SECTION III: OTHER INFORMATION (Sections 12-16)

FY 2016 HHS Agency Financial Report

Topics in this Section: Other Financial Information | Freeze the Footprint | Civil Monetary Penalty Adjustment for Inflation | Improper Payments Information Act Report (Section 1-10 | 11 | 12-16) | Summary of Financial Statement Audit and Management Assurances | FY 2016 Top Management and Performance Challenges Identified by the Office of Inspector General | Department’s Response to the Office of Inspector General Top Management Challenges

12.0 Supplemental Measures and Targets for High-Priority Programs

To comply with Executive Order 13520 and IPERIA, HHS developed supplemental measures for four high-priority programs: Medicare FFS, Medicare Part C, Medicare Part D, and Medicaid. Information on these programs’ supplemental measures—including a description of the measure, the current performance, and future performance target—can be found below. In addition, more information on these programs and their supplemental measures can be found at PaymentAccuracy.gov.

Medicare FFS: A main driver of the Medicare FFS improper payment rate is insufficient documentation errors for home health claims. Some of HHS’s corrective actions are discussed in Section 11.0: Program-Specific Reporting Information. This annual supplemental measure examines the percentage of improper Medicare FFS payments made for home health claims.

• Current performance: 42.01 percent
• Future performance target: 37.70 percent

Medicare Part C: Payments to Medicare Advantage organizations are partly based on enrollee health status. This annual supplemental measure analyzes the CMS Hierarchical Condition Categories (CMS-HCCs) that have the highest rates of error. CMS-HCCs are the disease groups that determine the disease component of risk-adjustment payment. The measure aggregates the CMS-HCCs that have the highest percentage of error as compared to the entire sample of CMS-HCCs, and divides that number of discrepancies by the overall number in the sample.

• Current performance: 4.0 percent
• Future performance target: 4.0 percent

Medicare Part D: The Prescription Drug Event (PDE) validation process validates the prescription against the PDE data submitted to HHS for payment and is the major driver of error in Part D. The root cause shown under this annual supplemental measure is missing or illegible supporting documentation.

• Current performance: 1.19 percent

• Future performance target: 1.19 percent

Medicaid: State non-compliance with new provider information, enrollment, and screening requirements has been a major driver of Medicaid improper payments in recent years. This annual supplemental measure shows the Medicaid FFS improper payment rate for these errors.

• Current performance: 9.97 percent
• Future performance target: 8.05 percent

13.0 Superstorm Sandy Reporting Information

Superstorm Sandy was a major hurricane that struck the United States’ eastern seaboard on October 29, 2012 and caused extensive damage from Florida to Maine, with New Jersey and New York sustaining the most damage. In response to this disaster, Congress passed the Disaster Relief Act, which was signed into law on January 29, 2013 and provided $50.5 billion in aid for Superstorm Sandy disaster victims and their communities. HHS received $747 million, allocated among multiple programs across five Divisions: ACF, ASPR, CDC, SAMHSA, and NIH. Because funding of this type and magnitude often carries additional risk, the Disaster Relief Act and OMB guidance state that all federal programs or activities receiving funds are automatically considered susceptible to significant improper payments, regardless of any previous improper payment risk assessment results, and are required to calculate and report an improper payment estimate. Accordingly, HHS developed methodologies to estimate improper payments in the programs that received Disaster Relief Act funding. Once a program’s Superstorm Sandy funding has been spent, agencies are no longer required to report error rate information. In FY 2016, HHS halted reporting error rate information for two programs – CDC Research and ACF Family Violence and Prevention Services Act – because they expended their funding. Information on the remaining Disaster Relief Act programs’ improper payment methodologies, results, and corrective actions can be found on subsequent pages.

13.10 Head Start

13.11 Head Start Statistical Sampling Process and Results

Head Start received approximately $95 million in Disaster Relief Act funding to provide services, training and oversight, and construction assistance to affected grantees. Every grantee who spends Superstorm Sandy funds receives an erroneous payments onsite monitoring visit in the quarter following the quarter when funds are spent, or as soon thereafter as possible. Superstorm Sandy transactions for each quarter are reviewed using a standard onsite monitoring tool to identify potential and actual erroneous payments. Additional information on Head Start’s statistical sampling process can be found on pages 223 – 224 of HHS's FY 2015 AFR.

Nearly all minor renovations and repairs to facilities, along with remaining enhanced mental health service activities, were completed in FY 2015. In FY 2016, grantees were primarily engaged in ongoing progress toward completion of major renovations and reconstruction of damaged facilities with HHS subject matter experts and regional staff working closely with grantees on a day-to-day basis. This resulted in fewer transactions in FY 2016, but larger total expenditures than in FY 2015.

The Head Start gross and net improper payment estimate for FY 2016 is 0 percent or $0.

13.12 Head Start Root Causes and CAP

Corrective Actions to Address Root Cause

No improper payments were identified for the review period. However, HHS continues to work with grantees to reduce the likelihood of the occurrence of improper payments by staying in regular communication with grantees to support ongoing compliance in areas such as procurement standards, source documentation, Davis-Bacon Act, cost allocation plan updates, and any other areas identified by subject matter experts as common areas of fiscal challenge in the general grantee community.

13.13 Head Start Improper Payment Recovery

No improper payments were identified during the period under review (PUR) and all prior year errors subject to recovery were recovered during the PUR in which they were identified.

