COMMUNITY HEALTH SYSTEMS, INC. You should read this discussion together with our condensed consolidated financial statements and the accompanying notes included herein.
Throughout this Form 10-Q, we refer toCommunity Health Systems, Inc. , or the Parent Company, and its consolidated subsidiaries in a simplified manner and on a collective basis, using words like "we," "our," "us" and the "Company". This drafting style is suggested by theSecurities and Exchange Commission , orSEC , and is not meant to indicate that the publicly traded Parent Company or any particular subsidiary of the Parent Company owns or operates any asset, business or property. The hospitals, operations and businesses described in this filing are owned and operated by distinct and indirect subsidiaries ofCommunity Health Systems, Inc. Executive Overview We are one of the largest publicly traded hospital companies inthe United States and a leading operator of general acute care hospitals and outpatient facilities in communities across the country. We provide healthcare services through the hospitals that we own and operate and affiliated businesses in non-urban and selected urban markets throughoutthe United States . We generate revenues by providing a broad range of general and specialized hospital healthcare services and outpatient services to patients in the communities in which we are located. As ofSeptember 30, 2021 , we owned or leased 84 hospitals, comprised of 82 general acute care hospitals and two stand-alone rehabilitation or psychiatric hospitals. As described in the Notes to Condensed Consolidated Financial Statements (Unaudited) in Part I, Item 1 of this Form 10-Q under the heading "Subsequent Events", we owned or leased 83 hospitals effectiveOctober 1, 2021 after giving effect to the hospital consolidation described therein. We are paid for our services by governmental agencies, private insurers and directly by the patients we serve. We previously disclosed that our portfolio rationalization and deleveraging strategy involving the divestiture of hospitals and non-hospital businesses had concluded. However, we continue to receive interest from potential acquirers for certain of our hospitals, and may, from time to time, consider selling additional hospitals or our unconsolidated equity interests in hospitals if we consider any such disposition to be in our best interests.
COVID-19 Pandemic
A novel strain of coronavirus causing the disease known as COVID-19 was first identified inDecember 2019 , and has spread throughout the world, including acrossthe United States . The Secretary of theU.S. Department of Health and Human Services , or HHS, has renewed the agency's declaration of a national public health emergency, which was originally declared inJanuary 2020 , due to the continued consequences of the COVID-19 pandemic. During the third quarter of 2021, the number of COVID-19 cases and hospitalizations increased inthe United States in comparison to earlier levels, and restrictive measures, including mask and vaccine requirements, were implemented or reinstituted by various government authorities and private businesses. As a provider of healthcare services, we are significantly affected by the public health and economic effects of the COVID-19 pandemic. The safety of our patients, physicians, nurses, and employees in the communities in which we serve remains our primary focus. We have been working with federal, state and local health authorities to respond to the COVID-19 pandemic in the communities we serve. Our hospitals, medical clinics, medical personnel, and employees have been actively caring for COVID-19 patients. Although we have implemented considerable safety measures, treatment of COVID-19 patients has associated risks, which may include the manner in which medical personnel perceive and respond to such risks. While our hospitals have not generally experienced major capacity constraints to date arising from the treatment of COVID-19 patients, there are hospitals inthe United States that have been overwhelmed in caring for COVID-19 patients, which has prevented such hospitals from treating all patients who seek care. One or more of our hospitals could be subject to such conditions in the future if a major COVID-19 outbreak occurs in a geographic region where any of our hospitals are located. We have incurred, and may continue to incur, certain increased expenses arising from the COVID-19 pandemic, including additional labor, supply chain, capital and other expenditures. Negative economic conditions and other factors resulting from the COVID-19 pandemic have affected, and may continue to affect, our service mix, revenue mix, payor mix and/or patient volumes, as well as our ability to collect outstanding receivables. Pandemic-related factors may continue to adversely affect demand for our services, as well as the ability of patients and other payors to pay for services rendered. We have observed deterioration in the collectability of patient accounts receivable from uninsured patients compared to pre-pandemic levels which, if sustained, may adversely affect our financial results and require an increased level of working capital. 26 -------------------------------------------------------------------------------- While we are not able to fully quantify the impact that the COVID-19 pandemic will have on our future financial results, we expect developments related to COVID-19 to continue to affect our financial performance. Moreover, the COVID-19 pandemic may otherwise have material adverse effects on our results of operations, financial position, and/or our cash flows if economic and/or public health conditions inthe United States deteriorate. The ultimate impact of the pandemic on our financial results will depend on, among other factors, the duration and severity of the pandemic, the volume of canceled or rescheduled procedures at our facilities, the volume of COVID-19 patients cared for across our health systems, the timing, availability and acceptance of effective medical treatments and vaccines, the spread of potentially more contagious and/or virulent forms of the virus, including any possible variants of the virus that may be resistant to currently available vaccines, and the impact of government actions and administrative regulation on the hospital industry and broader economy, including through existing and any future stimulus efforts as well as vaccine requirements. As discussed below under "Overview of Legislative Developments", we have received, and may continue to receive, payments and advances made available under the Coronavirus Aid, Relief, and Economic Security act, or the CARES Act, the Paycheck Protection Program and Health Care Enhancement Act, or the PPPHCE Act, the Consolidated Appropriations Act, 2021, or the CAA, the American Rescue Plan Act of 2021, or the ARPA, and other stimulus laws, which have been beneficial in partially mitigating the impact of the COVID-19 pandemic on our results of operation and financial position to date. The federal government may consider additional stimulus and relief efforts but we are unable to predict whether any additional stimulus measures will be enacted or their impact, if any. We are unable to assess the extent to which potential ongoing negative impacts on us arising from the COVID-19 pandemic will ultimately be offset by amounts received, and benefits which we may in the future receive, under the CARES Act, the PPPHCE Act, the CAA, the ARPA or any future stimulus measures.
Completed Divestiture and Acquisition Activity
During the nine months endedSeptember 30, 2021 , we completed the divestiture of five hospitals, including three which closed effectiveJanuary 1, 2021 (for these hospitals we received net proceeds at a preliminary closing onDecember 31, 2020 ). These five hospitals represented annual net operating revenues in 2020 of approximately$275 million and, including the net proceeds for the three hospital divestitures that preliminarily closed onDecember 31, 2020 , we received total net proceeds of approximately$28 million in connection with the disposition of these hospitals. During 2020, we completed the divestiture of 13 hospitals, including three which closed effectiveJanuary 1, 2020 (for these hospitals we received the net proceeds at a preliminary closing onDecember 31, 2019 ), but not including the divestiture of three hospitals noted in the prior paragraph which closed onJanuary 1, 2021 . These 13 hospitals represented annual net operating revenues in 2019 of approximately$1.2 billion and, including the net proceeds for the divestiture of three hospitals that preliminarily closed onDecember 31, 2019 , we received total net proceeds of approximately$845 million in connection with the disposition of these hospitals.
The following table provides a summary of hospitals that we divested during the
nine months ended
Licensed Effective
Hospital Buyer City, State Beds Date
2021 Divestitures:
Lea Regional Medical Covenant Health System Hobbs, NM 84 January 1,
Center 2021
Tennova Healthcare - Vanderbilt University Tullahoma, 135 January 1,
Tullahoma Medical Center TN 2021
Tennova Healthcare - Vanderbilt University Shelbyville, 60 January 1,
Shelbyville Medical Center TN 2021
Northwest Mississippi Delta Health System Clarksdale, 181 February
Medical Center MS 1, 2021
AllianceHealth Midwest SSM Health Care of Midwest 255 April 1,
Oklahoma City, OK 2021
2020 Divestitures:
Berwick Hospital Center Fayette Holdings, Inc. Berwick, PA 90 December
1, 2020
Brownwood Regional Medical Hendrick Health System Brownwood, 188 October
Center TX 27, 2020
Abilene Regional Medical Hendrick Health System Abilene, TX 231 October
Center 27, 2020
San Angelo Community Shannon Health System San Angelo, 171 October
Medical Center TX 24, 2020
Bayfront Health St. Orlando Health, Inc. St. 480 October 1,
Petersburg Petersburg, 2020
FL
Hill Regional Hospital AHRK Holdings, LLC Hillsboro, 25 August 1,
TX 2020
St. Cloud Regional Medical St. Cloud, 84 July 1,
Center Orlando Health, Inc. FL 2020
Northern Louisiana Medical
July 1 , Center Management, Inc. 2020 Shands Live Oak Regional HCA Healthcare, Inc. Live Oak, FL 25 May 1, Medical Center ("HCA") 2020 Shands Starke Regional HCA Starke, FL 49 May 1, Medical Center 2020
January 1 , Center Health System VA 2020 Southampton Memorial Bon Secours Mercy Franklin, VA 105 January 1, Hospital Health System 2020
January 1 , Medical Center Health System 2020 27
-------------------------------------------------------------------------------- While we previously disclosed that our formal portfolio rationalization program had concluded, we continue to receive interest from potential acquirers for certain of our hospitals, and may, from time to time, consider selling additional hospitals if we consider any such disposition to be in our best interests. We expect proceeds from any such divestitures to be used for general corporate purposes and capital expenditures.
During the nine months ended
As described in the Notes to Condensed Consolidated Financial Statements (Unaudited) in Part I, Item 1 of this Form 10-Q under the heading "Acquisitions and Divestitures", onJuly 30, 2021 , we sold our unconsolidated minority equity interests inMacon Healthcare, LLC , a joint venture with certain subsidiaries of HCA representing two hospitals inMacon, Georgia , in which we owned a 38% interest. We received$110 million in cash in connection with the sale of these equity interests and recognized a pre-tax gain of approximately$26 million on the sale of our investments in unconsolidated affiliates during the three and nine months endedSeptember 30, 2021 .
Overview of Operating Results
Net operating revenues remained consistent at$3.1 billion for the three month periods endedSeptember 30, 2021 and 2020. On a same-store basis, net operating revenues for the three months endedSeptember 30, 2021 increased$205 million . We had net income of$144 million during the three months endedSeptember 30, 2021 , compared to$128 million for the three months endedSeptember 30, 2020 . Net income for the three months endedSeptember 30, 2021 included the following:
• an after-tax charge of
divested businesses based on their estimated fair values, and
• an after-tax benefit of
unconsolidated affiliates.
Net income for the three months ended
• an after-tax benefit of
debt,
• an after-tax charge of $1 million for the impairment of goodwill andlong-lived assets of divested businesses based on their estimated fair values,
net of gains recognized upon the sale of certain facilities, and
• an after-tax charge of
restructuring costs.
Consolidated inpatient admissions for the three months endedSeptember 30, 2021 , decreased 5.5%, compared to the three months endedSeptember 30, 2020 . Consolidated adjusted admissions for the three months endedSeptember 30, 2021 , decreased 3.4%, compared to the three months endedSeptember 30, 2020 . Same-store inpatient admissions for the three months endedSeptember 30, 2021 , increased 2.8%, compared to the three months endedSeptember 30, 2020 , and same-store adjusted admissions for the three months endedSeptember 30, 2021 , increased 4.7%, compared to the three months endedSeptember 30, 2020 .
Our net operating revenues for the nine months ended
We had net income of$146 million during the nine months endedSeptember 30, 2021 , compared to$254 million for the nine months endedSeptember 30, 2020 . Net income for the nine months endedSeptember 30, 2021 included the following:
• an after-tax charge of
debt,
• an after-tax charge of
divested businesses based on their estimated fair values, net of gains
recognized upon the sale of certain businesses, and
• an after-tax benefit of
unconsolidated affiliates.
