recipients, there will often be cases in which it is judged that recovery would constitute an undue hardship. OFFICE OF INVESTIGATIONS Mr. MICHEL. Of the 42 new positions for the Office of Investigations referred to in your statement, how many have actually been filled to date? Mrs. LYNCH. Of the 42 new positions available to the Office of Investigations, four new employees have been hired and of these, three have entered on duty. The fourth employee-the Director, Office of Investigations will enter on duty April 19. Seven recruitment actions for senior investigators to head up field offices are being processed and the selections will be made by the new Director, Office of Investigations. Additional recruiting actions for 22 investigator positions are being processed for announcement by the Personnel Office. It is anticipated that within the next 6 to 8 weeks at least 39 of these 42 new positions will be filled. Mr. MICHEL. Would you provide for the record a statement of the role and functions of the Office of Investigations? Mrs. LYNCH. The Office of Investigations is authorized to conduct investigations of alleged cases of malfeasance, fraud, misuse of funds, equipment or facilities, violations of terms or conditions of funding, and conflict of interest by employees, grantees, contractors, and other personnel working on behalf of the Department. The Director, Office of Investigations has the authority to undertake such investigations without the prior approval of higher authority. No other unit or official within the Department will undertake such investigations unless specifically authorized by the Director, Office of Investigations. Mr. MICHEL. You have requested 108 new positions for a new Medicaid fraud and abuse unit. How will that unit differ from the Office of Investigations? Mrs. LYNCH. The function of the Medicaid fraud and abuse unit primarily is to help the States, who have first responsibility for eradicating fraud and abuse. This unit will assist States in developing management and claims processing and systematic detection activities that indicate program deficiencies. The Office of Investigations, in contrast, will be involved with specific cases that require investigation by trained criminal investigators and which may result in prosecution for violation of Federal law. NUMBER OF AUDITORS Mr. MICHEL. You are stepping up your fraud and abuse activities, and the auditors are the primary force to find fraud and abuse. Yet you are not increasing the number of auditors. Can you really step up your fraud and abuse activities without increasing the number of auditors? Mrs. LYNCH. The HEW Audit Agency provides audit coverage for all department programs. Its mission is to determine whether department operations are being conducted economically, efficiently and effectively and to provide a reasonable degree of assurance that Federal funds are expended properly and for the purpose for which appropriated. Audits performed are not specifically designed to uncover fraudulent practices but rather are aimed at determining that delivery systems used are functioning properly and have adequate controls to carry out program provisions. This includes financial, compliance, and programmatic controls. As a result of audit, recommendations are made to improve internal controls, strengthen management processes and, in some instances, request reimbursement for improperly spent funds. On occasion matters disclosed as a result of audit go beyond the scope and expertise of the Audit Agency and require professional investigation. In some instances these are areas where questionable practices may indicate potential fraud. When such matters are uncovered, they are directed to the Department's Office of Investigations for further action. To this extent, the audit effort complements the Office of Invesigation role in detecting fraud and abuse. As far as audit resources are concerned, the Audit Agency is presently authorized 960 positions. In addition, the Agency uses approximately 2.178 man-vears of effort provided by outside auditors including public accounting firms and State auditors. Thus, a total of 3,138 man-years of audit effort are available as compared to a total workload requiring some 3,834 man-years. There is no question that a gap exists a gap that presently equates to 696 man-years. The fiscal year 1977 budget did not request additional audit staff at this point in time. In agreement with the Office of Management and Budget, an analysis is being made of the potential increased use of CPA and State auditor effort. This analysis will be completed during May 1976. At that time, the Department will be in a position to decide how and to what extent HEW audit staff resources may need to be increased. Mr. MICHEL. Do you have any rule-of-thumb which indicates the amount of erroneous expenditures discovered per audit? Mrs. LYNCH. Current data show that more than $600,000 in erroneous expenditures are identified per audit. This, however, is an average of greatly diverse amounts. For example, some reports identify only minimal amounts while others address millions of dollars of erroneous expenditures. INDIRECT COSTS Mr. MICHEL. When the Alcohol and Drug Abuse people were before us, they indicated that indirect costs account for 40 percent of their grants. I understand that the NIH indirect cost rate is now up to 35 percent. Do you have any figures as to what it is department wide? Mrs. LYNCH. We believe the figure cited by Alcohol and Drug Abuse is in error and should be in the range of 34-35 percent. We have no reliable