[House Hearing, 106 Congress]
[From the U.S. Government Printing Office]
WASTE, FRAUD, ABUSE, AND MISMANAGEMENT
=======================================================================
HEARINGS
before the
TASK FORCE ON DEFENSE AND
INTERNATIONAL RELATIONS
of the
COMMITTEE ON THE BUDGET
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
__________
HEARINGS HELD IN WASHINGTON, DC: JUNE 22 & JULY 20, 2000
__________
Serial No. 10-5
Printed for the use of the Committee on the Budget
__________
U.S. GOVERNMENT PRINTING OFFICE
65-268 WASHINGTON : 2000
COMMITTEE ON THE BUDGET
JOHN R. KASICH, Ohio, Chairman
SAXBY CHAMBLISS, Georgia, JOHN M. SPRATT, Jr., South
Speaker's Designee Carolina,
CHRISTOPHER SHAYS, Connecticut Ranking Minority Member
WALLY HERGER, California JIM McDERMOTT, Washington,
BOB FRANKS, New Jersey Leadership Designee
NICK SMITH, Michigan LYNN N. RIVERS, Michigan
JIM NUSSLE, Iowa BENNIE G. THOMPSON, Mississippi
PETER HOEKSTRA, Michigan DAVID MINGE, Minnesota
GEORGE P. RADANOVICH, California KEN BENTSEN, Texas
CHARLES F. BASS, New Hampshire JIM DAVIS, Florida
GIL GUTKNECHT, Minnesota ROBERT A. WEYGAND, Rhode Island
VAN HILLEARY, Tennessee EVA M. CLAYTON, North Carolina
JOHN E. SUNUNU, New Hampshire DAVID E. PRICE, North Carolina
JOSEPH PITTS, Pennsylvania EDWARD J. MARKEY, Massachusetts
JOE KNOLLENBERG, Michigan GERALD D. KLECZKA, Wisconsin
MAC THORNBERRY, Texas BOB CLEMENT, Tennessee
JIM RYUN, Kansas JAMES P. MORAN, Virginia
MAC COLLINS, Georgia DARLENE HOOLEY, Oregon
ZACH WAMP, Tennessee KEN LUCAS, Kentucky
MARK GREEN, Wisconsin RUSH D. HOLT, New Jersey
ERNIE FLETCHER, Kentucky JOSEPH M. HOEFFEL III,
GARY MILLER, California Pennsylvania
PAUL RYAN, Wisconsin TAMMY BALDWIN, Wisconsin
PAT TOOMEY, Pennsylvania
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Task Force on Defense and International Relations
CHRISTOPHER SHAYS, Connecticut, Chairman
MAC THORNBERRY, Texas, Vice JAMES P. MORAN, Virginia,
Chairman Ranking Minority Member
CHARLES F. BASS, New Hampshire DAVID MINGE, Minnesota
JOSEPH PITTS, Pennsylvania DARLENE HOOLEY, Oregon
JIM RYUN, Kansas TAMMY BALDWIN, Wisconsin
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Professional Staff
Wayne T. Struble, Staff Director
Thomas S. Kahn, Minority Staff Director and Chief Counsel
C O N T E N T S
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Page
Hearing held in Washington, DC, June 22, 2000--Inefficiencies in
DOD's Health Care Claims Processing: The Need to Improve
Performance.................................................... 1
Statement of:
H. James T. Sears, M.D., Executive Director, TRICARE
Management Activity, U.S. Department of Defense........ 10
Stephen P. Backhus, Director, Veterans' Affairs and
Military Health Care Issues, U.S. General Accounting
Office................................................. 16
William J. Meyer, Senior Vice President of TRICARE, Blue
Cross-Blue Shield of South Carolina.................... 22
Prepared statement of:
Hon. James P. Moran, a Representative in Congress from
the State of Virginia.................................. 4
Hon. Paul Ryan, a Representative in Congress from the
State of Wisconsin..................................... 5
Hon. John M. Spratt, Jr., a Representative in Congress
from the State of South Carolina....................... 5
Dr. Sears................................................ 13
Mr. Backhus.............................................. 18
Mr. Meyer................................................ 25
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Hearing held in Washington, DC, July 20, 2000--Pentagon Financial
Management: What's Broken, How to Fix It....................... 53
Statement of:
Hon. William J. Lynn, Under Secretary of Defense
(Defense) and Chief Financial Officer.................. 56
Robert J. Lieberman, Assistant Inspector General for
Auditing, U.S. Department of Defense................... 70
Jeffrey C. Steinhoff, Assistant Comptroller General,
Accounting and Information Management Division, U.S.
General Accounting Office.............................. 80
Prepared statement of:
Mr. Lynn................................................. 59
Mr. Lieberman............................................ 73
Mr. Steinhoff............................................ 83
Inefficiencies in DOD's Health Care Claims Processing: The Need to
Improve Performance
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THURSDAY, JUNE 22, 2000
House of Representatives,
Committee on the Budget,
Task Force on Defense and International Relations,
Washington, DC.
The Task Force met, pursuant to call, at 10:05 a.m. in room
210, Cannon House Office Building, Hon. Mac Thornberry (vice
chairman of the Task Force) presiding.
Members present: Representatives Thornberry, Shays, Buyer,
Moran, Spratt, and McDermott.
Mr. Thornberry. We are going to go ahead and get started.
Mr. Moran is on his way and will join us shortly.
Let me welcome our witnesses and guests. This is the eighth
in a series of hearings held by the Budget Committee to
identify management and financial improvements to make
government agencies more efficient and effective. Of course,
making the most out of each taxpayer dollar is important to all
of us and I certainly appreciate Chairman Kasich's focus on
those issues.
Today, we are going to concentrate on improvements to the
military health care system as part of an overall effort to
improve quality of life for our military. Senior leadership at
the Department of Defense and especially Chairman Shelton have
committed themselves to making significant improvements in the
TRICARE program. Unfortunately, the President's budget proposal
this year did little to meet the full range of expectations
which were created by the Chief's support.
George Washington once said that the willingness with which
our young people are likely to serve in any war, no matter how
justified, shall be directly proportional as to how they
perceive the veterans of earlier wars were treated and
appreciated by their nation, and that, in sum, is the heart of
the reason this issue concerns me, not just doing right by
retirees but how we can get and keep top-quality people in the
military.
In May, the House passed a series of improvements in the
Floyd Spence Defense Authorization Act to try to deal with a
number of quality of life issues. Included in that was a 3.7
percent pay raise, adding money for housing allowance, dealing
with the food stamp issue, and a number of improvements dealing
with health care. I am pleased today that on our panel the
chairman of the Personnel Subcommittee of the Armed Services
Committee, the gentleman from Indiana, Mr. Buyer, has joined
us, because he is responsible for those improvements, as well
as others which Congress has made over the past few years.
Among other things, we learned during Chairman Buyer's
hearings that inefficient claims processing and payment were
among the most significant factors undermining the provider and
beneficiary support of TRICARE. We also found that substantial
savings could be gained by reducing the cost of processing
military medical claims. It is a disturbing fact that the
average cost to process a Medicare claim is $1.78 while the
average cost to process a TRICARE claim gets close to $8. There
are a variety of reasons for those differences we will be
talking about today, but the bottom line is, we could save up
to about $500 million over the next 5 years if we can improve
the paperwork and processing costs.
We are going to try to shed some light on the opportunities
for those improvements and how managed care support contractors
and DOD health officials can work together to reduce
administrative requirements for TRICARE. I think the bottom
line for all of us is that this money which is being used for
administrative costs and paperwork could be used for health
care, and that is certainly what we would prefer to have done.
At this time, I would yield to the chairman of this task
force, the gentleman from Connecticut, for any statement he
would like to make.
Mr. Shays. Thank you, Mr. Chairman. I also welcome our
witnesses and guests.
Last year, I sat down with a squadron of F-15 pilots at
Hurlbert Air Force Base in Florida and asked what was on their
minds. I expected to hear about spare parts shortages, distress
at their high operational tempo, and the need for fighter
aircraft modernization. But the conversation that followed was
dominated, I have to say overwhelmed, by complaints about the
Department's health care program, TRICARE. They described
difficulties making appointments, confusing coverage rules,
delayed payments, and denied claims. They described anguished
late-night telephone conversations with spouses and children
calling from the other side of the world, pleading for help
navigating the torturous TRICARE bureaucracy.
So when the task force vice chairman, Congressman
Thornberry, suggested we focus our first hearing on
inefficiencies in DOD health care, I concurred eagerly because
wasted TRICARE dollars affect so much more than just the fiscal
bottom line. Improving TRICARE claim processing and customer
service improves the quality of life for millions of service
members and their families. An efficient, responsive health
care system contributes to military readiness and sustains
morale. Military recruits need to be able to tell TRICARE
success stories, not TRICARE horror stories.
When a prospective volunteer in today's competitive job
market says, how is your health care plan, how is the DOD
health plan, according to the General Accounting Office [GAO],
TRICARE is too complex, but reluctant to standardize coverage
rules for fear of further alienating an already diminishing
pool of providers. The price of excess complexity is paid in
scarce health care dollars as paper claims clog the system and
fraudulent vendors manipulate the byzantine payment process to
their advantage.
As the former chairman of an oversight subcommittee with
jurisdiction over Federal health care programs, I am reluctant
to cast the Medicare program as a role model of efficiency and
responsiveness. In many ways, I think a comparison between
claims processing costs in the two systems is apt, but TRICARE
could emulate recent steps by the Medicare program to
streamline claims through electronic processing, standardized
vendor identification numbers, and systematically review high-
risk claims for fraud. DOD should also evaluate the benefits of
joint purchasing and closer integration with the Department of
Veterans Affairs, VA, health programs.
I look forward to the testimony of our witnesses this
morning on these important issues and also welcome our
colleague, Mr. Buyer, who is clearly in the center of this
issue, as well as Mr. Spratt, who has always been a
constructive force on this Budget Committee.
Mr. Thornberry. I now recognize the distinguished ranking
member of the full committee and member of the Armed Services
Committee, the gentleman from South Carolina.
Mr. Spratt. Thank you, Mr. Chairman, and thank you for
convening this important hearing. I would like to welcome our
three distinguished witnesses, Dr. Sears from the Department of
Defense, Steve Backhus from the GAO, and William Meyer,
Palmetto Government Benefits Administrator--a long name, but a
very important company with a very, very impressive record of
insuring stewardship in the management of our health care
assets, both in Medicare and in TRICARE.
This particular hearing will focus on TRICARE, and I think
that is extremely important. It is an important program that is
not working as well as it should and must, and there are a
number of problems with it and one is the cost of processing
claims. The cost of processing claims for TRICARE exceeds the
amount that we pay for Medicare and we need to know why. I
think it has something to do with the implementation of the
whole TRICARE program. I rather suspect that we have
underestimated the cost of the TRICARE program providing the
quality of care that our service members not only have a right
to expect, they have earned the right to that kind of care.
And furthermore, as we have tried to in the Congress
improve TRICARE, we have probably increased the burdens, the
demands upon this particular system. If the House proposal
which we have passed in the defense authorization bill goes
through or if the Senate proposal goes through, for example, in
the Senate, they are proposing that all retirees have the
option once they are in TRICARE, TRICARE Prime, of staying in
TRICARE Prime past the age of 65. I think they should have that
right. I think they earned that right. But if that happens,
that is nearly two million additional retired service members
who will be imposing additional demands upon the system and we
need to know, are we adequately providing for the
administration of this system? Why does it cost so much to
process these claims?
Mr. Meyer, I think you will tell the committee today that
your organization at times has had its own substantial backup
with the Department of Defense where you have processed
numerous claims and had outstanding receivables for the payment
of U.S. services that simply have not been paid in a timely
fashion by the Department of Defense. We need to get to the
bottom of this if we are going to get to the bottom of the
problems of TRICARE, and I think this is critically important.
I am delighted we are having this hearing. I have a much,
much longer statement which I think is pertinent but I will not
try the patience of the committee. Let us get on to the
substance of it. Mr. Chairman, I would like to offer this for
the record.
Mr. Thornberry. Without objection, any written statement
members would like to make will be made a part of the record.
[The prepared statements of James Moran, Paul Ryan, and
John Spratt follows:]
Prepared Statement of Hon. James P. Moran, a Representative in Congress
From the State of Virginia
Mr. Chairman, I want to thank you for scheduling today's hearing on
TRICARE claims processing. I look forward to the testimony of our
witnesses and greatly appreciate your willingness to allow me to submit
my statement for the record.
As you know from my involvement on this Committee and on the
Defense Appropriations Subcommittee, providing quality, affordable
health care for our nation's military personnel, their families and
retirees is an issue I have followed closely during my years in
Congress.
It is especially important now as we grapple with difficulties in
recruitment and retention of our military men and women. It is critical
that this Congress not only provide adequate health care for our active
duty personnel, but that we ensure that our nation's military
retirees--especially the 1.4 million Medicare-eligible military
retirees--have more health care options.
In the past few Congresses, I have introduced legislation granting
Medicare eligible military retirees the option of participating in the
Federal Employees Health Benefits Program. I introduced the Health Care
Commitment Act because I am deeply concerned that military retirees,
particularly once they become eligible for Medicare, are being denied
access to health care. Medicare-eligible retirees are denied access to
CHAMPUS. They are prohibited from participating in TRICARE. They are
also effectively shut out of military medical treatment facilities
because they are placed last on the priority list for receiving care.
In effect, we have created a system where military retirees, once
they reach the point in life where they need health care the most, are
given the least from their former employer. This does not happen in the
private sector and does not happen to Federal civilian retirees. Having
a large number of constituents who are military retirees, I am familiar
with the enormous difficulties that many retirees experience in
accessing affordable health care, especially at a time when they need
it most.
I have worked with Congressman Spratt, Shows, Norwood and
Cunningham, among others, on a variety of legislation aimed at
providing better care for military retirees over age 65. The budget
resolution offered by House Democrats was the first vehicle considered
on the House floor this year to address this issue and include $16.3
bullion over 10 years to improve health care for Medicare-eligible
military retirees.
While we could spend an entire hearing on health care options for
our nation's military retirees, this hearing will concentrate on
TRICARE claims processing.
In hearings held earlier this year by the Military Personnel
Subcommittee of the House Armed Services Committee, there were several
stories of unacceptable delays in TRICARE claims processing. In some of
these cases, providers turned to the military beneficiary to seek
payment for services rendered. This frustrates many service members and
is a burden in particular for those that are deployed overseas. Even
worse, as the service members tried to get TRICARE to pay and the bill
went unpaid, the credit ratings of some service members suffered. So,
prompt payment of claims is directly linked to quality of life and the
morale of our troops.
While today's hearing will touch on the quality of claims
processing, it will mostly focus on the cost of TRICARE claims
processing. The Military Processing Subcommittee received testimony
that the average cost of processing a TRICARE claim was between $8.00
and $15.00. Even the lower end of this range is substantially more than
what it costs the Health Care Finance Administration to process
Medicare claims.
It is my understanding that we will hear testimony today that the
delays in claims processing occurred primarily in the mid-1990's when
TRICARE was first being established and that the most recent surveys
indicate that TRICARE contractors are meeting or close to meeting the
major deadlines for claims processing.
While I expect that witnesses today will also testify that many of
the criticisms of TRICARE processing costs are inflated or based upon
unfair comparisons to less complex claims, it is my hope that we can
all agree that more can be done and commit to making TRICARE more user
friendly and efficient.
Thank you for this opportunity to discuss such an important issue
to our nation's 8.2 million active duty personnel, their dependents,
and retirees. I look forward to hearing the testimony of our witnesses
and any recommendations on how we can continue to improve the current
system in order to achieve greater efficiencies and cost-savings.
Prepared Statement of Hon. Paul Ryan, a Representative in Congress From
the State of Wisconsin
Mr. Chairman, I would like to bring some inefficiencies of the
TRICARE system to the attention of the members of the Task Force. Many
of my constituents rely on TRICARE for their health care services--yet
this program has repeatedly proven to be inefficient and ineffective,
leaving my constituents and I with little recourse.
TRICARE is a regionally managed health care program for active duty
and retired uniformed service members and their families. According to
their website, TRICARE is being implemented as a way to: provide
faster, more convenient access to civilian health care; create a more
efficient way to receive health care; and control escalating costs.
In my experience with TRICARE, this has certainly not been the
case. There have been a number of cases where I have assisted
constituents who had problems with TRICARE, of which two took over 5
months to resolve.
The first case had over 20 claims submitted that were either paid
incorrectly or not processed by TRICARE before the constituent
contacted our office. When my office inquired as to why this was the
case, TRICARE stated that clerical error was the cause of a number of
the errors--for example, registering the health care expense as $10
instead of $100. TRICARE could not explain why the remaining claims
were not processed.
Another case showing the inefficiencies of TRICARE included a
situation where thousands of dollars in claims were processed
incorrectly by TRICARE because Region 5 was not aware of changes in
Federal law under the National Defense Authorization Act for FY '99.
P.L. 105-261 was Federal law for more than a year prior to my inquiry.
TRICARE repeatedly denied claims because of this--even during our
inquiry.
These are just two examples of how the current TRICARE system has
let down constituents in Southeastern Wisconsin. I have dealt with this
program in countless other cases and I have found similar results.
I commend Chairman Shays and the Task Force for looking into this
very real and pressing problem in our armed services today. Our
military personnel deserve better health care than they are presently
receiving and taxpayers should not be forced to pay for these
inefficiencies.
Our service men and women should not have to wait 5 months to
settle their health care claims. I look forward to working with you,
Mr. Chairman and members of this Task Force, to put an end to this.
Prepared Statement of Hon. John M. Spratt, Jr., a Representative in
Congress From the State of South Carolina
I want to thank you, Mr. Chairman, for convening this hearing, and
welcome our three distinguished witnesses: Dr. James Sears, from the
Department of Defense; Stephen Backhus, from the General Accounting
Office; and William Meyer, of Palmetto GBA, from my own state of South
Carolina.
This hearing is about one aspect of DOD health care, but I want to
use this opportunity to make a larger point: we must provide better
health care for military retirees once they reach age 65. I serve on
both the Budget Committee and the Armed Services Committee, and I hear
a lot about how military retirees are no longer encouraging young
people to enlist. This red-hot economy is making recruitment and
retention difficult enough. We do not need more disincentives to
military service. General Henry Shelton, Chairman of the Joint Chiefs
of Staff, agrees. He testified that guaranteeing lifetime health care
is important not only to keep the promises made to those who dedicated
their careers to military service, but also to attract and retain good
people today. Providing health care to military retirees age 65 and
over is an issue this Congress should tackle this year.
Today's hearing is on TRICARE claims processing. TRICARE is the
Department of Defense's health care system. It is called TRICARE
because it offers three options; an HMO option, a preferred-provider
option, and a fee-for-service option. TRICARE uses a network of
civilian health care providers to complement the DOD's own hospitals
and clinics to provide health care to active-duty personnel and their
dependents, and eligible military retirees and their dependents.
Currently, TRICARE is not available to military retirees who are
eligible for Medicare. So when military retirees turn age 65, they can
no longer obtain TRICARE. Since the military has downsized and the
population of military retirees has grown and is still growing, it is
difficult for most retirees over age 65 to get treatment at military
facilities, even on a ``space-available'' basis, which is the only
health care option now open to them. These retirees spend much of their
adult lives in the military health care system, and get to know the
doctors at the base and in the network where they retire. Then they
turn 65, and in most cases, they have to establish new relations with
new doctors at an age when continuity of care is extremely important.
The budget resolution offered by House Democrats was the first
vehicle considered on the House floor this year to address this issue.
We included $16.3 billion over 10 years to improve health care for
Medicare-eligible military retirees. In part because of the impetus of
the Democratic budget, the House and Senate Defense Authorization bills
both propose extending DOD health care to military retirees, but do so
in different ways. The House bill proposes expanding Medicare
Subvention, where Medicare reimburses DOD for providing health care to
Medicare-eligible military retirees, much as it reimburses private
sector health care providers. Rep. Gene Taylor offered this provision
as an amendment on the House floor. The Senate bill would allow
military retirees age 65 and older to stay enrolled in TRICARE.
TRICARE is the successor to Civilian Health and Medical Program of
the Uniformed Services, or ``CHAMPUS.'' It began in the mid-1990's, and
frankly, it has had growing pains. One of the growing pains is claims
processing. There have been stories of claims being held up for long
stretches of time. In these cases, some providers have turned to the
military beneficiary to seek payment for services rendered. This
frustrates many service members, and if you are overseas on deployment,
it can be a real headache to deal with. Even worse, as the service
members tried to get TRICARE to pay and the bill went unpaid, the
credit ratings of some service members suffered. So, prompt payment of
claims is directly linked to quality of life, and when we have trouble
recruiting and retaining our soldiers, sailors, airmen, and marines,
this is important.
Today we will likely receive testimony that there have been
improvements in the quality of claims processing, and so we will focus
even more on costs. There have been allegations that TRICARE is
inefficient in processing claims in comparison to Medicare. In truth,
TRICARE claims do cost more to process. This hearing will explore why
that is, and what steps can be taken to reduce the cost of TRICARE
claims management.
This is important for several reasons. First, the less we have to
spend on claims processing, the more we have to spend on health care. I
am from South Carolina and I represent Shaw Air Force base. I can tell
you that TRICARE has a hard time signing up providers in my state. If
we had more money to offer, we could induce more providers into the
TRICARE network. In addition, the more we can standardize forms to make
them easier to process, and the better TRICARE is in making prompt
payments, the more doctors we can attract. This will make life better
for active duty troops, eligible military retirees, and the families of
both. TRICARE processed 32 million claims in 1999; if we could save $2
per claim, we could have up to $64 million more to spend on improving
the TRICARE networks, particularly in areas like South Carolina.
Second, we may end up adopting the Senate provision to open up
TRICARE to military retirees age 65 and older, and their dependents.
That would bring in about 1.4 million eligible beneficiarees into the
TRICARE system, and with them, many more claims. We have to get TRICARE
claims costs down and make that process more efficient if we open up
TRICARE to all military retirees.
The hearing today is just one subset of the DOD health care issue,
but it is an important one. While claims processing has not gotten the
attention that the question of health care for military retirees has
gotten, it is part of the equation. If we can reduce costs here, it
frees up resources sorely needed for our active duty troops and our
military retirees. I look forward to the testimony of our witnesses.
Mr. Thornberry. The chair would now recognize the
distinguished ranking member on the task force, the gentleman
from Virginia, Mr. Moran.
Mr. Moran. Thank you very much, Mr. Thornberry. Nice to see
you. I want to thank you for scheduling today's hearing, Mr.
Shays, Mr. Thornberry, and thank you, Mr. Buyer, for being
here, and, of course, our ranking member of the full Budget
Committee, Mr. Spratt.
This is an important issue. There are few more important
issues than providing quality, affordable health care for our
nation's military personnel, their families, and retirees,
because unless we do it, the quality of our military capability
is going to suffer greatly. This is one of the biggest issues
in terms of recruiting quality personnel.
It is especially important now as we grapple with
difficulties in recruitment and retention because the viability
of the TRICARE system is in question. I probably get more
complaints about military health care and TRICARE and retirees'
health care than anything else. Now, that may partly be a
function of my district, but I suspect that it cannot be a
unique problem. There are 1.4 million Medicare-eligible
military retirees and the Congress's attempt to provide
adequate health care for them that is accessible and affordable
has been one of the more controversial issues we have had to
deal with.
In the past few Congresses, I have introduced legislation
granting Medicare-eligible military retirees the option of
participating in the Federal Employees Health Benefits Plan. I
introduced a Health Care Commitment Act because I was concerned
the military retirees, once they become eligible for Medicare,
are being denied access to health care, given the fact that
they do not have CHAMPUS available to them any longer. They are
prohibited from participating in TRICARE and they are
effectively shut out of the military medical treatment
facilities because they are on the very bottom of the priority
list for receiving care.
In effect, we have created a system where military
retirees, once they reach the point in life where they need
health care the most, are given the least from their former
employer. We are the only large employer that does not provide
health care as a benefit to its employees, that is, the
Department of Defense military personnel.
Having a large number of constituents who are military
retirees, I can relate to their problems and I think it is
something that we are ultimately going to fix, but it is going
to cost a great deal of money. The bill that was most recently
considered on the floor that was sponsored by Mr. Spratt, Mr.
Shows, Congressmen Norwood and Cunningham, as well, would have
cost $16 billion over 10 years.
We can spend an entire hearing on health care options for
retirees, but this is going to be primarily on TRICARE claims
processing. There have been unacceptable claims in the claims
processing for TRICARE. It has frustrated many service members
and it is a particular burden for those deployed overseas. Even
worse, as the service members tried to get TRICARE to pay and
the bill went unpaid, the credit rating of many service members
suffered. So prompt payment of claims is directly linked to the
quality of life and morale of our troops.
While today's hearing will touch on the quality of claims
processing, it will also focus primarily on the cost of that
processing. The Military Personnel Subcommittee received
testimony that the average cost of processing a TRICARE claim
was between $8 and $15. Even the lower end of this range is
substantially more than what it costs the Health Care Financing
Administration, HCFA, to process Medicare claims.
It is my understanding that we are going to hear testimony
today that the delay in claims processing occurred primarily in
the mid-1990's, when TRICARE was first being established, and
that the most recent surveys indicate that TRICARE contractors
are meeting or close to meeting the major deadlines for claims
processing. I suspect the witnesses are also going to testify
that many of the criticisms of TRICARE processing costs are
inflated or based upon unfair comparisons to less-complex
claims.
I hope we can all agree that more can be done and that we
will commit to making TRICARE more user friendly and efficient.
It is as important an issue as there could be to the 8.2
million active duty personnel, their dependents, and retirees,
and so I am glad we are having the hearing. With that, I will
conclude my statement. Thank you, Mr. Chairman.
Mr. Thornberry. Thank you.
The chair recognizes the gentleman from Indiana, Chairman
Buyer, for any comments you would like to make.
Mr. Buyer. Thank you, Mr. Chairman, for the courtesy
extended by inviting me to participate with you and other
members during the examination of the cost of TRICARE claims
processing. I also appreciate the kind remarks you extended to
the Military Personnel Subcommittee of the House Armed Services
Committee on the whole area of military health care benefits.
There are very real and tangible benefits from the excellent
bipartisan working relationship Mr. Abercrombie and I enjoy.
With regard to comments by the ranking member, Mr. Moran,
he is very accurate in describing the 1.4 million retirees. We
have to be very careful, I would say, in our language about
what occurred on the House floor with regard to Mr. Taylor's
bill with Medicare subvention, because the reality is we only
have so much limited space, we only double the number covered
by the Medicare subvention program from 30,000 to 60,000. So
there is this unreal expectation out there among the force that
I am going to be deriving a very real benefit and it is not
going to be there.
We are going to work through this one, though. That is the
good story here. And Mr. Spratt's comment about moving toward
what the Senate has done, the Warner provision of saying when
you turn 65, you really sort of stay in the TRICARE that you
have, I am moving toward my own personal belief, having worked
on these issues now for 8 years, that I do not believe anything
magically should happen to a soldier when they turn 65. Now, I
know that there are some members who are really concerned that
we did not have this vote on FEHBP. We need to be very careful
about how we conduct our business here.
So, Mr. Spratt, I enjoyed your comments on that because I
think that is probably where we will end up going. The more we
telegraph to whoever the next administration is going to be
that when we put our arms around this one, the key here is that
in 2003 as we prepare for the 2004 budget, there is going to be
a large bill that could be $8 to $10 billion. So I enjoyed the
gentleman's comments.
The defense health program represents over $17 billion of
the Department of Defense budget. About $4.7 billion of that
now purchases care in the private sector through the TRICARE
program. Included in the cost of the private sector care is the
cost of the claims processing, which is estimated at $270
million.
Mr. Chairman, despite the fact that we already spend $17
billion a year on the Defense health program, the program is by
some estimates underfunded, so I would say, Mr. Spratt, you are
completely accurate. The GAO, even though the DOD does not like
to admit it, they are saying that it is by at least $6 billion
over the next 5 years, so that is a stunning number.
As a matter of fact, I want to share this with the Budget
Committee, and this is completely another hearing. I believe
that there is a problem in the modeling that the Department of
Defense uses for the estimates of what their budgets should be.
We have told them that year after year, but we still have those
problems. So I just wanted to bring that to your attention.
We need to invest our resources in purchasing benefits, not
unnecessary administrative costs. We should also ensure that
savings we achieve should be plowed back into this chronically
underfunded program. The TRICARE claims processing system has
lagged behind the health insurance industry. It frustrates our
TRICARE contractors. It also lags behind Medicare in moving to
more efficient claims processing, as all of you have said in
your statements.
I had directed that copies of several white papers that I
have requested from not only the TRICARE managed support
contractors but also that of the director of the TRICARE
management activity, who we will be receiving testimony here
today, were made available to the committee. These papers
describe the faltering claims process that is in great need of
modernization. In fact, our analysis indicated we might be
wasting over $100 million a year as a result of the inefficient
claims processing systems.
During our hearings on removing the barriers to TRICARE, we
received testimony from TRICARE providers, claims processors,
beneficiaries, managed care support contractors and the TRICARE
management agency and lead agents. We learned in our hearings
that there was a broad agreement among these different
stakeholders that the system as it now exists is outdated and
inefficient. Too many providers claim that they are not being
paid in a reasonable period of time. The administrative
requirements go far beyond what other governmental systems,
like Medicare, require. As a result, far too many providers
either never become participating providers or they end their
active participation with TRICARE. The managed care support
contractors have had to operate in a claims processing
environment one of them has described during the committee
hearing as ``the best Model-T money can buy.''
Mr. Chairman, we can do better and I think the Fiscal Year
2001 National Defense Authorization Act goes a long way in
resolving some of these concerns. I will not use a lot of my
time detailing all the specific actions that we have taken, but
in summary, we directed several very specific actions to
improve claims processing and other business practice
improvements to streamline and make user friendly all the
TRICARE administrative systems.
One of the lessons we learned in the white papers is the
cost per claim and chance for errors are increased whenever a
claim is manually processed. The more these systems can be
automated, the more efficient they become. As a result, costs
and costly errors are reduced through the whole system.
Therefore, most of our initiatives were designed to facilitate
improving or expanding automated claims processing in TRICARE.
You can imagine the example of a doctor who wants to track a
particular claim. He actually speaks to a person, and the more
that person handles it, the more time is invested and it just
escalates the cost.
Mr. Chairman, the Fiscal Year 2001 National Defense
Authorization Act, we picked much of what I would call the
lower hanging fruit in our efforts to improve the TRICARE
claims processing. However, I am confident that there are more
opportunities for improvement, so I applaud the Budget
Committee for choosing this as one of your subject areas to
investigate.
Ferreting out waste or abuse wherever it can be found is
wise. It is part of why we are here to serve, to make sure that
we spend our limited resources in the right way and exercise
good judgments to move toward good government principles. I
appreciate the opportunity to participate in this hearing and
look forward to continuing to exchange information with our
witnesses we have here today, and let me extend compliments to
them because I enjoy the working relationship which we have put
together on the National Defense Authorization Act, and I yield
back my time.
Mr. Thornberry. I thank the gentleman for his statements.
I trust the witnesses get a feel for the importance members
place on the military health care system and some of the
frustrations we feel if money is being used in a way that is
not as efficient and not as it is intended to be used.
Without objection, each of you can submit written
statements or whatever written materials you would like and
they will be made part of the record.
We will first hear from the senior leadership of the
Defense health program, Dr. James Sears, Executive Director of
the Department of Defense TRICARE Management Activity. Then we
will hear from Mr. Stephen Backhus, Director of Veterans'
Affairs and Military Health Care Issues for the General
Accounting Office. Then we will hear from Mr. William J. Meyer,
Senior Vice President for TRICARE, Blue Cross-Blue Shield of
South Carolina.
Dr. Sears, you may proceed.
STATEMENT OF H. JAMES T. SEARS, M.D., EXECUTIVE DIRECTOR,
TRICARE MANAGEMENT ACTIVITY, DEPARTMENT OF DEFENSE
Dr. Sears. Thank you, sir. Your concerns are ours.
Mr. Chairman, distinguished members of the task force, I
appreciate the opportunity to be here today to discuss the
Department's progress in improving claims processing,
timeliness, and accuracy, while at the same time implementing
initiatives to reduce the costs associated with adjudicating
claims.
Before I address the issues, I want to acknowledge the
support and positive working relationship we have with the
House Armed Services Committee, with Mr. Buyer and his
committee members, some of whom are on this task force. I also
want to thank Representative Moran for his support as a member
of the Defense Appropriations Committee.
Oftentimes, the cost of adjudicating TRICARE claims is
compared to that of Medicare. Unfortunately, the two programs
are not comparable entities. By definition, Medicare is a
single fee-for-service program. TRICARE is a triple-option
managed care program. Managed care, by definition, is designed
to assure the efficient use of health care dollars. Ensuring
this, however, requires the expenditure of administrative
dollars. Perhaps an example will help.
We recently discovered in one of our regions a rate for
caesarian sections that was six times the national average.
Through effective utilization management techniques, including
preauthorization and retrospective clinical claims review, we
have successfully changed practice patterns and improved the
quality of care for this procedure in that region, while
concurrently reducing health care costs by approximately 50
percent. This, however, minimally increased our administrative
cost to conduct these clinical reviews.
On the other hand, our work simplification and claims
reengineering initiatives revealed that the utilization
management effort associated with prenatal ultrasounds
associated with these deliveries were resulting in the
verification that these procedures were, in fact, being
delivered appropriately. This led to our elimination of the
government requirement to clinically review ultrasounds and the
savings of associated dollars.
Other differences between TRICARE and Medicare include the
sheer number of citizens served by Medicare compared to the
relatively small number of TRICARE beneficiaries. While
Medicare processes nearly 900 million claims a year, TRICARE's
32 million claims annually do not provide the economies of
scale Medicare enjoys. Our relatively small volume, especially
as compared to Medicare, and far more comprehensive program,
inhibits our ability to dictate the business practices of the
provider community.
The volume differences between TRICARE and Medicare also
significantly impact our ability to achieve the same level of
electronic submissions as Medicare. Our providers typically
submit fewer than 10 TRICARE claims a month. Conversely,
Medicare typically accounts for as much as 50 percent or more
of a provider's income. There is simply no return on investment
for small volume providers to invest in systems capable of
submitting TRICARE claims when over 95 percent of our claims
are paid within 30 days. Again, HIPAA, once implemented, will
eliminate this issue and result in a dramatic increase in the
receipt of electronic claims.
Over the last 2 years, the Department has been actively
involved both independently and with the assistance of our
contractors in reviewing the government's processes for
adjudicating claims, with an eye toward balancing customer
service with costs. These initiatives began with an effort we
called work simplification. Through this process, the
government partnered with our current contractors, who
identified roadblocks to prompt and efficient claims
processing. We identified a considerable number of impediments,
including mandated medical reviews, paper documentation, and
other program complexities that inhibited the processing of
claims.
We have issued two comprehensive changes as a result of
this initial effort that remove the vast majority of these
impediments and that, when fully implemented, will allow claims
to adjudicate without human intervention. We used caution when
implementing these initiatives. Each impediment to claims
processing was weighed against the potential impact on health
care dollar expenditures.
For example, removing medical review requirements and the
requirement for the associated documentation subjects the
government to excessive utilization and expenditure of finite
health care dollars and the potential for fraud and abuse.
Conversely, our overemphasizing review processes increases
the cost and time involved with processing of a claim. Working
with our contractors, we are carefully reviewing every aspect
of the health care financing and delivery system to determine
where statistical sampling is more appropriate than individual
case review, where case review is resulting in no savings, and
where profiling will identify instances where the Department
can focus on a very limited number of procedures or providers
to ensure that health care dollars are not unnecessarily
expended.
In conjunction with these efforts, the government is moving
forward to implement the electronic submission of as many
claims as possible. This is being done through the
implementation of web-based technology and an emphasis on
electronic claims submission, using Medicare's electronic
submission requirements and encouraging our providers to submit
their claims electronically in all of our education and
marketing materials.
Electronic submission can gain us several benefits,
equating to approximately $2 per claim. More importantly,
electronic submission is a tremendous benefit to our providers
in that simple clerical errors are detected immediately and
corrected without delay. These electronic submissions also feed
the provider's business systems to reduce the doctors'
administrative costs.
From a claims processing perspective, these systems
eliminate the need for our contractors to retype information.
They eliminate keying errors. They substantially increase the
number of ``clean claims,'' and they allow claims to process in
a fully electronic environment. While these substantial
benefits accrue to the government, we also recognize savings in
the area of filing and storage the vast amount of paper
associated with manual claims processing.
Unfortunately, these efforts are not the panacea and we
have much work left to be done before achieving a position
where all provider-submitted claims are electronic. TRICARE
alone has achieved an electronic submission rate that is
nearing 50 percent. However, the Congress in legislating the
Health Insurance Portability and Accountability Act, has
provided the health insurance industry with the single most
important tool for reaching our goal of 100 percent electronic
claims submission. This tool, a standardized format for the
data elements and the transmission format, will unify the
entire industry and make the electronic submission of claims
the only practical business process available to the provider
community.
We are looking forward to the publication of the HIPAA
rules by HHS and the mandated effective date 2 years hence. In
the interim, we are working very closely with our contractors
and have implemented the first phase of web-based technology.
These current systems allow our beneficiaries online access to
their claims status and history. Each electronic web-based
inquiry eliminates the need for a telephone call, including the
associated staffing facility and infrastructure costs. We are
rapidly expanding this technology and anticipate including
physician access in the very near future as security and
privacy issues are resolved.
As we are able to open these communication pipelines to all
of our clients, our client satisfaction will increase while the
government cost per claim will decline in future contracts.
Shifting gears, I would like to briefly address the issue
that some of our beneficiaries are being pursued by collection
agencies. While the number is extremely small, we are very
concerned with each and every instance. All of our TRICARE
contractors have established special units designed
specifically to resolve collection issues. In addition, at each
of our lead agents, we have created positions solely
responsible for assisting our beneficiaries with whatever they
require. We have expanded this function and created similar
positions at each of our military treatment facilities to
provide dedicated onsite assistance. I recognize that we can
never guarantee that a single beneficiary will not be subject
to collection. However, DOD is now in the position of being
able to provide dedicated personal assistance and resolution to
any problem that arises.
Finally, I wish to conclude with a word of caution. The key
to reducing claims costs is to pay claims without human
intervention. This is not without cost. We must carefully
balance fully electronic claims payment with ensuring that
taxpayer dollars are only expended for medically necessary and
appropriate care, and as we progress in these efforts, claims
costs will be reduced, but they will continue to contain those
costs associated with ensuring the proper expenditure of
government resources. We must also never forget service to our
military men and women and the doctors who provide their care.
This, too, is not without cost. However, the value of serving
our beneficiaries cannot be understated.
I sincerely appreciate the time this task force has
provided for me to briefly explain TRICARE claims and claim
costs. I am at your disposal to expand on my comments and
answer any other questions that you have.
Mr. Thornberry. Thank you, Dr. Sears.
[The prepared statement of H. James T. Sears, M.D.,
follows:]
Prepared Statement of H. James T. Sears, M.D., Executive Director,
TRICARE Management Activity
Mr. Chairman, distinguished members of the committee, I appreciate
the opportunity to discuss the Department's progress processing TRICARE
health care claims in the Military Health System.
My testimony today will focus on the steps we have taken to reduce
the costs associated with processing TRICARE claims. First, I would
like to report on two standards that have helped the Department make
significant progress in claims processing timeliness.
Beginning in October 1999, TRICARE removed barriers to electronic
claims submission and moved to claims processing timeliness standards
similar to those used by Medicare. The new standards, effective October
1999, require our Managed Care Support Contractors to process 95
percent of accurately submitted claims within 30 calendar days from the
date of receipt of the claim and payment errors may not exceed 2
percent. We have exceeded this standard in five of the last 7 months
(in December 1999 and January 2000, 2 months where the standard was not
met, the average was 94.4 percent). Our most recent information for
March and April 2000, shows that our contractors exceeded the 95
percent standard by processing 97.5 percent of all accurately submitted
claims within the 30-day standard.
The second standard requires contractors to process 100 percent of
accurately submitted claims within 60 days of receipt. We continue to
strive to meet this standard, however, for the most recent 2 months, we
processed 99.6 percent of claims within 60 days. This extremely high
level of performance will result in an ever-increasing number of
satisfied providers who will submit more accurate claims either by mail
or electronically. Accurate paper and electronic claims significantly
reduce the manual intervention required in the adjudication process and
equate to reductions in the overall cost of processing a claim.
These ongoing initiatives have resulted in dramatic increases in
the prompt adjudication of claims mentioned previously and, as
improvements continue to be realized, will result in further reductions
in the cost of adjudicating TRICARE claims. We will continue our
efforts to simplify requirements and reduce costs. When comparing our
claim costs to those of Medicare, it is important to remember that
there are significant differences between the two programs. Claim costs
for TRICARE include a number of functions that are not included in
Medicare claim costs. TRICARE claim costs include additional functions
such as appeals, customer service, beneficiary and provider education,
and coordination of benefits. In addition, for most Managed Care
Support Contracts, the prime contractor uses the claims processing
subcontractor's enrollment and utilization review systems, and those
costs are reflected in the claim rate. There are also statutory
requirements that increase complexity (and therefore cost). These
include the three-tiered benefit structure for TRICARE (Prime, Extra,
and Standard), differing copayments and catastrophic caps depending on
rank or service status. They also include mandated special programs
such as the Continued Health Care Benefits Program, TRICARE Senior
Prime, and Base Realignment and Closure (BRAC) pharmacy benefits.
Further, while we expect that managed care will reduce health care
costs overall, there are additional administrative tasks that accompany
these reduced health care costs. These include the more extensive use
of pre-authorizations and referrals that must be coordinated with
claims. There is also significantly more effort in maintaining provider
data. For example, the claims processor must track who is in the
network and what the negotiated rate is for each service. This may vary
even within provider groups or clinics, and network tracking and
updates requires significant effort.
An example of managed care's impact on health care costs is the
Pharmacy Data Transaction System (PDTS). The database will incorporate
prescription data from retail networks, from the Department's National
Mail Order Pharmacy program, and from pharmacies at Military Treatment
Facilities. Each of these prescription sources will have an electronic
connection to the national database.
PDTS will allow instantaneous checks for adverse drug reactions or
duplicate prescriptions. It will also help prevent over-utilization and
drug abuse by giving visibility of prescription drug usage across the
Military Health System. The PDTS checks will occur at Point-of-Sale,
allowing immediate patient intervention and education.
We expect to begin implementation of PDTS this summer, starting
with the Managed Care Support Contractors' retail networks.
Over the past few months, the health care industry, like other
industries, has been moving toward changing the way health care
business is conducted. Health plans, providers, employers, health care
consumers, and other health care-related businesses are adopting and
applying new electronic technologies at great speed. Congress
recognized the efficiencies and cost-savings that can be realized
through electronic data interchange (EDI) and the application of
standards in conducting health care business electronically, and passed
the Health Insurance Portability and Accountability Act of 1996
(HIPAA). The HIPAA statute requires the Secretary of Health and Human
Services to adopt standards for financial and administrative
transactions to enable health information to be exchanged
electronically. These standards apply to the entire health care
industry including the Military Health System. The first of these
standards, those applying to electronic transactions and code sets, is
expected to be published in a final rule in August, 2000. If published
as expected, the standards become effective in August 2002. The TRICARE
Management Activity is committed to and actively working toward
achieving full compliance with all HIPAA standards within the required
time frames.
While the health care industry awaits the publication of the HIPAA
standards and requirements, it is not waiting to develop and implement
other e-commerce and web-based business applications and solutions.
TRICARE isn't waiting either. The Department is actively reviewing all
facets of its business practices and operations and is identifying
those that can be moved to and performed on the Internet. Managed Care
Support Contractors and their claims processing subcontractors are
developing web sites on which beneficiaries and providers will be able
to look up the status of their claims, submit enrollment applications,
update addresses and other demographic data, submit health care
questions, request authorizations and referrals, and conduct other
health care related business. The Department has been working on the
development of the electronic health care record with new versions of
Defense Eligibility and Enrollment Reporting System (DEERS) and the
Composite Health Care System (CHCS) which should ultimately allow for
greater access by providers, beneficiaries, the Military Health System,
and TRICARE business partners and contractors. The development of
TRICARE data warehouses and of powerful data mining applications should
provide DoD with valuable new health care information on which business
decisions can be made and health care delivery improved for our
beneficiaries.
The speed with which technology is evolving and being adopted by
the health care industry requires that organizations evaluate and re-
think how business is conducted. Health care consumers, our
beneficiaries, are becoming computer-savvy and are demanding the kind
of improved health care services that can be delivered today. The
Department is actively working toward meeting their expectations and
the expectations of the health care industry as a whole. The result of
electronic commerce is the elimination of high cost human intervention
which directly correlates to reduced claims processing costs.
