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TENET HEALTHCARE CORP – 10-K – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION TO MANAGEMENT'S DISCUSSION AND ANALYSIS
The purpose of this section, Management's Discussion and Analysis of Financial
Condition and Results of Operations ("MD&A"), is to provide a narrative
explanation of our financial statements that enables investors to better
understand our business, to enhance our overall financial disclosures, to
provide the context within which our financial information may be analyzed, and
to provide information about the quality of, and potential variability of, our
financial condition, results of operations and cash flows. MD&A, which should be
read in conjunction with the accompanying Consolidated Financial Statements,
includes the following sections:
•Management Overview
•Sources of Revenue for Our Hospital Operations Segment
•Results of Operations
•Liquidity and Capital Resources
•Recently Issued Accounting Standards
•Critical Accounting Estimates
Our business consists of our Hospital Operations and other ("Hospital
Operations") segment, our Ambulatory Care segment and our Conifer segment. Our
Hospital Operations segment is comprised of our acute care and specialty
hospitals, imaging centers, ancillary outpatient facilities, microhospitals and
physician practices. At December 31, 2021 , our subsidiaries operated 60
hospitals serving primarily urban and suburban communities in nine states. In
April 2021 , we completed the sale of the majority of the urgent care centers
previously held by our Hospital Operations segment to an unaffiliated urgent
care provider. In addition, we completed the sale of five Miamiarea hospitals
and certain related operations (the "Miami Hospitals") held by our Hospital
Operations segment in August 2021 .
Our Ambulatory Care segment is comprised of the operations of USPI Holding
Company, Inc. ("USPI"), in which we hold an ownership interest of approximately
95%. At December 31, 2021 , USPI had interests in 399 ambulatory surgery centers
("ASCs") (249 consolidated) and 24 surgical hospitals (eight consolidated) in
34 states. At December 31, 2020 , our Ambulatory Care segment also included
40 urgent care centers that were classified as held for sale and 24 imaging
centers. In April 2021 , we completed the divestiture of the 40 urgent care
centers and transferred the 24 imaging centers to our Hospital Operations
segment.
Our Conifer segment provides revenue cycle management and value-based care
services to hospitals, health systems, physician practices, employers and other
clients, through our Conifer Holdings, Inc. subsidiary ("Conifer"). At
December 31, 2021 , Conifer provided services to approximately 650 Tenet and
nonTenet hospitals and other clients nationwide. Nearly all of the services
comprising the operations of our Conifer segment are provided by Conifer Health
Solutions, LLC , in which we owned an interest of approximately 76% at
December 31, 2021 , or by one of its direct or indirect wholly owned
subsidiaries.
Unless otherwise indicated, all financial and statistical information included
in MD&A relates to our continuing operations, with dollar amounts expressed in
millions (except peradjustedpatientadmission and peradjustedpatientday
amounts). Continuing operations information includes the results of our same 60
hospitals operated throughout the years ended December 31, 2021 and 2020, and
the Miami Hospitals we sold in August 2021 . Continuing operations information
excludes the results of our hospitals and other businesses that have been
classified as discontinued operations for accounting purposes. We believe this
information is useful to investors because it reflects our current portfolio of
operations and the recent trends we are experiencing with respect to volumes,
revenues and expenses. We present certain metrics as a percentage of net
operating revenues because a significant portion of our operating expenses are
variable. In addition, we present certain metrics on a
peradjustedpatientadmission and peradjustedpatientday basis to show trends
other than volume.
In certain cases, information presented in MD&A for our Hospital Operations
segment is described as presented on a samehospital basis, which includes the
results of our same 60 hospitals operated throughout the years ended
December 31, 2021 and 2020, and excludes the results of the Miami Hospitals we
sold in August 2021 and the results of our discontinued operations. We present
samehospital data because we believe it provides investors with useful
information regarding the performance of our hospitals and other operations that
are comparable for the periods presented.
36
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Table of Contents MANAGEMENT OVERVIEW RECENT DEVELOPMENTS Redemption of Senior Secured First Lien Notes-OnFebruary 9, 2022 , we called for the redemption of all$700 million aggregate principal amount outstanding of our 7.500% senior secured first lien notes due 2025 ("2025 Senior Secured First Lien Notes"). The 2025 Senior Secured First Lien Notes will be redeemed for an anticipated amount of approximately$730 million onFebruary 23, 2022 using cash on hand. We expect this transaction will lower our future annual cash interest payments by approximately$53 million . Exercise of Call Option to Purchase Additional Ownership Interest in USPI-We have a put/call agreement (the "Baylor Put /Call Agreement") withBaylor University Medical Center ("Baylor") with respect to Baylor's 5% ownership in USPI. InFebruary 2022 , we notified Baylor of our intention to exercise our call option under the Baylor Put/Call Agreement to purchase 33.3% of the USPI shares held by Baylor as ofApril 1, 2017 . The amount and timing of the payment related to the exercise of our call option are currently uncertain. See Note 18 to the accompanying Consolidated Financial Statements for additional information related to the Baylor Put/Call Agreement.
IMPACT OF THE COVID-19 PANDEMIC
The spread of COVID19 and the ensuing response of federal, state and local authorities beginning inMarch 2020 resulted in a material reduction in our patient volumes and also adversely affected our net operating revenues in the years endedDecember 31, 2021 and 2020. Restrictive measures, including travel bans, social distancing, quarantines and shelterinplace orders, reduced the number of procedures performed at our facilities, as well as the volume of emergency room and physician office visits. We began experiencing improvement in patient volumes inMay 2020 as various states eased stayathome restrictions and our facilities were permitted to resume elective surgeries and other procedures; however, the COVID19 pandemic generally and, most recently, the spread of the Delta variant and emergence of the Omicron variant continue to impact all three segments of our business, as well as our patients, communities and employees. Broad economic factors resulting from the pandemic, including higher inflation, increased unemployment rates in certain areas in which we operate and reduced consumer spending, continued to impact our patient volumes, service mix and revenue mix in 2021. The pandemic also continued to have an adverse effect on our operating expenses to varying degrees in 2021. As further described below, we have been required to utilize highercost temporary labor and pay premiums above standard compensation for essential workers. In addition, we have experienced significant price increases in medical supplies, particularly for personal protective equipment ("PPE"), and we have encountered supplychain disruptions, including shortages and delays. As described under "Sources of Revenue for Our Hospital Operations Segment" below, various legislative actions have mitigated some of the economic disruption caused by the COVID19 pandemic on our business. Additional funding for thePublic Health and Social Services Emergency Fund ("Provider Relief Fund " or "PRF") was among the provisions of the COVID19 relief legislation. In the years endedDecember 31, 2021 and 2020, we received cash payments of$215 million and$974 million , respectively, due to grants from theProvider Relief Fund and other state and local grant programs. We recognized$191 million and$882 million , respectively, from these funds as grant income and$14 million and$17 million , respectively, in equity in earnings of unconsolidated affiliates in the accompanying Consolidated Statements of Operations during the years endedDecember 31, 2021 and 2020. Throughout MD&A, we have provided additional information on the impact of the COVID19 pandemic on our results of operations and the steps we have taken, and are continuing to take, in response. The ultimate extent and scope of the pandemic and its future impact on our business remain unknown. For information about risks and uncertainties related to COVID19 that could affect our results of operations, financial condition and cash flows, see the Risk Factors section in Part I of this report. TRENDS AND STRATEGIES As described above and throughout MD&A, we experienced a significant disruption to our business in 2020 and 2021 due to the COVID19 pandemic. Although we have seen improvement in our patient volumes, we continue to experience negative impacts of the pandemic on our business in varying degrees. Most recently, in the second half of 2021, we experienced significant acceleration in COVID19 cases associated with the Delta variant, with a peak in such cases in lateAugust 2021 , and the Omicron variant, which emerged inNovember 2021 to drive a new COVID19 surge. Throughout the COVID19 pandemic, we have taken, and we continue to take, various actions to increase our liquidity and mitigate the impact of reductions in our patient volumes and operating revenues. We have issued new senior unsecured notes and senior secured first lien notes, redeemed existing senior unsecured notes and senior secured first lien notes, including those with the highest interest rate and nearest maturity date of all of our longterm debt, and amended our revolving credit facility. We also decreased our employee headcount throughout the organization at the outset of the COVID19 pandemic, and we deferred certain operating 37 -------------------------------------------------------------------------------- Table of Contents expenses that were not expected to impact our response to the pandemic. In addition, we reduced certain variable costs across the enterprise. Together with government relief packages, we believe these actions supported our continued operation during the initial uncertainty caused by the COVID19 pandemic and continue to do so. For further information on our liquidity, see "Liquidity and Capital Resources" below. We have experienced, and continue to experience, increased competition with other healthcare providers in recruiting and retaining qualified personnel responsible for the operation of our facilities. There is a limited availability of experienced medical support personnel nationwide, which drives up the wages and benefits required to recruit and retain employees. In particular, like others in the healthcare industry, we continue to experience a shortage of criticalcare nurses in certain disciplines and geographic areas. This shortage has been exacerbated by the COVID19 pandemic as more nurses choose to retire early, leave the workforce or take travel assignments. In some areas, the increased demand for care of COVID19 patients in our hospitals, as well as the direct impact of COVID19 on physicians, employees and their families, have put a strain on our resources and staff. Over the past two years, we have had to rely on higher-cost temporary and contract labor, which we compete with other healthcare providers to secure, and pay premiums above standard compensation for essential workers. The length and extent of the disruptions caused by the COVID19 pandemic are currently unknown; however, we have thus far seen such disruptions continue into 2022, and we expect they may endure through the duration of the pandemic. We believe that several key trends are also continuing to shape the demand for healthcare services: (1) consumers, employers and insurers are actively seeking lowercost solutions and better value as they focus more on healthcare spending; (2) patient volumes are shifting from inpatient to outpatient settings due to technological advancements and demand for care that is more convenient, affordable and accessible; (3) the growing aging population requires greater chronic disease management and higheracuity treatment; and (4) consolidation continues across the entire healthcare sector. In addition, the healthcare industry, in general, and the acute care hospital business, in particular, have experienced significant regulatory uncertainty based, in large part, on administrative, legislative and judicial efforts to limit, alter or repeal the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 ("Affordable Care Act" or "ACA"). It is difficult to predict the full impact of regulatory uncertainty on our future revenues and operations. Expansion of Our Ambulatory Care Segment-In response to these trends, we continue to focus on opportunities to expand our Ambulatory Care segment through acquisitions, organic growth, construction of new outpatient centers and strategic partnerships. During the years endedDecember 31, 2021 and 2020, we invested$1.315 billion and$1.200 billion , respectively, to acquire ownership interests in new, or increase our existing ownership in, ambulatory care facilities. This activity included the acquisition of ownership interests in 86 ASCs and related ambulatory support services (collectively, the "SCD Centers") fromSurgical Center Development #3, LLC andSurgical Center Development #4, LLC ("SCD") inDecember 2021 . The newly acquired facilities augmented our Ambulatory Care segment's existing musculoskeletal service line and expanded the number of markets it serves. In addition, USPI and SCD's principals entered into a joint venture and development agreement under which USPI will have the exclusive option to partner with affiliates of SCD on the future development of a minimum target of 50 de novo ASCs over a period of five years. During the year endedDecember 31, 2021 , we also acquired controlling interests in four ASCs inMaryland , two in each ofFlorida ,Georgia andTexas and one inArizona . We also opened four new ASCs - one each inMontana ,Nevada ,New Mexico andTennessee . We believe USPI's ASCs and surgical hospitals offer many advantages to patients and physicians, including greater affordability, predictability, flexibility and convenience. Moreover, due in part to advancements in medical technology and due to the lower cost structure and greater efficiencies that are attainable at a specialized outpatient site, we believe the volume and complexity of surgical cases performed in an outpatient setting will continue to increase. Historically, our outpatient services have generated significantly higher margins for us than inpatient services. Driving Growth in Our Hospital Systems-We remain committed to better positioning our hospital systems and competing more effectively in the everevolving healthcare environment by focusing on driving performance through operational effectiveness, increasing capital efficiency and margins, investing in our physician enterprise, particularly our specialist network, enhancing patient and physician satisfaction, growing our higherdemand and higheracuity clinical service lines (including outpatient lines), expanding patient and physician access, and optimizing our portfolio of assets. Over the past several years, we have undertaken enterprisewide cost reduction measures, comprised primarily of workforce reductions in 2019 (including streamlining corporate overhead and centralized support functions), the consolidation of office locations, and the continuing renegotiation of contracts with suppliers and vendors. Moreover, we established offshore support operations at ourGlobal Business Center ("GBC") inthe Philippines . We incurred restructuring charges in conjunction with these initiatives and our costsaving efforts in response to the COVID19 pandemic in the years endedDecember 31, 2021 , 2020 and 2019, and we could incur additional such charges if we identify other areas that can be transitioned offshore. 38 -------------------------------------------------------------------------------- Table of Contents We also continue to exit service lines, businesses and markets that we believe are no longer a core part of our longterm growth strategy. InApril 2021 , we divested the majority of our urgent care centers operated under the MedPost and CareSpot brands by our Hospital Operations and Ambulatory Care segments. In addition, we sold our former Miami Hospitals inAugust 2021 . We intend to continue to further refine our portfolio of hospitals and other healthcare facilities when we believe such refinements will help us improve profitability, allocate capital more effectively in areas where we have a stronger presence, deploy proceeds on higherreturn investments across our business, enhance cash flow generation, reduce our debt and lower our ratio of debttoAdjusted EBITDA. Improving the Customer Care Experience-As consumers continue to become more engaged in managing their health, we recognize that understanding what matters most to them and earning their loyalty is imperative to our success. As such, we have enhanced our focus on treating our patients as traditional customers by: (1) establishing networks of physicians and facilities that provide convenient access to services across the care continuum; (2) expanding service lines aligned with growing community demand, including a focus on aging and chronic disease patients; (3) offering greater affordability and predictability, including simplified registration and discharge procedures, particularly in our outpatient centers; (4) improving our culture of service; and (5) creating health and benefit programs, patient education and health literacy materials that are customized to the needs of the communities we serve. Through these efforts, we intend to improve the customer care experience in every part of our operations. Driving Conifer's Growth While Pursuing a Tax-Free Spin-Off-We previously announced a number of actions to support our goals of improving financial performance and enhancing shareholder value, including the exploration of strategic alternatives for Conifer. InJuly 2019 , we announced our intention to pursue a taxfree spinoff of Conifer as a separate, independent, publicly traded company. Completion of the proposed spinoff is subject to a number of conditions, including, among others, assurance that the separation will be taxfree forU.S. federal income tax purposes, finalization of Conifer's capital structure, the effectiveness of appropriate filings with theSEC , and final approval from our board of directors. Although inMarch 2021 we entered into a monthtomonth agreement amending and updating certain terms and conditions related to the revenue cycle management services Conifer provides to Tenet hospitals ("Amended RCM Agreement"), the execution of a comprehensive amendment to and restatement of the master services agreement between Conifer and Tenet remains an additional prerequisite to the spinoff of Conifer. If consummated, this transaction is expected to potentially enhance shareholder value and, to a lesser degree, the level of Tenet's debt through a taxfree debtfordebt exchange. There can be no assurance regarding the timeframe for completion of the Conifer spinoff, the allocation of assets and liabilities between Tenet and Conifer, that the other conditions of the spinoff will be met, or that it will be completed at all. Conifer serves approximately 650 Tenet and nonTenet hospitals and other clients nationwide. In addition to providing revenue cycle management services to health systems and physicians, Conifer provides support to both providers and selfinsured employers seeking assistance with clinical integration, financial risk management and population health management. Conifer remains focused on driving growth by continuing to market and expand its revenue cycle management and valuebased care solutions businesses. We believe that our success in growing Conifer and increasing its profitability depends in part on our success in executing the following strategies: (1) attracting hospitals and other healthcare providers that currently handle their revenue cycle management processes internally as new clients; (2) generating new client relationships through opportunities from USPI and Tenet's acute care hospital acquisition and divestiture activities; (3) expanding revenue cycle management and valuebased care service offerings through organic development and small acquisitions; and (4) leveraging data from tens of millions of patient interactions for continued enhancement of the valuebased care environment to drive competitive differentiation. Improving Profitability-As we return to more normal operations, we will continue to focus on growing patient volumes and effective cost management as a means to improve profitability. We believe our inpatient admissions have been constrained in recent years (prior to the COVID19 pandemic) by increased competition, utilization pressure by managed care organizations, new delivery models that are designed to lower the utilization of acute care hospital services, the effects of higher patient copays, coinsurance amounts and deductibles, changing consumer behavior, and adverse economic conditions and demographic trends in certain of our markets. However, we also believe that emphasis on higherdemand clinical service lines (including outpatient services), focus on expanding our ambulatory care business, cultivation of our culture of service, participation in Medicare Advantage health plans that have been experiencing higher growth rates than traditional Medicare, and contracting strategies that create shared value with payers should help us grow our patient volumes over time. We are also continuing to explore new opportunities to enhance efficiency, including further integration of enterprisewide centralized support functions, outsourcing additional functions unrelated to direct patient care, and reducing clinical and vendor contract variation. 39 -------------------------------------------------------------------------------- Table of Contents Reducing Our Leverage Over Time-All of our outstanding longterm debt has a fixed rate of interest, except for outstanding borrowings, if any, under our revolving credit facility, and the maturity dates of our notes are staggered from 2023 through 2031. We believe that our capital structure minimizes the nearterm impact of increased interest rates, and the staggered maturities of our debt allow us to refinance our debt over time. During the year endedDecember 31, 2021 , we retired approximately$2.988 billion aggregate principal amount of certain of our senior unsecured notes and senior secured first lien notes. These notes were retired using proceeds from theJune 2021 sale of$1.400 billion aggregate principal amount of 4.250% senior secured first lien notes due 2029 (the "2029 Senior Secured First Lien Notes"), the proceeds from the sale of the Miami Hospitals inAugust 2021 and cash on hand. These transactions reduced future annual cash interest expense payments by approximately$96 million . Moreover, onFebruary 9, 2022 , we called for the redemption of all$700 million aggregate principal amount outstanding of our 2025 Senior Secured First Lien Notes. We anticipate redeeming the notes using cash on hand. It remains our longterm objective to reduce our debt and lower our ratio of debttoAdjusted EBITDA, primarily through more efficient capital allocation and Adjusted EBITDA growth, which should lower our refinancing risk. Our ability to execute on our strategies and respond to the aforementioned trends is subject to the extent and scope of the impact on our operations of the COVID19 pandemic, as well as a number of other risks and uncertainties, all of which may cause actual results to be materially different from expectations. For information about risks and uncertainties that could affect our results of operations, see the ForwardLooking Statements and Risk Factors sections in Part I of this report. RECENT RESULTS OF OPERATIONS We have provided below certain selected operating statistics for the three months endedDecember 31, 2021 and 2020 on a continuing operations basis. The following tables also show information about facilities in our Ambulatory Care segment that we control and, therefore, consolidate.
Continuing Operations
Three Months Ended December 31, Increase Selected Operating Statistics 2021 2020 (Decrease)
Hospital Operations - hospitals and related outpatient
facilities:
Number of hospitals (at end of period)
60 65 (5) (1) Total admissions 133,809 152,694 (12.4) % Adjusted patient admissions(2) 241,008 261,097 (7.7) % Paying admissions (excludes charity and uninsured) 127,092 143,195 (11.2) % Charity and uninsured admissions 6,717 9,499 (29.3) % Admissions through emergency department 99,772 114,887 (13.2) % Emergency department visits, outpatient 531,737 466,179 14.1 % Total emergency department visits 631,509 581,066 8.7 % Total surgeries 88,504 95,467 (7.3) % Patient days - total 713,947 790,522 (9.7) % Adjusted patient days(2) 1,253,882 1,322,063 (5.2) % Average length of stay (days) 5.34 5.18 3.1 % Average licensed beds 15,379 17,203 (10.6) % Utilization of licensed beds(3) 50.5 % 49.9 % 0.6 % (1) Total visits 1,451,683 1,441,157 0.7 % Paying visits (excludes charity and uninsured) 1,364,789 1,350,576 1.1 % Charity and uninsured visits 86,894 90,581 (4.1) % Ambulatory Care: Total consolidated facilities (at end of period) 257 290 (33) (1) Total consolidated cases 308,402 566,519 (45.6) %
(1) The change is the difference between the 2021 and 2020 amounts shown.
