Managerial Cost Accounting Practices
Department of Health and Human Services and Social Security Administration Gao ID: GAO-06-599R April 18, 2006Authoritative bodies have promulgated laws, accounting standards, information system requirements, and related guidance to emphasize the need for cost information and cost management in the federal government. For example, the Chief Financial Officers (CFO) Act of 1990, contains several provisions related to managerial cost accounting, one of which states that an agency's CFO should develop and maintain an integrated accounting and financial management system that provides for the development and reporting of cost information. Statement of Federal Financial Accounting Standards No. 4, Managerial Cost Accounting Concepts and Standards for the Federal Government, and the Joint Financial Management Improvement Program's (JFMIP) Framework for Federal Financial Management Systems established accounting standards and system requirements for managerial cost accounting (MCA) information at federal agencies. The Federal Financial Management Improvement Act of 1996 built on this foundation and required, among other things, CFO Act agencies to comply substantially with federal accounting standards and federal financial management systems requirements. In light of the requirements for federal agencies to prepare MCA information, Congress asked us to determine the extent to which federal agencies develop cost information and use it for managerial decision making. The objectives of our review were to determine how federal agencies generate MCA information as well as how governmental managers use cost information to support managerial decision making and provide accountability. This report summarizes information provided during our briefing to Congressional staff concerning our review of MCA practices at the Department of Health and Human Services (HHS) and the Social Security Administration (SSA). This was our third in a series of briefings concerning the status of MCA activities at large government agencies. Our first briefing covered the status of MCA activities at the Department of Veterans Affairs and the Department of Labor. Our second briefing covered the status of MCA activities at the Departments of Education, Transportation, and the Treasury.
Similar to issues that surfaced in our earlier reports, we found a need for stronger leadership at HHS to promote and monitor the implementation of MCA departmentwide. SSA took a strong leadership role in implementing MCA and promoting the use of MCA information departmentwide. According to an HHS official, MCA at the department level was limited to aggregating costs from its operating divisions (OPDIV) to prepare the Statement of Net Cost (SNC) and did not focus on preparing MCA information for managerial decision making. Furthermore, HHS assigned responsibility for MCA implementation at the component level to its 11 OPDIVs, which are disparate in mission and focus, but HHS did not take an active leadership role to promote MCA or monitor its implementation at its OPDIVs. As a result, department officials did not have information about which components had and used MCA, and they had to refer to component officials to obtain information on the status and application of MCA for their major programs and activities. Neither of the two components we reviewed--the Centers for Medicare and Medicaid Services (CMS), and the Centers for Disease Control and Prevention (CDC)--had an MCA system in place at the component level to routinely allocate costs to activities, services, and outputs in support of managerial decision making. In the absence of strong leadership to promote and monitor MCA implementation across its OPDIVs, HHS management lacks routine access to reliable cost information to inform management decisions. This absence also contributed to a difference between HHS expectations and the plans of two OPDIVS for implementing an Oracle Projects cost accounting module. SSA's strong leadership promoting MCA and monitoring its usage and implementation, aided by a centrally managed organizational structure and fostered by legislative requirements, has resulted in routine use of MCA information for management decision making. Further, management focused on establishing a system of controls to help ensure the reliability of the data used. SSA reported that it started using cost information to manage its programs 30 years ago and is continuing to improve and expand its financial management efforts. Enhancements to SSA's MCA system, planned for completion in September 2008, are intended to improve the quality, consistency, and accessibility of information used by managers and analysts throughout SSA. SSA officials said that cost information was used for budgeting, resource allocation, and managing operations by determining unit costs and production rates, as well as SNC preparation. They also said SSA uses MCA information to allocate administrative expenses to the Social Security and Medicare trust funds as required by law.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
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April 18, 2006:
The Honorable Todd R. Platts:
Chairman, Subcommittee on Government Management, Finance, and
Accountability:
Committee on Government Reform:
House of Representatives:
Subject: Managerial Cost Accounting Practices: Department of Health and
Human Services and Social Security Administration:
Dear Mr. Chairman:
Authoritative bodies have promulgated laws, accounting standards,
information system requirements, and related guidance to emphasize the
need for cost information and cost management in the federal
government. For example, the Chief Financial Officers (CFO) Act of
1990,[Footnote 1] contains several provisions related to managerial
cost accounting, one of which states that an agency's CFO should
develop and maintain an integrated accounting and financial management
system that provides for the development and reporting of cost
information. Statement of Federal Financial Accounting Standards No. 4,
Managerial Cost Accounting Concepts and Standards for the Federal
Government, and the Joint Financial Management Improvement Program's
(JFMIP) Framework for Federal Financial Management Systems[Footnote 2]
established accounting standards and system requirements for managerial
cost accounting (MCA) information at federal agencies. The Federal
Financial Management Improvement Act of 1996[Footnote 3] built on this
foundation and required, among other things, CFO Act agencies to comply
substantially with federal accounting standards and federal financial
management systems requirements.
In light of the requirements for federal agencies to prepare MCA
information, you asked us to determine the extent to which federal
agencies develop cost information and use it for managerial decision
making. The objectives of our review were to determine how federal
agencies generate MCA information as well as how governmental managers
use cost information to support managerial decision making and provide
accountability.
This report summarizes information provided during our briefing to your
staff today concerning our review of MCA practices at the Department of
Health and Human Services (HHS) and the Social Security Administration
(SSA). This was our third in a series of briefings concerning the
status of MCA activities at large government agencies. Our first
briefing covered the status of MCA activities at the Department of
Veterans Affairs and the Department of Labor.[Footnote 4] Our second
briefing covered the status of MCA activities at the Departments of
Education, Transportation, and the Treasury.[Footnote 5] The slides
from today's briefing are presented in enclosure I.
