TENET HEALTHCARE CORPORATION INTRODUCTION TO MANAGEMENT'S DISCUSSION AND ANALYSIS
The purpose of this section, Management's Discussion and Analysis of Financial
Condition and Results of Operations ("MD&A"), is to provide a narrative
explanation of our financial statements that enables investors to better
understand our business, to enhance our overall financial disclosures, to
provide the context within which our financial information may be analyzed, and
to provide information about the quality of, and potential variability of, our
financial condition, results of operations and cash flows. As described in Note
1 to the accompanying Condensed Consolidated Financial Statements, our results
for prior periods have been recast to reflect retrospective application of a
change in accounting principle. Our Hospital Operations and other ("Hospital
Operations") segment is comprised of our acute care and specialty hospitals,
ancillary outpatient facilities, urgent care centers, micro-hospitals and
physician practices. As described in Note 4 to the accompanying Condensed
Consolidated Financial Statements, certain of these facilities are classified as
held for sale at March 31, 2020 . Our Ambulatory Care segment is comprised of the
operations of USPI Holding Company, Inc. ("USPI"), in which we own a 95%
interest. At March 31, 2020 , USPI had interests in 265 ambulatory surgery
centers, 39 urgent care centers, 23 imaging centers and 24 surgical hospitals in
27 states. Our Conifer segment provides revenue cycle management and value-based
care services to hospitals, healthcare systems, physician practices, employers
and other customers, through our Conifer Holdings, Inc. ("Conifer") subsidiary.
Nearly all of the services comprising the operations of our Conifer segment are
provided directly by Conifer Health Solutions, LLC , in which we own a 76.2%
interest, or by one of its direct or indirect wholly owned subsidiaries. MD&A,
which should be read in conjunction with the accompanying Condensed Consolidated
Financial Statements, includes the following sections:
• Management Overview
• Forward-Looking Statements
• Sources of Revenue for Our Hospital Operations Segment
• Results of Operations
• Liquidity and Capital Resources
• Off-Balance Sheet Arrangements
• Critical Accounting Estimates
Unless otherwise indicated, all financial and statistical information included in MD&A relates to our continuing operations, with dollar amounts expressed in millions (except per adjusted patient admission and per adjusted patient day amounts). Continuing operations information includes the results of our same 65 hospitals operated throughout the three months endedMarch 31, 2020 and 2019, and threeChicago -area hospitals, which we divested effectiveJanuary 28, 2019 . Continuing operations information excludes the results of our hospitals and other businesses that have been classified as discontinued operations for accounting purposes. MANAGEMENT OVERVIEW RECENT DEVELOPMENTS Impact of the COVID-19 Pandemic-The 2019 novel coronavirus ("COVID-19") pandemic is significantly affecting our patients, communities, employees and business operations. Our operating performance in the three months endedMarch 31, 2020 was ahead of expectations through February. However, the spread of COVID-19 and the ensuing response of federal, state and local authorities beginning inMarch 2020 resulted in a material reduction in our patient volumes and operating revenues that is ongoing. We have cancelled a substantial number of elective procedures at our hospitals and closed or reduced operating hours at our ambulatory surgery centers and other outpatient centers that specialize in elective procedures. Restrictive measures, such as travel bans, social distancing, quarantines and shelter-in-place orders, have also reduced the volume of procedures performed at our facilities more generally, as well as the volume of emergency room and physician office visits. Broad economic factors resulting from the COVID-19 pandemic, including increasing unemployment rates and reduced consumer spending, are impacting our service mix, revenue mix and patient volumes. Moreover, we are experiencing supply chain disruptions, including shortages, delays and significant price increases in medical supplies, particularly personal protective equipment. As described below under "Sources of Revenue for Our Hospital Operations Segment," we expect the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), which was signed into law onMarch 27, 2020 , as well as other legislative actions, to mitigate some of the economic disruption caused by the COVID-19 pandemic on our business in the months ahead. Throughout MD&A, we have provided additional information on the impact of the COVID-19 pandemic on our results of operations and the steps we have taken, and are continuing to take, in response. To help our employees impacted by the COVID-19 pandemic, our Executive Chairman and Chief Executive Officer will be donating 50% 27
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of his salary for six months (100% for three months) toThe Tenet Care Fund , which we established in 2010 as a 501(c)(3) organization to provide assistance to employees who have experienced hardship. Also, our other executive leadership team members will be donating 20% of their salaries for three months, along with many other leaders across the Company who will be donating 10% of their salaries for three months. For information about risks and uncertainties around COVID-19 that could affect our results of operations, financial condition and cash flows, see the Risk Factors section in Part II of this report. Sale of Senior Secured First Lien Notes-OnApril 7, 2020 , we sold$700 million aggregate principal amount of 7.500% senior secured first lien notes, which will mature onApril 1, 2025 (the "2025 Senior Secured First Lien Notes"). We will pay interest on the 2025 Senior Secured First Lien Notes semi-annually in arrears onApril 1 andOctober 1 of each year, commencing onOctober 1, 2020 . A portion of the proceeds from the sale of the 2025 Senior Secured First Lien Notes were used, after payment of fees and expenses, to repay the$500 million aggregate principal amount of borrowings outstanding under our Credit Agreement as ofMarch 31, 2020 . TRENDS AND STRATEGIES As described above and throughout MD&A, we are currently experiencing a disruption in our business due to the COVID-19 pandemic. The length and extent of this disruption is currently unknown. While demand for our services is expected to rebound in the future, we have taken, and continue to take, various actions to increase our liquidity and mitigate the impact of reductions in our patient volumes and operating revenues from the COVID-19 pandemic, including the sale of senior secured first lien notes and the amendment of our revolving credit facility, both as described below. We also reduced our planned capital expenditures for 2020 by approximately 40%. Furthermore, we have furloughed some employees, and we have deferred certain operating expenses that are not expected to impact our response to COVID-19. We are also reducing variable costs across the enterprise as a result of softening patient volumes. We believe these actions, together with government relief packages, to the extent available to us, will help us to continue operating during these uncertain times. For further information on our liquidity, see "Liquidity and Capital Resources" below. The healthcare industry, in general, and the acute care hospital business, in particular, have also been experiencing significant regulatory uncertainty based, in large part, on administrative, legislative and judicial efforts to significantly modify or repeal and potentially replace the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 ("Affordable Care Act" or "ACA"). It is difficult to predict the full impact of regulatory uncertainty on our future revenues and operations. In addition, we believe that several key trends have shaped the demand for healthcare services in recent years: (1) consumers, employers and insurers are actively seeking lower-cost solutions and better value as they focus more on healthcare spending; (2) patient volumes are shifting from inpatient to outpatient settings due to technological advancements and demand for care that is more convenient, affordable and accessible; (3) the growing aging population requires greater chronic disease management and higher-acuity treatment; and (4) consolidation continues across the entire healthcare sector. Driving Growth in Our Hospital Systems-We are committed to better positioning our hospital systems and competing more effectively in the ever-evolving healthcare environment by focusing on driving performance through operational effectiveness, increasing capital efficiency and margins, investing in our physician enterprise, particularly our specialist network, enhancing patient and physician satisfaction, growing our higher-demand and higher-acuity clinical service lines (including outpatient lines), expanding patient and physician access, and optimizing our portfolio of assets. Over the past several years, we have undertaken enterprise-wide cost reduction initiatives, comprised primarily of workforce reductions (including streamlining corporate overhead and centralized support functions), the renegotiation of contracts with suppliers and vendors, and the consolidation of office locations. Moreover, we established offshore support operations inthe Philippines . In conjunction with these initiatives, we incurred restructuring charges related to employee severance payments of$10 million in the three months endedMarch 31, 2020 , and we expect to incur additional such restructuring charges throughout 2020. We expect to continue in 2020 to explore new opportunities to enhance efficiency, including further integration of enterprise-wide centralized support functions, outsourcing certain functions unrelated to direct patient care, and reducing clinical and vendor contract variation. We also continue to exit service lines, businesses and markets that we believe are no longer a core part of our long-term growth strategy. InDecember 2019 , we entered into a definitive agreement to divest our two hospitals and other operations in theMemphis, Tennessee area. We intend to continue to further refine our portfolio of hospitals and other healthcare facilities when we believe such refinements will help us improve profitability, allocate capital more effectively in areas where we have a stronger presence, deploy proceeds on higher-return investments across our business, enhance cash flow generation, reduce our debt and lower our ratio of debt-to-Adjusted EBITDA. 28
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Improving the Customer Care Experience-As consumers continue to become more engaged in managing their health, we recognize that understanding what matters most to them and earning their loyalty is imperative to our success. As such, we have enhanced our focus on treating our patients as traditional customers by: (1) establishing networks of physicians and facilities that provide convenient access to services across the care continuum; (2) expanding service lines aligned with growing community demand, including a focus on aging and chronic disease patients; (3) offering greater affordability and predictability, including simplified registration and discharge procedures, particularly in our outpatient centers; (4) improving our culture of service; and (5) creating health and benefit programs, patient education and health literacy materials that are customized to the needs of the communities we serve. Through these efforts, we intend to improve the customer care experience in every part of our operations. Expansion of Our Ambulatory Care Segment-We expect to continue to focus on opportunities to expand our Ambulatory Care segment through organic growth, building new outpatient centers, corporate development activities and strategic partnerships. We believe USPI's surgery centers and surgical hospitals offer many advantages to patients and physicians, including greater affordability, predictability, flexibility and convenience. Moreover, due in part to advancements in medical technology, and due to the lower cost structure and greater efficiencies that are attainable at a specialized outpatient site, we believe the volume and complexity of surgical cases performed in an outpatient setting will continue to increase following the containment of the COVID-19 pandemic. Historically, our outpatient services have generated significantly higher margins for us than inpatient services. Driving Conifer's Growth While Pursuing a Tax-Free Spin-Off-We previously announced a number of actions to support our goals of improving financial performance and enhancing shareholder value, including the exploration of strategic alternatives for Conifer. InJuly 2019 , we announced our intention to pursue a tax-free spin-off of Conifer as a separate, independent, publicly traded company. Completion of the proposed spin-off is subject to a number of conditions, including, among others, assurance that the separation will be tax-free forU.S. federal income tax purposes, execution of a restructured services agreement between Conifer and Tenet, finalization of Conifer's capital structure, the effectiveness of appropriate filings with theSecurities and Exchange Commission , and final approval from our board of directors. We are targeting to complete the separation by the end of the second quarter of 2021; however, there can be no assurance regarding the timeframe for completing the spin-off, the allocation of assets and liabilities between Tenet and Conifer, the other conditions of the spin-off will be met, or the spin-off will be completed at all. Conifer serves approximately 660 Tenet and non-Tenet hospital and other clients nationwide. In addition to providing revenue cycle management services to healthcare systems and physicians, Conifer provides support to both providers and self-insured employers seeking assistance with clinical integration, financial risk management and population health management. Conifer remains focused on driving growth by continuing to market and expand its revenue cycle management and value-based care solutions businesses. We believe that our success in growing Conifer and increasing its profitability depends in part on our success in executing the following strategies: (1) attracting hospitals and other healthcare providers that currently handle their revenue cycle management processes internally as new clients; (2) generating new client relationships through opportunities from USPI and Tenet's acute care hospital acquisition and divestiture activities; (3) expanding revenue cycle management and value-based care service offerings through organic development and small acquisitions; and (4) leveraging data from tens of millions of patient interactions for continued enhancement of the value-based care environment to drive competitive differentiation. Improving Profitability-Following a return to normal operations post COVID-19, we will continue to focus on growing patient volumes and effective cost management as a means to improve profitability. We believe our inpatient admissions have been constrained in recent years (prior to the COVID-19 pandemic) by increased competition, utilization pressure by managed care organizations, new delivery models that are designed to lower the utilization of acute care hospital services, the effects of higher patient co-pays, co-insurance amounts and deductibles, changing consumer behavior, and adverse economic conditions and demographic trends in certain of our markets. However, we also believe that emphasis on higher-demand clinical service lines (including outpatient services), focus on expanding our ambulatory care business, cultivation of our culture of service, participation in Medicare Advantage health plans that have been experiencing higher growth rates than traditional Medicare plans, and contracting strategies that create shared value with payers should help us grow our patient volumes over time. In 2020, we will continue to explore new opportunities to enhance efficiency, including further integration of enterprise-wide centralized support functions, outsourcing certain functions unrelated to direct patient care, and reducing clinical and vendor contract variation. Reducing Our Leverage Over Time-All of our outstanding long-term debt has a fixed rate of interest, except for outstanding borrowings under our revolving credit facility, and the maturity dates of our notes are staggered from 2022 through 2031. We believe that our capital structure minimizes the near-term impact of increased interest rates, and the staggered maturities of our debt allow us to refinance our debt over time. Although we recently issued$700 million aggregate principal 29
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amount of senior secured first lien notes to manage our liquidity during the COVID-19 pandemic, it is nonetheless our long-term objective to reduce our debt and lower our ratio of debt-to-Adjusted EBITDA, primarily through more efficient capital allocation and Adjusted EBITDA growth, which should lower our refinancing risk. Our ability to execute on our strategies and respond to the aforementioned trends is subject to the length of time of the impact from the COVID-19 pandemic, as well as a number of other risks and uncertainties - all of which may cause actual results to be materially different from expectations. For information about risks and uncertainties that could affect our results of operations, see the Risk Factors section in Part II of this report and the Forward-Looking Statements and Risk Factors sections in Part I of our Annual Report on Form 10-K for the year endedDecember 31, 2019 ("Annual Report").