(2) Adjusted patient admissions/days represents actual patient admissions/days adjusted to
include outpatient services provided by facilities in our Hospital Operations segment
by multiplying actual patient admissions/days by the sum of gross inpatient revenues
and outpatient revenues and dividing the results by gross inpatient revenues.
(3) Utilization of licensed beds represents patient days divided by number of days in the
period divided by average licensed beds.
Total admissions decreased by 18,885, or 12.4%, in the three months endedDecember 31, 2021 compared to the three months endedDecember 31, 2020 , and total surgeries decreased by 6,963, or 7.3%, in the 2021 period compared to the 2020 period. Total emergency department visits increased 8.7% in the three months endedDecember 31, 2021 compared to the same period in the prior year. The decrease in our patient volumes from continuing operations in the three months ended 40 -------------------------------------------------------------------------------- Table of ContentsDecember 31, 2021 compared to the three months endedDecember 31, 2020 is primarily attributable to the sale of the Miami Hospitals inAugust 2021 . The decrease of Ambulatory Care total consolidated cases of 45.6% in the three months endedDecember 31, 2021 compared to the 2020 period is primarily due to the divestiture of USPI's urgent care centers and the realignment of its imaging centers under our Hospital Operations segment.
Continuing Operations
Three Months Ended December 31, Increase Revenues 2021 2020 (Decrease) Net operating revenues: Hospital Operations prior to inter-segment eliminations $ 3,910$ 4,065 (3.8) % Ambulatory Care 742 649 14.3 % Conifer 324 344 (5.8) % Inter-segment eliminations (120) (143) (16.1) % Total $ 4,856$ 4,915 (1.2) % Net operating revenues decreased by$59 million , or 1.2%, in the three months endedDecember 31, 2021 compared to the same period in 2020, primarily due to the sale of the Miami Hospitals and the divestiture of the urgent care centers previously held by our Hospital Operations and Ambulatory Care segments. During the three months endedDecember 31, 2021 and 2020, we recognized net grant income of$138 million and$437 million , respectively, which amounts are not included in net operating revenues. Our accounts receivable days outstanding ("AR Days") from continuing operations were 57.0 days atDecember 31, 2021 and 55.6 days atDecember 31, 2020 , compared to our target of less than 55 days. AR Days are calculated as our accounts receivable from continuing operations on the last date in the quarter divided by our net operating revenues from continuing operations for the quarter ended on that date divided by the number of days in the quarter. This calculation includes our Hospital Operations segment's contract assets. The AR Days calculation excludes (i) urgent care centers operated under the MedPost and CareSpot brands, which we divested inApril 2021 , (ii) the Miami Hospitals, which we sold inAugust 2021 , and (iii) ourCalifornia provider fee revenues. 41
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Table of Contents
Continuing Operations
Three Months Ended December 31, Increase
Selected Operating Expenses 2021 2020 (Decrease)
Hospital Operations:
Salaries, wages and benefits $ 1,841 $ 1,892 (2.7) %
Supplies 649 674 (3.7) %
Other operating expenses 875 910 (3.8) %
Total $ 3,365 $ 3,476 (3.2) %
Ambulatory Care:
Salaries, wages and benefits $ 178 $ 171 4.1 %
Supplies 188 149 26.2 %
Other operating expenses 94 91 3.3 %
Total $ 460 $ 411 11.9 %
Conifer:
Salaries, wages and benefits $ 169 $ 162 4.3 %
Supplies 1 1 - %
Other operating expenses 60 70 (14.3) %
Total $ 230 $ 233 (1.3) %
Total:
Salaries, wages and benefits $ 2,188 $ 2,225 (1.7) %
Supplies 838 824 1.7 %
Other operating expenses 1,029 1,071 (3.9) %
Total $ 4,055 $ 4,120 (1.6) %
Rent/lease expense(1):
Hospital Operations $ 71 $ 74 (4.1) %
Ambulatory Care 25 25 - %
Conifer 2 3 (33.3) %
Total $ 98 $ 102 (3.9) %
(1) Included in other operating expenses.
Continuing Operations
Three Months Ended December 31, Increase
Selected Operating Expenses per Adjusted Patient Admission 2021 2020 (Decrease)
Hospital Operations:
Salaries, wages and benefits per adjusted patient admission(1) $ 7,634 $ 7,244 5.4 %
Supplies per adjusted patient admission(1) 2,692 2,583 4.2 %
Other operating expenses per adjusted patient admission(1) 3,632 3,480 4.4 %
Total per adjusted patient admission $ 13,958 $ 13,307 4.9 %
(1) Calculation excludes the expenses from our now-divested health plan businesses.
Adjusted patient admissions represents actual patient admissions adjusted to include
outpatient services provided by facilities in our Hospital Operations segment by
multiplying actual patient admissions by the sum of gross inpatient revenues and
outpatient revenues and dividing the results by gross inpatient revenues.
Salaries, wages and benefits for our Hospital Operations segment decreased$51 million , or 2.7%, in the three months endedDecember 31, 2021 compared to the same period in 2020. This change was primarily attributable to the sale of the Miami Hospitals inAugust 2021 and our continued focus on cost-reduction measures and corporate efficiencies, partially offset by increased contract labor costs, increased overtime expense and annual merit increases for certain of our employees. On a peradjustedpatientadmission basis, salaries, wages and benefits increased 5.4% in the three months endedDecember 31, 2021 compared to the three months endedDecember 31, 2020 , primarily due to lower adjusted patient admissions and the expenses mentioned above. Supplies expense for our Hospital Operations segment decreased$25 million , or 3.7%, during the three months endedDecember 31, 2021 compared to the three months endedDecember 31, 2020 . This decrease was primarily attributable to the sale of the Miami Hospitals, the decrease in patient volumes during the 2021 period and our cost-efficiency measures, partially offset by increased costs for certain supplies as a result of the COVID-19 pandemic and higher patient acuity. On a peradjustedpatientadmission basis, supplies expense increased 4.2% in the three months endedDecember 31, 2021 compared 42 -------------------------------------------------------------------------------- Table of Contents to the three months endedDecember 31, 2020 , primarily due to higher patient acuity and increased costs of certain supplies as a result of the COVID-19 pandemic. Other operating expenses for our Hospital Operations segment decreased$35 million , or 3.8%, in the three months endedDecember 31, 2021 compared to the same period in 2020. The decrease was primarily attributable to the sale of the Miami Hospitals and our cost-efficiency measures. On a peradjustedpatientadmission basis, other operating expenses in the three months endedDecember 31, 2021 increased 4.4% compared to the three months endedDecember 31, 2020 . This increase was primarily due to lower adjusted patient admissions and the proportionally higher level of fixed costs (e.g., rent expense) in other operating expenses.
LIQUIDITY AND CAPITAL RESOURCES OVERVIEW
Cash and cash equivalents were
Significant cash flow items in the three months ended
included:
•Net cash provided by operating activities before interest, taxes, discontinued operations, impairment and restructuring charges, and acquisitionrelated costs, and litigation costs and settlements of$704 million , including$140 million received from federal, state and local grants,$186 million of Medicare advances recouped and repaid, and a$128 million payment of payroll taxes deferred during 2020; •Proceeds from the issuance of$1.450 billion aggregate principal amount of our 4.375% senior secured first lien notes due 2030 (the "2030 Senior Secured First Lien Notes"), which were primarily used to acquire the SCD Centers inDecember 2021 ;
•$1.156 billion of payments for purchases of businesses or joint venture
interests;
•Capital expenditures of
•Interest payments of
•$107 million of distributions paid to noncontrolling interests;
•Purchase of marketable securities and equity investments of
•$78 million of Medicare advances recouped and repaid by our unconsolidated
affiliates for which we provide cash management services.
Net cash provided by operating activities was$1.568 billion in the year endedDecember 31, 2021 compared to$3.407 billion in the year endedDecember 31, 2020 . Key factors contributing to the change between 2021 and 2020 include the following: •An increase in operating income of$1.031 billion before net losses on sales, consolidation and deconsolidation of facilities; litigation and investigation costs; impairment and restructuring charges and acquisition-related costs; depreciation and amortization; loss (income) from divested and closed businesses; and income recognized from government relief packages;
•$512 million of Medicare advances recouped and repaid in the year ended
the year ended
•$178 million of cash received from federal, state and local grants in 2021
compared to
•A
legislation compared to the deferral of
•Lower interest payments of
43 -------------------------------------------------------------------------------- Table of Contents •Higher income tax payments of$80 million in 2021;
•A decrease of
acquisitionrelated costs, and litigation costs and settlements in 2021; and
•The timing of other working capital items.
SOURCES OF REVENUE FOR OUR HOSPITAL OPERATIONS SEGMENT
We earn revenues for patient services from a variety of sources, primarily
managed care payers and the federal Medicare program, as well as state Medicaid
programs, indemnitybased health insurance companies and uninsured patients
(that is, patients who do not have health insurance and are not covered by some
other form of thirdparty arrangement).
The following table shows the sources of net patient service revenues less
implicit price concessions for our hospitals and related outpatient facilities,
expressed as percentages of net patient service revenues less implicit price
concessions from all sources:
Years Ended December 31,
Net Patient Service Revenues Less Implicit Price 2021 2020 2019
Concessions from:
Medicare 17.7 % 19.8 % 20.1 %
Medicaid 8.5 % 7.9 % 8.3 %
Managed care(1) 67.7 % 66.3 % 66.2 %
Uninsured 1.3 % 1.2 % 0.7 %
Indemnity and other 4.8 % 4.8 % 4.7 %
(1) Includes Medicare and Medicaid managed care programs.
Our payer mix on an admissions basis for our hospitals and related outpatient
facilities, expressed as a percentage of total admissions from all sources, is
shown below:
Years Ended December 31,
Admissions from: 2021 2020 2019
Medicare 20.8 % 22.8 % 24.8 %
Medicaid 5.8 % 6.2 % 6.2 %
Managed care(1) 64.4 % 61.8 % 60.3 %
Charity and uninsured 5.8 % 6.3 % 6.0 %
Indemnity and other 3.2 % 2.9 % 2.7 %
(1) Includes Medicare and Medicaid managed care programs.
GOVERNMENT PROGRAMS
TheCenters for Medicare and Medicaid Services ("CMS"), an agency of theU.S. Department of Health and Human Services ("HHS"), is the single largest payer of healthcare services inthe United States . Approximately 63 million individuals rely on healthcare benefits through Medicare, and approximately 83 million individuals are enrolled in Medicaid and theChildren's Health Insurance Program ("CHIP"). These three programs are authorized by federal law and administered by CMS. Medicare is a federally funded health insurance program primarily for individuals 65 years of age and older, as well as some younger people with certain disabilities and conditions, and is provided without regard to income or assets. Medicaid is coadministered by the states and is jointly funded by the federal government and state governments. Medicaid is the nation's main public health insurance program for people with low incomes and is the largest source of health coverage inthe United States . The CHIP, which is also coadministered by the states and jointly funded, provides health coverage to children in families with incomes too high to qualify for Medicaid, but too low to afford private coverage. Unlike Medicaid, the CHIP is limited in duration and requires the enactment of reauthorizing legislation. Funding for the CHIP has been reauthorized through federal fiscal year ("FFY") 2027. 44 -------------------------------------------------------------------------------- Table of Contents The Affordable Care Act The Affordable Care Act extended health coverage to millions of uninsured legalU.S. residents through a combination of private sector health insurance reforms and public program expansion. The expansion of Medicaid in 38 states (including four of the nine states in which we operate acute care hospitals) and theDistrict of Columbia is currently financed through:
•negative "productivity adjustments" to the annual market basket updates, which
began in 2011 and do not expire under current law; and
•reductions to Medicare and Medicaid disproportionate share hospital ("DSH")
payments, which began for Medicare payments in FFY 2014 and, under current law,
are scheduled to commence for Medicaid payments in FFY 2024.
The ACA also includes measures designed to promote quality and cost efficiency
in healthcare delivery and provisions intended to strengthen fraud and abuse
enforcement.
The initial expansion of health insurance coverage under the ACA resulted in an
increase in the number of patients using our facilities with either private or
public program coverage and a decrease in uninsured and charity care admissions.
Although a substantial portion of our patient volumes and, as a result, our
revenues has historically been derived from government healthcare programs,
reductions to our reimbursement under the Medicare and Medicaid programs as a
result of the ACA have been partially offset by increased revenues from
providing care to previously uninsured individuals.
The healthcare industry, in general, and the acute care hospital business, in
particular, have experienced significant regulatory uncertainty based, in large
part, on administrative, legislative and judicial efforts to limit, alter or
repeal the ACA. Since 2010, various states, private entities and individuals
have challenged parts or all of the ACA numerous times in state and federal
courts, and the U.S. Supreme Court has issued decisions in three such cases,
most recently in June 2021 . Various state legislatures have also challenged
parts or all of the ACA through legislation, while other states have acted to
safeguard the ACA by codifying certain provisions into state law. We cannot
predict what future action, if any, Congress might take with respect to the ACA.
Furthermore, we are unable to predict the impact on our future revenues and
operations of (1) court challenges to the ACA, (2) administrative, regulatory
and legislative changes, including the possibility of expansion of
governmentsponsored coverage, or (3) market reactions to those changes.
However, if the ultimate impact is that significantly fewer individuals have
private or public health coverage, we likely will experience decreased patient
volumes, reduced revenues and an increase in uncompensated care, which would
adversely affect our results of operations and cash flows.
Medicare
Medicare offers its beneficiaries different ways to obtain their medical
benefits. One option, the Original Medicare Plan (which includes "Part A" and
"Part B"), is a feeforservice ("FFS") payment system. The other option, called
Medicare Advantage (sometimes called "Part C" or "MA Plans"), includes health
maintenance organizations ("HMOs"), preferred provider organizations ("PPOs"),
private FFS Medicare special needs plans and Medicare medical savings account
plans. Our total net patient service revenues from continuing operations of the
hospitals and related outpatient facilities in our Hospital Operations segment
for services provided to patients enrolled in the Original Medicare Plan were
$2.615 billion , $2.695 billion , and $2.888 billion for the years ended
December 31, 2021 , 2020 and 2019, respectively.
A general description of the types of payments we receive for services provided
to patients enrolled in the Original Medicare Plan is provided below. Recent
regulatory and legislative updates to the terms of these payment systems and
their estimated effect on our revenues can be found under "Regulatory and
Legislative Changes" below.
Acute Care Hospital Inpatient Prospective Payment System
Medicare Severity-Adjusted Diagnosis-Related Group Payments-Sections 1886(d) and
1886(g) of the Social Security Act set forth a system of payments for the
operating and capital costs of inpatient acute care hospital admissions based on
a prospective payment system ("PPS"). Under the inpatient prospective payment
systems ("IPPS"), Medicare payments for hospital inpatient operating services
are made at predetermined rates for each hospital discharge. Discharges are
classified according to a system of Medicare severityadjusted diagnosisrelated
groups ("MSDRGs"), which categorize patients with similar clinical
characteristics that are expected to require similar amounts of hospital
resources. CMS assigns to each MSDRG a relative weight that represents the
average resources required to treat cases in that particular MSDRG, relative to
the average resources used to treat cases in all MSDRGs.
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The base payment amount for the operating component of the MSDRG payment is
comprised of an average standardized amount that is divided into a laborrelated
share and a nonlabor-related share. Both the laborrelated share of operating
base payments and the base payment amount for capital costs are adjusted for
geographic variations in labor and capital costs, respectively. Using diagnosis
and procedure information submitted by the hospital, CMS assigns to each
discharge an MSDRG, and the base payments are multiplied by the relative weight
of the MSDRG assigned. The MSDRG operating and capital base rates, relative
weights and geographic adjustment factors are updated annually, with
consideration given to: the increased cost of goods and services purchased by
hospitals; the relative costs associated with each MSDRG; changes in labor data
by geographic area; and other policies. Although these payments are adjusted for
area labor and capital cost differentials, the adjustments do not take into
consideration an individual hospital's operating and capital costs.
Outlier Payments-Outlier payments are additional payments made to hospitals on
individual claims for treating Medicare patients whose medical conditions are
costlier to treat than those of the average patient in the same MSDRG. To
qualify for a cost outlier payment, a hospital's billed charges, adjusted to
cost, must exceed the payment rate for the MSDRG by a fixed threshold updated
annually by CMS. A Medicare Administrative Contractor ("MAC") calculates the
cost of a claim by multiplying the billed charges by an average costtocharge
ratio that is typically based on the hospital's most recently filed cost report.
Generally, if the computed cost exceeds the sum of the MSDRG payment plus the
fixed threshold, the hospital receives 80% of the difference as an outlier
payment.
Under the Social Security Act, CMS must project aggregate annual outlier
payments to all PPS hospitals to be not less than 5% or more than 6% of total
MSDRG payments ("Outlier Percentage"). The Outlier Percentage is determined by
dividing total outlier payments by the sum of MSDRG and outlier payments. CMS
annually adjusts the fixed threshold to bring projected outlier payments within
the mandated limit. A change to the fixed threshold affects total outlier
payments by changing: (1) the number of cases that qualify for outlier payments;
and (2) the dollar amount hospitals receive for those cases that qualify for
outlier payments. Under certain conditions, outlier payments are subject to
reconciliation based on more recent data.
Disproportionate Share Hospital Payments-In addition to making payments for
services provided directly to beneficiaries, Medicare makes additional payments
to hospitals that treat a disproportionately high share of lowincome patients.
Prior to October 1, 2013 , DSH payments were based on each hospital's low income
utilization for each payment year (the "PreACA DSH Formula"). The ACA revised
the Medicare DSH adjustment effective for discharges occurring on or after
October 1, 2013 . Under the revised methodology, hospitals receive 25% of the
amount they previously would have received under the PreACA DSH Formula. This
amount is referred to as the "Empirically Justified Amount."
Hospitals qualifying for the Empirically Justified Amount of DSH payments are
also eligible to receive an additional payment for uncompensated care (the
"UCDSH Amount"). The UCDSH Amount is a hospital's share of a pool of funds
that the CMS Office of the Actuary estimates would equal 75% of Medicare DSH
that otherwise would have been paid under the PreACA DSH Formula, adjusted for
changes in the percentage of individuals that are uninsured. Generally, the
factors used to calculate and distribute UCDSH Amounts are set forth in the ACA
and are not subject to administrative or judicial review. The statute requires
that each hospital's cost of uncompensated care (i.e., charity and bad debt) as
a percentage of the total uncompensated care cost of all DSH hospitals be used
to allocate the pool. As of December 31, 2021 , 49 of our acute care hospitals in
continuing operations qualified for Medicare DSH payments.
The statutes and regulations that govern Medicare DSH payments have been the
subject of various administrative appeals and lawsuits, and our hospitals have
been participating in such appeals, including challenges to the inclusion of the
Medicare Advantage days used in the DSH calculation as set forth in the Changes
to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2005
Rates. We are unable to predict what action the Secretary of HHS might take with
respect to the DSH calculation for prior periods in this regard or the outcome
of the litigation; however, a favorable outcome of our DSH appeals could have a
material impact on our future revenues and cash flows.
Direct Graduate and Indirect Medical Education Payments-The Medicare program
provides additional reimbursement to approved teaching hospitals for the
increased expenses incurred by such institutions. This additional reimbursement,
which is subject to certain limits, including intern and resident full-time
equivalent ("FTE") limits, is made in the form of Direct Graduate Medical
Education ("DGME") and Indirect Medical Education ("IME") payments. As of
December 31, 2021 , 30 of our hospitals in continuing operations were affiliated
with academic institutions and were eligible to receive such payments.
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IPPS Quality Adjustments-The ACA also authorizes the following quality
adjustments to Medicare IPPS payments:
•ValueBased Purchasing ("VBP") - Under the VBP program, IPPS operating payments
to hospitals are reduced by 2% to fund valuebased incentive payments to
eligible hospitals based on their overall performance on a set of quality
measures;
•Hospital Readmission Reduction Program - Under this program, IPPS operating payments to hospitals with excess readmissions are reduced up to a maximum of 3% of base MSDRG payments; and
•HospitalAcquired Conditions Reduction Program - Under this program, overall
inpatient payments are reduced by 1% for hospitals in the worst performing
quartile of riskadjusted quality measures for reasonable preventable
hospitalacquired conditions.
These adjustments are generally based on a hospital's performance from prior
periods and are updated annually by CMS.
Hospital Outpatient Prospective Payment System
Under the outpatient prospective payment system, hospital outpatient services,
except for certain services that are reimbursed on a separate fee schedule, are
classified into groups called ambulatory payment classifications ("APCs").
