COMMUNITY HEALTH SYSTEMS, INC. You should read this discussion together with our condensed consolidated financial statements and the accompanying notes included herein.
Throughout this Quarterly Report on 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, 2020 , we owned or leased 93 hospitals, comprised of 91 general acute care hospitals and two stand-alone rehabilitation or psychiatric hospitals. For the hospitals that we own and operate, we are paid for our services by governmental agencies, private insurers and directly by the patients we serve. We have been implementing a portfolio rationalization and deleveraging strategy by divesting hospitals and non-hospital businesses that are attractive to strategic and other buyers. As discussed further below, we currently expect planned divestitures pursuant to this strategy to conclude during the fourth quarter of 2020. COVID-19 Pandemic A novel strain of coronavirus causing the disease known as COVID-19 was first identified inWuhan, China inDecember 2019 , and has spread throughout the world, including acrossthe United States . InJanuary 2020 , the Secretary of theU.S. Department of Health and Human Services , or HHS, declared a national public health emergency due to the novel coronavirus. InMarch 2020 , theWorld Health Organization declared the COVID-19 outbreak a pandemic. In an attempt to contain the spread and impact of COVID-19, authorities throughoutthe United States and the world have implemented measures such as travel bans and restrictions, quarantines, stay-at-home and shelter-in-place orders, the promotion of social distancing, and limitations on business activity. This pandemic has resulted in a significant economic downturn inthe United States and globally and has also led to significant disruptions and volatility in capital and financial markets. As a provider of healthcare services, we are significantly exposed to 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 cases in the communities we serve and have been taking or supporting measures to try to limit the spread of the virus and to mitigate the burden on the healthcare system, including rescheduling or cancelling elective procedures at our hospitals and other healthcare facilities. In addition, some states have been requiring hospitals to maintain a reserve of personal protective equipment and mandating COVID-19 screening for new patients and certain hospital staff. Beginning inMarch 2020 , we experienced a substantial reduction in the number of elective surgeries, physician office visits and emergency room volumes at our hospitals and other healthcare facilities due to restrictions on elective procedures, quarantines, stay-at-home and shelter-in-place orders, the promotion of social distancing, as well as general concerns related to the risk of contracting COVID-19 from interacting with the healthcare system. Some restrictive measures remain in place and, as of the time of this filing, some states and local governments are continuing to impose restrictions due to elevated rates of COVID-19 cases, including in select markets that we serve, which may continue to adversely impact our operating results. In this regard, while volumes for the current year have not returned to pre-pandemic levels, they have improved from their lows in March andApril 2020 . 32 -------------------------------------------------------------------------------- Our hospitals, medical clinics, medical personnel, and employees have been actively caring for COVID-19 patients. Although we have been implementing 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 are located in centers of the COVID-19 outbreak and have been overwhelmed in caring for COVID-19 patients, which has prevented such hospitals from treating all patientswho seek care. 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. In addition, some states have been limiting hospital volume by requiring a minimum percentage of vacant beds in case of a surge in COVID-19 patients. 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. Broad economic factors resulting from the COVID-19 pandemic, including high unemployment and underemployment levels and reduced consumer spending and confidence, may also affect our service mix, revenue mix, payor mix and patient volumes, as well as our ability to collect outstanding receivables. Business closures and layoffs in the geographic areas in which we operate has led to increases in the uninsured and underinsured populations, which 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 which, if sustained, may continue to adversely affect our financial results and require an increased level of working capital. Developments related to COVID-19 have materially affected our financial performance during 2020. Additionally, while we are not able to fully quantify the impact that the COVID-19 pandemic will have on our financial results during the remainder of 2020 and in future periods, we expect developments related to COVID-19 to materially affect our financial performance during the remainder of 2020, and, potentially, in future periods. Moreover, the COVID-19 pandemic may otherwise have material adverse effects on our results of operations, financial position, and/or our cash flows, particularly if negative economic and/or public health conditions inthe United States continue to deteriorate or persist for a significant period of time. The ultimate impact of the pandemic on our financial results will depend on, among other factors, the duration and severity of the pandemic as well as negative economic conditions arising from 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 and availability of effective medical treatments and vaccines, and the impact of government actions and administrative regulations on the hospital industry and broader economy, including through existing and any future stimulus efforts. Furthermore, the pandemic has resulted in, and may continue to result in, significant disruption of global financial markets, which could reduce our ability to access capital and negatively affect our liquidity in the future. As discussed below under "Legislative Overview", we have received, and may continue to receive, payments and advances under the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, and the Paycheck Protection Program and Health Care Enhancement Act, or PPPHCE Act, which have been beneficial in partially mitigating impact of the COVID-19 pandemic on our results of operations and financial position to date. Additionally, 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 anticipated 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, or any future stimulus measures.
Completed Divestiture and Acquisition Activity
During the nine months endedSeptember 30, 2020 , we completed the divestiture of eight hospitals, including three which closed effectiveJanuary 1, 2020 (for these hospitals, we received the net proceeds at a preliminary closing onDecember 31, 2019 ). These eight hospitals represented annual net operating revenues in 2019 of approximately$513 million and, including the net proceeds for the three hospitals that preliminarily closed onDecember 31, 2019 , we received total net proceeds of approximately$393 million in connection with the disposition of these hospitals. In addition, we completed the divestiture of one additional hospital onOctober 1, 2020 for which we received net proceeds of approximately$184 million at a preliminary closing held onSeptember 30, 2020 . During 2019, we completed the divestiture of 12 hospitals, including two which closed effectiveJanuary 1, 2019 (for these hospitals, we received the net proceeds at a preliminary closing onDecember 31, 2018 ), but not including the three hospitals noted above which closed onJanuary 1, 2020 . These 12 hospitals represented annual net operating revenues in 2018 of approximately$1.1 billion and, excluding the net proceeds for the two hospitals that preliminarily closed onDecember 31, 2018 , we received total net proceeds of approximately$335 million in connection with the disposition of these hospitals. 33 --------------------------------------------------------------------------------
The following table provides a summary of hospitals that we divested during the
nine months ended
Licensed Effective
Hospital Buyer City, State Beds Date
2020 Divestitures:
Hill Regional Hospital AHRK Holdings, LLC Hillsboro, 25 August 1,
TX 2020July 1 , Center 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 or 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 2019 Divestitures:
October 1 , Center Hospital Association WV
2019
Lake Wales Medical Center Adventist Health System
September
FL 1, 2019
Heart of Florida Regional Adventist Health System Davenport, 193 September
Medical Center FL 1, 2019 College Station Medical St. Joseph Regional College 167 August 1, Center Health Center Station, TX 2019 Tennova Healthcare - Vanderbilt University Lebanon, TN 245 August 1, Lebanon Medical Center 2019
March 1 , CenterHospital Authority
2019
Carolinas Hospital System
March 1 , -Florence Hospital Authority
2019
Springs Memorial Hospital
Hospital Authority SC
2019
Carolinas Hospital System
March 1 , - MarionHospital Authority
2019
January
County Associates, LLC 31, 2019 Mary Black Health System - Spartanburg Regional Spartanburg, 207 January 1, Spartanburg Healthcare System SC
2019
Mary Black Health System - Spartanburg Regional 125 January 1,
Gaffney Healthcare System Gaffney, SC 2019
34
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In addition, we have completed the following dispositions on or after
OnOctober 1, 2020 , we sold substantially all of the assets ofBayfront Health St. Petersburg (480 licensed beds) inSt. Petersburg, Florida to affiliates ofOrlando Health, Inc. , pursuant to the terms of a definitive agreement which was entered into onJune 25, 2020 , as referenced above. The net proceeds from this sale were received at a preliminary closing onSeptember 30, 2020 .
