CVS 2011 Annual Report Download - page 58

Notes to Consolidated Financial Statements
CVS CAREMARK 56 2011 ANNUAL REPORT
included in the PSS’ net revenues. The Company assumes 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 subsidies
received differ from the amounts based on actual prescription
claims, the difference is recorded in either accounts receivable
or accrued expenses.
The PSS accounts for CMS obligations and Member
Co-Payments (including the amounts subsidized by CMS)
using the gross method consistent with its revenue recogni-
tion policies for Mail Co-Payments and Retail Co-Payments
(discussed previously in this document). See Note 8 for
additional information about Medicare Part D.
Retail Pharmacy Segment – The RPS recognizes rev-
enue from the sale of merchandise (other than prescrip-
tion 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 filled, which is or
approximates when the retail customer picks up the prescrip-
tion. Customer returns are not material. Revenue generated
from the performance of services in the RPS’ health care clin-
ics is recognized at the time the services are performed. See
Note 14 for additional information 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 retail pharmacy network, (ii) shipping
and handling costs, and (iii) the operating costs of its mail ser-
vice pharmacies and client service operations and related
information technology support costs including deprecia-
tion 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 distribu-
tors and shipped to members in clients’ benefit 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 (includ-
ing Retail Co-Payments) through the PSS’ 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 report-
ing period and the related purchasing costs, warehousing
network contracts. Pursuant to these contracts, the PSS is
contractually required to pay the third party pharmacies in
its retail pharmacy network for products sold, regardless of
whether the PSS is paid by its clients. The PSS’ responsi-
bilities under its client contracts typically include validating
eligibility and coverage levels, communicating the prescrip-
tion 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 dis-
pensing, suggesting clinically appropriate generic alternatives
where appropriate and approving the prescription for dispens-
ing. 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
rebates, inclusive of discounts and fees, earned by its cli-
ents. The PSS pays rebates to its clients in accordance with
the terms of its client contracts, which are normally based on
fixed rebates per prescription for specific products dispensed
or a percentage of manufacturer discounts received for spe-
cific products dispensed. The liability for rebates due to the
PSS’ clients is included in “Claims and discounts payable” in
the accompanying consolidated balance sheets.
Medicare Part D – The PSS participates in the Federal
Government’s Medicare Part D program as a Prescription
Drug Plan (“PDP”). 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 beneficiary pre-
mium, 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 benefits.
In addition to these premiums, the PSS’ 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 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
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