The
2004 Congressional Budget Resolution required each congressional
committee to target wasteful spending within its mandatory
programs. Specifically, each committee must find enough waste,
fraud, and abuse to reduce its mandatory program budgets by 1
percent.
Government spending--which this year will
exceed $21,000 per household for the first time since World War
II--is growing at an unsustainable rate. Much of this spending has been financed
by a $400 billion budget deficit. Some would raise taxes to finance
this spending, but that would reduce incomes, cost jobs, slow the
economy, and consequently worsen the deficit. Instead, Congress
should reduce spending, and the first place to look should be
waste, fraud, and abuse.
Waste is also a symptom of ineffective
government. Combating waste does not imply hostility toward
government, but rather a desire to strengthen government programs
so that they can serve more constituents effectively. Good
government is nonpartisan.
Identifying 1 percent of mandatory program
spending as wasteful should not be difficult for Congress. In fact,
some consider a 1 percent target excessively modest and unlikely to
provide significant savings. However, cutting wasteful spending
today saves money not only in the current budget, but in future
budgets as well. If congressional waste cutters had reduced
mandatory spending by 1 percent in 1980, taxpayers would have saved
$190 billion through 2003--more than $2,000 per household.
This
study shows how some of the largest congressional committees can
easily identify 1 percent of their mandatory program budgets as
waste, fraud, and abuse. Combined, these recommendations could save
taxpayers as much as $300 billion over the next decade. Although
the listed programs are classified by their committees of
jurisdiction in the House of Representatives, they would also
satisfy most Senate committees' targets.
Agriculture Committee
Major mandatory expenditures: Farm
subsidies, food stamps, and rural assistance programs.
Targeted outlay savings: $455 million in
2004, $2,396 million for 2004-2008, $4,945 million for
2004-2013.
Food Stamps
(10-Year Savings: $6 Billion to $10 Billion) Simply
reforming the food stamp program, which provides $16 billion in
food vouchers to over 17 million families, would meet this
committee's waste, fraud, and abuse targets.
Auditors at the U.S. Department of
Agriculture discovered that erroneous payments of $1.4 billion ($1
billion in overpayments and $400 million in underpayments) were
made in 2001. Correcting these mistakes would save $600 million per
year and $6 billion over the next decade. The committee could
address this waste by continuing reforms that allow states
increased flexibility in assuring the proper eligibility of
recipients. Congress could also link each state's federal payment
for implementing the food stamp program more closely to its error
rate.
Food
stamps are also prone to trafficking, the illegal selling of the
food vouchers for cash. Approximately $660 million in food stamps
is trafficked by food stores each year, yet storeowners have paid
just 13 percent of the fines assessed by the courts for this crime.
With increasingly sophisticated technology available to identify
traffickers, Congress should continue to assist states in reducing
this practice and collecting the fines.
Education and the Workforce Committee
Major mandatory expenditures: Food and
nutrition programs and student loans.
Targeted outlay savings: $197 million in
2004, $1,103 million for 2004-2008, $2,431 million for
2004-2013.
School Lunch
Program (10-Year Savings: up to $12 Billion)The school
lunch program provides free or discounted meals to nearly 27
million school children from low-income families. A study
commissioned by the Department of Agriculture estimated that 18
percent of program participants do not qualify for benefits because
of their high family incomes.
Most
schools do not verify the incomes of parents who enroll their
children in the program. They have little incentive to do so
because increased school lunch participation signals to Congress
that a school district is low-income and automatically qualifies
the school district for substantial increases in education funding
(at the expense of school districts that do not inflate their
participation rates). Some school districts have even used benefits
such as free raffle tickets to bribe parents to apply for the
program.
The
committee could address this by requiring parents to document their
income before signing up their children and by no longer using
school lunch enrollment as a measure of poverty when allocating
education spending. Restricting just one-fifth of the ineligible
students currently enrolled in the program would produce enough
savings to meet the committee's spending targets. Of course, all
measures should be taken to assure that eligible families are not
excluded from the program.
Student Loans
(10-Year Savings: at Least $10 Billion)
The U.S. Department of Education manages a $267 billion
student loan portfolio and disburses $65 billion to college
students annually. The U.S. General Accounting Office (GAO) reports
that loans of $21.8 billion were in default as of 2001.
The
Department of Education does a poor job verifying the incomes and
eligibility of applicants and does not adequately track students
across different student loan programs. The GAO recommends that the
department implement reforms such as working with the IRS to better
verify applicant incomes and providing stronger oversight to
prevent improper aid disbursement. A more efficient program would
better target those in need and reduce pressures to replenish
student loans with new tax dollars.
