Unleashing the Power of Information Technology Innovation to Reduce … the Power... · Unleashing...

ACT-IAC Institute for Innovation

Quadrennial Government Technology Review

2012

Unleashing the Power of Information Technology Innovation to Reduce the Budget Deficit

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~ Advancing government through collaboration, education, and action ~

American Council for Technology—Industry Advisory Council: The American Council for Technology (ACT) is a non-profit educational organization established by government leaders in 1979 to improve government through the efficient and innovative application of information technology. ACT was created to provide an objective and trusted forum for collaboration and education. In 1989, ACT established the Industry Advisory Council (IAC) to bring industry and government executives together to collaborate on IT issues of interest to the government.

ACT-IAC is a unique, public-private partnership dedicated to helping government use technology to serve the public. The organization provides programs that facilitate communication, education and collaboration. Recognized as the premier collaborative forum in the government IT community, ACT-IAC has been called “a model of how government and industry can work together” and “the Switzerland of the government IT community.”

ACT-IAC welcomes the participation of all public and private organizations committed to improving the delivery of public services through the effective and efficient use of information technology.

Institute for Innovation’s 2012 Quadrennial Government Technology Review: The Quadrennial Government Technology Review (QGTR) is an initiative through ACT-IAC’s Institute for Innovation to provide senior government leaders with a discussion of some of the nation’s most pressing challenges. Over 100 volunteers from government and industry provided input to the seven papers that comprise the QGTR. Recommendations are offered to provide ways that information technology can make a positive impact on these challenges. Information technology underpins virtually every federal program and agency mission. Increased efficiency and effectiveness is especially critical to mission support, especially at times of budget shortages. This paper provides background information and recommendations developed by a cross-section of ACT-IAC members and represents a non-vendor specific, non-partisan perspective. The QGTR papers may be found at www.actgov.org/quadrennial.

Disclaimer: This document has been prepared to provide information regarding a specific issue. This document does not – and is not intended to – endorse or recommend any specific technology, product or vendor. This is a collaborative product and the views expressed in this document do not necessarily represent the official views of the individuals and organizations who participated in its development. Every effort has been made to present accurate and reliable information in this report. However, ACT-IAC assumes no responsibility for consequences resulting from the use of the information herein.

Copyright: ©American Council for Technology, 2012. This document may be quoted, reproduced and/or distributed without permission provided that credit is given to the American Council for Technology and Industry Advisory Council.

Further Information: For further information or collaborative discussions regarding these recommendations, contact the American Council for Technology and Industry Advisory Council at (703) 208-4800 or www.actgov.org.

http://www.actgov.org/quadrennial�

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Executive Summary

Bringing the federal government back to fiscal health will be a top priority of the next Presidential Administration. Since the 2008 recession, publicly held federal debt as a percentage of the gross domestic product has more than doubled, from 35 to 75 percent. The Congressional Budget Office projects that the debt could reach -- and possibly exceed -- 100 percent of GDP in 2020 (see Exhibit 1 – Federal Debt Projections from CBO’s Budget and Economic Outlook: Fiscal Years 2012 to 2022) To illustrate the consequences of possible changes to current law, in its article titled An Alternative Fiscal Scenario1

Exhibit 1 – Federal Debt Projections

, CBO produced projections that incorporate the following assumptions: that all expiring tax provisions are extended indefinitely (except the payroll tax reduction in effect in calendar years 2011 and 2012); that the alternative minimum tax is indexed for inflation after 2011; that Medicare’s payment rates for physicians’ services are held constant at their current level; and, that the automatic spending reductions required by the Budget Control Act, which are set to take effect in January 2013, do not occur (although the law’s original caps on discretionary appropriations are assumed to remain in place).

2

It is imperative that the nation find a way to get the federal debt under control. But it is equally imperative that in addressing the debt, we do not jeopardize the essential missions of the government to defend, protect, and serve the citizens of the United States.

Unleashing the power of information technology (IT) innovation can help agencies bridge this funding gap while continuing to deliver essential mission services to the federal government.

This paper contains three recommendations for using innovative information technology and processes to improve the government’s efficiency while preserving or enhancing the

1 http://www.cbo.gov/sites/default/files/cbofiles/attachments/08-22-2012-Update_to_Outlook.pdf 2 Federal Debt Projections from CBO’s Budget and Economic Outlook: Fiscal Years 2012 to 2022, January 2012.

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performance of its missions. As shown in Exhibit 2, the combined impact of these recommendations could be significant—a potential reduction in the deficit by up to $220 billion.

