Audit of Highmark's Unfunded Pension Costs for the Period Covering 1997 Through 2001, A-07-04-00177

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Office of Inspector General DEPARTMENT OF HEALTH & HUMAN SERVICES S Offices of Audit Services J Region VII 601 East 12th Street JAN 2 1 2005 Room 284A Kansas City, Missouri 64106 Report Number: A-07-04-00 177 Donald L. Fisher Vice President Compensation, Benefits, HRIS, and Risk Management Highmark, Inc. 1800 Center Street P.O. Box 890089 Camp Hill, Pennsylvania 17089-0089 r Dear Mr. Fisher: Enclosed are two copies of the Department of Health and Human Services, Office of Inspector General (OIG) report entitled "Audit of Highmark's Unfunded Pension Costs for the Period Covering 1997 Through 2001 ." A copy of this report will be forwarded to the HHS action official noted on the following page for her review and any action deemed necessary. The action official will make final determination regarding actions taken on all matters in the report. We request that you respond to the action official within 30 days from the date of this letter. Your response should present any comments or additional information that you believe may have a bearing on the final determination. In accordance with the principles of the Freedom of Information Act (5 U.S.C. 5 552, as amended by Public Law 104-23 I), OIG reports are made available publicly to the extent information contained therein is not subject to exemptions of the Act that the Department chooses to exercise. (See 45 CFR part 5.) If you have any questions or comments about this report, please do not hesitate ...

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Page 2 Mr. Donald L. Fisher Direct Reply to HHS Action Official: Nancy B. O’Connor Acting Regional Administrator, Region III Centers for Medicare & Medicaid Services Public Ledger Building, Suite 216 150 South Independence Mall West Philadelphia, Pennsylvania 19106

Department of Health and Human Services OFFICE OF INSPECTO GEN R ERAL

AUDIT OFHIGHMARK’SUNFUNDED PENSIONCOSTS FOR THEPERIOD COVERING1997 THROUGH2001

JANUARY 2005 A-07-04-00177

Office of Inspector General http://oig.hhs.gov

The mission of the Office of Inspector General (OIG), as mandated by Public Law 95-452, as amended, is to protect the integrity of the Department of Health and Human Services (HHS) programs, as well as the health and welfare of beneficiaries served by those programs. This statutory mission is carried out through a nationwide network of audits, investigations, and inspections conducted by the following operating components: Office of Audit Services The OIG's Office of Audit Services (OAS) provides all auditing services for HHS, either by conducting audits with its own audit resources or by overseeing audit work done by others. Audits examine the performance of HHS programs and/or its grantees and contractors in carrying out their respective responsibilities and are intended to provide independent assessments of HHS programs and operations in order to reduce waste, abuse, and mismanagement and to promote economy and efficiency throughout the department. Office of Evaluation and Inspections The OIG's Office of Evaluation and Inspections (OEI) conducts short-term management and program evaluations (called inspections) that focus on issues of concern to the department, the Congress, and the public. The findings and recommendations contained in the inspections reports generate rapid, accurate, and up-to-date information on the efficiency, vulnerability, and effectiveness of departmental programs. The OEI also oversees State Medicaid fraud control units, which investigate and prosecute fraud and patient abuse in the Medicaid program. Office of Investigations The OIG's Office of Investigations (OI) conducts criminal, civil, and administrative investigations of allegations of wrongdoing in HHS programs or to HHS beneficiaries and of unjust enrichment by providers. The investigative efforts of OI lead to criminal convictions, administrative sanctions, or civil monetary penalties. Office of Counsel to the Inspector General The Office of Counsel to the Inspector General (OCIG) provides general legal services to OIG, rendering advice and opinions on HHS programs and operations and providing all legal support in OIG's internal operations. The OCIG imposes program exclusions and civil monetary penalties on health care providers and litigates those actions within the department. The OCIG also represents OIG in the global settlement of cases arising under the Civil False Claims Act, develops and monitors corporate integrity agreements, develops compliance program guidances, renders advisory opinions on OIG sanctions to the health care community, and issues fraud alerts and other industry guidance.

