than private payments across Medicare payment localities in 2004, we used anesthesia service claims data from two billing companies that bill and track payments from private payers and Medicare and calculated payments by payer for services provided by anesthesiologists alone at the Medicare payment locality level. This provided us with average Medicare and private payments for a set of anesthesia services. We then calculated payment differences--that is, the percentage by which Medicare payments were lower than private payments, calculated as the difference between average private and Medicare payments as a percent of average private payments--for each of the localities included in our analysis. To calculate the difference between Medicare and private payments for anesthesia services, we used 2004 anesthesia service claims data from two companies that bill private payers and Medicare on behalf of anesthesia practitioners. We obtained names of several billing companies from interviews with industry experts who were knowledgeable about industry billing practices. We chose to use anesthesia service claims data from billing companies because such data contain claims from many different insurers in an area. The two billing companies from which we obtained claims data together provided billing services on behalf of over 10 percent of all anesthesiologists in the country in 2004. Although the anesthesia service claims data from the two companies may not be generalizeable to all anesthesia services provided by anesthesiologists, billing company officials stated that their claims data were generally representative of other companies that provided billing for anesthesia services and that anesthesia practioner groups that did not use billing services were not that different from groups that did use billing services. The billing companies provided us with claims data for anesthesia services provided in 2004, including payment information for the 27 highest- expenditure anesthesia services paid for by Medicare in 2003, which accounted for approximately 70 percent of Medicare anesthesia service expenditures in 2003. The specific information the billing companies provided included data on the type of payer; the anesthesia service code; payment modifiers that specified the type of anesthesia practitioner involved; total minutes of time required to perform the service; payments, including insurer and beneficiary payments; and the Medicare payment locality in which the service was provided. Due to the proprietary nature of the data and concerns about identification of providers or beneficiaries, the billing companies could not provide payment information at a smaller geographic level. Therefore, Medicare payment localities were the smallest areas for which we could examine payments for anesthesia services. Only claims for which fee-for-service Medicare was the payer were included in our calculation of Medicare payments. For our calculation of private payments for these services, we included fee-for-service, preferred provider organization, and managed care claims from all commercial payers. Average payments included payments made by insurers as well as patient obligations such as deductibles and coinsurance payments. Because our study compared Medicare and private payments only, we excluded the billing companies' claims from other payers of anesthesia services, such as Medicaid and workers' compensation funds. We also excluded any claims for which we could not definitively identify the payer. Although both billing companies provided claims data, one company provided information at the individual claims level while the other company provided claims information summarized to the case level. For the individual claims-level data, we excluded claims from the analysis if the average anesthesia service payment was greater than or less than 3 standard deviations from the log of the average anesthesia service payment, specific to each anesthesia service, Medicare payment locality, and payer. We applied similar criteria to anesthesia service conversion factors (which we calculated as the total payment for the service divided by the sum of the base and time units associated with the service) in the individual claims-level data. Because data from the other company were summarized, we were not able to apply similar exclusion criteria. Instead, prior to providing the claims data to us, the billing company excluded claims if an individual Medicare or private anesthesia service payment was less than 10 percent of the Medicare allowable payment for the locality in which the service was provided or if the receivable was greater than $50. We excluded claims paid by Medicare from the data provided by either billing company if the Medicare anesthesia conversion factor did not match any of the Centers for Medicare & Medicaid Services' (CMS) established conversion factors, based on the localities present in the data. We examined descriptive statistics for both data sets after all exclusions were applied and determined that it would be appropriate to merge the two data sets to calculate payment differences. After applying these and other exclusion criteria, we ranked the anesthesia service codes in order of prevalence across the Medicare payment localities represented in the billing companies' claims data. Based on the rankings and prevalence across localities, we identified a set of seven anesthesia services that were most prevalent and well represented across the Medicare payment localities included in the claims data. We balanced the need for maximizing the number of localities with having a set of anesthesia services that were prevalent in all of the localities chosen. In our final data set we retained billing company claims data for all seven of these anesthesia services in 41 different Medicare payment localities. These seven anesthesia services were services provided by anesthesiologists only. We did not have a sufficient volume of claims for anesthesia services provided by certified registered nurse anesthetists (CRNAs) alone to include data from CRNA-performed services in our analysis. We also did not include data for anesthesia services provided by anesthesiologists with the involvement of other anesthesia practitioners because the billing data for these services from the two billing companies were not consistent and we therefore determined them to be not reliable. Medicare and private payments were both weighted to account for the relative national expenditures for each of the seven anesthesia services by Medicare in 2003 (see table 1). For example, because anesthesia services for intraperitoneal procedures in the upper abdomen including laparoscopy accounted for approximately one-third of Medicare expenditures for the seven selected codes combined, approximately one- third of the overall average payment we calculated for each locality was based on payments for this service. There were far fewer Medicare expenditures associated with anesthesia for hernia repairs in the lower abdomen, not otherwise specified and therefore payments for these services had a much smaller weight in overall average payment calculations. Over 136,000 Medicare and private anesthesia service cases were included in our calculation of payment differences. Using the weighted average Medicare and private payments, we calculated payment differences for each of the 41 Medicare payment localities included in our analysis. We also calculated an overall average payment difference inclusive of data from all 41 localities. To examine a payment variable that was not influenced by variation in time, we examined the difference in conversion factors for Medicare and private anesthesia services, using the seven services provided by anesthesiologists in the 41 Medicare payment localities. The average difference in conversion factors was 69 percent, an amount very similar to the difference in Medicare and private payments. Therefore, we focused our analyses on the difference in Medicare and private payments. To estimate anesthesia practitioner supply at the locality level, we used data from the American Medical Association (AMA), the American Association of Nurse Anesthetists (AANA), the U.S. Census Bureau, and CMS. Only active anesthesiologists and CRNAs practicing in the 50 states and the District of Columbia were included in our analysis. We assigned anesthesia practitioners and the number of total U.S. general population residents to 87 Medicare payment localities.10,,11 12 To determine supply per 100,000 people, we divided the number of anesthesia practitioners in each locality by the total resident population in the same locality, multiplied by 100,000. (See table 2). To estimate the concentration of Medicare beneficiaries at the locality level, we used CMS and U.S. Census Bureau data. Using a geographic crosswalk file, we assigned the number of beneficiaries enrolled in Medicare and the number of total U.S. general population residents to Medicare payment localities. We then computed the percentage of Medicare beneficiaries in the general population to estimate the concentration of Medicare beneficiaries in each Medicare payment locality. (See table 3). To measure the relationship between the supply of anesthesia practitioners, the difference in average Medicare and private payments, and the concentration of Medicare beneficiaries at the locality level, we performed correlation analyses. A correlation coefficient measures the strength and direction of linear association between two variables without controlling for the effects of other characteristics as in a multivariate analysis. We calculated correlations between three measures of anesthesia practitioner supply--anesthesiologists, CRNAs, and total (anesthesiologists and CRNAs combined)--and differences in payments in 41 Medicare payment localities. We also calculated correlations between the three supply measures and the concentration of Medicare beneficiaries in 87 Medicare payment localities. (See tables 4 and 5 below.) We used a variety of data sources in our analysis, including anesthesia service claims data from two billing companies, the AMA, the AANA, the U.S. Census Bureau, CMS, the National Resident Matching Program (NRMP), and the Medical Group Management Association (MGMA). We tested the internal consistency and reliability of all our data sources and determined they were adequate for our purposes. The files containing the billing company data, which were used by the two companies to record bills and payments, were subjected to various internal controls, including spot checks, batch totals, and balancing controls as reported by the two companies. Although we did not review these internal controls, we did assess the reliability of the billing company data. We conducted extensive interviews with representatives from both companies to gain an understanding of the completeness and accuracy of the data the companies provided. We also reviewed all information provided to us concerning the data, including data dictionaries and file layouts. Additionally, we examined the data for errors, missing values, and values outside of expected range and computed payment differences from each company's data separately and found them to be comparable. Finally, we determined that our calculation of anesthesia service payment differences was comparable with the results of a MedPAC-sponsored study. We also assessed the reliability of median compensation information reported by MGMA. Although multiple compensation surveys are available, we chose to use MGMA as our data source because it has been used as a source in a number of peer-reviewed articles, and it contains comprehensive information on various aspects of physician compensation. Through interviews with MGMA officials, we learned of the steps taken by MGMA to ensure the reliability of the data the association published on median compensation, including comparisons with other industry studies on physician and nonphysician compensation and year-to-year analyses of respondents. We identified several potential limitations of our analyses. First, while we used payment data from 41 different Medicare payment localities, we do not know if the payment data are representative of all 89 of Medicare's payment localities. Second, we did not have sufficient payment information to calculate payment differences for anesthesia services provided by anesthesiologists working with other anesthesia practitioners or anesthesia services provided solely by CRNAs. As a result, we do not know if payment differences for services provided in these ways would have been different than payment differences for anesthesia services provided by anesthesiologists alone. Third, we limited our analyses to determining whether the supply of anesthesia practitioners was linearly associated with payment differences or Medicare beneficiary concentration. However, practitioners' decisions on where to locate could be influenced by many other factors not included in our analyses. We also identified potential limitations with MGMA's compensation data. The data were based on a survey of MGMA member organizations which are reported to overrepresent large medical groups. In addition, the MGMA survey response rate of 16 percent raises the possibility that their compensation data may not be representative of the compensation of all physician and nonphysician practitioners. We performed our work from September 2004 through May 2007 in accordance with generally accepted government auditing standards. In addition to the contact named above, Christine Brudevold, Assistant Director; Stella Chiang; Krister Friday; Jawaria Gilani; and Ba Lin made key contributions to this report. Medicare Physician Services: Use of Services Increasing Nationwide and Relatively Few Beneficiaries Report Major Access Problems. GAO-06-704. Washington, D.C.: July 21, 2006. Federal Employees Health Benefits Program: Competition and Other Factors Linked to Wide Variation in Health Care Prices. GAO-05-856. Washington, D.C.: August 15, 2005. Medicare Physician Fees: Geographic Adjustment Indices Are Valid in Design, but Data and Methods Need Refinement. GAO-05-119. Washington, D.C.: March 11, 2005. Physician Workforce: Physician Supply Increased in Metropolitan and Nonmetropolitan Areas but Geographic Disparities Persisted. GAO-04-124. Washington, D.C.: October 31, 2003.

In 2005 Medicare paid over $1.4 billion for anesthesia services. These services are generally provided by anesthesia practitioners, such as anesthesiologists and certified registered nurse anesthetists (CRNAs). A government-sponsored study found that Medicare payments for anesthesia services are lower than private payments. Congress is concerned that this difference may create regional discrepancies in the supply of anesthesia practitioners, and asked GAO to explore this issue. GAO examined (1) the extent to which Medicare payments for anesthesia services were lower than private payments across Medicare payment localities in 2004, (2) whether the supply of anesthesia practitioners across Medicare payment localities in 2004 was related to the differences between Medicare and private payments for anesthesia services or the concentration of Medicare beneficiaries, and (3) compensation levels for anesthesia practitioners in 2005 and trends in graduate training. GAO used claims data from two anesthesia service billing companies that bill private insurance payers and Medicare to calculate payments by payer for seven anesthesia services in 41 Medicare payment localities. GAO also used data from the Centers for Medicare & Medicaid Services (CMS) and other sources to determine practitioner supply and Medicare beneficiary concentration in 87 Medicare payment localities. GAO found that in 2004 average Medicare payments for a set of seven anesthesia services provided by anesthesiologists alone were 67 percent lower than average private insurance payments in 41 Medicare payment localities--geographic areas established by CMS to account for geographic variations in the relative costs of providing physician services. In 2004, there was no correlation between the overall supply of anesthesia practitioners--that is, the total number of both anesthesiologists and CRNAs per 100,000 people--and either the difference between Medicare and private insurance payments for anesthesia services or the concentration of Medicare beneficiaries in the Medicare payment localities included in GAO's analyses. However, when GAO examined the supply of anesthesiologists and CRNAs separately, GAO found correlations between practitioner supply and payment differences and practitioner supply and beneficiary concentration. Specifically, GAO found that in 2004, the supply of CRNAs tended to decrease as the difference between Medicare and private insurance payments for anesthesia services increased in 41 Medicare payment localities. GAO also found that in 2004 the supply of anesthesiologists tended to decrease as the concentration of Medicare beneficiaries increased across 87 Medicare payment localities, while the supply of CRNAs tended to increase as the concentration of Medicare beneficiaries increased across these Medicare payment localities. For 2005, compensation for anesthesia practitioners was reported to compare favorably with other practitioners, according to information from medical group practices from across the country that responded to a survey of Medical Group Management Association (MGMA) member organizations. The 2005 median annual compensation for general anesthesiologists--approximately $354,240--was over 10 percent higher than the median annual compensation for specialists and over twice the compensation for generalists. For 2005, MGMA-reported median annual compensation for CRNAs-approximately $131,400--was over 40 percent higher than the MGMA-reported median annual compensation for either nurse midwives or nurse practitioners and over 35 percent higher than the MGMA-reported median annual compensation for physician assistants. The number of anesthesiology residency positions offered through the National Resident Matching Program and the number of nurse anesthesia graduates have increased in recent years. CMS stated that the study provided a good summary of information collected from a variety of sources on anesthesia payments and the supply of anesthesia practitioners.

Social Security's projected long-term financing shortfall stems primarily from the fact that people are living longer and having fewer children. As a result, the number of workers paying into the system for each beneficiary is projected to decline. This demographic trend is occurring or will occur in all OECD countries. Although the number of workers for every elderly person in the U.S. has been relatively stable over the past few decades, it has already fallen substantially in other developed countries. The number of workers for every elderly person in the U.S. is projected to fall from 4.1 in 2005 to 2.9 in 2020. In nine of the OECD countries, this number has already fallen below the level projected for the U.S. in 2020. This rise in the share of the elderly in the population could have significant effects on countries' economies, particularly during the period from 2010 to 2030. These effects may include slower economic growth and increased costs for aging-related government programs. Historically, developed countries have relied on some form of a PAYG program and have used a variety of approaches to reform their national pension systems. In many cases, these approaches provide a basic or minimum benefit as well as a benefit based on the level of a worker's earnings. Several countries are preparing to pay future benefits by either supplementing or replacing their PAYG programs. For example, some have set aside and invested current resources in a national pension reserve fund to partially pre-fund their PAYG program. Some have established fully funded individual accounts. These are not mutually exclusive types of reform. In fact, many countries have undertaken more than one of the following types of reform: Adjustments to existing pay-as-you-go systems. Typically, these are designed to create a more sustainable program by increasing contributions or decreasing benefits, or both, while preserving the basic structure of the system. Measures include phasing in higher retirement ages, equalizing retirement ages across genders, and increasing the earnings period over which initial benefits are calculated. Some countries have created notional defined contribution (NDC) accounts for each worker, which tie benefits more closely to each worker's contributions and to factors such as the growth rate of the economy. National pension reserve funds. These are set up to partially pre-fund PAYG national pension programs. Governments commit to make regular transfers to these investment funds from, for example, budgetary surpluses. To the extent that these contribute to national saving, they reduce the need for future borrowing or large increases in contribution rates to pay scheduled benefits. Funds can be invested in a combination of government securities and domestic as well as foreign equities. Individual accounts. These fully funded accounts are administered either by employers or the government or designated third parties. The level of retirement benefits depends largely on the amount of each person's contributions into the account during their working life, investment earnings, and the amount of fees they are required to pay. We are applying GAO's Social Security reform criteria to the experiences of countries that are members of the OECD as well as Chile, which pioneered individual accounts in 1981. We are assessing both the extent to which another country's circumstances are similar enough to those in the U.S. to provide a useful example and the extent to which particular approaches to pension reform were considered to be successful. Countries have different starting points, including unique economic and political environments. Moreover availability of other sources of retirement income, such as occupation-based pensions, varies greatly. Recognizing this, GAO uses three criteria for evaluating pension reforms: Financing Sustainable Solvency. We are looking at the extent to which particular reforms influence the funds available to pay benefits and how the reforms affect the ability of the economy, the government's budget, and national savings to support the program on a continuing basis. Balancing Equity and Adequacy. We are examining the relative balance struck between the goals of allowing individuals to receive a fair return on their contributions and ensuring an adequate level of benefits to prevent dependency and poverty. Implementing and Administering Reforms. We are considering how easily a reform is implemented and administered and how the public is educated concerning the reform. Because each country is introducing reforms in a unique demographic, economic, and political context these factors will likely affect reform choices and outcomes. For instance, several European countries we are reviewing have strong occupation-based pension programs that contribute to retirement income security. In addition, some countries had more generous national pensions and other programs supporting the elderly than others. All countries also provide benefits for survivors and the disabled; often these are funded separately from old age benefit programs. Some countries are carrying out reforms against a backdrop of broader national change. For example, Hungary and Poland were undergoing large political and economic transformations as they reformed their national pension systems. All of these issues should be considered when drawing lessons. In addition to the adjustments that countries have made to their existing PAYG systems, many countries have undergone other changes as well, indicating that change may not be a one-time experience. (See table 1.) Understanding the outcomes of a country's reform requires us to look at all of the changes a country has made. The experiences of the countries that have adjusted their existing PAYG national pension programs highlight the importance of considering how modifications will affect the program's financial sustainability, its distribution of benefits, the incentives it creates, and the extent to which the public understands the new provisions. To reconcile PAYG program revenue and expenses, nearly all the countries we studied have decreased benefits and most have also increased contributions, often in part by increasing retirement ages. Generally countries with national pension programs that are relatively financially sustainable have undertaken a package of several far-reaching adjustments. The countries we are studying increased contributions to PAYG programs by raising contribution rates, increasing the range of earnings or kinds of earnings subject to contribution requirements, or increasing the retirement age. Most of these countries increased contribution rates for some or all workers. Canada, for example, increased contributions to its Canadian Pension Plan from a total of 5.85 percent to 9.9 percent of wages, half paid by employers and half by employees. Several countries, including the UK, increased contributions by expanding the range of earnings subject to contributions requirements. Nearly all of the countries we are studying decreased scheduled benefits, using a wide range of techniques. Some techniques reduce the level of initial benefits; others reduce the rate at which benefits increase during retirement or adjust benefits based on retirees' financial means. Increased years of earnings. To reduce initial benefits several countries increased the number of years of earnings they consider in calculating an average lifetime earnings level. France previously based its calculation on 10 years, but increased this to 25 years for its basic public program. Increased minimum years of contributions. Another approach is to increase the minimum number of years of contributions required to receive a full benefit. France increased the required number of years from 37.5 to 40 years. Belgium is increasing its minimum requirement for early retirement from 20 to 35 years. Changed formula for calculating benefits. Another approach to decreasing the initial benefit is to change the formula for adjusting prior years' earnings. Countries with traditional PAYG programs all make some adjustment to the nominal amount of wages earned previously to reflect changes in prices or wages over the intervening years. Although most of the countries we are studying use some kind of average wage index, others, including Belgium and France, have adopted the use of price indices. The choice of a wage or price index can have quite different effects depending on the rate at which wages increase in comparison to prices. We see variation in the extent to which wages outpace prices over time and among countries. Changed basis for determining year-to-year increases in benefits. In many of the countries we are studying, the rate at which monthly retirement benefits increase from year-to-year during retirement is based on increases in prices, which generally rise more slowly than earnings. Others, including Denmark, Ireland, Luxembourg, and the Netherlands, use increases in earnings or a combination of wage and price indices. Hungary, for example, changed from the use of a wage index to the Swiss method-- an index weighted 50 percent on price changes and 50 percent on changes in earnings. Implemented provisions that provide a closer link between pension contributions and benefits. Countries that have adopted this approach stop promising a defined level of benefits and instead keep track of notional contributions into workers' NDC accounts. Unlike individual accounts, these notional defined accounts are not funded. Current contributions to the program continue to be used largely to pay benefits to current workers, while at the same time they are credited to individuals' notional accounts. When these programs include adjustments that link benefits to factors such as economic growth, longevity, and/or the ratio of workers to retirees, they may contribute to the financial sustainability of national pension systems. Several countries, such as Sweden and the UK, have undertaken one or more of these adjustments to their PAYG programs and have achieved, or are on track to achieve relative financial sustainability. Others, including Japan, France, and Germany, may need additional reforms to fund future benefit commitments. All of the countries have included in their reforms provisions to ensure adequate benefits for lower-income groups and put into place programs designed to ensure that all qualified retirees have a minimum level of income. Most do so by providing a targeted means-tested program that provides more benefits to retirees with limited financial means. Two countries--Germany and Italy--provide retirees access to general social welfare programs that are available to people of all ages rather than programs with different provisions for elderly people. Twelve countries use another approach to providing a safety net: a basic retirement benefit. The level of the benefit is either a given amount per month for all retirees or an amount based on years of contributions to the program. In Ireland, for example, workers who contribute to the program for a specified period receive a minimum pension. Chile set a minimum pension equal to the minimum wage--about one-quarter of average earnings as of 2005. In addition, several of the countries we are studying give very low-income workers credit for a minimum level contribution. Other countries give workers credit for years in which they were unemployed, pursued postsecondary education, or cared for dependents. In selecting between the many reform options, policy makers need to strike a careful balance among the following objectives: provide a safety net, contain costs, and maintain incentives to work and save. Costs can be high if a generous basic pension is provided to all eligible retirees regardless of their income. On the other hand, means-tested benefits can diminish incentives to work and save. The UK provides both a basic state pension and a means-tested pension credit. Concerned about the decline in the proportion of preretirement earnings provided by the basic state pension, some have advocated making it more generous. Others argue that focusing safety-net spending on those in need enables the government to alleviate pensioner poverty in a cost effective manner. However, a guaranteed minimum income could reduce some peoples' incentive to save. In view of this disincentive, the UK adopted an additional means- tested benefit that provides higher benefits for retirees near the minimum income level. This benefit, called the savings credit, allows low-income retirees near the minimum pension level to retain a portion of their additional income. However, any loss of income due to means-testing still diminishes incentives to save. Without changes to pension rules, the proportion of pensioners eligible for means-tested income is expected to increase to include almost 65 percent of retiree households by 2050. The extent to which new provisions are implemented, administered, and explained to the public may affect the outcome of the reform. Poland, for example, adopted NDC reform in 1999, but the development of a data system to track contributions has been problematic. As of early 2004, the system generated statements indicating contributions workers made during 2002, but there was no indication of what workers contributed in earlier years or to previous pension programs. Without knowing how much they have in their notional defined accounts, workers may have a difficult time planning for their retirement. Some governments have had limited success in efforts to educate workers about changes in provisions that will affect their retirement income. For example, a survey of women in the UK showed that only about 43 percent of women who will be affected by an increase in the retirement age knew the age that applied to them. Another type of pension reform is the accumulation of reserves in national pension funds, which can contribute to the system's financial sustainability depending on when the funds are created or reformed and how they are managed. Countries that chose to partially pre-fund their PAYG programs decades ago have had more time to amass substantial reserves, reducing the risk that they will not meet their pension obligations. A record of poor fund performance has led some countries to put reserve funds under the administration of relatively independent managers with the mandate to maximize returns without undue risk. Establishing reserve funds ahead of demographic changes--well before the share of elderly in the population increases substantially--makes it more likely that enough assets will accumulate to meet future pension obligations. In countries such as Sweden, Denmark, and Finland, which have had long experiences with partial pre-funding of PAYG programs, important reserves have already built up. These resources are expected to make significant contributions to the long-term finances of national pension programs. Other countries that have recently created pension reserve funds for their pension program have a tighter time frame to accumulate enough reserves before population aging starts straining public finances. In particular, the imminent retirement of the baby-boom generation is likely to make it challenging to continue channeling a substantial amount of resources to these funds. France, for example, relies primarily on social security surpluses to finance its pension reserve fund set up in 1999, but given its demographic trends, may be able to do so only in the next few years. Similarly, Belgium and the Netherlands plan on maintaining a budget surplus, reducing public debt and the interest payments associated with the debt, and transferring these earmarked resources to their reserve funds. However, maintaining a surplus will require sustained budgetary discipline as a growing number of retirees begins putting pressure on public finances. Examples from several countries reveal that pre-funding with national pension reserve funds is less likely to be effective in helping ensure that national pension programs are financially sustainable if these funds are used for purposes other than supporting the PAYGO program. Some countries have used funds to pursue industrial, economic, or social objectives. For example, Japan used its reserve fund to support infrastructure projects, provide housing and education loans, and subsidize small and medium enterprises. As a result, Japan compromised to some extent the principal goal of pre-funding. Past experiences have also highlighted the need to mitigate certain risks that pension reserve funds face. One kind of risk has to do with the fact that asset build-up in a fund may lead to competing pressures for tax cuts and spending increases, especially when a fund is integrated in the national budget. For example, governments may view fund resources as a ready source of credit. As a result, they may be inclined to spend more than they would otherwise, potentially undermining the purpose of pre- funding. Ireland alleviated the risk that its reserve fund could raise government consumption by prohibiting investment of fund assets in domestic government bonds. Another risk is the pressure that groups may exert on the investment choices of a pension reserve fund, potentially lowering returns. For example, Canada and Japan have requirements to invest a minimum share of their fund portfolio in domestic assets, restricting holdings of foreign assets to stimulate economic development at home. Funds in several countries have also faced pressure to adopt ethical investment criteria, with possible negative impacts on returns. In recent years, some countries have taken steps to ensure that funds are managed to maximize returns, without undue risk. Canada, for example, has put its fund under the control of an independent Investment Board operating at arm's length from the government since the late 1990's. Several countries, including New Zealand, have taken steps to provide regular reports and more complete disclosures concerning pension reserve funds. Countries that have adopted individual account programs--which may also help pre-fund future retirement income--offer lessons about financing the existing PAYG pension program as the accounts are established. Some countries manage this transition period by expanding public debt, building up budget surpluses in advance of implementation, reducing or eliminating the PAYG program, or some combination of these. In addition, administering individual accounts requires effective regulation and supervision of the financial industry to protect individuals from avoidable investment risks. Educating the public is also important as national pension systems become more complex. It is important to consider how different approaches to including individual accounts may affect the short-term and long-term financing of the national pension system and the economy as a whole. A common challenge faced by countries that adopt individual accounts is how to pay for both a new funded pension and an existing PAYG pension simultaneously, known as transition costs. Countries will encounter transition costs depending on whether the individual accounts redirect revenue from the existing PAYG program, the amount of revenue redirected, and how liabilities under the existing PAYG program are treated. The countries we are examining offer a range of approaches for including individual accounts and dealing with the prospective transition costs. Australia and Switzerland avoided transition costs altogether by adding individual accounts to their existing national pension systems, which are modest relative to those in the other countries we are studying. Some countries diverted revenue from the existing PAYG program to the individual accounts. The resulting shortfall reflects, in part, the portion of the PAYG program being replaced with individual accounts and the amount of PAYG revenue being redirected to fund the accounts. For example, transition costs may be less in countries such as Sweden or Denmark where the contribution to individual accounts is 2.5 percent of covered earnings and 1 percent, respectively, than for Poland or Hungary, which replaced a larger portion of the PAYG program. All of the countries we are reviewing also made changes to their PAYG program that were meant to help reduce transition costs, such as increasing taxes or decreasing benefits. In addition, Chile built a surplus in anticipation of major pension reform, and Sweden had large budget surpluses in place prior to establishing individual accounts. Countries also transfer funds from general budget revenues to help pay benefits to current and near retirees, expanding public borrowing. If individual accounts are financed through borrowing they will not positively affect national saving until the debt is repaid, as contributions to individual accounts are offset by increased public debt. For example, Poland's debt is expected to exceed 60 percent of GDP in the next few years in part because of its public borrowing to pay for the movement to individual accounts. It is sometimes difficult for countries to predict their transition costs. In particular, countries that allow workers to opt in or out of individual account programs have had difficulty estimating costs. For example, Hungary and Poland experienced higher than anticipated enrollment from current workers in their individual account programs, leaving the existing PAYG program with less funding than planned. As a result, both countries had to make subsequent changes to their individual account and PAYG programs. Countries adopting individual accounts as part of their national pension system have had to make trade-offs between giving workers the opportunity to maximize returns in their accounts and ensuring that benefits will be adequate for all participants. Some countries set a guaranteed rate of return to reduce certain investment risks and help ensure adequacy of benefits. These guarantees may, however, result in limited investment diversification with a potentially negative impact on returns. In Chile, for example, fund managers' performance is measured against the returns of other funds. This has resulted in a "herding" effect because funds hold similar portfolios, reducing meaningful choice for workers. All the countries with individual accounts provide some form of a minimum guaranteed benefit so retirees will have at least some level of income. Some experts believe that a minimum pension guarantee could raise a moral hazard whereby individuals may make risky investment decisions, minimize voluntary contributions, or, as in the case of Australia where the minimum guarantee is means-tested, may spend down their retirement assets quickly. It is important to consider the payout options available from individual accounts, as these can also have substantial effects on adequacy of income throughout retirement. For example, an annuity payout option can help to ensure that individuals will not outlive their assets in retirement. However, purchasing an annuity can leave some people worse off if, for example, the annuities market is not fully developed, premiums are high, or inflation erodes the purchasing power of benefits. Several countries also allow for phased withdrawals, in some cases with restrictions, helping to mitigate the risk of individuals outliving their assets and becoming reliant on the government's basic or safety-net pension. Some countries offer a lump-sum payment under certain circumstances, such as small account balances, and Australia allows a full lump-sum payout for all retirees. Important lessons can be learned regarding the administration of individual accounts, including the need for effective regulation and supervision of the financial industry to protect individuals from avoidable investment risks. Some countries have expanded their permitted investment options to include foreign investments and increased the percentage of assets that can be invested in private equities. The experiences of countries we are studying also indicate the importance of keeping administrative fees and charges under control. The fees that countries permit pension funds to charge can have a big influence on the amount of income retirees receive from their individual accounts. Several countries have limits on the level and types of fees providers can charge. Additionally, the level of fees should take into consideration the potential impact not only on individuals' accounts, but also on fund managers. In the UK, for example, regulations capping fees may have discouraged some providers from offering pension funds. To keep costs low, Sweden aggregates individuals' transactions to realize economies of scale. Some countries' experiences highlighted weaknesses in regulations on how pension funds can market to individuals. The UK's and Poland's regulations did not prevent problems in marketing and sales. Poland experienced sales problems, in part because it had inadequate training and standards for its sales agents, which may have contributed to agents' use of questionable practices to sign up individuals. The UK had a widely- publicized "mis-selling" scandal involving millions of investors. Many opened individual accounts when they would more likely have been better off retaining their occupation-based pension. Insurance companies were ordered to pay roughly $20 billion in compensation. Countries' individual account experiences reveal pitfalls to be avoided during implementation. For example, Hungary, Poland, and Sweden had difficulty getting their data management systems to run properly and continue to experience a substantial lag time in recording contributions to individuals' accounts. In addition, Hungary and Poland did not have an annuities market that offered the type of annuity required by legislation. Education becomes increasingly important as the national pension systems become more complex. It is particularly important for workers who may have to make a one-time decision about joining the individual account program. Several countries require disclosure statements about the status of a pension fund, and some provide annual statements. To help individuals choose a fund manager, one important component of these statements should be the disclosure of fees charged. Some countries have done a better job of providing fund performance information than others. For example, Australia requires its fund providers to inform members through annual reports clearly detailing benefits, fees and charges, investment strategy, and the fund's financial position. In contrast, Hungary did not have clear rules for disclosing operating costs and returns, making it hard to compare fund performance. Demographic challenges and fiscal pressure have necessitated national pension reform in many countries. Though one common goal behind reform efforts everywhere is to improve financial sustainability, countries have adopted different approaches depending on their existing national pension system and the prevailing economic and political conditions. This is why reforms in one country are not easily replicated in another, or if they are, may not lead to the same outcome. Countries have different emphases, such as benefit adequacy or individual equity; as a result, what is perceived to be successful in one place may not be viewed as a viable option somewhere else. Although some pension reforms were undertaken too recently to provide clear evidence of results, the experiences of other countries may suggest some lessons for U.S. deliberations on Social Security reform. Some of these lessons are common to all types of national pension reform and are consistent with findings in previous GAO studies. Restoring long-term financial balance invariably involves cutting benefits, raising revenues, or both. Additionally, with early reform, policy makers can avoid the need for more costly and difficult changes later. Countries that undertook important national pension reform well before undergoing major demographic changes have achieved, or are close to achieving, financially sustainable national pension systems. Others are likely to need more significant steps because their populations are already aging. No matter what type of reform is undertaken, the sustainability of a pension system will depend on the health of the national economy. As the number of working people for each retiree declines, average output per worker must increase in order to sustain average standards of living. Reforms that encourage employment and saving, offer incentives to postpone retirement, and promote growth are more likely to produce a pension system that delivers adequate retirement income and is financially sound for the long term. Regardless of a country's approach, its institutions need to effectively operate and supervise the different aspects of reform. A government's capacity to implement and administer the publicly managed elements of reform and its ability to regulate and oversee the privately managed components are crucial. In addition, education of the public becomes increasingly important as workers and retirees face more choices and the national pension system becomes more complex. This is particularly true in the case of individual account reforms, which require higher levels of financial literacy and personal responsibility. In nearly every country we are studying, debate continues about alternatives for additional reform measures. It is clearly not a process that ends with one reform. This may be true in part because success can only be measured over the long term, but problems may arise and need to be dealt with in the short term. The positive lessons from other countries' reforms may only truly be clear in years to come. Mr. Chairman and Members of the Subcommittee, this concludes my prepared statement. I'd be happy to answer any questions you may have. For further information regarding this testimony, please contact Barbara D. Bovbjerg, Director, Education, Workforce, and Income Security Issues at (202) 512-7215. Alicia Puente Cackley, Assistant Director, Benjamin P. Pfeiffer, Thomas A. Moscovitch, Nyree M. Ryder, Seyda G. Wentworth and Corinna A. Nicolaou, also contributed to this report. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Many countries, including the United States, are grappling with demographic change and its effect on their national pension systems. The number of workers for each retiree is falling in most developed countries, straining the finances of national pension programs, particularly where contributions from current workers fund payments to current beneficiaries--known as a "pay-as-you-go" (PAYG) system. Although demographic and economic challenges are less severe in the U.S. than in many other developed countries, projections show that the Social Security program faces a long-term financing problem. Because some countries have already undertaken national pension reform efforts to address demographic changes similar to those occurring in the U.S., we may draw lessons from their experiences. The Chairman of the Subcommittee on Social Security of the House Committee on Ways and Means asked GAO to testify on preliminary results of ongoing work on lessons learned from other countries' experiences reforming national pension systems. GAO focuses on (1) adjustments to existing PAYG national pension programs, (2) the creation or reform of national pension reserve funds to partially pre-fund PAYG pension programs, and (3) reforms involving the creation of individual accounts. Based on preliminary work, all countries in the Organisation for Economic Co-operation and Development (OECD), as well as Chile, have, to some extent, reformed their national pension systems, consistent with their different economic and political conditions. While reforms in one country may not be easily replicated in another, their experiences may nonetheless offer lessons for the U.S. Countries' experiences adjusting PAYG national pension programs highlight the importance of considering how modifications will affect the program's financial sustainability, its distribution of benefits, the incentives it creates, and public understanding of the new provisions. Nearly all of the countries we are studying reduced benefits, and most have also increased contributions, often by increasing statutory retirement ages. Countries included provisions to ensure adequate benefits for lower-income groups, though these can lessen incentives to work and save for retirement. Also, how well new provisions are implemented, administered, and explained to the public may affect the outcome of the reform. Countries with national pension reserve funds designed to partially pre-fund PAYG pension programs provide lessons about the importance of early action and sound governance. Funds that have been in place for a long time provide significant reserves to strengthen the finances of national pension programs. Countries that insulate national reserve funds from being directed to meet other social and political objectives are better equipped to fulfill future pension commitments. In addition, regular disclosure of fund performance supports sound management and administration, and contributes to public education and oversight. Countries that have adopted individual account programs--which may also help pre-fund future retirement income--offer lessons about financing the existing PAYG pension program as the accounts are established. Countries that have funded individual accounts by directing revenue away from the PAYG program while continuing to pay benefits to PAYG program retirees have expanded public debt, built up budget surpluses in advance, cut back or eliminated the PAYG programs, or some combination of these. Because no individual account program can entirely protect against investment risk, some countries have adopted individual accounts as a relatively small portion of their national pension system. Others set minimum rates of return or provide a minimum benefit, which may, however, limit investment diversification and individuals' returns. To mitigate high fees, which can erode small account balances, countries have capped fees, centralized the processing of transactions, or encouraged price competition. Although countries have attempted to educate individuals about reforms and how their choices may affect them, some studies indicate that many workers have limited knowledge about their retirement prospects.

The decennial census is the nation's largest, most complex survey. In April 2009, address canvassing--a field operation for verifying and correcting addresses for all households and street features contained on decennial maps--will begin. One year later, the Bureau will mail census questionnaires to the majority of the population in anticipation of Census Day, April 1, 2010. Those households who do not respond will be contacted by field staff through the NRFU operation to determine the number of people living in the house on Census Day, among other information. In addition to address canvassing and NRFU, the Bureau conducts other operations, for example, to gather data from residents from group quarters, such as prisons or college dormitories. The Bureau also employs different enumeration methods in certain settings, such as remote Alaska enumeration, in which people living in inaccessible communities must be contacted in January 2010 in anticipation of the spring thaw which makes travel difficult, or update/enumerate, a data collection method involving personal interviews, used in communities where many housing units may not have typical house number-street name mailing addresses. Further, the efforts of state and local government are enlisted to obtain a more complete address file through the LUCA program. The census is also conducted against a backdrop of immutable deadlines, and the census's elaborate chain of interrelated pre- and post-Census Day activities is predicated upon those dates. The Secretary of Commerce is legally required to (1) conduct the census on April 1 of the decennial year, (2) report the state population counts to the President for purposes of congressional apportionment by December 31 of the decennial year, and (3) send population tabulations to the states for purposes of redistricting no later than 1 year after the April 1 census date. To meet these mandated reporting requirements, census activities must occur at specific times and in the proper sequence. The table below shows some dates for selected, key decennial activities. The Bureau estimates that the 2010 Census will cost $11.3 billion over its life-cycle, making it the most expensive in the nation's history. While some cost growth is expected, partly because the number of housing units has increased, the estimated cost escalation has far exceeded the housing unit increase. The Bureau estimates that the number of housing units for the 2010 Census will increase by 10 percent over 2000 Census levels, but the average 2010 cost to enumerate a housing unit is expected to increase by about 29 percent from 2000 levels (from $56 to $72) (see fig. 1). As the Bureau plans for 2010, maintaining cost effectiveness will be one of the single greatest challenges confronting the agency. According to the Bureau, the increasing cost of the census is caused by various societal trends--such as increasing privacy concerns, more non- English speakers, and people residing in makeshift and other nontraditional living arrangements--making it harder to find people and get them to participate in the census. The Bureau has reengineered the decennial census, including implementing new initiatives aimed at increasing the response rate. Furthermore, the Bureau also plans to begin to implement its outreach and communications campaign, an effort used in the 2000 Census that was designed to increase awareness and encourage individuals to respond to the census questionnaire. Increasing the decennial's response rate can result in significant savings because the Bureau can reduce the staffing and costs related to NRFU, as well as yield more complete and accurate data. According to the Bureau, for every one-percentage point increase in the response rate, the Bureau will be able to save $75 million. The Bureau plans to increase response rate by several means, including conducting a short-form-only census. The Bureau is able to do this because in 1996 the Bureau began efforts to replace the decennial long form with the American Community Survey. Since 1970, the overall mail response rate to the decennial census has been declining steadily, in part, because of the burden of responding to the long form, which was sent to a sample of respondents. In the 1980 Census, the overall mail response rate was 75 percent, 3 percentage points lower than it was in the 1970 Census. In the 1990 census, the mail response rate dropped to 65 percent but in 2000 appeared to be leveling off at about 64 percent. In the 2000 Census when comparing the short form to the long form the Bureau found the short form response rate of 66.4 percent was 12.5 percentage points higher that the long form response rate of 53.9 percent. While the difference between the long and short form response rates are significant, the Bureau in its initial assumption for the 2010 Census predicted that conducting a short-form-only census will yield only a 1-percent increase in the overall mail response rate. A targeted second mailing to households that fail to respond to the initial census questionnaire can increase the ultimate response rate. According to Bureau studies, sending a second questionnaire could yield a gain in overall response of 7 to 10 percentage points from non-responding households, thus potentially saving the Bureau between $525 million to $700 million dollars (given that every 1 percentage point increase in response may save $75 million). In reports, we have highlighted that a targeted second mailing could boost the mail response rate, which in turn would result in considerable savings by reducing the number of costly personal visits enumerators would need to make to nonresponding households. The Bureau has never before included this operation as part of a decennial census and over the decade has been testing its feasibility. A targeted second mailing was a part of 2006 test and boosted the response rate by 8.8 percent at the Austin, Texas test site. According to Bureau officials targeted second mailing will be a part of the 2010 Census design. For the 2010 Census the Bureau also intends to increase response rates by undertaking a public awareness campaign as it did in the previous census. In the 2000 Census that effort was comprised of two major activities: conducting the first-ever paid advertising campaign aimed at increasing the mail response rate, including the historically undercounted populations, and leveraging the value of local knowledge by building 140,000 partnerships at every level including state, local , and tribal governments; community- based organizations; and the media and private-sector organizations to elicit public participation in the census. In 2001 we reported that for the 2000 Census, it appeared that encouraging people to respond to the census questionnaire was successful, in part due to the Bureau's partnership efforts. For example, according to the Bureau, it achieved an initial mail response rate of about 64 percent, 3 percentage points higher that it had anticipated when planning for NRFU. This was a noteworthy accomplishment and, as a result, the Bureau had over 3 million fewer housing units to follow-up with than it had initially planned. The Bureau will soon begin its outreach and communication effort for 2010. The Bureau plans to award the communications contract in August 2007 and will begin hiring partnership specialists at headquarters starting in fiscal year 2008. The MCD is a keystone to the reengineered census. It allows the Bureau to automate operations and eliminate the need to print millions of paper questionnaires and maps used by census workers to conduct address canvassing and NRFU, as well as assisting to manage field staff's payroll. The benefits of using the MCD were tested in the 2004 and 2006 tests. According to the Bureau, during the 2004 Census Test, the MCD allowed the Bureau to successfully remove over 7,000 late mail returns from enumerators' assignments, reducing the total NRFU workload by nearly 6 percent. The ability to remove late mail returns from the Bureau's NRFU workload reduces costs, because census field workers no longer need to make expensive follow-up visits to households that return their questionnaire after the mail-back deadline. If the Bureau had possessed this capability during the 2000 Census, it could have eliminated the need to visit nearly 773,000 late-responding households and saved an estimated $22 million (based on our estimate that a 1-percentage-point increase in workload could add at least $34 million in direct salary, benefits, and travel costs to the price tag of NRFU). However, the Bureau's ability to collect and transmit data using the MCD is not fully tested and, at this point, constitutes a risk to the cost-effective implementation of the 2010 Census. During the 2004 test of NRFU and the 2006 test of address canvassing, the MCDs experienced significant reliability problems. For example, during the 2004 Census Test, the MCDs experienced transmission problems, memory overloads, and difficulties with a mapping feature--all of which added inefficiencies to the NRFU operation. Moreover, during the 2006 test, the MCD's global positioning system (GPS) receiver, a satellite-based navigational system to help workers locate street addresses and collect coordinates for each structure in their assignment area, was also unreliable. Bureau officials believe the MCD's performance problems will be addressed through a contract awarded on March 30, 2006, to develop a new MCD. A prototype of the MCD has been developed and delivered by the contractor for use in the 2008 Dress Rehearsal. However, operational testing of the MCD will not occur until May 2007, when address canvassing for the 2008 Dress Rehearsal occurs, and if problems do emerge, little time will be left to develop, test, and incorporate refinements. In our May 2006 report, we highlighted the tight time frames to develop the MCD and recommended that systems being developed or provided by contractors for the 2010 Census--including the MCD--be fully functional and ready to be assessed as part of the 2008 Dress Rehearsal. We are currently reviewing the cost, schedule and performance status of the contract for the MCDs. We plan to visit the dress rehearsal sites to determine the functionality of the devices to collect and transmit data. If after the 2008 Dress Rehearsal the MCD is found not to be reliable, the Bureau could be faced with the daunting possibility of having to revert to the costly, paper-based census used in 2000. Although the greater use of automation offers the prospect of greater efficiency and effectiveness, these actions also introduce new risks. The automation of key census processes involves an extensive reliance on contractors. Consequently, contract oversight and management becomes a key challenge to a successful census. As part of the Bureau's plans to increase the use of automation and technology for the 2010 Census, the Bureau estimates that it will spend about $ 3 billion on information technology (IT) investments. The Bureau will be undertaking several major acquisitions, including the Decennial Response Integration System (DRIS)--a system for integrating paper and telephone responses; the Field Data Collection Automation (FDCA) program--the systems and support equipment for field office data collection activities including the MCDs to be used by enumerators; the Data Access and Dissemination System (DADS II)--a system for tabulating and disseminating data from the decennial census and other Bureau surveys to the public; and the modernization of the Master Address File/Topologically Integrated Geographic Encoding and Referencing (MAF/TIGER) system, which provides the address list, maps, and other geographic support services for the decennial and other Bureau surveys, known as the MAF/TIGER Accuracy Improvement Project (MTAIP). Together these and other systems are to support collection, processing, and dissemination of census data. In March 2006, we testified on the Bureau's acquisition and management of two key information technology system acquisitions for the 2010 Census-- FDCA and the DRIS. We reported on the Bureau's progress in implementing acquisitions and management capabilities for these initiatives. To effectively manage major IT programs, organizations should use sound acquisition and management processes to minimize risk and thereby maximize chances for success. Such processes include project and acquisition planning, solicitation, requirement development and management, and risk management. We reported that while the project offices responsible for these two contracts have carried out initial acquisition management activities, neither office had the full set of capabilities they needed to effectively manage the acquisitions, including implementing a full risk management process. We also made recommendations for the Bureau to implement key activities needed to effectively manage acquisitions. For example, we recommended that the Bureau's project office for DRIS complete a project plan and obtain stakeholder concurrence before initiating additional development work and obtain validation, management, and customer approval of DRIS requirements. In response to our recommendation, the Bureau has finalized the project plan for DRIS and has obtained stakeholders' commitment. As a result, the DRIS project office will have the direction that it needs to successfully avoid unanticipated changes. Prior to Census Day, Bureau field staff perform the address canvassing operation, during which they verify the addresses of all housing units. The Bureau estimates spending $350 million to hire about 74,000 field workers for the address canvassing operation. About 1 year later, the Bureau mails out questionnaires to about 130 million households nationwide. However, the Bureau expects that about 40 million households will not return the questionnaire. To collect information from those households, the Bureau hires temporary field staff--based out of local census offices--to visit each nonresponding household in its NRFU operation. The Bureau expects to spend over $2 billion to employ about 525,000 temporary field staff for that activity. As shown in fig. 2, in total the Bureau will recruit and test 3.8 million applicants for addressing canvassing and NRFU, hiring some 600,000 people for the 2010 Census. For the 2010 Census, the Bureau plans to use a similar approach to recruit and hire workers as it used during Census 2000. These strategies made the Bureau a more attractive employer to prospective candidates and helped provide a steady stream of applicants during Census 2000. Despite a tight labor market, the Bureau attracted about 3.7 million qualified applicants and hired about half a million enumerators at peak. Some of the broad approaches from 2000 that the Bureau plans on implementing for the 2010 census include recruiting five times more applicants than the needed number of field workers to ensure a considerable depth in the applicant pool from which to hire; "frontloading" or hiring twice the number of people needed to do the work in anticipation of high levels of turnover; exercising the flexibility to raise pay rates for local census offices that were encountering recruiting difficulties; and launching a recruitment advertising campaign, which totaled over $2.3 million for Census 2000. As in 2000, the Bureau faces the daunting tasks of meeting its recruiting and hiring goals. However, it also faces additional challenges, such as demographic shifts whereby the population is increasingly diverse and difficult to locate, and newer challenges, like the Bureau's use of handheld computers for data collection in the field. It does plan some improvements to how it recruits and hires its temporary workforce to carry out the 2010 Census. For example, the Bureau has conducted and incorporated information collected from employee debriefings that could improve its recruiting and hiring processes. Bureau officials believe this feedback would be helpful in evaluating and refining its hiring and recruiting processes and intend to incorporate some of that information for the 2008 Dress Rehearsal. However, it can do more to target its recruitment of field staff. The Bureau casts a wide net to recruit its temporary workforce to ensure it has a large enough applicant pool from which to hire. In commenting on a draft of this work, Commerce noted that the Bureau's priority is to reach out as broadly a possible to the diverse communities in the county to attract several million applicants. We recognize that when recruiting and hiring for hundreds of thousands of positions, the Bureau faces a challenge in assessing applicants' potential success or willingness to work. However, opportunities exist for the Bureau to hone its recruiting efforts to identify individuals who would be more likely to be effective at census work and willing to continue working throughout an operation. Along those same lines, the Bureau could also evaluate the factors associated with an applicant's success, willingness to work in an operation, and likelihood of attrition to refine its hiring. Despite Commerce's reservations about refining its current recruiting and hiring strategies, we believe that the Bureau could do more to understand what makes for a successful recruit and, by hiring such applicants, reduce operating costs. Another recruiting and hiring issue we identified in our completed work is related to how the crew leaders are selected. We found that the Bureau's tools for hiring crew leaders could better distinguish the skills needed for those positions. Crew leaders fill an important role in the Bureau's field activities because they supervise the work of crews of field workers; train field workers; and will be counted on to troubleshoot the MCDs. We found that despite the different skill requirements of crew leaders and other field staff--for example, while it was important for field staff working in the NRFU operation to have arithmetic and visual identification skills, crew leaders need those skills as well as additional skills, such as management, leadership, and creative thinking--the Bureau used the same set of hiring tools to hire individuals for crew leaders and other field positions during the 2006 Census Test. In its review of the 2004 Census Test, the Department of Commerce Office of Inspector General OIG also reported that Bureau officials said that the applicants' the multiple-choice test does not capture the technical or supervisory skills needed by crew leaders. The Bureau hired a contractor to assess whether the tools used during the 2006 Census Test selected individuals with the skills necessary to conduct field work using MCDs; however, the Bureau has no current plans to make changes to its hiring process that would include differentiated hiring tools for crew leaders and other positions. Without hiring tools that distinguish between skills needed for the crew leader and other positions, the Bureau does not have assurances that it is selecting crew leaders that can best perform important duties like providing training, managing other field staff, and troubleshooting handheld computers. In commenting on our draft, Commerce indicated that the Bureau needs to evaluate its hiring tools. It is also working to identify and test what the appropriate skills are for the crew leader position. Finally, we found that the Bureau does not collect performance data needed to rehire former workers from prior or ongoing operations to whom it may give hiring priority. Officials say they try to exclude those terminated for cause (such terminations can result when workers have performance or conduct problems such as selling drugs or striking another worker). Bureau officials point to its internal systems, which, they say preclude the rehiring of employees who were terminated for cause. However, the OIG and field officials told us that poor performers may not always be terminated. Without better information on employee performance, the Bureau cannot ensure that the weakest performers are not rehired. Over the course of the 2006 Census Test, almost 15 percent of all field staff were rehired. If this percentage were to be rehired during the 2010 Census, the Bureau would not have performance data to meaningfully evaluate whether to rehire approximately 90,000 individuals. The Bureau believes that the pace of the decennial, particularly NRFU, is such that local census officials would not have enough time to consider past performance when making hiring decisions. However, we believe that the Bureau has enough time. For example, performance data could be collected during address canvassing to be used to assess workers for NRFU, nearly one-year later. The Bureau has employed essentially the same approach to training since the 1970 Census. To conduct training, the Bureau solicits free or low-cost training spaces from local organizations, such as churches or libraries. Training classes typically include 15 to 20 students. Crew leaders usually train their crews, with the assistance of at least one crew leader assistant, using a verbatim training approach, whereby crew leaders read training scripts word-for-word over the course of several days. Similarly, the crew leaders were themselves trained by their supervisors in a "train-the- trainers" approach. The length of training varies by operation; for NRFU, training took almost 42 hours over the course of 6 days during the 2006 test. The Bureau and others, including us, have reported that the Bureau should consider alternate approaches to training delivery. Our review of the 2004 Census Test found that, as a result of the demographic and technological changes that have taken place since 1970, the Bureau might want to explore alternatives to its verbatim approach to training. Moreover, in 2004, the OIG suggested the Bureau explore the use of interactive training methods, as the Bureau does for other non-decennial surveys. For example, while many field staff we contacted during the 2006 test said their overall impression of training was generally positive, many added that videos or visuals would or might improve training. In addition, while the Bureau is providing some computer-based training on using the handheld computers in key operations, overall the Bureau has made limited changes to the approach it uses to deliver training and has not evaluated alternative approaches to providing training. It is notable that observations during the 2004 and 2006 tests showed that field staff may have missed important parts of training. Contractor employees saw students playing games on their MCDs during training for the 2006 test, and in 2004 the OIG saw students not paying attention and falling asleep in class, concluding that some may not have learned how to conduct census operations. The content of the Bureau's training for field staff also has not changed substantially since Census 2000, despite the fact that, according to the Bureau itself, collecting data from the nation's population has become increasingly difficult. Field workers we spoke to during the 2006 test noted two related issues on which they had not received sufficient training-- dealing with reluctant respondents and handling location-specific challenges. According to the Department of Commerce OIG, in 2004 field staff complained that they felt unprepared to deal with reluctant respondents; the OIG report recommended the Bureau consider adding content to enhance training on this topic. Moreover, our review of the Bureau's summaries of debriefings it conducted after the 2006 test indicated that field staff found respondent reluctance to be a challenge. Crew leaders noted that this was the most difficult task enumerators faced. In our field visits, we observed that without adequate preparation in dealing with reluctant responders, field staff developed their own strategies when confronted with these situations, resulting in inconsistent and sometimes inappropriate data collection methods. For example, when unable to contact respondents, one Texas enumerator looked up respondent information online, tried to find a phone number for another respondent from a neighborhood cat's collar, and illegally went through residents' mail. Field staff may also need more training in overcoming location-specific challenges, such as rural conditions on the Cheyenne River Indian Reservation in South Dakota; and counting the transient student population in Austin, Texas. For example, in Austin, one crew leader explained that training spent a lot of time on mobile homes--which did not exist in his area--but very little time on apartment buildings, which are common there. Based on our observations of the 2004 test, we suggested that the Bureau supplement the existing training with modules geared toward addressing the particular enumeration challenges that field staff are likely to encounter in specific locales. During this review, the Bureau told us that it works with regional offices to develop 10-minute training modules for specific locations. For example, in 2000, Bureau officials said enumerators in Los Angeles were trained to look for small, hidden housing units, such as apartments in converted garages. Bureau officials said they provide guidance on the length of the modules and when they should be presented. However, they said they were not sure how often this kind of specialized training took place, nor had they allocated time during training to present specialized information. We believe the Bureau could do more to assist local offices provide training that recognizes local conditions. Specifically, based on work we will be reporting shortly, we will recommend that the Bureau centrally develop training modules covering enumeration strategies in a variety of situations, such as mobile homes, large apartment buildings, and migrant worker dwellings, which local officials can selectively insert into their training if there is a need to train their field staff on that topic. Such modules would enhance the effectiveness of training by giving greater attention to the challenges field staff are likely to face. In commenting on this recommendation, Commerce noted that the Bureau works with managers in each regional census center to customize a location-specific training module for local census offices. Nonetheless, developing modules for different types of locations centrally would allow the Bureau to control the consistency and quality of training throughout the nation. As part of our evaluation of the Bureau's LUCA dress rehearsal, we visited the localities along the Gulf Coast to assess the effect the devastation caused by Hurricanes Katrina and Rita might have on LUCA and possibly other operations. The effects of Hurricanes Katrina and Rita are still visible throughout the Gulf Coast region. Hurricane Katrina alone destroyed or made uninhabitable an estimated 300,000 homes; in New Orleans, local officials reported that Hurricane Katrina damaged an estimated 123,000 housing units. Such changes in housing unit stock continue to present challenges to the implementation of the 2010 LUCA Program in the Gulf Coast region and possibly other operations. Many officials of local governments we visited in hurricane-affected areas said they have identified numerous housing units that have been or will be demolished as a result of hurricanes Katrina and Rita and subsequent deterioration. Conversely, many local governments estimate that there is new development of housing units in their respective jurisdictions. The localities we interviewed in the Gulf Coast region indicated that such changes in the housing stock of their jurisdictions are unlikely to subside before local governments begin reviewing and updating materials for the Bureau's 2010 LUCA Program--in August 2007. Local government officials told us that changes in housing unit stock are often caused by difficulties families have in deciding whether to return to hurricane- affected areas. Local officials informed us that a family's decision to return is affected by various factors, such as the availability of insurance; timing of funding from Louisiana's "Road Home" program; lack of availability of contractors; school systems that are closed; and lack of amenities such as grocery stores. As a result of the still changing housing unit stock, local governments in hurricane-affected areas may be unable to fully capture reliable information about their address lists before the beginning of LUCA this year or address canvassing in April 2009. Furthermore, operation of local governments themselves has been affected by the hurricanes (see fig. 3). These local governments are focused on reconstruction and at least two localities we spoke to questioned their ability to participate in LUCA. The mixed condition of the housing stock in the Gulf Coast will increase the Bureau's address canvassing workload. During our field work, we found that hurricane-affected areas have many neighborhoods with abandoned and vacant properties mixed in with occupied housing units. Bureau staff conducting address canvassing in these areas may have an increased workload due to the additional time necessary to distinguish between abandoned, vacant and occupied housing units. Another potential issue is that due to continuing changes in the condition in the housing stock, housing units that are deemed vacant or abandoned during address canvassing may be occupied on Census Day (Apr. 1, 2010). Bureau officials said that they recognize there are issues with uninhabitable structures in hurricane-affected zones. They noted that addresses marked as vacant or uninhabitable during address canvassing in the Gulf Coast region will not be deleted from the MAF, and said that they may adjust training for Bureau staff in hurricane-affected areas. Workforce shortages may also pose significant problems for the Bureau's hiring efforts for address canvassing. The effects of hurricanes Katrina and Rita caused a major shift in population away from the hurricane-affected areas, especially in Louisiana. This migration displaced many low-wage workers. Should this continue, it could affect the availability of such workers for address canvassing and other decennial census operations. Bureau officials recognize the potential difficulty of attracting these workers, and have recommended that the Bureau be prepared to meet hourly wage rates for future decennial staff that are considerably higher than usual. It has noted that its Dallas regional office, which has jurisdiction over hurricane-affected areas in Texas, Louisiana, and Mississippi, will examine local unemployment rates to adjust pay rates in the region, and use "every single entity" available to advertise for workers in the New Orleans area. Early in 2006, we recommended that the Bureau develop plans (prior to the start of the 2010 LUCA Program in August 2007) to assess whether new procedures, additional resources, or local partnerships, may be required to update the MAF/TIGER database along the Gulf Coast--in the areas affected by hurricanes Katrina and Rita. The Bureau responded to our recommendations by chartering a team to assess the effect of the storm damage on the Bureau's address list and maps for areas along the Gulf Coast and develop strategies with the potential to mitigate these effects. The chartered team recommended that the Bureau consult with state and regional officials (from the Gulf Coast) on how to make LUCA as successful as possible, and hold special LUCA workshops for geographic areas identified by the Bureau as needing additional assistance. While the Bureau (through its chartered team, headquarters staff and Dallas regional office) has proposed several changes to the 2010 LUCA Program for the Gulf Coast region, there are no specific plans for implementing the proposed changes. In summary, Mr. Chairman, we recognize the Bureau faces formidable challenges in successfully implementing a redesigned decennial census. It must also overcome significant challenges of a demographic and socioeconomic nature due to the nation's increasing diversity in language, ethnicity, households, and housing type, as well as an increase in the reluctance of the population to participate in the census. The need to enumerate in the areas devastated by hurricanes Katrina and Rita is one more significant difficulty the Bureau faces. We applaud the moves the Bureau has undertaken to redesign the census; we have stated in the past, and believe still, that the reengineering, if successful, can help control costs and improve cost effectiveness and efficiency. Yet, there is more that the Bureau can do in examining and refining its recruiting, hiring, and training practices and in preparing to enumerate in the hurricane-affected areas. Also, the functionality and usability of the MCD--a key piece of hardware in the reengineered census---bears watching as does the oversight and management of information technology investments. All told, these areas continue to call for risk mitigation plans by the Bureau and careful monitoring and oversight by the Commerce Department, the Office of Management and Budget, the Congress, GAO, and other key stakeholders. As in the past, we look forward to supporting this subcommittee's oversight efforts to promote a timely, complete, accurate, and cost-effective census. For further information regarding this testimony, please contact Mathew J. Scire on (202) 512-6806, or by email at [email protected]. Individuals making contributions to this testimony included Betty Clark, Carlos Hazera, Shirley Hwang, Andrea Levine, Lisa Pearson, Mark Ryan, Niti Tandon, and Timothy Wexler. 2010 Census: Redesigned Approach Holds Promise, but Census Bureau Needs to Annually Develop and Provide a Comprehensive Project Plan to Monitor Costs. GAO-06-1009T. Washington, D.C.: July 27, 2006. 2010 Census: Census Bureau Needs to Take Prompt Actions to Resolve Long-standing and Emerging Address and Mapping Challenges. GAO-06- 272. Washington, D.C.: June 15, 2006. 2010 Census: Costs and Risks Must be Closely Monitored and Evaluated with Mitigation Plans in Place. GAO-06-822T. Washington, D.C.: June 6, 2006. 2010 Census: Census Bureau Generally Follows Selected Leading Acquisition Planning Practices, but Continued Management Attention Is Needed to Help Ensure Success. GAO-06-277. Washington, D.C.: May 18, 2006. Census Bureau: Important Activities for Improving Management of Key 2010 Decennial Acquisitions Remain to be Done. GAO-06-444T. Washington, D.C.: March 1, 2006. 2010 Census: Planning and Testing Activities Are Making Progress. GAO-06-465T. Washington D.C.: March 1, 2006. Information Technology Management: Census Bureau Has Implemented Many Key Practices, but Additional Actions Are Needed. GAO-05-661. Washington, D.C.: June 16, 2005. 2010 Census: Basic Design Has Potential, but Remaining Challenges Need Prompt Resolution. GAO-05-09. Washington, D.C.: January 12, 2005. Data Quality: Census Bureau Needs to Accelerate Efforts to Develop and Implement Data Quality Review Standards. GAO-05-86. Washington, D.C.: November 17, 2004. Census 2000: Design Choices Contributed to Inaccuracies in Coverage Evaluation Estimates. GAO-05-71. Washington, D.C.: November 12, 2004. American Community Survey: Key Unresolved Issues. GAO-05-82. Washington, D.C.: October 8, 2004. 2010 Census: Counting Americans Overseas as Part of the Decennial Census Would Not Be Cost-Effective. GAO-04-898. Washington, D.C.: August 19, 2004. 2010 Census: Overseas Enumeration Test Raises Need for Clear Policy Direction. GAO-04-470. Washington, D.C.: May 21, 2004. 2010 Census: Cost and Design Issues Need to Be Addressed Soon. GAO- 04-37. Washington, D.C.: January 15, 2004. Decennial Census: Lessons Learned for Locating and Counting Migrant and Seasonal Farm Workers. GAO-03-605. Washington, D.C.: July 3, 2003. Decennial Census: Methods for Collecting and Reporting Hispanic Subgroup Data Need Refinement. GAO-03-228. Washington, D.C.: January 17, 2003. Decennial Census: Methods for Collecting and Reporting Data on the Homeless and Others Without Conventional Housing Need Refinement. GAO-03-227. Washington, D.C.: January 17, 2003. 2000 Census: Lessons Learned for Planning a More Cost-Effective 2010 Census. GAO-03-40. Washington, D.C.: October 31, 2002. The American Community Survey: Accuracy and Timeliness Issues. GAO-02-956R. Washington, D.C.: September 30, 2002. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. 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The decennial census is a Constitutionally-mandated activity that produces data used to apportion congressional seats, redraw congressional districts, and allocate billions of dollars in federal assistance. The Census Bureau (Bureau) estimates the 2010 Census will cost $11.3 billion, making it the most expensive in the nation's history. This testimony discusses the Bureau's progress in preparing for the 2010 Census to (1) implement operations to increase the response rate and control costs; (2) use technology to increase productivity; (3) hire and train temporary staff; and (4) plan an accurate census in areas affected by hurricanes Katrina and Rita. The testimony is based on previously issued GAO reports and work nearing completion in which GAO observed recruiting, hiring, and training practices in the 2006 test, and visited localities that participated in the Local Update of Addresses Dress Rehearsal as well in the Gulf Coast region. The Bureau has made progress towards implementing a re-engineered census design that holds promise for increasing the response rate, thereby controlling the cost of the census while promoting accurate results. The re-engineered design includes a short form only census designed to increase the response rate by about 1 percent and a targeted second mailing, which is expected to increase response by between 7 to 10 percent. Both of these initiatives are new, have been tested, and will be a part of the 2010 Census design. According to Bureau officials, a 1 percent increase in the response rate can save $75 million, making these initiatives critical to the new design. Uncertainty surrounds a keystone to the reengineered census, the mobile computing device (MCD). The MCD allows the Bureau to automate operations and eliminate the need to print millions of paper questionnaires and maps used by census workers to conduct census operations and to assist in managing payroll. The MCD, tested in the 2004 and 2006 census tests, was found to be unreliable. While a contractor has developed a new version of the MCD, the device will not be field tested until next month, leaving little time to correct problems that might emerge during the 2008 Dress Rehearsal. The Bureau faces challenges in recruiting, hiring, and training an estimated 600,000 temporary employees. For example, opportunities exist for the Bureau to hone its recruiting efforts to identify individuals who would be more likely to be effective at census work and willing to work throughout an operation. Also, census workers indicated a need for additional training on reluctant respondents as well as location-specific challenges they encounter. The Bureau must also be prepared to accurately count the population affected by hurricanes Katrina and Rita. The Bureau has contacted local officials in the Gulf Area and is developing a plan that includes workshops and special staffing considerations.

Cutting off terrorists' funding is an important means of disrupting their operations. As initial U.S. and foreign government deterrence efforts focused on terrorists' use of the formal banking or mainstream financial systems, terrorists may have been forced to increase their use of various alternative financing mechanisms. Alternative financing mechanisms enable terrorists to earn, move, and store their assets and may include the use of commodities, bulk cash, charities, and informal banking systems, sometimes referred to as hawala. In its fight against terrorism, the United States has focused on individuals and entities supporting or belonging to terrorist organizations including al Qaeda, Hizballah, HAMAS (Harakat al- Muqawama al-Islamiya--Islamic resistance Movement), and others. These terrorist organizations are known to have used alternative financing mechanisms to further their terrorist activities. Government officials and researchers believe that terrorists do not always need large amounts of assets to support an operation, pointing out that the estimated cost of the September 11 attack was between $300,000 and $500,000. However, government officials also caution that funding for such an operation uses a small portion of the assets that terrorist organizations require for their support infrastructure such as indoctrination, recruitment, training, logistical support, the dissemination of propaganda, and other material support. In response to the terrorist attacks of September 11, the Departments of the Treasury and Justice both established multiagency task forces dedicated to combating terrorist financing. Treasury established Operation Green Quest, led by the Customs Service--now ICE in the Department of Homeland Security--to augment existing counterterrorist efforts by targeting current terrorist funding sources and identifying possible future sources. On September 13, 2001, the FBI formed a multiagency task force--which is now known as the Terrorist Financing Operations Section (TFOS)--to combat terrorist financing. The mission of TFOS has evolved into a broad role to identify, investigate, prosecute, disrupt, and dismantle all terrorist-related financial and fundraising activities. The FBI also took action to expand the antiterrorist financing focus of its Joint Terrorism Task Forces (JTTFs)--teams of local and state law enforcement officials, FBI agents, and other federal agents and personnel whose mission is to investigate and prevent acts of terrorism. In 2002, the FBI created a national JTTF in Washington, D.C., to collect terrorism information and intelligence and funnel it to the field JTTFs, various terrorism units within the FBI, and partner agencies. Following September 11, representatives of the FBI and Operation Green Quest met on several occasions to attempt to delineate antiterrorist financing roles and responsibilities. However, such efforts were largely unsuccessful. The resulting lack of clearly defined roles and coordination procedures contributed to duplication of efforts and disagreements over which agency should lead investigations. In May 2003, to resolve jurisdictional issues and enhance interagency coordination, the Attorney General and the Secretary of Homeland Security signed a Memorandum of Agreement concerning terrorist financing investigations. The Agreement and its related procedures specified that the FBI was to have the lead role in investigating terrorist financing and that ICE was to pursue terrorist financing solely through participation in FBI-led task forces, except as expressly approved by the FBI. Regarding strategic efforts, the Money Laundering and Financial Crimes Strategy Act of 1998 (Strategy Act) required the President--acting through the Secretary of the Treasury and in consultation with the Attorney General and other relevant federal, state, and local law enforcement and regulatory officials--to develop and submit an annual NMLS to the Congress by February 1 of each year from 1999 through 2003. Unless reauthorized by the Congress, this requirement ended with the 2003 strategy, which was issued on November 18, 2003. The goal of the Strategy Act was to increase coordination and cooperation among the various regulatory and enforcement agencies and to effectively distribute resources to combat money laundering and related financial crimes. The Strategy Act required the NMLS to define comprehensive, research-based goals, objectives, and priorities for reducing these crimes in the United States. The NMLS has generally included multiple priorities to guide federal agencies' activities in combating money laundering and related financial crimes. In 2002, the NMLS was adjusted to reflect new federal priorities in the aftermath of September 11 including a goal to combat terrorist financing. The U.S. government faces myriad challenges in determining and monitoring the nature and extent of terrorists' use of alternative financing mechanisms. Terrorists use a variety of alternative financing mechanisms to earn, move, and store their assets based on common factors that make these mechanisms attractive to terrorist and criminal groups alike. For all three purposes--earning, moving, and storing--terrorists aim to operate in relative obscurity, using mechanisms involving close knit networks and industries lacking transparency. More specifically, first, terrorists earn funds through highly profitable crimes involving commodities such as contraband cigarettes, counterfeit goods, and illicit drugs. For example, according to U.S. law enforcement officials, Hizballah earned an estimated profit of $1.5 million in the United States between 1996 and 2000 by purchasing cigarettes in a low tax state for a lower price and selling them in a high tax state at a higher price. Terrorists also earned funds using systems such as charitable organizations that collect large sums in donations from both witting and unwitting donors. Second, to move assets, terrorists seek out mechanisms that enable them to conceal or launder their assets through nontransparent trade or financial transactions such as the use of charities, informal banking systems, bulk cash, and commodities that may serve as forms of currency, such as precious stones and metals. Third, to store assets, terrorists may use similar commodities because they are likely to maintain value over a longer period of time and are easy to buy and sell outside the formal banking system. The true extent of terrorists' use of alternative financing mechanisms is unknown, owing to the criminal nature of the activity and the lack of systematic data collection and analysis. The limited and sometimes conflicting information available on alternative financing mechanisms adversely affects the ability of U.S. government agencies to assess risk and prioritize efforts. U.S. law enforcement agencies, and specifically the FBI, which leads terrorist financing investigations and maintains case data, do not systematically collect and analyze data on terrorists' use of alternative financing mechanisms. The lack of such a method of data collection hinders the FBI from conducting systematic analysis of trends and patterns focusing on alternative financing mechanisms. Without such an assessment, the FBI would not have analyses that could aid in assessing risk and prioritizing efforts. Moreover, despite an acknowledged need from some U.S. government officials and researchers for further analysis of the extent of terrorists' use of alternative financing mechanisms, U.S. government reporting on these issues has not always been timely or comprehensive, which could affect planning and coordination efforts. For example, the Departments of the Treasury and Justice did not produce a report on the links between terrorist financing and precious stone and commodity trading, as was required by March 2003 under the 2002 NMLS. Moreover, we found widely conflicting views in numerous interviews and available reports and documentation concerning terrorists' use of precious stones and metals. In monitoring terrorists' use of alternative financing mechanisms, the U.S. government faces a number of significant challenges including accessibility to terrorist networks, adaptability of terrorists, and competing demands or priorities within the U.S. government. First, according to law enforcement agencies and researchers, it is difficult to access or infiltrate ethnically or criminally based networks that operate in a nontransparent manner, such as informal banking systems or the precious stones and other commodities industries. Second, the ability of terrorists to adapt their methods hinders efforts to target high-risk industries and implement effective mechanisms for monitoring high-risk industry trade and financial flows. According to the FBI, once terrorists know that an industry they use to earn or move assets is being watched, they may switch to an alternative commodity or industry. Finally, competing priorities create challenges to federal and state officials' efforts to use and enforce applicable U.S. laws and regulations in monitoring terrorists' use of alternative financing mechanisms. For example, we reported to you in November 2003 the following: Although the Internal Revenue Service (IRS) agreed with us in 2002 to begin developing a system, as allowed by law, to share with states data that would improve oversight and could be used to deter terrorist financing in charities, the IRS had not made this initiative a priority. The IRS had not developed and implemented the system, citing competing priorities. The Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) officials stated the extent of the workload created under the 2001 Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (USA PATRIOT Act) initially increased the amount of work required and may have slowed efforts to take full advantage of the act concerning the establishment of anti-money laundering programs. FinCEN anti-money laundering program rules for dealers in precious metals, stones, or jewels were proposed on February 21, 2003, and had not been finalized when we recently contacted FinCEN on February 24, 2004. FBI officials told us that the 2002 NMLS contained more priorities than could be realistically accomplished, and Treasury officials said that resource constraints and competing priorities were the primary reasons why strategy initiatives, including those related to alternative financing mechanisms, were not met or were completed later than expected. As a result of our earlier findings: We recommended that the Director of the FBI, in consultation with relevant U.S. government agencies, systematically collect and analyze information involving terrorists' use of alternative financing mechanisms. Justice agreed with our finding that the FBI does not systematically collect and analyze such information, but Justice did not specifically agree or disagree with our recommendation. However, both ICE and IRS senior officials have informed us that they agree that law enforcement agencies should have a better approach to assessing the use of alternative financing mechanisms. We recommended that the Secretary of the Treasury and the Attorney General produce the report on the links between terrorism and the use of precious stones and commodities that was required by March 2003 under the 2002 NMLS based on up-to-date law enforcement investigations. The Treasury responded that the report would be included as an appendix in the 2003 NMLS. Precious stones and commodities were given a small amount of attention in an appendix on trade-based money laundering within the 2003 NMLS that was released in November 2003. It remains unclear as to how this will serve as a basis for an informed strategy. We recommended that the Commissioner of the IRS, in consultation with state charity officials, establish interim IRS procedures and state charity official guidelines, as well as set milestones and assign resources for developing and implementing both, to regularly share data on charities as allowed by federal law. The IRS agreed with our recommendation, and we are pleased to report that the IRS expedited efforts and issued IRS procedures and state guidance on December 31, 2003, as stated in its agency comments in response to our report. In May 2003, to resolve jurisdictional issues and enhance interagency coordination, the Attorney General and the Secretary of Homeland Security signed a Memorandum of Agreement concerning terrorist financing investigations. The Agreement and its related procedures specified that the FBI was to have the lead role in investigating terrorist financing and that ICE was to pursue terrorist financing solely through participation in FBI-led task forces, except as expressly approved by the FBI. Also, the Agreement contained several provisions designed to increase information sharing and coordination of terrorist financing investigations. For example, the Agreement required the FBI and ICE to (1) detail appropriate personnel to each other's agency and (2) develop specific collaborative procedures to determine whether applicable ICE investigations or financial crimes leads may be related to terrorism or terrorist financing. Another provision required that the FBI and ICE jointly report to the Attorney General, the Secretary of Homeland Security, and the Assistant to the President for Homeland Security on the status of the implementation of the Agreement 4 months from its effective date. In February 2004, we reported to the Senate Appropriations' Subcommittee on Homeland Security that the FBI and ICE had implemented or taken concrete steps to implement most of the key Memorandum of Agreement provisions. For example, the agencies had developed collaborative procedures to determine whether applicable ICE investigations or financial crimes leads may be related to terrorism or terrorist financing--and, if so, determine whether these investigations or leads should thereafter be pursued under the auspices of the FBI. However, we noted that the FBI and ICE had not yet issued a joint report on the status of the implementation, which was required 4 months from the effective date of the Agreement. By granting the FBI the lead role in investigating terrorist financing, the Memorandum of Agreement has altered ICE's role in investigating terrorism-related financial crimes. However, while the Agreement specifies that the FBI has primary investigative jurisdiction over confirmed terrorism-related financial crimes, the Agreement does not preclude ICE from investigating suspicious financial activities that have a potential (unconfirmed) nexus to terrorism--which was the primary role of the former Operation Green Quest. Moreover, the Agreement generally has not affected ICE's mission or role in investigating other financial crimes. Specifically, the Agreement did not affect ICE's statutory authorities to conduct investigations of money laundering and other traditional financial crimes. ICE investigations can still cover the wide range of financial systems--including banking systems, money services businesses, bulk cash smuggling, trade-based money laundering systems, illicit insurance schemes, and illicit charity schemes--that could be exploited by money launderers and other criminals. According to ICE headquarters officials, ICE is investigating the same types of financial systems as before the Memorandum of Agreement. Further, our February 2004 report noted that--while the Memorandum of Agreement represents a partnering commitment by the FBI and ICE-- continued progress in implementing the Agreement will depend largely on the ability of these law enforcement agencies to meet various operational and organizational challenges. For instance, the FBI and ICE face challenges in ensuring that the implementation of the Agreement does not create a disincentive for ICE agents to initiate or support terrorist financing investigations. That is, ICE agents may perceive the Agreement as minimizing their role in terrorist financing investigations. Additional challenges involve ensuring that the financial crimes expertise and other investigative competencies of the FBI and ICE are effectively utilized and that the full range of the agencies' collective authorities--intelligence gathering and analysis as well as law enforcement actions, such as executing search warrants and seizing cash and other assets--are effectively coordinated. Inherently, efforts to meet these challenges will be an ongoing process. Our interviews with FBI and ICE officials at headquarters and three field locations indicated that long-standing jurisdictional and operational disputes regarding terrorist financing investigations may have strained interagency relationships to some degree and could pose an obstacle in fully integrating investigative efforts. On a broader scale, as discussed below, we also have reported that opportunities exist to improve the national strategy for combating money laundering and other financial crimes, including terrorist financing. The 1998 Strategy Act required the President--acting through the Secretary of the Treasury and in consultation with the Attorney General and other relevant federal, state, and local law enforcement and regulatory officials--to develop and submit an annual NMLS to the Congress by February 1 of each year from 1999 through 2003. Also, in 2002, the NMLS was adjusted to reflect new federal priorities in the aftermath of September 11 including a goal to combat terrorist financing. Unless reauthorized by the Congress, the requirement for an annual NMLS ended with the issuance of the 2003 strategy. To assist in congressional deliberations on whether there is a continuing need for an annual NMLS, we reviewed the development and implementation of the 1999 through 2002 strategies. In September 2003, we reported to this Caucus that, as a mechanism for guiding the coordination of federal law enforcement agencies' efforts to combat money laundering and related financial crimes, the annual NMLS has had mixed results but generally has not been as useful as envisioned by the Strategy Act. For example, we noted that although Treasury and Justice had made progress on some NMLS initiatives designed to enhance interagency coordination of investigations, most had not achieved the expectations called for in the annual strategies, including plans to (1) use a centralized system to coordinate investigations and (2) develop uniform guidelines for undercover investigations. Headquarters officials cited differences in the various agencies' anti-money laundering priorities as a primary reason why initiatives had not achieved their expectations. Most financial regulators we interviewed said that the NMLS had some influence on their anti-money laundering efforts because it provided a forum for enhanced coordination, particularly with law enforcement agencies. Law enforcement agency officials said the level of coordination between their agencies and the financial regulators was good. However, the financial regulators also said that other factors had more influence on them than the strategy. For example, the financial regulators cited their ongoing oversight responsibilities in ensuring compliance with the Bank Secrecy Act as a primary influence on them. Another influence has been anti-money laundering working groups, some of which were initiated by the financial regulators or law enforcement agencies prior to enactment of the 1998 Strategy Act. The officials said that the U.S. government's reaction to September 11, which included a change in government perspective and new regulatory requirements placed on financial institutions by the USA PATRIOT Act, has driven their recent anti-money laundering and antiterrorist financing efforts. Although the financial regulators said that the NMLS had less influence on their anti-money laundering activities than other factors, they have completed the tasks for which the NMLS designated them as lead agencies over the years, as well as most of the tasks for which they were to provide support to the Treasury. In our September 2003 report, we noted that our work in reviewing national strategies for various crosscutting issues has identified several critical components needed for their development and implementation, including effective leadership, clear priorities, and accountability mechanisms. For a variety of reasons, these critical components generally have not been fully reflected in the development and implementation of the annual NMLS. For example, the joint Treasury-Justice leadership structure that was established to oversee NMLS-related activities generally has not resulted in (1) reaching agreement on the appropriate scope of the strategy; (2) ensuring that target dates for completing strategy initiatives were met; and (3) issuing the annual NMLS by February 1 of each year, as required by the Strategy Act. Also, although the Treasury generally took the lead role in strategy-related activities, the department had no incentives or authority to get other departments and agencies to provide necessary resources and compel their participation. And, the annual strategies have not identified and prioritized issues that required the most immediate attention. Each strategy contained more priorities than could be realistically achieved, the priorities have not been ranked in order of importance, and no priority has been explicitly linked to a threat and risk assessment. Further, although the 2001 and 2002 strategies contained initiatives to measure program performance, none had been used to ensure accountability for results. Officials attributed this to the difficulty in establishing such measures for combating money laundering. In addition, we noted that the Treasury had not provided annual reports to the Congress on the effectiveness of policies to combat money laundering and related financial crimes, as required by the Strategy Act. In summary, our September 2003 report recommended that--if the Congress reauthorizes the requirement for an annual NMLS--the Secretary of the Treasury, working with the Attorney General and the Secretary of Homeland Security, should take appropriate steps to strengthen the leadership structure responsible for strategy development and implementation by establishing a mechanism that would have the ability to marshal resources to ensure that the strategy's vision is achieved, resolve disputes between agencies, and ensure accountability for strategy implementation; link the strategy to periodic assessments of threats and risks, which would provide a basis for ensuring that clear priorities are established and focused on the areas of greatest need; and establish accountability mechanisms, such as (1) requiring the principal agencies to develop outcome-oriented performance measures that must be linked to the NMLS's goals and objectives and that also must be reflected in the agencies' annual performance plans and (2) providing the Congress with periodic reports on the strategy's results. In commenting on a draft of the September 2003 report, Treasury said that our recommendations are important, should Congress reauthorize the legislation requiring future strategies; Justice said that our observations and conclusions will be helpful in assessing the role that the strategy process has played in the federal government's efforts to combat money laundering; and Homeland Security said that it agreed with our recommendations. Our review of the development and implementation of the annual strategies did not cover the 2003 NMLS, which was issued in November 2003, about 2 months after our September 2003 report. While we have not reviewed the 2003 NMLS, we note that it emphasized that "the broad fight against money laundering is integral to the war against terrorism" and that money laundering and terrorist financing "share many of the same methods to hide and move proceeds." In this regard, one of the major goals of the 2003 strategy is to "cut off access to the international financial system by money launderers and terrorist financiers more effectively." Under this goal, the strategy stated that the United States will continue to focus on specific financing mechanisms--including charities, bulk cash smuggling, trade-based schemes, and alternative remittance systems--that are particularly vulnerable or attractive to money launderers and terrorist financiers. To be successful, efforts to disrupt terrorists' ability to fund their operations must focus not only on the formal banking and mainstream financial sectors but also on alternative financing mechanisms. The 2003 NMLS, which was issued last November includes a focus on alternative financing mechanisms; however, it is too soon to determine how well these efforts are working. We were pleased that IRS implemented our recommendation by expediting the establishment of procedures and guidelines for sharing data on charities with states. We continue to believe that implementation of our other two recommendations would further assist efforts to effectively address vulnerabilities posed by terrorists' use of alternative financing mechanisms. Also, regarding investigative efforts against sources of terrorist financing, the May 2003 Memorandum of Agreement signed by the Attorney General and the Secretary of Homeland Security represents a partnering commitment by two of the nation's premier law enforcement agencies, the FBI and ICE. In the 9 months since the Agreement was signed, progress has been made in waging a coordinated campaign against sources of terrorist financing. Continued progress will depend largely on the ability of the agencies to establish and maintain effective interagency relationships and meet various other operational and organizational challenges. Finally, from a broader or strategic perspective, the annual NMLS has had mixed results in guiding the efforts of law enforcement and financial regulators in the fight against money laundering and, more recently, terrorist financing. Through our work in reviewing national strategies, we identified critical components needed for successful strategy development and implementation; but, to date, these components have not been well reflected in the annual NMLS. The annual NMLS requirement ended with the issuance of the 2003 strategy. If the Congress reauthorizes the requirement for an annual NMLS, we continue to believe that incorporating these critical components--a strengthened leadership structure, the identification of key priorities, and the establishment of accountability mechanisms--into the strategy could help resolve or mitigate the deficiencies we identified. Mr. Chairman, this concludes our prepared statement. We would be happy to respond to any questions that you or Members of the Caucus may have. For further information about this testimony, please contact Loren Yager at (202) 512-4128 or Richard M. Stana at (202) 512-8777. Other key contributors to this statement were Christine M. Broderick, Danny R. Burton, Barbara I. Keller, R. Eric Erdman, Kathleen M. Monahan, Tracy M. Guerrero, and Janet I. Lewis. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The September 11, 2001, terrorist attacks highlighted the importance of data collection, information sharing, and coordination within the U.S. government. Such efforts are important whether focused on terrorism or as an integral part of a broader strategy for combating money laundering. In this testimony, GAO addresses (1) the challenges the U.S. government faces in deterring terrorists' use of alternative financing mechanisms, (2) the steps that the Federal Bureau of Investigation (FBI) and Immigration and Customs Enforcement (ICE) have taken to implement a May 2003 Memorandum of Agreement concerning terrorist financing investigations, and (3) whether the annual National Money Laundering Strategy (NMLS) has served as a useful mechanism for guiding the coordination of federal efforts to combat money laundering and terrorist financing. GAO's testimony is based on two reports written in September 2003 (GAO-03-813) and November 2003 (GAO-04-163) for the Caucus and congressional requesters within the Senate Governmental Affairs Committee, as well as a February 2004 report (GAO-04-464R) on related issues for the Senate Appropriations Subcommittee on Homeland Security. The U.S. government faces various challenges in determining and monitoring the nature and extent of terrorists' use of alternative financing mechanisms, according to GAO's November 2003 report. Alternative financing mechanisms are outside the mainstream financial system and include the use of commodities (cigarettes, counterfeit goods, illicit drugs, etc.), bulk cash, charities, and informal banking systems to earn, move, and store assets. GAO recommended more systematic collection, analysis, and sharing of information to make alternative financing mechanisms less attractive to terrorist groups. In response to our recommendation that the FBI, in consultation with other agencies, systematically collect and analyze information on terrorists' use of these mechanisms, Justice did not specifically agree or disagree with our recommendation, but other agencies agreed with the need for improved analysis. The Treasury agreed with our recommendation to issue an overdue report on precious stones and commodities, but it remains unclear how the resulting product may be used as the basis for an informed strategy as expected under the 2002 NMLS. The Internal Revenue Service (IRS) agreed with our recommendation to develop and implement procedures for sharing information on charities with states and issued IRS procedures and state guidance on December 31, 2003. To resolve jurisdictional issues and enhance interagency coordination of terrorist financing investigations, the FBI and ICE have taken steps to implement most of the key provisions of the May 2003 Memorandum of Agreement. According to GAO's February 2004 report, the agencies have developed collaborative procedures to determine whether applicable ICE investigations or financial crimes leads may be related to terrorism or terrorist financing--and, if so, determine whether the FBI should thereafter take the lead in pursuing them. GAO's report noted that continued progress will depend largely on the ability of the agencies to establish and maintain effective interagency relationships. From a broader or strategic perspective, the annual NMLS generally has not served as a useful mechanism for guiding coordination of federal efforts to combat money laundering and terrorist financing, according to GAO's September 2003 report. While Treasury and Justice had made progress on some strategy initiatives designed to enhance interagency coordination of investigations, most initiatives had not achieved the expectations called for in the annual strategies. The report recommended (1) strengthening the leadership structure for strategy development and implementation, (2) identifying key priorities, and (3) establishing accountability mechanisms. In commenting on a draft of the September 2003 report, Treasury said that our recommendations are important, should the Congress reauthorize the legislation requiring future strategies; Justice said that our observations and conclusions will be helpful in assessing the role that the strategy process has played in the federal government's efforts to combat money laundering; and Homeland Security said that it agreed with our recommendations.

The L.A. courthouse operations currently are split between two buildings--the Spring Street Courthouse built in 1938 and the Roybal Federal Building built in 1992. The Spring Street building currently consists of 32 courtrooms--11 of which do not meet the judiciary's minimum design standards for size. It also does not meet the security needs of the judiciary. The Roybal Federal Building, on the other hand, consists of 34 courtrooms (10 district, 6 magistrate, and 18 bankruptcy). The space within the L.A. Court's buildings, like most courthouses, are divided into courtroom space with associated jury and public spaces, chamber space where the judge and staff office space is located, cell blocks and other USMS spaces, and other support spaces, such as administrative offices. Since 2000, the construction of a new L.A. courthouse has been a top priority for the judiciary because of the current buildings' space, security, and operational problems. Since fiscal year 2001, Congress has made three appropriations totaling about $400 million for a new L.A. courthouse. In fiscal year 2001, Congress provided $35.25 million to acquire a site for and design a 41-courtroom building, and in fiscal year 2004, Congress appropriated $50 million for construction of the new L.A. Courthouse. In fiscal year 2005, Congress appropriated $314.4 million for the construction of a new 41-courtroom building in Los Angeles, which Congress designated to remain available until expended for construction of the previously authorized L.A. Courthouse. Since 2000 when GSA originally proposed building a new courthouse in downtown Los Angeles, the project has experienced repeated delays in its schedule. In 2000, GSA projected occupancy of a new L.A. courthouse by fiscal year 2006. However, after proposing several changes in project scope and design and repeated delays, GSA projected in 2008 the completion of a new courthouse by fiscal year 2014--a delay of 8 years as of now (see table 1). GSA has spent $16.3 million designing a new courthouse and $16.9 million acquiring and preparing a new site for it in downtown Los Angeles. Since no construction has occurred, about $366.45 million remains in GSA's Federal Building Fund for the construction of a 41-courtroom L.A. Courthouse. The delays were initially caused by GSA's decision to design a courthouse much larger than what was authorized by Congress. In fiscal year 2001, Congress appropriated funds for project design for a 1,016,300-square-foot courthouse that corresponded with plans for a 41-courtroom courthouse. In November 2001, however, GSA designed a 1,279,650-square-foot courthouse that contained 54-courtrooms. GSA officials said that GSA increased the scope of the project to accommodate the judiciary's stated need. Judiciary officials stated that the decision was made jointly with GSA and that changes to GSA's planning criteria contributed to the increased scope. GSA officials disagreed and stated that GSA's planning criteria did not contribute to the increase in the scope of the project. A year and a half later, after it had conducted the environmental assessments and purchased the site for the new courthouse, GSA informed Congress that it had designed a 54-courtroom courthouse in a May 2003 proposal. However, OMB did not include the 54-courtroom building plan in the President's fiscal year 2005 budget, which caused GSA to revise its plans and reduce the number of courtrooms in the plans for the new L.A. courthouse to 41. According to GSA, the 54-courtroom courthouse plan was designed to be readily adaptable to a reduced scope, if a larger scope was not approved. Nonetheless, a senior GSA official estimated that the initial decision to design a 54-courtroom courthouse delayed the project 2 years due to redesign and re-procurement requirements. This delay caused the project as initially planned to go over budget due to inflationary cost escalations, and GSA needed to make further reductions to the courthouse in order to procure it within authorized and appropriated amounts. However, GSA and L.A. Court officials were slow to reduce scope, which caused additional delays and led to the need to make additional reductions. For example, GSA did not simplify the building-high atrium and associated curtain wall that were initially envisioned for the new courthouse until January 2006 even though the judiciary had expressed repeated concerns about the construction and maintenance costs of the atrium since 2002. In July 2005, GSA advised the judiciary that the project could not be constructed for the appropriated amounts because of material shortages and other market factors, and in January 2006, GSA completed a redesigned plan with a simplified atrium and curtain wall. In addition, it took 18 months for GSA to formally propose reducing the number of courtrooms in an attempt to reduce costs. In March 2006, GSA cancelled the procurement of the new courthouse due to insufficient competition when one of the two construction contractors bidding on the 41 courtroom project withdrew. Yet, it was not until the following year in May 2007 that the judiciary proposed reducing the number of courtrooms in a new building to 36, and another 4 months before GSA delivered a revised 36-courtroom proposal to Congress. Additionally, an unforeseen, rapid increase in construction costs contributed to delays in the L.A. courthouse project. According to GSA officials, construction costs escalated in the L.A. market at more than twice the inflation factor used by GSA, necessitating scope reductions and redesigns and causing more delays. GSA officials stated that the escalations in construction costs, which went as high as 16 percent in 2006, were unprecedented and unpredictable. According to information provided by GSA, construction costs escalated nationwide and also affected the construction of a California State courthouse in Long Beach, California, which is near Los Angeles. Other issues related to the procurement process for the new courthouse also contributed to the delays in the L.A. courthouse project by diminishing contractor interest in the project or diverting contractors to other projects. For example, GSA solicited bids for the construction of the neighboring San Diego and L.A. courthouses around the same time. According to GSA officials, in hindsight, this may have limited the number of potential bidders for the construction of the L.A. courthouse as contractors with limited regional capacity chose to bid on the smaller San Diego project instead of the L.A. project. Furthermore, the L.A. courthouse project was competing with other public works construction in the Los Angeles area. GSA officials estimated that $50 billion worth of public construction projects in the L.A. market, which includes increased spending to renovate local schools, further limited the number of potential bidders for the L.A. courthouse project. GSA officials also stated that they chose a procurement approach designed to provide contractors with flexibility in meeting budgeted construction costs, but this approach may in actuality have lowered contractor interest by making the contractor responsible for more of the risk of cost overruns. Over 8 years of delay in GSA's estimated occupancy of the new L.A. courthouse, estimates have nearly tripled, rendering GSA's currently authorized 41-courtroom courthouse unachievable. In May 2004, GSA estimated the 41-courtroom courthouse project would cost about $400 million, but current estimates for building a new federal courthouse of similar scope now exceed $1.1 billion. At this rate, each day of additional delay costs about $54,000, assuming current escalation rates, according to GSA. Consequently, every 44 days of additional delay cost as much as one 2,400-square-foot district courtroom. GSA is currently at a standstill because current cost estimates for a 41- courtroom courthouse exceed authorized and appropriated amounts and the President's fiscal year 2009 budget request did not include any funds for the L.A. courthouse project. Consequently, GSA will need to obtain congressional approval to move forward on any plan. Specifically, all options currently under consideration would require approval of a new prospectus and an estimated appropriation of from $282.1 million to $733.6 million if cost estimates are still viable. Because of the delays in the courthouse project, the operational, space, and security issues that made the new courthouse a top priority have persisted and in some cases worsened. The L.A. Court's operational problems continue. Housing district and magistrate judges in both the Spring Street and the Roybal buildings causes operational inefficiencies, according to judiciary officials. For example, judges, prisoners, juries, and evidence must be transported between buildings, and many judicial offices need to be duplicated. In addition, a high-level L.A. Court official said that the judiciary has stopped investing in the parts of the Spring Street Courthouse for which it is responsible because it expects the judiciary to move into a new building. The L.A. Court's space needs persist. L.A. Court officials said that the court does not have chamber or courtroom space for four pending district judgeships and that it currently faces growing deficits in a number of support areas (see table 2). Severe security problems at Spring Street remain. According to USMS officials, the Roybal building has strong security, but security at the Spring Street building is poor and cannot be improved due to the age and design of the building. The Spring Street building lacks a secure parking area and secure prisoner corridors for 20 of its 32 courtrooms. In addition, USMS officials said that they do not use the prisoner corridors that do exist because they are unsafe and do not have holding cells just outside the courtrooms in accordance with judiciary security standards. In addition, USMS officials said that the security situation is worsening in Los Angeles because logs showed a five-fold increase in suspicious activities in L.A. federal courthouses from 2004 to 2007. Since 2000, GSA has developed eight different proposals for housing the L.A. court. Three of them are still under consideration (see table 3); proposals still under consideration are bolded in the table and identified as options in the rest of the report. Each of the options under consideration would require balancing court needs with costs, obtaining a new authorization and appropriation, and considering other benefits and challenges. Each of these remaining options expands the use of Roybal as a federal courthouse to varying degrees and only one option would continue to use the Spring Street building as a courthouse (see table 4). Each of these options would require congressional approval beyond what GSA has already received. In September 2007, GSA drafted the 36- courtroom building proposal, but the President did not include any funds for the project in his fiscal year 2009 budget request to Congress. Then, in March 2008, GSA developed the 20-courtroom building proposal, but it has not been authorized and no funds have been appropriated to for it. GSA estimated that this proposed project would cost $1.1 billion--$733.6 million more than Congress has already appropriated--and be completed by 2014 if construction starts in 2009. This project would provide the L.A. Court with 74 courtrooms in total, including 36 district courtrooms, 20 magistrate courtrooms, and 18 bankruptcy courtrooms, all of which would meet or exceed the judiciary's current design standards for size and security. The main advantage of this project is that it would allow a division of operational and support activities between the new courthouse and the Roybal building according to the function and responsibilities of the judges, which court officials and judges said would be more efficient than the current split. All the district and senior judges would be housed in the new courthouse, while the magistrate and bankruptcy judges would be in the Roybal building. In addition, because this plan includes a large new building, its implementation would not disrupt court operations by substantially renovating space the court simultaneously is using. The court favors this plan, in part, because it would fulfill its need for a larger building through courtroom sharing among senior judges who would occupy the extra chambers in the new building. The challenges of building a 36-courtroom courthouse are the high costs and the possibility that GSA would face the same problems attracting contractors as it did when it attempted to contract for the construction of a 41-courtroom building. GSA estimated that this proposed project would cost $701.1 million-- $301.5 million more than Congress has already appropriated--and be completed by 2014 if construction starts in 2009. This project would provide the L.A. Court with 66 courtrooms in total, including 36 district courtrooms, 20 magistrate courtrooms, and 10 bankruptcy courtrooms. With congressional approval, GSA could use existing funds to begin planning and constructing the new building. In addition, the planned 20- courtroom building may be expandable at some future time. This plan would also maximize the use of Roybal as a courthouse. The challenges of building the 20-courtroom courthouse are that district judges would continue to be split between two buildings and it is unclear what support operations would move to the new building. In addition, the success of this plan relies on GSA's obtaining an authorization and appropriation to add 12 courtrooms in Roybal. Without that appropriation, the L.A. Court would likely have to remain in the Spring Street building--meaning it would be split between three buildings, not just two, as is currently the case. Another challenge related to the 20-courtroom building plan is that GSA would need to build the new courtrooms in Roybal while the building is occupied by the L.A. Court. GSA officials said that this type of renovation is possible if the most disruptive work is done at night and on weekends. However, judiciary officials said that court officials often need to work at nights and on weekends. In addition, the L.A. district judges unanimously opposed it because it would split district judges over a further distance. The proposed location of the 20-courtroom building is about a third of a mile further from Roybal and the Spring Street Courthouse is. The L.A. Court also opposes this plan because it believes that GSA has underestimated the costs, overstated the end capacity, and would have trouble attracting bidders for the project. GSA estimated that this project would cost $648.4 million--$282.1 million more than Congress has already appropriated. In 2008, GSA estimated that it could complete the project by 2016, but to do so, it would have had to start work in January, which it did not do. For example, GSA's time line for this project assumed that procurement of the design contract would be completed by April 2008; that work has not yet begun. This proposal would provide the L.A. Court with 64 courtrooms in total, which would be composed of 29 district courtrooms, 17 magistrate courtrooms, and 18 bankruptcy courtrooms. GSA's proposal indicated that some of the courtrooms would not meet the judiciary's design standards for size. The advantages of this plan are that it would maximize the use of GSA's current stock of owned buildings in downtown Los Angeles, and that, with congressional approval, GSA could use existing funds to begin working on the project. Another advantage would be that GSA could sell the site it initially purchased for the new courthouse in order to help offset the costs of the project. The plan also would attempt to address the security concerns that currently exist in the Spring Street building. However, many of the same challenges for the 20-courtroom courthouse also exist for this plan, including the need to renovate occupied space and a lack of clarity about where different support operations would be located. In addition, the court's operations would be split further among the Spring Street building, the Roybal building, and the federal building located between those two buildings. Also, the estimate only covers security upgrades for the Spring Street building, not a complete renovation. This project also has the longest time until completion of the three projects, putting it at greater risk for additional cost escalations. Finally, the L.A. Court considers this the worst of the three options. Because there is neither consensus nor adequate funding to complete any of the plans currently under consideration, another option is for GSA and the judiciary to restart the planning process and develop a new proposal to meet the long-term needs of the L.A. Court that all stakeholders can support. Since GSA has developed numerous proposals on housing the L.A. Court, it is difficult to know which one it believes is the best solution, and the district judges assigned to the L.A. Court unanimously opposed GSA's most recent proposal to build a 20-courtroom building. Restarting the planning process would help avoid implementing one of the plans that the judiciary does not support. The remaining $366.5 million appropriated for the project could remain in place for meeting the judiciary's needs in Los Angeles once a project is agreed upon, or the funds could be used for other purposes, such as addressing GSA's $6.6 billion repair and maintenance backlog by receiving congressional approval to transfer or rescind the funds. This option would not address any of the L.A. Court's long-standing space deficits, operational problems with a split court, or security and other problems related to the Spring Street building, and some of the problems would likely worsen until a long-term solution could be found. We are not advocating this or any of the other three options. Our intent is to identify current options so that Congress and stakeholders can evaluate them. Nonetheless, it is clear the current process is deadlocked. We provided the Administrative Office of the U.S. Courts and GSA with draft copies of this report for their review and comment. In written comments, the Administrative Office of the U.S. Courts indicated that the report reflects the general sequence of events and circumstances that have led to the current situation. The letter also provided technical comments that we incorporated, as appropriate. The letter and our comments are contained in appendix II. In written comments, GSA indicated that it partially agreed with the report's findings related to the delays in the L.A. Courthouse project and provided additional technical comments that we incorporated, as appropriate. In the technical comments, GSA indicated that the judiciary has been reluctant to consider any reduction in the scope of the project as requested by GSA. Our report indicates that GSA and the judiciary were slow to reduce scope to stay on budget. GSA's written comments are contained in appendix III. We are sending copies of this report to the GSA Administrator and the Director of the Administrative Office of the U.S. Courts. We also will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions regarding this report, please contact me at (202) 512-2834 or [email protected]. Contact points for our Office of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff that made key contributions to this report are listed in appendix IV. courthouse in Los Angeles? 2. What effects have any delays in the project had on project costs and court operations? 3. What are the options for the future of the project? including project time line, project options analysis, planning studies, proposals, and other budget data. Toured L.A. federal court sites, including the Spring Street Courthouse, the Edward R. Roybal Federal Building and Courthouse, the federal building on Los Angeles Street, and the planned courthouse site. Interviewed L.A. district and magistrate judges and other court officials, the Administrative Office of the Federal Courts, the General Services Administration (GSA), and the U.S. Marshals Service (USMS). Washington, D.C., from January 2008 to May 2008 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. slow decision making, paired with unexpectedly high cost escalation rates, rendered the currently authorized prospectus for a new 41-courtroom building unachievable with currently appropriated funds. Stakeholders do not agree on how to proceed. GSA has developed numerous proposals on the L.A. courthouse and currently supports the 20-courtroom courthouse. The federal judges in Los Angeles unanimously opposed GSA's most recent proposal to build a 20- courtroom building. The following are GAO's comments on the Administrative Office of the U.S. Courts' letter dated August 25, 2008. 1. The Administrative Office of the U.S. Courts indicated that additional details on the reasoning behind the decision to propose a 41- courtroom courthouse would be helpful. GSA officials said that the decision to propose a 41-courtroom courthouse was based on 80 percent of the federal judiciary's stated need at the time--80 percent of 51 courtrooms is approximately 41--and that the judiciary could fit within that space by sharing courtrooms. We added this information to the body of the report. 2. We clarified the report in response to this comment. 3. We did not do a detailed assessment of the possible 20-courtroom courthouse plan and, consequently, did not assess whether it provides space for future expansion. However, there may be design concepts that would leave sufficient room for expansion on the 3.7-acre site, which originally supported the 54-courtroom courthouse plan developed by GSA. 4. Our report does not make any statements related to the number of bankruptcy courtrooms required by the federal judiciary in Los Angeles, but does list the number of those courtrooms that GSA projects for each of the current options thus shows that the 20- courtroom courthouse option would provide 8 fewer bankruptcy courtrooms in Los Angeles than the other options currently being considered. 5. Assessing the validity of GSA's project budget and schedule were outside the scope of this report. The U.S. House of Representatives, Committee on Transportation, Subcommittee on Economic Development, Public Buildings, and Emergency Management requested this information from the GSA Inspector General. 6. We have clarified the report to reflect that the estimated costs to house the L.A. Court have tripled. 7. We clarified the report to reflect that Roybal currently houses 10 district, 6 magistrate, and 18 bankruptcy courtrooms. In addition to the individual named above, David Sausville, Assistant Director; Keith Cunningham; Bess Eisenstadt; Susan Michal-Smith; Jennifer Kim; and Susan Sachs made key contributions to this report.

Since the early 1990s, the General Services Administration (GSA) and the federal judiciary (judiciary) have been carrying out a multibillion-dollar courthouse construction initiative. In downtown Los Angeles, California, one of the nation's busiest federal district courts (L.A. Court), the federal judiciary has split its district, magistrate, and bankruptcy judges between two buildings--the Spring Street Courthouse and the Edward R. Roybal Federal Building and Courthouse. In 2000 the judiciary requested and GSA proposed building a new courthouse in downtown Los Angeles in order to increase security, efficiency, and space. In response, Congress authorized and appropriated about $400 million for the project. GAO was asked to provide information on the construction of the L.A. courthouse. This report answers: (1) What is the status of the construction of a new federal courthouse in Los Angeles? (2) What effects have any delays in the project had on its costs and court operations? (3) What options are available for the future of the project? GAO reviewed project planning and budget documents, visited the key sites in Los Angeles, and interviewed GSA and judiciary officials. In its comments, the judiciary indicated that the report reflects the project's general sequence of events and circumstances, and GSA partially agreed with the report's findings related to the delays. GSA initially estimated in 2000 that the L.A. Court could take occupancy of a new courthouse in fiscal year 2006, but occupancy has been delayed by 8 years to fiscal year 2014 at the earliest. GSA has spent $16.3 million designing a new courthouse and $16.9 million acquiring and preparing a new site for it in downtown Los Angeles. Since no construction has occurred, about $366.45 million remains appropriated for the construction of a 41-courtroom L.A. Courthouse. Project delays were caused by GSA's decision to design a larger courthouse than what was authorized by Congress, slow decision making by GSA and the judiciary to reduce scope and stay on budget, unforeseen cost escalations, and low contractor interest that caused GSA to cancel the entire 41-courtroom courthouse project. Due to the delays, estimated costs for housing the L.A. Court have nearly tripled to over $1.1 billion, rendering GSA's currently authorized 41-courtroom courthouse unachievable and causing the L.A. Court's problems to persist. Because current cost estimates exceed authorized and appropriated amounts, GSA will need to obtain congressional approval to move forward on any plan. Meanwhile, almost half of the courtrooms in the L.A. Court's Spring Street building do not meet the judiciary's standards for size or security, and the U.S. Marshals have chosen not to use the prisoner passageways that exist in the building because they are too dangerous and inefficient. The L.A. Court also estimates that current courtroom and support space shortages will continue to worsen over time. GAO's analysis showed that four options exist for the L.A. Courthouse project, which require balancing needs for courtroom space, congressional approval, and additional estimated appropriations of up to $733 million. First, GSA has proposed building a 36-courtroom, 45-chamber courthouse to house all district and senior judges and adding 4 more courtrooms in the Roybal building to house all magistrate and bankruptcy judges. The L.A. Court supports this option, but it is the most expensive of the remaining options. Second, GSA has proposed constructing a new 20-courtroom, 20-chamber building and adding 12 more courtrooms to the Roybal building. GSA could begin construction with existing funds, but the L.A. Court opposes this option. Third, GSA has proposed housing the L.A. court in the existing buildings by adding 13 courtrooms to the Roybal building and upgrading security at the Spring Street building. GSA could begin work on the project with existing funds but the L.A. Court also opposes this option. Finally, another option, given the lack of consensus and adequate funding, is to restart the planning process. Under this option, the remaining $366.45 million appropriated for the courthouse could continue to be available for meeting the judiciary's needs in Los Angeles or be used for other purposes through a transfer or rescission. While GAO takes no position on this or the other three options, it is clear the current process is deadlocked.

