Medicare: Actions Needed to Better Manage Fraud Risks

Medicare covered over 58 million people in 2017 and has wide-ranging impact on the health-care sector and the overall U.S. economy. However, the billions of dollars in Medicare outlays as well as program complexity make it susceptible to improper payments, including fraud. Although there are no reliable estimates of fraud in Medicare, in fiscal year 2017 improper payments for Medicare were estimated at about $52 billion. Further, about $1.4 billion was returned to Medicare Trust Funds in fiscal year 2017 as a result of recoveries, fines, and asset forfeitures.

In December 2017, GAO issued a report examining how CMS managed its fraud risks overall and particularly the extent to which its efforts in the Medicare and Medicaid programs aligned with GAO's Framework. This testimony, based on that report, discusses the extent to which CMS's management of fraud risks in Medicare aligns with the Framework. For the report, GAO reviewed CMS policies and interviewed officials and external stakeholders.

In its December 2017 report, GAO found that the Centers for Medicare & Medicaid Services' (CMS) antifraud efforts for Medicare partially align with GAO's 2015 A Framework for Managing Fraud Risks in Federal Programs (Framework). The Fraud Reduction and Data Analytics Act of 2015 required OMB to incorporate leading practices identified in this Framework in its guidance to agencies on addressing fraud risks.

Consistent with the Framework, GAO determined that CMS had demonstrated commitment to combating fraud by creating a dedicated entity to lead antifraud efforts; the Center for Program Integrity (CPI) serves as this entity for fraud, waste, and abuse issues in Medicare. CMS also promoted an antifraud culture by, for example, coordinating with internal stakeholders to incorporate antifraud features into new program design. To increase awareness of fraud risks in Medicare, CMS offered and required training for stakeholder groups such as providers of medical services, but it did not offer or require similar fraud-awareness training for most of its workforce.

CMS took some steps to identify fraud risks in Medicare; however, it had not conducted a fraud risk assessment or designed and implemented a risk-based antifraud strategy for Medicare as defined in the Framework. CMS identified fraud risks through control activities that target areas the agency designated as higher risk within Medicare, including specific provider types, such as home health agencies. Building on earlier steps and conducting a fraud risk assessment, consistent with the Framework, would provide the detailed information and insights needed to create a fraud risk profile, which, in turn, is the basis for creating an antifraud strategy.

CMS established monitoring and evaluation mechanisms for its program-integrity control activities that, if aligned with an antifraud strategy, could enhance the effectiveness of fraud risk management in Medicare. For example, CMS used return-on-investment and savings estimates to measure the effectiveness of its Medicare program-integrity activities. In developing an antifraud strategy, consistent with the Framework, CMS could include plans for refining and building on existing methods such as return-on-investment, to evaluate the effectiveness of all of its antifraud efforts.

In its December 2017 report, GAO made three recommendations, namely that CMS (1) require and provide fraud-awareness training to its employees; (2) conduct fraud risk assessments; and (3) create an antifraud strategy for Medicare, including an approach for evaluation. The Department of Health and Human Services agreed with these recommendations and reportedly is evaluating options to implement them. Accordingly, the recommendations remain open.

I am pleased to appear before you today to discuss ways to better  manage Medicare fraud risks that we identified in a recent report.  Although there are no reliable estimates of fraud in Medicare, in fiscal  year 2017 improper payments for Medicare were estimated at about $52  billion.

A recent example illustrates the scope and scale of fraud risks. The  Department of Health and Human Services (HHS) Office of Inspector  General’s (OIG) latest Semiannual Report to Congress highlighted the  recent activities of the Medicare Fraud Strike Force (Strike Force).  During the period from October 1, 2017, through March 31, 2018, Strike  Force efforts resulted in the filing of charges against 77 individuals or  entities, 107 criminal actions, and more than $100.3 million in  investigative receivables. In one example, a Strike Force investigation led  to the conviction of two owners of a medical billing company, who were  both found guilty of conspiracy and health-care fraud, for fraudulently  billing Medicare for services that were never provided. They also  conspired to circumvent Medicare’s fraud investigation of one of the  owners by creating sham companies. The owners were sentenced to 10  years in prison, and 15 years in prison, respectively, and ordered to pay  nearly $9.2 million in restitution.

Overall, HHS OIG and the Department of Justice report annually on  monetary and other results of their efforts against health-care fraud and  abuse: in fiscal year 2017, about $1.4 billion was returned to Medicare  Trust Funds as a result of recoveries, fines, and asset forfeitures.

Medicare, which is administered within HHS by its Centers for Medicare &  Medicaid Services (CMS), has been on our high-risk list since 1990  because of the size and complexity of the program, and its susceptibility  to fraud, waste, and abuse. Medicare covered over 58 million people in  2017 and it has wide-ranging current and long-term effects beyond  beneficiaries, the health-care sector, and the overall U.S. economy. The  following statistics illustrate the program’s impact.

According to the Congressional Budget Office (CBO), in 2017  Medicare outlays totaled $702 billion. Under current law, the outlays  are projected to rise to $1.5 trillion in 2028, growing at about 7 percent  a year; that is, faster than the economy, as the population ages and  health-care costs rise.

In 2017, these expenditures accounted for 3.7 percent of gross  domestic product (GDP) and 17.6 percent of federal outlays. CBO  estimates that, in 2028, under current law, Medicare will account for  5.1 percent of GDP and 21.9 percent of federal outlays.

Over 1 million health-care providers, contractors, and suppliers from  across the health sector—including private health plans, physicians,  hospitals, skilled-nursing facilities, durable medical equipment  suppliers, ambulance providers, and many others—receive payments  from Medicare.

Given the size and impact of Medicare on the health-care sector and U.S.  economy overall, we recently reported on CMS’s fraud risk management  efforts relative to GAO’s 2015 A Framework for Managing Fraud Risks in  Federal Programs (Fraud Risk Framework). The Fraud Risk Framework  describes key components and leading practices for agencies to  proactively and strategically manage fraud risks. Our objectives in the December 2017 report were to determine: (1) CMS’s approach for  managing fraud risks across its four principal programs (including  Medicare) and (2) how CMS’s efforts for managing fraud risks in  Medicare and Medicaid align with the Fraud Risk Framework.

Drawing from the December 2017 report, my testimony today discusses  the extent to which CMS’s management of fraud risks in Medicare aligned  with the Fraud Risk Framework and the actions needed to better manage  fraud risks.

We performed our work on CMS antifraud efforts in Medicare and  Medicaid for the December 2017 report under the authority of the  Comptroller General to assist Congress with its oversight. The report  provides further detail on our scope and methodology. Because this  statement focuses on Medicare, we have omitted references to Medicaid  in some instances when discussing organizational structure and agency- wide efforts.

We conducted the work in the December 2017 report in accordance with  generally accepted government auditing standards. Those standards  require that we plan and perform the audit to obtain sufficient, appropriate  evidence to provide a reasonable basis for our findings and conclusions  based on our audit objectives. We believe that the evidence obtained  provides a reasonable basis for our findings and conclusions based on  our audit objectives.

Medicare is one of four principal health-insurance programs administered  by CMS; it provides health insurance for persons aged 65 and over,  certain individuals with disabilities, and individuals with end-stage renal  disease. See table 1 for information about Medicare’s component  programs.

Medicare is the largest CMS program, at $702 billion in fiscal year 2017.  As discussed earlier, according to CBO, Medicare outlays are projected  to rise to $1.5 trillion in 2028 (see fig. 1).

Fraud Vulnerabilities and Improper Payments in Medicare

Fraud involves obtaining something of value through willful  misrepresentation. There are no reliable estimates of the extent of fraud  in the Medicare program, or in the health-care industry as a whole. By its  very nature, fraud is difficult to detect, as those involved are engaged in  intentional deception. Further, potential fraud cases must be identified,  investigated, prosecuted, and adjudicated—resulting in a conviction— before fraud can be established.

As I mentioned earlier, we designated Medicare as a high-risk program in  1990 because its size, scope, and complexity make it vulnerable to fraud,  waste, and abuse. Similarly, the Office of Management and Budget  (OMB) designated all parts of Medicare a “high priority” program because  they each report $750 million or more in improper payments in a given  year. We also highlighted challenges associated with duplicative  payments in Medicare in our annual report on duplication and  opportunities for cost savings in federal programs.

Improper payments are a significant risk to the Medicare program and  may include payments made as a result of fraud. However, I would note  that improper payments are not a proxy for the amount of fraud or extent  of fraud risk in a particular program as improper payment measurement  does not specifically identify or estimate such payments due to fraud.  Improper payments are those that are either made in an incorrect amount  (overpayments and underpayments) or those that should not have been  made at all.

Our December 2017 report found that CMS manages its fraud risks as  part of a broader program-integrity approach working with a broad array  of stakeholders. CMS’s program-integrity approach includes efforts to  address waste, abuse, and improper payments as well as fraud across its  four principal programs. In Medicare, CMS collaborates with contractors,  health-insurance plans, and law-enforcement and other agencies to carry  out its program-integrity responsibilities. According to CMS officials, this  broader program-integrity approach can help the agency develop control  activities to address multiple sources of improper payments, including  fraud.

Fraud Risk Management Standards and Guidance

According to federal standards and guidance, executive-branch agency  managers are responsible for managing fraud risks and implementing  practices for combating those risks. Federal internal control standards call  for agency management officials to assess the internal and external risks  their entities face as they seek to achieve their objectives. The standards  state that as part of this overall assessment, management should  consider the potential for fraud when identifying, analyzing, and  responding to risks. Risk management is a formal and disciplined  practice for addressing risk and reducing it to an acceptable level.

In July 2015, GAO issued the Fraud Risk Framework, which provides a  comprehensive set of key components and leading practices that serve  as a guide for agency managers to use when developing efforts to  combat fraud in a strategic, risk-based way. The Fraud Risk Framework  describes leading practices in four components: commit, assess, design  and implement, and evaluate and adapt, as depicted in figure 2.

