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 national, diversified healthcare services company. We operate regionally focused, integrated healthcare delivery networks, primarily in large urban and suburban markets. Through our subsidiaries, partnerships and joint ventures, including USPI Holding Company, Inc. (“USPI”), at
June 30, 2019
, we operated
65
hospitals,
23
surgical hospitals and approximately
480
outpatient centers throughout the United States. In addition, our Conifer Holdings, Inc. (“Conifer”) subsidiary
provides healthcare business process services in the areas of hospital and physician revenue cycle management and value-based care solutions to healthcare 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, 2018
(“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).
Effective January 1, 2019, we adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)” (“ASU 2016-02”) using the modified retrospective transition approach as of the period of adoption. Our financial statements for periods prior to January 1, 2019 were not modified for the application of the new lease accounting standard. The main difference between the guidance in ASU 2016-02 and previous accounting principles generally accepted in the United States of America (“GAAP”) is the recognition of lease assets and lease liabilities on the balance sheet by lessees for those leases classified as operating leases under previous GAAP. Upon adoption of ASU 2016-02, we recorded
$822 million
of right-of-use assets, net of deferred rent, associated with operating leases in investments and other assets in our condensed consolidated balance sheet,
$147 million
of current liabilities associated with operating leases in other current liabilities in our condensed consolidated balance sheet and
$715 million
of long-term liabilities associated with operating leases in other long-term liabilities in our condensed consolidated balance sheet. We also recognized
$1 million
of cumulative effect adjustment that decreased accumulated deficit at January 1, 2019.
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 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, 2019
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; trends in patient accounts receivable collectability and associated implicit price concessions; fluctuations in interest rates; levels of malpractice insurance expense and settlement trends; 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; gains (losses) on sales, consolidation and deconsolidation of facilities; 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 (losses) from early extinguishment of debt; and changes in occupancy levels and patient volumes. Factors that affect service mix, revenue mix, patient volumes and, thereby, the results of operations at our hospitals and related healthcare facilities include, but are not limited to: changes in federal and state healthcare regulations; the business
environment, economic conditions and demographics of local communities in which we 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, satisfaction, 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; hospital performance data on quality measures and patient satisfaction, as well as standard charges for services; any unfavorable publicity about us, or our joint venture partners, that impacts our relationships with physicians and patients; and the timing of elective procedures. These considerations apply to year-to-year comparisons as well.
Net Operating Revenues
We recognize net operating revenues in the period in which we satisfy our performance obligations under contracts by transferring our services to our customers. Net operating revenues are recognized in the amounts to which we expect to be entitled, which are the transaction prices allocated to the distinct services. Net operating revenues for our Hospital Operations and other and Ambulatory Care segments primarily consist of net patient service revenues, 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
(“
Compact
”) and other uninsured discount and charity programs. Net operating revenues for our Conifer segment primarily consist of revenues from providing revenue cycle management services to healthcare systems, as well as individual hospitals, physician practices, self-insured organizations, health plans and other entities.
Net Patient Service Revenues—
We report net patient service revenues at the amounts that reflect the consideration to which we expect to be entitled in exchange for providing patient care. These amounts are due from patients, third-party payers (including managed care payers and government programs) and others, and they include variable consideration for retroactive revenue adjustments due to settlement of audits, reviews and investigations. Generally, we bill our patients and third-party payers several days after the services are performed or shortly after discharge. Revenues are recognized as performance obligations are satisfied.
Conifer Revenues—
Our Conifer segment recognizes revenue from its contracts when Conifer’s performance obligations are satisfied, which is generally as services are rendered. Revenue is recognized in an amount that reflects the consideration to which Conifer expects to be entitled.
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
$249 million
and
$411 million
at
June 30, 2019
and
December 31, 2018
, respectively. At
June 30, 2019
and
December 31, 2018
, our book overdrafts were
$251 million
and
$288 million
, respectively, which were classified as accounts payable.
At
June 30, 2019
and
December 31, 2018
,
$156 million
and
$177 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
$2 million
and
$8 million
, respectively, of total cash and cash equivalents in the accompanying Condensed Consolidated Balance Sheets were intended for the operations of our health plan-related businesses.
Also at
June 30, 2019
and
December 31, 2018
, we had
$80 million
and
$135 million
, respectively, of property and equipment purchases accrued for items received but not yet paid. Of these amounts,
$53 million
and
$114 million
, respectively, were included in accounts payable.
During the
six
months ended
June 30, 2019
and
2018
, we entered into non-cancellable capital (finance) leases of
$58 million
and
$50 million
, respectively.
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, 2019
and
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Book
Value
|
At June 30, 2019:
|
|
|
|
|
|
|
Capitalized software costs
|
|
$
|
1,615
|
|
|
$
|
(881
|
)
|
|
$
|
734
|
|
Trade names
|
|
102
|
|
|
—
|
|
|
102
|
|
Contracts
|
|
874
|
|
|
(86
|
)
|
|
788
|
|
Other
|
|
105
|
|
|
(84
|
)
|
|
21
|
|
Total
|
|
$
|
2,696
|
|
|
$
|
(1,051
|
)
|
|
$
|
1,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Book
Value
|
At December 31, 2018:
|
|
|
|
|
|
|
Capitalized software costs
|
|
$
|
1,667
|
|
|
$
|
(858
|
)
|
|
$
|
809
|
|
Trade names
|
|
102
|
|
|
—
|
|
|
102
|
|
Contracts
|
|
871
|
|
|
(76
|
)
|
|
795
|
|
Other
|
|
104
|
|
|
(79
|
)
|
|
25
|
|
Total
|
|
$
|
2,744
|
|
|
$
|
(1,013
|
)
|
|
$
|
1,731
|
|
Estimated future amortization of intangibles with finite useful lives at
June 30, 2019
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
Ending
|
|
Years Ending
|
|
Later Years
|
|
|
|
|
December 31,
|
|
|
|
Total
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
Amortization of intangible assets
|
|
$
|
964
|
|
|
$
|
76
|
|
|
$
|
130
|
|
|
$
|
115
|
|
|
$
|
99
|
|
|
$
|
89
|
|
|
$
|
455
|
|
We recognized amortization expense of
$90 million
and
$89 million
in the accompanying Condensed Consolidated Statements of Operations for the
six
months ended
June 30, 2019
and
2018
, respectively.
Investments in Unconsolidated Affiliates
We control
232
of the facilities within our Ambulatory Care segment and, therefore, consolidate their results. We account for many of the facilities our Ambulatory Care segment operates (
112
of
344
at
June 30, 2019
), as well as additional companies in which our Hospital Operations and other segment holds ownership interests, under the equity method as investments in unconsolidated affiliates and report only our share of net income 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; among the equity method investees are
four
North Texas hospitals in which we held minority interests that were operated by our Hospital Operations and other segment through the divestiture of these investments effective March 1, 2018. For investments acquired during the reporting periods, amounts reflect
100%
of the investee’s results beginning on the date of our acquisition of the investment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net operating revenues
|
|
$
|
619
|
|
|
$
|
547
|
|
|
$
|
1,187
|
|
|
$
|
1,121
|
|
Net income
|
|
$
|
141
|
|
|
$
|
132
|
|
|
$
|
291
|
|
|
$
|
248
|
|
Net income available to the investees
|
|
$
|
87
|
|
|
$
|
89
|
|
|
$
|
193
|
|
|
$
|
160
|
|
NOTE 2. ACCOUNTS RECEIVABLE
The principal components of accounts receivable are shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
Continuing operations:
|
|
|
|
|
|
|
Patient accounts receivable
|
|
$
|
2,525
|
|
|
$
|
2,427
|
|
Estimated future recoveries
|
|
158
|
|
|
148
|
|
Net cost reports and settlements receivable and valuation allowances
|
|
49
|
|
|
18
|
|
|
|
2,732
|
|
|
2,593
|
|
Discontinued operations
|
|
2
|
|
|
2
|
|
Accounts receivable, net
|
|
$
|
2,734
|
|
|
$
|
2,595
|
|
Accounts that are pursued for collection through Conifer’s business offices are maintained on our hospitals’ books and reflected in patient accounts receivable.
Patient accounts receivable, including billed accounts and certain unbilled accounts, as well as estimated amounts due from third-party payers for retroactive adjustments, are receivables if our right to consideration is unconditional and only the passage of time is required before payment of that consideration is due. Estimated uncollectable amounts are generally considered implicit price concessions that are a direct reduction to patient accounts receivable rather than allowance for doubtful accounts.
We had
$297 million
and
$149 million
of receivables recorded in other current assets and investments and other assets, respectively, and
$91 million
and
$29 million
of payables recorded in other current liabilities and other long-term liabilities, respectively, in the accompanying Condensed Consolidated Balance Sheet at
June 30, 2019
related to California’s provider fee program. We had
$278 million
and
$231 million
of receivables recorded in other current assets and investments and other assets, respectively, and
$100 million
and
$42 million
of payables recorded in other current liabilities and other long-term liabilities, respectively, in the accompanying Condensed Consolidated Balance Sheet at
December 31, 2018
related to California’s provider fee program.
We also provide financial assistance through our charity and uninsured discount programs to uninsured patients who are unable to pay for the healthcare services they receive. Our policy is not to pursue collection of amounts determined to qualify for financial assistance; therefore, we do not report these amounts in net operating revenues. Most states include an estimate of the cost of charity care in the determination of a hospital’s eligibility for
Medicaid disproportionate share hospital (“DSH”)
payments. These payments are intended to mitigate our cost of uncompensated care. Some states have also developed provider fee or other supplemental payment programs to mitigate the shortfall of Medicaid reimbursement compared to the cost of caring for Medicaid patients.