MCA involves the accumulation and analysis of financial and
nonfinancial data, resulting in the allocation of costs to
organizational pursuits such as performance goals, programs,
activities, and outputs. The data analyzed depend on the operations and
needs of the organization. Nonfinancial data measure the occurrences of
activities and can include, for example, the number of hours worked,
units produced, claims paid, grants managed, or time needed to perform
individual activities.
Status of Efforts to Implement Managerial Cost Accounting at HHS and
SSA:
Similar to issues that surfaced in our earlier reports, we found a need
for stronger leadership at HHS to promote and monitor the
implementation of MCA departmentwide. SSA took a strong leadership role
in implementing MCA and promoting the use of MCA information
departmentwide.
Department of Health and Human Services:
According to an HHS official, MCA at the department level was limited
to aggregating costs from its operating divisions (OPDIV) to prepare
the Statement of Net Cost (SNC) and did not focus on preparing MCA
information for managerial decision making. Furthermore, HHS assigned
responsibility for MCA implementation at the component level to its 11
OPDIVs, which are disparate in mission and focus, but HHS did not take
an active leadership role to promote MCA or monitor its implementation
at its OPDIVs. As a result, department officials did not have
information about which components had and used MCA, and they had to
refer to component officials to obtain information on the status and
application of MCA for their major programs and activities.
Neither of the two components we reviewed--the Centers for Medicare and
Medicaid Services (CMS), and the Centers for Disease Control and
Prevention (CDC)--had an MCA system in place at the component level to
routinely allocate costs to activities, services, and outputs in
support of managerial decision making. At the CMS Medicare Program
division, an activity-based cost system was developed for Medicare
contractors to report their costs for reimbursement. CMS officials used
that cost information to compare contractor costs and seek corrective
actions when costs were significantly different than anticipated. CDC
officials had not yet completed an assessment of their MCA needs.
In the absence of strong leadership to promote and monitor MCA
implementation across its OPDIVs, HHS management lacks routine access
to reliable cost information to inform management decisions. This
absence also contributed to a difference between HHS expectations and
the plans of two OPDIVS for implementing an Oracle Projects cost
accounting module. HHS officials told us that the Unified Financial
Management System (UFMS), currently under development with
implementation expected by fiscal year 2008, is to include an Oracle
Projects cost accounting module, and that the OPDIVs and the Program
Support Center (PSC) will incorporate Oracle Projects in their planned
UFMS implementation and tailor it to meet their needs. However, a CMS
official said that CMS had not yet analyzed Oracle Projects to
determine if it will meet CMS's MCA needs and was uncertain whether CMS
would use the module. Similarly, a CDC official said that CDC, a pilot
site for implementation of UFMS, had no plans to use the module for MCA
and had not yet completed a full assessment of its MCA needs. Without
appropriate evaluation of its MCA needs and the Oracle Projects cost
accounting module, HHS will not know whether the module can provide the
necessary MCA information.
Social Security Administration:
SSA's strong leadership promoting MCA and monitoring its usage and
implementation, aided by a centrally managed organizational structure
and fostered by legislative requirements, has resulted in routine use
of MCA information for management decision making. Further, management
focused on establishing a system of controls to help ensure the
reliability of the data used. SSA reported that it started using cost
information to manage its programs 30 years ago and is continuing to
improve and expand its financial management efforts. Enhancements to
SSA's MCA system, planned for completion in September 2008, are
intended to improve the quality, consistency, and accessibility of
information used by managers and analysts throughout SSA.
SSA officials said that cost information was used for budgeting,
resource allocation, and managing operations by determining unit costs
and production rates, as well as SNC preparation. They also said SSA
uses MCA information to allocate administrative expenses to the Social
Security and Medicare trust funds as required by law.
We identified an opportunity for SSA to use MCA to determine the full
costs related to fees that SSA collects from some states. In 2005, SSA
collected $276 million in fees from the states for processing claims to
state programs that supplement SSA's Supplemental Security Income (SSI)
benefits. The original fees were established by law with later
provisions permitting yearly increases based on the Consumer Price
Index or other rates for each state as determined appropriate by the
SSA Commissioner. SSA had not analyzed the costs related to these fees
to determine whether the states might be under-or overcharged for full
SSA costs incurred.
Recommendations for Executive Action:
We are making three recommendations to the Secretary of Health and
Human Services and one recommendation to the Commissioner of the Social
Security Administration.
Recommendations to the Secretary of Health and Human Services:
To help ensure that HHS and its OPDIVS and PSC implement and use
reliable MCA methodologies, we recommend that the Secretary of HHS:
* take an active leadership role to promote the benefits and uses of
MCA;
* direct appropriate department-level officials to develop procedures
to monitor the implementation of its MCA policy at its OPDIVs and PSC;
and:
* direct appropriate officials to evaluate whether the Oracle Projects
module will provide MCA information to support decision making at HHS,
its OPDIVs, and PSC.
Recommendation to the Commissioner of the Social Security
Administration:
To better understand the relationship of costs and revenues related to
fees SSA collects for administering state SSI supplementation programs,
the Commissioner of SSA should direct appropriate officials to study
those costs to determine the full cost, including the cost of services
provided by other entities for the benefit of SSA.
Agency Comments and Our Evaluation:
We requested comments on a draft of our briefing presentation from the
Secretary of Health and Human Services and the Commissioner of SSA or
their designees. We considered and incorporated, as appropriate, the
comments we received by e-mail from HHS and by letter from SSA. The
comment letter from SSA is reprinted in enclosure II.
