CVS 2011 Annual Report Download - page 30

Management’s Discussion and Analysis of Financial Condition
and Results of Operations
CVS CAREMARK 28 2011 ANNUAL REPORT
• During 2011 and 2010, our average revenue per mail
choice claim increased by 4.6% and 2.2%, compared to
2010 and 2009, respectively. This increase was primarily
due to drug cost inflation and claims mix, partially offset by
an increase in the percentage of generic prescription drugs
dispensed and changes in client pricing.
• Our mail choice generic dispensing rate increased to
64.9% in the year ended December 31, 2011, compared
to 61.3% in the prior year. During 2010, our mail choice
generic dispensing rate increased to 61.3%, compared to
our mail choice generic dispensing rate of 56.5% in 2009.
• Our pharmacy network generic dispensing rate increased
to 75.0% in the year ended December 31, 2011, com-
pared to 72.7% in the prior year. During 2010, our phar-
macy network generic dispensing rate increased to 72.7%
compared to our pharmacy network generic dispensing
rate of 69.3% in 2009. These continued increases in both
mail choice and pharmacy network generic dispensing
rates were primarily due to the impact of new generic drug
introductions and our continuous efforts to encourage plan
members to use generic drugs when they are available.
We believe our generic dispensing rates will continue to
increase in future periods. This increase will be affected by,
among other things, the number of new generic drug intro-
ductions and our success at encouraging plan members to
utilize generic drugs when they are available.
• Our pharmacy network claims processed increased 35.2%
to 704.0 million claims in the year ended December 31,
2011, compared to 520.6 million claims in the prior year.
The increase in the pharmacy network claim volume was
primarily due to the addition of the previously announced
long-term contract with Aetna, which became effective
on January 1, 2011. Additionally, we experienced higher
claims activity associated with our Medicare Part D pro-
gram as a result of our acquisition of the UAM Medicare
Part D Business completed during the second quarter
of 2011 and increases in covered lives under our legacy
Medicare Part D program. During 2010, our pharmacy
network claims processed decreased 12.1% to 520.6 mil-
lion compared to 592.5 million pharmacy network claims
processed in 2009. The decrease in 2010 was primarily
due to the termination of a few large client contracts effec-
tive January 1, 2010 and the decrease of covered lives
under our Medicare Part D program as a result of the 2010
Medicare Part D competitive bidding process.
• Our average revenue per pharmacy network claim pro-
cessed decreased 3.5%, in the year ended December 31,
2011 as compared to the prior year. This decrease was
primarily due to increases in the percentage of generic pre-
scription drugs dispensed, changes in client pricing, and
the impact of our acquisition of the UAM Medicare Part
D Business, partially offset by our previously announced
long-term contract with Aetna, which became effective on
January 1, 2011. During 2010, our average revenue per
pharmacy network claim processed increased by 2.7%,
compared to 2009. The increase was primarily due to the
conversion of RxAmerica’s pharmacy network contracts
from net to gross on April 1, 2009, (ii) a change in the reve-
nue recognition method from net to gross for a large health
plan on March 1, 2009 and (iii) higher drug costs, partially
offset by an increase in our pharmacy network generic dis-
pensing rate and changes in client pricing.
• During 2011, 2010, and 2009, we generated net rev-
enues from our participation in the administration of the
Medicare Part D drug benefit by providing PBM services
to our health plan clients and other clients that have quali-
fied as a Medicare Part D Prescription Drug Plan (a “PDP”)
under regulations promulgated by the Centers for Medicare
and Medicaid Services (“CMS”). We are also a national
provider of drug benefits to eligible beneficiaries under
the Medicare Part D program through our subsidiaries,
SilverScript, Pennsylvania Life and Accendo (which have
been approved by CMS as PDPs). On April 29, 2011, the
Company acquired the UAM Medicare Part D Business
for approximately $1.3 billion. The UAM Medicare Part D
Business offers prescription drug plan benefits to Medicare
beneficiaries throughout the United States through its
Community CCRSM prescription drug plan.
• The Pharmacy Services segment recognizes revenues
for its pharmacy network transactions based on individ-
ual contract terms. In accordance with ASC 605, Revenue
Recognition (formerly Emerging Issues Task Force (“EITF”)
EITF No. 99-19, “Reporting Revenue Gross as a Principal vs
Net as an Agent”), Caremark’s contracts are predominantly
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 num-
ber of RxAmerica’s retail pharmacy network contracts and a
large health plan to the Caremark contract structure, which
resulted in those contracts being accounted for using the
gross method. As a result, net revenues increased by
$1.1 billion during 2010 as compared to 2009.
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