Exhibit 2 – Cutting the Federal Deficit

Recommendations

Accelerate the use of data analytics to identify opportunities to reduce government costs.

The federal government already collects and stores great quantities of data. Moving deliberately to match this data with the power of emerging analytical technologies provides new opportunities to create actionable information and insight to inform decision-making across federal programs. The information created can help expose operational inefficiencies and identify operational and programmatic redundancies. Gathering and analyzing data from a variety of internal and external sources can help determine performance and outcomes for federal programs.

New data analytical technologies are particularly critical in the analysis of healthcare costs. By using structured and unstructured data in new combinations to provide actionable information and insight, the government – both civilian and defense — can discover ways to reduce costs in healthcare delivery and functional healthcare operations. The Centers for Medicare & Medicaid Services (CMS) exemplifies how the government can leverage IT through data analytics to reach higher levels of cost efficiencies. The potential savings from increased health intelligence is sizable: according to McKinsey Global Institute, “if US healthcare could use big data creatively and effectively to drive efficiency and quality, we estimate that the potential value from data in the sector could be more than $300 billion in value every year, two-thirds of which would be in

$1.1T

2012

$100B

$70B $50B

Enhance Program Integrity & Tax Collection

Healthcare Big Data

IT-Driven Productivity

$220 billion in Potential Deficit Reduction

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the form of reducing national health care expenditures by about 8%.”3

Invest in technology to increase productivity and reduce costs.

Approximately $70 billion is the federal portion of the total $300 billion.

IT and business process innovation are central to commercial industry productivity and success. We experience this everyday in online commerce and in daily business and personal interactions. Yet, the public sector lags significantly behind the private sector in IT and business process innovation. This results in slower productivity growth and declining services to a citizenry that increasingly takes online mobility and information for granted in its private sector interactions. The federal government has the opportunity to accomplish its missions in a cost effective manner while providing the citizenry with expected levels of service by strategically using IT as a part of the solution. Based on commercial industry best practices, the government could potentially save up to $100 billion a year in federal outlays. This is depicted Exhibit 2.

There are significant opportunities to apply innovation in the public sector and learn from private sector best practices. In a number of areas, the Department of Veterans Affairs (VA) has done this. Other federal agencies, especially those with healthcare missions, can learn from what the VA has done, and even collaborate with them going forward, to facilitate data sharing, interoperability and end-use accessibility to modern data systems.

Use technology to combat fraud, waste and abuse.

Federal payment and tax collection programs are complex and touch every person and company in the United States. There are trillions of dollars involved in these transactions and citizens have come to expect that payments or tax refunds will be issued promptly. Unfortunately, this creates a climate where fraud, waste and abuse is likely to occur. Fortunately, there are many technologies that can streamline programs to cut waste and improve services, identify fraud and abuse to prevent improper payments and collect the proper amount of taxes owed.

The Internal Revenue Service (IRS) reports the “tax gap” of uncollected taxes to be $385 billion and improper payments made by the federal government to exceed $100 billion a year.4

3 McKinsey Global Institute, May 2011, Big Data: The next frontier for innovation, competition and productivity by Manyika, J; Chui, M; Brown, B et al. MGI_big_data_full_report.pdf

Accelerating the modernization of key IT tools could drive a 10% reduction in these losses to the U.S. Treasury. Combined, this loss reduction could potentially decrease the deficit by almost $50 billion a year as depicted in Exhibit 2. This is just one example that demonstrates the impact of leveraging IT to decrease fraud, waste and abuse. Healthcare and other areas can reap similar benefits.

4 IRS Releases New Tax Gap Estimates; Compliance Rates Remain Statistically Unchanged From Previous Study, IRS, IR-2012-4, January 6, 2012

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The following analysis highlights how the above recommendations are applied at the three agencies interviewed for this paper: VA, Treasury and CMS. The true value of these recommendations, however, is their applicability across government. This paper underscores how much more could be done to help meet the nation’s fiscal challenge without sacrificing the government’s essential missions by leveraging IT best practices. In many cases, only a minimal investment is required in new tools and services to yield quantifiable results within a short payback period. For example, many expectant mothers now take advantage of an app that was very inexpensive to develop and tracks their pregnancy providing them with best practice pre-natal care information and reminders for appointments, etc.

