Performance and Accountability Report
Fiscal Year 2004

The Department of Health and Human Services (HHS) is the principal Federal agency responsible for protecting the health of all Americans and providing essential human services, especially for those who are least able to help themselves. Encompassing hundreds of programs, HHS is the Nation's largest health insurer and the U.S. Government's largest grant-making agency.

The HHS FY 2004 Performance and Accountability Report (PAR) is produced under the Reports Consolidation Act of 2000 and covers fiscal year (FY) 2004 (October 1, 2003, through September 30, 2004). The PAR contains a high level overview of:

• The Department's purposes, programs, accomplishments, and challenges;
• The nature of resources entrusted to HHS; and
• HHS' management of and accountability for those resources.

This is HHS' third PAR, and ninth annual report prepared pursuant to the Chief Financial Officers' Act, as amended. In this report to the Department's "stockholders," the American public, HHS accounts for the return on the taxpayers' investment. HHS also provides this information to a wide array of decision makers, including the Office of Management and Budget (OMB) and the Congress.

The report contains a discussion of key program, management, financial, and performance information (Sections I and II); HHS' FY 2004 financial statements that discuss the Department's financial condition (Section III); and the auditors' opinion (Section IV), which is an independent, objective assessment that provides reasonable assurance about whether the financial statements are free from material misstatements. Finally, this comprehensive report contains other streamlined statutorily required information that demonstrates management accountability, and financial and program performance (Section V).

HHS' Mission:
"To enhance the health and well-being of Americans by providing for effective health and human services and by fostering strong, sustained advances in the sciences, underlying medicine, public health, and social services."

Healthy and productive individuals, families, and communities are the very foundation of the Nation's security and prosperity. Under HHS' programs, initiatives, and leadership, virtually all Americans and many others throughout the world are positively impacted by the Department's direct health services, advances in science, and dissemination of information to help improve healthy decision making. In a society that is diverse in culture, language, and ethnicity, HHS also manages an array of programs that aim to improve health status and access to health services and increase opportunities for disadvantaged individuals to work and lead productive lives.

Secretary Tommy Thompson has identified several high priority goals needing urgent attention, including preparedness for terrorism incidents, emphasis on healthy choices and disease prevention practices for Americans, and continued progress in helping all Americans become self-sufficient. HHS also focuses on measuring and reducing improper payments, encouraging senior citizens to take advantage of the new prescription drug benefit under Medicare, and reducing burdensome HHS regulations. To carry out its mission, HHS articulated these priorities in its FY 2004 - FY 2009 Strategic Plan through eight strategic goals and hundreds of performance measures. The Department's performance report (Section II) and the performance overview later in this section tie the representative performance measures to the strategic goals. HHS also has aligned its efforts with the President's Management Agenda (PMA) initiatives, which articulate the Administration's strategy for "improving the management and performance of government."

HHS Strategic Goals

1. Reduce the Major Threats to the Health and Well-being of Americans.
2. Enhance the Ability of the Nation's Health Care System to Effectively Respond to Bioterrorism and Other Public Health Challenges.
3. Increase the Percentage of the Nation's Children and Adults Who Have Access to Health Care Services, and Expand Consumer Choices.
4. Enhance the Capacity and Productivity of the Nation's Health Science Research Enterprise.
5. Improve the Quality of Health Care Services.
6. Improve the Economic and Social Well-being of Individuals, Families, and Communities, Especially Those Most in Need.
7. Improve Stability and Healthy Development of Our Nation's Children and Youth.
8. Achieve Excellence in Management Practices.

HHS accomplishes its eight strategic goals by managing and delivering hundreds of programs across several disciplines. The following illustrates the breadth of activities that occur at HHS and indicates the strategic goals that they support.

• Conduct and sponsor medical and social science research to improve Americans' health and well-being (Goal 4);
• Guard against the outbreak of infectious diseases through immunization services and the elimination of environmental health hazards near people's homes and workplaces (Goals 1 and 2);
• Ensure the safety of food and drugs (Goal 2);
• Provide health services for elderly and disabled Americans, as well as low-income adults and children (Goal 3);
• Promote services that increase the proportion of older Americans who stay active and healthy (Goal 6);
• Provide financial assistance and employment support services for low-income families (Goal 6);
• Facilitate child support enforcement (Goal 7);
• Improve consumer and patient protections (Goal 5);
• Improve maternal and infant health (Goal 3);
• Increase the percentage of children and youth living in a permanent, safe environment (Goal 7);
• Prevent child abuse and domestic violence (Goal 7);
• Provide and improve substance abuse prevention and treatment services (Goal 1);
• Provide and improve mental health services (Goal 6); and
• Enhance the use of electronic commerce in service delivery and record keeping (Goal 8).

HHS' management philosophy is to function as a single entity, as "One HHS," rather than as a collection of disparate and unrelated Agencies. HHS is reforming its management processes, updating the policies that maintain and strengthen the HHS workforce, and continuing to collaborate and coordinate significant activities among HHS Agencies. The importance of a one-team approach has been underlined by the extensive new demands on HHS and its Agencies to rapidly enhance preparedness against terrorism. HHS' FY 2004-2009 Strategic Plan contains a management improvement and excellence goal, which includes strategies to consolidate personnel offices; modernize and improve human, financial, and technology management at HHS; and reform regulations to reduce excessive paperwork and burden on doctors and hospitals so that they may have more time to deliver quality care. To provide accountability, feedback, and a record of progress, HHS has instituted performance contracts tied to the strategic goals and objectives for its senior leadership. These contracts establish explicit standards to measure HHS officials' progress and achievements, which will cascade throughout the Department.

HHS' ability to meet client needs and accomplish its goals is tied directly to the commitment, cooperation, and success generated by HHS employees and those of other Federal agencies, State and local governments, Tribal organizations, community-based organizations, faith-based organizations, and others.

HHS provides direct services for the underserved populations of America, including American Indians/Alaska Natives. For many programs, HHS' partners provide direct services and have great discretion in program implementation. HHS supports its partners' goals and efforts by providing funding, technical assistance, outreach, education, training, research, and demonstration projects to test new programs, processes, or policies.

Often the needs of individuals and families transcend individual HHS program boundaries. HHS works internally and with its many diverse partners to coordinate service planning and delivery to optimize resource use. For example:

• HHS is the largest grant-making agency in the Federal Government, providing more than $240 billion of the more than $387 billion in Federal funds awarded to States and other entities in FY 2003;
• In FY 2001, HHS funded more than 200,000 research investigators affiliated with numerous universities, hospitals, and other research facilities;
• Approximately 19,200 centers and 47,000 classrooms help to provide comprehensive development services with HHS support under the Head Start program for more than 909,000 low-income preschool children, ages birth to 5, including more than 70,000 children under the age of 3 served through Early Head Start;
• HHS helps fund and foster a nationwide network of almost 3,600 community Health Center sites that provided primary and preventive care to 12.4 million medically-underserved patients last year;
• HHS partners with the Aging Network, which includes 56 State units on aging, 655 area agencies on aging, 236 Tribal and native organizations representing 300 American Indian/Alaska Native Tribal organizations, and two organizations serving Native Hawaiians, plus thousands of service providers and innumerable caregivers and volunteers;
• HHS supports networks of State and private agencies to provide and improve substance abuse and mental health services;
• HHS coordinates public health efforts to respond to multiple widespread disease outbreaks, including the West Nile virus epidemic, the global outbreak of Severe Acute Respiratory Syndrome (SARS), and the first U.S. human cases of Monkeypox;
• Medicare contractors process more than 1 billion Fee-for-Service (FFS) claims, answer numerous inquiries, process appeals, enroll and educate providers, and assist beneficiaries; and
• Approximately 45,000 health care providers are enrolled in the Vaccines for Children program, furnishing free vaccines to more than one-third of the Nation's children.

