441 G St. N.W. Washington, DC 20548 To the Commissioner of Internal Revenue In our audits of the fiscal years 2019 and 2018 financial statements of the Internal Revenue Service (IRS), we found IRS’s financial statements as of and for the fiscal years ended September 30, 2019, and 2018, are presented fairly, in all material respects, in accordance with U.S. generally accepted accounting principles; although internal controls could be improved, IRS maintained, in all material respects, effective internal control over financial reporting as of September 30, 2019; and no reportable noncompliance for fiscal year 2019 with provisions of applicable laws, regulations, contracts, and grant agreements we tested. The following sections discuss in more detail (1) our report on the financial statements and on internal control over financial reporting, which includes required supplementary information (RSI) and other information included with the financial statements; (2) our report on compliance with laws, regulations, contracts, and grant agreements; and (3) agency comments. Report on the Financial Statements and on Internal Control over Financial Reporting In accordance with our authority conferred by the Chief Financial Officers (CFO) Act of 1990, as amended by the Government Management Reform Act of 1994, we have audited IRS’s financial statements. IRS’s financial statements comprise the balance sheets as of September 30, 2019, and 2018; the related statements of net cost, changes in net position, budgetary resources, and custodial activity for the fiscal years then ended; and the related notes to the financial statements. We also have audited IRS’s internal control over financial reporting as of September 30, 2019, based on criteria established under 31 U.S.C. § 3512(c), (d), commonly known as the Federal Managers’ Financial Integrity Act (FMFIA). We conducted our audits in accordance with U.S. generally accepted government auditing standards. We believe that the audit evidence we obtained is sufficient and appropriate to provide a basis for our audit opinions. Management’s Responsibility IRS management is responsible for (1) the preparation and fair presentation of these financial statements in accordance with U.S. generally accepted accounting principles; (2) preparing, measuring, and presenting the RSI in accordance with U.S. generally accepted accounting principles; (3) preparing and presenting other information included in documents containing the audited financial statements and auditor’s report, and ensuring the consistency of that information with the audited financial statements and the RSI; (4) maintaining effective internal control over financial reporting, including the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; (5) evaluating the effectiveness of internal control over financial reporting based on the criteria established under FMFIA; and (6) its assessment about the effectiveness of internal control over financial reporting as of September 30, 2019, included in the accompanying Management’s Report on Internal Control over Financial Reporting in appendix I. Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements and an opinion on IRS’s internal control over financial reporting based on our audits. U.S. generally accepted government auditing standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free from material misstatement, and whether effective internal control over financial reporting was maintained in all material respects. We are also responsible for applying certain limited procedures to RSI and other information included with the financial statements. An audit of financial statements involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the auditor’s assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances. An audit of financial statements also involves evaluating the appropriateness of the accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. An audit of internal control over financial reporting involves performing procedures to obtain evidence about whether a material weakness exists. The procedures selected depend on the auditor’s judgment, including the assessment of the risk that a material weakness exists. An audit of internal control over financial reporting also includes obtaining an understanding of internal control over financial reporting, and evaluating and testing the design and operating effectiveness of internal control over financial reporting based on the assessed risk. Our audit of internal control also considered IRS’s process for evaluating and reporting on internal control over financial reporting based on criteria established under FMFIA. Our audits also included performing such other procedures as we considered necessary in the circumstances. We did not evaluate all internal controls relevant to operating objectives as broadly established under FMFIA, such as those controls relevant to preparing performance information and ensuring efficient operations. We limited our internal control testing to testing controls over financial reporting. Our internal control testing was for the purpose of expressing an opinion on whether effective internal control over financial reporting was maintained, in all material respects. Consequently, our audit may not identify all deficiencies in internal control over financial reporting that are less severe than a material weakness. Definition and Inherent Limitations of Internal Control over Financial Reporting An entity’s internal control over financial reporting is a process effected by those charged with governance, management, and other personnel, the objectives of which are to provide reasonable assurance that (1) transactions are properly recorded, processed, and summarized to permit the preparation of financial statements in accordance with U.S. generally accepted accounting principles, and assets are safeguarded against loss from unauthorized acquisition, use, or disposition, and (2) transactions are executed in accordance with provisions of applicable laws, including those governing the use of budget authority, regulations, contracts, and grant agreements, noncompliance with which could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent, or detect and correct, misstatements due to fraud or error. We also caution that projecting any evaluation of effectiveness to future periods is subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Opinion on Financial Statements In our opinion, IRS’s financial statements present fairly, in all material respects, IRS’s financial position as of September 30, 2019, and 2018, and its net cost of operations, changes in net position, budgetary resources, and custodial activity for the fiscal years then ended in accordance with U.S. generally accepted accounting principles. In accordance with federal accounting standards, IRS’s financial statements do not include an estimate of the dollar amount of taxes that are owed to the federal government but that taxpayers have not reported or that IRS has not identified through its enforcement programs, often referred to as the tax gap, nor do they include information on tax expenditures. Further detail on the tax gap and tax expenditures, as well as the associated dollar amounts, is provided in the other information included with the financial statements. Opinion on Internal Control over Financial Reporting In our opinion, although internal controls could be improved, IRS maintained, in all material respects, effective internal control over financial reporting as of September 30, 2019, based on criteria established under FMFIA. Our fiscal year 2019 audit identified continuing deficiencies concerning IRS’s internal control over unpaid assessments and continuing and new deficiencies concerning IRS’s internal control over financial reporting systems. While not considered material weaknesses, these deficiencies are collectively important enough to merit attention by those charged with governance of IRS. Therefore, we considered these issues affecting IRS’s internal controls over unpaid assessments and financial reporting systems to be significant deficiencies in internal control as of September 30, 2019. These two significant deficiencies are discussed in more detail below. We considered these significant deficiencies in determining the nature, timing, and extent of our audit procedures on IRS’s fiscal year 2019 financial statements. Although the significant deficiencies in internal control did not affect our opinion on IRS’s fiscal year 2019 financial statements, misstatements may occur in unaudited financial information reported internally and externally by IRS because of these significant deficiencies. In addition, because of the significant deficiencies in internal controls over unpaid assessments and financial reporting systems that existed during fiscal year 2019, IRS’s financial management systems did not comply substantially with federal financial management systems requirements as required by the Federal Financial Management Improvement Act of 1996. We will be reporting additional details concerning any new issues relating to these significant deficiencies separately to IRS management, along with recommendations for corrective actions. We also identified other deficiencies in IRS’s internal control over financial reporting that we do not consider to be material weaknesses or significant deficiencies. Nonetheless, these deficiencies warrant IRS management’s attention. We have communicated these matters to IRS management and, where appropriate, will report on them separately along with related recommendations for corrective actions. Further, as we have reported in past audits, IRS continues to face significant ongoing financial management challenges relating to safeguarding taxpayer receipts and associated information, and preventing and detecting fraudulent refunds based on identify theft. Although these challenges do not rise to the level of significant deficiencies in internal control, we believe they are sensitive matters requiring IRS management’s attention. We have made several recommendations to IRS to enhance its internal controls to mitigate these challenges. It is important that IRS continue its efforts to minimize the risks these challenges pose to taxpayers and any associated losses to the federal government. Significant Deficiency in Internal Control over Unpaid Assessments Limitations in the financial systems IRS uses to account for federal taxes receivable and other unpaid assessment balances, as well as other control deficiencies