TENET HEALTHCARE CORPORATION INTRODUCTION TO MANAGEMENT'S DISCUSSION AND ANALYSIS
The purpose of this section, Management's Discussion and Analysis of
Financial Condition and Results of Operations ("MD&A"), is to provide a
narrative explanation of our financial statements that enables investors to
better understand our business, to enhance our overall financial disclosures, to
provide the context within which our financial information may be analyzed, and
to provide information about the quality of, and potential variability of, our
financial condition, results of operations and cash flows. As described in Note
1 to the accompanying Condensed Consolidated Financial Statements, our results
for prior periods have been recast to reflect retrospective application of a
change in accounting principle. Our Hospital Operations and other ("Hospital
Operations") segment is comprised of our acute care and specialty hospitals,
ancillary outpatient facilities, urgent care centers, micro-hospitals and
physician practices. As described in Note 4 to the accompanying Condensed
Consolidated Financial Statements, certain of these facilities are classified as
held for sale at June 30, 2020 . Our Ambulatory Care segment is comprised of the
operations of USPI Holding Company, Inc. ("USPI"), in which we own a 95%
interest. At June 30, 2020 , USPI had interests in 264 ambulatory surgery
centers, 39 urgent care centers, 23 imaging centers and 24 surgical hospitals in
27 states. Our Conifer segment provides revenue cycle management and value-based
care services to hospitals, healthcare systems, physician practices, employers
and other customers, through our Conifer Holdings, Inc. ("Conifer") subsidiary.
Nearly all of the services comprising the operations of our Conifer segment are
provided directly by Conifer Health Solutions, LLC , in which we own a 76.2%
interest, or by one of its direct or indirect wholly owned subsidiaries. MD&A,
which should be read in conjunction with the accompanying Condensed Consolidated
Financial Statements, includes the following sections:
•Management Overview
•Forward-Looking Statements
•Sources of Revenue for Our Hospital Operations Segment
•Results of Operations
•Liquidity and Capital Resources
•Off-Balance Sheet Arrangements
•Critical Accounting Estimates
Unless otherwise indicated, all financial and statistical information
included in MD&A relates to our continuing operations, with dollar amounts
expressed in millions (except per adjusted patient admission and per adjusted
patient day amounts). Continuing operations information includes the results of
our same 65 hospitals operated throughout the six months ended June 30, 2020 and
2019, and three Chicago -area hospitals, which we divested effective January 28,
2019 . Continuing operations information excludes the results of our hospitals
and other businesses that have been classified as discontinued operations for
accounting purposes.
MANAGEMENT OVERVIEW
IMPACT OF THE COVID-19 PANDEMIC
The COVID-19 pandemic is significantly affecting our patients, communities, employees and business operations. The spread of COVID-19 and the ensuing response of federal, state and local authorities beginning inMarch 2020 resulted in a material reduction in our patient volumes and operating revenues that is ongoing. We have taken measures within the communities we serve, both voluntarily and in accordance with governmental mandates, to try to limit the spread of the virus and to mitigate the burden on the healthcare system. From mid-March through earlyMay 2020 , we suspended many elective procedures at our hospitals and closed or reduced operating hours at our ambulatory surgery centers and other outpatient centers that specialize in elective procedures. Restrictive measures, including travel bans, social distancing, quarantines and shelter-in-place orders, also reduced - and continue to impact - the volume of procedures performed at our facilities more generally, as well as the volume of emergency room and physician office visits. Broad economic factors resulting from the COVID-19 pandemic, including increased unemployment rates and reduced consumer spending, are impacting our service mix, revenue mix and patient volumes. Moreover, we are experiencing supply chain disruptions, including shortages, delays and significant price increases in medical supplies, particularly personal protective equipment. As described below under "Sources of Revenue for Our Hospital Operations Segment," the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), which was signed into law onMarch 27, 2020 , and other legislative actions have mitigated some of the economic disruption caused by the COVID-19 pandemic on our business. Additional funding for thePublic Health and Social Services Emergency Fund ("Relief Fund ") was among the provisions of the CARES Act. In the three months endedJune 30, 2020 , we received cash payments of$712 million , and we recognized approximately$511 million and$12 million as grant income and in equity in 29 -------------------------------------------------------------------------------- Table of Contents earnings of unconsolidated affiliates, respectively, in our accompanying Condensed Consolidated Statements of Operations due to grants from theRelief Fund and state grant programs. Also in the three months endedJune 30, 2020 , we received advance payments of approximately$1.5 billion from the Medicare accelerated payment program due to the revisions to that program under the CARES Act. We expect to repay these advances within the next year. Throughout MD&A, we have provided additional information on the impact of the COVID-19 pandemic on our results of operations and the steps we have taken, and are continuing to take, in response. For information about risks and uncertainties around COVID-19 that could affect our results of operations, financial condition and cash flows, see the Risk Factors section in Part II of this report.
TRENDS AND STRATEGIES
As described above and throughout MD&A, we are currently experiencing a
disruption in our business due to the COVID-19 pandemic. The length and extent
of this disruption is currently unknown. While demand for our services is
expected to rebound in the future, we have taken, and continue to take, various
actions to increase our liquidity and mitigate the impact of reductions in our
patient volumes and operating revenues from the COVID-19 pandemic, including the
sale of senior secured first lien notes and the amendment of our revolving
credit facility, both as described below. We also cut our planned capital
expenditures for 2020 by approximately 40%. Furthermore, we have decreased our
employee headcount throughout the organization, and we have deferred certain
operating expenses that are not expected to impact our response to COVID-19. In
addition, we are reducing variable costs across the enterprise as a result of
softening patient volumes due to the COVID-19 pandemic. We believe these
actions, together with government relief packages, to the extent available to
us, will help us to continue operating during the uncertainty caused by the
COVID-19 pandemic. For further information on our liquidity, see "Liquidity and
Capital Resources" below.
The healthcare industry, in general, and the acute care hospital business, in
particular, have also been experiencing significant regulatory uncertainty
based, in large part, on administrative, legislative and judicial efforts to
significantly modify or repeal and potentially replace the Patient Protection
and Affordable Care Act, as amended by the Health Care and Education
Reconciliation Act of 2010 ("Affordable Care Act" or "ACA"). It is difficult to
predict the full impact of regulatory uncertainty on our future revenues and
operations. In addition, we believe that several key trends have shaped the
demand for healthcare services in recent years: (1) consumers, employers and
insurers are actively seeking lower-cost solutions and better value as they
focus more on healthcare spending; (2) patient volumes are shifting from
inpatient to outpatient settings due to technological advancements and demand
for care that is more convenient, affordable and accessible; (3) the growing
aging population requires greater chronic disease management and higher-acuity
treatment; and (4) consolidation continues across the entire healthcare sector.
Driving Growth in Our Hospital Systems-We are committed to better positioning
our hospital systems and competing more effectively in the ever-evolving
healthcare environment by focusing on driving performance through operational
effectiveness, increasing capital efficiency and margins, investing in our
physician enterprise, particularly our specialist network, enhancing patient and
physician satisfaction, growing our higher-demand and higher-acuity clinical
service lines (including outpatient lines), expanding patient and physician
access, and optimizing our portfolio of assets. Over the past several years, we
have undertaken enterprise-wide cost reduction initiatives, comprised primarily
of workforce reductions (including streamlining corporate overhead and
centralized support functions), the renegotiation of contracts with suppliers
and vendors, and the consolidation of office locations. Moreover, we established
offshore support operations in the Philippines . In conjunction with these
initiatives, we incurred restructuring charges related to employee severance
payments of $37 million in the six months ended June 30, 2020 , and we expect to
incur additional such restructuring charges throughout 2020.
We also continue to exit service lines, businesses and markets that we believe
are no longer a core part of our long-term growth strategy. In December 2019 , we
entered into a definitive agreement to divest our two hospitals and other
operations in the Memphis, Tennessee area. We intend to continue to further
refine our portfolio of hospitals and other healthcare facilities when we
believe such refinements will help us improve profitability, allocate capital
more effectively in areas where we have a stronger presence, deploy proceeds on
higher-return investments across our business, enhance cash flow generation,
reduce our debt and lower our ratio of debt-to-Adjusted EBITDA.
Improving the Customer Care Experience-As consumers continue to become more
engaged in managing their health, we recognize that understanding what matters
most to them and earning their loyalty is imperative to our success. As such, we
have enhanced our focus on treating our patients as traditional customers by:
(1) establishing networks of physicians and facilities that provide convenient
access to services across the care continuum; (2) expanding service lines
aligned with growing community demand, including a focus on aging and chronic
disease patients; (3) offering greater affordability and predictability,
including simplified registration and discharge procedures, particularly in our
outpatient centers; (4) improving our culture of service; and (5) creating
health and benefit programs, patient education and health literacy materials
that are
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customized to the needs of the communities we serve. Through these efforts, we
intend to improve the customer care experience in every part of our operations.
Expansion of Our Ambulatory Care Segment-We expect to continue to focus on
opportunities to expand our Ambulatory Care segment through organic growth,
building new outpatient centers, corporate development activities and strategic
partnerships. We believe USPI's surgery centers and surgical hospitals offer
many advantages to patients and physicians, including greater affordability,
predictability, flexibility and convenience. Moreover, due in part to
advancements in medical technology, and due to the lower cost structure and
greater efficiencies that are attainable at a specialized outpatient site, we
believe the volume and complexity of surgical cases performed in an outpatient
setting will continue to increase following the containment of the COVID-19
pandemic. Historically, our outpatient services have generated significantly
higher margins for us than inpatient services.
Driving Conifer's Growth While Pursuing a Tax-Free Spin-Off-We previously
announced a number of actions to support our goals of improving financial
performance and enhancing shareholder value, including the exploration of
strategic alternatives for Conifer. In July 2019 , we announced our intention to
pursue a tax-free spin-off of Conifer as a separate, independent, publicly
traded company. Completion of the proposed spin-off is subject to a number of
conditions, including, among others, assurance that the separation will be
tax-free for U.S. federal income tax purposes, execution of a restructured
services agreement between Conifer and Tenet, finalization of Conifer's capital
structure, the effectiveness of appropriate filings with the Securities and
Exchange Commission , and final approval from our board of directors. We are
targeting to complete the separation by the end of the second quarter of 2021;
however, there can be no assurance regarding the timeframe for completing the
spin-off, the allocation of assets and liabilities between Tenet and Conifer,
the other conditions of the spin-off will be met, or the spin-off will be
completed at all.
Conifer serves approximately 640 Tenet and non-Tenet hospital and other clients
nationwide. In addition to providing revenue cycle management services to
healthcare systems and physicians, Conifer provides support to both providers
and self-insured employers seeking assistance with clinical integration,
financial risk management and population health management. Conifer remains
focused on driving growth by continuing to market and expand its revenue cycle
management and value-based care solutions businesses. We believe that our
success in growing Conifer and increasing its profitability depends in part on
our success in executing the following strategies: (1) attracting hospitals and
other healthcare providers that currently handle their revenue cycle management
processes internally as new clients; (2) generating new client relationships
through opportunities from USPI and Tenet's acute care hospital acquisition and
divestiture activities; (3) expanding revenue cycle management and value-based
care service offerings through organic development and small acquisitions; and
(4) leveraging data from tens of millions of patient interactions for continued
enhancement of the value-based care environment to drive competitive
differentiation.
Improving Profitability-Following a return to normal operations post COVID-19,
we will continue to focus on growing patient volumes and effective cost
management as a means to improve profitability. We believe our inpatient
admissions have been constrained in recent years (prior to the COVID-19
pandemic) by increased competition, utilization pressure by managed care
organizations, new delivery models that are designed to lower the utilization of
acute care hospital services, the effects of higher patient co-pays,
co-insurance amounts and deductibles, changing consumer behavior, and adverse
economic conditions and demographic trends in certain of our markets. However,
we also believe that emphasis on higher-demand clinical service lines (including
outpatient services), focus on expanding our ambulatory care business,
cultivation of our culture of service, participation in Medicare Advantage
health plans that have been experiencing higher growth rates than traditional
Medicare plans, and contracting strategies that create shared value with payers
should help us grow our patient volumes over time. In 2020, we are continuing to
explore new opportunities to enhance efficiency, including further integration
of enterprise-wide centralized support functions, outsourcing certain functions
unrelated to direct patient care, and reducing clinical and vendor contract
variation.
Reducing Our Leverage Over Time-All of our outstanding long-term debt has a
fixed rate of interest, except for outstanding borrowings under our revolving
credit facility, and the maturity dates of our notes are staggered from 2022
through 2031. We believe that our capital structure minimizes the near-term
impact of increased interest rates, and the staggered maturities of our debt
allow us to refinance our debt over time. Although we recently issued $1.3
billion aggregate principal amount of senior secured first lien notes to manage
our liquidity during the COVID-19 pandemic, it is nonetheless our long-term
objective to reduce our debt and lower our ratio of debt-to-Adjusted EBITDA,
primarily through more efficient capital allocation and Adjusted EBITDA growth,
which should lower our refinancing risk.
Our ability to execute on our strategies and respond to the aforementioned
trends is subject to the length of time of the impact from the COVID-19
pandemic, as well as a number of other risks and uncertainties - all of which
may cause actual results to be materially different from expectations. For
information about risks and uncertainties that could affect our results of
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operations, see the Risk Factors section in Part II of this report and our
Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 ("Q1'20
10-Q"), as well as the Forward-Looking Statements and Risk Factors sections in
Part I of our Annual Report on Form 10-K for the year ended December 31, 2019
("Annual Report").
RESULTS OF OPERATIONS-OVERVIEW
We have provided below certain selected operating statistics for the six
months ended June 30, 2020 and 2019 on a continuing operations basis, which
includes the results of our same 65 hospitals operated throughout the three
months ended June 30, 2020 and 2019, and three Chicago -area hospitals, which we
divested effective January 28, 2019 . The following tables also show information
about facilities in our Ambulatory Care segment that we control and, therefore,
consolidate. We believe this information is useful to investors because it
reflects our current portfolio of operations and the recent trends we are
experiencing with respect to volumes, revenues and expenses. We present certain
metrics on a per adjusted patient admission basis to show trends other than
volume.