13.20 SSBG

13.21 SSBG Statistical Sampling Process and Results

The SSBG program received $474.5 million in Disaster Relief Act funding to address necessary expenses resulting from Superstorm Sandy. These expenses include social, health, and mental health services for individuals; and repair, renovation and rebuilding of health care facilities (including mental health facilities), child care facilities, and other social services facilities. The SSBG Disaster Relief Act funds were allocated to five states affected by Superstorm Sandy: Connecticut, Maryland, New Jersey, New York, and Rhode Island. HHS selected 3 of the 5 states (Connecticut, New Jersey, and New York) to calculate improper payment error rates, since their allocations represent 99 percent of all SSBG Disaster Relief Act funds.

Because the states determine the types of services and eligibility for these services, as permitted by the SSBG law and regulations, there is considerable variation among states in their application of these funds. To account for this variation, HHS developed a two-fold (bifurcated) improper payment methodology to review the use of SSBG Disaster Relief Act funds in three states. The two methodologies are a case record review and a vendor payment review. The case record review examines payments or benefits provided to or on behalf of individuals, families or households (i.e., cases) based on specific eligibility criteria. The vendor payment review examines individual payments made to service vendors and assesses if the vendors provided adequate documentation (e.g., applications or authorizations) necessary to meet the eligibility requirements for these payments.

For the FY 2016 review period (July 1, 2015 to June 30, 2016), HHS completed case record and vendor payment reviews in Connecticut, New Jersey, and New York. HHS consolidated its review findings and calculated a national SSBG Superstorm Sandy Disaster Relief Act error rate from the aggregate findings across all three states.

HHS reviewed 612 records in FY 2016. For the case record review, HHS reviewed 312 case records across the 3 states – 47 cases in Connecticut, 181 cases in New Jersey, and 84 cases in New York. For the vendor payment review, HHS reviewed 300 vendor payments across the three states – 5 payments in Connecticut, 111 payments in New Jersey, and 184 payments in New York.

The SSBG gross and net improper payment estimate for FY 2016 is 0.68 percent or $1.35 million.

The error rate for the case record reviews was 1.84 percent, while the error rate for the vendor payment reviews was 0.55 percent.

13.22 SSBG Root Causes and CAP

Of the 612 records reviewed, 37 records had an improper payment.

Three errors (representing 0.002 percent of the estimated improper payments) were categorized as administrative or process errors due to state or local agency. These errors included: (1) miscalculation of payment amounts due to an incorrect formula; and (2) clerical errors in calculating payment amounts based on vendor claims.

Twenty-one errors (representing 20.74 percent of the estimated improper payments) were categorized as administrative or process errors due to other party (i.e., non-federal, non-state, and non-local agencies). These errors included: (1) clients receiving greater than necessary benefit amounts; (2) service provider mistakenly disposing of client eligibility documentation (though the provider was able to obtain new documentation after reviews were completed); (3) clients receiving benefits despite documentation indicating ineligibility for service; (4) clients receiving benefits despite not fully completing eligibility documentation; (5) clients receiving benefits before fully establishing their eligibility for service; (6) a service provider failing to obtain client’s signature verifying receipt of benefits; and (7) a service provider issuing a benefit payment on a client’s behalf before all internal payment approval processes were completed.

Thirteen errors (representing 79.26 percent of the estimated improper payments) were categorized as insufficient documentation to determine. These errors included: (1) case records missing necessary eligibility documentation (e.g., proof of insurance or proof of income); or (2) records missing necessary documentation of proper payment processing (e.g., proof of payment, payment approval forms, or copies of bills/invoices to be paid).

Corrective Actions to Address Root Causes:

In response to FY 2016 improper payment findings, HHS will provide each reviewed state a letter outlining the development of CAPs. These letters will be accompanied by itemized lists of unresolved errors from the FY 2016 review period (including descriptions of improper payment findings and amounts), and will establish a 30-day timeframe for states to respond with planned corrective actions. HHS will also hold calls with each state to answer any questions related to developing CAPs or establishing improper payment recovery amounts. In developing their responses, states may provide an explanation for recovery amounts to be sought for each error; however, HHS retains final discretion in determining total amounts of funds subject to recovery. Further information on specific root causes and corrective actions is located below.

Root Cause: Administrative or Process Errors Made by State or Local Agency

To address these errors, HHS will develop strategies with states to ensure that all documentation required for payment processing is present and complete before payments to vendors are approved. These activities will also emphasize examination of receipts and invoices to ensure that payments made by the states reflect established payment schedules and reimbursement protocols. HHS will continue to work with states to examine where in their payment approval processes the greatest intervention is warranted.

Root Cause: Administrative or Process Errors Made by Other Party

To address these errors, HHS will develop strategies with states to reinforce the importance of: (1) collecting all client eligibility documentation prior to the provision of service benefits; (2) ensuring that eligibility documentation is properly examined; (3) providing benefits to clients that match their documented needs; (4) preserving critical case record documentation for auditing needs; and (5) ensuring that payment processing procedures are followed, such that payments/benefits are not dispersed until all requisite signatures/approvals are obtained. HHS will continue to work with states to address how error-prone vendors can improve their client intake processes and improve processes for assessing and approving client benefits.

Root Cause: Insufficient Documentation to Determine

To address these errors, HHS will develop strategies with states to monitor and provide oversight to the most error-prone service agencies and providers. These strategies will reinforce the importance of record maintenance and organization. HHS will work with states to assess typical practices of record maintenance and organization.