Information Technology: A Pivotal Investment

Information Technology (IT) is a powerful force in the American economy. According to the U.S. Bureau of Economic Analysis, the information-communications industry “accounts for almost 15% of real GDP growth.”5

While overall 2012 federal outlays exceed $ 3.5 trillion the federal government spends approximately $80 billion annually on information technology products and services to support its missions and programs

Today, the list of globally successful American businesses is dominated by companies offering products and services that did not exist two decades ago. The innovative IT products, services and processes introduced by these companies have transformed how we work and play throughout the economy. By harnessing IT, innovative companies have enabled the United States to remain the leader of the global economy and reach levels of efficiency unmatched by other nations. Yet we have only begun to apply these same advances to the business of government to improve the efficiency and effectiveness of government missions and programs.

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The federal government does not have a comprehensive strategy to leverage IT investments to strategically reduce overall outlays, especially those mandatory healthcare outlays, to efficiently and effectively capture revenues. While Digital Government: Building a 21st Century Platform to

. This represents less than 3% of the total outlays at a time when the private sector leverages IT investments and process innovation to drive down business costs. Much of the current federal IT budget goes to operate and maintain outdated technologies rather than future capability investments. The federal government is in a unique position to strategically apply IT investments to reduce federal outlays and the federal deficit. Further, IT investments typically result in many ancillary benefits, such as providing jobs and much needed tax revenue.

5 US Department of Commerce, Bureau of Economic Analysis “Gross Domestic Product (GDP) by Industry”, April 26, 2012 (http://www.bea.gov/newsreleases/industry/gdpindustry/gdpindnewsrelease.htm) 6 Federal IT Dashboard, August31, 2012. (www.itdashboard.gov)

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Better Serve the American People (May 2012)7

This paper presents a crosscutting IT strategy to improve the efficiency and effectiveness of departments and agencies associated with large federal budget outlays.

lays a foundation for better serving the American public, it stops short of extending federal IT to achieve deficit reduction.

While there is pressure to reduce government IT expenditures, a tactical perspective can lead to strategic inefficiencies and drive mission costs up. The federal government’s massive inventory of legacy systems has important government cost implications. Legacy systems, and the cost and resources to maintain them, inhibit the government from taking full advantage of new technologies and innovative processes to improve government operations in critical areas such as healthcare and revenue collection. IT investment, technical innovation and improved process adoption can generate huge reductions in overall mission spend thereby reducing the overall federal deficit. By determining the baseline for cost and functionality, government can establish associated target levels of improvement that should be achieved for the investment (i.e., cost and/or performance efficiencies). Government can then provide clarity on the inherent gaps, risks and mitigation approaches that may guide the path to the next level of advancement for even better results.

The three recommendations above cite the use of innovative information technology and proven repeatable processes and methodologies to improve the government’s efficiency while preserving or enhancing mission performance. The recommendations are further discussed below and focus on specific agencies to drive home lessons learned and opportunities – but the recommendations cross multiple governmental entities and offer similar potential benefits. The focus agencies that serve as examples of potential savings are the Department of Health and Human Services, particularly the Centers for Medicare & Medicaid Services (CMS); the Department of Veterans Affairs; and, the Department of the Treasury, focusing on the Internal Revenue Service.

Recommendations and Agency Examples

RECOMMENDATION No. 1: Accelerate the Use of Data Analytics to Identify Opportunities to Reduce Government Costs.

The federal government already collects and stores massive quantities of data. Effective use of new data analytical technologies is critical to improved fiscal stewardship and increased deficit reduction. The following example, focused on CMS, is just one way to use technology to rein in rising healthcare expenditures. The projected savings is estimated to be $70 billion based on the assumptions described below.

7 http://www.whitehouse.gov/the-press-office/2012/05/23/presidential-memorandum-building-21st-century-digital-government

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AGENCY FOCUS: Centers for Medicare & Medicaid Services (CMS)

Background In 2011, the federal government spent about 25% (almost $1 trillion) of its total budget on healthcare. As shown in Exhibit 3 healthcare costs are by far the fastest growing segment of the budget. This exhibit also shows that the portion of the budget expended on mandatory CMS healthcare programs rose from 10% in 1987 to more than 20% today -- and is projected to reach 30% over the next 10 years. Healthcare costs put increasing pressure on the discretionary budget. For example, CBO projects that the Defense Department healthcare costs could rise from an already high 9% today to 14% of the total DoD budget in 2030—equivalent to the department’s entire budget for research and development8

Exhibit 3 – Budget Allocation by Category (CBO, January 2012)

.

