thc_Current folio_10Q

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

Form 10-Q

 

 

 

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the quarterly period ended June 30, 2016

 

 

OR

 

 

 

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from               to               

 

 

Commission File Number 1-7293

 


 

TENET HEALTHCARE CORPORATION

(Exact name of Registrant as specified in its charter)

 


 

 

 

 

Nevada

(State of Incorporation)

 

95-2557091

(IRS Employer Identification No.)

 

1445 Ross Avenue, Suite 1400
Dallas, TX 75202

(Address of principal executive offices, including zip code)

 

(469) 893-2200

(Registrant’s telephone number, including area code)

 


 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.   Yes  No 

 

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months.   Yes  No 

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Exchange Act Rule 12b-2).

 

 

 

 

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

 

Indicate by check mark whether the Registrant is a shell company (as defined in Exchange Act Rule 12b-2).  Yes  No 

 

At July 27, 2016, there were 99,517,920 shares of the Registrant’s common stock, $0.05 par value, outstanding.

 

 

 


 

Table of Contents

 

TENET HEALTHCARE CORPORATION

TABLE OF CONTENTS

 

 

 

 

 

 

 

 

 

 

 

 

Page

PART I. FINANCIAL INFORMATION 

 

 

 

 

Item 1. 

Financial Statements (Unaudited)

 

 

 

 

 

Condensed Consolidated Financial Statements

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

24 

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

55 

 

 

 

Item 4. 

Controls and Procedures

55 

 

 

 

PART II. OTHER INFORMATION 

 

 

 

 

Item 1. 

Legal Proceedings

56 

 

 

 

Item 1A.

Risk Factors

56 

 

 

 

Item 6. 

Exhibits

56 

 

 

 

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Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

TENET HEALTHCARE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

Dollars in Millions

(Unaudited)

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

 

 

2016

 

2015

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

656

 

$

356

Accounts receivable, less allowance for doubtful accounts ($946 at June 30, 2016 and $887 at December 31, 2015)

 

 

2,734

 

 

2,704

Inventories of supplies, at cost

 

 

316

 

 

309

Income tax receivable

 

 

3

 

 

7

Assets held for sale

 

 

2

 

 

550

Other current assets

 

 

1,282

 

 

1,245

Total current assets 

 

 

4,993

 

 

5,171

Investments and other assets

 

 

1,317

 

 

1,175

Deferred income taxes

 

 

797

 

 

776

Property and equipment, at cost, less accumulated depreciation and amortization ($4,814 at June 30, 2016 and $4,323 at December 31, 2015)

 

 

7,977

 

 

7,915

Goodwill

 

 

7,291

 

 

6,970

Other intangible assets, at cost, less accumulated amortization ($734 at June 30, 2016 and $659 at December 31, 2015)

 

 

1,865

 

 

1,675

Total assets 

 

$

24,240

 

$

23,682

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Current portion of long-term debt

 

$

181

 

$

127

Accounts payable

 

 

1,272

 

 

1,380

Accrued compensation and benefits

 

 

843

 

 

880

Professional and general liability reserves

 

 

179

 

 

177

Accrued interest payable

 

 

205

 

 

205

Liabilities held for sale

 

 

 —

 

 

101

Accrued legal settlement costs

 

 

525

 

 

294

Other current liabilities

 

 

1,225

 

 

1,144

Total current liabilities 

 

 

4,430

 

 

4,308

Long-term debt, net of current portion

 

 

14,320

 

 

14,383

Professional and general liability reserves

 

 

613

 

 

578

Defined benefit plan obligations

 

 

594

 

 

595

Deferred income taxes

 

 

274

 

 

37

Other long-term liabilities

 

 

582

 

 

557

Total liabilities 

 

 

20,813

 

 

20,458

Commitments and contingencies

 

 

 

 

 

 

Redeemable noncontrolling interests in equity of consolidated subsidiaries

 

 

2,275

 

 

2,266

Equity:

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

Common stock, $0.05 par value; authorized 262,500,000 shares; 147,937,909 shares issued at June 30, 2016 and 146,920,454 shares issued at December 31, 2015

 

 

7

 

 

7

Additional paid-in capital

 

 

4,791

 

 

4,815

Accumulated other comprehensive loss

 

 

(203)

 

 

(164)

Accumulated deficit

 

 

(1,655)

 

 

(1,550)

Common stock in treasury, at cost, 48,421,605 shares at June 30, 2016 and 48,425,298 shares at December 31, 2015

 

 

(2,417)

 

 

(2,417)

Total shareholders’ equity 

 

 

523

 

 

691

Noncontrolling interests 

 

 

629

 

 

267

Total equity 

 

 

1,152

 

 

958

Total liabilities and equity 

 

$

24,240

 

$

23,682

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 


 

Table of Contents

TENET HEALTHCARE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Dollars in Millions, Except Per-Share Amounts

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended 

 

Six Months Ended 

 

 

June 30, 

 

June 30, 

 

    

2016

    

2015

    

2016

    

2015

Net operating revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Net operating revenues before provision for doubtful accounts

 

$

5,220

 

$

4,844

 

$

10,640

 

$

9,631

Less: Provision for doubtful accounts

 

 

352

 

 

352

 

 

728

 

 

715

Net operating revenues 

 

 

4,868

 

 

4,492

 

 

9,912

 

 

8,916

Equity in earnings of unconsolidated affiliates

 

 

30

 

 

16

 

 

54

 

 

20

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Salaries, wages and benefits

 

 

2,316

 

 

2,185

 

 

4,718

 

 

4,310

Supplies

 

 

773

 

 

707

 

 

1,584

 

 

1,394

Other operating expenses, net

 

 

1,213

 

 

1,081

 

 

2,455

 

 

2,174

Electronic health record incentives

 

 

(21)

 

 

(33)

 

 

(21)

 

 

(39)

Depreciation and amortization

 

 

215

 

 

197

 

 

427

 

 

404

Impairment and restructuring charges, and acquisition-related costs

 

 

22

 

 

193

 

 

50

 

 

222

Litigation and investigation costs

 

 

114

 

 

14

 

 

287

 

 

17

Gains on sales, consolidation and deconsolidation of facilities

 

 

(1)

 

 

 —

 

 

(148)

 

 

 —

Operating income 

 

 

267

 

 

164

 

 

614

 

 

454

Interest expense

 

 

(244)

 

 

(217)

 

 

(487)

 

 

(416)

Investment earnings (losses)

 

 

2

 

 

(1)

 

 

3

 

 

(1)

Net income (loss) from continuing operations, before income taxes 

 

 

25

 

 

(54)

 

 

130

 

 

37

Income tax benefit (expense)

 

 

16

 

 

27

 

 

(51)

 

 

11

Net income (loss) from continuing operations, before discontinued operations 

 

 

41

 

 

(27)

 

 

79

 

 

48

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(2)

 

 

(2)

 

 

(7)

 

 

 —

Income tax benefit

 

 

 —

 

 

1

 

 

1

 

 

 —

Net loss from discontinued operations 

 

 

(2)

 

 

(1)

 

 

(6)

 

 

 —

Net income (loss)

 

 

39

 

 

(28)

 

 

73

 

 

48

Less: Net income attributable to noncontrolling interests

 

 

85

 

 

33

 

 

178

 

 

62

Net loss attributable to Tenet Healthcare Corporation common shareholders 

 

$

(46)

 

$

(61)

 

$

(105)

 

$

(14)

Amounts attributable to Tenet Healthcare Corporation common shareholders

 

 

 

 

 

 

 

 

 

 

 

 

Net loss from continuing operations, net of tax

 

$

(44)

 

$

(60)

 

$

(99)

 

$

(14)

Net loss from discontinued operations, net of tax

 

 

(2)

 

 

(1)

 

 

(6)

 

 

 —

Net loss attributable to Tenet Healthcare Corporation common shareholders 

 

$

(46)

 

$

(61)

 

$

(105)

 

$

(14)

Net loss per share attributable to Tenet Healthcare Corporation common shareholders:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.44)

 

$

(0.60)

 

$

(1.00)

 

$

(0.14)

Discontinued operations

 

 

(0.02)

 

 

(0.01)

 

 

(0.06)

 

 

 —

 

 

$

(0.46)

 

$

(0.61)

 

$

(1.06)

 

$

(0.14)

Diluted

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.44)

 

$

(0.60)

 

$

(1.00)

 

$

(0.14)

Discontinued operations

 

 

(0.02)

 

 

(0.01)

 

 

(0.06)

 

 

 —

 

 

$

(0.46)

 

$

(0.61)

 

$

(1.06)

 

$

(0.14)

Weighted average shares and dilutive securities outstanding (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

99,341

 

 

99,244

 

 

99,054

 

 

98,972

Diluted

 

 

99,341

 

 

99,244

 

 

99,054

 

 

98,972

 

See accompanying Notes to Condensed Consolidated Financial Statements.

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TENET HEALTHCARE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME (LOSS)

Dollars in Millions

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended 

 

Six Months Ended 

 

 

 

June 30, 

 

June 30, 

 

 

    

2016

    

2015

    

2016

    

2015

 

Net income (loss)

 

$

39

 

$

(28)

 

$

73

 

$

48

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of net actuarial loss included in net periodic benefit costs

 

 

3

 

 

2

 

 

3

 

 

5

 

Unrealized gains (losses) on securities held as available-for-sale

 

 

(2)

 

 

 —

 

 

1

 

 

1

 

Foreign currency translation adjustments

 

 

(43)

 

 

 —

 

 

(41)

 

 

 —

 

Other comprehensive income (loss) before income taxes 

 

 

(42)

 

 

2

 

 

(37)

 

 

6

 

Income tax expense related to items of other comprehensive income (loss)

 

 

(1)

 

 

 —

 

 

(2)

 

 

(1)

 

Total other comprehensive income (loss), net of tax 

 

 

(43)

 

 

2

 

 

(39)

 

 

5

 

Comprehensive net income (loss)

 

 

(4)

 

 

(26)

 

 

34

 

 

53

 

Less: Comprehensive income attributable to noncontrolling interests 

 

 

85

 

 

33

 

 

178

 

 

62

 

Comprehensive loss attributable to Tenet Healthcare Corporation common shareholders

 

$

(89)

 

$

(59)

 

$

(144)

 

$

(9)

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

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TENET HEALTHCARE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Dollars in Millions

(Unaudited)

 

 

 

 

 

 

 

 

 

Six Months Ended 

 

 

June 30, 

 

    

2016

    

2015

Net income

 

$

73

 

$

48

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

427

 

 

404

Provision for doubtful accounts

 

 

728

 

 

715

Deferred income tax expense (benefit)

 

 

37

 

 

(27)

Stock-based compensation expense

 

 

35

 

 

33

Impairment and restructuring charges, and acquisition-related costs

 

 

50

 

 

222

Litigation and investigation costs

 

 

287

 

 

17

Gains on sales, consolidation and deconsolidation of facilities

 

 

(148)

 

 

 —

Equity in earnings of unconsolidated affiliates, net of distributions received

 

 

10

 

 

(20)

Amortization of debt discount and debt issuance costs

 

 

21

 

 

21

Pre-tax loss (income) from discontinued operations

 

 

7

 

 

 —

Other items, net

 

 

(2)

 

 

(5)

Changes in cash from operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

(725)

 

 

(779)

Inventories and other current assets

 

 

(30)

 

 

36

Income taxes

 

 

(17)

 

 

9

Accounts payable, accrued expenses and other current liabilities

 

 

(106)

 

 

(267)

Other long-term liabilities

 

 

34

 

 

40

Payments for restructuring charges, acquisition-related costs, and litigation costs and settlements 

 

 

(99)

 

 

(86)

Net cash used in operating activities from discontinued operations, excluding income taxes 

 

 

 —

 

 

(8)

Net cash provided by operating activities 

 

 

582

 

 

353

Cash flows from investing activities:

 

 

 

 

 

 

Purchases of property and equipment — continuing operations

 

 

(413)

 

 

(359)

Purchases of businesses or joint venture interests, net of cash acquired

 

 

(94)

 

 

(636)

Proceeds from sales of facilities and other assets

 

 

573

 

 

 —

Proceeds from sales of marketable securities, long-term investments and other assets

 

 

24

 

 

11

Purchases of equity investments

 

 

(35)

 

 

(2)

Other long-term assets

 

 

(3)

 

 

 —

Other items, net

 

 

2

 

 

1

Net cash provided by (used in) investing activities 

 

 

54

 

 

(985)

Cash flows from financing activities:

 

 

 

 

 

 

Repayments of borrowings under credit facility

 

 

(1,195)

 

 

(1,315)

Proceeds from borrowings under credit facility

 

 

1,195

 

 

1,195

Repayments of other borrowings

 

 

(76)

 

 

(1,992)

Proceeds from other borrowings

 

 

 —

 

 

3,187

Debt issuance costs

 

 

 —

 

 

(72)

Distributions paid to noncontrolling interests

 

 

(95)

 

 

(23)

Proceeds from sale of noncontrolling interests

 

 

15

 

 

3

Purchase of noncontrolling interests

 

 

(177)

 

 

(254)

Proceeds from exercise of stock options

 

 

3

 

 

9

Other items, net

 

 

(6)

 

 

 —

Net cash provided by (used in) financing activities 

 

 

(336)

 

 

738

Net increase in cash and cash equivalents

 

 

300

 

 

106

Cash and cash equivalents at beginning of period

 

 

356

 

 

193

Cash and cash equivalents at end of period 

 

$

656

 

$

299

Supplemental disclosures:

 

 

 

 

 

 

Interest paid, net of capitalized interest

 

$

(467)

 

$

(385)

Income tax payments, net

 

$

(29)

 

$

(8)

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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TENET HEALTHCARE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1. BASIS OF PRESENTATION

 

Description of Business and Basis of Presentation

 

Tenet Healthcare Corporation (together with our subsidiaries, referred to herein as “Tenet,” “we” or “us”) is a diversified healthcare services company. At June 30, 2016, we operated 79 hospitals, 20 short-stay surgical hospitals, over 465 outpatient centers, nine facilities in the United Kingdom and six health plans through our subsidiaries, partnerships and joint ventures, including USPI Holding Company, Inc. (“USPI joint venture”). The results of 134 of these facilities, in which we hold noncontrolling interests, are recorded using the equity method of accounting. Our Conifer Holdings, Inc. (“Conifer”) subsidiary provides healthcare business process services in the areas of revenue cycle management and technology-enabled performance improvement and health management solutions to health systems, as well as individual hospitals, physician practices, self-insured organizations, health plans and other entities.

 

This quarterly report supplements our Annual Report on Form 10-K for the year ended December 31, 2015 (“Annual Report”). As permitted by the Securities and Exchange Commission for interim reporting, we have omitted certain notes and disclosures that substantially duplicate those in our Annual Report. For further information, refer to the audited Consolidated Financial Statements and notes included in our Annual Report. Unless otherwise indicated, all financial and statistical data included in these notes to our Condensed Consolidated Financial Statements relate to our continuing operations, with dollar amounts expressed in millions (except per-share amounts).  Certain prior-year amounts have been reclassified to conform to the current-year presentation.

 

Although the Condensed Consolidated Financial Statements and related notes within this document are unaudited, we believe all adjustments considered necessary for a fair presentation have been included and are of a normal recurring nature. In preparing our financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”), we are required to make estimates and assumptions that affect the amounts reported in our Condensed Consolidated Financial Statements and these 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. Financial and statistical information we report to other regulatory agencies may be prepared on a basis other than GAAP or using different assumptions or reporting periods and, therefore, may vary from amounts presented herein. Although we make every effort to ensure that the information we report to those agencies is accurate, complete and consistent with applicable reporting guidelines, we cannot be responsible for the accuracy of the information they make available to the public.

 

Operating results for the three and six month periods ended June 30, 2016 are not necessarily indicative of the results that may be expected for the full year. Reasons for this include, but are not limited to: overall revenue and cost trends, particularly the timing and magnitude of price changes; fluctuations in contractual allowances and cost report settlements and valuation allowances; managed care contract negotiations, settlements or terminations and payer consolidations; changes in Medicare and Medicaid regulations; Medicaid and other supplemental funding levels set by the states in which we operate; the timing of approval by the Centers for Medicare and Medicaid Services of Medicaid provider fee revenue programs; trends in patient accounts receivable collectability and associated provisions for doubtful accounts; fluctuations in interest rates; levels of malpractice insurance expense and settlement trends; the number of covered lives managed by our health plans and the plans’ ability to effectively manage medical costs; the timing of when we meet the criteria to recognize electronic health record incentives; impairment of long-lived assets and goodwill; restructuring charges; losses, costs and insurance recoveries related to natural disasters and other weather-related occurrences; litigation and investigation costs; acquisitions and dispositions of facilities and other assets; income tax rates and deferred tax asset valuation allowance activity; changes in estimates of accruals for annual incentive compensation; the timing and amounts of stock option and restricted stock unit grants to employees and directors; gains or losses from early extinguishment of debt; and changes in occupancy levels and patient volumes. Factors that affect patient volumes and, thereby, the results of operations at our hospitals and related healthcare facilities include, but are not limited to: the business environment, economic conditions and demographics of local communities in which we

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operate; the number of uninsured and underinsured individuals in local communities treated at our hospitals; seasonal cycles of illness; climate and weather conditions; physician recruitment, retention and attrition; advances in technology and treatments that reduce length of stay; local healthcare competitors; managed care contract negotiations or terminations; the number of patients with high-deductible health insurance plans; any unfavorable publicity about us, or our joint venture partners, that impacts our relationships with physicians and patients; changes in healthcare regulations and the participation of individual states in federal programs; and the timing of elective procedures. These considerations apply to year-to-year comparisons as well.

 

Translation of Foreign Currencies

 

The accounts of European Surgical Partners, Limited (“Aspen”) were measured in its local currency (the pound sterling) and then translated into U.S. dollars. All assets and liabilities were translated using the current rate of exchange at the balance sheet date. Results of operations were translated using the average rates prevailing throughout the period of operations. Translation gains or losses resulting from changes in exchange rates are accumulated in shareholders’ equity.

 

Net Operating Revenues Before Provision for Doubtful Accounts

 

We recognize net operating revenues before provision for doubtful accounts in the period in which our services are performed. Net operating revenues before provision for doubtful accounts primarily consist of net patient service revenues that are recorded based on established billing rates (i.e., gross charges), less estimated discounts for contractual and other allowances, principally for patients covered by Medicare, Medicaid, managed care and other health plans, as well as certain uninsured patients under our Compact with Uninsured Patients and other uninsured discount and charity programs.

 

The table below shows the sources of net operating revenues before provision for doubtful accounts from continuing operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended 

 

Six Months Ended 

 

 

 

June 30, 

 

June 30, 

 

 

    

2016

    

2015

    

2016

    

2015

    

 

General Hospitals:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Medicare

 

$

879

 

$

850

 

$

1,738

 

$

1,748

 

 

Medicaid

 

 

298

 

 

349

 

 

671

 

 

734

 

 

Managed care

 

 

2,407

 

 

2,501

 

 

5,033

 

 

4,906

 

 

Indemnity, self-pay and other

 

 

464

 

 

407

 

 

901

 

 

821

 

 

Acute care hospitals — other revenue

 

 

14

 

 

13

 

 

21

 

 

28

 

 

Other:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other operations

 

 

1,158

 

 

724

 

 

2,276

 

 

1,394

 

 

Net operating revenues before provision for doubtful accounts 

 

$

5,220

 

$

4,844

 

$

10,640

 

$

9,631

 

 

 

Cash and Cash Equivalents

 

We treat highly liquid investments with original maturities of three months or less as cash equivalents. Cash and cash equivalents were approximately $656 million and $356 million at June 30, 2016 and December 31, 2015, respectively. At June 30, 2016 and December 31, 2015, our book overdrafts were approximately $283 million and $301 million, respectively, which were classified as accounts payable.

 

At June 30, 2016 and December 31, 2015, approximately $190 million and $171 million, respectively, of total cash and cash equivalents in the accompanying Condensed Consolidated Balance Sheets were intended for the operations of our captive insurance subsidiaries and our health plans.

 

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Also at June 30, 2016 and December 31, 2015, we had $109 million and $133 million, respectively, of property and equipment purchases accrued for items received but not yet paid. Of these amounts, $66 million and $95 million, respectively, were included in accounts payable.

 

During the six months ended June 30, 2016 and 2015, we entered into non-cancellable capital leases of approximately $77 million and $92 million, respectively, primarily for buildings and equipment.