The Fraud Reduction and Data Analytics Act of 2015, enacted in June  2016, requires OMB to establish guidelines for federal agencies to create  controls to identify and assess fraud risks and design and implement  antifraud control activities. The act further requires OMB to incorporate  the leading practices from the Fraud Risk Framework in the guidelines. In  July 2016, OMB published guidance about enterprise risk management  and internal controls in federal executive departments and agencies.  Among other things, this guidance affirms that managers should adhere  to the leading practices identified in the Fraud Risk Framework. Further,  the act requires federal agencies to submit to Congress a progress report  each year for 3 consecutive years on the implementation of the controls  established under OMB guidelines, among other things.

CMS’s Efforts Managing Fraud Risks in Medicare Were Partially Aligned with the Fraud Risk Framework

CMS’s antifraud efforts partially aligned with the Fraud Risk Framework.  Consistent with the framework, CMS has demonstrated commitment to  combating fraud by creating a dedicated entity to lead antifraud efforts. It  has also taken steps to establish a culture conducive to fraud risk  management, although it could expand its antifraud training to include all  employees. CMS has taken some steps to identify fraud risks in  Medicare; however, it has not conducted a fraud risk assessment or  developed a risk-based antifraud strategy for Medicare as defined in the  Fraud Risk Framework. CMS has established monitoring and evaluation  mechanisms for its program-integrity control activities that, if aligned with  a risk-based antifraud strategy, could enhance the effectiveness of fraud  risk management in Medicare.

CMS’s Organizational Structure Includes a Dedicated Entity for Program-Integrity and Antifraud Efforts

The commit component of the Fraud Risk Framework calls for an agency  to commit to combating fraud by creating an organizational culture and  structure conducive to fraud risk management. This component includes  establishing a dedicated entity to lead fraud risk management activities.

Within CMS, the Center for Program Integrity (CPI) serves as the  dedicated entity for fraud, waste, and abuse issues in Medicare, which is  consistent with the Fraud Risk Framework. CPI was established in 2010,  in response to a November 2009 Executive Order on reducing improper  payments and eliminating waste in federal programs. This formalized  role, according to CMS officials, elevated the status of program-integrity  efforts, which previously were carried out by other parts of CMS.

As an executive-level Center—on the same level with five other  executive-level Centers at CMS, such as the Center for Medicare—CPI  has a direct reporting line to executive-level management at CMS. The  Fraud Risk Framework identifies a direct reporting line to senior-level  managers within the agency as a leading practice. According to CMS  officials, this elevated organizational status offers CPI heightened visibility  across CMS, attention by CMS executive leadership, and involvement in  executive-level conversations.

CMS Has Taken Steps to Create a Culture Conducive to Fraud Risk Management but Could Enhance Antifraud Training for Employees

The commit component of the Fraud Risk Framework also includes  creating an organizational culture to combat fraud at all levels of the  agency. Consistent with the Fraud Risk Framework, CMS has promoted  an antifraud culture by, for example, coordinating with internal and  external stakeholders.

Consistent with leading practices in the Fraud Risk Framework to involve  all levels of the agency in setting an antifraud tone, CPI has worked  collaboratively with other CMS Centers. In addition to engaging  executive-level officials of other CMS Centers through the Program  Integrity Board, CPI has worked collaboratively with other Centers within  CMS to incorporate antifraud features into new program design or policy  development and established regular communication at the staff level.  For example:

Center for Medicare and Medicaid Innovation (CMMI). When  developing the Medicare Diabetes Prevention Program, CMMI  officials told us they worked with CPI’s Provider Enrollment and  Oversight Group and Governance Management Group to develop  risk-based screening procedures for entities that would enroll in  Medicare to provide diabetes-prevention services, among other  activities. The program was expanded nationally in 2016, and CMS  determined that an entity may enroll in Medicare as a program  supplier if it satisfies enrollment requirements, including that the  supplier must pass existing high categorical risk-level screening  requirements.

Center for Medicare (CM). In addition to building safeguards into  programs and developing policies, CM officials told us that there are  several standing meetings, on monthly, biweekly, and weekly bases,  between groups within CM and CPI that discuss issues related to  provider enrollment, FFS operations, and contractor management. A  senior CM official also told us that there are ad hoc meetings taking  place between CM and CPI: “We interact multiple times daily at  different levels of the organization. Working closely is just a regular  part of our business.”

CMS has also demonstrated its commitment to addressing fraud, waste,  and abuse to its stakeholders. Representatives of CMS’s extensive  stakeholder network whom we interviewed—contractors and officials from  public and private entities—generally recognized the agency’s  commitment to combating fraud. In our interviews with stakeholders,  officials observed CMS’s increased commitment over time to address  fraud, waste, and abuse and cited examples of specific CMS actions.  CMS contractors told us that CMS’s commitment to combating fraud is  incorporated into contractual requirements, such as requiring (1) data  analysis for potential fraud leads and (2) fraud-awareness training for  providers. Officials from entities that are members of the Healthcare  Fraud Prevention Partnership (HFPP), specifically, a health-insurance  plan and the National Health Care Anti-Fraud Association, added that  CMS’s effort to establish the HFPP and its ongoing collaboration and  information sharing reflect CMS’s commitment to combat fraud in  Medicare.

The Fraud Risk Framework identifies training as one way of  demonstrating an agency’s commitment to combating fraud. Training and education intended to increase fraud awareness among stakeholders,  managers, and employees serve as a preventive measure to help create  a culture of integrity and compliance within the agency. The Fraud Risk  Framework discusses requiring all employees to attend training upon  hiring and on an ongoing basis thereafter.

To increase awareness of fraud risks in Medicare, CMS offers and  requires training for stakeholder groups such as providers, beneficiaries,  and health-insurance plans. Specifically, through its National Training  Program and Medicare Learning Network, CMS makes available training  materials on combating Medicare fraud, waste, and abuse. These  materials help to identify and report fraud, waste, and abuse in CMS  programs and are geared toward providers, beneficiaries, as well as  trainers and other stakeholders. Separately, CMS requires health- insurance plans working with CMS to provide annual fraud, waste, and  abuse training to their employees.

However, CMS does not offer or require similar fraud-awareness training  for the majority of its workforce. For a relatively small portion of its overall  workforce—specifically, contracting officer representatives who are  responsible for certain aspects of the acquisition function—CMS requires  completion of fraud and abuse prevention training every 2 years.  According to CMS, 638 of its contracting officer representatives (or about  10 percent of its overall workforce) completed such training in 2016 and  2017. Although CMS offers fraud-awareness training to others, the  agency does not require fraud-awareness training for new hires or on a  regular basis for all employees because the agency has focused on  providing process-based internal controls training for its employees.

While fraud-awareness training for contracting officer representatives is  an important step in helping to promote fraud risk management, fraud- awareness training specific to CMS programs would be beneficial for all  employees. Such training would not only be consistent with what CMS  offers to or requires of its stakeholders and some of its employees, but  would also help to keep the agency’s entire workforce continuously aware  of fraud risks and examples of known fraud schemes, such as those  identified in successful HHS OIG investigations. Such training would also  keep employees informed as they administer CMS programs or develop  agency policies and procedures. Considering the vulnerability of Medicare  and Medicaid programs to fraud, waste, and abuse, without regular  required training CMS cannot be assured that its workforce of over 6,000  employees is continuously aware of risks facing its programs.

In our December 2017 report, we recommended that the Administrator of  CMS provide fraud-awareness training relevant to risks facing CMS  programs and require new hires to undergo such training and all  employees to undergo training on a recurring basis. In its March 2018  letter to GAO, HHS stated that CMS is in the process of developing  Fraud, Waste, and Abuse Training for all new employees, to be presented  at CMS New Employee Orientations. Additionally, CMS is also developing  training to be completed by current CMS employees on an annual basis.  As of July 2018, this recommendation remains open.

CMS Has Taken Steps to Identify Fraud Risks but Has Not Conducted a Fraud Risk Assessment for Medicare

The assess component of the Fraud Risk Framework calls for federal  managers to plan regular fraud risk assessments and to assess risks to  determine a fraud risk profile. Identifying fraud risks is one of the steps  included in the Fraud Risk Framework for assessing risks to determine a  fraud risk profile.

In our December 2017 report, we discussed several examples of steps  CMS has taken to identify fraud risks as well as control activities that  target areas the agency has designated as higher risk within Medicare,  including specific provider types and specific geographic locations. These  examples include data analytics to assist investigations in Medicare FFS, including  Medicare’s Fraud Prevention System (FPS ), prior authorization for Medicare FFS services or supplies,  revised provider screening and enrollment processes for Medicare  FFS, and  temporary provider enrollment moratoriums for certain providers and  geographic areas for Medicare FFS.

CMS officials told us that CPI initially focused on developing control  activities for Medicare FFS and consider these activities to be the most  mature of all CPI efforts to address fraud risks.

CMS Has Not Conducted a Fraud Risk Assessment for Medicare  The assess component of the Fraud Risk Framework calls for federal  managers to plan regular fraud risk assessments and assess risks to  determine a fraud risk profile. Furthermore, federal internal control  standards call for agency management to assess the internal and  external risks their entities face as they seek to achieve their objectives.  The standards state that, as part of this overall assessment, management  should consider the potential for fraud when identifying, analyzing, and  responding to risks.

The Fraud Risk Framework states that, in planning the fraud risk  assessment, effective managers tailor the fraud risk assessment to the  program by, among other things, identifying appropriate tools, methods,  and sources for gathering information about fraud risks and involving  relevant stakeholders in the assessment process. Fraud risk  assessments that align with the Fraud Risk Framework involve (1)  identifying inherent fraud risks affecting the program, (2) assessing the  likelihood and impact of those fraud risks, (3) determining fraud risk  tolerance, (4) examining the suitability of existing fraud controls and  prioritizing residual fraud risks, and (5) documenting the results (see fig.  3).

