M edicaid is a means-tested entitlement program that finances the delivery of primary and acute medical services, as well as long-term services and supports. Historically, Medicaid eligibility generally has been limited to low-income children, pregnant women, parents of dependent children, the elderly, and individuals with disabilities. Since 2014, however, states have had the option to cover nonelderly adults with income up to 133% of the federal poverty level (FPL) under the Patient Protection and Affordable Care Act (ACA; P.L. 111-148 , as amended) Medicaid expansion. Medicaid is jointly financed by the federal government and the states. The federal government's share of most Medicaid expenditures is called the federal medical assistance percentage (FMAP). The remainder is referred to as the state share. Medicaid is a countercyclical program, meaning the rate of growth for Medicaid enrollment tends to accelerate when the economy weakens and tends to slow when the economy gains strength. During recessions, the rate of growth for Medicaid enrollment increases, which also increases the rate of growth for Medicaid expenditures at the same time that state revenues are decreasing. The federal government provided states with fiscal relief through temporary FMAP rate increases in response to the 2001 recession (March 2001 through November 2001) and the Great Recession (December 2007 through June 2009). The Families First Coronavirus Response Act (FFCRA; P.L. 116-127 ), enacted on March 18, 2020, recently added a temporary Medicaid FMAP increase, beginning January 1, 2020, and continuing through the Coronavirus Disease 2019 (COVID-19) public health emergency period. This report begins with an overview of the FMAP rate. Then, it discusses the recession-related impact on the Medicaid program based on the experiences of the 2001 recession and the Great Recession. The final section of this report describes the three recession-related FMAP increases and compares them according to their various aspects, such as time periods for the FMAP increases, the amounts of the increases, and the requirements for states to receive the increases. The FMAP Rate The FMAP rate generally is determined annually and varies by state according to each state's per capita income relative to the U.S. per capita income. The formula provides higher FMAP rates, or federal reimbursement rates, to states with lower per capita incomes, and it provides lower FMAP rates to states with higher per capita incomes. FMAP rates have a statutory minimum of 50% and a statutory maximum of 83%. For a state with an FMAP of 60%, the state gets 60 cents back from the federal government for every dollar the state spends on its Medicaid program. In FY2020, FMAP rates range from 50.00% (13 states) to 76.98% (Mississippi). The FMAP formula relies on each state's per capita personal income in relation to the U.S. average per capita personal income. The national economy is basically the sum of all state economies. As a result, the national response to an economic change is the sum of the state responses to economic change. If more states (or larger states) were to experience an economic decline, the national economy would reflect this decline to some extent. However, the extent of the total decline would be offset by states with small decreases or even increases (i.e., states with growing economies). The U.S. per capita personal income, because of this balancing of positive and negative, usually has only a small percentage change each year. Because the FMAP formula compares state changes in per capita personal income (which can have large changes each year) with changes in the U.S. per capita personal income, states' FMAP rates often change from year to year. For most of the states experiencing annual FMAP rate changes, the change has been be less than one percentage pointâbut that can translate to a significant dollar amount. The FMAP rate is used to reimburse states for the federal share of most Medicaid expenditures, but exceptions to the regular FMAP rate have been made for certain states (e.g., the District of Columbia and the territories), situations (e.g., during economic downturns), populations (e.g., ACA Medicaid expansion population and certain women with breast or cervical cancer), providers (e.g., Indian Health Service facilities), and services (e.g., family planning and home health services). The FMAP is also used to determine the federal share of other federal programs. For instance, it is used to determine the federal share of spending for foster care maintenance, adoption assistance, and guardianship assistance payments authorized by Title IV-E of the Social Security Act. The FMAP rate is also used to determine the relative federal and state shares of the "mandatory matching funds" provided by the Child Care Entitlement to States. In addition, it determines the federal share of funding under the Temporary Assistance for Needy Families (TANF) Contingency Funds and the federal share of collections under the Child Support Enforcement program. Separate from the regular FMAP rate, the enhanced FMAP (E-FMAP) rate is provided for services and administration under the State Children's Health Insurance Program (CHIP), subject to the availability of funds from a state's federal allotment for CHIP. The E-FMAP rate is calculated by reducing the state share under the regular FMAP rate by 30%. Medicaid and Recessions Medicaid expenditures are influenced by a number of economic, demographic, and programmatic factors. Economic factors include health care prices, unemployment rates, and individuals' wages. Demographic factors include population growth and the age distribution. Programmatic factors include changes to eligibility and benefits or other program changes. Other factors include the number of eligible individuals who enroll and their utilization of covered services. Medicaid is a countercyclical program. During recessions, growth in the unemployment rate results in an increase in the rate of growth for Medicaid enrollment, which increases the rate of growth for Medicaid expenditures at the same time that state revenues decline. Reduced state revenues can make it difficult for states to continue financing their Medicaid programs, especially with the recession-related growth in Medicaid enrollment. The effect of recessions on Medicaid enrollment, Medicaid expenditures, and state tax revenues are generally not isolated to the recession period and can continue after the recession has officially ended. Growth in Medicaid Enrollment Individuals and their dependents may become eligible for Medicaid because they experience reductions in their incomes due to reduced hours or job loss. During economic downturns, the number of individuals with reduced hours or job losses increases, and the rate of job losses are considerably higher among low-income workers. This increases the number of individuals eligible for Medicaid. Individuals and their dependents also may lose access to employer-sponsored health insurance. When individuals have reduced hours or experience job loss, they may lose the health insurance coverage they had through their employer for themselves and their dependents. These individuals may be eligible for the Consolidated Omnibus Budget Reconciliation Act (COBRA) continuation coverage, which provides temporary access to a former employer's health insurance. However, employers are not required to pay for the cost of COBRA coverage, which may be more expensive than an individual's prior cost of insurance. Some individuals, or their dependents, might already be Medicaid eligible and have employer-sponsored health insurance. During economic downturns, employers may lower the amount they contribute to the cost of health benefits or decide to no longer provide health insurance coverage to these employees. This increase in the cost of or loss of employer-sponsored health insurance may result in these individuals enrolling for Medicaid coverage. As discussed below, there is a relationship between the unemployment rate and Medicaid enrollment. The ACA Medicaid expansion, which was implemented after the last recession, is expected to increase the effects of a recession on Medicaid enrollment. Medicaid Enrollment Growth During Recent Recessions Medicaid enrollment follows economic cycles, with enrollment growth increasing at a faster rate during economic downturns and Medicaid enrollment growth increasing at a slower rate when economic conditions improve. The U.S. Government Accountability Office (GAO) analyzed federal Medicaid enrollment data during the 2001 recession and the Great Recession. GAO found that during the 2001 recession, the national unemployment rate increased from 4.3% to 5.5%, and total Medicaid enrollment increased by approximately 2 million (or 5.6%). GAO also found that during the Great Recession, the national unemployment rate grew from 5.0% to 9.5%, and Medicaid enrollment rose by nearly 4.3 million (or 9.7%). Potential Impact of Medicaid Expansion on Enrollment Growth The ACA Medicaid expansion that went into effect in 2014 is expected to increase the effects of a recession on Medicaid enrollment. As there has not been a recession since states have had the option to implement the Medicaid expansion, there is no experience available to quantify the impact. During the Great Recession, Medicaid eligibility in most states was not available to many of the individuals who lost their jobs. This is because nonelderly adults without dependent children were not eligible for Medicaid. Prior to the Medicaid expansion, Medicaid eligibility for nonelderly adults, in most states, was limited to individuals with disabilities, pregnant women, and parents of poor children. Also, states' Medicaid income eligibility thresholds for parents were significantly lower than the income eligibility level for the Medicaid expansion of up to 133% of FPL. As a result of the Medicaid expansion, the percentage of adults eligible for Medicaid during future periods of high unemployment is expected to be larger than in the past. An increase in the rate of enrollment growth for the Medicaid expansion in response to an increase in the unemployment rate would have less of an impact on state budgets than an increase in the rate of enrollment growth for the traditional Medicaid populations because the federal matching rate for the Medicaid expansion is 90%, which is higher than the regular FMAP rate. Although the state share of the Medicaid expansion is 10% of the expenditures, the increase in the enrollment for the Medicaid expansion during economic downturns could contribute to states' budget pressures. Medicaid Expenditures and State Revenues Increases in Medicaid enrollment growth during economic downturns generally result in an increased rate of growth for total Medicaid expenditures. As with Medicaid enrollment, when the economic conditions improve, Medicaid expenditure growth tends to slow. At the same time that unemployment rate increases during economic downturns cause Medicaid enrollment and expenditures to increase at a faster rate, states general revenues are negatively affected. During the 2001 recession, states experienced a 4.2% decline in state tax revenue from state FY2001 to state FY2002. In the study described in the " Medicaid Enrollment Growth During Recent Recessions " section, GAO also looked at the impact of the Great Recession on total state tax revenues. Nationally, GAO found that the Great Recession led to a 10.2% decline in state tax revenues from the fourth quarter of 2007 to the fourth quarter of 2009. The impact of the Great Recession on state tax revenue varied significantly from state to state. Although state tax revenue for most states (44 states and the District of Columbia) decreased, these revenue decreases ranged from 1% in Iowa to 23% in Arizona. Medicaid accounts for almost 20% of state general fund expenditures, and it is the second largest category of general fund expenditures for states. The reduction in state tax revenue during economic downturns can make it difficult for states to finance the