On
OnOctober 27, 2020 , we sold substantially all of the assets of each ofAbilene Regional Medical Center (231 licensed beds) inAbilene, Texas , andBrownwood Regional Medical Center (188 licensed beds) inBrownwood, Texas , to subsidiaries ofHendrick Health System pursuant to the terms of a definitive agreement which was entered into onApril 27, 2020 .
Together, proceeds of approximately
In addition to the divestiture of the hospitals in 2019 and 2020 noted above, we have entered into definitive agreements to sell a total of four hospitals. The following sets forth the definitive agreements to sell hospitals that we have entered into sinceJuly 1, 2020 :
• On
substantially all of the assets of
beds) in
• On
substantially all of the assets of each of
licensed beds) in
(60 licensed beds) in
Center.
• On
Company's ownership interest in Berwick Hospital Center (90 licensed beds) in
Berwick, Pennsylvania , to affiliates ofSant Partners, LLC . OnOctober 12, 2020 , we entered into a definitive agreement for the sale of 50% ownership interest in Merit Health Biloxi (153 licensed beds) and its associated healthcare businesses inBiloxi, Mississippi toMemorial Properties, Inc. , an affiliate ofMemorial Hospital of Gulfport . This transaction is expected to be completed in the fourth quarter of 2020. Merit Health Biloxi and its associated healthcare businesses will remain consolidated entities of the Company. There can be no assurance that these potential divestitures subject to definitive agreements will be completed, or if they are completed, the ultimate timing of the completion of these divestitures. 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 to use proceeds from divestitures for general corporate purposes and capital expenditures.
During the nine months ended
EffectiveSeptember 30, 2020 we finalized an agreement to terminate the lease and cease operations ofShands Lake Shore Regional Medical Center (99 licensed beds) inLake City, Florida , including transferring leased assets back to the landlord, theLake Shore Hospital Authority . We recorded an impairment charge of approximately$3 million during the three months endedSeptember 30, 2020 in conjunction with exiting the lease to operate this hospital.
Overview of Operating Results
Our net operating revenues for the three months endedSeptember 30, 2020 decreased$120 million to approximately$3.1 billion compared to approximately$3.2 billion for the three months endedSeptember 30, 2019 , primarily as a result of hospitals divested during 2019 and 2020, and developments related to COVID-19 as highlighted above. On a same-store basis, net operating revenues for the three months endedSeptember 30, 2020 increased$87 million . 35 -------------------------------------------------------------------------------- We had net income of$128 million during the three months endedSeptember 30, 2020 , compared to$2 million for the three months endedSeptember 30, 2019 . Net income for the three months endedSeptember 30, 2020 included the following:
• an after-tax charge of
long-lived assets of hospitals sold or held for sale based on their estimated
fair values, net of gains recognized upon the sale of certain facilities,
• an after-tax charge of
restructuring costs, and
• an after-tax benefit of
Net income for the three months ended
• an after-tax charge of
net of related legal expenses,
• an after-tax charge of less than
and other restructuring costs,
• after-tax income of
the outstanding balance of a promissory note from the buyer of a hospital,
• an after-tax charge of
• an after-tax charge of
liability claims accrual, which charge resulted from a further revision to the
estimate for professional liability claims accrual related to claims incurred
in 2016 and prior years recognized during the three months ended
2019,
• an after-tax charge of $2 million for the impairment of goodwill andlong-lived assets of hospitals sold or held for sale based on their estimated
fair values, net of gains recognized upon the sale of certain facilities,
• an after-tax charge of
of certain
entered into with the
• discrete tax benefits of (i)
allowance recognized on IRC Section 163(j) interest carryforward and (ii)
million for tax credits claimed in lieu of deductions for the HMA Legal
Matters.
Consolidated inpatient admissions for the three months endedSeptember 30, 2020 , decreased 13.0%, compared to the three months endedSeptember 30, 2019 . Consolidated adjusted admissions for the three months endedSeptember 30, 2020 , decreased 18.0%, compared to the three months endedSeptember 30, 2019 . Same-store inpatient admissions for the three months endedSeptember 30, 2020 , decreased 6.2%, compared to the three months endedSeptember 30, 2019 , and same-store adjusted admissions for the three months endedSeptember 30, 2020 , decreased 11.5%, compared to the three months endedSeptember 30, 2019 . These same-store decreases primarily resulted from the impact of the COVID-19 pandemic. Our net operating revenues for the nine months endedSeptember 30, 2020 decreased$1.3 billion to approximately$8.7 billion compared to approximately$9.9 billion for the nine months endedSeptember 30, 2019 , primarily as a result of developments related to COVID-19 as highlighted above, and hospitals divested during 2019 and 2020. On a same-store basis, net operating revenues for the nine months endedSeptember 30, 2020 decreased$579 million , also primarily as a result of the COVID-19 pandemic. We had net income of$254 million during the nine months endedSeptember 30, 2020 , compared to a net loss of$244 million for the nine months endedSeptember 30, 2019 . Net income for the nine months endedSeptember 30, 2020 included the following:
• an after-tax charge of
and related costs,
• an after-tax benefit of
• an after-tax charge of
long-lived assets of hospitals sold or held for sale based on their estimated
fair values, net of gains recognized upon the sale of certain facilities,
• an after-tax charge of
restructuring costs,
• an after-tax charge of
of the HMA Legal Matters, and
36
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• 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
Net loss for the nine months ended
• an after-tax charge of
net of related legal expenses,
• an after-tax charge of $68 million for the impairment of goodwill andlong-lived assets of hospitals sold or held for sale based on their estimated
fair values, net of gains recognized upon the sale of certain facilities,
• an after-tax charge of
restructuring costs,
• an after-tax charge of
promissory note outstanding that was received as part of the purchase price
from the sale of two hospitals in 2017, net of income from a reduction of the
valuation allowance on the outstanding balance of a promissory note from the
buyer of another hospital,
• an after-tax charge of
liability claims accrual related to claims incurred in 2016 and prior years,
• an after-tax charge of
• an after-tax charge of
of the HMA Legal Matters, and
• discrete tax benefits of (i)
allowance recognized on IRC Section 163(j) interest carryforwards and (ii)
million for tax credits claimed in lieu of deductions for the HMA Legal
Matters.
