TENET HEALTHCARE CORPORATION INTRODUCTION TO MANAGEMENT'S DISCUSSION AND ANALYSIS
The purpose of this section, Management's Discussion and Analysis of Financial
Condition and Results of Operations ("MD&A"), is to provide a narrative
explanation of our financial statements that enables investors to better
understand our business, to enhance our overall financial disclosures, to
provide the context within which our financial information may be analyzed, and
to provide information about the quality of, and potential variability of, our
financial condition, results of operations and cash flows. MD&A, which should be
read in conjunction with the accompanying Condensed Consolidated Financial
Statements, includes the following sections:
•Management Overview
•Forward-Looking Statements
•Sources of Revenue for Our Hospital Operations Segment
•Results of Operations
•Liquidity and Capital Resources
•Critical Accounting Estimates
Our business consists of our Hospital Operations and other ("Hospital
Operations") segment, our Ambulatory Care segment and our Conifer segment. Our
Hospital Operations segment is comprised of acute care and specialty hospitals,
imaging centers, ancillary outpatient facilities, microhospitals and physician
practices. At September 30, 2022 , our subsidiaries operated 61 hospitals serving
primarily urban and suburban communities in nine states, including the new acute
care hospital we opened in September 2022 in South Carolina . In April 2021 , we
completed the sale of the majority of the urgent care centers then held by our
Hospital Operations segment to an unaffiliated urgent care provider. In
addition, we completed the sale of five Miamiarea hospitals and certain related
operations (the "Miami Hospitals") in August 2021 and a micro-hospital located
in Arizona in April 2022 , all of which were held in our Hospital Operations
segment.
Our Ambulatory Care segment is comprised of the operations of USPI Holding
Company, Inc. ("USPI"). USPI had ownership interests in 440 ambulatory surgery
centers (each, an "ASC") (292 consolidated) and 24 surgical hospitals (eight
consolidated) in 35 states at September 30, 2022 . In April 2021 , we completed
the sale of 40 urgent care centers then held by our Ambulatory Care segment to
an unaffiliated urgent care provider and transferred 24 imaging centers from our
Ambulatory Care segment to our Hospital Operations segment. Effective June 30,
2022 , we purchased all of the shares previously held by Baylor University
Medical Center ("Baylor") in USPI for $406 million , which increased our
ownership interest in USPI's voting shares from 95% to 100%. See Note 13 to the
accompanying Condensed Consolidated Financial Statements and the "Liquidity and
Capital Resources" section of MD&A for additional information about this
transaction.
Our Conifer segment provides revenue cycle management and valuebased care
services to hospitals, health systems, physician practices, employers and other
clients through our Conifer Holdings, Inc. subsidiary ("Conifer"). At
September 30, 2022 , Conifer provided services to approximately 670 Tenet and
nonTenet hospitals and other clients nationwide. Almost all of the services
comprising the operations of our Conifer segment are provided by Conifer Health
Solutions, LLC , in which we own an interest of approximately 76%, or by one of
its direct or indirect wholly owned subsidiaries.
Unless otherwise indicated, all financial and statistical information included
in MD&A relates to our continuing operations, with dollar amounts expressed in
millions (except peradjustedadmission and peradjustedpatientday amounts).
Continuing operations information includes the results of our same 60 hospitals
operated throughout the nine months ended September 30, 2022 and 2021, as well
as the Miami Hospitals sold in August 2021 , the Arizona microhospital sold in
April 2022 and the new South Carolina hospital we opened in September 2022 .
Continuing operations information excludes the results of our hospitals and
other businesses that have been classified as discontinued operations for
accounting purposes. We believe this information is useful to investors because
it includes the operations of all facilities in continuing operations for the
period of time that we owned and operated them, and it reflects the recent
trends we are experiencing with respect to volumes, revenues and expenses. We
present certain metrics as a percentage of net operating revenues because a
significant portion of our operating expenses are variable. In addition, we
present certain metrics on a peradjustedadmission and peradjustedpatientday
basis to show trends other than volume.
In certain cases, information presented in MD&A for our Hospital Operations
segment is described as presented on a samehospital basis, which includes the
results of our same 60 hospitals operated throughout the nine months ended
September 30, 2022 and 2021, and excludes the results of the Miami Hospitals we
sold in August 2021 , the Arizona microhospital sold in April 2022 , the new
South Carolina hospital opened in September 2022 and the results of our
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discontinued operations. We present samehospital data because we believe it
provides investors with useful information regarding the performance of our
current portfolio of hospitals and other operations that are comparable for the
periods presented, as well as reflects recent trends we are experiencing with
respect to volumes, revenues and expenses.
MANAGEMENT OVERVIEW
RECENT DEVELOPMENTS
InOctober 2022 , our board of directors authorized a$1 billion share repurchase program. Repurchases will be made in accordance with applicable securities laws and may be made at management's discretion from time to time in open-market or privately negotiated transactions, subject to market conditions and other factors. The share repurchase program does not obligate us to acquire any particular amount of common stock, and it may be suspended for periods or discontinued at any time before its scheduled expiration date ofDecember 31, 2024 .
IMPACT OF THE COVID-19 PANDEMIC
The COVID19 pandemic continued to adversely impact all three segments of our business, as well as our patients, communities and employees, in the nine months endedSeptember 30, 2022 . Broad economic factors resulting from the pandemic affected our patient volumes, service mix and revenue mix. In addition, the pandemic continued to have an adverse impact on certain of our operating expenses during the nine months endedSeptember 30, 2022 . Various federal legislative actions, including additional funding for thePublic Health and Social Services Emergency Fund ("PRF"), have mitigated some of the economic disruption caused by the COVID19 pandemic on our business. In the nine months endedSeptember 30, 2022 and 2021, we received cash payments from the PRF and state and local grant programs totaling$155 million and$65 million , respectively, including$27 million received during the nine-month period in 2021 by our unconsolidated affiliates for whom we provide cash management services. We recognized$154 million and$53 million from these funds as grant income during the nine-month periods in 2022 and 2021, respectively. In addition, we recognized$12 million in equity in earnings of unconsolidated affiliates in the accompanying Condensed Consolidated Statement of Operations during the nine months endedSeptember 30, 2021 . Throughout MD&A, we have provided additional information on the impact of the COVID19 pandemic on our results of operations and the steps we have taken, and are continuing to take, in response. The ultimate extent and scope of the pandemic and its future impact on our business remain unknown. For information about risks and uncertainties related to COVID19 that could affect our results of operations, financial condition and cash flows, see the Risk Factors section in Part I of our Annual Report on Form 10-K for the year endedDecember 31, 2021 ("Annual Report") and in Part II of our Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2022 ("Q1'22 Report").
CYBERSECURITY INCIDENT
InApril 2022 , we experienced a cybersecurity incident that temporarily disrupted a subset of our acute care operations and involved the exfiltration of certain confidential company and patient information (the "Cybersecurity Incident"). During this time, our hospitals remained operational and continued to deliver patient care safely and effectively, utilizing wellestablished backup processes. We immediately suspended user access to impacted information technology applications, executed extensive cybersecurity protection protocols, and took steps to restrict further unauthorized activity. We have restored impacted information technology operations, and we have taken additional measures to protect patient, employee and other data, as appropriate, in response to the Cybersecurity Incident. Disruption from the Cybersecurity Incident placed pressure on our Hospital Operations segment's volumes and earnings, particularly in April andMay 2022 . We currently estimate that the Cybersecurity Incident has had an adverse pre-tax impact of approximately$100 million . This estimate includes the costs to remediate the issues, lost revenues from the associated business interruption and other related expenses. We have insurance coverage and have filed a claim within our policy limits for these losses. We are unable to predict or control the timing or amount of insurance recoveries.
TRENDS AND STRATEGIES
As described above and throughout MD&A, we continue to experience negative
impacts of the pandemic on our business in varying degrees. Throughout the
COVID19 pandemic, we have taken, and we continue to take, various actions to
increase our liquidity and mitigate the impact of reductions in our patient
volumes and changes in our service mix and revenue mix. We issued new senior
unsecured notes and senior secured first lien notes, redeemed existing senior
unsecured notes and senior secured first lien notes, including those with the
highest interest rates of all of our longterm debt, and amended our senior
secured revolving credit facility (as amended to date, the "Credit Agreement").
We also decreased our employee
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headcount throughout the organization at the outset of the COVID-19 pandemic,
and we deferred certain operating expenses that were not expected to impact our
response to the pandemic. In addition, we reduced certain variable costs across
the enterprise. Together with government relief packages, we believe these
actions supported our ability to provide essential patient services during the
initial uncertainty caused by the COVID-19 pandemic and continue to do so. For
further information on our liquidity, see "Liquidity and Capital Resources"
below.
We have experienced, and continue to experience, increased competition with
other healthcare providers in recruiting and retaining qualified personnel
responsible for the operation of our facilities. There is a limited availability
of experienced medical support personnel nationwide, which drives up the wages
and benefits required to recruit and retain employees. In particular, like
others in the healthcare industry, we continue to experience a shortage of
criticalcare nurses in certain disciplines and geographic areas. This shortage
has been exacerbated by the COVID19 pandemic as more nurses choose to retire
early, leave the workforce or take travel assignments. In some areas, the
increased demand for care of COVID19 patients in our hospitals, as well as the
direct impact of COVID19 on physicians, employees and their families, have put
a strain on our resources and staff. Over the past two years, we have had to
rely more on higher-cost temporary contract labor, which we compete with other
healthcare providers to secure, and pay premiums above standard compensation for
essential workers. In addition, we have experienced significant price increases
in medical supplies, particularly for personal protective equipment ("PPE"), and
we have encountered supplychain disruptions, including shortages and delays. In
recent months, our Ambulatory Care segment has been impacted by shipment delays
in connection with its de novo facility development efforts, which are a key
part of our portfolio expansion strategy.
We believe that several key trends are also continuing to shape the demand for
healthcare services: (i) consumers, employers and insurers are actively seeking
lowercost solutions and better value as they focus more on healthcare spending;
(ii) patient volumes are shifting from inpatient to outpatient settings due to
technological advancements and demand for care that is more convenient,
affordable and accessible; (iii) the growing aging population requires greater
chronic disease management and higheracuity treatment; and (iv) consolidation
continues across the entire healthcare sector. In addition, the healthcare
industry, in general, and the acute care hospital business, in particular, have
experienced significant regulatory uncertainty based, in large part, on
administrative, legislative and judicial efforts to limit, alter or repeal the
Patient Protection and Affordable Care Act, as amended by the Health Care and
Education Reconciliation Act of 2010 ("Affordable Care Act"). It is difficult to
predict the full impact of regulatory uncertainty on our future revenues and
operations.
Expansion of Our Ambulatory Care Segment-In response to these trends, we
continue to focus on opportunities to expand our Ambulatory Care segment through
acquisitions, organic growth, construction of new outpatient centers and
strategic partnerships. During the years ended December 31, 2021 and 2020, we
invested $1.315 billion and $1.200 billion , respectively, to acquire ownership
interests in new ASCs, increase our ownership interests in existing facilities
and invest in de novo facilities. This activity included the acquisition of
ownership interests in 86 ASCs and related ambulatory support services
(collectively, the "SCD Centers") from Surgical Center Development #3 LLC and
Surgical Center Development #4, LLC ("SCD") in December 2021 . USPI and SCD's
principals have also entered into a joint venture and development agreement
under which USPI will have the exclusive option to partner with affiliates of
SCD on the future development of a minimum target of 50 de novo ASCs over a
period of five years. In addition, USPI formed a joint venture with United
Urology Group and acquired ownership interests in 20 new and established ASCs
and two still in development in July 2022 . The ASCs, which are now managed and
consolidated by USPI, are located in Arizona , Colorado and Maryland .
Also during the nine months ended September 30, 2022 , we acquired controlling
interests in 11 ASCs, four of which are located in Florida , two in Tennessee and
one in each of five other states, and we acquired noncontrolling interests in an
ASC in each of New Jersey and Texas . During the same period, we acquired
controlling ownership interests in 14 previously unconsolidated ASCs in ten
geographically diverse states. In addition, we opened 12 ASCs in various states
during the nine months ended September 30, 2022 . We believe USPI's ASCs and
surgical hospitals offer many advantages to patients and physicians, including
greater affordability, predictability, flexibility and convenience. Moreover,
due in part to advancements in medical technology and due to the lower cost
structure and greater efficiencies that are attainable at a specialized
outpatient site, we believe the volume and complexity of surgical cases
performed in an outpatient setting will continue to increase. Historically, our
outpatient services have generated significantly higher margins for us than
inpatient services.
Driving Growth in Our Hospital Systems-We remain committed to better positioning
our hospital systems and competing more effectively in the everevolving
healthcare environment by focusing on driving performance through operational
effectiveness, increasing capital efficiency and margins, investing in our
physician enterprise, particularly our specialist network, enhancing patient and
physician satisfaction, growing our higherdemand and higheracuity clinical
service lines (including outpatient lines), expanding patient and physician
access, and optimizing our portfolio of assets. Over the past several years, we
have undertaken enterprisewide costefficiency measures, and we continue to
transition certain support
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operations offshore to our Global Business Center ("GBC") in the Philippines . We
incurred restructuring charges in conjunction with these initiatives in the nine
months ended September 30, 2022 , and we could incur additional such charges in
the future.
We regularly review the marginal costs of providing certain services, and we
manage our operations and make staffing decisions based on those analyses. We
also continue to exit service lines, businesses and markets that we believe are
no longer a core part of our longterm growth strategy. In April 2021 , we
divested the majority of our urgent care centers operated under the MedPost and
CareSpot brands by our Hospital Operations and Ambulatory Care segments. In
addition, we completed the sale of the Miami Hospitals in August 2021 and the
sale of an Arizona micro-hospital in April 2022 . We intend to further refine our
portfolio of hospitals and other healthcare facilities when we believe such
refinements will help us improve profitability, allocate capital more
effectively in areas where we have a stronger presence, deploy proceeds on
higherreturn investments across our business, enhance cash flow generation,
reduce our debt and lower our ratio of debttoAdjusted EBITDA.
We also seek advantageous opportunities to grow our portfolio of hospitals and
other healthcare facilities. In September 2022 , we opened a new acute care
hospital, Piedmont Medical Center - Fort Mill , in South Carolina . This 100bed
facility includes an emergency department, multispecialty operating rooms, an
intensive care unit, and labor and delivery rooms.
Improving the Customer Care Experience-As consumers continue to become more
engaged in managing their health, we recognize that understanding what matters
most to them and earning their loyalty is imperative to our success. As such, we
have enhanced our focus on treating our patients as traditional customers by:
(i) establishing networks of physicians and facilities that provide convenient
access to services across the care continuum; (ii) expanding service lines
aligned with growing community demand, including a focus on aging and chronic
disease patients; (iii) offering greater affordability and predictability,
including simplified registration and discharge procedures, particularly in our
outpatient centers; (iv) improving our culture of service; and (v) creating
health and benefit programs, patient education and health literacy materials
that are customized to the needs of the communities we serve. Through these
efforts, we intend to improve the customer care experience in every part of our
operations.