Although CMS had identified some fraud risks posed by providers in  Medicare FFS, the agency had not conducted a fraud risk assessment for  the Medicare program as a whole. Such a risk assessment would provide  the detailed information and insights needed to create a fraud risk profile,  which, in turn, is the basis for creating an antifraud strategy.

According to CMS officials, CMS had not conducted a fraud risk  assessment for Medicare because, within CPI’s broader approach of  preventing and eliminating improper payments, its focus has been on  addressing specific vulnerabilities among provider groups that have  shown themselves particularly prone to fraud, waste, and abuse. With this  approach, however, it is unlikely that CMS will be able to design and  implement the most-appropriate control activities to respond to the full  portfolio of fraud risks.

A fraud risk assessment consists of discrete activities that build upon  each other. Specifically:  Identifying inherent fraud risks affecting the program. As  discussed earlier, CMS took steps to identify fraud risks. However,  CMS has not used a process to identify inherent fraud risks from the  universe of potential vulnerabilities facing Medicare, including threats  from various sources. According to CPI officials, most of the agency’s  fraud control activities are focused on fraud risks posed by providers.  The Fraud Risk Framework discusses fully considering inherent fraud  risks from internal and external sources in light of fraud risk factors  such as incentives, opportunities, and rationalization to commit fraud.  For example, according to CMS officials, the inherent design of the  Medicare Part C program may pose fraud risks that are challenging to  detect. A fraud risk assessment would help CMS identify all sources  of fraudulent behaviors, beyond threats posed by providers, such as  those posed by health-insurance plans, contractors, or employees.

Assessing the likelihood and impact of fraud risks and  determining fraud risk tolerance. CMS has taken steps to prioritize  fraud risks in some areas, but it had not assessed the likelihood or  impact of fraud risks or determined fraud risk tolerance across all  parts of Medicare. Assessing the likelihood and impact of inherent  fraud risks would involve consideration of the impact of fraud risks on  program finances, reputation, and compliance. Without assessing the  likelihood and impact of risks in Medicare or internally determining  which fraud risks may fall under the tolerance threshold, CMS cannot  be certain that it is aware of the most-significant fraud risks facing this  program and what risks it is willing to tolerate based on the program’s  size and complexity.

Examining the suitability of existing fraud controls and  prioritizing residual fraud risks. CMS had not assessed existing  control activities or prioritized residual fraud risks. According to the  Fraud Risk Framework, managers may consider the extent to which  existing control activities—whether focused on prevention, detection,  or response—mitigate the likelihood and impact of inherent risks and  whether the remaining risks exceed managers’ tolerance. This  analysis would help CMS to prioritize residual risks and to determine  mitigation approaches. For example, CMS had not established  preventive fraud control activities in Medicare Part C. Using a fraud  risk assessment for Medicare Part C and closely examining existing  fraud control activities and residual risks, CMS could be better  positioned to address fraud risks facing this growing program and  develop preventive control activities. Furthermore, without assessing  existing fraud control activities and prioritizing residual fraud risks,  CMS cannot be assured that its current control activities are  addressing the most-significant risks. Such analysis would also help  CMS determine whether additional, preferably preventive, fraud  controls are needed to mitigate residual risks, make adjustments to  existing control activities, and potentially scale back or remove control  activities that are addressing tolerable fraud risks.

Documenting the risk-assessment results in a fraud risk profile.

CMS had not developed a fraud risk profile that documents key  findings and conclusions of the fraud risk assessment. According to  the Fraud Risk Framework, the risk profile can also help agencies  decide how to allocate resources to respond to residual fraud risks.  Given the large size and complexity of Medicare, a documented fraud  risk profile could support CMS’s resource-allocation decisions as well  as facilitate the transfer of knowledge and continuity across CMS staff  and changing administrations.

Senior CPI officials told us that the agency plans to start a fraud risk  assessment for Medicare after it completes a separate fraud risk  assessment of the federally facilitated marketplace. This fraud risk  assessment for the federally facilitated marketplace eligibility and  enrollment process is being conducted in response to a recommendation  we made in February 2016. In April 2017, CPI officials told us that this  fraud risk assessment was largely completed, although in September  2017 CPI officials told us that the assessment was undergoing agency  review. CPI officials told us that they have informed CM officials that there  will be future fraud risk assessments for Medicare; however, they could  not provide estimated timelines or plans for conducting such  assessments, such as the order or programmatic scope of the  assessments.

Once completed, CMS could use the federally facilitated marketplace  fraud risk assessment and apply any lessons learned when planning for  and designing fraud risk assessments for Medicare. According to the  Fraud Risk Framework, factors such as size, resources, maturity of the  agency or program, and experience in managing risks can influence how  the entity plans the fraud risk assessment. Additionally, effective  managers tailor the fraud risk assessment to the program when planning  for it. The large scale and complexity of Medicare as well as time and  resources involved in conducting a fraud risk assessment underscore the  importance of a well-planned and tailored approach to identifying the  assessment’s programmatic scope. Planning and tailoring may involve  decisions to conduct a fraud risk assessment for Medicare as a whole or  divided into several subassessments to reflect their various component  parts (e.g., Medicare Part C).

CMS’s existing fraud risk identification efforts as well as communication  channels with stakeholders could serve as a foundation for developing a  fraud risk assessment for Medicare. The leading practices identified in the  Fraud Risk Framework discuss the importance of identifying appropriate  tools, methods, and sources for gathering information about fraud risks  and involving relevant stakeholders in the assessment process. CMS’s  fraud risk identification efforts discussed earlier could provide key  information about fraud risks and their likelihood and impact.  Furthermore, existing relationships and communication channels across  CMS and its extensive network of stakeholders could support building a  comprehensive understanding of known and potential fraud risks for the  purposes of a fraud risk assessment. For example, the fraud  vulnerabilities identified through data analysis and information sharing  with health-insurance plans, law-enforcement organizations, and  contractors could inform a fraud risk assessment. CPI’s Command Center  missions—facilitated collaboration sessions that bring together experts  from various disciplines to improve the processes for fraud prevention in  Medicare—could bring together experts to identify potential or emerging  fraud vulnerabilities or to brainstorm approaches to mitigate residual fraud  risks.

As CMS makes plans to move forward with a fraud risk assessment for  Medicare, it will be important to consider the frequency with which the  fraud risk assessment would need to be updated. While, according to the  Fraud Risk Framework, the time intervals between updates can vary  based on the programmatic and operating environment, assessing fraud  risks on an ongoing basis is important to ensure that control activities are  continuously addressing fraud risks. The constantly evolving fraud  schemes, the size of the programs in terms of beneficiaries and  expenditures, as well as continual changes in Medicare—such as  development of innovative payment models and increasing managed- care enrollment—call for constant vigilance and regular updates to the  fraud risk assessment.

In our December 2017 report we recommended that the Administrator of  CMS conduct fraud risk assessments for Medicare and Medicaid to  include respective fraud risk profiles and plans for regularly updating the  assessments and profiles. In its March 2018 letter to GAO, HHS stated  that it is currently evaluating its options with regards to implementing this  recommendation. As of July 2018, the recommendation remains open.

CMS Needs to Develop a Risk-Based Antifraud Strategy for Medicare, Which Would Include Plans for Monitoring and Evaluation

The design and implement component of the Fraud Risk Framework calls  for federal managers to design and implement a strategy with specific  control activities to mitigate assessed fraud risks and collaborate to help  ensure effective implementation.

According to the Fraud Risk Framework, effective managers develop and  document an antifraud strategy that describes the program’s approach for  addressing the prioritized fraud risks identified during the fraud risk  assessment, also referred to as a risk-based antifraud strategy. A risk- based antifraud strategy describes existing fraud control activities as well  as any new fraud control activities a program may adopt to address  residual fraud risks. In developing a strategy and antifraud control  activities, effective managers focus on fraud prevention over detection,  develop a plan for responding to identified instances of fraud, establish  collaborative relationships with stakeholders, and create incentives to  help effectively implement the strategy. Additionally, as part of a  documented strategy, management identifies roles and responsibilities of  those involved in fraud risk management activities; describes control  activities as well as plans for monitoring and evaluation; creates timelines;  and communicates the antifraud strategy to employees and stakeholders,  among other things.

As discussed earlier, CMS had some control activities in place to identify  fraud risk in Medicare, particularly in the FFS program. However, CMS  had not developed and documented a risk-based antifraud strategy to  guide its design and implementation of new antifraud activities and to  better align and coordinate its existing activities to ensure it is targeting  and mitigating the most-significant fraud risks.

Antifraud strategy. CMS officials told us that CPI does not have a  documented risk-based antifraud strategy. Although CMS has developed  several documents that describe efforts to address fraud, the agency  had not developed a risk-based antifraud strategy for Medicare because,  as discussed earlier, it had not conducted a fraud risk assessment that  would serve as a foundation for such strategy.

In 2016, CPI identified five strategic objectives for program integrity,  which include antifraud elements and an emphasis on prevention.  However, according to CMS officials, these objectives were identified  from discussions with CMS leadership and various stakeholders and not  through a fraud risk assessment process to identify inherent fraud risks  from the universe of potential vulnerabilities, as described earlier and  called for in the leading practices. These strategic objectives were  presented at an antifraud conference in 2016, but were not announced  publicly until the release of the Annual Report to Congress on the  Medicare and Medicaid Integrity Programs for Fiscal Year 2015 in June  2017.

Stakeholder relationships and communication. CMS has established  relationships and communicated with stakeholders, but, without an  antifraud strategy, stakeholders we spoke with lacked a common  understanding of CMS’s strategic approach. Prior work on practices that  can help federal agencies collaborate effectively calls for a strategy that is  shared with stakeholders to promote trust and understanding. Once an  antifraud strategy is developed, the Fraud Risk Framework calls for  managers to collaborate to ensure effective implementation. Although  some CMS stakeholders were able to describe various CMS program- integrity priorities and activities, such as home health being a fraud risk  priority, the stakeholders could not communicate, articulate, or cite a  common CMS strategic approach to address fraud risks in its programs.

