HHS I.G. Audit: 'Blue Cross Blue Shield of South Carolina Overstated Its Supplemental Executive Retirement Plan'

WASHINGTON, May 26 -- The Health and Human Services Inspector General issued the following audit report (No. A-07-20-00600) in April 2021 entitled "Blue Cross Blue Shield of South Carolina Overstated Its Supplemental Executive Retirement Plan III Medicare Allowable Segment Pension Assets as of January 1, 2017" filed under the Centers for Medicare and Medicaid Services:

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Here are excerpts:

Report in Brief

Why OIG Did This Audit

Medicare contractors are required to separately account for the Medicare segment pension plan assets based on the requirements of Cost Accounting Standards (CAS) 412 and 413.

The Department of Health and Human Services, Office of Inspector General (OIG), Office of Audit Services, Region VII pension audit team reviews the Medicare segment pension assets to ensure compliance with Federal regulations. Previous OIG audits found that Medicare contractors did not always correctly update the segmented pension assets.

Our objective was to determine whether Blue Cross Blue Shield of South Carolina (BCBS South Carolina) complied with Federal requirements when updating its Supplemental Executive Retirement Plan III (SERP III) Medicare Allowable segment pension assets from January 1, 2015, to January 1, 2017.

How OIG Did This Audit

We reviewed BCBS South Carolina's update of its SERP III Medicare Allowable segment pension assets from January 1, 2015, to January 1, 2017.

What OIG Found

BCBS South Carolina did not correctly update its SERP III Medicare Allowable segment pension assets from January 1, 2015, to January 1, 2017, in accordance with Federal requirements. BCBS South Carolina identified $396,891 as its SERP III Medicare Allowable segment pension assets as of January 1, 2017; however, we determined that those assets were $391,943 as of that date. Therefore, BCBS South Carolina overstated its SERP III Medicare Allowable segment pension assets as of January 1, 2017, by $4,948. BCBS South Carolina overstated those pension assets because its policies and procedures did not always ensure that it calculated those assets in accordance with Federal requirements when updating its SERP III Medicare Allowable segment pension assets from January 1, 2015, to January 1, 2017.

What OIG Recommends and Auditee Comments

We recommend that BCBS South Carolina decrease its SERP III Medicare Allowable segment pension assets by $4,948 and recognize $391,943 as the SERP III Medicare Allowable segment pension assets as of January 1, 2017, and improve policies and procedures to ensure that going forward, it calculates Medicare Allowable segment pension assets in accordance with Federal requirements.

BCBS South Carolina stated that it did not object to our findings and recommendations and added that it did not believe our findings had a material impact on its submitted Incurred Cost Proposals.

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TABLE OF CONTENTS

INTRODUCTION ... 1

Why We Did This Audit ... 1

Objective ... 1

Background ... 1

Blue Cross Blue Shield of South Carolina and Medicare ... 1

Supplemental Executive Retirement Plan III ... 2

How We Conducted This Audit ... 3

FINDINGS ... 3

Update of Supplemental Executive Retirement Plan III Medicare Allowable Segment Pension Assets ... 4

Contributions and Transferred Prepayment Credits Understated ... 4

Earnings, Net of Expenses, Overstated ... 5

RECOMMENDATIONS ... 5

AUDITEE COMMENTS ... 6

APPENDICES

A: Audit Scope and Methodology ... 7

B: Statement of Market Value of Pension Assets for the Supplemental Executive Retirement Plan III for the Period January 1, 2015, to January 1, 2017 ... 8

C: Federal Requirements Related to Pension Segmentation ... 10

D: Blue Cross Blue Shield of South Carolina Supplemental Executive Retirement Plan III Cost Accounting Standards Balance Equation as of January 1, 2017 ... 11

E: Auditee Comments ... 13

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INTRODUCTION

WHY WE DID THIS AUDIT

Medicare contractors are required to separately account for the Medicare segment pension plan assets based on the requirements of their Medicare contracts and Cost Accounting Standards (CAS) 412 and 413. The Centers for Medicare & Medicaid Services (CMS) incorporated this requirement into the Medicare contracts beginning with fiscal year 1988. Previous Office of Inspector General audits found that Medicare contractors did not always correctly update the segmented pension assets.

