ITEM 1A. RISK FACTORS
Our business is subject to a number of risks and uncertainties, many of which are beyond our control, that may cause our actual operating results or financial performance to be materially different from our expectations and make an investment in our securities risky. If one or more of the events discussed in this report were to occur, actual outcomes could differ materially from those expressed in or implied by any forward‐looking statements we make in this report or our other filings with the SEC, and our business, financial condition, results of operations or liquidity could be materially adversely affected; furthermore, the trading price of our common stock could decline and our shareholders could lose all or part of their investment. Additional risks and uncertainties not presently known, or currently deemed immaterial, may also constrain our business and operations.
Risks Related to Our Overall Operations
The COVID-19 pandemic has significantly affected our operations and financial condition, and it continues to do so; moreover, our liquidity could be negatively impacted, particularly if the U.S. economy remains volatile for a significant period of time.
In 2021, the ongoing COVID‐19 pandemic significantly affected, and it continues to impact, all three segments of our business, as well as our patients, communities and employees. As a provider of healthcare services, we are acutely affected by the public health and economic effects of the pandemic. Over the course of the last two years, federal, state and local governmental authorities have imposed a variety of restrictions on people and businesses, and public health authorities have offered regular guidance on health and safety, all of which has impacted general economic activity and consumer behavior. More recently, new variants of the virus have caused additional outbreaks, and there is substantial uncertainty about the nature and degree of the continued effects of COVID-19 over time. Known and unknown risks and uncertainties caused by the COVID‐19 pandemic, including those described below, have had, and are continuing to have, a material impact on our business, financial condition, results of operations and cash flows; such risks and uncertainties may heighten other risks to our business as described herein.
Given the geographic diversity of our operations and the impact of COVID‐19 surges, we have been and may in the future be forced to reduce services at individual locations. Restrictive measures, including travel bans, social distancing, quarantines and shelter‐in‐place orders, have had, and may in the future have, the effect of reducing the number of procedures performed at our facilities more generally, as well as the volume of emergency room and physician office visits. In general, federal, state or local laws, regulations, orders or other actions imposing direct or indirect restrictions on our business due to the COVID‐19 pandemic or otherwise may have an adverse impact on our financial condition, results of operations and cash flows.
In some areas, the increased demand for care of COVID‐19 patients in our hospitals, as well as the direct impact of COVID‐19 on physicians, employees and their families, have put a strain on our resources and staff. Over the past two years, we have had to rely on higher‐cost temporary and contract labor, which we compete with other healthcare providers to secure, and pay premiums above standard compensation for essential workers. Increased demand could also cause some of our hospitals to temporarily reduce their overall operating capacity or suspend certain services. We have incurred and continue to incur additional costs to protect the health and well-being of patients and staff. Even with appropriate protective measures, however, exposure to COVID‐19 increases the risk that physicians, nurses and others in our facilities may contract the virus, which could further limit our ability to treat all patients who seek care. If current conditions persist or worsen in some of our markets, certain of our hospitals may experience workforce disruptions from illness, absenteeism or protests. Furthermore, we may be subject to lawsuits from patients, employees and others exposed to COVID‐19 at our facilities. Such actions may involve large demands, as well as substantial defense costs. Our professional and general liability insurance may not cover all claims against us.
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We have experienced supply‐chain disruptions, including shortages and delays, as well as significant price increases in medical supplies, particularly for personal protective equipment. COVID‐19 surges and outbreaks of new variants could further impact the cost of medical supplies, and supply shortages and delays may impact our ability to see, admit and treat patients.
Broad economic factors resulting from the COVID-19 pandemic, including higher inflation, increased unemployment rates in certain areas in which we operate and reduced consumer spending, have impacted, and are continuing to impact, our service mix, revenue mix and patient volumes. Business closings and layoffs in the areas we operate may lead to increases in the uninsured and underinsured populations and adversely affect demand for our services, as well as the ability of patients to pay for services as rendered. Any increase in the amount of or deterioration in the collectability of patient accounts receivable could adversely affect our cash flows and results of operations. If general economic conditions deteriorate or remain uncertain for an extended period of time, our liquidity and ability to repay our outstanding debt may be impacted, and there can be no assurance that we will be able to raise additional funds on terms acceptable to us, if at all.
In general, the extent of the impact of the COVID-19 pandemic on our future operational and financial performance is currently uncertain and will depend on many factors outside of our control, including, among others: the duration, severity and trajectory of the pandemic, including the possible spread of potentially more contagious and/or virulent forms of the virus; future economic conditions, as well as the impact of government actions and administrative regulations on the hospital industry and broader economy, including through existing and any future stimulus efforts; the development, availability and widespread use of effective medical treatments and vaccines; the imposition of public safety measures; the volume of canceled or rescheduled procedures at our facilities; and the volume of COVID-19 patients across our care network. Moreover, at such time as COVID-19 cases do abate, we cannot provide any assurances that our volumes and case mix will return to pre-pandemic levels. COVID-19 developments continue to evolve quickly, and additional developments may occur that we are unable to predict.
Changes to existing COVID-19-related relief measures may have an adverse impact on our business, financial condition, results of operations or cash flows, and we cannot predict whether we will qualify for, apply for, receive or benefit from additional financial assistance in the future, if any, or how any future laws and regulations related to or in response to the COVID-19 pandemic will impact our operations.
As described in detail in MD&A, the Coronavirus Aid, Relief, and Economic Security Act and other legislative and regulatory actions have provided relief measures intended to mitigate some of the economic disruption caused by the COVID‐19 pandemic on our business. We are unable to predict whether changes, if any, to existing COVID‐19 relief measures will have an adverse impact on our business, financial condition, results of operations or cash flows. Moreover, some of the measures allowing for flexibility in delivery of care and financial support for healthcare providers are available only for the duration of the public health emergency as declared by the Secretary of HHS, and it is unclear whether or for how long the HHS declaration will be extended past its current expiration date.
The federal government and state and local governments may consider additional stimulus and relief efforts, but we are unable to predict whether any such measures will be enacted. There can also be no assurance that we will be eligible or apply for, or receive or benefit from, additional COVID‐19‐related stimulus assistance in the future, nor can there be any assurance as to the amount and type of assistance we may receive or seek or whether we will be able to comply with the applicable terms and conditions to retain such assistance. To the extent we do receive amounts or benefits under future relief measures related to or in response to the COVID‐19 pandemic, we cannot predict how such assistance will affect our operations or whether it will offset the negative impacts on our operations arising from the pandemic.
We cannot predict the impact that future modifications of the Affordable Care Act may have on our business, financial condition, results of operations or cash flows.
The healthcare industry, in general, and the acute care hospital business, in particular, have experienced significant regulatory uncertainty based, in large part, on administrative, legislative and judicial efforts to limit, alter or repeal the ACA. Since 2010, various states, private entities and individuals have challenged parts or all of the ACA numerous times in state and federal courts, and the U.S. Supreme Court has issued decisions in three such cases, most recently in June 2021. Various state legislatures have also challenged parts or all of the ACA through legislation, while other states have acted to safeguard the ACA by codifying certain provisions into state law. We cannot predict what future action, if any, Congress might take with respect to the ACA. Furthermore, we are unable to predict the impact on our future revenues and operations of (1) court challenges to the ACA, (2) administrative, regulatory and legislative changes, including the possibility of expansion of government‐sponsored coverage, or (3) market reactions to those changes. However, if the ultimate impact is that significantly fewer individuals have private or public health coverage, we likely will experience decreased patient volumes, reduced revenues and an increase in uncompensated care, which would adversely affect our results of operations and cash flows.
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Future changes in the Medicare and Medicaid programs or other government healthcare programs, including reductions in scale and scope, could have an adverse effect on our business.
We are unable to predict the effect of future government healthcare funding policy changes on our operations. If the rates paid by governmental payers are reduced, if the scope of services covered by governmental payers is limited, or if we or one or more of our subsidiaries’ hospitals are excluded from participation in the Medicare or Medicaid program or any other government healthcare program, there could be a material adverse effect on our business, financial condition, results of operations or cash flows.
For the year ended December 31, 2021, approximately 18% and 8% of our net patient service revenues for the hospitals and related outpatient facilities in our Hospital Operations segment were from the Medicare program and various state Medicaid programs, respectively, in each case excluding Medicare and Medicaid managed care programs. The Medicare and Medicaid programs are subject to: statutory and regulatory changes, administrative and judicial rulings, interpretations and determinations concerning patient eligibility requirements, funding levels and the method of calculating reimbursements, among other things; requirements for utilization review; and federal and state funding restrictions, all of which could materially increase or decrease payments from these government programs in the future, as well as affect the cost of providing services to our patients and the timing of payments to our facilities, which could in turn adversely affect our overall business, financial condition, results of operations or cash flows.
Even prior to the COVID‐19 pandemic, several states in which we operate faced budgetary challenges that resulted in reduced Medicaid funding levels to hospitals and other providers. Because most states must operate with balanced budgets, and the Medicaid program is generally a significant portion of a state’s budget, states can be expected to adopt or consider adopting future legislation designed to reduce or not increase their Medicaid expenditures. In addition, some states delay issuing Medicaid payments to providers to manage state expenditures. As an alternative means of funding provider payments, many of the states in which we operate have adopted supplemental payment programs or have received federal government waivers allowing them to test new approaches and demonstration projects to improve care. Federal government denials or delayed approvals of waiver applications or extension requests by the states in which we operate could materially impact our Medicaid funding levels. Continuing pressure on state budgets and other factors, including legislative and regulatory changes, could result in future reductions to Medicaid payments, payment delays or changes to Medicaid supplemental payment programs.
Violations of existing regulations or failure to comply with new or changed regulations could harm our business and financial results.
Our hospitals, outpatient centers and related healthcare businesses are subject to extensive federal, state and local regulation relating to, among other things, licensure, contractual arrangements, conduct of operations, privacy of patient information, ownership of facilities, physician relationships, addition of facilities and services, and reimbursement rates for services. The laws, rules and regulations governing the healthcare industry are extremely complex and, in certain areas, the industry has little or no regulatory or judicial interpretation for guidance. Moreover, under the ACA, the government and its contractors may suspend Medicare and Medicaid payments to providers of services “pending an investigation of a credible allegation of fraud.” The potential consequences for violating such laws, rules or regulations include reimbursement of government program payments, the assessment of civil monetary penalties, including treble damages, fines, which could be significant, exclusion from participation in federal healthcare programs, or criminal sanctions against current or former employees, any of which could have a material adverse effect on our business, financial condition or cash flows. Even a public announcement that we are being investigated for possible violations of law could have a material adverse effect on the value of our common stock and our business reputation could suffer.
Furthermore, the healthcare industry continues to attract much legislative interest and public attention. We are unable to predict the future course of federal, state and local healthcare legislation, regulation or enforcement efforts, particularly in light of the partisan divide in Congress. Further changes in the regulatory framework negatively affecting healthcare providers could have a material adverse effect on our business, financial condition, results of operations or cash flows.
In addition, our operations at our Global Business Center in the Philippines are subject to certain U.S. healthcare industry‐specific requirements, as well as U.S. and foreign laws applicable to businesses generally, including anti‐corruption laws. One such law, the Foreign Corrupt Practices Act (“FCPA”), regulates U.S. companies in their dealings with foreign officials, prohibiting bribes and similar practices, and requires that they maintain records that fairly and accurately reflect transactions and appropriate internal accounting controls. FCPA enforcement actions continue to be a high priority for the SEC and the U.S. Department of Justice. Our failure to comply with the FCPA could result in the imposition of fines and other civil and criminal penalties, which could be significant.
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We could be subject to substantial uninsured liabilities or increased insurance costs as a result of significant legal actions.
We are subject to medical malpractice lawsuits, antitrust claims and other legal actions in the ordinary course of business. In addition, from time to time, we have been and expect to continue to be subject to regulatory proceedings and private litigation (including employee class action lawsuits) concerning our application of various federal and state labor laws, rules and regulations governing a variety of workplace wage and hour issues. Some of these actions involve large demands, as well as substantial defense costs. Even in states that have imposed caps on damages, litigants are seeking recoveries under new theories of liability that might not be subject to such caps. Our commercial insurance does not cover all claims against us. Moreover, commercial insurance may not continue to be available at a reasonable cost for us to maintain at adequate levels. We cannot predict the outcome of current or future legal actions against us or the effect that judgments or settlements in such matters may have on us or on our insurance costs. Additionally, all professional and general liability insurance we purchase is subject to per-claim and policy period aggregate limits. If the policy period aggregate limit of any of these policies is exhausted, in whole or in part, it could deplete or reduce the limits available to pay any other material claims applicable to that policy period. Any losses not covered by or in excess of the amounts maintained under insurance policies will be funded from our working capital. Furthermore, one or more of our insurance carriers could become insolvent and unable to fulfill its or their obligations to defend, pay or reimburse us when those obligations become due. In that case or if payments of claims exceed our estimates or are not covered by insurance, it could have a material adverse effect on our business, financial condition, results of operations or cash flows.
If we are unable to enter into, maintain and renew managed care contractual arrangements on competitive terms, if we experience material reductions in the contracted rates we receive from managed care payers or if we have difficulty collecting from managed care payers, our results of operations could be adversely affected.
Our future success depends, in part, on our ability to maintain and renew our existing managed care contracts and enter into new managed care contracts on competitive terms. For the year ended December 31, 2021, approximately 68%, or $9.985 billion, of our net patient service revenues for the hospitals and related outpatient facilities in our Hospital Operations segment was attributable to managed care payers, including Medicare and Medicaid managed care programs. In 2021, our commercial managed care net inpatient revenue per admission from the hospitals in our Hospital Operations segment was approximately 82% higher than our aggregate yield on a per‐admission basis from government payers, including managed Medicare and Medicaid insurance plans. Our ability to negotiate favorable contracts with HMOs, insurers offering preferred provider arrangements and other managed care plans, as well as add new facilities to our existing agreements at contracted rates, significantly affects our revenues and operating results. We currently have thousands of managed care contracts with various HMOs and PPOs; however, our top 10 managed care payers generated 61% of our managed care net patient service revenues for the year ended December 31, 2021. Because of this concentration, we may experience a short or long‐term adverse effect on our net operating revenues if we cannot renew, replace or otherwise mitigate the impact of expired contracts with significant payers. Furthermore, any disputes between us and significant managed care payers could have a material adverse effect on our financial condition, results of operations or cash flows. At December 31, 2021, 67% of our net accounts receivable for our Hospital Operations segment was due from managed care payers.