Services in each APC are similar clinically and in terms of the resources they
require, and a payment rate is established for each APC. Depending on the
services provided, hospitals may be paid for more than one APC for an encounter.
CMS annually updates the APCs and the rates paid for each APC.
Inpatient Psychiatric Facility Prospective Payment System
The inpatient psychiatric facility ("IPF") prospective payment system
("IPF-PPS") applies to psychiatric hospitals and psychiatric units located
within acute care hospitals that have been designated as exempt from the
hospital inpatient prospective payment system. The IPF-PPS is based on
prospectively determined perdiem rates and includes an outlier policy that
authorizes additional payments for extraordinarily costly cases. As of
December 31, 2021 , 19 of our general hospitals in continuing operations operated
IPF units.
Inpatient Rehabilitation Prospective Payment System
Rehabilitation hospitals and rehabilitation units in acute care hospitals
meeting certain criteria established by CMS are eligible to be paid as an
inpatient rehabilitation facility ("IRF") under the IRF prospective payment
system ("IRFPPS"). Payments under the IRFPPS are made on a per-discharge
basis. The IRFPPS uses federal prospective payment rates across distinct
casemix groups established by a patient classification system. As of
hospitals in continuing operations operated IRF units.
Physician and Other Health Professional Services Payment System
Medicare uses a fee schedule to pay for physician and other health professional
services based on a list of services and their payment rates referred to as the
Medicare Physician Fee Schedule ("MPFS"). In determining payment rates for each
service, CMS considers the amount of clinician work required to provide a
service, expenses related to maintaining a practice, and professional liability
insurance costs. These three factors are adjusted for variation in the input
prices in different markets, and the sum is multiplied by the fee schedule's
conversion factor (average payment amount) to produce a total payment amount.
Cost Reports
The final determination of certain Medicare payments to our hospitals, such as
DSH, DGME, IME and bad debt expense, are retrospectively determined based on our
hospitals' cost reports. The final determination of these payments often takes
many years to resolve because of audits by the program representatives,
providers' rights of appeal, and the application of numerous technical
reimbursement provisions.
For filed cost reports, we adjust the accrual for estimated cost report
settlements based on those cost reports and subsequent activity, and record a
valuation allowance against those cost reports based on historical settlement
trends. The accrual for estimated cost report settlements for periods for which
a cost report is yet to be filed is recorded based on estimates of what we
expect to report on the filed cost reports and a corresponding valuation
allowance is recorded as previously described. Cost reports must generally be
filed within five months after the end of the annual cost report reporting
period. After the cost report is filed, the accrual and corresponding valuation
allowance may need to be adjusted.
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Medicare Claims Reviews
HHS estimates that the overall 2021 Medicare FFS improper payment rate for the program is approximately 6.3%. The 2021 error rate for Hospital IPPS payments is approximately 2.4%. CMS has identified the FFS program as a program at risk for significant erroneous payments, and one of the agency's stated key goals is to pay claims properly the first time. This means paying the right amount, to legitimate providers, for covered, reasonable and necessary services provided to eligible beneficiaries. According to CMS, paying correctly the first time saves resources required to recover improper payments and ensures the proper expenditure ofMedicare Trust Fund dollars. CMS has established several initiatives to prevent or identify improper payments before a claim is paid, and to identify and recover improper payments after paying a claim. The overall goal is to reduce improper payments by identifying and addressing coverage and coding billing errors for all provider types. Under the authority of the Social Security Act, CMS employs a variety of contractors (e.g., MACs, Recovery Audit Contractors and Unified Program Integrity Contractors) to process and review claims according to Medicare rules and regulations. Claims selected for prepayment review are not subject to the normal Medicare FFS payment timeframe. Furthermore, prepayment and postpayment claims denials are subject to administrative and judicial review, and we intend to pursue the reversal of adverse determinations where appropriate. We have established robust protocols to respond to claims reviews and payment denials. In addition to overpayments that are not reversed on appeal, we incur additional costs to respond to requests for records and pursue the reversal of payment denials. The degree to which our Medicare FFS claims are subjected to prepayment reviews, the extent to which payments are denied, and our success in overturning denials could have a material adverse effect on our cash flows and results of operations.
Meaningful Use of Health Information Technology
The Health Information Technology forEconomic and Clinical Health ("HITECH") Act, which is part of the American Recovery and Reinvestment Act of 2009, promotes the use of healthcare information technology by, among other things, providing financial incentives to hospitals and physicians to become "meaningful users" of electronic health record ("EHR") systems and imposing penalties on those who do not. Under the HITECH Act and other laws and regulations, eligible hospitals that fail to demonstrate and maintain meaningful use of certified EHR technology and/or submit quality data every year (and have not applied and qualified for a hardship exception) are subject to a reduction of the Medicare market basket update. Eligible healthcare professionals are also subject to positive or negative payment adjustments based, in part, on their use of EHR technology. We have made significant investments in our information systems to bring our hospitals and employed physicians into EHR compliance, and we continue to invest in the maintenance and utilization of these certified EHR systems. Failure to continue to do so could subject us to penalties that may have an adverse effect on our net revenues and results of operations.
Medicaid
Medicaid programs and the corresponding reimbursement methodologies vary from statetostate and from yeartoyear. Estimated revenues under various state Medicaid programs, including statefunded Medicaid managed care programs, constituted approximately 18.7%, 17.8% and 18.4% of the total net patient service revenues of our acute care hospitals and related outpatient facilities for the years endedDecember 31, 2021 , 2020 and 2019, respectively. We also receive DSH and other supplemental revenues under various state Medicaid programs. For the years endedDecember 31, 2021 , 2020 and 2019, our total Medicaid revenues attributable to DSH and other supplemental revenues were approximately$915 million ,$754 million and$782 million , respectively. The year endedDecember 31, 2021 included$223 million related to theCalifornia provider fee program,$254 million related to theMichigan provider fee program,$174 million related to Medicaid DSH programs in multiple states,$71 million related to the Texas Section 1115 waiver program, and$193 million from a number of other state and local programs. Even prior to the COVID-19 pandemic, several states in which we operate faced budgetary challenges that resulted in reduced Medicaid funding levels to hospitals and other providers. Because most states must operate with balanced budgets, and the Medicaid program is generally a significant portion of a state's budget, states can be expected to adopt or consider adopting future legislation designed to reduce or not increase their Medicaid expenditures. In addition, some states delay issuing Medicaid payments to providers to manage state expenditures. As an alternative means of funding provider payments, many of the states in which we operate have adopted supplemental payment programs authorized under the Social Security Act. Continuing pressure on state budgets and other factors, including legislative and regulatory changes, could result in future reductions to Medicaid payments, payment delays or changes to Medicaid supplemental payment programs. Federal government denials or delayed approvals of waiver applications or extension requests by the states in which we operate could materially impact our Medicaid funding levels. 48
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Total Medicaid and Managed Medicaid net patient service revenues from continuing operations recognized by the hospitals and related outpatient facilities in our Hospital Operations segment for the years endedDecember 31, 2021 , 2020 and 2019 were$2.760 billion ,$2.427 billion , and$2.639 billion , respectively. During the year endedDecember 31, 2021 , Medicaid and Managed Medicaid revenues comprised 45% and 55%, respectively, of our Medicaidrelated net patient service revenues from continuing operations recognized by the hospitals and related outpatient facilities in our Hospital Operations segment. These revenues are presented net of provider taxes or assessments paid by our hospitals, which are reported as an offset reduction to FFS Medicaid revenue.
Regulatory and Legislative Changes
The Medicare and Medicaid programs are subject to: statutory and regulatory changes, administrative and judicial rulings, interpretations and determinations concerning patient eligibility requirements, funding levels and the method of calculating reimbursements, among other things; requirements for utilization review; and federal and state funding restrictions, all of which could materially increase or decrease payments from these government programs in the future, as well as affect the cost of providing services to our patients and the timing of payments to our facilities. We are unable to predict the effect of future government healthcare funding policy changes on our operations. If the rates paid or services covered by governmental payers are reduced, or if we or one or more of our subsidiaries' hospitals are excluded from participation in the Medicare or Medicaid program or any other government healthcare program, there could be a material adverse effect on our business, financial condition, results of operations or cash flows. Recent regulatory and legislative updates to the Medicare and Medicaid payment systems, as well as other government programs impacting our business, are provided below.
Payment and Policy Changes to the Medicare Inpatient Prospective Payment Systems
Section 1886(d) of the Social Security Act requires CMS to update inpatient FFS payment rates for hospitals reimbursed under IPPS annually. The updates generally become effectiveOctober 1 , the beginning of the federal fiscal year. InAugust 2021 , CMS issued final changes to the Hospital Inpatient Prospective Payment Systems for Acute Care Hospitals and Fiscal Year 2022 Rates ("Final IPPS Rule"). The Final IPPS Rule includes the following payment and policy changes: •A market basket increase of 2.7% for MSDRG operating payments for hospitals reporting specified quality measure data and that are meaningful users of electronic health record technology; CMS also finalized a 0.7% multifactor productivity reduction required by the ACA and a 0.5% increase required by the Medicare Access and CHIP Reauthorization Act ("MACRA") that collectively result in a net operating payment update of 2.5% before budget neutrality adjustments;
•Updates to the three factors used to determine the amount and distribution of
Medicare uncompensated care disproportionate share ("UCDSH") payments;
•A 1.37% net increase in the capital federal MSDRG rate;
•An increase in the cost outlier threshold from
•An extension of the New COVID19 Treatments Addon Payment for certain eligible
products through the end of the FFY in which the public health emergency as
declared by the Secretary of HHS ends; and
•The establishment of new requirements and the revision of existing requirements for the Hospital ValueBased Purchasing, Hospital Readmissions Reduction and HospitalAcquired Condition Reduction programs. According to CMS, the combined impact of the payment and policy changes in the Final IPPS Rule for operating costs will yield an average 2.6% increase in Medicare operating MSDRG FFS payments for hospitals in urban areas and an average 2.6% increase in such payments for proprietary hospitals in FFY 2022. We estimate that all of the final payment and policy changes affecting operating MSDRG and UCDSH payments will result in an estimated 1.4% increase in our annual Medicare FFS IPPS payments, which yields an estimated increase of approximately$27 million . Because of the uncertainty associated with various factors that may influence our future IPPS payments by individual hospital, including legislative, regulatory or legal actions, admission volumes, length of stay and case mix, we cannot provide any assurances regarding our estimates of the impact of the payment and policy changes. 49 -------------------------------------------------------------------------------- Table of Contents Payment and Policy Changes to the Medicare Outpatient Prospective Payment and Ambulatory Surgery Center Payment Systems InNovember 2021 , CMS issued the final policy changes and payment rates for the Hospital Outpatient Prospective Payment System ("OPPS") and Ambulatory Surgical Center ("ASC") Payment System for calendar year ("CY") 2022 ("Final OPPS/ASC Rule"). The Final OPPS/ASC Rule includes the following payment and policy changes: •An estimated net increase of 2.0% for the OPPS rates based on an estimated market basket increase of 2.7%, reduced by a multifactor productivity adjustment required by the ACA of 0.7%; •Continuation of the current policy of paying an adjusted amount of average sales price ("ASP") minus 22.5% for drugs acquired under the CMS 340B program (which program is the subject of litigation discussed in greater detail below); •Cessation of the elimination of the Inpatient Only List ("IPO List") (which is the list of procedures that must be performed on an inpatient basis); efforts to eliminate the IPO List commenced in CY 2021 and were scheduled to be completed over a transitional period ending in CY 2024; in addition, CMS reinstated substantially all of the services removed from the IPO List in CY 2021 to the IPO List beginning in CY 2022; •Various modifications to the hospital price transparency requirements that took effect onJanuary 1, 2021 , including significant increases to the civil monetary penalty for noncompliance, as well as prohibitions to specific barriers to accessing machinereadable price transparency files;
•A 2.0% increase to the ASC payment rates; and
•Reinstatement of the ASC Covered Procedures List ("ASC CPL") criteria in effect
in CY 2020 and removal of 255 of the 258 procedures that were proposed for
removal.
CMS projects that the combined impact of the proposed payment and policy changes in the Final OPPS/ASC Rule will yield an average 1.6% increase in Medicare FFS OPPS payments for hospitals in urban areas and an average 1.7% increase in Medicare FFS OPPS payments for proprietary hospitals. Based on CMS' estimates, the projected annual impact of the payment and policy changes in the Final OPPS/ASC Rule on our hospitals is an increase to Medicare FFS hospital outpatient revenues of approximately$12 million , which represents an increase of approximately 1.8%. Because of the uncertainty associated with various factors that may influence our future OPPS payments, including legislative or legal actions, volumes and case mix, we cannot provide any assurances regarding our estimate of the impact of the payment and policy changes.
Payment and Policy Changes to the Medicare Physician Fee Schedule
InNovember 2021 , CMS released the CY 2022 MPFS Final Rule ("MPFS Final Rule"). The MPFS Final Rule updates payment policies, payment rates and other provisions for services reimbursed under the MPFS for CY 2022. Under the MPFS Final Rule, the CY 2022 conversion factor, which is the base rate that is used to convert relative units into payment rates, would have been reduced approximately 3.7% due in part to the expiration of the onetime 3.75% MPFS payment increase provided for in CY 2021 by the Consolidated Appropriations Act, 2021 (the "Consolidated Appropriations Act"), as well as budget neutrality rules. However, the Protecting Medicare and American Farmers from Sequester Cuts Act enacted inDecember 2021 ("December 2021 Legislation") restored 3% of the expired 3.75% payment increase for CY 2022. The combined effects of the MPFS Final Rule and theDecember 2021 Legislation will result in an annual reduction of approximately$1 million to our FFS MPFS revenues. Because of the uncertainty associated with various factors that may influence our future MPFS payments, including legislative, regulatory or legal actions, volumes and case mix, we cannot provide any assurances regarding our estimate of the impact of the payment and policy changes.
The Coronavirus Aid, Relief, and Economic Security Act of 2020 and Related
Legislation
Several pieces of legislation (the "COVID Acts") have been signed into law in
response to the COVID19 pandemic. Among the numerous provisions included in the
legislation is funding to mitigate the economic effects of the COVID19
pandemic. Below is a brief overview of certain provisions of the COVID Acts that
have impacted, and that we expect will continue to impact, our business. This
summary is not exhaustive, and additional legislative action and regulatory
developments may evolve rapidly. There is no assurance that we will continue to
receive or remain eligible for funding or assistance under the COVID Acts or
similar measures. Statements regarding the projected impact of COVID19 relief
programs on our operations and financial condition are forwardlooking
statements.
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The COVID Acts authorized $178 billion in payments to be distributed to
providers through the Provider Relief Fund . Payments from the PRF are not loans
and, therefore, they are not subject to repayment. However, as a condition to
receiving distributions, providers are required to agree to certain terms and
conditions, including, among other things, that the funds are being used for
lost revenues and unreimbursed COVID-related costs as defined by HHS, and that
the providers will not seek collection of outofpocket payments from a COVID-19
patient that are greater than what the patient would have otherwise been
required to pay if the care had been provided by an in-network provider. All
recipients of PRF payments are required to comply with the reporting
requirements described in the terms and conditions and as determined by HHS. In
January 2021 , HHS released updated reporting requirements that include lost
revenues, expenses attributable to COVID-19 and non-financial information. The
updated reporting requirements reflect certain provisions of the Consolidated
Appropriations Act affecting the calculation of lost revenues, as well as the
distribution of PRF funds among subsidiaries in a hospital system. Furthermore,
HHS has indicated that it will be closely monitoring and, along with the Office
of Inspector General , auditing providers to ensure that recipients comply with
the terms and conditions of relief programs and to prevent fraud and abuse. All
providers will be subject to civil and criminal penalties for any deliberate
omissions, misrepresentations or falsifications of any information given to HHS.
Except for certain immaterial PRF payments we returned to HHS, we have formally
accepted PRF payments issued to our providers and the terms and conditions
associated with those payments, and we have complied with the reporting
requirements.
During the years ended December 31, 2021 and 2020, our Hospital Operations and
Ambulatory Care segments combined recognized approximately $176 million and
$868 million , respectively, of PRF grant income associated with lost revenues
and COVIDrelated costs. We recognized an additional $14 million and
$17 million , respectively, of Provider Relief Fund grant income from our
unconsolidated affiliates during 2021 and 2020. Our Hospital Operations and
Ambulatory Care segments also recognized $15 million and $14 million of grant
income from state and local grant programs during the years ended
December 31, 2021 and 2020, respectively. Grant income recognized by our
Hospital Operations and Ambulatory Care segments is presented in grant income,
and grant income recognized through our unconsolidated affiliates is presented
in equity in earnings of unconsolidated affiliates, in each case in the
accompanying Consolidated Statements of Operations for the years ended
December 31, 2021 and 2020. At December 31, 2021 and 2020, we had remaining
deferred grant payment balances of $5 million and $18 million , respectively,
which amounts were recorded in other current liabilities in the accompanying
Consolidated Balance Sheets for those periods. We cannot predict whether
additional distributions of grant funds will be authorized, and we cannot
provide any assurances regarding the amount of grant income, if any, to be
recognized in the future.
Medicare and Medicaid Payment Policy Changes-The COVID Acts have also alleviated
some of the financial strain on hospitals, physicians, other healthcare
providers and states through a series of Medicare and Medicaid payment policies
that temporarily increase Medicare and Medicaid reimbursement and allow for
added flexibility, as described below:
•The CMS 2% sequestration reduction on Medicare FFS and Medicare Advantage
payments to hospitals, physicians and other providers was suspended effective
May 1, 2020 through December 31, 2021 . The impact of the suspension on our
operations was an increase of approximately $78 million and $67 million of
revenues in the years ended December 31, 2021 and 2020, respectively. The
December 2021 Legislation extended the suspension of the 2% sequestration
reduction through March 31, 2022 , to be followed by a 1% reduction for the
period April 1, 2022 through June 30, 2022 , after which the full 2% reduction
will be restored.
•The COVID Acts instituted a 20% increase in the Medicare MSDRG payment for
COVID-19 hospital admissions for the duration of the public health emergency as
declared by the Secretary of HHS.
•The COVID Acts initially eliminated the scheduled nationwide reduction of $4
billion in federal Medicaid DSH allotments in FFY 2020 mandated by the
Affordable Care Act and decreased the FFY 2021 DSH reduction from $8 billion to
$4 billion effective December 1, 2020 . Subsequently, the FFY 2021 DSH reduction
was eliminated entirely and the remaining DSH reductions were delayed until
FFY 2024.
•The COVID Acts expanded the Medicare accelerated payment program, which
provides prepayment of claims to providers in certain circumstances, such as
national emergencies or natural disasters. Under Section 2501 of the Continuing
Appropriations Act, 2021, and Other Extensions Act, providers may retain the
accelerated payments for one year from the date of receipt before CMS commenced
recoupment, which is effectuated by a 25% offset of claims payments for 11
months, followed by a 50% offset for the succeeding six months. At the end of
the 29month period, interest on the unpaid balance will be assessed at 4% per
annum. During the year ended December 31, 2020 , our hospitals and other
providers applied for and received approximately $1.5 billion of accelerated
payments. No additional accelerated payment funds were applied for or received
in the year ended December 31, 2021 .
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•A 6.2% increase in the Federal Medical Assistance Percentage ("FMAP") matching
funds was instituted to help states respond to the COVID19 pandemic. The
additional funds are available to states from January 1, 2020 through the
quarter in which the public health emergency period ends, provided that states
meet certain conditions. In addition, the COVID Acts established an incentive
for states that have not already done so to expand Medicaid by temporarily
increasing each such respective state's FMAP for their base program by five
percentage points for two years. An increase in states' FMAP leverages
Medicaid's existing financing structure, which allows federal funds to be
provided to states more quickly and efficiently than establishing a new program
or allocating money from a new funding stream. Increased federal matching funds
support states in responding to the increased need for services, such as testing
and treatment during the COVID19 public health emergency, as well as increased
enrollment as more people lose income and qualify for Medicaid due to the
effects of the pandemic.
Because of the uncertainty associated with various factors that may influence
our future Medicare and Medicaid payments, including future legislative, legal
or regulatory actions, or changes in volumes and case mix, there is a risk that
actual payments received under, or the ultimate impact of, these programs will
differ materially from our expectations.