Driving Conifer's Growth-Conifer serves approximately 670 Tenet and nonTenet
hospitals and other clients nationwide. In addition to providing revenue cycle
management services to health systems and physicians, Conifer provides support
to both providers and selfinsured employers seeking assistance with clinical
integration, financial risk management and population health management. We
believe that our success in growing Conifer and increasing its profitability
depends in part on our success in executing the following strategies:
(i) attracting hospitals and other healthcare providers that currently handle
their revenue cycle management processes internally as new clients;
(ii) generating new client relationships through opportunities from USPI and
Tenet's acute care hospital acquisition and divestiture activities;
(iii) expanding revenue cycle management and valuebased care service offerings
through organic development and small acquisitions; (iv) leveraging data from
tens of millions of patient interactions for continued enhancement of the
valuebased care environment to drive competitive differentiation; and
(v) maximizing opportunities through automation and offshoring to improve the
effectiveness and efficiency of Conifer's services.
Improving Profitability-We continue to focus on growing patient volumes and
effective cost management as a means to improve profitability. Our inpatient
admissions have been constrained in recent years by the COVID19 pandemic,
increased competition, utilization pressure by managed care organizations, new
delivery models that are designed to lower the utilization of acute care
hospital services, the effects of higher patient copays, coinsurance amounts
and deductibles, changing consumer behavior, and adverse economic conditions and
demographic trends in certain of our markets. Our business has also been
impacted by the rise in inflation and its effects on elective procedures, wages
and costs. However, we also believe that emphasis on higherdemand clinical
service lines (including outpatient services), focus on expanding our ambulatory
care business, cultivation of our culture of service, participation in Medicare
Advantage health plans that have been experiencing higher growth rates than
traditional Medicare, and contracting strategies that create shared value with
payers should help us grow our patient volumes over time. We are also continuing
to explore new opportunities to enhance efficiency, including further
integration of enterprisewide centralized support functions, outsourcing
additional functions unrelated to direct patient care, and reducing clinical and
vendor contract variation.
Reducing Our Leverage Over Time-All of our longterm debt has a fixed rate of
interest, except for outstanding borrowings, if any, under our Credit Agreement,
and the maturity dates of our notes are staggered from 2024 through 2031. We
believe that our capital structure minimizes the nearterm impact of increased
interest rates, and the staggered maturities of our debt allow us to retire or
refinance our debt over time. It remains our longterm objective to reduce our
debt and lower our ratio of debttoAdjusted EBITDA, primarily through more
efficient capital allocation and Adjusted EBITDA growth, which should lower our
refinancing risk.
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During the nine months ended September 30, 2022 , we redeemed or repurchased
$2.572 billion aggregate principal amount of our senior secured first lien and
senior unsecured notes in advance of their maturity dates. We financed these
transactions using a substantial portion of the proceeds from our issuance of
$2.000 billion aggregate principal amount of 6.125% senior secured first lien
notes due 2030 (the "2030 Senior Secured First Lien Notes") and cash on hand.
Our ability to execute on our strategies and respond to the aforementioned
trends is subject to the extent and scope of the impact on our operations of the
COVID19 pandemic, as well as a number of other risks and uncertainties, all of
which may cause actual results to be materially different from expectations. For
information about risks and uncertainties that could affect our results of
operations, see the Risk Factors section in Part II of our Q1'22 Report and the
ForwardLooking Statements and Risk Factors sections in Part I of our Annual
Report.
RESULTS OF OPERATIONS-OVERVIEW
The following table presents selected operating statistics for our Hospital Operations and Ambulatory Care segments on a continuing operations basis:
Three Months Ended September 30, Increase
2022 2021 (Decrease)
Hospital Operations - hospitals and related
outpatient facilities:
Number of hospitals (at end of period) 61 60 1 (1)
Total admissions 133,125 145,412 (8.4) %
Adjusted admissions(2) 247,394 256,250 (3.5) %
Paying admissions (excludes charity and uninsured) 126,603 136,932 (7.5) %
Charity and uninsured admissions 6,522 8,480 (23.1) %
Admissions through emergency department 100,181 110,675 (9.5) %
Emergency department visits, outpatient 546,474 578,734 (5.6) %
Total emergency department visits 646,655 689,409 (6.2) %
Total surgeries 86,502 91,707 (5.7) %
Patient days - total 681,964 770,175 (11.5) %
Adjusted patient days(2) 1,221,812 1,335,610 (8.5) %
Average length of stay (days) 5.12 5.30 (3.4) %
Average licensed beds 15,443 15,987 (3.4) %
Utilization of licensed beds(3) 48.0 % 52.4 % (4.4) % (1)
Total visits 1,398,610 1,523,726 (8.2) %
Paying visits (excludes charity and uninsured) 1,317,103 1,423,068 (7.4) %
Charity and uninsured visits 81,507 100,658 (19.0) %
Ambulatory Care:
Total consolidated facilities (at end of period) 300 232 68 (1)
Total consolidated cases 332,507 295,026 12.7 %
(1) The change is the difference between the 2022 and 2021 amounts shown. (2) Adjusted admissions/patient days represents actual admissions/patient days adjusted to
include outpatient services provided by facilities in our Hospital Operations segment by
multiplying actual admissions/patient days by the sum of gross inpatient revenues and
outpatient revenues and dividing the results by gross inpatient revenues. (3) Utilization of licensed beds represents patient days divided by the number of days in the
period divided by average licensed beds.
Total admissions decreased by 12,287, or 8.4%, and total surgeries decreased by 5,205, or 5.7%, in the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 . Total emergency department visits decreased by 6.2% during the threemonth period in 2022 compared to the same period in 2021. These decreases in our patient volumes were primarily attributable to the sale of the Miami Hospitals inAugust 2021 and lower COVIDrelated volumes during the three months endedSeptember 30, 2022 as compared to the same period in the prior year. The increase in Ambulatory Care total consolidated cases of 12.7% in the three months endedSeptember 30, 2022 , as compared to the same period in 2021, is primarily attributable to incremental case volume from our recently acquired facilities, partially offset by the closure of two ASCs, the impact of the COVID19 pandemic, and the adverse impact of Hurricane Ian on certain of our facilities located inFlorida andSouth Carolina . 33 -------------------------------------------------------------------------------- Table of Contents The following table presents net operating revenues by segment on a continuing operations basis: Three Months Ended September 30, Increase Revenues 2022 2021 (Decrease) Net operating revenues: Hospital Operations prior to inter-segment eliminations $ 3,778$ 4,030 (6.3) % Ambulatory Care 806 666 21.0 % Conifer 333 314 6.1 % Inter-segment eliminations (116) (116) - % Total $ 4,801$ 4,894 (1.9) % Consolidated net operating revenues decreased by$93 million , or 1.9%, in the three months endedSeptember 30, 2022 compared to the same period in 2021. The decrease of$252 million , or 6.3%, in our Hospital Operations segment's net operating revenues prior to intersegment eliminations for the threemonth period in 2022 compared to the same period in 2021 was primarily due to the sale of the Miami Hospitals inAugust 2021 , lower overall patient volumes and decreased COVIDrelated patient acuity, partially offset by negotiated commercial rate increases. Net operating revenues in our Ambulatory Care segment increased$140 million , or 21.0%, in the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 . This increase was mainly driven by our recently acquired ASCs and negotiated commercial rate increases, partially offset by the closure of two ASCs and the adverse impacts of the COVID-19 pandemic and Hurricane Ian on case volumes. Conifer's revenues, net of intersegment eliminations, increased$19 million , or 9.6%, during the three months endedSeptember 30, 2022 compared to the same period in 2021, primarily due to contractual rate increases and new business expansion. During the three months endedSeptember 30, 2022 and 2021, we recognized net grant income of$54 million and$3 million , respectively, which amounts are not included in net operating revenues. Our accounts receivable days outstanding ("AR Days") from continuing operations were 58.0 days atSeptember 30, 2022 and 57.0 days atDecember 31, 2021 . Our AR Days target is less than 55 days. AR Days are calculated as our accounts receivable from continuing operations on the last date in the quarter divided by our net operating revenues from continuing operations for the quarter ended on that date divided by the number of days in the quarter. This calculation includes our Hospital Operations segment's contract assets. The AR Days calculation excludes (i) urgent care centers operated under the MedPost and CareSpot brands, which we divested inApril 2021 , (ii) the Miami Hospitals, which we sold inAugust 2021 , and (iii) ourCalifornia provider fee revenues. 34 -------------------------------------------------------------------------------- Table of Contents The following table provides information about selected operating expenses by segment on a continuing operations basis: Three Months Ended September 30, Increase 2022 2021 (Decrease) Hospital Operations: Salaries, wages and benefits $ 1,847$ 1,872 (1.3) % Supplies 598 656 (8.8) % Other operating expenses 841 894 (5.9) % Total $ 3,286$ 3,422 (4.0) % Ambulatory Care: Salaries, wages and benefits $ 208$ 169 23.1 % Supplies 218 170 28.2 % Other operating expenses 110 97 13.4 % Total $ 536$ 436 22.9 % Conifer: Salaries, wages and benefits $ 175$ 168 4.2 % Supplies 1 1 - % Other operating expenses 67 60 11.7 % Total $ 243$ 229 6.1 % Total: Salaries, wages and benefits $ 2,230$ 2,209 1.0 % Supplies 817 827 (1.2) % Other operating expenses 1,018 1,051 (3.1) % Total $ 4,065$ 4,087 (0.5) % Rent/lease expense(1): Hospital Operations $ 73$ 73 - % Ambulatory Care 29 24 20.8 % Conifer 2 2 - % Total $ 104$ 99 5.1 % (1) Included in other operating expenses. The following table provides information about our Hospital Operations segment's selected operating expenses per adjusted admission on a continuing operations basis: Three Months Ended September 30, Increase 2022 2021 (Decrease)
Hospital Operations:
Salaries, wages and benefits per adjusted admission(1) $ 7,464
2.1 %
Supplies per adjusted admission(1) 2,418 2,563 (5.7) %
Other operating expenses per adjusted admission(1) 3,396 3,488 (2.6) %
Total per adjusted admission $ 13,278 $ 13,359 (0.6) %
(1) Adjusted admissions represents actual admissions adjusted to include outpatient
services provided by facilities in our Hospital Operations segment by multiplying
actual admissions by the sum of gross inpatient revenues and outpatient revenues and
dividing the results by gross inpatient revenues.
Salaries, wages and benefits expense for our Hospital Operations segment decreased$25 million , or 1.3%, in the three months endedSeptember 30, 2022 compared to the same period in 2021. This change was primarily attributable to the sale of the Miami Hospitals inAugust 2021 , lower employee benefits costs, and our continued focus on cost-efficiency measures, partially offset by increased contract labor expense and annual merit increases for certain of our employees. On a peradjustedadmission basis, salaries, wages and benefits increased 2.1% in the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 . Supplies expense for our Hospital Operations segment decreased$58 million , or 8.8%, during the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 . This decrease was primarily attributable to the sale of the Miami Hospitals, lower patient volumes and COVID-related patient acuity during the 2022 period, and our costefficiency measures. These factors were partially offset by increased costs for certain supplies due to COVID-19, the impact of general market conditions and inflation. On a peradjustedadmission basis, supplies expense decreased by 5.7% in 35 -------------------------------------------------------------------------------- Table of Contents the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 due to the aforementioned factors. Other operating expenses for our Hospital Operations segment decreased$53 million , or 5.9%, in the three months endedSeptember 30, 2022 compared to the same period in 2021. The decrease was primarily attributable to the sale of the Miami Hospitals inAugust 2021 , a gain recognized on the sale of a portion of an interest in certain assets of$45 million during the 2022 period and our continued focus on cost-efficiency measures. On a peradjustedadmission basis, other operating expenses in the three months endedSeptember 30, 2022 decreased by 2.6% compared to the same period in 2021.
LIQUIDITY AND CAPITAL RESOURCES OVERVIEW
Cash and cash equivalents were
Significant cash flow items in the three months ended
•Net cash provided by operating activities before interest, taxes, discontinued operations, and restructuring charges, acquisitionrelated costs, and litigation costs and settlements of$568 million (including$51 million from federal and state grants);
•Proceeds from sales of marketable securities, long-term investments and other
assets of
•Purchases of marketable securities and equity investments of
•Interest payments of
•Capital expenditures of
•$122 million of distributions paid to noncontrolling interests;
•Payments totaling
•$158 million of payments for purchases of businesses or joint venture interests.
Net cash provided by operating activities was$662 million in the nine months endedSeptember 30, 2022 compared to$1.211 billion in the nine months endedSeptember 30, 2021 . Key factors contributing to the change between the 2022 and 2021 periods include the following: •$880 million of Medicare advances recouped or repaid in the nine months endedSeptember 30, 2022 compared to$326 million recouped during the same period in 2021;
•$155 million of cash received from grants in the nine months ended
•Lower interest payments of
•Higher income tax payments of
•Decreased net cash receipts of
•The timing of other working capital items.
FORWARD-LOOKING STATEMENTS
This report includes "forwardlooking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, each as amended. All statements, other than statements of
historical or present facts, that address activities, events, outcomes, business
strategies and other matters that we plan, expect, intend, assume, believe,
budget, predict, forecast, project, target, estimate or anticipate (and other
similar expressions) will, should or may occur in the future are forwardlooking
statements, including (but not limited to) disclosure regarding (i) the impact
of the
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COVID-19 pandemic, (ii) our future earnings, financial position, and operational
and strategic initiatives, and (iii) developments in the healthcare industry.
Forwardlooking statements represent management's expectations, based on
currently available information, as to the outcome and timing of future events,
but, by their nature, address matters that are indeterminate. They involve known
and unknown risks, uncertainties and other factors, many of which we are unable
to predict or control, that may cause our actual results, performance or
achievements to be materially different from those expressed or implied by
forwardlooking statements. Such factors include, but are not limited to, the
risks described in the ForwardLooking Statements and Risk Factors sections in
Part I of our Annual Report and the Risk Factors section in Part II of our
Q1'22 Report.
When considering forwardlooking statements, you should keep in mind the risk
factors and other cautionary statements in our Annual Report and in this report.
Should one or more of the risks and uncertainties described in these reports
occur, or should underlying assumptions prove incorrect, our actual results and
plans could differ materially from those expressed in any forwardlooking
statement. We specifically disclaim any obligation to update any information
contained in a forwardlooking statement or any forwardlooking statement in its
entirety except as required by law.
All forwardlooking statements attributable to us are expressly qualified in their entirety by this cautionary information.
SOURCES OF REVENUE FOR OUR HOSPITAL OPERATIONS SEGMENT
We earn revenues for patient services from a variety of sources, primarily
managed care payers and the federal Medicare program, as well as state Medicaid
programs, indemnitybased health insurance companies and uninsured patients
(that is, patients who do not have health insurance and are not covered by some
other form of thirdparty arrangement).
