Performance and Accountability Report Fiscal Year 2004

Note 1. Summary of Significant Accounting Policies

Reporting Entity
The Department of Health and Human Services (HHS or Department) is a cabinet-level Agency of the executive branch of the Federal Government. Its predecessor, the Department of Health, Education and Welfare (HEW) officially came into existence on April 11, 1953. In 1979, the Department of Education Organization Act was signed into law, providing for a separate Department of Education. HEW officially became HHS on May 4, 1980. The Department is responsible for protecting the health of all Americans and providing essential human services.

Organization and Structure of HHS
HHS is comprised of eleven Agencies with diverse missions and programs. Each Agency is considered a responsibility segment representing a component of a reporting entity that is responsible for carrying out a mission, conducting a major line of activity, or producing one or a group of related products or services. The managers of the responsibility segments report to the entity's top management directly and its resources and results of operations can be clearly distinguished from those of other responsibility segments of the entity. The 12 responsibility segments are:

1. Administration for Children and Families (ACF)
2. Administration on Aging (AoA)
3. Agency for Healthcare Research and Quality (AHRQ)
4. Centers for Disease Control and Prevention (CDC)/Agency for Toxic Substances and Disease Registry (ATSDR)
5. Centers for Medicare & Medicaid Services (CMS)
6. Food and Drug Administration (FDA)
7. Health Resources and Services Administration (HRSA)
8. Indian Health Service (IHS)
9. National Institutes of Health (NIH)
10. Office of the Secretary (OS) - excluding PSC
11. Program Support Center (PSC)
12. Substance Abuse and Mental Health Services Administration (SAMHSA)

Even though it is under the Office of the Secretary, the Program Support Center reports on its activity separately because its business activities encompass offering services to other Agencies and Federal agencies. The Agency for Toxic Substances and Disease Registry is combined with the Centers for Disease Control and Prevention for financial reporting purposes; therefore, these footnotes will refer to them as one Agency.

The Homeland Security Act of 2002 resulted in changes to the structure of HHS in 2003. The Office of Emergency Preparedness, National Disaster Medical System, Metropolitan Medical Response System, and Strategic National Stockpile (SNS) programs were transferred from HHS to the Department of Homeland Security (DHS), and the Unaccompanied Alien Children Program was transferred to HHS from the Immigration and Naturalization Service as of March 1, 2003.

The Project BioShield Act of 2004 transferred back to HHS the Strategic National Stockpile program on August 13, 2004. Note 9, "Inventory and Related Property, Net" provides additional information on the transfer of stockpile inventory from DHS to HHS.

Basis of Accounting and Presentation
The accompanying financial statements have been prepared to report the financial position and results of operations of the Department, pursuant to the requirements of the Chief Financial Officers Act of 1990 (P.L. 101-576), as amended by the Reports Consolidation Act of 2000 (P.L. 106-531), and presented in accordance with the form and content requirements contained in the Office of Management and Budget (OMB) Bulletin No. 01-09, Form and Content of Agency Financial Statements. These statements have been prepared from the Department's financial records on an accrual basis in conformity with accounting principles generally accepted in the United States (GAAP). The GAAP for Federal entities are the standards prescribed by the Federal Accounting Standards Advisory Board (FASAB) and recognized by the American Institute of Certified Public Accountants (AICPA) as Federal GAAP. These statements are therefore different from financial reports prepared pursuant to other OMB directives that are primarily used to monitor and control HHS' use of budgetary resources.

The financial statements consolidate the balances of about 140 appropriations and fund accounts, and a number of accounts used for suspense, collection of receipts and general government functions. Transactions and balances among HHS' Agencies have been eliminated in the presentation of the Consolidated Balance Sheet, Consolidated Statement of Net Cost, Consolidated Statement of Changes in Net Position, and the Consolidated Statement of Financing. The Combined Statement of Budgetary Resources (SBR) is presented on a combined basis. Supplemental information is accumulated from the Agency reports, regulatory reports, and other sources within HHS.