Funding for Uninsured Individuals-The COVID Acts provide claims reimbursement to
healthcare providers generally at Medicare rates for testing uninsured
individuals for COVID19 and treating uninsured individuals with a COVID19
diagnosis. A portion of the funding may also be used to reimburse providers for
COVID19 vaccine administration to uninsured individuals. We recognized net
operating revenues totaling $91 million and $40 million related to this program
in the accompanying Consolidated Statements of Operations for the years ended
December 31, 2021 and 2020, respectively.
Tax Changes-Beginning March 27, 2020 , all employers were able to elect to defer
payment of the 6.2% employer Social Security tax through December 31, 2020 .
Deferred tax amounts are required to be paid in equal amounts over two years,
with payments due in December 2021 and December 2022 . During the year ended
December 31, 2020 , we deferred Social Security tax payments totaling $275
million pursuant to this COVID Acts provision. In December 2021 , we repaid half
of the outstanding deferred Social Security tax payments.
CMS Innovation Models
The CMS Innovation Center develops and tests innovative payment and service delivery models that have the potential to reduce Medicare, Medicaid or CHIP expenditures while preserving or enhancing the quality of care for beneficiaries.Congress has defined - both through the Affordable Care Act and previous legislation - a number of specific demonstrations for CMS to conduct, including bundled payment models. Generally, the bundled payment models hold hospitals financially accountable for the quality and costs for an entire episode of care for a specific diagnosis or procedure from the date of the hospital admission or inpatient procedure through 90 days postdischarge, including services not provided by the hospital, such as physician, inpatient rehabilitation, skilled nursing and home health care. Provider participation in some of these models is voluntary; for example, 19 hospitals in our Hospital Operations segment and three surgical hospitals in our Ambulatory Care segment participate in the CMS Bundled Payments for Care Improvement Advanced ("BPCIA") program that became effectiveOctober 1, 2018 , and USPI also holds the CMS contract for one physician group practices participating in the BPCIA program. Participation in certain other bundled payment arrangements is mandatory for providers located in randomly selected geographic locations. Under the mandatory models, hospitals are eligible to receive incentive payments or will be subject to payment reductions within certain corridors based on their performance against quality and spending criteria. In 2015, CMS finalized a fiveyear bundled payment model (that was subsequently extended for an additional three years), called the Comprehensive Care for Joint Replacement ("CJR") model, which includes hip and knee replacements, as well as other major leg procedures. Eleven hospitals in our Hospital Operations segment and four surgical hospitals in our Ambulatory Care segment currently participate in the CJR model.
Significant Litigation
340B Litigation
The CMS 340B program allows certain hospitals (i.e., only nonprofit
organizations with specific federal designations and/or funding) ("340B
Hospitals") to purchase drugs at discounted rates from drug manufacturers ("340B
Drugs"). In the final rule regarding OPPS payment and policy changes for CY
2018, CMS reduced the payment for 340B Drugs from the ASP plus 6% to the ASP
minus 22.5% and made a corresponding budgetneutral increase to payments to all
hospitals for other drugs and services reimbursed under the OPPS (the "340B
Payment Adjustment"). In the final rules regarding OPPS payment and policy
changes for CYs 2019, 2020 and 2021, CMS continued the 340B Payment Adjustment.
Certain hospital associations and hospitals commenced litigation challenging
CMS' authority to impose the 340B Payment Adjustment for CYs 2018, 2019 and
2020. Previously, the U.S. District Court for the District of Columbia (the
"District Court") held that the adoption of the 340B Payment Adjustment in the
CYs 2018 and 2019 OPPS Final Rules exceeded CMS' statutory authority by reducing
drug
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reimbursement rates for 340B Hospitals. In July 2020 , the U.S. Court of Appeals
for the District of Columbia Circuit (the "Appeals Court") reversed the District
Court's holding, finding that HHS' decision to reduce the payment rate for
340B Drugs was based on a reasonable interpretation of the Medicare statute. The
Appeals Court subsequently denied the 340B Hospitals' petition for a rehearing.
The 340B Hospitals filed a timely petition asking the U.S. Supreme Court
("Supreme Court ") to reverse the Appeals Court's decision and, on July 2, 2021 ,
the Supreme Court agreed to review the case. We cannot predict what further
actions the Supreme Court , CMS or Congress might take with respect to the 340B
program; however, a reversal of the current payment policy and return to the
prior 340B payment methodology could have an adverse effect on our net operating
revenues and cash flows.
PRIVATE INSURANCE
Managed Care
We currently have thousands of managed care contracts with various HMOs and
PPOs. HMOs generally maintain a fullservice healthcare delivery network
comprised of physician, hospital, pharmacy and ancillary service providers that
HMO members must access through an assigned "primary care" physician. The
member's care is then managed by his or her primary care physician and other
network providers in accordance with the HMO's quality assurance and utilization
review guidelines so that appropriate healthcare can be efficiently delivered in
the most costeffective manner. HMOs typically provide reduced benefits or
reimbursement (or none at all) to their members who use noncontracted
healthcare providers for nonemergency care.
PPOs generally offer limited benefits to members who use noncontracted
healthcare providers. PPO members who use contracted healthcare providers
receive a preferred benefit, typically in the form of lower copays,
coinsurance or deductibles. As employers and employees have demanded more
choice, managed care plans have developed hybrid products that combine elements
of both HMO and PPO plans, including highdeductible healthcare plans that may
have limited benefits, but cost the employee less in premiums.
The amount of our managed care net patient service revenues, including Medicare
and Medicaid managed care programs, from our hospitals and related outpatient
facilities during the years ended December 31, 2021 , 2020 and 2019 was
$9.985 billion , $9.022 billion and $9.516 billion , respectively. Our top 10
managed care payers generated 61% of our managed care net patient service
revenues for the year ended December 31, 2021 . In 2021, national payers
generated 43% of our managed care net patient service revenues; the remainder
came from regional or local payers. At December 31, 2021 and 2020, 67% and 66%,
respectively, of our net accounts receivable for our Hospital Operations segment
were due from managed care payers.
Revenues under managed care plans are based primarily on payment terms involving
predetermined rates per diagnosis, perdiem rates, discounted FFS rates and/or
other similar contractual arrangements. These revenues are also subject to
review and possible audit by the payers, which can take several years before
they are completely resolved. The payers are billed for patient services on an
individual patient basis. An individual patient's bill is subject to adjustment
on a patientbypatient basis in the ordinary course of business by the payers
following their review and adjudication of each particular bill. We estimate the
discounts for contractual allowances at the individual hospital level utilizing
billing data on an individual patient basis. At the end of each month, on an
individual hospital basis, we estimate our expected reimbursement for patients
of managed care plans based on the applicable contract terms. We believe it is
reasonably likely for there to be an approximately 3% increase or decrease in
the estimated contractual allowances related to managed care plans. Based on
reserves at December 31, 2021 , a 3% increase or decrease in the estimated
contractual allowance would impact the estimated reserves by approximately $16
million . Some of the factors that can contribute to changes in the contractual
allowance estimates include: (1) changes in reimbursement levels for procedures,
supplies and drugs when threshold levels are triggered; (2) changes in
reimbursement levels when stoploss or outlier limits are reached; (3) changes
in the admission status of a patient due to physician orders subsequent to
initial diagnosis or testing; (4) final coding of inhouse and
dischargednotfinalbilled patients that change reimbursement levels;
(5) secondary benefits determined after primary insurance payments; and
(6) reclassification of patients among insurance plans with different coverage
and payment levels. Contractual allowance estimates are periodically reviewed
for accuracy by taking into consideration known contract terms, as well as
payment history. We believe our estimation and review process enables us to
identify instances on a timely basis where such estimates need to be revised. We
do not believe there were any adjustments to estimates of patient bills that
were material to our revenues. In addition, on a corporatewide basis, we do not
record any general provision for adjustments to estimated contractual allowances
for managed care plans. Managed care accounts, net of contractual allowances
recorded, are further reduced to their net realizable value through implicit
price concessions based on historical collection trends for these payers and
other factors that affect the estimation process.
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We expect managed care governmental admissions to continue to increase as a
percentage of total managed care admissions over the near term. However, the
managed Medicare and Medicaid insurance plans typically generate lower yields
than commercial managed care plans, which have been experiencing an improved
pricing trend. Although we have benefited from solid yearoveryear aggregate
managed care pricing improvements for some time, we have seen these improvements
moderate in recent years, and we believe this moderation could continue into the
future. In the year ended December 31, 2021 , our commercial managed care net
inpatient revenue per admission from the hospitals in our Hospital Operations
segment was approximately 82% higher than our aggregate yield on a per-admission
basis from government payers, including managed Medicare and Medicaid insurance
plans.
Indemnity
An indemnitybased agreement generally requires the insurer to reimburse an
insured patient for healthcare expenses after those expenses have been incurred
by the patient, subject to policy conditions and exclusions. Unlike an HMO
member, a patient with indemnity insurance is free to control his or her
utilization of healthcare and selection of healthcare providers.
Legislative Changes
As more fully described in Item 1, Business - Healthcare Regulation and
Licensing, of Part I of this report, the No Surprises Act ("NSA") and the rules
promulgated thereunder went into effect on January 1, 2022 . The NSA is intended
to address unexpected gaps in insurance coverage that result in "surprise
medical bills" when patients unknowingly obtain medical services from physicians
and other providers outside their health insurance network, including certain
emergency services, anesthesiology services and air ambulance transportation. At
this time, we are unable to assess the effect that the NSA or regulations
relating to the NSA might have on our business, financial position, results of
operations or cash flows.
UNINSURED PATIENTS
Uninsured patients are patients who do not qualify for government programs
payments, such as Medicare and Medicaid, do not have some form of private
insurance and, therefore, are responsible for their own medical bills. A
significant number of our uninsured patients are admitted through our hospitals'
emergency departments and often require highacuity treatment that is more
costly to provide and, therefore, results in higher billings, which are the
least collectible of all accounts.
Selfpay accounts receivable, which include amounts due from uninsured patients, as well as copays, coinsurance amounts and deductibles owed to us by patients with insurance, pose significant collectability problems. At bothDecember 31, 2021 and 2020, approximately 4% of our net accounts receivable for our Hospital Operations segment was selfpay. Further, a significant portion of our implicit price concessions relates to selfpay amounts. We provide revenue cycle management services through Conifer, which is subject to various statutes and regulations regarding consumer protection in areas including finance, debt collection and credit reporting activities. For additional information, see Item 1, Business - Regulations Affecting Conifer's Operations, of Part I of this report. Conifer has performed systematic analyses to focus our attention on the drivers of bad debt expense for each hospital. While emergency department use is the primary contributor to our implicit price concessions in the aggregate, this is not the case at all hospitals. As a result, we have increased our focus on targeted initiatives that concentrate on nonemergency department patients as well. These initiatives are intended to promote process efficiencies in collecting selfpay accounts, as well as copay, coinsurance and deductible amounts owed to us by patients with insurance, that we deem highly collectible. We leverage a statisticalbased collections model that aligns our operational capacity to maximize our collections performance. We are dedicated to modifying and refining our processes as needed, enhancing our technology and improving staff training throughout the revenue cycle process in an effort to increase collections and reduce accounts receivable. Over the longer term, several other initiatives we have previously announced should also help address the challenges associated with serving uninsured patients. For example, our Compact with Uninsured Patients ("Compact") is designed to offer managed carestyle discounts to certain uninsured patients, which enables us to offer lower rates to those patients who historically had been charged standard gross charges. Under the Compact, the discount offered to uninsured patients is recognized as a contractual allowance, which reduces net operating revenues at the time the selfpay accounts are recorded. The uninsured patient accounts, net of contractual allowances recorded, are further reduced to their net realizable value through implicit price concessions based on historical collection trends for selfpay accounts and other factors that affect the estimation process. We also provide financial assistance through our charity and uninsured discount programs to uninsured patients who are unable to pay for the healthcare services they receive. Our policy is not to pursue collection of amounts determined to qualify for financial assistance; therefore, we do not report these amounts in net operating revenues. Most states include an estimate of the cost of charity care in the determination of a hospital's eligibility for Medicaid DSH payments. These payments 54 -------------------------------------------------------------------------------- Table of Contents are intended to mitigate our cost of uncompensated care. Some states have also developed provider fee or other supplemental payment programs to mitigate the shortfall of Medicaid reimbursement compared to the cost of caring for Medicaid patients. The initial expansion of health insurance coverage under the Affordable Care Act resulted in an increase in the number of patients using our facilities with either health insurance exchange or government healthcare insurance program coverage. However, we continue to have to provide uninsured discounts and charity care due to the failure of states to expand Medicaid coverage and for persons living in the country who are not permitted to enroll in a health insurance exchange or government healthcare insurance program.
The following table 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 now-divested health plan
businesses) of caring for our uninsured and charity patients:
Years Ended December 31,
2021 2020 2019
Estimated costs for:
Uninsured patients $ 650 $ 617 $ 664
Charity care patients 97 147 156
Total $ 747 $ 764 $ 820
RESULTS OF OPERATIONS FOR THE YEAR ENDED
YEAR ENDED
The following tables summarize our consolidated net operating revenues, operating expenses and operating income from continuing operations, both in dollar amounts and as percentages of net operating revenues, for the years endedDecember 31, 2021 and 2020. We present metrics as a percentage of net operating revenues because a significant portion of our costs are variable. Years Ended December 31, Increase 2021 2020 (Decrease) Net operating revenues: Hospital Operations$ 15,982 $ 14,790 $ 1,192 Ambulatory Care 2,718 2,072 646 Conifer 1,267 1,306 (39) Inter-segment eliminations (482) (528) 46 Net operating revenues$ 19,485 $ 17,640 $ 1,845 Grant income 191 882 (691) Equity in earnings of unconsolidated affiliates 218 169 49 Operating expenses: Salaries, wages and benefits 8,878 8,418 460 Supplies 3,328 2,982 346 Other operating expenses, net 4,206 4,125 81 Depreciation and amortization 855 857 (2)
Impairment and restructuring charges, and acquisition-related
costs
85 290 (205) Litigation and investigation costs 116 44 72 Net gains on sales, consolidation and deconsolidation of facilities (445) (14) (431) Operating income$ 2,871 $ 1,989 $ 882 55
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Years Ended December 31, Increase
2021 2020 (Decrease)
Net operating revenues 100.0 % 100.0 % - %
Grant income 1.0 % 5.0 % (4.0) %
Equity in earnings of unconsolidated affiliates 1.1 % 1.0 % 0.1 %
Operating expenses:
Salaries, wages and benefits 45.6 % 47.8 % (2.2) %
Supplies 17.1 % 16.9 % 0.2 %
Other operating expenses, net 21.6 % 23.4 % (1.8) %
Depreciation and amortization 4.4 % 4.9 % (0.5) %
Impairment and restructuring charges, and acquisition-related
costs
0.4 % 1.6 % (1.2) % Litigation and investigation costs 0.6 % 0.2 % 0.4 % Net gains on sales, consolidation and deconsolidation of facilities (2.3) % (0.1) % (2.2) % Operating income 14.7 % 11.3 % 3.4 % The following tables present our net operating revenues, operating expenses and operating income from continuing operations, both in dollar amounts and as percentages of net operating revenues, by reportable segment for the years endedDecember 31, 2021 and 2020:
Year Ended
Hospital Operations Ambulatory Care Conifer Net operating revenues$ 15,500 $ 2,718$ 1,267 Grant income 142 49 - Equity in earnings of unconsolidated affiliates 25 193 - Operating expenses: Salaries, wages and benefits 7,511 690 677 Supplies 2,640 684 4 Other operating expenses, net 3,586 389 231 Depreciation and amortization 722 95 38
Impairment and restructuring charges, and acquisition-related
costs
39 27 19 Litigation and investigation costs 100 14 2 Net gains on sales, consolidation and deconsolidation of facilities (411) (34) - Operating income$ 1,480 $ 1,095$ 296 Year Ended December 31, 2021 Hospital Operations Ambulatory Care Conifer Net operating revenues 100.0 % 100.0 % 100.0 % Grant income 0.9 % 1.8 % - % Equity in earnings of unconsolidated affiliates 0.2 % 7.1 % - % Operating expenses: Salaries, wages and benefits 48.5 % 25.4 % 53.4 % Supplies 17.0 % 25.2 % 0.3 % Other operating expenses, net 23.2 % 14.3 % 18.2 % Depreciation and amortization 4.7 % 3.5 % 3.0 %
Impairment and restructuring charges, and acquisition-related
costs
0.3 % 1.0 % 1.5 %
Litigation and investigation costs 0.6 % 0.5 % 0.2 %
Net gains on sales, consolidation and deconsolidation of
facilities (2.7) % (1.3) % - %
Operating income 9.5 % 40.3 % 23.4 %
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Year Ended
Hospital Operations Ambulatory Care Conifer Net operating revenues$ 14,262 $ 2,072$ 1,306 Grant income 823 59 - Equity in earnings of unconsolidated affiliates 6 163 - Operating expenses: Salaries, wages and benefits 7,136 609 673 Supplies 2,511 468 3 Other operating expenses, net 3,513 349 263 Depreciation and amortization 739 81 37 Impairment and restructuring charges, and acquisition-related costs 187 57 46 Litigation and investigation costs 33 6 5 Net losses (gains) on sales, consolidation and deconsolidation of facilities 1 (15) - Operating income $ 971 $ 739$ 279 Year Ended December 31, 2020 Hospital Operations Ambulatory Care Conifer Net operating revenues 100.0 % 100.0 % 100.0 % Grant income 5.8 % 2.8 % - % Equity in earnings of unconsolidated affiliates - % 7.9 % - % Operating expenses: Salaries, wages and benefits 50.0 % 29.4 % 51.5 % Supplies 17.6 % 22.6 % 0.2 % Other operating expenses, net 24.7 % 16.7 % 20.2 % Depreciation and amortization 5.2 % 3.9 % 2.8 % Impairment and restructuring charges, and acquisition-related costs 1.3 % 2.8 % 3.5 % Litigation and investigation costs 0.2 % 0.3 % 0.4 % Net losses (gains) on sales, consolidation and deconsolidation of facilities - % (0.7) % - % Operating income 6.8 % 35.7 % 21.4 % Total net operating revenues increased by$1.845 billion , or 10.5%, for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . Hospital Operations net operating revenues, net of intersegment eliminations, increased by$1.238 billion , or 8.7%, for the year endedDecember 31, 2021 compared to 2020, primarily due to increased patient volumes, higher patient acuity, a more favorable payer mix and improved terms of our managed care contracts, partially offset by the sale of our former Miami Hospitals inAugust 2021 . Ambulatory Care net operating revenues increased by$646 million , or 31.2%, for the year endedDecember 31, 2021 compared to 2020. The change was primarily due to an increase from acquisitions of$476 million and same-facility growth of$307 million , which was attributable to the impact of higher patient volumes and acuity, incremental revenue from new service lines and negotiated commercial rate increases. These impacts were partially offset by a decrease of$137 million due to the sale of the Ambulatory Care segment's urgent care centers and the transfer of its imaging centers to the Hospital Operations segment.
Conifer net operating revenues decreased by
ended
customers, which revenues are not eliminated in consolidation, increased
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The following table shows selected operating expenses of our three reportable
operating segments. Information for our Hospital Operations segment is presented
on a samehospital basis, whereas information presented for our Ambulatory Care
and Conifer segments is presented on a continuing operations basis.
Years Ended December 31 ,
Increase
Selected Operating Expenses 2021 2020 (Decrease) Hospital Operations - Same-Hospital: Salaries, wages and benefits$ 7,227 $ 6,685 8.1 % Supplies 2,532 2,353 7.6 % Other operating expenses 3,375 3,229 4.5 % Total$ 13,134 $ 12,267 7.1 % Ambulatory Care: Salaries, wages and benefits $ 690$ 609 13.3 % Supplies 684 468 46.2 % Other operating expenses 389 349 11.5 % Total$ 1,763 $ 1,426 23.6 % Conifer: Salaries, wages and benefits $ 677$ 673 0.6 % Supplies 4 3 33.3 % Other operating expenses 231 263 (12.2) % Total $ 912$ 939 (2.9) % Rent/lease expense(1): Hospital Operations $ 280$ 257 8.9 % Ambulatory Care 100 92 8.7 % Conifer 10 12 (16.7) % Total $ 390$ 361 8.0 %
(1) Included in other operating expenses.
RESULTS OF OPERATIONS BY SEGMENT
Our operations are reported in three segments:
•Hospital Operations, which is comprised of our acute care and specialty
hospitals, imaging centers, ancillary outpatient facilities, microhospitals and
physician practices;
•Our Ambulatory Care segment is comprised of USPI's ASCs and surgical hospitals;
and
•Conifer, which provides revenue cycle management and valuebased care services
to hospitals, health systems, physician practices, employers and other clients.
