Performance and Accountability Report
Fiscal Year 2005

Management Discussion and Analysis

Introduction

Mission, Strategic Goals, and Scope of Services

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.

In his 500 Day Plan, Secretary Mike Leavitt has outlined his high priority goals needing urgent attention, including transforming the health care system; modernizing Medicare and Medicaid; advancing medical research; securing the Homeland; protecting life, family, and human dignity; and improving the human condition around the world. 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 and other 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.

Scope of Services

HHS accomplishes its eight strategic goals by managing and delivering hundreds of programs across several disciplines. The following examples illustrate the breadth of activities that occur at HHS and indicate 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);
• Reduce medical errors (Goal 5);
• Increase consumer and patient use of health care quality information (Goal 5);
• Reduce the regulatory burden on providers and consumers of HHS services (Goal 8);
• 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).

500-Day Plan

HHS Secretary Mike Leavitt established a 500-Day Plan to provide the Department a management tool for guiding its energies toward fulfilling the President’s vision of a healthier and more hopeful America. As a personal expression of the Secretary’s priorities in the daily leadership and management of the Department and its more than 67,000 dedicated employees, the Plan offers a core set of public policy principles that form the philosophical standard to uphold fiscal responsibility and good stewardship of the fiscal responsibilities for which HHS is charged.

Specifically, the Plan offers the Department a prism through which those who work with the Secretary can look to determine how the Secretary will approach goals associated with transforming the U.S. health care system; modernizing Medicare and Medicaid; advancing medical research; helping to secure the Homeland; protecting life, family and human dignity; as well as improving the human condition around the world.

The strategies in the Plan focus on actions during a rolling 500-day period that will achieve significant progress for the American people over a 5,000-day horizon. The Plan is updated every 200 days. For more information, visit www.hhs.gov/500DayPlan.

HHS Partners - Working Together

Often the needs of individuals and families transcend individual HHS program boundaries. HHS' ability to meet client needs and accomplish its goals is tied directly to the commitment, cooperation, and success generated by HHS employees and the Department’s partners, other Federal agencies, state and local governments, Tribal organizations, community-based organizations, faith-based organizations, and others.

HHS’ commitment to preparing America for and responding to national crises is exemplified in its response to helping those affected by Hurricanes Katrina and Rita. These hurricanes, two of the most devastating in the history of the Nation, hit the Gulf Coast in the late summer of 2005 and displaced more than 1 million people, killed more than 1,000, and caused immediate damages costing more than $200 billion. HHS led the largest ever mobilization of the U.S. Public Health Service Commissioned Corps to provide medical and mental health benefits and services to those impacted by the storms and to augment care in affected hospitals and shelters to hundreds of thousands of evacuees. For Katrina alone, more than 1,400 officers from more than 40 states came together to work with state, local, and private agencies in Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, and Texas.

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.

HHS Organization - Structured to Accomplish the Department’s Mission

Eleven Operating Divisions (OPDIVs) 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 the mission. The following pages provide a brief overview of HHS’ organization and the purpose and accomplishments of each OPDIV, including a twelfth HHS organization, the Program Support Center (PSC). The PSC provides administrative, financial, and human resource services to the Department. The following summary of each OPDIV’s responsibilities and highlights of its activities includes references to the corresponding strategic goal(s) addressed by these activities. Unless otherwise noted, the highlights that follow reflect the most current information available to HHS at the time of completion of this report.

Administration for Children and Families (ACF)

ACF programs promote the economic and social well-being of families, children, individuals, and communities. Major ACF programs include Temporary Assistance for Needy Families (TANF), Child Support Enforcement, and Head Start for preschool children. ACF also provides funds to help low-income families pay for child care, prevent child abuse and domestic violence, provide incentives for adoption of children, and create self-sufficiency for refugees.

ACF Highlights:

• Large numbers of people continue to move from welfare to work. The number of TANF recipients has continued to decline through March 2005. Many adult welfare recipients are earning money by working at paying jobs. In FY 2003, 28 percent of adult recipients were working (including employment, work experience, and community service), compared with less than 7 percent in 1992 and 11 percent in 1996. The recent decline in work rates underscores the importance of welfare reform reauthorization, which would reinstate a meaningful work participation rate so that more families achieve self-sufficiency. (Goal 6)
• The Child Support Enforcement program established approximately 11.5 million child support orders from 16 million cases in FY 2003. This program collected $21.2 billion for child support in FY 2003 representing a 33 percent increase since 1999, and collected a record $1.6 billion in delinquent child support in tax year 2003, on behalf of 1.6 million families, using tax refund and administrative offset tools. The percentage of child support cases with support orders rose to a high of 72 percent, exceeding the FY 2003 performance target of 67 percent. (Goal 7)
• From FY 1997 through 2003, 318,000 children were adopted from the child welfare system. In FY 2003, preliminary data indicate there were 50,000 adoptions. This number is expected to increase as additional adoptions for that year are reported. This represents a significant growth in the number of adoptions over the years, up from 47,000 adoptions in FY 1999 and 31,000 adoptions in 1997. While the number of adoptions has held fairly constant in the most recent years, the adoption rate (adoptions as a percentage of those in foster care) increased from 8.4 percent in FY 1999 to 9.2 percent in FY 2003. (Goal 7)
• The Head Start program has made advancements in improving the development and learning readiness of Head Start children. Overall, children in Head Start programs are gaining in word knowledge, emergent literacy, language skills, mathematics, and social skills. In improving the development and learning readiness, as appropriate, of infants, toddlers, and preschoolers in 2002: the program reached the target average of 32 percent or a 10.0-scale point increase in word knowledge; met the target of 43 percent or a 3.0-scale point increase in mathematical skills; and surpassed the goal of a gain of 10 percent or 1.4-scale points in social skills with a gain of 13 percent or 1.9-scale points. In 2004, the percentage of teachers with an associate, bachelor, or advanced degree, or a degree in a field related to early childhood education exceeded the target of 56 percent with an actual percentage of 64.8 percent. Finally, the Head Start Bureau is in the third year of implementing a national child outcomes and assessment reporting system (NRS) to strengthen program effectiveness. Over 400,000 four-year olds were assessed in the fall of 2004 and over 400,000 four- and five-year olds were assessed in the Spring of 2005. Fall 2005 assessments are currently underway. (Goal 7)

Administration on Aging (AoA)

AoA is the Federal focal point for programs and services for the elderly, and aims to assist elderly individuals maintain independence and dignity in their homes and communities. Through policy and program development, planning, and service delivery, AoA seeks to address the needs and concerns of the elderly, their families, and their caregivers. AoA leverages its funds through a nationwide service infrastructure to deliver comprehensive in-home and community-based services, including nutrition services, to the elderly. AoA funds also make preventive health services, elder rights, and long-term care ombudsmen programs available to elderly Americans. Established in 1965, AoA partners with state and area agencies on aging, Tribal organizations, and service providers within the aging network to accomplish its mission.

AoA Highlights:

• AoA collaborated with the Centers for Medicare & Medicaid Services (CMS) to help the elderly learn about and enroll in prescription drug coverage authorized by the Medicare Improvement and Modernization Act. AoA utilized the infrastructure of the National Aging Services Network to provide specialized information, technical assistance, outreach, and education to beneficiaries, with a particular emphasis on reaching out to limited-English speaking and hard-to-reach populations. (Goal 1)
• The agency continued implementation of initiatives to create greater balance in long-term care, improve access, and emphasize prevention. Aging and Disability Resource Centers, funded in partnership with CMS, are providing consumers in 43 states with objective information about their care options and are helping states to streamline access and control costs. Evidenced-Based Disease Prevention projects are assisting aging service provider organizations in 12 communities to translate research findings into high-quality preventive interventions targeted to seniors (Goals 1 and 6).
• AoA helped seniors remain in their homes and communities by providing a variety of supportive, nutrition, and caregiver services in FY 2004, including approximately 38 million rides to doctors offices, grocery stores, and other critical daily activities; 248 million congregate and home-delivered meals; 9.5 million information contacts on caregiver program and service, and 20 million hours of in-home services such as personal care, homemaker, and chore services. (Goal 6)

Agency for Healthcare Research and Quality (AHRQ)

AHRQ leverages its research and information-sharing programs to improve the quality, effectiveness, and accessibility of health care; and to reduce health care costs. AHRQ conducts and supports the research needed to guide decision-making and improvements in both clinical care and health care organization and financing. Furthermore, the Agency also promotes the incorporation of research-based information from AHRQ and others into effective health care choices and treatment by developing tools for public and private decision-makers and by broadly disseminating the results of the research.

AHRQ Highlights:

• The Pharmaceutical Outcomes portfolio, as part of its work to implement Section 1013 of the Medicare Modernization Act, has begun work to establish a new effectiveness program. The three legs of the effectiveness program - evidence synthesis, evidence generation, and evidence translation - are transparent resources that can serve the need for better information well. (Goals 1 and 5)
• Working within the structure of the Patient Safety portfolio, researchers and partners have successfully used existing research structures and networks to implement research, supported the development of new networks of patient safety researchers, trained patient safety experts, and funded the world's largest portfolio of patient safety research. (Goals 1 and 5).

Agency for Toxic Substances and Disease Registry (ATSDR)

ATSDR is the principal Federal public health agency charged with evaluating the human health effects of exposure to hazardous substances. The Agency’s mission is to serve the public by using the best science, taking responsive public health actions, and providing trusted health information to prevent harmful exposures and disease-related exposures to toxic substances.

ATSDR was created by the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, more commonly known as the Superfund law. The Superfund program is responsible for finding and cleaning up the most dangerous hazardous waste sites in the country. Currently, the U.S. Environmental Protection Agency (EPA) lists 1,241 “final” National Priorities List sites for cleanup. ATSDR leads Federal public health efforts at these and other sites with actual or potential toxic exposures. In accomplishing this purpose, ATSDR’s priorities include (1) mitigating the risks of health effects at sites with documented exposures, (2) preventing exposures and resulting health effects, and (3) determining what health effects, if any, are associated with exposures.