Transactions are recorded on an accrual and budgetary basis of accounting. Under the accrual method of accounting, revenues are recognized when earned, and expenses are recognized when incurred, without regard to receipt or payment of cash. The budgetary accounting principles, on the other hand, are designed to recognize the obligation of funds according to legal requirements, which in many cases is prior to the occurrence of an accrual-based transaction. The recognition of budgetary accounting transactions is essential for compliance with legal constraints and controls over the use of Federal funds. CMS uses the cash basis of accounting in the Medicare program to record benefit payments disbursed during the fiscal year, supplemented by the accrual methods to estimate the value of benefit payments incurred but not yet paid as of the fiscal year-end. A number of other HHS agencies also use the cash basis of accounting for some programs with an accrual adjustment made by recording year-end estimates of unpaid liabilities.

Use of Estimates in Preparing Financial Statements
Preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities as of the date of the financial statements. Estimates and assumptions also affect the revenues and expenses accrued and reported in the financial statements. Actual results may differ from those estimates.

Entity and Non-Entity Assets
Entity assets are assets that the reporting entity has authority to use in its operations. The authority to use funds in an entity's operations means entity management has the authority to decide how funds are used, or management is legally obligated to use funds to meet entity obligations.

Non-entity assets are those assets that are held by the reporting entity, but are not available for use by the entity. An example of a non-entity asset is the interest accrued on overpayments and cost settlements reported by the Medicare contractors.

The HHS financial statements do not report entity and non-entity assets separately on the face of the statement. Instead, entity/non-entity detail is presented in Note 2 "Non-Entity Assets".

The Department maintains its available funds with the Department of the Treasury (Treasury) except for the Medicare Benefit account maintained at commercial banks - see Note 4 "Cash and Other Monetary Assets." The Fund Balance with Treasury is available to pay current liabilities and finance authorized purchases. Cash receipts and disbursements are processed by Treasury, and HHS' records are reconciled with those of Treasury on a regular basis.

Note 3 provides additional information.

Investments
Investments consist of U.S. Treasury securities including the CMS Par Value securities carried at face value and other securities carried at amortized cost. Federal law requires that Trust Fund balances that are not necessary to meet current expenditures be invested in interest-bearing obligations of the U.S. Government or in obligations guaranteed as to both principal and interest by the U.S. Government. No provision is made for unrealized gains or losses on these securities since it is the Department's intent to hold investments to maturity. Interest income is compounded semiannually in June and December. An adjustment to the accrual for interest earned from July 1, 2004 to September 30, 2004 is included.

Note 5 provides additional information on Investments.

Accounts Receivable, Net
Accounts receivable consists of the amounts owed to HHS by other Federal agencies and by the public as the result of the provision of goods and services. Intragovernmental accounts receivable arise generally from the provision of reimbursable work to other Federal agencies and no allowance is established as they are considered to be fully collectible. Accounts receivable also includes interest due to HHS that is directly attributable to delinquent accounts receivable.

Accounts receivable from the public typically result from overpayments to Medicare providers and beneficiaries, amounts due from cost disallowance for Medicaid, and amount due from organizations for civil monetary penalty not yet remitted to the Department of Justice, and are presented net of an allowance for uncollectible accounts. The allowance for uncollectible accounts is determined based on past collection experience and an analysis of outstanding balances.

Note 6 provides additional information on Accounts Receivable.

Loans Receivable and Loan Guarantee Liability
HHS administers guaranteed loan programs for the Health Center and for Health Education Assistance Loans (HEAL) programs. Loans receivables represent defaulted guaranteed loans, which have been paid to lenders under this program. Loans receivable also include interest due to HHS on the defaulted loans. Loans guarantee liabilities are valued at the present value of the cash outflows from the Department less the present value of related inflows.

For loan guarantees committed subsequent to October 1, 1991, guaranteed loans are reduced by an allowance for subsidy - the present value of the amounts not expected to be recovered and thus having to be subsidized by the government for loan guarantees - as required under the Federal Credit Reform Act of 1990 (FCRA). The FCRA also requires that the subsidy cost estimate be based on the net present value of the specified cash flows discounted at the interest rate of marketable Treasury securities of similar maturities. The liability for loan guarantees committed subsequent to October 1, 1991 is reported at present value.

For loan guarantees committed prior to October 1, 1991, loan guarantee principal and interest receivable are reduced by an allowance for estimated uncollectible amounts. The allowance is estimated based on past experience and an analysis of outstanding balances. The liability for loan guarantees committed prior to October 1, 1991 is established based upon an average default rate. The liability is adjusted each year for the change in default rates.

