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Revenue Recognition Accounting Policy

PBM

Revenues from Express Scripts' PBM segment are earned by dispensing prescriptions from the home delivery and specialty pharmacies, processing claims for prescriptions filled by retail pharmacies in the networks, and providing services to drug manufacturers, including administration of discount programs.

Revenues from dispensing prescriptions from Express Scripts' home delivery pharmacies are recorded when drugs are shipped. At the time of shipment, Express Scripts' earnings process is complete; the obligation of the customer to pay for the drugs is fixed and, due to the nature of the product, the member may not return the drugs or receive a refund.

Revenues from Express Scripts' specialty pharmacies are from providing medications/pharmaceuticals for diseases that rely on high-cost injectable, infused, oral or inhaled drugs which have sensitive handling and storage needs and providing fertility pharmaceuticals to providers and patients. Specialty revenues earned by Express Scripts' PBM segment are recognized at the point of shipment. At the time of shipment, Express Scripts has performed substantially all of the obligations under the customer contracts and does not experience a significant level of reshipments. Appropriate reserves are recorded for discounts and contractual allowances which are estimated based on historical collections over a recent period. Any differences between Express Scripts' estimates and actual collections are reflected in operations in the period in which payment is received. Historically, adjustments to Express Scripts' original estimates have not been material. Differences may affect the amount and timing of Express Scripts' revenues for any period if actual performance varies from the estimates. Allowances for returns are estimated based on historical return trends and are not material.

Revenues from the PBM segment are also derived from the distribution of pharmaceuticals requiring special handling or packaging where Express Scripts has been selected by the pharmaceutical manufacturer as part of a limited distribution network. These revenues include management fees received from these programs.

Revenues related to the dispensing of prescription drugs by retail pharmacies in Express Scripts' networks consist of the prescription price (ingredient cost plus dispensing fee) negotiated with the clients, including the portion to be settled directly by the member (co-payment), plus any associated fees for services. These revenues are recognized when the claim is processed. When Express Scripts independently has a contractual obligation to pay the network pharmacy providers for benefits provided to the clients' members, Express Scripts acts as a principal in the arrangement and Express Scripts includes the total prescription price as revenues. Although Express Scripts generally does not have credit risk with respect to retail co-payments, the primary indicators of gross treatment are present. When a prescription is presented by a member to a retail pharmacy within the network, Express Scripts is solely responsible for confirming member eligibility, performing drug utilization review, reviewing for drug-to-drug interactions, performing clinical intervention which may involve a call to the member's physician, communicating plan provisions to the pharmacy, directing payment to the pharmacy and billing the client for the amount it is contractually obligated to pay Express Scripts for the prescription dispensed, as specified within the client contracts. Express Scripts also provides benefit design and formulary consultation services to clients. Express Scripts has separately negotiated contractual relationships with the clients and with network pharmacies, and under the contracts with pharmacies Express Scripts assumes the credit risk of the clients' ability to pay for drugs dispensed by these pharmacies to clients' members. Express Scripts, not the clients, is obligated to pay the retail pharmacies in the networks the contractually agreed upon amount for the prescription dispensed, as specified within the provider contracts. These factors indicate Express Scripts is a principal and, as such, Express Scripts records the total prescription price contracted with clients in revenues.

If Express Scripts merely administer a client's network pharmacy contracts to which Express Scripts is not a party and under which Express Scripts does not assume credit risk, Express Scripts records only the management fee as revenues. For these clients, Express Scripts earns a management fee for collecting payments from the client and remitting the corresponding amount to the pharmacies in the client's network. In these transactions Express Scripts acts as a conduit for the client. Because Express Scripts is not the principal in these transactions, drug ingredient cost is not included in the revenues or the cost of revenues.

In retail pharmacy transactions, amounts paid to pharmacies and amounts charged to clients are always exclusive of the applicable co-payment. Retail pharmacy co-payments, which Express Scripts instructed retail pharmacies to collect from members, are included in revenues and cost of revenues.

Many of the contracts contain terms whereby Express Scripts makes certain financial and performance guarantees, including the minimum level of discounts or rebates a client may receive, generic utilization rates and various service guarantees. These clients may be entitled to the payment of performance penalties if Express Scripts fails to meet a financial or service guarantee. Actual performance is compared to the guarantee for each measure throughout the period and accruals are recorded as an offset to revenues if Express Scripts determines the performance against the guarantee indicates a potential liability. These estimates are adjusted to actual when the guarantee period ends and Express Scripts has either met the guaranteed rate or paid amounts to clients. Historically, adjustments to Express Scripts' original estimates have not been material.

Other Business Operations

Revenues from Express Scripts' Other Business Operations segment are earned from the distribution of specialty pharmaceuticals and medical supplies to providers, clinics and hospitals, performance-oriented fees paid by specialty pharmacy manufacturers and medical benefit management services. Prior to the sale of UBC on December 27, 2017, revenues from Express Scripts' Other Business Operations also included fee-for-service arrangements from late-stage clinical trials, risk management and drug safety services.

For contracts in which Express Scripts is distributing prescription drugs, revenues are recognized at the point of shipment. At the time of shipment, Express Scripts has performed substantially all of the obligations under the customer contracts and does not experience a significant level of reshipments. Receivables are recorded at the net realizable value and there are no material allowances.

Since the acquisition of eviCore on December 15, 2017, Other Business Operations includes revenues from medical benefits management contracts, through which Express Scripts provides innovative solutions that include utilization management using evidence based criteria, analytics, patient transparency and site of service management as well as access to certain provider specialty networks for the clients and their members. The activity involves developing clinical review criteria for provider inquiries, assessing medical necessity of treatment, and maintaining a network of providers. In some medical benefits management contracts, Express Scripts earns a per-member-per month fee which is earned over the period in which the client's eligible members are entitled to service, and in other contracts Express Scripts is paid a per-claim fee for the services Express Scripts provides which is earned as services are rendered. Express Scripts is responsible for confirming member eligibility, performing program utilization review, potentially directing payment to the provider and accepting the financial risk of loss associated with services rendered, as specified within the client contracts. Express Scripts has the ability to influence contractual fees with clients and possesses the financial risk of loss in certain contractual obligations. These factors indicate Express Scripts is the principal and, as such, Express Scripts records gross fees contracted with clients in revenues. Certain arrangements also include provisions that require Express Scripts to share with the client the costs or profits of the program in the event medical claims experience is above or below certain specified targets as set forth in the respective contract.

Source: Express Scripts Holding Co., Annual Report

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Revenues as Reported

Express Scripts Holding Co., Income Statement, Revenues

USD $ in thousands

 
12 months ended Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Network revenues
Home delivery and specialty revenues
Other revenues
Product revenues
Service revenues
Revenues

Source: Express Scripts Holding Co. Annual Reports

Item Description The company
Revenues Aggregate revenue recognized during the period (derived from goods sold, services rendered, insurance premiums, or other activities that constitute an entity's earning process). For financial services companies, also includes investment and interest income, and sales and trading gains. Express Scripts Holding Co.'s revenues declined from 2015 to 2016 and from 2016 to 2017.

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