ATSDR Highlights:

ATSDR measures the effectiveness of its interventions by documenting the reduced occurrence or risk of health effects at sites with documented exposures. To capture this information, ATSDR selects the most appropriate measure(s) for each site that poses an urgent or public health hazard. These measures include (1) comparative morbidity/mortality rates, (2) biomarker tests, (3) levels of environmental exposures, and/or (4) behavior change of community members and/or health professionals. Using one or more of these measures, ATSDR then tracks the sites where human health risks or disease have been mitigated.

• Setting a baseline in FY 2004, ATSDR determined that its efforts had mitigated health risks or disease at 33 percent of its urgent and public health hazard sites. The Agency has established a long-term target of 80 percent by 2010. (Goal 1)

ATSDR responds to toxic substance releases when they occur or as they are discovered, and provides recommendations for protecting public health to EPA, state regulatory agencies, or private agencies. As a non-regulatory agency, ATSDR is able to prevent or mitigate exposures most effectively when these other agencies adopt and implement its recommendations.

• ATSDR has reported three consecutive years of performance data showing an increase in the percentage of adopted recommendations. It has established a long-term target of 85 percent by 2010. (Goal 1)

Centers for Disease Control and Prevention (CDC)

CDC works in the U.S. and abroad to ensure people have the opportunity and the ability to achieve the best quality of life at every stage throughout their lifespans. CDC is focused on transforming public health to ensure that its strategies, programs, research, and science continue to secure the Homeland; improve the human condition around the world; and protect the lives of Americans. CDC focuses its efforts through three overarching goals:

• All people, especially those at greater risk due to health disparities, will achieve their optimal lifespan with the best possible quality of health at every stage of life.
• People in all communities will be protected from infectious, occupational, environmental, and terrorist threats.
• The places where people live, work, learn, and play should protect and promote human health and eliminate health disparities.

Established in 1946 as the Communicable Disease Center, CDC operates from its national headquarters in Atlanta, GA. CDC’s workforce includes approximately 9,400 employees, including those in state and local health departments, and quarantine offices across the U.S. and in 45 countries around the world.

CDC Highlights:

• CDC is redefining itself to best address current and imminent threats to the health of the world’s people. Within the framework of the new CDC, a set of strategic goals has been developed to maximize health impact and reduce health disparities. These goals are organized by three thematic areas - people (by life stage), preparedness (related to terrorism, infectious diseases, environmental, and occupational emergencies), and places (to create and maintain healthy environments). CDC will ensure these goals are the focus of its programmatic activities and that the greatest impact on health is achieved through measurement, accountability, and strategic direction. (Goals 1 and 2)
• In FY 2005, CDC funded approximately $5 billion for its extramural programs, including grants/cooperative agreements and research contracts. Extramural programs are those programs for which the actual work is done outside of CDC by such organizations as state and local public health departments, universities, nonprofits, community-based organizations, etc. The programs are widespread across CDC and address areas related to infectious diseases, global health, chronic diseases, injuries, environmental health, terrorism prevention and control, occupational safety and health, and birth defects. (Goals 1 and 2)
• CDC provided onsite technical assistance and/or training to China, Vietnam, Thailand, and Malaysia for the avian influenza outbreak and technical assistance to South Korea and Taiwan through training at CDC. To enhance detection of influenza, including avian influenza, CDC provided support for influenza surveillance in Asia, Europe, and Latin America to monitor for variant viruses that could circulate in the U.S. in the future. (Goal 1)
• Working with communities, Racial and Ethnic Approaches to Community Health (REACH 2010) continues to demonstrate that health disparities can be reduced and that significant progress can be made in improving health in communities of racial and ethnic minority groups. Communities throughout the Nation are realizing improvements in the health care system and in personal behaviors as a result of targeted efforts relevant to racial and ethnic minority groups. REACH 2010 continues to be an excellent example of how communities can leverage resources to improve disparities in health in a variety of settings and through a variety of interventions and activities. (Goals 1 and 6)
• Research provides much needed evidence to support specific programs, practices, and policies that affect health decisions made by the American public and those responsible for health policies and programs. Through its health protection research initiative, CDC is building a cadre of health protection researchers, research training programs, and centers of excellence that encourage multidisciplinary approaches to public health practice. In the first year of dedicated support, FY 2004 funding allowed CDC to award 57 extramural research grants in support of health promotion and prevention activities in the workplace, training for public health researchers, and two new centers of excellence in economics. Efforts in FY 2005 began to address the need for a multidisciplinary approach to health marketing and health communication, public health informatics, and innovative statistical methods to estimate the burden of disease. (Goal 4)

Centers for Medicare & Medicaid Services (CMS)

The CMS, one of the largest purchasers of health care, administers the Medicare program and works in partnership with the states to administer the Medicaid program and the State Children’s Health Insurance Program (SCHIP). Medicare provides health care coverage for elderly and disabled Americans. Medicaid, a joint Federal-State program, provides health coverage for low-income persons, and also pays for nursing home coverage for low-income elderly. The SCHIP provides health insurance coverage for children who otherwise would be without coverage. In addition to these programs, CMS has other responsibilities that lead to and support various important CMS contributions to the delivery of health care for its beneficiaries.

CMS Highlights:

• The CMS is working hard to implement the Medicare Prescription Drug, Improvement, and Modernization Act of 2003. A more modern Medicare brings more affordable health care, prescription drug coverage to all people with Medicare, expanded health plan options, improved health care access for rural Americans, and preventive care services. The Medicare prescription drug benefit will officially begin January 1, 2006. Based on the strong response that CMS has received for this program, CMS expects to deliver the drug benefit on schedule, everywhere in the country. The CMS still has the Medicare Prescription Drug Discount Card and Transitional Assistance program in place until the prescription drug benefit starts. This program allows eligible Medicare beneficiaries to obtain prescription drugs at a discounted price as well as a credit up to $600 for the purchase of prescription drugs. In addition, Medicare beneficiaries will have more health plan choices and greater savings with the expansion of the Medicare Advantage program. The CMS recently approved 143 new Medicare Advantage plans in 49 states. (Goal 3)
• The CMS continues to strengthen its program integrity and financial management activities in the Medicaid program. The CMS examined detailed information on how states are financing their share of Medicaid program costs. The CMS also has continued to expand the Medi-Medi program to better coordinate Medicare and Medicaid program integrity. The Medi-Medi program has led to cost avoidances, savings, recoveries, investigations, and law enforcement referrals. In addition, CMS has hired 97 individuals to monitor state activities, enforce compliance with CMS financial management procedures, and improve Medicaid financial management oversight. (Goal 8)
• The CMS successfully implemented the Health Care Integrated General Ledger Accounting System (HIGLAS) at four Medicare contractor sites during FY 2005. HIGLAS is a component of the Unified Financial Management System (UFMS) and part of CMS’ total financial management system to enhance its financial structure, improve internal controls, and ensure reliable data. The new system will help CMS meet the Federal requirements of a dual entry accounting system and improve CMS’ ability to track payments. (Goal 8)

Food and Drug Administration (FDA)

FDA is a science-based regulatory Agency whose mission is to promote and protect public health and well-being by ensuring that safe and effective products reach the market in a timely manner, and to monitor products for continued safety once in use. FDA is divided into six program areas: (1) foods, (2) drugs, (3) biological products, (4) veterinary medicine, (5) medical devices, and (6) toxicological research. Each program area, except for toxicological research, is responsible for ensuring the safety and, where applicable, the effectiveness of products through their entire life cycle, from initial research through manufacturing, distribution, and consumption. These programs, supported by a national field force of scientific investigators, also monitor the safety of import shipments that arrive at America’s borders each year. The Toxicological Research program conducts peer-reviewed research that provides the basis for FDA to make sound, science-based regulatory decisions.

FDA Highlights:

• FDA joined three other Federal agencies (Department of Agriculture, Department of Homeland Security, and the Federal Bureau of Investigation) to form the Agroterrorism Strategic Partnership Initiative. This initiative will send teams of specialists from the four agencies to assess food security issues from farm-to-table and consider ways to better protect America’s food supply. These visits will help the Federal partners better consider how states and industry can protect the food supply, gain more information about the food industry’s protection needs and assist government and industry in refining its efforts including research and development goals. (Goal 2)
• FDA has made a series of improvements to strengthen the safety program for marketed drugs. FDA commissioned a study by the Institute of Medicine to examine the effectiveness of the drug safety system and its post-market phase, and to make necessary improvements. A drug safety oversight board also was established to oversee the management of important drug safety issues within the Center for Drug Evaluation and Research. The board is composed of members from the FDA Centers, other HHS OPDIVs, and other Federal departments (e.g., Department of Veterans Affairs). Other actions include creating a Drug Watch web page to share emerging data and risk information and foster increased use of consumer-friendly material written for health care professionals and patients; appointing a new director for the Office of Drug Safety, which is responsible for overseeing the post-marketing safety program for all drugs; and creating and publishing risk management guidance to assist pharmaceutical firms manage risks involving drugs and biological products. (Goal 1)
• FDA cleared for marketing the first Deoxyribose Nucleic Acid (DNA) microarray laboratory test that will allow physicians to consider unique genetic information from patients in selecting medications and doses of medications for a wide variety of common conditions such as cardiac disease, psychiatric disease, and cancer. A microarray is similar to a computer microchip, but instead of tiny circuits, the chip contains millions of tiny DNA molecules. “Physicians can use the genetic information from this test to prevent harmful drug interactions and to assure drugs are used optimally, which in some cases will enable patients to avoid less effective or potentially harmful treatment choices,” said, former FDA Commissioner, Dr. Lester M. Crawford. The test is performed using DNA that is extracted from a patient's blood. A person's DNA sequence is determined based on the sequence of the probe molecule to which the DNA is most similar. (Goal 5).

