Rite Aid 2016 Annual Report Download - page 63

We participate in the federal government’s Medicare Part D program as a PDP through our EIC
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 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.
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 receivable from 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.
Vendor allowances and purchase discounts for our 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 or (ii) a discount (or rebate) paid
subsequent to dispensing when products are purchased indirectly from a manufacturer (e.g., through a
wholesaler or retail pharmacy). 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
contract. In addition, the Pharmacy Services segment receives fees from pharmaceutical manufacturers
for administrative services. Purchase discounts and administrative service fees are recorded as a
reduction of cost of revenues.
Adjusted EBITDA, Adjusted Net Income, Adjusted Net Income per Diluted Share and Other
Non-GAAP Measures
In addition to net income determined in accordance with GAAP, we use certain non-GAAP
measures, such as ‘‘Adjusted EBITDA’’, in assessing our operating performance. We believe the
non-GAAP metrics serve as an appropriate measure in evaluating the performance of our business. We
define Adjusted EBITDA as net income excluding the impact of income taxes (and any corresponding
adjustments to tax indemnification asset), interest expense, depreciation and amortization, LIFO
adjustments, charges or credits for facility closing and impairment, inventory write-downs related to
store closings, debt retirements, and other items (including stock-based compensation expense, sale of
assets and investments, and revenue deferrals related to our customer loyalty program). We reference
this particular non-GAAP financial measure frequently in our decision-making because it provides
supplemental information that facilitates internal comparisons to the historical periods and external
comparisons to competitors. In addition, incentive compensation is primarily based on Adjusted
EBITDA and we base certain of our forward-looking estimates on Adjusted EBITDA to facilitate
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