Continuing Operations
Three Months Ended June 30,
Increase
Selected Operating Statistics 2020 2019 (Decrease)
Hospital Operations - hospitals and related outpatient facilities Number of hospitals (at end of period)
65 65 - (1)
Total admissions 134,898 169,352 (20.3) %
Adjusted patient admissions(2) 221,159 304,066 (27.3) %
Paying admissions (excludes charity and uninsured) 125,792 159,128 (20.9) %
Charity and uninsured admissions 9,106 10,224 (10.9) %
Emergency department visits 388,038 637,107 (39.1) %
Total surgeries 73,722 105,577 (30.2) %
Patient days - total 687,883 787,582 (12.7) %
Adjusted patient days(2) 1,094,208 1,387,929 (21.2) %
Average length of stay (days) 5.10 4.65 9.7 %
Average licensed beds 17,219 17,221 - %
Utilization of licensed beds(3) 43.9 % 50.3 % (6.4) % (1)
Total visits 983,321 1,693,805 (41.9) %
Paying visits (excludes charity and uninsured) 908,197 1,581,530 (42.6) %
Charity and uninsured visits 75,124 112,275 (33.1) %
Ambulatory Care
Total consolidated facilities (at end of period) 243 232 11 (1)
Total cases 364,196 514,567 (29.2) %
(1) The change is the difference between the 2020 and 2019 amounts shown. (2) Adjusted patient admissions/days represents actual patient admissions/days adjusted to
include outpatient services provided by facilities in our Hospital Operations segment by
multiplying actual patient admissions/days by the sum of gross inpatient revenues and
outpatient revenues and dividing the results by gross inpatient revenues. (3) Utilization of licensed beds represents patient days divided by number of days in the
period divided by average licensed beds.
Total admissions decreased by 34,454, or 20.3%, in the three months ended
June 30, 2020 compared to the three months ended June 30, 2019 , and total
surgeries decreased by 31,855, or 30.2%, in the 2020 period compared to the 2019
period. Our emergency department visits decreased 39.1% in the three months
ended June 30, 2020 compared to the same period in the prior year. Our volumes
from continuing operations in the three months ended June 30, 2020 compared to
the three months ended June 30, 2019 were negatively affected by
shelter-in-place orders and the mandated suspension of many elective procedures
at our hospitals due to the COVID-19 pandemic, as well as the divestiture of
three Chicago -area hospitals and affiliated operations effective
January 28, 2019 . Our Ambulatory Care total cases decreased 29.2% in the three
months ended June 30, 2020 compared to the 2019 period. Beginning in late March
2020 , we closed or reduced operating hours at our ambulatory surgery centers and
other outpatient centers that specialize in elective procedures due to the
COVID-19 pandemic. Nearly all of these had reopened with reduced operations by
June 30, 2020 .
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Continuing Operations
Three Months Ended
Increase
Revenues 2020 2019 (Decrease)
Net operating revenues
Hospital Operations prior to inter-segment eliminations $ 3,088 $ 3,827 (19.3) %
Ambulatory Care 368 524 (29.8) %
Conifer 305 355 (14.1) %
Inter-segment eliminations (113) (146) (22.6) %
Total $ 3,648 $ 4,560 (20.0) %
Net operating revenues decreased by $912 million , or 20.0%, in the three months
ended June 30, 2020 compared to the same period in 2019, primarily due to
decreased volumes as a result of the COVID-19 pandemic, partially offset by
increased acuity and improved terms of our managed care contracts. Our Hospital
Operations and Ambulatory Care segments also recognized income from federal and
state grants totaling $474 million and $49 million ($12 million of which is
included in equity in earnings of unconsolidated affiliates), respectively, in
the three months ended June 30, 2020 , which amounts are not included in net
operating revenues.
Our accounts receivable days outstanding ("AR Days") from continuing
operations were 68.4 days at June 30, 2020 and 58.4 days at December 31, 2019 ,
compared to our target of less than 55 days. Our AR Days at June 30, 2020 were
negatively impacted by the decline in our average net revenue per day due to the
COVID-19 pandemic. This calculation includes our Hospital Operations contract
assets, as well as the accounts receivable of our Memphis -area facilities that
have been classified in assets held for sale on our Consolidated Balance Sheet
at June 30, 2020 , and excludes (i) three Chicago -area hospitals, which we
divested effective January 28, 2019 , and (ii) our California provider fee
revenues.
Continuing Operations
Three Months Ended June 30,
Increase
Selected Operating Expenses 2020 2019 (Decrease)
Hospital Operations
Salaries, wages and benefits $ 1,580 $ 1,801 (12.3) %
Supplies 531 644 (17.5) %
Other operating expenses 842 885 (4.9) %
Total $ 2,953 $ 3,330 (11.3) %
Ambulatory Care
Salaries, wages and benefits $ 119 $ 157 (24.2) %
Supplies 79 108 (26.9) %
Other operating expenses 75 86 (12.8) %
Total $ 273 $ 351 (22.2) %
Conifer
Salaries, wages and benefits $ 165 $ 187 (11.8) %
Supplies 1 1 - %
Other operating expenses 66 64 3.1 %
Total $ 232 $ 252 (7.9) %
Total
Salaries, wages and benefits $ 1,864 $ 2,145 (13.1) %
Supplies 611 753 (18.9) %
Other operating expenses 983 1,035 (5.0) %
Total $ 3,458 $ 3,933 (12.1) %
Rent/lease expense(1)
Hospital Operations $ 67 $ 59 13.6 %
Ambulatory Care 20 21 (4.8) %
Conifer 3 3 - %
Total $ 90 $ 83 8.4 %
(1) Included in other operating expenses.
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Continuing Operations
Three Months Ended June 30,
Increase
Selected Operating Expenses per Adjusted Patient Admission 2020 2019 (Decrease)
Hospital Operations
Salaries, wages and benefits per adjusted patient admission(1) $ 7,147 $ 5,921 20.7 %
Supplies per adjusted patient admission(1) 2,396 2,118 13.1 %
Other operating expenses per adjusted patient admission(1) 3,811 2,908 31.1 %
Total per adjusted patient admission $ 13,354 $ 10,947 22.0 %
(1) Calculation excludes the expenses from our health plan businesses. Adjusted patient
admissions represents actual patient admissions adjusted to include outpatient
services provided by facilities in our Hospital Operations segment by multiplying
actual patient admissions by the sum of gross inpatient revenues and outpatient
revenues and dividing the results by gross inpatient revenues.
Salaries, wages and benefits decreased$221 million , or 12.3%, in the three months endedJune 30, 2020 compared to the same period in 2019. The decline was primarily due to reduced patient volumes and necessary employee furloughs and headcount reductions throughout the organization due to the COVID-19 pandemic, as well as lower health benefit costs; the effect of these changes was partially offset by annual merit increases for certain of our employees, a greater number of employed physicians and an increased average patient length-of-stay. On a per adjusted patient admission basis, salaries, wages and benefits increased 20.7% in the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 due to reduced patient volumes as a result of the COVID-19 pandemic. Supplies expense decreased$113 million , or 17.5%, in the three months endedJune 30, 2020 compared to the same period in 2019. The decline was primarily due to reduced patient volumes, partially offset by the increased cost of certain supplies as a result of the COVID-19 pandemic. On a per adjusted patient admission basis, supplies expense increased 13.1% in the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 due to reduced patient volumes and the increased cost of certain supplies as a result of the pandemic. Other operating expenses decreased$43 million , or 4.9%, in the three months endedJune 30, 2020 compared to the same period in 2019. The decline was primarily due to our execution of various strategies to improve cost efficiency, as well as reduced patient volumes as a result of the COVID-19 pandemic. There is proportionally a higher level of fixed costs (e.g., rent expense) in other operating expenses than salaries, wages and benefits or supplies. On a per adjusted patient admission basis, other operating expenses increased 31.1% in the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 due to reduced patient volumes as a result of the pandemic.
LIQUIDITY AND CAPITAL RESOURCES OVERVIEW
Cash and cash equivalents were
Significant cash flow items in the three months ended
•$1.482 billion of cash advances received from Medicare pursuant to COVID-19 stimulus legislation ($1.378 billion is included in net cash provided by operating activities, and$104 million of advances received by our Ambulatory Care segment's non-consolidated affiliates is included in net cash provided by financing activities); •$712 million of cash received from federal and state grants, including theRelief Fund ($674 million is included in net cash provided by operating activities, and$38 million of grants received by our Ambulatory Care segment's non-consolidated affiliates is included in net cash provided by financing activities);
•$89 million deferral of our payroll tax match in 2020 pursuant to COVID-19 stimulus legislation;
•$79 million of payments for our 401(k) match to employees that was deferred from the first quarter of 2020 due to the pandemic;
•Payments for restructuring charges, acquisition-related costs, and litigation
costs and settlements of
•Capital expenditures of
•Interest payments of
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•Proceeds from sales of marketable securities, long-term investments and other
assets of $25 million ;
•$24 million of distributions paid to noncontrolling interests;
•Debt issuance costs of
•$500 million of repayments of net cash borrowings under our credit facility;
•$600 million of proceeds from the issuance of
•$700 million of proceeds from the issuance of
•$142 million of payments to purchase
Net cash provided by operating activities was
•$1.378 billion of cash advances received from Medicare pursuant to COVID-19 stimulus legislation;
•$674 million of cash received from federal and state grants, including the
•$89 million deferral of our payroll tax match in 2020 pursuant to COVID-19 stimulus legislation;
•An increase of
•The timing of other working capital items.
FORWARD-LOOKING STATEMENTS
This report includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, each as amended. All statements, other than statements of
historical or present facts, that address activities, events, outcomes, business
strategies and other matters that we plan, expect, intend, assume, believe,
budget, predict, forecast, project, target, estimate or anticipate (and other
similar expressions) will, should or may occur in the future are forward-looking
statements, including (but not limited to) disclosure regarding (i) the impact
of the COVID-19 pandemic, (ii) our future earnings, financial position, and
operational and strategic initiatives, and (iii) developments in the healthcare
industry. Forward-looking statements represent management's expectations, based
on currently available information, as to the outcome and timing of future
events, but, by their nature, address matters that are indeterminate. They
involve known and unknown risks, uncertainties and other factors, many of which
we are unable to predict or control, that may cause our actual results,
performance or achievements to be materially different from those expressed or
implied by forward-looking statements. Such factors include, but are not limited
to, the risks described in the Risk Factors section in Part II of this report
and our Q1'20 10-Q, as well as the Forward-Looking Statements and Risk Factors
sections in Part I of our Annual Report.
When considering forward-looking statements, you should keep in mind the
risk factors and other cautionary statements in our Annual Report, in our Q1'20
10-Q and in this report. Should one or more of the risks and uncertainties
described in these reports occur, or should underlying assumptions prove
incorrect, our actual results and plans could differ materially from those
expressed in any forward-looking statement. We specifically disclaim any
obligation to update any information contained in a forward-looking statement or
any forward-looking statement in its entirety except as required by law.
All forward-looking statements attributable to us are expressly qualified in their entirety by this cautionary statement.
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SOURCES OF REVENUE FOR OUR HOSPITAL OPERATIONS SEGMENT
We earn revenues for patient services from a variety of sources, primarily
managed care payers and the federal Medicare program, as well as state Medicaid
programs, indemnity-based health insurance companies and uninsured patients
(that is, patients who do not have health insurance and are not covered by some
other form of third-party arrangement).
The following table shows the sources of net patient service revenues less
implicit price concessions for our hospitals and related outpatient facilities,
expressed as percentages of net patient service revenues less implicit price
concessions from all sources:
Three Months Ended Six Months Ended
June 30 , June 30 ,
Net Patient Service Revenues Less Increase Increase
Implicit Price Concessions from: 2020 2019 (Decrease)(1) 2020 2019 (Decrease)(1) Medicare 21.1 % 20.3 % 0.8 % 20.4 % 20.7 % (0.3) % Medicaid 9.2 % 8.9 % 0.3 % 8.5 % 8.9 % (0.4) % Managed care(2) 64.5 % 65.7 % (1.2) % 65.1 % 65.7 % (0.6) % Uninsured 0.8 % 0.3 % 0.5 % 1.0 % 0.2 % 0.8 % Indemnity and other 4.4 % 4.8 % (0.4) % 5.0 % 4.5 % 0.5 %
(1) The change is the difference between the 2020 and 2019 percentages shown. (2) Includes Medicare and Medicaid managed care programs.
Our payer mix on an admissions basis for our hospitals and related outpatient
facilities, expressed as a percentage of total admissions from all sources, is
shown below:
Three Months Ended Six Months Ended
June 30, June 30,
Increase Increase
Admissions from: 2020 2019 (Decrease)(1) 2020 2019 (Decrease)(1)
Medicare 22.5 % 24.8 % (2.3) % 23.6 % 25.5 % (1.9) %
Medicaid 6.4 % 6.1 % 0.3 % 6.2 % 6.1 % 0.1 %
Managed care(2) 61.5 % 60.3 % 1.2 % 61.0 % 60.0 % 1.0 %
Charity and uninsured 6.8 % 6.1 % 0.7 % 6.4 % 5.8 % 0.6 %
Indemnity and other 2.8 % 2.7 % 0.1 % 2.8 % 2.6 % 0.2 %
(1) The change is the difference between the 2020 and 2019 percentages shown. (2) Includes Medicare and Medicaid managed care programs.
GOVERNMENT PROGRAMS
The Centers for Medicare and Medicaid Services ("CMS"), an agency of the
U.S. Department of Health and Human Services ("HHS"), is the single largest
payer of healthcare services in the United States . Approximately 61 million
individuals rely on healthcare benefits through Medicare, and approximately 72
million individuals are enrolled in Medicaid and the Children's Health Insurance
Program ("CHIP"). These three programs are authorized by federal law and
administered by CMS. Medicare is a federally funded health insurance program
primarily for individuals 65 years of age and older, as well as some younger
people with certain disabilities and conditions, and is provided without regard
to income or assets. Medicaid is co-administered by the states and is jointly
funded by the federal government and state governments. Medicaid is the nation's
main public health insurance program for people with low incomes and is the
largest source of health coverage in the United States . The CHIP, which is also
co-administered by the states and jointly funded, provides health coverage to
children in families with incomes too high to qualify for Medicaid, but too low
to afford private coverage. Unlike Medicaid, the CHIP is limited in duration and
requires the enactment of reauthorizing legislation. During the three months
ended March 31, 2018 , separate pieces of legislation were enacted extending CHIP
funding for a total of 10 years from federal fiscal year ("FFY") 2018 (which
began on October 1, 2017 ) through FFY 2027.