“Bending the curve” of escalating healthcare costs presents a broad range of challenges to CMS, DoD, VA and other federal agencies. The good news for CMS and other agencies confronting these challenges is the promise and potential of more powerful capabilities enabled by new and emerging improvements in analytical and processing technologies for large and varied data sets. These technologies present new possibilities for expanding access to, and collaboration on, distributed data repositories. Technology presents the opportunity to explore data in new ways, learn from it, and use it in conjunction with data from other external sources

8 Fiscal Year 2013 historical tables, Budget of the US Government, Office of Management and Budget, budget.gov. ISBN 978-0-16-0900043-3 90000; future data: “The Budget and Economic Outlook: Fiscal Years 2012 to 2022” January 2012, The Congress of the United States, Congressional Budget Office.

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to provide new insights into the efficiency and effectiveness of US healthcare delivery. For example the costs of developing and testing new pharmaceutical products is dropping due to efficiencies now available through analytics; hospital administration is becoming more effective due to systems that identify areas for improvement in standard processes. The McKinsey Global Institute predicts an annual 8% savings ($200 billion) in healthcare reduction as cited earlier through the creative use of big data.

As the agency with the biggest share of the healthcare budget, CMS has done an excellent job of diligently chipping away at problems driving healthcare costs up by using IT and process innovations. Notable among these innovative approaches is the identification of data and advanced analytics as core agency functions and the establishment of a new Office of Information Products and Data Analysis (OIPDA) to administer and enhance the agency’s data and information portfolio. Existing elements of that portfolio include the Chronic Condition Warehouse, the Medicare Current Beneficiary Survey, and the Medicaid Analytic Extract. Newly announced elements include a 5 billion claim set of Medicare Geographic Variation Trend Data, the Medicare Enrollment Dashboard, and CMS Data Navigator.

The CMS approach should be studied by other agencies, especially those engaged in healthcare. Central to the ability to control costs is an understanding of data available to an agency internally and the ability to analyze that data to create actionable information to reduce the costs of agencies and their programs to the federal government. To do this, as CMS has done, federal agencies should consider creating internal organizations to administer and enhance the agency’s data and information portfolio.

Recommendations for CMS and other Agencies Providing Healthcare Services:

Make Data Analytics a Central Part of Healthcare Cost Control: Promote research into the development of better analytics for controlling healthcare costs.

Enable partnerships among public and private healthcare organizations in the productive application of those analytics.

Raise professional and public awareness of the impact that advanced analytics can and is having on controlling healthcare costs.

Recognize that advanced analytics can have a significant impact on controlling healthcare costs:

o Comparative effectiveness research gives provider and patient more reliable grounds for selecting the best course of action for their specific case.

o Automated clinical decision support systems allow less expensive staff (such as practitioners and physician assistants) to make a wider range of medical decisions and also reduce the incidence of adverse events.

o Profiling patients for managed care interventions to improve health-related behavior that impacts many chronic diseases.

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o Fraud prevention

Conduct Smaller “Problem-Based” Demonstrations to Showcase the Power of Data Analytics. Over and over again “big bang” projects often fail to deliver. Agility and the ability to respond to marketplace data velocity are key success factors, especially with today’s accelerating pace of technology, mobility and information exchange. When designing a problem-based demonstration project, some considerations include the following:

Identify the top “pain points” or operational needs within the agency that require the use of data – converted to information — to determine actionable decisions.

Assess whether the data analysis approach provides the targeted information, the required analytical models, data reliability, and time management.

Start the evaluation process with a proof of concept using a sample set of data and assess the results.

Review and verify validity, effectiveness and requirements for expanded analytics.

Proof-of-concept projects provide a valuable place to start testing theories to reap the benefits from data assets. Successful concepts can be expanded in light of initial results and ongoing agency objective considerations. An approach that starts small, demonstrates success, illustrates the potential of data analytics and then builds capability is more likely to help the organization move forward. This approach can also be used across the government to disentangle stove-piped information, systems and processes. Extending the enterprise data set analysis and investigation, and integrating those sets with existing data warehouse systems, gives decision makers an opportunity to change the way enterprises (CMS, the program itself, or other internal or external stakeholders) use information. Data must be managed, coordinated and controlled to ensure good internal controls and data compliance with laws, rules and regulations. The goal is to avoid the creation of new and bigger data silos and keep costs under control by using advanced data management techniques to develop more agile data access and increase the data’s usefulness.

Continue to Focus on Increasing Data Quality, Quantity, and Timeliness. All agencies should: continue to improve existing data sets; enlist the help of contractors, states and stakeholder groups to collect additional data; and, create new types of actionable information and insight. The use of National Information Exchange Model (NIEM) standards for all data will promote cross-organizational sharing. NIEM allows data analytical systems to support federal government-wide information exchange standards and processes and is an essential element to extending value. The Department of Justice, the Department of Homeland Security and the intelligence community have demonstrated the value of NIEM which allowed them to share terrorist information more effectively.

