Review of Unfunded Pension Costs of Arkansas Blue Cross and Blue Shield

This final report provides the results of our review of Unfunded Pension Costs of Arkansas Blue Cross and Blue Shield. During our previous review of Arkansas Blue Cross and Blue Shield (Arkansas) (CIN: A-07-93-00678), we determined that the Medicare segment accumulated $955,454 in unfunded pension costs as of January 1, 1992. We recommended that Arkansas identify those unfunded pension costs as an unallowable component of subsequent years' pension cost calculations. We also recommended that Arkansas update the accumulated unfunded pension costs, and identify and track similar costs occurring in later years.

Our current review showed that Arkansas did identify and update the accumulated unfunded pension costs from 1992 through 1996, and that there were no additional unfunded pension costs during this period. However, we determined that Arkansas understated its accumulated unfunded pension costs by $153,269 as of January 1, 1997. The understatement occurred because Arkansas inappropriately began amortizing the accumulated unfunded costs as a component of the Medicare segment's pension costs in 1996.

We recommend that Arkansas increase the January 1, 1997 accumulated unfunded pension costs of the Medicare segment by $153,269. We also recommend that Arkansas obtain approval of its contracting officer before including any portion of the accumulated unfunded costs as a component of the Medicare segment's pension costs. Arkansas concurred with our finding and recommendations.