At CMS's request, the Department of Health and Human Services, Office of Inspector General, Office of Audit Services, Region VII pension audit team reviews the cost elements related to qualified defined-benefit, nonqualified defined-benefit, postretirement benefit, and any other pension-related cost elements claimed by Medicare fiscal intermediaries and carrier contractors, Medicare administrative contractors (MACs), and other CAS-covered and Federal Acquisition Regulation (FAR)-covered contracts through Final Administrative Cost Proposals, Incurred Cost Proposals (ICPs), or both.

For this audit, we focused on one entity, Blue Cross Blue Shield of South Carolina (BCBS South Carolina). In particular, we examined the Supplemental Executive Retirement Plan III (SERP III) Medicare Allowable segment pension assets that BCBS South Carolina updated from January 1, 2015, to January 1, 2017.

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OBJECTIVE

Our objective was to determine whether BCBS South Carolina complied with Federal requirements when updating its SERP III Medicare Allowable segment pension assets from January 1, 2015, to January 1, 2017.

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BACKGROUND

Blue Cross Blue Shield of South Carolina and Medicare

During our audit period, Palmetto Government Benefits Administrator, LLC (Palmetto), CGS Administrators, LLC (CGS), and Companion Data Services, LLC (CDS), were subsidiaries of BCBS South Carolina, whose home office is in Columbia, South Carolina; these subsidiaries administered Medicare functions for CMS. Specifically, Palmetto administers Medicare operations under the MAC contracts for Medicare Parts A and B Jurisdiction 1/1 and Jurisdiction 11/2 effective October 25, 2007, and May 21, 2010, respectively, as well as other CAS-covered and FAR-covered contracts. Currently, Palmetto is the Medicare Parts A and B contractor for Jurisdictions J3 and M (formerly Jurisdiction 11). Palmetto also continues to perform Railroad Retirement Board contract operations under a specialty MAC contract awarded on November 27, 2012. CDS was created after being awarded the Enterprise Data Center (EDC) contract effective March 10, 2006. The EDC contract was replaced by a Virtual Data Center contract on November 15, 2012, which is still in effect. CGS administered Medicare Part B carrier contract operations under cost reimbursement contracts with CMS. With the implementation of Medicare contracting reform, CGS continued to perform Medicare work after being awarded the MAC contract for Medicare Parts A and B Jurisdiction 15, effective July 8, 2010.

During our audit period, CMS and BCBS South Carolina entered into an agreement called the "Advance Agreement Regarding the Computation of Nonqualified Defined Benefit Pension Plan Costs for the Periods Beginning January 1, 2015" (agreement). This agreement allowed BCBS South Carolina to change its accounting methodology from a pay-as-you to an accrual method.

This agreement also closed costs prior to January 1, 2015. Starting with January 1, 2015, the SERP III plan would, under the terms of the agreement, identify its segments by individual participant. These segments allocate to each of the BCBS South Carolina Medicare subsidiaries: Palmetto, CDS, and CGS. This report addresses BCBS South Carolina's compliance with the pension segmentation language under the provisions of Federal requirements and its Medicare contracts.

Supplemental Executive Retirement Plan III

BCBS South Carolina sponsors a SERP III plan. The purpose of this deferred compensation plan is to supplement participants' benefits payable under BCBS South Carolina's retirement plans.

This plan is provided to a limited group of management employees who are responsible for earnings and long-term growth of the company.