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Hospital Operations Segment
The following tables show operating statistics of our continuing operations
hospitals and related outpatient facilities on a samehospital basis, unless
otherwise indicated:
Same-Hospital
Years Ended December 31, Increase
Admissions, Patient Days and Surgeries 2021 2020
(Decrease)
Number of hospitals (at end of period) 60 60 - (1) Total admissions 547,754 548,569 (0.1) % Adjusted patient admissions(2) 973,552 950,789 2.4 % Paying admissions (excludes charity and uninsured) 518,515 518,042 0.1 % Charity and uninsured admissions 29,239 30,527 (4.2) % Admissions through emergency department 409,440 398,708 2.7 % Paying admissions as a percentage of total admissions 94.7 % 94.4 % 0.3 % (1) Charity and uninsured admissions as a percentage of total admissions 5.3 % 5.6 % (0.3) % (1) Emergency department admissions as a percentage of total admissions 74.7 % 72.7 % 2.0 % (1) Surgeries - inpatient 141,469 144,421 (2.0) % Surgeries - outpatient 216,011 192,600 12.2 % Total surgeries 357,480 337,021 6.1 % Patient days - total 2,888,928 2,798,386 3.2 % Adjusted patient days(2) 5,016,029 4,707,262 6.6 % Average length of stay (days) 5.27 5.10 3.3 % Licensed beds (at end of period) 15,379 15,403 (0.2) % Average licensed beds 15,396 15,446 (0.3) % Utilization of licensed beds(3) 51.4 % 49.5 % 1.9 % (1)
(1) The change is the difference between 2021 and 2020 amounts shown.
(2) Adjusted patient admissions/days represents actual patient admissions/days adjusted to
include outpatient services provided by facilities in our Hospital Operations segment
by multiplying actual patient admissions/days by the sum of gross inpatient revenues
and outpatient revenues and dividing the results by gross inpatient revenues.
Utilization of licensed beds represents patient days divided by number of days in the
(3) period divided by average licensed beds.
Same-Hospital
Years Ended December 31, Increase
Outpatient Visits 2021 2020 (Decrease)
Total visits 5,319,994 4,598,483 15.7 %
Paying visits (excludes charity and uninsured) 4,964,084 4,285,043 15.8 %
Charity and uninsured visits 355,910 313,440 13.5 %
Emergency department visits 2,034,405 1,846,361 10.2 %
Surgery visits 216,011 192,600 12.2 %
Paying visits as a percentage of total visits 93.3 % 93.2 % 0.1 % (1)
Charity and uninsured visits as a percentage of total visits 6.7 % 6.8 % (0.1) % (1)
(1) The change is the difference between 2021 and 2020 amounts shown.
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Same-Hospital
Years Ended December 31, Increase
Revenues 2021 2020 (Decrease)
Total segment net operating revenues(1) $ 14,768 $ 13,272 11.3 %
Selected revenue data - hospitals and related outpatient
facilities:
Net patient service revenues(1)(2)
$ 14,043 $ 12,655 11.0 % Net patient service revenue per adjusted patient admission(1)(2)$ 14,424 $ 13,310 8.4 %
Net patient service revenue per adjusted patient day(1)(2)
4.2 %
(1) Revenues are net of implicit price concessions.
(2) Adjusted patient admissions/days represents actual patient admissions/days adjusted to
include outpatient services provided by facilities in our Hospital Operations segment
by multiplying actual patient admissions/days by the sum of gross inpatient revenues
and outpatient revenues and dividing the results by gross inpatient revenues.
Same-Hospital
Years Ended December 31, Increase
Total Segment Selected Operating Expenses 2021 2020 (Decrease)
Salaries, wages and benefits as a percentage of net operating revenues
48.9 % 50.4 % (1.5) %
(1)
Supplies as a percentage of net operating revenues 17.1 % 17.7 % (0.6) %
(1)
Other operating expenses as a percentage of net operating revenues
22.9 % 24.3 % (1.4) % (1) (1) The change is the difference between 2021 and 2020 amounts shown.
Revenues
Samehospital net operating revenues increased$1.496 billion , or 11.3%, during the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 , primarily due to increased patient and surgical volumes, higher patient acuity, a more favorable payer mix and negotiated commercial rate increases. Our Hospital Operations segment also recognized grant income from federal, state and local grants totaling$142 million and$823 million in the years endedDecember 31, 2021 and 2020, respectively, which is not included in net operating revenues. Samehospital admissions during the year endedDecember 31, 2021 were consistent with the year endedDecember 31, 2020 , while outpatient visits increased 15.7% and samehospital adjusted admissions increased 2.4% yearoveryear.
The following table shows the consolidated net accounts receivable by payer at
December 31,
2021 2020
Medicare $ 155 $ 152
Medicaid 47 49
Net cost report settlements receivable and valuation allowances 33 34
Managed care 1,602 1,567
Self-pay uninsured 21 32
Self-pay balance after insurance 70 74
Estimated future recoveries 137 156
Other payers 331 318
Total Hospital Operations 2,396 2,382
Ambulatory Care 374 307
Total discontinued operations - 1
Accounts receivable, net $ 2,770 $ 2,690
Collection of accounts receivable has been a key area of focus, particularly
over the past several years. At December 31, 2021 , our Hospital Operations
segment collection rate on selfpay accounts was approximately 26.5%. Our
selfpay collection rate includes payments made by patients, including copays,
coinsurance amounts and deductibles paid by patients with insurance. Based on
our accounts receivable from uninsured patients and copays, coinsurance
amounts and deductibles owed to us by patients with insurance at
December 31, 2021 , a 10% decrease or increase in our selfpay collection rate,
or approximately 3%, which we believe could be a reasonably likely change, would
result in an unfavorable or favorable adjustment to patient accounts receivable
of approximately $9 million . There are various factors that can impact
collection trends, such as changes in the economy, which in turn have an impact
on unemployment rates and the number of uninsured and
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underinsured patients, the volume of patients through our emergency departments,
the increased burden of copays and deductibles to be made by patients with
insurance, and business practices related to collection efforts. These factors,
many of which have been affected by the COVID19 pandemic, continuously change
and can have an impact on collection trends and our estimation process.
Payment pressure from managed care payers also affects the collectability of our
accounts receivable. We typically experience ongoing managed care payment delays
and disputes; however, we continue to work with these payers to obtain adequate
and timely reimbursement for our services. Our estimated Hospital Operations
segment collection rate from managed care payers was approximately 96.6% at
December 31, 2021 .
We manage our implicit price concessions using hospitalspecific goals and
benchmarks such as (1) total cash collections, (2) pointofservice cash
collections, (3) AR Days and (4) accounts receivable by aging category. The
following tables present the approximate aging by payer of our net accounts
receivable from the continuing operations of our Hospital Operations segment of
$2.363 billion and $2.348 billion at December 31, 2021 and 2020, respectively,
excluding cost report settlements receivable and valuation allowances of
$33 million and $34 million , respectively, at December 31, 2021 and 2020:
Indemnity,
Managed Self-Pay
Medicare Medicaid Care and Other Total
At December 31, 2021 :
0-60 days 93 % 35 % 57 % 22 % 52 %
61-120 days 4 % 31 % 18 % 14 % 16 %
121-180 days 1 % 14 % 10 % 9 % 9 %
Over 180 days 2 % 20 % 15 % 55 % 23 %
Total 100 % 100 % 100 % 100 % 100 %
At December 31, 2020 :
0-60 days 91 % 33 % 58 % 24 % 52 %
61-120 days 5 % 31 % 15 % 13 % 14 %
121-180 days 2 % 14 % 8 % 8 % 8 %
Over 180 days 2 % 22 % 19 % 55 % 26 %
Total 100 % 100 % 100 % 100 % 100 %
Conifer continues to implement revenue cycle initiatives to improve our cash
flow. These initiatives are focused on standardizing and improving patient
access processes, including preregistration, registration, verification of
eligibility and benefits, liability identification and collections at
pointofservice, and financial counseling. These initiatives are intended to
reduce denials, improve service levels to patients and increase the quality of
accounts that end up in accounts receivable. Although we continue to focus on
improving our methodology for evaluating the collectability of our accounts
receivable, we may incur future charges if there are unfavorable changes in the
trends affecting the net realizable value of our accounts receivable.
At December 31, 2021 , we had a cumulative total of patient account assignments
to Conifer of $1.932 billion related to our continuing operations. These
accounts have already been written off and are not included in our receivables;
however, an estimate of future recoveries from all the accounts assigned to
Conifer is determined based on our historical experience and recorded in
accounts receivable.
Patient advocates from Conifer's Eligibility and Enrollment Services program
("EES") screen patients in the hospital to determine whether those patients meet
eligibility requirements for financial assistance programs. They also expedite
the process of applying for these government programs. Receivables from patients
who are potentially eligible for Medicaid are classified as Medicaid pending,
under the EES, net of appropriate implicit price concessions. Based on recent
trends, approximately 97% of all accounts in the EES are ultimately approved for
benefits under a government program, such as Medicaid.
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The following table shows the approximate amount of accounts receivable in the
EES still awaiting determination of eligibility under a government program at
December 31, 2021 and 2020 by aging category:
December 31,
2021 2020
0-60 days $ 87 $ 91
61-120 days 17 24
121-180 days 4 6
Over 180 days 7 6
Total $ 115 $ 127
Salaries, Wages and Benefits
Samehospital salaries, wages and benefits increased$542 million , or 8.1%, in the year endedDecember 31, 2021 compared to 2020. This increase was primarily attributable to higher patient volumes, increased contract labor costs, increased overtime expense, annual merit increases for certain of our employees and higher incentive compensation. Samehospital salaries, wages and benefits as a percentage of net operating revenues decreased by 150 basis points to 48.9% in the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 , primarily due higher patient acuity and cost-reduction measures, including the use of labor management tools as volumes fluctuate. Salaries, wages and benefits expense for the year endedDecember 31, 2021 and 2020 included stockbased compensation expense of$41 million and$28 million , respectively.
Supplies
Samehospital supplies expense increased$179 million , or 7.6%, in the year endedDecember 31, 2021 compared to 2020. The increase was primarily due to higher patient volumes, the increased cost of certain supplies as a result of the COVID19 pandemic and growth in our higheracuity, supplyintensive surgical services. Samehospital supplies expense as a percentage of net operating revenues decreased by 60 basis points to 17.1% in the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 , primarily due to the growth of our higher-margin services and our cost-efficiency measures. The COVID19 pandemic has created supplychain disruptions, including shortages and delays, as well as significant price increases in medical supplies, particularly for PPE. We strive to control supplies expense through product standardization, consistent contract terms and endtoend contract management, improved utilization, bulk purchases, focused spending with a smaller number of vendors and operational improvements. The items of current costreduction focus include cardiac stents and pacemakers, orthopedics, implants and highcost pharmaceuticals.
Other Operating Expenses, Net
Samehospital other operating expenses increased by$146 million , or 4.5%, in the year endedDecember 31, 2021 compared to 2020. Samehospital other operating expenses as a percentage of net operating revenues decreased by 140 basis points to 22.9% in the year endedDecember 31, 2021 compared to 24.3% in the year endedDecember 31, 2020 , primarily due to higher patient volumes and the growth of our net operating revenues. The changes in other operating expenses included:
•increased malpractice expense of
•increased rent and lease expense of
•increased collection fees of
•increased software costs of
•increased repair and maintenance costs of
•a gain on sale and leaseback of a medical office building of
was classified as a reduction of other operating expenses, net.
62 -------------------------------------------------------------------------------- Table of Contents Ambulatory Care Segment Our Ambulatory Care segment is comprised of USPI's ASCs and surgical hospitals. USPI operates its surgical facilities in partnership with local physicians and, in many of these facilities, a health system partner. We hold an ownership interest in each facility, with each being operated through a separate legal entity in most cases. USPI operates facilities on a daytoday basis through management services contracts. Our sources of earnings from each facility consist of:
•management and administrative services revenues, computed as a percentage of
each facility's net revenues (often net of implicit price concessions); and
•our share of each facility's net income (loss), which is computed by
multiplying the facility's net income (loss) times the percentage of each
facility's equity interests owned by USPI.
Our role as an owner and daytoday manager provides us with significant influence over the operations of each facility. For many of the facilities our Ambulatory Care segment operates (166 of 423 facilities atDecember 31, 2021 ), this influence does not represent control of the facility, so we account for our investment in the facility under the equity method for an unconsolidated affiliate. USPI controls 257 of the facilities our Ambulatory Care segment operates, and we account for these investments as consolidated subsidiaries. Our net earnings from a facility are the same under either method, but the classification of those earnings differs. For consolidated subsidiaries, our financial statements reflect 100% of the revenues and expenses of the subsidiaries, after the elimination of intercompany amounts. The net profit attributable to owners other than USPI is classified within net income available to noncontrolling interests.
For unconsolidated affiliates, our statements of operations reflect our earnings
in two line items:
•equity in earnings of unconsolidated affiliates-our share of the net income (loss) of each facility, which is based on the facility's net income (loss) and the percentage of the facility's outstanding equity interests owned by USPI; and
•management and administrative services revenues, which is included in our net
operating revenues-income we earn in exchange for managing the daytoday
operations of each facility, usually quantified as a percentage of each
facility's net revenues less implicit price concessions.
Our Ambulatory Care segment operating income is driven by the performance of all facilities USPI operates and by USPI's ownership interests in those facilities, but our individual revenue and expense line items contain only consolidated businesses, which represent 61% of those facilities. This translates to trends in consolidated operating income that often do not correspond with changes in consolidated revenues and expenses, which is why we disclose certain statistical and financial data on a pro forma systemwide basis that includes both consolidated and unconsolidated (equity method) facilities.
Year Ended
The following table summarizes certain statements of operations items for the
periods indicated:
Years Ended December 31,
Ambulatory Care Results of Operations 2021 2020 Increase (Decrease)
Net operating revenues $ 2,718 $ 2,072 31.2 %
Grant income $ 49 $ 59 (16.9) %
Equity in earnings of unconsolidated affiliates $ 193 $ 163 18.4 %
Salaries, wages and benefits $ 690 $ 609 13.3 %
Supplies $ 684 $ 468 46.2 %
Other operating expenses, net $ 389 $ 349 11.5 %
Revenues
Our Ambulatory Care net operating revenues increased by $646 million , or 31.2%,
during the year ended December 31, 2021 compared to 2020. The change was driven
by an increase from acquisitions of $476 million , as well as an increase in
samefacility net operating revenues of $307 million , which was attributable to
the impact of higher patient volumes and acuity, incremental revenue from new
service lines and negotiated commercial rate increases. These impacts were
partially offset by a decrease of $137 million , due primarily to the sale of
USPI's urgent care centers and the transfer of imaging centers to the Hospital
Operations segment. Our Ambulatory Care segment also recognized grant income
from federal grants totaling
63
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Table of Contents
$49 million and $59 million during the years ended December 31, 2021 and 2020,
respectively, which is not included in net operating revenues.
Salaries, Wages and Benefits
Salaries, wages and benefits expense increased by$81 million , or 13.3%, during the year endedDecember 31, 2021 compared to 2020. Salaries, wages and benefits expense was impacted by an increase from acquisitions of$79 million and an increase in samefacility salaries, wages and benefits expense of$57 million due primarily to higher surgical patient volumes. These increases were partially offset by a decrease of$55 million due to the sale of USPI's urgent care centers, the transfer of imaging centers to the Hospital Operations segment and the deconsolidation of a facility. Salaries, wages and benefits expense as a percentage of net operating revenues decreased 400 basis points during the year endedDecember 31, 2021 compared to 2020. This decrease was primarily attributable to higher surgical patient volumes and acuity, as well as staffing alignment and cost-reduction measures. Salaries, wages and benefits expense for the years endedDecember 31, 2021 and 2020 included stockbased compensation expense of$13 million and$14 million , respectively.
Supplies
Supplies expense increased by$216 million , or 46.2%, during the year endedDecember 31, 2021 compared to 2020. The change was driven by an increase from acquisitions of$143 million , as well as an increase in samefacility supplies expense of$82 million due primarily to an increase in surgical cases at our consolidated centers, higher costs driven by the higher level of patient acuity, and higher pricing of certain supplies as a result of the COVID19 pandemic, partially offset by a decrease of$9 million due to the sale of USPI's urgent care centers, the transfer of imaging centers to the Hospital Operations segment and the deconsolidation of a facility. Supplies expense as a percentage of net operating revenues increased 260 basis points from 22.6% in the year endedDecember 31, 2020 to 25.2% in the year endedDecember 31, 2021 . This change was driven by an increase in higheracuity, supplyintensive surgeries and higher pricing of certain supplies as a result of the COVID19 pandemic.
Other Operating Expenses, Net
Other operating expenses increased by$40 million , or 11.5%, during the year endedDecember 31, 2021 compared to 2020. The change was driven by an increase from acquisitions of$52 million , as well as an increase in samefacility other operating expenses of$27 million , partially offset by a decrease of$39 million due to the sale of USPI's urgent care centers and the transfer of imaging centers to the Hospital Operations segment. Other operating expenses, net as a percentage of net operating revenues decreased from 16.7% during the year endedDecember 31, 2020 to 14.3% for 2021, primarily due to higher patient volumes, an increase in our net operating revenues and our cost-efficiency measures.
Facility Growth
The following table summarizes the changes in our samefacility revenue yearoveryear on a pro forma systemwide basis, which includes both consolidated and unconsolidated (equity method) facilities. While we do not record the revenues of unconsolidated facilities, we believe this information is important in understanding the financial performance of our Ambulatory Care segment because these revenues are the basis for calculating our management services revenues and, together with the expenses of our unconsolidated facilities, are the basis for our equity in earnings of unconsolidated affiliates. Ambulatory Care Facility Growth Year EndedDecember 31, 2021 Net revenues 14.5% Cases 15.6% Net revenue per case (1.0)% 64
-------------------------------------------------------------------------------- Table of Contents Joint Ventures withHealth System Partners
USPI's business model is to jointly own its facilities with local physicians
and, in many of these facilities, a notforprofit health system partner.
Accordingly, as of
Ambulatory Care segment are operated in this model.
The table below summarizes the amounts we paid to acquire various ownership
interests in ambulatory care facilities in the periods indicated:
Years Ended December 31, Increase
Type of Ownership Interests Acquired 2021 2020 (Decrease)
Controlling interests $ 1,219 $ 1,175 $ 44
Noncontrolling interests 79 24 55
Equity investment in unconsolidated affiliates and
consolidated facilities 17 1 16
$ 1,315 $ 1,200 $ 115
The table below provides information about the ownership structure of the
facilities our Ambulatory Care segment operated at
Ambulatory Care FacilitiesDecember 31, 2021 Ownership Structure: With a health system partner 196 Without a health system partner 227 Total facilities operated 423
The table below reflects changes in the number of facilities operated during the
year ended
Ambulatory Care Facilities Year Ended
Change fromDecember 31, 2020 : Acquisitions 91 De novo 4 Dispositions/Mergers (68) Total increase in number of facilities operated
27
Through our transaction with SCD inDecember 2021 , we acquired majority ownership interests in six SCD Centers and minority ownership interests in 80 SCD Centers, along with other related ambulatory support services, for a cash payment of$1.048 billion . Since that initial closing, we have separately made offers, and continue to make offers in an ongoing process, to acquire a portion of the equity interests in certain of the SCD Centers from the physician owners for consideration of up to approximately$250 million ; before the end of 2021, we had completed purchases of physician equity resulting in the consolidation in our financial statements of an additional 10SCD Centers for aggregate payments of$77 million . AtDecember 31, 2021 , we held controlling interests in 15 SCD Centers and noncontrolling interests in 57 SCD Centers. The remaining 14 SCD Centers were acquired in the development stage and, therefore, are not included in total acquisitions in the table above. We cannot reasonably predict how many additional physician owners will accept our offers to acquire a portion of their equity, nor the timing or amount of any related payments. We will consolidate in our financial statements the results of the centers in which USPI acquires a majority ownership position. During the year endedDecember 31, 2021 , we also acquired controlling interests in four ASCs inMaryland , two in each ofFlorida ,Georgia andTexas , and one inArizona . We paid cash totaling approximately$73 million for these acquisitions. The ASC acquired inArizona and one of theFlorida centers are jointly owned with a health system partner and physicians. The remaining nine ASCs are jointly owned with physicians. During 2021, we obtained a controlling interest in three surgical hospitals inArizona in which we previously owned a noncontrolling interest for$13 million . We own one of the hospitals with a health system partner and the remaining two hospitals with a health system and physician partners. In addition to the those acquired through the SCD acquisition, we acquired noncontrolling interests in four ASCs inFlorida , two ASCs inNorth Carolina , and one each inNew Mexico andTexas during the year endedDecember 31, 2021 . We paid cash totaling approximately$79 million for these acquisitions. Following our initial investment, we purchased additional ownership interests in two of the ASCs inFlorida for$8 million and subsequently consolidated them. We own the ASC 65 -------------------------------------------------------------------------------- Table of Contents acquired inNew Mexico and one of the ASCs acquired inNorth Carolina jointly with a health system and physician partners, and the remaining six centers are jointly owned with physicians. We also regularly engage in the purchase of equity interests with respect to our investments in unconsolidated affiliates and consolidated facilities that do not result in a change in control. These transactions are primarily the acquisitions of equity interests in ASCs and the investment of additional cash in facilities that need capital for new acquisitions, new construction or other business growth opportunities. During the year endedDecember 31, 2021 , we invested approximately$17 million in such transactions. During the year endedDecember 31, 2021 , we transferred all 24 imaging centers held in our Ambulatory Care segment to our Hospital Operations segment, divested 40 urgent care centers and sold a portion of our ownership in two ASCs in which we previously had a controlling interest to a health system for approximately$12 million , resulting in the deconsolidation of those facilities.
