Express Scripts 2013 Annual Report Download - page 67

67 Express Scripts 2013 Annual Report
provisions to the pharmacy, directing payment to the pharmacy and billing the client for the amount it is contractually obligated
to pay us for the prescription dispensed, as specified within our client contracts. We also provide benefit design and formulary
consultation services to clients. We have separately negotiated contractual relationships with our clients and with network
pharmacies, and under our contracts with pharmacies we assume the credit risk of our clients’ ability to pay for drugs dispensed
by these pharmacies to clients’ members. We, not our clients, are obligated to pay the retail pharmacies in our networks the
contractually agreed upon amount for the prescription dispensed, as specified within our provider contracts. These factors
indicate we are a principal as defined by applicable accounting guidance and, as such, we record the total prescription price
contracted with clients in revenue.
If we merely administer a client’s network pharmacy contracts to which we are not a party and under which we do
not assume credit risk, we record only our administrative fees as revenue. For these clients, we earn an administrative fee for
collecting payments from the client and remitting the corresponding amount to the pharmacies in the client’s network. In these
transactions we act as a conduit for the client. Because we are not the principal in these transactions, drug ingredient cost is not
included in our revenues or in our cost of revenues.
In retail pharmacy transactions, amounts paid to pharmacies and amounts charged to clients are always exclusive of
the applicable co-payment. Retail pharmacy co-payments, which we instructed retail pharmacies to collect from members, of
$12,620.3 million, $11,668.6 million and $5,786.6 million for the years ended December 31, 2013, 2012 and 2011,
respectively, are included in revenues and cost of revenues. Retail pharmacy co-payments increased in the years ended
December 31, 2013 and 2012 as compared to 2011 due to the Merger.
Many of our contracts contain terms whereby we make certain financial and performance guarantees, including the
minimum level of discounts or rebates a client may receive, generic utilization rates and various service guarantees. These
clients may be entitled to performance penalties if we fail to meet a financial or service guarantee. Actual performance is
compared to the guarantee for each measure throughout the period and accruals are recorded as an offset to revenue if we
determine that our performance against the guarantee indicates a potential liability. These estimates are adjusted to actual when
the guarantee period ends and we have either met the guaranteed rate or paid amounts to clients. Historically, adjustments to
our original estimates have been immaterial.
At the end of a period, any unbilled revenues related to the sale of prescription drugs that have been adjudicated
with retail pharmacies are estimated based on the billable amount that is applied to the claim at the time of adjudication. That
calculation is completed based on the pricing setup agreed upon with each client. Those amounts due from our clients are
recorded as revenue as they are contractually due to us for past transactions. Adjustments are made to these estimated revenues
to reflect actual billings at the time clients are billed; historically, these adjustments have not been material.
In accordance with applicable accounting guidance, amortization expense for customer contracts related to the
PBM agreement has been included as an offset to revenue in the amount of $114.0 million for each of the years ended
December 31, 2013, 2012 and 2011.
Revenues from our Other Business Operations segment are earned from the distribution of pharmaceuticals and
medical supplies to providers and clinics, performance-oriented fees paid by Specialty Pharmacy manufacturers, revenues from
late-stage clinical trials, risk management and drug safety services associated with UBC and other non-product related
revenues.
Revenues from distribution activities are recognized at the point of shipment. At the time of shipment, we have
performed substantially all of our obligations under our customer contracts and do not experience a significant level of
reshipments. Appropriate reserves are recorded for discounts and contractual allowances, which are estimated based on
historical collections over a recent period. Any differences between our estimates and actual collections are reflected in
operations in the period in which payment is received. Differences may affect the amount and timing of our revenues for any
period if actual performance varies from our estimates. Allowances for returns are estimated based on historical return trends.
Our UBC subsidiary provides services to pharmaceutical and biotechnology companies related to late-stage clinical
trials, risk management and drug safety. These services are typically performed over several months and include general project
management services in addition to specific deliverables. Revenue related to their services is recognized as these services are
performed.
Rebate accounting. We administer ESI’s rebate program through which we receive rebates and administrative fees
from pharmaceutical manufacturers. Rebates and administrative fees earned for the administration of this program, performed
in conjunction with claims processing and home delivery services provided to clients, are recorded as a reduction of cost of
revenue and the portion of the rebate and administrative fees payable to customers is treated as a reduction of revenue. The
portion of rebates and administrative fees payable to clients is estimated based on historical and/or anticipated sharing