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Performance and Accountability Report
Fiscal Year 2002

U.S. Department of Health and Human Services
Notes to the Principal Financial Statements
For the Fiscal Years Ended September 30, 2002 and 2001
(in millions)

Note 1. Significant Accounting Policies

Reporting Entity
The Department of Health and Human Services (HHS) consists of 12 Operating Divisions (OPDIVs) that have diverse missions and programs. There are 12 financial reporting entities:

1. Administration for Children and Families (ACF)
2. Administration on Aging (AoA)
3. Agency for Healthcare Research and Quality (AHRQ)
4. Centers for Disease Control and Prevention (CDC)/Agency for Toxic Substances and Disease Registry (ATSDR)
5. Centers for Medicare & Medicaid Services (CMS)
6. Food and Drug Administration (FDA)
7. Health Resources and Services Administration (HRSA)
8. Indian Health Service (IHS)
9. National Institutes of Health (NIH)
10. Office of the Secretary (OS) - excluding PSC
11. Program Support Center (PSC)
12. Substance Abuse and Mental Health Services Administration (SAMHSA)

The Agency for Toxic Substances and Disease Registry is combined with the Centers for Disease Control and Prevention for financial reporting purposes; therefore, these footnotes will refer to them as one OPDIV. In FY 2002, nine of the 12 financial reporting entities listed have received or will receive full scope audits, while the remaining three, AoA, AHRQ, and OS, were reviewed as part of the Departmental consolidated audit. Each OPDIV is considered a responsibility segment for purposes of preparing the HHS-wide Statement of Net Cost. A responsibility segment is a component of a reporting entity that is responsible for carrying out a mission, conducting a major line of activity, or producing one or a group of related products or services. The managers of the segments report to the entity's top management directly and their resources and results of operations can be clearly distinguished from those of other segments of the entity.

Basis of Presentation
The financial statements have been prepared to report the financial position and results of operations of HHS, pursuant to the requirements of 31 U.S.C. 351 (b), the Chief Financial Officers Act of 1990 (P.L. 101-576), as amended by the Reports Consolidation Act of 2000 (P.L. 106-531). They have been prepared from Departmental records in accordance with the form and content guidance of the Office of Management and Budget (OMB) Bulletin 01-09 and accounting principles generally accepted in the United States (GAAP) of the Federal Government promulgated by the Federal Accounting Standards Advisory Board (FASAB) and recognized by the American Institute of Certified Public Accountants (AICPA) as Federal GAAP. These statements are therefore different from financial reports prepared pursuant to other OMB directives that are primarily used to monitor and control HHS' use of budgetary resources.

The financial statements consolidate the balances of about one hundred and forty discrete appropriations and fund accounts, and a number of accounts used for suspense, collection of receipts and general government functions. Material intra-HHS balances have been eliminated in the consolidation of the account balances from the financial statements of HHS' twelve OPDIVs, each of which is issued under separate cover. The effects of the intra-entity transactions are eliminated in the presentation of the Consolidated Balance Sheet, Consolidated Statement of Net Cost, Consolidated Statement of Changes in Net Position and the Consolidated Statement of Financing. The Statement of Budgetary Resources is presented on a combined basis. Supplemental information is accumulated from the OPDIV reports, regulatory reports and other sources within HHS. Information is generally presented on a summary level, hence greater detail on OPDIV programs and activities is found in the annual reports prepared by the OPDIVs.

Basis of Accounting
For most HHS programs, transactions are recorded on an accrual accounting basis and a budgetary basis. Under the accrual method, revenues are recognized when earned and expenses are recognized when resources are consumed, without regard to the payment of cash. Budgetary accounting facilitates compliance with legal constraints over the use of Federal funds. CMS uses the cash basis of accounting in the Medicare program to record benefit payments disbursed during the fiscal year, supplemented by the accrual method to estimate the value of benefit payments incurred but not yet paid as of the fiscal year end. A number of other OPDIVs also use the cash basis of accounting for some programs with an accrual adjustment made by recording year-end estimates of unpaid liabilities.

Changes in Accounting Principles
In FY 2002, CDC reclassified the ATSDR appropriation to the Health budget function, whereas in prior years it was classified to the Natural Resources and Environment budget function, based upon the fact that in prior years the funds were transferred to ATSDR from the Environmental Protection Agency. In FY 2002, for consistency with the President's budget, CDC reported all ATSDR funds from FY 2001 and FY 2002 to the Health Budget classification.

In FY 2002 CDC also changed its accounting practice from reporting biological products inventory as an asset to expensing them as acquired.

Entity and Non-Entity Assets
Entity assets are assets that the reporting entity has authority to use in its operations. The authority to use funds in an entity's operations means entity management has the authority to decide how funds are used, or management is legally obligated to use funds to meet entity obligations.

Non-entity assets are held by the entity but are not available to the entity. An example of non-entity assets is Child Support Enforcement collections, which ACF collects for the U.S. Government but does not have the authority to spend.

The HHS financial statements do not report entity and non-entity assets separately on the face of the statement, but instead break out entity and non-entity assets in footnote Note 2 - Non-Entity Assets.

Fund Balance with Treasury
The Department maintains all cash accounts with the Treasury Department. The account, "Fund Balance with Treasury," represents appropriated, revolving, trust and other funds available to pay current liabilities. The U.S. Treasury processes cash receipts and disbursements for HHS.

Investments
Trust fund balances are investments (plus the accrued interest on investments) held by Treasury. Law requires that trust fund investments that are not necessary to meet current expenditures be invested in "interest-bearing obligations of the United States or in obligations guaranteed as to both principal and interest by the United States."

Accounts Receivable
Accounts Receivable consists of amounts owed to the Department by other Federal agencies and by the public. Amounts due from the public are presented net of an allowance for loss on uncollectible accounts. The allowance for loss is based on past collection experience and/or an analysis of the outstanding balances. Accounts receivable also includes interest due to the Department that is directly attributable to accounts receivable.

Loans Receivable
Loans are accounted for as receivables after funds are disbursed. In accordance with credit reform legislation, for loans obligated prior to October 1, 1991, loan principal, interest, and other costs are reduced by an allowance for loss based on historical data and current market factors. For loans obligated on or after October 1, 1991, the amount of gross loans receivables is reduced by an allowance equal to the present value of the subsidy costs associated with these loans. Loans receivable also include interest due to the Department for direct loans and/or defaulted loan guarantees.

Advances to Grantees/Accrued Grant Liability
Advances to Grantees are cash outlays made by the Department to its grantees. An accrued grant liability occurs when the year-end grant accrual for the Department exceeds advances to grantees outstanding at year-end. Progress payments on work in process are not included in grants. HHS grants programs are classified into two categories: "Programs Not Subject to the Expense Accrual" and "Programs Subject to the Expense Accrual."

Programs Not Subject to the Expense Accrual: These programs are formula grants (also referred to as "block grants") under which states provide a variety of services or payments to individuals and Federal agencies. Expenses are recorded as the grantees draw funds. These programs operate on an allocation basis as opposed to a reimbursable basis. Therefore, they are not subject to an expense accrual.