Private payers are increasingly attempting to control healthcare costs through direct contracting with hospitals to provide services on a discounted basis, increased utilization reviews and greater enrollment in managed care programs, such as HMOs and PPOs. Any negotiated discount programs we agree to generally limit our ability to increase reimbursement rates to offset increasing costs. Furthermore, the ongoing trend toward consolidation among non‐government payers tends to increase their bargaining power over contract terms. Generally, we compete for these contracts on the basis of price, market reputation, geographic location, quality and range of services, caliber of the medical staff and convenience. Our relationships with payers, and reimbursement for the care we provide, may be further impacted by clinical and price transparency initiatives and out‐of‐network billing restrictions, including those in the No Surprises Act, which took effect January 1, 2022. In general, any material reductions in the contracted or out-of-network rates we receive for our services or any significant difficulties in collecting receivables from managed care payers could have a material adverse effect on our financial condition, results of operations or cash flows.
The industry trends toward value-based purchasing and alternative payment models may negatively impact our revenues.
Value‐based purchasing and alternative payment model initiatives of both governmental and private payers tying financial incentives to quality and efficiency of care will increasingly affect the results of operations of our hospitals and other healthcare facilities, and may negatively impact our revenues if we are unable to meet expected quality standards. Medicare requires providers to report certain quality measures in order to receive full reimbursement increases for inpatient and outpatient procedures that were previously awarded automatically, and the number of quality measures hospitals are required to report
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publicly has increased in recent years. In addition, hospitals that meet or exceed certain quality performance standards will receive increased reimbursement payments, and hospitals that have “excess readmissions” for specified conditions will receive reduced reimbursement. Furthermore, Medicare no longer pays hospitals additional amounts for the treatment of certain hospital‐acquired conditions (“HACs”), unless the conditions were present at admission. Hospitals that rank in the worst 25% of all hospitals nationally for HACs in the previous year receive reduced Medicare reimbursements. Moreover, the Affordable Care Act prohibits the use of federal funds under the Medicaid program to reimburse providers for treating certain provider‐preventable conditions.
The ACA also created the CMS Innovation Center to develop and test innovative payment and service delivery models that have the potential to reduce Medicare, Medicaid or Children’s Health Insurance Program expenditures while preserving or enhancing the quality of care for beneficiaries. Congress has defined – both through the ACA and previous legislation – a number of specific demonstrations for CMS to conduct, including bundled payment models. Generally, the bundled payment models hold hospitals financially accountable for the quality and costs for an entire episode of care for a specific diagnosis or procedure from the date of the hospital admission or inpatient procedure through 90 days post‐discharge, including services not provided by the hospital, such as physician, inpatient rehabilitation, skilled nursing and home health care. Provider participation in some of these models is voluntary; however, participation in certain other bundled payment arrangements is mandatory for providers located in randomly selected geographic locations. Under the mandatory models, hospitals are eligible to receive incentive payments or will be subject to payment reductions within certain corridors based on their performance against quality and spending criteria. We cannot predict what impact, if any, these demonstration programs will have on our inpatient volumes, net revenues or cash flows.
There are also trends among private payers toward value‐based purchasing and alternative payment models for healthcare services. Many large commercial payers expect hospitals to report quality data, and several of these payers will not reimburse hospitals for certain preventable adverse events. We expect value‐based purchasing programs, including programs that condition reimbursement on patient outcome measures, to become more common and to involve a higher percentage of reimbursement amounts.
We are unable at this time to predict how the industry trends toward value‐based purchasing and alternative payment models will affect our results of operations, but they could negatively impact our revenues, particularly if we are unable to meet the quality and cost standards established by both governmental and private payers.
Our hospitals, outpatient centers and other healthcare businesses operate in competitive environments, and competition in our markets can adversely affect patient volumes and other aspects of our operations.
We believe our hospitals and outpatient facilities compete within local communities on the basis of many factors, including: quality of care; location and ease of access; the scope and breadth of services offered; reputation; and the caliber of the facilities, equipment and employees. In addition, the competitive positions of hospitals and outpatient facilities depend in large part on the number, quality, specialties, and admitting and scheduling practices of the licensed physicians who are members of the medical staffs of those facilities, as well as physicians who affiliate with and use outpatient centers as an extension of their practices.
Some of the hospitals that compete with our hospitals are owned by tax‐supported government agencies, and many others are owned by not‐for‐profit organizations that may have financial advantages not available to our facilities, including (1) support through endowments, charitable contributions and tax revenues, (2) access to tax‐exempt financing, and (3) exemptions from sales, property and income taxes. In addition, in certain markets in which we operate, large teaching hospitals provide highly specialized facilities, equipment and services that may not be available at most of our hospitals. The existence or absence of state laws that require findings of need for construction and expansion of healthcare facilities or services may also impact competition. In recent years, the number of freestanding specialty hospitals, surgery centers, emergency departments and imaging centers in the geographic areas in which we operate has increased significantly. Some of these facilities are physician‐owned. Moreover, we expect to encounter additional competition from system‐affiliated hospitals and healthcare companies, as well as health insurers and private equity companies seeking to acquire providers, in specific geographic markets in the future.
Another major factor in the competitive position of a hospital or outpatient facility is the scope of its relationships with managed care plans given that HMOs, PPOs, third‐party administrators and other third‐party payers use managed care contracts to encourage patients to use certain hospitals in exchange for discounts from the hospitals’ established charges. Generally, we compete for managed care contracts on the basis of price, market reputation, geographic location, quality and range of services, caliber of the medical staff and convenience. Other healthcare providers may affect our ability to enter into acceptable managed care contractual arrangements or negotiate increases in our reimbursement. For example, some of our competitors may
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negotiate exclusivity provisions with managed care plans or otherwise restrict the ability of managed care companies to contract with us. Vertical integration efforts involving third‐party payers and healthcare providers, among other factors, may increase competitive challenges.
If our competitors are better able to attract patients, recruit physicians, expand services or obtain favorable managed care contracts at their facilities than we are, we may experience an overall decline in patient volumes. Furthermore, healthcare consumers are now able to access hospital performance data on quality measures and patient satisfaction, as well as standard charges for services, to compare competing providers. The No Surprises Act created additional price transparency requirements beginning January 1, 2022, including requiring providers to send to health plans of insured patients and to uninsured patients good faith estimates of the expected charges and diagnostic codes prior to the scheduled dates of services. If any of our hospitals achieve poor results (or results that are lower than our competitors) on quality measures or patient satisfaction surveys, or if our standard charges are or are perceived to be higher than our competitors, we may attract fewer patients.
It is essential to our ongoing business that we attract an appropriate number of quality physicians in the specialties required to support our services and that we maintain good relations with those physicians.
The success of our business and clinical program development depends in large part on the number, quality, specialties, and admitting and scheduling practices of the licensed physicians who are members of the medical staffs of our hospitals and other facilities, as well as physicians who affiliate with us and use our facilities as an extension of their practices. Physicians are often not employees of the hospitals or surgery centers at which they practice. Members of the medical staffs of our facilities also often serve on the medical staffs of facilities we do not operate, and they are free to terminate their association with our facilities or admit their patients to competing facilities at any time. In addition, although physicians who own interests in our facilities are generally subject to agreements restricting them from owning an interest in competitive facilities, we may not learn of, or be unsuccessful in preventing, our physician partners from acquiring interests in competitive facilities.
We expect to encounter increased competition from health insurers and private equity companies seeking to acquire providers in the areas where we operate physician practices and, where permitted by law, employ physicians. In 2021, we continued to experience challenges in recruiting and retaining physicians as a result of the prioritization of COVID-19 care and the challenges associated with relocating physicians during the pandemic. In some of our markets, physician recruitment and retention are affected by a shortage of qualified physicians in certain higher-demand clinical service lines and specialties. Furthermore, our ability to recruit and employ physicians is closely regulated. For example, the types, amount and duration of compensation and assistance we can provide to recruited physicians are limited by the Stark law, the Anti‐kickback Statute, state anti‐kickback statutes and related regulations. All arrangements with physicians must also be fair market value and commercially reasonable. If we are unable to attract and retain sufficient numbers of quality physicians by providing adequate support personnel, technologically advanced equipment, and facilities that meet the needs of those physicians and their patients, physicians may choose not to refer patients to our facilities, admissions and outpatient visits may decrease, and our operating performance may decline.
Our labor costs have been, and we expect will continue to be, adversely affected by competition for staffing, the shortage of experienced nurses and labor union activity.
The operations of our facilities depend on the efforts, abilities and experience of our management and medical support personnel, including nurses, therapists, pharmacists and lab technicians, as well as our employed physicians. There is a limited availability of experienced medical support personnel nationwide, and we compete with other healthcare providers in recruiting and retaining employees. Like others in the healthcare industry, we continue to experience a shortage of critical‐care nurses in certain disciplines and geographic areas. This shortage has been exacerbated by the COVID‐19 pandemic as more nurses choose to retire early, leave the workforce or take travel assignments. As a result of the aforementioned challenges, we have been and we may continue to be required to enhance wages and benefits to recruit and retain experienced employees, pay premiums above standard compensation for essential workers, make greater investments in education and training for newly licensed medical support personnel, or hire more expensive temporary or contract employees, which we compete with other healthcare providers to secure. Furthermore, state‐mandated nurse‐staffing ratios in California affect not only our labor costs, but, if we are unable to hire the necessary number of experienced nurses to meet the required ratios, they may also cause us to limit volumes, which would have a corresponding adverse effect on our net operating revenues. In general, our failure to recruit and retain qualified management, experienced nurses and other medical support personnel, or to control labor costs, could have a material adverse effect on our business, financial condition, results of operations or cash flows.
Increased labor union activity is another factor that can adversely affect our labor costs. At December 31, 2021, approximately 27% of the employees in our Hospital Operations segment were represented by labor unions. Less than 1% of the total employees in both our Ambulatory Care and Conifer segments belong to a union. Unionized employees – primarily registered nurses and service, technical and maintenance workers – are located at 33 of our hospitals, the majority of which are
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in California, Florida and Michigan. Organizing activities by labor unions could increase our level of union representation in future periods, which could impact our labor costs.
When we are negotiating collective bargaining agreements with unions (whether such agreements are renewals or first contracts), work stoppages and strikes may occur, as they did at one of our hospitals in 2021. Extended strikes have had, and could in the future have, an adverse effect on our patient volumes, net operating revenues and labor costs at individual hospitals or in local markets.
Employee vaccine mandates may adversely impact our business.
In November 2021, CMS published an interim final rule that requires all staff at healthcare facilities subject to the regulation, except for those with approved medical or religious exemptions, to be vaccinated against COVID-19. On January 13, 2022, the U.S. Supreme Court ruled that CMS had proper legislative authority to issue the mandate, and – although it is still being challenged in the lower courts – the mandate is enforceable while the challenges continue. Following the Supreme Court’s decision, CMS released new guidance that will require healthcare workers in 25 states to get their first vaccination in February and their second dose before the end of March 2022. (The CMS guidance did not change the compliance dates for healthcare workers in 25 states where the mandate was already in effect; those workers were required to get their first vaccination by January 27 and be fully vaccinated or exempt from the requirement by February 28.)
We are taking steps to develop policies and procedures to enforce the mandate in all of our hospitals and other healthcare facilities that have not already adopted such a standard. It is currently not possible to predict with certainty the impact the CMS mandate will have on our workforce; however, we recognize that enforcement of the mandate could result in labor disruptions, attrition, including the loss of nurses and other skilled employees, and challenges in meeting future labor needs, which could have a material adverse effect on our ability to treat patients, as well as our financial condition, results of operations or cash flows.
Our business could be significantly and negatively impacted by security threats, catastrophic events and other disruptions affecting our information technology and related systems.
Our information technology systems are critical to the day‐to‐day operation of our business. We rely on our information technology to process, transmit and store clinical, financial and operational data that includes PHI, personally identifiable information, and proprietary and confidential business performance data. We utilize electronic health records and other information technology in connection with all of our operations, including our billing and other financial systems, supply chain and labor management tools. Our systems, in turn, interface with and rely on third‐party systems that we do not control, including medical devices and other processes supporting the interoperability of healthcare infrastructures. We monitor and routinely test our security systems and processes and have a diversified data network that provides redundancies as well as other measures designed to protect the integrity, security and availability of the data we process, transmit and store. However, the information technology and infrastructure we use, and the third‐party systems we interact with, have been, and will likely continue to be, subject to computer viruses, attacks by hackers, or breaches due to employee error or malfeasance. The COVID‐19 pandemic has placed additional stress on our information technology systems, and the risk of attack, breach or other disruption to these systems is elevated in the current environment. In particular, we face a heightened risk of cybersecurity threats targeting healthcare providers, including ransomware attacks.
In general, attacks on, or breaches or other disruptions to, our information technology assets or those of third parties that we rely upon could impact the integrity, security or availability of data we process, transmit or store. While we are not aware of having experienced a material breach of our systems, the preventive actions we take to reduce the risk of such incidents and protect our information technology may not be sufficient in the future. As cybersecurity threats continue to evolve, we may not be able to anticipate certain attack methods in order to implement effective protective measures, and we continue to be required to expend significant additional resources to modify and strengthen our security measures, investigate and remediate any vulnerabilities in our information systems and infrastructure, and invest in new technology designed to mitigate security risks. Our insurance against cyber‐risks and attacks may not offset the financial impact of a material loss event.