Medicare
Medicare offers its beneficiaries different ways to obtain their medical
benefits. One option, the Original Medicare Plan (which includes "Part A" and
"Part B"), is a fee-for-service payment system. The other option, called
Medicare Advantage (sometimes called "Part C" or "MA Plans"), includes health
maintenance organizations ("HMOs"), preferred provider organizations ("PPOs"),
private fee-for-service Medicare special needs plans and Medicare medical
savings account plans. The major components of our net patient service revenues
from continuing operations of the hospitals and related outpatient
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facilities in our Hospital Operations segment for services provided to patients
enrolled in the Original Medicare Plan for the three and six months ended
June 30, 2020 and 2019 are set forth in the following table:
Three Months Ended Six Months Ended
June 30, June 30,
Revenue Descriptions 2020 2019 2020 2019
Medicare severity-adjusted diagnosis-related group -
$ 368 $ 702 $ 772 operating Medicare severity-adjusted diagnosis-related group - capital 26 32 61 68 Outliers 13 22 32 45 Outpatient 128 185 302 375 Disproportionate share 52 58 106 117 Other(1) 66 56 99 102 Total Medicare net patient service revenues$ 597
(1) The other revenue category includes Medicare Direct Graduate Medical Education and
Indirect Medical Education ("IME") revenues, IME revenues earned by our children's
hospital under the Children's Hospitals Graduate Medical Education Payment Program
administered by the
psychiatric units, inpatient rehabilitation units, other revenue adjustments, and
adjustments to the estimates for current and prior-year cost reports and related
valuation allowances.
A general description of the types of payments we receive for services provided
to patients enrolled in the Original Medicare Plan is provided in our Annual
Report. Recent regulatory and legislative updates to the terms of these payment
systems and their estimated effect on our revenues can be found under
"Regulatory and Legislative Changes" below.
Medicaid
Medicaid programs and the corresponding reimbursement methodologies vary
from state to state and from year to year. Estimated revenues under various
state Medicaid programs, including state-funded Medicaid managed care programs,
constituted approximately 18.2% and 18.9% of total net patient service revenues
less implicit price concessions of our acute care hospitals and related
outpatient facilities for the six months ended June 30, 2020 and 2019,
respectively. We also receive disproportionate share hospital ("DSH") and other
supplemental revenues under various state Medicaid programs. For the six months
ended June 30, 2020 and 2019, our total Medicaid revenues attributable to DSH
and other supplemental revenues were approximately $363 million and $414
million , respectively. The 2020 period included $117 million related to the
California provider fee program, $101 million related to the Michigan provider
fee program, $90 million related to Medicaid DSH programs in multiple states,
$29 million related to the Texas 1115 waiver program, and $26 million from a
number of other state and local programs.
Even prior to the COVID-19 pandemic, several states in which we operate
faced budgetary challenges that resulted in reduced Medicaid funding levels to
hospitals and other providers. Because most states must operate with balanced
budgets, and the Medicaid program is generally a significant portion of a
state's budget, states can be expected to adopt or consider adopting future
legislation designed to reduce or not increase their Medicaid expenditures. In
addition, some states delay issuing Medicaid payments to providers to manage
state expenditures. As an alternative means of funding provider payments, many
of the states in which we operate have adopted supplemental payment programs
authorized under the Social Security Act. Continuing pressure on state budgets
and other factors could adversely affect the Medicaid supplemental payments our
hospitals receive.
Because we cannot predict what actions the federal government or the states
may take under existing or future legislation and/or regulatory changes to
address budget gaps, deficits, Medicaid expansion, provider fee programs or
Medicaid Section 1115 waivers, we are unable to assess the effect that any such
legislation or regulatory action might have on our business; however, the impact
on our future financial position, results of operations or cash flows could be
material.
Medicaid and Managed Medicaid net patient service revenues from continuing
operations recognized by the hospitals and related outpatient facilities in our
Hospital Operations segment from Medicaid-related programs in the states in
which our facilities are (or were, as the case may be) located, as well as from
Medicaid programs in neighboring states, for the six months ended June 30, 2020
and 2019 are set forth in the following table. These revenues are presented net
of provider taxes or assessments paid by our hospitals, which are reported as an
offset reduction to fee-for-service Medicaid revenue.
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Six Months Ended
June 30,
Hospital Location 2020 2019
Alabama $ 50 $ 46
Arizona 81 72
California 383 441
Florida 98 111
Illinois - 5
Massachusetts 42 44
Michigan 272 361
South Carolina 30 28
Tennessee 17 18
Texas 188 222
$ 1,161 $ 1,348
Medicaid and Managed Medicaid revenues comprised 47% and 53%, respectively, of
our Medicaid-related net patient service revenues from continuing operations
recognized by the hospitals and related outpatient facilities in our Hospital
Operations segment for the six months ended June 30, 2020 .
Regulatory and Legislative Changes
Material updates to the information set forth in our Annual Report about the Medicare and Medicaid payment systems, as well as other government programs impacting our business, are provided below.
Payment and Policy Changes to the Medicare Inpatient Prospective Payment Systems
Section 1886(d) of the Social Security Act requires CMS to update inpatient
fee-for-service payment rates for hospitals reimbursed under the Inpatient
Prospective Payment System ("IPPS") annually. The updates generally become
effective
•A market basket increase of 3.0% for Medicare severity-adjusted
diagnosis-related group ("MS-DRG") operating payments for hospitals reporting
specified quality measure data and that are meaningful users of electronic
health record technology; CMS also proposed certain adjustments to the 3.0%
market basket increase that result in a net operating payment update of 3.1%
(before budget neutrality adjustments), including:
•A multifactor productivity reduction required by the ACA of 0.4%; and
•A 0.5% increase required under the Medicare Access and CHIP Reauthorization Act of 2015;
•Updates to the three factors used to determine the amount and distribution of Medicare uncompensated care disproportionate share ("UC-DSH") payments;
•A 1.3% net increase in the capital federal MS-DRG rate; and
•An increase in the cost outlier threshold from
According to CMS, the combined impact of the payment and policy changes in the
Proposed IPPS Rule for operating costs will yield an average 2.5% increase in
Medicare operating MS-DRG fee-for-service ("FFS") payments for hospitals in
large urban areas (populations over one million), and an average 2.6% increase
in operating MS-DRG FFS payments for proprietary hospitals in FFY 2021. We
estimate that all of the payment and policy changes affecting operating MS-DRG
and UC-DSH payments will result in an estimated 0.7% increase in our annual
Medicare FFS IPPS payments, which yields an estimated increase of approximately
$14 million . Because of the uncertainty associated with various factors that may
influence our future IPPS payments by individual hospital, including
legislative, regulatory or legal actions, admission volumes, length of stay and
case mix, as well as the potential changes to the proposed rule, we cannot
provide any assurances regarding our estimate of the impact of the proposed
payment and policy changes.
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Historically, CMS has used charges reduced to cost to set the relative weights
assigned to each MS-DRG. In the Proposed IPPS Rule, CMS expressed a concern that
chargemaster rates rarely reflect the true market costs. In order to reduce its
reliance on the hospital chargemaster, CMS proposed that, beginning in 2021,
hospitals be required to report in the annual cost report the median
payer-specific negotiated charge that the hospital has negotiated with all of
its Medicare Advantage and third-party payers by MS-DRG. This information may
potentially be used to set the IPPS MS-DRG relative weights in FFY 2024. This
proposal is in addition to the pricing transparency requirements effective
January 1, 2021 in the hospital price transparency final rule issued on November
27, 2019 that was recently upheld by a Federal District Court and is now before
the U.S. Court of Appeals for the District of Columbia .
The Coronavirus Aid, Relief, and Economic Security Act of 2020 and Related Legislation
The CARES Act and the Paycheck Protection Program and Health Care Enhancement
Act ("Paycheck Protection Program"), which was signed into law on April 24,
2020 , authorized up to $2 trillion in government spending to mitigate the
economic effects of the COVID-19 pandemic. Below is a brief overview of certain
provisions of the CARES Act and related legislation that have impacted and we
expect will continue to impact our business. Please note that this summary is
not exhaustive, and additional legislative action and regulatory developments
may evolve rapidly. There is no assurance that we will continue to receive or
remain eligible for funding or assistance under the CARES Act or similar
measures. Statements regarding the projected impact of COVID-19 relief programs
on our operations and financial condition are forward-looking and are made as of
the date of this filing.
Public Health and Social Services Emergency Fund . To address the fiscal burdens
on healthcare providers created by the COVID-19 public health emergency, the
CARES Act and the Paycheck Protection Program authorized $175 billion for the
Relief Fund . During the three months ended June 30, 2020 , HHS commenced
distribution of approximately $100 billion in several tranches from the Relief
Fund to providers, including:
•A
•An allocation of approximately
•Targeted distributions comprised of (i)$12 billion for hospitals determined to be in areas particularly impacted by COVID-19 based on reported COVID-19 admissions, (ii)$10 billion to rural healthcare providers, (iii)$5 billion to skilled nursing facilities, (iv)$10 billion to safety net hospitals and (v)$500 million to tribal hospitals, clinics and urban health centers.
In
Payments from theRelief Fund are not loans and, therefore, they are not subject to repayment. However, as a condition to receiving distributions, providers must agree to certain terms and conditions, including, among other things, that the funds are being used for lost operating revenues and COVID-related costs, and that the providers will not seek collection of out-of-pocket payments from a COVID-19 patient that are greater than what the patient would have otherwise been required to pay if the care had been provided by an in-network provider. Furthermore, HHS has indicated that it will be closely monitoring and, along with theOffice of Inspector General , auditing providers to ensure that recipients comply with the terms and conditions of relief programs and to prevent fraud and abuse. All providers will be subject to civil and criminal penalties for any deliberate omissions, misrepresentations or falsifications of any information given to HHS. Except for certain immaterialRelief Fund payments we returned to HHS, we have formally accepted the terms and conditions associated with the receipt ofRelief Fund payments we have received. During the three months endedJune 30, 2020 , we recognized approximately$508 million and$12 million ofRelief Fund income included in grant income and equity in earnings of unconsolidated affiliates, respectively, in our accompanying Condensed Consolidated Statements of Operations associated with lost operating revenues and COVID-related costs. Additionally, we recognized$3 million of grant income from state grant programs included in grant income in our accompanying Condensed Consolidated Statements of Operations associated with lost operating revenues and COVID-related costs. 39 -------------------------------------------------------------------------------- Table of Contents Medicare and Medicaid Payment Policy Changes. The CARES Act also alleviates some of the financial strain on hospitals, physicians, and other healthcare providers and states through a series Medicare and Medicaid payment policies that temporarily increase Medicare and Medicaid reimbursement and allow for added flexibility, as described below. •EffectiveMay 1, 2020 throughDecember 31, 2020 , the 2% sequestration reduction on Medicare FFS and Medicare Advantage payments to hospitals, physicians and other providers authorized by the Sequestration Transparency Act of 2020 is suspended and will resume effectiveJanuary 2021 . The estimated impact of this change on our operations is an increase of approximately$67 million of revenues in 2020. The suspension is financed by a one-year extension of the sequestration adjustment through 2030. •The CARES Act instituted a 20% increase in the Medicare MS-DRG payment for COVID-19 hospital admissions for the duration of the public health emergency as declared by the Secretary of HHS. •The scheduled reduction of$4 billion in federal Medicaid DSH allotments in FFY 2020, as mandated by the Affordable Care Act, is suspended untilDecember 1, 2020 . The projected impact of this change on our operations is an increase of approximately$60 million of revenues in 2020, which is not subject to repayment. Also, the federal DSH allotment reduction for FFY 2021 will be reduced from$8 billion to$4 billion . Notwithstanding these adjustments, the ACA-mandated reduction is not expected to be extended past its original termination in FFY 2025. •The CARES Act expanded the Medicare accelerated payment program, which provides prepayment of claims to providers in certain circumstances, such as national emergencies or natural disasters. Under this measure, providers could request accelerated payments that may be retained for 120 days during which time providers continue to receive payments for services. At the end of the 120-period, the accelerated payment will be repaid via a 100% offset of payments on claims that would otherwise be paid. The repayment period for hospitals and other providers is one year and 210 days, respectively, from the date of receipt of the accelerated payment, after which interest is assessed on the unpaid balance. During the six months endedJune 30, 2020 , our hospitals and other providers applied for and received approximately$1.5 billion of accelerated payments. •A 6.2% increase in the Federal Medical Assistance Percentage ("FMAP") matching funds was instituted to help states respond to the COVID-19 pandemic. The additional funds are available to states fromJanuary 1, 2020 through the quarter in which the public health emergency period ends, provided that states meet certain conditions. An increase in states' FMAP leverages Medicaid's existing financing structure, which allows federal funds to be provided to states more quickly and efficiently than establishing a new program or allocating money from a new funding stream. Increased federal matching funds support states in responding to the increased need for services, such as testing and treatment during the COVID-19 public health emergency, as well as increased enrollment as more people lose income and qualify for Medicaid during the economic downturn. Because of the uncertainty associated with various factors that may influence our future Medicare and Medicaid payments, including future legislative, legal or regulatory actions, or changes in volumes and case mix, there is a risk that our estimates of the impact of the aforementioned payment and policy changes will be incorrect and that actual payments received under, or the ultimate impact of, these programs will differ materially from our expectations. Tax Changes. BeginningMarch 27, 2020 , all employers may elect to defer payment of the 6.2% employerSocial Security tax throughDecember 31, 2020 . Deferred tax amounts are required to be paid in equal amounts over two years, with payments due inDecember 2021 andDecember 2022 . We expect that we will defer approximately$250 million of taxes in 2020 pursuant to this CARES Act provision. In addition, the CARES Act increases the interest expense deduction limitation from 30% of adjusted taxable income to 50% of adjusted taxable income for the 2019 and 2020 tax years, allowing businesses to take a larger deduction. This change is expected to increase our federal tax net operating loss ("NOL") carryforwards into future years, as further described in Note 14 to the accompanying Condensed Consolidated Financial Statements.
Significant Litigation
340B Litigation
The 340B program allows certain hospitals (i.e., only nonprofit organizations
with specific federal designations and/or funding) ("340B Hospitals") to
purchase separately payable drugs at discounted rates from drug manufacturers.