Programs Subject to the Expense Accrual: For programs subject to the accrual, grantees draw funds (recorded as Advances to Grantees in HHS' accounting systems) as bills or salary payments come due. The grantees report actual disbursements quarterly and the amounts are recorded as an expense and a reduction to the advance balance in the accounting systems. At year-end, the OPDIVs use actual grant payments when this data is available. When actual grant payments are not available, HHS adopted a process to estimate the year-end grant accrual by relying on historical spending patterns to predict unreported grantee expenditures. The year-end accrual for these non-block grants is equal to the estimate of fourth quarter disbursements, plus an average of two weeks expenditures for expenses incurred prior to cash drawdowns. (Refer to Note 16 "Accrued Grant Liability.")

Advances other than grant advances are reported in Note 11 "Other Assets."

Inventory and Related Property
Inventory and Related Property includes Inventory Held for Sale, Operating Materials and Supplies and Stockpile Materials. Inventory Held for Sale consists of small equipment and supplies held by the various OPDIV Service and Supply Funds for sale to HHS components and other Federal entities. Operating Materials and Supplies consist of pharmaceuticals, biological products, vaccines, and other medical supplies that are used in providing medical services and conducting medical research. Stockpile Materials represent supplies of biological materials and vaccines held for use in case of a national emergency or other unanticipated needs.

All inventories, with the exception of CDC biological products, are recorded as assets when purchased and are expensed when they are consumed or sold. Inventories may be recorded at either: (1) historical cost (or a method which reasonably approximates historical cost), or (2) the lower of cost (using a weighted-average cost method) or market. CDC expenses biological products as acquired.

General Property, Plant and Equipment
The basis for recording purchased Property, Plant and Equipment (PP&E) is full cost, which includes all costs incurred to bring the PP&E to a form and location suitable for its intended use. The cost of PP&E acquired under a capital lease is the amount recognized as a liability for the capital lease at its inception. The cost of PP&E acquired through donation is the estimated fair value when acquired. The cost of PP&E transferred from other Federal entities is the net book value of the transferring entity. All PP&E with an initial acquisition cost of $25,000 or more and an estimated useful life of two (2) years or greater are capitalized.

PP&E are depreciated using the straight-line method over the estimated useful life of the asset. Land and land rights, including permanent improvements, are not depreciated. Normal maintenance and repair costs are expensed as incurred.

Accounting for Internal Use Software was instituted in fiscal year 2001 in compliance with the FASAB Accounting Standard No. 10, Accounting for Internal Use Software. The capitalization threshold for internal use software costs for appropriated fund accounts is $1,000,000 or above. The capitalization threshold for revolving funds is $500,000. Costs below the threshold levels are expensed. The software is depreciated for a period of time consistent with the estimated useful life used for planning and acquisition purposes.

Liabilities
Liabilities are recognized for amounts of probable future outflows or other sacrifices of resources as a result of past transactions or events. Since HHS is a component of the U.S. Government, a sovereign entity, its liabilities cannot be liquidated without legislation that provides resources to do so. Payments of all liabilities other than contracts can be abrogated by the sovereign entity. In accordance with Public Law and existing Federal accounting standards, no liability is recognized for future payments to be made on behalf of current workers contributing to the Medicare Hospital Insurance Trust Fund, since future Medicare benefits are not tied to prior Medicare contributions.

Liabilities Covered by Budgetary Resources are those liabilities funded by available budgetary resources including: (1) new budget authority, (2) spending authority from offsetting collections, (3) recoveries of unexpired budget authority, (4) unobligated balances of budgetary resources at the beginning of the year, and (5) permanent indefinite appropriation or borrowing authority.

Liabilities Not Covered by Budgetary Resources are incurred when funding has not yet been made available through Congressional appropriations or current earnings. HHS recognizes liabilities for employee annual leave earned but not taken, and amounts billed by the Department of Labor for Federal Employees Compensation Act (FECA) disability payments. Also included in this category is the actuarial FECA liability determined by Labor but not yet billed. For HHS revolving funds, all liabilities are funded as they occur.

Liabilities Covered by Budgetary Resources and Liabilities Not Covered by Budgetary Resources are combined on the balance sheet. The breakout of these resources is presented in Note 12 "Liabilities Not Covered by Budgetary Resources", Note 13 "Entitlement Benefits Due and Payable", Note 15 "Environmental and Disposal Costs" and Note 17 "Other Liabilities".

Accounts Payable
Accounts Payable consists of amounts due for goods and services received, progress in contract performance, interest due on accounts payable, and other miscellaneous payables.

Entitlement Benefits
Entitlement Benefits represents benefits due and payable to the public from entitlement programs enacted by law. In HHS the largest entitlement programs, which comprise the bulk of HHS entitlement spending, are the CMS programs for Medicare and Medicaid. The ACF administers a number of entitlement benefit programs. The larger programs are Temporary Assistance to Needy Families (TANF), Social Services Block Grant, and Child Support Enforcement.

Federal Employee and Veterans' Benefits Federal Employee and Veterans' Benefits consist of the actuarial portions of future benefits earned by Federal employees and veterans, but not yet due and payable. These costs include pensions, other retirement benefits, and other post-employment benefits. These benefits are normally administered by the Office of Personnel Management (OPM) and not by the Department of Health and Human Services, or any of the individual operating divisions of the Department. Therefore, HHS does not recognize any liability in the balance sheet for pensions, other retirement benefits, and other post-employment benefits. HHS does, however, recognize the imputed cost and imputed financing related to these benefits in the Consolidated Statement of Net Cost and the Consolidated Statement of Changes in Net Position.

The lone exception to this policy is the Public Health Service (PHS) Commissioned Corps Retirement System. The HHS-administered PHS Commissioned Corps Retirement System is discussed in Note 14 "Federal Employee and Veterans' Benefits."

Revenue and Other Financing Sources
Funding for the Department is classified as revenue or other financing sources. Revenue is an inflow of resources that the government demands, earns, or receives by donation. Revenue comes from two sources: exchange transactions and nonexchange transactions. Exchange revenues arise when a government entity provides goods and services to the public or another government entity for a price. Another term for exchange revenue is earned revenue. Nonexchange revenue arises primarily from exercise of the government's power to demand payments from the public (e.g., taxes, duties, fines, and penalties), but also includes donations received. Other Financing Sources include appropriations used, transfers of assets from other government entities, and imputed financing.

Other Financing Sources: Congressional appropriations are the primary funding source for most of the Department's programs. For financial statement purposes, appropriations used are recognized as a financing source as expenses are incurred.

Imputed financing consists of costs incurred by one Federal entity, which are paid for by another Federal entity. OMB has limited the reporting of imputed costs to the following: 1) employee's pension benefits; 2) health insurance, life insurance, and other benefits for retired employees; 3) other post-employment benefits for retired, terminated, and inactive employees, which include severance payments, training and counseling, continued health care, and unemployment and workers' compensation under the FECA; and 4) losses in litigation proceedings (FASAB Interpretation No. 2, Accounting for Treasury Judgment Fund transactions).

