Crop Insurance
More Needs To Be Done to Reduce Program's Vulnerability to Fraud, Waste, and Abuse Gao ID: GAO-06-878T June 15, 2006The U.S. Dept. of Agriculture's (USDA) Risk Management Agency (RMA) administers the federal crop insurance program in partnership with private insurers. In 2005, the program cost $2.7 billion, including an estimated $117 million in losses from fraud, waste, and abuse. The Agricultural Risk Protection Act of 2000 (ARPA) provided new tools to monitor and control abuses, such as providing RMA sanction authority to address program abuse and having USDA's Farm Service Agency (FSA) inspect farmers' fields. This testimony is based on GAO's September 30, 2005, report, Crop Insurance: Actions Needed to Reduce Program's Vulnerability to Fraud, Waste, and Abuse (GAO-05-528). GAO assessed (1) USDA's processes to address fraud, waste, and abuse, and (2) the extent to which the program's design makes it vulnerable to abuse.
RMA has taken a number of steps to improve its procedures and processes to address fraud, waste and abuse in selling and servicing crop insurance policies and has reported more than $300 million in savings from 2001 to 2004. However, RMA is not effectively using all of its tools. GAO identified weaknesses in four key areas. First, FSA inspections during the growing season are not being used to maximum effect. Between 2001 and 2004, FSA conducted only 64 percent of the inspections RMA had requested. Without inspections, farmers may falsely claim crop losses. Second, RMA's data analysis of the largest farming operations is incomplete. According to GAO's analysis, in 2003 about 21,000 of the largest farming operations in the program did not report individuals or entities with an ownership interest in these operations as required. Without this information RMA was unaware of ownership interests that could help it prevent potential program abuse. FSA did not give RMA access to the data needed to identify such individuals or entities. USDA should be able to recover up to $74 million in improper claims payments. Third, RMA is not effectively overseeing insurance companies' efforts to control program abuse. GAO's review of 120 cases showed that companies did not complete all of the required quality assurance reviews of claims and those that were conducted were largely paper exercises. Fourth, RMA has infrequently used its new sanction authority to address program abuse. RMA has not issued regulations to implement its new sanction authority under ARPA and imposed only 114 sanctions from 2001 through 2004, although it annually identifies about 3,000 questionable claims, not all of which are necessarily sanctionable. RMA's regulations to implement the crop insurance program, as well as some statutory requirements, create program design problems that hinder RMA's efforts to reduce program abuse. For example, RMA's regulations allow farmers to insure fields individually rather than all fields combined. This option enables farmers to "switch" reporting of yield among fields to either make false claims or build up a higher yield history on a field to increase its eligibility for higher insurance guarantees. High premium subsidies, established by statute, may also limit RMA's ability to control program abuse because the subsidies shield farmers from the full effect of paying higher premiums associated with frequent claims. Eight recent crop insurance fraud cases, investigated by USDA's Office of Inspector General and resulting in criminal prosecutions between June 2003 and April 2005, reflect the issues GAO noted. These cases show how farmers, sometimes in collusion with insurance agents and others, falsely claim prevented planting and low production. Several of these cases also demonstrate the importance of having FSA and RMA work together to identify and share information on questionable farming practices/activities.
GAO-06-878T, Crop Insurance: More Needs To Be Done to Reduce Program's Vulnerability to Fraud, Waste, and Abuse
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Testimony:
Before the Subcommittee on General Farm Commodities and Risk
Management, Committee on Agriculture, House of Representatives:
United States Government Accountability Office:
GAO:
For Release on Delivery Expected at 10:00 a.m. EDT:
Thursday, June 15, 2006:
Crop Insurance:
More Needs To Be Done to Reduce Program's Vulnerability to Fraud,
Waste, and Abuse:
Statement of Daniel Bertoni, Acting Director:
Natural Resources and Environment:
GAO-06-878T:
GAO Highlights:
Highlights of GAO-06-878T, testimony before the Subcommittee on General
Farm Commodities and Risk Management, Committee on Agriculture, House
of Representatives.
