PREPARED STATEMENT We also have built into our request moneys to ensure funding for the Federal Employees Pay Comparability Act. This act has affected us greatly, and we want to ensure that funding is available. It is also in my formal statement. With your permission, I would like to stop my oral testimony now and reserve whatever time remains to answer questions that you might have about our operations or about the Department. [The statement follows:] STATEMENT OF RICHARD P. KUSSEROW Good morning Mr. Chairman, I am Richard P. Kusserow, Inspector General of the Department of Health and Human Services. I am pleased to appear before you today to present the fiscal year 1992 appropriations request for the Office of Inspector General (OIG). The fiscal year 1992 budget request we present for your consideration will enable us to continue our statutory mission to eliminate waste, fraud and abuse in the Department's programs and to protect those beneficiaries whose health and welfare depend on them. Also, it will enable us to undertake a major new effort to improve financial management across the Department by implementing provisions of the Chief Financial Officers Act of 1990. ACCOMPLISHMENTS Let me take this opportunity to thank you for your continued trust in our office and for your assistance with our past fiscal years' appropriations. Before discussing our objectives for the coming year, I would like to briefly recount our most recent accomplishments. Fiscal year 1990 marked our tenth consecutive increase in savings and prosecutorial accomplishments. During fiscal year 1990 alone, $5.8 billion in program savings, settlements, fines, restitutions, and receivables resulted from implementation of OIG recommendations, contributing toward a five year total of nearly $28 billion. We continue to implement the many enforcement responsibilities that the Congress and the Secretary have entrusted to our office. In fiscal year 1990, we imposed approximately 900 administrative sanctions on individuals and entities who defrauded or abused departmental programs or their beneficiaries. This is nearly double the number of sanctions made just two years ago. In addition, our investigations resulted in 1,310 successful judicial prosecutions. We are continuing to enhance the OIG Cost Savers and Management Improvement Recommendations handbooks to make them more useful to the Administration and Congress. These books, commonly referred to as the Red and Orange books, describe where funds could be better utilized and make recommendations as to which departmental programs require management improvements. The recent enactment of the Omnibus Budget Reconciliation Act of 1990 (OBRA 1990) implemented numerous recommendations made by the OIG. Our preliminary analysis indicates that this law contained more than $31 billion in Medicare savings alone which pertained to OIG recommendations. This represents 72 percent of all Medicare savings enacted. Significant changes in legislation include savings for durable medical equipment, outpatient procedures, the Part B deductible, prescription drugs and clinical diagnostic laboratory tests. In addition, OBRA 1990 included significant savings for the Social Security Administration's (SSA) trust funds based on the OIG's recommendations. Savings over a five year period are estimated to total nearly $10.3 billion for OIG recommendations made in the following areas: Mandatory coverage for part-time State and local employees not participating in a public retirement system, acceleration of the payment of FICA taxes, and recovery of Retirement, Survivors and Disability Insurance (RSDI) overpayments by reducing Federal tax refunds. We estimate that the President's fiscal year 1992 budget request, if enacted, would effect nearly $5.3 billion in savings which are attributable to OIG recommendations. BUDGET REQUEST The resource request currently under your consideration reflects a substantial new area for us. Our fiscal year 1992 budget request includes 1,510 FTE's and $111,189,000 in obligational authority, of which $63,842,000 would be from appro priations and $47,347,000 would be transferred from the Medicare and Social Security trust funds for work in support of these programs. This request is an increase over last year as a result of two important pieces of legislation which were enacted by the 101st Congress: the Chief Financial Officers Act (CFO) of 1990 and the Federal Employees Pay Comparability Act. I would like to briefly describe the impact of these legislative actions on the OIG. CHIEF FINANCIAL OFFICERS ACT The Chief Financial Officers Act of 1990, for which we are requesting 95 FTE's and $9.5 million, has important implications for Federal financial management. It requires agencies to prepare and the OIG to audit financial statements for revolving funds, trust funds and for agency offices, bureaus and activities which perform substantive commercial functions. While we will begin these audits for 7 programs in the Social Security Administration in fiscal year 1991, we will be adding 52 programs in fiscal year 1992, bringing 80 percent of the Department's outlays under audited financial statements. The goal of these audits is to express an independent opinion on the accuracy of the financial statements. In addition, these audits will instill public and governmental confidence that no further "HUD type" scandals will occur and will provide an assessment of the results of operations of the audited Federal programs. We have made substantial progress in planning and executing the responsibilities required by the Act. In support of this activity, we have established a new audit unit, the Accounting and Financial Management Division, committed solely to effecting financial policy and to providing technical assistance. In addition, many of the Department's and the OIG's activities related to the Federal Managers' Financial Integrity Act (FMFIA) will be useful in preparing and auditing financial statements. This information on the most serious of the Department's control weaknesses has a major impact on the financial statements which the Department is required to produce. Many problems identified through FMFIA reviews must be resolved prior to developing acceptable financial statements. Further, we will use relevant information from performance audits, inspections and investigations in the audit of program financial statements. For