Incentives. The Fraud Risk Framework discusses creating incentives to  help ensure effective implementation of the antifraud strategy once it is  developed. Currently, some incentives within stakeholder relationships  may complicate CMS’s antifraud efforts. Among contractors, CMS  encourages information sharing through conferences and workshops;  however, competition for CMS business among contractors can be a  disincentive to information sharing. CMS officials acknowledged this  concern and said that they expect contractors to share information related  to fraud schemes, outcomes of investigations, and tips for addressing  fraud, but not proprietary information such as algorithms to risk-score  providers.

Without  developing  and  documenting  an  antifraud  strategy  based  on  a  fraud  risk  assessment,  as  called  for  in  the  design  and  implement  component of the Fraud Risk Framework, CMS cannot ensure that it has  a  coordinated  approach  to  address  the  range  of  fraud  risks  and  to  appropriately target and allocate resources for the most-significant risks.  Considering fraud risks to which Medicare is most vulnerable, in light of  the malicious intent of those who aim to exploit the programs, would help  CMS to examine its current control activities and potentially design new  ones with recognition of fraudulent behavior it aims to prevent. This focus  on fraud is distinct from a broader view of program integrity and improper  payments by considering the intentions and incentives of those who aim  to  deceive  rather  than  well-intentioned  providers  who  make  mistakes.  Also, continued growth of the program, such as growth of Medicare Part  C, calls for consideration of preventive fraud control activities across the  entire network of entities involved.

Furthermore, considering the large size and complexity of Medicare and  the extensive stakeholder network involved in managing fraud in the  program, a strategic approach to managing fraud risks within the  programs is essential to ensure that a number of existing control activities  and numerous stakeholder relationships and incentives are being aligned  to produce desired results. Once developed, an antifraud strategy that is  clearly articulated to various CMS stakeholders would help CMS to  address fraud risks in a more coordinated and deliberate fashion.  Thinking strategically about existing control activities, resources, tools,  and information systems could help CMS to leverage resources while  continuing to integrate Medicare program-integrity efforts along functional  lines. A strategic approach grounded in a comprehensive assessment of  fraud risks could also help CMS to identify future enhancements for  existing control activities, such as new preventive capabilities for its Fraud  Prevention System (FPS) or additional fraud factors in provider  enrollment and revalidation, such as provider risk-scoring, to stay in step  with evolving fraud risks.

CMS Has Established Monitoring and Evaluation Mechanisms That  Could Inform a Risk-Based Antifraud Strategy for Medicare  The evaluate and adapt component of the Fraud Risk Framework calls for  federal managers to evaluate outcomes using a risk-based approach and  adapt activities to improve fraud risk management. Furthermore,  according to federal internal control standards, managers should  establish and operate monitoring activities to monitor the internal control  system and evaluate the results, which may be compared against an  established baseline. Ongoing monitoring and periodic evaluations  provide assurances to managers that they are effectively preventing,  detecting, and responding to potential fraud.

CMS has established monitoring and evaluation mechanisms for its  program-integrity activities that it could incorporate into an antifraud  strategy.

As described in the Fraud Risk Framework, agencies can gather  information on the short-term or intermediate outcomes of some antifraud  initiatives, which may be more readily measured. For example, CMS has  developed some performance measures to provide a basis for monitoring  its progress towards meeting the program-integrity goals set in the HHS  Strategic Plan and Annual Performance Plan. Specifically, CMS  measures whether it is meeting its goal of “increasing the percentage of  Medicare FFS providers and suppliers identified as high risk that receive  an administrative action.” CMS does not set specific antifraud goals for  other parts of Medicare; other CMS performance measures relate to  measuring or reducing improper payments in the various parts of  Medicare.

CMS uses return-on-investment and savings estimates to measure the  effectiveness of its Medicare program-integrity activities and FPS. For  example, CMS uses return-on-investment to measure the effectiveness of  FPS and, in response to a recommendation we made in 2012, CMS  developed outcome-based performance targets and milestones for FPS.  CMS has also conducted individual evaluations of its program-integrity  activities, such as an interim evaluation of the prior-authorization  demonstration for power mobility devices that began in 2012 and is  currently implemented in 19 states.

Commensurate with greater maturity of control activities in Medicare FFS  compared to other parts of Medicare and Medicaid, monitoring and  evaluation activities for Medicare Parts C and D and Medicaid are more  limited. For example, CMS calculates savings for its program-integrity  activities in Medicare Parts C and D, but not a full return-on-investment.  CMS officials told us that calculating costs for specific activities is  challenging because of overlapping activities among contractors. CMS  officials said they continue to refine methods and develop new savings  estimates for additional program-integrity activities.

According to the Fraud Risk Framework, effective managers develop a  strategy and evaluate outcomes using a risk-based approach. In  developing an effective strategy and antifraud activities, managers  consider the benefits and costs of control activities. Ongoing monitoring  and periodic evaluations provide reasonable assurance to managers that  they are effectively preventing, detecting, and responding to potential  fraud. Monitoring and evaluation activities can also support managers’  decisions about allocating resources, and help them to demonstrate their  continued commitment to effectively managing fraud risks.

As CMS takes steps to develop an antifraud strategy, it could include  plans for refining and building on existing methods such as return-on- investment or savings measures, and setting appropriate targets to  evaluate the effectiveness of all of CMS’s antifraud efforts. Such a  strategy would help CMS to efficiently allocate program-integrity  resources and to ensure that the agency is effectively preventing,  detecting, and responding to potential fraud. For example, while doing so  would involve challenges, CMS’s strategy could detail plans to advance  efforts to measure a potential fraud rate through baseline and periodic  measures. Fraud-rate measurement efforts could also inform risk  assessment activities, identify currently unknown fraud risks, align  resources to priority risks, and develop effective outcome metrics for  antifraud controls. Such a strategy would also help CMS ensure that it  has effective performance measures in place to assess its antifraud  efforts beyond those related to providers in Medicare FFS, and establish  appropriate targets to measure the agency’s progress in addressing fraud  risks.

In our December 2017 report we recommended that the Administrator of  CMS should, using the results of the fraud risk assessments for Medicare,  create, document, implement, and communicate an antifraud strategy that  is aligned with and responsive to regularly assessed fraud risks. This  strategy should include an approach for monitoring and evaluation. In its  March 2018 letter to GAO, HHS stated that it is currently evaluating its  options with regards to implementing this recommendation. As of July  2018, the recommendation remains open.

Chairman Jenkins and Ranking Member Lewis, this concludes my  prepared statement. I look forward to the subcommittee’s questions.

If you or your staff have any questions concerning this testimony, please  contact Seto J. Bagdoyan, who may be reached at (202) 512-6722 or  bagdoyans@gao.gov. Contact points for our Offices of Congressional  Relations and Public Affairs may be found on the last page of this  statement. Other individuals who made key contributions to this testimony  include Tonita Gillich (Assistant Director), Irina Carnevale (Analyst-in- Charge), Colin Fallon, Scott Hiromoto, and Maria McMullen.

Improper Payments: Actions and Guidance Could Help Address Issues  and Inconsistencies in Estimation Processes. GAO-18-377. Washington,  D.C.: May 31, 2018.

Medicare: CMS Should Take Actions to Continue Prior Authorization  Efforts to Reduce Spending. GAO-18-341. Washington, D.C.: April 20,  2018.

Medicare and Medicaid: CMS Needs to Fully Align Its Antifraud Efforts  with the Fraud Risk Framework. GAO-18-88. Washington, D.C.:  December 5, 2017.

Medicare: CMS Fraud Prevention System Uses Claims Analysis to  Address Fraud. GAO-17-710. Washington, D.C.: August 30, 2017.

Medicare Advantage Program Integrity: CMS’s Efforts to Ensure Proper  Payments and Identify and Recover Improper Payments. GAO-17-761T.  Washington, D.C.: July 19, 2017.

Medicare Provider Education: Oversight of Efforts to Reduce Improper  Billing Needs Improvement. GAO-17-290. Washington, D.C.: March 10,  2017.

High-Risk Series: Progress on Many High-Risk Areas, While Substantial  Efforts Needed on Others. GAO-17-317. Washington, D.C.: February 15,  2017.

Medicare Advantage: Limited Progress Made to Validate Encounter Data  Used to Ensure Proper Payments. GAO-17-223. Washington, D.C.:  January 17, 2017.

Medicare: Initial Results of Revised Process to Screen Providers and  Suppliers, and Need for Objectives and Performance Measures.  GAO-17-42. Washington, D.C.: November 15, 2016.

Medicare: Claim Review Programs Could Be Improved with Additional  Prepayment Reviews and Better Data. GAO-16-394. Washington, D.C.:  April 13, 2016.

Medicare Advantage: Fundamental Improvements Needed in CMS’s  Effort to Recover Substantial Amounts of Improper Payments. GAO-16- 76. Washington, D.C.: April 8, 2016.

Health Care Fraud: Information on Most Common Schemes and the  Likely Effect of Smart Cards. GAO-16-216. Washington, D.C.: January  22, 2016.

A Framework for Managing Fraud Risks in Federal Programs.  GAO-15-593SP. Washington, D.C.: July 28, 2015.

Medicare Program Integrity: Increased Oversight and Guidance Could  Improve Effectiveness and Efficiency of Postpayment Claims Reviews.  GAO-14-474. Washington, D.C.: July 18, 2014.

Medicare Fraud Prevention: CMS Has Implemented a Predictive  Analytics System, but Needs to Define Measures to Determine Its  Effectiveness. GAO-13-104. Washington, D.C.: October 15, 2012.

This is a work of the U.S. government and is not subject to copyright protection in the  United States. The published product may be reproduced and distributed in its entirety  without further permission from GAO. However, because this work may contain  copyrighted images or other material, permission from the copyright holder may be  necessary if you wish to reproduce this material separately.

Medicare improper payments were estimated to be about $52 billion in fiscal year 2017. As program spending increases, the cost of fraud could increase as well. Are the Centers for Medicare & Medicaid Services doing enough to prevent, detect, and combat Medicare fraud?