Comments from the Department of Health and Human Services:
HHS provided technical comments and did not respond to our conclusions
and recommendations to promote MCA, develop procedures for monitoring
MCA implementation, and evaluate whether the Oracle Projects module
will provide MCA information to support decision making at HHS.
HHS suggested we include information about the "green plan" it is
developing, stating that it will provide better financial information
to managers and that the effort will include leveraging UFMS projects
to provide MCA data. The HHS green plan initiative was undertaken in
response to the President's Management Agenda, which outlined five
governmentwide goals to improve federal management, including improved
financial performance and budget and performance integration. At the
time of our review, an HHS contractor had interviewed OPDIV
representatives and conducted benchmarking research to recommend an
approach for developing HHS's green plan. The contractor's plan for
HHS, however, did not identify how UFMS would be leveraged to provide
MCA data. Accordingly, we did not modify our report to address this
comment.
Comments from the Social Security Administration:
SSA generally agreed with our findings, conclusions, and recommendation
to analyze the full cost SSA incurs for processing state SSI
supplementation claims in order to better understand the relationship
of those costs to related fee revenues. SSA agreed to consider our
recommendation when improvements to its workload system for employee
time, the Time Allocation System (TAS), is implemented, making it
easier to perform a detailed analysis to determine the full cost SSA
incurs for the state SSI supplementation programs.
SSA also stated that the elements of cost in the state SSI
supplementation program fee and the impact of imputed costs on that fee
cannot be readily determined. These kinds of determinations, however,
are the essence of cost accounting and, as suggested by SSA, may be
facilitated by implementation of TAS.
Scope and Methodology:
Our methodology was consistent with the one employed in our prior
reviews of MCA practices.[Footnote 6] To obtain an understanding of how
MCA systems at HHS and SSA generate cost information, we interviewed
officials and reviewed documentation on the status of MCA system
implementation and the related obstacles to managerial costing. We also
examined departmental guidance and looked for evidence of leadership
and commitment to the implementation of entitywide cost management
practices. Using the Standards for Internal Control in the Federal
Government[Footnote 7] as a guide, we identified internal controls over
the reliability of financial and nonfinancial information used in MCA.
To determine how managers use cost information to support managerial
decision making and provide accountability, we obtained an
understanding of how HHS and SSA use cost accounting data for
budgeting, costing services or products, preparation of the Statement
of Net Cost, managing contractors' reimbursable costs, and other
managerial uses through interviews of agency officials and a review of
documentation provided by the agencies.
During our review, we visited HHS headquarters in Washington, D.C., and
the SSA headquarters in Baltimore. We also visited the headquarters of
HHS's largest component--CMS--in Baltimore, and held teleconferences
with officials at CDC, a pilot site for implementation of HHS's new
departmentwide financial management system, in Atlanta. When possible,
we corroborated information obtained in interviews with agency
documents such as policies, procedures, system descriptions, and
flowcharts. We also reviewed prior Office of Inspector General,
independent public accountant, and GAO reports regarding MCA
activities, systems, and data. The agencies provided comments on a
draft of this report, which we considered and incorporated as
appropriate. We performed this work from September 2005 through March
2006 in accordance with U.S. generally accepted government auditing
standards.
We are sending copies of this report to the Secretary of Health and
Human Services and the Commissioner of the Social Security
Administration; the Director of the Office of Management and Budget;
and other interested parties. Should you or your staff have any
questions on the matters discussed in this correspondence, please
contact me at (202) 512-6131 or martinr@gao.gov. Contact points for our
Offices of Congressional Relations and Public Affairs can be found on
the last page of this report. GAO staff who made major contributions to
this report are listed in enclosure III.
Sincerely yours,
Signed by:
Robert E. Martin:
Director, Financial Management and Assurance:
[End of Section]
Enclosure I:
April 18, 2006, Briefing:
Managerial Cost Accounting Practices:
Department of Health and Human Services Social Security Administration:
Briefing to the staff of the Subcommittee on Government Management,
Finance, and Accountability, Committee on Government Reform, House of
Representatives:
April 18, 2006:
Table of Contents:
Introduction and Objectives:
Scope and Methodology:
Results in Brief:
Background:
Department of Health and Human Services:
Social Security Administration:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Introduction and Objectives:
Authoritative bodies have promulgated laws, accounting standards,
system requirements, and related guidance to emphasize the need for
cost information and cost management in the federal government:
* Congress:
* Federal Accounting Standards Advisory Board (FASAB)
* Joint Financial Management Improvement Program (JFMIP):
* Office of Management and Budget (OMB):
In light of these requirements, you asked us to determine the extent to
which federal agencies develop cost information and use it for
managerial decision making.
The objectives of our review were to determine how:
* federal agencies generate managerial cost accounting (MCA)
information and:
* government managers use cost information to support managerial
decision making and provide accountability.
This is the third in a series of briefings concerning the status of MCA
activities at large government agencies.
This briefing summarizes our observations at the Department of Health
and Human Services (HHS) and the Social Security Administration (SSA).
Scope and Methodology:
To determine how MCA systems at HHS and SSA generate cost information,
we interviewed officials and reviewed documentation at the HHS and SSA
headquarters and at selected HHS component agencies on:
* the status of MCA system implementation;
* departmental guidance, leadership, and commitment to the
implementation of cost management practices entitywide;
* departmental internal controls to help ensure the reliability of
financial and nonfinancial information used in MCA; and:
* any obstacles to managerial costing.