that led to errors in taxpayer accounts, continued to exist during fiscal year 2019. As a result of these deficiencies, IRS’s systems were unable to provide the timely, reliable, and complete transaction-level financial information necessary to enable IRS to appropriately classify and report unpaid assessment balances. As in prior years, IRS used a complex and labor-intensive statistical estimation process to compensate for the effects of its system limitations and other deficiencies on a material portion of its federal taxes receivable balance to help ensure that this balance was free of material misstatement. During fiscal year 2019, IRS recorded adjustments totaling about $17 billion to correct the effects of continued errors in its underlying data that IRS identified during its manual estimation process. While using this process to determine a material portion of taxes receivable has enabled IRS to produce reliable related balances for year- end reporting, it does not provide IRS management with readily available, reliable unpaid assessment information on a daily basis throughout the year in order to effectively manage unpaid assessment balances. Further, errors in taxpayer accounts create a burden for those taxpayers whose accounts were affected. While not collectively considered a material weakness, IRS’s ongoing control deficiencies related to unpaid assessments are important enough to merit attention by those charged with governance of IRS. Therefore, these issues represent a significant deficiency in IRS’s internal control over financial reporting as of September 30, 2019. During fiscal year 2019, IRS documented the key management decisions in the design and use of the estimation process. This step should reduce the risk that IRS may perform sampling procedures inconsistent with management intent or plans. Continued management commitment and sustained efforts are necessary to build on the progress made to date and to fully address IRS’s remaining unresolved issues concerning the management and reporting of unpaid assessments. Significant Deficiency in Internal Control over Financial Reporting Systems During our fiscal year 2019 audit, we determined that unresolved information system control deficiencies from prior audits, along with new control deficiencies pertaining to business process application controls and general controls in IRS’s information systems, collectively represent a significant deficiency in IRS’s internal control over financial reporting systems. Specifically, IRS did not correct control deficiencies we reported as of September 30, 2018, concerning (1) unnecessary access rights granted to accounts, (2) inconsistent monitoring of systems and accounts, (3) out-of-date and unsupported hardware and software, (4) change controls over tax and financial management processing on the mainframe, and (5) developing and implementing effective policies and procedures as part of IRS’s security management program. In addition, during this year’s audit, we found new control deficiencies in the following areas: (1) implementing automated financial controls of interfaces between key applications, (2) ensuring that authorized personnel reviewed key documents for external systems, (3) enforcing multifactor authentication, (4) enforcing adequate encryption to protect systems and data, or (5) ensuring that patches installed on systems were current to protect against known vulnerabilities. The potential effect of these continuing and new deficiencies on IRS’s financial reporting for fiscal year 2019 was mitigated primarily by IRS’s compensating management controls designed to detect potential misstatements on the financial statements. Nevertheless, these application and general control deficiencies increase the risk of unauthorized access to, modification of, or disclosure of sensitive financial and taxpayer data and disruption of critical operations, and are therefore important enough to merit the attention of those charged with governance of IRS. According to IRS management, IRS has developed a plan that focuses on strengthening its information system controls. Continued and consistent management commitment and attention will be essential to addressing existing financial reporting system deficiencies. Other Matters Required Supplementary Information U.S. generally accepted accounting principles issued by the Federal Accounting Standards Advisory Board (FASAB) require that the RSI be presented to supplement the financial statements. Although the RSI is not a part of the financial statements, FASAB considers this information to be an essential part of financial reporting for placing the financial statements in appropriate operational, economic, or historical context. We have applied certain limited procedures to the RSI in accordance with U.S. generally accepted government auditing standards, which consisted of inquiries of management about the methods of preparing the RSI and comparing the information for consistency with management’s responses to the auditor’s inquiries, the financial statements, and other knowledge we obtained during the audit of the financial statements, in order to report omissions or material departures from FASAB guidelines, if any, identified by these limited procedures. We did not audit and we do not express an opinion or provide any assurance on the RSI because the limited procedures we applied do not provide sufficient evidence to express an opinion or provide any assurance. Other Information IRS’s other information contains a wide range of information, some of which is not directly related to the financial statements. This information is presented for purposes of additional analysis and is not a required part of the financial statements or the RSI. We read the other information included with the financial statements in order to identify material inconsistencies, if any, with the audited financial statements. Our audit was conducted for the purpose of forming an opinion on IRS’s financial statements. We did not audit and do not express an opinion or provide any assurance on the other information. Report on Compliance with Laws, Regulations, Contracts, and Grant Agreements In connection with our audits of IRS’s financial statements, we tested compliance with selected provisions of applicable laws, regulations, contracts, and grant agreements consistent with our auditor’s responsibility discussed below. We caution that noncompliance may occur and not be detected by these tests. We performed our tests of compliance in accordance with U.S. generally accepted government auditing standards. Management’s Responsibility IRS management is responsible for complying with laws, regulations, contracts, and grant agreements applicable to IRS. Auditor’s Responsibility Our responsibility is to test compliance with selected provisions of laws, regulations, contracts, and grant agreements applicable to IRS that have a direct effect on the determination of material amounts and disclosures in IRS’s financial statements, and perform certain other limited procedures. Accordingly, we did not test compliance with all laws, regulations, contracts, and grant agreements applicable to IRS. Results of Our Tests for Compliance with Laws, Regulations, Contracts, and Grant Agreements Our tests for compliance with selected provisions of applicable laws, regulations, contracts, and grant agreements disclosed no instances of noncompliance for fiscal year 2019 that would be reportable under U.S. generally accepted government auditing standards. However, the objective of our tests was not to provide an opinion on compliance with laws, regulations, contracts, and grant agreements applicable to IRS. Accordingly, we do not express such an opinion. Intended Purpose of Report on Compliance with Laws, Regulations, Contracts, and Grant Agreements The purpose of this report is solely to describe the scope of our testing of compliance with selected provisions of applicable laws, regulations, contracts, and grant agreements and the results of that testing, and not to provide an opinion on compliance. This report is an integral part of an audit performed in accordance with U.S. generally accepted government auditing standards in considering compliance. Accordingly, this report on compliance with laws, regulations, contracts, and grant agreements is not suitable for any other purpose. Agency Comments In commenting on a draft of this report, IRS stated that it was pleased to receive an unmodified opinion on its financial statements. IRS also commented on its continued efforts to address its financial reporting systems control deficiencies and improve its internal controls in financial reporting of unpaid assessments. The complete text of IRS’s response is reproduced in appendix II. Appendix I: Management’s Report on Internal Control over Financial Reporting Appendix II: Comments from the Internal Revenue Service


Background At the federal level, CMS, within the Department of Health and Human Services, is responsible for overseeing the design and operation of states’ Medicaid programs, and states administer their respective Medicaid programs’ day-to-day operations. As a comprehensive health benefit program for vulnerable populations, each state Medicaid program, by law, must cover certain categories of individuals and provide a broad array of benefits. Within these requirements, however, states have significant flexibility to design and implement their programs, resulting in more than 50 distinct state-based programs. These variations in design have implications for program eligibility and services offered, as well as for how expenditures are reported and services delivered. Medicaid Service Delivery In administering their own programs, states may provide Medicaid services under a fee-for-service delivery model or a managed care service delivery model. Under a fee-for-service model, states make payments directly to providers for services provided, and the federal government generally matches state expenditures for such services on the basis of a statutory formula. Under a managed care model, states pay MCOs a capitation payment, which is a fixed periodic payment per beneficiary enrolled in an MCO—typically, per member per month. MCOs pay health care providers for the services delivered to enrollees. In contrast, ACOs are organizations of health care providers and suppliers that come together voluntarily to provide coordinated care to patients with the goal of reducing spending while improving quality. States vary in terms of the types