 

Other Intangible Assets

 

The following tables provide information regarding other intangible assets, which are included in the accompanying Condensed Consolidated Balance Sheets at June 30, 2016 and December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

    

Gross

    

 

 

    

 

 

 

 

Carrying

 

Accumulated

 

Net Book

 

 

Amount

 

Amortization

 

Value

At June 30, 2016:

 

 

 

 

 

 

 

 

 

Capitalized software costs

 

$

1,537

 

$

(656)

 

$

881

Trade names

 

 

106

 

 

 —

 

 

106

Contracts

 

 

848

 

 

(35)

 

 

813

Other

 

 

108

 

 

(43)

 

 

65

Total 

 

$

2,599

 

$

(734)

 

$

1,865

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Gross

    

 

 

    

 

 

 

 

Carrying

 

Accumulated

 

Net Book

 

 

Amount

 

Amortization

 

Value

At December 31, 2015:

 

 

 

 

 

 

 

 

 

Capitalized software costs

 

$

1,456

 

$

(594)

 

$

862

Trade names

 

 

106

 

 

 —

 

 

106

Contracts

 

 

653

 

 

(26)

 

 

627

Other

 

 

119

 

 

(39)

 

 

80

Total 

 

$

2,334

 

$

(659)

 

$

1,675

 

Estimated future amortization of intangibles with finite useful lives at June 30, 2016 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ending December 31, 

 

Later

 

 

    

Total

    

2016

    

2017

    

2018

    

2019

    

2020

    

Years

 

Amortization of intangible assets

 

$

1,207

 

$

80

 

$

172

 

$

159

 

$

130

 

$

114

 

$

552

 

 

Investments in Unconsolidated Affiliates

We control 214 of the facilities operated by our Ambulatory Care segment and, therefore, consolidate their results (212 are consolidated within our Ambulatory Care segment and two are consolidated within our Hospital Operations and other segment). We account for many of the facilities our Ambulatory Care segment operates (120 of 334 at June 30, 2016) and four of the hospitals our Hospital Operations and other segment operates under the equity method as investments in unconsolidated affiliates and report only our share of net income attributable to the investee as equity in earnings of unconsolidated affiliates in the accompanying Condensed Consolidated Statements of Operations. Summarized financial information for these equity method investees is included in the following table.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended 

 

Six Months Ended 

 

 

June 30, 

 

June 30, 

 

 

2016

    

2016

Net operating revenues

 

$

615

 

$

1,193

Net income

 

$

130

 

$

235

Net income attributable to the investees

 

$

89

 

$

158

 

 

 

 

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NOTE 2. ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

 

The principal components of accounts receivable are shown in the table below:

 

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

 

 

2016

 

2015

Continuing operations:

 

 

 

 

 

 

Patient accounts receivable

 

$

3,568

 

$

3,486

Allowance for doubtful accounts

 

 

(946)

 

 

(887)

Estimated future recoveries

 

 

142

 

 

144

Net cost reports and settlements payable and valuation allowances

 

 

(33)

 

 

(42)

 

 

 

2,731

 

 

2,701

Discontinued operations

 

 

3

 

 

3

Accounts receivable, net 

 

$

2,734

 

$

2,704

 

At June 30, 2016 and December 31, 2015, our allowance for doubtful accounts was 26.5% and 25.4%, respectively, of our patient accounts receivable. Accounts that are pursued for collection through Conifer’s regional business offices are maintained on our hospitals’ books and reflected in patient accounts receivable with an allowance for doubtful accounts established to reduce the carrying value of such receivables to their estimated net realizable value. Generally, we estimate this allowance based on the aging of our accounts receivable by hospital, our historical collection experience by hospital and for each type of payer, and other relevant factors. At June 30, 2016 and December 31, 2015, our allowance for doubtful accounts for self-pay was 82.6% and 80.6%, respectively, of our self-pay patient accounts receivable, including co-pays and deductibles owed by patients with insurance. At June 30, 2016 and December 31, 2015, our allowance for doubtful accounts for managed care was 8.5% and 7.5%, respectively, of our managed care patient accounts receivable.

 

We also provide charity care to patients who are financially unable to pay for the healthcare services they receive. Most patients who qualify for charity care are charged a per-diem amount for services received, subject to a cap. Except for the per-diem amounts, our policy is not to pursue collection of amounts determined to qualify as charity care; 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 disproportionate share hospital (“DSH”) payments. These payments are intended to mitigate our cost of uncompensated care, as well as reduced Medicaid funding levels. The table below shows our estimated costs (based on selected operating expenses, which include salaries, wages and benefits, supplies and other operating expenses) of caring for our self-pay patients and charity care patients, and revenues attributable to Medicaid DSH and other supplemental revenues we recognized in three and six months ended June 30, 2016 and 2015.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended 

 

 

June 30, 

 

June 30, 

 

    

2016

    

2015

    

2016

    

2015

Estimated costs for:

 

 

 

 

 

 

 

 

 

 

 

 

Self-pay patients

 

$

159

 

$

168

 

$

310

 

$

332

Charity care patients

 

$

31

 

$

37

 

$

72

 

$

73

Medicaid DSH and other supplemental revenues

 

$

215

 

$

220

 

$

442

 

$

467

 

At June 30, 2016 and December 31, 2015, we had approximately $494 million and $387 million, respectively, of receivables recorded in other current assets and approximately $191 million and $139 million, respectively, of payables recorded in other current liabilities in the accompanying Condensed Consolidated Balance Sheets related to California’s provider fee program.

 

NOTE 3. ASSETS AND LIABILITIES HELD FOR SALE

 

Our hospitals, physician practices and related assets in Georgia met the criteria to be classified as assets held for sale in the three months ended June 30, 2015. In accordance with the guidance in the Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”) 360, “Property, Plant and Equipment,” we classified $549 million of

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our assets in Georgia as “assets held for sale” in current assets and $101 million of our liabilities in Georgia as “liabilities held for sale” in current liabilities in the accompanying Condensed Consolidated Balance Sheet at December 31, 2015. We completed the sale of our Georgia assets on March 31, 2016 at a transaction price of approximately $575 million and recognized a gain on sale of approximately $113 million. Because we did not sell the related accounts receivable with respect to the pre-closing period, net receivables of approximately $80 million are included in accounts receivable, less allowance for doubtful accounts in the accompanying Condensed Consolidated Balance Sheet at June 30, 2016.

 

 

NOTE 4. IMPAIRMENT AND RESTRUCTURING CHARGES, AND ACQUISITION-RELATED COSTS

 

During the six months ended June 30, 2016, we recorded impairment and restructuring charges and acquisition-related costs of $50 million primarily related to our Hospital Operations and other segment, consisting of approximately $2 million to write-down other intangible assets, $17 million of employee severance costs, $2 million of restructuring costs, $1 million of contract and lease termination fees, and $28 million in acquisition-related costs, which include $3 million of transaction costs and $25 million of acquisition integration charges.

 

During the six months ended June 30, 2015, we recorded impairment and restructuring charges and acquisition-related costs of $222 million, consisting of a $147 million charge to write-down assets held for sale to their estimated fair value, less estimated costs to sell, as a result of us entering into a definitive agreement for the sale of Saint Louis University Hospital in the period, $8 million of employee severance costs, $4 million of restructuring costs, $4 million of contract and lease termination fees, and $59 million in acquisition-related costs, which include $36 million of transaction costs and $23 million of acquisition integration charges.

 

Our impairment tests presume stable, improving or, in some cases, declining operating results in our facilities, which are based on programs and initiatives being implemented that are designed to achieve the facility’s most recent projections. If these projections are not met, or if in the future negative trends occur that impact our future outlook, impairments of long-lived assets and goodwill may occur, and we may incur additional restructuring charges, which could be material.

 

At June 30, 2016, our continuing operations consisted of three reportable segments, Hospital Operations and other, Ambulatory Care and Conifer. Within our Hospital Operations and other segment, our regions and markets are reporting units used to perform our goodwill impairment analysis and are one level below our reportable business segment level. Our Ambulatory Care segment consists of the operations of our USPI joint venture and our Aspen facilities.

 

Our Hospital Operations and other segment was structured as follows at June 30, 2016:

 

·

Our Florida region included all of our hospitals and other operations in Florida;

 

·

Our Northeast region included all of our hospitals and other operations in Illinois, Massachusetts and Pennsylvania;

 

·

Our Southern region included all of our hospitals and other operations in Alabama, South Carolina and Tennessee;

 

·

Our Texas region included all of our hospitals and other operations in Missouri, New Mexico and Texas;

 

·

Our Western region included all of our hospitals and other operations in Arizona and California; and

 

·

Our Detroit market included all of our hospitals and other operations in the Detroit, Michigan area.

 

Effective July 1, 2016, all of our hospitals and other operations in Missouri were transitioned from our Texas region to our Southern region.

 

 

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We periodically incur costs to implement restructuring efforts for specific operations, which are recorded in our statement of operations as they are incurred. Our restructuring plans focus on various aspects of operations, including aligning our operations in the most strategic and cost-effective structure. Certain restructuring and acquisition-related costs are based on estimates. Changes in estimates are recognized as they occur.

 

NOTE 5. LONG-TERM DEBT AND LEASE OBLIGATIONS

 

The table below shows our long-term debt at June 30, 2016 and December 31, 2015:

 

 

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

 

 

 

2016

 

2015

 

Senior notes:

 

 

 

 

 

 

 

5%, due 2019

 

$

1,100

 

$

1,100

 

51/2%, due 2019

 

 

500

 

 

500

 

63/4%, due 2020

 

 

300

 

 

300

 

8%, due 2020

 

 

750

 

 

750

 

81/8%, due 2022

 

 

2,800

 

 

2,800

 

63/4%, due 2023

 

 

1,900

 

 

1,900

 

67/8%, due 2031

 

 

430

 

 

430

 

Senior secured notes:

 

 

 

 

 

 

 

61/4%, due 2018

 

 

1,041

 

 

1,041

 

43/4%, due 2020

 

 

500

 

 

500

 

6%, due 2020

 

 

1,800

 

 

1,800

 

Floating % due 2020

 

 

900

 

 

900

 

41/2%, due 2021

 

 

850

 

 

850

 

43/8%, due 2021

 

 

1,050

 

 

1,050

 

Capital leases and mortgage notes

 

 

821

 

 

852

 

Unamortized issue costs, note discounts and premium

 

 

(241)

 

 

(263)

 

Total long-term debt 

 

 

14,501

 

 

14,510

 

Less current portion

 

 

181

 

 

127

 

Long-term debt, net of current portion 

 

$

14,320

 

$

14,383

 

 

Credit Agreement

 

On December 4, 2015, we entered into an amendment to our existing senior secured revolving credit facility (as amended, “Credit Agreement”) in order to, among other things, extend the scheduled maturity date of the facility, reduce the rates of certain interest and fees payable under the facility, and remove certain restrictions with respect to the borrowing base eligibility of certain accounts receivable. The Credit Agreement provides, subject to borrowing availability, for revolving loans in an aggregate principal amount of up to $1 billion, with a $300 million subfacility for standby letters of credit. The Credit Agreement, which has a scheduled maturity date of December 4, 2020, is collateralized by patient accounts receivable of substantially all of our domestic wholly owned hospitals. In addition, borrowings under the Credit Agreement are guaranteed by substantially all of our wholly owned domestic hospital subsidiaries. Outstanding revolving loans accrue interest at a base rate plus a margin ranging from 0.25% to 0.75% per annum or the London Interbank Offered Rate plus a margin ranging from 1.25% to 1.75% per annum, in each case based on available credit. An unused commitment fee payable on the undrawn portion of the revolving loans ranges from 0.25% to 0.375% per annum based on available credit. Our borrowing availability is based on a specified percentage of eligible accounts receivable, including self-pay accounts. At June 30, 2016, we had no cash borrowings outstanding under the Credit Agreement, and we had approximately $4 million of standby letters of credit outstanding. Based on our eligible receivables, approximately $996 million was available for borrowing under the Credit Agreement at June 30, 2016.

 

Letter of Credit Facility

 

On March 7, 2014, we entered into a letter of credit facility agreement (“LC Facility”) that provides for the issuance of standby and documentary letters of credit (including certain letters of credit issued under our prior credit

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agreement, which we transferred to the LC Facility (the “Preexisting Letters of Credit”)), from time to time, in an aggregate principal amount of up to $180 million (subject to increase to up to $200 million). The LC Facility has a scheduled maturity date of March 7, 2017, and obligations thereunder are guaranteed by and secured by a first priority pledge of the capital stock and other ownership interests of certain of our domestic hospital subsidiaries on an equal ranking basis with our existing senior secured notes.

 

Drawings under any letter of credit issued under the LC Facility (including the Preexisting Letters of Credit) that we have not reimbursed within three business days after notice thereof will accrue interest at a base rate plus a margin equal to 0.875% per annum. An unused commitment fee is payable at an initial rate of 0.50% per annum with a step down to 0.375% per annum based on the secured debt to EBITDA ratio of 3.00 to 1.00. A per annum fee on the aggregate outstanding amount of issued but undrawn letters of credit (including the Preexisting Letters of Credit) will accrue at a rate of 1.875% per annum. An issuance fee equal to 0.125% per annum of the aggregate face amount of each outstanding letter of credit is payable to the account of the issuer of the related letter of credit. At June 30, 2016, we had approximately $132 million of standby letters of credit outstanding under the LC Facility.

 

NOTE 6. GUARANTEES

 

At June 30, 2016, the maximum potential amount of future payments under our income guarantees to certain physicians who agree to relocate and revenue collection guarantees to hospital-based physician groups providing certain services at our hospitals was $83 million. We had a total liability of $72 million recorded for these guarantees included in other current liabilities at June 30, 2016.

 

At June 30, 2016, we also had issued guarantees of the indebtedness and other obligations of our investees to third parties, the maximum potential amount of future payments under which was approximately $32 million. Of the total, $16 million relates to the obligations of consolidated subsidiaries, which obligations are recorded in the accompanying Condensed Consolidated Balance Sheet at June 30, 2016.

 

NOTE 7. EMPLOYEE BENEFIT PLANS

 

At June 30, 2016, approximately 7.0 million shares of common stock were available under our 2008 Stock Incentive Plan for future stock option grants and other incentive awards, including restricted stock units. Options have an exercise price equal to the fair market value of the shares on the date of grant and generally expire 10 years from the date of grant. A restricted stock unit is a contractual right to receive one share of our common stock or the equivalent value in cash in the future. Options and time-based restricted stock units typically vest one-third on each of the first three anniversary dates of the grant; however, certain special retention awards may have longer vesting periods. In addition, we grant performance-based restricted stock units (and, in prior years, have granted performance-based options) that vest subject to the achievement of specified performance goals within a specified timeframe.

 

Our Condensed Consolidated Statements of Operations for the six months ended June 30, 2016 and 2015 include $31 million and $36 million, respectively, of pretax compensation costs related to our stock-based compensation arrangements recorded in salaries, wages and benefits.

 

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Stock Options

 

The following table summarizes stock option activity during the six months ended June 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Weighted Average

    

 

 

    

 

 

 

 

 

 

 

Exercise Price

 

Aggregate

 

Weighted Average

 

 

 

Options

 

Per Share

 

Intrinsic Value

 

Remaining Life

 

 

 

 

 

 

 

 

 

(In Millions)

 

 

 

 

Outstanding at December 31, 2015

 

1,606,842

 

$

22.87

 

 

 

 

 

 

 

Granted

 

 —

 

 

 —

 

 

 

 

 

 

 

Exercised

 

(104,815)

 

 

18.75

 

 

 

 

 

 

 

Forfeited/Expired

 

(53,456)

 

 

20.20

 

 

 

 

 

 

 

Outstanding at June 30, 2016

 

1,448,571

 

 

22.71

 

$

10

 

2.6

years

 

Vested and expected to vest at June 30, 2016

 

1,448,571

 

$

22.71

 

$

10

 

2.6

years

 

Exercisable at June 30, 2016

 

1,448,571

 

$

22.71

 

$

10

 

2.6

years

 

 

There were 104,815 stock options exercised during the six months ended June 30, 2016 with an aggregate intrinsic value of approximately $1 million, and 122,212 stock options exercised during the same period in 2015 with an aggregate intrinsic value of approximately $2 million.

 

At June 30, 2016, there were no unrecognized compensation costs related to stock options. Also, there were no stock options granted in the six months ended June 30, 2016 or 2015.

 

The following table summarizes information about our outstanding stock options at June 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options Outstanding

 

Options Exercisable

 

 

    

 

    

Weighted Average

    

 

 

    

 

    

 

 

 

 

 

Number of

 

Remaining

 

Weighted Average

 

Number of

 

Weighted Average

 

Range of Exercise Prices 

 

Options

 

Contractual Life

 

Exercise Price

 

Options

 

Exercise Price

 

$0.00 to $4.569

 

184,869

 

2.7

years

 

$

4.56

 

184,869

 

$

4.56

 

$4.57 to $25.089

 

827,315

 

3.3

years

 

 

20.85

 

827,315

 

 

20.85

 

$25.09 to $32.569

 

182,000

 

0.7

years

 

 

26.40

 

182,000

 

 

26.40

 

$32.57 to $42.529

 

254,387

 

1.7

years

 

 

39.31

 

254,387

 

 

39.31

 

 

 

1,448,571

 

2.6

years

 

$

22.71

 

1,448,571

 

$

22.71

 

 

Restricted Stock Units

 

The following table summarizes restricted stock unit activity during the six months ended June 30, 2016:

 

 

 

 

 

 

 

 

 

    

Restricted Stock

    

Weighted Average Grant

 

 

 

Units

 

Date Fair Value Per Unit

 

Unvested at December 31, 2015

 

3,627,232

 

$

44.69

 

Granted

 

1,584,063

 

 

30.43

 

Vested

 

(1,509,428)

 

 

43.18

 

Forfeited

 

(316,716)

 

 

33.85

 

Unvested at June 30, 2016

 

3,385,151

 

$

36.82

 

 

In the six months ended June 30, 2016, we granted 717,277 restricted stock units subject to time-vesting, of which 484,295 will vest and be settled ratably over a three-year period from the grant date, 57,139 will vest and be settled on the third anniversary of the grant date, and 175,843 will vest and be settled on the fifth anniversary of the grant date. In addition, in May 2016, we made an annual grant of 90,105 restricted stock units to our non-employee directors for the 2016-2017 board service year, which units vested immediately and will settle in shares of our common stock on the third anniversary of the date of the grant. In January 2016, following the appointment of two new members of our Board of Directors, we also made initial grants totaling 5,084 restricted stock units to these directors, as well as prorated annual grants totaling 5,614 restricted stock units. Both the initial grants and the annual grants vested immediately, however the initial grants will not settle until the directors’ separation from the Board, while the annual grants settle on the third

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anniversary of the grant date. In addition, we granted 474,443 performance-based restricted stock units to certain of our senior officers; the vesting of these restricted stock units is contingent on our achievement of specified three-year performance goals for the years 2016 to 2018. Provided the goals are achieved, the performance-based restricted stock units will vest and settle on the third anniversary of the grant date. The actual number of performance-based restricted stock units that could vest will range from 0% to 200% of the 474,443 units granted, depending on our level of achievement with respect to the performance goals. Moreover, in the six months ended June 30, 2016, we granted 291,540 restricted stock units as a result of our level of achievement with respect to prior-year target performance goals.

 

At June 30, 2016, there were $99 million of total unrecognized compensation costs related to restricted stock units. These costs are expected to be recognized over a weighted average period of 2.2 years.

 

NOTE 8. EQUITY

 

Changes in Shareholders’ Equity

 

The following table shows the changes in consolidated equity during the six months ended June 30, 2016 (dollars in millions, share amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tenet Healthcare Corporation Shareholders’ Equity

 

 

 

 

 

 

 

   

 

   

 

 

   

 

 

   

Accumulated

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Common Stock

 

Additional

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

Issued Par

 

Paid-in

 

Comprehensive

 

Accumulated

 

Treasury

 

Noncontrolling

 

 

 

 

 

Outstanding

 

Amount

 

Capital

 

Loss

 

Deficit

 

Stock

 

Interests

 

Total Equity

Balances at December 31, 2015

 

98,495

 

$

7

 

$

4,815

 

$

(164)

 

$

(1,550)

 

$

(2,417)

 

$

267

 

$

958

Net income (loss)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(105)

 

 

 —

 

 

62

 

 

(43)

Distributions paid to noncontrolling interests

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(51)

 

 

(51)

Other comprehensive loss

 

 —

 

 

 —

 

 

 —

 

 

(39)

 

 

 —

 

 

 —

 

 

 —

 

 

(39)

Purchases (sales) of businesses and noncontrolling interests

 

 —

 

 

 —

 

 

(36)

 

 

 —

 

 

 —

 

 

 —

 

 

114

 

 

78

Purchase accounting adjustments

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

237

 

 

237

Stock-based compensation expense, tax benefit and issuance of common stock

 

1,021

 

 

 —

 

 

12

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

12

Balances at June 30, 2016

 

99,516

 

$

7

 

$

4,791

 

$

(203)

 

$

(1,655)

 

$

(2,417)

 

$

629

 

$

1,152

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2014

 

98,382

 

$

7

 

$

4,614

 

$

(182)

 

$

(1,410)

 

$

(2,378)

 

$

134

 

$

785

Net income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(14)

 

 

 —

 

 

20

 

 

6

Distributions paid to noncontrolling interests

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(20)

 

 

(20)

Contributions from noncontrolling interests

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1

 

 

1

Other comprehensive income

 

 —

 

 

 —

 

 

 —

 

 

5

 

 

 —

 

 

 —

 

 

 —

 

 

5

Purchases (sales) of businesses and noncontrolling interests

 

 —

 

 

 —

 

 

130

 

 

 —

 

 

 —

 

 

 —

 

 

80

 

 

210

Stock-based compensation expense and issuance of common stock

 

933

 

 

 —

 

 

30

 

 

 —

 

 

 —

 

 

1

 

 

 —

 

 

31

Balances at June 30, 2015

 

99,315

 

$

7

 

$

4,774

 

$

(177)

 

$

(1,424)

 

$

(2,377)

 

$

215

 

$

1,018

 

 

 

 

 

 

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NOTE 9. PROPERTY AND PROFESSIONAL AND GENERAL LIABILITY INSURANCE

 

Property Insurance

 

We have property, business interruption and related insurance coverage to mitigate the financial impact of catastrophic events or perils that is subject to deductible provisions based on the terms of the policies. These policies are on an occurrence basis.