In the final rule regarding Hospital Outpatient Prospective Payment System
("OPPS") payment and policy changes for calendar year ("CY") 2018, CMS reduced
the payment for 340B Drugs from average sale price ("ASP") plus 6% to ASP minus
22.5% and made a corresponding budget-neutral increase to payments to all
hospitals for other drugs and services reimbursed under the OPPS (the "340B
Payment Adjustment"). In the final rules regarding OPPS payment and policy
changes for CYs 2019 and 2020, CMS
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continued the 340B Payment Adjustment. Certain hospital associations and
hospitals commenced litigation challenging CMS' authority to impose the 340B
Payment Adjustment for CYs 2018, 2019 and 2020. During the three months ended
June 30, 2019 , the U.S. District Court for the District of Columbia (the
"District Court") held that the adoption of the 340B Payment Adjustment in the
CY 2019 OPPS Final Rule exceeded CMS' statutory authority by reducing drug
reimbursement rates for 340B Hospitals. This holding followed the District
Court's December 2018 conclusion that HHS exceeded its statutory authority in
reducing the CY 2018 OPPS for the 340B Payment Adjustment. The District Court
did not grant a permanent injunction to the 340B Payment Adjustment, nor did it
vacate the 2018 and 2019 rules. Also during the three months ended June 30,
2019 , the District Court issued a Memorandum Opinion granting HHS' motion for
entry of final judgment, thus allowing HHS to proceed with a pending appeal of
the District Court's rulings at the U.S. Court of Appeals for the District of
Columbia Circuit (the "Circuit Court "). On July 31, 2020 , a three-judge panel of
the Circuit Court reversed the District Court's holding, finding that HHS'
decision to reduce the payment rate for 340B Drugs was based on a reasonable
interpretation of the Medicare statute. We cannot predict what actions the
plaintiff hospital associations and hospitals will take or the ultimate outcome
of the litigation relating to CMS' 340B program; however, an unfavorable outcome
of the litigation could have an adverse effect on the Company's net revenues and
cash flows.
PRIVATE INSURANCE
Managed Care
We currently have thousands of managed care contracts with various HMOs and
PPOs. HMOs generally maintain a full-service healthcare delivery network
comprised of physician, hospital, pharmacy and ancillary service providers that
HMO members must access through an assigned "primary care" physician. The
member's care is then managed by his or her primary care physician and other
network providers in accordance with the HMO's quality assurance and utilization
review guidelines so that appropriate healthcare can be efficiently delivered in
the most cost-effective manner. HMOs typically provide reduced benefits or
reimbursement (or none at all) to their members who use non-contracted
healthcare providers for non-emergency care.
PPOs generally offer limited benefits to members who use non-contracted
healthcare providers. PPO members who use contracted healthcare providers
receive a preferred benefit, typically in the form of lower co-pays,
co-insurance or deductibles. As employers and employees have demanded more
choice, managed care plans have developed hybrid products that combine elements
of both HMO and PPO plans, including high-deductible healthcare plans that may
have limited benefits, but cost the employee less in premiums.
The amount of our managed care net patient service revenues, including
Medicare and Medicaid managed care programs, from our hospitals and related
outpatient facilities during the six months ended June 30, 2020 and 2019 was
$4.145 billion and $4.684 billion , respectively. Our top ten managed care payers
generated 61% of our managed care net patient service revenues for the six
months ended June 30, 2020 . National payers generated 44% of our managed care
net patient service revenues for the six months ended June 30, 2020 . The
remainder comes from regional or local payers. At June 30, 2020 and
December 31, 2019 , 60% and 65%, respectively, of our net accounts receivable for
our Hospital Operations segment were due from managed care payers.
Revenues under managed care plans are based primarily on payment terms
involving predetermined rates per diagnosis, per-diem rates, discounted
fee-for-service rates and/or other similar contractual arrangements. These
revenues are also subject to review and possible audit by the payers, which can
take several years before they are completely resolved. The payers are billed
for patient services on an individual patient basis. An individual patient's
bill is subject to adjustment on a patient-by-patient basis in the ordinary
course of business by the payers following their review and adjudication of each
particular bill. We estimate the discounts for contractual allowances at the
individual hospital level utilizing billing data on an individual patient basis.
At the end of each month, on an individual hospital basis, we estimate our
expected reimbursement for patients of managed care plans based on the
applicable contract terms. We believe it is reasonably likely for there to be an
approximately 3% increase or decrease in the estimated contractual allowances
related to managed care plans. Based on reserves at June 30, 2020 , a 3% increase
or decrease in the estimated contractual allowance would impact the estimated
reserves by approximately $15 million . Some of the factors that can contribute
to changes in the contractual allowance estimates include: (1) changes in
reimbursement levels for procedures, supplies and drugs when threshold levels
are triggered; (2) changes in reimbursement levels when stop-loss or outlier
limits are reached; (3) changes in the admission status of a patient due to
physician orders subsequent to initial diagnosis or testing; (4) final coding of
in-house and discharged-not-final-billed patients that change reimbursement
levels; (5) secondary benefits determined after primary insurance payments; and
(6) reclassification of patients among insurance plans with different coverage
and payment levels. Contractual allowance estimates are periodically reviewed
for accuracy by taking into consideration known contract terms, as well as
payment history. We believe our estimation and review process enables us to
identify instances on a timely basis where such estimates need to be revised. We
do
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not believe there were any adjustments to estimates of patient bills that were
material to our revenues. In addition, on a corporate-wide basis, we do not
record any general provision for adjustments to estimated contractual allowances
for managed care plans. Managed care accounts, net of contractual allowances
recorded, are further reduced to their net realizable value through implicit
price concessions based on historical collection trends for these payers and
other factors that affect the estimation process.
We expect managed care governmental admissions to continue to increase as a
percentage of total managed care admissions over the near term. However, the
managed Medicare and Medicaid insurance plans typically generate lower yields
than commercial managed care plans, which have been experiencing an improved
pricing trend. Although we have benefited from solid year-over-year aggregate
managed care pricing improvements for several years, we have seen these
improvements moderate in recent years, and we believe the moderation could
continue in future years. In the six months ended June 30, 2020 , our commercial
managed care net inpatient revenue per admission from the hospitals in our
Hospital Operations segment was approximately 93% higher than our aggregate
yield on a per admission basis from government payers, including managed
Medicare and Medicaid insurance plans.
Indemnity
An indemnity-based agreement generally requires the insurer to reimburse an
insured patient for healthcare expenses after those expenses have been incurred
by the patient, subject to policy conditions and exclusions. Unlike an HMO
member, a patient with indemnity insurance is free to control his or her
utilization of healthcare and selection of healthcare providers.
UNINSURED PATIENTS
Uninsured patients are patients who do not qualify for government programs
payments, such as Medicare and Medicaid, do not have some form of private
insurance and, therefore, are responsible for their own medical bills. A
significant number of our uninsured patients are admitted through our hospitals'
emergency departments and often require high-acuity treatment that is more
costly to provide and, therefore, results in higher billings, which are the
least collectible of all accounts.
Self-pay accounts receivable, which include amounts due from uninsured
patients, as well as co-pays, co-insurance amounts and deductibles owed to us by
patients with insurance, pose significant collectability problems. At both
June 30, 2020 and December 31, 2019 , approximately 4% of our net accounts
receivable for our Hospital Operations segment was self-pay. Further, a
significant portion of our implicit price concessions relates to self-pay
amounts. We provide revenue cycle management services through Conifer, which is
subject to various statutes and regulations regarding consumer protection in
areas including finance, debt collection and credit reporting activities. For
additional information, see Item 1, Business - Regulations Affecting Conifer's
Operations, of Part I of our Annual Report.
Conifer has performed systematic analyses to focus our attention on the
drivers of bad debt expense for each hospital. While emergency department use is
the primary contributor to our implicit price concessions in the aggregate, this
is not the case at all hospitals. As a result, we have increased our focus on
targeted initiatives that concentrate on non-emergency department patients as
well. These initiatives are intended to promote process efficiencies in
collecting self-pay accounts, as well as co-pay, co-insurance and deductible
amounts owed to us by patients with insurance, that we deem highly collectible.
We leverage a statistical-based collections model that aligns our operational
capacity to maximize our collections performance. We are dedicated to modifying
and refining our processes as needed, enhancing our technology and improving
staff training throughout the revenue cycle process in an effort to increase
collections and reduce accounts receivable.
Over the longer term, several other initiatives we have previously announced
should also help address this challenge. For example, our Compact with Uninsured
Patients ("Compact") is designed to offer managed care-style discounts to
certain uninsured patients, which enables us to offer lower rates to those
patients who historically had been charged standard gross charges. Under the
Compact, the discount offered to uninsured patients is recognized as a
contractual allowance, which reduces net operating revenues at the time the
self-pay accounts are recorded. The uninsured patient accounts, net of
contractual allowances recorded, are further reduced to their net realizable
value through implicit price concessions based on historical collection trends
for self-pay accounts and other factors that affect the estimation process.
We also provide financial assistance through our charity and uninsured
discount programs to uninsured patients who are unable to pay for the healthcare
services they receive. Our policy is not to pursue collection of amounts
determined to qualify for financial assistance; therefore, we do not report
these amounts in net operating revenues. Most states include an estimate of the
cost of charity care in the determination of a hospital's eligibility for
Medicaid DSH payments. These payments are intended to mitigate our cost of
uncompensated care. Some states have also developed provider fee or other
supplemental payment programs to mitigate the shortfall of Medicaid
reimbursement compared to the cost of caring for Medicaid patients.
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The following table shows our estimated costs (based on selected operating
expenses, which include salaries, wages and benefits, supplies and other
operating expenses) of caring for our uninsured and charity patients in the
three and six months ended
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Estimated costs for:
Uninsured patients $ 145 $ 164 $ 301 $ 322
Charity care patients 43 41 83 75
Total $ 188 $ 205 $ 384 $ 397
RESULTS OF OPERATIONS
The following two tables summarize our consolidated net operating revenues,
operating expenses and operating income from continuing operations, both in
dollar amounts and as percentages of net operating revenues, for the three and
six months ended June 30, 2020 and 2019. We present metrics as a percentage of
net operating revenues because a significant portion of our costs are variable.
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Net operating revenues:
Hospital Operations $ 3,088 $ 3,827 $ 6,922 $ 7,689
Ambulatory Care 368 524 858 1,004
Conifer 305 355 637 704
Inter-segment eliminations (113) (146) (249) (292)
Net operating revenues 3,648 4,560 8,168 9,105
Grant income 511 - 511 -
Equity in earnings of unconsolidated affiliates 31 42 59 76
Operating expenses:
Salaries, wages and benefits 1,864 2,145 4,051 4,296
Supplies 611 753 1,374 1,494
Other operating expenses, net 983 1,035 1,996 2,100
Depreciation and amortization 206 214 409 422Impairment and restructuring charges, and acquisition-related costs
54 36 109 55
Litigation and investigation costs 2 18 4 31
Net losses (gains) on sales, consolidation and deconsolidation
of facilities (1) 1 (3) 2
Operating income $ 471 $ 400 $ 798 $ 781
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Net operating revenues 100.0 % 100.0 % 100.0 % 100.0 %
Grant income 14.0 % - % 6.2 % - %
Equity in earnings of unconsolidated affiliates 0.8 % 0.9 % 0.7 % 0.8 %
Operating expenses:
Salaries, wages and benefits 51.1 % 47.0 % 49.6 % 47.2 %
Supplies 16.7 % 16.5 % 16.8 % 16.4 %
Other operating expenses, net 26.9 % 22.7 % 24.4 % 23.1 %
Depreciation and amortization 5.6 % 4.7 % 5.0 % 4.6 %
Impairment and restructuring charges, and acquisition-related costs
1.5 % 0.8 % 1.3 % 0.6 %
Litigation and investigation costs 0.1 % 0.4 % - % 0.3 %
Net gains on sales, consolidation and deconsolidation of
facilities - % - % - % - %
Operating income 12.9 % 8.8 % 9.8 % 8.6 %
Total net operating revenues decreased by $912 million , or 20.0%, and
decreased by $937 million , or 10.3%, for the three and six months ended June 30,
2020 , respectively, compared to the three and six months ended June 30, 2019 ,
respectively. Hospital Operations net operating revenues net of inter-segment
eliminations decreased by $706 million , or
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19.2%, and decreased by $724 million , or 9.8%, for the three and six months
ended June 30, 2020 , respectively, compared to the three and six months ended
June 30, 2019 , respectively, primarily due to the negative impact of
shelter-in-place orders on patient volumes and the mandated suspension of many
elective procedures at our hospitals due to the COVID-19 pandemic. Ambulatory
Care net operating revenues decreased by $156 million and $146 million , or 29.8%
and 14.5%, for the three and six months ended June 30, 2020 , respectively,
compared to the three and six months ended June 30, 2019 , respectively. The
change in 2020 revenues for the three-month period was driven by a decrease in
same-facility net operating revenues of $166 million due primarily to the
negative impact of shelter-in-place orders on patient volumes and the mandated
suspension of many elective procedures due to the COVID-19 pandemic, as well as
a decrease of $10 million due to the deconsolidation of a facility. These
impacts were partially offset by an increase from acquisitions of $20 million .
The change in 2020 revenues for the six-month period was driven by a decrease in
same-facility net operating revenues of $157 million due primarily to the
negative impact of shelter-in-place orders on patient volumes and the mandated
suspension of many elective procedures due to the COVID-19 pandemic, as well as
a decrease of $15 million due to the deconsolidation of a facility. These
impacts were partially offset by an increase from acquisitions of $26 million .
Conifer net operating revenues decreased by $50 million and $67 million , or
14.1% and 9.5%, for the three and six months ended June 30, 2020 , respectively,
compared to the three and six months ended June 30, 2019 , respectively. Conifer
revenues from third-party customers, which are not eliminated in consolidation,
decreased $17 million and $24 million , or 8.1% and 5.8%, for the three and six
months ended June 30, 2020 , respectively, compared to the three and six months
ended June 30, 2019 , respectively. Conifer revenues from third-party customers
were negatively impacted by (i) the wind-down and termination of contracts for
facilities its clients previously owned then divested, (ii) other client
terminations at the end of their contract terms and (iii) the impact of the
COVID-19 pandemic on the revenue of Conifer's clients.
