Review of Pension Segmentation Requirements at Premera Blue Cross, a Terminated Medicare Contractor

EXECUTIVE SUMMARY:

Our objectives were to determine if Premera complied with the Medicare contract's pension segmentation requirements:  (1) while updating Medicare segment assets from January 1, 1995, to December 31, 2004, and (2) in determining Medicare's share of excess liabilities as a result of the termination of the Medicare contract. Premera did not comply with the Medicare contract's pension segmentation requirements while updating the Medicare segment's assets from January 1, 1995, to December 31, 2004.  As a result, Premera understated the Medicare segment assets by $481,681.  The understatement occurred primarily because Premera did not allocate net investment earnings to the Medicare segment in accordance with the Cost Accounting Standards requirements.

We recommended that Premera decrease Medicare's portion of the Medicare segment's excess pension liabilities by $856,522, and therefore recognize $190,637 as Medicare's portion.  Premera partially concurred with our findings.  Premera did not agree that the segment's accrued benefit liability was overstated by $369,752.