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RECOMMENDATION No. 2: Invest in Technology to Increase Productivity and Reduce Costs

Innovation is a cornerstone to private sector productivity and success. Highly successful businesses end up failing quickly if they do not constantly update their approaches or products to remain competitive. Over the past thirty years, technology has driven much innovation. We see the benefits in government services. Citizens no longer need to apply for a passport at a few designated government locations and we now use unmanned drones to determine or thwart national security risks. Government should continue to improve delivery of its mission in a coordinated, efficient fashion. Information technology, like other investments, runs the risk of being under leveraged. With constrained and declining budgets, the tendency will be to cut spending on technology – exactly the wrong thing to do at this critical time. It is important that technology investments continue to foster innovation, but these investments need to be managed economically.

The Technology CEO Council identified substantial savings in administrative functions from the best IT practices of high-performing companies. Exhibit 4 shows the potential benefit to the government over a 10-year period which could generate savings of almost $100 billion a year if government adopted industries’ best practices. This potential savings is identified in Exhibit 2.

Exhibit 4 – Potential 10-Year Savings of $970 billion from Adopting Commercially-Proven Best Practices9

(almost $100 billion annually as shown in Exhibit 2)

AGENCY FOCUS: The Department of Veterans Affairs (VA)

One of the key administrative functions performed by the government is the processing of claims and benefits. This function is a central part of VA’s mission. With the conclusion of the Iraq war and the winding down of the Afghanistan war, the VA has seen a sharp rise in applications for claims and benefits. There has been a corresponding increase in case backlog, from about 600,000 in 2008 to nearly 900,000 in 2012 to a projected 1.2 million in 2013.

The VA has and is taking a variety of measures to respond to and clear this rising backlog. One of the most important measures is the Veterans Benefits Management System (VBMS). VBMS is a paperless system scheduled for nationwide implementation in 2013.

9 Technology CEO Council, 2010 , Potential 10-Year Savings from Adopting Commercially-Proven Best Practices

Opportunity Savings Streamline Government Supply Chain $500B Monetize Government Assets $150B Consolidate Infrastructure $200B Reduce Field Operations/Self Serve $50B Shared Mission Support $50B Reduce Energy Usage $20B

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The VA has harnessed IT to deliver greater mission operations and productivity through the VA Blue Button Initiative. The Blue Button Initiative allows veterans to access and download medical and health information from My HealtheVet personal health record (a large health data repository) into a very simple text file or .pdf that can be read, printed or saved on any computer. This interface is easy to use and gives veterans complete control of their medical information – without any special software. My HealtheVet enables data sharing with healthcare providers, caregivers or other people veterans trust. This system enhances veteran service delivery through real-time data processing as well as cost reduction in healthcare delivery. Ready access to and provision of health information for veterans’ benefits or claims may also streamline future processes.

The VA has also made advances in its Veterans Health Information Systems and Technology Architecture (VistA) and its electronic patient record system. These advances have leveraged IT and IT investment to give the department an edge in productivity at lower cost. For example, VistA is an enterprise-wide electronic health record (EHR) information system deployed through the Veterans Health Administration (VHA). VistA offers physician-user interfaces that are graphical, intuitive and promote physician use. It is the most widely used EHR in the nation and delivers effective and accurate healthcare to veterans. The easy user-interface and increased interoperability among disparate systems helps the VA, and participating sites, achieve greater productivity levels at lower costs. VistA is estimated to improve efficiencies by 6% per year and has enabled the VA to achieve a 99+ percent accuracy rate in pharmacy prescriptions. VistA reportedly out-performs most public sector hospital systems in a variety of criteria. The increase in accuracy and mission delivery enables treatment and healthcare to reach more veterans without spending more money. The VA believes the investment in VistA modernization has resulted in a 2 to 1 return on investment in healthcare expenditures by improving patient outcomes and reducing costs, including costs incurred through unnecessary tests, admissions or other wastes. As more governmental and private hospitals adopt VistA, a broader interoperable system will exist that will find efficiencies and streamline processes throughout our nation, both federal and civilian.

Investing in better IT systems that automate and streamline operations and facilitate data sharing, interoperability, and end-user accessibility to modernized data systems will help all federal agencies meet the 21st century standards expected by the citizens they serve. As the VA examples demonstrate, there is a real opportunity right now to realize efficiencies, cost savings and better patient care through the coordinated automation of and access to healthcare records, healthcare information and claims processing. This not only helps VA and those integrating with VA, but also other government and private organizations involved with healthcare delivery system in the U.S.