Our 2017 report showed that some of CMS's fraud risk management practices aligned with leading practices, while others could be improved. We recommended improving fraud awareness training, conducting risk assessments, and creating an antifraud strategy.

As of this testimony, the recommendations are still open. We will continue to monitor the status of their implementation.


Black Lung Benefits Program: Options for Improving Trust Fund Finances

With revenue of about $450 million in fiscal year 2017, the Trust Fund paid about $184 million in benefits to more than 25,000 coal miners and eligible dependents. However, the Trust Fund also borrowed about $1.3 billion from the Treasury's general fund in fiscal year 2017 to cover its debt repayment expenditures. Adding to this financial challenge, the coal tax that supports the Trust Fund is scheduled to decrease by about 55 percent beginning in 2019. GAO was asked to review the financial positon of the Trust Fund and identify options to improve it.

This report examines (1) factors that have challenged the financial position of the Trust Fund since its inception and (2) the extent to which Trust Fund debt may change through 2050, and selected options that could improve its future financial position. GAO reviewed Trust Fund financial data from fiscal years 1979 through 2017. GAO also interviewed officials from the Departments of Labor, Treasury, Health and Human Services (HHS) and representatives of coal industry and union groups. Using assumptions, such as the about 55 percent coal tax decrease and moderately declining coal production, GAO simulated the extent to which Trust Fund debt may change through 2050. GAO also simulated how selected options, such as forgiveness of debt, could improve finances. The options simulated are not intended to be exhaustive. Further, GAO is not endorsing any particular option or combination of options.

GAO provided a draft of this report to DOL, Treasury, and HHS. The agencies provided technical comments, which were incorporated as appropriate.

Multiple factors have challenged Black Lung Disability Trust Fund (Trust Fund) finances since it was established about 40 years ago. Its expenditures have consistently exceeded its revenues, interest payments have grown, and actions taken that were expected to improve Trust Fund finances did not completely address its debt. When necessary to make expenditures, the Trust Fund borrows with interest from the Department of the Treasury's (Treasury) general fund. Because Trust Fund expenditures have consistently exceeded revenue, it has borrowed almost every year since 1979, its first complete fiscal year, and as a result debt and interest payments increased. Legislative actions were taken over the years including (1) raising the rate of the coal tax that provides Trust Fund revenues and (2) forgiving debt. For example, the Energy Improvement and Extension Act of 2008 provided an appropriation toward Trust Fund debt forgiveness; about $6.5 billion was forgiven, according to Department of Labor (DOL) data (see figure). However, coal tax revenues were less than expected due, in part, to the 2008 recession and increased competition from other energy sources, according to DOL and Treasury officials. As a result, the Trust Fund continued to borrow from Treasury's general fund from fiscal years 2010 through 2017 to cover debt repayment expenditures.

GAO's simulation suggests that Trust Fund borrowing will likely increase from fiscal years 2019 through 2050 due, in part, to the coal tax rate decrease of about 55 percent that will take effect in 2019 and declining coal production. The simulation estimates that Trust Fund borrowing may exceed $15 billion by 2050 (see figure). However, various options, such as adjusting the coal tax and forgiving interest or debt, could reduce future borrowing and improve the Trust Fund's financial position. For example, maintaining the current coal tax rates and forgiving debt of $2.4 billion could, under certain circumstances, balance the Trust Fund by 2050, whereby revenue would be sufficient to cover expenditures. However, a coal industry representative said that maintaining or increasing the coal tax would burden the coal industry, particularly at a time when coal production has been declining. Further, Treasury officials noted that the costs associated with forgiving Trust Fund interest or debt would be paid by taxpayers.

The Black Lung Disability Trust Fund (Trust Fund), established in 1978 by  the Black Lung Benefits Revenue Act of 1977, funds benefits to certain  coal miners who have been totally disabled due to pneumoconiosis, also  known as black lung disease. Their surviving dependents may also  receive compensation. That Act authorized the Trust Fund to pay benefits  in certain circumstances including in cases where no responsible mine  operator could be identified or when the liable mine operator does not  pay. The Trust Fund is financed primarily by a tax on coal produced and  sold domestically, which we refer to in this report as the coal tax.

The Trust Fund faces financial challenges and borrowed about $1.3  billion in fiscal year 2017 from the Department of the Treasury’s  (Treasury) general fund to cover its total expenditures, according to  Department of Labor (DOL) officials who administer the Trust Fund.  Beginning in calendar year 2019, the coal tax will decrease by  approximately 55 percent which, in turn, will increase borrowing,  according to DOL projections. Additionally, coal production has been  declining as the coal industry faces challenges from increased  competition from other energy sources, which may further affect future  Trust Fund revenue. With less revenue contributed by mine operators  through the coal tax, increased federal funding may be needed because  under federal law the Trust Fund borrows from Treasury’s general fund to  cover its expenditures.

Given the potential for increased federal funding of Trust Fund  expenditures as a result of the decreasing tax rate, you asked us to  review the financial positon of the Trust Fund and to identify options that  could improve its future financial position. This report examines (1) factors  that have challenged the financial position of the Trust Fund since its  inception; and (2) the extent to which the Trust Fund’s debt may change  through 2050, and selected options that could improve its future financial  position.

To address our first objective, we reviewed relevant federal laws,  regulations, policy, and guidance as well as agency documentation. We  primarily focused on changes to the coal tax rates and other legislative  actions taken that were expected to improve the financial position of the  Trust Fund, such as debt refinancing and forgiveness provisions  contained in the Energy Improvement and Extension Act of 2008 (EIEA).  We also reviewed publicly available Trust Fund financial data obtained  from the DOL Office of Workers’ Compensation Programs’ Annual  Reports to Congress and annual bulletins issued by the Treasury. We  examined information on Trust Fund revenue and expenditures from 1979  (the Trust Fund’s first complete fiscal year) through 2017, the most recent  year data were available at the time of our review. For example, we  reviewed the annual amounts of coal tax revenue collected and the  annual amounts paid by the Trust Fund in black lung benefits,  administrative costs, and debt servicing. We assessed the reliability of the  data by discussing it with relevant agency officials and reviewing it for  missing data, outliers, or obvious errors. We determined that the data  were sufficiently reliable for the purposes of our review. Additionally, we  interviewed officials from DOL’s Office of Workers’ Compensation  Programs and Mine Safety and Health Administration; the Department of  the Treasury’s Offices of Federal Program Finance and Tax Analysis; the  Department of Health and Human Services’ (HHS) National Institute for  Occupational Safety and Health and the Health Resources and Services  Administration, which funds black-lung-related grant programs; the  National Mining Association (an organization that represents the mining  industry); and the United Mine Workers of America (an organization that  represents coal miners).

To address our second objective, we simulated the extent to which Trust  Fund debt may change through 2050 and how various options may affect  future Trust Fund finances. Our simulations are based on various  assumptions and simulate Trust Fund revenues and expenditures from  fiscal years 2016 through 2050. To develop these simulations, we used  actual and projection data from (1) DOL for fiscal years 2015 through  2040; (2) Treasury’s Office of Tax Analysis for fiscal years 2011 through  2015; (3) the Department of Energy’s Energy Information Administration  (EIA) for calendar years 2015 through 2050; and (4) the Office of  Management and Budget (OMB) for fiscal year 2017. We ran each  simulation multiple times using different sets of assumptions about the  number of future black lung beneficiaries and future coal production.  Doing so provided a range of estimates about the Trust Fund’s future  borrowing needs and provided insight on the sensitivity of its overall  financial position relative to its various revenues and expenditures. In this  report, we generally present the results of a moderate set of assumptions  for each simulation. For more information on our simulation methodology  and the full range of results, see appendixes I and II. We assessed the  reliability of the data used to develop our simulations by interviewing  knowledgeable agency officials and reviewing relevant supporting  documentation describing the various inputs and assumptions used, if  applicable. We also reviewed DOL, Treasury, EIA, and OMB data for  outliers, obvious errors, or missing data. We determined that the data  were sufficiently reliable for the purposes of this report.

To identify options that may improve future Trust Fund finances, we  interviewed officials from DOL, Treasury, HHS, the National Mining  Association, and the United Mine Workers of America. We then selected  options to simulate based, in part, on these interviews and the availability  of DOL and other data. These options included adjusting the coal tax,  forgiving interest on some or all Trust Fund debt, forgiving some or all  Trust Fund debt, or various combinations of these options. The options  we simulated are not intended to be exhaustive and we are not endorsing  any particular option or combination of options.

We conducted this performance audit from February 2017 through May  2018 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.

Black lung benefits include both cash assistance and medical benefits.  Maximum cash assistance payments generally ranged from about $650  to $1,300 per month in fiscal year 2017, depending on the number of  dependents the miner has. Miners receiving cash assistance are also  eligible for medical benefits that cover the treatment of their black-lung- related conditions, which may include hospital and nursing care,  rehabilitation services, and drug and equipment charges, according to  DOL documentation. DOL estimates that the average annual cost for  medical treatment in fiscal year 2017 was approximately $6,980 per  miner.

There were about 25,700 total beneficiaries (primary and dependents)  receiving black lung benefits during fiscal year 2017 (see fig. 1). The  decrease in the number of beneficiaries over time has resulted from a  combination of declining coal mining employment and an aging  beneficiary population, according to DOL officials. Further, black lung  beneficiaries could increase in the near term due to the increased  occurrence of black lung disease and its most severe form, progressive  massive fibrosis, particularly among Appalachian coal miners, according  to HHS officials.

Black lung claims are processed by DOL’s Office of Workers’  Compensation Programs. Contested claims are adjudicated by DOL’s  Office of Administrative Law Judges, which issues decisions that can be  appealed to the Benefits Review Board. Claimants and mine operators  may further appeal these agency decisions to the federal courts. If an  award is contested, claimants can receive interim benefits, which are  generally paid from the Trust Fund according to DOL officials, while their  claims are in the appeals process. Final awards are either funded by mine  operators—who are identified as the responsible employers of  claimants—or the Trust Fund, when responsible employers cannot be  identified or do not pay. In fiscal year 2017, black lung claims had an  approval rate of about 29 percent, according to DOL data. Of the 19,430  primary black lung beneficiaries receiving benefits during fiscal year 2017,  64 percent (12,464) were paid from the Trust Fund, 25 percent (4,798)  were paid by liable mine operators, and 11 percent (2,168) were receiving  interim benefits, according to DOL officials.