 

Professional and General Liability Reserves

 

At June 30, 2016 and December 31, 2015, the aggregate current and long-term professional and general liability reserves in our accompanying Condensed Consolidated Balance Sheets were approximately $792 million and $755 million, respectively. These reserves include the reserves recorded by our captive insurance subsidiaries and our self-insured retention reserves recorded based on modeled estimates for the portion of our professional and general liability risks, including incurred but not reported claims, for which we do not have insurance coverage. We estimated the reserves for losses and related expenses using expected loss-reporting patterns discounted to their present value under a risk-free rate approach using a Federal Reserve seven-year maturity rate of 1.29% at June 30, 2016 and 2.09% at December 31, 2015.

 

If the aggregate limit of any of our professional and general liability policies is exhausted, in whole or in part, it could deplete or reduce the limits available to pay any other material claims applicable to that policy period.

 

Included in other operating expenses, net, in the accompanying Condensed Consolidated Statements of Operations is malpractice expense of $164 million and $147 million for the six months ended June 30, 2016 and 2015, respectively.

 

NOTE 10. CLAIMS AND LAWSUITS

 

We operate in a highly regulated and litigious industry. As a result, we commonly become involved in disputes, litigation and regulatory matters incidental to our operations, including governmental investigations, personal injury lawsuits, employment claims and other matters arising out of the normal conduct of our business.

 

We record accruals for estimated losses relating to claims and lawsuits when available information indicates that a loss is probable and we can reasonably estimate the amount of the loss or a range of loss. Significant judgment is required in both the determination of the probability of a loss and the determination as to whether a loss is reasonably estimable. These determinations are updated at least quarterly and are adjusted to reflect the effects of negotiations, settlements, rulings, advice of legal counsel and technical experts, and other information and events pertaining to a particular matter. If a loss on a material matter is reasonably possible and estimable, we disclose an estimate of the loss or a range of loss. In cases where we have not disclosed an estimate, we have concluded that the loss is either not reasonably possible or the loss, or a range of loss, is not reasonably estimable, based on available information.

 

Governmental Reviews and Lawsuits

 

Healthcare companies are subject to numerous investigations by various governmental agencies. Further, private parties have the right to bring qui tam or “whistleblower” lawsuits against companies that allegedly submit false claims for payments to, or improperly retain overpayments from, the government and, in some states, private payers. We and our subsidiaries have received inquiries in recent years from government agencies, and we may receive similar inquiries in future periods. The following matters are pending.

 

·

Clinica de la Mama Qui Tam Action and Criminal Investigation—The Company believes that it has reached an agreement in principle with the U.S. Department of Justice (“DOJ”), the U.S. Attorneys’ Offices for the Northern and Middle Districts of Georgia, and the Georgia Attorney General’s Office to resolve the civil qui tam litigation (United States of America, ex rel. Ralph D. Williams v. Health Management Associates, Inc., et al.) pending in the U.S. District Court for the Middle District of Georgia and the parallel criminal investigation of the Company and certain of its subsidiaries being conducted by the DOJ and the

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U.S. Attorney’s Office for the Northern District of Georgia (collectively, the “Clinica de la Mama matters”). The agreement in principle contemplates, among other things, payment by the Company of $513,788,345, which is comprised of a civil monetary payment of $368,000,000 and a criminal monetary payment of $145,788,345. Based on the agreement in principle, we have increased our reserve relating to the Clinica de la Mama matters from $407 million to $516 million to reflect the monetary payments and certain other costs to be paid by us.

 

In addition to the monetary component, the agreement in principle contemplates that: (i) Tenet HealthSystem Medical, Inc. (“THSM”), an indirect, wholly owned subsidiary of the Company, will enter into a Non-Prosecution Agreement with the DOJ; (ii) the DOJ will appoint a corporate monitor for a period of three years to assess the Company’s compliance with the federal anti-kickback and Stark laws; and (iii) our two indirect, wholly owned subsidiaries that previously operated Atlanta Medical Center and North Fulton Hospital, and which currently have no operating assets, will agree to plead guilty under 18 U.S.C. § 371 to a single count of conspiracy to violate the federal anti-kickback statute and defraud the United States. The agreement in principle also contemplates that the Company will enter into a Corporate Integrity Agreement with the Office of Inspector General of the U.S. Department of Health and Human Services. Based on discussions with the government, and assuming definitive agreements are reached as contemplated by the agreement in principle, none of our operating facilities will be subject to exclusion from participation in federal healthcare programs or payment suspension as a result of the Clinica de la Mama matters.

 

The implementation of the agreement in principle is subject to the negotiation and approval of definitive agreements and the court’s acceptance of the plea agreements, which we believe will be completed in the three months ending September 30, 2016. We expect the civil monetary payment and the criminal monetary payment will be due shortly after sentencing, which we believe will take place in the three months ending September 30, 2016. We expect to fund the payments through general corporate sources of liquidity, including cash on the balance sheet and borrowings under our revolving credit facility.

 

Although we believe we will reach a final resolution of the Clinica de la Mama matters, there can be no assurance that such a resolution will be reached or that the court will accept the pleas. If a resolution is not reached or approved, or if the terms of the final resolution are materially different than the agreement in principle, the eventual loss related to these matters could materially exceed the amount reserved and could have a material adverse effect on our business, financial condition, results of operations or cash flows.

 

As previously disclosed, the Clinica de la Mama matters relate to contracts that were in effect for various periods from 2000 to 2013 between four hospitals owned by THSM (Atlanta Medical Center, North Fulton Hospital, Spalding Regional Medical Center and Hilton Head Hospital) and Hispanic Medical Management, Inc. Although our Georgia hospitals have been sold, we have retained any potential liabilities arising from the Clinica de la Mama matters.

 

For additional information regarding the Clinica de la Mama matters, reference is made to Note 10 to our Condensed Consolidated Financial Statements in our Quarterly Report on Form 10-Q for the quarterly period ended March 30, 2016 and Note 15 to our Consolidated Financial Statements in our Annual Report.

 

Antitrust Class Action Lawsuit Filed by Registered Nurses in San Antonio

 

In Maderazo, et al. v. VHS San Antonio Partners, L.P. d/b/a Baptist Health Systems, et al., filed in June 2006 in the U.S. District Court for the Western District of Texas, a purported class of registered nurses employed by three unaffiliated San Antonio-area hospital systems allege those hospital systems, including Baptist Health System, and other unidentified San Antonio regional hospitals violated Section §1 of the federal Sherman Act by conspiring to depress nurses’ compensation and exchanging compensation-related information among themselves in a manner that reduced competition and suppressed the wages paid to such nurses. The suit seeks unspecified damages (subject to trebling under federal law), interest, costs and attorneys’ fees. The case had been stayed since 2008; however, in July 2015, the court lifted the stay and re-opened discovery. We will continue to seek to defeat class certification and vigorously defend ourselves against the plaintiffs’ allegations. Because these proceedings remain at an early stage, it is impossible at this time to predict their

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outcome with any certainty; however, we believe that the ultimate resolution of this matter will not have a material effect on our business, financial condition or results of operations.

 

Ordinary Course Matters

 

We are also subject to other claims and lawsuits arising in the ordinary course of business, including potential claims related to, among other things, the care and treatment provided at our hospitals and outpatient facilities, the application of various federal and state labor laws, tax audits and other matters. Although the results of these claims and lawsuits cannot be predicted with certainty, we believe that the ultimate resolution of these ordinary course claims and lawsuits will not have a material effect on our business or financial condition.

 

New claims or inquiries may be initiated against us from time to time. These matters could (1) require us to pay substantial damages or amounts in judgments or settlements, which, individually or in the aggregate, could exceed amounts, if any, that may be recovered under our insurance policies where coverage applies and is available, (2) cause us to incur substantial expenses, (3) require significant time and attention from our management, and (4) cause us to close or sell hospitals or otherwise modify the way we conduct business.

 

The table below presents reconciliations of the beginning and ending liability balances in connection with legal settlements and related costs recorded during the six months ended June 30, 2016 and 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

Balances at

   

Litigation and

   

 

 

   

 

 

   

Balances at

 

 

 

Beginning

 

Investigation

 

Cash

 

 

 

End of

 

 

 

of Period

 

Costs

 

Payments

 

Other

 

Period

 

Six Months Ended June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

299

 

$

287

 

$

(57)

 

$

 —

 

$

529

 

Discontinued operations

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

$

299

 

$

287

 

$

(57)

 

$

 —

 

$

529

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

73

 

$

17

 

$

(27)

 

$

3

 

$

66

 

Discontinued operations

 

 

10

 

 

(3)

 

 

(1)

 

 

 —

 

 

6

 

 

 

$

83

 

$

14

 

$

(28)

 

$

3

 

$

72

 

 

For the six months ended June 30, 2016 and 2015, we recorded costs of $287 million and $17 million, respectively, in continuing operations in connection with significant legal proceedings and governmental reviews. During the six months ended June 30, 2015, we reduced a previously established reserve for a legal matter in discontinued operations by approximately $3 million based on updated claims information.

 

 

NOTE 11. REDEEMABLE NONCONTROLLING INTERESTS IN EQUITY OF CONSOLIDATED SUBSIDIARIES

 

As previously disclosed, as part of the formation of our USPI joint venture in 2015, we entered into a put/call agreement (the “Put/Call Agreement”) with respect to the equity interests in the joint venture held by our joint venture partners. Each year starting in 2016, our joint venture partners must put to us at least 12.5%, and may put up to 25%, of the equity held by them in the joint venture immediately after the closing. In January 2016, Welsh, Carson, Anderson & Stowe, on behalf of our joint venture partners, delivered a put notice for the minimum number of shares they are required to put to us in 2016 according to the Put/Call Agreement. In April 2016, we paid approximately $127 million to purchase these shares, which increased our ownership interest in the USPI joint venture to approximately 56.3%.

 

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The following table shows the changes in redeemable noncontrolling interests in equity of consolidated subsidiaries during the six months ended June 30, 2016 and 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended 

 

 

June 30, 

 

    

2016

    

2015

Balances at beginning of period 

 

$

2,266

 

$

401

Net income

 

 

116

 

 

42

Distributions paid to noncontrolling interests

 

 

(44)

 

 

(3)

Purchase accounting adjustments

 

 

(47)

 

 

 —

Purchases and sales of businesses and noncontrolling interests, net

 

 

(16)

 

 

1,151

Balances at end of period 

 

$

2,275

 

$

1,591

 

 

NOTE 12. INCOME TAXES

 

During the six months ended June 30, 2016, we recorded income tax expense of $51 million in continuing operations on pre-tax earnings of $130 million. The recorded income tax differs from taxes calculated at the statutory rate primarily due to state income tax expense of approximately $7 million, tax benefits of $47 million related to net income attributable to noncontrolling partnership interests, which is excluded from the computation of the provision for income taxes, tax expense of $29 million related to nondeductible goodwill, tax benefits of $17 million related to nontaxable gains and related changes in deferred taxes, and tax expense of $33 million related to nondeductible litigation.

 

During the six months ended June 30, 2016, we decreased our estimated liabilities for uncertain tax positions by $3 million, net of related deferred tax assets. The total amount of unrecognized tax benefits at June 30, 2016 was $37 million, of which $34 million, if recognized, would impact our effective tax rate and income tax expense (benefit) from continuing operations.

 

Our practice is to recognize interest and penalties related to income tax matters in income tax expense in our consolidated statements of operations. Total accrued interest and penalties on unrecognized tax benefits at June 30, 2016 were $5 million, all of which related to continuing operations.

 

At June 30, 2016, approximately $6 million of unrecognized federal and state tax benefits, as well as reserves for interest and penalties, may decrease in the next 12 months as a result of the settlement of audits, the filing of amended tax returns or the expiration of statutes of limitations.

 

NOTE 13. LOSS PER COMMON SHARE

 

The following table is a reconciliation of the numerators and denominators of our basic and diluted loss per common share calculations for our continuing operations for three and six months ended June 30, 2016 and 2015. Loss attributable to our common shareholders is expressed in millions and weighted average shares are expressed in thousands.

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Loss Attributable

 

 

 

 

 

 

 

 

to Common

 

Weighted

 

 

 

 

 

 

Shareholders

 

Average Shares

 

Per-Share

 

 

 

(Numerator)

 

(Denominator)

 

Amount

 

Three Months Ended June 30, 2016

 

 

 

 

 

 

 

 

 

Net loss attributable to Tenet Healthcare Corporation common shareholders for basic loss per share

 

$

(44)

 

99,341

 

$

(0.44)

 

Effect of dilutive stock options, restricted stock units and deferred compensation units

 

 

 —

 

 —

 

 

 —

 

Net loss attributable to Tenet Healthcare Corporation common shareholders for diluted loss per share

 

$

(44)

 

99,341

 

$

(0.44)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2015

 

 

 

 

 

 

 

 

 

Net loss attributable to Tenet Healthcare Corporation common shareholders for basic loss per share

 

$

(60)

 

99,244

 

$

(0.60)

 

Effect of dilutive stock options, restricted stock units and deferred compensation units

 

 

 —

 

 —

 

 

 —

 

Net loss attributable to Tenet Healthcare Corporation common shareholders for diluted loss per share

 

$

(60)

 

99,244

 

$

(0.60)

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2016

 

 

 

 

 

 

 

 

 

Net loss attributable to Tenet Healthcare Corporation common shareholders for basic loss per share

 

$

(99)

 

99,054

 

$

(1.00)

 

Effect of dilutive stock options, restricted stock units and deferred compensation units

 

 

 —

 

 —

 

 

 —

 

Net loss attributable to Tenet Healthcare Corporation common shareholders for diluted loss per share

 

$

(99)

 

99,054

 

$

(1.00)

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2015

 

 

 

 

 

 

 

 

 

Net loss attributable to Tenet Healthcare Corporation common shareholders for basic loss per share

 

$

(14)

 

98,972

 

$

(0.14)

 

Effect of dilutive stock options, restricted stock units and deferred compensation units

 

 

 —

 

 —

 

 

 —

 

Net loss attributable to Tenet Healthcare Corporation common shareholders for diluted loss per share

 

$

(14)

 

98,972

 

$

(0.14)

 

 

All potentially dilutive securities were excluded from the calculation of diluted loss per share for the three and six months ended June 30, 2016 and 2015 because we did not report income from continuing operations available to common shareholders in those periods. In circumstances where we do not have income from continuing operations available to common shareholders, the effect of stock options and other potentially dilutive securities is anti-dilutive, that is, a loss from continuing operations attributable to common shareholders has the effect of making the diluted loss per share less than the basic loss per share. Had we generated income from continuing operations available to common shareholders in the three and six months ended June 30, 2016 and 2015, the effect (in thousands) of employee stock options, restricted stock units and deferred compensation units on the diluted shares calculation would have been an increase in shares of  1,386 and 1,477 for the three and six months ended June 30, 2016, respectively, and 2,673 and 2,423 for the three and six months ended June 30, 2015, respectively.

 

 

NOTE 14. FAIR VALUE MEASUREMENTS

 

Our financial assets and liabilities recorded at fair value on a recurring basis primarily relate to investments in available-for-sale securities held by our captive insurance subsidiaries. The following tables present information about our assets and liabilities that are measured at fair value on a recurring basis. The following tables also indicate the fair value hierarchy of the valuation techniques we utilized to determine such fair values. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. We consider a security that trades at least weekly to have an active market. Fair values determined by Level 2 inputs utilize data points

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that are observable, such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs are

unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Quoted Prices

    

 

 

    

 

 

 

 

 

 

 

 in Active

 

 

 

 

Significant

 

 

 

 

 

Markets for

 

Significant Other

 

Unobservable

 

 

 

 

 

Identical Assets

 

Observable Inputs

 

Inputs

Investments

 

June 30, 2016

 

(Level 1)

 

(Level 2)

 

(Level 3)

Marketable debt securities — noncurrent

 

$

63

 

$

25

 

$

38

 

$

 —

 

 

$

63

 

$

25

 

$

38

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Quoted Prices

    

 

 

    

 

 

 

 

 

 

 

 

 in Active

 

 

 

 

Significant

 

 

 

 

 

 

Markets for

 

Significant Other

 

Unobservable

 

 

 

 

 

 

Identical Assets

 

Observable Inputs

 

Inputs

 

Investments

 

December 31, 2015

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Marketable debt securities — noncurrent

 

$

59

 

$

24

 

$

35

 

$

 —

 

 

 

$

59

 

$

24

 

$

35

 

$

 —

 

 

The fair value of our long-term debt (except for borrowings under the Credit Agreement) is based on quoted market prices (Level 1). The inputs used to establish the fair value of the borrowings outstanding under the Credit Agreement are considered to be Level 2 inputs, which include inputs other than quoted prices included in Level 1 that are observable, either directly or indirectly. At June 30, 2016 and December 31, 2015, the estimated fair value of our long-term debt was approximately 95.6% and 96.2%, respectively, of the carrying value of the debt. 

 

NOTE 15. ACQUISITIONS

 

Preliminary purchase price allocations (representing the fair value of the consideration conveyed) for all acquisitions made during the six months ended June 30, 2016 are as follows:

 

 

 

 

 

 

Current assets

    

$

41

    

Property and equipment

 

 

31

 

Other intangible assets

 

 

6

 

Goodwill

 

 

314

 

Other long-term assets

 

 

6

 

Current liabilities

 

 

(23)

 

Other long-term liabilities

 

 

(16)

 

Redeemable noncontrolling interests in equity of consolidated subsidiaries

 

 

(114)

 

Noncontrolling interests

 

 

(122)

 

Cash paid, net of cash acquired

 

 

(94)

 

Gains on consolidations

 

$

29

 

 

The goodwill generated from these transactions, the majority of which will not be deductible for income tax purposes, can be attributed to the benefits that we expect to realize from operating efficiencies and growth strategies. Of the total $314 million of goodwill recorded for acquisitions completed during the six months ended June 30, 2016, $190 million was recorded in our Hospital Operations and other segment, and $124 million was recorded in our Ambulatory Care segment. Approximately $3 million in transaction costs related to prospective and closed acquisitions were expensed during the six months ended June 30, 2016, and are included in impairment and restructuring charges, and acquisition-related costs in the accompanying Condensed Consolidated Statement of Operations.

 

We are required to allocate the purchase prices of acquired businesses to assets acquired or liabilities assumed and, if applicable, noncontrolling interests based on their fair values. The excess of the purchase price allocation over those fair values is recorded as goodwill. We are in process of finalizing the purchase price allocations, including valuations of the acquired property and equipment, other intangible assets and noncontrolling interests for some of our

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2016 and 2015 acquisitions; therefore, those purchase price allocations are subject to adjustment once the valuations are completed.

 

During the six months ended June 30, 2016,  we recognized gains totaling $29 million, associated with stepping up our ownership interests in previously held equity investments, which we began consolidating after we acquired controlling interests.

 

USPI Joint Venture and Acquisition of Aspen

 

Effective June 16, 2015, we combined our freestanding ambulatory surgery and imaging center assets with the short-stay surgical facility assets of United Surgical Partners International, Inc. (“USPI”) into the USPI joint venture. We refinanced approximately $1.5 billion of existing USPI debt, which was allocated to the joint venture through an intercompany loan, and paid approximately $424 million to align the respective valuations of the assets contributed to the joint venture. We also completed the Aspen acquisition for approximately $226 million.

 

The final purchase price allocations for our USPI joint venture and Aspen acquisition are as follows:

 

 

 

 

 

Current assets

    

$

234

Property and equipment

 

 

554

Other intangible assets

 

 

539

Goodwill

 

 

2,794

Other long-term assets

 

 

813

Current liabilities

 

 

(326)

Deferred taxes — long term

 

 

(335)

Other long-term liabilities

 

 

(1,969)

Redeemable noncontrolling interests in equity of consolidated subsidiaries

 

 

(1,481)

Noncontrolling interests

 

 

(257)

Cash paid, net of cash acquired

 

$

566

 

Pro Forma Information – Unaudited

 

The following table provides 2016 actual results compared to 2015 pro forma information for Tenet as if the USPI joint venture and Aspen acquisition had occurred at the beginning of the year ended December 31, 2015. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended 

 

    

June 30,

    

June 30,

    

 

 

2016

 

2015

 

2016

 

2015

 

Net operating revenues

 

$

4,868

 

$

4,671

 

$

9,912

 

$

9,300

 

Equity in earnings of unconsolidated affiliates

 

$

30

 

$

38

 

$

54

 

$

63

 

Net loss attributable to common shareholders

 

$

(46)

 

$

(73)

 

$

(105)

 

$

(45)

 

Net loss per share attributable to common shareholders

 

$

(0.46)

 

$

(0.74)

 

$

(1.06)

 

$

(0.46)

 

 

 

NOTE 16. SEGMENT INFORMATION

 

Our business consists of our Hospital Operations and other segment, our Ambulatory Care segment and our Conifer segment. The factors for determining the reportable segments include the manner in which management evaluates operating performance combined with the nature of the individual business activities.