To determine how HHS and SSA managers used cost information to support
managerial decision making and provide accountability, we interviewed
officials at the HHS and SSA headquarters and at selected HHS component
agencies on the use of cost accounting data for:
* budgeting; costing activities, services, or products; monitoring
operations; and enhancing performance measures and operational
efficiency;
* preparing the Statement of Net Cost; and:
* any other uses.
We visited the HHS headquarters in Washington, D.C., and the SSA
headquarters in Baltimore. We also visited the headquarters of HHS's
largest component - the Centers for Medicare and Medicaid Services
(CMS) - in Baltimore, and held teleconferences with officials at HHS's
Centers for Disease Control and Prevention (CDC), a pilot site for
implementation of a new agencywide financial management system, in
Atlanta.
When possible, we corroborated information obtained in interviews with
agency documents, such as policies, procedures, system descriptions,
and flowcharts. We also reviewed prior Office of Inspector General
(OIG), independent public accountant, and GAO reports regarding MCA
activities, systems, and data.
We performed this work from September 2005 through March 2006 in
accordance with U.S. generally accepted government auditing standards.
Results in Brief:
At the department level, HHS did not have a MCA system focused on
managerial decision making. HHS assigned responsibility for MCA
implementation to its 11 operating divisions (OPDIV), which are
disparate in mission and focus, but did not take an active leadership
role to promote MCA or monitor its implementation at its OPDIVs. Thus,
only one of the two component agencies we reviewed used MCA.
An HHS official told us that the department-level focus is on
aggregating costs for external financial reporting, not MCA.
HHS officials told us that the Unified Financial Management System
(UFMS), currently under development, is to include an Oracle Projects
cost accounting module.
SSA management took a strong leadership role in developing, promoting,
and implementing the benefits and use of managerial cost accounting
policies and procedures departmentwide.
Further, management focused on establishing a system of controls to
help ensure the reliability of the data used.
SSA reported that it started using cost information to manage its
programs 30 years ago and is continuing to improve and expand its
financial management efforts.
The use of cost information varied between HHS and SSA.
* An HHS official said that HHS used cost information at the department
level to prepare the Statement of Net Cost (SNC). At CMS, in addition
to compiling program costs for the SNC, officials used cost information
to compare contractor costs and seek corrective actions when costs were
significantly different than anticipated.
* SSA officials said that cost information was used for budgeting,
resource allocation, and managing operations by determining unit costs
and production rates, as well as SNC preparation. We also identified an
opportunity to use MCA in determining the full cost related to certain
fees that SSA collects.
To address our findings, we made three recommendations to HHS and one
recommendation to SSA. We received comments by e-mail from HHS and by
letter from SSA on a draft of this briefing. We considered and
incorporated the comments, as appropriate.
Background:
The Chief Financial Officers (CFO) Act of 1990 calls for the
development and reporting o cost information and the systematic
measurement of performance. The FASAB Statement of Federal Financial
Accounting Standards No. 4, Managerial Cost Accounting Concepts and
Standards for the Federal Government, and JFMIP's Framework for Federal
Financial Management Systems establish accounting standards and
requirements for MCA at federal agencies.[Footnote 1]
The Federal Financial Management Improvement Act of 1996 builds on the
foundation provided by the CFO Act and includes requirements for CFO
Act agencies to comply with federal accounting standards and for the
agencies' systems to comply substantially with, among other things,
federal financial management systems requirements.
[1] In 2005, JFMIP's responsibilities for financial management and
oversight were realigned to OMB, the Office of Personnel Management,
and the Chief Financial Officer's Council.
MCA involves accumulating and analyzing financial and nonfinancial data
to allocate costs to organizational pursuits, such as performance
goals, programs, activities, and outputs in support of managerial
decision making. The data analyzed depend on the operations and needs
of the organization.
Financial data include the costs of all activities associated with a
given output, including direct and indirect costs.
Nonfinancial data measure the occurrences of activities and outputs to
which costs are assigned.
Nonfinancial data could include, for example, information on the number
of hours worked, units produced, grants managed, inspections conducted,
people trained, or time needed to perform activities.
HHS Background:
HHS's mission is to enhance the health and well-being of Americans by
providing for effective health and human services and fostering
advances in sciences underlying medicine, public health, and social
services.
HHS has 11 OPDIVs that are disparate in mission and focus. These
include CMS, its largest OPDIV, and C DC, a pilot OPDIV for
implementation of a new agencywide financial management system. In
addition, the HITS Program Support Center (PSC) provides business
services for the OPDIVs and HHS departmental offices.
In fiscal year 2005, HHS had approximately 67,400 employees and
reported net outlays of about $581 billion.
HHS awarded a reported average of 74,000 rants totaling more than 230
billion annually from fiscal years 2801 through 2004. As the largest
grant-awarding agency in the federal government, HHS manages grant
programs funding basic and applied science, child development, and
other health and social services.
CMS had approximately $484.3 billion (83 percent) of HHS's reported
fiscal year 2005 net outlays, and administered Medicare, Medicaid, and
other programs.
* CMS had approximately 4,750 employees in fiscal year 2005 and did
most of its work through third-party contractors. There were 42
Medicare contractors in 2005. CMS and its Medicare contractors process
over 1 billion Medicare claims annually. The contractors submit an
annual budget to CMS for administrative costs and throughout the year
file reports to draw down budgeted funds. At year-end, the contractors
file a final report on costs incurred. CMS also provides the states
with matching funds for Medicaid benefits.