Consolidated inpatient admissions for the nine months endedSeptember 30, 2020 , decreased 16.6%, compared to the nine months endedSeptember 30, 2019 . Consolidated adjusted admissions for the nine months endedSeptember 30, 2020 , decreased 20.0%, compared to the nine months endedSeptember 30, 2019 . Same-store inpatient admissions for the nine months endedSeptember 30, 2020 , decreased 9.8%, compared to the nine months endedSeptember 30, 2019 , and same-store adjusted admissions for the nine months endedSeptember 30, 2020 , decreased 13.5%, compared to the nine months endedSeptember 30, 2019 . These same-store decreases primarily resulted from the impact of the COVID-19 pandemic. Self-pay revenues represented approximately 0.5% and 0.8% of net operating revenues for the three months endedSeptember 30, 2020 and 2019, respectively, and (0.1)% and 1.0% for the nine months endedSeptember 30, 2020 and 2019, respectively. The amount of foregone revenue related to providing charity care services as a percentage of net operating revenues was approximately 9.1% and 3.9% for the three months endedSeptember 30, 2020 and 2019, respectively, and 8.7% and 4.1% for the nine months endedSeptember 30, 2020 and 2019, respectively. Direct and indirect costs incurred in providing charity care services as a percentage of net operating revenues was approximately 1.1% and 0.5% for the three months endedSeptember 30, 2020 and 2019, respectively, and 1.0% and 0.5% for the nine months endedSeptember 30, 2020 and 2019, respectively.
Legislative Overview
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 recent 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. 37 -------------------------------------------------------------------------------- However, the future of the Affordable Care Act is uncertain. Since the 2016 presidential election, significant changes have been made to the Affordable Care Act, its implementation, and its interpretation, and the current presidential administration and certain members ofCongress have stated their intent to repeal or make additional significant changes to the law. 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. InDecember 2018 , as a result of this change, a federal judge inTexas found the individual mandate unconstitutional and determined the rest of the Affordable Care Act was therefore invalid. InDecember 2019 , theFifth Circuit Court of Appeals upheld this decision with respect to the individual mandate, but remanded for further consideration of how this affects the rest of the law. Pending the appeals process, the law remains in effect. 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 will be 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, 2020 , 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, 2020 . Some states use, or have applied to use, waivers granted by CMS to implement expansion, impose different eligibility or enrollment restrictions, or otherwise implement programs that vary from federal standards. CMS administrators have indicated that they are increasing state flexibility in the administration of Medicaid programs. For example, CMS has granted a limited number of state applications for waivers that allow a state to condition Medicaid enrollment on work or other community engagement. Several states have similar applications pending. 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 the sale of insurance plans that contain gaps in coverage, which could destabilize insurance markets and impact the rates of uninsured or underinsured adults. Some current initiatives and proposals, including those 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. 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 constitutionality and interpretation, whether and how many states ultimately decide to expand Medicaid coverage, the number of uninsuredwho 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, extending reporting deadlines. 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 emergency period. 38
-------------------------------------------------------------------------------- One of the primary sources of relief for healthcare providers is the CARES Act, an economic stimulus package signed into law onMarch 27, 2020 . The PPPHCE Act, an expansion of the CARES Act that includes additional emergency appropriations, was signed into law onApril 24, 2020 . Together, the CARES Act and the PPPHCE Act include$175 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 may 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. As ofSeptember 30, 2020 , the program required CMS to begin recouping payments 120 days after receipt by the provider although no payments were recouped during the three or nine months endedSeptember 30, 2020 . EffectiveOctober 1, 2020 , the program was amended such that 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 (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 four percent (4%) from the date the letter was issued, and will be assessed for each full 30-day period that the balance remains unpaid. EffectiveOctober 8, 2020 , CMS is no longer accepting new applications from Medicare Part A providers, such as hospitals, for accelerated payments and it has suspended the advance payment program for physicians and other Medicare Part B health care providers. The CARES Act also includes other provisions offering financial relief, for example suspending the Medicare sequestration payment adjustment fromMay 1, 2020 throughDecember 31, 2020 , which would have otherwise reduced payments to Medicare providers by 2% (although it extends sequestration through 2030), delaying scheduled reductions to Medicaid DSH payments, providing a 20% add-on to the inpatient PPS DRG rate for COVID-19 patients for the duration of the public health emergency, and permitting 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 . During the three and nine months endedSeptember 30, 2020 , we received approximately$155 million and$719 million , respectively, in payments through the PHSSEF and various state and local programs, net of amounts that have been or will be repaid to HHS related to entities that are held-for-sale or that were previously divested. Approximately$448 million of the PHSSEF payments were recognized as a reduction in operating costs and expenses during the six months endedJune 30, 2020 , based on the terms and conditions of such payments as set forth by HHS at such time. Subsequently, onSeptember 19, 2020 , HHS issued a Post-Payment Notice of Reporting Requirements, or theSeptember 19, 2020 Notice, which, among various changes, substantially altered the definition of lost revenues eligible to be claimed in a manner less favorable to recipients of PHSSEF funds. During the three months endedSeptember 30, 2020 , our 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 was updated based on, among other things, theSeptember 19, 2020 Notice, our results of operations during such period and the receipt of additional payments during such period. Taking into account these countervailing factors, we believe that the amount previously recognized of approximately$448 million remains an appropriate estimate as ofSeptember 30, 2020 . However, if the facts and circumstances that serve as the basis of our estimate as ofSeptember 30, 2020 had been applied to the estimate as ofJune 30, 2020 , taking into account theSeptember 19, 2020 Notice, we estimate that the pandemic relief funds recognized as a reduction to operating costs and expenses would have been reduced by approximately$66 million as ofJune 30, 2020 . 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 nine months endedSeptember 30, 2020 , in the amount of$337 million . Amounts received through the PHSSEF or state and local programs that have not yet been recognized as a reduction in operating costs and expenses or otherwise have not been refunded to HHS as ofSeptember 30, 2020 are included within accrued liabilities-other in the condensed consolidated balance sheet, and such unrecognized amounts may be recognized as a reduction in operating costs and expenses in future periods if the underlying conditions for recognition are met. Subsequent toSeptember 30, 2020 , onOctober 22, 2020 , HHS issued an updated Post-Payment Notice of Reporting Requirements and a Reporting Requirements Policy Update, together, theOctober 22, 2020 Notice, which, among other changes, amends the definition of lost revenues as set forth in theSeptember 19, 2020 Notice in a manner more favorable to recipients of PHSSEF funds. Our evaluation of theOctober 22, 2020 Notice is ongoing and the amount by which the approximate$271 million of PHSSEF and other unrecognized relief payments as ofSeptember 30, 2020 may be recognized as a result of theOctober 22, 2020 Notice is not yet known. 39
-------------------------------------------------------------------------------- As evidenced by theOctober 22, 2020 Notice, HHS' interpretation of the underlying terms and conditions of such PHSSEF payments, including auditing and reporting requirements, continues to evolve. 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 the Company do not qualify for reimbursement based on future operations, we may be required to return such unrecognized payments to HHS following the end of the COVID-19 pandemic or other future time as may be determined by HHS guidance. 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, including during the three months endedSeptember 30, 2020 , and approximately$22 million of amounts previously received was repaid to CMS or assumed by buyers during the three months endedSeptember 30, 2020 related to divested entities. As a result of CMS no longer accepting new applications for accelerated payments, we do not expect to receive additional Medicare accelerated payments. Net of amounts that have been or will be repaid to CMS or assumed by buyers related to divested entities, approximately$1.1 billion remains outstanding as ofSeptember 30, 2020 within accrued liabilities-other in the condensed consolidated balance sheet. EffectiveOctober 1, 2020 , the repayment terms for Medicare accelerated payments were changed such that providers are required to repay the accelerated payments beginning one year after the payment was issued. If the program requirements enacted onOctober 1, 2020 had been effective as ofSeptember 30, 2020 , we estimate that approximately$873 million of the amount outstanding would have been classified as a long-term liability. Due to the recent enactment of the CARES Act and the PPPHCE Act, there is still a high degree of uncertainty surrounding their implementation, and 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 21, 2021 . 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. 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 we will receive under the CARES Act, PPPHCE Act 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, the PPPHCE Act, 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. 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. Following this ruling, unless the HHS is able to successfully assert another legal basis for this policy, one potential outcome is the federal government could be required to reimburse hospitals, including our affiliated hospitals, for DSH Medicare payments which otherwise would have been payable over certain prior time periods absent the enactment of this policy. While the ruling in this case was specific to the DSH payments calculated for federal fiscal year 2012 for the plaintiff hospitals, we believe that prior time periods with the potential for higher DSH payments because of the precedent of this ruling could include federal fiscal years 2005 to 2013. There continues to be uncertainty regarding the extent to which, if any, DSH Medicare payments will be remitted to our affiliated hospitals as the result of this ruling, and if so the timing of any such payments. However, we anticipate that if it is ultimately determined that our affiliated hospitals are entitled to receive such DSH Medicare 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. 40 -------------------------------------------------------------------------------- As a result of our current levels of cash, funds we have received and may in the future receive under the CARES Act, the PPPHCE Act, or 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.