The Department has developed TRICARE Encounter Data (TED) records
to replace Health Care Service Records (HCSRs). These records are
simply processed claims data that are submitted to TMA in a
standardized format. The TED record has evolved from the Health Care
Service Record (HCSR) to a more streamlined and ``user friendly''
format. Claims processors use proprietary systems for processing
TRICARE claims. The outputs from these claims processing systems are in
different formats and contain different data elements and values. The
Military Health System needs a centralized database of processed claims
and encounter data for financial and program management purposes. In
order to centralize the data and incorporate it into a single database,
it must come into the Department in a consistent format. The TED record
prescribes a much easier standardized format for contractors to submit
claims data that will further reduce administrative costs when adopted.
TED records allow us to apply rules and edits that help ensure that
the claims and encounter data being submitted is accurate and reliable.
Without the ability to establish rules and apply edits, financial and
other important business decisions may be based on erroneous
information with significant financial consequences.
As an alternative to TEDs, The Department is evaluating contractor
proposals to eliminate TEDs altogether. Under this proposal,
contractors would submit claims data to their own data warehouses to
which they would allow DoD access. As part of our evaluation, we are
looking at overall program costs to shifting from TEDs to a raw claims
data-warehousing model.
For now, TED records should reduce costs over those previously
associated with HCSRs and permit us to perform audits and monitor
contractor performance. They can be used in bid price adjustment
calculations and allow the development of reliable claims volume
projections for procurements. They enable us to identify and recoup
duplicate claims payments where one claim is paid by a contractor and
the same claim is paid by another. They will continue to enable us to
identify, account for and audit at-risk and not at-risk claims
payments. Until a viable and even more cost-effective alternative
emerges, TED records will support TRICARE management and provide better
and easier access to claims data across the enterprise at reduced cost.
I am extremely pleased with the significant progress that has
occurred over the last 2 years as a result of the joint efforts of the
Managed Care Support Contractors, TMA, the Lead Agents, and the
Surgeons General to reduce claims costs and complexities. Working
together, we have removed thousands of Government specified claims
reviews, such as the clinical review of oxygen, ultrasounds, and CT
scans. We eliminated prescriptive controlled development requirements,
simplified the provider certification process and now permit the use of
commercial best practices for utilization management. Soon, we plan to
simplify requirements for coordination of benefits and for third party
liability collections. By removing Government mandated reviews, we have
not only complied with the President's acquisition reform initiatives,
but have created a 21st century environment that allows our contractors
to employ their best commercial practices to the processing of TRICARE
claims while concurrently reducing cost.
These initial claims improvements were complemented by a study the
Department commissioned by First Consulting Group (FCG). FCG applauded
the work completed to date and offered additional suggestions for
enhancements. These included allowing our contractors to accept the
Medicare provider number on electronically submitted claims and
assisting the Department and our partners in the utilization of new
world wide web based technology. These initiatives, when fully
implemented, will eliminate much of the need for human intervention,
the highest single cost factor in claims adjudication.
Improving the TRICARE claims processing environment is a continuous
quality improvement process. Our MCS contractors continue to submit
suggestions for improving performance and implementing new
technologies. Working together, with all of our partners, we will
persist in our efforts to obtain state-of-the-art processes and systems
that achieve the highest quality of performance at the most reasonable
and effective cost to the Government.
Mr. Thornberry. Mr. Backhus, as I mentioned, your full
statement will be made part of the record and you may proceed
to summarize it.
STATEMENT OF STEPHEN P. BACKHUS, DIRECTOR, VETERANS' AFFAIRS
AND MILITARY HEALTH CARE ISSUES, GENERAL ACCOUNTING OFFICE
Mr. Backhus. Thank you, Mr. Chairman. Good morning, Mr.
Chairman and members of the task force. I am pleased to be here
today to discuss what DOD can do to reduce TRICARE claims
processing costs, and as you requested, I will also briefly
discuss the need for increased anti-fraud efforts and more
joint purchasing of pharmaceuticals and medical supplies with
the VA, both of which could reduce costs. Finally, I will
discuss our ongoing study of the process beneficiaries use to
make medical appointments. The information I am presenting is
based on a substantial body of work we have undertaken over the
past several years on TRICARE operations.
Today, TRICARE has much room for improvement. Each claim
costs an average of $7.50 to process, double the industry
average and more than four times the $1.78 for Medicare claims
processing costs. These higher costs are attributable to a
number of factors.
Over half of TRICARE's claims are manually reviewed, a rate
significantly higher than the industry average of 25 percent.
For example, claims submitted for electrocardiograms require
manual review, but in every case so far, after review, these
claims have been paid. Last year, for one TRICARE contract
alone, there were almost 14,000 of these claims.
Furthermore, claim inquiry rates average about one for
every four-and-a-half claims, four times higher than Medicare
inquiries. These inquires add substantial cost to the program.
But perhaps most significantly is that less than 20 percent
of hospital and professional claims are submitted
electronically, compared to the Medicare average of about 85
percent.
Obviously, we believe there is potential for reducing
claims processing costs. The initiatives that DOD has underway
and planned, some legislatively directed, if implemented
properly, should go a long way toward reducing such costs.
These include reducing manual review requirements when they are
unnecessary, promoting electronic claims submission, using
automated voice response systems for provider inquiries, and
adopting Medicare claims processing time limit standards. As a
means of encouraging electronic claims submission, DOD is also
permitting its contractors to delay payment of paper claims as
long as overall time limit standards are met.
I need to caution, however, that the cost reductions from
these and other efforts are limited and cannot be expected to
approach current Medicare costs, primarily because TRICARE and
Medicare are vastly different programs in terms of the benefit
structure and size. For example, TRICARE's fixed costs are
spread over a much smaller claims base than Medicare's and the
TRICARE triple-option managed care benefit requires greater
administrative costs than Medicare's fee-for-service plan.
I would now like to turn to opportunities for increased
efficiencies in other TRICARE areas. DOD estimates that losses
due to fraud and abuse could account for 10 to 20 percent of
military health care expenditures. DOD could be more effective
in combatting fraud and abuse if the contractors were more
proactive in identifying and referring potential fraud cases.
Out of over 40 million claims processed from January 1999
through April 2000, only 17 potential fraud referrals from
contractors have been accepted by DOD for investigation.
DOD would also benefit financially through additional
cooperative efforts with the VA to procure pharmaceuticals and
through the use of VA's mail outpatient pharmacy for their
refill workload. The expectation is that as the two agencies
buy more of a particular drug, their leverage, particularly
under competitively bid contracts, would permit them to obtain
even greater discounts from drug manufacturers and save money
for both departments. We believe that VA and DOD could
potentially save between $150 to $300 million more each year by
jointly purchasing medications. An additional $45 million could
be saved annually if DOD used VA's mail outpatient pharmacy for
their refills.
In addition to cost efficiencies, we are currently studying
ways DOD could increase beneficiary satisfaction through
changes to its medical appointment process. For years,
beneficiaries have expressed frustration and confusion over how
to access the health care system, largely because of the wide
variability that existed in the appointment making process.
Recently, DOD has been moving toward a centralized system that
beneficiaries call to schedule all their appointments.
However, even this process appears to be confusing and
frustrating to some beneficiaries because it is being
implemented inconsistently. Some beneficiaries are transferred
from the appointment center to a physician's office or clinic,
some are told to call the office or clinic directly, and others
get their appointments made as intended. Thus, what is meant to
be a simplified, more user-friendly appointment process appears
to still be a complex and confusing one, for beneficiaries are
unsure who to call. We expect to be making recommendations at
the conclusion of our work.
Mr. Chairman, this concludes my statement and I will be
glad to answer any questions you or other members of the task
force may have.
Mr. Thornberry. Thank you. I appreciate it.
[The prepared statement of Stephen P. Backhus follows:]
Prepared Statement of Stephen P. Backhus, Director, Veterans' Affairs
and Military Health Care Issues, General Accounting Office
Mr. Chairman and members of the Task Force, I am pleased to be here
today to discuss opportunities to reduce claims processing and other
costs of TRICARE--the Department of Defense's (DOD) managed health care
program. Today more than 8.2 million active-duty personnel, retirees,
and their dependents are eligible to receive care under this $16
billion-per-year health care system. As the costs of delivering health
care continue to increase and as beneficiaries demand improved and
expanded services, significant pressures have been placed on the
system, and DOD continues to search for ways to address them.
Since TRICARE's inception, we have reported on the challenges DOD
faces in delivering health care. DOD considers health care to be one of
its major quality-of-life issues important to maintaining a quality
force. As a result, DOD has continually striven to deliver this health
care benefit and to respond to suggestions made for improving its
health care system. Currently, DOD is facing increasing pressures to
improve customer service. Improvements in areas such as claims
processing not only have the potential to make the health care system
more user-friendly and efficient, but also to reduce costs.
At your request, my testimony today will focus primarily on the
cost of processing TRICARE claims. Additionally, I will briefly discuss
two other opportunities that potentially can reduce costs and improve
service to beneficiaries, namely increased antifraud efforts and more
joint procurement of pharmaceuticals and medical supplies with the
Department of Veterans Affairs (VA). You also asked that I discuss our
ongoing study of the process beneficiaries use to make medical
appointments. The information I am presenting is based on a substantial
body of work we have undertaken over the past several years on TRICARE
operations.
In summary, processing TRICARE claims costs several times as much
as processing Medicare claims--$7.50 compared to $1.78 per claim on
average. However, much of the cost difference appears to be
attributable to differences in program design and processing
requirements. For example, TRICARE offers three different benefit
packages, with reimbursement rates that are established for each
provider, and a complex system of authorizations and referrals. The
program also experiences frequent changes to coverage and operating
policies that make it difficult to administer. Nonetheless, we and
others believe that opportunities exist to reduce some of the
approximately $225 million spent annually to process claims. In
response to the House version of the fiscal year 2001 Defense
Authorization bill, and through several of its own initiatives that
mirror private-sector practices, DOD has adopted and is planning
several actions to reduce claims processing costs, including increasing
electronic claims submission and web-based services to reduce the costs
of claims review and to deal with the large number of inquiries
received by providers and beneficiaries.
Beyond claims processing, we believe there are other opportunities
to reduce TRICARE costs and improve services. For example, although DOD
has efforts under way to combat health care fraud and abuse, these
efforts have only been marginally effective. Additional opportunities
exist to save potentially hundreds of millions of dollars that could be
used to purchase care for military beneficiaries. Also, we believe that
additional cooperation with the VA to procure pharmaceuticals and
medical supplies could yield substantial savings. Lastly, different
systems are in place throughout the military health system for making
medical appointments, and beneficiaries sometimes are unsure as to how
to make such appointments, leading to frustration with TRICARE. We are
currently reviewing this process and anticipate making recommendations
for improving it at the conclusion of our study.
BACKGROUND
DOD's primary medical mission is to maintain the health of active-
duty service personnel and to provide health care during military
operations. DOD also offers health care to non-active-duty
beneficiaries, including dependents of active-duty personnel, military
retirees, and dependents of retirees, if space and resources are
available. The Army, Navy, and Air Force provide most of the system's
care through their own medical centers, hospitals, and clinics,
totaling about 580 treatment facilities worldwide. Civilian providers
supply the remaining care. TRICARE is a triple-option benefit program
designed to give beneficiaries a choice among a health maintenance
organization (TRICARE Prime), a preferred provider organization
(TRICARE Extra), and a fee-for-service benefit (TRICARE Standard).
TRICARE is organized geographically into 11 health care regions
administered by five managed-care support contractors. Among the
contractors' many responsibilities are claims processing, for which all
have subcontracted with one of two companies. DOD requires contractors
to meet specific timeliness and accuracy standards when processing
claims. The tasks required to process claims include claims receipt,
data entry, claims adjudication, and claims payment or denial. During
1999, contractors processed about 30 million health claims submitted by
institutions, health care providers, and beneficiaries.
To help safeguard against health care fraud and abuse in its
system, DOD established a Program Integrity unit in 1982 to coordinate
its antifraud activities. This unit is responsible for developing
policies and procedures regarding the prevention and detection of
TRICARE fraud and abuse. DOD's Office of Inspector General and the
Department of Justice work together with this unit (and sometimes also
with the Department of Health and Human Services) to investigate and
prosecute alleged health care fraud and abuse. DOD's contracts with its
five managed-care support contractors also require them to perform
antifraud and abuse activities to help ensure that TRICARE dollars are
used to pay only claims that are appropriate.
PROGRAM COMPLEXITY IMPEDES CLAIMS PROCESSING EFFICIENCY; IMPROVEMENTS
UNDER WAY
Claims processing activities have generated a great deal of
dissatisfaction among providers and beneficiaries, as well as among
various congressional committees, and DOD recognizes that problems
exist. Complaints and frustrations stem from perceived inaccurate and
late payments; complex program rules, processes, and reporting
requirements; and high costs. All agree that the claims adjudication
system needs to be simplified and made more user-friendly, and that it
could benefit from increased use of technology. A number of
administrative and legislative actions are under way, which, if
properly implemented, should reduce TRICARE claims processing costs.
Program Complexity and Size Contribute to High Claims-Processing Costs
In August 1999, at the request of the House Subcommittee on
Military Personnel, Committee on Armed Services, we reported on the
complexity of the TRICARE program and benefit structure.\1\ This
complexity manifests itself in many aspects of claims processing such
as high rates of manual review, low electronic submission rates, and
high customer inquiry rates. These factors, in addition to the
relatively small program size when compared with Medicare, increase
TRICARE claims processing costs because fixed costs are spread over a
smaller number of claims. Currently, TRICARE claims cost an average of
$7.50 per claim to process--double the industry average and more than
four times the $1.78 Medicare claims processing cost.
---------------------------------------------------------------------------
\1\Defense Health Care: Claims Processing Improvements are Under
Way but Further Enhancements are Needed (GAO/HEHS-99-128, Aug. 23,
1999).
---------------------------------------------------------------------------
Contractors told us that of the many programs they administer,
including Medicare and private plans, TRICARE is the most complicated,
contributing to claims processing difficulties and high costs. For
example, each of TRICARE's three options has a different array of
benefits, copayments, and deductibles. Claims require different
adjudication procedures, depending on which option is involved, and
contractual requirements for prepayment review further complicate the
process. Complexities such as these are manifested as thousands of
edits in the adjudication logic of the claims processing system. These
edits result in claims being ``kicked out'' of the system for manual
review, which extends processing time and increases administrative
costs. Over half of TRICARE's claims are manually reviewed, a rate
significantly higher than the industry average of 25 percent.
Program complexities also contribute to numerous beneficiary and
provider inquiries, which add considerably to the cost of processing a
claim. TRICARE claim inquiry rates average about one for every 4.5
claims--four times higher than Medicare inquiries. Documentation shows
that beneficiaries frequently inquire about their benefits and cost
shares because they do not understand the program. Providers inquire
most often about payment issues primarily because the same services
might be reimbursed at different amounts depending on which TRICARE
option the beneficiary is using. TRICARE has thousands of unique fee
schedules and contracts that change frequently. In contrast, Medicare
reimbursement is more consistent because it has national standard
physician and hospital payment methodologies. In addition, Medicare
inquiries are handled almost entirely by automated systems.
TRICARE's per-claim processing costs are higher than Medicare's
also because TRICARE's fixed costs are spread over a smaller claims
base. Medicare costs are spread over about 900 million claims per year,
whereas TRICARE processes only about 30 million claims per year.
Under TRICARE less than 20 percent of hospital and professional
claims are submitted electronically, compared to the Medicare average
of about 85 percent. Electronic claim submissions are faster, involve
less chance of data input error, and are less expensive to process than
paper claims. Paper-based claims require significant front-end handling
in the mailroom, document preparation, imaging, data entry, and
storage. However, because TRICARE is usually a small percentage of
providers' income--often less than 5 percent--providers have no
incentive to incur the expense of adapting their computer systems to
permit electronic TRICARE claim submission. Furthermore, because 98
percent of claims are paid within timeliness standards, the incentive
to submit electronic claims is further reduced.
Nevertheless, we believe that some opportunities exist to reduce
the administrative costs associated with processing a TRICARE claim.
One of the claims processing subcontractors reported that $4.46 of each
claim processed--totaling about $125 million per year--is paid for
services provided or processes required by the program above the costs
of determining payment outcomes. For example, responding to TRICARE
inquiries reportedly costs $1 per claim more than responding to
Medicare inquiries. Other costs that we consider to be targets of
opportunity include mailroom handling, document preparation, imaging,
paper storage, data entry, and certain reporting requirements. A number
of initiatives are currently under way or planned that may reduce these
costs as described below.
Initiatives Under Way to Improve Claims Processing Efficiencies
Several legislatively directed and DOD-initiated efforts are under
way to simplify the claims adjudication process, improve provider and
beneficiary education, and increase electronic claims submission. If
properly implemented, these actions should reduce TRICARE claims
processing costs.
For example, the House version of the fiscal year 2001 Defense
Authorization bill would direct that the Secretary of Defense take
action to require high-volume TRICARE providers to submit claims
electronically, and increase the use of automated voice response
systems for provider inquiries on claims status. Also, the bill would
direct that certain administrative reporting requirements be reduced.
With the assistance of a consultant, DOD has developed and is
implementing a plan that calls for eliminating unnecessary or
duplicative processes that interfere with optimal performance,
emphasizing the use of commercial best practices and Medicare
standards. For example, the plan calls for adopting Medicare's
standards for processing timeliness and the elimination of DOD required
edits that should help decrease the number of manually reviewed claims.
According to one of the claims processing subcontractors, some of these
edits are unnecessary while others should be modified or retained. For
example, claims for electrocardiograms must be manually reviewed, but
in every case so far, the claims have been paid after review. Last
year, for one TRICARE contract, almost 14,000 claims for this procedure
were submitted. While DOD has issued formal contract modifications for
all the changes it wants to make, contractors have not yet had time to
implement all of them.
Additionally, DOD is pursuing the possible use of Medicare's
provider identification numbers to encourage and facilitate electronic
claims submission. Also, DOD now permits contractors to delay the
payment of paper claims (as an incentive for providers to submit
electronically) so long as the contractors continue to meet standards.
This initiative mirrors Medicare's process for increasing the number of
claims submitted electronically. Further, to reduce the number of
manual reviews, DOD is encouraging contractors to limit prepayment
review of certain types of claims if appropriate.
DOD and the contractors are also looking at ways to use new
technology on the World Wide Web to reduce administrative costs and
increase provider and beneficiary satisfaction. Currently, TRICARE
claims processing subcontractors have developed comprehensive Web sites
containing information on policy and benefits, electronic claims
submissions, and claim status.\2\ In addition, DOD and contractor
officials are considering future use of the Internet as a means to
submit claims for processing. This method, which is similar to that
used for electronic claims, might provide a more expedient, less
expensive means of handling claims. However, before this Web-based
technology can be utilized, the government must define security
requirements to ensure privacy.
---------------------------------------------------------------------------
\2\One subcontractor's Web site (www.mytricare.com) allows
beneficiaries to access claim status while the other subcontractor's
site (www.wpsic.com) gives providers access. Both sites are designed to
ensure the privacy of beneficiary information.
---------------------------------------------------------------------------
Nonetheless, because TRICARE makes up such a small percentage of
most providers' business, neither Web-based nor electronic claims
submissions are likely to significantly increase in volume without
specific incentives or mandates. However, mandates may increase
providers' reluctance to participate in the program. In the future
these problems may be mitigated as a result of industrywide
requirements to adopt uniform standards for electronic health care
transactions, including claims.\3\ Uniform standards for electronic
claim submissions will enable providers to submit claims for any health
insurance plan in the same filing format.
---------------------------------------------------------------------------
\3\The Health Insurance Portability and Accountability Act of 1996
(P.L. 104-191) requires the industrywide adoption of uniform standards
for electronic transactions, including claims filing.
---------------------------------------------------------------------------
DOD COULD SAVE HUNDREDS OF MILLIONS OF DOLLARS WITH A MORE EFFECTIVE
ANTIFRAUD PROGRAM
While DOD does not know the precise extent of fraud and abuse in
its health care system, it estimates potential annual losses to its
TRICARE program to be in the hundreds of millions of dollars. In
addition to the financial loss, health care fraud and abuse also
affects the quality of care provided and may cause serious harm to
patients' health. Despite its responsibility to prevent and detect
health care fraud and abuse, DOD has not been effective in doing so,
recovering less than 3 percent of its estimated losses to fraud and
abuse between 1996 and 1998. DOD has the opportunity to improve its
antifraud efforts by developing clear and measurable goals and ensuring
that contractors comply with the antifraud requirements in their
contracts.
DOD estimates that losses due to fraud and abuse could account for
10 to 20 percent of military health care expenditures. These ranges are
consistent with estimates of other public and private-sector
organizations, such as the Health Care Financing Administration, the
U.S. Chamber of Commerce, the Health Insurance Association of America,
and the National Health Care Anti-Fraud Association. Given TRICARE's
expenditure of about $2.9 billion for contracted civilian-provided care
in fiscal year 1999, DOD could be losing between $290 million and $580
million annually to fraud and abuse. DOD officials acknowledged that
they could be more effective in combating fraud and abuse if their
TRICARE contractors were more proactive in identifying and referring
potential fraud cases. They also agreed that they should expedite the
implementation of revised antifraud policies and requirements that
place greater demands on contractors to identify and prevent fraud and
abuse. However, although DOD provided contractors with antifraud
software, not all contractors are using the software. Further, DOD
required contractors to develop and submit antifraud plans, but most
contractors' initial antifraud plans were deficient. Current statistics
do not indicate any significant improvements in DOD's antifraud
efforts. Out of over 40 million claims processed from January 1999
through April 2000, only 17 fraud referral cases from the contractors
have been accepted by DOD for investigation.\4\
---------------------------------------------------------------------------
\4\These 17 cases all involved high dollars or had the potential to
cause patient harm. In addition, contractors submitted numerous small
dollar cases that DOD has returned, believing they should be handled as
overpayments rather than as fraud.
---------------------------------------------------------------------------
ADDITIONAL JOINT PROCUREMENT OF PHARMACEUTICALS WITH VA WOULD YIELD
SUBSTANTIAL SAVINGS
We recently testified that DOD and VA would benefit through
additional cooperative efforts to procure pharmaceuticals and through
the use of VA's Consolidated Mail Outpatient Pharmacy (CMOP) for DOD's
prescription refill workload.\5\ As the largest direct Federal drug
purchasers, the Departments already enjoy varying, though significant,
discounts on their drug purchases. The expectation is that, as the two
agencies buy more of a particular drug, their leverage--particularly
under competitively bid contracts--would permit them to obtain even
greater discounts from drug manufacturers and to save funds for both
Departments. Currently, the two agencies have awarded 18 joint and 51
separate national contracts representing 19 percent of their combined
drug expenditures of $2.4 billion in fiscal year 1999. We believe that
VA and DOD could potentially save $150 to $300 million more each year
by jointly purchasing other medications they both use.
---------------------------------------------------------------------------
\5\DOD and VA Health Care: Jointly Buying and Mailing Out
Pharmaceuticals Could Save Millions of Dollars (GAO/T-HEHS-00-121, May
25, 2000).
---------------------------------------------------------------------------
Further, additional savings could be achieved by utilizing VA's
mail-out pharmacy program to handle DOD's annual refill workload of
about 23 million prescriptions. For example, VA has the capability for
mail order refills through its CMOP and documentation shows that CMOP
refills cost about one-half of DOD's current costs of refilling
prescriptions at military pharmacies. CMOPs potentially could reduce
military pharmacy refill dispensing costs by about $45 million
annually.
IMPROVING THE MEDICAL APPOINTMENT PROCESS WOULD LIKELY INCREASE
BENEFICIARY SATISFACTION
Since the inception of TRICARE, beneficiaries have complained about
the difficulties they encounter in making appointments for health care.
For years beneficiaries seeking to make appointments in military
treatment facilities accessed care by calling the desired clinic
directly. Over the past several years however, DOD has been moving
toward a centralized appointment system. In some military medical
facilities an appointment center has been created and beneficiaries
call that center to schedule various types of appointments. In four
TRICARE regions though, TRICARE contractors have established regional
appointment centers which beneficiaries call to schedule appointments
with physicians in military medical facilities. The contractors perform
this function as part of their administrative tasks under their
contracts with DOD. We are currently reviewing the appointment making
process in TRICARE.
We are finding that the lack of uniform appointment names and
requirements for scheduling appointments has resulted in confusion for
both appointment clerks and beneficiaries, with beneficiaries sometimes
being transferred from the appointment center to the military clinic,
or told to call the clinic themselves.
Thus, what is meant to be a simplified, more user-friendly
appointment process appears to be a complex and confusing process,
where beneficiaries are unsure as to whether to call the contractor or
the military medical facility to schedule appointments. We expect to be
making recommendations at the conclusion of our work.
Mr. Chairman, this concludes my prepared statement. I will be happy
to answer questions you or other Task Force members may have.
Mr. Thornberry. Mr. Meyer, we will go ahead and let you
proceed with your opening statement. We do have a vote, so
members may be coming and going. I think it is just one vote,
so we will try to keep things going as best we can. You may
proceed.
STATEMENT OF WILLIAM J. MEYER, SENIOR VICE PRESIDENT OF
TRICARE, BLUE CROSS-BLUE SHIELD OF SOUTH CAROLINA
Mr. Meyer. Thank you, Mr. Chairman, Congressman Shays,
Congressman Moran, Congressman Thornberry, Congressman Spratt,
Congressman Buyer. I thank you for the opportunity of inviting
me here today and thank you for your interest in the experience
of my company, Palmetto Government Benefit Administrators, a
division of Blue Cross-Blue Shield of South Carolina.
I appreciate your concern with the difference in processing
costs between Medicare and TRICARE and welcome the opportunity
to give you some information and ideas based on our experience.
Blue Cross-Blue Shield of South Carolina, through its
subsidiaries, is the largest claims processor in the country
for both Medicare and TRICARE, so we have a thorough
understanding of the administrative cost structures and program
differences of both programs.
The national average cost to process a Medicare claim in
fiscal year 1999 was $1.78. The average cost to process a
TRICARE claim at my company is just over $7.50. While on its
face this is a large disparity, close analysis shows that there
are reasons for it. The best way to understand the differences
in these processing costs is to understand the differences
between the two programs.
The most important difference is the most basic. By
definition, Medicare is a fee-for-service program while TRICARE
is a managed care program. The whole concept of managed care is
that managing health care to maximize its efficiency will
result in increased administrative cost, but that resulting
efficiency will save far more than its cost. A complex system
of authorizations, referrals, and discounted provider networks
means that the same service might get paid for in dozens and
even scores of different ways. This acknowledged administrative
complexity is far different from what we find in Medicare,
where fees are set, regardless of the provider, and almost
every claim is paid the same way.
There is a propensity to look at claims processing costs
without accounting for savings on the benefits side, but an
accurate analysis of the cost of Medicare and TRICARE demands
that you look at both. As an example, one reason processing
TRICARE claims is more complex, thus more costly, is that
physicians in the program are paid different amounts for the
same procedures. That is because reimbursement rates are
negotiated to get the most savings possible. You would save on
processing if you make all the reimbursement rates the same,
but you would lose whatever you are now saving by negotiating
rates with providers. It is my strong belief that for many, if
not most, of TRICARE's administrative costs, you will find a
substantial savings on the benefit side.
Another issue contributing to TRICARE's higher processing
cost is the wide range of coverages available under the three-
tiered managed care benefit. While Medicare has one benefit
package standardized nationwide, TRICARE beneficiaries choose
from among the standard indemnity plan, a point-of-service
network provider option, and an HMO-like option. Additionally,
each prime contractor can offer its own unique menu of
coverages in addition to the standard benefit.
There are also, of course, enrolled and unenrolled
beneficiaries with a seemingly infinite number of possible
combinations of cost and benefits. These choices and options
and the constantly evolving benefits make TRICARE more
attractive to the user, but much more complicated to
administer. Processing these claims accurately in a timely
manner is much more labor intensive than processing the
standard claims for Medicare benefits.
This complexity also results in a tremendous number of
inquiries from both beneficiaries and providers, primarily
related to benefits, cost share, and claim payments. Inquiry
rates are four times higher for TRICARE than for Medicare. In
fact, we receive one inquiry for every 4.5 TRICARE claims. We
are required to provide toll free numbers for these inquiries,
which certainly seems to be a service that these beneficiaries
deserve, but it adds significantly to the cost of processing
claims. And while HCFA requires Medicare providers to use the
contractor's automated response telephone system when checking
on the status of claims less than 30 days old, there are no
such restrictions on TRICARE providers.
Another difference between Medicare and TRICARE is size.
The cost difference here derives from the principle of economy
of scale, with which I know you are familiar. Each program has
certain fixed costs, including software development and
maintenance costs, fraud and abuse detection, and EMC marketing
costs. Medicare's fixed costs are spread over nearly 900
million claims a year, about 30 times the number of TRICARE
claims. The huge volume of Medicare claims reduces unit cost.
For example, $10 million in fixed costs to Medicare translates
to just over one penny per claim compared to more than 39 cents
per claim for TRICARE.
A major factor in claims costs is the use or lack of use of
electronic media claims filing. The cost of handling paper
claims is $2 or more higher than the cost of processing them
electronically. Our Medicare division receives 85.5 percent of
its medical and surgical claims electronically. We receive less
than 20 percent of TRICARE medical and surgical claims
electronically. If we could achieve the same 85.5 percent
electronic rate, we would reduce our costs by 26 percent.
There are multiple reasons for this disparity in electronic
filing. The biggest reason is that TRICARE rarely represents
more than 5 percent of a provider's income, while Medicare
typically represents 35 to 60 percent of his or her income.
Adding to this financial leverage Medicare has on a
provider, HCFA has mandated that all paper claim submissions be
held and not released until they are 27 days old. Compare that
to TRICARE. Fifty percent of TRICARE providers submit ten or
fewer claims per month. Ninety-eight percent of those claims
are paid within 30 days, averaging 12 to 14 days. There is
simply no financial reason for a provider to go through the
additional hassle and expense of an electronic system for
TRICARE.
Much of what I have said today has stressed the differences
between these two programs. It is difficult to compare with an
eye toward reducing the claims processing cost of two programs
whose concepts are completely different. I would like to
suggest to you that you might want to compare TRICARE with the
Federal Employees Health Benefits Program, FEHBP, which, as you
know, is quite highly regarded in terms of both benefits and
administration and which is much more like TRICARE than is the
Medicare program. Both are managed care programs, while
Medicare is a fee-for-service program. My research shows that
FEHBP and TRICARE have almost identical costs for claims
processing.
Since we are comparing administrative costs for TRICARE
with those of Medicare, however, let me quickly add that the
General Accounting Office recently raised questions about the
low administrative cost for Medicare. When cost is measured
against future population growth in the Medicare age brackets,
coupled with medical technology advancements and consideration
of new mandates, William J. Scanlon, Director of Public Health
Issues of the Health, Education, and Human Services Division of
the GAO, testified before the Senate's Committee on Finance on
May 4, 2000. Here is part of what he said, and I quote.
``Contractor budgets for claims administration have been
falling in proportion to the volume of claims they process.
Relative to the size of private health insurers and their
administrative budgets, HCFA runs Medicare on a shoestring.''
Blue Cross and Blue Shield of South Carolina is eager to
work with you on finding ways to reduce claims processing
costs, and indeed, we are always working toward streamlining
and improving our processes. I appreciate your interest in my
testimony and I will be happy to answer any questions.
Mr. Shays [presiding]. Thank you, Mr. Meyer.
[The prepared statement of William J. Meyer follows:]
Prepared Statement of William J. Meyer, Senior Vice President of
Tricare, Blue Cross-Blue Shield of South Carolina
Congressman Shays, Congressman Moran, Congressman Thornberry, thank
you for inviting me here today, and thank you for your interest in the
experience of my company, Palmetto Government Benefits Administrators,
a division of Blue Cross Blue Shield of South Carolina. I appreciate
your concern with the difference in processing costs between Medicare
and TRICARE, and welcome the opportunity to give you some information
and ideas based on our experience. Blue Cross and Blue Shield of South
Carolina, through its subsidiaries, is the largest claims processor in
the country for both Medicare and TRICARE, so we have a thorough
understanding of the administrative cost structures and program
differences of both programs.
The national average cost to process a Medicare claim in fiscal
year 1999 was $1.78. The average cost to process a TRICARE claim at my
company is just over $7.50. While on its face that is alarge disparity,
close analysis shows that there are reasons for it. The best way to
understand the differences in those processing costs is to understand
the differences between the two programs.
The most important difference is the most basic: By definition,
Medicare is a fee-for-service program, while TRICARE is a managed care
program. The whole concept of managed care is that managing healthcare
to maximize its efficiency will result in increased administrative
costs, but that the resulting efficiency will save far more than it
costs. A complex system of authorizations, referrals, and discounted
provider networks means that the same service might get paid for in
dozens, or even scores, of different ways. This acknowledged
administrative complexity is far different from what we find in
Medicare, where fees are set regardless of the provider, and almost
every claim is paid in the same way.
There is a propensity to look at claims processing costs without
accounting for savings on the benefit side, but an accurate analysis of
the costs of Medicare and TRICARE demands that you look at both. As an
example, one reason processing TRICARE claims is more complex-thus more
costly-is that physicians in the program are paid different amounts for
the same procedures. That is because reimbursement rates are negotiated
to get the most saving possible. You could save on processing if you
make all the reimbursement rates the same-but you would lose whatever
you now save by negotiating rates with providers. It is my strong
belief that for many, if not most, of TRICARE's administrative costs
you will find a substantial saving on the benefit side.
Another issue contributing to TRICARE's higher processing costs is
the wide range of coverages available under the three-tiered managed
care benefit. While Medicare has one benefit package, standardized
nationwide, TRICARE beneficiaries choose from among the standard
indemnity plan, a point-of service network provider option, and an HMO-
like option. Additionally, each prime contractor can offer its own
unique menu of coverages in addition to the standard benefit. There are
also, of course, enrolled and unenrolled beneficiaries, with a
seemingly infinite number of possible combinations of costs and
benefits. These choices and options, and the constantly evolving
benefits, make TRICARE more attractive to the user, but much more
complicated to administer. Processing these claims accurately in a
timely manner is much more labor-intensive than processing the standard
claims for Medicare benefits.
This complexity also results in a tremendous number of inquiries,
from both beneficiaries and providers, primarily related to benefits,
cost share, and claims payments. Inquiry rates are four times higher
for TRICARE than for Medicare claims. In fact, we receive one inquiry
for every 4.5 TRICARE claims. We are required to provide toll-free
numbers for these inquiries, which certainly seems to be a service that
these beneficiaries deserve, but it adds significantly to the cost of
processing claims. And while HCFA requires Medicare providers to use
the contractor's automated response telephone system when checking on
the status of claims less than 30 days old, there are no such
restrictions on TRICARE providers.
Another difference between Medicare and TRICARE is size. The cost
difference here derives from the principle of ``economy of scale,''
with which I know you are familiar. Each program has certain fixed
costs, including software development and maintenance costs, fraud and
abuse detection, and EMC marketing costs. Medicare's fixed costs are
spread over nearly 900 million claims a year, about 30 times the number
of TRICARE claims. The huge volume of Medicare claims reduces unit
costs. For example, 10 million dollars in fixed cost to Medicare
translates to just over one cent per claim, compared to more than 39
cents per claim for TRICARE.
A major factor in claims costs is the use-or lack of use-of
electronic media claims filing. The cost of handling paper claims is
$2.00 or more higher than the cost of processing them electronically.
Our Medicare division receives 85.5 percent of its medical surgical
claims electronically. We receive less than 20 percent of TRICARE
medical surgical claims electronically. If we could achieve the same
85.5 percent electronic submission rate we would reduce our cost by 26
percent.
There are multiple reasons for this disparity in electronic filing.
The biggest reason is that TRICARE rarely represents more than 5
percent of a provider's income, while Medicare typically represents 35
to 60 percent of his or her income. Adding to this financial leverage
Medicare has on a provider, HCFA has mandated that all paper claims
submissions be held and not released until they are 27 days old.
Compare that to TRICARE. Fifty percent of TRICARE providers submit
10 or fewer claims per month. Ninety-eight percent of those claims are
paid within 30 days, averaging 12-14 days. There is simply no financial
reason for a provider to go through the additional hassle and expense
for an electronic system for TRICARE.
Much of what I have said today has stressed the differences between
these two programs. It is difficult to compare, with an eye toward
reducing, the claims processing costs of two programs whose concepts
are completely different. I would like to suggest that you also might
want to compare TRICARE with the Federal Employees Health Benefit
Program, which as you know is quite highly regarded in terms of both
benefits and administration, and which is much more like TRICARE than
is the Medicare program. Both are managed care programs, while Medicare
is a fee-for-service program. My initial research shows that FEHBP and
TRICARE have virtually the same costs for claims processing.
Since we are comparing administrative costs for TRICARE with those
for Medicare, however, let me quickly add that the General Accounting
Office recently raised questions about the low administrative costs for
Medicare, when cost is measured against future population growth in the
Medicare age brackets, coupled with medical technology advancements and
consideration of new mandates. William J. Scanlon, Director of Health
Financing and Public Health Issues of the Health, Education, and Human
Services Division of the GAO, testified before the Senate's Committee
on Finance on May 4, 2000. Here is part of what he said, and I quote:
``* * * contractor budgets for claims administration have been falling
in proportion to the volume of claims they process. Relative to the
size of private health insurers and their administrative budgets, HCFA
runs Medicare on a shoestring.''
Blue Cross Blue Shield of South Carolina is eager to work with you
on finding ways to reduce claims processing costs, and indeed, we are
always working toward streamlining and improving our processes. I
appreciate your interest in my testimony, and will be glad to answer
any questions.
Mr. Shays. Other members are voting and they will be back
to ask questions. My name is Chris Shays. I chair this
committee along with Mr. Thornberry and I also chair the
National Security Subcommittee that oversees all of DOD for all
programs, including health care. While my Subcommittee on
Government Reform has not really gotten into health care, we
did get into health care issues when I chaired the Human
Resource Subcommittee and it is an issue we are tremendously
interested in.
Dr. Sears, I would like to have you just kind of describe
to me your perception as you would be listening to veterans of
all the reasons why they do not find TRICARE as satisfactory as
you would like or as I would like.
Dr. Sears. When you say veterans, sir, do you mean----
Mr. Shays. I do not mean veterans, I mean our military
personnel.
Dr. Sears. Yes. I think----
Mr. Shays. I might say also that my subcommittee also
oversees veterans' affairs and we have focused time on
veterans' affairs, so I let it slip there.
Dr. Sears. I was afraid you were getting out of my area----
Mr. Shays. That is also my bias, that I eventually would
like to combine both health care systems, too, so that is
another issue.
Dr. Sears [continuing]. Although many of our beneficiaries
are veterans, obviously. As we track satisfaction, which,
incidentally, has shown a trend of steady improvement since the
beginning of TRICARE in each of the regions in studies and
surveys done by outside consultants, clearly, the remaining
challenge, the largest remaining challenge to us is the issue
of access, and that revolves around the difficulties with
telephone access, sometimes a problem of infrastructure in our
military treatment facilities, particularly, and sometimes a
problem with access to easy appointments and sometimes access
to particularly acute care appointments.
We have made tremendous progress in those areas, but as Mr.
Backhus pointed out, this is an area they are studying. It is
an area where we have done a lot of work and there are
significant improvements in place and many that are going in
place over the next few months. But we must solve the telephone
access problem, moving toward the utilization of one TRICARE
number nationally that downlinks, and looking at other issues.
The biggest problem we face----
Mr. Shays. You say one number. There is not one 800 number
nationwide?
Dr. Sears. No, there is not. There is an 800 number
regionally----
Mr. Shays. See, I would have trouble understanding that. I
mean, given that our military fly everywhere and go everywhere,
why would that not have happened yesterday?
Dr. Sears. We are talking about a number to access claims,
and currently, the way the contracts are set, we have different
contractors in different regions who manage that central phone,
so that you access it currently on a regional basis because you
are enrolled in a particular region, so you get served by that
region.
Mr. Shays. But they all have their own number. I use my
Visa card and I enrolled in one place but I can go anywhere in
the world and I can use it.
Dr. Sears. Yes, sir, and that is where we are moving as
rapidly as we can. The banking card issue, or the USAA, which
is what our members talk to us about, is exactly where we are
moving. That will allow us, when we put that in place, and that
is in the works, to have one number that downlinks to all of
our regions for both advice and appointments and other
information, as needed.
Mr. Shays. If I said to my staff they are going to do
something as rapidly as possible, I would like to know, what
does that mean, and they have trained me to ask the same thing.
What does as rapidly as possible mean?
Dr. Sears. Well, we are in the process, first of all, of--
we have an IPT, a team that is working on this issue. They have
now worked with a number of the folks who provide these sorts
of services and they are looking to the establishment of a 1-
800 number capability sometime next fall.
Mr. Shays. Not this fall?
Dr. Sears. No, not this fall, next fall.
Mr. Shays. That does not seem as rapidly as possible, then.
That seems like on our own good time. You raised telephone
access as a great aggravant--I did not, you did--and it would
strike me that if that is the biggest problem, it is one of the
easier parts of the problem to solve.
Dr. Sears. There are several approaches to that, sir. One
is through an improvement in our regional systems so that
people can access that, and those initiatives, some of them are
in place, some of them are going into place. But the larger
problem of getting a downlink system that has the
infrastructure and takes advantage of all the current
technology is a longer process. We are striving to get that in
place, obviously, as quickly as we can. We also have current
contractual relationships in terms of some of those numbers
that have to be modified. Contracts have to be modified to put
that in place.
Mr. Shays. Well, it just strikes me, and I would think the
other members of the committee, that doing it in a year and 3
months or so is not rapidly as possible.
What would be others besides telephone access? When I go
out and I am listening to our men and women, they do not just
tell me telephone access.
Dr. Sears. No. The other major problem that we have had and
are in the process of solving in very short order, this fall,
is the issue of standardized appointments across our system.
Right now, with the three military services doing appointing in
different ways, using different appointment types, different
templates, using different business rules for their appointing,
we really have had a hodge-podge of different ways to get
appointments.
We are putting in place now a standardized appointment
system which reduces the number of appointment types from
literally thousands in the past to a manageable number of eight
or ten and building the templates that allow visibility of
appointments to the folks who are doing the scheduling. If the
appointing system is not properly structured, then even though
you may have appointments available, they may not be obvious to
the people who are making the appointments. That will be solved
this fall.
We also have put out a software package that allows each of
our military facilities to determine how they are utilizing
their templates. It is called the template analysis tool. It
allows them to make corrections in the way they are setting up
their appointments so that they can correct their problems and
make sure that the appointment availability is fully utilized.
So those are very dramatic changes which will improve that
access.
Now, as you know, under TRICARE, unlike CHAMPUS and our
military health system before, we are guaranteeing our
beneficiaries certain access availability. If you have an acute
illness and need to be seen immediately, the guarantee is that
you will be seen the same day. For routine appointments, we are
guaranteeing a 7-day appointment standard. And for wellness
visits and other consultations, up to 30 days.
For the most part, we are generally meeting those
standards, and in the TRICARE system, if those standards cannot
be met within the direct care system, within the military
system, our requirement is that they be referred into the
network so that they can be seen in a timely way.
Mr. Shays. Let me just, before, Mr. Chairman, yielding
back, just be clear on one thing. Our military personnel are
sometimes called at a moment's notice. Is there the flexibility
to meet a change in their schedule quickly, because they may
all of a sudden find they are going to be out to sea for a few
days?
Dr. Sears. Absolutely. Active duty folks have the highest
priority, and certainly deploying units would have the highest
priority for attention to their medical needs as they prepare
for deployment.
Mr. Shays. Thank you very much. Thank you, Mr. Chairman.
Mr. Thornberry [presiding]. Mr. Spratt.
Mr. Spratt. I will waive any questions.
Mr. Thornberry. Let me ask, I guess, kind of a bottom-line
question. We hear that the average cost to process a Medicare
claim is $1.78. We hear that the average cost for the health
insurance industry, I guess the private sector, is $3.50 to $4,
ballpark maybe. And for TRICARE, it is nearly $8. You all have
given a variety of factors that causes TRICARE to be higher.
Some of those, I suppose, are factors we can fix and some of
them are factors we cannot fix.
What I would like to get a sense of is, what do you think
the goal ought to be? Are we doing as well as we can do? Is $8
or whatever it is as good as we can do, given the way that
TRICARE is set up, or can we do better with electronic filing
and other kinds of improvements? What should our goal be if
things were running pretty well? Mr. Backhus, let me ask you to
start.