The following table shows our estimated costs (based on selected operating expenses, which include salaries, wages and benefits, supplies and other operating expenses and which exclude the costs of our health plan businesses) of caring for our uninsured and charity patients in the
three and six
months ended
June 30, 2019
and
2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Estimated costs for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Uninsured patients
|
|
$
|
164
|
|
|
$
|
159
|
|
|
$
|
322
|
|
|
$
|
305
|
|
Charity care patients
|
|
41
|
|
|
28
|
|
|
75
|
|
|
63
|
|
Total
|
|
$
|
205
|
|
|
$
|
187
|
|
|
$
|
397
|
|
|
$
|
368
|
|
NOTE 3. CONTRACT BALANCES
Hospital Operations and Other Segment
Amounts related to services provided to patients for which we have not billed and that do not meet the conditions of unconditional right to payment at the end of the reporting period are contract assets. For our Hospital Operations and other segment, our contract assets consist primarily of services that we have provided to patients who are still receiving inpatient care in our facilities at the end of the reporting period. Our Hospital Operations and other segment’s contract assets are included in other current assets in the accompanying Condensed Consolidated Balance Sheet at June 30, 2019.
The opening and closing balances of contract assets for our Hospital Operations and other segment are as follows:
|
|
|
|
|
|
December 31, 2018
|
|
$
|
169
|
|
June 30, 2019
|
|
160
|
|
Increase/(decrease)
|
|
$
|
(9
|
)
|
|
|
|
|
|
|
January 1, 2018
|
|
$
|
171
|
|
June 30, 2018
|
|
136
|
|
Increase/(decrease)
|
|
$
|
(35
|
)
|
Approximately
89%
of our Hospital Operations and other segment’s contract assets meet the conditions for unconditional right to payment and are reclassified to patient receivables within 90 days.
Conifer Segment
Conifer enters into contracts with customers to sell revenue cycle management and other services, such as value-based care, consulting and project services. The payment terms and conditions in our customer contracts vary. In some cases, customers are invoiced in advance and (for other than fixed-price fee arrangements) a true-up to the actual fee is included on a subsequent invoice. In other cases, payment is due in arrears. In addition, some contracts contain performance incentives, penalties and other forms of variable consideration. When the timing of Conifer’s delivery of services is different from the timing of payments made by the customers, Conifer recognizes either unbilled revenue (performance precedes contractual right to invoice the customer) or deferred revenue (customer payment precedes Conifer service performance). In the following table, customers that prepay prior to obtaining control/benefit of the service are represented by deferred contract revenue until the performance obligations are satisfied. Unbilled revenue represents arrangements in which Conifer has provided services to and the customer has obtained control/benefit of services prior to the contractual invoice date. Contracts with payment in arrears are recognized as receivables in the month the service is performed.
The opening and closing balances of Conifer’s receivables, contract asset, and current and long-term contract liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Liability-
|
|
Contract Liability-
|
|
|
|
|
Contract Asset-
|
|
Current
|
|
Long-Term
|
|
|
Receivables
|
|
Unbilled Revenue
|
|
Deferred Revenue
|
|
Deferred Revenue
|
December 31, 2018
|
|
$
|
42
|
|
|
$
|
11
|
|
|
$
|
61
|
|
|
$
|
20
|
|
June 30, 2019
|
|
96
|
|
|
15
|
|
|
67
|
|
|
19
|
|
Increase/(decrease)
|
|
$
|
54
|
|
|
$
|
4
|
|
|
$
|
6
|
|
|
$
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
January 1, 2018
|
|
$
|
89
|
|
|
$
|
10
|
|
|
$
|
80
|
|
|
$
|
21
|
|
June 30, 2018
|
|
90
|
|
|
11
|
|
|
78
|
|
|
21
|
|
Increase/(decrease)
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
(2
|
)
|
|
$
|
—
|
|
The difference between the opening and closing balances of Conifer’s contract assets and contract liabilities are primarily related to prepayments for those customers who are billed in advance, changes in estimates related to metric-based services, and up-front integration services that are typically not distinct and are, therefore, recognized over the performance obligation period to which they relate. Our Conifer segment’s receivables and contract assets are reported as part of other current assets in our accompanying Condensed Consolidated Balance Sheets, and our Conifer segment’s current and long-term contract liabilities are reported as part of other current liabilities and other long-term liabilities, respectively, in our accompanying Condensed Consolidated Balance Sheets.
The amount of revenue Conifer recognized in the
six
months ended
June 30, 2019
and
2018
that was included in the opening current deferred revenue liability was
$56 million
and
$66 million
, respectively. This revenue consists primarily of prepayments for those customers who are billed in advance, changes in estimates related to metric-based services, and up-front integration services that are recognized over the services period.
Contract Costs
We have elected to apply the practical expedient provided by FASB Accounting Standards Codification 340-40-25-4 and expense as incurred the incremental customer contract acquisition costs for contracts in which the amortization period of the asset that we otherwise would have recognized is one year or less. However, incremental costs incurred to obtain and fulfill customer contracts for which the amortization period of the asset that we otherwise would have recognized is longer than one year, which consist primarily of Conifer deferred contract setup costs, are capitalized and amortized on a straight-line basis over the lesser of their estimated useful lives or the term of the related contract. During the three months ended
June 30, 2019
and
2018
, we recognized amortization expense of
$1 million
and
$3 million
, respectively. During the
six
months ended
June 30, 2019
and
2018
, we recognized amortization expense of
$2 million
and
$6 million
, respectively. At
June 30, 2019
and December 31, 2018, the unamortized customer contract costs were
$27 million
and
$28 million
, respectively, and are presented as part of investments and other assets in the accompanying Condensed Consolidated Balance Sheets.
NOTE 4. ASSETS AND LIABILITIES HELD FOR SALE
There were no assets or liabilities classified as held for sale at
June 30, 2019
. In the three months ended December 31, 2017,
three
of our hospitals in the Chicago-area, as well as other operations affiliated with the hospitals, met the criteria to be classified as held for sale. As a result, we have classified these assets totaling
$107 million
as “assets held for sale” in current assets and the related liabilities of
$43 million
as “liabilities held for sale” in current liabilities in the accompanying Condensed Consolidated Balance Sheet at December 31, 2018. These assets and liabilities, which were in our Hospital Operations and other segment until their divestiture on January 28, 2019, were recorded at the lower of their carrying amount or their fair value less estimated costs to sell. We recorded impairment charges of
$17 million
in the three months ended March 31, 2018 for the write-down of the assets held for sale to their estimated fair value, less estimated costs to sell, as a result of the planned divestiture of these assets.
The following table provides information on significant components of our business that have been disposed of since January 1, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Significant disposals:
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations, before income taxes
|
|
|
|
|
|
|
|
|
Chicago-area (includes a $6 million loss on sale in the 2019 year-to-date period and $17 million of impairment charges in the 2018 year-to-date period)
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
(11
|
)
|
|
$
|
(15
|
)
|
Philadelphia (includes a $2 million loss on sale in the 2018 year-to-date period)
|
|
—
|
|
|
(2
|
)
|
|
1
|
|
|
(11
|
)
|
MacNeal (includes a $95 million gain on sale in the 2018 year-to-date period)
|
|
1
|
|
|
(4
|
)
|
|
2
|
|
|
97
|
|
Aspen (includes a $4 million of impairment charges in the 2018 year-to-date period)
|
|
—
|
|
|
(3
|
)
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
2
|
|
|
$
|
(8
|
)
|
|
$
|
(8
|
)
|
|
$
|
71
|
|
NOTE 5. IMPAIRMENT AND RESTRUCTURING CHARGES, AND ACQUISITION-RELATED COSTS
During the
six
months ended
June 30, 2019
, we recorded impairment and restructuring charges and acquisition-related costs of
$55 million
, consisting of
$5 million
of
impairment charges
,
$47 million
of
restructuring charges
and
$3 million
of
acquisition-related costs
. Restructuring charges consisted of
$18 million
of
employee severance costs
,
$2 million
of
contract and lease termination fees
, and
$27 million
of
other restructuring costs
. Acquisition-related costs consisted of
$3 million
of
transaction costs
. Our impairment charges for the
six
months ended
June 30, 2019
were comprised of
$4 million
from our Hospital Operations and other segment and
$1 million
from our Ambulatory Care segment.
During the
six
months ended
June 30, 2018
, we recorded impairment and restructuring charges and acquisition-related costs of
$77 million
, consisting of
$23 million
of
impairment charges
,
$47 million
of
restructuring charges
and
$7 million
of
acquisition-related costs
. Impairment charges consisted primarily of
$17 million
of
charges to write-down assets held for sale to their estimated fair value, less estimated costs to sell, for certain Chicago-area facilities
,
$4 million
of
charges to write-down assets held for sale to their estimated fair value, less estimated costs to sell, for Aspen
and
$2 million
of other impairment charges. Restructuring charges consisted of
$26 million
of
employee severance costs
,
$5 million
of
contract and lease termination fees
, and
$16 million
of
other restructuring costs
. Acquisition-related costs consisted of
$5 million
of
transaction
costs
and
$2 million
of
acquisition integration charges
. Our impairment charges for the
six
months ended
June 30, 2018
were comprised of
$19 million
from our Hospital Operations and other segment and
$4 million
from our Ambulatory Care segment.
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 each 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, 2019
, our continuing operations consisted of
three
reportable segments, Hospital Operations and other, Ambulatory Care and Conifer. Our segments are reporting units used to perform our goodwill impairment analysis.