The following table shows selected operating expenses of our three
reportable business segments. Information for our Hospital Operations segment is
presented on a same-hospital basis, which includes the results of our same
65 hospitals operated throughout the three and six months ended June 30, 2020
and 2019. Our same-hospital information excludes the results of three
Chicago -area hospitals, which we divested effective January 28, 2019 . We present
same-hospital data because we believe it provides investors with useful
information regarding the performance of our hospitals and other operations that
are comparable for the periods presented.
Three Months Ended Six Months Ended
June 30, June 30,
Increase Increase
Selected Operating Expenses 2020 2019 (Decrease) 2020 2019 (Decrease)
Hospital Operations - Same-Hospital Salaries, wages and benefits$ 1,580 $ 1,802 (12.3) %$ 3,426 $ 3,598 (4.8) % Supplies 530 644 (17.7) % 1,181 1,281 (7.8) % Other operating expenses 841 882 (4.6) % 1,711 1,791 (4.5) % Total$ 2,951 $ 3,328 (11.3) %$ 6,318 $ 6,670 (5.3) % Ambulatory Care Salaries, wages and benefits$ 119 $ 157 (24.2) %$ 281 $ 310 (9.4) % Supplies 79 108 (26.9) % 191 207 (7.7) % Other operating expenses 75 86 (12.8) % 161 168 (4.2) % Total$ 273 $ 351 (22.2) %$ 633 $ 685 (7.6) % Conifer Salaries, wages and benefits$ 165 $ 187 (11.8) %$ 344 $ 372 (7.5) % Supplies 1 1 - % 2 2 - % Other operating expenses 66 64 3.1 % 131 128 2.3 % Total$ 232 $ 252 (7.9) %$ 477 $ 502 (5.0) % Total Salaries, wages and benefits$ 1,864 $ 2,146 (13.1) %$ 4,051 $ 4,280 (5.4) % Supplies 610 753 (19.0) % 1,374 1,490 (7.8) % Other operating expenses 982 1,032 (4.8) % 2,003 2,087 (4.0) % Total$ 3,456 $ 3,931 (12.1) %$ 7,428 $ 7,857 (5.5) % Rent/lease expense(1) Hospital Operations$ 66 $ 59 11.9 %$ 131 $ 118 11.0 % Ambulatory Care 20 21 (4.8) % 43 41 4.9 % Conifer 3 3 - % 6 6 - % Total$ 89 $ 83 7.2 %$ 180 $ 165 9.1 % (1) Included in other operating expenses. 44
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RESULTS OF OPERATIONS BY SEGMENT
Our operations are reported in three segments:
•Hospital Operations, which is comprised of our acute care and specialty
hospitals, ancillary outpatient facilities, urgent care centers, micro-hospitals
and physician practices. As described in Note 4 to the accompanying Condensed
Consolidated Financial Statements, certain of these facilities are classified as
held for sale at June 30, 2020 .
•Ambulatory Care, which is comprised of USPI's ambulatory surgery centers,
urgent care centers, imaging centers and surgical hospitals.
•Conifer, which provides revenue cycle management and value-based care services
to hospitals, healthcare systems, physician practices, employers and other
customers.
Hospital Operations Segment
The following tables show operating statistics of our continuing operations
hospitals and related outpatient facilities on a same-hospital basis, unless
otherwise indicated, which includes the results of our same 65 hospitals
operated throughout the six months ended June 30, 2020 and 2019 and excludes the
results of three Chicago -area hospitals, which we divested effective January 28,
2019 . We present same-hospital data because we believe it provides investors
with useful information regarding the performance of our hospitals and other
operations that are comparable for the periods presented. We present certain
metrics on a per adjusted patient admission and per adjusted patient day basis
to show trends other than volume. We present certain metrics as a percentage of
net operating revenues because a significant portion of our operating expenses
are variable.
Same-Hospital Same-Hospital
Continuing Operations Continuing Operations
Three Months Ended Six Months Ended
June 30 , June 30 ,
Increase Increase
Admissions, Patient Days and Surgeries 2020 2019 (Decrease) 2020 2019 (Decrease)
Number of hospitals (at end of period) 65 65 - (1) 65 65 - (1)
Total admissions 134,898 169,352 (20.3) % 300,633 342,822 (12.3) %
Adjusted patient admissions(2) 221,159 304,066 (27.3) % 512,071 609,937 (16.0) %
Paying admissions (excludes charity and uninsured) 125,792 159,129 (20.9) % 281,612 322,761 (12.7) %
Charity and uninsured admissions 9,106 10,223 (10.9) % 19,021 20,061 (5.2) %
Admissions through emergency department 98,193 121,088 (18.9) % 220,484 246,316 (10.5) %
Paying admissions as a percentage of total admissions 93.2 % 94.0 % (0.8) % (1) 93.7 % 94.1 % (0.4) % (1)
Charity and uninsured admissions as a percentage of total admissions
6.8 % 6.0 % 0.8 % (1) 6.3 % 5.9 % 0.4 % (1)
Emergency department admissions as a percentage of total admissions
72.8 % 71.5 % 1.3 % (1) 73.3 % 71.8 % 1.5 % (1)
Surgeries - inpatient 34,973 44,641 (21.7) % 76,935 89,194 (13.7) %
Surgeries - outpatient 38,749 60,936 (36.4) % 92,139 118,832 (22.5) %
Total surgeries 73,722 105,577 (30.2) % 169,074 208,026 (18.7) %
Patient days - total 687,883 787,582 (12.7) % 1,498,362 1,602,911 (6.5) %
Adjusted patient days(2) 1,094,208 1,387,929 (21.2) % 2,479,971 2,795,982 (11.3) %
Average length of stay (days) 5.10 4.65 9.7 % 4.98 4.68 6.4 %
Licensed beds (at end of period) 17,219 17,221 - % 17,219 17,221 - %
Average licensed beds 17,219 17,221 - % 17,219 17,221 - %
Utilization of licensed beds(3) 43.9 % 50.3 % (6.4) % (1) 47.8 % 51.4 % (3.6) % (1)
(1) The change is the difference between 2020 and 2019 amounts shown. (2) Adjusted patient admissions/days represents actual patient admissions/days adjusted to
include outpatient services provided by facilities in our Hospital Operations segment by
multiplying actual patient admissions/days by the sum of gross inpatient revenues and
outpatient revenues and dividing the results by gross inpatient revenues. (3) Utilization of licensed beds represents patient days divided by number of days in the
period divided by average licensed beds.
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Same-Hospital Same-Hospital
Continuing Operations Continuing Operations
Three Months Ended Six Months Ended
June 30 , June 30 ,
Increase Increase
Outpatient Visits 2020 2019 (Decrease) 2020 2019 (Decrease)
Total visits 983,321 1,693,805 (41.9) % 2,599,848 3,380,669 (23.1) %
Paying visits (excludes charity and uninsured) 908,197 1,581,555 (42.6) % 2,407,737 3,159,190 (23.8) %
Charity and uninsured visits 75,124 112,250 (33.1) % 192,111 221,479 (13.3) %
Emergency department visits 388,038 637,107 (39.1) % 1,029,320 1,288,959 (20.1) %
Surgery visits 38,749 60,936 (36.4) % 92,139 118,832 (22.5) %
Paying visits as a percentage of total visits 92.4 % 93.4 % (1.0) % (1) 92.6 % 93.4 % (0.8) % (1)
Charity and uninsured visits as a percentage of
total visits 7.6 % 6.6 % 1.0 % (1) 7.4 % 6.6 % 0.8 % (1)
(1) The change is the difference between 2020 and 2019 amounts shown.
Same-Hospital Same-Hospital
Continuing Operations Continuing Operations
Three Months Ended Six Months Ended
June 30, June 30,
Increase Increase
Revenues 2020 2019 (Decrease) 2020 2019 (Decrease)
Total segment net operating revenues(1)
(19.2) % $ 6,675 $ 7,371 (9.4) %
Selected revenue data - hospitals and
related outpatient facilities
Net patient service revenues(1)(2) $ 2,830 $ 3,547 (20.2) % $ 6,372 $ 7,104 (10.3) %
Net patient service revenue per adjusted
patient admission(1)(2) $ 12,796 $ 11,665 9.7 % $ 12,444 $ 11,647 6.8 %
Net patient service revenue per adjusted
patient day(1)(2) $ 2,586 $ 2,556 1.2 % $ 2,569 $ 2,541 1.1 %
(1) Revenues are net of implicit price concessions. (2) Adjusted patient admissions/days represents actual patient admissions/days adjusted to
include outpatient services provided by facilities in our Hospital Operations segment by
multiplying actual patient admissions/days by the sum of gross inpatient revenues and
outpatient revenues and dividing the results by gross inpatient revenues.
Same-Hospital Same-Hospital
Continuing Operations Continuing Operations
Three Months Ended Six Months Ended
June 30 , June 30 ,
Increase Increase
Total Segment Selected Operating Expenses 2020 2019 (Decrease) 2020 2019 (Decrease)
Salaries, wages and benefits as a percentage of net operating revenues
53.1 % 49.0 % 4.1 % (1) 51.3 % 48.8 % 2.5 % (1)
Supplies as a percentage of net operating revenues 17.8 % 17.5 % 0.3 % (1) 17.7 % 17.4 % 0.3 %
(1)
Other operating expenses as a percentage of net operating
revenues 28.3 % 24.0 % 4.3 % (1) 25.6 % 24.3 % 1.3 % (1)
(1) The change is the difference between 2020 and 2019 amounts shown.
Revenues
Same-hospital net operating revenues decreased $706 million , or 19.2%,
during the three months ended June 30, 2020 compared to the three months ended
June 30, 2019 , primarily due to the negative impact of shelter-in-place orders
on patient volumes and the mandated suspension of many elective procedures at
our hospitals due to the COVID-19 pandemic, partially offset by increased acuity
and improved terms of our managed care contracts. Our Hospital Operations
segment also recognized income from federal and state grants totaling
$474 million in the three months ended June 30, 2020 , which is not included in
net operating revenues. Same-hospital admissions decreased 20.3% in the three
months ended June 30, 2020 compared to the same period in 2019. Same-hospital
outpatient visits decreased 41.9% in the three months ended June 30, 2020
compared to the prior-year period.
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Same-hospital net operating revenues decreased $696 million , or 9.4%, during the
six months ended June 30, 2020 compared to the six months ended June 30, 2019 ,
primarily due to the negative impact of shelter-in-place orders on patient
volumes and the mandated suspension of many elective procedures at our hospitals
due to the COVID-19 pandemic, partially offset by increased acuity and improved
terms of our managed care contracts. Our Hospital Operations segment also
recognized income from federal and state grants totaling $474 million in the six
months ended June 30, 2020 , which is not included in net operating
revenues. Same-hospital admissions decreased 12.3% in the six months ended
June 30, 2020 compared to the same period in 2019. Same-hospital outpatient
visits decreased 23.1% in the six months ended June 30, 2020 compared to the
prior-year period.
The following table shows the consolidated net accounts receivable by payer
at
June 30, 2020 December 31, 2019
Medicare $ 172 $ 189
Medicaid 73 69
Net cost report settlements receivable and valuation allowances 40 12
Managed care 1,340 1,618
Self-pay uninsured 16 25
Self-pay balance after insurance 77 76
Estimated future recoveries 163 162
Other payers 339 337
Total Hospital Operations 2,220 2,488
Ambulatory Care 214 253
Total discontinued operations 1 2
$ 2,435 $ 2,743
When we have an unconditional right to payment, subject only to the passage
of time, the right is treated as a receivable. Patient accounts receivable,
including billed accounts and certain unbilled accounts, as well as estimated
amounts due from third-party payers for retroactive adjustments, are recognized
as receivables if our right to consideration is unconditional and only the
passage of time is required before payment of that consideration is due.
Estimated uncollectable amounts are generally considered implicit price
concessions that are a direct reduction to patient accounts receivable rather
than allowance for doubtful accounts. Amounts related to services provided to
patients for which we have not billed and that do not meet the conditions of
unconditional right to payment at the end of the reporting period are contract
assets. For our Hospital Operations segment, our contract assets consist
primarily of services that we have provided to patients who are still receiving
inpatient care in our facilities at the end of the reporting period. Our
Hospital Operations segment's contract assets are included in other current
assets in the accompanying Condensed Consolidated Balance Sheets at June 30,
2020 and December 31, 2019 .
Collection of accounts receivable has been a key area of focus, particularly
over the past several years. At June 30, 2020 , our Hospital Operations segment
collection rate on self-pay accounts was approximately 22.9%. Our self-pay
collection rate includes payments made by patients, including co-pays,
co-insurance amounts and deductibles paid by patients with insurance. Based on
our accounts receivable from uninsured patients and co-pays, co-insurance
amounts and deductibles owed to us by patients with insurance at June 30, 2020 ,
a 10% decrease or increase in our self-pay collection rate, or approximately 2%,
which we believe could be a reasonably likely change, would result in an
unfavorable or favorable adjustment to patient accounts receivable of
approximately $10 million . There are various factors that can impact collection
trends, such as changes in the economy, which in turn have an impact on
unemployment rates and the number of uninsured and underinsured patients, the
volume of patients through our emergency departments, the increased burden of
co-pays and deductibles to be made by patients with insurance, and business
practices related to collection efforts. These factors continuously change and
can have an impact on collection trends and our estimation process.
Payment pressure from managed care payers also affects the collectability of
our accounts receivable. We typically experience ongoing managed care payment
delays and disputes; however, we continue to work with these payers to obtain
adequate and timely reimbursement for our services. Our estimated Hospital
Operations segment collection rate from managed care payers was approximately
97.9% at June 30, 2020 .
