CVS 2008 Annual Report Download - page 51

2008 ANNUAL REPORT 47
The PSS accounts for CMS obligations and Member Co-Payments
(including the amounts subsidized by CMS) using the gross
method consistent with its revenue recognition policies for Mail
Co-Payments and Retail Co-Payments (discussed previously in
this document), which include the application of EITF 99-19. See
Note 7 for additional information about Medicare Part D.
Retail Pharmacy Segment. The RPS recognizes revenue from
the sale of merchandise (other than prescription drugs) at the
time the merchandise is purchased by the retail customer.
Revenue from the sale of prescription drugs is recognized at
the time the prescription is fi lled, which is or approximates when
the retail customer picks up the prescription. Customer returns
are not material. Revenue generated from the performance of
services in the RPS’ health care clinics is recognized at the time
the services are performed. See Note 13 for additional informa-
tion about the revenues of the Company’s business segments.
Cost of Revenues:
Pharmacy Services Segment. The PSS’ cost of revenues
includes: (i) the cost of prescription drugs sold during the
reporting period directly through its mail service pharmacies
and indirectly through its national retail pharmacy network,
(ii) shipping and handling costs and (iii) the operating costs of
its mail service pharmacies and customer service operations
and related information technology support costs (including
depreciation and amortization). The cost of prescription drugs
sold component of cost of revenues includes: (i) the cost of the
prescription drugs purchased from manufacturers or distributors
and shipped to participants in customers’ benefi t plans from
the PSS’ mail service pharmacies, net of any volume-related
or other discounts (see “Drug Discounts” previously in this
document) and (ii) the cost of prescription drugs sold (including
Retail Co-Payments) through the PSS’ national retail pharmacy
network under contracts where it is the principal, net of any
volume-related or other discounts.
Retail Pharmacy Segment. The RPS’ cost of revenues includes:
the cost of merchandise sold during the reporting period and
the related purchasing costs, warehousing and delivery costs
(including depreciation and amortization) and actual and
estimated inventory losses. See Note 13 for additional information
about the cost of revenues of the Company’s business segments.
Vendor Allowances and Purchase Discounts:
The Company accounts for vendor allowances and purchase
discounts under the guidance provided by EITF Issue No. 02-16,
“Accounting by a Customer (Including a Reseller) for Certain
prescription price and the co-payments due to the third party
retail pharmacy, identifying possible adverse drug interactions for
the pharmacist to address with the physician prior to dispensing,
suggesting clinically appropriate generic alternatives where
appropriate and approving the prescription for dispensing.
Although the PSS does not have credit risk with respect to
Retail Co-Payments, management believes that all of the other
indicators of gross revenue reporting are present. For contracts
under which the PSS acts as an agent, the PSS records revenues
using the net method.
Drug Discounts. The PSS deducts from its revenues any
discounts paid to its customers as required by EITF No. 01-9,
“Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendor’s Products)” (“EITF 01-9”).
The PSS pays discounts to its customers in accordance with the
terms of its customer contracts, which are normally based on a
fi xed discount per prescription for specifi c products dispensed
or a percentage of manufacturer discounts received for specifi c
products dispensed. The liability for discounts due to the PSS’
customers is included in “Claims and discounts payable” in the
accompanying consolidated balance sheets.
Medicare Part D. The PSS began participating in the Federal
Government’s Medicare Part D program as a Prescription Drug
Plan (“PDP”) on January 1, 2006. The PSS’ net revenues include
insurance premiums earned by the PDP, which are determined
based on the PDP’s annual bid and related contractual arrange-
ments with the Centers for Medicare and Medicaid Services
(“CMS”). The insurance premiums include a benefi ciary premium,
which is the responsibility of the PDP member, but is subsidized by
CMS in the case of low-income members, and a direct premium
paid by CMS. Premiums collected in advance are initially deferred
in accrued expenses and are then recognized in net revenues over
the period in which members are entitled to receive benefi ts.
In addition to these premiums, the PSS’ net revenues include
co-payments, deductibles and co-insurance (collectively, the
“Member Co-Payments”) related to PDP members’ actual
prescription claims in its net revenues. In certain cases, CMS
subsidizes a portion of these Member Co-Payments and pays
the PSS an estimated prospective Member Co-Payment subsidy
amount each month. The prospective Member Co-Payment
subsidy amounts received from CMS are also included in the
PSS’ net revenues. The Company assumes no risk for these
amounts, which represented 1.3% and 0.8% of consolidated
net revenues in 2008 and 2007, respectively. If the prospective
Member Co-Payment subsidies received differ from the amounts
based on actual prescription claims, the difference is recorded
in either accounts receivable or accrued expenses.