We periodically incur costs to implement restructuring efforts for specific operations, which are recorded in our consolidated 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 6. LEASES
The following table presents the components of our right-of-use assets and liabilities related to leases and their classification in our Condensed Consolidated Balance Sheet at
June 30, 2019
:
|
|
|
|
|
|
|
|
Component of Lease Balances
|
|
Classification in Condensed Consolidated Balance Sheet
|
|
June 30, 2019
|
Assets:
|
|
|
|
|
Operating lease assets
|
|
Investments and other assets
|
|
$
|
874
|
|
Finance lease assets
|
|
Property and equipment, at cost, less
accumulated depreciation and amortization
|
|
439
|
|
Total leased assets
|
|
|
|
$
|
1,313
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Operating lease liabilities:
|
|
|
|
|
Current
|
|
Other current liabilities
|
|
$
|
149
|
|
Long-term
|
|
Other long-term liabilities
|
|
819
|
|
Total operating lease liabilities
|
|
|
|
968
|
|
Finance lease liabilities:
|
|
|
|
|
Current
|
|
Current portion of long-term debt
|
|
141
|
|
Long-term
|
|
Long-term debt, net of current portion
|
|
214
|
|
Total finance lease liabilities
|
|
|
|
355
|
|
Total lease liabilities
|
|
|
|
$
|
1,323
|
|
We determine if an arrangement is a lease at inception of the contract. Our right-of-use assets represent our right to use the underlying assets for the lease term and our lease liabilities represent our obligation to make lease payments arising from the leases. Right-of-use assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. We use our estimated incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of lease payments. For our Hospital Operations and other and Conifer segments, we estimate our incremental borrowing rates for our portfolio of leases using documented rates included in our recent equipment finance leases or, if applicable, recent secured debt issuances that correspond to various lease terms. We also give consideration to information obtained from our bankers, our secured debt fair value and publicly available data for instruments with similar characteristics. For our Ambulatory Care segment, we estimate an incremental borrowing rate for each center by utilizing historical and projected financial data, estimating a hypothetical credit rating using publicly available market data and adjusting the market data to reflect the effects of collateralization.
Our operating leases are primarily for real estate, including off-campus outpatient facilities, medical office buildings, and corporate and other administrative offices, as well as medical and office equipment. Our finance leases are primarily for medical equipment and information technology and telecommunications assets. Our real estate lease agreements typically have initial terms of five to 10 years, and our equipment lease agreements typically have initial terms of three years. We do not record leases with an initial term of 12 months or less (“short-term leases”) in our consolidated balance sheets.
Our real estate leases may include one or more options to renew, with renewals that can extend the lease term from five to 10 years. The exercise of lease renewal options is at our sole discretion. In general, we do not consider renewal options
to be reasonably likely to be exercised, therefore, renewal options are generally not recognized as part of our right-of-use assets and lease liabilities. Certain leases also include options to purchase the leased property. The useful life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. The majority of our medical equipment leases have terms of three years with a bargain purchase option that is reasonably certain of exercise, so these assets are depreciated over their useful life, typically ranging from five to seven years. Similarly, some of our leases of information technology and telecommunications assets include a transfer of title and, therefore, have useful lives of 15 years.
Certain of our lease agreements for real estate include payments based on actual common area maintenance expenses and others include rental payments adjusted periodically for inflation. These variable lease payments are recognized in other operating expenses, net, but are not included in the right-of-use asset or liability balances. Our lease agreements do not contain any material residual value guarantees, restrictions or covenants.
We have elected the practical expedient that allows lessees to choose to not separate lease and non-lease components by class of underlying asset and are applying this expedient to all relevant asset classes. We have also elected the practical expedient package to not reassess at adoption (i) expired or existing contracts for whether they are or contain a lease, (ii) the lease classification of any existing leases or (iii) initial indirect costs for existing leases.
The following table presents the components of our lease expense and their classification in our Condensed Consolidated Statement of Operations for the
three and six
months ended
June 30, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification on Condensed Consolidated
|
|
Three Months Ended
|
|
Six Months Ended
|
Component of Lease Expense
|
|
Statements of Operations
|
|
June 30, 2019
|
|
June 30, 2019
|
Operating lease expense
|
|
Other operating expenses, net
|
|
$
|
52
|
|
|
$
|
102
|
|
Finance lease expense:
|
|
|
|
|
|
|
Amortization of leased assets
|
|
Depreciation and amortization
|
|
23
|
|
|
41
|
|
Interest on lease liabilities
|
|
Interest expense
|
|
3
|
|
|
8
|
|
Total finance lease expense
|
|
|
|
26
|
|
|
49
|
|
Variable and short term-lease expense
|
|
Other operating expenses, net
|
|
33
|
|
|
67
|
|
Total lease expense
|
|
|
|
$
|
111
|
|
|
$
|
218
|
|
The weighted-average lease terms and discount rates for operating and finance leases are presented in the following table:
|
|
|
|
|
|
|
June 30, 2019
|
Weighted-average remaining lease term (years)
|
|
|
Operating leases
|
|
7.7
|
|
Finance leases
|
|
6.0
|
|
|
|
|
Weighted-average discount rate
|
|
|
Operating leases
|
|
5.5
|
%
|
Finance leases
|
|
5.6
|
%
|
Cash flow and other information related to leases is included in the following table:
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
June 30, 2019
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
Operating cash outflows from operating leases
|
|
$
|
95
|
|
Operating cash outflows from finance leases
|
|
$
|
9
|
|
Financing cash outflows from finance leases
|
|
$
|
75
|
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
|
Operating leases
|
|
$
|
139
|
|
Finance leases
|
|
$
|
58
|
|
Future maturities of lease liabilities at
June 30, 2019
are presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Finance Leases
|
|
Total
|
2019
|
|
$
|
149
|
|
|
$
|
141
|
|
|
$
|
290
|
|
2020
|
|
176
|
|
|
128
|
|
|
304
|
|
2021
|
|
163
|
|
|
72
|
|
|
235
|
|
2022
|
|
145
|
|
|
19
|
|
|
164
|
|
2023
|
|
124
|
|
|
13
|
|
|
137
|
|
Later years
|
|
492
|
|
|
124
|
|
|
616
|
|
Total lease payments
|
|
1,249
|
|
|
497
|
|
|
1,746
|
|
Less: Imputed interest
|
|
281
|
|
|
142
|
|
|
423
|
|
Total lease obligations
|
|
968
|
|
|
355
|
|
|
1,323
|
|
Less: Current obligations
|
|
149
|
|
|
141
|
|
|
290
|
|
Long-term lease obligations
|
|
$
|
819
|
|
|
$
|
214
|
|
|
$
|
1,033
|
|
Future maturities of lease liabilities at
December 31, 2018
, prior to our adoption of ASU 2016-02, are presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ending December 31,
|
|
Later Years
|
|
Total
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
Capital lease obligations
|
$
|
425
|
|
|
$
|
140
|
|
|
$
|
95
|
|
|
$
|
57
|
|
|
$
|
37
|
|
|
$
|
21
|
|
|
$
|
75
|
|
Long-term non-cancelable operating leases
|
$
|
932
|
|
|
$
|
171
|
|
|
$
|
151
|
|
|
$
|
133
|
|
|
$
|
113
|
|
|
$
|
92
|
|
|
$
|
272
|
|
NOTE 7. LONG-TERM DEBT
The table below shows our long-term debt at
June 30, 2019
and
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
Senior unsecured notes:
|
|
|
|
|
|
|
5.500% due 2019
|
|
$
|
—
|
|
|
$
|
468
|
|
6.750% due 2020
|
|
—
|
|
|
300
|
|
8.125% due 2022
|
|
2,800
|
|
|
2,800
|
|
6.750% due 2023
|
|
1,872
|
|
|
1,872
|
|
7.000% due 2025
|
|
478
|
|
|
478
|
|
6.875% due 2031
|
|
362
|
|
|
362
|
|
Senior secured first lien notes:
|
|
|
|
|
|
|
4.750% due 2020
|
|
500
|
|
|
500
|
|
6.000% due 2020
|
|
1,800
|
|
|
1,800
|
|
4.500% due 2021
|
|
850
|
|
|
850
|
|
4.375% due 2021
|
|
1,050
|
|
|
1,050
|
|
4.625% due 2024
|
|
1,870
|
|
|
1,870
|
|
Senior secured second lien notes:
|
|
|
|
|
7.500% due 2022
|
|
—
|
|
|
750
|
|
5.125% due 2025
|
|
1,410
|
|
|
1,410
|
|
6.250% due 2027
|
|
1,500
|
|
|
—
|
|
Credit facility due 2020
|
|
190
|
|
|
—
|
|
Finance leases and mortgage notes
|
|
467
|
|
|
500
|
|
Unamortized issue costs and note discounts
|
|
(173
|
)
|
|
(184
|
)
|
Total long-term debt
|
|
14,976
|
|
|
14,826
|
|
Less current portion
|
|
664
|
|
|
182
|
|
Long-term debt, net of current portion
|
|
$
|
14,312
|
|
|
$
|
14,644
|
|
Senior Secured and Senior Unsecured Notes
On February 5, 2019, we sold
$1.5 billion
aggregate principal amount of
6.250%
senior secured second lien notes, which will mature on February 1, 2027 (the “2027 Senior Secured Second Lien Notes”). We will pay interest on the 2027 Senior Secured Second Lien Notes semi-annually in arrears on February 1 and August 1 of each year, which payments commenced on August 1, 2019. The proceeds from the sale of the 2027 Senior Secured Second Lien Notes were used, after payment of fees and expenses, together with cash on hand and borrowings under our senior secured revolving credit facility, to fund the redemption of all
$300 million
aggregate principal amount of our outstanding
6.750%
senior notes due 2020 and all
$750 million
aggregate principal amount of our outstanding
7.500%
senior secured second lien notes due 2022, as well as the repayment upon maturity of all
$468 million
aggregate principal amount of our outstanding
5.500%
senior unsecured notes due March 1, 2019. In connection with the redemptions, we recorded a loss from early extinguishment of debt of approximately
$47 million
in the three months ended March 31, 2019
, primarily related to the difference between the redemption prices and the par values of the notes, as well as the write-off of the associated unamortized issuance costs.
