HHS I.G. Audit: 'Palmetto Government Benefits Administrator Overstated Its Excess Plan Medicare Segment Pension Assets'

WASHINGTON, May 26 -- The Health and Human Services Inspector General issued the following audit report (No. A-07-20-00598) in April 2021, entitled "Palmetto Government Benefits Administrator, LLC, Overstated Its Excess Plan Medicare 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 identify and update the segmented pension assets.

Our objective was to determine whether Palmetto Government Benefits Administrator, LLC (Palmetto), complied with Federal requirements and its established cost accounting practice when updating its Excess Plan Medicare segment pension assets from January 1, 2015, to January 1, 2017.

How OIG Did This Audit

We reviewed Palmetto's identification of its Excess Plan Medicare segment and its update of the Excess Plan Medicare segment pension assets from January 1, 2015, to January 1, 2017.

What OIG Found

Palmetto did not correctly update its Excess Plan Medicare segment pension assets from January 1, 2015, to January 1, 2017, in accordance with Federal requirements. Palmetto identified $746,467 as its Excess Plan Medicare segment pension assets as of January 1, 2017; however, we determined that those assets were $737,271 as of that date. Therefore, Palmetto overstated its Excess Plan Medicare segment pension assets as of January 1, 2017, by $9,196. Palmetto overstated those Excess Plan pension assets because its policies and procedures did not always ensure that it calculated those assets in accordance with Federal requirements when updating its Excess Plan Medicare segment's pension assets from January 1, 2015, to January 1, 2017.

What OIG Recommends and Auditee Comments

We recommend that Palmetto decrease its Excess Plan Medicare segment pension assets by $9,196 and recognize $737,271 as the Excess Plan Palmetto Medicare segment pension assets as of January 1, 2017, and improve policies and procedures to ensure that going forward, it calculates Medicare segment pension assets in accordance with Federal requirements.

Palmetto stated that it did not object to our findings and recommendations and added that it did not believe our findings would have 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

Palmetto Government Benefits Administrator, LLC, and Medicare ... 1

Blue Cross Blue Shield of South Carolina Excess Plan ... 2

How We Conducted This Audit ... 2

FINDINGS ... 3

Update of Excess Plan Palmetto Medicare Segment Pension Assets ... 3

Contributions and Transferred Prepayment Credits Overstated ... 4

Earnings, Net of Expenses, Overstated ... 4

RECOMMENDATIONS ... 5

AUDITEE COMMENTS ... 5

APPENDICES

A: Audit Scope and Methodology ... 6

B: Palmetto Government Benefits Administrator, LLC, Statement of Medicare Segment Excess Plan Assets for the Period January 1, 2015, to January 1, 2017 ... 8

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

D: Palmetto Government Benefits Administrator, LLC, Excess Plan 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 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 identify and 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, Palmetto Government Benefits Administrator, LLC (Palmetto). In particular, we examined the Blue Cross Blue Shield of South Carolina Excess Plan (Excess Plan) Palmetto Medicare segment pension assets that were updated from January 1, 2015, to January 1, 2017.

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OBJECTIVE

Our objective was to determine whether Palmetto complied with Federal requirements and its established cost accounting practice when updating its Excess Plan Medicare segment pension assets from January 1, 2015, to January 1, 2017.

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BACKGROUND

Palmetto Government Benefits Administrator, LLC, and Medicare

During our audit period, Palmetto was a subsidiary of Blue Cross Blue Shield of South Carolina (BCBS South Carolina), whose home office is in Columbia, South Carolina. Palmetto administers Medicare operations under the MAC contracts for Medicare Parts A and B Jurisdiction 1/1 and Jurisdiction 112 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.

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 Excess Plan would, under the terms of this agreement, have three Medicare segments: (1) Palmetto, (2) Companion Data Services, LLC (CDS), and (3) Partial Medicare./4 This report addresses Palmetto's compliance with the pension segmentation language under the provisions of Federal requirements and its Medicare contracts. We are addressing the Excess Plan Medicare segment pension assets for the CDS and Partial Medicare segments in separate audits.

Blue Cross Blue Shield of South Carolina Excess Plan

BCBS South Carolina sponsors the Excess Plan. The purpose of the Excess Plan is to provide benefits in excess of the limits imposed by the Employee Retirement Income Security Act of 1974 for participants in BCBS South Carolina's qualified defined-benefit plan./5

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FINDINGS

Palmetto did not correctly update its Excess Plan Medicare segment pension assets from January 1, 2015, to January 1, 2017, in accordance with Federal requirements. Palmetto identified $746,467 as its Excess Plan Medicare segment pension assets as of January 1, 2017; however, we determined that those assets were $737,271 as of that date. Therefore, Palmetto overstated its Excess Plan Medicare segment pension assets as of January 1, 2017, by $9,196.

Palmetto overstated those Excess Plan pension assets because its policies and procedures did not always ensure that it calculated those assets in accordance with Federal requirements when updating its Excess Plan Medicare segment's pension assets from January 1, 2015, to January 1, 2017.

Appendix B identifies the details of the Excess Plan Palmetto Medicare 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 the Excess Plan Palmetto Medicare 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 EXCESS PLAN PALMETTO MEDICARE SEGMENT PENSION ASSETS

Federal requirements require Medicare contractors to update the Medicare 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.

Palmetto did not correctly update its Excess Plan Medicare segment pension assets from January 1, 2015, to January 1, 2017, in accordance with Federal requirements. Palmetto identified $746,467 as its Excess Plan Medicare segment pension assets as of January 1, 2017; however, we determined that those assets were $737,271 as of that date. Therefore, Palmetto overstated its Excess Plan Medicare segment pension assets as of January 1, 2017, by $9,196.

The following are our findings regarding the update of the Excess Plan Palmetto Medicare Palmetto Government Benefits Administrator, LLC, Excess Plan Segmentation (A-07-20-00598) 4 segment pension assets from January 1, 2015, to January 1, 2017. Appendix D identifies the Excess Plan's CAS balance equation as of January 1, 2017./6

Contributions and Transferred Prepayment Credits Overstated

The audited contributions and transferred prepayment credits/7 are based on the assignable pension costs./8

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.

Palmetto overstated contributions and transferred prepayment credits by $8,792 for its Excess Plan Medicare segment for 2016. The overstatement occurred primarily because of differences in the asset base used to compute the assignable pension costs.

Earnings, Net of Expenses, Overstated

Palmetto overstated investment earnings, less administrative expenses, by $404 for its Excess Plan Medicare segment, because it used incorrect contributions and transferred prepayment credits (discussed above) to develop its Excess Plan Medicare 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 2 below shows the difference in the earnings, net of expenses, proposed by Palmetto and the earnings, net of expenses, that we calculated during our audit.

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[See link at end of text for Table 2: Earnings, Net of Expenses]

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View full report at https://oig.hhs.gov/oas/reports/region7/72000598.pdf