Third parties to whom we outsource certain of our functions, or with whom our systems interface and who may, in some instances, store our sensitive and confidential data, are also subject to the risks outlined above and may not have or use controls effective to protect such information. An attack, breach or other system disruption affecting any of these third parties could similarly harm our business. Further, successful cyber‐attacks at other healthcare services companies, whether or not we are impacted, could lead to a general loss of consumer confidence in our industry that could negatively affect us, including harming the market perception of the effectiveness of our security measures or of the healthcare industry in general, which could result in reduced use of our services.
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Our networks and technology systems have experienced disruption due to events such as system implementations, upgrades, and other maintenance and improvements, and they are subject to disruption in the future for similar events, as well as catastrophic events, including a major earthquake, fire, hurricane, telecommunications failure, ransomware attack, terrorist attack or the like. Any breach, system interruption or unavailability of our information systems or of third-party systems with access to our data could result in: the unauthorized disclosure, misuse, loss or corruption of such data; interruptions and delays in our normal business operations (including the collection of revenues); patient harm; potential liability under privacy, security, consumer protection or other applicable laws; regulatory penalties; and negative publicity and damage to our reputation. Any of these could have a material adverse effect on our business, financial condition, results of operations or cash flows.
Any future cost-reduction initiatives may not deliver the benefits we expect, and actions taken may adversely affect our business.
Our future financial performance and level of profitability may depend, in part, on various cost‐reduction initiatives, including our outsourcing certain functions unrelated to direct patient care. We may encounter challenges in executing cost‐reduction initiatives and not achieve the intended cost savings. In addition, we may face wrongful termination, discrimination or other legal claims from employees affected by any workforce reductions, and we may incur substantial costs defending against such claims, regardless of their merits. The threat of such claims may also significantly increase our severance costs. Workforce reductions, whether as a result of internal restructuring or in connection with outsourcing efforts, may result in the loss of numerous long‐term employees, the loss of institutional knowledge and expertise, the reallocation of certain job responsibilities and the disruption of business continuity, all of which could negatively affect operational efficiencies and increase our operating expenses in the short term. Moreover, outsourcing and offshoring expose us to additional risks, such as reduced control over operational quality and timing, foreign political and economic instability, compliance and regulatory challenges, and natural disasters not typically experienced in the United States, such as volcanic activity and tsunamis.
Trends affecting our actual or anticipated results may require us to record charges that may negatively impact our results of operations.
As a result of factors that have negatively affected our industry generally and our business specifically, we have been, and in the future expect to be, required to record various charges in our results of operations. Our impairment tests presume stable, improving or, in some cases, declining operating results in our facilities, which are based on programs and initiatives being implemented that are designed to achieve each facility’s most recent projections. If these projections are not met, or negative trends occur that impact our future outlook, future impairments of long‐lived assets and goodwill may occur, and we may incur additional restructuring charges, which could be material. We believe significant factors that contribute to adverse financial trends include reductions in volumes of insured patients, shifts in payer mix from commercial to governmental payers combined with reductions in reimbursement rates from governmental payers, and high levels of uninsured patients. Future restructuring of our operating structure that changes our goodwill reporting units could also result in future impairments of our goodwill. Any such charges could negatively impact our results of operations.
The utilization of our tax losses could be substantially limited if we experience an ownership change as defined in the Internal Revenue Code.
At December 31, 2021, we had federal net operating loss (“NOL”) carryforwards of approximately $194 million pre‐tax available to offset future taxable income. Of these NOL carryforwards, $13 million will expire in the years 2026 to 2036, and $181 million has no expiration date. Section 382 of the Internal Revenue Code imposes an annual limitation on the amount of a company’s taxable income that may be offset by the NOL carryforwards if it experiences an “ownership change” as defined in Section 382 of the Code. An ownership change occurs when a company’s “five‐percent shareholders” (as defined in Section 382 of the Code) collectively increase their ownership in the company by more than 50 percentage points (by value) over a rolling three‐year period. (This is different from a change in beneficial ownership under applicable securities laws.) These ownership changes include purchases of common stock under share repurchase programs, a company’s offering of its stock, the purchase or sale of company stock by five‐percent shareholders, or the issuance or exercise of rights to acquire company stock. While we expect to be able to realize our total NOL carryforwards prior to their expiration, if an ownership change occurs, our ability to use the NOL carryforwards to offset future taxable income will be subject to an annual limitation and will depend on the amount of taxable income we generate in future periods. There is no assurance that we will be able to fully utilize the NOL carryforwards. Furthermore, we could be required to record a valuation allowance related to the amount of the NOL carryforwards that may not be realized, which could adversely impact our results of operations.
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Risks Related to Acquisitions, Divestitures and Joint Ventures
When we acquire new assets or businesses, we become subject to various risks and uncertainties that could adversely affect our results of operations and financial condition.
We have completed a number of acquisitions in recent years, and we expect to pursue similar transactions in the future. A key business strategy for USPI, in particular, is the acquisition and development of facilities, primarily through the formation of joint ventures with physicians and health system partners. With respect to planned or future transactions, we cannot provide any assurances that we will be able to identify suitable candidates, consummate transactions on terms that are favorable to us, or achieve synergies or other benefits in a timely manner or at all. Furthermore, companies or operations we acquire may not be profitable or may not achieve the profitability that justifies the investments made. Businesses we acquire may also have pre‐existing unknown or contingent liabilities, including liabilities for failure to comply with applicable healthcare regulations. These liabilities could be significant, and, if we are unable to exclude them from the acquisition transaction or successfully obtain and pursue indemnification from a third party, they could harm our business and financial condition. In addition, we may face significant challenges in integrating personnel and financial and other systems. Future acquisitions could result in the incurrence of additional debt and contingent liabilities, potentially dilutive issuances of equity securities, and increased operating expenses, any of which could adversely affect our results of operations and financial condition.
We cannot provide any assurances that we will be successful in divesting assets we wish to sell.
We continue to exit service lines, businesses and markets that we believe are no longer strategic to our long‐term growth. In April 2021, we divested the majority of our urgent care centers and, in August 2021, we sold five Miami-area hospitals and certain related operations. We cannot provide any assurances that completed, planned or future divestitures or other strategic transactions will achieve their business goals or the benefits we expect.
We have in the past, and may in the future, fail to obtain applicable regulatory approvals, including FTC approvals, with respect to planned divestitures of assets or businesses. Moreover, we may encounter difficulties in finding acquirers or alternative exit strategies on terms that are favorable to us, which could delay the receipt of anticipated proceeds necessary for us to complete our planned strategic objectives. In addition, our divestiture activities have required, and may in the future require, us to retain significant pre-closing liabilities, recognize impairment charges (as discussed above) or agree to contractual restrictions that limit our ability to reenter a particular market, which may be material. Many of our acute care hospital divestitures also necessitate us entering into a transition services agreement with the buyer for information technology and other related services. As a consequence, we may be exposed to the financial status of the buyer for any payments under such transition services agreements or for transferred contractual liabilities, which could be significant.
Furthermore, our divestiture and other corporate development activities, including the potential spin‐off of Conifer, may present financial and operational risks, including (1) the diversion of management attention from existing core businesses, (2) adverse effects (including a deterioration in the related asset or business and, in Conifer’s case, the loss of existing clients and the difficulties associated with securing new clients) from the announcement of the planned or potential activity, and (3) the challenges associated with separating personnel and financial and other systems.
USPI and our hospital-based joint ventures depend on existing relationships with key health system partners. If we are unable to maintain historical relationships with these systems, or enter into new relationships, we may be unable to implement our business strategies successfully.
USPI and our hospital‐based joint ventures depend in part on the efforts, reputations and success of health system partners and the strength of our relationships with those systems. Our joint ventures could be adversely affected by any damage to those health systems’ reputations or to our relationships with them. In addition, damage to our business reputation could negatively impact the willingness of health systems to enter into relationships with us or USPI. If we are unable to maintain existing arrangements on favorable terms or enter into relationships with additional health system partners, we may be unable to implement our business strategies for our joint ventures successfully.
The remaining put/call arrangements associated with USPI, if settled in cash, will require us to utilize our cash flow or incur additional indebtedness to satisfy the payment obligations in respect of such arrangements.
We have a put/call agreement (the “Baylor Put/Call Agreement”) with Baylor that contains put and call options with respect to the 5% ownership interest Baylor holds in USPI. Each year starting in 2021, Baylor may put up to one-third of its total shares in USPI held as of April 1, 2017 (the “Baylor Shares”) by delivering notice by the end of January of such year. In each year that Baylor does not put the full 33.3% of USPI’s shares allowable, we may call the difference between the number of shares Baylor put and the maximum number of shares it could have put that year. In addition, the Baylor Put/Call Agreement contains a call option pursuant to which we have the ability to acquire all of Baylor’s ownership interest by 2024. We have the
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ability to choose whether to settle the purchase price for the Baylor put/call, which is mutually agreed-upon fair market value, in cash or shares of our common stock. Baylor did not deliver a put notice to us in January 2021 or January 2022. In February 2021, we notified Baylor of our intention to exercise our call option to purchase 33.3% of the Baylor Shares. We are continuing to negotiate the terms of that purchase. In February 2022, we notified Baylor of our intention to again exercise our call option to purchase an additional 33.3% of the Baylor Shares. The amount and timing of the payments related to the exercise of our call options in 2021 and 2022, as well as payments related to future put or call decisions under the Baylor Put/Call Agreement, are currently uncertain.
Put and call arrangements, to the extent settled in cash, may require us to dedicate a substantial portion of our cash flow to satisfy our payment obligations in respect of such arrangements, which may reduce the amount of funds available for our operations, capital expenditures and corporate development activities. Similarly, we may be required to incur additional indebtedness to satisfy our payment obligations in respect of such arrangements, which could have important consequences to our business and operations, as described more fully below.
Our joint venture arrangements are subject to a number of operational risks that could have a material adverse effect on our business, results of operations and financial condition.
We have invested in a number of joint ventures with other entities when circumstances warranted the use of these structures, and we may form additional joint ventures in the future. These joint ventures may not be profitable or may not achieve the profitability that justifies the investments made. Furthermore, the nature of a joint venture requires us to consult with and share certain decision‐making powers with unaffiliated third parties, some of which may be not‐for‐profit health systems. If our joint venture partners do not fulfill their obligations, the affected joint venture may not be able to operate according to its business or strategic plans. In that case, our results of operations could be adversely affected or we may be required to increase our level of financial commitment to the joint venture. Moreover, differences in economic or business interests or goals among joint venture participants could result in delayed decisions, failures to agree on major issues and even litigation. If these differences cause the joint ventures to deviate from their business or strategic plans, or if our joint venture partners take actions contrary to our policies, objectives or the best interests of the joint venture, our results of operations could be adversely affected. In addition, our relationships with not‐for‐profit health systems and the joint venture agreements that govern these relationships are intended to be structured to comply with current revenue rulings published by the Internal Revenue Service, as well as case law relevant to joint ventures between for‐profit and not‐for‐profit healthcare entities. Material changes in these authorities could adversely affect our relationships with not‐for‐profit health systems and related joint venture arrangements.
Our participation in joint ventures is also subject to the risks that:
•We could experience an impasse on certain decisions because we do not have sole decision‐making authority, which could require us to expend additional resources on resolving such impasses or potential disputes.
•We may not be able to maintain good relationships with our joint venture partners (including health systems), which could limit our future growth potential and could have an adverse effect on our business strategies.
•Our joint venture partners could have investment or operational goals that are not consistent with our corporate‐wide objectives, including the timing, terms and strategies for investments or future growth opportunities.
•Our joint venture partners might become bankrupt, fail to fund their share of required capital contributions or fail to fulfill their other obligations as joint venture partners, which may require us to infuse our own capital into any such venture on behalf of the related joint venture partner or partners despite other competing uses for such capital.
•Many of our existing joint ventures require that one of our wholly owned affiliates provide a working capital line of credit to the joint venture, which could require us to allocate substantial financial resources to the joint venture potentially impacting our ability to fund our other short‐term obligations.
•Some of our existing joint ventures require mandatory capital expenditures for the benefit of the applicable joint venture, which could limit our ability to expend funds on other corporate opportunities.
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•Our joint venture partners may have exit rights that would require us to purchase their interests upon the occurrence of certain events or the passage of certain time periods, which could impact our financial condition by requiring us to incur additional indebtedness in order to complete such transactions or, alternatively, in some cases we may have the option to issue shares of our common stock to our joint venture partners to satisfy such obligations, which would dilute the ownership of our existing shareholders. When our joint venture partners seek to exercise their exit rights, we may be unable to agree on the value of their interests, which could harm our relationship with our joint venture partners or potentially result in litigation.
•Our joint venture partners may have competing interests in our markets that could create conflict of interest issues.
•Any sale or other disposition of our interest in a joint venture or underlying assets of the joint venture may require consents from our joint venture partners, which we may not be able to obtain.
•Certain corporate‐wide or strategic transactions may also trigger other contractual rights held by a joint venture partner (including termination or liquidation rights) depending on how the transaction is structured, which could impact our ability to complete such transactions.
•Our joint venture arrangements that involve financial and ownership relationships with physicians and others who either refer or influence the referral of patients to our hospitals or other healthcare facilities are subject to greater regulatory scrutiny from government enforcement agencies. While we endeavor to comply with the applicable safe harbors under the Anti‐kickback Statute, certain of our current arrangements, including joint venture arrangements, do not qualify for safe harbor protection.
Risks Related to Conifer
We cannot provide any assurances that we will be successful in completing the proposed spin-off of Conifer.
We cannot predict the outcome of the process we are undertaking to pursue a tax‐free spin‐off of Conifer. We cannot provide any assurances regarding the timeframe for completing the spin‐off, the allocation of assets and liabilities between Tenet and Conifer, that the other conditions of the spin‐off will be met, or that the spin‐off will be completed at all. We also cannot provide any assurances that the proposed spin‐off of Conifer, if consummated, will achieve the business goals or the benefits we expect. Additional risks regarding our divestiture and other corporate development activities, including the potential spin‐off of Conifer are described above under “We cannot provide any assurances that we will be successful in divesting assets in non‐core markets.”
