Agencies managing large benefit payment programs face a difficult balancing act in the current budget environment. They have a duty to prevent and recover improper payments while maintaining strong relationships with their network of mission partners. However, they are often financially strapped in their ability to make investments to improve their improper payment systems or increase enforcement feet-on-the-street.
Agencies with tax or fee collection responsibilities face a similar challenge: to enforce existing collection laws fairly and collect monies owed without having the resources to expand enforcement staff or improve collection systems.
As agencies in both situations seek to do more with less to address these challenges, they can inform their strategies by considering business models currently being used successfully by major federal agencies and U.S. states to 1) increase fair enforcement of existing tax and improper payment laws, and 2) do so without spending money upfront on system modernization projects.
Boosting Resources to Tackle Improper Payments
For benefits paying agencies, the Centers for Medicare and Medicaid Services has pioneered an approach to increase resources it applies to reduce and recover improper payments, without needing the budget up-front to fund a project to make it happen. CMS Deputy Chief Operating Officer A. Michelle Snyder described CMS’s Recovery Audit program in July 28, 2011 testimony to the U.S. House Subcommittee on Government Organization, Efficiency, and Financial Management:
“The Recovery Audit program began as a 6-State demonstration project required by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003,” she testified. “Congress expanded the Recovery Audit program in the Tax Relief and Health Care Act of 2006, directing CMS to implement a permanent national Recovery Audit program in Medicare FFS by January 1, 2010. Recovery Auditors work to identify overpayments and underpayments in previously submitted and paid claims; per the statute, these contractors are paid on a contingency fee basis. The permanent Medicare FFS Recovery Audit program, as of July 4, 2011, corrected a total of $685 million in improper payments, including $110 million in underpayments corrected and $575 million in overpayments collected.”
The program incentivizes private sector partners to invest themselves in systems and people to identify potential improper payments and share that information with CMS for appropriate action. This approach expands CMS’s bandwidth, while maintaining CMS’s control over recovery decisions.
In 2010, Congress enacted legislation to broaden this recovery audit model to programs across the federal government. The Improper Payments Elimination and Recovery Act of 2010 states that, “if not prohibited under any other provision of law, the head of each agency shall conduct recovery audits with respect to each program and activity of the agency that expends $1,000,000 or more annually if conducting such audits would be cost-effective.”
“This bill brings the Improper Payments Elimination and Recovery Act to the next level and makes it stronger, more robust and more effective at preventing and recovering improper payments,” Sen. Tom Carper, D-Del., chairman of the Homeland Security and Governmental Affairs Subcommittee on Federal Financial Management, Government Information, Federal Services and International Security and chief sponsor of the legislation said, according to a July 2011 report in Government Executive.
So now the recovery audit model is an important tool for all benefit-paying agencies to assess and apply within the context of their programs.
Innovating to Close the Tax Gap
Tax and fee collection agencies face a similar challenge. As Michael Brostek, Director, Tax Issues, Strategic Issues at the U.S. Government Accountability Office said in June 28, 2011 testimony before the U.S. Senate Committee on Finance: “There are no easy solutions to the tax gap, but addressing the tax gap is as important as ever before in the face of the nation’s fiscal challenges. Innovative thinking and the combined efforts of IRS and Congress will be needed now and in the years to come.”
For potential approaches, agency leaders can examine an effort by the Commonwealth of Virginia. In the 1990s, Virginia faced a tight budget and a need to improve its collection systems. Virginia enacted legislation authorizing the tax commissioner to “enter into public-private partnership contracts to finance agency technology needs” where “compensation for such services shall be computed with reference to and paid from the increased revenue attributable to the successful implementation of the technology program.” Under subsequent public-private partnerships, Virginia’s Department of Taxation (VATAX) overhauled multiple facets of its tax system at no upfront cost to Virginia, and generated over $230 million over a ten year period.
In another similar example, the California Franchise Tax Board (FTB) adopted a performance-based contracting model to get modernization projects done without upfront cost. Members of the FTB documented their approach and experience in a paper presented at the Harvard University John F. Kennedy School of Government. Although written in the1990s, the paper’s analysis still rings true in today’s budget environment. For example, the FTB members wrote that their strategic planning “revealed a critical need to accelerate the deployment of appropriate technology within FTB. However, FTB did not have the in-house expertise to develop and implement the needed technology on its own. Also, FTB did not have the necessary funding available to meet its technology needs through the normal budget process.”
Like Virginia, the paper continues, the California FTB established a business model that “provides payment to the business partner only if and when the benefits are realized after implementation of the solution. This principle solves the up-front project funding problems, increases vendor commitment to success through their assumption of up-front project costs, and limits the State’s financial liability for unworkable solutions.”
After implementing the model, California overhauled its collections and auditing process, generating $784 million in increased revenues over an 11 year timeframe. The program continues on today.
These examples offer potential roadmaps for other agencies to explore as an innovative ways to incent potential mission partners to invest their own resources to help improve government operations.
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