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Fraud and Abuse Cost U.S. Government (and Taxpayers) about $100 billion

Do you know where your tax dollars are going?

By its own estimate, the U.S. government made about $100 billion in payments last year to people who may not have been entitled to receive them — tax credits to families that didn't qualify, unemployment benefits to people who had jobs and medical payments for treatments that might not have been necessary. Congressional investigators say the figure could be even higher.

The federal government's own astounding estimate is more than half a trillion dollars over the past five years," said Representative John Mica (R-Fla). "The fact is, improper payments are staggeringly high in programs designed to help those most in need — children, seniors and low-income families."

I believe that nobody really knows exactly how much taxpayer money is wasted through improper payments. If the government did know it should mean it doesn’t allow cheaters to get away with their crimes. Inefficiency in government leads me to believe the $100 billion probably should be doubled to have an accurate estimate of waste and abuse.

Each year, federal agencies are required to estimate the amount of improper payments they issue. They include overpayments, underpayments, payments to the wrong recipient and payments that were made without proper documentation.

Some improper payments are the result of fraud, while others are unintentional, caused by clerical errors or mistakes in awarding benefits without proper verification.

In 2013, federal agencies made $97 billion in overpayments, according to agency estimates. Underpayments totaled $9 billion.

According to the Government Accountability Office (GAO), the amount of improper payments has steadily dropped since 2010, when it peaked at $121 billion. I wonder whether that means we should jump for joy because the amount is steadily declining. This is like saying we should rejoice that the unemployment rate has dropped from a high of 10% in 2009 to the current rate of 6.1 percent. When you start with an outrageously high number it doesn’t take much for it to go down albeit still above historical levels.

The largest sources of improper payments are government health care programs, according to GAO estimates. Medicare's various health insurance programs for older Americans accounted for $50 billion in improper payments in the 2013 budget year, far exceeding any other program.

Most of the payments were deemed improper because they were issued without proper documentation, said Shantanu Agrawal, a deputy administrator for the Centers for Medicare & Medicaid Services. In some cases, the paperwork didn't verify that services were medically necessary. All I can say is inefficiency begets more inefficiency born out of incompetence in oversight of federal programs.

"Payments deemed 'improper' under these circumstances tend to be the result of documentation and coding errors made by the provider as opposed to payments made for inappropriate claims," Agrawal said. I have to ask shouldn't these coding errors be caught by the agencies and payments denied?

Among other programs with large amounts of improper payments:

—The earned income tax credit (EITC), which provides payments to the working poor in the form of tax refunds. Last year, improper payments totaled $14.5 billion. That's 24 percent of all payments under the program.

The EITC is one of the largest anti-poverty programs in the U.S., providing $60.3 billion in payments last year. Eligibility depends on income and family size, making it complicated to apply for the credit — and difficult to enforce, said IRS Commissioner John Koskinen.

"EITC eligibility depends on items that the IRS cannot readily verify through third-party information reporting, including marital status and the relationship and residency of children," Koskinen told a House of Representatives committee in May. "In addition, the eligible population for the EITC shifts by approximately one-third each year, making it difficult for the IRS to use prior-year data to assist in validating compliance."

— Medicaid, the government health care program for the poor. Last year, improper payments totaled $14.4 billion. (Double it and you probably have a closer estimate, I believe.)

Medicaid, which is run jointly by the federal government and the states, has seen a steady decline in improper payments since 2010, when they peaked at $23 billion. (I doubt this is the case. More likely billions are missed because of inefficiencies in the system).

—Unemployment insurance, a joint federal-state program that provides temporary benefits to laid-off workers. Amount of improper payments last year: $6.2 billion, or 9 percent of all payments.

The Labor Department said most overpayments went to people who continued to get benefits after returning to work, or who didn't meet state requirements to look for work while they were unemployed. Others were ineligible for benefits because they voluntarily quit their jobs or were fired.

—Supplemental Security Income, a disability program for the poor run by the Social Security Administration. Amount of improper payments: $4.3 billion, or 8 percent of all payments.

Social Security's much larger retirement and disability programs issued $2.4 billion in improper payments, according to agency estimates. Those programs provided more than $770 billion in benefits, so improper payments accounted for less than 1 percent.

One of the many problems we face as a nation is the extent to which some people go to cheat the system. All too may choose to commit fraud rather than work for their money. Another problem is the lack of a proper work ethic by those in charge of making sure it does not happen. A third is lax oversight by top administrators, as we have seen in the IRS and other agencies. A fourth is Congresses inability to do anything positive including reign in improper payments from federal programs.

When added together, we can see why ethics is on the decline in the U.S. All too many people put their own interests ahead of others. All too many don’t care about the consequences of their actions. Very few are motivated to do the right thing. In the end an ethical society depends on voluntary compliance with laws and regulations. In my view the improper payments are just another example that we have lost our ethical compass as a nation.

Blog posted by Steven Mintz, aka Ethics Sage, on July 24, 2014. Dr. Mintz is a professor in the Orfalea College of Business at Cal Poly, San Luis Obispo. He also blogs at: www.ethicssage.com.