Conifer Segment
Revenues
Our Conifer segment generated net operating revenues of$1.267 billion and$1.306 billion during the years endedDecember 31, 2021 and 2020, respectively. The decline in Conifer's net operating revenues of$39 million , or 3.0%, was primarily due to the revised terms in the Amended RCM Agreement, partially offset by client volume improvement in 2021 compared to 2020, as well as new business expansion. Conifer revenues from thirdparty customers, which revenues are not eliminated in consolidation, increased$7 million , or 0.9%, for the year endedDecember 31, 2021 compared to 2020. The increase was primarily driven by the transition of the Miami Hospitals sold inAugust 2021 to a thirdparty customer and new business expansion, partially offset by expected client attrition. The Amended RCM Agreement updated certain terms and conditions related to the revenue cycle management services Conifer provides to Tenet hospitals. Conifer's contract with Tenet represented 38.0% of the net operating revenues Conifer recognized in the year endedDecember 31, 2021 .
Salaries, Wages and Benefits
Salaries, wages and benefits expense for Conifer increased$4 million , or 0.6%, in the year endedDecember 31, 2021 compared to 2020. Salaries, wages and benefits expense included stockbased compensation expense of$2 million in both 2021 and 2020. Other Operating Expenses, Net Other operating expenses for Conifer decreased$32 million , or 12.2%, in the year endedDecember 31, 2021 compared to 2020. This decrease was attributable to reduced pass-through costs associated with the Amended RCM Agreement and a reduction of legal expenses. 66 -------------------------------------------------------------------------------- Table of Contents Consolidated
Impairment and Restructuring Charges, and Acquisition-Related Costs
The following table provides information about our impairment and restructuring
charges, and acquisitionrelated costs:
Years Ended December 31,
2021 2020
Consolidated:
Impairment charges $ 8 $ 92
Restructuring charges 57 184
Acquisition-related costs 20 14
Total impairment and restructuring charges, and
acquisition-related costs $ 85 $ 290
By segment:
Hospital Operations $ 39 $ 187
Ambulatory Care 27 57
Conifer 19 46
Total impairment and restructuring charges, and
acquisition-related costs $ 85 $ 290
Impairment charges for the year ended December 31, 2021 were comprised of
$5 million from our Ambulatory Care segment, primarily related to the impairment
of certain management contract intangible assets, and $3 million from our
Conifer segment. Restructuring charges during the year ended December 31, 2021
consisted of $14 million of employee severance costs, $19 million related to the
transition of various administrative functions to our GBC and $24 million of
other restructuring costs. Acquisitionrelated costs consisted of $20 million of
transaction costs for the year ended December 31, 2021 .
Impairment charges during the year ended December 31, 2020 primarily included
$76 million for the writedown of hospital buildings to their estimated fair
values in one of our markets, which assets are part of our Hospital Operations
segment. Material adverse trends in our estimates of future undiscounted cash
flows of the hospitals indicated the aggregate carrying value of the hospitals'
longlived assets was not recoverable from the estimated future cash flows. We
believe the most significant factors contributing to the adverse financial
trends included reductions in volumes of insured patients, shifts in payer mix
from commercial to governmental payers combined with reductions in reimbursement
rates from governmental payers, and high levels of uninsured patients. As a
result, we updated the estimate of the fair value of the hospitals' long-lived
assets and compared it to the aggregate carrying value of those assets. Because
the fair value estimates were lower than the aggregate carrying value of the
long-lived assets, an impairment charge was recorded for the difference in the
amounts. The aggregate carrying value of the hospitals' assets held and used for
which impairment charges were recorded was $483 million at December 31, 2020 . We
also recorded $16 million of other impairment charges. For additional discussion
see Note 6 to the accompanying Consolidated Financial Statements.
Restructuring charges for the year ended December 31, 2020 consisted of $65
million of employee severance costs, $50 million related to the transitioning of
various administrative functions to our GBC, $23 million of charges due to the
termination of the USPI management equity plan, $14 million of contract and
lease termination fees, and $32 million of other restructuring costs.
Acquisitionrelated costs consisted of $14 million of transaction costs for the
year ended December 31, 2020 .
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 negative trends occur that
impact our future outlook, future impairments of longlived assets and goodwill
may occur, and we may incur additional restructuring charges, which could be
material.
Litigation and Investigation Costs
Litigation and investigation costs for the years endedDecember 31, 2021 and 2020 were$116 million and$44 million , respectively, primarily related to costs associated with legal proceedings and governmental investigations. See Note 17 to the accompanying Consolidated Financial Statements for additional information. 67 -------------------------------------------------------------------------------- Table of ContentsNet Gains on Sales, Consolidation and Deconsolidation of Facilities During the year endedDecember 31, 2021 , we recorded net gains on sales, consolidation and deconsolidation of facilities of$445 million , primarily comprised of a gain of$406 million related to the sale of the Miami Hospitals inAugust 2021 , a gain of$14 million related to the sale of the majority of our urgent care centers inApril 2021 , net gains of$22 million related to consolidation changes of certain USPI businesses due to ownership changes and net gains of$3 million related to other activity. During the year endedDecember 31, 2020 , we recorded net gains on sales, consolidation and deconsolidation of facilities of$14 million , primarily comprised of aggregate gains of$15 million related to consolidation changes of certain USPI businesses due to ownership changes and a gain of$7 million related to postclosing adjustments on the 2017 sale of facilities in theHouston area, partially offset by a loss of$5 million related to postclosing adjustments on the 2019 sale of three of our hospitals in theChicago area and a loss of$3 million related to postclosing adjustments on the 2018 sale ofMacNeal Hospital .
Interest Expense
Interest expense for the year endedDecember 31, 2021 was$923 million compared to$1.003 billion for the year endedDecember 31, 2020 , primarily due to the early redemption of all$1.410 billion aggregate principal amount outstanding of our 5.125% senior secured second lien notes due 2025 (the "2025 Senior Secured Second Lien Notes") inJune 2021 and early retirement of all$478 million aggregate principal amount outstanding of our 7.000% senior unsecured notes due 2025 ("2025 Senior Unsecured Notes") inMarch 2021 .
Loss from Early Extinguishment of Debt
Loss from early extinguishment of debt was$74 million for the year endedDecember 31, 2021 and consisted of aggregate losses incurred from the redemption of our 4.625% senior secured first lien notes due 2024 ("2024 Senior Secured First Lien Notes") inSeptember 2021 , the redemption of our 2025 Senior Secured Second Lien Notes inJune 2021 and the retirement of our 2025 Senior Unsecured Notes inMarch 2021 , all in advance of their respective maturity dates. See Note 8 to the accompanying Consolidated Financial Statements for additional information. Loss from early extinguishment of debt was$316 million for the year endedDecember 31, 2020 and consisted of an aggregate loss of$320 million from the redemption and purchase of our 8.125% senior unsecured notes due 2022, partially offset by$4 million of gains on the extinguishment of mortgage notes.
Income Tax Expense
During the year endedDecember 31, 2021 , we recorded income tax expense of$411 million in continuing operations on pretax income of$1.888 billion compared to an income tax benefit of$97 million in continuing operations on pretax income of$671 million during the year endedDecember 31, 2020 . The reconciliation between the amount of recorded income tax expense (benefit) and the amount calculated at the statutory federal tax rate is shown in the following table: Years Ended December 31, 2021 2020 Tax expense at statutory federal rate of 21% $ 396$ 141 State income taxes, net of federal income tax benefit 77 33
Expired state net operating losses, net of federal income tax benefit
- 1 Tax benefit attributable to noncontrolling interests (114) (75) Nondeductible goodwill 35 - Nondeductible executive compensation 8 6 Nondeductible litigation costs 1 - Expired charitable contribution carryforward - 1 Stock-based compensation tax benefits (5) (2) Changes in valuation allowance 2 (226)
Prior-year provision to return adjustments and other changes in
deferred taxes
8 14 Other items 3 10 Income tax expense (benefit) $ 411$ (97) 68
-------------------------------------------------------------------------------- Table of Contents As a result of the change in the business interest expense disallowance rules under the COVID Acts, we recorded an income tax benefit of$88 million during the year endedDecember 31, 2020 to decrease the valuation allowance for interest expense and carryforwards due to the additional deduction of interest expense. InSeptember 2020 , we filed an application with the Internal Revenue Services ("IRS") to change our method of accounting for certain capitalized costs on our 2019 tax return. This change in tax accounting method resulted in additional interest expense being allowed on our 2019 and 2020 tax returns. We reduced our valuation allowance by an additional$126 million in the year endedDecember 31, 2020 related to the change in tax accounting method. Charitable contribution carryforward and state valuation allowance changes resulted in an additional$12 million decrease for the year endedDecember 31, 2020 .
Net Income Available to Noncontrolling Interests
Net income available to noncontrolling interests was$562 million for the year endedDecember 31, 2021 compared to$369 million for the year endedDecember 31, 2020 . Net income available to noncontrolling interests in 2021 was comprised of$448 million of income related to our Ambulatory Care segment,$69 million of income related to our Conifer segment and$45 million of income related to our Hospital Operations segment. Of the portion related to our Ambulatory Care segment,$21 million of income was related to the minority interests in USPI.
ADDITIONAL SUPPLEMENTAL NON-GAAP DISCLOSURES
The financial information provided throughout this report, including our Consolidated Financial Statements and the notes thereto, has been prepared in conformity with accounting principles generally accepted inthe United States of America ("GAAP"). However, we use certain nonGAAP financial measures defined below in communications with investors, analysts, rating agencies, banks and others to assist such parties in understanding the impact of various items on our financial statements, some of which are recurring or involve cash payments. We use this information in our analysis of the performance of our business, excluding items we do not consider relevant to the performance of our continuing operations. In addition, we use these measures to define certain performance targets under our compensation programs. "Adjusted EBITDA" is a nonGAAP measure we define as net income available (loss attributable) toTenet Healthcare Corporation common shareholders before (1) the cumulative effect of changes in accounting principle, (2) net loss attributable (income available) to noncontrolling interests, (3) income (loss) from discontinued operations, net of tax, (4) income tax benefit (expense), (5) gain (loss) from early extinguishment of debt, (6) other nonoperating income (expense), net, (7) interest expense, (8) litigation and investigation (costs) benefit, net of insurance recoveries, (9) net gains (losses) on sales, consolidation and deconsolidation of facilities, (10) impairment and restructuring charges and acquisitionrelated costs, (11) depreciation and amortization, and (12) income (loss) from divested and closed businesses (i.e., health plan businesses). Litigation and investigation costs do not include ordinary course of business malpractice and other litigation and related expense. We believe the foregoing nonGAAP measure is useful to investors and analysts because it presents additional information about our financial performance. Investors, analysts, company management and our board of directors utilize this nonGAAP measure, in addition to GAAP measures, to track our financial and operating performance and compare that performance to peer companies, which utilize similar nonGAAP measures in their presentations. The human resources committee of our board of directors also uses certain nonGAAP measures to evaluate management's performance for the purpose of determining incentive compensation. We believe that Adjusted EBITDA is a useful measure, in part, because certain investors and analysts use both historical and projected Adjusted EBITDA, in addition to GAAP and other nonGAAP measures, as factors in determining the estimated fair value of shares of our common stock. Company management also regularly reviews the Adjusted EBITDA performance for each operating segment. We do not use Adjusted EBITDA to measure liquidity, but instead to measure operating performance. The nonGAAP Adjusted EBITDA measure we utilize may not be comparable to similarly titled measures reported by other companies. Because this measure excludes many items that are included in our financial statements, it does not provide a complete measure of our operating performance. Accordingly, investors are encouraged to use GAAP measures when evaluating our financial performance. 69 -------------------------------------------------------------------------------- Table of Contents The following table shows the reconciliation of Adjusted EBITDA to net income available toTenet Healthcare Corporation common shareholders (the most comparable GAAP term) for the years endedDecember 31, 2021 and 2020: Years EndedDecember 31, 2021 2020
Net income available to
$ 914 $ 399 Less: Net income available to noncontrolling interests (562) (369) Loss from discontinued operations, net of tax (1) - Income from continuing operations 1,477 768 Income tax benefit (expense) (411) 97 Loss from early extinguishment of debt (74) (316) Other non-operating income, net 14 1 Interest expense (923) (1,003) Operating income 2,871 1,989 Litigation and investigation costs (116) (44)
Net gains on sales, consolidation and deconsolidation of facilities
445 14
Impairment and restructuring charges, and acquisition-related costs
(85) (290) Depreciation and amortization (855) (857) Income (loss) from divested and closed businesses (i.e. health plan businesses) (1) 20 Adjusted EBITDA$ 3,483 $ 3,146 Net operating revenues$ 19,485 $ 17,640 Less: Net operating revenues from health plans - 21 Adjusted net operating revenues$ 19,485 $ 17,619
Net income available to
of net operating revenues
4.7 % 2.3 % Adjusted EBITDA as % of adjusted net operating revenues (Adjusted EBITDA margin) 17.9 % 17.9 %
RESULTS OF OPERATIONS FOR THE YEAR ENDED
YEAR ENDED
A discussion of the results of operations for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 can be found in our Annual Report on Form 10K for the year endedDecember 31, 2020 . 70 -------------------------------------------------------------------------------- Table of Contents LIQUIDITY AND CAPITAL RESOURCES
CASH REQUIREMENTS
Scheduled Contractual Obligations
Our obligations to make future cash payments under contracts are summarized in the table below, all as ofDecember 31, 2021 . Other than the repayment of long-term debt, we expect to use net cash generated from operating activities, cash on hand or borrowings under our revolving credit facility to satisfy the below obligations. Longterm debt maturities may be refinanced or repaid using net cash generated from operating activities or from the proceeds from sales of facilities. Years Ended December 31, Total 2022 2023 2024 2025 2026 Later Years (In Millions) Long-term debt(1)$ 19,986 $ 851 $ 2,698 $ 2,121 $ 1,359 $ 2,664 $ 10,293 Finance lease obligations(1) 350 116 76 48 16 11 83 Long-term non-cancelable operating leases 1,368 236 211 185 156 124
456
Medicare accelerated payment program 880 880 - - - - - Academic teaching services 315 63 63 63 63 63 - Defined benefit plan obligations 486 25 23 23 23 23
369
Information technology contract services 546 214 203 119 2 2 6 Purchase orders 335 335 - - - - - Total$ 24,266 $ 2,720 $ 3,274 $ 2,559 $ 1,619 $ 2,887 $ 11,207 (1) Amounts include both principal and interest. Long-term Debt-We have a senior secured revolving credit facility (as amended to date, the "Credit Agreement") that provides for revolving loans in an aggregate principal amount of up to$1.900 billion with a$200 million subfacility for standby letters of credit. Any amounts outstanding under the Credit Agreement are due upon the facility's maturity inSeptember 2024 . AtDecember 31, 2021 , we had no cash borrowings outstanding under the Credit Agreement and less than$1 million of standby letters of credit outstanding. AtDecember 31, 2021 , we had outstanding senior unsecured and senior secured notes ("Senior Notes") with an aggregate principal balance of$15.354 billion . The Senior Notes generally require semiannual interest payments and have maturity dates ranging from 2023 through 2031. Any outstanding principal and accrued but unpaid interest is due upon maturity.
We consummated the following transactions affecting our longterm commitments in
the year ended
•InDecember 2021 , we issued$1.450 billion aggregate principal amount of our 2030 Senior Secured First Lien Notes. We will pay interest on these notes semiannually in arrears onJanuary 15 andJuly 15 of each year, commencing inJuly 2022 . We used the net proceeds from the issuance of the 2030 Senior Secured First Lien Notes, after payment of fees and expenses, to finance the acquisition of the SCD Centers inDecember 2021 and for general corporate purposes. •InSeptember 2021 , we redeemed approximately$1.100 billion of the thenoutstanding$1.870 billion aggregate principal amount of our 2024 Senior Secured First Lien Notes in advance of their maturity date. We paid$1.113 billion to redeem the notes, which was primarily funded with the proceeds from the sale of the Miami Hospitals inAugust 2021 . In connection with the redemption, we recorded a loss from early extinguishment of debt of$20 million in the three months endedSeptember 30, 2021 , primarily related to the difference between the purchase price and the par value of the notes, as well as the writeoff of associated unamortized issuance costs. •InJune 2021 , we issued$1.400 billion aggregate principal amount of our 2029 Senior Secured First Lien Notes. We pay interest on the 2029 Senior Secured First Lien Notes semiannually in arrears onJune 1 andDecember 1 of each year, which payments commenced inDecember 2021 . The proceeds from the sale of the 2029 Senior Secured First Lien Notes were used, after payment of fees and expenses, together with cash on hand, to finance the redemption of all$1.410 billion aggregate principal amount then outstanding of our 2025 Senior Secured Second Lien Notes in advance of their maturity date for approximately$1.428 billion . In connection with the redemption, we recorded a loss from early extinguishment of debt of approximately$31 million in the three 71 -------------------------------------------------------------------------------- Table of Contents months endedJune 30, 2021 , primarily related to the difference between the purchase price and the par value of the 2025 Senior Secured Second Lien Notes, as well as the writeoff of associated unamortized issuance costs. •InMarch 2021 , we retired all$478 million aggregate principal amount outstanding of our 2025 Senior Unsecured Notes in advance of their maturity date. We paid approximately$495 million from cash on hand to retire the notes. In connection with the retirement, we recorded a loss from early extinguishment of debt of$23 million in the three months endedMarch 31, 2021 , primarily related to the difference between the purchase price and the par value of the notes, as well as the writeoff of associated unamortized issuance costs. AtDecember 31, 2021 , using the last 12 months of Adjusted EBITDA, our ratio of total longterm debt, net of cash and cash equivalent balances, to Adjusted EBITDA was 3.81x, or 4.07x if adjusted to include outstanding obligations arising from cash advances received from Medicare pursuant to the COVID Acts. We anticipate this ratio will fluctuate from quarter to quarter based on earnings performance and other factors, including the use of our revolving credit facility as a source of liquidity and acquisitions that involve the assumption of longterm debt. We seek to manage this ratio and increase the efficiency of our balance sheet by following our business plan and managing our cost structure, including through possible asset divestitures, and through other changes in our capital structure. As part of our longterm objective to manage our capital structure, we continue to evaluate opportunities to retire, purchase, redeem and refinance outstanding debt subject to prevailing market conditions, our liquidity requirements, operating results, contractual restrictions and other factors. In the year endingDecember 31, 2023 and beyond, we may also consider share repurchases depending on market conditions and other investment opportunities. Our ability to achieve our leverage and capital structure objectives is subject to numerous risks and uncertainties, many of which are described in the ForwardLooking Statements and Risk Factors sections in Part I of this report. Interest payments, net of capitalized interest, were$937 million ,$962 million and$946 million in the years endedDecember 31, 2021 , 2020 and 2019, respectively. For the year endingDecember 31, 2022 , we expect annual interest payments to be approximately$850 million to$860 million . OnFebruary 9, 2022 , we called for the redemption of all$700 million aggregate principal amount outstanding of our 2025 Senior Secured First Lien Notes. We anticipate redeeming the notes using cash on hand. We expect this transaction will lower our annual cash interest payments by approximately$53 million , which savings are reflected in the expected annual interest payments above.