Note 8 provides additional information on Loans.

Advances to Grantees/Accrued Grant Liability HHS awards grants to various grantees and provides advance payments to grantees to meet their cash needs to carry out their programs. Advance payments are recorded as "Advances to Grantees" and are liquidated upon grantees' reporting expenditures. Grantees sometime incur expenditures before drawing down funds that, when claimed, would reduce the "Advances to Grantees" account. An accrued grant liability occurs when the accrued grant expenses exceeds the outstanding advances to grantees, resulting in a negative balance in the "Advances to Grantees" account. Progress payments on work in process are not included in grants. HHS grants are classified into two categories: "Grants Not Subject to Grant Expense Accrual" and "Grants Subject to Grant Expense Accrual."

Grants Not Subject to Grant Expense Accrual: These grants represent formula grants (also referred to as "block grants") under which grantees provide a variety of services or payments to individuals and local agencies. Expenses are recorded as the grantees draw funds. These grants are funded on an allocation basis as opposed to a reimbursable basis. Therefore, they are not subject to grant expense accrual.

Grants Subject to Grant Expense Accrual: For grants subject to grant expense accrual, grantees draw funds (recorded as Advances to Grantees in HHS' accounting systems) based on their estimated cash needs. As grantees report their actual disbursements, quarterly, the amounts are recorded as expense, and the advance balance is reduced. At year-end, the Agencies report both actual payments made through the third quarter and an unreported grant expenditures estimate for the fourth quarter based on historical spending patterns of the grantees. The year-end accrual estimate equals the estimate of fourth quarter disbursements plus an average of two weeks annual expenditures for expenses incurred prior to cash drawdown.

Exceptions to the definition of "block" or "non-block" grants for reporting purposes are Temporary Assistance for Needy Families program and the Child Care Development Fund program. These two programs are referred to as "block" grants but since the programs report expenses to HHS, they are treated as "non-block" grants for the estimate of the grant accrual.

HHS reports advances other than grant advances in Note 11, "Other Assets." In addition, Note 15 provides additional information on Accrued Grant Liability.

Inventory and Related Property, Net
Inventory and Related Property primarily consists of Inventory Held for Sale, Operating Materials and Supplies, and Stockpile Materials. Inventory Held for Sale consists of small equipment and supplies held by Service and Supply Funds for sale to HHS components and other Federal entities. Operating Materials and Supplies consist of pharmaceuticals, biological products, and other medical supplies used in providing medical services and conducting medical research. SNS materials are held for emergencies in response to local and national emergency. In addition, CDC maintains stockpile of vaccines to meet unanticipated needs in the cause of a national emergency.

Inventories held for sale are valued at historical cost using the first-in first-out (FIFO) cost flow assumption with the exception of the NIH, who uses the moving average cost flow assumption method. Operating materials and supplies are recorded as assets when purchased and expensed when they are consumed. Operating materials and supplies are valued at historical cost using the FIFO cost flow assumption. Stockpile materials are valued at historical cost using a specific identification cost flow assumption.

Note 9 provides additional information on Inventory and Related Property.

General Property, Plant and Equipment, Net
General Property, Plant and Equipment (PP&E) consists of buildings, structures, and facilities used for general operations; land acquired for general operating purposes; equipment; assets under capital lease; leasehold improvements; and construction-in-progress. Other property consists of internal use software. The basis for recording purchased PP&E is full cost, which includes all costs incurred to bring the PP&E to a form and location suitable for its intended use. The cost of PP&E acquired under a capital lease is the amount recognized as a liability for the capital lease at its inception. The cost of PP&E acquired through donation is the estimated fair value when acquired. The cost of PP&E transferred from other Federal entities is the net book value of the transferring entity. All PP&E with an initial acquisition cost of $25,000 or more and an estimated useful life of 2 years or greater are capitalized, except for internal use software discussed below.

PP&E is depreciated using the straight-line method over the estimated useful life of the asset. Land and land rights, including permanent improvements, are not depreciated. Normal maintenance and repair costs are expensed as incurred.

