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Management Challenge 4: Administration of Grants, Contracts, and Financial and Administrative Management Systems

Why This Is a Challenge

A magnifying glass over several columns of numbers, with money in the background

HHS is the largest grant-making organization and third-largest contracting agency in the federal government, with $402 billion and $21 billion awarded, respectively, in FY 2014. The Affordable Care Act provided additional grant and contract funding, adding to the Department's management and oversight responsibilities. Responsible stewardship of these program dollars is vital, and operating a financial management and administrative infrastructure that employs appropriate safeguards to minimize risk and protect resources remains a challenge for the Department.

Grants and Contracts Management. Across the Department, vulnerabilities have been identified in HHS grants, demonstrating the need for purposeful and consistent federal oversight. Awarding agencies lack a systematic method of and timing for sharing grantee risk information; sharing occurs infrequently; and oversight of grantee progress during the life of the grant needs improvement. Many grantees lack the robust financial management systems required to provide effective accountability for federal funds. For example, a community health center receiving Affordable Care Act grant assistance was not providing the services as described in its grant application and was unable to accurately account for how HHS funds were spent. Recent OIG investigations of HHS grantees reveal similar vulnerabilities in grants management. For example, in June 2014, four former officials of the Blackfeet Tribe's Po'ka Project, a multimillion-dollar HHS-funded effort to address the needs of troubled youth on the reservation, were convicted of fraud, embezzlement, and conspiracy and sentenced in federal court.

Previously identified weaknesses in the oversight of grantees, including late or absent financial reports and insufficient documentation on salaries and indirect costs, present challenges to the Department's implementation of the Office of Management and Budget's (OMB) Uniform Guidance. Another challenge is implementation of the DATA Act that establishes governmentwide financial data standards related to expenditures of federal grants, contracts, and loans.

HHS is the second-largest payer under the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs, awarding $680.7 million and $96.6 million, respectively, in such grants and contracts in FY 2014. Three significant issues exist with the programs: awardees who appeared not to meet eligibility requirements, inconsistent collection of information needed to evaluate commercialization success, and failures to check consistently for duplicative funding within the Department and across other agencies.

Given the high dollar amount and complexity of contracts, weaknesses in Department monitoring of the corrective actions taken, processes, oversight, and management is a concern. Oversight vulnerabilities have been identified through a range of issues across Departmental programs. For example, OIG has raised concerns about acquisition planning and procurement, contract monitoring, and payments to contractors related to the federal health insurance marketplaces operated by CMS. OIG has also identified weaknesses in CMS's oversight and performance measurement for its benefit integrity contractors. (For more information on specific contract management concerns, see Management Challenges 2 and 7.)

Financial Statement Audits. An audit of the Department's grant and contract systems, which are responsible for processing, awarding, and monitoring grants and contracts, uncovered multiple deficiencies in effective system controls. Deficiencies were related to segregation of duties, configuration management, and access to financial systems. The deficiencies represent a material weakness in internal controls – affecting the Department's ability to accurately manage financial information.

The financial statement audit also revealed challenges the Department continues to face in addressing violations of certain provisions of the Anti-Deficiency Act (ADA). These ADA violations highlight weaknesses in an agency's control over budgetary resources. Prior OIG audits of the National Institutes of Health (NIH) revealed ADA violations. The Department followed up with GAO regarding the violations. OIG will be doing a status report to assess and summarize the remedial actions taken by the Department to address the ADA violations.

Improper Payments. Improper payments cost federal programs billions of dollars annually. In FY 2014, the Department reported improper payments totaling almost $78.4 billion overall. Pursuant to the Improper Payments Information Act of 2002 (IPIA), as amended, federal agencies are required to provide uniform, annual reporting on improper payments and their efforts to reduce them. In OIG's most recent audit of the Department's IPIA reporting, we found that the Department did not meet all IPIA requirements, including reporting an improper payment rate for the Temporary Assistance for Needy Families (TANF) program and performing a risk assessment of payments to employees and charge card payments. HHS asserts that it does not have the statutory authority to collect from states the data that is necessary for the calculation of a TANF improper payment rate.

Progress in Addressing the Challenge

The Department has worked to strengthen its grants and contracts program integrity efforts. New grant regulations were published at 45 CFR Part 75, implementing OMB's Uniform Guidance requirements. Pursuant to those rules, the Assistant Secretary for Financial Resources (ASFR) is implementing a single audit resolution tracking system -- scheduled for completion by September 30, 2017. These rules also create a 270-day requirement to ensure all grant close out activities are complete. The Department is also serving as the governmentwide lead to identify the standardized data needed to meet the DATA Act requirements and has developed a Departmental implementation strategy to ensure adoption of approved data standards into business policies, processes, and systems.

