Express Scripts 2015 Annual Report Download - page 59

57 Express Scripts 2015 Annual Report
portion of rebates and administrative fees payable to clients is estimated based on historical and/or anticipated sharing
percentages. These estimates are adjusted to actual when amounts are paid to clients subsequent to collections from
pharmaceutical manufacturers; historically, these adjustments have not been material. We record rebates and administrative fees
receivable from the manufacturer and payable to clients when the prescriptions covered under contractual agreements with the
manufacturers are dispensed; these amounts are not dependent upon future pharmaceutical sales. Included in accounts
receivable are reserves of $381.2 million and $175.5 million as of December 31, 2015 and 2014, respectively, for estimated
uncollectible rebates from the manufacturers. Rebates and administrative fees billed to manufacturers are determinable when
the drug is dispensed. We pay all or a contractually agreed upon portion of such rebates to our clients.
Medicare Part D product offerings. Our revenues include premiums associated with our Medicare Part D prescription
drug plan (“PDP”) risk-based product offerings. These products involve prescription dispensing for beneficiaries enrolled in
Medicare Part D Prescription Drug Program (“Medicare Part D”) plans sponsored by us pursuant to our contracts with the
Centers for Medicare & Medicaid Services (“CMS”). We also offer numerous customized benefit plan designs to Employer-
Sponsored Group Waiver Plans (“EGWPs”) under our Medicare Part D PDP product offerings.
The Medicare Part D PDP premiums are determined based on our annual bid and related contractual arrangements
with CMS and are primarily comprised of amounts received from CMS as part of a direct subsidy and an additional subsidy
from CMS for low-income member premiums, as well as premium payments received from members. These premiums are
recognized ratably to revenues over the period in which members are entitled to receive benefits. Premiums received in
advance of the applicable benefit period are deferred and recorded in accrued expenses on the consolidated balance sheet.
There is a possibility the annual costs of drugs may be higher or lower than premium revenues. As a result, CMS provides a
risk corridor adjustment for the standard drug benefit that compares our actual annual drug costs incurred to the targeted
premiums in our CMS-approved bid. Based on the risk corridor, we will receive from CMS additional premium amounts or be
required to refund to CMS previously received premium amounts. We calculate the risk corridor adjustment based on drug cost
experience and record an adjustment to revenues with a corresponding receivable from or payable to CMS reflected on the
consolidated balance sheet.
In addition to Medicare Part D PDP premiums, there are certain co-payments and deductibles (the “cost share”) due
from members based on prescription orders by those members, some of which are subsidized by CMS in cases of low-income
membership. Non-low income members received a cost share benefit under the coverage gap discount program with brand
pharmaceutical manufacturers. For subsidies received in advance, the amount is deferred and recorded in accrued expenses on
the consolidated balance sheet. If there is cost share due from members, pharmaceutical manufacturers or CMS, or premiums
due from members, the amount is accrued and recorded in receivables, net, on the consolidated balance sheet. After the end of
the contract year and based on actual annual drug costs incurred, cost share amounts are reconciled with CMS and the
corresponding receivable or payable is settled. The cost share is treated consistently with other co-payments derived from
providing PBM services, as a component of revenues on the consolidated statement of operations.
Our cost of revenues includes the cost of drugs dispensed by our home delivery pharmacies or retail network for
members covered under our Medicare Part D PDP product offerings. These amounts are recorded at cost as incurred. We
receive a catastrophic reinsurance subsidy from CMS for approximately 80% of costs incurred by individual members in excess
of the individual annual out-of-pocket maximum. The subsidy is reflected as an offsetting credit in cost of revenues to the
extent catastrophic costs are incurred. Catastrophic reinsurance subsidy amounts received in advance are deferred and recorded
in accrued expenses on the consolidated balance sheet. If there are catastrophic reinsurance subsidies due from CMS, the
amount is accrued and recorded in receivables, net, on the consolidated balance sheet. After the end of the contract year and
based on actual annual drug costs incurred, catastrophic reinsurance amounts are reconciled with CMS and the corresponding
receivable or payable is settled.
Cost of revenues. Cost of revenues includes product costs, network pharmacy claims costs, co-payments and other
direct costs associated with dispensing prescriptions, including shipping and handling (see also “Revenue recognition” and
“Rebate accounting”).
Income taxes. Deferred tax assets and liabilities are recognized based on temporary differences between financial
statement basis and tax basis of assets and liabilities using presently enacted tax rates. We account for uncertainty in income
taxes as described in Note 7 - Income taxes. Effective for the year ended December 31, 2015, we adopted ASU 2015-17 which
provides for a prospective change to the balance sheet presentation of deferred taxes. Under this guidance, all deferred tax
assets and liabilities are classified as long-term. Deferred tax assets are evaluated to ensure the asset will be realized. To the
extent we do not consider it more likely than not that a deferred tax asset will be recovered, a valuation allowance is
established.