Credit Agreement
We have a senior secured revolving credit facility (as amended, the “Credit Agreement”) that 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. Obligations under the Credit Agreement, which has a scheduled maturity date of December 4, 2020, are guaranteed by substantially all of our domestic wholly owned hospital subsidiaries and are secured by a first-priority lien on the accounts receivable owned by us and the subsidiary guarantors.
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, 2019
, we had
$190 million
of cash borrowings outstanding under the Credit Agreement subject to a weighted average interest rate of
3.77%
, and we had
$2 million
of standby letters of credit outstanding. Based on our eligible receivables,
$808 million
was available for borrowing under the Credit Agreement at
June 30, 2019
.
Letter of Credit Facility
We have a letter of credit facility (as amended, the “LC Facility”) that provides for the issuance of standby and documentary 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 maturity date of the LC Facility is March 7, 2021.
Obligations under the LC Facility are guaranteed and secured by a first-priority pledge of the capital stock and other ownership interests of certain of our wholly owned domestic hospital subsidiaries on an equal ranking basis with our senior secured first lien notes.
Drawings under any letter of credit issued under the LC Facility that we have not reimbursed within
three
business days after notice thereof accrue interest at a base rate plus a margin equal to
0.50%
per annum. An unused commitment fee is payable at an initial rate of
0.25%
per annum with a step up to
0.375%
per annum should our secured-debt-to-EBITDA ratio equal or exceed
3.00
to 1.00 at the end of any fiscal quarter. A fee on the aggregate outstanding amount of issued but undrawn letters of credit accrues at a rate of
1.50%
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, 2019
, we had
$100 million
of standby letters of credit outstanding under the LC Facility.
NOTE 8. GUARANTEES
At
June 30, 2019
, 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
$138 million
. We had a total liability of
$112 million
recorded for these guarantees included in other current liabilities at
June 30, 2019
.
At
June 30, 2019
, 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
$24 million
. Of the total,
$8 million
relates to the obligations of consolidated subsidiaries, which obligations are recorded in the accompanying Condensed Consolidated Balance Sheet at
June 30, 2019
.
NOTE 9. EMPLOYEE BENEFIT PLANS
Share-Based Compensation Plans
In recent years, we have granted options and restricted stock units to certain of our employees and directors pursuant to our stock incentive plans. 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 in the future. Typically, options and time-based restricted stock units vest one-third on each of the first
three
anniversary dates of the grant; however, certain special retention awards may have different vesting terms. In addition, we grant performance-based options and performance-based restricted stock units that vest subject to the achievement of specified
performance goals within a specified time frame. At
June 30, 2019
, assuming outstanding performance-based restricted stock units and options for which performance has not yet been determined will achieve target performance, approximately
8.0 million
shares of common stock were available under our 2019 Stock Incentive Plan for future stock option grants and other equity incentive awards, including restricted stock units (approximately
7.7 million
shares remain available if we assume maximum performance for outstanding performance-based restricted stock units and options for which performance has not yet been determined).
The accompanying Condensed Consolidated Statements of Operations for the
six
months ended
June 30, 2019
and
2018
include
$23 million
and
$20 million
, respectively, of pre-tax compensation costs related to our stock-based compensation arrangements.
Stock Options
The following table summarizes stock option activity during the
six
months ended
June 30, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Weighted Average
Exercise Price
Per Share
|
|
Aggregate
Intrinsic Value
|
|
Weighted Average
Remaining Life
|
|
|
|
|
|
|
(In Millions)
|
|
|
Outstanding at December 31, 2018
|
|
2,262,743
|
|
|
$
|
19.12
|
|
|
|
|
|
Granted
|
|
230,713
|
|
|
28.28
|
|
|
|
|
|
Exercised
|
|
(76,159
|
)
|
|
4.56
|
|
|
|
|
|
Forfeited/Expired
|
|
(120,871
|
)
|
|
19.25
|
|
|
|
|
|
Outstanding at June 30, 2019
|
|
2,296,426
|
|
|
$
|
20.52
|
|
|
$
|
3
|
|
|
6.4 years
|
Vested and expected to vest at June 30, 2019
|
|
2,296,426
|
|
|
$
|
20.52
|
|
|
$
|
3
|
|
|
6.4 years
|
Exercisable at June 30, 2019
|
|
684,628
|
|
|
$
|
19.03
|
|
|
$
|
2
|
|
|
3.1 years
|
There were
76,159
and
581,120
stock options exercised during the
six
months ended
June 30, 2019
and
2018
, respectively, with aggregate intrinsic values of approximately
$1 million
and
$3 million
, respectively.
At
June 30, 2019
, there were
$6 million
of total unrecognized compensation costs related to stock options. These costs are expected to be recognized over a weighted average period of
1.9 years
.
On March 29, 2019, we granted an aggregate of
7,862
performance-based stock options to a new senior officer. The options will all vest on the third anniversary of the grant date, subject to the achievement of a closing stock price of at least
$36.05
(a
25%
premium above the March 29, 2019 grant-date closing stock price of
$28.84
) for at least
20
consecutive trading days within
three years
of the grant date, and will expire on the tenth anniversary of the grant date. On February 27, 2019, we granted to certain of our senior officers an aggregate of
222,851
performance-based stock options. The options will all vest on the third anniversary of the grant date, subject to the achievement of a closing stock price of at least
$35.33
(a
25%
premium above the February 27, 2019 grant-date closing stock price of
$28.26
) for at least
20
consecutive trading days within
three years
of the grant date, and will expire on the tenth anniversary of the grant date.
In the three months ended June 30, 2018, we granted new senior officers
31,184
performance-based stock options. The options will all vest on the third anniversary of the grant date, subject to achieving a closing stock price of at least
$44.29
(a
25%
premium above the May 31, 2018 grant-date closing stock price of
$35.43
) for at least
20
consecutive trading days within
three years
of the grant date, and will expire on the tenth anniversary of the grant date. In the three months ended March 31, 2018, we granted to certain of our senior officers an aggregate of
604,012
performance-based stock options. The stock options will all vest on the third anniversary of the grant date because, in the three months ended June 30, 2018, the requirement that our stock close at a price of at least
$25.75
(a
25%
premium above the February 28, 2018 grant-date closing stock price of
$20.60
) for at least
20
consecutive trading days within
three years
of the grant date was met; these options will expire on the tenth anniversary of the grant date.
The weighted average estimated fair value of stock options we granted in the
six
months ended
June 30, 2019
and
2018
was
$12.50
and
$9.16
per share, respectively. These fair values were calculated based on each grant date, using a Monte Carlo simulation with the following assumptions:
|
|
|
|
|
|
|
|
February 27, 2019
|
|
February 28, 2018
|
Expected volatility
|
|
48%
|
|
46%
|
Expected dividend yield
|
|
0%
|
|
0%
|
Expected life
|
|
6.2 years
|
|
6.2 years
|
Expected forfeiture rate
|
|
0%
|
|
0%
|
Risk-free interest rate
|
|
2.53%
|
|
2.72%
|
The expected volatility used for the 2019 and 2018 Monte Carlo simulations incorporates historical volatility based on an analysis of historical prices of our stock. The expected volatility reflects the historical volatility for a duration consistent with the expected life of the options; it does not consider the implied volatility from open-market exchanged options due to the limited trading activity and the transient nature of factors impacting our stock price volatility. The historical share-price volatility for 2019 and 2018 excludes the movements in our stock price for the period from August 15, 2017 through November 30, 2017 due to impact that the announcement of the departure of certain board members and officers, as well as reports that we were exploring a potential sale of the company, had on our stock price during that time. The risk-free interest rates are based on zero-coupon United States Treasury yields in effect at the date of grant consistent with the expected exercise time frames.
The following table summarizes information about our outstanding stock options at
June 30, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
Range of Exercise Prices
|
|
Number of
Options
|
|
Weighted Average
Remaining
Contractual Life
|
|
Weighted Average
Exercise Price
|
|
Number of
Options
|
|
Weighted Average
Exercise Price
|
$16.43 to $19.759
|
|
1,246,675
|
|
|
5.7 years
|
|
18.15
|
|
|
413,960
|
|
|
16.46
|
|
$19.76 to $35.430
|
|
1,049,751
|
|
|
7.1 years
|
|
23.33
|
|
|
270,668
|
|
|
22.94
|
|
|
|
2,296,426
|
|
|
6.4 years
|
|
$
|
20.52
|
|
|
684,628
|
|
|
$
|
19.03
|
|
Restricted Stock Units
The following table summarizes restricted stock unit activity during the
six
months ended
June 30, 2019
:
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Units
|
|
Weighted Average Grant
Date Fair Value Per Unit
|
Unvested at December 31, 2018
|
|
1,884,130
|
|
|
$
|
32.25
|
|
Granted
|
|
1,235,876
|
|
|
26.20
|
|
Vested
|
|
(817,820
|
)
|
|
27.55
|
|
Forfeited
|
|
(298,680
|
)
|
|
25.02
|
|
Unvested at June 30, 2019
|
|
2,003,506
|
|
|
$
|
31.52
|
|
In the
six
months ended
June 30, 2019
, we granted an aggregate of
1,235,876
restricted stock units. Of these,
243,506
will vest and be settled ratably over a
three
-year period from the grant date,
566,172
will vest and be settled ratably over a
27
month period from the grant date, and
318,327
will vest and be settled on the third anniversary of the grant date. In addition, in May 2019, we made an annual grant of
100,444
restricted stock units to our non-employee directors for the 2019-2020 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. We also granted
7,427
additional restricted stock units that vested and settled immediately as a result of our level of achievement with respect to a performance goal on a 2013 grant.
