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Goodwill and Other Intangible Assets
12 Months Ended
Dec. 31, 2015
Goodwill and Other Intangible Assets [Abstract]  
Goodwill and Other Intangible Assets Disclosure

 

 

5.  GOODWILL AND OTHER INTANGIBLE ASSETS    

 

Goodwill

 

The changes in the carrying amount of goodwill for the year ended December 31, 2015 are as follows (in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

 

2015

 

2014

 

Balance, beginning of year

$

8,951 

 

$

4,424 

 

Goodwill acquired as part of acquisitions during current year

 

39 

 

 

4,527 

 

Consideration and purchase price allocation adjustments

 

 

 

 

 

 

for prior year’s acquisitions and other adjustments

 

11 

 

 

 -

 

Impairment or allocation of goodwill to hospitals held for sale

 

(36)

 

 

 -

 

Balance, end of year

$

8,965 

 

$

8,951 

 

 

 

 

 

 

 

 

Goodwill is allocated to each identified reporting unit, which is defined as an operating segment or one level below the operating segment (referred to as a component of the entity). Management has determined that the Company’s operating segments and hospital management services operations meet the criteria to be classified as reporting units. At December 31, 2015, the hospital operations reporting unit, the home care agency operations reporting unit and the hospital management services reporting unit had approximately $8.9 billion, $47 million and $33 million, respectively, of goodwill. 

 

Goodwill is evaluated for impairment at the same time every year and when an event occurs or circumstances change that, more likely than not, reduce the fair value of the reporting unit below its carrying value. There is a two-step method for determining goodwill impairment. Step one is to compare the fair value of the reporting unit with the unit’s carrying amount, including goodwill. If this test indicates the fair value is less than the carrying value, then step two is required to compare the implied fair value of the reporting unit’s goodwill with the carrying value of the reporting unit’s goodwill. The Company performed its last annual goodwill evaluation during the fourth quarter of 2015. No impairment was indicated by this evaluation.  The next annual goodwill evaluation will be performed during the fourth quarter of 2016. 

 

The Company estimates the fair value of the related reporting units using both a discounted cash flow model as well as an EBITDA multiple model. The cash flow forecasts are adjusted by an appropriate discount rate based on the Company’s estimate of a market participant’s weighted-average cost of capital. These models are both based on the Company’s best estimate of future revenues and operating costs and are reconciled to the Company’s consolidated market capitalization, with consideration of the amount a potential acquirer would be required to pay, in the form of a control premium, in order to gain sufficient ownership to set policies, direct operations and control management decisions.  

 

Intangible Assets

 

Approximately $1 million of intangible assets other than goodwill were acquired during the year ended December 31, 2015.  The gross carrying amount of the Company’s other intangible assets subject to amortization was $82 million and $76 million at December 31, 2015 and 2014, respectively, and the net carrying amount was $31 million and $39 million at December 31, 2015 and 2014. The carrying amount of the Company’s other intangible assets not subject to amortization was $121 million and $131 million at December 31, 2015 and 2014, respectively. Other intangible assets are included in other assets, net on the Company’s consolidated balance sheets. Substantially all of the Company’s intangible assets are contract-based intangible assets related to operating licenses, management contracts, or non-compete agreements entered into in connection with prior acquisitions. 

 

The weighted-average remaining amortization period for the intangible assets subject to amortization is approximately four years. There are no expected residual values related to these intangible assets. Amortization expense on these intangible assets was $15 million, $13 million and $6 million during the years ended December 31, 2015, 2014 and 2013, respectively.  Amortization expense on intangible assets is estimated to be $15 million in 2016, $5 million in 2017, $4 million in 2018, $2 million in 2019, $2 million in 2020 and $3 million thereafter.   

 

The gross carrying amount of capitalized software for internal use was approximately  $1.5 billion at each of December 31, 2015 and 2014, and the net carrying amount considering accumulated amortization was approximately $771 million and $790 million at December 31, 2015 and 2014, respectively. The estimated amortization period for capitalized internal-use software is generally three years, except for capitalized costs related to significant system conversions, which is generally eight to ten years.  There is no expected residual value for capitalized internal-use software. At December 31, 2015, there was approximately $39 million of capitalized costs for internal-use software that is currently in the development stage and will begin amortization once the software project is complete and ready for its intended use. Amortization expense on capitalized internal-use software was $212 million, $260 million and $139 million during the years ended December 31, 2015, 2014 and 2013, respectively. Amortization expense on capitalized internal-use software is estimated to be $219 million in 2016, $179 million in 2017, $111 million in 2018, $65 million in 2019, $62 million in 2020 and $135 million thereafter.

 

In connection with the HMA merger, the Company further analyzed its intangible assets related to internal-use software used in certain of its hospitals for patient and clinical systems, including software required to meet criteria for meaningful use attestation and ICD-10 compliance. This analysis resulted in management reassessing its usage of certain software products and rationalizing that, with the addition of the HMA hospitals in the first quarter of 2014, those software applications were going to be discontinued and replaced with new applications that better integrate meaningful use and ICD-10 compliance, are more cost effective and can be implemented at a greater efficiency of scale over future implementations. During the year ended December 31, 2014, the Company recorded an impairment charge of approximately $24 million related to software in-process that was abandoned and the acceleration of amortization of approximately $75 million related to shortening the remaining useful life of software abandoned.