Net income for the nine months ended
28
--------------------------------------------------------------------------------
• an after-tax charge of
and related costs,
• an after-tax benefit of
debt,
• an after-tax charge of$58 million for the impairment of goodwill and long-lived assets of divested businesses based on their estimated fair values, net of gains recognized upon the sale of certain facilities,
• an after-tax charge of
other restructuring costs,
• an after-tax charge of $1 million for legal expenses related to the
settlement of certain litigation matters related to Health Management
Associates , or HMA, which existed on or prior to July 29, 2013 , and
• income of approximately
the release of federal and state valuation allowances on IRC Section 163(j)
interest carryforwards as a result of an increase to the deductible interest
expense allowed for 2019 and 2020 under the CARES Act that was enacted
during the nine months ended
Consolidated inpatient admissions for the nine months endedSeptember 30, 2021 , decreased 5.5%, compared to the nine months endedSeptember 30, 2020 . Consolidated adjusted admissions for the nine months endedSeptember 30, 2021 , decreased 2.4%, compared to the nine months endedSeptember 30, 2020 . Same-store inpatient admissions for the nine months endedSeptember 30, 2021 , increased 4.3%, compared to the nine months endedSeptember 30, 2020 , and same-store adjusted admissions for the nine months endedSeptember 30, 2021 , increased 7.3%, compared to the nine months endedSeptember 30, 2020 . Self-pay revenues represented approximately 1.3% and 0.5% of net operating revenues for the three months endedSeptember 30, 2021 and 2020, respectively, and 0.9% and (0.1)% for the nine months endedSeptember 30, 2021 and 2020, respectively. The amount of foregone revenue related to providing charity care services as a percentage of net operating revenues was approximately 6.9% and 9.1% for the three months endedSeptember 30, 2021 and 2020, respectively, and 7.2% and 8.7% for the nine months endedSeptember 30, 2021 and 2020, respectively. Direct and indirect costs incurred in providing charity care services as a percentage of net operating revenues was approximately 0.8% and 1.1% for the three months endedSeptember 30, 2021 and 2020, respectively, and 0.8% and 1.0% for the nine months endedSeptember 30, 2021 and 2020, respectively.
Overview of Legislative Developments
The U.S. Congress and certain state legislatures have introduced and passed a large number of proposals and legislation designed to make major changes in the healthcare system, including changes that have impacted access to health insurance. The most prominent of these efforts, the Affordable Care Act, affected how healthcare services are covered, delivered and reimbursed. The Affordable Care Act increased health insurance coverage through a combination of public program expansion and private sector health insurance reforms and mandated that substantially allU.S. citizens maintain health insurance. The Affordable Care Act also made a number of changes to Medicare and Medicaid, such as a productivity offset to the Medicare market basket update and reductions to the Medicare and Medicaid disproportionate share hospital, or DSH, payments. However, reductions to DSH payments have been delayed by the CAA through 2023. The Affordable Care Act has been subject to legislative and regulatory changes and court challenges and, although the current presidential administration has indicated its intent to protect the Affordable Care Act, it is possible that there may be continued changes to the law, its implementation or its interpretation. For example, final rules issued in 2018 expand availability of association health plans and allow the sale of short-term, limited-duration health plans, neither of which are required to cover all of the essential health benefits mandated by the Affordable Care Act. Additionally, effectiveJanuary 1, 2019 , the financial penalty associated with the individual mandate was eliminated as part of the 2017 tax reform legislation. This change resulted in legal challenges to the constitutionality of the individual mandate and validity of the Affordable Care Act as a whole. However, inJune 2021 , theU.S. Supreme Court determined that the plaintiffs lacked standing, allowing the law to remain in place. Nonetheless, the elimination of the individual mandate penalty and other changes may impact the number of individuals that elect to obtain public or private health insurance or the scope of such coverage, if purchased. Of critical importance to us is the potential impact of any changes specific to the Medicaid program, including the funding and expansion provisions of the Affordable Care Act or any subsequent legislation or agency initiatives. Historically, the states with the greatest reductions in the number of uninsured adult residents have expanded Medicaid. A number of states have opted out of the Medicaid coverage expansion provisions, but could ultimately decide to expand their programs at a later date. Of the 16 states in which we operated hospitals as ofSeptember 30, 2021 , nine states have taken action to expand their Medicaid programs. At this time, the other seven states have not, includingFlorida ,Alabama ,Tennessee andTexas , where we operated a significant number of hospitals as ofSeptember 30, 2021 . Some states use, or have applied to use, waivers granted by theCenters for Medicare and Medicaid Services , or CMS, to implement expansion, impose different eligibility or enrollment conditions, or otherwise implement programs that vary from federal standards. 29 -------------------------------------------------------------------------------- We believe that the Affordable Care Act has had a positive impact on net operating revenues and income as the result of the expansion of private sector and Medicaid coverage that has occurred. However, other provisions of the Affordable Care Act, such as requirements related to employee health insurance coverage and changes to Medicare and Medicaid reimbursement, have increased our operating costs or adversely impacted the reimbursement we receive. Legislative and executive branch efforts related to healthcare reform could result in increased prices for consumers purchasing health insurance coverage, or destabilize insurance markets. Some current initiatives, requirements and proposals, including requirements aimed at price transparency and out-of-network charges, may impact prices and the relationships between hospitals and insurers. In addition, members ofCongress have proposed measures that would expand government-sponsored coverage, including single-payor models, and some states have implemented or are considering public health insurance options. It is difficult to predict the ongoing effect of the Affordable Care Act due to executive orders, changes to the law's implementation, clarifications and modifications resulting from the rule-making process, judicial interpretations resulting from court challenges to its interpretation, whether and how many states ultimately decide to expand Medicaid coverage, the number of uninsured who elect to purchase health insurance coverage, budgetary issues at federal and state levels, and efforts to change or repeal the statute. We may not be able to fully realize the positive impact the Affordable Care Act may otherwise have on our business, results of operations, cash flow, capital resources and liquidity. We cannot predict whether we will be able to modify certain aspects of our operations to offset any potential adverse consequences from the Affordable Care Act or the impact of any alternative provisions that may be adopted. In recent years, a number of laws, including the Affordable Care Act and Medicare Access and CHIP Reauthorization Act of 2015, or MACRA, have promoted shifting from traditional fee-for-service reimbursement models to alternative payment models that tie reimbursement to quality and cost of care. CMS currently administers various accountable care organizations and bundled payment demonstration projects and has indicated that it will continue to pursue similar initiatives. However, the COVID-19 pandemic may impact provider performance and data reporting under these initiatives. CMS has temporarily modified requirements of certain programs by, for example, implementing special scoring and payment policies intended to mitigate negative impacts of the public health emergency on hospitals participating in the Hospital Value-Based Purchasing Program. As a result of the COVID-19 pandemic, federal and state governments have passed legislation, promulgated regulations, and taken other administrative actions intended to assist healthcare providers in providing care to COVID-19 and other patients during the public health emergency. These measures include temporary relief from Medicare conditions of participation requirements for healthcare providers, temporary relaxation of licensure requirements for healthcare professionals, temporary relaxation of privacy restrictions for telehealth remote communications, promoting use of telehealth by temporarily expanding the scope of services for which Medicare reimbursement is available, and limited waivers of fraud and abuse laws for activities related to COVID-19 during the public health emergency period. Sources of COVID-19 relief include the CARES Act, which was enacted onMarch 27, 2020 , the PPPHCE Act, which was enacted onApril 24, 2020 , the CAA, which was enacted onDecember 27, 2020 , and the ARPA, which was enacted onMarch 11, 2021 . In total, these stimulus laws authorize over$178 billion in funding to be distributed through the PHSSEF to eligible providers, including public entities and Medicare- and/or Medicaid-enrolled providers. PHSSEF payments are intended to compensate healthcare providers for lost revenues and incremental expenses incurred in response to the COVID-19 pandemic and are not required to be repaid, provided that recipients attest to and comply with certain terms and conditions, including limitations on balance billing, not using PHSSEF funds to reimburse expenses or losses that other sources have been or are obligated to reimburse and audit and reporting requirements. In addition, the CARES Act expanded the Medicare Accelerated and Advance Payment Program to increase cash flow to providers impacted by the COVID-19 pandemic. Inpatient acute care hospitals were able to request accelerated payment of up to 100% of their Medicare payment amount for a six-month period. The Medicare Accelerated and Advanced Payment Program payments are advances that providers must repay. Providers are required to repay accelerated payments beginning one year after the payment was issued. After such one-year period, Medicare payments owed to providers will be recouped according to the repayment terms. The repayment terms specify that for the first 11 months after repayment begins, repayment will occur through an automatic recoupment of 25% of Medicare payments otherwise owed to the provider. At the end of the eleven-month period, recoupment will increase to 50% for six months. At the end of the six months (or 29 months from the receipt of the initial accelerated payment), Medicare will issue a letter for full repayment of any remaining balance, as applicable. In such event, if payment is not received within 30 days, interest will accrue at the annual percentage rate of 4% from the date the letter was issued, and will be assessed for each full 30-day period that the balance remains unpaid. The CARES Act and related legislation include other provisions offering financial relief, for example suspending the Medicare sequestration payment adjustment fromMay 1, 2020 throughDecember 31, 2021 , which would have otherwise reduced payments to Medicare providers by 2% as required by the Budget Control Act of 2011 (but also extending sequestration through 2030). These laws also delay scheduled reductions to Medicaid DSH payments, provide a 20% add-on to the inpatient PPS DRG rate for COVID-19 patients for the duration of the public health emergency, and permit the deferral of payment of the employer portion of social security 30 -------------------------------------------------------------------------------- taxes betweenMarch 27, 2020 andDecember 31, 2020 , with 50% of the deferred amount dueDecember 31, 2021 and the remaining 50% dueDecember 31, 2022 . However, in addition to providing funding for healthcare providers, the ARPA increases the federal budget deficit in a manner that triggers an additional statutorily mandated sequestration under the Pay-As-You-Go Act of 2010, or PAYGO Act. As a result, absent congressional action, Medicare spending will be reduced by up to 4% in fiscal year 2022, to begin to take effect inJanuary 2022 , in addition to the existing sequestration requirements of the Budget Control Act of 2011. ThroughSeptember 30, 2021 , net of amounts that have been repaid to the respective federal, state, and local agency, we received approximately$709 million in payments through the PHSSEF and various state and local programs on a cumulative basis since their enactment. Of the net amount received to-date, approximately$705 million was received during the year endedDecember 31, 2020 and the remainder was received during the nine months endedSeptember 30, 2021 . DuringOctober 2021 , we submitted a combined application for Phase 4 of the CARES Act, or PRF Phase 4, and amounts appropriated by the ARPA for providers serving rural healthcare patients, or ARP Rural. No amounts have been received by us for the PRF Phase 4 or ARP Rural programs as of the date of this Form 10-Q and we are not able to predict the extent to which we may receive amounts pursuant to such programs, if any. The estimate of the amount of payments received through the PHSSEF or state and local programs for which we are reasonably assured of meeting the underlying terms and conditions is updated each reporting period and is based on, among other things, the CARES Act and subsequent relief legislation, various Post-Payment Notice of Reporting Requirements issued by HHS during the period, responses to all applicable frequently asked questions and other interpretative guidance as published by HHS, expenses incurred attributable to coronavirus, our results of operations during such period as compared to our 2020 budget and the allocation of general and targeted fund distribution payments among subsidiaries during such period. The PHSSEF and state and local program payments recognized to-date did not impact net operating revenues, and had a positive impact on net income attributable toCommunity Health Systems, Inc. common stockholders during the three and nine months endedSeptember 30, 2021 , in the amount of$14 million and$77 million , respectively, and$337 million during the nine months endedSeptember 30, 2020 . No pandemic relief funds were recognized during the three months endedSeptember 30, 2020 . Amounts received through the PHSSEF or state and local programs that have not yet been recognized or otherwise have not been refunded to HHS are included within accrued liabilities-other in the condensed consolidated balance sheet, and such unrecognized amounts may be returned to HHS or the respective state or local agency, as applicable, or may be recognized in future periods if the underlying conditions for recognition are reasonably assured of being met. HHS' interpretation of the underlying terms and conditions of such PHSSEF