CVS 2009 Annual Report Download - page 32

Management’s Discussion and Analysis of
Financial Condition and Results of Operations
• During 2008, the inclusion of Caremark’s results increased
net revenues by $7.9 billion, compared to 2007. 2008
includes a full year of net revenues from Caremark, com-
pared to 2007, which includes net revenues from Caremark
from the merger date (March 22, 2007) forward.
• Three fewer days in the 2009 fiscal year negatively impacted
net revenues by $268 million, compared to 2008.
• Four additional days in the 2008 fiscal year increased our net
revenue by $495 million, compared to 2007.
• During 2009, our comparable mail choice claims processed
increased 8.3% to 66.0 million claims. This increase was
primarily due to favorable net new business and significant
adoption of mail choice plan design. During 2008, our
comparable mail choice claims processed decreased 17.6%
to 60.9 million claims, compared to 73.9 million claims in
2007. This decrease was primarily due to the termination
of the Federal Employees Health Benefit Plan (“FEP”) mail
contract on December 31, 2007.
• During 2009 and 2008, our average revenue per mail choice
claim increased by 3.5% and 7.8%, compared to 2008 and
2007, respectively. Specialty mail choice claims, which have
significantly higher average net revenues per claim, were the
primary driver of the increase. Average revenue per specialty
mail choice claim increased primarily due to drug cost inflation
and claims mix. These increases were offset, in part, by an
increase in the percentage of generic drugs dispensed and
changes in client pricing.
• During 2009 and 2008, our mail choice generic dispensing
rate increased to 56.5% and 54.4%, respectively, compared
to our comparable mail choice generic dispensing rate
of 48.1% in 2007. These increases were primarily due to
new generic drug introductions and our continued efforts
to encourage plan members to use generic drugs when
they are available. In addition, the termination of the FEP
mail contract caused our comparable mail choice generic
dispensing rate to increase by approximately 120 basis
points during 2008, compared to 2007.
• During 2009 and 2008, our pharmacy network claims
processed increased to 592.5 million and 572.5 million,
respectively, compared to our comparable pharmacy
network claims of 533.3 million in 2007. The increase
in 2009, was primarily due to an increase of 61.0 million
RxAmerica claims compared with 2008. This was offset by
the reduction in claims due to the termination of two large
health plan clients effective January 1, 2009 and having three
fewer days in the 2009 reporting period compared to 2008.
During 2009, the Pharmacy Services segment’s results of
operations include a full year of RxAmerica results compared
to 2008, which includes RxAmerica results from the acquisition
date (October 20, 2008) forward.
During 2008 and 2007, the Pharmacy Services segment’s results
of operations were significantly affected by the Caremark
Merger. As such, the primary focus of our Pharmacy Services
segment discussion is based on the comparable financial
information presented previously in this document.
We define mail choice as claims filled at a Pharmacy Services’
mail facility, which includes specialty mail claims, as well as
90-day claims filled at retail pharmacies under the Maintenance
Choice program.
Mail choice penetration rate is calculated based on mail
choice and specialty claims divided by total pharmacy
claims processed.
Net revenues. As you review our Pharmacy Services segment’s
revenue performance, we believe you should consider the
following important information:
• The Pharmacy Services segment recognizes revenues for
its national retail pharmacy network transactions based on
individual contract terms. Caremark’s contracts are predomi-
nantly accounted for using the gross method. Prior to
April 1, 2009, RxAmerica’s contracts were accounted for
using the net method. Effective April 1, 2009, we converted
a number of RxAmerica’s retail pharmacy network contracts
to the Caremark contract structure, which resulted in those
contracts being accounted for using the gross method. As
a result, net revenues increased by $2.5 billion during 2009
compared to 2008.
In addition, prior to September 2007, PharmaCare’s contracts
were accounted for using the net method. Effective Septem-
ber 1, 2007, we converted a number PharmaCare’s retail
pharmacy network contracts to the Caremark contract structure,
which resulted in those contracts being accounted for using
the gross method. As a result, net revenues increased by
approximately $1.8 billion during 2008 compared to 2007.
Please see Note 1 to the consolidated financial statements
for additional information about the Pharmacy Services
segment’s revenue recognition policies.
• During 2009, the inclusion of RxAmerica’s results increased
net revenues by approximately $3.2 billion compared to
2008. These increases include the conversion of RxAmerica’s
retail pharmacy network contracts to the Caremark contract
structure discussed above.
CVS Caremark
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