The Department proposed an update to the HHS Acquisition Regulation (HHSAR) in March 2015 to supplement the Federal Acquisition Regulation. The HHSAR provides additional policy and procedural guidance to foster financial integrity and accountability across the acquisition lifecycle from the concept of need through contract close out. Additionally, HHS issued the Acquisition Strategy Directives in March 2015 and Acquisition Plan Directives in April 2015 which articulated the value and importance of HHS program offices adopting and implementing the acquisition lifecycle framework as a means to ensure business process/practices and mission/program needs drive requirements, and ensure the most appropriate vehicle is utilized to deliver critical results.

With respect to ADA violations related to systemic contract funding problems, the Department continues to provide its contracting workforce with an online reference tool for contract funding, formation, and appropriations law compliance. Further, the Department released a major update to its internal grants policies, featuring enhanced guidance on grants closeout, suspension and debarment, grants systems, and grants payments.

The Department has made efforts to assess grant program performance and improve grant and contract oversight. For example, the Substance Abuse and Mental Health Services Administration (SAMHSA) has improved outcome measurements for its largest program, the Substance Abuse Prevention and Treatment Block Grant. The Indian Health Service (IHS) and OIG partnered to provide training on using single audit reports to improve oversight of tribal health care funds. Furthermore, the Department and OIG sponsored training for grants and contracts officers on identifying and reporting potential fraud, waste, and abuse across all programs, including the SBIR/STTR programs, and OIG has encouraged contractors to self-report contract fraud and overpayments.

The Department has increased its use of suspension and debarment authorities, resulting in an increase from 8 debarments and 8 suspensions in FY 2013 to 32 debarments and 7 suspensions in FY 2014 - preventing offenders from receiving federal funding.

The Department has taken corrective actions to resolve the IT-related deficiencies reported in the Agency Financial Report. The impact of this effort will be assessed during the FY 2015 audit of these systems.

With respect to IPIA, the Department has stated in its comments on our IPIA-compliance audit report pertaining to the Department's FY 2013 AFR that it would submit a legislative proposal to Congress that would allow for a TANF error rate measurement. The Department, however, did not do so. Instead, the Department has reported that it submitted legislative proposals to Congress to improve TANF's program integrity. Specifically, the Department noted that ACF's FYs 2015 and 2016 Budget requests for TANF included $10 million for program improvement initiatives, including technical assistance on strengthening state program integrity efforts. The requests also proposed to prohibit the use of non-governmental third-party expenditures in meeting state maintenance-of-effort (MOE) requirements, and limiting the expenditure of TANF and MOE funds to benefits and services to needy families. The Department asserts that both of these proposed legislative changes would strengthen state accountability to the purposes of the TANF statute. CMS reports that it has prioritized closing out contracts. Since February 1, 2014, CMS closed 2,077 contracts with an obligated value of $1.3 billion and de-obligated $29.95 million. In October 2014, CMS implemented a goal of closing out approximately 20 percent—or 2,250—overdue contracts per year.

What Needs To Be Done

The Department needs to take more aggressive action to identify poorly performing grantees and those at risk of misspending federal dollars and either provide increased technical assistance and monitoring or prevent them from continuing to receive grant funds. Sustained focus is needed to monitor and address vulnerabilities, and the Department must continue diligent efforts to ensure that recipients use funds according to the award terms and consistent with the law. The Department has improved its contractor performance evaluation monitoring but is still underperforming compared to other government agencies.

The Operating Divisions (OPDIV) need to increase their monitoring efforts, including implementing program integrity initiatives, such as evaluating and mitigating risks, identifying and addressing cross-cutting issues; resolving grantee audit findings; and sharing best practices across the Department. In accordance with the new Uniform Guidance, the Department must implement processes to ensure that grantees have appropriate internal controls, including improved use of single audit reports throughout the grant cycle to ensure proper stewardship of funds. The Department will need to develop tracking and monitoring mechanisms for audit findings and the audit resolution process to effectively carry out this responsibility. The Department must also prepare for implementation of DATA Act requirements.

The Department needs to develop an improper-payment estimate for TANF and submit a legislative proposal to Congress to require state participation in such a measurement. In addition, the Department needs to meet improper-payment reduction targets, and reduce improper payments to less than 10 percent for all programs. The Department needs to conduct thorough root cause analyses of significant improper payments and develop robust corrective action plans that target identified causes. The Department also needs to conduct a risk assessment of payments made to employees and charge cards. The Department should resolve all financial control weaknesses identified by OIG, GAO, and other internal and external auditors.

The Department and OIG should continue to provide training on identifying and pursuing misconduct in grants and contracts. Grant and contract officers should more actively coordinate with and refer potential fraud to OIG for investigation. The Department also needs to continue to refine its suspension and debarment procedures by streamlining the referral and decision process, to continue providing training and decrease the processing time of referrals. Moreover, the Department needs to implement a program to actively pursue fraud under the Program Fraud Civil Remedies Act (PFCRA).

Key OIG Resources

Footnotes

6 Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (commonly referred to as the Uniform Guidance).

Management Challenge 5: Ensuring Appropriate Use of Prescription Drugs

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