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.
Funding for Uninsured Individuals—The COVID Acts provide claims reimbursement to healthcare providers generally at Medicare rates for testing uninsured individuals for COVID‐19 and treating uninsured individuals with a COVID‐19 diagnosis. A portion of the funding may also be used to reimburse providers for COVID‐19 vaccine administration to uninsured individuals. We recognized net operating revenues totaling $91 million and $40 million related to this program in the accompanying Consolidated Statements of Operations for the years ended December 31, 2021 and 2020, respectively.
Tax Changes—Beginning March 27, 2020, all employers were able to elect to defer payment of the 6.2% employer Social Security tax through December 31, 2020. Deferred tax amounts are required to be paid in equal amounts over two years, with payments due in December 2021 and December 2022. During the year ended December 31, 2020, we deferred Social Security tax payments totaling $275 million pursuant to this COVID Acts provision. In December 2021, we repaid half of the outstanding deferred Social Security tax payments.
CMS Innovation Models
The CMS Innovation Center develops and tests innovative payment and service delivery models that have the potential to reduce Medicare, Medicaid or CHIP expenditures while preserving or enhancing the quality of care for beneficiaries. Congress has defined – both through the Affordable Care Act 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; for example, 19 hospitals in our Hospital Operations segment and three surgical hospitals in our Ambulatory Care segment participate in the CMS Bundled Payments for Care Improvement Advanced (“BPCIA”) program that became effective October 1, 2018, and USPI also holds the CMS contract for one physician group practices participating in the BPCIA program. 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. In 2015, CMS finalized a five‐year bundled payment model (that was subsequently extended for an additional three years), called the Comprehensive Care for Joint Replacement (“CJR”) model, which includes hip and knee replacements, as well as other major leg procedures. Eleven hospitals in our Hospital Operations segment and four surgical hospitals in our Ambulatory Care segment currently participate in the CJR model.
Significant Litigation
340B Litigation
The CMS 340B program allows certain hospitals (i.e., only nonprofit organizations with specific federal designations and/or funding) (“340B Hospitals”) to purchase drugs at discounted rates from drug manufacturers (“340B Drugs”). In the final rule regarding OPPS payment and policy changes for CY 2018, CMS reduced the payment for 340B Drugs from the ASP plus 6% to the ASP minus 22.5% and made a corresponding budget‐neutral increase to payments to all hospitals for other drugs and services reimbursed under the OPPS (the “340B Payment Adjustment”). In the final rules regarding OPPS payment and policy changes for CYs 2019, 2020 and 2021, CMS continued the 340B Payment Adjustment. Certain hospital associations and hospitals commenced litigation challenging CMS’ authority to impose the 340B Payment Adjustment for CYs 2018, 2019 and 2020. Previously, the U.S. District Court for the District of Columbia (the “District Court”) held that the adoption of the 340B Payment Adjustment in the CYs 2018 and 2019 OPPS Final Rules exceeded CMS’ statutory authority by reducing drug
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reimbursement rates for 340B Hospitals. In July 2020, the U.S. Court of Appeals for the District of Columbia Circuit (the “Appeals Court”) reversed the District Court’s holding, finding that HHS’ decision to reduce the payment rate for 340B Drugs was based on a reasonable interpretation of the Medicare statute. The Appeals Court subsequently denied the 340B Hospitals’ petition for a rehearing. The 340B Hospitals filed a timely petition asking the U.S. Supreme Court (“Supreme Court”) to reverse the Appeals Court’s decision and, on July 2, 2021, the Supreme Court agreed to review the case. We cannot predict what further actions the Supreme Court, CMS or Congress might take with respect to the 340B program; however, a reversal of the current payment policy and return to the prior 340B payment methodology could have an adverse effect on our net operating revenues and cash flows.