state share of Medicaid, especially while Medicaid enrollment and expenditures are increasing. Since most states are required to balance their budgets, the reduced state tax revenues and increased Medicaid expenditures, among other budget pressures, may lead states to increase taxes, reduce expendituresâincluding for the Medicaid programâor both. In response to the 2001 recession, 34 states reduced Medicaid expenditures by freezing or reducing provider payments, eliminating coverage for optional services, increasing premiums, and increasing copayments for prescription drugs. As a result of the Great Recession, 31 states froze or reduced Medicaid provider rates or increased Medicaid provider taxes, and other states reduced prescription drug costs and limited or eliminated coverage for optional services, such as mental health or dental care. After Recessions The impacts of recessions on Medicaid enrollment, Medicaid expenditures, and state tax revenues have continued even after the recessions have officially ended. For example, the 2001 recession officially ended in November 2001, but state tax revenue continued to decline through the second quarter of 2002, and the national unemployment rate remained above prerecession levels through June 2003. Medicaid enrollment increased at higher than average rates of growth through 2003. Although the Great Recession officially ended in June 2009, 25 states continued to experience unemployment rates above 9%, until at least December 2010. Some states were still feeling the effects of the recession in 2011 and 2012. The timing and duration of the continued impact of national recessions on states have varied according to the economic conditions and revenue structures of each state, along with the mix of each state's industries and resources. Recession-Related FMAP Increases In the past, two laws have provided states with fiscal relief through temporary FMAP rate increases due to recessions: the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA; P.L. 108-27 ) and the American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5 , as amended by P.L. 111-226 ). In addition, the Families First Coronavirus Response Act (FFCRA; P.L. 116-127 ) recently provided a temporary FMAP increase during the COVID-19 public health emergency period. As noted by GAO, "the FMAP is a readily available mechanism for providing temporary assistance to states because assistance can be distributed quickly, with states obtaining funds on a quarterly basis through Medicaid's existing payment system." The increased FMAP rates help states maintain their Medicaid programs during economic downturns. Also, the increased FMAP rates effectively reduce the state share of Medicaid expenditures for states, allowing states to use the state funding that would have been used for the state share of Medicaidâif there were not a recession-related FMAP rateâfor non-Medicaid state budget needs. As shown in Table 1 , the recession-related FMAP increases have similar components, but there are differences. All three recession-related FMAP increases had across-the-board increases to the regular FMAP rates as their main component. The JGTRRA across-the-board increase of 2.95 percentage points was lower than the 6.2 percentage point across-the-board increases for ARRA and FFCRA. The ARRA across-the-board increase phased out at the end of the time period for the FMAP increase, but the other two increases do not phase down. In addition, the JGTRRA and ARRA FMAP increases included hold-harmless provisions that kept states' regular FMAP rates from declining, and these increases did not apply to certain Medicaid expenditures that use the regular FMAP rate. The FFCRA FMAP increase, however, does not exclude Medicaid expenditures that use the regular FMAP rate. Also, the ARRA FMAP increase included an unemployment-related additional increase to the FMAP, but the JGTRRA and FFCRA FMAP increases do not. JGTRRA and FFCRA applied the FMAP increases to the territories and provided the territories additional federal Medicaid funding, but ARRA gave the territories a choice of the across-the-board FMAP increase, along with increased funding or a larger increase in funding without an FMAP increase. All three of the recession-related FMAP increases have requirements for states in order to qualify for the FMAP increase. For example, all three FMAP increases require states to maintain Medicaid eligibility standards that are no more restrictive than those that were in effect on a certain date. All three also prohibit states from increasing the percentage local governments are required to contribute to the state share of Medicaid. The JGTRRA FMAP increase did not have additional requirements for states, but the ARRA and FFCRA FMAP increases include differing sets of additional requirements for states, which are listed in Table 1 . The following sections provide summaries of the recession-related FMAP rate increases from JGTRRA, ARRA, and FFCRA, as well as the time period for the FMAP increases, the amount of the increases, and the requirements for states to receive them. JGTRRA FMAP Increase As part of the state fiscal relief for FY2003 and FY2004 included in JGTRRA, FMAP rates for the 50 states, the District of Columbia, and the territories were held harmless and increased in the last two quarters of FY2003 and the first three quarters of FY2004. This provision was statutorily limited to $10 billion. Table A-1 shows JGTRRA FMAP increases for the 50 states, the District of Columbia, and the territories. The FMAP rates were increased by an across-the-board 2.95 percentage points for each state (i.e., the 50 states, the District of Columbia, and the territories). The FMAP increase did not apply to Medicaid disproportionate share hospital (DSH) payments and Medicaid payments that were matched using the E-FMAP (e.g., breast and cervical cancer treatment). The hold-harmless provision kept the FMAP rates from declining during that period. Specifically, for FY2003, if a state's FY2002 FMAP rate was higher than the FY2003 rate (without the 2.95 percentage point increase), then the FY2002 rate was substituted for the FY2003 rate for the last two quarters of FY2003. Similarly in FY2004, if a state's FY2003 FMAP rate was higher than the FY2004 rate (without the 2.95 percentage point increase), then the FY2003 rate was substituted for the FY2004 rate for the first three quarters of FY2004. To qualify for the JGTRRA FMAP increase, a state could not have had a Medicaid plan with more restrictive eligibility rules than the plan in effect on September 2, 2003. If a state restored program eligibility to the levels in effect on September 2, 2003, then the state would have qualified for the increased FMAP rate for the entire quarter in which eligibility was reinstated. States also needed to ensure that local governments were not required to contribute a larger percentage of the state's nonfederal Medicaid expenditures than otherwise would have been required on April 1, 2003, for the last two quarters of FY2003 and the first three quarters of FY2004. In addition to the JGTRRA FMAP increase, JGTRRA increased the federal Medicaid funding available for each of the territories by 5.9%. The JGTRRA FMAP increase was provided to states in FY2003 and FY2004, well after the recession ended in November 2001. All states received the same FMAP increase, and the increase was not based on need using measures such as unemployment rates or state tax revenues. States indicated that the JGTRRA FMAP increase prevented states from making additional cuts to the Medicaid program and other portions of state budgets. Specifically, 36 states said the JGTRRA FMAP increase helped to fund increased Medicaid expenditures, and 31 states said the increase allowed states to minimize or postpone Medicaid cuts or freezes. ARRA FMAP Increase ARRA provided an FMAP rate increase to states, which was later extended by P.L. 111-226 . The ARRA FMAP rate increase lasted for nine quarters, starting October 2008 and continuing through December 2010, and totaled an estimated $89 billion. This temporary FMAP rate increase was extended by six months as part of P.L. 111-226 âthe extension totaled an estimated $16.1 billion. With the extension, the ARRA FMAP rate increase ran for a total of 11 quarters, from the first quarter of FY2009 through the third quarter of FY2011 (i.e., October 2008 through June 2011), subject to certain requirements. Table B-1 shows the ARRA FMAP increase for the 50 states and the District of Columbia. For a "recession adjustment period" that began with the first quarter of FY2009 and ran through the third quarter of FY2011 (i.e., October 2008 through June 2011), ARRA held all states harmless from any decline in their regular FMAP rates throughout the period. All states (i.e., the 50 states and the District of Columbia) received an across-the-board increase of 6.2 percentage points to their regular FMAP rates until the last two quarters of the period, at which point the across-the-board percentage point increase phased down to 3.2 and then 1.2 percentage points. Throughout the period, states with unemployment rates that had increased by certain amounts in a quarter received an additional unemployment-related increase. There were three tiers of this unemployment-related increase. See "ARRA Unemployment-Related FMAP Increase" for details about the unemployment related increase, including how it was calculated. The ARRA FMAP increase was not available to the territories, but each territory was allowed to make a one-time choice between (1) an FMAP rate increase of 6.2 percentage points along with a 15% increase in its annual capped funding or (2) the regular FMAP rate along with a 30% increase in its capped funding. All territories chose the latter. The full amount of the temporary ARRA FMAP rate increase applied to most Medicaid expenditures, but not to the following Medicaid expenditures: (1) DSH payments, (2) Medicaid payments that were matched using the E-FMAP (e.g., breast and cervical cancer treatment), and (3) most expenditures for individuals who were eligible for Medicaid because of a state expansion of eligibility implemented after July 1, 2008. To receive ARRA FMAP rate increases, states were required to do the following: (1) ensure their Medicaid "eligibility standards, methodologies, and procedures" were no more restrictive than those that were in effect on July 1, 2008; (2) comply with requirements for prompt payment of health care providers under Medicaid; (3) not deposit or credit the additional federal funds paid as a result of the increase to any reserve or rainy day fund; (4) ensure that local governments did not pay a larger percentage of the state's nonfederal Medicaid expenditures (or a greater percentage of the nonfederal share of Medicaid DSH payments) than otherwise would have been required on September 30, 2008; and (5) submit a report to the Secretary of the Department of Health and Human Services regarding how the additional federal funds paid as a result of the temporary FMAP increase were expended. P.L. 111-226 added a requirement for the last six months (i.e., January 1, 2011, through June 30, 2011) that states certify that they would request and use the funds. FMAP rate increases reduced the amount of state funding required to maintain a given level of Medicaid services. For states that contemplated cuts in order to slow the growth of or reduce Medicaid spending (e.g., by eliminating coverage of certain benefits, freezing or reducing provider reimbursement rates, or increasing cost-sharing or premiums for beneficiaries), increased federal funding enabled them to avoid those cuts. For others, the state savings that resulted from an FMAP rate increase were used for various purposes that were not limited to Medicaid. For example, 36 states reported that they used funds from the ARRA FMAP rate increase to close or reduce their Medicaid budget shortfall, and 44 states used the funds to close or reduce state general fund shortfalls. In addition to avoiding cuts to Medicaid, the Congressional Budget Office (CBO) indicated in 2009 that providing additional federal aid to states that were facing fiscal pressures would probably stimulate the economy. However, CBO noted that the effects would vary. Federal aid to states with relatively healthy budgets would have provided little stimulus if the aid were used to build up rainy day funds (a prohibited use of the ARRA FMAP rate increase), rather than to increase spending or reduce taxes. One study found the ARRA FMAP increase "had an economically large and statistically robust positive effect on employment." GAO determined that the ARRA FMAP increase was better timed than the JGTRRA FMAP increase because the ARRA FMAP increase began during the recession, when all states were experiencing Medicaid enrollment increases and state tax revenue decreases. GAO also found that the ARRA FMAP increase was better targeted than the JGTRRA FMAP increase because the ARRA increase included unemployment-related adjustments for certain states. FFCRA FMAP Increase FFCRA provides an increase to the FMAP rate for all states, the District of Columbia, and the territories of 6.2 percentage points, beginning on the first day of the calendar quarter in which the COVID-19 public health emergency period began (i.e., January 1, 2020) and ending on the last day of the calendar quarter in which the last day of the COVID-19 public health emergency period ends. Table C-1 shows the FY2020 FMAP rates for the states, the District of Columbia, and the territories and those FMAP rates plus 6.2 percentage points. To receive this increased FMAP rate, states, the District of Columbia, and the territories are required to (1) ensure that their Medicaid "eligibility standards, methodologies, and procedures" are no more restrictive than those that were in effect on January 1, 2020; (2) not impose premiums exceeding the amounts in place as of January 1, 2020; (3) provide continuous coverage of Medicaid enrollees during the COVID-19 public health emergency period; and (4) provide coverage (without the imposition of cost sharing) for testing services and treatments for COVIDâ19 (including vaccines, specialized equipment, and therapies). Another condition to receive the FFCRA FMAP increase is that states, the District of Columbia, and the territories cannot require local governments to fund a larger percentage of the state's nonfederal Medicaid expenditures for the Medicaid state plan or Medicaid DSH payments than what was required on March 11, 2020. The FFCRA FMAP increase does not apply to most FMAP exceptions, including the FMAP exceptions for the ACA Medicaid expansion, family planning, and home health services. However, the FFCRA FMAP increase does apply to a few FMAP exceptions. For Community First Choice services, the FFCRA FMAP increase is added to the six percentage point FMAP increase under Section 1915(k) of the Social Security Act, if the expenditures otherwise qualify. Also, FMAP exceptions calculated based on the regular FMAP use the regular FMAP plus the FFCRA FMAP increase for the calculation. These FMAP exceptions are for individuals eligible on the basis of breast and cervical cancer, Certified Community Behavioral Health Clinics, and Money Follows the Person. In addition to the territories receiving the FFCRA FMAP increase, FFCRA increases the federal Medicaid funding available for each territory in FY2020 and FY2021. The aggregate additional funding for the territories increases from $3.0 billion to $3.1 billion in FY2020 and from $3.1 billion to $3.2 billion in FY2021. In the past, GAO developed a prototype formula for temporary FMAP increases. One of the key components of the GAO prototype was making the temporary FMAP increase automatic so the FMAP increase could begin closer to the onset of a national recession. Although the FFCRA does not provide an automatic increase, the FFCRA FMAP increase is starting prior to an expected economic downturn. Conclusion The FMAP rate has been used as a means to provide fiscal relief to states in response to the 2001 recession, the Great Recession, and current economic conditions due to the COVID-19 public health emergency. These recession-related FMAP increases have been provided at times when states have experienced growth in unemployment rates that results in increases in the rate of growth for Medicaid enrollment, which in turn increases the rate of growth for Medicaid expenditures at the same time that state revenues decline. These recession-related FMAP increases are similar but have some significant differences. All three of these recession-related FMAP increases have across-the-board FMAP increases; requirements to maintain Medicaid eligibility standards that are no more restrictive than they were prior to the FMAP increases; and requirements to ensure that states do not increase the percentage that local governments contribute to Medicaid expenditures. However, the JGTRRA and ARRA FMAP increases included hold-harmless provisions that kept the states' regular FMAP rates from declining, and these increases excluded certain Medicaid expenditures from the FMAP increases. The ARRA FMAP increase had an unemployment-related increase that the JGTRRA and FFCRA increases did not have. Also, the JGTRRA FMAP increase did not have additional requirements for states, but ARRA and FFCRA have differing sets of additional requirements for states to adhere to in order to qualify for the FMAP increases. In addition, many states indicated that the JGTRRA and ARRA FMAP increases provided fiscal relief that allowed the states to prevent further reductions to the Medicaid programs and other portions of their state budgets. Appendix A. Jobs and Growth Tax Relief Reconciliation Act of 2003 FMAP Increase The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA; P.L. 108-27 ) included a provision that increased federal medical assistance percentage (FMAP) rates for the 50 states, the District of Columbia, and the territories during the last two quarters of FY2003 and the first three quarters of FY2004. The FMAP rates were held harmless and increased by an across-the-board 2.95 percentage points for each state (i.e., the 50 states, the District of Columbia, and the territories). The JGTRRA FMAP increases were subject to certain requirements for states. For more detail about the JGTRRA FMAP increase, see " JGTRRA FMAP Increase ." Table A-1 shows states' regular FMAP rates and JGTRRA FMAP rates for FY2003 and FY2004. Appendix B. American Recovery and Reinvestment Act of 2009 FMAP Increase The American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5 ) provided a temporary FMAP rate increase to the 50 states and the District of Columbia that was later extended by P.L. 111-226 . With the extension, the ARRA FMAP increase lasted from the first quarter of FY2009 through the third quarter of FY2011 (i.e., October 2008 through June 2011). ARRA held all states harmless from any decline in their regular FMAP rates throughout the period. Under the ARRA FMAP increases, all states (i.e., the 50 states and the District of Columbia) received an across-the-board increase of 6.2 percentage points to their regular FMAP through the first quarter of FY2011, at which point the across-the-board percentage point increase phased down to 3.2 and then 1.2 percentage points for the second and third quarters of FY2011, respectively. Throughout the period, states with unemployment rates that had increased by certain amounts for a quarter received an additional unemployment-related increase. There were three tiers of the unemployment-related increase. See "ARRA Unemployment-Related Increase" for details about the unemployment-related increase, including how it was calculated. The ARRA FMAP increases were subject to certain requirements for states. For more information about the ARRA FMAP increases and these requirements, see " ARRA FMAP Increase ." Table B-1 shows the FMAP rate increases under ARRA and extended by P.L. 111-226 for each quarter, from the first quarter of FY2009 through the third quarter of FY2011. Table B-2 provides an example of how the FMAPs under ARRA with the hold-harmless and the unemployment-related increases were calculated for the second quarter of FY2010. Appendix C. Families First Coronavirus Response Act FMAP Increase The Families First Coronavirus Response Act (FFCRA; P.L. 116-127 ) provides an increase to the FMAP rate for the 50 states, the District of Columbia, and the territories of 6.2 percentage points, beginning on the first day of calendar quarter in which the public health emergency period began (i.e., January 1, 2020) and ending on the last day of the calendar quarter in which the last day of the public health emergency period ends. See the " FFCRA FMAP Increase " section for information about the state requirements for receiving the FFCRA FMAP increase. Table C-1 shows states' FY2020 FMAP rates and those FMAP rates plus the 6.2 percentage points added by FFCRA.


Background Congress provided DOD the authority to use other transactions in the late 1980s and has expanded the authority over time. In 1989, Congress provided the Defense Advanced Research Projects Agency the authority to temporarily use other transactions for research projects. These transactions were intended to spur research and development that would benefit both commercial companies and the government. In 1991, Congress allowed the military departments to use the authority as well and made the authority permanent. In 1993, Congress provided the Defense Advanced Research Projects Agency the authority to award other transactions for prototype projects. Congress expanded the authority to the military departments and other defense agencies in 1996. In 2001, Congress allowed DOD to provide for follow-on production in prototype other transactions. Further, DOD could award follow-on production other transactions, without using competitive procedures, to the participants of a successfully completed, competitively awarded prototype project, provided several conditions were met. Congress codified DOD’s other transaction authority for prototype and follow-on production other transactions at section 2371b of title 10, U.S. Code, in 2015. Congress did not define a prototype project in statute. DOD’s November 2018 Other Transactions Guide, however, defined a prototype project as addressing a proof of concept, model, novel application of commercial technologies for defense purposes, or a process including a business process, among other types. Under section 2371b, DOD can use other transactions for prototype projects that are directly relevant to enhancing the mission effectiveness of military personnel and the supporting platforms, systems, components, or materials proposed to be acquired or developed by DOD, or to improve those in use by the armed forces. In addition, Congress has required DOD to meet at least one of the following four conditions to use a prototype other transaction: 1. There is at least one non-traditional defense contractor or non-profit research institution participating to a significant extent in the prototype project. 2. All significant non-government participants in the transaction are small businesses or non-traditional defense contractors. 3. At least one-third of the total cost of the prototype project is to be paid out of funds provided by sources other than the federal government. 