CVS 2013 Annual Report Download - page 65

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2013 Annual Report
Drug Discounts – The PSS deducts from its revenues any rebates, inclusive of discounts and fees, earned by its
clients. Rebates are paid to clients in accordance with the terms of client contracts, which are normally based on
fixed rebates per prescription for specific products dispensed or a percentage of manufacturer discounts received
for specific products dispensed. The liability for rebates due to clients is included in “Claims and discounts payable”
in the accompanying consolidated balance sheets.
Medicare Part D – The PSS, through its SilverScript Insurance Company subsidiary, participates in the Federal
Government’s Medicare Part D program as a Prescription Drug Plan (“PDP”). Net revenues include insurance premi-
ums earned by the PDP, which are determined based on the PDP’s annual bid and related contractual arrangements
with the Centers for Medicare and Medicaid Services (“CMS”). The insurance premiums include a direct premium
paid by CMS and a beneficiary premium, which is the responsibility of the PDP member, but is subsidized by CMS in
the case of low-income members. 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, 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
included in net revenues. The Company assumes no risk for these amounts. 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 recognition policies for Mail Co-Payments and Retail Co-Payments
(discussed previously in this document).
Retail Pharmacy Segment – The RPS recognizes revenue from the sale of merchandise (other than prescription
drugs) at the time the merchandise is purchased by the retail customer. Prior to the fourth quarter of 2013, revenue
from the sale of prescription drugs was recognized at the time the prescription was 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.
During the fourth quarter of 2013, the Company began recognizing revenue from the sale of prescription drugs when
the prescription is picked up by the customer. This immaterial error correction is reflected in all annual and quarterly
financial statements presented. For the year ended December 31, 2012, the correction reduced net revenues and net
income attributable to CVS Caremark by $13 million and $13 million. For the year ended December 31, 2011, the
correction reduced net revenues by $20 million and increased net income attributable to CVS Caremark by $1 million.
Diluted earnings per share from net income attributable to CVS Caremark was reduced by $0.01 for the year ended
December 31, 2012. There was no impact on diluted earnings per share from net income attributable to CVS Caremark
in any other annual or interim period impacted by the immaterial error correction. The adjustment increased total
assets and total liabilities by $309 million and $360 million as of December 31, 2012 and decreased retained earnings
by $38 million and $39 million as of December 31, 2011 and 2010, respectively.
Customer returns are not material. Revenue generated from the performance of services in the RPS’s health care
clinics is recognized at the time the services are performed. Sales taxes are not included in revenue.
See Note 13 for additional information about the revenues of the Company’s business segments.