of managed care arrangements used, the populations enrolled, and the parts of the state covered by managed care. Service Utilization and Expenditures We previously reported that a small share of beneficiaries in each state collectively accounted for a disproportionately large share of total Medicaid expenditures. We found that in fiscal years 2009 through 2011, the most expensive 5 percent of Medicaid beneficiaries consistently accounted for almost half of the expenditures for all Medicaid beneficiaries. (See fig. 1.) Examining beneficiaries who were enrolled only in Medicaid, we also found that the most expensive 5 percent of beneficiaries were much more likely to have certain conditions—such as asthma, diabetes, and behavioral health conditions—than all other beneficiaries enrolled only in Medicaid. Examining 2009 data, we found that about 65 percent of the total expenditures for high-expenditure beneficiaries enrolled only in Medicaid were for hospital services and long-term services and supports, with the remaining 35 percent of expenditures for drugs, payments to managed care organizations and premium assistance, and non-hospital acute care. Other studies have also found similar patterns of service utilization and expenditures within the Medicaid population. For example, a January 2018 report noted that while beneficiaries who are dually eligible for Medicare and Medicaid constituted about 15 percent of Medicaid beneficiaries in 2013, they accounted for nearly one-third of Medicaid spending. A study examining data on children’s use of behavioral health services in Medicaid found that in 2005, about 10 percent of children in Medicaid received behavioral health services, but those services accounted for about 38 percent of spending on the overall Medicaid child population. Care Management Care management programs can be used as efforts to manage the cost and quality of health care services delivered to high-expenditure Medicaid populations, with the aim of improving outcomes and achieving cost savings. Generally, care management programs seek to assist consumers manage physical and mental health conditions more effectively, for example, by assessing patient needs and coordinating care across different providers. The general goal of care management is to achieve an optimal level of wellness and improve coordination of care while providing cost effective, non-duplicative services. Specific definitions for care management and other related terms such as care coordination, case management, and disease management vary. For the purpose of this report, we use care management to refer to these activities unless otherwise specified. Selected States Identified or Predicted High-Expenditure Medicaid Beneficiaries Using Statistics and Other Approaches Risk Scores Officials from most state agencies, MCOs, and the ACO said they used risk scores to identify or predict high-expenditure beneficiaries. Officials from four of the seven selected states, four MCOs, and the ACO said they used software or hired vendors who computed beneficiaries’ risk scores based on Medicaid service utilization data. Washington state officials said that in addition to Medicaid service utilization data, they used utilization data from Medicare Parts A, B, and D to compute risk scores for their dual-eligible population. Officials also discussed using the risk scores they computed in different ways. For example, Washington officials said they considered beneficiaries with a risk score of 1.5 or greater to be high expenditure, and they used that risk score as one of the eligibility criteria that must be met to receive certain care management services. In contrast, officials from an MCO in Nevada said they considered risk scores alongside other contextual information, such as the recent diagnosis of a chronic condition, to predict whether the beneficiary would likely generate high expenditures in the future and should be assigned care management services. Officials from three states, an MCO in South Carolina, and the ACO we interviewed said their software or vendors identified or predicted high-expenditure beneficiaries by using the risk scores they computed to stratify beneficiaries into risk tiers, such as low, medium, and high risk. Statistical Outliers Officials from South Carolina’s state Medicaid agency and two MCOs from Pennsylvania and Washington said they identified high-expenditure beneficiaries by examining service utilization data to identify statistical outliers or trends. Officials from the two MCOs said they looked for statistical outliers for various types of service utilization, such as emergency department visits, inpatient stays, and pharmacy use. Officials from South Carolina said they built internal software tools to help them easily examine service utilization for various subsets of beneficiaries and services. These officials said they looked for beneficiaries whose utilization appeared to be significantly higher or lower compared with other beneficiaries with similar characteristics, such as among children with Type 1 diabetes or among children in foster care. The officials also said that after they identified those outliers, they examined the reasons for those beneficiaries’ utilization patterns to better understand why those beneficiaries were outliers and to take corrective action if appropriate. The officials explained that they did not simply focus on a discrete list of beneficiaries with the highest overall expenditures, because many of those beneficiaries have medical needs that are inherently expensive and cannot be meaningfully improved through intervention. Diagnoses Officials from three of the seven state Medicaid agencies and four MCOs said they identified high-expenditure beneficiaries based on diagnoses or other group categorization. Officials commonly said they used chronic conditions, such as end-stage renal disease, the human immunodeficiency virus or acquired immune deficiency syndrome, chronic obstructive pulmonary disease, diabetes, or Hepatitis C. Pennsylvania officials said their list was developed based on clinical experience. Officials from South Carolina said their list of diagnoses was based on a review of conditions associated with high expenditures. Service Utilization and Claims Expenditure Thresholds Officials from two state Medicaid agencies—Indiana and Nevada—and all five MCOs said they identified high-expenditure beneficiaries as beneficiaries who exceed certain service utilization or claims expenditure thresholds. Indiana officials said they used service utilization thresholds, such as visiting the emergency room six or more times in the past 6 months. Nevada officials said one of their programs identified high- expenditure beneficiaries as those whose treatment costs exceeded $100,000 over a 12-month period. Officials from the five MCOs offered varying thresholds, such as claims exceeding $100,000 over a 6-month period; claims exceeding $40,000 during a state fiscal year; or stays in a neonatal intensive care unit exceeding 15 days. Clinical Judgment Officials from two state Medicaid agencies—Nevada and Pennsylvania— four MCOs, and the ACO said they relied on clinical judgment to decide whether a beneficiary was likely to be high expenditure. Officials from one MCO in Washington said the MCO conducted health assessments of new members to obtain a baseline understanding of their clinical states, which were then used to stratify beneficiaries and identify appropriate staff to address their needs. Similarly, officials from Pennsylvania and three MCOs said clinical reviews of beneficiaries’ needs or histories were triggered by providers, caregivers, or self-referrals for care management or other services. Officials from the ACO said that while risk scores made initial predictions about beneficiaries’ risk for generating high expenditures, those predictions could be overridden by clinical judgment. Selected States Used Care Management and Other Strategies to Manage Costs for High-Expenditure Medicaid Beneficiaries Officials from all seven selected states, all five MCOs, and the ACO we interviewed said they used care management to manage the costs and quality of care for high-expenditure Medicaid beneficiaries. In addition, some states used other strategies, such as strategies involving coverage policies, payment incentives, and restrictions on the number of providers certain beneficiaries could use. Across states that evaluated these efforts to manage costs and quality of care, results were mixed. All Selected States Used Care Management to Manage Costs for High- Expenditure Medicaid Beneficiaries Officials from all of the seven state Medicaid agencies we interviewed reported that they provided care management for high-expenditure beneficiaries in their fee-for-service delivery systems, for example, by assessing patient needs and coordinating care across providers, in an attempt to manage costs and ensure quality care. Further, the six selected states with MCOs or ACOs required these organizations to provide care management to high-expenditure beneficiaries enrolled in managed care. Officials also reported barriers to their efforts to provide care management. Care Management in Fee-for- Service Medicaid Officials from all of the seven state Medicaid agencies we interviewed reported that they provided care management for high-expenditure beneficiaries in their fee-for-service delivery system, to manage the cost and quality of their care. The organization and scope of the care management programs they described vary in some cases. For example: Pennsylvania provided care management for beneficiaries in fee-for- service through the state’s “intensive case management” unit, a unit of providers that contact beneficiaries by phone to ensure that they get the care they need. Care management is provided to newly enrolled Medicaid beneficiaries who are identified as high-expenditure until the beneficiary selects a managed care plan, typically within 30 days, and to certain other beneficiaries. State officials said that of the approximately 150,000 beneficiaries in fee-for-service, they provide care management to about 1,000 each month. Nevada implemented mandatory care management services for high- expenditure fee-for-service beneficiaries in rural areas of the state through a contract with a care management organization, which was paid to reach out to high-expenditure beneficiaries, assess their needs, and connect them with their medical providers. The organization delivered care management through regional care teams