Statement of Michael Lorsbach, Principal, On Point Technology, Inc., La Grange, Illinois

Testimony Before the Subcommittee on Human Resources
of the House Committee on Ways and Means

Hearing on Unemployment Fraud and Abuse

June 11, 2002

The problem has been studied for over 20 years.  No nationwide solutions have been offered

Fraud and abuse has been formally studied by the Department of Labor for over 20 years under a continuous program first called Random Audit, later Benefit Quality Control and now called Benefit Accuracy Measurement (BAM). The result of this ongoing study is consistent data that clearly defines the nature and level of improper payments, fraud and abuse in the Unemployment Insurance program. The issue then is not in defining the problem but in implementing a solution.

Since 1975, when the Employment and Training Administration (ETA) distributed a custom computer application to audit claimants, there has not been a serious systematic attempt to solve the problem. Over the past several years, the states have been granted supplemental budgets for Integrity processes but the money seems to have been absorbed with little or no impact on fraud and abuse.

BAM and its predecessors were established to obtain accurate figures on improper unemployment insurance payments. The Employment and Training Administration recognized that States had been unwilling to acknowledge the problem and as a result established the BAM program with a direct pipeline the ETA for both funding and data gathering.

We still live in the shadow of that denial. It is an uphill battle getting states to own the problem. The good news is that solid proven solutions do exist.

Most fraud and abuse is not debatable

1. The Problem must be Clearly Defined.

Part of the problem of why fraud and abuse has not been addressed is that the definition of the problem is almost endlessly debatable. What is an improper payment? Many issues depend on state law and vary subtlety from state to state.

But, the largest cause of overpayments is not debatable in definition. Benefit Year Earnings, or working while collecting UI, accounted for $573 million in improper payment in CY2000. No one can deny that this abuse is a clear target.

End the debate. Other issues, Separation Reason, Work Search, etc., need to be and can be addressed but they cannot be used to cloud the issue of Benefit Year Earnings.

It must be made a priority

2. A Matter of Priority.

It is frequently said that SESA Administrators have an average tenure of 13 months. Upon entry to the job, most are not familiar with the UI program. Yet they set the pace and the priorities. I have spoken with Administrators who have no concept of improper payments, fraud control or program auditing. It is simply not on their radar screen.

Legislative and ETA initiatives are needed to bring integrity into the light. It should be declared that before a state can expect support for special program funds they must consider and demonstrate strong program integrity.

Tie goals to specific measurement

3. Goals and Accurate Measurement.

The primary measurement of how well SESA’s perform, are called Desired Levels of Achievement (DLA). There is only one DLA that has to do with improper payments. This DLA says that states should collect 55% of the overpayments they identify. There are two fundamental problems with this measurement. The first is that it is not directed at identifying improper payments only at collecting them after they have been established. The second, an unintended consequence, is that it becomes a disincentive to identify improper payments. With a given staff allocation, it is much easier to meet one’s collection rate if fewer overpayments are established.

This DLA should be eliminated. It should be replaced with goals established from BAM data. For example if BAM determines that a state has a 3% error rate due to Benefit Year Earnings then the state should identify say 70% of that 3%. If the state pays $500 million a year in benefits, to meet the goal the state would have to establish $10.5 million in overpayments.

Even if this DLA is not replaced it should be eliminated immediately. In my experience, it is a strong disincentive to fraud control.

The auditors must be independent

4. The Auditors Report to the Audited.

It is a primary tenant of auditing that an auditing group be independent and autonomous of the organization being audited. In almost every SESA this autonomy does not exist. In most states, Benefit Payment Control (BPC) is the auditing group responsible for the investigation of improper payments and fraud. BPC commonly reports to the Director who is responsible for the UI program. If the fraud figures become embarrassing, it is too easy for BPC to be toned down.

The auditor should be separate from the UI program. Auditors should be measured on the thoroughness of their audits. The State of Washington, Office of Special Investigations, which has shown exemplary progress in fraud control over the past decade, initiated and developed its processes while the auditing unit reported to the Director of Legal Services a Division separate and equal to Unemployment Insurance.

The current systems for processing fraud are antiquated and ineffective

5. Systems are Antiquated.

In 1974 the Unemployment Insurance System Design Center, which was funded by the ETA, began distribution of a custom computer application for the detection of fraud and abuse in UI benefit payments. The system was a great leap forward in making the detection process more efficient. Most states adopted the software. The problem today is that most states still use it. It has been modified and updated by states but is still horribly ineffective by today’s standards. Most employer complaints of being bothered by paperwork come from forms generated by this system.

Proven, effective system solutions exist

 Highly automated computer systems exist and are very effective.  These systems have a return on investment of three months. After a year or so when the new systems have been fully adapted it can be verified that they can produce an annual return of 600% or more. They have been proven to significantly reduce fraud and abuse by getting the word out that it will no longer be tolerated. 

Integrity must wrap around the UI program

6. Integrate Integrity

There was a time when land could be developed with government funds and if the local community did not complain, no one cared about the impact on the environment. Now land cannot be developed without an environmental impact statement. I am sure that from this year forward, no bills will be debated in Congress without a discussion of its impact on homeland security. 

Integrity must become the UI Program’s point of light. No systems or applications should be defined and no funding should be approved without a study or statement on the impact to program integrity.

To solve the problem make the states accountable and install new software

In summary, the most critical pieces to solving fraud and abuse in the UI program are creating new performance measurements and installing improved technology. The performance measurement gets the problem on the screen. It forces everyone to pay attention.

New technology allows the rapid examination and processing of fraud and abuse with very little manpower. Case management systems that are fed by multiple types of audit including New Hire, can be tuned to also examine the other more debatable issues. 

Installation of compatible software in every SESA would cost about $30 million and should save the Nation’s employers about $700 million in UI taxes per year.     

Michael Lorsbach is a Principal and owner of On Point Technology, Inc. Mr. Lorsbach began his career with the Illinois Department of Employment Security in 1974. Mike served as a Claims Adjudicator, BPC Investigator, and Information Technology Manager.

On Point is an information technology firm that is exclusively dedicated to the support of State Employment Security Agencies. On Point builds UI benefit payment, tax, and other UI support systems.  On Point personnel have consulted with over 20 states. On Point is currently under contract with 4 SESA’s.

On Point is the exclusive distributor of the Benefit Audit Reporting and Tracking System (BARTS). BARTS is a software package that performs multiple audits of Unemployment Insurance programs, detects likely fraud and abuse then automatically manages the resulting cases. BARTS is installed in Alaska, Arizona, Illinois, Kentucky, New Jersey, Oregon and Washington.