A spin-off of Conifer could adversely affect our earnings and cash flows.
Conifer contributes a significant portion of our earnings and cash flows. Although there can be no assurance that the Conifer spin‐off process will result in a consummated transaction, any separation of all or a portion of Conifer’s business could adversely affect our earnings and cash flows.
Conifer operates in a highly competitive industry, and its current or future competitors may be able to compete more effectively than Conifer does, which could have a material adverse effect on Conifer’s margins, growth rate and market share.
We are continuing to market Conifer’s revenue cycle management, patient communications and engagement services, and value‐based care solutions businesses. The timing and uncertainty associated with our spin‐off plans for Conifer may have an adverse impact on Conifer’s ability to secure new clients. There can be no assurance that Conifer will be successful in generating new client relationships, including with respect to hospitals we or Conifer’s other clients sell, as the respective buyers of such hospitals may not continue to use Conifer’s services or, if they do, they may not do so under the same contractual terms. The market for Conifer’s solutions is highly competitive, and we expect competition may intensify in the future. Conifer faces competition from existing participants and new entrants to the revenue cycle management market, as well as from the staffs of hospitals and other healthcare providers who handle these processes internally. In addition, electronic medical record software vendors may expand into services offerings that compete with Conifer. To be successful, Conifer must respond more quickly and effectively than its competitors to new or changing opportunities, technologies, standards, regulations and client requirements. Moreover, existing or new competitors may introduce technologies or services that render Conifer’s technologies or services obsolete or less marketable. Even if Conifer’s technologies and services are more effective than the offerings of its competitors, current or potential clients might prefer competitive technologies or services to Conifer’s technologies and services. Furthermore, increased competition has resulted and may continue to result in pricing pressures, which could negatively impact Conifer’s margins, growth rate or market share.
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Violations of existing regulations or failure to comply with new or changed regulations could harm Conifer’s business and financial results.
Conifer and its subsidiaries are subject to numerous federal, state and local consumer protection and other laws governing such topics as privacy, financial services, and billing and collections activities. Regulations governing Conifer’s operations are subject to changing interpretations that may be inconsistent among different jurisdictions. In addition, a regulatory determination made by, or a settlement or consent decree entered into with, one regulatory agency may not be binding upon, or preclude, investigations or regulatory actions by other agencies. Conifer’s failure to comply with applicable consumer protection and other laws could result in, among other things, the issuance of cease and desist orders (which can include orders for restitution or rescission of contracts, as well as other kinds of affirmative relief), the imposition of fines or refunds, and other civil and criminal penalties, some of which could be significant in the case of knowing or reckless violations. In addition, Conifer’s failure to comply with the statutes and regulations applicable to it could result in reduced demand for its services, invalidate all or portions of some of Conifer’s services agreements with its clients, give clients the right to terminate Conifer’s services agreements with them or give rise to contractual liabilities, among other things, any of which could have a material adverse effect on Conifer’s business. Furthermore, if Conifer or its subsidiaries become subject to fines or other penalties, it could harm Conifer’s reputation, thereby making it more difficult for Conifer to retain existing clients or attract new clients.
Risks Related to Our Indebtedness
Our level of indebtedness could, among other things, adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, and prevent us from meeting our obligations under the agreements relating to our indebtedness.
At December 31, 2021, we had approximately $15.646 billion of total long‐term debt, as well as $139 million in standby letters of credit outstanding in the aggregate under our senior secured revolving credit facility (as amended, “Credit Agreement”) and our letter of credit facility agreement (as amended, “LC Facility”). Our Credit Agreement is collateralized by eligible inventory and patient accounts receivable, including receivables for Medicaid supplemental payments, of substantially all of our wholly owned acute care and specialty hospitals, and our LC Facility is guaranteed and secured by a first priority pledge of the capital stock and other ownership interests of certain of our hospital subsidiaries on an equal‐ranking basis with our existing senior secured notes. From time to time, we expect to engage in additional capital market, bank credit and other financing activities, depending on our needs and financing alternatives available at that time.
The interest expense associated with our indebtedness offsets a substantial portion of our operating income. During 2021, our interest expense was $923 million and represented 32% of our $2.871 billion of operating income. As a result, relatively small percentage changes in our operating income can result in a relatively large percentage change in our net income and earnings per share, both positively and negatively. In addition:
•Our substantial indebtedness may limit our ability to adjust to changing market conditions and place us at a competitive disadvantage compared to our competitors that have less debt.
•We may be more vulnerable in the event of a deterioration in our business, in the healthcare industry or in the economy generally, or if federal or state governments substantially limit or reduce reimbursement under the Medicare or Medicaid programs.
•Our debt service obligations reduce the amount of funds available for our operations, capital expenditures and corporate development activities, and may make it more difficult for us to satisfy our financial obligations.
•Our operations are capital intensive and require significant investment to maintain buildings, equipment, software and other assets. Our substantial indebtedness could limit our ability to obtain additional financing to fund future capital expenditures, as well as working capital, acquisitions or other needs.
•Our significant indebtedness may result in the market value of our stock being more volatile, potentially resulting in larger investment gains or losses for our shareholders, than the market value of the common stock of other companies that have a relatively smaller amount of indebtedness.
•A significant portion of our outstanding debt is subject to early prepayment penalties, such as make‐whole premiums; as a result, it may be costly to pursue debt repayment as a deleveraging strategy.
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Furthermore, our Credit Agreement, our LC Facility and the indentures governing our outstanding notes contain, and any future debt obligations may contain, covenants that, among other things, restrict our ability to pay dividends, incur additional debt and sell assets.
We may not be able to generate sufficient cash to service all of our indebtedness, and we may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments on or to refinance our indebtedness depends on our financial and operating performance, which is subject to prevailing economic and competitive conditions and to financial, business and other factors that may be beyond our control. We cannot assure you that we will maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.
In addition, our ability to meet our debt service obligations is dependent upon the operating results of our subsidiaries and their ability to pay dividends or make other payments or advances to us. We hold most of our assets at, and conduct substantially all of our operations through, direct and indirect subsidiaries. Moreover, we are dependent on dividends or other intercompany transfers of funds from our subsidiaries to meet our debt service and other obligations, including payment on our outstanding debt. The ability of our subsidiaries to pay dividends or make other payments or advances to us will depend on their operating results and will be subject to applicable laws and restrictions contained in agreements governing the debt of such subsidiaries. Our less than wholly owned subsidiaries may also be subject to restrictions on their ability to distribute cash to us in their financing or other agreements and, as a result, we may not be able to access their cash flows to service their respective debt obligations.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, including those required for physical plant maintenance or operation of our existing facilities, for integrating our historical acquisitions or for future corporate development activities, and such reduction or delay could continue for years. We also may be forced to sell assets or operations, seek additional capital, or restructure or refinance our indebtedness. We cannot assure you that we would be able to take any of these actions, that these actions would be successful and permit us to meet our scheduled debt service obligations, or that these actions would be permitted under the terms of our existing or future debt agreements, including our Credit Agreement, our LC Facility and the indentures governing our outstanding notes.
Restrictive covenants in the agreements governing our indebtedness may adversely affect us.
Our Credit Agreement, our LC Facility and the indentures governing our outstanding notes contain various covenants that, among other things, limit our ability and the ability of our subsidiaries to:
•incur, assume or guarantee additional indebtedness;
•incur liens;
•make certain investments;
•provide subsidiary guarantees;
•consummate asset sales;
•redeem debt that is subordinated in right of payment to outstanding indebtedness;
•enter into sale and lease‐back transactions;
•enter into transactions with affiliates; and
•consolidate, merge or sell all or substantially all of our assets.
These restrictions are subject to a number of important exceptions and qualifications. In addition, under certain circumstances, the terms of our Credit Agreement require us to maintain a financial ratio relating to our ability to satisfy certain fixed expenses, including interest payments. Our ability to meet this financial ratio and the aforementioned restrictive covenants may be affected by events beyond our control, and we cannot assure you that we will meet those tests. These restrictions could limit our ability to obtain future financing, make acquisitions or needed capital expenditures, withstand economic downturns in our business or the economy in general, conduct operations or otherwise take advantage of business opportunities that may arise. In
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addition, a breach of any of these covenants could cause an event of default, which, if not cured or waived, could require us to repay the indebtedness immediately. Under these conditions, we are not certain whether we would have, or be able to obtain, sufficient funds to make accelerated payments.
Despite current indebtedness levels, we have the ability and may decide to incur substantially more debt or otherwise increase our leverage. This could further exacerbate the risks described above.
We have the ability to incur additional indebtedness in the future, subject to the restrictions contained in our Credit Agreement, our LC Facility and the indentures governing our outstanding notes. We may decide to incur additional secured or unsecured debt in the future to finance our operations and any judgments or settlements or for other business purposes. Similarly, if we complete the proposed spin‐off of Conifer or continue to sell assets and do not use the proceeds to repay debt, this could further increase our financial leverage.
Our Credit Agreement provides for revolving loans in an aggregate principal amount of up to $1.9 billion, with a $200 million subfacility for standby letters of credit. Based on our eligible receivables, $1.797 billion was available for borrowing under the Credit Agreement at December 31, 2021. Our LC Facility provides for the issuance of standby and documentary letters of credit in an aggregate principal amount of up to $200 million. At December 31, 2021, we had no cash borrowings outstanding under the Credit Agreement, and we had $139 million of standby letters of credit outstanding in the aggregate under the Credit Agreement and the LC Facility. If new indebtedness is added or our leverage increases, the related risks that we now face could intensify.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The disclosure required under this Item is included in Item 1, Business, of Part I of this report.
ITEM 3. LEGAL PROCEEDINGS
Because we provide healthcare services in a highly regulated industry, we have been and expect to continue to be party to various lawsuits, claims and regulatory investigations from time to time. For information regarding material pending legal proceedings in which we are involved, see Note 17 to our Consolidated Financial Statements, which is incorporated by reference.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II.
ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Common Stock. Our common stock is listed on the New York Stock Exchange (“NYSE”) under the symbol “THC.” As of February 11, 2022, there were 3,578 holders of record of our common stock. Our transfer agent and registrar is Computershare. Shareholders with questions regarding their stock certificates, including inquiries related to exchanging or replacing certificates or changing an address, should contact the transfer agent at (866) 229‐8416.
Equity Compensation. Refer to Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, of Part III of this report, as well as Note 10 to our Consolidated Financial Statements, for information regarding securities authorized for issuance under our equity compensation plans.
Stock Performance Graph. The following graph shows the cumulative, five‐year total return for our common stock compared to the following indices:
•The S&P 500, a stock market index that measures the equity performance of 500 large companies listed on the stock exchanges in the United States (in which we are not included);
•The S&P 500 Health Care, a stock market index comprised of those companies included in the S&P 500 that are classified as part of the healthcare sector (in which we are not included); and
•A group made up of us and our healthcare provider peers (namely, Community Health Systems, Inc. (CYH), HCA Healthcare, Inc. (HCA), Tenet Healthcare Corporation (THC) and Universal Health Services, Inc. (UHS)), which we refer to as our “Peer Group” herein.
Performance data assumes that $100.00 was invested on December 31, 2016 in our common stock and each of the indices. The data assumes the reinvestment of all cash dividends and the cash value of other distributions. Moreover, in accordance with U.S. Securities and Exchange Commission (“SEC”) regulations, the returns of each company in our Peer Group have been weighted according to the respective company’s stock market capitalization at the beginning of each period for which a return is indicated. The stock price performance shown in the graph is not necessarily indicative of future stock price performance. The performance graph shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or incorporated by reference into any of our filings under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
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At December 31,
ITEM 6. RESERVED
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION TO MANAGEMENT’S DISCUSSION AND ANALYSIS
The purpose of this section, Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), is to provide a narrative explanation of our financial statements that enables investors to better understand our business, to enhance our overall financial disclosures, to provide the context within which our financial information may be analyzed, and to provide information about the quality of, and potential variability of, our financial condition, results of operations and cash flows. MD&A, which should be read in conjunction with the accompanying Consolidated Financial Statements, includes the following sections:
•Management Overview
•Sources of Revenue for Our Hospital Operations Segment
•Results of Operations
•Liquidity and Capital Resources
•Recently Issued Accounting Standards
•Critical Accounting Estimates
Our business consists of our Hospital Operations and other (“Hospital Operations”) segment, our Ambulatory Care segment and our Conifer segment. Our Hospital Operations segment is comprised of our acute care and specialty hospitals, imaging centers, ancillary outpatient facilities, micro‐hospitals and physician practices. At December 31, 2021, our subsidiaries operated 60 hospitals serving primarily urban and suburban communities in nine states. In April 2021, we completed the sale of the majority of the urgent care centers previously held by our Hospital Operations segment to an unaffiliated urgent care provider. In addition, we completed the sale of five Miami‐area hospitals and certain related operations (the “Miami Hospitals”) held by our Hospital Operations segment in August 2021.
Our Ambulatory Care segment is comprised of the operations of USPI Holding Company, Inc. (“USPI”), in which we hold an ownership interest of approximately 95%. At December 31, 2021, USPI had interests in 399 ambulatory surgery centers (“ASCs”) (249 consolidated) and 24 surgical hospitals (eight consolidated) in 34 states. At December 31, 2020, our Ambulatory Care segment also included 40 urgent care centers that were classified as held for sale and 24 imaging centers. In April 2021, we completed the divestiture of the 40 urgent care centers and transferred the 24 imaging centers to our Hospital Operations segment.
Our Conifer segment provides revenue cycle management and value-based care services to hospitals, health systems, physician practices, employers and other clients, through our Conifer Holdings, Inc. subsidiary (“Conifer”). At December 31, 2021, Conifer provided services to approximately 650 Tenet and non‐Tenet hospitals and other clients nationwide. Nearly all of the services comprising the operations of our Conifer segment are provided by Conifer Health Solutions, LLC, in which we owned an interest of approximately 76% at December 31, 2021, or by one of its direct or indirect wholly owned subsidiaries.