In the
six
months ended June 30, 2018, we granted an aggregate of
730,577
restricted stock units. Of these,
288,325
will vest and be settled ratably over a
three
-year period from the grant date,
339,806
will vest and be settled ratably over a
two
-year period from the grant date, and
26,356
will vest and be settled on the third anniversary of the grant date. In addition, in May 2018, we made an annual grant of
54,198
restricted stock units to our non-employee directors for the 2018-2019 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. Because the board of directors appointed
two
new members in May 2018, we made initial grants totaling
3,670
restricted stock units to these directors, as well as prorated annual grants totaling
12,154
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 anniversary of the grant date. In addition, we granted
6,068
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 performance goals for the years 2018 to 2020. 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
6,068
units granted, depending on our level of achievement with respect to the performance goals.
At
June 30, 2019
, there were
$34 million
of total unrecognized compensation costs related to restricted stock units. These costs are expected to be recognized over a weighted average period of
1.9 years
.
Employee Retirement Plans
In the
six
months ended
June 30, 2019
and
2018
, we recognized (i) service cost related to
one
of our frozen nonqualified defined benefit pension plans of less than
$1 million
and approximately
$1 million
, respectively, in salaries, wages and benefits expense, and (ii) other components of net periodic pension cost and net periodic postretirement benefit cost related to our frozen qualified and nonqualified defined benefit plans of
$11 million
and
$8 million
, respectively, in other non-operating expense, net, in the accompanying Condensed Consolidated Statements of Operations.
NOTE 10. EQUITY
Changes in Shareholders’ Equity
The following tables show the changes in consolidated equity during the
six
months ended
June 30, 2019
and
2018
(dollars in millions, share amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional
Paid-In
Capital
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Accumulated
Deficit
|
|
Treasury
Stock
|
|
Noncontrolling
Interests
|
|
Total Equity
|
|
|
Shares
Outstanding
|
|
Issued Par
Amount
|
|
|
|
|
|
|
Balances at December 31, 2018
|
|
102,537
|
|
|
$
|
7
|
|
|
$
|
4,747
|
|
|
$
|
(223
|
)
|
|
$
|
(2,236
|
)
|
|
$
|
(2,414
|
)
|
|
$
|
806
|
|
|
$
|
687
|
|
Net income (loss)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(19
|
)
|
|
—
|
|
|
37
|
|
|
18
|
|
Distributions paid to noncontrolling interests
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(37
|
)
|
|
(37
|
)
|
Other comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
Accretion of redeemable noncontrolling interests
|
|
—
|
|
|
—
|
|
|
(5
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5
|
)
|
Purchases (sales) of businesses and noncontrolling interests
|
|
—
|
|
|
—
|
|
|
(2
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
—
|
|
Cumulative effect of accounting change
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Stock-based compensation expense, tax benefit and issuance of common stock
|
|
543
|
|
|
—
|
|
|
8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8
|
|
Balances at March 31, 2019
|
|
103,080
|
|
|
$
|
7
|
|
|
$
|
4,748
|
|
|
$
|
(221
|
)
|
|
$
|
(2,254
|
)
|
|
$
|
(2,414
|
)
|
|
$
|
808
|
|
|
$
|
674
|
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
17
|
|
|
—
|
|
|
47
|
|
|
64
|
|
Distributions paid to noncontrolling interests
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(35
|
)
|
|
(35
|
)
|
Other comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
Accretion of redeemable noncontrolling interests
|
|
—
|
|
|
—
|
|
|
(4
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4
|
)
|
Purchases of businesses and noncontrolling interests
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5
|
|
|
5
|
|
Stock-based compensation expense, tax benefit and issuance of common stock
|
|
256
|
|
|
—
|
|
|
11
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11
|
|
Balances at June 30, 2019
|
|
103,336
|
|
|
$
|
7
|
|
|
$
|
4,755
|
|
|
$
|
(219
|
)
|
|
$
|
(2,237
|
)
|
|
$
|
(2,414
|
)
|
|
$
|
825
|
|
|
$
|
717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional
Paid-In
Capital
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Accumulated
Deficit
|
|
Treasury
Stock
|
|
Noncontrolling
Interests
|
|
Total Equity
|
|
|
Shares
Outstanding
|
|
Issued Par
Amount
|
|
|
|
|
|
|
Balances at December 31, 2017
|
|
100,972
|
|
|
$
|
7
|
|
|
$
|
4,859
|
|
|
$
|
(204
|
)
|
|
$
|
(2,390
|
)
|
|
$
|
(2,419
|
)
|
|
$
|
686
|
|
|
$
|
539
|
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
99
|
|
|
—
|
|
|
31
|
|
|
130
|
|
Distributions paid to noncontrolling interests
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(34
|
)
|
|
(34
|
)
|
Other comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8
|
|
Accretion of redeemable noncontrolling interests
|
|
—
|
|
|
—
|
|
|
(37
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(37
|
)
|
Sales of businesses and noncontrolling interests
|
|
—
|
|
|
—
|
|
|
(4
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2
|
)
|
|
(6
|
)
|
Cumulative effect of accounting change
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(43
|
)
|
|
43
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Stock-based compensation expense, tax benefit and issuance of common stock
|
|
1,017
|
|
|
—
|
|
|
15
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
16
|
|
Balances at March 31, 2018
|
|
101,989
|
|
|
$
|
7
|
|
|
$
|
4,833
|
|
|
$
|
(239
|
)
|
|
$
|
(2,248
|
)
|
|
$
|
(2,418
|
)
|
|
$
|
681
|
|
|
$
|
616
|
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
26
|
|
|
—
|
|
|
42
|
|
|
68
|
|
Distributions paid to noncontrolling interests
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(38
|
)
|
|
(38
|
)
|
Other comprehensive loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4
|
)
|
Accretion of redeemable noncontrolling interests
|
|
—
|
|
|
—
|
|
|
(123
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(123
|
)
|
Purchases (sales) of businesses and noncontrolling interests
|
|
—
|
|
|
—
|
|
|
(2
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
45
|
|
|
43
|
|
Stock-based compensation expense, tax benefit and issuance of common stock
|
|
312
|
|
|
—
|
|
|
14
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
14
|
|
Balances at June 30, 2018
|
|
102,301
|
|
|
$
|
7
|
|
|
$
|
4,722
|
|
|
$
|
(243
|
)
|
|
$
|
(2,222
|
)
|
|
$
|
(2,418
|
)
|
|
$
|
730
|
|
|
$
|
576
|
|
Our noncontrolling interests balances at
June 30, 2019
and
December 31, 2018
were comprised of
$116 million
and
$112 million
, respectively, from our Hospital Operations and other segment, and
$709 million
and
$694 million
, respectively, from our Ambulatory Care segment. Our net income available to noncontrolling interests for the
six
months ended
June 30, 2019
and
2018
in the table above were comprised of
$7 million
and
$4 million
, respectively,
from our Hospital Operations and other segment, and
$77 million
and
$69 million
, respectively, from our Ambulatory Care segment.
NOTE 11. NET OPERATING REVENUES
Net operating revenues for our Hospital Operations and other and Ambulatory Care segments primarily consist of net patient service revenues, principally for patients covered by Medicare, Medicaid, managed care and other health plans, as well as certain uninsured patients under our
Compact
and other uninsured discount and charity programs. Net operating revenues for our Conifer segment primarily consist of revenues from providing revenue cycle management services to healthcare systems, as well as individual hospitals, physician practices, self-insured organizations, health plans and other entities.
The table below shows our sources of net operating revenues from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Hospital Operations and other:
|
|
|
|
|
|
|
|
|
|
|
Net patient service revenues from hospitals and related outpatient facilities
|
|
|
|
|
|
|
|
|
Medicare
|
|
$
|
721
|
|
|
$
|
701
|
|
|
$
|
1,479
|
|
|
$
|
1,483
|
|
Medicaid
|
|
316
|
|
|
314
|
|
|
630
|
|
|
635
|
|
Managed care
|
|
2,330
|
|
|
2,273
|
|
|
4,684
|
|
|
4,641
|
|
Uninsured
|
|
11
|
|
|
8
|
|
|
12
|
|
|
45
|
|
Indemnity and other
|
|
169
|
|
|
147
|
|
|
324
|
|
|
282
|
|
Total
|
|
3,547
|
|
|
3,443
|
|
|
7,129
|
|
|
7,086
|
|
Physician practices revenues
|
|
282
|
|
|
271
|
|
|
552
|
|
|
551
|
|
Health plans
|
|
1
|
|
|
—
|
|
|
1
|
|
|
6
|
|
Revenue from other sources
|
|
(3
|
)
|
|
19
|
|
|
7
|
|
|
37
|
|
Hospital Operations and other total prior to inter-segment eliminations
|
|
3,827
|
|
|
3,733
|
|
|
7,689
|
|
|
7,680
|
|
Ambulatory Care
|
|
524
|
|
|
531
|
|
|
1,004
|
|
|
1,029
|
|
Conifer
|
|
355
|
|
|
386
|
|
|
704
|
|
|
790
|
|
Inter-segment eliminations
|
|
(146
|
)
|
|
(144
|
)
|
|
(292
|
)
|
|
(294
|
)
|
Net operating revenues
|
|
$
|
4,560
|
|
|
$
|
4,506
|
|
|
$
|
9,105
|
|
|
$
|
9,205
|
|
Adjustments for prior-year cost reports and related valuation allowances, principally related to Medicare and Medicaid, increased revenues in the
six
months ended
June 30, 2019
and
2018
by
$17 million
and
$11 million
, respectively. Estimated cost report settlements and valuation allowances are included in accounts receivable in the accompanying Condensed Consolidated Balance Sheets (see Note 2). We believe that we have made adequate provision for any adjustments that may result from final determination of amounts earned under all the above arrangements with Medicare and Medicaid.
