CVS 2012 Annual Report Download - page 43

CVS CAREMARK 2012 ANNUAL REPORT
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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 material 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
premiums 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 certain cases, CMS
subsidizes a portion of these Member Co-Payments and we are paid an estimated prospective Member Co-Payment
subsidy, each month. The prospective Member Co-Payment subsidy amounts received from CMS are also included in
our฀net฀revenues.฀We฀assume฀no฀risk฀for฀these฀amounts,฀which฀represented฀7.7%,฀3.1%฀and฀2.6%฀of฀consolidated฀net฀
revenues in 2012, 2011 and 2010, 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.
We account for CMS obligations 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 various assets and liabilities arising from our participation in the Medicare Part D program based on informa-
tion 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 reinsurance 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 corridor and (iii) estimates for claims that have been
reported and are in the process of being paid or contested and for our estimate 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.
RETAIL PHARMACY SEGMENT
Our Retail Pharmacy Segment recognizes revenue from the sale of merchandise (other than prescription 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 as opposed to upon delivery as required under the Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification 605,
Revenue Recognition . For substantially all prescriptions, the fill date
and the delivery date occur in the same reporting period. The effect on both revenue and income of recording prescription
drug sales upon fill as opposed to delivery is immaterial. Customer returns are not material. Revenue generated from the
performance of services in our health care clinics is recognized at the time the services are performed.
We have not made any material changes in the way we recognize revenue during the past three years.