Unless otherwise indicated, all financial and statistical information included in MD&A relates to our continuing operations, with dollar amounts expressed in millions (except per‐adjusted‐patient‐admission and per‐adjusted‐patient‐day amounts). Continuing operations information includes the results of our same 60 hospitals operated throughout the years ended December 31, 2021 and 2020, and the Miami Hospitals we sold in August 2021. Continuing operations information excludes the results of our hospitals and other businesses that have been classified as discontinued operations for accounting purposes. We believe this information is useful to investors because it reflects our current portfolio of operations and the recent trends we are experiencing with respect to volumes, revenues and expenses. We present certain metrics as a percentage of net operating revenues because a significant portion of our operating expenses are variable. In addition, we present certain metrics on a per‐adjusted‐patient‐admission and per‐adjusted‐patient‐day basis to show trends other than volume.
In certain cases, information presented in MD&A for our Hospital Operations segment is described as presented on a same‐hospital basis, which includes the results of our same 60 hospitals operated throughout the years ended December 31, 2021 and 2020, and excludes the results of the Miami Hospitals we sold in August 2021 and the results of our discontinued operations. We present same‐hospital data because we believe it provides investors with useful information regarding the performance of our hospitals and other operations that are comparable for the periods presented.
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MANAGEMENT OVERVIEW
RECENT DEVELOPMENTS
Redemption of Senior Secured First Lien Notes—On February 9, 2022, we called for the redemption of all $700 million aggregate principal amount outstanding of our 7.500% senior secured first lien notes due 2025 (“2025 Senior Secured First Lien Notes”). The 2025 Senior Secured First Lien Notes will be redeemed for an anticipated amount of approximately $730 million on February 23, 2022 using cash on hand. We expect this transaction will lower our future annual cash interest payments by approximately $53 million.
Exercise of Call Option to Purchase Additional Ownership Interest in USPI—We have a put/call agreement (the “Baylor Put/Call Agreement”) with Baylor University Medical Center (“Baylor”) with respect to Baylor’s 5% ownership in USPI. In February 2022, we notified Baylor of our intention to exercise our call option under the Baylor Put/Call Agreement to purchase 33.3% of the USPI shares held by Baylor as of April 1, 2017. The amount and timing of the payment related to the exercise of our call option are currently uncertain. See Note 18 to the accompanying Consolidated Financial Statements for additional information related to the Baylor Put/Call Agreement.
IMPACT OF THE COVID-19 PANDEMIC
The spread of COVID‐19 and the ensuing response of federal, state and local authorities beginning in March 2020 resulted in a material reduction in our patient volumes and also adversely affected our net operating revenues in the years ended December 31, 2021 and 2020. Restrictive measures, including travel bans, social distancing, quarantines and shelter‐in‐place orders, reduced the number of procedures performed at our facilities, as well as the volume of emergency room and physician office visits. We began experiencing improvement in patient volumes in May 2020 as various states eased stay‐at‐home restrictions and our facilities were permitted to resume elective surgeries and other procedures; however, the COVID‐19 pandemic generally and, most recently, the spread of the Delta variant and emergence of the Omicron variant continue to impact all three segments of our business, as well as our patients, communities and employees. Broad economic factors resulting from the pandemic, including higher inflation, increased unemployment rates in certain areas in which we operate and reduced consumer spending, continued to impact our patient volumes, service mix and revenue mix in 2021. The pandemic also continued to have an adverse effect on our operating expenses to varying degrees in 2021. As further described below, we have been required to utilize higher‐cost temporary labor and pay premiums above standard compensation for essential workers. In addition, we have experienced significant price increases in medical supplies, particularly for personal protective equipment (“PPE”), and we have encountered supply‐chain disruptions, including shortages and delays.
As described under “Sources of Revenue for Our Hospital Operations Segment” below, various legislative actions have mitigated some of the economic disruption caused by the COVID‐19 pandemic on our business. Additional funding for the Public Health and Social Services Emergency Fund (“Provider Relief Fund” or “PRF”) was among the provisions of the COVID‐19 relief legislation. In the years ended December 31, 2021 and 2020, we received cash payments of $215 million and $974 million, respectively, due to grants from the Provider Relief Fund and other state and local grant programs. We recognized $191 million and $882 million, respectively, from these funds as grant income and $14 million and $17 million, respectively, in equity in earnings of unconsolidated affiliates in the accompanying Consolidated Statements of Operations during the years ended December 31, 2021 and 2020.
Throughout MD&A, we have provided additional information on the impact of the COVID‐19 pandemic on our results of operations and the steps we have taken, and are continuing to take, in response. The ultimate extent and scope of the pandemic and its future impact on our business remain unknown. For information about risks and uncertainties related to COVID‐19 that could affect our results of operations, financial condition and cash flows, see the Risk Factors section in Part I of this report.
TRENDS AND STRATEGIES
As described above and throughout MD&A, we experienced a significant disruption to our business in 2020 and 2021 due to the COVID‐19 pandemic. Although we have seen improvement in our patient volumes, we continue to experience negative impacts of the pandemic on our business in varying degrees. Most recently, in the second half of 2021, we experienced significant acceleration in COVID‐19 cases associated with the Delta variant, with a peak in such cases in late August 2021, and the Omicron variant, which emerged in November 2021 to drive a new COVID‐19 surge. Throughout the COVID‐19 pandemic, we have taken, and we continue to take, various actions to increase our liquidity and mitigate the impact of reductions in our patient volumes and operating revenues. We have issued new senior unsecured notes and senior secured first lien notes, redeemed existing senior unsecured notes and senior secured first lien notes, including those with the highest interest rate and nearest maturity date of all of our long‐term debt, and amended our revolving credit facility. We also decreased our employee headcount throughout the organization at the outset of the COVID‐19 pandemic, and we deferred certain operating
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expenses that were not expected to impact our response to the pandemic. In addition, we reduced certain variable costs across the enterprise. Together with government relief packages, we believe these actions supported our continued operation during the initial uncertainty caused by the COVID‐19 pandemic and continue to do so. For further information on our liquidity, see “Liquidity and Capital Resources” below.
We have experienced, and continue to experience, increased competition with other healthcare providers in recruiting and retaining qualified personnel responsible for the operation of our facilities. There is a limited availability of experienced medical support personnel nationwide, which drives up the wages and benefits required to recruit and retain employees. In particular, like others in the healthcare industry, we continue to experience a shortage of critical‐care nurses in certain disciplines and geographic areas. This shortage has been exacerbated by the COVID‐19 pandemic as more nurses choose to retire early, leave the workforce or take travel assignments. In some areas, the increased demand for care of COVID‐19 patients in our hospitals, as well as the direct impact of COVID‐19 on physicians, employees and their families, have put a strain on our resources and staff. Over the past two years, we have had to rely on higher-cost temporary and contract labor, which we compete with other healthcare providers to secure, and pay premiums above standard compensation for essential workers. The length and extent of the disruptions caused by the COVID‐19 pandemic are currently unknown; however, we have thus far seen such disruptions continue into 2022, and we expect they may endure through the duration of the pandemic.
We believe that several key trends are also continuing to shape the demand for healthcare services: (1) consumers, employers and insurers are actively seeking lower‐cost solutions and better value as they focus more on healthcare spending; (2) patient volumes are shifting from inpatient to outpatient settings due to technological advancements and demand for care that is more convenient, affordable and accessible; (3) the growing aging population requires greater chronic disease management and higher‐acuity treatment; and (4) consolidation continues across the entire healthcare sector. In addition, the healthcare industry, in general, and the acute care hospital business, in particular, have experienced significant regulatory uncertainty based, in large part, on administrative, legislative and judicial efforts to limit, alter or repeal the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (“Affordable Care Act” or “ACA”). It is difficult to predict the full impact of regulatory uncertainty on our future revenues and operations.
Expansion of Our Ambulatory Care Segment—In response to these trends, we continue to focus on opportunities to expand our Ambulatory Care segment through acquisitions, organic growth, construction of new outpatient centers and strategic partnerships. During the years ended December 31, 2021 and 2020, we invested $1.315 billion and $1.200 billion, respectively, to acquire ownership interests in new, or increase our existing ownership in, ambulatory care facilities. This activity included the acquisition of ownership interests in 86 ASCs and related ambulatory support services (collectively, the “SCD Centers”) from Surgical Center Development #3, LLC and Surgical Center Development #4, LLC (“SCD”) in December 2021. The newly acquired facilities augmented our Ambulatory Care segment’s existing musculoskeletal service line and expanded the number of markets it serves. In addition, USPI and SCD’s principals entered into a joint venture and development agreement under which USPI will have the exclusive option to partner with affiliates of SCD on the future development of a minimum target of 50 de novo ASCs over a period of five years.
During the year ended December 31, 2021, we also acquired controlling interests in four ASCs in Maryland, two in each of Florida, Georgia and Texas and one in Arizona. We also opened four new ASCs – one each in Montana, Nevada, New Mexico and Tennessee. We believe USPI’s ASCs and surgical hospitals offer many advantages to patients and physicians, including greater affordability, predictability, flexibility and convenience. Moreover, due in part to advancements in medical technology and due to the lower cost structure and greater efficiencies that are attainable at a specialized outpatient site, we believe the volume and complexity of surgical cases performed in an outpatient setting will continue to increase. Historically, our outpatient services have generated significantly higher margins for us than inpatient services.
Driving Growth in Our Hospital Systems—We remain committed to better positioning our hospital systems and competing more effectively in the ever‐evolving healthcare environment by focusing on driving performance through operational effectiveness, increasing capital efficiency and margins, investing in our physician enterprise, particularly our specialist network, enhancing patient and physician satisfaction, growing our higher‐demand and higher‐acuity clinical service lines (including outpatient lines), expanding patient and physician access, and optimizing our portfolio of assets. Over the past several years, we have undertaken enterprise‐wide cost reduction measures, comprised primarily of workforce reductions in 2019 (including streamlining corporate overhead and centralized support functions), the consolidation of office locations, and the continuing renegotiation of contracts with suppliers and vendors. Moreover, we established offshore support operations at our Global Business Center (“GBC”) in the Philippines. We incurred restructuring charges in conjunction with these initiatives and our cost‐saving efforts in response to the COVID‐19 pandemic in the years ended December 31, 2021, 2020 and 2019, and we could incur additional such charges if we identify other areas that can be transitioned offshore.
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We also continue to exit service lines, businesses and markets that we believe are no longer a core part of our long‐term growth strategy. In April 2021, we divested the majority of our urgent care centers operated under the MedPost and CareSpot brands by our Hospital Operations and Ambulatory Care segments. In addition, we sold our former Miami Hospitals in August 2021. We intend to continue to further refine our portfolio of hospitals and other healthcare facilities when we believe such refinements will help us improve profitability, allocate capital more effectively in areas where we have a stronger presence, deploy proceeds on higher‐return investments across our business, enhance cash flow generation, reduce our debt and lower our ratio of debt‐to‐Adjusted EBITDA.
Improving the Customer Care Experience—As consumers continue to become more engaged in managing their health, we recognize that understanding what matters most to them and earning their loyalty is imperative to our success. As such, we have enhanced our focus on treating our patients as traditional customers by: (1) establishing networks of physicians and facilities that provide convenient access to services across the care continuum; (2) expanding service lines aligned with growing community demand, including a focus on aging and chronic disease patients; (3) offering greater affordability and predictability, including simplified registration and discharge procedures, particularly in our outpatient centers; (4) improving our culture of service; and (5) creating health and benefit programs, patient education and health literacy materials that are customized to the needs of the communities we serve. Through these efforts, we intend to improve the customer care experience in every part of our operations.
Driving Conifer’s Growth While Pursuing a Tax-Free Spin-Off—We previously announced a number of actions to support our goals of improving financial performance and enhancing shareholder value, including the exploration of strategic alternatives for Conifer. In July 2019, we announced our intention to pursue a tax‐free spin‐off of Conifer as a separate, independent, publicly traded company. Completion of the proposed spin‐off is subject to a number of conditions, including, among others, assurance that the separation will be tax‐free for U.S. federal income tax purposes, finalization of Conifer’s capital structure, the effectiveness of appropriate filings with the SEC, and final approval from our board of directors. Although in March 2021 we entered into a month‐to‐month agreement amending and updating certain terms and conditions related to the revenue cycle management services Conifer provides to Tenet hospitals (“Amended RCM Agreement”), the execution of a comprehensive amendment to and restatement of the master services agreement between Conifer and Tenet remains an additional prerequisite to the spin‐off of Conifer. If consummated, this transaction is expected to potentially enhance shareholder value and, to a lesser degree, the level of Tenet’s debt through a tax‐free debt‐for‐debt exchange. There can be no assurance regarding the timeframe for completion of the Conifer spin‐off, the allocation of assets and liabilities between Tenet and Conifer, that the other conditions of the spin‐off will be met, or that it will be completed at all.
Conifer serves approximately 650 Tenet and non‐Tenet hospitals and other clients nationwide. In addition to providing revenue cycle management services to health systems and physicians, Conifer provides support to both providers and self‐insured employers seeking assistance with clinical integration, financial risk management and population health management. Conifer remains focused on driving growth by continuing to market and expand its revenue cycle management and value‐based care solutions businesses. We believe that our success in growing Conifer and increasing its profitability depends in part on our success in executing the following strategies: (1) attracting hospitals and other healthcare providers that currently handle their revenue cycle management processes internally as new clients; (2) generating new client relationships through opportunities from USPI and Tenet’s acute care hospital acquisition and divestiture activities; (3) expanding revenue cycle management and value‐based care service offerings through organic development and small acquisitions; and (4) leveraging data from tens of millions of patient interactions for continued enhancement of the value‐based care environment to drive competitive differentiation.