Steps to a HealthierUS

Eleven HHS Agencies led by the Office of the Secretary provide a wide range of services and benefits. The Office of the Secretary consists of several staff divisions, including the Assistant Secretary for Budget, Technology, and Finance, which is responsible for producing this report. HHS also actively coordinates, in 10 regions throughout the U.S., the crosscutting and complementary efforts that are needed to accomplish its mission. The following pages provide a brief overview of HHS' organization and the purpose and accomplishments of each HHS Agency, as well as a twelfth HHS organization, the Program Support Center (PSC). The PSC provides administrative services to the Department. Agency highlights include a reference to the corresponding strategic goal supported.

A Focus on Outcomes

HHS manages hundreds of programs that serve to improve the health and well-being of the American public. Secretary Thompson established eight strategic goals that incorporate the full range of HHS' activities. To gauge program effectiveness, HHS uses hundreds of performance measures. These measures provide a basis for comparing actual program results with established program performance goals, as required by the Government Performance and Results Act (GPRA) of 1993. Given the complexity and vast number of HHS programs and measures, HHS, with OMB's concurrence, focuses on 22 program areas and 29 measures in this report that broadly represent HHS' significant efforts and achievements during FY 2004. The programs, which include Bioterrorism, Immunization, Medicare, Medicaid, Children's Health Insurance, Child Welfare, Substance Abuse Prevention and Treatment, and Medical Research, and their corresponding measures, are presented according to the strategic goal each supports. The corresponding measures highlight progress and discuss issues pertaining to the goals, objectives, and targets articulated in the HHS Strategic Plan as well as other HHS initiatives.

Performance Data Collection and Reporting

The Department's FY 2004 Program Performance Report is presented in Section II and summarized in the following pages. The following overview provides readers with a sense of the far-reaching effects of HHS programs. Focusing on performance over the past 3 fiscal years (FYs 2002 - 2004), each program discussion "spotlights" one of the critical performance measures by explaining its purpose and highlighting its performance and accomplishments. The "spotlighted" section is highlighted in the list of measures for each strategic goal. Performance for each "spotlight measure" is summarized in a table that presents a target and either the corresponding actual data or the expected date when actual data will become available. Additional information on the "spotlight" and other measures is included in Section II of this report.

Section II provides a detailed discussion of performance results for each of the 29 measures referenced in the overview, including additional trend data, individual Agency efforts taken to ensure relevance and reliability of the data reported, and results of any independent program evaluations and program reviews, including those under OMB's Program Assessment Rating Tool (PART). The PART is a diagnostic tool that examines different performance aspects to identify a program's strengths and weaknesses; it also supports the Administration's efforts to improve program effectiveness and to inform budget decisions. The results of PARTs completed during the FY 2004 and FY 2005 budget processes are summarized in Appendix I, and the comparative net costs of these and other HHS GPRA programs are presented in Appendix B.

Performance data availability lags occur, particularly in HHS programs that rely on third parties (e.g., States, grantees, and medical facilities) for such data. In addition, not all data are collected or available annually. Therefore, an assessment of HHS performance can best be determined by comparing annual trends from year to year, as additional performance data become available. HHS uses the same data collection systems to report on both Department- and HHS Agency-level performance. Assurance of the accuracy of performance data reported in Section II and in this section of the report is achieved through data verification processes inherent in the recurring use and updates of the data. Analysts, managers, and executives in both the Agencies and in HHS' Office of Budget verify the data on an ongoing basis. The data receive a final review in the Office of Budget by budget and program branch chiefs with budget and performance responsibilities prior to submission and final review by the Deputy Assistant Secretary for Budget. Performance management and assessment activities related to the GPRA, PART, and other performance-related activities include assurances of the accuracy of data, which are documented in the Data Verification and Validation sections of the Agencies' annual performance plans and reports.

Risks and Uncertainties Affecting Performance

Many external factors and influences beyond HHS' control may affect achievement of the Department's strategic goals and objectives. These factors introduce risks and uncertainties into the Department's planning environment and may, in some cases, pose challenges that are difficult to overcome.

Even during the best of economic times, health and social services must compete with other worthy interests for limited public funds. For example, the public health infrastructure received new infusions of funds following September 11, 2001, to address bioterrorism and other threats. While this offers opportunities for building needed surveillance systems and communication links, unexpected threats such as SARS continue to emerge and require immediate action, diverting attention from activities with a longer term. In addition, a weak economy can impact individuals by making finding jobs more difficult and can affect families seeking to become economically independent.

Individuals' choices about personal health habits (e.g., exercise, diet, or smoking) have a cumulative effect on the incidence of chronic disease. While the Department has many current activities addressing lifestyle health choices, its prevention initiative, Steps to a HealthierUS, seeks to help States, large and small communities, and Tribes build on their existing efforts to address diabetes, asthma, and obesity and the associated risk factors of tobacco use, poor nutrition, and inactivity, in organized sustained ways that can ultimately serve as models for wider use. Providing flexibility in program requirements enables HHS to address changing and unpredictable conditions. For instance, HHS has offered States greater choice in Medicaid and SCHIP program design through the Health Insurance Flexibility and Accountability (HIFA) demonstration initiative. This flexibility allows States to adapt their Medicaid programs, within the framework of existing law, to their unique needs. HHS has sought and received major new funding to address public health infrastructure needs and is working with State and local public health officials, hospitals, and other providers to build the necessary surveillance systems and communication networks.

The President's Management Agenda (PMA) articulates the Administration's strategy "for improving the management and performance of government." It consists of five government-wide initiatives (Strategic Management of Human Capital, Competitive Sourcing, Improved Financial Performance, Expanded Electronic Government, and Budget and Performance Integration) and several program-specific initiatives. HHS is a significant contributor to four of the program initiatives: Broadening Health Insurance Coverage and Faith-Based and Community Initiative; and two new initiatives for FY 2004: Real Property, and Research & Development (R&D) Investment Criteria. The following sections discuss HHS' efforts during FY 2004 to further the PMA and action plans to further promote progress in FY 2005.

Human Capital

People are the single most significant resource available to leadership in the Department. The foundation of HHS and the key to its future success are its workforce, without whom the important mission-related work of the Department could not be accomplished. In a world of turbulent change, success depends on the workforce's ability to reach, learn, and adapt at rapid speed. The overall challenge for HHS is to develop and utilize its human capital in a strategic manner. To support the PMA, the Department is building a fully integrated human capital management approach that bridges the gap between where HHS is today and where HHS needs to be.

Specifically, HHS has developed and implemented strategic workforce plans to respond to and eliminate skills imbalances, and has sought to implement effective Department-wide recruitment and retention strategies. In addition, HHS has consolidated administrative functions to eliminate duplication and increase efficiency and effectiveness, delayered the organization to no more than four management layers to speed decision making, and deployed staff to mission-related functions to improve HHS as a citizen-centered Department.

Accomplishing these objectives has made HHS a better-managed organization that is leveraging its human capital, systematically measuring its performance, remaining focused on its mission, and anticipating and responding to future requirements. HHS has worked diligently to implement an effective Department-wide recruitment and retention plan. The Department has developed specific strategies for improving recruitment, retention, and succession planning that will help reduce skills gaps and attract and retain talent. Leadership recruitment and development programs are being institutionalized as part of HHS' human capital strategy.

