CVS 2014 Annual Report Download - page 44

Management’s Discussion and Analysis
of Financial Condition and Results of Operations
42
CVS Health
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 6.4%,
7.0% and 7.7% of consolidated net revenues in 2014, 2013 and 2012, 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, reinsurance amounts and coverage gap discount
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 front store merchandise at the time the
merchandise is purchased by the retail customer and recognizes revenue from the sale of prescription drugs when
the prescription is picked up by the customer. 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. Sales taxes
are not included in revenue.
Our customer loyalty program, ExtraCare®, is comprised of two components, ExtraSavingsTM and ExtraBucks®
Rewards. ExtraSavings coupons redeemed by customers are recorded as a reduction of revenues when redeemed.
ExtraBucks Rewards are accrued as a charge to cost of revenues when earned, net of estimated breakage. We
determine breakage based on our historical redemption patterns.
Vendor Allowances and Purchase Discounts
Pharmacy Services Segment
Our Pharmacy Services Segment receives purchase discounts on products purchased. Contractual arrangements
with vendors, including manufacturers, wholesalers and retail pharmacies, normally provide for the Pharmacy
Services Segment to receive purchase discounts from established list prices in one, or a combination, of the
following forms: (i) a direct discount at the time of purchase, (ii) a discount for the prompt payment of invoices or
(iii) when products are purchased indirectly from a manufacturer (e.g., through a wholesaler or retail pharmacy), a
discount (or rebate) paid subsequent to dispensing. These rebates are recognized when prescriptions are dispensed
and are generally calculated and billed to manufacturers within 30 days of the end of each completed quarter.
Historically, the effect of adjustments resulting from the reconciliation of rebates recognized to the amounts billed
and collected has not been material to the results of operations. We account for the effect of any such differences
as a change in accounting estimate in the period the reconciliation is completed. The Pharmacy Services Segment
also receives additional discounts under its wholesaler contracts if it exceeds contractually defined annual purchase
volumes. In addition, the Pharmacy Services Segment receives fees from pharmaceutical manufacturers for adminis-
trative services. Purchase discounts and administrative service fees are recorded as a reduction of “Cost of revenues”.