Recommendations for VA and Other Agencies Providing Healthcare Services

Build on the VA Blue Button experience to further increase citizen access to services and their federal records.

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In addition to delivering on-demand services to veterans, the VA Blue Button Initiative has fostered an open-dialogue between the VA, CMS and private sector partners creating an environment ripe for co-innovation and collaboration. Further collaboration to improve veteran services should continue to be supported and encouraged. Best practices associated with this application opens doors to increased productivity and cost efficiencies that can drive future growth of IT development and offer benefits to others.

Ensure that VA and DoD continue to work collaboratively to share our service members’ health and other data seamlessly. Providing the best support to service members and their families from active duty through retirement is a critical mission for VA and DoD. Services to veterans, particularly healthcare services, would be facilitated and enhanced through seamless data and systems sharing between VA and DoD. Further actions should be taken to institutionalize this collaboration and develop plans to ensure timely data sharing. Acceleration of the development of “one record” for each service member across all agencies providing services, beyond VA and DoD, will be an important step forward to improved veteran healthcare.

Set-up a governance framework to leverage the efficiencies of the VistA electronic health record as it is adopted by organizations outside of VA. The promulgation of an electronic health record within the federal government and among its partners is a major, complicated undertaking. It requires coordination, accountability and a place where those involved and stakeholders can engage regularly in a constructive manner and progress can be monitored. A governance framework ensures that this effort stays focused and on course.

Set Government-wide goals for the digitization of all federal forms so claim and other data can be processed more efficiently and effectively. The savings, efficiencies and customer satisfaction realized from the automation and processing of claims and other forms is well accepted in the private sector. It should be no less so in the federal sector. The federal government should set accountable goals for digitizing its data as it is collected and for digitizing historical data when there is a good business case to do so. The effort to digitize federal data is underway, but more progress is needed. Having ready access to digital data for programs and operations allows federal agencies and stakeholders to take advantage of emerging analytical technologies. Analytics enables agencies to make their operations more efficient, provide more meaningful performance metrics and allow for the faster and earlier identification of fraud, waste and abuse in programs and operations.

RECOMMENDATION No. 3: Use Technology to Combat Fraud, Waste and Abuse.

Federal payment and tax collection programs are complex and touch every person and company in the United States. Citizen expectations for streamlining are high and with the trillions of dollars involved, a climate exists where fraud, waste and abuse may occur without the proper vigilance.

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Exhibit 5 – Improper Payment Amounts by Program10

Over the past few years, the government has made substantial progress in reducing the rate of improper payments. As shown in Exhibit 5, the current rate of 4.69 percent still translates into a potential worsening of the deficit by more than $100 billion a year. The FBI estimates that between 3 and 10 percent ($70 billion to $234 billion) of US healthcare expenditures was lost to healthcare fraud.11 In FY2010, CMS estimated that Medicare and Medicaid programs made a total of over $70 billion in improper payments and recovered approximately an additional $4 billion through a variety of fraud and waste detection technologies.12

Fortunately, there are many technologies that can be brought to bear to streamline programs to cut waste, improve services, identify fraud and abuse through prevention of improper payments and collect the proper amount of taxes owed. Using enhanced IT tools for better sharing, accessing, and analyzing the relevant data would enable the IRS, and other key agencies, to significantly reduce both improper payments and uncollected taxes. Every 10 percent improvement in these areas would reduce the deficit by almost $50 billion a year.

On the revenue side of the equation, the IRS reported a “tax gap” of $385 billion in uncollected taxes in 2006. As areas like healthcare and veterans benefits become greater due to population and other changes, these losses, in absolute dollars, will continue to grow if unchecked.

10 http://paymentaccuracy.gov/improper-payment-amounts 11 Federal Bureau of Investigation, Financial Crimes Report to the Public, available at http://www.fbi.gov/publications/financial/fcs_report2009/financial_crime_2009.htm#health. 12 http://www.justice.gov/opa/pr/2011/January/11-asg-094.html

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AGENCY FOCUS: The Internal Revenue Service (IRS)

The IRS example highlights one of the biggest federal agency’s IT challenges and demonstrates the opportunity associated with closing the tax gap, thereby reducing the deficit without compromising any of the government’s many vital missions.

Very few public or private organizations manage the data volume that the IRS generates and receives every year. Not only does the IRS process more than 230 million tax returns annually, but they also receive millions of information returns from financial institutions, businesses, and state and local government agencies. The task is further complicated by the absence of standardized data sets. IRS systems must manage disparate data from multiple sources in many varied formats. This challenge is further compounded by the extended age of many of the IRS legacy systems.

