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 September 30, 2020 . Our Ambulatory Care segment is comprised of
the operations of USPI Holding Company, Inc. ("USPI"), in which we own a 95%
interest. At September 30, 2020 , USPI had interests in 263 ambulatory surgery
centers, 40 urgent care centers, 24 imaging centers and 25 surgical hospitals in
28 states. Our Conifer segment provides revenue cycle management and value-based
care services to hospitals, health systems, physician practices, employers and
other clients, 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 nine months ended September 30, 2020 and 2019,
and three Chicago -area hospitals, which we divested effective January 28, 2019 .
Continuing operations information excludes the results of our hospitals and
other businesses that have been classified as discontinued operations for
accounting purposes.
MANAGEMENT OVERVIEW
RECENT DEVELOPMENTS
Amendment of Repayment Terms of Medicare Advances-On October 1, 2020 , the
Continuing Appropriations Act, 2021 and Other Extensions Act (the "CA Act") was
signed into law. Among other things, the CA Act significantly changed the
repayment terms for Medicare advance payments made under the Medicare
Fee-for-Service accelerated and advanced payment program. As originally
structured, advance payments made under the program would have been recouped by
offsetting 100% of the recipient's Medicare claim payments beginning 120 days
after the advance payment was made, with interest beginning to accrue as soon as
210 days after the date of the advance at a rate of 10.25%. The CA Act amended
these repayment terms as follows:
•allows recipients to extend repayment for a full year before recoupment of the advance payments begins;
•limits the claim payment offset to 25% of the recipient's full Medicare payments for 11 months, followed by six months with claim offset limited to 50%; and
•lowers the interest rate on balances still outstanding after the 29-month recoupment period to 4.00%.
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At September 30, 2020 , we had received Medicare advance payments of
approximately $1.5 billion , which were included in current liabilities in our
Condensed Consolidated Balance Sheet. In October 2020 , we will reclassify more
than $1 billion of these advance payments to long-term liabilities as a result
of the extended recoupment period under the CA Act.
Revised Guidance for Provider Relief Fund Grants-On October 22, 2020 , the U.S.
Department of Health and Human Services ("HHS") further revised its guidance
("October 2020 PRF Guidance") for reporting requirements for providers that
accepted funding from the Public Health and Social Services Emergency Fund
("Provider Relief Fund " or "PRF"). In addition to other changes, the October
2020 PRF Guidance revised the policy for transferring certain categories of
grant funds among providers within a hospital system and significantly modified
the methodology for determining lost revenues in connection with the grants.
We estimate that the October 2020 PRF Guidance will result in an additional
$100 million of grant income during the three months ending December 31, 2020
based on our revised estimate of lost revenues through September 30, 2020 . Based
on the uncertainty regarding future estimates of lost revenues and COVID-related
costs or the impact of further updates to HHS guidance, if any, we cannot
provide any assurances regarding the amount of grant income to be recognized in
the future.
IMPACT OF THE COVID-19 PANDEMIC
The COVID-19 pandemic is significantly affecting our patients, communities, employees and business operations. The spread of COVID-19 and the ensuing response of federal, state and local authorities beginning inMarch 2020 resulted in a material reduction in our patient volumes and also adversely affected our net operating revenues in the nine months endedSeptember 30, 2020 . We have taken measures within the communities we serve, both voluntarily and in accordance with governmental mandates, to try to limit the spread of the virus and to mitigate the burden on the healthcare system. From midMarch through earlyMay 2020 , we suspended many elective procedures at our hospitals and closed or reduced operating hours at our ambulatory surgery centers and other outpatient centers that specialize in elective procedures. Restrictive measures, including travel bans, social distancing, quarantines and shelter-in-place orders, also reduced - and continue to impact - the volume of procedures performed at our facilities more generally, as well as the volume of emergency room and physician office visits. Broad economic factors resulting from the COVID-19 pandemic, including increased unemployment rates and reduced consumer spending, are impacting our service mix, revenue mix and patient volumes. Moreover, we have experienced supply chain disruptions, including shortages and delays, as well as significant price increases in medical supplies, particularly for personal protective equipment. COVID-19 surges in our markets and elsewhere could further impact the cost of medical supplies, and supply shortages and delays may impact our ability to see, admit and treat patients. As described below under "Sources of Revenue for Our Hospital Operations Segment," the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), which was signed into law onMarch 27, 2020 , the Paycheck Protection Program and Health Care Enhancement Act (the "PPP Act"), which was signed into law onApril 24, 2020 , and other legislative actions have mitigated some of the economic disruption caused by the COVID-19 pandemic on our business. Additional funding for theProvider Relief Fund was among the provisions of the CARES Act and the PPP Act. In the nine months endedSeptember 30, 2020 , we received cash payments of$890 million , and we recognized approximately$445 million and$8 million as grant income and in equity in earnings of unconsolidated affiliates, respectively, in our accompanying Condensed Consolidated Statements of Operations due to grants from theProvider Relief Fund and state grant programs. InOctober 2020 , HHS published theOctober 2020 PRF Guidance, which revised the policy for transferring certain categories of grant funds among providers within a hospital system and significantly modified the methodology for determining lost revenues in connection with the grants. In the nine months endedSeptember 30, 2020 , we also received advance payments of approximately$1.5 billion from the Medicare accelerated payment program due to the revisions to that program under the CARES Act. We expect to repay these advances within the allocated recoupment period. Throughout MD&A, we have provided additional information on the impact of the COVID-19 pandemic on our results of operations and the steps we have taken, and are continuing to take, in response. For information about risks and uncertainties around COVID-19 that could affect our results of operations, financial condition and cash flows, see the Risk Factors section in Part II of this report and in each of our Quarterly Reports on Form 10-Q for the quarters ended March 31 and June 30, 2020 ("2020 10-Qs"). 32 -------------------------------------------------------------------------------- Table of Contents 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 notes and senior secured first lien notes, the redemption of senior notes with the highest interest rate and nearest maturity date of all of our long-term debt, and the amendment of our revolving credit facility, all as described below. We also have reduced our planned capital expenditures for 2020 by approximately 30%. Furthermore, we have decreased our employee headcount throughout the organization, and we have deferred certain operating expenses that are not expected to impact our response to the COVID-19 pandemic. In addition, we are reducing variable costs across the enterprise as a result of softening patient volumes due to the COVID-19 pandemic. We believe these actions, together with government relief packages, to the extent available to us, will help us to continue operating during the uncertainty caused by the COVID-19 pandemic. For further information on our liquidity, see "Liquidity and Capital Resources" below. The healthcare industry, in general, and the acute care hospital business, in particular, have also been experiencing significant regulatory uncertainty based, in large part, on administrative, legislative and judicial efforts to significantly modify or repeal and potentially replace the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 ("Affordable Care Act" or "ACA"). It is difficult to predict the full impact of regulatory uncertainty on our future revenues and operations. In addition, we believe that several key trends have shaped the demand for healthcare services in recent years: (1) consumers, employers and insurers are actively seeking lower-cost solutions and better value as they focus more on healthcare spending; (2) patient volumes are shifting from inpatient to outpatient settings due to technological advancements and demand for care that is more convenient, affordable and accessible; (3) the growing aging population requires greater chronic disease management and higher-acuity treatment; and (4) consolidation continues across the entire healthcare sector. Driving Growth in Our Hospital Systems-We are committed to better positioning our hospital systems and competing more effectively in the ever-evolving healthcare environment by focusing on driving performance through operational effectiveness, increasing capital efficiency and margins, investing in our physician enterprise, particularly our specialist network, enhancing patient and physician satisfaction, growing our higher-demand and higher-acuity clinical service lines (including outpatient lines), expanding patient and physician access, and optimizing our portfolio of assets. Over the past several years, we have undertaken enterprise-wide cost-reduction initiatives, comprised primarily of workforce reductions (including streamlining corporate overhead and centralized support functions), the renegotiation of contracts with suppliers and vendors, and the consolidation of office locations. Moreover, we established offshore support operations inthe Philippines . In conjunction with these initiatives and our cost-saving efforts in response to the COVID-19 pandemic, we incurred restructuring charges related to employee severance payments of$53 million in the nine months endedSeptember 30, 2020 , and we expect to incur additional such restructuring charges through the remainder of 2020. We also continue to exit service lines, businesses and markets that we believe are no longer a core part of our longterm 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. 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 33 -------------------------------------------------------------------------------- Table of Contents 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 640 Tenet and non-Tenet hospital and other clients nationwide. In addition to providing revenue cycle management services to healthcare systems and physicians, Conifer provides support to both providers and selfinsured 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-As we begin to return to more normal operations, 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. We are also continuing to explore new opportunities to enhance efficiency, including further integration of enterprise-wide centralized support functions, outsourcing certain functions unrelated to direct patient care, and reducing clinical and vendor contract variation. Reducing Our Leverage Over Time-All of our outstanding long-term debt has a fixed rate of interest, except for outstanding borrowings under our revolving credit facility, and the maturity dates of our notes are staggered from 2023 through 2031. We believe that our capital structure minimizes the near-term impact of increased interest rates, and the staggered maturities of our debt allow us to refinance our debt over time. Although we recently issued$1.3 billion aggregate principal amount of senior secured first lien notes to manage our liquidity during the COVID-19 pandemic, it is nonetheless our longterm 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. Moreover, inSeptember 2020 , we sold$2.500 billion aggregate principal amount of senior notes to finance the redemption of senior notes with the highest interest rate and nearest maturity date of all of our long-term debt. These transactions eliminated any significant debt maturities untilJune 2023 , as well as reduced future annual cash interest expense payments by approximately$50 million . 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 in each of our 2020 10-Qs, as well as the Forward-Looking Statements and Risk Factors sections in Part I of our Annual Report on Form 10-K for the year endedDecember 31, 2019 ("Annual Report"). 34 -------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS-OVERVIEW We have provided below certain selected operating statistics for the three months endedSeptember 30, 2020 and 2019 on a continuing operations basis. The following tables also show information about facilities in our Ambulatory Care segment that we control and, therefore, consolidate. We present certain metrics on a per adjusted patient admission basis to show trends other than volume. Continuing Operations Three Months Ended September 30, Increase Selected Operating Statistics 2020 2019 (Decrease) Hospital Operations - hospitals and related outpatient facilities: Number of hospitals (at end of period) 65 65 - (1) Total admissions 150,690 170,004 (11.4) % Adjusted patient admissions(2) 257,704 306,535 (15.9) % Paying admissions (excludes charity and uninsured) 141,300 159,299 (11.3) % Charity and uninsured admissions 9,390 10,705 (12.3) % Admissions through emergency department 112,131 120,915 (7.3) % Emergency department visits, outpatient 463,836 627,055 (26.0) % Total emergency department visits 575,967 747,970 (23.0) % Total surgeries 94,128 105,736 (11.0) % Patient days - total 784,013 782,643 0.2 % Adjusted patient days(2) 1,302,605 1,381,862 (5.7) % Average length of stay (days) 5.20 4.60 13.0 % Average licensed beds 17,242 17,208 0.2 % Utilization of licensed beds(3) 49.4 % 49.4 % - % (1) Total visits 1,402,346 1,673,801 (16.2) % Paying visits (excludes charity and uninsured) 1,302,529 1,562,007 (16.6) % Charity and uninsured visits 99,817 111,794 (10.7) % Ambulatory Care: Total consolidated facilities (at end of period) 244 237 7 (1) Total cases 544,279 522,530 4.2 %
(1) The change is the difference between the 2020 and 2019 amounts shown. (2) Adjusted patient admissions/days represents actual patient admissions/days adjusted to
include outpatient services provided by facilities in our Hospital Operations segment
by multiplying actual patient admissions/days by the sum of gross inpatient revenues
and outpatient revenues and dividing the results by gross inpatient revenues. (3) Utilization of licensed beds represents patient days divided by number of days in the
period divided by average licensed beds.
Total admissions decreased by 19,314, or 11.4%, in the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 , and total surgeries decreased by 11,608, or 11.0%, in the 2020 period compared to the 2019 period. Total emergency department visits decreased 23.0% in the three months endedSeptember 30, 2020 compared to the same period in the prior year. The decrease in our patient volumes from continuing operations in the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 continues to reflect the overall adverse impact of the COVID-19 pandemic. Our Ambulatory Care total cases increased 4.2% in the three months endedSeptember 30, 2020 compared to the 2019 period.
