Rite Aid 2016 Annual Report Download - page 62

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Medicaid plans, Medicare plans, and other sponsors of health benefit plans, and individuals throughout
the United States. Revenue from our Pharmacy Services segment includes: (i) the portion of the price
the client pays directly to us, net of any volume-related or other discounts paid back to the client,
(ii) the price paid to us (‘‘Mail Co-Payments’’) by individuals included in our clients’ benefit plans,
(iii) customer copayments made directly to the retail pharmacy network, and (iv) administrative fees.
Sales taxes are not included in revenue.
We recognize revenue in the Pharmacy Services segment when: (i) persuasive evidence that the
prescription drug sale has occurred or a contractual arrangement exists, (ii) delivery has occurred or
services have been rendered, (iii) the seller’s price to the buyer is fixed or determinable, and
(iv) collectability is reasonably assured. The following revenue recognition policies have been
established for the Pharmacy Services segment.
• Revenues generated from prescription drugs sold by third party pharmacies in the Pharmacy
Services segment’s retail pharmacy network and associated administrative fees are recognized at
the Pharmacy Services segment’s point-of-sale, which is when the claim is adjudicated by the
Pharmacy Services segment’s online claims processing system.
• Revenues generated from prescription drugs sold by our mail service dispensing pharmacy are
recognized when the prescription is delivered. At the time of delivery, the Pharmacy Services
segment has performed substantially all of its obligations under its client contracts and does not
experience a significant level of returns or reshipments.
• Revenues generated from administrative fees based on membership or claims volume are
recognized monthly based upon active membership in the plan or actual claims volume.
In the majority of its contracts, the Pharmacy Services segment has determined it is the principal
due to it: (i) being the primary obligor in the arrangement, (ii) latitude in establishing price,
(iii) performs part of the service, (iv) having discretion in supplier selection and v) having involvement
in the determination of product or service specifications. The Pharmacy Services segment’s obligations
under its client contracts for which revenues are reported using the gross method are separate and
distinct from its obligations to the third party pharmacies included in its retail pharmacy network
contracts. Pursuant to these contracts, the Pharmacy Services segment is contractually required to pay
the third party pharmacies in its retail pharmacy network for products sold after payment is received
from its clients. The Pharmacy Services segment’s responsibilities under its 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 prescriber prior to dispensing, suggesting generic alternatives where
clinically appropriate and approving the prescription for dispensing. Although the Pharmacy Services
segment does not have credit risk with respect to its pharmacy benefit manager operations and retail
co-payments, management believes that all of the other applicable indicators of gross revenue reporting
are present.
We deduct from our revenues that are generated from prescription drugs sold by third party
pharmacies the manufacturers’ rebates that are earned by our clients based on their members’
utilization of brand-name formulary drugs. For the majority of our clients, we pass these rebates to
clients at point-of-sale based on actual claims data and our estimates of the manufacturers’ rebates
earned by our clients. We base our estimates on the best available data and recent history for the
various factors that can affect the amount of rebates earned by the client. 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
condition.
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