RESULTS OF OPERATIONS-OVERVIEW
We have provided below certain selected operating statistics for the three months endedMarch 31, 2020 and 2019 on a continuing operations basis, which includes the results of our same 65 hospitals operated throughout the three months endedMarch 31, 2020 and 2019, and threeChicago -area hospitals, which we divested effectiveJanuary 28, 2019 . The following tables also show information about facilities in our Ambulatory Care segment that we control and, therefore, consolidate. We believe this information is useful to investors because it reflects our current portfolio of operations and the recent trends we are experiencing with respect to volumes, revenues and expenses. We present certain metrics on a per adjusted patient admission basis to show trends other than volume. Continuing Operations Three Months Ended March 31, Increase Selected Operating Statistics 2020 2019 (Decrease) Hospital Operations - hospitals and related outpatient facilities Number of hospitals (at end of period) 65 65 - (1) Total admissions 165,735 174,726 (5.1 )% Adjusted patient admissions(2) 290,912 308,133 (5.6 )% Paying admissions (excludes charity and uninsured) 155,820 164,793 (5.4 )% Charity and uninsured admissions 9,915 9,933 (0.2 )% Emergency department visits 641,282 657,449 (2.5 )% Total surgeries 95,352 103,013 (7.4 )% Patient days - total 810,479 822,079 (1.4 )% Adjusted patient days(2) 1,385,763 1,420,170 (2.4 )% Average length of stay (days) 4.89 4.70 4.0 % Average licensed beds 17,218 17,455 (1.4 )% Utilization of licensed beds(3) 51.7 % 52.3 % (0.6 )% (1) Total visits 1,616,527 1,714,392 (5.7 )% Paying visits (excludes charity and uninsured) 1,499,538 1,603,712 (6.5 )% Charity and uninsured visits 116,989 110,680 5.7 % Ambulatory Care Total consolidated facilities (at end of period) 244 226 18 (1) Total cases 501,226 496,988 0.9 %
(1) The change is the difference between the 2020 and 2019 amounts shown. (2) Adjusted patient admissions/days represents actual patient admissions/days
adjusted to include outpatient services provided by facilities in our Hospital
Operations segment by multiplying actual patient admissions/days by the sum of
gross inpatient revenues and outpatient revenues and dividing the results by
gross inpatient revenues. (3) Utilization of licensed beds represents patient days divided by number of days
in the period divided by average licensed beds.
Total admissions decreased by 8,991, or 5.1%, in the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 , and total surgeries decreased by 7,661, or 7.4%, in the 2020 period compared to the 2019 period. Our emergency department visits decreased 2.5% in the three months endedMarch 31, 2020 compared to the same period in the prior year. Our volumes from continuing operations in the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 were negatively affected by the cancellation of a substantial number of elective procedures at our hospitals due to the COVID-19 pandemic, as well as the divestiture of threeChicago -area hospitals and affiliated operations effectiveJanuary 28, 2019 . Our Ambulatory Care total cases increased 0.9% in the three months endedMarch 31, 2020 compared to the 2019 period. Beginning in lateMarch 2020 , we closed or reduced operating hours at our ambulatory surgery centers and other outpatient centers that specialize in elective procedures due to the COVID-19 pandemic. 30
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Continuing Operations
Three Months Ended March 31,
Increase
Revenues 2020 2019 (Decrease)
Net operating revenues
Hospital Operations prior to inter-segment eliminations $ 3,834 $ 3,862 (0.7 )%
Ambulatory Care 490 480 2.1 %
Conifer 332 349 (4.9 )%
Inter-segment eliminations (136 ) (146 ) (6.8 )%
Total $ 4,520 $ 4,545 (0.6 )%
Net operating revenues decreased by
Our accounts receivable days outstanding ("AR Days") from continuing operations
were 60.7 days at March 31, 2020 and 58.4 days at December 31, 2019 , compared to
our target of less than 55 days. This calculation includes our Hospital
Operations contract assets, as well as the accounts receivable of our
Memphis -area facilities that have been classified in assets held for sale on our
Consolidated Balance Sheet at March 31, 2020 , and excludes (i) three
Chicago -area hospitals, which we divested effective January 28, 2019 , and (ii)
our California provider fee revenues.
Continuing Operations
Three Months Ended March 31,
Increase
Selected Operating Expenses 2020 2019 (Decrease)
Hospital Operations
Salaries, wages and benefits $ 1,846 $ 1,813 1.8 %
Supplies 650 641 1.4 %
Other operating expenses 862 919 (6.2 )%
Total $ 3,358 $ 3,373 (0.4 )%
Ambulatory Care
Salaries, wages and benefits $ 162 $ 153 5.9 %
Supplies 112 99 13.1 %
Other operating expenses 86 82 4.9 %
Total $ 360 $ 334 7.8 %
Conifer
Salaries, wages and benefits $ 179 $ 185 (3.2 )%
Supplies 1 1 - %
Other operating expenses 65 64 1.6 %
Total $ 245 $ 250 (2.0 )%
Total
Salaries, wages and benefits $ 2,187 $ 2,151 1.7 %
Supplies 763 741 3.0 %
Other operating expenses 1,013 1,065 (4.9 )%
Total $ 3,963 $ 3,957 0.2 %
Rent/lease expense(1)
Hospital Operations $ 65 $ 59 10.2 %
Ambulatory Care 23 20 15.0 %
Conifer 3 3 - %
Total $ 91 $ 82 11.0 %
(1) Included in other operating expenses.
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Continuing Operations
Three Months Ended March 31,
Selected Operating Expenses per Adjusted Patient Increase
Admission 2020 2019 (Decrease)
Hospital Operations
Salaries, wages and benefits per adjusted patient
admission(1) $ 6,347 $ 5,881 7.9 %
Supplies per adjusted patient admission(1) 2,236 2,078 7.6 %
Other operating expenses per adjusted patient
admission(1) 2,961 2,986 (0.8 )%
Total per adjusted patient admission $ 11,544 $ 10,945 5.5 %
(1) Calculation excludes the expenses from our health plan businesses. Adjusted
patient admissions represents actual patient admissions adjusted to include
outpatient services provided by facilities in our Hospital Operations segment
by multiplying actual patient admissions by the sum of gross inpatient
revenues and outpatient revenues and dividing the results by gross inpatient
revenues.
Salaries, wages and benefits per adjusted patient admission increased 7.9% in
the three months ended March 31, 2020 compared to the same period in 2019. This
change was primarily due to reduced patient volumes and the related increase in
our patient length-of-stay due to the COVID-19 pandemic, as well as annual merit
increases for certain of our employees, a greater number of employed physicians
and higher health benefits costs, partially offset by decreased incentive
compensation expense in the three months ended March 31, 2020 compared to the
three months ended March 31, 2019 .
Supplies expense per adjusted patient admission increased 7.6% in the three
months ended
Other operating expenses per adjusted patient admission decreased by 0.8% in the three months endedMarch 31, 2020 compared to the prior-year period. This decrease was primarily due to reduced malpractice expense, which was$40 million lower in the 2020 period compared to the 2019 period, decreased software costs, decreased consulting and legal costs, and decreased costs associated with funding indigent care services at our hospitals, which costs were substantially offset by reduced net patient revenues, partially offset by higher medical fees.
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, acquisition-related
costs, and litigation costs and settlements of $372 million ;
• Payments for restructuring charges, acquisition-related costs, and
litigation costs and settlements of $68 million ;
• Capital expenditures of
• Interest payments of
• Purchases of businesses or joint venture interests of
•
•
Net cash provided by operating activities was$129 million in the three months endedMarch 31, 2020 compared to$10 million in the three months endedMarch 31, 2019 . Key factors contributing to the change between the 2020 and 2019 periods include the following: •$74 million less cash used in the 2020 period for the annual 401(k) match funding; 32
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• An increase of
charges, acquisition-related costs, and litigation costs and
settlements; and
• The timing of other working capital items.
FORWARD-LOOKING STATEMENTS
This report includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, each as amended. All statements, other than statements of historical or present facts, that address activities, events, outcomes, business strategies and other matters that we plan, expect, intend, assume, believe, budget, predict, forecast, project, target, estimate or anticipate (and other similar expressions) will, should or may occur in the future are forward-looking statements, including (but not limited to) disclosure regarding (i) the impact of the COVID-19 pandemic, (ii) our future earnings, financial position, operational and strategic initiatives, and (iii) developments in the healthcare industry. Forward-looking statements represent management's expectations, based on currently available information, as to the outcome and timing of future events, but, by their nature, address matters that are indeterminate. They involve known and unknown risks, uncertainties and other factors, many of which we are unable to predict or control, that may cause our actual results, performance or achievements to be materially different from those expressed or implied by forward-looking statements. Such factors include, but are not limited to, the risks described in the Risk Factors section in Part II of this report and the Forward-Looking Statements and Risk Factors sections in Part I of our Annual Report. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in our Annual Report and in this report. Should one or more of the risks and uncertainties described in our Annual Report or this report occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statement. We specifically disclaim any obligation to update any information contained in a forward-looking statement or any forward-looking statement in its entirety except as required by law.
All forward-looking statements attributable to us are expressly qualified in their entirety by this cautionary statement.
SOURCES OF REVENUE FOR OUR HOSPITAL OPERATIONS SEGMENT
We earn revenues for patient services from a variety of sources, primarily
managed care payers and the federal Medicare program, as well as state Medicaid
programs, indemnity-based health insurance companies and uninsured patients
(that is, patients who do not have health insurance and are not covered by some
other form of third-party arrangement).