Nonexchange Revenue: Nonexchange revenues include income taxes, excise taxes, duties, fines, penalties, and other inflows of resources arising from the government's power to demand payments, as well as voluntary donations. Nonexchange revenue is recognized when a reporting entity establishes a specifically identifiable, legally enforceable claim to cash or other assets. It is recognized to the extent that the collection is probable and the amount is measurable. Nonexchange revenue is reported in the Consolidated Statement of Changes in Net Position.

Medicare's Hospital Insurance program, or Medicare Part A, is financed through the Hospital Insurance Trust Fund, whose revenues come primarily through the Medicare portion of payroll and self-employment taxes collected under the Federal Insurance Contribution Act (FICA) and Self-Employment Contribution Act (SECA). The Medicare payroll tax rate is 2.9 percent of annual wages. Employees and employers are each required to contribute 1.45 percent of employees' wages, with no limitation, to the Hospital Insurance Trust Fund. Self-employed individuals pay the full 2.9 percent themselves.

Medicare's Supplemental Medical Insurance program, or Medicare Part B, is financed primarily by general fund appropriations (Payments to the Health Care Trust Funds) provided by Congress and by monthly premiums paid by beneficiaries. Premium payments from Medicare beneficiaries are matched approximately 3 to 1 by Congressional appropriations.

Exchange Revenue: Revolving funds recognize exchange revenue at the time goods or services are provided to the public or to another government entity. Reimbursable service agreements between HHS and other Federal agencies generally recognize these revenues when the related expenses are incurred. Various user fees are collected to offset the cost of providing services. Exchange revenue is reported in the Consolidated Statement of Net Cost.

Contingencies
A contingency is an existing condition, situation or set of circumstances involving uncertainty as to possible gain or loss to the Department. The uncertainty will ultimately be resolved when one or more future events occur or fail to occur. With the exception of pending, threatened or potential litigation, a contingent liability is recognized when a past transaction or event has occurred, a future outflow or other sacrifice of resources is more likely than not, and the related future outflow or sacrifice of resources is measurable. For pending, threatened or potential litigation, a liability is recognized when a past transaction or event has occurred, a future outflow or other sacrifice of resources is likely, and the related future outflow or sacrifice of resources is measurable.

Use of Estimates in Preparing Financial Statements
Preparation of financial statements in accordance with Federal accounting standards requires HHS to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent liabilities, as of the date of the financial statements. Estimates and assumptions also affect the revenues and expenses accrued and reported in the financial statements. Actual results may differ from those estimates.

Intragovernmental Relationships and Transactions
In the course of its operations, HHS has relationships and financial transactions with numerous Federal agencies. The more prominent of these are the Social Security Administration (SSA) and the Department of the Treasury. The SSA determines eligibility for Medicare programs, and also allocates a portion of Social Security benefit payments to the Medicare Part B Trust Fund for Social Security beneficiaries who elect to enroll in the Medicare Part B program. The Treasury receives the cumulative excess of Medicare receipts and other financing over outlays, and issues interest-bearing securities in exchange for the use of those monies. At the government-wide level, the assets related to the trust funds on HHS' financial statements and the corresponding liabilities on the Treasury's financial statements would be eliminated.

Note 2. Non-Entity Assets

	2002	2001
Intragovernmental:
Fund balance with Treasury	$5	$45
Accounts receivable	3	122
Other	-	-
Total Intragovernmental	$8	$167
Accounts receivable	$377	$34
Cash and other monetary assets	-	-
Other	-	-
Total non-entity assets	$385	$201
Total entity assets	377,523	344,980
Total Assets	$377,908	$345,181

Note 3. Fund Balance with Treasury

HHS' undisbursed account balances at September 30, 2002 and 2001 are listed below by fund type. Other Funds include balances in deposit, suspense, clearing and related non-spending accounts.

Fund Balances:
	2002	2001
Trust Funds	$3,201	$508
Revolving Funds	803	752
Appropriated Funds	80,208	79,358
Other Fund Types	560	331
Total	$ 84,772	$ 80,949
Status of Fund Balance with Treasury
	2002	2001
Unobligated Balance
Available	$ 5,537	$ 1,336
Unavailable	3,242	8,282
Obligated Balance not yet Disbursed	75,993	71,331
Total	$ 84,772	$ 80,949

Note 4. Cash and Other Monetary Assets

Cash and Other Monetary Assets are the total amount of time account balances at the Medicare contractors' commercial banks. The Checks Paid Letter-of-Credit method is used for reimbursing Medicare contractors for the payment of covered Medicare services. Medicare contractors issue checks against a Medicare Benefits account maintained at commercial banks. In order to compensate commercial banks for handling the Medicare Benefits accounts, Medicare funds are deposited into non-interest bearing time accounts. The earnings allowances on the time accounts are used to reimburse the commercial banks. The account balance in FY 2002 was $375 million and in FY 2001 the balance was $137 million.

Note 5. Investments, Net

HHS invests trust fund cash in excess of current needs in U.S. Treasury securities. The U.S. Treasury Department is HHS' agent and advisor for investing. The majority of HHS' investments in securities are held to maturity and no provision is made for unrealized gains or losses. Investments at September 30, 2002 and 2001 are summarized below. All investments are considered entity assets.

As of September 30, 2002

	Cost	Unamortized (Premium) Discount	Investments, Net	Other Adjustments	Market Value Disclosure
Intragovernmental Securities
Marketable	$ 27	$ -	$ 27	$ -	$ 27
Non-Marketable: Par Value	267,711	-	267,711	-	267,711
Non-Marketable: Market-based	1,853	44	1,897	-	1,897
Subtotal	$269,591	$ 44	$269,635	$ -	$269,635
Accrued Interest	4,232	-	4,232	-	4,232
Total, Intragovernmental	$273,823	$ 44	$273,867	$ -	$273,867

As of September 30, 2001

	Cost	Unamortized (Premium) Discount	Investments, Net	Other Adjustments	Market Value Disclosure
Intragovernmental Securities
Marketable	$ 22	$ -	$ 22	$ -	$ 22
Non-Marketable: Par Value	239,115	-	239,115	(1)	239,114
Non-Marketable: Market-based	1,762	56	1,818	-	1,818
Subtotal	$240,899	$ 56	$240,955	$ (1)	$240,954
Accrued Interest	3,977	-	3,977	-	3,977
Total, Intragovernmental	$ 244,876	$ 56	$244,932	$ (1)	$244,931

CMS invests in U.S. Treasury Special Issues that are special public obligations for exclusive purchase by the Medicare trust funds. Special issues are always purchased and redeemed at face value. Certificates are short term and pay 4 3/8 percent. The bond interest rates range from 5 � percent to 8 � percent. The accrued interest receivable as of September 30, 2002 and 2001 was $4,232 million and $3,977 million, respectively.

HRSA's Vaccine Injury Compensation Trust Fund (VICP) and Ricky Ray Hemophelia Relief funds are invested in market-based(MK) special securities and One-Day Certificates. These non-marketable MK securities are Treasury securities that are not traded on any securities exchange but mirror the prices of marketable securities with similar terms. Currently, securities held by the VICP will mature in fiscal years 2003, 2004, 2006, and 2008.

NIH invests trust fund cash that is in excess of current needs in U.S. Treasury securities.

See Note 1 "Significant Accounting Policies" for information on amortization methods used.