The Veterans' Health Care Eligibility Reform Act of 1996 authorized VA to provide certain medical services not previously available to veterans with non-service connected conditions. The Balanced Budget Act of 1997 authorized VA to use third-party health insurance payments to supplement its medical care appropriations. As part of VA's 1997 strategic plan, VA expected that collections from third-party payments and co-payments would cover the majority of costs of care for these veterans, some of which VA has determined to have higher incomes. For fiscal year 2002, about a quarter of VA's user population were higher income veterans. In September 1999, VA adopted a new fee schedule, called "reasonable charges," which are itemized fees based on diagnoses and procedures. This schedule allows VA to more accurately bill for the care provided. By linking charges to the care provided, VA created new bill-processing demands--particularly in the areas of documenting care, coding that care, and processing bills per episode of care. First, VA must be prepared to provide the insurance company with supporting medical documentation for itemized charges. Second, VA must accurately assign medical diagnoses and procedure codes to set appropriate charges, a task that requires coders to search through medical documentation and various databases to identify all billable care. Third, VA must prepare a separate bill for each health care provider involved in the patient's care and an additional bill when a hospital facility charge applies. To collect from health insurance companies, VA uses a four function process to manage the information needed to bill and collect third-party payments--also known as the Medical Care Collection Fund (MCCF) Revenue Cycle (see fig. 1). First, the patient intake function involves gathering insurance information and verifying that information with the insurance company as well as collecting demographic data on the veteran. Second, utilization review involves precertification of care in compliance with the veteran's insurance policy, including continued stay reviews to determine medical necessity. Third, billing functions involve properly documenting the health care provided to patients by physicians and other health care providers. Based on the physician documentation, the diagnoses and medical procedures performed are coded. VA then creates and sends bills to insurance companies based on the insurance and coding information obtained. And fourth, the collections or accounts receivable function includes processing payments from insurance companies and following up on outstanding or denied bills. As discussed in prior OIG and GAO reports, reasons for untimely third- party billings were heavy caseloads and backlogs for cases to be coded. VA was unprepared to bill under reasonable charges initially in fiscal year 2000, particularly because of its lack of proficiency in developing medical documentation and coding to appropriately support a bill. As a result, VA reported that many of its medical centers developed billing backlogs. In January 2003, we reported that after initially being unprepared in fiscal year 2000 to bill reasonable charges, VA began improving its implementation of the processes necessary to increase its third-party billings and collections. In fiscal year 2002, VA submitted over 8 million third-party insurance bills that constituted a 54 percent increase over the number in fiscal year 2001. VA officials attributed increased third-party billings to, among other reasons, reductions in billing backlogs and an increasing number of patients with billable insurance. We also reported that collections could be increased by addressing operational problems such as unpaid accounts receivable and missed billing opportunities due to insufficient identification of insured patients, inadequate documentation to support billings, coding problems, and billing backlogs. To address these issues and further increase collections, VA has several initiatives under way and is continuing to develop additional ones. In September 2001, VA introduced its Veterans Health Administration Revenue Cycle Improvement Plan. This plan initially included 24 actions to improve revenue performance. After the establishment of the Chief Business Office (CBO) in May 2002, VA issued the Revenue Action Plan (Plan) that superceded the 2001 plan and includes 16 objectives. With the implementation of several actions in the Plan, VA has reported increases in the number of billings. For example, in fiscal year 2003, VA submitted 10 million bills, a 25 percent increase over the number of bills in fiscal year 2002 and a 160 percent increase over fiscal year 2000. VA also reported that its collections of third-party payments over the past few years continue to increase as shown in figure 2. For fiscal year 2003, VA reported that it collected third-party payments of $804 million, a 6 percent increase over the $760 million collected in 2002 and a 49 percent increase over the $540 million collected in fiscal year 2001. To gain an understanding of VHA's policies and procedures and the related internal controls for the billings and collections, to identify key control activities, and to assess the design effectiveness of those controls, we obtained and reviewed VA and VHA directives, handbooks, and other policy guidance, and previous reports issued by VA's OIG. We also conducted interviews and walkthroughs with VHA personnel and reviewed previous GAO reports. To assess whether key control activities for the two areas of operation were effectively implemented, we used a case study approach, reviewing transaction documentation at three VA medical centers. We selected medical centers with varying success in meeting established performance goals and other factors. Because we used a case study approach the results of our study cannot be projected beyond the transactions we reviewed. To determine whether key internal controls for billings were effectively implemented, we discussed billing requirements and procedures with VHA headquarters and medical center personnel. Because billing records were not in a usable format and time constraints did not permit us to put them in a usable format, we could not select a statistical sample. Instead, we made a non-statistical selection of 30 patients from each of the three medical center's inpatient and outpatient billing records to perform tests to assess compliance with policies and procedures and to determine the number of days to bill third-party insurance companies. To determine whether key internal controls for collections were effectively implemented, we discussed requirements and procedures with VHA headquarters and medical center personnel. At each medical center we visited, we used the same 30 patients chosen for our billing tests to also assess compliance with accounts receivable policies and procedures, including VA Handbook 4800.14, Medical Care Debts (Handbook) and the Accounts Receivable Third-Party Guidebook. We reviewed and used as guides, the Standards for Internal Control in the Federal Government and the Internal Control Management and Evaluation Tool. The Comptroller General issued these internal control standards to provide the overall framework for establishing and maintaining internal control. According to these standards, internal control, also referred to as management control, comprises the plans, methods and procedures used to meet the missions, goals, and objectives of an organization. Internal control also serves as the first line of defense in safeguarding assets and preventing and detecting errors and fraud. We performed our work at VA medical centers in Cincinnati, Ohio; Tampa, Florida; and Washington, D.C., and at the VHA's Chief Business Office in Washington, D.C. We conducted our review from March 2004 through June 2004 in accordance with U.S. generally accepted government auditing standards. We requested comments on a draft of this report from the Secretary of Veterans Affairs or his designee. Written comments were received from the Secretary of Veterans Affairs and are reprinted in appendix I. Although VA has decreased the number of days it takes to bill for patient services and has increased its collections from third-party insurance companies since 2000, problems remain. At the three medical centers we visited, we found continuing weaknesses in the billings and collections processes that impair VA's ability to maximize the amount of dollars paid by third-party insurance companies. For example, medical centers did not always bill insurance companies in a timely manner. According to medical center officials, timeliness of billing is affected by, among other things, (1) VA's ability to verify and update a patient's third-party insurance information, (2) whether physicians and other health care providers properly document the patient's treatment so a bill can be coded appropriately, (3) the extent of manual intervention to process the bill, and (4) workload. We believe that improvements could be made in each of these areas. Further, the three medical centers we visited did not always pursue collections of accounts receivable in a timely manner or follow up on certain partially paid claims. Weaknesses in VA's collection activities hamper its ability to collect all monies due to the agency from third-party insurance companies to pay for veterans' growing demand for care. VA's current Plan to implement and sustain effective collections operations is in process. However, the Plan has not been fully implemented. Therefore, it is too early to determine the extent to which it will address operational problems and increase collections. While VA reported that it has decreased the average number of days it takes to bill for patient services, we found that medical centers could further improve billing timeliness by continuing to address operational problems that slow down the process. These operational problems include, among other things, delays in verifying and updating patient insurance information, incomplete or inaccurate documentation of patient care by health care providers, manual intervention, and workload. VA's billing process cuts across four functional areas, as shown in figure 3. Each phase of the billing process is dependent on the completeness and accuracy of information collected in the prior phases. Breakdowns occurring during any part of the process can affect the timeliness of billings. VA's policies and procedures do not specify the number of days for a bill to be issued once health care services are rendered. In fiscal year 2003, VA's Business Oversight Board established performance goals that were incorporated into the network and medical directors' performance contracts. The goal for sending a bill within a set number of days was reduced periodically during fiscal year 2004. During the time of our review, the performance goal for billing third party insurance companies was an average of 50 days from the date of patient discharge. As of the end of the first quarter of fiscal year 2004, the cumulative average days to bill third parties for Tampa, Washington, D.C. and Cincinnati were 73, 69, and 44 respectively. At each of the three medical centers visited, we made a non-representative selection of 30 patients billed during the first quarter of fiscal year 2004. In evaluating the timeliness of billing, we used the then-in-effect performance standard of 50 days after patient discharge. We recognize that the cumulative billing times for the 90 cases selected do not represent the average days to bill, which VHA uses to measure each medical center's performance. However, cases billed more than 50 days after patient discharge are illustrative of problematic issues that can delay billings. For the 90 cases selected, the number of days to bill at the three medical centers we visited ranged from 5 to 332 days, with almost 30 percent billed after 50 days. A summary of our results is shown in table 1. Promptly invoicing insurance companies for care provided is a sound business practice and should result in improved cash flow for VA. Officials at each of the three medical centers cited verifying and updating patients' third-party insurance information as a continuing impediment to billing third-party insurance companies in a timely manner. They told us that this occurs because, among other reasons, some patients are reluctant to provide insurance information for fear that their insurance premiums will increase. Patients delay providing insurance information until well after commencement of treatment, and patients do not always provide current insurance information. Thus, additional time is required to research and verify the patients' insurance coverage. Medical center officials also told us that incomplete or inaccurate documentation from health care providers continues to cause delays in billing third parties. If the coders do not have sufficient data from the provider to support a bill, the coding process can be delayed, thus hampering timely billing of third-party insurance companies. Further, without complete data on the actual health care services provided, the coders may also miscode the treatment, which could result in lost revenue. Another impediment to timely billing is that the billing process is not fully automated and manual intervention is required. For example, in certain cases, the medical diagnosis is transcribed onto a worksheet to be used for coding rather than being electronically transmitted. Additionally, before the coders can begin the coding process, they must first electronically download the listing of potential billable patients. Then the coders review the electronic medical records and assign diagnostic and procedure codes before a bill is generated. Further, due to system limitations, bills that exceed a certain dollar amount or number of medical procedure codes must be printed and mailed rather than transmitted electronically. For example, in Cincinnati bills greater than $100,000 or that have six or more medical procedure codes must be processed in this manner. Another contributing factor may be the workload levels at the medical centers. During the second quarter of fiscal year 2004, Cincinnati submitted 45,883 bills and had a staff of 13 coders. Concurrently, Tampa submitted 192,407 bills and had 16 coders and Washington D.C. issued 64,474 bills and had 8 coders. VHA data indicated that Cincinnati's average billing time was under 50 days for the quarter and had the lowest bill to coder ratio. Conversely, Tampa and Washington, D.C. exceeded the 50-day performance goal and had a much higher bill to coder ratio. Assuming 60 workdays per quarter, we calculated the ratio of bills issued per day to the number of coders as shown in table 2. We recognize that other factors such as the number of billable encounters per bill and coder productivity may affect the billing workload. However, given the wide diversity of the bill to coder ratios, staffing may also be a contributing factor affecting days to code and issue bills. Weaknesses in collection activities hamper VA's ability to collect all monies due to the agency from third-party insurance companies for veterans' care. We found that the three medical centers we visited did not always pursue collections of accounts receivable in a timely manner or follow up on certain partially paid insurance claims. These two factors could negatively affect third-party collections. VA's Handbook sets forth the requirements for collection of third-party accounts receivables. Also, in 2003, the VHA's Chief Business Office issued the Accounts Receivable Third-Party Guidebook that lays out more detailed procedures. Both documents require that once a claim has been sent to the insurance company, staff should follow up on unpaid reimbursable insurance cases as follows: The first telephone follow-up is to be initiated within 30 days after the initial bill is generated. All telephone follow-ups are to be documented to include, at a minimum, the name, position, title and telephone number of the person contacted, the date of contact, appropriate second follow-up date if payment is not received, and a brief summary of the conversation. A second telephone follow-up on unresolved outstanding receivables is to be made on an appropriate (but unspecified) date and documented. A third follow-up call is to be made within 14 days of the second contact and documented with a summary of the conversation and an appropriate, but not specified, follow-up date. If no payment has been received by the next follow-up date, the case may be referred by the MCCF Coordinator to regional counsel for further action. We tested compliance with these policies for the same 30 cases selected for our billing tests at each of the three medical centers we visited. Regarding the first follow-up procedure, initial follow-up calls were made within 30 days for only 14, or about 22 percent, of the 64 cases for which billings had not been collected within 30 days. Second follow-up phone calls were not made in a timely manner either. We considered 15 days after the initial follow-up of 30 days to be an appropriate time frame since the third follow-up is to be made within 14 days after the second follow-up and cases are to be referred to collection agencies after 60 days. Delays in making second follow-up calls increase the risk that payments will not be collected. Within our selected cases, four second follow-up calls were either made more than 15 days after the first follow-up call or not at all. These bills had not been paid within 120 days after the bill was sent to the insurance company. Both the first and second follow-up calls require that staff document the contact's name, title, telephone number, and expected follow-up date in the official records. However, we found that staff did not consistently do so. For example, for the 14 cases where a follow-up call was made during the first 30 days after the initial billing, only seven specified a follow-up date. Entering a follow-up date would serve as a reminder to make the second follow-up call. Further, we found that an unclear collection policy may have contributed to VA's untimely second follow-up efforts. Specifically, VA's Handbook requires that second follow-up telephone calls on unresolved outstanding receivables be made on an "appropriate date," but that date is not specified (i.e., the number of days elapsed since the first contact). Specifying a follow-up date (i.e., 15 days after the first follow-up) or providing criteria for selecting an appropriate follow-up date would clarify this requirement and provide a benchmark on which compliance could be measured. Medical center officials at the three sites we visited told us that staff shortages and a heavy workload contributed to noncompliance with follow-up procedures. For example, Tampa officials told us that the accounts receivable staff typically have over 1,000 cases needing follow-up at any one time. The Cincinnati Medical Care Collection Fund (MCCF) supervisor told us that if two additional staff were available, they would be dedicated to following up on delinquent payments. During our review of the 90 selected cases, we noted wide variances between the amounts billed and amounts received for patients who were eligible for Medicare benefits. For example, in one of our selected cases, VA billed the secondary insurance company for $60,994 but received only $5,205, or about 9 percent. In non-Medicare cases, when the patient has primary and secondary insurance, VHA bills the primary insurance company and, depending on the amount collected, bills the secondary insurer for the residual amount. For Medicare patients who have secondary insurance (i.e., Medigap or Medicare Supplemental insurance), VA is generally entitled to receive payment only from the secondary insurance company. Thus far, VA has not been able to provide post-Medicare payment information (i.e., deductible and co-insurance amounts) to other insurance companies because Medicare is generally not required to pay and thus does not pay VA. Lacking information on what Medicare would pay if required to do so, VA does not know what amount to bill the secondary insurance companies because it does not know the residual amount. In such cases, VA bills the secondary insurance company for the full amount associated with the care provided--the amount that would be reimbursable by Medicare as well as the amount not covered by Medicare. The secondary insurance companies have been using a variety of methodologies for reimbursing VA and some do not pay because they are unable to determine the proper amount of reimbursement. As a result, in certain cases, VA receives very little, if any, reimbursement from the secondary insurance companies for such billings. The Handbook describes procedures for following up on partial payments from insurance companies. It states that payment by a third-party insurance company of an amount which is claimed to be the full amount payable under the terms of the applicable insurance policy or other agreement will normally be accepted as payment in full. The unpaid balance is to be written down to zero. However, if there is a considerable difference between the amount collected and the amount billed, the Handbook directs staff to take various actions to pursue potential additional revenue. At each of the three medical centers, we found that accounts receivable staff typically accepted partial payments from secondary insurance companies as payment in full and adjust the unpaid balance to zero. Because the medical centers do not have the post- Medicare information needed to pursue collection of the unpaid amounts, there may be failure to collect millions of dollars because partial payments are accepted as payment in full. VA reported that as of September 2003, the median age of all living veterans was 58 years, with the number of veterans 85 years of age and older totaling nearly 764,000. As these veterans age, the demand for care will increase as will the number of veterans eligible for Medicare. To be able to offset the cost of care through third-party collections, it will become even more imperative in the coming years for VA to collect the maximum amount possible from secondary insurance companies. VA's current Revenue Action Plan includes 16 actions designed to increase collections by improving and standardizing the collections processes. Several of these actions are aimed at reducing billing times and backlogs, many of which have already been implemented. Specifically, medical centers are updating and verifying patients' insurance information and improving health care provider documentation. In addition, hiring contractors to code and bill old cases is reducing backlogs. Further, the introduction of performance measures into managers' performance contracts has provided an incentive for increased billings and collections. In addition to those actions already taken, VA has other initiatives under way such as automating the billing process by implementing the Patient Financial Services System (PFSS) and determining the amounts billable to Medicare secondary insurance companies through the use of an electronic Medicare Remittance Advice. To assist in updating and verifying patients' insurance information, a problematic issue discussed earlier in our report, each site now has staff dedicated to (1) verify that insurance reported by the veteran is current, (2) determine insurance coverage if the patient does not declare any, (3) acquire pre-certifications of patient admissions, and (4) obtain authorization of procedures from the patient's insurance company. Additionally, medical centers have taken actions to update demographic information on file, including insurance. These efforts help to reduce insurance denials, produce more accurate bills, and ensure that VA receives reimbursement for services provided. To assist in improving medical documentation, which we reported as a continuing operational issue, VA mandated physician use of the Computerized Patient Record System in December 2001 and reinforced its use through a VHA Directive in May 2003. The coders use the electronic medical records to determine what treatment each patient received and to document the diagnostic codes. In addition, the medical centers have been educating the physicians about the importance of completing the records. To reduce billing backlogs, VHA entered into an agreement with four vendors to code and assist with backlogs. The Washington, D.C. medical center hired a contractor to handle a backlog of 15,000 encounters. The contractor has certified staff for coding and billing and must meet 12 performance measures. The revenue officer told us that the backlog was eliminated in May 2004. In addition, in December 2003, VHA was given authority by the Office of Personnel Management to directly hire credentialed coders at industry-compatible salaries. In fiscal year 2003, VHA's Chief Business Officer implemented industry- based performance metrics and reporting capabilities to identify and compare overall VA revenue program performance. Metrics were introduced to measure collections, days to bill, gross days revenue outstanding, and accounts receivable over 90 days. For both network and medical center directors, the metrics and associated performance targets were incorporated into annual performance contracts effective fiscal year 2003. VHA officials attribute much of the decrease in days to bill and increased billings and collections to these performance measures. For example, VA reported that nationally the average days to bill insurance companies for the first half of fiscal year 2004 was about 74 days, which is an improvement from their fiscal year 2000 average days to bill of 117 days. However, VHA's average days to bill for that period exceeded the performance goals of 50 days and 47 days for the first and second quarters of fiscal year 2004, respectively. The industry standard is 10 days. In addition to actions already taken, VA's Plan has several other initiatives under way for improving billing times and increasing collections. For example, the PFSS is designed to integrate the health care billing and accounts receivable software systems to replace VA's current legacy system. The system is intended to increase staff efficiency through a streamlined, standardized, re-engineered process; create more accurate bills; and shorten bill lag times through automation. VA officials believe that this initiative, when implemented, will reduce manual intervention noted earlier in our report as a reason for delayed billings. However, implementation is behind schedule. Another effort under way, the electronic Medicare Remittance Advice project, helps to address obtaining allowable payments from secondary insurance companies, rather than accepting partial payments that are significantly lower than billed amounts as full payment. This project involves the electronic submission of claims to a fiscal intermediary to receive remittance advice on how Medicare would have paid the claim if it were legally bound to pay VA for care. The remittance advice, which will be attached to VA health care claims, will enable secondary insurance companies to determine the correct amount to reimburse VA. Further, VA believes it will be able to more accurately reflect the amount of its outstanding receivables and be in a strengthened position to follow up on partial payments, which it deems incorrect. The completion date for this project was November 2003 but has been delayed due to software issues. VA officials told us they plan to roll out the new system beginning in August 2004. Although the Plan provides another step forward in potentially improving operations and increasing collections, it is still in progress and many of the actions are not scheduled for implementation until at least fiscal year 2005. Therefore, it is too early to determine whether the Plan will successfully address operational problems and increase collections when fully implemented. The growing demands for veterans' health care increase VA's responsibility to supplement, as much as possible, its medical care appropriations with collections from insurance companies for treatment of non-service- connected conditions. VA is making progress in developing and implementing procedures to identify patients who can be billed for services, to bill for services correctly and in a timely manner, and to pursue collections. VA's Plan to further improve billing and collection operations, however, is still a work in progress and could benefit from the performance of a workload analysis. In the interim, strengthening internal controls such as clarifying billing and claims follow-up procedures and consistently implementing policies and procedures could help reduce billing times and increase collections. Even assuming that its Plan works as contemplated, these additional controls are needed to maximize VA revenues to enhance its medical care budget. We are making five recommendations to facilitate more timely billings and improve collection operations. The Secretary of Veterans Affairs should direct the Under Secretary for Health to: Perform a workload analysis of the medical centers' coding and billing Based on the workload analysis, consider making the necessary resource adjustments. Reinforce to accounts receivable staff that they should perform the first follow-up on unpaid claims within 30 days of the billing date, as directed by VA Handbook 4800.14, Medical Care Debts, and establish procedures for monitoring compliance. Reinforce the requirement for accounts receivable staff to enter the insurance company contact's name, title and phone number and the follow-up date when making follow-up phone calls. Augment VA Handbook 4800.14, Medical Care Debts, by either specifying a date or providing instructions for determining an appropriate date for conducting second follow-up calls to insurance companies. VA provided written comments on a draft of this report. In its response, VA agreed with our conclusions and recommendations and reported that it is developing an action plan to implement them. Additionally, VA's response stated that VHA is pursuing a number of strategies to improve overall performance toward achieving industry benchmarks. VA believes that the development of the Patient Financial Services System will address current billing system limitations and manual intervention and that the Medicare Remittance Advice project will assist VHA in pursuing partially paid claims. Also, in its response letter, VA included some technical comments that we have addressed in finalizing our report where appropriate. VA's written comments are presented in appendix I. As arranged with your office, unless you release its contents earlier, we plan no further distribution of this report until 30 days after its issuance date. At that time, we will send copies of this report to the Secretary of Veterans Affairs, the Under Secretary for Health, interested congressional committees, and other interested parties. We will also make copies available to others upon request. In addition, the report will be available at no charge on GAO's Web site at http://www.gao.gov. Should you or your staff have any questions on matters discussed in this report, please contact me at (202) 512-6906 or [email protected]; or Alana Stanfield, Assistant Director, at (202) 512-3197 or [email protected]. Major contributors to this report are acknowledged in appendix II. In addition to those named above, the following individuals made important contributions to this report: Teressa Broadie-Gardner, Lisa Crye, Jeffrey Isaacs, Sharon Loftin, Donell Ries, and Patricia Summers. The Government Accountability Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO's commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through GAO's Web site (www.gao.gov). Each weekday, GAO posts newly released reports, testimony, and correspondence on its Web site. To have GAO e-mail you a list of newly posted products every afternoon, go to www.gao.gov and select "Subscribe to Updates."

In the face of growing demand for veterans' health care, GAO and the Department of Veterans Affairs Office of Inspector General (OIG) have raised concerns about the Veterans Health Administration's (VHA) ability to maximize its third-party collections to supplement its medical care appropriation. GAO has testified that inadequate patient intake procedures, insufficient documentation by physicians, a shortage of qualified billing coders, and insufficient automation diminished VA's collections. In turn, the OIG reported that VA missed opportunities to bill, had billing backlogs, and did inadequate follow-up on bills. While VA has made improvements in these areas, GAO was asked to review internal control activities over third-party billings and collections at selected medical centers to assess whether they were designed and implemented effectively. VA has continued to take actions to reduce billing times and increase third-party collections. Collections of third-party payments have increased from $540 million in fiscal year 2001 to $804 million in fiscal year 2003. However, at the three medical centers visited, GAO found continuing weaknesses in the billings and collections processes that impair VA's ability to maximize the amount of dollars paid by third-party insurance companies. For example, the three medical centers did not always bill insurance companies in a timely manner. Medical center officials stated that inability to verify and update patients' third-party insurance, inadequate documentation to support billings, manual processes and workload continued to affect billing timeliness. The detailed audit work at the three facilities GAO visited also revealed inconsistent compliance with follow-up procedures for collections. For example, collections were not always pursued in a timely manner and partial payments were accepted as payments in full, particularly for Medicare secondary insurance companies, rather than pursuing additional collections. VA's current Revenue Action Plan (Plan) includes 16 actions designed to increase collections by improving and standardizing collections processes. Several of these actions are aimed at reducing billing times and backlogs. Specifically, medical centers are updating and verifying patients' insurance information and improving health care provider documentation. Further, hiring contractors to code and bill old cases is reducing backlogs. In addition to actions taken, VA has several other initiatives underway. For example, VA is taking action to enable Medicare secondary insurance companies to determine the correct reimbursement amount, which will strengthen VA's position to follow up on partial payments that it deems incorrect. Although implementation of the Plan could improve VA's operations and increase collections, many of its actions will not be completed until at least fiscal year 2005. As a result, it is too early to determine the extent to which actions in the Plan will address operational problems and increase collections.

Following a yearlong study, the Commercial Activities Panel in April 2002 reported its findings on competitive sourcing in the federal government. The report lays out 10 sourcing principles and several recommendations, which provide a roadmap for improving sourcing decisions across the federal government. Overall, the new Circular is generally consistent with these principles and recommendations. The Commercial Activities Panel held 11 meetings, including three public hearings in Washington, D.C.; Indianapolis, Indiana; and San Antonio, Texas. In these hearings, the Panel heard repeatedly about the importance of competition and its central role in fostering economy, efficiency, and continuous performance improvement. Panel members heard first-hand about the current process--primarily the cost comparison process conducted under OMB Circular A-76--as well as alternatives to that process. Panel staff conducted extensive additional research, review, and analysis to supplement and evaluate the public comments. Recognizing that its mission was complex and controversial, the Panel agreed that a supermajority of two-thirds of the Panel members would have to vote for any finding or recommendation in order for it to be adopted. Importantly, the Panel unanimously agreed upon a set of 10 principles it believed should guide all administrative and legislative actions in competitive sourcing. The Panel itself used these principles to assess the government's existing sourcing system and to develop additional recommendations. A supermajority of the Panel agreed on a package of additional recommendations. Chief among these was a recommendation that public- private competitions be conducted using the framework of the Federal Acquisition Regulation (FAR). Although a minority of the Panel did not support the package of additional recommendations, some of these Panel members indicated that they supported one or more elements of the package, such as the recommendation to encourage high-performing organizations (HPO) throughout the government. Importantly, there was a good faith effort to maximize agreement and minimize differences among Panel members. In fact, changes were made to the Panel's report and recommendations even when it was clear that some Panel members seeking changes were highly unlikely to vote for the supplemental package of recommendations. As a result, on the basis of Panel meetings and my personal discussions with Panel members at the end of our deliberative process, I believe the major differences among Panel members were few in number and philosophical in nature. Specifically, disagreement centered primarily on (1) the recommendation related to the role of cost in the new FAR-type process, and (2) the number of times the Congress should be required to act on the new FAR-type process, including whether the Congress should authorize a pilot program to test that process for a specific time period. As I noted previously, the new A-76 Circular is generally consistent with the Commercial Activities Panel's sourcing principles and recommendations and, as such, provides an improved foundation for competitive sourcing decisions in the federal government. In particular, the new Circular permits: greater reliance on procedures contained in the FAR, which should result in a more transparent, simpler, and consistently applied competitive process, and source selection decisions based on tradeoffs between technical factors and cost. The new Circular also suggests potential use of alternatives to the competitive sourcing process, such as public-private and public-public partnerships and high-performing organizations. It is not, however, specific as to how and when these alternatives might be used. If effectively implemented, the new Circular should result in increased savings, improved performance, and greater accountability, regardless of the service provider selected. However, this competitive sourcing initiative is a major change in the way government agencies operate, and successful implementation of the Circular's provisions will require that adequate support be made available to federal agencies and employees, especially if the time frames called for in the new Circular are to be achieved. Implementing the new Circular A-76 will likely be challenging for many agencies. GAO's past work on the competitive sourcing program at the Department of Defense (DOD)-- as well as agencies' efforts governmentwide to improve acquisition, human capital, and information technology management--has identified practices that have either advanced these efforts or hindered them. The lessons learned from these experiences--especially those that demonstrate best competitive sourcing practices--could prove invaluable to agencies as they implement the provisions in the new Circular. A major challenge agencies will face will be meeting a 12-month limit for completing the standard competition process in the new Circular. This provision is intended to respond to complaints from all sides about the length of time taken to conduct A-76 cost comparisons--complaints that the Panel repeatedly heard in the course of its review. OMB's new Circular states that standard competitions shall not exceed 12 months from public announcement (start date) to performance decision (end date). Under certain conditions, there may be extensions of no more than 6 months. The new Circular also states that agencies shall complete certain preliminary planning steps before a public announcement. We welcome efforts to reduce the time required to complete these studies. Even so, our studies of DOD competitive sourcing activities have found that competitions can take much longer than the time frames outlined in the new Circular. Specifically, DOD's most recent data indicate that competitions take on average 25 months. It is not, however, clear how much of this time was needed for any planning that may now be outside the revised Circular's time frame. In commenting on OMB's November 2002 draft proposal, we recommended that the time frame be extended to perhaps 15 to 18 months overall, and that OMB ensure that agencies provide sufficient resources to comply with A-76. In any case, we believe additional financial and technical support and incentives will be needed for agencies as they attempt to meet these ambitious time frames. Another provision in the new Circular that may affect the timeliness of the process is the "phased evaluation" approach--one of four approaches for making sourcing selections. Under this approach, an agency evaluates technical merit and cost in two separate phases. In the first phase, offerors may propose alternate performance standards. If the agency decides that a proposed alternate standard is desirable, it incorporates the standard into the solicitation. All offerors may then submit revised proposals in response to the new standard. In the second phase, the agency selects the offeror who meets these new standards and offers the lowest cost. While not in conflict with the principles or recommendations of the Commercial Activities Panel, the approach, if used, may prove burdensome in implementation, given the additional step involved in the solicitation. DOD has been at the forefront of federal agencies in using the A-76 process. We have tracked DOD's progress in implementing its A-76 program since the mid-to-late-1990s and have identified a number of challenges that hold important lessons that civilian agencies should consider as they implement their own competitive sourcing initiatives. Notably: competitions took longer than initially projected, costs and resources required for the competitions were selecting and grouping functions to compete was problematic, and determining and maintaining reliable estimates of savings was difficult. DOD's experience and our work identifying best practices suggest that several key areas will need sustained attention and communication by senior leadership as agencies plan and implement their competitive sourcing initiatives. Basing goals and decisions on sound analysis and integrating sourcing with other management initiatives. Sourcing goals and targets should contribute to mission requirements and improved performance and be based on considered research and sound analysis of past activities. Agencies should consider how competitive sourcing relates to strategic management of human capital, improved financial performance, expanded reliance on electronic government, and budget and performance integration, consistent with the President's Management Agenda. Capturing and sharing knowledge. The competition process is ultimately about promoting innovation and creating more economical, efficient, and effective organizations. Capturing and disseminating information on lessons learned and providing sufficient guidance on how to implement policies will be essential if this is to occur. Without effectively sharing lessons learned and sufficient guidance, agencies will be challenged to implement certain A-76 requirements. For example, calculating savings that accrue from A-76 competitions, as required by the new Circular, will be difficult or may be done inconsistently across agencies without additional guidance, which will contribute to uncertainties over savings. Building and maintaining agency capacity. Conducting competitions as fairly, effectively, and efficiently as possible requires sufficient agency capacity--that is, a skilled workforce and adequate infrastructure and funding. Agencies will need to build and maintain capacity to manage competitions, to prepare the in-house most-effective organization (MEO), and to oversee the work--regardless of whether the private sector or the MEO is selected. Building this capacity will likely be a challenge, particularly for agencies that have not been heavily invested in competitive sourcing previously. An additional challenge facing agencies in managing this effort will be doing so while addressing high- risk areas, such as human capital and contract management. In this regard, GAO has listed contract management at the National Aeronautics and Space Administration, the Department of Housing and Urban Development, and the Department of Energy as an area of high risk. With a likely increase in the number of public-private competitions and the requirement to hold accountable whichever sector wins, agencies will need to ensure that they have an acquisition workforce sufficient in numbers and abilities to administer and oversee these arrangements effectively. We recently initiated work to look at how agencies are implementing their competitive sourcing programs. Our prior work on acquisition, human capital, and information technology management--in particular, our work on DOD's efforts to implement competitive sourcing--provides a strong knowledge base from which to assess agencies' implementation of this initiative. Finally, an important issue for implementation of the new Circular A-76 is the right of in-house competitors to appeal sourcing decisions in favor of the private sector. The Panel heard frequent complaints from federal employees and their representatives about the inequality of protest rights. While both the public and the private sectors had the right under the earlier Circular to file appeals to agency appeal boards, only the private sector had the right, if dissatisfied with the ruling of the agency appeal board, to file a bid protest at GAO or in court. Under the previous version of the Circular, both GAO and the Court of Appeals for the Federal Circuit held that federal employees and their unions were not "interested parties" with the standing to challenge the results of A-76 cost comparisons. The Panel recommended that, in the context of improving to the federal government's process for making sourcing decisions, a way be found to level the playing field by allowing in-house entities to file a protest at GAO, as private-sector competitors have been allowed to do. The Panel also viewed the protest process as one method of ensuring accountability to assure federal workers, the private sector, and the taxpayer that the competition process is working properly. The new Circular provides a right to "contest" a standard A-76 competition decision using procedures contained in the FAR for protests within the contracting agencies. The new Circular thus abolishes the A-76 appeal board process and instead relies on the FAR-based agency-level protest process. An important legal question is whether the shift from the cost comparisons under the prior Circular to the FAR-like public-private competitions under the new one means that the in-house MEO should be eligible to file a bid protest at GAO. If the MEO is allowed to protest, there is a second question: Who will speak for the MEO and protest in its name? To ensure that our legal analysis of these questions benefits from input from everyone with a stake in this important area, GAO posted a notice in the Federal Register on June 13, seeking public comment on these and several related questions. Responses are due by July 16, and we intend to review them carefully before reaching our legal conclusion. While the new Circular provides an improved foundation for competitive sourcing decisions, implementing this initiative will undoubtedly be a significant challenge for many federal agencies. The success of the competitive sourcing program will ultimately be measured by the results achieved in terms of providing value to the taxpayer, not the size of the in- house or contractor workforce or the number of positions competed to meet arbitrary quotas. Successful implementation will require adequate technical and financial resources, as well as sustained commitment by senior leadership to establish fact-based goals, make effective decisions, achieve continuous improvement based on lessons learned, and provide ongoing communication to ensure federal workers know and believe that they will be viewed and treated as valuable assets. - - - - - Mr. Chairman, this concludes my statement. I will be happy to answer any questions you or other Members of the Committee may have. 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In May 2003, the Office of Management and Budget (OMB) issued a new Circular A-76--which sets forth the government's competitive sourcing process. Determining whether to obtain services in-house or through commercial contracts is an important economic and strategic decision for agencies, and the use of A-76 is expected to grow throughout the federal government. In the past, however, the A-76 process has been difficult to implement, and the impact on the morale of the federal workforce has been profound. Moreover, there have been concerns in both the public and private sectors about the timeliness and fairness of the process and the extent to which there is a "level playing field" for conducting public-private competitions. It was against this backdrop that the Congress enacted legislation mandating a study of the government's competitive sourcing process, which was carried out by the Commercial Activities Panel, which was chaired by the Comptroller General of the United States. This testimony focuses on how the new Circular addresses the Panel's recommendations with regard to providing a better foundation for competitive sourcing decisions, and the challenges agencies may face in implementing the new A-76. Overall, the new Circular is consistent with the principles and recommendations that the Commercial Activities Panel reported in April 2002, and should provide an improved foundation for competitive sourcing decisions in the federal government. In particular, the new Circular permits greater reliance on procedures in the Federal Acquisition Regulation--which should result in a more transparent and consistently applied competitive process--as well as source selection decisions based on tradeoffs between technical factors and cost. The new Circular also suggests potential use of alternatives to the competitive sourcing process, such as public-private and public-public partnerships and high-performing organizations. The new Circular should result in increased savings, improved performance, and greater accountability. However, this initiative is a major change in the way the government operates, and implementing the new Circular A-76 will likely be challenging for many agencies. A major challenge agencies will face will be meeting a 12-month limit for completing the standard competition process. This provision aims to respond to complaints about the length of time taken to conduct A-76 cost comparisons. However, GAO studies of competitive sourcing at the Department of Defense (DOD) have found that competitions can take much longer than 12 months. Other provisions in the new Circular may also prove burdensome in implementation. Lessons learned by DOD and other agencies as they initiate efforts to improve acquisition, human capital, and information technology management could prove invaluable as agencies implement the new A-76 provisions--especially those that demonstrate best competitive sourcing practices. Successful implementation of the Circular's provisions will also likely require additional financial and technical support and incentives.

In September 1993, the National Performance Review called for an overhaul of DOD's temporary duty (TDY) travel system. In response, DOD created the DOD Task Force to Reengineer Travel to examine the travel process. In January 1995, the task force issued the Report of the Department of Defense Task Force to Reengineer Travel. On December 13, 1995, the Under Secretary of Defense for Acquisition, Technology, and Logistics and the Under Secretary of Defense (Comptroller)/Chief Financial Officer issued a memorandum, "Reengineering Travel Initiative," establishing the PMO-DTS to acquire travel services that would be used DOD-wide. In a 1997 report to the Congress, the DOD Comptroller pointed out that the existing DOD TDY travel system was never designed to be an integrated system. Furthermore, the report stated that because there was no centralized focus on the department's travel practices, the travel policies were issued by different offices and the process had become fragmented and "stovepiped." The report further noted that there was no vehicle in the current structure to overcome these deficiencies, as no one individual within the department had specific responsibility for management control of the TDY travel system. To address these concerns, the department awarded a firm fixed-price, performance-based services contract in May 1998. Under the terms of the contract, the contractor was to start deploying a travel system and to begin providing travel services for approximately 11,000 sites worldwide, within 120 days of the effective date of the contract, completing deployment approximately 38 months later. Our reports and testimonies related to DTS have highlighted various management challenges that have confronted DOD in attempting to make DTS the standard end-to-end travel system for the department. The issues we have reported on include underutilization of DTS, weaknesses in DTS's requirements management and system testing practices, and the adequacy of the economic analysis. These reported weaknesses are summarized below. DTS underutilization. Our January 2006 and September 2006 reports noted the challenge facing the department in attaining the anticipated DTS utilization. More specifically, as discussed in our September 2006 report, we found that the department did not have reasonable quantitative metrics to measure the extent to which DTS was actually being used. The reported DTS utilization was based on a DTS Voucher Analysis Model that was developed in calendar year 2003 using estimated data, but over the years had not been completely updated with actual data. The DTS Voucher Analysis Model was prepared in calendar year 2003 and based on airline ticket and voucher count data that were reported by the military services and defense agencies, but the data were not verified or validated. Furthermore, PMO-DTS officials acknowledged that the model had not been completely updated with actual data as DTS continued to be implemented at the 11,000 sites. At the time, we found that the Air Force was the only military service that submitted monthly metrics to the PMO-DTS officials for use in updating the DTS Voucher Analysis Model. Rather than reporting utilization based on individual site system utilization data, DOD relied on outdated information in the reporting of DTS utilization to DOD management and the Congress. We have previously reported that best business practices indicate that a key factor of project management and oversight is the ability to effectively monitor and evaluate a project's actual performance against what was planned. In order to perform this critical task, best business practices require the adoption of quantitative metrics to help measure the effectiveness of a business system implementation and to continually measure and monitor results, such as system utilization. The lack of accurate and pertinent utilization data hindered management's ability to monitor its progress toward the DOD vision of DTS as the standard travel system as well as to provide consistent and accurate data to Congress. DTS's reported utilization rates for the period October 2005 through April 2006 averaged 53 percent for Army, 30 percent for Navy, and 39 percent for Air Force. Because the PMO-DTS was unable to identify the total number of travel vouchers that should have been processed through DTS (total universe of travel vouchers), we reported that these utilization rates may have been over- or understated. PMO-DTS program officials confirmed that the reported utilization data were not based on complete data because the department did not have comprehensive information to identify the universe or the total number of travel vouchers that should be processed through DTS. PMO-DTS and DTS military service officials agreed that the actual DTS utilization rate should be calculated by comparing actual vouchers processed in DTS to the total universe of vouchers that should be processed in DTS. The universe would exclude those travel vouchers that could not be processed through DTS, such as those related to permanent change of station travel. The underutilization of DTS also adversely affected the estimated savings. As discussed in our September 2005 testimony there were at least 31 legacy travel systems operating within the department at that time. The testimony recognized that some of the existing travel systems, such as the Integrated Automated Travel System, could not be completely eliminated because the systems performed other functions, such as permanent change of station travel claims that DTS could not process. However, in other cases, the department was spending funds to maintain duplicative systems that performed the same function as DTS. Since these legacy systems were not owned and operated by DTS, the PMO-DTS did not have the authority to discontinue their operation. We have previously stated that this issue must be addressed from a departmentwide perspective. Further, because of the continued operation of the legacy systems at locations where DTS had been fully deployed, DOD components were paying the Defense Finance and Accounting Service (DFAS) higher processing fees for processing manual travel vouchers as opposed to processing the travel vouchers electronically through DTS. According to an April 13, 2005, memorandum from the Assistant Secretary of the Army (Financial Management and Comptroller), DFAS was charging the Army $34 for each travel voucher processed manually and $2.22 for each travel voucher processed electronically--a difference of $31.78. The memorandum noted that for the 5-month period, October 1, 2004, to February 28, 2005, the Army spent about $5.6 million more to process 177,000 travel vouchers manually rather than processing the vouchers electronically using DTS. Requirements management and system testing. Our January 2006 and September 2006 reports noted problems with DTS's ability to properly display flight information and traced those problems to inadequate requirements management and system testing. As of February 2006, we found that similar problems continued to exist. Once again, these problems could be traced to ineffective requirements management and system testing processes. Properly defined requirements are a key element in systems that meet their cost, schedule, and performance goals since the requirements define the (1) functionality that is expected to be provided by the system and (2) quantitative measures by which to determine through testing whether that functionality is operating as expected. Requirements represent the blueprint that system developers and program managers use to design, develop, and acquire a system. Requirements represent the foundation on which the system should be developed and implemented. As we have noted in previous reports, because requirements provide the foundation for system testing, they must be complete, clear, and well documented to design and implement an effective testing program. Absent this, an organization is taking a significant risk that its testing efforts will not detect significant defects until after the system is placed into production. We reported in September 2006 that our analysis of selected flight information disclosed that DOD did not have reasonable assurance that DTS displayed flights in accordance with its stated requirements. We analyzed 15 domestic GSA city pairs, which should have translated into 246 GSA city pair flights for the departure times selected. However, we identified 87 flights that did not appear on one or more of the required listings based on the DTS requirements. After briefing PMO-DTS officials on the results of our analysis in February 2006, the PMO-DTS employed the services of a contractor to review DTS to determine the specific cause of the problems and recommend solutions. In a March 2006 briefing, the PMO-DTS acknowledged the existence of the problems and identified two primary causes. First, part of the problem was attributed to the methodology used by DTS to obtain flights from the Global Distribution System (GDS). The PMO-DTS stated that DTS was programmed to obtain a "limited" amount of data from GDS in order to reduce the costs associated with accessing GDS. This helps to explain why flight queries we reviewed did not produce the expected results. To resolve this particular problem, the PMO-DTS proposed increasing the amount of data obtained from GDS. Second, the PMO-DTS acknowledged that the system testing performed by the contractor responsible for developing and operating DTS was inadequate, and therefore, there was no assurance that DTS would provide the data in conformance with the stated requirements. This weakness was not new, but rather reconfirmed the concerns discussed in our September 2005 testimony and January 2006 report related to the testing of DTS. Validity of economic analysis. As noted in our September 2006 report, our analysis of the September 2003 economic analysis found that two key assumptions used to estimate cost savings were not based on reliable information. Consequently, the economic analysis did not serve to help ensure that the funds invested in DTS were used in an efficient and effective manner. Two primary areas--personnel savings of $24.2 million and reduced commercial travel office fees of $31 million--represented the majority of the over $56 million of estimated annual net savings DTS was expected to realize. However, the estimates used to generate these savings were unreliable. The personnel savings of $24.2 million was attributable to the Air Force and Navy. The assumption behind the personnel savings computation was that there would be less manual intervention in the processing of travel vouchers for payment, and therefore, fewer staff would be needed. However, based on our discussions with Air Force and Navy DTS program officials, it was questionable how the estimated savings would be achieved. Air Force and Navy DTS program officials stated that they did not anticipate a reduction in the number of personnel with the full implementation of DTS, but rather shifting staff to other functions. According to DOD officials responsible for reviewing economic analyses, while shifting personnel to other functions was considered a benefit, it should have been considered an intangible benefit rather than tangible dollar savings since the shifting of personnel did not result in a reduction of DOD expenditures. Also, as part of the Navy's overall evaluation of the economic analysis, program officials stated that "the Navy has not identified, and conceivably will not recommend, any personnel billets for reduction." Finally, the Naval Cost Analysis Division's October 2003 report on the economic analysis noted that it could not validate approximately 40 percent of the Navy's total costs, including personnel costs, in the DTS life-cycle cost estimates because credible supporting documentation was lacking. The report also noted that the PMO-DTS used unsound methodologies in preparing the DTS economic analysis. We also reported in 2006 that according to DOD's September 2003 economic analysis, it expected to realize annual net savings of $31 million through reduced fees paid to the commercial travel offices because the successful implementation of DTS would enable the majority of airline tickets to be acquired with either no or minimal intervention by the commercial travel offices. These are commonly referred to as "no touch" transactions. However, DOD did not have a sufficient basis to estimate the number of transactions that would be considered "no touch" since the (1) estimated percentage of transactions that can be processed using "no touch" was not supported and (2) analysis did not properly consider the effects of components that use management fees, rather than transaction fees, to compensate the commercial travel offices for services provided. The weaknesses we identified with the estimating process raised serious questions as to whether DOD would realize substantial portions of the estimated annual net savings of $31 million. DOD arrived at the $31 million of annual savings in commercial travel office fees by estimating that 70 percent of all DTS airline tickets would be considered "no touch" and then multiplying these tickets by the savings per ticket in commercial travel office fees. However, we found that the 70 percent assumption was not well supported. We requested, but the PMO-DTS could not provide, an analysis of travel data supporting its assertion. Rather, the sole support provided by the PMO-DTS was an article in a travel industry trade publication. The article was not based on information related to DTS, but rather on the experience of one private-sector company. As noted in our January 2006 report, opportunities existed at that time to better achieve the vision of a travel system that reduces the administrative burden and cost while supporting DOD's mission. Some of the suggested proposals are highlighted below. Automating approval of changes to authorized travel expenses. The business process used at the time by DTS designated the traveler's supervisor as the authorizing official responsible for authorizing travel and approving the travel voucher and making sure the charges are appropriate after the travel is complete. Furthermore, should the actual expenses claimed on the travel voucher differ from the authorized estimate of expenses, the authorizing official was required to approve these deviations as well. For example, if the estimated costs associated with the travel authorization are $500 and the actual expenses are $495, then the authorizing official was required to approve the $5 difference. If the difference was caused by two different items, then each item required approval. Similarly, if the actual expenses are $505, then the authorizing official was required to specifically approve this $5 increase. This policy appeared to perpetuate one of the problems noted in the 1995 DOD report--compliance with rigid rules rather than focusing on the performance of the mission. One practice that could be used to reduce the administrative burden on the traveler and the authorizing official was to automatically make the adjustments to the travel claim when the adjustments do not introduce any risk or the cost of the internal control outweighs the risk. For example, processing a travel claim that was less than the amount authorized does not pose any more risk than processing a travel claim that equals the authorized amount since the key was whether the claim is valid rather than whether the amount equals the funding initially authorized and obligated in the financial management system. Using commercial databases to identify unused airline tickets. We have previously reported that DOD had not recovered millions of dollars in unused airline tickets. One action that DOD was taking to address the problem was requiring the commercial travel offices to prepare reports on unused airline tickets. While this action was a positive step forward, it required (1) the commercial travel offices to have an effective system of performing this function and (2) DOD to have an effective program for monitoring compliance. At the time, we suggested that a third party service, commonly referred to as the Airlines Reporting Corporation, might provide DOD with the necessary information to collect unused airline tickets in an automated manner. If the information from the Airlines Reporting Corporation was utilized, DOD would not have to rely on the reports prepared by the commercial travel offices and would have been able to avoid the costs associated with preparing the unused airline ticket reports. According to DOD officials, at the time of our review, this requirement had not yet been implemented in all the existing commercial travel office contracts, and therefore, the total costs of preparing the unused airline ticket reports were unknown. Utilizing restricted airfares where cost effective. DOD's business rules and the design of DTS provided that only unrestricted airfares should be displayed. However, adopting a "one size fits all" policy did not provide an incentive to the traveler to make the best decision for the government, which was one of the stated changes documented in the 1995 DOD report. Other airfares, generally referred to as restricted airfares, may be less expensive than a given GSA city pair fare and other unrestricted airfares. However, as the name implies, these fares come with restrictions. For example, within the GSA city pair fare program, changes can be made in the flight numerous times without any additional cost to the government. Generally, with restricted airfares there was a fee for changing flights. The Federal Travel Regulation and DOD's Joint Travel Regulations allow travelers to take restricted airfares, including on those airlines not under the GSA city pair contract, if the restricted airfare costs less to the government. Adopting a standard policy of using one type of airfare--unrestricted or restricted--is not the most appropriate approach for DOD to follow. A better approach would have been to establish guidance on when unrestricted and restricted airfares should be used and then monitor how that policy was implemented. Although development of the guidance is an important first step, we previously stated that management also needs to determine (1) whether the policy was being followed and (2) what changes are needed to make it more effective. In our two reports we made 14 recommendations to help improve the department's management and oversight of DTS and streamline DOD's administrative travel processes. In commenting on our reports, the department generally agreed with the recommendations and described its efforts to address them. The implementation of our recommendations will be an important factor in DTS's achieving its intended goals. We will be following up to determine whether and if so, to what extent, DOD has taken action to address our recommendations in accordance with our standard audit follow-up policies and procedures. We would be pleased to brief the Subcommittee on the status of the department's actions once we have completed our follow-up efforts. Mr. Chairman, this concludes my prepared statement. We would be happy to answer any questions that you or other members of the Subcommittee may have at this time. For further information about this testimony, please contact McCoy Williams at (202) 512-2600 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. In addition to the above contacts, the following individuals made key contributions to this testimony: Darby Smith, Assistant Director; Evelyn Logue, Assistant Director; J. Christopher Martin, Senior-Level Technologist; F. Abe Dymond, Assistant General Counsel; Beatrice Alff; Francine DelVecchio; and Tory Wudtke. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

In 1995, the Department of Defense (DOD) began an effort to implement a standard departmentwide travel system, the Defense Travel System (DTS). This testimony is based on previously issued GAO reports and testimonies that highlighted challenges confronted by DOD in the implementation of DTS. More specifically, today's testimony focuses on prior GAO reporting concerning (1) the lack of quantitative metrics to measure the extent to which DTS is actually being used, (2) weaknesses with DTS's requirements management and system testing, and (3) two key assumptions related to the estimated cost savings in the September 2003 DTS economic analysis were not reasonable. Today's testimony also highlights some actions that DOD could explore to help streamline its administrative travel processes such as using a commercial database to identify unused airline tickets. Overhauling the department's antiquated travel management practices and systems has been a daunting challenge for DOD. In several prior reports and testimonies, GAO identified several key implementation issues regarding DOD's ability to make DTS the standard travel system for the department. Specifically, GAO reported that DTS was not being used to the fullest extent possible, and DOD lacked comprehensive data to effectively monitor its utilization. At the time of GAO's 2006 review, DOD's utilization data were based on a model that was developed in calendar year 2003. However, the model had not been completely updated to reflect actual DTS usage at that time. The lack of up-to-date utilization data hindered management's ability to monitor progress toward the DOD vision of DTS as the standard travel system. Additionally, the continued use of the department's legacy travel systems resulted in the underutilization of DTS and adversely affected the expected savings that DTS could achieve. Furthermore, GAO previously reported weaknesses in DTS's requirements management and system testing practices. GAO found that DTS's requirements were still inadequate. GAO noted that until DOD improves DTS's requirements management practices, the department will not have reasonable assurance that DTS can provide the intended functionality. Additionally, GAO's 2006 report of the September 2003 DTS economic analysis found that the two key assumptions used to estimate annual net savings were not based on reliable information. Two cost components represented the majority of the over $56 million in estimated net savings--personnel savings and reduced commercial travel office fees. GAO's analysis found that $24.2 million in personnel savings related to the Air Force and the Navy were not supported. Air Force and Navy DTS program officials stated that they did not anticipate a reduction in the number of personnel, but rather the shifting of staff from the travel function to other functions. The Naval Cost Analysis Division stated that the Navy will not realize any tangible personnel cost savings from the implementation of DTS. In regard to the commercial travel office fees, GAO's 2006 reporting disclosed that the economic analysis assumed that 70 percent of all DTS airline tickets would either require no intervention or minimal intervention from the commercial travel offices resulting in an estimated annual net savings of $31 million. However, the support provided by the DTS program office was an article in a trade industry publication. The article was not based on information related to DTS, but rather on the experience of one private-sector company. In addition, GAO identified concepts that the department can adopt to streamline its travel management practices.

According to a 1995 World Health Organization (WHO) report, the three major threats to the survival of children under age 5 in developing countries are diarrheal dehydration, acute respiratory infections (e.g., pneumonia), and vaccine-preventable diseases. WHO's 1995 report stated that 13.3 million children under age 5 died in developing countries in 1985 and that 12.2 million children under age 5 died in 1993. Figure 1 shows the causes of death for children under age 5 in developing countries, and figure 2 shows 1994 mortality rates for children under age 5 worldwide. Since 1954, USAID and its predecessor agencies have been involved in activities to improve child survival in the developing countries. Since the passage of Public Law 480 in 1954, U.S. food assistance has been provided to children and pregnant and lactating women. In the 1960s, USAID began building health clinics and funding research on treatments for diarrheal disease and the prevention of malaria. One of the specific objectives of the Foreign Assistance Act of 1961, the primary legislation governing U.S. foreign aid, was to reduce infant mortality. In the 1970s, USAID began to focus on providing appropriate health interventions for common health problems in communities with the greatest needs. Activities related to child health included field studies on oral rehydration and vitamin A therapy and malaria research. "In carrying out the purposes of this subsection, the President shall promote, encourage, and undertake activities designed to deal directly with the special health needs of children and mothers. Such activities should utilize simple, available technologies which can significantly reduce childhood mortality, such as improved and expanded immunization programs, oral rehydration to combat diarrhoeal diseases, and education programs aimed at improving nutrition and sanitation and at promoting child spacing." Because the statutory language is broad and emphasizes but does not limit USAID to the specified interventions, USAID has considerable latitude in developing child survival activities appropriate to the community being served. In February 1985, in response to the authorizing legislation, some of USAID's ongoing child health efforts were consolidated into a child survival program. USAID provided mission-level child survival assistance to 31 countries in 1985, but it placed special emphasis on 22 countries that had especially high mortality rates. For each of these 22 countries, USAID developed a detailed child survival strategy, in cooperation with the host government, to deal with the country's specific needs and circumstances. USAID's policy was to sustain bilateral child survival funding in these countries for at least 3 to 5 years and provide technical support and training on a priority basis. Over the years, the congressional appropriations committees have continued to emphasize the importance of the basic interventions mentioned in the authorizing statute, particularly immunizations and oral rehydration therapy. In some years, the committees have also directed USAID to support particular activities, including the promotion of breastfeeding, research and development of vaccines, and prevention of vitamin A and other micronutrient deficiencies through food fortification, tablets, and injections. USAID's child survival program has evolved in the 1990s to where it no longer is a separate program, but is encompassed within USAID's sustainable development strategy as a component of its population, nutrition, and health sector. (See app. I for a more detailed description of USAID's current child survival objectives and approach.) Between fiscal years 1985 and 1995, USAID reported that it obligated over $2.3 billion for the child survival program. Child survival projects and other activities attributed to child survival may be funded through USAID's overseas missions directly or through its four regional bureaus or its central bureaus (see table 1). The number of countries receiving mission-level child survival assistance in a single fiscal year increased from 31 in 1985 to about 43 in 1995. During this 11-year period, USAID provided mission-level assistance on a continuing basis for some countries, such as Egypt, whereas other countries received funding in only 1 year. A total of 83 developing countries received some mission-level child survival funding during this period. The amounts ranged from $9,000 for Oman to $137 million for Egypt. As shown in table 2, of the 10 countries that have received the most child survival assistance from USAID missions, 5 were in the Latin America and Caribbean region, 4 were in the Asia and Near East region, and 1 was in the Africa region. USAID provides funding to other organizations to implement health and population services. USAID guidance states that U.S. assistance must help build the capacity to develop and sustain host country political commitment to health and population programs, as well as enhance the ability of local organizations to define policies and design and manage their own programs. USAID's policy is to involve both the public and private sectors and give special attention to building, supporting, and empowering nongovernmental organizations (NGO) wherever feasible. USAID-supported child survival activities involve U.S. and foreign not-for-profit NGOs, including private voluntary organizations (PVO); universities; for-profit contractors; multilateral organizations; and U.S. and foreign government agencies. Figure 3 shows that U.S. NGOs received about 45 percent of fiscal year 1994 child survival funding. At least 35 U.S. PVOs and 22 other U.S. NGOs participated in USAID's child survival programs during that year as primary grantees. For-profit businesses and host country governments together accounted for another one-quarter of the funding. The remainder went to multilateral organizations, such as UNICEF; U.S. government agencies, including the Centers for Disease Control and Prevention; and indigenous NGOs. For-profit firms ($35.1 million) Host country government agencies ($32.7 million) USAID generally uses the different types of organizations for different purposes or for implementing different types of activities. No one single group or organization typically performs the full range of activities that the agency sponsors. For example, in all the countries we visited, PVOs were involved at the community level with direct delivery of some of the basic health interventions. In Guatemala, a for-profit contractor provided technical assistance for the computer hardware and software programs that USAID installed in the Ministry of Health to computerize its health data. Between 1985 and 1995, activities related to the three major causes of death among young children--acute respiratory infections, diarrheal diseases, and vaccine-preventable diseases--received about $972 million, or 41 percent of the child survival funds. Table 3 shows funding levels attributed to child survival by type of activity from 1985 to 1995. USAID is unable to determine with any degree of precision how much funding is actually being used for child survival activities because (1) of the way Congress has directed funding; (2) USAID guidance allows considerable flexibility and variation in attributing child survival funds; (3) the amounts reported are based on estimated percentages of projected budgets, which sometimes are not adjusted at the end of the year to reflect any changes that may have occurred; and (4) the amounts reported are not directly based on specific project expenditures. USAID plans a new information management system that may improve the precision of the data for its child survival activities. From fiscal year 1985, when the child survival program officially began, through fiscal year 1995, appropriations statutes have mandated spending of at least $1.8 billion for child survival activities. From fiscal years 1985 to 1991, funds appropriated by Congress for child survival went into a separate functional account under USAID's development assistance account. Additionally, for several years prior to fiscal year 1992, the appropriations laws not only earmarked money for child survival, but the appropriations committees' reports also expressed the intention that other accounts within the development assistance account should provide substantially more money for child survival activities. Beginning in fiscal year 1992, the functional account was eliminated and subsequent laws appropriating moneys to USAID contained an earmark for child survival activities that could be drawn from any USAID assistance account. Since 1991, Congress has substantially increased the level of funds designated for child survival through earmarks (from $100 million in direct appropriations in fiscal year 1991 to $250 million in fiscal year 1992). USAID issued guidance in 1992 and 1996 about the types of activities that were allowed to be attributed to child survival. Additionally, the agency's budget office issues annual instructions for reporting on project activities. These instructions name types of activities that may be attributed to child survival and give broad discretion to USAID officials to determine the percentage of funding that can be reported as child survival. However, the instructions do not provide specific indicators for determining attribution, such as the percent of children in the population served for water projects. Moreover, some mission officials responsible for recording project activities told us that the guidance for making attributions was not clear to them. In our discussions with USAID officials, we found that the process of attributing funds to child survival activities was imprecise and that mistakes occurred. As a result, the percentage of funds designated as child survival varied widely for similar activities. For example, USAID used child survival funds for the construction of water systems in all four countries we visited. USAID guidance suggested 30 percent of the total budget of water and sewerage projects as an appropriate level to attribute to child survival, but child survival funds comprised from 3 to 100 percent of the funding for some of these projects. According to an official at the USAID mission in Egypt, the mission has a policy of attributing 3 percent of sewerage projects and 6 percent of water projects to child survival. In contrast, the Health Sector II project in Honduras attributed 70 percent of the $16.9 million water and sanitation component to child survival. According to a mission official, the justification for this level of attribution was that children under age 5 comprised approximately 70 percent of the deaths due to water-borne diseases in rural areas. Another activity funded by this project was the construction of area warehouses. About $72,000, which was 26 percent of the cost, was attributed to child survival. The justification USAID provided for this attribution was that these warehouses, which were used to store medical supplies, have contributed to the decline in the infant mortality rate in Honduras. The funding amounts reported as child survival are based on estimated percentages of total project obligations for types of child survival activities carried out under individual projects. These estimates are made by project or budget officers and are supposed to be based on a knowledge of project plans and activities. However, mission officials told us that they generally did not change the activity assignments or percentages, even though changes in available funding or project plans may occur during the year. For example, $800,000 in child survival funding was attributed to a basic education project in Ethiopia in 1994. A mission official told us that the child survival activity did not actually take place, but the reports provided to us by USAID included child survival funding for this project. USAID reports on funds attributed to child survival and other activities are not based on expenditures. USAID stated that its activity reporting system was never intended to track expenditures for programs and that Congress was aware that reported funding represented estimates of obligations. However, according to USAID officials, a new information system is underway that will link budgets, obligations, and expenditures and enable the agency to track funds more accurately. USAID officials said that the new system would be able to link some child survival assistance with actual expenditures in cases in which a distinct child survival activity has been defined. However, in other cases, reported funding will continue to be based on the project manager's estimate of the percentage of funding attributable to child survival. USAID began implementing the new system in July 1996 for all new commitments made at headquarters, and it plans to extend the system to the overseas missions by October 1996. USAID has made significant contributions, in collaboration with other donors, in reducing under-5 mortality rates. Among the 10 countries receiving the most USAID mission-level child survival assistance, all but one improved their under-5 mortality rate between 1980 and 1994. Five countries achieved the World Summit goal of 70 or fewer deaths per 1,000 live births. The number of deaths from the three major causes of under-5 mortality declined during this time, but the largest decrease was for vaccine-preventable diseases. USAID can claim some far-reaching accomplishments in immunizations. Between 1985 and 1994, 26 of the 59 countries that received some mission-level assistance specifically for immunization activities achieved USAID's goal of 80-percent immunization rates. Through collaboration with the Pan American Health Organization (PAHO), UNICEF, Rotary International, other international organizations, and the individual countries, USAID helped to bring about the eradication of poliomyelitis in the Americas. USAID's Children's Vaccine Initiative project supports a revolving fund, called the Vaccine Independence Initiative, that is managed by PAHO and UNICEF. This fund, which received $3.8 million of child survival funding between 1992 and 1995, is used to help developing countries purchase vaccines. One of USAID's most important accomplishments in diarrheal disease control occurred before 1985 with the discovery that oral rehydration salts could be used to treat the dehydration that occurs with diarrheal diseases and causes death. USAID has also had positive results in efforts to increase usage of oral rehydration therapy, although only four countries where USAID has provided mission-level child survival assistance have usage rates above 80 percent. USAID's recent diarrheal disease control efforts have been aimed at promoting sustainability by transferring technology to developing countries so that they can manufacture the salts. USAID has also contributed to research on the importance of vitamin A supplementation and efforts to incorporate vitamin A into local food supplies around the world. USAID's Center for Development Information and Evaluation (CDIE) concluded in a 1993 report that USAID's child survival activities had achieved many successes and made a significant contribution in expanding child survival services and reducing infant mortality in many countries. The CDIE report cited the importance of USAID's role in vaccinations and stated that the agency had supported other major donors, such as UNICEF, through coordination and the provision of needed resources. Another evaluation conducted independently by RESULTS Educational Fund and the Bread for the World Institute concluded in a January 1995 report that USAID's child survival activities had made an important contribution to reducing deaths among children under age 5 in countries receiving USAID assistance. In the four countries we visited, USAID's contributions through child survival activities were evident. For example, in Mozambique, USAID supports PVOs that provide child survival services and other types of humanitarian and development assistance. We visited several sites where World Vision Relief and Development was implementing a child survival project. Among the activities we observed were vaccinations for children under age 3, monitoring of children's growth, prenatal examinations, and the construction of latrines. In Bolivia, PROSALUD health clinics we visited offered general medical services; childbirth and pediatric care; immunizations; family planning; and dental, pharmacy, and laboratory services. PROSALUD is a Bolivian private, nonprofit organization initiated and operated with USAID child survival funds. Between 1991 and 1996, USAID provided the PROSALUD project with $6.5 million, of which $6.2 million, or 95 percent, was attributed to child survival. The 26 PROSALUD clinics and its hospital charge small user fees that enable the organization to partially self-finance its operations. We also visited Andean Rural Health Care, a U.S. PVO that provides community health care in Bolivia through clinics and volunteers. The volunteers are trained at the health centers on how to make home visits to (1) provide families with oral rehydration salts, (2) treat diarrheal diseases and acute respiratory infections, (3) promote vaccinations by health center staff, and (4) monitor the growth and health of family members (see fig. 4). In Guatemala, we visited a clinic operated by APROFAM, which is a private, nonprofit organization that provides family planning services as well as selected maternal-child health services, such as pre- and postnatal care, child growth monitoring, and oral rehydration therapy. Under the current USAID grant, APROFAM received about $2.5 million in child survival funding, representing 15 percent of its total USAID funds. We also visited a pharmaceutical plant in Guatemala where USAID provided equipment and technical assistance to manufacture packets of oral rehydration salts used in the treatment of diarrheal disease dehydration (see fig. 5). The packets are to be distributed through Ministry of Health facilities. This plant was a component of USAID's $20 million child survival project started in 1985 to assist the Ministry of Health. In Egypt, we visited urban and rural health clinics that administered vaccinations and oral rehydration therapy and had laboratories that were equipped to perform medical tests. According to USAID officials, these health clinics also provided treatment for acute respiratory infections and family planning activities. For fiscal years 1993-95, USAID reportedly spent about $478.9 million, or 58 percent of child survival funding, on interventions that directly address the causes of death of children under the age of 5--immunizations, diarrheal disease control, nutrition, and acute respiratory infections. However, the amounts used for immunizations and diarrheal disease control were less in 1994 and 1995 than they had been in 1993. During the same period, USAID spent about $341.5 million on such areas as health systems development, health care financing, water quality, and environmental health (a new area). In Mozambique, USAID attributed child survival funds for the construction of a water supply system in Chimoio by the Adventist Development and Relief Agency to serve as many as 25,000 residents (see fig. 6). About $2.5 million, or 40 percent, of the project's almost $6.2 million cost was attributed to child survival. USAID described this project as an exception where such infrastructure activities would be appropriately attributed to child survival. Since 1992, the USAID mission in Egypt has designated as child survival about $6.5 million for water and wastewater infrastructure development.Egypt's sewerage projects include the design, construction, and operation of wastewater treatment plants and systems, and water projects include the construction of water treatment plants, which provide potable water to urban areas. The 1993 USAID/CDIE report recommended that water infrastructure projects not be funded as child survival because child survival resources were not considered adequate to construct enough water systems to have a measurable impact on national health indicators. The report also stated that the results of other child survival interventions appear to be greater than the results obtained from investing in water and sanitation and that oral rehydration therapy and interventions related to acute respiratory infections should be given higher priority. In Mozambique, reconstruction of a railroad bridge crossing the Zambezi River between Sena and Mutarara was considered child survival (see fig. 7). The goal of this project was to rehabilitate roads so that land movement of food and other relief assistance, the return of displaced persons and refugees, and drought recovery activities could occur. The railroad bridge was modified to accommodate vehicles and pedestrian traffic. Of the project's $10.8 million budget, $1.9 million was attributed to child survival as nutrition in 1993 and 1994. Although the railroad bridge in Mozambique was considered a nutrition intervention, other infrastructure projects that have used child survival funding were classified as water quality/health, health systems development, and health care financing. Between 1993 and 1995, USAID attributed about $38.6 million in child survival funds to water quality/health, $113.5 million to health systems development, and $24.6 million to health care financing. Examples of activities related to health systems development include the construction of warehouses for government medical supplies in Honduras. An example of a health care financing activity in Bolivia is PROSALUD, which USAID established to be a self-financing health care provider. USAID attributed $30 million of the international disaster assistance funds to child survival in fiscal year 1995. The projects that USAID's budget office counted as child survival included activities that benefited children, such as health and winterization activities in the former Yugoslavia, a water drilling program in northern Iraq, an emergency medical and nutrition project for displaced persons in Sudan, the purchase of four water purification/chlorination systems in Djibouti, and community health care in two regions of Somalia. Additionally, the conference report accompanying the fiscal year 1996 foreign operations appropriations act authorized USAID to attribute $30 million of disaster assistance funding to child survival. USAID's guidance states that child survival assistance will be provided to countries with mortality rates for children under age 5 at or above 150 per 1,000 live births. However, USAID does not provide assistance to some of the 30 countries with the most serious under-5 mortality problems. For example, many countries in sub-Saharan Africa, which have the most serious child survival problems, do not receive USAID child survival assistance for mission-level projects. According to USAID, the agency does not have a mission in these countries, had closed out assistance, or was in the process of closing out assistance because of budgetary or legal reasons or because sustainable development programs were not considered feasible. (See app. II for details regarding under-5 mortality rates and amounts of USAID mission-level assistance for developing countries.) On the other hand, USAID attributes mission-level child survival funds to activities in 17 countries that have a mortality rate of 70 or fewer deaths per 1,000 live births. In fiscal year 1995, USAID used about $89.5 million of child survival funding for activities in these 17 countries. Among these countries were several in the former Soviet Union, including Georgia, which had an under-5 mortality rate of 27 per 1,000 live births. By contrast, in fiscal year 1995, USAID used $53.4 million of child survival funding in 15 of the 30 countries that had the most serious problems with under-5 mortality--rates above 150 per 1,000 live births. In 1995, Egypt continued to have the largest share of mission-level assistance attributed to child survival ($27 million), as it has over the last decade. UNICEF reported Egypt's under-5 mortality rate in 1994 as 52; however, USAID indicated that its most recent data showed that the rate was 80.6. In commenting on a draft of this report, USAID indicated that it focused its child survival efforts in countries with high rates of under-5 mortality and other factors that indicated a great need for assistance. USAID stated that (1) national mortality rates are averages that often mask pockets of high child mortality, (2) the achievement of a target mortality rate is not a reason to stop support of efforts because gains need to be sustainable, and (3) child survival programs are not in some of the most needy countries because of legal, budgetary, and sustainability reasons. USAID issued new guidance in April 1996 that indicates that infrastructure is not generally considered to be an appropriate use of child survival funds. USAID stated that the infrastructure cases we cited, all of which began before April 1996, were isolated examples. USAID further stated that the bridge rehabilitation and water works construction projects in Mozambique were needed to reduce child mortality after the civil turmoil in that country. USAID also commented that its current financial reporting system was never intended to be used to track any program area on an expenditure basis. USAID indicated that a new information management system that is being implemented has been designed to track funding for each activity by linking budgets, obligations, procurements, and expenditures. After reviewing USAID's comments, we have deleted the recommendations that we presented in our draft report. In its comments and subsequent discussions, USAID provided us with sufficiently detailed information to adequately explain the reasons why some countries with very severe child mortality problems do not receive direct U.S. aid and others with lower mortality rates do. USAID's new operating procedures have the potential to address, for the most part, how its child survival activities will be linked to USAID's objectives and how its project activities will be measured. Our concern that USAID's new information management system provide accurate obligation and expenditure data is being addressed by USAID. We are still concerned, however, about the clarity of the guidance provided to USAID's activity managers for determining the percentage of funding and expenditures attributable to child survival when a broader activity contributes to USAID's child survival objectives. We are, however, making no specific recommendations in these areas. USAID also provided clarifications and corrections to the draft, and we have incorporated these changes where appropriate. USAID's comments are in appendix III. To understand the extent, nature, and progress of USAID's child survival activities, we reviewed the authorizing and appropriations legislation for 1985-95 and the accompanying committee reports and selected USAID project documents, including planning and program implementation documents, internal and external project evaluations, funding reports, health activity reports, and project files. We also held extensive discussions with officials from USAID, WHO, PAHO, UNICEF, USAID contractors, PVOs, and host governments and program beneficiaries. We visited USAID missions in Bolivia, Egypt, Guatemala, and Mozambique to directly observe the nature of USAID's child survival activities being implemented in the field. We selected these countries because they received significant child survival funding, had various types of child survival projects, and provided regional differences. During our fieldwork, we analyzed data for most of the USAID missions' ongoing projects and visited 63 project sites. In addition to the fieldwork, we also talked with USAID project officers in two other countries. We analyzed USAID strategic objectives, program goals, and funding documentation to determine the linkage between funds attributed to child survival and USAID's child survival objectives. We analyzed the most recent data on USAID funding attributed to child survival for 1985-95, which we obtained from the contractor that operates USAID's Center for International Health Information. At the time of our review, obligation data for fiscal year 1995 were not fully validated; therefore, some of the fiscal year 1995 obligation data are subject to change. According to USAID officials, the 1995 data had to be recoded, and the process was not completed by August 1996. We conducted our review between May 1995 and August 1996 in accordance with generally accepted government auditing standards. As arranged with your office, unless you publicly announce its contents earlier, we plan no distribution of this report until 30 days after the date of this letter. We will then send copies of this report to the Administrator, USAID; the Director, Office of Management and Budget; the Secretary of State; and other interested congressional committees. We will also make copies available to others on request. Please contact me at (202) 512-4128 if you or your staff have any questions concerning this report. Major contributors to this report are listed in appendix IV. In February 1985, in response to the legislation authorizing child survival activities, the U.S. Agency for International Development (USAID) established the child survival program to consolidate some of the agency's ongoing efforts related to reducing deaths among children in developing countries. Although USAID provided mission-level child survival assistance to 31 countries in 1985, it placed special emphasis on 22 countries that had especially high mortality rates. The child survival program for these 22 countries was originally guided by USAID's Child Survival Task Force. This task force helped to develop a detailed child survival strategy for each country, in cooperation with the host government, to deal with the country's specific needs and circumstances. USAID's policy was to sustain mission-level child survival funding in these countries for at least 3 to 5 years and provide technical support and training on a priority basis. Special attention was also to be given to program monitoring and evaluation and coordination with private voluntary organizations (PVO), international organizations, and other U.S. agencies. From 1985 to 1991, child survival appropriations went into a functional account for child survival set up under an overall development assistance account. Beginning in fiscal year 1992, Congress designated a specific amount for child survival, which could be drawn from any USAID appropriation. In the 1990s, child survival was incorporated into USAID's broad strategy for development assistance. According to the agency's 1995 Guidelines for Strategic Plans, USAID's current emphasis is on sustainable and participatory development, partnerships, and the use of integrated approaches. The agency's five goals are to encourage broad-based economic growth, build democracy, stabilize world population and protect human health, protect the environment, and provide humanitarian assistance. USAID's population, health, and nutrition sector has priority objectives in four areas: family planning, child survival, maternal health, and reducing sexually transmitted diseases and human immunodeficiency virus (HIV)/acquired immune deficiency syndrome (AIDS). Agency guidelines indicate that the core of the sector is family planning but that balanced strategies are encouraged. USAID's guidance on child survival states that activities are to focus on the principal causes of death and severe lifelong disabilities, and programmatic emphasis should be on children under the age of 3. Further, the guidance states that child survival service delivery is to be focused on the community; the primary health care system; and, to a limited extent, the first-level hospitals. Emphasis is to be on enabling caretakers to take effective action on behalf of their children's well-being and ensuring gender equity in children's access to preventive and curative health. Although USAID considers health and population services to be important, the agency does not provide them directly; instead, it tries to improve the capacity, infrastructure, systems, and policies that support these services in a sustainable way. In its 1994 Strategies for Sustainable Development, USAID stated that the agency's population and health programs would concentrate on countries that contribute the most to global population and health problems and have population and health conditions that impede sustainable development. Agency guidance states that any of the following key factors indicate the need to consider developing strategic objectives that address family planning, child survival, maternal health, and reduction of sexually transmitted diseases and HIV/AIDS: annual total gross domestic product growth less than 2 percent higher than annual population growth over the past 10 years, unmet need for contraception at or above 25 percent of married women of childbearing age, total fertility rate above 3.5 children per woman, mortality rate for children under age 5 at or above 150 per 1,000 live births, stunting in at least 25 percent of children under age 5, maternal mortality rate at or above 200 deaths per 100,000 live births, and prevalence of sexually transmitted diseases at or above 10 percent among women aged 15 to 30. Because USAID has identified global population growth as an issue of strategic priority agencywide, guidance states that strategies directed at family planning, child survival, maternal health, and reduction of sexually transmitted diseases and HIV/AIDS--all of which must be considered together--will receive particular attention in those countries where the unmet need for contraception is the greatest. USAID stated that other concerns would also include under-5 mortality, maternal mortality, prevalence of sexually transmitted diseases, and stunting. USAID's long-term goal is to contribute to a cooperative global effort to stabilize world population growth and protect human health. Its anticipated near-term results over a 10-year period are (1) significant improvement in women's health, (2) a reduction in child mortality by one-third, (3) a reduction of maternal mortality rates by one-half, and (4) a decrease in the rate of new HIV infections. USAID issued guidance in 1992 and 1996 about the types of activities that are allowable uses of child survival funds. The guidance named specific types of activities that may be considered to fall under the child survival program and gave broad discretion to USAID officials to determine the proportion of funding that could be reported as child survival. The annual instruction manual for coding activities and special interests further specifies how activities are to be reported. According to agency guidance and instructions, some activities are automatically funded in their entirety as child survival. These activities are diarrheal disease control and related research, immunization and child-related vaccine research, child spacing/high-risk births, acute respiratory infection, vitamin A, breastfeeding promotion, growth monitoring and weaning foods, micronutrients, and orphans and displaced children. Other activities can be partially funded as child survival. USAID's guidance stated that project managers could decide the percentage for the following activities that could be reported as child survival, even though suggested percentages were provided for some: health systems development; nutrition management, planning, and policy; other nutrition activities; health care financing; environmental health; vector control; water and sanitation; women's health; and malaria research and control. 1994 Under-5 population (in millions) (continued) 1994 Under-5 population (in millions) (continued) 1994 Under-5 population (in millions) (continued) 1994 Under-5 population (in millions) (Table notes on next page) 1 USAID has a presence in the country and a child survival program. 2 USAID has a presence in the country, but no activities were attributed to child survival in fiscal year 1995. 3 USAID had no presence in the country and supported no mission-level programs, as of August 1996, although some funding may be provided through regional or other mechanisms. 4 USAID was legally restricted from operating in these countries as of 1996. The following is GAO's comment on USAID's letter dated July 23, 1996. 1. We have revised this report since the time we provided it to USAID for comment. As a result, there are some instances in which the information discussed in USAID's letter is no longer included in our report. Richard Seldin The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. 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Pursuant to a congressional request, GAO reviewed the U.S. Agency for International Development's (AID) child survival activities and accomplishments, focusing on how child survival funds are being used to support AID objectives. GAO found that: (1) since 1985, AID has classified obligations totalling over $2.3 billion for activities in at least 83 countries as child survival; however, due to the way Congress directs funding to child survival, particularly since 1992, and AID's approach to tracking and accounting for such funds, it is not possible to determine precisely how much is actually being spent on child survival activities; (2) between 1985 and 1995, AID reported that it spent about $1.6 billion, or 67 percent of the child survival funds, for four types of activities: immunizations, diarrheal disease control, nutrition, and health systems development; (3) AID also reported that about 41 percent of the total amount identified as child survival has been used to address the three major threats to children under age 5 in the developing countries: diarrheal dehydration, acute respiratory infections, and vaccine-preventable diseases; (4) during GAO's field visits, it also noted that part of the cost of rehabilitating a railroad bridge and constructing a water tower in Mozambique and carrying out urban sewerage projects in Egypt were identified as child survival expenditures; (5) AID said the projects in Mozambique were critical for reducing child mortality because they supported access to water, food, and health services; (6) AID and other donors have made important contributions toward improving child mortality rates in many countries; (7) in 9 of the 10 countries receiving the most AID mission-level child survival assistance since 1985, mortality rates for children age 5 and under have dropped; (8) in addition, 5 of these 10 countries achieved mortality rates by 1994 of 70 or fewer deaths per 1,000 live births, a goal set for the year 2000 at the World Summit for Children; (9) both AID and independent evaluations have pointed out successes, such as collaboration with other donors to immunize children and promote oral rehydration therapy in the treatment of diarrheal disease; (10) in fiscal year 1995, AID's child survival funding was used in 17 countries that had an under-5 mortality rate of 70 or fewer deaths per 1,000 live births; (11) AID mission-level funding for child survival in these countries was $89.5 million, or 31 percent of the total child survival funding obligated in that year; (12) on the other hand, many countries that were far from achieving the goal, did not receive assistance for child survival; and (13) according to AID, most of these countries did not receive assistance because AID did not have a program in the country, had closed out assistance, or was in the process of closing out assistance due to budgetary or legal reasons or because sustainable development programs were not considered feasible.

Vocational education prepares students for an increasingly demanding labor market through an organized sequence of courses that are directly related to preparing students for employment in jobs that do not require a bachelor's degree. For example, one school district offers high school students the opportunity to acquire the technical skills needed for careers in fields like automobile repair, medical assisting, or electronics. Vocational education programs are funded at the federal, state, and local levels. Funding provided under the 1984 Perkins Act is the federal government's primary form of assistance for vocational education. Although federal financing accounts for only a small percentage of expenditures on vocational education, the Perkins Act provided about $1.4 billion in 1993-94, compared with approximately $1 billion in 1990-91. In addition to eliminating the set-aside requirement for special populations, the Perkins Act amendments included several provisions intended to improve the quality of vocational education. To help ensure that programs are of sufficient size and scope to be effective, the amendments set minimum funding thresholds at the secondary school level. School districts that would have received funding allocations of less than $15,000 under the original Perkins Act are now generally ineligible for funds unless they join other districts in a consortium in which the total funding meets the $15,000 minimum. The amendments also encourage several approaches to vocational education that smooth the transition from school to work. In 1993-94, Perkins funding included $104 million for tech-prep programs, which link secondary vocational education programs to postsecondary institutions in a coordinated program leading to an associate's degree or certificate. For example, one school district operates a tech-prep program in allied health services that prepares students for a career as a Medical Assistant, Emergency Medical Technician, or Surgical Technologist. The Perkins amendments also encourage schools and districts to integrate vocational and academic instruction, so that vocational students can develop a better appreciation of how academic learning is related to job requirements. In addition, the amendments require recipients (schools and districts) to evaluate the effectiveness of their vocational education programs and in particular to evaluate the progress of special population students. For example, placement data on high school graduates can indicate whether students have continued their education or obtained employment in their field. Despite widespread concern, removal of the set-aside requirement has apparently had no adverse impact on special population students. Specifically, neither student participation nor the availability of support services has declined following the implementation of the Perkins amendments. Furthermore, employment and educational outcomes for special population students--relative to vocational education students as a whole--were unchanged. We found no significant changes in the rate at which special population students participated in vocational education. In 1993-94, 42 percent of all students participated in vocational education, compared with 45 percent in 1990-91. This decline in overall participation was reflected in small, statistically insignificant declines in participation among students with disabilities (from 48 to 47 percent) and among students who were disadvantaged (from 53 to 50 percent). (See fig. 1.) Not only did students from special populations continue to participate in vocational education, but these students could be found in the full range of vocational education activities, including school-to-work transition activities. Since the implementation of the amendments, more schools have offered tech-prep programs; schools have also continued to offer work-study and apprenticeship opportunities. When comparing students from special populations with other students, we observed no significant differences in participation in these activities either before or after the amendments. For example, in 1993-94, 16.8 percent of disadvantaged students--and 16 percent of students who did not belong to special population groups--participated in tech-prep. However, because many schools were unable to provide this information, our estimates of participation in these activities are somewhat imprecise. (For more information about participation in vocational education programs, see app. II.) From 1990-91 to 1993-94, the percentage of schools that offered support services to students, including those from special population groups, generally increased. For example, the percentage of schools that offered transportation services to students with disabilities increased dramatically (from 59 to 74 percent). These students' access to teacher aides, tutoring, and life skills training also rose significantly. For students not in special population groups, there was a significant increase in the percentage of schools offering tutoring (from 52 to 66 percent). In some support areas, special population students were more likely to be offered additional services than students who did not belong to these groups (see fig. 2). For example, in 1993-94 students from any of the three special population groups were significantly more likely to be offered teacher aides than students who did not come from any of these groups. However, for many of the remaining support services, the differences between the various groups of students were small and statistically insignificant. Across all student groups, in 1993-94 schools were most likely to offer counseling or guidance, tutoring, evaluation or assessment, life skills training, and special recruitment; over two-thirds of schools offered these services. Day care was offered less frequently (by less than one-sixth of schools). (For more detailed information on the percentage of schools offering support services, see app. II.) Historically, vocational education graduates who have disabilities or are economically disadvantaged have been less likely to attend college and more likely to go directly to work than other students. This pattern is evident in both our 1990-91 and 1993-94 surveys. In general, these differences neither widened nor narrowed over time. For example, the proportion of disadvantaged vocational students who expected to attend a 4-year college was 14 percent in 1990-91 and 13 percent in 1993-94--a statistically insignificant change. However, many schools were unable to provide placement information, and this low response rate limited our ability to observe changes in postgraduation status. (For more information about changes in outcomes for vocational students who are members of special populations, see app. II.) The Perkins amendments directed recipients to adopt a number of strategies to enhance the quality of vocational education--most specifically, tech-prep programs, integrated learning approaches, and the development of standards by which schools and districts can better evaluate their vocational programs. The sponsors of the Perkins amendments believed that these approaches would improve the quality of vocational education by easing the transition from school to work and by ensuring that students apply cognitive skills in a vocational education environment. For similar reasons, vocational education experts have advised schools and districts to emphasize school-to-work transition activities. We observed many schools and districts moving aggressively to implement several of these approaches. However, other recommendations (such as using academic teachers in vocational classes) have been slower to gain acceptance. Many of the attributes associated with quality programs still affect only a small percentage of vocational education students. Similarly, although districts have increased their use of quality indicators for self-assessment, many districts have not yet developed standards to guide these assessments. Schools have moved aggressively to increase several of the approaches to vocational education associated with quality--such as integrated learning and tech-prep programs. For example, in 1993-94 35 percent of all schools reported that to a "great" or "very great" extent they were participating in teacher training activities designed to integrate academics into vocational education, compared with 20 percent or less in 1990-91 (see fig. 3). Even more dramatically, the percentage of schools offering tech-prep programs increased significantly in just 2 years: in 1990-91 only 27 percent of schools offered tech-prep, but by 1993-94 that figure had jumped to 45 percent (see fig. 4). For example, when we visited one district in 1990, officials were planning their tech-prep program. In 1991-92, they formed a tech-prep consortium, including 10 school districts. When we visited again in 1993-94, two more districts had joined the consortium and the first tech-prep program was under way. The consortium hopes to have 200 tech-prep students entering affiliated postsecondary institutions by September 1996. Acceptance of the integrated learning and tech-prep concepts has grown substantially. However, many more students will need to be exposed to these approaches before they become a standard part of vocational education. Less than half of the schools we surveyed employed several practices, such as team teaching, that bring integrated learning into the classroom. In one school we visited, informal cooperation among teachers facilitated integration--for example, the teacher of a course in computer-aided design invited the physics teacher into his classroom to explain some of the physics elements in computer-aided design. However, another district we visited was unable to implement the integrated learning concept to the extent that its administrators would have liked. These officials told us that teacher credentialing requirements at the state level prevented vocational teachers from teaching academic subjects, and contracting arrangements limited teachers' incentives to participate in summer training. Similarly, despite sizable increases in the number of schools and students participating in tech-prep programs, only 16 percent of vocational students in 1993-94 were participating in tech-prep. In addition, other methods for improving the school-to-work transition--such as work study and apprenticeships--have not grown significantly since the Perkins amendments were implemented (see fig. 4). These programs also reach only a small number of students; only 16 percent of vocational students participated in work-study programs in 1993-94, although 74 percent of schools reported that they offer a work-study program. In addition to integrated learning and school-to-work activities, experts in vocational education have urged schools to develop certificates of competency and to require students to meet minimum standards or competencies to complete the program. These initiatives have been slow to develop since the Perkins amendments; both the percentage of schools that reported issuing certificates and the number of programs that required competencies remained roughly constant between 1990-91 and 1993-94. School districts reported an increase in the use of various measures in their self-assessment process. For example, we observed substantial increases in the proportion of school districts that reported using graduation rates (from 72 to 83 percent) and placement rates (from 77 to 86 percent) as part of their self-assessments. The schools we visited, however, reported that it was difficult and time consuming to gather this type of information. For example, one school district attempted to contact recent graduates by mail but received only a 25-percent response rate. In addition, despite this increased use of information for self-assessment, many schools have yet to develop standards to guide these assessments. For example, 71 percent of schools used measures of students' academic gains as an input into their assessment process. However, only 69 percent of the schools that used this measure had developed standards that would allow them to determine if students' academic progress was satisfactory. (For more information about school progress in quality, assessment, and standards development, see app. II.) The Department of Education commented on a draft of this report. The Department believed that the draft did not make clear that the Perkins amendments contained a new requirement for local recipients to give priority in the use of title II funds to the special populations. However, the law requires only that recipients give priority to sites or programs that serve higher concentrations of special population students; there is no legislative requirement that special population students as a group be given priority over other students. We revised the report to more strongly emphasize that the amendments required such priority. The Department also believed that it would help to see a comparison of the extent to which the special populations are participating in educational improvements and services compared with the general student population. These comparisons are in table II.4 for programs and in table II.5 for support services. Department officials also made technical comments, which we discussed with them, and we made clarifications to the report as appropriate. The Department's comments appear in full in appendix V. We did our work between November 1993 and May 1995 in accordance with generally accepted government auditing standards. Please call me on (202) 512-7014 if you or your staffs have any questions. GAO contacts and staff acknowledgments for this report are listed in appendix VI. The Congress mandated that we conduct a 3-year study, using representative samples, to determine the effects of the amendments to the Perkins Act on access to and participation in vocational education for students who are disadvantaged, have disabilities, or have limited proficiency in English. The act specified that Perkins funds were to be used to improve vocational education programs and that the state was to provide assurance that members of special populations would have continued access to these programs. Consequently, we compared the status of special population students and vocational education programs before the amendments with their status after the amendments. Specifically, we measured the extent to which changes have occurred for students, in participation in vocational education, including participation in innovative programs; availability of special services; and college attendance and employment following graduation; for vocational education programs, in schools' and districts' use of formal coordination of high school and college courses; integration of academic and vocational learning; and development of competency standards for students. To address these objectives, we used panel data from two surveys administered to a nationally representative, stratified, randomly selected set of schools and their associated districts. The eight strata represent the major groups of secondary schools. After we adjusted the sample to remove inappropriate schools (for example, schools with no grades higher than 9), our sample included 1,938 schools in the first (or baseline) survey, and 1,844 schools in the second (or follow-up) survey. One thousand two hundred thirty-three schools responded to both surveys (for a 67-percent overall response rate). The item response rate varied with each item. The data from the two surveys were pooled--that is, we created a file consisting of those schools that had answered both questionnaires. For our analysis, we made direct comparisons of the reported status (such as the percentage of students who were in vocational education or the number of tech-prep programs) using data only when the school had answered the specific item in both surveys. The findings were then averaged across all schools that had responded to that item. The advantage of this approach is that small changes in the variables of interest are more easily identified than if separate studies were made using two or more independent samples. In addition, by comparing the data for just those schools that responded, we are able to report the average responses without concern that the averages are contaminated by changes in the composition of the respondents. The major disadvantage of the panel approach is that when nonresponse occurs, the data are no longer representative of national averages. The requirement that a school must have answered both surveys gives us a smaller response rate than had we used the mean values from both surveys independently. What we are reporting on are the estimated population means for those schools that would have answered both surveys, and the specific item in each survey, had they been given the chance. As a result, we cannot say that the responses represent all schools in the population from which the samples were drawn. Each observation from the school surveys was weighted (1) to adjust for the probability of being selected in the strata from which the sample was drawn and (2) to account for the pooled response rate from both surveys. Item response varied according to item, but the data were not weighted for item response. Because we used data only when the school responded to an item in both the baseline and follow-up surveys, the number responding may vary for each separate comparison. District data were not weighted, as it was not possible to adequately account for the probability of being selected from a pooled sample. The universe from which the samples were drawn, the sample sizes, and the number responding to the secondary school surveys are reported in table I.1. As part of our analysis of the survey data, we compared schools' responses for different types of students and over time (see fig. I.1): School Year 1990-91 vs. School Year 1993-94 Special Population Students vs. All Students in the School Special Population Students vs. Nonspecial Population Students Vocational Education Program Students vs. All Students in the School School year comparisons. We compared data from each school for 1990-91 with the same data item in 1993-94. These values were then averaged across schools that responded to the item. School year comparisons were made throughout and directly address whether or not changes have occurred over time. Special population and all students. For some analyses, we compared the mean values for the special population students with the mean values for all students, including the special populations. This comparison permits determination of whether mean values for the special populations differ from those for all students. For example, we compared the percentage of vocational education students in the overall student body with the percentage of vocational education students from among the special populations to get information on the overall participation rate in vocational education. Special population and nonspecial population students. For some analyses, we compared the special populations with students who were not part of the special populations. This comparison permits assessment of whether special population students are participating in services and programs in proportion to their enrollment in vocational education and at levels comparable to the nonspecial population students. Vocational students and all students. For some analyses, it is useful to know how vocational students compare with all students in the school. For example, we used this comparison to determine the general direction of average school attendance. We found that although the average number of vocational students was rising, the average number of all students was rising faster. This puts the increase in vocational students in proper perspective. To supplement the information obtained from our follow-up survey, during 1993-94 we visited four school districts in Oakland, Michigan; San Francisco, California; Delaware County, Pennsylvania; and New Castle County, Delaware. During these visits, we interviewed school and district officials to obtain information on vocational education programs, services to special populations, and assessment and improvement efforts. This appendix contains supplementary tables and more detailed information about changes in student participation, the availability of support services, student placement outcomes, and vocational education programs between 1990-91 and 1993-94. The data presented in the following sections compare changes in student and program characteristics only for those schools that responded to both surveys (that is, for 1990-91 and 1993-94). Thus, the numbers and percentages cited differ somewhat from those in our 1993 interim report, which reported on all schools that responded to our first survey. For the schools we surveyed, the average number of students per high school increased by about 6 percent between 1990-91 and 1993-94 (from 603 to 640 students per school). For the average school, the percentage increases were greatest for students from special population groups; however, the number of these students was often small. The proportion of students who were not part of special population groups remained constant at about 65 percent, while some of the special population groups grew. This may be accounted for, in part, by more students being defined as belonging to special populations. In addition, our definition permitted students to be classified in more than one special population category. (See table II.1.) body) (65.4%) (65.8%) (9.0) (10.1) (30.3) (31.6) (2.5) (3.1) The sum of the percentages in each school year exceeds 100 because students may be included in more than one special population category. Similarly, the sum of the number of students in each population group will exceed the total number of students. The percentages of the student body represent the average percentages reported by the schools responding to both surveys; they are not, for example, the average number of disabled students divided by the average number of total students. Vocational-technical enrollment also increased, but more slowly than overall enrollment. On average, there were 330 vocational students per school in 1990-91, and this number did not increase significantly. Again, the increase for students in special population groups was larger than for other students, but for many schools there were few students in some of these categories. (See table II.2.) body) (59.5%) (58.1%) (10.0) (11.8) (31.9) (35.6) (2.0) (2.7) The sum of the percentages in each school year exceeds 100 because students may be included in more than one special population category. Similarly, the sum of the number of students in each population group exceeds the total number of students. The percentages of the student body represent the average percentages reported by the schools responding to both surveys; they are not, for example, the average number of disabled students divided by the average number of total students. Because average per-school vocational-technical enrollment grew only 1.8 percent over this period (compared with 6.1 percent growth in the overall student population), the percentage of students participating in vocational-technical education declined relative to overall enrollments. Across all groups, except for those with limited English proficiency, a smaller percentage of students participated in vocational education. Although the rate of decline for students in special population groups was less than for other students, the changes were not statistically significant for any group. (See table II.3.) As shown in figure 4 (see p.11), the percentage of schools reporting that they have tech-prep programs increased dramatically (from 27 to 45 percent) between 1990-91 and 1993-94, while the percentage of schools reporting the use of work-study and apprenticeship programs remained about the same (at roughly 75 and 7 percent, respectively). Participation in such programs by students from special population groups over the 3-year period generally mirrored changes (or the lack of change) that occurred at the school level. There were no statistically significant differences in participation among student groups. However, because many schools were unable to report this information, our participation estimates are somewhat less precise. (See table II.4.) In both 1990-91 and 1993-94, schools offered a wide variety of services to their vocational-technical education students. Generally, the percentage of schools offering each service remained about the same or increased over the 3-year period for both special population students and students who did not belong to these groups. Most schools offered general services which were available to special population students about as often as to other students. For example, about 90 percent of schools offered counseling/guidance to all student groups in 1990-91, increasing to about 95 percent in 1993-94. In addition, schools often provided more specialized support services at higher rates to special population students than to other students. For example, about 54 percent of schools in 1993-94 reported offering special or modified equipment to students with disabilities; only about 18 percent of schools offered this service to students who were not members of special populations. (See table II.5.) We asked the schools we surveyed to estimate the postgraduation status of the most recent senior class for which they had employment or education information. Because many of the schools we surveyed did not gather placement information at this level of detail, our estimates are less precise. We observed no significant differences in employment or education outcomes for special population students before and after the Perkins amendments. (See table II.6.) Outcomes reported in baseline survey Outcomes reported in follow-up survey Percentages may not add up to 100 because of rounding. We found signs that many of the schools we surveyed were making considerable efforts to improve the quality of their vocational education programs, although many of these efforts have yet to reach the majority of students. More schools are focusing on integrating academic and vocational instruction, creating or strengthening linkages to the business community, and gathering and using more information for self-assessment. As shown in figure 3 (see p.10), we observed an increase in the percentage of schools that reported participating to a "great" or "very great" extent in teacher training activities to integrate vocational and academic learning. Although schools appear to be moving toward integrating academic and vocational learning, many of the schools we surveyed had not yet applied integrated learning to one or more vocational programs. For example, less than 30 percent of the schools reported using team teaching in mathematics, English, or science. (See table II.7.) Team teaching (where academic and vocational education teachers work together) We also found that the schools we surveyed were trying to improve their ties to the local community. Compared with 1990-91, in 1993-94 schools reported greater contributions from the local community in a number of areas. For example, 21 percent of schools reported that more industry people teach in the school, 19 percent reported that more teachers work in local industries for professional development, and 31 percent reported that more outside organizations provide mentor programs or job shadowing. (See table II.8.) Type of contribution by business or organization "Much More" or "Somewhat More" "About As Much" "Somewhat Less" or "Much Less" "Don't Know" Teachers work in local industry for professional development Industry people teach in the school Helps to develop or modify curriculum Consults with school about skills needed by students in workplace Donates money to vocational education program Donates material, supplies, or equipment to vocational education program Makes facilities available to students (other than through co-ops) By amending the Perkins Act to require states and school districts to continuously assess the performance of vocational-technical education programs, the Congress sent a clear message that it places importance on accountability and outcomes. However, the ability to evaluate program improvement is heavily dependent on the availability of data. Of the districts we surveyed, more are taking steps to use various indicators to assess their vocational-technical education programs in 1993-94 than in 1990-91. For example, the percentage of districts that used occupational competency standards in their program assessments increased from 68 percent to 85 percent. (See table II.9.) Number of students in vocational education programs Number of "high technology" programs Number of students participating in "high technology" programs Use of occupational competency standards Use of certificates of competency Placement rates (additional education, training, employment, or military service) Linkage with postsecondary vocational education programs Linkage with business or labor Integration of academics with vocational curriculum Coherent sequence of courses leading to an occupational skill Location of program (e.g., local high school, area vocational school, community college) Many of the districts we surveyed believed that the Perkins amendments have had a positive impact on their ability to improve their vocational education programs and services. Others believed that the Perkins amendments made little difference one way or another; but few reported the amendments adversely affected their ability to improve programs and services. Table II.10 provides specific information on districts' views. Table II.10: Views of the Districts We Surveyed on the Perkins Amendments' Effect on Their Ability to Produce Quality Programs "Greatly Increased" or "Increased" "Neither Increased nor Decreased" "Decreased" or "Greatly Decreased" "Don't Know" Your district's ability to purchase state-of-the-art equipment Your district's ability to spend Perkins funds where needed most Your district's ability to plan vocational programs and use Perkins funds Equity with which Perkins funding is allocated among districts Amount of record keeping required by state to meet Perkins requirements Extent of services your district offered to vocational-technical students in special populations Extent of services your district offered to vocational-technical students in general Access special population students have to vocational-technical programs Tutoring and remediation for vocational-technical students in general Your district's program improvement efforts Technical education standards that students must achieve Academic education standards that students must achieve Use of applied curricula in vocational-technical courses Use of integration of academic and vocational-technical courses (continued) "Greatly Increased" or "Increased" "Neither Increased nor Decreased" "Decreased" or "Greatly Decreased" "Don't Know" Elsie Picyk, Senior Computer Science Analyst, was responsible for computer programming and data analysis. Thomas Hubbs, Senior Evaluator, provided direction to the project at its earlier stages. Thomas Hungerford, Senior Economist, commented on drafts and assisted with the data analysis. Laurel Rabin, Communications Analyst, provided editing and writing assistance. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. 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Pursuant to a legislative requirement, GAO compared student participation and program features in high school vocational education programs between the 1991 and 1994 school years, focusing on the: (1) availability of support services; (2) the extent to which program students attended college or found employment following graduation; and (3) extent to which schools have enhanced the quality of vocational education programs. GAO found that: (1) between 40 and 50 percent of students in special population groups participated in vocational education programs in 1990 through 1994, despite the removal of the set-aside requirement; (2) schools continued to offer all students access to support services at the same or greater levels in 1994 than in 1991; (3) there was no significant changes in the proportion of program students who attended college, went directly to work, or were unemployed; (4) the percentage of schools offering tech-prep programs increased from 27 percent in 1991 to 45 percent in 1994 and the percentage of students participating in the programs rose from 9 to 16 percent, respectively; (5) traditional school-to-work transition programs showed no major change in participation; (6) teacher training in integrating vocational and academic instruction also increased, but most of the schools surveyed did not use integrated learning concepts in the classroom; (7) some school districts reported increased use of quality indicators in their self-assessment processes, however, the number of vocational education programs that require graduates to meet competency standards has remained stable; and (8) many of the program features associated with high-quality vocational education still affect a relatively small percentage of students and many more students will need to be exposed to these features before they become a standard part of vocational education.

Delivering more than 210 billion pieces of mail each year, USPS has a mission vital to the nation's communications and commerce. To meet its statutory universal service obligation, which requires it to "serve as nearly as practicable the entire population of the United States," USPS must "provide prompt, reliable, and efficient services to patrons in all areas" and "render postal services to all communities." In selecting modes of transportation, USPS is required to "give highest consideration to the prompt and economical delivery of all mail." Although USPS is authorized by law to receive appropriations for reimbursement of public service costs incurred by it in providing a maximum degree of effective and regular postal service nationwide, in communities where post offices may not be deemed self-sustaining, USPS has neither requested nor received such appropriations since 1982. USPS receives only minimal appropriations for reimbursement for providing free mail for the blind and overseas voting, which USPS refers to as "revenue foregone," that, in fiscal year 2007, represented less than 0.2 percent of its total revenues. USPS generated 99.8 percent of its total revenues from products and services, with mail revenues accounting for the vast majority (94.8 percent of total revenues). However, USPS faces an increasingly competitive environment. As some communications and payments have migrated to electronic alternatives, including the Internet, First-Class Mail, which historically has covered most overhead costs, has declined in volume, and more declines are expected. According to USPS, "The projected decline of First-Class Mail impacts the Postal Service's ability to continue to finance the growing universal service network. This is the single greatest challenge facing the Postal Service." Although Standard Mail (primarily advertising) is USPS's largest class of mail and key growth product, it is more price sensitive. Standard Mail volume has recently declined in the wake of postal rate increases and the economic downturn, and its future prospects are unclear as advertising expenditures continue to shift to the Internet. In this regard, a joint USPS-mailer work group recently reported that "Standard Mail must be delivered in a timely and consistent manner to the end customer according to published standards, in order to remain a viable growth product for its users and the Postal Service, and to remain competitive with alternative advertising media." Standard Mail growth will be critical to offset rising costs, primarily rising compensation and benefits costs that have consistently represented nearly 80 percent of USPS's expenses. USPS has restrained cost growth in recent years, in part through automation and other productivity initiatives that helped reduce the number of career employees from a peak of nearly 800,000 in September 1999 to fewer than 670,000 in September 2007. However, as USPS has recognized, continued productivity gains are needed in the face of the changing mail mix, sustained and evolving competition, and a challenging economic environment. USPS has recognized that given its workforce costs, continued work hour reductions are necessary to achieve productivity gains. The 2006 postal reform act generally limits rate increases for most mail to an inflationary price cap. The reform act also abolished the statutory mandate to break even financially over time. As a result, USPS generally cannot address financial losses with above-inflation rate increases, which underscores the need to remain financially viable by sufficiently growing revenues, restraining costs, or both. However, USPS recently reported that fiscal year 2008 revenues have not been covering costs, which have grown faster than the price cap. The PFP program includes quantitative corporate and unit indicators of performance and individual performance elements, both of which are used to rate PFP participants. According to USPS, the PFP program places emphasis on performance indicators that are objective and measurable. To this end, target levels of performance, expressed in quantitative terms, are established for the corporate and unit indicators, and PFP participants receive higher ratings as higher targets are achieved. In fiscal year 2008, 12 corporate indicators apply to all PFP participants, including measures of timely mail delivery, productivity, revenue, and net income, among other things. A total of 53 unit indicators apply to selected groups of participants, such as groups of postmasters and managers at various mail processing facilities, depending on their responsibilities and spans of control. Some unit indicators apply to most participants, such as the indicator of total operating expenses. Other indicators apply to relatively few participants, such as indicators of international mail delivery, which apply exclusively to managers at USPS International Service Centers. Besides being rated on results for corporate and unit indicators, each PFP participant is rated on individual performance elements that vary depending on the participant group and, within some groups, are tailored to each participant. Some individual performance elements have target levels of performance defined by narrative standards that are centrally established by USPS. For example, EAS postmasters have two individual performance elements that are defined by narrative standards: (1) fiscal management and (2) leadership and communication. Alternatively, other individual performance elements may be selected from a predefined list and then defined more specifically with target performance levels, based on a discussion that involves the participant and the participant's rater. For example, some individual performance elements for a field operations manager must be selected from a list, which includes, among other things, operational productivity, the rate of scanning barcodes on mail pieces, and overtime usage. If an individual performance element involving operational productivity is selected, it is then defined with target performance levels for specific mail processing, delivery, maintenance, and customer service operations, depending on the responsibilities of the field operations manager. Corporate and unit indicators are weighted to reflect organizational priorities. More heavily weighted indicators play a larger role in determining the overall PFP rating, while less heavily weighted indicators play a smaller role. To the extent that indicator weights vary--which can be substantial, depending on the indicator and the participant's position-- the indicator makes a different contribution to the overall PFP rating and the resulting salary adjustments and any lump sum awards. USPS establishes 15 target performance levels for each corporate and unit indicator. As more challenging targets (i.e., higher levels of performance) are reached, the indicator increases the overall PFP rating and the associated PFP award. Thus, indicator targets create incentives for PFP participants to maximize results for each indicator. Targets for some indicators are based on actual results achieved for the current fiscal year (e.g., the percentage of a specified type of mail delivered on time), while others are based on year-to-year improvement (e.g., the reduction in formal equal employment opportunity complaints). In some cases, targets are based on the USPS budget. For example, unit indicator targets are defined for total operating expenses relative to the final budget. To the extent that operating expenses are reduced below the budgeted level, higher target levels are achieved. These targets can be adjusted by various levels of management throughout the fiscal year, depending on numerous factors, such as changes in USPS's overall financial condition, increases in fuel prices, changes in local mailing volumes, and unexpected local expenses, among other things. Corporate and unit indicators are measured against targets at various levels of geographic aggregation, depending on the indicator and the participant's group. For example, some corporate indicators are measured at the national level, such as indicators of productivity, revenue, and net income. Other indicators are measured at different geographic levels. For example, for a postmaster of a small post office, the unit's total operating expense indicator is defined as the total expenses of that post office. For a district executive, the unit operating expense indicator is defined as the total expenses of the entire district. In some instances, USPS permits "mitigation" adjustments to the data used to measure achievement against targets. Some individual mitigation adjustments are intended to take into account events that are outside the control of the participant, such as a fire that results in the temporary suspension of a post office's operations. Other mitigation adjustments are processed in batches for multiple units and participants, such as adjustments that were made after postal operations were disrupted by Hurricane Katrina. USPS has established a structured process for administering the PFP program. Each participant is assigned a rater, who is generally the participant's immediate supervisor. At the beginning of the fiscal year, the rater is required to discuss PFP indicators and targets with the participant, including goals for corporate and unit indicators and individual performance elements. During the year, a midyear PFP review is used for the participant to record accomplishments to date, and the rater meets with the participant to review progress toward PFP targets. At the end of the year, the participant records accomplishments, and the rater meets with the participant and rates the participant on individual performance elements. USPS then calculates the overall PFP rating for each participant based on the results of corporate and unit indicators and ratings for individual performance elements; this rating is used to determine adjustments to the participant's salary and any lump sum award. The overall PFP rating is used to determine salary increases and any lump sum awards based on separate schedules that apply to EAS and PCES participants. First, for each participant, an overall rating is calculated based on the weighted outcomes for corporate and unit indicators and individual performance elements. Since each indicator and individual performance element produces an outcome ranging from 1 to 15, the overall rating also ranges from 1 to 15. The rating is rounded to the nearest whole number for the purpose of determining the PFP award. For EAS participants, all PFP awards are in the form of percentage increases to their salaries. For fiscal year 2008, the PFP award can range from 0 to 12 percent of the EAS participant's salary, as shown in figure 1. For PCES executives, PFP awards take the form of salary increases and lump sum awards. Salary increases depend on the overall PFP rating, as well as each executive's current salary relative to the maximum of his or her salary range, as shown in table 1. However, no salary increases are converted to lump sum awards, as they may be for EAS participants. In addition to a salary increase, a PCES executive may receive a PFP lump sum award that is based on his or her overall rating. This lump sum award is paid as a percentage of the executive's salary, as shown in table 2, for individuals with an overall rating of 4 and above, which is considered to be a minimum threshold for a lump sum award. Average PFP awards as a percentage of salary for EAS and other non- PCES participants are shown in figure 2, from fiscal year 2004--the first year of the current PFP program for EAS participants--through fiscal year 2007. Average PFP awards for PCES participants are shown in figure 3, from fiscal year 2003--the first year of the current PFP program for PCES participants--through fiscal year 2007. Overall PFP ratings primarily depend on results for corporate and unit indicators related to USPS's strategic goals of increasing efficiency, improving service, and generating revenue. Collectively, these indicators are weighted so that they account for two-thirds (66 percent) of the PFP rating for the average PFP participant in fiscal year 2008 (see fig. 4). Figure 4 shows that for fiscal year 2008, results for efficiency-related indicators, which are corporate and unit indicators, such as USPS's overall productivity and total unit expenses, make up 27 percent of the PFP rating for the average participant. Results for service-related indicators, such as corporate and unit indicators for timely delivery of different types of mail, represent 22 percent of the average rating. Results for corporate and unit revenue-generation indicators, such as national and unit revenues, account for 17 percent of the average rating. An additional 10 percent of the rating consists of results for corporate and unit indicators related to USPS's strategic goal of creating a more customer-focused culture. The remaining 24 percent of the rating reflects the results for individual performance elements, such as oral communication and other quantitative indicators, some of which were tailored to the individual. USPS officials have stated that indicators are weighted to reflect their relative importance to accomplishing USPS's strategic goals, as well as their applicability to individual positions based on the individual's responsibilities and span of control. According to USPS, the PFP program thereby recognizes and rewards individual performance that improves corporate and unit performance, particularly in high-priority areas. Consistent with this approach, some indicators are more heavily weighted than others. Among efficiency-related indicators, two indicators make the largest contribution to the overall PFP rating: total unit expenses (16 percent of the overall rating) and national productivity (5.6 percent of the rating) (see fig. 5). The 22 other efficiency-related indicators account for 5 percent of the overall rating, in part because some of these indicators measure results for specific USPS operations and, thus, are applicable to relatively few PFP participants. However, these indicators can have a significant weight for the participants they apply to. Among service-related indicators, the 13 indicators measuring timely delivery of the various mail types account for 16.4 percent of the overall rating. The 10 other service- related indicators account for 5.4 percent of the rating. Among revenue- generation indicators, the two most heavily weighted indicators are unit retail revenue (e.g., revenue from individual pieces of mail deposited at a post office), which represents 7.7 percent of the overall rating, and national revenue, which represents 5.7 percent of the rating. Five other revenue-generation indicators account for 3.9 percent of the overall rating. The weight of PFP indicators varies considerably by participant group, based on the responsibilities and spans of control of various managerial and executive positions. For example, for the 14,754 full-time postmasters in EAS levels 11 through 16, who generally head small post offices, 33 percent of the overall PFP rating is based on the total unit expenses indicator (see fig. 6). In contrast, this indicator accounts for 12 percent of the rating for the 2,365 postmasters in EAS levels 21 through 26 (see fig. 7), who generally head larger post offices. The overall rating of postmasters in EAS levels 21 through 26 is more dependent on a variety of other indicators related to efficiency, timely mail delivery, and revenue generation. Additional examples of how indicator weights vary for participants in different positions include the following: The retail revenues indicator is most heavily weighted for upper-level EAS postmasters. This indicator accounts for 35 percent of the overall PFP rating for the 6,853 postmasters in EAS levels 18 through 20 and 28 percent of the rating for the 2,365 postmasters in EAS levels 21 through 26; it makes up 5.5 percent of the rating for the 14,754 postmasters in EAS levels 11 through 16 and does not factor into the overall PFP rating for the 1,126 part-time EAS postmasters of small post offices (i.e., Cost Ascertainment Grouping levels A through E). To put the use of this indicator into context, USPS is looking to generate revenues through postmaster and other employee outreach to households and small businesses and has multiple programs for outreach to small business customers to promote the convenience and value of postal services. Three indicators related to equal employment opportunity (EEO) account for 35 percent of the overall PFP rating for the 167 managers with responsibilities in this area. These indicators measure outcomes of EEO complaints, including the percentage of informal complaints that become formal complaints, the number of formal complaints, and the processing time for complaints that are mediated. These indicators support USPS's emphasis on improving EEO processes and processing EEO complaints in a timely manner, and USPS classified these indicators as related to its strategic goal of creating a more customer-focused culture. USPS has provided training to supervisors and managers on the importance of EEO, open communication, and the benefits of resolving complaints at the lowest possible level. Various unit indicators apply to the 13,458 EAS field managers who work in the mail processing area, such as indicators of the efficient use and maintenance of mail processing equipment. These indicators support USPS's efforts to improve efficiency and service, and for some field managers, represent 21 percent of their rating. Other mail processing indicators measure the scanning of barcodes on mail containers and equipment used in mail processing operations--an activity that is critical to USPS's efforts to track mail, thereby improving service and efficiency. As USPS implements the postal reform law's requirements for measuring and reporting its delivery performance for all market-dominant products, which collectively make up nearly 99 percent of mail volume, USPS will have opportunities to incorporate new indicators into its PFP program, notably for Standard Mail and bulk First-Class Mail. PFP indicators of timely delivery apply to only some types of mail because, as we reported in July 2006, USPS measures timely delivery for less than one-fifth of mail volume, with no representative measures for Standard Mail (48.8 percent of volume), bulk First-Class Mail (25.3 percent of volume), Periodicals (4.1 percent of volume), and most types of Package Services (0.5 percent of volume). However, in December 2006, Congress enacted postal reform legislation that requires USPS to measure and report to the Postal Regulatory Commission on the delivery performance of market-dominant products, which include mail such as Standard Mail, bulk and single-piece First-Class Mail, and Periodicals. USPS is in the process of implementing new delivery performance measurement systems for market-dominant mail types that are not currently being measured--such as Standard Mail, bulk First-Class Mail, and Periodicals. Together, these three mail types constitute 78 percent of mail volume, including 49 percent for Standard Mail, 25 percent for bulk First-Class Mail, and 4 percent for Periodicals. USPS has recognized that the successful implementation of these new measurement systems will depend, in part, on mailers' barcoding mail and containers, as well as providing electronic information on mailings. USPS expects these activities to become more widespread over the next several years. Once such systems are fully implemented and mailers' participation is sufficient to generate representative data, USPS will have the opportunity to incorporate new delivery performance indicators into its PFP program. Such action would be consistent with the approach USPS has taken in recent years to incorporate new performance indicators into its PFP program. In addition, the External First-Class Measurement System (EXFC), which is incorporated into the PFP program to measure the timely delivery of single-piece First-Class Mail, has not been a systemwide indicator for this type of mail, in part because EXFC has measured delivery performance for mail deposited in collection boxes only in selected areas of the country. USPS is expanding EXFC coverage to include nearly all geographic areas. According to a senior USPS official, as EXFC coverage is expanded in fiscal year 2008, the additional data are being incorporated into the fiscal year 2008 indicators for single-piece First-Class Mail. This development is consistent with USPS's actions in the past to implement delivery performance measurement systems for Parcel Select and some types of International Mail, establish targets, identify opportunities to improve service, and to incorporate the measurement data into the PFP program to hold managers accountable for results. These actions have been credited with improving timely delivery performance for these types of mail, both of which operate in a highly competitive marketplace. To put these developments into context, in 2006, USPS said that its goal of improving service--which continues to be one of its primary goals--is supported by a "balanced scorecard" that uses service performance metrics for the mail that is measured to support personal and unit accountability. USPS noted that goals for these metrics--which include delivery performance indicators, as well as operational indicators that USPS said are critical to on-time service performance--were incorporated into the PFP program. We have agreed with USPS's focus on improving service and holding its managers accountable for results but noted in 2006 that USPS has not yet achieved its aim of a "balanced scorecard" for delivery performance because its delivery performance indicators cover less than one-fifth of mail volume, and these indicators do not cover Standard Mail, bulk First-Class Mail, Periodicals, and most Package Services mail. We observed that this gap in coverage has impeded USPS's potential for holding its managers accountable for the delivery performance of all types of mail and for balancing increasing financial pressures with the need to maintain quality delivery service. In 2007, the Chairman of the USPS Board of Governors noted in congressional testimony, "To improve service, we need better metrics on performance. As George Mason University President Alan Merten says, 'What gets measured gets better.'" The delivery performance indicators that USPS has implemented and incorporated into PFP incentives have been credited with stimulating improved service. For example, USPS created delivery standards and indicators for Parcel Select service in 1999, which it then incorporated into PFP incentives. In September 2007, the Deputy Postmaster General cited USPS's delivery performance for Parcel Select as an example of substantial improvement resulting from measuring and building results into its PFP program, thereby holding managers accountable. To fulfill its mission of providing universal postal service, USPS is required to provide prompt mail delivery throughout the nation. USPS can help improve delivery service by incorporating new delivery performance indicators for market-dominant products that represent most mail volume into its PFP program. Incorporating new delivery indicators would hold postal managers accountable for results. We recognize that incorporating such indicators would depend on successful implementation of the new measurement systems--which will depend not only on USPS but also on mailers, who must barcode the mail and provide necessary information in electronic format, among other things. It will take time to implement new delivery performance measurement systems at a level that permits meaningful performance measurement and incorporation into the PFP program. Thus, over time, USPS will have an opportunity to incorporate new delivery performance indicators into its PFP program--such as indicators of timely delivery for Standard Mail and bulk First-Class Mail-- to produce a more balanced scorecard of PFP indicators. As USPS has recognized, what gets measured gets better, and PFP indicators help drive performance improvement. We are making one recommendation that the Postmaster General incorporate new delivery performance indicators into the PFP program-- such as indicators that cover Standard Mail and bulk First-Class Mail-- once the necessary measurement systems are successfully implemented, including the actions that mailers must take to permit meaningful performance measurement. USPS provided written comments on a draft of this report in a letter dated August 4, 2008, from the Senior Vice President of Operations and the Vice President of Employee Resource Management. USPS's comments are summarized below and the letter is reproduced in appendix III. In separate correspondence, USPS also provided technical comments, which we incorporated, as appropriate. USPS concurred with our recommendation and said it was committed to incorporating new delivery performance measures into its PFP program. USPS noted that in its June 2008 response to Congress regarding the Postal Accountability and Enhancement Act, USPS identified implementing expanded measurement systems for single-piece First-Class Mail, new systems for bulk First-Class Mail, Standard Mail, Periodicals, and bulk Package Services mail and stated that implementation of these systems will continue through fiscal year 2009. USPS agreed with our draft report that successful implementation of new measurement systems will depend, in part, on mailers barcoding mail and containers, as well as providing electronic information on mailings. USPS said that in addition to expanding measurement systems for its market-dominant products during fiscal year 2009, it will also develop historical data to assist with the creation of future performance targets. USPS also provided comments on its PFP program, stating that the program's approach has been responsible for substantial performance improvements and is consistent with past efforts to ensure the proper balance of performance indicators. We are sending copies of this report to the Chairman of the Senate Committee on Homeland Security and Governmental Affairs; the Ranking Minority Member of the Subcommittee on Federal Financial Management, Government Information, Federal Services, and International Security, Senate Committee on Homeland Security and Governmental Affairs; the Chairman and Ranking Minority Member of the House Committee on Oversight and Government Reform; the Chairman and Ranking Minority Member of the Subcommittee on Federal Workforce, Postal Service, and the District of Columbia, House Committee on Oversight and Government Reform; the Chairman of the USPS Board of Governors; the Postmaster General; the USPS Inspector General; and other interested parties. We also will provide copies to others on request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at [email protected] or (202) 512-2834. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV. U.S. Postal Service (USPS) employee type Headquarters (HQ) and HQ-related EAS employees Attorneys on the Attorney Compensation Schedule Other HQ and HQ-related EAS Postal Career Executive Service (PCES) PCES field executives (including PCES Postmasters) Our objectives were to (1) describe the key features of the U.S. Postal Service's (USPS) pay for performance (PFP) program, (2) provide information on the weight of the PFP program's performance indicators in determining participants' ratings, and (3) assess opportunities for USPS to incorporate new indicators of delivery performance into its PFP program. To address these objectives, we obtained documentation from USPS on its PFP program and interviewed USPS officials responsible for the program. To assess opportunities for USPS to incorporate new delivery performance indicators into its PFP program, we also obtained documentation on USPS's plans to implement new delivery performance measurement systems. We primarily based our assessment on applicable laws--such as laws related to USPS's statutory mission of providing prompt, reliable, and efficient postal services to patrons in all areas at reasonable rates and statutory reporting requirements related to USPS's delivery performance--as well as on interviews with senior USPS officials. We also developed assessment criteria from our past work on other agencies' PFP programs and best practices used by high-performing organizations. We conducted a data reliability assessment of USPS's PFP information and determined that the information was sufficiently reliable for the purposes of our report. Our assessment was based on a review of the documentation and data provided, comparing the consistency of information provided by multiple sources and in multiple data files; interviews with USPS officials to discuss the documentation; and data, including how the data were developed; and follow-up questions to obtain further information. We conducted this performance audit from October 2007 to September 2008 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the above individuals, Gerald P. Barnes (Assistant Director), Elizabeth Eisenstadt, Brandon Haller, David Hooper, Kenneth E. John, Belva Martin, Laura Shumway, and Crystal Wesco made key contributions to this report.

