CVS 2013 Annual Report Download - page 44

Management’s Discussion and Analysis
of Financial Condition and Results of Operations
42
CVS Caremark
party pharmacies in our retail pharmacy network for products sold, regardless of whether we are paid by our clients.
Our responsibilities under these client contracts typically include validating eligibility and coverage levels, communi-
cating the prescription 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 dispensing, suggesting clinically appropri-
ate generic alternatives where appropriate and approving the prescription for dispensing. Although we do not have
credit risk with respect to Retail Co-Payments, we believe that all of the other indicators of gross revenue reporting
are present. For contracts under which we act as an agent, we record revenues using the net method.
We deduct from our revenues the manufacturers’ rebates that are earned by our clients based on their members’
utilization 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 material to our results
of operations or financial position.
We participate in the Federal Government’s Medicare Part D program as a PDP through our SilverScript Insurance
Company subsidiary. 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 7.0%, 7.7% and 3.1%
of consolidated net revenues in 2013, 2012 and 2011, 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 fully insured 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 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 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.