 

Our core business is Hospital Operations and other, which is focused on operating acute care hospitals, ancillary outpatient facilities, freestanding emergency departments, physician practices and health plans. We also own various related healthcare businesses. At June 30, 2016, our subsidiaries operated 79 hospitals, with a total of 20,380 licensed beds, primarily serving urban and suburban communities in 12 states, and six health plans, as well as hospital-based outpatient centers, freestanding emergency departments and freestanding urgent care centers.

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Our Ambulatory Care segment is comprised of the operations of our USPI joint venture and our nine Aspen facilities in the United Kingdom. At June 30, 2016, our USPI joint venture had interests in 250 ambulatory surgery centers, 34 urgent care centers, 21 imaging centers and 20 short-stay surgical hospitals in 28 states.

 

Our Conifer segment provides healthcare business process services in the areas of revenue cycle management and technology-enabled performance improvement and health management solutions to health systems, as well as individual hospitals, physician practices, self-insured organizations, health plans and other entities. At June 30, 2016, Conifer provided services to more than 800 Tenet and non-Tenet hospitals and other clients nationwide. Our Conifer subsidiary and our Hospital Operations and other segment entered into formal agreements documenting terms and conditions of various services provided by Conifer to Tenet hospitals, as well as certain administrative services provided by our Hospital Operations and other segment to Conifer. The services provided by both parties under these agreements are charged to the other party based on estimated third-party pricing terms.

 

The following tables include amounts for each of our reportable segments and the reconciling items necessary to agree to amounts reported in the accompanying Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Operations:

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31,

 

 

    

2016

    

2015

    

Assets:

 

 

 

 

 

 

 

Hospital Operations and other

 

$

17,412

 

$

17,353

 

Ambulatory Care

 

 

5,673

 

 

5,159

 

Conifer

 

 

1,155

 

 

1,170

 

Total 

 

$

24,240

 

$

23,682

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Three Months Ended 

 

Six Months Ended 

 

 

June 30, 

 

June 30, 

 

    

2016

    

2015

    

2016

    

2015

Capital expenditures:

 

 

 

 

 

 

 

 

 

 

 

 

Hospital Operations and other

 

$

184

 

$

166

 

$

375

 

$

341

Ambulatory Care

 

 

16

 

 

3

 

 

28

 

 

7

Conifer

 

 

5

 

 

6

 

 

10

 

 

11

Total 

 

$

205

 

$

175

 

$

413

 

$

359

 

 

 

 

 

 

 

 

 

 

 

 

 

Net operating revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Hospital Operations and other

 

$

4,202

 

$

4,175

 

$

8,599

 

$

8,326

Ambulatory Care

 

 

442

 

 

142

 

 

871

 

 

233

Conifer

 

 

 

 

 

 

 

 

 

 

 

 

Tenet

 

 

162

 

 

165

 

 

329

 

 

325

Other customers

 

 

224

 

 

175

 

 

442

 

 

357

Total Conifer revenues

 

 

386

 

 

340

 

 

771

 

 

682

Intercompany eliminations

 

 

(162)

 

 

(165)

 

 

(329)

 

 

(325)

Total 

 

$

4,868

 

$

4,492

 

$

9,912

 

$

8,916

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of unconsolidated affiliates:

 

 

 

 

 

 

 

 

 

 

 

 

Hospital Operations and other

 

$

4

 

$

10

 

$

3

 

$

14

Ambulatory Care

 

 

26

 

 

6

 

 

51

 

 

6

Total 

 

$

30

 

$

16

 

$

54

 

$

20

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA:

 

 

 

 

 

 

 

 

 

 

 

 

Hospital Operations and other

 

$

415

 

$

459

 

$

829

 

$

877

Ambulatory Care

 

 

139

 

 

49

 

 

275

 

 

78

Conifer

 

 

63

 

 

60

 

 

126

 

 

142

Total 

 

$

617

 

$

568

 

$

1,230

 

$

1,097

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization:

 

 

 

 

 

 

 

 

 

 

 

 

Hospital Operations and other

 

$

181

 

$

178

 

$

355

 

$

369

Ambulatory Care

 

 

22

 

 

7

 

 

47

 

 

11

Conifer

 

 

12

 

 

12

 

 

25

 

 

24

Total 

 

$

215

 

$

197

 

$

427

 

$

404

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA 

 

$

617

 

$

568

 

$

1,230

 

$

1,097

Depreciation and amortization

 

 

(215)

 

 

(197)

 

 

(427)

 

 

(404)

Impairment and restructuring charges, and acquisition-related costs

 

 

(22)

 

 

(193)

 

 

(50)

 

 

(222)

Litigation and investigation costs

 

 

(114)

 

 

(14)

 

 

(287)

 

 

(17)

Interest expense

 

 

(244)

 

 

(217)

 

 

(487)

 

 

(416)

Investment earnings (losses)

 

 

2

 

 

(1)

 

 

3

 

 

(1)

Gains on sales, consolidation and deconsolidation of facilities

 

 

1

 

 

 —

 

 

148

 

 

 —

Net income (loss) from continuing operations before income taxes

 

$

25

 

$

(54)

 

$

130

 

$

37

 

 

 

 

 

 

NOTE 17. RECENT ACCOUNTING STANDARDS

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which affects any entity that enters into a lease (as that term is defined in ASU 2016-02), with some specified scope exceptions. The main difference between the guidance in ASU 2016-02 and previous GAAP is the recognition of lease assets and lease liabilities by lessees for those leases

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classified as operating leases under current GAAP. We are currently evaluating the potential impact of this guidance, which will be effective for us beginning in 2019.

 

In March 2016, the FASB issued ASU 2016-09, “Compensation—Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”), which affects all entities that issue share-based payment awards to their employees. The guidance in ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Some of the areas of simplification apply only to nonpublic entities. We are currently evaluating the potential impact of this guidance, which will be effective for us beginning in 2017.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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. Our core business is our Hospital Operations and other segment, which is focused on operating acute care hospitals, ancillary outpatient facilities, freestanding emergency departments, physician practices and health plans. Our Ambulatory Care segment is comprised of the operations of our USPI Holding Company, Inc. (“USPI joint venture”), in which we acquired a majority interest on June 16, 2015, and European Surgical Partners Limited (“Aspen”) facilities, which we also acquired on June 16, 2015. At June 30, 2016, our USPI joint venture had interests in 250 ambulatory surgery centers, 34 urgent care centers, 21 imaging centers and 20 short-stay surgical hospitals in 28 states, and Aspen operated nine private hospitals and clinics in the United Kingdom. Our Conifer segment provides healthcare business process services in the areas of revenue cycle management and technology-enabled performance improvement and health management solutions to health systems, as well as individual hospitals, physician practices, self-insured organizations, health plans and other entities, through our Conifer Holdings, Inc. (“Conifer”) subsidiary. 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

·

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 share, per admission, per adjusted admission, per patient day, per adjusted patient day, per visit and per case amounts). Continuing operations information includes the results of (i) our same 67 hospitals and six health plans operated throughout the six months ended June 30, 2016 and 2015, (ii) our USPI joint venture, in which we acquired a majority interest on June 16, 2015, (iii) Aspen, which we also acquired on June 16, 2015, (iv) Hi-Desert Medical Center, which we began operating on July 15, 2015, (v) our Carondelet Heath Network joint venture, in which we acquired a majority interest on August 31, 2015, (vi) Saint Louis University Hospital (“SLUH”), which we divested on August 31, 2015, (vii) our joint venture with Baptist Health System, Inc., which we formed on October 2, 2015, (viii) DMC Surgery Hospital, which we closed in October 2015, (ix) our two North Carolina hospitals, which we divested effective January 1, 2016, (x) our four North Texas hospitals in which we divested a controlling interest effective January 1, 2016, but continue to operate, and (xi) our five Georgia hospitals, which we divested effective April 1, 2016, in each case only for the period from acquisition, or commencement of operations of the facility, as the case may be, to June 30, 2016 and 2015 or to the date of divestiture, as applicable. Continuing operations information excludes the results of our hospitals and other businesses that have been classified as discontinued operations for accounting purposes. Certain previously reported information, primarily related to our freestanding ambulatory surgery and imaging center assets that were contributed to the USPI joint venture, has been reclassified to conform to the current-year presentation. These outpatient facilities were formerly part of our Hospital Operations and other segment, but are now reported as part of our Ambulatory Care segment.  

 

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MANAGEMENT OVERVIEW

 

RECENT DEVELOPMENTS

 

Update on Clinica de la Mama Matters—The Company believes that it has reached an agreement in principle with the U.S. Department of Justice, the U.S. Attorneys’ Offices for the Northern and Middle Districts of Georgia, and the Georgia Attorney General’s Office to resolve a previously disclosed civil qui tam case and parallel criminal investigation of the Company and certain of its subsidiaries (collectively, the “Clinica de la Mama matters”) for $514 million. In addition to the monetary component, the agreement in principle contemplates, among other things: (i) the execution of a Non-Prosecution Agreement, which includes the appointment of a corporate monitor for a period of three years; (ii) the agreement of the two indirect, wholly owned subsidiaries that previously operated Atlanta Medical Center and North Fulton Hospital, and which currently have no operating assets, to plead guilty to a single count of conspiracy to violate the federal anti-kickback statute and defraud the United States; and (iii) the execution of a corporate integrity agreement. The final resolution is subject to the negotiation and execution of definitive agreements, which we believe will be completed in the three months ending September 30, 2016. For additional information regarding these and other terms of the agreement in principle, see Note 10 to the Condensed Consolidated Financial Statements.

 

STRATEGIES AND TRENDS

 

We are committed to providing the communities we serve with high quality, cost-effective healthcare while growing our business, increasing our profitability and creating long-term value for our shareholders. We believe that our success in increasing our profitability depends in part on our success in executing the strategies and managing the trends discussed below.

 

Core Business StrategyWe are focused on providing high quality care to patients through our hospitals and outpatient centers, and offering an array of business process solutions primarily to healthcare providers through Conifer. With respect to our hospitals, ambulatory care centers and other outpatient businesses, we seek to offer superior quality and patient services to meet community needs, to make capital and other investments in our facilities and technology, to recruit and retain physicians, and to negotiate competitive contracts with managed care and other private payers. With respect to business process services, we provide comprehensive operational management for revenue cycle functions, including patient access, health information management, revenue integrity and patient financial services. We also offer communication and engagement solutions to optimize the relationship between providers and patients. In addition, Conifer operates a management services business that supports value-based performance through clinical integration, financial risk management and population health management.

 

Commitment to QualityWe are continuing to make significant investments in equipment, technology, education and operational strategies designed to improve clinical quality at all of our facilities. In addition, we continually collaborate with physicians to implement the most current evidence-based medicine techniques to improve the way we provide care, while using labor management tools and supply chain initiatives to reduce variable costs. We believe the use of these practices will promote the most effective and efficient utilization of resources and result in shorter lengths of stay and reductions in readmissions for hospitalized patients.

 

Development StrategiesWe remain focused on opportunities to increase our hospital and outpatient revenues, and to expand our Conifer services business, through organic growth, corporate development activities and strategic partnerships.

 

From time to time, we build new facilities, make acquisitions of healthcare assets and companies, and enter into joint venture arrangements or affiliations with healthcare businesses in markets where we believe our operating strategies can improve performance and create shareholder value. Effective January 1, 2016, we formed two joint ventures with Baylor Scott & White Health (“BSW”) involving the ownership and operation of our four North Texas hospitals – which were operated by certain of our subsidiaries – and Baylor Medical Center at Garland – which was operated by BSW. The joint ventures are focusing on delivering integrated, value-based care primarily to select communities in Rockwall, Collin and Dallas counties. BSW holds a majority ownership interest in the joint ventures.

 

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Historically, our outpatient services have generated significantly higher margins for us than inpatient services. During the three months ended June 30, 2016, we derived approximately 42% of our net patient revenues from outpatient services. By expanding our outpatient business, we expect to increase our profitability over time. The surgical facilities in our USPI joint venture specialize in non‑emergency surgical cases. Due in part to advancements in medical technology, and due to the lower cost structure and greater efficiencies that are attainable in a specialized outpatient site, we believe the volume and complexity of surgical cases performed in an outpatient setting will continue to steadily increase. In addition, we have continued growing our imaging and urgent care businesses through our USPI joint venture’s acquisitions, including the December 31, 2015 acquisition of CareSpot Express Healthcare, which added over 30 urgent care centers in Florida and Tennessee to our USPI joint venture’s portfolio of outpatient centers. These acquisitions reflect our broader strategies to (1) offer more services to patients, (2) broaden the capabilities we offer to health system and physician partners to include other outpatient settings beyond the core ambulatory care business, and (3) expand into faster-growing, less capital intensive, higher-margin businesses. Furthermore, we continually evaluate joint venture opportunities with other healthcare providers in our markets to maximize effectiveness, reduce costs and build clinically integrated networks that provide quality services across the care continuum.

 

We intend to continue to market and expand Conifer’s revenue cycle management, patient communications and engagement services, and management services businesses. Conifer provides services to more than 800 Tenet and non-Tenet hospital and other clients nationwide. Historically, this business has generated high margins and improved our overall results of operations. Conifer’s service offerings have also expanded to support value-based performance through clinical integration, financial risk management and population health management, which are integral parts of the healthcare industry’s movement toward accountable care organizations (“ACOs”) and similar risk-based or capitated contract models. In addition to hospitals and independent physician associations, clients for these services include health plans, self-insured organizations, government agencies and other entities. We also remain focused on developing, acquiring or entering into joint venture arrangements to establish new capabilities at Conifer.

 

General Economic ConditionsWe believe that slow wage growth in some of the markets our hospitals serve and other adverse economic conditions have had a negative impact on our bad debt expense levels and payer mix. However, as the economy continues to recover, we expect to experience improvements in these metrics relative to recent levels. We believe our volumes were positively impacted in the six months ended June 30, 2016 by incremental market share we generated through improved physician alignment and service line expansion, insurance coverage for a greater number of individuals, and a strengthening economy.

 

Improving Operating LeverageWe believe targeted capital spending on critical growth opportunities for our hospitals, emphasis on higher-demand clinical service lines (including outpatient lines), focus on expanding our outpatient business, implementation of new payer contracting strategies, and improved quality metrics at our hospitals will improve our patient volumes. We believe our patient volumes have been constrained by the slow pace of the current economic recovery, increased competition, utilization pressure by managed care organizations, the effects of higher patient co-pays and deductibles, and demographic trends. In addition, in several markets, we have formed clinically integrated organizations, which are collaborations with independent physicians and hospitals to develop ongoing clinical initiatives designed to control costs and improve the quality of care delivered to patients. Arrangements like these provide a foundation for negotiating with plans under an ACO structure or other risk-sharing model.

 

Impact of the Affordable Care ActWe anticipate that we will continue to benefit over time from the provisions of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (“Affordable Care Act” or “ACA”) that have extended insurance coverage through Medicaid or private insurance to a broader segment of the U.S. population. Although we are unable to predict the ultimate net effect of the Affordable Care Act on our future results of operations, and while there have been and will continue to be some reductions in reimbursement rates by governmental payers, we began to receive reimbursement for caring for previously uninsured and underinsured patients in 2014. Through collaborative efforts with local community organizations, we launched a campaign under the banner “Path to Health” to assist our hospitals in educating and enrolling uninsured patients in insurance plans. At June 30, 2016, we operated hospitals in six of the states (Arizona, California, Illinois, Massachusetts, Michigan and Pennsylvania) that have expanded their Medicaid programs.

 

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Our ability to execute on these strategies and manage these trends is subject to a number of risks and uncertainties that may cause actual results to be materially different from expectations. In addition, it is important that we make steady and measurable progress in successfully integrating acquired businesses and new joint ventures into our business processes, as appropriate. For information about risks and uncertainties that could affect our results of operations, see the Forward-Looking Statements and Risk Factors sections in Part I of our Annual Report on Form 10-K for the year ended December 31, 2015 (“Annual Report”).

 

RESULTS OF OPERATIONS—OVERVIEW

 

The following tables show certain selected operating statistics for our continuing operations, which includes the results of (i) our same 67 hospitals and six health plans operated throughout six months ended June 30, 2016 and 2015, (ii) our USPI joint venture, in which we acquired a majority interest on June 16, 2015, (iii) Aspen, which we also acquired on June 16, 2015, (iv) Hi‑Desert Medical Center, which we began operating on July 15, 2015, (v) our Carondelet Heath Network joint venture, in which we acquired a majority interest on August 31, 2015, (vi) SLUH, which we divested on August 31, 2015, (vii) our joint venture with Baptist Health System, Inc., which we formed on October 2, 2015, (viii) DMC Surgery Hospital, which we closed in October 2015, (ix) our two North Carolina hospitals, which we divested effective January 1, 2016, (x) our four North Texas hospitals in which we divested a controlling interest effective January 1, 2016, but continue to operate, and (xi) our five Georgia hospitals, which we divested effective April 1, 2016, in each case only for the period from acquisition, or commencement of operations of the facility, as the case may be, to June 30, 2016 and 2015 or to the date of divestiture, as applicable. We believe this information is useful to investors because it reflects our current portfolio of operations and the recent trends we are experiencing with respect to volumes, revenues and expenses.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing Operations

 

 

 

Three Months Ended June 30, 

 

 

  

 

 

    

  

 

 

    

  

Increase

 

Selected Operating Statistics

 

2016

 

2015

 

(Decrease)

 

Hospital Operations and other

 

 

 

 

 

 

 

 

 

 

 

 

Number of hospitals (at end of period)

 

 

75

 

 

 

80

 

 

(5)

(1) 

 

Total admissions

 

 

193,898

 

 

 

201,908

 

 

(4.0)

%

 

Adjusted patient admissions(2) 

 

 

342,813

 

 

 

349,145

 

 

(1.8)

%

 

Paying admissions (excludes charity and uninsured)

 

 

183,539

 

 

 

191,373

 

 

(4.1)

%

 

Charity and uninsured admissions

 

 

10,359

 

 

 

10,535

 

 

(1.7)

%

 

Emergency department visits

 

 

715,692

 

 

 

742,951

 

 

(3.7)

%

 

Total surgeries

 

 

130,201

 

 

 

127,523

 

 

2.1

%

 

Patient days — total

 

 

897,313

 

 

 

929,840

 

 

(3.5)

%

 

Adjusted patient days(2) 

 

 

1,569,272

 

 

 

1,589,659

 

 

(1.3)

%

 

Average length of stay (days)

 

 

4.63

 

 

 

4.61

 

 

0.4

%

 

Average licensed beds

 

 

20,380

 

 

 

20,826

 

 

(2.1)

%

 

Utilization of licensed beds(3) 

 

 

48.4

%  

 

 

49.1

%  

 

(0.7)

%(1)

 

Total visits

 

 

2,038,287

 

 

 

2,063,037

 

 

(1.2)

%

 

Paying visits (excludes charity and uninsured)

 

 

1,896,394

 

 

 

1,903,403

 

 

(0.4)

%

 

Charity and uninsured visits

 

 

141,893

 

 

 

159,634

 

 

(11.1)

%

 

Ambulatory Care

 

 

 

 

 

 

 

 

 

 

 

 

Total consolidated facilities (at end of period)

 

 

214

 

 

 

141

 

 

73

(1) 

 

Total cases

 

 

444,955

 

 

 

180,524

 

 

146.5

%

 


(1)

The change is the difference between the 2016 and 2015 amounts shown.

(2)

Adjusted patient admissions/days represents actual patient admissions/days adjusted to include outpatient services provided by facilities in our Hospital Operations and other segment by multiplying actual patient admissions/days by the sum of gross inpatient revenues and outpatient revenues and dividing the results by gross inpatient revenues.

(3)

Utilization of licensed beds represents patient days divided by number of days in the period divided by average licensed beds.

 

Total admissions decreased by 8,010, or 4.0%, in the three months ended June 30, 2016 compared to the three months ended June 30, 2015. Total surgeries increased by 2.1% in the three months ended June 30, 2016 compared to the same period in 2015. Our emergency department visits decreased 3.7% in the three months ended June 30, 2016

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compared to the same period in the prior year. Our volumes from continuing operations were negatively impacted by the decrease in our number of hospitals, however, we believe the volume decreases were partially offset by the growth we generated through improved physician alignment and service line expansion, insurance coverage for a greater number of individuals, and a strengthening economy. Our Ambulatory Care total cases increased 146.5% due to our USPI joint venture and Aspen acquisition, both of which occurred on June15, 2015.