Health Resources and Services Administration (HRSA)

HRSA, an important component of the Nation’s health care safety net, improves the Nation’s health by helping to ensure equitable access to comprehensive, quality health care. HRSA and its state, local, and other partners work to eliminate barriers to care and health disparities for Americans who are underserved, vulnerable, and have special needs.

HRSA programs and services support comprehensive primary care services, decrease infant mortality, improve maternal and child health, provide services to people with Acquired Immunodeficiency Syndrome (AIDS) through the Ryan White Comprehensive AIDS Resources Emergency (Ryan White CARE) Act programs, oversee the Nation’s organ transplantation and bone marrow donor systems, and help hospitals and health care workers prepare in the event of bioterrorism or other mass public health emergency. HRSA also helps build a well-qualified health care workforce and maintains the National Health Service Corps.

HRSA Highlights:

• Through the Ryan White CARE Act’s State AIDS Drug Assistance program, more than 86,000 individuals received essential Human Immunodeficiency Virus (HIV)/AIDS medications during at least 1 month of the year in FY 2003, exceeding the previous year’s number by more than 5,100 persons. (Goal 3)
• In FY 2003, more than 78 percent of National Health Service Corps clinicians remained in service to underserved areas for at least 1 year following completion of their service contracts. (Goal 3)

Indian Health Service (IHS)

IHS is the principal Federal health care provider and health advocate for American Indian/Alaska Native (AI/AN) people. In partnership with AIs/ANs from more than 562 Federally-recognized Tribes, IHS’ mission is to raise the physical, mental, social, and spiritual health of AI/ANs to the highest level. IHS and the Indian Tribes are responsible for serving 1.8 million AI/ANs through direct delivery of local health services. Currently, AI/AN people experience lower life expectancy than the U.S. general population.

IHS funds hospitals, health centers, school health centers, and health stations, which are administered by Indian Tribes directly or by IHS. There are also 34 Urban Indian health programs that provide various services to AI/ANs living in urban areas of the country. When health care services are unavailable from IHS or the Indian Tribes, IHS purchases medical services from other providers to ensure delivery of needed care.

IHS Highlights:

• Developed and implemented IHS National Core Formulary. This formulary, which was implemented in all Federally-operated facilities by October 1, 2005, will help ensure that standard-of-care medications based on the most current medical practice and evidence are available to all patients using Indian, Tribal, and Urban pharmacies. (Goal 3)
• Developed an influenza vaccine reporting and redistribution process to assure that all IHS and Tribal sites had sufficient Influenza vaccine to meet needs of high-risk patients during 2004-05 influenza season. (Goal 5)
• Deployed the IHS Electronic Health Record, a robust integrated health information system in a graphical user format, at over 25 health care facilities. (Goal 5)
• Enhanced the Clinical Reporting System software (formerly called GPRA+). One of the new tools included in the FY 2005 version of this software is the ability for individual Indian, Tribal, and Urban facilities to generate lists of patients based on specific health measures. (Goal 5)
• Enhanced the widely-deployed Behavioral Health System (currently in use at over 250 IHS direct, Tribal, and Urban sites), including a graphical user interface version and a suicide reporting form developed to support the Agency’s behavioral health initiative. (Goal 5).

National Institutes of Health (NIH)

NIH is the world’s premier medical research organization, supporting studies nationwide in diseases such as cancer, Alzheimer’s, diabetes, arthritis, heart disease, and AIDS. Through the research they support, the NIH Institutes and Centers contribute to improving the health of all Americans by advancing knowledge of biology and behavior and sustaining the Nation’s medical research capacity in disease diagnosis, treatment, and prevention. More than $8 out of every $10 appropriated to NIH is awarded to researchers at universities, medical schools, hospitals, and other research facilities in all 50 states, U.S. territories, and points abroad. NIH’s research activities extend from basic research that explores the fundamental workings of biological systems, to studies that examine disease and treatments in clinical settings, to prevention, and to population-based analyses of health status and needs.

The NIH traces its roots to 1887, when a one-room laboratory was created within the Marine Hospital Service, predecessor agency to the U.S. Public Health Service (PHS). NIH provides scientific leadership and establishes research priorities, funds the best research in the scientific community at large and conducts leading-edge research in its laboratories; develops and maintains scientific human and physical resources; communicates and disseminates scientific results and information; and collaborates with other Federal agencies. The main campus of NIH is located in Bethesda, MD.

NIH Highlights:

• NIH scientists completed the Chemical Effects on Biology Systems (CEBS) System Biology object model (SysBio-OM) or data linkage map to capture data on the regulation of genes, proteins, and metabolites in individuals exposed to toxins. (Goal 4)
• NIH scientists also completed the CEBS System Toxicology object model (SysTox-OM) or data linkage map to enable the capture of toxic effects data, along with information such as time, dose, and severity of disease/disorder. (Goal 4)
• Microarray, toxicology and pathology datasets generated by the National Center for Toxicogenomics, the National Toxicology Program, by pharmaceutical companies, and by other outside groups have been deposited in CEBS. (Goal 4)
• CEBS (version 1.5) has been made available to the public. This program provides simple query download capability of global molecular expression and toxicology/pathology data on a select number of studies of environmental chemicals and drugs. (Goal 4)

Substance Abuse and Mental Health Services Administration (SAMHSA)

SAMHSA is the lead Federal agency for substance abuse and mental health services, enabling service capacity expansion and the implementation of evidence-based practices. SAMHSA provides services indirectly through grants and contracts to nonprofit organizations, universities, government agencies, and Indian Tribes for children, adolescents, and adults. SAMHSA administers two block grants that provide funding to states and territories for direct substance abuse and mental health services, as well as discretionary grants for other recipients.

SAMHSA is organized into the Center for Mental Health Services, the Center for Substance Abuse Prevention, and the Center for Substance Abuse Treatment, as well as two program offices, the Office of the Administrator and the Office of Applied Studies.

SAMHSA Highlights:

• SAMHSA initiated the new Mental Health state Incentive Grants for Transformation in FY 2005. This program will support an array of infrastructure and service delivery improvement activities to help grantees build a solid foundation for delivering and sustaining effective mental health and related services. These grants are unique in that they will support new and expanded planning and development to promote transformation to systems explicitly designed to foster recovery and meet the multiple needs of consumers (Goal 3). For more information, see the following website: http://www.samhsa.gov/grants/2005/nofa/sm05009_mht_sig.aspx
• In collaboration with the states, SAMHSA began implementation of and reporting on the National Outcome Measures (NOMs). These measures encompass 10 domains which embody meaningful, real life outcomes for people who are striving to attain and sustain recovery, build resilience, and work, learn, live, and participate fully in their communities. (Goal 8). For more information, see the following website: http://www.nationaloutcomemeasures.samhsa.gov/
• SAMHSA has initiated expansion of its National Registry of Evidence-Based Programs and Practices (NREPP) to include interventions to prevent and/or treat mental and substance use disorders. NREPP’s precursor, the National Registry of Effective Prevention Programs, identified interventions with demonstrated success in preventing or reducing substance use and other related high-risk behaviors that had been tested in communities, schools, social service organizations, and workplaces across America. The current NREPP expansion will further refine the scientific review process and review criteria, improve the practical implementation information available to users, and support innovative interventions seeking NREPP status. SAMHSA solicited public comment on its plans througha Federal Register notice published in August 2005 (Goal 1) (http://modelprograms.samhsa.gov).

Program Support Center (PSC)

PSC is the shared services provider of administrative support services to all components of HHS and other Agencies in the Federal Government. The purpose of the PSC is to provide efficient and cost-effective services and products that will allow its customers to focus on their core missions and program objectives. PSC offers over 50 products and services to government entities across the Nation. Services are provided on a fee-for-service basis in five major business areas: human resources, financial management, administrative operations, health care resources, and strategic sourcing.

Established in 1995, the PSC is supported through the HHS Service and Supply Fund, a revolving fund, and is organizationally aligned under the Assistant Secretary for Administration and Management, Office of the Secretary.

PSC Highlights:

• PSC successfully led the payroll conversion from the HHS Payroll System to the Defense Finance and Accounting System (DFAS). It was the single largest civilian agency payroll conversion ever completed by DFAS. (Goal 8)
• PSC is leading the Department-wide implementation of eTravel that is designed to consolidate the Department’s 24 Travel Management Center’s in to one center. PSC has successfully migrated all of its customers to GovTrip, the Department’s end-to-end eTravel solution. (Goal 8)
• The PSC was re-designated by the Department of the Treasury as a Debt Collection Center for the next 5 years. It is the only designated Debt Collection Center government-wide. E-government solutions recently have been implemented to improve electronic processes with PSC customers and allow for electronic collection of funds from debtors. (Goal 8)

An Overview of HHS Program Performance

A Focus on Outcomes

HHS manages hundreds of programs that improve the health and well-being of the American public. The HHS Strategic Plan encompasses eight strategic goals which cover all HHS activities. To gauge program effectiveness, HHS uses performance measures as a basis for comparing actual program results with established program performance goals, as required by the Government Performance and Results Act (GPRA). Given the complexity and vast number of programs and measures, HHS, with OMB’s concurrence, focuses on key priorities in this report to illustrate HHS’ significant efforts and achievements during FY 2005. The programs and corresponding measures in this report are presented according to the strategic goal each supports. The Department's FY 2005 Annual Performance Report, summarized in the following pages and presented in detail in Section II, provides readers with a sense of the far-reaching and positive effects of HHS programs

Performance Data Collection and Reporting

HHS programs collect data through several entities including state and local governments, nonprofit and faith-based organizations, and universities and research institutions. Several HHS programs rely on third parties for data collection and reporting, which can result in performance data availability lags. In addition, not all HHS performance data are collected or available annually. For example, the Head Start program’s goal “to achieve at least 80 percent of children completing the Head Start program rated by parent as being in excellent or very good health” experiences a data lag. The data for this goal are collected through the Family and Child Experiences Survey (FACES) study, an ongoing longitudinal study of program quality and impact. Because FACES has triennial cohorts, data for a comparable sample of 4-year-olds in Head Start is only available every 3 years. Data for the 2003 FACES cohort from the 2003-2004 program year will be reported in 2004, 2005, and 2006.

