Palmetto Government Benefits Administrator, LLC, Claimed Some Unallowable Medicare Postretirement Benefit 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. BCBS South Carolina sponsors a PRB plan, called the BCBS South Carolina Postretirement Health and Life Insurance Programs, which is offered to Palmetto employees. The purpose of this PRB plan is to provide retiree health and life insurance benefits to eligible retirees and their dependents. Palmetto claimed PRB costs using the accrual basis of accounting and funded those accrual costs through a Voluntary Employee Benefit Association (VEBA) trust and in conjunction with a 401(h) account. 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 Postretirement Benefit CostsCMS reimburses a portion of the Medicare contractors’ annual PRB costs, which are funded by contributions that contractors make to their dedicated trust funds. The PRB costs are included in the computation of the indirect cost rates and reported on the ICPs. In turn, CMS uses indirect cost rates in reimbursing costs under cost-reimbursement contracts. Federal regulations (FAR 31.205-6(o)) require that to be allowable for Medicare reimbursement, PRB costs must be (1) measured, assigned, and allocated in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 715-60 (formerly Statement of Financial Accounting Standards (SFAS) 106) and (2) funded as specified by part 31 of the FAR. In claiming costs, contractors must follow cost reimbursement principles contained in the FAR and the Medicare contracts. 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.