Energy and Commerce Committee
Major mandatory expenditures: Medicaid,
State Children's Health Insurance Program, and the radio
spectrum.
Targeted outlay savings: $1,815 million in
2004, $10,594 million for 2004-2008, $26,523 million for
2004-2013.
Medicaid
(10-Year Savings: at Least $26.5 Billion)
Significant waste, fraud, and abuse pervade Medicaid,
which provides health services to 44 million low-income Americans.
While states run their own Medicaid programs, the federal
government reimburses an average of 57 percent of each state's
costs.
This
system gives states an incentive to over-report their Medicaid
expenditures in order to receive larger federal reimbursements. Not
surprisingly, the GAO has identified state schemes that shift money
between state accounts to create an illusion of higher Medicaid
expenditures. Similarly, some states have spent their federal
Medicaid dollars on non-Medicaid purposes. Tight state budgets,
such as those experienced by most states today, have increased the
pressure to use such deceptive tactics.
The
GAO and the Department of Health and Human Services (HHS) Inspector
General have also uncovered some states' practice of recovering
improper payments, retaining the funds, and then spending them on
unrelated programs. Congress could enact legislation to further
prohibit these actions, which currently cost the federal government
over $2 billion per year.
Minor reforms enacted by HHS in 2001 and
2002 are expected to save Medicaid $70 billion over the next
decade. A small sample of financing schemes uncovered in a few
states suggests that the Energy and Commerce Committee could easily
meet its 10-year target of $26.5 billion by combating such
schemes.
Financial Services Committee
Major mandatory expenditures: Housing
loans, flood insurance, financial industry insurance, and the
Export-Import Bank.
Targeted outlay savings: $18 million in
2004, $61 million for 2004-2008, $95 million for 2004-2013.
Flood Insurance
(10-Year Savings: at Least $1 Billion)
The National Flood Insurance Program insures 4.5 million
properties, yet it pays nearly 40 percent ($200 million per year)
of its claims to the same 1 percent to 2 percent of properties that
flood repeatedly. While the owners of most insured properties pay
enough in premiums to keep the program solvent, nearly all of these
repeatedly flooded properties actually receive substantial
discounts on their policies due to the old age of the buildings.
Consequently, taxpayers are required to pay subsidies to these
45,000 property owners who do not have to pay the full insurance
cost of their risky properties. Better matching these properties'
flood insurance premiums to the actuarial costs they impose would
save taxpayers at least $1 billion over the next decade.
Housing (10-Year
Savings: Undetermined)
The Department of Housing and Urban Development's
single-family housing program has been financially mismanaged.
According to the GAO, program administrators have provided loans to
ineligible families, made loans that exceeded the value of the
properties themselves (which increases default risks), and allowed
foreclosed properties to deteriorate. The GAO has recommended that
the department adopt many private-sector practices to prevent these
occurrences. While the savings from such reforms have not yet been
calculated, they would help the committee meet its target.
Transportation and
Infrastructure Committee
Major mandatory expenditures: Highways,
railroad retirement, and some air/water transportation programs.
Targeted outlay savings: $143 million in
2004, $763 million for 2004-2008, $1,578 million for 2004-2013.
Highways
(10-Year Savings: $10 Billion to $20 Billion)
In 2001, the Federal Highway Administration (FHWA) identified $238
million in idle highway funds no longer associated with any
projects. Those funds could be diverted to more productive use.
The
government loses more than $1 billion per year in fuel tax fraud
from bootleggers who buy fuel in low gas tax states, cross the
border into high gas tax states, and then resell the fuel at the
higher price, profiting from the gas-tax differential. Allowing the
IRS to share tax information with state and federal agencies that
investigate these crimes would help recover these losses.
New
highway project proposals are typically accompanied by
unrealistically low cost estimates that can be off by hundreds of
millions of dollars. The FHWA is working to establish the same
minimum cost estimating standards for projects under $1 billion
that larger projects already use.
Taxpayers could save billions of dollars
through improved project cost estimating, diligent searches for
less costly alternatives to proposed projects, and policies
limiting federal responsibility for project cost overruns. States
would work more diligently to detect fraud in the highway program
if they were allowed to retain a percentage of the cost recoveries
rather than having to send it all to Washington. These reforms
could save a total of $10 billion to $20 billion over the next
decade.
Railroad
Retirement (10-Year Savings: $500 Million)
Railroad workers and their families currently receive
retirement, survivor, unemployment, and Medicare Part B benefits
from the railroad retirement program. Although the Railroad
Retirement Board (RRB) successfully recovers most overpayments
referred to it, the board is denied the authority to investigate
the Medicare benefits paid to railroad beneficiaries.