An internal HHS data verification process ensures accuracy of performance data reported in this report. In the HHS Office of Budget, staff review and update performance data submitted by HHS OPDIVs. The following documents, the FY 2006 Performance Budget and the FY 2005 and FY 2006 HHS Annual Plan, are used to reference and review the data submitted by the OPDIVs to ensure consistency and accuracy in reporting. Analysts in the Office of Budget complete a checklist to make sure that reporting is consistent throughout these documents and the supporting documentation such as OPDIV websites display accurate and current data. The internal data verification process in the Office of Budget ensures consistency and accuracy in the reporting of performance information. This model of data verification cascades down to each of the OPDIVs as they ensure data is valid and accurate; thus, the information reported in this section is accurate and the performance report is accurate and transparent. Each program also has its own data validation procedures that are described in detail Section II and in the performance budget volumes.

Risks and Uncertainties Affecting Performance

External factors and influences beyond HHS’ control affect achievement of the Department’s strategic goals and objectives. These factors introduce risks and uncertainties into the Department’s planning environment and pose challenges that may be difficult to overcome. For example, after September 11, 2001, our public health infrastructure refocused to address the threat of bioterrorism and funding was redirected for that purpose. State and local governments are major partners of the Department, both in determining health and social service funding levels and program implementation. Even during the best of economic times, the competition between health and social services, and other priorities, for limited public funds affects the achievement of long-term HHS goals. Similarly, social trends, reflecting individuals’ daily decisions, have significant influence on the overall health and welfare of the Nation.

Additional Performance Information

The following overview in the Management Discussion and Analysis section provides summary performance highlights from each of the programs discussed in the performance report. This summary includes a table with the most recent results available for each performance measure followed by a supplemental narrative that provides a discussion of performance results (including those targets that were not met) and historical trend data when available. The tables displaying the measures highlighted for each strategic goal present the OPDIV and program name, the performance measure, the most recent fiscal year for which results are available, the most recent result available, and an indicator of whether or not the goal was met. Under goal met, a check mark v signifies that the target was met for the most recent year, a blank square indicates that it was not met, and “N/A” indicates that it is not applicable because this is a new measure. Section II of this report, HHS' Annual Performance Report, contains additional details about the programs and accomplishments discussed in the following pages.

HHS OPDIVs annually prepare performance budgets provide a comprehensive look at the Department’s programs and performance goals and show how the goals support of HHS’ Strategic Plan. Individual OPDIV performance budgets are submitted to Congress in February. This information is available at the following locations on the HHS website:

• HHS performance goals, objectives, and measures, (the HHS Strategic Plan): http://aspe.hhs.gov/hhsplan/
• OPDIV performance budgets: http://www.hhs.gov/budget/opdivs.html

Strategic Goal 1
Reduce the Major Threats to the Health and Well-being of Americans

Each year, HHS renews its commitment to reduce health threats and promote healthy behaviors, and this commitment remains a critical priority. This goal supports the Department's vision to improve the health and well-being of people in this country and throughout the world. HHS recognizes that this vision can be accomplished only through coordination across the Department, and through partnerships with states, communities, and health professionals.

National Immunization Program (CDC): Vaccines are one of the most successful and cost-effective public health tools for preventing disease and death. In the United States and globally, CDC is engaged in a variety of efforts to ensure all recommended immunizations are provided safely and effectively to children, adolescents, and adults. Through the National Immunization Program, CDC has worked to achieve or sustain immunization coverage of at least 90 percent of children 19- to 35 months of age. In FY 2004, CDC achieved the 90 percent target for most vaccines, except for varicella and Diphtheria-Tetanus-Pertussis (DTaP).

In 2004, the coverage rate for four doses of DTaP did not achieve the 90 percent goal. While the administration of the first three doses of DTaP coincides with regular well-baby visits, the fourth dose does not. As such, there are fewer incentives to come in for the fourth dose. Moreover, in 2002 and 2003, CDC modified reporting on the measure for DTaP from four doses to three doses because vaccine shortages limited the availability of the fourth dose to children. This change was made because the Advisory Committee on Immunization Practices recommends that if this vaccine is in short supply, or not available, the fourth dose of DTaP may be dropped. The first three doses are considered the most critical to prevent disease. The change was temporary and reporting for the fourth dose has now been implemented.

HIV/AIDS Prevention (CDC): CDC will continue efforts to prevent and control the spread of HIV infections in the United States by engaging in surveillance, research, intervention, capacity building, and evaluation activities. Through the CDC’s domestic HIV prevention activities, CDC will work to reduce the major threats to the health and well-being of Americans from HIV/AIDS. This goal has two measures: (1) Reduce the number of HIV infection cases diagnosed each year among people less than 25 years of age, and (2) Decrease the number of perinatally-acquired AIDS cases from the 1998 base of 235 cases. With respect to the first measure, 2,926 cases were reported in 25 areas in FY 2002 and 2,331 cases were reported in 25 reporting areas in FY 2003. The results for the 2004 target of reducing the number of HIV infection cases diagnosed each year among people less than 25 years of age to 1900 cases in 25 areas are expected in November 2005. In prior years, performance information for this measure had to be updated as data was finalized.
Decreasing perinatal HIV transmission is one of four strategies included in CDC’s advancing HIV Prevention Initiative. Data for 2003 show low levels of perinatally-acquired AIDS cases, from 90 in 2002 to 58 in 2003. The results for the 2004 target of less than a 100 cases of perinatally-acquired AIDS will be available in November 2005. It is expected that the results will indicate a continued trend of decreasing the number of perinatally-acquired AIDS cases diagnosed. A policy change was made to change date for reporting results from August 2005 to November 2005 to allow for complete collection and analysis of data.

SAMHSA’s Substance Abuse Prevention and Treatment Block Grant Program works to improve the well-being of Americans by bringing effective alcohol and drug treatment and prevention services to every community through a block grant to states. In FY 2001 1,739,796 clients were served, in FY 2002 1,882,584 clients were served, and in FY 2003 1,840,275 clients were served. Data from SAMHSA’s Treatment Episode Data set, representing admissions to treatment, not the total number of individual clients served, are used as a proxy for this measure. FY 2003 is the most recent year for which data are currently available, because of the time required for states to report data on the number of admissions in any given year. The target was met for 2001 and 2002 but missed for 2003 (FY 2003 target was 1,884,654). SAMHSA is examining the reasons for the missed target.

HHS has a number of initiatives and programs directed at protecting Americans from bioterrorist attacks and other public health challenges. The events of September 11, 2001, and subsequent anthrax attacks have reinforced the lead role HHS plays in protecting Americans from attacks on the Nation’s health and food supply. HHS role in enhancing the Nation’s level of preparedness and overall response capabilities is absolutely vital to helping maintain America’s vigilance and security.

Field Foods Activities (FDA): The FDA continues to improve the Nation’s health care system to respond to bioterrorism and other public health challenges by ensuring the safety of foods, drugs, biological products, and medical devices, and by providing timely medical products to deal with emerging public health and terror threats. In FY 2005, the FDA supported the goal of ensuring food safety by surpassing its target of prior notice security reviews for foods and animal feeds line entries considered to be at risk for bioterrorism and that presented the potential of a significant health risk. In FY 2005, FDA with the help of Department of Homeland Security has completed 86,187 such reviews, exceeding its target of 38,000. There were over 53,000 more reviews in 2005 than 2004. However, it should be noted that FDA is not able to know in advance how many of the prior notices submitted will need to have a security review due to continuing changes in the criteria (intelligence and others) that must be met for determining when a security review is required. This information is tracked and verified through a variety of sources including the Operational and Administrative System Import Support. In addition, there is no trend information available as this measure is the result of the Bioterrorism Act which became effective in December of 2003.

HRSA's Bioterrorism Hospital Preparedness program is designed to enable State and regional planning among local hospitals, emergency medical services systems, health centers, poison control centers, and other health care facilities to improve their preparedness to work together to combat terrorist attacks and deal with infectious disease epidemics and other public health emergencies. HRSA met its FY 2005 target of 100 percent of Hospital Preparedness program awardees having surge capacity plans. This represents an increase from 89 percent in FY 2004.

Terrorism Preparedness (CDC): The CDC’s terrorism efforts are a critical element in the drive to protect the American public from a terrorist attack. Many of CDC’s programs are interconnected and strive to provide the best possible coverage and results under the unifying goal of protecting the population. One such program is the Strategic National Stockpile, which is designed to supplement local efforts by reaching and providing advanced treatment to areas affected by a terrorist attack or mass trauma event. One target is for 70 percent of state public health agencies to be prepared to use Stockpile materials in 2005. The data for this measure is expected to be available in December of 2005. In 2004, the target of 60 percent was exceeded. Another target for measuring emergency preparedness in 2005 is for 25 percent of state public health agencies improve their capacity to respond to chemicals or category A agents. This data will be available in December 2005. This is a new measure; there is no 2004 data for this measure.

Strategic Goal 3
Increase the Percentage of the Nation’s Children and Adults Who Have Access to Health Care Services, and Expand Consumer Choices

HHS is working to expand health care to all and remains committed to its many efforts aimed at increasing the percentage of the Nation's children and adults who have access to care and expanding consumer choices. The Department also will continue to promote increased access to health care for uninsured and underserved people and for those whose health care needs are not adequately met by the private health care system. In support of this goal, HHS will continue to promote a wide variety of activities intended to increase access to health care; encourage the development of low-cost health insurance options; reduce health disparities; and strengthen and improve health care services for targeted populations with special health care needs.

HRSA's Health Centers program provides regular access to high quality, family-oriented, and comprehensive primary and preventive health care, regardless of patients’ ability to pay. In 2004, the Health Centers program served 13.13 million persons, up from 12.39 million in 2003. While the program did not meet the target of 13.2 million persons served, the actual number served is extremely close to meeting the projected target based on the program’s projections on resources needed per patient. This represents a growth of more than 700,000 persons over FY 2003 and an increase of nearly 3 million persons since the beginning of the President’s initiative in FY 2002. In FY 2005, HRSA aimed to provide health services to 14 million persons. FY 2005 data are expected in August 2006.