Note 6. Accounts Receivable, Net

HHS' accounts receivable at September 30, 2002 and 2001 are summarized below.

As of September 30, 2002

	Accounts Receivable Principal	Interest Receivable	Accounts Receivable, Gross	Allowance	Net OPDIV Receivables Combined	Intra-OPDIV Eliminations	Net OPDIV Receivables Consolidated	Inter-OPDIV Eliminations	Net HHS Receivables Consol.
Intragovernmental
Entity	$ 2,841	$ -	$ 2,841	$ -	$2,841	$(1,876)	$ 965	$ (125)	$ 840
Non-Entity	3	-	3	-	3	-	3	-	3
Total, Intragovernmental	$2,844	$ -	$2,844	$ -	$2,844	$(1,876)	$ 968	$ (125)	$ 843
With the Public
Entity
Medicare	2,273	-	2,273	(1,169)	1,104	-	1,104	-	1,104
Other	2,273	-	2,273	(1,169)	1,104	-	1,104	-	1,104
Non-Entity	383	7	390	(13)	377	-	377	-	377
Total, With the Public	$ 8,992	$ 7	$ 8,999	$ (4,849)	$ 4,150	$ -	$ 4,150	$ -	$ 4,150

As of September 30, 2001

	Accounts Receivable Principal	Interest Receivable	Accounts Receivable, Gross	Allowance	Net OPDIV Receivables Combined	Intra-OPDIV Eliminations	Net OPDIV Receivables Consolidated	Inter-OPDIV Eliminations	Net HHS Receivables Consol.
Intragovernmental
Entity	$ 5,123	$ 10	$ 5,133	$ -	$ 5,133	$ (4,270)	$ 863	$ (78)	$ 785
Non-Entity	122	-	122	-	122	-	122	-	122
Total, Intragovernmental	$5,245	$ 10	$5,255	$ -	$5,255	$(4,270)	$ 985	$ (78)	$ 907
With the Public
Entity
Medicare	$ 7,522	$ -	$ 7,522	$ (4,428)	$ 3,094	$ -	$ 3,094	$ -	$ 3,094
Other	1,267	-	1,267	(230)	1,037	-	1,037	-	1,037
Non-Entity	6	568	574	(540)	34	-	34	-	34
Total, With the Public	$ 8,795	$ 568	$ 9,363	$ (5,198)	$ 4,165	$ -	$ 4,165	$ -	$ 4,165

CMS' Medicare receivables are primarily due to overpayments to providers, beneficiaries, physicians and suppliers, and to claims where Medicare should be the secondary payer.

HHS non-entity receivable balances represent amounts that cannot be used by HHS once collected. Such receipts are transferred to the General Fund of the Department of the Treasury.

The allowance for loss on accounts receivable is based upon analytical procedures on both individual and group bases. Individual analysis considers the debtor's ability and willingness to pay, payment record, and probable recovery of amounts from secondary sources (i.e., liens, and garnishments). To estimate allowance for loss by groups, HHS stratifies receivables into groups exhibiting similar characteristics. Estimated losses are projected based upon statistical sampling or historical loss experience. The allowance is periodically reviewed and adjusted.

Note 7. Anticipated Congressional Appropriation

Medicaid - Beginning in FY 1996, CMS has accrued an expense and liability for Medicaid claims Incurred But Not Reported (IBNR) as of September 30th. In FY 2002, the IBNR expense exceeded the available unexpended Medicaid appropriations in the amount of $10,399 million. A review of the appropriation language by CMS' Office of General Counsel has resulted in a determination that the Medicaid appropriation's indefinite authority provision allows for the entire IBNR amount to be reported as a funded liability. Consequently, CMS has recorded a $10,399 million anticipated appropriation in FY 2002 for IBNR claims that exceeded the available appropriation. The amount of Anticipated Congressional Appropriation recorded as of September 30, 2001 was $11,166 million.

Note 8. Direct Loans and Loan Guarantee Programs

HRSA operates guaranteed loan programs for the Health Center and Health Education Assistance Loans (HEAL) programs. For HEAL, the Administration guarantees payment of principal and interest made by private lenders to medical students, in various approved fields of practice, in the event of default, death or permanent disability. Health Center Program (Post-1991) guarantees the loans to HRSA grantees, made by non-Federal lenders.

Total loans guaranteed under these programs, as of September 30, 2002 and 2001 are summarized as follows.

	2002		2001
HEAL Loan Guarantees:	No. of Loans	Amount	No. of Loans	Amount
Pre-1992 loans	63,403	$ 483	87,000	$ 730
&nbap; &nbap; Post-1991 loans	94,238	2,254	108,000	2,444
Health Centers Loan Guarantees	1	4	1	4
Total	157,642	$ 2,741	195,001	$ 3,178

The receivable amount reported in the Balance Sheet represents defaulted loans, which have been paid to lenders under the guarantee. The lenders are required to perform certain procedures in an effort to collect amounts due prior to submitting the loan for payment under the guarantee. An allowance has been established for estimated uncollectible amounts on the loans. The allowance is based on management's assessment of the future collectibility analysis of these aged loans based on the last date of collection.

HHS' loans receivable at September 30, 2002 and 2001 are summarized below.

September 30, 2002:

Defaulted Guaranteed Loans:	Loans, Receivable, Principal	Interest Receivable	Loans Receivable, Gross	Allowance	Loans, Receivable, Net
HEAL Loans (HRSA)
Pre-1992 Loans	$ 492	$ 12	$ 504	$ (201)	$ 303
Post-1991 Loans	87	2	89	(22)	67
Subtotal	$ 579	$ 14	$ 593	$ (223)	$ 370
Other
Pre-1992 Loans	-	-	-	-	-
Post-1991 Loans	4	-	4	(4)	-
Total	$ 583	$ 14	$ 597	$ (227)	$ 370

September 30, 2001:

Defaulted Guaranteed Loans:	Loans, Receivable, Principal	Interest Receivable	Loans Receivable, Gross	Allowance	Loans, Receivable, Net
HEAL Loans (HRSA)
Pre-1992 Loans	$ 496	$ 13	$ 509	$ (134)	$ 375
Post-1991 Loans	65	2	67	(15)	52
Subtotal	$ 561	$ 15	$ 576	$ (149)	$ 427
Other
Post-1991 Loans	4	-	4	(4)	-
Total	$ 565	$ 15	$ 580	$ (153)	$ 427

The liability amount reported in the Balance Sheet represents future estimated payouts on defaulted loans under the loan guarantee program. The post-1991 loan guarantee liability is established based on criteria set forth in accordance to Credit Reform. This Act requires that the present value of cash outflows, associated with the estimated amount to be paid out under loan guarantees for each fiscal year, be calculated to determine the liability. The calculation is performed using a computer model established by OMB, utilizing assumptions made by the HEAL program based on historical data, such as default rates and interest rates. The liability is adjusted and accounted for independently each year based on loans issued annually under the guarantee. The pre-1992 loan guarantee liability for losses is established based upon an average default rate of approximately 3.95 percent in 2002 and 4.3 percent in 2001. The liability is adjusted each year for the change in default rates.