Why GAO Did This Study:
The U.S. Dept. of Agriculture‘s (USDA) Risk Management Agency (RMA)
administers the federal crop insurance program in partnership with
private insurers. In 2005, the program cost $2.7 billion, including an
estimated $117 million in losses from fraud, waste, and abuse. The
Agricultural Risk Protection Act of 2000 (ARPA) provided new tools to
monitor and control abuses, such as providing RMA sanction authority to
address program abuse and having USDA‘s Farm Service Agency (FSA)
inspect farmers‘ fields. This testimony is based on GAO‘s September 30,
2005, report, Crop Insurance: Actions Needed to Reduce Program‘s
Vulnerability to Fraud, Waste, and Abuse (GAO-05-528). GAO assessed (1)
USDA‘s processes to address fraud, waste, and abuse, and (2) the extent
to which the program‘s design makes it vulnerable to abuse.
What GAO Found:
RMA has taken a number of steps to improve its procedures and processes
to address fraud, waste and abuse in selling and servicing crop
insurance policies and has reported more than $300 million in savings
from 2001 to 2004. However, RMA is not effectively using all of its
tools. GAO identified weaknesses in four key areas:
* FSA inspections during the growing season are not being used to
maximum effect. Between 2001 and 2004, FSA conducted only 64 percent of
the inspections RMA had requested. Without inspections, farmers may
falsely claim crop losses.
* RMA‘s data analysis of the largest farming operations is incomplete.
According to GAO‘s analysis, in 2003 about 21,000 of the largest
farming operations in the program did not report individuals or
entities with an ownership interest in these operations as required.
Without this information RMA was unaware of ownership interests that
could help it prevent potential program abuse. FSA did not give RMA
access to the data needed to identify such individuals or entities.
USDA should be able to recover up to $74 million in improper claims
payments.
* RMA is not effectively overseeing insurance companies‘ efforts to
control program abuse. GAO‘s review of 120 cases showed that companies
did not complete all of the required quality assurance reviews of
claims and those that were conducted were largely paper exercises.
* RMA has infrequently used its new sanction authority to address
program abuse. RMA has not issued regulations to implement its new
sanction authority under ARPA and imposed only 114 sanctions from 2001
through 2004, although it annually identifies about 3,000 questionable
claims, not all of which are necessarily sanctionable.
RMA‘s regulations to implement the crop insurance program, as well as
some statutory requirements, create program design problems that hinder
RMA‘s efforts to reduce program abuse. For example, RMA‘s regulations
allow farmers to insure fields individually rather than all fields
combined. This option enables farmers to ’switch“ reporting of yield
among fields to either make false claims or build up a higher yield
history on a field to increase its eligibility for higher insurance
guarantees. High premium subsidies, established by statute, may also
limit RMA‘s ability to control program abuse because the subsidies
shield farmers from the full effect of paying higher premiums
associated with frequent claims.
Eight recent crop insurance fraud cases, investigated by USDA‘s Office
of Inspector General and resulting in criminal prosecutions between
June 2003 and April 2005, reflect the issues GAO noted. These cases
show how farmers, sometimes in collusion with insurance agents and
others, falsely claim prevented planting and low production. Several of
these cases also demonstrate the importance of having FSA and RMA work
together to identify and share information on questionable farming
practices/activities.
What GAO Recommends:
GAO suggested that the Congress consider reducing premium subsidies to
farmers who repeatedly file questionable claims. GAO recommended that
USDA (1) improve field inspections, (2) recover payments from
operations that failed to disclose farmers‘ ownership interests, (3)
strengthen oversight of insurers‘ use of quality controls, and (4)
issue regulations for expanded sanction authority. USDA agreed with
most of GAO‘s recommendations. However, it stated that it had
insufficient resources to conduct all inspections.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-878T].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Daniel Bertoni at (202)
512-3841 or bertonid@gao.gov.
[End of Section]
Mr. Chairman and Members of the Subcommittee:
I am pleased to be here today to discuss USDA's efforts to address
fraud, waste, and abuse in the Federal Crop Insurance Program. My
testimony today is based on our September 2005, report to the Chairman
of the Committee on Homeland Security and Governmental
Affairs.[Footnote 1] As you know, federal crop insurance is part of the
overall safety net of programs for American farmers. It provides
protection against financial losses caused by droughts, floods, or
other natural disasters. In 2005, the crop insurance program provided
$44 billion in insurance coverage for over 200 million acres of
farmland at a cost of $2.7 billion to the federal government, including
$117 million estimated by the U.S. Department of Agriculture's (USDA)
Risk Management Agency (RMA) to have resulted from fraud, waste, and
abuse.
RMA, which supervises the Federal Crop Insurance Corporation's (FCIC)
operations, has overall responsibility for administering the crop
insurance program, including protecting against fraud, waste, and
abuse. RMA partners with private insurance companies that sell and
service the insurance policies.