The IHS National Diabetes program is an integral part of the IHS Hospitals and Health Clinics program. The ongoing emphasis on diabetes care within IHS programs recognizes the role of diabetes as a major cofactor in morbidity and mortality among American Indian/Alaska Native people. Maintaining ideal blood glucose levels is vital for diabetic patients in delaying or preventing many of the complications associated with diabetes, including cardiovascular, kidney, and eye disease. To achieve improvements in glycemic control, IHS combines glucose-lowering medications with a continued emphasis on proper diet and exercise. From FY 2002 to FY 2005, IHS achieved a 4 percent increase in diabetic patients demonstrating ideal blood sugar control (from 30 to 34 percent). CMS is committed to its goal of assessing health care quality for children enrolled in Medicaid and SCHIP. Through the use of a core set of national performance measures developed in partnership with states, CMS continues to meet yearly targets related to this goal. For several years, CMS has collected voluntary performance measurement data from states and continues to provide technical assistance to improve State capability for performance measurement calculation and reporting. These data provide CMS and States with the tools to evaluate performance of those states voluntarily submitting data. The collection of this data helps states to gain insight into their current status, from which they can set goals for the future. These data are reported by states on a voluntary basis. In FY 2003, CMS partially met its target to identify a timeline for implementing recommendations for Medicaid; identify a strategy for improving health care delivery and quality, and specify measures for gauging improving and initiate action steps for implementing recommendations for Medicaid and SCHIP. In FY 2004, CMS continued to work with state representatives and updated the timeline for implementing recommendations and identified a strategy for improving health care delivery and quality and for implementing recommendations. In FY 2005, CMS met its target to refine the strategy and work plan for the provision of technical assistance to states in performance measurement calculation and reporting.

For SCHIP, CMS met its FY 2003 target to identify a timeline for implementing recommendations; its FY 2004 target to refine the data submission, methodological processes, and reporting; and its FY 2005 goal to continue to collect core performance measurement data from states through the state annual reports.

CMS has published final program regulations and will establish a major initiative to educate health care providers and consumers about the Medicare Prescription Drug, Improvement, and Modernization Act (MMA). The MMA, signed into law by the President in early FY 2004, provides enhanced coverage for the lowest income beneficiaries and an immediate prescription drug discount card for all beneficiaries who choose to obtain such a card until the full drug benefit is available nationwide. CMS plans to continue to provide information to all beneficiaries about the drug card program through written materials, the www.medicare.gov website, and 1-800-MEDICARE. CMS monitors the information needs of people with Medicare about the program. For example, the questions that come into the 1-800-MEDICARE call center are reviewed to ensure that the customer service representatives have the information needed to answer specific questions. When additional information needs are identified, CMS will modify print materials and the website as needed.

Strategic Goal 4
Enhance the Capacity and Productivity of the Nation’s Health Science Research Enterprise

HHS recognizes the important role research plays in improving the Nation's health. As a result, many of the strategies that HHS has identified as important components in achieving its other strategic goals also incorporate a research base. This goal, therefore, focuses on creating the underlying knowledge and strategies that improve and maintain the research infrastructure that produces advances in health science.

HHS is committed to advancing the understanding of the environmental factors that contribute to human disease. In order to accomplish this objective, HHS will continue to support basic, clinical, and applied biomedical and behavioral research with stringent peer review for scientific quality of research proposals. HHS will also develop and implement processes for setting research priorities that ensure that research is responsive to public health needs, scientific opportunities, and advances in technology. HHS places a high priority on improving the coordination, communication, and application of health research results.

NIH completed a first-pass draft HapMap containing 1.007 million single nucleotide polymorphisms or SNPs. Phase II, to be released in October 2005 , will contain about 3.6 million SNPs. The NIH significantly exceeded its target of releasing a HapMap containing 600,000 SNPs, and met or exceeded its annual targets. This information can be verified using the SNP Database.

NIH is in the process of establishing a knowledge base on the effects of chemicals and drugs in biological systems in order to better understand the role of gene-environment interactions in disease. In FY 2005, NIH met its annual target of creating and providing public access to a global molecular expression and toxicology/pathology by making its database of environmental chemicals and drugs (CEBS), featuring simple query download capability, available to the public. In future years, NIH has set a target of enhancing the CEBS database to add and integrate data on transcriptomics, proteomics, and toxicology for the same chemical compound. In the long term, this data is expected to lead to the discovery of characteristic gene- and protein-expression signatures that will help classify exposure to these chemicals by their biological activity, and provide a means for predicting effects on human health from such exposure. This measure has met it annual targets since its inception in 2003. Data for this system can be validated at CEBS website at http://cebs.niehs.nih.gov.

Strategic Goal 5
Improve the Quality of Health care Services

Improving the quality of life in the United States includes improving the quality of the health care services that people receive. This strategic goal is to improve health care services by reducing medical errors, improving consumer and patient information, and accelerating the development and use of electronic health information.

To achieve this goal, HHS will continue the implementation of a variety of strategies designed to improve the delivery of health care services. These strategies include the development and dissemination of evidence-based practices, information systems, new technologies for the home and clinical setting, and improved reporting systems for medical errors and adverse events. Health quality improvement also means translating new knowledge of effective health services into strategies, educational tools, and information to help clinicians and health care policy makers improve health care quality. HHS will work to expand provider networks to disseminate health care quality information, enabling consumers to make informed choices. HHS will provide leadership to promote the development of a national health information infrastructure that takes advantage of the most current technology available.

FDA MedSun: continues to improve the quality of health care services by reducing medical errors involving FDA-regulated products. FDA also strives to improve patient and consumer safety by increasing the use of health care quality information, strengthening consumer and patient protections, and monitoring the safety of FDA-related products already on the market. In FY 2005 the Medical Products Surveillance Network for medical devices (MedSun), supported this goal by exceeding its target of bringing 350 facilities into the MedSun network by four facilities. MedSun has met or exceeded its targets each year since 2002. This information can be validated by the FDA and the contractor responsible for managing the MedSun system.

Current chronic diseases such as cancer, diabetes, heart disease, and stroke are among the most common and costly of all health problems, yet they are among the most preventable⁴ . A critical step in reducing the burden caused by chronic disease is improving the quality of clinical services that prevent those diseases. Thus the Agency for Healthcare Research and Quality plays a key role in improving quality of care through activities accomplished within the Prevention Portfolio.

In FY 2005, AHRQ met its targets for both measures: 1) Establishing baselines for the quality and quantity of preventive services delivered; and 2) Forming partnerships with both Federal and non-Federal organizations. The portfolio now has baselines for clinical services delivered for Pap smear (81.3 percent), flexible sigmoidoscopy/colonoscopy (38.9percent), fecal occult blood test (33 percent), blood pressure measurement (90.1 percent), cholesterol measurement (67.0 percent), and smokers receiving advice to quit smoking (60.9 percent). These measurements were verified using the National Healthcare Quality Report, National Health Interview Survey and the Medical Expenditure Panel Survey. The Prevention Portfolio now has baseline measure of partners - 8 federal partners and 19 non-federal partners. A count of active partnerships is provided by outside contractors through stakeholder meeting, expert panel meetings and groups with clinicians. Since the both targets were established in FY 2005, no trend data is available.

Strategic Goal 6
Improve the Economic and Social Well-being of Individuals, Families, and Communities, Especially Those Most in Need

HHS promotes and supports interventions that help disadvantaged and distressed individuals, families, and communities improve their economic and social well-being. To achieve this strategic goal, HHS supports targeted efforts to increase the independence and stability of low-income families, people with disabilities, older Americans, American Indians/Alaska Natives, victims of domestic violence, refugees, and distressed communities.

The purpose of Temporary Assistance for Needy Families (TANF) is to increase the self-sufficiency and stability of low-income families by promoting employment and job readiness as well as activities that support healthy marriages. Welfare reform has been largely successful in increasing the financial independence of recipients since the Personal Responsibility and Work Opportunity Reconciliation Act passed in 1996. In March 2005, there were 63 percent fewer individuals receiving TANF benefits than in August 1996.

TANF has several work-related measures, including job entry, job retention, and earnings gain. The program has made progress in each of these areas, but did not meet some of the FY 2003 targets because of the unanticipated effects of the caseload reduction credit in reducing the recipient work participation rates. For example, the job retention rate measures the percentage of current or former TANF recipients who are employed in one quarter of the year and remain employed in the next two quarters. In FY 2003, the job retention rate was 59 percent, missing the original 68 percent target. Since then, the program has revised its performance targets to reflect the effects of the caseload reduction credit. Also, as welfare recipients continue to move from welfare to work, the President's TANF reauthorization proposal emphasizes the continued importance of strengthening work participation and achievement of TANF recipients.

AoA’s Aging Services program provides a comprehensive set of services to elderly individuals and family caregivers that help keep America’s rapidly growing older population healthy, secure and independent in the community. These services are especially important as part of a community-based long-term care system designed to give the elderly choice and control and delay institutionalization. Program performance measures included in this report reflect the importance AoA places on rebalancing the Nation’s long-term care system toward more home and community-based care. For the first performance measure 6b1: Increase the number of severely disabled clients receiving selected (home-delivered meals) home and community-based services, AoA collected baseline data in FY 2003. At baseline, there were 280,454 severely disabled home-delivered meal clients. In FY 2004, there were 293,500 severely disabled home-delivered meal clients, over a 4 percent increase. The FY 2005 performance target is 302,000. AoA anticipates achieving this target. For the second performance measure 6b2: Increase the percentage of caregivers reporting that services have definitely helped them provide care longer for older individuals, AoA collected baseline date in FY 2003. At baseline, 48 percent of caregivers reported that services definitely helped them provide care longer. In FY 2004, 52 percent reported that services definitely helped. The FY 2005 performance target is an ambitious 62 percent. Two years of data shows improved program performance for both measures.