payments, including auditing and reporting requirements, continues to evolve. InJune 2021 , HHS issued guidance that set forth deadlines for using and reporting on the use of PHSSEF funds, depending on the dates on which the funds were received. Additional guidance or new and amended interpretations of existing guidance on the terms and conditions of such PHSSEF payments may result in changes in our estimate of amounts for which the terms and conditions are reasonably assured of being met, and any such changes may be material. Additionally, any such changes may result in our inability to recognize additional PHSSEF payments or may result in the derecognition of amounts previously recognized, which (in any such case) may be material. In addition, to the extent that any unrecognized PHSSEF payments that have been or may be received by us do not qualify for reimbursement based on future operations, we may be required to return such unrecognized payments to HHS. With respect to the Medicare Accelerated and Advanced Payment Program, we received Medicare accelerated payments of approximately$1.2 billion inApril 2020 . No additional Medicare accelerated payments have been received by us since such time and because CMS is no longer accepting new applications for accelerated payments, we do not expect to receive additional Medicare accelerated payments. CMS began recouping Medicare accelerated payments inApril 2021 , and as ofSeptember 30, 2021 , approximately$249 million of accelerated payments previously received by us have been recouped by CMS. Additionally, approximately$18 million and$77 million of amounts previously received were repaid to CMS or assumed by buyers related to hospitals we divested during the nine months endedSeptember 30, 2021 and the year endedDecember 31, 2020 , respectively. As ofSeptember 30, 2021 , approximately$814 million of Medicare accelerated payments are reflected within accrued liabilities-other in the condensed consolidated balance sheet. As described in the Notes to Condensed Consolidated Financial Statements (Unaudited) in Part I, Item 1 of this Form 10-Q under the heading "Subsequent Events", the outstanding balance of Medicare accelerated payments of$814 million as ofSeptember 30, 2021 was repaid in full to CMS inOctober 2021 . There is still a high degree of uncertainty surrounding the implementation of the CARES Act and other stimulus legislation. In addition, the public health emergency continues to evolve. Some of the measures allowing for flexibility in delivery of care and various financial supports for health care providers are available only for the duration of the public health emergency, and it is unclear whether or for how long the public health emergency declaration will be extended. The current declaration expiresJanuary 16, 2022 . The HHS Secretary may choose to renew the declaration for successive 90-day periods for as long as the emergency continues to exist and may terminate the declaration whenever he determines that the public health emergency no longer exists, but has indicated that HHS will provide states with 60 days' notice prior to termination of the declaration. The federal government may consider additional stimulus and relief efforts, but we are unable to predict whether additional stimulus measures will be enacted or their impact on us. There can be no assurance as to the total amount of financial and other types of assistance that we will receive under the CARES Act, 31
-------------------------------------------------------------------------------- other enacted stimulus legislation, or future measures, if any, and it is difficult to predict the impact of such measures on our operations or how they will affect operations of our competitors. Further, there can be no assurance that the terms of provider relief funding or other programs will not change or be interpreted in ways that affect our funding or eligibility to participate or our ability to comply with applicable requirements and retain amounts received. We continue to assess the potential impact of the CARES Act and other enacted stimulus legislation, the potential impact of future stimulus measures, if any, and the impact of other laws, regulations, and guidance related to COVID-19 on our business, results of operations, financial condition and cash flows. InSeptember 2021 , as part of its plan for responding to the COVID-19 pandemic, the current presidential administration directed theOccupational Safety and Health Administration , orOSHA , to draft a rule which would require all employers with 100 or more employees to require their workforce to be fully vaccinated or, alternatively, to provide a negative COVID test result on a weekly basis.OSHA has drafted a rule (in the form of an emergency temporary standard) to implement this mandate, which is currently subject to review. In addition, CMS is in the process of preparing an interim final rule requiring COVID-19 vaccinations for workers in most health care settings that receive Medicare or Medicaid reimbursement, including clinical staff, individuals providing services under arrangements, volunteers, and staff who are not involved in direct patient care. Finally, some states have implemented or may implement in the future, vaccine mandates with respect to healthcare personnel. It is currently not possible to predict the impact that these rules may have on us. However, these rules, if or when they become effective, could result in the loss of personnel who are unvaccinated, including at our hospitals and other healthcare facilities, in a manner that adversely affects us. InJune 2019 , theU.S. Supreme Court ruled in Azar v.Allina Health Services that HHS failed to comply with statutory notice and comment rulemaking procedures before announcing an earlier policy related to DSH payments made under Medicare to hospitals. In response to this adverse ruling, CMS proposed a new rule inAugust 2020 in an attempt to retroactively cure the underlying procedural errors cited by theU.S. Supreme Court as the basis in their decision. CMS's action has introduced uncertainty regarding the potential outcomes from theSupreme Court ruling, and the proposed rule has resulted in further litigation. If HHS or CMS are unsuccessful in their attempt to assert the proposed rule or another legal basis for their policy, one potential outcome is the federal government could be required to reimburse hospitals, including our affiliated hospitals, for Medicare DSH payments which otherwise would have been payable over certain prior time periods absent the enactment of this policy. While the ruling in Allina was specific to the DSH payments calculated for federal fiscal year 2012 for the plaintiff hospitals, we believe that, because of the precedent of this ruling, prior time periods with the potential for higher DSH payments, including federal fiscal years 2005 to 2013, could be impacted. There continues to be uncertainty regarding the extent to which, if any, Medicare DSH payments will be remitted to our affiliated hospitals as the result of Allina and subsequent litigation, and, if so, the timing of any such payments. Litigants in lawsuits challenging the proposed rule are seeking such relief. We anticipate that if it is ultimately determined that our affiliated hospitals are entitled to receive such Medicare DSH payments for these prior time periods, these payments could have a material positive impact on a non-recurring basis in any future period in which net income is recognized in respect thereof as well as on our cash flows from operations in any future period in which these payments are received. The Corporate Integrity Agreement, or CIA, to which we have been subject, expired inSeptember 2021 . However, we are still subject to final audit and reporting requirements under the terms of the CIA. In connection with these final audit and reporting requirements, it remains possible that we will become subject to further action by theOffice of Inspector General , or OIG, which could include the imposition of civil monetary penalties and/or the extension of the term of the CIA. For additional information regarding the terms of the CIA, see pages 20-21 of the 2020 Form 10-K. As a result of our current levels of cash, funds we have received and may in the future receive under the CARES Act, other enacted stimulus legislation and any future stimulus measures, available borrowing capacity, long-term outlook on our debt repayments, the refinancing of certain of our notes, proceeds from the sale of hospitals and the continued projection of our ability to generate cash flows, we anticipate that we will be able to invest the necessary capital in our business over the next twelve months. We believe there continues to be ample opportunity to strengthen our market share in substantially all of our markets by decreasing the need for patients to travel outside their communities for healthcare. Furthermore, we will continue to strive to improve operating efficiencies and procedures in order to improve the performance of our hospitals. 32 --------------------------------------------------------------------------------
Sources of Revenue
The following table presents the approximate percentages of net operating revenues by payor source for the periods indicated. The data for the periods presented are not strictly comparable due to the effect that hospital acquisitions and divestitures have had on these statistics.
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Medicare 21.0 % 23.1 % 21.7 % 24.1 %
Medicaid 13.2 13.4 13.4 13.5
Managed Care and other third-party payors 64.5 63.0 64.0 62.5
Self-pay 1.3 0.5 0.9 (0.1 )
Total 100.0 % 100.0 % 100.0 % 100.0 %
As shown above, we receive a substantial portion of our revenues from the
Medicare and Medicaid programs. Included in Managed Care and other third-party
payors is operating revenues from insurance companies with which we have
insurance provider contracts, Medicare managed care, insurance companies for
which we do not have insurance provider contracts, workers' compensation
carriers and non-patient service revenue, such as rental income and cafeteria
sales. In the future, we generally expect the portion of revenues received from
the Medicare and Medicaid programs to increase over the long-term due to the
general aging of the population and the impact of the Affordable Care Act. The
Affordable Care Act has increased the number of insured patients in states that
have expanded Medicaid, which in turn, has reduced the percentage of revenues
from self-pay patients. In addition, there has been a trend toward increased
enrollment in Medicare and Medicaid managed care, which may adversely affect our
operating revenue. We may also be impacted by regulatory requirements imposed on
insurers, such as minimum medical-loss ratios and specific benefit requirements.
Furthermore, in the normal course of business, managed care programs, insurance
companies and employers actively negotiate the amounts paid to hospitals. Our
relationships with payors may be impacted by price transparency initiatives and
out-of-network billing restrictions, including those in the No Surprises Act,
which takes effect January 1, 2022 . There can be no assurance that we will
retain our existing reimbursement arrangements or that these third-party payors
will not attempt to further reduce the rates they pay for our services.
Net operating revenues include amounts estimated by management to be
reimbursable by Medicare and Medicaid under prospective payment systems and
provisions of cost-based reimbursement and other payment methods. In addition,
we are reimbursed by non-governmental payors using a variety of payment
methodologies. Amounts we receive for the treatment of patients covered by
Medicare, Medicaid and non-governmental payors are generally less than our
standard billing rates. We account for the differences between the estimated
program reimbursement rates and our standard billing rates as contractual
allowance adjustments, which we deduct from gross revenues to arrive at net
operating revenues. Final settlements under some of these programs are subject
to adjustment based on administrative review and audit by third parties. We
account for adjustments to previous program reimbursement estimates as
contractual allowance adjustments and report them in the periods that such
adjustments become known. Contractual allowance adjustments related to final
settlements and previous program reimbursement estimates impacted net operating
revenues and net income by an insignificant amount in each of the three and
nine-month periods ended September 30, 2021 and 2020.
The payment rates under the Medicare program for hospital inpatient and
outpatient acute care services are based on a prospective payment system,
depending upon the diagnosis of a patient's condition. These rates are indexed
for inflation annually, although increases have historically been less than
actual inflation. On August 13, 2021 , CMS published the final rule to increase
this index by 2.7% for hospital inpatient acute care services that are
reimbursed under the prospective payment system, beginning October 1, 2021 .
Together with other changes to payment policies, the CMS final rule is expected
to yield an average 2.5% increase in reimbursement for hospital inpatient acute
care services. Hospitals that do not submit required patient quality data are
subject to a reduction in payments. We are complying with this data submission
requirement. Payments may also be affected by various other adjustments, such as
admission and medical review criteria for inpatient services commonly known as
the "two midnight rule." This rule limits when services to Medicare
beneficiaries are payable as inpatient hospital services. Reductions in the rate
of increase or overall reductions in Medicare reimbursement may cause a decline
in the growth of our net operating revenues.
Payment rates under the Medicaid program vary by state. In addition to the base
payment rates for specific claims for services rendered to Medicaid enrollees,
several states utilize supplemental reimbursement programs to make separate
payments that are not specifically tied to an individual's care, some of which
offset a portion of the cost of providing care to Medicaid and indigent
patients. These programs are designed with input from CMS and are funded with a
combination of state and federal resources, including, in certain instances,
fees or taxes levied on the providers. The programs are generally authorized for
a specified period of time and require CMS's approval to be extended. We are
unable to predict whether or on what terms CMS will extend the supplemental
programs in the states in which we operate. Under these supplemental programs,
we recognize revenue and related expenses in the
33
--------------------------------------------------------------------------------period in which amounts are estimable and collection is reasonably assured. Reimbursement under these programs is reflected in net operating revenues and included as Medicaid revenue in the table above, and fees, taxes or other program related costs are reflected in other operating expenses.
Results of Operations
Our hospitals offer a variety of services involving a broad range of inpatient
and outpatient medical and surgical services. These include general acute care,
emergency room, general and specialty surgery, critical care, internal medicine,
obstetrics, diagnostic services, psychiatric and rehabilitation services.