CDC works in the United States and abroad to address public health
issues. It had approximately 9,400 employees and, with fiscal year 2005
net outlays of about $5.9 billion, represented about 1 percent of HHS's
fiscal year 2005 net outlays.
HHS: MCA Systems in Place:
HHS management did not actively support MCA implementation.
* HHS had issued a policy on MCA at components, but it had not
monitored component compliance.
* Department officials did not have information about which components
had and used MCA, and they referred us to component officials to obtain
information on the status and application of MCA to their major
programs and activities.
According to an HHS official MCA at the department level was limited to
aggregating costs from the OPDIVs to prepare the SNC and did not focus
on managerial decision making.
The official also stated that MCA implementation for rants to states
and other entities posed difficulties since HHS did not have access to
state systems to obtain grant cost information.
* The reported average $230 billion annual grants awards was about 40
percent of HHS's fiscal year 2005 net outlays.
According to HHS's MCA policy issued in 1998, determining the cost of
an agency's specific programs and activities is essential for effective
management of government operations. Each OPDIV is responsible for
implementing MCA in accordance with its specific needs.
* Each OPDIV should determine the appropriate detail for its cost
accounting processes and procedures, and accumulate and report the cost
of its programs and activities on a regular basis for management
information purposes.
* At the department level, the Secretary and assistant secretaries
should be informed of the costs and revenues of each OPDIV segment so
that they can report the net cost of operating the department.
HHS MCA policy also states that MCA should be a fundamental part of the
financial management system and, to the extent possible, should be
integrated with other parts of the system.
HHS is currently implementing a new financial management system, UFMS,
a COTS-based Oracle software package, which is expected to replace
outdated systems by fiscal year 2008. Plans for UFMS include a module
- Oracle Projects - which can be used for cost accounting.
An HHS official told us that the OPDIVs and PSC will incorporate Oracle
Projects in their planned UFMS implementation and tailor it to meet
their needs. However, a CMS official told us CMS was uncertain whether
it would use the Oracle Projects cost accounting module for MCA.
Similarly, a CDC official said that CDC had no current plans to use the
module for MCA and had not yet completed a full assessment of its MCA
needs.
HHS believes that UFMS will provide relevant, reliable, and timely
financial information to support decision making and cost-effective
business operations at all levels of HHS.
In 2004, we reported that UFMS implementation was at risk of not fully
meeting one or more of its cost, schedule, and performance objectives,
and we made 34 recommendations related to the lack of disciplined
processes, security controls, and human capital issues [Footnote 2].
* In response, HHS reevaluated the UFMS implementation schedule and
delayed UFMS implementation at CDC a pilot OPDIV for UFMS
implementation, until April 2005.[Footnote 3]:
* We will review actions HHS has taken on these recommendations as part
of our normal audit follow-up process.
[2] GAO, Financial Management Systems: Lack of Disciplined Processes
Puts Implementation of HHS' Financial System at Risk, GAO-04-1008
Washington, D.C.: Sept. 23, 2004).
[3] GAO, Financial Management Systems: HHS Faces Many Challenges in
Implementing Its Unified Financial Management System, GAO-04-1089T
(Washington, D.C.: Sept. 30, 2004).
Material weaknesses in internal control can result in inaccurate data,
which may adversely affect any decision based on these data.
* In fiscal year 2005, HHS's auditors noted that it continued to have
serious weaknesses in financial systems and processes. Because of
system limitations, many OPDIVs recorded numerous entries outside of
the general ledger system and employed intensive manual procedures to
prepare the year-end financial statements.
* That year, CMS's auditors noted a material weakness related to
reviewing and processing managed care payments, a lack of documentation
and procedures to determine the eligibility of managed care providers,
and a lack of a comprehensive methodology in implementation of a new
payment system.
According to an HHS official, the implementation of UFMS will address
these concerns. UFMS implementation is scheduled to be complete in
fiscal year 2008.
CMS headquarters did not have a MCA system in place to routinely
allocate costs to activities, services, and outputs in support of
managerial decision making.
* CMS officials used cost-finding techniques to prepare the SNC for
external reporting. This was accomplished by allocating indirect costs
to its three operating divisions based on annual surveys of labor hours
worked.
A CMS official told us the agency has not yet analyzed Oracle Projects
to determine if it will meet its MCA needs.
At the CMS Medicare Program division, an activity-based cost (ABC)
system was developed for Medicare contractors to report their costs for
reimbursement. It took cost data from the contractors' accounting
systems; distributed the costs among activities (e.g., paying claims);
and provided CMS managers with fully loaded costs of contractor
products services, and activities.
Medicare Program division officials noted that certain controls exist
to help ensure the reliability of contractors' financial and
nonfinancial data:
* Reviews by CMS of costs and activities self-reported by Medicare
contractors, to check for reasonableness of the data.
* Reconciliation of Medicare contractors' self-reported cost data to
their budgeted amounts and interim expenditure reports.
* Review by independent public accountants of the operational
effectiveness of internal controls and reviews of Medicare contractor
account receivable balances.
* Documentation of the ABC system used by the Medicare contractors.
Additionally, the HHS OIG audits CMS's Medicare contractors to
determine the allowability of costs claimed for reimbursement. For
example, we identified 39 OIG audits of CMS's Medicare contractors
reported in fiscal year 2005. While these audits are a control
mechanism, they also have raised issues about costs claimed.
* Specifically, these audits uncovered issues related to the
allowability of Medicare contractor pension costs, overhead, and
severance and terminations costs.
CDC officials said that it does not have a MCA system in place and
noted that prior to fiscal year 2005, CDC used a cost allocation system
(METIFY) to help determine indirect program costs. Officials said they
stopped using the system in fiscal year 2005 when indirect costs were
separately budgeted.