Improving Profitability—As we return to more normal operations, we will continue to focus on growing patient volumes and effective cost management as a means to improve profitability. We believe our inpatient admissions have been constrained in recent years (prior to the COVID‐19 pandemic) by increased competition, utilization pressure by managed care organizations, new delivery models that are designed to lower the utilization of acute care hospital services, the effects of higher patient co‐pays, co‐insurance amounts and deductibles, changing consumer behavior, and adverse economic conditions and demographic trends in certain of our markets. However, we also believe that emphasis on higher‐demand clinical service lines (including outpatient services), focus on expanding our ambulatory care business, cultivation of our culture of service, participation in Medicare Advantage health plans that have been experiencing higher growth rates than traditional Medicare, and contracting strategies that create shared value with payers should help us grow our patient volumes over time. We are also continuing to explore new opportunities to enhance efficiency, including further integration of enterprise‐wide centralized support functions, outsourcing additional functions unrelated to direct patient care, and reducing clinical and vendor contract variation.
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Reducing Our Leverage Over Time—All of our outstanding long‐term debt has a fixed rate of interest, except for outstanding borrowings, if any, under our revolving credit facility, and the maturity dates of our notes are staggered from 2023 through 2031. We believe that our capital structure minimizes the near‐term impact of increased interest rates, and the staggered maturities of our debt allow us to refinance our debt over time. During the year ended December 31, 2021, we retired approximately $2.988 billion aggregate principal amount of certain of our senior unsecured notes and senior secured first lien notes. These notes were retired using proceeds from the June 2021 sale of $1.400 billion aggregate principal amount of 4.250% senior secured first lien notes due 2029 (the “2029 Senior Secured First Lien Notes”), the proceeds from the sale of the Miami Hospitals in August 2021 and cash on hand. These transactions reduced future annual cash interest expense payments by approximately $96 million. Moreover, on February 9, 2022, we called for the redemption of all $700 million aggregate principal amount outstanding of our 2025 Senior Secured First Lien Notes. We anticipate redeeming the notes using cash on hand. It remains our long‐term objective to reduce our debt and lower our ratio of debt‐to‐Adjusted EBITDA, primarily through more efficient capital allocation and Adjusted EBITDA growth, which should lower our refinancing risk.
Our ability to execute on our strategies and respond to the aforementioned trends is subject to the extent and scope of the impact on our operations of the COVID‐19 pandemic, as well as a number of other risks and uncertainties, all of which may cause actual results to be materially different from expectations. For information about risks and uncertainties that could affect our results of operations, see the Forward‐Looking Statements and Risk Factors sections in Part I of this report.
RECENT RESULTS OF OPERATIONS
We have provided below certain selected operating statistics for the three months ended December 31, 2021 and 2020 on a continuing operations basis. The following tables also show information about facilities in our Ambulatory Care segment that we control and, therefore, consolidate.
Continuing Operations
Three Months Ended December 31, Increase(Decrease)
Hospital Operations – hospitals and related outpatient facilities:
Number of hospitals (at end of period) 60 65 (5) (1)
Average length of stay (days) 5.34 5.18 3.1 %
Utilization of licensed beds(3) 50.5 % 49.9 % 0.6 % (1)
Ambulatory Care:
Total consolidated facilities (at end of period) 257 290 (33) (1)
(1) The change is the difference between the 2021 and 2020 amounts shown.
Total admissions decreased by 18,885, or 12.4%, in the three months ended December 31, 2021 compared to the three months ended December 31, 2020, and total surgeries decreased by 6,963, or 7.3%, in the 2021 period compared to the 2020 period. Total emergency department visits increased 8.7% in the three months ended December 31, 2021 compared to the same period in the prior year. The decrease in our patient volumes from continuing operations in the three months ended
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December 31, 2021 compared to the three months ended December 31, 2020 is primarily attributable to the sale of the Miami Hospitals in August 2021. The decrease of Ambulatory Care total consolidated cases of 45.6% in the three months ended December 31, 2021 compared to the 2020 period is primarily due to the divestiture of USPI’s urgent care centers and the realignment of its imaging centers under our Hospital Operations segment.
Continuing Operations
Three Months Ended December 31, Increase(Decrease)
Net operating revenues:
Hospital Operations prior to inter-segment eliminations $ 3,910 $ 4,065 (3.8) %
Inter-segment eliminations (120) (143) (16.1) %
Net operating revenues decreased by $59 million, or 1.2%, in the three months ended December 31, 2021 compared to the same period in 2020, primarily due to the sale of the Miami Hospitals and the divestiture of the urgent care centers previously held by our Hospital Operations and Ambulatory Care segments. During the three months ended December 31, 2021 and 2020, we recognized net grant income of $138 million and $437 million, respectively, which amounts are not included in net operating revenues.
Our accounts receivable days outstanding (“AR Days”) from continuing operations were 57.0 days at December 31, 2021 and 55.6 days at December 31, 2020, compared to our target of less than 55 days. AR Days are calculated as our accounts receivable from continuing operations on the last date in the quarter divided by our net operating revenues from continuing operations for the quarter ended on that date divided by the number of days in the quarter. This calculation includes our Hospital Operations segment’s contract assets. The AR Days calculation excludes (i) urgent care centers operated under the MedPost and CareSpot brands, which we divested in April 2021, (ii) the Miami Hospitals, which we sold in August 2021, and (iii) our California provider fee revenues.
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Continuing Operations
Three Months Ended December 31, Increase(Decrease)
Hospital Operations:
Salaries, wages and benefits $ 1,841 $ 1,892 (2.7) %
Ambulatory Care:
Salaries, wages and benefits $ 178 $ 171 4.1 %
Other operating expenses 94 91 3.3 %
Conifer:
Salaries, wages and benefits $ 169 $ 162 4.3 %
Supplies 1 1 — %
Other operating expenses 60 70 (14.3) %
Total:
Salaries, wages and benefits $ 2,188 $ 2,225 (1.7) %
Rent/lease expense(1):
Hospital Operations $ 71 $ 74 (4.1) %
Ambulatory Care 25 25 — %
(1) Included in other operating expenses.
Continuing Operations
Three Months Ended December 31, Increase(Decrease)
Selected Operating Expenses per Adjusted Patient Admission 2021 2020
Hospital Operations:
Supplies per adjusted patient admission(1) 2,692 2,583 4.2 %
Other operating expenses per adjusted patient admission(1) 3,632 3,480 4.4 %
Salaries, wages and benefits for our Hospital Operations segment decreased $51 million, or 2.7%, in the three months ended December 31, 2021 compared to the same period in 2020. This change was primarily attributable to the sale of the Miami Hospitals in August 2021 and our continued focus on cost-reduction measures and corporate efficiencies, partially offset by increased contract labor costs, increased overtime expense and annual merit increases for certain of our employees. On a per‐adjusted‐patient‐admission basis, salaries, wages and benefits increased 5.4% in the three months ended December 31, 2021 compared to the three months ended December 31, 2020, primarily due to lower adjusted patient admissions and the expenses mentioned above.
Supplies expense for our Hospital Operations segment decreased $25 million, or 3.7%, during the three months ended December 31, 2021 compared to the three months ended December 31, 2020. This decrease was primarily attributable to the sale of the Miami Hospitals, the decrease in patient volumes during the 2021 period and our cost-efficiency measures, partially offset by increased costs for certain supplies as a result of the COVID-19 pandemic and higher patient acuity. On a per‐adjusted‐patient‐admission basis, supplies expense increased 4.2% in the three months ended December 31, 2021 compared
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to the three months ended December 31, 2020, primarily due to higher patient acuity and increased costs of certain supplies as a result of the COVID-19 pandemic.
Other operating expenses for our Hospital Operations segment decreased $35 million, or 3.8%, in the three months ended December 31, 2021 compared to the same period in 2020. The decrease was primarily attributable to the sale of the Miami Hospitals and our cost-efficiency measures. On a per‐adjusted‐patient‐admission basis, other operating expenses in the three months ended December 31, 2021 increased 4.4% compared to the three months ended December 31, 2020. This increase was primarily due to lower adjusted patient admissions and the proportionally higher level of fixed costs (e.g., rent expense) in other operating expenses.
LIQUIDITY AND CAPITAL RESOURCES OVERVIEW
Cash and cash equivalents were $2.364 billion at December 31, 2021 compared to $2.292 billion at September 30, 2021.
Significant cash flow items in the three months ended December 31, 2021 included:
•Net cash provided by operating activities before interest, taxes, discontinued operations, impairment and restructuring charges, and acquisition‐related costs, and litigation costs and settlements of $704 million, including $140 million received from federal, state and local grants, $186 million of Medicare advances recouped and repaid, and a $128 million payment of payroll taxes deferred during 2020;
•Proceeds from the issuance of $1.450 billion aggregate principal amount of our 4.375% senior secured first lien notes due 2030 (the “2030 Senior Secured First Lien Notes”), which were primarily used to acquire the SCD Centers in December 2021;
•$1.156 billion of payments for purchases of businesses or joint venture interests;
•Capital expenditures of $304 million;
•Interest payments of $273 million;
•$107 million of distributions paid to noncontrolling interests;
•Purchase of marketable securities and equity investments of $85 million; and
•$78 million of Medicare advances recouped and repaid by our unconsolidated affiliates for which we provide cash management services.
Net cash provided by operating activities was $1.568 billion in the year ended December 31, 2021 compared to $3.407 billion in the year ended December 31, 2020. Key factors contributing to the change between 2021 and 2020 include the following:
•An increase in operating income of $1.031 billion before net losses on sales, consolidation and deconsolidation of facilities; litigation and investigation costs; impairment and restructuring charges and acquisition-related costs; depreciation and amortization; loss (income) from divested and closed businesses; and income recognized from government relief packages;
•$512 million of Medicare advances recouped and repaid in the year ended December 31, 2021 compared to $1.393 billion of Medicare advances received in the year ended December 31, 2020;
•$178 million of cash received from federal, state and local grants in 2021 compared to $900 million received in 2020;
•A $128 million payment in 2021 of payroll taxes deferred pursuant to COVID-19 legislation compared to the deferral of $260 million of payroll taxes in 2020;
•Lower interest payments of $25 million in 2021;
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•Higher income tax payments of $80 million in 2021;
•A decrease of $180 million in payments for restructuring charges, acquisition‐related costs, and litigation costs and settlements in 2021; and
•The timing of other working capital items.
SOURCES OF REVENUE FOR OUR HOSPITAL OPERATIONS SEGMENT
We earn revenues for patient services from a variety of sources, primarily managed care payers and the federal Medicare program, as well as state Medicaid programs, indemnity‐based health insurance companies and uninsured patients (that is, patients who do not have health insurance and are not covered by some other form of third‐party arrangement).
The following table shows the sources of net patient service revenues less implicit price concessions for our hospitals and related outpatient facilities, expressed as percentages of net patient service revenues less implicit price concessions from all sources:
Years Ended December 31,
Indemnity and other 4.8 % 4.8 % 4.7 %
(1) Includes Medicare and Medicaid managed care programs.
Our payer mix on an admissions basis for our hospitals and related outpatient facilities, expressed as a percentage of total admissions from all sources, is shown below:
Years Ended December 31,
Charity and uninsured 5.8 % 6.3 % 6.0 %
Indemnity and other 3.2 % 2.9 % 2.7 %
(1) Includes Medicare and Medicaid managed care programs.
GOVERNMENT PROGRAMS
The Centers for Medicare and Medicaid Services (“CMS”), an agency of the U.S. Department of Health and Human Services (“HHS”), is the single largest payer of healthcare services in the United States. Approximately 63 millionindividuals rely on healthcare benefits through Medicare, and approximately 83 millionindividuals are enrolled in Medicaid and the Children’s Health Insurance Program (“CHIP”). These three programs are authorized by federal law and administered by CMS. Medicare is a federally funded health insurance program primarily for individuals 65 years of age and older, as well as some younger people with certain disabilities and conditions, and is provided without regard to income or assets. Medicaid is co‐administered by the states and is jointly funded by the federal government and state governments. Medicaid is the nation’s main public health insurance program for people with low incomes and is the largest source of health coverage in the United States. The CHIP, which is also co‐administered by the states and jointly funded, provides health coverage to children in families with incomes too high to qualify for Medicaid, but too low to afford private coverage. Unlike Medicaid, the CHIP is limited in duration and requires the enactment of reauthorizing legislation. Funding for the CHIP has been reauthorized through federal fiscal year (“FFY”) 2027.
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The Affordable Care Act
The Affordable Care Act extended health coverage to millions of uninsured legal U.S. residents through a combination of private sector health insurance reforms and public program expansion. The expansion of Medicaid in 38 states (including four of the nine states in which we operate acute care hospitals) and the District of Columbia is currently financed through:
•negative “productivity adjustments” to the annual market basket updates, which began in 2011 and do not expire under current law; and
•reductions to Medicare and Medicaid disproportionate share hospital (“DSH”) payments, which began for Medicare payments in FFY 2014 and, under current law, are scheduled to commence for Medicaid payments in FFY 2024.
The ACA also includes measures designed to promote quality and cost efficiency in healthcare delivery and provisions intended to strengthen fraud and abuse enforcement.
The initial expansion of health insurance coverage under the ACA resulted in an increase in the number of patients using our facilities with either private or public program coverage and a decrease in uninsured and charity care admissions. Although a substantial portion of our patient volumes and, as a result, our revenues has historically been derived from government healthcare programs, reductions to our reimbursement under the Medicare and Medicaid programs as a result of the ACA have been partially offset by increased revenues from providing care to previously uninsured individuals.
