Applying Risk Management Strategies to Reduce Improper Payments
Federal agencies make more than $2 trillion in payments to individuals and a variety of other entities each year. Disbursing these payments expose agencies to many risks. One such risk is making what is known as improper payments. Improper payments can take many forms: incorrect amounts paid to eligible recipients; payments made to ineligible recipients; payments for goods or services not received; duplicate payments; and payments with insufficient or no documentation.
Despite concerted governmentwide efforts, the issuance of Executive Order 13520, Reducing Improper Payments and the Improper Payment Elimination and Recovery Act (IPERA), federal agencies issued an estimated $136.7 billion in improper payments during FY15, the largest annual tally since 2004 when agencies first began reporting data on the subject. The fact is improper payments have increased for a fourth straight year and even more needs to be done to address this serious operational risk.
Risk Management & Reducing Improper Payments
A recent IBM Center report, Risk Management and Reducing Improper Payments: A Case Study of the U.S. Department of Labor, by Professors Robert Greer and Justin Bullock continues our long interest in risk management with a specific focus on employing risk management strategies to reduce improper payments at the U.S. Department of Labor’s (DOL) Unemployment Insurance (UI) program. The Unemployment Insurance program is a jointly administered federal-state program that provides unemployment benefits to eligible workers who are unemployed through no fault of their own and meet other state law eligibility requirements.
Due to the size and complexity of the UI program, and its role in disbursing funds directly to individual claimants, it faces significant challenges with payment efforts or making improper payments. DOL has devoted significant resources over the last six years to reducing those errors and managing the associated risks. The improper payment rate for Unemployment Insurance had fallen from 2006 to 2009, but it began to increase in 2010 and remained in violation of the IPERA standard for improper payments.
In response, the then assistant secretary of the Employment and Training Administration (ETA), Jane Oates, issued Unemployment Insurance Program Letter No.19-11 (UIPL No.19-11). Program letters play the role of communicating changes in the Department of Labor’s policies that affect UI state workforce agencies, which are the entities implementing Unemployment Insurance at the state level. This letter laid out a strategy in which the ETA encouraged its partners in state workforce agencies to adopt its national strategic plan to target improper payments, and in particular, overpayments.
Root Causes for Improper Payments
To better understand the risk management tools and strategies the DOL uses, Greer & Bullock reviewed eight UI program letters from 2011-2014. From this effort, four root causes of improper payments were identified:
- Payments made to claimants who continue to claim benefits after returning to work and failing to report (or underreporting) their claims
- Untimely and incomplete job separation information (information about the laid-off individual, also known as an individual experiencing job separation, was delivered late or incomplete to the Unemployment Insurance agents)
- The state’s inability to validate that claimants have met the state’s work search requirements (i.e., the state workforce agency cannot adequately prove that the laid-off individual is meeting the state’s requirements for looking for a new job)
- Claimants’ failure to register with the state’s employment service or the agency’s failure to process the employment service registrations
Addressing these Root Causes - Findings
To combat these known financial and reputation risks, the DOL identified eight different strategies and based on the review of these strategies, Greer and Bullock found the Department of Labor did the following:
- Encouraged increased collaboration between the states and the federal government to implement strategies and tools that will aid the states in lowering improper payments throughout the Unemployment Insurance program
- Established clear metrics by which state workforce agencies can work. Labor provided numerous tools and strategies for the state workforce agencies while also allowing customization within these tools. Further, it encouraged states to develop state-specific strategies.
- Highlighted the importance of a formal strategy that allowed for a systematic risk management strategy to minimize improper payment rates
- Identified the known root causes that needed to be mitigated and then developed specific strategies to combat them.
- Used financial resources to encourage states to better manage and mitigate improper payment rates. DOL provided to all stakeholders (claimants, employers, third-party administrators, and state workforce agencies) multiple tools aimed at reducing the cost of complying with Unemployment Insurance regulations
- Encouraged the adoption of several tools that fostered increased communication among relevant stakeholders and standardized the shared information to increase effective communication and decrease confusion.
In the end, the strategies and tools provided by the Department of Labor encouraged the state workforce agencies to engage in several useful behaviors, such as better information gathering, modernizing information technology systems, standardizing communication with both claimants and employers, and using state and national databases to more quickly catch claimants’ misreported or unreported wages.
Based on the content analysis, case study, and descriptive analysis, Greer and Bullock offer four recommendations for reducing improper payments.
- Establish clear metrics for measurement and evaluation.
- Take advantage of recommended strategies and resources, but don’t be afraid to innovate.
- Provide relevant and timely information to stakeholders.
- A broad range of strategies is needed when the causes of operational risks are varied.
Public managers faced with operational risks, and more specifically, improper payments, can use the information presented in this report to improve, create, or adopt risk management strategies. DOL and the state workforce agencies that adopted DOL strategies provide managers with examples of how they can propose and implement tools that address a variety of complex root causes of improper payments. It also highlights the administrative challenges in solving complex policy problems that require cooperation between federal and state agencies. Understanding the strategies and methods DOL employs to address rising improper payment rates will enable other managers to develop similar practices and improve organizational performance.
This report serves as an excellent companion piece to recent IBM Center reports which examine other aspects of risk management that can help government agencies. We hope that this new report will assist government leaders in better understanding the strategies and methods DOL employs to address rising improper payment rates and enable other managers to develop similar practices and improve organizational performance.