13.23 SSBG Improper Payment Recovery

Of the total error findings, $1.35 million was associated with overpayments. As states receive and review all unresolved errors from the FY 2016 review period, HHS will work with states to identify items for which additional corrective action will be taken (including obtaining additional documentation, making process adjustments, and the current state of improper payment recovery). Where additional action around improper payment recovery is warranted, HHS will work with states to focus recovery efforts on improper payments resulting from core eligibility errors, where benefits or payments should not have been paid. HHS is also working with states to recover overpayments identified in previous measurement cycles, as appropriate.

13.30 ASPR Research

13.31 ASPR Research Statistical Sampling Process and Results

ASPR received approximately $11.9 million in Disaster Relief Act funding to evaluate preparedness and response activities in the affected states. ASPR’s Superstorm Sandy improper payment methodology was conducted in two stages. Under the first stage, for FY 2014 reporting, HHS reviewed the eligibility of grantees that received funding in FY 2013. The second stage of the methodology was implemented in FY 2015 and continued in FY 2016. The methodology calculates an unallowable spending error rate (e.g., unallowable expenses or lack of documentation) based on a review of each grantee’s expenditures during the review period. The sample for the FY 2016 reporting period consisted of expenditures made during FY 2015 (October 1, 2014 to September 30, 2015).

Based on a review of over 900 transactions, the ASPR Research gross and net improper payment estimate for FY 2016 is 0 percent or $0.

13.32 ASPR Research Root Causes and CAP

Corrective Actions to Address Root Cause:

Although HHS has not identified any improper payments in the ASPR Research program in FY 2016, HHS established internal controls to prevent improper payments from occurring.

13.33 ASPR Research Improper Payment Recovery

No recoveries will be attempted as no improper payments were identified during this or previous reviews.

13.40 SAMHSA

13.41 SAMHSA Statistical Sampling Process and Results

SAMHSA received $10 million under the Disaster Relief Act. SAMHSA awarded approximately $6.2 million to four programs and returned approximately $3.8 million because fewer organizations applied for the funding and applications received were for amounts significantly less than expected. The four funded programs were: 1) Behavioral Health Treatment; 2) Disaster Distress Helpline; 3) Resiliency Training for Educators; and 4) Medication Assisted Treatment of Opioid Addiction Restoration.

For FY 2016, SAMHSA’s program universe subject to sampling consisted of four grants awarded to New York State ($798,339), New York City ($2,947,786), New Jersey ($329,120), and Links2Health ($2,100,000) for the four funded programs listed above. Between July 1, 2015 and June 30, 2016, SAMHSA had outlays of $1.279 million across 13 transactions. Due to the small number of transactions, SAMHSA reviewed all outlays for payment accuracy and used the results to calculate the total improper payments for the program.

SAMHSA’s gross improper payments for FY 2016 is 0.05 percent or $624.59; the net improper payments estimate is 0.05 percent or $624.59.

13.42 SAMHSA Root Causes and CAP

SAMHSA’s improper payments identified during the review period were due to administrative or process errors made by the grantees (100 percent). The total gross improper payments of $624.59 were due to one transaction that improperly calculated direct and indirect expenses.

Corrective Actions to Address Root Cause:

Root Cause: Administrative or Process Errors Made by Other Party

SAMHSA’s improper payment results were discussed with the grantee; to date, the grantee has not indicated concurrence with the findings. SAMHSA does not anticipate future improper payments, as the grants under the specified programs have ended.

13.43 SAMHSA Improper Payment Recovery

SAMHSA is correcting the entire $624.59 in improper payments by requesting a refund from the grantee.

13.50 NIH Research

13.51 NIH Research Statistical Sampling Process and Results

NIH received $148.7 million in funds under the Disaster Relief Act to support recovery efforts at eligible impacted universities and research institutions. These funds will restore NIH’s investment in biomedical research and infrastructure that was severely damaged or destroyed by Superstorm Sandy.

Due to the variable grant expenditure amounts, NIH implemented a stratified random sampling process, with the sampling frame being divided into mutually exclusive groups or "strata" based on expenditure amount. Each sampling period consisted of six months. NIH selected a random sample of expenditures from the grantees quarterly reports for the respective two quarters. The sampling unit was the total quarterly expenditures for a single award, while the sampling frame was the collection of all reports filed containing expenditures during the sampling period. NIH used a random number generator to assign random numbers to each quarterly expenditure report. The list of expenditure reports was sorted by stratum and random number, and the appropriate number of items from each stratum was reviewed. NIH’s methodology examined two areas for improper payments: (1) ensuring funds were used for an allowable program use and (2) grantee eligibility. For each grant in the sample, NIH requested detailed expenditure data and appropriate backup documentation from the grantee to determine allowability of expenditures. NIH also confirmed grantees’ continued eligibility to receive Disaster Relief Act funding in accordance with HHS requirements.

Under its methodology, NIH completed two rounds of improper payment reviews from FY 2014 to FY 2016 covering 12-months of expenditures in two semi-annual sampling periods: July 1 to December 31 and January 1 to June 30. For FY 2015, NIH reviewed 357 expenditure reports representing 242 grant awards and 18 different grantee institutions. For FY 2016, NIH reviewed 71 expenditure reports representing 50 grant awards and 14 different grantee institutions. The sample was smaller in FY 2016 due to the end of the two-year funding period.

The NIH Research gross and net improper payment estimate for FY 2016 is 0 percent or $0.

13.52 NIH Research Root Causes and CAP

HHS did not identify any improper payments in the NIH Research program in FY 2016.

