Medco 2014 Annual Report Download - page 65
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Express Scripts 2014 Annual Report
Manyofourcontractscontaintermswherebywemakecertainfinancialandperformanceguarantees,includingthe
minimumlevelofdiscountsorrebatesaclientmayreceive,genericutilizationratesandvariousserviceguarantees.These
clientsmaybeentitledtoperformancepenaltiesifwefailtomeetafinancialorserviceguarantee.Actualperformanceis
comparedtotheguaranteeforeachmeasurethroughouttheperiodandaccrualsarerecordedasanoffsettorevenuesifwe
determineourperformanceagainsttheguaranteeindicatesapotentialliability.Theseestimatesareadjustedtoactualwhenthe
guaranteeperiodendsandwehaveeithermettheguaranteedrateorpaidamountstoclients.Historically,adjustmentstoour
originalestimateshavebeenimmaterial.
RevenuesfromourOtherBusinessOperationssegmentareearnedfromthedistributionofpharmaceuticalsand
medicalsuppliestoproviders,clinicsandhospitals,performance-orientedfeespaidbySpecialtyPharmacymanufacturers,
revenuesfromlate-stageclinicaltrials,riskmanagementanddrugsafetyservicesassociatedwithUBCandothernon-product
relatedrevenues.
Revenuesfromdistributionactivitiesarerecognizedatthepointofshipment.Atthetimeofshipment,wehave
performedsubstantiallyallofourobligationsunderourcustomercontractsanddonotexperienceasignificantlevelof
reshipments.Appropriatereservesarerecordedfordiscountsandcontractualallowances,whichareestimatedbasedon
historicalcollectionsoverarecentperiod.Anydifferencesbetweenourestimatesandactualcollectionsarereflectedin
operationsintheperiodinwhichpaymentisreceived.Differencesmayaffecttheamountandtimingofourrevenuesforany
periodifactualperformancevariesfromourestimates.Allowancesforreturnsareestimatedbasedonhistoricalreturntrends.
Rebate accounting.Weadministerarebateprogramthroughwhichwereceiverebatesandadministrativefees
frompharmaceuticalmanufacturers.Rebatesandadministrativefeesearnedfortheadministrationofthisprogram,performed
inconjunctionwithclaimsprocessingandhomedeliveryservicesprovidedtoclients,arerecordedasareductionofcostof
revenuesandtheportionoftherebateandadministrativefeespayabletocustomersistreatedasareductionofrevenues.The
portionofrebatesandadministrativefeespayabletoclientsisestimatedbasedonhistoricaland/oranticipatedsharing
percentages.Theseestimatesareadjustedtoactualwhenamountsarepaidtoclientssubsequenttocollectionsfrom
pharmaceuticalmanufacturers;historically,theseadjustmentshavenotbeenmaterial.Werecordrebatesandadministrativefees
receivablefromthemanufacturerandpayabletoclientswhentheprescriptionscoveredundercontractualagreementswiththe
manufacturersaredispensed;theseamountsarenotdependentuponfuturepharmaceuticalsales.Rebatesandadministrative
feesbilledtomanufacturersaredeterminablewhenthedrugisdispensed.Wepayalloracontractuallyagreeduponportionof
suchrebatestoourclients.
Medicare Part D offerings.OurrevenuesincludepremiumsassociatedwithourMedicarePartDPrescription
DrugPlan(“PDP”)risk-basedproductofferings.Theseproductsinvolveprescriptiondispensingforbeneficiariesenrolledin
MedicarePartDPrescriptionDrugProgram(“MedicarePartD”)planssponsoredbyuspursuanttoourcontractswiththe
CentersforMedicare&MedicaidServices(“CMS”).WealsooffernumerouscustomizedbenefitplandesignstoEmployer-
SponsoredGroupWaiverPlans(“EGWPs”)undertheMedicarePartDprescriptiondrugbenefit.
TheMedicarePartDPDPpremiumsaredeterminedbasedonourannualbidandrelatedcontractualarrangements
withCMSandareprimarilycomprisedofamountsreceivedfromCMSaspartofadirectsubsidyandanadditionalsubsidy
fromCMSforlow-incomememberpremiums,aswellaspremiumpaymentsreceivedfrommembers.Thesepremiumsare
recognizedratablytorevenuesovertheperiodinwhichmembersareentitledtoreceivebenefits.Premiumsreceivedin
advanceoftheapplicablebenefitperiodaredeferredandrecordedinaccruedexpensesontheconsolidatedbalancesheet.
Thereisapossibilitytheannualcostsofdrugsmaybehigherorlowerthanpremiumrevenues.Asaresult,CMSprovidesa
riskcorridoradjustmentforthestandarddrugbenefitthatcomparesouractualannualdrugcostsincurredtothetargeted
premiumsinourCMS-approvedbid.Basedontheriskcorridor,wewillreceivefromCMSadditionalpremiumamountsorbe
requiredtorefundtoCMSpreviouslyreceivedpremiumamounts.Wecalculatetheriskcorridoradjustmentonaquarterlybasis
basedondrugcostexperienceandrecordanadjustmenttorevenueswithacorrespondingreceivablefromorpayabletoCMS
reflectedontheconsolidatedbalancesheet.
InadditiontoMedicarePartDPDPpremiums,therearecertainco-paymentsanddeductibles(the“costshare”)due
frommembersbasedonprescriptionordersbythosemembers,someofwhicharesubsidizedbyCMSincasesoflow-income
membership.Non-low-incomemembersreceivedacostsharebenefitunderthecoveragegapdiscountprogramwithbrand
pharmaceuticalmanufacturers.Forsubsidiesreceivedinadvance,theamountisdeferredandrecordedinaccruedexpenseson
theconsolidatedbalancesheet.Ifthereiscostshareduefrommembers,pharmaceuticalmanufacturersorCMS,orpremiums
duefrommembers,theamountisaccruedandrecordedinreceivables,net,ontheconsolidatedbalancesheet.Aftertheendof
thecontractyearandbasedonactualannualdrugcostsincurred,costshareamountsarereconciledwithCMSandthe
correspondingreceivableorpayableissettled.Thecostshareistreatedconsistentlyasotherco-paymentsderivedfrom
providingPBMservices,acomponentofrevenuesontheconsolidatedstatementofoperations.
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