The following table presents the sources of net patient service revenues less
implicit price concessions for our hospitals and related outpatient facilities,
expressed as percentages of net patient service revenues less implicit price
concessions from all sources:
Three Months Ended Nine Months Ended
September 30, Increase September 30, Increase
2022 2021 (Decrease)(1) 2022 2021 (Decrease)(1)
Medicare 16.6 % 16.6 % - % 17.2 % 18.0 % (0.8) %
Medicaid 7.4 % 9.0 % (1.6) % 6.7 % 7.9 % (1.2) %
Managed care(2) 69.7 % 69.2 % 0.5 % 70.1 % 68.1 % 2.0 %
Uninsured 1.0 % 0.9 % 0.1 % 1.1 % 1.3 % (0.2) %
Indemnity and other 5.3 % 4.3 % 1.0 % 4.9 % 4.7 % 0.2 %
(1) The change is the difference between the 2022 and 2021 percentages presented. (2) Includes Medicare and Medicaid managed care programs.
Our payer mix on an admissions basis for our hospitals, expressed as a percentage of total admissions from all sources, is presented below:
Three Months Ended Nine Months Ended
September 30, Increase September 30, Increase
Admissions from: 2022 2021 (Decrease)(1) 2022 2021 (Decrease)(1)
Admissions from:
Medicare 20.2 % 19.6 % 0.6 % 20.8 % 20.6 % 0.2 %
Medicaid 5.5 % 6.1 % (0.6) % 5.6 % 5.8 % (0.2) %
Managed care(2) 66.4 % 65.2 % 1.2 % 65.7 % 64.4 % 1.3 %
Charity and uninsured 4.9 % 5.8 % (0.9) % 4.8 % 6.0 % (1.2) %
Indemnity and other 3.0 % 3.3 % (0.3) % 3.1 % 3.2 % (0.1) %
(1) The change is the difference between the 2022 and 2021 percentages presented. (2) Includes Medicare and Medicaid managed care programs.
GOVERNMENT PROGRAMS
TheCenters for Medicare & Medicaid Services ("CMS") is an agency of theU.S. Department of Health and Human Services ("HHS") that administers a number of government programs authorized by federal law; it is the single largest payer of healthcare services inthe United States . Medicare is a federally funded health insurance program primarily for individuals 65 years of age and older, as well as some younger people with certain disabilities and conditions, and is provided without 37 -------------------------------------------------------------------------------- Table of Contents regard to income or assets. Medicaid is coadministered by the states and is jointly funded by the federal government and state governments. Medicaid is the nation's main public health insurance program for people with low incomes and is the largest source of health coverage inthe United States . TheChildren's Health Insurance Program ("CHIP"), which is also coadministered by the states and jointly funded, provides health coverage to children in families with incomes too high to qualify for Medicaid, but too low to afford private coverage. Unlike Medicaid, the CHIP is limited in duration and requires the enactment of reauthorizing legislation. Funding for the CHIP has been reauthorized through federal fiscal year ("FFY") 2027.
Medicare
Medicare offers its beneficiaries different ways to obtain their medical
benefits. One option, the Original Medicare Plan (which includes "Part A" and
"Part B"), is a feeforservice ("FFS") payment system. The other option, called
Medicare Advantage (sometimes called "Part C" or "MA Plans"), includes health
maintenance organizations ("HMOs"), preferred provider organizations ("PPOs"),
private FFS Medicare special needs plans and Medicare medical savings account
plans. Our total net patient service revenues from continuing operations of the
hospitals and related outpatient facilities in our Hospital Operations segment
for services provided to patients enrolled in the Original Medicare Plan were
$575 million and $616 million for the three months ended September 30, 2022 and
2021, respectively, and $1.773 billion and $2.001 billion for the nine months
ended September 30, 2022 and 2021, respectively.
A general description of the types of payments we receive for services provided
to patients enrolled in the Original Medicare Plan is provided in our Annual
Report. Recent regulatory and legislative updates to the terms of these payment
systems and their estimated effect on our revenues can be found under
"Regulatory and Legislative Changes" below.
Medicaid
Medicaid programs and the corresponding reimbursement methodologies vary from statetostate and from yeartoyear. Even prior to the COVID19 pandemic, several states in which we operate faced budgetary challenges that resulted in reduced Medicaid funding levels to hospitals and other providers. Because most states must operate with balanced budgets, and the Medicaid program is generally a significant portion of a state's budget, states can be expected to adopt or consider adopting future legislation designed to reduce or not increase their Medicaid expenditures. In addition, some states delay issuing Medicaid payments to providers to manage state expenditures. As an alternative means of funding provider payments, many of the states in which we operate have adopted supplemental payment programs authorized under the Social Security Act. Continuing pressure on state budgets and other factors, including legislative and regulatory changes, could result in future reductions to Medicaid payments, payment delays or changes to Medicaid supplemental payment programs. Federal government denials or delayed approvals of waiver applications or extension requests by the states in which we operate could materially impact our Medicaid funding levels. Estimated revenues under various state Medicaid programs, including statefunded Medicaid managed care programs, constituted approximately 19.4% and 18.2% of total net patient service revenues less implicit price concessions of our acute care hospitals and related outpatient facilities for the nine months endedSeptember 30, 2022 and 2021, respectively. We also receive disproportionate share hospital ("DSH") and other supplemental revenues under various state Medicaid programs. For the nine months endedSeptember 30, 2022 and 2021, our total Medicaid revenues attributable to DSH and other supplemental revenues were approximately$467 million and$631 million , respectively. The decrease between the two ninemonth periods was primarily attributable to$101 million of assessments we recognized related to the Texas Comprehensive Hospital Increase Reimbursement Program ("CHIRP") following its approval in 2022. During the nine months endedSeptember 30, 2022 , we also recognized$203 million of revenue related to CHIRP that is included in Managed Medicaid revenue rather than the DSH and other supplemental revenues classification due to the structure of the program. Total Medicaid and Managed Medicaid net patient service revenues from continuing operations recognized by the hospitals and related outpatient facilities in our Hospital Operations segment for the nine months endedSeptember 30, 2022 and 2021 were$1.996 billion and$2.023 billion , respectively. During the nine months endedSeptember 30, 2022 , Medicaid and Managed Medicaid revenues comprised 35% and 65%, respectively, of our Medicaidrelated net patient service revenues from continuing operations recognized by the hospitals and related outpatient facilities in our Hospital Operations segment. All Medicaid and Managed Medicaid patient service revenues are presented net of provider taxes or assessments paid by our hospitals, which are reported as an offset reduction to FFS Medicaid revenue. Because we cannot predict what actions the federal government or the states may take under existing or future legislation and/or regulatory changes to address budget gaps, deficits, Medicaid expansion, provider fee programs or Medicaid Section 1115 waivers, we are unable to assess the effect that any such legislation or regulatory action might have on our business; however, the impact on our future financial position, results of operations or cash flows could be material. 38 -------------------------------------------------------------------------------- Table of Contents Regulatory and Legislative Changes
Material updates to the information set forth in our Annual Report about the Medicare and Medicaid payment systems, as well as other government programs impacting our business, are provided below.
Payment and Policy Changes to the Medicare Inpatient Prospective Payment
Systems-Section 1886(d) of the Social Security Act requires CMS to update
Medicare inpatient FFS payment rates for hospitals reimbursed under the
inpatient prospective payment systems ("IPPS") annually. The updates generally
become effective October 1 , the beginning of the FFY. In August 2022 , CMS issued
final changes to the Hospital Inpatient Prospective Payment Systems for Acute
Care Hospitals and Fiscal Year 2023 Rates ("Final IPPS Rule"). The Final IPPS
Rule includes the following payment and policy changes:
•A market basket increase of 4.1% for Medicare severityadjusted
diagnosisrelated group ("MSDRG") operating payments for hospitals reporting
specified quality measure data and that are meaningful users of electronic
health record technology; CMS also finalized a 0.3% multifactor productivity
reduction required by the Affordable Care Act and a 0.5% increase required by
the Medicare Access and CHIP Reauthorization Act that together result in a net
operating payment update of 4.3% before budget neutrality adjustments;
•Changes to the hospital ValueBased Purchasing ("VBP") and Hospital-Acquired
Condition ("HAC") programs for FFY 2023 due to the impact of the COVID-19 Public
Health Emergency, including the implementation of a special scoring methodology
for the VBP program that results in each hospital receiving a valuebased
incentive payment amount equal to its 2% reduction to the operating standardized
amount; and suppression of all measures in the HAC reduction program resulting
in no hospitals being penalized for FFY 2023;
•An increase in the cost outlier threshold from
•A 2.36% net increase in the capital federal MSDRG rate; and
•Updates to the three factors used to determine the amount and distribution of Medicare uncompensated care disproportionate share hospital ("UCDSH") payments.
According to CMS, the combined impact of the payment and policy changes in the Final IPPS Rule for operating costs will yield an average 2.6% increase in Medicare operating MSDRG FFS payments for hospitals in urban areas and an average 3.3% increase in such payments for proprietary hospitals in FFY 2023. We estimate that all of the final payment and policy changes affecting operating MSDRG and UCDSH payments will result in an estimated 3.7% increase in our annual Medicare FFS IPPS payments, which yields an estimated increase of approximately$55 million . Because of the uncertainty associated with various factors that may influence our future IPPS payments by individual hospital, including legislative, regulatory or legal actions, admission volumes, length of stay and case mix, we cannot provide any assurances regarding our estimate of the impact of the payment and policy changes. Proposed Payment and Policy Changes to the Medicare Outpatient Prospective Payment and Ambulatory Surgery Center Payment Systems-InJuly 2022 , CMS released proposed policy changes and payment rates for the Hospital Outpatient Prospective Payment System ("OPPS") and Ambulatory Surgical Center Payment System for calendar year ("CY") 2023 ("Proposed OPPS/ASC Rule"). The Proposed OPPS/ASC Rule includes the following proposed payment and policy changes: •An estimated net increase of 2.7% for the OPPS rates based on an estimated market basket increase of 3.1%, reduced by a multifactor productivity adjustment required by the Affordable Care Act of 0.4%; •Removal of 10 services from the Inpatient Only List (which is the list of procedures that must be performed on an inpatient basis) after determining such services meet established criteria for removal; •Establishment of an exemption for rural Sole Community Hospitals from the site-neutral Medicare reduced payment rate for clinic visits furnished in exempt off-campus, provider-based departments and payment for such visits at the full OPPS rate; and
•A 2.7% increase to the Ambulatory Surgical Center payment rates.
In addition, the Proposed OPPS/ASC Rule acknowledges that additional changes
would be forthcoming with respect to CMS' 340B program, which allows certain
hospitals (i.e., only nonprofit organizations with specific federal designations
and/or funding) ("340B Hospitals") to purchase drugs at discounted rates from
drug manufacturers ("340B Drugs"). In the CY 2018
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final rule regarding OPPS payment and policy changes, CMS reduced the payment
for 340B Drugs from the average sales price ("ASP") plus 6% to the ASP minus
22.5% and made a corresponding budgetneutral increase to payments to all
hospitals for other drugs and services reimbursed under the OPPS (the
"340B Payment Adjustment"). CMS retained the same 340B Payment Adjustment in the
final rules regarding OPPS payment and policy changes for CYs 2019 through 2022.
Certain hospital associations and hospitals commenced litigation challenging
CMS' authority to impose the 340B Payment Adjustment for CYs 2018, 2019 and
2020. Following the initial court decisions and a series of appeals, the U.S.
Supreme Court (the "Supreme Court ") unanimously ruled in June 2022 that the
decision to impose the 340B Payment Adjustment in CYs 2018 and 2019 was
unlawful. The case was remanded to the lower courts to determine the appropriate
remedy, and it is expected that 340B Hospitals will be permitted to reclaim at
least some portion of the 340B payments that were previously withheld. The
Proposed OPPS/ASC Rule states that CMS did not have sufficient time to account
for the Supreme Court decision in the CY 2023 proposed rates and budget
neutrality calculations; however, CMS has indicated that it does anticipate
applying the ASP plus 6% for 340B Drugs in the CY 2023 final rule, in lieu of
the current payment policy of ASP minus 22.5%. CMS is still evaluating how to
apply the Supreme Court ruling to the prior cost years.
CMS projects that the combined impact of the proposed payment and policy changes
in the Proposed OPPS/ASC Rule under the current 340B payment policy (of ASP
minus 22.5%) will yield an average 2.9% increase in Medicare FFS OPPS payments
for hospitals in urban areas and an average 3.5% increase in Medicare FFS OPPS
payments for proprietary hospitals. Based on CMS' estimates under the current
340B payment policy, the projected annual impact of the payment and policy
changes in the Proposed OPPS/ASC Rule on our hospitals is an increase to
Medicare FFS hospital outpatient revenues of approximately $21 million , which
represents an increase of approximately 3.7%.
However, CMS projects that the combined impact of the proposed payment and
policy changes in the Proposed OPPS/ASC Rule under the anticipated final 340B
payment policy (of ASP plus 6%) will yield an average 4% increase in Medicare
FFS OPPS payments for hospitals in urban areas and an average 0.5% increase in
Medicare FFS OPPS payments for proprietary hospitals. Based on CMS' estimates
under the anticipated final 340B payment policy, the projected annual impact of
the payment and policy changes in the Proposed OPPS/ASC Rule on our hospitals is
an increase to Medicare FFS hospital outpatient revenues of approximately
$3 million , which represents an increase of approximately 0.5%.
Because of the uncertainty associated with various factors that may influence
our future OPPS payments, including legislative or legal actions, volumes and
case mix, as well as potential changes to the proposed rule, we cannot provide
any assurances regarding our estimate of the impact of the proposed payment and
policy changes. In addition, it remains unclear at this time how CMS will
finance any retroactive payments for 340B payments that were previously withheld
given that the original policy was budgetneutral and HHS already redistributed
the savings. We cannot predict the remedy that will be imposed, the timing
thereof, or what further actions CMS or Congress might take with respect to the
340B program; however, it is possible that reversal of the 340B Payment
Adjustments could have an adverse effect on our future net operating revenues
and cash flows.
Proposed Payment and Policy Changes to the Medicare Physician Fee Schedule-In
July 2022 , CMS released the CY 2023 Medicare Physician Fee Schedule ("MPFS")
Proposed Rule ("MPFS Proposed Rule"). The MPFS Proposed Rule includes updates to
payment policies, payment rates and other provisions for services reimbursed
under the MPFS from January 1 through December 31, 2023 . Under the MPFS Proposed
Rule, the CY 2023 conversion factor, which is the base rate that is used to
convert relative units into payment rates, would be reduced from $34.61 to
$33.08 , due in part to the expiration of the one-time 3% payment increase
provided for in CY 2022 by the Protecting Medicare and American Farmers from
Sequester Cuts Act (the "Sequester Cuts Act"), as well as budget neutrality
rules. This change would result in an annual reduction of approximately
$8 million to our FFS MPFS revenues. Because of the uncertainty associated with
various factors that may influence our future MPFS payments, including
legislative, regulatory or legal actions, volumes and case mix, as well as
potential changes to the MPFS Proposed Rule, we cannot provide any assurances
regarding our estimate of the impact of the proposed payment and policy changes.