Strategic Goal 7
Improve the Stability and Healthy Development of Our Nation’s Children and Youth

In order to promote the development and stability of our nation's children and youth, HHS will continue moving forward with several important efforts. HHS will continue to support the social and cognitive development of preschool children; provide supports for family formation and healthy marriages; support programs that increase the involvement and financial support of non-custodial parents; and increase the percentage of children and youth living in a safe and stable environment.

ACF Child Support Enforcement: The mission of Child Support Enforcement (CSE) is to ensure that children receive the financial and medical support they need by locating parents, establishing paternity, and enforcing support obligations. Child support is an important source of income to improve the quality of life for children and for families striving for self-sufficiency. In FY 2003, the CSE program met its target of collecting 58 percent of current support due (collections on current support/current support owed). Current support collections totaled $15.7 billion in FY 2003, an increase of approximately 4 percent over the previous fiscal year. In fact, the CSE program has met or exceeded its target for current support collections in every year since 2001, collecting 58 percent in 2002 and 57 percent in 2001. Data for FY 2005, which increases the target current support collection rate to 61 percent, is not yet available.

CSE is largely dependent on state administrative systems for collecting performance data. In terms of data quality and reliability, states maintain information on the necessary data elements for CSE program measures. The Office of CSE reviews the states’ and auditors’ ability to produce valid data. Data reliability audits are conducted annually. Self-evaluation by states and the Office of CSE audits provide an ongoing review of the validity of the data and the ability of automated systems to produce accurate data.

ACF Child welfare programs, like Foster Care, Promoting Safe and Stable Families, and Adoption Incentives, provide an array of services to children in at-risk families or children who need to be removed from the home. ACF is dedicated to protecting children, reunifying families when possible, and finding safe and stable permanent homes for children who cannot return to their families. In FY 2003 ACF finalized adoptions for 50,000 children from the child welfare system, but missed the goal of 58,500 adoptions. The goal of 58,500 adoptions in FY2003 was not met for a variety of complex reasons, including the decline in the number of children in foster care; the increase in age of the children entering care and waiting to be adopted; the increase in the percentage of children with a case plan goal of reunification; and the decline in the percentage of children with a case plan goal of adoption. To meet their adoption goals, the Children's Bureau is implementing a major effort to recruit adoptive families called "AdoptusKids." In addition, the Children's Bureau will continue to use the Child and Families Services Reviews (CFSR) to work with states to improve their child welfare systems. In FY 2002, there were 53,000 adoptions; 50,000 in FY 2001; and 51,000 in FY 2000. State child welfare agencies report data on foster care and adoption through the Adoption and Foster Care Analysis and Reporting System; system data is subject to edit checks for reliability.

ACF's Head Start program promotes school readiness by enhancing the social and cognitive development of low-income children through the provision of educational, health, nutritional, social, and other services. During FY 2002, the most recent period for which data are available, 79 percent of children completing the Head Start program were rated by their parent as being in excellent or very good health. This is within 1 percentage point of meeting the target for this measure. A likely contributor to this shortfall is the persistent difficulty low-income families face in gaining timely access to needed health care, with particular problems in receiving oral health care. To address this need, the Head Start Bureau has implemented, in partnership with HRSA’s Maternal and Child Health Bureau, an Oral Health Initiative which since 2004 has supported a national network of technical assistance designed to improve Head Start children's access to oral health care. With this resource focused on improved oral health care access, and its continued attention to the overall health of Head Start children, Head Start expects to reach the 80 percent target. The FY 2002 result represents an improvement from 77 percent in FY 2000.

Strategic Goal 8
Achieve Excellence in Management Practices

HHS is committed to improving the efficiency and effectiveness of the Department's programs by creating an organization that has a citizen-based focus, is results-oriented, and is market-driven, where practicable. The President's Management Agenda identifies key elements needed for HHS to achieve its commitment to establishing more effective Department management. In particular, HHS is dedicated to improving management of its financial resources; using competition to obtain the best price for services acquired; improving the management of its human capital and tying human capital goals to program performance goals; using technology wisely and in a cost effective manner; and achieving an integrated performance budget.

CMS will continue its focus on maintaining program integrity in the Medicare program to ensure that it pays the right amount to legitimate providers for covered, reasonable, and necessary services to eligible beneficiaries. CMS sets ambitious annual program integrity targets, including reducing the percentage of improper payments made under the Medicare fee-for-service program, as well as reducing the contractor error rate and improving the provider compliance error rate. The Comprehensive Error Rate Testing (CERT) program, initiated in FY 2003, has produced a national error rate for each year since its inception. The Office of Inspector General produced error rate information for years before those included in the FY 2003 report. In 2004, CMS began reporting gross error rates in addition to the net error rates previously reported. This change was necessary in order to comply with new Improper Payments Information Act requirements. As a transition, the FY 2004 reports will contain both net and gross numbers. A gross improper payment amount is calculated by adding underpayments to overpayments. A net improper payment amount is calculated by subtracting underpayments from overpayments. Future reports will contain only gross numbers.

The FY 2005 paid claims error rate of 5.2 percent exceeded CMS' Medicare Fee for Service Error Rate GPRA goal of 7.9 percent. Because of this dramatic improvement, CMS has chosen to revise its GPRA goals for 2006 and beyond. The FY 2004 Medicare error rate was 10.1 ⁷ percent, FY 2003 was 5.8 ⁸ percent and FY 2002 was 6.3 percent. The FY 2004 error rate is the baseline for future error rate estimates reflecting the CERT program. CMS did not meet its FY 2004 target error rate of 4.8 percent. The original target error rates were developed based upon the assumption that the CERT program would discover similar findings in its reports as the Office of Inspector General. However, the numbers reported did not align with the target assumptions; therefore CMS has revised its baseline target data to reflect CERT data. CMS and the CERT contractors audit the data through ongoing quality control measures that include comparison of the number of claims in the CERT universe (i.e., all claims Medicare contractors receive) to an independent CMS report of the number of claims Medicare contractors received and verification that paid amounts for sampled claims match independent CMS records of claims payments.

The Office of Inspector General (OIG) will continue to combat fraud, waste, and abuse, and recommend ways of increasing the economy, efficiency, and effectiveness of HHS programs and management practices. To accomplish this, the OIG will conduct and supervise audits, inspections, and investigations; and provide guidance to the health care industry.

Return on investment (ROI) has long been the primary measure of the effectiveness and efficiency of the OIG. It is the ratio of savings that would not have been possible in the absence of effective OIG work to the OIG operating budget. The savings that are claimed by the OIG consist of expected recoveries from investigations, audit disallowances, and savings from legislative and administrative changes that were stimulated by recommendations in OIG reports. The source data used for these results are the following: expected recoveries from investigations are entered into the OIG investigations data system “IRIS.” Documents that officially report the conclusion of criminal and civil proceedings, including the amount of fines, penalties, and restitution must be received by the OIG before the expected recoveries are allowed into the IRIS system. Audit disallowances are entered into the OIG WEB AIMS system by the Audit Resolution staff of the HHS Office of the Assistant Secretary for Budget Technology and Finance, and are reconciled to the OIG audit disallowance issuances. Savings from legislative and administrative changes are those scored and published by the Congressional Budget Office as part of the legislative process. All of the above are subject to periodic audit by the Government Accountability Office (GAO).

In 2002, the target for ROI was $79:1, but the final result was $121:1. The ROI target has risen each year, and in FY 2005 was $176:1. The FY 2002 result was $121:1. There was a decrease in FY 2003 to $117:1, but that result exceeded the $114:1 target. FY 2004 exceeded the previous year's results by 28% and the target for that year by 10 percent. The ROI target has risen each year, and in FY 2005 was $176:1. The FY 2005 result was $168:1 - an increase of 12% over FY 2004, but 5 percent below the target. Since the results of OIG work are not realized during the same year in which resources related to the results are expended - often requiring five or more years to be realized - it is inevitable that an increase in resources in any given year will impact ROI negatively. The results of OIG work often require five or more years to be realized because they are not realized during the same year in which resources related to the results are expended. Therefore, it is inevitable that an increase in resources in any given year will impact ROI negatively. In most years, the impact is not sufficient to result in an ROI that misses its target, but that did occur in FY 2005 when nearly $11 million was added to the OIG budget for the purpose of carrying out mandates contained in the MMA. If the MMA supplement were excluded from the ROI calculation, OIG FY 2005 ROI would have been $177:1, which exceeded the $176:1 target. With or without the MMA supplement, the result continued the OIG record of returns that far exceed its cost of operation.

President’s Management Agenda

The President’s Management Agenda (PMA) articulates the Administration’s strategy for improving the management and performance of government. It established goals for 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. As a result, agencies develop and implement action plans to achieve those goals. The Office of Management and Budget (OMB) uses PMA scorecards to hold agencies publicly accountable for their status in achieving the goals of each initiative and for their progress in implementing their action plans. Agencies also use these scorecards as blueprints for improvement efforts. The scorecards, which are released quarterly, employ a simple grading system of green for success, yellow for mixed results, and red for unsatisfactory.

* As of September 30, 2005.

The following table shows HHS status and progress on both the five government-wide initiatives that apply to all Federal agencies and the five program initiatives that impact HHS programs and operations: Broadening Health Insurance Coverage, Faith-Based and Community Initiative, Real Property Asset Management, Research and Development (R&D) Investment Criteria, and Eliminating Improper Payments. As of September 30, 2005, HHS earned three green status scores and nine of ten green progress scores.

The following tables discuss HHS' efforts during FY 2005 to further the PMA and action plans to promote progress in FY 2006.

Analysis of Financial Condition and Results of Operations

For the seventh consecutive year HHS received a clean audit opinion on its financial statements. The financial statements have been prepared in accordance with Federal accounting standards and audited by the independent accounting firm of Ernst & Young, LLP. Preparation and audit of these statements is required by the Chief Financial Officers Act of 1990 and is part of the Department’s goal to improve financial management and to produce accurate and reliable information that is useful in assessing performance and allocating resources.