Black Lung Disability Trust Fund revenue is primarily obtained from mine  operators through the coal tax. The coal tax is imposed at two rates,  depending on whether the coal is extracted from underground or surface  mines. The current tax rates are $1.10 per ton of underground-mined coal  and $0.55 per ton of surface-mined coal, up to 4.4 percent of the sales  price. Therefore, if a ton of underground-mined coal is sold for less than  $25, than the tax paid would be less than $1.10. For instance, if a ton of  underground-mined coal sold for $20, than it would be taxed at 4.4  percent of the sales price, or $0.88. To a lesser extent, the Trust Fund  also receives other miscellaneous revenue from interest payments, and  various fines and penalties paid by mine operators, among other sources,  according to DOL documentation. Coal tax revenue is collected from mine  operators by Treasury’s Internal Revenue Service and then transferred to  the Trust Fund where it is then used by DOL officials to pay black lung  benefits and the costs of administering the program.

Trust Fund expenditures include, among other things, black lung benefit  payments, certain administrative costs incurred by DOL and Treasury to  administer the black lung benefits program, and debt repayments. When  necessary for the Trust Fund to make relevant expenditures under federal  law, the Trust Fund borrows from the Treasury’s general fund. When this  occurs, the federal government is essentially borrowing from itself—and  hence from the general taxpayer—to fund its benefit payments and other  expenditures.

Multiple Factors Have Challenged Trust Fund Finances Resulting in Growing Debt

Multiple factors have challenged Trust Fund finances since it was  established about 40 years ago. Its expenditures have consistently  exceeded its revenue, interest payments have grown, and legislative  actions taken that were expected to improve Trust Fund finances did not  completely address its debt. Combined black lung benefit payments and  program administrative costs exceeded Trust Fund revenue every year  for the program’s first decade (fiscal years 1979 through 1989), resulting  in the accrual of debt. During the Trust Fund’s first three fiscal years in  particular, revenue covered less than 40 percent of the Trust Fund’s  combined benefit payments and administrative costs. For instance, in  fiscal year 1980, the Trust Fund received about $251 million in revenue  and paid about $726 million in black lung benefits and administrative  costs.

Beginning in 1982, revenue increased as a result of the Black Lung  Benefits Revenue Act of 1981 that doubled the coal tax rates from $0.50  to $1 per ton of underground-mined coal and from $0.25 to $0.50 per ton  of surface-mined coal, up to 4 percent of the sales price. Even with the  tax rate increase, combined benefit payments and administrative costs  continued to exceed revenue throughout the 1980s (see fig. 2). As a  result, the Trust Fund borrowed from Treasury’s general fund to cover the  annual differences between its expenditures and revenues, and by fiscal  year 1989 the Trust Fund’s outstanding debt to Treasury’s general fund  exceeded $3 billion.

Beginning in fiscal year 1990, Trust Fund revenue generally began to  exceed combined benefit payments and administrative costs, and, in fact,  total Trust Fund cumulative revenue collected from fiscal years 1979 through 2017 exceeded total cumulative benefit payments and  administrative costs incurred during these years. However, interest owed  from earlier years of borrowing led to more borrowing and debt. From  fiscal years 1979 through 1989, the Trust Fund borrowed—primarily  through 30-year term loans according to Treasury officials—from  Treasury’s general fund at interest rates that varied from about 6.5  percent to about 13.9 percent. In fiscal year 1985, for instance, the Trust  Fund paid about $275 million in interest, which was equal to about half of  the total revenue collected that year. Since fiscal year 1990, revenue  has generally exceeded combined benefit payments and administrative  costs, although interest payments on the Trust Fund’s outstanding debt  kept the fund in a position whereby its total expenditures continued to  exceed its total revenues. As a result, the principal amount of the Trust  Fund’s total outstanding debt to Treasury’s general fund increased and  exceeded $10 billion by fiscal year 2008.

Legislation has been enacted over the years that was expected to  improve Trust Fund finances:  In 1981, the Black Lung Benefits Revenue Act of 1981 doubled the  coal tax rates from $0.50 cents to $1 per ton of underground-mined  coal, and from $0.25 cents to $0.50 cents per ton of surface-mined  coal, up to 4 percent of the sales price (as mentioned previously).

In 1986, the Consolidated Omnibus Budget Reconciliation Act of 1985  established a 5 year moratorium on interest accrual with respect to  repayable advances to the Trust Fund (which we refer to as annual  borrowing from Treasury’s general fund), and increased the coal tax  rates to $1.10 per ton of underground-mined coal, and $0.55 per ton  of surface-mined coal (up to 4.4 percent of the sales price), where  they have remained since.

In 2008, the EIEA included provisions that were expected to eliminate  the Trust Fund’s debt. Specifically, EIEA (1) generally extended the  coal tax rates at their current rates until December 31, 2018 (after  which they are scheduled to decrease to their original levels of $0.50  per ton of underground-mined coal, and $0.25 per ton of surface- mined coal, up to 2 percent of the sales price); (2) provided for a one- time federal appropriation toward Trust Fund debt forgiveness (about  $6.5 billion, according to DOL data); and (3) provided for the  refinancing of the Trust Fund’s debt that was not forgiven as a result  of EIEA (which we refer to as the Trust Fund’s legacy debt).  Specifically, the Trust Fund’s legacy debt was refinanced with more  favorable interest rates, according to DOL data. Interest rates on the  refinanced legacy debt range from about 1.4 percent to about 4.5  percent.

The forgiveness and refinancing of Trust Fund debt along with extending  the current coal tax rates through 2018 were expected to result in annual  tax revenue that could be used to pay down interest and principal on the  Trust Fund’s legacy debt, according to DOL and Treasury officials. These  officials said that models showed that debt would be eliminated by fiscal  year 2040; however, they noted that coal tax revenue has been less than  originally projected due, in part, to the 2008 recession and increased  market competition from other energy sources. As a result, the Trust  Fund’s total expenditures continued to exceed revenue and the Trust  Fund borrowed from Treasury’s general fund each year from fiscal years  2010 through 2017 to cover debt repayments expenditures. In fiscal year  2017, the Trust Fund’s total principal amount of outstanding debt, which  includes its legacy debt and the amount borrowed from Treasury’s  general fund that year, was about $4.3 billion (see fig. 3).

Trust Fund Borrowing Will Likely Continue to Increase through 2050, and Multiple Options Could Reduce Future Debt

Trust Fund Borrowing Will Likely Continue to Increase through 2050

Trust Fund borrowing will likely continue to increase from fiscal years  2019 through 2050 due, in part, to the scheduled coal tax rate decrease  of about 55 percent that will take effect in 2019 and declining coal  production, according to our moderate simulation. We simulated the  effects of the scheduled 2019 tax rate decrease on Trust Fund finances  through 2050, and in this report, we generally present the results of a  moderate case set of assumptions (see table 1). These simulations are  not predictions of what will happen, but rather models of what could  happen given certain assumptions. For more information on our  simulation methodology see appendix I. In addition to the moderate case  assumptions, we also simulated how Trust Fund debt could change  through 2050 given various other assumptions, and the full range of  results for all of our simulations are presented in appendix II.

Our moderate case simulation suggests that Trust Fund revenue may  decrease, from about $485 million in fiscal year 2018 to about $298  million in fiscal year 2019, due, in part, to the scheduled approximate 55  percent decrease in the coal tax. Our simulation, which incorporates EIA  data on future expected coal production, also shows that annual Trust  Fund revenue will likely continue to decrease beyond fiscal year 2019  due, in part, to declining coal production. Domestic coal production has  declined from about 1.2 billion tons in 2008 to about 728 million tons in  2016, according to EIA. Based on these projections, our moderate  simulation shows that Trust Fund annual revenue may continue to  decrease from about $298 million in fiscal year 2019 to about $197 million  in fiscal year 2050 (see fig. 4).

With the scheduled 2019 tax rate decrease, our moderate case simulation  suggests that expected revenue will likely be insufficient to cover  combined black lung benefit payments and administrative costs, as well  as debt repayment expenditures. Specifically, our moderate case  simulation suggests that revenue may not be sufficient to cover  beneficiary payments and administrative costs from fiscal years 2020  through 2050 (see fig. 5). For instance, in fiscal year 2029, simulated  benefit payments and administrative costs will likely exceed simulated  revenue by about $99 million. These annual deficits will likely decrease  over time to about $4 million by fiscal year 2050 due, in part, to the  assumed continued net decline in total black lung beneficiaries. Our  simulation also therefore suggests that Trust Fund revenue may not be  enough to also cover the debt repayment expenditures it must continue to  make through fiscal year 2040, per the payment schedule established  following the 2008 EIEA.

Our moderate simulation suggests that the amount borrowed by the Trust  Fund will likely increase from about $1.6 billion in fiscal year 2019 to  about $15.4 billion in fiscal year 2050 (see fig. 6). Although the Trust  Fund’s legacy debt decreases through fiscal year 2040, total Trust Fund  expenditures—including combined benefit payments and administrative  costs as well as debt repayments—will likely continue to exceed revenue  which will require continued annual borrowing from Treasury’s general  fund. However, the amount borrowed by the Trust Fund could vary  depending, in part, on future coal production and the number of new  beneficiaries and could range between about $6 billion and about $27  billion in 2050, according to our simulations (see appendix II).