The loan guarantee liability is summarized as follows:

	2002	Restated 2001
Loan Guarantee Liabilities:
HEAL Loans (HRSA)
Pre-1992 Loans	$ 17	$ 30
Post-1991 Loans	256	282
Subtotal	$ 273	$ 312
Other
Post-1991 Loans	3	-
Total Loan Guarantee Liabilities	$ 276	$ 312

Loan guarantee subsidy expense:

Current year post-1991 HEAL subsidy methodology, using the credit subsidy model, was revised in fiscal year 2001, to account for historical interest rates versus applying current interest rates to the prior year Cohorts. Loan guarantee subsidy expense for the year ended September 2002 and 2001 is summarized as follows:

	2002	2001
Loan Defaults (Net of Recoveries)	$ 9	$ 10
Interest cohort	(24)	(33)
Other write-offs	(20)	3
Total current year subsidy	$ (35)	$ (20)
Re-estimates	(32)	(39)
Total Loan Guarantee Subsidy Expense	$ (67)	$ (59)

Note 9. Inventory and Related Property, Net

HHS' inventory and related property, net at September 30, 2002 and 2001 are summarized below.

	2002	2001
Inventory Held for Sale:
Inventory Held for Current Sale	$ 29	$ 27
Total Inventory Held for Sale	$ 29	$ 27
Operating Materials and Supplies:
Operating Materials and Supplies Held for Use	$ 10	$ 10
Operating Materials and Supplies Reserved for Future Use	-	8
Total Operating Materials and Supplies	$ 10	$ 18
Stockpile Materials:
Stockpile Materials Held for Emergency or Contingency	$ 126	$ 22
Total Stockpile Materials	$ 126	$ 22
Inventory and Related Property, Gross	$ 165	$ 67
Less: Allowance for Loss/Obsolescence/Spoilage	-	-
Inventory and Related Property, Net	$ 165	$ 67

HHS inventories are comprised of inventory held for sale, operating materials and supplies used in general operations, and stockpile materials. Inventories are valued at historical cost.

NIH has an inventory of materials to support their day-to-day activities. The NIH inventory is valued using the moving average method and stated at cost. CDC is mandated by law to maintain vaccine stockpiles to meet unanticipated needs for the vaccines, and for use in national emergencies. Vaccine stockpiles are maintained by the vaccine manufacturers and consist of several types of vaccines. The PSC, through its Perry Point Supply Services Center, maintains an inventory of pharmaceutical items for sale to HHS components and other Federal agencies.

In FY 2002, CDC changed its accounting practice from reporting biological products inventory as an asset to expensing them as acquired.

Note 10. General Property, Plant and Equipment, Net

Major categories of HHS Property, Plant and Equipment at September 30, 2002 and 2001 are listed below.

			2002			2001
	Depreciation Method	Estimated Useful Lives	Acquisition Cost	Accumulated Depreciation	Net Book Value	Net Book Value
Land & Land Rights			$ 48	$ -	$ 48	$ 48
Improvements to Land	Straight Line	5-20 Yrs	-	-	-	-
Construction in Progress			890	-	890	649
Buildings, Facilities & Other Structures	Straight Line	5-50 Yrs	1,556	(785)	771	1,206
Equipment	Straight Line	3-20 Yrs	804	(388)	416	392
Internal Use Software	Straight Line	Various	70	(16)	54	11
Assets Under Capital Lease	Straight Line	Life of Lease	60	(9)	51	25
Leasehold Improvements	Straight Line	*Life of Lease	893	(367)	526	-
Totals			$ 4,321	$ (1,565)	$2,756	$ 2,331

*7 to 15 years or life of lease.

See Note 1. Significant Accounting Policies for capitalization criteria and thresholds. See the disclosure Deferred Maintenance in the Required Supplementary Information section for information on deferred maintenance for General PP&E.

Note 11. Other Assets

Other Assets at September 30, 2002 and 2001 are comprised of the following, all of which are considered entity assets.

	2002	2001
Intragovernmental
Advances to Other Federal Entities	$ 430	$ 272
Other	-	13
OPDIV Combined, Intragovernmental	430	285
Less: Intra-OPDIV Eliminations	(277)	(187)
OPDIV Consolidated, Intragovernmental	153	98
Less: Inter-OPDIV Eliminations	(3)	(4)
HHS Consolidated, Intragovernmental	$ 150	$ 94
With the Public
Prepayments and Deferred Charges	$ 3	$ 5
Travel Advances and Emergency Employee Salary Advances	4	2
Other	54	-
HHS Consolidated, With the Public	$ 61	$ 7

Note 12. Liabilities Not Covered by Budgetary Resources

	2002	2001
Intragovernmental:
Accounts Payable	$ -	$ -
Accrued Payroll and Benefits	16	17
Other	702	367
Total Intragovernmental	$ 718	$ 384
Entitlement Benefits Due and Payable	$ 11,291	$ 7,779
Environmental and Disposal Costs	14	15
Federal Employees and Veterans' Benefits	8,174	7,501
Accrued Payroll and Benefits	370	335
Other	364	407
Total Liabilities Not Covered by Budgetary Resources	$ 20,931	$ 16,421
Total Liabilities Covered by Budgetary Resources	39,332	38,178
Total Liabilities	$ 60,263	$ 54,599

Note 13. Entitlement Benefits Due and Payable

Entitlement Benefits Due and Payable represents benefits due and payable to the public at year-end from entitlement programs enacted by law. In HHS the largest entitlement programs, which comprise the bulk of HHS entitlement spending, are the Medicare and Medicaid, which are managed by CMS.

Following is a summary of Entitlement Benefits Due and Payable at September 30, 2002 and 2001.

	2002			2001
	Liabilities Covered by Budgetary Resources	Liabilities Not Covered by Budgetary Resources	Total	Liabilities Covered by Budgetary Resources	Liabilities Not Covered by Budgetary Resources	Total
Medicare	$ 28,236	$ -	$ 28,236	$ 27,081	$ -	$ 27,081
Medicaid	5,049	11,291	16,340	5,581	7,779	13,360
Totals	$ 33,285	$ 11,291	$ 44,576	$ 32,662	$ 7,779	$ 40,441

Note 14. Federal Employee and Veterans' Benefits

HHS' Federal Employee and Veterans' Benefits at September 30, 2002 and 2001 are summarized below. These liabilities are not covered by budgetary resources.

	2002	2001
With the Public
Liabilities Not Covered by Budgetary Resources
PHS Commissioned Corp Pension Liability	$ 5,913	$ 5,664
PHS Commissioned Corp Post-retirement Health Benefits	1,984	1,545
Workers' Compensation Benefits (Actuarial FECA Liability)	277	292
Total, Federal Employee and Veterans' Benefits	$ 8,174	$ 7,501

PHS Commissioned Corps: HHS administers the Public Health Service (PHS) Commissioned Corps Retirement System for approximately 5,672 active duty officers and 4,605 retiree annuitants or survivors. Authorized by Public Law 78-410, it is a defined benefit plan and is noncontributory. The plan does not have accumulated assets; funding is provided entirely on a pay as you go basis by Congressional appropriations. Administrative costs are borne by the plan. The plan provides pension payments and medical benefits to eligible retirees. At September 30, 2002, the actuarial present value of accumulated plan pension benefits was $5,913 billion of which $536 million was not vested, and the liability for medical benefits was actuarially determined to be $1,984 million.