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,
2020 2019 2020 2019
Medicare 23.1 % 25.0 % 24.1 % 25.4 %
Medicaid 13.4 13.5 13.5 13.3
Managed Care and other third-party payors 63.0 60.7 62.5 60.3
Self-pay 0.5 0.8 (0.1 ) 1.0
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. However, it is unclear whether the trend of increased
coverage will continue, due in part to the impact of the COVID-19 pandemic and
the elimination of the financial penalty associated with the individual mandate,
effective January 1, 2019 . Further, the Affordable Care Act imposes significant
reductions in amounts the government pays Medicare managed care plans. An
executive order issued in October 2019 seeks to accelerate this shift away from
traditional fee-for-service Medicare to Medicare managed care. The trend toward
increased enrollment in Medicare and Medicaid managed care 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 proposals. 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 (loss) by an insignificant amount in each of the three
and nine-month periods ended September 30, 2020 and 2019.
41
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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 September 18, 2020 , CMS issued the final rule to increase
this index by 2.4% for hospital inpatient acute care services that are
reimbursed under the prospective payment system, beginning October 1, 2020 . The
final rule also provides for a 0.5 percentage point increase in accordance with
MACRA, which, together with other changes to payment policies is expected to
yield an average 2.9% 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 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,
2020 2019 2020 2019
Operating results, as a percentage of
net operating revenues:
Net operating revenues 100.0 % 100.0 % 100.0 % 100.0 %
Operating expenses (a) (86.7 ) (89.6 ) (86.5 ) (89.8 )
Depreciation and amortization (4.4 ) (4.7 ) (4.9 ) (4.6 )
Impairment and gain (loss) on sale of
businesses, net 0.2 - (0.6 ) (0.7 )
Income from operations 9.1 5.7 8.0 4.9
Interest expense, net (8.2 ) (8.0 ) (9.0 ) (7.9 )
Gain (loss) from early extinguishment of
debt 3.7 - 1.3 (0.3 )
Equity in earnings of unconsolidated
affiliates 0.1 0.1 0.1 0.1
Income (loss) before income taxes 4.7 (2.2 ) 0.4 (3.2 )
(Provision for) benefit from income
taxes (0.6 ) 2.3 2.5 0.7
Net income (loss) 4.1 0.1 2.9 (2.5 )
Less: Net income attributable to
noncontrolling interests (0.5 ) (0.6 ) (0.6 ) (0.5 )
Net income (loss) attributable to
Community Health
Systems, Inc. stockholders 3.6 % (0.5 )% 2.3 % (3.0 )%
42
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Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Percentage (decrease) increase from
prior year:
Net operating revenues (3.7 )% (5.9 )% (12.6 )% (7.3 )%
Admissions (b) (13.0 ) (9.2 ) (16.6 ) (11.4 )
Adjusted admissions (c) (18.0 ) (8.4 ) (20.0 ) (11.2 )
Average length of stay (d) 9.3 (2.3 ) 2.2 -
Net income (loss) attributable to
Community Health
Systems, Inc. 758.8 (94.8 ) 166.2 (34.3 )
Same-store percentage increase
(decrease) from prior year (e):
Net operating revenues 2.9 % 4.1 % (6.3 )% 4.3 %
Admissions (b) (6.2 ) 2.4 (9.8 ) 1.7
Adjusted admissions (c) (11.5 ) 3.6 (13.5 ) 2.3
(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, 2020, resulting from the receipt and 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.
(d) Average length of stay represents the average number of days inpatients stay
in our hospitals.
(e) Includes acquired hospitals to the extent we operated them in both periods
and excludes information for the hospitals sold or closed during 2019 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 decreased by 3.7% to approximately$3.1 billion for the three months endedSeptember 30, 2020 , from approximately$3.2 billion for the three months endedSeptember 30, 2019 . Net operating revenues on a same-store basis from hospitals that were operated throughout both periods increased$87 million , or 2.9%, during the three months endedSeptember 30, 2020 , as compared to the three months endedSeptember 30, 2019 . The increase in same-store net operating revenues was primarily due to COVID-19 pandemic-induced changes in the mix of services provided and payor mix compared to the prior period, partially offset by a decline in volumes resulting from the COVID-19 pandemic. Non-same-store net operating revenues decreased$208 million during the three months endedSeptember 30, 2020 , in comparison to the prior year period, with the decrease attributable primarily to the divestiture of hospitals during 2019 and 2020 as well as the impact of the COVID-19 pandemic. On a consolidated basis, inpatient admissions decreased by 13.0% during the three months endedSeptember 30, 2020 as compared to the three months endedSeptember 30, 2019 . Also on a consolidated basis, adjusted admissions decreased by 18.0% during the three months endedSeptember 30, 2020 as compared to the three months endedSeptember 30, 2019 . On a same-store basis, net operating revenues per adjusted admission increased 16.2%, while inpatient admissions decreased by 6.2% and adjusted admissions decreased by 11.5% for the three months endedSeptember 30, 2020 , compared to the three months endedSeptember 30, 2019 . Operating costs and expenses, as a percentage of net operating revenues, decreased from 94.3% during the three months endedSeptember 30, 2019 to 90.9% during the three months endedSeptember 30, 2020 . 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 89.6% for the three months endedSeptember 30, 2019 to 86.7% for the three months endedSeptember 30, 2020 . Salaries and benefits, as a percentage of net operating revenues, decreased from 45.3% for the three months endedSeptember 30, 2019 to 43.7% for the three months endedSeptember 30, 2020 . Supplies, as a percentage of net operating revenues, increased from 16.2% for the three months endedSeptember 30, 2019 to 16.7% for the three months endedSeptember 30, 2020 . Other operating expenses, as a percentage of net operating revenues, decreased from 24.9% for the three months endedSeptember 30, 2019 to 23.6% for the three months endedSeptember 30, 2020 . Expense related to government and other legal settlements and related costs, as a percentage of net operating revenues, decreased from 0.8% for the three months endedSeptember 30, 2019 to less than 0.1% during the three months endedSeptember 30, 2020 . Lease cost and rent, as a percentage of net operating revenues, increased from 2.4% for the three months endedSeptember 30, 2019 to 2.7% for the three months endedSeptember 30, 2020 . The increases in supplies and lease cost and rent, as a percentage of net operating revenues, during the three months endedSeptember 30, 2020 compared toSeptember 30, 2019 is primarily due to the impact of the COVID-19 pandemic. 43 -------------------------------------------------------------------------------- Depreciation and amortization, as a percentage of net operating revenues, decreased from 4.7% for the three months endedSeptember 30, 2019 to 4.4% for the three months endedSeptember 30, 2020 , primarily due to ceasing depreciation on property and equipment at hospitals sold or held for sale. Impairment and (gain) loss on sale of businesses was$(7) million for the three months endedSeptember 30, 2020 , compared to$(1) million for the three months endedSeptember 30, 2019 . For the three months endedSeptember 30, 2020 , a net gain resulted from the sale of a facility during the period offset by impairment of facilities held-for-sale or for which we are in discussions with potential buyers for the divestiture of a facility at a sales price that indicates a fair value below carrying value. The net gain for the three months endedSeptember 30, 2019 relates to sales of facilities during the period offset by impairment charges resulting from final working capital settlements for divestitures completed in the nine months endedSeptember 30, 2019 . Interest expense, net, decreased by$2 million to$257 million for the three months endedSeptember 30, 2020 compared to$259 million for the three months endedSeptember 30, 2019 . This was primarily due to our debt refinancing activity during the three months endedSeptember 30, 2020 as discussed further in Capital Resources. 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. Loss from early extinguishment of debt of less than$1 million was recognized during the three months endedSeptember 30, 2019 , as a result of the Credit Facility amendment and repayment of the term loans under the Credit Facility.