Another challenge, one that is particularly relevant to closing the tax gap, is that taxpayers can file their returns as early as January; however, data required for those returns may not be received from third parties until February or March. Given that most returns are filed electronically and processed within two weeks, the IRS has virtually no opportunity for matching tax return and information return data to screen for non-compliance, identity theft, or other types of fraud before issuing refunds. In addition, a large portion of the tax gap comes from millions of cases of small amounts of underpayment or over-refund for which audits or other enforcement measures are simply too expensive.

The IRS addresses these challenges in many ways. It stopped over $14 billion in fraudulent returns in FY2011 while its identify theft caseload rose to over 34,000 cases -- twice the volume realized in FY2010.13 Its Strategic Plan recognizes that it must continue to “Invest for High Performance” in people and technology and “Build and deploy advanced information technology systems, processes, and tools to improve IRS efficiency and productivity.”14 Examples of that strategy include the:

Currency & Banking Retrieval System, which provides field agents and law enforcement on-line access to Bank Secrecy Act information.

Customer Account Data Engine-2 (CADE-2) database, which has sped up tax return processing from weekly batches to daily.

Virtual server technology deployment and IRS2GO Smartphone App, both of which have been recently lauded by the GAO. 15, 16

13 IRS Oversight Board Annual Report to Congress 2011

14 IRS Strategic Plan 2009 - 2013 15 Treasury Inspector General for Tax Administration, “Virtual Server Technology Has Been Successfully Imple-mented, but Additional Actions Are Needed to Further Reduce the Number of Servers and Increase Savings”, March 30, 2012 Reference Number: 2012-20-029

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Recommendations for IRS and Other Agencies

Adopt New Approaches to Modernizing IT Systems/Capabilities.

Rather than simply modernize to today’s standard (e.g. relational databases), IRS and other agencies should continue to modernize to the industry standard that will be commonplace by the end of this effort. For example, to enhance the IRS’ ability to collect taxes owed, consider allowing more Treasury components to have flexible shared research and development (R&D) efforts by leveraging private sector technology and resources through such potential funding sources as: Cooperative Research and Development Agreements (CRADA), Technology Transition Plans (TTP), Rapid Technology Application Programs (RTAP) and other forward-thinking development programs. Similar to Department of Defense and Department of Homeland Security programs, this allows industry to work with government-sponsored development efforts to more quickly advance capabilities at much lower risks and costs. By promoting competitions among open source and freeware-type solution providers, and conducting shared learning development with trusted partners such as DHS’ accredited Centers of Excellence (COE) network, Treasury can utilize security-cleared personnel and facilities to solve challenging problems not evidenced by today’s acquisitions. Several Treasury components without the flexibility in their mandate to participate in these types of activities include those responsible for collecting and disseminating key data streams.

Establish analytical shared centers of excellence (COE) focused on enterprise-level operations to reduce fraud, waste, and abuse and strengthen program integrity.

These COEs, whether dedicated to an agency, or shared among agencies, will enable sophisticated modeling and simulation of historical data, e.g., to identify anomalous thresholds based on multivariate factor analysis, disparate data fusion to include advanced geospatial analytics, testing of new means, methods, and tools, etc. Further, the COEs can develop more sophisticated rule systems (rather than simple filters) to screen incoming entities and outgoing transactions with acceptable false positive rates.

Proactively screen to reduce fraud, waste, and abuse prior to payment.

Key to this approach is the effective use of third party data sources at enterprise levels to screen incoming filings and outgoing transactions against more advanced analytical efforts. Examples include confirming best known addresses and Personally Identifiable Information (PII) to establish unique entities across VA, HHS, IRS, and SSA databases. The PII screening can verify addresses of record,. For example, the system can confirm that a taxpayer filed all of the appropriate state tax returns during a specific year (e.g., they received VA benefits at an address in NY, yet didn’t file a NY state return). This capability may also be provided to outside organizations where Treasury provides central payment services (e.g. Financial Management Service). Using

16 Treasury Inspector General for Tax Administration, “The IRS2GO Smartphone Application Is Secure, but Development Process Improvements Are Needed”, August 29, 2011 Reference Number: 2011-20-076

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proactive and predictive analytics, agencies can move from a “pay and chase” model (where refunds are distributed, then compliance checks are made) to a “verify then pay” model.