Significant assumptions used by the actuary in its reports on the pension and medical programs as of September 30, 2002, were as follows: interest on Federal securities of 6.25 percent, annual basic pay scale increase of 3.5 percent, and annual inflation of 3.0 percent. Withdrawal and retirement rates are based on the historical trends of officers in the PHS retirement system. The aggregate entry age normal actuarial cost method is used for both programs in the determination of their liabilities.

Workers' Compensation Benefits: The actuarial liability for future workers' compensation benefits includes the expected liability for death, disability, medical and miscellaneous costs for approved compensation cases.

FY 2002	FY 2001
5.20% in Year 1	5.21% in Year 1
5.20% in Year 2 and thereafter	5.21% in Year 2 and thereafter

The liability is determined using a method that utilizes historical benefit payment patterns related to a specific incurred period to predict the ultimate payment related to that period. Consistent with past practice, these projected annual benefit payments have been discounted to present value using the OMB's economic assumptions for 10-year Treasury notes and bonds. Interest rate assumptions utilized for discounting in FY 2002 and 2001 appear above.

To provide more specifically for the effects of inflation on the liability for future workers' compensation benefits, wage inflation factors (cost of living adjustments or COLAs) and medical inflation factors (consumer price index medical or CPIMs) are applied to the calculation of projected future benefits. These factors are also used to adjust the methodology's historical payments to current year dollars. The compensation COLAs and CPIMs used in projections are displayed below as follows:

FY	COLA	CPIM
2003	1.80%	4.31%
2004	2.67%	4.01%
2005	2.40%	4.01%
2006+	2.40%	4.01%

Note 15. Environmental and Disposal Costs

Environmental and Disposal Costs are the costs of removing, containing, and/or disposing of (1) hazardous waste from property, or (2) material and or property that consists of hazardous waste at a permanent or temporary closure or shutdown of associated PP&E.

Following is a summary of HHS' Environmental and Disposal Costs at September 30, 2002 and 2001. Based on guidance from the U.S. Department of Treasury , Intragovernmental costs of $3 million reported by FDA in FY 2001 have been reclassified as With The Public.

At September 30, 2002:
	With The Public
	Liabilities Covered by Budgetary Resources	Liabilities Not Covered by Budgetary Resources	Total
CDC	$ -	$ 3	$ 3
FDA	1	3	4
NIH	-	8	8
Consolidated HHS Totals	$ 1	$ 14	$ 15
At September 30, 2001:
CDC	$ -	$ -	$ -
FDA	1	4	5
NIH	-	11	11
Consolidated HHS Totals	$ 1	$ 15	$ 16

Note 16. Accrued Grant Liability

Grant advances are liquidated upon the grantee's reporting of expenditures on the quarterly SF-272 Report (Federal Cash Transaction Report). In many cases, these reports are received several months after the grantee actually incurs the expense, resulting in an understated grant expense in the financial statements. To mitigate this, HHS developed Department wide procedures to estimate and accrue amounts due grantees for their expenses, both realized and accrued, through September 30, 2002 and 2001.

At fiscal year-end when OPDIVs record the estimated accrual for amounts due to grantees for their expenses, if the amount of outstanding advances exceeds the amount of the accrual, the OPDIV reports an asset for "Advances to Grantees." Otherwise, the OPDIV reports a liability called "Accrued Grant Liability", equal to the amount that the accrual exceeds the outstanding advances. For additional information on this subject see Note 1 under "Advances to Grantees/Accrued Grant Liability".

	2002	2001
Grant Advances Outstanding (before year-end grant accrual)	$ 14,860	$ 12,609
Less: Estimated Accrual for Amounts Due to Grantees	(18,340)	(15,684)
Net Grant Advances (Liability)	$ (3,480)	$ (3,075)

All advances other than grant advances are reported in Note 11, "Other Assets."

Note 17. Other Liabilities

At September 30, 2002:

	Intragovernmental			With the Public
	Liabilities Covered by Budgetary Resources	Liabilities Not Covered by Budgetary Resources	Total	Liabilities Covered by Budgetary Resources	Liabilities Not Covered by Budgetary Resources	Total
Advances from Others	$ 1	$ -	$ 1	$ -	$ -	$ -
Deferred Revenue	535	-	535	384	-	384
Liabilities for Deposit Funds, Clearing Accounts and Undeposited Collections	2	-	2	18	-	18
Contingent Liabilities	-	269	269	-	103	103
Capital Lease Liability	-	49	49	-	6	6
Custodial Liabilities	-	383	383	-	-	-
Vaccine Injury Compensation Program	-	-	-	-	251	251
Other	58	1	59	96	4	100
Combined OPDIV Totals	$ 596	$ 702	$1,298	$ 498	$ 364	$ 862
Less: Intra-OPDIV Eliminations	(277)	-	( 277)	-	-	-
Connsolidated OPDIV Totals	$ 319	$ 702	$1,021	$ 498	$ 364	$ 862
Less: Inter-OPDIV Eliminations	(54)	-	(54)	-	-	-
Consolidated HHS Totals	$ 265	$ 702	$ 967	$ 498	$364	$ 862

At September 30, 2001:

	Intragovernmental			With the Public
	Liabilities Covered by Budgetary Resources	Liabilities Not Covered by Budgetary Resources	Total	Liabilities Covered by Budgetary Resources	Liabilities Not Covered by Budgetary Resources	Total
Deferred Revenue	$ 205	$ 187	$ 392	$ 226	$ 29	$ 255
Liabilities for Deposit Funds, Clearing Accounts and Undeposited Collections	15	-	15	38	-	38
Contingent Liabilities	-	-	-	6	-	6
Capital Lease Liability	-	22	22	6	1	7
Custodial Liabilities	-	345	345	-	50	50
Vaccine Injury Compensation Program	-	-	-	-	327	327
Other	4,714	-	4,714	92	-	92
Combined OPDIV Totals	$4,934	$ 554	$5,488	$ 368	$ 407	$ 775
Less: Intra-OPDIV Eliminations	(4,222)	(187)	(4,409)	-	-	-
Consolidated OPDIV Totals	$ 712	$ 367	$1,079	$ 368	$ 407	$ 775
Less: Inter-OPDIV Eliminations	(53)	-	(53)	-	-	-
Consolidated HHS Totals	$ 659	$ 367	$1,026	$ 368	$ 407	$ 775

Deferred Revenue of $535 million is for the provision of goods and services. The Vaccine Injury Compensation Program (VICP), administered by HRSA, provides compensation for vaccine-related injury or death. The VICP liability of $251 million represents the estimated future payment value of injury claims outstanding for VICP as of September 30, 2002.

Through the issuance of grants, HRSA supports the operation of certain health centers under the Health Centers Consolidation Act of 1996. These grantees, and many of their health professionals, are provided malpractice insurance under the Federally Supported Health Centers Assistance Act. Settlement and awards are paid from a separate Fund in the Treasury (Appropriation 75x0365). Accordingly, there are numerous malpractice legal actions pending against these grantees, which, if settled, will be paid by HRSA. For FY2002, a preliminary contingent liability by HRSA's actuarial contractor is estimated to be $101 million. No loss accrual had been made for these cases outstanding at September 30, 2001.