Public Health and Social Services Emergency Fund-During the nine months ended
September 30, 2022 and 2021, our Hospital Operations and Ambulatory Care
segments together recognized a total of $138 million and $40 million ,
respectively, of PRF grant income associated with lost revenues and
COVIDrelated costs. Our Hospital Operations segment also recognized $16 million
and $13 million of grant income from state and local grant programs during the
same ninemonth periods in 2022 and 2021, respectively. In addition, we
recognized $12 million of grant income through our unconsolidated affiliates
during the nine months ended September 30, 2021 . Grant income recognized by our
Hospital Operations and Ambulatory Care segments is presented in grant income,
and grant income recognized through our unconsolidated affiliates is presented
in equity in earnings of unconsolidated affiliates, in each case in our
condensed consolidated statements of operations. We cannot predict whether
additional distributions of grant funds will be authorized, and we cannot
provide assurances regarding the amount of grant income, if any, to be
recognized in the future.
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Medicare and Medicaid Payment Policy Changes-The federally mandated 2% sequestration reduction on Medicare FFS and Medicare Advantage payments to hospitals, physicians and other providers was suspended effectiveMay 1, 2020 throughDecember 31, 2021 . The Sequester Cuts Act, which was signed into law inDecember 2021 , extended the 2% Medicare sequestration moratorium throughMarch 31, 2022 , and adjusted the sequestration to 1% for the periodApril 1, 2022 throughJune 30, 2022 . Because further legislation was not passed, the full 2% reduction was restored effectiveJuly 1, 2022 . The impact of the Sequester Cuts Act on our operations was an increase of approximately$39 million of revenues in the six months endedJune 30, 2022 , after which the sequestration was fully reinstated. Because of the uncertainty associated with various factors that may influence our future Medicare and Medicaid payments, including future legislative, legal or regulatory actions, or changes in volumes and case mix, there is a risk that actual payments received under, or the ultimate impact of, these programs will differ materially from our expectations. PRIVATE INSURANCE Managed Care We currently have thousands of managed care contracts with various HMOs and PPOs. HMOs generally maintain a fullservice healthcare delivery network comprised of physician, hospital, pharmacy and ancillary service providers that HMO members must access through an assigned "primary care" physician. The member's care is then managed by his or her primary care physician and other network providers in accordance with the HMO's quality assurance and utilization review guidelines so that appropriate healthcare can be efficiently delivered in the most costeffective manner. HMOs typically provide reduced benefits or reimbursement (or none at all) to their members who use noncontracted healthcare providers for nonemergency care. PPOs generally offer limited benefits to members who use noncontracted healthcare providers. PPO members who use contracted healthcare providers receive a preferred benefit, typically in the form of lower copays, coinsurance or deductibles. As employers and employees have demanded more choice, managed care plans have developed hybrid products that combine elements of both HMO and PPO plans, including highdeductible healthcare plans that may have limited benefits, but cost the employee less in premiums. The amount of our managed care net patient service revenues, including Medicare and Medicaid managed care programs, from our hospitals and related outpatient facilities during the nine months endedSeptember 30, 2022 and 2021 was$7.227 billion and$7.592 billion , respectively. Our top 10 managed care payers generated 62% of our managed care net patient service revenues for the nine months endedSeptember 30, 2022 . During the same period, national payers generated 43% of our managed care net patient service revenues; the remainder came from regional or local payers. At bothSeptember 30, 2022 andDecember 31, 2021 , 67% of our net accounts receivable for our Hospital Operations segment were due from managed care payers. Revenues under managed care plans are based primarily on payment terms involving predetermined rates per diagnosis, perdiem rates, discounted FFS rates and/or other similar contractual arrangements. These revenues are also subject to review and possible audit by the payers, which can take several years before they are completely resolved. The payers are billed for patient services on an individual patient basis. An individual patient's bill is subject to adjustment on a patientbypatient basis in the ordinary course of business by the payers following their review and adjudication of each particular bill. We estimate the discounts for contractual allowances at the individual hospital level utilizing billing data on an individual patient basis. At the end of each month, on an individual hospital basis, we estimate our expected reimbursement for patients of managed care plans based on the applicable contract terms. We believe it is reasonably likely for there to be an approximately 3% increase or decrease in the estimated contractual allowances related to managed care plans. Based on reserves atSeptember 30, 2022 , a 3% increase or decrease in the estimated contractual allowance would impact the estimated reserves by approximately$19 million . Some of the factors that can contribute to changes in the contractual allowance estimates include: (i) changes in reimbursement levels for procedures, supplies and drugs when threshold levels are triggered; (ii) changes in reimbursement levels when stoploss or outlier limits are reached; (iii) changes in the admission status of a patient due to physician orders subsequent to initial diagnosis or testing; (iv) final coding of inhouse and dischargednotfinalbilled patients that change reimbursement levels; (v) secondary benefits determined after primary insurance payments; and (vi) reclassification of patients among insurance plans with different coverage and payment levels. Contractual allowance estimates are periodically reviewed for accuracy by taking into consideration known contract terms, as well as payment history. We believe our estimation and review process enables us to identify instances on a timely basis where such estimates need to be revised. We do not believe there were any adjustments to estimates of patient bills that were material to our revenues. In addition, on a corporatewide basis, we do not record any general provision for adjustments to estimated contractual allowances for managed care plans. Managed care accounts, net of contractual allowances recorded, are further 41 -------------------------------------------------------------------------------- Table of Contents reduced to their net realizable value through implicit price concessions based on historical collection trends for these payers and other factors that affect the estimation process. We expect managed care governmental admissions to continue to increase as a percentage of total managed care admissions over the near term. However, the managed Medicare and Medicaid insurance plans typically generate lower yields than commercial managed care plans, which have been experiencing an improved pricing trend. Although we have benefited from solid yearoveryear aggregate managed care pricing improvements for some time, we have seen these improvements moderate in recent years, and we believe this moderation could continue into the future. In the nine months endedSeptember 30, 2022 , our commercial managed care net inpatient revenue per admission from the hospitals in our Hospital Operations segment was approximately 81% higher than our aggregate yield on a peradmission basis from government payers, including managed Medicare and Medicaid insurance plans.
Indemnity
An indemnitybased agreement generally requires the insurer to reimburse an insured patient for healthcare expenses after those expenses have been incurred by the patient, subject to policy conditions and exclusions. Unlike an HMO member, a patient with indemnity insurance is free to control his or her utilization of healthcare and selection of healthcare providers.
Legislative Changes
As more fully described in Item 1, Business - Healthcare Regulation and
Licensing, of Part I of our Annual Report, the No Surprises Act ("NSA") and the
rules promulgated thereunder went into effect on January 1, 2022 . The NSA is
intended to address unexpected gaps in insurance coverage that result in
"surprise medical bills" when patients unknowingly obtain medical services from
physicians and other providers outside their health insurance network, including
certain emergency services, anesthesiology services and air ambulance
transportation. At this time, we are unable to assess the effect that the NSA or
regulations relating to the NSA might have on our business, financial position,
results of operations or cash flows.
UNINSURED PATIENTS
Uninsured patients are patients who do not qualify for government programs payments, such as Medicare and Medicaid, do not have some form of private insurance and, therefore, are responsible for their own medical bills. A significant number of our uninsured patients are admitted through our hospitals' emergency departments and often require highacuity treatment that is more costly to provide and, therefore, results in higher billings, which are the least collectible of all accounts.
Selfpay accounts receivable, which include amounts due from uninsured patients, as well as copays, coinsurance amounts and deductibles owed to us by patients with insurance, pose significant collectability problems. AtSeptember 30, 2022 andDecember 31, 2021 , 5% and 4%, respectively, of our net accounts receivable for our Hospital Operations segment was selfpay. Further, a significant portion of our implicit price concessions relates to selfpay amounts. We provide revenue cycle management services through Conifer, which is subject to various statutes and regulations regarding consumer protection in areas including finance, debt collection and credit reporting activities. For additional information, see Item 1, Business - Regulations Affecting Conifer's Operations, of Part I of our Annual Report. Conifer has performed systematic analyses to focus our attention on the drivers of bad debt expense for each hospital. While emergency department use is the primary contributor to our implicit price concessions in the aggregate, this is not the case at all hospitals. As a result, we have increased our focus on targeted initiatives that concentrate on nonemergency department patients as well. These initiatives are intended to promote process efficiencies in collecting selfpay accounts, as well as copay, coinsurance and deductible amounts owed to us by patients with insurance, that we deem highly collectible. We leverage a statisticalbased collections model that aligns our operational capacity to maximize our collections performance. We are dedicated to modifying and refining our processes as needed, enhancing our technology and improving staff training throughout the revenue cycle process in an effort to increase collections and reduce accounts receivable. Over the longer term, several other initiatives we have previously announced should also help address the challenges associated with serving uninsured patients. For example, our Compact with Uninsured Patients ("Compact") is designed to offer managed carestyle discounts to certain uninsured patients, which enables us to offer lower rates to those patients who historically had been charged standard gross charges. Under the Compact, the discount offered to uninsured patients is recognized as a contractual allowance, which reduces net operating revenues at the time the selfpay accounts are recorded. The uninsured patient accounts, net of contractual allowances recorded, are further reduced to their net realizable value through implicit price concessions based on historical collection trends for selfpay accounts and other factors that affect the estimation process. 42 -------------------------------------------------------------------------------- Table of Contents We also provide financial assistance through our charity and uninsured discount programs to uninsured patients who are unable to pay for the healthcare services they receive. Our policy is not to pursue collection of amounts determined to qualify for financial assistance; therefore, we do not report these amounts in net operating revenues. Most states include an estimate of the cost of charity care in the determination of a hospital's eligibility for Medicaid DSH payments. These payments are intended to mitigate our cost of uncompensated care. Some states have also developed provider fee or other supplemental payment programs to mitigate the shortfall of Medicaid reimbursement compared to the cost of caring for Medicaid patients. The initial expansion of health insurance coverage under the Affordable Care Act resulted in an increase in the number of patients using our facilities with either health insurance exchange or government healthcare insurance program coverage. However, we continue to have to provide uninsured discounts and charity care due to the failure of certain states to expand Medicaid coverage and for persons living in the country who are not permitted to enroll in a health insurance exchange or government healthcare insurance program.
The following table presents our estimated costs (based on selected operating expenses, which include salaries, wages and benefits, supplies and other operating expenses) of caring for our uninsured and charity patients:
Three Months Ended Nine Months Ended
September 30, September 30,
Estimated costs for: 2022 2021 2022 2021
Uninsured patients $ 131 $ 181 $ 389 $ 507
Charity care patients 22 25 62 74
Total $ 153 $ 206 $ 451 $ 581
RESULTS OF OPERATIONS
The following tables present our consolidated net operating revenues, operating
expenses and operating income, both in dollar amounts and as percentages of net
operating revenues, on a continuing operations basis:
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Net operating revenues:
Hospital Operations $ 3,778 $ 4,030 $ 11,221 $ 12,072
Ambulatory Care 806 666 2,315 1,976
Conifer 333 314 990 943
Inter-segment eliminations (116) (116) (342) (362)
Net operating revenues 4,801 4,894 14,184 14,629
Grant income 54 3 154 53
Equity in earnings of unconsolidated affiliates 51 45 151 141
Operating expenses:
Salaries, wages and benefits 2,230 2,209 6,538 6,690
Supplies 817 827 2,413 2,490
Other operating expenses, net 1,018 1,051 2,966 3,177
Depreciation and amortization 209 209 628 654
Impairment and restructuring charges, and
acquisition-related costs 24 15 97 55
Litigation and investigation costs 12 29 50 64
Net gains on sales, consolidation and deconsolidation of - (412) - (427)
facilities
Operating income $ 596 $ 1,014 $ 1,797 $ 2,120
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Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Net operating revenues 100.0 % 100.0 % 100.0 % 100.0 %
Grant income 1.1 % 0.1 % 1.1 % 0.4 %
Equity in earnings of unconsolidated affiliates 1.1 % 0.9 % 1.1 % 1.0 %
Operating expenses:
Salaries, wages and benefits 46.4 % 45.1 % 46.1 % 45.8 %
Supplies 17.0 % 16.9 % 17.0 % 17.0 %
Other operating expenses, net 21.3 % 21.5 % 20.9 % 21.7 %
Depreciation and amortization 4.4 % 4.3 % 4.4 % 4.5 %
Impairment and restructuring charges, and
acquisition-related costs 0.5 % 0.3 % 0.7 % 0.4 %
Litigation and investigation costs 0.2 % 0.6 % 0.4 % 0.4 %
Net gains on sales, consolidation and deconsolidation of - % (8.4) % - % (2.9) %
facilities
Operating income 12.4 % 20.7 % 12.7 % 14.5 %
The following tables present our net operating revenues, operating expenses and
operating income, both in dollar amounts and as percentages of net operating
revenues, by operating segment on a continuing operations basis:
Three Months Ended September 30, 2022 Nine Months Ended September 30, 2022
Hospital Hospital
Operations Ambulatory Care Conifer Operations Ambulatory Care Conifer