The U.S. Postal Service (USPS) pay for performance (PFP) program for managers includes quantitative performance indicators. PFP ratings are the basis for salary increases and lump sum awards for nearly 750 Postal Career Executive Service (PCES) executives and about 71,700 other participants, mostly Executive and Administrative Schedule (EAS) employees. GAO was requested to provide information about USPS's PFP system. This report (1) describes the key features of USPS's PFP system, (2) provides information on the weight of its performance indicators in determining PFP ratings, and (3) identifies opportunities for USPS to incorporate delivery performance indicators into its PFP system. GAO obtained USPS documents and data, interviewed USPS officials, and primarily based its assessment on laws related to timely delivery and interviews with senior USPS officials. Key features of the PFP program are quantitative corporate and unit indicators of performance and individual performance elements that are used to rate participants and provide the basis for awards. Quantitative performance targets are established for corporate and unit indicators. Corporate indicators apply to all participants and include measures of timely delivery, productivity, revenue, and net income, among others. Unit indicators apply to selected groups of participants and vary according to the groups' responsibilities and span of control. Individual performance elements are tailored to the participant group and, within some groups, to individuals. Individual performance elements may be defined by narrative standards or may be quantitative indicators defined with specific target performance levels. The overall PFP rating is based on results of corporate and unit indicators and individual performance elements and is used to determine the salary adjustment and any lump sum award. PFP indicators related to three USPS strategic goals--increasing efficiency, improving service, and generating revenues--collectively account for two-thirds of the average participant's rating (see fig.). However, indicator weights vary considerably by participant group, based on the responsibilities and span of control of various positions. As USPS implements requirements of the postal reform law for measuring delivery performance, it will have opportunities to incorporate new indicators into its PFP program, notably for timely delivery of Standard Mail (49 percent of mail volume in fiscal year 2007) and bulk First-Class Mail (25 percent of volume). Once new delivery performance measurement systems are fully implemented and mailers' participation is sufficient to generate representative data, USPS will be able to incorporate new delivery performance indicators into its PFP program. These new indicators would create a more "balanced scorecard" that uses service performance metrics for the mail that is measured to support personal and unit accountability.

FHA's single-family mortgage programs have played a prominent role in mortgage financing in the wake of the 2007-2009 financial crisis, the housing downturn, and the contraction of the conventional mortgage market. In 2012, FHA insured about $227 billion in single-family mortgages, and the overall insurance portfolio was about $1.1 trillion. The Omnibus Budget Reconciliation Act of 1990 required HUD to take steps to ensure that the insurance fund attained a capital ratio of at least 2 percent by November 2000 and maintained at least that level thereafter. The capital ratio is the fund's economic value divided by the insurance-in-force (outstanding insurance obligations). The act also required an annual independent actuarial review of the economic net worth and soundness of the insurance fund. The annual actuarial review is now a requirement in the Housing and Economic Recovery Act of 2008, which also requires an annual report to Congress on the results of the review. Under the Federal Credit Reform Act of 1990 (FCRA), FHA and other federal agencies must estimate the net lifetime costs--known as credit subsidy costs--of their loan insurance or guarantee programs and include the costs to the government in their annual budgets. Credit subsidy costs represent the net present value of expected lifetime cash flows, excluding administrative costs.insurance premiums) exceed expected cash outflows (such as insurance claims), a program is said to have a negative credit subsidy rate and generates offsetting receipts that reduce the federal budget deficit. When the opposite is true, the program is said to have a positive credit subsidy rate--and therefore requires appropriations. Generally, agencies must produce annual updates of their subsidy estimates--reestimates--on the basis of information about actual performance and estimated changes in future loan performance. FCRA recognized the difficulty of making credit subsidy estimates that mirrored actual loan performance and provides When estimated cash inflows (such as borrower permanent and indefinite budget authority for reestimates that reflect increased program costs. Upward reestimates increase the federal budget deficit unless accompanied by reductions in other government spending or an increase in receipts. In recent years, HUD's voucher program annually helped provide affordable rental housing to about 2 million households with very or extremely low incomes. Approximately 2,400 state and local housing agencies administer the voucher program on HUD's behalf. Under the program, an assisted household pays 30 percent of its monthly adjusted income or the housing-agency established minimum rent--up to $50-- toward its monthly rent. The remainder of the rent-- the difference between (1) the lesser of the unit's gross rent (rent plus utilities) or a local "payment standard" and (2) the household's payment--is paid through a HUD-subsidized "voucher." The payment standard is based on the HUD- determined fair market rent for the locality, which HUD annually estimates for metropolitan and nonmetropolitan areas.agencies can set payment standards (that is, pay subsidies) between 90 and 110 percent of the fair market rent for their areas. Each year, Congress appropriates funding for subsidies for renewal (existing) and incremental (new) vouchers and administrative expenses. HUD then allocates the program funding to housing agencies, which are expected to use all allocated subsidy funding for authorized program expenses. However, if housing agencies' allocated amounts exceed the total cost of their program expenses in a given year, their unused subsidy funds must be maintained in subsidy reserve accounts. HUD also pays administrative fees to housing agencies based on the number of units leased (vouchers used) as of the first of each month. As with subsidy funding, if the appropriated amount does not fully cover agencies' fees, HUD will reduce the amount of funding each housing agency receives to fit within the appropriated amount. The voucher program is not an entitlement program; thus, the amount of budget authority Congress provides through annual appropriations limits the number of households that the program can assist. Historically, appropriations for the voucher program (or for other housing programs) have not been sufficient to assist all households that HUD identified as having worst-case housing needs--households with very low incomes that pay more than 50 percent of their incomes in rent, live in substandard housing, or both. HUD implemented the MTW demonstration program in 1999. As of February 2013, 35 housing agencies were participating. To put in place the innovations intended under the program's authorizing legislation, agencies may request waivers of certain provisions in the United States Housing Act of 1937, as amended. For example, housing agencies may combine the funding they are awarded annually from different programs-- such as public housing capital funds, public housing operating funds, and voucher funds--into a single, authoritywide funding source. The act that created the program requires participating agencies to address three purposes and meet five requirements. The purposes are to (1) reduce costs and achieve greater cost-effectiveness in federal housing expenditures, (2) give families with children incentives to obtain employment and become self-sufficient, and (3) increase housing choices for low-income families. In making these changes, MTW agencies must (1) serve substantially the same total number of eligible low-income families that they would have served had funding amounts not been combined; (2) maintain a mix of families (by family size) comparable to those they would have served without the demonstration; (3) ensure that at least 75 percent of households served are very low income; (4) establish a reasonable rent policy to encourage employment and self-sufficiency; and (5) assure that the housing provided meets HUD's housing quality standards. The insurance fund's capital ratio dropped sharply in 2008 and fell below the statutory minimum in 2009, when economic and market developments created conditions that simultaneously reduced the fund's economic value (the numerator of the ratio) and increased the insurance-in-force (the denominator of the ratio). According to annual actuarial reviews of the insurance fund, the capital ratio fell from about 7 percent in 2006 to 3 percent in 2008 and below 2 percent in 2009 (see fig. 1). In 2012, the ratio fell below zero to negative 1.44 percent. In its November 2012 report to Congress, HUD cited several reasons for the declines from 2011 to 2012. These included the following: First, the estimates of house price appreciation for the 2012 actuarial study were significantly lower than those used for 2011. The difference accounted for an estimated $10.5 billion reduction in the value of the insurance fund compared with the actuary's 2011 projection of what the fund's economic value would be at the end of 2012. Second, the continued decline in interest rates causes a substantial loss of revenue. Premium revenues from an existing portfolio go down when more borrowers pay off their mortgages to refinance into lower rates. The capital ratio calculation does not include those borrowers who refinance into new FHA-insured loans. In addition, actuarial projections include higher claim expenses when interest rates stay low because borrowers who are unable to refinance become more willing to default. The effects of continued low interest rates resulted in a reduction of $8 billion in the estimated economic value of the insurance fund (versus the previous year's projections). Third, FHA directed the actuary to adjust the way losses from defaulted loans and reverse mortgages were reflected in the economic value of the insurance fund. This resulted in an estimated $10 billion reduction to the economic value, compared with the 2011 projections. As the capital ratio declined, the insurance fund's condition also worsened from the federal budgetary perspective. FHA annually estimates the subsidy costs of new activity for its loan insurance program and also reestimates, or annually updates, prior subsidy cost estimates. Historically, FHA estimated that its loan insurance program was a negative subsidy program. On the basis of these estimates, FHA accumulated substantial balances in a capital reserve account, which represents amounts in excess of those needed for estimated credit subsidy costs and helps cover reestimates reflecting unanticipated increases to those costs (such as higher-than-expected claims). Funds needed to cover estimated subsidy costs are accounted for in the insurance fund's financing account. In recent years, FHA has transferred billions of dollars annually from the capital reserve account to the financing account, reflecting increases in estimated credit subsidy costs (upward subsidy reestimates). As a result, balances in the capital reserve account fell dramatically, from $19.3 billion at the end of 2008 to an estimated $3.3 billion at the end of 2012 (see fig. 2). At the end of 2012, the financing account held approximately $35.1 billion. If the capital reserve account were to be depleted due to additional upward reestimates, FHA would need to draw on permanent and indefinite budget authority to have sufficient reserves for all future insurance claims on its existing portfolio. The President's budget for 2013 contained a $9.3 billion upward reestimate in FHA's credit subsidy costs for the insurance fund. The budget indicated that the reestimate would deplete FHA's capital reserve account in 2012, potentially causing FHA to draw on $688 million in permanent and indefinite budget authority. However, according to FHA, the agency ultimately did not need to draw on this authority because of premium increases and higher-than- anticipated loan volumes. In its 2012 report to Congress, HUD noted that information (the insurance fund valuation) in the forthcoming President's budget for 2014 will determine the adequacy of the capital balance in the insurance fund and thus the need to draw on permanent and indefinite budget authority in the current fiscal year. The President's budget is expected to be released in the spring of 2013. The 2012 actuarial analysis projects that the capital ratio will be positive by 2014 and return to above the statutory 2 percent minimum in 2017. This forecast was based on assumptions such as the level of future lending activity and house prices for multiple years, which are difficult to predict. The forecast also assumed no changes in policy or other actions by FHA that might accelerate "recovery" time. FHA plans policy changes that may accelerate increases to the ratio, including premium increases. For example, effective April 1, 2013, FHA announced that it will increase the annual insurance premiums most new borrowers pay between 0.05 and 0.10 percentage points. The annual premium for loans of $625,500 or more will be set at the statutory maximum of 1.5 or 1.55 percent, depending on the loan-to-value ratio. Effective June 3, 2013, for new loans FHA also announced that it will require borrowers to continue to pay annual premiums, regardless of loan value. Previously, premiums could be eliminated after loans (principal amounts) declined to 78 percent of their original value. Further actions could help to restore FHA's long-term financial soundness and define its future role. For example, we previously concluded that Congress or HUD needs to determine the economic conditions the insurance fund would be expected to withstand without borrowing from Treasury (drawing on permanent and indefinite budget authority). Considering the importance of defining the economic conditions FHA should withstand, as well as continuing uncertainty over the resolution of Fannie Mae and Freddie Mac and the potential impact of their resolution on FHA, in February 2013 we included FHA in a high-risk area called "modernizing the U.S. financial regulatory system and the federal role in housing finance." In November 2011, we reported on several weaknesses in FHA's risk- assessment efforts. Specifically, we noted that: FHA's risk-assessment strategy was not integrated throughout the organization. Although a consultant's report recommended that FHA integrate risk assessment and reporting throughout the organization, the Office of Single Family Housing's 2009 quality control initiative (designed to strengthen internal controls and risk assessment) and the Office of Risk Management's activities remained separate efforts. FHA officials noted that until the Office of Risk Management (which was created in 2010) set up a governance process, such integration would not be possible. FHA officials stated they were making every effort to help ensure that Office of Risk Management activities complemented program office activities. Contrary to HUD guidance, the Office of Single Family Housing had not conducted an annual, systematic review of risks to its program and administrative functions since 2009. According to an official in this office, management intended to conduct an annual assessment but changes in senior leadership in the office and the few staff available to perform assessments (because of attrition and increased workload) hampered these efforts. The Office of Single Family Housing's risk-assessment efforts did not include procedures for anticipating potential risks presented by changing conditions. The consultant's report proposed a reporting process and templates for identifying emerging risks. Office of Risk Management officials told us that once they were operational, risk committees would determine the exact design and content of these reports and templates. We concluded that all these factors limited FHA's effectiveness in identifying, planning for, and addressing risk. Based on the consultant's findings, as well as our internal control guidance and HUD guidance, we recommended that FHA (1) integrate the internal quality control initiative of the Office of Single Family Housing into the processes of the Office of Risk Management, (2) conduct an annual risk assessment, and (3) establish ongoing mechanisms--such as using report templates from the consultant's report--to anticipate and address risks that might be caused by changing conditions. HUD agreed with our recommendations. FHA has begun addressing recommendations made by the consultant. For instance, in June 2012 it finalized the delegations of authority needed for the Office of Risk Management and Regulatory Affairs to establish and maintain risk-management policies, activities, and controls for FHA. It also formed a Single Family Credit Risk Committee and an Operational Risk Committee. FHA also has begun addressing our November 2011 recommendations by taking the following actions: FHA has begun integrating its quality control initiatives into the processes of the Office of Risk Management. For example, the Office of Risk Management and Regulatory Affairs is reviewing the results of quality control activities as it prepares baseline operational risk assessments. FHA developed a plan for conducting an inaugural annual risk assessment (including preparing baseline operational risk assessments) for the Office of Single Family Housing. As previously noted, FHA has created committees to address credit and operational risks. The charters for both committees indicate that they are to discuss and address emerging risks. And, as part of the annual risk-assessment process mentioned above, FHA plans to identify emerging risks. However, some of the initiatives taken in response to our recommendations have not been completed or put fully in place. For example, FHA does not expect to complete its inaugural risk assessment until September 2013. These initiatives are critical to FHA's efforts to assess and manage risk. Our November 2011 report also identified weaknesses in FHA's human capital management. Specifically, we noted that leading organizations use workforce planning practices that include defining critical skills and skill gaps, but FHA's approach did not have mechanisms for doing so or a current workforce plan. contrary to our internal control standards and HUD guidance, FHA also did not have a current succession plan. We noted that succession planning was particularly important because, as of July 2011, almost 50 percent of Single Family Housing staff at headquarters were eligible to retire in the next 3 years. The percentage of staff eligible to retire at the homeownership centers was even higher--63 percent. Additionally, while single-family loan volume grew significantly from 2006 to 2010, staffing levels for the Office of Single Family Housing remained relatively constant. We concluded that without a more comprehensive workforce planning process that included succession planning, FHA's ability to systematically identify future workforce needs and plan for upcoming retirements was limited. We recommended that FHA develop workforce and succession plans for the Office of Single Family Housing. HUD agreed with our recommendations. Since our November 2011 report, FHA has developed a workforce analysis and succession plan that identifies gaps in critical competencies and additional steps that need to be taken, although the timing of many of these steps is not specified. Completing these steps remains critical to ensuring that the agency has adequate staff to effectively oversee its mortgage insurance programs. We reported in March 2012 that appropriations for the voucher program increased from $14.8 billion in 2005 to $18.4 billion in 2011 (about 24 percent). HUD disburses appropriated funds to housing agencies for program expenses such as subsidy payments to landlords and administrative costs. From 2003 through 2010, housing agencies' expenditures increased from approximately $11.7 billion to $15.1 billion (about 29 percent). After adjusting for inflation, total expenditures grew by 8.8 percent over this period. Several factors affected voucher program costs from 2003 to 2010, including (1) increases in subsidy costs for existing vouchers, (2) subsidy costs for new vouchers, and (3) administrative fees paid to housing agencies. After adjusting for inflation, subsidy costs for existing vouchers grew 2.4 percent. Two factors generally explain this growth--increasing rents and decreasing incomes. First, rents outpaced inflation. As rents increase, HUD and housing agencies must pay larger subsidies to cover the increases, assuming no changes to household incomes. Second, tenant incomes declined. Specifically, the median annual income of voucher-assisted households fell about 3 percent (from about $11,000 to $10,700, in 2011 dollars). As incomes decline, assisted households pay less towards rent, requiring larger subsidies to cover the difference between rents and tenant payments. subsidy costs for new vouchers grew 4.4 percent, accounting for half the overall constant dollar increase in expenditures. Congress increased the size of the program by adding new vouchers for groups such as homeless veterans and nonelderly disabled households. administrative fees paid to housing agencies grew about 2 percent, although the fees housing agencies have received over the years have been less than the amount for which they were eligible due to reductions in appropriations. Housing agencies noted that the cost of doing business increased. For example, higher gasoline prices contributed to higher inspection costs, especially for housing agencies administering vouchers over large areas. The design and goals of the voucher program also contributed to overall program costs. The voucher program has various features to give priority to the poorest households, and serving these households requires greater subsidies. For instance, housing agencies must lease 75 percent of their new vouchers to extremely low-income households. Despite increases in program costs, our work and other published studies have found that vouchers generally were more cost-effective in providing housing assistance than federal programs designed to build or rehabilitate low- income housing. Since 2003, Congress and HUD have taken some actions to limit the extent of increases, while maintaining assistance for existing program participants. For example, in 2003, Congress changed the voucher program's funding formula to tie renewal funding for vouchers to actual costs and leasing rates, rather than the number of authorized vouchers (used or unused). Also, each year since 2004, Congress has provided administrative fees that were at least 6 percent lower than the 2003 rate. HUD has also taken steps to increase program efficiencies. For example, according to HUD reports, steps taken by the agency have reduced improper payments (subsidy over- and underpayments) from $1.1 billion in 2000 to $440 million in 2009. These steps include providing housing agencies with fraud detection tools, such as the Enterprise Income Verification system, which makes tenant income and wage data available to housing agencies. This system was fully implemented in 2005. In 2010, HUD began studying the administrative fee structure for the voucher program to ascertain how much it costs a housing agency to run an efficient program. Because the study is ongoing, the extent to which it will identify ways to improve efficiency is not yet clear. We identified several options that if implemented effectively, could reduce voucher program costs or allow housing agencies to assist additional households. Each option would require congressional action to implement. These options, which include rent reform and administrative consolidation, also involve difficult policy decisions that will affect some of the most vulnerable members of the population and alter long-standing program priorities and practices. Improved information on the level of subsidy reserve funding housing agencies should maintain could aid budget decisions and reduce the need for new appropriations. Housing agencies have accumulated subsidy reserves (unspent funds) that Congress could use to (1) reduce program appropriations (through a rescission and offset) and potentially meet other needs or (2) direct HUD to assist more households.agencies may under-lease or receive more funding than they can spend in a year. Unless rescinded and offset, housing agencies can keep unused subsidy funding in reserve accounts and spend it (for authorized expenses) in future years. As of December 31, 2012, 2,178 housing agencies had a total of approximately $1.2 billion in subsidy reserves. HUD has requested the authority to offset and, in some cases, redistribute "excess" reserves (those beyond what is needed to fund defined contingencies). But HUD has not developed specific or consistent criteria defining what constitutes excess reserves or how it would redistribute funding among housing agencies. For example, HUD officials told us that housing agencies should retain approximately 8.5 percent (or 1 month's worth) of their annual funding allocations in reserves. However, in its 2010 and 2011 budget proposals, HUD defined excess reserves as those above 4 and 6 percent, respectively, of allocated amounts. In our March 2012 report, we concluded that providing Congress with better information on subsidy reserves could help ensure that disbursed funds would be used to assist households rather than remain unused.We recommended that HUD provide information to Congress on (1) the estimated amount of excess subsidy reserves and (2) criteria for how it will redistribute excess reserves among housing agencies. HUD neither agreed nor disagreed with our recommendations. However, HUD officials subsequently told us that, upon request, they provide information to HUD's Appropriations Committee on subsidy reserve levels, including balances above certain minimum reserve levels. We will continue to monitor the agency's progress in implementing our recommendations. As we indicated in our March 2012 report, in various budget requests for 2004 through 2012, HUD requested the authority to put in place reforms that could decrease voucher program subsidy costs, administrative costs, or both. These reforms include streamlining complex and burdensome requirements and improving the delivery and oversight of rental assistance. For example, housing agencies must re-examine household income and composition at least annually. HUD wants to extend the time between re-examinations from 1 year to 3 years and between unit inspections from 1 year to 2 years. According to one program administrator, annual re-examinations and inspections account for more than 50 percent of administrative costs in the voucher programs the agency administers. Although some of the changes needed to simplify and streamline the voucher program would require congressional action, HUD's forthcoming study of the program's administrative fee structure and the experiences of housing agencies in the MTW program may provide insight into specific reforms to ease administrative burden. We recommended in our March 2012 report that HUD consider proposing to Congress options for streamlining and simplifying the administration of the voucher program and making corresponding changes to the administrative fee formula to reflect any new or revised administrative We stated that such proposals should be informed by requirements.results of HUD's ongoing administrative fee study and the experience of the MTW program. HUD neither agreed nor disagreed with our recommendations. As of March 2013, HUD had not made such proposals to Congress. If implemented, rent reform (that is, changes to the calculation of households' payment toward rent) and the consolidation of voucher administration under fewer housing agencies could yield substantial cost savings, allow housing agencies to serve additional households if Congress were to reinvest annual cost savings in the voucher program, or both. Furthermore, these options are not mutually exclusive; that is, cost savings or additional households served could be greater if both options were implemented. Because about 90 percent of voucher program funds are used to pay subsidies, decreasing the subsidy (or, alternatively stated, increasing the household contribution toward rent) will yield the greatest costs savings. As shown in table 1, our March 2012 report estimated the effect of several options that change the minimum rents households must pay or different formulas for calculating what tenants pay. For example, increasing minimum rents to $75 would yield an estimated $67 million in annual cost savings or allow housing agencies to serve an estimated 8,600 additional households. Requiring assisted households to pay 30 percent of their gross income (rather than net income) in rent would yield an estimated annual savings of $513 million or allow housing agencies to serve an estimated 76,000 additional households. While each of these options could reduce costs or create administrative efficiencies--each also involves trade-offs. Under each option, some households would have to pay more in rent than they currently pay. From 2 to 92 percent of households would experience an increase in their monthly payment: setting a minimum rent of $50 would affect the fewest households and increasing rent to 35 percent of adjusted income would affect the most. The options also would have varying effects on different types of households (such as families with children, persons with disabilities, and the elderly). We noted disparities by geographic area (such as high-cost versus low-cost rental markets) as well. For example, setting household rental payments based on a percentage of the applicable fair market rent would place greater burdens on households in high-cost areas. We concluded in our March 2012 report that consolidating voucher program administration under fewer housing agencies could yield a more efficient oversight and administrative structure and cost savings for HUD and housing agencies. HUD spends considerable resources in overseeing the more than 2,400 housing agencies that administer the voucher program. According to a 2008 HUD study, the department dedicated from more than half to two-thirds of its level of oversight to 10 percent of its units (generally, housing agencies that administered 400 or fewer vouchers and about 5 percent of total program funds). According to agency officials, consolidating voucher administration under fewer agencies would decrease HUD's oversight responsibilities. However, current information on the magnitude of these savings was not available when we conducted our 2012 review. As we reported in April 2012, HUD has not identified standard performance data and indicators needed to evaluate the MTW program. Housing agencies in the MTW program report annually on their activities, which include efforts to reduce administrative costs and encourage residents to work. However, the usefulness of this information is limited because, in some cases, it is not outcome-oriented. For example, for similar activities designed to promote family self-sufficiency, one MTW agency reported only the number of participants, which is generally considered an output, and another did not provide any performance information. In contrast, a third agency reported on the average income of program graduates, which we consider an outcome. To be consistent with the GPRA Modernization Act, HUD's guidance on reporting performance information should indicate the importance of outcome-oriented Without more specific guidance on the reporting of information.performance information--for example, to report quantifiable and outcome-oriented information--HUD cannot be assured of collecting information that reflects the outcomes of individual activities. Our April 2012 report also noted that HUD has not identified the performance data that would be needed to assess the results of similar MTW activities or of the program as a whole. Researchers and others have noted the limitations of the program's initial design in terms of evaluation. Specifically, it lacks standard performance data. Obtaining performance information from demonstration programs that are intended to test whether an approach (or any of several approaches) can obtain positive results is critical. This information helps determine whether the program has led to improvements consistent with its purposes. HUD started collecting additional data from MTW agencies (including household size, income, and educational attainment), but has not yet analyzed the data. And since 2009, HUD required agencies to provide information on the impact of activities, including benchmarks and metrics, in their annual MTW reports. While these reports are informative, they do not lend themselves to quantitative analysis because the reporting requirements do not call for standardized data, such as the number of residents who found employment. Whether these data are sufficient to assess similar activities and the program as a whole is not clear, and HUD has not identified the data it would need for such an assessment. HUD also has not established performance indicators for the MTW program. The GPRA Modernization Act requires that federal agencies establish efficiency, output, and outcome indicators for each program activity as appropriate. Internal control standards also require the establishment of performance indicators. As we noted in 2012, specific performance indicators for the MTW program could be based on the three statutory purposes of the program. For example, agencies could report on the savings achieved (reducing costs). However, without performance indicators HUD cannot demonstrate the results of the program. The shortage of analysis and performance indicators has hindered comprehensive evaluation efforts, although such evaluations are key to determining the success of any demonstration program. We recommended that HUD (1) improve its guidance to MTW agencies on providing performance information in their annual reports by requiring that such information be quantifiable and outcome-oriented, (2) develop and implement a plan for quantitatively assessing the effectiveness of similar activities and for the program, and (3) establish performance indicators for the program. HUD generally agreed with our recommendations. Consistent with our recommendations, HUD has taken initial steps to revise performance reporting requirements for MTW agencies, but these requirements had not yet been finalized as of March 2013. Furthermore, as we indicated in our 2012 report, while HUD has identified some lessons learned on an ad hoc basis, it does not have a systematic process in place for identifying such lessons. As previously noted, obtaining impact information from demonstration programs is critical. Since 2000, HUD has identified some activities that could be replicated by other housing agencies. For example, a HUD-sponsored contractor developed five case studies to describe some of the issues involved in implementing the MTW demonstration. However, these and subsequent efforts have shortcomings. In most cases, the practices were chosen based on the opinions of HUD or contracted staff and largely involved anecdotal (or qualitative) data rather than quantitative data. Also, HUD has not established criteria, such as demonstrated performance, for identifying lessons learned or made regular efforts to review and identify lessons learned. Because HUD does not currently have a systematic process for identifying lessons learned, it is limited in its ability to promote useful practices that could be implemented more broadly. Thus, we recommended that HUD create a process to systematically identify lessons learned. In response to this recommendation, HUD stated that once its revised reporting requirements were implemented, the resulting data would inform an effort to establish lessons learned. HUD has policies and procedures in place to monitor MTW agencies but could do more to ensure that MTW agencies demonstrate compliance with statutory requirements and to identify possible risks relating to each agency's activities. For example, as noted in our 2012 report, HUD has not issued guidance to participating agencies clarifying key program terms, including definitions of the purposes and statutory requirements of the MTW program. Internal control standards require the establishment of clear, consistent goals and objectives. Agencies also must link each of their activities to one of the three program purposes cited in the MTW authorizing legislation. However, HUD has not clearly defined what the language in some of these purposes means, such as "increasing housing choices for low-income families." HUD officials told us that they plan to update their guidance to MTW agencies to more completely collect information related to the program's statutory purposes and requirements. They acknowledged that the guidance could be strengthened. As a first step, they noted that they planned to require agencies to define "self- sufficiency" by choosing one of the definitions provided by HUD or creating their own. Without clarifying key terms and establishing a process for assessing compliance with statutory requirements, HUD lacks assurance that agencies are complying with the statute. Additionally, our 2012 report indicated that HUD only recently assessed agencies' compliance with two self-certified requirements (to serve substantially the same total number of eligible low-income families that they would have served had funding amounts not been combined and ensure that at least 75 percent of households served are very low income). Further, HUD has not assessed compliance with the third self- certified requirement (to maintain a comparable mix of families). Internal control standards require control activities to be in place to address program risks. In addressing these risks, management should formulate an approach for assessing compliance with program requirements. Without a process for systematically assessing compliance with statutory requirements, HUD lacks assurance that agencies are complying with them. Furthermore, as we reported in 2012, HUD has not annually assessed program risks, despite its own requirement to do so, and has not developed risk-based monitoring procedures. HUD's internal control standards require program offices to perform an annual risk assessment of their programs or administrative functions using a HUD risk- assessment worksheet. By not performing annual risk assessments or tailoring its monitoring efforts to reflect the perceived risk of each MTW agency, HUD lacks assurance that it has properly identified and addressed risks that may prevent agencies from addressing program purposes and meeting statutory requirements. HUD also lacks assurance that it is efficiently using its limited monitoring resources. Finally, our 2012 report indicated that HUD does not have policies or procedures in place to verify the accuracy of key information that agencies self-report, such as the number of program participants and the average income of program graduates. Internal control standards and guidance emphasize the need for federal agencies to have control activities in place to help ensure that program participants report information accurately. For example, HUD staff do not verify self- reported performance information during their reviews of annual reports or annual site visits. GAO guidance on data reliability recommends tracing a sample of data records to source documents to determine whether the data accurately and completely reflect the source documents.performance information, it lacks assurance that this information is accurate. To the extent that HUD relies on this information to assess program compliance with statutory purposes and requirements, its analyses are limited. Because HUD does not verify the accuracy of any reported To improve HUD's oversight over the MTW program, we recommended in April 2012 that HUD (1) issue guidance that clarifies key program terms, such as the statutory purposes and requirements MTW agencies must meet; (2) develop and implement a systematic process for assessing compliance with statutory requirements; (3) conduct an annual risk assessment for MTW and implement risk-based monitoring policies and procedures; and (4) implement control activities to verify the accuracy of a sample of the performance information that MTW agencies self-report. HUD partially agreed with our recommendations, citing potential difficulties in verifying MTW performance data. HUD also described steps it was taking to improve its guidance to MTW agencies and implement risk-based monitoring procedures. As of March 2013, this guidance had not yet been finalized. Without more complete information on program effectiveness and compliance, it will be difficult for Congress to know whether an expanded MTW program would benefit additional agencies and the residents they serve. Mr. Chairman, Ranking Member Pastor, and Members of the Subcommittee, this concludes my prepared statement. I would be happy to respond to any questions that you may have at this time. For further information about this testimony, please contact me at 202- 512-8678 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony include Daniel Garcia-Diaz, Director; Paige Smith, Assistant Director; Steve Westley; Assistant Director; Stephen Brown; Emily Chalmers; William Chatlos; Cory Marzullo; John McGrail; Marc Molino; Lisa Moore; Daniel Newman; Lauren Nunnally; Jose R. Pena; Josephine Perez; Beth Reed Fritts; Barbara Roesmann; and Andrew Stavisky. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

HUD operates programs that provide mortgage insurance to homebuyers and subsidize the rents of low-income households. In recent years, HUD's FHA has experienced dramatic growth in its insurance portfolio. Expenditures for HUD's rental voucher program also have risen substantially. Through the MTW demonstration program, HUD has sought to reduce costs and achieve greater cost-effectiveness in federal expenditures for rental housing. This testimony discusses (1) the financial condition of FHA's insurance fund and FHA's risk management, (2) the costs of the voucher program and options to increase its efficiency, and (3) HUD's efforts to evaluate and monitor the MTW program. This testimony draws from GAO reports on FHA's insurance fund and oversight capacity ( GAO-10-827R and GAO-12-15), HUD's voucher program (GAO-12-300), and HUD's MTW program (GAO-12-490). GAO also reviewed updated information on the insurance fund and voucher subsidy reserves as of the end of 2012. The Department of Housing and Urban Development's (HUD) Federal Housing Administration (FHA) faces financial and risk-management challenges. For the fourth straight year, capital reserves for FHA's Mutual Mortgage Insurance Fund are below the statutory minimum. Also, declining balances in the fund's capital reserve account have heightened the possibility that FHA will require additional funds to have sufficient reserves for all future insurance claims on its existing portfolio. Further actions could help to restore FHA's financial soundness. For example, GAO previously concluded that Congress or HUD needs to determine the economic conditions the fund would be expected to withstand without drawing on Department of the Treasury funding. With regard to risk management, FHA has made or plans improvements. For example, FHA implemented an initiative in 2009 to strengthen internal controls and risk assessment for single-family housing and created a risk office in 2010. However, FHA has only recently begun to integrate these activities and conduct annual risk assessments in accordance with HUD guidance. Without integrated and updated risk assessments that identify emerging risks, as GAO recommended, FHA lacks assurance that it has identified all its risks. Congress and HUD have taken steps to limit cost increases in the Housing Choice Voucher (voucher) program while maintaining assistance for existing program participants. Nonetheless, between 2003 and 2010, program expenditures grew about 9 percent (after adjusting for inflation), mainly due to rising rents, declining household incomes, and decisions to expand the number of assisted households. GAO identified options that, if implemented effectively, could reduce the need for new appropriations, cut expenditures, or increase the number of households assisted. These options include (1) reducing the subsidy reserves (unspent funds) of state and local housing agencies that administer the program, (2) streamlining administrative requirements, and (3) implementing rent reforms and consolidating voucher administration. These options would also involve trade-offs, such as higher rent burdens for low-income households. Opportunities exist to improve how HUD evaluates and monitors the Moving to Work (MTW) program, which is intended to give state and local housing agencies flexibility to design and test innovative strategies for providing housing assistance. HUD's guidance does not specify that performance information collected from participating housing agencies be outcome-oriented, and HUD has not identified performance indicators for the program. In addition, HUD has not developed a systematic process for identifying lessons learned from the program, which limits HUD's ability to promote useful practices for broader implementation. HUD also has not taken key monitoring steps set out in internal control standards, such as issuing guidance that defines program terms or assessing compliance with all the program's statutory requirements. As a result, HUD lacks assurance that agencies are complying with statutory requirements. Also, without more complete information on program effectiveness and compliance, it will be difficult for Congress to know whether an expanded MTW program would benefit additional agencies and the residents they serve. Consistent with GAO recommendations, HUD has begun to revise guidance on MTW performance reporting. GAO has made a number of recommendations to improve FHA's risk management, and FHA has taken some actions. GAO also recommended that HUD consider proposing to Congress options for improving the efficiency of the voucher program. HUD neither agreed nor disagreed and has not yet proposed such options. In addition, GAO recommended that HUD improve MTW information and monitoring. HUD partially agreed with these recommendations and has taken initial steps to improve performance data.

Overall, our High-Risk Series has served to identify and help resolve serious government weaknesses in areas that involve substantial resources and provide critical services to the public. Since we began reporting on high-risk areas, the government has taken high-risk problems seriously and has made long-needed progress toward correcting them. With that in mind, we designated the federal oversight of food safety as a high-risk area to raise the priority and visibility of the need to transform the federal government's oversight system. Since 1990, GAO has reported on government operations that we identified as high risk and has periodically reported on the status of progress to address high-risk areas and updated our high-risk list. Historically, high- risk areas have been so designated because of traditional vulnerabilities related to their greater susceptibility to fraud, waste, abuse, and mismanagement. As our high-risk program has evolved, we have increasingly used the high-risk designation to draw attention to areas needing broad-based transformations to achieve greater economy, efficiency, effectiveness, accountability, and sustainability of selected key government programs and operations. In determining whether a government program or operation is high risk, we consider whether it has national significance or a management function that is key to performance and accountability. Further, we consider qualitative factors, such as whether the risk involves public health or safety, service delivery, national security, national defense, economic growth, or privacy or citizens' rights; or could result in significantly impaired service, program failure, injury or loss of life, or significantly reduced economy, efficiency, or effectiveness. Clearly, these factors weighed heavily into our deliberations to place the federal oversight of food safety on our high-risk list. We remove a high-risk designation when legislative and agency actions, including those in response to our recommendations, result in significant and sustainable progress toward resolving a high-risk problem. Key determinants include a demonstrated strong commitment to and top leadership support for addressing problems, the capacity to do so, a corrective action plan, and demonstrated progress in implementing corrective measures. The sustained attention and commitment by Congress and agencies to resolve serious, long-standing high-risk problems have paid off; because of sufficient progress, we were able to remove the high-risk designation from 18 areas--more than half of our original list. As we have with areas previously removed from the high-risk list, we will continue to monitor these programs, as appropriate, to ensure that the improvements we have noted are sustained. For areas that remain on our high-risk list for 2007, there has been important--but varying levels of--progress. Top administration officials have expressed their commitment to ensuring that high-risk areas receive adequate attention and oversight. The Office of Management and Budget (OMB) has led an initiative to prompt agencies to develop detailed action plans for each area on our high-risk list. These plans are intended to identify specific goals and milestones that address and reduce the risks we identified within each high-risk area. Further, OMB has encouraged agencies to consult with us regarding the problems our past work has identified and the many recommendations for corrective actions we have made. While progress on developing and implementing plans has been mixed, concerted efforts by agencies and ongoing attention by OMB are critical. In addition to the programs that remain on the list, we recently designated three new areas as high risk, including the need to transform federal oversight of food safety. For these recently added areas, along with those remaining on the list, we expect that continued perseverance will ultimately yield significant benefits. To begin to address the weaknesses in federal oversight of food safety, executive agencies can start by implementing our recommendations intended to improve the problems we previously identified. Further, continued congressional oversight, including today's hearing, and additional legislative action will also be key to achieving progress, particularly in addressing challenges in the broad- based transformation needed to promote the safety and integrity of the nation's food supply. For several years, we have reported on issues that suggest that food safety could be designated as a high-risk area because of the need to transform the federal oversight framework to reduce risks to public health as well as the economy. Specifically, the patchwork nature of the federal food oversight system calls into question whether the government can plan more strategically to inspect food production processes, identify and react more quickly to outbreaks of contaminated food, and focus on promoting the safety and the integrity of the nation's food supply. This challenge is even more urgent since the terrorist attacks of September 11, 2001, heightened awareness of agriculture's vulnerabilities to terrorism, such as the deliberate contamination of food or the introduction of disease to livestock, poultry, and crops. An accidental or deliberate contamination of food or the introduction of disease to livestock, poultry, and crops could undermine consumer confidence in the government's ability to ensure the safety of the U.S. food supply and have severe economic consequences. Agriculture, as the largest industry and employer in the United States, generates more than $1 trillion in economic activity annually, or about 13 percent of the gross domestic product. The value of U.S. agricultural exports exceeded $68 billion in fiscal year 2006. An introduction of a highly infectious foreign animal disease, such as avian influenza or foot-and-mouth disease, would cause severe economic disruption, including substantial losses from halted exports. Similarly, food contamination, such as the recent E. coli outbreaks, can harm local economies. For example, industry representatives estimate losses from the recent California spinach E. coli outbreak to range from $37 million to $74 million. While 15 agencies collectively administer at least 30 laws related to food safety, the two primary agencies are the U.S. Department of Agriculture (USDA), which is responsible for the safety of meat, poultry, and processed egg products, and the Food and Drug Administration (FDA), which is responsible for virtually all other foods. Among other agencies with responsibilities related to food safety, the National Marine Fisheries Service (NMFS) in the Department of Commerce conducts voluntary, fee- for-service inspections of seafood safety and quality; the Environmental Protection Agency (EPA) regulates the use of pesticides and maximum allowable residue levels on food commodities and animal feed; and the Department of Homeland Security (DHS) is responsible for coordinating agencies' food security activities. The food safety system is further complicated by the subtle differences in food products that dictate which agency regulates a product as well as the frequency with which inspections occur. For example, how a packaged ham and cheese sandwich is regulated depends on how the sandwich is presented. USDA inspects manufacturers of packaged open-face meat or poultry sandwiches (e.g., those with one slice of bread), but FDA inspects manufacturers of packaged closed-face meat or poultry sandwiches (e.g., those with two slices of bread). Although there are no differences in the risks posed by these products, USDA inspects wholesale manufacturers of open-face sandwiches sold in interstate commerce daily, while FDA inspects manufacturers of closed-face sandwiches an average of once every 5 years. This federal regulatory system for food safety, like many other federal programs and policies, evolved piecemeal, typically in response to particular health threats or economic crises. During the past 30 years, we have detailed problems with the current fragmented federal food safety system and reported that the system has caused inconsistent oversight, ineffective coordination, and inefficient use of resources. Our most recent work demonstrates that these challenges persist. Specifically: Existing statutes give agencies different regulatory and enforcement authorities. For example, food products under FDA's jurisdiction may be marketed without the agency's prior approval. On the other hand, food products under USDA's jurisdiction must generally be inspected and approved as meeting federal standards before being sold to the public. Under current law, thousands of USDA inspectors maintain continuous inspection at slaughter facilities and examine all slaughtered meat and poultry carcasses. They also visit each processing facility at least once during each operating day. For foods under FDA's jurisdiction, however, federal law does not mandate the frequency of inspections. Federal agencies are spending resources on overlapping food safety activities. USDA and FDA both inspect shipments of imported food at 18 U.S. ports of entry. However, these two agencies do not share inspection resources at these ports. For example, USDA officials told us that all USDA-import inspectors are assigned to, and located at, USDA-approved import inspection facilities and some of these facilities handle and store FDA-regulated products. USDA has no jurisdiction over these FDA-regulated products. Although USDA maintains a daily presence at these facilities, the FDA-regulated products may remain at the facilities for some time awaiting FDA inspection. In fiscal year 2003, USDA spent almost $16 million on imported food inspections, and FDA spent more than $115 million. Food recalls are voluntary, and federal agencies responsible for food safety have no authority to compel companies to carry out recalls-- with the exception of FDA's authority to require a recall for infant formula. USDA and FDA provide guidance to companies for carrying out voluntary recalls. We reported that USDA and FDA can do a better job in carrying out their food recall programs so they can quickly remove potentially unsafe food from the marketplace. These agencies do not know how promptly and completely companies are carrying out recalls, do not promptly verify that recalls have reached all segments of the distribution chain, and use procedures that may not be effective to alert consumers to a recall. The terrorist attacks of September 11, 2001, have heightened concerns about agriculture's vulnerability to terrorism. The Homeland Security Act of 2002 assigned DHS the lead coordination responsibility for protecting the nation against terrorist attacks, including agroterrorism. Subsequent presidential directives further define agencies' specific roles in protecting agriculture and the food system against terrorist attacks. We reported that in carrying out these new responsibilities, agencies have taken steps to better manage the risks of agroterrorism, including developing national plans and adopting standard protocols. However, we also found several management problems that can reduce the effectiveness of the agencies' routine efforts to protect against agroterrorism. For example, there are weaknesses in the flow of critical information among key stakeholders and shortcomings in DHS's coordination of federal working groups and research efforts. More than 80 percent of the seafood that Americans consume is imported. We reported in 2001 that FDA's seafood inspection program did not sufficiently protect consumers. For example, FDA tested about 1 percent of imported seafood products. We subsequently found that FDA's program has improved: More foreign firms are inspected, and inspections show that more U.S. seafood importers are complying with its requirements. Given FDA officials' concerns about limited inspection resources, we also identified options, such as using personnel in the National Oceanic and Atmospheric Administration's (NOAA) Seafood Inspection Program to augment FDA's inspection capacity or state regulatory laboratories for analyzing imported seafood. FDA agreed with these options. In fiscal year 2003, four agencies--USDA, FDA, EPA, and NMFS-- spent a total of $1.7 billion on food safety-related activities. USDA and FDA together were responsible for nearly 90 percent of federal expenditures for food safety. However, these expenditures were not based on the volume of foods regulated by the agencies or consumed by the public. The majority of federal expenditures for food safety inspection were directed toward USDA's programs for ensuring the safety of meat, poultry, and egg products; however, USDA is responsible for regulating only about 20 percent of the food supply. In contrast, FDA, which is responsible for regulating about 80 percent of the food supply, accounted for only about 24 percent of expenditures. We have cited the need to integrate the fragmented federal food safety system as a significant challenge for the 21st century, to be addressed in light of the nation's current deficit and growing structural fiscal imbalance. The traditional incremental approaches to budgeting will need to give way to more fundamental reexamination of the base of government. While prompted by fiscal necessity, such a reexamination can serve the vital function of updating programs to meet present and future challenges within current and expected resource levels. To help Congress review and reconsider the base of federal spending, we framed illustrative questions for decision makers to consider. While these questions can apply to other areas needing broad-based transformation, we specifically cited the myriad of food safety programs managed across several federal agencies. Among these questions are the following: How can agencies partner or integrate their activities in new ways, especially with each other, on crosscutting issues, share accountability for crosscutting outcomes, and evaluate their individual and organizational contributions to these outcomes? How can agencies more strategically manage their portfolio of tools and adopt more innovative methods to contribute to the achievement of national outcomes? Integration can create synergy and economies of scale and can provide more focused and efficient efforts to protect the nation's food supply. Further, to respond to the nation's pressing fiscal challenges, agencies may have to explore new ways to achieve their missions. We have identified such opportunities. For example, as I already mentioned, USDA and FDA spend resources on overlapping food safety activities, and we have made recommendations designed to reduce this overlap. Similarly, regarding FDA's seafood inspection program, we have discussed options for FDA to use personnel at NOAA to augment FDA's inspection capacity. Many of our recommendations to agencies to promote the safety and integrity of the nation's food supply have been acted upon. Nevertheless, as we discuss in the 2007 High-Risk Series, a fundamental reexamination of the federal food safety system is warranted. Such a reexamination would need to address criticisms that have been raised about USDA's dual mission as both a promoter of agricultural and food products and an overseer of their safety. Taken as a whole, our work indicates that Congress and the executive branch can and should create the environment needed to look across the activities of individual programs within specific agencies and toward the goals that the federal government is trying to achieve. To that end, we have recommended, among other things, that Congress enact comprehensive, uniform, and risk-based food safety legislation and commission the National Academy of Sciences or a blue ribbon panel to conduct a detailed analysis of alternative organizational food safety structures. We also recommended that the executive branch reconvene the President's Council on Food Safety to facilitate interagency coordination on food safety regulation and programs. These actions can begin to address the fragmentation in the federal oversight of food safety. Going forward, to build a sustained focus on the safety and the integrity of the nation's food supply, Congress and the executive branch can integrate various expectations for food safety with congressional oversight and through agencies' strategic planning processes. The development of a governmentwide performance plan that is mission-based, is results-oriented, and provides a cross-agency perspective offers a framework to help ensure agencies' goals are complementary and mutually reinforcing. Further, this plan can help decision makers balance trade-offs and compare performance when resource allocation and restructuring decisions are made. As I have discussed, GAO designated the federal oversight of food safety as a high-risk area that is in need of a broad-based transformation to achieve greater economy, efficiency, effectiveness, accountability, and sustainability. The high-risk designation raises the priority and visibility of this necessary transformation and thus can bring needed attention to address the weaknesses caused by a fragmented system. GAO stands ready to provide professional, objective, fact-based, and nonpartisan information and thereby assist Congress as it faces tough choices on how to fundamentally reexamine and transform the government. Lasting solutions to high-risk problems offer the potential to save billions of dollars, dramatically improve service to the American public, strengthen public confidence and trust in the performance and accountability of our national government, and ensure the ability of government to deliver on its promises. Madam Chairwoman, this concludes my prepared statement. I would be pleased to respond to any questions that you or other Members of the Subcommittee may have. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. For further information about this testimony, please contact Lisa Shames, Acting Director, Natural Resources and Environment at (202) 512-3841 or [email protected]. Key contributors to this statement were Erin Lansburgh, Bart Fischer, Alison O'Neill, and Beverly Peterson. Homeland Security: Management and Coordination Problems Increase the Vulnerability of U.S. Agriculture to Foreign Pests and Disease. GAO-06-644. Washington, D.C.: May 19, 2006. Oversight of Food Safety Activities: Federal Agencies Should Pursue Opportunities to Reduce Overlap and Better Leverage Resources. GAO-05- 213. Washington, D.C.: March 30, 2005. Food Safety: Experiences of Seven Countries in Consolidating Their Food Safety Systems. GAO-05-212. Washington, D.C.: February 22, 2005. Food Safety: USDA and FDA Need to Better Ensure Prompt and Complete Recalls of Potentially Unsafe Food. GAO-05-51. Washington, D.C.: October 6, 2004. Antibiotic Resistance: Federal Agencies Need to Better Focus Efforts to Address Risk to Humans from Antibiotic Use in Animals. GAO-04-490. Washington, D.C.: April 22, 2004. School Meal Program: Few Instances of Foodborne Outbreaks Reported, but Opportunities Exist to Enhance Outbreak Data and Food Safety Practices. GAO-03-530. Washington, D.C.: May 9, 2003. Food-Processing Security: Voluntary Efforts Are Under Way, but Federal Agencies Cannot Fully Assess Their Implementation. GAO-03-342. Washington, D.C.: February 14, 2003. Meat and Poultry: Better USDA Oversight and Enforcement of Safety Rules Needed to Reduce Risk of Foodborne Illnesses. GAO-02-902. Washington, D.C.: August 30, 2002. Genetically Modified Foods: Experts View Regimen of Safety Tests as Adequate, but FDA's Evaluation Process Could Be Enhanced. GAO-02-566. Washington, D.C.: May 23, 2002. Food Safety: Improvements Needed in Overseeing the Safety of Dietary Supplements and "Functional Foods." GAO/RCED-00-156. Washington, D.C.: July 11, 2000. his is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Each year, about 76 million people contract a foodborne illness in the United States; about 325,000 require hospitalization; and about 5,000 die. While the recent E. coli outbreaks highlighted the risks posed by accidental contamination, the attacks of September 11, 2001, heightened awareness that the food supply could also be vulnerable to deliberate contamination. This testimony focuses on the (1) role that GAO's high-risk series can play in raising the priority and visibility of the need to transform federal oversight of food safety, (2) fragmented nature of federal oversight of food safety, and (3) need to address federal oversight of food safety as a 21st century challenge. This work is based on previously issued reports. GAO's high-risk series is intended to raise the priority and visibility of government programs that are in need of broad-based transformation to achieve greater economy, efficiency, effectiveness, accountability, and sustainability. In January 2007, as part of our regular update of this series for each new Congress, GAO designated the federal oversight of food safety as a high-risk area for the first time. While this nation enjoys a plentiful and varied food supply that is generally considered to be safe, the federal oversight of food safety is fragmented, with 15 agencies collectively administering at least 30 laws related to food safety. The two primary agencies are the U.S. Department of Agriculture (USDA), which is responsible for the safety of meat, poultry, and processed egg products, and the Food and Drug Administration (FDA), which is responsible for other food. In many previous reports, GAO found that this fragmented system has caused inconsistent oversight, ineffective coordination, and inefficient use of resources. For example, existing statutes give agencies different regulatory and enforcement authorities. Under current law, thousands of USDA inspectors must examine all slaughtered carcasses and visit all processing facilities at least once during each operating day. However, federal law does not mandate the frequency of inspection for foods that are under FDA's jurisdiction. Food recalls are generally voluntary. While USDA and FDA provide guidance to companies for carrying out voluntary recalls, they do not know how promptly and completely companies carry out recalls and do not promptly verify that recalls have reached the entire distribution chain. In addition, they use procedures that may not be effective to alert consumers to a recall. Federal agencies are spending resources on overlapping food safety activities. USDA and FDA both inspect shipments of imported food at 18 U.S. ports of entry but do not share inspection resources at these ports. Integrating the fragmented federal food safety system is a significant challenge for the 21st century, particularly in light of the nation's current deficit and growing structural fiscal imbalance. To help Congress review and reconsider the base of federal spending, GAO framed illustrative questions for decision makers to consider in 21st Century Challenges: Reexamining the Base of the Federal Government. Among these questions are how agencies can integrate and share accountability for their activities on crosscutting issues and how they can adopt more innovative methods to contribute to the achievement of national outcomes. While framing these questions, GAO specifically cited the myriad of food safety programs managed across several federal agencies.

Approaches to electronic health information exchange have expanded in recent years with the increased adoption of EHRs and growth of HIE organizations. For example, some providers can electronically exchange clinical information via interoperable EHR systems. In cases in which providers wish to exchange electronic health information but do not have interoperable systems, HIE organizations can serve as key facilitators of exchange by providing for data connections among stakeholders, including laboratories, public health departments, hospitals, and physicians. Specifically, the use of EHR technology and the use of HIE organizations can allow providers to request and receive information about patients from other providers' records, such as medication lists, laboratory results, or previous diagnoses and hospitalizations. For example, when a provider requests information, the HIE organization may be able to identify the sources of the requested data and initiate the electronic transmission that delivers the data from another provider's EHR in a format that can be accepted and processed by the receiving provider's EHR. Examples of exchange activities that can occur using EHR technology directly between providers or through an HIE organization are shown in figure 1. According to an April 2012 article, exchanging EHR information with other entities can be significantly more difficult for a provider than using EHRs to manage health information within the provider's organization only-- without exchanging the information with others. Appendix I provides information about the extent to which providers are able to electronically exchange health information, as reported by providers and stakeholders we interviewed. HITECH provided funding for various activities, including the Medicare and Medicaid EHR programs. These programs are intended to help increase the meaningful use of EHR technology by providing incentive payments for, and later imposing penalties on, providers--that is, certain hospitals and health care professionals such as physicians--who participate in Medicare or Medicaid. These programs are the largest of the activities, in terms of potential federal expenditures, funded by HITECH. Within HHS, CMS and ONC have developed the programs' requirements. As the programs progress through these stages, Stage 1, which began in 2011, set the basic functionalities EHRs must include, such as capturing data electronically and providing patients with electronic copies of health information. CMS and ONC indicated that Stage 1 allowed providers to test the capability of their EHRs to electronically exchange health information. Stage 2, which began in 2014, added requirements such as increased health information exchange between providers to improve care coordination for patients. For example, Stage 2 will require hospitals and professionals to provide an electronic summary of care document for each transition of care or referral to another provider, whereas in Stage 1 this measure was optional. Stage 3, which is scheduled to go into effect in 2017, will continue to expand on meaningful use to improve health care outcomes and the exchange of health information, according to CMS and ONC. The requirements for this stage have not yet been developed. ONC is responsible for identifying health data standards and technical specifications for EHR technology and establishing and overseeing the certification of EHR technology. As part of the EHR programs, providers must report annually on certain mandatory meaningful use measures and on additional measures that they may choose from a menu of measures. Appendix II describes those Stage 1 and Stage 2 meaningful use measures that CMS and ONC reported as specifically relating to health information exchange. Providers and stakeholders we interviewed cited key challenges to electronic health information exchange; in particular, they cited issues related to insufficient standards, concerns about how privacy rules can vary among states, difficulties in matching patients to their records, and costs associated with electronic health information exchange. CMS and ONC officials noted that they have several ongoing programs and initiatives to help address some aspects of these key challenges, but concerns in these areas continue to exist. Reported insufficiencies in standards for electronic health information exchange. While standards for electronically exchanging information within the EHR programs exist, providers reported that standards may not be sufficient in some areas. Information that is electronically exchanged from one provider to another must adhere to the same standards in order to be interpreted and used in EHRs, thereby permitting interoperability. Several providers stated that they often have difficulty exchanging certain types of health information with other providers that have a different EHR system due to a lack of sufficient standards to support exchange. One area for which providers told us standards were insufficient relates to standards for allergies. Specifically, one provider noted that there are not sufficient standards to define allergic reactions, and another provider explained that some EHR systems classify an allergic reaction as a side effect, while other EHR systems classify the same reaction as an allergy. Such differences can cause confusion when health information is exchanged among providers because providers who receive information may have difficulty locating or using information on allergies if their EHR systems classify the information differently than the EHR systems of the providers who sent the information. Similarly, an article from the Journal of the American Medical Informatics Association stated that the proper terminology for encoding patients' allergies is complex and that some gaps still exist across existing standards. Providers who participated in the EHR programs from fiscal year 2011 through fiscal year 2013 could use certified EHR technology that conformed to the 2011 edition of the standards and certification criteria. All providers that participate in the EHR Programs in fiscal year 2014 must conform to the 2014 edition of the standards and certification criteria. ONC is expected to develop another set of standards and certification criteria that certified EHR technology would be required to conform to beginning in 2016. from one entity to another. HHS expects that providers using the 2014 edition will have greater ability to exchange information. Patient encounters are commonly recorded in free-form text narratives, or as unstructured clinical data. While free-form patient narratives give the provider flexibility to note observations that are not supported by structured data, they are not easily searchable and aggregated and can be more difficult to analyze. that RxNorm and the Systematized Nomenclature of Medicine Clinical Terms (SNOMED CT) should be expanded for nonmedication allergies and allergic reactions. Fifth, several providers and stakeholders commented that the Direct Protocol allows for limited exchange, such as exchanging a secure email message, rather than enabling certain other functionalities, such as the ability to query another EHR system. Reported variation in state privacy rules and lack of clarity about requirements. Some providers noted that exchanging health information with providers in other states can be difficult due to their limited understanding of variations in privacy rules from state to state. Some providers also noted that exchange can be especially difficult in cases when providers are located close to state borders and therefore serve patients from another state. Providers that are covered by the Health Insurance Portability and Accountability Act (HIPAA) of 1996 must adhere to federal privacy rules and can also be subject to state privacy rules. These state rules can be more stringent than HIPAA requirements or standards. HIPAA's Administrative Simplification Provisions required the establishment of, among other things, national privacy standards. Pub. L. No. 104-191, Title II, Subtitle F, 110 Stat. 1936, 2021 (codified at 42 U.S.C. SSSS 1320d-1320d-8). These provisions also expressly provided that such national standards would not preempt state laws that impose requirements, standards, or implementation specifications that are more stringent than those imposed under federal regulation. Pub. L. No. 104-191, Title II, Subtitle F, 110 Stat. 1936, 2021, see 42 U.S.C. SSSS 1320d-2 notes. HIPAA regulates covered entities' (including most health care providers') use and disclosure of personal health information. The Privacy Rule generally permits the use or disclosure of an individual's protected health information without the individual's written authorization for purposes of treatment, payment and health care operations. Under the Privacy Rule, more stringent state laws that are not preempted by federal law include those that prohibit or restrict a use or disclosure in circumstances under which such use or disclosure would be permitted under HIPAA. See 45 C.F.R. 160.202. To address privacy issues related to electronic health information exchange, ONC officials have several ongoing efforts. For example, ONC has issued high-level guidance for providers on how to ensure the privacy and security of health information covering a wide range of topics related to meaningful use and the HIPAA Privacy and Security Rules, among other things. Regarding state privacy laws, this guidance suggests that providers seek information from state agencies, RECs, and professional associations to understand how state laws affect the sharing of patient health information. In addition, ONC began the Data Segmentation for Privacy Initiative to develop and pilot test standards for managing patient consents and data segmentation. As part of this initiative, ONC released an implementation guide for consent management and data segmentation in the summer of 2012, and the agency is currently pilot testing this guide. In addition, ONC's state HIE organization program is currently receiving reports from states on how they are implementing their state's privacy rules. Officials expect to receive the information from states by March 2014. ONC officials are hopeful that these efforts will help address privacy concerns and, as a result, facilitate exchange efforts for providers. Although ONC is working on privacy issues, some providers we spoke with reported that lack of clarity in state privacy laws is one reason that they have experienced difficulty exchanging health information with providers in other states. They found it difficult to ensure they were compliant with state laws when exchanging certain personal health information with providers in another state. For example, some providers in Minnesota and Massachusetts noted that some state laws have stringent requirements related to sharing health information related to mental health, or human immunodeficiency virus or other sexually transmitted infections. In addition, some providers told us that different providers in their state have different interpretations regarding how frequently they must obtain consent from the patient, as required under the state privacy rule, for the exchange of patients' health information. For example, some providers may interpret the state privacy rule to mean that every time a patient's health information is exchanged with another provider they have to obtain consent. Other providers in the same state may interpret the state privacy rule to mean that they have to obtain consent only once. In addition to the privacy challenges identified by providers, stakeholders responding to HHS's March 2013 RFI also identified privacy as a challenge related to health information exchange, and noted that additional training for providers on varying state privacy laws is needed to address this challenge. Stakeholders also suggested that HHS could focus more resources on consent policies and recommended that HHS undertake additional work to facilitate (1) electronically obtaining patient consent for disclosing health information, and (2) communicating that consent along with the related health information. Reported difficulty of accurately matching patients to their health records. Some providers we interviewed reported that they do not have an accurate and efficient way to match patients to their records when exchanging health information. Multiple providers and stakeholders cited situations in which several of their patients are listed with the same name and birth year, and live in the same area. Two of these providers reported that patients can be matched to the wrong set of records, and that providers often need to manually match records, which is time- consuming. Some stakeholders also noted similar problems, including safety concerns from incorrect patient matching. HHS programs or initiatives to address patient matching issues related to health information exchange include both a patient matching project and efforts by two federal advisory committees. According to ONC officials, planning for the Patient Matching Initiative was begun by the State Health Information Exchange Cooperative Agreement Program in July 2013, and the project launched publicly in September 2013. The goals of the initiative are to (1) improve patient matching based on an assessment of current approaches used by selected stakeholders, (2) identify key attributes and algorithms for matching patients to their records, and (3) define processes or best practices to support the identified key attributes. The first phase of the initiative was completed in February 2014 with the release of a report containing patient matching recommendations for possible inclusion in Stage 3 of the EHR programs The two and the 2015 edition of the standards and certification criteria.federal advisory committees established under HITECH, the HIT Policy Committee and the HIT Standards Committee, made recommendations to HHS in 2011 that relate to patient matching.recommended standardized formats for demographic data fields, internally evaluating matching accuracy, accountability, developing, promoting and disseminating best practices, and supporting the role of the patient. The HIT Standards Committee made four recommendations on patient matching covering patient attributes that could be used, data quality issues, formats for data elements, and the data that could be returned from a match request. According to ONC officials, as of July 2013 ONC had efforts under way to respond to these recommendations, under the Patient Matching Initiative, in coordination with the committees. For example, to address one recommendation related to developing, promoting, and disseminating best practices, ONC officials said that they plan to determine which approaches to patient matching work best and develop guidance to help organizations implement such steps. Although HHS has ongoing efforts to address the patient matching challenge, several providers and stakeholders commented that more work needs to be done on this issue. Some providers we interviewed use different methodologies, such as algorithms that make use of multiple patient attributes for identifying patients. However, providers told us that they still have challenges matching patients to their records. Several providers and stakeholders have stated that there should be a national patient identifier for matching patients to their records.stakeholders who responded to HHS's March 2013 RFI stated that HHS has an opportunity to reduce the potential risks of engaging in exchange by focusing more resources on patient matching. Some Reported challenges with cost of exchanging health information. Providers we interviewed reported challenges covering costs associated with health information exchange, including upfront costs associated with purchasing and implementing EHR systems, fees for participation in state or local HIE organizations, and per-transaction fees for exchanging health information charged by some vendors or HIE organizations. Several providers said that they must invest in additional capabilities such as establishing interfaces for exchange with laboratories or other entities such as HIE organizations. For example, many providers told us that the cost of developing, implementing, and maintaining interfaces with others to exchange health information is a significant barrier. One provider and several officials estimated various amounts between $50,000 and $80,000 that providers spend to establish data exchange interfaces. Other stakeholders we interviewed or who responded to HHS's March 2013 RFI also identified costs associated with participation in HIE organizations and maintaining EHR systems as a challenge for providers. To address costs of exchanging health information, ONC's State Health Information Exchange Cooperative Agreement Program has provided funding to HIE organizations. Agency officials stated that by funding HIE organizations, a relatively low cost option can be made available for providers to use to exchange health information. However, ONC officials said that this program is scheduled to end in March 2014. In addition, several providers we interviewed told us that for them the benefits to them of joining an HIE organization often do not exceed the costs, in some cases because few providers have joined their state or regional HIE organizations, resulting in limited opportunities to exchange health information. Some providers told us they do not participate in HIE organizations because they exchange information in other ways that they believe are more efficient, such as exchanging directly with other providers that use the same EHR system from the same vendor. One study noted that most health care providers, including over 65 percent of hospitals and 90 percent of physician practices, were not participating in HIE organizations. HHS payments to providers under the EHR programs can help support the cost of exchange, but providers can participate in the programs without routinely exchanging information electronically that could lead to improved care. While some of the meaningful use requirements for Stage 1 and Stage 2 help to facilitate the exchange of health information, they require exchange only under certain circumstances. (See app. II for more information.) For example, one part of the requirement to provide a summary care document for each transition of care or referral in Stage 2 compels providers to complete either (1) one successful electronic exchange of a summary of care record with a recipient using technology designed by an EHR developer other than the sender's, or (2) one successful test with CMS's test EHR during the reporting period. stakeholder we spoke with explained that for this part of the requirement some providers just complete one successful test with CMS's test EHR and do not routinely demonstrate exchanging health information electronically with other EHR systems. HHS officials stated that Stage 2 is an incremental step toward advancing exchange, and that providers generally do not yet have the technology to enable greater exchange. The requirement to provide a summary of care document for each transition of care or referral in Stage 2 also requires eligible professionals and hospitals to provide summary of care documents for more than 10 percent of transitions of care and referrals either (1) electronically transmitted using certified EHR technology or (2) through an exchange with an organization that is a Nationwide Health Information Network Exchange participant or in a way that is consistent with the Nationwide Health Information Network. The Nationwide Health Information Network was a program funded by ONC that transitioned to the eHealth Exchange, a group of federal agencies and nonfederal organizations whose mission, among other things, is to improve public health reporting through secure, trusted, and interoperable health information exchange. CMS and ONC have identified a minimum set of technical capabilities that are required for an EHR to be considered a test EHR. Eligible professionals and hospitals that select to attest to this requirement will be randomly matched with a designated test EHR that is designed by an EHR developer other than the sender's. HHS, including CMS and ONC, developed and issued a strategy document in August 2013 that describes how it expects to advance electronic health information exchange, with principles to guide future actions in three broad areas--accelerating health information exchange, advancing standards and interoperability, and patient engagement. Examples of principles in the strategy include (1) working with multiple stakeholders to develop standards and facilitating the adoption and use of standards among federal agencies; (2) supporting the privacy, security, and integrity of patient health information across health information exchange activities; (3) seeking to enable a patient's health information to be available wherever the patient accesses care, to support patient- centered care delivery; and (4) supporting exchange through state-led efforts to reduce costs to providers. (See app. III for a complete list of principles.) According to the strategy, these principles have the potential to address the key health information challenges identified by providers and stakeholders we interviewed, which relate to standards, patients' privacy, matching patients with data, and costs. GAO-04-408T. See Pub L. No. 103-62, 107 Stat. 285 (1993) (GPRA), as amended by Pub. L. No. 111- 352, 124 Stat. 3866 (2011) (GPRAMA). GPRA requires, among other things, that federal agencies develop strategic plans that include agencywide goals and strategies for achieving those goals. We have reported that these requirements also can serve as leading practices for planning at lower levels within federal agencies, such as individual programs or initiatives. programs and to determine whether adjustments need to be made in order to maintain progress within given time frames. Below are examples of how the lack of these elements affects the HHS strategy. Specific Actions. While the strategy mentions that HHS seeks to enable a patient's health information to be available wherever the patient accesses care, it does not indicate specific actions that HHS will take to implement that principle or how those actions would overcome exchange-related challenges. Including specific actions could enhance the strategy's usefulness for helping to make program management decisions. Prioritized Actions. While the HHS strategy states that HHS will continue to evaluate short- and long-term steps to advance exchange, it does not clearly delineate how future actions related to the principles should be prioritized. Prioritizing actions can help HHS ensure that the most appropriate activities are completed first, to more efficiently achieve the goal of advancing exchange. Milestones. The HHS strategy does not provide milestones with specific time frames to help the agencies gauge their progress in advancing exchange. Exchange-related milestones with specified time frames could be particularly useful because they could provide a framework for determining whether any actions HHS intends to take could help lead to progress in addressing the challenges providers face related to exchange. Milestones with time frames could also set realistic expectations so stakeholders can anticipate when they can expect to see actions to advance exchange. CMS and ONC officials acknowledged the importance of providers being able to exchange health information effectively by Stage 3 of the EHR programs to allow for improved outcomes such as quality, efficiency, and patient safety. Determining specific, prioritized actions and exchange- related milestones with specified time frames can help to ensure that the agencies' principles and future actions result in timely improvements in addressing the key exchange-related challenges reported by providers and stakeholders, which are particularly important because planning for Stage 3 is expected to begin as soon as 2014. This information could also help HHS prioritize its future actions based on whether health information is being exchanged effectively among providers, in order to better achieve the EHR programs' ultimate goals of improving quality, efficiency, and patient safety. HHS and providers have made some progress toward addressing challenges reported by providers and others related to the electronic exchange of health information, but these challenges are complex and difficult to address and are likely to continue to persist. Some of HHS's most important efforts, such as designing the 2014 edition of the standards and certification criteria to include an increased exchange capability in EHR systems, may lead to greater exchange over the next year. In addition, exchange may increase as providers modify their systems to meet more stringent exchange-related requirements in Stage 2 of the EHR programs. However, a number of remaining challenges make these outcomes uncertain. HHS has both ongoing programs and future plans to address concerns about exchange, but it is not always clear how HHS will effectively prioritize and implement its potential responses to the challenges of exchange. Specifically, the HHS strategy to advance electronic health information exchange does not identify specific actions that CMS and ONC expect will lead to increased exchange, prioritize these actions, or include milestones for gauging progress over time. Guidance on planning and implementing effective strategies highlights the importance of key elements, such as specific, prioritized actions and milestones for gauging progress. These elements could help the agencies make future adjustments based on the effectiveness of their efforts. Exchange is especially important because of its potential to help improve coordination of care within the fragmented health care system. According to CMS and ONC officials, ensuring progress in providers' ability to electronically exchange information is critical for the effective implementation of the EHR programs. Without a sufficient focus on exchange--including specific, prioritized actions with milestones and time frames--CMS and ONC run the risk that the desired outcomes of the EHR programs of improved quality, efficiency, and patient safety will be compromised. To address challenges that affect the ability of providers to electronically exchange health information, we recommend that the Secretary of Health and Human Services direct CMS and ONC to take the following two actions: develop and prioritize specific actions that HHS will take consistent with the principles in HHS's strategy to advance health information exchange; and develop milestones with time frames for the actions to better gauge progress toward advancing exchange, with appropriate adjustments over time. We provided a draft of this report to HHS for comment. HHS provided written comments, which are reprinted in appendix IV. HHS concurred with our recommendations. For the first recommendation, HHS (including CMS and ONC) stated that it has begun to develop and prioritize specific action items, consistent with the principles in its strategy to advance health information exchange, and that it has begun to take action on some of the prioritized items. For the second recommendation, HHS (including CMS and ONC) stated that it has begun developing milestones with time frames for the actions to better gauge progress toward advancing exchange. In general, HHS's comments also reiterated that the electronic exchange of health information is a key element of meaningful use and ultimately will be critical for the success of health care delivery system reforms under the Patient Protection and Affordable Care Act. HHS also stated that it has begun to take definitive steps to accelerate exchange through policy guidance, grant funding to states, and development of standards and certification, such as collaborating with private sector organizations that develop health IT standards to fill key gaps in standards to better support information exchange during transitions in care and when coordinating care across providers. Additionally, HHS provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the Secretary of Health and Human Services, the Administrator of CMS, the National Coordinator for Health Information Technology, and other interested parties. In addition, the report will be available at no charge on GAO's website at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-7114 or at [email protected]. Contact points for our Office of Congressional Relations and Office of Public Affairs can be found on the last page of this report. Other major contributors to this report are listed in appendix V. This appendix provides additional information reported from providers we spoke with about health information exchange and its related benefits. We conducted a total of 25 interviews with providers and stakeholders, such as regional extension centers (REC) and health information exchange organizations (HIE organization), in four states--Georgia, Massachusetts, Minnesota, and North Carolina. We interviewed staff from at least two hospitals or health systems and at least one physician office or group practice in each state. We selected the four states because they were mentioned during interviews with officials from HHS and relevant stakeholders as having ongoing efforts related to health information exchange. We asked interviewees about what types of patient health information providers are currently able to electronically exchange, the methods used to exchange such information, and the benefits providers have realized or foresee from such exchange. Providers we interviewed reported that the most critical types of health information that they need to be able to electronically exchange include patient allergy information, medication lists, and problem lists. However, providers generally reported being able to electronically exchange only specific types of health information at this time, including lab orders and results, immunization and prescription information, and certain clinical documents. For example, Almost all the providers we interviewed reported some exchange of lab information. In most cases, such exchanges involved both the submission of lab orders and the receipt of lab results via interfaces designed for exchange between providers and labs or through their electronic health record (EHR) system. While these exchanges were reported to generally occur between providers and laboratories outside their organizations, two providers noted that such capabilities were still limited to sharing lab information with others in the same health system. Some providers also reported electronically exchanging some information with state public health departments, generally immunization data and notification of certain infectious diseases. They said that these electronic exchanges were generally limited to submissions to the departments and did not include receipt of data from these departments. Several of the providers we interviewed said they engaged in e- prescribing activities, which in some instances included both the submission of electronic prescriptions to pharmacies and the receipt of medication information from pharmacies. However, some providers noted that such exchanges could take place only if the pharmacy had a compatible e-prescribing system that could electronically receive prescription information from the provider's EHR system. In the absence of compatible systems, faxes were used. Several providers we interviewed also noted that they could exchange continuity of care documents (CCD) with other providers in their organization, although the exchange of this type of information varied among the providers we interviewed. Several providers said they could exchange CCDs within their health system, whereas other providers said they could exchange this information only with providers using the same EHR vendor. Providers in all four states and stakeholders that we interviewed reported that, at this time, methods used to electronically exchange health information are limited to use within health systems, use between certain EHR systems, or use of the Direct Protocol. For example, In Georgia, REC officials and the four providers we spoke with told us that electronic exchange is generally occurring only within health systems and among those affiliated providers that work in the health systems. Some providers noted that they could electronically exchange lab orders and results outside their organizations, but one provider noted that even this information was still exchanged electronically only within its hospital. Providers in Minnesota, Massachusetts, and North Carolina reported that they used the same EHR system from the same vendor and were able to electronically exchange all patient clinical information with any other entity using that vendor via an interoperability feature. According to these providers, this interoperability feature provides a mechanism for them to electronically exchange all types of clinical information about their patients. A community-based hospital in Minnesota reported using a different EHR system than was used by the other, larger health systems in the community it shared information with. This provider reported relying on the Direct Protocol to electronically exchange some limited health information with other providers in the region. A provider in Massachusetts noted that it was building web-based "view portals" to allow other providers outside its health system to view health information electronically in order to help coordinate patient care. Providers that participated in an HIE organization reported being able to electronically exchange health information with other providers. Others have opted to electronically exchange information using their EHR technology rather than an HIE organization, even if one was available. In Massachusetts, some providers told us that they are able to directly connect to the state's HIE organization in order to electronically exchange health information, such as CCDs. However, not all providers in the state are electronically exchanging information at this time. A Massachusetts law calls for the creation and maintenance of a state HIE organization that allows providers in all health care settings to exchange patient health information with other providers by the end of 2016. Some providers we spoke with in Minnesota said they had no plans to join any of the HIE organizations available in the state at this time due to the limited benefits they would realize from participating, and would instead continue to rely on their EHR technology to electronically exchange health information with other providers that use the same vendor. Some providers noted that without a sufficient number of other providers participating in an HIE organization, it would be of limited value. Several Georgia and North Carolina providers reported that the availability of an HIE organization could help facilitate electronic exchange among providers. Entities in both states are establishing regional HIE organizations that will ultimately connect to one another via a statewide HIE organization. Providers in both states said they expected that the HIE organizations, once established, would facilitate broader electronic exchange of health information throughout the state. Although providers we interviewed described certain circumstances when they could electronically exchange health information, they indicated that they would like to expand the electronic exchange of health information and cited a variety of benefits related to such electronic exchange. For example, some providers noted that electronic exchange can provide access to critical information needed when administering medical care, thus improving care quality and reducing duplicative testing; improve access to information related to a patient's health history, including medication histories and previous diagnoses; result in more timely access to information, which is particularly helpful in emergency departments; and reduce labor-intensive efforts to send and receive health information in paper form, such as a printed document, or conduct public health reporting activities. This appendix provides information on the Stage 1 and Stage 2 meaningful use measures related to electronic health information exchange, according to officials from the Centers for Medicare & Medicaid Services (CMS) and the Office of the National Coordinator for Health Information Technology (ONC). According to these officials, Stage 2, which began in 2014, provides additional requirements related to the exchange of health information. For example, some meaningful use measures related to health information exchange that providers could select from a menu of optional measures in Stage 1 are mandatory for Stage 2. In addition, some Stage 2 measures are new. For example, the measure "provide structured electronic lab results to ambulatory providers" is a new measure for hospitals in Stage 2. See table 1 for more information. This appendix provides information on the principles that the Centers for Medicare & Medicaid Services (CMS) and the Office of the National Coordinator for Health Information Technology (ONC) plan to use to guide their future actions to facilitate health information exchange. These principles are outlined in a strategy that the agencies released in August 2013 to describe how they expect the principles to lead to future actions that have the potential to address the key challenges providers and stakeholders have identified relative to electronic health information exchange in four areas--standards, patients' privacy, matching patients with data, and costs. The strategy includes principles under three broad categories--accelerating health information exchange, advancing standards and interoperability, and patient engagement. See table 2 for more information. In addition to the contact named above, Will Simerl, Assistant Director; La Sherri Bush; Thomas Murphy; Monica Perez-Nelson; Roseanne Price; Andrea Richardson; Teresa Tucker; and Rebecca Rust Williamson made key contributions to this report.

The Health Information Technology for Economic and Clinical Health Act (HITECH) promotes the use of health information technology and identifies the importance of health information exchange. It provides incentive payments to promote the widespread adoption and meaningful use of EHR technology. To be a meaningful user, providers are to demonstrate, among other things, that their certified EHR technology can electronically exchange health information. GAO examined (1) the key challenges to the electronic exchange of health information, if any, that have been reported by providers and stakeholders, and HHS's ongoing efforts to address them, and (2) the extent to which HHS has planned future actions to address those key challenges. GAO reviewed HHS documentation; interviewed HHS officials; and interviewed providers--hospital officials and physicians--and relevant stakeholders about their experiences. Providers and stakeholders GAO interviewed in four states with ongoing electronic health information exchange efforts cited key challenges to exchange, in particular, issues related to insufficient standards, concerns about how privacy rules can vary among states, difficulties in matching patients to their records, and costs associated with exchange. Officials from the Centers for Medicare & Medicaid Services (CMS) and the Office of the National Coordinator for Health Information Technology (ONC)--agencies within the Department of Health and Human Services (HHS)--noted that they have several ongoing programs and initiatives to help address some aspects of these key challenges, but concerns in these areas continue to exist. For example, several providers GAO interviewed said that they have difficulty exchanging certain types of health information due to insufficient health data standards. Although HHS has begun to address insufficiencies in standards through its Medicare and Medicaid Electronic Health Record (EHR) programs, such as through the introduction of new 2014 standards for certified EHR technology, it is unclear whether its efforts will lead to widespread improvements in electronic health information exchange. In addition, providers GAO interviewed reported challenges covering costs associated with electronic exchange, such as upfront costs associated with purchasing and implementing EHR systems. While HHS is working to address this challenge through various efforts, including a program that helps fund health information exchange organizations--organizations that provide support to facilitate the electronic exchange of health information--some providers told GAO they do not participate in these organizations because they see limited opportunities for exchanging information through them. HHS, including CMS and ONC, developed and issued a strategy document in August 2013 that describes how it expects to advance electronic health information exchange. The strategy identifies principles intended to guide future actions to address the key challenges that providers and stakeholders have identified. However, the HHS strategy does not specify any such actions, how any actions should be prioritized, what milestones the actions need to achieve, or when these milestones need to be accomplished. GAO's prior work, consistent with the Government Performance and Results Act Modernization Act of 2010 (GPRAMA), sets forth several key elements of strategies that can guide agencies in planning and implementing an effective government program. As noted in GAO's prior work, elements such as specific actions, priorities, and milestones are desirable for evaluating progress, achieving results in specified time frames, and ensuring effective oversight and accountability. Determining specific actions and exchange-related milestones with specified time frames can help to ensure that the agencies' principles and future actions result in timely improvements in addressing the key challenges reported by providers and stakeholders; this is particularly important because planning for Stage 3 of the EHR programs, which focuses on improving outcomes, is expected to begin as soon as 2014. This information could also help CMS and ONC prioritize their future actions based on whether health information is being exchanged effectively among providers, in order to better achieve the EHR programs' ultimate goals of improving quality, efficiency, and patient safety. GAO recommends that CMS and ONC (1) develop and prioritize specific actions that HHS will take consistent with the principles in HHS's strategy to advance health information exchange, and (2) develop milestones with time frames for the actions to better gauge progress toward advancing exchange, with appropriate adjustments over time. In commenting on the draft report, HHS, including CMS and ONC, concurred with these recommendations.

VA manages access to services in relation to available resources through a priority system established by law. The order of priorities is generally based on service-connected disability, income, or other special status, such as having been a prisoner of war. Additionally, Congress has stipulated that certain combat veterans discharged from active duty on or after January 2003 are eligible for priority enrollment. VA provides mental health care--for conditions such as PTSD, depression, and substance abuse disorders--in a variety of facilities, including medical centers, community-based outpatient clinics, and rehabilitation treatment programs. These facilities may include both specialty mental health care settings and other settings. Specialty mental health settings, including mental health clinics, primarily provide mental health services. Other settings may provide mental health services but focus primarily on other types of care, such as primary care. VA also provides counseling services that focus on mental health issues through its Vet Centers, a nationwide system of community-based centers that VA established separately from other facilities. The counseling services provided by Vet Centers differ from the mental health services provided by other VA facilities in that they focus on counseling to assist combat veterans in readjusting from wartime military service to civilian life but do not diagnose veterans' mental health conditions. Veterans needing more acute care--for example, veterans with multiple mental health conditions, such as severe PTSD and depression, or those who pose a risk of harm to themselves or others--are often referred to VA medical centers for diagnosis and treatment. VA groups veterans by dates--or era--of their military service based on provisions in federal law. (See table 1.) VA estimates that as of September 30, 2011, there were approximately 22.2 million living veterans. OEF/OIF veterans represented approximately 12 percent (2.6 million) of that total. Over the 5-year period from fiscal years 2006 through 2010, about 2.1 million unique veterans received mental health care from VA. Each year the number of veterans receiving care increased--from about 900,000 in fiscal year 2006 to about 1.2 million in fiscal year 2010. (See fig. 1.) VA provided this mental health care to veterans in both specialty mental health care and other settings, such as primary care clinics staffed with mental health providers. (See app. II for information on the number of veterans receiving mental health care in specialty mental health care and other settings.) Although the number of veterans receiving mental health care from VA increased for both OEF/OIF veterans and veterans of other eras of service, as shown in figure 1, OEF/OIF veterans accounted for an increasing proportion of the veterans receiving care. Specifically, the proportion of OEF/OIF veterans receiving mental health care from VA out of the total number of veterans receiving mental health care increased from 4 percent in fiscal year 2006 to 12 percent in fiscal year 2010. Nonetheless, veterans from earlier eras, such as Vietnam, accounted for approximately 90 percent of the 2.1 million veterans receiving care at VA over the 5-year period from fiscal years 2006 through 2010, although the proportion decreased from 96 percent in fiscal year 2006 to 88 percent in fiscal year 2010. VA officials indicated that the increasing proportion of OEF/OIF veterans receiving mental health care is not unexpected because of the nature of OEF/OIF veterans' military service--veterans of this era typically had intense and frequent deployments. In addition, according to VA officials, VA has made changes in its mental health screening protocols that may have resulted in more mental health conditions being diagnosed among veterans entering the VA system. For example, VA requires veterans treated in primary care settings to be screened for mental health conditions such as PTSD, depression, substance abuse disorders, as well as a history of military sexual trauma. Additionally, the 2.1 million veterans receiving mental health care from VA accounted for almost a third of the 7.2 million total unique veterans receiving any type of health care from VA over the 5-year period from fiscal years 2006 through 2010. Specifically, 38 percent of all OEF/OIF veterans and 28 percent of all other veterans receiving any health care during this time period received mental health care. (See fig. 2.) The five most common diagnostic categories for veterans receiving mental health care from VA in fiscal year 2010 were adjustment reaction, depressive disorder, episodic mood disorder, neurotic disorder, and substance abuse disorder. (See table 2.) Within each diagnostic category, there are specific mental health diagnoses; for example, PTSD is one of the diagnoses within the adjustment reaction category. Although veterans of all eras had similar diagnoses, the likelihood of experiencing diagnoses in any one category varied by era. Specifically, almost twice as many OEF/OIF veterans had diagnoses within the adjustment reaction category compared to the next most common diagnostic category--depressive disorder. In comparison, for veterans of all other eras, depressive disorder was the most common diagnostic category, but it was closely followed by adjustment reaction. According to VA officials, the higher relative incidence of adjustment reaction (including PTSD) among OEF/OIF veterans may be due to many factors, including the length and frequency of their deployments and a better understanding of how to identify and diagnose PTSD among mental health care providers. The key barriers we identified from the literature that may hinder veterans from accessing mental health care from VA, which were corroborated through interviews with VA and VSO officials, are stigma, lack of understanding or awareness of mental health care, logistical challenges to accessing mental health care, and concerns about VA's care. (See table 3 for a description of each of these key barriers.) For example, stigma--negative personal or societal beliefs about mental health conditions or mental health care--may discourage veterans from accessing care. According to VA and VSO officials we spoke with, some veterans may have concerns that if colleagues or employers find out they are receiving mental health care, their careers will be negatively affected. Many of these barriers are not necessarily unique to veterans accessing mental health care from VA, but may affect anyone accessing mental health care from any provider. According to the Substance Abuse and Mental Health Services Administration's 2008 National Survey on Drug Use and Health, approximately 5 million adults who reported an unmet need for mental health care reported similar barriers. In particular, survey participants cited the following as barriers: a belief that the problem could be handled without care, not knowing where to go for care, and not having the time to go for care. Additionally, according to the literature we reviewed and VA and VSO officials we interviewed, some of these key barriers may affect veterans from different demographic groups differently. For example, veterans may be affected by barriers differently based on age, gender, Reservist or National Guard status, or rural location. Age: OEF/OIF veterans, who are generally younger than other veterans, may have concerns about VA's health care system because they perceive that primarily older veterans, such as those who served in Vietnam, go to VA for care. Additionally, some younger veterans may have multiple personal priorities--such as family, school, or work commitments--that make accessing care a lower priority. Older veterans may have different reasons for not accessing mental health care. For example, stigma and beliefs about mental health care may hinder veterans who served in World War II and Korea from accessing care because they grew up during a time when mental health conditions generally were not recognized and accepted. According to a national survey of veterans, as of March 2010, more than 60 percent of all veterans were 55 years of age or older. Gender: Female veterans may perceive some barriers to accessing mental health care differently than male veterans. For example, some female veterans may not identify themselves as veterans if they did not serve in combat and, as a result, may not access care from VA. In addition, female veterans may have concerns about VA's health care system because they perceive that the care is male oriented, and therefore, VA is not a place where they feel comfortable receiving mental health care. Female veterans are a growing demographic in the veteran population--from fiscal year 2010 to fiscal year 2020, the percentage of female veterans in the total veteran population is projected to increase from approximately 8 percent to approximately 10 percent, according to VA's National Center for Veterans Analysis and Statistics. (See app. III for data on the gender of veterans receiving care from VA.) Reservist or National Guard status: Reservists and National Guard members may be particularly hindered by privacy and confidentiality concerns because they worry that accessing mental health care might have a negative impact on their military or civilian careers. For example, Reservists and National Guard members may not access mental health care because of concerns about military leaders obtaining access to their VA health records and these leaders treating them differently or limiting their career development because they accessed mental health care. As of November 2010, Reservists and National Guard members made up nearly 50 percent of the OEF/OIF veteran population, according to VA data. Rural location: Veterans who live in rural locations may be particularly hindered by access challenges because of the distance they may have to travel to obtain mental health care. According to the Office of Rural Health, veterans in rural areas are less likely to access mental health services than veterans in urban areas in part because they must travel greater distances to receive care and have more limited public transportation options. According to VA's Office of Rural Health, as of fiscal year 2010, veterans living in rural areas made up 41 percent of the veterans enrolled in VA's health care system. VA has expanded options to increase veterans' access to mental health care and implemented education efforts to help connect veterans with care, according to VA officials. VA has begun integrating mental health care into its primary care settings. Specifically, VA now requires its primary care clinics to conduct mental health screenings and has placed mental health care providers in primary care settings. For example, VA requires veterans treated in primary care settings to be screened for PTSD, depression, substance abuse disorders, and history of military sexual trauma. Further, in 2008, VA began requiring primary care clinics that serve more than 1,500 veterans annually to have mental health providers available on-site, able to serve veterans. Historically, veterans were more limited in the ways they could access VA's mental health services. For example, some veterans could receive mental health care only if they went to specialty VA mental health facilities, such as mental health clinics. According to VA, from fiscal years 2008 through 2010, the number of unique patients receiving mental health care in a primary care setting doubled. Several VA officials who work in primary care clinics that have integrated primary and mental health care told us that this integration is critical for lowering the stigma of receiving mental health care and for creating an environment of collaboration among providers for discussing veterans' needs and treatment options. VA also has continued to increase the number of its Vet Centers, which provide confidential and free counseling services to address mental health issues. From fiscal year 2008 to August 2011, VA increased the number of Vet Centers from 232 to 292 and, according to VA, plans to open another 8 before the end of 2011. VA also has expanded the availability of Vet Center services through the use of approximately 70 Mobile Vet Centers--specially equipped vehicles that help bring Vet Center counseling services to more veterans, particularly those in rural areas. Vet Centers are often the first point of contact within VA for veterans and, according to VA and VSO officials, can help veterans overcome barriers to accessing mental health care. For example, many Vet Center counselors have firsthand combat experience, which, according to VA, helps them relate to veterans and reduce the stigma of mental health care that veterans may experience. Additionally, VA has expanded its use of call centers to help connect veterans with counseling services. VA call centers are telephone-based systems through which veterans can access free, confidential counseling services. VA officials said that the call centers are an effective way to reach veterans because discussions with call center staff, many of whom are also veterans, may help callers assess whether they could benefit from mental health care. One call center VA operates, the Veterans Crisis Line, allows veterans and their families to call to receive multiple services, including suicide prevention services, 24 hours a day, 7 days a week. According to VA officials, since the Veterans Crisis Line became operational in 2007, it has received more than 400,000 calls and referred approximately 55,000 veterans to local VA suicide prevention coordinators for same-day or next-day services. In addition to the Veterans Crisis Line, VA officials told us that VA has call centers focused on specific populations, such as combat veterans, homeless veterans, and family members of veterans. Moreover, VA has increased its mental health staff from about 14,000 in fiscal year 2006 to more than 21,000 in fiscal year 2011, according to VA. VA also has expanded the availability of telemental health services, which allow veterans to access mental health care providers remotely through VA medical centers, community-based outpatient clinics, and Mobile Vet Centers. Without telemental health, according to VA, some veterans in rural areas would have to drive as much as 5 hours to the nearest mental health provider, potentially decreasing their access to mental health care. To increase the availability of mental health appointments, as of 2007, VA required its mental health clinics to begin providing "after hours" treatment times, such as early morning, evening, or Saturday morning treatment times, to better accommodate veterans' schedules, including weekday school or work schedules. Additionally, as of 2007, VA has required that all veterans with mental health referrals be contacted within 24 hours to assess their needs; for nonemergency situations, VA requires that veterans receive follow-up care within 14 days of their referral. To help connect veterans with mental health care, VA has implemented various efforts to educate veterans, veterans' families, health care providers, and other community stakeholders about mental health conditions and care. VA's efforts to help connect veterans with mental health care include collaborations with the Department of Defense, redesigned websites, and other technology-based education tools. VA has collaborated with the Department of Defense to educate veterans and active duty servicemembers returning home from deployments about VA benefits, including mental health care, through activities such as Yellow Ribbon Program events and postdeployment health reassessments. According to VA officials, VA has redesigned some of its key mental health websites--including its websites for the Office of Mental Health Services and the National Center for PTSD--to raise awareness of and provide convenient access to some of VA's mental health services, such as its call centers and resources for locating mental health providers. VA also has developed interactive technology-based tools to help educate veterans about how to recognize the symptoms of mental health conditions and connect with VA mental health care, including web-based self-help applications, mobile phone applications, and social media sites, such as Twitter and Facebook. In addition, VA has developed tailored efforts to educate specific groups of veterans, such as Native American veterans and veterans with serious mental illness. (See table 4 for examples of VA efforts to educate specific groups of veterans.) VA also has efforts to educate veterans' families about what veterans may be experiencing and how to recognize the possible need for mental health care, according to VA officials. For example, VA has a guide for family members posted on its websites that describes common reactions to being in war, warning signs that a veteran or servicemember might need outside help, and where to go for help. According to VA and VSO officials, veterans' families are often the first to notice that the veteran is having mental health problems and may be more successful in encouraging the veteran to seek care. Additionally, VA has trainings to teach its primary care physicians how to screen veterans for mental health conditions and have discussions with veterans about what to expect during mental health care. VA also has trainings for its providers covering topics such as the assessment and treatment of PTSD or military sexual trauma. According to VA, these types of trainings are important because primary care physicians are often a first point of contact for veterans who might benefit from VA mental health care. Additionally, the trainings help educate mental health care providers about evidence-based mental health practices, including issues regarding gender differences and cultural competencies. For example, according to VA, its National Center for PTSD offers web-based training intended to enhance VA staff sensitivity to, and knowledge of, specific health care needs affecting women veterans. VA also has developed efforts to educate other community stakeholders, including law enforcement personnel, chaplains, and employers, about veterans' mental health conditions and VA mental health care. For example, VA has a program that helps law enforcement personnel identify veterans with mental health conditions and connect these veterans to appropriate mental health treatment options. The literature shows that some veterans' mental health conditions have been found to increase their likelihood of entering or reentering the criminal justice system. VA also has developed a series of training conferences for chaplains and clergy to educate them to recognize the symptoms of PTSD and other service-related mental health conditions and to refer veterans to VA for care. According to VA, training chaplains and clergy to recognize the symptoms of mental health conditions is important because they are often a first point of contact for veterans in need of assistance. To support employers who may interact with veterans who have mental health conditions, VA has developed a set of online resources, including information on postdeployment mental health issues and information on mental health care available through VA. We provided a draft of this report to VA for comment. In its response, which is reprinted in appendix IV, VA provided technical comments, which we have incorporated as appropriate. We are sending a copy of this report to the appropriate congressional committees and the Secretary of Veterans Affairs. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix V. To determine how many veterans received mental health care from the Department of Veterans Affairs (VA) from fiscal years 2006 through 2010, we obtained data from VA's Northeast Program Evaluation Center (NEPEC). NEPEC used VA's administrative data files, which include inpatient and outpatient files, to generate counts of the number of veterans who received mental health care. For the purposes of this report, we defined mental health care as the care provided to veterans with mental health conditions. A veteran was counted as having a mental health condition if, at any point in the fiscal year, his or her medical record indicated at least two outpatient encounters with any mental health diagnosis (with at least one encounter having a primary mental health diagnosis) or an inpatient stay in which the veteran had any mental health diagnosis. Additionally, the number of veterans represents a unique count of veterans; veterans were counted only once, even if they received care multiple times during a fiscal year or across the 5-year period. NEPEC also used VA administrative data files to provide us with data on the total number of veterans receiving any health care at VA--not just veterans receiving mental health care. The number of veterans includes former active duty servicemembers, including Reservists and National Guard members. NEPEC's data on the number of veterans receiving mental health care included breakouts by specific demographic groups, such as era of service; by the type of setting where care was provided; and by the mental health diagnostic category. For the era of service data, NEPEC identified two groups of veterans: (1) veterans serving in the Operations Enduring Freedom (OEF) and Iraqi Freedom (OIF) era and (2) veterans from all other eras--including peacetime. Because OEF/OIF veterans are not tracked separately from Persian Gulf War veterans in VA's administrative data files, NEPEC used Department of Defense data to identify OEF/OIF veterans from the total population of veterans in the VA data. The non-OEF/OIF veterans in the VA data comprised the veterans from all other eras. Veterans who served in more than one era of service were assigned based on their most recent era of service. NEPEC also provided data on the settings where care was provided--that is, specialty mental health care settings that primarily provided mental health services or other settings that may have provided some mental health services but focus primarily on other types of care, such as primary care. Furthermore, NEPEC provided data on the top five mental health diagnostic categories. The most common diagnostic categories were determined based on the number of veterans with diagnoses included in the diagnostic category, not the number of visits associated with the diagnoses. To assess the reliability of the data NEPEC provided us, we discussed with NEPEC officials their methodology and data collection techniques used for obtaining and using the data, the data checks that NEPEC performed, as well as any limitations officials identified in the data. In addition, we did our own review of NEPEC's programming and methodological approaches using data file documentation, code book and file dictionaries, and programming logs NEPEC officials provided. We determined that the data were sufficiently reliable for our purposes. The data on veterans receiving care from VA are not necessarily representative of the entire veteran population because some veterans receive care outside of VA. To identify the key barriers that may hinder veterans from accessing mental health care from VA, we searched research databases, such as MEDLINE and PsycINFO, that included peer-reviewed journals to capture relevant literature published on or between January 1, 2006, and March 3, 2011. We searched these databases for articles with key words in their titles or subject terms related to veterans, mental health, and barriers. In addition, we also reviewed relevant literature that was cited in articles from our original search or recommended to us during the course of our research. To corroborate the barriers identified in the literature, we interviewed officials from (1) several VA offices--the Office of Mental Health Services, the Office of Mental Health Operations, the Office of Rural Health, the Office of Research and Development, and Readjustment Counseling Services; (2) several mental health-focused VA research centers--the Mental Illness Research, Education and Clinical Center, the Serious Mental Illness Treatment Resource and Evaluation Center, the Center for Chronic Disease Outcomes Research, and the National Center for PTSD; (3) several VA mental health and primary care providers; and (4) a judgmental sample of veterans service organizations (VSO). We defined "key barriers" as those that the majority of VA and VSO officials we interviewed said could have the greatest impact on veterans. As a result, we do not report an exhaustive list of all possible barriers that veterans may face. To identify the efforts VA has implemented to increase veterans' access to VA mental health care, we interviewed officials from the same VA offices and mental health-focused VA research centers that we interviewed to corroborate the barriers for veterans. We also reviewed supporting VA documentation, such as program descriptions, policy directives, and congressional budget justifications. We compiled a list of efforts by focusing on the efforts that had been implemented and were national in scope. As a result, the list of efforts we report is not an exhaustive list of all VA efforts. In addition, we did not assess the extent to which VA has fully implemented these efforts or their effectiveness, including the extent to which the efforts eliminate or diminish barriers that may hinder veterans from accessing mental health care. We conducted our work from November 2010 to October 2011 in accordance with all sections of GAO's Quality Assurance Framework that are relevant to our objectives. The framework requires that we plan and perform the engagement to obtain sufficient and appropriate evidence to meet our stated objectives and to discuss any limitations in our work. We believe that the information and data obtained, and the analysis conducted, provide a reasonable basis for any findings and conclusions. In addition to the contact named above, Janina Austin, Assistant Director; Jennie F. Apter; Eleanor M. Cambridge; Kathleen Diamond; Lisa Motley; Monica Perez-Nelson; Karin Wallestad; and Suzanne Worth made key contributions to this report.

In fiscal year 2010, the Department of Veterans Affairs (VA) provided health care to about 5.2 million veterans. Recent legislation has increased many Operations Enduring Freedom (OEF) and Iraqi Freedom (OIF) veterans' priority for accessing VA's health care, and concerns have been raised about the extent to which VA is providing mental health care to eligible veterans of all eras. There also are concerns that barriers may hinder some veterans from accessing needed mental health care. GAO was asked to provide information on veterans who receive mental health care from VA. In this report, GAO provides information on (1) how many veterans received mental health care from VA from fiscal years 2006 through 2010, (2) key barriers that may hinder veterans from accessing mental health care from VA, and (3) VA efforts to increase veterans' access to VA mental health care. GAO obtained data from VA's Northeast Program Evaluation Center (NEPEC) on the number of veterans who received mental health care from VA. The number of veterans represents a unique count of veterans; veterans were counted only once, even if they received care multiple times during a fiscal year or across the 5-year period. GAO also reviewed literature published from 2006 to 2011, reviewed VA documents, and interviewed officials from VA and veterans service organizations (VSO). Over the 5-year period from fiscal years 2006 through 2010, about 2.1 million unique veterans received mental health care from VA. Each year the number of veterans receiving mental health care increased, from about 900,000 in fiscal year 2006 to about 1.2 million in fiscal year 2010. OEF/OIF veterans accounted for an increasing proportion of veterans receiving care during this period. The key barriers identified from the literature that may hinder veterans from accessing mental health care from VA, which were corroborated through interviews, are stigma, lack of understanding or awareness of mental health care, logistical challenges to accessing mental health care, and concerns about VA's care, such as concerns that VA's services are primarily for older veterans. Many of these barriers are not necessarily unique to veterans accessing mental health care from VA, but may affect anyone accessing mental health care from any provider. Veterans may be affected by barriers differently based on demographic factors, such as age and gender. For example, younger OEF/OIF veterans and female veterans may perceive that VA's services are primarily for someone else, such as older veterans or male veterans. VA has implemented several efforts to increase veterans' access to mental health care, including integrating mental health care into primary care. VA also has implemented efforts to educate veterans, their families, health care providers, and other community stakeholders about mental health conditions and VA's mental health care. According to VA officials, these efforts help get veterans into care by reducing, and in some cases eliminating, the barriers that may hinder them from accessing care. GAO provided a draft of this report to VA for comment. In its response, VA provided technical comments, which were incorporated as appropriate.