Historically, the strongest demand for hospital services generally occurs during
January through April and the weakest demand for these services generally occurs
during the summer months. Accordingly, eliminating the effects of new
acquisitions and/or divestitures, our net operating revenues and earnings are
historically highest during the first quarter and lowest during the third
quarter. As previously noted, the COVID-19 pandemic has disrupted the pattern of
demand for services we provide.
The following tables summarize, for the periods indicated, selected operating
data.
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Operating results, as a percentage of
net operating revenues:
Net operating revenues 100.0 % 100.0 % 100.0 % 100.0 %
Operating expenses (a) (84.7 ) (86.7 ) (84.5 ) (86.5 )
Depreciation and amortization (4.4 ) (4.4 ) (4.5 ) (4.9 )
Impairment and (gain) loss on sale of
businesses, net - 0.2 (0.3 ) (0.6 )
Income from operations 10.9 9.1 10.7 8.0
Interest expense, net (6.9 ) (8.2 ) (7.3 ) (9.0 )
(Loss) gain from early extinguishment of
debt - 3.7 (0.9 ) 1.3
Gain on sale of investments in
unconsolidated affiliates 0.8 - 0.3 -
Equity in earnings of unconsolidated
affiliates 0.1 0.1 0.2 0.1
Income before income taxes 4.9 4.7 3.0 0.4
(Provision for) benefit from income
taxes (0.3 ) (0.6 ) (1.4 ) 2.5
Net income 4.6 4.1 1.6 2.9
Less: Net income attributable to
noncontrolling interests (1.0 ) (0.5 ) (1.0 ) (0.6 )
Net income attributable to Community
Health
Systems, Inc. stockholders 3.6 % 3.6 % 0.6 % 2.3 %
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Percentage (decrease) increase from
prior year:
Net operating revenues (0.4 )% (3.7 )% 5.4 % (12.6 )%
Admissions (b) (5.5 ) (13.0 ) (5.5 ) (16.6 )
Adjusted admissions (c) (3.4 ) (18.0 ) (2.4 ) (20.0 )
Average length of stay (d) 8.5 9.3 6.5 2.2
Net income attributable to Community
Health
Systems, Inc. (0.9 ) 758.8 (74.0 ) 166.2
Same-store percentage increase
(decrease) from prior year (e):
Net operating revenues 7.1 % 2.9 % 14.8 % (6.3 )%
Admissions (b) 2.8 (6.2 ) 4.3 (9.8 )
Adjusted admissions (c) 4.7 (11.5 ) 7.3 (13.5 )
(a) Operating expenses include salaries and benefits, supplies, other operating
expenses, government and other legal settlements and related costs, lease
cost and rent, net of the reduction in operating expenses through September
30, 2021 and 2020, resulting from the recognition of pandemic relief funds.
(b) Admissions represents the number of patients admitted for inpatient
treatment.
(c) Adjusted admissions is a general measure of combined inpatient and outpatient
volume. We computed adjusted admissions by multiplying admissions by gross
patient revenues and then dividing that number by gross inpatient revenues.
34
--------------------------------------------------------------------------------(d) Average length of stay represents the average number of days inpatients stay
in our hospitals.
(e) Excludes information for businesses sold or closed during 2020 and the nine
months ended
Items (b) - (e) are metrics used to manage our performance. These metrics provide useful insight to investors about the volume and acuity of services we provide, which aid in evaluating our financial results.
Three Months Ended
Net operating revenues remained consistent at$3.1 billion for the three month periods endedSeptember 30, 2021 and 2020. Net operating revenues on a same-store basis from hospitals that were operated throughout both periods increased$205 million , or 7.1%, during the three months endedSeptember 30, 2021 , as compared to the three months endedSeptember 30, 2020 . Increases in net operating revenues, on a same-store basis, for the three months endedSeptember 30, 2021 compared to 2020, primarily reflect increased volumes and higher acuity during the 2021 period. Non-same-store net operating revenues decreased$216 million during the three months endedSeptember 30, 2021 , in comparison to the prior year period, with the decrease attributable primarily to the divestiture of hospitals during 2020 and 2021. On a consolidated basis, inpatient admissions decreased by 5.5% during the three months endedSeptember 30, 2021 as compared to the three months endedSeptember 30, 2020 . Also on a consolidated basis, adjusted admissions decreased by 3.4% during the three months endedSeptember 30, 2021 as compared to the three months endedSeptember 30, 2020 . On a same-store basis, net operating revenues per adjusted admission increased 2.3%, while inpatient admissions increased by 2.8% and adjusted admissions increased by 4.7% for the three months endedSeptember 30, 2021 , compared to the three months endedSeptember 30, 2020 . All operating expense calculations, as a percentage of net operating revenues, were impacted by the net effect of divestitures and the aforementioned increase in same-store net operating revenues. Operating costs and expenses, as a percentage of net operating revenues, decreased from 90.9% during the three months endedSeptember 30, 2020 to 89.1% during the three months endedSeptember 30, 2021 . Operating costs and expenses, excluding depreciation and amortization and impairment and (gain) loss on sale of businesses, as a percentage of net operating revenues, decreased from 86.7% for the three months endedSeptember 30, 2020 to 84.7% for the three months endedSeptember 30, 2021 . Salaries and benefits, as a percentage of net operating revenues, decreased from 43.7% for the three months endedSeptember 30, 2020 to 42.9% for the three months endedSeptember 30, 2021 . Supplies, as a percentage of net operating revenues, increased from 16.7% for the three months endedSeptember 30, 2020 to 17.0% for the three months endedSeptember 30, 2021 , primarily due to an increase in our expenses associated with COVID-19 related pharmaceuticals. Other operating expenses, as a percentage of net operating revenues, decreased from 23.6% for the three months endedSeptember 30, 2020 to 23.0% for the three months endedSeptember 30, 2021 . Lease cost and rent, as a percentage of net operating revenues, decreased from 2.7% for the three months endedSeptember 30, 2020 to 2.4% for the three months endedSeptember 30, 2021 . Pandemic relief funds, as a percentage of net operating revenues, was (0.6)% for the three months endedSeptember 30, 2021 , compared to 0.0% for the three months endedSeptember 30, 2020 .
Depreciation and amortization, as a percentage of net operating revenues,
remained consistent at 4.4% for both of the three-month periods ended
Impairment and (gain) loss on sale of businesses, net was expense of
Interest expense, net, decreased by$41 million to$216 million for the three months endedSeptember 30, 2021 compared to$257 million for the three months endedSeptember 30, 2020 . This was primarily due to our debt refinancing activities in 2020 and 2021 as discussed further in Capital Resources. No (gain) loss from early extinguishment of debt was recognized during the three months endedSeptember 30, 2021 . Gain from early extinguishment of debt of$115 million was recognized during the three months endedSeptember 30, 2020 , as a result of extinguishment of a portion of certain series of our outstanding notes through open market repurchases. The pre-tax gain on sale of investments in unconsolidated affiliates of$26 million was recognized during the three months endedSeptember 30, 2021 , resulting from the sale of our minority equity interests inMacon Healthcare, LLC , a joint venture with certain subsidiaries of HCA representing two hospitals inMacon, Georgia , in which we owned a 38% interest.
Equity in earnings of unconsolidated affiliates, as a percentage of net
operating revenues, remained consistent at (0.1)% for both of the three-month
periods ended
The net results of the above-mentioned changes resulted in income before income taxes increasing$6 million to$154 million for the three months endedSeptember 30, 2021 from$148 million for the three months endedSeptember 30, 2020 . 35 -------------------------------------------------------------------------------- Our provision for income taxes for the three months endedSeptember 30, 2021 was$10 million compared to$20 million for the three months endedSeptember 30, 2020 . Our effective tax rates were 6.5% and 13.5% for the three months endedSeptember 30, 2021 and 2020, respectively. The difference in our effective tax rate for the three months endedSeptember 30, 2021 , compared to the three months endedSeptember 30, 2020 , was primarily due to an increase in the valuation allowance recognized on IRC Section 163(j) interest carryforwards created as a result of financing transactions completed during the three months endedSeptember 30, 2020 .
Net income, as a percentage of net operating revenues, was 4.6% for the three
months ended
Net income attributable to noncontrolling interests as a percentage of net
operating revenues was 1.0% for the three months ended
Net income attributable toCommunity Health Systems, Inc. stockholders was$111 million for the three months endedSeptember 30, 2021 , compared to$112 million for the three months endedSeptember 30, 2020 .
Nine months Ended
Net operating revenues increased by 5.4% to approximately$9.1 billion for the nine months endedSeptember 30, 2021 , from approximately$8.7 billion for the nine months endedSeptember 30, 2020 . Net operating revenues on a same-store basis from hospitals that were operated throughout both periods increased$1.2 billion , or 14.8%, during the nine months endedSeptember 30, 2021 , as compared to the nine months endedSeptember 30, 2020 . Increases in net operating revenues, both on a consolidated and same-store basis, for the nine months endedSeptember 30, 2021 compared to 2020, resulted from increased volumes and higher acuity during the 2021 period. Non-same-store net operating revenues decreased$705 million during the nine months endedSeptember 30, 2021 , in comparison to the prior year period, with the decrease attributable primarily to the divestiture of hospitals during 2020 and 2021. On a consolidated basis, inpatient admissions decreased by 5.5% during the nine months endedSeptember 30, 2021 as compared to the nine months endedSeptember 30, 2020 . Also on a consolidated basis, adjusted admissions decreased by 2.4% during the nine months endedSeptember 30, 2021 as compared to the nine months endedSeptember 30, 2020 . On a same-store basis, net operating revenues per adjusted admission increased 6.9%, while inpatient admissions increased by 4.3% and adjusted admissions increased by 7.3% for the nine months endedSeptember 30, 2021 , compared to the nine months endedSeptember 30, 2020 . All operating expense calculations, as a percentage of net operating revenues, were impacted by the net effect of divestitures and the aforementioned increase in same-store net operating revenues. Operating expenses, as a percentage of net operating revenues, decreased from 92.0% during the nine months endedSeptember 30, 2020 to 89.3% during the nine months endedSeptember 30, 2021 . Operating expenses, excluding depreciation and amortization and impairment and loss on sale of businesses, as a percentage of net operating revenues, decreased from 86.5% for the nine months endedSeptember 30, 2020 to 84.5% for the nine months endedSeptember 30, 2021 . Salaries and benefits, as a percentage of net operating revenues, decreased from 46.8% for the nine months endedSeptember 30, 2020 to 42.7% for the nine months endedSeptember 30, 2021 . Supplies, as a percentage of net operating revenues, increased from 16.6% for the nine months endedSeptember 30, 2020 to 16.7% for the nine months endedSeptember 30, 2021 , primarily due to an increase in our expenses associated with COVID-19 related pharmaceuticals. Other operating expenses, as a percentage of net operating revenues, decreased from 25.4% for the nine months endedSeptember 30, 2020 to 23.7% for the nine months endedSeptember 30, 2021 . Lease cost and rent, as a percentage of net operating revenues, decreased from 2.9% for the nine months endedSeptember 30, 2020 to 2.5% for the nine months endedSeptember 30, 2021 . Pandemic relief funds, as a percentage of net operating revenues, was (1.1)% for the nine months endedSeptember 30, 2021 , compared to (5.2)% for the nine months endedSeptember 30, 2020 . Depreciation and amortization, as a percentage of net operating revenues, decreased to 4.5% for the nine months endedSeptember 30, 2021 from 4.9% for the nine months endedSeptember 30, 2020 , primarily due to the decrease in net operating revenues during the nine months endedSeptember 30, 2020 , as a result of the COVID-19 pandemic. Impairment and (gain) loss on sale of businesses was$24 million for the nine months endedSeptember 30, 2021 , compared to$48 million for the nine months endedSeptember 30, 2020 , related to impairment of the long-lived assets and reporting unit goodwill allocated to hospitals classified as held for sale or sold during the respective periods. Interest expense, net, decreased by$113 million to$666 million for the nine months endedSeptember 30, 2021 compared to$779 million for the nine months endedSeptember 30, 2020 . This was primarily due to our debt refinancing activity during 2020 and 2021 as discussed further in Capital Resources. 36 -------------------------------------------------------------------------------- Loss from early extinguishment of debt of$79 million was recognized during the nine months endedSeptember 30, 2021 , as a result of the refinancing of certain of our outstanding notes as discussed further in Capital Resources. Gain from early extinguishment of debt of$111 million was recognized during the nine months endedSeptember 30, 2020 , as a result of extinguishment of a portion of certain series of our outstanding notes through open market repurchases. The pre-tax gain on sale of investments in unconsolidated affiliates of$26 million was recognized during the nine months endedSeptember 30, 2021 , resulting from the sale of our minority equity interests inMacon Healthcare, LLC , a joint venture with certain subsidiaries of HCA representing two hospitals inMacon, Georgia , in which we owned a 38% interest.