4. The senior procurement executive determines in writing that exceptional circumstances justify the use of a transaction that provides for innovative business arrangements or structures that would not be feasible or appropriate under a contract, or would provide an opportunity to expand the defense supply base in a manner that would not be practical or feasible under a contract. Section 2371b of title 10, U.S. Code, does not limit DOD to awarding prototype other transactions to non-traditional companies. DOD could award traditional defense contractors a prototype other transaction under the first, third, and fourth conditions listed above. It could also award prototype other transactions to consortiums, which may be comprised of non-traditional companies, traditional defense contractors, and others such as non-profit research institutions. These consortiums may be administratively managed by a single firm. Consortium management firms in general provide administrative support to consortium members, such as distributing requests for proposals, holding proposal writing workshops, negotiating the general terms and conditions of prototype projects with consortium members, and making payments to consortium members. For example, Advanced Technology International, a consortium management firm, reported that it represented 298 members in the Countering Weapons of Mass Destruction consortium as of September 2019, according to its website. The website also states that 87 percent of the consortium’s members were non-traditional companies. Contracting offices generally designate a subset of their contracting officers to award other transactions, including prototype other transactions. In this capacity, these individuals are referred to as agreements officers. According to senior contracting officials at offices we included in this review, agreements officers are typically more experienced contracting officers that have demonstrated the ability to exercise business acumen and judgement in a less structured contracting environment and have a strong working knowledge of intellectual property. All of the contracting offices we included in this review required agreements officers to complete training courses offered by their office or the Defense Acquisition University related to the award of other transactions. The Director, Defense Procurement and Acquisition Policy, issued an Other Transaction Guide for Prototype Projects in January 2017 that included general information about planning, evaluating, and awarding prototype other transactions. The Office of the Under Secretary of Defense for Acquisition and Sustainment issued updated guidance in November 2018 that covered all types of other transactions, including case studies and lessons learned to help agreements officers when awarding other transactions. For example, the November 2018 guide states the following: An agreements officer should consider whether a company is supplying a new key technology, providing a material increase in the performance of a product, or making some other contribution when determining if a non-traditional company or non-profit research institution will be participating to a significant extent. DOD components should not establish predetermined percentages of total costs or labor hours to determine significant participation. As such, agreements officers can use their own discretion when using cost and labor hour information to determine if a non-traditional company is playing a significant role on a prototype other transaction. The Competition in Contracting Act does not apply to other transactions, but competition and fairness are still important considerations and agencies may determine how competition will be structured. Other transactions may take longer to award than FAR-based contracts due to factors such as drafting and negotiating all the terms and conditions in an other transaction. Fiscal law requirements are applicable to other transactions and the decision to use an other transaction does not expand or restrict available appropriations. Therefore, multiple funding types, including research, development, test, and evaluation; procurement; and operations and maintenance appropriations may be appropriate depending on the intent and stage of the prototype. Modifications of ongoing transaction projects are fairly common and other transactions should address how changes will be handled. DOD’s Use of Prototype Other Transactions Increased from Fiscal Years 2016 through 2018 DOD significantly increased its use of prototype other transactions from fiscal years 2016 through 2018, both in terms of the number of prototype other transactions awarded and the amount obligated on prototype other transactions. Most prototype other transactions involved at least one non- traditional company that was participating to a significant extent. About 71 percent of the obligations were awarded to three consortiums and two traditional defense contractors. DOD is currently preparing a report to Congress on its use of the other transaction authority and working to address certain limitations in its data collection efforts, including improving data related to consortiums. DOD’s Use of Prototype Other Transactions Grew Significantly from Fiscal Years 2016 through 2018 FPDS-NG data showed that DOD obligated a total of $7.2 billion on prototype other transactions from fiscal years 2016 through 2018. The total number of new prototype other transactions increased five-fold from 34 to 173 during this time frame. According to a Defense Pricing and Contracting official, DOD is encouraging the use of these transactions as a way to acquire innovative technology from non-traditional companies that it could not typically access. There were also modifications and orders related to these prototype other transactions and those awarded in prior years that resulted in a change in obligations, such as providing funding to members of consortiums to carry out new projects. As discussed in more detail later in the report, FPDS-NG did not identify the number of projects carried out by consortiums. Overall, obligations made on prototype other transactions nearly tripled from $1.4 billion to $3.7 billion (see fig. 1). The Army, Defense Advanced Research Projects Agency, and the Air Force accounted for 97 percent of all new awards and actions that resulted in a change in obligations from fiscal years 2016 through 2018. They also accounted for 97 percent of the total amount obligated on these new awards and actions (see table 1). Appendix I shows more detailed information. The Army was responsible for over two-thirds of the new awards and actions made from fiscal years 2016 through 2018—valued at nearly $5.3 billion—but some of these were awarded on behalf of other DOD components, such as the Air Force, Navy, and Defense Innovation Unit. Officials from the Air Force Research Laboratory and Navy’s Office of Naval Research told us that they relied on the Army to award prototype other transactions on their behalf because, in some cases, the Army had previously awarded a transaction, such as to a consortium, which they could leverage to meet their own components’ needs. The Army awarded prototype other transactions on behalf of the Defense Innovation Unit, as it did not have the authority to award prototype other transactions, until November 2018. Majority of Awards Cited That at Least One Non- Traditional Company or Non-Profit Research Institution Was Participating to a Significant Extent DOD reported that at least one non-traditional company or non-profit research institution participated to a significant extent—one of four statutory conditions that Congress established for the appropriate use of a prototype other transaction—in 88 percent of the 1,250 new awards and actions made from fiscal years 2016 through 2018 (see fig. 2). Majority of Dollars Were Obligated to Consortiums and Traditional Defense Contractors We found that from fiscal years 2016 through 2018, the top five recipients by obligations were either consortiums or traditional defense contractors. Awards to these five recipients accounted for $5.1 billion or 71 percent of the obligations on new awards and actions during this time frame (see table 2). Three of the top five recipients were consortium management firms— Advanced Technology International, Consortium Management Group, and National Center for Manufacturing Sciences. In general, a consortium management firm does not complete the prototype, but rather helps manage consortium members. The other two companies among the top five were traditional defense contractors—Lockheed Martin and Aerojet Rocketdyne. As stated earlier, according to statute, traditional defense contractors can be awarded prototype other transactions under three possible conditions: by partnering with at least one non-traditional defense contractor or non- profit research institution participating to a significant extent, paying at least one-third of the total project cost, or having the government agency’s senior procurement executive determine in writing that exceptional circumstances justify the use of a prototype other transaction. Paying one-third of the project’s costs is an example of cost-sharing. For the eight new prototype other transactions these two companies were awarded from fiscal years 2016 through 2018, four involved non- traditional companies or non-profit research institutions that participated to a significant extent and the remaining four involved cost-sharing arrangements. In the one prototype other transaction awarded to Lockheed Martin that we reviewed, the Army entered into the transaction, currently valued at $17.5 million, to prototype two removable sensors for unmanned aircraft. According to the Army agreements officer, Lockheed Martin was awarded an other transaction instead of a FAR-based contract because Lockheed Martin needed to collaborate with four other companies that were awarded prototype other transactions. The Army agreements officer told us he concluded that it would have been difficult for all the contractors to collaborate if some were operating under prototype other transactions and Lockheed Martin was subject to the requirements of a FAR-based contract. Since Lockheed Martin did not have a non-traditional company participating to a significant extent on the prototype other transaction it was awarded, the company was required to pay at least one-third of the cost of the project to comply with statutory requirements. Lockheed Martin used a combination of in-kind contributions, such as test articles, and independent research and development funds for its share of total project costs. DOD Is Preparing a Report on Its Use of the Other Transaction Authority and Addressing Certain Data Limitations In response to congressional direction, DOD expects to submit a report in November 2019 on its use of the prototype other transaction authority in fiscal year 2018. This report will include, among other elements, data on new prototype other transactions awarded in fiscal year 2018; actions made in fiscal year 2018 on these prototype other transactions and ones awarded in prior fiscal years; detailed information on the DOD organizations using the authority; the purpose and status of projects; and those prototype other transactions that led to a follow-on production other transaction. This report, which was originally due to be delivered in December 2018 was delayed, according to DOD, as FPDS-NG was not configured to capture all the data needed to prepare the report. DOD’s Defense Pricing and Contracting is collecting the required data directly from DOD components. DOD and military component officials whom we interviewed acknowledged limitations in the FPDS-NG data on prototype other transactions. DOD officials stated they have addressed some of these limitations and officials are discussing how to improve the information collected in the future. For example, as noted above, we found four other transaction awards for the production of products and four procurements for experimental purposes identified as prototype other transactions in FPDS-NG. According to Defense Pricing and Contracting officials, until June 2019, DOD did not have the ability to differentiate between prototype and production other transactions in FPDS-NG; therefore, both prototype and production other transactions were reported as prototype other transactions. The General Services Administration—the organization that is responsible for managing and updating FPDS-NG— added an option in FPDS-NG that would allow users to identify other transactions as either for a prototype or production, as appropriate, beginning in June 2019. DOD officials stated that they are discussing the best approach for consistently identifying procurements for experimental purposes in FPDS-NG. This could include adding an option to