geographically located in beneficiaries’ communities, which coordinated with the beneficiaries’ providers to implement personalized care plans and manage follow-up appointments and services. High-expenditure beneficiaries were assigned to one of eight care management programs based on the beneficiary’s qualifying condition, such as whether they had cancer, chronic kidney disease, or a mental health diagnosis. South Dakota implemented a health home program in 2013, which paid local primary care clinics, community mental health centers, and Indian Health Service facilities to provide care management to high- expenditure Medicaid beneficiaries. Each clinic or center had a care coordinator who reached out to high-expenditure beneficiaries to initiate care management and connect them with their primary care providers. These beneficiaries were placed in one of four categories indicating the level of care coordination they needed based on the severity of their illness and risk of future costs. The program helped beneficiaries create a care plan, set goals to address their particular care needs, and manage their conditions. In state fiscal year 2018, around 5,800 recipients received services through more than 100 health home clinics in South Dakota. Washington State also implemented a health home program in 2013 in which care management activities were coordinated through “lead” entities, such as Area Agencies on Aging and other community-based organizations. These entities established networks of care coordination organizations representing primary care, mental health, long term care, chemical dependency providers, and specialty providers. The lead entities conducted outreach to high-expenditure beneficiaries to connect them with a care manager, who might be a nurse, physician assistant, social worker, behavioral health professional, or chemical dependency professional. Care Management in Managed Care State Medicaid officials who have MCOs and ACOs within their states said that they required these organizations to provide care management to high-expenditure beneficiaries to manage the cost and quality of their care. Examples of states’ care management requirements included steps such as beneficiary and provider outreach, conducting screenings or health assessments, and developing care plans (see sidebar). Some requirements specified the minimum frequency for conducting outreach and what information and data must be reported to the state regarding care management activities (see sidebar). Beneficiaries with excessive utilization or under-utilization for conditions other than those specified diseases in the contract must also be eligible for disease management services. beneficiaries are categorized for different levels of care coordination. (Indiana Medicaid) standard model of care management for high-risk beneficiaries, but each clinical department in the MCO—for example, Obstetrics or Cardiology—established specific plans for care management within their area of care. Care managers in these departments—nurses or social workers—were responsible for coordinating with a beneficiary’s primary care provider to ensure that the beneficiary is appropriately referred to specialists. Care managers can contact beneficiaries by phone, but they are also based in the community, such as at hospitals and state mental health clinics. Officials from the ACO in Vermont said that the ACO paid providers that were part of their network—such as primary care offices, home health agencies, and mental health agencies—to serve as beneficiaries’ care managers. Beneficiaries select one provider to be their “lead care coordinator” based on who they have the strongest relationship and trust with, and this provider receives enhanced payments from the ACO to support coordination with other providers in the beneficiary’s care team. Care team members communicate with each other through a software tool provided by the ACO, which maintains updated information on beneficiaries’ conditions and the care received. Barriers to Care Management for High-Expenditure Beneficiaries Officials we spoke to from the selected states, MCOs, and the ACO identified barriers to implementing care management for some high- expenditure Medicaid beneficiaries, including the inability to contact beneficiaries, the lack of social supports—that are part of what is referred to as “social determinants of health”—and shortages of providers or care management staff in rural areas. Difficulties contacting beneficiaries. The lack of valid contact information can result from missing or outdated information, transiency and homelessness, and beneficiary reliance on cell phones with limited minutes. Officials described efforts they had taken to address this barrier, including asking pharmacies to confirm and get updated information when beneficiaries pick up prescriptions; using e- mail, which officials stated is more consistent than physical addresses; and conducting direct outreach in emergency rooms. Addressing Social Determinants of Health Officials at most of the selected states, managed care organizations (MCO), and the accountable care organization said they took steps to help beneficiaries address social determinants of health, for example, by gathering data to identify which beneficiaries needed help with social supports, helping beneficiaries obtain transportation to medical appointments, assisting beneficiaries in accessing social services, providing short- term housing, and meeting other needs. For example, officials from one MCO described a beneficiary with diabetes, who, despite consistently filling his prescription and adhering to his care plan, regularly visited the emergency department in insulin shock. Through outreach they discovered that the beneficiary could not appropriately store his prescribed insulin, which needed to be refrigerated, because his home did not have running electricity or a refrigerator. The MCO identified resources in the community to provide a refrigerator and restore electricity. Social determinants of health. The effectiveness of care management in addressing the health needs of high-expenditure beneficiaries can be hindered by the lack of social supports. Officials said that in order to help beneficiaries manage their medical needs, care managers sometimes needed to address these social determinants of health, such as lack of transportation to medical appointments, lack of stable housing, and inconsistent access to food and other basic resources (see sidebar). At the same time, states and MCOs can face challenges to addressing social determinants of health, such as lack of data on social determinants of health and a lack of understanding about the effect of social determinants of health on health care utilization, which if available could help bolster program investments in those areas. Staff shortages in rural areas. Efforts to provide care management and medical services can be hindered by staff shortages in rural areas. Officials with one state Medicaid agency’s health home program said there was a shortage of individuals in rural areas willing to provide care management to high-expenditure beneficiaries. MCO officials in another state said their ability to care for beneficiaries in rural areas was also affected by a shortage of care managers. In Addition to Care Management, Some Selected States Used Other Strategies to Manage High-Expenditure Beneficiaries Other strategies, in addition to care management, reported by selected states—South Carolina, Nevada, Pennsylvania, and Indiana—to manage the cost and care for high-expenditure Medicaid beneficiaries included coverage policy changes, payment incentives, and restrictions on the use of providers. Coverage policy changes. South Carolina Medicaid officials said that in certain cases they reviewed their coverage policy to see if changes could reduce costs and improve health outcomes for high-expenditure beneficiaries. For example, according to officials, the state had a small number of high-expenditure beneficiaries with Type 1 diabetes that officials thought could benefit from continuous glucose monitoring, which was not covered by their state Medicaid program. The officials said that they wrote a proposal into their state budget and drafted state plan amendment language to address this, though they noted that the proposal had not been implemented as of January 2019. Payment incentives. Medicaid officials in Nevada and Pennsylvania described efforts to use payment incentives to manage costs for high- expenditure beneficiaries. Nevada officials told us that the state’s arrangement with its care management organization for high-expenditure beneficiaries included payment incentives related to reductions in cost, as well as performance on certain quality measures, such as immunization rates and treatments for specific conditions such as asthma, coronary artery disease, and heart failure. However, state officials said that they faced difficulties measuring these outcomes. The care management organization did not receive incentive payments for the first year of operation of the program (2014-2015) and state officials said they did not have results on incentive payments for subsequent years. Pennsylvania officials told us that in response to the high cost of drugs to treat Hepatitis C, Pennsylvania’s Medicaid agency created a risk-sharing arrangement with MCOs that had high-expenditure beneficiaries with Hepatitis C. According to state officials, the MCOs were required to submit their enrollees’ Hepatitis C test scores to show whether beneficiaries were obtaining treatment and experiencing improvement. The state then allocated additional funds to MCOs that demonstrated positive quality outcomes, thus saving the cost of re-treating beneficiaries who failed to follow through on treatment. The Pennsylvania officials also told us that the state provided payment incentives to MCOs in its Integrated Care Plan Program, in which physical health and behavioral health MCOs coordinate with each other in the care of high-expenditure beneficiaries with persistent serious mental illness, such as schizophrenia, depression, or psychosis. To quality for incentive payments, these MCOs had to create an integrated care plan for each beneficiary with a qualifying condition. The state’s Medicaid agency identified outcome measures that MCOs were held accountable to in calendar year 2018 related to emergency department utilization, inpatient admissions, inpatient readmissions, prescription medication adherence, and engagement in treatment