example, in fiscal year 1990 the OIG performed a review of the Department's payroll system relative to time and attendance. This review identified significant weaknesses in the Department's controls regarding time and attendance of employees. We are able to use the results of this review to plan audits of the Department's payroll system in order to render an opinion on the accuracy of financial statements in this area. There are many similar examples of audits conducted in the past. FEDERAL EMPLOYEES PAY COMPARABILITY ACT The other piece of legislation enacted last year which has affected OIG's resource request is the Federal Employees Pay Comparability Act (FEPCA) of 1990. We estimate that this new law will increase OIG's payroll costs by nearly $1.3 million in fiscal year 1992. In addition to the geographic differentials currently being paid for our employees located in New York City, Los Angeles and San Francisco, this law also stipulates special pay for law enforcement officers. These new pay reforms are designed to reduce turnover and provide incentives to law enforcement officers. At this time OIG has decided to implement only the mandatory provisions of the Act. The other discretionary provisions will be implemented as funding becomes available. In addition to the new financial management activities, we will continue our efforts to target vulnerabilities in HHS programs and activities that protect the safety, health and welfare of the American people and to prevent and detect fraud, waste and abuse and to promote economy and efficiency in the Department and its programs. This includes our endeavors in the following areas: reviewing whether Medicare is being billed as the secondary payer; monitoring the implementation of physician payment reforms; reviewing programs within the Public Health Service, such as the Indian Health Service, acquired immune deficiency syndrome (AIDS) activities, and the Food and Drug Administration (FDA); and evaluating the impact of the expansion of the Head Start program. CONCLUSION In summary, our goals are ambitious. But we believe you have found that funding for the OIG is a sound investment. In fiscal year 1990, each dollar you invested in our Office resulted in savings of more than $62. We are pleased with the accomplishments we have had in ensuring that beneficiaries receive quality care, that the integrity of the trust funds is maintained and that those individuals who defraud the Department's programs are held responsible for their actions. The resources that we have requested for fiscal year 1992 will enable us to further our accomplishments, protect departmental programs and safeguard the health and welfare of program beneficiaries. Our new responsibility for auditing financial statements will help improve financial management of the Department's programs. BIOGRAPHICAL SKETCH OF RICHARD P. KUSSEROW Richard P. Kusserow has served as Inspector General of the U.S. Department of Health and Human Services since June 1981. He has the statutory responsibility to ferret out fraud, waste, abuse and inefficiency in the world's largest agency. The department has some 250 health and human services programs with a budget of nearly $500 billion which represents more than one-third of Federal outlays. Kusserow directs a staff of 1,400 auditors, inspectors, program analysts and investigators. His office recorded more than $5.5 billion in fines, savings, restitutions, recoveries and settlements in the last year. This represents a 3,500 percent increase during his tenure. Since 1981, convictions resulting from his investigative staff rose from 165 to nearly 1,300, an 800 percent increase. Additionally, he has increased successful administrative sanctions in excess of 1,000 percent. Kusserow served from 1986 to 1989 as the Vice Chairman of the President's Council on Integrity and Efficiency (PCIE). The PCIE was established to provide cohesive leadership to governmentwide activities to reduce fraud, waste and abuse in Federal programs and operations. Kusserow is president of the National Association of Government Accountants (AGA) and past-president of the Baltimore Chapter of AGA. Since 1985, he has served on the AGA Task Force on Federal Financial Management. in 1989, he served on the National Advisory Commission on Enforcement and he was a member of the Attorney General's Economic Crime Council from 1985–89. He also served 3 years on the Executive Committee of the National Intergovernmental Audit Forum. In 1984 and 1985, he was national president of the Association of Federal Investigators and is an active member of the Society of Former FBI Agents. In 1984, Kusserow received the Secretary's Bronze Medal from the Department of Health and Human Services. It represents one of the highest honors accorded to an HHS employee. In 1987, he received the National Distinguished Leadership Award for sustained outstanding leadership and notable contributions in the field of financial management from the National AGA. Kusserow served in the United States Marine Corps and was honorably discharged as a captain. He was an intelligence officer with the Central Intelligence Agency (CIA) before joining the Federal Bureau of Investigation (FBI) in 1969 as an FBI special agent. He was the coordinating supervisor of the Chicago FBI Organized Crime program preceding his appointment as Inspector General. He earned his bachelor's degree from UCLA and a master's degree from California State University at Los Angeles where he was also employed as a lecturer in government. He has done postgraduate work at Southern Methodist University and John Marshall University School of Law. He has lectured widely and written numerous articles on innovative management and investigative techniques to detect and prevent fraud and corruption in government programs. He is co-author of the book entitled "Management Principles for Asset Protection." INDIRECT COSTS Senator HARKIN. Thank you very much, Mr. Kusserow, for your statement. I have some questions on the chief financial officers matter, but I will come back to that later. I really want to get into the indirect costs, because this is something that, the more I look at it from my limited viewpoint, I believe that there is just something amiss here. I do not know what it is, but there is something wrong someplace. Mr. KUSSEROw. I do not know if it will provide you any comfort, Mr. Chairman, but I have personally