Continuing Operations
Three Months Ended
Increase
Revenues 2020 2019 (Decrease)
Net operating revenues:
Hospital Operations prior to inter-segment
eliminations $ 3,803 $ 3,850 (1.2) %
Ambulatory Care 565 522 8.2 %
Conifer 325 336 (3.3) %
Inter-segment eliminations (136) (140) (2.9) %
Total $ 4,557 $ 4,568 (0.2) %
Net operating revenues decreased by $11 million , or 0.2%, in the three months
ended September 30, 2020 compared to the same period in 2019, primarily due to
lower patient volumes as a result of the COVID-19 pandemic, partially offset by
higher patient acuity, a more favorable payer mix, incremental revenue from new
service lines, and improved terms of our
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managed care contracts. Our Hospital Operations and Ambulatory Care segments
were also impacted by the reduction of federal grant income reported in prior
periods during the three months ended September 30, 2020 due to the revised
grant guidelines issued in September 2020 described in Note 1 to our
accompanying Condensed Consolidated Financial Statements. As a result, our
Hospital Operations and Ambulatory Care segments recognized reductions of grant
income from federal grants totaling $57 million and $13 million ($4 million of
which is included in equity in earnings of unconsolidated affiliates) in the
three months ended September 30, 2020 , respectively, which reductions are not
included in net operating revenues.
Our accounts receivable days outstanding ("AR Days") from continuing operations
were 55.8 days at September 30, 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 September 30, 2020 , and excludes (i) three
Chicago -area hospitals, which we divested effective January 28, 2019 , and (ii)
our California provider fee revenues.
Continuing Operations
Three Months Ended September 30,
Increase
Selected Operating Expenses 2020 2019 (Decrease)
Hospital Operations:
Salaries, wages and benefits $ 1,818 $ 1,835 (0.9) %
Supplies 656 650 0.9 %
Other operating expenses 899 885 1.6 %
Total $ 3,373 $ 3,370 0.1 %
Ambulatory Care:
Salaries, wages and benefits $ 157 $ 157 - %
Supplies 128 109 17.4 %
Other operating expenses 97 86 12.8 %
Total $ 382 $ 352 8.5 %
Conifer:
Salaries, wages and benefits $ 167 $ 180 (7.2) %
Supplies - 1 (100.0) %
Other operating expenses 62 65 (4.6) %
Total $ 229 $ 246 (6.9) %
Total:
Salaries, wages and benefits $ 2,142 $ 2,172 (1.4) %
Supplies 784 760 3.2 %
Other operating expenses 1,058 1,036 2.1 %
Total $ 3,984 $ 3,968 0.4 %
Rent/lease expense(1):
Hospital Operations $ 72 $ 60 20.0 %
Ambulatory Care 24 22 9.1 %
Conifer 3 3 - %
Total $ 99 $ 85 16.5 %
(1) Included in other operating expenses.
Continuing Operations
Three Months Ended September 30,
Increase
Selected Operating Expenses per Adjusted Patient Admission 2020 2019 (Decrease)
Hospital Operations:
Salaries, wages and benefits per adjusted patient admission(1) $ 7,054 $ 5,984 17.9 %
Supplies per adjusted patient admission(1) 2,546 2,119 20.2 %
Other operating expenses per adjusted patient admission(1) 3,487 2,890 20.7 %
Total per adjusted patient admission $ 13,087 $ 10,993 19.0 %
(1) Calculation excludes the expenses from our health plan businesses. Adjusted patient
admissions represents actual patient admissions adjusted to include outpatient
services provided by facilities in our Hospital Operations segment by multiplying
actual patient admissions by the sum of gross inpatient revenues and outpatient
revenues and dividing the results by gross inpatient revenues.
Salaries, wages and benefits for our Hospital Operations segment decreased$17 million , or 0.9%, in the three months endedSeptember 30, 2020 compared to the same period in 2019. This decrease is primarily attributable to reduced patient volumes, as well as necessary employee furloughs and headcount reductions throughout the organization due to the COVID-19 36 -------------------------------------------------------------------------------- Table of Contents pandemic. The effect of these changes was partially offset by annual merit increases for certain of our employees, a greater number of employed physicians, increased incentive compensation expense and an increased average patient length-of-stay, as well as the impact of higher temporary labor and premium pay. Our continued focus on strategic cost-reduction and efficiency measures partially mitigated the impact of the COVID-19 surges in certain markets in the three months endedSeptember 30, 2020 . On a per adjusted patient admission basis, salaries, wages and benefits increased 17.9% in the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 due to reduced patient volumes as a result of the COVID-19 pandemic. Supplies expense for our Hospital Operations segment increased$6 million , or 0.9%, in the three months endedSeptember 30, 2020 compared to the same period in 2019. The increase was primarily due to the increased cost of certain supplies as a result of the COVID-19 pandemic, partially offset by reduced patient volumes. On a per adjusted patient admission basis, supplies expense increased 20.2% in the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 due to reduced patient volumes and the increased cost of certain supplies as a result of the pandemic. Other operating expenses for our Hospital Operations segment increased$14 million , or 1.6%, in the three months endedSeptember 30, 2020 compared to the same period in 2019. The increase was primarily due to higher medical fees, partially offset by lower patient volumes as a result of the COVID-19 pandemic. There is proportionally a higher level of fixed costs (e.g., rent expense) in other operating expenses than salaries, wages and benefits or supplies. On a per adjusted patient admission basis, other operating expenses increased 20.7% in the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 due to reduced patient volumes as a result of the pandemic.
LIQUIDITY AND CAPITAL RESOURCES OVERVIEW
Cash and cash equivalents were
Significant cash flow items in the three months ended
•Net cash provided by operating activities before interest, taxes, discontinued operations and restructuring charges, acquisition-related costs, and litigation costs and settlements of$1.029 billion , including$174 million of cash received from federal grants;
•Payments for restructuring charges, acquisition-related costs, and litigation
costs and settlements of
•Capital expenditures of
•Interest payments of
•Proceeds from sales of marketable securities, long-term investments and other
assets of
•Purchases of marketable securities and equity investments of
•$84 million of distributions paid to noncontrolling interests;
•Debt issuance costs of
•$34 million of purchases of noncontrolling interests;
•$2.5 billion of proceeds from the issuance of
•$2.957 billion of payments to finance the redemption and other purchases of
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Net cash provided by operating activities was $2.961 billion in the nine months
ended September 30, 2020 compared to $713 million in the nine months ended
September 30, 2019 . Key factors contributing to the change between the 2020 and
2019 periods include the following:
•$1.380 billion of cash advances received from Medicare pursuant to COVID-19 stimulus legislation;
•$848 million of cash received from federal and state grants, including the
•A
•Decreased cash receipts of
•An increase of
•The timing of other working capital items.
FORWARD-LOOKING STATEMENTS
This report includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, each as amended. All statements, other than statements of historical or present facts, that address activities, events, outcomes, business strategies and other matters that we plan, expect, intend, assume, believe, budget, predict, forecast, project, target, estimate or anticipate (and other similar expressions) will, should or may occur in the future are forward-looking statements, including (but not limited to) disclosure regarding (i) the impact of the COVID-19 pandemic, (ii) our future earnings, financial position, and operational and strategic initiatives, and (iii) developments in the healthcare industry. Forward-looking statements represent management's expectations, based on currently available information, as to the outcome and timing of future events, but, by their nature, address matters that are indeterminate. They involve known and unknown risks, uncertainties and other factors, many of which we are unable to predict or control, that may cause our actual results, performance or achievements to be materially different from those expressed or implied by forward-looking statements. Such factors include, but are not limited to, the risks described in the Risk Factors section in Part II of this report and in each of our 2020 10-Qs, as well as the Forward-Looking Statements and Risk Factors sections in Part I of our Annual Report. When considering forward-looking statements, one should keep in mind the risk factors and other cautionary statements in our Annual Report, in each of our 2020 10-Qs and in this report. Should one or more of the risks and uncertainties described in these reports occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statement. We specifically disclaim any obligation to update any information contained in a forward-looking statement or any forward-looking statement in its entirety except as required by law.
All forward-looking statements attributable to us are expressly qualified in their entirety by this cautionary statement.
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SOURCES OF REVENUE FOR OUR HOSPITAL OPERATIONS SEGMENT
We earn revenues for patient services from a variety of sources, primarily
managed care payers and the federal Medicare program, as well as state Medicaid
programs, indemnity-based health insurance companies and uninsured patients
(that is, patients who do not have health insurance and are not covered by some
other form of third-party arrangement).
The following table shows the sources of net patient service revenues less
implicit price concessions for our hospitals and related outpatient facilities,
expressed as percentages of net patient service revenues less implicit price
concessions from all sources:
Three Months Ended Nine Months Ended
September 30, September 30,
Net Patient Service Revenues Less Increase Increase
Implicit Price Concessions from: 2020 2019 (Decrease)(1) 2020 2019 (Decrease)(1)
Medicare 18.9 % 19.6 % (0.7) % 19.9 % 20.4 % (0.5) %
Medicaid 7.1 % 8.0 % (0.9) % 8.0 % 8.6 % (0.6) %
Managed care(2) 67.7 % 66.1 % 1.6 % 66.0 % 65.8 % 0.2 %
Uninsured 1.4 % 1.2 % 0.2 % 1.1 % 0.5 % 0.6 %
Indemnity and other 4.9 % 5.1 % (0.2) % 5.0 % 4.7 % 0.3 %
(1) The change is the difference between the 2020 and 2019 percentages shown. (2) Includes Medicare and Medicaid managed care programs.
Our payer mix on an admissions basis for our hospitals and related outpatient
facilities, expressed as a percentage of total admissions from all sources, is
shown below:
Three Months Ended Nine Months Ended
September 30, September 30,
Increase Increase
Admissions from: 2020 2019 (Decrease)(1) 2020 2019 (Decrease)(1)
Medicare 21.9 % 23.9 % (2.0) % 23.0 % 25.0 % (2.0) %
Medicaid 6.4 % 6.4 % - % 6.3 % 6.2 % 0.1 %
Managed care(2) 62.7 % 60.7 % 2.0 % 61.6 % 60.2 % 1.4 %
Charity and uninsured 6.2 % 6.3 % (0.1) % 6.3 % 6.0 % 0.3 %
Indemnity and other 2.8 % 2.7 % 0.1 % 2.8 % 2.6 % 0.2 %
(1) The change is the difference between the 2020 and 2019 percentages shown. (2) Includes Medicare and Medicaid managed care programs.
GOVERNMENT PROGRAMS
TheCenters for Medicare and Medicaid Services ("CMS"), an agency of HHS, is the single largest payer of healthcare services inthe United States . Approximately 61 million individuals rely on healthcare benefits through Medicare, and approximately 75 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. Funding for the CHIP has been reauthorized through federal fiscal year ("FFY") 2027. 39 -------------------------------------------------------------------------------- Table of Contents 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 and nine months endedSeptember 30, 2020 and 2019 are set forth in the following table: Three Months Ended Nine Months Ended September 30, September 30, Revenue Descriptions 2020 2019 2020 2019
Medicare severity-adjusted diagnosis-related group -
$ 362 $ 1,052 $ 1,134 operating Medicare severity-adjusted diagnosis-related group - capital 29 33 90 101 Outliers 14 17 46 62 Outpatient 160 182 462 557 Disproportionate share 54 61 160 178 Other(1) 55 42 154 144 Total Medicare net patient service revenues$ 662
(1) The other revenue category includes Medicare Direct Graduate Medical Education and
Indirect Medical Education ("IME") revenues, IME revenues earned by our children's
hospital under the Children's Hospitals Graduate Medical Education Payment Program
administered by the
psychiatric units, inpatient rehabilitation units, other revenue adjustments, and
adjustments to the estimates for current and prior-year cost reports and related
valuation allowances.