Future maturities of our long-term debt obligations are summarized in the table
above. See Note 8 to the accompanying Consolidated Financial Statements for
additional information about our longterm debt obligations.
Lease Obligations-We have operating lease agreements primarily for real estate, including offcampus outpatient facilities, medical office buildings, and corporate and other administrative offices, as well as for medical office equipment. Our finance leases are primarily for medical equipment and information technology and telecommunications assets. As ofDecember 31, 2021 , we had fixed payment obligations of$1.407 billion under noncancellable lease agreements. Future payments due in connection with our operating and finance leases, including imputed interest, are summarized in the table above. Additional information about our lease commitments is provided in Note 7 to the accompanying Consolidated Financial Statements. Medicare Accelerated Payment Program-As further discussed in Note 1 to the accompanying Consolidated Financial Statements, we received advance payments from the Medicare accelerated payment program following its expansion under the COVID Acts. As ofDecember 31, 2021 , we had a liability of$880 million related to advances received under the Medicare accelerated payment program that will be recouped during the year endingDecember 31, 2022 through reductions of our Medicare claims payments.
Academic Teaching Services-We enter into contracts for academic teaching
services with university and physician groups to support graduate medical
education. These agreements contain various rights and termination provisions.
Defined Benefit Obligations-We maintain three frozen, nonqualified defined benefit plans that provide supplemental retirement benefits to certain of our current and former executives. These plans are unfunded, and plan obligations are paid from our working capital. We also maintain a frozen, qualified defined benefit plan that benefits certain of our employees inDetroit . See Note 10 to the accompanying Consolidated Financial Statements for additional information about our defined benefit plans. 72 -------------------------------------------------------------------------------- Table of Contents Information Technology Contracts-We enter into various noncancellable contracts for information technology services and licenses as a normal part of our business. These contracts generally relate to information technology infrastructure support and services, software licenses for certain operational and administrative systems, and cybersecurityrelated software and services.
Purchase Orders-We had outstanding shortterm purchase commitments of
million
Other Contractual Obligations
Asset Retirement Obligations-Asset retirement obligations represent the estimated costs to perform environmental remediation work, which we are legally obligated to complete, at certain of our facilities upon their retirement. This work could include asbestos abatement, the removal of underground storage tanks and other similar activities. AtDecember 31, 2021 , the undiscounted aggregate future estimated payments related to these obligations was$185 million . We are unable to predict the timing of these payments due to the uncertainty and long timeframes inherent in these obligations. Standby Letters of Credit-Standby letters of credit are required principally by our insurers and various states to collateralize our workers' compensation programs pursuant to statutory requirements and as security to collateralize the deductible and selfinsured retentions under certain of our professional and general liability insurance programs. The amount of collateral required is primarily dependent upon the level of claims activity and our creditworthiness. The insurers require the collateral in case we are unable to meet our obligations to claimants within the deductible or selfinsured retention layers. We have a letter of credit facility (as amended, the "LC Facility") that provides for the issuance of standby and documentary letters of credit. The aggregate principal amount of letters of credit that from time to time may be issued under the LC Facility is$200 million . Drawings under any letter of credit issued under the LC Facility accrue interest if not reimbursed within three business days. AtDecember 31, 2021 , we had$139 million of standby letters of credit outstanding under the LC Facility. The timing of reimbursement payments is uncertain, as we cannot foresee when, or if, a standby letter of credit will be drawn upon. Guarantees-Our guarantees include minimum revenue guarantees, primarily related to physicians under relocation agreements and physician groups that provide services at our hospitals, as well as operating lease guarantees. AtDecember 31, 2021 , the maximum potential amount of future payments under these guarantees was$216 million , of which$116 million were recorded in the accompanying Consolidated Balance Sheet atDecember 31, 2021 . The timing and amount of future payments under these guarantees is uncertain. Professional and General Liability Obligations-AtDecember 31, 2021 , the current and longterm professional and general liability reserves included in our Consolidated Balance Sheet were$254 million and$791 million , respectively, and the current and longterm workers' compensation reserves included in our Consolidated Balance Sheet were$43 million and$107 million , respectively. The timing of professional and general liability payments is uncertain as such payments depend on several factors, including the nature of claims and when they are received.Baylor Put /Call Agreement-As further discussed in Note 18 to the accompanying Consolidated Financial Statements, we have a put/call agreement with Baylor with respect to Baylor's 5% ownership in USPI. Each year starting in 2021, Baylor may put up to onethird of its total shares in USPI held as ofApril 1, 2017 (the "Baylor Shares") by delivering notice by the end of January of such year. In each year that Baylor does not put the full 33.3% of USPI's shares allowable, we may call the difference between the number of shares Baylor put and the maximum number of shares it could have put that year. In addition, the Baylor Put/Call Agreement contains a call option pursuant to which we have the ability to acquire all of Baylor's ownership interest by 2024. We have the ability to choose whether to settle the purchase price for the Baylor put/call, which is mutually agreedupon fair market value, in cash or shares of our common stock. The carrying value of the redeemable noncontrolling interests in USPI that are subject to the Baylor Put/Call Agreement was$258 million atDecember 31, 2021 . Baylor did not deliver a put notice to us inJanuary 2021 orJanuary 2022 . InFebruary 2021 , we notified Baylor of our intention to exercise our call option to purchase 33.3% of the Baylor Shares. We are continuing to negotiate the terms of that purchase. In addition, inFebruary 2022 , we notified Baylor of our intention to again exercise our call option to purchase an additional 33.3% of the Baylor Shares. The amount and timing of the payments related to the exercise of our call options in 2021 and 2022, as well as payments related to future put or call decisions under the Baylor Put/Call Agreement, are currently uncertain. 73 -------------------------------------------------------------------------------- Table of Contents SCD Development Agreement-InNovember 2021 , USPI and SCD's principals entered into a joint venture and development agreement under which USPI will have the exclusive option to partner with affiliates of SCD on the future development of a minimum target of 50 de novo ASCs over a period of five years. The timing and amount of payments related to the development of these facilities is currently unknown. Investment in the SCD Centers-Beginning inDecember 2021 , USPI made offers, and it continues to make offers in an ongoing process, to acquire a portion of the equity interests in certain of the SCD Centers from the physician owners for consideration of up to approximately$250 million . Before the end of 2021, we made aggregate payments of$77 million to acquire majority ownership interests in 10 SCD Centers. We cannot reasonably predict how many additional physician owners will accept our offers to acquire a portion of their equity, nor the timing or amount of any remaining payments. We expect to fund these payments using cash on hand.
Other than the obligations described above, we had no offbalance sheet
arrangements that may have a current or future material effect on our financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources at
Other Cash Requirements
Our capital expenditures primarily relate to the expansion and renovation of existing facilities (including amounts to comply with applicable laws and regulations), equipment and information systems additions and replacements, introduction of new medical technologies, design and construction of new buildings, and various other capital improvements, as well as commitments to make capital expenditures in connection with acquisitions of businesses. Capital expenditures were$658 million ,$540 million and$670 million in the years endedDecember 31, 2021 , 2020 and 2019, respectively. We anticipate that our capital expenditures for continuing operations for the year endingDecember 31, 2022 will total approximately$725 million to$775 million , including$95 million that was accrued as a liability atDecember 31, 2021 . As previously reported, we are building a 100bed acutecare hospital and a medical office building inFort Mill, South Carolina , which we expect to open inAugust 2022 . We expect construction of theFort Mill campus will cost approximately$150 million over the construction period, of which$51 million was expended as ofDecember 31, 2021 . InSan Antonio , we are planning to break ground on a new healthcare campus inWestover Hills in 2022, inclusive of a hospital, ASC and medical office space. We expect construction of theWestover Hills facilities will cost approximately$260 million over the construction period. Income tax payments, net of tax refunds, were$92 million in year endedDecember 31, 2021 and$12 million in both the years endedDecember 31, 2020 and 2019. AtDecember 31, 2021 , our carryforwards available to offset future taxable income consisted of (1) federal NOL carryforwards of approximately$194 million pretax,$13 million of which expires in 2026 to 2036 and$181 million of which has no expiration date, (2) general business credit carryforwards of approximately$9 million expiring in 2034 through 2038, (3) charitable contribution carryforwards of approximately$90 million expiring in 2024 through 2025 and (4) state NOL carryforwards of approximately$3.333 billion expiring in 2022 through 2041 for which the associated deferred tax benefit, net of valuation allowance and federal tax impact, is$49 million . Our ability to utilize NOL carryforwards to reduce future taxable income may be limited under Section 382 of the Internal Revenue Code if certain ownership changes in our company occur during a rolling threeyear period. These ownership changes include purchases of common stock under share repurchase programs, the offering of stock by us, the purchase or sale of our stock by 5% shareholders, as defined in theTreasury regulations, or the issuance or exercise of rights to acquire our stock. If such ownership changes by 5% shareholders result in aggregate increases that exceed 50 percentage points during the threeyear period, then Section 382 imposes an annual limitation on the amount of our taxable income that may be offset by the NOL carryforwards or tax credit carryforwards at the time of ownership change. Periodic examinations of our tax returns by theIRS or other taxing authorities could result in the payment of additional taxes. TheIRS has completed audits of our tax returns for all tax years ended on or beforeDecember 31, 2007 . All disputed issues with respect to these audits have been resolved and all related tax assessments (including interest) have been paid. Our tax returns for years ended afterDecember 31, 2007 and USPI's tax returns for years ended afterDecember 31, 2017 remain subject to audit by theIRS . 74 -------------------------------------------------------------------------------- Table of Contents SOURCES AND USES OF CASH Our liquidity for the year endedDecember 31, 2021 was primarily derived from net cash provided by operating activities and cash on hand. During 2021, we also received$215 million , including$37 million received by our unconsolidated affiliates, of supplemental funds from federal, state and local grants provided under the COVID Acts. We had$2.364 billion of cash and cash equivalents on hand atDecember 31, 2021 to fund our operations and capital expenditures, and our borrowing availability under our Credit Agreement was$1.797 billion based on our borrowing base calculation atDecember 31, 2021 . When operating under normal conditions, our primary source of operating cash is the collection of accounts receivable. As such, our operating cash flow is impacted by levels of cash collections, as well as levels of implicit price concessions, due to shifts in payer mix and other factors. Our revolving credit facility provides additional liquidity to manage fluctuations in operating cash caused by these factors. Net cash provided by operating activities was$1.568 billion in the year endedDecember 31, 2021 compared to$3.407 billion in the year endedDecember 31, 2020 . Key factors contributing to the change between 2021 and 2020 include the following: •An increase in operating income of$1.031 billion before net losses on sales, consolidation and deconsolidation of facilities; litigation and investigation costs; impairment and restructuring charges and acquisition-related costs; depreciation and amortization; loss (income) from divested and closed businesses; and income recognized from government relief packages;
•$512 million of Medicare advances recouped and repaid in the year ended
the year ended
•$178 million of cash received from federal, state and local grants in 2021
compared to
•A
Acts compared to the deferral of
•Lower interest payments of
•Higher income tax payments of
•A decrease of
acquisitionrelated costs, and litigation costs and settlements in 2021; and
•The timing of other working capital items.
Net cash used in investing activities was$714 million for the year endedDecember 31, 2021 compared to$1.608 billion for the year endedDecember 31, 2020 . The 2021 activity included an increase in proceeds from the sale of facilities and other assets of$1.171 billion compared to 2020, primarily related to the sale of the majority of our urgent care centers inApril 2021 and the sale of the Miami Hospitals inAugust 2021 . This increase was partially offset by increased capital expenditures of$118 million and an increase of$64 million in purchases of equity interests in unconsolidated affiliates during the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . We made aggregate payments of$1.220 billion during the year endedDecember 31, 2021 to acquire businesses, primarily for the purchase of ownership interests in the SCD Centers. During the year endedDecember 31, 2020 we paid$1.177 billion to acquire businesses, primarily related to our acquisition of ownership interests in 45 ASCs from affiliates of SCD. Net cash used in financing activities was$936 million for the year endedDecember 31, 2021 compared to net cash provided by financing activities of$385 million for the year endedDecember 31, 2020 . During the year endedDecember 31, 2021 , we issued$2.850 billion aggregate principal amount of senior secured first lien notes and used a portion of the proceeds, together with the proceeds from our sale of the Miami Hospitals and cash on hand, to redeem and retire$2.988 billion aggregate principal amount of our thenoutstanding senior unsecured and senior secured first lien notes. Financing activity in 2021 also included the receipt of$37 million of grant funds by our Ambulatory Care segment's unconsolidated affiliates and their repayment of$104 million of Medicare advances. Additionally, we paid total distributions to noncontrolling interest holders of$423 million during the year endedDecember 31, 2021 . 75 -------------------------------------------------------------------------------- Table of Contents During the year endedDecember 31, 2020 , we issued$3.800 billion aggregate principal amount of senior unsecured and senior secured first lien notes and paid$3.099 billion to redeem and purchase$2.800 billion aggregate principal amount then outstanding of our senior notes. Additionally, our Ambulatory Care segment's non-consolidated affiliates received$74 million of grant funds and$113 million of cash advances from Medicare. We have several structured payables arrangements that are a part of our strategy to make our procurement processes more efficient and cost effective. AtDecember 31, 2021 , we were paying approximately 6,300 vendors under these programs, with an annual charge volume of approximately$1.2 billion . We do not expect these programs to result in any significant changes to our liquidity. We record our equity securities and our debt securities classified as availableforsale at fair market value. The majority of our investments are valued based on quoted market prices or other observable inputs. We have no investments that we expect will be negatively affected by the current economic conditions such that they will materially impact our financial condition, results of operations or cash flows.
DEBT INSTRUMENTS, GUARANTEES AND RELATED COVENANTS
Credit Agreement-AtDecember 31, 2021 , our Credit Agreement provided for revolving loans in an aggregate principal amount of up to$1.900 billion with a$200 million subfacility for standby letters of credit. InApril 2020 , we amended our Credit Agreement to, among other things, (i) increase the aggregate revolving credit commitments from$1.500 billion to$1.900 billion (the "Increased Commitments"), subject to borrowing availability, and (ii) increase the advance rate and raise limits on certain eligible accounts receivable in the calculation of the borrowing base, in each case, for an incremental period of 364 days. InApril 2021 , we further amended the Credit Agreement to, among other things, extend the availability of the Increased Commitments throughApril 22, 2022 and reduce the interest rate margins. Obligations under the Credit Agreement, which has a scheduled maturity date ofSeptember 12, 2024 , are guaranteed by substantially all of our domestic wholly owned hospital subsidiaries and are secured by a firstpriority lien on the eligible inventory and accounts receivable owned by us and the subsidiary guarantors, including receivables for Medicaid supplemental payments. AtDecember 31, 2021 , we had no cash borrowings outstanding under the Credit Agreement, and we had less than$1 million of standby letters of credit outstanding. Based on our eligible receivables,$1.797 billion was available for borrowing atDecember 31, 2021 . AtDecember 31, 2021 , we were in compliance with all covenants and conditions in our Credit Agreement. See Note 8 to the accompanying Consolidated Financial Statements for additional information about our Credit Agreement. Letter of Credit Facility-InMarch 2020 , we amended our LC Facility to extend the scheduled maturity date fromMarch 7, 2021 toSeptember 12, 2024 and to increase the aggregate principal amount of standby and documentary letters of credit that from time to time may be issued thereunder from$180 million to$200 million . InJuly 2020 , we further amended the LC Facility to incrementally increase the maximum secured debt covenant from 4.25 to 1.00 on a quarterly basis up to 6.00 to 1.00 for the quarter endedMarch 31, 2021 , at which point the maximum ratio began to step down incrementally on a quarterly basis through the quarter endedDecember 31, 2021 . AtDecember 31, 2021 , the effective maximum secured debt covenant was 4.25 to 1.00, where it will remain until maturity. Obligations under the LC Facility are guaranteed and secured by a firstpriority pledge of the capital stock and other ownership interests of certain of our wholly owned domestic hospital subsidiaries on an equalranking basis with our senior secured first lien notes. AtDecember 31, 2021 , we were in compliance with all covenants and conditions in the LC Facility. AtDecember 31, 2021 , we had$139 million of standby letters of credit outstanding under the LC Facility. Senior Secured Note Issuances and Debt Refinancing Transactions. In 2021, we sold$2.850 billion aggregate principal amount of senior secured first lien notes - specifically, our 2029 Senior Secured First Lien Notes inJune 2021 and our 2030 Senior Secured First Lien Notes inDecember 2021 . The net proceeds from these note issuances was primarily used to redeem our 2025 Senior Secured Second Lien Notes inJune 2021 and to finance the acquisition of the SCD Centers inDecember 2021 . During the year endedDecember 31, 2021 , we paid$3.036 billion to redeem and/or retire$2.988 billion aggregate principal amount then outstanding of senior unsecured and senior secured notes in advance of their respective maturity dates. We used the net proceeds from theJune 2021 issuance of our 2029 Senior Secured First Lien Notes, after payment of fees and expenses, the proceeds from the sale of the Miami Hospitals and cash on hand to finance these transactions. We recognized an aggregate loss from early extinguishment of debt of$74 million in the year endedDecember 31, 2021 , primarily related to the difference between the purchase prices and the par values of the notes, as well as the writeoff of associated unamortized issuance costs. 76
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Table of Contents
LIQUIDITY
Broad economic factors resulting from the COVID19 pandemic, including higher inflation, increased unemployment rates in certain areas in which we operate and reduced consumer spending, continued to impact our service mix, revenue mix and patient volumes in 2021. Business closings and layoffs in the areas we operate have led to increases in the uninsured and underinsured populations; higher uninsured and underinsured populations adversely affect demand for our services, as well as the ability of patients to pay for services as rendered. Any increase in the amount of or deterioration in the collectability of patient accounts receivable could adversely affect our cash flows and results of operations. If general economic conditions deteriorate or remain uncertain for an extended period of time, our liquidity and ability to repay our outstanding debt may be impacted. Throughout the COVID19 pandemic, we have taken, and we continue to take, various actions to increase our liquidity and mitigate the impact of reductions in our patient volumes and operating revenues. These actions included the sale and redemption of various senior unsecured and senior secured notes, which eliminated any significant debt maturities untilJune 2023 and reduced our required annual cash interest payments. InApril 2021 , we further amended our Credit Agreement to extend the availability of the Increased Commitments throughApril 22, 2022 . In addition, we have continued to focus on costreduction measures and corporate efficiencies to substantially offset incremental costs, including temporary staffing and premium pay, as well as higher supply costs for PPE. We have also sought to compensate for the COVID19 pandemic's disruption of our patient volumes and mix by growing our services for which demand has been more resilient, including our higheracuity service lines, and we expect demand for these higheracuity service lines will continue to grow in the future. We believe all of these actions, together with government relief packages, supported our continued operation during the initial uncertainty caused by the COVID19 pandemic and continue to do so.
From time to time, we expect to engage in additional capital markets, bank
credit and other financing activities depending on our needs and financing
alternatives available at that time. We believe our existing debt agreements
provide flexibility for future secured or unsecured borrowings.
Our cash on hand fluctuates daytoday throughout the year based on the timing and levels of routine cash receipts and disbursements, including our book overdrafts, and required cash disbursements, such as interest payments and income tax payments, as well as cash disbursements required to respond to the COVID19 pandemic. These fluctuations result in material intra-quarter net operating and investing uses of cash that have caused, and in the future may cause, us to use our Credit Agreement as a source of liquidity. We believe that existing cash and cash equivalents on hand, borrowing availability under our Credit Agreement and anticipated future cash provided by our operating activities should be adequate to meet our current cash needs. These sources of liquidity, in combination with any potential future debt incurrence, should also be adequate to finance planned capital expenditures, payments on the current portion of our long-term debt, payments to joint venture partners, including those related to put and call arrangements, and other presently known operating needs. Long-term liquidity for debt service and other purposes will be dependent on the amount of cash provided by operating activities and, subject to favorable market and other conditions, the successful completion of future borrowings and potential refinancings. However, our cash requirements could be materially affected by the use of cash in acquisitions of businesses, repurchases of securities, the exercise of put rights or other exit options by our joint venture partners, and contractual commitments to fund capital expenditures in, or intercompany borrowings to, businesses we own. In addition, liquidity could be adversely affected by a deterioration in our results of operations, including our ability to generate sufficient cash from operations, as well as by the various risks and uncertainties discussed in this section and the Risk Factors section in Part I of this report, including any costs associated with legal proceedings and government investigations. We do not rely on commercial paper or other short-term financing arrangements nor do we enter into repurchase agreements or other short-term financing arrangements not otherwise reported in our balance sheet. In addition, we do not have significant exposure to floating interest rates given that all of our current long-term indebtedness has fixed rates of interest except for borrowings under our Credit Agreement.