FY 2004 Accomplishments:

• Established the HHS University, achieving economies of scale by providing a central focus for common needs training. The University coordinates centers of excellence for programmatic and scientific training across the Department.
• Recently completed workforce analyses have provided an empirical basis upon which the Department can build and implement strategic plans to address skills imbalances. Findings are linked to recruitment, retention, redeployment, career development, and succession planning programs.
• Consolidated 40 personnel offices scattered throughout HHS into four departmental human resources (HR) service sites to eliminate redundancy and duplication of effort, reduce HR staffing levels, and improve service.
• Completed a prototype for a web-based HR Accountability System that will help communicate objectives, manage behavior, and document performance within the HR function at the Department. By providing ready access to current performance data to all levels of the organization, it will facilitate translating Department strategy into operational objectives.
• In the last year HHS has adopted new automation technology to expedite production of vacancy announcements and classification of positions. Other programs have enabled automation of screening and rating applications, in-processing new hires, maintaining official personnel records, and workload tracking.
• The Emerging Leaders program has been a tremendous success, graduating its first class and hiring its third in July 2004.
• The Department's Senior Executive Service (SES) Candidate Development program provides an ongoing pool of future SES members to succeed over 100 executives across HHS. Twenty-five participants have developmental assignments within HHS, as well as training in core executive leadership skills. The announcement for the class of 2004 attracted over 350 qualified applicants.

FY 2005 Action Plan:

• Reduce skills imbalances through workforce reshaping, Emerging Leaders program, and developmental programs.
• Implement HR Accountability program in all HHS HR Centers.
• Implement additional HR automation programs, including workload tracking, electronic official personnel folders, and QuickClassification, a position description and job classification software package.
• Implement category rating, which provides authority to refer more than three candidates for selection. Utilize additional hiring flexibilities such as direct hire authority to improve recruiting program.
• Continue to improve workforce diversity through strategic recruiting efforts and gauge their effectiveness by evaluating results to determine the best sources of qualified applicants from targeted groups.

Competitive Sourcing

In competitive sourcing, HHS is at the forefront of civilian agencies. For example, HHS was one of the first Federal agencies to develop and implement a long-range competitive sourcing plan, which is consistent with the revised Circular A-76, Performance of Commercial Activities. The Department also supports a fair and reasoned approach to competitive sourcing and encourages input from competitive sourcing programs across HHS Agencies.

FY 2004 Accomplishments:

• Since the start of the competitive sourcing initiative, the Department competitively sourced over 25 percent of its commercial activities. In FY 2004 alone, HHS completed six standard studies consisting of over 1,000 full-time equivalent employees (FTEs) in an average of 285 days and completed 33 streamlined studies consisting of 365 FTEs in an average of 69 days. While over 95 percent of the studies were retained in-house by government employees, opening these commercial activities to competition drove improvements such that HHS anticipates positive net savings and increased efficiency and performance.
• In FY 2003, "One HHS" conducted 121 competitions that included 2,764 FTEs. When fully implemented over the next several fiscal years, these competitions are expected to yield net savings of more than $250 million over a period of 5 years, for the greater benefit of HHS programs and the American taxpayer.

FY 2005 Action Plan:

• HHS has developed and will implement an FY 2005 competition plan. Based on the competitive sourcing knowledge that the Department has acquired in the past several years, the FY 2005 plan is designed to maximize efficiencies and savings. For example, the FY 2005 plan encourages the formation of Most Efficient Organizations for streamlined studies, which under the revised OMB Circular A-76 is only required for standard studies.
• HHS will demonstrate positive anticipated net savings and performance improvements from completed competitions. For a random sample of completed competitions, HHS will independently validate that the anticipated savings are realized.
• HHS will structure competitions to encourage increased private sector participation and regularly review work performed to determine whether performance standards are met and take corrective action when services provided are deficient.
• HHS will fully implement a Federal Activities Inventory Report (FAIR) Act database that will maintain the FY 2005 FAIR Act inventory data and beyond. This database system will be tailored to HHS specifications to enable the Department of run reports and queries, which will promote consistency in the FAIR Act inventories.

Improved Financial Performance

The goals and initiatives in HHS' Financial Management Five-Year Plan correlate with the key success elements articulated in the PMA. HHS' overarching financial management goals (1) provide decision makers with timely, accurate, and useful financial and program information; and (2) ensure that HHS resources are used appropriately, efficiently, and effectively. In correlation with the PMA, the plan's focal points include, but are not limited to: the results and timeliness of the annual financial statement audit, the continued development and implementation of a Unified Financial Management System (UFMS), and effectively managing improper payments across the Department.

Audit Results and Timeliness

HHS has earned unqualified or "clean" opinions on its financial statement audits for the past 6 years. A clean audit opinion means that the Department's financial statements present its financial position fairly, in all material respects. During FY 2003 and early FY 2004, HHS successfully implemented an accelerated reporting and auditing pilot to test the Department's capacity to meet the accelerated reporting deadlines mandated for FY 2004. HHS was one of eight agencies, and one of only three Cabinet-level Departments to meet the accelerated reporting deadline of November 15, 45 days earlier than the previous reporting cycle. A key driver of this effort included the introduction of a new "top-down" audit approach, which consolidated several individual HHS Agency audits into a single review process. This new approach consolidated the number of individual audits being conducted throughout HHS without sacrificing the integrity of the overall audit process. However, despite recent successes, HHS continues to rely on antiquated, disparate systems to produce its financial statements and reports. This not only has contributed to two ongoing material weaknesses identified by HHS auditors (see table above and the audit report), but also makes for an inefficient process and complicates the identification and resolution of statement and audit issues. In response, HHS has spent the past several years developing and implementing a new, integrated financial system as described below.

Development and Implementation of a Unified Financial Management System

HHS currently is implementing its $700 million UFMS as part of Secretary Thompson's ""One HHS"" initiative. In June 2001, Secretary Thompson stated that "...the purpose of this endeavor is to achieve greater economies of scale, eliminate duplication, and provide better service delivery." Improved systems effectiveness and efficiency, enhanced management empowerment, improved compliance with legal and regulatory requirements, and strengthened internal controls are among the anticipated benefits of this new system scheduled for full implementation in FY 2007. HHS intends for full implementation of UFMS, as well as actions reflected in the corrective action plans, to resolve any remaining reportable conditions and nonconformances. Please refer to the "Systems, Controls, and Legal Compliance" discussion on page 57 for additional information about UFMS and the legacy systems currently in use.

One of the main components of UFMS is the Health Care Integrated General Ledger Accounting System (HIGLAS). CMS has initiated steps to implement an integrated standard general ledger system, know as HIGLAS, for the Medicare contractors, and its regional and central offices. HIGLAS will initially integrate the CMS' financial systems with the Medicare contractors' two existing shared claims processing systems. The CMS' current mainframe-based financial system will also be replaced by HIGLAS. Additionally, NIH is developing the NIH Business and Research Support System (NBRSS), which will migrate with UFMS by the end of FY 2006.

Managing Improper Payments

During FY 2004, HHS engaged in numerous activities to reduce improper payments in its programs. In its commitment to ensuring that taxpayers' dollars are appropriately spent, HHS has continued to work closely with its OIG and OMB to identify the best strategies for estimating, reducing and recovering improper payments in HHS programs. While HHS' extensively diverse funding portfolio and various program legislative barriers have presented challenges in identifying effective and cost efficient approaches for estimating improper payments, HHS achieved numerous accomplishments in its improper payment activities during FY 2004, including:

• Compiled a program inventory and completed program risk assessments for the purpose of identifying those programs which may be susceptible to significant improper payments as required by the Improper Payments Information Act of 2002 (IPIA). HHS expects that its risk assessment work for FY 2005 will be completed early in the year and that plans for measuring improper payments for high risk programs will be developed and implemented soon after.

• Implemented a recovery auditing program as required by Section 831 of the Defense Authorization Act of 2002. This included awarding a contract to a recovery auditing firm in June 2004. During the months of July - September 2004, the contractor worked with HHS payment offices to obtain electronic contract payment data files. The contractor will begin on-site recovery auditing in November of 2004. HHS expects that all payment offices will be engaged in on-site recovery auditing activities by the second quarter of FY 2005.

