Palmetto Government Benefits Administrator, LLC, Did Not Claim Some Allowable Medicare Pension Costs Through Its Incurred Cost Proposals

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 and Jurisdiction 11 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 J 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. The disclosure statement that Palmetto submits to CMS states that Palmetto uses pooled cost accounting. Medicare contractors use pooled cost accounting to calculate the indirect cost rates (whose computations include pension, PRB, Supplemental Executive Retirement Plan and Excess Plan 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. Medicare Reimbursement of Pension CostsCMS reimburses a portion of the annual contributions that contractors make to their pension plans. The pension costs are included in the computation of the indirect cost rates reported on the ICPs. In turn, CMS uses indirect cost rates in reimbursing costs under cost-reimbursement contracts. To be allowable for Medicare reimbursement, pension costs must be (1) measured, assigned, and allocated in accordance with CAS 412 and 413 and (2) funded as specified by part 31 of the FAR. In claiming costs, contractors must follow cost reimbursement principles contained in the FAR, the CAS, and the Medicare contracts. Previous Audits of Allocable Pension CostsWe previously reviewed Palmetto’s allocable pension costs (A-07-17-00505, Jul. 6, 2017) and the BCBS South Carolina’s allocable pension costs (A-07-17-00509, Aug. 28, 2017). Our Palmetto audit report identified allocable pension costs that Palmetto should have used when calculating its indirect cost rates for CYs 2006 through 2012. We recommended that Palmetto increase the Medicare segment pension costs used to calculate its indirect cost rates by $143,261 for CYs 2006 through 2012. Our BCBS South Carolina audit report identified Other segment allocable pension costs that BCBS South Carolina’s subsidiaries’ Medicare segments should have used when calculating the indirect cost rates for CYs 2006 through 2012. We recommended that BCBS South Carolina decrease the Medicare segment pension costs used to calculate its indirect cost rates by $6,193,748 for CYs 2006 through 2012. Incurred Cost Proposal AuditsAt CMS’s request, Figliozzi & Company CPAs P.C. (Figliozzi), the Defense Contract Audit Agency (DCAA), and CliftonLarsonAllen, LLP (Allen), performed audits of the ICPs that Palmetto submitted for CYs 2012 through 2016. The objectives of these ICP audits were to determine whether costs were allowable in accordance with applicable Federal regulations.