13.53 NIH Research Improper Payment Recovery

No recoveries will be attempted as no improper payments were identified.

14.0 Internal Control Over Payments

In FY 2016, the Department summarized HHS’s status of internal control over payments for each program reporting an improper payment rate, as required by Appendix C to OMB Circular A-123. HHS’s error rate measurements and root cause analyses have led to the implementation of a number of effective strategies to prevent, detect, and recover improper payments (many of which are discussed in Section 11.0: Program-Specific Reporting Information) and help create and maintain a robust internal control system. Generally, these strategies

are tailored to the nature of program improper payments resulting from administrative and documentation errors rather than from fraud and abuse. Examples of HHS’s internal control over payment efforts include:

• Implementing key control activities to prevent and detect improper payments;
• Using, sharing, and communicating information that is timely, accurate, and reliable; and
• Performing monitoring and assessment activities.

Additional information on internal control over payment efforts can be found on pages 208 – 216 of the FY 2015 AFR. As shown in Table 3 below, HHS programs have implemented internal controls to prevent improper payments. HHS continues to improve and evaluate its internal control over payment efforts.

Table 3
FY 2016 Risk Susceptible Programs Status of Internal Controls

Internal Control Standards	Medicare FFS	Medicare Part C	Medicare Part D	Medicaid	CHIP	Foster Care	Child Care
Control Environment	4	4	4	3	3	3	3
Risk Assessment	4	4	4	4	4	4	3
Control Activities	3	3	3	3	3	4	3
Information and Communication	4	4	4	3	3	3	3
Monitoring	3	3	3	3	3	4	3

Legend:
4 = Sufficient controls are in place to prevent improper payments.
3= Controls are in place to prevent improper payments but there is room for improvement.
2 = Minimal controls are in place to prevent improper payments.
1= Controls are not in place to prevent improper payments.

15.0 Recovery Auditing Reporting

HHS developed a risk-based strategy to implement the recovery auditing provisions of IPERA. Specifically, HHS focuses on implementing recovery audit programs in Medicare and Medicaid, which accounted for 86 percent of HHS’s outlays in FY 2016. HHS is progressing in recovering improper payments in Medicare and Medicaid and, most importantly, implementing corrective actions to prevent improper payments, as described below.

Medicare FFS RACs

Section 302 of the Tax Relief and Health Care Act of 2006 required HHS to implement the Medicare FFS RAC program in all 50 states no later than January 1, 2010. HHS allows the RACs to review a variety of claim types, except for hospital patient status reviews, which are limited to only those providers referred by the QIOs for exhibiting persistent noncompliance with Medicare payment policies. HHS has been working to procure the next RAC contracts since 2013. However, multiple pre- and post-award protests have delayed the awards. As HHS continued the procurement process for the new contracts, the current contracts have been modified to allow the RACs to review claims through July 31, 2016, after which the RACs have continued to work to resolve all open claims and claims adjustments. As part of these contract modifications, HHS incorporated several program enhancements developed in response to industry feedback:

• Reducing the complex review timeframe from 60 to 30 days and withholding the contingency fee if the RAC does not meet its review deadline;
• Requiring the RAC to wait 30 days to allow for a discussion with the provider after identifying an improper payment before sending the claim to the MAC for adjustment;
• Confirming receipt of a discussion request and other written correspondence within three days;
• Broadening review topics to all provider types and requiring reviews of topics referred by HHS; and
• Enhancing the information available on the provider web portals.

In addition, HHS established requirements known as Additional Documentation Request (ADR) limits on the number of claims that RACs can review for each provider. In FY 2016, HHS revised its ADR limits for institutional providers to be diversified across the different claim types a facility submits (e.g., inpatient and outpatient claims). HHS will adjust the limits in accordance with a provider’s denial rate. Providers with low denial rates will have lower ADR limits while providers with high denial rates will have higher ADR limits. RACs are also required to apply incrementally the ADR limits for providers new to RAC reviews. HHS expects to award the new RAC contracts in early FY 2017.

In FY 2016, the Medicare FFS RAC program identified approximately $440.53 million in overpayments and recovered $404.46 million. Policy changes regarding the payment and treatment of inpatient hospital claims and a delay in awarding new Medicare FFS RAC contracts resulted in fewer reviews in FY 2016 compared to previous years. Meanwhile, amounts that HHS identified in previous years continue to be collected. During FY 2016, the majority of Medicare FFS RAC collections were from Diagnosis Related Group validations and outpatient therapy reviews.

In addition to using the Medicare FFS RACs to identify overpayments, HHS also uses Medicare FFS RAC findings to prevent future improper payments. For example, in FY 2016, HHS released quarterly Provider Compliance Newsletters that offered detailed information on 12 findings identified by the Medicare FFS RACs. Also, HHS used these findings to implement local and/or national system edits to prevent improper payments. More information on the Medicare FFS RAC program can be found at CMS's website.

Medicare Secondary Payer RACs

The Medicare Secondary Payer (MSP) RAC began full recovery operations at the end of FY 2013 and operates as the MSP Commercial Repayment Center (CRC). The CRC reviews information collected by HHS regarding beneficiaries that had or have primary coverage through an employer-sponsored Group Health Plan (GHP) and, as of FY 2016, situations where a Non-Group Health Plan (NGHP), such as a Workers’ Compensation entity or No-Fault insurer, has or had primary payment responsibility. When GHP information is incomplete, Medicare FFS may mistakenly pay for services as the primary payer. The CRC recovers these mistaken payments from the entity that had primary payment responsibility (typically the employer or other plan sponsor, insurer, or claims processing administrator). The debtors for these GHP MSP debts do not have formal appeal rights, but do have the opportunity to dispute the debt through the established “defense” process. In FY 2016, the CRC workload expanded to include the recovery of certain conditional payments made by Medicare FFS until HHS identifies an NGHP with primary payment responsibility. Upon learning that the NGHP has primary payment responsibility, the CRC initiates recovery of these conditional payments.

