5. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

The changes in the carrying amount of goodwill for the years ended December 31, 2018 and 2017 are as follows (in millions):


Balance, beginning of year	2018		2017
Goodwill	$	7,537	$	7,916
Accumulated impairment losses		(2,814)		(1,395)
		4,723		6,521

Goodwill acquired as part of acquisitions during current year		22		5
Consideration and purchase price allocation adjustments for prior year’s
acquisitions and other adjustments		-		(27)
Goodwill allocated to hospitals held for sale		(186)		(357)
Impairment of goodwill		-		(1,419)

Balance, end of year
Goodwill		7,373		7,537
Accumulated impairment losses		(2,814)		(2,814)
	$	4,559	$	4,723

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 meet the criteria to be classified as reporting units. At December 31, 2018, after giving effect to 2018 divestiture activity, the Company had approximately $4.6 billion of goodwill recorded.

Goodwill is evaluated for impairment annually 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. During 2017, the Company adopted ASU 2017-04, which allows a company to record a goodwill impairment when the reporting unit’s carrying value exceeds the fair value determined in step one. In 2017, consistent with prior years, the Company performed its annual goodwill evaluation during the fourth quarter as of September 30, 2017, and then an updated evaluation as of November 30, 2017 due to the identification of certain impairment indicators. With the elimination of the time-intensive step two calculation to determine the implied value of goodwill, the Company has considered the additional benefits of performing the annual goodwill evaluation later in the fourth quarter to coincide with the timing of the next fiscal year’s budgeting and financial projection process. Based on these considerations, the Company elected to change the annual goodwill impairment measurement date to October 31 beginning in 2018. The Company performed its annual goodwill impairment evaluation during the fourth quarter of 2018 using the October 31, 2018 measurement date, which evaluation indicated no impairment. The next annual goodwill evaluation will be performed during the fourth quarter of 2019 with an October 31, 2019 measurement date, or sooner if the Company identifies certain indicators of impairment.

The Company estimates the fair value of the related reporting units using both a discounted cash flow model as well as a market 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.

As noted above, during the three months ended December 31, 2017, the Company identified certain indicators of impairment occurring following its annual goodwill evaluation that required an interim goodwill impairment evaluation, which was performed as of November 30, 2017. Those indicators were primarily a further decline in the Company’s market capitalization and fair value of the Company’s long-term debt during November 2017. The Company performed an estimated calculation of fair value in step one of the impairment test at November 30, 2017, which indicated that the carrying value of the hospital operations reporting unit exceeded its fair value. As a result of this evaluation and the early adoption of ASU 2017-04, the Company recorded a non-cash impairment charge of $1.419 billion to goodwill during the three months ended December 31, 2017.

The reduction in the Company’s fair value and the resulting goodwill impairment charges recorded during 2016 and 2017 reduced the carrying value of the Company’s hospital operations reporting unit to an amount equal to the Company’s estimated fair value. This increases the risk that future declines in fair value could result in goodwill impairment. The determination of fair value in step one of the Company’s goodwill impairment analysis is based on an estimate of fair value for the hospital operations reporting unit utilizing known and estimated inputs at the evaluation date. Some of those inputs include, but are not limited to, the most recent price of the Company’s common stock or fair value of the Company’s long-term debt, estimates of future revenue and expense growth, estimated market multiples, expected capital expenditures, income tax rates, and costs of invested capital. Future estimates of fair value could be adversely affected if the actual outcome of one or more of these assumptions changes materially in the future, including further decline in the Company’s stock price or fair value of long-term debt, lower than expected hospital volumes, higher market interest rates or increased operating costs. Such changes impacting the calculation of fair value could result in a material impairment charge in the future.

The determination of fair value of the Company’s hospital operations reporting unit as part of its goodwill impairment measurement represents a Level 3 fair value measurement in the fair value hierarchy due to its use of internal projections and unobservable measurement inputs.

These impairment charges do not have an impact on the calculation of the Company’s financial covenants under the Company’s Credit Facility.

Intangible Assets

No intangible assets other than goodwill were acquired during the years ended December 31, 2018 and 2017. The gross carrying amount of the Company’s other intangible assets subject to amortization was $1 million and $18 million at December 31, 2018 and 2017, respectively, and the net carrying amount was less than $1 million and $10 million at December 31, 2018 and 2017, respectively. The carrying amount of the Company’s other intangible assets not subject to amortization was $67 million and $79 million at December 31, 2018 and 2017, 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 two years. There are no expected residual values related to these intangible assets. Amortization expense on these intangible assets was $3 million, $4 million and $14 million during the years ended December 31, 2018, 2017 and 2016, respectively. Amortization expense on intangible assets is estimated to be less than $1 million in 2019, 2020 and 2021.

The gross carrying amount of capitalized software for internal use was approximately $1.2 billion for both of the years ended December 31, 2018 and 2017, and the net carrying amount was approximately $355 million and $416 million at December 31, 2018 and 2017, respectively. The estimated amortization period for capitalized internal-use software is generally three years, except for capitalized costs related to significant system conversions, for which the estimated amortization period is generally eight to ten years. There is no expected residual value for capitalized internal-use software. At December 31, 2018, there were approximately $40 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 $140 million, $178 million and $201 million during the years ended December 31, 2018, 2017 and 2016, respectively. Amortization expense on capitalized internal-use software is estimated to be $138 million in 2019, $84 million in 2020, $57 million in 2021, $34 million in 2022, $26 million in 2023 and $16 million thereafter.