Note 18. Leases

Capital Leases: HHS and it's OPDIVS have entered into various capital leases with Indian tribes and the General Services Administrations (GSA) for office and warehouse space. Lease terms vary from one to twenty years. Capitalized assets acquired under capital lease agreements and the related liabilities are reported at the present value of the minimum lease payments.

Operating Leases: HHS and its components also have commitments under various operating leases with private entities and GSA for office, laboratory spaces, and land. Leases with private entities have initial or remaining noncancelable lease terms from one to twenty years. GSA leases in general are cancelable within 120 days notice.

Following is a Summary of Net Assets under Capital Lease and Future Minimum Lease Payments at September 30, 2002 and 2001.

Table 1. Summary of Assets Under Capital Lease	2002	2001
Land and Building	$ 58	$ 31
Machinery and Equipment	1	1
Other	1	-
Subtotal	$ 60	$ 32
Less: Accumulated Amortization	(9)	(7)
Assets Under Capital Lease	$ 51	$ 25

Table 2. Future Minimum Lease Payments	2002		2001
	Capital Leases	Operating Lease	Capital Leases	Operating Lease
Year 1	$ 5	$ 214	$ 3	$ 186
Year 2	5	231	3	191
Year 3	5	244	3	196
Year 4	5	256	3	192
Year 5	5	270	3	194
Later Years	81	629	40	339
Total Minimum Lease Payments	$ 106	$ 1,844	$ 55	$ 1,298
Less: Imputed Interest	(51)		(26)
Total Capital Lease Liability	$ 55		$ 29

Note 19. Consolidated Gross Cost and Exchange Revenue by Budget Functional Classification

HHS' consolidated gross cost and exchange revenue by budget functional classification for the fiscal year ended September 30, 2002 and 2001 are summarized below.

	2002									2001
	Education Training and Social Services	Health	Medicare	Income Security	Admin. of Justice	Natural Resources/ Environment	OPDIV Combined Totals	Intra-HHS Eliminations	HHS Consolidated Totals	HHS Consolidated Totals
Intragovernmental
Gross Cost	$ 96	$ 4,217	$ 254	$ 24	$ -	$ 1	$ 4,592	$ (970)	$ 3,623	$ 1,910
Less: Exchange Revenue	(9)	(1,058)	-	-	-	-	(1,067)	590	( 478)	(448)
Net Cost, Intragovernmental	$ 87	$ 3,159	$ 254	$ 24	$ -	$ 1	$ 3,525	$ ( 380)	$ 3,145	$ 1,462
With the Public
Gross Cost	$ 17,156	$192,218	$256,837	$29,768	$ 28	$ 10	$496,016	$ -	$ 496,016	$ 456,258
Less: Exchange Revenue	-	(1,129)	(25,959)	-	-	-	(27,087)	-	(27,087)	(24,812)
Net Cost, With the Public	$ 17,156	$191,089	$230,878	$29,768	$ 28	$ 10	$468,929	-	$ 468,929	$ 431,446
Totals
Gross Cost	$ 17,252	$196,435	$257,090	$29,792	$ 28	$ 11	$500,608	$ ( 969)	$ 499,639	$ 458,168
Less: Exchange Revenue	( 9)	(2,187)	(25,958)	-	-	-	(28,154)	589	(27,565)	(25,260)
Net Cost of Operations	$ 17,243	$194,248	$231,132	$29,792	$ 28	$ 11	$472,454	$ ( 380)	$ 472,074	$ 432,908

Note 20. Prior Period Adjustments

Prior period adjustments are included in the calculation of the net change in cumulative results of operations to correct errors and accounting changes with retroactive effect. Following is a summary of the prior period adjustments as of September 30, 2002 and 2001.

Increases (Decreases) to Equity	2002	2001
Correction of Errors	$ (33)	$ (32)
Change in Accounting Principles	(2)	6
Departmental Adjustments to Beginning Net Position	(72)	(458)
Total	$ (107)	$ ( 484)

Departmental Adjustments to Beginning Net Position represent audit adjustments booked by OPDIVs after the HHS audit deadlines, as well as an additional net position adjustment related to prior year intra-HHS eliminations. These adjustments are not included in the OPDIV statement figures used to compile the department-wide figures. Therefore, the Department must enter an adjustment to Beginning Net Position to reflect the Department's true beginning net position balance.

Note 21. Custodial Activity

ACF receives monies from the Internal Revenue Service for outlay to the states for Child Support. These monies represent delinquent child support payments withheld from Internal Revenue tax refunds. Receipts are transferred to appropriation 75X6234 to cover outlays. During FY 2002, receipts amounted to $1,466 million and outlays amounted to $1,494 million.

FDA's custodial activity involves collections for civil monetary penalties (CMP) assessed by the Department of Justice on behalf of FDA. Penalties are assessed for violations in areas such as illegally manufactured, marketed, and distributed animal feeds and drug products. Total CMP collections in FY 2002 were $373.7 million ($61.6 million for FY 2001). CMP collections are immediately forwarded to the Department of the Treasury and cannot be used for FDA operation.

Note 22. Medicare Benefit Payments

Medicare Claims Estimated Improper Payments Federal government audits require the review of programs for compliance with federal laws and regulations. Accordingly, the OIG reviewed a statistically valid sample of CMS' Medicare claims to determine that claims were paid properly by Medicare contractors, and that services were actually performed and were medically necessary. Medicare, like other insurers, makes payments based on a standard claims form. The internal claims process involves reviewing claims as billed and paying the correct amount for the services rendered. Based on the OIG statistical sample, the point estimate of improper Medicare benefit payments made during FY 2002 was $13.3 billion or about 6.3 percent of the $212.7 billion in processed fee-for-service payments reported by CMS. The estimated range of the improper payments at 95 percent confidence level is $8.2 billion to $18.4 billion, or about four percent to nine percent. The majority of the errors fell into four broad categories: lack of medical necessity; insufficient or no documentation; incorrect coding; and noncovered/unallowable services.

Cost Report Settlement Process The cost report settlement process represents the value of final outlays to providers based on fiscal intermediary (FI) audits, reviews and final settlements of Medicare cost reports. Institutional providers are required to file Medicare cost reports. For providers paid under the Prospective Payment System (PPS), the cost report includes costs that are not covered under PPS, such as disproportionate share hospital payments, indirect medical education payments, and other indirect costs. For providers paid on a cost basis, the cost report represents the total costs incurred by the provider for medical services to patients and reflects the final distribution of these costs to the Medicare program.

In FY 2002, 30,430 cost reports totaling $88.5 billion were reviewed. Approximately $72.4 billion represented inpatient claims to PPS providers. The cost report settlements, therefore, focused on the remaining non-PPS balance of about $16.1 billion.

Following is a summary of cost reports reviewed and the amount of costs claimed and disallowed as of September 30, 2002 and 2001.