In performing our evaluation of the accuracy and completeness of DOD's reported inventory of financial management systems, we reviewed DOD guidance related to classifying its systems as financial, mixed financial, and nonfinancial; determined whether systems categorized as nonfinancial contained information needed to produce DOD financial statements and other financial reports; compared DOD's financial management systems inventory to other DOD systems inventories to determine whether categories of systems not included in financial management systems inventories and reports were properly categorized as nonfinancial (however, we did not test the accuracy of these inventories); interviewed appropriate DOD, OMB, and DFAS staff to obtain information regarding the categorizing and reporting of financial management systems; reviewed federal financial management system guidance and applicable laws, the Joint Financial Management Improvement Program's (JFMIP) Framework for Federal Financial Management Systems, and OMB Circulars A-123, A-127, and A-130; and reviewed military service audits to identify systems used to prepare financial statements. We performed our work from December 1995 to November 1996 in the Washington, D.C., area in accordance with generally accepted government auditing standards. We requested agency comments from the Secretary of Defense or his designee. The Deputy Chief Financial Officer provided us with written comments that are discussed in the "Agency Comments and Our Evaluation" section of this report and reprinted in appendix II. Legislative and other requirements to which DOD is subject recognize the significance of developing a complete financial management systems inventory. The intent of these requirements, as indicated in the policy statement found in section 6 of OMB Circular A-127, is to ensure that financial management systems provide complete, reliable, and timely information to enable government entities to carry out their fiduciary responsibilities; deter fraud, waste, and abuse; and facilitate efficient and effective delivery of programs through relating financial consequences to program performance. Further details on federal financial management systems requirements can be found in appendix I. The Chief Financial Officers (CFO) Act of 1990 gives agency CFOs the responsibility for developing and maintaining integrated accounting and financial management systems. In addition, the act requires that the agency CFO provide policy guidance and oversight of agency financial management personnel, activities, and operations, including the implementation of agency asset management systems such as those for property and inventory management. OMB implementing guidance states that the CFO is to approve the design for information systems that provide, at least in part, financial and/or program performance data used in financial statements, solely to ensure that CFO needs are met. In addition, CFOs are required to prepare and annually revise agency plans to implement OMB's 5-year financial management plan for the federal government. Agency 5-year plans are to include information such as the agency's strategy for developing and integrating agency accounting, financial information, and other financial management systems. A recent congressional initiative in this area is the Federal Financial Management Improvement Act of 1996, which provides a legislative mandate to implement and maintain financial management systems that substantially comply with federal financial management systems requirements, applicable federal accounting standards, and the U.S. Standard General Ledger. The legislative history of the act expressly refers to JFMIP requirements and OMB Circular A-127 as sources of the financial management systems requirements. If the head of an agency determines that the agency's financial management systems do not comply with the requirements of the act, a remediation plan must be established that includes resources, remedies, and intermediate target dates necessary to bring the agency's financial management systems into substantial compliance. The act defines financial management systems to include the financial systems and the financial portions of mixed systems necessary to support financial management, including automated and manual processes, procedures, controls, data, hardware, software, and support personnel dedicated to the operation and maintenance of system functions. A mixed system is defined as an information system that supports both financial and nonfinancial functions of the federal government or its components. Additional key financial management systems requirements include the following. JFMIP's Framework for Federal Financial Management Systems provides a model for the development of an integrated financial management system. Circular A-127 requires that executive agencies develop and maintain an agencywide inventory of financial management systems and ensure that appropriate assessments of these systems are conducted. Circular A-127 applies to financial management systems, which include financial and mixed systems. The circular also requires that agencies establish and maintain a single, integrated financial management system. According to the circular, a single, integrated financial management system refers to a unified set of financial systems and the financial portions of mixed systems encompassing the software, hardware, personnel, processes (manual and automated), procedures, controls, and data necessary to carry out financial management functions, manage financial operations of the agency, and report on the agency's financial status to central agencies, the Congress, and the public. The Paperwork Reduction Act establishes a broad mandate for agencies to perform their information resources management activities in an efficient, effective, and economical manner. Consistent with the act, Circular A-130 states that the head of each agency shall maintain an inventory of the agency's major information systems. OMB requires that executive agencies, under section 4 of the Federal Managers' Financial Integrity Act (FMFIA), produce an annual statement on whether their financial management systems conform with governmentwide principles, standards, and requirements. DFAS maintains a DOD inventory of financial systems in the Systems Inventory Data Base (SID). Using SID, DOD reported 249 systems in its fiscal year 1995 annual financial management systems inventory to OMB. However, this does not include many systems that DOD relies on to produce financial management information and reports. A complete inventory is a critical step in DOD's efforts to correct its long-standing financial systems deficiencies and develop a reliable, integrated financial management system. These deficiencies have been a major factor contributing to DOD's inability to fulfill its stewardship responsibilities for its resources, including maintaining control over specific assets, such as shipboard supplies and weapons systems, and over its expenditures, such as payroll and contract payments. In addition, the DOD Inspector General (IG) recently reported that (1) the overarching deficiency that prevented auditors from rendering audit opinions on fiscal year 1995 DOD general fund financial statements was the lack of adequate accounting systems and (2) disclaimers of opinion can most likely be expected until the next century. The number of reported systems has been limited because both DOD regulations and DFAS guidance did not properly define financial management systems, as required. Although we did not identify all of the systems that should have been included, several of the excluded systems account for billions of dollars of DOD assets and are clearly mixed systems that meet the OMB and JFMIP definition of financial management systems. DOD Financial Management Regulation (DOD 7000.14-R, Volume 1) does not include all mixed systems in its definition of financial management systems, as required. Instead, the regulation states that "feeder systems ... are the initial record of financial data for processing by accounting systems" are not within the scope of financial management systems reporting. The regulation provides the following specific examples of feeder systems: (1) logistics and inventory systems that provide acquisition cost, location, and quantity information, (2) personnel systems that provide grade and entitlements information, and (3) timekeeping systems that provide attendance and leave information. DFAS repeats DOD's limited definition of financial management systems in its annual guidance to Defense components for conducting financial management systems reviews. The feeder systems generally excluded by DOD are typical of systems used to track financial events and are specifically mentioned in the JFMIP Framework document as critical to an integrated financial management system. An integrated system under general ledger control is necessary to provide oversight and control to ensure accurate and complete accounting for DOD's resources. To be truly effective, DOD's integrated financial management system must link program delivery to the systems that process and track financial events. This linkage is crucial to support the information needs of management, central agencies, and the Congress. Integrated systems help to provide the overall discipline needed to ensure the accuracy and completeness of the information that is used to support DOD's stewardship responsibilities for the vast resources entrusted to it. Audit reports have disclosed numerous problems resulting from the lack of an integrated financial management system that directly affect the military services' ability to achieve mission objectives. For example, in our review of the Department of the Navy's inventory management, we reported that Navy's item managers could not keep track of the $5.7 billion in operating materials and supplies on board ships and at 17 redistribution sites. The Atlantic and Pacific Fleets and other Navy components are pursuing separate, nonintegrated systems projects in an attempt to improve visibility and thus management of their operating materials and supplies. In another example, at the end of fiscal year 1995, DOD reported that it had inventory valued at almost $70 billion, and we estimate that about half of the inventory includes items that are not needed to support DOD war reserves or current operating requirements. Since 1990, GAO has designated DOD inventory management a high-risk area, with billions of dollars being wasted on excess supplies. The lack of integrated financial management systems and the lack of accurate reliable data to support the quantity, condition, and value of items have been major contributing factors to DOD's inability to account for and control its inventory. In addition, we previously reported that thousands of soldiers on Army's payroll could not be matched with Army personnel records, and Army had no assurance that these individuals should have been paid. In fact, we found that DFAS paid $6.1 million to 2,279 soldiers who should not have been paid. In response to our recommendation that steps be taken to integrate its payroll and personnel systems, DOD stated that neither the DOD CFO nor the DFAS Director alone had sufficient authority to ensure that specific steps were taken toward the integration or interface of payroll and personnel systems. Since financial transactions are initiated in systems such as acquisition, logistics, and personnel, the DOD Comptroller is a stakeholder in them and has oversight responsibilities in accordance with the CFO Act. Furthermore, these systems are covered under the newly enacted Federal Financial Management Improvement Act of 1996. We believe that the Senior Financial Management Oversight Council could appropriately address issues dealing with systems that have multiple stakeholders that cross departmental boundaries. We compared DOD's inventory of financial management systems to the systems inventories contained in the Defense Information Systems Agency's (DISA) Defense Integration Support Tools (DIST) database. As of April 1996, DIST contained 8,624 information systems which were segregated by category. DIST labeled 931 of the systems as financial, 682 more than the 249 systems included in the DOD inventory. While DOD officials have indicated that the DIST listing may be incomplete or systems may be incorrectly identified as supporting financial management, the large discrepancy indicates that additional financial management systems likely exist. Most acquisition, personnel, property, and time and attendance systems were not included in the DIST financial systems category. For example, the DIST database did not identify as financial systems the Defense Civilian Personnel Data System, used for civilian personnel management, or the Civil Engineering Material Acquisition System, an inventory management system. These systems were also excluded from the DOD inventory. We performed a limited search on the entire DIST database for the key words acquisition, personnel, property, and time and attendance and identified 282 systems that contained one or more of these words in their system name and therefore appeared to meet the OMB and JFMIP definitions of financial management systems; however, only 43 of those systems were classified in the DIST as financial and only 6 were reported in the DOD financial management systems inventory. Several systems that were not included in DOD's inventory provide critical information for use in formulating the financial statements of the military services. These systems clearly meet the OMB and JFMIP definition for financial management systems. For example, DOD's list of 249 financial management systems did not include the following key systems, which account for billions of dollars of DOD assets and were identified in recent financial statement audit reports or other financial reporting. Continuing Balance System - Expanded (CBSX). Army uses CBSX to report the year-end value of retail equipment on hand and in transit for active Army and Army Reserve activities. In its fiscal year 1995 financial statements, Army reported about $82.6 billion of equipment on hand and about $500 million of assets in transit. Reliability and Maintainability Information System (REMIS). REMIS is an Air Force system designed to track inventory, status, and utilization of aircraft, as well as compute their value. For fiscal year 1995, Air Force used REMIS to report on over 9,450 aircraft and 4,500 guided and ballistic missiles valued at $144.6 billion. Support Equipment Resources Management Information System (SERMIS). This system is Navy's automated source of information on naval aviation support equipment assets currently in use. SERMIS maintains financial and management information on support equipment valued at $5.3 billion in fiscal year 1995. Standard Installation/Division Personnel System (SIDPERS). SIDPERS is the personnel system operated by Army installation and field commanders for active duty personnel. This system is used to report data to the Total Army Personnel Data Base which in turn reports five pay events to DFAS for about 493,000 personnel. Army plans to fully implement a version of SIDPERS within the next 2 years which will interface directly with DFAS and account for 88 pay events. Despite their importance to the payroll process, neither SIDPERS nor the Total Army Personnel Data Base have been identified as financial management systems. A comprehensive inventory of the financial management systems used to record, accumulate, classify, and report DOD's financial management information is a critical step if DOD is to (1) effectively manage its existing systems, (2) prioritize and coordinate efforts to correct its long-standing financial systems deficiencies, and (3) develop a reliable, integrated financial management system. DOD's severe systems deficiencies have been a major factor contributing to its inability to meet its stewardship responsibilities for the vast resources entrusted to it. Finally, until a complete inventory of financial management systems is developed, DOD will not be able to fulfill the requirements of the financial management improvement initiatives enacted by the Congress. As part of DOD's long-term systems improvement strategy, we recommend that you direct that the Under Secretary of Defense (Comptroller) revise the Department of Defense Financial Management Regulation, DOD 7000.14-R, Volume 1, to include all mixed systems in its definition of financial management systems; the Senior Financial Management Oversight Council oversee the development of an inventory of all financial management systems, using the revised definition; and systems identified be incorporated in the DOD Chief Financial Officer Financial Management 5-Year Plan, DFAS Chief Financial Officer Financial Management 5-Year Plan, and FMFIA section 4 reporting. In written comments on a draft of this report, DOD's Deputy Chief Financial Officer stated that DOD concurred or partially concurred with all of our recommendations. In response to our first recommendation that DOD revise its financial management regulations to include all mixed systems in its definition of financial management systems, DOD stated that it will use the definition provided in OMB Circular A-127 as a base for the revised definition. DOD further stated that it will also include other relevant statutory and regulatory requirements in the revised definition. We want to reiterate our position that the OMB requirements be fully implemented. Since 1984, OMB's Circular A-127 and all subsequent guidance have included a definition of financial management systems that includes personnel, property, procurement, and inventory. These are the types of systems that DOD has specifically excluded from its reporting. The most recent guidance, issued by OMB in 1993, classifies these types of systems as mixed systems. Also, the recently enacted Federal Financial Management Improvement Act of 1996 uses the same definitions for financial management systems and mixed systems as OMB Circular A-127. We provided OMB officials with a copy of our draft report, and they concurred with the representations of OMB Circular A-127 requirements included in our report. DOD partially concurred with our recommendation that the DOD Senior Financial Management Oversight Council oversee the development of the financial management systems inventory. DOD agreed that oversight was necessary but stated that the Council was not the appropriate body. Rather, DOD indicated that this responsibility will remain with the Chief Financial Officer and DFAS, with assistance from the DOD components. In light of the serious deficiencies in DOD's financial management, DOD must address its financial management systems problems immediately. In our view, timely resolution of this issue can only be accomplished with the involvement of top-level management throughout the affected components of DOD, such as those responsible for logistics, acquisition, and personnel. We continue to believe that the Council's oversight, together with participation of the CFO and DFAS, is necessary to ensure that the inventory is completed as soon as possible. We support DOD's efforts to review the DIST database to determine if any of the systems should be included. For this effort to succeed, DOD must adopt a definition of financial management systems that is consistent with OMB Circular A-127 and the Federal Financial Management Improvement Act. In response to our recommendation that the financial management systems identified be incorporated in the DOD Chief Financial Officer Financial Management 5-Year Plan, DFAS Chief Financial Officer Financial Management 5-Year Plan, and FMFIA section 4 reporting, DOD stated that it has and will continue to report on its financial systems. However, until DOD changes its definition of financial management systems in acccordance with OMB guidance and the provisions of the Federal Financial Management Improvement Act, its reporting will continue to be incomplete. DOD needs to identify all of the systems it relies on to manage its vast resources as a critical step in its efforts to develop reliable financial management systems and resolve its long-standing financial management problems. Although DOD generally concurred with the report's recommendations, DOD stated that some of the issues addressed in the report were significantly inaccurate. Specifically, DOD took issue with the report in its treatment of three areas. First, DOD asserted that its System Inventory Database provides a comprehensive inventory of financial management systems. Our report recognizes that DOD has an inventory maintained in the Systems Inventory Database. However, our report points out that DOD's inventory is not a comprehensive inventory of all DOD financial management systems. The report states that the number of reported systems has been limited because both DOD regulations and DFAS guidance did not properly define financial management systems. Most personnel, property, procurement, and inventory systems have been excluded from DOD's reporting. Our report includes examples of systems not included in DOD's inventory that account for billions of dollars of DOD assets. These systems meet OMB's definition of a mixed system and must be included in a comprehensive inventory if DOD is to develop a reliable, integrated financial management system. Second, DOD stated that DIST is not a database that is used for baselining financial systems and that the database does not contain a process or procedure for classifying or certifying systems as financial systems. As stated in the report, although the DIST listing may be incomplete or systems may be incorrectly identified as supporting financial management, the large disparity between the number of systems identified in DIST and SID indicates that additional financial management systems likely exist. Third, DOD stated that it is complying with the provisions of OMB Circular A-127. Our report recognizes that DOD has an established process intended to meet OMB requirements. However, because DOD has not adopted the OMB definition for financial management systems, its inventory and reporting have not been comprehensive. We are sending copies of this report to the Chairmen and Ranking Minority Members of the Senate Committee on Armed Services, the House Committee on National Security, the Senate Committee on Governmental Affairs, the House Committee on Government Reform and Oversight, and the Director of the Office of Management and Budget. We are also sending copies to the Secretary of Defense and the Under Secretary of Defense (Comptroller). Copies will also be made available to others upon request. Please contact me at (202) 512-9095 if you have any questions on this report. Major contributors to this report are listed in appendix III. The following are the specific requirements for financial management systems to which DOD, as an executive agency, is subject. The CFO Act specifies that the responsibilities of an agency CFO are to include developing and maintaining integrated accounting and financial directing, managing, and providing policy guidance and oversight of all agency financial management personnel, activities, and operations; and approving and managing financial management systems design and enhancement projects. On February 27, 1991, OMB issued guidance (M-91-07) for preparing organization plans required by the CFO Act. The guidance details the authorities, functions, and responsibilities that a CFO is to have to comply with the act. Specifically, the guidance states that the organization plans should provide the CFO with authority to manage directly and/or monitor, evaluate, and approve the design, budget, development, implementation, operation, and enhancement of agencywide and agency component accounting, financial, and asset management systems; to clear the design for other information systems that provide, at least in part, financial and/or program performance data used in financial statements, solely to ensure that CFO needs are met; to ensure that program information systems provide financial and programmatic data (including program performance measures) on a reliable, consistent, and timely basis to agency financial management systems; and to evaluate, where appropriate, the installation and operation of such systems. In addition, the CFO Act requires OMB to prepare annually and submit to the Congress a governmentwide 5-year financial management plan that describes planned OMB and agency activities for the next 5 fiscal years to improve the financial management of the federal government. Further, the act requires agency CFOs to prepare and annually revise agency plans to implement OMB's 5-year plan. Each 5-year plan is to include information such as the following: a description of the existing financial management structure and any changes needed to establish an integrated financial management system; a strategy for developing and integrating individual agency accounting, financial information, and other financial management systems; and proposals to eliminate duplicate and other unnecessary systems and projects to bring existing systems into compliance with applicable standards and requirements. DOD is subject to section 4 of FMFIA; OMB requires executive agencies under section 4 to produce an annual statement on whether its financial management systems conform with governmentwide principles, standards, and requirements. Governmentwide systems requirements, developed by OMB in consultation with the Comptroller General, are presented in section 7 of OMB Circular A-127, "Financial Management Systems Requirements." Circular A-127 requires that executive agencies, including DOD, develop and maintain an agencywide inventory of financial management systems and ensure that appropriate assessments are conducted of these systems. In addition, DOD must consider the results of its FMFIA reviews when it develops its financial management systems plans. Requirements for reporting the results of FMFIA section 4 systems assessments are found in OMB Circular A-123, "Management Accountability and Control." Executive agencies, including DOD, must produce an annual statement on whether the agency's financial management systems conform with governmentwide requirements found in Circular A-127. If the agency does not conform with these requirements, the statement must discuss the agency's plans for bringing its systems into compliance. If the agency head judges any financial management systems weakness to be material, the issue must be included in the annual FMFIA report. The FMFIA report is to be transmitted to the President, the President of the Senate, the Speaker of the House of Representatives, the Director of OMB, and key congressional committees and subcommittees. Circular A-127 applies to financial management systems, which include financial and mixed systems. In determining which systems are subject to these requirements, the Circular categorizes and defines information systems in the following manner. A financial system (1) collects, processes, maintains, transmits, and reports data about financial events, (2) supports financial planning or budgeting activities, (3) accumulates and reports cost information, or (4) supports the preparation of financial statements. A mixed system supports both financial and nonfinancial functions. A nonfinancial system supports nonfinancial functions and any financial data included in the system are insignificant to agency financial management and/or not required for the preparation of financial statements. Circular A-127 also requires that DOD establish and maintain a single, integrated financial management system. According to the Circular, a single, integrated financial management system refers to a unified set of financial systems and the financial portions of mixed systems encompassing the software, hardware, personnel, processes (manual and automated), procedures, controls, and data necessary to carry out financial management functions, manage financial operations of the agency, and report on the agency's financial status to central agencies, the Congress, and the public. Unified means that the systems are planned for and managed together, operated in an integrated fashion, and linked together electronically to provide the agencywide financial system support necessary to carry out the agency's mission and support the agency's financial management needs. In addition, Circular A-130 provides governmentwide information resources management policies as required by the Paperwork Reduction Act of 1980, as amended. The Paperwork Reduction Act establishes a broad mandate for agencies to perform their information resources management activities in an efficient, effective, and economical manner. Consistent with the act, Circular A-130 states that the head of each agency shall maintain an inventory of the agency's major information systems. Developing and maintaining a complete inventory of DOD's information resources is essential to implementing a strategic information resources management process, as required by the Paperwork Reduction Act and the recently enacted Clinger-Cohen Act of 1996. The Clinger-Cohen Act calls for agency heads, under the supervision of OMB's Director, to design and implement a process for maximizing the value and assessing and managing the risks of their information technology acquisitions, including establishing minimum criteria on whether to undertake an investment in information systems. This process is to be integrated with the processes for making budget, financial, and program management decisions with the agency. In addition, the act states that the head of each executive agency, in consultation with the Chief Information Officer and the Chief Financial Officer, is responsible for establishing policies and procedures that ensure that the accounting, financial, and asset management systems and other information systems of the agency are designed, developed, maintained, and used effectively to provide financial or program performance data for financial statements. JFMIP's Framework for Federal Financial Management Systems provides a model for the development of an integrated financial management system. This document points out the importance of financial management systems in the overall effort to improve government. "These systems should not only support the basic accounting functions for accurately recording and reporting financial transactions but must also be the vehicle for integrated budget, financial, and performance information that managers use to make decisions on their programs....Without meaningful financial information and supporting systems, neither the President, the Congress, nor the program managers can effectively carry out their stewardship responsibilities." According to the Framework, an integrated system includes, among others, the following financial management system types: a core financial system that supports general ledger management, funds management, payment management, receipt management, and cost management; a personnel/payroll system; an inventory system; a property management system; an acquisition system; a budget formulation system; and a managerial cost accounting system. To function as a single, integrated system, the types of systems listed above must have these physical characteristics: common data elements, common transaction processing, consistent internal controls, and efficient transaction entry. The following are GAO's comments on the Department of Defense's letter dated January 24, 1997. 1. See the "Agency Comments and Our Evaluation" section of this report. 2. In a follow-up discussion on DOD's statement that the additional 682 DIST systems have failed to satisfactorily complete the required process and qualify as legitimate financial management systems, DOD officials stated that these systems have not yet undergone the required process. As stated in DOD's response to our second recommendation, DOD plans to review the DIST database to determine if any of these systems should be included in its SID. 3. In a January 10, 1997, discussion on a draft of this report, DOD officials stated that the Department defines a mixed system as an integrated system that performs both financial and program functions. For example, they told us that the Marine Corps Total Force System meets DOD's definition because it is an integrated payroll and personnel system that shares the same database for both functions. In our discussions, DOD officials indicated that a personnel system that provided data to a separate payroll system with which it was not physically integrated would not meet its definition of a mixed system and therefore would be excluded from its inventory of financial management systems. However, neither Circular A-127 nor the Federal Financial Management Reform Act uses integration as a criterion in its definition of financial management systems. Lynn Filla Clark, Senior Evaluator Neal Gottlieb, Senior Evaluator Stewart Seman, Senior Evaluator Lenny Moore, Evaluator The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. 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Pursuant to a legislative requirement, GAO reviewed the Department of Defense's (DOD) financial management systems, focusing on the accuracy and completeness of DOD's inventory of financial management systems. GAO found that: (1) DOD does not have a comprehensive inventory of the systems it relies on to record, accumulate, classify, and report financial information; (2) the number of systems included in DOD's inventory was limited because the regulations and guidance from the Defense Finance and Accounting Service (DFAS) did not properly define financial management systems; (3) Office of Management and Budget Circular A-127, Joint Financial Management Improvement Program system requirements, and the recently enacted Federal Financial Management Improvement Act of 1996 define financial management systems to include the financial systems and the financial portions of mixed systems necessary to support financial management; (4) a mixed system is defined as an information system that supports both financial and nonfinancial functions of the federal government or its components; (5) DOD considers mixed systems that are generally not within the Chief Financial Officer (Comptroller) organization, such as acquisition, logistics, and personnel systems, to be nonfinancial and, therefore, does not include them in its inventory; and (6) although GAO did not identify all of the systems that should have been included, several of the excluded systems account for billions of dollars of assets and clearly meet the required definition of financial management systems.

VA pays monthly disability compensation benefits to veterans with service-connected disabilities (injuries or diseases incurred or aggravated while on active military duty) according to the severity of the disability. VA also pays compensation to some spouses, children, and parents of deceased veterans and service members. VA's pension program pays monthly benefits based on financial need to certain wartime veterans or their survivors. When a veteran submits a claim to any of the Veterans Benefits Administration's 57 regional offices, a veterans service representative is responsible for obtaining the relevant evidence to evaluate the claim. Such evidence includes veterans' military service records, medical examinations, and treatment records from VA medical facilities and private medical service providers. Once a claim has all the necessary evidence, a rating specialist evaluates the claim and determines whether the claimant is eligible for benefits. If the veteran is eligible for disability compensation, the rating specialist assigns a percentage rating based on degree of disability. A veteran who disagrees with the regional office's decision can appeal to VA's Board of Veterans' Appeals and then to U.S. federal courts. If the Board finds that a case needs additional work such as obtaining additional evidence or contains procedural errors, it is sent back to the Veterans Benefits Administration, which is responsible for initial decisions on disability claims. In November 2003, the Congress established the Veterans' Disability Benefits Commission to study the appropriateness of VA disability benefits, including disability criteria and benefit levels. The commission is scheduled to report to the Congress by October 1, 2007. VA continues to experience significant service delivery challenges including lengthy processing times and inaccurate and inconsistent decisions. While VA made progress in fiscal years 2002 and 2003 reducing the size and age of its pending claims inventory, it has lost ground since then. This is due in part to increased filing of claims, including those filed by veterans of the Iraq and Afghanistan conflicts. Moreover, questions remain about consistency of VA's decisions across regional offices and at the Board of Veterans' Appeals. VA's inventory of pending claims and their average time pending have increased significantly in the last 3 years. The number of pending claims increased by almost one-half from the end of fiscal year 2003 to the end of fiscal year 2006, from about 254,000 to about 378,000. During the same period, the number of claims pending longer than 6 months increased by more than three-fourths, from about 47,000 to about 83,000 (see fig.1). Similarly, as shown in figure 2, VA reduced the average age of its pending claims from 182 days at the end of fiscal year 2001 to 111 days at the end of fiscal year 2003. However, by the end of fiscal year 2006 average days pending had increased to 127 days. Meanwhile, the time required to resolve appeals remains too long. The average time to resolve an appeal rose from 529 days in fiscal year 2004 to 657 days in fiscal year 2006. The increase in VA's inventory of pending claims, and their average time pending is due in part to an increase in claims receipts. Rating-related claims, including those filed by veterans of the Iraq and Afghanistan conflicts, increased steadily from about 579,000 in fiscal year 2000 to about 806,000 in fiscal year 2006, an increase of about 39 percent. In addition to problems with deciding claims in a timely manner, VA acknowledges that regional office decision accuracy needs further improvement. VA reports that it has improved the accuracy of decisions on rating related compensation claims from 80 percent in fiscal year 2002 to 88 percent in fiscal year 2006. However, this figure remains well short of its strategic goal of 98 percent. VA also continues to face questions about its ability to ensure that veterans receive consistent decisions across regional offices. We have identified the need for VA to systematically address this issue to achieve acceptable levels of variation. VA's Inspector General has studied one indicator of possible inconsistency, the wide variations in average payments per veteran from state to state. In May 2005, the Inspector General reported that compensation payments are affected by many factors and that some disabilities are inherently more susceptible to variations in rating determinations. Further, we reported in May 2005 that the Board of Veterans' Appeals had taken actions to strengthen its system for reviewing the quality of its decisions, but VA still lacked a systematic method for ensuring the consistency of decision making within VA as a whole. VA has recently taken several steps to improve service delivery, but their potential to lead to significant improvements may be limited by several factors. These steps include requesting funding for additional staff, initiatives to reduce appeal remands, and initiatives to assess and monitor decision consistency. However, limitations on potential improvements include increases in claims volume and complexity, and challenges in acquiring needed evidence in a timely manner. In its fiscal year 2008 budget justification, VA identified an increase in claims processing staff as essential to reducing the pending claims inventory and improving timeliness. According to VA, with a workforce that is sufficiently large and correctly balanced, it can successfully meet the veterans' needs while ensuring good stewardship of taxpayer funds. The fiscal year 2008 request would fund 8,320 full-time equivalent employees working on compensation and pension, which would represent an increase of about 6 percent over fiscal year 2006. In addition, the budget justification cites near-term initiatives to increase the number of claims completed, such as using retired VA employees to provide training, and the increased use of overtime. Even as staffing levels increase, however, VA acknowledges that it still must take other actions to improve productivity. VA's budget justification provides information on actual and planned productivity, in terms of claims decided per full-time equivalent employee. While VA expects a temporary decline in productivity as new staff are trained and become more experienced, it expects productivity to increase in the longer term. Also, VA has identified additional initiatives to help improve productivity. For example, VA plans to pilot paperless Benefits Delivery at Discharge, where service members' disability claim applications, service medical records, and other evidence would be captured electronically prior to discharge. VA expects that this new process will reduce the time needed to obtain the evidence needed to decide claims. To resolve appeals faster, VA has been working to reduce the number of appeals sent back by the Board of Veterans' Appeals for further work such as obtaining additional evidence and correcting procedural errors. To do so, VA has established joint training and information sharing between field staff and the Board. VA reports that it has reduced the percentage of decisions remanded from about 57 percent in fiscal year 2004 to about 32 percent in fiscal year 2006, and expects its efforts to lead to further reductions. Also, VA reports that it has improved the productivity of the Board's judges from an average of 604 appeals decided in fiscal year 2003 to 698 in fiscal year 2006. The Board attributes this improvement to training and mentoring programs and expects productivity to improve to 752 decisions in fiscal year 2008. To improve decision consistency, VA has contracted for a study of the major influences on compensation payments, to develop baseline data for monitoring and managing decision variances. Also, VA is in the process of testing templates for compensation and pension medical examinations for specific types of disabilities to ensure that medical evidence from these examinations will enable consistent evaluations of disabilities. Further, VA formed a workgroup to study variances in the rates of benefit grants and denials, and in assigned disability evaluations, leading to development of plans to monitor consistency on an ongoing basis. Despite these efforts, VA may be limited in its ability to make and sustain significant claims processing performance improvements. Recent history has shown that VA's claims processing workload and performance are affected by several factors, including the impacts of laws and court decisions, increasing numbers and complexity of claims, and difficulties in obtaining accurate and timely information to adjudicate claims. Since 1999, several court decisions and laws related to VA's responsibilities to assist veterans in developing their benefit claims have significantly affected VA's ability to process claims in a timely manner. VA attributes some of the increase in the number of claims pending and the average days pending to a September 2003 court decision that required over 62,000 claims to be deferred, many for 90 days or longer. Also, VA notes that legislation and VA regulations have expanded benefit entitlement and added to the volume of claims. For example, in recent years, laws and regulations have created new presumptions of service-connected disabilities for many Vietnam veterans and former prisoners of war. Also, VA expects additional claims receipts based on the enactment of legislation allowing certain military retirees to receive both military retirement pay and VA disability compensation. In addition, rating-related claims continue to increase, from about 579,000 in fiscal year 2000 to about 806,000 in fiscal year 2006, an increase of about 39 percent. While VA projects relatively flat claim receipts in fiscal years 2007 and 2008, it cautions that ongoing hostilities in Iraq and Afghanistan, and the Global War on Terrorism in general, may increase the workload beyond current levels. VA has also noted that claims have increased in part because older veterans are filing disability claims for the first time. Moreover, according to VA, the complexity of claims is also increasing. For example, some veterans are citing more disabilities in their claims than in the past. Because each disability needs to be evaluated separately, these claims can take longer to complete. Additionally, VA notes that they are receiving more disability claims, such as those related to mental health issues including post-traumatic stress disorder, which are generally harder to evaluate. Additionally, claims processing timeliness and decisional accuracy can be hampered if VA cannot obtain the evidence it needs in a timely manner. For example, to obtain information needed to fully develop some post- traumatic stress disorder claims, VBA must obtain records from the U.S. Army and Joint Services Records Research Center (JSRRC), whose average response time to VBA regional office requests is about 1 year. This can significantly increase the time it takes to decide a claim. In December 2006, we recommended that VBA assess whether it could systematically utilize an electronic library of historical military records rather than submitting all research requests to the JSRRC. VBA agreed to determine the feasibility of regional offices using an alternative resource prior to sending some requests to the JSRRC. We also reported that while VBA quality reviewers found few decision errors due to failure to obtain military service records, VBA does not know the extent to which the information that is provided to regional offices is reliable and accurate. Regional offices rely on a VBA unit at the National Personnel Records Center, where service records of many veterans are stored, to do thorough and reliable searches and analyses of records and provide accurate reports on the results. However, we noted that VBA does not systematically evaluate the quality of these searches and analyses. Incomplete and inaccurate reports could affect decisional accuracy. While VA is taking actions to address its claims processing challenges, there are opportunities for more fundamental reform that could dramatically improve decision making and processing. These include reexamining program design, as well as the structure and division of labor among field offices. After more than a decade of research, we have determined that federal disability programs are in urgent need of attention and transformation and placed modernizing federal disability programs on our high-risk list in January 2003. Specifically, our research showed that the disability programs administered by VA and the Social Security Administration lagged behind the scientific advances and economic and social changes that have redefined the relationship between impairments and work. For example, advances in medicine and technology have reduced the severity of some medical conditions and have allowed individuals to live with greater independence and function in work settings. Moreover, the nature of work has changed in recent decades as the national economy has moved away from manufacturing-based jobs to service- and knowledge- based employment. Yet VA's and SSA's disability programs remain mired in concepts from the past--particularly the concept that impairment equates to an inability to work--and as such, we found that these programs are poorly positioned to provide meaningful and timely support for Americans with disabilities. In August 2002, we recommended that VA use its annual performance plan to delineate strategies for and progress in periodically updating labor market data used in its disability determination process. We also recommended that VA study and report to the Congress on the effects that a comprehensive consideration of medical treatment and assistive technologies would have on its disability programs' eligibility criteria and benefits package. This study would include estimates of the effects on the size, cost, and management of VA's disability programs and other relevant VA programs and would identify any legislative actions needed to initiate and fund such changes. Another area of program design that could be examined is the option of providing a lump sum payment in lieu of monthly disability compensation. In 1996, the Veterans' Claims Adjudication Commission noted that most disability compensation claims are repeat claims--such as claims for increased disability percentage--and most repeat claims were from veterans with less severe disabilities. According to VA, about 65 percent of veterans who began receiving disability compensation in fiscal year 2003 had disabilities rated 30 percent or less. The commission questioned whether concentrating claims processing resources on these claims, rather than on claims by more severely disabled veterans, was consistent with program intent. The commission asked Congress to consider paying less severely disabled veterans compensation in a lump sum. According to the commission, the lump sum option could have a number of benefits for VA as well as veterans. Specifically, the lump sum option could reduce the number of claims submitted and allow VA to process claims more quickly--especially those of more seriously disabled veterans. Moreover, a lump sum option could be more useful to some veterans as they make the transition from military to civilian life. In December 2000, we reported that about one-third of newly compensated veterans could be interested in a lump sum option. In addition to program design, VA's regional office claims processing structure may be disadvantageous to efficient operations. VBA and others who have studied claims processing have suggested that consolidating claims processing into fewer regional offices could help improve claims processing efficiency, save overhead costs, and improve decisional accuracy and consistency. We noted in December 2005 that VA had made piecemeal changes to its claims processing field structure. VA consolidated some of its pension income and eligibility verifications at three regional offices. Further, VA consolidated decision making on Benefits Delivery at Discharge claims, which are generally original claims for disability compensation, at the Salt Lake City and Winston-Salem regional offices. However, VA has not changed its basic field structure for processing compensation and pension claims at 57 regional offices, which experience large performance variations and questions about decision consistency. Unless more comprehensive and strategic changes are made to its field structure, VBA is likely to miss opportunities to substantially improve productivity, accuracy, and consistency, especially in the face of future workload increases. We have recommended that the VA undertake a comprehensive review of its field structure for processing disability compensation and pension claims. While reexamining claims processing challenges may be daunting, there are mechanisms for undertaking such an effort, including the congressionally chartered commission currently studying veterans' disability benefits. In November 2003, the Congress established the Veterans' Disability Benefits Commission to study the appropriateness of VA disability benefits, including disability criteria and benefit levels. The commission is to examine and provide recommendations on (1) the appropriateness of the benefits, (2) the appropriateness of the benefit amounts, and (3) the appropriate standard or standards for determining whether a disability or death of a veteran should be compensated. The commission held its first public hearing in May 2005 and in October 2005, established 31 research questions for study. These questions address such issues as how well disability benefits meet the congressional intent of replacing average impairment in earnings capacity, whether lump sum payments should be made for certain disabilities or level of severity of disability, and how VA's claims processing operation compares to other disability programs, including the location and number of processing centers. These issues and others have been raised by previous studies of VBA's disability claims process. The commission is scheduled to report to the Congress by October 1, 2007. Mr. Chairman, this concludes my remarks. I would be happy to answer any questions that you or other members of the committee may have. For further information, please contact Daniel Bertoni at (202) 512-7215 or [email protected]. Also contributing to this statement were Shelia Drake, Martin Scire, Greg Whitney, and Charles Willson. High Risk Series: An Update. GAO-07-310. Washington, D.C.: January 31, 2007. Veterans' Disability Benefits: VA Can Improve Its Procedures for Obtaining Military Service Records. GAO-07-98. Washington, D.C.: December 12, 2006. Veterans' Benefits: Further Changes in VBA's Field Office Structure Could Help Improve Disability Claims Processing. GAO-06-149. Washington, D.C.: December 9, 2005. Veterans' Disability Benefits: Claims Processing Challenges and Opportunities for Improvements. GAO-06-283T. Washington, D.C.: December 7, 2005. Veterans' Disability Benefits: Improved Transparency Needed to Facilitate Oversight of VBA's Compensation and Pension Staffing Levels. GAO-06- 225T. Washington, D.C.: November 3, 2005. VA Benefits: Other Programs May Provide Lessons for Improving Individual Unemployability Assessments. GAO-06-207T. Washington, D.C.: October 27, 2005. Veterans' Disability Benefits: Claims Processing Problems Persist and Major Performance Improvements May Be Difficult. GAO-05-749T. Washington, DC.: May 26, 2005. VA Disability Benefits: Board of Veterans' Appeals Has Made Improvements in Quality Assurance, but Challenges Remain for VA in Assuring Consistency. GAO-05-655T. Washington, D.C.: May 5, 2005. Veterans Benefits: VA Needs Plan for Assessing Consistency of Decisions. GAO-05-99. Washington, D.C.: November 19, 2004. Veterans' Benefits: More Transparency Needed to Improve Oversight of VBA's Compensation and Pension Staffing Levels. GAO-05-47. Washington, D.C.: November 15, 2004. Veterans' Benefits: Improvements Needed in the Reporting and Use of Data on the Accuracy of Disability Claims Decisions. GAO-03-1045. Washington, D.C.: September 30, 2003. Department of Veterans Affairs: Key Management Challenges in Health and Disability Programs. GAO-03-756T. Washington, D.C.: May 8, 2003. Veterans Benefits Administration: Better Collection and Analysis of Attrition Data Needed to Enhance Workforce Planning. GAO-03-491. Washington, D.C.: April 28, 2003. Veterans' Benefits: Claims Processing Timeliness Performance Measures Could Be Improved. GAO-03-282. Washington, D.C.: December 19, 2002. Veterans' Benefits: Quality Assurance for Disability Claims and Appeals Processing Can Be Further Improved. GAO-02-806. Washington, D.C.: August 16, 2002. Veterans' Benefits: VBA's Efforts to Implement the Veterans Claims Assistance Act Need Further Monitoring. GAO-02-412. Washington, D.C.: July 1, 2002. Veterans' Benefits: Despite Recent Improvements, Meeting Claims Processing Goals Will Be Challenging. GAO-02-645T. Washington, D.C.: April 26, 2002. Veterans Benefits Administration: Problems and Challenges Facing Disability Claims Processing. GAO/T-HEHS/AIMD-00-146. Washington, D.C.: May 18, 2000. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The Senate Veterans' Affairs Committee asked GAO to discuss its recent work related to the Department of Veterans Affairs' (VA) disability claims and appeals processing. GAO has reported and testified on this subject on numerous occasions. GAO's work has addressed VA's efforts to improve the timeliness and accuracy of decisions on claims and appeals, VA's efforts to reduce backlogs, and concerns about decisional consistency. VA continues to face challenges in improving service delivery to veterans, specifically in speeding up the process of adjudication and appeal, reducing the existing backlog of claims, and improving the accuracy and consistency of decisions. For example, as of the end of fiscal year 2006, rating-related compensation claims were pending an average of 127 days, 16 days more than at the end of fiscal year 2003. During the same period, the inventory of rating-related claims grew by almost half, due in part to increased filing of claims, including those filed by veterans of the Iraq and Afghanistan conflicts. Meanwhile, appeals resolution remains a lengthy process, taking an average of 657 days in fiscal year 2006. Further, we and VA's Inspector General have identified concerns about the consistency of decisions by VA's regional offices and the Board of Veterans' Appeals (BVA). VA is taking steps to address these problems. For example, the President's fiscal year 2008 budget requests an increase of over 450 full-time equivalent employees to process compensation claims. VA is working to improve appeals timeliness by reducing appeals remanded for further work. VA is also developing a plan to monitor consistency across regional offices. However, several factors may limit VA's ability to make and sustain significant improvements in its claims processing performance, including the potential impacts of laws and court decisions, continued increases in the number and complexity of claims being filed, and difficulties in obtaining the evidence needed to decide claims in a timely and accurate manner, such as military service records. Opportunities for significant performance improvement may lie in more fundamental reform of VA's disability compensation program. This could include reexamining program design such as updating the disability criteria to reflect the current state of science, medicine, technology, and labor market conditions. It could also include examining the structure and division of labor among field offices.

Federal agencies, including DOD, are responsible for ensuring that they use appropriated funds only for purposes, and within the amounts, authorized by the Congress. DOD Directive 7200.1, May 4, 1995, states the policy that DOD organizations are to establish positive control of, and maintain adequate systems of accounting for, appropriations and other funds. The Directive also states that financial management systems are to provide a capability for DOD officials to be assured of the availability of funds before incurring an obligation or making a payment. To comply with legal and regulatory requirements, DOD organizations' accounting and fund control systems must be able to accurately record disbursements as expenditures of appropriations and as reductions of previously recorded obligations. Proper matching of disbursements with related obligations ensures that the agency has reliable information on the amount of funds available for obligation and expenditure. Problem disbursements occur when (1) the wrong appropriation account or customer is charged when a payment is made, (2) information on an obligation, payment, or collection transaction is inaccurately or incompletely processed, or (3) a contractor is paid too much. In October 1994, we reported that DOD's records included at least $24.8 billion of such problem disbursements as of June 30, 1994, and that long-standing systemic control weaknesses were keeping DOD from solving its disbursement process problems. We also pointed out that persistent management emphasis was essential to resolving the problem. Specifically, we recommended that DOD management undertake long-term efforts, such as correcting system weaknesses involving the contract payment and accounting systems, and pursue short-term efforts to improve the quality of information in its systems. These short-term actions could be as simple as complying with existing guidance and procedural requirements for (1) recording obligations prior to making contract payments, (2) detecting and correcting errors in the disbursement process, and (3) posting accurate and complete accounting information in systems that support the disbursement processes. We also previously reported that since we did not audit the $24.8 billion problem disbursement figure, DOD's total problem disbursements could be greater. Acting on our recommendations, DOD subsequently determined that its records contained at least $37.8 billion of problem disbursements as of June 30, 1994. As of January 31, 1996, DOD reported that it had reduced the $37.8 billion of problem disbursement balances to $25.4 billion. Also concerned about DOD's problem disbursements, the Congress passed section 8137 of Public Law 103-335, to improve accountability over DOD disbursements. The law directed the Secretary of Defense to require that each disbursement in excess of $5 million be matched to a particular obligation before the disbursement is made. This requirement had to be implemented by July 1, 1995. The legislation further required that the Secretary of Defense lower the dollar threshold for matching disbursements and obligations to $1 million no later than October 1, 1995. Subsequently, section 8102 of Public Law 104-61, the Department of Defense Appropriations Act, 1996, superseded the earlier legislation and eliminated the requirement that the threshold be lowered to $1 million. However, section 8102(d), like section 8137(e) of the earlier legislation, provided that the Secretary of Defense could establish a threshold lower than the statutory threshold. In addition, the legislation directed the Secretary to ensure that a disbursement in excess of the threshold amounts not be divided into multiple disbursements to avoid prematching requirements. It also required (1) DOD to develop and submit an implementation plan to the Congress and (2) the DOD Inspector General to review the plan and submit an independent assessment to the congressional defense committees. On February 28, 1995, DOD submitted its plan--which was a general overview plan describing processes and milestones for automating the prevalidation process and lowering the prevalidation threshold to $1 million--to the Congress, and the DOD IG provided the defense congressional committees with its independent assessment, which generally agreed with the plan and DOD's overall approach for implementation. Our objectives were to (1) assess DOD's progress in reducing problem disbursements and (2) review DOD's implementation of the requirement in section 8137 of Public Law 103-335 and section 8102 of Public Law 104-61 that DOD match disbursements over $5 million with obligations in the official accounting records prior to making payments. This review was a joint effort between the DOD IG and GAO. The DOD IG was generally responsible for completing the field work at Army and Navy activities and supporting locations while GAO was generally responsible for completing the field work at Air Force and Marine Corps activities and supporting locations. We combined our efforts to complete work at other DOD locations visited during the review. In conducting our review, we focused primarily on the DFAS Columbus Center because it is DOD's largest contract paying activity. For example, during fiscal year 1995, DOD paid contractors and vendors $160 billion. Of this amount, $61 billion, or 38 percent, was paid by DFAS Columbus. We conducted our review between June 1995 and April 1996 in accordance with generally accepted government auditing standards. Appendix I contains further details of our scope and methodology. We requested comments from the Secretary of Defense or his designee. On May 23, 1996, officials of the Office of the Secretary of Defense (Comptroller) and DFAS, who are responsible for DOD disbursements, provided us with oral comments. Their comments have been incorporated where appropriate and are discussed in the "Agency Comments" section. Using the June 1994 problem disbursement balance of $37.8 billion as a baseline, DOD began to report reductions in problem disbursement balances, reaching a low in September 1995 of $23.1 billion. Between September 1995 and January 1996, DOD's reported problem disbursement balances fluctuated between $23.1 billion and $26.1 billion as shown in table 1. According to the leader of the DOD team established to address problem disbursements, the problem disbursements have increased since September 1995 because the inflow of new problem balances continues to offset any gains made by correcting existing balances. As table 2 shows, the inflow of problem disbursements between October 1995 and January 1996 eclipsed the value of problem disbursements that were resolved by $2.3 billion. Although DOD did not have data readily available to show how much of the $21.8 billion of the new problem disbursements was caused by DFAS Columbus, DOD officials acknowledged that tens of thousands of transactions, totaling billions of dollars, were attributable to disbursements made by the Columbus Center. The team leader also told us that the inflow of new problem disbursements has not slowed down because the same long-standing weaknesses regarding system problems and failure to comply with basic accounting procedures, which we previously reported in 1994, generally still exist. For example, he stated that the lack of integrated accounting and disbursing systems was one of the primary causes of disbursement problems. The lack of integrated systems resulted in data entry errors because the same data had to be manually entered into two or more systems. The DOD IG also pointed out in an August 1995 report that Army and Air Force accounting personnel were not complying with accounting regulations and procedures for documenting, validating, reconciling, and reporting transactions that affect obligations. For example, the IG noted that (1) accounting personnel were arbitrarily posting payments to any available unliquidated contract obligation and (2) much of the disbursement information received from the DFAS Columbus Center was not accurate and did not include sufficient information to record payments. The IG noted that such failures to comply with accounting policies and procedures resulted in disbursement problems that, in turn, prevented auditors from rendering audit opinions, other than disclaimers, on the Army's and Air Force's financial statements. The DOD team leader also told us that DOD is starting to have difficulties in reducing the older problem disbursement balances already included in its accounting records. For example, between October 1995 and January 1996, DOD reports showed that problem disbursements over 180 days old had increased from $12.9 billion to $14.1 billion. According to the team leader, over time, DOD activities have selected the easier problem disbursement transactions for review. Consequently, the remaining older, unresolved problem disbursements balances represent some of the more difficult balances to reconcile. We are currently reviewing DOD problem disbursements to identify the specific root causes for problematic transactions. Fundamental accounting controls require that the proper funds available for a payment are identified before the payment is made. Prevalidating disbursements to obligations helps to ensure that this is done, but DOD has not followed this basic accounting procedure. To help ensure implementation of this control feature, the Congress has included in DOD's appropriation acts for the past 2 fiscal years a requirement that DOD prematch disbursements exceeding $5 million with obligations in the official accounting records. The prevalidation process has demonstrated that it is a useful tool to help identify and prevent errors from being recorded in the official accounting records. However, as discussed earlier, to prevent errors from occurring in the first place, DOD must address short-term and long-term efforts targeted at improving the quality of information in its systems. The cornerstone of DOD's long-term effort is its ongoing development of the Standard Procurement System (SPS) and the Defense Procurement Payment System (DPPS). However, DOD estimates that these systems will not be fully operational until at least the year 2001. In discussing this with DOD officials, they said that in the interim, DOD will concurrently pursue various short-term efforts to improve the quality of information on the amount of funds obligated and disbursed. For example, DOD officials stated that they are in the process of implementing automated interfaces between the contract writing, disbursing, and accounting systems to eliminate data errors generated during the manual entry of data. DOD officials stated that they plan to begin implementing the electronic exchange of data by the end of calendar year 1996. DOD had automated prevalidation to electronically process certain disbursement data between the DFAS Columbus Center's disbursing system, known as the Mechanization of Contract Administration Services (MOCAS), and eight DOD primary contract accounting systems. As of January 1996, 56 DOD locations were using the eight contract accounting systems to prevalidate disbursements with MOCAS. Consistent with the authority contained in section 8137(e) of Public Law 103-335 and section 8102(d) of Public Law 104-61, DOD required all activities, except the DFAS Columbus Center, to lower the prevalidation threshold from $5 million to $1 million, on October 1, 1995. The disbursement process starts when a contractor submits an invoice or other formal request for payment to a disbursing office. Prior to starting the prevalidation process, the disbursing office is required to determine if the contractor is entitled to the payment. To do this, the disbursing office must ensure that the (1) payments are made only for goods and services authorized by purchase orders, contracts, or other authorizing documents, (2) government received and accepted the goods and services, and (3) payment amounts are accurately computed. They are also responsible for ensuring that accounting data on payment supporting documents are complete and accurate. After determining that the contractor is (1) entitled to the payment and (2) the accounting data are complete and accurate, the disbursing office initiates action to prevalidate the payment by matching the disbursement with an obligation in the official accounting record. These procedures, as described below, are followed for both the automated and manual prevalidating of disbursements. For the automated process, information needed to prevalidate a disbursement is electronically sent from the disbursing system to the funding station's accounting system. For the manual process, information is exchanged through the use of telephones, fax machines, and mail. First, the disbursing activity provides the accountable station, or stations if the payment is for services or supplies related to two or more DOD activities, with data showing how much it plans to pay and how the payment is to be charged to the obligations in the accountable station(s) records. The accountable station compares this data with its obligations and sends back a notice to the disbursing activity either authorizing or rejecting the payment. If the payment is authorized, the accountable activity is to reserve an amount of unliquidated obligations to cover the amount of payment. After receiving authorization to make a payment, the disbursing activity will make the payment and notify the accountable station that the payment has been made. Several days later, the disbursing activity formally reports to the accountable station on the payment. This final report is currently not part of the automated process on prevalidating disbursements. Figures 1 and 2 illustrate the additional role played by the accounting station when disbursements are prevalidated. Our review disclosed that DOD generally had successfully implemented the automated prevalidation process. However, we and DOD's IG did find deficiencies in the DFAS automated programs used to prevalidate disbursements related to Army and Air Force funds that could result in material weaknesses which would undermine the intent of prevalidation if not promptly corrected. The most significant weakness was the lack of controls to ensure that Air Force and Army obligations could not be used to cover more than one payment. For example, the Air Force's Central Procurement Accounting System (CPAS) did not maintain the reservation of funds until the final payment data were received from MOCAS. As a result, the same obligation balances could be used to prevalidate more than one disbursement. Our review of about $66 million of over $1.4 billion problem disbursement balances at one DOD location that operated CPAS found a $3.4 million payment that had been prevalidated but could not be recorded in CPAS once the payment was made. Our analysis disclosed that another $107,000 payment had also been processed and recorded against the same $3.4 million of CPAS obligation balances. Because the $107,000 payment reduced the available obligation balance below the $3.4 million necessary to record the initial prevalidated payment, there were not sufficient obligations in the CPAS accounting system to cover the $3.4 million prevalidated payment. DFAS officials agreed with our analysis and were still reviewing the two payment transactions to determine causes of the problem and necessary corrective actions. We met with DFAS headquarters' officials to discuss the problems both we and the DOD IG found during our review of the automated programs. The officials agreed that these were serious problems and have taken actions or plan to take actions to correct the identified problems. For example, DFAS has approved a system change request to resolve the problems we identified with CPAS and told us that it should be corrected by June 1996. However, the DFAS officials could not tell us when this problem would be resolved for the Army. The DOD IG has made specific recommendations to address these problems in its report on the prevalidation program. Although section 8102 of DOD's Appropriations Act for Fiscal Year 1996 required DOD to prevalidate only disbursements in excess of $5 million, on October 1, 1995, DOD lowered the prevalidation threshold to $1 million at all activities except the DFAS Columbus Center. DFAS officials told us that the threshold was not lowered to $1 million at the DFAS Columbus Center because of concerns that the Columbus Center could not absorb the increase in the volume of payments that would have to be prevalidated at the $1 million level. For example, they estimated that the number of invoices they would have to prevalidate annually would increase from about 1,800 at the $5 million level to about 11,200 at the $1 million level. The $1 million threshold level would still only cover about 50 percent of the dollar value of payments at DFAS Columbus. According to the officials, since the DFAS Columbus Center administers some of the most complex contracts in DOD, it requires more time to process and prevalidate payments than it does at the other DOD activities which have much simpler contracts. DFAS officials told us that it is not uncommon for a voucher examiner at the DFAS Columbus Center to allocate a payment across 30 or 40 appropriation fund cites in order to record the payment. Conversely, other DOD activities generally only have to allocate a payment against one or two appropriation fund cites. Our analysis of about 1,400 disbursements prevalidated at the DFAS Columbus Center confirmed what the officials told us about the complexity of processing and prevalidating payments. We found hundreds of payments that were spread across multiple appropriation fund cites ranging from two to over 100 appropriation fund cites. For example, one $6 million payment had been spread across 107 appropriation fund cites, all of which had to be approved before payment could be made. However, since prevalidation at DFAS Columbus is made only for payments exceeding $5 million, large numbers of transactions, amounting to tens of billions of dollars, are excluded from this important accounting control. Our review of the DFAS Columbus Center's disbursement data between July 1, 1995, and January 31, 1996, disclosed that the Columbus Center made 521,262 disbursements totaling $37.1 billion. Of these, only 1,157 disbursements totaling $12.3 billion were prevalidated. This is less than one-fourth of one percent of the total payments and only about one-third of the total dollars. Our analysis of calendar year 1995 disbursement data disclosed that the DFAS Columbus Center paid about 1.2 million invoices totaling at least $55 billion. As shown in table 3, if DFAS Columbus had been prevalidating disbursements for the entire year, only about 1,800 payments totaling $15.1 billion would have been subject to prevalidation at the $5 million level. DFAS Columbus officials acknowledged that they were not prevalidating many payments by doing only those above the $5 million level and that errors were still occurring at levels below that threshold. The officials acknowledged that lowering the threshold would help prevent additional errors from being passed on to the accountable stations. Although, the DFAS Columbus Center had planned to lower the threshold to $4 million on February 26, 1996, the DOD Comptroller directed the Center not to lower the threshold. In discussing this matter with the DFAS Director, he informed us that DOD was in compliance with the prevalidation legislation and that DOD made a policy decision to keep the $5 million threshold at DFAS Columbus. He noted, however, that one factor considered when deciding not to lower the threshold was that DFAS Columbus was not currently meeting DOD's payment performance goals for progress payments and cost vouchers. For example, as of December 1995, DFAS Columbus reported that it was taking an average of 16 days to pay a progress payment and 15 days to pay a cost voucher. He said that when DFAS Columbus reduces the overall number of days it takes to pay progress payments and cost vouchers, DOD would consider lowering the threshold. However, he told us that DOD did not have a plan that specified the exact payment period the Columbus Center needed to reach before the prevalidation threshold could be lowered. In discussing a draft of this report with DOD officials, they agreed that they should begin reducing the threshold at the DFAS Columbus Center. They stated that they will start by reducing the threshold to $4 million but had not yet decided when this would take place. They also stated that they intend to develop a plan to continuously lower the threshold. Our review of the prevalidation process at DFAS Columbus showed that prevalidation did add time to the overall payment process. For example, we found that under the best of circumstances, when no errors or rejections occurred, prevalidation took about 3 days. Our analysis of 586 DFAS Columbus payments (progress and cost vouchers which were prevalidated as of March 1996) showed that, when errors and rejections are included, prevalidation took an average of 5 to 6 days overall. DOD could not provide comparable data, as of December 1995, for transactions before prevalidation for us to determine whether DOD was taking longer to pay an invoice as a result of prevalidation or if payment delays were due to problems other than those that occurred during the prevalidation process. However, DFAS Columbus reports on payments overall show that, between September 1995 and February 1996, it had reduced the payment period for progress payments from about 14 days to about 11 days and for cost vouchers from 17 to about 16 days. In addition, our analysis of DFAS Columbus payment data disclosed that as of May 1, 1996, there were only four invoices, totaling $46 million, ranging from about 30 days to 118 days old that had either been rejected or were awaiting further confirmation from the accounting station and lowering the threshold to $4 million would result in the prevalidation of only 557 more payments annually--or about two additional invoices a day--totaling $1.5 billion. Columbus officials told us that with the recent automation of the prevalidation process, they believe that they could now handle the workload at the $4 million threshold level. According to the officials, they had reassigned 25 people in February 1996 to work on the prevalidation program at the Columbus Center to assist with (1) managing the program, (2) reconciling, researching, tracking, and following up on rejected transactions, and (3) reporting to DFAS headquarters on program results. We agree that Columbus could handle the additional workload at the $4 million level. However, as previously shown in table 3, this would only increase the percentage of the dollar amount of disbursements that are prevalidated from 27 percent to 30 percent. The prevalidation program allowed DOD to identify errors and prevent problem disbursements from being recorded in DOD's official accounting records. However, unless the $5 million threshold is lowered at DFAS Columbus, and the $1 million threshold is lowered at the other payment centers, tens of billions of dollars in transactions will continue to bypass this important control. Until a detailed plan is developed to ensure that all payments are properly prevalidated before taxpayer funds are disbursed, the full benefits of prevalidation will not be realized. More importantly, even at its best, prevalidation will not solve Defense's disbursement problems as evidenced by $21.8 billion of new problem disbursements that surfaced between October 1995 and January 1996. Because prevalidation is an effort to impose quality near the end of the disbursement process, it does not address the root problems inherent in poor systems and processes as well as failure to follow fundamental internal controls. DOD's problems with accounting for and reporting on disbursements will not be resolved until (1) weaknesses in control procedures that allow problem disbursements to occur are corrected and (2) improvements are made to DOD's contract pay, disbursing, and accounting processes and systems. Prevalidating all disbursements is important, especially in the short term, to protect the integrity of DOD's disbursement process while long-term improvements are made to DOD's contract pay, disbursing, and accounting processes and systems. Accordingly, we recommend that the Secretary of Defense direct the DOD Comptroller to develop a plan to meet this target. As a first step, the Comptroller should reduce the threshold at the DFAS Columbus Center to $4 million and continuously lower the threshold in accordance with the plan. We also recommend that the Secretary of Defense direct the Comptroller to develop similar plans for prevalidating all disbursements at all the other DOD disbursing activities. These plans should incorporate the DOD IG's recommendations. Further, we recommend that the Secretary of Defense direct the Comptroller to ensure that existing accounting policies and procedures are followed in recording obligations, detecting and correcting errors, and posting complete and accurate accounting information in systems supporting the disbursement process. On May 23, 1996, we discussed a draft of this report with officials of the Secretary of Defense (Comptroller) and DFAS who are responsible for DOD disbursements and have incorporated their views where appropriate. In general, these officials agreed with the report's findings, conclusions, and recommendations. Regarding the recommendations, they stated that DOD plans to reduce the threshold at the DFAS Columbus Center to $4 million and that they intend to develop a plan to continuously lower the threshold at both the Columbus Center and other DOD disbursing activities. We are sending copies of this report to the Ranking Minority Members of the Subcommittee on National Security, House Committee on Appropriations, and the Subcommittee on Government, Management, Information and Technology, House Committee on Government Reform and Oversight; the Chairman of the Senate Committee on Governmental Affairs; the Secretary of Defense; the Director of the Office of Management and Budget, and other interested parties. We will make copies available to others upon request. Please contact me at (202) 512-6240 if you or your staff have any questions concerning this report. Major contributors to this report are listed in appendix I. Our objectives were to (1) assess DOD's progress in reducing problem disbursements and (2) review DOD's implementation of the requirements in section 8137 of Public Law 103-335 and section 8102 of Public Law 104-61, for DOD to match disbursements over $5 million with obligations in the official accounting records prior to making payments. This review was a joint effort between the DOD IG and GAO. The DOD IG was generally responsible for completing the field work at Army and Navy activities and supporting locations while GAO was generally responsible for completing the field work at Air Force and Marine Corps activities and supporting locations. Discussions related to Army and Navy prevalidation issues are based primarily on the DOD IG's work. To satisfy ourselves as to the sufficiency, relevance, and competence, of the IG's work at Army and Navy, we reviewed the IG's audit program, workpapers, and draft report. We also combined our efforts with the IG to complete work at other DOD locations visited during the review. To assess DOD's progress in resolving problem disbursements, we met with the DFAS officials responsible for managing problem disbursements to discuss and assess their various initiatives aimed at reducing problem disbursement balances. We (1) analyzed various DOD reports on problem disbursements to identify and document any changes in problem disbursement balances, (2) spoke with DFAS officials to identify systemic problems hindering DOD's ability to reduce problem disbursement balances, and (3) reviewed internal DOD audit reports and the Secretary of Defense's fiscal year 1995 Annual Statement of Assurance under the Federal Manager's Financial Integrity Act. To assess the DOD progress in addressing these weaknesses, we spoke with DFAS officials at DFAS centers and headquarters and reviewed various progress reports and other internal documents of disbursement problems and corrective actions taken or planned. The dollar values of disbursements discussed in this report were obtained from agency reports or compiled from agency records. We did not verify the accuracy of disbursement data included in agency reports or records because the data consisted of hundreds of thousands of disbursement transactions. Consequently, we cannot provide any assurance that the $25.4 billion of problem disbursements that had not been properly matched to obligations as of January 31, 1996, are correct. To determine if DOD's implementation of the prevalidation program complied with legislative requirements, we reviewed DOD's implementation plan and other DOD policies and procedures for implementing the program. We also visited various activities and observed their prevalidation processes. At these locations, we judgmentally selected large dollar transactions for detailed analysis. Our analysis included reviewing the official accounting records to determine if the payment had been properly validated and correctly posted to the accounting records. We met with responsible DFAS and military service officials to discuss and resolve identified discrepancies. Our work and that of the DOD IG was performed at the offices of the DOD Comptroller, Washington, D.C.; Assistant Secretary of the Army (Financial Management and Comptroller), Washington, D.C.; DFAS Headquarters, Arlington, Virginia, and the following DFAS Centers: DFAS Columbus, Columbus, Ohio; DFAS Cleveland, Cleveland, Ohio; DFAS Indianapolis, Indianapolis, Indiana; DFAS Kansas City, Kansas City, Missouri; and DFAS Denver, Denver, Colorado. We also performed work at the Air Force Materiel Command and DFAS Dayton Operating Location, Dayton, Ohio; DFAS Operating Location, Charleston, South Carolina; DFAS Operating Location, Norfolk, Virginia; DFAS Operating Location and Defense Megacenter, St. Louis, Missouri; Defense Accounting Office, U. S. Army Missile Command and Defense Megacenter, Huntsville, Alabama; Assistant Secretary of the Navy (Financial Management and Comptroller), Washington, D.C.; Navy Strategic Systems Program Office, Arlington, Virginia; Navy International Logistics Command, Philadelphia, Pennsylvania; Quantico Marine Base, Quantico, Virginia; and Camp Lejune Marine Base, Jacksonville, North Carolina. Larry W. Logsdon, Assistant Director Gregory E. Pugnetti, Assistant Director Roger Corrado, Senior Evaluator Cristina T. Chaplain, Communications Analyst The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. 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Pursuant to congressional requests, GAO reviewed, in conjunction with the Department of Defense's (DOD) Inspector General (IG), DOD efforts to reduce problem disbursements and its implementation of a statutory requirement to match each disbursement exceeding $5 million to the appropriate obligation before the disbursement is made. GAO found that: (1) DOD reduced its problem disbursements from $37.8 billion to $23.1 billion as of September 1995; (2) DOD disbursement problems persist due to long-standing system weaknesses and DOD failure to comply with basic accounting procedures for validating, reconciling, and reporting transactions; (3) DOD has automated the prevalidation process for the Defense Finance and Accounting Service's (DFAS) Columbus Center contract payment system and eight other primary contract accounting systems to handle their large volume of transactions; (4) there are deficiencies in the automated programs for prevalidating Army and Air Force disbursements; (5) DOD has lowered the prevalidation threshold to $1 million for all disbursement centers except DFAS-Columbus; (6) this limited implementation hampers DOD ability to resolve its disbursement problems, since DFAS-Columbus is responsible for about 40 percent of DOD contractor and vendor payments; (7) from July 1995 through January 1996, DFAS-Columbus prevalidated only about one-third of the total dollar amount of its disbursements; and (8) to resolve disbursement problems, DOD needs to prevalidate as many transactions as practical, further lower the prevalidation threshold, and follow basic accounting procedures until it has corrected serious weaknesses in its accounting and contracting systems.

We are all aware that certain key large-scale terrorist incidents at home and abroad since 1993 have dramatically raised the public profile of U.S. vulnerability to terrorist attack. The bombings of the World Trade Center in 1993 and of the federal building in Oklahoma City, Oklahoma, in 1995, along with terrorists' use of a nerve agent in the Tokyo subway in 1995, have elevated concerns about terrorism in the United States--particularly terrorists' use of chemical and biological weapons. Previously, the focus of U.S. policy and legislation had been more on international terrorism abroad and airline hijacking. The U.S. intelligence community, which includes the Central Intelligence Agency, the National Security Agency, the Federal Bureau of Investigation (FBI), and others, has issued classified National Intelligence Estimates and an update on the foreign-origin terrorist threat to the United States. In addition, the FBI gathers intelligence and assesses the threat posed by U.S. or domestic sources of terrorism. What is important to take away from these intelligence assessments is the very critical distinction made between what is conceivable or possible and what is likely in terms of the threat of terrorist attack. According to intelligence agencies, conventional explosives and firearms continue to be the weapons of choice for terrorists. Terrorists are less likely to use chemical and biological weapons than conventional explosives, although the likelihood that terrorists may use chemical and biological materials may increase over the next decade. Chemical and biological agents are less likely to be used than conventional explosives, at least partly because they are more difficult to weaponize and the results are unpredictable. According to the FBI, the threat of terrorists' use of chemical and biological weapons is low, but some groups and individuals of concern are beginning to show interest in such weapons. Agency officials also have noted that terrorists' use of nuclear weapons is the least likely scenario, although the consequences could be disastrous. The FBI will soon issue its report on domestic terrorist incidents and preventions for 1996. According to the FBI, in 1996, there were 3 terrorist incidents in the United States, as compared with 1 in 1995; zero in 1994; 12 in 1993; and 4 in 1992. The three incidents that occurred in 1996 involved pipe bombs, including the pipe bomb that exploded at the Atlanta Olympics. U.S. policy and strategy have evolved since the 1970s, along with the nature and perception of the terrorist threat. The basic principles of the policy continue, though, from the 1970s to today: make no concessions to terrorists, pressure state sponsors of terrorism, and apply the rule of law to terrorists as criminals. U.S. policy on terrorism first became formalized in 1986 with the Reagan administration's issuance of National Security Decision Directive 207. This policy resulted from the findings of the 1985 Vice President's Task Force on Terrorism, which highlighted the need for improved, centralized interagency coordination of the significant federal assets to respond to terrorist incidents. The directive reaffirmed lead agency responsibilities, with the State Department responsible for international terrorism policy, procedures, and programs, and the FBI, through the Department of Justice, responsible for dealing with domestic terrorist acts. Presidential Decision Directive (PDD) 39--issued in June 1995 following the bombing of the federal building in Oklahoma City--builds on the previous directive and contains three key elements of national strategy for combating terrorism: (1) reduce vulnerabilities to terrorist attacks and prevent and deter terrorist acts before they occur; (2) respond to terrorist acts that do occur--crisis management--and apprehend and punish terrorists; and (3) manage the consequences of terrorist acts, including restoring capabilities to protect public health and safety and essential government services and providing emergency relief. This directive also further elaborates on agencies' roles and responsibilities and some specific measures to be taken regarding each element of the strategy. Now a new PDD on combating terrorism is being drafted that could further refine and advance the policy. This draft directive, which is classified, reflects a recognition of the need for centralized interagency leadership in combating terrorism. Among other things, the draft policy tries to resolve jurisdictional issues between agencies and places new emphasis on managing the consequences of a terrorist incident and on the roles and responsibilities of the various agencies involved. Based on the reports and work we have performed to date, we would like to make three observations. First, in certain critical areas, just as the Vice President's Task Force on Terrorism noted in 1985, improvements are needed in interagency coordination and program focus. Since that time--and even since PDD-39 was issued in June 1995--the number of players involved in combating terrorism has increased substantially. In our September 1997 report, we noted that more than 40 federal agencies, bureaus, and offices were involved in combating terrorism. To illustrate the expansion of players since PDD-39, for example, Department of Agriculture representatives now attend counterterrorism crisis response exercise planning functions. Also, to implement the Nunn-Lugar-Domenici Domestic Preparedness Program, the U.S. Army's Director of Military Support has created a new office for the new mission to train U.S. cities' emergency response personnel to deal with terrorist incidents using chemical and biological WMD and plans to create another office to integrate another new player--the National Guard and Reserve--into the terrorism consequence management area. The National Guard and Reserve initially plan to establish 10 Rapid Assessment and Initial Detection (RAID), teams throughout the country. The U.S. Marine Corps has established the Chemical Biological Incident Response Force. Further, the Department of Energy has redesigned its long-standing Nuclear Emergency Search Team into various Joint Technical Operations Teams and other teams. At least one Department of Energy laboratory is offering consequence management services for chemical and biological as well as nuclear incidents. And the Public Health Service is in the process of establishing 25 Metropolitan Medical Strike Teams throughout the country in addition to 3 deployable "national asset" National Medical Response Teams and existing Disaster Medical Assistance Teams. There are many more examples of new players in the terrorism arena. Effectively coordinating all these various agencies', teams', and offices' requirements, programs, activities, and funding requests is clearly important. We are currently examining interagency coordination issues as part of our work for this Subcommittee and Congressman Skelton in counterterrorism operations, exercises, and special events and in the Nunn-Lugar-Domenici Domestic Preparedness Program. In doing our work, we have observed some indications of potential overlap in federal capabilities to deal with WMD, and we plan to further assess this issue for you and Congressman Skelton. In a second, related observation, more money is being spent to combat terrorism without any assurance of whether it is focused on the right programs or in the right amounts. Our December 1997 report showed that seven key federal agencies spent more than an estimated $6.5 billion in fiscal year 1997 on federal efforts to combat terrorism, excluding classified programs and activities. Some key agencies' spending on terrorism-related programs has increased dramatically. For example, between fiscal year 1995 and 1997, FBI terrorism-related funding and staff-level authorizations tripled, and Federal Aviation Administration spending to combat terrorism tripled. We also reported that key interagency management functions were not clearly required or performed. For example, neither the National Security Council nor the Office of Management and Budget (OMB) was required to regularly collect, aggregate, and review funding and spending data relative to combating terrorism on a crosscutting, governmentwide basis. Further, neither agency had established funding priorities for terrorism-related programs within or across agencies' individual budgets or ensured that individual agencies' stated requirements had been validated against threat and risk criteria before budget requests were submitted to the Congress. Because governmentwide priorities have not been established and funding requirements have not necessarily been validated based on an analytically sound assessment of the threat and risk of terrorist attack, there is no basis to have a reasonable assurance that funds are being spent on the right programs in the right amounts and that unnecessary program and funding duplication, overlap, misallocation, fragmentation, and gaps have not occurred. In part, as a result of our work, the National Defense Authorization Act for Fiscal Year 1998 (P.L. 105-85, Nov. 18, 1997) requires OMB to establish a reporting system for executive agencies on the budgeting and expenditure of funds for programs and activities to combat terrorism. OMB is also to collect the information and the President is to report the results to the Congress annually, including information on the programs and activities, priorities, and duplication of efforts in implementing the programs. OMB recently issued its first report to the Congress on enacted and requested terrorism-related funding for fiscal years 1998 and 1999, respectively. OMB reported that more than 17 agencies' classified and unclassified programs were authorized $6.5 billion for fiscal year 1998, and $6.7 billion was requested for fiscal year 1999. OMB's figures are lower than ours were for fiscal year 1997, but different definitions and interpretations of how to attribute terrorism-related spending in broader accounts could cause a difference of billions of dollars. What is important about the OMB effort is that it is a first step in the right direction toward improved management and coordination of this growing program area. But this crosscutting, or functional, view of U.S. investments in combating terrorism, by itself, does not tell the Congress or the executive branch whether or not the federal government is spending the right amounts in the right areas. Many challenges are ahead as we continue to see the need for (1) governmentwide priorities to be set; (2) agencies' programs, activities, and requirements to be analyzed in relation to those priorities; and (3) resources to be allocated based on the established priorities and assessments of the threat and risk of terrorist attack. As an example of my last point, if an agency spends $20 million without a risk assessment on a security system for terrorism purposes at a federal building, and the risk of an attack is extremely low, the agency may have misspent the $20 million, which could have been allocated to higher risk items. Additionally, we see opportunities in the future to apply Government Performance and Results Act of 1993 principles to the crosscutting programs and activities intended to combat terrorism. The act requires each executive branch agency to define its mission and desired outcomes, measure performance, and use performance information to ensure that programs meet intended goals. The act's emphasis on results implies that federal programs contributing to the same or similar outcomes should be closely coordinated to ensure that goals are consistent and program efforts are mutually reinforcing. In response to a separate requirement from the fiscal year 1998 Appropriations conference report (House Report 105-405), the Department of Justice is drafting a 5-year interdepartmental counterterrorism and technology crime plan. The plan, due to be completed by December 31, 1998, is to identify critical technologies for targeted research and development efforts and outline strategies for a number of terrorism-related issues. In developing the plan, Justice is to consult with the Departments of Defense, State, and the Treasury; the FBI; the Central Intelligence Agency; and academic, private sector, and state and local law enforcement experts. While Justice's efforts to develop an interagency counterterrorism and technology crime plan are commendable, this plan does not appear to have been integrated into the agencywide Government Performance and Results Act planning system. Justice's 1999 annual performance plan contains a section on reducing espionage and terrorism, and it does not mention the 5-year plan or how it plans to coordinate its counterterrorism activities with other agencies and assess inputs, outputs, and outcomes. Justice has recognized that it needs to continue to focus on developing and improving crosscutting goals and indicators. Our third observation is that there are different sets of views and an apparent lack of consensus on the threat of terrorism--particularly WMD terrorism. In our opinion, some fundamental questions should be answered before the federal government builds and expands programs, plans, and strategies to deal with the threat of WMD terrorism: How easy or difficult is it for terrorists (rather than state actors) to successfully use chemical or biological WMDs in an attack causing mass casualties? And if it is easy to produce and disperse chemical and biological agents, why have there been no WMD terrorist attacks before or since the Tokyo subway incident? What chemical and biological agents does the government really need to be concerned about? We have not yet seen a thorough assessment or analysis of these questions. It seems to us that, without such an assessment or analysis and consensus in the policy-making community, it would be very difficult--maybe impossible--to properly shape programs and focus resources. Statements in testimony before the Congress and in the open press by intelligence and scientific community officials on the issue of making and delivering a terrorist WMD sometimes contrast sharply. On the one hand, some statements suggest that developing a WMD can be relatively easy. For example, in 1996, the Central Intelligence Agency Director testified that chemical and biological weapons can be produced with relative ease in simple laboratories, and in 1997, the Central Intelligence Agency Director said that "delivery and dispersal techniques also are effective and relatively easy to develop." One article by former senior intelligence and defense officials noted that chemical and biological agents can be produced by graduate students or laboratory technicians and that general recipes are readily available on the internet. On the other hand, some statements suggest that there are considerable difficulties associated with successfully developing and delivering a WMD. For example, the Deputy Commander of the Army's Medical Research and Materiel Command testified in 1998 about the difficulties of using WMDs, noting that "an effective, mass-casualty producing attack on our citizens would require either a fairly large, very technically competent, well-funded terrorist program or state sponsorship." Moreover, in 1996, the Director of the Defense Intelligence Agency testified that the agency had no conclusive information that any of the terrorist organizations it monitors were developing chemical, biological, or radiological weapons and that there was no conclusive information that any state sponsor had the intention to provide these weapons to terrorists. In 1997, the Central Intelligence Agency Director testified that while advanced and exotic weapons are increasingly available, their employment is likely to remain minimal, as terrorist groups concentrate on peripheral technologies such as sophisticated conventional weapons. Mr. Chairman, that concludes our prepared statement. we would be happy to answer any questions at this time. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. 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GAO discussed its work and observations on federal efforts to combat terrorism, focusing on the: (1) foreign-origin and domestic terrorism threat in the United States; and (2) origins and principles of the U.S. policy and strategy to combat terrorism. GAO noted that: (1) conventional explosives and firearms continue to be the weapons of choice for terrorists; (2) terrorists are less likely to use chemical and biological weapons than conventional explosives, although the likelihood that they may use chemical and biological materials may increase over the next decade, according to intelligence agencies; (3) more than a decade ago, the Vice President's Task Force on Terrorism highlighted the need for improved, centralized interagency coordination; (4) GAO's work suggests that the government should continue to strive for improved interagency coordination today; (5) the need for effective interagency coordination--both at the federal level and among the federal, state, and local levels--is paramount; (6) the challenges of efficient and effective management and focus for program investments are growing as the terrorism issue draws more attention from Congress and as there are more players and more programs and activities to integrate and coordinate; (7) the United States is spending billions of dollars annually to combat terrorism without assurance that federal funds are focused on the right programs or in the right amounts; (8) as GAO has emphasized in two reports, a critical piece of the equation in decisions about establishing and expanding programs to combat terrorism is an analytically sound threat and risk assessment using valid inputs from the intelligence community and other agencies; (9) threat and risk assessments could help the government make decisions about: (a) how to target investments in combating terrorism and set priorities on the basis of risk; (b) unnecessary program duplication, overlap, and gaps; and (c) correctly sizing individual agencies' levels of effort; and (10) finally, there are different sets of views and an apparent lack of consensus on the threat of terrorism--particularly weapons of mass destruction terrorism.

We defined the financial services industry to include the following sectors: depository credit institutions, which include commercial banks, thrifts (savings and loan associations and savings banks), and credit unions; holdings and trusts, which include investment trusts, investment companies, and holding companies; nondepository credit institutions, which extend credit in the form of loans, include federally sponsored credit agencies, personal credit institutions, and mortgage bankers and brokers; the securities sector, which is made up of a variety of firms and organizations (e.g., broker-dealers) that bring together buyers and sellers of securities and commodities, manage investments, and offer financial advice; and the insurance sector, including carriers and insurance agents, which provides protection against financial risks to policyholders in exchange for the payment of premiums. Additionally, the financial services industry is a major source of employment in the United States. According to the EEO-1 data, the financial services firms we reviewed for this testimony, which have 100 or more staff, employed nearly 3 million people in 2004. Moreover, according to the U.S. Bureau of Labor Statistics, employment in management and professional positions in the financial services industry was expected to grow at a rate of 1.2 percent annually through 2012. Finally, a recent U.S. Census Bureau report based on data from the 2002 Economic Census stated that, between 1997 and 2002, Hispanics in the United States opened new businesses at a rate three times faster than the national average. Overall EEO-1 data do not show substantial changes in diversity at the management level and suggest that certain financial sectors are more diverse at this level than others. Figure 1 shows that overall management- level representation by minorities increased from 11.1 percent to 15.5 percent from 1993 through 2004. Specifically, African-Americans increased their representation from 5.6 percent to 6.6 percent, Asians from 2.5 percent to 4.5 percent, Hispanics from 2.8 percent to 4.0 percent and American Indians from 0.2 to 0.3 percent. Management-level representation by white women was largely unchanged at slightly more than one-third during the period, while representation by white men declined from 52.2 percent to 47.2 percent. EEO-1 data may actually overstate representation levels for minorities and white women in the most senior-level positions, such as Chief Executive Officers of large investment firms or commercial banks, because the category that captures these positions--"officials and managers"--covers all management positions. Thus, this category includes lower level positions (e.g., assistant manager of a small bank branch) that may have a higher representation of minorities and women. In 2007, EEOC plans to use a revised form for employers that divides this category into "executive/senior-level officers and managers" and "first/mid-level officials," which could provide a more accurate picture of diversity among senior managers. As shown in figure 2, EEO-1 data also show that the depository and nondepository credit sectors, as well as the insurance sector, were somewhat more diverse at the management level than the securities and holdings and trust sectors. In 2004, minorities held 19.9 percent of management-level positions in nondepository credit institutions, such as mortgage bankers and brokers, but 12.4 percent in holdings and trusts, such as investment companies. You also asked that we collect data on the accounting industry. According to the 2004 EEO-1 data, minorities held 13.5 percent, and white women held 32.4 percent of all "officials and managers" positions in the accounting industry. Minorities' rapid growth as a percentage of the overall U.S. population and increased global competition have convinced some financial services firms that workforce diversity is a critical business strategy. Officials from the firms with whom we spoke said that their top leadership was committed to implementing workforce diversity initiatives, but noted that they faced challenges in making such initiatives work. In particular, they cited ongoing difficulties in recruiting and retaining minority candidates and in gaining employees' "buy-in" for diversity initiatives, especially at the middle management level. Since the mid-1990s, some financial services firms have implemented a variety of initiatives designed to recruit and retain minority and women candidates to fill key positions. Officials from several banks said that they had developed scholarship and internship programs to encourage minority students to consider careers in banking. Some firms and trade organizations have also developed partnerships with groups that represent minority professionals and with local communities to recruit candidates through events such as conferences and career fairs. To help retain minorities and women, firms have established employee networks, mentoring programs, diversity training, and leadership and career development programs. Officials from some financial services firms we contacted, as well as industry studies, noted that that financial services firms' senior managers were involved in diversity initiatives. For example, according to an official from an investment bank, the head of the firm meets with every minority and female senior executive to discuss his or her career development. Officials from a few commercial banks said that the banks had established diversity "councils" of senior leaders to set the vision, strategy, and direction of diversity initiatives. A 2005 industry trade group study and some officials also noted that some companies were linking managers' compensation with their progress in hiring, promoting, and retaining minority and women employees. A few firms have also developed performance indicators to measure progress in achieving diversity goals. These indicators include workforce representation, turnover, promotion of minority and women employees, and employee satisfaction survey responses. Officials from several financial services firms stated that measuring the results of diversity efforts over time was critical to the credibility of the initiatives and to justifying the investment in the resources such initiatives demanded. The financial services firms and trade organizations we contacted that had launched diversity initiatives cited a variety of challenges that may have limited the success of their efforts. First, officials said that the industry faced ongoing challenges in recruiting minority and women candidates. According to industry officials, the industry lacks a critical mass of minority employees, especially at the senior levels, to serve as role models to attract and retain other minorities. Available data on minority students enrolled in Master of Business Administration (MBA) programs suggest that the pool of minorities, a source that may feed the "pipeline" for management-level positions within the financial services industry and other industries, is relatively small. In 2000, minorities accounted for 19 percent of all students enrolled in MBA programs in accredited U.S. schools; in 2004, that student population had risen to 23 percent. Financial services firms compete for this relatively small pool not only with one another but also with firms from other industries. Evidence suggests, however, that the financial services industry may not be fully leveraging its "internal" pipeline of minority and women employees for management-level positions. As shown in figure 3, there are job categories within the financial services industry that generally have more overall workforce diversity than the "official and managers" category, particularly among minorities. For example, minorities held 22 percent of "professional" positions in the industry in 2004 as compared with 15 percent of "officials and managers" positions. According to a recent EEOC report, the professional category represented a possible pipeline of available management-level candidates. The EEOC states that the chances of minorities and women (white and minority combined) advancing from the professional category into management-level positions is lower when compared with white males. Many officials from financial services firms and industry trade groups agreed that retaining minority and women employees represented one of the biggest challenges to promoting workforce diversity. One reason they cited is that the industry, as described previously, lacks a critical mass of minority men and women, particularly in senior-level positions, to serve as role models. Without a critical mass, the officials said that minority or women employees may lack the personal connections and access to informal networks that are often necessary to navigate an organization's culture and advance their careers. For example, an official from a commercial bank we contacted said he learned from staff interviews that African-Americans believed that they were not considered for promotion as often as others partly because they were excluded from informal employee networks needed for promotion or to promote advancement. In addition, some industry officials said that achieving "buy-in" from key employees such as middle managers could be challenging. Middle managers are particularly important to diversify institutions because they are often responsible for implementing key aspects of diversity initiatives and for explaining them to other employees. However, the officials said that middle managers may be focused on other aspects of their responsibilities, such as meeting financial performance targets, rather than the importance of implementing the organization's diversity initiatives. Additionally, the officials said that implementing diversity initiatives represents a considerable cultural and organizational change for many middle managers and employees at all levels. An official from an investment bank told us that the bank has been reaching out to middle managers who oversee minority and women employees by, for example, instituting an "inclusive manager program." Studies and reports, as well as interviews we conducted, suggest that minority- and women-owned businesses face challenges obtaining bank credit in conventional financial markets for several reasons, including business characteristics (e.g., small firm size) and the possibility that lenders may discriminate. Some business characteristics may also limit the ability of minority- and women-owned businesses to raise equity capital. However, some financial institutions, primarily commercial banks, have recently begun marketing their loan products and offering technical assistance to minority- and women-owned businesses. Reports and other research, as well as interviews we conducted with commercial banks, including minority-owned banks and trade groups representing minority- and women-owned businesses, highlight some of the challenges these businesses may face in obtaining commercial bank credit. For example, many minority-owned businesses are in the retail and service sectors and may have few assets to offer as collateral. Further, many of these businesses are relatively young and may not have an established credit history. Many also are relatively small and often lack technical expertise. On the other hand, some studies suggest that lenders may discriminate against minority-owned businesses. We reviewed one study that found given comparable loan applications--by African-American and Hispanic- owned firms and white-owned firms--the applications by the African- American and Hispanic-owned firms were more likely to be denied. However, assessing such alleged discrimination may be complicated by limitations in data availability. The Federal Reserve's Regulation B, which implements the Equal Credit Opportunity Act, prohibits financial institutions from requiring information on race and gender from applicants for nonmortgage credit products. Although the regulation was initially implemented to prevent such information from being used to discriminate against certain groups, some federal financial regulators have stated that removing the prohibition would allow them to better monitor and enforce laws prohibiting discrimination in lending. Likewise, at least one bank official noted that Regulation B limited the bank's ability to measure the success of its efforts to provide financial services to minority groups. We note that under the Home Mortgage Disclosure Act (HMDA), lenders are required to collect and report data on racial and gender characteristics of applicants for mortgage loans. Researchers have used the HMDA data to assess potential mortgage lending discrimination by financial institutions. Research also suggests that some business characteristics (e.g., limited technical expertise) that may affect the ability of many minority- and women-owned businesses to obtain bank credit, as discussed earlier, may also limit their capacity to raise equity capital. Although venture capital firms may not have traditionally invested in minority-owned businesses, a recent study suggests that firms that do focus on such entities can earn rates of return comparable to those earned on mainstream private equity investments. Officials from some financial institutions we contacted, primarily large commercial banks, told us that they are reaching out to minority- and women-owned businesses by marketing their financial products to them (including in different languages), establishing partnerships with relevant trade and community organizations, and providing technical assistance. For example, officials from some banks said that they educate potential business clients by providing technical assistance through financial workshops and seminars on various issues, such as developing a business plans and obtaining commercial bank loans. While these efforts take time and resources, the officials we spoke with indicated that their institutions recognize the benefits of tapping this growing segment of the market. Madam Chairwoman, this concludes my prepared statement. I would be pleased to respond to any questions you or other Members of the Subcommittee may have. For further information about this testimony, please contact Orice M. Williams on (202) 512-8678 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony include Wesley M. Phillips, Assistant Director; Emily Chalmers; William Chatlos; Kimberly Cutright; Simin Ho; Marc Molino; Robert Pollard; LaSonya Roberts; and Bethany Widick. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

A July 2004 congressional hearing raised concerns about the lack of diversity in the financial services industry, particularly in key management positions. Some witnesses noted that these firms (e.g., banks and securities firms) had not made sufficient progress in recruiting minorities and women at the management level. Others raised concerns about the ability of minority-owned businesses to raise debt and equity capital. At the request of the House Financial Services Committee, GAO was asked to provide a report on overall trends in management-level diversity and diversity initiatives from 1993 through 2004. This testimony discusses that report and focuses on (1) what the available data show about diversity at the management level, (2) the types of initiatives that the financial services industry has taken to promote workforce diversity and the challenges involved, and (3) the ability of minority- and women-owned businesses to obtain capital and initiatives financial institutions have taken to make capital available to these businesses. For our analysis, we analyzed data from the Equal Employment Opportunity Commission (EEOC); reviewed select studies; and interviewed officials from financial services firms, trade organizations, and federal agencies. GAO makes no recommendations at this time. From 1993 through 2004, overall diversity at the management level in the financial services industry did not change substantially, but some racial/ethnic minority groups experienced more change in representation than others. EEOC data show that management-level representation by minority women and men overall increased from 11.1 percent to 15.5 percent. Specifically, African-Americans increased their representation from 5.6 percent to 6.6 percent, Asians from 2.5 percent to 4.5 percent, Hispanics from 2.8 percent to 4.0 percent, and American Indians from 0.2 percent to 0.3 percent. Financial services firms and trade groups have initiated programs to increase workforce diversity, but these initiatives face challenges. The programs include developing scholarships and internships, partnering with groups that represent minority professionals, and linking managers' compensation with their performance in promoting a diverse workforce. Some firms have developed indicators to measure progress in achieving workforce diversity. Industry officials said that among the challenges these initiatives face are recruiting and retaining minority candidates, as well as gaining the "buy-in" of key employees, such as the middle managers who are often responsible for implementing such programs. Research reports suggest that minority- and women-owned businesses have difficulty obtaining access to capital for several reasons, such as that these businesses may be concentrated in service industries and lack assets to pledge as collateral. Some studies suggest that lenders may discriminate, but proving such an allegation is complicated by the lack of available data. However, some financial institutions, primarily commercial banks, said that they have developed strategies to serve minority- and women-owned businesses. These strategies include marketing existing financial products specifically to minority and women business owners.

USPS faces a dire financial situation and does not have sufficient revenues to cover its expenses, putting its mission of providing prompt, reliable, and efficient universal services to the public at risk. USPS continues to incur operating deficits that are unsustainable, has not made required payments of $11.1 billion to prefund retiree health benefit liabilities, and has reached its $15 billion borrowing limit. Moreover, USPS lacks liquidity to maintain its financial solvency or finance needed capital investment. As presented in table 1, since fiscal year 2006, USPS has achieved about $15 billion in savings and reduced its workforce by about 168,000, while also experiencing a 25 percent decline in total mail volume and net losses totaling $40 billion. As a result of significant declines in volume and revenue, USPS reported that it took unprecedented actions to reduce its costs by $6.1 billion in fiscal year 2009. Also, in fiscal year 2009, a cash shortfall necessitated congressional action to reduce USPS's mandated payment to prefund retiree health benefits from $5.4 billion to $1.4 billion. In 2011, USPS's $5.5 billion required retiree health benefit payment was delayed until August 1, 2012. USPS missed that payment as well as the $5.6 billion that was due by September 30, 2012. USPS continues to face significant decreases in mail volume and revenues as online communication and e-commerce expand. While remaining among USPS's most profitable products, both First-Class Mail and Standard Mail volumes have declined in recent years as illustrated in figure 1. First-Class Mail--which is highly profitable and generates the majority of the revenues used to cover overhead costs--declined 33 percent since it peaked in fiscal year 2001, and USPS projects a continued decline through fiscal year 2020. Standard Mail (primarily advertising) has declined 23 percent since it peaked in fiscal year 2007, and USPS projects that it will remain roughly flat through fiscal year 2020. Standard Mail is profitable overall, but it takes about three pieces of Standard Mail, on average, to equal the profit from the average piece of First-Class Mail. First-Class Mail and Standard Mail also face competition from electronic alternatives, as many businesses and consumers have moved to electronic payments over the past decade in lieu of using the mail to pay bills. USPS reported that for the first time, in fiscal year 2010, fewer than 50 percent of household bills were paid by mail. In addition to lost mail volume and revenue, USPS also has incurred debt, workers' compensation, and unfunded benefit liabilities, such as pension and retiree health benefits, that totaled $96 billion at the end of fiscal year 2012. Table 2 shows the amounts of these liabilities over the last 6 fiscal years. One of these liabilities, USPS's debt to the U.S. Treasury, increased over this period from $4 billion to its statutory limit of $15 billion. Thus, USPS can no longer borrow to maintain its financial solvency or finance needed capital investment. USPS continues to incur unsustainable operating deficits. In this regard, the USPS Board of Governors recently directed postal management to accelerate restructuring efforts to achieve greater savings. These selected USPS liabilities increased from 83 percent of revenues in fiscal year 2007 to 147 percent of revenues in fiscal year 2012 as illustrated in figure 2. This trend demonstrates how USPS liabilities have become a large and growing financial burden. USPS's dire financial condition makes paying for these liabilities highly challenging. In addition to reaching its limit in borrowing authority in fiscal year 2012, USPS did not make required prefunding payments of $11.1 billion for fiscal year 2011 and 2012 retiree health benefits. At the end of fiscal year 2012, USPS had $48 billion in unfunded retiree health benefit liabilities. Looking forward, USPS has warned that it suffers from a severe lack of liquidity. As USPS has reported, "Even with some regulatory and legislative changes, our ability to generate sufficient cash flows from current and future management actions to increase efficiency, reduce costs, and generate revenue may not be sufficient to meet all of our financial obligations." For this reason, USPS has stated that it continues to lack the financial resources to make its annual retiree health benefit prefunding payment. USPS has also reported that in the short term, should circumstances leave it with insufficient liquidity, it may need to prioritize payments to its employees and suppliers ahead of those to the federal government. For example, near the end of fiscal year 2011, in order to maintain its liquidity USPS temporarily halted its regular contributions for the Federal Employees Retirement System (FERS) that are supposed to cover the cost of benefits being earned by current employees. However, USPS has since made up those missed FERS payments. USPS's statements about its liquidity raise the issue of whether USPS will need additional financial help to remain solvent while it restructures and, more fundamentally, whether it can remain financially self-sustainable in the long term. USPS has also raised the concern that its ability to negotiate labor contracts is essential to maintaining financial stability and that failure to do so could have significant adverse consequences on its ability to meet its financial obligations. Most USPS employees are covered by collective bargaining agreements with four major labor unions which have established salary increases, cost-of-living adjustments, and the share of health insurance premiums paid by employees and USPS. When USPS and its unions are unable to agree, binding arbitration by a third-party panel is used to establish agreement. There is no statutory requirement for USPS's financial condition to be considered in arbitration. In 2010, we reported that the time has come to reexamine USPS's 40-year-old structure for collective bargaining, noting that wages and benefits comprise 80 percent of its costs at a time of escalating losses and a dramatically changed competitive environment. We also reported that Congress should consider revising the statutory framework for collective bargaining to ensure that USPS's financial condition be considered in binding arbitration. USPS has several initiatives to reduce costs and increase its revenues to curtail future net losses. In February 2012, USPS announced a 5-year business plan with the goal of achieving $22.5 billion in annual cost savings by the end of fiscal year 2016. USPS has begun implementing this plan, which includes initiatives to save: $9 billion in mail processing, retail, and delivery operations, including consolidation of the mail processing network, and restructuring retail and delivery operations; $5 billion in compensation and benefits and non-personnel initiatives; $8.5 billion through proposed legislative changes, such as moving to a 5-day delivery schedule and eliminating the obligation to prefund USPS's retiree health benefits. Simultaneously, USPS's 5-year plan would further reduce the overall size of the postal workforce by roughly 155,000 career employees, with many of those reductions expected to result from attrition. According to the plan, half of USPS's career employees are currently eligible for full or early retirement. Reducing its workforce is vital because, as noted, compensation and benefits costs continue to generate about 80 percent of USPS's expenses. Compensation alone (primarily wages) exceeded $36 billion in fiscal year 2012, or close to half of its costs. Compensation costs decreased by $542 million in fiscal year 2012 as USPS offered separation incentives to postmasters and mail handlers to encourage more attrition. This fiscal year, separation incentives were offered to employees represented by the American Postal Workers Union (e.g., mail processing and retail clerks) to encourage further attrition as processing and retail operations are redesigned and consolidated to more closely correspond with workload. To accelerate implementation of its plan, in early February 2013, USPS announced plans to transition to a new delivery schedule by early August 2013 that would limit its delivery of mail on Saturdays to mail addressed to Post Office Boxes and to packages. USPS's operational plan for the new delivery schedule anticipates a combination of employee reassignment and attrition to generate an expected annual cost savings of about $2 billion once its plan is fully implemented. Over the past several years, USPS has advocated shifting to a 5-day delivery schedule for both mail and packages. According to USPS, however, recent strong growth in package delivery--as we will discuss in more detail below--and projections for continued strong package growth throughout the coming decade led to a revised approach to maintain package delivery 6 days per week. Another key area of potential savings included in the 5-year plan focused on reducing compensation and benefit costs. USPS's largest benefit payments in fiscal year 2012 included: $7.8 billion in current-year health insurance premiums for employees, retirees, and their survivors (USPS's health benefit payments would have been $13.4 billion if USPS had paid the required $5.6 billion retiree health prefunding payment); $3.0 billion in FERS pension funding contributions; $1.8 billion in social security contributions; $1.4 billion in workers' compensation payments; and $1.0 billion in Thrift Savings Plan contributions. USPS has proposed administering its own health care plan for its employees and retirees and withdrawing from the Federal Employee Health Benefits (FEHB) program so that it can better manage its costs and achieve significant savings, which USPS has estimated could be over $7 billion annually. About $5.5 billion of the estimated savings would come from eliminating the retiree health benefit prefunding payment and another $1.5 billion would come from reducing health care costs. We are currently reviewing USPS's proposal including its potential financial effects on participants and USPS. To increase revenue, USPS is working to increase use of shipping and package services. With the continued increase in e-commerce, USPS projects that shipping and package volume will grow by 7 percent in fiscal year 2013, after increasing 7.5 percent in fiscal year 2012. Revenue from these two product categories represented about 18 percent of USPS's fiscal year 2012 operating revenue. However, USPS does not expect that continued growth in shipping and package services will fully offset the continued decline of revenue from First-Class Mail and other products. We recently reported that USPS is pursuing 55 initiatives to generate revenue. Forty-eight initiatives are extensions of existing lines of postal products and services, such as offering Post Office Box customers a suite of service enhancements (e.g., expanded lobby hours and earlier pickup times) at selected locations and increasing public awareness of the availability of postal services at retail stores. The other seven initiatives included four involving experimental postal products, such as prepaid postage on the sale of greeting cards, and three that were extensions of nonpostal services that are not directly related to mail delivery. USPS offers 12 nonpostal services including Passport Photo Services, the sale of advertising to support change-of-address processing, and others generating a net income of $141 million in fiscal year 2011. USPS has also increased its use of negotiated service agreements that offer competitively priced contracts as well as promotions with temporary rate reductions that are targeted to retain mail volume. We are currently reviewing USPS's use of negotiated service agreements. As USPS attempts to reduce costs and increase revenue, its mission to provide universal service continues. USPS's network serves more than 152 million residential and business delivery points. In May 2011, we reported that many of USPS's delivery vehicles were reaching the end of their expected 24-year operational life and that USPS's financial challenges pose a significant barrier to replacing or refurbishing its fleet. As a result, USPS's approach has been to maintain the delivery fleet until USPS determines how to address longer term needs, but USPS has been increasingly incurring costs for unscheduled maintenance because of breakdowns. The eventual replacement of its vehicle delivery fleet represents yet another financial challenge facing USPS. We are currently reviewing USPS's investments in capital assets. We have issued a number of reports on strategies and options for USPS to improve its financial situation by optimizing its network and restructuring the funding of its pension and retiree health benefit liabilities. To assist Congress in addressing issues related to reducing USPS's expenses, we have issued several reports analyzing USPS's initiatives to optimize its mail processing, delivery, and retail networks. In April 2012, we issued a report related to USPS's excess capacity in its network of 461 mail processing facilities. We found that USPS's mail processing network exceeds what is needed for declining mail volume. USPS proposed consolidating its mail processing network, a plan based on proposed changes to overnight delivery service standards for First- Class Mail and Periodicals. Such a change would have enabled USPS to reduce an excess of 35,000 positions and 3,000 pieces of mail equipment, among other things. We found, however, that stakeholder issues and other challenges could prevent USPS from implementing its plan for consolidating its mail processing network. Although some business mailers and Members of Congress expressed support for consolidating mail processing facilities, other mailers, Members of Congress, affected communities, and employee organizations raised concerns. Key issues raised by business mailers were that closing facilities could increase their transportation costs and decrease service. Employee associations were concerned that reducing service could result in a greater loss of mail volume and revenue that could worsen USPS's financial condition. We reported that if Congress preferred to retain the current delivery service standards and associated network, decisions will need to be made about how USPS's costs for providing these services will be paid. In March 2011, we reported on USPS's proposal to reduce costs by moving from a 6-day to a 5-day delivery schedule. USPS delivers to more than 152 million addresses. USPS also estimated that 5-day delivery would result in minimal mail volume decline. We found that the extent to which USPS can achieve cost savings from this change and mitigate volume and revenue loss depends on how well and how quickly USPS can realign its operations, workforce, and networks; maintain service quality; and communicate with stakeholders. USPS has spent considerable time and resources developing plans to facilitate this transition. Nevertheless, risks and uncertainties remain, such as how quickly USPS can realign its workforce through attrition; how effectively it can modify certain finance systems; and how mailers will respond to this change in service. In April 2012, we reported that USPS has taken several actions to restructure its retail network--which included almost 32,000 postal- managed facilities in fiscal year 2012--through reducing its workforce and its footprint while expanding retail alternatives. We also reported on concerns customers and other stakeholders have expressed regarding the impact of post office closures on communities, the adequacy of retail alternatives, and access to postal services, among others. We discussed challenges USPS faces, such as legal restrictions and resistance from some Members of Congress and the public, that have limited USPS's ability to change its retail network by moving postal services to more nonpostal-operated locations (such as grocery stores), similar to what other nations have done. The report concluded that USPS cannot support its current level of services and operations from its current revenues. We noted that policy issues remain unresolved related to what level of retail services USPS should provide, how the cost of these services should be paid, and how USPS should optimize its retail network. In November 2011, we reported that USPS had expanded access to its services through alternatives to post offices in support of its goals to improve service and financial performance and recommended that USPS develop and implement a plan with a timeline to guide efforts to modernize USPS's retail network, and that addresses both traditional post offices and retail alternatives as well. We added that the plan should also include: (1) criteria for ensuring the retail network continues to provide adequate access for customers as it is restructured; (2) procedures for obtaining reliable retail revenue and cost data to measure progress and inform future decision making; and (3) a method to assess whether USPS's communications strategy is effectively reaching customers, particularly those customers in areas where post offices may close. In November 2012, we reported that although contract postal units (CPUs)--independent businesses compensated by USPS to sell most of the same products and services as post offices at the same price--have declined in number, they have supplemented post offices by providing additional locations and hours of service. More than 60 percent of CPUs are in urban areas where they can provide customers nearby alternatives when they face long lines at post offices. In fiscal year 2011, after compensating CPUs, USPS retained 87 cents of every dollar of CPU revenue. We found that limited interest from potential partners, competing demands on USPS staff resources, and changes to USPS's retail network posed potential challenges to USPS's use of CPUs. To assist Congress in addressing issues related to funding USPS's liabilities, we have also issued several reports that address USPS's liabilities, including its retiree health benefits, pension, and workers' compensation. In December 2012, we reported that USPS's deteriorating financial outlook will make it difficult to continue the current schedule for prefunding postal retiree health benefits in the short term, and possibly to fully fund the remaining $48 billion unfunded liability over the remaining decades of the statutorily required actuarial funding schedule. However, we also reported that deferring funding could increase costs for future ratepayers and increase the possibility that USPS may not be able to pay for some or all of its liability. We stated that failure to prefund these benefits is a potential concern. Making affordable prefunding payments would protect the viability of USPS by not saddling it with bills later on, when employees are already retired and no longer helping it generate revenue; it can also make the promised benefits more secure. Thus, as we have previously reported, we continue to believe that it is important for USPS to prefund these benefits to the maximum extent that its finances permit. We also recognize that without congressional or further USPS actions to align revenue and costs, USPS will not have the finances needed to make annual payments and reduce its long term retiree health unfunded liability. No funding approach will be viable unless USPS can make the required payments. We reported on options with regard to the FERS surplus, noting the degree of uncertainty inherent in this estimate and reporting on the implications of alternative approaches to accessing this surplus. The estimated FERS surplus decreased from 2011 to 2012, and at the end of fiscal year 2012, USPS had an estimated FERS surplus of $3.0 billion and an estimated CSRS deficit of $18.7 billion. In 2012, we reported on workers' compensation benefits paid to both postal and nonpostal beneficiaries under the Federal Employees' Compensation Act (FECA). USPS has large FECA program costs. At the time of their injury, 43 percent of FECA beneficiaries in 2010 were employed by USPS. FECA provides benefits to federal workers who sustained injuries or illnesses while performing federal duties, and benefits are not taxed or subject to age restrictions. Various proposals to modify FECA's benefit levels have been advanced. At the request of Congress, we have provided information to assist it in making decisions about the FECA program. In summary, to improve its financial situation, USPS needs to reduce its expenses to close the gap between revenue and expenses, repay its outstanding debt, continue funding its retirement obligations, and increase capital for investment, such as replacing its aging vehicle fleet. In addition, as noted in prior reports, congressional action is needed to (1) modify USPS's retiree health benefit payments in a fiscally responsible manner; (2) facilitate USPS's ability to align costs with revenues based on changing workload and mail use; and (3) require that any binding arbitration resulting from collective bargaining takes USPS's financial condition into account. As we have continued to underscore, Congress and USPS need to reach agreement on a comprehensive package of actions to improve USPS's financial viability. In previous reports, we have provided strategies and options, to both reduce costs and enhance revenues, that Congress could consider to better align USPS costs with revenues and address constraints and legal restrictions that limit USPS's ability to reduce costs and improve efficiency; we have also reported on implications for addressing USPS's benefit liabilities. If Congress does not act soon, USPS could be forced to take more drastic actions that could have disruptive, negative effects on its employees, customers, and the availability of reliable and affordable postal services. Chairman Carper, Ranking Member Coburn, and Members of the Committee, this concludes my prepared statement. I would be pleased to answer any questions that you may have at this time. For further information about this statement, please contact Lorelei St. James, Director, Physical Infrastructure, at (202) 512-2834 or [email protected]. Contact points for our Congressional Relations and Public Affairs offices may be found on the last page of this statement. In addition to the contact named above, Frank Todisco, Chief Actuary; Samer Abbas, Teresa Anderson, Barbara Bovbjerg, Kyle Browning, Colin Fallon, Imoni Hampton, Kenneth John, Kim McGatlin, Amelia Shachoy, Andrew Sherrill, and Crystal Wesco made important contributions to this statement. 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USPS is in a serious financial crisis as its declining mail volume has not generated sufficient revenue to cover its expenses and financial obligations. First-Class Mail--which is highly profitable and generates the majority of the revenues used to cover overhead costs--declined 33 percent since it peaked in fiscal year 2001, and USPS projects a continued decline through fiscal year 2020. Declining mail volume is putting USPS's mission of providing prompt, reliable, and efficient universal services to the public at risk. This testimony discusses (1) USPS's financial condition, (2) initiatives to reduce costs and increase revenues, and (3) actions needed to improve USPS's financial situation. The testimony is based primarily on our past and ongoing work and our analysis of USPS's recent financial results. In previous reports, GAO has provided strategies and options that USPS and Congress could consider to better align USPS costs with revenues and address constraints and legal restrictions that limit USPS's ability to reduce costs and improve efficiency. GAO has also stated that Congress and USPS need to reach agreement on a comprehensive package of actions to improve USPS's financial viability. The U.S. Postal Service (USPS) continues to incur unsustainable operating deficits, has not made required payments of $11.1 billion to prefund retiree health benefits, and has reached its $15 billion borrowing limit. Thus far, USPS has been able to operate within these constraints, but now faces a critical shortage of liquidity that threatens its financial solvency and ability to finance needed capital investment. USPS had an almost 25 percent decline in total mail volume and net losses totaling $40 billion since fiscal year 2006. While USPS achieved about $15 billion in savings and reduced its workforce by about 168,000 over this period, its debt and unfunded benefit liabilities grew to $96 billion by the end of fiscal year 2012. USPS expects mail volume and revenue to continue decreasing as online bill communication and e-commerce expand. USPS has reported on several initiatives to reduce costs and increase its revenues to curtail future net losses. To reduce costs, USPS announced a 5-year business plan in February 2012 with the goal of achieving $22.5 billion in annual cost savings by the end of fiscal year 2016. USPS has begun implementing this plan, which includes making changes to its mail processing, retail, and delivery networks and redesigning its workforce in line with changing mail volume. To achieve greater savings, USPS's Board of Governors recently directed postal management to accelerate these efforts. To increase revenue, USPS is pursuing 55 initiatives. While USPS expects shipping and package services to continue to grow, such growth is not expected to fully offset declining mail volume. USPS needs to reduce its expenses to avoid even greater financial losses, repay its outstanding debt, continue funding its retirement obligations, and increase capital for investment, including replacing its aging vehicle fleet. Also, Congress needs to act to (1) modify USPS's retiree health benefit payments in a fiscally responsible manner; (2) facilitate USPS's ability to align costs with revenues based on changing workload and mail use; and (3) require that any binding arbitration resulting from collective bargaining takes USPS's financial condition into account. No one action in itself will address USPS's financial condition; we have previously recommended a comprehensive package of actions. If Congress does not act soon, USPS could be forced to take more drastic actions that could have disruptive, negative effects on its employees, customers, and the availability of postal services. USPS also reported that it would prioritize payments to employees and suppliers ahead of those to the federal government.

In 2000, a report of the Surgeon General noted that tooth decay is the most common chronic childhood disease. Left untreated, the pain and infections caused by tooth decay may lead to problems in eating, speaking, and learning. Tooth decay is almost completely preventable, and the pain, dysfunction, or on extremely rare occasion, death, resulting from dental disease can be avoided (see fig. 1). Preventive dental care can make a significant difference in health outcomes and has been shown to be cost- effective. For example, a 2004 study found that average dental-related costs for low-income preschool children who had their first preventive dental visit by age 1 were less than one-half ($262 compared to $546) of average costs for children who received their first preventive visit at age 4 through 5. The American Academy of Pediatric Dentistry (AAPD) recommends that each child see a dentist when his or her first tooth erupts and no later than the child's first birthday, with subsequent visits occurring at 6-month intervals or more frequently if recommended by a dentist. The early initial visit can establish a "dental home" for the child, defined by AAPD as the ongoing relationship with a dental provider who can ensure comprehensive and continuously accessible care. Comprehensive dental visits can include both clinical assessments, such as for tooth decay and sealants, and appropriate discussion and counseling for oral hygiene, injury prevention, and speech and language development, among other topics. Because resistance to tooth decay is determined in part by genetics, eating patterns, and oral hygiene, early prevention is important. Delaying the onset of tooth decay may also reduce long-term risk for more serious decay by delaying the exposure to caries risk factors to a time when the child can better control his or her health behaviors. Recognizing the importance of good oral health, HHS in 1990 and again in 2000 established oral health goals as part of its Healthy People 2000 and 2010 initiatives. These include objectives related to oral health in children, for example, reducing the proportion of children with untreated tooth decay. One objective of Healthy People 2010 relates to the Medicaid population: to increase the proportion of low-income children and adolescents under the age of 19 who receive any preventive dental service in the past year, from 25 percent in 1996 to 66 percent in 2010. Medicaid, a joint federal and state program which provides health care coverage for low-income individuals and families; pregnant women; and aged, blind, and disabled people, provided health coverage for an estimated 20.1 million children aged 2 through 18 in federal fiscal year 2005. The states operate their Medicaid programs within broad federal requirements and may contract with managed care organizations to provide Medicaid benefits or use other forms of managed care, when approved by CMS. CMS estimates that as of June 30, 2006, about 65 percent of Medicaid beneficiaries received benefits through some form of managed care. State Medicaid programs must cover some services for certain populations under federal law. For instance, under Medicaid's EPSDT benefit, states must provide dental screening, diagnostic, preventive, and related treatment services for all eligible Medicaid beneficiaries under age 21. Children in Medicaid aged 2 through 18 often experience dental disease and often do not receive needed dental care, and although receipt of dental care has improved somewhat in recent years, the extent of dental disease for most age groups has not. Information from NHANES surveys from 1999 through 2004 showed that about one in three children ages 2 through 18 in Medicaid had untreated tooth decay, and one in nine had untreated decay in three or more teeth. Compared to children with private health insurance, children in Medicaid were substantially more likely to have untreated tooth decay and to be in urgent need of dental care. MEPS surveys conducted in 2004 and 2005 found that almost two in three children in Medicaid aged 2 through 18 had not received dental care in the previous year and that one in eight never sees a dentist. Children in Medicaid were less likely to have received dental care than privately insured children, although they were more likely to have received care than children without health insurance. Children in Medicaid also fared poorly when compared to national benchmarks, as the percentage of children in Medicaid ages 2 through 18 who received any dental care-- 37 percent--was far below the Healthy People 2010 target of having 66 percent of low-income children under age 19 receive a preventive dental service. MEPS data on Medicaid children who had received dental care--from 1996 through 1997 compared to 2004 through 2005--showed some improvement for children ages 2 through 18 in Medicaid. By contrast, comparisons of recent NHANES data to data from the late 1980s and 1990s suggest that the extent that children ages 2 through 18 in Medicaid experience dental disease has not decreased for most age groups. Dental disease is a common problem for children aged 2 through 18 enrolled in Medicaid, according to national survey data (see fig. 2). NHANES oral examinations conducted from 1999 through 2004 show that about three in five children (62 percent) in Medicaid had experienced tooth decay, and about one in three (33 percent) were found to have untreated tooth decay. Close to one in nine--about 11 percent--had untreated decay in three or more teeth, which is a sign of unmet need for dental care and, according to some oral health experts, can suggest a severe oral health problem. Projecting these proportions to 2005 enrollment levels, we estimate that 6.5 million children in Medicaid had untreated tooth decay, with 2.2 million children having untreated tooth decay involving three or more teeth. Compared with children with private health insurance, children in Medicaid were at much higher risk of tooth decay and experienced problems at rates more similar to those without any insurance. As shown in figure 3, the proportion of children in Medicaid with untreated tooth decay (33 percent) was nearly double the rate for children who had private insurance (17 percent) and was similar to the rate for uninsured children (35 percent). These children were also more than twice as likely to have untreated tooth decay in three or more teeth than their privately insured counterparts (11 percent for Medicaid children compared to 5 percent for children with private health insurance). These disparities were consistent across all age groups we examined. According to NHANES data, more than 5 percent of children in Medicaid aged 2 through 18 had urgent dental conditions, that is, conditions in need of care within 2 weeks for the relief of symptoms and stabilization of the condition. Such conditions include tooth fractures, oral lesions, chronic pain, and other conditions that are unlikely to resolve without professional intervention. On the basis of these data, we estimate that in 2005, 1.1 million children aged 2 through 18 in Medicaid had conditions that warranted seeing a dentist within 2 weeks. Compared to children who had private insurance, children in Medicaid were more than four times as likely to be in urgent need of dental care. The NHANES data suggest that the rates of untreated tooth decay for some Medicaid beneficiaries could be about three times more than national health benchmarks. For example, the NHANES data showed that 29 percent of children in Medicaid aged 2 through 5 had untreated decay, which compares unfavorably with the Healthy People 2010 target for untreated tooth decay of 9 percent of children aged 2 through 4. Most children in Medicaid do not visit the dentist regularly, according to 2004 and 2005 nationally representative MEPS data (see fig. 4). According to these data, nearly two in three children in Medicaid aged 2 through 18 had not received any dental care in the previous year. Projecting these proportions to 2005 enrollment levels, we estimate that 12.6 million children in Medicaid have not seen a dentist in the previous year. In reporting on trends in dental visits of the general population, AHRQ reported in 2007 that about 31 percent of poor children (family income less than or equal to the federal poverty level) and 34 percent of low- income children (family income above 100 percent through 200 percent of the federal poverty level) had a dental visit during the year. Survey data also showed that about one in eight children (13 percent) in Medicaid reportedly never see a dentist. MEPS survey data also show that many children in Medicaid were unable to access needed dental care. Survey participants reported that about 4 percent of children aged 2 through 18 in Medicaid were unable to get needed dental care in the previous year. Projecting this percentage to estimated 2005 enrollment levels, we estimate that 724,000 children aged 2 through 18 in Medicaid could not obtain needed care. Regardless of insurance status, most participants who said a child could not get needed dental care said they were unable to afford such care. However, 15 percent of children in Medicaid who had difficulty accessing needed dental care reportedly were unable to get care because the provider refused to accept their insurance plan, compared to only 2 percent of privately insured children. Children enrolled in Medicaid were less likely to have received dental care than privately insured children, but they were more likely to have received dental care than children without health insurance. (See fig. 5.) Survey data from 2004 through 2005 showed that about 37 percent of children in Medicaid aged 2 through 18 had visited the dentist in the previous year, compared with about 55 percent of children with private health insurance, and 26 percent of children without insurance. The percentage of children in Medicaid who received any dental care--37 percent--was far below the Healthy People 2010 target of having 66 percent of low-income children under age 19 receive a preventive dental service. The NHANES data from 1999 through 2004 also provide some information related to the receipt of dental care. The presence of dental sealants, a form of preventive care, is considered to be an indicator that a person has received dental care. About 28 percent of children in Medicaid had at least one dental sealant, according to 1999 through 2004 NHANES data. In contrast, about 40 percent of children with private insurance had a sealant. However, children in Medicaid were more likely to have sealants than children without health insurance (about 20 percent). While comparisons of past and more recent survey data suggest that a larger proportion of children in Medicaid had received dental care in recent surveys, the extent that children in Medicaid experience dental disease has not decreased. A comparison of NHANES results from 1988 through 1994 with results from 1999 through 2004 showed that the rates of untreated tooth decay were largely unchanged for children in Medicaid aged 2 through 18: 31 percent of children had untreated tooth decay in 1988 through 1994, compared with 33 percent in 1999 through 2004 (see fig. 6). The proportion of children in Medicaid who experienced tooth decay increased from 56 percent in the earlier period to 62 percent in more recent years. This increase appears to be driven by younger children, as the 2 through 5 age group had substantially higher rates of dental disease in the more recent time period, 1999 through 2004. This preschool age group experienced a 32 percent rate of tooth decay in the 1988 through 1994 time period, compared to almost 40 percent experiencing tooth decay in 1999 through 2004 (a statistically significant change). Data for adolescents, by contrast, suggest declining rates of tooth decay. Almost 82 percent of adolescents aged 16 through 18 in Medicaid had experienced tooth decay in the earlier time period, compared to 75 percent in the latter time period (although this change was not statistically significant). These trends were similar for rates of untreated tooth decay, with the data suggesting rates going up for young children, and declining or remaining the same for older groups that are more likely to have permanent teeth. According to CDC, these trends are similar for the general population of children, for which tooth decay in permanent teeth has generally declined and untreated tooth decay has remained unchanged. CDC also found that tooth decay in preschool aged children in the general population had increased in primary teeth. At the same time, indicators of receipt of dental care, including the proportion of children who had received dental care in the past year and use of sealants, have shown some improvement. Two indicators of receipt of dental care showed improvement from earlier surveys: The percentage of children in Medicaid aged 2 through 18 who received dental care in the previous year increased from 31 percent in 1996 through 1997 to 37 percent in 2004 through 2005, according to MEPS data (see fig. 7). This change was statistically significant. Similarly, AHRQ reported that the percent of children with a dental visit increased between 1996 and 2004 for both poor children (28 percent to 31 percent) and low-income children (28 percent to 34 percent). The percentage of children aged 6 through 18 in Medicaid with at least one dental sealant increased nearly threefold, from 10 percent in 1988 through 1994 to 28 percent in 1999 through 2004, according to NHANES data, and these changes were statistically significant. The increase in receipt of sealants may be due in part to the increased use of dental sealants in recent years, as the percentage of uninsured and insured children with dental sealants doubled over the same time period. Adolescents aged 16 through 18 in Medicaid had the greatest increase in receipt of sealants relative to other age groups. The percentage of adolescents with dental sealants was about 6 percent in the earlier time period, and 33 percent more recently. The percentage of children in Medicaid who reportedly never see a dentist remained about the same between the two time periods, with about 14 percent in 1996 through 1997 who never saw a dentist, and 13 percent in 2004 through 2005, according to MEPS data. More information on our analysis of NHANES and MEPS for changes in dental disease and receipt of dental care for children in Medicaid over time, including confidence intervals and whether changes over time were statistically significant, can be found in appendixes I and II. The information provided by nationally representative surveys regarding the oral health of our nation's low-income children in Medicaid raises serious concerns. Measures of access to dental care for this population, such as children's dental visits, have improved somewhat in recent surveys, but remain far below national health goals. Of even greater concern are data that show that dental disease is prevalent among children in Medicaid, and is not decreasing. Millions of children in Medicaid are estimated to have dental disease in need of treatment; in many cases this need is urgent. Given this unacceptable condition, it is important that those involved in providing dental care to children in Medicaid--the federal government, states, providers, and others--address the need to improve the oral health condition of these children and to achieve national oral health goals. We provided a draft of this report for comment to HHS. HHS provided written comments which we summarize below. The text of HHS's letter, including comments from CMS, CDC, and AHRQ, is reprinted in appendix III. HHS also provided technical comments, which we incorporated as appropriate. In commenting on the draft, CMS acknowledged the challenge of providing dental services to children in Medicaid, as well as all children nationwide, and cited a number of activities undertaken by CMS in coordination with states, such as completing 17 focused dental reviews and forming an Oral Health Technical Advisory Group. CDC commented that trends in dental caries vary by age group and for primary versus permanent teeth. CDC also noted that beginning in 2005, trained health technologists conducted basic assessments of caries experience. We revised our report to further clarify the differing trends by age groups and to acknowledge the assessments performed by health technologists. We did not analyze the data by both age and dentition (primary versus permanent teeth) due to small sample sizes; we note that the trends for the youngest and oldest age groups in the Medicaid child population that we identified are consistent with those that CDC found in the general population by age and dentition. AHRQ commented that agency staff had completed a Chartbook that summarizes dental use, expenses, dental coverage, and changes from 1996 and 2004 for the general population that was not cited and referenced in our report, and indicated it was unclear why the same analytical approach was not followed for the determination of public coverage status. In technical comments, AHRQ noted that their reported findings are generally comparable to GAO's findings. We revised our report to cite AHRQ's findings on dental services for children and to further describe our methodology. Regarding our determination of public coverage status, we did not use AHRQ's analytical approach that describes "public coverage" because the focus of this report was on children covered by Medicaid. AHRQ's approach did not distinguish Medicaid from other types of public coverage. We are sending copies of this report to other interested congressional committees and to the Secretary of HHS. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have any questions regarding this report, please contact me at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors are listed in appendix IV. The National Health and Nutrition Examination Survey (NHANES), conducted multiple times since the early 1960s by the Department of Health and Human Services' (HHS) National Center for Health Statistics of the Centers for Disease Control and Prevention (CDC), is designed to provide nationally representative estimates of the health and nutrition status of the noninstitutionalized civilian population of the United States. NHANES provides information on civilians of all ages. Prior to 1999, three periodic surveys were conducted. Since 1999, NHANES has been conducted annually. For this study, we examined data from 1999 through 2004 and data from 1988 through 1994. We did not analyze any NHANES data after 2004 because, beginning in 2005, NHANES surveys do not include examinations by dentists for tooth decay, dental sealants, and most other oral health conditions. Our analysis of NHANES data focused on the oral examination of children ages 2 through 18. As part of an overall physical examination, dental examiners inspect children's mouths and collect data on the number and condition of teeth and the condition of gums. To analyze these data, we considered three categories of children, based on their health insurance status as reported by their parents or guardians on the interview section of the survey: children with Medicaid, children with private health insurance, and children without health insurance. These categories include more than 90 percent of children who were given dental examinations as part of NHANES. We do not present results for children with other forms of government health insurance, such as TRICARE or Medicare, and we do not present results for children whose parents or guardians provided no information on their health insurance status (about 1.5 percent of children fell into this category). For the 1999 through 2004 time period, the Medicaid category includes some children enrolled in the State Children's Health Insurance Program (SCHIP); we estimate that about 85 percent of the children for that time period were enrolled in Medicaid with the remainder enrolled in SCHIP. To assess the reliability of NHANES data, we interviewed knowledgeable officials, reviewed relevant documentation, and compared the results of our analyses to published data. We determined that the NHANES data were sufficiently reliable for the purposes of our engagement. Using the NHANES data, we analyzed the percentage of children with untreated tooth decay, the percentage of children who had experienced tooth decay, the percentage of children with tooth decay in three or more teeth, and the percentage of children with dental sealants (see tables 1 through 5). We also analyzed the dental examiner's recommendation for care as the basis for determining whether a child had an urgent need for dental care. For each of these measures, we estimated the percentage, with 95 percent confidence intervals (that is, there is a 95 percent probability that the actual number falls within the lower and upper limits of our estimates), of children in each of the three insurance categories using raw data and appropriate sampling weights. We also used standard errors to calculate if changes from the 1988 through 1994 time period to the 1999 through 2004 time period were statistically significant at the 95 percent level. To estimate the number of children in the Medicaid category with a given condition, we multiplied the calculated percentage by an estimate of the 2005 average monthly enrollment of children ages 2 through18 in Medicaid (20.1 million children). We estimated the 2005 average monthly enrollment of children ages 2 through 18 in Medicaid using CMS statistics, by age group, for children ages 1 through 18 (we reduced this number to account for children age 1 using Census data). Our analysis of the NHANES data was conducted in accordance with generally accepted government auditing standards from December 2007 through September 2008. The Medical Expenditure Panel Survey (MEPS), administered by HHS's Agency for Healthcare Research and Quality (AHRQ), collects data on the use of specific health services--frequency, cost, and payment. We analyzed results from the household component of the survey, which surveys families and individuals and their medical providers. Our analysis was based on data from surveys conducted in 1996 through 1997 and 2004 through 2005. We used the 1996 through 1997 data because they were the earliest available and we used the 2004 through 2005 data because they were the most current available. The household component of MEPS collects data from a sample of families and individuals in selected communities across the United States, drawn from a nationally representative subsample of households that participated in the prior year's National Health Interview Survey (a survey conducted by the National Center for Health Statistics at the Centers for Disease Control and Prevention). The household interviews feature several rounds of interviewing covering 2 full calendar years. MEPS is continuously fielded; each year a new sample of households throughout the country is introduced into the study. MEPS collects information for each person in the household based on information provided by one adult member of the household. This information includes demographic characteristics, health conditions, health status, use of medical services, provider charges, access to care, satisfaction with care, health insurance coverage, income, and employment. We analyzed responses to questions on the use of dental care as well as responses to questions on the difficulty accessing needed dental care. As with the National Health and Nutrition Examination Survey (NHANES) data, we analyzed results from children aged 2 through 18 and divided children into three categories on the basis of their health insurance status. Similar to NHANES, the Medicaid category included children enrolled in the State Children's Health Insurance Program (SCHIP) for the later time period (2004 through 2005 for MEPS). The privately insured category included children with private health insurance, some of whom had dental coverage and others who did not, while the uninsured category comprised children who had neither health insurance nor dental insurance. To determine the reliability of the MEPS data, we spoke with knowledgeable agency officials and reviewed related documentation and compared our results to published data. We determined that the MEPS data were sufficiently reliable for the purposes of our engagement. We analyzed data according to four different questions asked by the MEPS survey (see tables 6 through 9). The questions asked (1) whether the child had seen or talked to any dental provider in a given time period; (2) how often the child got a dental checkup; (3) whether the child had trouble accessing needed dental care; and (4) if the respondent answered yes to the third question, then what the reasons were for having trouble accessing needed dental care. Using sampling weights, we estimated the percentage of children in each category as well as a lower and upper limit of this percentage, calculated at the 95 percent confidence interval. We also used standard errors to calculate if changes from the 1996 through 1997 time period to the 2004 through 2005 time period were statistically significant at the 95 percent level. To estimate the number of children ages 2 through 18 in Medicaid not receiving dental care in the previous year, we calculated the percentage that had not received dental care in the previous year (62.6 percent) and applied this percentage to an estimate of the 2005 average monthly enrollment of children ages 2 through18 in Medicaid (20.1 million children). We estimated the 2005 average monthly enrollment of children ages 2 through 18 in Medicaid using CMS statistics, by age group, for children ages 1 through 18 (we reduced this number using Census data to account for children age 1). Our analysis of the MEPS data was conducted in accordance with generally accepted government auditing standards from December 2007 through September 2008. In addition to the individual named above, Katherine M. Iritani, Assistant Director; Susannah Bloch; Alex Dworkowitz; Erin Henderson; Martha Kelly; Ba Lin; Elizabeth T. Morrison; Terry Saiki; Hemi Tewarson; and Suzanne Worth made key contributions to this report. Medicaid: Concerns Remain about Sufficiency of Data for Oversight of Children's Dental Services. GAO-07-826T. Washington, D.C.: May 2, 2007. Medicaid Managed Care: Access and Quality Requirements Specific to Low-Income and Other Special Needs Enrollees. GAO-05-44R. Washington, D.C.: December 8, 2004. Medicaid and SCHIP: States Use Varying Approaches to Monitor Children's Access to Care. GAO-03-222. Washington, D.C.: January 14, 2003. Medicaid: Stronger Efforts Needed to Ensure Children's Access to Health Screening Services. GAO-01-749. Washington, D.C.: July 13, 2001. Oral Health: Factors Contributing to Low Use of Dental Services by Low- Income Populations. GAO/HEHS-00-149. Washington, D.C.: September 11, 2000. Oral Health: Dental Disease Is a Chronic Problem Among Low-Income Populations. GAO/HEHS-00-72. Washington, D.C.: April 12, 2000. Medicaid Managed Care: Challenge of Holding Plans Accountable Requires Greater State Effort. GAO/HEHS-97-86. Washington, D.C.: May 16, 1997.

