United Healthcare 2011 Annual Report Download - page 62

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The Company's PBM businesses contract with pharmaceutical manufacturers, some of whom provide rebates based on use of
the manufacturers' products by its PBM businesses' affiliated and non-affiliated clients. The Company accrues rebates as they
are earned by its clients on a monthly basis based on the terms of the applicable contracts, historical data and current estimates.
The PBM businesses bill these rebates to the manufacturers on a monthly or quarterly basis depending on the contractual terms.
The PBM businesses record rebates attributable to affiliated clients as a reduction to medical costs. Rebates attributable to non-
affiliated clients are accrued as rebates receivable and a reduction of cost of products sold with a corresponding payable for the
amounts of the rebates to be remitted to non-affiliated clients in accordance with their contracts and recorded in the
Consolidated Statements of Operations as a reduction of Product Revenue. The Company generally receives rebates from two
to five months after billing.
For details on the Company's Medicare Part D receivables see “Medicare Part D Pharmacy Benefits” below.
For details on the Company's reinsurance receivable see “Future Policy Benefits and Reinsurance Receivable” below.
Medicare Part D Pharmacy Benefits
The Company serves as a plan sponsor offering Medicare Part D prescription drug insurance coverage under contracts with
CMS. Under the Medicare Part D program, there are seven separate elements of payment received by the Company during the
plan year. These payment elements are as follows:
• CMS Premium. CMS pays a fixed monthly premium per member to the Company for the entire plan year.
• Member Premium. Additionally, certain members pay a fixed monthly premium to the Company for the entire plan year.
• Low-Income Premium Subsidy. For qualifying low-income members, CMS pays some or all of the member's monthly
premiums to the Company on the member's behalf.
• Catastrophic Reinsurance Subsidy. CMS pays the Company a cost reimbursement estimate monthly to fund the CMS
obligation to pay approximately 80% of the costs incurred by individual members in excess of the individual annual out-
of-pocket maximum. A settlement is made with CMS based on actual cost experience, after the end of the plan year.
• Low-Income Member Cost Sharing Subsidy. For qualifying low-income members, CMS pays on the member's behalf
some or all of a member's cost sharing amounts, such as deductibles and coinsurance. The cost sharing subsidy is funded
by CMS through monthly payments to the Company. The Company administers and pays the subsidized portion of the
claims on behalf of CMS, and a settlement payment is made between CMS and the Company based on actual claims and
premium experience, after the end of the plan year.
• CMS Risk-Share. Premiums from CMS are subject to risk corridor provisions that compare costs targeted in the
Company's annual bids by product and region to actual prescription drug costs, limited to actual costs that would have
been incurred under the standard coverage as defined by CMS. Variances of more than 5% above or below the original
bid submitted by the Company may result in CMS making additional payments to the Company or require the Company
to refund to CMS a portion of the premiums it received. The Company estimates and recognizes an adjustment to
premium revenues related to the risk corridor payment settlement based upon pharmacy claims experience. The estimate
of the settlement associated with these risk corridor provisions requires the Company to consider factors that may not be
certain, including member eligibility status differences with CMS. The Company records risk-share adjustments to
Premium Revenues in the Consolidated Statements of Operations and Other Policy Liabilities or Other Current
Receivables in the Consolidated Balance Sheets.
• Drug Discount. Beginning in 2011, Health Reform Legislation mandated a consumer discount of 50% on brand name
prescription drugs for Part D plan participants in the coverage gap. This discount is funded by CMS and pharmaceutical
manufacturers while the Company administers the application of these funds. Amounts received are not reflected as
premium revenues, but rather are accounted for as deposits. The Company records a liability when amounts are received
from CMS and a receivable when the Company bills the pharmaceutical manufacturers. Related cash flows are presented
as Customer Funds Administered within financing activities in the Condensed Consolidated Statements of Cash Flows.
The CMS Premium, the Member Premium, and the Low-Income Premium Subsidy represent payments for the Company's
insurance risk coverage under the Medicare Part D program and therefore are recorded as Premium Revenues in the
Consolidated Statements of Operations. Premium revenues are recognized ratably over the period in which eligible individuals
are entitled to receive prescription drug benefits. The Company records premium payments received in advance of the
applicable service period in Unearned Revenues in the Consolidated Balance Sheets.
The Catastrophic Reinsurance Subsidy and the Low-Income Member Cost Sharing Subsidy (Subsidies) represent cost
reimbursements under the Medicare Part D program. Amounts received for these Subsidies are not reflected as premium
revenues, but rather are accounted for as receivables and/or deposits. Related cash flows are presented as Customer Funds