Audit of Medicare Contractor's Segmented Pension Cost, Blue Cross and Blue Shield of Texas, Inc.

This final report provides the results of our audit of Blue Cross and Blue Shield of Texas, Inc.'s (Texas) implementation of its Medicare contract clause on pension plan segmentation. Texas identified four Medicare segments in 1981 using cost centers instead of responsible organizational units specified in the contract. Texas' identification methodology understated the actuarial liability fraction. When applied to the 1986 pension assets, Texas' fraction understated Medicare's pension assets as of 1986 by $552,870. We recommended that Medicare's segmented assets be increased by $552,870. Medicare's pension assets were understated by another $880,874 in the updating of Medicare's segmented assets from 1986 to 1990. The understatement occurred because Texas incorrectly identified the Medicare segments and had not adjusted for participant transfers in and out of the Medicare segments after 1986. We recommended that Texas increase pension assets of the Medicare segments by an additional $880,874. Texas generally agreed with our recommendations. The Health Care Financing Administration also agreed with our findings and recommendations.