• Continued making progress in HHS' work on estimating payment errors for seven HHS programs identified in Section 57 of OMB Circular A-11, Preparation, Submission and Execution of the Budget: Medicare, Medicaid, SCHIP, Child Care, Head Start, Foster Care, and TANF. These are HHS' largest programs, accounting for about 89 percent of approximately $550 billion of FY 2004 outlays. HHS' accomplishments in these programs during FY 2004 include:

  • Medicare: HHS reported an unadjusted paid claims error rate of 9.8 percent, or $19.6 billion in net improper payments ($21.5 billion gross), and an adjusted paid claims error rate of 5.8 percent, or $11.6 billion last year. During FY 2004, HHS worked to develop and implement appropriate corrective action. Further, for FY 2004, HHS determined a paid claims error rate of 10.1 percent, or $21.7 billion, in gross improper payments.
  • Medicaid: HHS continued the Payment Accuracy Measurement (PAM) pilot. For the 12 States that participated in the second year of the pilot (FY 2003), payment accuracy estimates were determined. Eleven of the 12 States determined FFS payment accuracy rates ranging from 81.4 percent to 99.7 percent, with 80 percent of these States having a payment accuracy rate over 95 percent; 5 of the 12 participating States determined Managed Care payment accuracy rates ranging from 97.5 percent to 100.0 percent, with 80 percent of the States having a payment accuracy rate over 99 percent. Twenty-seven States participated during FY 2004, the third year of the pilot.
  • SCHIP: HHS expanded the Medicaid PAM pilot to include SCHIP. Fifteen States participated in the PAM pilot for SCHIP during FY 2004.
  • Child Care: HHS initiated a pilot project with selected partner States to evaluate the feasibility of developing an efficient and cost-effective strategy for addressing improper payments in the Child Care program. This pilot will be useful in determining and implementing appropriate strategies.
  • Head Start: HHS conducted reviews to determine the rate of improper payments associated with programs serving children from over income eligibility families beyond the 10 percent allowed. An error rate of 3.9 percent was computed for the Head Start program in FY 2004.
  • Foster Care: HHS conducted eligibility reviews as required under program regulation. Further, HHS awarded a contract for expert support in determining a methodology for estimating improper payment errors consistent with the parameters set forth in OMB's IPIA guidance which will complement the current legislatively required review process.
  • TANF: HHS engaged in various activities which were geared toward increasing program oversight and fiscal integrity in the TANF program. The results of these activities will be helpful to ACF in exploring possible methods for addressing payment errors and reducing the occurrence of improper payments in the TANF program.

• Implemented a new policy to hold managers accountable for identifying, reducing, and recovering improper payments. A new performance plan objective was established which requires that managers "identify and address weaknesses in grant system(s), procurement system(s) and finance offices to ensure recovery of improper payments and to reduce the number of improper payments by the Department."

• Participated in several work group initiatives under the joint Chief Financial Officers Council/President's Council on Integrity and Efficiency Erroneous and Improper Payments working group. The work groups have been exploring areas related to identifying a more coordinated and efficient Federal-wide approach for identifying and reducing improper payments.

HHS planned activities for these programs in FY 2005 include:

• Medicare Fee-For Service: HHS will continue to take corrective action to address causes related to the national Medicare FFS paid claim error rate and also continue to work toward reducing the error rate. Further, HHS will determine a national Medicare FFS error rate in FY 2005.
• Medicaid: HHS will report on the results of the PAM pilot for the 27 States that participated during FY 2004, the third and final year of the pilot. Further, HHS will work with a number of States to measure payment errors under a modified PAM pilot - the Payment Error Rate Measurement (PERM) pilot. HHS expects that the PERM program will be implemented in all States in FY 2006. ("Notice of Proposed Rulemaking" for implementation of the PERM program in FY 2006 was published in the Federal Register in the fourth quarter of 2004). In addition, the Health Care Fraud and Abuse Control account includes at least two projects (the hiring of 100 regional office positions to do prospective reviews of State Medicaid operations, and the Medicare/Medicaid data match program) designed to ferret out improper payments and identify areas in need of improved payment accuracy. OIG also continues to receive money from HCFAC to conduct audits on the Medicaid program. Finally, the Public Assistance Reporting Information System data match program managed by ACF primarily benefits the Medicaid program, and offers States numerous opportunities to improve their payment accuracy, especially in the Managed Care portion of their programs.
• SCHIP: HHS will report on estimated payment errors for the 15 States participating in the FY 2004 PAM pilot for SCHIP. These rates will be reported in the FY 2005 PAR. Also, the PERM discussed above will include payment error rate measurements for SCHIP.
• Child Care: HHS will continue working with the States in the Child Care pilot project that was initiated this year. Further, HHS will expand the pilot project to include preparing a plan for measuring payment errors.
• Foster Care: HHS will work with a contractor to identify the best approach for using the regulatory review process for determining a national Foster Care payment error rate. HHS plans to have identified a methodology for establishing and reporting on a Foster Care payment error rate in FY 2005.
• Head Start: HHS will take appropriate corrective action to address the causes of the 3.9 percent payment error rate reported this year. Further, HHS will determine a payment error rate for FY 2005.
• TANF: HHS will implement a plan to increase program oversight and fiscal integrity in the TANF program and act upon other opportunities to address improper payments in the TANF program as they surface. Further, HHS will continue exploring possible methods for addressing payment errors and reducing the occurrence of improper payments in the TANF program.
• IPIA Program Risk Assessments: HHS is working toward having many of its FY 2005 program risk assessments completed by the end of the first quarter; and will also be working to have plans in place for estimating payment errors for most of the programs determined to be high risk by the end of the second quarter.
• Recovery Auditing: HHS will begin on-site recovery auditing activities in all five contract payment offices by the second quarter of FY 2005. As improper payments are identified during FY 2005, HHS will work to determine causes and formulate necessary corrective action strategies. Also, HHS will use experiences in this first year of recovery auditing to improve on its recovery auditing strategies going forward.

More detailed information on the FY 2004 accomplishments and planned FY 2005 activities can be found in Appendix C.

Other Initiatives

During FY 2004, OMB began emphasizing the generation and use of financial and performance information for routine or "day-to-day" management decisions as a key component of PMA success. In response, HHS initiated a Department-wide study of the extent to which HHS Agencies produce and use this information for program and Agency management, and to identify opportunities for improved integration of financial and performance information. This is a significant undertaking, given the size, scope, and breadth of HHS activities across several Agencies.

FY 2004 Accomplishments:

• Streamlined and accelerated the annual financial reporting process making financial information more useful in decision making by shortening the time for providing financial information from 4 months to 45 days after the fiscal yearend.
• Added a quarterly financial reporting cycle to provide more timely information and to facilitate the annual reporting cycle.
• Initiated an HHS-wide analysis to identify the extent to which financial and performance information currently is being used to support routine or "day-to-day" management decisions. This analysis is intended ultimately to help identify core mission business functions within HHS Agencies and across the Department and to improve the utility and use of routine financial and performance information to support program and management decision making.
• Began a phased-in implementation plan for UFMS throughout HHS, beginning with NIH in FY 2004, to culminate with IHS and the final phase of CMS contractors in FY 2007.
• Initiated a study to consolidate resources performing similar activities across the Department to facilitate enhanced service delivery for core financial processes.
• Developed and implemented internal PMA scorecard to communicate to HHS employees' their responsibilities and achievements under the PMA.
• Awarded a contract for recovery auditing services.
• Developed and began implementing a project plan to comply with the IPIA.