for substance use disorders. As metrics improved, MCOs become eligible for incentives. According to state officials, Pennsylvania allocated $10 million for Integrated Care Plan program incentive payments for calendar year 2018. Restrictions on the use of providers. Indiana Medicaid officials described their program to address over-utilization of services by certain high-expenditure beneficiaries who may be engaged in doctor or pharmacy shopping—a strategy of using multiple providers that results in over-utilization or improper utilization of prescription drugs or other services. According to the officials, if other efforts to address a beneficiary’s over-utilization fail over a 2- to 4-month period, the beneficiary may be enrolled in Indiana’s Right Choices Program. This program restricts, or “locks in,” the beneficiary to a single physician, pharmacy, and hospital. Officials said that this program has helped to ensure that the provider is aware of the beneficiary’s history and has proven effective in getting beneficiaries to change their behavior. In addition to using the program for Medicaid beneficiaries enrolled in fee- for-service, MCOs are provided with a report of their beneficiaries who have high-utilization levels so that the MCO can determine if any of these beneficiaries should be enrolled in the program. Across Selected States that Assessed the Effect of their Strategies on Medicaid Expenditures and Other Outcomes, Results Were Mixed While some of the selected state Medicaid agencies reported that their efforts to manage costs and care for high-expenditure beneficiaries showed positive results, officials in other states reported mixed or inconclusive findings. Medicaid officials in four states—Pennsylvania, South Dakota, Vermont, and Washington—said their assessment of efforts to manage costs and care for high-expenditure beneficiaries showed positive results, such as cost savings or reductions in the use of expensive services. Pennsylvania Medicaid officials said that their Integrated Care Plan Program for high-expenditure beneficiaries with persistent serious mental illness resulted in improvements in utilization, including reductions in inpatient hospitalizations and readmissions. South Dakota Medicaid officials found that for 2017, health home participants cost $204 less per month than the comparison group, and experienced an 8 percent decline in emergency room visits from the prior year compared with a 10 percent increase in emergency room visits for the comparison group. The state estimated $7.7 million in costs were avoided. Vermont Medicaid officials analyzed utilization of high-expenditure beneficiaries in care management before and after they enrolled. The state reported in 2018 that the rate of inpatient visits per thousand beneficiaries decreased from 600 to 393, and the annual rate of emergency visits per thousand beneficiaries decreased from 1,536 to 1,003. An independent evaluation of a demonstration program for dually eligible beneficiaries in Washington that incorporated its Health Homes program found $107 million in Medicare cost savings over its first 42 months. As part of the state’s Financial Alignment Initiative, part of those savings went to the state Medicaid program. In contrast with the results reported by the four states, officials from Indiana and Nevada Medicaid agencies reported mixed or inconclusive findings related to the impact on cost or quality of their programs for high- expenditure Medicaid beneficiaries. Officials with Indiana’s Medicaid agency told us that an assessment of the Right Choices Program found relatively low cost savings generally, with the exception of pharmacy costs, where the program curbed excessive drug use among beneficiaries with substance use disorders and led to cost savings. Nevada Medicaid officials said that their fee-for-service care management organization appeared to achieve some cost savings, but had little effect on quality of care after the program was implemented in 2013. They also said that it was difficult to determine the true effect of the program, because the state implemented several other cost savings policies at the same time as the care management organization. Nevada let the program expire in 2018 and is researching other potential ways to manage high-expenditure beneficiaries in the state’s fee-for-service program. CMS Offered Optional Tools and Technical Assistance That Could Be Used To Identify or Better Manage High- Expenditure Medicaid Beneficiaries CMS offered optional tools, as well as technical assistance and other educational resources that state Medicaid agencies used to identify or better manage high-expenditure beneficiaries. CMS Offered Tools That Could Help States Manage High-Expenditure Medicaid Beneficiaries CMS’s optional tools included the Health Home State Plan Option and the Financial Alignment Initiative, though these are not specifically designed for the purpose of identifying and managing high-expenditure beneficiaries. Medicaid officials in two selected states said that these programs improved their efforts to manage care for their high-expenditure beneficiaries. Health Home State Plan Option. The Medicaid Health Home State Plan Option, authorized under the Patient Protection and Affordable Care Act, allowed states to design health home programs to provide comprehensive care coordination for Medicaid beneficiaries with chronic conditions. CMS officials we spoke with said the states who chose the option received access to resources including planning funds and technical assistance from CMS. For example, CMS issued a brief illustrating how states could focus their health home programs on high-expenditure beneficiaries. CMS officials noted that they supported 23 states’ and the District of Columbia’s health home programs. Among the state officials we interviewed, South Dakota Medicaid officials said that when they were establishing their health home program, CMS was helpful in connecting them with other states that had created similar programs so that they could learn from other states’ experiences. South Dakota Medicaid officials stated they would like CMS to continue to bring health home program managers from several states together to discuss their successes, challenges, and innovations. Nevada Medicaid officials stated they were considering establishing a health home program. Financial Alignment Initiative. For the Financial Alignment Initiative, CMS oversaw efforts by states to implement improvements in Medicaid service delivery aimed at achieving savings for both Medicare and Medicaid, with one state we spoke with using the initiative to target high- expenditure beneficiaries. As noted earlier, Washington established its Health Homes demonstration program for dually eligible beneficiaries in association with the Financial Alignment Initiative. Washington targeted the demonstration to high-cost, high-risk Medicare-Medicaid beneficiaries based on the principle that focusing intensive care coordination on beneficiaries with the greatest need provided the greatest potential for improved health outcomes and cost savings. Washington’s Financial Alignment Initiative demonstration was approved through 2020, and Washington officials stated they are hoping to get an extension, because it has yielded cost savings for both Medicaid and Medicare. A feature of the Financial Alignment Initiative is that any cost savings achieved by the program are split between the state Medicaid program and Medicare. CMS Provided Technical Assistance and Educational Resources to Help States Identify and Manage Care for High- Expenditure Medicaid Beneficiaries CMS also offered state Medicaid agencies access to several resources that, while not designed specifically to target high-expenditure beneficiaries, have been used to support states in identifying or better managing care for this population. These resources included the Medicaid Innovation Accelerator Program, the State Data Resource Center, and the Medicare-Medicaid Data Integration Initiative. Medicaid Innovation Accelerator Program. The Medicaid Innovation Accelerator Program is funded by the Center for Medicare and Medicaid Innovation and run by the Center for Medicaid and CHIP Services, both within CMS. The goals of the program were to improve care for Medicaid beneficiaries and reduce costs by supporting states in their ongoing payment and delivery system reforms through targeted technical support. The program offered participating states targeted technical support to Medicaid agencies in building their data analytic capacity as they design and implement delivery system reforms for high-expenditure beneficiaries, one of the program’s focus areas. The program worked with five states on issues such as identifying and stratifying beneficiaries with complex care needs and high costs, designing effective care management strategies, and incorporating social determinants of health into program design activities. In addition to working directly with five states, the program also offered a national webinar series under the broader topic of Medicaid Beneficiaries with Complex Care Needs and High Costs. The webinar series covered a variety of topics, including a webinar titled “Identification and Stratification of Medicaid Beneficiaries with Complex Care Needs and High Costs,” which provided information about different approaches to targeting and assessing the needs of this population. Vermont Medicaid officials we spoke with said it would be helpful to have more information about how social determinants of health impact beneficiaries’ ability to manage their own care. CMS hosted other webinars on various technical support and data analytics topics for states. Among the state Medicaid officials we interviewed, Nevada officials mentioned participating in the Innovation Accelerator Program. State Data Resource Center. State Medicaid agencies have traditionally been hampered in managing the Medicaid portion of care for dually eligible beneficiaries, because they lacked data on the Medicare services these beneficiaries receive, such as hospitalizations, physician visits, prescription drugs, and skilled nursing facility stays. To address this challenge, CMS established the State Data Resource Center to facilitate state access to and use of Medicare data on dually eligible beneficiaries. Through the program, states had access to technical advisors when working with CMS Medicare data, which have allowed states to better predict and identify high-expenditure dually eligible Medicaid beneficiaries, CMS