Equity in earnings of unconsolidated affiliates, as a percentage of net
operating revenues, increased to (0.2)% for the nine months ended
The net results of the above-mentioned changes resulted in income before income
taxes increasing
Our provision for income taxes for the nine months endedSeptember 30, 2021 was$132 million compared to a benefit from income taxes of$221 million for the nine months endedSeptember 30, 2020 . Our effective tax rates were 47.5% and (669.7)% for the nine months endedSeptember 30, 2021 and 2020, respectively. The difference in our effective tax rate for the nine months endedSeptember 30, 2021 , when compared to the nine months endedSeptember 30, 2020 , was primarily due to the changes in tax benefits as a result of an increase to the deductible interest expense allowed for 2019 and 2020 under the CARES Act that was enacted during the three months endedMarch 31, 2020 .
Net income, as a percentage of net operating revenues, was 1.6% for the nine
months ended
Net income attributable to noncontrolling interests, as a percentage of net
operating revenues, increased to 1.0% for the nine months ended
Net income attributable toCommunity Health Systems, Inc. stockholders was$52 million for the nine months endedSeptember 30, 2021 , compared to$200 million for the nine months endedSeptember 30, 2020 .
Liquidity and Capital Resources
Net cash provided by operating activities decreased$1.7 billion , from approximately$2.1 billion for the nine months endedSeptember 30, 2020 , to approximately$400 million for the nine months endedSeptember 30, 2021 . The decrease was primarily attributable to the receipt of Medicare accelerated payments as well as PHSSEF funds under the CARES Act and PPPHCE Act during the nine months endedSeptember 30, 2020 . Cash paid for interest was$572 million during the nine months endedSeptember 30, 2021 compared to$765 million for the nine months endedSeptember 30, 2020 . Cash paid for income taxes, net of refunds received, resulted in a net payment of$3 million , and a net payment of approximately$2 million during the nine months endedSeptember 30, 2021 and 2020, respectively. Our net cash used in investing activities was approximately$313 million for the nine months endedSeptember 30, 2021 , compared to net cash provided by investing activities of approximately$9 million for the nine months endedSeptember 30, 2020 , a decrease of approximately$322 million . The cash used in investing activities during the nine months endedSeptember 30, 2021 was primarily impacted by a decrease of$330 million in cash proceeds from dispositions of hospitals and other ancillary operations, an increase in cash used in the purchase of property and equipment of$17 million , an increase of$2 million in cash used for acquisition of facilities and other related businesses, an increase in cash used in the net impact of the purchase and sale of available-for-sale and equity securities of$61 million , an increase in cash from the sale of investments in unconsolidated affiliates of$110 million and an increase in cash used to purchase other investments of$25 million . The decrease in cash used in investing activities was partially offset by a$3 million increase in cash proceeds from the sale of property and equipment. Our net cash used in financing activities was approximately$469 million for the nine months endedSeptember 30, 2021 , compared to approximately$504 million for the nine months endedSeptember 30, 2020 , a decrease in cash used in financing activities of approximately$35 million . This was primarily due to the net effect of our debt repayments, refinancing activities, and cash paid for deferred financing costs and other debt-related costs during the nine months endedSeptember 30, 2021 . Amounts received through the PHSSEF or state and local programs that had not yet been recognized or otherwise refunded to HHS as ofSeptember 30, 2021 totaled approximately$6 million . Such amount is included within accrued liabilities-other in the condensed consolidated balance sheet, and such unrecognized amounts may either be returned to HHS or the respective state or local agency or may be recognized in future periods if the underlying conditions for recognition are met. 37
-------------------------------------------------------------------------------- As noted above, we received Medicare accelerated payments of approximately$1.2 billion inApril 2020 under the Medicare Accelerated and Advanced Payments Program. No additional Medicare accelerated payments have been received by us since such time. CMS began recouping Medicare accelerated payments inApril 2021 and as ofSeptember 30, 2021 , approximately$249 million of accelerated payments previously received by us has been recouped by CMS. Additionally, approximately$18 million and$77 million of amounts previously received were repaid to CMS or assumed by buyers related to hospitals we divested during the nine months endedSeptember 30, 2021 and year endedDecember 31, 2020 , respectively. As ofSeptember 30, 2021 , approximately$814 million of Medicare accelerated payments are reflected within accrued liabilities-other in the condensed consolidated balance sheet. As described in the Notes to Condensed Consolidated Financial Statements (Unaudited) in Part I, Item 1 of this Form 10-Q under the heading "Subsequent Events", the outstanding balance of Medicare accelerated payments of$814 million as ofSeptember 30, 2021 was repaid in full to CMS inOctober 2021 . The CARES Act provided for deferred payment of the employer portion of social security taxes betweenMarch 27, 2020 andDecember 31, 2020 , with 50% of the deferred amount dueDecember 31, 2021 and the remaining 50% dueDecember 31, 2022 . We began deferring the employer portion of social security taxes inmid-April 2020 and, as ofSeptember 30, 2021 , we had deferred approximately$146 million . Of this amount, approximately$73 million is included within accrued liabilities employee compensation and approximately$73 million is included within other long-term liabilities in the condensed consolidated balance sheet. As described in the Notes to Condensed Consolidated Financial Statements (Unaudited) in Part I, Item 1 of this Form 10-Q under the heading "Acquisitions and Divestitures", onJuly 30, 2021 , we sold our unconsolidated minority equity interests inMacon Healthcare, LLC , a joint venture with certain subsidiaries of HCA representing two hospitals inMacon, Georgia , in which we owned a 38% interest. We received$110 million in cash in connection with the sale of these equity interests during the three months endedSeptember 30, 2021 . There have been no material changes outside of the ordinary course of business to our upcoming cash obligations during the nine months endedSeptember 30, 2021 from those disclosed in the table on page 64 of our 2020 Form 10-K, except as discussed below related to debt refinancing activity during 2021.
Capital Expenditures
Cash expenditures for purchases of facilities and other related businesses were approximately$3 million for the nine months endedSeptember 30, 2021 , compared to$1 million for the nine months endedSeptember 30, 2020 . Our expenditures for the nine months endedSeptember 30, 2021 and 2020 were primarily related to physician practices and other ancillary services. Excluding the cost to construct replacement and de novo hospitals, our cash expenditures for routine capital for the nine months endedSeptember 30, 2021 totaled$237 million compared to$186 million for the nine months endedSeptember 30, 2020 . These capital expenditures related primarily to the purchase of additional equipment, minor renovations and information systems infrastructure. Costs to construct replacement hospitals totaled$47 million for the nine months endedSeptember 30, 2021 , primarily related to the construction of a replacement facility inFort Wayne, Indiana , which is expected to be completed during the fourth quarter of 2021. Costs to construct replacement hospitals for the nine months endedSeptember 30, 2020 totaled$97 million , primarily related to the construction of a replacement facility inLa Porte ,Indiana . During the nine months endedSeptember 30, 2021 and 2020, we also had cash expenditures of$50 million and$34 million , respectively, that represent both planning and construction costs for two de novo hospitals in theTucson, Arizona market. In theTucson, Arizona market, we commenced operations for an 18-bed micro-hospital during the fourth quarter of 2020, while the other de novo hospital is expected to be completed in the first half of 2022 and have 52 beds. Pursuant to a hospital purchase agreement from ourMarch 1, 2016 acquisition ofNorthwest Health -La Porte , formerly known asLa Porte Hospital , andNorthwest Health -Starke , formerly known asStarke Hospital , we committed to build replacement facilities in bothLa Porte ,Indiana andKnox, Indiana . The completion of the replacement facility forNorthwest Health -La Porte , inLa Porte ,Indiana , and transfer of operations, including renaming the hospital toNorthwest Health -La Porte , was completed onOctober 24, 2020 . Construction of the replacement facility forNorthwest Health -Starke is required to be completed within five years of the date we enter into a new lease withStarke County, Indiana , the hospital lessor, or in the event we do not enter into a new lease withStarke County , construction shall be completed bySeptember 30, 2026 . We have not entered into a new lease with the lessor forNorthwest Health -Starke and currently anticipate completing construction of theNorthwest Health -Starke replacement facility in 2026. Construction costs for theNorthwest Health -Starke replacement facility are currently estimated to be approximately$15 million . 38
--------------------------------------------------------------------------------
Capital Resources
Net working capital was approximately$1.1 billion atSeptember 30, 2021 , compared to$1.7 billion atDecember 31, 2020 . Net working capital decreased by approximately$608 million betweenDecember 31, 2020 andSeptember 30, 2021 . The decrease is primarily due to the decrease in cash, as a result of debt repayments, repayment of Medicare accelerated payments and classification of the remaining liability for Medicare accelerated payments as current, refinancing activities and cash paid for deferred financing costs during the nine months endedSeptember 30, 2021 , partially offset by a decrease in current maturities of long-term debt. In addition to cash flows from operations, available sources of capital include amounts available under the asset-based loan (ABL) credit agreement, or the ABL Credit Agreement, which we entered into onApril 3, 2018 , as well as anticipated access to public and private debt markets. Pursuant to the ABL Credit Agreement, the lenders have extended toCHS/Community Health Systems Inc. , or CHS, a revolving asset-based loan facility, or the ABL Facility, in the maximum aggregate principal amount of$1.0 billion , subject to borrowing base capacity. AtSeptember 30, 2021 , the available borrowing base under the ABL Facility was$836 million , of which$108 million was reserved for outstanding letters of credit and$728 million represented excess availability. We had no outstanding borrowings as ofSeptember 30, 2021 . Letters of credit were reduced during the nine months endedSeptember 30, 2021 by$42 million , primarily in relation to a professional liability claim that was settled and funded during the three months endedDecember 31, 2020 . The issued letters of credit are primarily in support of potential insurance-related claims and certain bonds. Principal amounts outstanding under the ABL Facility, if any, will be due and payable in full onApril 3, 2023 .
On
OnFebruary 2, 2021 , we completed a private offering of$1.775 billion aggregate principal amount of 6?% Junior-Priority Secured Notes dueApril 15, 2029 , or the 6?% Junior-Priority Secured Notes due 2029. The proceeds of the offering were used, together with cash on hand, to redeem the 9?% Junior-Priority Secured Notes due 2023 via a tender offer which was funded onFebruary 2, 2021 , or to the extent not tendered, to fund the redemption of the remaining notes onFebruary 4, 2021 , and to pay related fees and expenses. The 6?% Junior-Priority Secured Notes due 2029 bear interest at a rate of 6.875% per year payable semi-annually in arrears onApril 15 andOctober 15 of each year, commencing onOctober 15, 2021 . OnFebruary 9, 2021 , we completed a private offering of$1.095 billion aggregate principal amount of 4¾% Senior Secured Notes dueFebruary 15, 2031 , or the 4¾% Senior Secured Notes due 2031. The proceeds of the offering were used, together with cash on hand, to redeem the 8?% Senior Secured Notes due 2024 onFebruary 9, 2021 and to pay related fees and expenses. The 4¾% Senior Secured Notes due 2031 bear interest at a rate of 4.750% per year payable semi-annually in arrears onFebruary 15 andAugust 15 , commencing onAugust 15, 2021 .