	Cost Report Summary
	2002			2001
	Desk Reviews & Other	Audits	Total	Desk Reviews & Other	Audits	Total
Cost Reports Reviewed	27,098	3,332	30,430	30,393	3,725	34,118
Costs Claimed	$ 35,469	$53,076	$ 88,545	$36,810	$ 55,891	$92,701
Costs Disallowed	$ 119	$ (141)	$ (22)	$ 407	$ 350	$ 757

In FY 2002, the cost report audits did not result in cost savings (which would have shown a positive number, as was the case in FY 2001). Instead, the audits determined that in relation to the costs claimed on the cost reports, providers were due $141 million. When the amount due to providers (a negative balance of $141 million) is combined with the disallowed costs determined by the desk reviews of $119 million, a net of $22 million is due to providers.

Potential Liability The CMS routinely processes and settles cost reports and payment issues for institutional providers and healthcare insurers. As part of this process, some providers/insurers have filed suits challenging the amount of reimbursement to which they claim entitlement. The CMS cannot reasonably estimate the probability of the providers successfully winning their suits or the exact amount of the potential loss to the Medicare trust funds. In the opinion of management, the resolution of these matters will not potentially have a material impact on the results of operations and financial condition.

Note 23. Federal Matching Contribution

Supplemental Medical Insurance program (SMI) benefits and administrative expenses are financed by monthly premiums paid by Medicare beneficiaries and are matched by the federal government through the general fund appropriation, Payments to the Health Care Trust Funds. Section 1844 of the Social Security Act authorizes appropriated funds to match SMI premiums collected, and outlines the ratio for the match as well as the method to make the trust funds whole if insufficient funds are available in the appropriation to match all premiums received in the fiscal year. The monthly SMI premium per beneficiary was $50 from October 2001 through December 2001 and $54 from January 2002 through September 2002. Premiums collected from beneficiaries totaled $24.4 billion in FY 2002 and were matched by a $76.7 billion contribution from the Federal government.

Note 24. Contingencies

The Department and its components are parties to various administrative proceedings, legal actions, and claims brought by or against it. These contingencies arise in the normal course of operations and their ultimate disposition is unknown. Management, in consultation with legal counsel, has determined that it is reasonably possible that certain claims may result in an adverse outcome to the Department. However, an estimate of the range of possible liability cannot be determined. Based on information currently available, it is management's opinion that the expected outcome of these matters, individually or in the aggregate, will not have a material adverse effect on the financial statements of the Department.

Obligations Related to Cancelled Appropriations Payments may be required of up to one percent of current year appropriations for valid obligations incurred against prior year appropriations that have been cancelled. The total payments related to cancelled appropriations are estimated at $983 million and $1,197 million as of September 30, 2002 and 2001, respectively. Note 25. Apportionment Categories of Obligations Incurred

Obligations incurred by apportionment categories are as follows:

	Direct	Reimbursable	Totals
Category A	$ 100,490	$ 2,831	$ 103,321
Category B	495,257	122	495,379
Exempt from apportionment	3,895	-	3,895
Total Obligations Incurred	$ 599,642	$ 2,953	$ 602,595

Note 26. Legal Arrangements Affecting Use of Unobligated Balances

Unobligated balances consist of appropriated funds, revolving fund, Management Fund, trust funds, NIH's Cooperative Research and Development Agreement (CRADA) fund and royalty's fund. Annual appropriations are available for new obligations in the year of appropriation and for adjustments to valid obligations for five subsequent years. Revolving funds are no year funds without any time limit. The NIH Management fund is available for two fiscal years. The trust funds are also no year funds without time limits. NIH's CRADA funds are available for the performance of the contractual agreement.

FDA has a Contingency Fund that was established in FY 1983 whereby funds are to be used for unusual direct costs of product emergencies (i.e., Tylenol incident, Breast Plant Hotline, etc.). Two rules were set for this fund: (1) only for emergency costs exceeding $100 thousand over the normal budget and (2) any use has to be specifically apportioned and approved by OMB. During FY 2002, FDA had funds of $1.1 million temporarily not available for national public health emergencies. FDA received $151.1 million in funding in FY 2002, to remain available until expended, to support Counter Terrorism projects.

Note 27. Exchange Revenue

The pricing policy for exchange revenue at HHS is to establish prices at full cost and to incur no profit or loss. Most OPDIVs either charge full cost, or are implementing procedures to do so. Several Operating Divisions at HHS collect revenue related to reimbursable agreements and recognize the revenue when expenses are incurred. In addition to reimbursable agreements, OPDIVs recognize exchange revenue related to collection of various user fees and recognize the exchange revenue when expenses are incurred.

Note 28. Explanation of Differences Between the Statement of Budgetary Resources (SBR) and the Budget of the United States Government

Statement of Federal Financial Accounting Standard (SFFAS) No. 7, "Accounting for Revenue and Other Financing Sources" calls for disclosure of "explanations of any material differences between the information required by paragraph 77 [of SFFAS 7] and the amounts described as 'actual' in the "Budget of the United States Government" (also called the "President's Budget"). Paragraph 77 of SFFAS 7 calls for presentation of total budgetary resources available to a reporting entity, the status of those resources, and outlays of the reporting entity. This information is provided in the Department's SBR (see page III.6).

The President's Budget with actual numbers for FY 2002 has not yet been published, and therefore no comparisons can be made between FY 2002 amounts presented in the SBR with amounts reported in the 'actual' column of the President's Budget. The President's Budget is expected to be released on February 3, 2003, and may be obtained from the Office of Management and Budget or the U.S. Government Printing Office at that time.

Note 29. Explanation of Differences Between Liabilities Not Covered by Budgetary Resources and Components Requiring or Generating Resources in Future Periods

The Balance Sheet uses proprietary accounts to disclose liabilities combining funded by budgetary resources and not funded by budgetary resources on the same line. The covered and not covered liabilities use budgetary accounts for the footnote disclosure in the financial statements.

The Statement of Financing reconciles the budgetary accounts with the proprietary accounts. The future funding of transactions included in net costs for the period, and the budgetary resources from future periods used for the obligations, are reconciling items. The reconciling items include liabilities and other transactions such as increases in exchange revenue from the public.

The differences between the liabilities not covered by budgetary resources and components requiring or generating resources in future periods are created by the budgetary basis of accounting required for reporting requirements and the proprietary basis of accounting required to prepare the Balance Sheet and FACTS I reporting.

Note 30. Permanent and Indefinite Appropriations

The HHS permanent and indefinite accounts have both budget authority available without current action by Congress and indefinite authority meaning there is no specific sum at the time the authority is granted. The list below includes the Treasury Fund Symbols, the availability (fiscal year or no year), and the titles of the accounts.

75 0340 - (fiscal year) Health Education Assistance Loans Program
75X0513 - (no year) Payments for Credits Against Health Care Contributions
75X0585 - (no year) Taxation on OASDI Benefits
75 1552 - (fiscal year) Temporary Assistance for Needy Families
75X1553 - (no year) Children's Research and Technical Assistance
75X4305 - (no year) Health Professions Graduate Student Loan Insurance Fund, Liquidating Account
75X8250 - (no year) Gifts and Donations
7520X8004 - (no year) Federal Supplementary Medical Insurance Trust Fund
7520X8005 - (no year) Federal Hospital Insurance Trust Fund

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