FY 2005 Action Plan:

• Submit FY 2004 PAR by November 15, 2004.
• Continue progress in UFMS development and implementation:
  • Go live with two components of the UFMS implementation: CDC and FDA.
  • CDC and FDA: October 2004 - Will deploy General Ledger and the Accounting for Pay System.
  • Grants Processing will be added in the first quarter for CDC.
  • CDC and FDA: April 2005 - Will deploy remaining components of the JFMIP Core Financial Management functionality.
• Finalize "day-to-day" study and implement improved reporting formats where warranted.
• The Department will continue working on the Shared Services effort.
• HHS will continue planning on the development of the Department-wide Enterprise Data Warehouse effort.
• HHS will continue to participate in the OMB Lines of Business project.
• HIGLAS will transition to some Medicare contractors.
• HHS will formally establish an Administrative Systems work group to ensure the Department manages its financial and mixed-financial systems projects.

Expanded Electronic Government

HHS has made significant progress in expanding the use of electronic government (e-Gov) to conduct Departmental business and to serve citizens more effectively and efficiently. HHS has been a leader, a participant, and contributor in all of the PMA's e-Gov portfolios, as well as the crosscutting E-Authentication initiative, and is a strong contributor to the Lines of Business task forces for Financial, Grants, and Federal Health Architecture. HHS' strategic planning and performance management efforts have aligned all major IT projects with HHS IT strategic planning goals and objectives and those, in turn, are aligned with the Departmental goals and objectives.

The Department has made great strides in its HHS Enterprise Architecture program that will ensure the integration of e-Gov and HHS enterprise-wide initiatives as the Department pursues its architecture-based, modern IT delivery system. HHS has implemented a portfolio management tool that will ensure that the Department develops strong business cases and applies effective IT capital planning and control over IT investments.

FY 2004 Accomplishments:

• The Grants.gov (formerly known as e-Grants) program met all milestones related to the development and deployment of the Grants.gov Find and Apply mechanisms. Currently, all 26 grant-making agencies are posting funding opportunities on the Grants.gov Find mechanism.
• HHS continues to lead the Federal Health Architecture that envisions an information-driven partnership among educational, private, and public agencies, as well as citizens through an online public health network. The Consolidated Health Informatics initiative has been merged under the Federal Health Architecture operational umbrella and will be leveraged to address future issues of data and vocabulary standards within the context of the architectural segments being reviewed.
• Under the "Secure One HHS"" IT Security program, HHS has certified and accredited 90 percent of its IT systems and achieved the goal that 100 percent of HHS employees have received annual security awareness training. HHS drafted and circulated for comment the HHS Information Security Program Policy and the HHS Information Security Program Handbook.
• HHS developed and published an Enterprise Architecture linking performance to strategic and capital planning and budget processes.

FY 2005 Action Plan:

• Under the "Secure One HHS"" IT Security program, HHS plans to have 100 percent of its IT systems certified and accredited. In addition, HHS will strengthen the Federal Information Security Management Act plan of action and milestone process within each Agency to the point that the OIG judges it highly effective and aligned with the "Secure One HHS"" program. HHS will also ensure that 100 percent of HHS employees have received annual security awareness training.
• Grants.gov will continue its efforts to establish system-to-system interfaces with agencies, work with grant-making agencies to establish a schedule for placing application packages on Grants.gov's Apply mechanism, and increase agencies' adoption and utilization of the Find and Apply mechanisms.
• The Federal Health Architecture partners will continue to review health business processes and performance metrics broadly across the Federal Government in order to document processes, identify opportunities for collaboration, and ensure the effective exchange of health information across Federal departments. Partners' work groups will pursue their task to develop the architecture for health business processes based on level of interest and priority.
• HHS will continue to participate in the OMB Lines of Business project.
• HHS will execute its Earned Value Management Roadmap to achieve 100 percent American National Standards Institute-compliant earned value management for all major HHS developmental investments. Cost and schedule variances for 90 percent of these investments will be within 10 percent of the originally planned cost and schedule for each individual investment.

Budget and Performance Integration

In FY 2004, HHS succeeded in improving its status to yellow for Budget and Performance Integration on OMB's PMA scorecard. HHS achieved this by implementing the outcomes and deliverables identified in OMB's Management Plan Agreement, which defines the milestones for successful achievement of budget and performance integration. HHS achieved a green progress rating for the second, third, and fourth quarter of this fiscal year. In FY 2004, HHS efforts focused on further integrating strategic goals and performance information into the Department's budget decision-making process, as well as taking active steps to improve program effectiveness; calculate full cost of programs; develop a methodology to calculate the marginal cost of measures; and promote accountability among program managers.

HHS continued using results of OMB's PART as a means of using program performance to inform budget decisions. Under the PART process, OMB evaluates a program's purpose and design, planning, management, and results and accountability to determine its overall effectiveness. At HHS, program managers use the PART to justify funding requests and legislative actions and to make program improvements. For example, as a direct result of PART recommendations, ACF plans to conduct national evaluations of major grant programs such as the Low Income Home Energy Assistance program. In addition, ACF's PART recommendations resulted in proposed legislation to better integrate Head Start, Child Care, and State-operated preschool programs. Section II of this report, Program Performance by HHS Strategic Goal, contains additional information on the PART.

FY 2004 Accomplishments:

• Sponsored a budget and performance conference for representatives from all HHS Agencies to share information and open a dialogue on budget and performance integration within the Department.
• Created the outline for the FY 2006 integrated performance budget by forming a design team that included a budget and a performance representative from every HHS Agency.
• Developed the FY 2006 budget that integrates performance and budget information at the HHS Agency and Department levels and provides full cost information for performance program areas.
• Submitted a methodology for calculating marginal costs for selected programs at FDA and CDC.
• Participated in OMB's PART process for the FY 2006 budget cycle. HHS completed 22 PART assessments for FY 2006, for a total of 65 assessed programs from FYs 2004-2006 representing well over 60 percent of the total HHS budget.
• Implemented a process for tracking and following up on PART recommendations.
• Reinforced efforts to link strategic planning goals with budget and performance decision making through the Secretary's Budget Council, which conducts the summer budget review process, by including performance and PART information along with budget materials for the Secretary's Budget Council meetings.

FY 2005 Action Plan:

• Refine and improve the integrated performance budget for FYs 2006 and 2007.
• Ensure that senior managers continue to meet and examine reports that integrate financial and performance information.
• Continue to implement PART recommendations.
• Strengthen and improve the measures used to track program performance.
• Continue to report the full cost of achieving performance goals accurately in budget and performance documents.
• Expand the use of marginal cost.
• Continue to ensure that budget decisions are informed by performance information.

Broadening Health Insurance Coverage

The Medicaid program provides a lifeline to millions of low-income Americans who otherwise would lack health insurance coverage. However, many Americans still lack either private or public insurance coverage. Through a variety of initiatives, and in partnership with the Nation's governors, the Administration has made significant strides in addressing access to coverage for uninsured Americans.

Since 2002, when CMS first announced the HIFA demonstration initiative, a new approach to demonstrations in Medicaid and SCHIP, the Administration has encouraged new comprehensive State approaches to increase the number of individuals with health insurance coverage within current-level Medicaid and SCHIP resources. HIFA puts a particular emphasis on broad Statewide approaches that maximize private health insurance coverage options and target Medicaid and SCHIP resources to populations with incomes below 200 percent of the Federal poverty level. By supporting private coverage options in the States, the Administration has sought to promote new health care coverage without encouraging a "one-size-fits-all" approach. In addition to HIFA, CMS has approved broad-based section 1115 demonstrations in States such as Utah that expanded coverage to previously uninsured individuals.