The healthcare industry, in general, and the acute care hospital business, in particular, have experienced significant regulatory uncertainty based, in large part, on administrative, legislative and judicial efforts to limit, alter or repeal the ACA. Since 2010, various states, private entities and individuals have challenged parts or all of the ACA numerous times in state and federal courts, and the U.S. Supreme Court has issued decisions in three such cases, most recently in June 2021. Various state legislatures have also challenged parts or all of the ACA through legislation, while other states have acted to safeguard the ACA by codifying certain provisions into state law. We cannot predict what future action, if any, Congress might take with respect to the ACA. Furthermore, we are unable to predict the impact on our future revenues and operations of (1) court challenges to the ACA, (2) administrative, regulatory and legislative changes, including the possibility of expansion of government‐sponsored coverage, or (3) market reactions to those changes. However, if the ultimate impact is that significantly fewer individuals have private or public health coverage, we likely will experience decreased patient volumes, reduced revenues and an increase in uncompensated care, which would adversely affect our results of operations and cash flows.
Medicare
Medicare offers its beneficiaries different ways to obtain their medical benefits. One option, the Original Medicare Plan (which includes “Part A” and “Part B”), is a fee‐for‐service (“FFS”) payment system. The other option, called Medicare Advantage (sometimes called “Part C” or “MA Plans”), includes health maintenance organizations (“HMOs”), preferred provider organizations (“PPOs”), private FFS Medicare special needs plans and Medicare medical savings account plans. Our total net patient service revenues from continuing operations of the hospitals and related outpatient facilities in our Hospital Operations segment for services provided to patients enrolled in the Original Medicare Plan were $2.615 billion, $2.695 billion, and $2.888 billion for the years ended December 31, 2021, 2020 and 2019, respectively.
A general description of the types of payments we receive for services provided to patients enrolled in the Original Medicare Plan is provided below. Recent regulatory and legislative updates to the terms of these payment systems and their estimated effect on our revenues can be found under “Regulatory and Legislative Changes” below.
Acute Care Hospital Inpatient Prospective Payment System
Medicare Severity-Adjusted Diagnosis-Related Group Payments—Sections 1886(d) and 1886(g) of the Social Security Act set forth a system of payments for the operating and capital costs of inpatient acute care hospital admissions based on a prospective payment system (“PPS”). Under the inpatient prospective payment systems (“IPPS”), Medicare payments for hospital inpatient operating services are made at predetermined rates for each hospital discharge. Discharges are classified according to a system of Medicare severity‐adjusted diagnosis‐related groups (“MS‐DRGs”), which categorize patients with similar clinical characteristics that are expected to require similar amounts of hospital resources. CMS assigns to each MS‐DRG a relative weight that represents the average resources required to treat cases in that particular MS‐DRG, relative to the average resources used to treat cases in all MS‐DRGs.
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The base payment amount for the operating component of the MS‐DRG payment is comprised of an average standardized amount that is divided into a labor‐related share and a nonlabor-related share. Both the labor‐related share of operating base payments and the base payment amount for capital costs are adjusted for geographic variations in labor and capital costs, respectively. Using diagnosis and procedure information submitted by the hospital, CMS assigns to each discharge an MS‐DRG, and the base payments are multiplied by the relative weight of the MS‐DRG assigned. The MS‐DRG operating and capital base rates, relative weights and geographic adjustment factors are updated annually, with consideration given to: the increased cost of goods and services purchased by hospitals; the relative costs associated with each MS‐DRG; changes in labor data by geographic area; and other policies. Although these payments are adjusted for area labor and capital cost differentials, the adjustments do not take into consideration an individual hospital’s operating and capital costs.
Outlier Payments—Outlier payments are additional payments made to hospitals on individual claims for treating Medicare patients whose medical conditions are costlier to treat than those of the average patient in the same MS‐DRG. To qualify for a cost outlier payment, a hospital’s billed charges, adjusted to cost, must exceed the payment rate for the MS‐DRG by a fixed threshold updated annually by CMS. A Medicare Administrative Contractor (“MAC”) calculates the cost of a claim by multiplying the billed charges by an average cost‐to‐charge ratio that is typically based on the hospital’s most recently filed cost report. Generally, if the computed cost exceeds the sum of the MS‐DRG payment plus the fixed threshold, the hospital receives 80% of the difference as an outlier payment.
Under the Social Security Act, CMS must project aggregate annual outlier payments to all PPS hospitals to be not less than 5% or more than 6% of total MS‐DRG payments (“Outlier Percentage”). The Outlier Percentage is determined by dividing total outlier payments by the sum of MS‐DRG and outlier payments. CMS annually adjusts the fixed threshold to bring projected outlier payments within the mandated limit. A change to the fixed threshold affects total outlier payments by changing: (1) the number of cases that qualify for outlier payments; and (2) the dollar amount hospitals receive for those cases that qualify for outlier payments. Under certain conditions, outlier payments are subject to reconciliation based on more recent data.
Disproportionate Share Hospital Payments—In addition to making payments for services provided directly to beneficiaries, Medicare makes additional payments to hospitals that treat a disproportionately high share of low‐income patients. Prior to October 1, 2013, DSH payments were based on each hospital’s low income utilization for each payment year (the “Pre‐ACA DSH Formula”). The ACA revised the Medicare DSH adjustment effective for discharges occurring on or after October 1, 2013. Under the revised methodology, hospitals receive 25% of the amount they previously would have received under the Pre‐ACA DSH Formula. This amount is referred to as the “Empirically Justified Amount.”
Hospitals qualifying for the Empirically Justified Amount of DSH payments are also eligible to receive an additional payment for uncompensated care (the “UC‐DSH Amount”). The UC‐DSH Amount is a hospital’s share of a pool of funds that the CMS Office of the Actuary estimates would equal 75% of Medicare DSH that otherwise would have been paid under the Pre‐ACA DSH Formula, adjusted for changes in the percentage of individuals that are uninsured. Generally, the factors used to calculate and distribute UC‐DSH Amounts are set forth in the ACA and are not subject to administrative or judicial review. The statute requires that each hospital’s cost of uncompensated care (i.e., charity and bad debt) as a percentage of the total uncompensated care cost of all DSH hospitals be used to allocate the pool. As of December 31, 2021, 49 of our acute care hospitals in continuing operations qualified for Medicare DSH payments.
The statutes and regulations that govern Medicare DSH payments have been the subject of various administrative appeals and lawsuits, and our hospitals have been participating in such appeals, including challenges to the inclusion of the Medicare Advantage days used in the DSH calculation as set forth in the Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2005 Rates. We are unable to predict what action the Secretary of HHS might take with respect to the DSH calculation for prior periods in this regard or the outcome of the litigation; however, a favorable outcome of our DSH appeals could have a material impact on our future revenues and cash flows.
Direct Graduate and Indirect Medical Education Payments—The Medicare program provides additional reimbursement to approved teaching hospitals for the increased expenses incurred by such institutions. This additional reimbursement, which is subject to certain limits, including intern and resident full-time equivalent (“FTE”) limits, is made in the form of Direct Graduate Medical Education (“DGME”) and Indirect Medical Education (“IME”) payments. As of December 31, 2021, 30 of our hospitals in continuing operations were affiliated with academic institutions and were eligible to receive such payments.
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IPPS Quality Adjustments—The ACA also authorizes the following quality adjustments to Medicare IPPS payments:
•Value‐Based Purchasing (“VBP”) – Under the VBP program, IPPS operating payments to hospitals are reduced by 2% to fund value‐based incentive payments to eligible hospitals based on their overall performance on a set of quality measures;
•Hospital Readmission Reduction Program – Under this program, IPPS operating payments to hospitals with excess readmissions are reduced up to a maximum of 3% of base MS‐DRG payments; and
•Hospital‐Acquired Conditions Reduction Program – Under this program, overall inpatient payments are reduced by 1% for hospitals in the worst performing quartile of risk‐adjusted quality measures for reasonable preventable hospital‐acquired conditions.
These adjustments are generally based on a hospital’s performance from prior periods and are updated annually by CMS.
Hospital Outpatient Prospective Payment System
Under the outpatient prospective payment system, hospital outpatient services, except for certain services that are reimbursed on a separate fee schedule, are classified into groups called ambulatory payment classifications (“APCs”). Services in each APC are similar clinically and in terms of the resources they require, and a payment rate is established for each APC. Depending on the services provided, hospitals may be paid for more than one APC for an encounter. CMS annually updates the APCs and the rates paid for each APC.
Inpatient Psychiatric Facility Prospective Payment System
The inpatient psychiatric facility (“IPF”) prospective payment system (“IPF-PPS”) applies to psychiatric hospitals and psychiatric units located within acute care hospitals that have been designated as exempt from the hospital inpatient prospective payment system. The IPF-PPS is based on prospectively determined per‐diem rates and includes an outlier policy that authorizes additional payments for extraordinarily costly cases. As of December 31, 2021, 19 of our general hospitals in continuing operations operated IPF units.
Inpatient Rehabilitation Prospective Payment System
Rehabilitation hospitals and rehabilitation units in acute care hospitals meeting certain criteria established by CMS are eligible to be paid as an inpatient rehabilitation facility (“IRF”) under the IRF prospective payment system (“IRF‐PPS”). Payments under the IRF‐PPS are made on a per-discharge basis. The IRF‐PPS uses federal prospective payment rates across distinct case‐mix groups established by a patient classification system. As of December 31, 2021, we operated one freestanding IRF, and 17 of our general hospitals in continuing operations operated IRF units.
Physician and Other Health Professional Services Payment System
Medicare uses a fee schedule to pay for physician and other health professional services based on a list of services and their payment rates referred to as the Medicare Physician Fee Schedule (“MPFS”). In determining payment rates for each service, CMS considers the amount of clinician work required to provide a service, expenses related to maintaining a practice, and professional liability insurance costs. These three factors are adjusted for variation in the input prices in different markets, and the sum is multiplied by the fee schedule’s conversion factor (average payment amount) to produce a total payment amount.
Cost Reports
The final determination of certain Medicare payments to our hospitals, such as DSH, DGME, IME and bad debt expense, are retrospectively determined based on our hospitals’ cost reports. The final determination of these payments often takes many years to resolve because of audits by the program representatives, providers’ rights of appeal, and the application of numerous technical reimbursement provisions.
For filed cost reports, we adjust the accrual for estimated cost report settlements based on those cost reports and subsequent activity, and record a valuation allowance against those cost reports based on historical settlement trends. The accrual for estimated cost report settlements for periods for which a cost report is yet to be filed is recorded based on estimates of what we expect to report on the filed cost reports and a corresponding valuation allowance is recorded as previously described. Cost reports must generally be filed within five months after the end of the annual cost report reporting period. After the cost report is filed, the accrual and corresponding valuation allowance may need to be adjusted.
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Medicare Claims Reviews
HHS estimates that the overall 2021 Medicare FFS improper payment rate for the program is approximately 6.3%. The 2021 error rate for Hospital IPPS payments is approximately 2.4%. CMS has identified the FFS program as a program at risk for significant erroneous payments, and one of the agency’s stated key goals is to pay claims properly the first time. This means paying the right amount, to legitimate providers, for covered, reasonable and necessary services provided to eligible beneficiaries. According to CMS, paying correctly the first time saves resources required to recover improper payments and ensures the proper expenditure of Medicare Trust Fund dollars. CMS has established several initiatives to prevent or identify improper payments before a claim is paid, and to identify and recover improper payments after paying a claim. The overall goal is to reduce improper payments by identifying and addressing coverage and coding billing errors for all provider types. Under the authority of the Social Security Act, CMS employs a variety of contractors (e.g., MACs, Recovery Audit Contractors and Unified Program Integrity Contractors) to process and review claims according to Medicare rules and regulations.
Claims selected for prepayment review are not subject to the normal Medicare FFS payment timeframe. Furthermore, prepayment and post‐payment claims denials are subject to administrative and judicial review, and we intend to pursue the reversal of adverse determinations where appropriate. We have established robust protocols to respond to claims reviews and payment denials. In addition to overpayments that are not reversed on appeal, we incur additional costs to respond to requests for records and pursue the reversal of payment denials. The degree to which our Medicare FFS claims are subjected to prepayment reviews, the extent to which payments are denied, and our success in overturning denials could have a material adverse effect on our cash flows and results of operations.
Meaningful Use of Health Information Technology
The Health Information Technology for Economic and Clinical Health (“HITECH”) Act, which is part of the American Recovery and Reinvestment Act of 2009, promotes the use of healthcare information technology by, among other things, providing financial incentives to hospitals and physicians to become “meaningful users” of electronic health record (“EHR”) systems and imposing penalties on those who do not. Under the HITECH Act and other laws and regulations, eligible hospitals that fail to demonstrate and maintain meaningful use of certified EHR technology and/or submit quality data every year (and have not applied and qualified for a hardship exception) are subject to a reduction of the Medicare market basket update. Eligible healthcare professionals are also subject to positive or negative payment adjustments based, in part, on their use of EHR technology. We have made significant investments in our information systems to bring our hospitals and employed physicians into EHR compliance, and we continue to invest in the maintenance and utilization of these certified EHR systems. Failure to continue to do so could subject us to penalties that may have an adverse effect on our net revenues and results of operations.
Medicaid
Medicaid programs and the corresponding reimbursement methodologies vary from state‐to‐state and from year‐to‐year. Estimated revenues under various state Medicaid programs, including state‐funded Medicaid managed care programs, constituted approximately 18.7%, 17.8% and 18.4% of the total net patient service revenues of our acute care hospitals and related outpatient facilities for the years ended December 31, 2021, 2020 and 2019, respectively. We also receive DSH and other supplemental revenues under various state Medicaid programs. For the years ended December 31, 2021, 2020 and 2019, our total Medicaid revenues attributable to DSH and other supplemental revenues were approximately $915 million, $754 million and $782 million, respectively. The year ended December 31, 2021 included $223 million related to the California provider fee program, $254 million related to the Michigan provider fee program, $174 million related to Medicaid DSH programs in multiple states, $71 million related to the Texas Section 1115 waiver program, and $193 million from a number of other state and local programs.
Even prior to the COVID-19 pandemic, several states in which we operate faced budgetary challenges that resulted in reduced Medicaid funding levels to hospitals and other providers. Because most states must operate with balanced budgets, and the Medicaid program is generally a significant portion of a state’s budget, states can be expected to adopt or consider adopting future legislation designed to reduce or not increase their Medicaid expenditures. In addition, some states delay issuing Medicaid payments to providers to manage state expenditures. As an alternative means of funding provider payments, many of the states in which we operate have adopted supplemental payment programs authorized under the Social Security Act.