In recent years, concerns have been raised about the adequacy of dental care for low-income children. Attention to this subject became more acute due to the widely publicized case of Deamonte Driver, a 12-year-old boy who died as a result of an untreated infected tooth that led to a fatal brain infection. Deamonte had health coverage through Medicaid, a joint federal and state program that provides health care coverage, including dental care, for millions of low-income children. Deamonte had extensive dental disease and his family was unable to find a dentist to treat him. GAO was asked to examine the extent to which children in Medicaid experience dental disease, the extent to which they receive dental care, and how these conditions have changed over time. To examine these indicators of oral health, GAO analyzed data for children ages 2 through 18, by insurance status, from two nationally representative surveys conducted by the Department of Health and Human Services (HHS): the National Health and Nutrition Examination Survey (NHANES) and the Medical Expenditure Panel Survey (MEPS). GAO also interviewed officials from the Centers for Disease Control and Prevention, and dental associations and researchers. In commenting on a draft of the report, HHS acknowledged the challenge of providing dental services to children in Medicaid, and cited a number of studies and actions taken to address the issue. Dental disease remains a significant problem for children aged 2 through 18 in Medicaid. Nationally representative data from the 1999 through 2004 NHANES surveys--which collected information about oral health through direct examinations--indicate that about one in three children in Medicaid had untreated tooth decay, and one in nine had untreated decay in three or more teeth. Projected to 2005 enrollment levels, GAO estimates that 6.5 million children aged 2 through 18 in Medicaid had untreated tooth decay. Children in Medicaid remain at higher risk of dental disease compared to children with private health insurance; children in Medicaid were almost twice as likely to have untreated tooth decay. Receipt of dental care also remains a concern for children aged 2 through 18 in Medicaid. Nationally representative data from the 2004 through 2005 MEPS survey--which asks participants about the receipt of dental care for household members--indicate that only one in three children in Medicaid ages 2 through 18 had received dental care in the year prior to the survey. Similarly, about one in eight children reportedly never sees a dentist. More than half of children with private health insurance, by contrast, had received dental care in the prior year. Children in Medicaid also fared poorly when compared to national benchmarks, as the percentage of children in Medicaid who received any dental care--37 percent--was far below the Healthy People 2010 target of having 66 percent of low-income children under age 19 receive a preventive dental service. Survey data on Medicaid children's receipt of dental care showed some improvement; for example, use of sealants went up significantly between the 1988 through 1994 and 1999 through 2004 time periods. Rates of dental disease, however, did not decrease, although the data suggest the trends vary somewhat among different age groups. Younger children in Medicaid--those aged 2 through 5--had statistically significant higher rates of dental disease in the more recent time period as compared to earlier surveys. By contrast, data for Medicaid adolescents aged 16 through 18 show declining rates of tooth decay, although the change was not statistically significant.

Our work has identified the need for improvements in the federal government's approach to cybersecurity of its systems and those supporting the nation's critical infrastructures and in protecting the privacy of PII. While previous administrations and agencies have acted to improve the protections over the information and information systems supporting federal operations and U.S. critical infrastructure, additional actions are needed. Federal agencies need to effectively implement risk-based entity- wide information security programs consistently over time. Since the first FISMA was enacted in 2002, agencies have been challenged to fully and effectively develop, document, and implement the entity-wide information security program required by FISMA to protect the information and information systems that support their operations and assets, including those provided or managed by another agency or contractor. For example, as of February 7, 2017, 19 of 23 federal agencies covered by the Chief Financial Officers Act (CFO Act) that had issued their required annual financial reports for fiscal year 2016 reported that information security control deficiencies were either a material weakness or significant deficiency in internal controls over financial reporting for fiscal year 2016. In addition, inspectors general at 20 of the 23 agencies identified information security as a major management challenge for their agencies. Further, in light of these challenges, we have identified a number of actions to assist agencies in implementing their information security programs. Enhance capabilities to effectively identify cyber threats to agency systems and information. A key activity for assessing cybersecurity risk and selecting appropriate mitigating controls is the identification of cyber threats to computer networks, systems, and information. In 2016, we reported on several factors that agencies identified as impairing their ability to identify these threats to a great or moderate extent. The impairments included an inability to recruit and retain personnel with the appropriate skills, rapidly changing threats, continuous changes in technology, and a lack of government-wide information sharing mechanisms. Addressing these impairments will enhance the ability of agencies to identify the threats to their systems and information and be in a better position to select and implement appropriate countermeasures. Implement sustainable processes for securely configuring operating systems, applications, workstations, servers, and network devices. We routinely determine that agencies do not enable key information security capabilities of their operating systems, applications, workstations, servers, and network devices. Agencies were not always aware of the insecure settings that introduced risk to the computing environment. Establishing strong configuration standards and implementing sustainable processes for monitoring and enabling configuration settings will strengthen the security posture of federal agencies. Patch vulnerable systems and replace unsupported software. Federal agencies consistently fail to apply critical security patches on their systems in a timely manner, sometimes doing so years after the patch becomes available. We also consistently identify instances where agencies use software that is no longer supported by their vendors. These shortcomings often place agency systems and information at significant risk of compromise, since many successful cyberattacks exploit known vulnerabilities associated with software products. Using vendor-supported and patched software will help to reduce this risk. Develop comprehensive security test and evaluation procedures and conduct examinations on a regular and recurring basis. Federal agencies we reviewed often did not test or evaluate their information security controls in a comprehensive manner. The evaluations were sometimes based on interviews and document reviews, limited in scope, and did not identify many of the security vulnerabilities that our examinations identified. Conducting in-depth security evaluations that examine the effectiveness of security processes and technical controls is essential for effectively identifying system vulnerabilities that place agency systems and information at risk. Strengthen oversight of contractors providing IT services. As demonstrated by the OPM data breach of 2015, cyber attackers can sometimes gain entry to agency systems and information through the agency's contractors or business partners. Accordingly, agencies need to assure that their contractors and partners are adequately protecting the agency's information and systems. In August 2014, we reported that five of six selected agencies were inconsistent in overseeing the execution and review of security assessments that were intended to determine the effectiveness of contractor implementation of security controls, resulting in security lapses. In 2016, agency chief information security officers (CISOs) we surveyed reported that they were challenged to a large or moderate extent in overseeing their IT contractors and receiving security data from the contractors. This challenge diminished their ability to assess how well agency information maintained by the contractors is protected. Effectively overseeing and reviewing the security controls implemented by contractors and other parties is essential to ensuring that the agency's information is properly safeguarded. We have several ongoing and planned audit engagements that will continue to assess the effectiveness of agency actions to implement information security programs. These engagements include in-depth assessments of information security programs at individual agencies including OPM and the Centers for Disease Control and Prevention as well as our biennial review of the adequacy of agencies' information security policies and practices and their compliance with the provisions of FISMA. Also, on an annual basis, we evaluate information security controls over financial systems and information at seven agencies and incorporate the audit results of agency offices of inspector general during our annual audit of the consolidated financial statements of the federal government. In addition, we are currently conducting an assessment of the Federal Risk Authorization and Management Program and have plans to review cyber risk management practices and continuous monitoring programs at federal agencies. The federal government needs to improve its cyber incident detection, response, and mitigation capabilities. Even agencies or organizations with strong security can fall victim to information security incidents due to the existence of previously unknown vulnerabilities that are exploited by attackers to intrude into an agency's information systems. Accordingly, agencies need to have effective mechanisms for detecting, responding to, and recovering from such incidents. We have previously identified various actions that could assist the federal government in building its capabilities for detecting, responding to, and recovering from security incidents. Expand capabilities, improve planning, and support wider adoption of the government-wide intrusion detection and prevention system. In January 2016, we reported that DHS's National Cybersecurity Protection System (NCPS) had limited capabilities for detecting and preventing intrusions, conducting analytics, and sharing information. In addition, adoption of these capabilities at federal agencies was limited. We noted that expanding NCPS's capabilities for detecting and preventing malicious traffic, defining requirements for future capabilities, and developing network routing guidance could increase assurance of the system's effectiveness in detecting and preventing computer intrusions and support wider adoption by agencies. Improve cyber incident response practices at federal agencies. In April 2014 we reported that 24 major federal agencies did not consistently demonstrate that they had effectively responded to cyber incidents. For example, six agencies reviewed had not determined the impact of incidents or taken actions to address the underlying control weaknesses that allowed the incidents to occur, in part because they had not developed comprehensive policies, plans, and procedures for responding to security incidents, and had not tested their incident response capabilities. By developing comprehensive incident response policies, plans, and procedures for responding to incidents and effectively overseeing response activities, agencies will have increased assurance that they will effectively respond to cyber incidents. Update federal guidance on reporting data breaches and develop consistent responses to breaches of PII. As we reported in December 2013, eight agencies that we reviewed did not consistently implement policies and procedures for responding to breaches of PII. For example, none of the agencies had documented the evaluation of incidents and lessons learned. In addition, we noted that OMB guidance calling for agencies to report each PII-related incident-- even those with inherently low risk to the individuals affected--within 1 hour of discovery may cause agencies to expend resources to meet reporting requirements that provide little value and divert time and attention from responding to breaches. We recommended that OMB update it guidance on federal agencies' responses to a PII-related data breach and that the agencies we reviewed take steps to improve their response to data breaches involving PII. Updating guidance and consistently implementing breach response practices will improve the effectiveness of governmentwide and agency data breach response programs. GAO routinely evaluates agencies' intrusion detection, response, and mitigation activities during audits of agency information security controls and programs. We plan to continue to do so during ongoing and future engagements. In addition, the Cybersecurity Act of 2015 contains a provision for us to study and publish a report by December 2018 on the effectiveness of the approach and strategy of the federal government to secure agency information systems, including the intrusion detection and prevention capabilities and the government's intrusion assessment plan. The federal government needs to expand its cyber workforce planning and training efforts. Ensuring that the government has a sufficient number of cybersecurity professionals with the right skills and that its overall workforce is aware of information security responsibilities remains an ongoing challenge. Enhance efforts for recruiting and retaining a qualified cybersecurity workforce. This has been a long-standing dilemma for the federal government. In 2013, agency chief information officers and experts we surveyed cited weaknesses in education, awareness, and workforce planning as a root cause in hindering improvements in the nation's cybersecurity posture. Several experts also noted that the cybersecurity workforce was inadequate, both in numbers and training. They cited challenges such as the lack of role-based qualification standards and difficulties in retaining cyber professionals. In 2016, agency chief information security officers we surveyed cited difficulties related to having sufficient staff; recruiting, hiring, and retaining security personnel; and ensuring that security personnel have appropriate skills and expertise as posing challenges to their abilities to carry out their responsibilities effectively. Improve cybersecurity workforce planning activities at federal agencies. In November 2011, we reported that only five of eight selected agencies had developed workforce plans that addressed cybersecurity. Further, all eight agencies reported challenges with filling cybersecurity positions, and only three of the eight had a department-wide training program for their cybersecurity workforce. GAO has two current engagements to further review cybersecurity workforce issues in the federal government. The Homeland Security Cybersecurity Workforce Assessment Act of 2014 contains a provision for us to monitor, analyze, and report by December 2017 on the Department of Homeland Security's implementation of the National Cybersecurity Workforce Measurement Initiative. In addition, the Cybersecurity Act of 2015 calls for us to monitor, analyze, and submit a report by December 2018 on the implementation of this initiative and the identification of cyber-related work roles of critical need by federal agencies. The federal government needs to expand efforts to strengthen cybersecurity of the nation's critical infrastructures. U.S. critical infrastructures such as financial institutions, energy production and transmission facilities, and communications networks, are vital to the U.S. security, economy, and public health and safety. Similar to federal systems, the systems supporting critical infrastructures face an evolving array of cyber-based threats. To help secure infrastructure cyber assets-- most of which is owned and operated by the private sector--federal policy and the National Infrastructure Protection Plan provide for a public- private partnership in which federal agencies support or assist their private sector partners in securing systems supporting critical infrastructure. We have identified the following actions that can assist agencies in performing these vital services. Develop metrics to assess the effectiveness of efforts promoting the NIST cybersecurity framework. In December 2015, we reported that NIST and other agencies had promoted the adoption of the Framework for Improving Critical Infrastructure Cybersecurity to critical infrastructure owners and operators and other organizations. Toward this end, DHS established the Critical Infrastructure Cyber Community Voluntary Program to encourage entities to adopt the framework. However, DHS had not developed metrics to measure the success of its activities and programs. In addition, DHS and the General Services Administration had not determined whether to develop tailored guidance for implementing the framework in government facilities sector as other agencies had done for their respective sectors. DHS concurred with our recommendation to develop metrics, but has not indicated that it has taken action, and DHS and the General Services Administration concurred with our recommendation to determine whether tailored guidance was needed. Develop metrics to measure and report on the effectiveness of cyber risk mitigation activities and the cybersecurity posture of critical infrastructure sectors. In November 2015, we reported that all eight sector-specific agencies reviewed had determined the significance of cyber risk to the nation's critical infrastructures and had taken actions to mitigate cyber risks and vulnerabilities for their respective sectors. However, not all sector-specific agencies had metrics to measure and report on the effectiveness of all their activities to mitigate cyber risks or their sectors' cybersecurity posture. We recommended that agencies lacking metrics develop them and determine how to overcome any challenges to reporting the results of their activities to mitigate cyber risks. Four of the agencies explicitly agreed with our recommendations and identified planned or on-going efforts to implement performance metrics; however, they have not yet provided metrics or reports of outcomes. GAO has several ongoing and planned engagements that will touch on the cybersecurity of national critical infrastructures. Among these engagements, our study of the "Internet of things" addresses the security and privacy implications of this phenomenon. In addition, the Cybersecurity Enhancement Act of 2014 contains a provision for us to assess the extent to which critical infrastructure sectors have adopted a voluntary cybersecurity framework to reduce cyber risks and the success of such a framework for protecting critical infrastructure against cyber threats. We also plan to review the cybersecurity of oil and gas pipeline control systems and the Department of Homeland Security's efforts to share cyber information with federal and non-federal entities. The federal government needs to better oversee protection of PII. Regarding PII, advancements in technology, such as new search technology and data analytics software for searching and collecting information, have made it easier for individuals and organizations to correlate data and track it across large and numerous databases. In addition, lower data storage costs have made it less expensive to store vast amounts of data. Also, ubiquitous Internet and cellular connectivity make it easier to track individuals by allowing easy access to information pinpointing their locations. These advances--combined with the increasing sophistication of hackers and others with malicious intent, and the extent to which both federal agencies and private companies collect sensitive information about individuals--have increased the risk of PII being exposed and compromised. Our work has identified the following actions that need to be taken to better protect the privacy of personal information. Protect the security and privacy of electronic health information. In August 2016, we reported that guidance for securing electronic health information issued by Department of Health and Human Services (HHS) did not address all key controls called for by other federal cybersecurity guidance. In addition, this department's oversight efforts did not always offer pertinent technical guidance and did not always follow up on corrective actions when investigative cases were closed. HHS generally concurred with the five recommendations we made and stated that it would take actions to implement them. Ensure privacy when face recognition systems are used. In May 2016, we reported that the Department of Justice had not been timely in publishing and updating privacy documentation for the Federal Bureau of Investigation's (FBI) use of face recognition technology. Publishing such documents in a timely manner would better assure the public that the FBI is evaluating risks to privacy when implementing systems. Also, the FBI had taken limited steps to determine whether the face recognition system it was using was sufficiently accurate. We recommended that the department ensure required privacy-related documents are published and that the FBI test and review face recognition systems to ensure that they are sufficiently accurate. Of the six recommendations we made, the Department of Justice agreed with one, partially agreed with two, and disagreed with three. The agency has not yet provided information about the actions it has taken to address the recommendations. Protect the privacy of users' data on state-based marketplaces. In March 2016, we reported on weaknesses in technical controls for the "data hub" that the Centers for Medicare and Medicaid Services (CMS) uses to exchange information between its health insurance marketplace and external partners. We also identified significant weaknesses in the controls in place at three selected state-based marketplaces established to carry out provisions of the Patient Protection and Affordable Care Act. We recommended that CMS define procedures for overseeing the security of state-based marketplaces and require continuous monitoring of state marketplace controls. HHS concurred with our recommendations and stated it has taken or plans to take actions to address these recommendations. GAO has several ongoing and planned reviews that address actions intended to protect the privacy of PII. For example, we are assessing agency efforts and government-wide initiatives to reduce or eliminate the use of Social Security numbers. In addition, the Cybersecurity Act of 2015 calls for us to review and report by December 2018 on agency policies and actions taken by the federal government to remove PII from shared cyber threat indicators or defensive measures. Further, the 21st Century Cures Act of 2016 requires us to review and report by December 2018 on the policies and activities of the Office of the National Coordinator for Health Information Technology to ensure appropriate matching to protect patient privacy and security with respect to electronic health records. Recent reports by the Cybersecurity Commission and CSIS identify topical areas and numerous recommendations for the new administration to consider as it develops and implements cybersecurity strategy and policy. In its study, the Commission focused on 10 cybersecurity topics including international issues, critical infrastructure, cybersecurity research and development, cybersecurity workforce, and the Internet of Things. CSIS addressed similar topics and identified five major issues related to international strategy, securing government agencies and critical infrastructure, cybersecurity research and workforce development, cybercrime, and defending cyberspace. Over the last several years, GAO has reviewed many of the areas covered by the Commission and CSIS reports. Our conclusions and recommendations are generally directed to specific agencies and may be more limited in scope than the recommendations of the Commission and CSIS. Nevertheless, several of our recommendations are generally consistent with or similar to recommendations made by the Commission and CSIS in the following areas: International cybersecurity strategy. In July 2010, we identified a number of challenges confronting U.S. involvement in global cybersecurity and governance. These include developing a comprehensive national strategy; ensuring international standards and policies do not pose unnecessary barriers to U.S. trade; participating in international cyber-incident response and appropriately sharing information without jeopardizing national security; investigating and prosecuting transnational cybercrime; and contending with differing laws and norms of behavior. We made five recommendations to the administration's cybersecurity coordinator to address these challenges, to include developing a comprehensive national global cyberspace strategy and defining cyberspace norms. In their recent reports, the Commission and CSIS also identified actions for enhancing international cybersecurity strategy and policies and agreeing on norms of behavior with like-minded nations. Protecting cyber critical infrastructure. In November 2015, we reported that sector specific agencies--federal agencies that are responsible for collaborating with their private sector counterparts in their assigned critical infrastructure sectors--were acting to address sector cyber risk by sharing information, supporting incident response activities, and providing technical assistance. However, they had not developed metrics to measure and improve the effectiveness of their cyber risk mitigation activities or their sectors' cybersecurity posture. We recommended that the agencies develop performance metrics to monitor and improve the effectiveness of their cyber risk mitigation activities. In their recent reports, the Commission and CSIS also identified actions for enhancing the public-private partnership, including improving information sharing, incident response capabilities, and cyber risk management practices. Promoting Use of the NIST Cybersecurity Framework. In December 2015, we reported that NIST had developed a set of voluntary standards and procedures for enhancing cybersecurity of critical infrastructure, known as the Framework for Improving Critical Infrastructure Cybersecurity. We also reported that although DHS had established a program dedicated to encouraging the framework's adoption, it had not established metrics to assess the effectiveness of these efforts. We recommended that DHS develop metrics for measuring the effectiveness of efforts to promote and support the framework. Similarly, both the Commission and CSIS have recommended actions to promote and measure use of the framework. Prioritizing cybersecurity research and development (R&D). In June 2010, we reported that the federal government lacked a prioritized national R&D agenda and a data repository to track research and development projects and funding, as required by law. We recommended that the Office of Science and Technology Policy (OSTP) take several steps, including developing a comprehensive national R&D agenda that identifies priorities for short-term, mid-term, and long-term complex R&D projects and is guided by input from the public and private sectors. Similarly, in its report, the Commission stated that OSTP, as part of an overall R&D agenda, should lead the development of an integrated government-private-sector cybersecurity roadmap for developing defensible systems. Expanding cybersecurity workforce capabilities. As discussed earlier in this statement, we have reported that ensuring that the government has a sufficient number of cybersecurity professionals with the right skills and that its overall workforce is aware of information security responsibilities remains an ongoing challenge. Consistent with this view, the Commission and CSIS have identified actions to address improving the nation's cybersecurity workforce, including increasing the number of cybersecurity practitioners; implementing a range of education and training programs at the federal, state, and local levels; providing incentives for individuals to enter the workforce; and allocating additional funds at key departments for cybersecurity education and training programs. Combatting cybercrime. In June 2007, we identified a number of challenges impeding public and private entities efforts in mitigating cybercrime, including working in a borderless environment with laws of multiple jurisdictions. We stated that efforts to investigate and prosecute cybercrime are complicated by the multiplicity of laws and procedures that govern in the various nations and states where victims may be found, and the conflicting priorities and varying degrees of expertise of law enforcement authorities in those jurisdictions. In addition, laws used to address cybercrime differ across states and nations. For example, an act that is illegal in the United States may be legal in another nation or not directly addressed in the other nation's laws. Developing countries, for example, may lack cybercrime laws and enforcement procedures. In its recent report, CSIS stated that many countries still do not have adequate cybercrime laws and recommended that (1) countries that refuse to cooperate with law enforcement should be penalized in some way and (2) methods be found to address the concerns of countries not willing to sign an existing treaty addressing cybercrime. In summary, the dependence of the federal government and the nation's critical infrastructure on computerized information systems and electronic data makes them potentially vulnerable to a wide and evolving array of cyber-based threats. Securing these systems and data is vital to the nation's security, prosperity, and well-being. Nevertheless, the security over these systems is inconsistent and additional actions are needed to address ongoing cybersecurity and privacy challenges. Specifically, federal agencies need to address control deficiencies and fully implement organization-wide information security programs, cyber incident response and mitigation efforts needs to be improved across the government, maintaining a qualified cybersecurity workforce needs to be a priority, efforts to bolster the cybersecurity of the nation's critical infrastructure needs to be strengthened, and the privacy of PII needs to be better protected. Several recommendations made by the Commission and CSIS are generally consistent with previous recommendations made by GAO and warrant close consideration. Chairwoman Comstock, Ranking Member Lipinski, and Members of the Subcommittee, this concludes my statement. I would be happy to respond to your questions. If you or your staff have any questions about this testimony, please contact Gregory C. Wilshusen at (202) 512-6244 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. GAO staff who made key contributions to this testimony are Michael Gilmore, Nancy Glover, and Kush Malhotra. GAO, Cybersecurity: DHS's National Integration Center Generally Performs Required Functions but Needs to Evaluate Its Activities More Completely, GAO-17-163 (Washington, D.C.: Feb. 1, 2017). GAO, Federal Information Security: Actions Needed to Address Challenges, GAO-16-885T (Washington, D.C.: Sept. 19, 2016). GAO, Federal Chief Information Security Officers: Opportunities Exist to Improve Roles and Address Challenges to Authority, GAO-16-686. (Washington, D.C.: Aug. 26, 2016). GAO, Electronic Health Information: HHS Needs to Strengthen Security and Privacy Guidance and Oversight, GAO-16-771 (Washington, D.C.: Aug. 26, 2016). GAO, Face Recognition Technology: FBI Should Better Ensure Privacy and Accuracy, GAO-16-267 (Washington, D.C.: May 16, 2016) (Reissued August 3, 2016). GAO, Information Security: Agencies Need to Improve Controls over Selected High-Impact Systems, GAO-16-501 (Washington, D.C.: May 18, 2016). GAO, Healthcare.gov: Actions Needed to Enhance Information Security and Privacy Controls, GAO-16-265 (Washington, D.C.: Mar. 23, 2016). GAO, Information Security: DHS Needs to Enhance Capabilities, Improve Planning, and Support Greater Adoption of Its National Cybersecurity Protection System, GAO-16-294 (Washington, D.C.: Jan. 28, 2016). GAO, Critical Infrastructure Protection: Measures Needed to Assess Agencies' Promotion of the Cybersecurity Framework, GAO-16-152 (Washington, D.C.: Dec. 17, 2015). GAO, Critical Infrastructure Protection: Sector-Specific Agencies Need to Better Measure Cybersecurity Progress, GAO-16-79, (Washington, D.C.: Nov. 19, 2015). GAO, Cybersecurity: National Strategy, Roles, and Responsibilities Need to Be Better Defined and More Effectively Implemented, GAO-13-187 (Washington, D.C.: Feb. 14, 2013). GAO, Cybersecurity Human Capital: Initiatives Need Better Planning and Coordination, GAO-12-8 (Washington, D.C.: Nov. 29, 2011). GAO, Cyberspace: United States Faces Challenges in Addressing Global Cybersecurity and Governance, GAO-10-606 (Washington, D.C.: July 2, 2010). This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. 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Cyber-based intrusions and attacks on federal systems and systems supporting our nation's critical infrastructure, such as communications and financial services, are evolving and becoming more sophisticated. GAO first designated information security as a government-wide high-risk area in 1997. This was expanded to include the protection of cyber critical infrastructure in 2003 and protecting the privacy of personally identifiable information in 2015. This statement (1) provides an overview of GAO's work related to cybersecurity of the federal government and the nation's critical infrastructure and (2) identifies areas of consistency between GAO recommendations and those recently made by the Cybersecurity Commission and CSIS. In preparing this statement, GAO relied on previously published work and its review of the two recent reports issued by the Commission and CSIS. GAO has consistently identified shortcomings in the federal government's approach to ensuring the security of federal information systems and cyber critical infrastructure as well as its approach to protecting the privacy of personally identifiable information (PII). While previous administrations and agencies have acted to improve the protections over federal and critical infrastructure information and information systems, the federal government needs to take the following actions to strengthen U.S. cybersecurity: Effectively implement risk-based entity-wide information security programs consistently over time . Among other things, agencies need to (1) implement sustainable processes for securely configuring operating systems, applications, workstations, servers, and network devices; (2) patch vulnerable systems and replace unsupported software; (3) develop comprehensive security test and evaluation procedures and conduct examinations on a regular and recurring basis; and (4) strengthen oversight of contractors providing IT services. Improve its cyber incident detection, response, and mitigation capabilities . The Department of Homeland Security needs to expand the capabilities and support wider adoption of its government-wide intrusion detection and prevention system. In addition, the federal government needs to improve cyber incident response practices, update guidance on reporting data breaches, and develop consistent responses to breaches of PII. Expand its cyber workforce planning and training efforts . The federal government needs to (1) enhance efforts for recruiting and retaining a qualified cybersecurity workforce and (2) improve cybersecurity workforce planning activities. Expand efforts to strengthen cybersecurity of the nation's critical infrastructures . The federal government needs to develop metrics to (1) assess the effectiveness of efforts promoting the National Institute of Standards and Technology's (NIST) Framework for Improving Critical Infrastructure Cybersecurity and (2) measure and report on effectiveness of cyber risk mitigation activities and the cybersecurity posture of critical infrastructure sectors. Better oversee protection of personally identifiable information . The federal government needs to (1) protect the security and privacy of electronic health information, (2) ensure privacy when face recognition systems are used, and (3) protect the privacy of users' data on state-based health insurance marketplaces. Several recommendations made by the Commission on Enhancing National Cybersecurity (Cybersecurity Commission) and the Center for Strategic & International Studies (CSIS) are generally consistent with or similar to GAO's recommendations in several areas including: establishing an international cybersecurity strategy, protecting cyber critical infrastructure, promoting use of the NIST cybersecurity framework, prioritizing cybersecurity research, and expanding cybersecurity workforces. Over the past several years, GAO has made about 2,500 recommendations to federal agencies to enhance their information security programs and controls. As of February 2017, about 1,000 recommendations had not been implemented.

The use of information technology (IT) to electronically collect, store, retrieve, and transfer clinical, administrative, and financial health information has great potential to help improve the quality and efficiency of health care and is important to improving the performance of the U.S. health care system. Historically, patient health information has been scattered across paper records kept by many different caregivers in many different locations, making it difficult for a clinician to access all of a patient's health information at the time of care. Lacking access to these critical data, a clinician may be challenged to make the most informed decisions on treatment options, potentially putting the patient's health at greater risk. The use of electronic health records can help provide this access and improve clinical decisions. Electronic health records are particularly crucial for optimizing the health care provided to military personnel and veterans. While in military status and later as veterans, many DOD and VA patients tend to be highly mobile and may have health records residing at multiple medical facilities within and outside the United States. Making such records electronic can help ensure that complete health care information is available for most military service members and veterans at the time and place of care, no matter where it originates. Key to making health care information electronically available is interoperability--that is, the ability to share data among health care providers. Interoperability enables different information systems or components to exchange information and to use the information that has been exchanged. This capability is important because it allows patients' electronic health information to move with them from provider to provider, regardless of where the information originated. If electronic health records conform to interoperability standards, they can be created, managed, and consulted by authorized clinicians and staff across more than one health care organization, thus providing patients and their caregivers the necessary information required for optimal care. (Paper- based health records--if available--also provide necessary information, but unlike electronic health records, paper records do not provide decision support capabilities, such as automatic alerts about a particular patient's health, or other advantages of automation.) Interoperability can be achieved at different levels. At the highest level, electronic data are computable (that is, in a format that a computer can understand and act on to, for example, provide alerts to clinicians on drug allergies). At a lower level, electronic data are structured and viewable, but not computable. The value of data at this level is that they are structured so that data of interest to users are easier to find. At still a lower level, electronic data are unstructured and viewable, but not computable. With unstructured electronic data, a user would have to find needed or relevant information by searching uncategorized data. Beyond these, paper records also can be considered interoperable (at the lowest level) because they allow data to be shared, read, and interpreted by human beings. Figure 1 shows the distinctions between the various levels of interoperability and examples of the types of data that can be shared at each level. According to DOD and VA officials, not all data require the same level of interoperability. For example, in their initial efforts to implement computable data, DOD and VA focused on outpatient pharmacy and drug allergy data because clinicians gave priority to the need for automated alerts to help medical personnel avoid administering inappropriate drugs to patients. On the other hand, for such narrative data as clinical notes, unstructured, viewable data may be sufficient. Achieving even a minimal level of electronic interoperability is valuable for potentially making all relevant information available to clinicians. Interoperability depends on adherence to common standards to promote the exchange of health information between participating agencies and with nonfederal entities in supporting quality and efficient health care. In the health IT field, standards govern areas ranging from technical issues, such as file types and interchange systems, to content issues, such as medical terminology. Developing, coordinating, and agreeing on standards are only part of the processes involved in achieving interoperability for electronic health record systems or capabilities. In addition, specifications are needed for implementing the standards, as well as criteria and a process for verifying compliance with the standards. In April 2004, the President called for widespread adoption of interoperable electronic health records by 2014. Health Information established the Office of the National Coordinator for Technology within the Department of Health and Human Services (HHS). This office has been tasked to, among other things, develop, ma direct the implementation of a strategic plan to guide the nationwide implementation of interoperable health IT in both the public and private health care sectors. Under the direction of HHS (through the Office of the National Coordinator), three primary organizations were designated to play major roles in expanding the implementation of health IT: The American Health Information Community was created by the Secretary of HHS as a federal advisory body to make recommendatio on how to accelerate the development and adoption of healt including advancing interoperability, identifying health IT standards, advancing a nationwide health information exchange, and protecti ng personal health information. Formed in September 2005, the community is made up of representatives from both the public and private sectors, including high-level DOD and VA officials. The community determines specific health care areas of high priority and develops "use cases" for these areas, which provide the cont ext in which standards would be applicable. The use cases convey how he care professionals would use such records and what standards w apply. Executive Order 13335, Incentives for the Use of Health Information Technology and Establishing the Position of the National Health Information Technology Coordinator (Washington, D.C.: Apr. 27, 2004). The Healthcare Information Technology Standards Panel, sponsored byerican National Standards Institute and funded by the Office of the Am the National Coordinator, was established in October 2005 as a public- private partnership to identify competing standards for the use cases being developed by the American Health Information Community and to "harmonize" the standards. The panel also develops the interoperability specifications that are needed for implementing the standards. Interoperability specifications were developed fo the seven use cases developed by the American Health Information Community in 2006 and 2007. The community also developed six use cases for 2008. The Healthcare Information Technology Standards Panel is made up of representatives from both the public and private sectors, including DOD and VA officials who serve as members and a actively working on several committees and groups within the panel. DOD and VA have been working to exchange patient health data electronically since 1998. As we have previously noted, their effo included both short-term initiatives to share information in existing (legacy) systems, as well as a long-term initiative to develop moderni zed health information systems--replacing their legacy systems--that would be able to share data and, ultimately, use interoperable electronic health records. In their short-term initiatives to share information from existing systems, the departments began from different positions. VA has one integrated medical information system--the Veterans Health Information Systemsand Technology Architecture (VistA)--which uses all electronic records and was developed in-house by VA clinicians and IT personnel. All VA medical facilities have access to all VistA information. In contrast, DOD uses multiple legacy medical information systems, all of which are commercial software products that are customized for specific uses. For example, the Composite Health Care System (CHCS), which was formerly DOD's primary health information system, is still in use to capture pharmacy, radiology, and laboratory information. In addition, the Clinical Information System (CIS), a commercial health information system customized for DOD, is used to support inpatient treatment at military medical facilities. The departments' short-term initiatives to share information in their existing systems have included the following projects: The Federal Health Information Exchange (FHIE), completed in 2004, enables DOD to electronically transfer service members' electronic health information to VA when the members leave active duty. he Bidirectional Health Information Exchange (BHIE), also T established in 2004, was aimed at allowing clinicians at both departments viewable access to records on shared patients (t those who receive care from both departments--for example, vetera ns may receive outpatient care from VA clinicians and be hospitalized at a hat is, military treatment facility). The interface also allows DOD sites to see previously inaccessible data at other DOD sites. As part of the long-term initiative, each of the departments aims to develop a modernized system in the context of a common health information architecture that would allow a two-way exchange of health information. The common architecture is to include standardized, computable data; communications; security; and high-performance health information systems: DOD's Armed Forces Health Longitudinal Technology Application (AHLTA) and VA's HealtheVet. The departments' modernized systems are to store information (in standardized, computable form) in separate data repositories: DOD's Clinical Data Repository (CDR) and VA's Health Data Repository (HDR). For the two-way exchange of health information, in September 2006 the departments implemented an interface named CHDR, to link the two repositories. Beyond these initiatives, in January 2007, the departments announced their intention to jointly determine an approach for inpatient health records. On July 31, 2007, they awarded a contract for a feasibility study and exploration of alternatives. In December 2008, the contractor provide the departments with a recommended strategy for jointly developing an inpatient solution. In reporting on the departments' progress toward developing fully interoperable electronic health records in July 2008, we highlighted several findings: DOD and VA had established and implemented mechanisms to achieve sharing of electronic health information at different levels of interoperability. As of June 2008, pharmacy and drug allergy data on about 18,300 shared patients were being exchanged at the highest level of interoperability--that is, in computable form, a standardized format that a computer application can act on (for example, to provide alerts to clinicians of drug allergies). Viewable data also were being shared including, among other types, outpatient pharmacy data, allergy information, procedures, problem lists, vital signs, microbiology results, cytology reports, and chemistry and hematology reports. However, the departments were not sharing all electronic health data, including for example, immunization records and history, data on exposure to health hazards, and psychological health treatment and care records. Finally, although VA's health information was all captured electronically, not all health data collected by DOD were electronic--many DOD medical facilities used paper-based health records. DOD and VA were participating in a number of initiatives led by the Office of the National Coordinator for Health Information Technology (within HHS), aimed at promoting the adoption of federal standards and broader use of electronic health records. The involvement of the departments in these initiatives was an important mechanism for aligning their electronic health records with emerging standards. The departments also had jointly published a common (agreed to) set of interoperability standards called the Target DOD/VA Health Standards Profile. Updated annually, the profile was used for reviewing joint DOD/VA initiatives to ensure standards compliance. The departments anticipate such updates and revisions to the profile as additional federal standards emerge and are recognized and accepted by HHS. In addition, according to DOD officials, the department was taking steps to ensure that its modernized health information system, AHLTA, was compliant with standards by arranging for certification through the Certification Commission for Healthcare Information Technology. Specifically, version 3.3 of AHLTA was conditionally certified in April 2007 against 2006 outpatient electronic health record criteria established by the commission. DOD officials stated that AHLTA version 3.3 was installed at three DOD locations. The departments' efforts to set up the DOD/VA Interagency Program Office were still in their early stages. Leadership positions in the office had not been permanently filled, staffing was not complete, and facilities to house the office had not been designated. According to the Acting Director, DOD and VA had begun developing a charter for the office, but had not yet completed the document. Further, the implementation plan was in draft, and although it included schedules, milestones for several activities were not determined (such as implementing a capability to share immunization records), even though all capabilities were to be achieved by September 2009. We pointed out that without a fully established program office and a finalized implementation plan with set milestones, the departments might be challenged in meeting the September 2009 date for achieving interoperable electronic health records and capabilities. As a result, we recommended that the Secretaries of Defense and Veterans Affairs give priority to fully establishing the interagency program office and finalizing the draft implementation plan. Both DOD and VA agreed with these recommendations. Since our July 2008 report and September 2008 testimony, DOD and VA have continued to make progress toward increased interoperability through ongoing initiatives and activities documented in their plans related to increasing information sharing efforts. Also, the departments recently expanded the number of standards and specifications with which they expect their interoperability initiatives will comply. However, the departments' plans lack results-oriented (i.e., objective, quantifiable, and measurable) performance goals and measures that are characteristic of effective planning. As a result, the extent to which the departments' progress can be assessed and reported in terms of results achieved is largely limited to reporting on activities completed and increases in interoperability over time. Consequently, it is unclear what health information sharing capabilities will be delivered by September 2009. With regard to their ongoing initiatives, DOD and VA reported increases in data exchanged between the departments for their long-term initiative (CHDR) and their short-term initiative (BHIE). For example, between June and October 2008, the departments increased the number of shared patients for which computable outpatient pharmacy and drug allergy data were being exchanged through the CHDR initiative by about 2,700 (from about 18,300 to over 21,000). For the BHIE initiative, the departments continued to expand their information exchange by sharing viewable patient vital signs information in June 2008, and demonstrated the capability to exchange family history, social history, other history, and questionnaires data in September 2008. Since we last reported, DOD and VA also have made progress toward adopting additional health data interoperability standards that are newly recognized and accepted by the Secretary of HHS. The departments have identified these new standards, which relate to three use cases in the updated September 2008 Target Standards Profile. Specifically, the profile now includes Electronic Health Records Laboratory Results Reporting, Biosurveillance, and Consumer Empowerment use cases. According to DOD and VA officials, the adoption of recognized standards is a goal of both departments in order to comply with the provisions set forth in the National Defense Authorization Act for Fiscal Year 2008. In addition, DOD has reported progress toward certification of its health IT system in adhering to applicable standards. Department officials stated that AHLTA version 3.3 is now fully operational and certified at five DOD locations, having met certification criteria, including specific functionality, interoperability, and security requirements. According to DOD officials, this version of AHLTA is expected to be installed at the remaining locations by September 30, 2009. DOD and VA have also reported progress relative to two plans that contain objectives, initiatives, and activities related to further increasing health information sharing. Specifically, the departments have identified the November 2007 VA/DOD Joint Executive Council Strategic Plan for Fiscal Years 2008-2010 (known as the VA/DOD Joint Strategic Plan) and the September 2008 DOD/VA Information Interoperability Plan (Version 1.0) as defining their efforts to provide interoperable health records. The Joint Strategic Plan identified 39 activities related to information sharing that the departments planned to complete by September 30, 2008. The Information Interoperability Plan describes six objectives to be met by September 30, 2009. The departments reported that the 39 information sharing activities identified in the Joint Strategic Plan were completed on or ahead of schedule. For example, the departments completed a report on the analysis of alternatives and recommendations for the development of the joint inpatient electronic health record, and briefed the recommendations to the Health Executive Council and the Joint Executive Council. However, only 3 of the 39 activities in the Joint Strategic Plan were described in results-oriented (i.e., objective, quantifiable, and measurable) terms that are characteristic of effective planning and can be used as a basis to track and measure progress toward the delivery of new interoperable capabilities. For example, among these three, one of the activities called for the departments to share viewable vital signs data in real-time and bidirectional for shared patients among all sites by June 30, 2008. In contrast, 36 activities lacked results-oriented performance measures, limiting the extent to which progress can be reported in terms of results achieved. For example, one activity calls for the development of a plan for interagency sharing of essential health images, but does not provide details on measurable achievement of additional interoperable capabilities. Another activity calls for the review of national health IT standards, but does not provide a tangible deliverable to determine progress in achieving the goal. According to department officials, DOD and VA have activities underway to address the six interoperability objectives included in the Information Interoperability Plan. Among these objectives, one calls for DOD to deploy its inpatient solution at additional medical sites to expand sharing of inpatient discharge summaries. Department officials indicated that, as of December 2008, DOD is sharing patient discharge summaries at 50 percent of inpatient beds compared to their goal of 70 percent by September 30, 2009. However, this is the only one of six objectives in the Information Interoperability Plan with an associated results-oriented performance measure. None of the remaining five objectives are documented in terms that could allow the departments to measure and report their progress toward delivering new capabilities. Specifically, the objective for scanning medical documents calls for providing an initial capability. However, "initial capability" is not defined in quantifiable terms. As such, this objective cannot be used as a basis to effectively measure results-oriented performance. According to DOD and VA officials, their plans are relatively new and represent their initial efforts to articulate interoperability goals. However, while the departments' plans identify interoperable capabilities to be implemented, the plans do not establish the results-oriented (i.e., objective, quantifiable, and measurable) goals and associated performance measures that are a necessary basis for effective management. Without establishing plans that include results-oriented goals, then reporting progress using measures relative to the plans, the departments and their stakeholders do not have the comprehensive information that they need to effectively manage their progress toward achieving increased interoperability. The National Defense Authorization Act for Fiscal Year 2008 called for the establishment of an interagency program office and for the office to be accountable for implementing electronic health record systems or capabilities that allow for full interoperability of personal health care information between DOD and VA. Since we last reported, the departments have continued taking steps to set up the program office, although they have not yet fully executed their plan for doing so. As a result, the office is not yet in a position to be accountable for accelerating the departments' efforts to achieve interoperability by the September 30, 2009 deadline. To address the requirements set forth in the Act, the departments identified in the September 2008 DOD/VA Information Interoperability Plan a schedule for standing up the interagency program office. Consistent with the plan, the departments have taken steps, such as developing descriptions for key positions, including those of the Director and Deputy Director. Further, the departments have begun to hire personnel for program staff positions. Specifically, out of 30 total program office positions, they have hired staff for 2 of 14 government positions, 6 of 16 contractor positions, and have actions underway to fill the remaining 22 positions. Also, since we reported in July 2008, the departments developed the program office organization structure document that depicts the program office's organization. Further, in December 2008, DOD issued a Delegation of Authority Memorandum, signed by the Deputy Secretary of Defense that formally recognizes the program office. In January 2009, the departments approved a program office charter to describe, among other things, the mission and function of the office. Nonetheless, even with the actions taken, four of eight selected key activities that the departments identified in their plan to set up the program office remain incomplete, including filling the remaining 22 positions, in addition to those of the Director and Deputy Director (as shown in table 1). DOD and VA officials stated that the reason the departments have not completed the execution of their plan to fully set up an interagency program office is the longer than anticipated time needed to obtain approval from multiple DOD and VA offices for key program office documentation (for example, the delegation of authority memorandum and charter). They stated that this was because the departments' leadership broadened the program office's scope to include the sharing of personnel and benefits data in addition to health information. Our July 2008 report recommended that the departments give priority to establishing the program office by establishing permanent leadership and hiring staff. Without completion of these and other key activities to set up the program office, the office is not yet positioned to be fully functional, or accountable, for fulfilling the departments' interoperability plans. Coupled with the lack of results-oriented plans that establish program commitments in measurable terms, the absence of a fully operational interagency program office leaves DOD and VA without a clearly established approach for ensuring that their actions will achieve the desired purpose of the Act. In the more than 10 years since DOD and VA began collaborating to electronically share health information, the two departments have increased interoperability. Nevertheless, while the departments continue to make progress, the manner in which they report progress--by reporting increases in interoperability over time--has limitations. These limitations are rooted in the departments' plans, which identify interoperable capabilities to be implemented, but lack the results-oriented (i.e., objective, quantifiable, and measurable) goals and associated performance measures that are a necessary basis for effective management. Without establishing results-oriented goals, then reporting progress using measures relative to the established goals, the departments and their stakeholders do not have the comprehensive picture that they need to effectively manage their progress toward achieving increased interoperability. Further constraining the departments' management effectiveness is their slow pace in addressing our July 2008 recommendation related to setting up the interagency program office that Congress called for to function as a single point of accountability in the development and implementation of electronic health record capabilities. To better ensure that DOD and VA achieve interoperable electronic health record systems or capabilities, we recommend that the Secretaries of Defense and Veterans Affairs take the following two actions: Develop results-oriented (i.e., objective, quantifiable, and measurable) goals and associated performance measures for the departments' interoperability objectives and document these goals and measures in their interoperability plans. Use results-oriented performance goals and measures as the basis for future assessments and reporting of interoperability progress. In providing written comments on a draft of this report in a January 22, 2009 letter, the Assistant Secretary of Defense for Health Affairs concurred with our recommendations. In a January 17, 2009 letter, the Secretary of Veterans Affairs also concurred with our recommendations. (The departments' comments are reproduced in app. II and app. III, respectively.) DOD and VA stated that high priority will be given to the establishment and use of results- oriented (i.e., objective, quantifiable, and measurable) goals and associated performance measures for the departments' interoperability objectives. If the recommendations are properly implemented, they should better position DOD and VA to effectively measure and report progress in achieving full interoperability. The departments also provided technical comments on the draft report, which we incorporated as appropriate. We are sending copies of this report to the Secretaries of Defense and Veterans Affairs, appropriate congressional committees, and other interested parties. In addition, the report is available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have questions about this report, please contact me at (202) 512-6304 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix II. To evaluate the Department of Defense's (DOD) and the Department of Veterans Affairs' (VA) progress toward developing electronic health record systems or capabilities that allow for full interoperability of personal health care information, we reviewed our previous work on DOD and VA efforts to develop health information systems, interoperable health records, and interoperability standards to be implemented in federal health care programs. To describe the departments' efforts to ensure that their health records comply with applicable interoperability standards, we analyzed information gathered from DOD and VA documentation and interviews pertaining to the interoperability standards that the two departments have agreed to for exchanging health information via their health care information systems. We reviewed documentation and interviewed agency officials from the Department of Health and Human Services' Office of the National Coordinator for Health Information Technology to obtain information regarding the defined federal interoperability standards, implementation specifications, and certification criteria. Further, we interviewed responsible officials to obtain information regarding the steps taken by the departments to certify their electronic health record products. To evaluate DOD and VA plans toward developing electronic health record systems or capabilities, we obtained information from agency documentation and interviews with cognizant DOD and VA officials pertaining to the November 2007 VA/DOD Joint Executive Council Strategic Plan for Fiscal Years 2008-2010, and the September 2008 DOD/VA Information Interoperability Plan (Version 1.0) which together constitute the departments' overall plans for achieving full interoperability of electronic health information. Additionally, we reviewed information gathered from agency documentation to identify interoperability objectives, milestones, and target dates. Further, we analyzed objectives and activities from their plans to determine if DOD and VA had established results-oriented performance measures that enable the departments to assess progress toward achieving increased sharing capabilities and functionality of their electronic health information systems. To determine whether the interagency program office is fully operational and positioned to function as a single point of accountability for developing and implementing electronic health records, we analyzed DOD and VA documentation, including the schedule for setting up the office identified in the DOD/VA Information Interoperability Plan. Additionally, we interviewed responsible officials to determine the departments' progress to date in setting up the interagency program office. Further, we reviewed documentation and interviewed DOD and VA officials to determine the extent to which the departments have positioned the office to function as a single point of accountability for developing electronic health records. We conducted this performance audit at DOD sites and also the Department of Heath and Human Services' Office of the National Coordinator for Health Information Technology in the greater Washington, D.C., metropolitan area from August 2008 through January 2009 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, key contributions to this report were made by Mark Bird, Assistant Director; Neil Doherty; Rebecca LaPaze; J. Michael Resser; Kelly Shaw; and Eric Trout. Information Technology: DOD and VA Have Increased Their Sharing of Health Information, but Further Actions Are Needed. GAO-08-1158T. Washington, D.C.: September 24, 2008. Electronic Health Records: DOD and VA Have Increased Their Sharing of Health Information, but More Work Remains. GAO-08-954. Washington, D.C.: July 28, 2008. VA and DOD Health Care: Progress Made on Implementation of 2003 President's Task Force Recommendations on Collaboration and Coordination, but More Remains to Be Done. GAO-08-495R. Washington, D.C.: April 30, 2008. Health Information Technology: HHS Is Pursuing Efforts to Advance Nationwide Implementation, but Has Not Yet Completed a National Strategy. GAO-08-499T. Washington, D.C.: February 14, 2008. Information Technology: VA and DOD Continue to Expand Sharing of Medical Information, but Still Lack Comprehensive Electronic Medical Records. GAO-08-207T. Washington, D.C.: October 24, 2007. Veterans Affairs: Progress Made in Centralizing Information Technology Management, but Challenges Persist. GAO-07-1246T. Washington, D.C.: September 19, 2007. Information Technology: VA and DOD Are Making Progress in Sharing Medical Information, but Remain Far from Having Comprehensive Electronic Medical Records. GAO-07-1108T. Washington, D.C.: July 18, 2007. Health Information Technology: Efforts Continue but Comprehensive Privacy Approach Needed for National Strategy. GAO-07-988T. Washington, D.C.: June 19, 2007. Information Technology: VA and DOD Are Making Progress in Sharing Medical Information, but Are Far from Comprehensive Electronic Medical Records. GAO-07-852T. Washington, D.C.: May 8, 2007. DOD and VA Outpatient Pharmacy Data: Computable Data Are Exchanged for Some Shared Patients, but Additional Steps Could Facilitate Exchanging These Data for All Shared Patients. GAO-07-554R. Washington, D.C.: April 30, 2007. Health Information Technology: Early Efforts Initiated but Comprehensive Privacy Approach Needed for National Strategy. GAO-07-400T. Washington, D.C.: February 1, 2007. Health Information Technology: Early Efforts Initiated, but Comprehensive Privacy Approach Needed for National Strategy. GAO-07-238. Washington, D.C.: January 10, 2007. Health Information Technology: HHS is Continuing Efforts to Define Its National Strategy. GAO-06-1071T. Washington, D.C.: September 1, 2006. Information Technology: VA and DOD Face Challenges in Completing Key Efforts. GAO-06-905T. Washington, D.C.: June 22, 2006. Health Information Technology: HHS Is Continuing Efforts to Define a National Strategy. GAO-06-346T. Washington, D.C.: March 15, 2006. Computer-Based Patient Records: VA and DOD Made Progress, but Much Work Remains to Fully Share Medical Information. GAO-05-1051T. Washington, D.C.: September 28, 2005. Health Information Technology: HHS Is Taking Steps to Develop a National Strategy. GAO-05-628. Washington, D.C.: May 27, 2005. Computer-Based Patient Records: VA and DOD Efforts to Exchange Health Data Could Benefit from Improved Planning and Project Management. GAO-04-687. Washington, D.C.: June 7, 2004. Computer-Based Patient Records: Improved Planning and Project Management Are Critical to Achieving Two-Way VA-DOD Health Data Exchange. GAO-04-811T. Washington, D.C.: May 19, 2004. Computer-Based Patient Records: Sound Planning and Project Management Are Needed to Achieve a Two-Way Exchange of VA and DOD Health Data. GAO-04-402T. Washington, D.C.: March 17, 2004. Computer-Based Patient Records: Short-Term Progress Made, but Much Work Remains to Achieve a Two-Way Data Exchange Between VA and DOD Health Systems. GAO-04-271T. Washington, D.C.: November 19, 2003. VA Information Technology: Management Making Important Progress in Addressing Key Challenges. GAO-02-1054T. Washington, D.C.: September 26, 2002. Veterans Affairs: Sustained Management Attention Is Key to Achieving Information Technology Results. GAO-02-703. Washington, D.C.: June 12, 2002. VA Information Technology: Progress Made, but Continued Management Attention Is Key to Achieving Results. GAO-02-369T. Washington, D.C.: March 13, 2002. VA and Defense Health Care: Military Medical Surveillance Policies in Place, but Implementation Challenges Remain. GAO-02-478T. Washington, D.C.: February 27, 2002. VA and Defense Health Care: Progress Made, but DOD Continues to Face Military Medical Surveillance System Challenges. GAO-02-377T. Washington, D.C.: January 24, 2002. VA and Defense Health Care: Progress and Challenges DOD Faces in Executing a Military Medical Surveillance System. GAO-02-173T. Washington, D.C.: October 16, 2001. Computer-Based Patient Records: Better Planning and Oversight by VA, DOD, and IHS Would Enhance Health Data Sharing. GAO-01-459. Washington, D.C.: April 30, 2001.

Under the National Defense Authorization Act for Fiscal Year 2008, the Department of Defense (DOD) and the Department of Veterans Affairs (VA) are required to accelerate the exchange of health information between the departments and to develop systems or capabilities that allow for interoperability (generally, the ability of systems to exchange data) and that are compliant with federal standards. The Act also established a joint interagency program office to function as a single point of accountability for the effort, which is to implement such systems or capabilities by September 30, 2009. Further, the Act required that GAO semi-annually report on the progress made in achieving these goals. For this second report, GAO evaluates the departments' progress and plans toward sharing electronic health information that comply with federal standards, and whether the interagency program office is positioned to function as a single point of accountability. To do so, GAO reviewed its past work, analyzed agency documentation, and conducted interviews. DOD and VA continue to increase health information sharing through ongoing initiatives and related activities. Specifically, the departments' are now exchanging pharmacy and drug allergy data on over 21,000 shared patients, an increase of about 2,700 patients between June and October 2008. Further, they recently expanded the number of standards and specifications with which they expect their interoperability initiatives will comply. In addition, DOD reported that it received certification of its electronic health record system. Also, the departments have defined their plans to further increase their sharing of electronic health information. In particular, they have identified the Joint Executive Council Strategic Plan and the DOD/VA Information Interoperability Plan as the key documents defining their planned efforts to provide interoperable health records. These plans identify various objectives and activities that, according to the departments, are aimed at increasing health information sharing and achieving full interoperability, as required by the National Defense Authorization Act for Fiscal Year 2008. However, neither plan identifies results-oriented (i.e., objective, quantifiable, and measurable) performance goals and measures that are characteristic of effective planning and can be used as a basis to track and assess progress toward the delivery of new interoperable capabilities. In the absence of results-oriented goals and performance measures, the departments are not positioned to adequately assess progress toward increasing interoperability. Instead, DOD and VA are limited to assessing progress in terms of activities completed and increases in data exchanged (e.g., the number of patients for which certain types of data are exchanged). The departments have continued to take steps to set up the interagency program office. For example, they have developed descriptions for key positions and agreed with GAO's July 2008 recommendation that they give priority to establishing permanent leadership and hiring staff. Also, the departments developed the program office organization structure document that depicts the office's organization and, in January 2009, the departments approved a program office charter to describe, among other things, the mission and function of the office. Nonetheless, DOD and VA have not yet fully executed their plan to set up the program office. For example, among other activities, they have not yet filled key positions for the Director and Deputy Director, or 22 of 30 other positions identified for the office. In the continued absence of a fully established program office, the departments will remain ineffectively positioned to assure that interoperable electronic health records and capabilities are achieved by the required date.

Express Mail, the Service's premium service, was first offered in 1970 and is designed to provide overnight delivery for documents and packages weighing up to 70 pounds, which are to be tracked from the points of acceptance to points of delivery. It is the Service's only guaranteed delivery service, and customers may request and receive a postage refund if an Express Mail package is not delivered on time. As of July 1996, the minimum postage for mailing an Express Mail package was $10.75. Overall, Express Mail represents a relatively small portion of the Service's total mail volume and revenue. For fiscal year 1995, the Service reported Express Mail volume of 56 million pieces, which generated revenue of about $711 million, or about 1 percent of the Service's total mail volume and postage revenue that year. The Postal Service began offering EMCAs in 1984 to make Express Mail more attractive to customers by giving them a more convenient way to pay postage. Around that time, the Postal Service took other steps as well to retain Express Mail customers. For example, the Postal Service's 1986 annual report to Congress shows that after Express Mail volume dropped by 8.7 percent between fiscal years 1985 and 1986, it ". . . moved aggressively to stop the decline and to make Express Mail service more competitive." According to the 1986 report, the Postal Service implemented an Express Mail morning-delivery program in 30 cities, placed 10,000 Express Mail collection boxes on the streets, and introduced a new Express Mail letter envelope in 1986. During fiscal year 1995, customers used EMCAs to pay about $139 million in postage on about 8 million Express Mail packages, or 13 percent and 16 percent of the Service's total Express Mail volume and revenue, respectively. About 90 percent of all EMCA transactions were for domestic Express Mail, and the balance for international Express Mail. In addition to EMCAs, Express Mail customers can pay postage with cash, checks, and postage meters. Recently, the Postal Service has begun making debit and credit cards increasingly available for use by Express Mail customers and other postal customers. The Service's Vice President for Marketing Systems, under the Senior Vice President for Marketing, has overall responsibility for Express Mail procedures and management oversight. Employees at post offices and mail-processing plants where Express Mail is accepted from customers and prepared for delivery are responsible for implementing the Service's EMCA policy and procedures. In recent years, the House Subcommittee on the Postal Service, the U.S. Postal Service, and we have received allegations of fraudulent schemes to evade payment of postage. In addition, we have reported serious weaknesses in some of the Service's revenue systems. In 1993, we reported weak controls over postage meters after allegations of postage meter fraud and a statement by the Postmaster General, which related that revenue losses could total $100 million annually. More recently, we reported a lack of adequate procedures for accepting bulk mail, for which the Service recorded revenue of about $23 billion in 1994. In response to allegations and our reports, the Service took numerous actions to improve its systems of controls over postage meters and bulk mail acceptance. Since that time, we received the allegation that mailers were abusing EMCAs. Our objectives were to determine (1) whether there is any basis for an allegation regarding EMCA abuse and (2), if so, what steps the Service is taking and could take to help avoid or minimize EMCA revenue losses. To review alleged EMCA abuse, we interviewed various Service officials at headquarters offices in Washington, D.C., and reviewed Servicewide EMCA policies, procedures, and internal controls for opening EMCAs, verifying EMCA numbers presented by customers, closing EMCAs with negative balances, and recording all required Express Mail data when packages are accepted. To ascertain whether procedures and controls were adequate to protect EMCA revenue and were being followed, we reviewed pertinent Postal Service policies, procedures, and forms for EMCA operations and discussed Express Mail and EMCA practices with Service officials in three customer service districts (Dallas, TX; New York, NY; and Van Nuys, CA). We selected the New York and Van Nuys districts because they were among those having the largest number of EMCA transactions. We selected the Dallas district to provide broader geographic coverage of the Service's EMCA activities. To help determine if use of EMCAs had resulted in revenue losses, we reviewed, but did not verify, various management reports relating to EMCA activities generated from the Service's Electronic Marketing and Reporting System (EMRS). These reports provided data on (1) invalid EMCAs accepted by the Service, (2) EMCAs with negative fund balances, and (3) Express Mail packages delivered by the Service with no acceptance data recorded. For the three selected districts, we gathered data on the dollar amounts of the EMCA negative balances that existed for at least five consecutive accounting periods. We scanned some Express Mail labels in all three districts to determine if the Postal Service accepted Express Mail packages from EMCA customers and did not record any acceptance data. We reviewed data provided by the Service's collection agency on the amount of EMCA-related postage lost due to invalid EMCAs. We reviewed relevant portions of all 19 Postal Inspection Service reports that addressed EMCA activities in various districts, including two of the three selected districts. To help determine what recent actions, if any, the Service had taken or planned to take relating to EMCAs, we interviewed various headquarters officials responsible for EMCA procedures and controls and for providing employees with equipment that could help to strengthen EMCA-related controls. We also discussed EMCA procedures with officials at the Service's area offices in Dallas, TX and Memphis, TN. At the Memphis office, we inquired about a recently developed EMCA self-audit guide, which was to be used by all districts. To determine what actions the Service might take to reduce EMCA losses, we interviewed various headquarters officials and reviewed various Service reports showing the purpose to be achieved with EMCAs, Express Mail volumes, and related data after the Service introduced EMCAs. We also interviewed account representatives for two of the Service's principal competitors for overnight delivery--Federal Express and United Parcel Service. We determined if these competitors offered corporate accounts to customers and, if so, what they required for opening an account. The Postal Service provided written comments on a draft of this report. The Service's comments are summarized and evaluated beginning on page 17 and included in appendix II. We did our work from November 1995 through April 1996 in accordance with generally accepted government auditing standards. EMCA procedures have not adequately protected the Service against postage revenue losses, and EMCA customers have sometimes obtained Express Mail services without valid EMCAs. Postal Service reports showed that the EMCAs were invalid because the EMCA numbers used by customers did not match any of the Service's valid numbers. Also, although EMCAs are to always contain sufficient funds to cover Express Mail postage, EMCA customers sometimes overdrew their accounts and accumulated large negative account balances. The Service lost increasing sums of Express Mail revenue in the past 3 years because of weak internal controls over EMCAs. Nationwide, the Service referred about $966,000 in delinquent EMCAs to its collection agency in fiscal year 1995. Of that amount, the Service recovered about $165,000 (17 percent), and the balance of $801,000 was written off as uncollectible, almost twice (90 percent increase) the amount written off in 1993, as figure 1 shows. Postal Service reports show that its employees accepted and delivered some Express Mail packages with invalid EMCA numbers. After delivering the packages, the Service determined that EMCA numbers provided by customers did not match any of the valid EMCA numbers in the Service's automated system. The Service lost revenue and incurred administrative cost to follow up on these customers because it had not determined that their EMCA numbers were invalid before accepting and delivering Express Mail packages. To help employees detect invalid EMCA numbers before accepting Express Mail, the Service includes, as part of a "Fraud Alert" in a biweekly Postal Bulletin distributed within the Service, a list of EMCA numbers that it has determined to be invalid after some prior EMCA action (e.g., it had previously closed the account). Employees are instructed to not accept Express Mail packages bearing any of the invalid numbers. When the packages are accepted at a post office or a mail-processing plant, employees are to check EMCA numbers manually against the biweekly list of invalid numbers. Various Service officials told us that employees accepting Express Mail with EMCA payment do not always use the bulletins to check for invalid EMCAs. Employees at mail-processing plants are expected to move huge volumes of mail in a few hours, and Postal Service officials said that, due to time pressures, most of the EMCA problems occur as a result of improper acceptance of Express Mail at processing plants. A manual process of checking for invalid EMCAs can take a considerable amount of time because of the large quantity of invalid numbers to be scanned for each EMCA package (e.g., the Postal Bulletin dated June 20, 1996, contained about 2,900 invalid 6-digit EMCA numbers listed in numeric order). Employees accepting Express Mail packages at post offices and mail-processing plants have access to and are to use only the list of invalid EMCA numbers to verify that customers are presenting valid EMCA numbers. Therefore, if a customer made up a number, it likely would not be on the Service's list of invalid EMCAs. Postal employees at post offices and processing plants do not have automated access to valid EMCA numbers--which totaled about 113,000 in February 1996. The Postal Service incurred administrative costs to collect postage from some EMCA customers using invalid EMCA numbers after the Postal Service delivered Express Mail packages. Each of the three selected districts we visited had 4 to 13 employees responsible for domestic and international Express Mail and Priority Mail activities. Service officials said that all districts have employees with similar responsibilities. District officials told us that these employees receive reports each workday showing EMCA errors that must be investigated so postage can be collected. These administrative actions can be time consuming and costly because they entail obtaining copies of mailing labels, verifying data, and recording new data when a valid EMCA can be charged. When the EMCA number appears to be invalid, i.e., does not match the Service's records of valid EMCA numbers, the employees must further investigate each case through telephone calls or letters asking for reimbursement and requesting mailers to stop using invalid accounts. Some customers continued to use EMCAs although they had insufficient funds in their accounts to cover charges for Express Mail services that they received--a problem that the Inspection Service reported over several years. Under current Service procedures, customers must maintain a minimum EMCA balance of either the customer's estimated Express Mail postage for 1 week or $50, whichever is higher. However, employees do not have the necessary EMCA data access to verify that this requirement is met before accepting Express Mail packages. Some EMCA customers overdrew their EMCA accounts, and the Postal Service continued to accept Express Mail packages from these customers. When EMCA customers overdraw their accounts, Postal Service procedures require that employees contact individuals and businesses to collect the postage due. A letter is to be sent to the EMCA customer when the account is deficient for one postal accounting period (28 days). If the account remains deficient after 3 postal accounting periods (84 days), the Service is to close the account and refer it to a collection agency used by the Service. However, the Service has little information from EMCA applications to use in locating customers and collecting postage. Under current Service procedures, an individual or corporation is to be approved for an EMCA after completing a one-half page application, which shows the applicant's name, address, and telephone number, and depositing the minimum money required in the account. The Service does not require the applicant to present any identification, such as a driver's license or major credit card, to receive an EMCA. Employees approving EMCA applications are not required to verify any information presented on the applications. Thus, an EMCA applicant could provide false or erroneous information on the application and, in these instances, efforts by the Postal Service and its collection agency to locate the customers and collect postage on the basis of information in the EMCA application likely would be unsuccessful. A Service report on EMCA operations for February 1996 showed that about 97,000 of the approximately 113,000 EMCAs (or 86 percent) had money on deposit with the Service totaling $18.5 million. However, for the remaining 14 percent, or about 16,000 EMCAs, there was no money on deposit; rather, the accounts were overdrawn by $4.3 million. According to the Service's management reports on Express Mail operations, many EMCAs had large negative balances for periods exceeding three accounting periods and were not closed or sent to the collection agency. For example, in the New York district, 16 of the 27 EMCAs we reviewed had negative balances for about 5 consecutive accounting periods (about 140 days). Of these 16 EMCAs, 10 had negative balances of more than $2,000 each, at the time of our review; and the negative balance for one account was about $10,000. Similarly, in the Van Nuys district, 10 of the 14 EMCAs we reviewed had negative balances for 5 consecutive accounting periods, and the negative balances for 8 accounts were about $3,000 each. In the Dallas district, 3 of the 12 EMCAs we reviewed had negative balances for 5 consecutive accounting periods, including 1 EMCA with a $8,800 negative balance. The Service's practice of allowing postage to remain unpaid for Express Mail services over long periods of time is inconsistent with the Service policy, which requires that Express Mail must be prepaid or paid at the time of mailing. Further, allowing customers to overdraw EMCAs and maintain active EMCAs with negative balances for periods exceeding three accounting periods violates Postal Service procedures. The Postal Inspection Service has conducted financial audits that included a review of controls over EMCA operations. Postal inspectors in the New York district reported finding overdrawn EMCAs during five audits done since 1987. Some audits revealed that the total negative EMCA balances for the district exceeded $600,000. The inspectors reported that the Van Nuys district had EMCAs with negative balances at various times since 1988. For example, in 1994, the district had EMCA accounts with negative balances totaling about $122,000. As a result of financial audits, the Inspection Service also reported EMCAs with negative balances in many districts that we did not visit. In reports on districts with negative EMCA balances, the Inspection Service recommended that local management take action to eliminate such balances. Along with not verifying some EMCAs, Service employees at times did not make any record of accepting Express Mail packages that the Service processed and delivered. In these instances, the necessary information was not available to respond to customer inquiries about the status of packages and process requests for postage refunds when customers claimed that packages were delivered late. Also, in cases where EMCAs were to be charged, the Service lost some revenue because of the lack of acceptance data. Employees receiving Express Mail packages, whether EMCAs are used or not, are to electronically scan a barcode on the mailing labels to record data for tracking and reporting purposes. When the packages include EMCA numbers, employees are to record those numbers so that the Service can charge postage to the EMCA. Postal Service reports showed that, for the 12-month period ending February 1996, it delivered about 1.9 million domestic Express Mail packages, or 3.4 percent of total domestic Express Mail volume, for which the Service did not record any required acceptance data. Service officials in the three districts we visited said that recording Express Mail acceptance can be a problem when customers drop packages in collection boxes and employees are expected to record acceptance data when the packages arrive at a mail-processing plant. According to these officials, pressures to keep the mail moving and meet scheduled deadlines can result in some Express Mail being received, sorted, and delivered without proper acceptance. Service officials at headquarters and in the districts we visited routinely receive exception reports showing that Express Mail was delivered but not properly accepted. They said that generally no attempt is made to correct these errors or collect the postage due in cases where EMCAs are used. Specifically, district officials said that they were instructed by Service headquarters not to take any action in these cases. They also said that they did not have the employees needed to do follow-up, even if it were required. When the Service failed to record acceptance of Express Mail packages, it did not have data needed to respond to customers' inquiries about the status of Express Mail packages. Because the packages were not logged in, the Service had no record to show when packages were received. The Service needs such data to verify whether Express Mail customers' claims for postage refunds on late deliveries are valid. The Service guarantees that Express Mail packages will be delivered on time. In fiscal year 1995, the Service refunded postage to Express Mail customers totaling about $1.5 million. We did not determine if it had adequate data for determining whether the refund claims were valid. However, if the Service lacks data on when a package was accepted for delivery, it cannot determine whether the package was delivered on time or whether it was delivered late. Further, the Service regularly reports on-time delivery rates for Express Mail on the basis of the data that are to be recorded when packages are accepted and delivered. When acceptance data are not recorded, the Service has incomplete data to report on-time delivery rates for Express Mail. The Service lost unknown amounts of revenue because some customers had included EMCA numbers on Express Mail packages, but Service employees did not record any acceptance data. We scanned some Express Mail labels in the three selected districts and noted that all three had received some Express Mail packages from EMCA customers without recording acceptance data. In all three districts, the practice was to not follow up when customers used EMCAs; therefore, no Express Mail acceptance data were recorded. Postal Service officials in the three districts and at headquarters did not know the extent of EMCA revenue losses associated with the failure to record Express Mail acceptance data. We identified two Postal Service actions under way that could help to improve EMCA controls and thereby reduce related revenue losses and provide needed EMCA data. However, these actions were not fully implemented at the time of our review, and the actions do not address some EMCA control weaknesses that we identified. Recognizing the Postal Service's overall vulnerability to revenue losses, in 1994, the Senior Vice President for Finance established a new revenue assurance unit to help collect revenue owed to the Service. The new unit targeted EMCAs as one of five Postal Service operations for improvement. The unit developed strategies, such as self-audits of EMCA activities, to reduce revenue losses resulting from EMCAs. At the time of our review, the strategies had not yet been fully implemented; and no results from the self-audits, or the unit's other EMCA-related efforts, were available for our review. In addition to the above action, the Postal Service was installing "point-of-service" terminals at post offices to provide employees with improved access to current postage rates and certain other automated data maintained by the Postal Service. According to the headquarters manager responsible for the point-of-service terminal project, eventually, the terminals are to provide access to the EMCA database and thus enable employees to verify EMCA numbers and fund balances before accepting Express Mail packages. He said that the date and additional cost to provide this access are yet to be determined. The Service did not plan to provide the terminals to employees in mail-processing plants who accept Express Mail packages. These employees will still lack access to valid EMCA numbers and current fund balances, and the Service will continue to be vulnerable to revenue losses when customers drop Express Mail packages in collection boxes and include invalid EMCA numbers on the packages. Although completion of Service actions discussed above should help to improve controls over EMCAs and reduce related revenue losses, control weaknesses will remain. Taking additional steps to better ensure compliance with existing controls, as well as adding controls, can help to protect revenue. But, the Postal Service will incur cost to strengthen internal controls over EMCAs. Given this and other factors, such as changes that have occurred in the overnight mail delivery market and new methods of providing customer convenience, a reasonable step would be for the Postal Service to first ensure that it wants to retain EMCAs before incurring substantial, additional costs to improve related controls. The Postal Service introduced EMCAs in 1984 to help stem the decline in the growth of Express Mail business and become more competitive. As we previously reported, since that time, private carriers have dominated the expedited (overnight) delivery market. We reported that Federal Express is the acknowledged leader in this market and that the Postal Service's share of the market declined from 100 percent in 1971 to 12 percent in 1990. Recognizing these market realities, in recent years, the Postal Service has focused marketing efforts more on Priority Mail--which generally is to be delivered in 2 or 3 days--than overnight Express Mail. Priority Mail accounted for almost 6 percent of total revenue in fiscal year 1995, compared with just over 1 percent for Express Mail. Unlike Express Mail, the Postal Service does not offer a corporate account for Priority Mail, and the annual growth rate of Priority Mail pieces outpaced Express Mail growth over each of the past 5 fiscal years. (See figure 2.) Other factors also suggest that EMCAs may not be the most cost-effective method of offering payment convenience. Specifically, in 1994, the Postal Service began offering customers the use of major debit or credit cards (e.g., MasterCard, Visa, or American Express) to pay for various mail services at post offices. Customers who want to drop Express Mail packages in collection boxes currently have the option of using postage meters to pay postage. Thus, as one step toward addressing EMCA control problems, the Postal Service could compare the relative customer convenience, administrative cost, and risk of revenue losses of EMCAs with alternative payment methods currently available to Express Mail customers. The Postal Service could also consider competitors' current customer service practices. On the basis of our limited inquiry, we found some of the Postal Service's competitors (i.e., Federal Express and United Parcel Service) offer corporate accounts to customers. For example, Federal Express offers customers a "FedEx" account and requires that applicants have a major credit card to qualify for an account. If the Postal Service determines that EMCAs are necessary or desirable, we identified two additional steps, beyond those now planned and under way, to help minimize the risk of EMCA abuse and revenue losses as discussed below. First, while the self-audits proposed by the revenue assurance unit could help to improve compliance, the audits were just getting started at the time of our review. Express Mail packages can be accepted at about 40,000 post offices and several hundred mail-processing plants, and self-audits covering all of these entities will take some time to complete. Postal Service headquarters responsible for Express Mail operations could reinforce the need for managers and employees to comply with existing internal procedures and controls designed to prevent EMCA abuse. These procedures require employees to (1) record all required data from Express Mail labels, (2) verify EMCA numbers presented by customers against lists of invalid EMCA numbers, and (3) close EMCAs with negative balances running more than three postal accounting periods. Second, the Postal Service could improve EMCA internal controls by imposing more stringent requirements for opening EMCAs, such as requiring that individuals present a valid driver's license, a valid major credit card, or other appropriate identification to receive an EMCA. If Postal Service employees approving EMCAs are required to record information from such sources about EMCA applicants, such information could be useful to the Service and its collection agency to locate and collect postage from customers with overdrawn and closed EMCAs. Internal controls over EMCAs are weak or nonexistent, which has resulted in potential for abuse and increasing revenue losses over the past 3 fiscal years. Establishing adequate control over EMCA operations will require management attention and additional dollar investments. In light of the control problems we identified, overnight mail market developments since 1984, and the increased availability of other payment methods, EMCAs may not be the most cost-effective method of providing a convenient method for paying Express Mail postage. This question requires further evaluation by the Postal Service of all the relevant factors. If EMCAs are necessary or desirable, the Postal Service can take steps beyond those planned and under way to help minimize revenue losses and other problems associated with EMCAs. Some employees did not always comply with existing EMCA procedures for checking EMCAs numbers and recording Express Mail data. Although acceptance employees are under pressure to move the mail and some have side stepped some required tasks, management could emphasize to these employees the importance of following EMCA procedures and collecting the postage due when the Postal Service delivers mail. Further, the Postal Service violated its procedures by allowing customers to overdraw EMCAs and continue using them for up to 5 months. Currently, few requirements exist for customers to obtain EMCAs; and more stringent requirements for opening EMCAs, similar to those used by the Service's competitors, might also help to avoid Express Mail revenue losses. To help reduce EMCA revenue losses and other related problems discussed in this report, we recommend that the Postmaster General require Service executives to determine if EMCAs are the most cost-effective method for achieving the purpose for which they were intended, in light of all relevant factors. If EMCAs are determined to be a necessary or desirable method, we recommend that the Service (1) establish stronger requirements for opening EMCAs and (2) hold managers and employees accountable for handling EMCA transactions in accordance with the new requirements as well as existing Service policies and procedures for verifying EMCA numbers, closing EMCAs with negative balances, and recording required data for all Express Mail packages accepted. In a September 9, 1996, letter, the Postmaster General said that the Postal Service agreed with our overall findings and conclusions. He said that the Service was moving forward with initiatives to cut down on revenue losses from invalid EMCAs. In addition to the two actions discussed previously in our report, he said that the Service will take the following actions to address our recommendations: Establish more stringent requirements for opening and using EMCAs. These requirements will include a $250 deposit (in lieu of a $100 deposit now required) to open an account and weekly reviews at acceptance units of EMCA use to ensure that minimum balance requirements are met. Area and district managers will focus more consistent attention on ensuring that acceptance units follow EMCA procedures. Examine the feasibility and cost of installing terminals at mail-processing plants in addition to the terminals being installed at many post offices to check instantly whether EMCAs are valid and contain sufficient funds for Express Mail postage. Evaluate whether continuing to offer EMCAs as a payment option still makes good business sense. The Service expects these corrective actions to go a long way toward minimizing the use of invalid EMCAs and revenue losses. We agree that, when the Service has fully implemented the actions taken and planned, controls over EMCA are likely to be significantly improved. The Service will need to coordinate these EMCA improvement actions with its evaluation to determine whether to continue offering EMCAs. Otherwise, it could incur unnecessary cost of improving controls over EMCAs if later it determines that EMCAs do not make good business sense and should be discontinued. We are sending copies of this report to the Postmaster General, the Postal Service Board of Governors, the Ranking Minority Member of your Subcommittee, the Chairman and Ranking Minority Member of the Senate Oversight Committee for the Postal Service, and other congressional committees that have responsibilities for Postal Service issues. Copies will also be made available to others upon request. The major contributors to this report are listed in appendix III. If you have any questions about this report, please call me on (202) 512-8387. EMCAs are available to both individual and business customers. Under current Service procedures, anyone can open an EMCA by depositing $100 or the customer's estimated 2-weeks Express Mail postage, whichever is higher. EMCA customers are required to maintain a minimum balance of $50 or 1-week Express Mail postage, whichever is higher, on deposit with the Service. Although Service officials said that the number of active EMCA varies daily, Service records show that, during the month of February 1996, an average of about 113,000 EMCAs existed nationwide. When opening EMCAs, customers are to be given a six-digit EMCA number, and these numbers are to be included on mailing labels affixed to the Express Mail packages. Customers can drop the package in a collection box designated for Express Mail or take the package to a post office, mail-processing plant, or other places where the Service accepts Express Mail. Postmasters, clerks, or other Service employees accepting Express Mail at post offices and mail-processing plants are to electronically scan a preprinted barcode on the Express Mail label, which enters the label's unique identifying number into an automated system for tracking purposes. The employees are to weigh the package, verify that the customer calculated the correct postage, and take steps as required to ensure the correct postage is collected. These steps are to be done for all Express Mail, whether an EMCA is used for payment or not. For those Express Mail packages involving an EMCA, employees accepting the package are to determine if the EMCA number on the package is invalid by manually comparing the number against a list of EMCA numbers that the Service has determined to be invalid. If the number on the package is not found on that list, employees are to manually key in the EMCA number and the postage due so that the amount can be charged to the EMCA. An EMCA is to be charged for the Express Mail package when employees record a valid EMCA number at the acceptance point and scan the Express Mail barcode. A sample Express Mail label follows, showing EMCA numbers and other data to be recorded by employees when they accept a package. Postal Service employees are to manually record an Express Mail Corporate Account number supplied by the customer in this block. Employees are to scan a barcode pre-printed by the Service on each Express Mail label. After acceptance is recorded, the Service is to track each Express Mail package until it reaches the delivery station near the home or business receiving the package. At these stations, Service employees are to again electronically scan the barcode on the Express Mail label before the package is delivered. The Service has an Electronic Marketing and Reporting System (EMRS) to record, track, and report on Express Mail transactions. The system is used to receive and compare the Express Mail identification numbers scanned by postal employees at the post offices or mail-processing plants and delivery stations. If the comparisons show no match between the scanned barcodes entered at the points of acceptance and delivery, exception reports are to be prepared and made available to Service officials each workday for follow-up action. EMRS also generates reports showing (1) pieces of mail charged to invalid EMCAs; (2) Express Mail packages scanned at either the acceptance point or the delivery point, but not both; and (3) EMCAs with insufficient or negative fund balances. Along with these exception reports, the system generates other reports every 4 weeks for use by Service officials and, in some cases, EMCA customers. Among these reports are those that show Express Mail volume and revenue, on-time delivery rates, and refunds of postage for late delivery. Service officials and each EMCA customer are to receive a report every 4 weeks showing the beginning EMCA balance, number of packages mailed, amount of postage charged during the preceding 4-week period, ending and minimum balances, and any additional deposit required by the customer. Sherrill Johnson, Core Group Manager Raimondo Occhipinti, Evaluator-in-Charge Hugh Reynolds, Evaluator The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a congressional request, GAO reviewed the U.S. Postal Service's controls over Express Mail Corporate Accounts (EMCA), focusing on: (1) whether there is any basis for the allegation of EMCA abuse; and (2) if so, what steps the Service is taking to help avoid or minimize EMCA revenue losses. GAO found that: (1) some mailers obtained Express Mail services using invalid EMCA in fiscal year 1995; (2) the Service did not collect the postage due or verify EMCA which were later determined to be invalid; (3) some EMCA customers overdrew their accounts and carried negative balances; (4) the Service plans to provide post office employees with automated access to valid EMCA numbers and fund balances, but has no plans to provide similar access to employees at mail-processing plants; (5) although the Service's planned actions to improve controls over EMCA operations will take a considerable amount of money and time to complete, they will not have addressed several other EMCA control weaknesses; (6) to determine whether EMCA continue to be necessary or desirable, the Service could evaluate the relative customer convenience, cost-effectiveness, and other relevant factors; and (7) if EMCA are continued, Service employees need to follow new and existing procedures designed to help prevent EMCA revenue losses.

Before I discuss our review of agencies' fiscal year 2005 PARs, I would like to summarize IPIA, related OMB initiatives, and statutory requirements for recovery audits. The act, passed in November 2002, requires agency heads to review their programs and activities annually and identify those that may be susceptible to significant improper payments. For each program and activity agencies identify as susceptible, the act requires them to estimate the annual amount of improper payments and submit those estimates to the Congress. The act further requires that for programs for which estimated improper payments exceed $10 million, agencies are to report annually to the Congress on the actions they are taking to reduce those payments. The act requires the Director of OMB to prescribe guidance for federal agencies to use in implementing IPIA. OMB issued guidance in May 2003 requiring the use of a systematic method for the annual review and identification of programs and activities that are susceptible to significant improper payments. The guidance defines significant improper payments as those in any particular program that exceed both 2.5 percent of program payments and $10 million annually. It requires agencies to estimate improper payments annually using statistically valid techniques for each susceptible program or activity. For those agency programs determined to be susceptible to significant improper payments and with estimated annual improper payments greater than $10 million, IPIA and related OMB guidance require each agency to report the results of its improper payment efforts for fiscal years ending on or after September 30, 2004. OMB guidance requires the results to be reported in the Management Discussion and Analysis section of the agency's PAR. In August 2004, OMB established Eliminating Improper Payments as a new program-specific initiative under the PMA. This separate improper payments PMA program initiative began in the first quarter of fiscal year 2005. Previously, agency efforts related to improper payments were tracked along with other financial management activities as part of the Improving Financial Performance initiative of the PMA. The objective of establishing a separate initiative for improper payments was to ensure that agency managers are held accountable for meeting the goals of IPIA and are therefore dedicating the necessary attention and resources to meeting IPIA requirements. With this new initiative, 15 agencies are to measure their improper payments annually, develop improvement targets and corrective actions, and track the results annually to ensure the corrective actions are effective. In August 2005, OMB revised Circular No. A-136, Financial Reporting Requirements, and incorporated IPIA reporting details from its May 2003 IPIA implementing guidance. Among other things, OMB Circular No. A-136 includes requirements for agencies to report on their risk assessments; annual improper payment estimates; corrective action plans; and recovery auditing efforts, including the amounts recovered in the current year. Section 831 of the National Defense Authorization Act for Fiscal Year 2002 contains a provision that requires all executive branch agencies entering into contracts with a total value exceeding $500 million in a fiscal year to have cost-effective programs for identifying errors in paying contractors and for recovering amounts erroneously paid. The legislation further states that a required element of such a program is the use of recovery audits and recovery activities. The law authorizes federal agencies to retain recovered funds to cover in-house administrative costs as well as to pay contractors, such as collection agencies. Agencies that are required to undertake recovery audit programs were directed by OMB to provide annual reports on their recovery audit efforts, along with improper payment reporting details in an appendix to their PARs. The fiscal year 2005 PARs, the second set of reports representing the results of agency assessments of improper payments for all federal programs, were due November 15, 2005. In our December 2005 report on the U.S. government's consolidated financial statements for the fiscal years ended September 30, 2005 and 2004, which includes our associated opinion on internal control, we reported improper payments as a material weakness in internal control. Specifically, we reported that while progress had been made to reduce improper payments, significant challenges remain to effectively achieve the goals of IPIA. We reviewed the fiscal year 2005 PARs or annual reports for 32 of the 35 federal agencies that the Treasury determined to be significant to the U.S. government's consolidated financial statements. Of those 32 agencies, 23 reported that they had completed risk assessments for all programs and activities. See appendix II for detailed information on each agency. This was the same number of agencies that reported having completed risk assessments in our prior year review. The remaining 9 agencies either were silent on IPIA reporting details in their PARs or annual reports or had not yet assessed the risk of improper payments for all their programs. In addition, we noted that selected agency auditors reviewed agencies' risk assessment methodologies and identified issues of noncompliance or other deficiencies. For example, auditors for the Departments of Justice and Homeland Security cited agency noncompliance with IPIA in their fiscal year 2005 annual audit reports, primarily caused by inadequate risk assessments. The Department of Justice auditor stated that one agency component had not established a program to assess, identify, and track improper payments. The agency acknowledged this noncompliance in its PAR as well. The Department of Homeland Security (DHS) auditor reported that the department did not institute a systematic method of reviewing all programs and identifying those it believed were susceptible to significant erroneous payments. This was the second consecutive year that the auditor reported IPIA noncompliance for DHS. Although the auditors identified the agency's risk assessment methodology as inadequate, DHS reported in its PAR that it had assessed all of its programs for risk. A third agency auditor reported that the Department of Agriculture needed to strengthen its program risk assessment methodology to identify and test critical internal controls over program payments totaling over $100 million. As I highlighted in my introduction, federal agencies' reported estimates of improper payments for fiscal year 2005 exceeded $38 billion. This represents almost a $7 billion, or 16 percent, decrease in the amount of improper payments reported by 17 agencies in fiscal year 2004. On the surface, this appears to be good news. However, the magnitude of the governmentwide improper payment problem remains unknown. This is because, in addition to not assessing all programs, some agencies had not yet prepared estimates of significant improper payments for all programs determined to be at risk. Specifically, of the 32 agency PARs included in our review, 18 agencies reported improper payment estimates totaling in excess of $38 billion for some or all of their high-risk programs. The $38 billion represents estimates for 57 programs. Of the remaining 14 agencies that did not report estimates, 8 said they did not have any programs susceptible to significant improper payments, 5 were silent about whether they had programs susceptible to significant improper payments, and the remaining 1 identified programs susceptible to significant improper payments and said it plans to report an estimate by fiscal year 2007. Further details are included in appendix I. Regarding the reported $7 billion decrease in the governmentwide improper payment estimate for fiscal year 2005, we determined that this decrease was primarily due to a $9.6 billion reduction in the Department of Health and Human Services's (HHS) Medicare program improper payment estimate, which was partially offset by more programs reporting estimates of improper payments, resulting in a net decrease of $7 billion. Based on our review, HHS's $9.6 billion decrease in its Medicare program improper payment estimate was principally due to its efforts to educate health care providers about its Medicare error rate testing program and the importance of responding to its requests for medical records to perform detailed statistical reviews of Medicare payments. HHS reported that these more intensive efforts had dramatically reduced the number of "no documentation" errors in its medical reviews. The relevance of this significant decrease is that when providers do not submit documentation to justify payments, these payments are counted as erroneous for purposes of calculating an annual improper payment estimate for the Medicare program. HHS reported marked reductions in its error rate attributable to (1) nonresponses to requests for medical records and (2) insufficient documentation submitted by the provider. We noted that these improvements partially resulted from HHS extending the time that providers have for responding to documentation requests from 55 days to 90 days. These changes primarily affected HHS's processes related to its efforts to perform detailed statistical reviews for the purposes of calculating an annual improper payment estimate for the Medicare program. While this may represent a refinement in the program's improper payment estimate, the reported reduction may not reflect improved accountability over program dollars. Our work did not include an overall assessment of HHS's estimating methodology. However, we noted that the changes made for the fiscal year 2005 estimate were not related to improvements in prepayment processes, and we did not find any evidence that HHS had significantly enhanced its preventive controls in the Medicare payment process to prevent future improper payments. Therefore, the federal government's progress in reducing improper payments may be exaggerated because the reported improper payments decrease in the Medicare program accounts for the bulk of the overall reduction in the governmentwide improper payments estimate. Mr. Chairman, I think the only valid observation at this time is that improper payments are a serious problem, agencies are working on this issue at different paces, and the extent of the problem and the level of effort necessary to control these losses is as yet unknown. What is clear is that there is a lot of work to do in this area. Agency auditors have reported major management challenges related to agencies' improper payment estimating methodologies and highlighted internal control weaknesses that continue to plague programs susceptible to significant improper payments. For example, the Department of Labor's agency auditor reported that inadequate controls existed in the processing of medical bill payments for its Federal Employee Compensation Act program. As a result, medical providers were both overpaid and underpaid. Internal control weaknesses were also identified in the Small Business Administration's (SBA) 7(a) Business Loan program. SBA did not consistently identify instances of noncompliance with its own requirements, resulting in improper payments. In another example, agency auditors for the Department of Education (Education) raised concerns about the methodology Education used to estimate improper payments for its Federal Student Aid program. The auditors reported that the methodology used did not provide a true reflection of the magnitude of improper payments in the student loan programs. To overcome these major management challenges, agencies will need to aggressively deploy more innovative and sophisticated approaches to correct such deficiencies and identify and reduce improper payments. Also, I would like to point out that the fiscal year 2005 governmentwide improper payments estimate of $38 billion did not include seven major programs, with outlays totaling over $227 billion for fiscal year 2005. OMB had specifically required these seven programs to report selected improper payment information for several years before IPIA reporting requirements became effective. After passage of IPIA, OMB's implementing guidance required that these programs continue to report improper payment information under IPIA. As shown in table 1, the fiscal year 2005 governmentwide improper payment estimate does not include one of the largest federal programs determined to be susceptible to risk, HHS's Medicaid program, with outlays exceeding $181 billion annually. Of these seven programs, four programs reported that they would be able to estimate and report on improper payments sometime within the next 3 fiscal years, but could not do so for fiscal year 2005. For the remaining three programs, the agencies did not estimate improper payment amounts in their fiscal year 2005 PARs and were silent about whether they would report estimates in the future. As a result, improper payments for these programs susceptible to risk will not be known for at least several years, even though these agencies had been required to report this information since 2002, with their fiscal year 2003 budget submissions under previous OMB Circular No. A-11 requirements. OMB reported that some of the agencies were unable to determine the rate or amount of improper payments because of measurement challenges or time and resource constraints, which OMB expects to be resolved in future reporting years. However, in the case of the HHS programs, the agency auditor recognized this lack of reporting as a reportable condition. In its fiscal year 2005 audit report on compliance with laws and regulations, the auditor reported that HHS potentially had not fully complied with IPIA because nationwide improper payment estimates and rates for significant health programs were under development and the agency did not expect to complete the estimation process until fiscal year 2007. Another factor which may affect the magnitude of improper payments is Hurricane Katrina, one of the largest natural disasters in our nation's history. In order to respond to the immediate needs of disaster victims and to rebuild the affected areas, government agencies streamlined eligibility verification requirements for delivery of benefits and expedited contracting methods in order to commit contractors to begin work immediately. These expedited processes can increase the potential for improper payments. For example, from our recent review of the Federal Emergency Management Agency's (FEMA) Individuals and Households Program we identified significant flaws in the process for registering disaster victims for assistance payments. We found limited procedures in place designed to prevent, detect, and deter certain types of duplicate and potentially fraudulent disaster registrations. As a result, we determined that thousands of registrants provided incorrect Social Security numbers, dates of birth, and addresses to obtain assistance and found that FEMA made duplicate assistance payments to about 5,000 of the nearly 11,000 debit card recipients. In one example of expedited contracting, the Department of Transportation (DOT) Office of Inspector General (OIG) determined that DOT had overpaid a contractor by approximately $32 million for services to provide buses for evacuating hurricane victims from the New Orleans area. According to the OIG, the overpayment occurred because DOT had made partial payments based on initial task estimates and without documentation that substantiated the dollar amount of services actually provided to date. Although DOT promptly recovered the funds, the nature of these types of exigencies to adequately respond to the hurricane victims illustrates that future improper payments are likely to occur. As a result, selected agencies, such as DHS and DOT, have said they plan to perform concentrated reviews of payments related to relief efforts to identify the extent of improper payments, develop actions to reduce these types of payments, and enhance internal controls for future relief efforts. Section 831 of the National Defense Authorization Act for Fiscal Year 2002 provides an impetus for applicable agencies to systematically identify and recover contract overpayments. Recovery auditing is another method that agencies can use to recoup detected improper payments. Recovery auditing focuses on the identification of erroneous invoices, discounts offered but not received, improper late penalty payments, incorrect shipping costs, and multiple payments for single invoices. Recovery auditing can be conducted in-house or contracted out to recovery audit firms. The law authorizes federal agencies to retain recovered funds to cover in-house administrative costs as well as to pay contractors, such as collection agencies. Any residual recoveries, net of these program costs, shall be credited back to the original appropriation from which the improper payment was made, subject to restrictions as described in legislation. As we previously reported, with the passage of this law, the Congress has provided agencies a much needed incentive for identifying and reducing their improper payments that slip through agency prepayment controls. The techniques used in recovery auditing offer the opportunity for identifying weaknesses in agency internal controls, which can be modified or upgraded to be more effective in preventing improper payments before they occur. For fiscal year 2005, OMB clarified the type of recovery auditing information that applicable agencies are to report in their annual PARs. Prior to fiscal year 2005, applicable agencies were only required to report on the amount of recoveries expected, the actions taken to recover them, and the business process changes and internal controls instituted or strengthened to prevent further occurrences. In addition, OMB was not reporting on a governmentwide basis agencies' recovery audit activities in its annual report on agencies' efforts to improve the accuracy and integrity of federal payments. In fiscal year 2005, OMB revised its recovery auditing reporting requirements and required applicable agencies to provide more detailed information on their recovery auditing activities. Specifically, in addition to the prior year requirements, agencies that entered into contracts with a total value exceeding $500 million annually were required to discuss any contract types excluded from review and justification for doing so. In addition, agencies were required to report, in table format, various amounts related to contracts subject to review and actually reviewed, contract amounts identified for recovery and actually recovered, and prior year amounts. For fiscal year 2005, 19 agencies reported entering into contracts with a total value in excess of the $500 million reporting threshold. These 19 agencies reported reviewing more than $300 billion in contract payments to vendors. From these reviews, agencies reported identifying about $557 million in improper payments for recovery and reported actually recovering about $467 million, as shown in table 2. In closing, I want to say that we recognize that measuring improper payments and designing and implementing actions to reduce them are not simple tasks and will not be easily accomplished. The ultimate success of the governmentwide effort to reduce improper payments depends, in part, on each federal agency's continuing diligence and commitment to meeting the requirements of IPIA and the related OMB guidance. The level of importance each agency, the administration, and the Congress place on the efforts to implement the act will determine its overall effectiveness and the level to which agencies reduce improper payments and ensure that federal funds are used efficiently and for their intended purposes. With budgetary pressures rising across the federal government, and the Congress's and the American public's increasing demands for accountability over taxpayer funds, identifying, reducing, and recovering improper payments become even more critical. Fulfilling the requirements of IPIA will require sustained attention to implementation and oversight to monitor whether desired results are being achieved. Mr. Chairman, this concludes my statement. I would be pleased to respond to any questions that you or other members of the Subcommittee may have. For more information regarding this testimony, please contact McCoy Williams, Director, Financial Management and Assurance, at (202) 512-9095 or by e-mail at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. Individuals making key contributions to this testimony included Carla Lewis, Assistant Director; Francine DelVecchio; Christina Quattrociocchi; and Donell Ries. Programs that the agency reported were not susceptible to significant improper 38. Section 8 Tenant 39. Section 8 Project Development Block Grant (Entitlement Grants, States/Small Cities) Programs that the agency reported were not susceptible to significant improper 48. All programs and 49. All programs and Education Grants and Cooperative Agreements 51. All programs and Program (Civil Service Retirement System and Federal Employees Retirement System) See table 1 of this testimony. Agency fiscal year 2005 PAR or annual report information not available as of the end of our fieldwork. Agency did not address improper payments or the Improper Payments Information Act (IPIA) requirements for this program in its fiscal year 2005 PAR or annual report. Financial Management: Challenges in Meeting Governmentwide Improper Payment Requirements. GAO-05-907T. Washington, D.C.: July 20, 2005. Financial Management: Challenges in Meeting Requirements of the Improper Payments Information Act. GAO-05-605T. Washington, D.C.: July 12, 2005. Financial Management: Challenges in Meeting Requirements of the Improper Payments Information Act. GAO-05-417. Washington, D.C.: March 31, 2005. Financial Management: Fiscal Year 2003 Performance and Accountability Reports Provide Limited Information on Governmentwide Improper Payments. GAO-04-631T. Washington, D.C.: April 15, 2004. Financial Management: Status of the Governmentwide Efforts to Address Improper Payment Problems. GAO-04-99. Washington, D.C.: October 17, 2003. Financial Management: Effective Implementation of the Improper Payments Information Act of 2002 Is Key to Reducing the Government's Improper Payments. GAO-03-991T. Washington, D.C.: July 14, 2003. Financial Management: Challenges Remain in Addressing the Government's Improper Payments. GAO-03-750T. Washington, D.C.: May 13, 2003. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Improper payments are a longstanding, widespread, and significant problem in the federal government. The Congress enacted the Improper Payments Information Act of 2002 (IPIA) to address this issue. Fiscal year 2005 marked the second year that federal agencies governmentwide were required to report improper payment information under IPIA. One result of IPIA has been increased visibility over improper payments by requiring federal agencies to identify programs and activities susceptible to improper payments, estimate the amount of their improper payments, and report on the amounts of improper payments and their actions to reduce them in their annual performance and accountability reports (PAR). GAO was asked to testify on the progress being made by agencies in complying with requirements of IPIA and the magnitude of improper payments. As part of the review, GAO looked at (1) the extent to which agencies have performed risk assessments, (2) the annual amount of improper payments estimated, and (3) the amount of improper payments recouped through recovery audits. The federal government continues to make progress in identifying programs susceptible to the risk of improper payments in addressing the new IPIA requirements. At the same time, significant challenges remain to effectively achieve the goals of IPIA. The 32 fiscal year 2005 PARs GAO reviewed show that some agencies still have not instituted systematic methods of reviewing all programs and activities, have not identified all programs susceptible to significant improper payments, or have not annually estimated improper payments for their high-risk programs as required by the act. The full magnitude of the problem remains unknown because some agencies have not yet prepared estimates of improper payments for all of their programs. Of the 32 agencies reviewed, 18 reported over $38 billion of improper payments in 57 programs. This represented almost a $7 billion, or 16 percent, decrease in the amount of improper payments reported by 17 agencies in fiscal year 2004. However, the governmentwide improper payments estimate does not include 7 major agency programs with outlays totaling about $228 billion. Further, agency auditors have identified major management challenges related to agencies' improper payment estimating methodologies and significant internal control weaknesses for programs susceptible to significant improper payments. In addition, two agency auditors cited noncompliance with IPIA in their annual audit reports. For fiscal year 2005 PARs, agencies that entered into contracts with a total value exceeding $500 million annually were required to report additional information on their recovery audit efforts. Nineteen agencies reported reviewing over $300 billion in vendor payments, identifying approximately $557 million to be recovered, and actually recovering about $467 million.