RECENTLY ISSUED ACCOUNTING STANDARDS
See Note 24 to the accompanying Consolidated Financial Statements for a
discussion of recently issued accounting standards.
77 -------------------------------------------------------------------------------- Table of Contents CRITICAL ACCOUNTING ESTIMATES In preparing our Consolidated Financial Statements in conformity with GAAP, we must use estimates and assumptions that affect the amounts reported in our Consolidated Financial Statements and accompanying notes. We regularly evaluate the accounting policies and estimates we use. In general, we base the estimates on historical experience and on assumptions that we believe to be reasonable, given the particular circumstances in which we operate. Actual results may vary from those estimates. We consider our critical accounting estimates to be those that (1) involve significant judgments and uncertainties, (2) require estimates that are more difficult for management to determine, and (3) may produce materially different outcomes under different conditions or when using different assumptions.
Our critical accounting estimates cover the following areas:
•Recognition of net operating revenues, including contractual allowances and
implicit price concessions;
•Accruals for general and professional liability risks;
•Impairment of longlived assets;
•Impairment of goodwill; and
•Accounting for income taxes.
REVENUE RECOGNITION
We report net patient service revenues at the amounts that reflect the consideration we expect to be entitled to in exchange for providing patient care. These amounts are due from patients, thirdparty 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 thirdparty payers several days after the services are performed or shortly after discharge. Revenues are recognized as performance obligations are satisfied. We determine performance obligations based on the nature of the services we provide. We recognize revenues for performance obligations satisfied over time based on actual charges incurred in relation to total expected charges. We believe that this method provides a faithful depiction of the transfer of services over the term of performance obligations based on the inputs needed to satisfy the obligations. Generally, performance obligations satisfied over time relate to patients in our hospitals receiving inpatient acute care services. We measure performance obligations from admission to the point when there are no further services required for the patient, which is generally the time of discharge. We recognize revenues for performance obligations satisfied at a point in time, which generally relate to patients receiving outpatient services, when: (1) services are provided and (2) we do not believe the patient requires additional services. We determine the transaction price based on gross charges for services provided, reduced by contractual adjustments provided to thirdparty payers, discounts provided to uninsured patients in accordance with our Compact, and implicit price concessions provided primarily to uninsured patients. We determine our estimates of contractual adjustments and discounts based on contractual agreements, our discount policies and historical experience. We determine our estimate of implicit price concessions based on our historical collection experience with these classes of patients using a portfolio approach as a practical expedient to account for patient contracts as collective groups rather than individually. The financial statement effects of using this practical expedient are not materially different from an individual contract approach. Revenues under the traditional FFS Medicare and Medicaid programs are based primarily on prospective payment systems. Retrospectively determined costbased revenues under these programs, which were more prevalent in earlier periods, and certain other payments, such as IME, DGME, DSH and bad debt expense reimbursement, which are based on our hospitals' cost reports, are estimated using historical trends and current factors. Cost report settlements under these programs are subject to audit by Medicare and Medicaid auditors and administrative and judicial review, and it can take several years before final settlement of such matters is determined and completely resolved. Because the laws, regulations, instructions and rule interpretations governing Medicare and Medicaid reimbursement are complex and change frequently, the estimates we record could change by material amounts.
We have a system and estimation process for recording Medicare net patient
service revenue and estimated cost report settlements. As a result, we record
accruals to reflect the expected final settlements on our cost reports. For
filed cost reports, we record the accrual based on those cost reports and
subsequent activity and record a valuation allowance against those cost
78 -------------------------------------------------------------------------------- Table of Contents reports based on historical settlement trends. The accrual for periods for which a cost report is yet to be filed is recorded based on estimates of what we expect to report on the filed cost reports, and a corresponding valuation allowance is recorded as previously described. Cost reports generally must be filed within five months after the end of the annual cost reporting period. After the cost report is filed, the accrual and corresponding valuation allowance may need to be adjusted. Revenues under managed care plans are based primarily on payment terms involving predetermined rates per diagnosis, perdiem rates, discounted FFS rates and/or other similar contractual arrangements. These revenues are also subject to review and possible audit by the payers, which can take several years before they are completely resolved. The payers are billed for patient services on an individual patient basis. An individual patient's bill is subject to adjustment on a patientbypatient basis in the ordinary course of business by the payers following their review and adjudication of each particular bill. We estimate the discounts for contractual allowances at the individual hospital level utilizing billing data on an individual patient basis. At the end of each month, on an individual hospital basis, we estimate our expected reimbursement for patients of managed care plans based on the applicable contract terms. We believe it is reasonably likely for there to be an approximately 3% increase or decrease in the estimated contractual allowances related to managed care plans. Based on reserves atDecember 31, 2021 , a 3% increase or decrease in the estimated contractual allowance would impact the estimated reserves by approximately$16 million . Some of the factors that can contribute to changes in the contractual allowance estimates include: (1) changes in reimbursement levels for procedures, supplies and drugs when threshold levels are triggered; (2) changes in reimbursement levels when stoploss or outlier limits are reached; (3) changes in the admission status of a patient due to physician orders subsequent to initial diagnosis or testing; (4) final coding of inhouse and dischargednotfinalbilled patients that change reimbursement levels; (5) secondary benefits determined after primary insurance payments; and (6) reclassification of patients among insurance plans with different coverage and payment levels. Contractual allowance estimates are periodically reviewed for accuracy by taking into consideration known contract terms, as well as payment history. We believe our estimation and review process enables us to identify instances on a timely basis where such estimates need to be revised. We do not believe there were any adjustments to estimates of patient bills that were material to our revenues. In addition, on a corporatewide basis, we do not record any general provision for adjustments to estimated contractual allowances for managed care plans. Managed care accounts, net of contractual allowances recorded, are further reduced to their net realizable value through implicit price concessions based on historical collection trends for these payers and other factors that affect the estimation process. Generally, patients who are covered by thirdparty payers are responsible for related copays, coinsurance and deductibles, which vary in amount. We also provide services to uninsured patients and offer uninsured patients a discount from standard charges. We estimate the transaction price for patients with copays, coinsurance and deductibles and for those who are uninsured based on historical collection experience and current market conditions. Under our Compact and other uninsured discount programs, the discount offered to certain uninsured patients is recognized as a contractual allowance, which reduces net operating revenues at the time the selfpay accounts are recorded. The uninsured patient accounts, net of contractual allowances recorded, are further reduced to their net realizable value at the time they are recorded through implicit price concessions based on historical collection trends for selfpay accounts and other factors that affect the estimation process. There are various factors that can impact collection trends, such as: changes in the economy, which in turn have an impact on unemployment rates and the number of uninsured and underinsured patients; the volume of patients through our emergency departments; the increased burden of copays, coinsurance amounts and deductibles to be made by patients with insurance; and business practices related to collection efforts. These factors continuously change and can have an impact on collection trends and our estimation process. Subsequent changes to the estimate of the transaction price are generally recorded as adjustments to net patient service revenues in the period of the change. We have provided implicit price concessions, primarily to uninsured patients and patients with copays, coinsurance and deductibles. The implicit price concessions included in estimating the transaction price represent the difference between amounts billed to patients and the amounts we expect to collect based on our collection history with similar patients. Although outcomes vary, our policy is to attempt to collect amounts due from patients, including copays, coinsurance and deductibles due from patients with insurance, at the time of service while complying with all federal and state statutes and regulations, including, but not limited to, the Emergency Medical Treatment and Active Labor Act ("EMTALA"). Generally, as required by EMTALA, patients may not be denied emergency treatment due to inability to pay. Therefore, services, including the legally required medical screening examination and stabilization of the patient, are performed without delaying to obtain insurance information. In nonemergency circumstances or for elective procedures and services, it is our policy to verify insurance prior to a patient being treated; however, there are various exceptions that can occur. Such exceptions can include, for example, instances where (1) we are unable to obtain verification because the patient's insurance company was unable to be reached or contacted, (2) a determination is made that a patient may be eligible for benefits under various government programs, such as Medicaid or Victims of Crime, and it takes several days or weeks before qualification for such benefits is confirmed or denied, and (3) under physician orders we provide services to patients that require immediate treatment. 79 -------------------------------------------------------------------------------- Table of Contents Based on our accounts receivable from uninsured patients and copays, coinsurance amounts and deductibles owed to us by patients with insurance atDecember 31, 2021 , a 10% increase or decrease in our selfpay collection rate, or approximately 3%, which we believe could be a reasonably likely change, would result in a favorable or unfavorable adjustment to patient accounts receivable of approximately$9 million .
ACCRUALS FOR GENERAL AND PROFESSIONAL LIABILITY RISKS
We accrue for estimated professional and general liability claims, to the extent not covered by insurance, when they are probable and can be reasonably estimated. We maintain reserves, which are based on modeled estimates for the portion of our professional liability risks, including incurred but not reported claims, to the extent we do not have insurance coverage. Our liability consists of estimates established based upon calculations using several factors, including the number of expected claims, estimates of losses for these claims based on recent and historical settlement amounts, estimates of incurred but not reported claims based on historical experience and the timing of historical payments. We consider the number of expected claims and average cost per claim to be the most significant assumptions in estimating accruals for general and professional liabilities. Our liabilities are adjusted for new claims information in the period such information becomes known. Malpractice expense is recorded within other operating expenses in the accompanying Consolidated Statements of Operations. Our estimated reserves for professional and general liability claims will change significantly if future trends differ from projected trends. We believe it is reasonably likely for there to be a 500 basis point increase or decrease in our frequency or severity trend. Based on our reserves and other information atDecember 31, 2021 , a 500 basis point increase in our frequency trend would increase the estimated reserves by$47 million , and a 500 basis point decrease in our frequency trend would decrease the estimated reserves by$37 million . A 500 basis point increase in our severity trend would increase the estimated reserves by$190 million , and a 500 basis point decrease in our severity trend would decrease the estimated reserves by$131 million . In addition, because of the complexity of the claims, the extended period of time to settle the claims and the wide range of potential outcomes, our ultimate liability for professional and general liability claims could change materially from our current estimates.
The table below shows the case reserves and incurred but not reported and loss
development reserves as of
December 31,
2021 2020
Case reserves $ 387 $ 273
Incurred but not reported and loss development reserves 658 705
Total reserves
$ 1,045 $ 978 Several actuarial methods, including the incurred, paid loss development and BornhuetterFerguson methods, are applied to our historical loss data to produce estimates of ultimate expected losses and the resulting incurred but not reported and loss development reserves. These methods use our specific historical claims data related to paid losses and loss adjustment expenses, historical and current case reserves, reported and closed claim counts, and a variety of hospital census information. These analyses are considered in our determination of our estimate of the professional liability claims, including the incurred but not reported and loss development reserve estimates. The determination of our estimates involves subjective judgment and could result in material changes to our estimates in future periods if our actual experience is materially different than our assumptions. Malpractice claims generally take up to five years to settle from the time of the initial reporting of the occurrence to the settlement payment. Accordingly, the percentage of reserves atDecember 31, 2021 and 2020 representing unsettled claims was approximately 98% and 99%, respectively. 80 -------------------------------------------------------------------------------- Table of Contents The following table, which includes both our continuing and discontinued operations, presents the amount of our accruals for professional and general liability claims and the corresponding activity therein:
Years Ended
2021 2020
Accrual for professional and general liability claims, beginning of
the year
$ 978$ 965 Less losses recoverable from re-insurance and excess insurance carriers (50) (86) Expense related to:(1) Current year 200 195 Prior years 131 120 Total incurred loss and loss expense 331 315 Paid claims and expenses related to: Current year (13) (3) Prior years (239) (263) Total paid claims and expenses (252) (266)
Plus losses recoverable from re-insurance and excess insurance
carriers
38 50
Accrual for professional and general liability claims, end of year $
1,045$ 978
(1)Total malpractice expense for continuing operations, including premiums for
insured coverage and recoveries from third parties, was
IMPAIRMENT OF LONG-LIVED ASSETS
We evaluate our longlived assets for possible impairment annually or whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable from estimated future undiscounted cash flows. If the estimated future undiscounted cash flows are less than the carrying value of the asset group, we calculate the amount of an impairment charge only if the carrying value of the asset group exceeds the fair value. For purposes of impairment testing, all asset groups are evaluated at a level below that of the reporting unit, and their carrying values do not include any allocations of goodwill. The fair values of assets are estimated based on appraisals, established market values of comparable assets or internal estimates of future net cash flows expected to result from the use and ultimate disposition of those assets. The estimates of these future net cash flows are based on assumptions and projections we believe to be reasonable and supportable. Estimates require our subjective judgments and take into account assumptions about revenue and expense growth rates, operating margins and recoverable disposition values, based on industry and operating factors. These assumptions may vary by type of asset group and presume stable, improving or, in some cases, declining results, depending on their circumstances. If the presumed level of performance does not occur as expected, impairment may result. We report longlived assets to be disposed of at the lower of their carrying amounts or fair values less costs to sell. In such circumstances, our estimates of fair value are based on appraisals, established market prices for comparable assets or internal estimates of future net cash flows.
Fair value estimates can change by material amounts in subsequent periods. Many
factors and assumptions can impact the estimates, including the following risks:
•future financial results, which can be impacted by volumes of insured patients and declines in commercial managed care patients, terms of managed care payer arrangements, our ability to collect amounts due from uninsured and managed care payers, loss of volumes as a result of competition, physician recruitment and retention, and our ability to manage costs such as labor costs, which can be adversely impacted by union activity and the shortage of experienced nurses; •changes in payments from governmental healthcare programs and in government regulations such as reductions to Medicare and Medicaid payment rates resulting from government legislation or rulemaking or from budgetary challenges of states in which we operate;
•how the hospitals are operated in the future;
•the nature of the ultimate disposition of the assets; and
•macro-economic conditions such as inflation, GDP growth and unforeseen
technological advancements.
81 -------------------------------------------------------------------------------- Table of Contents During the year endedDecember 31, 2021 , we recorded$8 million of impairment charges, primarily related to the writedown of certain indefinite-lived management contracts within our Ambulatory Care segment to their estimated fair values. Of the total impairment charges recognized for the year endedDecember 31, 2021 ,$5 million related to our Ambulatory Care segment and$3 million related to our Conifer segment. During the year endedDecember 31, 2020 , we recorded$92 million of impairment charges, consisting of$76 million to writedown hospital buildings located in one of our Hospital Operations segment's markets to their estimated fair values and$16 million of other impairment charges. Of the total impairment charges recognized for the year endedDecember 31, 2020 ,$79 million related to our Hospital Operations segment,$12 million related to our Ambulatory Care segment and$1 million related to our Conifer segment. In our most recent impairment analysis as ofDecember 31, 2021 , we had one asset group, including two hospitals and related operations, with an aggregate carrying value of$224 million whose estimated undiscounted future cash flows exceeded the carrying value by approximately 188%. The estimated undiscounted future cash flows of these longlived asset groups may not be considered to be substantially in excess of cash flows necessary to recover the carrying values of their long-lived assets. Future adverse trends that necessitate changes in the estimates of undiscounted future cash flows could result in the estimated undiscounted future cash flows being less than the carrying values of the longlived assets, which would require a fair value assessment, and if the fair value amount is less than the carrying value of the longlived assets, material impairment charges could result.
IMPAIRMENT OF GOODWILL
Goodwill represents the excess of purchase price over the net estimated fair value of identifiable assets acquired and liabilities assumed in a business combination.Goodwill is determined to have an indefinite useful life and is not amortized, but is instead subject to impairment tests performed at least annually, or when events occur that would more likely than not reduce the fair value of the reporting unit below its carrying amount. For goodwill, we assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Further testing is required only if we determine, based on the qualitative assessment, that it is more likely than not that a reporting unit's fair value is less than its carrying value. Otherwise no further impairment testing is required. If we determine the carrying value of goodwill is impaired, or if the carrying value of a business that is to be sold or otherwise disposed of exceeds its fair value, we reduce the carrying value, including any allocated goodwill, to fair value, with any impairment not to exceed the carrying amount of goodwill. Any impairment would be recognized as a charge to income from operations and a reduction in the carrying value of goodwill. AtDecember 31, 2021 , our business included three reportable segments - Hospital Operations, Ambulatory Care and Conifer. Our reportable segments are reporting units used to perform our goodwill impairment analysis, and goodwill is accordingly assigned to these reporting segments. We completed our annual impairment tests for goodwill as ofOctober 1, 2021 . The allocated goodwill balance related to our Hospital Operations segment totals$2.808 billion . For the Hospital Operations segment, we performed a qualitative analysis and concluded that it was more likely than not that the fair value of the reporting unit exceeded its carrying value. The allocated goodwill balance related to our Ambulatory Care segment totals$5.848 billion . For the Ambulatory Care segment, we performed a qualitative analysis and concluded that it was more likely than not that the fair value of the reporting unit exceeded its carrying value. The allocated goodwill balance related to our Conifer segment totals$605 million . For the Conifer segment, we performed a qualitative analysis and concluded that it was more likely than not that the fair value of the reporting unit exceeded its carrying value. Factors considered in the above analyses included recent and estimated future operating trends derived from macro-economic conditions, industry conditions and other factors specific to each reporting segment.
ACCOUNTING FOR INCOME TAXES
We account for income taxes using the asset and liability method. This approach
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of temporary differences between the carrying amounts
and the tax bases of assets and liabilities. Income tax receivables and
liabilities and deferred tax assets and liabilities are recognized based on the
amounts that more likely than not will be sustained upon ultimate settlement
with taxing authorities.
82
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Table of Contents
Developing our provision for income taxes and analysis of uncertain tax
positions requires significant judgment and knowledge of federal and state
income tax laws, regulations and strategies, including the determination of
deferred tax assets and liabilities and, if necessary, any valuation allowances
that may be required for deferred tax assets.
We assess the realization of our deferred tax assets to determine whether an
income tax valuation allowance is required. Based on all available evidence,
both positive and negative, and the weight of that evidence to the extent such
evidence can be objectively verified, we determine whether it is more likely
than not that all or a portion of the deferred tax assets will be realized. The
main factors that we consider include:
•Cumulative profits/losses in recent years, adjusted for certain nonrecurring
items;
•Income/losses expected in future years;
•Unsettled circumstances that, if unfavorably resolved, would adversely affect
future operations and profit levels;
•The availability, or lack thereof, of taxable income in prior carryback periods
that would limit realization of tax benefits; and
•The carryforward period associated with the deferred tax assets and
liabilities.
During the year endedDecember 31, 2021 , the valuation allowance increased by$2 million , including an increase of$2 million due to limitations on the tax deductibility of interest expense, a decrease of$2 million due to the expiration or worthlessness of unutilized state net operating loss carryovers, and an increase of$2 million due to changes in expected realizability of deferred tax assets. The balance in the valuation allowance as ofDecember 31, 2021 was$57 million . During the year endedDecember 31, 2020 , the valuation allowance decreased by$226 million , including a decrease of$211 million due to limitations on the tax deductibility of interest expense, a decrease of$1 million due to the expiration or worthlessness of unutilized state net operating loss carryovers, and a decrease of$14 million due to changes in expected realizability of deferred tax assets. The remaining balance in the valuation allowance atDecember 31, 2020 was$55 million . Deferred tax assets relating to interest expense limitations under Internal Revenue Code Section 163(j) have a full valuation allowance because the interest expense carryovers are not expected to be utilized in the foreseeable future. We consider many factors when evaluating our uncertain tax positions, and such judgments are subject to periodic review. Tax benefits associated with uncertain tax positions are recognized in the period in which one of the following conditions is satisfied: (1) the more likely than not recognition threshold is satisfied; (2) the position is ultimately settled through negotiation or litigation; or (3) the statute of limitations for the taxing authority to examine and challenge the position has expired. Tax benefits associated with an uncertain tax position are derecognized in the period in which the more likely than not recognition threshold is no longer satisfied. While we believe we have adequately provided for our income tax receivables or liabilities and our deferred tax assets or liabilities, adverse determinations by taxing authorities or changes in tax laws and regulations could have a material adverse effect on our consolidated financial position, results of operations or cash flows.
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AON PLC – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations
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