The table below shows the composition of net operating revenues for our Ambulatory Care segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net patient service revenues
|
|
$
|
496
|
|
|
$
|
500
|
|
|
$
|
947
|
|
|
$
|
969
|
|
Management fees
|
|
23
|
|
|
23
|
|
|
46
|
|
|
46
|
|
Revenue from other sources
|
|
5
|
|
|
8
|
|
|
11
|
|
|
14
|
|
Net operating revenues
|
|
$
|
524
|
|
|
$
|
531
|
|
|
$
|
1,004
|
|
|
$
|
1,029
|
|
The table below shows the composition of net operating revenues for our Conifer segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Revenue cycle services – Tenet
|
|
$
|
142
|
|
|
$
|
139
|
|
|
$
|
284
|
|
|
$
|
283
|
|
Revenue cycle services – other customers
|
|
187
|
|
|
220
|
|
|
367
|
|
|
452
|
|
Other services – Tenet
|
|
4
|
|
|
5
|
|
|
8
|
|
|
11
|
|
Other services – other customers
|
|
22
|
|
|
22
|
|
|
45
|
|
|
44
|
|
Net operating revenues
|
|
$
|
355
|
|
|
$
|
386
|
|
|
$
|
704
|
|
|
$
|
790
|
|
Other services represent
8%
of Conifer’s revenue and include value-based care services, consulting services and other client-defined projects.
Performance Obligations
The following table includes Conifer’s revenue that is expected to be recognized in the future related to performance obligations that are unsatisfied, or partially unsatisfied, at the end of the reporting period. The amounts in the table primarily consist of revenue cycle management fixed fees, which are typically recognized ratably as the performance obligation is satisfied. The estimated revenue does not include volume or contingency based contracts, performance incentives, penalties or other variable consideration that is considered constrained. Conifer’s contract with Common Spirit, a minority interest owner of
Conifer Health Solutions, LLC, represents the majority of the fixed-fee revenue related to remaining performance obligations. Conifer’s contract term with Common Spirit ends in 2032.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
Ending
|
|
Years Ending
|
|
Later Years
|
|
|
|
|
December 31,
|
|
|
|
Total
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
Performance obligations
|
|
$
|
7,587
|
|
|
$
|
298
|
|
|
$
|
597
|
|
|
$
|
594
|
|
|
$
|
594
|
|
|
$
|
594
|
|
|
$
|
4,910
|
|
NOTE 12. 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.
For the policy period April 1, 2019 through March 31, 2020, we have coverage totaling
$850 million
per occurrence, after deductibles and exclusions, with annual aggregate sub-limits of
$100 million
for floods,
$200 million
for earthquakes and a per-occurrence sub-limit of
$200 million
for named windstorms with no annual aggregate. With respect to fires and other perils, excluding floods, earthquakes and named windstorms, the total
$850 million
limit of coverage per occurrence applies. Deductibles are
5%
of insured values up to a maximum of
$40 million
for California earthquakes,
$25 million
for floods and named windstorms, and
2%
of insured values for New Madrid fault earthquakes, with a maximum per claim deductible of
$25 million
. Floods and certain other covered losses, including fires and other perils, have a minimum deductible of
$1 million
.
Professional and General Liability Reserves
We are self-insured for the majority of our professional and general liability claims and purchase insurance from third-parties to cover catastrophic claims. At
June 30, 2019
and
December 31, 2018
, the aggregate current and long-term professional and general liability reserves in the accompanying Condensed Consolidated Balance Sheets were
$897 million
and
$882 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
1.87%
at
June 30, 2019
and
2.59%
at
December 31, 2018
.
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
$205 million
and
$163 million
for the
six
months ended
June 30, 2019
and
2018
, respectively.
NOTE 13. CLAIMS AND LAWSUITS
We operate in a highly regulated and litigious industry. 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. We are also subject to class action lawsuits, employment-related claims and other legal actions in the ordinary course of business. Some of these actions may involve large demands, as well as substantial defense costs. We cannot predict the outcome of current or future legal actions against us or the effect that judgments or settlements in such matters may have on us.
We are also subject to a non-prosecution agreement (“NPA”), as described in our Annual Report. If we fail to comply with this agreement, we could be subject to criminal prosecution, substantial penalties and exclusion from participation in federal healthcare programs, any of which could adversely impact our business, financial condition, results of operations or cash flows.
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, but are subject to significant uncertainty regarding numerous factors that could affect the ultimate loss levels. 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. Given the inherent uncertainties involved in these matters, especially those involving governmental agencies, and the indeterminate damages sought in some of these matters, there is significant uncertainty as to the ultimate liability we may incur from these matters, and an adverse outcome in one or more of these matters could be material to our results of operations or cash flows for any particular reporting period.
Shareholder Derivative Litigation
In January 2017, the Dallas County District Court consolidated
two
previously disclosed shareholder derivative lawsuits filed on behalf of the Company by purported shareholders of the Company’s common stock against current and former officers and directors into a single matter captioned
In re Tenet Healthcare Corporation Shareholder Derivative Litigation
. The plaintiffs filed a consolidated shareholder derivative petition in February 2017. The consolidated shareholder derivative petition alleged that false or misleading statements or omissions concerning the Company’s financial performance and compliance policies, specifically with respect to the previously disclosed civil qui tam litigation and parallel criminal investigation of the Company and certain of its subsidiaries (together, the “Clinica de la Mama matters”), caused the price of the Company’s common stock to be artificially inflated. In addition, the plaintiffs alleged that the defendants violated GAAP by failing to disclose an estimate of the possible loss or a range of loss related to the Clinica de la Mama matters. The plaintiffs claimed that they did not make demand on the Company’s board of directors to bring the lawsuit because such a demand would have been futile. In May 2018, the judge in the consolidated shareholder derivative litigation entered an order lifting the previous year-long stay of the matter and, in July 2018, the defendants filed pleadings seeking dismissal of the lawsuit. In October 2018, the judge granted defendants’ motion to dismiss, but also agreed to give the plaintiffs 30 days to replead their complaint. In January 2019, the court issued a final judgment and order of dismissal after the plaintiffs elected not to replead. In February 2019, the plaintiffs filed an appeal of the court’s ruling that dismissal was appropriate because the plaintiffs failed to adequately plead that a pre-suit demand on the Company’s board of directors, a precondition to their action, should be excused as futile. The defendants intend to continue to vigorously contest the plaintiffs’ allegations in this matter.
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 alleged those hospital systems, including our 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 sought unspecified damages (subject to trebling under federal law), interest, costs and attorneys’ fees. In January 2019, the district court issued an opinion denying the plaintiffs’ motion for class certification. The plaintiffs’ subsequent appeal of the district court’s decision to the U.S. Court of Appeals for the Fifth Circuit was denied on March 26, 2019. On April 30, 2019, the appellate court denied the plaintiffs’ request for further review of the district court’s ruling. The district court has ordered the plaintiffs to advise the court by August 6, 2019 if they will be dismissing the action or proceeding with the individually named plaintiffs. If necessary, we will continue to vigorously defend against the plaintiffs’ allegations.
Government Investigation of Detroit Medical Center
Detroit Medical Center (“DMC”) is subject to an ongoing investigation by the U.S. Attorney’s Office for the Eastern District of Michigan and the U.S. Department of Justice (“DOJ”) for potential violations of the Stark law, the Medicare and Medicaid anti-kickback and anti-fraud and abuse amendments codified under Section 1128B(b) of the Social Security Act (the “Anti-kickback Statute”), and the federal False Claims Act (“FCA”) related to DMC’s employment of nurse practitioners and physician assistants (“Mid-Level Practitioners”) from 2006 through 2017. As previously disclosed, a media report was published in August 2017 alleging that 14 Mid-Level Practitioners were terminated by DMC earlier in 2017 due to compliance concerns. We are cooperating with the investigation and continue to produce documents on a schedule agreed upon with the DOJ. Because the government’s review is in its preliminary stages, we are unable to determine the potential exposure, if any, at this time.
Oklahoma Surgical Hospital Qui Tam Action
In May 2016, a relator filed a qui tam lawsuit under seal in the Western District of Oklahoma against, among other parties, (i) Oklahoma Center for Orthopaedic & Multispecialty Surgery (“OCOM”), a surgical hospital jointly owned by USPI, a healthcare system partner and physicians, (ii) Southwest Orthopaedic Specialists, an independent physician practice group, (iii) Tenet, and (iv) other related entities and individuals. The complaint alleges various violations of the FCA, the Anti-kickback Statute, the Stark law and the Oklahoma Medicaid False Claims Act. In May 2018, Tenet and its affiliates learned that they were parties to the suit when the court unsealed the complaint and the DOJ declined to intervene with respect to the issues involving Tenet, USPI, OCOM and individually named employees. In June 2018, the relator filed an amended complaint more fully describing the claims and adding additional defendants. Tenet, USPI, OCOM and individually named employees filed motions to dismiss the case in October 2018, but the court has not yet ruled on the motions. The litigation is currently stayed until October 2019.