In part, to improve the integrity of the crop insurance program,
Congress enacted the Agricultural Risk Protection Act of 2000 (known as
ARPA). This act provided RMA and USDA's Farm Service Agency (FSA) with
new tools for monitoring and controlling program abuses. ARPA required
the Secretary of Agriculture to develop and implement a coordinated
plan for FSA to assist RMA in the ongoing monitoring of the crop
insurance program and to use information technologies, such as data
mining--the analysis of data to establish relationships and identify
patterns--to administer and enforce the program.
However, concerns have arisen that some farmers may have abused the
crop insurance program by allowing crops to fail through neglect or
deliberate actions in order to collect insurance and that some
insurance companies have not exercised due diligence in investigating
losses and paying claims. My testimony today focuses on two primary
issues discussed in the September 2005 report: (1) the effectiveness of
USDA's procedures and processes to prevent and detect fraud, waste, and
abuse in selling and servicing crop insurance policies, and (2) the
extent to which program design issues may make the program more
vulnerable to fraud, waste, and abuse.[Footnote 2]
In summary, since the enactment of ARPA, RMA has taken a number of
steps to improve its procedures and processes to prevent and detect
fraud, waste, and abuse in the crop insurance program. Most notably,
RMA reports that data mining analyses and subsequent communication to
farmers resulted in a decline of at least $300 million in questionable
claims payments from 2001 to 2004. However, we found that RMA is not
effectively using all of the tools it has available and that farmers
and others can continue to take advantage of the program. We identified
weaknesses in four key areas: (1) field inspections, (2) data mining
processes that exclude many large farming operations when farmers do
not report their interest in them, (3) quality assurance reviews
conducted by insurance companies, and (4) imposition of sanctions.
Weaknesses in these areas continue to leave the program vulnerable to
questionable claims, and insurance companies and RMA cannot always
determine the validity of a claim to minimize fraud, waste, and abuse.
We also found that the program's design, as laid out in RMA's
regulations or as required by statute, can impede RMA officials'
efforts to prevent and detect fraud, waste, and abuse in a number of
ways. In terms of RMA's regulations, farmers can insure their fields
individually instead of insuring all fields combined, which makes it
easier for them to switch production among fields, either to make false
insurance claims or to build up a higher yield history on a particular
field in order to increase its eligibility for higher future insurance
guarantees. Moreover, companies participating in the crop insurance
program bear minimal risk on some of the policies they sell and
service, giving the companies little incentive to rigorously challenge
questionable claims on these policies. In terms of statutory
requirements, RMA is obligated by law to offer farmers "prevented
planting" coverage--coverage if an insured crop is prevented from being
planted--but it is often difficult to determine whether the farmer had
the opportunity to plant a crop. Furthermore, statutorily established
premium subsidies are high and, therefore, may shield high-risk farmers
from the full effect of paying higher premiums.
Our report highlighted eight recent crop insurance fraud cases that
reflect some of the issues we identified. These cases, totaling $3.1
million in insurance claims, were investigated by USDA's Office of
Inspector General (OIG) and resulted in criminal prosecutions between
June 2003 and April 2005. The cases show how farmers, sometimes in
collusion with insurance agents and others, falsely claim prevented
planting, weather damage, and low production. Some of the cases show
farmers hiding or moving production from one field to another. Several
of these cases also demonstrate the importance of having FSA and RMA
work together to identify and share information on questionable farming
practices/activities.
In our report, we made several recommendations to the Secretary of
Agriculture to strengthen procedures and processes to prevent and
detect fraud, waste, and abuse in the crop insurance program. We also
noted that the Congress should consider allowing RMA to reduce premium
subsidies for farmers who consistently have claims that are irregular
in comparison with other farmers growing the same crop in the same
location.
Background:
In conducting their operations, farmers are exposed to both production
and price risks. Over the years, the federal government has played an
active role in helping to mitigate the effects of these risks on farm
income by promoting the use of crop insurance.
RMA administers the federal crop insurance program in partnership with
private insurance companies that sell the insurance policies to farmers
and adjust any claims. The companies also share in a percentage of the
risk of loss or opportunity for gain associated with each insurance
policy written.