been looking at this area for 10 years, and I am at the same place as you. So I feel a great deal of discomfort as well. Senator HARKIN. I would like to tackle this. Of course, we heard about the costs of the yacht and the flowers and things at Stanford University that were included. We have an indirect cost range from 6.3 percent for the foundation at New Jersey Institute of Technology to 155 percent for the Michigan Cancer Foundation. For colleges and universities, the rate ranges from 26.3 percent for New Mexico State University to 108 percent for Gettysburg College. We also computed the space difference between a research project at the University of Washington, I believe it was, and Southern California. I'll have my staff correct me as I go along, but at one university they had allocated 1.1 million square feet, and the other one was about 500,000 square feet for similar research projects, with obvious indirect costs being a lot more at one than the other. My staff says both received about the same amount of money from NIH for the research work, but the indirect costs are obviously a lot more in one case than in the other. Tell me about these charts you have here, Mr. Kusserow. What should we be looking at here? Mr. KUSSEROW. Let me see if I can put the whole discussion in context. First of all, there are roughly 2,800 colleges and universities in the country that have Federal money flowing through them, and all but 39 of those schools are under the cognizance of HHS, meaning under the cognizance of my office. Cognizance means that, years ago, if the Department of Education had some money on a campus, they would go and audit it. Then the Department of Commerce would go out to the same university and audit their own money. Then we would go out and audit ours, and everybody in turn would go out. What OMB has decided is that that is a very inefficient way in which to do audits. Plus, there is always the problem of whether people are moving money around, depending upon who is arriving to do the next audit. So they said whoever has the most money going to the school should have the responsibility of being the Federal auditor. They formalized that decision under OMB circular A88. The way that ended up, though, is that virtually the entire universe went to our Department because we have so much in the way of research money out there. So we had most cognizance assigned to us. For the purpose of this discussion, I would mention that out of those 2,800 schools, the 39 that belong to the military industrial complex includes Stanford University. So that was not our school, it was the Defense Department's. Senator Department HARKIN. The Stanford deal was a Defense Mr. KUSSEROW. A Defense Department school, yes. I would be shocked if those kinds of horror stories appeared in our area of cognizance. The point of this is that it was not our school. I think the more important thing in trying to get a handle on the problem is to realize that if you were to go from that 2,800 down to the number of schools that really engage in research grant work, then you get down from 2,800 to 600. If you were to ask who gets the most money, 95 percent of the money is flowing to 276 schools. So suddenly we go from a universe of 2,800 down to 276 where virtually all the money is going. The chart in front of you on the top left basically tries to outline how much money is out there. You can see that from our end of the pot, meaning from NIH research, we have about $3.9 billion out there. But it should be emphasized that if you were to add the research that comes from all the other departments like Defense or the National Science Foundation and a host of others, the overall number of research dollars going to these universities is much higher than that. DIRECT VERSUS INDIRECT COSTS The chart on the right tries to differentiate between direct and indirect costs. The confusing thing is that you will have somebody who says they can do a certain type of research in a certain area, whether it be cancer research or dealing with the HIV virus or whatever the case may be. So there is cost associated with engaging in that research that is direct; that is, you pay the researchers and you pay to sustain their operation. Indirect cost is due to the fact that the principal investigator, who gets the grant, has to house the overall operation. In the housing of it they will go to a university, where they have what is called the indirect cost component. This includes items that are not specifically identifiable to the research grant, but are things that helps house it. So it would include the general administration of the university where this research is taking place, their portion of the overall departmental administration costs, campus guards, the mowing of the lawns, et cetera. One of the most perplexing things that I have encountered over 10 years of looking at this area is that I cannot identify factors that would explain the differential between universities. The chart on the bottom is a fairly randomly selected number of universities and what their indirect costs are. You will see that there are both public and private schools, and they vary enormously. Now I have tried over the years to identify common factors. Is it the size of the university that affects the indirect cost rate? Is it the amount of grants they are servicing? Is it the amount of money that is going to the universities? Pardon my French, Mr. Chairman, but I will be damned if I can figure out any correlation to any of these things. We have developed a system by which we pay for the housing of this research, which almost involves a gentleman's agreement. That is, we have to depend a great deal upon what the university says indirect costs cover and what they should be. Now we do not trust them entirely, but we trust them to a certain measure. My wife always says that when you have a gentleman's agreement, really what it requires is that both parties be gentlemen. So if you have a situation where one is not, you have a problem. We have a Division of Cost Allocation in our Department that tries to look at indirect cost aberrations and deal with them. I will tell you, Mr. Chairman, that they do a far better job with their huge host of responsibilities than the Defense Department does. There is an 8-point percentage difference between what we pay in indirect costs where we are the cognizant agency versus what the |