We manage our implicit price concessions using hospital-specific goals and
benchmarks such as (1) total cash collections, (2) point-of-service cash
collections, (3) AR Days and (4) accounts receivable by aging category. The
following tables present the approximate aging by payer of our net accounts
receivable from the continuing operations of our Hospital Operations segment of
$2.180 billion and $2.476 billion at June 30, 2020 and December 31, 2019 ,
respectively, excluding cost report settlements receivable and valuation
allowances of $40 million and $12 million , respectively, at June 30, 2020 and
December 31, 2019 :
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June 30, 2020
Indemnity,
Managed Self-Pay
Medicare Medicaid Care and Other Total
0-60 days 92 % 47 % 52 % 20 % 47 %
61-120 days 4 % 19 % 13 % 11 % 12 %
121-180 days 2 % 13 % 12 % 11 % 11 %
Over 180 days 2 % 21 % 23 % 58 % 30 %
Total 100 % 100 % 100 % 100 % 100 %
December 31, 2019
Indemnity,
Managed Self-Pay
Medicare Medicaid Care and Other Total
0-60 days 91 % 49 % 56 % 21 % 51 %
61-120 days 5 % 21 % 16 % 14 % 15 %
121-180 days 2 % 10 % 10 % 10 % 9 %
Over 180 days 2 % 20 % 18 % 55 % 25 %
Total 100 % 100 % 100 % 100 % 100 %
Conifer continues to implement revenue cycle initiatives to improve our cash
flow. These initiatives are focused on standardizing and improving patient
access processes, including pre-registration, registration, verification of
eligibility and benefits, liability identification and collections at
point-of-service, and financial counseling. These initiatives are intended to
reduce denials, improve service levels to patients and increase the quality of
accounts that end up in accounts receivable. Although we continue to focus on
improving our methodology for evaluating the collectability of our accounts
receivable, we may incur future charges if there are unfavorable changes in the
trends affecting the net realizable value of our accounts receivable.
At June 30, 2020 , we had a cumulative total of patient account assignments
to Conifer of $3.229 billion related to our continuing operations. These
accounts have already been written off and are not included in our receivables
or in the allowance for doubtful accounts; however, an estimate of future
recoveries from all the accounts assigned to Conifer is determined based on our
historical experience and recorded in accounts receivable.
Patient advocates from Conifer's Medicaid Eligibility Program ("MEP") screen
patients in the hospital to determine whether those patients meet eligibility
requirements for financial assistance programs. They also expedite the process
of applying for these government programs. Receivables from patients who are
potentially eligible for Medicaid are classified as Medicaid pending, under the
MEP, with appropriate contractual allowances recorded. Based on recent trends,
approximately 98% of all accounts in the MEP are ultimately approved for
benefits under a government program, such as Medicaid. The following table shows
the approximate amount of accounts receivable in the MEP still awaiting
determination of eligibility under a government program at June 30, 2020 and
December 31, 2019 by aging category:
June 30, December 31,
2020 2019
0-60 days $ 83 $ 89
61-120 days 9 11
121-180 days 4 4
Over 180 days 6 11
Total $ 102 $ 115
Salaries, Wages and Benefits
Same-hospital salaries, wages and benefits decreased by $222 million , or
12.3%, in the three months ended June 30, 2020 compared to the same period
in 2019. The decline was primarily due to reduced patient volumes and necessary
employee furloughs and headcount reductions throughout the organization due to
the COVID-19 pandemic, as well as lower health benefit costs; the effect of
these changes was partially offset by annual merit increases for certain of our
employees, a greater number of employed physicians and an increased average
patient length-of-stay. Same-hospital salaries, wages and benefits as a
percentage of net operating revenues increased by 410 basis points to 53.1% in
the three months ended June 30, 2020 compared to the three months ended June 30,
2019 primarily due to reduced patient revenues as a result of the COVID-19
pandemic. Salaries, wages and benefits expense for the three months ended
June 30, 2020 and 2019 included stock-based compensation expense of $8 million
and $10 million , respectively.
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Same-hospital salaries, wages and benefits decreased$172 million , or 4.8%, in the six months endedJune 30, 2020 compared to the same period in 2019. The decline was primarily due to reduced patient volumes and necessary employee furloughs and headcount reductions throughout the organization due to the COVID-19 pandemic, as well as lower health benefit costs; the effect of these changes was partially offset by annual merit increases for certain of our employees, a greater number of employed physicians and an increased average patient length-of-stay. Same-hospital salaries, wages and benefits as a percentage of net operating revenues increased by 250 basis points to 51.3% in the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 primarily due to reduced patient revenues as a result of the COVID-19 pandemic. Salaries, wages and benefits expense for the six months endedJune 30, 2020 and 2019 included stock-based compensation expense of$15 million and$16 million , respectively.
Supplies
Same-hospital supplies expense decreased $114 million , or 17.7%, in the
three months ended June 30, 2020 compared to the same period in 2019. The
decline was primarily due to reduced patient volumes, partially offset by the
increased cost of certain supplies as as a result of the COVID-19 pandemic.
Same-hospital supplies expense as a percentage of net operating revenues
increased by 30 basis points to 17.8% in the three months ended June 30, 2020
compared to the three months ended June 30, 2019 due to reduced patient revenues
and the increased cost of certain supplies as a result of the COVID-19 pandemic.
Same-hospital supplies expense decreased $100 million , or 7.8%, in the six
months ended June 30, 2020 compared to the same period in 2019. The decline was
primarily due to reduced patient volumes, partially offset by the increased cost
of certain supplies as as a result of the COVID-19 pandemic. Same-hospital
supplies expense as a percentage of net operating revenues increased by 30 basis
points to 17.7% in the six months ended June 30, 2020 compared to the six months
ended June 30, 2019 due to reduced patient revenues and the increased cost of
certain supplies as a result of the COVID-19 pandemic.
We strive to control supplies expense through product standardization,
consistent contract terms and end-to-end contract management, improved
utilization, bulk purchases, focused spending with a smaller number of vendors
and operational improvements. The items of current cost reduction focus include
personal protective equipment, cardiac stents and pacemakers, orthopedics,
implants, and high-cost pharmaceuticals.
Other Operating Expenses, Net
Same-hospital other operating expenses decreased by $41 million , or 4.6%, in
the three months ended June 30, 2020 compared to the same period in 2019. The
decline was primarily due to our execution of various strategies to improve cost
efficiency, as well as reduced patient volumes as a result of the COVID-19
pandemic. There is proportionally a higher level of fixed costs (e.g., rent
expense) in other operating expenses than salaries, wages and benefits or
supplies. Same-hospital other operating expenses as a percentage of net
operating revenues increased by 430 basis points to 28.3% for the three months
ended June 30, 2020 compared to 24.0% for the three months ended June 30, 2019
primarily due to reduced patient revenues as a result of the pandemic. The
changes in other operating expenses included:
•increased medical fees of
•decreased software costs of
•decreased consulting and legal fees of
•decreased costs of contracted services of
•decreased malpractice expense of
•decreased costs of$17 million associated with funding indigent care services at our hospitals, which costs were substantially offset by reduced net patient revenues. Same-hospital other operating expenses decreased by$80 million , or 4.5%, in the six months endedJune 30, 2020 compared to the same period in 2019. Same-hospital other operating expenses as a percentage of net operating revenues increased by 130 basis points to 25.6% in the six months endedJune 30, 2020 compared to 24.3% for the six months endedJune 30, 2019 primarily due to reduced patient revenues as a result of the COVID-19 pandemic. The changes in other operating expenses included: 49 -------------------------------------------------------------------------------- Table of Contents •increased medical fees of$57 million ;
•decreased software costs of
•decreased consulting and legal fees of
•decreased costs of contracted services of
•decreased malpractice expense of
•decreased costs of$29 million associated with funding indigent care services at our hospitals, which costs were substantially offset by reduced net patient revenues. Ambulatory Care Segment Our Ambulatory Care segment is comprised of USPI's ambulatory surgery centers, urgent care centers, imaging centers and surgical hospitals. USPI operates its surgical facilities in partnership with local physicians and, in many of these facilities, a healthcare system partner. We hold an ownership interest in each facility, with each being operated through a separate legal entity in most cases. USPI operates facilities on a day-to-day basis through management services contracts. Our sources of earnings from each facility consist of: •management services revenues, computed as a percentage of each facility's net revenues (often net of implicit price concessions); and •our share of each facility's net income (loss), which is computed by multiplying the facility's net income (loss) times the percentage of each facility's equity interests owned by USPI. Our role as an owner and day-to-day manager provides us with significant influence over the operations of each facility. For many of the facilities our Ambulatory Care segment operates (107 of 350 facilities atJune 30, 2020 ), this influence does not represent control of the facility, so we account for our investment in the facility under the equity method for an unconsolidated affiliate. USPI controls 243 of the facilities our Ambulatory Care segment operates, and we account for these investments as consolidated subsidiaries. Our net earnings from a facility are the same under either method, but the classification of those earnings differs. For consolidated subsidiaries, our financial statements reflect 100% of the revenues and expenses of the subsidiaries, after the elimination of intercompany amounts. The net profit attributable to owners other than USPI is classified within "net income available to noncontrolling interests."
For unconsolidated affiliates, our consolidated statements of operations reflect our earnings in two line items:
•equity in earnings of unconsolidated affiliates-our share of the net income (loss) of each facility, which is based on the facility's net income (loss) and the percentage of the facility's outstanding equity interests owned by USPI; and
•management and administrative services revenues, which is included in our net operating revenues-income we earn in exchange for managing the day-to-day operations of each facility, usually quantified as a percentage of each facility's net revenues less implicit price concessions.
Our Ambulatory Care segment operating income is driven by the performance of
all facilities USPI operates and by USPI's ownership interests in those
facilities, but our individual revenue and expense line items contain only
consolidated businesses, which represent 69% of those facilities. This
translates to trends in consolidated operating income that often do not
correspond with changes in consolidated revenues and expenses, which is why we
disclose certain statistical and financial data on a pro forma systemwide basis
that includes both consolidated and unconsolidated (equity method) facilities.
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Results of Operations
The following table summarizes certain consolidated statements of operations items for the periods indicated:
Three Months Ended Six Months Ended
June 30, June 30,
Increase Increase
Ambulatory Care Results of Operations 2020 2019 (Decrease) 2020 2019 (Decrease)
Net operating revenues $ 368 $ 524 (29.8) % $ 858 $ 1,004 (14.5) %
Grant income $ 37 $ - N/A $ 37 $ - N/A
Equity in earnings of unconsolidated
affiliates $ 35 $ 34 2.9 % $ 61 $ 65 (6.2) %
Salaries, wages and benefits $ 119 $ 157 (24.2) % $ 281 $ 310 (9.4) %
Supplies $ 79 $ 108 (26.9) % $ 191 $ 207 (7.7) %
Other operating expenses, net $ 75 $ 86 (12.8) % $ 161 $ 168 (4.2) %
Our Ambulatory Care net operating revenues decreased by $156 million , or
29.8%, during the three months ended June 30, 2020 as compared to the same
period in 2019. The change was driven by a decrease in same-facility net
operating revenues of $166 million due primarily to the impact of
shelter-in-place orders on patient volumes and the mandated suspension of many
elective procedures as a result of the COVID-19 pandemic, as well as a decrease
of $10 million due to the deconsolidation of a facility, partially offset by an
increase from acquisitions of $20 million . Our Ambulatory Care net operating
revenues decreased by $146 million , or 14.5%, during the six months ended
June 30, 2020 as compared to the same period in 2019. The change was driven by a
decrease in same-facility net operating revenues of $157 million due primarily
to the COVID-19 pandemic, as well as a decrease of $15 million due to the
deconsolidation of a facility, partially offset by an increase from acquisitions
of $26 million .
Salaries, wages and benefits expense decreased by $38 million , or 24.2%,
during the three months ended June 30, 2020 as compared to the same period in
2019. Salaries, wages and benefits expense was impacted by a decrease in
same-facility salaries, wages and benefits expense of $41 million due primarily
to the necessary flexing of staff as patient volumes decreased at our centers
due to shelter-in-place orders and the mandated suspension of many elective
procedures due to the COVID-19 pandemic, as well as a decrease of $2 million due
to the deconsolidation of a facility. These impacts were partially offset by an
increase from acquisitions of $5 million . Salaries, wages and benefits expense
decreased by $29 million , or 9.4%, during the six months ended June 30, 2020 as
compared to the same period in 2019. Salaries, wages and benefits expense was
impacted by a decrease in same-facility salaries, wages and benefits expense of
$33 million due primarily to the COVID-19 pandemic, as well as a decrease of $3
million due to the deconsolidation of a facility. These impacts were partially
offset by an increase from acquisitions of $7 million .
Supplies expense decreased by $29 million , or 26.9%, during the three months
ended June 30, 2020 as compared to the same period in 2019. The change was
driven by a decrease in same-facility supplies expense of $32 million due
primarily to reduced patient volumes as a result of the COVID-19 pandemic, as
well as a decrease of $3 million due to the deconsolidation of a facility,
partially offset by an increase from acquisitions of $6 million . Supplies
expense decreased by $16 million , or 7.7%, during the six months ended June 30,
2020 as compared to the same period in 2019. The change was driven by a decrease
in same-facility supplies expense of $20 million as a result of the COVID-19
pandemic, as well as a decrease of $4 million due to the deconsolidation of a
facility, partially offset by an increase from acquisitions of $8 million .
Other operating expenses decreased by $11 million , or 12.8%, during the
three months ended June 30, 2020 as compared to the same period in 2019. The
change was driven by a decrease in same-facility other operating expenses of
$14 million due primarily to strong expense management while patient volumes
were reduced as a result of the COVID-19 pandemic, as well as a decrease of $2
million due to the deconsolidation of a facility, partially offset by an
increase from acquisitions of $5 million . Other operating expenses decreased by
$7 million , or 4.2%, during the six months ended June 30, 2020 as compared to
the same period in 2019. The change was driven by a decrease in same-facility
other operating expenses of $11 million due primarily to strong expense
management while patient volumes were reduced as a result of the COVID-19
pandemic, as well as a decrease of $3 million due to the deconsolidation of a
facility, partially offset by an increase from acquisitions of $7 million .
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Facility Growth
The following table summarizes the changes in our same-facility revenue
year-over-year on a pro forma systemwide basis, which includes both consolidated
and unconsolidated (equity method) facilities. While we do not record the
revenues of unconsolidated facilities, we believe this information is important
in understanding the financial performance of our Ambulatory Care segment
because these revenues are the basis for calculating our management services
revenues and, together with the expenses of our unconsolidated facilities, are
the basis for our equity in earnings of unconsolidated affiliates.
Three Months Ended Six Months Ended
Ambulatory Care Facility Growth June 30, 2020 June 30, 2020
Net revenues (28.2)% (15.4)%
Cases (33.7)% (19.3)%
Net revenue per case 8.2% 4.8%
Joint Ventures with Healthcare System Partners
USPI's business model is to jointly own its facilities with local physicians
and, in many of these facilities, a not-for-profit healthcare system partner.
Accordingly, as of June 30, 2020 , the majority of facilities in our Ambulatory
Care segment are operated in this model.
