Basis of Presentation and Significant Accounting Policies (Policies)

3 Months Ended

Mar. 31, 2020

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 $96 million and $86 million for the quarters ended March 31, 2020 and 2019, respectively. Operating results for the quarter ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. 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, 2019.

COVID-19 Pandemic

On March 11, 2020, the World Health Organization designated

COVID-19

as a global pandemic. Patient volumes and the related revenues for most of our services were significantly impacted in the last two weeks of the first quarter of 2020 as various policies were implemented by federal, state and local governments in response to the

COVID-19

pandemic that have caused many people to remain at home and forced the closure of certain businesses, as well as suspended elective surgical procedures by health care facilities. We expect consolidated patient volumes and revenues to be negatively impacted until the effects of the pandemic begin to subside and the economy begins to stabilize.

Our response plan has multiple facets and continues to evolve as the pandemic unfolds. As a precautionary measure, we have taken steps to enhance our operational and financial flexibility, and react to the risks the

COVID-19

pandemic presents to our business, including the following:

•

Implemented certain cost reduction initiatives;

•

Suspended our authorized share repurchase program;

•

Suspended our quarterly dividend program;

•

Reduced certain planned projects and capital expenditures;

•

Executed a new $2 billion 364-day term loan facility (which was undrawn at March 31, 2020) to supplement our existing credit facilities;

and

•

Subsequent to March 31, 2020, requested accelerated Medicare payments as provided for in the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act

We believe the extent of the

COVID-19

pandemic’s adverse impact on our operating results and financial condition will be driven by many factors, most of which are beyond our control and ability to forecast. Such factors include, but are not limited to, the scope and duration of

stay-at-home

policies and business closures, continued decreases in patient volumes for an indeterminable length of time, increases in the number of uninsured and underinsured patients as a result of accelerated rates of unemployment, incremental expenses required for supplies and personal protective equipment, and changes in professional and general liability exposure. Because of these and other uncertainties, we cannot estimate the length or severity of the impact of the pandemic on our business. Decreases in cash flows and results of operations may have an impact on the inputs and assumptions used in significant accounting estimates, including estimated implicit price concessions related to uninsured patient accounts, professional and general liability reserves, and potential impairments of goodwill and long-lived assets.

Revenues

Our revenues generally relate to contracts with patients in which our performance obligations are to provide health care services to the patients. Revenues are recorded during the period our obligations to provide health care services are satisfied. Our performance obligations for inpatient services are generally satisfied over periods that average approximately five days, and revenues are recognized based on charges incurred in relation to total expected charges. Our performance obligations for outpatient services are generally satisfied over a period of less than one day. The contractual relationships with patients, in most cases, also involve a third-party payer (Medicare, Medicaid, managed care health plans and commercial insurance companies, including plans offered through the health insurance exchanges) and the transaction prices for the services provided are dependent upon the terms provided by (Medicare and Medicaid) or negotiated with (managed care health plans and commercial insurance companies) the third-party payers. The payment arrangements with third-party payers for the services we provide to the related patients typically specify payments at amounts less than our standard charges. Medicare generally pays for inpatient and outpatient services at prospectively determined rates based on clinical, diagnostic and other factors. Services provided to patients having Medicaid coverage are generally paid at prospectively determined rates per discharge, per identified service or per covered member. Agreements with commercial insurance carriers, managed care and preferred provider organizations generally provide for payments based upon predetermined rates per diagnosis, per diem rates or discounted

fee-for-service

rates. Our revenues for the quarters ended March 31, 2020 and 2019, respectively, include $55 million related to the settlement of Medicare outlier calculations for prior periods and $86 million related to the resolution of transaction price differences regarding certain

out-of-network

services performed in prior periods. Management continually reviews the contractual estimation process to consider and incorporate updates to laws and regulations and the frequent changes in managed care contractual terms resulting from contract renegotiations and renewals.