A general description of the types of payments we receive for services provided
to patients enrolled in the Original Medicare Plan is provided in our Annual
Report. Recent regulatory and legislative updates to the terms of these payment
systems and their estimated effect on our revenues can be found under
"Regulatory and Legislative Changes" below.
Medicaid
Medicaid programs and the corresponding reimbursement methodologies vary from state to state and from year to year. Estimated revenues under various state Medicaid programs, including state-funded Medicaid managed care programs, constituted approximately 17.9% and 18.6% of total net patient service revenues less implicit price concessions of our acute care hospitals and related outpatient facilities for the nine months endedSeptember 30, 2020 and 2019, respectively. We also receive disproportionate share hospital ("DSH") and other supplemental revenues under various state Medicaid programs. For the nine months endedSeptember 30, 2020 and 2019, our total Medicaid revenues attributable to DSH and other supplemental revenues were approximately$533 million and$604 million , respectively. The 2020 period included$171 million related to theCalifornia provider fee program,$157 million related to theMichigan provider fee program,$129 million related to Medicaid DSH programs in multiple states,$44 million related to theTexas 1115 waiver program, and$32 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 nine 40 -------------------------------------------------------------------------------- Table of Contents months endedSeptember 30, 2020 and 2019 are set forth in the following table. These revenues are presented net of provider taxes or assessments paid by our hospitals, which are reported as an offset reduction to fee-for-service Medicaid revenue. Nine Months Ended September 30, Hospital Location 2020 2019 Alabama$ 74 $ 69 Arizona 120 112 California 603 650 Florida 149 169 Illinois - 5 Massachusetts 66 68 Michigan 404 542 South Carolina 44 42 Tennessee 26 27 Texas 287 304$ 1,773 $ 1,988 Medicaid and Managed Medicaid revenues comprised 45% and 55%, 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 nine months endedSeptember 30, 2020 .
Regulatory and Legislative Changes
Material updates to the information set forth in our Annual Report about the Medicare and Medicaid payment systems, as well as other government programs impacting our business, are provided below.
Payment and Policy Changes to the Medicare Inpatient Prospective Payment Systems
Section 1886(d) of the Social Security Act requires CMS to update inpatient
fee-for-service payment rates for hospitals reimbursed under the Inpatient
Prospective Payment System ("IPPS") annually. The updates generally become
effective October 1 , the beginning of the federal fiscal year. In September
2020 , CMS issued the final Changes to the Hospital Inpatient Prospective Payment
Systems for Acute Care Hospitals and Fiscal Year 2021 Rates ("Final IPPS Rule").
The Final IPPS Rule includes the following payment and policy changes:
•A market basket increase of 2.4% for Medicare severity-adjusted
diagnosis-related group ("MS-DRG") operating payments for hospitals reporting
specified quality measure data and that are meaningful users of electronic
health record technology; CMS also finalized certain proposed adjustments to the
2.4% market basket increase that resulted in a net operating payment update of
2.9% (before budget neutrality adjustments), as follows:
•No multifactor productivity adjustment under the ACA (i.e, an adjustment of 0.0%) for FFY 2021; and
•A 0.5% increase, as required under the Medicare Access and CHIP Reauthorization Act of 2015;
•Updates to the three factors used to determine the amount and distribution of Medicare uncompensated care disproportionate share ("UC-DSH") payments;
•A 0.84% net increase in the capital federal MS-DRG rate; and
•An increase in the cost outlier threshold from
According to CMS, the combined impact of the payment and policy changes in the
Final IPPS Rule for operating costs will yield an average 2.5% increase in
Medicare operating MS-DRG fee-for-service ("FFS") payments for hospitals in
urban areas, and an average 2.4% increase in operating MS-DRG FFS payments for
proprietary hospitals in FFY 2021. We estimate that all of the payment and
policy changes affecting operating MS-DRG and UC-DSH payments will result in an
estimated 1.8% increase in our annual Medicare FFS IPPS payments, which yields
an estimated increase of approximately $37 million . Because of the uncertainty
associated with various factors that may influence our future IPPS payments by
individual hospital, including legislative, regulatory or legal actions,
admission volumes, length of stay and case mix, we cannot provide any assurances
regarding our estimate of the impact of the payment and policy changes.
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Historically, CMS has used charges reduced to cost to set the relative weights
assigned to each MS-DRG. In the Final IPPS Rule, CMS expressed a concern that
chargemaster rates rarely reflect the true market costs. In order to reduce its
reliance on the hospital chargemaster, CMS determined that, beginning in 2021,
hospitals will be required to report in the annual cost report the median
payer-specific negotiated charge that the hospital has negotiated with all of
its Medicare Advantage payers by MS-DRG. This information may potentially be
used to set the IPPS MS-DRG relative weights in FFY 2024. This standard is in
addition to the pricing transparency requirements effective January 1, 2021 in
the hospital price transparency final rule issued on November 27, 2019 that was
recently upheld by a Federal District Court and is now before the U.S. Court of
Appeals for the District of Columbia .
Proposed Payment and Policy Changes to the Medicare Outpatient Prospective Payment and Ambulatory Surgery Center Payment Systems
InAugust 2020 , CMS released proposed policy changes and payment rates for the Hospital Outpatient Prospective Payment System ("OPPS") and Ambulatory Surgical Center ("ASC") Payment System for calendar year ("CY") 2021 ("Proposed OPPS/ASC Rule"). The Proposed OPPS/ASC Rule includes the following payment and policy changes: •An estimated net increase of 2.6% for the OPPS rates based on an estimated market basket increase of 3.0% reduced by a multifactor productivity adjustment required by the ACA of 0.4%; •An update to the reduced payment amount for drugs acquired with a discount under CMS' 340B program ("340B Drugs") to a rate of average sales price ("ASP") minus 22.5% in CY 2020 to ASP minus 28.7% for CY 2021 (the 340B program is the subject of litigation discussed in greater detail below); •Elimination of the Inpatient Only List (which is the list of procedures that must be performed on an inpatient basis) over a transitional period beginning in CY 2021 and ending in CY 2024, starting with the removal of 266 musculoskeletal services from the list for CY 2021;
•The addition of two new OPPS service categories for which prior authorization is required; and
•A 2.6% increase to the ASC payment rates.
CMS projects that the combined impact of the payment and policy changes in the Proposed OPPS/ASC Rule will yield an average 2.5% increase in Medicare FFS OPPS payments for hospitals in urban areas and an average 4.1% increase in Medicare FFS OPPS payments for proprietary hospitals. Based on CMS' estimates, the projected annual impact of the payment and policy changes in the Proposed OPPS/ASC Rule on our hospitals is an increase to Medicare FFS hospital outpatient revenues of approximately$30 million , which represents an increase of approximately 4.7%. Because of the uncertainty associated with various factors that may influence our future OPPS payments, including legislative or legal actions, volumes and case mix, as well as potential changes to the proposed rule, we cannot provide any assurances regarding our estimate of the impact of the proposed payment and policy changes.
Proposed Payment and Policy Changes to the Medicare Physician Fee Schedule
InAugust 2020 , CMS released the CY 2021 Medicare Physician Fee Schedule ("MPFS") Proposed Rule ("MPFS Proposed Rule"). The proposed rule updates payment policies, payment rates and other provisions for services reimbursed under the MPFS on and afterJanuary 1, 2021 . The statutory update factor to the MPFS conversion factor (the base rate that is used to convert relative value units ("RVUs") into payment rates) for CY 2021, as required by the Medicare Access and CHIP Reauthorization Act of 2015, was set at 0.0%. The proposed conversion factor also reflects a negative budget neutrality adjustment of 10.61% to account for the estimated positive or negative effects of the proposed changes on each specialty due to, among other things, CMS' projection of volumes in each specialty and the recalibration of the RVUs. CMS estimates that the combined impact of the proposed payment and policy changes will not result in any change in payments.
The Coronavirus Aid, Relief, and Economic Security Act of 2020 and Related Legislation
The CARES Act and the PPP Act authorized over$2 trillion in government spending to mitigate the economic effects of the COVID-19 pandemic. Below is a brief overview of certain provisions of these laws that have impacted, and that we expect will continue to impact, our business. 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, the PPP 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. 42
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Public Health and Social Services Emergency Fund-Through the CARES Act and the PPP Act, the federal government has authorized$175 billion in payments to be distributed through theProvider Relief Fund . Distribution from the PRF to providers commenced during the three months endedJune 30, 2020 . It is our understanding that, as ofSeptember 30, 2020 , the government has apportioned approximately$124 billion of the PRF in several tranches, including:
•A
•An allocation of approximately
•Targeted distributions comprised of approximately (i)$22 billion for hospitals determined to be in areas particularly impacted by COVID-19 based on reported COVID-19 admissions, (ii)$11 billion to rural healthcare providers, (iii)$7 billion to skilled nursing facilities, (iv)$15 billion to safety net hospitals and (v)$500 million to tribal hospitals, clinics and urban health centers. InOctober 2020 , HHS announced an additional$20 billion general distribution that considers financial losses and changes in operating revenues and expenses, including expenses attributable to COVID-19, and payments already received through PRF distributions. Payments from the PRF are not loans and, therefore, they are not subject to repayment. However, as a condition to receiving distributions, providers must agree to certain terms and conditions, including, among other things, that the funds are being used for lost revenues and COVID-related costs as defined by HHS, and that the providers will not seek collection of outofpocket 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. All recipients of PRF payments are required to comply with the reporting requirements described in the terms and conditions and as determined by HHS. During the three months endedSeptember 30, 2020 , HHS released reporting requirements that include lost revenues, expenses attributable to COVID-19, and non-financial information, including employer data, as well as numbers of inpatient visits, outpatient admissions and staffed beds ("September 2020 PRF Guidance"). These reporting requirements reflected a revised definition of lost revenues and COVID-related costs from guidance HHS released during the three months endedJune 30, 2020 . Furthermore, HHS has indicated that it will be closely monitoring and, along with theOffice of Inspector General , auditing providers to ensure that recipients comply with the terms and conditions of relief programs and to prevent fraud and abuse. All providers will be subject to civil and criminal penalties for any deliberate omissions, misrepresentations or falsifications of any information given to HHS. Except for certain immaterial PRF payments we returned to HHS, we have formally accepted PRF payments issued to our providers and the terms and conditions associated with those payments. During the three months endedSeptember 30, 2020 , based on theSeptember 2020 PRF Guidance, our Hospital Operations and ASC segments recognized reductions of PRF income totaling$66 million and$4 million included in the grant income and equity in earnings of unconsolidated affiliates line items, respectively, in our accompanying Condensed Consolidated Statements of Operations. During the nine months endedSeptember 30, 2020 , we recognized approximately$442 million and$8 million ofProvider Relief Fund income included in grant income and equity in earnings of unconsolidated affiliates, respectively, in our accompanying Condensed Consolidated Statements of Operations associated with lost revenues and COVID-related costs. Additionally, we recognized$3 million of grant income from state grant programs included in grant income in our accompanying Condensed Consolidated Statements of Operations for the nine months endedSeptember 30, 2020 . OnOctober 22, 2020 HHS published theOctober 2020 PRF Guidance, which amended theSeptember 2020 PRF Guidance described above. The amendments include: (1) re-defining lost revenues again; and (2) revising the policy for transferring general distribution funds among providers within a hospital system. We estimate that theOctober 2020 PRF Guidance will result in an additional$100 million of grant income during the three months endingDecember 31, 2020 based on our revised estimate of lost revenues throughSeptember 30, 2020 . Based on the uncertainty regarding future estimates of lost revenues and COVID-related costs or the impact of further updates to HHS guidance, if any, we cannot provide any assurances regarding the amount of grant income to be recognized in the future. Medicare and Medicaid Payment Policy Changes-The CARES Act also alleviates some of the financial strain on hospitals, physicians, other healthcare providers and states through a series of Medicare and Medicaid payment policies that temporarily increase Medicare and Medicaid reimbursement and allow for added flexibility, as described below. •EffectiveMay 1, 2020 throughDecember 31, 2020 , the 2% sequestration reduction on Medicare FFS and Medicare Advantage payments to hospitals, physicians and other providers is suspended and will resume effectiveJanuary 2021 as authorized by the Sequestration Transparency Act of 2020. The estimated impact of this change 43 -------------------------------------------------------------------------------- Table of Contents on our operations is an increase of approximately$67 million of revenues in 2020. The suspension is financed by a one-year extension of the sequestration adjustment through 2030. •The CARES Act instituted a 20% increase in the Medicare MS-DRG payment for COVID-19 hospital admissions for the duration of the public health emergency as declared by the Secretary of HHS. •The CARES Act eliminated the scheduled nationwide reduction of$4 billion in federal Medicaid DSH allotments in FFY 2020 mandated by the Affordable Care Act and decreased the FFY 2021 DSH reduction from$8 billion to$4 billion effectiveDecember 1, 2020 . The CA Act delays the 2021 reduction untilDecember 11, 2020 . The projected impact of the suspension of the decreased DSH reduction on our operations is an increase of approximately$60 million of revenues in 2020, which is not subject to repayment. Notwithstanding these adjustments, the ACA-mandated reduction is not expected to be extended past its original termination in FFY 2025. •The CARES Act expanded the Medicare accelerated payment program, which provides prepayment of claims to providers in certain circumstances, such as national emergencies or natural disasters. Under this measure, providers could request accelerated payments during which time providers continue to receive payments for services. Under the CARES Act, accelerated payments could be retained for 120 days; at the end of the 120-day period, the accelerated payment would be repaid via an offset of payments on claims that would otherwise be paid. Generally, repayments of the accelerated payments we received were to commence during the three months endedSeptember 2020 ; however, under Section 2501 of the CA Act, providers may retain the accelerated payments for one year from the date of receipt before CMS commences recoupment, which will be effectuated by a 25% offset of claims payments for 11 months, followed by 50% offset for the succeeding six months. At the end of the 29month period, interest on the unpaid balance will be assessed at 4% per annum. ThroughSeptember 30, 2020 , our hospitals and other providers applied for and received approximately$1.5 billion of accelerated payments. •A 6.2% increase in the Federal Medical Assistance Percentage ("FMAP") matching funds was instituted to help states respond to the COVID-19 pandemic. The additional funds are available to states fromJanuary 1, 2020 through the quarter in which the public health emergency period ends, provided that states meet certain conditions. An increase in states' FMAP leverages Medicaid's existing financing structure, which allows federal funds to be provided to states more quickly and efficiently than establishing a new program or allocating money from a new funding stream. Increased federal matching funds support states in responding to the increased need for services, such as testing and treatment during the COVID-19 public health emergency, as well as increased enrollment as more people lose income and qualify for Medicaid during the economic downturn. Because of the uncertainty associated with various factors that may influence our future Medicare and Medicaid payments, including future legislative, legal or regulatory actions, or changes in volumes and case mix, there is a risk that our estimates of the impact of the aforementioned payment and policy changes will be incorrect and that actual payments received under, or the ultimate impact of, these programs will differ materially from our expectations. Tax Changes-BeginningMarch 27, 2020 , all employers may elect to defer payment of the 6.2% employerSocial Security tax throughDecember 31, 2020 . Deferred tax amounts are required to be paid in equal amounts over two years, with payments due inDecember 2021 andDecember 2022 . We expect that we will defer approximately$270 million of taxes in 2020 pursuant to this CARES Act provision. In addition, the CARES Act increases the interest expense deduction limitation from 30% of adjusted taxable income to 50% of adjusted taxable income for the 2019 and 2020 tax years, allowing businesses to take a larger deduction. This change is expected to increase our federal tax net operating loss ("NOL") carryforwards into future years, as further described in Note 14 to the accompanying Condensed Consolidated Financial Statements.