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 (loss) before income taxes increasing$220 million from a loss of$72 million before income taxes for the three months endedSeptember 30, 2019 to income before income taxes of$148 million for the three months endedSeptember 30, 2020 . Our provision for income taxes for the three months endedSeptember 30, 2020 was$20 million compared to a benefit from income taxes of$74 million for the three months endedSeptember 30, 2019 . Our effective tax rates were 13.5% and 102.8% for the three months endedSeptember 30, 2020 and 2019, respectively. The difference in our effective tax rate for the three months endedSeptember 30, 2020 , when compared to the three months endedSeptember 30, 2019 , was primarily due to discrete tax benefits for (i) a reduction in the valuation allowance recognized on IRC Section 163(j) interest carryforwards and (ii) tax credits claimed in lieu of deductions for the HMA Legal Matters recognized during the three months endedSeptember 30, 2019 .
Net income, as a percentage of net operating revenues, was 0.1% for the three
months ended
Net income attributable to noncontrolling interests, as a percentage of net
operating revenues, decreased from 0.6% for the three months ended
Net income attributable toCommunity Health Systems, Inc. was$112 million for the three months endedSeptember 30, 2020 , compared to a net loss attributable toCommunity Health Systems, Inc. of$17 million for the three months endedSeptember 30, 2019 .
Nine Months Ended
Net operating revenues decreased by 12.6% to approximately$8.7 billion for the nine months endedSeptember 30, 2020 , from approximately$9.9 billion for the nine months endedSeptember 30, 2019 . Net operating revenues on a same-store basis from hospitals that were operated throughout both periods decreased$579 million , or 6.3%, during the nine months endedSeptember 30, 2020 , as compared to the nine months endedSeptember 30, 2019 . The decrease in same-store net operating revenues was primarily due to a decline in volumes resulting from the COVID-19 pandemic. Non-same-store net operating revenues decreased$675 million during the nine months endedSeptember 30, 2020 , in comparison to the prior year period, with the decrease attributable primarily to the impact of the COVID-19 pandemic as well as the divestiture of hospitals during 2019 and 2020. On a consolidated basis, inpatient admissions decreased by 16.6% during the nine months endedSeptember 30, 2020 as compared to the nine months endedSeptember 30, 2019 . Also on a consolidated basis, adjusted admissions decreased by 20.0% during the nine months endedSeptember 30, 2020 as compared to the nine months endedSeptember 30, 2019 . On a same-store basis, net operating revenues per adjusted admission increased 8.3%, while inpatient admissions decreased by 9.8% and adjusted admissions decreased by 13.5% for the nine months endedSeptember 30, 2020 , compared to the nine months endedSeptember 30, 2019 . 44 -------------------------------------------------------------------------------- Operating costs and expenses, as a percentage of net operating revenues, decreased from 95.1% during the nine months endedSeptember 30, 2019 to 92.0% during the nine months endedSeptember 30, 2020 . 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 89.8% for the nine months endedSeptember 30, 2019 to 86.5% for the nine months endedSeptember 30, 2020 due to the recognition of approximately$448 million of PHSSEF payments as a reduction of operating costs and expenses during the nine months endedSeptember 30, 2020 . Salaries and benefits increased as a percentage of net operating revenues from 45.3% for the nine months endedSeptember 30, 2019 to 46.8% for the nine months endedSeptember 30, 2020 . Supplies, as a percentage of net operating revenues, increased from 16.4% for the nine months endedSeptember 30, 2019 to 16.6% for the nine months endedSeptember 30, 2020 . Other operating expenses, as a percentage of net operating revenues, increased from 25.3% for the nine months endedSeptember 30, 2019 to 25.4% for the nine months endedSeptember 30, 2020 . Expense related to government and other legal settlements and related costs, as a percentage of net operating revenues, decreased from 0.4% for the nine months endedSeptember 30, 2019 to less than 0.1% for the nine months endedSeptember 30, 2020 primarily due to the net impact of several lawsuits settled in principle in 2019 and related legal expenses. Lease cost and rent, as a percentage of net operating revenues, increased from 2.4% for the nine months endedSeptember 30, 2019 to 2.9% for the nine months endedSeptember 30, 2020 . The increases in salaries and benefits, supplies, other operating expenses and lease cost and rent, as a percentage of net operating revenues, during the nine months endedSeptember 30, 2020 compared toSeptember 30, 2019 is primarily due to the impact of the COVID-19 pandemic.
Depreciation and amortization, as a percentage of net operating revenues,
increased from 4.6% for the nine months ended
Impairment and (gain) loss on sale of businesses was$48 million for the nine months endedSeptember 30, 2020 , compared to$70 million for the nine months endedSeptember 30, 2019 . For the nine months endedSeptember 30, 2020 , gains on facilities sold onJanuary 1, 2020 andJuly 1, 2020 were offset by impairment of facilities held-for-sale or for which we are in discussions with potential buyers for the divestiture of a facility at a sales price that indicates a fair value below carrying value. The impairment and net loss on facilities during nine months endedSeptember 30, 2019 relates to impairment of the long-lived assets and reporting unit goodwill allocated to hospitals sold during the period partly offset by gains on the sale of facilities during the three months endedSeptember 30, 2019 . Interest expense, net, decreased by$3 million to$779 million for the nine months endedSeptember 30, 2020 compared to$782 million for the nine months endedSeptember 30, 2019 . This was primarily due to our debt refinancing activity during the nine months endedSeptember 30, 2020 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 our certain series of outstanding notes through open market repurchases. Loss from early extinguishment of debt of$31 million was recognized during the nine months endedSeptember 30, 2019 , as a result of the Credit Facility amendment and repayment of the term loans under the Credit Facility.