Under the program, participating farmers are assigned (1) a "normal"
crop yield based on their actual production history and (2) a price for
their commodity based on estimated market conditions. Farmers can then
select a percentage of their normal yield to be insured and a
percentage of the price they wish to receive if crop losses exceed the
selected loss threshold. In addition, under the crop insurance
program's "prevented planting" provision, insurance companies pay
farmers who were unable to plant the insured crop because of an insured
cause of loss that is general to their surrounding area, such as
weather conditions causing wet fields, and that had prevented other
farmers from planting fields with similar characteristics. These
farmers are entitled to claims payments that generally range from 50 to
70 percent of the coverage they purchased, depending on the crop.
RMA establishes the terms and conditions that the private insurance
companies selling and servicing crop insurance policies are to use
through a contract called the standard reinsurance agreement (SRA). The
SRA establishes the minimum training, quality control review
procedures, and performance standards required of all insurance
providers in delivering any policy insured or reinsured under the
Federal Crop Insurance Act, as amended.
RMA is responsible for ensuring that the federal crop insurance program
is carried out efficiently and effectively and for protecting against
fraud, waste, and abuse in the program. In this regard, RMA uses a
broad range of tools, including RMA compliance reviews of companies'
procedures, companies' quality assurance reviews of claims, data
mining, and FSA inspections of farmers' fields. Insurance companies
must conduct quality assurance reviews of claims that RMA has
identified as anomalous or of those claims that are $100,000 or more to
determine whether the claims they have paid are in compliance with
policy provisions.
The Congress enacted ARPA, amending the Federal Crop Insurance Act, in
part, to improve compliance with, and the integrity of, the crop
insurance program. Among other things, ARPA expanded RMA's authority to
impose sanctions against farmers, agents, loss adjusters, and insurance
companies that willfully and intentionally provide false or inaccurate
information to FCIC or to an approved insurance provider. It also
provided authority to impose civil fines for violations. ARPA also
increased the percentage share of the premium the government pays for
most coverage levels of crop insurance, beginning with the 2001 crop
year. Although the percentage of the premium the government pays
declines as farmers select higher levels of coverage, the government
contribution significantly increases for all levels of coverage,
particularly for the highest levels of coverage. For example, the
government now pays fully one-half of the premium for farmers who
choose to insure their crop at 75-percent coverage.
RMA Has Strengthened Procedures for Preventing Questionable Claims, but
the Program Remains Vulnerable to Potential Abuse:
RMA has taken a number of steps to improve its procedures and processes
to prevent and detect fraud, waste, and abuse, such as data mining,
expanded field inspections and quality assurance reviews. In
particular, RMA now develops a list of farmers each year whose
operations warrant an on-site inspection during the growing season
because data mining uncovered patterns in their claims that are
consistent with the potential for fraud and abuse. For example, the
list includes:
* farmers, agents, and adjusters linked in irregular behavior that
suggests collusion;
* farmers who for several consecutive years received most of their crop
insurance payments from prevented planting indemnity payments;
* farmers who appear to have claimed the production amounts for
multiple fields as only one field's yield, thereby creating an
artificial loss on their other field(s);
and:
* farmers who, in comparison with their peers, have excessive harvested
losses over many years.
Since RMA began performing this data mining in 2001, it has identified
about 3,000 farmers annually who warrant an on-site inspection because
of anomalous claims patterns. In addition, RMA annually performs about
100 data manipulations to identify areas of potential vulnerability and
trends in the program.
RMA also provides the names of farmers from its list of suspect claims
for inspection to the appropriate FSA state office for distribution to
FSA county offices, as well as to the insurance company selling the
policy to the farmer. As a result of these inspections and other
information, RMA reported total cost savings of $312 million from 2001
to 2004, primarily in the form of estimated payments avoided. For
example, according to RMA, claims payments to farmers identified for an
inspection decreased nationwide from $234 million in 2001 to $122
million in 2002. According to RMA, some of the farmers on the list for
filing suspect claims bought less insurance and a few dropped crop
insurance entirely, but most simply changed their behavior regarding
loss claims.
However, our review showed that RMA is not effectively using all of the
tools it has available and that some farmers and others continue to
take advantage of the program, as the following discussion indicates.
Inspections during the growing season are not being used to maximum
effect. Although FSA is assisting RMA as required under ARPA, by
conducting field inspections, FSA is not doing so in accordance with
USDA guidance. Between 2001 and 2004, farmers filed claims on about
380,000 policies annually, and RMA's data mining identified about 1
percent of these claims as questionable and needing FSA inspection.