Significant Litigation
340B Litigation
The 340B program allows certain hospitals (i.e., only nonprofit organizations
with specific federal designations and/or funding) ("340B Hospitals") to
purchase drugs at discounted rates from drug manufacturers. In the final rule
regarding Hospital OPPS payment and policy changes for CY 2018, CMS reduced the
payment for 340B Drugs from ASP plus 6% to ASP minus 22.5% and made a
corresponding budget-neutral increase to payments to all hospitals for other
drugs and services reimbursed under the OPPS (the "340B Payment Adjustment"). In
the final rules regarding OPPS payment and policy changes for CYs 2019 and 2020,
CMS continued the 340B Payment Adjustment. Certain hospital associations and
hospitals commenced litigation challenging CMS' authority to impose the 340B
Payment Adjustment for CYs 2018, 2019 and 2020. In May 2019 , the
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U.S. District Court for the District of Columbia (the "District Court") held
that the adoption of the 340B Payment Adjustment in the CY 2019 OPPS Final Rule
exceeded CMS' statutory authority by reducing drug reimbursement rates for 340B
Hospitals. This holding followed the District Court's December 2018 conclusion
that HHS exceeded its statutory authority in reducing the CY 2018 OPPS for the
340B Payment Adjustment. The District Court did not grant a permanent injunction
to the 340B Payment Adjustment, nor did it vacate the 2018 and 2019 rules. In
July 2019 , the District Court issued a Memorandum Opinion granting HHS' motion
for entry of final judgment, thus allowing HHS to proceed with a pending appeal
of the District Court's rulings at the U.S. Court of Appeals for the District of
Columbia Circuit (the "Circuit Court "). In July 2020 , a three-judge panel of the
Circuit Court reversed the District Court's holding, finding that HHS' decision
to reduce the payment rate for 340B Drugs was based on a reasonable
interpretation of the Medicare statute. On October 16, 2020 , the Circuit Court
denied the plaintiff hospital associations' and hospitals' request for an en
banc hearing. We cannot predict what further actions the plaintiff hospital
associations and hospitals will take or the ultimate outcome of the litigation
relating to CMS' 340B program; however, an unfavorable outcome of the litigation
could have an adverse effect on the Company's net revenues and cash flows.
PRIVATE INSURANCE
Managed Care
We currently have thousands of managed care contracts with various HMOs and PPOs. HMOs generally maintain a full-service healthcare delivery network comprised of physician, hospital, pharmacy and ancillary service providers that HMO members must access through an assigned "primary care" physician. The member's care is then managed by his or her primary care physician and other network providers in accordance with the HMO's quality assurance and utilization review guidelines so that appropriate healthcare can be efficiently delivered in the most cost-effective manner. HMOs typically provide reduced benefits or reimbursement (or none at all) to their members who use non-contracted healthcare providers for non-emergency care. PPOs generally offer limited benefits to members who use non-contracted healthcare providers. PPO members who use contracted healthcare providers receive a preferred benefit, typically in the form of lower co-pays, co-insurance or deductibles. As employers and employees have demanded more choice, managed care plans have developed hybrid products that combine elements of both HMO and PPO plans, including high-deductible healthcare plans that may have limited benefits, but cost the employee less in premiums. The amount of our managed care net patient service revenues, including Medicare and Medicaid managed care programs, from our hospitals and related outpatient facilities during the nine months endedSeptember 30, 2020 and 2019 was$6.519 billion and$7.041 billion , respectively. Our top ten managed care payers generated 61% of our managed care net patient service revenues for the nine months endedSeptember 30, 2020 . National payers generated 44% of our managed care net patient service revenues for the nine months endedSeptember 30, 2020 . The remainder comes from regional or local payers. AtSeptember 30, 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 atSeptember 30, 2020 , a 3% increase or decrease in the estimated contractual allowance would impact the estimated reserves by approximately$14 million . Some of the factors that can contribute to changes in the contractual allowance estimates include: (1) changes in reimbursement levels for procedures, supplies and drugs when threshold levels are triggered; (2) changes in reimbursement levels when stop-loss or outlier limits are reached; (3) changes in the admission status of a patient due to physician orders subsequent to initial diagnosis or testing; (4) final coding of in-house and discharged-not-final-billed patients that change reimbursement levels; (5) secondary benefits determined after primary insurance payments; and (6) reclassification of patients among insurance plans with different coverage and payment levels. Contractual allowance estimates are periodically reviewed for accuracy by taking into consideration known contract terms, as well as payment history. We believe our estimation and review process enables us to identify instances on a timely basis where such estimates need to be revised. We do 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 45 -------------------------------------------------------------------------------- Table of Contents 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 nine months endedSeptember 30, 2020 , our commercial managed care net inpatient revenue per admission from the hospitals 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 bothSeptember 30, 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 self-pay accounts, as well as co-pay, co-insurance and deductible amounts owed to us by patients with insurance, that we deem highly collectible. We leverage a statistical-based collections model that aligns our operational capacity to maximize our collections performance. We are dedicated to modifying and refining our processes as needed, enhancing our technology and improving staff training throughout the revenue cycle process in an effort to increase collections and reduce accounts receivable. Over the longer term, several other initiatives we have previously announced should also help address this challenge. For example, our Compact with Uninsured Patients ("Compact") is designed to offer managed care-style discounts to certain uninsured patients, which enables us to offer lower rates to those patients who historically had been charged standard gross charges. Under the Compact, the discount offered to uninsured patients is recognized as a contractual allowance, which reduces net operating revenues at the time the self-pay accounts are recorded. The uninsured patient accounts, net of contractual allowances recorded, are further reduced to their net realizable value through implicit price concessions based on historical collection trends for self-pay accounts and other factors that affect the estimation process. We also provide financial assistance through our charity and uninsured discount programs to uninsured patients who are unable to pay for the healthcare services they receive. Our policy is not to pursue collection of amounts determined to qualify for financial assistance; therefore, we do not report these amounts in net operating revenues. Most states include an estimate of the cost of charity care in the determination of a hospital's eligibility for Medicaid DSH payments. These payments are intended to mitigate our cost of uncompensated care. Some states have also developed provider fee or other supplemental payment programs to mitigate the shortfall of Medicaid reimbursement compared to the cost of caring for Medicaid patients. 46
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The following table shows our estimated costs (based on selected operating
expenses, which include salaries, wages and benefits, supplies and other
operating expenses) of caring for our uninsured and charity patients in the
three and nine months ended
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Estimated costs for:
Uninsured patients $ 165 $ 171 $ 466 $ 493
Charity care patients 30 41 113 116
Total $ 195 $ 212 $ 579 $ 609
RESULTS OF OPERATIONS
The following two tables summarize our consolidated net operating revenues,
operating expenses and operating income from continuing operations, both in
dollar amounts and as percentages of net operating revenues, for the three and
nine months ended September 30, 2020 and 2019. We present metrics as a
percentage of net operating revenues because a significant portion of our costs
are variable.
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Net operating revenues:
Hospital Operations $ 3,803 $ 3,850 $ 10,725 $ 11,539
Ambulatory Care 565 522 1,423 1,526
Conifer 325 336 962 1,040
Inter-segment eliminations (136) (140) (385) (432)
Net operating revenues 4,557 4,568 12,725 13,673
Grant income (66) - 445 -
Equity in earnings of unconsolidated affiliates 44 38 103 114
Operating expenses:
Salaries, wages and benefits 2,142 2,172 6,193 6,468
Supplies 784 760 2,158 2,254
Other operating expenses, net 1,058 1,036 3,054 3,136
Depreciation and amortization 215 205 624 627Impairment and restructuring charges, and acquisition-related costs
57 46 166 101
Litigation and investigation costs 9 84 13 115
Net losses (gains) on sales, consolidation and deconsolidation
of facilities (1) 1 (4) 3
Operating income $ 271 $ 302 $ 1,069 $ 1,083
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Net operating revenues 100.0 % 100.0 % 100.0 % 100.0 %
Grant income (1.4) % - % 3.5 % - %
Equity in earnings of unconsolidated affiliates 1.0 % 0.8 % 0.8 % 0.8 %
Operating expenses:
Salaries, wages and benefits 47.1 % 47.6 % 48.6 % 47.3 %
Supplies 17.2 % 16.6 % 17.0 % 16.5 %
Other operating expenses, net 23.2 % 22.7 % 24.0 % 22.9 %
Depreciation and amortization 4.7 % 4.5 % 4.9 % 4.6 % Impairment and restructuring charges, and acquisition-related costs
1.3 % 1.0 % 1.3 % 0.7 %
Litigation and investigation costs 0.2 % 1.8 % 0.1 % 0.9 %
Net gains on sales, consolidation and deconsolidation of
facilities - % - % - % - %
Operating income 5.9 % 6.6 % 8.4 % 7.9 %
Total net operating revenues decreased by $11 million and $948 million , or 0.2%
and 6.9%, for the three and nine months ended September 30, 2020 , respectively,
compared to the three and nine months ended September 30, 2019 , respectively.