officials told us. The officials said the State Data Resource Center provided states with learning opportunities through webinars and monthly “Medicare Data Workgroup” calls, during which states shared their data use experiences. CMS officials and CMS contractors we spoke with said 29 states have received Medicare data, including all 10 states that participated in the Financial Alignment Initiative, though not all had projects specifically linked to high- expenditure Medicaid beneficiaries. CMS officials said all states had some contact with the State Data Resource Center, whether through data inquiries or participation in webinars. Medicare-Medicaid Data Integration Initiative. The Medicare-Medicaid Coordination Office and the Center for Medicaid and CHIP Services’ Medicaid Innovation Accelerator Program, both within CMS, jointly sponsored the Medicare-Medicaid Data Integration Initiative. The initiative assisted states with integrating Medicare and Medicaid data in order to enhance care coordination and reduce costs for the dually eligible population, which may have included high-expenditure Medicaid beneficiaries. CMS officials we spoke with said the Medicare-Medicaid Data Integration Initiative had assisted 10 states—five participating in the Financial Alignment Initiative (Colorado, Minnesota, Ohio, Rhode Island, and Virginia) and five participating in the Medicaid Innovation Accelerator Program from October 2015 to March 2019 (Alabama, the District of Columbia, New Hampshire, New Jersey, and Pennsylvania). Agency Comments We provided a draft of this product to the Department of Health and Human Services for review. The department provided technical comments, which we incorporated as appropriate. As agreed with your office, 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 to the appropriate congressional committees, the Secretary of Health and Human Services, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-7114 or yocomc@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 I. Appendix I: GAO Contact and Staff Acknowledgments GAO Contact Staff Acknowledgments In addition to the contact named above, Lori Achman (Assistant Director), Mary Giffin (Analyst-in-Charge), Matthew Dobratz, Drew Long, and Brandon Nakawaki made key contributions to this report. Also contributing were Julianne Flowers, Vikki Porter, Jennifer Rudisill, and Eric Wedum.


Background The military services preposition stocks ashore and afloat so that DOD is able to respond to multiple scenarios during the initial phases of an operation until the supply chain has been established. The military services maintain their own configurations and types of equipment and stocks to support their respective prepositioned stock programs: The Army stores sets of combat brigade equipment, supporting supplies, and other stocks at land sites in several countries and aboard ships. The Marine Corps stores equipment and supplies for its forces aboard ships stationed around the world and at land sites in Norway (see fig. 1). The Navy’s prepositioned stock program provides construction support, equipment for off-loading and transferring cargo from ships to shore, and expeditionary medical facilities to support the Marine Corps. The Air Force’s prepositioned stock programs include assets such as direct mission support equipment for fighter and strategic aircraft as well as base operating support equipment to provide force, infrastructure, and aircraft support during wartime and contingency operations. Prepositioned stocks are employed by the geographic combatant commanders, who have the authority to, among other things, organize and employ forces assigned to them as they deem necessary to accomplish assigned missions. DOD apportions the services’ prepositioned stocks among the geographic combatant commands according to joint guidance, and the afloat prepositioned stocks may be apportioned to more than one geographic combatant command. Requirements for prepositioned stocks are developed based on an approved operation plan. The services determine how best to meet the needs of the geographic combatant commanders, which may include the use of prepositioned stocks. Geographic combatant commanders periodically review their plans, assess the risk to those plans, and report the results to the Chairman of the Joint Chiefs of Staff. The approval of the Secretary of Defense is generally required to use the prepositioned stocks. DOD’s Prepositioned Stock Implementation Plan Does Not Fully Address Four of the Seven Required Elements DOD’s implementation plan for managing prepositioned stocks includes information that addresses three of the seven required elements enumerated in section 321 of the NDAA for Fiscal Year 2014. However, the plan, which is 5 pages in length, lacks the detail needed to fully address the remaining four required elements (see table 1). The Assistant Secretary of Defense for Logistics and Materiel Readiness approved the implementation plan on August 29, 2017, but an official from the Office of the Secretary of Defense told us that DOD did not formally issue the plan. As such, it does not bear a DOD seal, signature, or issuance number and most prepositioning service officials we spoke with were not aware of the plan’s existence. As shown in the table, DOD fully addressed three elements in section 321 of the NDAA for Fiscal Year 2014 by describing how the department will achieve its vision, desired end state, and goals, assigning roles and responsibilities, and including a schedule for the implementation of the plan. However, we assessed the remaining elements as partially addressed or not addressed because DOD did not provide the required information in its implementation plan. Specifically: Element two (comprehensive list of DOD’s prepositioned materiel and equipment programs, partially addressed). DOD’s implementation plan contains a list of the department’s prepositioned stock programs but that list omits one Army and eight Air Force prepositioned stock programs. In table 2, we compare the list of prepositioned stock programs that service officials provided to us with the list in DOD’s implementation plan. An official from the Office of the Secretary of Defense told us in April 2017 as part of a previous review that the department would not address this required element in the implementation plan because the department lists its prepositioned stock programs in its annual report to Congress. The implementation plan notes that DOD submits a comprehensive list of materiel to Congress each year per 10 U.S.C. §2229a. However, the annual report to Congress does not include a comprehensive list of the department’s prepositioned materiel and equipment programs. Rather, the annual report describes most of the department’s prepositioning programs but it omits one Army and six Air Force programs not listed in the implementation plan. Apart from the statutory requirement, Standards for Internal Control in the Federal Government state that management should communicate quality information externally so that external parties can help the entity achieve its goals and address risks. Without a comprehensive list of prepositioned materiel and equipment programs, DOD decision makers do not have all of the information they need to conduct effective oversight to assist the department in achieving its vision and goals. Element three (detailed description of how the plan will be implemented, partially addressed). The plan identifies policy, governance, and assessment initiatives through which the department aims to achieve its goals. However, the plan does not provide a detailed description of how the department will implement these three initiatives. Specifically, the plan states that DOD will identify policy gaps and revise or develop policy at all levels to better oversee prepositioned stocks; assigns the Under Secretary of Defense for Acquisition, Technology, and Logistics, the Chairman of the Joint Chiefs of Staff, and the services to review and revise the current prepositioning policies as appropriate; and tasks the geographic combatant commanders to ensure that theater campaign plans provide clear guidance for service prepositioned stock planning. However, the plan does not provide details on when geographic combatant commanders should finalize clear guidance for service prepositioned stock planning or describe what the guidance should include. The plan also states that DOD will use a governance body composed of the Under Secretary of Defense for Acquisition, Technology, and Logistics; the Chairman of the Joint Chiefs of Staff; the geographic combatant commanders; and the services to provide joint oversight of the prepositioned stock programs. However, the plan is unclear as to whether the Global Prepositioned Materiel Capabilities Working Group is the governance body. For example, the plan states that DOD’s joint oversight framework will include the Global Prepositioned Materiel Capabilities Working Group but also assigns the group to present capability shortfalls and gaps to a governance body and implement governance body decisions. Further, the plan states that DOD will use current systems of record and established metrics to evaluate performance and measure prepositioned stock status and capability. However, these are existing mechanisms to monitor the services’ programs and do not provide details on how the department will assess implementation of the plan itself. In 2017, a Joint Staff official told us that the implementation plan would be broad and high-level but would be more detailed than the DOD’s strategic policy. However, the plan’s descriptions of the implementation initiatives lack sufficient detail on what the department will do to implement the plan. Apart from the statutory requirement, Standards for Internal Control in the Federal Government establish that objectives should be defined in specific and measureable terms that clearly define what is to be achieved. Without sufficient detail, DOD risks being unable to fully support the emphasis and high priority that the 2018 National Defense Strategy gives to prepositioned stocks. Element six (description of the resources required to implement the plan, not addressed). DOD’s implementation plan does not describe the resources required to implement the plan. Rather, the plan states that prepositioning programs are resourced and managed by the services in support of combatant command operational and training requirements. In describing the joint oversight framework, the plan states that DOD will