The following table shows the sources of net patient service revenues less
implicit price concessions for our hospitals and related outpatient facilities,
expressed as percentages of net patient service revenues less implicit price
concessions from all sources:
Three Months Ended
March 31,
Net Patient Service Revenues Less Implicit Price Increase
Concessions from: 2020 2019 (Decrease)(1)
Medicare 19.9 % 21.2 % (1.3 )%
Medicaid 7.9 % 8.8 % (0.9 )%
Managed care(2) 65.6 % 65.7 % (0.1 )%
Uninsured 1.1 % - % 1.1 %
Indemnity and other 5.5 % 4.3 % 1.2 %
(1) The change is the difference between the 2020 and 2019 percentages shown. (2) Includes Medicare and Medicaid managed care programs.
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Our payer mix on an admissions basis for our hospitals and related outpatient
facilities, expressed as a percentage of total admissions from all sources, is
shown below:
Three Months Ended
March 31,
Increase
Admissions from: 2020 2019 (Decrease)(1)
Medicare 24.5 % 26.1 % (1.6 )%
Medicaid 6.0 % 6.0 % - %
Managed care(2) 60.7 % 59.7 % 1.0 %
Charity and uninsured 6.0 % 5.7 % 0.3 %
Indemnity and other 2.8 % 2.5 % 0.3 %
(1) The change is the difference between the 2020 and 2019 percentages shown. (2) Includes Medicare and Medicaid managed care programs.
GOVERNMENT PROGRAMS
TheCenters for Medicare and Medicaid Services ("CMS"), an agency of theU.S. Department of Health and Human Services ("HHS"), is the single largest payer of healthcare services inthe United States . Approximately 60 million individuals rely on healthcare benefits through Medicare, and approximately 72 million individuals are enrolled in Medicaid and theChildren's Health Insurance Program ("CHIP"). These three programs are authorized by federal law and administered by CMS. Medicare is a federally funded health insurance program primarily for individuals 65 years of age and older, as well as some younger people with certain disabilities and conditions, and is provided without regard to income or assets. Medicaid is co-administered by the states and is jointly funded by the federal government and state governments. Medicaid is the nation's main public health insurance program for people with low incomes and is the largest source of health coverage inthe United States . The CHIP, which is also co-administered by the states and jointly funded, provides health coverage to children in families with incomes too high to qualify for Medicaid, but too low to afford private coverage. Unlike Medicaid, the CHIP is limited in duration and requires the enactment of reauthorizing legislation. During the three months endedMarch 31, 2018 , separate pieces of legislation were enacted extending CHIP funding for a total of 10 years from federal fiscal year ("FFY") 2018 (which began onOctober 1, 2017 ) through FFY 2027.
Medicare
Medicare offers its beneficiaries different ways to obtain their medical
benefits. One option, the Original Medicare Plan (which includes "Part A" and
"Part B"), is a fee-for-service payment system. The other option, called
Medicare Advantage (sometimes called "Part C" or "MA Plans"), includes health
maintenance organizations ("HMOs"), preferred provider organizations ("PPOs"),
private fee-for-service Medicare special needs plans and Medicare medical
savings account plans. The major components of our net patient service revenues
from continuing operations of the hospitals and related outpatient facilities in
our Hospital Operations segment for services provided to patients enrolled in
the Original Medicare Plan for the three months ended March 31, 2020 and 2019
are set forth in the following table:
Three Months Ended
March 31,
Revenue Descriptions 2020 2019
Medicare severity-adjusted diagnosis-related group - operating
35 36 Outliers 19 23 Outpatient 174 190 Disproportionate share 54 59 Other(1) 33 46 Total Medicare net patient service revenues $
705
(1) The other revenue category includes Medicare Direct Graduate Medical Education
and Indirect Medical Education ("IME") revenues, IME revenues earned by our
children's hospital under the Children's Hospitals Graduate Medical Education
Payment Program administered by the Health Resources and Services
units, other revenue adjustments, and adjustments to the estimates for current
and prior-year cost reports and related valuation allowances.
A general description of the types of payments we receive for services provided
to patients enrolled in the Original Medicare Plan is provided in our Annual
Report. Recent regulatory and legislative updates to the terms of these payment
systems and their estimated effect on our revenues can be found under
"Regulatory and Legislative Changes" below.
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Medicaid
Medicaid programs and the corresponding reimbursement methodologies vary from state to state and from year to year. Estimated revenues under various state Medicaid programs, including state-funded Medicaid managed care programs, constituted approximately 18.1% and 19.0% of total net patient service revenues less implicit price concessions of our acute care hospitals and related outpatient facilities for the three months endedMarch 31, 2020 and 2019, respectively. We also receive disproportionate share hospital ("DSH") and other supplemental revenues under various state Medicaid programs. For the three months endedMarch 31, 2020 and 2019, our total Medicaid revenues attributable to DSH and other supplemental revenues were approximately$182 million and$199 million , respectively. The 2020 period included$58 million related to theCalifornia provider fee program,$58 million related to theMichigan provider fee program,$46 million related to Medicaid DSH programs in multiple states,$12 million related to theTexas 1115 waiver program, and$8 million from a number of other state and local programs. Even prior to the COVID-19 pandemic, several states in which we operate faced budgetary challenges that resulted in reduced Medicaid funding levels to hospitals and other providers. Because most states must operate with balanced budgets, and the Medicaid program is generally a significant portion of a state's budget, states can be expected to adopt or consider adopting future legislation designed to reduce or not increase their Medicaid expenditures. In addition, some states delay issuing Medicaid payments to providers to manage state expenditures. As an alternative means of funding provider payments, many of the states in which we operate have adopted supplemental payment programs authorized under the Social Security Act. Continuing pressure on state budgets and other factors could adversely affect the Medicaid supplemental payments our hospitals receive. Because we cannot predict what actions the federal government or the states may take under existing or future legislation and/or regulatory changes to address budget gaps, deficits, Medicaid expansion, provider fee programs or Medicaid Section 1115 waivers, we are unable to assess the effect that any such legislation or regulatory action might have on our business; however, the impact on our future financial position, results of operations or cash flows could be material. Medicaid and Managed Medicaid net patient service revenues from continuing operations recognized by the hospitals and related outpatient facilities in our Hospital Operations segment from Medicaid-related programs in the states in which our facilities are (or were, as the case may be) located, as well as from Medicaid programs in neighboring states, for the three months endedMarch 31, 2020 and 2019 are set forth in the following table. These revenues are presented net of provider taxes or assessments paid by our hospitals, which are reported as an offset reduction to fee-for-service Medicaid revenue. Three Months Ended March 31, Hospital Location 2020 2019 Alabama$ 27 $ 24 Arizona 37 34 California 203 226 Florida 50 52 Illinois - 5 Massachusetts 25 22 Michigan 178 187 South Carolina 17 14 Tennessee 9 8 Texas 95 108$ 641 $ 680 Medicaid and Managed Medicaid revenues comprised 44% and 56%, respectively, of our Medicaid-related net patient service revenues from continuing operations recognized by the hospitals and related outpatient facilities in our Hospital Operations segment for the three months endedMarch 31, 2020 .
Regulatory and Legislative Changes
Material updates to the information set forth in our Annual Report about the Medicare and Medicaid payment systems, as well as other government programs impacting our business, are provided below.
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The Coronavirus Aid, Relief, and Economic Security Act of 2020 and Related Legislation
The CARES Act, which was signed into law onMarch 27, 2020 , aims to mitigate the economic disruption caused by the COVID-19 pandemic and authorizes up to$2 trillion in government spending to accomplish that goal. Among the vast array of spending provisions is an additional$100 billion for thePublic Health and Social Services Emergency Fund ("PHSS Emergency Fund "), which is designed to provide an influx of money to hospitals and other healthcare entities responding to the pandemic. We have provided below a brief overview of certain provisions of the CARES Act and related legislation that have impacted and we expect will continue to impact our business in the months ahead. Please note that this summary is not exhaustive, and additional legislative action and regulatory developments may evolve rapidly. There is no assurance that we will continue to receive or remain eligible for funding or assistance under the CARES Act or similar measures. Statements regarding the projected impact of COVID-19 relief programs on our operations and financial condition are forward-looking and are made as of the date of this filing. PHSS Emergency Fund Disbursements. Payments from thePHSS Emergency Fund are intended to support healthcare-related expenses or lost revenue attributable to the COVID-19 pandemic and to ensure uninsured Americans can get testing and treatment for COVID-19, with$50 billion allocated for general distribution to certain eligible healthcare providers.Between April 10 and April 17, 2020 , HHS made an initial distribution of payments from thePHSS Emergency Fund to eligible providers totaling$30 billion . This quick dispersal of funds was intended to provide relief to both providers in areas heavily impacted by the COVID-19 pandemic and those providers who are struggling to remain operational due to cancelled and delayed elective services. All facilities and providers that received Medicare fee-for-service ("FFS") reimbursements in 2019 were eligible for this initial rapid distribution. Based on our share of total Medicare FFS reimbursements in 2019, we receivedPHSS Emergency Fund payments of approximately$225 million inmid-April 2020 . OnApril 22, 2020 , HHS announced the release of the remaining$70 billion of the$100 billion PHSS Emergency Fund appropriated in the CARES Act, including, among other allocations: (i)$20 billion (remaining from the initial$50 billion allocation described above) for general distribution to eligible healthcare facilities and providers; (ii)$10 billion for hospitals determined to be in areas particularly impacted by COVID-19; and (iii) an unspecified portion for the treatment of the uninsured and possibly other further releases for Medicaid providers. Payments to eligible providers from the additional$20 billion of general allocation funds were calculated to rebalance the entire$50 billion general distribution such that it is based on total 2018 net patient revenue rather than Medicare FFS reimbursements. HHS began disbursing payments onApril 24, 2020 . Based on our share of 2018 net patient revenue, we estimate we will receive additional payments of approximately$145 million . As a result, we estimate we will receive total payments of approximately$370 million from the total$50 billion general distribution to eligible healthcare providers. The targeted$10 billion allocation to hospitals in areas acutely hit by the COVID-19 pandemic will be distributed based on the submission of an application for such funds, which was due onApril 25, 2020 , and the applicant's Medicare DSH payments. Completion of an application is not a guarantee of eligibility nor receipt of any amounts from this distribution. Although we applied for a portion of this funding for certain of our hospitals, there is no assurance that we will receive any related payments.The Health Resources & Services Administration will administer the program intended to reimburse healthcare providers who treat uninsured COVID-19 patients with dates of service or admittance on or afterFebruary 4, 2020 . Claims may be submitted electronically and, if eligible, will be reimbursed at Medicare rates, subject to available funding and timely filing requirements. Although we have registered for the program and expect to begin submitting claims inMay 2020 , we can give no assurances that we will receive reimbursement for such claims from thePHSS Emergency Fund . Payments from thePHSS Emergency Fund are not loans and, therefore, they are not subject to repayment. However, as a condition to receivingPHSS Emergency Fund payments, providers must submit sufficient documentation demonstrating that the funds are being used for healthcare-related expenses or lost revenue attributable to the COVID-19 pandemic. In addition, providers must agree to certain terms and conditions, including, among other things, not to seek collection of out-of-pocket payments from a COVID-19 patient that are greater than what the patient would have otherwise been required to pay if the care had been provided by an in-network provider. Furthermore, HHS has indicated that it will be closely monitoring and, along with theOffice of Inspector General , auditing providers to ensure that recipients comply with the terms and conditions of relief programs and to prevent fraud and abuse. All providers will be subject to civil and criminal penalties for any deliberate omissions, misrepresentations or falsifications of any information given to HHS. We are in the process of evaluating and accepting the terms and conditions associated with the receipt ofPHSS Emergency Fund payments where appropriate and within the required timeframes. 36
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The Paycheck Protection Program and Health Care Enhancement Act (the "Enhancement Act"), a$484 billion COVID-19 emergency supplemental package, was signed into law onApril 24, 2020 . Among other things, the Enhancement Act provides an additional$100 billion for thePHSS Emergency Fund consisting of$75 billion for eligible healthcare providers to continue to address COVID-19 related expenses and lost revenue and$25 billion for COVID-19 testing. Because CMS has not yet released any guidance with respect to how these funds will be allocated, it is unclear at this time whether we will be eligible for any additional payments or, if we are, the amount and timing thereof. Medicare and Medicaid Policy Changes. The CARES Act also seeks to alleviate some of the financial strain on hospitals, physicians, and other healthcare providers through a series of new Medicare policies that temporarily boost Medicare and Medicaid reimbursement and allow for added flexibility.