According to IRS, the agency's overall mission is to collect the proper amount of tax revenue at the least cost; serve the public by continually improving the quality of its products and services; and perform in a manner warranting the highest degree of public confidence in IRS' integrity, efficiency, and fairness. Its strategic objectives are to improve customer service, increase compliance with the tax laws, and increase IRS' productivity. Essentially, IRS is striving to encourage taxpayers to pay what they owe, reduce taxpayers' cost to get answers to their questions and prepare their tax returns, and reduce IRS' cost to collect federal taxes. In the mid-1980s, IRS' Strategic Business Plan first provided IRS' mission statement, objectives, general strategies, and goals. IRS created the Fiscal Year 1995-2001 Business Master Plan (BMP) to incorporate IRS' vision and long-range objectives. The fiscal year 1996 BMP formalized IRS' "measures hierarchy," which was intended to link IRS' mission, objectives, and annual performance goals with respective programs. For fiscal year 1997, IRS replaced the BMP with the Strategic Plan and Budget and the Annual Performance Plan. On September 30, 1997, IRS released a new Strategic Plan that updates its strategic measures. IRS expects to use these documents to provide guidance to its field offices and to implement the Results Act. According to IRS, improving taxpayer service is one of its highest priorities, and it has a variety of programs and operational units to assist taxpayers in meeting their federal tax obligations. A primary source of taxpayer assistance is IRS' 24 customer service centers, which are to answer calls from taxpayers who have questions about the tax laws, where to file returns, or the status of their accounts and refunds. According to IRS, in fiscal year 1996, the centers answered over 99 million taxpayer calls about tax law and procedures. Other sources of assistance include IRS' walk-in sites, taxpayer education and outreach programs, Problem Resolution Program, and Internet web site. According to IRS, about 440 walk-in sites helped almost 6.4 million taxpayers in fiscal year 1996 with tax forms, questions about their accounts, or preparing tax returns. In addition, over the past several months, IRS has been working to improve its measures and has consulted with many stakeholders. A task force has been formed with representatives from Treasury and OMB to develop a "balanced scorecard." IRS' taxpayer education and outreach programs assist millions of taxpayers at various community locations, often with the help of volunteers and nonprofit organizations. For example, almost 12.7 million taxpayers in fiscal year 1996 received free tax information and return preparation through IRS' Volunteer Income Tax Assistance, Tax Counseling for the Elderly, and other outreach programs. The Problem Resolution Program staff assists taxpayers who have such problems as repeated unsuccessful attempts to resolve an issue or a pending IRS enforcement action that might cause undue hardship, such as the seizure of a taxpayer's property. Also, taxpayers may use the Internet to obtain forms and instructions, publications, information on tax topics, and press releases. According to IRS, its web site had 73 million "hits" in fiscal year 1996. IRS has had several efforts under way to improve its performance measures. For example, the agency established the Measures Advisory Group, comprising field and National Office executives, in part to provide advice and recommendations on the agency's performance measures. As the group suggested, IRS recently developed three new performance measures for its customer service centers: (1) customers successfully served per dollars expended, (2) dollars collected per dollars expended, and (3) taxpayers gaining access to telephone assistance as a percentage of demand. IRS' September 30, 1997, Strategic Plan included the first measure as a strategic-level indicator for increasing productivity and the third measure as a strategic-level indicator for improving customer service. IRS plans to use the second measure as a program-level indicator. The Results Act requires federal agencies to measure the results of their programs and operations. Agencies are expected to set goals, measure performance, make needed improvements, and report results. The Results Act required executive agencies, no later than September 30, 1997, to have developed strategic plans covering a period of at least 5 years and have submitedt them to Congress and the Office of Management and Budget (OMB). Strategic plans are intended to be the framework for each agency's performance measurement system. The Results Act also requires agencies to develop annual performance plans that are intended to reinforce the link between strategic goals and day-to-day activities. The first annual performance reports, covering fiscal year 1999, are due by March 31, 2000. Implementation of the Results Act requires adequate and reliable performance measures that are useful in improving agency and program performance, improving accountability, or supporting policy decisionmaking. IRS recognizes that collecting such data can be costly and difficult. As with other federal agencies, IRS will have to balance the cost of data collection efforts against the need to ensure that the collected data are complete, accurate, and consistent enough to document performance and support decisionmaking at various organizational levels. In conjunction with developing the required strategic plans, federal agencies are required to solicit views of other stakeholders to clarify their missions and reach agreement on their goals. This statutory requirement was, in part, designed to address instances where Congress, the agency, and other interested parties may disagree because of competing priorities. Our objectives were to (1) describe IRS' system of performance measures and (2) identify any challenges IRS faces in developing and implementing performance measures to gauge its efforts to reduce taxpayer burden through improved customer service. To describe IRS' performance measures, we reviewed IRS' fiscal year 1997 Strategic Plan and Budget, including the Annual Performance Plan; its updated September 30, 1997, Strategic Plan; and other planning documents, including IRS' fiscal year 1996 Business Master Plan and Business Review. We also interviewed the staff of the National Director of Compliance Research and the National Director and staff of the Strategic Planning Division, who are responsible for developing the Annual Performance Plan; and officials in the Analysis and Studies Division, who conduct the Business Review and are responsible for establishing selected strategic measures. To identify any challenges IRS faces in developing and implementing performance measures to gauge its efforts to reduce taxpayer burden through improved customer service, we reviewed IRS' strategic-level measures to improve customer service in its September 30, 1997, Strategic Plan for fiscal years 1997 through 2002; its fiscal year 1997 Strategic Plan; and selected program-level customer service measures in its Annual Performance Plan for fiscal year 1997. Using criteria drawn from the steps and critical practices set forth in GAO's Executive Guide: Effectively Implementing the Government Performance and Results Act (GAO/GGD-96-118, June 1996), we examined the strategic-level and new customer service measures to determine if they were based on sound methodologies and were useful in improving agency and program performance and in supporting agency policy decisionmaking. For example, we analyzed the strategic-level taxpayer burden indicator to determine whether it (1) was linked to the burden IRS can influence and the services it provides; and (2) measured the full range of costs that taxpayers' incur, including the costs they incur after they file their returns. Similarly, we examined IRS' definition of initial contact resolution to determine what services IRS measures and the contacts that are counted as successful. We reviewed the fiscal year 1997 Performance Plan to determine whether IRS had comparable program-level indicators for the different sources of assistance, including customer service centers, walk-in sites, the Problem Resolution Program, the Education and Outreach Program, and the Internet web site. We selected these five units or programs because they are primary sources of assistance for taxpayers who need help from IRS. Additionally, we examined IRS' definition of "customers successfully served" to determine whether IRS considered the quality of the service, such as how many times the taxpayers had to call before being assisted. We also interviewed IRS' National Office, Atlanta Service Center, Southeast Region, Georgia District, and Nashville District officials who were responsible for either developing, implementing, or using the customer service performance measures to determine the status of IRS' system of performance measures and to obtain an understanding of the newly developed customer service measures. We did our work from September 1996 through December 1997 in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from the Commissioner of Internal Revenue or his designated representative. Responsible IRS officials, including Chief Management and Administration; the National Director, Strategic Planning Division; and staff of the Executive Officer for Customer Service provided oral comments and factual clarifications in a January 21, 1998, meeting. We have incorporated those comments in the report where appropriate. The Commissioner of IRS provided us written comments on January 23, 1998, which are discussed near the end of this report and reproduced in appendix III. IRS' system of performance measures has three tiers: mission, strategic, and program. IRS has 1 mission effectiveness measure, 3 strategic objectives with 9 measures, and 111 program measures, as depicted in figure 1. See appendix I for definitions of mission-level, strategic-level, and selected customer service program-level measures. IRS' mission-level effectiveness indicator (MEI) is intended to measure the agency's performance in accomplishing its primary mission of collecting the proper amount of tax revenue at the least cost. The MEI compares total revenue collected during a fiscal year, less the cost of collecting the revenue (the sum of IRS' budget and estimated taxpayers' costs), to the revenue that should have been collected if all taxpayers had paid their full liability. With the MEI, IRS has a mission-level performance indicator that includes the taxpayer compliance rate, the cost or burden to taxpayers of complying with the tax laws, and the cost of operating IRS. The second tier of measures includes nine performance indicators that are intended to gauge IRS' progress in achieving its three strategic objectives--improve customer service, increase compliance, and increase productivity. These three objectives link directly to the MEI, because improving customer service reduces taxpayer burden, increasing compliance increases the compliance rate, and increasing productivity reduces IRS cost. To improve customer service, IRS seeks to better serve the public, reduce taxpayer burden, and increase public confidence in the tax administration system. IRS seeks to improve taxpayer access, resolve as many inquiries as possible on the first contact, and increase customer satisfaction. IRS states that improving customer service supports its mission to collect the proper amount of tax at the least cost to taxpayers and IRS. IRS uses five indicators to gauge its progress in improving customer service: (1) taxpayer burden cost for IRS to collect $100, (2) initial contact resolution rate, (3) toll-free telephone level of access, (4) tax law accuracy rate for taxpayer inquiries, and (5) customer satisfaction rates (being developed at the time our review). According to IRS, the taxpayer burden measure is the principal measure of its efforts to improve customer service. To increase compliance, IRS seeks to encourage and assist taxpayers to file timely and accurate returns and to pay their taxes on time. If taxpayers do not comply, IRS intends to take appropriate action to force the taxpayers to comply. Also, to help improve customer satisfaction, IRS intends to treat taxpayers with courtesy, fairness, and professionalism. IRS uses two indicators to gauge its progress in increasing compliance: (1) total collection percentage and (2) total net revenue collected. According to IRS, the principal measure of taxpayer compliance is the total collection percentage, or the comparison of the revenue IRS collects with the total tax liability. To increase productivity, IRS seeks to continually improve operations and the quality of products and services it provides to customers through reengineering and a highly skilled work force. IRS states that accomplishing this objective will increase compliance, improve customer service, and reduce the cost of tax administration. To gauge its progress toward accomplishing this objective, IRS uses two indicators: (1) budget cost to collect $100 and (2) customers successfully served per dollars expended. According to IRS, its principal productivity measure is the amount it spends to collect $100 as measured by comparing IRS' budget to the revenues it collects. The third tier of measures--111 in all--is intended to gauge how well specific IRS programs are performing. IRS' fiscal year 1997 Annual Performance Plan had 16 submission processing measures, 30 customer service measures, and 38 compliance measures. The plan also had 8 Service-wide measures for which all IRS executives and managers shared responsibility and 19 other measures specific to such areas as resource management and business operations. Appendix II provides a complete list of IRS' 30 program-level customer service performance measures. IRS is striving to develop and implement a results-oriented performance measurement system to meet the requirements of the Results Act. However, IRS faces some difficult challenges in measuring the results of its efforts to reduce taxpayer burden through improved customer service. The key challenges we identified are (1) developing a reliable measure of taxpayer burden, including the portion that IRS can influence; (2) developing measures that can be used to compare the effectiveness of the various customer service programs; and (3) refining or developing new measures that gauge the quality of the services provided. As IRS refines its customer service measures, it must consider the costs of implementing the measures, including the costs of collecting and analyzing data over time. IRS' taxpayer burden indicator is intended to measure taxpayers' cost for IRS to collect $100. IRS measures taxpayer burden by using a model that estimates the time taxpayers spend on each tax form using variables such as the number of lines on a tax form. The burden estimate excludes the time and costs taxpayers face after they file their tax returns, such as responding to IRS notices and audits. Additionally, it is not linked to important IRS services to assist taxpayers in meeting their tax obligations. As a result, IRS' burden estimates may not reflect reductions in taxpayer burden that are attributable to these services. The flaws in the burden measure also limit the usefulness of IRS' mission effectiveness indicator, because burden is a key component of this indicator. IRS recognizes the limitations of its burden measure and is looking for alternatives. IRS calculates its burden indicator by using a model developed by Arthur D. Little, Inc. The model estimates the time a taxpayer spent on each tax form using variables, such as the number of lines on the form, number of words and pages in the related instruction booklet, and the number of references to the Internal Revenue Code. IRS then converts this total time estimate to dollar costs by multiplying the total time by IRS' estimate of the value of a taxpayer's hour. IRS' burden model excludes the time and costs taxpayers incur after tax forms are filed, such as the time taxpayers spend inquiring about the status of a tax refund or responding to notices, examinations, or other IRS-initiated compliance activities. In a recent draft issue paper, IRS identified several other shortcomings in the model, including weaknesses in the underlying assumptions of the model. For example, the model uses the number of lines on a form to estimate the form's burden, even though additional lines may make the form simpler or easier to understand. Also, the draft issue paper said that the 1983 data underlying the model are outdated and cited methodological errors in the development of the model. The limitations of the taxpayer burden measure affect IRS' mission effectiveness indicator because taxpayer burden is one of the four elements of this indicator. The indicator compares total revenue collected during a fiscal year, less the cost of collecting the revenue (the sum of IRS' budget and estimated taxpayers' costs) with the revenue that should have been collected if all taxpayers had paid their full liability. The usefulness of IRS' overall measure is questionable considering the limitations of the taxpayer burden measure. IRS recognizes the limitations of the current methodology for measuring burden and in 1995 sought help in developing an improved methodology for measuring all facets of taxpayer burden. Specifically, IRS issued a request for proposals seeking contractors to develop an approach for measuring taxpayer burden, including the burden after forms are filed. However, according to IRS, no contractors were interested in doing the work. The lack of response to IRS' request may reflect the difficulty of measuring overall compliance burden. In our December 9, 1994, testimony before the Subcommittee on Oversight, House Committee on Ways and Means, we discussed the difficulties of measuring taxpayer burden and reported that a reliable estimate of the overall burden taxpayers incur to comply with the tax laws was not available. As a part of our study, we spoke with several business and tax professionals, who told us that the complexity of the Internal Revenue Code, compounded by the frequent changes made to the Code, is part of what makes federal tax compliance so burdensome. Recently, IRS initiated another effort to obtain a contractor to develop an improved burden measurement model and is now in the initial stages of determining contractor interest. In the short term, IRS plans to expand its current measure of taxpayer burden to include contact and enforcement burden, such as the burden taxpayers incur when responding to IRS notices, telephone calls, and audits. Despite recognizing the shortcomings in the current taxpayer burden measure, IRS has set goals for reducing burden based on the measure. It then rolls these goals up into its mission effectiveness indicator. To show progress through this indicator, IRS must reduce the number of lines on tax forms or worksheets, reduce the number of words and pages in instructions, or take actions that affect the variables in the Little model. However, the model does not distinguish between lines on forms that add to burden and lines that reduce the burden by making the calculation of tax liability easier. Unless additional analysis is done to assess how eliminating particular lines on forms affects burden, IRS could take actions to meet its goals that actually increase taxpayer burden. Furthermore, most IRS customer service programs have no effect on IRS' measure of taxpayer burden. Devising a comprehensive measure to gauge the costs taxpayers incur to meet their federal tax obligations is a difficult task and offers a significant challenge for IRS. First, IRS would need to devise a means to capture the costs taxpayers incur after they file their returns. This may be difficult to do, because the costs could vary substantially depending on the circumstances of the different taxpayers. For example, providing information to support a tax return may not cost very much when compared to the cost of preparing for and responding to an audit. Second, because of the limitations of the Little model, IRS must decide whether to revise the model or to devise another means to estimate the costs taxpayers incur to prepare and file their tax returns. Third, IRS must measure the elements of burden it can influence as opposed to the burden caused by such things as changes in the tax code. A reliable taxpayer burden measure would allow IRS to make decisions on how to allocate resources to best reduce the burdens taxpayers face to meet their tax obligations. Finally, as IRS refines its taxpayer burden measure, it will be faced with devising an efficient means for collecting and analyzing the data to measure burden over time. Otherwise, the cost of measuring burden could exceed the benefits. Among other things, the Results Act requires agencies to develop and implement measures that are useful in improving program performance or in supporting policy decisionmaking. One way IRS can do this is to develop measures that can be used to compare the effectiveness of the different customer service programs. Our analysis of IRS' fiscal year 1997 program-level measures for customer service points out the need for such measures, but the history of the initial contact resolution measure demonstrates the difficulty IRS faces in implementing such measures. Although IRS has three new strategic-level customer service measures for fiscal year 1998, similar to the initial contact resolution measure, two are limited to measuring telephone assistance. When taxpayers need assistance from IRS, among other things, they can call a customer service center, visit a walk-in site, call or visit a problem resolution office, call or visit an outreach facility, or access IRS' Internet web site. IRS' 1997 Annual Performance Plan had 27 program-level indicators for its customer service centers and 3 for its Problem Resolution Program. However, the plan had no program-level indicators to measure the performance of the walk-in sites, education and outreach programs, and the Internet web site, even though these three sources of assistance provide a range of services to help taxpayers file their returns and otherwise comply with the tax laws and reporting requirements. One of IRS' fiscal year 1997 strategic-level indicators for measuring its progress in improving customer service was the initial contact resolution rate. This measure is intended to gauge IRS' progress in satisfactorily resolving all issues resulting from a taxpayer's first inquiry to IRS--formerly known as the "one-stop service" concept. Providing one-stop service would reduce taxpayer burden and the demand for IRS services. However, since the August 1991 implementation of its one-stop service goal, IRS has often redefined the goal and the types of contacts that are counted as successful and plans to change the goal again. Originally, IRS' measurement focused on account-related taxpayer inquiries at district toll-free telephone sites. In our August 1994 report, we concluded that IRS was overstating its successes for one-stop service because it was counting calls that did not fully resolve the taxpayers' questions. We recommended that IRS develop better measures to exclude those instances where taxpayers would likely need to contact IRS again about the same matter. We also recommended that IRS measure all types of taxpayer inquiries, including all telephone contacts, service center correspondence, and walk-in inquiries. In March 1995, IRS changed the name of the measure to "initial contact resolution" and incorporated our recommendations to include correspondence and walk-in inquiries. Officials told us that IRS was establishing a new definition for fiscal year 1998 that would be limited to telephone operations, which was recommended in a recent internal audit report. The internal audit report did not address the need for measuring other types of IRS assistance, such as education and outreach and walk-in. Essentially, the report concluded that IRS' initial contact resolution measure should be limited to telephone operations, because the inclusion of correspondence would add responses to notices that had, in the past, taken up to 60 days to resolve. An IRS official told us that the initial contact resolution measure would not include walk-ins because (1) IRS does not have a system in place to measure the rate; (2) it is very difficult to monitor walk-in contacts in a valid way without standing over the individual customer service representative; and (3) the volume is relatively small compared to telephone contacts and paper correspondence and, as a result, would not affect the measure very much. Because IRS' customer service programs vary, without comparable measures, IRS is unable to compare the performance and effectiveness of the different customer service programs. Comparable measures for the customer service programs would allow IRS to monitor the performance and compare the effectiveness of the different programs. Such comparisons would assist IRS in making decisions on how to allocate resources among the different programs to maximize results. However, developing comparable measures of effectiveness will be difficult, primarily because of the range of services and options taxpayers have when they need assistance from IRS. Also, IRS would need to consider the costs of collecting and analyzing the data to measure performance of the different programs. IRS added three new strategic-level measures in its September 30, 1997, Strategic Plan: (1) toll-free telephone level of access, which is intended to compare the number of calls attempted to the number of calls answered; (2) tax law accuracy rate for taxpayer inquiries, which is intended to measure the accuracy of tax law information provided to taxpayers through the toll-free telephone assistance program; and (3) customer satisfaction rates. Similar to the initial contact resolution measure, the first two measures are also limited to the telephone program, even though taxpayers have other sources, such as walk-in sites and the Internet, to obtain answers to their tax law questions. At the time of our review, IRS was in the process of determining how to measure customer satisfaction. One of IRS' new strategic-level productivity measures for its 24 customer service centers for fiscal year 1998 is "customers successfully served per dollar expended." Our analysis of this measure points out the need to better measure the quality of services provided. According to IRS' definition, successfully served means a taxpayer received "an accurate response to a call or resolution of a case." This definition does not consider other elements that would affect what a taxpayer may consider as successful service, such as the number of times the taxpayer called before being assisted, how long the taxpayer had to wait before being served, and the courtesy and professionalism of the assistor. As a result, the taxpayer, although served, may not believe he or she was "successfully" served. IRS' strategic-level customer service measures have similar limitations. For example, the initial contact resolution measure is intended to gauge IRS' performance in resolving issues resulting from a taxpayer's first inquiry to IRS. The tax law accuracy rate measure gauges the extent to which taxpayers are provided correct answers. IRS does not measure such things as how long it took to resolve the issues or how courteous and professional the assistors were when interacting with the taxpayers or whether the need for the contact could have been prevented. Revising measures to better gauge the quality of assistance is a major challenge for IRS. For example, developing measures of timeliness will be very difficult because of the different programs and the range of services they provide. Also, IRS would have to devise a means to capture such data. As with other measures, IRS may be faced with making trade-offs between how to refine the measures and the cost of collecting the needed data. Although statutory requirements are to be the starting point for agency mission statements, Congress, the executive branch, and other interested parties may all disagree about a given agency's mission and goals. The Results Act seeks to address such situations by requiring federal agencies to consult with Congress and solicit the views of other stakeholders in developing their strategic plans. Stakeholder involvement is important to help agencies ensure that their efforts and resources are targeted at the highest priorities. Obtaining stakeholder involvement is especially important for IRS as it seeks to balance its efforts and resources between assisting taxpayers and enforcing compliance with the nation's tax laws. Stakeholders could assist IRS in devising performance measures that would enhance IRS' ability to make more informed decisions about how to allocate its resources between the competing demands of assistance and enforcement. IRS is striving to develop and implement a results-oriented performance measurement system to meet the requirements of the Results Act. However, IRS faces some difficult challenges as it develops and implements its efforts to reduce taxpayer burden through improved customer service. IRS will be faced with devising reliable measures that are useful in improving agency and program performance, improving accountability, or supporting policy decisionmaking. At the same time, IRS will be faced with making decisions on how to minimize the costs of collecting data and measuring results over time. IRS' taxpayer burden measure is not a useful guide to IRS performance because it is based on flawed methodology that does not link to the burdens IRS influences and the various services it provides. Additionally, it does not measure burdens taxpayers face after they file their tax returns. As a result, most IRS customer service programs that IRS characterizes as customer service have no effect on IRS' measure of taxpayer burden. IRS does not have a comprehensive set of customer service indicators that gauges the full range of taxpayer services. As a result, IRS is unable to compare the performance of the different customer service programs and make funding decisions based on the programs' costs and benefits--a key goal of the Results Act. Developing comparable measures for the different programs will be difficult, primarily because of the range of assistance the different programs provide. Similarly, IRS' customer service measures do not adequately measure the quality of the services taxpayers receive from IRS. Although some of the measures gauge the extent to which taxpayers' issues are resolved or the accuracy of the information IRS provides, they do not measure such things as how long it takes IRS to resolve the issues or how courteous and professional the assistors are when interacting with the taxpayers. Revising the measures to better gauge the quality of assistance is a major challenge for IRS, primarily because of the many different programs and the range of services they provide. Also, IRS would have to devise a means to capture such data. Devising ways to measure taxpayer burden and overcoming the other limitations we identified offer significant challenges for IRS as it strives to meet the requirements of the Results Act. Not only will IRS be faced with devising consistent, results-oriented measures for a range of taxpayer services, it will also be faced with making decisions on how to minimize the costs of collecting data and measuring results over time. In doing so, IRS is also faced with balancing competing priorities. To balance these competing priorities, it is essential that IRS continue to involve those who are served by IRS--the taxpayers--as well as other stakeholders, such as Congress and the Office of Management and Budget. As IRS refines its customer service performance measures, we believe it is essential that IRS make the measures useful for managing the different customer service programs, allocating resources, improving accountability, and supporting policy decisions. Accordingly, as IRS refines its customer service measures, we recommend that the Commissioner of Internal Revenue direct the appropriate officials to work to develop performance indicators that cover the full range of IRS' customer service programs. We requested comments on a draft of this report from the Commissioner of Internal Revenue or his designated representative. In a January 21, 1998, meeting responsible IRS officials, including the Chief Management and Administration; the National Director, Strategic Planning Division; and staff of the Executive Officer for Customer Service provided oral comments and some factual clarifications, which we incorporated in the report where appropriate. The Commissioner of IRS provided us written comments on January 23, 1998 (see app. III). He concurred with the report's findings and recommendation. He said that IRS recognizes the critical importance of measuring customer service and is working to improve its measures, including consulting many stakeholders. He also said that IRS is working with a contractor to develop customer satisfaction surveys for all business lines that interact with the public. On January 28, 1998, after our receipt of IRS' comments on the draft of this report, the IRS Commissioner announced a conceptual framework for a proposal to reorganize IRS to better align its activities into organizational elements serving different types of taxpayers (e.g., individuals, large corporations). Although details of this proposed reorganization are not available, and any IRS reorganization may be affected by other proposals for IRS restructuring under consideration by Congress, we note that the customer service measures discussed in this report and any IRS plans to improve them may be affected by these possible organizational changes. We are sending copies of this report to the Subcommittee's Ranking Minority Member, the Chairmen and Ranking Minority Members of the House Committee on Ways and Means and the Senate Committee on Finance, various other congressional committees, the Secretary of the Treasury, the Commissioner of Internal Revenue, the Director of the Office of Management and Budget, and other interested parties. Copies will also be made available to others upon request. Major contributors to this report are listed in appendix IV. Please contact me on (202) 512-9110 if you have any questions. These definitions are as stated in the Internal Revenue Service's (IRS) September 30, 1997, Strategic Plan for fiscal years 1997 through 2002, except for minor changes we made for clarity. We did not validate these definitions. Mission Effectiveness Indicator: This compares the revenue IRS expects to collect during a fiscal year, less the cost of collecting that revenue, with the amount of revenue that IRS would collect if all tax obligations were honored. The four components of this measure are budget, total revenue, burden, and total tax liability. Budget: This is the amount of money appropriated by Congress or requested by IRS through Treasury and the Office of Management and Budget (OMB). Total revenue: This is all revenue collected by IRS, including revenue resulting from enforcement activities, but excluding refunds. Burden: This is a "monetized" estimate of the number of burden hours placed on taxpayers to meet their tax obligations. The calculation is based on a methodology developed by Arthur D. Little, Inc. Total tax liability: This is an estimate of the amount of individual income, corporate income, and employment taxes that should have been paid in a given year, if all taxes that were legally owed had been paid. Improve Customer Service Objective: The purpose of this objective is to better serve the public, reduce taxpayer burden, and increase public confidence in the tax administration system. IRS seeks to improve taxpayer access, resolve as many inquiries as possible on the first contact, and increase customer satisfaction. Taxpayer burden cost (in dollars) for IRS to collect $100: This ratio measures the private sector costs compared to the cost for IRS to collect $100 in net tax revenue. Net tax revenue includes all revenue collected (income, employment, estate and gift, and excise taxes) by IRS in a fiscal year, less refunds. Private sector costs cover the paperwork burden imposed on the public as a result of the federal tax reporting system administered by IRS. Private sector costs of the paperwork burden are based on the estimated time individual and business taxpayers spend keeping tax records, learning about tax laws, preparing tax forms, and sending tax forms to IRS. Taxpayer paperwork burden is converted from time to dollars by multiplying total time by the estimated value of a taxpayer's hour. Initial contact resolution rate: This measures the successful resolution of all issues resulting from the taxpayer's first inquiry, telephone only. Toll-free telephone level of access: This is the percentage of calls answered. The percentage is computed by comparing the number of calls attempted (demand) to the number answered in all components of the Customer Service function (Automated Collection System, Customer Service Toll-free, and the Centralized Inventory and Distribution System). Tax law accuracy rate for taxpayer inquiries: This measures the rate at which IRS' toll-free telephone assistance program provides taxpayers accurate tax information. Customer satisfaction rates: This measure was under development at the time of our review. Increase Compliance Objective: The purpose of this objective is to encourage and assist taxpayers to voluntarily file timely and accurate returns and to pay on time and, if taxpayers do not comply, to take appropriate compliance actions. Total collection percentage: This is the ratio of total collections to total estimated true tax liability. Total net revenue collected: This is all revenue collected by IRS, including revenue resulting from enforcement activities, but excluding refunds. Increase Productivity Objective: The purpose of this objective is to continually improve operations and the quality of products and services provided to taxpayers, using systems management tools and a highly skilled work force. Budget cost to collect $100 in revenue: This ratio measures the IRS budget cost of collecting $100 in net tax revenue. Net tax revenue includes all revenue collected (income, employment, estate and gift, and excise taxes) by IRS in a fiscal year, less refunds. Customers successfully served per dollars expended: This measure calculates the average cost for IRS' 24 customer service centers to accurately respond to a taxpayer's inquiry. Number of calls answered: This is the number of calls accepted by the Automatic Call Distributor system, including calls where the caller chooses Tele-Tax (an interactive, self-directed system) during and after business hours. Number of assistor calls answered: This is the number of calls accepted by the Automatic Call Distributor system and answered by an assistor. Percentage of scheduled calls answered: This is the number of calls answered as a percentage of the number of calls expected to be answered by the call sites, considering the level of staffing. Level of access: This is the number of taxpayers who receive telephone assistance as a percentage of the total number of taxpayers seeking assistance. Number of calls answered per full-time equivalent (FTE) employee: This is the number of calls accepted by the Automatic Call Distributor System, minus calls abandoned, divided by the number of FTE employees assigned to answer taxpayers' calls. These selected customer service program-level definitions are included in IRS' fiscal year 1997 Annual Performance Plan. A. Carl Harris, Assistant Director Catherine H. Myrick, Evaluator-in-Charge Katherine P. Chenault, Senior Evaluator Ronald W. Jones, Evaluator The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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Pursuant to a congressional request, GAO reviewed the Internal Revenue Service's (IRS) efforts to implement the Government Performance and Results Act (GPRA), focusing on: (1) IRS's system of performance measures; and (2) the challenges IRS faces in developing and implementing performance measures to gauge its efforts to reduce taxpayer burden through improved customer service. GAO noted that: (1) IRS is striving to develop and implement a results-oriented performance measurement system that will meet the requirements of GPRA; (2) however, IRS faces some difficult challenges in measuring the results of its efforts to reduce taxpayer burden through improved customer service; (3) IRS has a three-tiered system of performance measures; (4) at the highest level, IRS has a mission effectiveness indicator, which is intended to measure the agency's overall performance in collecting the proper amount of tax revenue at the least cost or burden to the government and the taxpayer; (5) the second level of indicators is intended to gauge IRS' progress in meeting its strategic objectives to improve customer service, increase taxpayer compliance, and increase its productivity; (6) to gauge its progress in improving customer service, IRS uses five initial indicators: (a) taxpayer burden cost for IRS to collect $100; (b) initial contact resolution rate for taxpayer inquiries; (c) toll-free telephone level of access; (d) tax law accuracy rate for taxpayer inquiries; and (e) customer satisfaction rates (being developed at the time of GAO's review); (7) the third level of indicators is intended to measure the accomplishments of specific IRS programs or operations, such as IRS' toll-free telephone operations; (8) IRS' 1997 Annual Performance Plan had 30 program-level customer service measures, which measure such things as the number of taxpayer calls answered and the average number of calls answered per full-time employee; (9) although IRS is striving to improve its overall performance measurement system, it faces some difficult challenges as it develops and implements performance measures to gauge its efforts to reduce taxpayer burden through improved customer service; (10) the key challenges GAO identified are: (a) developing a reliable measure of taxpayer burden; (b) developing measures that can be used to compare the effectiveness of the various customer service programs; and (c) refining or developing new measures that gauge the quality of the services provided; (11) it is important that IRS obtain stakeholder involvement to balance its efforts between assisting taxpayers and enforcing compliance with the tax laws; (12) IRS recognizes the limitations of its taxpayer burden measure and is looking for alternatives; and (13) at the same time, IRS will be faced with making decisions on how to minimize the costs of collecting data and measuring results over time.

Students with limited English proficiency are a diverse and complex group. They speak many languages and have a tremendous range of educational needs and include refugees with little formal schooling and students who are literate in their native languages. Accurately assessing the academic knowledge of these students in English is challenging. If a student responds incorrectly to a test item, it may not be clear if the student did not know the answer or misunderstood the question because of language barriers. Title I of NCLBA requires states to administer tests in language arts and mathematics to all students in certain grades and to use these tests as the primary means of determining the annual performance of states, districts, and schools. These assessments must be aligned with the state's academic standards--that is, they must measure how well a student has demonstrated his or her knowledge of the academic content represented in these standards. States are to show that increasing percentages of students are reaching the proficient level on these state tests over time. NCLBA also requires that students with limited English proficiency receive reasonable accommodations and be assessed, to the extent practicable, in the language and form most likely to yield accurate data on their academic knowledge. In addition, for language arts, students with limited English proficiency who have been in U.S. schools for 3 years or more must generally be assessed in English. Finally, NCLBA also created a new requirement for states to annually assess the English language proficiency of students identified as having limited English proficiency. Accurately assessing the academic knowledge of students with limited English proficiency has become more critical because NCLBA designated specific groups of students for particular focus. These four groups are students who (1) are economically disadvantaged, (2) represent major racial and ethnic groups, (3) have disabilities, and (4) are limited in English proficiency. These groups are not mutually exclusive, so that the results for a student who is economically disadvantaged, Hispanic, and has limited English proficiency could be counted in three groups. States and school districts are required to measure the progress of all students in meeting academic proficiency goals, as well as to measure separately the progress of these designated groups. To make adequate yearly progress, each district and school must generally show that each of these groups met the state proficiency goal and that at least 95 percent of students in each group participated in these assessments. Students with limited English proficiency are a unique group under NCLBA because once they attain English proficiency they are no longer counted as part this group, although Education has given states some flexibility in this area. Recognizing that language barriers can hinder the assessment of students who have been in the country for a short time, Education has provided some testing flexibility. Specifically, Education does not require students with limited English proficiency to participate in a state's language arts assessment during their first year in U.S. schools. In addition, while these students must take a state's mathematics assessment during their first year, a state may exclude their scores in determining whether it met its progress goals. Title III of NCLBA focuses specifically on students with limited English proficiency, with the purpose of ensuring that these students attain English proficiency and meet the same academic standards as other students. This title holds states and districts accountable for student progress in attaining English proficiency by requiring states to establish goals to demonstrate annual increases in both the number of students attaining English proficiency and the number making progress in learning English. States must establish English language proficiency standards that are aligned with a state's academic standards in order to ensure that students are acquiring the academic language they need to successfully participate in the classroom. Education also requires that a state's English language proficiency assessment be aligned to its English language proficiency standards. While NCLBA requires states to administer academic assessments to students in some grades, it requires states to administer English language proficiency assessments annually to all students with limited English proficiency, from kindergarten to grade 12. In nearly two-thirds of the 48 states for which we obtained data, students with limited English proficiency did not meet state proficiency goals in the 2003-2004 school year. Students with limited English proficiency met goals in language arts and mathematics in 17 states. In 31 states, these students missed the goals either for language arts or for both language arts and mathematics (see fig. 1). In 21 states, the percentage of proficient students in this group was below both the mathematics and the language arts proficiency goals. We found that the percentage of elementary school students with limited English proficiency achieving proficient scores on the state's mathematics assessment was lower than that for the total student population in 48 of 49 states that reported to Education in school year 2003-2004. We also found that, in general, a lower percentage of students with limited English proficiency achieved proficient test scores than other selected student groups. All of the 49 states reported that these students achieved lower rates of proficiency than white students. The performance of limited English proficient students relative to the other student groups varied. In 37 states, for example, economically disadvantaged students outperformed students with limited English proficiency, while students with disabilities outperformed these students in 14 states. Officials in the 5 states we studied reported that they have taken steps to address challenges associated with academic assessments of students with limited English proficiency. However, Education's peer reviews of 38 states found a number of concerns in assessing these students. Our group of experts indicated that states are generally not taking the appropriate set of comprehensive steps to create valid and reliable assessments for students with limited English proficiency. To increase validity and reliability, most states offered accommodations to students, such as providing extra time to complete the test and offering native language assessments. However, offering accommodations may or may not improve the validity of test results, as research in this area is lacking. Officials in 5 states we studied reported taking some steps to address challenges associated with assessing students with limited English proficiency. Officials in 4 of these states reported following generally accepted test development procedures, while a Nebraska official reported that the state expects districts to follow such procedures. Officials in California, New York, North Carolina, and Texas told us that they try to implement the principles of universal design, which support making assessments accessible to the widest possible range of students. This is done by ensuring that instructions, forms, and questions are clear and not more linguistically complex than necessary. In addition, officials in some states reported assembling committees to review test items for bias. For example, when developing mathematics items, these states try to make language as clear as possible to ensure that the item is measuring primarily mathematical concepts and to minimize the extent to which it is measuring language proficiency. A mathematics word problem involving subtraction, for example, might refer to fish rather than barracuda. Officials in 3 of our study states told us they also used a statistical approach to evaluate test items for bias related to students with limited English proficiency. Education's completed NCLBA peer reviews of 38 states found that 25 did not provide sufficient evidence on the validity or reliability of results for students with limited English proficiency. For example, in Idaho, peer reviewers commented that the state did not report reliability data for students with limited English proficiency. As of March 2007, 18 states have had their assessment systems fully approved by Education. Our group of experts indicated that states are generally not taking the appropriate set of comprehensive steps to create valid and reliable assessments for these students and identified essential steps that should be taken. These experts noted that no state has implemented an assessment program for students with limited English proficiency that is consistent with technical standards. They noted that students with limited English proficiency are not defined consistently within and across states, which is a crucial first step to ensuring reliability. If the language proficiency levels of these students are classified inconsistently, an assessment may produce results that appear inconsistent because of the variable classifications rather than actual differences in skills. Further, it appears that many states do not conduct separate analyses for different groups of limited English proficient students. Our group of experts indicated that the reliability of a test may be different for heterogeneous groups of students, such as students who are literate in their native language and those who are not. Further, these experts noted that states are not always explicit about whether an assessment is attempting to measure skills only (such as mathematics) or mathematics skills as expressed in English. According to the group, a fundamental issue affecting the validity of a test is the definition of what is being measured. The expert group emphasized that determining the validity and reliability of academic assessments for students with limited English proficiency is complicated and requires a comprehensive collection of evidence rather than a single analysis. In addition, the appropriate combination of analyses will vary from state to state, depending on the characteristics of the student population and the type of assessment. The group indicated that states are not universally using all the appropriate analyses to evaluate the validity and reliability of test results for students with limited English proficiency. These experts indicated that some states may need assistance to conduct appropriate analyses. Finally, they indicated that reducing language complexity is essential to developing valid assessments for these students, but expressed concern that some states and test developers do not have a strong understanding of universal design principles or how to use them to develop assessments that eliminate language barriers to measuring specific skills. The majority of states offered some accommodations to try to increase the validity and reliability of assessment results for students with limited English proficiency. These accommodations are intended to permit students to demonstrate their academic knowledge, despite limited language ability. Our review of state Web sites found documentation on accommodations for 42 states. The number of accommodations offered varied considerably among states. The most common accommodations were allowing the use of a bilingual dictionary and reading test items aloud in English (see table 1). Some states also administered assessments to small groups of students or individuals, while others gave students extra time to complete a test. According to our expert group and our review of literature, research is lacking on what specific accommodations are appropriate for students with limited English proficiency, as well as their effectiveness in improving the validity of assessment results. A 2004 review of state policies found that few studies focus on accommodations intended to address the linguistic needs of students with limited English proficiency or on how accommodations affect the performance of students with limited English proficiency. In contrast, significantly more research has been conducted on accommodations for students with disabilities, much of it funded by Education. Because of this research disparity, our group of experts reported that some states offer accommodations to students with limited English proficiency based on those they offer to students with disabilities, without determining their appropriateness for individual students. They noted the importance of considering individual student characteristics to ensure that an accommodation appropriately addresses the needs of the student. In our survey, 16 states reported that they offered statewide native language assessments in language arts or mathematics in some grades for certain students with limited English proficiency in the 2004-2005 school year. For example, New York translated its statewide mathematics assessments into Spanish, Chinese, Russian, Korean, and Haitian-Creole. In addition, 3 states were developing or planning to develop a native language assessment. Our group of experts told us that this type of assessment is difficult and costly to develop. Development of a valid native language assessment involves more than a simple translation of the original test. In most situations, a process of test development and validation similar to that of the nontranslated test is recommended. In addition, the administration of native language assessments may not be practicable, for example, when only a small percentage of limited English proficient students in the state speak a particular language or when a state's student population has many languages. Members of our expert group told us that native language assessments are generally an effective accommodation only for students in specific circumstances, such as students who are instructed in their native language or are literate in their native language. Thirteen states offered statewide alternate assessments (such as reviewing a student's classroom work portfolio) in 2005 for certain students with limited English proficiency, as of March 2006. Our expert group noted that alternate assessments are difficult and expensive to develop, and may not be feasible because of the amount of time required for such an assessment. Members of the group also expressed concern about the extent to which these assessments are objective and comparable and can be aggregated with regular assessments. Many states implemented new English language proficiency assessments for the 2005-2006 school year to meet Education's requirement for states to administer English language proficiency tests that meet NCLBA requirements by the spring of 2006. These assessments must allow states to track student progress in learning English. Additionally, Education requires that these assessments be aligned to a state's English language proficiency standards. Education officials said that because many states did not have tests that met NCLBA requirements, the agency funded four state consortia to develop new assessments that were to be aligned with state standards and measure student progress. In the 2005-2006 school year, 22 states used assessments or test items developed by one of four state consortia, making this the most common approach taken by states. Eight states worked with test developers to augment off-the-shelf English language proficiency assessments to incorporate state standards. Officials in 14 states indicated that they are administering off-the-shelf assessments. Seven states, including Texas, Minnesota, and Kansas, created their own English language proficiency assessments. Officials in these states said they typically worked with a test developer or research organization to create the assessments. Officials in our study states and test developers we interviewed reported that they commonly apply generally accepted test development procedures to develop their assessments, but some are still in the process of documenting their validity and reliability. A 2005 review of the documentation of 17 English proficiency assessments used by 33 states found that the evidence on validity and reliability was generally insufficient. The study, which was funded by Education, noted that none of the assessments contained "sufficient technical evidence to support the high-stakes accountability information and conclusions of student readiness they are meant to provide." Education has offered states a variety of technical assistance to help them appropriately assess students with limited English proficiency, such as providing training and expert reviews of their assessment systems. However, Education has issued little written guidance on how states are expected to assess and track the English proficiency of these students, leaving state officials unclear about Education's expectations. While Education has offered states some flexibility in how they incorporate these students into their accountability systems, many of the state and district officials we interviewed indicated that additional flexibility is needed to ensure that academic progress of these students is accurately measured. Education offers support in a variety of ways to help states meet NCLBA's assessment requirements for students with limited English proficiency. The department's primary technical assistance efforts have included the following: Title I peer reviews of states' academic standards and assessment systems: During these reviews, experts review evidence provided by the state about the validity and reliability of these assessments. Education shares information from the peer review to help states address issues identified during the review. Title III monitoring visits: Education began conducting site visits to review state compliance with Title III requirements in 2005. As part of these visits, the department reviews the state's progress in developing English language proficiency assessments that meet NCLBA requirements. Comprehensive centers: Education has contracted with 16 regional comprehensive centers to build state capacity to help districts that are not meeting their adequate yearly progress goals. At least 3 of these centers plan to assist individual states in developing appropriate goals for student progress in learning English. In 2005, Education also funded an assessment and accountability comprehensive center, which provides technical assistance related to the assessment of students, including those with limited English proficiency. Ongoing technical assistance for English language proficiency assessments: Education has provided information and ongoing technical assistance to states using a variety of tools and has focused specifically on the development of the English language proficiency standards and assessments required by NCLBA. While providing this technical assistance, Education has issued little written guidance on developing English language proficiency assessments that meet NCLBA's requirements and on tracking the progress of students in acquiring English. Education issued some limited nonregulatory guidance on NCLBA's basic requirements for English language proficiency standards and assessments in February 2003. However, officials in about one-third of the 33 states we contacted expressed uncertainty about implementing these requirements. They told us that they would like more specific guidance from Education to help them develop tests that meet NCLBA requirements, generally focusing on two issues. First, some officials said they were unsure about how to align English language proficiency standards with content standards for language arts, mathematics, and science, as required by NCLBA. Second, some officials reported that they did not know how to use the different scores from their old and new English language proficiency assessments to track student progress. Without guidance and specific examples on both of these issues, some of these officials were concerned that they will spend time and resources developing an assessment that may not meet Education's requirements. Education officials told us that they were currently developing additional nonregulatory guidance on these issues, but it had not yet been finalized. Education has offered states several flexibilities in tracking academic progress goals for students with limited English proficiency to support their efforts to develop appropriate accountability systems for these students. For example, students who have been in U.S. schools for less than a year do not have to meet the same testing requirements as other students. Another flexibility recognizes that limited English proficiency is a more transient quality than being of a particular race. Students who achieve English proficiency leave the group at the point when they demonstrate their academic knowledge in English, while new students with lower English proficiency are constantly entering the group (see fig. 2). Given the group's continually changing composition, meeting progress goals may be more difficult than doing so for other student groups, especially in districts serving large numbers of these students. Consequently, Education allowed states to include, for up to 2 years, the scores of students who were formerly classified as limited English proficient when determining whether a state met its progress goals for students with limited English proficiency. Several state and local officials in our study states told us that additional flexibility would be helpful to ensure that the annual progress measures provide meaningful information about the performance of students with limited English proficiency. Officials in 4 of the states we studied suggested that certain students with limited English proficiency should be exempt from testing or have their test results excluded for longer periods than is currently allowed. Several officials voiced concern that some of these students have such poor English skills or so little previous school experience that assessment results do not provide any meaningful information. Instead, some of these officials stated that students with limited English proficiency should not be included in academic assessments until they demonstrate appropriate English. However, the National Council of La Raza, a Hispanic advocacy organization, has voiced concern that excluding too many students from a state's annual progress measures will allow some states and districts to overlook the needs of these students. With respect to including the scores of students previously classified as limited English proficient for up to 2 years, officials in 2 of our 5 study states, as well as one member of our expert group, thought it would be more appropriate for these students to be counted in the limited English proficient group throughout their school careers--but only for accountability purposes. They pointed out that by keeping students formerly classified as limited English proficient in the group, districts that work well with these students would see increases in the percentage who score at the proficient level in language arts and mathematics. An Education official explained that the agency does not want to label these students as limited English proficient any longer than necessary. Education officials also noted that including all students who were formerly limited English proficient would inflate the achievement measures for this group. District officials in 4 states argued that tracking the progress of individual students in this group is a better measure of how well these students are progressing academically. Officials in one district pointed to a high school with a large percentage of students with limited English proficiency that had made tremendous progress with these students, doubling the percentage of students achieving academic proficiency. The school missed the annual progress target for this group by a few percentage points, but school officials said that the school would be considered successful if it was measured by how much individual students had improved. In response to educators and policymakers who believe such an approach should be used for all students, Education initiated a pilot project in November 2005, allowing a limited number of states to incorporate measures of student progress over time in determining whether districts and schools met their annual progress goals. We made several recommendations to Education in our July 2006 report. Specifically, we recommended that Education support additional research on appropriate accommodations for these students and disseminate information on research-based accommodations to states. We also recommended that Education determine what additional technical assistance states need to implement valid and reliable academic assessments for these students and provide such assistance. Further, we recommended that Education publish additional guidance with more specific information on the requirements for assessing English language proficiency and tracking student progress in learning English. Finally, we recommended that Education explore ways to provide states with additional flexibility in terms of holding states accountable for students with limited English proficiency. Education agreed with our first three recommendations and has taken a number of steps to address them. In recognition of the challenges associated with assessing students with limited English proficiency and in response to GAO's report, Education initiated the LEP (Limited English Proficient) Partnership in July 2006. Under the partnership, Education has pledged to provide technical assistance and support to states in the development of assessment options for states to use in addressing the needs of their diverse student populations. Education's partners in this effort include the National Council of LaRaza, Mexican American Legal Defense and Educational Fund, Council of Chief State School Officers, Comprehensive Center on Assessment and Accountability, and the National Center on English Language Acquisition. All states have been invited to participate in this effort. The partnership held its first meeting in August 2006. In October 2006, officials from all the states came together to discuss areas for which they need additional technical assistance. As a result of these meetings, Education is supporting a variety of technical assistance projects, including the development of a framework on English language proficiency standards and assessments, the development of guides for developing native language and simplified assessments, and the development of a handbook on appropriate accommodations for students with limited English proficiency. Education officials told us that they are planning the next partnership meeting for the summer of 2007 and expect to have several of these resources available at that time. Education did not explicitly agree or disagree with our recommendation to explore additional options for state flexibility. Instead, the agency commented that it has explored and already provided various types of flexibility regarding the inclusion of students with limited English proficiency in accountability systems. However, in January 2007, Education issued a blueprint for strengthening NCLBA, which calls for greater use of growth models and the recognition within state accountability systems of schools that make significant progress in moving students toward English proficiency. Mr. Chairman, this completes my prepared statement. I would be happy to respond to any questions you or other members of the subcommittee may have. For further information regarding this testimony, please contact me at (202) 512- 7215. Individuals making key contributions to this testimony include Harriet Ganson, Bryon Gordon, Shannon Groff, Krista Loose, Michelle St. Pierre, Sheranda Campbell, and Nagla'a El Hodiri. No Child Left Behind Act: Education's Data Improvement Efforts Could Strengthen the Basis for Distributing Title III Funds. GAO-07-140. Washington, D.C.: December 7, 2006. No Child Left Behind Act: Education Actions Needed to Improve Local Implementation and State Evaluation of Supplemental Educational Services. GAO-06-758. Washington, D.C.: August 4, 2006. No Child Left Behind Act: Assistance from Education Could Help States Better Measure Progress of Students with Limited English Proficiency. GAO-06-815. Washington, D.C.: July 26, 2006. No Child Left Behind Act: States Face Challenges Measuring Academic Growth That Education's Initiatives May Help Address. GAO-06-661. Washington, D.C.: July 17, 2006. No Child Left Behind Act: Improved Accessibility to Education's Information Could Help States Further Implement Teacher Qualification Requirements. GAO-06-25. Washington, D.C.: November 21, 2005. No Child Left Behind Act: Education Could Do More to Help States Better Define Graduation Rates and Improve Knowledge about Intervention Strategies. GAO-05-879. Washington, D.C.: September 20, 2005. No Child Left Behind Act: Most Students with Disabilities Participated in Statewide Assessments, but Inclusion Options Could Be Improved. GAO-05-618. Washington, D.C.: July 20, 2005. Head Start: Further Development Could Allow Results of New Test to Be Used for Decision Making. GAO-05-343. Washington, D.C.: May 17, 2005. No Child Left Behind Act: Education Needs to Provide Additional Technical Assistance and Conduct Implementation Studies for School Choice Provision. GAO-05-7. Washington, D.C.: December 10, 2004. No Child Left Behind Act: Improvements Needed in Education's Process for Tracking States' Implementation of Key Provisions. GAO-04-734. Washington, D.C.: September 30, 2004. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The No Child Left Behind Act of 2001 (NCLBA) focused attention on the academic achievement of more than 5 million students with limited English proficiency. Obtaining valid test results for these students is challenging, given their language barriers. This testimony describes (1) the extent to which these students are meeting annual academic progress goals, (2) what states have done to ensure the validity of their academic assessments, (3) what states are doing to ensure the validity of their English language proficiency assessments, and (4) how the U.S. Department of Education (Education) is supporting states' efforts to meet NCLBA's assessment requirements for these students. This testimony is based on a July 2006 report (GAO-06-815). To collect the information for this report, we convened a group of experts and studied five states (California, Nebraska, New York, North Carolina, and Texas). We also conducted a state survey and reviewed state and Education documents. In nearly two-thirds of 48 states for which we obtained data, students with limited English proficiency did not meet state proficiency goals for language arts or mathematics in school year 2003-2004. Further, in most states, these students generally did not perform as well as other student groups on state mathematics tests for elementary students. Officials in our five study states reported taking steps to follow generally accepted test development procedures to ensure the validity and reliability of academic tests for these students. However, our group of experts expressed concerns about whether all states are assessing these students in a valid manner, noting that some states lack technical expertise. Further, Education's completed peer reviews of assessments in 38 states found that 25 states did not provide adequate evidence of their validity or reliability. To improve the validity of these test results, most states offer accommodations, such as a bilingual dictionary. However, our experts reported that research is lacking on what accommodations are effective in mitigating language barriers. Several states used native language or alternate assessments for students with limited English proficiency, but these tests are costly to develop and are not appropriate for all students. Many states implemented new English language proficiency assessments in 2006 to meet NCLBA requirements, and, as a result, complete information on their validity and reliability is not yet available. In 2006, 22 states used tests developed by one of four state consortia. Officials in our study states reported taking steps to ensure the validity of these tests. However, a 2005 Education-funded review of 17 English language proficiency tests found insufficient documentation of their validity. Education has offered a variety of technical assistance to help states assess students with limited English proficiency. However, Education has issued little written guidance to states on developing English language proficiency tests. Officials in about one-third of the 33 states we contacted told us they wanted more guidance about how to develop tests that meet NCLBA requirements. Education has offered states some flexibility in how they assess students with limited English proficiency, but officials in our study states told us that additional flexibility is needed to ensure that progress measures appropriately track the academic progress of these students. Since our report was published, Education has initiated a partnership with the states and other organizations to support the development of valid assessment options for students with limited English proficiency.

One of the key provisions of the President's Management Agenda, released in 2001, is the expansion of electronic government. To implement this provision, OMB sought to identify potential projects that could be implemented to address the issue of multiple federal agencies' performing similar tasks that could be consolidated through e-government processes and technology. To accomplish this, OMB established a team called the E- Government Task Force, which analyzed the federal bureaucracy and identified areas of significant overlap and redundancy in how federal agencies provide services to the public. The task force noted that multiple agencies were conducting redundant operations within 30 major functions and business lines in the executive branch. For example, the task force found that 10 of the 30 federal agencies it studied had ongoing activities in the National Security and Defense line of business, while 13 of the 30 agencies had ongoing activities related to Disaster Preparation and Response Management. To address such redundancies, the task force evaluated a variety of potential projects, focusing on collaborative opportunities to integrate IT operations and simplify processes within lines of business across agencies and around citizen needs. Twenty-five projects were selected to lead the federal government's drive toward e-government transformation and enhanced service delivery. In its e-government strategy, published in February 2002, OMB established a portfolio management structure to help oversee and guide the selected initiatives. The five portfolios in this structure are "government to citizen," "government to business," "government to government," "internal efficiency and effectiveness," and "cross-cutting." For each initiative, OMB designated a specific agency as the managing partner responsible for leading the initiative, and also assigned other federal agencies as partners in carrying out the initiative. OMB initially approved Project SAFECOM as an e-government initiative in October 2001. SAFECOM falls within the government-to-government portfolio, due to its focus on accelerating the implementation of interoperable public safety communications at all levels of government. As described in its 2002 e-government report, OMB planned for SAFECOM to address critical shortcomings in efforts by public safety agencies to achieve interoperability and eliminate redundant wireless communications networks. OMB also stated that the project was expected to save lives and lead to better-managed disaster response, as well as result in billions of dollars in budget savings from "right-sized" federal communications networks and links to state networks . In order to effectively carry out their normal duties and respond to extraordinary events such as natural disasters and domestic terrorism, public safety agencies need the ability to communicate with those from other disciplines and jurisdictions. However, the wireless communications used today by many police officers, firefighters, emergency medical personnel, and other public safety agencies do not provide such capability, which hinders their ability to respond. For example, emergency agencies responding to events such as the bombing of the federal building in Oklahoma City and the attacks of September 11, 2001, experienced difficulties while trying to communicate with each other. Historically, the ability of first responders to communicate with those from other disciplines and jurisdictions has been significantly hampered because they often use different and incompatible radio systems operating on different frequencies of the radio spectrum. In February 2003, the National Task Force on Interoperability estimated the number of emergency response officials in the United States--also called first-responders--at about 2.5 million, working for 50,000 different agencies, such as law enforcement organizations, fire departments, and emergency medical services. Response to an emergency may involve any or all of these disciplines, as well as may additional personnel from the transportation, natural resources, or public utility sectors. A complex array of challenges affects the government's ability to address the emergency communications interoperability problem. In addition to the vast number of distinct governmental entities involved, the National Task Force on Interoperability identified a variety of additional barriers, including the fragmentation and limited availability of radio communications spectrum for dedicated use by emergency personnel, incompatible and aging communications equipment, limited equipment standards within the public safety community, and the lack of appropriate life-cycle funding strategies. These barriers have been long-standing, and fully overcoming them will not be accomplished easily or quickly. Figure 1 summarizes the challenge of achieving seamlessly interoperable communications among the many personnel and organizations responding to an emergency. In some cases, first responders have resorted to stopgap measures to overcome communications problems. For example, some may swap radios with another agency at the scene of an emergency, others may relay messages through a common communications center, and still others may employ messengers to physically carry information from one group of responders to another. However, these measures have not always been adequate. The National Task Force on Interoperability identified several cases where the inability to communicate across agencies and jurisdictions in emergency situations was a factor in the loss of lives or delayed emergency response. Over the last decade, several federal programs have been established to address various aspects of public safety communications and interoperability. Among these was the Public Safety Wireless Network (PSWN) program--originally developed as a joint undertaking of the departments of Justice and the Treasury. PSWN's focus was to promote state and local interoperability by establishing a technical resource center, collecting and analyzing data related to the operational environment of public safety communications, and initiating pilot projects to test and refine interoperable technology. Another similar initiative is the Advanced Generation of Interoperability for Law Enforcement (AGILE) program, which is run by the Department of Justice's National Institute of Justice. AGILE was created to coordinate interoperability research within the Department of Justice and with other agencies and levels of government. AGILE has four main activities: (1) supporting research and development, (2) testing and evaluating pilot technologies, (3) developing standards, and (4) educating end users and policymakers. With roughly 100 agencies that use radio communications in law enforcement activities, the federal government also has a need for interoperable communications, both internally among its own departments and agencies and with state and local entities. This need has grown since the attacks of September 11, 2001, which blurred the distinctions between public safety and national security, and has placed federal entities such as the Federal Bureau of Investigation, the U.S. Secret Service, and the U.S. Coast Guard into broader public safety roles. As a result, federal public safety personnel have an increased need to be able to communicate directly with one another and with their state and local counterparts. After more than 2 years, Project SAFECOM has made very limited progress in addressing its overall objective of achieving communications interoperability among entities at all levels of government. SAFECOM's lack of progress has prevented it from achieving the benefits that were expected of it as one of the 25 OMB-sponsored e-government initiatives, including improving government efficiency and realizing budgetary savings. Two factors have contributed significantly to the project's limited results. First, there has been a lack of sustained executive leadership, as evidenced by multiple shifts in program responsibility and management staff. Second, the project has not achieved the level of collaboration necessary for a complex cross-government initiative of this type. In recent months, the current project team has pursued various near-term activities that are intended to lay the groundwork for future interoperability, including establishing a governance structure that emphasizes collaboration with stakeholders and developing grant guidance for use with awards to public safety agencies that encourage planning for interoperability. However, it has not yet reached written agreements with several of its major stakeholders on their roles in the project or established a stable funding mechanism. Until these weaknesses are addressed, SAFECOM's ability to achieve its ultimate goal of improving interoperable communications will remain in doubt. When the e-government initiative was launched in 2002, OMB identified achieving public safety interoperability and reducing redundant wireless communications infrastructures as the goal for Project SAFECOM. Specifically, SAFECOM was to achieve federal-to-federal interoperability throughout the nation, achieve federal-to-state/local interoperability throughout the nation, and achieve state/local interoperability throughout the nation. As of March 2004, Project SAFECOM has made very limited progress in addressing its overall objective of achieving communications interoperability among entities at all levels of government. Specifically, project officials could provide no specific examples of cases where interoperability had been achieved as a direct result of SAFECOM activities. Furthermore, program officials now estimate that a minimum level of interoperability will not occur until 2008, and full interoperability will not occur until 15 years later, in 2023. OMB expected SAFECOM's value to citizens to include saved lives and better managed disaster response; however, because of the program's limited progress, these benefits have not yet been achieved. OMB also forecasted that a reduction in the number of communications devices and their associated maintenance and training would result in cost savings, including "billions" in federal savings. Project officials are currently conducting a study to estimate potential federal savings, such as savings from reducing equipment purchases. However, according to the program manager, federal savings in the billions of dollars are not likely. He added, however, that state and local agencies could realize significant savings if they could rely on Project SAFECOM to conduct consolidated testing of equipment for compliance with interoperability standards. Finally, on the issue of federal agency efficiency, the project has achieved mixed results. Although SAFECOM absorbed the projects and functions of PSWN, it has not consolidated the functions of Project AGILE, despite the similarities between the two programs' activities. According to SAFECOM's manager, the project lacks the authority to consolidate additional programs. As we have identified in previous work, successful organizations foster a committed leadership team and plan for smooth staff transitions. The transition to modern management requires sustained, committed leadership on the part of agency executives and managers. As in the case with well-run commercial entities, strong leadership and sound management are central to the effective implementation of public-sector policies or programs, especially transformational programs such as the OMB-sponsored e-government initiatives. Instead of sustained management attention, SAFECOM has experienced frequent changes in management, which have hampered its progress. OMB originally designated the Department of the Treasury, which was already involved in overseeing PSWN, as the project's managing partner. As originally conceived, SAFECOM would build on PSWN's efforts to achieve interoperability among state and local agencies by building an interoperable federal communications network. However, in May 2002, the Federal Emergency Management Agency (FEMA), which had an emergency-response mission more closely aligned with SAFECOM's goals, was designated managing partner. At that time, project staff focused their efforts on securing funding and beginning outreach to stakeholders such as the AGILE program and associations representing local emergency agencies. By September 2002, the Federal Emergency Management Agency had replaced its SAFECOM management team and shifted its implementation strategy to focus on helping first responders make short- term improvements in interoperability using vehicles such as demonstration projects and research. At that time, development of an interoperable federal first-responder communications system was seen as a long-term goal. Following the establishment of DHS, in May 2003, the project was taken out of the Federal Emergency Management Agency and assigned to the department's new Science and Technology Directorate because of a perceived need to incorporate more technical expertise. At that time, the project was assigned to a fourth management team. Figure 2 summarizes the major management changes that have occurred throughout Project SAFECOM's history. This lack of sustained, committed executive leadership hampered SAFECOM's ability to produce results tied to its overall objective. The changing of project teams approximately every 6 to 9 months has meant that much of the effort spent on the project has been made repeatedly to establish administrative structures, develop program plans, and obtain stakeholder input and support. Additionally, according to the project manager of PSWN, the changes in leadership have led to skepticism among some of the project's stakeholders that the project's goals can be met. The ability of Project SAFECOM to meet its overall objective has also been hampered by inadequate collaboration with the project's stakeholders. As an umbrella program meant to coordinate efforts by various federal, state, and local agencies to achieve interoperability, SAFECOM's success relies on cross-agency collaboration. As we have previously reported, cross- organizational initiatives such as this require several conditions to be successful, including: (1) a collaborative management structure; (2) clear agreements among participants on purpose, outcomes, and performance measures; (3) shared contribution of resources; and (4) a common set of operating standards. While the project's current management team has made progress in developing a collaborative management structure, SAFECOM does not yet have other necessary structures or agreements in place. Its previous management teams worked on creating a collaborative management structure by, for example, seeking input from stakeholders and drafting a memorandum of understanding among the departments of Homeland Security, Justice, and the Treasury, but these activities were not completed at the time of the transition to DHS. Since taking control of the project in May 2003, Project SAFECOM has pursued a number of activities that stress collaboration and are intended to lay the groundwork for future interoperability, according to its current manager. Specifically, DHS established a governance structure for the project in November 2003 that includes executive and advisory committees to formalize collaboration with stakeholders and provides a forum for significant input on goals and priorities by federal agencies and state and local representatives. The department has also conducted several planning conferences meant to identify project stakeholders to reach agreements with them on the program's purpose and intended outcomes. One such conference, in December 2003, provided an opportunity for stakeholders to modify program goals and the tasks planned to address them. The program manager also cited a statement of support by several organizations representing local first responders as evidence that the current structure is achieving effective collaboration. In addition, project officials are working with the Commerce Department to catalog all existing federal agencies that use public safety communications systems and networks. Further, program officials noted that the SAFECOM project developed grant guidance that promotes interoperability by requiring public safety agencies to describe specific plans for achieving improved interoperability when applying for grants that fund communications equipment. This guidance represents a positive step, but it does not provide public safety agencies with complete specifications for achieving interoperability. Specifically, the guidance strongly encourages applicants to ensure that purchased equipment complies with a technical standard for interoperable communications equipment that has not yet been finalized and that, according to program officials, addresses only part of the interoperability problem. This guidance has already been incorporated into grants awarded by the Department of Justice's Office of Community Oriented Policing Services and the Federal Emergency Management Agency. However, Project SAFECOM has not yet fulfilled other conditions necessary for successful cross-government collaboration. First, project officials have not signed memorandums of agreement with all of the project's stakeholders. As shown in table 1, agreements were completed on funding or program participation with five agencies in fiscal year 2003. However, DHS did not reach a 2003 agreement with the Department of the Interior or the Department of Justice, both agencies designated as funding partners. According to the SAFECOM program manager, the Department of the Interior has not fully determined the extent of its expected participation in the program, and the Department of Justice had to delay its agreement until it received approval to reprogram the necessary funds. Justice has reached an agreement with DHS for fiscal year 2004, but as of March 2004, none of the other funding partners have signed agreements covering the current year. In addition, although other federal agencies and the organizations representing state and local stakeholders are represented in SAFECOM's governing structure and some have expressed support for the program, none has reached an agreement with DHS that commits it to provide nonfinancial assistance to the project. Finally, those agreements that were in place did not address key program parameters, such as specific program outcomes or performance measures. While the program's stakeholders agreed to a broad set of goals and expected outcomes at the December planning meeting, as of March 2004, there was no agreement on performance measures for them. According to the program manager, new performance measures were under development. Second, while effective collaboration requires the sharing of resources, DHS had not received all of the funding it planned to receive from its federal partners. During fiscal year 2003, SAFECOM received only about $17 million of the $34.9 million in funding OMB allocated to it from these funding partners. About $1.4 million of that $17 million was not received until late September 2003, when only a week remained in the fiscal year. According to program officials, these funding shortfalls and delays resulted in the program's having to delay some of the tasks it had intended to complete, such as identifying the project's major milestones. Finally, although DHS has not yet developed a common set of operating standards for SAFECOM, efforts to identify technical standards are underway, according to program officials. For example, program officials from SAFECOM and AGILE plan to accelerate the development of an incomplete standard for interoperable communications equipment that is cited in SAFECOM's grants guidance. Program officials are also developing a document describing the requirements for public safety communications interoperability, which is intended to form the basis for future technical development efforts. SAFECOM also is supporting several demonstration projects and vendor presentations to publicize currently available interoperable systems. The absence of many aspects of successful collaboration could hamper SAFECOM officials' ability to achieve the program's goals. For example, the lack of written agreements with some stakeholders raises concerns about the extent to which those agencies are willing to contribute to the program's success. Also, until performance measures and technical standards are finalized and implemented, it will be difficult to determine the extent of any progress. Should such difficulties continue to hamper the program's progress in fulfilling its overall goals, solutions to the problems of public safety interoperability will be further delayed. While the lack of rapid progress in improving interoperable communications among first responders may be understandable, considering the complexity of the issues and the number of entities involved, federal efforts to address the issue as an e-government initiative have been unnecessarily delayed by management instability and weaknesses in collaboration. Since taking over management of the project in May 2003, DHS has shown greater executive commitment to the project than had previously been demonstrated. The agency has determined that a long-term, intergovernmental effort will be needed to achieve the program's overall goal of improving emergency response through broadly interoperable first-responder communications systems, and it has taken steps to lay the groundwork for this by creating a governance structure allowing for significant stakeholder input on program management. However, DHS has made less progress in establishing written agreements with other government agencies on responsibilities and resource commitments. The DHS effort could experience difficulties if it does not reach such agreements, which have proven essential to the success of other similarly complex, cross-agency programs. To enhance the ability of Project SAFECOM to improve communications among emergency personnel from federal, state, local, and tribal agencies, we recommend that the Secretary of Homeland Security direct the Under Secretary for Science and Technology to complete written agreements with the project's identified stakeholders, including federal agencies and organizations representing state and local governments. These agreements should define the responsibilities and resource commitments that each of those organizations will assume and include specific provisions that measure program performance. In written comments on a draft of this report, which are reprinted in appendix I, the Department of Homeland Security's GAO liaison agreed that the lack of interoperable communications hampers emergency response. The official also provided additional information about activities undertaken by the current program management team since May 2003, including the implementation of a management structure that includes state and local stakeholders, the ongoing development of technical standards, and development of a database to track federal interoperability efforts. We discuss these activities in our report. Regarding our draft recommendation, this official indicated that DHS has provided draft agreements to SAFECOM's federal funding partners, and added that DHS supports the need for further delineation of responsibilities and funding in future MOUs. Until DHS reaches specific agreements with all of SAFECOM's stakeholders, including nonfunding federal partners and state and local partners, its ability to achieve its objectives will continue to be hindered. The official also stated that DHS agrees that performance measures are essential for adequate program management, and added that SAFECOM had developed a strategic performance management tool. However, DHS did not provide any evidence that SAFECOM had determined the specific performance measures that will be used to assess progress against its goals, or the process for applying them. Until such measures are implemented, program managers will be unable to determine the impact of their efforts. We also made technical corrections, as appropriate, in response to DHS's comments. We plan to send copies to this report to the Ranking Minority Member, House Committee on Government Reform; the Ranking Minority Member, Subcommittee on Technology, Information Policy, Intergovernmental Relations and the Census; and the Ranking Minority Member, Subcommittee on National Security, Emerging Threats and International Relations. In addition, we will provide copies to the Secretary of Homeland Security and the Director of OMB. Copies will also be available without charge on GAO's Web site at www.gao.gov. Should you have any questions concerning this report, please call me at (202) 512-6240 or John de Ferrari, Assistant Director, at (202) 512-6335. We can also be reached by e-mail at [email protected] and [email protected], respectively. Other key contributors to this report were Felipe Colon, Jr., Neil Doherty, Michael P. Fruitman, Jamie Pressman, and James R. Sweetman, Jr. The General Accounting Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. 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One of the five priorities in the President's Management Agenda is the expansion of electronic government (e-government)--the use of Internet applications to enhance access to and delivery of government information and services. Project SAFECOM is one of the 25 initiatives sponsored by the Office of Management and Budget (OMB) to implement this agenda. Managed by the Department of Homeland Security, the project's goal is to achieve interoperability among emergencyresponse communications at all levels of government, while at the same time realizing cost savings. GAO assessed the government's progress in implementing Project SAFECOM. While its overall objective of achieving communications interoperability among emergency response entities at all levels of government is a challenging task that will take many years to fully accomplish, Project SAFECOM, in its 2-year history, has made very limited progress in addressing this objective. OMB's e-government objectives of improving operating efficiency and achieving budgetary savings within federal programs have also been largely stymied. Two major factors have contributed to the project's limited progress: (1) lack of consistent executive commitment and support, and (2) an inadequate level of interagency collaboration. In its 2 1/2-year history, Project SAFECOM has had four different management teams in three different agencies. In recent months, the current project team has pursued various near-term activities that are intended to lay the groundwork for future interoperability, including establishing a governance structure that emphasizes collaboration with stakeholders and developing guidance for making grants that can be used to encourage public safety agencies to plan for interoperability. However, it has not yet reached written agreements with several of its major stakeholders on their roles in the project or established a stable funding mechanism. Until these shortcomings are addressed, the ability of Project SAFECOM to deliver on its promise of improved interoperability and better response to emergencies will remain in doubt.

In October 1990, the Federal Accounting Standards Advisory Board (FASAB) was established by the Secretary of the Treasury, the Director of the Office of Management and Budget (OMB), and the Comptroller General of the United States to consider and recommend accounting standards to address the financial and budgetary information needs of the Congress, executive agencies, and other users of federal financial information. Using a due process and consensus building approach, the nine-member Board, which has since its formation included a member of DOD, recommends accounting standards for the federal government. Once FASAB recommends accounting standards, the Secretary of the Treasury, the Director of OMB, and the Comptroller General decide whether to adopt the recommended standards. If they are adopted, the standards are published as Statements of Federal Financial Accounting Standards (SFFAS) by OMB and GAO. In addition, the Federal Financial Management Improvement Act of 1996 requires federal agencies to implement and maintain financial management systems that will permit the preparation of financial statements that substantially comply with applicable federal accounting standards. Also, the Federal Managers' Financial Integrity Act of 1982 requires agency heads to evaluate and report annually whether their financial management systems conform to federal accounting standards. Issued on November 30, 1995, and effective for the fiscal years beginning after September 30, 1997, SFFAS No. 6, Accounting for Property, Plant, and Equipment, requires the disclosure of deferred maintenance in agencies' financial statements. SFFAS No. 6 defines deferred maintenance as "maintenance that was not performed when it should have been or was scheduled to be and which, therefore, is put off or delayed for a future period." It includes preventive maintenance and normal repairs, but excludes modifications or upgrades that are intended to expand the capacity of an asset. The deferred maintenance standard applies to all property, plant, and equipment, including mission assets--which will be disclosed on the supplementary stewardship report. For the Department of Defense (DOD), mission assets, such as submarines, ships, aircraft, and combat vehicles, is a major category of property, plant, and equipment. In fiscal year 1996, DOD reported over $590 billion in this asset category, of which over $297 billion belonged to the Navy, including 338 active battle force ships such as aircraft carriers, submarines, surface combatants, amphibious ships, combat logistics ships, and support/mine warfare ships. The Navy spent a little over $2 billion on ship depot maintenance for its active fleet in fiscal year 1996. SFFAS No. 6 recognizes that there are many variables in estimating deferred maintenance amounts. For example, the standard acknowledges that determining the condition of the asset is a management function because different conditions might be considered acceptable by different entities or for different items of property, plant, and equipment held by the same entity. Amounts disclosed for deferred maintenance may be measured using condition assessment surveys or life-cycle cost forecasts.Therefore, SFFAS No. 6 provides flexibility for agencies' management to (1) determine the level of service and condition of the asset that are acceptable, (2) disclose deferred maintenance by major classes of assets, and (3) establish methods to estimate and disclose any material amounts of deferred maintenance. SFFAS No. 6 also has an optional disclosure for distinguishing between critical and noncritical amounts of maintenance needed to return each major class of asset to its acceptable operating condition. If management elects to disclose critical and noncritical amounts, the disclosure must include management's definition of these categories. The objective of our work was to identify information on specific issues to be considered in developing implementing guidance for disclosing deferred maintenance on ships. We reviewed financial and operational regulations and documentation related to managing and reporting on the ship maintenance process. The documentation we reviewed included fleet spreadsheets used to track depot-level maintenance requirements and execution by specific ship. We also reviewed Navy Comptroller budget documents. We discussed this information with officials at DOD and Navy headquarters and at various organizational levels within the Department of the Navy. While the deferred maintenance standard applies to all levels of maintenance, this report addresses ship depot-level maintenance because it is the most complicated and expensive. (See the following section for a discussion of the Navy ship maintenance process, including the levels of maintenance.) The amounts for deferred depot level maintenance presented in this report were developed using information provided by Navy managers. We did not independently verify the accuracy and completeness of the data. We conducted our review from July 1996 through November 1997 in accordance with generally accepted government auditing standards. We requested written comments on a draft of this report from the Secretary of Defense or his designee. The Under Secretary of Defense (Comptroller) provided us with written comments, which are discussed in the "Agency Comments" section and are reprinted in appendix I. The Navy accomplishes maintenance on its ships (including submarines) at three levels: organizational, intermediate, and depot. Organizational-level maintenance includes all maintenance actions which can be accomplished by a ship's crew. For example, the ship's crew may replace or fix a cracked gasket or leaks around a hatch or doorway aboard ship. Intermediate-level maintenance is accomplished by Navy Intermediate Maintenance Activities (IMAs) for work that is beyond the capability or capacity of a ship's crew. For example, an IMA performs calibration or testing of selected ship systems for which the ship's crew may not have the equipment or capability to perform. Depot-level maintenance includes all maintenance actions that require skills or facilities beyond those of the organizational and intermediate levels. As such, depot-level maintenance is performed by shipyards with extensive shop facilities, specialized equipment, and highly skilled personnel to accomplish major repairs, overhauls, and modifications. The Navy determines what depot-level maintenance is needed for its ships through a requirements process that builds from broad maintenance concepts outlined in Navy policy and culminates with the execution of an approved schedule. There are three types of maintenance requirements that are executed: (1) time-directed requirements, (2) condition-based requirements, or (3) modernization requirements. Time-directed requirements are derived from technical directives and include those that are periodic in nature and are based on elapsed time or recurrent operations. Condition-based requirements are based on the documented physical condition of the ship as found by the ship's crew or an independent inspection team. Lastly, modernization requirements include ship alterations, field changes, and service changes that either add new capability or improve reliability and maintainability of existing systems through design improvements or replacements. Initial depot-level maintenance requirements are determined and a proposed maintenance schedule is developed and approved based on overall ship maintenance policy, specific maintenance tasks, operational requirements, force structure needs, and fielding schedules. These approved maintenance schedules undergo numerous changes as new requirements are identified, others are completed or canceled, operational priorities change, and budgets fluctuate. Thus, these factors result in many deviations from the plan once actual maintenance is executed and complicate the measurement of exactly what maintenance should be considered deferred. Less flexibility in scheduling is permissible with submarines than surface ships because prescribed maintenance must be done on submarines periodically for them to be certified to dive. If the specified maintenance is not done by the time required, the submarine is not to be operated until the maintenance is accomplished. Neither DOD nor the Navy has developed implementing guidance for determining and disclosing deferred maintenance on financial statements. Navy officials said that they are reluctant to develop their procedures until DOD issues its guidance. As we reported to DOD in our September 30, 1997, letter, DOD guidance is important to ensure consistency among the military services and to facilitate the preparation of DOD-wide financial statements. We also stated that the guidance needs to be available as close to the beginning of fiscal year 1998 as possible so that the military services have time to develop implementing procedures and accumulate the necessary data to ensure consistent DOD-wide implementation for fiscal year 1998. We found that operations and comptroller officials from both DOD and the Navy have varying opinions concerning the nature of unperformed maintenance that should be reported as "deferred." The differences in opinions arise from various interpretations of how to apply the standard to the maintenance process. The views on how to apply the deferred maintenance standard to the ship maintenance process ranged from including only unfunded ship overhauls to estimating the cost of repairing all problems identified in each ship's maintenance log. Brief descriptions of various views of how SFFAS No. 6 could be applied to disclosing deferred depot-level maintenance for ships follow. The descriptions explain what would be considered deferred maintenance for ships and the rationale for each option. In its budget justification documents, the Navy reports deferred depot-level maintenance for unfunded ship overhauls. The Navy Comptroller officials' rationale for excluding other types of depot-level maintenance not done is that overhauls represent the Navy's top priority for accomplishing ship depot-level maintenance and, therefore, should be highlighted for the Congress when a lack of funds prevents them from occurring when needed. While overhauls consumed most of the depot-level maintenance funding in past years, the Navy is performing fewer overhauls as it moves toward a more incremental approach of doing smaller amounts of depot-level work more frequently. Consequently, overhauls now represent a relatively small part of the Navy's ship depot-level maintenance budget. In fiscal year 1996, over 80 percent of the Navy's ship depot-level maintenance budget was spent on work other than ship overhauls. Specifically, the Navy reported spending almost $1.7 billion for other ship depot-level maintenance and $367.8 million for ship overhauls. The Navy officials' rationale for disclosing only unfunded overhauls as deferred depot-level maintenance in financial statements is that the data are readily available and are consistent with what is being reported in budget justification documents. However, this view omits all other types of scheduled depot-level maintenance not done and clearly does not meet the intent of SFFAS No. 6. FASAB addressed the deferred maintenance issue because of widespread concern over the deteriorating condition of government-owned equipment. FASAB reported that the consequences of underfunding maintenance (increased safety hazards, poor service to the public, higher costs in the future, and inefficient operations) are often not immediately reported and that the cost of the deferred maintenance is important to users of financial statements and key decisionmakers. Using this option, the amount disclosed for fiscal year 1996 (the most recent fiscal year data available) would have been $0. Both Atlantic and Pacific fleet officials monitor deferred ship depot-level maintenance and report these backlog amounts to the Navy Comptroller although these amounts are not reported in the Navy's budget justification documents. These fleet backlog reports quantify the ship depot-level maintenance work that should have been performed by the end of the fiscal year according to the Chief of Naval Operations (CNO) but was not done and was not rescheduled. The rationale for using the amounts on the fleet backlog reports for financial statement reporting is that the data are readily available, and it is a more realistic representation of deferred maintenance than just the unfunded ship overhauls. Using this option, the amount disclosed in the Navy's financial statements for fiscal year 1996 would have been about $117.5 million. However, the fleet backlog reports do not include any depot-level work rescheduled to future years. Under one approach, the estimated value of work rescheduled beyond the ship's approved maintenance schedule time frames, as established by the CNO, would also be disclosed. The rationale for adding the estimated value of work rescheduled beyond these time frames is that the CNO Notice provides the Navy's established requirements for accomplishing ship depot-level maintenance; therefore, any work rescheduled beyond the specified time frames should be considered deferred. For example, maintenance work on two Pacific Fleet destroyers was rescheduled beyond the CNO-specified time frames of June and July 1996, respectively, to October 1996. On the other hand, maintenance on two Atlantic Fleet submarines was rescheduled from the end of one fiscal year to early the next fiscal year but still within CNO-specified time frames. Under this option, the estimated value of the maintenance work rescheduled to the next fiscal year on the destroyers would be recognized as deferred maintenance at the end of the fiscal year. However, the value of the rescheduled work on the submarines would not be recognized because it was still to be performed within the CNO-specified time frames. Under this option, using Navy data, the amount disclosed for fiscal year 1996 would have been about $15.1 million greater or $132.6 million. Another option discussed with Navy officials would be to modify the fleet backlog reports to include the estimated value of any scheduled maintenance work not accomplished during the fiscal year, regardless of the CNO-specified time frames. Under this approach, the estimated value of work on the two submarines discussed above would also be recognized as deferred maintenance. The rationale for this option is that any scheduled work moved to the next fiscal year should be disclosed as deferred maintenance at the end of the fiscal year when the scheduled maintenance was to be performed. Under this option, using Navy data, the amount disclosed for fiscal year 1996 would have been about $188.5 million. Another view discussed with Navy officials for disclosing deferred ship maintenance is to report the costs to perform the needed work on all items listed on each ship's maintenance log at the end of the fiscal year. The rationale for using this source is that the log may more completely capture all levels of maintenance needed on each ship. Depending on the size and condition of the ship, the maintenance log could contain only a few items or many thousands. However, the Navy does not routinely determine the cost of items that appear on a ship's maintenance log. Further, although these logs are supposed to be up-to-date and routinely checked for accuracy and completeness, Navy fleet officials stated that estimating the cost to repair the items on each ship's log would be very time-consuming and costly because maintenance tasks that are accomplished are not routinely deleted from the log, and the time estimates contained in the logs may be inaccurate. Nevertheless, officials said that using the estimated value of all items listed on each ship's maintenance log would exceed any of the above estimates due to the sheer volume of items included. As discussed in our earlier report, implementing guidance is needed so that all military services consistently apply the deferred maintenance standard. As a result of the variations in the way the deferred maintenance standard can be applied to ships (including submarines), DOD and the Navy need to consider a number of issues, including the following. Acceptable asset condition - SFFAS No. 6 allows agencies to decide what "acceptable condition" means and what maintenance needs to be done to keep assets in that condition. Determining acceptable operating condition could be in terms of whether (1) the ship can perform all or only part of its mission, (2) the most important components of the ship function as intended, (3) the ship meets specified readiness indicators, or (4) the ship and/or its major components meets some other relevant criteria determined by management. The determination may also be influenced by whether the ship is currently deployed or scheduled to be deployed in the near future. An example of the acceptable operating condition issue is as follows. Each ship is composed of many systems, and those systems critical to the ship's ability to meet its operational commitments and achieve high readiness scores (such as the weapons systems) rarely have maintenance deferred. On the other hand, maintenance on the ship's distributive systems (such as the ship's pipes and hulls) are more likely to be deferred since this has little direct impact on the ship's readiness indicators. Therefore, the question is whether needed maintenance not performed on the distributive systems, should be disclosed as deferred maintenance since it has little impact on the ship's readiness scores but could affect the ship's long-term viability. Timing of deferred maintenance recognition - Each ship class has standard operating intervals between visits to the depot; however, changes to this plan may take place as the scheduled maintenance approaches (except for certain maintenance requirements for the submarines and aircraft carriers which have mandated maintenance intervals to meet safety requirements) due to operational considerations, funds available, and condition-based inspections. To ensure that meaningful, consistent data are provided, DOD and the military services will need to decide which one of the many possible alternatives will be used to determine when maintenance needed but not performed is considered deferred. The timing issue involves what needed maintenance should be recognized as deferred as of the end of the fiscal year--the date specified in the CNO Notice, the date the maintenance needs were identified, or the date the maintenance was scheduled. Applicability of the reporting requirements - DOD and the military services will need to determine whether deferred maintenance should be reported for assets that are not needed for current requirements. For example, should maintenance deferred on ships being considered for decommissioning or not scheduled for deployment for a significant period be recognized on DOD's and the Navy's financial statements? Reporting the maintenance not done as deferred would more accurately reflect how much it would cost to have all reported assets in an acceptable operating condition; however, it would also be reporting maintenance which is not really needed at this time and which may never be needed or done. Critical and noncritical deferred maintenance - If critical versus noncritical deferred maintenance is to be disclosed, such a disclosure must be consistent among the services, and critical must be defined. For example, different kinds of maintenance needed--from preventive to urgent for continued operation--may be used to differentiate between critical and noncritical. Also, if DOD chooses to disclose deferred maintenance for all reported assets, including maintenance on assets not needed for current requirements, identifying the types of assets included in the deferred maintenance disclosure may be another way to differentiate between critical and noncritical. Although our work focused on the depot level, the deferred maintenance standard applies to all maintenance that should have been done, regardless of where the maintenance should have taken place. Therefore, in addressing the issues in this report and others regarding deferred maintenance, all levels of maintenance must be considered. In comments on a draft of this report (see appendix I), the Department of Defense agreed that it must consider the key issues identified in this report as it implements deferred maintenance reporting requirements. We are sending copies of this letter to the Chairmen and Ranking Minority Members of the Senate Committee on Appropriations, the House Committee on Appropriations, the Senate Committee on Armed Services, the House Committee on National Security, the Senate Committee on Governmental Affairs, and the House Committee on Government Reform and Oversight. We are also sending copies to the Director of the Office of Management and Budget, the Secretary of Defense, the Assistant Secretaries for Financial Management of the Air Force and Army, and the Acting Director of the Defense Finance and Accounting Service. Copies will be made available to others upon request. Please contact me at (202) 512-9095 if you or your staffs have any questions concerning this letter. Cleggett Funkhouser, Merle Courtney, Chris Rice, Rebecca Beale, and John Wren were major contributors to this report. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

GAO reviewed the Department of Defense's (DOD) implementation of the requirement for valuable information related to deferred maintenance on mission assets, focusing on Navy ships, including submarines. GAO noted that: (1) the development of DOD and Navy policy and implementing guidance for deferred maintenance is essential to ensure consistent reporting among the military services and to facilitate the preparation of accurate DOD-wide financial statements, particularly since the new accounting standard provides extensive management flexibility in implementing the disclosure requirement; (2) Navy officials stated that they were reluctant to develop procedures to implement the required accounting standard until DOD issues overall policy guidance; (3) DOD and Navy officials have expressed numerous views as to how to apply the deferred maintenance standard to ships; (4) this makes it even more important for clear guidance to be developed; (5) the opinions ranged from including only unfunded ship overhauls to including cost estimates of repairing all problems identified in each ship's maintenance log; (6) in formulating the DOD and Navy guidance, key issues need to be resolved to allow for meaningful and consistent reporting within the Navy and from year to year including: (a) what maintenance is required to keep the ships in an acceptable operating condition; and (b) when to recognize as deferred needed maintenance which has not been done on a ship; and (7) in addition, DOD needs to address in its implementing guidance whether the: (a) deferred maintenance standard should be applied to all or only certain groups of assets, such as ships being deactivated in the near future; and (b) reported deferred maintenance should differentiate between critical and noncritical and, if so, what constitutes control.

IRFs generally do not receive appropriations directly. Instead, they are accounts that may receive reimbursements and advances from other federal accounts. In addition, they may accept fees collected from nonfederal sources for the sale of government products or services. The use of IRFs to fund consolidated or shared services allows agencies to benefit from economies of scale or take advantage of specialized expertise that they may not have. The market-like atmosphere promoted by IRF-supported services is intended to create incentives for federal customers and managers to exercise cost control and economic restraint. IRF management affects the success of the programs they support. Within the Department of Commerce (Commerce), there are six IRFsthat support either management and administrative services--such as building security and human capital management--or specialized services based on the unique nature of the agency's mission. For example, Census maintains a nationwide survey infrastructure and has expertise and address lists that would be uneconomical for others to replicate. Thus, it conducts surveys on behalf of other organizations (e.g., Department of Housing and Urban Development's (HUD) American Housing Survey and the Bureau of Labor Statistics' (BLS) Consumer Expenditure Survey). The Commerce Departmental and the Census WCFs were established to support services and projects that are performed more advantageously when centralized, such as information technology services and acquisition management. The statutory authority requires both funds to charge rates that recover agencies' actual costs of operations. Customers of both WCFs either pay in advance or reimburse the fund depending on the terms of the agreement. Three entities play important roles in the management of the Commerce Departmental WCF. First, the Commerce Office of Executive Budgeting (OEB) is responsible for overall management of the Commerce Departmental WCF. Second, the algorithm review group, which includes representatives from the fund's customer bureaus and OEB, convenes every other year to review rate-setting formulas. At this meeting, service providers present their billing methods and implement any changes to the rate-setting formulas that are agreed upon within the group. Finally, the Commerce Chief Financial Officer Council (Commerce CFO Council) is comprised of the CFOs from each of Commerce's bureaus, giving each customer bureau a "seat at the table." This Commerce CFO Council has an important role related to WCF increases and changes to the algorithms used to determine charges. It meets at least annually to review and update service rates, but may meet more frequently as needs arise. Management responsibility for the Census WCF is delegated across various divisions of the bureau. For example, the Budget Division leads the setting and reviewing of service rates each year as well as fund reconciliation. The Finance Division records and tracks customer charges and payments in the Commerce Business System (CBS), which is the financial system used throughout the Department of Commerce. The Acquisition Division reviews, approves, and tracks the status of interagency agreements with Census' external customers. The program offices--also referred to as the sponsoring divisions--are responsible for the day-to-day management of the agreements and build relationships with the customer agencies. Both the Commerce Departmental and Census WCFs primarily support centralized management and administrative services (M&A) for their respective bureaus and programs. For example, almost all of the Commerce Departmental WCF collections support centralized M&A services for its 13 bureaus. In contrast, about half of the Census WCF collections support M&A services for its internal divisions; most of the remaining collections support survey-related services Census performs for other federal agencies and a small share is provided to nonfederal entities. This range of activities complicates management of the fund. Accordingly, Census maintains separate fund components to account for these different activities. Figure 1 illustrates the flow of funds from customers into the Commerce Departmental WCF for the provision of M&A services. The majority of activity is attributed to services provided by four offices--General Counsel, Human Resources Management, Security, and Administrative Services. Customers of the Commerce Departmental WCF are billed directly for services provided. A combination of mostly federal customers, including internal Census divisions/offices, pay into each of the various components of the Census WCF: Reimbursable, Cost Collection, and Cost Allocation. As shown in figure 2, the Reimbursable component supports services purchased by a single federal agency or nonfederal entity, such as the American Housing Survey for HUD, or services for New York City and Duke University. The Cost Collection component supports services where multiple federal agencies or customers share the costs and benefits of a single project, such as the Current Population Survey.indirect costs for customers are distributed among separate components of the Census WCF: direct costs are distributed to the Reimbursable and Cost Collection components whereas indirect costs are distributed to the Cost Allocation component. We identified four key operating principles that offer a framework to effectively manage WCFs. As previously discussed, to identify key principles, we reviewed governmentwide guidance on business operating principles, internal controls, managerial cost accounting, and performance management. In addition, we met with staff from the two WCFs and OMB to obtain their views on the use of these principles to assess WCFs. Commerce Departmental, Census, and OMB staff generally found the principles to be reasonable. Moreover, we considered our past work. The significance of these four principles is described below. 1. Clearly Delineate Roles and Responsibilities: Appropriate delineation of roles and responsibilities promotes a clear understanding of who will be held accountable for specific tasks or duties such as authorizing and reviewing transactions, implementing controls over WCF management, and helping ensure that related responsibilities are coordinated. In addition, this reduces the risk of mismanaged funds and tasks or functions "falling through the cracks." Moreover, it helps customers know who to contact in the event they have questions. 2. Ensure Self-Sufficiency by Recovering the Agency's Actual Costs: Transparent and equitable pricing methodologies allow agencies to ensure that rates charged recover agencies' actual costs and reflect customers' service usage. If customers understand how rates are determined or changed including the assumptions used, customers can better anticipate potential changes to those assumptions, identify their effect on costs, and incorporate that information into budget plans. A management review process can help to ensure the methodology is applied consistently over time and provides a forum to inform customers of decisions and discuss as needed. 3. Measure Performance: Performance goals and measures are important management tools applicable to all levels of an agency, including the program, project, or activity level. Performance measures and goals could include targets that assess fund managers' responsiveness to customer inquiries, the consistency in the application of the funds' rate-setting methodology, the reliability of cost information, and the billing error rates. Performance measures that are aligned with strategic goals can be used to evaluate whether, and if so how, WCF activities are contributing to the achievement of agency goals. A management review process comparing expected to actual performance allows agencies to review progress towards goals and potentially identify ways to improve performance. 4. Build in Flexibility to Obtain Customer Input and Meet Customer Needs: Opportunities for customers to provide input about WCF services, or voice concerns about needs, in a timely manner enable agencies to regularly assess whether customer needs are being met or have changed. This also enables agencies to prioritize customer demands and use resources most effectively, enabling them to adjust WCF capacity up or down as business rises or falls. By incorporating these principles in written guidance, agencies promote consistent application of management processes and provide a baseline for agency officials to assess and improve management processes. Moreover, agencies can use the guidance as a training tool for new staff and as an information tool for customers, program managers, stakeholders, and reviewers. Figure 3 summarizes the four principles and their underlying components. The responsibility for managing and overseeing aspects of the Commerce Departmental and Census WCFs is segregated across a number of offices and entities, thus minimizing the risk of error in fund management. However, neither agency's WCF guidance includes complete information on the roles and responsibilities of all key personnel. The Commerce Department's Office of Executive Budgeting has created a working environment that promotes communication, according to customers and service providers. This has resulted in a clear understanding among Commerce Departmental WCF managers, service providers, and customers about the roles and responsibilities of key personnel who manage the Commerce Departmental WCF. Customers and service providers we interviewed said that OEB is where they go to get answers or raise concerns. In addition, customers and service providers said they communicate directly with each other or through OEB about services they receive and rates charged. Service providers expressed appreciation for OEB's role in facilitating and coordinating regular communication between the service providers and customers. For example: two of the four service providers said they interact with OEB on a daily basis, and all four service providers said that communication occurs on at least a monthly or quarterly basis through meetings or status reports. However, while the Commerce Departmental WCF handbook includes the roles and responsibilities of many key personnel and review groups involved with fund management, it leaves out information on the cross- departmental role of the Commerce CFO Council, which is comprised of the CFOs from each of Commerce's bureaus and has an important role regarding increases or changes to the WCF. The absence of this entity from the handbook results in an incomplete reflection of the process and a missed opportunity to promote understanding by new staff and customers. In contrast to the centralized management of the Commerce Departmental WCF, management responsibilities for the Census WCF are delegated across several divisions including the Census Budget, Finance, and Acquisition Divisions. Although decentralization provides segregation of duties, Census does not have a formal process to coordinate and consolidate information managed by these disparate divisions to provide a corporate view of the WCF. In addition, information about the roles and responsibilities of Census management is incomplete, spread across three documents, and contains varying levels of detail and clarity. For example, the Census WCF Manual lists key personnel responsible for management of the WCF but does not describe their duties and responsibilities or provide specific contact information. This limits the usefulness of the guidance for bureau staff, customers, and other stakeholders. For example, one of the Census WCF's larger customers we interviewed was unsure who to speak with about questions relating to service needs (e.g., the level of service to expect and the wait times before receiving services) and suggested that the Census WCF develop guidelines about service needs and expectations. The Commerce Business System (CBS), which is the financial system used throughout most of Commerce, does not provide a mechanism to record the period of availability of appropriations advanced from customer agencies. The Commerce Department advised us that both WCFs accept advances or reimbursements. When customers pay in advance, those advances have not yet been "earned" in performance of an agreed-upon service and still retain the period of availability from the original appropriation. If the providing agency were to obligate against advanced funds after the appropriation account closes, the customer agency would be required to transfer currently available funds to the WCF. If the customer does not have such funds available, they could be exposed to possible Anti-Deficiency Act violations. Thus, to appropriately manage the use of funds, agencies need a way to track whether funds remain available for purposes of the interagency agreement when it bills against the advance. Similar to what we found in our prior work at NIST, Census tracks customer funds by the period of performance, which may not always coincide with the availability of the funds. Although customer agencies bear ultimate responsibility for proper use of their funds, we have previously reported that the performing agency shares responsibility with its customer agencies to ensure the proper use of federal funds when entering into interagency agreements. Census officials can verify the availability of advanced funds through the Treasury Account Symbol (TAS); however, TAS is not electronically captured in CBS. Unless CBS is updated to include a mechanism for tracking the availability of funds, the performing agency cannot ensure that funds are legally available when it bills against the advances. This is an indication of a potential internal control weakness over resources and, as mentioned above, creates a risk that customer agencies may incur an Anti-Deficiency Act violation. According to service providers and customers, the rate-setting processes for the Commerce Departmental WCF are transparent, clearly coordinated, and designed to recover annual actual costs. For example, the meetings of the Commerce CFO Council--which is comprised of CFOs from each of the Commerce Department's bureaus--provide a regular source of information on the status of funding recommendations to Commerce's CFO. In addition, the algorithm review group and OEB review rates charged at least annually to determine how much each customer bureau will pay into the Commerce Departmental WCF. These rates are based on algorithms that include variables such as prior year actual costs associated with customers' service usage. For example, when determining rates for building maintenance, one important variable is the square footage of the customer office space. Similarly, when determining rates for human resource management services, the number of full-time equivalents is an important variable. This rate-setting process, including the method for setting and distributing charges among users, is clearly explained in the Commerce Departmental WCF handbook. Moreover, Commerce customers said they understood how rates were determined and were satisfied with the amount of input they had in the process. Managers of the Commerce Departmental WCF said that their goal each year is to set rates that cover annual WCF costs and maintain at least the same level of services as the prior year. OEB officials said that the WCF has a limited number of significant cost increases, so a large carryover balance is not needed to sustain the fund. The Census WCF is also designed to recover actual costs and bases its M&A service rates on algorithms linked to expected service usage. In contrast to the Commerce Departmental WCF, managers of the Census WCF maintain an operating reserve to help keep rates stable throughout the decennial census cycle. The Census WCF charges rates that are higher than needed earlier in the decennial cycle to break even later in the decennial cycle. Information about how rates are charged and costs distributed is incomplete and dispersed across three documents. Census customers we spoke with had mixed responses about how M&A costs are determined. For example, five of the seven customers we spoke with said Census informed them of the charges in general terms but did not describe how the individual costs that make up the total M&A costs are determined. However, the customers provided no detail about their efforts to obtain such information from Census. Nonetheless, the lack of clarity in how M&A costs are determined makes it difficult for customers to challenge rates or suggest improvements. A recent Census task force report on cost-saving opportunities related to survey work performed for other federal agencies found that no one Census division had authority to oversee and manage the allocation of resources or the timing of delivering services to any one customer. This report recommended that Census provide greater details on survey costs and establish a "single point of authority" for communicating with customers. Both Commerce and Census WCFs have a management review process that examines how rates are set. However, the level of transparency differs between the two organizations. For example, each month OEB creates and updates a "status of funds" document that tracks available funding in the Commerce Departmental WCF throughout the fiscal year. Commerce officials said OEB uses this document to regularly monitor the WCF and the document is shared with the Commerce CFO each month. In addition, OEB reconciles actual obligations with estimates to identify and investigate variances of 10 percent or more. The service providers meet quarterly with OEB to review budget status and any changes in customer service needs. This process is also documented in the Commerce WCF handbook and helps ensure that rates recover the agency's actual costs. In contrast, Census' WCF reconciliation and review process lacks transparency. Census provides a fragmented and limited description of how it sets rates and there is no formal process to communicate with customers. According to Census officials, the rates for the M&A services are reviewed annually and the costs of the survey services are reconciled when a project concludes. However, two of the three Census WCF internal customers said they have limited discussions and input with Census WCF managers about how rates were determined. Moreover, it is unclear what information is provided, or when, to senior Census management (e.g., Census' CFO). Documentation provided by Census officials did not show what assumptions were used to set rates, whether they were applied consistently, and if actual costs are fully recovered. Although the Census WCF is subject to periodic reviews conducted by the Budget Division to compare revenues generated with the costs captured, it does not include further details on how this is done or with whom the information is shared. Census officials said the WCF is discussed during quarterly budget review meetings with senior management. However, the document that Census officials shared with us, which is used to explain the components of the WCF balance, includes amounts only related to the Cost Allocation component. Without transparent processes for reviewing and updating the service rates, Census misses the opportunity to assure customers and other stakeholders that rates charged are set fairly and to receive suggestions from stakeholders on potential improvements. OEB has processes in place that help it manage the operations of the Commerce Departmental WCF. For example: A "status of funds" report is updated monthly and provided to Commerce's CFO. This report helps WCF managers track the remaining balance of customers' funds to pay for WCF services. Variances of 10 percent or more in the Commerce Departmental WCF's estimated and actual obligations are investigated to obtain justification. In addition, OEB meets quarterly with the director of each office to review the current status of the organization's budget. Customers are surveyed annually about the quality of OEB's assistance and written guidance for the services OEB provides. However, this survey asks broad questions that are not targeted to a specific activity or level of performance. For example, the only references to the Commerce Departmental WCF are general questions about customer interactions with OEB staff and whether the Commerce WCF handbook is useful. While OEB finds these processes helpful in day-to-day management of WCF activities--such as tracking available balances of customer funds-- it does not define these processes as measures to assess WCF performance. We believe that Commerce could use these processes as a starting point to determine what specific measures would be helpful to continuously improve WCF management. As part of its strategic plan, Commerce outlined departmentwide strategic goals and performance measures in its "balanced scorecard approach." The offices that provide services supported through the Commerce Departmental and Census WCFs are assessed as part of this approach, but currently this does not include measures to assess how the WCFs are operating or if they could each function better as an entity. Customers corroborated receiving surveys from other service providers, such as the Acquisition and Finance Divisions, but were unable to provide copies of these surveys. participating divisions. Further, Census WCF managers could not provide any examples of fund-specific performance measures. Although the Commerce Departmental and Census WCFs are intended to achieve economies of scale by supporting services and projects that are performed more advantageously when centralized, both WCFs support similar M&A services that could potentially be supported by one WCF. Officials at Commerce and Census were unable to clearly explain why each WCF provides the same or similar services, or why these services could not be consolidated. For example, both the Commerce Departmental and Census WCFs support a range of space management, travel, and training services for staff, as well as other personnel-related activities. These are potential areas that could be consolidated. In addition, by establishing WCF-specific performance measures, fund managers could benchmark or compare fund performance, which would be useful in identifying improvement opportunities and deciding whether or not to consolidate services. In general, customers we interviewed said they had regular and ongoing interactions with fund managers or service providers. Commerce Departmental customers said they communicate regularly about the type and amount of services received and rates charged. Census customer concerns about overhead costs initiated the recent Census task force report previously described. As a result of the report findings, Census made several rate changes. Also in response to customer input, the Census Bureau recently decided to close six field offices. The Commerce CFO Council actively seeks WCF managers' involvement in setting customer priorities and addressing customer needs. The council meets to discuss individual bureau requests and recommends final allocations to Commerce's CFO, including identifying any potential need to shift funds across programs. When prioritizing customer demand, Commerce Departmental WCF managers also have to incorporate the statutory cap that limits the amount NOAA pays into the Commerce Departmental WCF. Because fund managers strive to ensure self- sufficiency of the WCF and equitably distribute costs across customers, this cap limits the amount other bureaus pay into the Commerce Departmental WCF and thus the level of services that can be supported for all customers. As a result, Commerce Departmental WCF managers in the past have had to propose reductions to services to compensate for the NOAA cap and still provide needed services. When the needs of customers exceed the capacity of the Commerce Departmental WCF, the department and the customer enter into a memorandum of understanding (MOU), outside of the standard suite of services offered through the WCF. However, this additional process somewhat works against the efficiencies that WCFs are intended to provide as WCF managers must rely on a separate mechanism to provide the same type, but a higher level, of service to customers. Although the Commerce Departmental WCF carries over some balances, the NOAA cap's effective limit on revenues hinders the ability to build a reserve. During fiscal years 2001 through 2010, the Commerce Departmental WCF carryover balance ranged from $3 million to $13 million. Census uses its operating reserve to maintain price stability for customers throughout the decennial cycle. During fiscal years 2001 through 2010, the Census WCF carryover balance ranged from $21 million to $430 million as reported in the President's budget. According to Census officials, the operating reserve is a portion of the Census WCF carryover balance. In fiscal year 2010, they estimated the amount of the operating reserve ranged from $45 million to $75 million. However, they did not provide documentation to support this range. In certain cases, Census also provides separate services to customers outside the WCF's standard offerings. Census' process to meet changes in customer demand is designed to address the fluctuating costs of providing services to internal customers during the decennial cycle while equitably distributing costs among all internal customers. For example, in the peak years of the decennial cycle, the decennial program requires such an increased level of M&A services to support temporary staff that not all of those costs can be supported by the WCF reserve without undermining the goal of equitable cost distribution among customers. Therefore, Census directly bills these additional costs to the decennial program. WCFs provide agencies with an opportunity to operate more efficiently by consolidating services and creating incentives for customers and managers to exercise cost control and economic restraint. Given the fiscal pressures facing the federal government, consolidating operations could potentially achieve cost savings and help agencies provide more efficient and effective services. Agencies can maximize the potential of these opportunities by following four key WCF operating principles. Incorporating these principles in written guidance could promote consistent application, provide a baseline for officials to assess and improve management processes, and serve as an information tool for customers, program managers, stakeholders, and reviewers. Clear guidance on the roles and responsibilities of key personnel for managing the WCF promotes understanding of who will be held accountable, helps ensure that related responsibilities are coordinated, and reduces the risk that funds will be mismanaged. While the roles and responsibilities of the Commerce Departmental WCF's management are well understood by customers, the guidance does not include complete information about all key participants. Because Census WCF guidance is fragmented and incomplete, it lacks clarity and is of limited use for employees and customers. Additionally, Census does not have a process to facilitate coordination among key WCF personnel to ensure appropriate tracking of funds. To appropriately manage the use of funds advanced from customers for projects spanning multiple fiscal years, performing agencies need a way to track whether funds advanced remain available to bill against. Both Commerce and Census use the Commerce Business System (CBS) to manage funds, but the system does not track a key element to confirm that funds advanced in support of an interagency agreement are available to cover the costs of performance. Modifying CBS would help ensure that customer funds are legally available and avoid potential Anti-Deficiency Act violations for the customer agencies. A transparent rate-setting process helps assure that customers are being charged accurately and fairly for services supported through the WCF. Commerce clearly explains its rate-setting process and customers feel they have sufficient input on the process. Census' rate-setting process is less transparent, which limits the ability of fund managers to confirm that the WCF is self-sufficient and makes it difficult for customers to make appeals. WCF managers can better foster a results-oriented environment focused on continuous improvement by establishing performance measures and goals for WCF operations, ensuring those performance measures and goals align with the agency's strategic goals, and by establishing a management review process to track WCF performance. The purpose of the WCFs is to achieve economies of scale through shared services. However, the lack of performance measures makes it difficult to know whether these economies are being achieved. Moreover, WCF-specific performance information and a corresponding management review process could be used to hold fund managers accountable for achieving the efficiencies that WCFs were designed to produce. Furthermore, the two WCFs may provide services in overlapping areas, which warrants further examination. We make seven recommendations to the Secretary of Commerce. To improve the management of the Commerce Departmental Working Capital Fund, we recommend that the Secretary of Commerce take the following actions: 1. Update the Commerce Departmental WCF handbook to include a description of the Commerce CFO Council and its roles and responsibilities. 2. To meet its responsibilities in ensuring the proper use of federal funds and to help guard against the use of canceled appropriations, revise its financial systems to electronically record and monitor the period of availability of appropriations advanced to Commerce and its bureaus from client agencies. 3. Establish performance measures to assess performance of WCF operations, such as billing error rates, and determine what additional measures would be helpful to improve WCF management. 4. Coordinate with the Census Bureau to examine the M&A services provided through both WCFs to determine what services might be consolidated. To improve the management of the Census Bureau Working Capital Fund, we recommend that the Secretary of Commerce require the Under Secretary for Economic Affairs as well as the Census Director to take the following actions: 5. Develop guidance that clarifies and consolidates existing WCF policies to include: a. roles and responsibilities of key personnel responsible for WCF management, and b. a process to coordinate information managed by disparate divisions to provide an overarching view of the WCF and ensure the appropriate tracking of funds. 6. Include a more detailed explanation in WCF guidance on the rate- setting process for all components of the fund, such as an explanation of how rates are determined and costs distributed, and establish a formal process similar to the Departmental WCF's process to communicate with customers. 7. Establish performance measures to assess performance of WCF operations and determine what would be helpful to improve WCF management. We provided a draft of this report to the Secretary of the Department of Commerce for official review and comment. In his letter that is reprinted in appendix II, the Secretary agreed with our findings and recommendations and has directed the managers of both the Commerce Departmental WCF and the Census Bureau WCF to begin implementing our recommendations. Commerce and Census provided technical comments that were incorporated into the report as appropriate. We also provided portions of the report to the customer agencies with which we met. None of these customer agencies offered any technical comments. We are sending copies of this report to the Secretary of Commerce, the Under Secretary for Economic Affairs, and the Director of the Census Bureau. We are also sending copies to the appropriate congressional Committees. In addition, the report is available at no charge on GAO's website at http://www.gao.gov. If you or your staff have any questions about this report, please contact Denise M. Fantone at (202) 512-6806 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. Principle Clearly delineate roles and responsibilities Appropriate delineation of roles and responsibilities promotes a clear understanding of who will be held accountable for specific tasks or duties, such as authorizing and reviewing transactions, implementing controls over WCF management, and helping ensure that related responsibilities are coordinated. In addition, this reduces the risk of mismanaged funds and tasks or functions "falling through the cracks." Moreover, it helps customers know who to contact in the event they have questions. Written roles and responsibilities specify how key duties and responsibilities are divided across multiple individuals/offices and are subject to a process of checks and balances. This should include separating responsibilities for authorizing transactions, processing and recording them, and reviewing the transactions. Written description of all WCF roles and responsibilities in an accessible format such as a fund manual. Discussions with providers and clients confirm a clear understanding. A routine review process exists to ensure proper execution of transactions and events. Ensure self-sufficiency by recovering the agency's actual costs Transparent and equitable pricing methodologies allow agencies to ensure that rates charged recover agencies' actual costs and reflect customers' service usage. If customers understand how rates are determined or changed including the assumptions used, customers can better anticipate potential changes to those assumptions, identify their effect on costs, and incorporate that information into budget plans. A management review process can help to ensure the methodology is applied consistently over time and provides a forum to inform customers of decisions and discuss as needed. Published price sheets for services are readily available. Documentation of pricing formulas supports equitable distribution of costs. Pricing methodology and accompanying process ensures that, in aggregate, charges recover the actual costs of operations. Management review process allows fund managers to receive and incorporate feedback from customers. Discussions with customers confirm an understanding of the charges and that they are viewed as transparent and equitable. Principle Measure performance Performance goals and measures are important management tools applicable to all operations of an agency, including the program, project, or activity level. Performance measures and goals could include targets that assess fund managers' responsiveness to customer inquiries, the consistency in the application of the funds' rate-setting methodology, the reliability of cost information, and the billing error rates. Performance measures that are aligned with strategic goals can be used to evaluate whether, and if so how, WCF activities are contributing to the achievement of agency goals. A management review process comparing expected to actual performance allows agencies to review progress towards goals and potentially identify ways to improve performance. Performance indicators and metrics for WCF management (not just for the services provided) are documented. Indicators or metrics to measure outputs and outcomes are aligned with strategic goals and WCF priorities. WCF managers regularly compare actual performance with planned or expected results and make improvements as appropriate. In addition, performance results are periodically benchmarked against standards or "best in class" in a specific activity. Build in flexibility to obtain customer input and meet customer needs Opportunities for customers to provide input about WCF services, or voice concerns about needs, in a timely manner enable agencies to regularly assess whether customer needs are being met or have changed. This also enables agencies to prioritize customer demands and use resources most effectively, enabling them to adjust WCF capacity up or down as business rises or falls. Established forum, routine meetings, and/or surveys solicit information on customer needs and satisfaction with WCF performance. Established communication channels regularly and actively seek information on changes in customer demand and assess the resources needed to accommodate those changes. Established management review process that allows for trade-off decisions to prioritize and shift limited resources needed to accommodate changes in demand across the organization. In addition to the contact named above, Carol M. Henn, Assistant Director and Leah Q. Nash, Analyst-in-Charge managed this assignment. Anna Chung, Elisabeth Crichton, Wati Kadzai, Margit Myers, and Amrita Sen made major contributions to this report. Tom Beall, Robert Gebhart, Felicia Lopez, and Jack Warner also made key contributions to this report.

Agencies can improve their efficiency through the use of shared services, which are often financed through intragovernmental revolving funds (IRF). GAO was asked to (1) identify key operating principles the Commerce Departmental and Census Bureau Working Capital Funds (WCF), which are one type of IRF, should follow to ensure appropriate tracking and use of federal funds and (2) evaluate how departmental and Census policies and procedures for managing these WCFs reflect these principles. GAO identified four key operating principles based on a review of governmentwide guidance on business principles, internal controls, managerial cost accounting, and performance management. GAO also discussed the reasonableness of the principles with staff of the two WCFs and the Office of Management and Budget; these staff generally found the principles to be reasonable. GAO reviewed WCF authorizing legislation and statutory authorities, analyzed agency policies and data, and interviewed agency officials. Four key operating principles offer a framework for effective WCF management: (1) Clearly delineate roles and responsibilities; (2) Ensure self-sufficiency by recovering the agency's actual costs; (3) Measure performance; (4) Build in flexibility to obtain customer input and meet customer needs Commerce and Census guidance do not identify the roles and responsibilities of all key WCF personnel. While all involved had a clear informal understanding of who is responsible for managing the Departmental WCF, Commerce's guidance does not discuss its CFO Council--an entity with an important role related to WCF increases and changes. Census lacks a process to coordinate and consolidate information managed by disparate divisions and ensure appropriate tracking of funds. There are also opportunities for the agencies to achieve greater management efficiencies by consolidating certain WCF services. Commerce has a transparent process to ensure recovery of actual costs. However, Census' process could be more transparent. The Commerce Departmental WCF's rate setting and review processes are clearly described, coordinated, and designed to recover actual annual costs. Entities such as the Commerce CFO Council and algorithm review group help to facilitate shared understanding among fund managers, customers, and service providers. Census has a fragmented and limited description of its processes and lacks a formal process to communicate with customers. Census customers GAO spoke with had a mixed understanding about how certain WCF costs are determined, limiting their ability to make appeals and suggest improvements. Both WCFs could benefit from performance measures that assess operational effectiveness. Commerce and Census have identified performance measures related to organizational strategic goals. However, neither has established WCF operational performance measures such as responsiveness to customer inquiries and billing error rates. Moreover, both WCFs support similar management and administrative services that could potentially be consolidated. Both WCFs obtain customer input and have flexibility to adjust to customer needs, but challenges exist. In general, customers GAO interviewed said they had regular and ongoing discussions with fund managers or service providers. At Commerce, its CFO Council and WCF managers periodically assess and shift resources to address changes in customer needs and prioritize requests for services. However, the statutory cap on one bureau's payments into the WCF limits the level of services that can be provided to all Commerce bureaus. To provide services beyond the capacity of the WCF, Commerce enters into a memorandum of understanding with specific customers. The Census WCF's ability to build and maintain an operating reserve helps to provide price stability for customers throughout the decennial census cycle when the costs of management and administrative services supported through the WCF fluctuate dramatically. Similar to Commerce, Census has the flexibility to provide additional services by billing customers directly. GAO is making seven recommendations to improve the management of the two WCFs, including updating and consolidating WCF guidance, establishing a process to measure WCF performance, and examining opportunities to consolidate certain WCF services. The Commerce Secretary agreed with all of our findings and recommendations and has directed managers of both the departmental WCF and the Census WCF to begin implementing GAO's recommendations.