FPDS-NG for users to identify these procurements or including unique letters in the award number. DOD officials are also working to address FPDS-NG data limitations related to consortiums that reduce DOD’s management insight on the use and award of prototype other transactions. Army contracting officials noted that FPDS-NG tracks information about the base prototype other transaction that is awarded to a consortium, but does not track data about each project conducted through the consortium, such as whether a non- traditional company is participating on each project. The Army Deputy Assistant Secretary for Procurement issued a policy, effective October 1, 2019, that changes how the Army reports other transactions into FPDS- NG to improve data on projects conducted by consortium members. The policy, however, does not discuss how it will track non-traditional company participation. Further, FPDS-NG does not track the extent of competition among consortium members. DOD officials stated that, while FPDS-NG data shows DOD competitively awarded 48 percent of all prototype other transaction obligations for fiscal years 2016 through 2018, they believed this figure understates the degree of competition actually achieved. These issues are illustrated in the following examples. FPDS-NG shows that Advanced Technology International was awarded a prototype other transaction in fiscal year 2018 with a ceiling of $10 billion for the Countering Weapons of Mass Destruction Consortium. FPDS-NG also shows that, as of March 2019, the Army had obligated $116 million as modifications under the base transaction, and, according to the Army Contracting Command-New Jersey agreements officer, were for consortium members to carry out various prototype projects. FPDS-NG did not identify the number of projects that are being carried out by the consortium or which consortium members were participating on the projects. The Army Contracting Command-New Jersey agreements officer that awarded this prototype other transaction, however, maintained her own records to help her manage and oversee the consortium’s efforts. According to this agreements officer, as of March 2019, all 44 projects carried out by consortium members involved non-traditional companies—37 prototype projects were carried out by non-traditional companies that served as prime contractors and seven prototype projects were carried out by traditional defense contractors with subcontractors that were non-traditional companies that participated to a significant extent. FPDS-NG shows that the base contract, as well as all the modifications, for a different prototype other transaction the Army Contracting Command-New Jersey awarded to Advanced Technology International was non-competitively awarded. These modifications accounted for 69 percent or $2.6 billion of the non-competitive obligations DOD made through new awards and actions from fiscal years 2016 through 2018. However, according to command contracting officials, during this time frame, all the obligations on modifications were associated with projects that were competitively awarded among consortium members. DOD senior contracting officials stated that FPDS-NG tracks only whether the base transaction was competitively awarded and that modifications made to transactions awarded to consortiums automatically retain the same competitive or non-competitive designation as the base contract. DOD Agreements Officers Used Multiple Methods to Evaluate Non-Traditional Company Status and Participation Agreements Officers Used Various Methods to Determine Whether a Company Was a Non- Traditional Company Agreements officers used multiple methods to determine whether and to what extent non-traditional companies were participating on the prototype other transactions we reviewed. We found that agreements officers first determined whether a company was traditional or non-traditional by reviewing government databases and consulting with subject matter experts, among other approaches; and then determined the extent to which a non-traditional company was expected to participate on a prototype other transaction. In accordance with DOD’s November 2018 Other Transactions Guide, agreements officers determined whether non-traditional companies participated on nine of the 11 transactions in our non-generalizable sample that met this statutory condition. For the other two transactions, one involved a cost sharing arrangement between the Army and a traditional defense company; therefore, the agreements officer did not have to make this determination. The other instance involved the award of an other transaction to a consortium. In this instance, the consortium and agreements officer set out to negotiate general terms and conditions that would flow down to subsequent prototype projects carried out by consortium members. The agreements officer plans to make the determination about whether a non-traditional company is participating or meeting another statutory condition on a case-by-case basis for each subsequent prototype project that is funded. Agreements officers typically used more than one method to determine if a company was a non-traditional company for the nine transactions in our sample. For example, agreements officers considered, in varying combinations, a contractor’s assertion, data from government information systems, subject matter expert input, or market research when making the determination (see table 3). As reflected in table 3, in none of the cases we reviewed did an agreements officer rely solely on the contractor’s assertion that a company was a non-traditional company. The following two examples illustrate the type of actions agreements officers took to determine that a contractor was a non-traditional company: In a $19.3 million prototype other transaction awarded by Washington Headquarters Services for a large autonomous ship, the prime contractor stated that it and a subcontractor were non-traditional companies. This was because neither had performed work on a DOD contract or subcontract that was subject to full cost accounting standards in the preceding year, which is one of the statutory criteria to be considered a non-traditional company. To confirm that the prime contractor and the subcontractor were non-traditional companies, the agreements officer checked the System for Award Management, leveraged market research, and relied on input from technical officials from the Navy’s Surface Warfare Directorate and Unmanned Maritime Systems Program Office with industry knowledge about contractors. In a $10 million Army prototype other transaction for an artificial intelligence war-gaming capability, the contractor that was to perform all the work stated that it met the statutory definition of a non- traditional company. To verify its status, the agreements officer determined that the contractor did not have a record in the System for Award Management, which would ordinarily be required if the company had previously done business with the federal government. The agreements officer also conducted market research to verify that the company was not a DOD subcontractor that was subject to cost accounting standards in the preceding year. Agreements Officers Then Used Various Methods to Determine Whether the Non-Traditional Company Was Participating to a Significant Extent After determining whether a company was a non-traditional company, agreements officers then used various methods to determine whether one or more non-traditional companies would play a significant role on the nine prototype other transactions before they were awarded. These methods included assessing whether the contractor was performing all the work on the prototype, evaluating whether the services or technologies provided by the non-traditional companies were critical, using input from subject matter experts, or considering the percentage of total costs or labor hours performed by the contractor (see table 4). As shown in table 4, the proportion of award values received by non- traditional companies on the prototype other transactions, which ranged from 16 to 100 percent, did not always indicate the significance of the non-traditional companies’ contributions. Consistent with DOD guidance, agreements officers took various factors into account when determining whether a non-traditional company is participating to a significant extent. In the transaction in which the non-traditional company was expected to receive about 16 percent of the total award value, the agreements officer considered the engineering work performed by a non-traditional company—which was a subcontractor on the effort—to be critical to developing the data port for a robotic satellite servicing vehicle. In another example, the agreements officer and Navy subject matter experts determined a non-traditional company that would receive less than 25 percent of a transaction’s overall award value was participating to a significant extent since it was providing the vessel and crew necessary to execute testing of the large autonomous ship that was being prototyped. DOD Agreements Officers Generally Followed Established Review Processes for Awarding Selected Prototype Other Transactions DOD Contracting Offices Established Processes for Reviewing Prototype Other Transactions Agreements officers followed their commands’ established review processes, which involved higher level reviews by senior officials and legal reviews, in nine of the 11 transactions in our sample. Agreements officers did not obtain higher level reviews in the two remaining transactions, but senior contracting officials plan to take action to address the issues we identified. Award times for these transactions ranged from 45 to 370 days. Each of the DOD contracting offices we assessed established policies for reviewing prototype other transactions before award, though the processes differed. For example, the contracting offices we evaluated generally required other transactions to be reviewed by an official at least one level above the agreements officer and to be subject to a legal review. Some contracting offices required additional reviews at higher dollar thresholds. In addition, the officials responsible for reviewing transactions within a contracting office sometimes differed based on the expected dollar value of the transaction. For example, at the Army Contracting Command-New Jersey, the Branch Chief can review only transactions valued at less than $10 million. Transactions exceeding that amount would be reviewed by a higher ranking official, such as the Center Director. According to senior contracting officials, the review process is intended to ensure that prototype other transactions meet the statutory requirements for use of the authority before award. The review process also facilitates component efforts to obtain the “best deal” for the government based on decisions by the agreements officers, senior contracting and program officials, and legal advisors about factors such as whether to compete the transaction and whether to obtain technical data rights for the prototype. Table 5 provides more specific information on the review process required by the Air Force Research Laboratory, Army Contracting Command-New Jersey, Defense Advanced Research Projects Agency, and Washington Headquarters Services. Agreements Officers Documented Various Decisions Prior to Awarding Prototype Other Transactions Agreements officers in our review documented aspects of their decision making prior to awarding a transaction. For example, agreements officers generally documented the condition under section 2371b of title 10, U.S. Code, that was met to use a prototype other transaction, and some documented the negotiation process with the commercial companies regarding terms and conditions of the transactions. We also found that the Air Force Research Laboratory, Defense Advanced Research Projects Agency, and Washington Headquarters Services required agreements officers to document acquisition planning for prototype projects to some extent. Senior contracting officials from these organizations stated that acquisition