CVS 2011 Annual Report Download - page 57

CVS CAREMARK 55 2011 ANNUAL REPORT
Redeemable noncontrolling interest – The Company
has an approximately 60% ownership interest in Generation
Health, Inc. (“Generation Health”) and consolidates Generation
Health in its consolidated financial statements. The noncon-
trolling shareholders of Generation Health hold put rights for
the remaining interest in Generation Health that if exercised
would require the Company to purchase the remaining inter-
est in Generation Health in 2015 for a minimum of $27 million
and a maximum of $159 million, depending on certain financial
metrics of Generation Health in 2014. Since the noncontrolling
shareholders of Generation Health have a redemption feature
as a result of the put rights, the Company has classified the
Revenue Recognition
Pharmacy Services Segment – The PSS sells prescription
drugs directly through its mail service pharmacies and indi-
rectly through its retail pharmacy network. The PSS rec-
ognizes revenues from prescription drugs sold by its mail
service pharmacies and under retail pharmacy network con-
tracts where the PSS is the principal using the gross method
at the contract prices negotiated with its clients. Net rev-
enue from the PSS includes: (i) the portion of the price the
client pays directly to the PSS, net of any volume-related or
other discounts paid back to the client (see “Drug Discounts”
later in this document), (ii) the price paid to the PSS (“Mail
Co-Payments”) or a third party pharmacy in the PSS’ retail
pharmacy network (“Retail Co-Payments”) by individuals
included in its clients’ benefit plans, and (iii) administrative
fees for retail pharmacy network contracts where the PSS is
not the principal as discussed below.
The PSS recognizes revenue when: (i) persuasive evidence of
an arrangement exists, (ii) delivery has occurred or services
have been rendered, (iii) the seller’s price to the buyer is fixed
or determinable, and (iv) collectability is reasonably assured.
redeemable noncontrolling interest in Generation Health in the
mezzanine section of the consolidated balance sheet outside
of shareholders’ equity. The Company initially recorded the
redeemable noncontrolling interest at a fair value of $37 million
on the date of acquisition which was determined using inputs
classified as Level 3 in the fair value hierarchy. At the end of
each reporting period, if the estimated accreted redemption
value exceeds the carrying value of the noncontrolling interest,
the difference is recorded as a reduction of retained earnings.
Any such reductions in retained earnings would also reduce
income attributable to CVS Caremark in the Company’s
earnings per share calculations.
The Company has established the following revenue recogni-
tion policies for the PSS:
• Revenues generated from prescription drugs sold by mail
service pharmacies are recognized when the prescription
is shipped. At the time of shipment, the Company has
performed substantially all of its obligations under its
client contracts and does not experience a significant
level of reshipments.
• Revenues generated from prescription drugs sold by third
party pharmacies in the PSS’ retail pharmacy network and
associated administrative fees are recognized at the PSS’
point-of-sale, which is when the claim is adjudicated by the
PSS’ online claims processing system.
The PSS determines whether it is the principal or agent for
its retail pharmacy network transactions on a contract by
contract basis. In the majority of its contracts, the PSS has
determined it is the principal due to it: (i) being the primary
obligor in the arrangement, (ii) having latitude in establish-
ing the price, changing the product or performing part of the
service, (iii) having discretion in supplier selection, (iv) having
involvement in the determination of product or service specifi-
cations, and (v) having credit risk. The PSS’ obligations under
its client contracts for which revenues are reported using the
gross method are separate and distinct from its obligations
to the third party pharmacies included in its retail pharmacy
The following is a reconciliation of the changes in the redeemable noncontrolling interest:
in millions 2011 2010 2009
Beginning balance $ 34 $ 37 $ —
Acquisition of Generation Health — — 37
Net loss attributable to noncontrolling interest (4) (3) —
Ending balance $ 30 $ 34 $ 37
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