There are four major steps in the contract-level RADV audit process as reported by CMS: MA contract selection. CMS selects 30 MA organization contracts for contract-level RADV audits, which agency officials stated provides a sufficient representation of contracts (about 5 percent) without imposing unreasonable costs on the agency. An MA organization may have more than one contract selected for a contract-level RADV audit. CMS selects contracts based on diagnosis coding intensity, which the agency defines for each contract as the average change in the risk score component specifically associated with the reported diagnoses for the beneficiaries covered by the contract. That is, increases in coding intensity measure the extent to which the estimated medical needs of the beneficiaries in a contract increase from year to year; thus, contracts whose beneficiaries appear to be getting "sicker" at a relatively rapid rate, based on the information submitted to CMS, will have relatively high coding intensity scores. Contracts with the highest increases in coding intensity are those with beneficiaries whose reported diagnoses increased in severity at the fastest rates. CMS officials stated that the agency adopted this selection methodology to (1) focus the contract-level RADV audits on MA organization contracts that might be more likely to have submitted diagnoses that are not supported by the medical records and (2) provide additional oversight of contracts with the most aggressive coding. To be eligible for a contract-level audit, MA contracts must have had at least three pair-years of data that can be used to distinguish a change in disease risk scores from one year to the next; that is, the contract must have been in place for at least 4 years of continuous payment activity plus the audit year. For each pair year, CMS's coding intensity calculation excludes beneficiaries not enrolled in the same contract or not eligible for Medicare in consecutive years. CMS ranks contracts by coding intensity and divides them into three categories: high, medium, and low. CMS then randomly selects contracts for audit: 20 from the high category, 5 from the medium category, and 5 from the low category. According to CMS officials, this strategy ensures contracts with the highest coding intensity-- considered high risk for improper payments by CMS--have a higher probability for audit while keeping all contracts at risk for review. MA beneficiary sampling. After CMS selects 30 MA contracts to audit, the agency selects the beneficiaries whose medical records will be the focus of review. Up to 201 beneficiaries are chosen from each contract based on the individuals' risk scores using a stratified random sample: 67 beneficiaries from each of the three risk score groups (highest one-third of risk scores, the middle one-third, and the lowest third). Medical record collection and review. After selecting beneficiaries for review, CMS requests supporting medical record documentation for all diagnoses submitted to adjust risk in the payment year. The MA organization may submit up to five medical records per audited diagnosis. CMS contractors review the submitted medical records to determine if the records support the diagnoses submitted by the MA organizations. If the initial reviewer determines that a diagnosis is not supported, a second reviewer reviews the case. Payment error calculation and extrapolation. When medical record review is completed, CMS extrapolates a payment error rate to the entire contract beginning with contract-level audits of 2011 payments. Each beneficiary's payment error is multiplied by a sampling weight and the number of months the beneficiary was enrolled in the MA contract during the payment year. After these beneficiary-level payment errors are summed, the amount CMS will seek to recover will be reduced by (1) using the lower limit of a 99 percent confidence interval based on the sample and (2) reducing the recovery amount by a FFS adjuster amount that estimates payment errors that would have likely occurred in FFS claims data. Once the recovery amount is finalized, CMS releases contract-level RADV audit finding reports to each audited MA organization, which may dispute the results of medical record review or appeal the audit findings. Beginning with the contract-level RADV audits of 2011 payments, CMS will collect extrapolated overpayments from MA organizations once all appeals are final. Recovery auditors have been used in various industries, including health care, to identify and collect overpayments. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 directed CMS to test the use of RACs to identify overpayments and underpayments through a postpayment review of FFS medical claims and recoup overpayments. The Tax Relief and Health Care Act of 2006 required CMS to implement a permanent national recovery audit contractor program by January 1, 2010 and to compensate RACs using a contingency fee structure under which the RACs are paid from recovered overpayments. The Patient Protection and Affordable Care Act expanded the recovery audit program initiated in Medicare FFS to MA plans under Part C, among other things. In future contract-level RADV audits, CMS also will review diagnoses submitted through MA encounter data. While CMS previously collected diagnoses from MA organizations, in 2012 the agency also began collecting encounter data from MA organizations similar to that submitted on FFS claims. CMS requires MA organizations to submit, via the Encounter Data System, encounter data weekly, biweekly, or monthly depending on their number of enrollees. Encounter data include diagnosis and treatment information recorded by providers for all medical services and may either originate from claims that providers submit to MA organizations for payment or from MA organizations' medical record review. CMS started including the diagnosis information from MA encounter data from 2014 dates of service when calculating 2015 enrollee risk scores. While coding intensity scores can be helpful in assessing the likelihood of improper payments for MA contracts, results from the CMS contract-level RADV audits of 2007 payments indicate that the coding intensity scores CMS calculated were not strongly correlated with the percentage of unsupported diagnoses within a contract. The fact that this correlation is not strong reduces the likelihood that contracts selected for audit would be those most likely to yield large amounts of improper payments and hampers CMS's goal of using the audits to recover improper payments. In addition, internal control standards for federal agencies state that agencies should use and communicate quality information in achieving program goals. Figure 1 shows, for example, that CMS reported that the percentage of unsupported diagnoses (36.0 percent) among the high coding intensity contracts it audited was nearly identical to the percentage of unsupported diagnoses (35.7 percent) among the medium coding intensity contracts audited. In addition, 7 contracts in the high coding intensity group had unsupported diagnosis rates below 30 percent, including the contract with the highest coding intensity score. Several shortcomings in CMS's methods for calculating coding intensity could have weakened the correlation between the degree of coding intensity and the percentage of improper payments. These shortcomings and their potential effects are as follows. CMS's coding intensity calculation may be based on noncomparable coding intensity scores across contracts because (1) the years of data used for each contract may not be the same and (2) coding intensity scores are not standardized to control for year-to-year differences. First, although CMS officials stated that the agency requires at least three pair- years of data for each contract, the agency includes data from all available years for each contract, which may vary between contracts. Because the growth in risk scores was lower in the MA program in earlier years among beneficiaries that continuously enrolled in the program, CMS's inconsistent standard of years measured for each contract would tend to calculate higher coding intensity scores for contracts that entered the MA market during periods of higher risk score growth. Among beneficiaries who enrolled in MA in consecutive years, the growth in average risk scores was 0.106 from 2004 through 2006, 0.119 from 2006 through 2010, and 0.132 from 2010 through 2013. Second, CMS officials stated that the agency does not standardize its coding intensity data relative to a measure of central tendency. Because CMS's coding intensity calculation does not account for the expected increase in risk scores during each period of growth, changes in risk scores may be more volatile from year to year than they would likely be if standardized or indexed to a measure of central tendency. CMS's coding intensity calculation does not distinguish between the diagnoses that were likely coded by providers and the diagnoses that were likely revised by MA organizations. MA organizations may receive diagnoses from providers that are related to services rendered to MA beneficiaries. Because these diagnoses are submitted by providers, the medical records they create may be more likely to support these diagnoses compared with diagnoses that are subsequently coded by the MA organization through medical record chart reviews. For future years, CMS has an available method to distinguish between diagnoses likely submitted by providers to MA organizations and diagnoses that were likely later added by MA organizations. CMS's Encounter Data System provides a way for MA organizations to designate supplemental diagnoses that the organization added or revised after conducting medical record review. CMS has not outlined plans for incorporating encounter data into its contract selection methodology, even though the encounter data could help target the submitted diagnoses that may be most likely related to improper payments in the future. CMS follows contracts that are renewed or consolidated under a different existing contract within the same MA organization; however, the agency's coding intensity calculation does not include the prior risk scores of the prior contract in the MA organization's renewed contract. This may result in overestimated improper payment risk if MA organizations move beneficiaries with higher risk scores--such as those with special needs-- into one consolidated contract. CMS's contract selection methodology did not (1) always target contracts with the highest coding intensity scores, (2) use results from prior contract-level RADV audits, (3) account for contract consolidation, and (4) account for contracts with high enrollment. These shortcomings are impediments to CMS's goal of recovering improper payments and are counter to federal internal control standards, which require that agencies use quality information to achieve their program goals. For the 2011 contract-level RADV audits, CMS used a contract selection methodology that did not focus on contracts with the highest coding intensity scores. While we found that coding intensity scores are not strongly correlated with diagnostic discrepancies, they are somewhat correlated. CMS failed to fully consider that correlation for the 2011 contract-level RADV audit. For that audit, CMS officials stated that 20 of the 30 contracts were chosen because they were among the top third of all contracts in coding intensity, but we found that many of the 20 contracts were not at the highest risk for improper payments according to CMS's estimate of coding intensity. Only 4 of the 20 contracts ranked among the highest 10 percent in coding intensity, while 8 of the 20 contracts ranked below the 75th percentile in the coding intensity distribution (see fig. 2). In addition, CMS chose 5 of the 30 contracts because they were among the bottom third of all contracts in coding intensity, even though CMS's contract-level RADV audits of 2007 payments found that all contracts in the lowest third of the agency's coding intensity calculation had a below-average percentage of unsupported diagnoses. CMS officials stated that the RADV contract selection methodology includes these contracts to show that all contracts are at risk of being audited. However, officials also stated that MA organizations are not informed of their contracts' coding intensity relative to all other MA contracts; thus, MA organizations cannot be certain their contracts will not be audited even if CMS announced it will no longer audit low coding intensity contracts. According to agency officials, CMS's 2011 contract-level RADV contract selection methodology also did not consider results from the agency's prior RADV audits, potentially overlooking information indicating contracts with known improper payment risk. Thus, contracts with the highest rates of unsupported diagnoses in the 2007 contract-level RADV audits were not among those selected for 2011 contract-level RADV audits. While CMS selected 6 contracts for 2011 that also underwent 2007 contract- level RADV audits, only 1 of these contracts was among the 10 with the highest rates of unsupported diagnoses in 2007. For the 2011 contract- level RADV audits, CMS officials stated that the agency selected 6 MA contracts because the HHS Office of Inspector General had conducted audits of 2007 payments on those contracts, but CMS did not know the rates of unsupported diagnoses for those contracts and did not determine which of them were at high risk of improper payments. By not considering results from prior contract-level RADV audits, CMS's contract selection methodology also did not account for contract consolidation. An MA organization may have more than one contract in a service area; further, it may no longer have a contract that underwent a prior RADV audit but continue to operate another contract within the same service area. For example, the contract with the highest rate of unsupported diagnoses in the 2007 contract-level RADV audit is no longer in place, but the MA organization continues to operate a different contract that includes the service area from its prior contract. Thus, without considering all of an MA organization's contracts in that service area, CMS cannot audit the beneficiaries affiliated with the highest percentage of unsupported diagnoses in 2007. Although the potential dollar amount of improper payments to MA organizations with high rates of unsupported diagnoses is likely greater when contract enrollment is large, CMS officials stated that the 2011 contract-level RADV contract selection methodology did not account for contracts with high enrollment. In 2011, the median enrollment among MA contracts was about 5,000, while enrollment at the 90th percentile was nearly 45,000. Some MA contracts with large enrollment had high rates of unsupported diagnoses under prior contract-level RADV audits. For example, 5 of the 10 MA contracts with the highest rates of unsupported diagnoses for the 2007 contract-level RADV audits had 2011 enrollment above the 90th percentile. CMS officials reported that current contract-level RADV audits have been ongoing for several years, including the appeals associated with the 2007 contract-level RADV audits. (See fig. 3.) For audits of 2007 payments, CMS notified MA organizations in November 2008 that their contracts would be audited but did not complete medical record review until approximately 4-1/2 years later in March 2013. Similarly, 2011 contract- level RADV audits had not been completed as of August 2015. CMS notified MA organizations of contract audit selection in November 2013 but did not begin medical record review for these contracts until May 2015. CMS officials said the agency will start collecting payments from the 2011 contract-level RADV audits in fiscal year 2016. As the agency is in the medical record review phase, appeals have not yet started. This slow progress in completing audits is contrary to CMS's goal to conduct contract-level RADV audits on an annual basis and slows its recovery of improper payments. In addition, CMS lacks a timetable that would help the agency to complete these contract-level audits on an annual cycle. In contrast, the national RADV audit that calculates the national improper payment estimate uses a timetable, but this is not applied to the contract-level audits. The national RADV audits that CMS annually conducts to estimate the national MA improper payment rate under IPIA provide the agency with a possible timetable for completing annual contract-level RADV audits. CMS has not followed established project management principles in this regard, which call for developing an overall plan to meet strategic goals and to complete projects in a timely manner. In addition to the lack of a timetable, other factors have lengthened the time frame of the contract-level audit process. First, CMS's sequential notification to MA organizations--first identifying which contracts had been selected for audit and then later identifying which beneficiaries under these contracts would be audited--hinders the agency's goal of conducting annual contract-level audits because it creates a time gap. For example, for the 2011 contract-level audits, CMS officials stated that the agency notified MA organizations about the beneficiaries whose diagnoses would be audited 3 months after notifying these same MA organizations about which contracts had been selected for audit. Both the selection of contracts and beneficiaries currently require risk score and beneficiary enrollment data. Second, ongoing performance issues with the web-based system CMS uses to receive medical records submitted by MA organizations for contract-level RADV audits caused CMS to substantially lengthen the time frame for MA organizations to submit these medical records for the 2011 contract-level RADV audits. According to CMS officials, for the 2007 contract-level RADV audits, MA organizations submitted medical records for 98 percent of all audited diagnoses within a 16-week time frame. However, system performance issues with the Central Data Abstraction Tool (CDAT)--CMS's web-based system for transferring and receiving contract-level RADV audit data--led CMS to more than triple the medical record submission time frame for the 2011 contract-level RADV audits to over 1 year. Officials from AHIP and the two MA organizations we interviewed indicated that CDAT often proved inoperable, with significant delays and errors in uploading files. CMS officials stated that the agency suspended the use of CDAT for 8 months and implemented steps to monitor and test CDAT's performance. CMS officials stated that they have implemented steps to continue monitoring and testing CDAT's performance. However, officials from MA organizations stated that CDAT continued to experience significant delays in uploading files after CMS reopened CDAT for use. Officials of one MA organization suspected that the system may have been overwhelmed because CMS increased the number of medical records allowed per audited diagnosis from one to five between the 2007 and 2011 contract-level audits. For future medical record submissions, CMS officials subsequently told us that they plan to use a 20-week submission period and did not indicate to us any plans for an additional medical record submission method if CDAT's problems persisted. CMS's Medicare FFS program has increasingly used the Electronic Submission of Medical Documentation System (ESMD) to transfer medical records reliably from providers to Medicare contractors since 2011. Both ESMD and CDAT allow for the electronic submission of medical records by securely uploading and submitting medical record documentation in a portable document format file. CMS officials stated that the agency did not use ESMD to transfer medical records primarily because it could not also be used for medical record review like CDAT. However, medical records could be reviewed without being transferred through CDAT. The transfer of medical records has been the main source of delay in completing CMS's contract-level audits of 2011 payments, and CMS has not assessed the feasibility of updating ESMD for transferring medical records in contract-level RADV audits. While ESMD was not available when CMS began its 2007 contract-level RADV audits, the system has demonstrated a greater capacity for transferring medical records than CDAT. In fiscal year 2014, providers used ESMD to transfer nearly 500,000 medical records--far beyond the capacity necessary for contract-level RADV audits. In interviews, officials of two FFS RACs stated that ESMD was very reliable and did not have technical issues that affected audits. In addition, CMS has not applied time limits to contract-level RADV reviewers for completing medical record reviews. These reviews took 3 years for the 2007 contract-level RADV audits. In contrast, CMS generally requires its Medicare Administrative Contractors (MAC)--a type of FFS contractor--to make postpayment audit determinations within 60 days of receiving medical record documentation. Because CMS has not required that contract-level RADV auditors complete medical record reviews within a specific time period, the agency is hindering its ability to reach its goal of conducting annual contract-level RADV audits. Disputes and appeals stemming from the 2007 contract-level RADV audit findings have been ongoing for years and the lack of time frames at the first level of the appeal process hinders CMS from achieving its goal of using contract-level audits to recoup improper payments. Nearly all MA organizations whose contracts were included in the 2007 contract-level RADV audit cycle disputed at least one diagnosis finding following medical record review, and five MA organizations disputed all the findings of unsupported diagnoses. CMS officials stated that MA organizations in total disputed 624 (4.3 percent) of the 14,388 audited diagnoses, and that the determinations on these disputes, which were submitted starting March 2013 through May 2013, were not complete until July 2014. If an MA organization disagrees with the medical record dispute determination, the MA organization may appeal to a hearing officer. This appeal level is called review by a CMS hearing officer. Because the medical record dispute process for the 2007 contract-level RADV audit cycle took nearly 1-1/2 years to complete, CMS officials stated that the agency did not receive all 2007 second-level appeal requests for hearing officer review until August 2014. CMS officials stated that the hearing officer adjudicated or received a withdrawal request from the MA organization for 377 of the 624 appeals (60 percent) from August 2014 through September 2015. Appeals for the 2011 contract-level RADV audit cycle have yet to begin, as CMS officials stated that the agency is currently in the process of reviewing medical records submitted by MA organizations for the 2011 contract-level RADV audits. CMS officials stated that the medical record dispute process for the 2011 contract-level RADV audit cycle will differ from the process used during the 2007 cycle in certain respects. In particular, for the 2011 RADV audit cycle, the medical record dispute process will be incorporated into the appeal process instead of being part of the audit process, as it was during the 2007 cycle. The new first-level appeal process, in which an MA organization can submit a written request for an independent reevaluation of the RADV audit decision, will be called the reconsideration stage. This change will allow MA organizations to request reconsideration of medical record review determinations simultaneously with the appeal of payment error calculations, rather than sequentially, as was the case during the 2007 contract-level RADV audit cycle. While such a change may be helpful, the new process does not establish time limits for when reconsideration decisions must be issued. In contrast, CMS generally imposes a 60-day time limit on MA organization decisions regarding beneficiary payment first-level appeals in MA. CMS measures the timeliness of decisions regarding MA beneficiary first-level appeals to assist the agency in assigning quality performance ratings and bonus payments to MA organizations. Similarly in Medicare FFS, officials generally must issue decisions within 60 days of receiving first-level appeal requests. CMS officials stated that due to the agency's limited experience with the contract-level RADV audit process, time limits were not imposed at the reconsideration appeal level and that this issue may be revisited once CMS completes a full contract-level RADV audit cycle. The lack of explicit time frames for appeal decisions at the reconsideration level hinders CMS's collection of improper payments as the agency cannot recover extrapolated overpayments until the MA organization exhausts all levels of appeal and is inconsistent with established project management principles. CMS has not expanded the RAC program to MA, as it was required to do by the end of 2010 by the Patient Protection and Affordable Care Act. CMS issued a request for industry comment regarding implementation of the MA RAC on December 27, 2010, seeking stakeholder input regarding potential ways improper payments could be identified in MA using RACs. CMS reported that it had received all stakeholder comments from this request by late February 2011. CMS issued a request for proposals for the MA RAC in July 2014. As defined by the Statement of Work in that request, the MA RAC would audit improper payments in the audit areas of Medicare secondary payer, end-stage renal disease, and hospice. In October 2014, CMS officials told us that the agency did not receive any proposals to conduct the work in those three audit areas and that CMS's goal was to reissue the MA RAC solicitation in 2015. In November 2015, CMS officials told us that the agency is no longer considering Medicare secondary payer, end-stage renal disease, and hospice services as audit areas for the MA RAC. Instead, the officials told us that CMS was exploring whether and how an MA RAC could assist CMS with contract-level RADV audits. In December 2015, CMS issued a request for information seeking industry comment regarding how an MA RAC could be incorporated into CMS's existing contract-level RADV audit framework. In the request document, CMS stated that it is seeking an MA RAC to help the agency expand the number of MA contracts subject to audit each year. In the request, CMS stated that its ultimate goal is to have all MA contracts subject to either a contract-level RADV audit or what it termed a condition-specific RADV audit for each payment year. Officials we interviewed from three of the current Medicare FFS RACs all acknowledged that their organizations had the capacity and willingness to conduct contract-level RADV audits. Despite its recent request for information, CMS does not have specific plans or a timetable for including RACs in the contract-level RADV audit process. Established project management principles call for developing an overall plan and monitoring framework to meet strategic goals. A plan and timetable would help guide CMS's efforts in incorporating a RAC in MA and help hold the agency accountable for implementing this requirement from the Patient Protection and Affordable Care Act. Once the requirement is implemented, CMS could leverage the MA RAC in order to increase the number of MA organization contracts audited. CMS's recovery of improper payments has been restricted because it has not established an MA RAC. For example, CMS currently plans to include 30 MA contracts in contract-level RADV audits for each payment year, about 5 percent of all contracts. Limitations in CMS's processes for selecting contracts for audit, in the timeliness of CMS's audit and appeal processes, and in the agency's plans for using MA RACs to assist in identifying improper payments hinder the accomplishment of its contract-level RADV audit goals: to conduct annual contract-level audits and recover improper payments. These limitations are also inconsistent with federal internal control standards and established project management principles. Our analyses of these processes and plans suggest that CMS will likely recover a small portion of the billions of dollars in MA improper payments that occur every year. Shortcomings in CMS's MA contract selection methodology may result in audits that are not focused on the contracts most likely to be disproportionately responsible for improper payments. Furthermore, CMS's RADV time frames are so long that they may hamper the agency's efforts to conduct audits annually, collect extrapolated payments efficiently, and use audit results to inform future RADV contract selection. By CMS's own estimates, conducting annual contract-level audits would potentially allow CMS to recover hundreds of millions of dollars more in improper payments each year. Agency officials have expressed concerns about the intensive agency resources required to conduct contract-level RADV audits. To address the resource requirements of conducting contract-level audits, CMS intends to leverage the MA RACs for this purpose; however, the agency has not outlined how it plans to incorporate RACs into the contract-level RADV audits and is in the early stages of soliciting industry comment regarding how to do so. As CMS continues to implement and refine the contract-level RADV audit process, we recommend that the Administrator of CMS take actions in the following five key areas to improve the efficiency and effectiveness of reducing and recovering improper payments. First, to improve the accuracy of CMS's calculation of coding intensity, the Administrator should modify that calculation by taking actions such as the following: including only the three most recent pair-years of risk score data for all contracts; standardizing the changes in disease risk scores to account for the expected increase in risk scores for all MA contracts; developing a method of accounting for diagnostic errors not coded by providers, such as requiring that diagnoses added by MA organizations be flagged as supplemental diagnoses in the agency's Encounter Data System to separately calculate coding intensity scores related only to diagnoses that were added through MA organizations' supplemental record review (that is, were not coded by providers); and including MA beneficiaries enrolled in contracts that were renewed from a different contract under the same MA organization during the pair-year period. Second, the Administrator should modify CMS's selection of contracts for contract-level RADV audits to focus on those contracts most likely to have high rates of improper payments by taking actions such as the following: excluding contracts with low coding intensity scores; selecting more contracts with the highest coding intensity scores; selecting contracts with high rates of unsupported diagnoses in prior contract-level RADV audits; if a contract with a high rate of unsupported diagnoses is no longer in operation, selecting a contract under the same MA organization that includes the service area of the prior contract; and selecting some contracts with high enrollment that also have either high rates of unsupported diagnoses in prior contract-level RADV audits or high coding intensity scores. Third, the Administrator should enhance the timeliness of CMS's contract- level RADV process by taking actions such as the following: closely aligning the time frames in CMS's contract-level RADV audits with those of the national RADV audits the agency uses to estimate the MA improper payment rate; reducing the time between notifying MA organizations of contract audit selection and notifying them about the beneficiaries and diagnoses that will be audited; improving the reliability and performance of the agency's process for transferring medical records from MA organizations, including assessing the feasibility of updating ESMD for use in transferring medical records in contract-level RADV audits; and requiring that CMS contract-level RADV auditors complete their medical record reviews within a specific number of days comparable to other medical record review time frames in the Medicare program. Fourth, the Administrator should improve the timeliness of CMS's contract-level RADV appeal process by requiring that reconsideration decisions be rendered within a specified number of days comparable to other medical record review and first-level appeal time frames in the Medicare program. Fifth, the Administrator should ensure that CMS develops specific plans and a timetable for incorporating a RAC in the MA program as mandated by the Patient Protection and Affordable Care Act. We provided a draft of this report to HHS for comment. HHS provided written comments, which are printed in appendix I. HHS concurred with our recommendations. In its comment letter, HHS also reaffirmed its commitment to identifying and correcting improper payments in the MA program. HHS also provided technical comments, which we incorporated as appropriate. Based on HHS's technical comments, we revised our suggested actions for how HHS could meet GAO's first recommendation. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the appropriate congressional committees and the Secretary of Health and Human Services. In addition, this report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix II. James Cosgrove, (202) 512-7114 or [email protected]. In addition to the contact named above, individuals making key contributions to this report include Martin T. Gahart, Assistant Director; Luis Serna III; and Marisa Beatley. Elizabeth T. Morrison and Jennifer Whitworth also provided valuable assistance.

In 2014, Medicare paid about $160 billion to MA organizations to provide health care services for approximately 16 million beneficiaries. CMS, which administers Medicare, estimates that about 9.5 percent of its payments to MA organizations were improper, according to the most recent data--primarily stemming from unsupported diagnoses submitted by MA organizations. CMS currently uses RADV audits to recover improper payments in the MA program. GAO was asked to review the extent to which CMS is addressing improper payments in the MA program. This report examines the extent to which (1) CMS's contract selection methodology for RADV audits facilitates the recovery of improper payments, (2) CMS has completed RADV audits and appeals in a timely manner, and (3) CMS has made progress toward incorporating RACs into the MA program to identify and assist with improper payment recovery. In addition to reviewing research literature and agency documents, GAO analyzed data from ongoing RADV audits of 2007 and 2011 payments--CMS's two initial contract-level RADV audits. GAO also interviewed CMS officials. Medicare Advantage (MA) organizations contract with the Centers for Medicare & Medicaid Services (CMS) to offer beneficiaries a private plan alternative to the original program and are paid a predetermined monthly amount by Medicare for each enrolled beneficiary. These payments are risk adjusted to reflect each enrolled beneficiary's health status and projected spending for Medicare-covered services. CMS conducts risk adjustment data validation (RADV) audits of MA contracts which facilitate the recovery of improper payments from MA organizations that submitted beneficiary diagnoses for payment adjustment purposes that were unsupported by medical records. With a separate national audit, CMS estimated that it improperly paid $14.1 billion in 2013 to MA organizations, primarily because of these unsupported diagnoses. GAO found that CMS's methodology does not result in the selection of contracts for audit that have the greatest potential for recovery of improper payments. First, CMS's estimate of improper payment risk for each contract, which is based on the diagnoses reported for the beneficiaries in that contract, is not strongly correlated with unsupported diagnoses. Second, CMS does not use other available information to select the contracts at the highest risk of improper payments. As a result, 4 of the 30 contracts CMS selected for its RADV audit of 2011 payments were among the 10 percent of contracts estimated by CMS to be at the highest risk for improper payments. These limitations are impediments to CMS's goal of recovering improper payments and do not align with federal internal control standards, which require that agencies use quality information to achieve their program goals. CMS's goal of eventually conducting annual RADV audits is in jeopardy because its two RADV audits to date have experienced substantial delays in identifying and recovering improper payments. RADV audits of 2007 and 2011 payments have taken multiple years and are still ongoing for several reasons. First, CMS's RADV audits rely on a system for transferring medical records from MA organizations that has often been inoperable. Second, CMS audit procedures have lacked specified time requirements for completing medical record reviews and for other steps in the RADV audit process. In addition, CMS has not established timeframes for appeal decisions at the first-level of the MA appeal process, as it has done in other contexts. CMS has not expanded the recovery audit program to MA by the end of 2010, as it was required to do by the Patient Protection and Affordable Care Act. RACs have been used in other Medicare programs to recover improper payments for a contingency fee. In December 2015, CMS issued a request for information seeking industry comment on how an MA RAC could be incorporated into the RADV audit framework. CMS noted in its request that incorporating a RAC into the RADV framework would increase the number of MA contracts audited each year. CMS currently includes 30 MA contracts in each RADV audit, about 5 percent of all MA contracts. Despite the importance of increasing the number of contracts audited, CMS does not have specific plans or a timetable for incorporating RACs into the RADV audit framework, contrary to established project management principles, which stress the importance of developing an overall plan to meet strategic goals. GAO is making five recommendations to CMS to improve its processes for selecting contracts to include in the RADV audits, enhance the timeliness of the audits, and incorporate RACs into the RADV audits. HHS concurred with the recommendations.

The North Atlantic Treaty was signed on April 4, 1949, by 12 European and North American countries to take measures against the emerging threat the Soviet Union posed to the democracies of Western Europe. Of indefinite duration, the treaty created a political framework for an international alliance obligating its members to prevent or repel aggression, should it occur against one or more treaty countries. Article 10 of the treaty provides for the possibility of accession by any other European state in a position to further the principles of the treaty upon the unanimous agreement of the current members; it contains no explicit criteria an aspiring member must meet to join NATO. The PfP program was a U.S. initiative launched at the January 1994 NATO summit in Brussels as a way for the alliance to engage the former members of the Warsaw Pact and other former communist states in Central and Eastern Europe. The objectives of the partnership, stated in NATO's Partnership Framework Document, are to (1) facilitate transparency in national defense planning and budgeting processes; (2) ensure democratic control of defense forces; (3) maintain the capability and readiness to contribute to crisis response operations under the United Nations and other international organizations; (4) develop cooperative military relations with NATO for the purposes of joint planning, training, and exercises for peacekeeping; search and rescue; and humanitarian operations; and (5) develop forces that are better able to operate with NATO members. NATO also uses PfP to support countries interested in NATO membership. In July 1994, the United States launched the Warsaw Initiative to support the objectives of the Partnership. According to joint DOD and State Department guidance, the objectives of the Initiative are to (1) facilitate the participation of partner states in exercises and programs with NATO countries, (2) promote the ability of partner forces to operate with NATO, (3) support efforts to increase defense and military cooperation with Partnership partners, and (4) develop strong candidates for membership in NATO. The Initiative is jointly funded and administered by DOD and the State Department. A total of 29 nations have joined the Partnership, and 3 have since joined NATO. The partner states range from mature free market democracies in the European Union, such as Finland and Sweden, which have relatively advanced military technologies that do not receive and have no need for Warsaw Initiative assistance, to autocratic command economies with outdated military structures such as Uzbekistan, and others such as Georgia that are greatly dependent on Western security assistance for their reform efforts. (Fig. 1 shows the overlapping memberships of NATO, EU, MAP, and PfP members.) Each partner participates in activities to the extent it desires and assembles a unique annual work program by selecting from a variety of activities listed in NATO's annual partnership work program, a compendium of activities offered by donor countries. For those states that have formally expressed their interest in joining the Alliance, NATO has developed a Membership Action Plan to help them become better candidates. (MAP countries are identified in figure 1.) The MAP builds upon Partnership activities, helps ready these states for the full range of NATO missions, and requires additional planning by the partner country and review by NATO. Countries provide assistance to partner states primarily through bilateral arrangements in order to meet the requirements identified in the work program. Since the beginning of the alliance in 1949, NATO has held out the prospect of membership to other nations as changing political and strategic circumstances warranted. NATO has expanded on four occasions since 1949, adding seven new European members. The first three expansions took place during times of confrontation with the Communist bloc, particularly the Soviet Union, and were undertaken to meet pressing strategic and security needs. A significantly different strategic environment marked the fourth and latest expansion, wherein NATO's goal was to extend stability eastward into the political vacuum left after the collapse of the Soviet Union. (Fig. 2 shows the countries that have joined NATO since 1949, as well as MAP and PfP members.) In 1952, Turkey and Greece joined NATO for strategic reasons; the Korean War was at its height, and the United States wished to shore up NATO's southern flank to forestall similar Communist military action in Europe. West Germany acceded in 1955, after it agreed to maintain large NATO forces on its territory and to place its national army within NATO's integrated command structure. Spain joined the alliance in 1982 at NATO's invitation. NATO wanted to gain better access to Spain's air and naval bases, while the newly democratized Spain sought membership as a means to better its chances to join the European Economic Community. In 1991, NATO redefined its strategic concept to reflect the post-Cold War geopolitical landscape and to pursue greater cooperation with its former adversaries to the east. NATO committed itself in January 1994 to enlarging its membership to include the newly democratic states of the former Communist bloc. In 1999, the Czech Republic, Hungary, and Poland joined NATO in fulfillment of this commitment. Between 1994 and 2000, the Warsaw Initiative provided assistance worth about $590 million to 22 partner states to support equipment grants, training, exercises, information technology, and other activities to make these countries' militaries better able to operate with NATO and contribute to NATO's missions. Moreover, a large portion of this funding was allocated to five programs, and about 70 percent has been devoted to the 12 partner nations that had formally declared an interest in joining NATO. In this same time period, the United States provided to the partner states additional security assistance totaling over $165 million outside the framework of the Warsaw Initiative but complementary to its objectives. About 90 percent of the approximately $590 million in Warsaw Initiative funds ($530 million) has funded five programs. The largest program provides nonlethal military equipment and training. The other programs support military exercises, information technology programs, a defense education institute, and a defense resource management system. See table 1 for the costs of these five programs. Appendix I contains details on other Warsaw Initiative interoperability programs. Funding for military equipment and training was used to provide communications, search and rescue, mountaineering, and mapping equipment, along with field gear, air defense radar systems, and computers; training for English language, noncommissioned officer development, vehicle maintenance and logistics, and other purposes. According to State Department documents and a DOD-sponsored study, this equipment and training have directly contributed to partner country participation in NATO-led peacekeeping operations in the Balkans. For example, this funding provided communication equipment to Romania for engineering units in the NATO-led Stabilization Force (SFOR) in Bosnia; air traffic management systems to Hungary, which supported Operation Allied Force; fuel, supplies, and construction assistance to Ukraine to support the initial deployment of a battalion for peacekeeping duties in the Kosovo Force/International Security Force (KFOR) in Kosovo; and an automated logistics system to Poland to help deploy its military units in peacekeeping operations. Of all the interoperability programs supported by the Warsaw Initiative, military exercises were typically cited in Defense-sponsored studies and by U.S. and international officials as the most useful of partnership activities. Exercises range from search and rescue simulations to joint multinational amphibious landing exercises. Exercises have grown in complexity and sophistication as the skills and experiences of partner participants have grown. For example, the United States annually conducts Exercise Combined Endeavor. In the 1995 exercise, 10 countries participated in a demonstration of the use of common communications equipment. In the 2000 exercise, 35 countries participated in the identification, testing, and documentation of communications interoperability between NATO and PfP communication networks. The Partnership Information Management System (PIMS) created an information management and communications system among Partnership members that stores and disseminates all types of data relevant to the PfP community. The system has been used to support military exercises, civil- military emergency planning, military medical education, environmental security activities, and provides e-mail capabilities and other basic information management capabilities. The system currently links 18 partner capitals and NATO and is augmented by networks that include ministries of defense, national defense academies, other international organizations, and U.S. and NATO military commands. The Marshall Center is a jointly funded U.S.-German defense educational institution that focuses on the resolution of security issues involving Atlantic, European, and Eurasian countries. The Center offers post- graduate studies, conferences, research programs, foreign area studies, and language courses to civilian and military professionals from more than 40 countries. Warsaw Initiative funding supports the Marshall Center's annual conferences for PfP members on topics ranging from defense planning and management to civil oversight of the military. DOD's Defense Resource Management program creates models for individual partner countries to help restructure their militaries. Initially, DOD conducts a 6-month study in the subject country to help it develop a rational defense program linked to strategic assessments and budget constraints. Thereafter, the Department conducts short follow-up visits to provide technical assistance and help implement a defense resource management system. The objectives of the program include exposure of partner countries to defense management systems similar to those of NATO members. The program also aims to help partner states' civilian officials assert control over their military structures by making defense management more transparent. About 70 percent of the Warsaw Initiative's approximately $590 million in assistance has been provided to the 12 partner states that have joined or declared their intention to join NATO. Approximately twenty-six percent of all Warsaw Initiative assistance between 1994 and 2000, or $153 million, went to Poland, Hungary, and the Czech Republic--the three former Warsaw Pact states that joined NATO in 1999. Almost 44 percent of that funding, or $258 million, has gone to the nine MAP states of Albania, Bulgaria, Estonia, Latvia, Lithuania, Macedonia, Romania, Slovakia, and Slovenia. The remaining funding, $178 million, has supported Partnership activities in Croatia and countries that were once part of the former Soviet Union-- Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Russia, Turkmenistan, Ukraine, Uzbekistan--and to support certain U.S. costs associated with the program. Figure 3 shows the distribution of Warsaw Initiative funding. In addition, between 1994 and 2000, the United States provided to the partner states military assistance totaling over $165 million outside the framework of the Warsaw Initiative but complementary to its objectives. This funding was distributed through three Department of State and DOD programs that predate the Warsaw Initiative: the International Military Education and Training Program, Cooperative Threat Reduction Defense and Military Contacts Program, and the U.S. European Command's Joint Contact Team Program. Although these programs were not designed to implement Warsaw Initiative objectives, they provide additional training to partner militaries, facilitate military contacts, and promote closer relationships with NATO. Appendix II provides details on these programs. U.S. and international officials and DOD-sponsored studies provide consistent and reinforcing views that Partnership and Warsaw Initiative programs have had important results and benefits. U.S. and NATO military commanders and other international officials have concluded that Warsaw Initiative and PfP programs have enhanced the capabilities of partner countries to participate effectively in NATO-led peace operations in the Balkans and have improved their ability to operate with NATO, thus making them better candidates for membership in the alliance. Warsaw Initiative funding has directly supported the creation of seven multinational peacekeeping units composed of NATO and partner state troops, some of which can or have been deployed to NATO-led peace operations in the Balkans. According to representatives of the three newest NATO member states, PfP and Warsaw Initiative assistance was invaluable to their preparation for joining NATO. Our cost analysis, along with the DOD-sponsored studies, reinforced these conclusions by showing that most Warsaw Initiative funding is associated with effective programs. U.S. and international officials noted that the growing contribution of Partner states' troops and other assistance to NATO-led peacekeeping operations in the Balkans is the most significant indicator of the effectiveness of U.S. and NATO PfP programs. Between 1995 and 1999, NATO established three peacekeeping missions--two long-term and one short-term--with partner state military participation. The long-term missions are the Implementation Force (IFOR) in Bosnia and Herzegovina and Croatia, now known as SFOR, and KFOR in Kosovo, Macedonia, and Albania. In 1999, NATO also established the short-term Albania Force during the NATO bombing campaign against Serbia and Montenegro to assist and coordinate humanitarian efforts. As shown in figure 4, partner state's contributions of troops to these missions rose from about 5,800 in 1996 to more than 12,800 in 1999 (11 percent and 15 percent of the total force, respectively). Twenty partner states contributed troops to one or more of these missions; 9 partners contributed a battalion or more. Moreover, NATO heads of government stated in the 1997 Madrid Declaration that without the experiences and assistance PfP had provided, the participation of partner forces in SFOR and IFOR would not have been as effective and efficient. Several SFOR and KFOR commanders and other NATO officers also noted that PfP activities, particularly exercises with NATO troops, were effective in preparing partner units to operate with NATO forces in an integrated command structure. One NATO official stated that every soldier a partner contributes to SFOR and KFOR means that NATO will not have to send an additional NATO or U.S. soldier to perform that function. According to DOD officials and documents, partner states also provided logistical assistance for the 1999 NATO bombing campaign against Serbia and Montenegro. The Czech Republic, Hungary, and Poland offered or provided basing rights for NATO aircraft. Along with Romania and Bulgaria, the three newest NATO members permitted allied aircraft to transit their airspace. Romania also helped NATO commanders direct the bombing campaign by providing NATO air controllers access to their NATO-compatible radar coverage system, which was procured through the Warsaw Initiative. U.S. officials and documents also indicate that Warsaw Initiative programs have helped create or support seven international peacekeeping units of battalion size or larger involving a total of 5 NATO countries (including the 2 former partners Poland and Hungary) and 16 partner countries. In 1996, the Congress declared that some of these units should receive appropriate support from the United States because they could make important contributions to European peace and security and could assist participant countries in preparing to assume the responsibilities of possible NATO membership. Two of these units have been deployed to the Balkans. See table 2 for details on the composition of these units and the U.S. assistance they have received. According to the NATO delegations of the three newest NATO members, PfP assistance, of which the United States was their largest donor through the Warsaw Initiative, was invaluable to their preparation for joining NATO. In particular, PfP exercises, equipment grants, and exposure to western military doctrine and practice boosted the ability of their forces to operate with NATO. Members from all three delegations affirmed the value of Partnership for Peace and Warsaw Initiative support in making them better candidates for NATO membership. In particular, they cited the exposure to NATO procedures, operations, and command structures they received through PfP exercises and programs; the professional and personal contacts that they developed to build a defense establishment better able to operate with NATO; and exercise experiences and equipment grants that improved the ability of their military forces to operate with NATO. The Czech delegation noted that its experiences in PfP activities helped expose the conflicts between the prerequisites for being a successful NATO ally and the practical difficulties of achieving those prerequisites, given their political and economic realities. For example, PfP activities helped them (1) reconcile the theoretical need for public support for accession at a time when political support within the government was relatively low and (2) plan a defense strategy and budget that met the demands of NATO interoperability goals and spending targets in a constrained budget environment. In 2000, DOD commissioned two studies to analyze the objectives, activities, and accomplishments of Warsaw Initiative programs and identify the lessons learned from program implementation and results. The studies, conducted by DFI International, reviewed programs that represented $409 million of the approximately $590 million in Warsaw Initiative funding. By combining the cost data that we collected from DOD and the State Department with the results of these studies, we determined that, in aggregate, about $367 million, or 90 percent, of the funding associated with the programs examined, was deemed effective or successful in promoting the objectives of the Warsaw Initiative. The first study, which focussed on the partner states of Central and Eastern Europe, showed that 91 percent of the resources associated with the programs examined were exceptionally or significantly effective. Figure 5 shows in greater detail the findings of this study. The second study, which focussed on the Central Asian and Caucasus partner states along with Russia, Ukraine, and Moldova, showed that 67 percent of the resources associated with the programs examined were successful or partially successful. Figure 6 shows in greater detail the findings of this study. In addition, both studies concluded that the Warsaw Initiative programs need to be better focused on U.S. strategic and regional objectives and to better take into account the capacities of the recipient states to absorb or apply the programs. For example, the second study noted that certain programs emphasizing NATO interoperability are not well suited for the Central Asian states. To prepare our overview of previous NATO accessions, we reviewed historical texts, and for the most recent accession, interviewed numerous U.S. and international officials and scholars. We also obtained U.S. and NATO documents on the accession process. To describe the cost and contents of Warsaw Initiative programs, we obtained comprehensive cost and program data by recipient country and year from DOD and State. We interviewed DOD and State Department country desk officers, program managers, and fiscal officers. We obtained historic budget and program documents from DOD and State. For information we were unable to obtain from DOD, we drew on our previous reports and workpapers on Partnership for Peace. For fiscal years 1994 and 1995, we extrapolated from planning documents to approximate actual obligations by recipient country. In cases where costs were not readily attributable to a specific country, we applied decision rules for country allocation generated in agreement with Defense officials. To assess the outcomes of Warsaw Initiative programs in support of Partnership for Peace, we synthesized information we obtained from numerous U.S. and international officials and scholars and historical information developed for our previous reviews of NATO-led peacekeeping operations in the Balkans. U.S. officials include cognizant officials from the Departments of Defense and State, members of the U.S. mission to NATO, and the Defense Security Cooperation Agency. We also interviewed and obtained documents from U.S. military officers at the U.S. European Command in Stuttgart, Germany, and from the U.S. National Military Representative to the Supreme Headquarters, Allied Powers Europe, in Mons, Belgium. International officials included members of the Czech, Hungarian, Swedish, and Polish delegations to NATO; NATO's International Staff in Brussels, Belgium; and the director of the Partnership Coordination Cell in Mons, Belgium. We also reviewed the results of two studies the Department of Defense commissioned in 2000 to analyze the objectives, activities, and accomplishments of Warsaw Initiative programs and identify the lessons learned from program implementation and results. One study, "Assessing the Practical Impact of the Warsaw Initiative" examined 11 of the largest Defense and State-funded Warsaw Initiative programs in Albania, Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Macedonia, Poland, Romania, Slovakia, and Slovenia. The other study, "Department of Defense Engagement of the New Independent States: Developing the Warsaw Initiative and Minimizing Risks in the Russia Relationship," examined all DOD-sponsored Warsaw Initiative programs and other related DOD assistance activities in the nine New Independent States of Belarus, Russia, Ukraine, Moldova, Georgia, Kazakhstan, Kyrgyzstan, Turkmenistan, and Uzbekistan. This study also looked at DOD-sponsored security activities in three other New Independent States: the partner states of Armenia and Azerbaijan, which did not receive Warsaw Initiative assistance between 1994 and 2000; and Tajikistan, which is not a PfP member. Both studies evaluated the effectiveness of programs in terms of objectives associated with the Warsaw Initiative and the Partnership for Peace. The principal analysts of these studies briefed us on their methodology. This methodology included the development of measures of effectiveness and other metrics to assess the programs. To implement this methodology, the analysts collected information from DOD and State Department officials, including desk officers, Defense Security Cooperation Agency officials, and U.S. embassy personnel from partner countries. In addition to briefing us on its methodology and results, DFI International provided us with their detailed results on each program for each country, along with the specific criteria used in evaluating each program. The Department of State and DOD generally concurred with the report's major findings, and State complimented GAO's analysis and methodology. In addition, both DOD and State offered technical and editorial suggestions, which we have incorporated where appropriate. The State Department's written comments are presented in appendix III; DOD provided oral comments. We are sending copies of this report to other interested congressional committees. We will also send copies to the Secretary of State and the Secretary of Defense. We will also make copies available to others upon request. Please contact me at (202) 512-8979 if you or your staff have any questions about this report. Key contributors to this assignment were F. James Shafer, Muriel J. Forster, B. Patrick Hickey, and Lynn Cothern. During fiscal years 1994 through 2000, the Department of Defense (DOD) supported numerous U.S. interoperability programs in Partnership for Peace (PfP) nations. Among the largest dollar programs are the following activities. SIMNET ($9.0 million): SIMNET is an exercise simulation network focused on peace support operations and scenarios. It is part of a U.S.-launched effort to link defense education institutions to increase the level of sophistication of military exercises and cooperative defense education. Commander in Chief Conferences and Other Expenses ($13.4 million): These two program categories combined provide funding to cover costs of hosting PfP-related conferences or sending U.S. or partner personnel to attend PfP-related events either in the United States or abroad. Command and Control (C4) Studies ($6.1 million): C4 studies analyze and document command and control interoperability of the subject country's forces with U.S. forces for bilateral or multilateral contingencies. The purpose of the studies is to understand the country's capabilities for NATO interoperability and identify useful recommendations for improvement. Transportation for Excess Defense Articles ($4.5 million): DOD sells or transfers articles no longer needed by U.S. armed forces to partnership countries. Warsaw Initiative funding can be used to support the costs of transporting this equipment. U.S. Army Corps of Engineers Exchanges and Assessments ($3.6 million): The Army Corps of Engineers conducts information exchanges and assessments in Partner countries on environmental and infrastructure topics, such as hazardous waste and material storage and transportation, disaster relief, and contamination control and prevention at military bases. Civil Military Emergency Planning ($3.4 million): This initiative aims to enhance the capabilities of partner states to work with each other, with neighboring nations, and with the international community to prepare for natural and technological disasters within any partner nation. Workshops and exercises are conducted in country by traveling contact teams or through exchanges of military personnel between units of the U.S. National Guard and comparable units of partner armed forces. Regional Airspace Initiative ($3.3 million): This program seeks to help develop civil and military airspace regimes that are fully interoperable with West European civilian airspace organizations. Warsaw Initiative funds are used to study partner requirements for building and operating an effective air sovereignty system. State Department foreign military financing funds may be used to procure the hardware necessary to implement the system. Navigational Aids Program ($3.2 million): This initiative supports assessments that document the interoperability of navigational aids and landing systems of partner states with western military forces under various contingencies. The assessments provide recommendations for modernization, with a focus on interoperability. Logistics Exchanges ($2.5 million): These exchanges consist of in-country workshops that focus on improving partners' understanding of NATO's collective logistics doctrine and logistics support requirements of NATO operations and of hosting NATO forces. National Military Command Centers ($1.4 million): This initiative aims to provide modern, centralized command center support to military and civil crises and disaster management. Its goal is to establish common command and control information systems throughout a region. Partnership for Peace Consortium ($1.1 million): This program primarily supports the annual conference costs of the Consortium, which includes representatives from 188 military academies, universities, and defense study institutions. Radar Interoperability and Lifecycle Upgrade Study ($1.1 million): More than 600 radar in 14 countries remained from the Warsaw Pact military structure. This study evaluates the utility and NATO compatibility of those radar for integration into the evolving airspace systems in the partner states. Defense Resource Planning Exchanges ($1.0 million): This program consists of small group workshops that provide an introduction to and explanation of the DOD's resource management system to encourage partners to consider U.S. concepts that could be used to improve their resource management. National Guard ($1.0 million): In 1999, the Air National Guard supported the Partnership for Peace program largely through military-to-military contacts. This 1-year Warsaw Initiative funding supported National Guard participation in flood preparedness workshops, exchanges for engineering platoons, air exercise planning, field training, medical training, and other activities. The Departments of State and Defense provided additional military assistance to partner states totaling more than $165 million between 1994 and 2000. This funding was distributed through three programs with objectives that complement the objectives of the Partnership for Peace and the Warsaw Initiative. These programs are: The International Military Education and Training Program (IMET) ($72.4 million): This program provides military education and training on a grant basis to allied and friendly nations' militaries to (1) increase their exposure to the proper role of the military in a democratic society, including human rights issues, and to U.S. professional military education; and (2) help to develop the capability to teach English. The State Department funds IMET through its Foreign Operations Appropriation, and DOD implements the program through the Defense Security Cooperation Agency. IMET complements or builds on Warsaw Initiative programs by offering more advanced training to partner state defense officials, including English language training, defense resource management, and instruction in doctrines common to the officials of NATO countries. The Cooperative Threat Reduction (CTR) Defense and Military Contacts Program ($40.4 million): The United States launched the Cooperative Threat Reduction initiative in 1991 to help the nations of the former Soviet Union eliminate, control, and prevent the proliferation of weapons of mass destruction. This program has assisted CTR efforts by supporting defense and military contacts between the United States and Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Russia, Turkmenistan, Ukraine, and Uzbekistan (Belarus and Turkmenistan are currently ineligible for CTR funding). The objectives of these efforts complement the objectives of Partnership for Peace and the Warsaw Initiative by expanding contacts between defense establishments. The Joint Contact Team Program ($52.9 million): This program supports the deployment of small teams of military personnel to operate in a number of partner states and other countries within the U.S. European Command's area of responsibility. The teams' mission is to promote stability, democratization, and closer relationships with NATO. They exchange ideas and demonstrate operational methods to host nation military personnel and assist their militaries in the transition to democracies with free market economies. They do not conduct formal training or supply equipment. According to a U.S. European command document, 90 percent of the teams' efforts support partner countries' PfP programs.

After the collapse of the former Soviet Union and the Warsaw Pact in 1991, North Atlantic Treaty Organization (NATO) allies and the United States sought new ways to cooperate with the political and military leadership of their former adversaries. In January 1994, NATO established the Partnership for Peace to increase defense cooperation with former Warsaw Pact members and other former communist states in Central and Eastern Europe. Supported by the United States through the Warsaw Initiative, the Partnership plays a key role in developing the capabilities of those states and reforming their defense establishments. Given the key role the Partnership for Peace has played in the transformation of NATO's relationship with these states, the significant U.S. involvement and investment in this program through the Warsaw Initiative, and the impending debate on potential NATO members drawn from the Partnership, this report (1) provides an historic overview of previous NATO accessions, (2) describes the cost and content of the Warsaw Initiative, and (3) describes the results and benefits of Warsaw Initiative programs.

Title XIX of the Social Security Act establishes Medicaid as a joint federal- state program to finance health care for certain low-income, aged, or disabled individuals. Medicaid is an entitlement program, under which the federal government is obligated to pay its share of expenditures for covered services provided to eligible individuals under each state's federally approved Medicaid plan. States operate their Medicaid programs by paying qualified health care providers for a range of covered services provided to eligible beneficiaries and then seeking reimbursement for the federal share of those payments. Although the federal government establishes broad federal requirements for the Medicaid program, states can elect to cover a range of optional populations and benefits. CMS, within HHS, is responsible for administering legislation and regulations affecting the Medicaid program, including disbursement of federal matching funds. CMS also provides guidelines, technical assistance, and periodic assessments of state Medicaid programs. Title XIX of the Social Security Act allows flexibility in the states' Medicaid plans. Guidelines established by federal statutes, regulations, and policies allow each state some flexibility to (1) broaden its eligibility standards; (2) determine the type, amount, duration, and scope of services; (3) set the rate of payment for services; and (4) administer its own program, including enrollment of providers and beneficiaries, processing and monitoring of medical claims, payment of claims, and maintenance of fraud prevention programs. Controlled Substances Act The Controlled Substances Act of 1970 (CSA) established a classification structure for certain drugs and chemicals used in drug manufacturing. Controlled substances are classified into five schedules on the basis of their currently accepted medical use and potential for abuse and dependence. Schedule I drugs--including heroin, marijuana, and hallucinogens such as LSD--have a high potential for abuse, no currently accepted medical uses in treatment in the United States, and a lack of accepted safety for use under medical supervision. Schedule II drugs-- including methylphenidate (Ritalin) and opiates such as morphine and oxycodone--have high potential for abuse and abuse may lead to severe psychological or physical dependence, but have currently accepted medical uses. Drugs on Schedules III through V have medical uses and successively lower potentials for abuse and dependence. Schedule III drugs include anabolic steroids, codeine, hydrocodone in combination with aspirin or acetaminophen, and some barbiturates. Schedule IV contains such drugs as the anti-anxiety medications diazepam (Valium) and alprazolam (Xanax). Schedule V includes preparations such as cough syrups with codeine. All drugs but those in Schedule I are legally available to the public with a prescription. CSA mandates that DEA establish a closed system of control for manufacturing, distributing, and dispensing controlled substances. Any person who manufactures, dispenses, imports, exports, or conducts research with controlled substances must register with DEA (unless exempt), keep track of all stocks of controlled substances, and maintain records to account for all controlled substances received, distributed, or otherwise disposed of. Although all registrants, including pharmacies, are required to maintain records of controlled substance transactions, only manufacturers and distributors are required to report their Schedule I and II drugs and Schedule III narcotics drug transactions, including sales to the retail level, to DEA. The data provided to DEA are available for use in investigations of illegal diversions. The act does not require pharmacies to report dispensing information at the patient level to DEA. We found tens of thousands of Medicaid beneficiaries and providers involved in potential fraudulent, wasteful, and abusive purchases of controlled substances through the Medicaid program in the selected states during fiscal years 2006 and 2007. The fraud, waste, and abuse activities that we examined in our analysis include the following: beneficiaries acquiring addictive medication from multiple medical practitioners, known as doctor shopping, to feed their habits, sell on the street, or both; medical practitioners and pharmacies barred from receiving federal funds nevertheless writing and filling Medicaid prescriptions; and prescriptions being paid for with Medicaid funds for dead beneficiaries and for prescriptions attributed to dead doctors by pharmacies. Approximately 65,000 Medicaid beneficiaries in the five states investigated visited six or more doctors to acquire prescriptions for the same type of controlled substances in the selected states during fiscal years 2006 and 2007. These individuals incurred approximately $63 million in Medicaid costs for these drugs, which were painkillers, sedatives, and stimulants. In some cases, beneficiaries may have justifiable reasons for receiving prescriptions from multiple medical practitioners, such as visiting specialists or several doctors in the same medical group. However, our analysis of Medicaid claims found that at least 400 of them visited 21 to 112 medical practitioners and up to 46 different pharmacies for the same controlled substances. In these situations, Medicaid beneficiaries were likely seeing several medical practitioners to support and disguise their addiction or to obtain drugs to fraudulently sell. Our analysis understates the number of instances and dollar amounts involved in the potential abuse related to multiple medical practitioners. First, the total we found does not include related costs associated with obtaining prescriptions, such as visits to the doctor's office and emergency room. Second, the selected states did not identify the prescriber for many Medicaid claims submitted to CMS. Without such identification, we could not always identify and thus include the number of unique doctors for each beneficiary who received a prescription. Third, our analysis did not focus on all controlled substances, but instead targeted 10 types of the most frequently abused controlled substances, as shown in table 1. Table 2 shows how many beneficiaries received controlled substances and the number of medical practitioners who prescribed them the same type of drug. We found that 65 medical practitioners and pharmacies in the selected states had been barred from federal health care programs, excluded from these programs, or both, including Medicaid, when they wrote or filled Medicaid prescriptions for controlled substances during fiscal years 2006 and 2007. Nevertheless, Medicaid approved the claims at a cost of approximately $2.3 million. The offenses that led to their banishment from federal health programs included Medicaid fraud and illegal diversion of controlled substances. Our analysis understates the total number of excluded providers because the selected states either did not identify the prescribing medical practitioner for many Medicaid claims (i.e., the field was blank) or did not provide the taxpayer identification number for the practitioner, which was necessary to determine if a provider was banned. The banned providers we identified had been placed on one or both of the following exclusion lists, which Medicaid officials must check before paying for a prescription claim: the List of Excluded Individuals/Entities (LEIE), managed by HHS, and the Excluded Parties List System (EPLS), managed by GSA. The LEIE provides information on health care providers that are excluded from participation in Medicare, Medicaid, and other federal health care programs because of criminal convictions related to Medicare or state health programs or other major problems related to health care (e.g., patient abuse or neglect). The EPLS provides information on individuals or entities that are debarred, suspended, or otherwise excluded from participating in any other federal procurement or nonprocurement activity. Federal agencies can place individuals or entities on the GSA debarment list for a variety of reasons, including fraud, theft, bribery, and tax evasion. Our analysis of matching Medicaid claims in the selected states with SSA's Death Master File (DMF) found that controlled substance prescription claims to over 1,800 beneficiaries were filled after they died. Even though the selected state programs assured us that beneficiaries were promptly removed from Medicaid following their deaths based on either SSA DMF matches or third-party information, these same state programs paid over $200,000 for controlled substances during fiscal years 2006 and 2007 for postdeath controlled substance prescription claims. In addition, our analysis also found that Medicaid paid about $500,000 in Medicaid claims based on controlled substance prescriptions "written" by over 1,200 doctors after they died. The extent to which these claims were paid because of fraud is not known. For example, in the course of our work, we found that certain nursing homes use long-term care pharmacies to fill prescriptions for drugs. One long-term care pharmacy dispensed controlled substances to over 50 beneficiaries after the dates of their deaths because the nursing homes did not notify the pharmacy of their deaths before delivery of the drugs. The nursing homes that received the controlled substances, which included morphine, Demerol, and Fentanyl, were not allowed to return them because, according to DEA officials, CSA does not permit such action. Officials at two selected states said that unused controlled substances at nursing homes represent a waste of Medicaid funds and also pose risk of diversion by nursing home staff. In fact, officials from one state said that the certain nursing homes dispose of these controlled substances by flushing them "down the toilet," which also poses environmental risks to our water supply. In addition to performing the aggregate-level analysis discussed above, we also performed in-depth investigations for 25 cases of fraudulent, improper, and abusive actions related to the prescribing and dispensing of controlled substances through the Medicaid program in the selected states. Table 3 shows a breakdown of the types of cases that we identified from our analysis and confirmed through our investigations. In the course of our investigation, as we pursued leads produced from our data mining, we also found two other types of fraudulent, improper, and abusive actions, as shown in table 4. As noted in table 4, we are highlighting six examples where a doctor's DEA registration did not authorize the doctor to prescribe a particular schedule of controlled substance. Under CSA, controlled substances are classified into five schedules based on the extent to which the drugs have an accepted medical use and their potential for abuse and degree of psychological or physical dependence. Schedule II includes what are considered by DEA to be the most addictive and abused drugs that legally can be prescribed. Schedule V, meanwhile, covers those that are least likely to cause such problems. Each provider must obtain a valid registration from DEA that reflects the schedule(s) of controlled substances the provider is authorized to store, dispense, administer, or prescribe. For example, if a physician wants the authority to prescribe Schedule II drugs, the physician must register and be granted authority by DEA to do so. As noted in table 4, we also found two cases where the physician prescribed controlled substances in excess of medical need. In one of these cases, our investigators found that the physician prescribed a controlled substance in a manner intended to circumvent Medicaid's dosage limitations. In the other, the beneficiary sold excess controlled substances (in this case, painkillers). Table 5 summarizes 15 of the 25 cases we developed of fraudulent, improper, and abusive controlled substance activities in the Medicaid program. Appendix I provides details on the other 10 cases we examined. We have referred certain cases to DEA and the selected states for further criminal investigation. The following provides illustrative detailed information on four cases we investigated. Case 2: The beneficiary used the identity of an individual who was killed in 1980 to receive Medicaid benefits. According to a state Medicaid official, he originally applied for Medicaid assistance at a California county in January 2004. During the application process, the man provided a Social Security card to a county official. When the county verified the SSN with SSA, SSA responded that the SSN was not valid. The county enrolled the beneficiary into Medicaid provisionally for 90 days under the condition that the beneficiary resolve the SSN discrepancy with SSA within that time frame. Although the beneficiary never resolved the issue, he remained in the Medicaid program until April 2007. From 2004 through 2007, the Medicaid program paid for over $200,000 in medical services. This included at least $2,870 for controlled substances that he received from the pharmacies. We attempted to locate the beneficiary but could not locate him. Case 8: The physician prescribed controlled substances to the beneficiary after she died in February 2006. The physician stated that the beneficiary had been dying of a terminal disease and became unable to come into the office to be examined. The physician stated that in instances where a patient is compliant and needs pain medication, physicians will sometimes prescribe it without requiring an examination. A pharmacy eventually informed the physician that the patient had died and the patient's spouse had continued to pick up her prescriptions for Methadone, Klonopin, and Xanax after her death. According to the pharmacy staff, the only reason they became aware of the situation was when an acquaintance of the spouse noticed him picking up prescriptions for a wife who had died months ago. The acquaintance informed the pharmacy staff of the situation. They subsequently contacted the prescribing physician. Since this incident, the pharmacy informed us that it has not filled another prescription for the deceased beneficiary. Case 9: A mother with a criminal history and Ritalin addiction used her child as a means to doctor shop for Ritalin and other similar controlled stimulants used to treat ADHD. Although the child received overlapping prescriptions of methylphenidate and amphetamine medications during a 2-year period and was banned (along with his mother) from at least three medical practices, the Illinois Medicaid Program never placed the beneficiary on a restricted recipient program. Such a move would have restricted the child to a single primary care, pharmacy, or both thus preventing him (and his mother) from doctor shopping. Over the course of 21 months, the Illinois Medicaid Program paid for 83 prescriptions of ADHD controlled stimulants for the beneficiary, which totaled approximately 90,000 mg and cost $6,600. Case 11: Claims indicated that a deceased physician "wrote" controlled substance prescriptions for several patients in the Houston area. Upon further analysis, we discovered that the actual prescriptions were signed by a physician assistant who once worked under the supervision of the deceased physician. The pharmacy neglected to update its records and continued filling prescriptions under the name of the deceased prescriber. The physician assistant has never been a DEA registrant. The physician assistant told us that the supervising physicians always signed prescriptions for controlled substances. After informing her that we had copies of several Medicaid prescriptions that she had signed for Vicodin and lorazepam, the physician assistant ended the interview. Although states are primarily responsible for the fight against Medicaid fraud and abuse, CMS is responsible for overseeing state fraud and abuse control activities. CMS has provided limited guidance to the states on how to improve their control measures to prevent fraud and abuse of controlled substances in the Medicaid program. Thus, for the five state programs we reviewed, we found different levels of fraud prevention controls. For example, the Omnibus Budget Reconciliation Act of 1990 encourages states to establish a Drug Utilization Review (DUR) Program. The main emphasis of the program is to promote patient safety through an increased review and awareness of prescribed drugs. States receive increased federal funding if they design and install a point-of-sale electronic prescription claims management system to interact with their Medicaid Management Information Systems (MMIS), each state's Medicaid computer system. Each state was given considerable flexibility in how to identify prescription problems, such as therapeutic duplication and overprescribing by providers, and how to use MMIS to prevent such problems. The level of screening, if any, states perform varies because CMS does not set minimum requirements for the types of reviews or edits that are to be conducted on controlled substances. Thus, one state requires prior approval when ADHD treatments like Ritalin and Adderall are prescribed outside age limitations, while another state had no such controlled substance requirement at the time of our review. Recently, under the Deficit Reduction Act of 2005 (DRA), CMS is required to initiate the Medicaid Integrity Program (MIP) to combat Medicaid fraud, waste, and abuse. DRA requires CMS to enter intocontracts with Medicaid integrity contractors (MIC) to review provideractions, audit provider claims and identify overpayments, and cond uct provider education. To date, CMS has awarded umbrella contracts to several contractors to perform the functions outlined above. According to CMS, these contractors cover 40 states, 5 territories, and the Distri Columbia. CMS officials stated that CMS will award task orders to cover the rest of the country by the end of fiscal year 2009. CMS officials stated that MIC audits are currently under way in 19 states. CMS officials stated that most of the MIP reviews will focus on Medicaid providers and that the state Medicaid programs will handle beneficiary fraud. Because the Medicaid program covers a full range of health care services and the prescription costs associated with controlled substances is relatively small, the extent to which MICs focus on controlled substances is likely to be relatively minimal. In addition, CMS is required to provide effective support and assistance to states in their efforts to combat Medicaid provider fraud and abuse. investigations and prosecutions to design more effective preventive controls. Preventive controls: Fraud prevention is the most efficient and effective means to minimize fraud, waste, and abuse. Thus, controls that prevent fraudulent health care providers and individuals from entering the Medicaid program or submitting claims are the most important element in an effective fraud prevention program. Effective fraud prevention controls require that where appropriate, organizations enter into data-sharing arrangements with organizations to perform validation. System edit checks (i.e., built-in electronic controls) are also crucial in identifying and rejecting fraudulent enrollment applications, fraudulent claims, or both before payments are disbursed. Some of the preventive controls and their limitations that we observed at the selected states include the following. Federal debarment and exclusion: Federal regulation requires states to ensure that no payments are made for any items or services furnished, ordered, or prescribed by an individual or entity that has been debarred from federal contracts, excluded from Medicare and Medicaid programs, or both. Officials from all five selected states said that they do not screen prescribing providers or pharmacies against the federal debarment list, also known as the EPLS. Further, officials from four states said that when a pharmacy claim is received, they do not check to see if the prescribing provider was excluded by HHS OIG from participating in the Medicaid program. DEA registration: DEA, on behalf of the Attorney General of the United States, is the agency primarily responsible for enforcing CSA. Federal regulations require physicians and pharmacies to be registered with DEA for the controlled substance schedule(s) that they are authorized to prescribe or dispense. According to DEA officials, DEA can take administrative action against a provider who violates CSA or its implementing regulations, such as revoking DEA registration. Legal action against the provider is also a possibility. Although DEA's registrant database is available for purchase by the public through the Department of Commerce's National Technical Information Service, none of the five state Medicaid offices obtained the database at the time of our study to determine if physicians are authorized to prescribe particular controlled substances. Thus, the selected state Medicaid programs do not screen prescription claims for controlled substances to ensure that a health care provider is authorized to prescribe the particular drug(s). Further, DEA officials stated that pharmacies have corresponding responsibility to determine if a prescription is legitimate, which includes determining whether a health care provider is authorized to prescribe the particular schedule of controlled substance before filling a prescription. However, none of the pharmacy boards of the selected states said that this is a requirement they monitor. In fact, four pharmacy boards stated that the states only require that their pharmacists check to see if the DEA number on the prescription appears to be a valid DEA number, without verifying it with the DEA registration database. Duplicate enrollment: Medicaid officials in two states said that they did not have pre-enrollment checks in place to provide assurance that duplicate applications are not approved. One state does not even require the beneficiary to furnish an SSN when applying for the Medicaid program, thus making this fraud difficult to identify. In fact, during the period covered by our work, this state had 4,296 Medicaid beneficiaries who were enrolled without SSNs. These beneficiaries were approved for about 8,300 controlled substances claims, totaling $193,500. We did not investigate these beneficiaries for fraud or abuse. DUR: As mentioned earlier, states perform DURs and other controls during the prescription claims process to promote patient safety, reduce costs, and prevent fraud and abuse. The DURs include prospective screening and edits for potential inappropriate drug therapies, such as overutilization, drug-drug interaction, or therapeutic duplication. In addition, selected states also require health care providers to submit prior authorization forms for certain prescriptions of drugs because those medications have public health concerns, are considered high risk for fraud and abuse, or both. Each state has developed its DUR differently, and some of the differences that we saw from the selected states include the following: Officials from certain states said that they use the results of prospective screening (e.g., findings of overutilization, overlapping controlled substance prescriptions, etc.) as an automatic denial of the prescription. Officials from the other states generally use the prospective screening as more of an advisory tool for pharmacies, which pharmacies can override by entering a reason code. As such, the effectiveness of the tool for preventing fraud and abuse in these states is more limited. The types of drugs that require prior authorization vary greatly between the selected states. In states where it is used, health care providers may be required to obtain prior authorization if a specific brand name is prescribed (e.g., OxyContin) or if a dosage exceeds a predetermined amount for a therapeutic class of controlled substances (e.g., hypnotics, narcotics). Detection and monitoring: Even with effective preventive controls, there is risk that fraud and abuse will occur in Medicaid regarding controlled substances. States must continue their efforts to monitor the execution of the prescription program, including periodically matching their beneficiary files to third-party databases to determine continued eligibility, monitor controlled substance prescriptions to identify abuse, and make necessary corrective actions. Such actions include the following. Checking death files: After enrolling beneficiaries, Medicaid offices in the selected states generally did not periodically compare their information against death records. Specifically, two of the five selected states said that they did not obtain death records from SSA or the state vital statistics office to determine if a Medicaid beneficiary was still alive. Officials from two states said that Medicaid offices primarily rely on obituaries, providers, family members, or others to report the status change of the beneficiary. Increasing the use of the restricted recipient program: In the course of DURs or audits, the state Medicaid offices may identify beneficiaries who have abused, the Medicaid prescription drug program, defrauded the program, or both. In those cases, the selected states may place the beneficiaries into a restricted recipient program. Under this program, the state Medicaid office restricts the beneficiaries to one health care provider, one pharmacy, or both for receiving prescriptions. This program only applies to those beneficiaries in a fee-for-service arrangement since managed care organizations are responsible for determining the quality of care treatments for their enrollees. Thus, a significant portion of the Medicaid recipients for some of the selected states are not subject to this program. Fully utilizing the prescription drug monitoring program: Beginning in fiscal year 2002, Congress appropriated funding to the Department of Justice to support prescription drug monitoring programs (PDMP). These programs help prevent and detect the diversion and abuse of pharmaceutical controlled substances, particularly at the retail level where no other automated information collection system exists. States that have implemented PDMPs have the capability to collect and analyze data on filled and paid prescriptions more efficiently than those without such programs, where the collection of prescription information can require a time- consuming manual review of pharmacy files. If used properly, PDMPs are an effective way to identify and prevent diversion of the drugs by health care providers, pharmacies, and patients. The PDMPs at the selected states have the following limitations: For PDMPs to be useful, health care providers and pharmacies must use the data. Officials from the five selected states said that physician participation in the PDMP is not widespread and not required. In fact, one state did not have a Web-based PDMP; a health care provider has to put in a manual request to the agency to have a controlled substance report generated. Program officials at the selected states said that their systems were primarily used to respond to requests for controlled substance information on specific patients from medical practitioners. None of the selected states compared all the prescribers of controlled substances to the DEA authorization list to identify medical practitioners who are illegally prescribing drugs that they are not authorized to prescribe. Although the PDMPs generally capture the name and address of the patient, the controlled substance prescribed, the date of the prescription, and the identity of the prescriber, they generally do not capture the method of payment that the patient used. Thus, the system will not differentiate between prescriptions paid in cash and those paid using health insurance. One state restricts law enforcement access to the PDMP to only the state bureau of investigation. As such, local police and sheriff's departments cannot access the data, which impedes their ability to conduct prescription drug diversion investigations. According to state officials, the limitation was enacted because of privacy concerns. No nationwide PDMP exists, and only 33 states had operational PDMPs as of June 2009. According to an official in one of the selected states, people would sometimes cross state borders to obtain prescription drugs in a state without a program. Investigations and prosecutions: Another element of a fraud prevention program is the aggressive investigation and prosecution of individuals who defraud the federal government. Prosecuting perpetrators serves as a preventive measure; it sends the message that the government will not tolerate individuals stealing money. Schemes identified through investigations and prosecution also can be used to improve the fraud prevention program. The MFCU serves as the single identifiable entity within a state government that investigates and prosecutes health care providers who defraud the Medicaid program. In the course of our investigation, however, we found several factors that may limit its effectiveness. Federal regulations generally limit MFCUs from pursuing beneficiary fraud. According to MFCU officials at one selected state, this limitation impedes investigations because agents cannot use the threat of prosecution as leverage to persuade beneficiaries to cooperate in criminal probes of Medicaid providers. In addition, the MFCU officials in this selected state said that this limitation restricts the agency's ability to investigate organized crime related to controlled substances when the fraud is perpetrated by the beneficiaries. Federal regulations do not permit federal funding for MFCUs to engage in routine computer screening activities that are the usual monitoring function of the Medicaid agency. According to MFCU officials in one selected state, this issue has caused a strained working relationship with the state's Medicaid OIG, on whom the MFCU relies for claims information. The MFCU official stated that based on fraud trends in other states, the state MFCU wanted the Medicaid OIG to provide claims information on providers who had similar trends in that state. The Medicaid OIG cited this prohibition on routine computer screening activities when refusing to provide these data. In addition, this MFCU official also stated that the state Medicaid office and its OIG did not promptly incorporate improvements that the MFCU suggested regarding preventing the abuse of controlled substances. DEA officials stated that although DEA monitors purchases of certain Schedule II and III controlled substances by pharmacies, it does not routinely receive information regarding written or dispensed controlled substance prescriptions. In states with PDMPs, a state agency collects and maintains data relating to dispensed controlled substance prescriptions. In the course of an investigation regarding the diversion or abuse of controlled substances, DEA may request information from a PDMP. In those states without PDMPs, DEA may obtain controlled substance prescription information from an individual pharmacy's records during the course of an inspection or investigation. Fraud and abuse related to controlled substances paid for by Medicaid exist in the five selected states. Given that states are responsible for administering Medicaid and investigating and prosecuting any fraudulent activities, each state must set its own course to ensure the integrity of its Medicaid program, including its monitoring of the dispensing and use of controlled substances. CMS is also responsible for actively partnering with and providing guidance to the states to ensure that they succeed in minimizing fraud and abuse in the Medicaid program. To establish an effective fraud prevention system for the Medicaid program, we recommend that the Administrator of CMS evaluate our findings and consider issuing guidance to the state programs to provide assurance that claims processing systems prevent the processing of claims from providers and pharmacies debarred from federal contracts (i.e., on the EPLS), excluded from the Medicare and Medicaid programs (i.e., on the LEIE), or both; DUR and restricted recipient program requirements adequately identify and prevent doctor shopping and other abuses of controlled substances; effective claims processing system are in place to periodically identify both duplicate enrollments and deaths of Medicaid beneficiaries and to prevent the approval of claims when appropriate; and effective claims processing systems are in place to periodically identify deaths of Medicaid providers and prevent the approval of claims when appropriate. We provided a draft of this report to DEA and CMS for comment. DEA provided us technical comments by e-mail. CMS comments are reprinted in appendix II. CMS stated that it generally agrees with the four recommendations. CMS stated that it will continue to evaluate its programs and will work to develop methods to address the identified issues found in this report. CMS provided us two comments regarding our recommendations. First, CMS stated that we should be more specific as to the databases that the states should access in screening for debarred providers. Second, CMS also stated that we recommend that DEA make its registrant database available to the states without a fee. Third, CMS stated that information on deceased providers and beneficiaries could be provided by a feed from SSA. CMS also provided us two technical comments to the report. In response to CMS comment on the specificity of databases, we revised the recommendation to specify the two databases that should be used in screening claims: (1) the EPLS on federal debarments and (2) Medicare and Medicaid exclusions (i.e., the LEIE) maintained by HHS OIG. As stated in the report, both of these databases are required to be used by the states before they pay prescription claims. We did not recommend that states use the DEA registration database in the processing of Medicaid controlled substance claims, and thus we do not make any recommendations to DEA at this time. In response to CMS's comment about screening for deceased providers and beneficiaries, we agree with CMS that SSA data can be used in determining the eligibility of Medicaid beneficiaries and providers. In developing its guidance to the states, we believe that CMS should consider SSA death records and other sources to identify deceased Medicaid providers and beneficiaries. We incorporated the technical comments made by DEA and CMS into the report as appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the date of this letter. We will then send copies of this report to interested congressional committees and the Acting Administrators of CMS and DEA. The report also will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-6722 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. Table 5, in the main portion of the report, provides data on 15 detailed case studies. Table 6 provides details of the remaining 10 cases we selected. As with the 15 cases discussed in the body of this report, we also found fraudulent, improper, and abusive controlled substances activities in Medicaid for these 10 cases. In addition to the contact named above, the following individuals made major contributions to this report: Matthew Harris, Assistant Director; Matthew Valenta, Assistant Director; Erika Axelson; Paul Desaulniers; Eric Eskew; Dennis Fauber; Alberto Garza; Robert Graves; Barbara Lewis; Olivia Lopez; Steve Martin; Vicki McClure; Kevin Metcalfe; Gloria Proa; Chris Rodgers; Ramon Rodriguez; and Barry Shillito.

One significant cost to Medicaid is prescription drugs, which accounted for over $23 billion in fiscal year (FY) 2008, or about 7 percent of total Medicaid outlays. Many of these drugs are susceptible to abuse and include pain relievers and stimulants that are on the Drug Enforcement Administration's (DEA) Schedule of Controlled Substances. As part of the American Recovery and Reinvestment Act of 2009 (ARRA), the Medicaid program will receive about $87 billion in federal assistance based on a greater federal share of Medicaid spending. GAO was asked to determine (1) whether there are indications of fraud and abuse related to controlled substances paid for by Medicaid; (2) if so, examples of fraudulent, improper, and abusive activity; and (3) the effectiveness of internal controls that the federal government and selected states have in place to prevent fraud and abuse related to controlled substances. To meet these objectives, GAO analyzed Medicaid controlled substance claims for fraud and abuse indications for FY 2006 and 2007 from five selected states. GAO also interviewed federal and state officials and performed investigations. GAO found tens of thousands of Medicaid beneficiaries and providers involved in potential fraudulent purchases of controlled substances, abusive purchases of controlled substances, or both through the Medicaid program in California, Illinois, New York, North Carolina, and Texas. About 65,000 Medicaid beneficiaries in the five selected states acquired the same type of controlled substances from six or more different medical practitioners during fiscal years 2006 and 2007 with the majority of beneficiaries visiting from 6 to 10 medical practitioners. Such activities, known as doctor shopping, resulted in about $63 million in Medicaid payments and do not include medical costs (e.g., office visits) related to getting the prescriptions. In some cases, beneficiaries may have justifiable reasons for receiving prescriptions from multiple medical practitioners, such as visiting specialists or several doctors in the same medical group. However, GAO found that other beneficiaries obtained these drugs to support their addictions or to sell on the street. In addition, GAO found that Medicaid paid over $2 million in controlled substance prescriptions during fiscal years 2006 and 2007 that were written or filled by 65 medical practitioners and pharmacies barred, excluded, or both from federal health care programs, including Medicaid, for such offenses as illegally selling controlled substances. Finally, GAO found that according to Social Security Administration data, pharmacies filled controlled substance prescriptions of over 1,800 beneficiaries who were dead at that time. GAO performed in-depth investigations on 25 Medicaid cases and found fraudulent, improper, or abusive actions related to the prescribing and dispensing of controlled substances. These investigations uncovered other issues, such as doctors overprescribing medication and writing controlled substance prescriptions without having required DEA authorization. States are primarily responsible for the fight against Medicaid fraud; however, the selected states did not have a comprehensive fraud prevention framework to prevent fraud and abuse of controlled substances. CMS is responsible for overseeing state fraud and abuse control activities but has provided limited guidance to the states to prevent fraud and abuse of controlled substances.

Medical credit cards are private-label credit cards that may be used across a network of participating providers (such as dental offices or veterinary clinics) that have contractual relationships with the card company. Consumers typically learn about medical credit cards, or related products such as installment loans, from participating providers, who give information about the product and the available financing options. Consumers often can apply immediately at the provider's office, sometimes with the assistance of the office staff, either online, by telephone, or using a printed application. The card company determines eligibility and, if the application is approved and an account is opened, is required to provide the consumer with the account-opening disclosures with the full terms and conditions, including fees, percentage rates, and rate terms. Once enrolled, consumers generally interact with the card company--rather than the participating provider--regarding use of the card, and they direct their payments to the card company. Medical credit cards can be used to pay for elective (planned, nonemergency) services, such as dental and orthodontic procedures, eye correction surgery, audiology care, cosmetic procedures, and hair removal or restoration, as well as for veterinary services. Some medical credit cards also may be used to pay for insurance copayments and deductibles or to finance medical care for people who do not have health insurance. The products generally are subject to the same state and federal statutory provisions as other lending products, which under federal law include but are not limited to the following: Truth in Lending Act and its implementing Regulation Z, which requires certain disclosures about a card's terms and cost. The Credit Card Accountability Responsibility and Disclosure Act of 2009 amended the Truth in Lending Act to require certain disclosures about rates and fees on credit cards and prohibit certain practices (such as raising the rate on an existing balance). Federal Trade Commission Act, which prohibits unfair or deceptive acts or practices. Consumer Financial Protection Act of 2010, which prohibits unfair, deceptive, or abusive acts or practices by providers of consumer financial products or services and authorizes CFPB to take enforcement actions to prevent providers of consumer financial products or services from engaging in unfair, deceptive, or abusive acts or practices in connection with transactions with consumers involving consumer financial products or services. Fair Credit Reporting Act, which generally prohibits creditors from obtaining and using medical information in connection with determining eligibility for credit. However, Regulation FF allows creditors to use medical information "o determine, at the consumer's request whether the consumer qualifies for a legally permissible special credit program or credit-related assistance program" that meets certain requirements. CFPB has primary supervisory authority for consumer financial protection laws at large banks and certain nondepository entities. Smaller banks (those with assets of $10 billion or less) are supervised by the federal banking regulators. CFPB has enforcement authority for violations of federal consumer financial laws, including violations of the Consumer Financial Protection Act of 2010 and the consumer financial protection laws, and rulemaking authority for these provisions. FTC has authority to enforce the Federal Trade Commission Act against most providers of financial services that are not banks, thrifts, and federal credit unions-- which may include some medical credit card companies--as well as health care providers in certain contexts. CFPB and FTC share enforcement authority for nonbanks in accordance with a memorandum of understanding. State attorneys general have enforcement authority under state and federal law, including the authority to enforce the Consumer Financial Protection Act of 2010 and CFPB rulemakings. One company, CareCredit LLC (CareCredit), issues the majority of medical credit cards, according to available information, although no comprehensive data source on the industry exists. A registration statement (Form S-1) filed with the Securities and Exchange Commission in March 2014 by an affiliate of CareCredit reported that CareCredit had 4.4 million active cardholders and 177,000 health care and veterinary providers in its network and revenues of approximately $1.5 billion for calendar year 2013. Market participants with whom we spoke cited three other banks--Citibank, N.A. (Citibank), Wells Fargo Financial National Bank (Wells Fargo), and Comenity Capital Bank (Comenity)--as also among the largest issuers of medical credit cards. Representatives of these banks generally said that data on the number of cardholders and network providers were proprietary, but told us they believed that their share of the market was relatively low. Companies participating in the medical credit card marketplace play different roles (see table 1). Card issuers generally are responsible for marketing, origination, and underwriting of accounts, and management and collection of payments. CareCredit, Citibank, and Wells Fargo issue medical credit cards under their own names, while Comenity works with third-party companies (sometimes called aggregators) or retail networks that offer and market the product under their own names. For example, Comenity has a partnership with Springstone Patient Financing, a nonbank financial institution, to offer a product co-branded under Springstone's name. With the direct oversight of Comenity, Springstone makes the product available through a network of participating providers, while Comenity is responsible for the financing and servicing of the credit card accounts. In addition to these and other established companies, our review identified at least 25 websites that marketed financing for health care procedures but did not always clearly identify the corporate entity or financial institution with which they were affiliated. In some cases, these websites appeared to serve largely a marketing function, collecting information that would be used to direct consumers elsewhere. Apart from participants in the medical credit card market, some companies play other roles related to financing procedures not covered by health insurance. For example, some firms assist medical offices in arranging and managing their own payment plans, or they purchase accounts receivable from such offices and assume collections responsibilities. Card companies contract with participating providers to offer financing products to consumers. Card companies enroll providers into their card networks by marketing to them through trade shows, direct marketing sales calls, trade journal advertisements, direct mail, and e-mail. In some cases, card companies paid trade organizations to endorse specific products and promote them to their members. For example, CareCredit reported that as of December 2013, it had relationships with 107 professional and other associations--such as the American Dental Association and American Animal Hospital Association--to endorse and promote CareCredit products to their members. The compensation for 63 of the associations was linked to enrollment of association members in the company's card program and the volume of product transactions by association members. Dental care appears to be the procedure mostly commonly financed with medical credit cards. Among the companies we reviewed in depth, one reported that dental practices composed approximately 64 percent of its medical credit card business, veterinary 14 percent, cosmetic and dermatology 10 percent, vision 6 percent, audiology 3 percent, and other services such as weight loss treatments and procedures 4 percent. Representatives of another company, which entered the medical credit card market in 2003, told us that as of November 2013, dental and orthodontia made up about 85 percent of its medical credit card business, with the remaining 15 percent financing hair restoration, vision care, and audiology and veterinary services. Representatives from a third company, which entered the market in 2008, said that its largest market was for dental and audiology services, although its card also financed veterinary and vision services. Finally, representatives of the fourth company, which entered the medical credit card market in 2006, said it typically financed audiology, dental, hair removal, hair restoration, and skin care. Participating providers compensate card companies for their clients' use of the cards through a transaction or administrative fee. When a consumer's financing is approved, the card company typically pays the provider the full amount financed--minus the fee--within 24 to 72 hours after service is provided. Card companies generally told us that the exact amount of the fee was proprietary information and generally declined to provide it to us. They said it can vary based on such factors as the provider's overall volume of business and the specific financing options (such as payment plan and term length) that the provider makes available to patients or clients. In exchange for this fee, the card company rather than the provider is responsible for billing and collection and generally assumes the risk of nonpayment by the borrower. Card companies typically provide participating providers with the informational marketing materials, applications, and disclosures needed to enroll consumers. Card companies also often train providers and staff on the products and enrollment process through webinars and telephone tutorials, and in-person. Some card companies told us that they also offer participating providers dedicated customer support. In December 2013, CFPB announced a consent order with GE Capital Retail Bank and its affiliate CareCredit. CFPB said it initiated an investigation of the company after receiving hundreds of complaints from consumers. The consent order alleged deceptive card enrollment processes, such as unclear communication about the terms of the deferred interest product; inadequate disclosures, whereby consumers did not always receive copies of the actual card agreement and did not understand the terms of the deferred interest product (discussed in the next section); and poorly trained staff at some health care provider offices, some of whom admitted they were confused by the product. As part of the settlement, GE Capital Retail Bank and CareCredit must refund up to $34.1 million to what CFPB described as potentially more than 1 million CareCredit consumers. The company also agreed to make several changes in its practices, including enhancements to consumer disclosures provided during the application process and on billing statements immediately prior to the expiration of the promotional period, enhanced training to providers on making the terms of the credit arrangement transparent to patients, and enhanced warnings to consumers about the expiration of the promotional period. (Representatives of CareCredit told us that it already had in place some of these practices.) In addition, for dental or audiology transactions over $1,000, consumers must apply directly to CareCredit, rather than through the health care provider, for credit approval if they use the card for such a transaction within 3 days of the application. In June 2013, GE Capital Retail Bank and CareCredit entered into a settlement agreement with the New York Attorney General, who had alleged deceptive enrollment practices and inadequate disclosure of product terms and conditions. This settlement required CareCredit to provide a 3-day "cooling-off" period, which prohibits certain charges of $1,000 or more on a CareCredit card within 3 days of an in-office application and provides New York consumers an opportunity to consider the card's terms and the treatment plan. The settlement also limited what the health care provider can charge in advance and required clearer disclosure of the interest rates associated with deferred-interest products (discussed below). It also required CareCredit to call consumers within 72 hours of the submission of a CareCredit application with a same-day charge to confirm the account opening with the consumers and to inform them of certain account terms, a practice that CareCredit has said it adopted nationally. In addition, the settlement required CareCredit to pay for and establish an appeals fund that resulted in cardholder refunds or adjustments of approximately $175,000. The medical credit cards we reviewed in depth resembled conventional credit cards (offered a revolving line of credit with an established credit limit) and offered some form of promotional financing (special terms and conditions valid for a specified period). Most common was a deferred interest option, which 85 percent of CareCredit cardholders had chosen, according to the settlement agreement with CFPB. Deferred interest plans start accruing interest from the initial purchase date based on the stated annual percentage rate (APR). If the entire promotional balance is paid off during the specified promotional period (generally 6, 12, 18, or 24 months, depending on the plan), the accrued interest is waived. But if the balance is not paid in full within the specified promotional period, the accrued interest is assessed to the account. As seen in table 2, the APR for consumers who did not pay off the purchase amount before the promotional period expired varied depending on the product, but our analysis found that most cardholders had deferred interest products with an APR of 26.99 percent or more. One company's APR was 26.99 percent, a second ranged from 26.99 to 28.99 percent, and a third ranged from 14.99 to 26.99 percent. A fourth company offered a variable APR of 9.99 percent that became effective October 22, 2013; before that it had been 27.99 percent. The companies declined to provide the proportion of consumers who did not pay off the full balance during the promotional period, stating that this information was proprietary. Although less common, major card companies we reviewed also offered a promotional monthly fixed-payment option, which charged a set interest rate (an APR from 0 to 17.99 percent) during a specified period (from 12 to 60 months). The number of cardholders who do not participate in promotional financing appears to be small; for example, CareCredit told us that the vast majority of the credit extended through its medical credit card was promotional financing. The standard APR without promotional financing ranged from 9.99 to 28.99 percent. Representatives of the medical credit card companies with whom we spoke said their customers typically were prime borrowers--that is, with credit scores that put them at low risk of default--and that the interest rates and other terms of the loan did not vary based on the cardholder's credit profile. As noted earlier, in addition to the companies listed above, we identified 25 websites that marketed products--either revolving lines of credit or installment loans--designed to finance services not covered by health insurance. These websites did not always provide comprehensive information about the terms and conditions of the products, which generally appeared to be marketed by smaller companies, and we did not verify the product information. However, some of these websites appeared to market financing terms, such as deferred interest, similar to those of the banks listed above. In addition, two companies marketed products that charged interest, but refunded that interest in the form of a rebate check if the loan was paid in full within 12 months. Some of these websites marketed financing for persons with a wide range of credit histories, including those with marginal or poor credit. We provided a draft of this report to CFPB and FTC. CFPB provided technical comments that we incorporated as appropriate. We also provided selected relevant portions of the draft for technical review to CareCredit, LLC; Citibank, N.A.; Comenity Capital Bank; Springstone Patient Financing; and Wells Fargo Financial National Bank, and incorporated their technical comments as appropriate. We are sending copies of this report to the Director of CFPB and the Chairwoman of FTC. In addition, the report will be available at no charge on GAO's website at http://www.gao.gov. Please contact me at (202) 512-8678 or [email protected] if you or your staff have any questions about this report. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix II. This report examines the (1) participants and (2) products in the marketplace for medical credit cards. For the purposes of this report, we used "medical credit cards" to refer collectively to financial products-- including revolving credit lines and installment loans--that are designed specifically to finance health care services not covered by health insurance. This report provides an overview of this industry, but does not necessarily describe all its products and participants. To address these objectives, we conducted a literature review of articles using the Proquest, PubMed, and ABI/Inform databases using search terms such as "medical credit card," "health care credit card," "healthcare financing," and "medical financing" for the purpose of obtaining background and context surrounding the products. We also searched the Internet using these same search terms and also "medical procedure financing." We reviewed publications from, or interviewed representatives of, organizations that study the credit card industry, such as Argus Information and Advisory Services, The Nilson Report, and CreditCards.com. We interviewed representatives of companies that serve as lenders or marketers of medical credit cards, including AA Medical Finance, Advance Care, American HealthCare Lending, Citibank N.A., Comenity Capital Bank, Fundmydr.com, GE Capital Retail Bank's CareCredit LLC, HELPcard, JPMorgan Chase & Co., MedicalFinancing.com, MyMedicalFunding, Springstone Patient Financing, United Medical Credit, and Wells Fargo Financial National Bank, as well as CarePayment, which provides billing and patient financing services. These companies were selected either because they were identified by industry and government representatives as key players in this marketplace or because they represented a variety of different sizes, roles, and products. We also corresponded with the Financial Services Roundtable, a trade organization representing financial services companies. We also interviewed representatives of two federal agencies, the Bureau of Consumer Financial Protection (known as CFPB) and the Federal Trade Commission. We conducted two group interviews, coordinated by the National Association of Attorneys General, that together included staff from the office of the attorney general of nine states that chose to participate (Indiana, Louisiana, Maryland, Massachusetts, Nebraska, Nevada, New York, Ohio, and Tennessee), as well as a separate interview with the Minnesota Office of the Attorney General, which had been examining the medical credit card industry. We also interviewed or received written responses from organizations representing health care providers (American Dental Association and American Society of Plastic Surgeons) and representatives of consumer interests (Consumers Union, National Consumer Law Center, and Community Health Advisors). Our review of reports and data from organizations that study the credit card industry broadly, and interviews with industry representatives, indicated that no comprehensive source of information existed on the medical credit card industry and the market share of its participants. However, based on the testimonial and documentary information we received from the sources above, we identified four companies that appeared to be among the largest market participants--CareCredit LLC, Citibank, N.A., Comenity Capital Bank, and Wells Fargo Financial National Bank--which we selected for greater examination. In addition to our interviews with company representatives, we gathered and analyzed the terms and conditions of these companies' medical credit card products, application forms, and informational and marketing materials when publicly available or provided by the company. One card company also provided us with a generic copy of its standard contract with participating providers. We also reviewed, where applicable and available, the companies' public filings with the Securities and Exchange Commission. We found that only the filing for an affiliate of CareCredit reported information specific to medical credit cards. To assess the reliability of that public filing, we reviewed the data for completeness and consistency and found that they were reliable for the purposes of describing characteristics of the CareCredit product. Apart from the four companies we examined in depth, we collected and reviewed publicly available product information from the websites of 25 other companies that provide medical credit cards and related products. In some instances, we contacted the companies to confirm or clarify certain aspects of the products. We generally did not independently verify this information, but we did use it for context and to provide a broader picture of available products and key features. We reviewed applicable federal laws and regulations related to medical credit cards and to lending products more generally, including Regulation Z (which implements the Truth in Lending Act), the Consumer Financial Protection Act of 2010, the Federal Trade Commission Act, the Credit Card Accountability Responsibility and Disclosure Act of 2009, and the Fair Credit Reporting Act. We also reviewed the settlement agreements and related materials resulting from two enforcement actions against CareCredit, one by CFPB and one by the New York State Office of the Attorney General. We conducted this performance audit from July 2013 to June 2014 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact name above, Jason Bromberg (Assistant Director), Rhonda Rose (Analyst-in-Charge), Bethany Benitez, Pamela Davidson, Josephine Perez, Barbara Roesmann, and Jena Sinkfield made key contributions to this report.

Medical credit cards and related products (such as installment loans) are offered by financial institutions through participating providers to pay for services not covered by health insurance, such as dental and cosmetic procedures, or for veterinary care. Medical credit cards received increased attention after enforcement actions in 2013 against GE Capital Retail Bank in relation to its CareCredit product. GAO was asked to review the marketplace for medical credit cards and related products. This report describes the participants and products in this marketplace. To address these objectives, GAO conducted a literature review and reviewed websites, product terms and conditions, and other publicly available information. GAO also interviewed staff of, and collected documents from, CFPB, 14 card companies representing a mix of size and type, and organizations that represented participating providers, financial institutions, and consumer interests and were familiar with the medical credit card marketplace. GAO also reviewed settlement agreements between CareCredit and CFPB and the New York Attorney General. Multiple entities offer medical credit cards, but according to market participants with whom GAO spoke, CareCredit LLC issues the majority of medical credit cards. In 2013, the company reported 4.4 million cardholders and 177,000 participating providers in its network, the majority of which were dental offices. Several other financial institutions also issue medical credit cards, usually offering their own branded product, but sometimes providing financing for retail networks or third-party companies that offer and market cards under their own names (see table). The marketplace for financing services not covered by health insurance also includes companies that assist providers in offering their own payment plans and websites that largely serve a marketing function by directing consumers to others' products. In 2013, GE Capital Retail Bank and its affiliate CareCredit entered into separate agreements with the New York Attorney General and the Bureau of Consumer Financial Protection (known as CFPB), which had alleged deceptive card enrollment processes, including failure to provide disclosures and inaccurate information given by participating providers to consumers. Both settlements required CareCredit to make several changes to its practices, such as enhancing consumer disclosures. Medical credit cards from large banks offer a revolving line of credit with an established credit limit--akin to a conventional credit card--with some form of promotional financing (special terms and conditions, which are valid for a specified period of time). The most commonly used financing option is deferred interest, with no interest charged for a promotional period but interest charged retroactively if the balance is not paid in full before the end of the promotional period, usually 6 to 24 months. Among large banks GAO reviewed, as of May 2014, the most commonly used products had an annual percentage rate (APR) of 26.99 percent or more. Alternatively, these banks also offered revolving credit with fixed monthly payments, with an APR of 0 to 17.99 percent. Installment loans or products targeted at consumers with poor credit histories were offered by certain other market participants. GAO makes no recommendations in this report.

The National Aeronautics and Space Administration Authorization Act of 2010 directed NASA to develop a Space Launch System as a follow-on to the Space Shuttle and as a key component in expanding human presence beyond low-earth orbit. The Act also directed NASA to continue development of a multi-purpose crew vehicle for use with that system.that end, NASA plans to incrementally develop three progressively-larger SLS launch vehicle capabilities--70-, 105- and 130-metric ton (MT) variants--complemented by the Orion and supporting ground systems. To Figure 1 below illustrates NASA's planned capabilities for the SLS, Orion, and some of the related GSDO efforts. These capabilities follow the agency's previous attempt to develop a next- generation human spaceflight system, the Constellation program, which was cancelled in 2010 when the program's budget proved inadequate to resolve technical challenges. The first version of the SLS being developed is a 70-metric ton launch vehicle known as Block I. NASA expects to conduct two test flights of the Block I vehicle--the first in 2017 and the second in 2021. The vehicle is scheduled to fly some 700,000 kilometers beyond the moon during the first test flight, known as Exploration Mission-1 (EM-1), and to fly a second mission, known as Exploration Mission-2 (EM-2), to test additional aspects of its performance. After 2021, NASA intends to build 105- and 130-metric ton launch vehicles, known respectively as Block IA/B and Block II, which it expects to use as the backbone of manned spaceflight for decades. NASA anticipates that these launch vehicles will require the development of new systems to achieve the agency's goals for carrying greater amounts of cargo and traveling farther into space. The agency has not yet selected specific missions for the increased capabilities to be provided by Block IA/B and Block II but, in keeping with the language contained in the 2010 Authorization Act, anticipates using the vehicles for such deep- space destinations as near-Earth asteroids and Mars. In concert with SLS, NASA expects to evolve the Orion and ground systems. The agency plans an un-crewed Orion capsule to fly atop the SLS during EM-1 in 2017, a crewed capsule during EM-2 in 2021, and ultimately, at a date to be determined, a crewed capsule with capability for such missions as a Mars landing. NASA is also modifying the existing ground systems so that they can support the SLS Block I variant and eventually accommodate the Block IA/B and Block II launch vehicles as well as enhanced versions of the Orion crew capsule. For example, NASA plans to add moveable floors to the vehicle assembly building at Kennedy Space Center so that the three launch vehicle variants can be more easily prepared for flight as the SLS capability evolves. NASA established the preliminary cost estimates for the initial capabilities of the SLS, Orion, and associated GSDO as each of these programs entered the preliminary design and technology completion phase of development, known as key decision point B (KDP-B). At KDP-B, programs use a probability-based analysis to develop a range of preliminary cost and schedule estimates which are used to inform the budget planning for the programs. This phase culminates in a review at key decision point C (KDP-C), known as program confirmation, where cost and schedule baselines with point estimates are established and documented in the agency baseline commitment. After this review, programs are considered to be in the implementation phase of development, and program progress is subsequently measured against these baselines. NASA plans to hold the program confirmation review for SLS in spring 2014 and expects to conduct the KDP-C review for GSDO in May 2014 and Orion in December 2014. Because the life cycle costs of these programs are expected to exceed $250 million, NASA is required to report the programs' baseline estimates to Congress once the programs are approved to move into implementation. The agency provides this information through its annual budget submission. NASA also uses the annual budget submission to inform Congress about the preliminary cost ranges for projects proceeding into formulation. NASA's preliminary cost estimates for the SLS, Orion, and associated GSDO programs do not provide a complete picture of the costs required to develop and operate the programs through the entire course of their respective life cycles. These preliminary estimates include the funding required for the scope of work related to initial capabilities--that is, development and operations through 2017 for the SLS launch vehicle and ground systems and through 2021 for the Orion. NASA also expects to use this same limited scope of work to develop the SLS, Orion, and GSDO baseline cost estimates. Moreover, NASA's estimates do not capture the cost of the second flight of the 70-metric ton vehicle during EM-2, the costs of development work that will be necessary to fly the increased 105- and 130-metric ton SLS capabilities, and the costs associated with legacy hardware that will be used for the Orion program. In contrast, best practices for cost estimation call for "cradle to grave" life cycle cost estimates in order to help assess a program's long-term affordability. NASA's preliminary cost estimates for the three programs' initial capabilities total a low-to-high cost range of approximately $19 to $22 billion. Table 1 below depicts the scope, including content and schedule, of the SLS, Orion, and GSDO initial capabilities' preliminary cost estimates. As the SLS, Orion, and GSDO programs move from formulation into implementation phases, NASA plans to use the same content and scope for calculating the programs' respective baseline cost estimates. NASA's preliminary cost estimates for SLS, Orion, and GSDO provide no information about the longer-term, life cycle costs of developing, manufacturing, and operating the launch vehicle, crew capsule, and ground systems: The SLS estimate does not cover the cost to build the second 70- metric ton vehicle and conduct EM-2 in 2021 with that vehicle. NASA is already incurring costs for EM-2 because it is funding some EM-2 development in concert with EM-1 efforts, such as work on the solid rocket boosters and core stage that are expected to help power the 70-metric ton SLS. NASA officials indicated at one point in our review that they did not expect to begin formally tracking EM-2 costs until after the SLS design's maturity was assessed at a critical design review scheduled for 2015; however, the agency stated in technical comments to this report that it is tracking those costs for budget purposes and plans to begin formally reporting them once SLS reaches the project confirmation phase. Additionally, the SLS estimate does not address the potential for costs NASA would incur to produce, operate, and sustain flights of the 70-MT Block I capability beyond 2021. NASA officials stated that there are currently no plans to fly that vehicle beyond 2021, but that the agency could reassess its decision if a specific mission arises for the vehicle. The SLS estimate also does not include costs to design, develop, build, and produce the 105- or 130-metric ton Block IA/B and Block II SLS variants that NASA intends to use well into the future. NASA indicated that these variants will require new systems development efforts--including advanced boosters and a new upper stage to meet the greater performance requirements associated with larger payloads as well as travel to Mars or other deep-space locations. NASA has started funding concept development, trades, and analyses related to these new designs, such as assessing the use of lightweight materials to construct the upper stage and selective laser melting to produce system components. In addition, NASA anticipates a re-start of the production line for the RS-25 engine that it plans to use to power the Block IA/B and Block II vehicles. Currently, the agency has enough residual RS-25 liquid-fuel engines from the Space Shuttle program to launch the SLS for up to 4 flights. NASA expects to need more of the engines beyond that, but it has not yet finalized acquisition plans to manufacture them. According to agency officials, re-starting the production line would entail at least 3 years, whereas development of a new engine would require a minimum of 8 years. The Orion estimate does not address costs for production, operations, or sustainment of additional crew capsules after 2021 nor does it address prior costs incurred when Orion was being developed as part of the now-defunct Constellation program. NASA initiated the crew capsule's development in 2006 as part of the Constellation program. During approximately 4 years that the capsule's development occurred under Constellation, the agency spent about $4.7 billion for the capsule's design and development. When Constellation was cancelled in 2010 and the work transitioned to the current Orion program, however, NASA excluded the Constellation-related costs from Orion's current preliminary cost estimate of $8.5 to $10.3 billion through 2021. The GSDO estimate does not address the costs to develop or operate SLS ground systems infrastructure beyond EM-1 in 2017, although NASA intends to modify ground architecture to accommodate all SLS variants. NASA officials have indicated that the road ahead involves many decisions about the programs beyond 2021, including how development will proceed, what missions will be performed, when the programs will end, and how each effort will be managed. They noted that the agency is using a capability-based approach to SLS, Orion, and the associated GSDO development, in which system capability grows over time. They indicated that the programs' preliminary cost estimates are for attainment of capabilities rather than the full cost of the programs, and that it is difficult to define life cycle costs because the programs' intended long- term uses and life spans have not been fully determined. According to NASA, the agency is developing a tailored definition for life cycle cost estimating that is allowed by NASA requirements. Because the missions drive the number and types of vehicles, crew capsules, and ground systems that would be required, as missions are defined, NASA officials said they would be in a better position to estimate the programs' life cycle costs. The officials stated that NASA is looking ahead to future costs as much as possible, and NASA indicated in technical comments to this report that the SLS program plans to begin formally reporting costs for the launch vehicle's EM-2 after the program's anticipated confirmation in spring 2014. We recognize that defining life cycle costs can be difficult when uncertainties exist. However, in contrast to NASA's tailored approach, both widely-accepted best practices for cost estimation and the agency's own requirements support the need for full life cycle cost estimates. Even when uncertainties exist, best practices maintain that a high-quality cost estimate takes into account those uncertainties while forecasting the minimum and maximum range of all life cycle costs. The best practices, developed by the GAO in concert with the public and private sector cost estimating communities, call for "cradle to grave" life cycle cost estimates and maintain that life cycle cost estimates should provide an exhaustive, structured accounting of all resources and associated cost elements required to develop, produce, deploy, and sustain a particular program. This entails identification of all pertinent cost elements, from initial concept through operations, support, and disposal. Likewise, NASA's program management requirements direct that programs develop a preliminary full life cycle cost estimate. In accordance with the agency's guidance regarding life cycle costs, such an estimate would encompass total costs from the formulation through the implementation phase, including design, development, mission operations, support, and disposal activities. According to best practices, because life cycle estimates encompass all possible costs, they provide a wealth of information about how much programs are expected to cost over time. Life cycle cost estimates, including a range for preliminary costs as directed by NASA requirements for programs in the formulation phase, enhance decision making, especially in early planning and concept formulation of acquisition. High- quality cost estimates, as noted by best practices, can support budgetary decisions, key decision points, milestone reviews, and investment decisions. For example, a preliminary life cycle cost estimate provides the basis of the financial investment that the agency is committing the government to, while a baseline life cycle cost estimate forms the basis for measuring cost growth over time. Because NASA expects to continue with a limited scope for the SLS, Orion, and baseline estimates, however, cost growth over time within the programs will be difficult to identify and could be masked as growth in the SLS capability if the most current cost estimate did not contain the same content as the baseline estimate. As noted in best practices for cost estimating, the quality of a program's cost estimate is also key to determining its affordability, that is, the degree to which a program's funding requirements fit within an agency's overall portfolio plan. However, NASA's preliminary cost estimates do not address the affordability of increased capabilities because they exclude the life cycle costs associated with the SLS Block IA/B and Block II launch vehicles that the agency intends to use well into the future. According to agency officials at the time of our review, NASA has not yet decided whether it will manage the Block IA/B and Block II development efforts as individual programs and, if so, what the programs' scope would be. Best practices for cost estimating look favorably on the incremental development approach NASA has chosen for SLS, and they also state that programs following such an approach should clearly define the characteristics of each increment of capability so that a rigorous life cycle cost estimate can be developed. In addition, we have previously concluded that it is prudent for an agency to manage increasing capabilities of an existing program on par with the investments yet to come and in a way that is beneficial for oversight. For example, we have recommended that agencies developing weapon systems in increments consider establishing each increment of increased capability with its own cost and schedule baseline. According to cost estimating best practices, dividing programs into smaller pieces makes management and testing easier and helps avoid unrealistic cost estimates, resulting in more realistic long-range investment funding and more effective resource allocation. These are important considerations given that NASA is likely to spend billions of dollars beyond its initial investment of up to $22 billion to develop the increased capabilities. Development of human-rated liquid- fueled engines, for example, has been among the most difficult, time- intensive, and costly parts of launch vehicle development. As a case in point, NASA spent about 8 years and $1.5 billion to develop a human- rated engine known as J-2X for use on Ares launch vehicles within the agency's now-defunct Constellation program. NASA has faced issues with affordability of its manned space flight investments and other major projects in the past, and those affordability issues have sometimes contributed to a program's cancellation. For example, NASA originally envisioned that the Space Shuttle would fly up to 100 times per vehicle at a cost of $7.7 million per launch. In reality, the Shuttle flew 135 times in total over a period of 30 years at a cost that was about $3.5 billion per year around the 2008 timeframe. Amid concerns that included the Shuttle's costs and safety, the program ended. NASA then focused on building human spaceflight alternatives that included Constellation. In 2010, Constellation was canceled because, as noted by NASA's Administrator, the program could not return astronauts to the moon at an affordable cost and would require far more funding to make the agency's approach viable. In a recent example noted in the agency's 2015 presidential budget request, NASA may place in storage the Stratospheric Observatory for Infrared Astronomy, an airborne observatory for studying astronomical objects and phenomena, after spending some 23 years and more than $1 billion to develop the project. The agency cited high operating costs, estimated at some $1.8 billion over the project's planned life, as a factor in its considerations. The SLS, Orion, and GSDO programs NASA has established to fulfill its mandate of providing the capability for transporting humans to space are well underway. These programs represent a significant investment for the country--as much as $22 billion for initial capabilities and potentially billions more to field increased capabilities over time as envisioned in the 2010 NASA Authorization Act. Given the goals that have been outlined for NASA as part of the National Space Transportation Policy, the success of these programs is to be measured not only by the capability that is achieved but also by NASA's ability to achieve them within a reasonable timeframe and cost to the U.S. taxpayer. As such, establishing these programs with both near-term and long-term affordability in mind is key. The limited scope that NASA has chosen to use as the basis for formulating the programs' cost baselines, however, does not provide the transparency necessary to assess long-term affordability and will hamper oversight by those tasked with assessing whether the agency is progressing in a cost-effective and affordable manner. If the SLS, Orion, and GSDO baseline cost estimates cannot be compared to current costs, the baseline estimates lose their usefulness because they no longer serve as a means to hold NASA accountable for cost growth and program progress. Furthermore, if NASA does not clearly delineate costs for operations and sustainment of the initial capabilities or separate cost and schedule baselines for upcoming capabilities, then it will be difficult to assess program affordability and for the Congress to make informed, long-term budgetary decisions. Estimates that use all available information to establish a potential range of costs for the full scope of these upcoming capabilities can help inform such decisions. To provide the Congress with the necessary insight into program affordability, ensure its ability to effectively monitor total program costs and execution, and to facilitate investment decisions, we recommend that NASA's Administrator direct the Human Exploration and Operations Mission Directorate take the following 3 actions: Establish a separate cost and schedule baseline for work required to support the SLS Block I EM-2 and report this information to the Congress through NASA's annual budget submission. If NASA decides to fly the SLS Block I beyond EM-2, establish separate life cycle cost and schedule baseline estimates for those efforts, to include funding for operations and sustainment, and report this information annually to Congress via the agency's budget submission. Because NASA intends to use the increased capabilities of the SLS, Orion, and GSDO efforts well into the future and has chosen to estimate costs associated with achieving the capabilities, establish separate cost and schedule baselines for each additional capability that encompass all life cycle costs, to include operations and sustainment. When NASA cannot fully specify costs due to lack of well-defined missions or flight manifests, forecast a cost estimate range -- including life cycle costs -- having minimum and maximum boundaries. These baselines or ranges should be reported to Congress annually via the agency's budget submission. Because a significant amount of the original Orion development work occurred under the Constellation program, include those costs in the baseline cost estimate for the Orion program. NASA provided written comments on a draft of this report. These comments are reprinted in Appendix I. In responding to a draft of our report, NASA partially concurred with our three recommendations, citing among other reasons that actions already in place at the time of our review such as establishing SLS, Orion, GSDO as separate programs and a block upgrade approach for SLS--and actions it plans to take to track costs--met the intent of our recommendations. In most cases, the actions that NASA plans to take do not fully address the issues we raised in this report. We continue to believe that our recommendations are valid and should be fully addressed as discussed below. NASA also provided technical comments which we incorporated as appropriate. NASA partially concurred with our first recommendation to establish a separate cost and schedule baseline for work required to support the SLS Block I EM-2, report this information to the Congress through NASA's annual budget submission, and establish separate life cycle cost and schedule baseline estimates for EM-2 if NASA decides to fly Block I beyond EM-2. NASA also partially concurred with our second recommendation to establish separate cost and schedule baselines that encompass life cycle costs, including operations and sustainment, for each additional SLS, Orion, and GSDO capability and to report cost estimates for the capabilities annually via the agency budget submission until key requirements are defined and baselines can be established. In its response, NASA stated that it had established separate programs for SLS, Orion, and GSDO and adopted a block upgrade approach for SLS. This approach, NASA stated, is in concert with best practices and NASA policy. In addition, NASA indicated that it will establish cost and schedule estimates for initial demonstration of the three programs as they enter respective implementation phases and will begin reporting development, operations, and sustainment costs for SLS Block I and subsequent variants starting in fiscal year 2016 via its annual budget submission to Congress. Finally, the agency stated that it intends to conduct design reviews for upgraded SLS elements, including the upper stage and booster, and set up cost commitments similar to what it has done for Block I capability as part of that design review process, but that it does not intend to establish life cycle estimates for SLS through the end of the program because flight rates, mission destinations and other strategic parameters are yet unknown. As discussed in the report, best practices for cost estimating recognize that NASA's evolutionary development approach for SLS, Orion, and GSDO helps reduce risk and provide capabilities more quickly. Given NASA's planned long-term use of the SLS, Orion, and GSDO, its block upgrade approach and intention to conduct design reviews for each of the planned upgrades will provide some understanding of the development work and resources required. For example, such reviews are typically expected to yield information about technical progress against requirements. While NASA's prior establishment of SLS, Orion, and GSDO as separate programs lends some insight into expected costs and schedule at the broader program level, it does not meet the intent of our first two recommendations because cost and schedule identified at that level is unlikely to provide the detail necessary to monitor the progress of each block against a baseline. Furthermore, it is unclear from NASA's response whether the cost commitments the agency plans within the design review process will serve the same purpose as establishing a cost baseline for each respective upgrade. Additionally, NASA's planned approach for reporting costs associated with EM-2 and subsequent variants of SLS via its annual budget submission only partially meets the intent of our first two recommendations. Providing cost information at an early phase when baseline estimates have yet to be established is helpful to ensure costs associated with EM-1 and EM-2 are not conflated and funding requirements for future flights of the Block I SLS and future variants are somewhat understood. Reporting the costs via the budget process alone, however, will not provide information about potential costs over the long- term because budget requests neither offer all the same information as life cycle cost estimates nor serve the same purpose. Plainly, progress cannot be assessed without a baseline that serves as a means to compare current costs against expected costs. An agency's budget submission reflects its current annual fiscal needs and anticipated short- term needs up through an additional 4-year period for a particular program, is subject to change based on fiscal negotiation, and is not necessarily linked to an established baseline that indicates how much the agency expects to invest to develop, operate, and sustain a capability over the long-term. Conversely, life cycle cost estimates establish a full accounting of all program costs for planning, procurement, operations and maintenance, and disposal and provide a long-term means to measure progress over a program's life span. As NASA establishes parameters for the additional flights of the first SLS capability and upgraded capabilities, including flight rates, mission destinations, and other requirements, it will be well-poised to move from reporting costs in budget submissions to establishing baseline cost and schedule estimates for each capability and reporting progress against these respective baselines. Therefore, we continue to believe that NASA should baseline costs for EM-2 and each future variant of SLS and report progress against those established baselines. NASA makes no specific mention of how it plans to account for future work associated with Orion and GSDO. We believe it is important to treat Orion and GSDO with the same significance as SLS because this trio of programs is expected to work in concert now and in the future to achieve NASA's goals for human space exploration. Reporting Orion and GSDO development, operations, and sustainment costs in the annual budget request, as NASA plans for SLS, would be a logical first step. Just as with SLS, however, it will be important for NASA to establish and report progress against baseline costs and schedules for each block of Orion and GSDO efforts as flight rates, missions, and other strategic parameters are defined because doing so will help the agency more effectively manage not only each program but its human exploration portfolio as a whole. NASA partially concurred with our third recommendation to include the costs of Orion development work under the Constellation program as part of the baseline cost estimate for the Orion program. Agency officials stated that they agree those costs should be tracked and disclosed, but that the current Orion program has a new concept of operations, requirements, and budget plan than that under the Constellation effort. The past costs incurred for Orion's development are important because they provide visibility into the total cost of developing a crew capsule for human space exploration. Exclusion of these costs from Orion's current estimate understates how much NASA will invest to put humans into space. Although NASA notes that it has changed Orion's concept of operations and requirements, the agency nonetheless migrated Orion critical technology development efforts from Constellation to the SLS program. For example, NASA began efforts to develop the coating for Orion's heat shield as part of Constellation, and the agency continues that development today in preparation for the capsule's launch atop SLS. Therefore, we continue to believe our recommendation to include Orion development costs under Constellation in the baseline cost estimate for the current Orion program is valid and should be fully implemented. We are sending this report to NASA's Administrator and to interested congressional committees. In addition, the report will be available at no charge on GAO's website at http://www.gao.gov. Should you or your staff have any questions on matters discussed in this report, please contact me at (202) 512-4841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Other key contributors to this report are listed in Appendix II. Key contributors to this report were Shelby S. Oakley, Assistant Director; Tana M. Davis; John S. Warren, Jr.; Jennifer Echard; Laura Greifner; Roxanna Sun; and Sylvia Schatz.

NASA is undertaking a trio of closely-related programs to continue human space exploration beyond low-Earth orbit: the SLS vehicle; the Orion capsule, which will launch atop the SLS and carry astronauts; and the supporting ground systems. As a whole, the efforts represent NASA's largest exploration investment over the next decade, potentially as much as $22 billion, to demonstrate initial capabilities. Beyond 2021, NASA plans to incrementally develop progressively more-capable SLS launch vehicles complemented by Orion capsules and ground systems. GAO was asked to assess the costs of NASA's human exploration program. This report examines the scope of NASA's preliminary cost estimates for the three programs. To conduct this work, GAO reviewed NASA information on cost estimates for the three programs, discussed the estimates with NASA officials, and assessed the estimates against best practices criteria in GAO's cost estimating guidebook as well as NASA's own requirements and guidance. The scope of the National Aeronautics and Space Administration's (NASA) preliminary cost estimates for the Space Launch System (SLS), Orion Multi-Purpose Crew Vehicle (Orion), and associated ground systems encompasses only the programs' initial capabilities and does not include the long-term, life cycle costs associated with the programs or significant prior costs: The SLS estimate is based on the funding required to develop and operate the initial 70-metric ton variant through first flight in 2017 but not the costs for its second flight in 2021. NASA is now incurring some costs related to the second flight, but it is not currently tracking those costs for life cycle cost estimating purposes. Furthermore, the estimate does not include costs to incrementally design, develop, and produce future 105- and 130-metric ton SLS variants which NASA expects to use for decades. NASA is now funding concept development and analysis related to these capabilities. The Orion estimate does not include costs for production, operations, or sustainment of additional crew capsules, despite plans to use and possibly enhance this capsule after 2021. It also does not include $4.7 billion in prior costs incurred during the approximately 4 years when Orion was being developed as part of NASA's now-defunct Constellation program. The ground systems estimate excludes costs to develop or operate the ground systems infrastructure beyond 2017, although NASA intends to modify ground architecture to accommodate all SLS variants. NASA expects to use this same limited scope of work to establish the programs' baseline cost estimates in 2014. According to NASA, the agency is developing a tailored definition for the programs' life cycle cost estimates as allowed by NASA requirements. Agency officials stated that NASA chose its approach in part due to uncertainties about the programs' end dates and missions beyond 2021. GAO recognizes that defining life cycle costs can be difficult when uncertainties exist, and that best practices for cost estimating look favorably on evolutionary development. Even so, best practices expect that a high-quality cost estimate will account for program uncertainties, forecast a minimum and maximum range for all life cycle costs, and clearly define the characteristics of each increment of capability so that a rigorous life cycle cost estimate can be developed. According to these practices as well as NASA's requirements and guidance, life cycle cost estimates should encompass all past, present, and future costs for a program, including costs for operations, support, and disposal. The limited scope that the agency has chosen for constructing preliminary and baseline cost estimates, however, means that the estimates are unlikely to serve as a way to measure progress and track cost growth over the life of the programs. For example, cost growth on the current SLS variant could be masked as the addition of scope associated with work for future variants, and the baseline estimate would no longer be applicable. Insight into program costs helps decision makers understand the long-term affordability of programs--a key goal of the National Space Transportation Policy--and helps NASA assess management of its portfolio to achieve increasing capabilities as directed in the NASA Authorization Act of 2010. NASA should establish separate cost baselines that address the life cycle of each SLS increment, as well as for any evolved Orion or ground systems capability, among other actions to enable assessment of affordability and enhance oversight. In commenting on a draft of this report, NASA partially concurred with GAO's recommendations, citing that actions taken to structure the programs and track costs met their intent. However, GAO believes NASA's responses do not fully address the issues raised in this report.