Mr. Backhus. We asked ourselves and two claims processors
that question, as well as the organizations that they process
claims for, the TRICARE support contractors. We have analyzed
the costs currently incurred in TRICARE. We have not looked at
FEHBP at this point, but have a little bit of information on
that.
It seems to me that the consensus around this is in the
neighborhood of $3 or $4 per claim, which would be more like
the industry average. There is $3 or so in costs per claim that
are above and beyond the real cost of determining payment. Some
of these costs like maintenance of information relative to who
is using the system and to detect and deter fraud and abuse,
are necessary expenditures.
But there are so many different edits in the program that
probably are not necessary, and there is so much opportunity
with technology such as potentially using the Internet and
other more state-of-the-art systems, that I think we are
talking, in my judgment, about $3 to $4 per claim.
Mr. Thornberry. Mr. Meyer, do you agree that we can save
that much money if we get everything running right?
Mr. Meyer. I think if we did everything possible, this
program would cost at least $5 a claim because of some of the
basic inherent differences, and if you will just give me one
moment, I will give you the best example I can, and that is our
largest volume provider, we have five of the seven regions. We
process 82 percent of the TRICARE claims.
The largest single provider we have across all five regions
that does not submit claims electronically is the provider from
the East Coast of North Carolina, a large group provider. They
submit over 3,300 TRICARE claims per month, every month. They
submit them all paper. We have been fighting to get these
people to submit electronically.
Their answer to us is that they give TRICARE--they are a
TRICARE Prime provider. They give TRICARE a 15 percent discount
off the TRICARE rate for all their services. They are taking a
15 percent hit on the benefit dollars. Their electronic
submitter is a company that charges them 35 cents a claim to
submit claims electronically. Their paper TRICARE claims are
getting paid in an average of 2 weeks.
They said there is exactly no reason for them to ever
submit those claims electronically to us because they will be
damned if they are going to give us--even though that 35 cents
does not go to us, that is another 35 cents they would have to
cut and they do not need the money in less than 2 weeks.
And that is the story over and over again. Once again, we
could cut our costs 26 percent if we could get the same
electronic rates as Medicare, and to say our electronic rate is
50 percent is a little bit misleading because most of that is
pharmacy claims. Almost all of our pharmacy claims come
electronically, but the hard claims, the professional claims
and the surgical claims, only 17 to 20 percent of those come
electronically.
Mr. Thornberry. I want to clarify that and get back to it
in just a second, because I had that as a question, to resolve
that difference.
But Dr. Sears, what do you think? What ought to be our goal
here that we could achieve if we get everything running right?
Dr. Sears. I think Mr. Meyer has hit it pretty closely.
Obviously, we want to get the cost as low as possible, but I
think the $2 to $3 range is achievable.
Mr. Thornberry. So we could save $2 to $3 per claim if we
get everything going right?
Dr. Sears. I think that is achievable with HIPAA, when
HIPAA gets into place, when we complete all of our
restructuring of edits and reviews and all of the
simplification things that we are going through right now in
our task forces that are looking at how to prevent rework of
claims. I think further savings are achievable and should be
striven for. The new technology, obviously, will also help
significantly and it is in some ways hard to predict what cost
savings can be achieved through the new technology.
Mr. Thornberry. Do you agree with Mr. Meyer's point that if
you just look at, set pharmacy aside and the rest of the
claims, only 17 to 20 percent are filed electronically now?
Dr. Sears. That is correct.
Mr. Thornberry. And you, I think, said something about 50
percent, but that is only when you include all the pharmacy?
Dr. Sears. That is right.
Mr. Thornberry. OK.
Dr. Sears. That is correct.
Mr. Thornberry. Now, it is a little puzzling to me why it
takes so long and seems to be so difficult to get electronic
filing done, because, as you mentioned, Congress passed a law
several years ago to require everybody to move in that
direction, and you all seem to be saying we have no tools at
our disposal to get these providers to file electronically. Are
we making electronic filing too difficult for them? Do we have
such a separate system for TRICARE with unique fields to be
filled in and such special requirements for our computers that
it is too difficult?
Dr. Sears. Mr. Meyer is the expert in this, but if I am a
physician practicing and I see a Medicare patient or a TRICARE
patient, we use the same forms, the HCFA-1500 for individual
providers and the UV-92 for hospital providers, the same form
obviously for TRICARE and for Medicare. We have built things
into the system now that mean that those claims could be
submitted and processed--the same claim that could be submitted
to the HCFA claims processor can be submitted to Mr. Meyer's
organization and be processed.
Mr. Thornberry. OK. Mr. Meyer, if you are using the same
form that you get anyway from Medicare providers, why can you
not just use the same form and why can these doctors and
providers not use the same form and e-mail it to somebody else
other than----
Mr. Meyer. The form is the same, Mr. Chairman, but the data
on the form is not necessarily the same, the data required on
the form. There are some additional things that have to be put
on that form for a TRICARE claim that does not have to be put
on that form for a Medicare claim.
Mr. Thornberry. Are there some of those things we can get
rid of?
Mr. Meyer. No, not really. You need to know branch of
service, you need to know--there are TRICARE particulars you
have to have. But let me say that that is not a large
impediment. For the most part, that is a one-time cost, to
modify a system to accept it for TRICARE.
The bigger impediment is, once again, more than 90 percent
of the TRICARE claims we receive, excluding drug ones again,
are coming from providers that submit less than ten claims per
month. In other words, they are submitting 800 Medicare claims,
three TRICARE claims. They say, we are not going to go through
the expense of adjusting our automated system. It is going to
cost us $400 to fix our automated system to accept TRICARE
claims for three or four claims a month when you are paying
them in less than 30 days anyway. There is no advantage for us
to do that. We run into that over and over and over again.
Mr. Thornberry. I am sure it is just my ignorance. I am
just not quite understanding why it should be so much more
difficult, if you are already submitting so many Medicare
claims, to submit a TRICARE claim on the same form.
Let me ask one last question and then see if my colleagues
have questions. Mr. Backhus, you used the example of these
electrocardiograms. Would you explain that to me? As I
understand it, from one provider alone, 14,000 claims for
electrocardiograms were all sent over here for manual review.
Now, I presume that means somebody looking at each piece of
paper and approving each of those claims manually, when none of
them are ever denied. Can you explain that to me?
Mr. Backhus. I will try. The history of this dates back to
program requirements that preceded TRICARE. At a time when
CHAMPUS was in place and the Department of Defense was, in
fact, a direct payer of claims, there was a feeling that there
was a need to screen claims for many different kinds of
services, in other words require that claims for many different
services be edited and reviewed for medical necessity. In this
particular case, the requirement was for all electrocardiograms
claims to be manually reviewed for that purpose.
Now that TRICARE is here and the contractors have some
fiscal responsibility for the costs, the responsibilities for
determining medical necessity and appropriateness rests in many
cases with them. However, technologies have changed and
utilization has changed, and thus, in some cases, the need to
review services in particular have changed.
Electrocardiogram claims fall into that category, but the
requirement did not change. It is outdated, probably needs to
be--in fact, recently, a policy has been put into place, as I
understand it, to permit the contractors now to remove that
particular edit from the claims processing system. It is not in
place at this point, but it should be within a few months.
The other thing I would like to clarify is that the 14,000
claims are from one particular TRICARE contract, one particular
region.
Mr. Thornberry. We do not want to make too much out of each
individual instance, but I think it is helpful for us to get a
feel for some of the problems that we are trying to sort
through and why these costs are so much, because obviously if
you have got to go through 14,000 pieces of paper, each one and
every one gets approved, then that is an unnecessary expense in
a variety of ways and it is one example.
Mr. Spratt. Would the gentleman yield?
Mr. Thornberry. I would be happy to yield to the gentleman.
Mr. Spratt. With respect to your cost, I am not quite clear
as to your testimony. You testified, Mr. Meyer, that in
addition to just the direct cost of processing a claim, you are
also handling the network, responding to provider inquiries,
responding to patient inquiries, and trying to make this
managed care network an efficient provider as opposed to just
some fee-for-service situation where you pay whatever the
charge says to pay.
Are you saying that when you give us your per claim
estimate of what it costs to settle one claim, pay one claim,
you are dividing the number of claims into the total
compensation you receive from managing this whole program?
Mr. Meyer. That is correct, Congressman. Typically, claims
processing costs in this program includes all the things you
just mentioned, includes providing the telephone service, the
toll-free lines, the responding to written inquiries, the
management of the provider file and pricing files. It is all
rolled together. The cost to actually process the claim with
none of that itself is $2 and some odd cents.
Mr. Spratt. So it is pretty close to Medicare, the actual
claims management aspect.
Mr. Meyer. Right. But in fairness, Medicare includes the
cost of processing the inquiries and they are $1.78. So the
$1.78 for Medicare and the $7.50 for TRICARE is as close as you
can get to apples to apples for the different requirements.
Mr. Spratt. But does the $7.50 include all of these other
managerial responsibilities?
Mr. Meyer. Yes, it does, and many of those, Medicare does
not have. Medicare does not have to manage the one million
provider file that I have to manage. It is very, very small
compared to that.
Mr. Spratt. To what extent do you have to nourish the
network? Do you have to deal with providers and try to coax and
persuade them to stay in the network? I know in South Carolina,
which is under your purview, we have had a problem with the
TRICARE network, first of all building it up and filling out
different aspects of it, and then keeping some of those who
signed up originally in the system.
Mr. Meyer. Yes, we do that, Congressman. We have a very--it
is probably 60 cents a claim that we spend on just maintaining
those provider networks. It is classic, for example, for one
doctor to belong to one group and be in the network in that
group and belong to another group at the same time and not be
in the network in that group, which is legal but not ethical.
He can manage his fees that way. In other words, as a part of
the network in this group, he is going to get paid $50 for a
service, but in this other group, he can get paid $75 for the
same service, so he will move over to that group to get that
service done. We have to manage that. There are over one
million individual providers on our provider file that we have
to manage the pricing on those things and the complexity is
just enormous, and that is 60 cents a claim that Medicare does
not experience.
Mr. Spratt. I thank the gentleman for yielding.
Mr. Thornberry. I thank the gentleman.
Mr. Buyer.
Mr. Buyer. Thank you, Mr. Chairman. Back to the hearing
that we had this past spring, of all the hearings that I have
ever attended or chaired in Congress, as I look back at that
one, it was 5 hours. It was a marathon hearing that we had, but
it was also one of the most productive I think that I have ever
participated in because we talked about TRICARE. No one could
duck anything. They were all in the room. I was going through
the white paper that one of the companies had submitted and I
wanted to touch on a couple of things.
If we were to, back to the chairman's initial questions of
you, to get at it quickly, when you talk about--I would
appreciate your testimony about what are the front costs and
then discuss the inquiry rates and why is there such a
differential in the inquiry rates between Medicare and TRICARE,
and those are two huge cost drivers.
Mr. Meyer. Absolutely. Let me take the inquiry rates first.
We have, once again, we get more than five million telephone
inquiries per year for our claim volume, one phone call for
every four-and-a-half claims. One of the reasons why that is so
different compared to Medicare, and it is an important point to
make, is that our research has shown that 50 percent of our
phone calls are people, mostly providers, calling to find out
the status of the claim. Sixty percent of that 50 percent are
phone calls on claims less than 30 days old.
In Medicare, those phone calls must go through the
automated voice response unit. In other words, a doctor cannot
opt past the automated response unit to a human attendant. In
TRICARE, there is no such prohibition. Virtually 100 percent of
them go right past the automated response unit and come to an
individual to answer. This usually inflates the volume of phone
calls. I would go on a limb to say 30 percent of our phone
calls could be eliminated if we required, as Medicare does,
those providers to use the automated response unit for claims
that are less than 30 days old.
Once again, more than half the phone calls we get on claim
status are claims for 8 days old, 10 days old, 12 days old. It
is routine. We have the same providers call every Monday and
they call on the list of every claim they have submitted. Even
if the claim was submitted last Thursday, they are calling for
the status on a Monday. They read off 50 claims and they want
the same status.
Mr. Buyer. What had been submitted to me was that--and I
wish you would concur or not concur--that with regard to
Medicare, you receive one inquiry per 18 Medicare claims.
Mr. Meyer. That is correct.
Mr. Buyer. TRICARE, it is one inquiry for 4.5 claims.
Mr. Meyer. That is correct. That is the ratio.
Mr. Buyer. That is almost five times the amount.
Mr. Meyer. It is exactly four-to-one, right.
Mr. Buyer. That is stunning, especially given the volume of
Medicare claims you process versus TRICARE claims. So this
issue of moving toward greater simplification----
Mr. Meyer. It is a huge benefit.
Mr. Buyer [continuing]. It is a huge benefit. Will you
share with the committee a breakout of what you meant by front
costs? If the front end costs were--front end costs are handled
different ways.
Mr. Meyer. Right.
Mr. Buyer. Break that out. Define that for me.
Mr. Meyer. That is the mailroom, the place that receives
the 25 million claims that we receive. That is the cost for
coding all those claims and data rendering all those claims
into the system. That is the cost of passing the paper around,
collecting the paper, and then, in fact, sending the paper off
to storage places for that paper to be stored, because,
frankly, the Federal records centers are all full so we have to
absorb the cost of retaining 25 million claims and associated
correspondence per year.
Mr. Buyer. So you threw in mailroom, document preparation,
imaging, distribution, data entry, paper storage, according to
this white paper by your company, it could add up to $1.35 to
$1.50 per claim.
Mr. Meyer. Right, Congressman. Since we did that paper, we
looked at it closer and it is actually closer to $2 per claim.
Mr. Buyer. That is almost equivalent to the cost of
Medicare alone, and that is just the front cost.
Mr. Meyer. That is correct.
Mr. Buyer. That is pretty stunning when you think about
that.
Mr. Spratt. Would the gentleman yield?
Mr. Buyer. Yes.
Mr. Spratt. Is some of this due to the fact that this is a
new program, you are just getting accustomed to it, getting
your providers in the groove, so to speak, and they therefore
have more inquiries, they need more guidance?
Mr. Meyer. The inquiries in this program--well, yes and no.
For example, we get more inquiries on the newer contracts than
we get on the more mature contracts. For example, we process
claims for Regions 9, 10, and 12, which is the States of
California and Hawaii and Alaska. The ratio of calls to claims
there is lower than the ratio of calls to claims, for example,
in the Mid-Atlantic region, which is one of the last regions to
come up, where people are still getting used to the
complexities of the TRICARE program and still do not understand
what the benefit is and what the cost share is all the
complexities associated with the program.
Mr. Spratt. If you had electronic filing, do you avoid most
of this front-end cost?
Mr. Meyer. If you have electronic filing, you avoid all of
the front-end cost.
Mr. Spratt. Gee whiz. Do we give providers the software, or
do they have to buy proprietary software?
Mr. Meyer. We have a free product that we offer every
single provider. We say, this is absolutely free to you, this
software. As a rule, once again, they are already using another
software package and they are using it primarily for Medicare
or they are a large commercial carrier and they say they do not
want to run two packages, even though it is free. They have a
large vendor that does this for them and they do not want to
run the second package, and thanks but no thanks.
If there was a way to do it, we would eliminate that paper
tomorrow. It would drop right down to our bottom line. There is
no reason not to do it.
Mr. Spratt. If the gentleman would yield still, does the
software we provide free integrate easily with most operating
systems?
Mr. Meyer. Yes, it does. It is on a floppy disk. You pop it
into your computer and away you go. We will have the capability
within 1 to 2 months for anybody, any provider in the country
to submit TRICARE claims across the web. All you need at that
point is government permission to get past whatever security
issues that they have. We believe we have that conquered and
then 100 percent of all providers in the country can file
electronically across the web free.
But my prediction is they are still not going to do it,
because once again there, they have thee large systems in place
that they are submitting from Medicare, which is 50 percent of
their income, and they are going to say, that is what I am
using and that is all I am going to use. We may pick up some
around the edges in the three or four claim per month providers
that say, well, we can get them done this way.
Mr. Spratt. Do most of these providers also have a separate
software package for Medicaid in their particular State?
Mr. Meyer. I could not answer that question for Medicaid. I
can look it up for you. For Medicare, I know, but not for
Medicaid. I would not know.
Mr. Spratt. Blue Cross-Blue Shield, do you provide your
PPOs and others who are approved providers, do you provide them
with software for submission of electronic claims?
Mr. Meyer. Yes, we do.
Mr. Spratt. And is the acceptability rate there high?
Mr. Meyer. Yes, it is, and once again the reason is the
financial leverage on the doctors we have in the State of South
Carolina. For the most part, we represent anywhere from 33
percent to 80 percent of their income.
Mr. Spratt. Again, it is market share.
Mr. Meyer. Right.
Mr. Buyer. We were very cautious when we did the defense
bill not to place the mandate to electronic filing. We have Dr.
Sears here and Mr. Backhus. Let us explore that for just a
moment.
Mr. Backhus, on page 7 of your written testimony, you
indicate that one of the challenges in reducing the cost of
TRICARE claims processing is increasing the number of providers
who are submitting claims electronically. You indicate that
this is not likely to happen without either incentives or
mandates. I agree with your assessment that mandates might
actually drive providers away from TRICARE.
What kind of incentives can be used to encourage providers
to make more use of electronic means of filing claims, to make
sure that that does not happen? I mean, how do we work
cooperatively here, DOD with contractors and providers, to make
sure that does not happen rather than Congress coming in and
saying, you cannot get it right. We are just going to mandate
and we are going to micromanage.
Mr. Backhus. First of all, if these HIPAA requirements do
come to pass and data submissions are similar for every
program, then that would go a long way toward providing
incentives for people to do this that would not require their
own separate systems and software packages.
Secondly, you know, Medicare, as Mr. Meyer pointed out, has
tried to provide incentives for electronic claims processing by
permitting, or actually requiring, that the paper claims not be
paid in less than 26 days, whereas electronic claims, of
course, can be processed and paid much quicker. The same
possibility exists here to do this. He says his company
processes the paper claims in 2 weeks.
Mr. Meyer. On average.
Mr. Backhus. On average, and the standard is 30 days. It
may not be popular, but it is possible that if paper claims
were paid something closer to 30 days, it may offer these folks
an incentive to submit electronic claims because they will get
paid quicker. Now, as he says, if they are going to get paid in
2 weeks with the paper claim, what reason do they have to
change?
There is another opportunity here that I think exists that
is more technical in nature and Mr. Meyer can probably explain
it better than I can, but, for example, there are opportunities
for TRICARE to try to adopt the Medicare provider
identification numbers. What this means simply is that when a
TRICARE provider wants to file a claim, their unique
identification number does not fit into the current TRICARE
electronic formatting and contractors have to convert their
systems to try to adapt if they want to file under TRICARE.
There is a possibility to go ahead and allow these folks
just to use their Medicare numbers, for the TRICARE system to
recognize that, convert it over to whatever the particular
network is that this TRICARE provider is associated with, and
process the claim that way.
Mr. Buyer. Mr. Chairman, may I be permitted a little
latitude? Dr. Sears, would you please comment on what we have
just heard from these two other gentlemen's testimony----
Dr. Sears. Sure.
Mr. Buyer [continuing]. Because you have some kind of
responsibility here.
Dr. Sears. Yes, sir. What you are hearing described is a
delicate balance that we have, in part, in attracting providers
and keeping providers in the network, and the service that is
provided to the provider is very important both in terms of the
ability to access information about inquiries and the ability
to get paid in a timely way. And so often, we hear from
provider groups that they are willing to stay, they do not like
the reimbursement, but they are willing to stay because they
are getting paid in a timely way and there is a customer
service feature that has been helpful to them. So I think you
can see the tension there between mandating, which, as has been
pointed out, could drive people out of the system and the other
approach.
Again, Mr. Meyer is the expert here, but the government has
given approval to the contractors to use the UPIN, the
Universal Provider Identification Number, and we used to
require that, I believe, the tax ID number and a sub-
identifier, but there is now an ability to crosswalk between
the UPIN number and the tax ID number, so that should not be an
issue.
Mr. Spratt. Will the gentleman yield?
Mr. Buyer. Yes.
Mr. Spratt. Mr. Meyer, Mr. Backhus mentioned HIPAA and
standardization, and I understand that your particular company
has a problem with standardization. According to your
experience, it turned out to be much more complex than it would
seem and it is also going to be very costly. Would you care to
comment on that?
Mr. Meyer. Well, I think you just said it, Congressman
Spratt, that our experience in our company is we do not--it is
not that we disagree with HIPAA. We just feel that by the time
the smoke clears on HIPAA, the cost for administration, for the
implementation of HIPAA will probably be four times higher than
what is currently being said. We think there is a huge cost to
doing it and it is going to drag out over a protracted period
of time. I have very little confidence that it is going to be
in 2 years like they say it is going to be. The way the
committees on that are progressing, they are just not
progressing at all.
Mr. Buyer. I want to switch gears for a second, because Dr.
Sears, one item in your written testimony concerns me a great
deal. You state the Department is evaluating contractor
proposals to eliminate the TRICARE Encounter Data System as a
replacement for the Health Care Service Record. The committee
staff has worked closely with you and in the 2001 Defense
Authorization Act, you specifically requested and we put in the
bill $3.1 million to finish the work on TEDS. So what is up
here?
Dr. Sears. We are studying, as the testimony says, but our
intention is moving to replace the HCSR, the Health Care
Service Record, with the TRICARE Encounter Data, again----
Mr. Buyer. You intend to finish the work on TEDS?
Dr. Sears. We intend to implement that. We are always
looking at ways to do business in a better way, and this has
been a very strong demand from our contractors, to look at
another way of doing this. So we are looking at that. We are
working with them. But that has not impaired in any way our
implementation or our switch from the HCSR to the TED.
Mr. Buyer. OK. You see, we want to be helpful here and be
responsive and that is the challenge we have made not only to
you but under the contractors, and so if you have asked us to
fund a particular system while you are also looking, we want to
make sure we are casting good judgment.
Dr. Sears. You are and it is appreciated and we are
proceeding, and we appreciate the language in the bill this
year that supports that.
Mr. Buyer. Thank you, Mr. Chairman. I will have a second
round of questions. I yield back to the chair.
Mr. Thornberry. Mr. Shays.
Mr. Shays. Thank you. I am still wrestling with something
that is kind of silly, but I am still wrestling with it. If you
are telling me the primary negative that your recipients have
to health care is access and just finding a real live person or
getting information, and you are telling me that you do not
have a uniform number for people to call in this day and age,
and then you are telling me they are going to do it as rapidly
as possible and rapidly as possible means next September, not
this September, I am just wrestling with the question mark as
to why, if this is a serious problem, at least in terms of
product satisfaction, it could not be done in a month or two.
Why can they not call an 800 number? Why can the 800 number
not know exactly where it is coming from and refer to the, I
guess you have 11 regions, is that correct?
Dr. Sears. Twelve regions.
Mr. Shays. I mean, the average stay that a military person
has in one area has got to be relatively small. So of all the
organizations that should want to do this, I would think you
would want to do it before almost any other organization. Mr.
Meyer or Mr. Backhus, tell me why it would be a problem to do
this sooner than 15 months from now. Why could it not be done
sooner?
Mr. Meyer. Congressman, I think there are actually two
issues on the telephone that Dr. Sears is talking about. One is
the phone system where people call to get appointments.
Mr. Shays. Right.
Mr. Meyer. And the other is the phone system they call if
they have claims questions. I think one phone number could
handle it for the claims questions and another phone number--
two phone numbers, one phone number for claims issues and
another phone number for appointments and I think that could be
done.
Mr. Shays. In the private sector fairly quickly, correct?
Mr. Meyer. I am sorry?
Mr. Shays. In the private sector, fairly quickly?
Mr. Meyer. Yes.
Mr. Shays. Mr. Backhus, you made some specific
recommendations that would be helpful and one of them was
dealing with the perennial and daily problem of fraud. What I
was struck with was your pointing out there are 40 million
claims processed from January 1999 through April of 2000. Only
17 fraud referral cases from the contractors have been accepted
by DOD for investigation. That boggles my mind. I mean, that
seems so tiny, and I would like you to just talk about it a
bit.
Mr. Backhus. OK. A year ago, or about a year ago, we looked
at this issue extensively. While recognizing TRICARE is a
different program than Medicare, and the two are hard to
compare, we were struck by how relatively little activity there
was at the contractor level in terms of the referrals that they
were making to other parts of the Department of Defense
involving potential health care fraud. We asked why and how
this could be, and what would one expect out of a program this
size. We learned that while there are requirements in the
contracts for the contractors to have programs in place to do
certain kinds of analyses of claims, to look for patterns and
trends and things like that, they were very poorly staffed.
Mr. Shays. And is the reason because they have no financial
incentive?
Mr. Backhus. No.
Mr. Shays. In other words, it is not their money?
Mr. Backhus. No, they do have incentives. This is the odd
thing about it. They do have, in many cases, the incentive to
do this because they are at risk for the health care costs that
are incurred. It just did not seem to be something that they
had yet pursued with the vigor that ultimately they ought to.
Mr. Shays. Well, how much are they at risk and how much is
the government at risk? What is their risk?
Mr. Backhus. That is a complicated thing. I am not so sure
I can give an easy answer to that question.
Mr. Shays. Give me your best effort.
Mr. Backhus. Essentially, the contracts are fixed price.
The simple explanation is that for the population that the
contractors are serving, they bid a fixed price for those
services. If the costs exceed what they have bid on and were
awarded in the contract and those costs are not attributable to
unforseen circumstances, such as population shifts and things
like that or inflation, unanticipated inflation, then they are
at risk for a portion of those excess costs shared with the
government.
I am having trouble. I would have to provide for the record
what that split is, but I think Dr. Sears probably has----
Mr. Shays. Mr. Meyer, can you help me out here?
Mr. Meyer. It is 80/20, Congressman Shays.
Mr. Shays. So who has the 80?
Mr. Meyer. The government does.
Mr. Shays. And the contractor has 20? And we have a measly
17 cases out of 40 million?
Mr. Meyer. Congressman, once again, I am a little bit
troubled by the numbers in that I know I have right now several
thousand claims suspended for fraud investigation. So, you
know, sometimes a case might involve 8,000 or 9,000 claims. I
think you have got a little bit of apples and oranges here
again. We talked about 40 million claims and 17 cases. Those 17
cases can represent a whole lot more than one claim per case.
Mr. Shays. I understand that, but if only 17 organizations
or people were prosecuted--is that what I understand to be
right, Mr. Backhus?
Mr. Backhus. No, these are active cases.
Mr. Shays. That would not strike fear in the hearts of
someone who is seeking to get payment, if 17 out of--but the
cases are 40 million, so your point is that there are not 40
million vendors, obviously. But in our work with Medicare and
when we recommended that we have health care fraud be both a
Federal and State offense, that it would be both Federal as
well as State so people could not go from one area to the
other, I mean, we are capturing billions of dollars as the
result of those changes.
I guess what I am interested in is, what would you
recommend, Mr. Backhus, to beef up this effort? I mean, I am
going to make an assumption that I do not have to be a rocket
scientist to, that between fraud and abuse, we have got
billions of dollars at play.
Dr. Sears. If I could answer that, sir----
Mr. Shays. Yes.
Dr. Sears. First of all, the 10 to 20 percent is really
felt to be an inaccurate projection of what the fraud and abuse
is. The National Health Care Anti-Fraud Association feels it is
between 3 and 5. Now, I am not belittling the problem----
Mr. Shays. But between 3 and 5----
Dr. Sears [continuing]. I am just saying the magnitude of
it is not as great as it may have been portrayed. We have
probably the leading industry piece in terms of pre-pay edits
and edits in the system that detect abusive claims, many of
which are potentially fraudulent claims. So those are
identified in the system before the claim is paid, and with the
prepaid edits, that amounts to about seven million in claims
saving a year, and in the software that detects inappropriate
or potentially abusive or fraudulent claims, we save about $87
million a year in that area.
Mr. Shays. What is the total expenditure that we make, $8
billion? Out of how much? I am trying to understand the overall
billing.
Dr. Sears. The total purchased care dollars that we expend
is about $2.9 billion for purchased care in our system. We
have, in the last year and a half, instituted what is called
the Operation TRICARE Fraud Watch, which is a very aggressive
approach to address many of the issues that Mr. Backhus raises.
We have required, are requiring--it is not totally in place yet
but it is going into place--artificial intelligence software
that we have mandated that each of our contractors use to
further identify potential cases of fraud that then can be
identified.
We make a major contribution through our national database,
our TRICARE purchased care database, in support of HCFA, the
FBI, the Defense criminal investigators----
Mr. Shays. I am just going to interrupt you and let others
ask questions.
Dr. Sears [continuing]. How to do that.
Mr. Shays. The bottom line is, there is 17 out of 40
million.
Dr. Sears. Yes.
Mr. Shays. That is the bottom line, and the bottom line,
that would suggest that there is not the aggressive effort.
Dr. Sears. Yes. Now, that is not all the referrals that we
get. Those are the referrals that we have gotten that we feel
where there has been potential harm done to the patient or
where there is significant recovery. There would be a number of
other submittals to us that get returned to be investigated as
abusive claims rather than fraudulent claims.
But frankly, that is--I do not want to be misunderstood
here. We think that is a low number also, and it has become a
special interest item during our quarterly meetings with our
contractors where we review their turning over to us for
potential fraud cases, and we expect that to increase. In fact,
we are seeing increases, not as dramatic as we had hoped, but
we are seeing increases this year in referrals and anticipate
with the utilization of the additional software piece and all
of the other educational efforts--we have required the
contractors to put on the explanation of benefits forms a fraud
hotline number. The EOB is one of the great detectors of fraud
and we think that is an effective way. We have established a
web page that also identifies sanctioned providers and gives
people the direction and providers the direction in terms of
how to report fraud.
Mr. Shays. Let me thank----
Mr. Buyer. Would the gentleman yield to me for a moment?
Mr. Shays. Sure.
Mr. Buyer. I have listened to this and I am not completely
satisfied that, despite what you have testified to, Dr. Sears,
is completely responsive to Mr. Shays. That is my personal
observation.
What we have here is Mr. Backhus, with regard to his
interest in the Department of Defense efforts to implement an
effective system for identifying waste, fraud, and abuse, comes
out and says, we have identified potential losses of up to $580
million. Mr. Shays and the Budget Committee's reaction to that
is appropriate. I think that is incredible. Then when you add
to that and say that 17 cases of potential fraud were accepted
from the managed care support contractors by the Department of
Defense for investigation is stunning.
So let me pause for a moment here, if I may, Mr. Shays, and
let us turn to Mr. Backhus here and let us try to put the
ketchup back in the bottle. Mr. Backhus.
Mr. Backhus. I am not sure what you are asking me.
Mr. Buyer. What I am asking here is, of the $580 million,
what all is that and give us your judgments here or your
observations about why the Department is giving the answers
that they are giving here.
Mr. Backhus. I suppose the first thing I need to say is
that I doubt--I would say it would be impossible to ever, ever
pinpoint or be precise as to what this upper limit is. The
estimates that comprise or make up $580 million come from a
number of different sources, from people in the business who
are talking 10 to 20 percent. It is fraud, waste, and abuse,
not just fraud, necessarily. It is important to distinguish and
to make clear that it is not always criminal kinds of fraud but
there are over-billings and things like that, possibly
unnecessary care and things like that which are included in
this. So that accounts for, I think, the difference,
potentially, between 3 percent and something in the
neighborhood of 10 to 20 percent. So we are talking about lots
of things here.
The activity--in response to the report that we wrote last
year on this, the Department has been responsive in several
ways. Giving it attention was the first order of business here,
and there was at the time nothing in the way of strategic
planning or emphasis, in terms of management attention, that we
could see that existed. Since that time, there is now in place
an emphasis that has been placed on this from the top. They do
have prepayment edits. They identify over-billings in some
cases and things like that.
But in preparing for this hearing today what we tried to do
was to find out exactly what has changed in the way of
additional kinds of analysis, mostly in an automated way, that
are being made of the claims that are submitted, either
provider profiling, trending, patterns, billing practices, at
the contractor level. This is a level above where Mr. Meyer
works--the people that he contracts with to process claims.
There is software available around to do this that matches
claims together to determine potential issues involving fraud,
mostly. The software is available. The Department of Defense
has identified that software and wants their folks to use it,
but as I understand it, this stuff is not going to be loaded by
the contractors until the end of this fiscal year, sometime in
the September-October time frame, and until that happens, I
suspect that we are going to see much the same kind of----
Mr. Buyer. Of the $580 million. So you have got the fraud
side of it, you have got abuses of the systems, and then you
have waste, and that is sort of what we are looking at here, is
how we bring efficiencies to the systems.
Let me shift gears for just a moment. This is a unique
opportunity, so I have to ask this question. We conduct our
hearings on the Armed Services Committee. We work with you. We
sort of move toward solutions. Now you have an opportunity to
examine what we have placed in the Defense Authorization Act.
We chose not to give you an actual mandate, come in and
mandate, and we talked about some of those concerns. But what
we gave you was a goal, to move to 50 percent of the non-
pharmaceutical claims.
Do you know what that sort of is? We are telegraphing
exactly where we are coming from. We want to see if you can
achieve the goal, because if you do not achieve the goal, you
know exactly what Congress is going to do and it will be
mandates. So my question to you is, how realistic will you be
to achieve the goal so we do not micromanage? Dr. Sears.
Dr. Sears. Are you asking if the goal is realistic?
Mr. Buyer. I want to know if you can achieve the goal
without Congress having to mandate electronic filing. Can you
do it on your own?
Dr. Sears. We certainly feel that that is achievable. As
Mr. Meyer has pointed out, it is difficult, but we will
certainly--I think the 50 percent level is going to be
difficult and I would just be repeating what has been stated
before in testimony, but we certainly have a full court press
in terms of our attempts to convert, particularly as you stated
in the legislation, that we would, identify the high-volume
providers. We have directed the Secretary to identify the high-
volume providers in an attempt to get that level up to 50
percent, and we will pursue that vigorously. I have----
Mr. Buyer. Let us be specific. Full court to achieve, full
court press to achieve is your quote. What is the date to
implement a web-based system of open architecture? When is that
going to happen? Give me an idea. It was supposed to have
occurred by May. Is it going to happen? I mean, if you can say
full press, that should have happened by now. When is this
going to happen?
Dr. Sears. As you know, our contracts are established and
requirements are put in those contracts that are met. Changes
in those change. Some of the web-based systems are currently
online. They are in place. They are being utilized. In terms of
looking up the status of claims and other enhancements will go
on those.
As Mr. Meyer mentioned, they are moving toward the
utilization of web-based capability to submit claims. Those
things are underway. We are supporting with our contractors
discussions that may lead to other approaches to this. So there
is activity, there are things in place, and this is
progressing.
But it will take new contracts to bring a total system
across--a total approach across the system, which is one of the
things that is difficult that we cannot move as rapidly as we
would like to and as we see the right way to move. But in the
meantime, things are going into place and in the new contracts,
with the requirement that our contractors use best business
practices, obviously, a good share of those things will be a
part of those new contracts.
Mr. Buyer. Mr. Chairman, may I have one more? I think this
has been very helpful and productive and I want to thank the
Budget Committee. We have talked about different pillars here
relative to why it costs so much, whether it is front costs,
inquiry costs, how we can reduce actually the human element in
touching this administration.
Mr. Meyer, I think your testimony was very helpful. The
theme I received from your written testimony is about the
complexity of the claims processing. I think the other pillar
is the complexity of these claims versus Medicare. So in our
system, you have got to look at it and you say, well, how do we
move to data warehousing? Right now, you go, OK, a claim. Are
they active, pending, TRICARE, standard, prime, senior, extra,
how were the rates negotiated, portability, who pays what,
competition between regions, not my responsibility.
Mr. Meyer. Right.
Mr. Buyer. Wow. So how do we move toward streamlining, all
right, and I would be interested in your views here. Actually,
for all of you gentlemen, how do we move toward streamlining,
reduce the complexity without actually reducing the benefits at
the same time?
Mr. Meyer. I think the Department has begun to do that. I
think the work simplification efforts in the past year are
beginning to get away from the fact that 14,000
electrocardiograms had deferred the year before for somebody in
my shop to look at the paper and say it is appropriate and pass
on. That is times 400 other deferrals just like that. That has
begun. The Department has told us, do away with that. That does
not make any sense. That is a carryover from the CHAMPUS days.
So that is being done away with and that will simplify the
program.
I think Mr. Backhus discussed earlier today one of the big
hangups on electronic claims has been our being unable to
accept the Medicare provider numbers. The Department has now
said, you can now accept the Medicare provider numbers. We have
to build a crosswalk system behind it, but that is an
impediment that is being blown away. So one by one, these
things are coming away.
I guess my caution is that nobody should believe that at
the end of the day, when all of it goes away, we are going to
be at $1.78, because we are not.
Mr. Buyer. Mr. Backhus or Dr. Sears? Dr. Sears, then Mr.
Backhus.
Dr. Sears. Obviously, the example I gave in my opening
statement about ultrasounds is another one of the examples. As
we determine things that have no yield, that do not reduce
health care costs or improve quality, those things are being
removed. I could provide for the record, if you wish, a very
extensive list of specific initiatives that are being
undertaken to remove the complexity, unnecessary edits, and
other approaches that we are using to simplify claims.
Mr. Buyer. Mr. Chairman, Dr. Sears has offered it to the
Budget Committee and I think it would be helpful, if you would
so order.
Mr. Thornberry. We will look forward to receiving that
list. Thank you.
Dr. Sears. Very fine.
[The information of H. James T. Sears, M.D., follows:]
Claims Processing Re-Engineering Status Report
Improvements already implemented or in progress to address the need
for process simplification, improved timeliness of claims processing
and increased electronic claims submission include a work
simplification contract modification, a comprehensive expert consultant
review of the claims process, partnering with contractors to initiate
improvement and investigation of e-commerce options.
Work Simplification Initiatives: Fully implemented by Fall 2000,
modifying current contracts to eliminate unnecessary or duplicative
processes that interfere with optimal performance in claims processing,
emphasizing the use of commercial best practices and Medicare
procedures, where possible. Changes implemented were:
Simplified Provider Authorization Process; implemented
Summer 1999;
Eliminated Prescriptive Controlled Development;
implemented Summer 1999;
Increased Claims Processing Cycle Time Standard;
implemented Fall 1999;
Allowed Commercial Best Practices for Utilization
Management; implemented Spring 2000;
Changed Third-Party Liability Collection Approach; Final
Regulation and implementation Fall 2000; and
Increased Transition Time (between award and start work
date) to a minimum of 9 months (to be included in all future
contracts).
Consultant's Comprehensive Evaluation and Assessment
Recommendations: Completed in November 1999, resulting in initiatives
that will be implemented throughout 2000. The goal of these changes is
to improve beneficiary and provider satisfaction through improved
claims processing timeliness and reduction of deferrals or denial of
claims. Initiatives identified include:
Increase Electronic Claim Submission and Auto-
Adjudication;
Improve Customer Service, Provider Education and
Beneficiary Education;
Enhance Management Reporting Capabilities and Program-Wide
Data Quality;
Improve Enrollment and Eligibility Process; and
Enhance Fraud and Abuse Mitigation Capabilities.
Partnering With Managed Care Contractors: One key strategy to
implement recommended changes is ongoing partnering with the managed
care contractors. Meetings were held in January and April 2000,
focusing on improvements that could be implemented quickly and that
would eliminate root causes of re-work, increase first-pass rates,
remove barriers to EMC and Auto Adjudication, and decrease deferrals.
Initiatives were approved in the following areas:
Provider ID: An interim solution was developed, allowing
the use of the Medicare Uniform Provider Identification Number for
provider identification on TRICARE claims, with the claims processors
developing the TRICARE ID (Health Care Provider Record) from internal
resources. This change will facilitate electronic claims submission.
Performance Reports Streamlining: Unnecessary reports have
been eliminated, some reports have been placed on an ad hoc or annual
basis and the routine monthly reporting has been reformatted and
simplified.
Health Care Service Records: Edits have been eliminated,
where possible, and investigation is under way, in cooperation with the
managed care contractors, to implement the new TRICARE Encounter Data
system as soon as possible.
Coding and Pricing Update Process: The annual processes
for updating CMAC and DRG rates and for providing coding updates has
been streamlined to ensure that claims are not delayed due to these
processes.
Performance Audit Process: Extensive changes and
streamlining to this process have been undertaken with the goal of
reducing the contractor's resource investment in auditing, while
maintaining a strong TMA oversight of performance, allowing the
contractor to refocus resources on claims processing.
Claims Deferrals: Changes have been authorized to allow
contractors to use their best business practices in determining the
need for pre-pay review of claims. Examples include use of Durable
Medical Equipment Regional Carriers' pricing where no CMAC exists and
there is not sufficient data available to set a locality price, review
of consultations versus office visit codes for specific provider
specialties and annual rather than per claim review of MTF Durable
Medical Equipment status. These changes improve auto-adjudication of
claims, decreasing processing time and reducing costs by eliminating
the need for manual intervention.
Third Party Liability Handling: The regulation change
necessary to implement this change has been finalized, and
implementation is expected by the end of 2000. This change will
eliminate delays in claims processing due to Third Party Liability
issues.
Implementation plans have been developed and changes will be
implemented throughout 2000 and 2001. The next partnering meeting is
planned for October 2000, focusing on implementation status for the
initiatives identified in previous meetings, preparation for the Coding
and Fee Schedule update process that will take place in early 2001,
discussion of Web-based applications for beneficiary or provider access
to information and web-based claims processing options. These meetings
have been well received by the managed care contractors and will be
continued throughout 2001.
Electronic Claims Processing and Web-based Applications:
Initiatives recommended by the managed care contractors are under
investigation and internal strategy development has been undertaken to
determine how available technology can be properly utilized to
facilitate claims processing and customer service, in conjunction with
implementation of national HIPAA standards.
Debt Collection Assistance Officer Program: The Department is
moving to rapidly implement a new program to assist our military
families in addressing notices of debt collection. The Debt Collection
Assistance Officer Program will provide a single point of contract for
our service members for assisting in resolving debt collection issues.
Assistance officers will be located at each Military Treatment Facility
(MTF) and TRICARE Lead Agent office. Once contacted by a TRICARE-
eligible beneficiary, the debt collection assistance officer will
intercede with all agencies involved, including military personnel
offices, the MTFs, lead agents, network and non-network providers, the
TRICARE Management Activity, managed care contractors, and debt
collection agencies when appropriate, to resolve a collection issue
arising from a TRICARE claim. The officer will research the claims
history with the priority unit at the claims processor, and notify the
beneficiary of the resolution. If appropriate, written documentation
will be provided for use with national credit reporting companies in
removing unwarranted adverse credit information related to TRICARE
claims. Servicemembers in remote locations may contact any debt
collection assistance officer who is convenient for them. An
implementation team of representative from the TMA, the military
Services, and the Lead Agents are currently working to define
implementation parameters.
Mr. Buyer. I did not mean to interrupt. Were you concluding
you would provide it to us written?
Dr. Sears. Along all these lines, there are tremendous
efforts underway to move this along. There are certain very
significant impediments that we face that make it difficult to
simplify or do some of the things that we would like to do in
the system, and the fact that we have open enrollment, or that
we do not have all of our members enrolled, is a significant
impediment to us, and there are other issues like that that
make it difficult to negotiate. But where we can find
solutions, where we can remove these impediments, that is being
done right now.
Mr. Buyer. Mr. Backhus.
Mr. Backhus. Well, we have obviously taken the position
that we have positive reactions to all the initiatives
underway. We have been monitoring them but have not evaluated
them up to this point in detail. But they are clearly the right
things to do.
The only concern I really have at this point is, I guess I
am hearing the same thing from you, and that is how long is it
going to take? I have seen a number of initiatives come and go
in the past, so I will be looking here for sustained commitment
to make these kinds of changes. I think, in many respects,
these folks know what to do, but this bureaucracy sometimes
just kind of makes it hard to do.
Mr. Buyer. Thank you, gentlemen.
I want to thank the Budget Committee for permitting me to
sit with you here as we explore these issues. I think they are
extremely important, and I also want to compliment you as you
work in a bipartisan fashion. This is a really important issue
to the troops out there because what happens is exactly what
both of you had mentioned earlier, and in particular Mr. Moran.
I do not necessarily agree with Dr. Sears' testimony
earlier about that, well, all these payments are being made
timely. They are not being made timely. Some of the contractors
are not getting paid on time and then they take those bills and
they drop them right on the soldiers and the soldiers do not
have the money and then they end up with all of the bad credit
ratings and, guess what, guys, they call us. So it is a system
that begins a vicious circle. It is circuitous.
So I think all this is very important, and the more light
we shine on this, the more we can move to productive solutions.
I want to compliment the Budget Committee. We from the House
Armed Services Committee would enjoin and work cooperatively
with you in the efforts toward moving toward a solution. Thank
you, gentlemen, for the bipartisan effort.