The following table summarizes HHS’ financial condition at the end of FY 2005 (dollars in millions).

Assets

HHS assets were $428 billion at the end of FY 2005. This represents an increase of $25 billion, or 6.1 percent over the prior year’s assets totaling $404 billion. This variance is largely attributable to increases in Investments, Anticipated Congressional Appropriations, and Other Assets. The Investments increase was related primarily to growth in the Medicare trust fund for Hospital Insurance (HI). The majority of the Anticipated Congressional Appropriations increase was related to the rise in Medicaid funding to cover the unfunded portion of the Incurred But Not Reported. The increase in Other Assets was due primarily to prepaid expense payments to health maintenance organizations.

Investments and Fund Balance with Treasury together comprise 93.4 percent of total assets, while Anticipated Congressional Appropriations account for 3.3 percent. Other assets of 3.2 percent consist of Accounts Receivable; Loans Receivable; Cash and Other Monetary Assets; Inventory and Related Property; General Property, Plant, and Equipment; and Other Assets.

Medicare Trust Funds

At the end of FY 2005, approximately $298 billion or 99.3 percent of HHS investments were in U.S. Treasury securities to support the Medicare trust funds, which include HI and the Supplementary Medical Insurance (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, usually is 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 section of this report, HI trust fund assets steadily increase through 2011. At that point, expenditures start to exceed income including interest, thus drawing down assets until 2020 when they would be depleted. The shortfall between income and expenditures arises as a result of health costs increases that are expected to continue to grow faster than workers’ earnings. Actual economic or other conditions, however, could delay or accelerate this condition. Based on estimates from the Mid-Session Review of the FY 2005 President’s Budget, inpatient hospital spending accounted for 67 percent of HI benefit outlays. Managed Care spending comprised 15 percent of total HI outlays. During FY 2005, HI benefit outlays grew by 9.4 percent. The HI benefit outlays per enrollee are projected to increase by 7.8 percent to $4,300.

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 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 94 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 nearly $8.6 trillion over the 75-year projection period, as compared to about $8.2 trillion in the 2004 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. Based on estimates, during FY 2005, SMI benefit outlays grew by 12 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 10.2 percent to $3,730. 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, 2005. This is because Medicare is accounted for as a social insurance program rather than a pension program. The Required Supplementary Stewardship Information within Section III of this report contains additional details of HHS’ social insurance funds and other stewardship property and investments.

Liabilities

During FY 2005, HHS liabilities increased $4 billion or 6.2 percent to a total of $71 billion. This increase can be attributed primarily to a $5 billion or 9.2 percent increase to $54 billion in Entitlement Benefits Due and Payable, which represent benefits due and payable to the public from the CMS insurance programs discussed above, offset by a decrease of $314 million or 22.3 percent to Accounts Payable. The increase in Entitlement Benefits was due to increases in HI and SMI Incurred But Not Reported, HI and SMI payables to health maintenance organizations, and Medicaid Incurred But Not Reported. Accounts Payable decreased primarily due to a reduction of HI and SMI administrative cost payables.

Entitlement Benefits and Federal Employee and Veteran Benefits account for 75.8 percent and 10.1 percent of total liabilities, respectively. Accrued Grant Liability accounts for 5.3 percent, while Accounts Payable comprises 1.6 percent. Other liabilities of 7.2 percent consist of Accrued Payroll and Benefits, Loan Guarantees, and Other Liabilities.

Ending Net Position

At the end of FY 2005, HHS’ Net Position was $358 billion, an increase of $21 billion or 6.1 percent from the previous year. HHS net position 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.

Results of Operations

HHS incurred a Total Net Cost for the year of $581 billion, which represents a $34 billion or 6.2 percent increase over FY 2004. This increase resulted primarily from program growth experienced by the Medicare HI and SMI, Medicaid, and State Children’s Health Insurance Programs. The Consolidated Statement of Net Cost in Section III of this report presents HHS Net Operating Costs by HHS Agency (which comprise Departmental responsibility segments), while functional detail is provided in the footnotes to the financial statements, also in Section III. The CMS, ACF, and NIH account for a combined 96.0 percent of HHS’ total Net Cost of Operations, incurring net costs of $483 billion, $47 billion, and $28 billion, respectively. HHS incurs net costs across its primary functions as defined in the budget, and HHS’ Medicare (50.8 percent); Health (40.9 percent); Income Security (6.1 percent); and Education, Training, and Social Services (2.2 percent) account for all of HHS’ net costs incurred during FY 2005.

Cost vs. Outlays The following concepts are critical for understanding the HHS financial history:

• Costs are typically reported in accounting reports and are synonymous with expenses. These are the amounts recognized when services are rendered or goods are received. They are not necessarily linked to the outflow of cash in the form of check issuance, disbursements of cash, or electronic funds transfer.
• Costs incurred or expenses are netted against exchange or earned revenues to identify the net cost of programs.
• Outlays are payments to liquidate an obligation (other than the repayment of debt principal).
• Outlays generally are equal to cash disbursements, but also are recorded for cash-equivalent transactions.

Budgetary Resources

During FY 2005, most of the funding to support net costs came from $773 billion in appropriations from Congress, as shown in HHS’ Combined Statement of Budgetary Resources. This represents 94.9 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 $794 billion, an increase of 10.1 percent over FY 2004 levels. During FY 2005, HHS incurred obligations of $776 billion, a 10.5 percent increase over FY 2004, and made 7.0 percent more net outlays totaling $581 billion.

Limitations of the Principal Financial Statements

The principal financial statements in Section III of this report have been prepared to report the financial position and results of operations of HHS, pursuant to the requirements of 31 U.S.C. 3515 (b), the Chief Financial Officers Act of 1990, as amended by the Reports Consolidation Act of 2000 (P.L. 106-531). While the statements have been prepared from the books and records of HHS in accordance with generally accepted accounting principles (GAAP) for federal entities and the formats prescribed by OMB, the statements are in addition to the financial reports used to monitor and control budgetary resources, which are prepared from the same books and records. The statements should be read with the realization that they are for a component of the U.S. Government, a sovereign entity, and that the liabilities reported in the financial statements cannot be liquidated without legislation providing resources to do so.

Grants Management

As the largest grant-awarding agency in the Federal Government and the Nation’s largest health insurer, HHS plays a key role in Federal grants management. HHS manages an assortment of grant programs in basic and applied science, public health, income support, child development, and health and social services. Through these programs, HHS awarded an average of 74,000 grants totaling more than $230 billion annually between FYs 2001 and 2004. ⁹ These programs are the Department’s primary means to achieving its strategic goals.

HHS awards two types of grants: mandatory and discretionary. Mandatory grants are those that a Federal agency is required by statute to award if the recipient, usually a state, submits an acceptable application and meets the eligibility and compliance requirements of the grant program’s statutory and regulatory provisions. 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.

For FYs 2001 through 2004, most HHS-awarded grants were discretionary (93 percent of total grant volume awarded), yet most dollars associated with HHS grants were mandatory (85 percent of total dollars awarded). The NIH awards the majority (70 percent) of HHS’ total grants, but only 8 percent of total grant dollars, indicating a low dollar per grant ratio. Still, NIH grants annually account for the majority of total HHS discretionary dollars awarded. While ACF awards the greatest proportion of mandatory grants, CMS awards the majority of mandatory and total (67 percent) grant dollars, but only a small percentage of total grant volume, indicating a high dollar per grant ratio.

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 Office of Inspector General.
• Resolving and following up on grants audit findings.

OMB designated HHS as 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. 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.

HHS also manages the Tracking Accountability in Government Grants System, which contains Department-wide grants award information. Current policies, regulations, and other pertinent grants-related information are available at http://taggs.hhs.gov.

Debt Collection Improvement Act

HHS manages its delinquent debt pursuant to the Debt Collection Improvement Act of 1996. Although HHS refers delinquent debt to the Department of the Treasury (Treasury) for cross-servicing and offset, HHS has centralized the delinquent debt referral process by establishing the Program Support Center (PSC) as the Department’s delinquent debt collection center. In addition, Treasury has granted a cross-servicing exemption for several types of program debts (e.g., Medicare Secondary Payer and various health professional loans). The PSC cross-services these debts and also refers them to the Treasury Offset Program.

According to the FY 2005 third quarter Treasury Report on Receivables, HHS and Treasury cooperative debt collection efforts have resulted in:

• HHS referral rates at the end of the third quarter FY 2005 are as follows:
• 99.1 percent of debt eligible for referral was referred to the Treasury Offset Program; and
• 97.2 percent of debt eligible for referral was cross-serviced
• HHS collections were nearly $11.5 billion at the end of the third quarter FY 2005.

Prompt Payment Act

The Prompt Pay Act requires Federal agencies to make timely vendor payments and to pay interest penalties when payments are late. HHS reached a Department-wide record in FY 2002 by making over 98 percent of payments on time. Since then, HHS’ prompt pay rate has decreased slightly. HHS’ prompt pay rate for FY 2005 was 97.1 percent.

Systems, Controls, and Legal Compliance

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 implementation of the Unified Financial Management System (UFMS). 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 Federal Managers’ Financial Integrity Act (FMFIA), the Chief Financial Officers Act, the Government Management Reform Act, the Clinger-Cohen Act of 1996, the Federal Financial Management Improvement Act (FFMIA), as well as OMB Circular A-127, Financial Management Systems.

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 the two weaknesses (as identified in its corrective action reports) in financial management system processes, and Medicare contractors’ electronic data processing (EDP) access controls.

HHS Financial Management Systems

This table 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 four core accounting systems including numerous feeder systems processing grants, travel, acquisitions, logistics, and other administrative systems.