leverage the processes that already exist to resource prepositioning stock requirements including a focused effort on prepositioning as part of the annual planning, programming, budget and execution process, and the Joint Capabilities Integration Development System. Officials from the Office of the Under Secretary of Defense for Policy told us when they were developing the implementation plan that they understood this element as requiring information about the resources such as funding, personnel, and technology that would be needed to implement the plan. However, the plan does not include a description of the funding, personnel, or technology resources required to implement the plan. DOD officials reported that the services received $1.2 billion for prepositioned stocks in fiscal year 2018 and that the annual report to Congress also contains further information on the funding. However, this information does not describe the resources needed to implement DOD’s plan for prepositioned stocks as required by the NDAA for Fiscal Year 2014. Apart from the statutory requirement, Standards for Internal Control in the Federal Government establish that organizations should gather relevant operational and financial information for effective monitoring. Without a description of the resources required for implementation, decision makers do not have enough information to understand whether the department has sufficient resources to implement the plan. Element seven (description of how the plan will be reviewed and assessed to monitor progress, partially addressed). DOD’s implementation plan describes how the department will monitor the services’ prepositioned stock capabilities and readiness but does not describe how the department will review and assess the plan itself. The plan states that the department will use standard metrics contained in the readiness reporting systems of record to monitor prepositioning capability and readiness of the services’ programs. The plan assigns the services and combatant commands to assess prepositioned stock programs and posture annually and notes that all of the services are to begin reporting through the Defense Readiness Reporting System in the first quarter of fiscal year 2018. However, similar to element three, the plan does not fully address the mandated element in that it does not describe how the department will review or assess the plan as a tool toward achieving the stated vision and desired end state. The plan directs the Global Prepositioned Materiel Capabilities Working Group—which is responsible for providing oversight of prepositioned stock programs and resolving joint issues concerning prepositioned stocks—to assess actions to ensure desired results are achieved but does not describe how it is to do this. Apart from the statutory requirement, Standards for Internal Control in the Federal Government state that management should monitor its internal controls to determine their effectiveness and make modifications as necessary. Without reviewing and assessing the implementation plan, DOD will be unable to determine whether the current plan is helping the department progress toward its identified vision and desired end state for its prepositioned stock programs. DOD did not fully address the required elements in the implementation plan because, according to officials from the Office of the Secretary of Defense for Policy and the Joint Staff, implementation of the plan for managing prepositioned stock programs is the role of the services. According to these officials, DOD developed the implementation plan without details to allow the services to determine how to implement their respective prepositioning stock programs. Further, an official from the Under Secretary of Defense for Policy noted that DOD’s annual report to Congress on prepositioned stock programs contains some of the required information. However, as discussed earlier, we found that the annual report to Congress does not include all of the information to satisfy the required elements, such as a comprehensive list of the department’s prepositioned stock programs; and most service officials we spoke with were unaware of the plan. Moreover, section 321 of the NDAA for Fiscal Year 2014 required DOD to develop an implementation plan that contained all seven elements. Absent an implementation plan that fully addresses all of the elements required in the NDAA for Fiscal Year 2014 and aligns with internal control standards, DOD continues to provide incomplete information to Congress and stakeholders within the department on its prepositioned stock programs. DOD Has Made Little Progress in Implementing a Joint Oversight Approach for Managing the Military Services’ Prepositioned Stock Programs DOD’s Progress in Establishing a Joint Oversight Approach Has Been Slow In 2011, Congress began mandating DOD take steps to develop a joint strategy. Beginning in 2005 and subsequently in 2011, we reported that DOD lacked a joint oversight framework of the services’ programs. However, as shown in figure 2, DOD has made limited progress in addressing congressional requirements and our reporting recommendations related to joint oversight of prepositioned stock programs. DOD’s Guidance on Joint Oversight Lacks Detail and Other Related Efforts Have Limitations DOD’s recent approach to joint oversight has been to update guidance and implement other related efforts. For example, over the past 2 years, the Office of the Secretary of Defense and the Joint Staff have updated existing documents and issued new policy documents, which each contain broad statements about the need for joint oversight of the services’ prepositioned stock programs: In December 2016, the Chairman of the Joint Chiefs of Staff updated its Logistics Planning Guidance for Prepositioned War Reserve Materiel. The document states that all service prepositioned stock programs require joint alignment with national priorities and global combatant command requirements across the full range of military operations. The instruction specifically directs the Joint Staff to develop a framework for joint oversight processes for synchronizing the services’ prepositioning strategies to minimize duplicative efforts and to maximize efficiencies and return on investment for prepositioned stocks. However, this document does not detail how the Joint Staff is to develop this framework and does not describe the elements that are to be included as a part of an effective approach for joint oversight. In March 2017, the Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics issued its Pre-Positioned War Reserve Materiel Strategic Policy. One of the purposes of the document is to establish joint oversight of the military services’ pre- positioning efforts to maximize efficiencies across DOD. The directive assigns the Chairman of the Joint Chiefs of Staff with the responsibility to develop a framework for synchronizing the services’ prepositioning strategies to minimize duplicative efforts and to maximize efficiency and return on investment across DOD. However, similar to the instruction above, this document does not detail how the Joint Staff is to develop this framework or describe the elements that are to be included as a part of an effective approach for joint oversight. In August 2017, the Assistant Secretary of Defense for Logistics and Materiel Readiness finalized DOD’s implementation plan for managing prepositioned stock programs, which we discuss earlier in this report. The plan calls for improved DOD guidance that builds a framework and establishes joint oversight to synchronize service prepositioned stock programs with DOD’s strategic guidance and priorities. The plan also calls for balancing service prepositioned stock programs to maximize effectiveness and efficiency while minimizing potential duplication across the department. However, in addition to the shortcomings of the plan that we discuss earlier in this report, the plan also does not provide a detailed discussion of what is needed to implement a department-wide framework for joint oversight. Further, although the plan states that clear policy is the foundation for joint oversight, the plan itself was not issued as formal guidance, and, as noted earlier, most prepositioning service officials we spoke with were not aware of the plan’s existence. DOD officials stated that they are continuing to update existing guidance as needed and that the services are responsible for implementing and managing their own prepositioned stock programs. DOD also provides Congress annual reports on the status of the services’ prepositioned stock programs. However, in June 2015, we reported that the annual report provided inconsistent information among the services’ programs using a nonstandardized definition of “prepositioned stocks” and that the annual report is not an effective tool for joint oversight. We recommended that DOD develop a standardized definition of “prepositioning” for its annual report that is consistent with the definition used in the department’s joint service guidance and apply this definition consistently to identify prepositioning materiel and equipment across DOD. DOD concurred with our recommendations. However, as of October 2018, DOD continued to use varying definitions of prepositioned stocks. A broad definition exists at the strategic level, but service-level definitions vary depending on what each service’s prepositioned stock needs are. For example, the Army’s definition of prepositioned stocks is based on the equipment and stocks required to meet the unique mission requirements of brigade combat team configurations. Within this definition, the Army includes equipment sets used for training units, but the other services do not. DOD officials stated that although there is a broad definition of prepositioned stocks, the services are responsible for managing their individual programs to include what equipment and stocks are a part of their respective programs based on their mission and needs. Further, in 2008, DOD directed the establishment of the Global Prepositioned Materiel Capabilities Working Group and assigned it responsibility for addressing joint issues concerning war reserve materiel requirements and positioning. According to DOD’s prepositioned stock implementation plan, the working group is DOD’s focused joint oversight framework effort to execute the following for prepositioned stock programs: analyze service and combatant commander input in the annual report identify potential opportunities to enhance efficiency and reduce