Mr. Thornberry. We appreciate the gentleman participating.
He has added a lot in trying to get to the heart of the matter
and we thank him for his time.
Mr. Moran.
Mr. Moran. I do not have anything further to add because I
think the questions that needed to be asked have been asked. I
just had one thing that I cannot figure out right away.
You said that it costs on average $2 extra to do the
processing the way that you feel you have to do and that the
principal reason is because these providers, they just do not
have enough claims to make automation make sense, to automate
it completely, because it costs on average 35 cents per claim,
or it would cost the providers 35 cents per claim to automate
their system, as I understand it, on average, and why should
they incur that expense.
But why could you not incentivize it by saying, we will pay
you, not only give you free software but we will give you 50
cents a claim. So if it costs you on average 35 cents a claim,
we will give you an extra half-buck per claim. So now you have
no economic reason not to automate it and we are better off,
the Defense Department, because we are saving $2 a claim. Can
we not give them some of the money that we would save, or am I
missing something?
Mr. Meyer. You, in fact, can do that. That would be up to--
I am a subcontractor. That would be up to the prime contractor,
because that money would have to come out of their pocket, to
make that decision.
One of the issues in making that decision is right now
there are many providers who are paying for the service. So if
I am paying for the service and the guy next door to me all of
a sudden starts getting paid for the same thing, I just created
chaos inside that network. I am just speaking frankly, what
would happen. Everybody that is currently paying for the
service the next day is going to say, I am not paying for it
anymore. It might be a good thing to happen, but that is what
would happen and there would be an interim period of time where
there would be chaos going on because some guys are paying for
something somebody else is being paid to do.
Mr. Moran. But our interest is in reducing that $2 extra
that is attributable to the non-automation.
Mr. Meyer. Clearly.
Dr. Sears. We pay claims at the maximum allowable rate, so
theoretically, under the law, we could not add money to that
rate.
Mr. Moran. You cannot by law?
Dr. Sears. We pay at the maximum allowable rate.
Mr. Moran. Could the authorizing subcommittee do something
there that would enable them to incentivize it so that it does
not cost 35 cents, on average, a claim?
Mr. Buyer. If the gentleman would yield.
Mr. Moran. I would love to yield.
Mr. Buyer. Obviously, it is worth looking at. I mean, no
matter what the system is out there in government, whenever we
can--whatever investments we also make to reduce costs and save
money is smart business. You brought up something worth looking
at. Thank you.
Mr. Moran. Thank you, Mr. Buyer. Thank you, Mr. Thornberry,
and thanks to the witnesses. I know you are trying to do as
good a job as you can under the circumstances, and I do think
that TRICARE, particularly TRICARE Prime, is going to get
better as time goes on and that you are going to be able to
automate more. I think that we all have the same objective. It
just is frustrating to see this very high differential. You
have explained why the differential exists, but it still is
unacceptable in the long run and I trust that that gap will be
narrowed because we are going to continue to be criticized for
letting the system go on where the costs are so much higher
than it costs HCFA. While we may understand that and may be
sympathetic, it just lends itself to constant criticism and
more and more GAO reports. But as you say, the process for
automation is ongoing.
Why were you smiling there, Mr. Backhus?
Mr. Backhus. Dr. Sears got a chuckle out of more GAO
reports. I agree.
Mr. Moran. But do you not agree, until we narrow the gap,
it is just easy pickings, and particularly for the Congress.
But I know that the people involved are trying to do a good job
and do the right thing. I do not have any sense that anybody is
trying to rip off the system. And while we may have a lot of
fraud, we have more fraud in HCFA, and I do not think fraud is
the problem. I think we have a system that simply needs to be
modernized and needs to be more subject to the information
technology that is available. When you have small providers,
you can understand why they just do not want to automate their
system for a handful of claims. It does not make sense from
their point of view.
It has been useful. Does our colleague, the ranking member
of the full committee, want to have a final word of wisdom?
Mr. Spratt. I just wanted to, if I could take a second and
ask Mr. Meyer what has been your situation recently with
respect to your own receivables from the Department of Defense.
Mr. Meyer. We have a problem there, Congressman Spratt. We
are owed about $40 to $50 million in back payments.
Mr. Spratt. At this point in time?
Mr. Meyer. Yes.
Mr. Spratt. Is that high or low relative to the past?
Mr. Meyer. It is extremely high. We have two situations on
two contracts where the government estimated claim volume came
up way short of the actual claim volume and reasonable
equitable adjustments were put forward. We have been working on
them two to 3 years now. One of them did settle. The other one
is still pending, and of that $40 million, most of it is
wrapped up in that one settlement.
Mr. Spratt. And was the fee that you, or the proposal that
you made in the bidding for this contract predicated on a
certain volume of claims processed?
Mr. Meyer. Yes, sir. In all five contracts, the government
provided the claims volume estimate and said, bid your staffing
and your dollars on your receiving this number of claims.
Mr. Spratt. And what was their estimate, claims volume?
Mr. Meyer. It was different on each contract, but, for
example, on the contract that is not resolved yet, the
government estimate was five million claims per year.
Mr. Spratt. And what did----
Mr. Meyer. In fact, we got seven-and-a-half million.
Mr. Spratt. So it is off by 50 percent?
Mr. Meyer. Right.
Mr. Spratt. Under by 50 percent.
Mr. Meyer. Correct.
Mr. Spratt. And has this been a continual frustration, or
has the basis for bidding improved as experience has gone on?
Mr. Meyer. The basis for the claims volume did improve in
the last two contracts. In the last two contracts, the
government actually asked us what we thought the volume would
be and we jointly agreed on what the volume probably would be
and, in fact, were right on the last two contracts. But it is
the earlier contracts that still are not resolved that create
the financial problem for us.
Mr. Spratt. So does this indicate that in structuring this
system, DOD underestimated what the administrative complexities
and volume of claims processing was likely to be?
Mr. Meyer. Well, certainly the claims volume was
underestimated.
Mr. Spratt. What about, since you participated in this, the
difficulties building the network? Do you think that the
assumptions going into this were a bit too facile about how you
would build a network?
Mr. Meyer. The problem that you have with this program with
building the network is that the requirements are the same for
100 percent of the geographic area of this country, although
the practice of medicine and distribution of the physicians is
not the same. So the requirement for numbers of doctors in a
network, for example, in Portsmouth, Virginia, where there is a
high concentration of military retirees and active duty
military and their families, is the same as it is for Rock
Hill, where there are not very many military retirees. So even
though things are not the same, they are tried to force to make
to look like the same.
Mr. Spratt. Dr. Sears----
Mr. Meyer. Dr. Sears has done a great job working with us
in trying to get that resolved, and Dr. Sears, to his credit,
in the resolution of the REA has been the single person who has
been trying to push to get the thing resolved more than anybody
else. We wish we could get that kind of initiative underneath
Dr. Sears.
Mr. Spratt. How is it your largest contractor, you are $40
million in arrears on the payment of its account?
Dr. Sears. I am pleased to be able to say that we are close
to resolution of those REAs and the money for the prime that
will be passed to the sub will be forthcoming.
Mr. Spratt. Humana? You said the prime is--I may have
misunderstood your----
Dr. Sears. I did not say, but it is Humana.
Mr. Spratt. Has this been a learning process for DOD? Do
you think the Department underestimated the complexity of
putting in place a national managed care network?
Dr. Sears. There were many factors that--yes. As Mr. Meyer
said, we are trying to put a uniform benefit in place across
the country, and I worked actually for a contractor in
California and it was very easy to build networks in San Diego
and Los Angeles and San Francisco. It was very difficult to
build networks in places like Monterey and to bring the same
benefit and get the same advantages to the contractor and the
government in those places.
We also, as you know, have been going through some very
significant changes in health care and in the military health
care system. With the significant downsizing of military
medical facilities, the conversions from hospitals to clinics,
there are just a myriad of things that affected the--and the
utilization, switching from a system where the beneficiary was
the primary person who submitted claims to a system where the
provider submits the claim in 97 percent of the cases. There
were a number of factors that increased the number of claims
over what the government projection was.
So yes, there were lessons learned and the example that was
just used was one of those lessons, talking to the claims
processor about what their anticipated numbers were and sitting
down together and figuring out what a more likely number was
and then going forward with that. That has been a feature of
the program. This is a program that came up essentially in 1995
and is now worldwide and has had some growing pains, but
tremendous progress has been made.
Mr. Spratt. One final question. In our State with TRICARE,
we have experienced--first of all, it took a while to fill out
the network and now we are seeing repercussions to the rates of
reimbursement of pay and there are pieces of the network that
are sloughing off, providers pulling out, both hospitals and
physicians. Is this a problem nationwide?
Dr. Sears. It is a problem in some localities. As I say,
where there are concentrations of providers, where there is
some competition among providers, that is not an issue for us.
In the communities where there are stand-alone providers or
sole community hospitals, those sorts of things, it is more of
an issue for us. The reimbursement rate, as you know, is at the
Medicare level. CHAMPUS used to reimburse at higher levels than
that. So we are experiencing some of the same things in terms
of provider participation, actually, that Medicare is
experiencing in terms of providers dropping out of the network.
Mr. Spratt. So TRICARE rates equate to Medicare rates?
Dr. Sears. We are required to have our rates at Medicare
rates and that has been accomplished. There are a few of our
rates that are somewhat higher, but those are for things that
Medicare generally does not do, like deliveries and things of
that nature. But yes, our rates are at the Medicare level.
Mr. Spratt. Thank you very much.
Mr. Thornberry. Dr. Sears, have you made a request for
money or some authorities to help improve the efficiency of
claims processing that has gotten stopped while going up the
chain?
Dr. Sears. As you know, funding for the DHP is an issue and
there are funding----
Mr. Thornberry. So you have made funding requests that
basically get reduced before they get to the Congress?
Dr. Sears. We do not have enough money to do all the things
we want to do, yes, sir.
Mr. Thornberry. I think that was yes. OK.
I appreciate the testimony from all of you today. I think
it certainly has been helpful. I am left a little bit with the
feeling that we have a health care system that has some
dissatisfaction among beneficiaries, some problems among
providers, and to try to keep providers there, we are having to
do things to try to be nice to them, paper filing in 2 weeks
and the rest, that is more expensive and helps reduce care and
puts further strain on the budget, which kind of gets to be a
vicious circle. Hopefully, we can break out of that sort of
thing.
I think at a minimum, we have got agreement that we can at
least save $3 a claim if we get everything right, and certainly
if there are--you were talking about the incentives and the
things that Mr. Moran was talking about. If there are other
authorities that any of you see would be helpful in getting us
to save that $3 or $4 quicker, well, then please let us know.
If that is all, then we will call this hearing adjourned.
Thank you all.
[Whereupon, at 12:20 p.m., the Task Force was adjourned.]
Pentagon Financial Management: What's Broken, How to Fix It
----------
THURSDAY, JULY 20, 2000
House of Representatives,
Committee on the Budget,
Task Force on Defense and International Relations,
Washington, DC.
The Task Force met, pursuant to call, at 10:05 a.m. in room
210, Cannon House Office Building, Hon. Christopher Shays
(chairman of the Task Force) presiding.
Chairman Shays. I would like to call this hearing to order,
the Budget Committee Task Force on Defense and International
Relations on Pentagon Financial Management: What's Broken, How
to Fix It.
I welcome our witnesses and I welcome our guests. As
defenders of freedom and the instrument of U.S. policy when
force is required, our military is unsurpassed. But as a
steward of the public funds entrusted to it, the Department of
Defense, DOD, enters the new century captive to the wasteful
fiscal habits of the last.
It seems the guardian of the new world order keeps accounts
like a Third World banana republic. Audits have found hundreds
of millions wasted on inefficient, duplicative information
systems, billions in excess inventory and trillions of dollars
in unsupported accounting adjustments.
In 1999, DOD reported problem disbursements totaling more
than $10 billion, more than half of which could not even be
matched to a valid invoice or contract. The true extent of DOD
overpayments can only be inferred from the $5.3 billion
voluntarily returned by contractors between 1994 and 1999.
A recent report disclosed the Pentagon has been
miscalculating simple payroll withholding taxes for many
civilian employees.
Due to these and a myriad of other persistent systemic
accounting problems, the Department is unable to comply with
Federal laws requiring annual financial statements and other
management controls. Sadly, these problems are not new and
reforms spawn only more reforms, pushing promised solutions
over the budgetary political horizon.
We convene this Budget Committee Task Force hearing on DOD
financial management practices this morning to discuss not just
the extent, but the impact of these chronic problems, and what
the Department is doing to get its fiscal house in order. In an
enterprise as vast and costly as the Department of Defense,
effective business systems are not peacetime luxuries that
occupy lawyers and accountants. Today's generals, admirals,
colonels, and captains rely on management information to
support their core mission. The projection of global power
requires the production of timely and accurate data on troop
readiness, supply inventories, equipment performance and much
more. The link between ledgers and lives is very real.
The Government Reform Subcommittee on National Security,
which I chair, recently heard sobering testimony from the DOD
Inspector General on the prosecution of a company knowingly
providing substandard protective suits for use against chemical
and biological weapons. The IG found more than financial fraud.
The lack of effective inventory controls prevented rapid
segregation of the defective suits. Some were sent to deployed
troops in high-risk areas. U.S. Forces were put needlessly at
risk.
This year the House authorized $306 billion for defense.
Current projections call for increased defense spending in the
years to come. Our constitutional obligation to provide for the
common defense and our fiduciary obligation to protect public
assets dedicated to the effort demand a system of modern
financial and management controls that can account for those
dollars from beginning to end and at every stop in between.
That is not the case today, but DOD has plans to simplify
current processes, eliminate incompatible data sets and
standardize some transaction and inventory codes across
programs and service branches. Our witnesses today have been
asked to discuss these initiatives and the challenges still
confronting the effort to transform last century's quaint
bookkeeping into the modern business of defense.
As I said before, we welcome their testimony. At this time,
I would call on Ms. Hooley, the ranking member of the Task
Force.
Ms. Hooley. Thank you, Mr. Chairman, for convening this
hearing--I should turn on my mike--Pentagon Financial
Management: What Is Broken, How to Fix It.
We have before us today three distinguished witnesses, Mr.
Bill Lynn, Comptroller of the Department of Defense; Mr. Robert
Lieberman from the Office of Inspector General of the
Department of Defense; and Mr. Jeffrey Steinhoff from the
General Accounting Office. I thank you for coming before this
committee today and look forward to the testimony from all of
you.
Congressman Moran is the ranking member of this Task Force,
but he is also ranking member of the District of Columbia
Appropriations Subcommittee, which is in markup this morning.
He sends his regrets that he will not be able to attend this
important hearing.
From the stories of overpriced hammers and toilet seats
that garnered great attention in the 1980's to anecdotes we
will hear today from our witnesses, it is obvious that the
Department is still struggling to establish a fully reliable
and accurate financial management system.
To some extent we should not be surprised, because the
Department is so large and complex. The defense budget
represents about 16 percent of all Federal spending and is
almost one-half of the entire discretionary budget. The Defense
Department employs almost 3 million military personnel and
civilians and has facilities in more than 100 countries. It has
millions of items in its inventory, ranging from simple screws
to the world's most complex weapons systems.
The Department's system of financial management was born
and raised during the Cold War when the threat of conflict with
the Soviet Union took primacy over other considerations,
including financial management. After the fall of the Berlin
Wall and the end of the Cold War, both Congress and the
Department started paying much closer attention to financial
management issues.
In 1990, Congress enacted the Chief Financial Officers Act,
establishing a CFO for each of the 24 major agencies, including
the Defense Department. The Government Performance and Results
Act of 1993 and the Government Management Reform Act of 1994
established statutory financial management standards for the
Department of Defense and other agencies.
Frankly, the financial management systems developed during
the Cold War were overwhelmed by the standards of the 1990's.
The Department is in the midst of revamping its financial
management systems to meet today's standards. The Department
has made progress, and I hope our witnesses will tell us about
that progress that they have made to date, and by all accounts,
the Department still has a long way to go.
The issue before us today is not a partisan issue, but
rather a long-standing and daunting problem that both
Republican and Democratic administrations have struggled to
overcome. I appreciate the title of today's hearing because not
only should we know what is broken with the Pentagon financial
management system, but more importantly, we need to discuss how
to fix it.
I look forward to the testimony of each of the witnesses.
Thank you, Mr. Chairman.
Chairman Shays. Thank you very much.
At this time, I would call on Mac Thornberry, who is co-
chair of this Task Force and also serves on the Armed Services
Committee.
Mac.
Mr. Thornberry. Thank you, Mr. Chairman.
It is my opinion that defense is the first function of the
Federal Government, and it is also my belief that we ought to
spend whatever resources are necessary to do the job. But if
defense is that high a priority, it makes it nearly even more--
it makes it even more disturbing to me that we have the
continuing problems that we have in the Department of Defense;
and I think, in a lot of ways, it makes it less forgivable.
When we have such serious problems, which Mr. Lynn is well
aware of, trying to come up with increased pay and benefits so
that we can get and keep top quality people, when Congress has
to put more money every year into the Department of Defense
health care system, when we have shortages of a serious nature
in research and development and other critical accounts, it is
even more disturbing that we don't know where our money is
spent, and we don't know how much of it is wasted and how much
of it is spent on 30,000 accounting people and to try to deal
with this cumbersome, outdated, indefensible system.
I agree with Ms. Hooley; of course, it is a long-term
problem, and it is not just one administration and it is not
going to have just one fix. But it also seems to me that fixing
the problem has not gotten priority from the top leadership at
the Department, and that is--and it is going to have to have
that.
It also seems to me that we in Congress need to provide
part of the solution, because big bureaucratic organizations
are hard to change; and in the past, there have been several
examples where it has taken an act of Congress to give the
Department a nudge, or even a shove, into fixing the problems
that need to be fixed. We did that with Goldwater-Nichols in
reorganization. Congress did it last year with the Department
of Education and the nuclear weapons complex. We mandated
reorganization and changes. We may have to do some of that
here.
And so I look forward again not just to hear what the
problems are, but what the answers are. We need to be part of
that solution, but we have to have a solution and it needs to
happen quickly.
Thank you, Mr. Chairman.
Chairman Shays. Thank you very much, Mr. Thornberry.
Mr. Bass, do you have any comments?
Mr. Bass. No statement.
Chairman Shays. Thank you. Let me welcome all three of our
witnesses, and I will announce them and then we will begin with
the first individual I am introducing, William J. Lynn III,
Under Secretary of Defense, Comptroller and Chief Financial
Officer.
We also have Robert J. Lieberman, Assistant Inspector
General, Department of Defense.
And then we will also have Jeffrey Steinhoff, Assistant
Comptroller, General Accounting Office.
And, Mr. Lynn, let me just say to you, I appreciate your
appearing with the Department of Defense Inspector General and
the Acting Assistant Comptroller General. Sometimes we just
have the Department testify alone, but it will enable us to
have a better dialogue. And also I realize that we basically
have two who kind of examine the Department of Defense and are,
in some cases, critics of the attempt to show how it can be
approved. But we will welcome anybody else that you want to
have respond to a question if you think they might be able to
respond to it better.
But at this time, let me welcome you, Mr. Lynn, and you
have the floor.
STATEMENT OF HONORABLE WILLIAM J. LYNN, UNDER SECRETARY OF
DEFENSE (DEFENSE) AND CHIEF FINANCIAL OFFICER
Mr. Lynn. Thank you very much, Mr. Chairman. I appreciate
the opportunity to be before the committee to discuss this
important issue. I particularly appreciate, Mr. Chairman, your
offer that I can call on help if I get over my head.
I would ask that my formal written statement, more
exhaustive treatment of the issue, be treated as part of the
record.
Chairman Shays. Let me just say that all the witnesses may
ask unanimous consent that their entire statement be submitted
for the record, if they want to just speak on part of it. And I
also ask unanimous consent that all members be given, as well,
5 days to submit written statements for the record.
Without objection, so ordered. Sorry to interrupt.
Mr. Lynn. Thank you, Mr. Chairman.
Let me begin by respectfully disagreeing with Mr.
Thornberry. Financial management reform has been a high
priority of this Department in the two terms that I have been a
part of it, and it has been a particularly high priority under
Secretary Cohen. He has had long experience with this from the
congressional side, and he has paid personal attention to these
issues. And I would be happy to go into that in more detail if
you would like.
That said, there is--as Ms. Hooley indicated, substantial
work to be done. I am encouraged by the substantial progress
that we have made, the commitment that our people have toward
that progress. But we indeed have much left to do.
What I would like to give you today is a status report on
our major initiatives and highlight the challenges ahead. While
the Department has had notable successes in its financial
management reform efforts, the reality is that it is impossible
to overhaul our financial management operations overnight. The
planned reforms will require several years to fully implement,
as the chairman indicated, and nonetheless, though much remains
to be done, we have made much solid progress.
The analogy you might give here--the chairman, I think,
indicated correctly that we inherited an accounting system that
was not only outdated, but was intended for different purposes
than it is being asked to do today. For 200 years, the
accounting systems that we had were essentially to mark and
track the obligation of funding along the lines that Congress
appropriated it. Towards that end, the systems are actually
quite strong and are able to do that.
What we are trying to do today is to move into a more
businesslike case where we can do accrual accounting, not just
obligations and disbursements, but to do a business style
accrual accounting. That is important in terms of estimating
costs, in terms of trying to allocate costs toward decisions
that understand the implications of the various far-reaching
choices the Department is faced with.
But it is a mammoth task. It is akin to driving a very
large car at 60 miles an hour, and we are going to have to
change all the tires and overhaul the engine, and we are not
going to be able to stop the car. We still have to continue to
do all of the things that we are doing, pay all of the people,
pay all of the contractors to do all of the financial
management of the Department, and at the same time overhaul it.
So it is a very difficult process.
The financial reform effort that Secretary Cohen has laid
out has three major phases.
The first phase is to consolidate our financial management
operation. That phase is largely complete. We have consolidated
over 300 finance and accounting field sites, scattered
throughout the world, into 26 locations. That, in and of
itself, has produced substantial savings, over $100 million a
year. But more importantly, this organizational consolidation
has enabled the second phase of financial management reform,
the elimination of incompatible and noncompliant finance and
accounting systems. This phase is well under way. The number of
noncompliant finance and accounting systems has been
significantly reduced.
In 1991, just prior to this administration, we had 324
systems, and none of them met today's accounting requirements.
Today we are down to 96. By 2003, we will be at about 30
finance and accounting systems. That is a 90 percent reduction
in less than a decade, and we expect all those finance and
accounting systems to be compliant with current accounting
requirements.
That leads to the third phase which we have recently
initiated. The third phase involves upgrading the interfaces
with the functional systems that feed data into the finance and
accounting reports. A little-known fact is, more than 80
percent of the data on DOD's financial statement comes from
outside the finance and accounting systems. The data comes from
personnel, acquisitions, medical, logistics and other systems
necessary to perform the defense mission. Establishing a
seamless connection between these so-called ``feeder systems''
and the accounting systems used to prepare the financial
statements is the crucial final step in financial management
reform.
These steps were developed and put in--these systems,
excuse me--were developed and put into service long before the
promulgation of Federal accounting standards. They simply were
not designed to produce business-type financial statements.
Accordingly, much of our financial information has to be
manually transferred from these systems into the accounting
systems, and some of the information that the auditors insist
upon is simply not available in these systems they were never
designed for.
Mr. Lynn. For example, most of our inventory systems are
designed to maintain records on the latest acquisition costs.
This is the data the logistics managers find the most critical.
These systems, however, do not retain historical costs, which
is the data the auditors would like to see.
We are moving to upgrade our inventory systems to retain
both historical and latest acquisition costs, but this is an
expensive and laborious process. This type of effort can be
repeated through the acquisition area, through the medical
area, through all the logistics area; and that is what
encompasses this third phase of financial management reform. It
extends well beyond the financial arena to touch nearly every
other function of the Department.
To oversee this massive effort, to oversee the effort that
is going to be needed to bring these areas into compliance with
new accounting standards, we have established a Y2K-like panel.
This panel will report to the Deputy Secretary of Defense
through the Defense Management Council. The panel will
establish milestones to move the 70 or so critical feeder
systems into compliance with current accounting standards.
In order to accomplish fundamental financial reform, we
will have to complete this effort to establish interfaces with
all the critical feeder systems. This will take a number of
years and substantial new resources. In the interim, however,
we believe that we can make substantial progress toward earning
an unqualified audit opinion for the Department.
Toward that end, we have collaborated with the
organizations and the individuals represented at this table.
They have helped us identify major obstacles that must be
overcome for the Department to be successful. We have developed
interim solutions to systemic problems, and we are applying
accounting and auditing standards in ways that make sense for
the Department of Defense.
Major deficiencies which have prevented us from receiving a
favorable audit opinion in the past have been identified.
Strategies to deal with those deficiencies have been developed
and coordinated. Details of these strategies are discussed in
my written statement. I would be happy to go into them in
questions.
In sum, we have built a strong financial management reform
foundation upon which those who follow us can build. We remain
determined to have financial management reform so well advanced
by the time the next DOD leadership team takes office that they
will conclude that the job is not only wise but achievable.
Our DOD leadership team has always been determined to keep
foremost in our minds that the Department's primary mission is
national security. Our reforms must support that mission, not
burden the troops and support activities that aren't fulfilling
it. We have been asked by Congress and the audit community to
do things not previously required of the Department. Our
challenge is to design such new procedures so they enhance, not
diminish, the Department's management and leadership. We
believe we have a plan to do just that.
Thank you again, Mr. Chairman.
Chairman Shays. Thank you, Mr. Lynn.
[The prepared statement of William J. Lynn follows:]
Prepared Statement of Hon. William J. Lynn, Under Secretary of Defense
(Comptroller), Chief Financial Officer, U.S. Department of Defense
Mr. Chairman and members of the Task Force, it is a pleasure to be
here to discuss financial management within the Department of Defense.
Today, I would like to summarize the comprehensive financial
management reforms currently underway within the Department. In
particular, I would like to highlight some of the major initiatives
that are enhancing financial management throughout the Department
while, at the same time, are supporting our forces at a high level of
readiness and effectiveness.
FINANCIAL MANAGEMENT REFORM
Financial management reform within the Department of Defense
continues to be a very high priority. As we move into the 21st century,
and chart a new financial management millenium, the Department's senior
leaders are committed to improving financial management. As the Chief
Financial Officer for the Department, this continues to be one of my
highest priorities as well, and I remain encouraged by the commitment
of the Department's personnel engaged in these improvement efforts.
Reflecting the resolve of the Department's senior leaders, the
Department is pursuing the most comprehensive reform of financial
management systems and practices in the Department's history. Progress
to date has been substantial, and the Department is determined to
successfully complete this historically significant reform effort.
The Department's pivotal agent for accomplishing needed financial
management reforms is the Defense Finance and Accounting Service
(DFAS). The DFAS has made remarkable progress since its formation in
1991. Prior to the establishment of the DFAS, the Department compiled
finance and accounting information through a series of vertical
operations and organizations--information traveled up stove pipes but
not across communities. Each Component had different processes and
systems for its financial management, logistics, acquisition, and
personnel activities. These processes and systems often did not share
common data and could not effectively communicate with each other.
Additionally, the processes and systems were not sufficiently flexible
to respond rapidly to changing requirements.
When the Department of Defense Components turned over their finance
and accounting operations to the DFAS in 1991, they also turned over
numerous problems. In response to these many problems, the Department
undertook the most comprehensive reform of financial management systems
and practices in the Department's history. Since 1991, financial
operations have been consolidated, the number of noncompliant finance
and accounting systems have been significantly reduced, standard
systems have been designated, ambitious deployment schedules have been
established and implemented, and business practices have been
reengineered to adopt best practices from both the private and
government sectors.
CONSOLIDATION OF FINANCIAL MANAGEMENT OPERATIONS
The DFAS has consolidated over 300 finance and accounting field
sites scattered throughout the world into 26 locations, saving $120
million annually. Through these consolidations, the Department has been
able to eliminate redundancy and unnecessary management layers,
facilitate standardization, improve the accuracy and timeliness of
financial operations, enhance service to customers, increase
productivity, and provide better financial management support to the
Department's decision-makers. In short, the DFAS has taken what was a
number of widely disbursed, costly and less effective nonstandard
accounting operations and merged them into a smaller, more efficient
and more effective operation. And it accomplished this goal almost 2
years ahead of schedule.
CONSOLIDATION OF FINANCE AND ACCOUNTING SYSTEMS
To remedy the problem of numerous, incompatible and noncompliant
finance and accounting systems the DFAS inherited from the Department's
Components, the DFAS embarked on a major effort to streamline financial
systems. As of May 2000, 95 finance and accounting systems were
operating--down from 324 systems in 1991, a 70-percent reduction.
Finance systems have been reduced from 127 to 15, with a goal of
dropping to just nine by 2003. Accounting systems are down from 197 to
80, with a goal of 22 or fewer by 2003. By the year 2003, the
Department expects to account for and pay over 2 million service
members, 2.2 million retirees and annuitants, over 700,000 civilian
employees, and 200,000 contractors using just 31 finance and accounting
systems--a 90-percent reduction.
These consolidations have achieved genuine benefits and savings.
For example, in bringing into a single system all of the Department's
700,000 civilian payroll accounts, 26 separate systems were eliminated
and 348 payroll offices closed. In 1999, a typical civilian payroll
technician handled over 2,100 accounts, compared to just 380 accounts
in 1991.
The objective of the Department's initiative, however, is not
simply to reduce the number of financial management systems. The
consolidation, standardization, and modernization of the Department's
financial management systems is intended to enable the Department to
eliminate its outdated noncompliant financial management systems and
substantially meet federal financial management system requirements,
adhere to new applicable federal accounting standards, and use the
United States Government Standard General Ledger at the transaction
level. These efforts also are producing more accurate, timely, and
meaningful financial management information for decision-makers.
EFFICIENCIES
As a result of a number of initiatives, the DFAS has significantly
reduced its personnel requirements and its operational costs, creating
more efficient and economical operations while improving services
provided to its customers.
Between FY 1993 and FY 1999, personnel levels that the DFAS
inherited from the Department's Components decreased by 37 percent,
from 31,000 personnel in FY 1993, to 19,500 personnel at the end of FY
1999. By FY 2003, the Department projects that DFAS personnel levels
will decrease by another 2,000 personnel, to 17,500. Thus, over the 10-
year period from FY 1993 to FY 2003, the DFAS will have achieved a 44-
percent reduction in its personnel levels.
In FY 2000 constant dollars, the DFAS cost of operations has
decreased from approximately $2.0 billion in FY 1995 to $1.7 billion in
FY 1999--a 15-percent reduction. These savings in operating costs have
been achieved despite the assumption of additional missions.
Admittedly, these savings are being offset, in part, by the need to
invest in new systems and technology in order to meet today's new
requirements and tomorrow's challenges. However, when compared to the
operations of the Department as a whole, the DFAS budget equates to
approximately six-tenths of one percent of the Department's budget.
This is about one-half the private industry average of 1.2 percent.
PUBLIC-PRIVATE PARTNERSHIPS
The Department has successfully used competition within the
government and with the private sector to improve support services and
save money. The Department recognizes that many finance and accounting
functions can be competed without posing a significant risk to the
Department's operations. The DFAS has recognized that approximately 85
percent of its personnel perform functions that might be eligible to be
outsourced on a competitive basis. To date, approximately one-third of
the DFAS operations, measured in terms of costs, either have been
outsourced, competed for outsourcing, or are in the process of an
outsourcing competition. In addition, the DFAS has committed to study
over 6,000 positions during the next 5 years.
Changes implemented by the DFAS, as a result of competition
studies, already have produced annual savings of $36.9 million through
the streamlining of administration operations, facilities, and
logistics; vendor payments; transportation accounting; depot
maintenance accounting; and by consolidating debt and claims
management. Within the financial community, the Department is using
public-private competition--the A-76 process--to improve functions in
other areas such as civilian and retiree/annuitant payroll and security
assistance accounting.
FINANCIAL MANAGEMENT POLICIES
The Department has replaced approximately 30,000 pages of separate,
and sometimes conflicting, Defense organizational financial management
regulations, policies, and procedures with a single standard
``Department of Defense Financial Management Regulation'' (``DoDFMR
''). In order to ensure the widest possible distribution of the
policies contained in the ``DoDFMR,'' the ``DoDFMR'' has been made
available on the Internet and on CD-ROM.
In January 2000, the Department began to review the approximately
40,000 remaining pages of financial management policy and procedures
still in publication within the Department's Components. This effort is
expected to result in the elimination, or merging into the ``DoDFMR,''
of many of those policies and procedures and create a single source of
consistent financial management guidance for use throughout the
Department.
INTERNAL CONTROLS AND FRAUD DETECTION
To strengthen internal controls and elevate fraud awareness, the
Department has implemented, and continues to implement, additional
checks, balances, and approval requirements for transactions. Such
internal controls minimize the Department's susceptibility to fraud,
waste and abuse within its finance and accounting operations. In
implementing adequate internal controls, the Department strives to
incorporate appropriate levels of verification without requiring
excessive resources or hampering the Department's ability to complete
the mission. The DFAS and other Department of Defense organizations
also continue to implement information assurance programs and fraud
detection and protection measures. Some of the more significant
internal control efforts include:
Creating a centralized Fraud and Internal Review Office
within the DFAS to better ensure that programs achieve intended
results, laws and regulations are obeyed, resources are appropriate for
a program's mission, data is reliable, and fraud is prevented;
Enacting a 100-percent review of the Department's vendor
pay systems to determine who has access and at what levels, and
ensuring that the necessary separation of duties exists;
Implementing an employee internal control responsibility
training program;
Strengthening in-house reviews to detect improper
alterations of receiving reports; and
Enhancing fraud awareness and prevention training for
vendor pay employees.
OPERATION MONGOOSE
Another internal control initiative was the creation of Operation
Mongoose to identify potential erroneous, duplicative, or fraudulent
payments, and to detect and correct potential internal control
weaknesses. This initiative uses the combined efforts of the DFAS, the
Defense Manpower Data Center, and the Department of Defense's Inspector
General's Office, including the Defense Criminal Investigative Service,
to develop fraud indicators that can be spotted by discrepancies
between systems. This program collects and compares data throughout the
Department, detects the presence of anomalies within the Department's
systems and refers these anomalies to appropriate Department
organizations for further review or investigation. If fraud is found,
the Department vigorously pursues criminal charges against those who
are responsible for the fraud. The objective of Operation Mongoose is
to establish a permanent structure to detect and prevent fraud by
reducing the opportunity for the concealment of crimes and actively
seeking it out, rather than waiting for it to surface by chance, be
identified by informants, or be detected by random reviews. Despite
isolated occurrences, the Department is succeeding in firmly closing
the door on fraud.
IMPROVING ACCOUNTING FOR DISBURSEMENTS
Nearly all of the Department's payments are matched to recorded
obligations at the time the payment is made or shortly thereafter. A
small percentage of payments, however, require additional time and
research to ensure that the transactions are recorded correctly in the
Department's accounting records. This additional effort is required
because, within the Department, separate offices and separate automated
systems often are used to record the obligation of purchases in the
accounting records, compute payment entitlements (i.e., determine how
much should be paid and when), disburse funds (i.e., make payments),
and then record the payment in the accounting system.
This separation of duties reflects good internal controls. However,
because the applicable entitlement, payment, and accounting systems are
not fully integrated, some of the data required to process these
transactions must be input manually into the Department's automated
systems. This creates the potential for ``unmatched'' transactions as
data flows between the different systems involved. For example, simple
keystroke errors may occur during the process of manually inputting the
same data into different systems. Such errors can result in data not
matching when comparable information subsequently is transmitted
between systems.
These disbursement matching problems have been reduced by over 80
percent in recent years. Although the Department considers this problem
a matter to be taken seriously, almost all such expenditures connected
with these disbursements were made only after a Department official
confirmed that the goods or services were received and that the payment
was in accordance with a valid contract.
Prevalidation, the procedure of matching a disbursement to an
obligation before (rather than after) a payment is made, has helped to
significantly reduce accounting problems associated with disbursements.
Thresholds for applying prevalidation are gradually being lowered until
virtually all payments will be prevalidated.
In addition to prevalidation, the Department also is implementing a
system called the Defense Cash Accountability System (DCAS), through
which disbursement voucher data is collected electronically under one
central standard system and distributed electronically for posting to
accounting systems. DCAS is expected to reduce the Department's
accounting cycle for disbursements from over 90 days to approximately
48 hours.
INFORMATION INFRASTRUCTURE
The DFAS Corporate Information Infrastructure (DCII) is being
implemented to help modernize DFAS finance and accounting systems and
to establish the information environment needed to better support
future financial activities. DCII will support the use of common
standard data for the collection, storage, and retrieval of financial
information. It also will simplify and standardize the Department's
finance and accounting transactions. Included in DCII is an ambitious
effort to standardize and share acquisition data. This will greatly
improve the interactions between the Department's procurement systems
and the financial systems that process and account for payments for the
Department's procurements.
ELECTRONIC EXCHANGE OF FINANCIAL INFORMATION
The DFAS also is promoting the paperless exchange of financial
information through a variety of other initiatives. One of the primary
benefits of these initiatives is the elimination of manual processing
of various documents and, thereby, significantly increasing the
accuracy and timeliness of information. Another primary benefit is a
reduction in the cost of processing data. Some examples of these
initiatives include:
Electronic Document Management (EDM) and World Wide Web
applications. EDM and World Wide Web applications are enabling on-line,
real-time access to documents needed to perform bill paying and
accounting operations. Under this process, contracts, bills of lading,
and payment vouchers can be stored in an electronic file and shared
among DFAS activities. Another application eliminates the printing of
reports by converting them into an electronic format for on-line
analysis, reconciliation, and reporting. EDM technology also is being
used to enhance the control and management of documents needed for bill
paying operations, regardless of the format of the document, as well as
to link to the Department's pay systems.
Electronic Funds Transfer (EFT). EFT is being used to
reduce the cost and improve the accuracy and timeliness of
disbursements. Over 98 percent of the Department's civilian and
military employees have their pay directly deposited into their
personal bank accounts. The direct deposit participation rate for
travel payments is now over 90 percent. In 1999, EFT accounted for
about 90 percent of the total contract dollars disbursed by the
Department.
Electronic Data Interchange (EDI). The DFAS is using EDI
to send remittance information directly to vendors and currently is
processing EDI contracts and contract modifications into finance and
accounting systems. The DFAS also is implementing a web-based invoicing
system that provides industry with an economical method to submit
electronic invoices.
Web-based Central Contractor Registration (CCR). Through
its Joint Electronic Commerce Program Office, the Department has
fielded a web-based CCR program that provides our procurement and
payment offices with a single source of valid and reliable contractor
data. The CCR capability also helps the DFAS capture up-front
contractor financial data that facilitates EDI and EFT payments.
FINANCIAL MANAGEMENT IMPROVEMENT PLAN
The Department's long-term strategy recognizes that lasting
effective financial management reforms require a Defense-wide
management information overhaul. The long-term strategy is, through
reengineering or replacement, to ensure that both the Department's
financial and feeder systems can implement new federal accounting
standards and that they are effectively interfaced or integrated.
(Feeder systems are systems that support both financial management and
other functions and pass, or ``feed'' information to accounting
systems. For example, an inventory system may provide inventory
managers information about the type, quantity and location of inventory
while also ``feeding'' financial information to accounting systems for
use in the preparation of financial reports and/or statements.)
The Department has developed a comprehensive plan--the Financial
Management Improvement Plan--to address planned changes to financial
management operations. In October 1998, the Department submitted its
first Financial Management Improvement Plan to the Congress. The
Department updated the Plan in 1999 and intends to continue to update
the Plan on an annual basis.
In the Plan, the Department identifies its long-term strategy for
improving its financial management operations, to include addressing
various initiatives intended to reform the Department's financial
management practices and systems. The Plan discusses the current
financial management environment within the Department, addresses the
Department's financial management concept of operations for the future
and identifies the Department's proposed approach for transitioning to
the future concept of operations.
The Plan also summarizes and highlights the substantial progress
the Department has made in improving its financial management
operations to date. In addition, it presents information on the
Department's systems--including the compliance status of systems, their
noted deficiencies, proposed corrective actions with milestones, and a
graphical representation of system interfaces. Details on policy and
infrastructure initiatives also are provided. The Plan may be found at
http://www.dtic.mil/comptroller/99FMIP/ on the Internet.
Y2K-LIKE PROCESS FOR ACHIEVING SYSTEMS COMPLIANCY
To aid in improving and/or replacing the Department's financial and
feeder systems, the Department is initiating a ``Y2K-like Process.''
Similar to the efforts associated with the potential January 1, 2000
computer problems, this ``Process'' provides for overseeing and
monitoring progress on actions needed to better ensure that both
financial and feeder systems meet federal financial management
requirements. The ``Process'' consists of five phases with defined exit
criteria and a governing body to provide oversight and guidance.
The five phases of the process are awareness, evaluation,
renovation, validation and compliance. The awareness phase includes
identifying the Department's financial and feeder systems and then
determining which of the systems are ``critical'' to financial
management. This phase mostly has been completed. The evaluation phase
includes identifying specific deficiencies and developing corrective
action plans. The renovation phase involves implementing needed
corrective actions and bringing the systems into compliance. During the
validation phase, confirmation is obtained from an independent third
party that the system is compliant with federal financial management
systems and other applicable requirements.
As the Under Secretary of Defense (Comptroller), I will chair the
governing body which will provide oversight and guidance to the
Military Departments, the Defense Agencies, and the Defense Finance and
Accounting Service. While the Military Departments and Defense the
Agencies will be responsible for executing the five phases of the
``Process'' for each of their respective critical systems, they will be
required to obtain approval from the governing body for each phase
before proceeding to the next phase.
FINANCIAL MANAGEMENT TRAINING AND PROFESSIONAL DEVELOPMENT
The Department's financial management reform initiatives have
focused on organizational structure, infrastructure, policies,
processes and systems. However, the Department recognizes that sound
financial management practices also demand well-trained and well-
qualified personnel.
While the Department's current financial management workforce is
well-qualified and highly motivated, its future workforce must be even
better qualified. Accordingly, the Department needs to better prepare
the next generation of its financial management leaders. To that end,
an extensive workforce development program is underway within the
Department. An agreement with the U.S. Department of Agriculture
Graduate School has been reached to present a new 5-day class in 32
locations to over 2,000 Department of Defense financial managers this
calendar year. These classes will address financial management
challenges that face the Department of Defense. This training is
intended to better ensure that the Department's personnel ``know the
rules'' that affect the administration of the Department's funds. The
Department intends to continue presentation of these classes to over
2,000 Department of Defense financial managers in each of the next 5
years, and beyond.
The Department's financial management senior leaders also are
encouraging members of their financial management community to obtain
appropriate professional certifications such as those of a Certified
Public Accountant, Certified Government Financial Manager, Certified
Internal Auditor, Certified Cash Manager, and other appropriate
certifications. In addition to demonstrating professional competency,
such professional certifications often impose a continuing education or
training requirement to better ensure that once certified, the
individual remains current with changes in financial management
requirements and retains their proficiency.
In addition, and in cooperation with the American Society of
Military Comptrollers, the Department has initiated a new Certified
Defense Financial Manager (CDFM) Program specifically geared toward
Defense financial managers. The Department believes there is a benefit
to having a Defense certification program because of the complexity of
the Defense budget and its appropriations; the Defense Planning,
Programming, and Budgeting System; the Department's accounting
procedures; and related financial management policies and procedures.
Eligibility requirements for the CDFM include a minimum of 3 years of
relevant Defense financial management experience, or 2 years of
relevant Defense financial management experience with an Associate or
higher degree. Similar to other certification programs, the CDFM is a
test-based program. Additionally, once certification is obtained, an
individual must continue their professional education/training in order
to retain their certification.
The pursuit of desired professional standards for the Department's
financial management workforce should help to better ensure that the
Department can continue to produce high quality financial managers. It
also should demonstrate the desired level of knowledge and capability
of the Department's financial managers in an objective and measurable
manner that is visible to the Department's leaders, the Congress and to
the American public. In short, greater attention to professional
training and development is good, not only for the Department's
financial management community, but also for the Department as a whole.
Employees outside of the Department's financial management
community also must be, and are being, given appropriate financial
management training. Senior leadership and management training courses,
such as the Services' War Colleges, the National War College, and the
Industrial College of the Armed Forces, all have incorporated financial
management modules into their curriculums. In addition, many of the
Department's courses for mid-level leaders and managers, such as the
Command and General Staff Colleges and the Army Management Staff
College, include financial management modules as well.