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing Operations

 

 

Three Months Ended June 30, 

 

  

 

 

    

 

 

    

Increase

Revenues

 

2016

 

2015

 

(Decrease)

Net operating revenues before provision for doubtful accounts

 

$

5,220

 

$

4,844

 

7.8

%  

Hospital Operations and other

 

 

 

 

 

 

 

 

 

Revenues from charity and the uninsured

 

$

249

 

$

253

 

(1.6)

%

Net inpatient revenues(1) 

 

$

2,588

 

$

2,623

 

(1.3)

%

Net outpatient revenues(1) 

 

$

1,460

 

$

1,484

 

(1.6)

%  

Ambulatory Care revenues

 

$

442

 

$

142

 

211.3

%  

Conifer revenues

 

$

386

 

$

340

 

13.5

%  

 


(1)

Net inpatient revenues and net outpatient revenues are components of net operating revenues. Net inpatient revenues include self-pay revenues of $118 million and $93 million for the three months ended June 30, 2016 and 2015, respectively. Net outpatient revenues include self-pay revenues of $131 million and $160 million for the three months ended June 30, 2016 and 2015, respectively.

 

Net operating revenues before provision for doubtful accounts increased by $376 million, or 7.8%, in the three months ended June 30, 2016 compared to the same period in 2015, primarily due to acquisitions, increases in our outpatient volumes and improved managed care pricing, partially offset by hospital divestitures.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing Operations

 

 

Three Months Ended June 30, 

 

  

 

 

    

 

 

 

    

 

Increase

Provision for Doubtful Accounts

 

2016

 

2015

 

(Decrease)

Provision for doubtful accounts

 

$

352

 

 

$

352

 

 

 —

%

Provision for doubtful accounts as a percentage of net operating revenues before provision for doubtful accounts

 

 

6.7

%  

 

 

7.3

%  

 

(0.6)

%(1) 

 


(1)

The change is the difference between the 2016 and 2015 amounts shown.

 

Provision for doubtful accounts as a percentage of net operating revenues before provision for doubtful accounts was 6.7% and 7.3% for the three months ended June 30, 2016 and 2015, respectively. Our accounts receivable days outstanding (“AR Days”) from continuing operations were 51.1 days at June 30, 2016 and 49.5 days at December 31, 2015, within our target of less than 55 days.

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Continuing Operations

 

 

Three Months Ended June 30, 

 

    

 

 

    

 

 

    

Increase

Selected Operating Expenses

 

2016

 

2015

 

(Decrease)

Hospital Operations and other

 

 

 

 

 

 

 

 

 

Salaries, wages and benefits

 

$

1,931

 

$

1,935

 

(0.2)

%  

Supplies

 

 

682

 

 

679

 

0.4

%  

Other operating expenses

 

 

1,037

 

 

980

 

5.8

%  

Total

 

$

3,650

 

$

3,594

 

1.6

%  

Ambulatory Care

 

 

 

 

 

 

 

 

 

Salaries, wages and benefits

 

$

147

 

$

41

 

258.5

%  

Supplies

 

 

91

 

 

28

 

225.0

%  

Other operating expenses

 

 

91

 

 

30

 

203.3

%  

Total

 

$

329

 

$

99

 

232.3

%  

Conifer

 

 

 

 

 

 

 

 

 

Salaries, wages and benefits

 

$

238

 

$

209

 

13.9

%  

Other operating expenses

 

 

85

 

 

71

 

19.7

%  

Total

 

$

323

 

$

280

 

15.4

%  

Total

 

 

 

 

 

 

 

 

 

Salaries, wages and benefits

 

$

2,316

 

$

2,185

 

6.0

%  

Supplies

 

 

773

 

 

707

 

9.3

%  

Other operating expenses

 

 

1,213

 

 

1,081

 

12.2

%  

Total

 

$

4,302

 

$

3,973

 

8.3

%  

Rent/lease expense(1)

 

 

 

 

 

 

 

 

 

Hospital Operations and other

 

$

61

 

$

54

 

13.0

%

Ambulatory Care

 

 

20

 

 

6

 

233.3

%

Conifer

 

 

5

 

 

4

 

25.0

%  

Total

 

$

86

 

$

64

 

34.4

%


(1)

Included in other operating expenses.

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing Operations

 

 

Three Months Ended June 30, 

 

    

 

 

    

 

 

    

Increase

Selected Operating Expenses per Adjusted Patient Admission

 

2016

 

2015

 

(Decrease)

Hospital Operations and other

 

 

 

 

 

 

 

 

 

Salaries, wages and benefits per adjusted patient admission(1)

 

$

5,633

 

$

5,542

 

1.6

%  

Supplies per adjusted patient admission(1)

 

 

1,989

 

 

1,943

 

2.4

%  

Other operating expenses per adjusted patient admission(1)

 

 

3,046

 

 

2,829

 

7.7

%  

Total per adjusted patient admission

 

$

10,668

 

$

10,314

 

3.4

%  


(1)

Adjusted patient admissions represents actual patient admissions adjusted to include outpatient services provided by facilities in our Hospital Operations and other segment by multiplying actual patient admissions by the sum of gross inpatient revenues and outpatient revenues and dividing the results by gross inpatient revenues.

 

Salaries, wages and benefits per adjusted patient admission increased 1.6% in the three months ended June 30, 2016 compared to the same period in 2015. This change is primarily due to annual merit increases for certain of our employees and increased employee health benefits costs in the three months ended June 30, 2016 compared to the three months ended June 30, 2015, partially offset by lower incentive compensation expense.

 

Supplies expense per adjusted patient admission increased 2.4% in the three months ended June 30, 2016 compared to the three months ended June 30, 2015. The change in supplies expense was primarily attributable to volume growth in our higher acuity supply-intensive surgical services.

 

Other operating expenses per adjusted patient admission increased by 7.7% in the three months ended June 30, 2016 compared to the three months ended June 30, 2015. This increase is due to higher contracted services and

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medical fees, as well as increased costs associated with our health plans due to an increase in covered lives, which costs were substantially offset by increased health plan revenues. Malpractice expense for our Hospital Operations and other segment was $12 million higher in the 2016 period compared to the 2015 period. The 2016 period included an unfavorable adjustment of approximately $6 million due to a 25 basis point decrease in the interest rate used to estimate the discounted present value of projected future malpractice liabilities compared to a favorable adjustment of approximately $6 million as a result of a 36 basis point increase in the interest rate in the 2015 period.

 

LIQUIDITY AND CAPITAL RESOURCES OVERVIEW

 

Cash and cash equivalents were $656 million at June 30, 2016 compared to $728 million at March 31, 2016.

 

Significant cash flow items in the three months ended June 30, 2016 included:

 

·

Capital expenditures of $205 million;

 

·

Purchases of businesses, net of cash acquired, of $65 million;

 

·

Interest payments of $335 million; and

 

·

A $127 million payment to increase our ownership interest in our USPI joint venture from 50.1% to 56.3%.

 

Net cash provided by operating activities was $582 million in the six months ended June 30, 2016 compared to $353 million in the six months ended June 30, 2015. Key positive and negative factors contributing to the change between the 2016 and 2015 periods include the following:

 

·

Increased income from continuing operations before income taxes of $133 million, excluding investment earnings (losses), gain (loss) from early extinguishment of debt, interest expense, gains on sales, consolidation and deconsolidation of facilities, litigation and investigation costs, impairment and restructuring charges, and acquisition-related costs, and depreciation and amortization in the six months ended June 30, 2016 compared to the six months ended June 30, 2015;

 

·

$67 million less cash used by the change in accounts receivable, net of provision for doubtful accounts, in the 2016 period;

 

·

Approximately $110 million of additional net cash proceeds in the 2016 period related to supplemental Medicaid programs in California and Texas;

 

·

Higher aggregate annual 401(k) matching contributions and annual incentive compensation payments of $18 million and $9 million, respectively;

 

·

An increase of $13 million in payments on reserves for restructuring charges, acquisition-related costs, and litigation costs and settlements; and

 

·

Higher interest payments of $82 million.

 

FORWARD-LOOKING STATEMENTS

 

The information in 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, estimate or anticipate (and other similar expressions) will, should or may occur in the future are forward-looking statements. These forward-looking statements represent management’s current expectations, based on currently available information, as to the outcome and timing of future events. They involve known and unknown risks, uncertainties and other factors — many of which we

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are unable to predict or control — that may cause our actual results, performance or achievements, or healthcare industry results, 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 Forward-Looking Statements and Risk Factors sections in Part I of our Annual Report.

 

When considering forward-looking statements, a reader should keep in mind the risk factors and other cautionary statements in our Annual Report and in this report. Should one or more of the risks and uncertainties described in our Annual Report or this report occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statement. We specifically disclaim any obligation to update any information contained in a forward-looking statement or any forward-looking statement in its entirety and, therefore, disclaim any resulting liability for potentially related damages.

 

All forward-looking statements attributable to us are expressly qualified in their entirety by this cautionary statement.

 

SOURCES OF REVENUE

 

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 self-pay patients (that is, patients who do not have health insurance and are not covered by some other form of third-party arrangement).

 

The table below shows the sources of net patient revenues before provision for doubtful accounts for our Hospital Operations and other segment, expressed as percentages of net patient revenues before provision for doubtful accounts from all sources:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended 

 

 

June 30, 

 

June 30, 

 

    

 

    

    

 

    

    

Increase

    

 

    

    

 

    

    

Increase

Net Patient Revenues from:

 

2016

 

2015

 

(Decrease)(1)

    

   2016   

    

   2015   

    

(Decrease)(1)

Medicare

 

21.7

%  

 

20.7

%  

 

1.0

%  

 

20.8

%  

 

21.3

%  

 

(0.5)

%  

Medicaid

 

7.4

%  

 

8.5

%  

 

(1.1)

%  

 

8.0

%  

 

9.0

%  

 

(1.0)

%  

Managed care

 

59.4

%  

 

60.8

%  

 

(1.4)

%

 

60.4

%  

 

59.9

%  

 

0.5

%

Indemnity, self-pay and other

 

11.5

%  

 

10.0

%  

 

1.5

%

 

10.8

%  

 

9.8

%  

 

1.0

%


(1)

The increase (decrease) is the difference between the 2016 and 2015 percentages shown.

 

Our payer mix on an admissions basis for our Hospital Operations and other segment, expressed as a percentage of total admissions from all sources, is shown below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended 

 

 

June 30, 

 

June 30, 

 

    

 

    

    

 

    

    

Increase

    

 

    

    

 

    

    

Increase

Admissions from:

 

2016

 

2015

 

(Decrease)(1)

 

2016

 

2015

 

(Decrease)(1)

Medicare

 

25.9

%  

 

26.8

%  

 

(0.9)

%

 

26.6

%  

 

27.4

%  

 

(0.8)

%

Medicaid

 

6.7

%  

 

8.1

%  

 

(1.4)

%

 

7.0

%  

 

8.1

%  

 

(1.1)

%

Managed care

 

59.4

%  

 

57.6

%  

 

1.8

%  

 

58.7

%  

 

56.9

%  

 

1.8

%

Indemnity, self-pay and other

 

8.0

%  

 

7.5

%  

 

0.5

%

 

7.7

%  

 

7.6

%  

 

0.1

%


(1)

The increase (decrease) is the difference between the 2016 and 2015 percentages shown.

 

GOVERNMENT PROGRAMS

 

The Centers for Medicare and Medicaid Services (“CMS”), an agency of the U.S. Department of Health and Human Services (“HHS”), is the single largest payer of healthcare services in the United States. Approximately 129 million Americans rely on healthcare benefits through Medicare, Medicaid and the Children’s Health Insurance Program (“CHIP”). These three programs are authorized by federal law and directed by CMS. Medicare is a federally funded health insurance program primarily for individuals 65 years of age and older, certain younger people with

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disabilities, and people with end-stage renal disease, and is provided without regard to income or assets. Medicaid is 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 in the United States. The CHIP, which is also 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.

 

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 revenues from continuing operations of our Hospital Operations and other segment for services provided to patients enrolled in the Original Medicare Plan for the three and six months ended June 30, 2016 and 2015 are set forth in the following table:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended 

 

Six Months Ended 

 

 

 

June 30, 

 

June 30, 

 

Revenue Descriptions

    

2016

    

2015

    

2016

    

2015

 

Medicare severity-adjusted diagnosis-related group — operating

 

$

415

 

$

435

 

$

889

 

$

892

 

Medicare severity-adjusted diagnosis-related group — capital

 

 

38

 

 

40

 

 

81

 

 

82

 

Outliers

 

 

16

 

 

14

 

 

38

 

 

32

 

Outpatient

 

 

252

 

 

236

 

 

474

 

 

470

 

Disproportionate share

 

 

72

 

 

86

 

 

150

 

 

174

 

Direct Graduate and Indirect Medical Education(1)

 

 

61

 

 

68

 

 

125

 

 

135

 

Other(2) 

 

 

44

 

 

3

 

 

27

 

 

14

 

Adjustments for prior-year cost reports and related valuation allowances

 

 

17

 

 

10

 

 

30

 

 

32

 

Total Medicare net patient revenues 

 

$

915

 

$

892

 

$

1,814

 

$

1,831

 


(1)

Includes Indirect Medical Education revenues earned by our children’s hospitals under the Children’s Hospitals Graduate Medical Education Payment Program administered by the Health Resources and Services Administration of HHS.

(2)

The other revenue category includes inpatient psychiatric units, inpatient rehabilitation units, one long-term acute care hospital, other revenue adjustments, and adjustments related to the estimates for current-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 are administered by the states and vary from state to state and from year to year. Estimated revenues under various state Medicaid programs, including state-funded managed care Medicaid programs, constituted approximately 18.5% and 18.7% of total net patient revenues before provision for doubtful accounts of our continuing general hospitals for the six months ended June 30, 2016 and 2015, respectively. We also receive DSH and other supplemental revenues under various state Medicaid programs. For the six months ended June 30, 2016 and 2015, our total Medicaid revenues attributable to DSH and other supplemental revenues were approximately $442 million and $467 million, respectively, of which $112 million and $91 million, respectively, were from the California provider fee program.

 

Several states in which we operate face budgetary challenges that have resulted, and likely will continue to result, 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 provider fee programs or received waivers under Section 1115 of the Social Security Act. Under a Medicaid waiver, the federal government

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waives certain Medicaid requirements, thereby giving states flexibility in the operation of their Medicaid program to allow states to test new approaches and demonstration projects to improve care. Generally the Section 1115 waivers are for a period of five years with an option to extend the waiver for three additional years. Continuing pressure on state budgets and other factors could result in future reductions to Medicaid payments, payment delays or additional taxes on hospitals.

 

Because we cannot predict what actions the federal government or the states may take under existing legislation and future legislation 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 might have on our business, but the impact on our future financial position, results of operations or cash flows could be material.

 

Medicaid-related patient revenues from continuing operations recognized by our Hospital Operations and other segment from Medicaid-related programs in the states in which our hospitals are located, as well as from Medicaid programs in neighboring states, for the six months ended June 30, 2016 and 2015 are set forth in the table below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended 

 

 

 

June 30, 

 

 

 

2016

 

2015

 

 

    

 

 

    

Managed

    

 

 

    

Managed

 

Hospital Location

 

Medicaid

 

Medicaid

 

Medicaid

 

Medicaid

 

California

 

$

191

 

$

214

 

$

163

 

$

191

 

Michigan

 

 

188

 

 

151

 

 

196

 

 

150

 

Texas

 

 

107

 

 

118

 

 

126

 

 

116

 

Alabama

 

 

42

 

 

 —

 

 

7

 

 

 —

 

Florida

 

 

37

 

 

84

 

 

51

 

 

81

 

Pennsylvania

 

 

36

 

 

102

 

 

33

 

 

98

 

Illinois

 

 

33

 

 

34

 

 

48

 

 

23

 

Massachusetts

 

 

18

 

 

27

 

 

19

 

 

24

 

Georgia

 

 

13

 

 

9

 

 

35

 

 

18

 

South Carolina

 

 

7

 

 

17

 

 

8

 

 

17

 

Tennessee

 

 

2

 

 

16

 

 

3

 

 

16

 

Missouri

 

 

 —

 

 

 —

 

 

39

 

 

10

 

Arizona

 

 

(1)

 

 

103

 

 

(8)

 

 

57

 

North Carolina

 

 

(2)

 

 

 —

 

 

14

 

 

3

 

 

 

$

671

 

$

875

 

$

734

 

$

804

 

 

Regulatory and Legislative Changes

 

Material updates to the information set forth in our Annual Report about the Medicare and Medicaid payment systems are provided below.

 

Proposed Payment and Policy Changes to the Medicare Inpatient Prospective Payment Systems

 

Under Medicare law, CMS is required to annually update certain rules governing the inpatient prospective payment systems (“IPPS”). The updates generally become effective October 1, the beginning of the federal fiscal year (“FFY”). On April 18, 2016, CMS issued Proposed Changes to the Hospital Inpatient Prospective Payment Systems for Acute Care Hospitals and Fiscal Year 2017 Rates (“Proposed IPPS Rule”). The Proposed IPPS Rule includes the following payment and policy changes:

 

·

A market basket increase of 2.8% 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 (“EHR”) technology (hospitals that do not report specified quality measure data and/or are not meaningful users of EHR technology will receive a reduced market basket increase); CMS is also proposing certain adjustments to the estimated 2.8% market basket increase and the outlier baseline that result in a net operating payment update of 0.65% (before budget neutrality adjustments), including:

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·

Market basket index and multifactor productivity reductions required by the ACA of 0.75% and 0.5%, respectively;

 

·

A documentation and coding recoupment reduction of 1.5% as required by the American Taxpayer Relief Act of 2012;

 

·

Prospective reversal of the 0.2% reduction related to the two-midnights rule that was first imposed in FFY 2014;

 

·

A one-time increase of 0.6% to reverse the 0.2% two-midnights rule reductions imposed in FFYs 2014 through 2016; and

 

·

A 0.2% reduction in the FFY 2016 estimated outlier baseline of 5.3% to ensure that FFY 2017 outlier payments do not exceed 5.1% of total IPPS payments;

 

·

Updates to the factors used to determine the amount and distribution of Medicare uncompensated care disproportionate share (“UC-DSH”) payments;

 

·

A 1.73% net increase in the capital federal MS-DRG rate;

 

·

An increase in the cost outlier threshold from $22,544 to $23,681; and

 

·

A proposed three-year transition beginning in FFY 2018 to use uncompensated care to determine the distribution of the UC-DSH payments.

 

CMS projects that the combined impact of the payment and policy changes in the Proposed IPPS Rule will yield an average 0.6% increase in operating MS-DRG payments for hospitals in large urban areas (populations over one million) in FFY 2016. The proposed payment and policy changes affecting operating MS-DRG payments and other proposals, notably those affecting Medicare UC-DSH payments, would result in an estimated 0.1% decrease in our annual IPPS payments, which yields an estimated decrease of approximately $2 million in our annual Medicare IPPS payments. Because of the uncertainty regarding factors that may influence our future IPPS payments by individual hospital, including legislative action, admission volumes, length of stay 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 changes.

 

Proposed Payment and Policy Changes to the Medicare Outpatient Prospective Payment and Ambulatory Surgical Center Payment Systems

 

On July 6, 2016, CMS released proposed policy changes, quality provisions and payment rates for the Medicare Hospital Outpatient Prospective Payment System (“OPPS”) and Ambulatory Surgical Center (“ASC”) Payment System for calendar year 2017 (“Proposed OPPS/ASC Rule”). The Proposed OPPS/ASC rule includes the following proposed changes:

 

·

An estimated net increase in the OPPS rates of 1.55% based on an estimated market basket increase of 2.8% reduced by market basket index and multifactor productivity reductions required by the ACA of 0.75% and 0.5%, respectively;

 

·

Several proposals on the implementation of Section 603 of the Bipartisan Budget Act of 2015, which requires that certain items and services furnished by certain off-campus hospital departments shall not be considered covered outpatient department services for purposes of OPPS payments and shall instead be paid “under the applicable payment system” beginning January 1, 2017;

 

·

A proposal to remove four spine procedure codes and two laryngoplasty codes from the CMS list of procedures than can be performed only on an inpatient basis (the “Inpatient Only List”) (CMS is also

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seeking comments on whether it should consider for future rulemaking the removal of total knee arthroplasty from the Inpatient Only List);

 

·

A 1.2% update to the ASC payment rates; and

 

·

Several proposals to the EHR system, including a proposal to reduce the 2016 reporting period from 12 months to a consecutive 90-day period.

 

CMS projects that the combined impact of the payment and policy changes in the Proposed OPPS/ASC Rule will yield an average 1.6% increase in OPPS payments for all facilities and an average 1.4% increase in OPPS payments for hospitals in large urban areas (populations over one million). 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 outpatient revenues of approximately $11 million. Because of the uncertainty associated with various factors that may influence our future OPPS payments, including legislative action, 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 changes.