departmentwide information. As we have indicated previously, the Department's records do not at the present time provide for the accumulation of such information. We are endeavoring to capture this information for project grants made after July 1, 1976. Mr. MICHEL. Do you have any figures as to the total amount of HEW money which is going into indirect costs? Mrs. LYNCH. We have no reliable information. We would estimate somewhere between $500 and $600 million annually. Mr. MICHEL. Can you give us figures as to the number of different agencies in which indirect cost payments are made, and the total amount for each agency? Mrs. LYNCH. Indirect costs are paid on project grants and cost reimbursement contracts awarded by all Department agencies. Except for the National Institutes of Health, we have no reliable information on the amount of indirect costs paid by those agencies. Mr. MICHEL. I understand that you are in the process of developing a new indirect cost formula. Would you explain how it will work and how it will differ from the current system. Mrs. LYNCH. We have recommended to the Office of Management and Budget a series of changes to the current Federal cost principles for colleges and universities. The purpose of these recommendations is to give us a greater assurance that college and university charges for indirect costs are truly reflective of the amount of services provided to Federal grants and contracts. We have recommended clarification of language and the stipulation of a greater degree of uniformity in allocating costs which ultimately results in charges to Federal awards, given the state of the art of cost accounting now existent in the college and university community. We have not recommended, and we do not anticipate, any fundamental changes in the basic formula under which indirect costs are now computed but rather than tightening up of that formula by limiting the flexibility now afforded institutions in allocating costs. We are currently discussing our recommendations with the Office of Management and Budget and the college and university community in an effort to reach a resolution of those changes which will ultimately be made in Financial Management Circular 73-8. Some of the major changes we have suggested are submitted for the record. [The information follows:] CHANGES IN COST PRINCIPLES FOR COLLEGES AND UNIVERSITIES 1. Expand the scope of the circular to cover all types of Federal programs, rather than just research and training awards (for example, clinical centers, community oriented programs). 2. Replace buzz words such as "adequate," "appropriate," "generally acepted institutional practices", and so forth, which have different meanings to different readers, and have caused disputes, with words which given specificity to requirements. 3. Redefine research to include self-sponsored research including mandatory cost sharing by institutions. 4. Prescribe more definitive procedures for allocating indirect costs between Federal and nonfederally supported activities of the institution to: (a) Reduce disagreements on methodology between individual institutions and Government representatives; and (b) to bring about greater uniformity in costing data for making comparisons between institutions to assess reasonableness, probable causes of rate changes, trends, and so forth. 5. Provide more definitive guidance on time and effort reporting. Require 100 percent accountability of the effort of each individual whose salary is charged wholly or partially, to Federal awards. Requires that reports supporting S. & W. charges to Federal awards be consistent with and reconcilable to reports submitted to State/local legislatures or regulatory agencies and under Fair Labor Standards Act. Retains current requirement for monthly reporting for faculty and other professionals. 6. Limit amount of departmental administration chargeable to Federal awards to that portion of the salaries of deans and associate deans applicable to their administrative duties. All other departmental expenses are defined as being applicable to nongovernment activities. 7. Eliminate the library as an indirect cost pool and instead permit reimbursement as a direct charge to the extent that library services are actually provided to a grant or contract and approved by the awarding agency. 8. Clarify the current rules on the distinction between student aid and compensation to students for work performed on grants and contracts; requires a bona fide employer/employee relationship as a condition for the allowability of tuition remission and other forms of compensation paid to students. 9. Make student service costs (for example, registrar admissions, deans of students, et cetera) unallowable as charges to Federal awards. These costs are incurred for and are applicable to students in their capacity as students and not in their capacity as part-time employees on Federal grants and contracts. 