Adjusting Coal Tax Rates, Forgiving Interest, and Forgiving Debt Are Options That Could Improve the Trust Fund’s Future Financial Position

We simulated three options that can affect Trust Fund finances through  fiscal year 2050. Specifically, we simulated the effects of (1) adjusting the  coal tax, (2) forgiving interest, and (3) forgiving debt. In each of the  simulations, we compared the results of the option to a baseline in which  the coal tax rates will decrease by about 55 percent, which we refer to as  the scheduled 2019 tax rate decrease. We compare interest and debt  forgiveness options to a baseline which assumes the scheduled 2019 tax  rate decrease has taken effect, and that there is no interest or debt  forgiveness. The simulated options are not intended to be exhaustive and  we are not endorsing any particular option or combination of options.

Using the moderate case, we simulated four options: (1) implementing the  2019 coal tax rate reduction to $0.50 per ton of underground-mined coal  and $0.25 per ton of surface-mined coal; (2) maintaining the current coal  tax rates of $1.10 per ton for underground-mined coal and $0.55 per ton  of surface-mined coal; (3) reducing the tax rates by 25 percent (from  $1.10 and $0.55); and (4) increasing these tax rates by 25 percent (see  fig. 7). Increasing the tax rates by 25 percent was the only option that  eliminated simulated Trust Fund debt by fiscal year 2050, according to  our moderate case simulation.

We simulated three interest forgiveness options including forgiving  interest on (1) legacy debt, (2) annual borrowing, and (3) all debt. Our  moderate case simulation suggests that forgiving interest will not  eliminate simulated debt by fiscal year 2050 (see fig. 8).

We simulated two debt forgiveness options by forgiving principal and  interest on (1) legacy debt and (2) all debt. Our moderate case simulation  suggests that both debt forgiveness options would reduce simulated Trust  Fund borrowing by fiscal year 2050, but these options would not eliminate  debt altogether as simulated revenue will likely not be enough to cover  simulated expenditures (see fig. 9). In these cases, the Trust Fund will  need to continue borrowing from Treasury’s general fund to cover annual  deficits, and thus accumulate debt.

While adjusting coal tax rates and forgiving interest or debt could reduce  the Trust Fund’s simulated borrowing by 2050, implementing them could  affect the coal industry or general taxpayers, according to stakeholders  we interviewed. For instance, a coal industry representative noted that  maintaining the coal tax at its current rate would continue to burden the  coal industry and increasing the tax would exacerbate the burden at a  time when coal production has been declining. Treasury officials noted  that the costs associated with forgiving Trust Fund interest or debt would  be borne by the general taxpayer since Treasury borrows from taxpayers  to lend to the Trust Fund as needed. These officials also said that  making a one-time federal appropriation to forgive interest or debt would  be the most transparent way to satisfy the Trust Fund’s outstanding debt  to Treasury’s general fund.

In addition to the simulations, other options could affect the financial  position of the Trust Fund including reducing black lung benefits,  eliminating or adjusting the coal tax cap, or creating a variable coal tax.  Our moderate case simulation suggests that completely eliminating black  lung benefits as of fiscal year 2019 could reduce the Trust Fund’s  borrowing from Treasury’s general fund in fiscal year 2050 from about  $15.4 billion to about $6.4 billion. However, doing so would generally  mean that coal tax revenue would be collected solely to fund the  repayment of Trust Fund debt. Another option could be to eliminate or  adjust the coal tax cap, which currently prevents mine operators from  paying a coal tax of more than 4.4 percent of the price per ton of coal  sold. If the coal tax cap were eliminated, for instance, mine operators  would pay $1.10 per ton of underground-mined coal and $0. 55 per ton of  surface-mined coal regardless of price sold, which could increase  revenue. As an additional option, changing the structure of the coal tax  to flexible rates that change based on an annual actuarial assessment of  the Trust Fund could help to ensure that coal mine operators pay the  necessary amount of tax to cover Trust Fund expenditures, without  resulting in a Trust Fund balance or deficit.

Multiple Options Could Reduce Future Trust Fund Debt and Would Distribute the Financial Burden Differently Among General Taxpayers and Industry

Multiple options could reduce the Trust Fund’s future debt and distribute  the financial burden among the coal industry and general taxpayers. We  simulated whether various coal tax and debt forgiveness options could  balance the Trust Fund by fiscal year 2050, whereby its simulated  revenue would be sufficient to cover its simulated expenditures. These  options were selected, in part, based on interviews with Trust Fund  stakeholders and the availability of DOL and other data. We approached  these simulations from two perspectives. First, we simulated how much  Trust Fund debt would need to be forgiven based on various coal tax  rates. Second, we simulated the average tax collected per ton needed to  balance the Trust Fund by 2050, based on certain debt forgiveness  options. The simulated options are not intended to be exhaustive and we  are not endorsing any particular combination of options.

Our first set of options using the moderate case simulations are based on  the current coal tax rates of $1.10 per ton of underground-mined coal and  $0.55 per ton of surface-mined coal, and show the amount of debt  forgiveness in fiscal year 2019 needed to balance the Trust Fund by fiscal  year 2050 based on certain tax rates (see fig. 10). Specifically, our  moderate case simulations show the following:  Increasing current coal tax rates by 25 percent could balance the  Trust Fund by 2050 and would likely require no debt forgiveness. For  this option, the simulated coal tax revenue would likely be sufficient to  cover simulated Trust Fund expenditures, including combined benefit  payments and administrative costs, as well as debt repayments.  However, this option would place the burden solely on the coal  industry that would be paying higher taxes at a time when coal  production has been declining.

Maintaining current coal tax rates could balance the Trust Fund by  2050 if coupled with about $2.4 billion of debt forgiveness. This option  would distribute the burden among the coal industry and general  taxpayers.

Decreasing current coal tax rates by 25 percent could balance the  Trust Fund by 2050 if coupled with about $4.8 billion in debt  forgiveness. This option would burden the coal industry less than  maintaining the current tax rates, but would increase the burden on  general taxpayers.

Decreasing current tax rates by 55 percent, which we refer to as the  scheduled 2019 tax rate decrease, would balance the Trust Fund by  2050 if coupled with about $7.8 billion in debt forgiveness. This figure  comprises the Trust Fund’s total simulated outstanding debt in fiscal  year 2019 ($6.6 billion), and an additional about $1.2 billion that would  be required because the Trust Fund will accrue additional debt from  fiscal years 2020 through 2050, according to our moderate case  simulations. The coal industry would bear some of the financial  burden of this option, while also placing a financial burden on general  taxpayers.

Our second set of options using moderate case simulations show the  change in average coal tax revenue collected per ton to balance the Trust  Fund by fiscal year 2050 based on certain debt forgiveness options (see  fig. 11). Specifically, our moderate simulations show the following:

Forgiving the Trust Fund’s legacy debt would allow for an average tax  collected of about $0.59 per ton to balance the Trust Fund by 2050.  Based on certain assumptions, this could be accomplished with a tax  of $0.88 per ton on underground-mined coal and $0.44 per ton on  surface-mined coal.

Forgiving all Trust Fund debt would allow for an average tax collected  per ton of coal sold of $0.47 per ton to balance the Trust Fund by  2050. Based on certain assumptions, this could be accomplished with  a tax of $0.70 per ton on underground-mined coal and a tax of $0.35  per ton of surface-mined coal.

We provided a draft of this report to the Departments of Labor (DOL),  Treasury, and Health and Human Services (HHS) for review and  comment. DOL, Treasury, and HHS provided technical comments, which  we incorporated as appropriate.

As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time we will send copies of this report to the  appropriate congressional committees, the Secretaries of Labor,  Treasury, and Health and Human Services, and other interested parties.  In addition, the report will be available at no charge on GAO’s web site at  http://www.gao.gov.

If you or your staff should have any questions about this report, please  contact me at (202) 512-7215 or brownbarnesc@gao.gov. Contact points  for our Offices of Congressional Relations and Public Affairs may be  found on the last page of this report. GAO staff who made key  contributions to this report are listed in appendix III.

Appendix I: Black Lung Disability Trust Fund Simulation Methodology

We examined the extent to which (1) Black Lung Disability Trust Fund  (Trust Fund) debt may change through 2050 and (2) selected options to  improve its future financial position. We interviewed officials from the  Departments of Labor (DOL), Treasury, and Health and Human Services  (HHS), as well as representatives from the National Mining Association  and the United Mine Workers of America. We then selected options to  simulate based, in part, on these interviews and the availability of DOL  and other data. These options included adjusting the coal tax, forgiving  interest on some or all Trust Fund debt, forgiving some or all Trust Fund  debt, or various combinations of these options. The options we simulated  are not intended to be exhaustive and we are not endorsing any particular  option or combination of options. Our simulations are based on various  assumptions and simulate Trust Fund revenues and expenditures from  fiscal years 2016 through 2050. To develop these simulations, we used  actual and projection data from (1) DOL for fiscal years 2015 through  2040; (2) Treasury’s Office of Tax Analysis for fiscal years 2011 through  2015; (3) the Department of Energy’s Energy Information Administration  (EIA) for calendar years 2015 through 2050; and (4) the Office of  Management and Budget for fiscal year 2017.

To simulate future Trust Fund benefit expenditures, we simulated the  number of beneficiaries each fiscal year, and the annual average amount  of benefits received (cash assistance and medical benefits). To simulate  the numbers of beneficiaries, we used DOL data on the (1) age  distributions of miner and widow beneficiaries for fiscal year 2015; (2)  mortality rates by age for miner and widow beneficiaries as of fiscal year  2015; and (3) numbers of beneficiaries—including married miners, single  miners, widows, and miners receiving medical benefits only—in fiscal  year 2015. We assumed—as DOL does in its Black Lung Budget and  Liability Model—that all miners are men, all widows are women, and all  spouses are 3 years younger than the miner. We also assumed that the  age distribution of single miners is the same as for married miners, and  that the age distribution of new miner and widow beneficiaries is the same  as for miner and widow beneficiaries during fiscal year 2015. We used  DOL’s mortality rates to simulate the number of beneficiaries of each age  and type in each year, and used those numbers to then simulate the total  number of beneficiaries of each type each year (see table 2).

We also assumed that there will be no new medical-benefit-only recipients.