? Effective
Medicare FFS and Medicare Advantage payments to hospitals, physicians
and other providers will be suspended for the rest of calendar year
("CY") 2020. The projected impact of this change on our operations is
an increase of approximately $67 million of revenues in 2020, which is
not subject to repayment. The 2% sequestration revenue reduction is
scheduled to resume again in CY 2021. In order to offset the addedexpense of the 2020 suspension, the CARES Act extends the sequestration
revenue reduction by one year through 2030.
? The weighting factor that would otherwise apply to the
severity-adjusted diagnosis-related group ("DRG") to which a COVID-19patient discharge is assigned under the Medicare inpatient prospective
payment systems ("IPPS") has been increased by 20%. The add-on payment
will be available for the duration of the public health emergency asdeclared by the Secretary of HHS (the "COVID-19 emergency period").
? The scheduled reduction of
FFY 2020, as mandated by the Affordable Care Act, will be suspended
until
operations is an increase of approximately
2020, which is not subject to repayment. Also, the DSH revenue
reduction for FFY 2021 will be reduced from
Notwithstanding these adjustments, the ACA-mandated reduction is not
expected to be extended past its original termination in FFY 2025.
Because of the uncertainty associated with various factors that may influence
our future Medicare and Medicaid payments, including future legislative, legal
or regulatory actions, or changes in volumes and case mix, there is a risk that
our estimates of the impact of the aforementioned payment and policy changes
will be incorrect and that actual payments received under, or the ultimate
impact of, these programs will differ materially from our expectations.
Expansion of Medicare Accelerated Payments Program. In certain circumstances,
when a hospital is experiencing financial difficulty due to delays in receiving
payment for Medicare services provided, it may be eligible for an accelerated or
advance payment pursuant to the Medicare accelerated payment program. In an
attempt to disburse payments to hospitals more quickly to mitigate shortfalls
due to delays in non-essential procedures, as well as staffing and billing
disruptions, the CARES Act revises the Medicare accelerated payment program to:
? Increase the prepayment amount from 70% to 100% (125% for critical
access hospitals) of expected Medicare payments;
? Increase the length of time accelerated payments may cover from three
to six months;
? Delay the start of recoupment of any overpayments from 90 to 120 days(repayment of advance payments will be effectuated through an automatic
100% offset against future claims payments); and
? Extend the due date for any outstanding balances from 90 days to oneyear for hospitals; all other providers will have 210 days to repay the
advance payment.
Medicare started accepting and processing accelerated payment requests
immediately, and CMS anticipates that payments will be issued within seven days
of the approval of the provider's request. The CARES Act also expands the
Medicare accelerated payment program for the duration of the COVID-19 emergency
period to children's hospitals, cancer hospitals and critical access hospitals.
Our hospitals, ambulatory surgery centers, physician practices and other
outpatient facilities received approximately $1.500 billion of accelerated
payments under this program in April 2020 .
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Enhanced Medicaid Matching Funding. The CARES Act amends a section of the Families First Coronavirus Response Act of 2020 to increase federal matching funding of traditional state Medicaid programs by 6.2 percentage points, which is anticipated to result in additional Medicaid payment rates to providers. The amount and timing of such payments are not currently known or estimable. This enhanced Medicaid matching funding will be available through the end of the calendar quarter following termination of the COVID-19 emergency period. Stabilization Loans. The CARES Act allocates$500 billion to theU.S. Treasury's Exchange Stabilization Fund (the "Stabilization Fund ") to provide loans, loan guarantees and other investments to businesses, states and municipalities needing economic relief due to the COVID-19 pandemic.The Stabilization Fund specifically allocated$46 billion to passenger air carriers, cargo air carriers and businesses important to maintaining national security, with the remaining$454 billion available to fund loans to businesses, states and municipalities needing economic relief. Tax Changes. BeginningMarch 27, 2020 , all employers may elect to defer payment of the 6.2% employerSocial Security tax throughDecember 31, 2020 . Deferred tax amounts are required to be paid in equal amounts over two years, with payments due inDecember 2021 andDecember 2022 . We expect that we will defer approximately$250 million of taxes in 2020 pursuant to this CARES Act provision. In addition, the CARES Act increases the limitation from 30% of adjusted taxable income to 50% of adjusted taxable income for the 2019 and 2020 tax years, allowing businesses to take a larger interest expense deduction. This change is expected to increase our federal tax net operating loss ("NOL") carryforwards into future years, as further described in Note 14 to the accompanying Condensed Consolidated Financial Statements.
PRIVATE INSURANCE
Managed Care
We currently have thousands of managed care contracts with various HMOs and PPOs. HMOs generally maintain a full-service healthcare delivery network comprised of physician, hospital, pharmacy and ancillary service providers that HMO members must access through an assigned "primary care" physician. The member's care is then managed by his or her primary care physician and other network providers in accordance with the HMO's quality assurance and utilization review guidelines so that appropriate healthcare can be efficiently delivered in the most cost-effective manner. HMOs typically provide reduced benefits or reimbursement (or none at all) to their members who use non-contracted healthcare providers for non-emergency care. PPOs generally offer limited benefits to members who use non-contracted healthcare providers. PPO members who use contracted healthcare providers receive a preferred benefit, typically in the form of lower co-pays, co-insurance or deductibles. As employers and employees have demanded more choice, managed care plans have developed hybrid products that combine elements of both HMO and PPO plans, including high-deductible healthcare plans that may have limited benefits, but cost the employee less in premiums. The amount of our managed care net patient service revenues, including Medicare and Medicaid managed care programs, from our hospitals and related outpatient facilities during the three months endedMarch 31, 2020 and 2019 was$2.321 billion and$2.354 billion , respectively. Our top ten managed care payers generated 61% of our managed care net patient service revenues for the three months endedMarch 31, 2020 . National payers generated 44% of our managed care net patient service revenues for the three months endedMarch 31, 2020 . The remainder comes from regional or local payers. AtMarch 31, 2020 andDecember 31, 2019 , 64% and 65%, respectively, of our net accounts receivable for our Hospital Operations segment were due from managed care payers. Revenues under managed care plans are based primarily on payment terms involving predetermined rates per diagnosis, per-diem rates, discounted fee-for-service rates and/or other similar contractual arrangements. These revenues are also subject to review and possible audit by the payers, which can take several years before they are completely resolved. The payers are billed for patient services on an individual patient basis. An individual patient's bill is subject to adjustment on a patient-by-patient basis in the ordinary course of business by the payers following their review and adjudication of each particular bill. We estimate the discounts for contractual allowances at the individual hospital level utilizing billing data on an individual patient basis. At the end of each month, on an individual hospital basis, we estimate our expected reimbursement for patients of managed care plans based on the applicable contract terms. We believe it is reasonably likely for there to be an approximately 3% increase or decrease in the estimated contractual allowances related to managed care plans. Based on reserves atMarch 31, 2020 , a 3% increase or decrease in the estimated contractual allowance would impact the estimated reserves by approximately$12 million . Some of the factors that can contribute to changes in the contractual allowance 38
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estimates include: (1) changes in reimbursement levels for procedures, supplies and drugs when threshold levels are triggered; (2) changes in reimbursement levels when stop-loss or outlier limits are reached; (3) changes in the admission status of a patient due to physician orders subsequent to initial diagnosis or testing; (4) final coding of in-house and discharged-not-final-billed patients that change reimbursement levels; (5) secondary benefits determined after primary insurance payments; and (6) reclassification of patients among insurance plans with different coverage and payment levels. Contractual allowance estimates are periodically reviewed for accuracy by taking into consideration known contract terms, as well as payment history. We believe our estimation and review process enables us to identify instances on a timely basis where such estimates need to be revised. We do not believe there were any adjustments to estimates of patient bills that were material to our revenues. In addition, on a corporate-wide basis, we do not record any general provision for adjustments to estimated contractual allowances for managed care plans. Managed care accounts, net of contractual allowances recorded, are further reduced to their net realizable value through implicit price concessions based on historical collection trends for these payers and other factors that affect the estimation process. We expect managed care governmental admissions to continue to increase as a percentage of total managed care admissions over the near term. However, the managed Medicare and Medicaid insurance plans typically generate lower yields than commercial managed care plans, which have been experiencing an improved pricing trend. Although we have benefited from solid year-over-year aggregate managed care pricing improvements for several years, we have seen these improvements moderate in recent years, and we believe the moderation could continue in future years. In the three months endedMarch 31, 2020 , our commercial managed care net inpatient revenue per admission from the hospitals and related outpatient facilities in our Hospital Operations segment was approximately 96% higher than our aggregate yield on a per admission basis from government payers, including managed Medicare and Medicaid insurance plans.
Indemnity
An indemnity-based agreement generally requires the insurer to reimburse an insured patient for healthcare expenses after those expenses have been incurred by the patient, subject to policy conditions and exclusions. Unlike an HMO member, a patient with indemnity insurance is free to control his or her utilization of healthcare and selection of healthcare providers.
UNINSURED PATIENTS
Uninsured patients are patients who do not qualify for government programs payments, such as Medicare and Medicaid, do not have some form of private insurance and, therefore, are responsible for their own medical bills. A significant number of our uninsured patients are admitted through our hospitals' emergency departments and often require high-acuity treatment that is more costly to provide and, therefore, results in higher billings, which are the least collectible of all accounts.