CONCLUSION

The trends in outlays over the past 50 years and projected forward 10 years depict significant shifts in our expenditures. In 1962 mandatory federal outlays for social security, healthcare programs (Medicare and Medicaid) and Safety Net Programs (unemployment, nutrition support, foster care, etc.) comprised less than 20% of total federal outlays. By 2022, these outlays are projected to be 60% of the total federal outlays. The ongoing efforts in these three agencies exemplify how IT innovation can be a powerful weapon in the ongoing struggle against cost escalation and fiscal deficits while still effectively and efficiently supporting agency critical missions. The fiscal challenges faced by CMS, VA, and IRS are not unique to them. What these agencies have done, together with IT innovations made at other agencies, can and should be leveraged in a very deliberate way across the government to deliver required 21st century services to our citizens at a reasonable cost.

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Quadrennial Government Technology Review Budget Reduction Team Bill Bennett, Microsoft (Member)

Patricia Healy, CGI Federal (Member)

Lee Holcomb, Lockheed Martin (Topic Lead)

Kavita Kalatur, NetImpact Strategies (Member)

Val Lunz, NASA (Government Liaison)

Kristin Oelke, Oceus Networks (Marketing Communications Liaison)

Greg Prince, Performix Consulting LLC (Member)

Travis Totten, NASA, (Government Liaison)

Roxanne Rucker (Member)

Quadrennial Government Technology Review Steering Committee and Advisors Ramon Barquin, Barquin International (Member)

Chris Chroniger, Acentia (Member)

Mark Cohn, Unisys (Member)

Sara DeCarlo, ACT-IAC Institute for Innovation (Director)

Judy Douglas, HP, (IAC Executive Committee Liaison)

Karen Evans, KE&T Partners (Advisor)

Joan Golden, Topside Consulting (Chief Editor)

Rahul Gupta, PwC Management Consulting (Member)

Wendy Henry, Deloitte Consulting LLP(Member)

Steve Lynott, 1901 Group (Member)

Molly O’Neill, CGI Federal (Co-chair)

Anne Reed, Anne Reed Consulting (Co-chair)

Jim Williams, Daon (Advisor)

Bob Woods, Topside Consulting (Advisor)

ACT-IAC Staff Support Kenneth Allen

Donald Arnold

Sara DeCarlo

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Institute for Innovation Established in 2011, the ACT-IAC Institute for Innovation was chartered to promote innovation in the delivery of government services and operations. It develops and delivers high-quality strategic advice that reflects cross-industry recommendations based on the consensus of experts from ACT-IAC’s member companies and government liaisons. Through ethical collaborative discussion, the Institute recommends approaches to key issues affecting government where information technology can be or is a factor and a broad spectrum of perspectives is required.

The Institute commissioned the 2012 Quadrennial Government Technology Review to develop a series of reports and executive briefings for consideration by the next administration. Each report focuses on the use of information technology to address a national challenge. These papers, and additional information on the Institute, can be found on: www.actgov.org/innovation.

Empowering Citizen-Driven Government through Collaboration and Service Delivery Educating our Workforce for Today’s Jobs in Science and Technology Improving Population Wellness and Reducing Growth in Healthcare Costs Enhancing National Security Through Responsible Information Sharing and Identity Management Unleashing the Power of Information Technology to Reduce the Budget Deficit Delivering Mission Results by Aligning Business and Information Technology Tackling the Nation’s Biggest Challenges by Investing in Information Technology Solutions

The work of the Institute is made possible through the support of partners from non-profit organizations and for-profit companies. Thought leaders from these partners, and representatives of the ACT-IAC leadership team, guide and govern the Institute, but do not influence project recommendations in keeping with ACT-IAC’s commitment to maintaining a non-partisan, vendor-neutral, collaborative environment. Members of the Institute for Innovation are as follows:

Darren Ash, (ACT Executive Committee Liaison) Doug Barbee, Evolver (Member) Dan Chenok, IBM (IAC Executive Committee

Liaison) Jim Cook, The MITRE Corporation (Research

Partner) Mike Grasso, Lockheed Martin (Member) Mike Howell,(ACT Executive Committee Liaison) Kavita Kalatur, NetImpact Strategies (Member)

Wyatt Kash, AOL Government (Member) Ryan LaSalle, Accenture (Member) Dale Luddeke, TASC (IAC Executive Committee

Liaison) Dave McClure, (Government Liaison) Andrew McLauchlin, CGI Federal (IAC

Executive Committee Liaison) Andy Robinson, ICFi (Member) Dave Wennergren, (Government Liaison)

Thank you to these organizations for their commitment and leadership in government innovation by supporting the ACT-IAC Institute for Innovation. Sara K. DeCarlo, Director

http://www.actgov.org/innovation�

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