Under USDA guidance, FSA should have conducted all of the requested
inspections, but instead conducted only 64 percent of them;
FSA inspectors said that they did not conduct all requested inspections
primarily because they did not have sufficient time. Moreover, between
2001 and 2004, FSA offices in nine states did not conduct any of the
field inspections RMA requested in one or more of the years. Until we
brought this matter to their attention in September 2004, FSA
headquarters officials were unaware that the requested inspections in
these nine states had not been conducted. Furthermore, FSA may not be
as effective as possible in conducting field inspections because RMA
does not provide it with information on the nature of the suspected
abusive behavior or the results of follow-up investigations. About 80
percent of the FSA inspectors we surveyed believe that receiving more
information from RMA would help them be more effective in detecting
fraud, waste, and abuse. Finally, these inspections do not always occur
in a timely fashion, which would help detect abuse during the growing
season. Because of these problems, the insurance companies and RMA
cannot always determine the validity of a claim.
RMA's data analysis of the largest farming operations is incomplete.
RMA's data mining analysis excludes comparisons of the largest farming
operations--including those organized as partnerships and joint
ventures. These entities may include individuals who are also members
of one or more other entities. Because it does not know the ownership
interests in the largest farming operations, RMA cannot readily
identify potential fraud. For example, farmers who are members of more
than one farming operation could move production from one operation to
another to file unwarranted claims, without RMA's knowledge that these
farmers participate in more than one farming operation. RMA cannot make
these comparisons because it has not been given access to similar data
that FSA maintains. However, ARPA requires the Secretary of Agriculture
to develop and implement a coordinated plan for RMA and FSA to
reconcile all relevant information received by either agency from a
farmer who obtains crop insurance coverage.
Using FSA data, we examined the extent to which (1) farming operations
report all members who have a substantial beneficial interest in the
operation, (2) these farming operations file questionable crop
insurance claims, and (3) agents or claims adjusters had financial
interests in the claim.[Footnote 3] We found that of the 69,184
entities that had crop insurance policies in 2003 and that were in both
RMA's and FSA's databases, 21,310, or about 31 percent, did not report
one or more members who held a beneficial interest of 10 percent or
more in the farming operation holding the policy--for a total of $224.8
million in claims paid.
RMA should be able to recover a portion of these payments. According to
RMA regulations, if the policyholder fails to disclose an ownership
interest in the farming operation, the policyholder must repay the
amount of the claims payment that is proportionate to the interest of
the person who was not disclosed.[Footnote 4] The average ownership
interest of the persons not disclosed for the 21,310 entities was 33
percent; as a result, RMA should be able to recover up to $74 million
in claims payments. Our analysis of RMA's and FSA's databases for 2004
showed similar results. Of the 21,310 entities failing to disclose
ownership interest in 2003, we found 210 entities with suspicious
insurance claims totaling $11.1 million. In addition, we identified 24
crop insurance agents who sold policies to farming entities in which
the agents held a substantial beneficial interest but failed to report
their ownership interest to RMA as required.[Footnote 5] These farming
entities received $978,912 in claims payments in 2003 and 2004.
RMA is not effectively overseeing insurance companies' quality
assurance programs. RMA guidance requires insurance companies to
provide oversight to properly underwrite the federal crop insurance
program, including implementing a quality control program, conducting
quality control reviews, and submitting an annual report to FCIC.
However, RMA is not effectively overseeing insurance companies' quality
assurance programs, and for the claims we reviewed, it does not appear
that most companies are rigorously carrying out their quality assurance
functions. For example, 80 of the 120 insurance claim files we reviewed
claimed more than $100,000 in crop losses or met some other significant
criteria; RMA's guidance states that the insurance provider must
conduct a quality assurance review for such claims. However, the
insurance companies conducted reviews on only 59 of these claims, and
the reviews were largely paper exercises, such as computational
verifications, rather than comprehensive analysis of the claim. RMA did
not ensure that companies conducted all reviews called for under its
guidance and did not examine the quality of the companies' reviews.
RMA has infrequently used its new sanction authority to address program
abuses. Although ARPA expanded RMA's authority to impose sanctions on
farmers, agents, and adjusters who willfully and intentionally provide
false or inaccurate information or fail to comply with other FCIC
program requirements, RMA has only used this authority on a limited
basis. RMA has identified about 3,000 farmers with suspicious claims
payments--notable policy irregularities compared with other farmers
growing the same crop in the same county--each year since the enactment
of ARPA. While not all of these policy irregularities were necessarily
sanctionable, RMA imposed only 114 sanctions from 2001 through 2004.
