Basis of Presentation and Significant Accounting Policies

9 Months Ended

Sep. 30, 2020

Basis of Presentation and Significant Accounting Policies

NOTE 1 — BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Reporting Entity

HCA Healthcare, 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 Healthcare, Inc. and partnerships and joint ventures in which such subsidiaries are partners. At September 30, 2020, these affiliates owned and operated 187 hospitals, 121 freestanding surgery centers and provided extensive outpatient and ancillary services. HCA Healthcare, Inc.’s facilities are located in 21 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 Healthcare, 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 $117 million and $88 million for the quarters ended September 30, 2020 and 2019, respectively, and $289 million and $268 million for the nine months ended September 30, 2020 and 2019, respectively. Operating results for the quarter and nine months ended September 30, 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 and CARES Act Funding

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 during the latter portion of the first quarter and the first half of the second quarter and have continued to be impacted into the third 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 or limitations on certain businesses, as well as suspended elective surgical procedures by health care facilities.

While many

of these restrictions have been eased across the U.S. and most states have lifted moratoriums on

non-emergent

procedures, some restrictions remain in place, and we are unable to predict the future impact of the pandemic on our operations.

During the nine months ended September 30, 2020, we received $4.449 billion of accelerated Medicare payments and $1.674 billion in general and targeted distributions from the Provider

Relief Fund (net of amounts returned), both

as provided for and established under the Coronavirus Aid, Relief and Economic Security (“CARES”) Act. The Provider Relief Fund distributions were accounted for as government grants, and recognized on a systematic and rational basis as other income, once there is reasonable assurance that the applicable terms and conditions required to retain the funds will be met. Based on our analysis of the compliance and reporting requirements of the Provider Relief Fund and the impact of the pandemic on our operating results from the beginning of the pandemic in March through June 30, 2020, we recognized $822 million related to the general distribution funds during the quarter ended June 30, 2020.

During the quarter ended September 30, 2020, we continued to evaluate our operating results and gave consideration to the updated reporting guidelines issued in September by the U.S. Department of Health and Human Services that significantly changed the measurement of Provider Relief Fund distributions providers are able to retain. Based on our assessment of the likelihood of meeting the applicable terms and conditions of the Provider Relief Fund, during the quarter ended September 30, 2020 we reversed the $822 million of government stimulus income recognized during the quarter ended June 30, 2020. On October 8, 2020, we announced our decision to return, or repay early, all of our share of the Provider Relief Fund distributions of approximately $1.6 billion and the approximately $4.4 billion of Medicare accelerated payments. The total accelerated Medicare payments and Provider Relief Fund distributions received are recorded under the caption “government stimulus refund liability” in our condensed consolidated balance sheet at September 30, 20

The CARES Act also provides for a deferral of payments of the employer portion of Social Security tax incurred during the pandemic, allowing half of such payroll taxes to be deferred until December 2021 and the remaining half until December 2022. At September 30, 2020, the Company had deferred $441 million of Social Security taxes. Additionally, the CARES Act created a payroll tax credit designed to encourage companies to retain employees during the pandemic. During the nine months ended September 30, 2020, the Company evaluated its eligibility for this credit and recorded $60 million of employee retention payroll tax credits pursuant to the CARES Act. These tax credits are recorded as a reduction of salaries and benefits in our condensed consolidated income statement.

We believe the extent of the

COVID-19

pandemic’s impact on our operating results and financial condition has been and will continue to 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

practices and business closures and restrictions, suspensions of elective procedures, continued declines in patient volumes for an indeterminable length of time, increases in the number of uninsured and underinsured patients as a result of higher sustained 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 impact of the pandemic on our business. If we incur declines in cash flows and results of operations, such declines could 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. During the third quarter of 2020, we believe COVID-19 cases at our hospitals contributed to an increase in patient acuity and had a positive impact on our average reimbursement per case. However, the impact of COVID-19 in future periods may vary and could adversely impact our results of operations.

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 nine months ended September 30, 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 and nine months ended September 30, 2020 and 2019 are summarized in the following table (dollars in millions):


	Quarter
	2020		Ratio			2019		Ratio
Medicare	$	2,603		19.6	%	$	2,592		20.4	%
Managed Medicare		1,760		13.2			1,615		12.7
Medicaid		445		3.3			361		2.8
Managed Medicaid		707		5.3			641		5.0
Managed care and insurers		6,752		50.7			6,554		51.7
International (managed care and insurers)		307		2.3			282		2.2
Other		737		5.6			649		5.2

Revenues	$	13,311		100.0	%	$	12,694		100.0	%


	Nine Months
	2020		Ratio			2019		Ratio
Medicare	$	7,618		20.5	%	$	7,997		21.2	%
Managed Medicare		5,074		13.6			4,799		12.7
Medicaid		1,423		3.8			1,124		3.0
Managed Medicaid		1,904		5.1			1,808		4.8
Managed care and insurers		19,028		51.0			19,405		51.1
International (managed care and insurers)		838		2.3			863		2.3
Other		1,355		3.7			1,817		4.9

Revenues	$	37,240		100.0	%	$	37,813		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 and nine months ended September 30, 2020 and 2019 follows (dollars in millions):


	Quarter						Nine Months
	2020			2019			2020			2019
Patient care costs (salaries and benefits, supplies, other operating expenses and depreciation and amortization)	$	11,170		$	11,060		$	32,428		$	32,619
Cost-to-charges ratio (patient care costs as percentage of gross patient charges)		12.0	%		12.3	%		12.1	%		12.1	%
Total uncompensated care	$	7,023		$	7,923		$	21,625		$	22,703
Multiply by the cost-to-charges ratio		12.0	%		12.3	%		12.1	%		12.1	%

Estimated cost of total uncompensated care	$	843		$	975		$	2,617		$	2,747

The total uncompensated care amounts include charity care of $3.160 billion and $3.425 billion, respectively, and the related estimated costs of charity care were $376 million and $421 million, for the quarters ended September 30, 2020 and 2019, respectively. The total uncompensated care amounts include charity care of $9.972 billion and $9.641 billion, respectively, and the related estimated costs of charity care were $1.207 billion and $1.167 billion, for the nine months ended September 30, 2020 and 2019, respectively.

Reclassifications

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