planning helps programs manage risks and provides direction to agreements officers who are new to awarding other transactions. For an Air Force other transaction we reviewed, documentation included the purpose and objectives for the prototyping project, the anticipated cost and type of funding needed for the project, and the transaction award schedule. We found the Army agreements officer who awarded the prototype other transaction to the Countering Weapons of Mass Destruction Consortium developed an acquisition planning document, even though policy did not require her to do so. The agreements officer said she did this because the transaction had a $10 billion ceiling and she considered this a best practice. Legal counsel, several senior level contracting officials, and program officials reviewed the acquisition planning document before the agreements officer awarded the transaction. Defense Advanced Research Projects Agency also required agreements officers to document the reason for non-competitive awards in a memorandum. We previously reported that competition promotes the efficient use of taxpayer resources and establishes accountability for results by helping to drive down prices and motivate better contractor performance. We found that an Air Force Research Laboratory agreements officer also documented the reasons why a $1.2 million prototype other transaction to develop a manufacturing process to reduce a missile engine’s production costs was awarded non-competitively, even though policy did not require such documentation. The agreements officer said the reason for the non-competitive award was that a non-traditional company is the manufacturer of the engine and has the experience to create cost-saving innovations to its manufacturing process. The agreements officer stated legal counsel reviewed this documentation prior to awarding the other transaction and that management was aware of the non-competitive status of this transaction during acquisition planning. Contracting officials from the Army Contracting Command-New Jersey stated that, consistent with statute, they did not require acquisition planning or non-competitive award documentation because they wanted to maintain few requirements to award prototype other transactions. Award Times Varied Significantly for the Prototype Other Transactions We Reviewed While senior contracting officials told us that they were able to streamline the review process for other transactions compared to the actions typically required before awarding other procurement contracts, they cautioned that the time needed to award a prototype other transaction can vary significantly. We found that, for the 11 prototype other transactions we reviewed, award times—which we defined as the time a contracting office released a solicitation until the time the government awarded the other transaction—ranged from 45 to 370 days. By way of reference, we recently reported that the time from solicitation issuance until the time the government awarded 129 weapon systems-related procurement contracts ranged from less than a month to over 4 years, with a median of about 9 months. For the 11 prototype other transactions we reviewed, contracting officials noted that the times varied due to factors such as prior knowledge about the contractor and the complexity of the prototype project. An Air Force prototype other transaction for improving missile engine manufacturing processes was awarded in 45 days because the agreements officer said she had extensive knowledge about the capabilities of the contractor prior to awarding this transaction and was, therefore, able to plan for and develop other transaction documentation early. The agreements officer told us that she had knowledge of this company because it had previously been a subcontractor on a technology demonstration. Conversely, the Army took 370 days to award a prototype other transaction because the government needed time to assess what contracting instrument to use to ensure multiple contractors collaborated to build an autonomous airborne network of sensors. According to the agreements officer, the government needed time to research the effects of several possible teaming arrangements, including creating a new consortium, using an existing consortium, awarding a FAR-based contract, placing all of the contractors on a single other transaction, or awarding individual other transactions to each contractor. Agreements Officers Generally Followed Management Review Processes Prior to the Award of the Prototype Other Transactions GAO Reviewed In nine of the 11 prototype other transactions we reviewed, agreements officers followed their contracting offices’ policies to have prototype other transactions reviewed before awarding the other transactions. In a $4.6 million Army prototype other transaction to develop a capability to modernize legacy hardware systems, the appropriate senior-level contracting official reviewed the transaction, such as by checking terms and conditions and ensuring that the contract file was complete. Legal counsel also reviewed the transaction prior to award, as required. In a $6.1 million Defense Advanced Research Projects Agency prototype other transaction, the agreements officer consulted the Deputy Director about this transaction before negotiations and a contracting official one level above the agreements officer reviewed the transaction, as the agency’s policy required. The agreements officer also consulted legal counsel, an optional policy action, to draft and negotiate a clause that would waive specific topics of the commercial rights license that did not apply to the government. The agreements officer stated that by working with legal counsel to develop a clause, he was able to meet the program’s objective to prototype a capability to emulate and validate microchip designs and accommodate the contractor’s desire to use its commercial license. For the remaining two prototype other transactions, we found, and contracting officials agreed, that agreements officers did not meet policy requirements for obtaining higher level review before award. In the first case, a Defense Advanced Research Projects Agency agreements officer did not have a higher level official review a $7.8 million prototype other transaction before it was awarded. Agency policy required the agreements officer to consult with the Deputy Director of the Contract Management Office about the negotiation strategy and discuss any issues that arose during negotiations. In addition, policy required the agreements officer to have a contracting official one level above the agreements officer review the prototype other transaction before award, regardless of dollar value. The agreements officer told us that he did not consult with the Deputy Director or obtain the required review because he thought the terms and conditions were straightforward and the dollar value was too low to require a review by an official above him. Senior-level Defense Advanced Research Projects Agency contracting officials told us they were not aware that this prototype other transaction was awarded without the required consultation and review until we brought this to their attention. According to these officials, internal controls were in place that should have prevented the award of prototype other transactions without the required consultation and review—such as making current policy documents readily accessible to agreements officers, communicating policy changes to agreements officers, and using a data system to track the development of other transactions prior to award. These officials stated that they plan to check compliance with the required pre-award consultation and review during their next internal file review of awarded other transactions that will be completed in fiscal year 2020. If they find instances of noncompliance, officials stated that the agency will take corrective actions, such as providing additional training for agreements officers. They also stated that they subsequently reviewed the $7.8 million prototype other transaction and determined that no changes needed to be made to the other transaction in this instance. In the second case, the Army Contracting Command-New Jersey agreements officer—who was also the Center Director—had his Branch Chief review a $10 million prototype other transaction prior to award. Command policy, however, generally requires the Center Director to review prototype other transactions valued at or greater than $10 million. The Center Director stated that he did not serve as the reviewer on this transaction because he would have been reviewing his own work. Army Contracting Command-New Jersey officials stated that the management review should have been conducted by another Center Director or a higher contracting official, but noted that this was an atypical situation not addressed in the command’s policies. As such, Army Contracting Command-New Jersey officials plan to revise their management review policy by fall 2019 to address who should be responsible for conducting a higher level management review when someone who is designated to conduct the management review serves as the agreements officer for the transaction. The officials stated that they reexamined the prototype other transaction and found that there were no issues with the terms and conditions and, therefore, no changes needed to be made to the transaction. Based on the stated intent of Defense Advanced Research Projects Agency and Army Contracting Command-New Jersey contracting officials to address issues we identified in our review, we are not making recommendations at this time but will monitor their actions to address the issues. Agency Comments We provided a draft of this product to DOD for comment. DOD provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees and the Secretary of Defense; the Acting Principal Director of Defense Pricing and Contracting; the Secretaries of the Air Force and Army; and the Directors of the Defense Advanced Research Projects Agency and the Washington Headquarters Services. In addition, the 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) 512-4841 or dinapolit@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 II. Appendix I: Department of Defense (DOD) Use of Prototype Other Transactions by Command Appendix II: GAO Contact and Staff Acknowledgments GAO Contact Staff Acknowledgments In addition to the contact named above, Cheryl Andrew, Assistant Director; Carmen Yeung, Analyst-in-Charge; Pete Anderson; Lorraine Ettaro; Kurt Gurka; Daniel Glickstein; Julia Kennon; Roxanna Sun; and Leanne Violette made key contributions to this report.


