With great fanfare, The White House announced the passage of legislation that most Americans probably thought had always existed. Or, at least was common sense. In the year 2010, do we really need a law to prevent government payments to dead people? Or do away with double-paying our bills? Or requiring bureaucrats to end wasteful spending practices?
Apparently, and sadly, the answer is yes. It seems that the feds acknowledge handing out more than $180 million in benefits to about 20,000 deceased Americans over the last three years. And - try not to laugh or cry - more than $230 million has gone to 14,000 ineligible prisoners and fugitive felons. Medicare tops the list of shame, bungling tens of billions of dollars in wrongful payouts.
The Improper Payments Elimination and Recovery Act requires federal agencies to conduct annual risk assessments of programs, expands the types of programs that are subject to audits, and imposes penalties on agencies that don't comply. As a bit of a carrot, the legislation allows the agencies to keep the money they recover, for use in their own programs - ostensibly properly.
President Obama claimed that the new law would reduce waste and fraud by $50 billion by 2012. Obviously, the current president isn't to blame for all of the wasteful practices in Washington, but it is incredibly depressing that the federal government, with our tax dollars, has become so inept, and tolerant of possible criminal behavior, that they can actually find $50 billion to cut in just two years!
But our nation's capital isn't the only place where new legislation might save substantial tax dollars. We should be examining a little-known loophole in PA's school health care programs, which could be costing us big bucks. The problem is - like all school issues - the teachers' union, with the help of the state legislature, is a hundred steps ahead of the public.
Most school districts contract with health care claim administrators for paying employee and dependents' claims. There are more than $1.5 billion dollars involved every year. And nobody is required to audit these claims, whether they are made by the employees, or their dependents. The system relies completely on the abilities, and honesty, of the Human Resources departments of the 500 school districts, and the competence of the claim administrators' employees. There is no independent oversight on healthcare benefits as there is on all other aspects of school finances. Budgets and spending must be (at least minimally) audited every year. District financials, complex as they are, must all be open to the community. But there is zero transparency in the health care system. And, of course, federal privacy laws prohibit making claim information public.
As a result, a Human Resources Manager, knowing that nobody would audit the claims, could instruct the administrator to include his brother (not a district employee) in the list of eligible dependents. No one would know. Or, more likely, there could be just plain human error, like you find on your bills at home. Anyone who has been frustrated - or outraged - by Blue Cross, Comcast, Verizon, Mastercard, Any Bank, or any other company that handles zillions of transactions, understands. Mistakes are not uncommon.
There is a rule of thumb in auditing: in any process that requires human intervention, it is normal to have up to a three percent error rate. This could be due to bad coding, improper co-pay information, delay in processing termination documents, overlooked annual limits, or misidentifying individuals with similar names. Shoddy work, or honest mistakes, with no intention to defraud. That is why good business policy requires independent audits.
In the private sector, work like this would be audited as a matter of course. Companies can't afford the three percent (or more) losses. But not school districts providing exactly the same service. Because it's not their money - it's yours!
Given the huge number of districts in PA, and the relatively small size of the HR departments, the atmosphere is ripe for poor internal controls. In accounting-speak, this "limits the desirable high segregation of duties", and the weaker the segregation, the greater risk of errors - or fraud. And the greater the need for regular audits. In QCSD, HR Manager Nancianne Edwards is very competent, and a person with integrity. But the experience of the Phoenixville district, where, for five years, school personnel misappropriated tens of thousands of dollars, and covered it up until finally caught by an audit, should be a giant red flag to everyone.
Manuel Alfonso, a retired auditor and former QCSD board member, has been warning of this problem, and came up with some startling conclusions. His informed estimate (since the actual figures are not made public) using the US Census and reliable statistical sources, shows that between $36 million and $110 million may have been paid improperly statewide in 2008-09. In QCSD alone, that would be $110,000 - $330,000. Alfonso has asked PA Auditor General Jack Wagner to investigate.
Alfonso noted the deficiency in the state system: "At present, benefit payments to dependents are audited on an exception basis only. Neither the state auditors, nor the districts' independent auditors, review employee healthcare payments. Although I only comment on the need for dependent eligibility audits, I believe all healthcare claim payments should be audited periodically. Payments pertaining to employees are likely to have lower error incidence, but may still be significant."
And Alfonso sees even more trouble ahead: "On prescription drugs alone, the May 2010 Kaiser Family report estimated US spending to increase from $234.1 billion in 2008 to $457.8 billion in 2019, almost doubling over the 11-year period. The recently enacted Healthcare Reform Law establishes that children can remain in their parents' plan until age 26. In other words, the chance for error, or payment shenanigans, is going to be exponentially greater.
Alfonso also pointed out that even if there is an audit, agreements like QCSD has with its payment administrator limits examinations to only the current and previous year. This further reduces the opportunity to recover improper payments. If plan administrators knew that their work was going to be audited like most other public and private organizations, and auditors were permitted to go back further than one year, they would likely be far more careful.
Alfonso made several recommendations to Wagner:
Amend the Right to Know Law that currently (with union and legislative blessings) makes dependent names confidential - even from the school board! At present, board members can review the names (not the claims themselves) of covered employees, but they can not even see the names of dependents listed in their own districts! There is no one checking the eligibility of these people.
Schedule Dependent Eligibility Audits ASAP in order to meet limitations on the number of previous years that school districts can audit (like the one-year rule in QCSD). The most economical alternative for taxpayers and school districts would be to have the PA Auditor General perform Dependent Eligibility Audits as part of their regular yearly district audits. It might require more auditors, but the savings will be astronomically more. And it will keep the districts on their toes - and honest.
Our own Improper Payments Elimination and Recovery Act.