Self-pay accounts receivable, which include amounts due from uninsured patients, as well as co-pays, co-insurance amounts and deductibles owed to us by patients with insurance, pose significant collectability problems. At bothMarch 31, 2020 andDecember 31, 2019 , approximately 4% of our net accounts receivable for our Hospital Operations segment was self-pay. Further, a significant portion of our implicit price concessions relates to self-pay amounts. We provide revenue cycle management services through Conifer, which is subject to various statutes and regulations regarding consumer protection in areas including finance, debt collection and credit reporting activities. For additional information, see Item 1, Business - Regulations Affecting Conifer's Operations, of Part I of our Annual Report. Conifer has performed systematic analyses to focus our attention on the drivers of bad debt expense for each hospital. While emergency department use is the primary contributor to our implicit price concessions in the aggregate, this is not the case at all hospitals. As a result, we have increased our focus on targeted initiatives that concentrate on non-emergency department patients as well. These initiatives are intended to promote process efficiencies in collecting selfpay accounts, as well as co-pay, co-insurance and deductible amounts owed to us by patients with insurance, that we deem highly collectible. We leverage a statistical-based collections model that aligns our operational capacity to maximize our collections performance. We are dedicated to modifying and refining our processes as needed, enhancing our technology and improving staff training throughout the revenue cycle process in an effort to increase collections and reduce accounts receivable. Over the longer term, several other initiatives we have previously announced should also help address this challenge. For example, our Compact with Uninsured Patients ("Compact") is designed to offer managed care-style discounts to certain uninsured patients, which enables us to offer lower rates to those patients who historically had been charged standard gross charges. Under the Compact, the discount offered to uninsured patients is recognized as a contractual allowance, which reduces net operating revenues at the time the self-pay accounts are recorded. The uninsured patient accounts, net of contractual allowances recorded, are further reduced to their net realizable value through implicit price concessions based on historical collection trends for self-pay accounts and other factors that affect the estimation process. 39
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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 following table shows our estimated costs (based on selected operating
expenses, which include salaries, wages and benefits, supplies and other
operating expenses) of caring for our uninsured and charity patients in the
three months ended
Three Months Ended
March 31,
2020 2019
Estimated costs for:
Uninsured patients $ 156 $ 158
Charity care patients 40 34
Total $ 196 $ 192
RESULTS OF OPERATIONS
The following two tables summarize our consolidated net operating revenues,
operating expenses and operating income from continuing operations, both in
dollar amounts and as percentages of net operating revenues, for the three
months ended
Three Months Ended
March 31,
2020 2019
Net operating revenues:
Hospital Operations $ 3,834 $ 3,862
Ambulatory Care 490 480
Conifer 332 349
Inter-segment eliminations (136 ) (146 )
Net operating revenues 4,520 4,545
Equity in earnings of unconsolidated affiliates 28 34
Operating expenses:
Salaries, wages and benefits 2,187 2,151
Supplies 763 741
Other operating expenses, net 1,013 1,065
Depreciation and amortization 203 208
Impairment and restructuring charges, and
acquisition-related costs 55 19
Litigation and investigation costs 2
13
Net losses (gains) on sales, consolidation and deconsolidation of facilities (2 ) 1 Operating income $ 327$ 381 Three Months Ended March 31, 2020 2019 Net operating revenues 100.0 % 100.0 % Equity in earnings of unconsolidated affiliates 0.6 % 0.7 % Operating expenses: Salaries, wages and benefits 48.4 % 47.3 % Supplies 16.9 % 16.3 % Other operating expenses, net 22.4 % 23.4 % Depreciation and amortization 4.5 % 4.6 % Impairment and restructuring charges, and acquisition-related costs 1.2 % 0.4 % Litigation and investigation costs - % 0.3 % Net gains on sales, consolidation and deconsolidation of facilities - % - % Operating income 7.2 % 8.4 % 40
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Total net operating revenues decreased by$25 million , or 0.6%, for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 . Hospital Operations net operating revenues net of inter-segment eliminations decreased by$18 million , or 0.5%, for the three months endedMarch 31, 2020 compared to the same period in 2019, primarily due to the negative impact of the cancellation of a substantial number of elective procedures at our hospitals due to the COVID-19 pandemic. Ambulatory Care net operating revenues increased by$10 million , or 2.1%, for the three months endedMarch 31, 2020 compared to the prior-year period. This growth was driven by an increase in same-facility net operating revenues of$9 million and an increase from acquisitions of$6 million , partially offset by a decrease of$5 million due to the deconsolidation of a facility. Conifer net operating revenues decreased by$17 million , or 4.9%, for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 . Conifer revenues from third-party customers, which are not eliminated in consolidation, decreased$7 million , or 3.4%, for the three months endedMarch 31, 2020 compared to the same period in 2019. Conifer revenues from third-party customers were negatively impacted by the wind-down and termination of contracts for facilities we previously owned then divested, as well as other client terminations at the end of their contract terms. The following table shows selected operating expenses of our three reportable business segments. Information for our Hospital Operations segment is presented on a same-hospital basis, which includes the results of our same 65 hospitals operated throughout the three months endedMarch 31, 2020 and 2019. Our same-hospital information excludes the results of threeChicago -area hospitals, which we divested effectiveJanuary 28, 2019 . We present same-hospital data because we believe it provides investors with useful information regarding the performance of our hospitals and other operations that are comparable for the periods presented. Three Months Ended March 31, Increase Selected Operating Expenses 2020 2019 (Decrease) Hospital Operations - Same-Hospital Salaries, wages and benefits$ 1,846 $ 1,796 2.8 % Supplies 651 637 2.2 % Other operating expenses 870 909 (4.3 )% Total$ 3,367 $ 3,342 0.7 % Ambulatory Care Salaries, wages and benefits$ 162 $ 153 5.9 % Supplies 112 99 13.1 % Other operating expenses 86 82 4.9 % Total$ 360 $ 334 7.8 % Conifer Salaries, wages and benefits$ 179 $ 185 (3.2 )% Supplies 1 1 - % Other operating expenses 65 64 1.6 % Total$ 245 $ 250 (2.0 )% Total Salaries, wages and benefits$ 2,187 $ 2,134 2.5 % Supplies 764 737 3.7 % Other operating expenses 1,021 1,055 (3.2 )% Total$ 3,972 $ 3,926 1.2 % Rent/lease expense(1) Hospital Operations$ 65 $ 59 10.2 % Ambulatory Care 23 20 15.0 % Conifer 3 3 - % Total$ 91 $ 82 11.0 % (1) Included in other operating expenses.
RESULTS OF OPERATIONS BY SEGMENT
Our operations are reported in three segments: • Hospital Operations, which is comprised of our acute care and specialty
hospitals, ancillary outpatient facilities, urgent care centers,
micro-hospitals and physician practices. As described in Note 4 to the
accompanying
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Condensed Consolidated Financial Statements, certain of these facilities are classified as held for sale atMarch 31, 2020 . • Ambulatory Care, which is comprised of USPI's ambulatory surgery
centers, urgent care centers, imaging centers and surgical hospitals.
• Conifer, which provides revenue cycle management and value-based care
services to hospitals, healthcare systems, physician practices,
employers and other customers.
Hospital Operations Segment
The following tables show operating statistics of our continuing operations hospitals and related outpatient facilities on a same-hospital basis, unless otherwise indicated, which includes the results of our same 65 hospitals operated throughout the three months endedMarch 31, 2020 and 2019 and excludes the results of threeChicago -area hospitals, which we divested effectiveJanuary 28, 2019 . We present same-hospital data because we believe it provides investors with useful information regarding the performance of our hospitals and other operations that are comparable for the periods presented. We present certain metrics on a per adjusted patient admission and per adjusted patient day basis to show trends other than volume. We present certain metrics as a percentage of net operating revenues because a significant portion of our operating expenses are variable. Same-Hospital Continuing Operations Three Months Ended March 31, Increase Admissions, Patient Days and Surgeries 2020 2019
(Decrease)
Number of hospitals (at end of period) 65 65 - (1) Total admissions 165,735 173,470 (4.5 )% Adjusted patient admissions(2) 290,912 305,871 (4.9 )% Paying admissions (excludes charity and uninsured) 155,820 163,632 (4.8 )% Charity and uninsured admissions 9,915 9,838 0.8 % Admissions through emergency department 122,291 125,228 (2.3 )% Paying admissions as a percentage of total admissions 94.0 % 94.3 % (0.3 )% (1) Charity and uninsured admissions as a percentage of total admissions 6.0 % 5.7 % 0.3 % (1) Emergency department admissions as a percentage of total admissions 73.8 % 72.2 % 1.6 % (1) Surgeries - inpatient 41,962 44,553 (5.8 )% Surgeries - outpatient 53,390 57,896 (7.8 )% Total surgeries 95,352 102,449 (6.9 )% Patient days - total 810,479 815,329 (0.6 )% Adjusted patient days(2) 1,385,763 1,408,053 (1.6 )% Average length of stay (days) 4.89 4.70 4.0 % Licensed beds (at end of period) 17,219 17,221 - % Average licensed beds 17,218 17,221 - % Utilization of licensed beds(3) 51.7 % 52.6
% (0.9 )% (1)
(1) The change is the difference between 2020 and 2019 amounts shown. (2) Adjusted patient admissions/days represents actual patient admissions/days
adjusted to include outpatient services provided by facilities in our Hospital
Operations segment by multiplying actual patient admissions/days by the sum of
gross inpatient revenues and outpatient revenues and dividing the results by
gross inpatient revenues. (3) Utilization of licensed beds represents patient days divided by number of days
in the period divided by average licensed beds.
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Same-Hospital
Continuing Operations
Three Months Ended
March 31,
Increase
Outpatient Visits 2020 2019 (Decrease)
Total visits 1,616,527 1,686,864 (4.2 )%
Paying visits (excludes charity and uninsured) 1,499,540 1,577,635 (5.0 )%
Charity and uninsured visits 116,987 109,229 7.1 %
Emergency department visits 641,282 651,852 (1.6 )%
Surgery visits 53,390 57,896 (7.8 )%
Paying visits as a percentage of total visits 92.8 % 93.5 % (0.7 )% (1)
Charity and uninsured visits as a percentage of
total visits 7.2 % 6.5 % 0.7 % (1)
(1) The change is the difference between 2020 and 2019 amounts shown.
Same-Hospital
Continuing Operations
Three Months Ended
March 31,
Increase
Revenues 2020 2019 (Decrease)
Total segment net operating revenues(1) $ 3,700 $ 3,690 0.3 %
Selected revenue data - hospitals and related
outpatient facilities
Net patient service revenues(1)(2) $ 3,542 $ 3,557 (0.4 )%
Net patient service revenue per adjusted patient
admission(1)(2) $ 12,176 $ 11,629 4.7 %
Net patient service revenue per adjusted patient
day(1)(2) $ 2,556 $ 2,526 1.2 %
(1) Revenues are net of implicit price concessions. (2) Adjusted patient admissions/days represents actual patient admissions/days
adjusted to include outpatient services provided by facilities in our Hospital
Operations segment by multiplying actual patient admissions/days by the sum of
gross inpatient revenues and outpatient revenues and dividing the results by
gross inpatient revenues.
Same-Hospital
Continuing Operations
Three Months Ended
March 31,
Increase
Total Segment Selected Operating Expenses 2020 2019 (Decrease)
Salaries, wages and benefits as a percentage of net operating revenues 49.9 % 48.7 % 1.2 % (1) Supplies as a percentage of net operating revenues 17.6 % 17.3 % 0.3 % (1) Other operating expenses as a percentage of net operating revenues 23.5 % 24.6 % (1.1 )% (1)
(1) The change is the difference between 2020 and 2019 amounts shown.
Revenues
Same-hospital net operating revenues increased$10 million , or 0.3%, during the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 , primarily due to increased acuity and improved terms of our managed care contracts, partially offset by the negative impact of the cancellation of a substantial number of elective procedures at our hospitals due to the COVID-19 pandemic. Same-hospital admissions decreased 4.5% in the three months endedMarch 31, 2020 compared to the same period in 2019. Same-hospital outpatient visits decreased 4.2% in the three months endedMarch 31, 2020 compared to the prior-year period. 43
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The following table shows the consolidated net accounts receivable by payer at
March 31, 2020 December 31, 2019
Medicare $ 180 $ 189
Medicaid 64 69
Net cost report settlements receivable and valuation
allowances 37 12
Managed care 1,624 1,618
Self-pay uninsured 19 25
Self-pay balance after insurance 78 76
Estimated future recoveries 163 162
Other payers 361 337
Total Hospital Operations 2,526 2,488
Ambulatory Care 195 253
Total discontinued operations 1 2
$ 2,722 $ 2,743
When we have an unconditional right to payment, subject only to the passage of
time, the right is treated as a receivable. Patient accounts receivable,
including billed accounts and certain unbilled accounts, as well as estimated
amounts due from third-party payers for retroactive adjustments, are recognized
as receivables if our right to consideration is unconditional and only the
passage of time is required before payment of that consideration is due.