Statement of Federal Financial Accounting Standards (SFFAS) No. 10, Accounting for Internal Use Software requires that the capitalization of internally-developed, contractor-developed, and commercial off-the-shelf (COTS) software begin in the software development phase. In FY 2004, HHS incurred development costs for the Unified Financial Management System (UFMS), a COTS software, and began capitalizing the cost. The estimated useful life for internal use software was determined at 7-10 years for amortization. SFFAS No. 10 also requires that amortization begins when the asset is placed in use.

The capitalization threshold for internal use software costs for appropriated fund accounts is $1 million or more. The internal use software capitalization threshold for revolving funds is $500,000. Costs below the threshold levels are expensed. The software is depreciated for a period of time consistent with the estimated useful life used for planning and acquisition purposes.

Note 10 provides additional information on General Property, Plant and Equipment.

Liabilities
Liabilities are recognized for amounts of probable and measurable future outflows or other sacrifices of resources as a result of past transactions or events. Since HHS is a component of the U.S. Government, a sovereign entity, its liabilities cannot be liquidated without legislation that provides resources to do so. Payments of all liabilities other than contracts can be abrogated by the sovereign entity. In accordance with public law and existing Federal accounting standards, no liability is recognized for future payments to be made on behalf of current workers contributing to the Medicare HI Trust Fund, since future Medicare benefits are not tied to prior Medicare contributions. The Department's liabilities are classified as covered by budgetary resources or not covered by budgetary resources.

Liabilities Covered by Budgetary Resources are those liabilities funded by available budgetary resources including: (1) new budget authority, (2) spending authority from offsetting collections, (3) recoveries of expired budget authority, (4) unobligated balances of budgetary resources at the beginning of the year, and (5) permanent indefinite appropriation or borrowing authority.

Liabilities Not Covered by Budgetary Resources are incurred when funding has not yet been made available through Congressional appropriations or current earnings. The major liabilities in this category include employee annual leave earned but not taken, and amounts billed by the Department of Labor (DOL) for Federal Employees' Compensation Act (FECA) disability payments, and for portions of the Entitlement Benefits Due and Payable liability for which no obligations have been incurred. Also included in this category is the actuarial FECA liability determined by DOL but not yet billed. For HHS revolving funds, all liabilities are funded as they occur.

Liabilities Covered by Budgetary Resources and Liabilities Not Covered by Budgetary Resources are combined on the balance sheet. The breakout of these resources is presented in Note 12, "Liabilities Not Covered by Budgetary Resources"; Note 13, "Entitlement Benefits Due and Payable; Note 14, "Federal Employee and Veterans' Benefits"; and Note 16, "Other Liabilities".

Accounts Payable
Accounts Payable primarily consists of amounts due for goods and services received, progress in contract performance, interest due on accounts payable, and other miscellaneous payables.

Accrued Payroll and Benefits
Liability for annual and other vested compensatory leave is accrued when earned and reduced when taken. At the end of each fiscal year, the balance in the accrued annual leave liability account is adjusted to reflect current pay rates. Annual leave earned but not taken is considered an unfunded liability since this leave will be funded from future appropriations when it is actually taken by employees. Sick leave and other types of leave are not accrued and are expensed when taken.

Entitlement Benefits Due and Payable
Entitlement Benefits Due and Payable represents the liability for Medicare and Medicaid for medical services incurred but not reported (IBNR) as of the balance sheet date.

Medicare IBNR
The Medicare liability is developed by the CMS Office of the Actuary (OACT) and includes (1) an estimate of claims incurred that may or may not have been submitted to the Medicare contractors but were not yet approved for payment, (2) actual claims that have been approved for payment by the Medicare contractors for which checks have not yet been issued, (3) checks that have been issued by the Medicare contractors in payment of a claim and that have not yet been cashed by payees, (4) periodic interim payments for services rendered in FY 2004 but paid in FY 2005, and (5) an estimate of retroactive settlements of cost reports submitted to the Medicare contractors by health care providers.

For fiscal years 2003 and prior, CMS did not record corresponding budgetary obligations for the September 30 accrual of the liability for Medicare expenses incurred but not reported (IBNR). CMS recorded obligations when the Medicare contractors' banks actually drew on their letters-of-credit with the Federal Reserve as reimbursement for checks presented for payment. In FY 2003 OMB exempted CMS from the OMB Circular No. A-11, Preparation, Submission, and Execution of the Budget requirement to report obligations when the liability is incurred.