Notices THIS REPORT IS AVAILABLE TO THE PUBLIC athttp://oig.hhs.gov/ In accordance with the principleFs roefe tdhoe m of Information Act, 5 U.S.C. 552, as amended by Public Law 104-231, Offipceud A Sitviers,cearenO ,lcifffo e of Insctor Ge reports are made available to memhbee rpsu obfli tc to the extent information contained therein is not subject to exemptions in the Act. (See 45 CFR Part 5.) OAS FINDINGS AND OPINIONS The designation of financial or meanegmtp artccise as questionableo r aa recommendation for the disallowancse i nofc ucrorsetd or claimed as well as other conclusions and recommendations int onsthf opd ioin eepresentrepor ridgn snat ehf nis hi HHS/OIG/OAS. Authorized officials aowf atrhdei ng agency will make final determination on these matt ers.

EXECUTIVE SUMMARY BACKGROUND Highmark, Inc. (Highmark) administers Medicare Part A and B operations under cost reimbursement contracts with the Centers for Medicare & Medicaid Services (CMS). Highmark was formed by the merger of Veritus, Inc. (Veritus) and Pennsylvania Blue Shield (PBS) on December 6, 1996. On December 31, 1997, Highmark merged the Veritus pension plan into the PBS pension plan. Effective January 1, 1998, the PBS plan was amended and restated, and became the pension plan for Highmark. For the purposes of this report, the term Highmark will be used to address the findings concerning Part A and B unfunded pension costs for the review period of 1997 through 2001. OBJECTIVES Our objectives were to: •the years 1997-2001 were funded in accordance with thedetermine if pension costs for Federal Acquisition Regulations (FAR) and the Cost Accounting Standards (CAS) and •and properly account for any accumulated unfunded pension costs, includingidentify allowable and reassignable portions. SUMMARY OF FINDINGS Highmark funded the pension costs for plan years 1997 through 2001 in accordance with the FAR and the CAS. However, Highmark did not identify correctly or account properly for the additional accumulated unfunded pension costs. The accumulated unfunded pension costs consists of the accumulated unallowable pension costs and the accumulated reassignable pension costs. Highmark correctly identified and properly accounted for the accumulated reassignable pension costs. Highmark overstated the accumulated unallowable pension costs by $236,744 ($12,882 for the Medicare Part A segment plus $223,862 for the Other segment). As of January 1, 2002, Highmark determined its accumulated unallowable pension costs to be $9,660,939; however, audited accumulated unallowable pension costs were $9,424,195. The overstatements occurred because Highmark started its update of accumulated unallowable pension costs with an incorrect amount for its Part A segment.

RECOMMENDATION As of January 1, 2002, Highmark should decrease its accumulated unallowable pension costs by $236,744 ($12,882 for the Medicare Part A segment plus $223,862 for the Other segment). AUDITEE’S COMMENTS Highmark’s comments are summarized in the following paragraphs, and its redacted comments are presented in their entirety in the appendix. Highmark partially concurred with our report and stated that it: “. . . does not concur with the OIG’s [the Office of Inspector General] recommendation that it should decrease the accumulated unallowable pension cost by $236,744, as of January 1, 2002. Highmark concurs that it started its update of accumulated unallowable pension costs with an incorrect amount for its Part A segment . . . “ Highmark contends that: •OIG assigned certain participants to incorrect segments. •Audited accumulated unallowable costs of $9,424,195 represented the total company costs, and overstatement of accumulated unallowable costs of $236,744 was comprised from an overstatement of both the Medicare Part A segment and Other segment. OIG RESPONSE We partially disagree with Highmark’s assertion concerning identification of the audited unallowable pension costs. Our identification of the Medicare segment assets was in accordance with the Medicare contract, and the update of assets was in accordance with CAS 412 and 413. During the course of the audit, we reviewed our identification of the participants and cost centers comprising the Medicare segment with representatives of Highmark and obtained their concurrence. The findings and recommendations of this report are based upon that identification. In its response, Highmark provided revised cost center information for several participants. Although Highmark did not provide us with supporting documentation necessary to accept these revisions, we did compute the impact of such revisions on our report. We determined that including the revised participants did not materially impact the findings of the report, and we will not require Highmark to provide us with the supporting documentation necessary to accept these revisions. Therefore, our position has not changed, and we recommend that Highmark decrease its accumulated unallowable pension costs by $236,744 as of January 1, 2002.