Pursuant to the obligations under our NPA, we reported the unsealed qui tam action to the DOJ. At this time, we are investigating the claims contained in the amended complaint and cooperating fully with the DOJ. We anticipate meeting with the DOJ and the Office of Inspector General of the U.S. Department of Health and Human Services in the three months ending September 30, 2019 to begin discussing potential resolution of these matters. Because these proceedings and investigations remain at a preliminary stage, we are unable to predict with any certainty the terms, or potential impact on our business or financial condition, of any potential resolution of these matters.
Other Matters
On July 1, 2019, certain of the entities that purchased the operations of Hahnemann University Hospital and St. Christopher’s Hospital for Children in Philadelphia from us commenced Chapter 11 bankruptcy proceedings. As previously disclosed in our Form 8-K filed September 1, 2017, the purchasers assumed our funding obligations under the Pension Fund for Hospital and Health Care Employees of Philadelphia and Vicinity (the “Fund”), a pension plan related to the operations at Hahnemann University Hospital and, pursuant to rules under the Employee Retirement Income Security Act of 1974, as amended, under certain circumstances we could become liable for withdrawal liability in the event a withdrawal is triggered with respect to the Fund. In July 2019, the Fund notified us of a withdrawal liability assessment of approximately
$63 million
. We dispute and intend to contest this assessment in accordance with applicable law.
We are also subject to 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 in continuing operations during the
six
months ended
June 30, 2019
and
2018
. No amounts were recorded in discontinued operations in those periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at
Beginning
of Period
|
|
Litigation and
Investigation
Costs
|
|
Cash
Payments
|
|
Balances at
End of
Period
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2019
|
|
$
|
8
|
|
|
$
|
31
|
|
|
$
|
(24
|
)
|
|
$
|
15
|
|
Six Months Ended June 30, 2018
|
|
$
|
12
|
|
|
$
|
19
|
|
|
$
|
(11
|
)
|
|
$
|
20
|
|
For the
six
months ended
June 30, 2019
and
2018
, we recorded costs of
$31 million
and
$19 million
, respectively, in continuing operations in connection with significant legal proceedings and governmental investigations.
NOTE 14. REDEEMABLE NONCONTROLLING INTERESTS IN EQUITY OF CONSOLIDATED SUBSIDIARIES
The following table shows the changes in redeemable noncontrolling interests in equity of consolidated subsidiaries during the
six
months ended
June 30, 2019
and
2018
:
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
2019
|
|
2018
|
Balances at beginning of period
|
|
$
|
1,420
|
|
|
$
|
1,866
|
|
Net income
|
|
95
|
|
|
101
|
|
Distributions paid to noncontrolling interests
|
|
(72
|
)
|
|
(70
|
)
|
Accretion of redeemable noncontrolling interests
|
|
9
|
|
|
160
|
|
Purchases and sales of businesses and noncontrolling interests, net
|
|
10
|
|
|
(628
|
)
|
Balances at end of period
|
|
$
|
1,462
|
|
|
$
|
1,429
|
|
The following tables show the composition by segment of our redeemable noncontrolling interests balances at
June 30, 2019
and
December 31, 2018
, as well as our net income available to redeemable noncontrolling interests for the
six
months ended
June 30, 2019
and
2018
:
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
Hospital Operations and other
|
|
$
|
408
|
|
|
$
|
431
|
|
Ambulatory Care
|
|
737
|
|
|
713
|
|
Conifer
|
|
317
|
|
|
276
|
|
Redeemable noncontrolling interests
|
|
$
|
1,462
|
|
|
$
|
1,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
2019
|
|
2018
|
Hospital Operations and other
|
|
$
|
(15
|
)
|
|
$
|
(6
|
)
|
Ambulatory Care
|
|
69
|
|
|
70
|
|
Conifer
|
|
41
|
|
|
37
|
|
Net income available to redeemable noncontrolling interests
|
|
$
|
95
|
|
|
$
|
101
|
|
NOTE 15. INCOME TAXES
During the three months ended
June 30, 2019
, we recorded
income tax expense
of
$30 million
in continuing operations on
pre-tax income
of
$140 million
compared to
income tax expense
of
$44 million
on
pre-tax income
of
$150 million
during the three months ended
June 30, 2018
. During the
six
months ended
June 30, 2019
, we recorded
income tax expense
of
$47 million
in continuing operations on
pre-tax income
of
$214 million
compared to
income tax expense
of
$114 million
on
pre-tax income
of
$410 million
during the
six
months ended
June 30, 2018
. Our provision for income taxes during interim reporting periods is calculated by applying an estimate of the annual effective tax rate for the full year to “ordinary” income or loss (pre-tax income or loss excluding unusual or infrequently occurring discrete items) for the reporting period. In calculating “ordinary” income, non-taxable income or loss attributable to noncontrolling interests has been deducted from pre-tax income or loss in the determination of the annualized effective tax rate used to calculate income taxes for the quarter. The reconciliation between the amount of recorded income tax expense and the amount calculated at the statutory federal tax rate is shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Tax expense at statutory federal rate of 21%
|
|
$
|
29
|
|
|
$
|
31
|
|
|
$
|
45
|
|
|
$
|
86
|
|
State income taxes, net of federal income tax benefit
|
|
6
|
|
|
7
|
|
|
9
|
|
|
17
|
|
Tax attributable to noncontrolling interests
|
|
(19
|
)
|
|
(16
|
)
|
|
(36
|
)
|
|
(34
|
)
|
Nondeductible goodwill
|
|
—
|
|
|
2
|
|
|
—
|
|
|
7
|
|
Nontaxable gains
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
Stock-based compensation
|
|
1
|
|
|
—
|
|
|
—
|
|
|
4
|
|
Change in valuation allowance-interest expense limitation
|
|
11
|
|
|
18
|
|
|
35
|
|
|
30
|
|
Other items
|
|
2
|
|
|
2
|
|
|
(5
|
)
|
|
4
|
|
Income tax expense
|
|
$
|
30
|
|
|
$
|
44
|
|
|
$
|
47
|
|
|
$
|
114
|
|
During the
six
months ended
June 30, 2019
, there were no adjustments to our estimated liabilities for uncertain tax positions. The total amount of unrecognized tax benefits at
June 30, 2019
was
$45 million
, of which
$43 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, 2019
were
$4 million
, all of which related to continuing operations.
At
June 30, 2019
, approximately
$10 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 16. EARNINGS (LOSS) PER COMMON SHARE
The following table is a reconciliation of the numerators and denominators of our basic and diluted earnings (loss) per common share calculations for our continuing operations for
three and six
months ended
June 30, 2019
and
2018
. Net income available (loss attributable) to our common shareholders is expressed in millions and weighted average shares are expressed in thousands.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Available (Loss Attributable)
to Common
Shareholders
(Numerator)
|
|
Weighted
Average Shares
(Denominator)
|
|
Per-Share
Amount
|
Three Months Ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
Net income available to Tenet Healthcare Corporation common shareholders
for basic earnings per share
|
|
$
|
15
|
|
|
103,198
|
|
|
$
|
0.15
|
|
Effect of dilutive stock options, restricted stock units and deferred compensation units
|
|
—
|
|
|
1,431
|
|
|
(0.01
|
)
|
Net income available to Tenet Healthcare Corporation common shareholders for diluted earnings per share
|
|
$
|
15
|
|
|
104,629
|
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2018
|
|
|
|
|
|
|
|
|
|
Net income available to Tenet Healthcare Corporation common shareholders
for basic earnings per share
|
|
$
|
24
|
|
|
102,147
|
|
|
$
|
0.23
|
|
Effect of dilutive stock options, restricted stock units and deferred compensation units
|
|
—
|
|
|
2,030
|
|
|
—
|
|
Net income available to Tenet Healthcare Corporation common shareholders for diluted earnings per share
|
|
$
|
24
|
|
|
104,177
|
|
|
$
|
0.23
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Tenet Healthcare Corporation common shareholders
for basic loss per share
|
|
$
|
(12
|
)
|
|
102,993
|
|
|
$
|
(0.12
|
)
|
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
|
|
$
|
(12
|
)
|
|
102,993
|
|
|
$
|
(0.12
|
)
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2018
|
|
|
|
|
|
|
|
|
|
Net income available to Tenet Healthcare Corporation common shareholders
for basic earnings per share
|
|
$
|
122
|
|
|
101,770
|
|
|
$
|
1.20
|
|
Effect of dilutive stock options, restricted stock units and deferred compensation units
|
|
—
|
|
|
1,646
|
|
|
(0.02
|
)
|
Net income available to Tenet Healthcare Corporation common shareholders for diluted earnings per share
|
|
$
|
122
|
|
|
103,416
|
|
|
$
|
1.18
|
|
All potentially dilutive securities were excluded from the calculation of diluted loss per share for the six months ended
June 30, 2019
because we did not report income from continuing operations available to common shareholders in that period. 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 six months ended
June 30, 2019
, 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
1,592
.
