CVS 2011 Annual Report Download - page 40

Management’s Discussion and Analysis of Financial Condition
and Results of Operations
CVS CAREMARK 38 2011 ANNUAL REPORT
We deduct from our revenues the manufacturers’ rebates
that are earned by our clients based on their members’ uti-
lization of brand-name formulary drugs. We estimate these
rebates at period-end based on actual and estimated claims
data and our estimates of the manufacturers’ rebates earned
by our clients. We base our estimates on the best available
data at period-end and recent history for the various factors
that can affect the amount of rebates due to the client. We
adjust our rebates payable to clients to the actual amounts
paid when these rebates are paid or as significant events
occur. We record any cumulative effect of these adjustments
against revenues as identified, and adjust our estimates
prospectively to consider recurring matters. Adjustments
generally result from contract changes with our clients or
manufacturers, differences between the estimated and actual
product mix subject to rebates or whether the product was
included in the applicable formulary. We also deduct from
our revenues pricing guarantees and guarantees regarding
the level of service we will provide to the client or member
as well as other payments made to our clients. Because the
inputs to most of these estimates are not subject to a high
degree of subjectivity or volatility, the effect of adjustments
between estimated and actual amounts have not been mate-
rial to our results of operations or financial position.
We participate in the Federal Government’s Medicare Part D
program as a PDP. Our net revenues include insurance pre-
miums earned by the PDP, which are determined based on
the PDP’s annual bid and related contractual arrangements
with CMS. The insurance premiums include a beneficiary
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 as accrued expenses and are
then recognized ratably as revenue over the period in which
members are entitled to receive benefits.
In addition to these premiums, our net revenues include
co-payments, coverage gap benefits, deductibles and
co-insurance (collectively, the “Member Co-Payments”)
related to PDP members’ actual prescription claims. In cer-
tain cases, CMS subsidizes a portion of these Member
Co-Payments and we are paid an estimated prospective
Member Co-Payment subsidy, each month. The prospec-
tive Member Co-Payment subsidy amounts received from
CMS are also included in our net revenues. We assume no
risk for these amounts, which represented 3.1%, 2.6% and
3.5% of consolidated net revenues in 2011, 2010 and 2009,
respectively. If the prospective Member Co-Payment subsi-
dies received differ from the amounts based on actual pre-
scription claims, the difference is recorded in either accounts
receivable or accrued expenses. We account for CMS obli-
gations and Member Co-Payments (including the amounts
subsidized by CMS) using the gross method consistent with
our revenue recognition policies for Mail Co-Payments and
Retail Co-Payments. We have recorded estimates of vari-
ous assets and liabilities arising from our participation in the
Medicare Part D program based on information in our claims
management and enrollment systems. Significant estimates
arising from our participation in the Medicare Part D program
include: (i) estimates of low-income cost subsidy and reinsur-
ance amounts ultimately payable to or receivable from CMS
based on a detailed claims reconciliation, (ii) an estimate of
amounts payable to CMS under a risk-sharing feature of the
Medicare Part D program design, referred to as the risk cor-
ridor and (iii) estimates for claims that have been reported and
are in the process of being paid or contested and for our esti-
mate of claims that have been incurred but have not yet been
reported. Actual amounts of Medicare Part D-related assets
and liabilities could differ significantly from amounts recorded.
Historically, the effect of these adjustments has not been
material to our results of operations or financial position.
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