Estimated uncollectable amounts are generally considered implicit price
concessions that are a direct reduction to patient accounts receivable rather
than allowance for doubtful accounts. Amounts related to services provided to
patients for which we have not billed and that do not meet the conditions of
unconditional right to payment at the end of the reporting period are contract
assets. For our Hospital Operations segment, our contract assets consist
primarily of services that we have provided to patients who are still receiving
inpatient care in our facilities at the end of the reporting period. Our
Hospital Operations segment's contract assets are included in other current
assets in the accompanying Condensed Consolidated Balance Sheet at March 31,
2020 .
Collection of accounts receivable has been a key area of focus, particularly
over the past several years. At March 31, 2020 , our Hospital Operations segment
collection rate on self-pay accounts was approximately 22.5%. Our self-pay
collection rate includes payments made by patients, including co-pays,
co-insurance amounts and deductibles paid by patients with insurance. Based on
our accounts receivable from uninsured patients and co-pays, co-insurance
amounts and deductibles owed to us by patients with insurance at March 31, 2020 ,
a 10% decrease or increase in our self-pay collection rate, or approximately 2%,
which we believe could be a reasonably likely change, would result in an
unfavorable or favorable adjustment to patient accounts receivable of
approximately $10 million . There are various factors that can impact collection
trends, such as changes in the economy, which in turn have an impact on
unemployment rates and the number of uninsured and underinsured patients, the
volume of patients through our emergency departments, the increased burden of
co-pays and deductibles to be made by patients with insurance, and business
practices related to collection efforts. These factors continuously change and
can have an impact on collection trends and our estimation process.
Payment pressure from managed care payers also affects the collectability of our
accounts receivable. We typically experience ongoing managed care payment delays
and disputes; however, we continue to work with these payers to obtain adequate
and timely reimbursement for our services. Our estimated Hospital Operations
segment collection rate from managed care payers was approximately 98.1% at
March 31, 2020 .
We manage our implicit price concessions using hospital-specific goals and
benchmarks such as (1) total cash collections, (2) point-of-service cash
collections, (3) AR Days and (4) accounts receivable by aging category. The
following tables present the approximate aging by payer of our net accounts
receivable from the continuing operations of our Hospital Operations segment of
$2.489 billion and $2.476 billion at March 31, 2020 and December 31, 2019 ,
respectively, excluding cost report settlements receivable and valuation
allowances of $37 million and $12 million , respectively, at March 31, 2020 and
December 31, 2019 :
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March 31, 2020
Indemnity,
Managed Self-Pay
Medicare Medicaid Care and Other Total
0-60 days 89 % 36 % 53 % 21 % 48 %
61-120 days 7 % 26 % 17 % 15 % 16 %
121-180 days 2 % 13 % 10 % 10 % 9 %
Over 180 days 2 % 25 % 20 % 54 % 27 %
Total 100 % 100 % 100 % 100 % 100 %
December 31, 2019
Indemnity,
Managed Self-Pay
Medicare Medicaid Care and Other Total
0-60 days 91 % 49 % 56 % 21 % 51 %
61-120 days 5 % 21 % 16 % 14 % 15 %
121-180 days 2 % 10 % 10 % 10 % 9 %
Over 180 days 2 % 20 % 18 % 55 % 25 %
Total 100 % 100 % 100 % 100 % 100 %
Conifer continues to implement revenue cycle initiatives to improve our cash
flow. These initiatives are focused on standardizing and improving patient
access processes, including pre-registration, registration, verification of
eligibility and benefits, liability identification and collections at
point-of-service, and financial counseling. These initiatives are intended to
reduce denials, improve service levels to patients and increase the quality of
accounts that end up in accounts receivable. Although we continue to focus on
improving our methodology for evaluating the collectability of our accounts
receivable, we may incur future charges if there are unfavorable changes in the
trends affecting the net realizable value of our accounts receivable.
At March 31, 2020 , we had a cumulative total of patient account assignments to
Conifer of $2.987 billion related to our continuing operations. These accounts
have already been written off and are not included in our receivables or in the
allowance for doubtful accounts; however, an estimate of future recoveries from
all the accounts assigned to Conifer is determined based on our historical
experience and recorded in accounts receivable.
Patient advocates from Conifer's Medicaid Eligibility Program ("MEP") screen
patients in the hospital to determine whether those patients meet eligibility
requirements for financial assistance programs. They also expedite the process
of applying for these government programs. Receivables from patients who are
potentially eligible for Medicaid are classified as Medicaid pending, under the
MEP, with appropriate contractual allowances recorded. Based on recent trends,
approximately 98% of all accounts in the MEP are ultimately approved for
benefits under a government program, such as Medicaid. The following table shows
the approximate amount of accounts receivable in the MEP still awaiting
determination of eligibility under a government program at March 31, 2020 and
December 31, 2019 by aging category:
March 31, December 31,
2020 2019
0-60 days $ 68 $ 89
61-120 days 12 11
121-180 days 4 4
Over 180 days 5 11
Total $ 89 $ 115
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Salaries, Wages and Benefits
Same-hospital salaries, wages and benefits as a percentage of net operating revenues increased by 120 basis points to 49.9% in the three months endedMarch 31, 2020 compared to the same period in 2019. Same-hospital net operating revenues increased 0.3% during the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 , and same-hospital salaries, wages and benefits increased by 2.8% in the three months endedMarch 31, 2020 compared to the 2019 period. The change in same-hospital salaries, wages and benefits as a percentage of net operating revenues was primarily due to reduced patient volumes caused by the cancellation of a substantial number of elective procedures at our hospitals and the related increase in our patient length-of-stay due to the COVID-19 pandemic, as well as annual merit increases for certain of our employees, a greater number of employed physicians and increased health benefits costs, partially offset by decreased incentive compensation expense. Salaries, wages and benefits expense for the three months endedMarch 31, 2020 and 2019 included stock-based compensation expense of$7 million and$6 million , respectively.
Supplies
Same-hospital supplies expense as a percentage of net operating revenues increased by 30 basis points to 17.6% in the three months endedMarch 31, 2020 compared to the same period in 2019. This change was primarily due increased acuity and the increased cost of supplies due to the COVID-19 pandemic. We strive to control supplies expense through product standardization, consistent contract terms and end-to-end contract management, improved utilization, bulk purchases, focused spending with a smaller number of vendors and operational improvements. The items of current cost reduction focus include personal protective equipment, cardiac stents and pacemakers, orthopedics, implants, and high-cost pharmaceuticals.
Other Operating Expenses, Net
Same-hospital other operating expenses as a percentage of net operating revenues decreased by 110 basis points to 23.5% in the three months endedMarch 31, 2020 compared to 24.6% in the same period in 2019. Same-hospital other operating expenses decreased by$39 million , or 4.3%, for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 . The changes in other operating expenses included:
• increased medical fees of
• decreased software costs of
• decreased consulting and legal fees of
• decreased malpractice expense of
• decreased costs of$13 million associated with funding indigent care services at our hospitals, which costs were substantially offset by reduced net patient revenues.
Ambulatory Care Segment
Our Ambulatory Care segment is comprised of USPI's ambulatory surgery centers, urgent care centers, imaging centers and surgical hospitals. USPI operates its surgical facilities in partnership with local physicians and, in many of these facilities, a healthcare system partner. We hold an ownership interest in each facility, with each being operated through a separate legal entity in most cases. USPI operates facilities on a day-to-day basis through management services contracts. Our sources of earnings from each facility consist of: • management services revenues, computed as a percentage of each
facility's net revenues (often net of implicit price concessions); and
• our share of each facility's net income (loss), which is computed by
multiplying the facility's net income (loss) times the percentage of
each facility's equity interests owned by USPI.
Our role as an owner and day-to-day manager provides us with significant
influence over the operations of each facility. For many of the facilities our
Ambulatory Care segment operates (107 of 351 facilities at March 31, 2020 ), this
influence does not represent control of the facility, so we account for our
investment in the facility under the equity method for
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an unconsolidated affiliate. USPI controls 244 of the facilities our Ambulatory Care segment operates, and we account for these investments as consolidated subsidiaries. Our net earnings from a facility are the same under either method, but the classification of those earnings differs. For consolidated subsidiaries, our financial statements reflect 100% of the revenues and expenses of the subsidiaries, after the elimination of intercompany amounts. The net profit attributable to owners other than USPI is classified within "net income available to noncontrolling interests."
For unconsolidated affiliates, our consolidated statements of operations reflect our earnings in two line items:
• equity in earnings of unconsolidated affiliates-our share of the net
income (loss) of each facility, which is based on the facility's net
income (loss) and the percentage of the facility's outstanding equity
interests owned by USPI; and
• management and administrative services revenues, which is included in
our net operating revenues-income we earn in exchange for managing the
day-to-day operations of each facility, usually quantified as a
percentage of each facility's net revenues less implicit price
concessions.
Our Ambulatory Care segment operating income is driven by the performance of all
facilities USPI operates and by USPI's ownership interests in those facilities,
but our individual revenue and expense line items contain only consolidated
businesses, which represent 70% 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.
Results of Operations
The following table summarizes certain consolidated statements of operations items for the periods indicated:
Three Months Ended
March 31,
Ambulatory Care Results of Operations 2020 2019 Increase (Decrease)
Net operating revenues $ 490 $ 480 2.1 %
Equity in earnings of unconsolidated affiliates $ 26 $ 31 (16.1 )%
Salaries, wages and benefits $ 162 $ 153 5.9 %
Supplies $ 112 $ 99 13.1 %
Other operating expenses, net $ 86 $ 82 4.9 %
Our Ambulatory Care net operating revenues increased by $10 million , or 2.1%,
during the three months ended March 31, 2020 as compared to the three months
ended March 31, 2019 . The change was driven by an increase in same-facility net
operating revenues of $9 million and an increase from acquisitions of
$6 million , partially offset by a decrease of $5 million due to the
deconsolidation of a facility.
Salaries, wages and benefits expense increased by $9 million , or 5.9%, during
the three months ended March 31, 2020 as compared to the three months ended
March 31, 2019 . Salaries, wages and benefits expense was impacted by an increase
in same-facility salaries, wages and benefits expense of $8 million and an
increase from acquisitions of $2 million , partially offset by a decrease of
$1 million due to the deconsolidation of a facility.
Supplies expense increased by $13 million , or 13.1%, during the three months
ended March 31, 2020 as compared to the three months ended March 31, 2019 . The
change was driven by an increase in same-facility supplies expense of
$12 million and an increase from acquisitions of $2 million , partially offset by
a decrease of $1 million due to the deconsolidation of a facility.
Other operating expenses increased by
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Facility Growth
The following table summarizes the changes in our same-facility revenue
year-over-year on a pro forma systemwide basis, which includes both consolidated
and unconsolidated (equity method) facilities. While we do not record the
revenues of unconsolidated facilities, we believe this information is important
in understanding the financial performance of our Ambulatory Care segment
because these revenues are the basis for calculating our management services
revenues and, together with the expenses of our unconsolidated facilities, are
the basis for our equity in earnings of unconsolidated affiliates.