The
Inspector General of the RRB estimates that $49 million of this
$787 million in Medicare payments could be classified as fraudulent
and recovered by the board. The House Transportation and
Infrastructure Committee has recommended providing the RRB with the
oversight powers to recover those funds, which could save nearly
$500 million over the decade.
Veterans' Affairs Committee
Major mandatory expenditures:
Compensation, education, and insurance for veterans.
Targeted outlay savings: $340 million in
2004, $1,825 million for 2004-2008, $3,850 million for
2004-2013.
Veterans'
Benefits (10-Year Savings: at Least $3.85 Billion)Despite
recent progress, veterans' programs are still prone to waste,
fraud, and abuse. The Inspector General of the Department of
Veterans' Affairs (DVA) estimates that program overpayments exceed
$800 million per year, mostly because of fraudulent benefit claims.
While the DVA is working to reduce these overpayments, significant
opportunities remain.
In
addition, the DVA has not been sufficiently diligent in collecting
the $3 billion in debt owed to the department by loan program
recipients. The DVA's Inspector General has provided Congress with
several recommendations for addressing these problems. When
combined, they should have little difficulty reaching the
committee's 10-year target of $3,850 million.
Ways and Means Committee
Major mandatory expenditures: Medicare,
debt interest, unemployment benefits, earned income tax credit,
child tax credit, Temporary Assistance for Needy Families,
Supplemental Security Income, and other social welfare programs.
Targeted outlay savings: $5,517 million in
2004, $30,467 million for 2004-2008, $71,428 million for
2004-2013.
Medicare
(10-Year Savings: up to $150 Billion)
According to the GAO, the Medicare program "contracts with
38 health insurance companies to process about 900 million claims
submitted each year by over 1 million hospitals, physicians and
other health care providers." This level of complexity provides an
environment ripe for waste, fraud, and abuse. The HHS Inspector
General found $12.3 billion in improper payments in fiscal year
2002 alone. Program administrators can reduce overpayments by
helping contractors to oversee their billing better and by holding
the contractors responsible for their errors.
Medicare also overpays for prescription
drugs. In 2000, Medicare paid $887 million more than wholesale
prices, and $1.9 billion more than other federal departments, for
24 leading prescription drugs. These overpayments resulted from
billing errors, fraud, and health industry inflation of the
reported "wholesale price" that determines Medicare payment
formulas. Similarly, Medicare overpays for medical supplies and
equipment by as much as $958 million per year.
In
addition to costing taxpayers, these overpayments hurt the Medicare
participants who are required to make co-payments. Examples of excess
Medicare payments include paying:
- 19 percent more than the providers' cost
for skilled nursing facility care,
- 35 percent more than the providers' cost
for home health care,
- 130 percent more for a hospital bed than
other federal agencies,
- 338 percent more than the widely available
price for some prescription drugs,
- 347 percent more for a wheelchair than
other federal agencies, and
- 750 percent more for saline solution than
other federal agencies.
Medicare officials act slowly to recover
monies owed to the program. By 2000, Medicare contractors had
failed to collect or write off $7 billion in outstanding debt. More
can be done to recover this money.
Reducing waste, fraud, and abuse could
save Medicare $15 billion per year, for a total of $150 billion
over the next decade--more than enough to meet the Ways and Means
Committee's targets.
Earned Income
Tax Credit (10-Year Savings:
$80 Billion to $90 Billion)
The earned income tax credit (EITC) provides $31 billion
in refundable tax credits to 19 million low-income families. The
IRS estimates that $8.5 billion to $9.9 billion of that
amount--nearly one-third--is wasted in overpayments.
The
complexity of the EITC law leads to many of these mistakes.
Calculating the credits is more complex than calculating regular
income taxes, and while the credit amount depends on the number of
children in a household, the tax code does not clearly define a
qualifying child. In addition, fraud and income underreporting are
common, and the IRS lacks the resources to verify the
qualifications of all EITC claimants. Efforts are being made to
address this problem, but Congress can do more by requiring better
verification of incomes and creating a uniform definition of a
qualifying child.
Conclusion
The
seven committees discussed above are responsible for 84 percent of
Congress's total 10-year, $132 billion waste reduction target, and
the recommendations outlined in this study could save taxpayers as
much as $300 billion. The remaining seven committees, most of which
have only a few mandatory programs and modest savings targets,
should also have little difficulty meeting their spending targets.
Congress should seize this opportunity to save taxpayers hundreds
of billions of dollars while also making government more effective
and efficient.
Brian M. Riedl is Grover M. Hermann
Fellow in Federal Budgetary Affairs in the Thomas A. Roe Institute
for Economic Policy Studies at The Heritage Foundation. The author
wishes to thank Heritage Foundation intern James Sherk for his
contributions to this paper.