Express Scripts 2011 Annual Report Download - page 84

Express Scripts 2011 Annual Report
82
We record self-insurance accruals based upon estimates of the aggregate liability of claim costs in excess of
our insurance coverage. Accruals are estimated using certain actuarial assumptions followed in the insurance
industry and our historical experience (see Note 1 – Summary of significant accounting policies, ―Self-insurance
accruals‖). The majority of these claims are legal claims and our liability estimate is primarily related to the cost to
defend these claims. We do not accrue for settlements, judgments, monetary fines or penalties until such amounts
are probable and estimable. Under authoritative guidance, if the range of possible loss is broad, the liability accrual
is based on the lower end of the range.
When a loss contingency is not both probable and estimable, we do not establish an accrued liability.
However, if the loss (or an additional loss in excess of the accrual) is at least a reasonable possibility and material,
then we disclose an estimate of the possible loss or range of loss, if such estimate can be made, or disclose that an
estimate cannot be made.
The assessments of whether a loss is probable or a reasonable possibility, and whether the loss or a range of
loss is estimable, often involve a series of complex judgments about future events. We are often unable to estimate a
range of reasonably possible loss, particularly where (i) the damages sought are substantial or indeterminate, (ii) the
proceedings are in the early stages, or (iii) the matters involve novel or unsettled legal theories or a large number of
parties. In such cases, there is considerable uncertainty regarding the timing or ultimate resolution of such matters,
including a possible eventual loss, fine, penalty or business impact, if any. Accordingly, for many proceedings, we
are currently unable to estimate the loss or a range of possible loss. For a limited number of proceedings, we may be
able to reasonably estimate the possible range of loss in excess of any accruals. However, we believe that such
matters, individually and in the aggregate, when finally resolved, are not reasonably likely to have a material
adverse effect on our consolidated cash flow or financial condition. We also believe that any amount that could be
reasonably estimated in excess of accruals, if any, for such proceedings is not material. However, an adverse
resolution of one or more of such matters could have a material adverse effect on our results of operations in a
particular quarter or fiscal year.
While we believe our services and business practices are in compliance with applicable laws, rules and
regulations in all material respects, we cannot predict the outcome of these claims at this time. An unfavorable
outcome in one or more of these matters could result in the imposition of judgments, monetary fines or penalties, or
injunctive or administrative remedies. We can give no assurance that such judgments, fines and remedies, and future
costs associated with any such matters, would not have a material adverse effect on our financial condition, our
consolidated results of operations or our consolidated cash flows.
In December 2011, we received a proposal from a client asserting claims regarding the interpretation of
certain contractual terms. We responded with an offer to settle these issues that included a lump sum payment of
$30.0 million. Based on authoritative accounting guidance, we determined that these communications indicate that a
loss is both probable and estimable and we recorded an accrual of $30.0 million as an offset to revenues in the
consolidated statement of operations for the year ended December 31, 2011. While no final agreement has been
reached on the matter, the parties are engaged in active discussions and continue to work to resolve the open issues.
We received a $15.0 million insurance recovery in the second quarter of 2009 for previously incurred
litigation costs. We incurred a charge of $35.0 million in the third quarter of 2009 related to the settlement of a
lawsuit brought against us and one of our subsidiaries, which settlement resulted in the dismissal of the case by the
court on October 22, 2009.
12. Segment information
We report segments on the basis of services offered and have determined we have two reportable segments:
PBM and EM. Our domestic and Canadian PBM operating segments have similar characteristics and as such have
been aggregated into a single PBM reporting segment. During the third quarter of 2011, we reorganized our
FreedomFP line of business from our EM segment into our PBM segment. All related segment disclosures have
been reclassified in the table below and throughout the financial statements, where appropriate, to reflect the new
segment structure.
Operating income is the measure used by our chief operating decision maker to assess the performance of
each of our operating segments. The following table presents information about our reportable segments, including a
reconciliation of operating income from continuing operations to income before income taxes from continuing
operations for the respective years ended December 31.