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. UFMS is a business transformation effort designed to integrate Department-wide financial management systems and operations by aligning HHS’ businesses with modern technological capabilities. The existing HHS financial management system configuration supports standard data elements and interface records. With UFMS, HHS will also standardize business processes for all core functions including general ledger, accounts payable, accounts receivable, cost management, budget execution, and financial reporting. In the CDC and FDA implementations many processes were standardized, including shared interfaces, SGL, naming conventions, Accounts Payable and Accounts Receivable. The purpose of these initiatives is to implement an integrated procurement system across all OPDIVs in HHS in collaboration with the UFMS and the asset management system.

General and Application Controls

Electronic Data Processing (EDP) weaknesses were identified for Medicare contractors in five primary types of controls: entity-wide security programs, access controls (physical and logical), systems software, application software development and change controls, and service continuity. The CMS continues to make progress in identifying and addressing weaknesses in its automated processing systems. The first phase of Healthcare Integrated General Ledger Accounting System (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 first phase of HIGLAS is underway; the first implementation was Palmetto Part A, the next three implementations were Empire Part A, Empire Part B, and First Coast Part A and all four are now operating.

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 legacy 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.

UFMS will produce information that is timely, useful, and reliable and will support the integration of financial and performance information. UFMS will produce the information that program managers and decision makers will need in a timely manner and will provide the real-time processes needed to support effective e-Gov initiatives. Finally, the Secretary’s plans 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 which will eventually migrate with UFMS.
• UFMS is scheduled to be interfaced with CMS’ HIGLAS by the end of FY 2007.

Details about the UFMS initiative can be obtained through the UFMS website at www.hhs.gov/ufms.

Payroll Conversion

PSC successfully led the Departmental payroll conversion from the HHS legacy Payroll System to the Defense Finance and Accounting System (DFAS). The payroll conversion took place on April 17, 2005 and is the single largest civilian agency payroll conversion ever completed by DFAS. The PSC was instrumental in the development of the new payroll interfaces and conversion files. PSC simultaneously kept the old payroll system and interfaces operational to ensure that more than 67,000 HHS employees continued to receive their pay.

Statement of Auditing Standards (SAS) 70 Systems Reviews

Independent examinations of HHS internal controls are completed annually under oversight of the HHS Office of Inspector General (OIG). The service auditors’ examinations for FY 2005 were completed under the guidelines of the American Institute for Certified Public Accountants (AICPA) Statement of Auditing Standards (SAS) Number 70, Service Organizations. The annual examination is a “Type 2” report providing an opinion on the internal controls placed in operation and includes tests of operating effectiveness. The following summarizes HHS systems findings during the FY 2005 examinations.

PSC: Division of Financial Operations - CORE Accounting System and Feeder Systems

An independent examination was conducted of the HHS controls for the Division of Financial Operations (DFO) general information technology and application controls over the CORE accounting system and feeder systems (i.e., Accounting for Pay System, Travel Management System, Managing and Accounting Credit Card System (MACCS), Accounts Receivable System, and the Debt Management Collection System). The DFO’s network infrastructure is operated by the Information Technology Service Center (ITSC). In the examiner’s opinion, the description of controls presents fairly, in all material respects, the relevant aspects of the DFO controls that have been placed in operation as of June 30, 2005.

In the examiner’s opinion, except for the following control objectives not being achieved: “Applications software development and change controls provide reasonable assurance that all programs and program modifications are properly authorized, tested, and approved and that access to and distribution of programs are carefully controlled; controls provide reasonable assurance that computer resources (data files, application programs, system software and computer-related facilities and equipment) are protected against unauthorized modification, disclosure, loss, or impairment; and controls provide reasonable assurance that changes to the existing systems software and implementation of new system software are authorized, tested, approved, properly implemented, and documented” ; the controls that were tested were operating with sufficient effectiveness to provide reasonable, but not absolute assurance that the control objectives were achieved during the period of July 1, 2004, to June 30, 2005.

PSC: Human Resources Service Personnel and Payroll Systems

An independent examination of HHS internal controls for the PSC examined the PSC general IT and application controls over the Human Resources Service personnel and payroll systems (i.e., Civilian Payroll System, EHRP, and the Commissioned Officer Personnel and Payroll System). In the examiner’s opinion, the controls that were tested were operating with sufficient effectiveness to provide reasonable, but not absolute, assurance that the control objectives were achieved during the period of July 1, 2004, to June 30, 2005 except for as noted below:

• The HR Processor role allows a user to process a transaction from start to finish in the system without supervisory review.
• Change control procedures developed by the Commissioned Corps Support Branch of HRS did not include procedures for segregating duties, retaining test documentation, and tracking changes; and monitoring controls were not sufficiently established.

PSC: Division of Payment Management

An independent examination was conducted of HHS internal controls for the Division of Payment Management. In the examiner’s opinion, the controls that were tested were operating with sufficient effectiveness to provide reasonable, but not absolute, assurance that the control objectives were achieved during the period of July 1, 2004, to June 30, 2005. The controls identified were suitably designed to provide reasonable assurance that the specified control objectives were achieved and all Division of Payment Management controls were complied with satisfactorily.

NIH: Center for Information Technology

An independent examination was conducted of HHS internal controls for the NIH Center for Information Technology. In the examiner’s opinion, except for procedures for “System Software Implementation and Maintenance for the Windows Environment,” the controls that were tested were operating with sufficient effectiveness to provide reasonable, but not absolute, assurance that the control objectives were achieved during the period of July 1, 2004, to June 30, 2005.

Legal Compliance

FMFIA requires that agencies establish controls that reasonably ensure the integrity of Federal programs and the use of funds. FFMIA requires agencies to implement and maintain systems that comply with specific government-wide system parameters and policies. The Federal Information Security Management Act (FISMA) lays out a framework for annual information technology security reviews, reporting, and remediation planning to improve Federal agency internal controls over information resources and ensure compliance with laws and regulations regarding computer security. As noted in the assurance statements in the Secretary’s message at the beginning of this report, the following FMFIA, FFMIA, and FISMA issues remain outstanding at the end of FY 2005.

Federal Manager’s Financial Integrity Act

HHS reports one new Section 2 material weaknesses in 2005, Managed Care Benefit expense Cycle. Two Section 2 material weaknesses from the FY 2004 report - Federal Information Security Management Act (FISMA) Significant Deficiency, Departmental Financial Reporting - have been corrected as planned. For the Departmental Payroll System, the auditors found that substantial progress has been made and it is no longer material.

In addition, the Department reported one repeat material nonconformance, Department-wide Financial Systems and Processes. For one of the two subcomponents of this material nonconformance -- Financial Systems Analysis and Oversight -- CMS made progress which resulted in the findings in both the Medicare and Health Programs being reduced to a reportable condition or incorporated into the Managed Care Benefit Expense Cycle material weakness. Both CDC and FDA continued to record thousands of nonstandard accounting entries both prior and subsequent to the UFMS conversion. FDA recorded 14 thousand non-standard accounting entries totaling an absolute value of approximately $9.4 billion to create the September 30, 2005 financial statements. FDA noted this was primarily due to the productivity dip and lack of familiarity with the system. To prepare the September 30, 2005 financial statements, CDC indicated that it was required to record the following:

• Accounting entries totaling an absolute value of $11.3 billion either to its statements or to another HHS operating division;
• Adjustments totaling an absolute value of $24.4 billion with the Automated Desktop Integrator Program. Generally these adjustments related to conversion, data clean up, corrections, account reclassifications, and other adjustments to conform to UFMS processing.
• A $19.1 billion absolute value adjustment to the database to generate financial statements as a result of conversion adjustments made in the UFMS which could not be extracted into the database.

For the second subcomponent -- Medicare electronic data processing controls, much of that finding has been corrected and is also now classified by the auditors as a reportable condition.

Federal Financial Management Improvement Act

FFMIA mandates that agencies “�implement and maintain financial management systems that comply substantially with Federal financial management systems requirements, applicable Federal accounting standards and the United States Government Standard General Ledger at the transaction level.” FFMIA also requires that remediation plans be developed for any entity that is unable to report substantial compliance with these requirements. The Department’s FY 2005 financial statement audit revealed one instance of noncompliance - Financial Systems and Processes, in which HHS financial management systems did not substantially comply with federal financial management systems requirements. The one noncompliance includes four sub-components; 1a) CMS’ financial systems analysis and oversight, 1b) the Department’s Payroll System, 1c) the CORE accounting system, and 1d) NIH’s Center for Information Technology (CIT). HHS concurs with the auditor’s findings. In last year’s report (FY 2004 PAR), the auditors reported 3 FFMIA noncompliances: 1) Financial Systems and Processes, 2) CMS Financial Systems and Analysis, and 3) Departmental Payroll System. These three noncompliances have now been consolidated into one noncompliance with 2 sub-components. In addition, the auditors identified 2 new noncompliances -- the core accounting system and the NIH Center for Information Technology (CIT), which they are reporting as additional sub-components of the one noncompliance, Financial Systems and Processes.

Federal Information Security Management Act

HHS’ FY 2005 FISMA evaluation determined that the significant deficiency involving contingency planning and disaster recovery for some of HHS systems has been corrected to the extent that it is no longer considered to be a significant deficiency, although some corrective actions are ongoing.

Improper Payments Information Act of 2002 (IPIA)

The IPIA requires that HHS annually review all programs and activities that it administers and identify all such programs and activities that may be susceptible to significant improper payments.  For high risk programs, the IPIA requires that HHS report improper payment estimates and various other related data. Although HHS did not identify high risk programs in its FY 2005 risk assessment work, seven HHS programs were previously identified by OMB as being high risk.  These programs are Medicare, Medicaid, SCHIP, TANF, Foster Care, Head Start and Child Care.  HHS is reporting improper payment estimates in the Medicare fee-for-service, Head Start and Foster Care programs.  For the Medicaid, SCHIP, TANF and Child Care Programs, HHS is working on developing or implementing plans to determine estimated amounts of improper payments. More detailed Information on HHS improper payment activities can be found in Appendix C.

Looking Ahead to 2006 - HHS Management Challenges and High-Risk Areas

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 detailed responses to those challenges. 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.

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