In FY 2016, the CRC identified approximately $243.68 million and collected $106.29 million in mistaken payments. Collections decreased by about $43.31 million in FY 2016, compared to $149.60 in FY 2015. FY 2015 collections were higher due to a one-time surplus of available GHP recoveries during that year. More information on the CRC can be found at: CMS's website.

Medicare Part C and Part D RACs

Section 6411(b) of the Affordable Care Act expanded the RAC program to Medicare Parts C and D. As part of the procurement process to secure a Medicare Part C RAC, HHS posted a Request for Quote in June 2014; however, HHS did not receive any responses to the solicitation. More recently, HHS posted a Request for Information in December 2015 to solicit additional feedback from industry regarding this program, and received several submissions in response to the announcement. HHS continues its implementation efforts and anticipates awarding a Part C RAC contract in 2017.

The Part D RAC program became fully operational in FY 2012. Since its launch, the Part D RAC recouped overpayments made as a result of prescriptions written by excluded or unauthorized providers and improper refills of Drug Enforcement Agency scheduled drugs. The Part D RAC recouped approximately $2.30 million in FY 2016. In addition, notifications of improper payments were sent to plan sponsors in FY 2016, totaling approximately $7.95 million and recoupments are expected to occur in FY 2017.

More information on the Medicare Part C and Part D RAC programs can be found at: CMS's website.

State Medicaid RACs

Section 6411(a) of the Affordable Care Act required states to submit assurances by December 31, 2010 that their programs meet the statutory requirements to establish State Medicaid RAC programs. States were required to implement RAC programs by January 1, 2012. Thus, FY 2016 is the fourth full federal FY of reporting State Medicaid RAC recoveries. As states continue to implement their State Medicaid RAC programs, State Medicaid RAC federal-share recoveries totaled $44.31 million in FY 2016. State Medicaid RAC federal-share recoveries include overpayments collected, adjusted, or refunded to HHS, as reported by states on the CMS-64.

By the end of FY 2016, 47 States and the District of Columbia had implemented Medicaid RAC programs to identify and recover overpayments and identify underpayments in their Medicaid programs. However, each state has the flexibility to tailor its RAC program where appropriate with guidance from HHS. For example, two of the states that have implemented Medicaid RAC programs ended their RAC programs when HHS approved an exception due to the high proportion of beneficiaries enrolled in Medicaid managed care compared to FFS. Five states currently have time-limited HHS-approved exceptions to Medicaid RAC implementation due to high managed care penetration or small beneficiary populations.

Recovery Auditing Reporting Tables

OMB Circular A-136 requires agencies to provide detailed information on their recovery auditing programs, as well as other efforts related to the recapture of improper payments. Some of our programs have results to report in this area and those results are included in the following tables. If HHS excluded a program from a table, it is because it does not have results in that area.

Table 4
Overpayments Recaptured with and without Recapture Audit Programs
FY 2016 (in Millions)

	Payment Recapture Audits of Contracts					Payment Recapture Audits of Benefits					Total		Overpayments Recaptured Outside of Payment Recapture Audits
Program or Activity	Amount	Amount Recap Note (1)	CY Recap Rate	CY + 1 Recap Rate Target	CY + 2 Recap Rate Target	Amount	Amount Recap	CY Recap Rate Note (1)	CY + 1 Recap Rate Target	CY + 2 Recap Rate Target	Amount	Amount Recap	Amount	Amount Recap
Medicare FFS Error Rate Measurement Note (2)													$25.55	$22.02
Medicare FFS Recovery Auditors	$440.53	$404.46	91.81%	85%	85%						$440.53	$404.46
Medicare Secondary Payer Recovery Auditor	$243.68	$106.29	43.62%	85%	85%						$243.68	$106.29
Medicare Contractors Note (3)													$14,534.26	$12,267.70
Medicare Part C Note (4)													$316.88	$316.88
Medicare Part C Recovery Auditors Note (5)
Medicare Part D Note (4)													$9.53	$9.53
Medicare Part D Recovery Auditors	$7.95	$2.30	28.93%	85%	85%						$7.95	$2.30
Medicare C RADV Audits Note (6)
Medicaid Error Rate Measure- ment Note (7)													$4.08	$0.70
CHIP Error Rate Measure- ment Note (7)													$1.63	$0.26
Medicaid Integrity Contractors-Federal Share Note (8)													$33.64	$9.02
State Medicaid Recovery Auditors – Federal Share Note (9)						N/A	$44.31	N/A	N/A	N/A	N/A	$44.31
Foster Care Eligibility Reviews - Post Payment Reviews													$1.43	$1.43 (Note 10)
Foster Care OIG Reviews													$0.00	$65.52
Foster Care Single Audits													$2.27	$7.91
Child Care Single Audits													$25.43	$0.13
Child Care Error Rate Measure- ment Note (11)													$0.11	$0.02
Child Care OIG Reviews													$3.02	$7.38
Head Start OIG Reviews													$0.63	$0.15
Head Start Single Audits													$4.49	$2.22
ACF OIG Reviews – All Other Programs													$8.19	$25.53
ACF Single Audits – All Other Programs													$1.44	$2.12
Superstorm Sandy SSBG Error Rate Measure- ment Note (12)													$0.12	$0.00
Superstorm Sandy SAMHSA Error Rate Measure- ment													$0.0006	$0.00
TOTAL	$692.16	$513.05	74.12%	85%	85%		$44.31				$692.16	$557.36	$14,972.70	$12,738.52