operational risk, present capability shortfalls/gaps to a governance body for implement governance body decisions in coordination with the services and combatant commands, and assess actions to ensure desired results are achieved. According to DOD guidance, the Assistant Secretary of Defense for Sustainment and the Chairman of the Joint Chiefs of Staff appoint co- chairs for the working group, which will include members from the military services, the Defense Logistics Agency and the combatant commands and meet annually or more often, as needed. However, since 2011, our work has shown that DOD has been unable to ensure that the working group’s activities include the full range of the tasks the group was established to perform because the working group lacks clear oversight and reporting relationships to authoritative bodies within DOD. We recommended that DOD assess the continued relevance of the Global Prepositioned Materiel Capabilities Working Group’s assigned tasks, and DOD concurred. In September 2012, we reported that, according to DOD officials, the main responsibility of the working group had been to consolidate the services’ individual submissions on their prepositioned stock programs into DOD’s annual report for Congress, and that the working group had met only sporadically and had not yet addressed many of the duties specified in its charter. This continues to be the case. We found that, according to DOD officials, quarterly working group meetings were frequently postponed, attendance was not fully representative of all stakeholders, and the discussions during a September 2018 meeting we observed were primarily focused on gathering information from the services for preparations for the upcoming annual report to Congress and receiving service updates on the current status of their respective prepositioned stock programs. DOD has not fully implemented joint oversight of the services’ prepositioned stock programs because the department’s guidance lacks detail and the department has not fully implemented requirements within other intended joint oversight efforts, such as the working group. Instead, DOD’s approach has been for the services to manage their own respective programs with limited oversight at the department level. Standards for Internal Control in the Federal Government state that objectives should be defined in specific and measureable terms that clearly define what is to be achieved, who is to achieve it, how it will be achieved, and the time frames for achievement. These standards also state that management should evaluate performance and hold individuals accountable for their internal control responsibilities. In addition, the NDAA for Fiscal Year 2014 mandates a framework for joint departmental oversight that reviews and synchronizes the military services’ prepositioned stock strategies to minimize potentially duplicative efforts and maximize efficiencies in prepositioned stocks across the DOD. Further, our prior work in the area of fragmentation, overlap, and duplication in the federal government has found that Congress and executive branch agencies have opportunities to contribute toward fiscal sustainability and act as stewards of federal resources. These include taking actions to reduce, eliminate, or better manage duplication, overlap, or fragmentation among federal agencies and programs; achieve cost savings; or enhance revenues. “Fragmentation” refers to those circumstances in which more than one organization within an agency is involved in the same broad area of national need and opportunities exist to improve service delivery. Without strengthening joint oversight across the department, DOD continues to have a fragmented approach to its management of prepositioning programs, which has led to inefficiencies. For example, according to Joint Staff officials, there is no uniform process by which the services are reporting the readiness of prepositioned stock assets. Joint Staff officials also said that having a joint oversight approach would help them have a more complete picture on the readiness of prepositioned stocks across the services and help the services in developing more consistent reporting methods. Service officials we interviewed have also noted that there may be duplication among DOD’s prepositioned stock programs resulting from limited joint oversight. For example, Navy officials stated that because each service utilizes medical assets as a part of its prepositioned stock programs, there is potential duplicative medical equipment across the services, which may result in inefficiencies. Finally, our ongoing classified work is finding a lack of joint oversight related to DOD’s management of prepositioned stocks in Europe. Although DOD’s current approach relies on the services managing their own prepositioned stock programs and Title 10 requires the services to train, man, and equip their forces, without fully implementing joint oversight—including providing more detailed information on how to implement such an approach in its guidance and reviewing its other efforts, such as the working group—DOD will continue to experience fragmented management of its prepositioned stock programs. Further, given the lack of progress DOD has made in the past several years, providing information to Congress on its efforts in this area could help hold the department to greater accountability. Conclusions Prepositioned stocks play a pivotal role during the initial phases of an operation. We have reported for over a decade on the importance of DOD having a department-wide strategic policy and joint oversight of the services’ prepositioned stock programs, and Congress has required that DOD take action in this area. DOD issued guidance to include an implementation plan for managing prepositioned stock programs. However, the plan does not address all of the required elements enumerated in section 321 of the National Defense Authorization Act for Fiscal Year 2014, and DOD’s various guidance documents include broad direction for joint oversight. Without revising the implementation plan to have more complete information—including a full list of programs, a detailed description of how DOD will implement key initiatives, a description of the resources required, and an approach for monitoring and assessing the plan itself—the services will continue to operate their prepositioned stock programs with limited direction from DOD. Further, without fully implementing joint oversight, including providing more details in guidance and reviewing related efforts, and providing accountability to Congress on how the department will implement such oversight, DOD’s current fragmented management approach will continue to exist, which creates the potential for duplication and inefficiencies among the services’ prepositioned stock programs. Recommendations for Executive Action We are making the following six recommendations to DOD: The Secretary of Defense should ensure that the Assistant Secretary of Defense for Sustainment, in coordination with the Chairman of the Joint Chiefs of Staff, issue a more detailed implementation plan or include implementation plan details in identified formal department-wide guidance to include an updated list to provide quality information, including all of DOD’s prepositioned materiel and equipment programs. (Recommendation 1) The Secretary of Defense should ensure that the Assistant Secretary of Defense for Sustainment, in coordination with the Chairman of the Joint Chiefs of Staff, issue a more detailed implementation plan or include implementation plan details in identified formal department-wide guidance to include a detailed description of how DOD will implement the three key initiatives in the plan—policy, governance, and assessment—including clearly identifying what is to be achieved in these areas. (Recommendation 2) The Secretary of Defense should ensure that the Assistant Secretary of Defense for Sustainment, in coordination with the Chairman of the Joint Chiefs of Staff, issue a more detailed implementation plan or include implementation plan details in identified formal department-wide guidance to include a description of the resources (i.e., relevant operational and financial information) required to implement the plan including dollar and personnel amounts. (Recommendation 3) The Secretary of Defense should ensure that the Assistant Secretary of Defense for Sustainment, in coordination with the Chairman of the Joint Chiefs of Staff, issue a more detailed implementation plan or include implementation plan details in identified formal department-wide guidance to include a description of how the department will review and assess the implementation plan for effectiveness. (Recommendation 4) The Secretary of Defense should ensure that the Assistant Secretary of Defense for Sustainment, in coordination with the Chairman of the Joint Chiefs of Staff, take steps to fully implement joint oversight of DOD’s prepositioned stock programs, including providing detailed information on how to implement such an oversight approach in department guidance and reviewing other joint oversight efforts, in order to synchronize the military services’ preposition stock strategies to avoid fragmentation. (Recommendation 5) The Secretary of Defense should ensure that the Assistant Secretary of Defense for Sustainment, in coordination with the Chairman of the Joint Chiefs of Staff, update Congress on the department’s progress in joint oversight management in the prepositioned stock annual report or in a separate report. (Recommendation 6) Agency Comments and Our Evaluation We provided a draft of this report to DOD for review and comment. In its comments, reproduced in appendix II, DOD concurred with each of the six recommendations and described planned actions it will take to implement them. We are providing copies of this report to the appropriate congressional committees; the Secretary of Defense; the Assistant Secretary of Defense for Sustainment; and the Chairman of the Joint Chiefs of Staff. In addition, this report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-5431 or russellc@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: Offices That We Contacted Appendix II: Comments from the Department of Defense Appendix III: GAO Contact and Staff Acknowledgments GAO Contact Staff Acknowledgments In addition to the contact named above, individuals who made key contributions to this report include Alissa H. Czyz, Assistant Director; Vincent M. Buquicchio; Pamela Davidson; Mae Jones; Cody Knudsen; and Yong Song.