Hospital Operations net operating revenues net of inter-segment eliminations
decreased by $43 million and $767 million , or 1.2% and 6.9%, for the three and
nine months ended September 30, 2020 , respectively, compared to the same
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three and nine-month periods in 2019. These decreases were primarily due to
lower patient volumes as a result of the COVID-19 pandemic, partially offset by
higher patient acuity, a more favorable payer mix and improved terms of our
managed care contracts.
Ambulatory Care net operating revenues increased by $43 million , or 8.2%, during
the three-month period and decreased by $103 million , or 6.7%, during the
nine-month period ended September 30, 2020 compared to the same three and
nine-month periods in 2019. The year-over-year increase in the three months
ended September 30, 2020 is attributable higher patient acuity, incremental
revenue from new service lines and improved terms of our managed care contracts,
as well as an increase from acquisitions of $26 million . These increases were
partially offset by a decrease of $12 million due to the deconsolidation of a
facility. The decrease in the Ambulatory Care segment's net operating revenues
during the nine months ended September 30, 2020 compared to the same period in
2019 was primarily due to the negative impact of shelter-in-place orders on
patient volumes and the mandated suspension of many elective procedures due to
the COVID-19 pandemic, as well as a decrease of $27 million due to the
deconsolidation of a facility. These impacts were partially offset by an
increase from acquisitions of $52 million .
Conifer net operating revenues decreased by $11 million and $78 million , or 3.3%
and 7.5%, for the three and nine months ended September 30, 2020 , respectively,
compared to the three and nine months ended September 30, 2019 , respectively.
Conifer revenues from third-party customers, which are not eliminated in
consolidation, decreased $7 million and $31 million , or 3.6% and 5.1%, for the
three and nine months ended September 30, 2020 , respectively, compared to the
three and nine months ended September 30, 2019 , respectively. Conifer's net
operating revenues were negatively impacted by the unfavorable downstream impact
of the COVID-19 pandemic on its clients' patient volumes, as well as attrition
due to planned hospital divestitures by its clients.
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The following table shows selected operating expenses of our three reportable
business segments. Information for our Hospital Operations segment is presented
on a same-hospital basis, which includes the results of our same 65 hospitals
operated throughout the three and nine months ended September 30, 2020 and 2019.
Our same-hospital information excludes the results of three Chicago -area
hospitals, which we divested effective January 28, 2019 . We present
same-hospital data because we believe it provides investors with useful
information regarding the performance of our hospitals and other operations that
are comparable for the periods presented.
Three Months Ended Nine Months Ended
September 30, September 30,
Increase Increase
Selected Operating Expenses 2020 2019 (Decrease) 2020 2019 (Decrease)
Hospital Operations - Same-Hospital:
Salaries, wages and benefits $ 1,818 $ 1,835 (0.9) % $ 5,244 $ 5,433 (3.5) %
Supplies 656 651 0.8 % 1,837 1,932 (4.9) %
Other operating expenses 898 884 1.6 % 2,609 2,675 (2.5) %
Total $ 3,372 $ 3,370 0.1 % $ 9,690 $ 10,040 (3.5) %
Ambulatory Care:
Salaries, wages and benefits $ 157 $ 157 - % $ 438 $ 467 (6.2) %
Supplies 128 109 17.4 % 319 316 0.9 %
Other operating expenses 97 86 12.8 % 258 254 1.6 %
Total $ 382 $ 352 8.5 % $ 1,015 $ 1,037 (2.1) %
Conifer:
Salaries, wages and benefits $ 167 $ 180 (7.2) % $ 511 $ 552 (7.4) %
Supplies - 1 (100.0) % 2 3 (33.3) %
Other operating expenses 62 65 (4.6) % 193 193 - %
Total $ 229 $ 246 (6.9) % $ 706 $ 748 (5.6) %
Total:
Salaries, wages and benefits $ 2,142 $ 2,172 (1.4) % $ 6,193 $ 6,452 (4.0) %
Supplies 784 761 3.0 % 2,158 2,251 (4.1) %
Other operating expenses 1,057 1,035 2.1 % 3,060 3,122 (2.0) %
Total $ 3,983 $ 3,968 0.4 % $ 11,411 $ 11,825 (3.5) %
Rent/lease expense(1):
Hospital Operations $ 72 $ 60 20.0 % $ 203 $ 178 14.0 %
Ambulatory Care 24 22 9.1 % 67 63 6.3 %
Conifer 3 3 - % 9 9 - %
Total $ 99 $ 85 16.5 % $ 279 $ 250 11.6 %
(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 Condensed Consolidated Financial Statements, certain of these facilities are classified as held for sale atSeptember 30, 2020 .
•Ambulatory Care, which is comprised of USPI's ambulatory surgery centers, urgent care centers, imaging centers and surgical hospitals.
•Conifer, which provides revenue cycle management and value-based care services to hospitals, health systems, physician practices, employers and other clients.
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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 and nine months ended September 30, 2020 and 2019
and excludes the results of three Chicago -area hospitals, which we divested
effective January 28, 2019 . We present same-hospital data because we believe it
provides investors with useful information regarding the performance of our
hospitals and other operations that are comparable for the periods presented. We
present certain metrics on a per adjusted patient admission and per adjusted
patient day basis to show trends other than volume. We present certain metrics
as a percentage of net operating revenues because a significant portion of our
operating expenses are variable.
Same-Hospital Same-Hospital
Continuing Operations Continuing Operations
Three Months Ended Nine Months Ended
September 30 , September 30 ,
Increase Increase
Admissions, Patient Days and Surgeries 2020 2019 (Decrease) 2020 2019 (Decrease)
Number of hospitals (at end of period) 65 65 - (1) 65 65 - (1)
Total admissions 150,690 170,004 (11.4) % 451,323 512,826 (12.0) %
Adjusted patient admissions(2) 257,704 306,535 (15.9) % 769,775 916,472 (16.0) %
Paying admissions (excludes charity and uninsured) 141,300 159,300 (11.3) % 422,912 482,061 (12.3) %
Charity and uninsured admissions 9,390 10,704 (12.3) % 28,411 30,765 (7.7) %
Admissions through emergency department 112,131 120,915 (7.3) % 332,615 367,231 (9.4) %
Paying admissions as a percentage of total admissions 93.8 % 93.7 % 0.1 % (1) 93.7 % 94.0 % (0.3) % (1)
Charity and uninsured admissions as a percentage of total admissions
6.2 % 6.3 % (0.1) % (1) 6.3 % 6.0 % 0.3 % (1)
Emergency department admissions as a percentage of total admissions
74.4 % 71.1 % 3.3 % (1) 73.7 % 71.6 % 2.1 % (1)
Surgeries - inpatient 39,650 45,637 (13.1) % 116,585 134,831 (13.5) %
Surgeries - outpatient 54,478 60,099 (9.4) % 146,617 178,931 (18.1) %
Total surgeries 94,128 105,736 (11.0) % 263,202 313,762 (16.1) %
Patient days - total 784,013 782,643 0.2 % 2,282,375 2,385,554 (4.3) %
Adjusted patient days(2) 1,302,605 1,381,862 (5.7) % 3,782,576 4,177,844 (9.5) %
Average length of stay (days) 5.20 4.60 13.0 % 5.06 4.65 8.8 %
Licensed beds (at end of period) 17,242 17,206 0.2 % 17,242 17,206 0.2 %
Average licensed beds 17,242 17,208 0.2 % 17,226 17,217 0.1 %
Utilization of licensed beds(3) 49.4 % 49.4 % - % (1) 48.4 % 50.8 % (2.4) % (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.
Same-Hospital Same-Hospital
Continuing Operations Continuing Operations
Three Months Ended Nine Months Ended
September 30 , September 30 ,
Increase Increase
Outpatient Visits 2020 2019 (Decrease) 2020 2019 (Decrease)
Total visits 1,402,346 1,673,801 (16.2) % 4,002,194 5,054,470 (20.8) %
Paying visits (excludes charity and uninsured) 1,302,562 1,562,010 (16.6) % 3,710,299 4,721,200 (21.4) %
Charity and uninsured visits 99,784 111,791 (10.7) % 291,895 333,270 (12.4) %
Emergency department visits 463,836 627,055 (26.0) % 1,493,156 1,916,014 (22.1) %
Surgery visits 54,478 60,099 (9.4) % 146,617 178,931 (18.1) %
Paying visits as a percentage of total visits 92.9 % 93.3 % (0.4) % (1) 92.7 % 93.4 % (0.7) % (1)
Charity and uninsured visits as a percentage of
total visits 7.1 % 6.7 % 0.4 % (1) 7.3 % 6.6 % 0.7 % (1)
(1) The change is the difference between 2020 and 2019 amounts shown.
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Same-Hospital Same-Hospital
Continuing Operations Continuing Operations
Three Months Ended Nine Months Ended
September 30, September 30,
Increase Increase
Revenues 2020 2019 (Decrease) 2020 2019 (Decrease)
Total segment net operating revenues(1) $ 3,661 $ 3,707 (1.2) % $ 10,336 $ 11,078 (6.7) %
Selected revenue data - hospitals and
related outpatient facilities:
Net patient service revenues(1)(2) $ 3,502 $ 3,562 (1.7) % $ 9,874 $ 10,666 (7.4) %
Net patient service revenue per adjusted
patient admission(1)(2) $ 13,589 $ 11,620 16.9 % $ 12,827 $ 11,638 10.2 %
Net patient service revenue per adjusted
patient day(1)(2) $ 2,688 $ 2,578 4.3 % $ 2,610 $ 2,553 2.2 %
(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 Same-Hospital
Continuing Operations Continuing Operations
Three Months Ended Nine Months Ended
September 30 , September 30 ,
Increase Increase
Total Segment Selected Operating Expenses 2020 2019 (Decrease) 2020 2019 (Decrease)
Salaries, wages and benefits as a percentage of net operating revenues
49.7 % 49.5 % 0.2 % (1) 50.7 % 49.0 % 1.7 % (1)
Supplies as a percentage of net operating revenues 17.9 % 17.6 % 0.3 % (1) 17.8 % 17.4 % 0.4 % (1)
Other operating expenses as a percentage of net operating
revenues 24.5 % 23.8 % 0.7 % (1) 25.2 % 24.1 % 1.1 % (1)
(1) The change is the difference between 2020 and 2019 amounts shown.