Notes:

1. The amount reported in the Amount Recaptured column is the amount recovered in FY 2016, regardless of the year HHS identified the overpayment.
2. The actual overpayments identified by the CERT program during the FY 2016 report period were $25,552,562.45. The identified overpayments are recovered by the MACs via standard payment recovery methods. As of the report publication date, MACs reported collecting $22,015,289.85 or 86.16 percent of the actual overpayment dollars.
3. This total reflects amounts reported by the Medicare FFS Contractors excluding the amounts reported for the Medicare FFS Recovery Auditors program and the Medicare FFS Error Rate Measurement program, which HHS reports separately in this table.
4. The values in the Medicare Part C and Medicare Part D rows represent overpayments reported and returned by Medicare Advantage organizations and Part D sponsors, respectively.
5. HHS expects to award a contract for a Medicare Part C RAC program in 2017.
6. During FY 2016, HHS continued the contract-level RADV audits based on calendar years 2011 and 2012 and launched the calendar year 2013 audits. As such, there were no RADV payment amounts identified or recovered in FY 2016.
7. For the Medicaid and CHIP Error Measurement rows, HHS works closely with states to recover overpayments identified from the FFS and managed care claims sampled and reviewed. Recoveries of Medicaid and CHIP improper payments are governed by the Social Security Act and related regulations under which states must return the federal share of overpayments. States reimburse HHS for the federal share of overpayments. Section 6506 of the Affordable Care Act amended the Social Security Act to allow states up to one year from the date of discovery of an overpayment for Medicaid and CHIP services to recover, or to attempt to recover, such overpayment before making an adjustment to refund the federal share of the overpayment.
8. For Medicaid, the Medicaid Integrity Contractors identified total overpayments that include both the federal and state shares. However, HHS reports only the actual federal share across audits.
9. For the State Medicaid Recovery Auditor row, states are only required to report the amount of recoveries on the CMS-64, and not the amount of improper payments identified or recovery rates or targets. The State Medicaid Recovery Auditors Amount Recaptured cell represents the federal share of the state recoveries as of the publication date of the AFR.
10. As a result of conducting Foster Care eligibility reviews in 16 states during the 12-month period between July 2015 and June 2016, HHS recovered over $1.4 million in Title IV-E improper payments. The recovered funds are comprised of $1,043,326 in disallowed maintenance payments and $382,688 in disallowed administrative payments.
11. The Child Care Error Rate Measurement information reflects overpayments that are identified through the statistical sampling process. The information reported represents the amount that is subject to disallowance. For the Child Care Error Rate Measurement Amount Recaptured information, states are required to recover child care payments that are the result of fraud and have discretion as to whether to recover misspent funds that were not the result of fraud, such as in cases of administrative error. Data reported in FY 2016 represent improper payments recovered by the Year Three states based on improper payments identified in FY 2013.
12. In FY 2016, HHS formally requested grantees to determine whether selected overpayments would be recaptured and allocated towards an allowable activity or repaid to the federal government. Grantees plan to complete actions for recapture or repayment in FY 2017.

Table 5
Disposition of Funds Recaptured Through Payment Recapture Audits
FY 2016 (in Millions)

Program or Activity	Amount Recovered	Type of Payment	Agency Expenses to Administer the Program	Payment Recapture Auditor Fees	Financial Management Improvement Activities	Original Purpose Note (1)	Office of Inspector General	Returned to Treasury
Medicare FFS Recovery Auditors	$404.46	Contract	$20.82	$39.12	N/A	$275.06	N/A	N/A
Medicare Secondary Payer Recovery Auditor	$106.29	Contract	$0.53	$17.41	N/A	$88.35	N/A	N/A
Medicare Part D Recovery Auditors	$2.30	Contract	N/A	$0.46	N/A	$1.84	N/A	N/A
State Medicaid Recovery Auditors – Federal Share Note (2)	$44.31	Benefits	N/A	N/A	N/A	N/A	N/A	$44.31
Total	$557.36		$21.35	$56.99	N/A	$365.25	N/A	$44.31

Notes:

1. Funds included under the Original Purpose column were returned to the Medicare Trust Funds after taking into consideration agency expenses to administer the program and recovery auditor contingency fees. In addition, the Medicare FFS Recovery Auditors Original Purpose cell also takes into consideration underpayments to providers that were identified and corrected ($69.46 million).
2. The state Medicaid recovery auditors’ row only includes information on the federal share of recoveries, which are returned to Treasury. States do not report information to HHS on how the state portions of recoveries are used.