For FY 2004, CMS has begun obligating funds when the Medicare IBNR is recorded. This treatment complies with OMB Circular No. A-11 and results in the restatement of the FY 2003 SBR, as discussed later in this note.

Medicaid IBNR
The Medicaid estimate represents the net of unreported expenses incurred by the states less amounts owed to the states for overpayment of Medicaid funds to providers, anticipated rebates from drug manufacturers, and settlements of probate and fraud and abuse cases. The FY 2004 and FY 2003 estimate were developed based on historical relationships between prior Medicaid net payables and current Medicaid activity.

Note 13 provides additional information on Entitlement Benefits Due and Payable.

Federal Employee and Veterans' Benefits
Most HHS employees participate in either the Civil Service Retirement System (CSRS) - a defined benefit plan, or the Federal Employees Retirement System (FERS) - a defined benefit and contribution plan. For employees covered under CSRS, the Department contributes a fixed percentage of pay. Most employees hired after December 31, 1983 are automatically covered by FERS. For employees covered under FERS, the Department contributes the employer's matching share for Social Security and Medicare Insurance. A primary feature of FERS is that it offers a Thrift Savings Plan (TSP) into which the Department automatically contributes one percent of employee pay and matches employee contributions up to an additional four percent of pay.

The U.S. Office of Personnel Management (OPM) is the administering Agency for both of these benefit plans and, thus, reports CSRS or FERS assets, accumulated plan benefits, or unfunded liabilities applicable to Federal employees. Therefore, HHS does not recognize any liability on its balance sheet for pensions, other retirement benefits, and other post-employment benefits with the exception of Commission Corp (see below). HHS does, however, recognize an expense in the Consolidated Statement of Net Cost and imputed financing source for the annualized unfunded portion of pension and post-retirement benefits in the Consolidated Statement of Changes in Net Position.

HHS administers the Public Health Service (PHS) Commissioned Corps Retirement System, a defined noncontributory benefit plan, for its active duty officers and retiree annuitants or survivors.

The plan does not have accumulated assets, and funding is provided entirely on a pay as you go basis by Congressional appropriations. HHS records the actuarial liability based on the present value of accumulated pension plan benefits and the post-retirement health benefits.

The liability for Federal employee and veterans' benefits also includes liability for actual and estimated future payments for workers' compensation pursuant to FECA. FECA provides income and medical cost protection to Federal employees who were injured on the job or who have sustained a work-related occupational disease and to beneficiaries of employees whose death is attributable to job-related injury or occupational disease. The FECA program is administered by the DOL, which pays valid claims and subsequently bills the employing Agency. The FECA liability consists of two components - the actual claims paid by DOL but not yet disbursed, and the estimated liability for future benefit payments as a result of past events, such as death, disability, and medical costs.

Note 14 provides additional information on Federal Employee and Veterans' Benefits.

Revenue and Financing Sources
The Department receives the majority of funding needed to support its programs through Congressional appropriation and through reimbursement for the provision of goods or services to other Federal agencies. The United States Constitution prescribes that no money may be expended by a Federal Agency unless and until funds have been made available by Congressional appropriation. Appropriations are recognized as financing sources when related expenses are incurred or assets are purchased. Revenues from reimbursable agreements are recognized when the goods or services are provided by the Department. Other financing sources, such as donations and transfers of assets without reimbursements, are also recognized on the consolidated statement of changes in net position.

Appropriations. The Department receives annual, multi-year, and no-year appropriations that may be used within statutory limits. For example, funds for general operations are generally made available for one fiscal year, funds for long-term projects such as major construction will be available for the expected life of the project, and funds used to establish revolving fund operations are generally available indefinitely (i.e., no year funds). The SBR presents information about the resources appropriated to the Department.

Exchange and Non-Exchange Revenue. HHS classifies revenues as either exchange revenue or non-exchange revenue. Exchange revenues are recognized when earned, i.e., when goods have been delivered or services have been rendered. These revenues reduce the cost of operations borne by the taxpayer. Non-exchange revenues result from donations to the government and from the government's sovereign right to demand payment, including taxes. Non-exchange revenues are recognized when a specifically identifiable, legally enforceable claim to resources arises, but only to the extent that collection is probable and the amount is reasonably estimable. Non-exchange revenues are not considered to reduce the cost of the Department's operations and are reported in the Statement of Changes in Net Position.