On
OnMay 19, 2021 , we completed a private offering of$1.440 billion aggregate principal amount of 6?% Junior-Priority Secured Notes dueApril 1, 2030 , or the 6?% Junior-Priority Secured Notes due 2030. The proceeds of the offering were used, together with cash on hand, to redeem the 8?% Junior-Priority Secured Notes due 2024 onMay 19, 2021 and to pay related fees and expenses. The 6?% Junior-Priority Secured Notes due 2030 bear interest at a rate of 6.125% per year payable semi-annually in arrears onApril 1 andOctober 1 , commencing onOctober 1, 2021 . Our ability to meet the restricted covenants and financial ratios and tests in the ABL Facility and the indentures governing our outstanding notes can be affected by events beyond our control, and we cannot assure you that we will meet those tests. A breach of any of these covenants could result in a default under the ABL Facility and/or the indentures that govern our outstanding notes. Upon the occurrence of an event of default under the ABL Facility or indentures that govern our outstanding notes, all amounts outstanding under the ABL Facility and the indentures that govern our outstanding notes may become immediately due and payable and all commitments under the ABL Facility to extend further credit may be terminated.
As of
ThroughSeptember 30, 2021 , we received approximately$1.2 billion of accelerated payments pursuant to the Medicare Accelerated and Advance Payment Program. As ofSeptember 30, 2021 , approximately$814 million of Medicare accelerated payments remained outstanding and are reflected within accrued liabilities-other in the condensed consolidated balance sheet. Recoupment of these funds by CMS began inApril 2021 under the repayment framework more specifically described above under "Overview of Legislative Developments" of this "Management's Discussion and Analysis of Financial Condition and Results of 39 -------------------------------------------------------------------------------- Operations." As described in the Notes to Condensed Consolidated Financial Statements (Unaudited) in Part I, Item 1 of this Form 10-Q under the heading "Subsequent Events", the outstanding balance of Medicare accelerated payments of$814 million as ofSeptember 30, 2021 was repaid in full to CMS inOctober 2021 . Additionally, the CARES Act permitted the deferral of payment of the employer portion of social security taxes betweenMarch 27, 2020 andDecember 31, 2020 , with 50% of the deferred amount dueDecember 31, 2021 and the remaining 50% dueDecember 31, 2022 . ThroughSeptember 30, 2021 , we had deferred approximately$146 million of which, approximately$73 million is included within accrued liabilities employee compensation and approximately$73 million is included within other long-term liabilities in the condensed consolidated balance sheets. The deferral of the employer portion of social security taxes along with the repayment of Medicare accelerated payments are expected to negatively impact our cash flows from operations during 2021. As previously discussed, we may require an increased level of working capital if we experience extended billing and collection cycles resulting from negative economic conditions arising from the COVID-19 pandemic or other factors, which may impact service mix, revenue mix, payor mix and patient volumes, as well as our ability to collect outstanding receivables. A material increase in the amount or deterioration in the collectability of accounts receivable will adversely affect our cash flows and results of operations, requiring an increased level of working capital. We believe that internally generated cash flows and current levels of availability for additional borrowing under the ABL Facility, as well as our continued access to the capital markets, will be sufficient to finance acquisitions, capital expenditures, working capital requirements, and any debt repurchases or other debt repayments we may elect to make or be required to make through the next 12 months. PHSSEF funds that we have received and may continue to receive under the CARES Act and related legislation will be used according to their terms and conditions as reimbursement for lost revenues and incremental expenses attributable to COVID-19, including working capital requirements and capital expenditures. The COVID-19 pandemic has resulted in, and may continue to result in, significant disruptions of financial and capital markets, which could reduce our ability to access capital and negatively affect our liquidity in the future. Additionally, while we have received PHSSEF payments and accelerated Medicare payments under the CARES Act and related legislation and may continue to receive and be able to utilize PHSSEF payments which have been received, as noted above, there is no assurance regarding the extent to which potential ongoing negative impacts on us arising from the COVID-19 pandemic will be offset by benefits which we may recognize or receive in the future under the CARES Act and related legislation or any future stimulus measures. We may elect from time to time to continue to purchase our outstanding debt in open market purchases, privately negotiated transactions or otherwise. Any such debt repurchases will depend upon prevailing market conditions, our liquidity requirements, contractual restrictions, applicable securities laws requirements, and other factors.
Off-balance Sheet Arrangements
Off-balance sheet arrangements consist of letters of credit of$108 million issued on the ABL Facility, primarily in support of potential insurance-related claims and certain bonds, as well as approximately$13 million representing the maximum potential amount of future payments under physician recruiting guarantee commitments in excess of the liability recorded atSeptember 30, 2021 . As previously discussed, we have a commitment to build one replacement facility. As part of an acquisition in 2016, we agreed to build a replacement facility inKnox, Indiana . The estimated construction costs, including equipment costs, are currently estimated to be approximately$15 million . We have incurred no cost to date for the construction of the replacement facility inKnox, Indiana .
Noncontrolling Interests
We have sold noncontrolling interests in certain of our subsidiaries or acquired subsidiaries with existing noncontrolling interest ownership positions. As ofSeptember 30, 2021 , we have hospitals in eight of the markets we serve, with noncontrolling physician ownership interests ranging from less than 1% to 40%. In addition, as ofSeptember 30, 2021 , we have five other hospitals with noncontrolling interests owned by non-profit entities or a for-profit subsidiary of a non-profit entity. Redeemable noncontrolling interests in equity of consolidated subsidiaries was$493 million and$484 million atSeptember 30, 2021 andDecember 31, 2020 , respectively, and noncontrolling interests in equity of consolidated subsidiaries was$83 million and$87 million atSeptember 30, 2021 andDecember 31, 2020 , respectively. The amount of net income attributable to noncontrolling interests was$33 million and$16 million for the three month periods endedSeptember 30, 2021 and 2020, respectively, and$94 million and$54 million for the nine months endedSeptember 30, 2021 and 2020, respectively. As a result of the change in the Stark Law "whole hospital" exception included in the Affordable Care Act, we are not permitted to introduce physician ownership at any of our hospital facilities that did not have physician ownership at the time of the adoption of the Affordable Care Act, or increase the aggregate percentage of physician ownership in any of our former or existing hospital joint ventures in excess of the aggregate physician ownership level held at the time of the adoption of the Affordable Care Act. 40 --------------------------------------------------------------------------------
Reimbursement, Legislative and Regulatory Changes
Ongoing legislative and regulatory efforts could reduce or otherwise adversely affect the payments we receive from Medicare and Medicaid and other payors. Within the statutory framework of the Medicare and Medicaid programs, there are substantial areas subject to administrative rulings, interpretations and discretion which may further affect payments made under those programs, and the federal and state governments might, in the future, reduce the funds available under those programs or require more stringent utilization and quality reviews of hospital facilities. Additionally, there may be a continued rise in managed care programs and additional restructuring of the financing and delivery of healthcare inthe United States . These events could cause our future financial results to be adversely impacted. We cannot estimate the impact of Medicare and Medicaid reimbursement changes that have been enacted or are under consideration. We cannot predict whether additional reimbursement reductions will be made or whether any such changes or other restructuring of the financing and delivery of healthcare would have a material adverse effect on our business, financial conditions, results of operations, cash flow, capital resources and liquidity. Inflation The healthcare industry is labor intensive. Wages and other expenses increase during periods of inflation, when labor shortages occur in the marketplace or when market forces or other factors drive such developments, which has occurred and may continue to occur in connection with the current competitive labor market arising out of the COVID-19 pandemic. Additionally, our suppliers may pass along higher materials costs and shipping/handling fees to us in the form of higher prices. We have implemented cost control measures, including our case and resource management program, to curb increases in operating costs and expenses. We have generally offset increases in operating costs by increasing reimbursement for services, expanding services and reducing costs in other areas. However, we cannot predict our ability to cover or offset future cost increases, particularly any increases in our cost of providing health insurance benefits to our employees. Critical Accounting Policies The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance withU.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our condensed consolidated financial statements. Actual results may differ from these estimates under different assumptions or conditions.
Critical accounting policies are defined as those policies that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations of the registrant. We believe that our critical accounting policies are limited to those described below.