 

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 revenues during the six months ended June 30, 2016 and 2015 was $5.0 billion and $4.9 billion, respectively. Approximately 65% of our managed care net patient revenues for the six months ended June 30, 2016 was derived from our top ten managed care payers. National payers generated approximately 45% of our total net managed care revenues. The remainder comes from regional or local payers. At June 30, 2016 and December 31, 2015, approximately 60% and 59%, respectively, of our net accounts receivable for our Hospital Operations and other 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 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 at June 30, 2016, a 3% increase or decrease in the estimated contractual allowance would impact the estimated reserves by approximately $13 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

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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 levels. Contractual allowance estimates are periodically reviewed for accuracy by taking into consideration known contract terms, as well as payment history. Although we do not separately accumulate and disclose the aggregate amount of adjustments to the estimated reimbursement for every patient bill, 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 operating income. In addition, on a corporate-wide basis, we do not record any general provision for adjustments to estimated contractual allowances for managed care plans.

 

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 benefitted from solid year-over-year aggregate managed care pricing improvements for several years, we have seen these improvements moderate recently, and we believe the moderation could continue in future years. In the six months ended June 30, 2016, our commercial managed care net inpatient revenue per admission from our acute care hospitals was approximately 75% 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.

 

SELF-PAY PATIENTS

 

Self-pay patients are patients who do not qualify for government programs, 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 self-pay 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 pose significant collectability problems. At both June 30, 2016 and December 31, 2015, approximately 5% of our net accounts receivable for our Hospital Operations and other segment were due from self-pay patients. Further, a significant portion of our provision for doubtful accounts relates to self-pay patients, as well as co‑pays and deductibles owed to us by patients with insurance. We provide revenue cycle management services through our Conifer subsidiary, which is subject to various laws, rules and regulations regarding consumer finance, debt collection and credit reporting activities. For additional information, see Item 1, Business — Regulations Affecting Conifer’s Operations, in 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 provision for doubtful accounts in the aggregate, this is not the case at all hospitals. As a result, we have been increasing 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 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

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charged standard gross charges. A significant portion of those charges had previously been written down in our provision for doubtful accounts. 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 provision for doubtful accounts based on historical collection trends for self-pay accounts and other factors that affect the estimation process.

 

We also provide charity care to patients who are financially unable to pay for the healthcare services they receive. Most patients who qualify for charity care are charged a per-diem amount for services received, subject to a cap. Except for the per-diem amounts, our policy is not to pursue collection of amounts determined to qualify as charity care; 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, as well as reduced Medicaid funding levels. Generally, our method of measuring the estimated costs uses adjusted self-pay/charity patient days multiplied by selected operating expenses (which include salaries, wages and benefits, supplies and other operating expenses) per adjusted patient day. The adjusted self‑pay/charity patient days represents actual self-pay/charity patient days adjusted to include self-pay/charity outpatient services by multiplying actual self-pay/charity patient days by the sum of gross self-pay/charity inpatient revenues and gross self-pay/charity outpatient revenues and dividing the results by gross self-pay/charity inpatient revenues. The following table shows our estimated costs (based on selected operating expenses) of caring for self-pay patients and charity care patients, as well as revenues attributable to Medicaid DSH and other supplemental revenues we recognized, in the three and six months ended June 30, 2016 and 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended 

 

 

June 30, 

 

June 30, 

 

    

2016

    

2015

    

2016

    

2015

Estimated costs for:

 

 

 

 

 

 

 

 

 

 

 

 

Self-pay patients

 

$

159

 

$

168

 

$

310

 

$

332

Charity care patients

 

$

31

 

$

37

 

$

72

 

$

73

Medicaid DSH and other supplemental revenues

 

$

215

 

$

220

 

$

442

 

$

467

 

The expansion of health insurance coverage has resulted in an increase in the number of patients using our facilities who have either health insurance exchange or government healthcare insurance program coverage. However, we continue to have to provide uninsured discounts and charity care due to the failure of states to expand Medicaid coverage and for persons living in the country illegally who are not permitted to enroll in a health insurance exchange or government healthcare insurance program.

 

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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 six months ended June 30, 2016 and 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended 

 

Six Months Ended 

 

 

 

June 30, 

 

June 30, 

 

 

    

2016

    

2015

    

2016

    

2015

 

Net operating revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

General hospitals

 

$

4,062

 

$

4,120

 

$

8,364

 

$

8,237

 

Other operations

 

 

1,158

 

 

724

 

 

2,276

 

 

1,394

 

Net operating revenues before provision for doubtful accounts

 

 

5,220

 

 

4,844

 

 

10,640

 

 

9,631

 

Less provision for doubtful accounts

 

 

352

 

 

352

 

 

728

 

 

715

 

Net operating revenues 

 

 

4,868

 

 

4,492

 

 

9,912

 

 

8,916

 

Equity in earnings of unconsolidated affiliates

 

 

30

 

 

16

 

 

54

 

 

20

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries, wages and benefits

 

 

2,316

 

 

2,185

 

 

4,718

 

 

4,310

 

Supplies

 

 

773

 

 

707

 

 

1,584

 

 

1,394

 

Other operating expenses, net

 

 

1,213

 

 

1,081

 

 

2,455

 

 

2,174

 

Electronic health record incentives

 

 

(21)

 

 

(33)

 

 

(21)

 

 

(39)

 

Depreciation and amortization

 

 

215

 

 

197

 

 

427

 

 

404

 

Impairment and restructuring charges, and acquisition-related costs

 

 

22

 

 

193

 

 

50

 

 

222

 

Litigation and investigation costs

 

 

114

 

 

14

 

 

287

 

 

17

 

Gains on sales, consolidation and deconsolidation of facilities

 

 

(1)

 

 

 —

 

 

(148)

 

 

 —

 

Operating income

 

$

267

 

$

164

 

$

614

 

$

454

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended 

 

Six Months Ended 

 

 

 

June 30, 

 

June 30, 

 

 

    

2016

    

2015

    

2016

    

2015

 

Net operating revenues

 

100.0

%  

 

100.0

%  

 

100.0

%  

 

100.0

%  

 

Equity in earnings of unconsolidated affiliates

 

0.6

%  

 

0.4

%  

 

0.5

%  

 

0.2

%  

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries, wages and benefits

 

47.6

%  

 

48.6

%  

 

47.6

%  

 

48.3

%  

 

Supplies

 

15.9

%  

 

15.7

%  

 

16.0

%  

 

15.6

%  

 

Other operating expenses, net

 

24.9

%  

 

24.1

%  

 

24.8

%  

 

24.4

%  

 

Electronic health record incentives

 

(0.4)

%

 

(0.7)

%

 

(0.2)

%

 

(0.4)

%

 

Depreciation and amortization

 

4.4

%  

 

4.4

%  

 

4.3

%  

 

4.5

%  

 

Impairment and restructuring charges, and acquisition-related costs

 

0.4

%  

 

4.3

%  

 

0.4

%  

 

2.5

%  

 

Litigation and investigation costs

 

2.3

%  

 

0.3

%  

 

2.9

%  

 

0.2

%  

 

Gains on sales, consolidation and deconsolidation of facilities

 

 —

%  

 

 —

%  

 

(1.5)

%  

 

 —

%  

 

Operating income

 

5.5

%  

 

3.7

%  

 

6.2

%  

 

5.1

%  

 

 

Net operating revenues of our general hospitals include inpatient and outpatient revenues for services provided by facilities in our Hospital Operations and other segment, as well as nonpatient revenues (e.g., rental income, management fee revenue, and income from services such as cafeterias, gift shops and parking) and other miscellaneous revenue. Net operating revenues of other operations primarily consist of revenues from (1) physician practices, (2) a long-term acute care hospital, (3) our Ambulatory Care segment, (4) services provided by our Conifer subsidiary to third parties and (5) our health plans. Revenues from our general hospitals represented approximately 78% and 85% of our total net operating revenues before provision for doubtful accounts for the three months ended June 30, 2016 and 2015, respectively, and 79% and 86% for the six months ended June 30, 2016 and 2015, respectively.

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Net operating revenues from our other operations were $1.158 billion and $724 million in the three months ended June 30, 2016 and 2015, respectively, and $2.276 billion and $1.394 billion in the six months ended June 30, 2016 and 2015, respectively. The increase in net operating revenues from other operations during 2016 primarily relates to revenue cycle services provided by our Conifer subsidiary, as well as revenues from our USPI joint venture and Aspen acquisition, our health plans and physician practices. Equity earnings of unconsolidated affiliates were $30 million and $16 million for the three months ended June 30, 2016 and 2015, respectively, and $54 million and $20 million for the six months ended June 30, 2016 and 2015, respectively. The increase in equity earnings of unconsolidated affiliates in the 2016 period compared to the 2015 period primarily related to our USPI joint venture.

 

The following table shows selected operating expenses of our three reportable business segments. Information for our Hospital Operations and other segment is presented on a same-hospital basis, which includes the results of our same 67 hospitals and six health plans operated throughout the six months ended June 30, 2016 and 2015. The results of the following facilities are excluded from our same-hospital information: (i) Hi-Desert Medical Center, which we began operating on July 15, 2015, (ii) our Carondelet Heath Network joint venture, in which we acquired a majority interest on August 31, 2015, (iii) SLUH, which we divested on August 31, 2015, (iv) our joint venture with Baptist Health System, Inc., which we formed on October 2, 2015, (v) DMC Surgery Hospital, which we closed in October 2015, (vi) our two North Carolina hospitals, which we divested effective January 1, 2016, (vii) our four North Texas hospitals in which we divested a controlling interest effective January 1, 2016, but continue to operate, and (viii) our five Georgia hospitals, which we divested effective April 1, 2016.  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

 

    

 

 

    

 

 

    

Increase

 

 

 

    

 

 

    

Increase

 

Selected Operating Expenses

 

2016

 

2015

 

(Decrease)

 

2016

 

2015

 

(Decrease)

 

Hospital Operations and other — Same-Hospital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries, wages and benefits

 

$

1,780

 

$

1,744

 

2.1

%  

 

$

3,567

 

$

3,468

 

2.9

%  

 

Supplies

 

 

621

 

 

598

 

3.8

%  

 

 

1,258

 

 

1,188

 

5.9

%  

 

Other operating expenses

 

 

957

 

 

837

 

14.3

%  

 

 

1,911

 

 

1,704

 

12.1

%  

 

Total

 

$

3,358

 

$

3,179

 

5.6

%  

 

$

6,736

 

$

6,360

 

5.9

%  

 

Ambulatory Care

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries, wages and benefits

 

$

147

 

$

41

 

258.5

%  

 

$

293

 

$

65

 

350.8

%  

 

Supplies

 

 

91

 

 

28

 

225.0

%

 

 

177

 

 

45

 

293.3

%

 

Other operating expenses

 

 

91

 

 

30

 

203.3

%  

 

 

177

 

 

51

 

247.1

%  

 

Total

 

$

329

 

$

99

 

232.3

%

 

$

647

 

$

161

 

301.9

%

 

Conifer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries, wages and benefits

 

$

238

 

$

209

 

13.9

%  

 

$

477

 

$

402

 

18.7

%  

 

Other operating expenses

 

 

85

 

 

71

 

19.7

%  

 

 

168

 

 

138

 

21.7

%  

 

Total

 

$

323

 

$

280

 

15.4

%  

 

$

645

 

$

540

 

19.4

%  

 

Rent/lease expense(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hospital Operations and other

 

$

50

 

$

47

 

6.4

%  

 

$

100

 

$

93

 

7.5

%  

 

Ambulatory Care

 

 

20

 

 

6

 

233.3

%  

 

 

37

 

 

13

 

184.6

%  

 

Conifer

 

 

5

 

 

4

 

25.0

%  

 

 

9

 

 

7

 

28.6

%  

 

Total

 

$

75

 

$

57

 

31.6

%  

 

$

146

 

$

113

 

29.2

%  

 


(1)

Included in other operating expenses.

 

Results of Operations by Segment

 

Our operations are reported under three segments:

 

·

Hospital Operations and other, which is focused on operating acute care hospitals, ancillary outpatient facilities, freestanding emergency departments, physician practices and health plans;

 

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·

Ambulatory Care, which is comprised of our USPI joint venture’s ambulatory surgery centers, urgent care centers, imaging centers and short-stay surgical hospitals, as well as Aspen’s hospitals and clinics; and

 

·

Conifer, which operates revenue cycle management and patient communication and engagement services businesses.

 

Hospital  Operations and  other  Segment

 

The following tables show operating statistics of our continuing operations hospitals on a same-hospital basis, which includes the results of our same 67 hospitals and six health plans operated throughout the six months ended June 30, 2016 and 2015. The results of the following facilities are excluded from our same-hospital information: (i) Hi‑Desert Medical Center, which we began operating on July 15, 2015, (ii) our Carondelet Heath Network joint venture, in which we acquired a majority interest on August 31, 2015, (iii) SLUH, which we divested on August 31, 2015, (iv) our joint venture with Baptist Health System, Inc., which we formed on October 2, 2015, (v) DMC Surgery Hospital, which we closed in October 2015, (vi) our two North Carolina hospitals, which we divested effective January 1, 2016, (vii) our four North Texas hospitals in which we divested a controlling interest effective January 1, 2016, but continue to operate, and (viii) our five Georgia hospitals, which we divested effective April 1, 2016.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same-Hospital

 

 

 

Continuing Operations

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

 

    

 

    

    

 

    

    

Increase

    

 

    

    

 

    

    

Increase

 

Admissions, Patient Days and Surgeries

 

2016

 

2015

 

(Decrease)

 

2016

 

2015

 

(Decrease)

 

Number of hospitals (at end of period)

 

67

 

 

67

 

 

 —

(1)  

 

67

 

 

67

 

 

 —

(1)  

 

Total admissions

 

177,151

 

 

179,135

 

 

(1.1)

%  

 

362,204

 

 

364,282

 

 

(0.6)

%  

 

Adjusted patient admissions(2) 

 

309,372

 

 

307,958

 

 

0.5

%  

 

625,159

 

 

616,687

 

 

1.4

%  

 

Paying admissions (excludes charity and uninsured)

 

167,717

 

 

170,389

 

 

(1.6)

%  

 

344,003

 

 

346,412

 

 

(0.7)

%  

 

Charity and uninsured admissions

 

9,434

 

 

8,746

 

 

7.9

%

 

18,201

 

 

17,870

 

 

1.9

%

 

Admissions through emergency department

 

111,994

 

 

113,741

 

 

(1.5)

%  

 

230,572

 

 

232,067

 

 

(0.6)

%  

 

Paying admissions as a percentage of total admissions

 

94.7

%  

 

95.1

%  

 

(0.4)

%(1)  

 

95.0

%  

 

95.1

%  

 

(0.1)

%(1) 

 

Charity and uninsured admissions as a percentage of total admissions

 

5.3

%  

 

4.9

%  

 

0.4

%(1)  

 

5.0

%  

 

4.9

%  

 

0.1

%(1) 

 

Emergency department admissions as a percentage of total admissions

 

63.2

%  

 

63.5

%  

 

(0.3)

%(1)  

 

63.7

%  

 

63.7

%  

 

0

%(1) 

 

Surgeries — inpatient

 

49,222

 

 

49,291

 

 

(0.1)

%  

 

97,769

 

 

97,586

 

 

0.2

%  

 

Surgeries — outpatient

 

65,678

 

 

64,407

 

 

2.0

%  

 

129,677

 

 

124,901

 

 

3.8

%  

 

Total surgeries

 

114,900

 

 

113,698

 

 

1.1

%  

 

227,446

 

 

222,487

 

 

2.2

%  

 

Patient days — total

 

805,662

 

 

817,881

 

 

(1.5)

%  

 

1,667,800

 

 

1,678,808

 

 

(0.7)

%  

 

Adjusted patient days(2) 

 

1,394,486

 

 

1,391,305

 

 

0.2

%  

 

2,851,066

 

 

2,812,810

 

 

1.4

%  

 

Average length of stay (days)

 

4.55

 

 

4.57

 

 

(0.4)

%

 

4.60

 

 

4.61

 

 

(0.2)

%  

 

Licensed beds (at end of period)

 

18,144

 

 

18,244

 

 

(0.5)

%  

 

18,144

 

 

18,244

 

 

(0.5)

%  

 

Average licensed beds

 

18,144

 

 

18,244

 

 

(0.5)

%  

 

18,142

 

 

18,241

 

 

(0.5)

%  

 

Utilization of licensed beds(3) 

 

48.8

%  

 

49.3

%  

 

(0.5)

%(1)  

 

50.8

%  

 

50.8

%  

 

 —

%(1) 

 


(1)

The change is the difference between 2016 and 2015 amounts shown.

(2)

Adjusted patient admissions/days represents actual patient admissions/days adjusted to include outpatient services provided by facilities in our Hospital Operations and other segment by multiplying actual patient admissions/days by the sum of gross inpatient revenues and outpatient revenues and dividing the results by gross inpatient revenues.

(3)

Utilization of licensed beds represents patient days divided by number of days in the period divided by average licensed beds.

 

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Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same-Hospital

 

 

 

Continuing Operations 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

 

    

 

    

 

 

    

 

Increase

    

 

    

    

 

    

    

Increase

 

Outpatient Visits

 

2016

 

2015

 

 

(Decrease)

 

2016

 

2015

 

 

(Decrease)

 

Total visits

 

1,830,522

 

 

1,815,393

 

 

0.8

%  

 

3,685,257

 

 

3,578,261

 

 

3.0

%  

 

Paying visits (excludes charity and uninsured)

 

1,707,375

 

 

1,691,554

 

 

0.9

%  

 

3,436,059

 

 

3,330,685

 

 

3.2

%  

 

Charity and uninsured visits

 

123,147

 

 

123,839

 

 

(0.6)

%

 

249,198

 

 

247,576

 

 

0.7

%

 

Emergency department visits

 

640,774

 

 

632,470

 

 

1.3

%  

 

1,311,452

 

 

1,269,330

 

 

3.3

%  

 

Surgery visits

 

65,678

 

 

64,407

 

 

2.0

%  

 

129,677

 

 

124,901

 

 

3.8

%  

 

Paying visits as a percentage of total visits

 

93.3

%  

 

93.2

%  

 

0.1

%(1) 

 

93.2

%  

 

93.1

%  

 

0.1

%(1) 

 

Charity and uninsured visits as a percentage of total visits

 

6.7

%  

 

6.8

%  

 

(0.1)

%(1) 

 

6.8

%  

 

6.9

%  

 

(0.1)

%(1) 

 


(1)

The change is the difference between 2016 and 2015 amounts shown.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same-Hospital

 

 

 

Continuing Operations 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

 

    

 

 

    

 

 

    

Increase

 

 

 

    

 

 

    

Increase

 

Revenues

 

2016

 

2015

 

(Decrease)

 

2016

 

2015

 

(Decrease)

 

Net operating revenues

 

$

3,732

 

$

3,523

 

5.9

%  

 

$

7,499

 

$

7,056

 

6.3

%  

 

Revenues from charity and the uninsured

 

$

222

 

$

216

 

2.8

%

 

$

433

 

$

443

 

(2.3)

%

 

Net inpatient revenues(1) 

 

$

2,400

 

$

2,305

 

4.1

%

 

$

4,899

 

$

4,687

 

4.5

%  

 

Net outpatient revenues(1) 

 

$

1,343

 

$

1,281

 

4.8

%  

 

$

2,674

 

$

2,507

 

6.7

%  

 


(1)

Net inpatient revenues and net outpatient revenues are components of net operating revenues. Net inpatient revenues include self-pay revenues of $91 million and $83 million for the three months ended June 30, 2016 and 2015, respectively, and $176 million and $177 million for the six months ended June 30, 2016 and 2015, respectively. Net outpatient revenues include self-pay revenues of $131 million and $133 million for the three months ended June 30, 2016 and 2015, respectively, and $257 million and $266 million for the six months ended June 30, 2016 and 2015, respectively.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same-Hospital

 

 

 

Continuing Operations 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

Revenues on a Per Admission,

    

 

 

    

 

 

    

Increase

 

 

 

    

 

 

    

Increase

 

Per Patient Day and Per Visit Basis

 

2016

 

2015

 

(Decrease)

 

2016

 

2015

 

(Decrease)

 

Net inpatient revenue per admission

 

$

13,548

 

$

12,867

 

5.3

%

 

$

13,526

 

$

12,866

 

5.1

%  

 

Net inpatient revenue per patient day

 

$

2,979

 

$

2,818

 

5.7

%

 

$

2,937

 

$

2,792

 

5.2

%

 

Net outpatient revenue per visit

 

$

734

 

$

706

 

4.0

%  

 

$

726

 

$

701

 

3.6

%  

 

Net patient revenue per adjusted patient admission(1) 

 

$

12,099

 

$

11,644

 

3.9

%

 

$

12,114

 

$

11,666

 

3.8

%  

 

Net patient revenue per adjusted patient day(1) 

 

$

2,684

 

$

2,577

 

4.2

%

 

$

2,656

 

$

2,558

 

3.8

%  

 


(1)

Adjusted patient admissions/days represents actual patient admissions/days adjusted to include outpatient services provided by facilities in our Hospital Operations and other 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.