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FINDINGS

BCBS South Carolina did not correctly update its SERP III Medicare Allowable segment pension assets from January 1, 2015, to January 1, 2017, in accordance with Federal requirements. BCBS South Carolina identified $396,891 as its SERP III Medicare Allowable segment pension assets as of January 1, 2017; however, we determined that those assets were $391,943 as of that date. Therefore, BCBS South Carolina overstated its SERP III Medicare Allowable segment pension assets as of January 1, 2017, by $4,948. BCBS South Carolina overstated those pension assets because its policies and procedures did not always ensure that it calculated those assets in accordance with Federal requirements when updating its SERP III Medicare Allowable segment pension assets from January 1, 2015, to January 1, 2017.

Appendix B identifies the details of BCBS South Carolina's SERP III Medicare Allowable segment pension assets from January 1, 2015, to January 1, 2017, as determined during our audit.

Table 1 below summarizes the audit adjustments required to update BCBS South Carolina's SERP III Medicare Allowable segment pension assets in accordance with Federal requirements.

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[See link at end of text for Table 1: Summary of Audit Adjustments]

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UPDATE OF SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN III MEDICARE ALLOWABLE SEGMENT PENSION ASSETS

Federal requirements require Medicare contractors to update the Medicare Allowable segment pension assets yearly in accordance with the CAS. The CAS requires that the asset base be adjusted by contributions, income, benefit payments, and expenses. For details on the Federal requirements, see Appendix C.

BCBS South Carolina did not correctly update its SERP III Medicare Allowable segment pension assets from January 1, 2015, to January 1, 2017, in accordance with Federal requirements.

BCBS South Carolina identified $396,891 as its SERP III Medicare Allowable segment pension assets as of January 1, 2017; however, we determined that those assets were $391,943 as of that date. Therefore, BCBS South Carolina overstated its SERP III Medicare Allowable segment pension assets as of January 1, 2017, by $4,948. The following are our findings regarding the update of the SERP III Medicare Allowable segment pension assets from January 1, 2015, to January 1, 2017. Appendix D identifies BCBS South Carolina's CAS balance equation for the SERP III as of January 1, 2017./5

Contributions and Transferred Prepayment Credits Understated

The audited contributions and transferred prepayment credits/6 are based on the assignable pension costs./7

In compliance with the CAS, we applied prepayment credits first to current-year assignable pension costs (because the credits were available at the beginning of the year) and then updated any remaining credits with interest to the next measurement (valuation) date. We then allocated contributions to assigned pension costs, as needed, as of the date of deposit. For additional details on these Federal requirements, see Appendix C.

BCBS South Carolina understated contributions and transferred prepayment credits by $1,088. The understatement occurred primarily because of differences in the asset base used to compute the assignable pension costs.

Table 2 on the following page shows the differences between the transferred prepayment credits and contributions proposed by BCBS South Carolina and the transferred prepayment credits and contributions that we calculated during our review.

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[See link at end of text for Table 2: Contributions and Transferred Prepayment Credits]

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Earnings, Net of Expenses, Overstated

BCBS South Carolina overstated investment earnings, less administrative expenses, by $6,036, because it used incorrect contributions and transferred prepayment credits (discussed above) to develop the SERP III Medicare Allowable segment pension asset base. In our audited update, we allocated earnings, net of expenses, based on the applicable CAS requirements.

For details on applicable Federal requirements, see Appendix C. Table 3 below shows the difference in the earnings, net of expenses, proposed by BCBS South Carolina and the earnings, net of expenses, that we calculated during our review.

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[See link at end of text for Table 3: Earnings, Net of Expenses]

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RECOMMENDATIONS

We recommend that Blue Cross Blue Shield of South Carolina:

* decrease its SERP III Medicare Allowable segment pension assets by $4,948 and recognize $391,943 as the SERP III Medicare Allowable segment pension assets as of January 1, 2017, and

* improve policies and procedures to ensure that going forward, it calculates Medicare Allowable segment pension assets in accordance with Federal requirements.

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View full report at https://oig.hhs.gov/oas/reports/region7/72000600.pdf