Revenues
Same-hospital net operating revenues decreased$46 million , or 1.2%, during the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 , primarily due to lower patient volumes as a result of the COVID-19 pandemic, partially offset by higher patient acuity, a more favorable payer mix and improved terms of our managed care contracts. Our Hospital Operations segment recognized a reduction of income from federal grants totaling$57 million in the three months endedSeptember 30, 2020 due to theSeptember 2020 PRF Guidance, which is not included in net operating revenues. Same-hospital admissions decreased 11.4% in the three months endedSeptember 30, 2020 compared to the same period in 2019. Same-hospital outpatient visits decreased 16.2% in the three months endedSeptember 30, 2020 compared to the prior-year period. Same-hospital net operating revenues decreased$742 million , or 6.7%, during the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 , primarily due to the same factors that impacted the three-month period endedSeptember 30, 2020 . Our Hospital Operations segment also recognized income from federal and state grants totaling$417 million in the nine months endedSeptember 30, 2020 , which is not included in net operating revenues. Same-hospital admissions decreased 12.0% in the nine months endedSeptember 30, 2020 compared to the same period in 2019. Same-hospital outpatient visits decreased 20.8% in the nine months endedSeptember 30, 2020 compared to the prior-year period. 51 -------------------------------------------------------------------------------- Table of Contents The following table shows the consolidated net accounts receivable by payer atSeptember 30, 2020 andDecember 31, 2019 : September 30, December 31, 2020 2019 Medicare$ 158 $ 189 Medicaid 55 69 Net cost report settlements receivable and valuation allowances 42 12 Managed care 1,436 1,618 Self-pay uninsured 16 25 Self-pay balance after insurance 74 76 Estimated future recoveries 158 162 Other payers 300 337 Total Hospital Operations 2,239 2,488 Ambulatory Care 239 253 Total discontinued operations 1 2$ 2,479 $ 2,743 Collection of accounts receivable has been a key area of focus, particularly over the past several years. AtSeptember 30, 2020 , our Hospital Operations segment collection rate on self-pay accounts was approximately 24.4%. Our selfpay 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 atSeptember 30, 2020 , a 10% decrease or increase in our self-pay collection rate, or approximately 2%, which we believe could be a reasonably likely change, would result in an unfavorable or favorable adjustment to patient accounts receivable of approximately$9 million . There are various factors that can impact collection trends, such as changes in the economy, which in turn have an impact on unemployment rates and the number of uninsured and underinsured patients, the volume of patients through our emergency departments, the increased burden of co-pays and deductibles to be made by patients with insurance, and business practices related to collection efforts. These factors continuously change and can have an impact on collection trends and our estimation process. Payment pressure from managed care payers also affects the collectability of our accounts receivable. We typically experience ongoing managed care payment delays and disputes; however, we continue to work with these payers to obtain adequate and timely reimbursement for our services. Our estimated Hospital Operations segment collection rate from managed care payers was approximately 97.4% atSeptember 30, 2020 . We manage our implicit price concessions using hospital-specific goals and benchmarks such as (1) total cash collections, (2) point-of-service cash collections, (3) AR Days and (4) accounts receivable by aging category. The following tables present the approximate aging by payer of our net accounts receivable from the continuing operations of our Hospital Operations segment of$2.197 billion and$2.476 billion atSeptember 30, 2020 andDecember 31, 2019 , respectively, excluding cost report settlements receivable and valuation allowances of$42 million and$12 million , respectively, atSeptember 30, 2020 andDecember 31, 2019 : September 30, 2020 Indemnity, Managed Self-Pay Medicare Medicaid Care and Other Total 0-60 days 90 % 40 % 57 % 21 % 51 % 61-120 days 5 % 28 % 15 % 13 % 14 % 121-180 days 2 % 12 % 6 % 7 % 6 % Over 180 days 3 % 20 % 22 % 59 % 29 % 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 % 52
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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. AtSeptember 30, 2020 , we had a cumulative total of patient account assignments to Conifer of$2.381 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 97% 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 atSeptember 30, 2020 andDecember 31, 2019 by aging category: September 30, December 31, 2020 2019 0-60 days $ 82 $ 89 61-120 days 16 11 121-180 days 5 4 Over 180 days 6 11 Total $ 109 $ 115
Salaries, Wages and Benefits
Same-hospital salaries, wages and benefits decreased by$17 million , or 0.9%, in the three months endedSeptember 30, 2020 compared to the same period in 2019. This decrease is primarily attributable to reduced patient volumes, as well as necessary employee furloughs and headcount reductions throughout the organization due to the COVID-19 pandemic; the effect of these changes was partially offset by annual merit increases for certain of our employees, a greater number of employed physicians, increased incentive compensation expense and an increased average patient length-of-stay, as well as the impact of higher temporary labor and premium pay. Our continued focus on strategic cost-reduction and efficiency measures partially mitigated the impact of the COVID-19 surges in certain markets in the three months endedSeptember 30, 2020 . Samehospital salaries, wages and benefits as a percentage of net operating revenues increased by 20 basis points to 49.7% in the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 , primarily due to reduced patient revenues as a result of the COVID-19 pandemic. Salaries, wages and benefits expense for the three months endedSeptember 30, 2020 and 2019 included stock-based compensation expense of$7 million and$8 million , respectively. Same-hospital salaries, wages and benefits decreased$189 million , or 3.5%, in the nine months endedSeptember 30, 2020 compared to the same period in 2019. This decrease is primarily attributable to the same factors that affected the three-month period, as well as lower health benefit costs. Same-hospital salaries, wages and benefits as a percentage of net operating revenues increased by 170 basis points to 50.7% in the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 , primarily due to reduced patient revenues as a result of the COVID-19 pandemic. Salaries, wages and benefits expense for the nine months endedSeptember 30, 2020 and 2019 included stock-based compensation expense of$22 million and$24 million , respectively.
Supplies
Same-hospital supplies expense increased$5 million , or 0.8%, in the three months endedSeptember 30, 2020 compared to the same period in 2019. The increase was primarily due to the increased cost of certain supplies, such as personal protective equipment, as a result of the COVID-19 pandemic, partially offset by reduced patient volumes. Same-hospital supplies expense as a percentage of net operating revenues increased by 30 basis points to 17.9% in the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 due to reduced patient revenues and the increased cost of certain supplies as a result of the COVID-19 pandemic. Same-hospital supplies expense decreased$95 million , or 4.9%, 53 -------------------------------------------------------------------------------- Table of Contents in the nine months endedSeptember 30, 2020 compared to the same period in 2019. The decline was primarily due to reduced patient volumes, partially offset by the increased cost of certain supplies as a result of the COVID-19 pandemic. Same-hospital supplies expense as a percentage of net operating revenues increased by 40 basis points to 17.8% in the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 due to reduced patient revenues and the increased cost of certain supplies as a result of the COVID-19 pandemic. We strive to control supplies expense through product standardization, consistent contract terms and end-to-end contract management, improved utilization, bulk purchases, focused spending with a smaller number of vendors and operational improvements. The items of current cost-reduction focus include personal protective equipment, cardiac stents and pacemakers, orthopedics, implants, and high-cost pharmaceuticals.
Other Operating Expenses, Net
Same-hospital other operating expenses increased by$14 million , or 1.6%, in the three months endedSeptember 30, 2020 compared to the same period in 2019. The increase was primarily due to higher medical fees, partially offset by lower patient volumes as a result of the COVID-19 pandemic. There is proportionally a higher level of fixed costs (e.g., rent expense) in other operating expenses than salaries, wages and benefits or supplies. Same-hospital other operating expenses as a percentage of net operating revenues increased by 70 basis points to 24.5% for the three months endedSeptember 30, 2020 compared to 23.8% for the three months endedSeptember 30, 2019 , primarily due to reduced patient revenues as a result of the COVID-19 pandemic. The changes in other operating expenses included:
•increased medical fees of
•increased rent and lease expense of
•decreased costs of contracted services of
•increased malpractice expense of
•decreased costs of$12 million associated with funding indigent care services at our hospitals, which costs were substantially offset by reduced net patient revenues. Same-hospital other operating expenses decreased by$66 million , or 2.5%, in the nine months endedSeptember 30, 2020 compared to the same period in 2019. Same-hospital other operating expenses as a percentage of net operating revenues increased by 110 basis points to 25.2% in the nine months endedSeptember 30, 2020 compared to 24.1% for the nine months endedSeptember 30, 2019 , primarily due to reduced patient revenues as a result of the COVID-19 pandemic. The changes in other operating expenses included:
•increased medical fees of
•increased rent and lease expense of
•decreased consulting and legal fees of
•decreased costs of contracted services of
•decreased expenses related to our risk-contracting business in
•decreased repairs and maintenance costs of
•decreased malpractice expense of
•decreased costs of$41 million associated with funding indigent care services at our hospitals, which costs were substantially offset by reduced net patient revenues. 54 -------------------------------------------------------------------------------- Table of Contents 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 (108 of 352 facilities atSeptember 30, 2020 ), this influence does not represent control of the facility, so we account for our investment in the facility under the equity method for an unconsolidated affiliate. USPI controls 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 69% of those facilities. This translates to trends in consolidated operating income that often do not correspond with changes in consolidated revenues and expenses, which is why we disclose certain statistical and financial data on a pro forma systemwide basis that includes both consolidated and unconsolidated (equity method) facilities.
Results of Operations
The following table summarizes certain consolidated statements of operations items for the periods indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
Increase Increase
Ambulatory Care Results of Operations 2020 2019 (Decrease) 2020 2019 (Decrease)
Net operating revenues $ 565 $ 522 8.2 % $ 1,423 $ 1,526 (6.7) %
Grant income $ (9) $ - N/A $ 28 $ - N/A
Equity in earnings of unconsolidated
affiliates $ 41 $ 37 10.8 % $ 102 $ 102 - %
Salaries, wages and benefits $ 157 $ 157 - % $ 438 $ 467 (6.2) %
Supplies $ 128 $ 109 17.4 % $ 319 $ 316 0.9 %
Other operating expenses, net $ 97 $ 86 12.8 % $ 258 $ 254 1.6 %
Our Ambulatory Care net operating revenues increased by $43 million , or 8.2%,
during the three months ended September 30, 2020 as compared to the same period
in 2019. The change was driven by an increase in same-facility net operating
revenues of $29 million due primarily to higher patient acuity, incremental
revenue from new service lines and improved terms of our managed care contracts,
as well as an increase from acquisitions of $26 million . These increases were
partially offset by a decrease of $12 million due to the deconsolidation of a
facility. Our Ambulatory Care net operating
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revenues decreased by $103 million , or 6.7%, during the nine months ended
September 30, 2020 as compared to the same period in 2019. The change was driven
by a decrease in same-facility net operating revenues of $128 million due
primarily to the COVID-19 pandemic, as well as a decrease of $27 million due to
the deconsolidation of a facility, partially offset by an increase from
acquisitions of $52 million .
Salaries, wages and benefits expense remained the same during the three months
ended September 30, 2020 as compared to the same period in 2019. Salaries, wages
and benefits expense was impacted by a decrease in same-facility salaries, wages
and benefits expense of $3 million due to the impact of the COVID-19 pandemic
and a decrease of $3 million due to the deconsolidation of a facility, offset by
an increase from acquisitions of $6 million . Salaries, wages and benefits
expense decreased by $29 million , or 6.2%, during the nine months ended
September 30, 2020 as compared to the same period in 2019. This change is
attributable to a decrease in same-facility salaries, wages and benefits expense
of $36 million due primarily to the necessary flexing of staff as patient
volumes decreased at our centers due to shelter-in-place orders and the mandated
suspension of many elective procedures due to the COVID-19 pandemic, as well as
a decrease of $6 million due to the deconsolidation of a facility. These impacts
were partially offset by an increase from acquisitions of $13 million .
Supplies expense increased by $19 million , or 17.4%, during the three months
ended September 30, 2020 as compared to the same period in 2019. The change was
driven by an increase in same-facility supplies expense of $14 million due
primarily to an increase in cases at our consolidated centers, higher costs
driven by the higher level of patient acuity, and higher pricing of certain
supplies as a result of the COVID-19 pandemic, as well as an increase from
acquisitions of $9 million , partially offset by a decrease of $4 million due to
the deconsolidation of a facility. Supplies expense increased by $3 million , or
0.9%, during the nine months ended September 30, 2020 as compared to the same
period in 2019. The change was driven by an increase from acquisitions of
$17 million , partially offset by a decrease in same-facility supplies expense of
$6 million as a result of the COVID-19 pandemic, as well as a decrease of $8
million due to the deconsolidation of a facility.
Other operating expenses increased by $11 million , or 12.8%, during the three
months ended September 30, 2020 as compared to the same period in 2019. The
change was driven by an increase in same-facility other operating expenses of
$8 million due primarily to higher professional fees and facility expenses, as
well as an increase from acquisitions of $5 million , partially offset by a
decrease of $2 million due to the deconsolidation of a facility. Other operating
expenses increased by $4 million , or 1.6%, during the nine months ended
September 30, 2020 as compared to the same period in 2019. The change was driven
by an increase from acquisitions of $12 million , partially offset by a decrease
in same-facility other operating expenses of $3 million due primarily to strong
expense management while patient volumes were reduced as a result of the
COVID-19 pandemic, as well as a decrease of $5 million due to the
deconsolidation of a facility.