Aggregate non-exchange revenues consist primarily of FICA Taxes of $142,659 million and $139,934 million, SECA taxes of $10,789 million and $9,905 million, and Trust Fund investment interest of $16,574 million and $17,066 million for FY 2004 and 2003, respectively. For periods after December 31, 1993, employees and employers are each required to contribute 1.45 percent of employees' wages, and self-employed persons are required to contribute 2.90 percent of net income, with no limitation, to the HI Trust Fund. The Social Security Act requires the transfer of these contributions from the General Fund of Treasury to the HI Trust Fund based on the amount of wages certified by the Commissioner of Social Security from SSA records of wages established and maintained by SSA in accordance with wage information reports. The SSA uses the wage totals reported annually by employers via the quarterly Internal Revenue Service Form 941 as the basis for conducting quarterly certification of regular wages.

With minor exceptions, all receipts of revenues by Federal agencies are processed through Treasury's central accounting system. Regardless of whether they derive from exchange or non-exchange transactions, all receipts that are not earmarked by Congressional appropriation for immediate departmental use are deposited in the general or special funds of the Treasury. Amounts not retained for use by the Department are reported as transfers to other government agencies on the HHS Statement of Changes in Net Position.

Imputed Financing Sources. In certain instances, operating costs of HHS are paid out of funds appropriated to other Federal agencies. For example, by law, certain costs of retirement programs are paid by OPM and certain legal judgments against HHS are paid from the Judgment Fund maintained by Treasury. When costs that are identifiable to HHS and directly attributable to the Department's operations are paid by other agencies, the Department recognizes these amounts as imputed costs of HHS, and at the same time, this amount is recognized as an imputed financing source on the Consolidated Statement of Changes in Net Position

Other Financing Sources. Medicare's HI program, or Medicare Part A, is financed through the HI Trust Fund, whose revenues come primarily from the Medicare portion of payroll and from self-employment taxes collected under the Federal Insurance Contribution Act (FICA) and under the Self-Employment Contribution Act (SECA). The Medicare payroll tax rate is 2.9 percent of annual wages. Employees and employers are each required to contribute 1.45 percent of employees' wages, with no limitation, to the Hospital Insurance Trust Fund. Self-employed individuals pay the full 2.9 percent of net income.

Medicare's Supplemental Medical Insurance (SMI) program, or Medicare Part B, is financed primarily by general fund appropriations (Payments to the Health Care Trust Funds) provided by Congress and by monthly premiums paid by beneficiaries. Premium payments from Medicare beneficiaries are matched approximately three to one by Congressional appropriations.

Restatements
For FY 2003 and prior, CMS did not record corresponding budgetary obligations for the September 30 accrual of the liability for Medicare expenses incurred but not reported (IBNR). The CMS recorded obligations when the Medicare contractors' banks actually drew on their letters-of-credit with the Federal Reserve as reimbursement for checks presented for payment. In FY 2003, OMB exempted CMS from the OMB Circular No. A-11 requirement to report obligations when the liability is incurred. For FY 2004 CMS has begun obligating funds when the Medicare IBNR is recorded. This resulted in restatement of the FY 2003 SBR, the principal effect of which was to increase beginning obligated balances and ending balances for FY 2003 by $28,236 million and $30,339 million respectively, a corresponding reduction in Medicare Trust Fund beginning and ending balances for FY 2003, and an increase in net obligations recorded in FY 2003 of $2,103 million on the SBR and corresponding reduction of temporarily not available budgetary resources.

The Statement of Financing (SOF) has been further restated to reflect the funding of the Medicare IBNR: "Resources that fund expenses in prior periods" and "Accrued Unfunded Entitlement Benefit Costs" exclude the Medicare IBNR. The SOF Net Cost of Operations section remains unchanged. Resources used to finance items not part of the net cost of operations and components of net cost of operations that will not require or generate resources in the current period were reduced by $28,236 million and $30,339 million, respectively.

For FY 2003 and prior, CMS reported only the Medicare HI and Medicare SMI premiums collected as offsetting receipts. The transfers from the Payments to the Health Care Trust Funds (PTF) to HI and SMI were not reported. The United States Standard General Ledger (USSGL) Crosswalk for the SBR included accounts for Medicare premiums but not for the PTF transfers.