Formula  The number of married miner beneficiaries age a in fiscal year y is equal to the number of new  married miner beneficiaries age a in fiscal year y plus the number of married miner  beneficiaries age a-1 in fiscal year y-1 who survived and whose spouse survived. The total  number of married miner beneficiaries in fiscal year y is then the sum of the number of married  miner beneficiaries of all ages in fiscal year y. Finally, we averaged the number of married  miner beneficiaries by averaging the prior fiscal year’s total and the current fiscal year’s total.

The number of single miner beneficiaries age a in fiscal year y is equal to the number of new  single miner beneficiaries age a in fiscal year y plus the number of single miner beneficiaries  age a-1 in fiscal year y-1 who survived plus the number of married miner beneficiaries age a-1  in fiscal year y-1 who survived but whose spouse did not survive. The total number of single  miner beneficiaries in fiscal year y is then the sum of the number of single miner beneficiaries  of all ages in fiscal year y. Finally, we averaged the number of single miner beneficiaries by  averaging the prior fiscal year’s total and the current fiscal year’s total.

The number of widow beneficiaries age a in fiscal year y is equal to the number of new  beneficiaries who are widows age a in fiscal year y plus the number of widow beneficiaries age  a-1 in fiscal year y-1 who survived plus the number of married miner beneficiaries age a+2 in  fiscal year y-1 who did not survive but whose spouse did survive. The total number of widow  beneficiaries in fiscal year y is then the sum of the number of widow beneficiaries of all ages in  fiscal year y. Finally, we averaged the number of widow beneficiaries by averaging the prior  fiscal year’s total and the current fiscal year’s total.

The number of MBO beneficiaries of age a in fiscal year y is equal to the number of MBO  beneficiaries of age a-1 in fiscal year y-1 who survived. The total number of MBO beneficiaries  only in fiscal year y is then the sum of the number of MBO beneficiaries of all ages in fiscal  year y. Finally, we averaged the number of MBO beneficiaries by averaging the prior fiscal  year’s total and the current fiscal year’s total.

To simulate future coal tax revenue, we used Treasury and EIA data to  calculate (1) the amounts of underground and surface-mined coal taxed  at fixed dollar amounts of $1.10 and $0.55 per ton, respectively, in 2015;  (2) the amounts of underground and surface-mined coal taxed at variable  dollar amounts per ton equal to 4.4 percent of the price in 2015; and (3)  average prices of underground and surface-mined coal taxed at 4.4  percent of the price in 2015. We then used EIA data on projected  amounts of total coal production, underground-mined coal production,  lignite coal production, and coal exports, as well as projected average  coal prices, for the period from 2015 through 2050 to simulate future coal  tax revenues (see table 3).

We simulated other Trust Fund expenditures and revenues, including  administrative costs and debt repayments (see table 4). For our  simulations, total Trust Fund expenditures are the sum of black lung  benefits (cash assistance and medical benefits), total administrative  costs, repayment of interest and principal on outstanding debt to  Treasury’s general fund, and other expenditures. Total Trust Fund  revenues are the sum of coal tax revenue and other miscellaneous  revenue, and exclude annual borrowing from Treasury’s general fund.  Annual borrowing from Treasury’s general fund is the difference between  total Trust Fund expenditures and revenues and is assumed to be repaid  with interest the following year. If total revenues are greater than total  expenditures, then the Trust Fund has a balance and would not have to  borrow that year. In this case, we assumed that the Trust Fund will earn  interest on that balance at the same rate on which interest would accrue  on annual borrowing.

We simulated how the scheduled 2019 tax rate decrease and various  options including adjusting the coal tax, forgiving debt interest, and  forgiving debt principal and interest may affect Trust Fund finances  through fiscal year 2050 (see table 5). The options listed are not intended  to be exhaustive and we are not endorsing any particular option or  combination of options.

We simulated option combinations for coal tax rates, interest forgiveness,  and debt forgiveness to demonstrate how potential financial adjustments  could affect future Trust Fund borrowing from Treasury’s general fund  through fiscal year 2050. For options that involve adjusting coal tax rates,  we estimated the amount of debt that would need to be forgiven in fiscal  year 2019 for the Trust Fund’s revenues to be sufficient to cover its  expenditures through fiscal year 2050, assuming the Trust Fund does not  borrow from Treasury’s general fund after fiscal year 2018. To do so, we  first calculated the real discounted present value of Trust Fund  expenditures for fiscal years 2019 through 2050, including benefit  payments, administrative costs, legacy debt repayments, and repayment  of annual borrowing from Treasury’s general fund. Second, we calculated  the real discounted present value of Trust Fund revenue for the same  period, including coal tax revenue and other miscellaneous revenue.  Third, we calculated debt forgiveness as the difference between the real  discounted present value of Trust Fund expenditures from the first  calculation and the real discounted present value of Trust Fund revenues  from the second calculation. When the amount of debt forgiveness is  greater than the amount of debt outstanding, the Trust Fund would need  an additional cash inflow in addition to forgiveness of all outstanding debt.  Amounts of debt forgiveness less than zero suggest that no debt  forgiveness is required.

For options involving forgiving debt (interest or principal), we estimated  the average tax per ton of coal that, if implemented in fiscal year 2019,  would provide the Trust Fund sufficient revenue to cover its expenditures  through fiscal year 2050, assuming the Trust Fund does not receive any  advances from Treasury’s general fund after fiscal year 2018. To do so,  we first calculated the real discounted present value of Trust Fund  expenditures for the period from fiscal year 2019 through fiscal year 2050,  again including benefit payments, administrative costs, legacy debt  repayments, and repayment of annual borrowing from Treasury’s general  fund, minus the real discounted present value of miscellaneous revenues  for the same period. Second, we calculated the real discounted present  value of coal production for the same period. Third, we calculated the  average tax per ton of coal as the first amount divided by the second  amount.

To assess the sensitivity of each option, we ran each simulation 36 times  using four different sets of assumptions about the numbers of future  beneficiaries and nine different sets of assumptions about future coal production and prices (see table 6). Doing so provided a range of  estimates about the Trust Fund’s future borrowing needs and provided  insight on the sensitivity of its overall financial position relative to its  various expenditures and revenues. The analysis also provided a range  of estimates of the amount of debt forgiveness needed to bring the Trust  Fund into balance by fiscal year 2050, assuming various coal tax rates,  and the average tax collection per ton needed to do the same, and  assuming various amounts of debt forgiveness.

From the range of estimates that resulted from our sensitivity analysis, we  selected cases with moderate expectations related to future Trust Fund  expenditures and revenue. Specifically, for future expenditures, we  assumed an average growth rate of new black lung beneficiaries for fiscal  years 2003 through 2015 as a moderate case that reflects historical  experience. For future revenue, we used a moderate coal production  outlook based on EIA’s reference case, which reflects moderate  expectations about future coal production based on various assumptions  about economic growth, oil prices, technological innovation, and energy  policy.

Appendix II: Results of GAO’s Black Lung Disability Trust Fund Simulations

We summarized the results of our simulations by showing the extent to  which the Black Lung Disability Trust Fund’s (Trust Fund) balance—the  sum of tax revenue and miscellaneous revenue less expenditures—may  change in fiscal year 2050 for each option simulated. For example, with  the scheduled 2019 tax rate decrease, our moderate case simulations  suggest that the Trust Fund would likely have a deficit in fiscal year 2050  of about $15.4 billion.

Multiple options could reduce the Trust Fund’s future debt and distribute  the financial burden among the coal industry and general taxpayers. We  simulated how various coal tax and debt forgiveness options could  balance the Trust Fund by fiscal year 2050, whereby its simulated  revenue would be sufficient to cover its simulated expenditures. We  approached these simulations from two perspectives. First, we simulated  how much Trust Fund debt would need to be forgiven based on various  coal tax rates. Second, we simulated the average tax collected per ton  needed to balance the Trust Fund by 2050, based on certain debt  forgiveness options.

For our first set of simulations, we calculated the amount of debt  outstanding in fiscal year 2019 and the amount that would likely need to  be forgiven in fiscal year 2019 for the Trust Fund to have sufficient  revenues to cover its expenditures by fiscal year 2050, assuming that it  does not borrow from Treasury’s general fund after fiscal year 2018. For  example, before any options are implemented, our moderate case  simulations suggest that the Trust Fund’s outstanding debt in fiscal year  2019—including both legacy debt and annual borrowing from Treasury’s  general fund—would likely be about $6.6 billion (after discounting and  adjusting for inflation). Therefore, with implementation of the coal tax rate  decrease of about 55 percent as scheduled in calendar year 2019, about  117.7 percent of that debt would need to be forgiven to balance the Trust  Fund. In other words, balancing the Trust Fund would require forgiveness  of $6.6 billion and an additional cash inflow of about $1.2 billion because  the Trust Fund will accrue additional debt from fiscal years 2020 through  2050, according to our moderate case simulations (see table 8).

For our second set of simulations, we estimated the average tax per ton  of coal that, if implemented in fiscal year 2019, would likely provide the  Trust Fund sufficient revenues to cover its expenditures in fiscal year  2050, assuming that it does not borrow from Treasury’s general fund after  fiscal year 2018. For example, if all principal and interest on Trust Fund  legacy debt is forgiven, as of 2019, the estimated average tax that  balances the Trust Fund is about $0.59 per ton (see table 9). Based on  certain assumptions, this could be accomplished with a tax of $0.88 per  ton on underground-mined coal and $0.44 per ton on surface-mined  coal.

Appendix III: GAO Contact and Staff Acknowledgments

In addition to the contact named above, Blake Ainsworth (Assistant  Director), Justin Dunleavy (analyst-in-charge), Angeline Bickner,  Courtney LaFountain, and Rosemary Torres Lerma made key  contributions to this report. Also contributing to this report were James  Bennett, Melinda Bowman, Lilia Chaidez, Caitlin Cusati, Holly Dye, Alex  Galuten, Carol Henn, John Lack, Emei Li, Almeta Spencer, Kate van  Gelder, and Shana Wallace.