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 Nine Months Ended
Ambulatory Care Facility Growth September 30, 2020 September 30, 2020
Net revenues 6.5% (7.8)%
Cases (0.3)% (12.9)%
Net revenue per case 6.9% 5.9%
56-------------------------------------------------------------------------------- Table of Contents Joint Ventures withHealthcare System Partners USPI's business model is to jointly own its facilities with local physicians and, in many of these facilities, a notforprofit healthcare system partner. Accordingly, as ofSeptember 30, 2020 , the majority of facilities in our Ambulatory Care segment are operated in this model. Nine Months Ended Ambulatory Care FacilitiesSeptember 30, 2020 Facilities: With a healthcare system partner 224 Without a healthcare system partner 128 Total facilities operated 352 Change fromDecember 31, 2019 : Acquisitions 9 De novo 3 Dispositions/Mergers (6) Total increase in number of facilities operated 6 During the nine months endedSeptember 30, 2020 , we acquired controlling interests in two multi-specialty surgery centers inFlorida , one multi-specialty surgery center in each ofArizona ,Colorado ,Tennessee andWashington , and one imaging center inTexas . We paid cash totaling approximately$59 million for these acquisitions. The facilities inArizona ,Colorado andTennessee are jointly owned with local physicians and a healthcare system partner. TheWashington facility is jointly owned with a healthcare system partner. During the nine months endedSeptember 30, 2020 , we acquired noncontrolling interests in one surgical hospital and one multi-specialty surgery center, both of which are located inCalifornia . We paid cash totaling approximately$23 million for these ownership interests. Each of these facilities is jointly owned with local physicians and two healthcare system partners. 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 nine months endedSeptember 30, 2020 , we invested approximately$1 million in such transactions.
Conifer Segment
Our Conifer segment generated net operating revenues of$325 million and$336 million during the three months endedSeptember 30, 2020 and 2019, respectively, and$962 million and$1.040 billion during the nine months endedSeptember 30, 2020 and 2019, respectively, a portion of which was eliminated in consolidation as described in Note 18 to the accompanying Condensed Consolidated Financial Statements. Conifer revenues from third-party customers, which are not eliminated in consolidation, decreased$7 million and$31 million , or 3.6% and 5.1%, for the three and nine months endedSeptember 30, 2020 , respectively, compared to the same periods in 2019. Conifer's net operating revenues were negatively impacted by the unfavorable downstream impact of the COVID-19 pandemic on its clients' patient volumes, as well as attrition due to planned hospital divestitures by its clients. Salaries, wages and benefits expense for Conifer decreased$13 million , or 7.2%, in the three months endedSeptember 30, 2020 compared to the same period in 2019, and decreased$41 million , or 7.4%, in the nine months endedSeptember 30, 2020 compared to the same period in 2019, in both cases primarily due to furloughs and headcount reductions.
Other operating expenses for Conifer decreased
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 40.0% of the net operating revenues Conifer recognized in the nine months endedSeptember 30, 2020 . 57 -------------------------------------------------------------------------------- Table of Contents Consolidated
Impairment and Restructuring Charges, and Acquisition-Related Costs
During the three months endedSeptember 30, 2020 , we recorded impairment and restructuring charges and acquisition-related costs of$57 million , consisting of$3 million of impairment charges,$52 million of restructuring charges and$2 million of acquisition-related costs. Restructuring charges consisted of$16 million of employee severance costs,$15 million related to ourGlobal Business Center inthe Philippines ,$14 million of contract and lease termination fees, and$7 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 endedSeptember 30, 2020 were comprised of$44 million from our Hospital Operations segment,$2 million from our Ambulatory Care segment and$11 million from our Conifer segment. During the three months endedSeptember 30, 2019 , we recorded impairment and restructuring charges and acquisition-related costs of$46 million , consisting of$2 million of impairment charges,$43 million of restructuring charges and$1 million of acquisition-related costs. Restructuring charges consisted of$20 million of employee severance costs,$1 million of contract and lease termination fees, and$22 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 endedSeptember 30, 2019 were comprised of$22 million from our Hospital Operations segment,$7 million from our Ambulatory Care segment and$17 million from our Conifer segment. During the nine months endedSeptember 30, 2020 , we recorded impairment and restructuring charges and acquisitionrelated costs of$166 million , consisting of$8 million of impairment charges,$155 million of restructuring charges and$3 million of acquisition-related costs. Restructuring charges consisted of$53 million of employee severance costs,$40 million related to ourGlobal Business Center inthe Philippines ,$23 million of charges due to the termination of the USPI management equity plan,$15 million of contract and lease termination fees, and$24 million of other restructuring costs. Acquisition-related costs consisted of$3 million of transaction costs. Our impairment and restructuring charges and acquisitionrelated costs for the nine months endedSeptember 30, 2020 were comprised of$94 million from our Hospital Operations segment,$33 million from our Ambulatory Care segment and$39 million from our Conifer segment. During the nine months endedSeptember 30, 2019 , we recorded impairment and restructuring charges and acquisitionrelated costs of$101 million , consisting of$7 million of impairment charges,$90 million of restructuring charges and$4 million of acquisition-related costs. Restructuring charges consisted of$38 million of employee severance costs,$3 million of contract and lease termination fees, and$49 million of other restructuring costs. Acquisition-related costs consisted of$4 million of transaction costs. Our impairment and restructuring charges and acquisition-related costs for the nine months endedSeptember 30, 2019 were comprised of$58 million from our Hospital Operations segment,$12 million from our Ambulatory Care segment and$31 million from our Conifer segment.
Litigation and Investigation Costs
Litigation and investigation costs for the three months endedSeptember 30, 2020 and 2019 were$9 million and$84 million , respectively. Litigation and investigation costs for the nine months endedSeptember 30, 2020 and 2019 were$13 million and$115 million , respectively. The costs in the 2019 period included accruals for matters described in Note 17 to the Consolidated Financial Statements in our Annual Report.
During the three months endedSeptember 30, 2020 and 2019, we recorded net gains (losses) on sales, consolidation and deconsolidation of facilities of approximately and$1 million and$(1) million , respectively, primarily related to consolidation changes of certain USPI businesses due to ownership changes. During the nine months endedSeptember 30, 2020 , we recorded net gains on sales, consolidation and deconsolidation of facilities of approximately$4 million , primarily comprised of gains of$12 million related to consolidation changes of certain USPI businesses due to ownership changes, partially offset by$5 million of post-closing adjustments on the sale of three of our hospitals in theChicago -area and$3 million of post-closing adjustments on the sale ofMacNeal Hospital .
During the nine months ended
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partially offset by
Interest Expense
Interest expense for the three months endedSeptember 30, 2020 was$263 million compared to$244 million for the same period in 2019. Interest expense for the nine months endedSeptember 30, 2020 was$761 million compared to$742 million for the same period in 2019.
Loss From Early Extinguishment of Debt
Loss from early extinguishment of debt was$312 million and$316 million for the three and nine months endedSeptember 30, 2020 , respectively. The loss incurred during the nine-month period consisted of aggregate losses of$320 million related to the debt redemption and purchase transactions described in Note 6 to the accompanying Condensed Consolidated Financial Statements, partially offset by$4 million of gains on the extinguishment of mortgage notes. Loss from early extinguishment of debt was$180 million and$227 million for the three and nine months endedSeptember 30, 2019 , respectively, arising from the debt transactions described in Note 8 to the Consolidated Financial Statements in our Annual Report. Income Tax Expense During the three months endedSeptember 30, 2020 , we recorded an income tax benefit of$197 million in continuing operations on a pre-tax loss of$304 million compared to income tax expense of$22 million on a pre-tax loss of$125 million during the three months endedSeptember 30, 2019 . During the nine months endedSeptember 30, 2020 , we recorded an income tax benefit of$227 million in continuing operations on a pre-tax loss of$5 million compared to income tax expense of$75 million on pre-tax income of$111 million during the nine months endedSeptember 30, 2019 . The reconciliation between the amount of recorded income tax expense and the amount calculated at the statutory federal tax rate is shown in the following table: Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 Tax expense (benefit) at statutory federal rate of 21%$ (64) $ (26) $ (1) $ 24 State income taxes, net of federal income tax benefit (6) (3) 9 6 Tax benefit attributable to noncontrolling interests (18) (17) (48) (53) Nontaxable gains - - 3 (1) Nondeductible litigation costs - 7 - 7 Stock-based compensation 1 4 1 4 Change in valuation allowance (113) 53 (201) 88 Change in tax contingency reserves, including interest - (3) - (3) Other items 3 7 10 3 Income tax expense (benefit)$ (197)
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$88 million during the nine months endedSeptember 30, 2020 to decrease the valuation allowance for interest expense carryforwards due to the additional deduction of interest expense. We reduced our valuation allowance by an additional$113 million in the nine months endedSeptember 30, 2020 , including a reduction of$119 million related to the change in tax accounting method discussed in Note 14 and an increase of$6 million related to state interest expense and charitable contribution carryforwards.
Net Income Available to Noncontrolling Interests
Net income available to noncontrolling interests was$90 million for the three months endedSeptember 30, 2020 compared to$80 million for the three months endedSeptember 30, 2019 . Net income available (loss attributable) to noncontrolling interests for the three months endedSeptember 30, 2020 was comprised of$(7) million related to our Hospital Operations segment,$80 million related to our Ambulatory Care segment and$17 million related to our Conifer segment. Of the portion related to our Ambulatory Care segment,$3 million related to the minority interests in USPI. 59 -------------------------------------------------------------------------------- Table of Contents Net income available to noncontrolling interests was$237 million for the nine months endedSeptember 30, 2020 compared to$259 million for the nine months endedSeptember 30, 2019 . Net income available (loss attributable) to noncontrolling interests for the nine months endedSeptember 30, 2020 was comprised of$(8) million related to our Hospital Operations segment,$200 million related to our Ambulatory Care segment and$45 million related to our Conifer segment. Of the portion related to our Ambulatory Care segment,$6 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. Litigation and investigation costs do not include ordinary course of business malpractice and other litigation and related expense. The Company believes the foregoing non-GAAP measure is useful to investors and analysts because it presents additional information about the Company's financial performance. Investors, analysts, Company management and the Company's board of directors utilize this non-GAAP measure, in addition to GAAP measures, to track the Company's financial and operating performance and compare the Company's performance to peer companies, which utilize similar nonGAAP measures in their presentations. The human resources committee of the Company's board of directors also uses certain nonGAAP 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. 60 -------------------------------------------------------------------------------- Table of Contents The following table shows the reconciliation of Adjusted EBITDA to net income available toTenet Healthcare Corporation common shareholders (the most comparable GAAP term) for the three and nine months endedSeptember 30, 2020 and 2019: Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019
Net loss attributable to
(90) (80) (237) (259)
Income from discontinued operations, net of tax 1 1 - 11
Income (loss) from continuing operations (107) (147) 222 36
Income tax benefit (expense) 197 (22) 227 (75)
Loss from early extinguishment of debt (312) (180) (316) (227)
Other non-operating income (expense), net - (3) 3 (3)
Interest expense (263) (244) (761) (742)
Operating income 271 302 1,069 1,083
Litigation and investigation costs (9) (84) (13) (115)
Net gains (losses) on sales, consolidation and deconsolidation of facilities
1 (1) 4 (3)
Impairment and restructuring charges, and acquisition-related costs
(57) (46) (166) (101)
Depreciation and amortization (215) (205) (624) (627)
Loss from divested and closed businesses - (1) - (2)
Adjusted EBITDA $ 551 $ 639 $ 1,868 $ 1,931
Net operating revenues
- - - 1
Adjusted net operating revenues
Net loss attributable to
(4.3) % (4.9) % (0.1) % (1.6) %
Adjusted EBITDA as % of adjusted net operating revenues
(Adjusted EBITDA margin) 12.1 % 14.0 % 14.7 % 14.1 %
LIQUIDITY AND CAPITAL RESOURCES
CASH REQUIREMENTS
There have been no material changes to our obligations to make future cash payments under contracts, such as debt and lease agreements, and under contingent commitments, such as standby letters of credit and minimum revenue guarantees, as disclosed in our Annual Report, except for additional lease obligations and the long-term debt transactions disclosed in Notes 1 and 6 to our accompanying Condensed Consolidated Financial Statements. AtSeptember 30, 2020 , using the last 12 months of Adjusted EBITDA, our ratio of total long-term debt, net of cash and cash equivalent balances, to Adjusted EBITDA was 4.66x. This ratio atSeptember 30, 2020 was temporarily impacted by the increase in cash received from advances from Medicare. We anticipate this ratio will fluctuate from quarter to quarter based on earnings performance and other factors, including the use of our revolving credit facility as a source of liquidity and acquisitions that involve the assumption of long-term debt. We seek to manage this ratio and increase the efficiency of our balance sheet by following our business plan and managing our cost structure, including through possible asset divestitures, and through other changes in our capital structure. As part of our long-term objective to manage our capital structure, we may issue equity or convertible securities, and we may seek to retire, purchase, redeem or refinance some of our outstanding debt or equity securities, in each case subject to prevailing market conditions, our liquidity requirements, operating results, contractual restrictions and other factors. Our ability to achieve our leverage and capital structure objectives is subject to numerous risks and uncertainties, many of which are described in the Risk Factors section in Part II of this report and in each of our 2020 10Qs, as well as the Forward-Looking Statements and Risk Factors sections in Part I of our Annual Report.