Many uninsured women need treatment for breast and cervical cancer, and CMS has been working to ensure that as many States as possible take advantage of the opportunity for enhanced Federal funding under the Breast and Cervical Cancer Prevention and Treatment Act of 2000 (BCCPTA). BCCPTA gave States enhanced Federal matching funds to provide Medicaid eligibility to a new group of women previously not Medicaid-eligible. The new option allows States to provide full Medicaid benefits to uninsured women under age 65 who are identified through the CDC's National Breast and Cervical Cancer Early Detection program, are in need of treatment for breast or cervical cancer, including pre-cancerous conditions, and are not otherwise eligible for Medicaid. This program, effective October 1, 2000, also allows States to extend presumptive eligibility to applicants to ensure that needed treatment begins as early as possible and that life-saving interventions may be made in a timely fashion.

Access to health care coverage is also a crucial factor in allowing Americans with disabilities realize their fullest employment potential. To ensure that the contributions of disabled individuals in the workforce are not overlooked and that the business community takes full advantage of disabled individuals' skills and talents, CMS has designed and implemented two groundbreaking employment initiatives mandated by the Ticket to Work and Work Incentives Act of 1999 (TWWIA): the Demonstration to Maintain Independence and the Medicaid Infrastructure Grants. These initiatives enable States to build supports for people with disabilities who would like to be employed.

FY 2004 Accomplishments:

• CMS estimates that HIFA demonstrations, if fully implemented, could result in as many as approximately 822,000 new enrollees, and non-HIFA demonstrations could result in as many as 681,000 new enrollees.
• Through the efforts of the Administration and the States, 49 States and the District of Columbia are now participating in the BCCPTA partnership with the CDC. Furthermore, nearly half of those participating States also have adopted a presumptive eligibility option. As of mid-2004, States reported having enrolled an additional 18,315 women in Medicaid since January 20, 2001.
• CMS has awarded grants to 45 States to develop an optional working disabled eligibility group (also known as "Medicaid buy-in"), increase the availability of Statewide personal assistance services, form linkages with other State and local agencies that provide employment-related supports, and create a seamless infrastructure that will maximize the employment potential of all people with disabilities. Since passage of the TWWIA legislation, the number of States with a Medicaid buy-in program has increased from 1 to 31 and enrollment has increased from 2,000 to over 68,000.

FY 2005 Action Plan:

• Continue to work with States to expand coverage through the use of the HIFA Demonstration initiative, Family Planning, and Independence Plus waivers.
• Develop guidance to implement the law to redistribute funding to States for SCHIP.
• Encourage States to apply for grants under the New Freedom initiative and to undertake efforts to maximize the employment potential for persons with disabilities through the development of optional working disabled eligibility groups ("Medicaid buy-in"), and increasing the availability of Statewide personal assistance services.

Faith-Based and Community Initiative

The mission of the Center for Faith-Based and Community Initiatives (CFBCI) is to create an environment within HHS that welcomes the participation of faith-based and community organizations as valued and essential partners in assisting Americans in need. This mission is part of HHS' focus on improving human services for America's most needy populations. Through work completed in FY 2004, HHS has achieved a green progress rating for every quarter this fiscal year by making the following accomplishments in data collection, pilot projects, regulatory reform, and outreach/technical assistance.

FY 2004 Accomplishments:

This section summarizes the significant changes in HHS financial condition during the past year. The following table provides an overview of HHS financial condition at the end of FY 2004 (dollars in millions).

Assets: What HHS Owns

Charts 1 and 2

HHS assets increased $14 billion or 3.7 percent to a total of $404 billion during FY 2004 as shown in Chart 1. Increases of $11 billion or 13.2 percent in fund balance with Treasury and $5.5 billion or 2.0 percent in Investments accounted for most of the change in total assets. The increase in fund balance with Treasury resulted primarily from increases to Medicare Supplementary Medical Insurance (SMI) and Hospital Insurance (HI). The increase to investments was primarily related to a net increase of $5.5 billion in the Medicare trust funds for SMI and HI. While SMI experienced a net decrease, HI experienced a larger net increase. As shown in Chart 2, HHS investments of $288 billion and its fund balance with Treasury of $98 billion together comprise 95.5 percent of HHS total assets. The fund balance with Treasury is HHS' "checkbook balance," or the aggregate amount of funds deposited in the Treasury available to make authorized expenditures and pay liabilities. At the end of FY 2004, approximately $286 billion or 99 percent of HHS investments were in U.S. Treasury securities to support the Medicare trust funds, which include HI and the SMI trust funds. Established in 1965 as Title XVIII of the Social Security Act, Medicare was legislated as a complement to Social Security retirement, survivors, and disability benefits, and originally covered people age 65 and over. In 1972, the program was expanded to cover the disabled, people with end-stage renal disease requiring dialysis or kidney transplant, and people age 65 or older who elect Medicare coverage. Medicare is a combination of three programs: HI, SMI, and Medicare Advantage. Since 1966, Medicare enrollment has increased from 19 million to approximately 42 million beneficiaries.

Hospital Insurance

HI or Medicare Part A, is usually provided automatically to people age 65 and over who have worked long enough to qualify for Social Security benefits and to most disabled people entitled to Social Security or Railroad Retirement benefits. The HI program pays for hospital, skilled nursing facility, home health, and hospice care and is financed primarily by payroll taxes paid by workers and employers. The taxes paid each year are used mainly to pay benefits for current beneficiaries. Funds not currently needed to pay benefits and related expenses are held in the HI trust fund, and invested in U.S. Treasury securities. As reported in the Required Supplementary Stewardship Information (RSSI) section of this report, HI trust fund assets steadily increase through 2009. At this point, expenditures start to exceed income including interest, thus drawing down assets until 2019 when they would be depleted. The shortfall between income and expenditures is due in part to the attainment of Medicare eligibility, starting in 2011, of those born during the 1946-1964 baby boom, and also due to health costs that are expected to increase faster than workers' earnings. Actual economic conditions, however, could delay (in the case of economic recovery) or accelerate this condition. Based on estimates from the Mid-Session Review of the FY 2005 President's budget, inpatient hospital spending accounted for 71 percent of HI benefit outlays. Managed Care spending comprised 13 percent of total HI outlays. During FY 2004, HI benefit outlays grew by 8.7 percent. The HI benefit outlays per enrollee are projected to increase by 6.8 percent to $4,040.

Supplementary Medical Insurance

SMI, or Medicare Part B and Medicare Part D, is available to nearly all people age 65 and over, the disabled, and people with end-stage renal disease requiring dialysis or kidney transplant who are entitled to Part A benefits. The SMI program pays for physician, outpatient hospital, home health, laboratory tests, durable medical equipment, designated therapy, Medicare prescription drug discount card enrollment fees and prescription drug expenses for Transitional Assistance beneficiaries, and other services not covered by HI. The SMI coverage is optional and beneficiaries are subject to monthly premium payments. About 95 percent of HI enrollees elect to enroll in SMI. Whereas HI is funded primarily by payroll taxes, SMI obtains its funding through monthly beneficiary premiums and income from the general fund of the U.S. Treasury - both of which are established annually to cover the following year's expenditures. Thus, the SMI trust fund is in financial balance every year, regardless of future economic and other conditions, due to its financing mechanism. Funds not currently needed to pay benefits and related expenses are held in the SMI trust fund, and invested in U.S. Treasury securities. Under the Trustees' intermediate set of assumptions, the HI trust fund will incur an actuarial deficit of more than $8.2 trillion over the 75-year projection period, as compared to more than $5.9 trillion in the 2003 financial report. In order to bring the HI trust fund into actuarial balance over the next 75 years, very substantial increases in revenues and/or reductions in benefits would be required. Since the SMI trust fund is in financial balance every year, there has been substantially less attention directed toward its financial status than to the HI trust fund - even though the SMI expenditures have increased faster than the HI expenditures in most years and are expected to continue to do so for a number of years in the future. Also based on estimates, during FY 2004, SMI benefit outlays grew by 9.8 percent. Physician services, the largest component of SMI, accounted for 39 percent of SMI benefit outlays. The SMI benefit outlays per enrollee are projected to increase 8.3 percent to $3,370. It is important to note that no liability has been recognized on HHS' balance sheet for future payments to be made to current and future program participants beyond the existing "incurred but not reported" Medicare claim amounts as of September 30, 2004. This is because Medicare is accounted for as a social insurance program rather than a pension program. A more detailed discussion of HHS' social insurance funds and other stewardship property and investments can be found in the Section III RSSI discussion of this report. A more detailed discussion of the Medicare Trust Fund can be found in RSSI and in the CMS financial report.

