CVS 2015 Annual Report Download - page 43

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2015 Annual Report
pay the third 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, communicating 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 appropriate generic alternatives where appropriate and approving the prescription for dispensing. Although
we do not have credit risk with respect to Retail Co-Payments or inventory risk related to retail network claims, 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 which 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 6.3%,
6.4% and 7.0% of consolidated net revenues in 2015, 2014 and 2013, 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.