The Defense Acquisition Workforce Improvement Act mandates training
and certification of all of the Department's employees who serve in
acquisition workforce designated positions. The training required for
certification in some acquisition subspecialties includes elements of
budget formulation, justification and execution; accounting and
auditing principles; internal controls; and other financial management
principals. As the Under Secretary of Defense (Comptroller), I am
represented on the board that develops and periodically reviews and
updates the training requirements for this career field, as well as
assists in the oversight of courses and the quality of instruction.
Additionally, the Department is in the process of developing
training for its property managers and logisticians. This training not
only is intended to reinforce accountability requirements, but also to
emphasize financial management requirements to such personnel. The
training is intended to instruct property managers and logisticians on
how their management responsibilities impact the Department's efforts
to accurately record and report property acquisition costs, acquisition
and disposal dates, and depreciation. Property accountability modules
within these training courses are intended to inform property managers
and logisticians of the mandatory requirements for conducting physical
inventories, the documentation requirements for such inventories, and
the actions necessary to correct property accountability records and
systems to reflect the results of physical inventories.
AUDITED FINANCIAL STATEMENTS
With the passage of the Chief Financial Officers Act, the
Government Management Reform Act, the Federal Financial Management
Improvement Act and new federal-wide accounting standards promulgated
by the Federal Accounting Standards Advisory Board, the federal
government has been playing catch-up to comply with many new
requirements to produce business-type auditable financial statements.
The Department of Defense is no exception. It, too, is striving to
comply with new statutory and other requirements.
The Department previously has acknowledged that its financial and
feeder systems were not designed to produce business-type financial
statements. Quite the contrary. The Department's financial management
systems were designed to perform budgetary accounting for the resources
appropriated to the Department by the Congress. The Department's feeder
systems, which generate the preponderance of business transactions
within the Department, were designed to provide accountability over the
Department's assets and perform other functions. These financial and
feeder systems satisfactorily perform the missions that they were
designed to perform. However, because these systems were not designed
to provide financial information for business-type financial
statements, it is not surprising that these systems do not do a good
job of producing business-type financial statements that, until
recently, the Department was not required to prepare. Nor should the
difficulty in producing data for financial statements be misconstrued
to mean that the Department does not do a good job of carrying out its
stewardship and fiduciary responsibilities. In fact, the Department
does a very good job.
Most of the Department's financial and feeder systems were designed
prior to the promulgation of new federal accounting standards.
Information from these systems often is not collected in a way that
complies with new federal accounting standards. Other information
needed to meet some of the new reporting requirements is not collected
in the Department's automated systems at all. Therefore, such
information is manually entered into the accounting system at the end
of the applicable fiscal year in order to facilitate the preparation of
business-type financial statements. Although the use of estimates and
the manual entry of data into accounting systems are acceptable
practices, the Department is aggressively engaged in modernizing its
financial and feeder systems and developing automated interfaces
between its systems--both to minimize the use of estimates and to avoid
the need to manually enter information. Thus, one challenge for the
Department is to modernize both its financial and feeder systems to
produce business-like financial statements.
STRATEGIES FOR OBTAINING FAVORABLE AUDIT OPINIONS
While system changes are the long-term solution, there is much that
the Department can, and must, do now. Our short-term strategy
recognizes that. We are developing interim methodologies that will aid
the Department in achieving more acceptable results and will be
sufficient to support more favorable audit opinions on the Department's
financial statements.
To succeed in this effort, the Department has fully engaged in a
partnership with the Office of Management and Budget (OMB), the General
Accounting Office (GAO) and the Office of the Inspector General (OIG)
for the Department of Defense. We have worked, on a collaborative
basis, to identify major obstacles that must be overcome for the
Department to be successful; to develop interim solutions to the
Department's systemic problems; and to apply accounting and auditing
standards in ways that make sense for the Department of Defense.
Major deficiencies that prevented the Department from receiving a
favorable audit opinion in the past have been identified. Alternative
methodologies to deal with these deficiencies have been developed and
coordinated with the OMB, GAO, and OIG. To implement these
alternatives, plans detailing short-term strategies for solutions to
each of the deficiencies have been developed along with the
identification of responsible parties and milestone dates needed to
support accomplishment of the Department's goal. To better ensure that
we stay on track, applicable organizations within the Department are
being asked to report on their progress and, as appropriate, update
their plans.
Each of the implementation strategies is intended to address
specific deficiencies previously noted by the audit community. When
fully implemented, these implementation strategies are expected to
allow the Department to attain a more favorable audit opinion on the
Department's financial statements. Examples of some of the Department's
more significant short-term implementation strategies include, but are
not limited to, the following:
VALUATION OF GENERAL PROPERTY, PLANT AND EQUIPMENT (PP&E)
Recently approved accounting standards require PP&E to be reported
at acquisition (i.e., historical) cost and depreciated. To validate the
original costs, auditors want to see the original receipt or purchase
document. However, the federal government's record retention policies
are not consistent with such audit requirements.
For example, the National Archives and Records Administration
requires that most financial management documents and records be
retained only for 6 years and 3 months. When the auditors attempt to
audit assets that are older than 6 years and 3 months, they have
difficulty finding documentation to support the reported values because
the activities typically do not maintain documentation beyond the
required retention period. This does not mean that the values reported
by the Department are incorrect, rather it means that the auditors
cannot verify the values reported.
To address this situation, the Department engaged two of the
largest and most prestigious public accounting firms in the world to
provide a value for the Department's property that would be acceptable
to the Department's auditors. Recently, the public accounting firm
assessing the value of the Department's real property indicated that
the values recorded by the Department were materially accurate for the
Department's real property. The Department has not yet reached a
similar milestone relative to its personal property. However, the
Department continues to work with the contractor and the audit
community in the pursuit of attaining a similar goal.
Additionally, because the Department's accounting systems were not
designed to capture, retain and depreciate the costs of PP&E assets,
the Department is working with the audit community, and has asked
public accounting firms to assist, in the development of guidance,
processes and other changes needed to resolve existing systems
deficiencies. This is an enormous undertaking for the Department
because of the tremendous number of PP&E assets that the Department
owns worldwide.
ACCOUNTING FOR THE DEPARTMENT'S MILITARY EQUIPMENT
The Department has an estimated $600 billion invested in, and
spends significant amounts of funds annually for, military equipment.
The Federal Accounting Standards Advisory Board (FASAB) has yet to
determine the desired permanent accounting and reporting requirements
for the Department's military equipment--which the FASAB refers to as
National Defense Property, Plant and Equipment (PP&E). Obviously, once
the FASAB issues its permanent accounting standard for National Defense
PP&E, the standard will have a major impact on the Department's
financial management processes. The FASAB is considering several
accounting and reporting alternatives. This issue is a very complex
matter and can be expected to have a major impact, not only on the
Department of Defense's financial statements, but, potentially, also on
the consolidated government-wide financial statements.
Recently, the Department hired a contractor to perform a detailed
and thorough analysis of each of the accounting and reporting
alternatives being considered by the FASAB. The FASAB has agreed to
consider, as part of its deliberations, such appropriate analysis as
the contractor may complete, as well as other relevant information that
the contractor may provide.
The contractor--a well respected national Certified Public
Accounting firm--will:
(1) identify pros and cons of each alternative being considered,
(2) provide an estimate of the costs for implementing each alternative,
and (3) recommend timeframes for implementing each alternative. The
Department will closely monitor the deliberations of the FASAB.
Ideally, the FASAB will issue an accounting and reporting standard that
meets the needs of external users of the Department's financial
statements, is compatible with the manner in which the Department does
business and supports internal decision-makers that might use such
financial information.
VALUATION OF INVENTORY
Similar to PP&E, the new accounting standards require a valuation
of inventory based on historical cost (the amount paid) or latest
acquisition cost (a revaluation of all items in stock to equal the
amount paid for the last item purchased). When the latest acquisition
cost is used, the difference between historical cost and the latest
acquisition cost must be reported as an unrealized gain or loss--in
effect resulting in latest acquisition cost equating to historical
cost.
Inventory values are not contained in the Department's financial
systems. Instead, such information is included in logistical (feeder)
inventory systems. These systems do an excellent job of ensuring that
our troops have the parts they need, when they need them, at the place
that they need them, and in the condition required to perform their
mission effectively and efficiently. However, the systems were not
designed to provide accounting data to support financial statements--
which became a requirement only beginning in FY 1998. Nor are the
Department's logistics systems sufficiently integrated with the
Department's accounting systems to pass, in an automated manner,
information that is required by the new federal accounting standards.
Additionally, these logistical inventory systems often value inventory
at selling price--not historical cost or latest acquisition cost. As a
consequence, the dollar value of inventory reported on financial
statements is a calculated, vice a system driven, amount. These
calculated amounts are determined by using a formula that adjusts the
inventory values reported by logistical inventory systems to an
approximation of latest acquisition cost and historical cost.
The Department's logistics and financial communities are working
together to improve the quality and reliability of the financial
inventory amounts that are reported and are actively pursuing process
improvements that will better comply with the new accounting standards.
As inventory systems are renovated or replaced, new functionality that
will better support audited financial statements will be added. In the
meantime, the Department is working with its auditors to refine the
formula used to calculate inventory values reported on the Department's
financial statements, as well as to identify what specific sources of
information would be most beneficial for use in such a calculation.
OPERATING MATERIALS AND SUPPLIES
The current accounting standard allows for the use of two
accounting treatments for operating materials and supplies--the
consumption method and the purchase method. Under the consumption
method, operating materials and supplies are recognized as assets when
purchased, and are expensed when they are issued to an end user in
normal operations. Under the purchase method, operating materials and
supplies may be expensed when purchased.
The Department is working in conjunction with the audit community
to evaluate when the consumption method should be used and when the
purchase method is appropriate, and to define ``end users.'' In those
cases where it is determined that the consumption method is
appropriate, the systems that would be used by the Department's
Components to report operating materials and supplies primarily are
logistics systems. These logistics systems were not designed to record
and report historical cost, and logistics processes do not require
retention of supporting documentation that meets the very stringent
audit trail requirements necessary to support preparation of audited
annual financial statements. The Department is working to define and
develop functional requirements for logistics systems that better
support accounting and valuation of operating materials and supplies,
and to develop plans to update existing systems. While system changes
will be required to institutionalize the automated reporting of
accepted values for operating materials and supplies, the Department is
working with the audit community to identify process or other changes
that can be implemented in the interim to allow applicable values to be
reported in a manner acceptable for financial statement purposes.
ENVIRONMENTAL LIABILITIES
Current federal accounting standards require reporting the
estimated costs of known and potential future environmental liabilities
associated with the Defense Environmental Restoration Program (cleanup
from past waste disposal practices at active and closed installations
and formerly used defense sites); cleanup of closed, transferred, and
transferring training ranges; preservation and management of active and
inactive training ranges; and the future disposal of weapons systems
(nuclear powered ships and submarines) and chemical munitions. Many of
these costs will not be incurred until 20, 30, or even 40 or more years
in the future.
The Department reported approximately $34 billion in environmental
liabilities for FY 1998. For FY 1999, the amount that was reported was
$80 billion. The large increase in environmental liabilities reported
for FY 1999 resulted primarily from the inclusion of amounts for future
disposal of weapons systems and future efforts associated with the
cleanup of training ranges. There also was an increase associated with
reporting the estimated disposal cost of chemical munitions.
However, some of the Department's future environmental liabilities
have not yet been fully assessed. For example, it is likely that
additional environmental liabilities associated with training ranges
will be reported in future years. To report these additional amounts,
the Department requires additional time to conduct inventories, surveys
and site assessments, and to prepare cost estimates.
MILITARY POSTRETIREMENT HEALTH BENEFITS AND CLAIMS LIABILITIES
Military postretirement health benefits and claims liabilities are
amounts that are estimated to be paid over a period that could be as
long as the next 100 years. In reporting an actuarial liability for
military postretirement health benefits and claims, historically the
Department based its estimate on prior actual obligations. However, the
new accounting standard requires that, to be acceptable estimates,
these liabilities must be determined through the use of accrued costs
instead of obligations.
The Department is enhancing its ability to report such liabilities
using factors that are more in accordance with the new accounting
standards. The Department, in partnership with the GAO and the OIG, has
formed a working group to evaluate the use of various cost data as a
means to measure future military postretirement health benefits and
claims liabilities. This data will be the baseline used to calculate
estimated military postretirement health benefits and claims
LIABILITIES FOR FUTURE FINANCIAL STATEMENT REPORTING PURPOSES.
FUND BALANCE WITH TREASURY
The Department maintains its own checkbook. Private sector firms
that maintain their own checking accounts reconcile the cash balance
reported by the bank with the firm's check register. Similarly, cash
balances shown on the Department's checkbooks should be reconciled with
the cash balances on the books of the U.S. Treasury. In the past, the
Department's financial statements reported the amounts provided by the
U.S. Treasury instead of the balance reflected in the Department's
financial records. Frequently, the account balances at the U.S.
Treasury do not agree with the account balances on the Department's
financial records. These differences primarily are caused by timing
differences that result from (1) separate accounting and reporting
systems that are not integrated, or (2) other agencies disbursing on
behalf of, and charging such disbursements to, the Department of
Defense.
As approved by the OMB, the Department has discontinued reporting
the cash balances reported by the Treasury and, instead, effective with
its FY 1999 statements, reports the fund balance shown in the
Department's ``Fund Balance With Treasury'' general ledger account.
Differences between the amount reported by the Department and the
balance in Treasury's account, if any, are reconciled and explained in
the footnotes to the financial statements.
IMPORTANCE OF FINANCIAL MANAGEMENT REFORM
Sound financial management information is important for a variety
of reasons. And the financial management reforms underway within the
Department of Defense embrace that precept.
Sound financial management practices provide greater
visibility over costs. Having timely and accurate cost information aids
decision-makers--both internal and external to the Department--in
better allocating resources and in making business decisions.
Sound financial management controls provide safeguards to
better ensure that funds are used for intended purposes and to
discourage and prevent fraud, waste and abuse.
Dependable financial operations assure contractors and
vendors with whom the Department does business that they will be paid
accurately and in a timely manner. In turn, this better ensures goods
and services will be available to the Department when and where the
goods and services are needed.
Reliable financial management operations support our
troops. It instills confidence in our soldiers, sailors, airmen,
marines, and our civilian employees, that their financial entitlements,
as well as those of their families, will not be neglected even though
they may be thousands of miles from home.
Because sound financial management information is important,
financial management reforms within the Department also are important.
Reforming financial management practices will allow the Department to
obtain better and more timely information to support better informed
management decisions. And better management information also can be the
foundation for even more reforms in the Department's business
practices. Further, financial management reforms can be expected to
increase the public's confidence in the Department by demonstrating, to
those outside the Department, that the Department is, indeed, a good
steward of the resources that the Congress, and the Nation, has
entrusted to it.
CONSTRAINTS ON THE PACE OF FINANCIAL MANAGEMENT REFORMS
The Department's financial management reforms were designed to
fulfill the financial management information needs of the Department's
leaders, meet statutory requirements, and maximize efficiency and
minimize fraud. However, these reforms are still a work-in-progress.
While tremendous strides have been made, and there have been many
notable successes, progress has been slow in some areas. The reality
is, it is impossible to reverse decades-old problems overnight. These
reforms will require several years to complete. Further, in pursuing
such reforms, the Department has had to recognize, and accommodate,
three unavoidable constraints.
CONTINUATION OF DIVERSE, WORLD-WIDE OPERATIONS
The size, complexity and diversity of the Department's ongoing
operations make changes to the Department's financial management
processes and systems a significant challenge. The Department manages
over a trillion dollars in assets, including weapons systems, and
maintains hundreds of bases in over 100 countries and territories
throughout the world. It has over two million active duty and reserve
component personnel as well as 700,000 civilian employees. The size of
the three Military Departments--Army, Navy and Air Force--collectively
dwarfs the largest organizations in the private sector as well as all
other federal agencies.
There is no other organization in the United States, perhaps in the
world, that is as large and diverse as the Department of Defense. The
Department operates 100,000 vehicles, from trucks to tanks, maintains a
fleet of more than 22,000 aircraft and operates hundreds of oceangoing
vessels around the world. Every month, the Department makes 920,000
contract or purchase actions, fits troops with 50,000 pairs of boots
and serves 3.4 million meals. On any given day, the Department buys
enough fuel to drive a car around the world 13,000 times, maintains
12,000 miles of waterways, operates 550 public utility systems--
including 24 percent of the nation's hydropower capacity, manages 232
schools and provides day care for over 200,000 children.
As the largest finance and accounting firm in the world, the
Defense Finance and Accounting Service processes a monthly average of
nearly 10 million payments to the Department's personnel; processes and
pays 1.2 million commercial invoices; settles and pays 450,000 travel
vouchers; issues 500,000 savings bonds; processes and pays over 100,000
transportation bills of lading; and makes disbursements averaging
approximately $24 billion.
The Department cannot stop its financial operations while it fixes
outdated business practices and flawed systems. The daily operating
requirements of the Department impose a strong practical constraint on
our plans for improving systems and business practices.
CONSENSUS AND COLLABORATION
Lasting reform demands consensus and collaboration. Few solutions
rest exclusively within the jurisdiction of the financial management
community. It is estimated that most of the information needed for
financial management reports and statements originates in systems that
are not under the control of the Department's financial community.
Rather, such information comes from feeder systems--most notably from
acquisition, logistics, medical, and personnel systems. It is an
enormous challenge to upgrade these feeder systems to produce the
needed information and to improve their interfaces with the
Department's financial systems--especially since the primary purpose of
those feeder systems is to support the U.S. military forces defending
our nation, not to produce financial data.
The development of an infrastructure capable of providing more
accurate and reliable financial management information and achieving
auditable financial statements is a high priority of the Department. An
infrastructure built around the integration and transfer of financial
information between feeder systems and accounting systems is a
Departmental goal and is necessary to enhance the sharing of
information and to avoid redundant and sometimes conflicting data. The
achievement of this objective is a Department-wide management challenge
that requires a close cooperative working relationship among the
Department's various functional communities. Therefore, much of our
effort must, and does, involve working with other functional
communities to upgrade their systems and to improve their interfaces
with the Department's financial management systems. While this
cooperative endeavor is well underway, much additional effort will be
required to successfully complete the undertaking.
CHANGING FINANCIAL MANAGEMENT ENVIRONMENT
Legislation in the 1990s has changed the Federal Government's
accounting requirements. More recent legislation requires audited
financial statements from federal agencies. The Department's financial
information must be collected and reported in accordance with new
applicable Statements of Federal Financial Accounting Standards. These
standards require more comprehensive accounting and reporting than the
existing financial management systems were designed to accommodate. For
the Department of Defense, this requires the Department to track
financial data on items from their purchase to disposal in a more
integrated process. No longer can we solely rely on separate systems
monitoring separate categories. For example, if the Department
purchased a patrol boat in 1975, we now must be able to identify when
the boat was purchased; determine how much the Department paid for it
and produce the original receipt; track where it is being used; or if
it no longer is being used, determine if it has been offered for resale
through the surplus property program, and, if so, when it was sold and
for how much. And, we must have supporting paperwork for all these
transactions, sometimes up to 18 months after the disposal or sale of
the item. Obtaining a clean financial opinion requires an integrated
and complete audit trail for millions of the Department's items, many
purchased decades ago.
Accommodating these three constraints--continuing operations,
building consensus and collaboration, and implementing process and
system enhancements in the face of ever changing financial management
requirements--imposes an enormous challenge. But the challenge is not
just a financial management challenge; it is a Department-wide
challenge that requires the involvement of all communities within the
Department. The Department has accepted this challenge and each of the
Department's functional communities actively are engaged in
implementing various aspects of the Department's financial management
reform initiatives.
CLOSING
In closing, Mister Chairman, I would like to thank you and the Task
Force Members for providing me this opportunity to address financial
management reform within the Department of Defense. The Department's
financial management reforms are continuing to cut costs and improve
effectiveness by exploiting the best of private and government
practices. Especially productive are the extensive uses of
consolidation, standardization, simplification, and advanced
technology. During my tenure as the Department's Chief Financial
Officer, I have witnessed substantial progress and an extraordinary
transformation of the Department's financial activities, as well as
other functional areas with which those activities must interact.
Collectively, the initiatives addressed in this statement, as well as
other initiatives underway within the Department, have built a strong
financial management reform foundation upon which the Department can
continue to build.
Chairman Shays. Mr. Lieberman.
Mr. Lieberman. Thank you, Mr. Chairman.
Chairman Shays. Excuse me, Mr. Lieberman. I just want to
point out that we are fortunate to have the ranking member of
the full committee, John Spratt, here; and I welcome you to the
meeting. Thank you.
Mr. Spratt. Thank you.
STATEMENT OF ROBERT J. LIEBERMAN, ASSISTANT INSPECTOR GENERAL
FOR AUDITING, U.S. DEPARTMENT OF DEFENSE
Mr. Lieberman. Mr. Chairman and members of the Task Force,
thank you for the opportunity to participate in this hearing
this morning.
You asked me in your invitation letter specifically to
discuss the results of our financial statement audits. The
first part of my written statement talks about basically how
the Department ended up in the situation that it is in today,
and I won't dwell on that in detail because references already
have been made to it.
For decades, as a decentralized operation, Defense, like
most other government agencies, did not do a particularly good
job of moving into the computer age on a controlled basis so
that we would have systems that talk to each other and fully
meet user requirements.
During the 1990's, there has been a gradual but major
transformation of the way the Department does business. There
are several reasons for this. One is the advance of information
technology. Particularly the Internet makes it much easier to
move information among organizations and between locations more
efficiently and faster than ever before. There has been a
powerful example set by the U.S. private sector in how to
harness modern information technology and use it to develop new
business practices that are far more efficient than the
practices of the '70's and the '80's.
Also, there has been the stimulus of reform legislation, as
previously mentioned, particularly the Chief Financial Officers
Act of 1990 and related legislation. I would point to the
Results Act and the Clinger-Cohen Act also as having had a
profound influence on DOD financial management. But it is an
enormous challenge.
As Mr. Lynn said, DOD had somewhat over 300 finance and
accounting systems in place when the CFO Act was passed, and
none of them were capable of producing the kind of data needed
to meet modern accounting standards. Also, there was no
particular audit requirement related to financial reporting by
the DOD, which in retrospect seems somewhat amazing, but was
very true at the time.
The DOD efforts to compile and audit the annual financial
statements for the Department as a whole and for its nine
subsidiary reporting entities have been massive, year after
year, for 10 years. Unfortunately, the Department has never
been able to overcome the impediments caused by poor systems
and inadequate documentation of transactions and assets.
In terms of opinions, the audit results again this year
differ little from those of the past several years. A clean
opinion was possible for the military retirement fund, but we
had to disclaim the ability to render an opinion on any of the
other reporting entities or on the Department's statements as a
whole. In accounting terms, that means that the statements were
unauditable.
The scope of accounting adjustments to financial statements
is perhaps one of the best indicators of how hard it has been
for DOD to follow private sector financial reporting practices.
When the financial reporting system of a corporation can't
generate fully reliable financial statements, accountants
sometimes make accounting entries, often as recommended by
their external auditors, to complete or correct the statements.
But making major entries or adjustments to override, correct or
transfer data is not the preferred way of doing business; and
there is considerable attention paid to any significant change
to official accounting records before the contents of those
records are disclosed in financial statements.
The notion of accounting entries being made on a massive
scale, in most cases to compensate for underlying system
problems, is completely foreign to Corporate America, as is the
prospect of any such adjustments being unsupported by clear
audit trails. In fact, accounting adjustments are closely
scrutinized by external auditors and the Security and Exchange
Commission for fraud indicators.
Unfortunately, the Defense Department has no integrated
systems for compiling financial statements and relies on the
patchwork of crosswalks, workarounds and what in the Army years
ago we used to euphemistically call ``field expedients.''
The audits of the fiscal year 1999 DOD financial statements
indicated that thousands of accounting entries worth $7.6
trillion were made to compile them. Of the $5.8 trillion worth
of those adjustments that we audited this year, $2.3 trillion
were unsupported by reliable explanatory information and audit
trails or were made to invalid general ledger accounts.
These huge amounts portray a massive, but fundamentally
inefficient and largely futile, attempt to get the numbers
right on the financial statements. We now clearly have the
Department's attention in this particular problem; and,
actually, we are pleased with recently announced initiatives to
minimize unsupported changes. But, fundamentally, the number of
adjustments is not going to come down appreciably until new and
better systems are in place. CFO Act compliance is
fundamentally a systems problem.
The testimony of the other witnesses today provide good
summaries of the other major deficiencies in the statements. So
in my written statement I discuss just two examples of areas
where I believe the rigor of better financial control would
help the Department address persistent problems. Those are
inventory and environmental cleanup. I would be happy to
address any questions you have in either of those areas.
It is particularly important, however, this morning to
stress our concern about the long-standing lack of good ways to
measure progress toward sound financial reporting and to focus
on the long poles of the tent, which are the noncompliant
systems.
Audit opinions on the annual agency financial statements
still are the only widely used way of measuring progress by the
Federal Government toward accurate and, by implication, useful
financial reporting. Unfortunately, this means that
considerable improvement can be made within each of the huge
DOD reporting entities without any appreciable effect on the
overall audit opinion. A series of declarations that the
statements are unreliable or unauditable tells you very little
about what progress has been made and what remains to be done,
especially in terms of replacing or fixing specific systems.
Conversely, a favorable audit opinion can be misleading, too.
We fully agree with the GAO that a clean audit opinion would
not necessarily be synonymous with responsive financial
information that enables sound decisionmaking.
First, auditors can easily determine for you the accuracy
of the numbers, but usefulness is more of a moving target. I
don't think there has been enough dialogue between the Congress
and the executive branch about what information in these
financial statements would be useful.
Secondly, audit opinions can be gamed. If the financial
statements are put together using ad hoc procedures for
bypassing the official financial systems and records that are
relied on for day-to-day management information, the clean
audit opinion can actually mask continued underlying serious
problems with systems, records and actual operations.
Therefore, I urge that the limitations of audit opinions per se
be kept in mind as we assess DOD's performance.
To help develop CFO Act compliance performance measures and
to enhance management control, last year we recommended that
DOD apply its highly successful Y2K management approach to the
challenge of attaining CFO Act compliance. As was the case with
the Y2K conversion, the CFO Act challenge is fundamentally a
systems problem, which needs to be addressed with a clear,
widely distributed plan that draws in all parts of the
Department, not just the financial community. This is a problem
that requires cooperation and resource expenditure by every
single part of the Department--the acquisition people, the
personnel people, the logistics people and what have you.
There are several advantages to using the kind of
individual system measurement terminology that we used for Y2K.
The Department knows this approach works, managers and the
Congress are familiar with the terminology, and it entails
fairly simple and verifiable metrics to show progress in
highlight risk areas.
We are pleased that the Department has adopted this
recommendation and concept, but, frankly, the implementation
has been disappointingly slow----
Chairman Shays. Let me give you about a minute more.
Mr. Lieberman [continuing]. Yes, sir. I will finish in that
time. And key Y2K process attributes are still missing.
Similarly, the biennial financial management improvement
plan still has holes in it. For example, although we have a
fairly well-defined goal for when finance and accounting
systems are going to be compliant, that is 2003, we do not have
a sound, definitive goal for when all the feeder systems are
going to be compliant. As Mr. Lynn said, they are absolutely
critical.
In closing, I would like to mention that in DOD we have a
cooperative effort, a good relationship between the audit and
finance communities. We have written lots of candid audit
reports for 10 years taking the Department to task on these
matters, and the Department in general has tried very hard to
be responsive. This is, though, a massive task; and we think it
is going to be several more years before you can look forward
to clean audit opinions on the Department of Defense.
Thank you, Mr. Chairman.
Chairman Shays. Thank you, Mr. Lieberman.
[The prepared statement of Robert J. Lieberman follows:]
Prepared Statement of Robert J. Lieberman, Assistant Inspector General
for Auditing, U.S. Department of Defense
Mr. Chairman and members of the Task Force, I am pleased to have
the opportunity today to discuss the efforts of the Department of
Defense to account for its funds and physical assets, provide useful
financial information to decision makers, and operate its huge payroll
and contractor payment operations efficiently.
I would like to begin by underscoring both the critical importance
of sound financial management and the unavoidable complexity of finance
and accounting operations in an organization as large as the DOD. It is
useful to keep in mind that the Department is the largest holder of
U.S. Government physical assets ($1 trillion), has the most employees
(about 1,500,000 active military and 710,000 civilians), owns the most
automated systems, administers the most complicated chart of accounts,
and manages the most diverse mix of operating and business functions of
any Government Agency.
The average monthly finance and accounting workload includes
cutting 5 million paychecks, taking 920,000 contract or purchase
actions and reporting commitments, obligations, expenditures and other
data for many thousands of accounts.
PAST PRACTICES AND RESULTING CHALLENGES
The Department's accounting systems and financial reporting
practices mirrored its overall management philosophy during the 1950's
through 1980's. Most DOD business processes--acquisition, inventory
management, maintenance, training, and many others were decentralized;
controlled in theory by elaborately detailed rules and regulations;
developed unilaterally by organizations operating within their own
functional ``stovepipe'' with insufficient coordination with other
stakeholders; and often labor intensive despite the use of many
thousands of automated systems.
In the finance and accounting area, each Military Department
operated dozens of systems; data element standardization was never
effectively enforced; DOD accounting policies were enunciated in a
Handbook whose precepts were not mandatory and therefore were widely
ignored; and the primary focus of financial reporting was on funds
control, not on providing the full range of financial data needed by
managers. In retrospect, it is remarkable how infrequently the DOD
accounting community was asked questions along the lines of how much
does it cost to run a base, fill a requisition or operate a warehouse.
To this day, when such cost information is needed, managers frequently
must hire consultants to make estimates or use special data calls
instead of relying on standard reports, often with questionably
reliable results.
During the 1990's, a combination of factors highlighted many
longstanding DOD financial management problems and created new
challenges for DOD. Those factors included:
The centralization of most DOD finance and accounting
functions into the Defense Finance and Accounting Service (DFAS) in
1991 was a long overdue initiative to streamline the organizational
structure in this area. Establishing a central organization is never
easy, because users and customers are leery about the quality of
service they will receive from offices they no longer directly control
and some elements of the workforce resist change. In the case of DFAS,
the usual problems were compounded by the compelling need to make deep
workforce cuts rapidly and close many finance offices, as DOD sought to
reduce its support costs. The downsizing effort was a major
preoccupation for the first several years of DFAS' existence. In
addition, DFAS was created at the same time the Department was
expanding its revolving fund concepts to require users of services to
pay for the total costs of those services. DFAS soon became immersed in
arguments with customers over fees for services that previously had
appeared free or cheaper from the users' standpoints. Some users
continue to regard DFAS as a monopoly with inadequate incentives for
cost reduction or service quality improvements.
The Chief Financial Officers (CFO) Act of 1990 required
preparation and audit of financial statements of revolving funds, trust
funds and commercial-like functions throughout the Federal Government.
Additionally, the Departments of the Army and Air Force were designated
as pilot programs, requiring preparation and audit of financial
statements for the General Funds of those Services. The Federal
Financial Management Act of 1994 expanded the requirement for annual
audited financial statements to all DOD funds, as well as Government-
wide financial statements. The DOD and many other Government agencies
lacked the systems, controls and policies for complying with those
requirements.
The Federal Financial Management Improvement Act of 1996
requires the head of each Federal agency to prepare a Remediation Plan
if the agency's financial management systems do not comply
substantially with Federal accounting standards, requirements for
financial management systems, and the U.S. Government Standard General
Ledger at the transaction level. The Department's systems cannot meet
any of those standards and therefore the DOD is implementing a
Remediation Plan.
The National Defense Authorization Act of 1998 requires
the Secretary of Defense to submit to Congress a biennial strategic
plan for the improvement of financial management within DOD. The
Biennial Plan is to address all aspects of financial management,
including the finance systems, accounting systems, and data feeder
systems that support financial functions. The Authorization Act also
included additional detailed requirements for a statement of
objectives, performance measures, schedules, and the identification of
individual and organizational responsibilities for Special Interest
Items. Because of other, similar reporting requirements, the Department
now considers this to be an annual report.
Previous Government accounting and auditing standards were
inadequate for CFO Act implementation and private sector financial
reporting methods cannot be adopted by the public sector without
considerable modification. Therefore, over the past few years, the
Federal Accounting Standards Advisory Board (FASAB) has issued 18 new
accounting standards and 3 concepts. Each of these standards has
generated very significant new workload requirements for the DOD
managers who are trying to make systems ``CFO compliant,'' for the
preparers of financial statements, and for the auditors. The standards
also require further clarification and interpretation, as with any new
set of policies.
Because of its size, the DOD is required to prepare
financial statements for both the overall Department and for numerous
large component entities, such as each Military Department's General
Fund. No other Federal Agency has an equivalent accounting and auditing
workload. The annual financial audits alone consume about 400 staff
workyears of my office and the Military Department audit organizations.
The full cost of DOD CFO Act compliance effort has never been
identified.
FINANCIAL STATEMENT AUDIT RESULTS
Neither the full integration of DOD support operations, including
financial management, nor the achievement of clean audit opinions on
the consolidated DOD financial statements are feasible short term
goals. The Department remains several years away from being able to
achieve favorable audit opinions on most major financial statements,
although breakthroughs on a few individual statements are likely over
the next couple years.
The DOD efforts to compile and audit the FY 1999 financial
statements, for the Department as a whole and for the 9 subsidiary
reporting entities, were massive. Nevertheless they could not overcome
the impediments caused by poor systems and inadequate documentation of
transactions and assets. In terms of opinions, the audit results
differed little from the past several years. A clean opinion was again
issued for the Military Retirement Fund, but disclaimers were necessary
for all other funds, including the DOD-wide consolidated statements.
The scope of accounting adjustments to financial statements is one
of the best indicators of how difficult it has been for DOD to emulate
private sector financial reporting practices. When the financial
reporting system of a public or private sector organization cannot
generate fully reliable financial statements, accountants sometimes
make accounting entries, often as recommended by auditors, to complete
or correct the statements. Making major entries or adjustments to
override, correct or transfer data is not the preferred way of doing
business and there is considerable attention paid to any significant
change made to official accounting records. The notion of accounting
entries being made on a mass scale, in most cases to compensate for
underlying system problems, is completely foreign to Corporate America,
as is the prospect of any such adjustments being unsupported by clear
audit trails. In fact, accounting adjustments are closely scrutinized
for fraud indicators.
The audits of the FY 1999 DOD financial statements indicated that
$7.6 trillion of accounting entries were made to compile them. This
startling number is perhaps the most graphic available indicator of
just how poor the existing systems are. The magnitude of the problem is
further demonstrated by the fact that, of $5.8 trillion of those
adjustments that we audited this year, $2.3 trillion were unsupported
by reliable explanatory information and audit trails or were made to
invalid general ledger accounts. About $602.7 billion of accounting
entries were made to correct errors in feeder reports.
I will discuss some of the other specific problems in the
statements later in this testimony, but first I would like to mention
our longstanding concern about measuring where the DOD CFO Act
compliance effort stands.
MEASURING PROGRESS
Audit opinions on the annual agency financial statements still are
the sole widely used metric for quantifying progress by the Federal
Government toward accurate and, by implication, useful financial
reporting. Unfortunately, this means that considerable improvement can
be made in each of the huge DOD reporting entities without any effect
at all on the overall audit opinions. For example, the Air Force made a
concerted effort to correct records and compile support for
transactions so that a favorable audit opinion could be achieved on its
Statement of Budgetary Resources (SBR), which is a key part of the Air
Force General Fund financial statements. Notwithstanding these numerous
improvements and corrections, the effort could not overcome the problem
of an unreliable opening balance. Despite a relatively near miss, the
Air Force SBR audit result for FY 1999 is scored as another failure for
the Department, one of many disclaimed audit opinions, but this is only
part of the story.
Although the DOD deserves credit for the considerable effort made
to improve its financial reporting, it seems that everyone involved--
the Congress, the Office of Management and Budget, the audit community
and DOD managers--have at best a general sense of how much progress has
been made, what is the planned pace of further action, how much remains
to be done and how much risk exists in terms of meeting goals and
schedules. Nor has it ever been clear, as previously mentioned, how
much the various aspects of this effort have cost to date, how much
more will be needed and whether the effort is sufficiently resourced.
Ironically, although the Department annually compiles voluminous
documents in response to statutory requirements for multi-year
financial management improvement plans and other data, very little of
that information is consistently updated, analyzed and used for day to
day program management or frequent senior management oversight. Much of
it has to be collected in annual data calls to the DOD component
organizations. The various reports to OMB and Congress, the annual
financial statement audits, and even supplementary audits cannot
substitute for structured, readily accessible, meaningful and frequent
internal management reporting. Current data on project performance,
cost and schedule status should be routinely provided up a clearly
defined program management chain and shared with external reviewers.
What has been in place up until now has been a 1970's or 80's
management model.
APPLYING YEAR 2000 LESSONS LEARNED
In our November 1999 report, Deficiencies in FY 1998 DOD Financial
Statements and Progress Toward Improved Financial Reporting, we
recommended that DOD emulate its highly successful ``Y2K'' management
approach to address the challenge of attaining CFO Act compliance. As
was the case with the Y2K conversion, the CFO Act challenge has been
designated by the Secretary of Defense as a high priority and it is
fundamentally a systems problem. Therefore it can be addressed most
effectively if there are goals, criteria and milestones set forth in a
clear management plan that involves all DOD organizations and
functional communities, because it cannot be overcome unilaterally by
the Chief Financial Officer without the active assistance of the rest
of the Department. Like Y2K compliance, CFO Act compliance needs
extensive audit verification and testing, and the Congress, OMB and GAO
are all strongly interested in measuring progress toward the goal.
There would be several advantages to this approach. The Department
knows it works, managers and the Congress are familiar with terminology
related to defined phases and system status, and it entails fairly
simple and verifiable metrics to show progress and highlight risk
areas.
Although the Department reports in its current Financial Management
Improvement Plan that the Y2K concept has been adopted, implementation
has been disappointingly slow and key Y2K process attributes are still
missing. The Plan of September 1999 established March 31, 2000, as the
milestone for completing the Assessment Phase for CFO Act compliance of
168 critical systems, but we understand this milestone has slipped
until later this year. Despite the Y2K program experience that initial
system assessments and status reports often were overly optimistic,
incomplete or inconsistent, audit community involvement in validating
milestone status has been limited. This is in marked contrast to the
Y2K conversion effort, which we supported on a massive scale and whose
managers shared status reporting with the auditors on a virtually
continuous basis. To help redress this weakness, we plan to issue at
least one report this year on the Assessment Phase, based on a self-
initiated audit.
The Biennial Plan did not identify an overall milestone to correct
all system deficiencies and fully integrate the financial management
systems. The Plan stated that compliant finance and accounting systems
are expected to be in place by FY 2003, which likely is optimistic.
Significantly, the Plan did not provide a specific date goal for
correction of all feeder system deficiencies. Because the logistics,
personnel, acquisition and other feeder systems provide from 50 to 80
percent of all data, this is a crucial gap in last year's plan.
We have identified feeder systems with intermediate target dates
extended beyond the FY 2003 milestone for the finance and accounting
systems. For example, the Army Standard Installation and Division
Personnel System had a September 2005 milestone for improvements. It is
important that there be a clear understanding of the plan for those
feeder systems and intensive management of this vital segment of the
overall effort. We will work with the Department this summer to
strengthen management oversight and the next iteration of the plan. We
consider it crucial that the Department act now to be able to provide
the incoming Administration with a clear and realistic roadmap of what
needs to be done to attain a new generation of fully capable systems
and clean audit opinions on the output of those systems.
USEFUL FINANCIAL DATA
In adopting the private sector practice of audited annual financial
statements, the Congress clearly expected improved financial
management. The lack of performance metrics and cost data, as
previously discussed, handicap an assessment of whether the effort to
attain auditable financial statements has been worthwhile. The more
important question to be asked, however, is whether data produced in
compliance with Federal Accounting Standards and validated in financial
statement audits is useful to users--managers and the Congress. Because
much of the data rolled up into annual financial statements is also
provided to users in various reports and budget exhibits, frequently
often during the year, the focus should be across the spectrum of
financial information reported within and by the Department, in
whatever form.
We fully agree with the General Accounting Office that a clean
audit opinion would not necessarily be synonymous with responsive
financial information that enables sound decision making by program
officials and resource allocators. This would be particularly true if
the financial statements were formulated using ad hoc procedures for
bypassing the official financial systems and records that are relied on
for day to day management information.
Questions on the usefulness of various financial reports can best
be answered by the users, not auditors or accountants. Unfortunately,
we are unaware of much feedback to the DOD CFO community along those
lines from other managers or Congress. Hopefully this dialogue will
expand in the future, so that the accounting community has the best
possible idea of what managers and the Congress actually need, when and
in what form.
ASSET ACCOUNTABILITY
Accounting and auditing standards can be very arcane. In my view,
some of the property valuation issues confronting the Department are
marginally relevant in Government and will never have any impact on DOD
decision making. However, other management information deficiencies
identified by the financial statement audits have very practical
implications. For example, inventory management has been a high risk
area for DOD for many years. Having complete, accurate and timely data
on inventory is essential for logistics readiness and for making good
procurement and disposal decisions.
Examples of inventory accuracy problems were highlighted in our
report on Inventory Accuracy at the Defense Depot, Columbus, Ohio,
February 27, 1997, and a follow-up report on Assuring Condition and
Inventory Accountability of Chemical Protective Suits, February 25,
2000. For the first audit, we observed an inventory count of chemical
protective suits, which must be carefully controlled as a critical
warfighting item. The audit disclosed major discrepancies between the
Columbus Depot's records and the actual number of chemical protective
suits on-hand. The audit indicated 423,062 fewer protective suits
actually on-hand than in the records. At other locations on the
premises that were not designated as containing protective suits, we
found an additional 696,380 protective suits that were not on the
inventory records. This loss of control was caused by poor management
practices, rather than by problems with the automated inventory records
system. Management took action to regain control of the chemical
protective suits and temporarily corrected its records. Shortly
thereafter, as part of efforts to consolidate overall supply depot
operations, the protective suits were transferred to the Defense Depot
at Albany, Georgia.
Last year, we observed the physical inventory count for 158 items
stored at the Defense Depot, Albany. One of the sampled items was one
of the types of protective suits that we had addressed in 1997. We
discovered that, instead of improving inventory management, the
transfer of the protective suits had had the opposite effect. The
inventory records were again materially inaccurate. Although the
records indicated 225,202 protective suits on hand, the physical count
was 31,277 less. We also reported that these suits had been involved in
a criminal investigation by the Defense Criminal Investigative Service,
were potentially defective, and should have been withdrawn from active
inventory. This problem was not caused by the inventory record errors,
but does illustrate that financial audits can have a variety of
benefits and highlight problems other than poor accounting. The
inventory records have again been corrected and the potentially
defective suits have been designated as usable for training only.
FINANCIAL LIABILITIES FOR ENVIRONMENTAL CLEANUP
Another area where DOD financial statements have been materially
deficient, and which involves controversy about the practicality of the
new accounting standards, is the recognition of liabilities for
environmental costs to dispose of equipment and clean up DOD
installations. We were unable to verify the $79.7 billion reported for
environmental liabilities on the FY 1999 DOD Agency-wide Balance Sheet.
The reported amount, as large as it is, was clearly understated.
The magnitude of DOD environmental cleanup requirements has been a
matter of intense DOD and Congressional interest for many years, but
information on costs is fragmented and often unreliable. It would seem
logical that costs identified in budget exhibits, other DOD
environmental program reports, Selected Acquisition Reports and
financial statements should be as consistent as possible, reconcilable
and supported. More work is needed to move toward that goal.
Specifically, there are unresolved issues regarding when to recognize
environmental disposal costs for other than nuclear powered weapon
systems on financial statements. Also, the cost estimates for
installation cleanup need improvement.
For example, the $20.7 billion equipment disposal portion of the
overall environmental liability estimate was clearly incomplete,
although improved over previous years. The Air Force reported nothing.
The Navy, in contrast, estimated $11.5 billion for nuclear-powered
submarine and ship disposal.
An open issue remains on when to recognize environmental disposal
costs for most DOD weapon systems on the financial statements--as soon
as estimates are made as part of initial weapon system life cycle
costing or much later when disposal decisions are made. We are working
with the Department and GAO to resolve the question of what the
accounting standards require and how much flexibility the DOD has to
distinguish between nuclear powered systems and others with different
types of hazardous materials. Regardless of the decision, we have
recommended more aggressive action by the Military Departments to
ensure that acquisition program managers include hazardous waste
handling and disposal costs in the total estimated ownership costs of
their systems. Recent audits indicated commendable emphasis by program
managers on reducing the amount of environmentally hazardous material
that will require costly disposal, but virtually no emphasis on
including disposal costs in life cycle cost estimates. Both Congress
and DOD have stressed the importance of complete life cycle cost
estimates for weapon systems, and stated that support costs are the
most frequently understated category. Disposal costs are part of
support costs.