Liabilities: What HHS Owes

Charts 3 and 4

HHS liabilities increased $3.7billion or 5.8 percent to a total of $67 billion during FY 2004, as shown in Chart 3. This increase can be attributed primarily to a $1.1 billion or 2.3 percent increase to $49 billion in entitlement benefits due and payable (EBDP) and a $2.1 billion increase in other liabilities (refer to Footnote 7 in Section III of this report for discussion of the change to other liabilities). Entitlement benefits experienced a net increase due to the combination of HI, SMI, and Medicaid EBDP. Entitlement benefits account for nearly three-fourths of total liabilities, as shown in Chart 4. Entitlement benefits represent benefits due and payable to the public from the CMS insurance programs discussed above.

Statement of Changes in Net Position: Where HHS Stands

HHS' Net Position, which increased $11 billion or 3.3 percent to $337 billion at the end of FY 2004, consists of the cumulative net results of operations since inception, and unexpended appropriations, or those appropriations provided to HHS that remain unused at the end of the fiscal year.

Net Cost - How HHS Spends

Charts 5 and 6

HHS incurred a total net cost for the year of $547 billion, which represents a $37 billion or 7.2 percent increase over FY 2003. This increase resulted primarily from largely normal program growth experienced by the Medicare HI and SMI, and Medicaid programs, as well as increased grant expenditures, contracted services, and payroll and benefit costs. The consolidated statement of net cost in Section III of this report presents HHS net operating costs by HHS Agency (which comprise of Departmental responsibility segments) while functional detail is provided in the footnotes to the financial statements, also in Section III. As can be seen in Chart 5, CMS, ACF, and NIH account for a combined 96 percent of HHS' total net cost of operations, incurring net costs of $452 billion, $46 billion, and $26 billion, respectively. Chart 6 shows how HHS incurs net costs across its primary functions as defined in the budget. HHS' Medicare (49.3 percent); Health (42.1 percent); Income Security (6.4 percent); and Education, Training, and Social Services (2.2 percent) account for nearly all of HHS' net costs incurred during FY 2004. The percentages in Chart 6 reflect a proportional analysis of HHS' combined net costs (not accounting for intradepartmental costs and revenues). Intradepartmental net costs accounted for less than 0.1 percent of total combined net costs.

Budgetary Resources and Financing - Where the Money Comes From

During FY 2004, most of the funding to support net costs came from $700 billion in appropriations from Congress, as shown in HHS' Combined Statement of Budgetary Resources. This represents 96 percent of the gross budgetary resources available to HHS. This gross amount was offset by a pre-designated portion of funds that were either temporarily or permanently unavailable pursuant to specific legislation to derive a net funds available amount of $721 billion, an increase of 9.9 percent over FY 2003 levels. During FY 2004, HHS incurred obligations of $702 billion, an 8.2 percent increase over FY 2003, and made 7.5 percent more Net Outlays totaling $543 billion.

Transfer of Department of Homeland Security Operations to HHS

The Homeland Security Act of 2002 resulted in changes to the structure of HHS in 2003. The Office of Emergency Preparedness, National Disaster Medical System, Metropolitan Medical Response System, and Strategic National Stockpile programs were transferred from HHS to the Department of Homeland Security, and the Unaccompanied Alien Children program was transferred to HHS from the Immigration and Naturalization Service as of March 1, 2003. The Project BioShield Act of 2004 transferred back to HHS the Strategic National Stockpile program on August 13, 2004.

Grants Management

As the largest grant-awarding agency in the Federal Government, HHS plays a key role in Federal grants management. Through hundreds of assistance programs, HHS awards more than $240 billion in total Federal grant funding.

Grant awards provide financial support and assistance to accomplish a public purpose. Awards include grants and other agreements in the form of money, or property in lieu of money, to eligible recipients. HHS awards most grant dollars in the form of mandatory grants. A mandatory grant is one that a Federal agency is required by statute to award if the recipients meet the eligibility and compliance requirements of the relevant statute and regulations. The remaining HHS grants are discretionary grants. Discretionary grants permit the Federal Government, according to specific legislation, to exercise judgment in selecting the project or proposal to be supported and selecting the recipient organization through a competitive process.

HHS grant program stewardship and oversight responsibilities involve a variety of ongoing administrative functions, including:

• Helping OMB revise key OMB Circulars pertinent to grants administration;
• Providing training and developing related guidance documents on these revised OMB Circulars;
• Conducting oversight through the "Balanced Scorecard Initiative;"
• Strengthening HHS indirect cost negotiation capabilities;
• Updating internal Departmental grants administrative procedures;
• Utilizing a Department-wide grants management information system to report on grant award data across all HHS grant programs;
• Reviewing Departmental program announcements; and
• Reviewing grant single audits by HHS OIG.

OMB designated HHS to be the lead agency to manage the Federal Grant Streamlining program, a government-wide effort required by the Federal Financial Assistance Management Improvement Act (Public Law 106-107) of 1999. The program's goal is to streamline, simplify, and provide electronic options for the grants management processes employed by Federal agencies and improve the delivery of services to the public. Program initiatives encompass the entire grant life cycle and include: standardizing, simplifying, and streamlining the formats used to provide program synopses; announcing funding opportunities; and publishing the forms required to apply for and report on grant funds. HHS is also the lead agency for government-wide Grants.gov, a PMA e-Gov initiative. The HHS Grants.gov program office, in partnership with the 26 major grant-making agencies, is modifying and developing grants management practices and information systems that will allow current and prospective recipients of Federal grants to find, apply for, and manage grant funds online through a common website.

This section describes select systems that are critical to HHS Department-wide management, and discusses HHS' capacity to comply with the Federal laws and regulations that pertain to those systems and controls over the Department's resources. The systems discussion includes an overview of HHS' current key systems and details on the Department's future multi-million dollar implementation of UFMS, currently under development.

A cornerstone to improving HHS management practices is the Department's ability to maintain management systems, processes, and controls that ensure financial accountability; provide useful management information; and meet requirements of Federal laws, regulations, and guidance. HHS seeks to comply with a variety of Federal financial management systems requirements, including those articulated by the Chief Financial Officers Act, Federal Managers' Financial Integrity Act (FMFIA), Government Management Results Act, Federal Financial Management Improvement Act (FFMIA), JFMIP principles, OMB Circular A-127, Financial Management Systems, and the Clinger-Cohen Act of 1996. HHS' overall goals for its financial management systems focus on ensuring effective internal controls, timely and reliable financial and performance data for reporting, and system integration. The Department's immediate priorities are to address two material weaknesses (repeat conditions) identified in the CFO audit process: 1) financial systems and processes, and 2) Medicare Contractors electronic data processing (EDP) access controls. As in prior years, these findings are reported the Department's FMFIA Report as one combined FMFIA Section 4 material non-conformance. In addition, HHS is also reporting three new FMFIA material weaknesses, two of which were identified through the CFO audit -- Departmental Payroll System, and Departmental Financial Reporting, and one which was identified as a significant deficiency under the Federal Information Security Management Act (FISMA).