Net operating revenues $ 3,662 $ 806$ 333 $ 10,879 $ 2,315 $ 990 Grant income 54 - - 150 4 - Equity in earnings of unconsolidated affiliates 2 49 - 8 143 - Operating expenses: Salaries, wages and benefits 1,847 208 175 5,419 603 516 Supplies 598 218 1 1,786 624 3 Other operating expenses, net 841 110 67 2,455 315 196 Depreciation and amortization 172 28 9 518 83 27 Impairment and restructuring charges, and acquisition-related costs 14 5 5 68 13
16
Litigation and investigation costs 7 3 2 33 3 14 Operating income$ 239 $ 283$ 74 $ 758 $ 821$ 218 Net operating revenues 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % Grant income 1.5 % - % - % 1.4 % 0.2 % - % Equity in earnings of unconsolidated affiliates 0.1 % 6.1 % - % 0.1 % 6.2 % - % Operating expenses: Salaries, wages and benefits 50.4 % 25.8 % 52.6 % 49.8 % 26.0 % 52.1 % Supplies 16.3 % 27.0 % 0.3 % 16.4 % 27.0 % 0.3 % Other operating expenses, net 23.1 % 13.7 % 20.1 % 22.6 % 13.6 % 19.9 % Depreciation and amortization 4.7 % 3.5 % 2.7 % 4.8 % 3.6 % 2.7 % Impairment and restructuring charges, and acquisition-related costs 0.4 % 0.6 % 1.5 % 0.6 % 0.6 % 1.6 % Litigation and investigation costs 0.2 % 0.4 % 0.6 % 0.3 % 0.1 % 1.4 % Operating income 6.5 % 35.1 % 22.2 % 7.0 % 35.5 % 22.0 % 44
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Three Months Ended September 30, 2021 Nine Months Ended September 30, 2021
Hospital Hospital
Operations Ambulatory Care Conifer Operations Ambulatory Care Conifer
Net operating revenues $ 3,914 $ 666 $ 314 $ 11,710 $ 1,976 $ 943
Grant income 2 1 - 30 23 -
Equity in earnings of unconsolidated
affiliates 2 43 - 11 130 -
Operating expenses:
Salaries, wages and benefits 1,872 169 168 5,670 512 508
Supplies 656 170 1 1,991 496 3
Other operating expenses, net 894 97 60 2,711 295 171
Depreciation and amortization 177 23 9 555 71 28
Impairment and restructuring charges,
and acquisition-related costs 11 1 3 31 9 15
Litigation and investigation costs 26 3 - 54 9
1
Net losses (gains) on sales, consolidation and deconsolidation of facilities (413) 1 - (415) (12) - Operating income$ 695 $ 246$ 73 $ 1,154 $ 749$ 217 Net operating revenues 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % Grant income 0.1 % 0.2 % - % 0.3 % 1.2 % - % Equity in earnings of unconsolidated affiliates 0.1 % 6.5 % - % 0.1 % 6.6 % - % Operating expenses: Salaries, wages and benefits 47.8 % 25.4 % 53.5 % 48.4 % 25.9 % 53.9 % Supplies 16.8 % 25.5 % 0.3 % 17.0 % 25.1 % 0.3 % Other operating expenses, net 22.9 % 14.5 % 19.1 % 23.1 % 14.9 % 18.1 % Depreciation and amortization 4.5 % 3.5 % 2.9 % 4.7 % 3.6 % 3.0 % Impairment and restructuring charges, and acquisition-related costs 0.3 % 0.2 % 1.0 % 0.3 % 0.5 % 1.6 % Litigation and investigation costs 0.7 % 0.5 % - % 0.5 % 0.5 % 0.1 % Net losses (gains) on sales, consolidation and deconsolidation of facilities (10.6) % 0.2 % - % (3.5) % (0.6) % - % Operating income 17.8 % 36.9 % 23.2 % 9.9 % 37.9 % 23.0 % Consolidated net operating revenues decreased by$93 million and$445 million , or 1.9% and 3.0%, for the three and nine months endedSeptember 30, 2022 , respectively, compared to the three and nine months endedSeptember 30, 2021 , respectively. Hospital Operations net operating revenues net of intersegment eliminations decreased by$252 million and$831 million , or 6.4% and 7.1%, for the three and nine months endedSeptember 30, 2022 , respectively, compared to the same three and ninemonth periods in 2021, respectively. These decreases were primarily due to the loss of revenues in our Hospital Operations segment from the Miami Hospitals we sold inAugust 2021 , lower overall patient volumes and decreased COVIDrelated patient acuity during the 2022 period, partially offset by negotiated commercial rate increases. Our Hospital Operations segment also recognized grant income from federal and state grants totaling$54 million and$150 million during the three and nine months endedSeptember 30, 2022 , respectively, which is not included in net operating revenues. Ambulatory Care net operating revenues increased by$140 million and$339 million , or 21.0% and 17.2%, for the three and nine months endedSeptember 30, 2022 , respectively, compared to the three and nine months endedSeptember 30, 2021 , respectively. The change in 2022 revenues for the threemonth period was driven by an increase from acquisitions of$124 million , as well as an increase in samefacility net operating revenues of$19 million due primarily to higher net revenue per case. These increases were partially offset by a decrease of$3 million due to the closure of two ASCs, as well as the adverse impacts of the COVID-19 pandemic and Hurricane Ian on case volumes. The change in 2022 revenues for the ninemonth period was driven by an increase from acquisitions of$298 million , as well as an increase in samefacility net operating revenues of$103 million due primarily to higher surgical patient volume and higher net revenue per case. These increases were partially offset by a decrease of$62 million due mainly to the sale of urgent care centers and the transfer of imaging centers to the Hospital Operations segment inApril 2021 . Our Ambulatory Care segment recognized income from federal grants totaling$4 million during the six months endedJune 30, 2022 , which is not included in net operating revenues. Our Ambulatory Care segment did not recognize any grant income in the three months endedSeptember 30, 2022 . 45
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Conifer's net operating revenues increased by$19 million and$47 million , or 6.1% and 5.0%, for the three and nine months endedSeptember 30, 2022 , respectively, compared to the three and nine months endedSeptember 30, 2021 , respectively. Conifer's revenues from thirdparty clients, which revenues are not eliminated in consolidation, increased$19 million and$67 million , or 9.6% and 11.5%, for the three and nine months endedSeptember 30, 2022 , respectively, compared to the same three and ninemonth periods in 2021, respectively. These increases were primarily due to contractual rate increases and new business expansion. The following table presents selected operating expenses of our three operating segments. Information for our Hospital Operations segment is presented on a samehospital basis, whereas information presented for our Ambulatory Care and Conifer segments is presented on a continuing operations basis. Three Months Ended Nine Months Ended September 30, Increase September 30, Increase Selected Operating Expenses 2022 2021 (Decrease) 2022 2021 (Decrease) Hospital Operations - Same-Hospital: Salaries, wages and benefits$ 1,833 $ 1,827 0.3 %$ 5,386 $ 5,397 (0.2) % Supplies 595 638 (6.7) % 1,779 1,885 (5.6) % Other operating expenses 824 850 (3.1) % 2,410 2,513 (4.1) % Total$ 3,252 $ 3,315 (1.9) %$ 9,575 $ 9,795 (2.2) % Ambulatory Care: Salaries, wages and benefits$ 208 $ 169 23.1 %$ 603 $ 512 17.8 % Supplies 218 170 28.2 % 624 496 25.8 % Other operating expenses 110 97 13.4 % 315 295 6.8 % Total$ 536 $ 436 22.9 %$ 1,542 $ 1,303 18.3 % Conifer: Salaries, wages and benefits$ 175 $ 168 4.2 %$ 516 $ 508 1.6 % Supplies 1 1 - % 3 3 - % Other operating expenses 67 60 11.7 % 196 171 14.6 % Total$ 243 $ 229 6.1 %$ 715 $ 682 4.8 % Rent/lease expense(1): Hospital Operations$ 71 $ 69 2.9 %$ 205 $ 210 (2.4) % Ambulatory Care 29 24 20.8 % 84 75 12.0 % Conifer 2 2 - % 8 8 - % Total$ 102 $ 95 7.4 %$ 297 $ 293 1.4 % (1) Included in other operating expenses.
RESULTS OF OPERATIONS BY SEGMENT
Our operations are reported in three segments:
•Hospital Operations, which is comprised of acute care and specialty hospitals, imaging centers, ancillary outpatient facilities, microhospitals and physician practices;
•Ambulatory Care, which is comprised of USPI's ASCs and surgical hospitals; and
•Conifer, which provides revenue cycle management and valuebased care services to hospitals, health systems, physician practices, employers and other clients.
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Hospital Operations Segment
The following tables present operating statistics, revenues and expenses of our
hospitals and related outpatient facilities on a samehospital basis, unless
otherwise indicated:
Same-Hospital Same-Hospital
Three Months Ended Nine Months Ended
September 30 , Increase September 30 , Increase
Admissions, Patient Days and Surgeries 2022 2021 (Decrease) 2022 2021 (Decrease)
Number of hospitals (at end of period) 60 60 - (1) 60 60 - (1)
Total admissions 132,975 140,491 (5.3) % 388,825 413,942 (6.1) %
Adjusted admissions(2) 247,060 248,798 (0.7) % 714,024 732,540 (2.5) %
Paying admissions (excludes charity and uninsured) 126,470 132,614 (4.6) % 370,090 391,432 (5.5) %
Charity and uninsured admissions 6,505 7,877 (17.4) % 18,735 22,510 (16.8) %
Admissions through emergency department 100,024 106,217 (5.8) % 293,844 309,681 (5.1) %
Paying admissions as a percentage of total admissions 95.1 % 94.4 % 0.7 % (1) 95.2 % 94.6 % 0.6 % (1)
Charity and uninsured admissions as a percentage of total admissions
4.9 % 5.6 % (0.7) % (1) 4.8 % 5.4 % (0.6) % (1)
Emergency department admissions as a percentage of total admissions
75.2 % 75.6 % (0.4) % (1) 75.6 % 74.8 % 0.8 % (1)
Surgeries - inpatient 34,180 35,535 (3.8) % 100,837 106,994 (5.8) %
Surgeries - outpatient 52,273 54,119 (3.4) % 157,169 161,982 (3.0) %
Total surgeries 86,453 89,654 (3.6) % 258,006 268,976 (4.1) %
Patient days - total 681,537 748,012 (8.9) % 2,046,155 2,174,982 (5.9) %
Adjusted patient days(2) 1,220,864 1,301,989 (6.2) % 3,638,687 3,762,149 (3.3) %
Average length of stay (days) 5.13 5.32 (3.6) % 5.26 5.25 0.2 %
Licensed beds (at end of period) 15,369 15,399 (0.2) % 15,369 15,399 (0.2) %
Average licensed beds 15,376 15,399 (0.1) % 15,384 15,401 (0.1) %
Utilization of licensed beds(3) 48.2 % 52.8 % (4.6) % (1) 48.7 % 51.7 % (3.0) % (1)
(1) The change is the difference between the 2022 and 2021 amounts presented. (2) Adjusted admissions/patient days represents actual admissions/patient days adjusted to
include outpatient services provided by facilities in our Hospital Operations segment by
multiplying actual admissions/patient days by the sum of gross inpatient revenues and
outpatient revenues and dividing the results by gross inpatient revenues. (3) Utilization of licensed beds represents patient days divided by number of days in the
period divided by average licensed beds.
Same-Hospital Same-Hospital
Three Months Ended Nine Months Ended
September 30 , Increase September 30 , Increase
Outpatient Visits 2022 2021 (Decrease) 2022 2021 (Decrease)
Total visits 1,266,760 1,360,953 (6.9) % 3,788,402 4,008,056 (5.5) %
Paying visits (excludes charity and uninsured) 1,190,461 1,265,603 (5.9) % 3,557,929 3,736,175 (4.8) %
Charity and uninsured visits 76,299 95,350 (20.0) % 230,473 271,881 (15.2) %
Emergency department visits 545,766 567,260 (3.8) % 1,587,529 1,502,651 5.6 %
Surgery visits 52,273 54,119 (3.4) % 157,169 161,982 (3.0) %
Paying visits as a percentage of total visits 94.0 % 93.0 % 1.0 % (1) 93.9 % 93.2 % 0.7 % (1)
Charity and uninsured visits as a percentage
of total visits 6.0 % 7.0 % (1.0) % (1) 6.1 % 6.8 % (0.7) % (1)
(1) The change is the difference between the 2022 and 2021 amounts presented.
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Same-Hospital Same-Hospital
Three Months Ended Nine Months Ended
September 30, Increase September 30, Increase
Revenues 2022 2021 (Decrease) 2022 2021 (Decrease)
Total segment net operating revenues(1)
(4.5) % $ 10,779 $ 11,050 (2.5) %
Selected revenue data - hospitals and
related outpatient facilities:
Net patient service revenues(1)(2) $ 3,425 $ 3,599 (4.8) % $ 10,217 $ 10,498 (2.7) %
Net patient service revenue per adjusted
admission(1)(2) $ 13,863 $ 14,466 (4.2) % $ 14,309 $ 14,331 (0.2) %
Net patient service revenue per adjusted
patient day(1)(2) $ 2,805 $ 2,764 1.5 % $ 2,808 $ 2,790 0.6 %
(1) Revenues are net of implicit price concessions. (2) Adjusted admissions/patient days represents actual admissions/patient days adjusted to
include outpatient services provided by facilities in our Hospital Operations segment by
multiplying actual admissions/patient days by the sum of gross inpatient revenues and
outpatient revenues and dividing the results by gross inpatient revenues.
Same-Hospital Same-Hospital
Three Months Ended Nine Months Ended
September 30 , Increase September 30 , Increase
Total Segment Selected Operating Expenses 2022 2021 (Decrease)(1) 2022 2021 (Decrease)(1)
Salaries, wages and benefits as a percentage of net operating revenues
50.5 % 48.1 % 2.4 % 50.0 % 48.8 % 1.2 %
Supplies as a percentage of net operating revenues 16.4 % 16.8 % (0.4) % 16.5 % 17.1 % (0.6) %
Other operating expenses as a percentage of net
operating revenues 22.7 % 22.4 % 0.3 % 22.4 % 22.7 % (0.3) %
(1) The change is the difference between the 2022 and 2021 amounts presented.
Revenues Samehospital net operating revenues decreased$170 million , or 4.5%, during the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 , primarily due to lower overall patient volumes and decreased COVIDrelated patient acuity during the 2022 period, partially offset by negotiated commercial rate increases. Our Hospital Operations segment also recognized grant income totaling$54 million and$2 million from federal and state grants in the three months endedSeptember 30, 2022 and 2021, respectively, which is not included in net operating revenues. Samehospital admissions and outpatient visits decreased 5.3% and 6.9%, respectively, in the three months endedSeptember 30, 2022 compared to the same period in 2021, primarily driven by the COVIDrelated patient acuity and volume changes noted above. Samehospital net operating revenues decreased$271 million , or 2.5%, during the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 , due in part to lower patient volumes, decreased COVIDrelated patient acuity and the adverse impact of the Cybersecurity Incident on patient volumes. These factors were partially offset by negotiated commercial rate increases. Our Hospital Operations segment also recognized grant income from federal, state and local grants totaling$150 million and$30 million in the nine months endedSeptember 30, 2022 and 2021, respectively, which is not included in net operating revenues. Samehospital admissions and outpatient visits decreased by 6.1% and 5.5%, respectively, in the nine months endedSeptember 30, 2022 compared to the same period in 2021, primarily due to the factors described above. 48
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The following table presents our consolidated net accounts receivable by payer:
September 30, December 31,
2022 2021
Medicare $ 151 $ 155
Medicaid 44 47
Net cost report settlements receivable and valuation allowances 44 33
Managed care 1,643 1,602
Self-pay uninsured 37 21
Self-pay balance after insurance 82 70
Estimated future recoveries 144 137
Other payers 304 331
Total Hospital Operations 2,449 2,396
Ambulatory Care 377 374
Accounts receivable, net $ 2,826 $ 2,770
The collection of accounts receivable has been a key area of focus, particularly
over the past several years. At September 30, 2022 , our Hospital Operations
segment collection rate on selfpay accounts was approximately 28.9%. Our
selfpay collection rate includes payments made by patients, including copays,
coinsurance amounts and deductibles paid by patients with insurance. Based on
our accounts receivable from uninsured patients and copays, coinsurance
amounts and deductibles owed to us by patients with insurance at
September 30, 2022 , a 10% decrease or increase in our selfpay collection rate,
or approximately 3%, which we believe could be a reasonably likely change, would
result in an unfavorable or favorable adjustment to patient accounts receivable
of approximately $10 million . There are various factors that can impact
collection trends, such as changes in the economy and inflation, which in turn
have an impact on unemployment rates and the number of uninsured and
underinsured patients, the volume of patients through our emergency departments,
the increased burden of copays and deductibles to be made by patients with
insurance, and business practices related to collection efforts. These factors,
many of which have been affected by the COVID19 pandemic, continuously change
and can have an impact on collection trends and our estimation process.