In addition, though department-level officials said components were
expected to use the Oracle Projects cost accounting module when they
implement U FMS, CDC officials said that CDC had no current plans to
use the module for MCA, and had not yet completed a full assessment of
its MCA needs.
A document provided by HHS noted that the nature of some grant programs
posed challenges and obstacles to successfully implementing MCA:
* There is inherent difficulty in tracking performance of and obtaining
information on mandatory grants, which account for 85 percent of HHS's
annual grant funds disbursed.
* Grant-making OPDIVs expressed concern about a number of grant
management issues, including data lags from grantees and the inability
to verify and validate data.
According to HHS officials, while they had no MCA system in place at
the department level for managerial decision making, they used cost-
finding techniques to support budget formulation, and they aggregated
cost information from CMS, CDC, and other OPDIVs to prepare the HHS
SNC.
CMS Medicare contractors used a Medicare ABC system to report their
costs for reimbursement.
* CMS officials used the reported cost data to analyze contractor
performance and compare unit costs of activities. Officials said, in
some cases, they would seek corrective action if costs were higher than
the national average for contractors, or they would transfer subsequent
contracts to better- performing contractors.
SSA Background:
SSA's mission is to advance the economic security of the nation's
people through shaping and managing America's Social Security programs.
The programs include Old-Age and Survivors Insurance, Disability
Insurance, and Supplemental Security Income (SSI).
SSA also does work to support other programs and entities, such as the
Medicare program at HHS and, in some states, state supplementation of
SSI.
In fiscal year 2005, SSA reported annual operating expenses of
approximately $10.2 billion and employed approximately 65,000 people.
SSA's reported total net outlays, including benefit payments, were more
than $561 billion in fiscal year 2005.
SSA's organization is centrally managed with a nationwide network of
over 1,500 offices, which includes field offices, regional offices,
teleservice (800-Number) centers, and program service centers.
SSA: MCA Systems in Place:
SSA management promoted the benefits of MCA and monitored its
implementation.
* For example, SSA's Commissioner committed to better integrating
financial and budget data for decision making in her opening message of
the agency's 2004 performance and accountability report.
* The status of MCA system conversion to the Managerial Cost Analysis
System (MCAS) is tracked as a monthly performance indicator.
SSA has implemented a cost system with a unified structure for its
focused line of programs that collects cost data from its nationwide
network of offices.
According to SSA officials, SSA's basic cost allocation policy for
allocating direct and indirect costs to Medicare programs was
established about 1965.
SSA background documentation provided to us noted that SSA's
departmentwide MCA system, the Cost Analysis System (CAS), was first
put in use in 1976.
* SSA officials said that the agencywide CAS measures costs on a full-
cost basis, except for those expenses incurred by other agencies for
SA's benefit such as certain postretireent costs paid by OPM.
* According to SSA documents, the system integrates data from payroll,
work measurement, accounting , and other management information
systems, and assigns costs to the specific workloads and later to
funding sources.
Since 1987, SSA has tracked productivity improvement, and has current
productivity improvement goals of 2 percent per annum.
To better integrate data and systems for decision making, management is
in the process of implementing MCAS, a new second-generation MCA
system. SSA officials expect that MCAS will be implemented by September
2008. It is intended to:
* Eliminate several legacy systems and integrate with a new data
warehouse - the Social Security Unified IVI-measurement System SUMS -
for operational, performance and nonfinancial data.
* Update and expand upon the CAS system and, when integrated with SUMS,
provide more detailed management information to meet changing business
requirements.
* Help address outstanding audit findings which noted a lack of
policies procedures, and documentation concerning the collection,
review, ad reporting of information for some individual performance
indicators.
A component of the MCAS/SUMS project is the development of the Time
Allocation System (TAS). SSA documentation noted that:
* TAS is intended to gather employee time from workload information
drawn erectly from an individual's computer terminal, as work is being
performed.
* The new system is expected to enhance the accuracy of employee time
from workload data, which under the existing CAS system is based on
extensive sampling procedures.
* The need for labor-intensive work sampling procedures would be
reduced or eliminated.
SSA's system of internal control includes:
* Demonstrated tone at the top setting SSA's values, competence,
philosophy, and operating style.
* Documented policies and procedures.
* Financial data integration that includes edit checks and variance
analysis to help ensure data quality.
* Routine monitoring and assessment of performance and financial
information.
* Annual audits of financial statements, which resulted in 12
consecutive years of unqualified audit opinions, and an unqualified
auditor's opinion on internal controls over financial reporting for
fiscal year 2005 (SSA was the only CFO Act agency to receive positive
assurance on the adequacy of internal controls over financial reporting
for fiscal year 2005).
SSA's system of internal control also includes regular internal review
of financial and feeder systems by a contractor for the Office of
Financial Policy and Operations. According to SSA documents, this
review program:
* Tests key systems within a 5-year cycle.
* Uses GAO's Federal Information System Controls Audit Manual (FISCAM)
methodology.
* Identifies system weaknesses and unresolved findings from past
reviews and recommends system improvements.
* For example, in a June 2004 CAS review report, auditors recommended
improvements in certain documentation, report distribution, and general
computer controls. While management considered the risks associated
with CAS to be low because the conversion to MCAS is under way,
officials told us management nonetheless took corrective action on most
recommendations.