Equity in earnings of unconsolidated affiliates, as a percentage of net
operating revenues, remained consistent at (0.1)% for both of the nine-month
periods ended
The net results of the above-mentioned changes resulted in income (loss) before income taxes increasing$348 million from a loss of$315 million for the nine months endedSeptember 30, 2019 to income of$33 million for the nine months endedSeptember 30, 2020 . Our benefit from income taxes for the nine months endedSeptember 30, 2020 was$221 million and$71 million for the nine months endedSeptember 30, 2020 and 2019, respectively. Our effective tax rates were (669.7)% and 22.5% for the nine months endedSeptember 30, 2020 and 2019, respectively. The difference in our effective tax rate for the nine months endedSeptember 30, 2020 , when compared to the nine months endedSeptember 30, 2019 , was primarily due to 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 (loss), as a percentage of net operating revenues, was (2.5)% for the nine months endedSeptember 30, 2019 compared to 2.9% for the nine months endedSeptember 30, 2020 .
Net income attributable to noncontrolling interests, as a percentage of net
operating revenues, increased from 0.5% for the nine months ended
45
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Net income attributable to Community Health Systems, Inc. was $200 million for
the nine months ended September 30, 2020 , compared to a net loss attributable to
Community Health Systems, Inc. of $302 million for the nine months ended
September 30, 2019 .
Liquidity and Capital Resources
Net cash provided by operating activities increased$1.9 billion , from approximately$191 million for the nine months endedSeptember 30, 2019 , to approximately$2.1 billion for the nine months endedSeptember 30, 2020 . The increase in cash provided by operating activities is primarily the result of the receipt of PHSSEF funds under the CARES Act and PPPHCE Act as well as Medicare accelerated payments during the nine months endedSeptember 30, 2020 . Total cash paid for interest during the nine months endedSeptember 30, 2020 decreased to approximately$765 million compared to$810 million for the nine months endedSeptember 30, 2019 . Cash paid for income taxes, net of refunds received, resulted in a net payment of$2 million and a net refund of$3 million during the nine months endedSeptember 30, 2020 and 2019, respectively. Our net cash provided by investing activities was approximately$9 million for the nine months endedSeptember 30, 2020 , compared to net cash used in investing activities of approximately$103 million for the nine months endedSeptember 30, 2019 , an increase of approximately$112 million . The cash provided by investing activities during the nine months endedSeptember 30, 2020 was primarily impacted by a decrease in cash used for other investments (primarily from internal-use software expenditures and physician recruiting costs) of$110 million , a decrease in the cash used in the acquisition of facilities and other related equipment of$12 million as a result of fewer physician practice, clinic and other ancillary business acquisitions in the first nine months of 2020 compared to the same period in 2019, a decrease in cash used in the purchase of property and equipment of$5 million , an increase in cash provided by the proceeds from the sale of property and equipment of approximately$3 million , offset by a decrease in proceeds provided by divestitures of hospitals and other ancillary operations of$16 million as a result of fewer hospital divestitures in the first nine months of 2020 (including the receipt of the net proceeds for one hospital divested effectiveOctober 1, 2020 at a preliminary closing onSeptember 30, 2020 ) compared to the same period in 2019 (including the receipt of the net proceeds for three hospitals divested effectiveJanuary 1, 2020 at a preliminary closing onDecember 31, 2019 ), and a decrease to the net impact of the purchases and sales of available-for-sale securities and equity securities of$2 million . Our net cash used in financing activities was$504 million for the nine months endedSeptember 30, 2020 , compared to approximately$127 million for the nine months endedSeptember 30, 2019 , an increase of approximately$377 million . The increase in cash used in financing activities, in comparison to the prior year period, was primarily due to the net effect of our debt repayment, refinancing activity, and cash paid for deferred financing costs and other debt-related costs. During the nine months endedSeptember 30, 2020 , we received approximately$719 million in payments through the PHSSEF and various state and local programs, net of amounts that have or will be repaid to HHS related to entities that are held-for-sale or that were previously divested, including$155 million in such payments received during the three months endedSeptember 30, 2020 . We previously recognized approximately$448 million of the PHSSEF payments eligible to be claimed as a reduction in operating costs and expenses during the six months endedJune 30, 2020 . Although payments were received during the three months endedSeptember 30, 2020 , the net effect of changes in our estimate due to theSeptember 19, 2020 Notice, our results of operations during such period and the receipt of additional payments, resulted in no additional pandemic relief funds being recognized during the period as described in greater detail above. 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 nine months endedSeptember 30, 2020 , in the amount of$337 million . Amounts received through the PHSSEF or state and local programs that had not yet been recognized as a reduction in operating costs and expenses or otherwise refunded to HHS as ofSeptember 30, 2020 totaled approximately$271 million . Such amount is included within accrued liabilities-other in the condensed consolidated balance sheet, and such unrecognized amounts may be recognized as a reduction in operating costs and expenses in future periods if the underlying conditions for recognition are met. As evidenced by theOctober 22, 2020 Notice, HHS' interpretation of the underlying terms and conditions of such PHSSEF payments, including auditing and reporting requirements, continues to evolve. Additional guidance or new and amended interpretations of existing guidance on the terms and conditions of such PHSSEF payments may result in our inability to recognize certain PHSSEF payments, changes in the estimate of amounts recognized, or the derecognition of amounts previously recognized, which (in any such case) may be material. As a way to increase cash flow to Medicare providers impacted by the COVID-19 pandemic, the CARES Act expanded the Medicare Accelerated and Advance Payment Program. Inpatient acute care hospitals may request accelerated payments of up to 100% of their anticipated Medicare payment amount for a six-month period (not including Medicare Advantage payments), although CMS is reevaluating pending and new applications from Medicare Part A providers, including hospitals, in light of direct payments made available through PHSSEF, and has suspended the advance payment program for physicians and other Medicare Part B providers. CMS will base payment amounts for inpatient acute care hospitals on the provider's Medicare fee-for-service reimbursements in the 46 -------------------------------------------------------------------------------- last six months of 2019. As ofSeptember 30, 2020 , the program terms required repayment to begin within 120 days of receipt although no amounts were recouped by CMS during the three or nine months endedSeptember 30, 2020 . EffectiveOctober 1, 2020 , the program requirements were changed such that accelerated payments are interest free for inpatient acute care hospitals for 29 months, and CMS must begin recouping the payments one year after receipt by the provider. Once recoupment begins, CMS will withhold 25% of Medicare fee-for-service payments during the first 11 months and 50% of Medicare fee-for-service payments during the subsequent six months. The program currently requires the provider to repay any outstanding balance remaining after 29 months or pay interest of 4% per annum on any outstanding balance. We received Medicare accelerated payments of approximately$1.2 billion inApril 2020 . No additional Medicare accelerated payments have been received by the Company since such time. Net of amounts that have or will be repaid to CMS or assumed by buyers related to divested entities, approximately$1.1 billion of Medicare accelerated payments remained outstanding as ofSeptember 30, 2020 and are reflected within accrued liabilities-other in the condensed consolidated balance sheet. If the program requirements enacted onOctober 1, 2020 had been effective as ofSeptember 30, 2020 , we estimate that approximately$873 million of the amount outstanding would have been classified as a long-term liability. The CARES Act provides 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, 2020 , have deferred approximately$91 million which is included within other long-term liabilities in the condensed consolidated balance sheet. There have been no material changes outside of the ordinary course of business to our upcoming cash obligations during the nine months endedSeptember 30, 2020 from those disclosed in the table on page 72 of our 2019 Form 10-K and discussed below related to debt refinancing activity during 2020.