In FY 2004, the Treasury revised the USSGL crosswalk for the offsetting receipts line item of the SBR to include transfers between the general fund and trust funds. In addition, OMB revised Circular A-11, clarifying that "intrabudgetary receipts" (which includes PTF transfers) should be reported on the offsetting receipts line of the SBR. Accordingly, the offsetting receipts line of the CMS' SBR and SOF has been restated by an aggregate of $89,867 million for FY 2003. Also, previously unreported offsetting receipts for ACF, CDC, HRSA, and IHS required restating the offsetting receipts lines on the SBR and the SOF for FY 2003 by an inconsequential amount.

Contingencies
A contingency is an existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss to the Department. The uncertainty will ultimately be resolved when one or more future events occur or fail to occur. With the exception of pending, threatened, or potential litigation, a contingent liability is recognized when a past transaction or event has occurred, a future outflow or other sacrifice of resources is more likely than not to occur, and the related future outflow or sacrifice of resources is measurable. For pending, threatened, or potential litigation, a liability is recognized when a past transaction or event has occurred, a future outflow or other sacrifice of resources is likely to occur, and the related future outflow or sacrifice of resources is measurable.

Note 23 provides additional information on Contingencies.

Reclassifications
The liability for Environmental and Disposal Costs is immaterial and has been reclassified to other liabilities for FY 2003 for presentation of the FY 2004 financial statements.

Reconciliation of FACTS II to the Statement of Budgetary Resources
Management recognizes that the Federal Agencies' Centralized Trial-balance System II (FACTS II) submission of budgetary data does not agree with the SBR as presented in the audited financial statements. CMS reported an obligation of $1,867 million for a liability resulting from the incorrect eligibility determinations on the SBR that was not reported in FACTS II. There are many known recurring differences that contribute to the differences that are properly reported on the SBR and are appropriately not included in the FACTS II submission. Some of these reconciling items include: accounts payable adjustments, estimated grantee expenditure reports (SF 272s) not yet received for the fourth quarter, estimated grantee expenses incurred but not reported, and certain intra-departmental transactions (Intra-Departmental Delegations of Authority - IDDAs).

Intragovernmental Relationships and Transactions
In the course of its operations, HHS has relationships and financial transactions with numerous Federal agencies. The more prominent of these are the Social Security Administration (SSA) and the Treasury. The SSA determines eligibility for Medicare programs and also allocates a portion of Social Security benefit payments to the Medicare Part B Trust Fund for Social Security beneficiaries who elect to enroll in the Medicare Part B program. The Treasury receives the cumulative excess of Medicare receipts and other financing over outlays and issues interest-bearing securities in exchange for the use of those monies. At the government-wide level, the assets related to the trust funds on HHS' financial statements and the corresponding liabilities on the Treasury's financial statements would be eliminated.

Medicare Hospital Insurance (HI) Trust Fund
Medicare contractors are paid by CMS to process Medicare claims for hospital inpatient services, hospice, and certain skilled nursing and home health services. Benefit payments made by the Medicare contractors for these services as well as any related administrative costs are charged to the HI trust fund. The CMS payments to managed care plans are also charged to this fund. The financial statements include HI trust fund activities administered by the Treasury. This trust fund has permanent indefinite authority.

Medicare Supplementary Medical Insurance (SMI) Trust Fund
Medicare contractors are paid by CMS to process Medicare claims for physicians, medical suppliers, hospital outpatient services and rehabilitation, end stage renal disease, rural health clinics, and certain skilled nursing and home health services. Benefit payments made by the Medicare contractors for these services, as well as administrative costs, are charged to the SMI trust fund. The CMS payments to managed care plans are also charged to this fund. The financial statements include SMI trust fund activities administered by Treasury. This trust fund has permanent indefinite authority.

Medicare Integrity Program (MIP)
The Health Insurance Portability and Accountability Act, Public Law 104-191, established the MIP and codified the program integrity activities previously known as "payment safeguards." This account is also called the Health Care Fraud and Abuse Control (HCFAC) program or simply "Fraud and Abuse." The CMS contracts with eligible entities to perform such activities as medical and utilization reviews, fraud reviews, cost report audits, and the education of providers and beneficiaries with respect to payment integrity and benefit quality assurance issues. The MIP is funded by the HI trust fund.