NOTE 17. FAIR VALUE MEASUREMENTS
Our non-financial assets and liabilities not permitted or required to be measured at fair value on a recurring basis typically relate to long-lived assets held and used, long-lived assets held for sale and goodwill. We are required to provide additional disclosures about fair value measurements as part of our financial statements for each major category of assets and liabilities measured at fair value on a non-recurring basis. The following table presents this information and indicates 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, which generally are not applicable to non-financial assets and liabilities. Fair values determined by Level 2 inputs utilize data points that are observable, such as definitive sales agreements, appraisals or established market values of comparable assets. 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, such as internal estimates of future cash flows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Long-lived assets held for sale
|
|
$
|
39
|
|
|
$
|
—
|
|
|
$
|
39
|
|
|
$
|
—
|
|
Long-lived assets held and used
|
|
130
|
|
|
—
|
|
|
130
|
|
|
—
|
|
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, 2019
and
December 31, 2018
, the estimated fair value of our long-term debt was approximately
102.1%
and
97.3%
, respectively, of the carrying value of the debt.
NOTE 18. ACQUISITIONS
Preliminary purchase price allocations (representing the fair value of the consideration conveyed) for all acquisitions made during the
six
months ended
June 30, 2019
and
2018
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
2019
|
|
2018
|
Current assets
|
|
$
|
6
|
|
|
$
|
3
|
|
Property and equipment
|
|
8
|
|
|
3
|
|
Other intangible assets
|
|
3
|
|
|
3
|
|
Goodwill
|
|
18
|
|
|
132
|
|
Other long-term assets, including previously held equity method investments
|
|
5
|
|
|
1
|
|
Current liabilities
|
|
(3
|
)
|
|
(2
|
)
|
Long-term liabilities
|
|
(6
|
)
|
|
(1
|
)
|
Redeemable noncontrolling interests in equity of consolidated subsidiaries
|
|
(9
|
)
|
|
(8
|
)
|
Noncontrolling interests
|
|
(4
|
)
|
|
(42
|
)
|
Cash paid, net of cash acquired
|
|
(13
|
)
|
|
(89
|
)
|
Gains on consolidations
|
|
$
|
5
|
|
|
$
|
—
|
|
The goodwill generated from these transactions, the majority of which will be deductible for income tax purposes, can be attributed to the benefits that we expect to realize from operating efficiencies and growth strategies. The goodwill total of
$18 million
from acquisitions completed during the
six
months ended
June 30, 2019
was recorded in our Ambulatory Care segment. Approximately
$3 million
and
$5 million
in transaction costs related to prospective and closed acquisitions were expensed during the
six
month periods ended
June 30, 2019
and
2018
, respectively, and are included in impairment and restructuring charges, and acquisition-related costs in the accompanying Condensed Consolidated Statements 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 2019 and
2018
acquisitions; therefore, those purchase price allocations are subject to adjustment once the valuations are completed.
During the
six
months ended
June 30, 2019
and
2018
, we recognized gains totaling
$5 million
and less than
$1 million
, respectively, associated with stepping up our ownership interests in previously held equity method investments, which we began consolidating after we acquired controlling interests.
NOTE 19. 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 Hospital Operations and other segment
is comprised of our acute care and specialty hospitals, ancillary outpatient facilities, urgent care centers, microhospitals and physician practices
. At
June 30, 2019
, our subsidiaries operated
65
hospitals serving primarily urban and suburban communities in
nine
states.
Our Ambulatory Care segment is comprised of the operations of USPI and included
nine
Aspen facilities in the United Kingdom until their divestiture effective August 17, 2018. At
June 30, 2019
, USPI had interests in
260
ambulatory surgery centers
,
38
urgent care centers
operated under the CareSpot brand,
23
imaging centers
and
23
surgical hospitals
in
27
states
. At
June 30, 2019
, we owned
95.0%
of USPI.
Our Conifer segment
provides healthcare business process services in the areas of hospital and physician revenue cycle management and value-based care solutions to healthcare systems, as well as individual hospitals, physician practices, self-insured organizations, health plans and other entities
. At
June 30, 2019
, Conifer provided services to approximately
680
Tenet and non-Tenet hospitals and other clients nationwide. In 2012, we entered into agreements documenting the terms and conditions of various services Conifer provides to Tenet hospitals, as well as certain administrative services our Hospital Operations and other segment provides to Conifer. The pricing terms for the services provided by each party to the other under these contracts were based on estimated third-party pricing terms in effect at the time the agreements were signed. At
June 30, 2019
, we owned
76.2%
of Conifer Health Solutions, LLC, which is the principal subsidiary of Conifer Holdings, Inc.
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 in the Condensed Consolidated Statements of Operations, as applicable:
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
Assets:
|
|
|
|
|
|
|
Hospital Operations and other
|
|
$
|
16,072
|
|
|
$
|
15,684
|
|
Ambulatory Care
|
|
6,057
|
|
|
5,711
|
|
Conifer
|
|
1,078
|
|
|
1,014
|
|
Total
|
|
$
|
23,207
|
|
|
$
|
22,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospital Operations and other
|
|
$
|
118
|
|
|
$
|
108
|
|
|
$
|
288
|
|
|
$
|
228
|
|
Ambulatory Care
|
|
21
|
|
|
13
|
|
|
41
|
|
|
28
|
|
Conifer
|
|
5
|
|
|
4
|
|
|
7
|
|
|
12
|
|
Total
|
|
$
|
144
|
|
|
$
|
125
|
|
|
$
|
336
|
|
|
$
|
268
|
|
|
|
|
|
|
|
|
|
|
Net operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospital Operations and other total prior to inter-segment eliminations
(1)
|
|
$
|
3,827
|
|
|
$
|
3,733
|
|
|
$
|
7,689
|
|
|
$
|
7,680
|
|
Ambulatory Care
|
|
524
|
|
|
531
|
|
|
1,004
|
|
|
1,029
|
|
Conifer
|
|
|
|
|
|
|
|
|
|
|
Tenet
|
|
146
|
|
|
144
|
|
|
292
|
|
|
294
|
|
Other customers
|
|
209
|
|
|
242
|
|
|
412
|
|
|
496
|
|
Total Conifer revenues
|
|
355
|
|
|
386
|
|
|
704
|
|
|
790
|
|
Inter-segment eliminations
|
|
(146
|
)
|
|
(144
|
)
|
|
(292
|
)
|
|
(294
|
)
|
Total
|
|
$
|
4,560
|
|
|
$
|
4,506
|
|
|
$
|
9,105
|
|
|
$
|
9,205
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of unconsolidated affiliates:
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospital Operations and other
|
|
$
|
8
|
|
|
$
|
6
|
|
|
$
|
11
|
|
|
$
|
4
|
|
Ambulatory Care
|
|
34
|
|
|
33
|
|
|
65
|
|
|
60
|
|
Total
|
|
$
|
42
|
|
|
$
|
39
|
|
|
$
|
76
|
|
|
$
|
64
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
(2)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospital Operations and other
(2)
|
|
$
|
347
|
|
|
$
|
345
|
|
|
$
|
684
|
|
|
$
|
747
|
|
Ambulatory Care
|
|
207
|
|
|
198
|
|
|
384
|
|
|
363
|
|
Conifer
|
|
103
|
|
|
91
|
|
|
202
|
|
|
189
|
|
Total
|
|
$
|
657
|
|
|
$
|
634
|
|
|
$
|
1,270
|
|
|
$
|
1,299
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospital Operations and other
|
|
$
|
185
|
|
|
$
|
164
|
|
|
$
|
364
|
|
|
$
|
339
|
|
Ambulatory Care
|
|
18
|
|
|
17
|
|
|
36
|
|
|
34
|
|
Conifer
|
|
11
|
|
|
13
|
|
|
22
|
|
|
25
|
|
Total
|
|
$
|
214
|
|
|
$
|
194
|
|
|
$
|
422
|
|
|
$
|
398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Adjusted EBITDA
(2)
|
|
$
|
657
|
|
|
$
|
634
|
|
|
$
|
1,270
|
|
|
$
|
1,299
|
|
Income (loss) from divested and closed businesses
(i.e., the Company’s health plan businesses)
|
|
—
|
|
|
1
|
|
|
(1
|
)
|
|
—
|
|
Depreciation and amortization
|
|
(214
|
)
|
|
(194
|
)
|
|
(422
|
)
|
|
(398
|
)
|
Impairment and restructuring charges, and acquisition-related costs
|
|
(36
|
)
|
|
(30
|
)
|
|
(55
|
)
|
|
(77
|
)
|
Litigation and investigation costs
|
|
(18
|
)
|
|
(13
|
)
|
|
(31
|
)
|
|
(19
|
)
|
Interest expense
|
|
(247
|
)
|
|
(254
|
)
|
|
(498
|
)
|
|
(509
|
)
|
Loss from early extinguishment of debt
|
|
—
|
|
|
(1
|
)
|
|
(47
|
)
|
|
(2
|
)
|
Other non-operating expense, net
|
|
(1
|
)
|
|
(1
|
)
|
|
—
|
|
|
(2
|
)
|
Net gains (losses) on sales, consolidation and deconsolidation of facilities
|
|
(1
|
)
|
|
8
|
|
|
(2
|
)
|
|
118
|
|
Income from continuing operations, before income taxes
|
|
$
|
140
|
|
|
$
|
150
|
|
|
$
|
214
|
|
|
$
|
410
|
|
|
|
(1)
|
Hospital Operations and other revenues includes health plan revenues of approximately
$1 million
for both the
three and six
months ended
June 30, 2019
, and less than
$1 million
and
$6 million
for the
three and six
months ended
June 30, 2018
, respectively.
|
|
|
(2)
|
Hospital Operations and other Adjusted EBITDA excludes health plan EBITDA of less than
$1 million
and
$(1) million
for the
three and six
months ended
June 30, 2019
, respectively, and
$1 million
and less than
$1 million
for the
three and six
months ended
June 30, 2018
, respectively.
|