Pension Segmentation Review at Highmark, Inc. of Pennsylvania

EXECUTIVE SUMMARY:

The objectives of our review were to determine if Highmark: (1) identified Medicare pension assets as of December 31, 1997, and (2) complied with the pension segmentation requirements of the Medicare contract while updating Medicare segment assets from December 31, 1997, to January 1, 2002.  We found that Highmark did not comply with the pension segmentation requirements of the Medicare contract while updating Medicare segment assets from December 31, 1997, to January 1, 2002.  Highmark overstated Medicare Part A segment pension assets by $2,663,777 and understated Medicare Part B by $2,394,501.  We recommend that Highmark:  (1) decrease Medicare Part A segment pension assets by $2,663,777 and recognize segment assets of $10,808,230, increase Medicare Part B segment pension assets by $2,394,501 and recognize segment assets of $41,701,031 as of January 1, 2002, and implement controls to ensure that Medicare segments are identified in accordance with the Medicare contract and updated in accordance with CAS 412 and 413.  Highmark disagreed with our report and contends that: (1) OIG assigned certain participants to incorrect segments,  (2) most of the audit findings were due to the cumulative effect of the prior audit findings for Medicare Part A and Medicare Part B, and (3) most of OIG's findings concerning the understatement of Medicare Part B segment assets were due to a retroactive application of a recent decision handed down by the U.S. Court of Appeals concerning reassignable pension costs.