Three Months Ended
Ambulatory Care Facility Growth March 31, 2020
Net revenues (1.5)%
Cases (4.3)%
Net revenue per case 2.9%
Joint Ventures with
USPI's business model is to jointly own its facilities with local physicians and, in many of these facilities, a not-for-profit healthcare system partner. Accordingly, as ofMarch 31, 2020 , the majority of facilities in our Ambulatory Care segment are operated in this model. Three Months Ended Ambulatory Care FacilitiesMarch 31, 2020
Facilities:
With a healthcare system partner 223 Without a healthcare system partner 128 Total facilities operated 351 Change fromDecember 31, 2019 Acquisitions 5 De novo 2 Dispositions/Mergers (2 ) Total increase in number of facilities operated 5 During the three months endedMarch 31, 2020 , we acquired controlling interests in one multi-specialty surgery center in each ofColorado ,Tennessee andArizona , and two inFlorida . We paid cash totaling approximately$54 million for these acquisitions. All of these acquired facilities are jointly owned with local physicians, and a healthcare system partner is an owner in all of the facilities except the two facilities inFlorida . We also regularly engage in the purchase of equity interests with respect to our investments in unconsolidated affiliates and consolidated facilities that do not result in a change of control. These transactions are primarily the acquisitions of equity interests in ambulatory care facilities and the investment of additional cash in facilities that need capital for acquisitions, new construction or other business growth opportunities. During the three months endedMarch 31, 2020 , we invested approximately$1 million in such transactions.
Conifer Segment
Our Conifer segment generated net operating revenues of$332 million and$349 million during the three months endedMarch 31, 2020 and 2019, respectively, a portion of which was eliminated in consolidation as described in Note 18 to the accompanying Condensed Consolidated Financial Statements. Conifer revenues from third-party customers, which are not eliminated in consolidation, decreased$7 million , or 3.4%, for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 . Conifer revenues from third-party customers were negatively impacted by the wind-down and termination of contracts for facilities we previously owned then divested, as well as other client terminations at the end of their contract terms. Salaries, wages and benefits expense for Conifer decreased$6 million , or 3.2%, in the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 primarily due to the impact of previously announced workforce reductions as part of our enterprise-wide cost reduction initiatives.
Other operating expenses for Conifer increased
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Agreements document the current terms and conditions of various services Conifer provides to Tenet hospitals, as well as certain administrative services our Hospital Operations segment provides to Conifer; however, execution of a restructured services agreement between Conifer and Tenet is a condition to completion of the proposed spin-off. Conifer's contract with Tenet represented 41.0% of the net operating revenues Conifer recognized in the three months endedMarch 31, 2020 . Consolidated
Impairment and Restructuring Charges, and Acquisition-Related Costs
During the three months endedMarch 31, 2020 , we recorded impairment and restructuring charges and acquisition-related costs of$55 million , consisting of$54 million of restructuring charges and$1 million of acquisition-related costs. Restructuring charges consisted of$10 million of employee severance costs,$15 million related to ourGlobal Business Center inthe Philippines ,$23 million of charges due to the termination of the USPI management equity plan,$1 million of contract and lease termination fees, and$5 million of other restructuring costs. Acquisition-related costs consisted of$1 million of transaction costs. Our impairment and restructuring charges and acquisition-related costs for the three months endedMarch 31, 2020 were comprised of$18 million from our Hospital Operations segment,$24 million from our Ambulatory Care segment and$13 million from our Conifer segment. During the three months endedMarch 31, 2019 , we recorded impairment and restructuring charges and acquisition-related costs of$19 million , consisting of$1 million of impairment charges,$16 million of restructuring charges and$2 million of acquisition-related costs. Restructuring charges consisted of$7 million of employee severance costs,$1 million of contract and lease termination fees, and$8 million of other restructuring costs. Acquisition-related costs consisted of$2 million of transaction costs. Our impairment and restructuring charges and acquisition-related costs for the three months endedMarch 31, 2019 were comprised of$10 million from our Hospital Operations segment,$3 million from our Ambulatory Care segment and$6 million from our Conifer segment.
Litigation and Investigation Costs
Litigation and investigation costs for the three months ended
During the three months endedMarch 31, 2020 , we recorded net gains on sales, consolidation and deconsolidation of facilities of approximately$2 million , primarily comprised of gains of$11 million related to consolidation changes of certain USPI businesses due to ownership changes, partially offset by$6 million of post-closing adjustments on the sale of three of our hospitals in theChicago -area and$3 million of post-closing adjustments on the sale ofMacNeal Hospital . During the three months endedMarch 31, 2019 , we recorded net losses on sales, consolidation and deconsolidation of facilities of approximately$1 million , primarily comprised of a$7 million loss on the sale of ourChicago -area facilities, partially offset by$5 million of gains related to consolidation changes of certain USPI businesses due to ownership changes, as well as post-closing adjustments on several other recent divestitures.
Interest Expense
Interest expense for the three months ended
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Loss From Early Extinguishment of Debt
Loss from early extinguishment of debt was
Income Tax Expense During the three months endedMarch 31, 2020 , we recorded an income tax benefit of$75 million in continuing operations on pre-tax income of$85 million compared to income tax expense of$20 million on pre-tax income of$84 million during the three months endedMarch 31, 2019 . The reconciliation between the amount of recorded income tax expense and the amount calculated at the statutory federal tax rate is shown in the following table: Three Months EndedMarch 31, 2020
2019
Tax expense at statutory federal rate of 21%
3
Tax attributable to noncontrolling interests (14 ) (17 )
Nontaxable gains 3 (1 )
Stock-based compensation - (1 )
Change in valuation allowance (90 ) 24
Other items 3 (6 )
Income tax expense (benefit) $ (75 ) $ 20
As a result of the change in the business interest expense disallowance rules,
as discussed in Note 14 to the accompanying Condensed Consolidated Financial
Statements, we recorded an income tax benefit of $91 million to decrease the
valuation allowance for interest expense carryforwards due to the additional
deduction of interest expense.
Net Income Available to Noncontrolling Interests
Net income available to noncontrolling interests was$66 million for the three months endedMarch 31, 2020 compared to$84 million for the three months endedMarch 31, 2019 . Net income available (loss attributable) to noncontrolling interests for the three months endedMarch 31, 2020 was comprised of$(7) million related to our Hospital Operations segment,$57 million related to our Ambulatory Care segment and$16 million related to our Conifer segment. Of the portion related to our Ambulatory Care segment,$1 million related to the minority interests in USPI.
ADDITIONAL SUPPLEMENTAL NON-GAAP DISCLOSURES
The financial information provided throughout this report including our Condensed Consolidated Financial Statements and the notes thereto has been prepared in conformity with accounting principles generally accepted inthe United States of America ("GAAP"). However, we use certain non-GAAP financial measures defined below in communications with investors, analysts, rating agencies, banks and others to assist such parties in understanding the impact of various items on our financial statements, some of which are recurring or involve cash payments. We use this information in our analysis of the performance of our business, excluding items we do not consider relevant to the performance of our continuing operations. In addition, we use these measures to define certain performance targets under our compensation programs. "Adjusted EBITDA" is a non-GAAP measure defined by the Company as net income available (loss attributable) toTenet Healthcare Corporation common shareholders before (1) the cumulative effect of changes in accounting principle, (2) net income available (loss attributable) to noncontrolling interests, (3) income (loss) from discontinued operations, net of tax, (4) income tax benefit (expense), (5) gain (loss) from early extinguishment of debt, (6) other non-operating income (expense), net, (7) interest expense, (8) litigation and investigation (costs) benefit, net of insurance recoveries, (9) net gains (losses) on sales, consolidation and deconsolidation of facilities, (10) impairment and restructuring charges and acquisition-related costs, (11) depreciation and amortization, and (12) income (loss) from divested and closed businesses (i.e., our health plan businesses). Litigation and investigation costs do not include ordinary course of business malpractice and other litigation and related expense.
The Company believes the foregoing non-GAAP measure is useful to investors and analysts because it presents additional information about the Company's financial performance. Investors, analysts, Company management and the
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Company's board of directors utilize this non-GAAP measure, in addition to GAAP measures, to track the Company's financial and operating performance and compare the Company's performance to peer companies, which utilize similar non-GAAP measures in their presentations. The human resources committee of the Company's board of directors also uses certain non-GAAP measures to evaluate management's performance for the purpose of determining incentive compensation. The Company believes that Adjusted EBITDA is a useful measure, in part, because certain investors and analysts use both historical and projected Adjusted EBITDA, in addition to GAAP and other non-GAAP measures, as factors in determining the estimated fair value of shares of the Company's common stock. Company management also regularly reviews the Adjusted EBITDA performance for each operating segment. The Company does not use Adjusted EBITDA to measure liquidity, but instead to measure operating performance. The non-GAAP Adjusted EBITDA measure the Company utilizes may not be comparable to similarly titled measures reported by other companies. Because this measure excludes many items that are included in our financial statements, it does not provide a complete measure of our operating performance. Accordingly, investors are encouraged to use GAAP measures when evaluating the Company's financial performance. The following table shows the reconciliation of Adjusted EBITDA to net income available (loss attributable) toTenet Healthcare Corporation common shareholders (the most comparable GAAP term) for the three months endedMarch 31, 2020 and 2019: Three Months Ended March 31, 2020 2019 Net income available (loss attributable) toTenet Healthcare Corporation common shareholders $ 93$ (12 ) Less: Net income available to noncontrolling interests (66 ) (84 ) Income (loss) from discontinued operations, net of tax (1 )
8
Income from continuing operations 160
64
Income tax benefit (expense) 75 (20 ) Loss from early extinguishment of debt - (47 ) Other non-operating income, net 1 1 Interest expense (243 ) (251 ) Operating income 327 381 Litigation and investigation costs (2 ) (13 ) Net gains (losses) on sales, consolidation and deconsolidation of facilities 2 (1 ) Impairment and restructuring charges, and acquisition-related costs (55 ) (19 ) Depreciation and amortization (203 ) (208 ) Loss from divested and closed businesses (i.e., the Company's health plan businesses) - (1 ) Adjusted EBITDA$ 585 $ 623 Net operating revenues$ 4,520 $ 4,545 Net income available (loss attributable) toTenet Healthcare Corporation common shareholders as a % of net operating revenues 2.1 %
(0.3 )%
Adjusted EBITDA as % of net operating revenues (Adjusted EBITDA margin) 12.9 % 13.7 %
LIQUIDITY AND CAPITAL RESOURCES
CASH REQUIREMENTS
There have been no material changes to our obligations to make future cash payments under contracts, such as debt and lease agreements, and under contingent commitments, such as standby letters of credit and minimum revenue guarantees, as disclosed in our Annual Report, except for additional lease obligations and the long-term debt transactions disclosed in Notes 1 and 19, respectively, to our accompanying Condensed Consolidated Financial Statements. AtMarch 31, 2020 , using the last 12 months of Adjusted EBITDA, our ratio of total long-term debt, net of cash and cash equivalent balances, to Adjusted EBITDA was 5.44x. We anticipate this ratio will fluctuate from quarter to quarter based on earnings performance and other factors, including the use of our revolving credit facility as a source of liquidity and acquisitions that involve the assumption of long-term debt. We seek to manage this ratio and increase the efficiency of our balance sheet by following our business plan and managing our cost structure, including through possible asset divestitures, and through other changes in our capital structure. As part of our long-term objective to manage our capital structure, we may issue 51
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equity or convertible securities, and we may seek to retire, purchase, redeem or refinance some of our outstanding debt or equity securities, in each case subject to prevailing market conditions, our liquidity requirements, operating results, contractual restrictions and other factors. Our ability to achieve our leverage and capital structure objectives is subject to numerous risks and uncertainties, many of which are described in the Risk Factors section in Part II of this report and the Forward-Looking Statements and Risk Factors sections in Part I of our Annual Report. Our capital expenditures primarily relate to the expansion and renovation of existing facilities (including amounts to comply with applicable laws and regulations), equipment and information systems additions and replacements, introduction of new medical technologies, design and construction of new buildings, and various other capital improvements, as well as commitments to make capital expenditures in connection with acquisitions of businesses. Capital expenditures were$182 million and$192 million in the three months endedMarch 31, 2020 and 2019, respectively. We have reduced our planned capital expenditures for 2020 by approximately 40%. We now anticipate that our capital expenditures for continuing operations for the year endingDecember 31, 2020 will total approximately$400 million to$450 million , including$136 million that was accrued as a liability atDecember 31, 2019 .