Our revenues are based upon the estimated amounts we expect to be entitled to receive from patients and third-party payers. Estimates of contractual adjustments under managed care and commercial insurance plans are based upon the payment terms specified in the related contractual agreements. Revenues related to uninsured patients and uninsured copayment and deductible amounts for patients who have health care coverage may have discounts applied (uninsured discounts and contractual discounts). We also record estimated implicit price concessions (based primarily on historical collection experience) related to uninsured accounts to record these revenues at the estimated amounts we expect to collect. Patients treated at our hospitals for non-elective care, who have income at or below 400% of the federal poverty level, are eligible for charity care. Because we do not pursue collection of amounts determined to qualify as charity care, they are not reported in revenues. Our revenues by primary third-party payer classification and

other (including uninsured patients) for the quarters ended March 31, 2020 and 2019 are summarized in the following table (dollars in millions):


	2020		Ratio			2019		Ratio
Medicare	$	2,743		21.3	%	$	2,770		22.1	%
Managed Medicare		1,826		14.2			1,589		12.7
Medicaid		414		3.2			347		2.8
Managed Medicaid		666		5.2			613		4.9
Managed care and insurers		6,645		51.6			6,426		51.4
International (managed care and insurers)		292		2.3			297		2.4
Other		275		2.2			475		3.7

Revenues	$	12,861		100.0	%	$	12,517		100.0	%

To quantify the total impact of the trends related to uninsured patient accounts, we believe it is beneficial to view total uncompensated care, which is comprised of charity care, uninsured discounts and implicit price concessions. A summary of the estimated cost of total uncompensated care for the quarters ended March 31, 2020 and 2019 follows (dollars in millions):


	2020			2019
Patient care costs (salaries and benefits, supplies, other operating expenses and depreciation and amortization)	$	11,342		$	10,606
Cost-to-charges ratio (patient care costs as percentage of gross patient charges)		11.9	%		11.8	%
Total uncompensated care	$	7,873		$	7,085
Multiply by the cost-to-charges ratio		11.9	%		11.8	%

Estimated cost of total uncompensated care	$	937		$	836

The total uncompensated care amounts include charity care of $3.735 billion and $2.905 billion, and the related estimated costs of charity care were $444 million and $343 million, for the quarters ended March 31, 2020 and 2019, respectively.

Recent Pronouncements

During March 2020, the Securities and Exchange Commission adopted final rules that amend the financial disclosure requirements in Regulation S-X for subsidiary issuers and guarantors of registered debt securities and for affiliates whose securities are pledged as collateral for registered securities. The new rules are effective January 2021, but earlier compliance is permitted, and we have elected to adopt the new rules effective for the quarter ended March 31, 2020. The new rules permit alternative disclosures of summarized financial information, rather than our previous footnote presentation of condensed consolidating financial statements. The summarized financial information for subsidiary issuers and guarantors may be presented on a combined basis and the periods for which the summarized financial information must be provided has been reduced from all periods presented in the Company’s condensed consolidated financial statements to the most recent fiscal year and applicable

year-to-date

interim period. The new rules permit the summarized financial information and related disclosures to be presented outside of the Company’s condensed consolidated financial statements and accompanying notes.

We are providing the summarized financial information and related disclosures in management’s discussion and analysis included in Item 2 of this Form 10-Q.

The new rules also amend the requirement that a registrant file financial statements of an affiliate whose securities constitute a substantial portion of the collateral for a class of registered securities, and replace it with a requirement to present summarized financial information for the applicable affiliate to the extent material. The new rules provide for the continued application of Rule 3-16 of Regulation S-X for registered securities issued prior to January 4, 2021 where financial statements have not previously been filed under Rule 3-16 for affiliates whose securities are pledged as collateral for such registered securities, including in situations such as ours where the indentures governing such securities include Rule 3-16 collateral release provisions. We are therefore not providing summarized financial information with respect to affiliates whose securities are pledged as collateral for our outstanding senior secured notes.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation.