NOTE 1 — BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Reporting Entity

HCA Holdings, Inc. is a holding company whose affiliates own and operate hospitals and related health care entities. The term “affiliates” includes direct and indirect subsidiaries of HCA Holdings, Inc. and partnerships and joint ventures in which such subsidiaries are partners. At September 30, 2014, these affiliates owned and operated 165 hospitals, 113 freestanding surgery centers and provided extensive outpatient and ancillary services. HCA Holdings, Inc.’s facilities are located in 20 states and England. The terms “Company,” “HCA,” “we,” “our” or “us,” as used herein and unless otherwise stated or indicated by context, refer to HCA Holdings, Inc. and its affiliates. The terms “facilities” or “hospitals” refer to entities owned and operated by affiliates of HCA and the term “employees” refers to employees of affiliates of HCA.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal and recurring nature.

The majority of our expenses are “costs of revenues” items. Costs that could be classified as general and administrative would include our corporate office costs, which were $71 million and $76 million for the quarters ended September 30, 2014 and 2013, respectively, and $206 million and $207 million for the nine months ended September 30, 2014 and 2013, respectively. Operating results for the quarter and the nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. For further information, refer to the consolidated financial statements and footnotes thereto included in our annual report on Form 10-K for the year ended December 31, 2013.

Revenues are recorded during the period the health care services are provided, based upon the estimated amounts due from the patients and third-party payers. Third-party payers include federal and state agencies (under Medicare, Medicaid and other programs), managed care health plans (includes the health insurance exchanges, beginning with the first quarter of 2014), commercial insurance companies and employers. Estimates of contractual allowances under managed care health plans are based upon the payment terms specified in the related contractual agreements. Revenues related to uninsured patients and copayment and deductible amounts for patients who have health care coverage may have discounts applied (uninsured discounts and contractual discounts). We also record a provision for doubtful accounts related to uninsured accounts to record the net self pay revenues at the estimated amounts we expect to collect. Our revenues from third-party payers and the uninsured for the quarters and nine months ended September 30, 2014 and 2013 are summarized in the following table (dollars in millions):


	Quarter
	2014			Ratio			2013			Ratio
Medicare	$	2,120			23.0	%	$	1,847			21.8	%
Managed Medicare		901			9.8			794			9.4
Medicaid		372			4.0			401			4.7
Managed Medicaid		510			5.5			386			4.6
Managed care and other insurers		5,073			55.0			4,636			54.8
International (managed care and other insurers)		323			3.5			287			3.4

		9,299			100.8			8,351			98.7
Uninsured		313			3.4			717			8.5
Other		366			4.0			343			4.1

Revenues before provision for doubtful accounts		9,978			108.2			9,411			111.3
Provision for doubtful accounts		(758	)		(8.2	)		(955	)		(11.3	)

Revenues	$	9,220			100.0	%	$	8,456			100.0	%


	Nine Months
	2014			Ratio			2013			Ratio
Medicare	$	6,285			23.0	%	$	5,961			23.5	%
Managed Medicare		2,706			9.9			2,441			9.6
Medicaid		1,404			5.1			1,098			4.3
Managed Medicaid		1,383			5.1			1,165			4.6
Managed care and other insurers		14,742			54.0			13,777			54.4
International (managed care and other insurers)		983			3.6			868			3.4

		27,503			100.7			25,310			99.8
Uninsured		1,019			3.7			1,809			7.1
Other		1,097			4.0			959			3.8

Revenues before provision for doubtful accounts		29,619			108.4			28,078			110.7
Provision for doubtful accounts		(2,337	)		(8.4	)		(2,732	)		(10.7	)

Revenues	$	27,282			100.0	%	$	25,346			100.0	%

During the quarter ended September 30, 2014, we recorded two changes in estimates which had the net effect of increasing revenues $26 million. We recorded $94 million, or $0.13 per diluted share, of Medicare revenues as the estimated settlement amount for certain claims denied by Recovery Audit Contractors (“RAC”) entities conducting reviews on behalf of the Centers for Medicare and Medicaid Services (“CMS”) and currently in the pending appeals process. CMS is offering an administrative agreement to providers willing to withdraw their pending appeals in exchange for a timely partial payment (generally, 68% of the claim amount, subject to certain adjustments). We also recorded a reduction of $68 million, or $0.09 per diluted share, to Medicaid revenues related to the Texas Medicaid Waiver Program. On October 1, 2014, the Texas Health and Human Services Commission (“THHSC”) issued a notice to hospitals participating in the Texas Medicaid Waiver Program. According to the notice, a review conducted by CMS identified certain local government/hospital affiliations it believes may be inconsistent with the waiver. As a result of these findings, CMS notified THHSC that it is deferring the federal portion of the Medicaid payments associated with these affiliations while it completes its review.

Recent Pronouncements

In May 2014, the Financial Accounting Standards Board and the International Accounting Standards Board issued a final, converged, principles-based standard on revenue recognition. Companies across all industries will use a five-step model to recognize revenue from customer contracts. The new standard, which replaces nearly all existing United States Generally Accepted Accounting Principles (“US GAAP”) and International Financial Reporting Standards revenue recognition guidance, will require significant management judgment in addition to changing the way many companies recognize revenue in their financial statements. The standard is effective for public entities for annual and interim periods beginning after December 15, 2016. Early adoption is not permitted under US GAAP. We are evaluating the effects the adoption of this standard will have on our financial statements and financial disclosures.