Table 6
Aging of Outstanding Overpayments Identified in the Payment Recapture Audits
FY 2016 (in Millions)Note (1)

Program or Activity	Type of Payment	CY Amount Outstanding (0 – 6 months)	CY Amount Outstanding (6 months to 1 year)	CY Amount Outstanding (over 1 year)	Amount Determined to Not be Collectable
Medicare FFS Recovery Auditors	Contract	$45.51 Note (2)	$44.20	$1,598.15	N/A
Medicare Secondary Payer Recovery Auditor Note (3) and (4)	Contract	$155.53	$24.36	$0.00	N/A
Medicare Part D Recovery Auditors	Contract	N/A Note (5)	N/A	N/A	N/A
Total		$201.04	$68.56	$1,598.15	N/A

Notes:

1. The state Medicaid recovery auditors are not included in this table since states do not report information to HHS that would allow the Department to calculate the aging of overpayment amounts that are currently outstanding.
2. Under the Medicare FFS recovery auditors program, recovery of identified overpayments cannot begin until the overpayment is at least 41 days old. Therefore, the CY Amount Outstanding (0-6 months) includes identified overpayments that HHS cannot begin collecting.
3. The Medicare Secondary Payer recovery auditor maintains debts established under prior MSP recovery programs; consequently, collections exclusively related to mistaken payments identified by the MSP recovery auditor does not directly correlate to the amount outstanding.
4. The amount of outstanding payments identified by the Medicare Secondary Provider recovery auditor included in this table reflect the outstanding balances on debts identified in FY 2016.
5. Recoupments of FY 2016 Part D overpayments will not begin until the appeals process is complete. The appeals process is ongoing, but is expected to be completed during FY 2017. However, as stated in Section 15.0, HHS recovered $2.30 million in overpayments that the Part D RAC identified in previous years.

16.0 Do Not Pay Initiative

In June 2010, the President issued a Memorandum on Enhancing Payment Accuracy Through a "Do Not Pay List” in a network of databases where agencies can access relevant information before determining eligibility for a benefit, grant or contract award, or other federal funding. Subsequently, the “Do Not Pay List” was codified by IPERIA. The Presidential memorandum and IPERIA identified six databases to include in the Do Not Pay (DNP) portal. Treasury's DNP website includes information on currently available and pending data sources in the DNP portal.

Since 2010, HHS has worked diligently to implement the DNP initiative. HHS and CMS established a Computer Matching Agreement (CMA) with Treasury under the DNP initiative in FY 2014. HHS has continued to receive information through the CMA that was established in FY 2014 and worked to establish additional CMAs in FY 2016. In addition, several of our Divisions are continuing to use DNP to check for recipients’ or potential recipients’ eligibility and to prevent improper payments. Treasury-disbursed payments are matched against the SSA’s DMF and the General Services Administrations’ excluded parties’ elements of the System for Award Management in the DNP portal to identify improper payments on a daily basis. While the Department identified four potential improper payments over the past year as part of these daily matches (as shown in Table 8), there were no confirmed matches in FY 2016. Lastly, CMS is also checking certain payments against IPERIA-listed databases outside of the DNP portal, and reporting results for the first time in FY 2016. The results of these matches can also be found in Table 7.

Table 7
Results of the Do Not Pay Initiative in Preventing Improper Payments
FY 2016

	Number (#) of payments reviewed for possible improper payments	Dollars ($) of payments reviewed for possible improper payments	Number (#) of payments stopped	Dollars ($) of payments stopped	Number (#) of potential improper payments reviewed and determined accurate	Dollars ($) of potential improper payments reviewed and determined accurate.
Reviews with the IPERIA specified databases Note (1)	1,230,677 Note (2)	$385,481,524,698.27	0 Note (3)	0 Note (3)	4 Note (4)	$488.90 Note (4)
Reviews with the IPERIA specified database disbursed by CMS Note (5)	1,139,204,538	$395,065,205,838.23	656,399 Note (3)	1,576,586,430.05 Note (3)	N/A Note (6)	N/A Note (6)
Reviews with databases not listed in IPERIA	N/A	N/A	N/A	N/A	N/A	N/A

Notes:

1. This row shows payments that are disbursed through Treasury and matched against IPERIA specified databases.
2. HHS data included 18,857 payment records that contained missing or invalid information.
3. “Payments Stopped” refers to payments for which the agency has implemented Stop Payment Rules or a similar method of disbursement prevention during the pre-payment stage. It does not include post-payment reclamations, collections, or offsets.
4. This cell includes information on payments that were flagged as potentially improper, but were determined proper after further review.
5. This row represents the Medicare FFS payments that were reviewed for improper payments. Medicare FFS payments are not disbursed by Treasury but are also matched against databases listed in IPERIA.
6. Data on payments that were flagged as potentially improper, but were determined proper after further review, is not included in the table. However, 134,073 payments totaling $67,724,395.65 for deceased beneficiary’s claims were not stopped and subsequently determined improper after further review.

Summary of Financial Statement Audit and Management Assurances

As described in the “Management’s Discussion and Analysis” section, management annually presents an assurance statement on the effectiveness of internal control. The following two tables present summary information related to the material weakness identified during the audit, as well as conformance with FMFIA and compliance with FFMIA.

Table 1: Summary of Financial Statement Audit

Audit Opinion			Unmodified for Four Financial Statements. No Opinion Expressed on Statement of Social Insurance and Statement of Changes in Social Insurance Amounts
Restatement			No
Material Weaknesses	Beginning Balance	New	Resolved	Consolidated	Ending Balance
Financial Reporting, Systems, Analyses & Oversight	−	−	−	−	−
NIH Financial Management Systems and Review Processes	−	−	−	−	−
Financial Information Systems	1	−	−	−	1
Total Material Weaknesses	1	−	−	−	1

(Reference: OMB Circular A-136, Financial Reporting Requirements, October 7, 2016, page 143)

Beginning Balance: The beginning balance will agree with the ending balance of material weaknesses from the prior year.

