FY 2021 Improper Payment Totals Hit an All-Time High of $281B Due to the Pandemic

Improper payments (IP) are payments made by the government to the wrong person, in the wrong amount, or for the wrong reason. Improper payments include both overpayments and underpayments. Improper payments do not directly translate to fraud or monetary loss but need addressing to protect the integrity of taxpayer and federal funds.

In an effort to reduce IP in federal programs, Congress has passed several pieces of legislation since 2002.  The Improper Payments Elimination and Recovery Act of 2010 (IPERA) expanded core principles of the 2002 Improper Payments Act in the areas of agency IP identification, compliance, and reporting requirements. 

Unfortunately, total IP and IP rates have been increasing since FY 2017 and dramatically increased in the past year due to the pandemic.

The increase in FY 2021 IP is mostly attributable to the Federal-State Unemployment Insurance (UI) program where IP  jumped from $8B in FY 2020 to $78B in FY 2021. The pandemic triggered a massive surge in UI claims that overwhelmed state-run agencies responsible for administering unemployment insurance. In March 2020, initial claims rose from 211,000 a week to 6.6M a week. Outdated IT systems and limited statutory fraud and eligibility controls make the UI program more susceptible to improper payments.

Additionally, the Medicaid program saw an increase in IP from $86.5B in FY 2020 to $98.7B in FY 2021 mainly due to the increase in program outlays. Total program outlays increased from $405B to $455 billion during the same time period and the rate of IP remained steady at 21%.

In an effort to reduce administrative burden and make IP data and information more useful and actionable, OMB made several changes to the payment integrity compliance framework in March 2021.  One of these changes is a new categorization of payment types.  Payments are now classified as proper payments, improper payments, or unknown.  An “unknown” payment is defined as a payment that cannot be discerned as improper or proper. Previously, unknown payments would have been grouped with improper payments.

The chart below shows totals for IP without unknown payments for the last three years:

Agencies began classifying payments as unknown as of FY 2019. Most of the unknown payments occurred in FY 2019 and FY 2020.  In FY 2021, the IP amount with unknown payments is relatively close to the IP amount without unknown payments. Because the totals are similar, the rest of the charts in this blog refer to IP including unknown payments.

Charted below shows the distribution of IP by agency:

HHS continues to show the highest amount of IP at $154B, equating to 12.9% of total program outlays for FY 2021.

In FY 2021, Medicaid outpaced the Medicare FFS program for the largest improper payment totals at $99B and a rate of 21.7% of total program outlays. The Medicare FFS program shows the second-largest IP amount at $25B with a 6.3% improper payment rate. However, the Medicare FFS program has shown progress in increasing program integrity and reducing IP. The amount of IP in the program fell by $700M in FY 2021 and the IP rate remained the same as the previous year.

Below are the main causes for IP in FY 2021: 

Most IPs are due to the failure to access data or information needed to determine if a payment is improper. This occurs because of human error to access the appropriate data or information to determine whether a beneficiary or recipient should be receiving payment, even though such information exists and is accessible to the agency or entity making the payment.

The second most frequent cause of IP is the inability to access data or information to determine if a payment is improper. In this case, the information needed to validate payment accuracy exists but the agency or entity making the payment does not have access to it.

Although IP amounts rose from FY 2020 to FY 2021, if the UI program is eliminated from FY 2020 and FY 2021 IP amounts, total IP would have been $198B FY 2020 and $203B in FY 2021, which is nearly flat. The administration is taking targeted action to reduce improper payments in the UI program.  The American Rescue Plan included $2B to support grants to prevent identity theft, deploy “Tiger Teams” to work with state UI officials, and upgrade outdated IT systems. The administration also established a data-sharing agreement between states and the Labor Inspector General to help prevent multi-state UI fraud.

In an OMB memo regarding the new IP totals, the agency stated that it is working closely with the oversight community and agencies to make payment integrity a top priority. Additionally, the memo emphasized President Biden’s commitment to combatting payment errors and delivering effective, efficient, and accountable government.  

Efforts to curb waste and IP could lead to contracting opportunities for forensic accounting, investigators, claims analysts, and IT products and services, such as analytics, AI, and blockchain solutions.