Our capital expenditures primarily relate to the expansion and renovation of existing facilities (including amounts to comply with applicable laws and regulations), equipment and information systems additions and replacements, introduction of new medical technologies, design and construction of new buildings, and various other capital improvements, as well as
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commitments to make capital expenditures in connection with acquisitions of
businesses. Capital expenditures were $374 million and $492 million in the nine
months ended September 30, 2020 and 2019, respectively. We have reduced our
planned capital expenditures for 2020 by approximately 30%. We now anticipate
that our capital expenditures for continuing operations for the year ending
December 31, 2020 will total approximately $500 million to $550 million ,
including $136 million that was accrued as a liability at December 31, 2019 .
Interest payments, net of capitalized interest, were
Income tax payments, net of tax refunds, were
SOURCES AND USES OF CASH
Our liquidity for the nine months endedSeptember 30, 2020 was primarily derived from net cash provided by operating activities, cash on hand and borrowings under our revolving credit facility. We had$3.3 billion of cash and cash equivalents on hand atSeptember 30, 2020 to fund our operations and capital expenditures, and our borrowing availability under our credit facility was$1.777 billion based on our borrowing base calculation atSeptember 30, 2020 .
When operating under normal conditions, 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$2.961 billion in the nine months endedSeptember 30, 2020 compared to$713 million in the nine months endedSeptember 30, 2019 . Key factors contributing to the change between the 2020 and 2019 periods include the following:
•$1.380 billion of cash advances received from Medicare pursuant to COVID-19 stimulus legislation;
•$848 million of cash received from federal and state grants, including the
•A
•Decreased cash receipts of
•An increase of
•The timing of other working capital items.
Net cash used in investing activities was$406 million for the nine months endedSeptember 30, 2020 compared to$426 million for the nine months endedSeptember 30, 2019 . The 2020 amount included an increase in investments for purchases of businesses or joint venture interests of$38 million , primarily for increased USPI acquisition activity. The 2019 period included proceeds from sales of facilities and other assets of$44 million primarily from the sale of three hospitals and hospital-affiliated operations in theChicago area. Capital expenditures were$374 million and$492 million in the nine months endedSeptember 30, 2020 and 2019, respectively. Net cash provided by financing activities was$483 million for the nine months endedSeptember 30, 2020 compared to net cash used in financing activities of$384 million for the nine months endedSeptember 30, 2019 . The 2020 amount included proceeds from the issuance of$2.5 billion aggregate principal amount of our 2028 Senior Notes,$700 million aggregate principal amount of 7.500% senior secured first lien notes due 2025 and$600 million aggregate principal amount of 4.625% senior secured first lien notes due 2028. The 2020 amount also included$3.1 billion of payments for our redemption and purchase of$2.8 billion aggregate principal amount of our outstanding 2022 Senior Notes,$109 million of cash advances from Medicare and$42 million of stimulus grants received by our Ambulatory Care segment's non-consolidated affiliates. The 2019 period included net borrowings under our credit facility of$275 million and$63 million of cash paid for debt issuance costs. 62 -------------------------------------------------------------------------------- Table of Contents 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, atSeptember 30, 2020 , provided for revolving loans in an aggregate principal amount of up to$1.9 billion with a$200 million subfacility for standby letters of credit. AtSeptember 30, 2020 , we had no cash borrowings outstanding under the revolving credit facility, and we had less than$1 million of standby letters of credit outstanding. Based on our eligible receivables,$1.777 billion was available for borrowing under the revolving credit facility atSeptember 30, 2020 . AtSeptember 30, 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 . OnJuly 29, 2020 , we further amended the LC Facility to increase the maximum secured debt covenant from 4.00 to 1.00 on a quarterly basis up to 6.00 to 1.00 for the quarter endingMarch 31, 2021 , which maximum ratio will step down on a quarterly basis through the quarter endingDecember 31, 2021 . Obligations under the LC Facility are guaranteed and secured by a firstpriority 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. AtSeptember 30, 2020 , we were in compliance with all covenants and conditions in our LC Facility. AtSeptember 30, 2020 , we had$88 million of standby letters of credit outstanding under the LC Facility. Senior Unsecured and Senior Secured Notes-OnSeptember 16, 2020 , we sold$2.500 billion aggregate principal amount of unsecured 6.125% 2028 Senior Notes. We will pay interest on the 2028 Senior Notes semi-annually in arrears onApril 1 andOctober 1 of each year, commencing onApril 1, 2021 . The proceeds from the sale of the 2028 Senior Notes were used, after payment of fees and expenses, together with cash on hand, to finance the redemption of all$2.556 billion aggregate principal amount then outstanding of our 2022 Senior Notes for approximately$2.843 billion . In connection with the redemption, we recorded a loss from early extinguishment of debt of approximately$305 million in the three months endedSeptember 30, 2020 , primarily related to the difference between the purchase price and the par value of the 2022 Senior Notes, as well as the write-off of associated unamortized issuance costs. In July andAugust 2020 , we purchased approximately$109 million aggregate principal amount of our 2022 Senior Notes for approximately$114 million . In connection with the purchase, we recorded a loss from early extinguishment of debt of$7 million in the three months endedSeptember 30, 2020 , primarily related to the difference between the purchase price and the par value of the 2022 Senior Notes, as well as the write-off of associated unamortized issuance costs. InJune 2020 , we purchased approximately$135 million aggregate principal amount of our 2022 Senior Notes for approximately$142 million . In connection with the purchase, we recorded a loss from early extinguishment of debt of approximately$8 million in the three months endedJune 30, 2020 , primarily related to the difference between the purchase price and the par value of the 2022 Senior Notes, as well as the write-off of associated unamortized issuance costs. OnJune 16, 2020 , we sold$600 million aggregate principal amount of 4.625% senior secured first lien notes, which will mature onJune 15, 2028 (the "2028 Senior Secured First Lien Notes"). We will pay interest on the 2028 Senior Secured First Lien Notes semi-annually in arrears onJune 15 andDecember 15 of each year, commencing onDecember 15, 2020 . 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, which payments commenced onOctober 1, 2020 . A portion of the proceeds from the sale of the 2025 Senior Secured First Lien Notes was used, after payment 63 -------------------------------------------------------------------------------- Table of Contents 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 8 to the Consolidated Financial Statements included in our Annual Report.
LIQUIDITY
Broad economic factors resulting from the COVID-19 pandemic, including increased unemployment rates and reduced consumer spending, are impacting our service mix, revenue mix and patient volumes. Business closings and layoffs in the areas we operate may lead to increases in the uninsured and underinsured populations and adversely affect demand for our services, as well as the ability of patients to pay for services as rendered. Any increase in the amount of or deterioration in the collectability of patient accounts receivable will adversely affect our cash flows and results of operations. If general economic conditions continue to deteriorate or remain uncertain for an extended period of time, our liquidity and ability to repay our outstanding debt may be impacted. 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. InSeptember 2020 , we sold$2.500 billion aggregate principal amount of our 2028 Senior Notes, the proceeds of which were used to redeem our 2022 Senior Notes. InJune 2020 , we sold$600 million aggregate principal amount of our 2028 Senior Secured First Lien Notes. InApril 2020 , we sold$700 million aggregate principal amount of our 2025 Senior Secured First Lien Notes, a portion of the proceeds of which were used to repay borrowings outstanding under our Credit Agreement. In addition, we amended our Credit Agreement inApril 2020 to increase our borrowing availability and make certain changes with respect to the calculation of our borrowing base. We also have reduced our planned capital expenditures for 2020 by approximately 30%. Furthermore, we have decreased our employee headcount throughout the organization, and we have deferred certain operating expenses that are not expected to impact our response to the COVID-19 pandemic. In addition, we are reducing variable costs across the enterprise as a result of softening patient volumes due to the COVID-19 pandemic. We believe these actions, together with government relief packages, to the extent available to us, will help us to continue operating during the uncertainty caused by the COVID-19 pandemic. As more fully described under "Sources of Revenue for Our Hospital Operations Segment - Government Programs" above: •The Medicare Fee-for-Service accelerated and advanced payment program has been expanded. ThroughSeptember 30, 2020 , our hospitals and other providers applied for and received approximately$1.5 billion of accelerated payments. We expect to repay these advances within the allocated recoupment period. •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$270 million of taxes in 2020 pursuant to this CARES Act provision. •To address the fiscal burdens on healthcare providers created by the COVID-19 public health emergency, the CARES Act and the PPP Act authorized$175 billion for theProvider Relief Fund . In the nine months endedSeptember 30, 2020 , we received cash payments of$890 million due to grants from the PRF and state grant programs. Payments from the PRF are not loans and, therefore, they are not subject to repayment. However, as a condition to receiving distributions, providers must agree to certain terms and conditions, including, among other things, that the funds are being used for lost revenues and COVID-related costs as defined by HHS, and that the providers will not seek collection of outofpocket 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. As previously noted, HHS guidance related to grant funds is still evolving and subject to change. •EffectiveMay 1, 2020 throughDecember 31, 2020 , the 2% sequestration reduction on Medicare FFS and Medicare Advantage payments to hospitals, physicians and other providers is suspended and will resume effectiveJanuary 2021 as authorized by the Sequestration Transparency Act of 2020. The estimated impact of this change on our operations is an increase of approximately$67 million of revenues in 2020. •The CARES Act eliminated the scheduled nationwide reduction of$4 billion in federal Medicaid DSH allotments in FFY 2020 mandated by the Affordable Care Act and decreased the FFY 2021 DSH reduction from$8 billion to$4 billion effectiveDecember 1, 2020 . The CA Act delays the 2021 reduction untilDecember 11, 2020 . The 64
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projected impact of the suspension of the decreased DSH reduction on our
operations is an increase of approximately
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, as well as cash disbursements required to respond to the COVID-19 pandemic. 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 our operating activities and possible additional government relief packages 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, other sections of this report, in our Annual Report and in each of our 2020 10-Qs, including any costs associated with legal proceedings and government investigations. We do not rely on commercial paper or other short-term financing arrangements nor do we enter into repurchase agreements or other short-term financing arrangements not otherwise reported in our balance sheets. In addition, we do not have significant exposure to floating interest rates given that all of our current long-term indebtedness has fixed rates of interest except for borrowings under our Credit Agreement.
OFF-BALANCE SHEET ARRANGEMENTS
We have no off-balance sheet arrangements that may have a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources, except for$194 million of standby letters of credit outstanding and guarantees atSeptember 30, 2020 .
CRITICAL ACCOUNTING ESTIMATES
In preparing our Condensed Consolidated Financial Statements in conformity with GAAP, we must use estimates and assumptions that affect the amounts reported in our Condensed Consolidated Financial Statements and accompanying notes. We regularly evaluate the accounting policies and estimates we use. In general, we base the estimates on historical experience and on assumptions that we believe to be reasonable, given the particular circumstances in which we operate. Actual results may vary from those estimates. We consider our critical accounting estimates to be those that (1) involve significant judgments and uncertainties, (2) require estimates that are more difficult for management to determine, and (3) may produce materially different outcomes under different conditions or when using different assumptions.
Our critical accounting estimates have not changed from the description provided in our Annual Report.
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