Six Months Ended
Ambulatory Care Facilities June 30, 2020
Facilities:
With a healthcare system partner 223 Without a healthcare system partner 127 Total facilities operated 350 Change fromDecember 31, 2019 Acquisitions 5 De novo 2 Dispositions/Mergers (3) Total increase in number of facilities operated 4 During the six months endedJune 30, 2020 , we acquired controlling interests in one multi-specialty surgery center in each ofColorado ,Tennessee andArizona , and two inFlorida . We paid cash totaling approximately$55 million for these acquisitions. All of these acquired facilities are jointly owned with local physicians, and a healthcare system partner is an owner in all of the facilities except the two facilities inFlorida . We also regularly engage in the purchase of equity interests with respect to our investments in unconsolidated affiliates and consolidated facilities that do not result in a change of control. These transactions are primarily the acquisitions of equity interests in ambulatory care facilities and the investment of additional cash in facilities that need capital for acquisitions, new construction or other business growth opportunities. During the six months endedJune 30, 2020 , we invested approximately$1 million in such transactions.
Conifer Segment
Our Conifer segment generated net operating revenues of $305 million and
$355 million during the three months ended June 30, 2020 and 2019, respectively,
and $637 million and $704 million during the six months ended June 30, 2020 and
2019, respectively, a portion of which was eliminated in consolidation as
described in Note 18 to the accompanying Condensed Consolidated Financial
Statements. Conifer revenues from third-party customers, which are not
eliminated in consolidation, decreased $17 million and $24 million , or 8.1% and
5.8%, for the three and six months ended June 30, 2020 , respectively, compared
to the same periods in 2019. Conifer revenues from third-party customers were
negatively impacted by (i) the wind-down and termination of contracts for
facilities its clients previously owned then divested, (ii) other client
terminations at the end of their contract terms and (iii) the impact of the
COVID-19 pandemic on the revenue of Conifer's clients.
Salaries, wages and benefits expense for Conifer decreased $22 million , or
11.8%, in the three months ended June 30, 2020 compared to the same period in
2019, and decreased $28 million , or 7.5%, in the six months ended June 30, 2020
compared to the same period in 2019, in both cases primarily due to furloughs
and headcount reductions throughout the organization.
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Other operating expenses for Conifer increased $2 million , or 3.1%, in the
three months ended June 30, 2020 compared to the same period in 2019, and
increased $3 million , or 2.3%, in the six months ended June 30, 2020 compared to
the same period in 2019.
Agreements document the current terms and conditions of various services
Conifer provides to Tenet hospitals, as well as certain administrative services
our Hospital Operations segment provides to Conifer; however, execution of a
restructured services agreement between Conifer and Tenet is a condition to
completion of the proposed spin-off. Conifer's contract with Tenet represented
39.1% of the net operating revenues Conifer recognized in the six months ended
June 30, 2020 .
Consolidated
Impairment and Restructuring Charges, and Acquisition-Related Costs
During the three months ended June 30, 2020 , we recorded impairment and
restructuring charges and acquisition-related costs of $54 million , consisting
of $49 million of restructuring charges and $5 million of impairment charges.
Restructuring charges consisted of $27 million of employee severance costs,
$10 million related to our Global Business Center in the Philippines , and $12
million of other restructuring costs. Our impairment and restructuring charges
and acquisition-related costs for the three months ended June 30, 2020 were
comprised of $32 million from our Hospital Operations segment, $7 million from
our Ambulatory Care segment and $15 million from our Conifer segment.
During the three months ended June 30, 2019 , we recorded impairment and
restructuring charges and acquisition-related costs of $36 million , consisting
of $4 million of impairment charges, $31 million of restructuring charges and $1
million of acquisition-related costs. Restructuring charges consisted of
$11 million of employee severance costs, $1 million of contract and lease
termination fees, and $19 million of other restructuring costs.
Acquisition-related costs consisted of $1 million of transaction costs. Our
impairment and restructuring charges and acquisition-related costs for the three
months ended June 30, 2019 were comprised of $26 million from our Hospital
Operations segment, $2 million from our Ambulatory Care segment and $8 million
from our Conifer segment.
During the six months ended June 30, 2020 , we recorded impairment and
restructuring charges and acquisition-related costs of $109 million , consisting
of $5 million of impairment charges, $103 million of restructuring charges and
$1 million of acquisition-related costs. Restructuring charges consisted of
$37 million of employee severance costs, $25 million related to our Global
Business Center in the Philippines , $23 million of charges due to the
termination of the USPI management equity plan, $1 million of contract and lease
termination fees, and $17 million of other restructuring costs.
Acquisition-related costs consisted of $1 million of transaction costs. Our
impairment and restructuring charges and acquisition-related costs for the six
months ended June 30, 2020 were comprised of $50 million from our Hospital
Operations segment, $31 million from our Ambulatory Care segment and $28 million
from our Conifer segment.
During the six months ended June 30, 2019 , we recorded impairment and
restructuring charges and acquisition-related costs of $55 million , consisting
of $5 million of impairment charges, $47 million of restructuring charges and
$3 million of acquisition-related costs. Restructuring charges consisted of
$18 million of employee severance costs, $2 million of contract and lease
termination fees, and $27 million of other restructuring costs.
Acquisition-related costs consisted of $3 million of transaction costs. Our
impairment and restructuring charges and acquisition-related costs for the six
months ended June 30, 2019 were comprised of $36 million from our Hospital
Operations segment, $5 million from our Ambulatory Care segment and $14 million
from our Conifer segment.
Litigation and Investigation Costs
Litigation and investigation costs for the three months ended
During the three months ended June 30, 2020 , we recorded net gains on sales,
consolidation and deconsolidation of facilities of approximately $1 million ,
primarily due to a post-closing adjustment on the sale of three of our hospitals
in the Chicago -area.
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During the three months ended
During the six months endedJune 30, 2020 , we recorded net gains on sales, consolidation and deconsolidation of facilities of approximately$3 million , primarily comprised of gains of$11 million related to consolidation changes of certain USPI businesses due to ownership changes, partially offset by$5 million of post-closing adjustments on the sale of three of our hospitals in theChicago -area and$3 million of post-closing adjustments on the sale ofMacNeal Hospital . During the six months endedJune 30, 2019 , we recorded net losses on sales, consolidation and deconsolidation of facilities of approximately$2 million , primarily comprised of a$6 million loss on the sale of ourChicago -area facilities, partially offset by$3 million of gains related to consolidation changes of certain USPI businesses due to ownership changes, as well as post-closing adjustments on several other divestitures.
Interest Expense
Interest expense for the three months ended June 30, 2020 was $255 million
compared to $247 million for the same period in 2019. Interest expense for both
the six month periods ended June 30, 2020 and 2019 was $498 million .
Loss From Early Extinguishment of Debt
Loss from early extinguishment of debt was $4 million for both the three and
six month periods ended June 30, 2020 . Loss from early extinguishment of debt
was zero and $47 million for the three and six months ended June 30, 2019 ,
respectively. The loss in the 2020 period included $8 million due to the debt
repurchase transactions described in Note 6 to the accompanying Condensed
Consolidated Financial Statements partially offset by $4 million of gains on
extinguishment of mortgage notes. The loss in the 2019 period was due to the
debt transactions described in Note 8 to the Consolidated Financial Statements
in our Annual Report.
Income Tax Expense
During the three months ended June 30, 2020 , we recorded income tax expense
of $45 million in continuing operations on pre-tax income of $214 million
compared to income tax expense of $33 million on pre-tax income of $152 million
during the three months ended June 30, 2019 . During the six months ended
June 30, 2020 , we recorded an income tax benefit of $30 million in continuing
operations on pre-tax income of $299 million compared to income tax expense of
$53 million on pre-tax income of $236 million during the six months ended
June 30, 2019 . The reconciliation between the amount of recorded income tax
expense and the amount calculated at the statutory federal tax rate is shown in
the following table:
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Tax expense at statutory federal rate of 21% $ 45 $ 32 $ 63 $ 50
State income taxes, net of federal income tax
benefit 10 6 15 9
Tax benefit attributable to noncontrolling
interests (16) (19) (30) (36)
Nontaxable gains - - 3 (1)
Stock-based compensation - 1 - -
Change in valuation allowance 2 11 (88) 35
Other items 4 2 7 (4)
Income tax expense (benefit) $ 45 $ 33 $ (30) $ 53
As a result of the change in the business interest expense disallowance
rules, as discussed in Note 14 to the accompanying Condensed Consolidated
Financial Statements, we recorded an income tax benefit of
Net Income Available to Noncontrolling Interests
Net income available to noncontrolling interests was $81 million for the
three months ended June 30, 2020 compared to $95 million for the three months
ended June 30, 2019 . Net income available to noncontrolling interests for the
three months ended June 30, 2020 was comprised of $6 million related to our
Hospital Operations segment, $63 million related to our
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Ambulatory Care segment and $12 million related to our Conifer segment. Of the
portion related to our Ambulatory Care segment, $2 million related to the
minority interests in USPI.
Net income available to noncontrolling interests was $147 million for the six
months ended June 30, 2020 compared to $179 million for the six months ended
June 30, 2019 . Net income available (loss attributable) to noncontrolling
interests for the six months ended June 30, 2020 was comprised of $(1) million
related to our Hospital Operations segment, $120 million related to our
Ambulatory Care segment and $28 million related to our Conifer segment. Of the
portion related to our Ambulatory Care segment, $3 million related to the
minority interests in USPI.
ADDITIONAL SUPPLEMENTAL NON-GAAP DISCLOSURES
The financial information provided throughout this report including our
Condensed Consolidated Financial Statements and the notes thereto has been
prepared in conformity with accounting principles generally accepted in the
United States of America ("GAAP"). However, we use certain non-GAAP financial
measures defined below in communications with investors, analysts, rating
agencies, banks and others to assist such parties in understanding the impact of
various items on our financial statements, some of which are recurring or
involve cash payments. We use this information in our analysis of the
performance of our business, excluding items we do not consider relevant to the
performance of our continuing operations. In addition, we use these measures to
define certain performance targets under our compensation programs.
"Adjusted EBITDA" is a non-GAAP measure defined by the Company as net income
available (loss attributable) to Tenet Healthcare Corporation common
shareholders before (1) the cumulative effect of changes in accounting
principle, (2) net income available (loss attributable) to noncontrolling
interests, (3) income (loss) from discontinued operations, net of tax,
(4) income tax benefit (expense), (5) gain (loss) from early extinguishment of
debt, (6) other non-operating income (expense), net, (7) interest expense,
(8) litigation and investigation (costs) benefit, net of insurance recoveries,
(9) net gains (losses) on sales, consolidation and deconsolidation of
facilities, (10) impairment and restructuring charges and acquisition-related
costs, (11) depreciation and amortization, and (12) income (loss) from divested
and closed businesses (i.e., our health plan businesses). Litigation and
investigation costs do not include ordinary course of business malpractice and
other litigation and related expense.
The Company believes the foregoing non-GAAP measure is useful to investors
and analysts because it presents additional information about the Company's
financial performance. Investors, analysts, Company management and the Company's
board of directors utilize this non-GAAP measure, in addition to GAAP measures,
to track the Company's financial and operating performance and compare the
Company's performance to peer companies, which utilize similar non-GAAP measures
in their presentations. The human resources committee of the Company's board of
directors also uses certain non-GAAP measures to evaluate management's
performance for the purpose of determining incentive compensation. The Company
believes that Adjusted EBITDA is a useful measure, in part, because certain
investors and analysts use both historical and projected Adjusted EBITDA, in
addition to GAAP and other non-GAAP measures, as factors in determining the
estimated fair value of shares of the Company's common stock. Company management
also regularly reviews the Adjusted EBITDA performance for each operating
segment. The Company does not use Adjusted EBITDA to measure liquidity, but
instead to measure operating performance. The non-GAAP Adjusted EBITDA
measure the Company utilizes may not be comparable to similarly titled measures
reported by other companies. Because this measure excludes many items that are
included in our financial statements, it does not provide a complete measure of
our operating performance. Accordingly, investors are encouraged to use GAAP
measures when evaluating the Company's financial performance.
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The following table shows the reconciliation of Adjusted EBITDA to net
income available to Tenet Healthcare Corporation common shareholders (the most
comparable GAAP term) for the three and six months ended June 30, 2020 and 2019:
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Net income available to
$
88
(81) (95) (147) (179)
Income (loss) from discontinued operations, net of tax - 2 (1) 10
Income from continuing operations 169 119 329 183
Income tax benefit (expense) (45) (33) 30 (53)
Loss from early extinguishment of debt (4) - (4) (47)
Other non-operating income (expense), net 2 (1) 3 -
Interest expense (255) (247) (498) (498)
Operating income 471 400 798 781
Litigation and investigation costs (2) (18) (4) (31)
Net gains (losses) on sales, consolidation and deconsolidation of facilities
1 (1) 3 (2)
Impairment and restructuring charges, and acquisition-related costs
(54) (36) (109) (55)
Depreciation and amortization (206) (214) (409) (422)
Loss from divested and closed businesses (i.e., the Company's
health plan businesses) - - - (1)
Adjusted EBITDA $ 732 $ 669 $ 1,317 $ 1,292
Net operating revenues $
3,648
- 1 - 1
Adjusted net operating revenues $
3,648
Net income available to
2.4 % 0.6 % 2.2 % 0.2 %
Adjusted EBITDA as % of adjusted net operating revenues
(Adjusted EBITDA margin) 20.1 % 14.7 % 16.1 % 14.2 %
LIQUIDITY AND CAPITAL RESOURCES
CASH REQUIREMENTS
There have been no material changes to our obligations to make future cash
payments under contracts, such as debt and lease agreements, and under
contingent commitments, such as standby letters of credit and minimum revenue
guarantees, as disclosed in our Annual Report, except for additional lease
obligations and the long-term debt transactions disclosed in Notes 1 and 6 to
our accompanying Condensed Consolidated Financial Statements.
At June 30, 2020 , using the last 12 months of Adjusted EBITDA, our ratio of
total long-term debt, net of cash and cash equivalent balances, to Adjusted
EBITDA was 4.49x. This ratio at June 30, 2020 was temporarily impacted by the
increase in cash received from advances from Medicare. We anticipate this ratio
will fluctuate from quarter to quarter based on earnings performance and other
factors, including the use of our revolving credit facility as a source of
liquidity and acquisitions that involve the assumption of long-term debt. We
seek to manage this ratio and increase the efficiency of our balance sheet by
following our business plan and managing our cost structure, including through
possible asset divestitures, and through other changes in our capital structure.