SSA: Use of MCA Information:
SSA uses MCA information to allocate administrative expenses, as
required by law, to:
* SSA trust funds (e.g., Old Age and Survivors Insurance, Disability
Insurance);
* HHS administered trust funds (e.g., Medicare Health Insurance and
Supplementary Medical Insurance), which according to SSA officials,
account for about 15 percent of SSA s administrative expenses; and
* general funds (e.g., SSI).
According to SSA documents and SSA officials, MCA data from CAS are
also routinely used to:
* Determine unit costs and production rates for various time periods.
* Track workload output, such as transactions processed and pending.
* Measure actual performance against planned and past performance.
* Assist with budget formulation and execution and the development o
the Service Delivery Budget - the Commissioner's multiyear plan to
improve productivity and fiscal stewardship - which aligns costs and
work years with overarching performance goals in SSA's strategic plan.
SSA uses MCA to facilitate recovery of full cost for reimbursable
activity, such as earnings records requests from pension funds and
individuals. However, SSA has not analyzed the costs related to fees
that it charges to states for processing state supplementation claims
to determine whether the states might be under-or overcharged for full
SSA costs incurred [Footnote 4].
The original fees were established by law with later provisions
permitting yearly increases based on the Consumer Price Index or a
different rate as the Commissioner of SSA determines is appropriate for
each state.
[4] In fiscal year 2005, SSA collected $276 million in SSI fees from
the states. As provided by authorizing legislation, $151.2 million of
this amount went to the Department of the Treasury.
SSA expects that implementation of SUMS/MCAS will improve the quality,
consistency, and accessibility of information used by managers and
analysts throughout SSA by:
* Capturing and counting work more consistently across the agency.
* Improving documentation controls over the workload data generation
and calculation processes.
* Providing, down to the local manager level, valid productivity
information and more comprehensive information about the full cost of
work activities.
* Minimizing manual data collection and inputs.
Conclusions:
Strong leadership is needed to implement MCA across government. This is
true regardless of whether a department chooses a departmentwide system
or delegates responsibility for system development to component
agencies. In either case, the reliability of the data used will depend
on how well system implementation is monitored and whether a sound
system of internal controls is established.
Department of Health and Human Services:
In the absence of strong leadership to promote and monitor MCA
implementation across its OPDIVs, HHS management lacks routine access
to reliable cost information to inform management decisions. This
absence also contributed to a difference between HHS expectations and
CDC and CMS plans for implementing the Oracle Projects cost accounting
module. Without appropriate evaluation of their MCA needs and the
Oracle Projects cost accounting module, HHS will not know whether the
module can provide the necessary MCA information.
Social Security Administration:
SSA's strong leadership promoting MCA and monitoring its usage and
implementation, aided by a centrally managed organizational structure
and fostered by legislative requirements, has resulted in routine use
of MCA information for management decision making. Further
opportunities for MCA could include analysis of costs and revenues
related to fees for state supplementation. Enhancements to SSA's MCA
system, planned for completion in September 2008, are intended to
improve data precision of its workload sampling procedures.
Recommendations for Executive Action:
Recommendations to the Secretary of Health and Human Services:
To help ensure that HHS and its operating divisions implement and use
reliable MCA methodologies, we recommend that the Secretary of Health
and Human Services:
* take an active leadership role to promote the benefits and uses of
MCA;
* direct appropriate department-level officials to develop procedures
to monitor the implementation of its MCA policy at its OPDIVs and PSC;
and:
* direct appropriate officials to evaluate whether the Oracle Projects
module will provide MCA information to support decision making at HS,
its OPDIVs, and PSC.
Recommendation to the Commissioner, Social Security Administration:
To better understand the relationship of costs and revenues related to
fees for administering state supplementation programs, the SSA
Commissioner should direct appropriate officials to study those costs
to determine the full cost, including the cost of services provided by
other entities for the benefit of SSA.
Agency Comments and Our Evaluation:
We requested comments on a draft of our briefing presentation from the
Secretary of Health and Human Services and the SSA Commissioner or
their designees. We considered and incorporated, as appropriate, the
comments we received by e-mail from HHS and by letter from SSA.
HHS did not respond to our conclusions and recommendations to promote
MCA, develop procedures for monitoring MCA implementation, and evaluate
whether the Oracle Projects module will provide MCA information to
support decision making at HHS.
In its technical comments, HHS said that it is developing a "green
plan" to provide better financial information to managers, and that the
effort will include leveraging UFMS projects to provide MCA data.
The HHS green plan initiative was undertaken in response to the
President's Management Agenda which outlined five government-wide goals
to improve federal management, including improved financial performance
and budget and performance integration.
At the time of this review, an HHS contractor had interviewed OPDIV
representatives and conducted benchmarking research to recommend an
approach for developing HHS's green plan. The contractor's plan for
HHS, however, did not identify how UFMS would be leveraged to provide
MCA data. Accordingly, we did not modify our report to address this
comment.
SSA generally agreed with our findings, conclusions and recommendation
to analyze the full cost SSA incurs for processing state SSI
supplementation claims. SSA agreed to consider our recommendation when
TAS is implemented, making it easier to perform a detailed analysis to
determine the full cost SSA incurs for the state SSI supplementation
programs.
SSA also stated that the elements of cost in the state SSI
supplementation program fee and the impact of imputed costs on that fee
cannot be readily determined. These kinds of determinations, however,
are the essence of cost accounting and, as suggested by SSA, may be
facilitated by implementation of TAS.
[End of Section]
Enclosure II:
Comments from the Social Security Administration:
Social Security:
The Commissioner:
March 23, 2006:
Mr. Robert E. Martin:
Director, Financial Management and Assurance:
U.S. Government Accountability Office:
Washington, D.C. 20548:
Dear Mr. Martin:
Thank you for the opportunity to review excerpts from your upcoming
report, "Managerial Cost Accounting Practices: Department of Health and
Human Services and the Social Security Administration." Our comments
are enclosed.