According to RMA officials, RMA requested and imposed few sanctions
because it had not issued regulations to implement its expanded
authority under ARPA. Without regulations, RMA has not established what
constitutes an "FCIC requirement" and how it will determine that a
violation has occurred or what procedural process it will follow before
imposing sanctions. Insurance agents we surveyed and company officials
we contacted believe that RMA needs to more aggressively seek to
penalize those farmers, agents, and adjusters who abuse the program.
RMA officials told us that they will give priority to issuing
regulations implementing the sanctions authorized under ARPA.
RMA's Regulations and Some Statutory Requirements Hinder Efforts to
Reduce Abuse in the Crop Insurance Program:
While RMA can improve its day-to-day oversight of the federal crop
insurance program in a number of ways, the program's design, as laid
out in RMA's regulations or as required by statute, hinders officials'
efforts to administer certain program provisions to prevent fraud,
waste, and abuse, as the following discussion indicates.
RMA's regulations allow farmers the option of insuring their fields
individually rather than combined as one unit. Under RMA's regulations,
farmers can insure production of a crop on each optional unit or insure
an entire basic unit. Farmers may want to insure fields separately out
of concern that they would experience losses in a certain field because
of local weather conditions, such as hail or flooding. If farmers
instead insured their entire crop in a single basic insurance unit, the
hail losses may not have caused the production yield of all units
combined to have been below the level guaranteed by the insurance and,
therefore, would not warrant an indemnity payment. Although optional
units provide farmers added protection against loss, this coverage
option increases the potential for fraud and abuse in the crop
insurance program.
Insuring fields separately enables farmers to "switch" production among
fields--reporting production of a crop from one field that was actually
produced on another field--either to make false insurance claims based
on low production or to build up a higher yield history on a particular
field in order to increase its eligibility for higher future insurance
guarantees. Of the 2,371 farmers identified through data mining as
having irregular claims in 2003, 12 percent were suspected of switching
production among their fields. Furthermore, in our review of claim
files, we identified 10 farmers with patterns of claims associated with
this type of fraud.
According to a 2002 RMA study, relative losses per unit increase as the
number of separately insured optional units increases.[Footnote 6]
However, according to an RMA official, gathering the evidence to
support a yield-switching fraud case requires considerable resources,
especially for large farming operations.
In some cases, insurance companies have little incentive to rigorously
challenge questionable claims. Insurance companies participating in the
crop insurance program share a percentage of the risk of loss or
opportunity for gain on each insurance policy they write, but the
federal government ultimately bears a high share of the risk. Under the
SRA, insurance companies are allowed to assign policies to one of three
risk funds--assigned risk, developmental, or commercial. The SRA
provides some criteria for designating policies to these funds. For the
assigned risk fund, the companies cede up to 85 percent of the premium
and associated liability for claims payments to the government and
share a limited portion of the gains and losses on the policies they
retain. For the developmental and commercial funds, the companies cede
a smaller percent of the premium and associated liability for claims
payments to the government and share a larger portion of the gains and
losses on the policies they retain.[Footnote 7]
Economic incentives to control program costs associated with fraud,
waste, and abuse are commensurate with financial exposure. Therefore,
for policies placed in the assigned risk fund, companies have far less
financial incentive to investigate suspect claims. For example, in one
claim file we reviewed, an insurance company official characterized the
farmer as filing frequent, questionable claims;
however, the company paid a claim of over $500,000. The official
indicated that if the company vigorously challenged the claim, the
farmer would have defended his claim just as vigorously, and the
company would have potentially incurred significant litigation
expenses, which RMA does not specifically reimburse. With this cost and
reimbursement structure, in the company's opinion, it was less costly
to pay the claim.
RMA and insurance companies have difficulty determining potential abuse
associated with prevented planting coverage. Under the Federal Crop
Insurance Act, as amended, RMA must offer prevented planting coverage.
RMA allows claims for prevented planting if farmers cannot plant due to
an insured cause of loss that is general in the surrounding area and
that prevents other farmers from planting acreage with similar
characteristics.[Footnote 8] Claims for prevented planting are paid at
a reduced level, recognizing that farmers do not incur all production
costs associated with planting and harvesting a crop. However,
determining whether farmers can plant their crop may be difficult.
Annually, RMA pays about $300 million in claims for prevented planting.
Twenty-five of the FSA county officials that provided us written
comments on this issue reported that they believe some farmers in their
county who claimed prevented planting losses never intended to plant or
did not make a good faith attempt to plant their crop. Additionally, in
some cases, it appears that the insurance company's claims adjusters
may not exercise due diligence in evaluating prevented planting claims.
