Palmetto Government Benefits Administrator, LLC, Claimed Some Unallowable Medicare Supplemental Executive Retirement Plan III 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. During our audit period, CMS and BCBS South Carolina entered into an agreement called the “Advance Agreement on the Computation of Nonqualified Defined-Benefit Pension Plan Costs for Periods Beginning January 1, 2015” (agreement). This agreement allowed BCBS South Carolina to change its accounting methodology from a pay-as-you-go to an accrual method. This agreement also closed costs prior to January 1, 2015. Starting with January 1, 2015, the SERP III plan would, under the terms of the agreement, identify its segments by individual participant. These segments allocate to each of BCBS South Carolina’s Medicare subsidiaries: Palmetto; Companion Data Services, LLC; and CGS Administrators, LLC. This report addresses Palmetto’s compliance with the provisions of the Federal requirements and its Medicare contracts in claiming SERP III costs. 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, postretirement benefit, SERP III, 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. BCBS South Carolina sponsors a SERP III plan. The purpose of this deferred compensation plan is to supplement participants’ benefits payable under BCBS South Carolina’s retirement plans. This plan is provided to a limited group of management employees who are responsible for earnings and long-term growth of the company. BCBS South Carolina allocated costs to the Palmetto Medicare segment. Accounting MethodologiesThe Medicare contracts require Palmetto to calculate the SERP III plan costs in accordance with the FAR and CAS 412 and 413. The FAR and the CAS require that the costs for nonqualified plans be measured under either the accrual method or the pay-as-you-go method. Under the accrual method, the allowable costs are based on the annual contributions that the employer deposits into its trust fund. For nonqualified 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. Palmetto claimed SERP III plan costs on an accrual basis. At CMS’s request, the Defense Contract Audit Agency (DCAA) and CliftonLarsonAllen, LLP (Allen), performed audits of the ICPs that Palmetto submitted for CYs 2015 and 2016. The objectives of these ICP audits were to determine whether costs were allowable in accordance with applicable Federal regulations.