New: The total number of material weaknesses that have been identified during the current year.

Resolved: The total number of material weaknesses that have dropped below the level of materiality in the current year.

Consolidated: The combining of two or more findings.

Reassessed: The removal of any finding not attributable to corrective actions (e.g., management has re-evaluated and determined a finding does not meet the criteria for materiality or is redefined as more correctly classified under another heading (e.g., Section 2 to a Section 4 and vice versa).

Ending Balance: The agency’s year-end balance of material weaknesses.

Table 2: Summary of Management Assurances

Effectiveness of Internal Control over Financial Reporting (FMFIA #2)

Statement of Assurance	Qualified
Material Weaknesses	Beginning Balance	New	Resolved	Consolidated	Reassessed	Ending Balance
Information System Controls and Security	1	-	-	-	13	0
Total Material Weaknesses	1	-	-	-	1	0

Effectiveness of Internal Control over Operations (FMFIA #2)

Statement of Assurance	Modified
Material Weaknesses	Beginning Balance	New	Resolved	Consolidated	Reassessed	Ending Balance
Information System Controls and Security	1	-	-	-	-	1
Error Rate Measurement	1	-	-	-	-	1
Medicare Appeals Process	0	1	-	-	-	1
Total Material Weaknesses	2	1	-	-	-	3

Conformance with Federal Financial Management System Requirements (FMFIA #4)

Statement of Assurance	Do not conform to financial management system requirements
Non-Conformances	Beginning Balance	New	Resolved	Consolidated	Reassessed	Ending Balance
Information System Controls and Security	1	-	-	-	13	0
Total Non-Conformances	1	-	-	-	1	0

Compliance with Section 803(a) of the Federal Financial Management Improvement Act (FFMIA)

	Agency	Auditor
1. Federal Financial Management System Requirements	No lack of compliance noted	Lack of compliance noted
2. Applicable Federal Accounting Standards	No lack of compliance noted	No lack of compliance noted
3. USSGL at Transaction Level	No lack of compliance noted	No lack of compliance noted

FY 2016 Top Management and Performance Challenges Identified by the Office of Inspector General

The Reports Consolidation Act of 2000, Public Law 106-531, requires the Office of Inspector General (OIG) to identify top management challenges, assess the Department’s progress in addressing each challenge, and submit this statement to the Department annually.

The OlG’s top management and performance challenges for fiscal year 2016 are:

1. Ensuring Program Integrity in Medicare Parts A and B
2. Effectively Administering the Medicaid Program to Improve Oversight of Managed Care, Address High Improper Payments, and Strengthen Program Integrity
3. Health Information Technology and the Meaningful and Secure Exchange and Use of Electronic Information
4. Improving Financial and Administrative Management
5. Ensuring the Proper Administration of HHS Grants for Public Health and Human Services Programs
6. Curbing the Abuse and Misuse of Controlled and Non-controlled Drugs in Part D and Medicaid
7. Ensuring Quality of Care and Safety for Vulnerable Populations
8. Operating and Overseeing the Health Insurance Marketplaces
9. Managing Delivery System Reform and Strengthening Medicare Advantage
10. Ensuring the Safety of Food, Drugs, and Medical Devices

See the full report on the OIG site at: http://oig.hhs.gov/reports-and-publications/top-challenges/2016

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DEPARTMENT’S RESPONSE TO THE OFFICE OF INSPECTOR GENERAL TOP MANAGEMENT CHALLENGES

To: Daniel R. Levinson, Inspector General
From: Mary K. Wakefield, Acting Deputy Secretary
Subject: FY 2016 Top Management and Performance Challenges Identified by the Office of Inspector General (OIG)

Thank you for the OIG’s work in assessing the major management and performance challenges facing the Department of Health and Human Services (HHS). We appreciate the OIG’s dedication to helping us improve operations through its audit and investigative work throughout the year.

HHS faces a number of long-term challenges. The suggestions you offer to address our challenges will help us inform and improve decisions related to budgeting, strategic planning, and other critical mission functions. It is critical we find innovative ways to work leaner. Looking ahead, we are committed to building on our progress. We recognize that there is more to be done that will require our organization’s sustained attention, action, and improvement. The Department’s Operating Divisions continue to focus on serving all Americans by protecting their health, providing essential human services, and promoting the well-being of individuals, families, and communities. The OIG’s work will help us do this in the most effective and efficient way possible.

We look forward to cooperating with you and our stakeholders on the continuous improvement of our activities. We are committed to focusing our resources on the issues related to these challenges as we smoothly transition into a new Presidential administration and continue to execute our strategic plan.

/Mary K. Wakefield/

Mary K. Wakefield
Acting Deputy Secretary
November 14, 2016

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[3] With the revision of OMB Circular A-123, Management’s Responsibility for Enterprise Risk Management and Internal Control, HHS reassessed the Information System Controls and Security material weakness and determined that the factors contributing to the material weakness are more correctly classified under the heading Effectiveness of Internal Control over Operations (FMFIA #2). The auditor categorized the same FMFIA material weakness as a lack of compliance with FFMIA (FMFIA #4).

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Also see these sections of the Agency Financial Report:

• Section I: Management, Discussion and Analysis
• Section II: Financial Section
• Section III: Other Information - Subsection 1
• Section III: Other Information - Subsection 2
• Section III: Other Information - Subsection 3
• Section III: Other Information - Subsection 4
• Appendices

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