For example, a farmer in south Texas received claims payments of over
$21,000 for prevented planting claims for corn in 2003 and 2004. The
farmer claimed that excess rainfall made his fields too wet to plant.
However, according to a June 2004 FSA field inspection report, there
was no evidence the farmer had made any attempt to prepare the fields
for planting in either the 2003 or 2004 growing season. Among other
things, the FSA inspection report noted, and photographs showed, the
fields contained permanent grasses and 5-foot tall weeds, as well as
large hay bales from the prior growing season. In response to our
review, RMA investigated the 2003 and 2004 prevented planting claims
for this farmer and subsequently directed the insurance company to seek
reimbursement for the 2003 claims payment.
High premium subsidies may inhibit RMA's ability to control program
abuse. To encourage program participation, ARPA increased premium
subsidies--the share of the premium paid by the government--but this
increase may hamper RMA's ability to control program fraud, waste, and
abuse. Premium subsidies are calculated as a percentage of the total
premium, and farmers pay only between 33 to 62 percent of the policy
premium, depending on coverage level. High premium subsidies shield
farmers from the full effect of paying higher premiums. Because premium
rates are higher in riskier areas and for riskier crops, the subsidy
structure transfers more federal dollars to those who produce riskier
crops or farm in riskier areas.
In addition, premium rates are higher for farmers who choose to insure
their fields separately under optional units, rather than all fields
combined, because the frequency of claims payments is higher on the
separately insured units. Again, however, because of high premium
subsidies, farmers pay only a fraction of the higher premium. Thus, the
subsidy structure creates a disincentive for farmers to insure all
fields combined. Over one-half (56 percent) of the crop insurance
agents responding to our survey believed that charging higher premiums
for farmers with a pattern of high or frequent claims would discourage
fraud, waste, and abuse in the crop insurance program.
Recently Prosecuted Crop Insurance Fraud Cases Highlight Program
Vulnerabilities:
Some of the issues we identified are reflected in eight recent crop
insurance fraud cases that USDA's Office of Inspector General (OIG)
investigated and that resulted in criminal prosecution between June
2003 and April 2005. The cases show how a few farmers, sometimes in
collusion with others, falsely report planting, claims of damage, and
production to try to circumvent RMA's procedures. In some cases,
farmers hid production or switched it from one field to another.
Several of these cases also demonstrate the importance of having FSA
and RMA work together to identify and share information on questionable
farming practices/activities. Table 1 summarizes these eight cases,
which accounted for $3.1 million in fraudulent claims payments. These
cases were researched and analyzed by our Office of Forensic Audits and
Special Investigations.
Table 1: Crop Insurance Fraud Cases Investigated by the USDA/OIG and
Resulting in Criminal Prosecution, June 2003 to April 2005:
Case: 1;
Fraud allegation: Failure to plant;
How detected: OIG/RMA/ FSA identified irregularities through joint data
mining effort and follow-up inspection;
Collusion: Possible. Insurance adjuster indicted for falsely verifying
losses;
Fraudulent claims payments: $57,155.
Case: 2;
Fraud allegation: False claim of crop damage from hail, heat, and
drought;
How detected: RMA and FSA received complaints and initiated review;
Collusion: Possible. Insurance policy purchased from agency owned by a
sister-in-law;
Fraudulent claims payments: 39,826.
Case: 3;
Fraud allegation: False claim of crop damage from excessive moisture;
How detected: OIG initiated. Fraud detection survey of grain elevator
disclosed irregularities;
Collusion: No;
Fraudulent claims payments: 435,087.
Case: 4;
Fraud allegation: Failure to plant;
How detected: FSA filed complaint with RMA;
Collusion: Yes. Insured was also agent and issued policies through his
agency. Insurance adjusters falsified forms. Seed dealers also provided
false receipts;
Fraudulent claims payments: 630,000.
Case: 5;
Fraud allegation: False claim of crop damage;
How detected: RMA noticed suspicious adjustments in grain quality by
grain elevator company;
Collusion: Yes. Farmer and grain elevator operator;
Fraudulent claims payments: 1,000,000.
Case: 6;
Fraud allegation: False crop yield history to inflate insurance claim;
How detected: OIG hotline complaint;
Collusion: Yes. Insurance agents pled guilty to falsifying insurance
documents;
Fraudulent claims payments: [A].