The DOD reported $34 billion as the liability for environmental
cleanup of munitions residue at training ranges. Reporting this amount
represents a significant improvement over FY 1998, when cleanup
liabilities for training ranges were not recognized or reported at all.
However, reporting was incomplete and some managers question the
usefulness of collecting the data. Although final DOD guidance for
reporting liabilities for cleanup of training ranges has not yet been
published, it is expected in FY 2000. Also, we will issue a report next
month on inefficiencies in the processes for collecting and disposing
of range residue.
SIMPLIFYING ACCOUNTING REQUIREMENTS
In the mid-1990's, we recommended that DOD and the Congress
consider ways to reduce the burden on DOD accounting offices and the
risk of errors by simplifying requirements. The Under Secretaries of
Defense (Comptroller) and (Acquisition, Technology and Logistics) have
pressed the DOD components to adopt measures to avoid the unnecessary
use of multiple accounts on contracts and commingling of funds from
different accounts on the same contract line item. Likewise, our office
has periodically commented on the incredible complexity of the DOD
chart of accounts, which is probably unique in the world because of its
hundreds of thousands of accounting entities, and the absurdly long
accounting codes that result. This multiplicity of ``colors of money''
is a root cause of the formidable DOD problems with the accuracy of
accounting data, the complexity of contracts, the difficulty of
properly managing disbursements and progress payments, the high
overhead costs of DOD budget and accounting operations, and the
considerable restrictions on the flexibility of managers to shift funds
quickly to meet contingencies. Millions of documents must contain at
least one, and in some cases, many accounting classification codes that
typically have from 46 to 55 characters each. Compare 12 or 16
characters used for a commercial credit card to a typical Navy fund
cite:
17x1611 1936 026 54002 3 068572 ID 000151 000560852000
We believe that the DOD and Congress ought to reconsider the need
for so many discrete appropriations, budget activities, line items, and
other subaccounts. These kinds of issues are seldom considered in the
context of management reform, but we believe that any streamlining of
DOD accounting requirements would considerably assist managers in
avoiding errors, improving data quality, and cutting overhead costs
throughout the Department.
Unfortunately, the budget and appropriation structures are
difficult to change. The DOD must administer at least 1,200 open
appropriation accounts at any given time. A single appropriation may
have many hundred subaccounts. The main driver of complexity, however,
is the business practice of the individual DOD component. The Army, for
example, has resisted simplification of either contracts or its chart
of accounts, in effect asserting that it wishes to continue trying to
capture costs and control funds at extremely challenging levels of
detail.
OTHER CONCERNS
We have concerns about information assurance, fraud and management
controls in finance operations, particularly vendor pay. We continue to
view DFAS as a likely target for hackers and are working closely with
the Department to reduce vulnerability to computer crime and other
fraud. Conflicting priorities and constrained resources have minimized
recent audit coverage of vendor pay and other high risk areas related
to financial management. Nevertheless, the results of the relatively
few audits performed recently on other than financial statement
processes provide an insight into what kinds of issues require
management attention. For example:
Last November we reported that the Department's policies
on the timely recording of fiscal obligations needed to be strengthened
to ensure compliance with the intent of applicable laws. The Department
has taken responsive actions.
On June 5, 2000, we reported that DFAS had improved
controls over vendor payments made for the Air Force using the
Integrated Accounts Payable System, but more needed to be done to
ensure that all payments were properly documented for compliance with
the Prompt Payment Act. About 176,000 of 307,000 payments made from
April through June 1999 lacked complete supporting documentation.
Although we found no indication of widespread fraud, better compliance
with prescribed controls would diminish the risk of fraud and non
compliance with laws such as the Prompt Payment Act.
On June 9, 2000, we reported that management controls over
the National Drug Control Program funds received by DOD were
reasonable; however, the manual process used to report the status of
those funds to the Office of National Drug Control Policy was not
linked to the official accounting records. As a result, we were unable
to attest to the accuracy of the annual report for FY 1999 as required
by Public Law 105-277, the Office of National Drug Control Policy
Reauthorization Act of 1998. This is a good example of the current
inability of DOD accounting systems to provide information needed by
the DOD and Congress, necessitating special workaround measures.
On June 16, 2000, we reported that the DOD had not
rigorously applied the principles set forth in the Clinger-Cohen Act
when approving the acquisition strategy for the Defense Joint
Accounting System. The planning for this new system, currently intended
to be one of four DOD systems for multi-organization general fund
accounting, has been severely criticized by the House Armed Services
and Appropriations Committees. The main concerns are the lack of a
sound analysis of alternatives and the poor precedent involved in the
combined Milestone I and II approval for the project despite the
absence of that analysis.
On June 29, 2000, we reported that controls needed
improvement to ensure that payroll withholding for DOD civilians was
accurate. A limited sample of withholding in 279 individual accounts
indicated errors in 24 accounts and inadequate supporting records in
DOD personnel offices. This is an example of a payment problem that is
caused by erroneous input from feeder systems, not by errors in the
finance office, but the tendency is to blame DFAS.
CONCLUSION
Mr. Chairman, every time we testify on DOD financial management, we
assert that sustained involvement by senior managers and the Congress
are vital ingredients for progress. This remains very much the case and
we urge the Task Force to continue its dialogue with the Department on
these tough issues. Despite commendable progress, the DOD remains far
from CFO Act compliance and continued measures will be needed over the
next several years to achieve success. The DOD audit community, which
has invested so much effort and resources in this area over the past
several years, very much appreciates your interest in our activities
and viewpoints. The titles of some of our reports that are applicable
to this testimony are attached, for ready reference.
Finally, I would be remiss if I did not mention that the DOD audit
community has an outstanding relationship with the Department's
financial managers and virtually all of our recommendations have been
accepted over the past several years. Likewise, the advice of the
General Accounting Office has been very helpful to us and we will
continue working closely with them to provide DOD and Congress with a
well rounded picture of DOD financial management issues. This concludes
my statement.
examples of fy 2000 inspector general, dod, reports and testimony
related to this statement
No. 2000-030, Recording Obligations in Official Accounting Records, 11/
4/99
No. 2000-041, Deficiencies in FY 1998 DOD Financial Statements and
Progress Toward Improved Financial reporting, 11/26/99
No. 2000-069, FY 1998 Department of Defense Agency-Wide Statement of
Budgetary Resources, 12/29/99
No. 2000-077, Testimony by Deputy Inspector General, DOD, to the House
Budget Committee on Defense Management Challenges, 2/17/00
No. 2000-086, Assuring Condition and Inventory Accountability of
Chemical Protective Suits, 2/25/00
No. 2000-091, Internal Controls and Compliance with Laws and
regulations for the DOD Agency-wide Financial Statements
for FY 1999, 2/25/00
No. 2000-120, Testimony by Assistant Inspector General for Auditing,
DOD, to Subcommittee on Government Management, Information
and Technology, House Committee on Government Reform 5/7/00
No. 2000-121, Hazardous Material Management for Major Defense Systems,
5/4/00
No. 2000-136, Reporting of Performance Measures in the DOD Agency-Wide
Financial Statements, 5/31/00
No. 2000-139, Controls Over the Integrated Accounts Payable System, 6/
5/00
No. 2000-151, Acquisition of the Defense Joint Accounting System, 6/16/
00
No. 2000-156, DOD Payroll Withholding Data for FY 1999, 6/29/00
All reports and testimony listed above are available on the
Internet at www.dodig.mil.
Chairman Shays. Mr. Steinhoff.
STATEMENT OF JEFFREY C. STEINHOFF, ASSISTANT COMPTROLLER
GENERAL, ACCOUNTING AND INFORMATION MANAGEMENT DIVISION, U.S.
GENERAL ACCOUNTING OFFICE
Mr. Steinhoff. Mr. Chairman, members of the Task Force, a
pleasure to be here today.
Mr. Chairman, as you said in your opening, DOD has an
incredibly vast and complex worldwide mission that it carries
on in a way that no other nation can match. Financial
management must play an important role in carrying out that
mission. The bottom line, DOD continues to make important
progress in addressing its serious financial management
weaknesses, as the other witnesses have said. At the same time,
it has a long way to go. DOD's problems are pervasive, long-
standing, deeply rooted, widespread and complex in nature. My
testimony today highlights some of the challenges DOD faces.
As we have reported in the past, these weaknesses adversely
impact on DOD's ability to control cost, to ensure
accountability and to address pressing management issues which
drain resources needed to carry out missions and to increase
readiness. World-class organizations have found, private sector
and government, that there is a great payoff from good
financial management and the ability to efficiently and
effectively manage day-to-day operations and to anticipate
future costs and claims on the budget.
What has been markedly different in DOD over the last 2
years is we have seen for the first time a clear and
demonstrated commitment to address these serious weaknesses. A
number of important initiatives, both short and long term, are
under way and planned; and we are seeing positive results. I
applaud Bill Lynn and his top team for their efforts. As he
mentioned before, they are facing systems and problems that go
back decades and a culture that viewed these issues in a
stovepiped manner and administrative versus viewing financial
management at the fiber of managing.
This commitment, though, must be sustained over a number of
years to turn plans into reality. A big challenge remains, and
the finish line is not yet in sight. For the short term,
continuing efforts to standardize, streamline and simplify
processes, reengineering will be critical to success. I can't
overemphasize that. They have to change the basic processes
they have in place today.
Next, they have to strengthen and enforce existing
controls. There is no lack of controls in Defense. In some
areas there may be too many controls, but they oftentimes are
not followed or enforced to ensure basic transaction processing
which today is a major impediment as well as a cost that can be
greatly reduced.
As you will see in my detailed statement, there are a
tremendous amount of adjusting entries--one of every three
disbursement transactions, $51 billion last fiscal year was an
adjustment. So they are entering transactions, and then
reentering them to correct them. Some are corrected years
later. This is a tremendous expense.
The private sector and successful State governments have
found that the key to having good finance operations is to
reduce your backroom operations. You don't want to be spending
a whole lot of time processing and reprocessing transactions.
Have them processed one time at the source. You have tremendous
economies, tremendous savings, you have richer data, and the
data comes to you on a day-to-day basis.
Next, they have to develop more reliable estimates of some
of their future liabilities, which will be helpful in the
budget process. They have to enhance human capital, and they
have to oversee performance.
At the heart of the long-term challenge--and I echo the
other witnesses' views; this is a long-term challenge--is a
financial system that needs to be overhauled. The system is not
integrated or tied together and represents a patchwork of
systems that individually have weaknesses, some very serious,
and collectively simply do not get the job done. Information
does not automatically flow from system to system, as the IG
reported.
To prepare its fiscal year '99 financial reports, DOD has
had to make thousands and thousands of accounting entries and
adjustments totalling $7.6 trillion.
To give you some sense--this isn't the whole picture. This
is some sense of the challenge that Bill Lynn and his folks
face. Over at your left is an example of DOD's own depiction of
the current system's environment for its payment system. They
have got other systems and other operations; and, as you can
see, this is overly complex. The system has been built up over
decades. Around the outer edge are 22 payment systems that are
fed by numerous other systems, systems that are generally not
compatible or properly tied together and often do not use
common data codes. In a nutshell, this tells a story as to what
they are trying to fix.
Compounding the challenge is that most of the information
needed to prepare annual financial reports and, more
importantly--I want to emphasize more importantly--to manage
DOD's operations on a day-to-day basis comes from feeder
systems--logistics, acquisition, personnel--that are not under
the comptroller's control. He controls around 20 percent of the
information. The other 80 percent comes in from the other
systems.
So to achieve the end game of the CFO Act, and that end
game is systems that routinely provide reliable, useful, timely
information for day-to-day management purposes, DOD faces a
systems challenge that transcends the comptroller's operation.
It is far beyond financial reporting, and it is at the fiber of
the management system in DOD.
The Y2K experience I think can be a great teacher. DOD
lagged far behind on Y2K on a regular basis. Steve Horn was
grading the Department as an F. But the Department recognized
that fundamental changes had to be made. They successfully
turned the Y2K effort around, and they passed that test with
flying colors. They demonstrated that applying some of these
concepts can get them to that finish line.
First, DOD recognized that Y2K was a chief executive
officer issue, not just a CIO issue. The Department Secretary
took direct control, exerted strong overall leadership over
Y2K.
DOD's financial management challenge cuts across its
operations similar to Y2K. It also has a host of initiatives
ongoing in logistics and in the other functional areas to deal
with systems; and given DOD's corporate culture, which tends to
be stovepiped within services, tends within activities to be
stovepiped, having a strong, direct, sustained leadership must
come from the top. It must be at the corporate level, at the
deputy level.
I brought some copies today of our executive guide--
Creating Value Through World-Class Financial Management, which
was just issued back in April. In performing this study we went
to Boeing, Chase Manhattan, GE, Hewlett-Packard, Owens-Corning,
Pfizer, and the States of Massachusetts, Texas and Virginia. We
found in successful organizations, private sector and
government, that financial management is an entity-wide
priority for which the chief executive provides clear, strong
leadership, including being actively engaged in systems
development. They see this as the lifeblood of the company.
Second, Y2K had a date certain. Financial management reform
doesn't have the same type of date certain, but Y2K also had
interim dates that you had to meet along the way to gauge the
likelihood of meeting the January 1st date. And it also had
periodic self-reporting.
It gets back to what Mr. Lieberman said, have interim
steps, have interim goals. Next year this time, probably DOD
will not have a clean audit opinion again. I think you can
expect that, but establishing interim goals, measuring DOD
against how it is meeting those interim goals, and having the
rigor of reporting back against those goals will be very
important.
Third, for Y2K, DOD followed a structured, disciplined
approach. Given the tremendous complexity of this challenge, it
will be very important that DOD fully adhere to the investment
controls in the Clinger-Cohen Act.
There have been other systems initiatives in DOD. They have
been extremely problematic. Systems development--and I am
talking about information technology systems--has been a GAO
high-risk area since 1995. So they have a track record where
developing systems has been difficult. Many other agencies are
in the same boat, and the private sector, has problems as well.
So a disciplined approach will be very important.
Also, for Y2K, the IG was very much involved with
validation, with interim reporting, with working with DOD on a
real-time basis; and that kind of partnership will be
important.
In closing, the comptroller and his staff should be
applauded for their efforts. They have a long way to go, a
sustained, high-level commitment that transcends this
administration. This is a multiyear effort and will be key to
the ultimate success of DOD's reform efforts. Likewise,
sustained congressional attention such as this hearing and the
work of this group will be crucial to instilling the expected
accountability in DOD.
Mr. Chairman, members of the Task Force, this completes my
summary remarks. I will be pleased to respond to any questions
at this time.
Chairman Shays. Thank you.
[The prepared statement of Jeffrey C. Steinhoff follows:]
Prepared Statement of Jeffrey C. Steinhoff, Assistant Comptroller
General, Accounting and Information Management Division, U.S.
Government Accounting Office
Mr. Chairman and members of the Task Force, I appreciate the
opportunity to discuss financial management issues at the Department of
Defense (DOD) and their implications for the budget process. We
recently testified\1\ before the House Subcommittee on Government
Management, Information and Technology on the status of DOD's efforts
to address its long-standing pervasive weaknesses in financial
management systems, operations, and controls. Material financial
management deficiencies identified at DOD, taken together, continue to
represent the single largest obstacle that must be effectively
addressed to achieve an unqualified opinion on the U.S. government's
consolidated financial statements. DOD's vast operations--with an
estimated $1 trillion in assets, nearly $1 trillion in reported
liabilities and a reported net cost of operations of $378 billion in
fiscal year 1999--have a tremendous impact on the government's
consolidated reporting.
To date, no major part of DOD has yet been able to pass the test of
an independent audit; auditors consistently have issued disclaimers of
opinion because of pervasive weaknesses in DOD's financial management
systems, operations, and controls. Such problems led us in 1995 to put
DOD financial management on our list of high-risk areas vulnerable to
waste, fraud, abuse, and mismanagement, a designation that continued in
last year's update.\2\ Lacking such key controls and information not
only hampers the department's ability to produce timely and accurate
financial information, but also significantly impairs efforts to
improve the economy and efficiency of its operations. Unreliable cost
and budget information affects DOD's ability to effectively measure
performance, reduce costs, and maintain adequate funds control, while
ineffective asset accountability and control adversely affect DOD's
visibility over weapons systems and inventory.
DOD has made genuine progress in many areas throughout the
department, both larger steps forward and smaller incremental
improvements. We have seen a strong commitment by the DOD Comptroller
and his counterparts in the military services to address the
department's serious financial management problems. At the same time,
DOD has a long way to go. Major problems remain--problems that are
pervasive, long-standing, deeply rooted, and complex in nature. Our
previous testimony outlined DOD's most difficult financial management
challenges and described the many initiatives that are under way or
planned to address them.
Today, I will highlight certain of those ongoing challenges, with a
focus on those that affect the reliability of budget execution data as
well as other areas where accurate and complete financial management
information could provide a useful perspective to decisionmakers
related to budget requests, performance measures, costs, and other key
decision points.
Finally, I will discuss DOD's plans and actions to develop an
integrated financial management system that complies with Federal
system standards. To achieve what the Comptroller General has referred
to as the ``end game"--systems and processes that routinely generate
good financial information for day-to-day management purposes--will
require a major systems and reengineering effort. Integrated financial
management systems, along with marshaling the human capital needed to
achieve results, have long been cited as major components to the final
resolution of DOD's financial management problems. The successful Year
2000 effort demonstrated that DOD can resolve complex, entitywide
problems through top management leadership working across functional
lines. Applying the Year 2000 lessons learned to the department's
financial management system integration effort will require similar
leadership and commitment to a disciplined systems development
approach.
RELIABILITY OF BUDGET EXECUTION DATA IMPAIRED
As an integral part of an effective budget execution system, an
agency is responsible for determining and maintaining its available
fund balance. Treasury also has information about activity in the
agency's accounts, and Treasury's and the agency's records must be
periodically reconciled to determine the actual amount of funds
available. This is analogous to reconciling one's personal checking
account with the monthly bank statement. DOD weaknesses in accounting
for its funds include (1) the inability to reconcile its balances to
Treasury's, (2) frequent adjustments of recorded payments from one
appropriation to another appropriation account, including to canceled
appropriations, (3) problem disbursements--disbursements that are not
properly matched to specific obligations recorded in the department's
records, and (4) obligated balances that are incorrect or unsupported.
As a result of these weaknesses, auditors have been unable to
verify DOD's Fund Balance With Treasury and its major components--
obligated and unobligated balances. This means that DOD does not know
with certainty the amount of funding that is available. This
information is essential for DOD and the Congress to be able to
determine the status of funds and if unobligated balances are available
that could be used to reduce current funding requirements or that could
be reprogrammed to meet other critical program needs.
SIGNIFICANT DIFFERENCES BETWEEN DOD'S AND TREASURY'S RECORDS
Although DOD has made some improvements in its accountability over
its fund balance with Treasury, the amount of funds available at DOD
remains questionable because (1) significant differences between DOD's
and Treasury's records remain, (2) the reduction in differences between
Treasury's and DOD's recorded fund balances may be, in part, a result
of a change in policy rather than an actual reduction, and (3) items in
suspense accounts, which cannot be identified with a specific
appropriation account, may not be DOD transactions.
DOD made the reduction of differences a high priority in its short-
term improvement plans last year. There was a drop in the amount of the
unresolved differences from $9.6 billion at September 30, 1998, to $7.3
billion at September 30, 1999. Although some of the differences may be
due to the timing of transaction processing at Treasury versus DOD, an
aging of the difference suggests that significant reconciliation issues
remain. For example, of the $7.3 billion difference, $2.5 billion is 60
days or older. Differences over 60 days old are generally not
attributable to timing.
At least some of the decrease in the total differences as of
September 30, 1999, can be attributed to the practice of some Defense
Finance and Accounting Service (DFAS) center staff to routinely adjust
their records each month to match those at Treasury without first
identifying whether the adjustment is proper. This practice results in
fewer differences on the reports but does not necessarily mean that the
reconciliation process has actually improved or that the causes of the
differences, such as Treasury or DOD errors in recording transactions,
have been addressed and resolved. For example, one Army disbursing
station recorded $608 million in differences to a suspense account.\3\
At year-end, DOD charged the differences to Army's Operations and
Maintenance appropriation, without documentation to support that these
transactions should be recorded to this account. This resulted in
financial reports to the Congress and OMB that show a reduction in the
obligated balance in that account available for disbursement. However,
DOD has little assurance that the charge should not have been properly
assessed against, for example, some other Army appropriation or even to
another entity's appropriation. Further, at the beginning of the next
fiscal year, DOD reversed the Operations and Maintenance charges and
returned the amounts to suspense accounts.
Finally, DOD records show that an estimated $1.6 billion of
transactions held in suspense accounts at the end of fiscal year 1999
have not been properly reported to Treasury and may also affect the
fund balance with Treasury amount. Until suspense account transactions
are posted to the proper appropriation account, the department will
have little assurance that appropriation balances are accurate, and
that it has a right to any collections, that adjustments are valid, and
that the disbursements do not exceed appropriated amounts. Moreover,
the reported amounts in suspense accounts represent the offsetting
(netting) of collections and adjustments against disbursements, thus
understating the magnitude of the unrecorded amounts in suspense
accounts. To illustrate the magnitude of this issue, we previously
testified\4\ that audit work for fiscal year 1997 found that while the
Navy had a net balance of $464 million in suspense accounts recorded in
its records, the individual transactions--collections as well as
disbursements--totaled about $5.9 billion.
FREQUENT ADJUSTMENTS AFFECT RELIABILITY
DOD frequently adjusts recorded payments to transfer the payment to
another appropriation account, including to canceled appropriations.
These adjustments raise questions about the reliability of amounts
reported as obligated and available for disbursement in specific
appropriations. In March 2000, we reported\5\ that about one of every
two dollars in fiscal year 1997 contract payment transactions processed
was for adjustments to previously recorded disbursement transactions.
Although DOD reported that the number of adjustments has declined, it
remains significant. During fiscal year 1999, DFAS data showed that
almost one of every three dollars in contract payment transactions was
for adjustments to previously recorded payments--$51 billion in
adjustments out of $157 billion in transactions. Adjustments were often
made to original entries that were recorded years earlier. A number of
the adjustments selected during our review were made to canceled
accounts.
In the National Defense Authorization Act for Fiscal Year 1991, the
Congress changed the government's account closing procedures. The
intent of the changes was to impose the discipline of the
Antideficiency Act\6\ and the bona fide needs rule\7\ to expired
appropriations and to ensure that expired appropriations do not remain
open on the government's books indefinitely.\8\
Subsequent to the amendment of the account closing law, DOD
requested that Treasury reopen hundreds of closed accounts to permit
the posting of adjustments. Treasury asked us whether it had authority
to correct reporting or accounting errors in closed accounts. In 1993,
we determined that Treasury had authority to correct these errors.\9\
The decision concluded that Treasury may adjust the records of canceled
appropriations to record disbursements that were in fact made before
the cancellation. However, Treasury can make these adjustments only if
DOD can establish that a disbursement was a liquidation of a valid
obligation, recorded or unrecorded, that was properly chargeable
against the account before it closed.\10\
Adjusting disbursements previously recorded to current accounts by
moving those transactions to canceled accounts can increase balances
available for obligation in the current accounts. Since the 1991
account closing law was enacted, DOD has requested that Treasury reopen
333 closed accounts, totaling $26 billion. These accounts remained open
as of September 30, 1999. By comparison, all other Federal agencies
combined have requested that Treasury reopen 21 closed accounts,
totaling $5 million. According to Treasury's records, DOD made $576
million in net adjustments to canceled accounts in fiscal year 1999.
DOD has indicated that it has controls in place to ensure that
adjustments to canceled accounts are proper. Chairman Kasich and
Chairman Horn recently asked us to review DOD's practice of making
adjustments to canceled accounts, and our work has just begun.
DISBURSEMENTS NOT PROPERLY RECORDED
Problem disbursements--disbursements that are not properly matched
to specific obligations recorded in the department's records--continue
to impede the department's efforts to improve its budgetary data. This
situation can misstate DOD's reported obligated balances, undermining
this important budgetary control. For example, when disbursements are
not matched to specific obligations, an understatement of obligations
and an overdisbursement of an account can occur. This situation occurs
if the disbursement is for an item for which an obligation has not been
recorded or if the amount of the recorded obligation is less than the
recorded disbursement. Obligations are also understated in the case of
in-transits, in which a disbursement has been made but documentation is
insufficient to determine how the transaction should be recorded in the
accounting records. The elimination of problem disbursements is one of
the department's highest financial management priorities. DOD has
reported progress in resolving problem disbursements. As of September
30, 1999, DOD reported\11\ $10.5 billion in problem disbursements,
including in-transits, as compared with about $17.3 billion in problem
disbursements reported at the end of fiscal year 1998.
Of the $10.5 billion, DOD reported that about $1.5 billion were
problem unmatched disbursements and negative unliquidated obligations
(NULOs)\12\ over 180 days old. DOD's problem disbursement policy
requires that obligations be recorded for amounts paid that are
unmatched to a recorded obligation or exceed recorded obligated
balances after 180 days. However, the policy makes an exception if
sufficient funds are not available for obligation. In that case, DOD's
policy permits the department to delay recording an obligation or
adjustment until the funds cancel--up to 5 years after expiration of
the account. DOD believes that by delaying the recording of the
obligation, funds will become available--for example, through de-
obligation--thus permitting the obligation to be recorded without
raising an Antideficiency Act concern and ensuing investigation. If DOD
had recorded this $1.5 billion after the transactions remained
unmatched for 180 days, the related account balances would have
reflected potential Antideficiency Act violations and required an
investigation and report to the Congress if the appropriation is
ultimately determined to be overobligated or overspent.
An agency may not avoid the requirements of the Antideficiency Act,
including its reporting requirements, by failing to record obligations
or to investigate potential violations. To ensure sound funds control
and compliance with the Antideficiency Act, an agency's fund control
system must record transactions as they occur. We and the DOD IG have
previously reported\13\ on this issue and recommended that DOD revise
its problem disbursement policies and procedures to ensure that
accurate and reliable balances are maintained.
Finally, the process and control problems that result in the
problem disbursement issues previously discussed also contribute to
improper payments by the department. For example, our work continues to
identify problems with overpayments and erroneous payments to
contractors. For fiscal years 1994 through 1999, according to DFAS
records, defense contractors returned over $5.3 billion to the DFAS
Columbus Center, including about $670 million during fiscal year 1999,
due to contract administration actions and payment processing errors.
However, these amounts do not reflect the true magnitude of this
problem because many overpayments are returned through billing offsets.
We are currently working to estimate the scope of the overpayment
problem, including these offsets.
OBLIGATED BALANCES WERE INCORRECT AND UNSUPPORTED
In their testing of obligated balances, DOD auditors found evidence
of unsupported obligations and poor internal controls over obligations,
as illustrated by the following examples.
The Army Audit Agency found\14\ that internal controls
over the recording of obligations were not adequate to ensure that
reported obligated balances were accurate. In a sample of 60 1999
transactions, the auditors found that 21 could not be supported.
For fiscal year 1999, audit results\15\ show that the Air
Force Working Capital Fund had $211 million of obligations out of
approximately $1 billion tested, that is 700 out of 2,526 transactions
that were incorrect, inadequately supported, or not supported. In
addition, Air Force's general fund audit continued to identify
inaccurate or unsupported obligated balances as of September 30, 1999.
Specifically, Air Force auditors identified an estimated $1.3 billion
in inaccurate or unsupported obligated balances, a significant
improvement over the prior year when an estimated $4 billion in
obligated balances were inaccurate or unsupported.
In addition to auditors' reports, the Department of the Navy
identified its unliquidated and invalid obligations as a material
management control weakness in its fiscal year 1999 annual assurance
statement issued pursuant to the Federal Managers' Financial Integrity
Act.\16\ For example, the Navy reported that within the Operation and
Maintenance--Navy appropriation, some activities were not verifying
that only valid obligations were entered into the accounting system. As
a result, funding may have been available but not used. In addition,
the Navy had more than $1 billion in expired budget authority that was
allowed to cancel at the end of fiscal year 1999, including more than
$750 million that had been obligated but not disbursed. According to
Treasury data, at the end of fiscal year 1999, the department had $3.8
billion in expired budget authority that canceled.
Accurate and reliable information would permit the Congress to
review DOD year-end unobligated and unexpended balances and identify
opportunities for possible funding reductions. For example, as a result
of our analysis of unobligated balances in the military personnel
appropriation, the House Appropriations Committee recommended a
reduction of $96 million in the fiscal year 2001 request for this
account. Since the military services' account data have shown a pattern
of not spending all of their appropriated funds, the Committee
concluded that the fiscal year 2001 military personnel budget request
is overstated and can be reduced.
IMPROVED DATA ON ENVIRONMENTAL/DISPOSAL LIABILITY WOULD BE AN IMPORTANT
OVERSIGHT TOOL
Under federal, state, and international law, DOD faces a major
funding requirement associated with environmental cleanup and disposal.
These environmental costs result from the production of weapons systems
and prior and current operations. Even when current operations are
carried out in full compliance with existing environmental regulations,
future cleanup costs for certain operations will still result due to
the nature of these DOD activities. DOD has taken important steps to
implement the Federal accounting standards\17\ requiring recognition
and reporting of these liabilities and has made noteworthy progress.
For example, DOD's reported estimated liabilities increased from $34
billion in its fiscal year 1998 financial statements to $80 billion in
fiscal year 1999. However, the full magnitude and timing of these costs
are not yet known because (1) all potential liabilities were not
considered in the reported estimates, (2) estimates were not based on
the consistent application of assumptions and methodologies across the
services, and (3) support for the basis of reported estimates continues
to be inadequate.
A reliable estimate of DOD's environmental liability would be an
important factor in determining the cost of its operations and specific
programs and for resource planning. To effectively, efficiently, and
economically manage DOD's programs, its managers and oversight
officials need reliable cost information for the following key decision
points.
Evaluating programs--Long-term liabilities that affect program
costs must be accurately measured and considered in evaluating the
status of programs. For example, the liability for disposal activity is
part of the overall life-cycle cost of weapon systems and can
contribute to the ongoing dialogue on funding comparable weapons. The
National Defense Authorization Act for Fiscal Year 1995 required that
the Secretary of Defense analyze the environmental costs of major
defense acquisitions as part of the life-cycle costs of the programs.
However, recent IG audits of several major weapons systems programs,
including the Black Hawk helicopter and F-15 aircraft, have found that
life-cycle cost estimates did not include costs for demilitarization,
disposal, and associated cleanup.\18\ In addition, the Senate Committee
on Appropriations has required that DOD develop disposal cost estimates
for munitions.\19\
Making current economic choices--DOD's decisions on whether to
outsource specific functions require accurate and complete supporting
cost data. Yet DOD, as well as other government agencies, has
historically been unable to provide actual data on the costs associated
with functions to be considered for outsourcing. For example,
environmental and disposal costs must be considered in the department's
plans to analyze its more than 2,000 utility systems for privatization.
If these costs prove significant to DOD, they should be considered in
any cost-benefit analyses developed by the department in deciding to
retain or privatize these functions.
Resource planning--Reliable information on the full extent of the
environmental liability that DOD faces under current law and the likely
timing of funding requests would enable DOD and the Congress to make
informed judgments about DOD's ability to carry out those requirements.
As the Comptroller General recently testified\20\ before the Senate
Budget Committee, although we are currently enjoying a period of budget
surplus, it does not signal the end of fiscal challenges. Long-term
cost pressures from programs such as Social Security and Medicare will
consume an ever-larger share of the economy and squeeze the resources
available for other commitments and contingencies, such as Federal
insurance programs and cleanup costs from Federal operations known to
result in hazardous waste, including defense facilities and weapons
systems. Accurate and complete information on the magnitude and timing
of DOD's environmental liability would permit DOD and the Congress to
strategically plan for this long-term liability and set realistic
priorities among the competing challenges that we will face in the
future. Further, quantifying this enormous liability and providing a
breakdown of the costs by the approximate time periods the disposal
costs are expected to be incurred would add an important context for
congressional and other decisionmakers on the timing of resource needs,
including those that are more near-term. For example, we estimated\21\
that approximately $1.6 billion of the $5.6 billion estimate for the
disposal of nuclear powered submarines was for submarines that are
already decommissioned and awaiting disposal.
In summary, the most significant issues faced by the department in
determining and verifying its environmental/disposal liability include
incomplete estimates, inconsistent methodologies, and inadequate
documentation.
Incomplete estimates--To date, DOD has focused on what it expects
will be its most significant liabilities, those associated with nuclear
weapons and training ranges. It has not yet considered the magnitude of
costs associated with other weapon systems, conventional munitions, or
its ongoing operations, although these costs may also be billions of
dollars. For example, the department's costs to dispose of
conventionally powered ships would be at least $2.4 billion, based on
applying the Navy's estimated average cost of $500 per ton of
displacement used to estimate disposal costs for its inactive fleet. In
addition, we previously estimated that the conventional munitions
disposal liability for Army alone could exceed $1 billion.
Also, the costs of cleaning up and disposing of assets used in
ongoing operations may be significant. Significant environmental and
disposal costs are required to be recognized over the life of the
related assets to capture the full cost of operations. We are working
with DOD to assess whether operations, such as landfills and utilities
(including wastewater treatment and power generation facilities), will
ultimately have significant environmental costs associated with
closure. For example, Edwards Air Force Base officials provided us with
a landfill closure cost estimate of approximately $8 million. This
estimate excluded post-closure maintenance costs (such as monitoring)
which are estimated to exceed $200,000 annually over 30 years. To
provide some perspective on the potential scope of these operations,
the Army alone reported 65 landfills that, based on the Air Force
estimated cost data, could cost nearly $1 billion to close and monitor.
Cost estimates should also be refined for changes in cleanup/
disposal schedules. For example, DOD reported a liability of
approximately $8.9 billion in its fiscal year 1999 financial statements
for chemical weapons disposal. Initial estimates to comply with the
United Nations-sponsored Chemical Weapons Convention were based on a
2007 completion date. However, we recently reported\22\ that while 90
percent of the stockpile could be destroyed by the 2007 deadline,
schedule slippages associated with the remaining 10 percent are likely
to occur because of additional time required to validate, certify, and
obtain approval of technologies to dispose of the remaining stockpile
of chemical weapons. These schedule slippages will likely result in
additional program costs. Historically, schedule delays have been found
to increase costs such as labor, emergency preparedness, and program
management.
Inconsistent methodologies and inadequate documentation--Each
military service independently estimated its liabilities with, in some
cases, significantly different results, and the lack of documentation
hampered auditors' ability to verify the estimates. For example,
although the Air Force reported twice as many aircraft as the Navy, it
has not yet reported environmental and disposal liabilities for its
aircraft. The Navy's financial statements included an initial estimate
of $331 million in fiscal year 1999 for its disposal of fixed- and
rotary-wing aircraft. In addition, our limited analysis of DOD's first-
time effort to develop complete cleanup cost estimates for training
ranges, which we view as an important step forward, showed that the
reported amount of $34 billion was comprised primarily of cost
estimates for active, inactive, and closed Navy/Marine Corps ranges of
approximately $31 billion. The Navy reported this to be a minimum
estimate based on assumptions of ``low'' contamination and cleanup/
remediation to ``limited public access'' levels, for uses such as
livestock grazing or wildlife preservation but not for human
habitation. Based on these assumptions, the Navy used a cost factor of
$10,000 per acre. Although the Army also has significant exposure for
training range cleanup liabilities, it reported only $2.4 billion for
ranges on formerly used defense sites and closed ranges on active
installations. The Army assumed one closed training range per base for
the active installations. However, because the Army has not developed a
complete range inventory nor recorded any liability for active or
inactive ranges, this approach may have significantly understated its
liability. To illustrate the potential magnitude of Army training range
cleanup, applying the cost factor used by the Navy to estimated range
acreage of the Army's National Training Center at Ft. Irwin,
California, would result in a cleanup cost estimate of approximately $4
billion for that installation alone.
Further, DOD has had ongoing problems in adequately documenting its
reported liability--an important control in ensuring its reliability.
Last year, the DOD IG reported that the basis of estimates for
significant recorded liabilities--primarily those related to
restoration (cleanup) of sites contaminated from prior operations--was
not adequately supported, and those problems persist. Military service
auditors continue to find that significant portions of the reported
restoration liabilities lack adequate support for the basis of cost
estimates. For example, the Army Audit Agency found that the Army
lacked support for its estimates and attributed it to the fact that
recent guidance on documentation requirements was not properly
disseminated to project managers and others preparing project cost
estimates.
BETTER ESTIMATES OF RETIREE HEALTH CARE BENEFITS COULD ASSIST DOD AND
THE CONGRESS
DOD and the Congress are looking at numerous options to provide
more--and more cost-effective--health care to military personnel upon
their retirement. Currently, there are several pilot programs underway
to test the feasibility of providing additional health care benefits to
retirees over 65 years, including the Medicare Subvention demonstration
and the TRICARE Senior Supplement project.\23\ Congress is now
considering expanding these pilot programs to cover greater numbers of
retirees or extending the length of the trial periods. The Congress is
also considering expanding coverage of certain benefits, such as for
pharmaceuticals, to Medicare eligible retirees. Reliable financial and
patient care data would enhance the ability of DOD and the Congress to
consider medical care options.
DOD estimates that, based on its current benefit programs, the cost
of providing future health care benefits for military retirees and
their dependents will be $196 billion;\24\ however, we have previously
testified\25\ that this estimate is unreliable because DOD does not
have accurate or complete cost and patient care information. DOD
developed its estimate using an actuarial model that relies on
historical information about the retiree population and the numbers,
types, and costs of medical services provided to them. The model also
uses economic, actuarial, and other assumptions, such as future
interest rates and projected rate increases for medical costs.
Improvements to the underlying data or assumptions can
significantly change the liability estimate. DOD has made meaningful
progress in improving the processes and underlying data on which its
liability is based. For example, when better and more complete data
about DOD's population, medical care costs, and outpatient clinic usage
were used in the model in fiscal year 1999, the revised estimate was
lower by $37.5 billion, or nearly 17 percent, than the fiscal year 1998
estimate.
DOD has used its health care model to determine the long-term
impacts of some benefit changes; for example, DOD recently calculated
the long-term change in the liability of a proposal to provide
eligibility for purchased care to retirees over 65. With better
underlying data and some refinements to its methodology, DOD's model
could be a valuable tool to both the department and the Congress for
estimating the short-term, as well as long-term, budgetary impacts of
complex changes to the retiree health benefits program. DOD has been
using a similar model to calculate its long-term liability for military
retiree pensions for many years, and both DOD and the Congressional
Budget Office rely on the model to analyze the impact of changes to the
retirement program.
As we testified in May 2000, DOD needs to improve the underlying
data used by the model. First, DOD needs actual cost data for its
military treatment facilities. DOD has been using budget obligation
information as a surrogate; however, obligations do not reflect the
full cost of providing health care because they do not, for example,
include civilian employee retirement benefits that are paid directly
out of the Civil Service Retirement and Disability Fund rather than by
DOD. Nor do obligations include depreciation costs for medical
facilities and equipment. In addition, DOD needs to improve the
accessibility and reliability of its patient workload information. The
DOD IG has reported\26\ that medical services could not be validated
either because the medical records were not available or outpatient
visits were not adequately documented. The DOD IG also reported that
outpatient visits are often double counted and that many telephone
consultations have been incorrectly counted as visits. An accurate
count of patient visits by clinic and type is necessary for DOD to make
the proper allocations of medical personnel, supplies, and funding. DOD
has been working with the audit community on health care cost and
workload data deficiencies and currently has several improvement
efforts underway. DOD has been using examples of blatant data errors,
such as negative costs for some surgery clinics and obstetric services
provided to male patients, to stress to its own staff and to health
care contractors the importance of its improvement efforts.
We are currently working with a contractor to assess DOD's retiree
health benefits estimation methodology, and preliminary results
indicate several areas where the model could be refined. DOD is
currently assessing the feasibility and impact of making the following
types of refinements.
Pharmacy costs for retirees are currently not segregated
from those of non-retirees, even though preliminary evidence suggests
that retirees use more outpatient pharmacy resources. Also, the future
trend rate used by DOD for pharmacy costs is the same as that for
general medical costs, even though we previously estimated that DOD
pharmacy costs increased 13 percent from 1995 through 1997 while its
overall health care costs increased only 2 percent for the same
period.\27\
In the past, DOD has assumed that numbers and types of
clinic visits are adequate measures of outpatient health care usage for
purposes of allocating health care costs to retiree and active duty
populations; however, additional work may show that diagnosis related
information is a better indicator of health resources usage because
retirees may have more complicated diseases and therefore require
longer and more resource intensive procedures.
DOD's model currently does not calculate separate
liabilities for retirees under and over 65 years old. DOD applies the
same cost and economic assumptions to the two groups even though
Medicare eligible retirees are offered different benefits than retirees
under age 65 and therefore, their behavior, needs, and costs could be
quite different.
CONTROL AND ACCOUNTABILITY FOR ASSETS IMPAIRED
DOD relies on various information systems to carry out its
important stewardship responsibility over an estimated $1 trillion in
physical assets, ranging from multimillion dollar weapon systems to
enormous inventories of ammunition, stockpile materials, and other
military items. These systems are the primary source of information for
(1) maintaining visibility over assets to meet military objectives and
readiness goals and (2) financial reporting. However, these systems
have material weaknesses that, in addition to hampering financial
reporting, impair DOD's ability to maintain central visibility over its
assets and prevent the purchase of assets already on hand. Overall,
these weaknesses can seriously diminish the efficiency and economy of
the military services' support operations. In addition, DOD's systems
are not designed to capture the full cost of its assets, a major
component in determining the total costs of its programs and
activities. If reliable, such costs could be important tools for
oversight and performance measurement.
Significant weaknesses in accountability and cost information for
DOD's three major categories of assets include the following.
Weapons systems--The reported cost of this equipment in fiscal year
1997--the last year for which such information was reported on DOD's
balance sheet--was more than $600 billion. We have previously
testified\28\ that many of the military services' logistics information
systems used to track and support weapon systems and support equipment
were unable to be relied on. DOD continues to experience problems in
accumulating and reporting accurate information on its national defense
equipment.
For example, because the military services cannot identify all of
their assets through a centralized system, each service had to
supplement its automated data with manual procedures to collect the
information. Items identified as a result of the fiscal year 1999 data
call that were not included in the Army's centralized systems included
56 airplanes, 32 tanks, and 36 Javelin command-launch units. In
addition, the military services have historically been unable to
maintain information on additions and deletions for most of their
national defense assets. While some progress has been made toward
improving this data, auditors found that much of it was still
unreliable for fiscal year 1999. Reliable information on additions and
deletions is an important internal control to ensure accountability
over assets. Without integrated accounting, acquisition, and logistics
systems to provide accounting controls over asset balances, this
control is even more important. For example, property managers should
be able to review information on additions to ensure that all assets
acquired are reported in logistics systems. If such a control is not in
place, DOD cannot have assurance that all items purchased are received
and properly recorded.
Because of the recognized problems with national defense asset
information, the audit community in the past year focused on supporting
and reviewing improvement efforts, rather than conducting any
significant tests of data and systems. Under the National Defense
Authorization Act for Fiscal Year 2000, the DOD Inspector General is
required to review national defense asset data submitted to the
Congress for fiscal year 1999. Such a review should help determine the
success of DOD's improvement efforts so far, as well as identify those
areas requiring further improvement.
In addition, DOD has acknowledged that the lack of a cost
accounting system is the single largest impediment to controlling and
managing weapon systems costs, including costs of acquiring, managing,
and disposing of weapons systems. Accurate information on the life-
cycle costs of weapon systems would allow DOD officials and the
Congress to make more fully informed decisions about which weapons, or
how many to buy.
Properly accounting for the revenue associated with the sale of
these assets has also been a significant financial management
challenge. Since October 1998, we have issued four reports identifying
internal control weaknesses in DOD's foreign military sales program
that includes sales of national defense assets and services to eligible
foreign countries. Most recently, on May 3, 2000, we reported\29\ that
the Air Force did not have adequate controls over its foreign military
sales to ensure that foreign customers were properly charged.
Specifically, our analysis of data contained in the Defense Finance and
Accounting Service's Defense Integrated Financial System as of July
1999, indicated that the Air Force might not have charged FMS customer
trust fund accounts for $540 million of delivered goods and services.
In performing a detailed review of $96.5 million of these
transactions, we found that the Air Force was able to reconcile about
$20.9 million. However, of the remaining $75.6 million, the Air Force
had either
failed to charge customer accounts ($5.1 million, 22
transactions);
made errors, such as incorrectly estimating delivery
prices ($44 million, 11 transactions); or
could not explain differences between the recorded value
of delivered goods and services and corresponding value of charges to
customer accounts. ($26.5 million or 19 transactions).
