GAO exposes fraud in federal crop insurance program

The Government Accountability Office has shined brightly in reports from the press and some sectors of the blogosphere this month. GAO labeled the Food and Drug Administration's decision on the Plan-B morning after pill as "very unusual." For a federal government agency in the legislative branch, which is nonpartisan but which answers to a Republican Congress, that is pretty loud criticism.

With similar understated conviction, the GAO recently reported (.pdf) on serious fraud in the federal crop insurance program. USDA's Risk Management Agency (RMA) administers the insurance program in cooperation with private insurance companies. GAO reported:

RMA does not effectively use all the tools it has available. Specifically:

• Inspections during the growing season are not being used to maximum effect. Between 2001 and 2004, FSA [the Farm Service Agency] conducted only 64 percent of the inspections RMA had requested. Without inspections, producers may falsely claim crop losses.

• RMA’s data analysis of the largest farming operations is incomplete. According to GAO’s analysis, in 2003, about 21,000 of the largest farming operations in the program did not report individuals or entities with an ownership interest in these operations. As a result, USDA should be able to recover up to $74 million in claims payments. FSA did not give RMA access to the data needed to identify such individuals or entities.

• RMA is not effectively overseeing insurance companies’ quality assurance programs. GAO’s review of 120 cases showed that companies completed only 75 percent of the required reviews and those that were conducted were largely paper exercises.

• RMA has infrequently used its new sanction authority to address program abuses. RMA has not issued regulations to implement its new sanction authority under ARPA. RMA imposed only 114 sanctions from 2001 through 2004. Annually, RMA identifies about 3,000 questionable claims, not all of which are necessarily sanctionable.

For more colorful detail on how the fraud works, see National Public Radio's reporting. The report has a nice interview with one cotton farmer who was caught (and later got to see a new slice of life playing cards in prison with a table full of drug dealers -- where his nickname was "Cotton"). He explains that the fraud becomes tempting if the potential insurance payments become high enough relative to what one would get selling a crop. In such situations, a farmer finds ways to make sure the crop doesn't come up -- "either planting substandard seed, plowing too deep, planting too shallow. I mean, if you don't want it to come up, you can pretty well make it to where it won't come up." The thrust of the GAO report is that neither insurance companies nor "captured" federal agencies had sufficient interest in protecting the taxpayer from such schemes.

This issue is significant for U.S. farm policy more broadly. From an economic perspective, it is sometimes tempting to support insurance arrangements to reduce the exceptional earnings risk of farming, relative to other occupations. Some might defend such insurance plans, even while criticizing chronic subsidization. The GAO takes one plank out of this platform. If farmers and the financial industries that service them abuse such insurance arrangements, it will push reasonable people toward an even more severe stance on farm programs.