Case: 7;
Fraud allegation: No ownership interest in crops;
underreporting of crop yield;
How detected: OIG hotline complaint;
Collusion: No;
Fraudulent claims payments: 19,000.
Case: 8;
Fraud allegation: Failure to plant;
false claim of moisture damage;
concealing production;
How detected: Bankruptcy fraud investigation revealed insurance fraud;
Collusion: Ongoing investigation of insurance representatives;
Fraudulent claims payments: $912,364.
Source: GAO's analysis of USDA and U.S. Department of Justice case
information.
[A] Data not available.
[End of table]
In conclusion, Mr. Chairman, federal crop insurance plays an invaluable
role in assuring the nation's farmers that their crops will be
protected from natural disasters. However, fraud, waste, and abuse can
result in higher program costs and hurt the reputation of the program.
In recent years, with the assistance of the new tools in ARPA, RMA has
made progress in strengthening a number of program elements and thereby
reducing fraud, waste, and abuse, as well as the amount of funds paid
in error.
Still, the weaknesses we identified in how RMA, FSA, and insurance
companies carry out their program responsibilities continue to leave
the program vulnerable to questionable claims and missed opportunities
to prevent losses to the federal government. In addition, RMA may be
able to reduce program vulnerability and costs by improving aspects of
the program's design.
In our report, we said that the Congress may wish to consider allowing
RMA to reduce premium subsidies--and hence raise the insurance
premiums--for farmers who consistently have claims that are irregular
in comparison with other farmers growing the same crop in the same
location. We made eight recommendations to the Secretary of Agriculture
to strengthen program oversight and reduce vulnerability to fraud,
waste and abuse, including improved sharing of information between RMA
and FSA, improved inspection practices, regulations to implement
sanctions, and stronger oversight of companies' quality control
procedures. USDA agreed to act on most of our recommendations. However,
it disagreed with our recommendation to ensure that FSA field offices
conduct all inspections called for under agency guidance, stating that
FSA did not have sufficient resources to complete all of these
inspections. USDA also disagreed with our recommendation to reduce the
insurance guarantee or eliminate optional unit coverage for farmers who
consistently have filed claims that are irregular in comparison with
other farmers growing the same crop in the same location. We continue
to believe that it is reasonable for USDA to use all tools at its
disposal and that our recommendations will reduce the federal crop
insurance program's vulnerability to fraud, waste, and abuse.
Mr. Chairman, this concludes my prepared statement. We would be happy
to respond to any questions that your or other Members of the
Subcommittee may have.
Contact and Staff Acknowledgments:
Contact points for our Offices of Congressional Relations and Public
Affairs may be found on the last page of this statement. For further
information about this testimony, please contact Daniel Bertoni, Acting
Director, Natural Resources and Environment, (202) 512-3841 or by email
at bertonid@gao.gov. Key contributors to this statement were Ron Maxon,
Thomas Cook, and Carol Herrnstadt Shulman.
FOOTNOTES
[1] GAO, Crop Insurance: Actions Needed to Reduce Program's
Vulnerability to Fraud, Waste, and Abuse, GAO-05-528 (Washington, D.C.:
September 30, 2005).
[2] Our September 2005 report also addressed the effectiveness of
USDA's procedures to assure program integrity in developing new crop
insurance products.
[3] The Center for Agribusiness Excellence conducted this analysis at
our request. The Center, located at Tarleton State University in
Stephenville, Texas, provides research, training, and resources for
data warehousing and data mining of agribusiness and agriculture data.
The Center provides data mining of crop insurance data for RMA.
[4] 7 C.F.R. § 457.8.
[5] RMA guidance Manual 14, Guidelines and Expectations for Delivery of
the Federal Crop Insurance Program states that insurance companies must
conduct conflict-of-interest reviews for all crop insurance claims of
individuals directly associated with the federal crop insurance
program. However, without knowledge that these insurance agents held a
substantial beneficial interest of 10 percent or more in entities that
received claims payments, insurance companies may not have conducted
the reviews in 2003 and 2004. As of August 2005, RMA could not confirm
that these reviews had been conducted.
[6] Final Research Report For Multiple Year Coverage, Task Order # RMA-
RED-01-06, Watts and Associates, Inc., June 27, 2002.
[7] In 2003, companies placed about 19 percent of the policies they
wrote in the assigned risk fund and about 69 percent in the commercial
fund. However, for those farmers on RMA's inspection list, about 47
percent of the policies were in the assigned risk fund, and 38 percent
were in the commercial fund.
[8] 7 C.F.R. § 457.8.
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