If you have any questions, please have your staff contact Candace
Skurnik, Director, Audit Management and Liaison Staff, at (410) 965-
4636.
Sincerely,
Signed by:
JoAnne B. Barnhart
Enclosure:
Comments Of The Social Security Administration (SSA) On The Government
Accountability Office (Gao) Draft Report, "Managerial Cost Accounting
Practices: Department Of Health And Human Services And The Social
Security Administration" (Gao Code 147009):
Thank you for the opportunity to review and provide comments on
excerpts of this GAO draft report concerning managerial cost accounting
(MCA) at SSA. The report acknowledges SSA management's strong
leadership role in developing, promoting and implementing the benefits
and use of MCA policies and procedures, and recognizes our progress in
implementing a second-generation system, the Managerial Cost Analysis
System (MCAS), to better integrate data and systems for decision
making.
GAO Recommendation:
To better understand the relationship of costs and revenues related to
fees for administering State Supplemental Security Income (SSI)
supplementation programs, the Commissioner of Social Security should
direct appropriate officials to study those costs to determine the full
cost, including the cost of services provided by other entities for the
benefit of SSA.
SSA Comment:
The GAO draft report notes that a component of our implementation of
the MCAS is development of the Time Allocation System (TAS). We agree
to consider this recommendation when the maturity of the TAS makes it
feasible to perform a detailed analysis to determine the full cost SSA
incurs for the State SSI supplementation programs.
Other Comments:
We suggest the following changes to the GAO report for improving the
accuracy and clarity of matters addressed in the report.
To enhance the report's clarity with regard to determination of fees
for State SSI supplementation programs, we suggest the following
background information be included in the GAO report. The original fees
were established by law with later provisions permitting an increase
based on the consumer price index (CPI) or establishing a different
rate as the Commissioner of Social Security determines is appropriate
for each State. Each year, SSA has increased this fee by the
appropriate CPI. Since the original fee was established by law and not
the actual full cost, the elements of cost in the fee cannot be
precisely determined. Thus, the estimated impact of imputed costs in
the SSI administrative fee also cannot be readily determined. This does
not necessarily mean the fee does not cover the imputed costs. It only
means a reasonable fee was established based on law, not a precise cost
accounting methodology, for each State participating in the SSI
supplementation program.
Page 12, 2nd bullet should be revised to read, "SSA also does work to
support other programs and entities, such as the Medicare program at
HHS and, in some States, State supplementation of SSL"
Page 12, 3rd bullet, second sentence should be revised to read, "SSA's
reported net outlays, including benefit payments, were more than $563
billion in fiscal year 2005." Additionally, we want to clarify that the
$10.2 billion in operating expenses noted on page 12, 3 bullet, first
sentence, includes not only SSA's Limitation on Administrative Expense
expenses, but also: 1) Department of the Treasury expenses to assist in
managing the Old-Age and Survivors Insurance Trust Fund and the
Disability Insurance (DI) Trust Fund (which Treasury draws directly
from the trust funds as managing trustee); 2) reimbursement payments to
State Vocational Rehabilitation agencies; and 3) Ticket to Work
payments to Employer Networks for rehabilitation services provided to
DI and SSI beneficiaries.
Page 16, 2nd and 3rd bullets should be revised by inserting the words
"employee time from" immediately before the word "workload" in both the
2ND and P bullets.
Page 21, the second sentence in the bullet should be revised by
deleting the word "SSI."
Page 21, footnote #4 should be revised to read, "In fiscal year 2005,
SSA collected $275 million in SSI fecs from the States. Of this total,
$151.2 million went to the Department of Treasury."
Page 24, the second sentence should be revised to read, "Further
opportunities for MCA could include analysis of costs and revenues
related to fees for State supplementation."
Page 25, the second line should be revised by deleting the word "SSI."
[End of Section]
Enclosure III:
GAO Contact and Staff Acknowledgments:
GAO Contact:
Robert E. Martin (202) 512-6131 or martinr@gao.gov:
Acknowledgments:
In addition to the contact named above, key contributors to this
assignment were Jack Warner, Assistant Director; Lisa Crye; Dan Egan;
Fred Evans; Barry Grinnell; Tom Hackney; Barbara House; Paul Kinney;
Lisa Knight; James Moses; and Glenn Slocum.
(197009):
FOOTNOTES
[1] Pub. L. No. 101-576, 104 Stat. 2838 (Nov. 15, 1990).
[2] In 2005, JFMIP's responsibilities for financial management and
policy oversight were realigned to the Office of Management and Budget,
the Office of Personnel Management, and the Chief Financial Officer's
Council.
[3] Pub. L. No. 104-208, div. A., § 101 (f), title VIII, 110 Stat.
3009, 3009-389 (Sept. 30, 1996).
[4] GAO, Managerial Cost Accounting Practices: Leadership and Internal
Controls Are Key to Successful Implementation, GAO-05-1013R
(Washington, D.C.: Sept. 2, 2005).
[5] GAO, Managerial Cost Accounting Practices: Departments of
Education, Transportation, and the Treasury, GAO-06-301R (Washington,
D.C.: Dec. 19, 2005).
[6] GAO-05-1013R, 12; GAO-06-301R, 7.
[7] GAO, Standards for Internal Control in the Federal Government, GAO/
AIMD-00-21.3.1 (Washington, D.C.: November 1999).