10. Eliminate the educational service agreement (training) indirect cost rate now prescribed in the cost principles; instead, requires that training grants and contracts be costed in line with the facilities and resources used in performing them. Thus, research training grants would take the same rate as research grants because they use the same resources. This proposal stems from college and university contention (with which we agree) that research and training are to a large extent indistinguishable. Mr. MICHEL. Will the new formula reduce the indirect cost rate? If so, by about how much? Mrs. LYNCH. We cannot answer that question with certainty. The new formula should provide us with the greater assurance that the charges made to Federal awards are truly indicative of the amount of benefits and services provided to those awards. Whether this would result in less costs charged to Federal grants and contracts is unanswerable at this time. Mr. MICHEL. When the Secretary was here, he indicated it wasn't important that we know the total number of grants and contracts being issued by your Department. Well, I think it is important and I would like to have that figure, and by agency if possible. Mrs. LYNCH. We will be happy to provide this information. [Information follows:] Agency DEPARTMENT OF HEALTH, EDUCATION, AND WELFARE GRANTS AND CONTRACTS 1 Office of the Secretary.. Office of Human Development.. Office of Education.. Office of Regional Directors. National Institutes of Education.. Social Security Administration. Social and Rehabilitation Service. Public Health Service... Total.. 1 Contract awards are reflected for fiscal year 1975 and grant awards for fiscal year 1974. A Department-wide grants information system is presently being developed which will produce up-to-date grant tabulations. Contract awards for the Office of Human Development are included in the total reflected for the Office of the Secretary. Mr. MICHEL. At what levels are grants and contracts approved in the Office of the Secretary? Mrs. LYNCH. The Assistant Secretary for Planning and Evaluation has authority for awarding grants under the policy research program. This is the only grant program within the Office of the Secretary. The Assistant Secretary for Administration and Management has overall authority for awarding contracts in the Office of the Secretary. This authority is delegated to and exercised by Federal contracting officers in his office. Although formal contract authority rests with this office, specific contract approvals are also required from program offices entering into contracts, by the budget and finance office, and under certain circumstances, by other organizations within the Department such as the Audit Agency and the Office of Grants and Procurement Management. Mr. MICHEL. Under your predecessor, several task forces were appointed to study grant and contract procedures in the Department and make recommendations for improvements. I understand that this work has been completed, correct? Mrs. LYNCH. Yes, that is correct. Mr. MICHEL. What generally have the recommendations been-and I would suggest that you submit for the record a detailed list—and are you taking steps to implement them? Mrs. LYNCH. Generally the recommendations concerning grants have been directed toward definition of the appropriate roles of program officials and grants officials; establishment of departmental standards for grant and contract policy and procedures; making grants management a distinct function from that of program policymaking and management; and making administrative actions in all major functions visible and open. Regarding contracts, recommendations were directed toward: Furthering independence of contracting offices; improvement of departmental procurement policy and insuring that authority to make noncompetitive procurements was exercised only when absolutely necessary. A detailed list of grant and contract procedures is provided for the record. [The information follows:] RECOMMENDATIONS ON GRANTS (1) Grantmaking should compile manuals detailing their procedures for the monitoring of grant-assisted projects and should reevaluate and improve such procedures on the basis of regular reviews of results. Standardized monitoring records should be maintained. (2) Grantmaking offices should determine, before making a grant, what risks there may be that grant funds will not be economically utilized solely for permissible purposes and, where risks are present but the grant should nevertheless be made, they should place necessary special conditions on the grant and make sure that appropriate assistance is available to further the grantee's compliance with requirements. (3) Full information about discretionary grant programs, such as the governing regulations, application due dates, application evaluation criteria and, where feasible, projected funding levels, should be published in the Federal Register and elsewhere early enough to afford all potential applicants adequate opportunity to compete for grants. (4) Grant application evaluation criteria should include, at a minimum, criteria going to the soundness of the project proposed, the reasonableness of the estimated costs, and the congruence of the project with the published program objectives. (5) Grant applications should be date stamped, assigned identification numbers and acknowledged upon receipt, and they should be promptly forwarded from the reception point to the office responsible for processing. (6) Grant applications should be objectively reviewed and scored by evaluation panels in accordance with the published evaluation criteria. As far as consistent with the nature of the program, evaluation panels should consist of Federal employees. Where panels include members associated with organizations applying for grants, a member should not participate in the review of an application from his organization. (7) Where field readers are employed instead of a grant application evaluation panel, the readers should serve on terms approximating as nearly as feasible those applicable to panel members. (8) A ranking of the grant applications should be prepared on the basis of the scores received. The appropriate program official should prepare a list of |