Eligibility for benefits from both programs is determined by State agencies called Disability Determination Services which are totally funded by the Federal Government. Indirect costs for administration, purchasing, accounting, budgeting, and space are not readily assignable to a particular grant but can be calculated in two ways: cost allocation plans which identify all costs not chargeable to the Federal Government and distribute them to beneficiary State agencies and indirect cost proposals which convert all unidentified costs to a percentage rate and apply that to Federal grants. In response to a congressional request, these reimbursement mechanisms were examined in Arkansas, California, Colorado, New York, Ohio, and Texas which together accounted for about 55 percent of the programs' total indirect costs for 1978. State and Federal officials responsible for negotiating and establishing indirect cost charges were interviewed. In California, Colorado, New York, and Texas, the GAO estimated that disability programs were overcharged at least $645,000 in indirect costs. Another $570,000 could have been saved if New York and California had used a more equitable method of allocating indirect costs. GAO found that DHEW negotiators do not adequately analyze the propriety of indirect costs and have few contacts with the responsible State officials. DHEW headquarters does not effectively monitor the negotiation process to ensure that no excessive indirect costs are being applied to the disability programs. Furthermore, Social Security Administration (SSA) officials do not understand indirect cost principles and do not assist DHEW in identifying improper charges. Improvements in DHEW's negotiating and monitoring procedures and more SSA participation in the negotiation process could reduce costs. Specifically, DHEW negotiators should verify that services paid for are actually are benefiting the programs and determine that States are using the most equitable formula for allocating indirect costs. The official requests for the GAO review is appended. (Author abstract modified)