In May 2003, the Coalition Provisional Authority (CPA) dissolved the military organizations of the former regime and began the process of reestablishing or creating new Iraqi security forces, including the police and a new Iraqi army. Over time, multinational force commanders assumed responsibility in their areas for recruiting and training some Iraqi defense and police forces. In October 2003, the multinational force outlined a multistep plan for transferring security missions to Iraqi security forces. The plan had the objective of gradually decreasing the number of coalition forces in conjunction with neutralizing Iraq's insurgency and developing Iraqi forces capable of securing their country. Citing the growing capability of Iraqi security forces, coalition forces in Iraq began to shift responsibilities to Iraqi security forces in February 2004, earlier than planned. According to the President, senior DOD officials, and multinational force commanders, Iraqi forces were unprepared to assume security responsibilities and responded poorly to a series of anti-coalition attacks in April 2004. In western and central Iraq, insurgents attacked the multinational force in Fallujah, Baghdad, Ar Ramadi, Samarra, and Tikrit, while a radical Shi'a militia, the Mahdi Army, launched operations to dislodge multinational forces and occupy cities from Baghdad to Basra in the south. Although some Iraqi forces fought alongside coalition forces, other units abandoned their posts and responsibilities and, in some cases, assisted the insurgency. MNF-I identified a number of problems that contributed to the collapse of Iraqi security forces, including problems in training and equipping them. In May 2004, the President issued a National Security Presidential Directive, which stated that, after the transition of power to the Iraqi government, DOD would be responsible for U.S. activities relating to security and military operations. The Presidential directive established that the U.S. Central Command (CENTCOM) would direct all U.S. government efforts to organize, equip, and train Iraqi security forces. In the summer of 2004, MNF-I developed and began implementing a comprehensive campaign plan, which elaborated and refined the original strategy for transferring security responsibilities to Iraqi forces. In April 2006, MNF-I revised the campaign plan and, in conjunction with the U.S. Embassy in Baghdad, issued a new Joint Campaign Plan that contains the goal of transitioning security responsibility from MNF-I to the Iraqi security forces and government. Further details on the campaign plan are classified. In late August 2006, the MNF-I Commanding General said that the United States is helping Iraq build a force to deal with its current security threats of international terrorism and insurgency. He noted, however, that the Iraqi government is developing a long-term security plan to shape the type of armed forces that the country will need 5 to 10 years from now. Since June 2003, overall security conditions in Iraq have deteriorated and grown more complex, as evidenced by increased numbers of attacks and more recent Sunni/Shi'a sectarian strife after the February 2006 bombing of the Golden Mosque in Samarra. The deteriorating conditions threaten continued progress in U.S. and other international efforts to assist Iraq in the political and economic areas. Moreover, the Sunni insurgency and Shi'a militias have contributed to an increase in sectarian strife and large numbers of Iraqi civilian deaths and displaced individuals. Enemy-initiated attacks against the coalition and its Iraqi partners have continued to increase through July 2006 (see fig. 1). Since 2003, enemy- initiated attacks have increased around major religious or political events, including Ramadan and elections. Attack levels also follow a seasonal pattern, increasing through the spring and summer and decreasing in the fall and winter months. Overall, attacks increased by 23 percent from 2004 to 2005. After declining in the fall of 2005, the number of attacks rose to the highest level ever in July 2006. Total attacks reported from January 2006 through July 2006 were about 57 percent higher than the total reported during the same period in 2005. These data show significant increases in attacks against coalition forces, who remain the primary targets, as well as civilians and Iraqi security forces. According to a June 2006 UN report, an increasingly complex armed opposition continues to be capable of maintaining a consistently high level of violent activity across Iraq. Baghdad, Ninewa, Salahuddin, Anbar, and Diyala have been experiencing the worst of the violence. Other areas, particularly Basra and Kirkuk, have witnessed increased tension and a growing number of violent incidents. In August 2006, DOD reported that breaking the cycle of violence is the most pressing immediate goal of coalition and Iraqi operations. The security situation has deteriorated even as Iraq has made progress in meeting key political milestones and in developing its security forces. Since the CPA transferred power to the Iraqi interim government in June 2004, Iraq has held an election for a transitional government in January 2005, a referendum on the constitution in October 2005, and an election for a Council of Representatives in December 2005 that led to the formation of a new government in May 2006 (see fig. 2). However, according to the Director of the Defense Intelligence Agency (DIA), the December 2005 elections appeared to heighten sectarian tensions and polarize sectarian divides. According to a U.S. Institute of Peace report, the focus on ethnic and sectarian identity has sharpened as a result of Iraq's political process, while nationalism and a sense of Iraqi identity have weakened. Moreover, according to the Director of National Intelligence's February 2006 report, Iraqi security forces are experiencing difficulty in managing ethnic and sectarian divisions among their units and personnel. In addition, the DIA Director reported that many elements of the Iraqi security forces are loyal to sectarian and party interests. According to DOD's August 2006 report, sectarian lines among Iraqi security forces are drawn along geographic lines, with Sunni, Shi'a, or Kurdish soldiers mostly serving in units located in geographic areas familiar to their group. Moreover, according to the report, commanders at the battalion level tend to command only soldiers of their own sectarian or regional background. On August 7, 2006, MNF-I and Iraqi security forces began phase II of Operation Together Forward. The operation is an effort to reduce the level of murders, kidnappings, assassinations, terrorism, and sectarian violence in Baghdad and to reinforce the Iraqi government's control of the city. On August 30, 2006, the MNF-I Commanding General said that he was pleased with the operation's progress, but that there was a long way to go in bringing security to the neighborhoods of Baghdad. U.S. intelligence assessments of this operation's impact are classified. The State Department reported in July 2006 that the recent upturn in violence has hindered the U.S. government's efforts to engage fully with its Iraqi partners and to move forward on political and economic fronts. State noted that a baseline of security was a prerequisite for moving forward on these fronts, which are essential to achieving the right conditions for withdrawing U.S. forces. For example, Iraqi government efforts to foster reconciliation have become more difficult with the increase in sectarian divisions and violence during the spring and summer of 2006. According to DOD's August 2006 report, security issues--such as the attempted kidnapping of a deputy minister and threats to personnel who work with embassy teams--have made some ministers reluctant to have U.S. personnel visit them. The report also noted that the security situation in some provinces has hampered interaction between U.S.-led Provincial Reconstruction Teams and provincial leaders. Moreover, the UN reported that the lack of security has hampered reconstruction efforts. The UN reported that the diplomatic community remains under serious threat as embassy staff have been abducted and killed and facilities attacked. The UN noted that improved security is central to the normal ability of international agencies to provide assistance to the government and people of Iraq. As we reported in July 2006, the poor security conditions have also hindered U.S. and Iraqi government efforts to revitalize Iraq's economy and restore essential services in the oil and electricity sectors. According to a State Department report, during the week of August 16-22, 2006, Iraq was producing 2.17 million barrels of oil per day. This figure is below the Iraqi Oil Ministry's goal of 2.5 million barrels of oil per day and the pre-war level of 2.6 million barrels per day. Over the same time period, electricity availability averaged 5.9 hours per day in Baghdad and 10.7 hours nationwide. Electricity output for the week was about 9 percent above the same period in 2005. U.S. officials report that major oil pipelines continue to be sabotaged, shutting down oil exports and resulting in lost revenues. Current U.S. assistance is focused on strengthening the Strategic Infrastructure Battalions, which are Ministry of Defense forces that protect oil fields and pipelines. Major electrical transmission lines have also been repeatedly sabotaged, cutting power to parts of the country. Security conditions in Iraq have, in part, led to project delays and increased costs for security services. Although it is difficult to quantify the costs and delays resulting from poor security conditions, both agency and contractor officials acknowledged that security costs have diverted a considerable amount of reconstruction resources and have led to canceling or reducing the scope of some reconstruction projects. Although the Sunni insurgency has remained strong and resilient, the presence and influence of Shi'a militias have grown and led to increased sectarian violence. According to a July 2006 State Department report, the Sunni insurgency remains a pressing problem in Iraq. However, in recent months, Shi'a militia groups have grown more prominent and threaten Iraq's stability. The increase in sectarian violence has led to an increasing number of Iraqis fleeing their homes. According to the U.S. Ambassador to Iraq, the demobilization of Shi'a militias requires a corresponding reduction in the Sunni insurgency. Despite coalition efforts and the efforts of the newly formed Iraqi government, insurgents continue to demonstrate the ability to recruit new fighters, supply themselves, and attack coalition and Iraqi security forces. According to a July 2006 State Department report, the Sunni insurgency remains a pressing problem in Iraq, even after the death of Abu Musab al Zarqawi, the leader of al-Qaeda in Iraq, in early June 2006. As DOD recently reported, al-Qaeda in Iraq remains able to conduct operations due to its resilient, semi-autonomous cellular structure of command and control. The Sunni insurgency consists of former Baathists, whose goal is to return to power; terrorist groups such as al-Qaeda in Iraq, its affiliates in the Mujahadeen Shura Council, and Ansar al Sunna; and various other groups that rely on violence to achieve their objectives. Sunni insurgents have no distinct leader but share the goal of destabilizing the Iraqi government to pursue their individual and, at times, conflicting goals. Although these groups have divergent goals, some collaborate at the tactical and operational levels. DOD has reported that the relationships among insurgents, terrorists, and criminal opportunists are blurred at times but that the ideological rifts between terrorists and other resistance groups remain. DOD also reports that many insurgent groups employ a dual-track political and military strategy to subvert emerging institutions and to infiltrate and co-opt security and political organizations. These groups attempt to leverage the political process to address their core concerns and demands while attacking coalition and Iraqi security forces. The presence and influence of Shi'a militia groups have grown in recent months, as they have become more prominent and acted in ways that threaten Iraq's stability. According to the CENTCOM Commander, as of early August 2006, these militias are the largest contributors to sectarian violence in Iraq. As DOD reported in August 2006, the threat posed by Shi'a militias is growing and represents a significant challenge for the Iraqi government. The Shi'a militias that are affecting the security situation the most are the Mahdi Army and the Badr Organization. Mahdi Army: Led by radical Shi'a cleric Muqtada al-Sadr, this group was responsible for attacks against the coalition and two uprisings in April 2004 and August 2004. The militia committed abuses against Sunni civilians, which have exacerbated sectarian tensions, and were implicated in unrest following the February bombing in Samarra. Evidence exists that the Mahdi Army are supplied by sources outside Iraq, most notably Iran. As of June 2006, Sadr followers headed four of Iraq's 40 ministries--the ministries of health, transportation, agriculture, and tourism and antiquities. As DOD recently reported, this militia has popular support in Baghdad and Iraq's southern provinces and is tolerated by elements in the Iraqi government. Badr Organization: This Shi'a militia group is the paramilitary wing of the Supreme Council for the Islamic Revolution in Iraq, a prominent political party in the new government. The party was founded in Iran during the Iran-Iraq war and retains strong ties to Iran. According to DOD, the Badr Organization received financial and material support from Iran, and individuals from Badr have been implicated in death squads. The Supreme Council for the Islamic Revolution in Iraq is one of the two largest Shi'a parties in parliament. One of Iraq's two deputy presidents and the Minister of Finance are party members. According to the CENTCOM Commander, Shi'a militias must be controlled because they are nonstate actors that have the attributes of the state, yet bear no responsibility for their actions. In many cases, according to DOD, militias provide protection for people and religious sites, sometimes operating in conjunction with the Iraqi police in areas where the Iraqi police are perceived to provide inadequate support. According to a May 2006 DOD report, Shi'a militias seek to place members into army and police units as a way to serve their interests. This is particularly evident in the Shi'a dominated south where militia members have hindered the implementation of law enforcement. Militia leaders also influence the political process through intimidation and hope to gain influence with the Iraqi people through politically based social welfare programs. In areas where they provide social services and contribute to local security, they operate openly and with popular support. According to the Director of National Intelligence, Iran provides guidance and training to select Iraqi Shi'a political groups and provides weapons and training to Shi'a militant groups to enable anticoalition attacks. Iran also has contributed to the increasing lethality and effectiveness of anticoalition attacks by enabling Shi'a militants to build improvised explosive devices with explosively formed projectiles, similar to those developed by Lebanese Hezbollah. Iranian support for Shi'a militias reinforces Sunni fears of Iranian domination, further elevating sectarian violence. According to the August 2006 DOD report, Sunni Arabs do not have formally organized militias. Instead, they rely on neighborhood watches, Sunni insurgents, and increasingly, al-Qaeda in Iraq. The rise of sectarian attacks is driving some Sunni and Shi'a civilians in Baghdad and in ethnically mixed provinces to support militias. Such support is likely to continue, according to DOD's report, in areas where the population perceives Iraqi institutions and forces as unable to provide essential services or meet security requirements. According to DOD's August 2006 report, rising sectarian strife defines the emerging nature of violence in mid-2006, with the core conflict in Iraq now a struggle between Sunni and Shi'a extremists seeking to control key areas in Baghdad, create or protect sectarian enclaves, divert economic resources, and impose their own respective political and religious agendas. The UN reported in March 2006 that the deteriorating security situation is evidenced by increased levels of sectarian strife and the sectarian nature of the violence, particularly in ethnically mixed areas. Figure 3 shows the ethnic distribution of the population in Iraq. Baghdad, Kirkuk, Mosul, and southwest of Basra are key ethnically mixed areas. In June 2006, the UN reported that much of the sectarian violence has been committed by both sides of the Sunni-Shi'a sectarian divide and has resulted in increased civilian deaths. The UN reported that the number of Iraqi civilian casualties continues to increase, with a total of about 14,300 civilians killed in Iraq from January to June 2006. The overwhelming majority of casualties were reported in Baghdad, according to the report. Specifically targeted groups included prominent Sunni and Shi'a Iraqis, government workers and their families, members of the middle class (such as merchants and academics), people working for or associated with MNF- I, and Christians. According to the UN, daily reports of intercommunal intimidation and murder include regular incidents of bodies of Sunni and Shi'a men found to be tortured and summarily executed in Baghdad and its surrounding areas. Violence against Kurds and Arabs has also been reported in Kirkuk, while the abduction and intimidation of ordinary Iraqis is a growing problem. According to the report, repeated bombings against civilians, mosques, and more recently against churches are creating fear, animosity, and feelings of revenge within Iraq's sectarian communities. Moreover, according to a July 2006 UN report, the increase in sectarian violence has resulted in a growing number of Iraqis fleeing their homes. The UN estimated that about 150,000 individuals had been displaced as of June 30, 2006. The UN reported that people left their community of origin primarily because of direct or indirect threats against them or attacks on family members and their community. According to the report, displaced persons are vulnerable, lack many basic rights, and compete for limited services. This in turn can increase intercommunal animosities and can generate further displacement. Although U.S. and UN officials recognize the importance of demobilizing the militias, the U.S. Ambassador to Iraq has stated that the demobilization of the Shi'a militias depends on a reduction in the Sunni insurgency. According to the Ambassador, a comprehensive plan for demobilizing all the militias and reintegrating them into Iraqi society is needed to ensure Iraq's stability and success. However, the Sunni insurgent groups now see themselves as protectors of the Sunni community, and the Shi'a militias see themselves as protectors of the Shi'a community. As DOD reported in August 2006, Sunni and Shi'a extremists are locked in mutually reinforcing cycles of sectarian strife, with each portraying themselves as the defenders of their respective sectarian groups. DOD and State report progress in developing capable Iraqi security forces and transferring security responsibilities to them and the Iraqi government in three key areas: (1) the number of trained and equipped forces, (2) the number of Iraqi army units and provincial governments that have assumed responsibility for security of specific geographic areas, and (3) the assessed capabilities of operational units, as reported in aggregate Transition Readiness Assessment (TRA) reports. While all three provide some information on the development of Iraqi security forces, they do not provide detailed information on specific capabilities that affect individual units' readiness levels. Unit-level TRA reports provide that information. We are currently working with DOD to obtain these reports because they would more fully inform both GAO and the Congress on the capabilities and needs of Iraq's security forces. DOD and State have reported progress toward the current goal of training and equipping about 325,000 Iraqi security forces by December 2006. As shown in table 1, the State Department reports that the number of trained army and police forces has increased from about 174,000 in July 2005 to about 294,000 as of August 2006. According to State, the Ministries of Defense and Interior are on track to complete the initial training and equipping of all their authorized end-strength forces by the end of 2006. The authorized end-strength is 137,000 military personnel in the Ministry of Defense and about 188,000 in Ministry of Interior police and other forces. However, as we previously reported, the number of trained and equipped security forces does not provide a complete picture of their capabilities and may overstate the number of forces on duty. For example, Ministry of Interior data include police who are absent without leave. Ministry of Defense data exclude absent military personnel. In spring 2005, MNF-I recognized that the number of trained and equipped forces did not reflect their capability to assume responsibility for security. MNF-I began to develop and refine the TRA system as a means of assessing the capabilities of Iraqi security forces. It also started a program to place transition teams with Iraqi army and special police units. DOD also assesses progress in the number of Iraqi army units and provincial governments that have assumed responsibility for the security of specific geographic areas in Iraq. The joint MNF-I/U.S. Embassy Campaign Plan calls for the Iraqi army to assume the lead for counterinsurgency operations in specific geographic areas and Iraqi civil authorities to assume security responsibility for their provinces. The transition of security responsibilities concludes when the Iraq government assumes responsibility for security throughout Iraq. As shown in table 2, DOD reports that an increasing number of Iraqi army units are capable of leading counterinsurgency operations in specific geographic areas. DOD reports more detailed information on this transition in a classified format. However, when an Iraqi army unit assumes the lead, it does not mean that the unit is capable of conducting independent operations since it may need to develop additional capabilities and may require the support of coalition forces. According to DOD's May 2006 report, it will take time before a substantial number of Iraqi units are assessed as fully independent and requiring no assistance considering the need for further development of Iraqi logistical elements, ministry capacity and capability, intelligence structures, and command and control. Table 2 also shows that one provincial government--Muthanna--had assumed responsibility for security operations, as of August 2006. According to a July 2006 State Department report, when a provincial government can assume security responsibilities depends on the (1) threat level in the province, (2) capabilities of the Iraqi security forces, (3) capabilities of the provincial government, and (4) posture of MNF-I forces, that is, MNF-I's ability to respond to major threats, if needed. Once the provincial government assumes security responsibilities, the provincial governor and police are in charge of domestic security. According to an MNF-I official, MNF-I forces will then move out of all urban areas and assume a supporting role. In August 2006, DOD reported that security responsibility for as many as nine of Iraq's provinces could transition to Iraqi government authority by the end of 2006. DOD has provided GAO with aggregate information on the overall TRA levels for Iraqi security forces and the number of Iraqi units in the lead for counterinsurgency operations. DOD's aggregate data on the capabilities and readiness of Iraqi security forces do not provide information on shortfalls in personnel, command and control, equipment, and leadership. Unit-level TRA reports provide more insight into Iraqi army capabilities and development needs in personnel, leadership, and logistics than do the overall TRA levels that DOD reports in classified format. The TRA rating for individual Iraqi army units is a key factor in determining the ability of the unit to conduct and assume the lead for counterinsurgency operations. According to Multinational Corps-Iraq (MNC-I) guidance, the TRA is intended to provide commanders with a method to consistently evaluate Iraqi units, as well as to identify factors hindering progress, determine resource issues, make resource allocation decisions, and determine when Iraqi army units are prepared to assume the lead for security responsibilities. The TRA is prepared jointly on a monthly basis by the unit's military transition team chief and Iraqi security forces commander. In completing TRA reports, commanders assess the unit's capabilities in six subcategories--personnel, command and control, training, sustainment/logistics, equipment, and leadership (see app. 1). After considering the unit's subcategory ratings, commanders then give each Iraqi army unit an overall TRA rating that describes the unit's overall readiness to assume the lead for counterinsurgency operations. The overall ratings go from TRA level 1 through TRA level 4. To be able to assume the lead for counterinsurgency operations, Iraqi army units are required to obtain an overall rating of TRA level 2 as assessed by their commanders. Commanders also provide a narrative assessment that describes key shortfalls and impediments to the unit's ability to assume the lead for counterinsurgency operations and estimate the number of months needed for the unit to assume the lead. The purpose of the narrative is to clarify and provide additional support for the overall TRA rating. The aggregate data on overall TRA ratings for Iraqi security forces are classified. DOD has provided us with classified data on the aggregate number of Iraqi units at each TRA level and more detailed information on which Iraqi army units have assumed the lead for counterinsurgency operations. We are currently working with DOD to obtain the unit-level TRA reports. These unit-level reports would provide GAO and Congress with more complete information on the status of developing effective Iraqi security forces. Specifically, unit-level TRA reports would allow us to (1) determine if the TRA reports are useful and if changes are needed; (2) verify if aggregate data on overall TRA ratings reflect unit-level TRA reports; and (3) determine if shortfalls exist in key areas, such as personnel, equipment, logistics, training, and leadership. 1. What are the key political, economic, and security conditions that must be achieved before U.S. forces can draw down and ultimately withdraw from Iraq? What target dates, if any, has the administration established for drawing down U.S. forces? 2. The continued deterioration of security conditions in Iraq has hindered U.S. political and economic efforts in Iraq. According to the State Department, a baseline of security is a prerequisite for moving forward on the political and economic tasks essential to achieving the right conditions for withdrawing U.S. forces. Why have security conditions continued to deteriorate in Iraq even as the country has met political milestones, increased the number of trained and equipped security forces, and increasingly assumed the lead for security? What is the baseline of security that is required for moving forward on political and economic tasks? What progress, if any, can be made in the political and economic areas without a significant improvement in current security conditions? If existing U.S. political, economic, and security measures are not reducing violence in Iraq, what additional measures, if any, will the administration propose for stemming the violence? 3. In February 2006, the Director of National Intelligence reported that Iraqi security forces were experiencing difficulty in managing ethnic and sectarian divisions among their units and personnel. The DIA Director reported that many elements of the Iraqi security forces are loyal to sectarian and party interests. How does the U.S. government assess the extent to which personnel in the Iraqi security forces are loyal to groups other than the Iraqi government or are operating along sectarian lines, rather than as unified national forces? What do these assessments show? How would DOD modify its program to train and equip Iraqi security forces if evidence emerges that Iraqi military and police are supporting sectarian rather than national interests? 4. MNF-I established the TRA system to assess the capabilities and readiness of Iraqi security forces. How does DOD assess the reliability of TRAs and ensure that they present an accurate picture of Iraq security forces' capabilities and readiness? At what TRA rating level would Iraqi army units not require any U.S. military support? What U.S. military support would Iraqi units still require at TRA levels 1 and 2? How does DOD use unit-level TRAs to assess shortfalls in Iraqi capabilities? What do DOD assessments show about the developmental needs of Iraqi security forces? 5. In late August 2006, the MNF-I Commanding General said that the United States is helping Iraq build a force to deal with its current security threats of international terrorism and insurgency. However, he noted that the Iraqi government is developing a long-term security plan to shape the type of armed forces the country will need 5 to 10 years from now. What are the current resource requirements for developing Iraqi security forces capable of dealing with international terrorism and insurgency? What have been the U.S. and Iraqi financial contributions to this effort thus far? What U.S. and Iraqi contributions will be needed over the next several years? What are the projected resource requirements for the future Iraqi force? What are the projected U.S. and Iraqi financial contributions for this effort? For further information, please contact Joseph A. Christoff on (202) 512- 8979. Key contributors to this testimony were Nanette J. Barton, Lynn Cothern, Tracey Cross, Martin De Alteriis, Whitney Havens, Brent Helt, Rhonda Horried, Judith McCloskey, Mary Moutsos, Jason Pogacnik, and Jena Sinkfield. This appendix provides information on the TRA reports used to assess the capabilities of Iraqi army units. Commanders provide ratings in each of 6 subcategories (see fig. 4). For each subcategory, a green rating corresponds to TRA level 1, yellow to TRA level 2, orange to TRA level 3, and red to TRA level 4. The commanders consider the subcategory ratings in deciding the overall TRA rating for each unit.

From fiscal years 2003 through 2006, U.S. government agencies have reported significant costs for U.S. stabilization and reconstruction efforts in Iraq. In addition, the United States currently has committed about 138,000 military personnel to the U.S.-led Multinational Force in Iraq (MNF-I). Over the past 3 years, worsening security conditions have made it difficult for the United States to achieve its goals in Iraq. In this statement, we discuss (1) the trends in the security environment in Iraq, and (2) progress in developing Iraqi security forces, as reported by the Departments of Defense (DOD) and State. We also present key questions for congressional oversight, including what political, economic, and security conditions must be achieved before the United States can draw down and withdraw? Why have security conditions continued to deteriorate even as Iraq has met political milestones, increased the number of trained and equipped forces, and increasingly assumed the lead for security? If existing U.S. political, economic, and security measures are not reducing violence in Iraq, what additional measures, if any, will the administration propose for stemming the violence? Since June 2003, the overall security conditions in Iraq have deteriorated and grown more complex, as evidenced by increased numbers of attacks and Sunni/Shi'a sectarian strife, which has grown since the February 2006 bombing in Samarra. As shown in the figure below, attacks against the coalition and its Iraqi partners reached an all time high during July 2006. The deteriorating conditions threaten the progress of U.S. and international efforts to assist Iraq in the political and economic areas. In July 2006, the State Department reported that the recent upturn in violence has hindered efforts to engage with Iraqi partners and noted that a certain level of security was a prerequisite to accomplishing the political and economic conditions necessary for U.S. withdrawal. Moreover, the Sunni insurgency and Shi'a militias have contributed to growing sectarian strife that has resulted in increased numbers of Iraqi civilian deaths and displaced individuals. DOD uses three factors to measure progress in developing capable Iraqi security forces and transferring security responsibilities to the Iraqi government: (1) the number of trained and equipped forces, (2) the number of Iraqi army units and provincial governments that have assumed responsibility for security in specific geographic areas, and (3) the capabilities of operational units, as reported in unit-level and aggregate Transition Readiness Assessments (TRA). Although the State Department reported that the number of trained and equipped Iraqi security forces has increased, these numbers do not address their capabilities. As of August 2006, 115 Iraqi army units had assumed the lead for counterinsurgency operations in specific areas, and one province had assumed control for security. Unit-level TRA reports provide insight into the Iraqi army units' training, equipment, and logistical capabilities. GAO is working with DOD to obtain the unit-level TRA reports. Such information would inform the Congress on the capabilities and needs of Iraq's security forces.

The Results Act is the centerpiece of a statutory framework to improve federal agencies' management activities. The Results Act was designed to focus federal agencies' attention from the amounts of money they spend or the size of their workloads to the results of their programs. Agencies are expected to base goals on their results-oriented missions, develop strategies for achieving their goals, and measure actual performance against the goals. The Results Act requires agencies to consult with the Congress in developing their strategic plans. This gives the Congress the opportunity to help ensure that their missions and goals are focused on results, are consistent with programs' authorizing laws, and are reasonable in light of fiscal constraints. The products of this consultation should be clearer guidance to agencies on their missions and goals and better information to help the Congress choose among programs, consider alternative ways to achieve results, and assess how well agencies are achieving them. fiscal year 1999 budget submissions, which were due to OMB by September 8, 1997. OMB, in turn, is required to include a governmentwide performance plan in the President's fiscal year 1999 budget submission to the Congress. As required by the Results Act, GAO reviewed agencies' progress in implementing the act, including the prospects for agency compliance. VA's August 15, 1997, draft strategic plan represents a significant improvement over the June 1997 draft. The latest version is clearer and easier to follow, more complete, and better organized to focus more on results and less on process. At the same time, VA has still not fully addressed some of the key elements required by the Results Act; the draft plan has a lack of goals focused on the results of VA programs for veterans and their families, such as assisting veterans in readjusting to civilian life; limited discussions of external factors beyond VA's control that could affect its achievement of goals; a lack of program evaluations to support the development of results-oriented goals; and insufficient plans to identify and meet needs to coordinate VA programs with those of other federal agencies. The draft strategic plan, acknowledging that three of these four elements (results-oriented goals, program evaluations, and agency coordination) have not been fully addressed, does plan to address them. VA has indicated that it views strategic planning as a long-term process and intends to continue refining its strategic plan in consultation with the Congress, veterans service organizations, and other stakeholders. Another challenge for VA is to improve its financial and information technology management, so that the agency's ongoing planning efforts under the Results Act will be based on the best possible information. VA's draft strategic plan addresses several financial and information technology issues, such as the need for cost accounting systems for VA programs and the need to improve VA's capital asset planning. results. VA officials indicated that, based on consultations with staff from the House and Senate Veterans' Affairs committees, which included input from GAO, the draft strategic plan would be revised to make it clearer, more complete, and more results-oriented. The August 15, 1997, version reflects significant progress in these areas. Instead of presenting four overall goals, three of which were process-oriented, VA has reorganized its draft strategic plan into two sections. The first section, entitled "Honor, Care, and Compensate Veterans in Recognition of Their Sacrifices for America," is intended to incorporate VA's results-oriented strategic goals. The second section, entitled "Management Strategies," incorporates the three other general goals, related to customer service, workforce development, and taxpayer return on investment. In addition, VA has filled significant gaps in the discussions of program goals. The largest gap in the June 1997 draft was the lack of goals for four of the five major veterans benefit programs. The current plan includes goals for each of these programs, stating them in terms of ensuring that VA benefit programs meet veterans' needs. Finally, the reorganized draft plan increases the emphasis on results. The June 1997 draft appeared to make such process-oriented goals as improving customer service and speeding claims processing equivalent to more results-oriented goals such as improving veterans' health care. In the August 1997 version, the process-oriented goals remain but have been placed in their own process-oriented section supplementing the plan's results orientation. At the same time, VA believes that the process-oriented portions of the plan are important as a guide to VA's management. It considers customer service very important because VA's focus is on providing services to veterans and their families. The Assistant Secretary for Policy and Planning, in written comments on a draft of our July 1997 letter, stated that VA continues to believe "that processes and operations are important to serving veterans and [VA] will continue to place appropriate emphasis on the areas of customer service, workforce development, and management issues." VA also contends that the Results Act does not preclude process-oriented goals from its strategic plan. We agree that many of the process issues VA raises are important to its efficient and effective operation and can be included in VA's strategic plan as long as they are integrated with the plan's primary focus on results. Perhaps the most significant deficiency in VA's draft strategic plan, in both the June 1997 and current versions, is the lack of results-oriented goals for major VA programs, particularly for benefit programs. While discussions of goals for benefit programs have been added to the current version, they are placeholders for results-oriented goals that have not yet been developed. The general goals for 4 of the 5 the major benefit program areas--compensation and pensions, education, vocational rehabilitation, and housing credit assistance--are stated in terms of ensuring that VA is meeting the needs of veterans and their families. The objectives supporting VA's general goal for its compensation and pension area are to (1) evaluate compensation and pension programs to determine their effectiveness in meeting the needs of veterans and their beneficiaries; and (2) modify these programs, as appropriate. For the three other major benefit program areas, the objectives suggest possible results-oriented goals and are supported by strategies aimed at evaluating and improving programs. For example, the objectives under vocational rehabilitation include increasing the number of disabled veterans who acquire and maintain suitable employment and are considered to be rehabilitated. The strategies under this objective include evaluating the vocational rehabilitation needs of eligible veterans and evaluating the effect of VA's vocational rehabilitation program on the quality of participants' lives. VA has noted that developing results-oriented goals will be difficult until program evaluations have been completed. Given the program evaluation time periods stated in the draft strategic plan, which calls for evaluations to continue through fiscal year 2002, results-oriented goals may not be developed for some programs for several years. Another difficulty VA has cited is that, for many VA programs, congressional statements of the program purposes and expected results are vague or nonexistent. VA officials cited VA's medical research and insurance programs as examples of programs with unclear purposes. This is an area where VA and the Congress can make progress in further consultations. individual goals generally did not link demographic changes in the veteran population to VA's goals. VA's current draft has added discussions of the implications of demographic changes on VA programs. For example, VA notes that the death rate for veterans is increasing, which will lead VA to explore various options for meeting increased demands for burials in VA and state veterans' cemeteries. Meanwhile, the goal to ensure that VA's burial programs meet the needs of veterans and their families is accompanied by a detailed list of specific cemetery construction and land acquisition projects and by a specific target for expanding burials in state veterans' cemeteries. The discussion of external factors related to this goal focuses on the Congress' willingness to fund VA's proposed projects and the cooperation of the states in participating in the State Cemetery Grants Program. What is missing in the draft is a link between the projected increase in veteran deaths and the proposed schedule of specific cemetery projects. Similarly, we recently reported that National Cemetery System strategic planning does not tie goals for expanding cemetery capacity to veterans' mortality rates and their preferences for specific burial options. We noted that the goals in VA's June 1997 draft strategic plan were not supported by formal program evaluations. Evaluations can be an important source of information for helping the Congress and others ensure that agency goals are valid and reasonable, providing baselines for agencies to use in developing performance measures and performance goals, and identifying factors likely to affect agency performance. As noted above, VA cites the lack of completed evaluations as a reason for not providing results-oriented goals for many of its programs. The first general goal of VA's plan is to conduct program evaluations over a period of several years. VA plans to identify distinct programs in each of its 10 major program areas and then prioritize evaluations of these programs in consultation with the Congress, veterans' service organizations, and other stakeholders. VA expects to complete this prioritization sometime in fiscal year 1998, complete the highest-priority evaluations by the end of fiscal year 2000, and complete at least one evaluation in each of the 10 major program areas by fiscal year 2003. In our comments on the June 1997 draft strategic plan, we noted that VA has not clearly identified the areas where its programs overlap with those of other federal agencies, nor has it coordinated its strategic planning efforts with those of other agencies. Three areas where such coordination is needed (and the relevant key federal agencies) are employment training (Department of Labor), substance abuse (departments of Education, Health and Human Services, and Housing and Urban Development), and telemedicine (Department of Defense). In addition, we noted that VA relies on other federal agencies for information; for example, VA needs service records from the Department of Defense to help determine whether veterans have service-connected disabilities and to help establish their eligibility for Montgomery G.I. Bill benefits. VA's current draft strategic plan addresses the need to improve coordination with other federal agencies and state governments. This will involve (1) identifying overlaps and links with other federal agencies, (2) enhancing and improving communications links with other agencies, and (3) keeping state directors of veterans' affairs and other state officials apprised of VA benefits and programs and of opportunities for collaboration and coordination. As we noted in our comments on VA's June 1997 draft strategic plan, VA has made progress in financial management and information technology. Like other federal agencies, VA needs accurate and reliable information to support executive branch and congressional decision-making. The "Management Strategies" section of VA's current draft strategic plan addresses some financial management and information technology issues. Since VA has identified the need to devote a portion of its strategic plan to process-oriented goals, it is appropriate that some of these goals should focus on improving its management in these areas. much of its costs were attributable to each of the benefit programs it administers. According to the plan, this system would include two cost accounting systems already in development: VHA's Decision Support System (DSS) and VBA's Activity Based Costing (ABC) system. Another goal in the current draft plan is to establish a VA capital policy that ensures that capital investments, including capital information technology investments, reflect the most efficient and effective use of VA's resources. Achieving this goal involves developing a VA-wide Agency Capital Plan and establishing a VA Capital Investment Board to generate policies for capital investments and to review proposed capital investments based on VA's mission and priorities. Still another goal is designed to address the need for VA-wide information technology management to facilitate VA's ability to function as a unified department. Achieving of this goal involves developing a VA-wide information technology strategic plan and a portfolio of prioritized information technology capital investments. In addition, the plan calls for the promotion of crosscutting VA information technology initiatives in order to improve services to veterans. The draft plan's discussion of information technology addresses one of the information technology issues we have identified as high-risk throughout the federal government--the year-2000 computer problem. Unless corrections are made by January 1, 2000, VA's computers may be unable to cope with dates in 2000, which could prevent VA from making accurate and timely benefit payments to veterans. VA's draft plan includes as a performance goal that full implementation and testing of compliant software (that is, software capable of processing dates beyond 1999) will be completed by October 1999. Mr. Chairman, this completes my testimony this morning. I would be pleased to respond to any questions you or Members of the Subcommittee may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

GAO discussed the draft strategic plan developed by the Department of Veterans Affairs (VA), pursuant to the Government Performance and Results Act of 1993. GAO noted that: (1) VA has made substantial progress in its strategic planning, based in part on consultations with the Congress; (2) however, as with many other agencies, VA's process of developing a plan that meets the requirements of the Results Act is an evolving one that will continue well after the September 30, 1997, deadline for submitting its first strategic plan to the Congress and the Office of Management and Budget (OMB); (3) the August 15, 1997, draft that VA submitted to OMB for review is an improvement over the June 1997 version, because it is easier to follow, places more emphasis on results and less on process, and fills in some major gaps in the June 1997 draft; (4) however, the latest draft strategic plan continues to lack some of the key elements expected under the Results Act; and (5) as with the June 1997 draft, the August 15, 1997, draft lacks results-oriented goals for several major VA programs, lacks a program evaluation schedule, and contains inadequately developed discussions of external factors and the need to coordinate with other federal agencies.

Almost 537 million general-purpose credit cards were in circulation in the United States as of the end of 2012.some credit card issuers have offered college affinity cards, which are governed by contracts (agreements) between the issuer and an organization such as a college, university, or alumni association. The cards typically bear the organization's logo. In return, the issuer makes payments to the organization based on factors such as the number of cards issued or the amount charged to the cards. College affinity cards Since at least the early 1990s, can be an effective way for issuers to market credit cards because college alumni often have an attachment to their schools. In addition, some credit card issuers, including banks and credit unions, offer college student credit cards--cards that are specifically labeled and intended for college students. As of November 2013, 6 of the 10 largest credit card issuers offered these cards, such as Citibank's Citi Dividend Card for College Students and Bank of America's BankAmericard Cash Rewards for Students. Issuers use these cards to help build a base of customers who may continue using the issuers' credit cards after graduation. The terms and conditions of college student credit cards may be somewhat different from those of other credit cards--for example, they may have lower initial credit limits. card issuers and creditors not offer a student any tangible item to induce the student to apply for or participate in a credit card on or near the campus of the institution of higher education or at an event sponsored by or related to an institution of higher education. The act also requires credit card issuers to submit to CFPB each year the terms and conditions of any college affinity credit card agreement between the issuer and an institution of higher education or an affiliated organization in effect at any time during the preceding calendar year. In addition to a copy of any college credit card agreement to which the issuer was a party, issuers also must submit summary information for each agreement, such as the number of cardholders covered with accounts open at year-end (regardless of when the account was opened) and the payments made by the issuer to the institution or organization during the year. CFPB must submit to Congress, and make available to the public, an annual report that contains the information submitted by the card issuers to CFPB.annual report, which covered the 2012 calendar year. Since the CARD Act was passed in 2009, the numbers of college affinity card agreements and cardholders have decreased, according to data from the Federal Reserve and CFPB. From 2009 through 2012, the number of card agreements declined from 1,045 to 617 (41 percent). Similarly, the total number of cardholders for college affinity cards declined by 40 percent (see table 1). In 2012, 43 percent of the 617 college affinity card agreements were with alumni associations and 28 percent were with a college, university, or other institution of higher education (see fig 1). Among these organization types, the greatest decline in the number of card agreements since 2009 was for institutions of higher education (see fig. 2). In contrast, the largest decline in the number of overall cardholders occurred within alumni associations, while "other" organizations (a category that includes fraternities, sororities, and professional or trade organizations) had the largest decrease in the number of new cardholders (see table 2). In 2012, 23 credit card issuers offered college affinity cards.issuer--FIA Card Services, N.A., a subsidiary of Bank of America--had 412 of the 617 reported agreements (67 percent of the market). However, as seen in figure 3, the company's market share has dropped since 2009. Most affinity card issuers had a small number of card agreements--for example, the majority of issuers had one or two affinity card agreements (see table 3). The payments that card issuers made to institutions with which they had affinity card agreements have decreased since 2009, consistent with the decline in the number of agreements and cardholders.table 4, affinity card issuers made payments of $50.4 million to participating institutions in 2012. The median payment in 2012 was about $5,000, while the average (mean) was about $82,000, with alumni associations receiving the highest average payment. Total payments declined by 40 percent between 2009 and 2012. The largest decline in payments was to alumni associations, while institutions of higher education had the largest decline in affinity card agreements over this period. However, during that period, the average payment to institutions of higher education increased by about $13,200, while the average payment to alumni associations decreased by about $13,700. The University of Southern California, through its agreement with FIA Card Services, received about $1.5 million, the largest payment to an institution of higher education in 2012. Among all the organizations, the Penn State Alumni Association received the largest payment in 2012-- about $2.7 million, from FIA Card Services. In contrast, 22 percent of the agreements did not result in any payments to organizations in 2012. College affinity card agreements serve as contracts between the card issuer and the participating organization. Using a data collection instrument, we reviewed 39 agreements filed with CFPB, which represented about 38 percent of all cardholders covered by college affinity card agreements in 2011. The agreements typically covered such things as the card's target market, marketing practices, and payments to the participating organization. As shown in figure 4, the length of time that the card agreements had been in effect varied. The oldest originally was signed in January 1991 and the most recent in December 2011. Many of the agreements had been amended or received addendums since they were first adopted, which in some cases extended the existing terms of the original agreement. In addition to credit cards, 30 of the 39 agreements included other financial products, such as deposit and checking accounts, automobile and home loans, and investment accounts. Some agreements included exclusivity provisions that restricted the organization from offering its members these products except in conjunction with the current affinity card issuer. The agreements identified which potential cardholders the issuer could solicit and how. Thirty-seven of the 39 reviewed agreements identified specific target customers for the college affinity card. Most often, issuers targeted alumni for the cards, but two-thirds of the agreements also allowed the issuers to solicit undergraduate students (see table 5).of the agreements identified multiple target populations for card solicitations. All but two of the 39 reviewed agreements included provisions requiring the organization to provide a list of its members to the issuer for marketing purposes. However, two-thirds of the agreements included mechanisms allowing the organizations to exclude members who requested that they not receive third-party solicitations. Nine of the reviewed agreements also included restrictions on soliciting student members, generally by restricting their inclusion on the provided lists. The agreements allowed card issuers to solicit potential cardholders through a variety of methods (see table 6). More than 80 percent of the reviewed agreements allowed issuers to use telemarketing, website links (such as from the alumni association's website), direct mail, and print advertisements (such as in sport programs or member magazines). All of the reviewed agreements allowed the issuers to use more than one of the different methods that we tracked. All of the reviewed agreements included provisions allowing the card issuers to use the trademark or logo of the institution of higher education or organization. In some instances, the issuer could put these trademarks on gifts for individuals who completed applications or on other items. All but two of the agreements included provisions for obtaining prior approval of marketing materials from the organization or institution (to help ensure that the card issuer used the trademark or logo appropriately). All but one of the 39 reviewed agreements contained information about the payment arrangement between the issuer and the affiliated organization or institution of higher education. As shown in table 7, issuers most frequently provided payments to the organization or institution based on the number of new and open cards and the amount of money charged to the cards. Many included bonus payments for accounts that the organization or institution originated (as opposed to ones originated through the issuer), and three included bonus payments if the number of cardholders exceeded a threshold. Many of the agreements also included a guaranteed payment to the organization or institution that was not based on the number of cardholders or amount charged. The reviewed agreements sometimes contained payments based on other related products or included broader financial support to the organization or institution. For example, some payments under the agreements were based on balances of certificates of deposit or loans provided. In some instances, the reviewed agreements included support for scholarships or building renovations. About one-quarter of the 39 reviewed agreements included explicit consumer or cardholder protections or service standards. The consumer protections included restrictions on how often and how issuers could solicit group members, as well as restrictions on the sharing of the member database or student information with third parties. Two of the reviewed agreements also included metrics to assess servicing standards. For example, one agreement with an alumni association specified how quickly the issuer would answer and resolve calls and also required that the credit card terms and features (such as fees and annual percentage rates) be "best in class" when compared with a set of identified peer institutions. Additionally, most of the reviewed agreements included provisions allowing the issuer to make periodic adjustments to the card program and its terms and features. According to available data and representatives of card issuers and affiliated organizations, marketing of college affinity cards and college student credit cards directly to students appears to have declined. As of 2013, college affinity cards were not being marketed directly to students, according to representatives of issuers and affiliated organizations with whom we spoke. Four large issuers of affinity cards, representing 91 percent of the market (as measured by 2012 cardholders), said they did not actively market these cards to students-- that is, they did not market on campus or specifically target students through direct mail, e-mail, print or broadcast media, or their other marketing venues. Representatives of five affiliated organizations with affinity credit card agreements corroborated these statements; they told us that the card issuers no longer marketed their affinity cards to students, focusing instead on alumni. The issuers noted that it was still possible that some students applied for college affinity cards because they would see the same marketing as the general public--such as advertising at bank branches, sporting events, or on issuer websites. Graduate students also may receive card solicitations from their undergraduate schools or alumni organizations. Officials from three affiliated organizations estimated that the percentage of their current cardholders who still were students was less than 3 percent and that these percentages had been declining. Before the enactment of the CARD Act in 2009, it was not uncommon for college affinity cards to be marketed to students. Representatives of four organizations with college affinity cards told us that at one time their cards were targeted to students, and, as discussed earlier, card agreements often specified students as a target market and required sharing student contact information for marketing purposes. However, many of the new agreements--and amendments to existing agreements--we reviewed that were put in place after 2009 expressly limit or restrict the marketing of college affinity cards to students. Views diverged on the extent to which the CARD Act was responsible for the decline in marketing of college affinity cards to students. One card issuer told us the act had little influence because the company had begun reducing marketing cards to students before the statute was enacted. A second issuer said it did not market to students because it sought more affluent customers, but it acknowledged the CARD Act also played a role by making it more difficult and less efficient to market to students--for example, placing restrictions on making prescreened credit offers to those under 21. Representatives of three organizations with college affinity cards told us they believed the CARD Act played a significant role in the decline of card marketing to students. Institutions of higher education also may have influenced this decline--for example, representatives of one college told us that undergraduate students were not included in its program or targeted for marketing, largely because the college did not want to be seen as pushing credit cards on its students. Marketing of college affinity cards overall--not just to students--has declined in recent years as many large issuers have diminished their presence in the marketplace. As discussed earlier, the number of agreements and cardholders declined by 41 percent and 40 percent, respectively, from 2009 through 2012. Three of the four affinity card issuers told us they were not actively seeking additional agreements. Specifically, one issuer said it was exiting the marketplace as existing agreements expired, one said it was evaluating the performance of its existing portfolio before deciding a future direction, and one said it was evaluating each agreement as it expired and did not regard its college affinity card business as strategically important. The fourth issuer noted that while it was seeking new agreements, it had ended many of its existing agreements because it did not see the program being sustainable over the long term. Although some card agreements provide payments to the affiliated organizations based on the number of card accounts, organizations told us they generally played a limited role in marketing the cards to their members. Three of the five organizations had sent e-mails to their members promoting the cards. One of these organizations told us it would like to do additional marketing of its own but that the issuer had been reluctant to permit this. Two organizations were concerned that participation in marketing could affect the tax status of their payments under the agreements. Active marketing of college student credit cards appears to have declined in recent years. We spoke with five issuers of these cards, which represented 39 percent of all general-purpose credit cards in circulation as of December 2012. All the issuers told us that as of 2013, they did not rely on active marketing to students to solicit potential cardholders. Active marketing includes methods such as direct mail, telemarketing, or e-mail. Instead, interested students could learn about the cards through issuer or third-party websites and bank branch offices. Representatives of affiliated organizations with whom we spoke confirmed they had observed a reduction in the marketing of credit cards to students in recent years. For example, they noted that issuers no longer conducted on-campus solicitations at sporting events and other university functions, as they had in the past. Two organizations told us they believed the decline in marketing of college student credit cards began by the early or mid-2000s, while three others said it began around 2009, when the CARD Act was enacted. According to annual surveys of college students conducted by Student Monitor, a market research firm specializing in the college student market, the number of students obtaining a credit card in response to a solicitation through direct mail or on campus has dropped significantly in recent years. The proportion of students reporting that they obtained a credit card as a result of a direct mail solicitation declined from 36 percent in 2000 to 6 percent in 2013 (see fig. 5). In 2013, students reported receiving significantly fewer mail (1.6) and e-mail solicitations (1.4) in a typical month than respondents in 2007 (5.6 and 9.1, respectively). Two issuers told us the decline in direct mail resulted in part from restrictions in the CARD Act on prescreened credit offers to those under 21. In 2013, fewer than 1 percent of students obtained their credit card as a result of an on-campus display or a company representative on campus (a practice known as tabling), as compared with 15 percent and 6 percent, respectively, in 2000. Two issuers told us they still used on-campus marketing but that they focused on their other financial products, such as checking accounts, and no longer accepted credit card applications at on- campus events. According to Student Monitor, more students have been acquiring their credit cards by initiating contact with the card issuer. For example, in 2013, 48 percent of students receiving a credit card applied in person at a bank (often the one with which they already had a deposit account), compared with 14 percent in 2000. Twenty-four percent received a card by initiating contact through the Internet or by telephone, compared with approximately 8 percent in 2000. Data are not available to definitively determine the effect that affinity cards and college student cards have had on student credit card debt. The effect of affinity cards may be limited because, as seen earlier, fewer students appear to hold these cards. The effect of college student cards is difficult to determine because the available data cover credit cards in general rather than college student cards in particular. However, students' overall use of credit cards appears to have declined in recent years. Publicly available data do not allow a clear determination of the impact of college affinity and college student cards on student credit card debt. One limiting factor is that card issuers do not always ask on applications or know which of their cardholders are students. Additionally, while some data exist about the age of credit cardholders, age is not a reliable proxy for student status, especially as the age of college students has increased in recent years. Multiple studies have examined the factors influencing credit card use among students, but none that we identified focused specifically on the impact of college affinity or college student credit cards on student debt. For example, a 2012 study that examined the effect of the CARD Act reviewed affinity card agreements and surveyed college students on their use of credit cards, but it did not seek to determine the impact of particular types of credit cards. Similarly, surveys on student credit card use by Sallie Mae (a financial services company specializing in education) and Student Monitor, discussed later in this report, asked respondents about general credit card use but not specifically about affinity or college student credit cards. The effect of affinity cards on student credit card debt may be limited because fewer students appear to hold these cards, which generally have not been marketed specifically to college students since at least 2009. Representatives of two organizations with affinity cards estimated that 1 percent or less of their current cardholders were students, while a third organization estimated that 3 percent were students. The proportion of affinity cards held by students appears to have declined since the cards' introduction. For example, one organization estimated that in the past, up to 15 percent of its cardholders were students, but that virtually none were at present. However, the exact prevalence of students holding affinity credit cards is not known. While the CARD Act requires issuers to submit information on college affinity card programs, including the number of cardholders, to CFPB, issuers are not required to report on the number of student cardholders. Three affinity card issuers with whom we spoke said that they could not identify which cardholders were students, or they considered cardholder information proprietary and therefore declined to share the information. We did not identify data that would allow a determination of the effect of college student credit cards in particular--as distinct from credit cards in general--on student credit card debt. Representatives of CFPB, researchers, and organizations that have studied credit card use told us that they were not aware of research or data sets specific to college student credit cards. While banks file quarterly reports with regulators that contain information on the banks' credit card portfolios, these reports do not differentiate by type of card. Similarly, The Nilson Report, an industry trade journal that reports on credit cards, has not issued a report specific to student credit cards in more than 10 years. Four issuers of college student credit cards told us they were unable to share specific information on these cards or the student holders of their other credit cards because the information was not available or they considered such information proprietary. Even if comprehensive data on college student credit cards existed, the data's value for understanding student credit card debt would be limited because many cardholders could continue to use their student cards after they ceased being students. While data specific to college affinity and college student credit cards are limited, available evidence suggests college students' use of credit cards overall has declined in recent years. Annual surveys of college students conducted by Sallie Mae and Student Monitor represent two primary sources of information on student credit card use. The two studies suggest that the number of students owning credit cards declined in recent years. Student Monitor found that the proportion of college students holding credit cards declined from 53 percent in 2004 to 33 percent in 2013. owning credit cards decreased from 49 percent in 2010 (the first year it began collecting this information) to 29 percent in 2013 (see fig. 6). In the Student Monitor study, 72 percent of students who had a credit card in their own name in 2013 owned a single card, 21 percent had two credit cards, and 8 percent had three or more credit cards. Student Monitor, Financial Services - Spring 2013 (Ridgewood, N.J.: June 2013). Overall credit card ownership includes cards the students own and those for which they have permission to use (typically, parents' cards). The number of students who had a credit card in their name similarly declined--from 46 percent in 2004 to 26 percent in 2013. See Student Monitor, 2013. Forty-five percent of all students with a credit card in their name charged $100 or less each month in 2013, according to Student Monitor. Fifty-nine percent used their card fewer than six times a month, including 8 percent who indicated that they did not usually use their credit card each month. On average, students charged $171 monthly, a decrease of 8 percent from 2012. Sallie Mae reported that students' median reported balance for all cardholders was $179 in 2013, as compared with $289 in 2011. The survey also found that 2 percent of all students in 2013 with a credit card had a combined outstanding balance of more than $4,000, while 29 percent had a zero balance. Student Monitor found that the 28 percent of respondents who carried a balance had a median outstanding balance of $136. Credit limits for credit cards owned by students usually are lower than those for the general population and have been decreasing. In 2010, the median credit limit for all bank-type general credit cards was $15,000.contrast, Student Monitor found that more than 60 percent of credit cards owned by students had credit limits of $500 or less, and 80 percent were $1,000 or less. In 2000, 27 percent of respondents had credit limits of $1,000 or less, and 11 percent had limits of at least $5,000. However, because students may have multiple credit cards, their total credit card debt can be higher than the credit limit of any one card. Several studies provide information on college students' payment patterns for credit cards: Payment amount. Student Monitor found that 72 percent of students reported paying their outstanding charges in full each month in 2013. Sallie Mae found that 52 percent of student respondents in 2013 paid in full each month in the previous year, and that 10 percent of students typically made only the minimum payment. Parental responsibility. The Student Monitor and Sallie Mae studies found that the college student, rather than the parent, was most often responsible for making credit card payments (79 percent in the Student Monitor study and 92 percent in the Sallie Mae study). Late payment fees. One quarter of students in the 2013 Student Monitor study reported paying a late payment fee at least once since acquiring a credit card, with almost half of that group incurring more than one late fee. Delinquent payment. Cardholders under 21 were more likely to experience minor delinquencies (30 or 60 days past due) than older cardholders, according to the Federal Reserve Bank of Richmond study. At the same time, young cardholders were substantially less likely to experience serious delinquency (90 days past due and longer). The study also found that cardholders who got their credit cards earlier in life were less likely to experience a serious default later in life. We provided a draft of this report to CFPB and the Federal Reserve. We incorporated technical comments from these agencies as appropriate. We are sending copies of this report to the appropriate congressional committees, CFPB, the Federal Reserve, and other interested parties. In addition, the report will be available at no charge on our website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-8678 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix II. This report examines (1) the trends associated with and characteristics of college affinity card agreements, (2) the extent of marketing for college affinity and college student credit cards, and (3) what is known about the effect of the use of affinity cards and student credit cards on student credit card debt. We use "college affinity card" to refer to a credit card issued in conjunction with an agreement between a credit card issuer and an institution of higher education or an affiliated organization (such as an alumni association or foundation). We use "college student credit card" to refer to a credit card established for and targeted to college students. To identify the trends and general characteristics associated with college affinity card agreements, we reviewed the 2010 and 2011 Report to the Congress on College Credit Card Agreements, which the Board of Governors of the Federal Reserve System (Federal Reserve) issued, and the 2012 and 2013 College Credit Card Agreements: Annual Report to Congress, which the Bureau of Consumer Financial Protection (also known as the Consumer Financial Protection Bureau or CFPB) issued. These reports provide summary information, such as the total number of agreements in effect and number of accounts open at the end of the year. To determine the characteristics of the agreements, we first reviewed and analyzed affinity card agreements between issuers and schools or affiliated organizations from calendar years 2009-2012. We downloaded information for all those agreements in effect during those years from public databases managed by the Federal Reserve and CFPB. We analyzed the agreements to identify general trends and characteristics. We assessed these data by interviewing Federal Reserve and CFPB staff knowledgeable about the data and checking the data for illogical values or obvious errors. We found the data to be sufficiently reliable for describing the general characteristics and trends of the affinity card marketplace. Because we were most interested in current agreements, we focused our analysis on the agreements from 2011, the most recent year for which information was available. Twenty providers issued these agreements. For a more thorough analysis, we selected a nonprobability sample of 39 agreements from 574 agreements identified as being in effect as of January 1, 2012. We determined the sample by applying three criteria to the agreements. First, we included the 25 largest agreements overall, as measured by the number of cardholders. Second, we included the largest agreement from each issuer that provided affinity credit cards. Third, we included the five largest agreements with institutions of higher education, as measured by the number of cardholders under those agreements. These numbers do not add to 39 because agreements could meet criteria for inclusion under more than one category. We selected these criteria because we wanted to capture a large proportion of affinity cardholders as well as any potential variation among issuers or organizational type. We included the five largest institutions of higher education because we anticipated that those agreements could be more likely to include students as cardholders, a topic of specific interest. See table 8 for the list of reviewed agreements. Collectively, the agreements included in our sample covered about 38 percent of all cardholders in 2011. Twenty-six of the reviewed agreements were with alumni associations, 8 were with institutions of higher education, 3 were with foundations, and 2 were with other organizations. We reviewed these agreements and collected information using a data collection instrument (DCI) to gather characteristics such as their effective date, duration, allowed marketing practices and target populations, payments to the organization, consumer protections, and service standards. Findings from this limited review of 39 agreements cannot be generalized to the overall population of agreements in 2011. We developed the DCI after reviewing some of the 2011 agreements, focusing on items such as the scope, consumer protections, marketing practices, payments, terms, and fees. We converted the DCI to a pdf format for direct data entry. Three team members entered information on two agreements each using the DCI and discussed their experiences. We revised some questions for clarity and deleted others to avoid duplication. This version of the DCI was reviewed by a GAO survey specialist and an expert who surveyed students regarding their credit card use and conducted a similar review of the credit card agreements, and we incorporated minor changes. We further clarified that the review of agreements would focus on the most recent full agreement or amendment and those items that were still in effect as of January 1, 2012. Two team members then entered information about the agreements into the DCI. We verified our coding by comparing the original coder's DCI responses with those of the second coder. For each comparison set, we compared the coding for 59 data elements and found discrepancies in fewer than 10 percent of the entries. This was determined to ensure a base level of reliability in the information collected. While the results of our review of the 39 agreements cannot be projected nationwide, they provide context and information related to the contents of the 39 agreements. To address the second and third objectives, we reviewed documents and interviewed representatives of credit card issuers, organizations and schools with affinity card agreements, and federal agencies, as well as academics and other individuals who have studied credit cards and their use by students. We reviewed studies--such as those by Sallie Mae (a financial services company specializing in education), Student Monitor (a market research firm that specializes in the college student market), and U.S. Public Interest Research Group (a consumer advocacy organization)--on student credit card use. We identified these studies through the Econ Lit database and general Internet searches using terms such as "college credit cards." We focused on several years of Sallie Mae's How America Pays for College studies and on Student Monitor's Financial Services - Spring 2013 report, as well as recent reports by CFPB and the Federal Reserve Bank of Richmond. We assessed the quality of the survey data by interviewing Student Monitor and Sallie Mae officials knowledgeable about the data and checked the data for illogical values or obvious errors. We found the data to be of sufficient quality and reliability for providing general information on student credit card use. According to the Student Monitor, the estimates from the 2013 study had a 2.4 percent margin of error at the 95 percent confidence level. Because surveys are based on self-reporting of payment behaviors and estimated credit card debt levels, they may be prone to biases and not accurately represent actual behaviors and debt levels. The surveys were not designed to verify that information. Some researchers maintain that respondents sometimes underreport the quantity or level of characteristics that could be considered unflattering, such as the amount of outstanding credit card debt. We also reviewed marketing materials issuers used to market the cards. Lastly, we reviewed provisions of the Credit Card Accountability Responsibility and Disclosure Act of 2009 related to affinity credit cards and credit card use by those under 21. We interviewed representatives of four issuers of affinity credit cards-- Bank of America (FIA Services), Capital One, Chase, and U.S. Bank-- that had 91 percent of such cardholders in 2012. We also interviewed representatives of the five largest general credit card issuers, measured We discussed by 2011 portfolio size, as reported by The Nilson Report. with these issuers--American Express, Bank of America (FIA Services), Chase, Citibank, and Wells Fargo--any student credit cards currently or previously issued. To get a broader perspective on the use of these cards by financial institutions, we also interviewed representatives of three industry trade groups--the American Bankers Association, the Consumer Bankers Association, and the Credit Union National Association. We also interviewed representatives of six organizations and schools to discuss their affinity credit card relationships--the Association of Former Students of Texas A&M University, Boston University Alumni Association, Georgia Tech Alumni Association, Golden Key International Honour Society, Penn State Alumni Association, and Washington University. These six organizations were chosen because they had among the largest number of affinity cards (as determined by number of cardholders), had cards from the three affinity card issuers with the most agreements, and included one organization (Washington University) that had previously chosen to end its affinity agreement. To get a broader perspective, we also interviewed representatives of the National Association of College and University Business Officers. In addition, we interviewed representatives of CFPB, the Department of Education, the Federal Reserve, and the Office of the Comptroller of the Currency to discuss their oversight of affinity and student credit cards and trends they have observed in the industry. We talked with two academics who have studied and written about student credit card use, as well as representatives of Sallie Mae, Student Monitor, and the U.S. Public Interest Research Group. The Nilson Report is a twice-monthly trade journal that provides information on companies, products, and services from the payments industry. We conducted this performance audit from December 2012 to February 2014 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, individuals making key contributions to this report were Jason Bromberg, Assistant Director; Amy Anderson; Kevin Averyt; Daniel Newman; Christopher H. Schmitt; and Michelle St. Pierre. In addition, key support was provided by Bethany M. Benitez; Kenneth Bombara; William Chatlos; Barbara Roesmann; and Jena Sinkfield.

Institutions of higher education, alumni groups, and other affiliated organizations may enter into agreements with credit card issuers for "college affinity cards," in which issuers use the institution's name or logo in exchange for payments. Separately, some credit card issuers offer "college student credit cards," which are expressly targeted to students. Partly in response to concerns about card issuer practices and rising student credit card debt, Congress passed the Credit Card Accountability Responsibility and Disclosure Act of 2009. The act includes consumer protections and requires disclosures specifically for consumers under the age of 21, including limits to on-campus credit card marketing and requirements for public disclosure of affinity card agreements. The act mandates that GAO review these agreements and assess their effect on student credit card debt. This report examines (1) trends associated with and characteristics of college affinity card agreements, (2) the extent of marketing for college affinity cards and college student credit cards, and (3) what is known about the effect of use of these cards on student credit card debt. GAO analyzed data from the Federal Reserve and CFPB, including a sample of 39 affinity agreements filed by the issuers. GAO also analyzed data on student credit card use or indebtedness, and interviewed officials from federal agencies, credit card issuers, and affiliated organizations. Trends associated with college affinity card agreements include fewer agreements and cardholders and declining payments, according to data GAO analyzed from the Board of Governors of the Federal Reserve System (Federal Reserve) and the Bureau of Consumer Financial Protection (CFPB). The number of affinity card agreements declined from 1,045 in 2009 to 617 in 2012 (41 percent). More than 70 percent of the agreements in 2012 were with institutions of higher education or alumni organizations, and one issuer--FIA Card Services, a subsidiary of Bank of America--had 67 percent of all agreements. Affinity card issuers paid $50.4 million to all organizations in 2012, 40 percent less than in 2009. In most cases, payments were based on numbers of cardholders and the amount spent on the cards. The card agreements covered contractual obligations related to such things as marketing practices, target populations, use of the organization's logo or trademark, terms of payment, and, in some cases, service standards. Student-focused marketing of affinity and student cards on campus appears to have declined. Four large affinity card issuers GAO interviewed (representing 91 percent of cardholders) said that they primarily targeted alumni and no longer marketed affinity cards directly to students. In interviews with GAO, institutions of higher education and affiliated organizations agreed that affinity card marketing directly to students had ceased. In addition, five of the nine largest overall credit card issuers that also issue college student credit cards told GAO they no longer actively marketed these cards (such as through direct mail, e-mail, or on-campus activity), but rather relied upon websites and bank branches. Representatives of five institutions with large affinity card agreements told GAO that they generally noticed a decline in on-campus credit card marketing in recent years. Consistent with these observations, available data show a decline in card solicitations to students in recent years. For example, a survey of students in 2013 by Student Monitor, a research firm, found that 6 percent of students reported obtaining a credit card as a result of a direct mail solicitation, compared with 36 percent in 2000. Data are not available to definitively determine the effect that affinity cards and college student credit cards have had on student credit card debt. For affinity cards, the effect may be limited because fewer students appear to hold such cards. For college student credit cards, the effect is difficult to determine because data are available for credit cards in general but not for student credit cards in particular. However, students' overall use of credit cards appears to have declined in recent years. For example, Student Monitor reported 33 percent of students owned credit cards in 2013 versus 53 percent in 2004, a trend corroborated by several other studies that GAO identified. But Student Monitor found that students with credit cards in their names increasingly obtained the cards before starting college. In addition, it found that in 2013, students charged an average of $171 monthly on their cards, 80 percent of the cards had a credit limit of $1,000 or less, and 72 percent of students said they paid their outstanding charges in full each month. Student Monitor also reported that one quarter of students in 2013 paid a late payment fee at least once since they acquired the credit card, with almost half of those paying more than once. GAO makes no recommendations in this report.

Guam and CNMI natives are U.S. citizens, and many serve in the U.S. military. Upon discharge from the U.S. military, veterans, based on their eligibility, can obtain health care at VA facilities or from non-VA providers through VA sharing agreements. Guam is a 212-square-mile island located roughly 6,000 miles west of the continental United States and 1,500 miles southeast of Japan. Guam was ceded to the United States in 1898 and became a territory in 1950. Since its cession, it has had important U.S. military significance, given its strategic location in the Pacific Ocean. In 1995, the population of Guam was estimated at 149,249. As of fiscal year 1997, there were about 9,400 veterans living on Guam and CNMI and about 20,000 military beneficiaries living on Guam. CNMI is a self-governing commonwealth of the United States. The people of CNMI were granted U.S. citizenship in 1986. CNMI consists of 14 islands with a total land area of about 184 square miles; its main island of Saipan is located about 100 miles northeast of Guam. In 1995, CNMI's population was estimated at 59,913 persons. While CNMI is currently considered part of VA's domestic program, the Director of VA's Health Administration Center, which administers the Foreign Medical Program, recently requested a legal opinion from VA's General Counsel to determine whether veterans residing in CNMI are entitled to benefits under VA's domestic program or whether they should be covered by VA's Foreign Medical Program. At the time our report was issued, however, VA's General Counsel had not yet made a determination on the legal status of veterans residing on CNMI. Figure 1 illustrates the location of Guam and CNMI in relation to the U.S. mainland and Japan. VA provides health care services to its veterans on a priority basis, depending on factors such as the presence and extent of a service-connected disability, income level, duration of military service, and type of discharge from the military. VA assigns each veteran to one of seven priority groups it established for providing health care: (1) veterans with service-connected disabilities rated at 50 percent or higher; (2) veterans with service-connected disabilities rated at 30 or 40 percent; (3) former prisoners of war and veterans with service-connected disabilities rated at 10 or 20 percent; (4) catastrophically disabled veterans and veterans receiving increased nonservice-connected disability pensions because they are housebound or need the aid and attendance of another person to accomplish the activities of daily life; (5) veterans unable to defray the cost of medical care; (6) all other veterans in the so-called "core" group, including veterans of World War I and veterans with a priority for care based on presumed environmental exposure; and (7) all other veterans. VA recently implemented a change that restricted access to VA health care for some veterans in the Pacific region. In October 1997, VA began phasing out the medical care offered to Pacific region veterans in priority group 7--veterans who have no compensable service-connected disabilities and annual incomes above the statutory threshold. This change affected veterans residing in VA's Pacific Islands region, including about 30 veterans on Guam. According to VA officials, this change was made as a result of increasing medical costs and declining budgets; these officials stated that VA needed to make this change in order to continue serving Pacific region veterans with service-connected disabilities. In 1996, VA created 22 Veterans Integrated Service Networks (VISN) to serve as the basic budgetary and decisionmaking units in VA's health care system for veterans within their geographic boundaries. VISN-21 has geographic responsibility for Northern California and VA's Pacific Islands region. It relies on the VA Medical and Regional Office Center (VAMROC)--located in Honolulu, Hawaii--to oversee health care and other veterans' benefits for veterans living in the Pacific Islands region of Guam, CNMI, the Hawaiian Islands, and American Samoa. In addition to its outpatient clinic on Guam, VA has a sharing agreement with the U.S. Naval Hospital to provide inpatient, specialty outpatient, and ancillary health care services to veterans. The U.S. Naval Hospital opened on Guam in 1954. Its primary mission is to provide medical support to forward-deployed military personnel and U.S. ships in the Pacific and to respond to wartime medical casualties. It also responds to medical emergencies and disasters, such as caring for typhoon victims and survivors of the recent Korean Airlines plane crash on Guam. In 1996, responding to a congressional mandate, the U.S. Navy studied the possibility of establishing a VA inpatient facility within the U.S. Naval Hospital on Guam to serve the health care needs of veterans. The Navy analyzed VA inpatient admissions at the U.S. Naval Hospital from fiscal years 1992 through 1995 and determined that, on average, less than one VA beneficiary received inpatient care at the hospital each day. The Navy also found that these few patients were integrated into normal hospital operations and were cared for in the hospital location most appropriate to their medical condition. The Navy concluded that VA inpatient workload data did not support the establishment of a veterans' inpatient facility at the U.S. Naval Hospital. (See app. II for the March 1996 Navy report.) Veterans residing on Guam and CNMI receive VA health care through a network of providers, including outpatient care provided through the VA clinic, inpatient and specialty care provided at the U.S. Naval Hospital, and other specialty health care through Guam's private sector. When certain care, such as cardiac care, is not available on Guam, veterans are sent via aeromedical evacuations to VA, military, or private hospitals in Hawaii or the continental United States. Although veterans we spoke with on Guam would prefer that the U.S. Naval Hospital provide cardiac care to avoid medical evacuations, the annual cardiac workload does not meet DOD's minimum workload requirement for this specialty. According to DOD officials, this requirement is needed to maintain the skill level of cardiac specialists and ensure that quality of care is not compromised. Veterans seeking health care on Guam or CNMI typically enter the VA health care system through VA's outpatient clinic. If they cannot receive the needed treatment there, they are referred to one of several providers, depending on the type and availability of care needed. According to VAMROC records and officials, during fiscal years 1995 through 1997, VA spent an average of $1.2 million per year to provide health care to Guam and CNMI veterans. The VA outpatient clinic is staffed by one full-time internal medicine physician, one part-time psychiatrist under contract to VA, one full-time psychiatric clinical nurse, and two administrative staff. As the primary point of entry for veterans seeking medical care, the clinic conducts eligibility determinations and provides outpatient services, such as primary care and psychiatric treatment. According to veteran satisfaction surveys from 1995 through 1997, nearly all veterans were very or extremely satisfied with VA care at the clinic. Over the past 3 years, the number of veterans seeking care through VA's outpatient clinic on Guam has increased by 24 percent--from 562 veterans in fiscal year 1995 to 697 in fiscal year 1997. According to VA's outpatient clinic administrator, this increase is partially due to increased outreach by VA and veteran service organizations on Guam to inform veterans of available health care and encourage them to use the clinic. When veterans on Guam or CNMI require inpatient, specialty outpatient, or ancillary health care services, such as general surgery, preventive medicine, or pharmacy, VA refers them to the U.S. Naval Hospital. In emergency situations, veterans may be treated in or directly admitted to the hospital. During fiscal years 1995, 1996, and 1997, the number of veteran inpatient admissions to the U.S. Naval Hospital were 43, 42, and 36, respectively, representing an average of less than one veteran inpatient admission per week. The hospital's current total bed capacity is 146 beds (29 active and 117 inactive), with an expanded wartime capacity of 266. The hospital currently provides a number of surgical, medical, and ancillary services. (See table 1.) The U.S. Naval Hospital on Guam, in some instances, also uses telemedicine as a way to enhance the health care it provides to both military beneficiaries and veterans. Telemedicine is used to transfer patient data--via text, image, and video--among DOD military facilities. The U.S. Naval Hospital is participating in telemedicine with Tripler Army Medical Center in Hawaii in areas such as cancer tumor diagnosis, telepathology, and teleradiology. For example, U.S. Naval Hospital and Tripler physicians meet weekly via teleconferencing to discuss medical cases for U.S. Naval Hospital patients with tumors and examine possible treatment options using current data, which are exchanged over a computer network. If VA's outpatient clinic or the U.S. Naval Hospital cannot readily provide care to a veteran, VA may refer the veteran to the private medical sector on Guam for treatment. For example, VA occasionally refers veterans to physicians on Guam for ear, nose, and throat care because the demand for this care is high and the U.S. Naval Hospital's outpatient specialty clinic sometimes does not have an adequate number of physicians available to treat these conditions. In addition, the U.S. Naval Hospital shares ancillary services such as magnetic resonance imaging and other specialized equipment with the island's one private hospital, Guam Memorial Hospital. When veterans require health care that is not available on Guam, VA will send them (as DOD does for its military beneficiaries) via a military or commercial aircraft to a VA, military, or private hospital in Hawaii or the continental United States. Regularly scheduled military evacuation flights are provided twice per week from Guam to Hawaii or the continental United States. Because of the routing military evacuation aircraft follow, it can take over 24 hours for the veteran to reach the destination; however, if the condition requires immediate medical attention, a special military medical evacuation can be arranged. In addition to military aircraft flights, medical evacuations via commercial airlines are available to veterans on Guam. For example, according to VA's outpatient clinic administrator, a commercial airline is used when a veteran does not possess a U.S. passport that would allow entry into Japan, which is necessary on military medical evacuation flights. On nonstop commercial flights, it takes about 7 hours for veterans to reach Hawaii from Guam. During our discussions with representatives of veterans organizations about VA health care on Guam, they told us that medical evacuations were inconvenient because of the lengthy flight times associated with medical evacuations and the time evacuees spent away from their families. These representatives told us that veterans would prefer to have cardiac surgery available at the U.S. Naval Hospital to eliminate the need for evacuations for cardiac care. Establishing a cardiac surgery capability at the U.S. Naval Hospital, however, would require much more demand for these procedures than currently exists in order to provide sufficient quality. According to DOD requirements for cardiac surgical procedures, such as coronary bypass and cardiovascular procedures, standards set by the American Board of Cardiothoracic Surgeons and the Health Care Financing Administration require that a hospital perform or expect to perform a minimum of 150 surgical procedures per year to begin providing or maintain this medical specialty. According to DOD officials, these standards are necessary to ensure enough workload to maintain the specialists' skill level and the resultant quality of care. Overall, the combined military beneficiary and veteran inpatient workload for cardiac care on Guam does not meet DOD requirements for establishing a cardiac surgery unit at the U.S. Naval Hospital on Guam to ensure quality of care. According to VA and DOD records, in fiscal years 1995 through 1997, a total of 1,140 medical evacuations were provided--1,071 for military beneficiaries and 69 for veterans. Cardiac care, which is the most frequently cited reason for medical evacuations, accounted for 15 percent of these evacuations--on average, about 56 per year. The remaining 85 percent were for various medical reasons, including orthopedic, neurological, renal, oncology, and psychiatric treatment. While representatives of veterans organizations on Guam expressed concern about the future availability of health care on Guam, DOD and VA officials believe that VA's network for providing outpatient care, inpatient care, and medical evacuations will continue into the future even if there is an increase in demand for these services. With the aging of the veteran population, if current treatment patterns (in terms of patient treatment rates and average lengths of stay) do not change, these veterans' projected use of inpatient health care could increase from the current one-half bed per day to a little over one bed per day, on average, by the year 2010. If veteran demand for health care on Guam and CNMI mirrored one of the highest utilization rates in the VA system, then use of inpatient care could increase to 14 beds per day by 2010. However, given its current capacity and workload and a continued sharing agreement with VA, the U.S. Naval Hospital should be able to absorb even this unlikely increase in veteran demand for inpatient care. In our discussions with representatives of veterans organizations on Guam, concern was raised about potential downsizing at the U.S. Naval Hospital. This concern may stem from the fact that since 1993, the U.S. military presence on Guam has downsized approximately 17 percent in active duty personnel and dependents. In addition, other than health care provided by the VA and U.S. Naval Hospital health care systems, health care options on Guam are limited. For example, there is only one other hospital on Guam. However, both VA and DOD officials told us that veterans will continue to have access to outpatient and inpatient care through VA, the U.S. Naval Hospital, and the private sector on Guam. VA and DOD recently renewed their sharing agreement at the U.S. Naval Hospital for an additional 5 years. The U.S. Naval Hospital's budget is projected to remain stable through fiscal year 2001, and hospital officials stated that they do not plan to reduce the total bed capacity or the number of medical specialties currently available to veterans at the hospital. Finally, DOD and VA officials expect that necessary medical evacuations--both commercial and military--will continue to be available to Guam and CNMI veterans. Although our projections show a slight decrease in the Guam and CNMI veteran population from 1990 through 2010, these veterans may demand more VA health care in the future. In 1990, the combined veteran population on Guam and CNMI was 8,526, according to U.S. Census data. Using VA's veteran population projection methodology, our analysis indicates that this veteran population peaked at about 9,400 veterans in 1996 and will steadily decline to 8,406 in 2010. This represents a 1.4 percent decrease from 1990 and an 11 percent decrease from its peak population in 1996. Although Guam and CNMI veterans are relatively young compared to the veteran population nationwide, they will likely require more frequent and intensive medical care as they age over the next decade. In 1990, only about 41 percent of the veterans on Guam and CNMI were older than 45 years; by fiscal year 2010, over three-quarters--or about 77 percent--of these veterans are projected to be 45 years or older. As indicated by historical inpatient utilization at the U.S. Naval Hospital on Guam, veterans aged 35 to 44 had 2.6 inpatient admissions per 1,000, while veterans aged 45 to 54 had 4.4 inpatient admissions per 1,000. Corresponding lengths of stay also increased. To estimate the potential increase in veteran demand for VA inpatient health care in the future, we analyzed a high-demand scenario and a low-demand scenario. Our low-demand scenario assumes that the current level of veteran demand for VA inpatient care on Guam--one of the lowest utilization rates in the VA system--will continue into the future, adjusted for aging of the Guam and CNMI veteran population. Under this scenario, we estimate that by the year 2010, these veterans could potentially need 1.01 inpatient beds per day, on average, up from the 1997 utilization of about 0.5 beds per day, on average. Our high-demand scenario assumes that the veteran demand for VA inpatient care on Guam would mirror that on Puerto Rico--which has one of the highest utilization rates in the VA system--adjusted for aging of the Guam and CNMI veteran population. Under this scenario, we estimate that by the year 2010, Guam and CNMI veterans could potentially need up to 14 inpatient beds per day, on average. With a current capacity of 146 beds--consisting of 29 active and 117 inactive beds--U.S. Naval Hospital officials believe that the hospital could handle even the upper limit of a projected increase in future veteran inpatient workload. In fiscal year 1997, the hospital needed, on average, about 23 beds to care for all its patients, including veterans. U.S. Naval Hospital officials told us that the hospital could handle even the highest potential veteran inpatient need, projected under the high-demand scenario of up to 14 inpatient beds by the year 2010. Although only 29 beds are currently staffed and equipped, U.S. Naval Hospital officials are confident that--using VA reimbursements for veteran inpatient care--they could activate beds and hire additional staff to care for these veterans, if needed. U.S. Naval Hospital officials told us that their hospital has historically met VA's veteran inpatient and specialty outpatient care needs with existing staffing. Further, DOD officials explained that, while unlikely, the only factors that may limit the hospital's ability to provide health care services to veterans would be (1) war, (2) lack of providers for specialized care, (3) operational commitments, (4) downsizing of staff, (5) cuts in funding, and (6) increased military presence on Guam. Apart from a large conflict or war, which they could not predict, Navy officials felt confident that they had or could obtain sufficient resources to handle any likely increase in veteran inpatient workload. According to VA officials, establishing a 14-bed VA inpatient facility could range between $3.7 million to $6.9 million in construction costs, depending on whether the facility is renovated or newly constructed. In addition, it would cost at least $4 million annually to operate such a facility. Further, VA's average annual cost to purchase the care equivalent to the 14 inpatient veteran beds from the U.S. Naval Hospital under the current sharing agreement between VA and DOD is about $3.7 million. According to VA officials, if space were available within the U.S. Naval Hospital and no significant upgrades were required by the year 2010, such as adding structural support to make the facility safer during earthquakes, the estimated cost to renovate approximately 12,000 square feet of space for a VA inpatient facility would be about $3.7 million. This existing space would have to be modified to make it suitable for inpatient health care activities. However, if by the year 2010, space were not available within the U.S. Naval Hospital or significant seismic upgrades were required, the estimated cost to construct and outfit a 14-bed VA inpatient facility adjacent to the hospital would be about $6.9 million. If a future engineering assessment concluded that a seismic upgrade were required, VA officials told us that renovating the space within the U.S. Naval Hospital could cost more than constructing a new facility. To determine the average annual operating cost of a possible new veterans' inpatient facility at the U.S. Naval Hospital, VA officials estimated that a 14-bed inpatient facility would need four physicians and 23 other staff (primarily nurses), at an annual cost of $2.8 million. Other annual operating costs would include ancillary services; other expenses, such as laundry and food service; housekeeping, maintenance, and utilities; and overhead. When added together, staffing and other operating costs total an estimated annual operating cost of at least $4 million. Further, we estimated VA's average annual cost to purchase the care equivalent to the 14 inpatient veteran beds from the U.S. Naval Hospital under the existing sharing agreement between VA and DOD. Currently, when veterans obtain inpatient care at the U.S. Naval Hospital, VA reimburses the U.S. Naval Hospital for this care based on actual veteran admissions. Based on VA's historical expenditures per veteran admission, by age category, we estimated that, under the high-demand scenario, VA's annual costs to deliver care to these same veterans would be about $3.7 million. In its March 1996 report, the Navy concluded that a VA inpatient wing was not needed due to the low veteran inpatient workload, and our recent work confirms that the veteran inpatient workload averages less than one bed per day. Also, in the unlikely event that Guam and CNMI veteran demand for services increased significantly, U.S. Navy officials believe that the U.S. Naval Hospital will be able to meet even the highest projected workload. Last, constructing a new VA inpatient facility or renovating space within the U.S. Naval Hospital would cost from $3.7 to $6.9 million, with additional annual operating costs of at least $4 million. While veterans consider evacuations inconvenient and would like the U.S. Naval Hospital on Guam to offer cardiac surgery procedures to reduce the number of evacuations, the veteran and military beneficiary population on Guam and CNMI has required far fewer than the minimum 150 procedures per year recommended by DOD guidance to ensure acceptable quality of care. Without sufficient workload to maintain the skills of the surgeon and other supporting team members, the U.S. Naval Hospital on Guam would not be able to offer cardiac surgery and ensure quality of care. We provided a draft of this report to DOD and VA for official comments. DOD and VA agreed with the report's findings. DOD also provided one technical change, which we incorporated. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 13 days from the date of this letter. At that time, we will send copies to the Secretary of Veterans Affairs, the Secretary of Defense, and interested congressional committees. We will also make copies available to others upon request. If you have any questions about this report, please call me at (202) 512-7101 or Ronald J. Guthrie, Assistant Director, at (303) 572-7306. Other major contributors to this report were Lisa P. Gardner, Dawn Shorey, Paul Reynolds, Deborah Edwards, Alicia Cackley, Karen Sloan, and Sylvia Shanks. We were asked to (1) describe how VA currently meets Guam and CNMI veterans' health care needs, (2) estimate these veterans' possible future demand for health care and assessed VA's ability to meet this demand, and (3) estimate the cost to establish a veterans' inpatient ward at the U.S. Naval Hospital on Guam. To determine how VA meets Guam and CNMI veterans' health care needs, we met with and obtained information from DOD and VA officials in Washington, D.C.; Hawaii; and Guam. We also reviewed and analyzed relevant laws and regulations pertinent to VA's responsibility and authority to provide care to veterans on Guam and CNMI. Although the legal opinion from VA's General Counsel regarding the status of CNMI veterans--whether they are entitled to benefits under VA's domestic program or should be covered by VA's Foreign Medical Program--is still pending, the decision would not affect the outcome of our analyses in this report. To learn more about VA and DOD policies and practices for providing health care to veterans on Guam and CNMI, we contacted VA and DOD officials stateside and on Guam. Specifically, we contacted VA officials at VA Headquarters in Washington, D.C.; VISN-21 in northern California; the VA Medical and Regional Office Center in Honolulu, Hawaii; and VA's outpatient clinic on Guam. We contacted DOD officials at the Navy's Bureau of Medicine and Surgery in Washington, D.C.; the U.S. Pacific Command in Hawaii; Tripler Army Medical Center in Hawaii; and the U.S. Naval Hospital on Guam. We also reviewed VA and DOD documents on veteran health care policies, practices, and eligibility as well as budget data. We compiled and analyzed (1) the cost of health care for the last 3 fiscal years provided at the VA outpatient clinic on Guam and the U.S. Naval Hospital, (2) referrals to private sector providers, and (3) medical evacuations to Hawaii or the continental United States. We further analyzed the frequency and medical reasons for medical evacuations provided to veterans and military beneficiaries on Guam. We did not verify the reliability of VA or U.S. Naval Hospital medical evacuation data. We also met with officials of the Government of Guam Veterans Affairs Office and with Guam representatives of the Veterans of Foreign Wars, Vietnam Veterans of America, and American Legion to better understand and describe veterans' concerns about their VA care. During our meeting with the Guam Veterans Affairs Office, we reconciled differences between its veteran population estimate and the estimate from the Guam 1990 Census data. We also reviewed Guam VA outpatient clinic satisfaction survey results for the last 3 years. We further met with Guam Memorial Hospital officials to discuss health care issues on Guam and the hospital's accreditation status. To assess VA's ability to meet our projected demand, we interviewed VA, DOD, Air Force, and Navy officials and reviewed DOD staffing estimates and U.S. Naval Hospital budget projections. To determine Guam and CNMI veterans' possible demand for health care in the future, we estimated the current veteran population on Guam and CNMI and analyzed possible changes in level of veteran demand for care and patterns of inpatient utilization. We projected Guam's total veteran population to the year 2010 by adjusting 1990 Census data to reflect the aging of the current population since 1990 and recent and expected future separations from the military.We relied on survival data obtained from the Government of Guam Department of Public Health and Social Services and separation data obtained from VA's Office of Policy and Planning for this projection. To estimate how much VA inpatient care veterans on Guam and CNMI could potentially require over the next decade, we developed two different health care demand scenarios, based on actual low and high veteran inpatient utilization rates within the VA system. These scenarios represent a range of potential demand and are not intended to predict a specific future demand. We then used VA's inpatient planning model and Puerto Rico and Guam current veteran inpatient utilization rates (patient treated rates and average lengths of stay) to compute total bed days of care and inpatient bed requirements for both the low- and high-demand scenarios.Both scenarios age the veteran population through the year 2010 and provide for the same type of hospital beds (medical, surgical, and intensive care) that are currently available at the U.S. Naval Hospital. To estimate the cost of a VA inpatient facility at the U.S. Naval Hospital on Guam, VA prepared two cost estimates for a 14-bed VA inpatient facility within the U.S. Naval Hospital on Guam--one estimate was for renovating the existing space, the other was for new construction. These estimates provided 10 medical or surgical beds and four intensive care beds, all fully outfitted and within 11,588 square feet (VA's space planning criteria). VA officials adjusted its renovation and construction cost estimates to reflect that construction on Guam is twice as expensive as in the continental United States. Annual operating costs for either VA inpatient facility would consist of staffing; ancillary services; other expenses, such as laundry and food service; housekeeping, maintenance, and utilities; and overhead. VISN-21 estimated staffing costs for 27 VA staff, including 4 physicians. We estimated ancillary and other expenses using the U.S. Naval Hospital average costs per bed day of care in 1997 multiplied by the projected number of VA inpatient bed days of care for 2010. We also estimated housekeeping, maintenance, and utilities based on the U.S. Naval Hospital costs per square foot multiplied by the square footage of the proposed VA facility. We included overhead costs equal to 10 percent of total operating costs. Both a VA and a Naval Hospital official reviewed the methodologies we used to estimate ancillary and other costs and concluded that the approaches would result in a conservative estimate of the potential costs. Last, we computed the cost to obtain inpatient care required by the projected high- and low-demand scenarios under the existing VA and DOD sharing agreement at the U.S. Naval Hospital. Our estimate was derived by calculating a 3-year historical average cost per veteran admission at the U.S. Naval Hospital by age category. The resulting historical average cost by age group was then applied to the high- and low-demand veteran admissions by age group in 2010. VA and Navy officials reviewed the estimated construction and staffing costs obtained from VA. All cost estimates are in current 1998 dollars. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. 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Pursuant to a congressional request, GAO reviewed the need for establishing a Department of Veterans Affairs (VA) inpatient facility on Guam, focusing on: (1) how VA currently meets Guam and the Commonwealth of the Northern Mariana Islands (CNMI) veterans' health care needs; (2) veterans' possible future demand for health care and VA's ability to meet this demand; and (3) the cost to establish a veterans' inpatient ward at the U.S. Naval Hospital on Guam. GAO noted that: (1) to meet the health care needs of veterans on Guam and CNMI, VA currently provides services through a network of providers; (2) this network includes outpatient and inpatient care provided on Guam as well as by military or private hospitals in Hawaii or the continental United States, which is accessed through aeromedical evacuations; (3) in discussing their concerns about the VA health care system, veterans on Guam told GAO that medical evacuations, while necessary, are inconvenient and that they would like the U.S. Naval Hospital on Guam to provide cardiac care to reduce the need for some of these evacuations; (4) however, VA and Naval Hospital records indicate that only 15 percent of the 1,140 medical evacuations provided to military beneficiaries and veterans over the past 3 years were for cardiac care, which, according to Department of Defense officials, is an insufficient workload to maintain quality care for this specialty; (5) in the future, VA and Navy officials expect to be able to continue to meet veterans' demand for health care; (6) VA and Navy officials told GAO that they expect to continue providing the same type of health care to Guam and CNMI veterans that is currently available, including the services provided by the U.S. Naval Hospital; (7) even if there were a significant increase in veterans' demand for inpatient medical care in the future, U.S. Naval Hospital officials believe that their hospital could handle the potential veteran inpatient workload; (8) currently, the U.S. Naval Hospital has a total capacity of 146 beds--consisting of 29 active beds and 117 inactive beds; (9) in fiscal year 1997, of the 29 active beds, military beneficiaries used 22 beds per day on average and veterans used less than 1 on average; (10) GAO's analyses indicate that, under a high-demand scenario, Guam and CNMI veterans would use, on average, 14 inpatient beds per day; (11) while it is highly unlikely that Guam and CNMI veterans' demand for inpatient health care will ever reach this level, Navy officials told GAO that the U.S. Naval Hospital could hire staff and activate additional beds, if needed, to meet this demand; (12) these officials said that apart from a large conflict or war, which they could not predict, they were confident that the U.S. Naval Hospital on Guam could handle any likely increase in veteran inpatient workload; and (13) in light of GAO's analysis, establishing an inpatient ward at the U.S. Naval Hospital is not warranted and would be expensive.

In January 2012, IRS estimated that the gross tax gap--the difference between taxes owed and taxes paid on time--was $450 billion in tax year 2006. IRS estimated that it would eventually recover about $65 billion of this amount through late payments and enforcement actions, leaving a net tax gap of $385 billion. The tax gap has been a persistent problem in spite of extensive congressional and IRS efforts to reduce it. In past work we have said that reducing the tax gap will not likely be achieved through a single solution. Rather, the tax gap must be attacked on multiple fronts and with multiple strategies over a sustained period of time. On the enforcement front, IRS's efforts to ensure compliance of individual taxpayers combine several distinct programs that collectively monitor and correct noncompliance with income tax filing, reporting, and payment requirements. These programs fill different roles in the enforcement process and vary in the number of taxpayers covered, the resources used, and their level of automation. IRS's Math Error program electronically checks all filed tax returns for obvious math errors as returns are processed. The Math Error program reviews and adjusts items specifically listed in Internal Revenue Code section 6213. The specific issues that the program has authority to review include calculation errors, entries that are inconsistent with or exceed statutory limits, various omissions, inclusions, and entries of information, or incorrect use of an IRS table. IRS collects information on taxpayers from employers, financial institutions, and other third parties and compiles these data in the Information Returns Processing (IRP) system. The Automated Underreporter (AUR) program electronically matches the IRP data against the information that taxpayers report on their forms 1040 as a means of identifying potentially underreported income or unwarranted deductions or tax credits. The matching process takes place months after taxpayers have filed their tax returns. For tax year 2010, AUR identified approximately 23.8 million potential discrepancies between taxpayer income, deduction, and other information reported by third parties and the information supplied by taxpayers on their individual income tax returns. IRS officials said that resource constraints prevent them from contacting taxpayers for all of the cases in which discrepancies are identified. If a mismatch exceeds a certain tax threshold, AUR reviewers decide if it warrants a notice to the taxpayer asking for an explanation of the discrepancy or payment of any additional tax assessed. IRS guidance directs reviewers to consider the reasonableness of the taxpayers' responses, but reviewers generally do not examine the accuracy of the information in the responses because they do not have examination authority. For certain issues, AUR reviewers may refer cases for a correspondence examination. The Automated Substitute for Return (ASFR) program uses data from the IRP system to identify persons who did not file returns, construct tax returns for certain nonfilers, and assess tax, interest, and penalties based on those substitute returns. IRS does not pursue all of the constructed returns. Potential cases fall into one of ten priority levels and are worked highest-priority first. ASFR officials said they make budget decisions by taking into account the resources available to the program and determine the level of new cases that will be worked over the following year. In fiscal year 2011, the ASFR program closed nearly 1.4 million cases. Correspondence examinations are formal audits of individual taxpayers but do not involve face-to-face meetings with taxpayers. Instead, these examinations target specific issues that are limited in scope and complexity, easily documented, and can be handled quickly and efficiently through correspondence between the taxpayer and the IRS examiner. Tax returns are selected as potential cases through automated business rules that filter or select tax returns according to predetermined criteria. These business rules can detect multiple potential issues, all of which can be worked through a single correspondence exam. Examiners have the authority to review additional issues on a return even if they were not identified by the automatic filters. Field examinations are conducted in face-to-face meetings between the taxpayer and the IRS examiner. These audits are targeted at individual returns with broader and more complex issues. Unlike correspondence examinations, the field examination program has a classification process where an experienced tax examiner will review a potential case to determine which, if any, issues should be examined. Individual tax returns are selected for field examination in a variety of ways. Some returns are selected in the pursuit of specifically identified compliance issues, such as abusive transactions or offshore compliance. Others are selected on the basis of a statistical formula that attempts to predict the potential for additional tax assessments, and yet others are selected randomly for research purposes. Regardless of why the return was initially selected for audit, an examiner will review the return in its entirety to determine if other issues are present. The responsibility for operating these individual taxpayer enforcement programs largely rests with IRS's Small Business/Self-Employed (SB/SE) Division, which handles complex individual returns, and Wage and Investment (W&I) Division, which handles simpler returns. SB/SE operates parts of all four IRP and exam programs; W&I operates parts of three programs, excluding field examinations. Correspondence and field exams accounted for more than 80 percent of the total administrative costs of the four programs we reviewed over the 2-year period we examined. (Total costs include direct examination time, training and other offline activities of examiners, supervisory and administrative support, and other overhead costs allocable to each program.) Based on data for hourly costs and time spent on different types of cases that IRS provided, we estimated that the cost per case for field exams, $2,278, was many times greater than those for correspondence exams, $274, AUR, $52, and ASFR, $72. (See fig. 1.) IRS spent almost 20 percent of the $1.6 billion per year that it devoted to exams opened in 2007 and 2008 on returns with positive income of at least $200,000, even though such returns accounted for only 3 percent of the 136 million individual income tax returns filed per year. The share of total cost for these returns was greater than their share of total returns because they were examined at above average rates and, compared to lower-income returns, field exams were a greater proportion of their examinations. (See fig. 2.) For the 2 years of cases we reviewed, exams (both correspondence and field) of taxpayers with positive incomes of at least $200,000 produced significantly more direct revenue per dollar of cost than exams of lower- income taxpayers. Across income groups, correspondence exams were significantly more productive than field exams in terms of discounted direct revenue per dollar of cost. (See fig. 3 and table 1 in app. II.) We estimated that the average direct revenue yield per dollar of cost across all correspondence exams of individual taxpayers was $7. In contrast, the average direct yield per dollar for field exams of individual taxpayers was $1.8. We also estimated that the direct revenue per dollar of cost was about $22 for AUR cases and about $31 for ASFR cases. Exams that are more complicated than average are likely to require both more time to complete and more highly skilled examiners, who cost more per hour. In estimating the results for field exams in figure 3, we incorporated differences in the amount of time spent on each field exam, which is recorded in the ERIS database, but we did not account for differences in hourly costs relating to varying skill levels of examiners across cases because the data available for that purpose were limited.Nevertheless, to test the potential sensitivity of our results to this missing factor, we estimated an alternative set of field exam results, using an ERIS data element that reflects the expected difficulty of an exam. We also tested the effect of differences in locality pay for field examiners in different geographic locations. (See app. I for further details.) We found that adjusting for skill levels likely reduces some of the differences in direct revenue per dollar of cost across field exam categories; adjusting for location has a negligible effect. (See table 3 in app. II.) IRS would be able to estimate ratios of direct revenue to cost that better incorporate differences in the hourly costs across examiners with different skill levels if data from IRS's timekeeping system that records the number of hours that each employee charged to specific exam cases were matched to revenue data for the same cases. Our analysis of a hypothetical reallocation of IRS examination resources for this 2-year period indicates that a shift of about $124 million in enforcement resources could have increased direct revenue by $1 billion over the $5.5 billion per year IRS actually collected. This result is based on shifting the $124 million from exams of lower-income returns with the earned income tax credit (EITC) and lower-income business returns without EITC to exams of higher-income returns and lower-income nonbusiness returns without EITC. The result holds true as long as the average ratio of direct revenue to cost for each category of returns remained unchanged. (See fig. 4.) Similar gains would recur annually, relative to the revenue that IRS otherwise would collect if it did not change its resource allocation and taxpayer behavior remained substantially the same. We took account of several constraints when designing our hypothetical resource reallocation example. First, we did not want to suggest a large- scale change because some reallocations cannot be made quickly, particularly if they require a different distribution of examiner skills than exists in IRS's current workforce. The $124 million that we shifted represents less than 8 percent of the $1.6 billion per year that IRS devoted to examinations of individual tax returns for the 2 years we studied and we shifted less than 5 percent of existing field exam resources ($1.1 billion per year) to correspondence exams. Second, we did not want to end up with extreme coverage rates (either high or low) in any return category. Therefore, we did not reduce the combined coverage rate for any category for which the coverage rate was already close to or below 1 percent, and we kept the highest coverage rate (for returns with positive incomes of $1 million or more) under 11 percent.that 11 percent rate is almost twice the current rate for that category.) Finally, given that certain compliance issues can be reviewed effectively only through a field exam, we did not decrease field exam resources in any return category for which we increased correspondence exam resources. Exam resource reallocation can also affect tax collections indirectly by influencing the voluntary compliance of nonexamined taxpayers. These indirect effects are difficult to estimate and IRS has no empirical evidence that would allow it to say whether overall voluntary compliance would increase or decrease as a result of specific resource reallocations. Changes in exam coverage rates are generally believed to affect voluntary compliance by altering taxpayers' perceived risks of being audited. The higher the risk of being audited, the less inclined taxpayers are to evade taxes. As shown in figure 5, our hypothetical reallocation would have increased combined coverage rates in most of the tax return categories we examined. For those categories in which coverage rates declined, the declines were relatively modest. For these reasons we believe that the direct revenue gains associated with our hypothetical reallocation would not likely be offset by significant indirect revenue losses. However, if larger resource allocations were considered, the lack of empirical evidence on the potential changes in voluntary compliance could leave IRS uncertain of the extent to which direct revenue gains might be offset by negative indirect revenue effects. Although research on this issue is challenging, IRS might be able to leverage its existing efforts to study voluntary compliance through the National Research Program (NRP) to get better information on the influence of enforcement activity on voluntary compliance. Our analysis focused upon ratios of average direct revenue to average cost. We did not incorporate other potentially important considerations due to data constraints. One such consideration is the extent to which the ratio of direct revenue per dollar of cost may decline for a particular category of exams as additional resources are devoted to that category. The revenue yield of each additional return that IRS exams within a particular return category may be lower than the average revenue- productivity rates we estimated, particularly if IRS's return selection process for examinations results in returns with the greatest revenue potential being worked first and those with the least potential being worked last. Little is known about the relationship between marginal and average revenue and cost within specific return categories because IRS currently does not identify the marginal cases worked each year.IRS collects some information on marginal cases, such as how the broad characteristics of those returns that would likely be selected (or not selected) in a modest program expansion (or contraction) would differ from the average return actually audited now, planners would have to rely solely upon ratios of average direct revenue to average cost--a less accurate basis for estimating the direct revenue consequences of specific exam resource allocations. An analysis of the marginal revenue yields for specific categories of returns might also enable IRS to reduce the number of audits that result in no direct change in tax liability (although they may have beneficial effects on voluntary compliance). These no-change cases impose burdens on compliant taxpayers. Further, substantial variations across return categories in the percentage of exams that result in no change could be viewed as inequitable because compliant taxpayers in some categories have a greater chance of being burdened than compliant taxpayers in other categories. No-change rates in some higher-income return categories are already relatively high, compared to rates for lower- income categories. For example, the no-change rate for correspondence exams of tax returns with positive income of $1 million or more was about 53 percent for fiscal years 2007 to 2008. (See table 1 in app. II.) However, the highest no-change rates are associated with correspondence exams, which should be less burdensome than field exams. High no-change rates could also be associated with declining revenue yields in marginal cases; however, without a specific study of marginal cases, it is not possible to say whether no-change cases are concentrated among the last cases examined in a particular category or whether they are spread relatively evenly across exams worked throughout the course of the year. Factors other than revenue yields and IRS budget costs also matter for purposes of an overall cost-benefit evaluation of IRS exam activities. These activities impose compliance costs on taxpayers and economic efficiency costs on society. Return categories with low ratios of direct revenue to IRS budget costs could have offsetting advantages in terms of lower efficiency and compliance costs; however, no empirical evidence of variations in these other effects or costs across the return categories exists, nor would it be easy to obtain. (See app. III for further discussion of these tradeoffs.) The results of our analyses suggest that there is potential for IRS to increase the direct revenue yield of selected enforcement programs by hundreds of millions of dollars per year without significant (if any) adverse effect on the indirect effect that examinations have on revenues. However, our results are preliminary and limited in scope. The collection and analysis of additional data would help to both confirm our basic conclusion and assist IRS in more finely adjusting its resource allocation decisions. One priority would be to study the feasibility of estimating the marginal revenue and marginal costs within each program within each taxpayer group. It would be helpful, for example, to estimate at least how the broad characteristics of those returns that would likely be selected (or not selected) in a modest program expansion (or contraction) would differ from the average return actually audited now. Such information would help IRS assess the extent to which revenue productivity would likely decline, if at all, if more exam resources are devoted to a particular group of taxpayers. Another useful project would be to see if some linkage could be made between the amounts of time that specific examiners spend on each case and the revenue collection amounts for each case that are recorded in ERIS. Such a link would enable IRS to estimate ratios of direct revenue to cost that better incorporate differences in the hourly costs across examiners with different skill levels. The collection or estimation of other information that would be useful when allocating resources, such as the influence of enforcement activity on voluntary compliance, is challenging, which is why little is known about those topics to date. Nevertheless, IRS might be able to leverage its existing efforts to study voluntary compliance through the NRP to get better information on the influence of enforcement activity on voluntary compliance. In the absence of the additional data identified above, IRS planners can use the results of an analysis such as ours in combination with their professional judgment to decide whether the potential for direct revenue gains more than offsets the potential for reductions in indirect revenue or in equity and any increases in compliance or efficiency costs. If the answer is positive, they can adjust their allocation of resources accordingly. Nevertheless, the better empirical basis IRS planners have for making such judgments, the more confident they can be that they are allocating their limited resources to the best effect. To better ensure that IRS's limited enforcement resources are allocated in a manner that maximizes the revenue yield of the income tax, subject to other important objectives of tax administration, such as minimizing compliance costs and ensuring equitable treatment across different groups of taxpayers, the Commissioner of Internal Revenue should: review disparities in the ratios of direct revenue yield to costs across different enforcement programs and across different groups of cases within programs and determine whether this evidence provides a basis for adjusting IRS's allocation of enforcement resources each year. As part of this review, IRS should: develop estimates of the marginal direct revenue and marginal direct cost within each enforcement program and each taxpayer group; compile data on the amount of time that specific grades of examiners and downstream employees spend on specific categories of exams that can be identified in ERIS; and explore the potential of estimating the marginal influence of enforcement activity on voluntary compliance, potentially taking advantage of new NRP data. We requested written comments from the Commissioner of Internal Revenue and received a letter from IRS Deputy Commissioner for Services and Enforcement on November 29, 2012, (which is reprinted in app. IV). IRS agreed with our recommendations and agreed that the development of additional key data will require considerable work. In recognition of the time it will take to obtain this information, IRS said it will consider how to apply interim methods, findings, or approximations. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to interested congressional committees, the Secretary of the Treasury, the Commissioner of Internal Revenue, and other interested parties. In addition, the report also will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-9110 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix V. Our principal analysis compares the costs and direct revenues associated with correspondence and field exams that were opened during fiscal years 2007 and 2008 across the principal categories of individual taxpayers that the Internal Revenue Service (IRS) uses for exam planning purposes. These categories, defined in terms of income size and the nature of items reported on the returns, are shown in table 1 of appendix II. IRS provided us with total cost estimates for correspondence exams (with and without the earned income tax credit (EITC)) and field exams (with and without EITC) from its Integrated Financial System. These total cost estimates included all direct examiner costs, training and other off-line activities of examiners, supervisory and administrative support, and other overhead costs allocable to each program. We estimated hourly costs by dividing the total costs by the average examination hours per case, which IRS provided for correspondence exams (with and without the earned income tax credit (EITC)) and field exams (with and without EITC) from its Audit Information Management System (AIMS). These hourly cost estimates are adequate for the relatively high-level comparisons we present in this report. IRS would be able to make more precise estimates for more detailed categories of exams if data from IRS's timekeeping system that records the number of hours that each employee charged to specific exam cases were matched to revenue data for the same cases. To estimate the cost for each category of field exams we multiplied the hourly cost rates by the number of direct hours reported in the Enforcement Revenue Information System (ERIS) for each category of According to IRS officials the ERIS data relating to time spent on exam. correspondence exams is not reliable for our purposes. On their advice, given that neither the time spent on 1040 correspondence exams nor the skill level of examiners typically vary significantly from case to case, we used the same cost estimate for all cases, which IRS provided to us. We restated the costs for each case in terms of 2011 dollars by adjusting for inflation. Due to limitations of the ERIS data our cost estimates do not include any downstream costs that IRS's Collections function may have devoted to these cases or any costs associated with examinations of pass-through entities that could have improved the productivity of some of these 1040 exams. We do not know whether the prevalence of these missing costs varies significantly across our exam categories; however, we do note that the one category we studied that specifically excluded returns with pass-through income had ratios of revenue to costs that were greater or equal to the ratios for the one category identified as likely to include such returns. We aggregated all of the tax, interest, and penalty collections recorded in ERIS for the same fiscal years, exam types, and taxpayer categories used for the cost side of our analysis. We also included amounts of refunds disallowed due to examinations in our definition of revenues. These amounts represent revenue saved for the government, even though IRS does not have to collect it after the exams. We compiled the revenue data for each fiscal year in which the collections were made (through the end of fiscal year 2011) and restated the revenue in terms of 2011 dollars by adjusting for inflation.collections over the gap between the fiscal year in which IRS incurred the exam costs (which we estimated as being the midpoint of the exam) and the fiscal year in which the revenue was collected. The purpose of this discounting, which is standard practice for cost-benefit analyses, is to Then we discounted the value of account for the time-value of money between the time at which the government bears the cost of an activity or investment and the time at which it receives the related benefit. (We used a real discount rate for this discounting because we had already adjusted all of our figures for inflation.) The first set of estimates that we present in this report do not reflect potential differences in costs across exams due to the degree of experience demanded of the examiner or the location at which the exam was conducted. For a second set of estimates we adjusted the cost of field exams for relative difficulty. To do this we used ERIS data on hours by grade to compute a weighted average pay rate for all exams (for each combination of EITC and non-EITC and field or correspondence for each year). We then adjusted costs for each record by multiplying the cost by the mid-point pay rate for the grade of the record, divided by the weighted average difficulty pay rate for the relevant year and EITC status. For a third set of estimates we made this difficulty adjustment for field exams and then we also adjusted the costs of both correspondence and field exams for location differences by using data on the location of exams, hours, and locality pay for each location to compute a national average locality pay rate (weighted by the number of hours in each location) for each combination of field and correspondence exams of returns with and without EITC and a locality pay rate for each location. We then multiplied the cost estimate for each exam by the ratio of the national rate over the relevant location-specific rate. The columns labeled "Change in Resources" in table 2 of appendix II show the amounts of IRS budget resources we moved out of or into specified exam categories for our hypothetical reallocation. These shifts were guided by the considerations we noted earlier. We estimated the revenue effect of each shift by multiplying the gain or loss of resources for each category by our estimated ratios of direct revenue to cost for those categories. We estimated the effect on the coverage rate within each category by multiplying the coverage rate prior to the reallocation by the percentage change in each category's resources caused by the reallocation. Appendix II: Detailed Tables ($ millions) ($ millions) Change in resources ($ millions) Change in direct revenue ($ millions) Change in resources ($ millions) Change in direct revenue ($ millions) An economic cost-benefit evaluation of IRS's overall activities would involve a comparison of the social costs and social benefits associated with those activities. IRS's function is to collect tax revenue that the federal government transfers among citizens as cash payments or in the form of goods and services. The collection process imposes costs on society but produces no direct benefit itself. The government's use of the collected revenue may ultimately produce a net benefit for society if the social value of that use exceeds the social cost of raising the revenue. IRS has no influence over how tax revenue is used; it can only contribute to increasing the net social benefit by increasing the amount of revenue collected for a given amount of social cost (or decreasing the social cost of raising a given amount of revenue). Specific resource allocation choices can be compared on the basis of the amount of revenue they produce for a given amount of total social costs. The social costs of tax collection comprise the following: Tax burden. This is the actual money collected from taxpayers. IRS budget costs. Amounts collected as a result of IRS enforcement activities from taxpayers who, otherwise, would have been noncompliant may have a zero social cost. The cost that those amounts represent can be attributed to the tax law, rather than to IRS enforcement efforts. If those additional amounts of taxes due are not collected, the tax burdens evaded by noncompliant individuals are offset by the additional taxes that compliant taxpayers must pay in order to support a given government budget. Compliance burden. IRS's enforcement activities can affect the costs that taxpayers incur when complying with the tax law by increasing the time and money that they spend preparing their returns and interacting with IRS. Efficiency costs. IRS's enforcement activities can alter the tax avoidance and evasion behavior of individuals, which affects the efficiency of resource allocation in the economy. If an enforcement activity increases the aggregate costs of tax avoidance and evasion, economic efficiency and the average standard of living is reduced. Conversely, if the activity reduces such aggregate costs, economic efficiency would improve. Equity costs. IRS's resource allocation can affect how exam-related compliance burdens are distributed across different groups of taxpayers and also how the risk of noncompliant taxpayers getting penalized for evasion varies across groups. It is difficult to know what society as a whole would view as an equitable distribution of these burdens and risks; therefore it is difficult to assess the equity effects of any particular reallocation of resources. The only component of social costs that can be reliably measured is the IRS budget cost, and it is difficult to attribute even that cost to very specific enforcement activities (such as specific audits). Consequently, IRS planners cannot consider all types of social costs in a rigorously quantitative manner when making their resource allocation decisions. Economists use the term "margin" when referring to the scopes of the various types of decisions that individuals make. For example, if IRS examination planners were deciding how to allocate the last million dollars of their budget between different types of audits, the marginal social cost of the choice they made would be a million dollars, plus the sum of all other social costs resulting from the IRS activities supported by that million dollars. The marginal revenue would be the amount of additional tax collections attributable (both directly and indirectly) to those activities. The most economically efficient choice would be the one that produced the highest ratio of marginal revenue to marginal social cost. The ratio of marginal revenue to marginal social cost provides a basis for comparing the cost of collecting taxes by different approaches. Such comparisons can be made across broadly defined approaches (e.g., increasing taxpayer services to promote higher voluntary compliance versus increasing enforcement efforts to reduce noncompliance). Alternatively, as in this study, comparisons could be made across more narrowly defined alternatives (e.g., devoting more resources to audits of taxpayers with incomes below a certain amount versus devoting those resources to audits of taxpayers with incomes above that amount). In addition to the contact named above, James Wozny (Assistant Director), Kevin Daly (Assistant Director), Michael Brostek, Ethan Wozniak, Suzanne Heimbach, Sara Daleski, Lois Hanshaw, Karen O'Conor, Ray Bush, Elizabeth Fan, and Robert MacKay made key contributions to this report.

Heightened attention to federal deficits has increased pressure on IRS to reduce the tax gap--the difference between taxes owed and taxes paid on time--and better enforce taxpayer compliance. Resource limitations and concern over taxpayer burden, however, prevent IRS from auditing more than a small fraction of individual income tax returns filed. How IRS allocates these limited resources demands careful consideration. As requested, this report (1) describes how IRS allocates resources across individual taxpayer compliance enforcement programs and across types of taxpayers within each program; (2) estimates the direct revenue return on investment for the individual taxpayer enforcement programs and the extent of variation across those programs and across types of taxpayers; and (3) determines the potential for gains from shifting resources from lower-yielding programs and types of taxpayers to higher-yielding ones. To accomplish these objectives GAO analyzed IRS data on 2007 and 2008 tax returns, reviewed IRS documentation, and interviewed appropriate IRS officials. The Internal Revenue Service (IRS) spends most of its enforcement resources on examinations. Correspondence exams of individual tax returns, which target fewer and simpler compliance issues, are significantly less costly on average than the broader and more complex field exams. GAO estimated that the average cost (including overhead) of correspondence exams opened in 2007 and 2008 was $274, compared to an average of $2,278 for field exams. IRS spent almost 20 percent of the $1.6 billion per year that it devoted to exams on returns from taxpayers with positive income of at least $200,000, even though such returns accounted for only 3 percent of the 136 million individual returns filed per year. (Positive income, a measure that IRS uses to classify returns for exam planning purposes, disregards losses that may offset this income). GAO estimated that, for the 2 years of cases reviewed, correspondence exams were significantly more productive in terms of direct revenue produced per dollar of cost than field exams. Both types of exams of taxpayers with positive incomes of at least $200,000 were significantly more productive than exams of lower-income taxpayers. GAO demonstrated how these estimates could be used to inform resource allocation decisions. For example, a hypothetical shift of a small share of resources (about $124 million) from exams of tax returns in less productive groups shown in the figure to exams in the more productive groups could have increased direct revenue by $1 billion over the $5.5 billion per year IRS actually collected (as long as the average ratio of direct revenue to cost for each category of returns did not change). These gains would recur annually, relative to the revenue that IRS would collect if it did not change its resource allocation. This particular resource shift would not reduce exam coverage rates significantly and, therefore, should have little, if any, negative effect on voluntary compliance. GAO recommends that IRS review disparities in the ratios of direct revenue yield to costs across different enforcement programs and across different groups of cases and consider this evidence as a potential basis for adjusting its allocation of enforcement resources each year. IRS agreed with the recommendations.