Revenue Recognition
We record net operating revenues at the transaction price estimated to reflect the total consideration due from patients and third-party payors in exchange for providing goods and services in patient care. These services are considered to be a single performance obligation and have a duration of less than one year. Revenues are recorded as these goods and services are provided. The transaction price, which involves significant estimates, is determined based on our standard charges for the goods and services provided, with a reduction recorded for price concessions related to third party contractual arrangements as well as patient discounts and patient price concessions. During each of the three and nine-month periods endedSeptember 30, 2021 and 2020, the impact of changes to the inputs used to determine the transaction price was considered immaterial to the current period. Currently, several states utilize supplemental reimbursement programs for the purpose of providing reimbursement to providers to offset a portion of the cost of providing care to Medicaid and indigent patients. These programs are designed with input from the CMS and are funded with a combination of state and federal resources, including, in certain instances, fees or taxes levied on the providers. Under these supplemental programs, we recognize revenue and related expenses in the period in which amounts are estimable and collection is reasonably assured. Reimbursement under these programs is reflected in net operating revenues and fees, taxes or other program-related costs are reflected in other operating expenses. Net operating revenues include amounts estimated by management to be reimbursable by Medicare and Medicaid under prospective payment systems and provisions of cost-reimbursement and other payment methods. In addition, we are reimbursed by non-governmental payors using a variety of payment methodologies. Amounts we receive for treatment of patients covered by these programs are generally less than the standard billing rates. Explicit price concessions are recorded for contractual allowances that are calculated and recorded through internally-developed data collection and analysis tools to automate the monthly estimation of required contractual allowances. Within this automated system, payors' historical paid claims data are utilized to calculate the contractual allowances. This data is automatically updated on a monthly basis. All hospital contractual allowance calculations are subjected to 41 -------------------------------------------------------------------------------- monthly review by management to ensure reasonableness and accuracy. We account for the differences between the estimated program reimbursement rates and the standard billing rates as contractual allowance adjustments, which is one component of the deductions from gross revenues to arrive at net operating revenues. The process of estimating contractual allowances requires us to estimate the amount expected to be received based on payor contract provisions. The key assumption in this process is the estimated contractual reimbursement percentage, which is based on payor classification, historical paid claims data and, when applicable, application of the expected managed care plan reimbursement based on contract terms. Due to the complexities involved in these estimates, actual payments we receive could be different from the amounts we estimate and record. If the actual contractual reimbursement percentage under government programs and managed care contracts differed by 1% atSeptember 30, 2021 from our estimated reimbursement percentage, net income for the nine months endedSeptember 30, 2021 would have changed by approximately$88 million , and net accounts receivable atSeptember 30, 2021 would have changed by$113 million . Final settlements under some of these programs are subject to adjustment based on administrative review and audit by third parties. We account for adjustments to previous program reimbursement estimates as contractual allowance adjustments and report them in the periods that such adjustments become known. Contractual allowance adjustments related to final settlements and previous program reimbursement estimates impacted net operating revenues and net income by an insignificant amount for each of the three and nine-month periods endedSeptember 30, 2021 and 2020. Patient Accounts Receivable Substantially all of our accounts receivable are related to providing healthcare services to patients at our hospitals and affiliated businesses. Collection of these accounts receivable is our primary source of cash and is critical to our operating performance. Our primary collection risks relate to uninsured patients and outstanding patient balances for which the primary insurance payor has paid some but not all of the outstanding balance, with the remaining outstanding balance (generally deductibles and co-payments) owed by the patient. For all procedures scheduled in advance, our policy is to verify insurance coverage prior to the date of the procedure. Insurance coverage is not verified in advance of procedures for walk-in and emergency room patients. We estimate any adjustments to the transaction price for implicit price concessions by reserving a percentage of all self-pay accounts receivable without regard to aging category, based on collection history, adjusted for expected recoveries and any anticipated changes in trends. Our ability to estimate the transaction price and any implicit price concessions is not impacted by not utilizing an aging of our net accounts receivable as we believe that substantially all of the risk exists at the point in time such accounts are identified as self-pay. The percentage used to reserve for all self-pay accounts is based on our collection history. We believe that we collect substantially all of our third-party insured receivables, which include receivables from governmental agencies. Patient accounts receivable are recorded at net realizable value based on certain assumptions determined by each payor. For third-party payors including Medicare, Medicaid, and Managed Care, the net realizable value is based on the estimated contractual reimbursement percentage, which is based on current contract prices or historical paid claims data by payor. For self-pay accounts receivable, which includes patients who are uninsured and the patient responsibility portion for patients with insurance, the net realizable value is determined using estimates of historical collection experience without regard to aging category. These estimates are adjusted for estimated conversions of patient responsibility portions, expected recoveries and any anticipated changes in trends. Patient accounts receivable can be impacted by the effectiveness of our collection efforts. Additionally, significant changes in payor mix, business office operations, economic conditions or trends in federal and state governmental healthcare coverage could affect the net realizable value of accounts receivable. We also continually review the net realizable value of accounts receivable by monitoring historical cash collections as a percentage of trailing net operating revenues, as well as by analyzing current period net revenue and admissions by payor classification, days revenue outstanding, the composition of self-pay receivables between pure self-pay patients and the patient responsibility portion of third-party insured receivables, the impact of recent acquisitions and dispositions and the impact of current economic and other events. If the actual collection percentage differed by 1% atSeptember 30, 2021 from our estimated collection percentage as a result of a change in expected recoveries, net income for the nine months endedSeptember 30, 2021 would have changed by$42 million , and net accounts receivable atSeptember 30, 2021 would have changed by$54 million . We also continually review our overall reserve adequacy by monitoring historical cash collections as a percentage of trailing net operating revenues, as well as by analyzing current period net revenue and admissions by payor classification, days revenue outstanding, the composition of self-pay receivables between pure self-pay patients and the patient responsibility portion of third-party insured receivables and the impact of recent acquisitions and dispositions. 42 -------------------------------------------------------------------------------- Our policy is to write-off gross accounts receivable if the balance is under$10.00 or when such amounts are placed with outside collection agencies. We believe this policy accurately reflects our ongoing collection efforts and is consistent with industry practices. We had approximately$2.4 billion atSeptember 30, 2021 , and$3.3 billion atDecember 31, 2020 , being pursued by various outside collection agencies. We expect to collect less than 3%, net of estimated collection fees, of the amounts being pursued by outside collection agencies. As these amounts have been written-off, they are not included in our accounts receivable. Collections on amounts previously written-off are recognized as a recovery of net operating revenues when received. However, we take into consideration estimated collections of these future amounts written-off in determining the implicit price concessions used to measure the transaction price for the applicable portfolio of patient accounts receivable.
All of the following information is derived from our hospitals, excluding clinics, unless otherwise noted.
Patient accounts receivable from our hospitals represent approximately 98% of our total consolidated accounts receivable.
Days revenue outstanding, adjusted for the impact of receivables for state
Medicaid supplemental payment programs and divested facilities, was 56 days and
52 days at
Total gross accounts receivable (prior to allowance for contractual adjustments and implicit price concessions) was approximately$16.4 billion as ofSeptember 30, 2021 and approximately$14.8 billion as ofDecember 31, 2020 . The approximate percentage of total gross accounts receivable (prior to allowance for contractual adjustments and implicit price concessions) summarized by aging categories is as follows:
As of
% of Gross Receivables
0 - 90 90 - 180 180 - 365 Over 365
Payor Days Days Days Days
Medicare 12 % - % - % - %
Medicaid 8 % 1 % 1 % 1 %
Managed Care and Other 34 % 5 % 4 % 2 %
Self-Pay 8 % 6 % 7 % 11 %
As of
% of Gross Receivables
0 - 90 90 - 180 180 - 365 Over 365
Payor Days Days Days Days
Medicare 13 % 1 % - % - %
Medicaid 7 % 1 % 1 % 1 %
Managed Care and Other 31 % 4 % 3 % 3 %
Self-Pay 8 % 6 % 9 % 12 %
The approximate percentage of total gross accounts receivable (prior to allowances for contractual adjustments and implicit price concessions) summarized by payor is as follows:
September 30 ,December 31 ,
2021 2020
Insured receivables 67.3 % 64.3 %
Self-pay receivables 32.7 35.7
Total 100.0 % 100.0 %
The combined total at our hospitals and clinics for the estimated implicit price
concessions for self-pay accounts receivable and allowances for other self-pay
discounts and contractuals, as a percentage of gross self-pay receivables, was
approximately 91% at both September 30, 2021 and December 31, 2020 . If the
receivables that have been written-off, but where collections are still being
pursued by outside collection agencies, were included in both the allowances and
gross self-pay receivables specified above, the percentage of combined
allowances to total self-pay receivables would have been 94% at both September
30, 2021 and December 31, 2020 .
43
--------------------------------------------------------------------------------Goodwill represents the excess of the fair value of the consideration conveyed in the acquisition over the fair value of net assets acquired.Goodwill is evaluated for impairment annually and when an event occurs or circumstances change that, more likely than not, reduce the fair value of the reporting unit below its carrying value. During 2017, we early adopted Accounting Standards Update 2017-04, which allows a company to record a goodwill impairment when the reporting units carrying value exceeds the fair value determined in step one. We performed our last annual goodwill impairment evaluation during the fourth quarter of 2020 using theOctober 31, 2020 measurement date, which indicated no impairment. AtSeptember 30, 2021 , we had approximately$4.2 billion of goodwill recorded, all of which resides at our hospital operations reporting unit. A detailed evaluation of potential impairment indicators was performed as ofSeptember 30, 2021 . On the basis of available evidence as ofSeptember 30, 2021 , no impairment indicators were identified. The determination of fair value in our goodwill impairment analysis is based on an estimate of fair value for the hospital operations reporting unit utilizing known and estimated inputs at the evaluation date. Some of those inputs include, but are not limited to, the most recent price of our common stock or fair value of our long-term debt, estimates of future revenue and expense growth, estimated market multiples, expected capital expenditures, income tax rates, and costs of invested capital. Future estimates of fair value could be adversely affected if the actual outcome of one or more of the assumptions described above changes materially in the future, including a decline in or volatility of our stock price and the fair value of its our long-term debt, lower than expected hospital volumes, higher market interest rates or increased operating costs. Such changes impacting the calculation of our fair value, the risks of which are amplified by the COVID-19 pandemic, could result in a material impairment charge in the future.
Impairment or Disposal of Long-Lived Assets
Whenever events or changes in circumstances indicate that the carrying values of certain long-lived assets may be impaired, we project the undiscounted cash flows expected to be generated by these assets. If the projections indicate that the reported amounts are not expected to be recovered, such amounts are reduced to their estimated fair value based on a quoted market price, if available, or an estimate based on valuation techniques available in the circumstances.
Professional Liability Claims
As part of our business of owning and operating hospitals, we are subject to legal actions alleging liability on our part. We accrue for losses resulting from such liability claims, as well as loss adjustment expenses that are out-of-pocket and directly related to such liability claims. These direct out-of-pocket expenses include fees of outside counsel and experts. We do not accrue for costs that are part of our corporate overhead, such as the costs of our in-house legal and risk management departments. The losses resulting from professional liability claims primarily consist of estimates for known claims, as well as estimates for incurred but not reported claims. The estimates are based on specific claim facts, our historical claim reporting and payment patterns, the nature and level of our hospital operations, and actuarially determined projections. The actuarially determined projections are based on our actual claim data, including historic reporting and payment patterns which have been gathered over an approximately 20-year period. As discussed below, since we purchase excess insurance on a claims-made basis that transfers risk to third-party insurers, the liability we accrue does include an amount for the losses covered by our excess insurance. We also record a receivable for the expected reimbursement of losses covered by our excess insurance. Since we believe that the amount and timing of our future claims payments are reliably determinable, we discount the amount we accrue for losses resulting from professional liability claims using the risk-free interest rate corresponding to the timing of our expected payments. The net present value of the projected payments was discounted using a weighted-average risk-free rate of approximately 1.9% and 1.8% atSeptember 30, 2021 andDecember 31, 2020 , respectively. This liability is adjusted for new claims information in the period such information becomes known to us. Professional malpractice expense includes the losses resulting from professional liability claims and loss adjustment expense, as well as paid excess insurance premiums, and is presented within other operating expenses in the accompanying condensed consolidated statements of income. Our processes for obtaining and analyzing claims and incident data are standardized across all of our hospitals and have been consistent for many years. We monitor the outcomes of the medical care services that we provide and for each reported claim, we obtain various information concerning the facts and circumstances related to that claim. In addition, we routinely monitor current key statistics and volume indicators in our assessment of utilizing historical trends. The average lag period between claim occurrence and payment of a final settlement is between three and four years, although the facts and circumstances of individual claims could result in the timing of such payments being different from this average. Since claims are paid promptly after settlement with the claimant is reached, settled claims represent approximately 1.0% of the total liability at the end of any period. 