Multiple Aspects of the REAC Inspection Program Have Weaknesses Our March 2019 report identified a number of areas in which HUD needs to improve its physical inspection process and its oversight of inspectors, which could help better ensure the health and safety of households that live in HUD-assisted properties. These areas include conducting a comprehensive review of the inspection process; incorporating sampling error as part of determining inspection frequency and enforcement actions; tracking whether inspections are conducted by their expected date; enhancing the process and practices related to selecting, training, and evaluating inspectors; and ensuring that new quality control policies and procedures are implemented. Comprehensive Review of REAC Inspection Process We found that REAC had not conducted a comprehensive review of its inspection process since 2001, although new risks to its process have emerged since then. For example, REAC staff have raised concerns that some property owners have taken advantage of the scoring system and others have misrepresented the conditions of their properties. Specifically, because more points are deducted for deficiencies on the property site than for deficiencies in a dwelling unit, some property owners prioritize site repairs over unit repairs. Additionally, some property owners attempt to cover up, rather than address, deficiencies—such as by using mulch on a building exterior to hide erosion. REAC staff also have raised concerns about property owners employing current or former REAC contract inspectors to help prepare for an inspection, sometimes by guiding owners to repair just enough to pass inspection rather than comprehensively addressing deficiencies. REAC also continues to find that some contract inspectors conduct inspections that do not meet REAC’s quality standards. Furthermore, REAC fundamentally changed the entities that conduct inspections. In 1998, REAC employed a few large inspection companies to conduct the inspections. However, in 2005, REAC introduced the reverse auction program and opened up the inspection process to a larger number of small businesses, which resulted in a change in the composition of inspectors. We found that without a comprehensive review, REAC cannot determine if it has been meeting the goal of producing inspections that are reliable, replicable, and reasonable. We recommended that REAC conduct a comprehensive review of the physical inspection process, and HUD agreed with this recommendation. In November 2019, HUD officials told us that they recently completed a comprehensive review of the physical inspection process. In supporting documentation, HUD stated that the current model was insufficient for evaluating HUD-assisted housing when compared to modern expectations of housing quality, and that there is now a need to focus more on health and safety of residents and less on asset preservation and condition and appearance items. We have been assessing HUD’s recent review to determine whether it is has fully addressed our recommendation. Incorporating Sampling Errors We also found that REAC may not be identifying all properties in need of more frequent inspections or enforcement actions because it does not consider sampling errors of the inspection scores. For large properties, REAC inspects a statistical sample of the property’s units and buildings rather than all of them. The results for the sample are then used to estimate a score that represents the condition of the entire property. HUD takes enforcement action for multifamily properties with a score below 60. However, sampling introduces a degree of uncertainty, called sampling error, which statisticians commonly express as a range associated with numerical results. For example, for a property that scored 62 on its physical inspection, due to sampling error, the range associated with this score could be between 56 on the lower bound and 68 on the upper bound. REAC would consider this a passing score that requires an annual inspection and no enforcement action, although the lower bound fell below 60. REAC previously calculated sampling errors but ceased doing so in 2013, according to REAC officials, in part because of a lack of resources and also because they believed there was no need to calculate them. Based on our analysis of REAC inspection data, HUD could have taken enforcement actions against more properties if REAC had taken sampling errors in inspection scores into account. For example, from fiscal years 2002 through 2013, about 4.3 percent of inspections of multifamily and public housing properties had an inspection score of 60 or slightly above 60 but had a lower bound score under 60. Without considering sampling errors when determining whether enforcement action is needed, REAC will not identify some properties that may require more frequent inspections or enforcement actions. We recommended in our March 2019 report that REAC resume calculating the sampling error associated with the physical inspection score for each property, identify what changes may be needed for HUD to use sampling error results, and consider those results when determining whether more frequent inspections or enforcement actions would be needed. HUD neither agreed nor disagreed with this recommendation. However, since our report was issued, HUD said that by September 30, 2020, REAC planned to include the standard error calculations in the next version of its scoring software for physical inspections. REAC officials also stated that a task team concluded that the use of sampling error likely would have no impact on any individual enforcement action. However, REAC’s statement appears to contradict its own policies because inspection scores alone are used to determine whether some properties are referred for potential enforcement actions. We will continue to monitor REAC’s actions regarding this recommendation, including how it uses sampling error results to make decisions about properties. Selecting, Training, and Evaluating Inspectors In our March 2019 report, we also found that REAC lacked formal mechanisms to assess the effectiveness of its training program for contractors hired to inspect properties (contract inspectors) and for HUD employees responsible for monitoring and overseeing contract inspectors (quality assurance inspectors). Unlike professional inspection organizations, REAC does not have continuing education requirements. Formal mechanisms to assess the effectiveness of its training program could help REAC ensure that its program supports the development needs of inspectors. Furthermore, requiring continuing education could help REAC ensure that inspectors are current on any changes in REAC’s policies or industry standards. We also found weaknesses in REAC’s process for evaluating the performance of inspectors, which could hinder its ability to ensure the quality of inspections. We made a number of recommendations related to the selection, training, and performance evaluation of inspectors. Specifically, we recommended that HUD take the following actions: Follow through on REAC’s plan to create a process to verify candidate qualifications for contract inspectors—for example, by calling references and requesting documentation from candidates that supports their completion of 250 residential or commercial inspections. Develop a process to evaluate the effectiveness of REAC’s training program—for example, by reviewing the results of tests or soliciting participant feedback. Revise training for quality assurance inspectors to better reflect their job duties. Develop continuing education requirements for contract and quality assurance inspectors. Review performance standards for quality assurance inspectors and revise them to better reflect the skills and supporting behaviors that quality assurance inspectors need to effectively contribute to REAC’s mission. HUD agreed with these recommendations, and we have been evaluating actions it has taken in response to them since our report was issued. For example, in November 2019, HUD officials said that they were moving toward a model of contracting with larger firms to conduct physical inspections of properties. In this model, HUD plans to put the first level of responsibility on the contractor to do its own due diligence on inspector candidates, and the contractor would be required to review 25 verifiable prior inspections completed by each inspector candidate. A REAC official then would be expected to select a sample of the candidate’s inspections to review. In response to our recommendation about revising training for quality assurance inspectors, REAC said that it recently began requiring a minimum of 8 hours of continuing education annually for all quality assurance staff. As of November 2019, REAC had not yet provided us with information about the subject matter of that training. Since our report was issued, REAC also developed continuing education requirements for contract and quality assurance inspectors, which it said will be required beginning in January 2020. In addition, REAC has developed updated performance standards for quality assurance inspectors, which REAC officials said were under review. REAC considers the new standards to be more aligned with the job responsibilities of quality assurance inspectors. Meeting Target Dates for Inspections We also found that REAC did not always meet its schedule for inspecting multifamily properties or track progress toward meeting scheduling requirements. REAC did not meet its schedule for about 20 percent of multifamily property inspections from calendar years 2013 through 2017. On average, REAC conducted inspections for these properties about 6 months past the targeted date. REAC staff told us that there may be legitimate reasons for not conducting an inspection according to the targeted date. For example, the Office of Multifamily Housing, which oversees the performance of properties that receive project-based assistance, can delay an inspection for reasons such as natural disasters or major rehabilitation to the property. However, REAC maintains limited data on the reasons why inspections have been rescheduled or cancelled. In addition, these data are not readily available to understand retrospectively why an inspection did not occur on schedule. REAC also does not track its progress toward meeting its requirement for inspecting multifamily properties within prescribed time frames. REAC’s inability to adhere to the inspection schedule could hinder the Office of Multifamily Housing’s ability to monitor the physical condition of properties on a timely basis and take enforcement actions when warranted. Furthermore, the lack of a mechanism to track REAC’s progress toward meeting its requirement for inspecting multifamily properties hinders its ability to determine what factors have contributed to delays in conducting the inspections. In our March 2019 report, we recommended that REAC track on a routine basis whether it conducts inspections of multifamily housing properties in accordance with federal guidelines for scheduling, as well as coordinate with the Office of Multifamily Housing to minimize the number of properties that can cancel or reschedule their physical inspections. HUD partially agreed with this recommendation. Since our report was issued, REAC officials told us that REAC developed an electronic spreadsheet to better track information about its inspections, and they expect information technology enhancements that would automate the tracking of information about these inspections to be deployed by September 1, 2020. HUD’s Office of Multifamily Housing also issued a memorandum in March 2019 that provides guidance on when a field office may approve an owner’s request to delay an inspection. We will continue to monitor HUD’s actions related to this recommendation. Implementing New Quality Control Policies and Procedures In our March 2019 report, we found that REAC had yet to implement policies and procedures for its Quality Control group, which was formed in 2017. REAC created the Quality Control group to standardize quality assurance inspector reviews by conducting more frequent oversight and looking for trends across all quality assurance inspectors, according to a Quality Control official. In November 2018, Quality Control developed a mission statement that says that the primary goal of the group is to improve the consistency of inspections. Also in November 2018, Quality Control developed procedures for reviewing quality assurance inspectors, which include processes for conducting field reviews of completed inspections, criteria for acceptable inspections, and processes for providing feedback. An official from the group told us both its mission and procedures have not been implemented, in part because Quality Control staff repeatedly have been occupied with other special projects. Without finalizing and implementing its policies and procedures for reviewing quality assurance inspectors, Quality Control may not be able to provide consistent reviews of quality assurance inspectors, which could affect the quality of inspections and the feedback and coaching that quality assurance inspectors provide to contract inspectors. We recommended that REAC ensure that Quality Control’s policies and procedures for overseeing quality assurance inspectors are implemented, and HUD agreed with this recommendation. Since our report was issued, REAC has begun to implement this recommendation by clarifying in writing the roles, responsibilities, and objectives of the Quality