Interest payments, net of capitalized interest, were
Income tax payments, net of tax refunds, were$3 million in the three months endedMarch 31, 2020 compared to income tax refunds, net of tax payments, of$9 million in the three months endedMarch 31, 2019 .
SOURCES AND USES OF CASH
Our liquidity for the three months ended
Our primary source of operating cash is the collection of accounts receivable. As such, our operating cash flow is impacted by levels of cash collections, as well as levels of implicit price concessions, due to shifts in payer mix and other factors. Net cash provided by operating activities was$129 million in the three months endedMarch 31, 2020 compared to$10 million in the three months endedMarch 31, 2019 . Key factors contributing to the change between the 2020 and 2019 periods include the following: •$74 million less cash used in the 2020 period for the annual 401(k) match funding;
• An increase of
charges, acquisition-related costs, and litigation costs and
settlements; and
• The timing of other working capital items.
Net cash used in investing activities was$204 million for the three months endedMarch 31, 2020 compared to$139 million for the three months endedMarch 31, 2019 . The 2020 amount included$53 million of additional investments for purchases of businesses or joint venture interests compared to the 2019 period. The 2019 period included proceeds from sales of facilities and other assets of$41 million due to the sale of three hospitals and hospital-affiliated operations in theChicago area. Capital expenditures were$182 million and$192 million in the three months endedMarch 31, 2020 and 2019, respectively. Net cash provided by financing activities was$426 million for the three months endedMarch 31, 2020 compared to net cash used in financing activities of$30 million for the three months endedMarch 31, 2019 . The 2020 amount included net borrowings under our credit facility of$500 million described in Note 6 to our accompanying Condensed Consolidated Financial Statements. The 2019 amount included proceeds from the issuance of$1.5 billion aggregate principal amount of 6.250% senior secured second lien notes due 2027, as well as the payments for our purchases of$300 million aggregate principal amount of our outstanding 6.750% senior notes due 2020,$750 million aggregate principal amount of our outstanding 7.500% senior secured second lien notes due 2022, and$468 million aggregate principal amount of our outstanding 5.500% senior unsecured notes due 2019. The 2019 amount also included net borrowings under our credit facility of$190 million . 52
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We record our equity securities and our debt securities classified as available-for-sale at fair market value. The majority of our investments are valued based on quoted market prices or other observable inputs. We have no investments that we expect will be negatively affected by the current economic conditions such that they will materially impact our financial condition, results of operations or cash flows.
DEBT INSTRUMENTS, GUARANTEES AND RELATED COVENANTS
Credit Agreement.We have a senior secured revolving credit facility that, atMarch 31, 2020 , provided for revolving loans in an aggregate principal amount of up to$1.5 billion with a$200 million subfacility for standby letters of credit. AtMarch 31, 2020 , we had$500 million of cash borrowings outstanding under the revolving credit facility subject to a weighted average interest rate of 1.894%, and we had$1 million of standby letters of credit outstanding. Based on our eligible receivables,$999 million was available for borrowing under the revolving credit facility atMarch 31, 2020 . AtMarch 31, 2020 , we were in compliance with all covenants and conditions in our senior secured revolving credit facility. OnApril 24, 2020 , we amended our credit agreement (as amended, the "Credit Agreement") to, among other things, (i) increase the aggregate revolving credit commitments from$1.5 billion to$1.9 billion , subject to borrowing availability, and (ii) increase the advance rate and raise limits on certain eligible accounts receivable in the calculation of the borrowing base, in each case, for an incremental period of 364 days. For additional information regarding the Credit Agreement, see Note 6 to the accompanying Condensed Consolidated Financial Statements. Letter of Credit Facility. InMarch 2020 , we amended our letter of credit facility (as amended, the "LC Facility") to extend the scheduled maturity date of the LC Facility fromMarch 7, 2021 toSeptember 12, 2024 and to increase the aggregate principal amount of standby and documentary letters of credit that from time to time may be issued thereunder from$180 million to$200 million . Obligations under the LC Facility are guaranteed and secured by a first-priority pledge of the capital stock and other ownership interests of certain of our wholly owned domestic hospital subsidiaries on an equal ranking basis with our senior secured first lien notes. AtMarch 31, 2020 , we were in compliance with all covenants and conditions in our LC Facility. AtMarch 31, 2020 , we had$91 million of standby letters of credit outstanding under the LC Facility. Sale of Senior Secured First Lien Notes. OnApril 7, 2020 , we sold$700 million aggregate principal amount of 7.500% senior secured first lien notes, which will mature onApril 1, 2025 (the "2025 Senior Secured First Lien Notes"). We will pay interest on the 2025 Senior Secured First Lien Notes semi-annually in arrears onApril 1 andOctober 1 of each year, commencing onOctober 1, 2020 . A portion of the proceeds from the sale of the 2025 Senior Secured First Lien Notes were used, after payment of fees and expenses, to repay the$500 million aggregate principal amount of borrowings outstanding under our Credit Agreement as ofMarch 31, 2020 .
For additional information regarding our long-term debt, see Note 6 to the accompanying Condensed Consolidated Financial Statements and Note 7 to the Consolidated Financial Statements included in our Annual Report.
LIQUIDITY
Broad economic factors resulting from the COVID-19 pandemic, including increasing unemployment rates and reduced consumer spending, are impacting our service mix, revenue mix and patient volumes. Business closings and layoffs in the areas we operate may lead to increases in the uninsured and underinsured populations and adversely affect demand for our services, as well as the ability of patients to pay for services as rendered. Any increase in the amount of or deterioration in the collectability of patient accounts receivable will adversely affect our cash flows and results of operations. If general economic conditions continue to deteriorate or remain uncertain for an extended period of time, our liquidity and ability to repay our outstanding debt may be impacted. While demand for our services is expected to rebound in the future, we have taken, and continue to take, various actions to increase our liquidity and mitigate the impact of reductions in our patient volumes and operating revenues from the COVID-19 pandemic. InApril 2020 , we sold$700 million aggregate principal amount of our 2025 Senior Secured First Lien Notes, a portion of the proceeds of which were used to repay borrowings outstanding under our Credit Agreement. In addition, we amended our Credit Agreement inApril 2020 to increase our borrowing availability and make certain changes with respect to the calculation of our borrowing base. We also reduced our planned capital expenditures for 2020 by approximately 40%. Furthermore, we have furloughed some employees, and we have deferred certain operating expenses that are not expected to impact our response to COVID-19. We are also reducing variable costs across the enterprise as a result of softening patient volumes. We believe these actions, together with government relief programs intended to mitigate increases in expenses and lost revenue attributable to the COVID-19 pandemic, will help us to continue operating during these uncertain times. As more fully described under "Sources of Revenue for Our Hospital Operations Segment - Government Programs" above: 53
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• The Medicare Fee-for-Service accelerated and advanced payment program
has been expanded. Our hospitals, ambulatory surgery centers, physician
practices and other outpatient facilities received approximately
$1.500 billion of accelerated payments under this program in
April 2020 .
• Beginning
the 6.2% employer Social Security tax through December 31, 2020 .
Deferred tax amounts are required to be paid in equal amounts over two
years, with payments due in December 2021 and December 2022 . We expect
that we will defer approximately $250 million of taxes in 2020 pursuant
to this CARES Act provision.
• $100 billion has been authorized under the CARES Act for theexpenses or lost revenue attributable to the COVID-19 pandemic and to
ensure uninsured Americans can get testing and treatment for COVID-19,
with
healthcare providers. Based on our share of total Medicare FFS
reimbursements in 2019, we received PHSS Emergency Fund payments of
approximately $225 million in mid-April 2020 . Based on our share of
2018 net patient revenue, we estimate we will receive additional
payments of approximately $145 million . As a result, we estimate we
will receive total payments of approximately $370 million from the
total $50 billion general distribution to eligible healthcare
providers. Payments from the PHSS Emergency Fund are not loans and,therefore, they are not subject to repayment. However, as a condition
to receiving PHSS Emergency Fund payments, providers must submit
sufficient documentation demonstrating that the funds are being used
for healthcare-related expenses or lost revenue attributable to the
COVID-19 pandemic. In addition, providers must agree to certain terms
and conditions.
• Effective
Medicare FFS and Medicare Advantage payments to hospitals, physicians
and other providers will be suspended for the rest of CY 2020. The
projected impact of this change on our operations is an increase of
approximately
repayment.
• The scheduled reduction of $4 billion in Medicaid DSH payments inFFY 2020, as mandated by the Affordable Care Act, will be suspended
until
operations is an increase of approximately
2020, which is not subject to repayment.
From time to time, we expect to engage in additional capital markets, bank credit and other financing activities depending on our needs and financing alternatives available at that time. We believe our existing debt agreements provide flexibility for future secured or unsecured borrowings.
Our cash on hand fluctuates day-to-day throughout the year based on the timing and levels of routine cash receipts and disbursements, including our book overdrafts, and required cash disbursements, such as interest payments. Cash flows from operating activities in the first quarter of the calendar year are usually lower than in subsequent quarters of the year, primarily due to the timing of certain working capital requirements during the first quarter, including our annual 401(k) matching contributions and annual incentive compensation payments. These fluctuations result in material intra-quarter net operating and investing uses of cash that have caused, and in the future will cause, us to use our Credit Agreement as a source of liquidity. We believe that existing cash and cash equivalents on hand, borrowing availability under our Credit Agreement, anticipated future cash provided by government relief packages and our operating activities should be adequate to meet our current cash needs. These sources of liquidity, in combination with any potential future debt incurrence, should also be adequate to finance planned capital expenditures, payments on the current portion of our long-term debt, payments to joint venture partners, including those related to put and call arrangements, and other presently known operating needs. Long-term liquidity for debt service and other purposes will be dependent on the amount of cash provided by operating activities and, subject to favorable market and other conditions, the successful completion of future borrowings and potential refinancings. However, our cash requirements could be materially affected by the use of cash in acquisitions of businesses, repurchases of securities, the exercise of put rights or other exit options by our joint venture partners, and contractual commitments to fund capital expenditures in, or intercompany borrowings to, businesses we own. In addition, liquidity could be adversely affected by deterioration in our results of operations, including our ability to generate sufficient cash from operations, as well as by the various risks and uncertainties discussed in this section and other sections of this report and in our Annual Report, 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 period-end balance sheets. In addition, we
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do not have significant exposure to floating interest rates given that all of our current long-term indebtedness has fixed rates of interest except for borrowings under our Credit Agreement.
OFF-BALANCE SHEET ARRANGEMENTS
We have no off-balance sheet arrangements that may have a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources, except for$192 million of standby letters of credit outstanding and guarantees atMarch 31, 2020 .
CRITICAL ACCOUNTING ESTIMATES
In preparing our Condensed Consolidated Financial Statements in conformity with GAAP, we must use estimates and assumptions that affect the amounts reported in our Condensed Consolidated Financial Statements and accompanying notes. We regularly evaluate the accounting policies and estimates we use. In general, we base the estimates on historical experience and on assumptions that we believe to be reasonable, given the particular circumstances in which we operate. Actual results may vary from those estimates. We consider our critical accounting estimates to be those that (1) involve significant judgments and uncertainties, (2) require estimates that are more difficult for management to determine, and (3) may produce materially different outcomes under different conditions or when using different assumptions.
Our critical accounting estimates have not changed from the description provided in our Annual Report.
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