Group Health Incorporated Overstated Its Allowable Medicare Supplemental Executive Retirement Plan Costs for Calendar Years 2009 Through 2016

GHI, a subsidiary of EmblemHealth Services Company, LLC, administered Medicare operations under Coordination of Benefits (COB) contracts with CMS. During our audit period, GHI also performed Medicare work on the Medicare Secondary Payer Recovery and Benefit Coordination and Recovery (MSPRC) contracts. GHI also performed work as a subcontractor on the Retiree Drug Subsidy (RDS) contract. The disclosure statement that GHI submits to CMS states that GHI uses pooled cost accounting. Medicare contractors use pooled cost accounting to calculate the indirect cost rates (whose computations include pension, PRB, and SERP costs) that they submit on their ICPs. Medicare contractors use the indirect cost rates to calculate the contract costs that they report on their ICPs. In turn, CMS uses these indirect cost rates in determining the final indirect cost rates for each contract. Group Health Incorporated Supplemental Executive Retirement Plan CostsGHI sponsors two SERPs: the Supplemental Executive Retirement Plan for EmblemHealth Services Company, LLC (SERP I), and the Supplemental Executive Retirement Plan II for EmblemHealth Services Company, LLC (SERP II). Both the SERP I and SERP II plans’ purpose is to provide a competitive level of benefits in order to attract and retain well-qualified senior executives of EmblemHealth Services Company, LLC. GHI’s SERPs are thus designed to restore benefits to participants who lost benefits under the GHI Local 153 Pension Plan, GHI Cash Balance Pension Plan, and EmblemHealth Services Company, LLC, Employees’ Retirement Plan because of the Internal Revenue Code, sections 401(a) and 415, limits. , This report addresses both the SERP I and SERP II plan costs that GHI claimed under the provisions of its MAC-related contracts. Accounting MethodologiesThe Medicare contracts require GHI to calculate SERP costs in accordance with the FAR and CAS 412 and 413. The FAR and the CAS require that the costs for nonqualified defined-benefit plans be measured under either the accrual method or the pay-as-you-go method. Under the accrual method, allowable costs are based on the annual contributions that the employer deposits into its trust fund. For nonqualified defined-benefit plans that are not funded through the use of a funding agency, costs are to be accounted for under the pay-as-you-go method. This method is based on the actual benefits paid to participants, which are comprised of lump-sum payments and annuity payments. Incurred Cost Proposal Audits At CMS’s request, Figliozzi & Company, P.C. (Figliozzi), Kearney & Company, P.C. (Kearney), and Davis Farr, LLP (Farr), performed audits of the ICPs that GHI submitted for CYs 2009 through 2016. The objectives of the Figliozzi, Kearney, and Farr ICP audits were to determine whether costs were allowable in accordance with the FAR, the U.S. Department of Health and Human Services Acquisition Regulation, and the CAS. For this audit, we relied on the Figliozzi, Kearney, and Farr ICP audit findings and recommendations when computing the allowable SERP costs discussed in this report. We incorporated the results of the Figliozzi, Kearney, and Farr ICP audits into our computations of the audited indirect cost rates, and ultimately the SERP costs claimed, for the contracts subject to the FAR. CMS will use our report on allowable SERP costs, as well as the Figliozzi, Kearney, and Farr ICP audit reports, to determine the final indirect cost rates and the total allowable contract costs for GHI for CYs 2009 through 2016. The cognizant Contracting Officer will perform a final settlement with the contractor to determine the final indirect cost rates. These rates ultimately determine the final costs of each contract.