Inventory--DOD's inability to account for and control its huge
investment in inventories effectively has been an area of major concern
for many years. In its fiscal year 1999 financial statements, DOD
reported $128 billion in inventory and related property. The sheer
volume of DOD's on-hand inventories impedes the department's efforts to
accumulate and report accurate inventory data. We reported\30\ in our
January 1999 high-risk report on defense inventory management that the
department needs to avoid burdening its supply system with large
inventories not needed to support current operations or war reserves.
For example, our analysis of approximately $63 billion of DOD's
reported secondary inventory at September 30, 1999, showed that 58
percent of the reviewed items, or an estimated $36.9 billion, exceeded
these requirements. Further, during the fourth quarter of fiscal year
1999, only 2 of the Defense Logistics Agency's (DLA) 20 distribution
depots reported accuracy rates above 90 percent, and overall accuracy
was reported at 83 percent, with error rates ranging from 6 percent to
28 percent. DLA's goal is 95 percent accuracy. The lack of complete
visibility over inventories increases the risk that responsible
inventory item managers may request funds to obtain additional,
unnecessary items that may be on-hand but not reported.
Control weaknesses over inventory can lead to inaccurate reported
balances, which could affect supply responsiveness and purchase
decisions, and result in a loss of accountability. For example, during
a December 1999 visit to one Army ammunition depot, we found weak
internal controls over self-contained, ready-to-fire, handheld rockets,
a sensitive item requiring strict controls and serial number
accountability. As detailed in our recently issued report,\31\ we and
depot personnel identified 835 quantity and location discrepancies
associated with 3,272 rocket and launcher units contained in two
storage igloos. The depot had more items on hand than shown in its
records because of control weaknesses over receipt of items, and, in
some cases, the records had location errors. Depot management responded
immediately to our findings, and the depot subsequently accounted for
and corrected the inventory records of all the rocket and launcher
units. Regarding this problem, we identified potentially systemic
weaknesses in controls and lack of compliance with Federal accounting
standards and inventory system requirements and made recommendations to
the Army to establish and verify operating procedures to help ensure
that systemic weaknesses are corrected.
DOD has long-standing problems accumulating and reporting the full
costs associated with working capital fund operations that provide
goods and services in support of the military services, its primary
customers. The foundation for achieving the goals of these business-
type funds is accurate cost data, which are critical for management to
operate efficiently, measure performance, and maintain national defense
readiness.
With regard to inventory cost information, Federal accounting
standards require inventories to be valued based on historical costs or
a method that approximates historical costs. However, DOD systems do
not capture the information needed to report historical cost. Instead,
inventory records and accounting transactions are maintained at a
latest acquisition cost or a standard selling price. Inventory levels
are also reported to the Congress at latest acquisition cost. Although
latest acquisition cost data may be important for budget projection and
purchase decisions, this information may not be appropriate for
performance measurement. Latest acquisition cost can substantially
differ from the cost paid for the item. To illustrate how this occurs,
assume a military service had 10 items that cost $10 each, so each item
would be valued at $10, or at $100 in total. However, if the service
then purchased 1 new item at $25, all 11 items would be valued based
upon the latest purchase price of $25, or $275 in total. The former
Commander of Air Force Materiel Command testified in October 1999 that
such valuation practices distort DOD's progress toward reducing
inventory levels and impact Congressional funding decisions.\32\ The
Commander stated the following.
``Part of the problem was accounting policy. * * * Each year,
inventories of old spare parts were increased in value to reflect their
latest acquisition price (the normal commercial practice is to deflate,
not inflate, the value of long term assets). Many supply managers who
faithfully disposed of unneeded inventory were surprised at the end of
the year to see their total inventory value increase. As a result, they
were subject to great pressure to further reduce inventory levels. * *
* The new spares were needed but funding restrictions prevented
purchase of these parts for several years.''
Overall, the effect of increasing prices can be demonstrated by
noting that the Air Force's $32.6 billion of inventory at latest
acquisition cost is revalued to $18.3 billion to reflect estimated
historical costs.
Real and personal property--Audit tests of real property
transactions, additions, deletions, and modifications that occurred
during fiscal year 1999 indicated that DOD continues to lack the
necessary systems and processes to ensure that its real property assets
are promptly and properly recorded in its accountability databases. For
example, Army auditors reviewed about $408 million in real property
transactions recorded during fiscal year 1999 and determined that $113
million of those transactions should have been posted in prior fiscal
years. Army auditors also identified $43 million in unrecorded real
property transactions.\33\ In addition, recent audits by the military
service auditors have continued to find that while DOD regulations
require periodic physical inventories and inspections--a critical
control in safeguarding assets--they are not always performed as
required. Air Force auditors reported that real property personnel did
not perform required inventories at 34 of 99 installations audited in
fiscal year 1999. To illustrate the benefit of physical inventories,
while implementing the Navy's new accountability system, the number of
assets recorded in the accountability database at one Marine Corps
location alone increased by over 35 percent as result of wall-to-wall
inventories.
In addition, because DOD does not have the systems and processes in
place to reliably accumulate costs, it is unable to account for several
significant costs of its operations, including its facilities and
equipment. Comprehensive and reliable asset financial information is
necessary for determining the full cost of operations and can be useful
for anticipating the need for additional budgetary resources.
An analysis of reported asset balances and related depreciation\34\
can provide additional information to review specific budget requests.
For example, the Navy reported that 85 percent, or approximately $1.2
billion of its $1.4 billion of depreciated equipment reported on its
fiscal year 1998 financial statements, was fully depreciated. If Navy's
financial information accurately reflected asset accountability and
utilization periods, this information could be used as a factor in
analyzing Navy's funding requests. Specifically, if the Navy's fiscal
year 1998 information were accurate, it would indicate that most of the
Navy's equipment is at or beyond its anticipated utilization period.
This type of information could help support a funding request or,
absent such a request, could be used to question whether operations
would be impaired by the lack of needed capital equipment.
DOD NET COST INFORMATION IS UNRELIABLE
Our audit of the U.S. government's consolidated financial
statements for fiscal year 1999 found that the government was unable to
support significant portions of the $1.8 trillion reported as the total
net cost of government operations. Federal accounting standards require
Federal agencies to accumulate and report on the full costs of their
activities.\35\ DOD, which represents $378 billion of the $1.8
trillion, was not able to support its reported net costs. Although we
have seen some improvements in DOD's ability to produce reliable
financial information, as noted throughout this testimony and discussed
in greater detail in my May 9, 2000, testimony, capturing and
accurately reporting the full cost of its programs remains one of the
most significant challenges DOD faces.
DOD needs reliable systems and processes to appropriately capture
the required cost information from the hundreds of millions of
transactions it processes each year. To do so, DOD must perform the
basic accounting activities of entering these transactions into systems
that conform to established systems requirements, properly classifying
transactions, analyzing data processed in its systems, and reporting in
accordance with requirements. As I will discuss later, this will
require properly trained personnel, simplified processes, modern
integrated systems supporting operational and accounting needs, and a
disciplined approach for accomplishing these steps.
Because it does not have the systems and processes in place to
reliably accumulate costs, DOD is unable to account for several
significant costs of its operations, as discussed in this testimony. As
I have highlighted today, the accuracy of the department's reported
operating costs was affected by DOD's inability to
complete the reconciliation of its records with those of
the Department of the Treasury,
identify the full extent of its environmental and disposal
liability,
determine its liability associated with post-retirement
health care for military personnel,
properly value and capitalize its facilities and
equipment, and
properly account for and value its inventory.
In addition, DOD did not have adequate managerial cost accounting
systems in place to collect, process, and report its $378 billion in
total reported fiscal year 1999 net operating costs by program area
consistent with Federal accounting standards.\36\ Instead it used
budget classifications, such as military construction, procurement, and
research and development, to present its cost data. In general, the
data DOD reported in its financial statements represented disbursement
data for those budgetary accounts, adjusted for estimated asset
purchases and accruals. For financial reports other than the financial
statements, DOD typically uses obligation data as a substitute for
cost. As I stated earlier, DOD budget data are also unreliable.
To manage DOD's programs effectively and efficiently, its managers
need reliable cost information. This information is necessary to (1)
evaluate programs, such as by measuring actual results of management's
actions against expected savings or determining the effect of long-term
liabilities created by current programs, (2) make economic choices,
such as whether to outsource specific activities and how to improve
efficiency through technology choices, (3) control costs for its
weapons systems and business activities funded through the working
capital funds, and (4) measure performance.
The lack of reliable, cost-based information hampers DOD in each of
these areas as illustrated by the following examples.
DOD is unable to provide actual data to fully account for
the costs associated with functions studied for potential outsourcing
under OMB Circular A-76. We reported last year on a long-standing
concern over how accurately DOD's in-house cost estimates used in A-76
competitions reflect actual costs.\37\
DOD has acknowledged that its Defense Reform Initiative
efforts have been hampered by limited visibility into true ownership
costs of its weapons systems. Specifically, the department cited
inconsistent methods used by the military services to capture support
cost data and failure to include certain costs as limiting the utility
of existing weapons system cost data. As noted previously, DOD has also
acknowledged that the lack of a cost accounting system is the single
largest impediment to controlling and managing weapon systems costs,
including costs of acquiring, managing, and disposing of weapon
systems.
DOD has long-standing problems accumulating and reporting
the full costs associated with its working capital fund operations,
which provide goods and services in support of the military services.
Cost is a key performance indicator to assess the efficiency of working
capital fund operations. For example, we recently reported\38\ that the
Air Force's Air Mobility Command--which operated using a working
capital fund--lacked accurate cost information needed to set rates to
charge its customers and assess the economy and efficiency of its
operations. We separately reported that Air Force depot maintenance
officials acknowledged that they lack all the data needed to
effectively manage their material costs.\39\ As a result, DOD is unable
to reliably assess the economy and efficiency of its business-like
activities financed with working capital funds.
integrated financial management system using year 2000 approach
Establishing an integrated financial management system--including
both automated and manual processes--will be key to reforming DOD's
financial management operations. DOD has acknowledged that its present
system has long-standing inadequacies and does not, for the most part,
comply with Federal system standards. DOD has set out an integrated
financial management system goal. Further, the department is now well-
positioned to adapt the lessons learned from addressing the Year 2000
issue and our recently issued survey of the best practices of world-
class financial management organizations\40\ and to use the information
technology investment criteria included in the Clinger-Cohen Act of
1996.
INTEGRATED FINANCIAL MANAGEMENT SYSTEM NEEDED
Establishing an integrated system is central to the framework for
financial reforms set out by the Congress in the Chief Financial
Officers (CFO) Act of 1990 and the Federal Financial Management
Improvement Act (FFMIA) of 1996. Specifically, among the requirements
of the CFO Act is that each agency CFO develop an integrated agency
accounting and financial management system. Further, FFMIA provided a
legislative mandate to implement and maintain financial management
systems that substantially comply with Federal financial management
systems requirements, including the requirement that Federal agencies
establish and maintain a single, integrated financial management
system.\41\
The department faces a significant challenge in integrating its
financial management systems because of its size and complexity and the
condition of its current financial management operations. DOD is not
only responsible for an estimated $1 trillion in assets and
liabilities, but also for providing financial management support to
personnel on an estimated 500 bases in 137 countries and territories
throughout the world. DOD has also estimated that it makes $24 billion
in monthly disbursements, and that in any given fiscal year, the
department may have as many as 500 or more active appropriations. Each
service operates unique, nonstandard financial processes and systems.
In describing the scope of its challenge in this area, DOD recognized
that it will not be possible to reverse decades-old problems overnight.
DOD submitted its first Financial Management Improvement Plan to
the Congress on October 26, 1998. We reported\42\ that DOD's plan
represented a great deal of effort and provided a first-ever vision of
the department's future financial management environment. In developing
this overall concept of its envisioned financial management
environment, DOD took an important first step in improving its
financial management operations. DOD's 1999 update to its Financial
Management Improvement Plan set out an integrated financial management
system as the long-term solution for establishing effective financial
management. As part of its 1999 plan, DOD reported that it relies on an
inventory of 168 systems to carry out its financial management
responsibilities. This financial management systems inventory includes
98 finance and accounting systems and 70 critical feeder systems--
systems owned and operated by functional communities throughout DOD,
such as personnel, acquisition, property management, and inventory
management. The inclusion of feeder systems in the department's
inventory of financial management systems is a significant landmark
because of the importance of the programmatic functions to the
department's ability to carry out not only its financial reporting but
also its asset accountability responsibilities. The department has
reported that an estimated 80 percent of the data needed for sound
financial management comes from these feeder systems. However, DOD has
also acknowledged that, overall, its financial management systems do
not comply with the FFMIA Federal financial management systems
requirements.
DOD presently lacks the integrated, transaction-driven, double
entry accounting systems that are necessary to properly control assets
and accumulate costs. As a result, millions of transactions must be
keyed and rekeyed into the vast number of systems involved in a given
business process. To illustrate the degree of difficulty that DOD faces
in managing these complex systems, the following figure shows for one
business area--contract and vendor payments--the number of systems
involved and their relationship to one another.
In addition to the 22 financial systems involved in the contract
payment process that are shown in figure 1, DFAS has identified many
other critical acquisition systems used in the contract payment process
that are not shown on this diagram. To further complicate the
processing of these transactions, each transaction must be recorded
using a nonstandard, complex line of accounting that accumulates
appropriation, budget, and management information for contract
payments. Moreover, the line of accounting code structure differs by
service and fund type. For example, the following line of accounting is
used for the Army's Operations and Maintenance appropriation.
2162020573106325796.bd26fbqsupca200gre12340109003ab22wornaas34030
Because DOD's payment and accounting processes are complex, and
generally involve separate functions carried out by separate offices
using different systems, the line of accounting must be manually
entered multiple times, which compounds the likelihood of errors. An
error in any one character in such a line of code can delay payment
processing or affect the reliability of data used to support management
and budget decisions. In either case, time-consuming research must then
be conducted by DOD staff or by contractor personnel to identify and
correct the error. Over a period of 3 years, one DOD payment center
spent $28.6 million for a contractor to research such errors.
The combination of nonintegrated systems, extremely complex coding
of transactions, and poor business processes have resulted in billions
of dollars of adjustments to correct transactions processed for
functions such as inventory and contract payments. As stated
previously, during fiscal year 1999, almost one of every three dollars
in contract payment transactions was made to adjust a previously
recorded transaction. In addition, the DOD IG found that $7.6 trillion
of adjustments to DOD's accounting transactions were required last year
to prepare DOD's financial statements.
DOD ADOPTS YEAR 2000 APPROACH
As we testified last year, DOD has a unique opportunity to
capitalize on the valuable lessons it has learned in addressing the
Year 2000 issue and apply them to its efforts to reform financial
management. The Year 2000 approach is based on managing projects as
critical investments and uses a structured five-phase process,
including awareness, assessment, renovation, validation, and
implementation. Each phase represents a major program activity or
segment that includes (1) specific milestones, (2) independent
validation and verification of system compliance, and (3) periodic
reporting on the status of technology projects. During the department's
Year 2000 effort, DOD followed this structured approach and (1)
established interim dates or milestones for each significant aspect of
the project, (2) used auditors to provide independent verification and
validation of systems compliance, and (3) periodically reported the
status of its efforts to OMB, the Congress, and the audit community.
To successfully adapt this structured, disciplined process to DOD's
current financial management improvement initiatives, DOD must ensure
that the lessons learned in addressing the Year 2000 effort and from
our financial management best practices survey are effectively applied.
In this regard, two important lessons should be drawn from the Year
2000 experience--the importance of (1) focusing on process improvement
instead of systems compliance and (2) strong leadership at the highest
levels of the department to ensure the reform effort becomes an
entitywide priority.
END-TO-END BUSINESS PROCESS FOCUS
Establishing the right goal is essential for success. Initially,
DOD's Year 2000 focus was on information technology and systems
compliance. This process was geared toward ensuring compliance system
by system and did not appropriately consider the interrelationship of
all systems within a given business process. However, DOD eventually
shifted to a core mission and function approach and greatly reduced its
Year 2000 risk through a series of risk mitigation measures including
123 major process end-to-end evaluations. Through the Year 2000
experience, DOD has learned that the goal of systems improvement
initiatives should be improving end-to-end business processes, not
systems compliance.
This concept is also consistent with provisions of the Clinger-
Cohen Act of 1996 and related system and software engineering best
practices, which provide Federal agencies with a framework for
effectively managing large, complex system modernization efforts. This
framework is designed to help agencies establish the information
technology management capability and controls necessary to effectively
build modernized systems. For example, the act requires agency chief
information officers to develop and maintain an integrated system
architecture. Such an architecture can guide and constrain information
system investments, providing a systematic means to preclude
inconsistent system design and development decisions and the resulting
suboptimal performance and added cost associated with incompatible
systems. The act also requires agencies to establish effective
information technology investment management processes whereby (1)
alternative solutions are identified, (2) reliable estimates of project
costs and benefits are developed, and (3) major projects are structured
into a series of smaller increments to ensure that each constitutes a
wise investment.
The financial management concept of operations included in DOD's
Financial Management Improvement Plan should fit into the overall
system architecture for the department developed under the provisions
of the Clinger-Cohen Act. In addition, the goal of DOD's Financial
Management Improvement Plan should be to improve DOD's business
processes in order to provide better information to decisionmakers and
ensure greater control and accountability over the department's assets.
However, we reported last year,\43\ the vision and goals the department
established in its Financial Management Improvement Plan fell short of
achieving basic financial management accountability and control and did
not position DOD to adopt financial management best practices in the
future.
Although the 1999 improvement plan includes more detailed
information on the department's hundreds of improvement initiatives,
the fundamental challenges we highlighted last year remain.
Specifically, a significant effort will be needed to ensure that future
plans address (1) how financial management operations will effectively
support not only financial reporting but also asset accountability and
control, (2) how financial management ties to budget formulation, (3)
how the planned and ongoing improvement initiatives will result in the
target financial management environment, and (4) how feeder systems'
data integrity will be improved--an acknowledged major deficiency in
the current environment.
For example, to effectively support accountability and control,
DOD's plan needs to define each of its business processes and discuss
the interrelationships among the functional areas and related systems.
To illustrate, the plan should address the entire business process for
property from acquisition to disposal and the interrelationships among
the functional areas of acquisition, property management, and property
accounting.
In its 1999 Financial Management Improvement Plan, dated September
1999, the department announced its intention to develop a ``Y2K like''
approach for tracking and reporting the CFO compliance of its financial
management systems, including critical feeder systems. However, the
department currently has hundreds of individual initiatives aimed at
improving financial management, many of which were begun prior to the
decision that a Year 2000 approach would be used for financial
management reform. These decentralized, individual efforts must now be
brought under the disciplined structure envisioned by the Clinger-Cohen
Act and used previously during the department's Year 2000 effort. Doing
so will ensure that further investments in these initiatives will be
consistent with Clinger-Cohen Act investment criteria and that the
department's financial management reform efforts focus on entire
business processes and needed process improvements.
Because of the extraordinarily short time frames involved for the
Year 2000 effort, the department rarely had the opportunity to evaluate
alternatives such as eliminating systems and reengineering related
processes. DOD has established a goal of September 30, 2003, for
completing its financial management systems improvement effort. This
time frame provides a greater opportunity to consider all available
alternatives, including reengineering business processes in conjunction
with the implementation of new technology, which was envisioned by the
Clinger-Cohen Act.
STRONG DEPARTMENT-LEVEL LEADERSHIP
Lessons learned from the Year 2000 effort and from our survey of
leading financial management organizations also stressed the importance
of strong leadership from top leaders. Both these efforts pointed to
the critical role of strong leadership in making any goal--such as
financial management and systems improvements--an entitywide priority.
As we have testified many times before, strong, sustained executive
leadership is critical to changing the culture and successfully
reforming financial management at DOD. Although it is the
responsibility of the DOD Comptroller, under the CFO Act, to establish
the mission and vision for the future of DOD financial management, the
department has learned through its Year 2000 effort that major
initiatives that cut across DOD components must have the leadership of
the Secretary and Deputy Secretary of Defense to succeed. In addition,
our best practices work has shown that chief executives similarly need
to periodically assess investments in major projects in order to
prioritize projects and make sound funding decisions.
Improving DOD financial management is a managerial, as well as
technical, challenge. The personal involvement of the Deputy Secretary
played an important role in building entitywide support for Year 2000
initiatives by linking these improvements to the warfighting mission.
To energize DOD, the Secretary of Defense directed the DOD leadership
to treat Year 2000 as a readiness issue. This turning point ensured
that all DOD components understood the need for cooperation to achieve
success in preparing for Year 2000 and it galvanized preparedness
efforts.
Similarly, to gain DOD-wide support for financial management
systems initiatives, DOD's top leadership must link the improvement of
financial management to DOD's mission. For example, DOD stated in its
Defense Reform Initiative that improved business practices will
eventually provide a major source of funding for weapon system
modernization. This can occur through reductions in the cost of
performing these activities as well as through efficiencies gained
through better information. To ensure that this mission objective is
realized will require top leadership involvement to reinforce the
relationship between good financial management and improved mission
performance. To build this support across the organization, many
leading organizations have developed education programs that provide
financial managers a better understanding of the business problems and
nonfinancial managers an appreciation of the value of financial
information to improved decision-making. As discussed below, DOD is
taking these first steps in providing training to its financial
personnel, and DOD officials have recently stated that their next
annual financial management improvement plan will begin to address the
need for financial management training for nonfinancial managers.
STRATEGIC HUMAN CAPITAL INVESTMENT INTEGRAL TO REFORM
An integral part of financial and information management is
building, maintaining, and marshaling the human capital needed to
achieve results. While DOD has several initiatives underway directed at
improving the competencies and professionalism of its financial
management workforce, it has not yet embraced a strategic approach to
improving its financial management human capital. Our recently issued
guide on the results of our survey of the best practices of recognized
world-class financial management organizations shows that a strategic
approach to human capital is essential to reaching and maintaining
maximum performance.
DOD's 1999 Financial Management Improvement Plan recognized the key
role of financial management training in ensuring that the department
has a qualified and competent workforce. The DOD Comptroller recently
issued a memorandum to the department's financial management community
emphasizing the importance of professional training and certification
in helping to ensure that its financial managers are well-qualified
professionals. Consistent with this recent emphasis, the department has
begun several initiatives aimed at improving the professionalism of its
financial management workforce. For example, DFAS contracted to have
government financial manager training developed by the Association of
Government Accountants provided to several thousand of its employees
over the next 5 years. This training is aimed at enhancing
participants' knowledge of financial management and can then be used to
prepare for a standardized exam to obtain a professional certification,
such as the Certified Government Financial Manager (CGFM)\44\--a
designation being encouraged by DOD management.
In another initiative, undertaken in conjunction with the American
Society of Military Comptrollers, the department reports that it
expects to have its own examination-based certification program for a
defense financial manager in place in the near future. The department
has contracted with the USDA Graduate School--a continuing education
institution--to provide financial management training to an estimated
2,000 DOD financial personnel in fiscal year 2000 and thousands more
over the next 5 years. The department reports that this training will
be directed at helping participants to develop sufficient knowledge so
that they can demonstrate competencies in governmentwide accounting and
financial management systems requirements as they are applied in the
DOD financial management environment.
The department is faced with a considerable challenge if it is to
improve its financial management human capital to the performance-based
level of financial management personnel operating as partners in the
management of world-class organizations. While DOD's financial
personnel are now struggling to effectively carry out day-to-day
transaction processing, personnel in world-class financial management
organizations are providing analysis and insight about the financial
implications of program decisions and the impact of those decisions on
agency performance goals and objectives. To help agencies better
implement performance-based management, we have identified common
principles that underlie the human capital strategies and practices of
leading private sector organizations.\45\ Further, we have issued a
human capital self-assessment checklist for agency leaders to use in
taking practical steps to improve their human capital practices.\46\
In closing, as we have noted throughout this testimony, DOD
continues to make incremental improvements to its financial management
systems and operations. At the same time, the department has a long way
to go to address the remaining problems. Overhauling DOD's financial
systems, processes, and controls and ensuring that personnel throughout
the department share the common goal of improving DOD financial
management, will require sustained commitment from the highest levels
of DOD leadership--a commitment that must extend to the next
administration.
Mr. Chairman, this concludes my statement. We will be glad to
answer any questions you or the other Members of the Task Force may
have at this time.
ENDNOTES
1. Department of Defense: Progress in Financial Management Reform
(GAO/T-AIMD/NSIAD-00-163, May 9, 2000).
2. High-Risk Series: An Overview (GAO/HR-95-1, Feb. 1995), High-
Risk Series: Defense Financial Management (GAO/HR-97-3, Feb. 1997), and
Major Management Challenges and Program Risks: A Governmentwide
Perspective (GAO/OCG-99-1, Jan. 1999).
3. A suspense account is a temporary holding account for problem
transactions involving both collections and disbursements--for example,
those rejected because of system edit controls.
4. Department of Defense: Status of Financial Management Weaknesses
and Actions Needed to Correct Continuing Challenges (GAO/T-AIMD/NSIAD-
99-171, May 4, 1999).
5. Financial Management: Differences in Army and Air Force
Disbursing and Accounting Records (GAO/AIMD-00-2-, Mar. 7, 2000).
6. The Antideficiency Act provides that an officer or employee of
the United states Government may not ``make or authorize an expenditure
or obligation exceeding an amount available in an appropriation or
fund'' or enter into a contract or other obligation for payment of
money ``before an appropriation is made.'' (31 U.S.C. 1341 (a)).
7. The bona fide needs rule, based on 31 U.S.C. 1502(a), requires
that agencies use appropriations available for obligation for a limited
period of time to meet the legitimate needs of the agency arising
during that period of time.
8. Under the account closing law, 31 U.S.C. 1551-1558, agencies
must continue to account for the obligated and unobligated balances of
their appropriations for 5 years after the expiration of their period
of availability. At the end of 5 years, appropriation balances, both
obligated and unobligated, are canceled. After that time, they are no
longer available for obligation, obligation adjustment, or expenditure
for any purposes. Because these accounts are no longer available for
disbursement, they are not reported as part of DOD's Fund Balance with
Treasury or in the department's Status of Funds reports to OMB or the
Congress.
9. 72 Comp. Gen. at 343 (1993).
10. 72 Comp. Gen. at 347 (1993).
11. Defense Finance and Accounting Service reports to the DOD
Comptroller on problem disbursements and in-transits as of September
30, 1999.
12. Negative unliquidated obligations (NULOs) are disbursements
that have been received and posted to specific obligations by the
accounting station, but the recorded disbursements exceed the recorded
obligations.
13. Financial Management: Problems in Accounting for Navy
Transactions Impair Funds Control and Financial Reporting (GAO/AIMD-99-
19, Jan. 19, 1999) and Recording Obligations in Official Accounting
Records (DOD IG Report No. D-2000-030, Nov. 4, 1999).
14. Army's General Fund Principal Financial Statements for Fiscal
Year 1999, Financial Reporting of Budgetary Resources (U.S. Army Audit
Agency Report No. AA 00-223, Apr. 28, 2000).
15. Opinion on Fiscal Year 1999 Air Force Working Capital Fund
Financial Statements (Air Force Audit Agency Report No. 99068011, Feb.
9, 2000).
16. The Federal Managers' Financial Integrity Act of 1982 requires
Federal agencies to annually assess controls and report on internal
control and accounting system deficiencies, along with the status of
related corrective actions.
17. Statements of Federal Financial Accounting Standards No. 5,
Accounting for Liabilities of the Federal Government and No. 6,
Accounting for Property, Plant, and Equipment.
18. Hazardous Material Management for the Black Hawk Helicopter
Program (DOD IG Report No. 99-242, Aug. 23, 1999) and Hazardous
Material Management for the F-15 Aircraft Program (DOD IG Report No.
00-012, Oct. 15, 1999).
19. Report on the Fiscal Year 1995 Defense Appropriations Bill
(Senate Committee on Appropriations, Senate Report 103-321, July 29,
1994).
20. Budget Issues: Effective Oversight and Budget Discipline Are
Essential-Even in a Time of Surplus (GAO/T-AIMD-00-73, Feb. 1, 2000).
21. The Department of the Navy reported an estimated disposal
liability for all nuclear submarines, both active and inactive and
awaiting disposal, of $5.6 billion as of September 30, 1999. To
determine the portion of the total reported $5.6 billion liability that
applied to inactive submarines awaiting disposal, we divided the $5.6
billion by the total number of active and inactive submarines reported
in the Naval Vessel Register to arrive at an estimated disposal cost
per submarine of about $49 million. Applying this average cost to the
reported number of inactive submarines awaiting disposal, we estimated
a cost of $1.6 billion to dispose of decommissioned submarines awaiting
disposal.
22. Chemical Weapons Disposal: Improvements Needed in Program
Accountability and Financial Management (GAO/NSIAD-00-80, May 8, 2000).
23. The Medicare Subvention demonstration allows retirees over 65
to use their Medicare benefit to receive care from DOD and Medicare
will reimburse DOD for a portion of the cost of that care. The TRICARE
Senior Supplement project allows older retirees to use TRICARE programs
to supplement their Medicare coverage, including coverage of
prescription drugs.
24. DOD's health benefits liability represents the present value
cost of providing future health care benefits to current retirees and
their dependents as well as to that segment of current active duty
personnel and their dependents that DOD estimates will retire from the
military. This estimate generally extends for the lifetimes or covered
periods of eligible beneficiaries.
25. Department of Defense: Progress in Financial Management Reform
(GAO/T-AIMD/NSIAD-00-163, May 9, 2000).
26. Data Supporting the FY 1998 DOD Military Retirement Health
Benefits Liability Estimate (DOD IG Report No. 99-127, Apr. 7, 1999).
27. Defense Health Care: Fully Integrated Pharmacy System Would
Improve Service and Cost-Effectiveness (GAO/HEHS-98-176, June 12,
1998).
28. DOD Financial Management: More Reliable Information Key to
Assuring Accountability and Managing Defense Operations More
Efficiently (GAO/T-AIMD/NSIAD-99-145, Apr. 14, 1999).
29. Foreign Military Sales: Air Force Controls Over the FMS Program
Need Improvement (GAO/AIMD-00-101, May 3, 2000).
30. Major Management Challenges and Program Risks: Department of
Defense (GAO/OCG-99-4, Jan. 1999).
31. DOD Inventory: Weaknesses in Controls Over Category I Rockets
(GAO/AIMD-00-62R, Apr. 13, 2000).
32. Statement of General George T. Babbitt, USAF, Commander, Air
Force Materiel Command, Before the Subcommittee on Military Readiness,
Committee on Armed Services, House of Representatives, October 7, 1999.
33. Army's General Fund Principal Financial Statements for Fiscal
Year 1999, Summary Audit Report (Army Audit Agency Report No. AA 00-
168, Feb. 9, 2000).
34. Depreciation recognizes the cost of assets over the estimated
period of time they are expected to be used in operations, rather than
at the time of acquisition.
35. Statement of Federal Financial Accounting Standards No. 4 ,
Managerial Cost Accounting Standards, requires accumulating the full
cost associated with an entity's output through appropriate costing
methodologies or cost-finding techniques.
36. Statement of Federal Financial Accounting Standards No. 4,
Managerial Cost Accounting Standards (July 31, 1995) and Internal
Controls and Compliance With Laws and Regulations for the DOD Agency-
Wide Financial Statements for FY 1999 (DOD IG Report No. D-2000-091,
Feb. 25, 2000).
37. DOD Competitive Sourcing: Lessons Learned System Could Enhance
A-76 Study Process (GAO/NSIAD-99-152, July 21, 1999).
38. Defense Transportation: More Reliable Information Key to
Managing Airlift Services More Efficiently (GAO/NSIAD-00-6, Mar. 6,
2000).
39. Air Force Depot Maintenance: Analysis of Its Financial
Operations (GAO/AIMD/NSIAD-00-38, Dec. 10, 1999).
40. Executive Guide: Creating Value Through World-class Financial
Management (GAO/AIMD-00-134, Apr. 2000).
41. Office of Management and Budget Circular A-127 defines an
integrated financial management system as a unified set of financial
systems and the financial portions of mixed systems encompassing the
software, hardware, personnel, processes (manual and automated),
procedures, controls, and data necessary to carry out financial
management functions of an agency, manage financial operations of an
agency, and report on an agency's financial status to central agencies,
Congress, and the public.
42. Financial Management: Analysis of DOD's First Biennial
Financial Management Improvement Plan (GAO/AIMD-99-44, Jan. 29, 1999).
43. Financial Management: Analysis of DOD's First Biennial
Financial Management Improvement Plan (GAO/AIMD-99-44, Jan. 29, 1999).
44. The Certified Government Financial Manager (CGFM) is a
government financial manager professional certification awarded by the
Association of Government Accountants.
45. Human Capital: Key Principles From Nine Private Sector
Organizations (GAO/GGD-00-28, Jan. 31, 2000).
46. Human Capital: A Self-Assessment Checklist for Agency Leaders
(GAO/GGD-99-179, Sept. 1999).
Chairman Shays. I am going to recognize Mr. Thornberry.
I am just going to read one quote from your boss,
Comptroller General Walker, who said before the Budget
Committee, no part of DOD is able to pass the test of an
independent financial statement audit. Many have trouble
putting together a financial statement, much less having an
audited financial statement. Continuing financial management
problems have real consequences for program management and
resource allocation. For instance, DOD cannot properly account
for billions of dollars of basic transactions, leaving the
agency vulnerable to the misuse of appropriated funds.
Mr. Thornberry.
Mr. Thornberry [presiding]. Thank you, Mr. Chairman.
I appreciate the testimony from each of you.
It is hard to discuss this subject for regular folks and
not come away feeling like we are talking about accounting
moves and tending to make one's eyes glaze over, but it does
catch your attention when you talk about trillions of dollars
of accounting entries. And, Mr. Lieberman, in your testimony
you talked about as--in fiscal year '99, DOD financial
statements, as they try to go through, as I understand there
were $2.3 trillion worth of accounting entries that did not
have adequate backup information, is that right?
Mr. Lieberman. Yes, sir.
Mr. Thornberry. Now, that is hard to understand in a way,
because we only spend about $300 billion a year on defense.
But, as I understand it, it gets back to something Mr.
Steinhoff was talking about; and that is we don't enter this
information right the first time. We reenter it and reenter it
and reenter it, and you are talking about trillions of dollars
by the time you add it all up. Is that how we get to such huge
numbers?
Mr. Lieberman. Yes, that is a gross number. That portrays
how many adjustments are made to the automated record.
Mr. Thornberry. And I assume at each step of the way there
is room for error or mistakes--or at least confusion--if you
have to reenter each of these entries so many times to end up
to $7.6 trillion total in errors.
Mr. Lieberman. Sure. What we need is a seamless system
where the information moves from its source right into the
financial statements without having to be moved between
incompatible systems with some sort of jerry-rigged crosswalk
process.
Mr. Thornberry. Because I understand now one of the
problems now is DOD's books do not reconcile. They don't add up
with Treasury's books. So the Department of Treasury and
Department of Defense don't have the same numbers as far as how
much money they have got or how much money they spend, is that
right?
Mr. Lieberman. Yes, it is a chronic problem that actually
has major implications for the government-wide statement that
GAO audits.
Mr. Thornberry. Mr. Steinhoff, I think everybody on the
panel compares this situation with Y2K. And all of us were
relieved at the way that Y2K worked out, and obviously it took
an enormous effort. It took a fair amount of money by Congress.
It took a lot of time and attention from the top folks at every
Department. If you had to compare the magnitude of the
challenge of Y2K for the Department of Defense and the problems
we are talking about today for the Department of Defense, how
do they compare?
Mr. Steinhoff. I would say that this is a much greater
challenge.
Mr. Thornberry. How much greater?
Mr. Steinhoff. Severalfold. Y2K was really addressing a
specific aspect of the systems for which there was a big
unknown. People didn't quite know how a system would work in
that environment, and they had to go through and find out how
that system would work through analysis and end-to-end testing.
And they had to work with business partners.
For DOD's current system challenge, you are really talking
about revamping the entire management system. Mr. Lynn's plan
is 900 pages long. We have had some issues with it. We have
asked for more information. But he has a very comprehensive
plan covering the accounting systems that he controls. In
addition to that, you have all of the other systems, such as
the logistics systems, for which there are major initiatives
ongoing that must be integrated. This is a huge, huge
challenge.
Mr. Thornberry. Let me ask this--and I am just picking a
number out of the air. If you assume that this challenge is
three times bigger than the Y2K--and I am trying to be
conservative--are we spending three times the effort and three
times the money to solve the problem?
Mr. Steinhoff. What will be important here is that the
money be spent in a very wise manner. There have been literally
billions of dollars spent on systems in DOD, and we have
reported information systems development in DOD as a high-risk
area. They had a major initiative back in the '80's, the
corporate information management initiative where big dollars
were spent without getting the expected result.
I think that these efforts can be funded. But, it has to be
done following a disciplined process where DOD ends up with a
result from the money spent, that they don't go to point C
before they get to point B, and that it not be solely date
driven where you have to have it on line by a certain date
regardless of the risk. Of course, people have to be
accountable for meeting milestone dates, but it should be done
in a way where there is a disciplined process. And under
Clinger-Cohen and under the various investment guides, there
are, in essence, proven approaches to design and put in modern
systems, which is what DOD needs.
Mr. Thornberry. Mr. Lynn, let me ask you, you heard the
testimony that 80 percent of the problem of the information is
outside of your direct control. It is in other systems
throughout the Department that have to put the information in
that feed in to the accounting systems. I would be interested,
do you agree with that approximation? And, secondly, how are we
going to solve the 80 percent of the problem that is outside
your control and when are we going to solve it?
Mr. Lynn. I actually gave you the 80 percent number, Mr.
Thornberry. That is an accurate representation. We had set up a
Y2K process. We have signed the organizing memo this week. It
is going to require a cross-departmental process. I am going to
have to bring in the logistics, the acquisition, the medical
personnel people to solve this problem.
More importantly than that, though, we are going to have to
persuade them that solving the problem is going to help them do
their job. To get them to do all this work and spend all of
this money upgrading their systems, just to get a clean opinion
in my world, is not going to be persuasive to a logistician. I
have to persuade the logistician that the information that
supports that clean opinion is going to help that logistician
manage better. It is going to help him manage his inventory
better. It is going to help him make better decisions. It is
going to help him understand his costs. That is the crucial
step.
Mr. Thornberry. You talk about persuading him. It will help
him do his job better. Do you also need a stick to go with that
carrot? And I don't know exactly what it will be, but you don't
get more money unless you do it the right way or something.
Mr. Lynn. Being in charge of the Department's finances, I
am not short of sticks, in fact. So we have ways. But I do
believe this set of measures will help the logisticians, will
help the acquisition managers of the Department. I think it is
largely a matter of education and information. And indeed, not
again to be disrespectful, but part of that has to come over to
this side of the river in Congress.
We had an unfortunate problem with the defense bill this
year. Our major accounting system that we proposed for the Army
and for the Defense Agencies to try and help reform this system
was zero. We got no money. That is going to, frankly, set back
our reform efforts. It is great that this committee is having a
hearing. We need for, frankly, the other committees to take
ownership of this issue as well. It has gotten very little
notice, and we need for it to get more.
Mr. Thornberry. Let me just say I agree. The difficulty you
get is that either gets to be lack of confidence in the
Department's plans to solve a problem and, with such tremendous
other budget needs, then it becomes easier to take that money
and apply it somewhere else, to health care or wherever it is.
But this problem does have to be fixed, and we have to find
some way to restore confidence that not just you but the whole
Department from the very top all the way through is taking it
seriously and will solve it.
Mr. Lynn. And, Mr. Thornberry, that is exactly what we are
trying to do by working collaboratively with the outside
independent bodies, the GAO and the Inspector General. I think
they both testified that we are working together
collaboratively and making progress, and I hope that they would
share that information with these other committees because the
key to the solution is the systems. If we do not get these new
systems on line, there is no work around that will work in the
long run.
Mr. Thornberry. I appreciate it.
Ms. Hooley, would you like to go ahead? We have a vote on.
We may have to be coming and going some.
Ms. Hooley. I think a couple of people left to vote. I
don't think I'll have time to finish my questioning, but let me
at least start.
Let me ask you a question, Mr. Lynn. As I read the
information for today and looked at some of the problems, the
fact that one out of every three transactions needs an
adjustment, those are sort of alarming things. I also was
struck by the fact--and let me make sure that I am right on
this--that you had no audits before 1990, is that correct?
Mr. Lynn. It is even later than that. This is a very new
requirement.
Ms. Hooley. This is really the first time we have opened
the books and sort of discovered some of the problems that are
occurring.
Mr. Lynn. It is the first time we have looked at the books
this way, I think is the right way to say it. The books have
been treated for 200 years the way the Appropriations Committee
look at them in terms of appropriations titles and, in term of
obligations.
Ms. Hooley. Right, but if you look at sort of the whole
management and financial management, we have really not had a
system, is that right?
Mr. Lynn. The requirements for this kind of accounting are
new in the last 5 to 10 years, that is right. Really, prior to
this administration, very little had been done; and prior to
this Congress in the early '90's very little had been done.
Ms. Hooley. Let me ask you a question. I think the
appropriation was $306 billion for defense. I mean, and you
talk about trying to get that this year, Congress and the
Defense Department had zero for financial management.
Mr. Lynn. No, no, that is not true.
Ms. Hooley. Well, what did they have for financial
management?
Mr. Lynn. It is hard to break the budget down, but just,
simply put, the Defense Finance and Accounting Service, which
is the central agency for finance and accounting, had a budget
of about $1.7 billion.
Ms. Hooley. But for some of the improvements----
Mr. Lynn. That includes some of the improvements.
Ms. Hooley. OK. Is there a way from--I mean, can you--out
of this large of a budget, is there some way to peel off some
money from some other areas to help make some progress?
Mr. Lynn. That is exactly what we proposed. Unfortunately,
the Congress didn't approve the major move, which was a new
accounting system for the Army.
Ms. Hooley. OK.
Mr. Lynn. We proposed $46 million. Congress provided zero.
Ms. Hooley. I am going to leave, so if I can come back with
some questions. Thank you.
Chairman Shays [presiding]. This is our only panel, so we
will have some time to cover it pretty well.
I would like to go back to that $7.6 trillion; and I know,
Mr. Lieberman, you attempted to make some explanation. I just
want to make sure--we are basically looking--we are looking at
a total Federal budget of $1.7 trillion, a defense budget that
is basically $306 billion, and I want to know if this number
just represents all the transactions that take place in a $306
billion budget. In other words, is it buying fuel at wholesale,
moving it to different areas, then accounting it, going into
the planes, going into the trucks and so on? Is it just taking
that 306 and just saying there's so many transactions along the
way?
And what I would like, Mr. Lynn, for you to do is explain
to me how you view those DOD bookkeeping adjustments. Are those
mistakes, adjustments or just transactions, you know, 20
transactions times your budget? Mr. Lynn.
Mr. Lynn. Sure. Several----
Chairman Shays. First off, do you agree with this?
Mr. Lynn. I have no reason to question the audit.
The chart you have up there, of course, is apples and
oranges. You have bookkeeping adjustments on one side and the
budget on the other. What you would have to do if you wanted to
do an apples-to-apples chart is try and find the total number
of bookkeeping adjustments in the U.S. economy and put that
number--and it would be, I think, outstandingly high or the
total bookkeeping adjustments and the total Federal budget
would be similarly high. But I don't really think that is a
fair way to look at it.
Chairman Shays. Let us just look at it in terms of your
budget, which is admittedly gigantic, but it seems like a
tremendous amount of adjustments.
Mr. Lynn. It is a very large amount of adjustments. And I
think you were going in the right direction with your earlier
comments that it is the multiple stops that the money takes,
each one being recorded, that is the cause for the
multiplication for $306 million up to $7.6 trillion. In
addition to that, the financial statement includes long-term
liabilities. It includes a hundred years of medical
liabilities, a hundred years of environmental liabilities.
Those are in the hundreds of billions of dollars as well. So
that is outside of our $300 billion annual budget.
In a financial statement you try and look at your long-term
liabilities and make an assessment of those. You also look at
the value of your property, which is in the neighborhood of a
trillion dollars. Those, too, are included. So there is some
very large numbers on the DOD financial statement, and some of
them are on several times, which is how you get to that.
I think the core of your question, though, goes to what is
the meaning of the adjustments; and I think the meaning is the
bottom line of all of our testimony. The fundamental cause of
the adjustment is that we do not have a seamless system where
the transaction gets entered at one end and goes through a
series of automated steps to the financial statement. That is
what you would like to have. That is what we aspire to have. It
is the manual adjustments at each step that we have to now do
as a substitute for that seamless system that is the cause for
that adjustment. Achieving a seamless system is what we are
about with this Y2K process.