Capital Expenditures
Cash expenditures for purchases of facilities and other related businesses were approximately$1 million for the nine months endedSeptember 30, 2020 , compared to$13 million for the nine months endedSeptember 30, 2019 . Our expenditures for the nine months endedSeptember 30, 2020 and 2019 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, 2020 totaled$186 million compared to$286 million for the nine months endedSeptember 30, 2019 . These capital expenditures related primarily to the purchase of additional equipment, minor renovations and information systems infrastructure. Costs to construct replacement hospitals totaled$97 million for the nine months endedSeptember 30, 2020 , compared to$30 million for the nine months endedSeptember 30, 2019 . The costs to construct replacement hospitals for the nine months endedSeptember 30, 2020 and 2019 primarily represent construction costs for replacement facilities inLa Porte ,Indiana andFort Wayne, Indiana . During the nine months endedSeptember 30, 2020 and 2019, we had cash expenditures of$34 million and$6 million , respectively, that represent both planning and construction costs for two de novo hospitals inArizona . We expect to commence operations for an 18-bed micro-hospital during the fourth quarter of 2020, while the other de novo hospital is expected to be completed by 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 . Under the terms of such agreement, construction of the replacement hospital forNorthwest Health -La Porte is required to be completed within five years of the date of acquisition, orMarch 2021 . In addition, 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, including equipment costs, for theNorthwest Health -La Porte totaled approximately$119 million as ofSeptember 30, 2020 . Construction costs for theNorthwest Health -Starke replacement facility is currently estimated to be approximately$15 million . 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 .
Capital Resources
Net working capital was approximately$1.1 billion at bothSeptember 30, 2020 andDecember 31, 2019 . Net working capital decreased by approximately$82 million betweenDecember 31, 2019 andSeptember 30, 2020 . This decrease was primarily due to the increase in other accrued liabilities and decrease in patient accounts receivable, partially offset by an increase in cash, driven by the receipt of PHSSEF funds as well as Medicare accelerated payments, during the nine months endedSeptember 30, 2020 . 47 -------------------------------------------------------------------------------- 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, 2020 , the available borrowing base under the ABL Facility was$654 million , of which we had no outstanding borrowings and letters of credit issued of$151 million . The issued letters of credit were 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 . The ABL Facility contains customary representations and warranties, subject to limitations and exceptions, and customary covenants restricting our ability, subject to certain exceptions, to, among other things (1) declare dividends, make distributions or redeem or repurchase capital stock, (2) prepay, redeem or repurchase other debt, (3) incur liens or grant negative pledges, (4) make loans and investments and enter into acquisitions and joint ventures, (5) incur additional indebtedness or provide certain guarantees, (6) engage in mergers, acquisitions and asset sales, (7) conduct transactions with affiliates, (8) alter the nature of our businesses, (9) grant certain guarantees with respect to physician practices, (10) engage in sale and leaseback transactions or (11) change our fiscal year. We are also required to comply with a consolidated fixed coverage ratio, upon certain triggering events described below, and various affirmative covenants. The consolidated fixed coverage ratio is calculated as the ratio of (x) consolidated EBITDA (as defined in the ABL Facility) less capital expenditures to (y) the sum of consolidated interest expense (as defined in the ABL Facility), scheduled principal payments, income taxes and restricted payments made in cash or in permitted investments. For purposes of calculating the consolidated fixed charge coverage ratio, the calculation of consolidated EBITDA as defined in the ABL Facility is a trailing 12-month calculation that begins with our consolidated net income, with certain adjustments for interest, taxes, depreciation and amortization, net income attributable to noncontrolling interests, stock compensation expense, restructuring costs, and the financial impact of other non-cash or non-recurring items recorded during any such 12-month period. The consolidated fixed charge coverage ratio is a required covenant only in periods where the total borrowings outstanding under the ABL Facility reduce the amount available in the facility to less than the greater of (i)$95 million or (ii) 10% of the calculated borrowing base. As a result, in the event we have less than$95 million available under the ABL Facility, we would need to comply with the consolidated fixed charge coverage ratio. AtSeptember 30, 2020 , we were not subject to the consolidated fixed charge coverage ratio as such triggering event had not occurred during the last twelve months endedSeptember 30, 2020 . OnFebruary 6, 2020 , CHS completed a private offering of$1.462 billion aggregate principal amount of 6?% Senior Secured Notes dueFebruary 15, 2025 (the "6?% Senior Secured Notes due 2025"). CHS used the net proceeds of the offering of the 6?% Senior Secured Notes due 2025 to (i) purchase any and all of its 5?% Senior Secured Notes due 2021 validly tendered and not validly withdrawn in the cash tender offer announced onJanuary 23, 2020 , (ii) redeem all of the 5?% Senior Secured Notes due 2021 that were not purchased pursuant to such tender offer, (iii) purchase in one or more privately negotiated transactions approximately$426 million aggregate principal amount of its 6¼% Senior Secured Notes due 2023 and (iv) pay related fees and expenses. The 6?% Senior Secured Notes due 2025 bear interest at a rate of 6.625% per annum, payable semi-annually in arrears onFebruary 15 andAugust 15 of each year, commencing onAugust 15, 2020 . The 6?% Senior Secured Notes are scheduled to mature onFebruary 15, 2025 . The 6?% Senior Secured Notes due 2025 are unconditionally guaranteed on a senior-priority secured basis by us and each of the CHS current and future domestic subsidiaries that provide guarantees under the ABL Facility, any capital market debt securities of CHS (including CHS' outstanding senior notes) and certain other long-term debt of CHS. The 6?% Senior Secured Notes due 2025 and the related guarantees are secured by shared (i) first-priority liens on the Non-ABL Priority Collateral and (ii) second-priority liens on the ABL Priority Collateral that secures on a first-priority basis the ABL Facility, in each case subject to permitted liens described in the indenture governing the 6?% Senior Secured Notes due 2025.
During the three months ended
Principal Amount
6?% Senior Notes due 2028 $ 226
8?% Junior-Priority Secured Notes due 2024 1
6?% Senior Notes due 2022 34
Total principal amount of debt extinguished $ 261
A gain from early extinguishment of debt of
48
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As of
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
Any net proceeds from divestitures are expected to be used for general corporate purposes and capital expenditures.
ThroughSeptember 30, 2020 , we received approximately$1.9 billion of relief payments via the CARES Act and other sources, including approximately$719 million in payments through the PHSSEF and various state and local programs, net of amounts attributable to previously divested entities, and approximately$1.2 billion of accelerated payments pursuant to the Medicare Accelerated and Advance Payment Program, of which approximately$1.1 billion remained outstanding as ofSeptember 30, 2020 . As previously noted, PHSSEF payments are not required to be repaid, subject to certain terms and conditions, while payments received under the Medicare Accelerated and Advance Payment Program are required to be repaid. Additionally, the CARES Act permits 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 . As ofSeptember 30, 2020 , approximately$91 million of social security taxes have been deferred. The deferral of the employer portion of social security taxes along with the funds received under the CARES Act provisions noted above, have positively impacted our cash flows from operations during 2020. 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 (including high unemployment and underemployment levels) arising from the COVID-19 pandemic, 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 the PPPHCE Act 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. As noted above, 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 the PPPHCE Act, 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 anticipated 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, the PPPHCE Act or any future stimulus measures. As noted above, during the three months endedSeptember 30, 2020 , we purchased a portion of certain series of our outstanding notes through open market purchases, and 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$151 million issued on the ABL Facility, primarily in support of potential insurance-related claims and certain bonds, as well as approximately$17 million representing the maximum potential amount of future payments under physician recruiting guarantee commitments in excess of the liability recorded atSeptember 30, 2020 .