 

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Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same-Hospital

 

 

 

Continuing Operations

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

 

    

 

 

    

 

 

 

    

 

Increase

 

 

 

    

 

 

 

    

 

Increase

 

Provision for Doubtful Accounts

 

2016

 

2015

 

(Decrease)

 

2016

 

2015

 

(Decrease)

 

Provision for doubtful accounts

 

$

315

 

 

$

292

 

 

7.9

%  

 

$

642

 

 

$

595

 

 

7.9

%  

 

Provision for doubtful accounts as a percentage of net operating revenues before provision for doubtful accounts

 

 

7.8

%  

 

 

7.7

%  

 

0.1

%(1)  

 

 

8.0

%  

 

 

7.9

%  

 

0.1

%(1) 

 


(1)

The change is the difference between 2016 and 2015 amounts shown.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same-Hospital

 

 

Continuing Operations 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

    

 

    

 

 

    

 

Increase

    

 

    

    

 

    

    

Increase

Selected Operating Expenses

 

2016

 

2015

 

 

(Decrease)

 

2016

 

2015

 

 

(Decrease)

Hospital Operations and other — Same-Hospital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries, wages and benefits as a percentage of net operating revenues

 

47.7

%

 

49.5

%

 

(1.8)

%(1) 

 

47.6

%

 

49.1

%

 

(1.5)

%(1) 

Supplies as a percentage of net operating revenues

 

16.6

%

 

17.0

%

 

(0.4)

%(1) 

 

16.8

%

 

16.8

%

 

 —

%(1) 

Other operating expenses as a percentage of net operating revenues

 

25.6

%

 

23.8

%

 

1.8

%(1) 

 

25.5

%

 

24.1

%

 

1.4

%(1) 


(1)

The change is the difference between 2016 and 2015 amounts shown.

 

 

Revenues

 

Same-hospital net operating revenues increased $209 million, or 5.9%, during the three months ended June 30, 2016 compared to the three months ended June 30, 2015. The increase in same-hospital net operating revenues in the 2016 period is primarily due to volume growth in higher acuity inpatient services, higher outpatient volumes, improved terms of our managed care contracts and an increase in our other operations revenues. Same-hospital net inpatient revenues increased $95 million, or 4.1%, while same-hospital admissions decreased 1.1% in the three months ended June 30, 2016 compared to the same period in 2015. Same-hospital net inpatient revenue per admission increased 5.3%, primarily due to the improved terms of our managed care contracts and volume growth in higher acuity service lines, in the three months ended June 30, 2016 compared to the three months ended June 30, 2015. Same-hospital net outpatient revenues increased $62 million, or 4.8%, and same-hospital outpatient visits increased 0.8% in the three months ended June 30, 2016 compared to the same period in 2015. Growth in outpatient revenues and volumes was primarily driven by improved terms of our managed care contracts and increased outpatient volume levels associated with our outpatient development program. Same-hospital net outpatient revenue per visit increased 4.0% in the three months ended June 30, 2016 compared to the three months ended June 30, 2015, primarily due to the improved terms of our managed care contracts.

 

Same-hospital net operating revenues increased $443 million, or 6.3%, during the six months ended June 30, 2016 compared to the six months ended June 30, 2015. The increase in same-hospital net operating revenues in the 2016 period is primarily due to volume growth in higher acuity inpatient services, higher outpatient volumes, improved terms of our managed care contracts and an increase in our other operations revenues. Same-hospital net inpatient revenues increased $212 million, or 4.5%, while same-hospital admissions decreased 0.6% in the six months ended June 30, 2016 compared to the same period in 2015. Same-hospital net inpatient revenue per admission increased 5.1%, primarily due to the improved terms of our managed care contracts and volume growth in higher acuity service lines, in the six months ended June 30, 2016 compared to the six months ended June 30, 2015. Same-hospital net

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outpatient revenues increased $167 million, or 6.7%, and same-hospital outpatient visits increased 3.0% in the six months ended June 30, 2016 compared to the same period in 2015. Growth in outpatient revenues and volumes was primarily driven by improved terms of our managed care contracts and increased outpatient volume levels associated with our outpatient development program. Same-hospital net outpatient revenue per visit increased 3.6% in the six months ended June 30, 2016 compared to the six months ended June 30, 2015, primarily due to the improved terms of our managed care contracts.

 

Provision for Doubtful Accounts

 

Same-hospital provision for doubtful accounts as a percentage of net operating revenues before provision for doubtful accounts was 7.8% and 7.7% for the three months ended June 30, 2016 and 2015, respectively, and 8.0% and 7.9% for the six months ended June 30, 2016 and 2015, respectively. The table below shows the consolidated net accounts receivable and allowance for doubtful accounts by payer at June 30, 2016 and December 31, 2015.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2016

 

December 31, 2015

 

 

    

Accounts

    

 

 

    

 

 

    

Accounts

    

 

 

    

 

 

 

 

 

Receivable

 

 

 

 

 

 

 

Receivable

 

 

 

 

 

 

 

 

 

Before

 

 

 

 

 

 

 

Before

 

 

 

 

 

 

 

 

 

Allowance

 

Allowance

 

 

 

 

Allowance

 

Allowance

 

 

 

 

 

 

for Doubtful

 

for Doubtful

 

 

 

 

for Doubtful

 

for Doubtful

 

 

 

 

 

 

Accounts

 

Accounts

 

Net

 

Accounts

 

Accounts

 

Net

 

Medicare

 

$

389

 

$

 

$

389

 

$

360

 

$

 

$

360

 

Medicaid

 

 

64

 

 

 

 

64

 

 

70

 

 

 

 

70

 

Net cost report settlements payable and valuation allowances

 

 

(33)

 

 

 

 

(33)

 

 

(42)

 

 

 

 

(42)

 

Managed care

 

 

1,767

 

 

138

 

 

1,629

 

 

1,715

 

 

126

 

 

1,589

 

Self-pay uninsured

 

 

445

 

 

402

 

 

43

 

 

509

 

 

436

 

 

73

 

Self-pay balance after insurance

 

 

233

 

 

158

 

 

75

 

 

208

 

 

142

 

 

66

 

Estimated future recoveries

 

 

142

 

 

 

 

142

 

 

144

 

 

 

 

144

 

Other payers

 

 

477

 

 

220

 

 

257

 

 

442

 

 

166

 

 

276

 

Total Hospital Operations and other

 

 

3,484

 

 

918

 

 

2,566

 

 

3,406

 

 

870

 

 

2,536

 

Ambulatory Care

 

 

193

 

 

28

 

 

165

 

 

182

 

 

17

 

 

165

 

Total discontinued operations

 

 

3

 

 

 —

 

 

3

 

 

3

 

 

 —

 

 

3

 

 

 

$

3,680

 

$

946

 

$

2,734

 

$

3,591

 

$

887

 

$

2,704

 

 

A significant portion of our provision for doubtful accounts relates to self-pay patients, as well as co-pays and deductibles owed to us by patients with insurance. Collection of accounts receivable has been a key area of focus, particularly over the past several years. At June 30, 2016, our collection rate on self-pay accounts was approximately 26.1%. Our self-pay collection rate includes payments made by patients, including co-pays and deductibles paid by patients with insurance. Based on our accounts receivable from self-pay patients and co-pays and deductibles owed to us by patients with insurance at June 30, 2016, a 10% decrease or increase in our self-pay collection rate, or approximately 3%, which we believe could be a reasonably likely change, would result in an unfavorable or favorable adjustment to provision for doubtful accounts of approximately $9 million.

 

Payment pressure from managed care payers also affects our provision for doubtful accounts. 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 collection rate from managed care payers was approximately 97.9% at June 30, 2016.

 

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We manage our provision for doubtful accounts 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 and other segment of $2.599 billion and $2.578 billion at June 30, 2016 and December 31, 2015, respectively, excluding cost report settlements payable and valuation allowances of $33 million and $42 million at June 30, 2016 and December 31, 2015, respectively:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2016

 

    

 

    

 

 

    

 

 

    

 

Indemnity,

 

 

 

 

 

 

 

 

 

 

 

Managed

 

Self-Pay

 

 

 

 

 

Medicare

 

Medicaid

 

Care

 

and Other

 

Total

0-60 days

 

88

%  

 

64

%  

 

61

%  

 

23

%  

 

58

%  

61-120 days

 

7

%  

 

18

%  

 

16

%  

 

17

%  

 

15

%  

121-180 days

 

3

%  

 

8

%  

 

9

%  

 

12

%  

 

9

%  

Over 180 days

 

2

%  

 

10

%  

 

14

%  

 

48

%  

 

18

%  

Total 

 

100

%  

 

100

%  

 

100

%  

 

100

%  

 

100

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

    

 

    

 

 

    

 

 

    

 

Indemnity,

 

 

 

 

 

 

 

 

 

 

 

Managed

 

Self-Pay

 

 

 

 

 

Medicare

 

Medicaid

 

Care

 

and Other

 

Total

0-60 days

 

90

%  

 

65

%  

 

64

%  

 

27

%  

 

62

%  

61-120 days

 

6

%  

 

16

%  

 

16

%  

 

19

%  

 

15

%  

121-180 days

 

2

%  

 

6

%  

 

7

%  

 

11

%  

 

7

%  

Over 180 days

 

2

%  

 

13

%  

 

13

%  

 

43

%  

 

16

%  

Total 

 

100

%  

 

100

%  

 

100

%  

 

100

%  

 

100

%  

 

At June 30, 2016, we had a cumulative total of patient account assignments to our Conifer subsidiary of approximately $2.2 billion related to our continuing operations, but excluding our newly acquired hospitals. 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 our Conifer subsidiary 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. At the present time, our newly acquired facilities are beginning to implement this program. Based on recent trends, approximately 96% of all accounts in the MEP are ultimately approved for benefits under a government program, such as Medicaid. The following table shows the approximate amount of accounts receivable in the MEP still awaiting determination of eligibility under a government program at June 30, 2016 and December 31, 2015 by aging category for the hospitals currently in the program.

 

 

 

 

 

 

 

 

 

 

    

June 30, 

 

December 31,

 

 

 

2016

 

2015

 

0-60 days 

 

$

62

 

$

86

 

61-120 days

 

 

15

 

 

14

 

121-180 days

 

 

6

 

 

7

 

Over 180 days

 

 

13

 

 

18

 

Total 

 

$

96

 

$

125

 

 

Salaries, Wages and Benefits

 

Same-hospital salaries, wages and benefits as a percentage of net operating revenues decreased 180 basis points to 47.7% in the three months ended June 30, 2016 compared to 49.5% for the same period in 2015. While same-hospital

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net operating revenues increased 5.9% during the three months ended June 30, 2016 compared to the three months ended June 30, 2015, same-hospital salaries, wages and benefits increased by only 2.1% in the three months ended June 30, 2016 compared to the 2015 period. The increase in same-hospital salaries, wages and benefits was primarily due to annual merit increases for certain of our employees and increased employee health benefits costs, partially offset by lower incentive compensation expense. Salaries, wages and benefits expense for the three months ended June 30, 2016 and 2015 included stock-based compensation expense of $16 million and $18 million, respectively.

 

Same-hospital salaries, wages and benefits as a percentage of net operating revenues decreased 150 basis points to 47.6% in the six months ended June 30, 2016 compared to 49.1% for the same period in 2015. While same-hospital net operating revenues increased 6.3% during the six months ended June 30, 2016 compared to the six months ended June 30, 2015, same-hospital salaries, wages and benefits increased by only 2.9% in the six months ended June 30, 2016 compared to the 2015 period. The increase in same-hospital salaries, wages and benefits was primarily due to annual merit increases for certain of our employees and increased employee health benefits costs, partially offset by lower incentive compensation expense. Salaries, wages and benefits expense for the six months ended June 30, 2016 and 2015 included stock-based compensation expense of $29 million and $36 million, respectively.

 

At June 30, 2016, approximately 23% of the employees in our Hospital Operations and other segment were represented by labor unions. There were no unionized employees in our Ambulatory Care segment, and less than 1% of Conifer’s employees belong to a union. Unionized employees – primarily registered nurses and service and maintenance workers – are located at 35 of our hospitals, the majority of which are in California, Florida and Michigan. We currently have two expired contracts and are negotiating renewals under extension agreements. We are also negotiating first contracts at five hospitals and one physician practice where employees recently selected union representation. At this time, we are unable to predict the outcome of the negotiations, but increases in salaries, wages and benefits could result from these agreements. Furthermore, there is a possibility that strikes could occur during the negotiation process, which could increase our labor costs and have an adverse effect on our patient admissions and net operating revenues. Future organizing activities by labor unions could increase our level of union representation in 2016.

 

Supplies

 

Same-hospital supplies expense as a percentage of net operating revenues decreased 40 basis points to 16.6% for the three months ended June 30, 2016 compared to the three months ended June 30, 2015 and stayed the same for the six months ended June 30, 2016 and 2015 at 16.8%.

 

We strive to control supplies expense through product standardization, contract compliance, improved utilization, bulk purchases and operational improvements. The items of current cost reduction focus continue to be cardiac stents and pacemakers, orthopedics and implants, and high-cost pharmaceuticals. We also utilize group-purchasing strategies and supplies-management services in an effort to reduce costs.

 

Other Operating Expenses, Net

 

Same-hospital other operating expenses as a percentage of net operating revenues increased 180 basis points  to 25.6% in the three months ended June 30, 2016 compared to 23.8% for the same period in 2015. The increase in other operating expenses was primarily due to:

 

·

higher same-hospital malpractice expense of $14 million;

 

·

increased costs of $47 million associated with our health plans due to an increase in covered lives, which costs were substantially offset by increased health plan revenues; and

 

·

increased costs of contracted services of $42 million.

 

Same-hospital malpractice expense in the 2016 period included an unfavorable adjustment of approximately $6 million due to a 25 basis point decrease in the interest rate used to estimate the discounted present value of projected future malpractice

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liabilities compared to a favorable adjustment of approximately $6 million as a result of a 36 basis point increase in the interest rate in the 2015 period.

 

Same-hospital other operating expenses as a percentage of net operating revenues increased 140 basis points to 25.5% in the six months ended June 30, 2016 compared to 24.1% for the same period in 2015. The increase in other operating expenses was primarily due to:

 

·

additional medical fees of $19 million;

 

·

higher same-hospital malpractice expense of $16 million;

 

·

increased costs of $67 million associated with our health plans due to an increase in covered lives, which costs were substantially offset by increased health plan revenues; and

 

·

increased costs of contracted services of $79 million.

 

Same-hospital malpractice expense in the 2016 period included an unfavorable adjustment of approximately $17 million due to a 80 basis point decrease in the interest rate used to estimate the discounted present value of projected future malpractice liabilities compared to a favorable adjustment of approximately $2 million as a result of a 10 basis point increase in the interest rate in the 2015 period.

 

Ambulatory  Care  Segment

 

On June 16, 2015, we completed the transaction that combined our freestanding ambulatory surgery and imaging center assets with the short-stay surgical facility assets of USPI into our new USPI joint venture, and we acquired Aspen, which operates nine private short-stay surgical hospitals and clinics in the United Kingdom, thereby forming our Ambulatory Care separate reportable business segment. The results of our USPI joint venture and Aspen are included in the financial and statistical information provided only for the period from acquisition to June 30, 2016. 

 

Our USPI joint venture operates its surgical facilities in partnership with local physicians and, in many of these facilities, a health system partner. We hold an ownership interest in each facility, with each being operated through a separate legal entity. The joint venture 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 bad debt expense); 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 our USPI joint venture.

 

Our role as an owner and day-to-day manager provides us with significant influence over the operations of each facility. In many of the facilities our Ambulatory Care segment operates (120 of 334 at June 30, 2016), 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. The joint venture controls 214 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 us is classified within “net income attributable to noncontrolling interests.”

 

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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 of each facility, which is based on the facility’s net income and the percentage of the facility’s outstanding equity interests owned by us; 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 bad debt expense.

 

Our Ambulatory Care operating income is driven by the performance of all facilities our USPI joint venture operates and by the joint venture’s ownership interests in those facilities, but our individual revenue and expense line items contain only consolidated businesses, which represent 63% of those facilities. This translates to trends in consolidated operating income that often do not correspond with changes in consolidated revenues and expenses.

 

Three and Six Months Ended June 30, 2016 Compared to Three and Six Months Ended June 30, 2015

 

The following table summarizes certain consolidated statements of operations items for the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended 

 

 

Six Months Ended 

 

 

June 30, 

 

 

June 30, 

 

Ambulatory Care Results of Operations

    

2016

    

2015

    

2016

    

2015

    

Net operating revenues

 

$

442

 

$

142

 

$

871

 

$

233

 

Equity in earnings of unconsolidated affiliates

 

 

26

 

 

6

 

 

51

 

 

6

 

Operating expenses, excluding depreciation and amortization

 

 

329

 

 

99

 

 

647

 

 

161

 

Depreciation and amortization

 

 

22

 

 

7

 

 

47

 

 

11

 

Operating income

 

$

117

 

$

42

 

$

228

 

$

67

 

 

Our Ambulatory Care net operating revenues increased by $300 million and $638 million, or 211.3% and 273.8%, for the three and six months ended June 30, 2016, respectively, compared to the three and six months ended June 30, 2015, respectively. The growth in revenues was primarily driven by increases from acquisitions of $290 million and $618 million for the three and six month periods, respectively.

 

Salaries, wages and benefits expense increased by $106 million and $228 million, or 258.5% or 350.8%, for the three and six months ended June 30, 2016, respectively, compared to the three and six months ended June 30, 2015, respectively. The increases were primarily driven by salaries, wages and benefits expense from acquisitions of $103 million and $222 million for the three and six month periods, respectively.

 

Supplies expense increased by $63 million and $132 million, or 225.0% and 293.3%, for the three and six months ended June 30, 2016, respectively, compared to the three and six months ended June 30, 2015, respectively. The increases were primarily driven by supplies expense from acquisitions of $62 million and $131 million for the three and six month periods, respectively.

 

Other operating expenses increased by $61 million and $126 million, or 203.3% and 247.1%, for the three and six months ended June 30, 2016, respectively, compared to three and six months ended June 30, 2015, respectively. The increases were driven by other operating expenses from acquisitions of $58 million and $121 million for the three and six month periods, respectively.

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Facility Growth

 

The following table summarizes the changes in our same-facility revenue year-over-year on a pro forma systemwide basis, which includes both consolidated and unconsolidated (equity method) facilities. While we do not record the revenues of unconsolidated facilities, we believe this information is important in understanding the financial performance of our Ambulatory Care segment because these revenues are the basis for calculating our management services revenues and, together with the expenses of our unconsolidated facilities, are the basis for our equity in earnings of unconsolidated affiliates.

 

 

 

 

 

 

 

 

 

 

Three Months Ended 

 

Six Months Ended 

Ambulatory Care Facility Growth

    

June 30, 2016

    

June 30, 2016

Net revenues

 

11.7

%  

 

11.4

%  

Cases

 

5.2

%  

 

6.9

%  

Net revenue per case

 

6.1

%  

 

4.2

%  

 

Joint Ventures with Health System Partners

 

Our USPI joint venture’s business model is to jointly own its facilities with local physicians and not-for-profit health systems. Accordingly, as of June 30, 2016, the majority of facilities in our Ambulatory Care segment are operated in this model.

 

 

 

 

 

 

Six Months Ended 

Ambulatory Care Facilities with Health System Partners

    

June 30, 2016

Facilities:

 

 

With a health system partner

 

179

Without a health system partner

 

155

Total facilities operated

 

334

Change from December 31, 2015:

 

 

Acquisitions

 

4

De novo

 

1

Dispositions/Mergers

 

(4)

Total increase in number of facilities operated

 

1

 

Conifer  Segment

 

Our Conifer subsidiary generated net operating revenues of $386 million and $340 million during the three months ended June 30, 2016 and 2015, respectively, and $771 million and $682 million during the six months ended June 30, 2016 and 2015, respectively, a portion of which was eliminated in consolidation as described in Note 16 to the Condensed Consolidated Financial Statements. The increase in the revenue from third-party customers, which is not eliminated in consolidation, is primarily due to new clients.

 

Salaries, wages and benefits expense for Conifer increased $29 million, or 13.9%, in the three months ended June 30, 2016 compared to the three months ended June 30, 2015, and $75 million, or 18.7%, in the six months ended June 30, 2016 compared to the six months ended June 30, 2015, in both cases due to an increase in employee headcount as a result of the growth in Conifer’s business primarily attributable to new clients.

 

Other operating expenses for Conifer increased $14 million, or 19.7%, in the three months ended June 30, 2016 compared to the three months ended June 30, 2015, and $30 million, or 21.7%, in the six months ended June 30, 2016 compared to the six months ended June 30, 2015, in both cases due to the growth in Conifer’s business primarily attributable to new clients.