HHS Financial Management Systems

The table on the following page summarizes the existing key HHS systems that allow HHS Agencies to perform the majority of financial management business functions across the Department. HHS current financial systems environment consists of five core accounting systems including numerous feeder systems processing grants, travel, acquisitions, logistics, and other administrative systems.

Transfer of HHS Payroll Functions to Defense Finance and Accounting Service

The Defense Finance and Accounting Service (DFAS) will begin to perform the payroll functions for HHS in FY 2005. Through the DFAS system, HHS employees will be able to view and print leave and earning statements in addition to viewing and printing employees' W-2's (Wage and Tax Statements).

HHS Financial Management System Weaknesses

Financial Management Systems Processes:

HHS continues to have serious internal control weaknesses in its financial systems and processes for producing financial statements. HHS' primary strategy to remedy this material weakness is the implementation of UFMS. Consistent with the vision of "One HHS," the Department is seeking to meet this goal by unifying and modernizing HHS financial management systems. UFMS is a business transformation effort designed to integrate Department-wide financial management systems and operations by aligning HHS' businesses with modern technological capabilities. Existing HHS financial management system configuration supports standard data elements and interface records. With UFMS, HHS will also standardize business processes for all core JFMIP functions including general ledger, accounts payable, accounts receivable, cost management, budget execution, and financial reporting.

General and Application Controls:

EDP weaknesses were identified for Medicare contractors in five primary types of controls: entitywide security programs, access controls (physical and logical), systems software, application software development and change controls, and service continuity. CMS continues to make progress in identifying and addressing weaknesses in its automated processing systems. Following the establishment of a baseline in FY 2002, CMS continues to assess the risks inherent in each area of vulnerability, assign priorities, and seek resources as necessary to correct known deficiencies. In addition, a critical goal of the HIGLAS investment is to integrate CMS accounting systems to produce audited financial statements. The first phase of HIGLAS is to develop the financial accounting and businesses related to Medicare contractor's claims payments. The next phase is to integrate all remaining Medicare Trust Funds, Medicaid, and administrative financial functionality. UFMS will contain a summary set of books, while HIGLAS would continue to process all of CMS core business program related activities and administrative processes.

The Department remains dedicated to ongoing performance improvement of its financial management environment. HHS, using the Secretary's "One HHS" vision as a guiding principle, is striving to establish an environment that uses efficient business processes, is supported by modern financial systems, and is consistent with Federal financial management requirements and best practices. The UFMS investment represents a substantial commitment toward establishing the target financial management environment across the Department. HHS will continue to monitor the progress and results of its financial management operations in the areas of financial accountability, usefulness of information, and compliance.

Department Payroll System

The Department also recognizes that its payroll systems controls need strengthening. The auditor's found that there are significant deficiencies in the Departmental Payroll System that could result in misstatements to payroll-account balances and the Commission Corp liability, improper payments, release of sensitive data, and reduced controls over safeguarding of assets. The Department recognizes that improvements can be made to the systems and processing activities that comprise the HR and payroll cycles. However, HHS has made significant changes to its human resources operation in response to the President's Management Agenda (PMA) including HR consolidation, implementing Department wide automated HR systems also referred to as electronic Official Personnel Files (e-OPF), and the transition to the Defense Finance and Accounting System (DFAS). The transition of payroll services to the Defense Finance and Accounting Service (DFAS), which is scheduled for March 2005. Additionally, the Electronic Official Personnel Folders (eOPF) project is scheduled for implementation from December 2004 - September 2005. We believe our efforts in these areas will enhance our ability to have a solid payroll system while providing the Department with opportunities to comply with the FMFIA by the end of FY 2005. A corrective action plan is included in Appendix D, FMFIA Report (HHS-04-02).

UFMS Implementation

The UFMS investment will replace five legacy accounting systems (PSC's CORE Accounting System, CDC's TOPS, FDA's GLAS, NIH's CAS, and CMS' FACS) with a web-based, commercial, off-the-shelf product. Once fully implemented, UFMS will reduce the five legacy financial management systems to one modern accounting system, with two components: HIGLAS will support CMS and the Medicare contractors and the other will serve the rest of HHS. Upon completion, UFMS will be the largest civilian financial management system of the Federal Government.

The following illustration shows HHS' UFMS implementation milestones and current timelines.

UFMS will produce information that is timely, useful, and reliable and will support the integration of financial and performance information. Older mainframe systems such as PSC's CORE, FDA's GLAS, and CDC's TOPS cannot produce the information that program managers and decision makers need in a timely manner, nor can they provide the real-time processes needed to support effective e-Gov initiatives. By eliminating redundant and outdated financial systems and by standardizing business rules, data requirements, and accounting policies (particularly around the accounting classification structure), UFMS will reduce the extent of manual processes now involved in producing reports. This will increase the timeliness and accuracy of financial management information Department-wide, including HHS-level consolidated financial statements. Within HHS, UFMS establishes the foundation for full integration of financial and administrative systems and more robust cost management ability. UFMS also will strengthen the extent of internal financial management controls by providing automated funds control that will allow managers to accurately assess available program funds on a daily basis.

Finally, the Secretary's "One HHS" vision also will result in streamlining critical administrative systems that impact financial management functions, including grants and acquisition. In conjunction with these internal streamlining efforts, the Department will continue to ensure coordination with e-Gov initiatives efforts such as e-Travel, e-Payroll, e-Procurement, and Grants.gov.

Finally, the Secretary's "One HHS" vision also will result in streamlining critical administrative systems that impact financial management functions, including grants and acquisition. In conjunction with these internal streamlining efforts, the Department will continue to ensure coordination with e-Gov initiatives efforts such as e-Travel, e-Payroll, e-Procurement, and Grants.gov.

HHS has ambitious implementation goals for UFMS. As currently structured, HHS is proceeding on three parallel tracks:

• Implementation activities for CDC, FDA, PSC, and their customers.
• NIH is proceeding with its modernization initiative, NBRSS. NBS will migrate with UFMS.
• UFMS is scheduled to be interfaced with CMS' HIGLAS by the end of FY 2007.

One major accomplishment necessary to enable the integration of these three tracks is to have a unified global design, including the recently completed budget and accounting classification structure. Parallel operations will run during October 2004 through April 2005 and open balances/documents will be transferred into UFMS. HHS anticipates deployment at the CDC and FDA in FY 2005. Implementation at HHS Agencies supported by PSC will be phased-in beginning in January 2006. The following illustration shows HHS' UFMS implementation strategy.

HHS Implementation Strategy

Key Targets and Performance:

The following chart contains key UFMS accomplishments for FY 2004.

The breadth of services that HHS delivers and the myriad support functions required to support them create a number of management challenges, which help set the course for HHS improvement efforts each year. The OIG identifies these challenges and tracks HHS' progress in resolving them. Pursuant to the Reports Consolidation Act of 2000, Appendix A addresses the challenges identified by the OIG, and management's responses to those challenges in detail. As shown in the accompanying chart, many of the initiatives discussed in this report, both under the auspices of the PMA and HHS' own strategic goals, address these challenges. It should be noted that because many of the PMA initiatives address, in great part, government-wide issues, there will not necessarily be a complete correlation between HHS' management challenges and each of the PMA initiatives. There is, however, a more direct relationship between the challenges identified and HHS' strategic goals. It is this relationship that articulates, in part, HHS' efforts to resolve these challenges. As such, through the Department's many initiatives, HHS continually strives to improve not only the quality of services it delivers to its "customers" and beneficiaries, but also to enhance management effectiveness and efficiency.