However, OIG agrees that of the $236,744 overstatement, $12,882 relates to Medicare Part A segment and $223,862 relates to the Other segment. In addition, OIG agrees that the $9,424,195 in audited costs are the total plan accumulated unallowable pension costs. We have integrated these comments in the report to provide further clarification.

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TABLE OF CONTENTS

Page INTRODUCTION 1 BACKGROUND 1 Highmark and Medicare 1 CAS 1 FAR 2 Conflict between the FAR Funding Requirement and Tax Limits 2 Revised CAS 2 OBJECTIVES, SCOPE, AND METHODOLOGY 3 Objectives 3 Scope 3 Methodology 3 FINDINGS AND RECOMMENDATION4 ACCUMULATED UNFUNDED PENSION COSTS 4 CRITERIA - CAS AND FAR 4 CONDITION - INCORRECT COMPUTATION OF THE ACCUMULATED UNALLOWABLE PENSION COSTS 5 CAUSE - USE OF INCORRECT UNALLOWABLE BASES 5 EFFECT - OVERSTATEMENT OF ACCUMULATED UNALLOWABLE COSTS 5 RECOMMENDATION 5 AUDITEE’S COMMENTS 5 OIG RESPONSE 6 APPENDIX HIGHMARK’S RESPONSE

CAS CFR CMS ERISA FAR OBRA 87 OIG PBS TRA 86

Glossary of Abbreviations and Acronyms Cost Accounting Standards Code of Federal Regulations Centers for Medicare & Medicaid Services Employees Retirement Income Security Act of 1974 Federal Acquisition Regulations Omnibus Budget Reconciliation Act of 1987 Office of the Inspector General Pennsylvania Blue Shield Tax Reform Act of 1986

INTRODUCTION

BACKGROUND Highmark and Medicare Highmark administers Medicare Part A and B operations under cost reimbursement contracts. In claiming costs, contractors must follow cost reimbursement principles contained in the FAR, the CAS, and the Medicare contracts. Since its inception, Medicare has paid a portion of the annual contributions made by contractors to their pension plans. The payments are allowable pension costs under the FAR and its predecessor, the Federal Procurement Regulations (FPR). In 1980, the Medicare contracts and the FPR incorporated CAS 412 and 413. CAS The CAS deals with stability between contract periods and requires that pension costs be consistently measured and assigned to contract periods. On March 30, 1995, the Office of Federal Procurement Policy, Cost Accounting Standards Board, revised the CAS relating to accounting for pension costs. Unless otherwise noted, the following CAS citations refer to the standards that were in effect before the revision. We refer to the postrevision standards as the revised CAS. The CAS within 48 CFR 9904.412-50(a)(7) stated: “If any portion of the pension cost computed for a cost accounting period is not funded in that period, no amount for interest on the portion not funded in that period shall be a component of pension cost of any future cost accounting period. Also, the CAS within 48 CFR 9904.412-50(a)(2) stated: “Pension costs applicable to prior years that were specifically unallowable in accordance with then existing Government contractual provisions . . . shall be separately identified and eliminated from any unfunded actuarial liability being amortized . . . . The revised CAS within 48 CFR 9904.412-40(c) imposes the fundamental requirement: “Assignment of pension cost. Except costs assigned to future periods by 9904.412-50(c)(2) and (5), the amount of pension cost computed for a cost accounting period is assignable only to that period . . . .