 

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 collection at point-of-service, and financial counseling. These

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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.

 

Consolidated 

 

Impairment and Restructuring Charges, and Acquisition-Related Costs

 

During the three months ended June 30, 2016, we recorded impairment and restructuring charges and acquisition-related costs of $22 million, consisting of approximately, $7 million of employee severance costs, $1 million of restructuring costs, and $14 million in acquisition-related costs, which include $3 million of transaction costs and $11 million of acquisition integration costs.

 

During the three months ended June 30, 2015, we recorded impairment and restructuring charges and acquisition-related costs of $193 million, consisting of a $147 million charge to write-down assets held for sale to their estimated fair value, less estimated costs to sell, as a result of us entering into a definitive agreement for the sale of SLUH, $2 million of employee severance costs, $1 million of restructuring costs, $4 million of contract and lease termination fees, and $39 million in acquisition-related costs, which include $29 million of transaction costs and $10 million in acquisition integration costs.

 

During the six months ended June 30, 2016, we recorded impairment and restructuring charges and acquisition-related costs of $50 million, consisting of approximately $2 million to write-down other intangible assets, $17 million of employee severance costs, $2 million of restructuring costs, $1 million of contract and lease termination fees, and $28 million in acquisition-related costs, which include $3 million of transaction costs and $25 million of acquisition integration costs.

 

During the six months ended June 30, 2015, we recorded impairment and restructuring charges and acquisition-related costs of $222 million, consisting of a $147 million charge to write-down assets held for sale to their estimated fair value, less estimated costs to sell, as a result of us entering into a definitive agreement for the sale of SLUH, $8 million of employee severance costs, $4 million of restructuring costs, $4 million of contract and lease termination fees, and $59 million in acquisition-related costs, which include $36 million of transaction costs and $23 million in acquisition integration costs.

 

Litigation and Investigation Costs

 

Litigation and investigation costs for the three months ended June 30, 2016 and 2015 were $114 million and $14 million, respectively, and $287 million and $17 million, respectively, for the six months ended June 30, 2016 and 2015. These costs were  primarily attributable to significant legal proceedings and governmental investigations described in Note 10 to our Condensed Consolidated Financial Statements.

 

Gains on Sales, Consolidation and Deconsolidation of Facilities

 

During the three and six months ended June 30, 2016, we recorded gains on sales, consolidation and deconsolidation of facilities of approximately $1 million and $148 million, respectively, primarily comprised of a $113 million gain from the sale of our Atlanta-area facilities and $29 million of gains related to the consolidation and deconsolidation of certain businesses of our USPI joint venture due to ownership changes.

 

Interest Expense

 

Interest expense for the three months ended June 30, 2016 was $244 million compared to $217 million for the same period in 2015, and $487 million for the six months ended June 30, 2016 compared to $416 million for the same period in 2015, in both cases primarily due to increased borrowings related to our recent acquisitions.

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Income Tax Expense

 

During the three months ended June 30, 2016, we recorded an income tax benefit of $16 million in continuing operations on pre-tax income of $25 million. The recorded income tax differs from taxes calculated at the statutory rate primarily due to a state income tax benefit of approximately $6 million, tax benefits of $26 million related to net income attributable to noncontrolling partnership interests, which is excluded from the computation of the provision for income taxes, and tax expense of $7 million related to nondeductible litigation compared to an income tax benefit of $27 million during the three months ended June 30, 2015.  

 

During the six months ended June 30, 2016, we recorded income tax expense of $51 million in continuing operations on pre-tax income of $130 million. The recorded income tax differs from taxes calculated at the statutory rate primarily due to state income tax expense of approximately $7 million, tax benefits of $47 million related to net income attributable to noncontrolling partnership interests, which is excluded from the computation of the provision for income taxes, tax expense of $29 million related to nondeductible goodwill, tax benefits of $17 million related to nontaxable gains and related changes in deferred taxes, and tax expense of $33 million related to nondeductible litigation, compared to an income tax benefit of $11 million during the six months ended June 30, 2015.

 

Net Income Attributable to Noncontrolling Interests

 

Net income attributable to noncontrolling interests was $85 million for the three months ended June 30, 2016 compared to $33 million for the three months ended June 30, 2015. Net income attributable to noncontrolling interests for the three months ended June 30, 2016 was comprised of $14 million related to our Hospital Operations and other segment, $60 million related to our Ambulatory Care segment and $11 million related to our Conifer segment. Of the portion related to our Ambulatory Care segment, $8 million was related to the minority interest in our USPI joint venture. The portion related to our Conifer segment is due to Catholic Health Initiatives’ 23.8% ownership interest in our Conifer Health Solutions, LLC subsidiary.

 

Net income attributable to noncontrolling interests was $178 million for the six months ended June 30, 2016 compared to $62 million for the six months ended June 30, 2015. Net income attributable to noncontrolling interests for the six months ended June 30, 2016 was comprised of $20 million related to our Hospital Operations and other segment, $135 million related to our Ambulatory Care segment and $23 million related to our Conifer segment. Of the portion related to our Ambulatory Care segment, $37 million was related to the minority interest in our USPI joint venture.

 

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 in the 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, from time to time 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) to Tenet Healthcare Corporation common shareholders before (1) the cumulative effect of changes in accounting principle, (2) net loss (income) attributable to noncontrolling interests, (3) income (loss) from discontinued operations, (4) income tax benefit (expense), (5) investment earnings (losses), (6) gain (loss) from early extinguishment of debt, (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, and (11) depreciation and amortization.  Litigation and investigation costs do not include ordinary course of business malpractice and other litigation and related expense.

 

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The Company believes the foregoing non-GAAP measures are useful to investors and analysts because they present additional information on the Company’s financial performance. Investors, analysts, Company management and the Company’s Board of Directors utilize these non-GAAP measures, in addition to GAAP measures, to track the Company’s financial and operating performance and compare the Company’s performance to its peer companies, which utilize similar non-GAAP measures in their presentations. The Human Resources Committee of the Company’s Board of Directors also uses certain of these measures to evaluate management’s performance for the purpose of determining incentive compensation. Additional information regarding the purpose and utility of specific non-GAAP measures used by the Company is set forth below. 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 other GAAP and 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.These non-GAAP measures may not be comparable to similarly titled measures reported by other companies. Because these measures exclude many items that are included in our financial statements, they do not provide a complete measure of our operating performance. Accordingly, investors are encouraged to use GAAP measures when evaluating the Company’s financial performance

 

The table below shows the reconciliation of Adjusted EBITDA to net income available (loss attributable) to Tenet Healthcare Corporation common shareholders (the most comparable GAAP term) for the three and six months ended June 30, 2016 and 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended 

 

Six Months Ended 

 

 

 

June 30, 

 

June 30, 

 

 

  

2016

 

2015

 

2016

 

2015

 

Net loss attributable to Tenet Healthcare Corporation common shareholders

 

$

(46)

 

 

$

(61)

 

 

$

(105)

 

 

$

(14)

 

 

Less: Net income attributable to noncontrolling interests

 

 

(85)

 

 

 

(33)

 

 

 

(178)

 

 

 

(62)

 

 

Net loss from discontinued operations, net of tax

 

 

(2)

 

 

 

(1)

 

 

 

(6)

 

 

 

 —

 

 

Income (loss) from continuing operations

 

 

41

 

 

 

(27)

 

 

 

79

 

 

 

48

 

 

Income tax benefit (expense)

 

 

16

 

 

 

27

 

 

 

(51)

 

 

 

11

 

 

Investment earnings (losses)

 

 

2

 

 

 

(1)

 

 

 

3

 

 

 

(1)

 

 

Interest expense

 

 

(244)

 

 

 

(217)

 

 

 

(487)

 

 

 

(416)

 

 

Operating income

 

 

267

 

 

 

164

 

 

 

614

 

 

 

454

 

 

Litigation and investigation costs

 

 

(114)

 

 

 

(14)

 

 

 

(287)

 

 

 

(17)

 

 

Gains on sales, consolidation and deconsolidation of facilities

 

 

1

 

 

 

 —

 

 

 

148

 

 

 

 —

 

 

Impairment and restructuring charges, and acquisition-related costs

 

 

(22)

 

 

 

(193)

 

 

 

(50)

 

 

 

(222)

 

 

Depreciation and amortization

 

 

(215)

 

 

 

(197)

 

 

 

(427)

 

 

 

(404)

 

 

Adjusted EBITDA

 

$

617

 

 

$

568

 

 

$

1,230

 

 

$

1,097

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net operating revenues

 

$

4,868

 

 

$

4,492

 

 

$

9,912

 

 

$

8,916

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) from continuing operations as a % of operating revenues

 

 

(0.9)

%

 

 

(1.4)

%

 

 

(1.1)

%

 

 

(0.2)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA as % of net operating revenues (Adjusted EBITDA margin) 

 

 

12.7

%

 

 

12.6

%

 

 

12.4

%

 

 

12.3

%

 

 

 

 

 

 

 

 

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LIQUIDITY AND CAPITAL RESOURCES

 

CASH REQUIREMENTS

 

There have been no material changes to our obligations to make future cash payments under contracts and under contingent commitments, such as standby letters of credit and minimum revenue guarantees, as disclosed in our Annual Report.

 

As part of our long-term objective to manage our capital structure, we may from time to time seek to retire, purchase, redeem or refinance some of our outstanding debt or equity securities subject to prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. These actions are part of our strategy to manage our leverage and capital structure over time, which is dependent on our total amount of debt, our available cash balances and our operating results.

 

At June 30, 2016, using the last 12 months of Adjusted EBITDA, including our USPI joint venture and Aspen’s last 12 months of Adjusted EBITDA, our ratio of total long-term debt, net of cash and cash equivalent balances, to Adjusted EBITDA was 5.75x on a consolidated basis. We anticipate this ratio will fluctuate from quarter to quarter based on earnings performance and other factors, including acquisitions that involve the assumption of long-term debt. We intend to manage this ratio by following our business plan, managing our cost structure, possible asset divestitures and through other changes in our capital structure, including, if appropriate, the issuance of equity or convertible securities. Our ability to achieve our leverage and capital structure objectives is subject to numerous risks and uncertainties, many of which are described in 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 (including those required to achieve compliance with the health information technology requirements under the American Recovery and Reinvestment Act of 2009), introduction of new medical technologies, design and construction of new buildings, and various other capital improvements, as well as commitments to make capital expenditures in connection with the acquisitions of businesses. Capital expenditures were $413 million and $359 million in the six months ended June 30, 2016 and 2015, respectively. We anticipate that our capital expenditures for continuing operations for the year ending December 31, 2016 will total approximately $850 million to $900 million, including $133 million that was accrued as a liability at December 31, 2015. Our budgeted 2016 capital expenditures include approximately $5 million to improve disability access at certain of our facilities pursuant to the terms of a negotiated consent decree.

 

Interest payments, net of capitalized interest, were $467 million and $385 million in the six months ended June 30, 2016 and 2015, respectively.

 

Income tax payments, net of tax refunds, were approximately $29 million and $8 million in the six months ended June 30, 2016 and 2015, respectively.

 

SOURCES AND USES OF CASH

 

Our liquidity for the six months ended June 30, 2016 was primarily derived from net cash provided by operating activities, cash on hand and borrowings under our revolving credit facility. We had approximately $656 million of cash and cash equivalents on hand at June 30, 2016 to fund our operations and capital expenditures, and our borrowing availability under our credit facility was $996 million based on our borrowing base calculation at June 30, 2016.

 

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 and levels of bad debt due to shifts in payer mix and other factors.

 

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Net cash provided by operating activities was $582 million in the six months ended June 30, 2016 compared to $353 million in the six months ended June 30, 2015. Key positive and negative factors contributing to the change between the 2016 and 2015 periods include the following:

 

·

Increased income from continuing operations before income taxes of $133 million, excluding investment earnings (losses), gain (loss) from early extinguishment of debt, interest expense, gains on sales, consolidation and deconsolidation of facilities, litigation and investigation costs, impairment and restructuring charges, and acquisition-related costs, and depreciation and amortization in the six months ended June 30, 2016 compared to the six months ended June 30, 2015;

 

·

$67 million less cash used by the change in accounts receivable, net of provision for doubtful accounts, in the 2016 period;

 

·

Approximately $110 million of additional net cash proceeds in the 2016 period related to supplemental Medicaid programs in California and Texas;

 

·

Higher aggregate annual 401(k) matching contributions and annual incentive compensation payments of $18 million and $9 million, respectively;

 

·

An increase of $13 million in payments on reserves for restructuring charges, acquisition-related costs, and litigation costs and settlements; and

 

·

Higher interest payments of $82 million.

 

We continue to seek further initiatives to increase the efficiency of our balance sheet by generating incremental cash, including by means of the sale of underutilized or inefficient assets.

 

Capital expenditures were $413 million and $359 million in the six months ended June 30, 2016 and 2015, respectively.

 

We record our investments that are available-for-sale at fair market value. As shown in Note 14 to our Condensed Consolidated Financial Statements, 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. On December 4, 2015, we entered into an amendment to our existing senior secured revolving credit facility (as amended, “Credit Agreement”) in order to, among other things, extend the scheduled maturity date of the facility, reduce the rates of certain interest and fees payable under the facility and remove certain restrictions with respect to the borrowing base eligibility of certain accounts receivable. The Credit Agreement provides, subject to borrowing availability, for revolving loans in an aggregate principal amount of up to $1 billion, with a $300 million subfacility for standby letters of credit. The Credit Agreement has a scheduled maturity date of December 4, 2020. We are in compliance with all covenants and conditions in our Credit Agreement. At June 30, 2016, we had no cash borrowings outstanding under the Credit Agreement, and we had approximately $4 million of standby letters of credit outstanding. Based on our eligible receivables, approximately $996 million was available for borrowing under the Credit Agreement at June 30, 2016.

 

Letter of Credit Facility. We have a letter of credit facility agreement (“LC Facility”) that provides for the issuance of standby and documentary letters of credit (including certain letters of credit originally issued under our prior credit agreement, which we transferred to the LC Facility), from time to time, in an aggregate principal amount of up to $180 million (subject to increase to up to $200 million). The LC Facility has a scheduled maturity date of March 7, 2017. We are in compliance with all covenants and conditions in our LC Facility. At June 30, 2016, we had approximately $132 million of standby letters of credit outstanding under the LC Facility.

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For information regarding our long-term debt and capital lease obligations, see Note 5 to our Condensed Consolidated Financial Statements.

 

LIQUIDITY

 

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 and income tax payments. These fluctuations result in material intra-quarter net operating and investing uses of cash that has caused, and in the future could cause, us to use our Credit Agreement as a source of liquidity.

 

We believe that existing cash and cash equivalents on hand, availability under our Credit Agreement, anticipated future cash provided by operating activities, and our investments in marketable securities of our captive insurance companies classified as noncurrent investments on our balance sheet 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 and other presently known operating needs. We also expect to use cash on the balance sheet and borrowings under our Credit Agreement to fund the $514 million in payments anticipated to be made in the three months ending September 30, 2016 in connection with the resolution of the Clinica de la Mama matters.

 

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 or 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 acquire. In addition, liquidity could be adversely affected by a deterioration in our results of operations, including our ability to generate cash from operations, as well as by the various risks and uncertainties discussed in this and other sections of this report, including any costs associated with significant legal proceedings and government investigations.

 

We do not rely on commercial paper or other short-term financing arrangements nor do we enter into repurchase agreements or other short-term financing arrangements not otherwise reported in our period-end balance sheets. In addition, we do not have significant exposure to floating interest rates given that substantially all of our current long-term indebtedness has fixed rates of interest.

 

We continue to aggressively identify and implement further actions to control costs and enhance our operating performance, including cash flow. Among the areas being addressed are capital allocation priorities, volume growth, including the acquisition of outpatient businesses, physician recruitment and alignment strategies, expansion of our Conifer services businesses, managed care payer contracting, procurement efficiencies, cost standardization, bad debt expense reduction initiatives, underperforming hospitals and portfolio optimization, and certain hospital and overhead costs not related to patient care. Although these initiatives may result in improved performance, our performance may remain somewhat below our hospital management company peers because of geographic and other differences in hospital portfolios.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

Our consolidated operating results for the six months ended June 30, 2016 and 2015 include $2 million and $42 million, respectively, of net operating revenue, and $7 million of net operating losses and $4 million of net operating income, respectively, generated from hospitals operated by us under operating lease arrangements (one hospital in the six months ended June 30, 2016, which was sold effective March 31, 2016, and two hospitals in the six months ended

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June 30, 2015). In accordance with GAAP, the applicable buildings and the future lease obligations under these arrangements are not recorded on our consolidated balance sheet.

 

We have no other off-balance sheet arrangements that may have a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources, except for $219 million of standby letters of credit outstanding and guarantees at June 30, 2016.

 

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.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The table below presents information about certain of our market-sensitive financial instruments at June 30, 2016. The fair values were determined based on quoted market prices for the same or similar instruments. The average effective interest rates presented are based on the rate in effect at the reporting date. The effects of unamortized premiums and discounts are excluded from the table.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maturity Date, Years Ending December 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

2016

 

2017

 

2018

 

2019

 

2020

 

Thereafter

 

Total

 

Fair Value

 

 

 

(Dollars in Millions)

 

Fixed rate long-term debt

 

$

109

 

 

$

166

 

 

$

1,143

 

 

$

1,683

 

 

$

3,410

 

 

$

7,331

 

 

$

13,842

 

 

$

13,181

 

Average effective interest rates

 

 

5.9

%  

 

 

6.7

%  

 

 

6.5

%  

 

 

5.5

%  

 

 

6.7

%  

 

 

7.1

%  

 

 

6.8

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable rate long-term debt

 

$

 —

 

 

$

 —

 

 

$

 —

 

 

$

 —

 

 

$

900

 

 

$

 —

 

 

$

900

 

 

$

909

 

Average effective interest rates

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

4.1

%  

 

 

 —

%  

 

 

 —

%  

 

 

 

 

 

At June 30, 2016, the potential reduction of annual pretax earnings due to a one percentage point (100 basis point) increase in variable interest rates on long-term debt would be approximately $9 million.

 

At June 30, 2016, we had long-term, market-sensitive investments held by our captive insurance subsidiaries. Our market risk associated with our investments in debt securities classified as non-current assets is substantially mitigated by the long-term nature and type of the investments in the portfolio.

 

We have no affiliation with partnerships, trusts or other entities (sometimes referred to as “special-purpose” or “variable-interest” entities) whose purpose is to facilitate off-balance sheet financial transactions or similar arrangements by us. As a result, we have no exposure to the financing, liquidity, market or credit risks associated with such entities.

 

We do not hold or issue derivative instruments for trading purposes and are not a party to any instruments with leverage or prepayment features.

 

ITEM 4. CONTROLS AND PROCEDURES

 

We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined by Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report with respect to our operations that existed prior to the USPI joint venture and Aspen transactions. The evaluation was performed under the supervision and with the

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participation of management, including our chief executive officer and chief financial officer. Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective to ensure that material information is recorded, processed, summarized and reported by management on a timely basis in order to comply with our disclosure obligations under the Exchange Act and the SEC rules thereunder.

 

There were no changes in our internal control over financial reporting during the quarter ended June 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II.

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Because we provide healthcare services in a highly regulated industry, we have been and expect to continue to be party to various lawsuits, claims and regulatory investigations from time to time. For information regarding material pending legal proceedings in which we are involved, see Note 10 to our Condensed Consolidated Financial Statements, which is incorporated by reference.

ITEM 1A. RISK FACTORS

 

There have been no material changes to the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2015.

 

ITEM 6. EXHIBITS

 

The following exhibits are filed with this report:

 

 

 

 

 

 

 

(10)

 

Material Contracts

 

 

 

 

 

(a)

Sixth Amended and Restated Tenet Healthcare 2008 Stock Incentive Plan, as amended and restated effective March 10, 2016*

 

 

 

(31)

 

Rule 13a-14(a)/15d-14(a) Certifications

 

 

 

 

 

 

(a)

Certification of Trevor Fetter, Chief Executive Officer and Chairman of the Board of Directors

 

 

 

 

 

 

(b)

Certification of Daniel J. Cancelmi, Chief Financial Officer

 

 

 

 

(32)

 

Section 1350 Certification of Trevor Fetter, Chief Executive Officer and Chairman of the Board of Directors, and Daniel J. Cancelmi, Chief Financial Officer

 

 

 

 

(101 INS)

 

XBRL Instance Document

 

 

 

 

(101 SCH)

 

XBRL Taxonomy Extension Schema Document

 

 

 

 

(101 CAL)

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

 

(101 DEF)

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

 

(101 LAB)

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

 

(101 PRE)

 

XBRL Taxonomy Extension Presentation Linkbase Document

* Management contract or compensatory plan or arrangement

 

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

 

TENET HEALTHCARE CORPORATION

 

 

(Registrant)

 

 

 

Date: August 1, 2016

By:

/s/ R. SCOTT RAMSEY

 

 

R. Scott Ramsey

 

 

Vice President and Controller

 

 

(Principal Accounting Officer)

 

57