44 -------------------------------------------------------------------------------- For purposes of estimating our individual claim accruals, we utilize specific claim information, including the nature of the claim, the expected claim amount, the year in which the claim occurred and the laws of the jurisdiction in which the claim occurred. Once the case accruals for known claims are determined, information is stratified by loss layers and retentions, accident years, reported years, geography, and claims relating to the acquired HMA hospitals versus claims relating to our other hospitals. Several actuarial methods are used against this data to produce estimates of ultimate paid losses and reserves for incurred but not reported claims. Each of these methods uses our company-specific historical claims data and other information. This company-specific data includes information regarding our business, including historical paid losses and loss adjustment expenses, historical and current case loss reserves, actual and projected hospital statistical data, a variety of hospital census information, employed physician information, professional liability retentions for each policy year, geographic information and other data. Based on these analyses, we determine our estimate of the professional liability claims. The determination of management's estimate, including the preparation of the reserve analysis that supports such estimate, involves subjective judgment of management. Changes in reserving data or the trends and factors that influence reserving data may signal fundamental shifts in our future claim development patterns or may simply reflect single-period anomalies. Even if a change reflects a fundamental shift, the full extent of the change may not become evident until years later. Moreover, since our methods and models use different types of data and we select our liability from the results of all of these methods, we typically cannot quantify the precise impact of such factors on our estimates of the liability. Due to our standardized and consistent processes for handling claims and the long history and depth of our company-specific data, our methodologies have historically produced reliably determinable estimates of ultimate paid losses. Management considers any changes in the amount and pattern of its historical paid losses up through the most recent reporting period to identify any fundamental shifts or trends in claim development experience in determining the estimate of professional liability claims. However, due to the subjective nature of this estimate and the impact that previously unforeseen shifts in actual claim experience can have, future estimates of professional liability could be adversely impacted when actual paid losses develop unexpectedly based on assumptions and settlement events that were not previously known or anticipated. We are primarily self-insured for these claims; however, we obtain excess insurance that transfers the risk of loss to a third-party insurer for claims in excess of our self-insured retentions. Our excess insurance is underwritten on a claims-made basis. For claims reported prior toJune 1, 2002 , substantially all of our professional and general liability risks were subject to a less than$1 million per occurrence self-insured retention and for claims reported fromJune 1, 2002 throughJune 1, 2003 , these self-insured retentions were$2 million per occurrence. Substantially all claims reported afterJune 1, 2003 and beforeJune 1, 2005 are self-insured up to$4 million per claim. Substantially all claims reported on or afterJune 1, 2005 and beforeJune 1, 2014 are self-insured up to$5 million per claim. Substantially all claims reported on or afterJune 1, 2014 and beforeJune 1, 2018 are self-insured up to$10 million per claim. Substantially all claims reported on or afterJune 1, 2018 are self-insured up to$15 million per claim. Management, on occasion, has selectively increased the insured risk at certain hospitals based upon insurance pricing and other factors and may continue that practice in the future. Excess insurance for all hospitals has been purchased through commercial insurance companies and generally covers us for liabilities in excess of the self-insured retentions. The excess coverage consists of multiple layers of insurance, the sum of which totals up to$95 million per occurrence and in the aggregate for claims reported on or afterJune 1, 2003 , up to$145 million per occurrence and in the aggregate for claims reported on or afterJanuary 1, 2008 , up to$195 million per occurrence and in the aggregate for claims reported on or afterJune 1, 2010 , and up to at least$215 million per occurrence and in the aggregate for claims reported on or afterJune 1, 2015 . In addition, for integrated occurrence malpractice claims, there is an additional$50 million of excess coverage for claims reported on or afterJune 1, 2014 and an additional$75 million of excess coverage for claims reported on or afterJune 1, 2015 throughJune 1, 2020 . The$75 million in integrated occurrence coverage will also apply to claims reported betweenJune 1, 2020 andJune 1, 2022 for events that occurred prior toJune 1, 2020 but which were not previously known or reported. For certain policy years prior toJune 1, 2014 , if the first aggregate layer of excess coverage becomes fully utilized, then the self-insured retention will increase to$10 million per claim for any subsequent claims in that policy year until our total aggregate coverage is met. BeginningJune 1, 2018 , this drop-down provision in the excess policies attaches over the$15 million per claim self-insured retention. EffectiveJune 1, 2014 , the hospitals acquired from HMA were insured on a claims-made basis as described above and through commercial insurance companies as described above for substantially all claims reported on or afterJune 1, 2014 except for physician-related claims with an occurrence date prior toJune 1, 2014 . Prior toJune 1, 2014 , the former HMA hospitals obtained insurance coverage through a wholly-owned captive insurance subsidiary and a risk retention group subsidiary which are domiciled in theCayman Islands andSouth Carolina , respectively. Those insurance subsidiaries, which are collectively referred to as the "Insurance Subsidiaries," provided (i) claims-made coverage to all of the former HMA hospitals and (ii) occurrence-basis coverage to most of the physicians employed by the former HMA hospitals. The employed physicians not covered by the Insurance Subsidiaries generally maintained claims-made policies with unrelated third party insurance companies. To mitigate the exposure of the program covering the former HMA hospitals and other healthcare facilities, the Insurance Subsidiaries bought claims-made reinsurance policies from unrelated third parties for claims above self-retention levels of$10 million or$15 million per claim, depending on the policy year. 45 -------------------------------------------------------------------------------- EffectiveJanuary 1, 2008 , the former Triad hospitals were insured on a claims-made basis as described above and through commercial insurance companies as described above for substantially all claims occurring on or afterJanuary 1, 2002 and reported on or afterJanuary 1, 2008 . Substantially all losses for the former Triad hospitals in periods prior toMay 1, 1999 were insured through a wholly-owned insurance subsidiary of HCA, Triad's owner prior to that time, and excess loss policies maintained by HCA. HCA has agreed to indemnify the former Triad hospitals in respect of claims covered by such insurance policies arising prior toMay 1, 1999 . FromMay 1, 1999 throughDecember 31, 2006 , the former Triad hospitals obtained insurance coverage on a claims incurred basis from HCA's wholly-owned insurance subsidiary with excess coverage obtained from other carriers that is subject to certain deductibles. Effective for claims incurred afterDecember 31, 2006 , Triad began insuring its claims from$1 million to$5 million through its wholly-owned captive insurance company, replacing the coverage provided by HCA. Substantially all claims occurring during 2007 were self-insured up to$10 million per claim.
There were no significant changes in our estimate of the reserve for
professional liability claims during the nine months ended
Income Taxes
We must make estimates in recording provision for income taxes, including determination of deferred tax assets and deferred tax liabilities and any valuation allowances that might be required against the deferred tax assets. We believe that future income will enable us to realize certain deferred tax assets, subject to the valuation allowance we have established.
The total amount of unrecognized benefit that would impact the effective tax rate, if recognized, was less than$1 million as ofSeptember 30, 2021 . A total of less than$1 million of interest and penalties is included in the amount of liability for uncertain tax positions atSeptember 30, 2021 . It is our policy to recognize interest and penalties related to unrecognized benefits in our condensed consolidated statements of income as income tax expense. It is possible the amount of unrecognized tax benefit could change in the next 12 months as a result of a lapse of the statute of limitations and settlements with taxing authorities; however, we do not anticipate the change will have a material impact on our consolidated results of operations or consolidated financial position. Our federal income tax returns for the 2014, 2015 and 2018 tax years remain under examination by the Internal Revenue Service. We believe the results of these examinations will not be material to our consolidated results of operations or consolidated financial position. We have extended the federal statute of limitations throughDecember 31, 2021 forCommunity Health Systems, Inc. for the tax periods endedDecember 31, 2014 and 2015. 46 --------------------------------------------------------------------------------
FORWARD-LOOKING STATEMENTS
Some of the matters discussed in this Report include "forward-looking statements" within the meaning of the federal securities laws, which involve risks, assumptions and uncertainties. Statements that are predictive in nature, that depend upon or refer to future events or conditions or that include words such as "expects," "anticipates," "intends," "plans," "believes," "estimates," "thinks," and similar expressions are forward-looking statements. These statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results and performance to be materially different from any future results or performance expressed or implied by these forward-looking statements. These factors include, among other things:
• developments related to COVID-19, including, without limitation, related to
the length and severity of the pandemic; the volume of canceled or rescheduled
procedures; the volume of COVID-19 patients cared for across our health
systems; the timing, availability and acceptance of effective medical
treatments and vaccines; the spread of potentially more contagious and/or
virulent forms of the virus, including any possible variants of the virus that
may be resistant to currently available vaccines; measures we are taking to
respond to the COVID-19 pandemic; the impact of government actions and
administrative regulation on us, including with respect to vaccine mandates;
changes in net revenue due to patient volumes, payor mix and negative
macroeconomic conditions; increased expenses related to labor, supply chain,
capital and other expenditures; workforce disruptions; and supply shortages
and disruptions;
• uncertainty regarding the implementation of the CARES Act, the PPPHCE Act, the
CAA, the ARPA and any other future stimulus measures related to COVID-19,
including the magnitude and timing of any future payments or benefits we may
receive or realize thereunder;
• general economic and business conditions, both nationally and in the regions
in which we operate, including economic and business conditions resulting from
the COVID-19 pandemic;
• the impact of current or future federal and state health reform initiatives,
including, without limitation, the Affordable Care Act, and the potential for
changes to the Affordable Care Act, its implementation or its interpretation
(including through executive orders and court challenges);
• the extent to and manner in which states support increases, decreases or
changes in Medicaid programs, implement health insurance exchanges or alter
the provision of healthcare to state residents through regulation or
otherwise;
• the future and long-term viability of health insurance exchanges and potential
changes to the beneficiary enrollment process;
• risks associated with our substantial indebtedness, leverage and debt service
obligations, including our ability to refinance such indebtedness on
acceptable terms or to incur additional indebtedness, and our ability to
remain in compliance with debt covenants;
• demographic changes;
• changes in, or the failure to comply with, federal, state or local laws or
governmental regulations affecting our business, including any such laws or
governmental regulations which are adopted in connection with the COVID-19
pandemic;
• potential adverse impact of known and unknown legal, regulatory andgovernmental proceedings and other loss contingencies, including governmental
investigations and audits, and federal and state false claims act litigation;
• our ability, where appropriate, to enter into and maintain provider
arrangements with payors and the terms of these arrangements, which may be
further affected by the increasing consolidation of health insurers and
managed care companies and vertical integration efforts involving payors and
healthcare providers;
• changes in, or the failure to comply with, contract terms with payors and
changes in reimbursement policies or rates paid by federal or state healthcare
programs or commercial payors;
• any potential impairments in the carrying value of goodwill, other intangible
assets, or other long-lived assets, or changes in the useful lives of other
intangible assets;
• changes in inpatient or outpatient Medicare and Medicaid payment levels and
methodologies;
• the effects related to the implementation of sequestration spending reductions
pursuant to both the Budget Control Act of 2011 and the PAYGO Act and the
potential for future deficit reduction legislation;
47
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• increases in the amount and risk of collectability of patient accounts
receivable, including decreases in collectability which may result from, among
other things, self-pay growth and difficulties in recovering payments for
which patients are responsible, including co-pays and deductibles;
• the efforts of insurers, healthcare providers, large employer groups and
others to contain healthcare costs, including the trend toward value-based
purchasing;
• increases in wages as a result of inflation or competition for highlytechnical positions and higher supply and drug costs due to market pressure
from pharmaceutical companies and new product releases;
• liabilities and other claims asserted against us, including self-insured
malpractice claims;
• competition;
• our ability to attract and retain, at reasonable employment costs, qualified
personnel, key management, physicians, nurses and other healthcare workers;
• trends toward treatment of patients in less acute or specialty healthcare
settings, including ambulatory surgery centers or specialty hospitals or via
telehealth;
• changes in medical or other technology;
• changes in U.S. GAAP;
• the availability and terms of capital to fund any additional acquisitions or
replacement facilities or other capital expenditures;
• our ability to successfully make acquisitions or complete divestitures, our
ability to complete any such acquisitions or divestitures on desired terms or
at all, the timing of the completion of any such acquisitions or divestitures,
and our ability to realize the intended benefits from any such acquisitions or
divestitures;
• the impact that changes in our relationships with joint venture or syndication
partners could have on effectively operating our hospitals or ancillary
services or in advancing strategic opportunities;
• our ability to successfully integrate any acquired hospitals, or to recognize
expected synergies from acquisitions;
• the impact of seasonal severe weather conditions, including the timing and
amount of insurance recoveries in relation to severe weather events;
• our ability to obtain adequate levels of insurance, including general
liability, professional liability, and directors and officers liability
insurance;
• timeliness of reimbursement payments received under government programs;
• effects related to pandemics, epidemics, or outbreaks of infectious diseases,
including the novel coronavirus causing the disease known as COVID-19 as noted
above;
• the impact of cyber-attacks or security breaches;
• any developments with respect to the Corporate Integrity Agreement;
• the concentration of our revenue in a small number of states;
• our ability to realize anticipated cost savings and other benefits from our
current strategic and operational cost savings initiatives;
• any changes in or interpretations of income tax laws and regulations; and
• the other risk factors set forth in our 2020 Form 10-K, and our other public
filings with the SEC .
48
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Although we believe that these forward-looking statements are based upon reasonable assumptions, these assumptions are inherently subject to significant regulatory, economic and competitive uncertainties and contingencies, which are difficult or impossible to predict accurately and may be beyond our control. Accordingly, we cannot give any assurance that our expectations will in fact occur, and we caution that actual results may differ materially from those in the forward-looking statements. Given these uncertainties, prospective investors are cautioned not to place undue reliance on these forward-looking statements. These forward-looking statements are made as of the date of this filing. We undertake no obligation to revise or update any forward-looking statements, or to make any other forward-looking statements, whether as a result of new information, future events or otherwise.
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