Control group, including how the group plans to support changes in REAC’s inspection program. In determining the status of our recommendation, we will look for evidence that the group has been consistently implementing its policies and procedures. Other Recommendations and Actions HUD Has Taken In addition, our March 2019 report made several other recommendations regarding the physical inspection process and oversight of inspectors. These recommendations addressed documenting the sampling methodology for the inspection process, designing and implementing an evaluation plan for assessing the effectiveness of REAC’s pilot program for staffing inspections in hard- to-staff geographic areas, implementing internal HUD recommendations, implementing a plan for meeting management targets for reviews by quality assurance inspectors, and reporting to Congress on why the agency has not complied with a Consolidated Appropriations Act requirement. HUD generally agreed with these recommendations. While HUD has taken some steps, it had not fully addressed them as of November 2019. We have been assessing the actions HUD has taken and will continue to monitor HUD’s progress toward implementing these recommendations. HUD has been undertaking significant changes to the REAC physical inspection program. In a Federal Register notice published on August 21, 2019, HUD said it was soliciting comments on a proposed voluntary demonstration of a new physical inspection process, called the “National Standards for the Physical Inspection of Real Estate.” According to HUD officials, the new inspection model is intended to address issues of inspections not always identifying health and safety conditions and properties with poor unit conditions passing inspections, among other things. HUD officials have said that a transition to the new model may take 2 years or more. HUD also has been taking steps to replace its reverse auction program with a program in which large contractors will be responsible for conducting physical inspections. We will continue to monitor HUD’s actions regarding the recommendations, as well as HUD’s activities more broadly related to implementing a new inspection model. Full implementation of the recommendations, even as the inspection program undergoes changes, can help REAC to ensure that properties are decent, safe, sanitary, and in good repair. HUD Needs to Better Monitor Compliance with Lead Paint Regulations and Measure and Report on Performance of Lead Efforts Compliance Monitoring and Enforcement Our June 2018 report identified a number of areas in which HUD needs to improve its efforts to identify and address lead paint hazards and protect children in low-income housing from lifelong health problems. Among other issues, we identified shortcomings in compliance monitoring and enforcement, inspection standards, and performance assessment and reporting. Our June 2018 report noted that HUD began taking steps in 2016 to monitor how PHAs comply with lead paint regulations. These steps included tracking the status of lead inspection reports for public housing properties and PHA-reported information about cases of children with elevated blood lead levels living in voucher and public housing units. However, we also identified several limitations with HUD’s monitoring efforts. For example, HUD relies in part on PHAs self-certifying their compliance with lead paint regulations, but investigations found that some PHA officials may have falsely certified that they were in compliance. Also, on-site compliance reviews performed by HUD staff can be used to determine if PHAs are in compliance with these regulations, but HUD performs a limited number of these reviews annually. In fiscal year 2017, HUD conducted these reviews at less than 2 percent of the roughly 4,000 PHAs. Finally, HUD does not have data readily available on the physical condition of the roughly 2.5 million voucher units or these units’ compliance with lead paint regulations because the individual PHAs keep these data. These limitations in HUD’s monitoring suggest that HUD may not be fully aware of the extent to which children may live in unsafe units. As a result, we recommended that HUD establish a plan to mitigate and address risks in its lead paint compliance monitoring processes. These actions could further strengthen HUD’s oversight and keep PHAs accountable for ensuring that housing units are lead-safe. HUD agreed with the recommendation. As of November 2019, HUD officials told us the agency had taken steps to implement the recommendation, including requiring PHAs to submit appropriate documentation regarding public housing units’ compliance with lead paint regulations and updating an internal checklist for on-site compliance reviews that HUD staff conduct. We will continue to monitor HUD’s progress in response to our recommendation. Our 2018 report also found that HUD did not have detailed procedures to address PHA noncompliance with lead paint regulations or to determine when enforcement decisions might be needed. HUD staff stated that they address PHA noncompliance through ongoing communication and technical assistance. However, HUD has not documented specific actions staff should perform when deficiencies are identified. Furthermore, in response to our requests for information on enforcement actions taken, HUD was able to provide information on only one enforcement action, which dated from 2013. As a result, we recommended that HUD develop and document procedures to ensure staff take consistent and timely steps to address issues of PHA noncompliance with lead paint regulations. HUD generally agreed with the recommendation. As of November 2019, HUD officials told us procedures were in draft form and under internal review and were not expected to be finalized until spring 2020. HUD officials noted that the draft procedures could help HUD staff decide when an enforcement action might be appropriate, including determining how long PHAs have to resolve noncompliance. Inspection Standards We also found that HUD’s Lead Safe Housing Rule requires a stricter lead inspection standard for public housing than for voucher units. For public housing, inspectors must conduct a risk assessment that includes testing paint chips and dust for the presence of lead paint. For voucher units, inspectors conduct a visual assessment that includes looking for deteriorated paint or visible surface dust but does not include any testing of paint chips or samples. As a result of the different inspection standards in the two programs, children living in voucher units may receive less protection from lead paint hazards than children living in public housing. According to agency officials, HUD does not have the statutory authority to require the more stringent inspection in the voucher program. In our June 2018 report, we recommended that HUD request authority from Congress to use the stricter lead inspection standard in the voucher program as indicated by analysis of health effects for children, the impact on landlord participation in the program, and other relevant factors. In August 2018, HUD officials told us that they planned to convene a working group to design and conduct a statistically rigorous study on the impact of risk assessments to help decide whether to support statutory change for greater flexibility in strengthening inspection standards for pre- 1978 units under the voucher program. Such an analysis could be useful in evaluating the potential benefits and risks of a change in the voucher program, and we will continue to monitor the progress made by the working group. As of November 2019, HUD officials told us they were working on a demonstration proposal to test an alternative inspection standard in the voucher program. The officials noted that details of the demonstration proposal were not currently available. Separately, we have ongoing work reviewing possible changes in the inspection standard for the voucher program. This work started in September 2019 and will include an in-depth review of the impact a change in the inspection standard may have on the cost and length of time of inspections, as well as the impact on landlords and families participating in the voucher program. Performance Assessment and Reporting Our June 2018 report also identified weaknesses in HUD’s performance assessment of and reporting on its lead-safety efforts. We found that HUD had taken limited steps to measure, evaluate, and report on the performance of its programmatic efforts to ensure that housing is lead- safe. First, HUD lacked comprehensive goals and performance measures for its lead-reduction efforts. We found that HUD did not track the number of housing units in the voucher or public housing programs that were lead-safe. At the time of our report, HUD officials told us that the agency did not have systems to count the number of housing units made lead- safe in these two programs. HUD had begun discussing whether existing databases could be used to count lead-safe housing units but did not provided us with details at that time. Second, HUD had not formalized plans and did not have a time frame for evaluating the effectiveness of its lead paint regulations. Third, it had not complied with annual statutory reporting requirements and last reported on its lead efforts in 1997. We noted that by improving its measurement of whether its housing is lead- safe and evaluating and reporting on its efforts, HUD will be better positioned to inform Congress and the public about its progress toward ensuring that housing is lead-safe for residents. As a result of these findings, we recommended that HUD develop performance goals and measures, including a measure to track its efforts to ensure that housing units in its rental assistance programs were lead- safe. Additionally, we recommended that HUD finalize plans for evaluating the effectiveness of its lead paint regulations. Finally, we recommended that HUD complete statutory reporting requirements and make the reports publicly available. HUD generally agreed with these recommendations. In August 2018, HUD told us that it would use existing data systems to begin to establish a baseline for reporting lead-safe housing units in its rental assistance programs. As of November 2019, HUD officials told us they still were exploring whether current data systems could be used to count the number of lead-safe housing units in HUD’s rental assistance programs. According to HUD officials, for public housing, HUD has made progress in counting housing units that have been made lead-safe using funds from the Lead-Based Paint Capital Fund Program. However, officials told us data will not be available until spring 2020. To evaluate the effectiveness of lead paint regulations, in November 2019 HUD officials told us they planned to use data from the forthcoming update to the American Healthy Homes Survey to better estimate the prevalence of lead paint hazards in federally assisted housing. However, officials told us the findings from the updated survey likely would not be available until summer 2020. With respect to complying with statutory reporting requirements, in November 2019, HUD officials told us they planned to issue a report to Congress on the agency’s lead efforts in early 2020. We will continue to monitor HUD’s efforts to implement these recommendations. In summary, it is essential to strengthen HUD’s oversight and keep PHAs accountable for ensuring that housing units are lead-safe because children continue to test positive for lead while living in HUD-assisted housing. As of November 2019, HUD officials told us they continue to learn of confirmed cases of children testing positive for lead while living in HUD-assisted housing because PHAs are required to record the cases in a HUD database. We maintain that improvements to the areas noted in this statement today will help HUD better protect children from lifelong health problems. Chairman Clay, Ranking Member Stivers, and Members of the Subcommittee, this concludes my statement for the record. 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