Review of Medicare Segment Assets for the Nonqualified Defined-Benefit Pension Plans for Highmark, Inc. & Predecessors From January 1, 1992, To January 1, 2003

EXECUTIVE SUMMARY:

Our objectives were to determine if the pension segmentation requirements of the Medicare contract were followed while updating the nonqualified defined-benefit plan (NQDBP) Medicare segment assets for: (1) Veritus from January 1, 1994, to January 1, 1998, (2) Pennsylvania Blue Shield (PBS) from January 1, 1992, to January 1, 1998, and (3) Highmark from January 1, 1998, to January 1, 2003.  We found that Highmark and its predecessors did not fully comply with the Medicare contracts' pension segmentation requirements while updating the NQDBP Medicare segment assets.  As a result, Veritus understated the Medicare segment assets for the NQDBP by $9,476 as of January 1, 1998.  PBS overstated the Medicare segment assets for the NQDBP by $46,999 as of January 1, 1998.  Highmark understated Medicare segment assets for the NQDBP for Medicare Part A by $4,057 and overstated Medicare segment assets for Medicare Part B by $50,351 as of January 1, 2003.

We recommended that: (1) Veritus increase its NQDBP Medicare segment assets by $9,476, and recognize $13,484 of Medicare segment assets as of January 1, 1998; (2) PBS decrease its NQDBP Medicare segment assets by $46,999 and recognize $367,210 of Medicare segment assets as of January 1, 1998; and (3)  Highmark increase its NQDBP Medicare Part A segment assets by $4,057, decrease NQDBP Medicare Part B segment assets by $50,351, and recognize Medicare segment assets of $227,868 and $409,562, respectively, as of January 1, 2003.  In comments, Highmark agreed to increase its Medicare Part A assets and decrease its Part B segment assets, but stated that is is unnecessary to adjust Veritus or PBS Medicare segment assets as of January 1, 1998.  We maintain that adjustments to Veritus and PBS are necessary.