We also typically experience ongoing managed care payment delays and disputes;
however, we continue to work with these payers to obtain adequate and timely
reimbursement for our services. Our estimated Hospital Operations segment
collection rate from managed care payers was approximately 95.9% at
September 30, 2022 .
We manage our implicit price concessions using hospitalspecific goals and
benchmarks such as (i) total cash collections, (ii) pointofservice cash
collections, (iii) AR Days and (iv) accounts receivable by aging category. The
following tables present the approximate aging by payer of our net accounts
receivable from the continuing operations of our Hospital Operations segment of
$2.405 billion and $2.363 billion at September 30, 2022 and December 31, 2021 ,
respectively, excluding cost report settlements receivable and valuation
allowances of $44 million and $33 million , respectively, at September 30, 2022
and December 31, 2021 :
Indemnity,
Managed Self-Pay
Medicare Medicaid Care and Other Total
At September 30, 2022 :
0-60 days 91 % 31 % 56 % 22 % 50 %
61-120 days 5 % 28 % 16 % 13 % 15 %
121-180 days 2 % 16 % 9 % 9 % 9 %
Over 180 days 2 % 25 % 19 % 56 % 26 %
Total 100 % 100 % 100 % 100 % 100 %
At December 31, 2021 :
0-60 days 93 % 35 % 57 % 22 % 52 %
61-120 days 4 % 31 % 18 % 14 % 16 %
121-180 days 1 % 14 % 10 % 9 % 9 %
Over 180 days 2 % 20 % 15 % 55 % 23 %
Total 100 % 100 % 100 % 100 % 100 %
Conifer continues to implement revenue cycle initiatives to improve our cash
flow. These initiatives are focused on standardizing and improving patient
access processes, including preregistration, registration, verification of
eligibility and benefits, liability identification and collections at
pointofservice, and financial counseling. These initiatives are intended to
reduce denials, improve service levels to patients and increase the quality of
accounts that end up in accounts receivable.
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Although we continue to focus on improving our methodology for evaluating the
collectability of our accounts receivable, we may incur future charges if there
are unfavorable changes in the trends affecting the net realizable value of our
accounts receivable.
At September 30, 2022 , we had a cumulative total of patient account assignments
to Conifer of $1.880 billion related to our continuing operations. These
accounts have already been written off and are not included in our receivables;
however, an estimate of future recoveries from all the accounts assigned to
Conifer is determined based on our historical experience and recorded in
accounts receivable.
Patient advocates from Conifer's Eligibility and Enrollment Services program
("EES") screen patients in the hospital to determine whether those patients meet
eligibility requirements for financial assistance programs. They also expedite
the process of applying for these government programs. Receivables from patients
who are potentially eligible for Medicaid are classified as Medicaid pending,
under the EES, net of appropriate implicit price concessions. Based on recent
trends, approximately 97% of all accounts in the EES are ultimately approved for
benefits under a government program, such as Medicaid.
The following table presents the approximate amount of accounts receivable in
the EES still awaiting determination of eligibility under a government program
at September 30, 2022 and December 31, 2021 by aging category:
September 30, 2022 December 31, 2021
0-60 days $ 69 $ 87
61-120 days 16 17
121-180 days 6 4
Over 180 days 8 7
Total $ 99 $ 115
Salaries, Wages and Benefits
Samehospital salaries, wages and benefits increased$6 million , or 0.3%, in the three months endedSeptember 30, 2022 compared to the same period in 2021. This increase was primarily attributable to higher contract labor costs and annual merit increases for certain of our employees, partially offset by lower employee benefit costs and our continued focus on costefficiency measures. Samehospital salaries, wages and benefits as a percentage of net operating revenues increased by 240 basis points to 50.5% in the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 , due to the factors noted above and the impact of lower patient volumes on our patient revenues during the period. Salaries, wages and benefits expense for the three months endedSeptember 30, 2022 and 2021 included stockbased compensation expense of$10 million and$9 million , respectively. Samehospital salaries, wages and benefits decreased$11 million , or 0.2%, in the nine months endedSeptember 30, 2022 compared to the same period in 2021. This decrease was primarily attributable to reduced patient volumes, lower incentive compensation and employee benefit costs, and our continued focus on costefficiency measures. These factors were partially offset by higher premium pay and contract labor costs, as well as annual merit increases for certain of our employees. Samehospital salaries, wages and benefits as a percentage of net operating revenues increased by 120 basis points to 50.0% in the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 , due to the factors noted above and the impact of the Cybersecurity Incident on our patient revenues during the 2022 period. Salaries, wages and benefits expense for the nine months endedSeptember 30, 2022 and 2021 included stockbased compensation expense of$36 million and$31 million , respectively.
Supplies
Samehospital supplies expense decreased$43 million , or 6.7%, in the three months endedSeptember 30, 2022 compared to the same period in 2021. The decrease was primarily due to decreased patient volumes, lower COVID-related patient acuity and our cost-efficiency measures, including those described below. These decreases were partially offset by the increased cost of certain supplies as a result of the COVID19 pandemic, the impact of general market conditions and inflation. Samehospital supplies expense as a percentage of net operating revenues decreased by 40 basis points to 16.4% in the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 , primarily due to the factors described above. We strive to control supplies expense through product standardization, consistent contract terms and endtoend contract management, improved utilization, bulk purchases, focused spending with a smaller number of vendors and operational improvements. 50 -------------------------------------------------------------------------------- Table of Contents Samehospital supplies expense decreased$106 million , or 5.6%, in the nine months endedSeptember 30, 2022 compared to the same period in 2021. The decrease was primarily due to lower patient volumes and our cost-efficiency measures. The increased cost of certain supplies as a result of the COVID19 pandemic, the impact of general market conditions and inflation, as well as the growth in our higher-acuity supply-intensive surgical services, partially offset the decrease in supplies expense between the two nine-month periods. Samehospital supplies expense as a percentage of net operating revenues decreased by 60 basis points to 16.5% in the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 , primarily due to the factors noted above.
Other Operating Expenses, Net
Samehospital other operating expenses decreased by$26 million , or 3.1%, in the three months endedSeptember 30, 2022 compared to the same period in 2021. Samehospital other operating expenses as a percentage of net operating revenues increased by 30 basis points to 22.7% for the three months endedSeptember 30, 2022 compared to 22.4% for the three months endedSeptember 30, 2021 , primarily due to the decrease in our patient volumes and the proportionally higher level of fixed costs (e.g., rent expense) in other operating expenses. The changes in other operating expenses included:
•a gain from the sale of a portion of an interest in certain assets of
•decreased malpractice expense of
•increased indigent care expense of
Samehospital other operating expenses decreased by$103 million , or 4.1%, in the nine months endedSeptember 30, 2022 compared to the same period in 2021. Samehospital other operating expenses as a percentage of net operating revenues decreased by 30 basis points to 22.4% in the nine months endedSeptember 30, 2022 compared to 22.7% for the nine months endedSeptember 30, 2021 , primarily due to the net gains from the sale of assets noted below. The changes in other operating expenses included:
•net gains from the sale of assets of
•decreased malpractice expense of
•decreased contract services expense of
•increased indigent care expense of
Ambulatory Care Segment
Our Ambulatory Care segment is comprised of USPI's ASCs and surgical hospitals. USPI operates its surgical facilities in partnership with local physicians and, in many of these facilities, a health system partner. We hold an ownership interest in each facility, with each being operated through a separate legal entity in most cases. USPI operates facilities on a daytoday basis through management services contracts. Our sources of earnings from each facility consist of:
•management and administrative services revenues, computed as a percentage of each facility's net revenues (often net of implicit price concessions); and
•our share of each facility's net income (loss), which is computed by multiplying the facility's net income (loss) times the percentage of each facility's equity interests owned by USPI.
Our role as an owner and daytoday manager provides us with significant influence over the operations of each facility. For many of the facilities our Ambulatory Care segment holds an ownership interest in (164 of 464 facilities atSeptember 30, 2022 ), this influence does not represent control of the facility, so we account for our investment in the facility under the equity method for an unconsolidated affiliate. USPI controls 300 of the facilities our Ambulatory Care segment operates, and we account for these investments as consolidated subsidiaries. Our net earnings from a facility are the same under either method, but the classification of those earnings differs. For consolidated subsidiaries, our financial statements reflect 100% of the revenues and expenses of the subsidiaries, after the elimination of intercompany amounts. The net profit attributable to owners other than USPI is classified within net income available to noncontrolling interests. 51 -------------------------------------------------------------------------------- Table of Contents For unconsolidated affiliates, our statements of operations reflect our earnings in two line items: •equity in earnings of unconsolidated affiliates-our share of the net income (loss) of each facility, which is based on the facility's net income (loss) and the percentage of the facility's outstanding equity interests owned by USPI; and
•management and administrative services revenues, which is included in our net operating revenues-income we earn in exchange for managing the daytoday operations of each facility, usually quantified as a percentage of each facility's net revenues less implicit price concessions.
Our Ambulatory Care segment operating income is driven by the performance of all facilities USPI operates and by USPI's ownership interests in those facilities, but our individual revenue and expense line items contain only consolidated businesses, which represent 65% of those facilities. This translates to trends in consolidated operating income that often do not correspond with changes in consolidated revenues and expenses, which is why we disclose certain statistical and financial data on a pro forma systemwide basis that includes both consolidated and unconsolidated (equity method) facilities. Our unconsolidated facilities received cash payments from the PRF during 2021 and 2020. During the three and nine months endedSeptember 30, 2021 , we recognized grant income of$1 million and$12 million , respectively, from these funds, which income is included in equity in earnings of unconsolidated affiliates in the accompanying Condensed Consolidated Statement of Operations. No additional grant income was recognized from our unconsolidated facilities during the three and ninemonth periods endedSeptember 30, 2022 .
Results of Operations
The following table summarizes certain statement of operations items:
Three Months Ended Nine Months Ended
September 30, Increase September 30, Increase
2022 2021 (Decrease) 2022 2021 (Decrease)
Net operating revenues $ 806 $ 666 21.0 % $ 2,315 $ 1,976 17.2 %
Grant income $ - $ 1 (100.0) % $ 4 $ 23 (82.6) %
Equity in earnings of unconsolidated
affiliates $ 49 $ 43 14.0 % $ 143 $ 130 10.0 %
Salaries, wages and benefits $ 208 $ 169 23.1 % $ 603 $ 512 17.8 %
Supplies $ 218 $ 170 28.2 % $ 624 $ 496 25.8 %
Other operating expenses, net $ 110 $ 97 13.4 % $ 315 $ 295 6.8 %
Revenues
Ambulatory Care net operating revenues increased by $140 million , or 21.0%,
during the three months ended September 30, 2022 compared to the same period in
2021. The change was driven by an increase from acquisitions of $124 million , as
well as an increase in samefacility net operating revenues of $19 million due
primarily to higher net revenue per case. These increases were partially offset
by a decrease of $3 million , due to the closure of two ASCs, as well as the
adverse impacts of the COVID-19 pandemic and Hurricane Ian on case volumes. Our
Ambulatory Care segment recognized grant income from federal grants totaling
$1 million during the three months ended September 30, 2021 , which is not
included in net operating revenues. Our Ambulatory Care segment did not
recognize any grant income in the three months ended September 30, 2022 .
Ambulatory Care net operating revenues increased by $339 million , or 17.2%,
during the nine months ended September 30, 2022 compared to the same period in
2021. The change was driven by an increase from acquisitions of $298 million , as
well as an increase in samefacility net operating revenues of $103 million due
primarily to higher surgical patient volume and higher net revenue per case.
These increases were partially offset by a decrease of $62 million due primarily
to the sale of urgent care centers to an unaffiliated urgent care provider and
the transfer of imaging centers to the Hospital Operations segment, both in
April 2021 , as well as the adverse impacts of COVID-19 and Hurricane Ian noted
above. Our Ambulatory Care segment also recognized grant income from federal
grants totaling $4 million and $23 million during the nine months ended
September 30, 2022 and 2021, respectively, which is not included in net
operating revenues.
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Salaries, Wages and Benefits
Salaries, wages and benefits expense increased by $39 million , or 23.1%, during
the three months ended September 30, 2022 compared to the same period in 2021.
Salaries, wages and benefits expense was impacted by an increase from
acquisitions of $31 million , as well as an increase in samefacility salaries,
wages and benefits expense of $8 million . Salaries, wages and benefits expense
included $3 million of stockbased compensation in each of the threemonth
periods ended September 30, 2022 and 2021.
Salaries, wages and benefits expense increased by $91 million , or 17.8%, during
the nine months ended September 30, 2022 compared to the same period in 2021.
Salaries, wages and benefits expense was impacted by an increase from
acquisitions of $84 million and an increase in samefacility salaries, wages and
benefits expense of $35 million due primarily to higher surgical patient
volumes, partially offset by a decrease of $28 million due to the aforementioned
sale of urgent care centers and the transfer of imaging centers to the Hospital
Operations segment. Salaries, wages and benefits expense included $9 million of
stockbased compensation expense in each of the ninemonth periods ended
September 30, 2022 and 2021.
Supplies
Supplies expense increased by$48 million , or 28.2%, during the three months endedSeptember 30, 2022 compared to the same period in 2021. The change was driven by an increase from acquisitions of$44 million , as well as an increase in samefacility supplies expense of$5 million due primarily to additional costs driven by the higher level of patient acuity, mainly due to a greater number of implant cases, and higher pricing of certain supplies as a result of the COVID19 pandemic. Supplies expense increased by$128 million , or 25.8%, during the nine months endedSeptember 30, 2022 compared to the same period in 2021. The change was driven by an increase from acquisitions of$107 million , as well as an increase in samefacility supplies expense of$25 million due primarily to higher surgical patient volume, additional costs driven by the higher level of patient acuity, and higher pricing of certain supplies as a result of the COVID19 pandemic, partially offset by a decrease of$4 million due to the aforementioned sale of urgent care centers and the transfer of imaging centers to the Hospital Operations segment. Other Operating Expenses, Net Other operating expenses increased by$13 million , or 13.4%, during the three months endedSeptember 30, 2022 compared to the same period in 2021. The change was driven by an increase from acquisitions of$17 million , partially offset by a decrease in samefacility other operating expenses of$4 million . Other operating expenses increased by$20 million , or 6.8%, during the nine months endedSeptember 30, 2022 compared to the same period in 2021. The change was driven by an increase from acquisitions of$37 million , partially offset by a decrease of$17 million due to the aforementioned sale of urgent care centers and the transfer of imaging centers to the Hospital Operations segment.
Facility Growth
The following table summarizes the yearoveryear changes in our samefacility
revenue and cases on a pro forma systemwide basis, which includes both
consolidated and unconsolidated (equity method) facilities. While we do not
record the revenues of unconsolidated facilities, we believe this information is
important in understanding the financial performance of our Ambulatory Care
segment because these revenues are the basis for calculating our management
services revenues and, together with the expenses of our unconsolidated
facilities, are the basis for our equity in earnings of unconsolidated
affiliates.