Medicaid
Medicaid, the health care program for low-income Americans, is administered by CMS in partnership with the states. Grant awards limit the funds that can be drawn by the states to cover current expenses. The grant awards, which are prepared at the beginning of each quarter and which are amended as necessary, are an estimate of the CMS share of States' Medicaid costs. At the end of each quarter, states report their expenses (net of recoveries) for the quarter, and subsequent grant awards are issued by CMS for the difference between approved expenses reported for the period and grant awards previously issued.

Note 2. Non-Entity Assets
Non-entity assets at September 30, 2004 and 2003 consisted of the following:

The $19 million non-entity asset balance includes $8 million representing the collections of royalties from licenses for which a portion is paid to inventors under the Federal Technology Transfer Act, and $11 million representing tax refunds collected by the Internal Revenue Service (IRS) which was transferred to ACF for distribution to States. The majority of the $24 million accounts receivable represents the interest accrued on overpayments as well as any cost settlements reported by the Medicare contractors.

The amount of unused funds that were returned to Treasury due to cancelled appropriations at the end of FY 2004 and FY 2003 were approximately $600 million and $4.7 billion, respectively.

Note 3. Fund Balance with Treasury The Fund Balance with Treasury and the status of the fund balance at September 30, 2004 and 2003 are listed below by fund type.

Other Funds include balances in deposit, suspense, clearing, and related non-spending accounts.

The Unobligated Balance includes $2.9 billion, which is restricted for future use and are not apportioned for current use. An example of these funds are the ACF's Contingency Fund for State Welfare Programs, CMS' Program Management Funds, and PSC's Service and Supply Funds.

The Unobligated Unavailable negative balance is due primarily to CMS obligating $30.3 billion for Medicare IBNR that changed the amounts temporarily precluded from obligation that occur in the trust funds. The change required restatement of the FY 2003 FBWT note.

Note 4. Cash and Other Monetary Assets
Cash and Other Monetary Assets consist primarily of the time account balances at the Medicare contractors' commercial banks. CMS uses the Checks Paid Letter-of-Credit method for reimbursing Medicare contractors for the payment of covered Medicare services. Medicare contractors issue checks against a Medicare Benefits account maintained at commercial banks. In order to compensate commercial banks for handling the Medicare Benefits accounts, Medicare funds are deposited into non-interest bearing time accounts. The interest foregone by the CMS on these time accounts is used to reimburse the commercial banks for the service. The account balance as of September 30, 2004 was $460 million and in FY 2003 the balance was $843 million.

Note 5. Investments, Net
HHS' investments, net at September 30, 2004 and 2003 are summarized below.

HHS invests entity trust fund balances in excess of current needs in U.S. Treasury securities. The majority of HHS investments in securities are redeemed at maturity and no provision is made for unrealized gains or losses. The Treasury Department acts as the fiscal agent for the U.S. Government's investments in securities. HHS securities purchased and redeemed include Marketable, Non-Marketable, Par Value, One Day Certificates, and Non-Marketable, Market-based (MK).

Par value securities purchased by CMS are recorded at cost, interest is earned based on a statutory formula, and securities are redeemed at face value. MK securities mirroring marketable securities terms that are not traded on any securities exchange include both Non-Marketable, MK, and One Day Certificates. MKs are purchased by HRSA's Vaccine Injury Compensation Program (VICP) trust fund, the Ricky Ray Hemophilia Relief trust fund and the NIH Gift funds. The MKs are purchased at a discount or premium based on market terms and are recorded at cost. Discounts and premiums are recorded and amortized on a straight-line basis. Marketable securities purchased are recorded at cost based on market terms. Currently, securities held by the VICP will mature in fiscal years 2005 through 2009.

CMS invests in U.S. Treasury Special Issues bonds (Par value securities) that are special public obligations for exclusive purchase by the Medicare trust funds. Special issued bonds are always purchased and redeemed at face value. Certificates are short term and paid 4 1/2 percent in FY 2004 and FY 2003. The bond interest rates ranged from 3 1/2 percent to 8 3/4 percent in FY 2004 and FY 2003. The accrued interest receivable as of September 30, 2004 and 2003 was $3,988 million and $4,066 million, respectively.

Note 6. Accounts Receivable, Net
HHS' accounts receivable as of September 30, 2004 and 2003 are summarized below.