Noncontrolling Interests
We have sold noncontrolling interests in certain of our subsidiaries or acquired subsidiaries with existing noncontrolling interest ownership positions. As ofSeptember 30, 2020 , we have hospitals in 10 of the markets we serve, with noncontrolling physician 49 -------------------------------------------------------------------------------- ownership interests ranging from 1% to 40%. In addition, as ofSeptember 30, 2020 , we have four other hospitals with noncontrolling interests owned by non-profit entities. Redeemable noncontrolling interests in equity of consolidated subsidiaries was$481 million and$502 million atSeptember 30, 2020 andDecember 31, 2019 , respectively, and noncontrolling interests in equity of consolidated subsidiaries was$60 million and$77 million as ofSeptember 30, 2020 andDecember 31, 2019 , respectively. The amount of net income attributable to noncontrolling interests was$16 million and$19 million for the three months endedSeptember 30, 2020 and 2019, respectively, and$54 million and$58 million for the nine months endedSeptember 30, 2020 and 2019, 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.
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 and when labor shortages occur in the marketplace. In addition, our suppliers pass along rising costs 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. Moreover, as noted above, 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.
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 that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. 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, 2020 and 2019, the impact of changes to the inputs used to determine the transaction price was considered immaterial to the current period. 50 -------------------------------------------------------------------------------- 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 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, 2020 from our estimated reimbursement percentage, net income (loss) for the nine months endedSeptember 30, 2020 would have changed by approximately$79 million , and net accounts receivable atSeptember 30, 2020 would have changed by$102 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 (loss) by an insignificant amount for each of the three and nine-month periods endedSeptember 30, 2020 and 2019.
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 patientswho 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. 51
-------------------------------------------------------------------------------- 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, 2020 from our estimated collection percentage as a result of a change in expected recoveries, net income (loss) for the nine months endedSeptember 30, 2020 would have changed by$42 million , and net accounts receivable atSeptember 30, 2020 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. 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$3.6 billion atSeptember 30, 2020 and$3.8 billion December 31, 2019 , 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 53 days and
58 days at
Total gross accounts receivable (prior to allowance for contractual adjustments and implicit price concessions) was approximately$15.3 billion as ofSeptember 30, 2020 and approximately$16.6 billion as ofDecember 31, 2019 . 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 ofSeptember 30, 2020 : % of Gross Receivables 0 - 90 90 - 180 180 - 365 Over 365 Payor Days Days Days Days Medicare 14 % - % - % 1 % Medicaid 7 % 1 % 1 % 1 % Managed Care and Other 31 % 4 % 3 % 3 % Self-Pay 8 % 5 % 9 % 12 % As ofDecember 31, 2019 : % of Gross Receivables 0 - 90 90 - 180 180 - 365 Over 365 Payor Days Days Days Days Medicare 13 % 1 % - % 1 % Medicaid 6 % 1 % 1 % 1 % Managed Care and Other 27 % 4 % 3 % 2 % Self-Pay 9 % 8 % 10 % 13 % 52
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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 ,
2020 2019
Insured receivables 64.9 % 59.5 %
Self-pay receivables 35.1 40.5
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% and 90% at September 30, 2020 and December 31, 2019 ,
respectively. 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, 2020 and December 31, 2019 .
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, or ASU 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 2019 using theOctober 31, 2019 measurement date, which indicated no impairment.
At
While no impairment was indicated in our annual goodwill evaluation as of theOctober 31, 2019 measurement date, the reduction in our fair value and the resulting goodwill impairment charges recorded in 2016 and 2017 reduced the carrying value of our hospital operations reporting unit to an amount equal to our estimated fair value as of such prior year measurement dates. This increases the risk that future declines in fair value could result in goodwill impairment. 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. A detailed evaluation of potential impairment indicators was performed as ofSeptember 30, 2020 , which specifically considered the volatility of the fair market value of our outstanding senior secured and unsecured notes and common stock during the nine months endedSeptember 30, 2020 , as well as declines in patient volumes and net operating revenues resulting from the COVID-19 pandemic. On the basis of available evidence as ofSeptember 30, 2020 , no impairment indicators were identified. 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.
53
--------------------------------------------------------------------------------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 1.9% as ofSeptember 30, 2020 and 2.6% and 3.1% in 2019 and 2018, 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 (loss). 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. 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. 54 -------------------------------------------------------------------------------- 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 andMay 31, 2021 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. 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. 55 --------------------------------------------------------------------------------
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 approximately$1 million as ofSeptember 30, 2020 . A total of approximately$1 million of interest and penalties is included in the amount of liability for uncertain tax positions atSeptember 30, 2020 . It is our policy to recognize interest and penalties related to unrecognized benefits in our condensed consolidated statements of income (loss) 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 2009 and 2010 tax years have been settled with the Internal Revenue Service. The results of these examinations were not material to our consolidated results of operations or consolidated financial position. Our federal income tax returns for the 2014 and 2015 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 throughJune 30, 2021 forCommunity Health Systems, Inc. for the tax periods endedDecember 31, 2014 and 2015. Our federal income tax return for the 2018 tax year is under examination by the Internal Revenue Service.
Recent Accounting Pronouncements
InMarch 2020 , the FASB issued Accounting Standards Update, or ASU, 2020-04, or Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria that reference LIBOR or another rate that is expected to be discontinued. The amendments in the ASU are effective for all entities as ofMarch 12, 2020 throughDecember 31, 2022 . The adoption of this guidance did not have a material impact on our condensed consolidated financial position or results of operations. We have evaluated all other recently issued, but not yet effective, ASUs and do not expect the eventual adoption of these ASUs to have a material impact our condensed consolidated financial position or results of operations. 56 --------------------------------------------------------------------------------
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 and availability of effective medical treatments and
vaccines; measures we are taking to respond to the COVID-19 pandemic; the
impact of government and administrative regulation on us; 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, 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
the Affordable Care Act to be repealed or found unconstitutional or otherwise
invalidated, or for additional changes to the law, 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, as well as risks associated with
disruptions in the financial and capital markets as the result of the COVID-19
pandemic which could impact us from a financing and liquidity perspective;
• 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 government investigations,
audits, and federal and state false claims act litigation and other legal
proceedings;
• our ability, where appropriate, to enter into and maintain providerarrangements 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 additional 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 continued implementation of the sequestration
spending reductions and the potential for future deficit reduction
legislation;
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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 rising 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,
including the disposition of hospitals and non-hospital businesses pursuant to
our portfolio rationalization and deleveraging strategy, 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 failure to comply with the terms of 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;
• changes in interpretations, assumptions and expectations regarding the Tax
Cuts and Jobs Act; and
• the other risk factors set forth in our 2019 Form 10-K, our Quarterly Report
on Form 10-Q filed with the
with the SEC .
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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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