Three Months Ended Nine Months Ended
Ambulatory Care Facility Growth September 30, 2022 September 30, 2022
Net revenues 3.0 % 4.9 %
Cases - % 2.4 %
Net revenue per case 3.0 % 2.5 %
Joint Ventures with
USPI's business model is to jointly own its facilities with local physicians
and, in many of these facilities, a notforprofit health system partner.
Accordingly, as of
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Table of Contents The table below summarizes the amounts we paid to acquire various ownership interests in ambulatory care facilities:
Nine Months Ended
September 30, Increase
Type of Ownership Interests Acquired 2022 2021 (Decrease)
Controlling interests $ 224 $ 63 $ 161
Noncontrolling interests - 1 (1)
Equity investment in unconsolidated affiliates and
consolidated facilities 18 13 5
Total $ 242 $ 77 $ 165 The table below provides information about the ownership structure of the facilities operated by our Ambulatory Care segment:
Ownership Structure of Ambulatory Care FacilitiesSeptember 30 ,
2022
Owned with a health system partner 203 Owned without a health system partner 261 Total 464
The table below reflects the change in the number of facilities operated by our
Ambulatory Care segment since
Nine Months Ended
September 30, 2022
Acquisitions 33
De novo 12
Dispositions/Mergers (4)
Total increase in number of facilities operated 41
During the nine months ended September 30, 2022 , we acquired controlling
interests in 31 ASCs, 16 of which are located in Maryland , four in Florida ,
three in Arizona , two in each of Colorado and Tennessee , and four ASCs each
located in other states. We paid cash totaling $169 million for these
acquisitions. All of these facilities are jointly owned with physicians, except
one that is jointly owned with a health system partner and physicians. During
the same period in 2022, we acquired a noncontrolling interest in one ASC
located in each of New Jersey and Texas .
Also during the nine months ended September 30, 2022 , we acquired controlling
ownership interests in 14 previously unconsolidated ASCs (including 12
SCD Centers) located in ten geographically diverse states. We paid an aggregate
of $55 million to acquire controlling ownership interests in these facilities.
Following our acquisition of a controlling interest in one of these ASCs, we
contributed our ownership interest in it to a joint venture in which we have a
noncontrolling ownership interest.
We also regularly engage in the purchase of equity interests with respect to our
investments in unconsolidated affiliates and consolidated facilities that do not
result in a change in control. These transactions are primarily the acquisitions
of equity interests in ASCs and the investment of additional cash in facilities
that need capital for new acquisitions, new construction or other business
growth opportunities. During the nine months ended September 30, 2022 , we
invested approximately $18 million in such transactions.
Conifer Segment
Revenues
Our Conifer segment generated net operating revenues of$333 million and$314 million during the three months endedSeptember 30, 2022 and 2021, respectively, a portion of which was eliminated in consolidation as described in Note 18 to the accompanying Condensed Consolidated Financial Statements. Conifer's revenues from thirdparty clients, which revenues are not eliminated in consolidation, increased$19 million , or 9.6%, for the three months endedSeptember 30, 2022 compared to the same period in 2021. The increase was primarily attributable to contractual rate increases and new business expansion. 54 -------------------------------------------------------------------------------- Table of Contents Our Conifer segment generated net operating revenues of$990 million and$943 million during the nine months endedSeptember 30, 2022 and 2021, respectively. Conifer revenues from thirdparty clients, which revenues are not eliminated in consolidation, increased$67 million , or 11.5%, for the nine months endedSeptember 30, 2022 compared to the same period in 2021. The increase was primarily driven by the same factors that impacted the three-month period described above.
Salaries, Wages and Benefits
Salaries, wages and benefits expense for Conifer increased$7 million , or 4.2%, in the three months endedSeptember 30, 2022 compared to the same period in 2021, and increased$8 million , or 1.6%, in the nine months endedSeptember 30, 2022 compared to the same period in 2021. The increase in both periods was primarily due to new business expansion, planned staffing increases and annual merit increases for certain of our employees.
Other Operating Expenses, Net
Other operating expenses for Conifer increased
Consolidated
Impairment and Restructuring Charges, and Acquisition-Related Costs
The following table presents information about our impairment and restructuring charges, and acquisitionrelated costs:
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Consolidated:
Impairment charges $ 3 $ - $ 9 $ 1
Restructuring charges 17 14 78 48
Acquisition-related costs 4 1 10 6
Total impairment and restructuring charges, and
acquisition-related costs $ 24 $ 15 $ 97 $ 55
By segment:
Hospital Operations $ 14 $ 11 $ 68 $ 31
Ambulatory Care 5 1 13 9
Conifer 5 3 16 15
Total impairment and restructuring charges, and
acquisition-related costs $ 24 $ 15 $ 97 $ 55
During the three months ended September 30, 2022 , restructuring charges included
$3 million of employee severance costs, $5 million related to the transition of
various administrative functions to our GBC, $3 million related to contract and
lease termination fees, and $6 million of other restructuring costs. Impairment
charges recognized during the three months ended September 30, 2022 were
comprised of $3 million from our Hospital Operations segment.
Acquisitionrelated costs during the threemonth period consisted entirely of
transaction costs.
Restructuring charges for the three months ended September 30, 2021 consisted of
employee severance costs of $3 million , $4 million related to the transition of
various administrative functions to our GBC and $7 million of other
restructuring costs. Acquisitionrelated costs incurred during this period
consisted entirely of transaction costs.
During the nine months ended September 30, 2022 , restructuring charges included
$24 million of employee severance cost, $10 million related to the transition of
various administrative functions to our GBC, $25 million related to contract and
lease termination fees, and $19 million of other restructuring costs. Impairment
charges for the nine months ended September 30, 2022 were comprised of
$5 million from our Hospital Operations segment and $2 million from each of our
Ambulatory Care and Conifer segments. Acquisitionrelated costs for the nine
months ended September 30, 2022 consisted entirely of transaction costs.
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Restructuring charges for the nine months ended September 30, 2021 consisted of
employee severance costs of $13 million , costs related to the transition of
various administrative functions to our GBC totaling $16 million and $19 million
of other restructuring costs. Impairment charges for the nine months ended
September 30, 2021 were comprised of $1 million from our Ambulatory Care
segment. Acquisitionrelated costs during the ninemonth period consisted
entirely of transaction costs.
Litigation and Investigation Costs
Litigation and investigation costs during the three months endedSeptember 30, 2022 and 2021 were$12 million and$29 million , respectively, and$50 million and$64 million during the nine months endedSeptember 30, 2022 and 2021, respectively.
During the three months ended
During the nine months endedSeptember 30, 2021 , we recorded net gains on sales, consolidation and deconsolidation of facilities of approximately$427 million , primarily comprised of a gain of$409 million related to the sale of the Miami Hospitals inAugust 2021 , a gain of$14 million related to the sale of the majority of our urgent care centers inApril 2021 and net gains of$4 million related to other activity. Interest Expense
Interest expense for the three and nine months ended
Loss from Early Extinguishment of Debt
During the nine months endedSeptember 30, 2022 , we incurred aggregate losses from early extinguishment of debt of$109 million . These losses related to the redemption of our 7.500% senior secured first lien notes due 2025 ("2025 Senior Secured First Lien Notes") inFebruary 2022 , open market purchases of our 6.750% senior unsecured notes due 2023 (the "2023 Senior Unsecured Notes") during the six-month period endedJune 30, 2022 and the redemption in full of the 2023 Senior Unsecured Notes inJune 2022 , in all cases in advance of the notes' maturity date. Loss from early extinguishment of debt was$20 million and$74 million for the three and nine months endedSeptember 30, 2021 , respectively. The loss in the three months endedSeptember 30, 2021 related to the redemption of our 4.625% senior secured first lien notes due 2024 ("2024 Senior Secured First Lien Notes") in advance of their maturity date. The loss in the ninemonth period included the loss from the redemption of our 2024 Senior Secured First Lien Notes, as well as losses incurred from the redemption of our 5.125% senior secured second lien notes due 2025 inJune 2021 and the retirement of our 7.000% senior unsecured notes due 2025 inMarch 2021 , both in advance of their respective maturity dates. In all of the 2022 and 2021 periods, the losses from early extinguishment of debt primarily related to the difference between the purchase prices and the par value of the notes, as well as the writeoff of associated unamortized issuance costs. Income Tax Expense During the three months endedSeptember 30, 2022 , we recorded income tax expense of$112 million in continuing operations on pre-tax income of$380 million compared to$197 million on pre-tax income of$774 million during the prioryear period. During the nine months endedSeptember 30, 2022 , we recorded income tax expense of$297 million in continuing operations on pretax income of$1.023 billion compared to$303 million on pre-tax income of$1.360 billion during the nine months endedSeptember 30, 2021 . During the nine months endedSeptember 30, 2022 , we recorded income tax expense of$113 million to increase the valuation allowance for interest expense carryforwards as a result of the limitation on business interest expense. We did not have any interest expense limited during 2021. 56 -------------------------------------------------------------------------------- Table of Contents A reconciliation between the amount of reported income tax expense and the amount computed by multiplying income from continuing operations before income taxes by the statutory federal tax rate is presented below: Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 2022 2021 Tax expense at statutory federal rate of 21%$ 80 $ 163 $ 215 $ 286 State income taxes, net of federal income tax 15 29 40 56
benefit
Tax benefit attributable to noncontrolling (29) (26) (86) (79) interests Nondeductible goodwill - 28 1 35 Stock-based compensation tax benefit (1) (1) (4) (4) Changes in valuation allowance 36 - 113 - Other items 11 4 18 9 Income tax expense$ 112 $ 197 $ 297 $ 303
Net Income Available to Noncontrolling Interests
Net income available to noncontrolling interests was$137 million for the three months endedSeptember 30, 2022 compared to$129 million for the three months endedSeptember 30, 2021 . Net income available to noncontrolling interests for the 2022 period was comprised of$111 million related to our Ambulatory Care segment,$5 million related to our Hospital Operations segment and$21 million related to our Conifer segment. Net income available to noncontrolling interests was$418 million for the nine months endedSeptember 30, 2022 compared to$392 million for the nine months endedSeptember 30, 2021 . Net income available to noncontrolling interests for the nine months endedSeptember 30, 2022 was comprised of$324 million related to our Ambulatory Care segment,$38 million related to our Hospital Operations segment and$56 million related to our Conifer segment. Of the portion related to our Ambulatory Care segment,$9 million related to the minority interest Baylor held in USPI untilJune 30, 2022 .
ADDITIONAL SUPPLEMENTAL NON-GAAP DISCLOSURES
The financial information provided throughout this report, including our Condensed Consolidated Financial Statements and the notes thereto, has been prepared in conformity with accounting principles generally accepted inthe United States of America ("GAAP"). However, we use certain nonGAAP financial measures defined below in communications with investors, analysts, rating agencies, banks and others to assist such parties in understanding the impact of various items on our financial statements, some of which are recurring or involve cash payments. We use this information in our analysis of the performance of our business, excluding items we do not consider relevant to the performance of our continuing operations. In addition, we use these measures to define certain performance targets under our compensation programs. "Adjusted EBITDA" is a nonGAAP measure we define as net income available (loss attributable) toTenet Healthcare Corporation common shareholders before (1) the cumulative effect of changes in accounting principle, (2) net loss attributable (income available) to noncontrolling interests, (3) income (loss) from discontinued operations, net of tax, (4) income tax benefit (expense), (5) gain (loss) from early extinguishment of debt, (6) other nonoperating income (expense), net, (7) interest expense, (8) litigation and investigation (costs) benefit, net of insurance recoveries, (9) net gains (losses) on sales, consolidation and deconsolidation of facilities, (10) impairment and restructuring charges and acquisitionrelated costs, (11) depreciation and amortization, and (12) income (loss) from divested and closed businesses (i.e., health plan businesses). Litigation and investigation costs do not include ordinary course of business malpractice and other litigation and related expense. We believe the foregoing nonGAAP measure is useful to investors and analysts because it presents additional information about our financial performance. Investors, analysts, company management and our board of directors utilize this nonGAAP measure, in addition to GAAP measures, to track our financial and operating performance and compare that performance to peer companies, which utilize similar nonGAAP measures in their presentations. The human resources committee of our board of directors also uses certain nonGAAP measures to evaluate management's performance for the purpose of determining incentive compensation. We believe that Adjusted EBITDA is a useful measure, in part, because certain investors and analysts use both historical and projected Adjusted EBITDA, in addition to GAAP and other nonGAAP measures, as factors in determining the estimated fair value of shares of our common stock. Company management also regularly reviews the Adjusted EBITDA performance for each operating segment. We do not use Adjusted EBITDA to measure liquidity, but instead to measure operating performance. The nonGAAP Adjusted EBITDA measure we utilize may not be comparable to similarly titled measures reported by other companies. Because this measure excludes many items that are included in our financial statements, it does not provide a complete measure of our operating performance. Accordingly, investors are encouraged to use GAAP measures when evaluating our financial performance. 57
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The following table presents the reconciliation of Adjusted EBITDA to net income available toTenet Healthcare Corporation common shareholders (the most comparable GAAP term) for the three and nine months endedSeptember 30, 2022 and 2021: Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 2022 2021
Net income available to
(137) (129) (418) (392)
Income from discontinued operations, net of tax - 1 1 -
Income from continuing operations 268 577 726 1,057
Income tax expense (112) (197) (297) (303)
Loss from early extinguishment of debt - (20) (109) (74)
Other non-operating income, net 6 7 6 16
Interest expense (222) (227) (671) (702)
Operating income 596 1,014 1,797 2,120
Litigation and investigation costs (12) (29) (50) (64)
Net gains on sales, consolidation and deconsolidation of facilities
- 412 - 427
Impairment and restructuring charges, and acquisition-related costs
(24) (15) (97) (55)
Depreciation and amortization (209) (209) (628) (654)
Adjusted EBITDA $ 841 $ 855 $ 2,572 $ 2,466
Net operating revenues $ 4,801 $ 4,894 $ 14,184 $ 14,629 Net income available to
2.7 % 9.2 % 2.2 % 4.5 %
Adjusted EBITDA as a % of net operating revenues 17.5 % 17.5 % 18.1 % 16.9 %
(Adjusted EBITDA margin)
LIQUIDITY AND CAPITAL RESOURCES
CASH REQUIREMENTS
There have been no material changes to our obligations to make future cash payments under scheduled contractual obligations, such as debt and lease agreements, and under contingent commitments, such as standby letters of credit and minimum revenue guarantees, as disclosed in our Annual Report, except for the matters set forth below under "Other Contractual Obligations" and the additional lease obligations and the longterm debt transactions disclosed in Notes 1 and 6, respectively, to our accompanying Condensed Consolidated Financial Statements.