As part of our long-term objective to manage our capital structure, we may issue
equity or convertible securities, and we may seek to retire, purchase, redeem or
refinance some of our outstanding debt or equity securities, in each case
subject to prevailing market conditions, our liquidity requirements, operating
results, contractual restrictions and other factors. Our ability to achieve our
leverage and capital structure objectives is subject to numerous risks and
uncertainties, many of which are described in the Risk Factors section in Part
II of this report and our Q1'20 10-Q, as well as the Forward-Looking Statements
and Risk Factors sections in Part I of our Annual Report.
Our capital expenditures primarily relate to the expansion and renovation of existing facilities (including amounts to comply with applicable laws and regulations), equipment and information systems additions and replacements, introduction of
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new medical technologies, design and construction of new buildings, and various
other capital improvements, as well as commitments to make capital expenditures
in connection with acquisitions of businesses. Capital expenditures were
$288 million and $336 million in the six months ended June 30, 2020 and 2019,
respectively. We have reduced our planned capital expenditures for 2020 by
approximately 40%. We now anticipate that our capital expenditures for
continuing operations for the year ending December 31, 2020 will total
approximately $400 million to $450 million , including $136 million that was
accrued as a liability at December 31, 2019 .
Interest payments, net of capitalized interest, were
Income tax payments, net of tax refunds, were $5 million in the six months
ended June 30, 2020 compared to $13 million in the six months ended June 30,
2019 .
SOURCES AND USES OF CASH
Our liquidity for the six months ended
Our primary source of operating cash is the collection of accounts receivable. As such, our operating cash flow is impacted by levels of cash collections, as well as levels of implicit price concessions, due to shifts in payer mix and other factors.
Net cash provided by operating activities was
•$1.378 billion of cash advances received from Medicare pursuant to COVID-19 stimulus legislation;
•$674 million of cash received from federal and state grants, including the
•$89 million deferral of our payroll tax match in 2020 pursuant to COVID-19 stimulus legislation;
•An increase of
•The timing of other working capital items.
Net cash used in investing activities was $289 million for the six months
ended June 30, 2020 compared to $303 million for the six months ended June 30,
2019 . The 2020 amount included an increase in proceeds from sales of marketable
securities, long-term investments and other assets of $26 million . The 2019
period included proceeds from sales of facilities and other assets of
$40 million due to the sale of three hospitals and hospital-affiliated
operations in the Chicago area. Capital expenditures were $288 million and
$336 million in the six months ended June 30, 2020 and 2019, respectively.
Net cash provided by financing activities was $1.173 billion for the six months
ended June 30, 2020 compared to net cash used in financing activities of
$153 million for the six months ended June 30, 2019 . The 2020 amount included
proceeds from the issuance of $700 million aggregate principal amount of 7.500%
senior secured first lien notes due 2025 and $600 million aggregate principal
amount of 4.625% senior secured first lien notes due 2028. The 2020 amount also
included $104 million of cash advances from Medicare and $38 million of stimulus
grants received by our Ambulatory Care segment's non-consolidated affiliates, as
well as $142 million of payments for our purchases of $135 million aggregate
principal amount of our outstanding 8.125% senior unsecured notes due 2022. The
2019 amount included proceeds from the issuance of $1.5 billion aggregate
principal amount of 6.250% senior secured second lien notes due 2027, as well as
the payments for our purchases of $300 million aggregate principal amount of our
outstanding 6.750% senior notes due 2020, $750 million aggregate principal
amount of our outstanding 7.500% senior secured second lien notes due 2022, and
$468 million aggregate principal amount of our outstanding 5.500% senior
unsecured notes due 2019. The 2019 amount also included net borrowings under our
credit facility of $190 million .
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We record our equity securities and our debt securities classified as
available-for-sale at fair market value. The majority of our investments are
valued based on quoted market prices or other observable inputs. We have no
investments that we expect will be negatively affected by the current economic
conditions such that they will materially impact our financial condition,
results of operations or cash flows.
DEBT INSTRUMENTS, GUARANTEES AND RELATED COVENANTS
Credit Agreement.We have a senior secured revolving credit facility that, at
June 30, 2020 , provided for revolving loans in an aggregate principal amount of
up to $1.9 billion with a $200 million subfacility for standby letters of
credit. At June 30, 2020 , we had no cash borrowings outstanding under the
revolving credit facility, and we had less than $1 million of standby letters of
credit outstanding. Based on our eligible receivables, $1.757 billion was
available for borrowing under the revolving credit facility at June 30, 2020 . At
June 30, 2020 , we were in compliance with all covenants and conditions in our
senior secured revolving credit facility.
On April 24, 2020 , we amended our credit agreement (as amended, the "Credit
Agreement") to, among other things, (i) increase the aggregate revolving credit
commitments from $1.5 billion to $1.9 billion , subject to borrowing
availability, and (ii) increase the advance rate and raise limits on certain
eligible accounts receivable in the calculation of the borrowing base, in each
case, for an incremental period of 364 days. For additional information
regarding the Credit Agreement, see Note 6 to the accompanying Condensed
Consolidated Financial Statements.
Letter of Credit Facility. In March 2020 , we amended our letter of credit
facility (as amended, the "LC Facility") to extend the scheduled maturity date
of the LC Facility from March 7, 2021 to September 12, 2024 and to increase the
aggregate principal amount of standby and documentary letters of credit that
from time to time may be issued thereunder from $180 million to $200 million . On
July 29, 2020 , we further amended the LC Facility to increase the maximum
secured debt covenant from 4.00 to 1.00 on a quarterly basis up to 6.00 to 1.00
for the quarter ending March 31, 2021 , which maximum ratio will step down on a
quarterly basis through the quarter ending December 31, 2021 . Obligations under
the LC Facility are guaranteed and secured by a first-priority pledge of the
capital stock and other ownership interests of certain of our wholly owned
domestic hospital subsidiaries on an equal ranking basis with our senior secured
first lien notes. At June 30, 2020 , we were in compliance with all covenants and
conditions in our LC Facility. At June 30, 2020 , we had $88 million of standby
letters of credit outstanding under the LC Facility.
Senior Unsecured and Senior Secured Notes. In June 2020 , we purchased $135
million aggregate principal amount of our 8.125% senior unsecured notes due 2022
for $142 million . In connection with the purchase, we recorded a loss from early
extinguishment of debt of $8 million in the three months ended June 30, 2020 ,
primarily related to the write-off of associated unamortized issuance costs and
the difference between the purchase price and the par value of the notes. In
July 2020 , we purchased $104 million aggregate principal amount of our 8.125%
senior unsecured notes due 2022 for $109 million .
On June 16, 2020 , we sold $600 million aggregate principal amount of 4.625%
senior secured first lien notes, which will mature on June 15, 2028 (the
"2028 Senior Secured First Lien Notes"). We will pay interest on the 2028 Senior
Secured First Lien Notes semi-annually in arrears on June 15 and December 15 of
each year, commencing on December 15, 2020 .
On April 7, 2020 , we sold $700 million aggregate principal amount of 7.500%
senior secured first lien notes, which will mature on April 1, 2025 (the
"2025 Senior Secured First Lien Notes"). We will pay interest on the 2025 Senior
Secured First Lien Notes semi-annually in arrears on April 1 and October 1 of
each year, commencing on October 1, 2020 . A portion of the proceeds from the
sale of the 2025 Senior Secured First Lien Notes was used, after payment of fees
and expenses, to repay the $500 million aggregate principal amount of borrowings
outstanding under our Credit Agreement as of March 31, 2020 .
For additional information regarding our long-term debt, see Note 6 to the accompanying Condensed Consolidated Financial Statements and Note 7 to the Consolidated Financial Statements included in our Annual Report.
LIQUIDITY
Broad economic factors resulting from the COVID-19 pandemic, including
increased unemployment rates and reduced consumer spending, are impacting our
service mix, revenue mix and patient volumes. Business closings and layoffs in
the areas we operate may lead to increases in the uninsured and underinsured
populations and adversely affect demand for our services, as well as the ability
of patients to pay for services as rendered. Any increase in the amount of or
deterioration in the collectability of patient accounts receivable will
adversely affect our cash flows and results of operations. If general economic
conditions continue to deteriorate or remain uncertain for an extended period of
time, our liquidity and ability to repay our outstanding debt may be impacted.
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While demand for our services is expected to rebound in the future, we have taken, and continue to take, various actions to increase our liquidity and mitigate the impact of reductions in our patient volumes and operating revenues from the COVID-19 pandemic. InJune 2020 , we sold$600 million aggregate principal amount of our 2028 Senior Secured First Lien Notes. InApril 2020 , we sold$700 million aggregate principal amount of our 2025 Senior Secured First Lien Notes, a portion of the proceeds of which were used to repay borrowings outstanding under our Credit Agreement. In addition, we amended our Credit Agreement inApril 2020 to increase our borrowing availability and make certain changes with respect to the calculation of our borrowing base. We also cut our planned capital expenditures for 2020 by approximately 40%. Furthermore, we have decreased our employee headcount throughout the organization, and we have deferred certain operating expenses that are not expected to impact our response to COVID-19. In addition, we are reducing variable costs across the enterprise as a result of softening patient volumes due to the COVID-19 pandemic. We believe these actions, together with government relief packages, to the extent available to us, will help us to continue operating during the uncertainty caused by the COVID-19 pandemic. As more fully described under "Sources of Revenue for Our Hospital Operations Segment - Government Programs" above: •The Medicare Fee-for-Service accelerated and advanced payment program has been expanded. During the six months endedJune 30, 2020 , our hospitals and other providers applied for and received approximately$1.5 billion of accelerated payments. We expect to repay these advances within the next year. •BeginningMarch 27, 2020 , all employers may elect to defer payment of the 6.2% employerSocial Security tax throughDecember 31, 2020 . Deferred tax amounts are required to be paid in equal amounts over two years, with payments due inDecember 2021 andDecember 2022 . We expect that we will defer approximately$250 million of taxes in 2020 pursuant to this CARES Act provision. •To address the fiscal burdens on healthcare providers created by the COVID-19 public health emergency, the CARES Act and other legislation authorized$175 billion for theRelief Fund . In the three months endedJune 30, 2020 , we received cash payments of$712 million due to grants from theRelief Fund and state grant programs. InJuly 2020 , we received cash payments of$155 million from theRelief Fund . Payments from theRelief Fund are not loans and, therefore, they are not subject to repayment. However, as a condition to receiving distributions, providers must agree to certain terms and conditions, including, among other things, that the funds are being used for lost operating revenues and COVID-related costs, and that the providers will not seek collection of out-of-pocket payments from a COVID-19 patient that are greater than what the patient would have otherwise been required to pay if the care had been provided by an in-network provider. •EffectiveMay 1, 2020 throughDecember 31, 2020 , the 2% sequestration reduction on Medicare FFS and Medicare Advantage payments to hospitals, physicians and other providers authorized by the Sequestration Transparency Act of 2020 is suspended and will resume effectiveJanuary 2021 . The estimated impact of this change on our operations is an increase of approximately$67 million of revenues in 2020. •The scheduled reduction of$4 billion in federal Medicaid DSH allotments in FFY 2020, as mandated by the Affordable Care Act, is suspended untilDecember 1, 2020 . The projected impact of this change on our operations is an increase of approximately$60 million of revenues in 2020, which is not subject to repayment. From time to time, we expect to engage in additional capital markets, bank credit and other financing activities depending on our needs and financing alternatives available at that time. We believe our existing debt agreements provide flexibility for future secured or unsecured borrowings. Our cash on hand fluctuates day-to-day throughout the year based on the timing and levels of routine cash receipts and disbursements, including our book overdrafts, and required cash disbursements, such as interest payments. These fluctuations result in material intra-quarter net operating and investing uses of cash that have caused, and in the future will cause, us to use our Credit Agreement as a source of liquidity. We believe that existing cash and cash equivalents on hand, borrowing availability under our Credit Agreement, anticipated future cash provided by government relief packages and our operating activities should be adequate to meet our current cash needs. These sources of liquidity, in combination with any potential future debt incurrence, should also be adequate to finance planned capital expenditures, payments on the current portion of our long-term debt, payments to joint venture partners, including those related to put and call arrangements and other presently known operating needs. Long-term liquidity for debt service and other purposes will be dependent on the amount of cash provided by operating activities and, subject to favorable market and other conditions, the successful completion of future borrowings and potential refinancings. However, our cash requirements could be materially affected by the use of cash in acquisitions of businesses, repurchases of securities, the exercise of put rights or other exit options by our joint venture partners, and contractual commitments to fund capital expenditures in, or intercompany borrowings to, businesses we own. In addition, liquidity could be 59 -------------------------------------------------------------------------------- Table of Contents adversely affected by deterioration in our results of operations, including our ability to generate sufficient cash from operations, as well as by the various risks and uncertainties discussed in this section and other sections of this report and in our Annual Report and Q1'20 10-Q, including any costs associated with legal proceedings and government investigations.
We do not rely on commercial paper or other short-term financing arrangements nor do we enter into repurchase agreements or other short-term financing arrangements not otherwise reported in our balance sheets. In addition, we do not have significant exposure to floating interest rates given that all of our current long-term indebtedness has fixed rates of interest except for borrowings under our Credit Agreement.
OFF-BALANCE SHEET ARRANGEMENTS
We have no off-balance sheet arrangements that may have a current or future
material effect on our financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources, except for
$193 million of standby letters of credit outstanding and guarantees at June 30,
2020 .
CRITICAL ACCOUNTING ESTIMATES
In preparing our Condensed Consolidated Financial Statements in conformity
with GAAP, we must use estimates and assumptions that affect the amounts
reported in our Condensed Consolidated Financial Statements and accompanying
notes. We regularly evaluate the accounting policies and estimates we use. In
general, we base the estimates on historical experience and on assumptions that
we believe to be reasonable, given the particular circumstances in which we
operate. Actual results may vary from those estimates.
We consider our critical accounting estimates to be those that (1) involve
significant judgments and uncertainties, (2) require estimates that are more
difficult for management to determine, and (3) may produce materially different
outcomes under different conditions or when using different assumptions.
Our critical accounting estimates have not changed from the description provided in our Annual Report.
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