Continuing pressure on state budgets and other factors, including legislative and regulatory changes, could result in future reductions to Medicaid payments, payment delays or changes to Medicaid supplemental payment programs. Federal government denials or delayed approvals of waiver applications or extension requests by the states in which we operate could materially impact our Medicaid funding levels.
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Total Medicaid and Managed Medicaid net patient service revenues from continuing operations recognized by the hospitals and related outpatient facilities in our Hospital Operations segment for the years ended December 31, 2021, 2020 and 2019 were $2.760 billion, $2.427 billion, and $2.639 billion, respectively. During the year ended December 31, 2021, Medicaid and Managed Medicaid revenues comprised 45% and 55%, respectively, of our Medicaid‐related net patient service revenues from continuing operations recognized by the hospitals and related outpatient facilities in our Hospital Operations segment. These revenues are presented net of provider taxes or assessments paid by our hospitals, which are reported as an offset reduction to FFS Medicaid revenue.
Regulatory and Legislative Changes
The Medicare and Medicaid programs are subject to: statutory and regulatory changes, administrative and judicial rulings, interpretations and determinations concerning patient eligibility requirements, funding levels and the method of calculating reimbursements, among other things; requirements for utilization review; and federal and state funding restrictions, all of which could materially increase or decrease payments from these government programs in the future, as well as affect the cost of providing services to our patients and the timing of payments to our facilities. We are unable to predict the effect of future government healthcare funding policy changes on our operations. If the rates paid or services covered by governmental payers are reduced, or if we or one or more of our subsidiaries’ hospitals are excluded from participation in the Medicare or Medicaid program or any other government healthcare program, there could be a material adverse effect on our business, financial condition, results of operations or cash flows. Recent regulatory and legislative updates to the Medicare and Medicaid payment systems, as well as other government programs impacting our business, are provided below.
Payment and Policy Changes to the Medicare Inpatient Prospective Payment Systems
Section 1886(d) of the Social Security Act requires CMS to update inpatient FFS payment rates for hospitals reimbursed under IPPS annually. The updates generally become effective October 1, the beginning of the federal fiscal year. In August 2021, CMS issued final changes to the Hospital Inpatient Prospective Payment Systems for Acute Care Hospitals and Fiscal Year 2022 Rates (“Final IPPS Rule”). The Final IPPS Rule includes the following payment and policy changes:
•A market basket increase of 2.7% for MS‐DRG operating payments for hospitals reporting specified quality measure data and that are meaningful users of electronic health record technology; CMS also finalized a 0.7% multifactor productivity reduction required by the ACA and a 0.5% increase required by the Medicare Access and CHIP Reauthorization Act (“MACRA”) that collectively result in a net operating payment update of 2.5% before budget neutrality adjustments;
•Updates to the three factors used to determine the amount and distribution of Medicare uncompensated care disproportionate share (“UC‐DSH”) payments;
•A 1.37% net increase in the capital federal MS‐DRG rate;
•An increase in the cost outlier threshold from $29,064 to $30,988;
•An extension of the New COVID‐19 Treatments Add‐on Payment for certain eligible products through the end of the FFY in which the public health emergency as declared by the Secretary of HHS ends; and
•The establishment of new requirements and the revision of existing requirements for the Hospital Value‐Based Purchasing, Hospital Readmissions Reduction and Hospital‐Acquired Condition Reduction programs.
According to CMS, the combined impact of the payment and policy changes in the Final IPPS Rule for operating costs will yield an average 2.6% increase in Medicare operating MS‐DRG FFS payments for hospitals in urban areas and an average 2.6% increase in such payments for proprietary hospitals in FFY 2022. We estimate that all of the final payment and policy changes affecting operating MS‐DRG and UC‐DSH payments will result in an estimated 1.4% increase in our annual Medicare FFS IPPS payments, which yields an estimated increase of approximately $27 million. Because of the uncertainty associated with various factors that may influence our future IPPS payments by individual hospital, including legislative, regulatory or legal actions, admission volumes, length of stay and case mix, we cannot provide any assurances regarding our estimates of the impact of the payment and policy changes.
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Payment and Policy Changes to the Medicare Outpatient Prospective Payment and Ambulatory Surgery Center Payment Systems
In November 2021, CMS issued the final policy changes and payment rates for the Hospital Outpatient Prospective Payment System (“OPPS”) and Ambulatory Surgical Center (“ASC”) Payment System for calendar year (“CY”) 2022 (“Final OPPS/ASC Rule”). The Final OPPS/ASC Rule includes the following payment and policy changes:
•An estimated net increase of 2.0% for the OPPS rates based on an estimated market basket increase of 2.7%, reduced by a multifactor productivity adjustment required by the ACA of 0.7%;
•Continuation of the current policy of paying an adjusted amount of average sales price (“ASP”) minus 22.5% for drugs acquired under the CMS 340B program (which program is the subject of litigation discussed in greater detail below);
•Cessation of the elimination of the Inpatient Only List (“IPO List”) (which is the list of procedures that must be performed on an inpatient basis); efforts to eliminate the IPO List commenced in CY 2021 and were scheduled to be completed over a transitional period ending in CY 2024; in addition, CMS reinstated substantially all of the services removed from the IPO List in CY 2021 to the IPO List beginning in CY 2022;
•Various modifications to the hospital price transparency requirements that took effect on January 1, 2021, including significant increases to the civil monetary penalty for noncompliance, as well as prohibitions to specific barriers to accessing machine‐readable price transparency files;
•A 2.0% increase to the ASC payment rates; and
•Reinstatement of the ASC Covered Procedures List (“ASC CPL”) criteria in effect in CY 2020 and removal of 255 of the 258 procedures that were proposed for removal.
CMS projects that the combined impact of the proposed payment and policy changes in the Final OPPS/ASC Rule will yield an average 1.6% increase in Medicare FFS OPPS payments for hospitals in urban areas and an average 1.7% increase in Medicare FFS OPPS payments for proprietary hospitals. Based on CMS’ estimates, the projected annual impact of the payment and policy changes in the Final OPPS/ASC Rule on our hospitals is an increase to Medicare FFS hospital outpatient revenues of approximately $12 million, which represents an increase of approximately 1.8%. Because of the uncertainty associated with various factors that may influence our future OPPS payments, including legislative or legal actions, volumes and case mix, we cannot provide any assurances regarding our estimate of the impact of the payment and policy changes.
Payment and Policy Changes to the Medicare Physician Fee Schedule
In November 2021, CMS released the CY 2022 MPFS Final Rule (“MPFS Final Rule”). The MPFS Final Rule updates payment policies, payment rates and other provisions for services reimbursed under the MPFS for CY 2022. Under the MPFS Final Rule, the CY 2022 conversion factor, which is the base rate that is used to convert relative units into payment rates, would have been reduced approximately 3.7% due in part to the expiration of the one‐time 3.75% MPFS payment increase provided for in CY 2021 by the Consolidated Appropriations Act, 2021 (the “Consolidated Appropriations Act”), as well as budget neutrality rules. However, the Protecting Medicare and American Farmers from Sequester Cuts Act enacted in December 2021 (“December 2021 Legislation”) restored 3% of the expired 3.75% payment increase for CY 2022. The combined effects of the MPFS Final Rule and the December 2021 Legislation will result in an annual reduction of approximately $1 million to our FFS MPFS revenues. Because of the uncertainty associated with various factors that may influence our future MPFS payments, including legislative, regulatory or legal actions, volumes and case mix, we cannot provide any assurances regarding our estimate of the impact of the payment and policy changes.
The Coronavirus Aid, Relief, and Economic Security Act of 2020 and Related Legislation
Several pieces of legislation (the “COVID Acts”) have been signed into law in response to the COVID‐19 pandemic. Among the numerous provisions included in the legislation is funding to mitigate the economic effects of the COVID‐19 pandemic. Below is a brief overview of certain provisions of the COVID Acts that have impacted, and that we expect will continue to impact, our business. This summary is not exhaustive, and additional legislative action and regulatory developments may evolve rapidly. There is no assurance that we will continue to receive or remain eligible for funding or assistance under the COVID Acts or similar measures. Statements regarding the projected impact of COVID‐19 relief programs on our operations and financial condition are forward‐looking statements.
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The COVID Acts authorized $178 billion in payments to be distributed to providers through the Provider Relief Fund. Payments from the PRF are not loans and, therefore, they are not subject to repayment. However, as a condition to receiving distributions, providers are required to agree to certain terms and conditions, including, among other things, that the funds are being used for lost revenues and unreimbursed COVID-related costs as defined by HHS, and that the providers will not seek collection of out‐of‐pocket payments from a COVID-19 patient that are greater than what the patient would have otherwise been required to pay if the care had been provided by an in-network provider. All recipients of PRF payments are required to comply with the reporting requirements described in the terms and conditions and as determined by HHS. In January 2021, HHS released updated reporting requirements that include lost revenues, expenses attributable to COVID-19 and non-financial information. The updated reporting requirements reflect certain provisions of the Consolidated Appropriations Act affecting the calculation of lost revenues, as well as the distribution of PRF funds among subsidiaries in a hospital system. Furthermore, HHS has indicated that it will be closely monitoring and, along with the Office of Inspector General, auditing providers to ensure that recipients comply with the terms and conditions of relief programs and to prevent fraud and abuse. All providers will be subject to civil and criminal penalties for any deliberate omissions, misrepresentations or falsifications of any information given to HHS. Except for certain immaterial PRF payments we returned to HHS, we have formally accepted PRF payments issued to our providers and the terms and conditions associated with those payments, and we have complied with the reporting requirements.
During the years ended December 31, 2021 and 2020, our Hospital Operations and Ambulatory Care segments combined recognized approximately $176 million and $868 million, respectively, of PRF grant income associated with lost revenues and COVID‐related costs. We recognized an additional $14 million and $17 million, respectively, of Provider Relief Fund grant income from our unconsolidated affiliates during 2021 and 2020. Our Hospital Operations and Ambulatory Care segments also recognized $15 million and $14 million of grant income from state and local grant programs during the years ended December 31, 2021 and 2020, respectively. Grant income recognized by our Hospital Operations and Ambulatory Care segments is presented in grant income, and grant income recognized through our unconsolidated affiliates is presented in equity in earnings of unconsolidated affiliates, in each case in the accompanying Consolidated Statements of Operations for the years ended December 31, 2021 and 2020. At December 31, 2021 and 2020, we had remaining deferred grant payment balances of $5 million and $18 million, respectively, which amounts were recorded in other current liabilities in the accompanying Consolidated Balance Sheets for those periods. We cannot predict whether additional distributions of grant funds will be authorized, and we cannot provide any assurances regarding the amount of grant income, if any, to be recognized in the future.
Medicare and Medicaid Payment Policy Changes—The COVID Acts have also alleviated some of the financial strain on hospitals, physicians, other healthcare providers and states through a series of Medicare and Medicaid payment policies that temporarily increase Medicare and Medicaid reimbursement and allow for added flexibility, as described below:
•The CMS 2% sequestration reduction on Medicare FFS and Medicare Advantage payments to hospitals, physicians and other providers was suspended effective May 1, 2020 through December 31, 2021. The impact of the suspension on our operations was an increase of approximately $78 million and $67 million of revenues in the years ended December 31, 2021 and 2020, respectively. The December 2021 Legislation extended the suspension of the 2% sequestration reduction through March 31, 2022, to be followed by a 1% reduction for the period April 1, 2022 through June 30, 2022, after which the full 2% reduction will be restored.
•The COVID Acts instituted a 20% increase in the Medicare MS‐DRG payment for COVID-19 hospital admissions for the duration of the public health emergency as declared by the Secretary of HHS.
•The COVID Acts initially eliminated the scheduled nationwide reduction of $4 billion in federal Medicaid DSH allotments in FFY 2020 mandated by the Affordable Care Act and decreased the FFY 2021 DSH reduction from $8 billion to $4 billion effective December 1, 2020. Subsequently, the FFY 2021 DSH reduction was eliminated entirely and the remaining DSH reductions were delayed until FFY 2024.
•The COVID Acts expanded the Medicare accelerated payment program, which provides prepayment of claims to providers in certain circumstances, such as national emergencies or natural disasters. Under Section 2501 of the Continuing Appropriations Act, 2021, and Other Extensions Act, providers may retain the accelerated payments for one year from the date of receipt before CMS commenced recoupment, which is effectuated by a 25% offset of claims payments for 11 months, followed by a 50% offset for the succeeding six months. At the end of the 29‐month period, interest on the unpaid balance will be assessed at 4% per annum. During the year ended December 31, 2020, our hospitals and other providers applied for and received approximately $1.5 billion of accelerated payments. No additional accelerated payment funds were applied for or received in the year ended December 31, 2021.
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•A 6.2% increase in the Federal Medical Assistance Percentage (“FMAP”) matching funds was instituted to help states respond to the COVID‐19 pandemic. The additional funds are available to states from January 1, 2020 through the quarter in which the public health emergency period ends, provided that states meet certain conditions. In addition, the COVID Acts established an incentive for states that have not already done so to expand Medicaid by temporarily increasing each such respective state’s FMAP for their base program by five percentage points for two years. An increase in states’ FMAP leverages Medicaid’s existing financing structure, which allows federal funds to be provided to states more quickly and efficiently than establishing a new program or allocating money from a new funding stream. Increased federal matching funds support states in responding to the increased need for services, such as testing and treatment during the COVID‐19 public health emergency, as well as increased enrollment as more people lose income and qualify for Medicaid due to the effects of the pandemic.
Because of the uncertainty associated with various factors that may influence our future Medicare and Medicaid payments, including future legislative, legal or regulatory actions, or changes in volumes and case mix, there is a risk that actual payments received under, or the ultimate impact of, these programs will differ materially from our expectations.