Chairman Shays. I would like both GAO and IG to make any
comment in regards to how I should interpret $7.6 trillion in
adjustments. I just want to know, is it mistakes or it is just
transactions multiplied?
Mr. Lieberman. Some of them are mistakes; some of them are
corrections of mistakes. About $602 billion worth of that $7.6
trillion represent adjustments made by the accountants in the
finance centers that are responsible for getting these feeder
reports from the field and putting them into the financial
statements. They recognize what they consider to be errors in
the incoming information and change it to try to fix it.
Chairman Shays. Would it be like with my checkbook? At the
end, I had my bank statement. I couldn't find the mistake. I
just accept it and start from what the bank says and go from
there.
Mr. Lieberman. When we are talking about unsupported
adjustments, yes, there are a lot of numbers plugged in to make
things add up or force them to match other records; and there
is no----
Chairman Shays. So we don't know why they don't add up.
Mr. Lieberman. No, we don't.
Chairman Shays. We just know they don't add up. Doesn't
that lend itself to tremendous potential for fraud?
Mr. Lieberman. At the level we are talking about, these
massive financial statements, I actually don't think that there
is much fraud vulnerability involved. The fraud vulnerability
is more worrisome in the inaccuracies and the records down at
the local level, in the contracting offices, the payroll
offices and, the personnel offices. If we are making payments
that we shouldn't be making or out of accounts that are
overdrawn and what have you, that is where the rubber hits the
road. What we are talking about here are compiling these end-
of-year financial statements and their massive roll-ups of
information.
I do think, though, that it is not fair to say we are
talking about comparing those bookkeeping adjustments to any
other bookkeeping adjustments by anybody in the United States.
What we are talking about here is this population of between
17,000 and 20,000 changes which we believe were made to the
end-year DOD financial statements. Now if you went to any of
the large corporations in the United States and asked them how
many adjustments they made on their end-year financial
statements, the answer would be somewhere between zero and
something that probably they could count on both hands.
Chairman Shays. Let me ask you, if they had to count them
on both hands, they would be severely criticized, wouldn't
they?
Mr. Lieberman. This is something they do indeed try to
avoid, and they would go back and question why their systems
were incapable of getting it right in the first place.
Chairman Shays. Mr. Steinhoff.
Mr. Steinhoff. I would agree with what has been said. A lot
of the data comes from data calls where, because a system can't
produce it, they call various activities and roll up the
amounts. And you will have activities that will report a zero
balance, and DOD will call to obtain the needed information.
For example, you have adjustments that result from taking
physical inventories and finding 35 percent more stock on hand.
There are many errors. I had mentioned in my summary
statement that out of $157 billion of payment transactions made
in fiscal year '99 that $51 billion of those represented an
adjustment to a previous transaction. Now those are outside
these adjustments, but that gives you some idea of the number
of changes they have to make because a system is very complex
and doesn't work well and the fact that they really don't have
accurate data on an ongoing basis. It really defies logic to
have $7.6 trillion in adjustments, as you said, with a budget
that is a small fraction of that.
Chairman Shays. But, Mr. Lynn, since we have two kind of
critiquing here, I don't mind you coming back if you have any
comment you want to make in regards to this.
Mr. Lynn. It is not really fair, two on one, is it?
I don't really disagree with the thrust of what they are
saying. I think what they are saying is that a bookkeeping
adjustment is not a measure of the budget. It is a measure of
the need for automation in the systems. It is also, I think, a
measure of just how new this requirement is.
I think the example I gave in my remarks was that when the
logistics managers want to replace inventory, they want to know
the latest acquisition cost. That is the number that is of the
most relevance to them.
That is not the number the auditors want. The auditors want
a historical cost so they can depreciate it. The logistic
manager is less interested in that. So the systems that we have
had to do inventory, in general, don't do that. They don't
record the historical costs. They can only keep one number.
They keep the latest acquisition cost. It takes a manual
adjustment, one of those adjustments, for a bookkeeper to look
and try and estimate what the historical cost is for the
financial statement.
Now what we need to do, and what we are doing, is to change
the inventory system so it records both numbers. That takes
time and money, and we are putting both against it.
Chairman Shays. Let me just say--Mr. Steinhoff, yes.
Mr. Steinhoff. What also makes that more difficult is that,
let us say the accounting wanted the latest acquisition, which
is what they purport to have, oftentimes the items aren't on
the system. So DOD has problems with recording all the assets
it owns, and then it has problems with valuation, and those end
up with a multiplicity of adjustments.
Chairman Shays. Let me just say, Mr. Lynn, in terms of
fairness, I have been with Mr. Steinhoff and Mr. Lieberman
where they have been far more harsh, so I think they are trying
to be very fair here. Because there is a lot you could say
about this. Let me just----
Mr. Lynn. Mr. Chairman, I am not suggesting they have been
anything but fair.
Chairman Shays. I just have one--let me just put up the
chart on Social Security.
A lot of people in the United States of America--and we do
that with nine digits and, as near as you can--I can't count
the bottoms of that. But it seems like there are 65 digits to
an Army operation A&I maintenance code. I would love for you,
Mr. Lynn, to explain to me why you think that is the case and
what the logic is for doing it and what is going to happen to
change it.
Mr. Lynn. The logic--those two are not really comparable.
The nine-digit code there for the Social Security number is
intended to record one thing, which is the name of the
individual. That is what is recorded. The 65 digits have to
record multiple and overlapping requirements. The office that
is managing that particular account wants to have management
information to know how much they are spending on paper clips
and how much they are spending on rubber bands, and so on, so
they have better understanding of their cost structure.
So some of the requirements come from the auditors. The
auditors need to know certain things about the transactions,
and those have to be recorded in those codes.
Some of the requirements come from the Congress. The
Congress wants to know what year, and what appropriations
title, and various other things about the money so that we can
track it and report it in great detail back to the
Appropriations and Armed Services Committees.
So each of those numbers has a purpose to report
information to various entities who require it.
Now that said, would I like to reduce that? Yes, I would.
If I can just finish, Mr. Chairman. I would like to be able to
reduce that number, but to do that I have to convince some of
the people who are now demanding information--the Congress, the
program manager, the auditors, my office--to reduce their need
for information.
I think the problem you are going for is when you have 65
numbers, and somebody transposes two of those numbers, we have
an unmatched disbursement. It doesn't mean we have spent money
we shouldn't have. It just means we can't quite match it
because we can't find it because of those two numbers.
When you do that manually 5, 10, 15 times for an individual
transaction, there is great opportunity for error. I would like
to reduce the number, that number of digits, but, even more
importantly, what I need is to automate the system so we only
enter it once.
Chairman Shays. Only entering it once would make sense. But
I am told--I don't know if it is permutations. I am told, if
you get to 65 digits, the variations are so extensive that you
could provide lots more information. And it seems to be an
indication that we are still thinking in terms of separate
units, and they add their requirements and we end up with this
mess, and the sense is that somebody central isn't taking
charge and saying this shouldn't happen.
Mr. Lynn. That is true. Because, as I say, I think we can
reduce and try and eliminate overlapping. I am not really
fighting you on that, but some of these I cannot reduce. I can
try, but I won't succeed to reduce the requirements for
providing Congress information.
Chairman Shays. Mr. Steinhoff and Mr. Lieberman.
Mr. Steinhoff. I have got a couple of thoughts on this. It
is my understanding DOD now has 46 data elements. The
transaction on your poster board from the Army includes 13
different data elements. So they have 46 data elements, 271
characters in all, that might be used in some combination.
Also, if you had the same transaction in the Navy, you
would have a different line there. In the Navy, you would have
a total of 45 characters; and you would have 11 data elements
covered.
In the Air Force, you would have 41 characters and 14 data
elements; and they are not all in the same order as the other
services.
So you have got each service, with a unique code, having a
different number of digits and different number of data
elements, all in a different order, in a stovepiped fashion,
and then within a service you don't always have standard fiscal
codes. So the Army itself might have different fiscal codes or
different structures. So you have service unique transaction
codes. You then have within service, nonstandard codes. It
becomes extremely complex when you have all kind of data
elements required by all types of parties.
It is my understanding that DOD's goal is to reduce it to
five to seven data elements, to greatly reduce the number of
data element; and, therefore, the transaction code would be
reduced. And, therefore, to have a standard entry, whether it
is O&M in the Army or O&M in the Air Force, it should be the
same way.
Chairman Shays. I got you.
Mr. Lieberman.
Mr. Lieberman. The probability of people making the right
choices to get everything correct when they have so many
choices in all of these fields is not all that great. I mean, I
may be the only person in here who started life as a GS-9
budget analyst, but I used to be responsible for trying to make
some choices on what number to put in about three-fourths of
the way through that type of string. And I will tell you, the
people in the field don't understand what the difference is,
don't understand what the criteria is, and they just plug stuff
in.
So if we think that we are really shading things with this
ultra degree of fidelity and getting back good information, I
think we are, frankly, kidding ourselves.
This whole situation reminds me very much of where Federal
Acquisition Regulations were, say in the mid-'90's. Every
single part of the FAR had a good reason behind it and had been
put in there for some specific reason that made a lot of sense
to somebody, but over the years it just got bigger and bigger
and bigger, and it reached the point where it could not be
administered efficiently anymore. And I think that is what we
are saying here. The Department really needs to do a zero-based
review of what is possible, particularly in this era right now
where we know our systems are not particularly capable.
Chairman Shays. I am struck by the fact that, with all the
different things that need to happen, they don't have to wait.
These changes can happen simultaneously, and I hope they do.
Let me just say, Mr. Lieberman, you said you were a budget
analyst number 9, but I was noticing from your bio that you
also have a Bronze Star and have gotten other military awards,
so your affection for the military goes before you got your
budget analyst requirements.
Mr. Spratt, I don't know whether to go back to Ms. Hooley--
would you like--OK. Ms. Hooley.
Ms. Hooley. Thank you. Sorry I had to leave to go vote.
Mr. Lynn, I just want to continue sort of with the
questioning where we left off about when you look at your
budget and look at your needs for financial management--I
mean--and at least what I read, that we have a hard time
keeping track of our inventory and so forth, is that right?
Mr. Lynn. There are certainly issues with our inventory.
Ms. Hooley. I mean, is it possible to not--to build one
less tank or do something that would give you some money to put
into your financial management?
Mr. Lynn. We have done that. Inventory really is only a
corollary to financial management. We need--within the
inventory system--a module that would report the financial
information to the finance and accounting systems, but what we
need to do is do that as part of an overall upgrade to the
inventory systems. We are doing that.
We have an initiative. The phrase used in the logistics
world is total asset visibility. What they are looking for is
what most commercial operations had moved to and what we had
partly moved to, is where you know where every piece of
equipment is at every time, with barricades on the rest. That
is the step we are trying to take in the inventory word.
I am only tangentially related to that. I am basically
trying to piggyback onto that by making sure we have the right
financial module so I can report the financial information both
accurately to the managers and in a way that is auditable for
the financial statement.
Ms. Hooley. But doesn't that all work together?
Mr. Lynn. Absolutely.
Ms. Hooley. I mean, when you have acquisition, it
automatically goes into inventory and where it is so that you
have some accounting?
Mr. Lynn. Yes.
Ms. Hooley. Part of that process--I mean, obviously, doing
what you are trying to do isn't cheap. What do you need and
what kind of goals do you have for next year, for 5 years from
now that will get you to where, again, you have a system? And I
am--I mean, I understand what audits do. They certainly point
out some problems, but they don't solve all your problems. So
that we at least get to the point that we know what we are
doing and you don't have to reenter things three times and you
don't have accounting for huge amounts of money that you know
what you have in your inventory, when do we get there, how do
we get there and what is it going to take?
Mr. Lynn. Let me break that down a bit.
In the finance and accounting world, which is one I am most
directly responsible for, we are two-thirds of the way home. We
have started, when we came into office, to try and reduce those
330 systems that were all noncompliant, none of them met
accounting standards. We are down below a hundred now. By 2003,
we are on track to get it down to about 30.
Just to give you a benchmark, at 300 we were way, way
behind any kind of commercial operation. At 90 to a hundred, we
are kind of in the middle of the pack of a major Fortune 500 or
the top end of the Fortune 500 companies. That is about the
number of finance and accounting systems they would have. When
we get down to 30 and below, we will be in a world-class
position. That will be in terms of the standards, and that is
what we seek to achieve.
As we have all testified, that is actually only 20 percent
of the financial data. The other 80 percent is harder because
it is in the other systems. We have set up a Y2K process to try
and upgrade the financial modules. The first thing you do in
Y2K is awareness and identification, try and understand what
your systems are and where they stand. That is the process we
are in now.
We think there is about 70 systems right now, but we are
refining that, that are critical. We will target those systems
and try and upgrade those. And my personal target--this is more
personal to me--is what I would like to do is, before I leave
in this administration, is set up a system so that the next
administration coming in will not push this problem aside,
which will, frankly, be their temptation. If it looks too
daunting and too expensive, they will push it aside because
they are going to have to deal with strategy and weapons
decisions and a whole series of other things. What I would like
is, within the term of the next administration, that they could
achieve a clean opinion.
Ms. Hooley. So you are looking at the next four and a half
years.
Mr. Lynn. In the next four and a half years, if they could
look at reasonably what has to be done and they could think
that they may be able to get a clean opinion. Now to do that
they are going to have make substantial progress on those
feeder systems. That is the target I would lay out for you.
Ms. Hooley. That is for the 20 percent of the systems.
Mr. Lynn. The 20 percent we are on track.
Ms. Hooley. It is bringing the other 80 percent----
Mr. Lynn. It is bringing that other 80 percent in that is
the key. I don't have fear as an administration change for the
20 percent. They will continue along the lines we have. It is
very well laid out, and everything is pretty well set. I want
them to be in a similar position for the 80 percent so that
they will see a process, they will see a plan, and they will
understand the budget implications and, most importantly, they
will think it is achievable. Nobody up until this point has
thought that it was even within the realm of possibility DOD
could achieve a clean opinion. I think we are now getting to--
we are not there, but I want to put it within reach of the next
administration.
Ms. Hooley. Well, I, frankly, think we have to make that
happen.
Mr. Lynn. I couldn't agree with you more.
Ms. Hooley. It is not an option not to have that happen, at
least having read the background information.
I am going to change line of questioning for just a little
bit and talk to Mr. Lieberman for a second, ask him some
questions. There are a lot of expenditures for contractor
services out there, and they certainly comprise a huge
acquisition program in their own right. And, in fact, the
largest subcategory of contracts for services was for
professional, administrative and management support services.
In fact, spending grew by 54 percent during these last fiscal
years. And according to your testimony last March 16th before
the House Subcommittee on Government Management, Information
and Technology, spending on outsourcing will continue to grow
as outsourcing initiatives expand. And I understand that last
year you undertook a comprehensive audit to look at service
contracts reviewing 105 Army, Navy and Air Force actions valued
at $6.7 billion for a wide range of professional,
administrative, and management support services amounting to
about 104 million labor hours, about 50,000 staff years. Would
you like to comment on the results of that audit?
Mr. Lieberman. Yes. The results were dismaying. Every
single one of the contract actions that we reviewed had major
flaws in it--poor cost estimating, ignoring the rules for
competition and a sundry other things. The Department has
responded very positively to that audit. There has been no
quibbling about whether there is a problem or not. Everyone
recognizes that there has been a lot of acquisition reform
emphasis on buying hardware, but next to none on buying
services.
You are right. We are now spending over $50 billion a year
on services, so this is a gigantic acquisition program in its
own right. The problem basically is contracting officers are
not taught how to buy services. The contracting officers tend
to gravitate toward buying hardware, that is where the career
enhancement lies, not buying mundane things like computer
maintenance or something like that. So we have had very poor
training for them. We also need to look at improving policies
and sharing more information.
Corporations solve this by establishing centers of
excellence in their contracting offices and having certain
contracting people do just services contracts. So the
Department has agreed with our recommendation that they ought
to look at that concept.
Ms. Hooley. Do you have--have they talked about when they
think they can get this done?
Mr. Lieberman. Well, they are working on enhanced training
right now. I don't really have a sense for how long it will
take to turn this around. We are talking about having to
retrain thousands of people here, so it is going to take a
while. And I really welcome your questions because I think this
is an area that is terribly important and has been overlooked,
in all the acquisition reform dialogue for the last several
years.
Ms. Hooley. And I think the monetary impact for these
deficiencies have to be just enormous.
Mr. Lieberman. Yes. There is no doubt we are making bad
procurement decisions, paying too much for certain services or
not getting what we are paying for in a lot of cases.
Ms. Hooley. A lot of times--at least this is what I read or
heard--that a lot of times as we contract out we also
shortchange workers on their pay or benefits. When you talk
about people that--I mean, our--first, there are problems with
contracting out. Are we saving any money contracting out?
Mr. Lieberman. Well, when we make a decision to contract
out, there is a very rigorous process enshrined in Office of
Management and Budget Circular A-76 that requires cost
comparisons between the public and private sectors; and DOD
policy is only to contract out when it is going to be cost
effective to do that. The problem is, frankly, that with this
being done on a mass scale and with cost data being rather
unreliable, there really is completely inadequate follow-up, in
my opinion, to see what the results of outsourcing have been.
We have many things that look good on the front end, but down
the road the cost picture could very well change, and we don't
have a very good handle on whether the savings actually come to
pass and are sustained or not.
Ms. Hooley. Well, and my question is, also, do sometimes we
save money because when we contract out they get less benefits
or lower wages? And at a time of really high--I mean, we have--
employment is up, but we have very low unemployment. I mean,
sort of the quality of people you get, too, if we are actually
paying them less on contracted-out services.
Mr. Lynn. If I might add, we have done some studies; and
what we found is that we save when we do an A-76 competition.
We save money regardless of how it comes out. We save 20 to 30
percent regardless of whether the government wins the
competition or the private sector wins the competition.
On the government side, just the process of going through
the most efficient organization and developing a more cost-
effective approach has been very effective; and we found that
on about half the occasions the government does win the
contract.
Mr. Lieberman. But I agree the quality question is very,
very hard to measure. Whether we are really getting sufficient
quality when we contract out for services largely depends on
how smart we are about writing the statement of work and then
enforcing the contractual terms. With the downsizing of the
acquisition workforce there is a whole lot less oversight on
contracts, particularly on service contracts. So there is a
very valid question about whether we are getting the same
quality service as we had before.
Ms. Hooley. Well, and I am looking for efficiency, saving
money, but I also look for quality. And especially--I mean, if
we want the strongest Defense Department, I want some quality
there as well.
Mr. Steinhoff. One of the issues, if I might add, and this
was reported by GAO last July, is, going into many of these
outsourcing studies, the baseline costs are estimated or
anecdotal. They are not always fully fleshed out, and there is
a difficulty then in really tracking the impact of changes. So
the ability to have better metrics and to be able to really
tell the result both financially and qualitatively is very
important. That would get to your issue and get to really the
bottom line: Is it qualitatively as good and is it costing
less?
Our work has shown that when DOD outsources it competes the
government. It does reduce the cost, as Mr. Lynn said. The type
of question you ask is a very good question. It gets right to
the heart of the issue, and it gets to the heart of what a good
financial management system would produce--not a financial
accounting system, not a financial statement, but that end game
I talked about. It would help you develop metrics and would
tell your performance in a variety of ways.
Ms. Hooley. I just want to finish up with Mr. Lynn this
line of questioning. Do we collect any information when we
contract out about what kind of pay or retirement benefits that
the contracting out people have?
Mr. Lynn. There are--I am going to be little bit out of my
line on this. There are certain standards they have to meet,
Davis-Bacon and others, that are legislative. And I would have
to get back to you for the record whether we have--what
processes we have beyond that.
Ms. Hooley. OK. I am really interested in knowing; and, if
you don't know now, if you could get back to me.
Mr. Lynn. I understand the question. I just don't have it
in my head.
Ms. Hooley. OK. Thank you thank you very much.
[The information referred to follows:]
Mr. Lynn's Response to Ms. Hooley's Question About the Pay or
Retirement Benefits of the Contracting-Out People
A key part of an A-76 competition is the requirement that each
offeror submit a detailed cost proposal that identifies the proposed
labor hours, by labor category, of the people who will perform the work
under the contract. This includes the contractor's proposed
compensation of those people, including their pay and retirement
benefits. This is a necessary part of the overall cost comparison that
leads to the decision regarding whether or not to contract out the
requirement.
Mr. Thornberry [presiding]. Mr. Spratt.
Mr. Spratt. Thank you very much.
Mr. Lieberman, you said you might be the only one here who
started your career as a GS-9 budget analyst. I would like to
introduce you to Hugh Brady, who started the same way, working
for Mr. Nemfakos and--many years ago, so we should let him sit
up and ask a few questions.
Mr. Lieberman. I don't want to have to make any more
confessions.
Mr. Spratt. I went to work as a first lieutenant in the
Army for Bill Lynn's predecessor, Bob Moot, who was the
Assistant Secretary of Defense and Comptroller. Interesting
case. Mr. Moot had grown up in the military system. He had been
a warrant officer in the Second World War. His predecessor, who
had polar, opposite training, was Robert Anthony. McNamara
brought him down from Harvard Business School, and Anthony set
up, to his credit, many of the things that we still live with
today. To the extent we have program budgeting, that was his
creation; and to the extent we have POMs and things like that,
most of those were created in that period of time.
One of the products of the little group that Anthony
created was the SAR, Selected Acquisition Report. This was an
effort at doing a variance report when we had none.
I guess I state my thesis first. The problems we are
talking about today have been with us for a long, long time;
and while the progress you have made I think is commendable,
some progress is being made, we have still a long way to go;
and we shouldn't fool ourselves about that.
The SAR is a good example. Mel Laird came up here to
testify. This was in the peak of the Vietnam years, and there
was a lot of procurement activity going on. Costs were going
up, inflation was overtaking contracts, and there was no
baseline. There was no good way to measure actual cost against
promised costs, actual schedule against promised schedule,
actual performance against the supposed performance when the
system was originally authorized.
And Mr. Laird told the Senate Armed Services Committee--Mr.
Schweiker, I think, was then on the committee--don't worry
about that. We have just had Booz-Allen-Hamilton come in, and
we are setting up a variance reporting system--which, as it
turned out, wasn't true. Not that he was misrepresenting it to
the committee. He really didn't know that Booz-Allen had just
come in and taken one or two or three systems that GAO was
working on out of about 50 systems. But having said it the
Department was bound to go ahead and create the selected
acquisition report. That is how that was extracted from the
Department of Defense almost inadvertently.
When I came here in 1983, since this particular report had
been kind of spearheaded and shepherded through the group that
I worked in, the operations and analysis group, I went down to
the committee where I had a seat. I was on the Armed Services
Committee, still am, and I asked to see the selected
acquisition reports. I wanted to see how much they had evolved
between 1970 and 1983.
I found, to my dismay, they hadn't evolved at all. They
were still pretty static, and they weren't used--and that was
the key to it. They weren't useful to the users and, therefore,
there weren't these evolutionary improvements you would expect
in a document that was used continually. And the users would
say, gosh, it would be good to have this, and we don't need
that, and gradually the system improves over time if it is an
actively used accounting document for the purposes that it was
intended, namely, a variance report.
And I have to ask myself about a lot of this data that you
are generating. Do you think within this complex realm of all
these statements, all these source documents and entries, that
you are really doing a lot of stuff that is not useful to
anybody and that is part of the problem, that this is
overcomplex and it could be streamlined, you could strip out
some of this stuff and the users would never miss it?
I put that question to all three of you.
Mr. Lynn. It is a hard question. I think it is going to
depend on where you sit. I think that you will never persuade
the Deputy Assistant Under Secretary for Logistics that he does
not need that data, and he will always insist that he needs
that data to review the budgets to be able to understand what
is going on in his area.
And I think you might find a few things where people just
aren't using the data any longer, no longer want it. I think,
though, if you wanted to go the direction of true streamlining
you would have to centralize the consideration and make a
corporate judgment as to whether the value of the data would be
something that is worth the cost of collecting it, and make
that judgment. Right now, those two are divorced. The logistics
guy does not pay, in general, to get that data.
Mr. Spratt. Are the users really using these documents? Are
the auditors simply using them to satisfy themselves with
respect to issuing an opinion? Are these really management
documents that users are resorting to to make sound management
decisions?
Mr. Steinhoff. Mr. Spratt, the audited financial statement
is not the end game. It is one marker. It is one way to measure
how a stewardship responsibility has been carried out. It is a
way to pinpoint issues.
One of the things that this process has done in DOD is to
put some light on some of the major issues that have been there
since your time at DOD and before, shone some more light on
those problems.
Financial reporting can be of use in a variety of ways.
One, you want to know what are the cost of operations. Right
now, DOD doesn't really know the cost of operations. You know
how many obligations were incurred against the budget, but what
was the cost of carrying out an operation? You want to know
what are the some of the unfunded liabilities. Right now, the
budget scenario is pretty good. We are running a surplus. Down
the road, as the Comptroller General has testified, we face
some very difficult challenges.
You want to know what are the present and future
liabilities, whether it be retiree costs or environmental
disposal or medical costs going forward; and a financial
statement can provide that to you. You want some assurance that
they can reconcile their cash account. You want to know what is
owed to them. You want to know what they own and the condition
of their property.
The financial report itself is not at all the panacea to
DOD's management challenges. It is one mechanism. It is one
measure. At a minimum, this is something that any organization
should be expected to produce. And in the private sector they
expect those reports to be out 4 to 10 days after the close of
the year, close of the month. They expect them to be correct.
They don't want to spend a lot of time on them, and the
information flows immediately from the system.
In the long term, what is important is that this
Department, as well as others, have a financial management
system in place that is far broader than a financial accounting
system; a financial management system that provides to you
rich, useful, relevant data. The key to the CFO Act is useful
data that is relevant, timely, and reliable for the kind of
decision you are making.
Right now, the Department, as you are aware, is ordering
inventory it doesn't need. At the same time, it is suffering
from not having parts it needs.
Mr. Spratt. Let me give you just an example from raw data,
that gives rise to my question.
Somebody in his testimony said that there was $7.6 trillion
worth of entries in 1999. The defense budget in accrual terms
that year--this is problematic because we don't think in those
terms--was $378 billion. I think in cash terms it was probably
300-, $270 billion. So right there you have got a complexity.
You have got to have a cash set of books and an accrual set of
books, if you want to do what you were talking about and keep
tab of future liabilities you are incurring from present
operations. But, in any event, $7.6 trillion of entries in a
$378 billion budget. That means you are turning over that $378
billion about 15 times, maybe 20 times--20 times.
Mr. Steinhoff. I will defer to my colleague here. Those
were actually the entries that were made to prepare the
financial reports. There were more entries than that.
Mr. Spratt. On a $378 billion budget you have got 20
entries for every dollar.
Mr. Lieberman. Well, that is the way the math works out. We
still are comparing apples and oranges here, but fundamentally
you are right. This is a massive administrative effort. Matter
of fact, it is a heroic effort to try to satisfy these
requirements. Obviously, it is costly. I don't know how much it
costs to do it, but it soaks up lots of man hours and
unfortunately right now is ultimately futile, because the end
result still is not acceptable.
Mr. Lynn. Mr. Spratt, if I could just add one thing. When I
came into this position I was actually very skeptical of the
need for a financial statement for the Department. No one reads
it. It is not used. I mean I would guess no one in our
authorizing appropriating committees has ever laid eyes on it.
It is not a usable document for those purposes. Nor would you
expect it to be. We are not a private corporation. We are not
going to sell the place. We are not going to seek bonds. We are
not looking for loans. So in the usual commercial reporting a
financial statement is a very, very limited utility for the
Department of Defense.
What has persuaded me to pursue this is that I think--and
particularly it is the collaboration with the IG and GAO is
critical. Getting a clean opinion can, as Mr. Steinhoff
indicated, be the report card that the management systems you
have are providing the information to the managers that need to
make decisions, that you understand your cost. And what we are
trying to do is make sure that we modify the requirements so
that--I think along the lines you are saying--they are
producing appropriate data.
For example, we don't need to depreciate M-1 tanks. That is
not how we decide to make decisions. We use the threat and
technology and a whole series of others things, not the
depreciation value of the tanks. So that is not a useful set of
information. It might be on a commercial set of books, but not
for us.
On the other hand, commercial depreciation of real property
is of real value. Knowing how much we pay for property, as you
have done in your earlier life, that is a critical component to
figure out how much maintenance you ought to be doing on that
property. That is useful data. What we are trying to do is work
with the audit community to try and narrow down and get an
achievable set of objectives that will allow us to get a clean
opinion but, more importantly, produce the management
information that our senior leadership needs.
Mr. Spratt. In that regard, clearly you have got lots of
formidable problems. I think you have made progress, but you
have got lots of hurdles ahead of you.
How much of your problems are tangible? By that I mean, due
to outdated procedures and systems, both software and hardware?
And how much of your problem is attributable to intangible
causes such as the lack of really sharp and capable people to
get the job done, particularly at the accounting helm?
Mr. Lynn. We have made a transition at the start of the
decade where we pulled all the finance and accounting
organizations out of the individual military departments and
set up the Defense Finance and Accounting Service. I think
that, right now, that is an extremely strong organization; and
I would hope in the next decade it will become a world-class
finance and accounting center.
We have just set up a new set of personnel standards, a
certification process with the testing process so you can
become a Certified Defense Financial Manager. This involves a
whole series of courses prior to getting the certification,
then continuing professional education afterwards. I think with
that kind of initiative we have the talent that it takes. I
think the critical and the overwhelming problem is upgrading
the systems. The problem is with the systems at this point, not
with the people.
Mr. Spratt. Would the General Accounting Office care to
comment on that?
Mr. Steinhoff. I agree that they face a monumental--what I
call world-class systems challenge--to address problems in all
their business systems, with financial systems being an
integral part of their general business systems. Also, human
capital is going to be a very more important area.
The Comptroller General has spoken about the crisis in
government, the fact that government has to deal with human
capital and look ahead. A large number of employees can retire
soon. There are certainly other opportunities for them in this
economy. The work that DOD is now doing to rebuild its staff
and to provide training is important. The study we did a few
years ago found that very few of the folks were being trained
then. Now they have got a training program that is under way to
better professionalize their staff.
Mr. Spratt. Go ahead.
Mr. Steinhoff. All agencies are going to have to prepare
themselves for the technology age and the changes that will
come as we actually get systems in place. So Defense is going
to have to start planning for that era where they are not going
to need as many accounting technicians, or people that enter
the number of massive transactions. To the extent you can get
away from transaction processing you are going to need a
different type of person, a person with an analytical
background, financial analyst, financial systems people; and
you have to begin planning for that transition as you move into
the technology age.
Mr. Spratt. To give you an example, some years ago, when I
was interested in doing some work with the Selected Acquisition
Report and improving it, I was hiring a staffer to work for me
in the defense area on the Armed Services Committee who had
some background in this. I put that out in the RFP for possible
employees and had a couple of applicants come to me and say,
well, I have been working on such and such a SAR. And I said,
how is that? Well, they worked for local consulting firms; and
those firms were contracting agencies for doing this Selected
Acquisition Report.
It struck me that every program management office ought to
be made to do the Selected Acquisition Report for two reasons:
If they don't know how to fill out a Selected Acquisition
Report, they aren't competent to manage the program; and,
secondly, if they do it themselves, then they are going to have
to dig into the data and understand it and be responsible for
defending it if and when it goes wrong.
Are we undercutting our own accounting efforts by
outsourcing too much?
Mr. Lynn. I don't think so. I actually would, in the area
of audited financial statements, which is quite different than
the SARs you are talking about, with the program offices I am
actually looking to outsource more. We need more professional
accounting help in terms of the remedial steps that are
required to get a clean opinion than we have in-house. I think
we only need it for a relatively short period of years. I
wouldn't want to bring people on full time, but I think we are
interested in, frankly, hiring Big Six accounting firms to go
through with us what it is we need to change in terms of the
system and set up a plan so we can get a clean opinion. So I
think we are interested in using outsourcing in that sense.
Mr. Spratt. What are the real--what are the worst--most
intractable and difficult problems? For example, let me ask
this. The number that you have got there for a Navy source
reporting, that lengthy number in one of your testimonies, I am
not sure, covers the whole width of the page. I have an old
friend who was a captain who was in charge of trying to get the
Navy's inventory control system and CINCPAC in working order;
and his perennial and continual and final complaint was that
the users riddled it by requiring that it be adapted to their
own particular, peculiar and idiosyncratic needs and that there
wasn't a czar sitting on top of the system saying, no, we are
going to keep this thing streamlined.
Has that been a problem? Are we suffering the consequences
of that now, where we try to please the users too much and they
proliferated some of our management systems to the point they
are too complex?
Mr. Lieberman. Yes. I think the capability of the
technology that we have nowadays seduces people into thinking
they can collect infinite amounts of information accurately. So
managers don't really do very good planning, I think, in terms
of figuring out the cost effectiveness of requiring this extra
data, how much time is going to be involved in somebody
plugging these numbers in and how much effort is involved in
analyzing what the right number ought to be.
Ultimately, we don't have any such thing as a sunset
provision on these requirements; and so, over time, what is
necessary to collect today may not be used any more. You
mentioned the SARs, and you are right. There is very little
feedback that I am aware of from the Congress nowadays. They
get the SARs, and nobody knows whether they are being read or
not. Many of our requirements in all of our databases were
generated years ago by somebody who had some legitimate need at
the time, I am sure, but we would be worlds better off if we
were more efficient about regularly revisiting these things and
making everybody rejustify the need for collecting the data.
Mr. Steinhoff. As you are aware from your past experience,
there is service-unique transaction coding and processing. Many
things are nonstandard. Standardization is really a major
issue. In order to achieve standardization, you really have to
break down those stovepipes of each service doing its own
things. People have to come together and agree to a standard
approach, a standard system, a reengineered process that is
much simpler, much more straightforward, and provides the basic
data needed to provide fundamental accountability.
There was a study done recently for the Air Force where the
consultant found in one area that the service could reduce by
78 percent the number of transactions it processes, a reduction
of 155 million transactions, by changing its processes.
A lot of economies are possible through standardization and
simplification, which is a goal of DOD. A real challenge is to
get past the culture that you saw with each service having its
own unique approaches and each manager thinking they knew
better how to do something; and that cultural challenge is hard
to overcome.
Mr. Thornberry. Mr. Spratt, if I could turn to Mr. Bass. It
has been about 20 minutes or----
Mr. Spratt. One final comment, if I could.
Mr. Thornberry. Sure.
Mr. Spratt. That is, you notice the Y2K effort had worked,
and one of the reasons it worked is that senior management took
it seriously. This was clearly an imperative. And I think we
probably have to same kind of imperative attention to this, and
that includes the Congress of the United States.
I have been on the Armed Services Committee for 18 years. I
have been on the Government Operations Committee. And we do far
too little oversight into this very mundane but extremely
important area. And I think if we gearing to expect success we
have to have more hearings like this and we have to have sort
of a common purpose between us where we all work and agree that
this is a principal focus of our efforts.
Thank you for coming and testifying. I think it has been a
worthwhile hearing.
Mr. Thornberry. I agree.
Mr. Bass.
Mr. Bass. Thank you, Mr. Chairman. I appreciate this
hearing, and I agree with Mr. Spratt that it is important. We
don't spend enough time on it.
This hearing is entitled, Pentagon Financial Management,
What's Broken and How to Fix It. You probably can't answer this
question: Are you the three best possible people we could have
up here--one from GAO, the two people in the Defense
Department--that understand the most what is broken and how to
fix it? Have we got the right guys here?
Mr. Steinhoff. I hope so.
Mr. Bass. OK. Two of the three of you aren't CPAs. Is that
problematic or not? Does it matter? Let me qualify that for a
second.
Mr. Lynn, you are a graduate of Dartmouth, class of '76. I
am Dartmouth class of '74. So you don't have a problem. You are
well qualified.
But, in all seriousness, I know that financial problems
assailing the Department of Defense are far more than that
which an accountant can address. And I am not an accountant,
but I run a small business, but I don't handle the financial
statements and the details of my business. I hire an accountant
to do it. Maybe that is what you are doing yourself.
And I don't want you to say that you still need to be
accountants in order to handle the problems of the Defense
Department, but we have had--I have been in a number of these
hearings, and we get spiderwebs like that one over there. We
don't seem to be making an awful lot of progress overall.
I would suggest that maybe this has been tried 50 times
already, that the DOD establish some sort of a Task Force of
two or three of the best accountants in the country, perhaps
two or three or one or two of the best management consultants,
private management consultants, people that consult for
governments, people that may consult for very large
corporations, to try to pull their management and financial
structures together and start by making them understandable.
I am on the Intelligence Committee. I get acronyms
constantly. Even Mr. Spratt had a few acronyms I had never
heard of. And really try to get your arms around the bigger
issues here. I don't understand most of the material that has
been brought forth in this hearing, but I do know that we have
severe systemic problems in the Department of Defense. We
always have. And they don't seem to be getting an awful lot
better.
You guys have--any of you three have any observations about
this? Mr. Lynn, just remember, you are all right. Dartmouth is
OK. You are off the hook.
Mr. Lynn. I have a couple of comments, if I could.
You are absolutely right. We need accounting expertise. And
in response to your question, you have the best people--
actually, the best person, from the Department's perspective,
is sitting directly behind me, is Nelson Toye, who is the
Deputy Chief Financial Officer. He is the one that honchos
issues for the Department.
We have the requisite expertise. What I would suggest is
the problem in prior years has been that only the accountants
understood the problems, and these are problems that affect
management at the highest levels. This is information that
needs to come to management, and if it stays below that we are
not going to be able to solve the problems. So we need to pull
nonaccountants, frankly, and it is not just myself but it is my
colleagues in the logistics world, and the acquisition world,
and the medical world. If we cannot pull them in and persuade
them that they are going to have to make these upgrades, we are
not going to succeed.
Your suggestion of an outside panel I think is a good one,
but I am pursuing it in a different way. I found, in general,
that outside panels of observers are helpful in perhaps
identifying a problem. They are almost never equipped to get
seriously into the nitty-gritty of solving it. To do that, you
have to pay people.
Mr. Bass. I am not suggesting they be free. For the amount
of money you are losing and so forth, this would be a drop in
the bucket. You pay these guys lifetime salary.
Mr. Lynn. And that is the direction where we are headed--I
can't remember if you were in the room when I was discussing
this with Mr. Spratt--is to hire Big Six accounting expertise
to go through the specifics of what we need to do to upgrade
our systems. We are in the process. The Defense Finance and
Accounting Service and the Defense Logistics Agency have
embarked on this. The other agencies in the Air Force--I am
working on the Army and the Navy now--are working similarly.
I do not think we have--and that is where I agree with
you--I do not think we have enough in-house expertise to solve
this problem, and we do need to go outside to do it. I do think
it needs to go above the accounting expertise in the
Department.
Mr. Bass. Being an Under Secretary you are also a political
appointee, right?
Mr. Lynn. Completely.
Mr. Bass. So another problem we have here is you are the
top guy. There may be somebody else in your position next year
at this time. Do you have a fixed term?
Mr. Lynn. No, no. I serve at the pleasure of the President;
and the President, obviously, will change on January 20th.
Mr. Bass. Every 8 years or 4 years, you have a completely
different person involved in the overall financial management
of the Department of Defense.
Mr. Lynn. That is absolutely right.
In answer to Ms. Hooley's question, I indicated that one of
the goals that I have, as the Department's Chief Financial
Officer, is to leave in place a foundation that the next
administration will want to pursue these initiatives because
they are achievable within that time.
Mr. Bass. Has your job been frustrating?
Mr. Lynn. No, I actually enjoy my job quite a lot.
Mr. Bass. How long have you been on the job?
Mr. Lynn. In this particular job, since '97; and I was in
the Pentagon prior to that for the first time in long-term
planning.
Mr. Bass. That is all the questions I have, Mr. Chairman.
Mr. Thornberry. Thank you.
Let me just have one final question for each of you.
Part of the problem is--I think everybody has alluded to--
is you get down into the weeds of this thing and you are into
territory that is kind of hard to pull together and make some
sense in a larger sense. But, in essence, I think everybody
agrees we can't really keep track of where all the money goes
in the Department. We don't know everything we own. We have
liabilities that it is hard to get a handle on. And it is
because, in part, we have systems that started a long time ago,
for a variety of reasons; and it is very hard to make change;
and, at best, we are on track to fix 20 percent of the problem.
What I want to get back to, I guess starting with you, Mr.
Lynn, is, OK, you want to get in, to try to get--keep your 20
percent going but also set things up for the rest of the 80
percent to be solved, regardless of who wins the election. And
the new administration is going to have to review strategy,
they have got to figure out what fighter aircraft they are
going to buy and what they are going to do with aircraft
carriers, all these problems. In short, simple language, can
you explain to me why the new administration ought to care
about this other 80 percent and making sure we get it fixed?
Why it is important that they focus on this issue?
Mr. Lynn. In a single sentence, because the Department----
Mr. Thornberry. It does haven't to be one sentence. It has
to be short and simple so I can understand it.
Mr. Lynn. The Department needs accurate, timely and
reliable financial data. The key to that is--we have done two
of the three steps that we need to produce that. First, we have
consolidated all the finance and accounting operations. We have
done it 2 years early. We have brought it down from hundreds of
systems, from hundreds of sites, down to a couple--to two to
three dozen. That is a major accomplishment, and that is the
foundation on which any other reforms are going to proceed.
The next step, as you indicate, and it is the hardest step,
is to get the financial information that is produced outside
the finance and accounting system into that finance and
accounting system in a reliable way. This means a seamless
automation from the logistics area to the finance area, from
the acquisition area to finance area. That is the key. We have
set up a process to do that. I think that that process will
show that it can be successful within the next term; and I
think, frankly, that is the biggest incentive. I think a new
President and a new Secretary of Defense might well be the
owners of a clean financial opinion before they leave office.
That is the biggest incentive I can give them to try and pursue
this.
Mr. Thornberry. Mr. Steinhoff, if I am worried about what I
am going to do with China and proliferation of missiles and
terrorists and Middle East and drug trafficking, why should I
care about this?
Mr. Steinhoff. Defense is the largest, most complex entity,
with worldwide reach; and as a steward or the head of that
Department, I want to make sure I operate in an effective,
efficient manner. I want to assure that I am fully accountable
to the taxpayer for the money I have been given to carry out
that mission. I want to make sure that the mission is carried
out in the most effective way possible, that the troops have
the items they need, that we do it at the least cost. And I
want to have a high level of stewardship. I owe it to my
Department. I owe it to the public.
There is another side to this, too. I would want to leave a
legacy for the next person that came in, that they weren't
burdened with having to worry about the back room, that the
back room is taken care of; and they would be able to focus on
business decisions, such as resource allocation and spending,
which is why they really take the job.
When Mr. Lynn took this job, I don't think he took it to
work in the back room, trying to reconcile these transactions.
I think he took it trying to make decisions on the budget of
DOD and the performance of DOD. So I would want to leave some
kind of legacy that I, in fact, left a business process in
place and the most complex operation, the most diverse, also
had the finest financial operation.
Mr. Thornberry. Mr. Lieberman.
Mr. Lieberman. I have to agree with what was just said, and
I would like to add one point. I don't think this problem is
insurmountable, and we shouldn't make more out of it than it
is. The most important thing that needs to be done is to fix,
Mr. Lynn says, 70 systems. I think it may be a few more than
that. Well, DOD has between 5 and 7,000 mission-critical
information systems; and most of those are being modified or
updated at any given time. So this is a small population of the
Department's systems; and with sustained top-management
attention, I don't think there is any particular reason why all
those systems can't be made CFO compliant within a few years.
Mr. Thornberry. Let me just suggest to you all that I think
in some way this problem is like a virus on our defense
efforts, because I think it weakens up--it weakens some of the
support you get in Congress. You had some people voting against
the defense appropriations bill yesterday because of the lack
of confidence of how the money is being spent.
I think it weakens our effort to make good decisions as we
try to sort out where we are going, the outsource, or put into
health care and various sorts of things. If you don't have good
data, it makes it very difficult. And it is the kind of
systemic problem that is not glamorous but has huge
consequences. And I would hope----
Mr. Lynn, there was a couple of questions related to zero-
based review, whether it deals with this number or whether it
deals with some of the things Mr. Spratt was talking about. I
would like for you to think about, during your last 6 months or
whatever, coming to us or to the Department with
recommendations--don't worry about what the logistics people
think they need. You come to look at maybe some recommendations
on how we can improve this system and leave that perhaps as one
of your recommendations to your successors. And we want to try
to help and support that effort, because we do bear part of
this burden as well. It is a big problem, and I think it is
important.
I thank all our witnesses for being here; and, with that,
the hearing is adjourned.
[Whereupon, at 12:05 p.m., the Task Force was adjourned.]