Long-Term Debt
AtSeptember 30, 2022 , using the last 12 months of Adjusted EBITDA, our ratio of total longterm debt, net of cash and cash equivalent balances, to Adjusted EBITDA was 3.87x. We anticipate this ratio will fluctuate from quarter to quarter based on earnings performance and other factors, including the use of our Credit Agreement as a source of liquidity and acquisitions that involve the assumption of longterm debt. We seek to manage this ratio and increase the efficiency of our balance sheet by following our business plan and managing our cost structure, including through possible asset divestitures, and through other changes in our capital structure. As part of our longterm objective to manage our capital structure, we continue to evaluate opportunities to retire, purchase, redeem and refinance outstanding debt subject to prevailing market conditions, our liquidity requirements, operating results, contractual restrictions and other factors. Our ability to achieve our leverage and capital structure objectives is subject to numerous risks and uncertainties, many of which are described in the ForwardLooking Statements and Risk Factors sections in Part I of our Annual Report and the Risk Factors section in Part II of our Q1'22 Report.
Interest payments, net of capitalized interest, were
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Share Repurchase Program
In October 2022 , our board of directors authorized a $1 billion share repurchase
program. The timing and amounts of repurchases will be based on management's
discretion, subject to market conditions and other factors. The share repurchase
program does not obligate us to acquire any particular amount of common stock,
and it may be suspended for periods or discontinued at any time before its
scheduled expiration.
Other Contractual Obligations
Baylor Put /Call Agreement-As previously discussed in our Annual Report, our put/call agreement (the "Baylor Put /Call Agreement") with Baylor contained put and call options with respect to the 5% ownership interest Baylor held in USPI. The Baylor Put/Call Agreement gave Baylor the option to annually put up to one-third of its total shares in USPI (the "Baylor Shares") over a period of three years beginning in 2021. We had the right to call the difference between the number of shares Baylor put each year and the maximum number of shares it could have put. In each of 2021 and 2022, we notified Baylor of our intention to exercise our call option to purchase 33.3% of the Baylor Shares for that year (66.6% in total). InJune 2022 , we entered into an agreement with Baylor (the "Share Purchase Agreement") to complete the purchase of the Baylor Shares we called in 2021 and 2022 and to accelerate the acquisition of the remainingBaylor Shares eligible to be put/called in 2023. Under the terms of the Share Purchase Agreement, we agreed to pay Baylor$406 million to buy its entire 5% voting ownership interest in USPI. We paid$11 million upon execution of the Share Purchase Agreement and will make 35 additional non-interest bearing monthly payments of approximately$11 million , which payments commenced inAugust 2022 . AtSeptember 30, 2022 , we had liabilities of$135 million recorded in other current liabilities and$222 million in other long-term liabilities in the accompanying Condensed Consolidated Balance Sheet for the purchase of these shares. Investment in the SCD Centers-USPI continues to make offers in an ongoing process to acquire a portion of the equity interests in certain of the SCD Centers from the physician owners for consideration of up to approximately$250 million . During the nine months endedSeptember 30, 2022 , we made aggregate payments of$51 million to acquire controlling interests in 12 SCD Centers. We cannot reasonably predict how many additional physician owners will accept our offers to acquire a portion of their equity, nor the timing or amount of any remaining payments. We have no off-balance sheet arrangements that may have a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources, except for$219 million of standby letters of credit outstanding and guarantees atSeptember 30, 2022 .
Other Cash Requirements
Our capital expenditures primarily relate to the expansion and renovation of existing facilities (including amounts to comply with applicable laws and regulations), surgical hospital expansion focused on higher acuity services, equipment and information systems additions and replacements, introduction of new medical technologies (including robotics), design and construction of new buildings or hospitals, and various other capital improvements. We continue to implement our portfolio diversification strategy into ambulatory surgery and have a baseline intention to invest$250 million annually in ambulatory business acquisitions and de novo facilities. Capital expenditures were$472 million and$354 million in the nine months endedSeptember 30, 2022 and 2021, respectively. We anticipate that our capital expenditures for continuing operations for the year endingDecember 31, 2022 will total approximately$725 million to$775 million , including$95 million that was accrued as a liability atDecember 31, 2021 . USPI maintains a separate management equity plan (the "USPI Management Equity Plan") under which it grants restricted stock units ("RSUs") representing a contractual right to receive one share of USPI's nonvoting common stock in the future. The vesting of RSUs granted under the plan varies based on the terms of the underlying award agreement. Once the requisite holding period is met, during specified times, the participant can sell the underlying shares to USPI at their estimated fair market value. At our sole discretion, the purchase of any nonvoting common shares can be made in cash or in shares of Tenet's common stock. AtSeptember 30, 2022 , there were 175,036 outstanding vested shares of non-voting common stock eligible to be sold to USPI.
Income tax payments, net of tax refunds, were
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SOURCES AND USES OF CASH
Our liquidity for the nine months ended September 30, 2022 was primarily derived
from net cash provided by operating activities and cash on hand. During the nine
months ended September 30, 2022 , we also received supplemental funds from
federal and state grants provided under COVID19 relief legislation. We had
$1.208 billion of cash and cash equivalents on hand at September 30, 2022 to
fund our operations and capital expenditures, and our borrowing availability
under our credit facility was $1.500 billion based on our borrowing base
calculation at September 30, 2022 .
Our primary source of operating cash is the collection of accounts receivable.
As such, our operating cash flow is impacted by levels of cash collections, as
well as levels of implicit price concessions, due to shifts in payer mix and
other factors. Our Credit Agreement provides additional liquidity to manage
fluctuations in operating cash caused by these factors.
Net cash provided by operating activities was $662 million in the nine months
ended September 30, 2022 compared to $1.211 billion in the nine months ended
September 30, 2021 . Key factors contributing to the change between the 2022 and
2021 periods include the following:
•$880 million of Medicare advances recouped or repaid in the nine months ended
September 30, 2022 compared to $326 million recouped during the same period in
2021;
•$155 million of cash received from grants in the nine months ended
•Lower interest payments of
•Higher income tax payments of
•Decreased net cash receipts of
•The timing of other working capital items.
Net cash used in investing activities was$502 million for the nine months endedSeptember 30, 2022 compared to net cash provided by investing activities of$802 million for the nine months endedSeptember 30, 2021 . Proceeds from the sale of facilities and other assets were$1.026 billion lower during the 2022 period, primarily due to the sale of the majority of our urgent care centers inApril 2021 and the sale of the Miami Hospitals inAugust 2021 . Additionally, cash used for the purchase of businesses increased$160 million and capital expenditures increased$118 million in the nine months endedSeptember 30, 2022 compared to the same period in 2021. We used net cash of$1.316 billion and$2.167 billion for financing activities during the nine months endedSeptember 30, 2022 and 2021, respectively. Financing activity during the nine months endedSeptember 30, 2022 included payments against our borrowings of$2.786 billion , including$1.933 billion paid to redeem all$1.872 billion of aggregate principal amount outstanding of our 2023 Senior Unsecured Notes and$730 million paid to redeem all$700 million aggregate principal amount outstanding of our 2025 Senior Secured First Lien Notes. In addition, distributions to noncontrolling interest holders increased$116 million , including distributions of the proceeds from the sale of several medical office buildings to minority interest holders totaling$61 million . These factors were partially offset by proceeds of$2.000 billion from the issuance of our 2030 Senior Secured First Lien Notes during the nine months endedSeptember 30, 2022 . We record our equity securities and our debt securities classified as availableforsale at fair market value. The majority of our investments are valued based on quoted market prices or other observable inputs. We have no investments that we expect will be negatively affected by the current economic conditions such that they will materially impact our financial condition, results of operations or cash flows.
DEBT INSTRUMENTS, GUARANTEES AND RELATED COVENANTS
Credit Agreement-AtSeptember 30, 2022 , our Credit Agreement provided for revolving loans in an aggregate principal amount of up to$1.500 billion with a$200 million subfacility for standby letters of credit. InMarch 2022 , we amended the revolving credit facility to, among other things, (i) decrease the previous maximum aggregate revolving credit commitments from$1.900 billion to$1.500 billion , subject to borrowing availability, (ii) extend the scheduled maturity date fromSeptember 2024 toMarch 2027 , and (iii) replace theLondon Interbank Offered Rate (LIBOR) with the Term Secured Overnight Financing Rate ("SOFR") and Daily Simple SOFR (each, as defined in the Credit Agreement) as the reference 60 -------------------------------------------------------------------------------- Table of Contents interest rate. AtSeptember 30, 2022 , we had no cash borrowings outstanding under the Credit Agreement, and we had less than$1 million of standby letters of credit outstanding. Based on our eligible receivables,$1.500 billion was available for borrowing under the Credit Agreement atSeptember 30, 2022 . We were in compliance with all covenants and conditions in our Credit Agreement atSeptember 30, 2022 . Letter of Credit Facility-We have a letter of credit facility (as amended to date, the "LC Facility") that provides for the issuance, from time to time, of standby and documentary letters of credit in an aggregate principal amount of up to$200 million . The scheduled maturity date of the LC Facility isSeptember 12, 2024 . The LC Facility is subject to an effective maximum secured debt covenant of 4.25 to 1.00. AtSeptember 30, 2022 , we were in compliance with all covenants and conditions in the LC Facility, and we had$116 million of standby letters of credit outstanding thereunder. Senior Unsecured Notes and Senior Secured Notes-OnJune 15, 2022 , we issued$2.000 billion aggregate principal amount of our 2030 Senior Secured First Lien Notes. We will pay interest on the 2030 Senior Secured First Lien Notes semiannually in arrears onJune 15 andDecember 15 of each year, commencing onDecember 15, 2022 . As further discussed below, we used a substantial portion of the proceeds from the issuance of the 2030 Senior Secured First Lien Notes, after payment of fees and expenses, to finance the redemption of our 2023 Senior Unsecured Notes. Through a series of openmarket transactions during the six months endedJune 30, 2022 , we repurchased$124 million aggregate principal amount outstanding of our 2023 Senior Unsecured Notes using cash on hand. Following the issuance of our 2030 Senior Secured First Lien Notes, we used a substantial portion of the proceeds to redeem the then-remaining$1.748 billion aggregate principal outstanding of the 2023 Senior Unsecured Notes in advance of their maturity date. In total, we paid$1.933 billion during the six months endedJune 30, 2022 to retire our 2023 Senior Unsecured Notes in full and recorded aggregate losses from early extinguishment of debt of$71 million , primarily related to the difference between the purchase prices and the par value of the notes, as well as the writeoff of associated unamortized issuance costs. OnFebruary 23, 2022 , we redeemed all$700 million aggregate principal amount outstanding of our 2025 Senior Secured First Lien Notes in advance of their maturity date. We paid$730 million from cash on hand to redeem the notes. In connection with the redemption, we recorded a loss from early extinguishment of debt of$38 million in the three months endedMarch 31, 2022 , primarily related to the difference between the purchase price and the par value of the notes, as well as the writeoff of associated unamortized issuance costs.
For additional information regarding our long-term debt, see Note 6 to the accompanying Condensed Consolidated Financial Statements and Note 8 to the Consolidated Financial Statements included in our Annual Report.
LIQUIDITY
We continue to experience negative impacts of the COVID19 pandemic on our business in varying degrees. In various periods during the nine months endedSeptember 30, 2022 , we were affected by a significant acceleration in COVID19 cases associated with the Omicron variant and subvariants. Future variants could similarly emerge and cause surges in COVID19 cases, which may adversely impact the local economies of areas we serve. Any increase in the amount of or deterioration in the collectability of patient accounts receivable could adversely affect our cash flows and results of operations. If general economic conditions deteriorate or remain uncertain for an extended period of time, our liquidity and ability to repay our outstanding debt may be impacted. We have taken, and continue to take, various actions to increase our liquidity and mitigate the impact of reductions in our patient volumes and changes in our service mix and revenue mix. These actions included the sale and redemption of various senior unsecured notes and senior secured notes, which eliminated any significant debt maturities untilJuly 2024 and will reduce our future annual cash interest expense payments. In addition, we have continued cost-efficiency measures, as well as necessary cost reductions, to substantially offset incremental costs, including temporary staffing and premium pay, as well as higher supply costs for PPE. We have also sought to compensate for the COVID19 pandemic's disruption of our patient volumes and service mix by growing our services for which demand has been more resilient, including our higheracuity service lines. While the length of time that will be required for our patient volumes and mix to return to pre-pandemic levels is unknown, especially demand for loweracuity services, we believe demand for our higheracuity service lines will continue to grow. We believe these actions, together with government relief packages, supported our ability to provide essential patient services during the initial uncertainty caused by the COVID19 pandemic and continue to do so.
From time to time, we expect to engage in additional capital markets, bank credit and other financing activities depending on our needs and financing alternatives available at that time. We believe our existing debt agreements provide flexibility for future secured or unsecured borrowings.
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Our cash on hand fluctuates daytoday throughout the year based on the timing and levels of routine cash receipts and disbursements, including our book overdrafts, and required cash disbursements, such as interest payments and income tax payments, as well as cash disbursements required to respond to the COVID19 pandemic. These fluctuations result in material intra-quarter net operating and investing uses of cash that have caused, and in the future may cause, us to use our Credit Agreement as a source of liquidity. We believe that existing cash and cash equivalents on hand, borrowing availability under our Credit Agreement and anticipated future cash provided by our operating activities should be adequate to meet our current cash needs. These sources of liquidity, in combination with any potential future debt incurrence, should also be adequate to finance planned capital expenditures, payments on the current portion of our long-term debt, payments to current and former joint venture partners, including those related to our Share Purchase Agreement with Baylor, and other presently known operating needs. Long-term liquidity for debt service and other purposes will be dependent on the amount of cash provided by operating activities and, subject to favorable market and other conditions, the successful completion of future borrowings and potential refinancings. However, our cash requirements could be materially affected by the use of cash in acquisitions of businesses, repurchases of securities, the exercise of put rights or other exit options by our joint venture partners, and contractual commitments to fund capital expenditures in, or intercompany borrowings to, businesses we own. In addition, liquidity could be adversely affected by a deterioration in our results of operations, including our ability to generate sufficient cash from operations, as well as by the various risks and uncertainties discussed in this section, other sections of this report and in our Annual Report and our Q1'22 Report, including any costs associated with legal proceedings and government investigations. We do not rely on commercial paper or other short-term financing arrangements nor do we enter into repurchase agreements or other short-term financing arrangements not otherwise reported in our balance sheet. In addition, we do not have significant exposure to floating interest rates given that all of our current long-term indebtedness has fixed rates of interest except for borrowings under our Credit Agreement.
CRITICAL ACCOUNTING ESTIMATES
In preparing our Condensed Consolidated Financial Statements in conformity with GAAP, we must use estimates and assumptions that affect the amounts reported in our Condensed Consolidated Financial Statements and accompanying notes. We regularly evaluate the accounting policies and estimates we use. In general, we base the estimates on historical experience and on assumptions that we believe to be reasonable, given the particular circumstances in which we operate. Actual results may vary from those estimates.
We consider our critical accounting estimates to be those that (i) involve significant judgments and uncertainties, (ii) require estimates that are more difficult for management to determine, and (iii) may produce materially different outcomes under different conditions or when using different assumptions.
Our critical accounting estimates have not changed from the description provided in our Annual Report.
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