PRIVATE INSURANCE
Managed Care
We currently have thousands of managed care contracts with various HMOs and PPOs. HMOs generally maintain a full‐service healthcare delivery network comprised of physician, hospital, pharmacy and ancillary service providers that HMO members must access through an assigned “primary care” physician. The member’s care is then managed by his or her primary care physician and other network providers in accordance with the HMO’s quality assurance and utilization review guidelines so that appropriate healthcare can be efficiently delivered in the most cost‐effective manner. HMOs typically provide reduced benefits or reimbursement (or none at all) to their members who use non‐contracted healthcare providers for non‐emergency care.
PPOs generally offer limited benefits to members who use non‐contracted healthcare providers. PPO members who use contracted healthcare providers receive a preferred benefit, typically in the form of lower co‐pays, co‐insurance or deductibles. As employers and employees have demanded more choice, managed care plans have developed hybrid products that combine elements of both HMO and PPO plans, including high‐deductible healthcare plans that may have limited benefits, but cost the employee less in premiums.
The amount of our managed care net patient service revenues, including Medicare and Medicaid managed care programs, from our hospitals and related outpatient facilities during the years ended December 31, 2021, 2020 and 2019 was $9.985 billion, $9.022 billion and $9.516 billion, respectively. Our top 10 managed care payers generated 61% of our managed care net patient service revenues for the year ended December 31, 2021. In 2021, national payers generated 43% of our managed care net patient service revenues; the remainder came from regional or local payers. At December 31, 2021 and 2020, 67% and 66%, respectively, of our net accounts receivable for our Hospital Operations segment were due from managed care payers.
Revenues under managed care plans are based primarily on payment terms involving predetermined rates per diagnosis, per‐diem rates, discounted FFS rates and/or other similar contractual arrangements. These revenues are also subject to review and possible audit by the payers, which can take several years before they are completely resolved. The payers are billed for patient services on an individual patient basis. An individual patient’s bill is subject to adjustment on a patient‐by‐patient basis in the ordinary course of business by the payers following their review and adjudication of each particular bill. We estimate the discounts for contractual allowances at the individual hospital level utilizing billing data on an individual patient basis. At the end of each month, on an individual hospital basis, we estimate our expected reimbursement for patients of managed care plans based on the applicable contract terms. We believe it is reasonably likely for there to be an approximately 3% increase or decrease in the estimated contractual allowances related to managed care plans. Based on reserves at December 31, 2021, a 3% increase or decrease in the estimated contractual allowance would impact the estimated reserves by approximately $16 million. Some of the factors that can contribute to changes in the contractual allowance estimates include: (1) changes in reimbursement levels for procedures, supplies and drugs when threshold levels are triggered; (2) changes in reimbursement levels when stop‐loss or outlier limits are reached; (3) changes in the admission status of a patient due to physician orders subsequent to initial diagnosis or testing; (4) final coding of in‐house and discharged‐not‐final‐billed patients that change reimbursement levels; (5) secondary benefits determined after primary insurance payments; and (6) reclassification of patients among insurance plans with different coverage and payment levels. Contractual allowance estimates are periodically reviewed for accuracy by taking into consideration known contract terms, as well as payment history. We believe our estimation and review process enables us to identify instances on a timely basis where such estimates need to be revised. We do not believe there were any adjustments to estimates of patient bills that were material to our revenues. In addition, on a corporate‐wide basis, we do not record any general provision for adjustments to estimated contractual allowances for managed care plans. Managed care accounts, net of contractual allowances recorded, are further reduced to their net realizable value through implicit price concessions based on historical collection trends for these payers and other factors that affect the estimation process.
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We expect managed care governmental admissions to continue to increase as a percentage of total managed care admissions over the near term. However, the managed Medicare and Medicaid insurance plans typically generate lower yields than commercial managed care plans, which have been experiencing an improved pricing trend. Although we have benefited from solid year‐over‐year aggregate managed care pricing improvements for some time, we have seen these improvements moderate in recent years, and we believe this moderation could continue into the future. In the year ended December 31, 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.
Indemnity
An indemnity‐based agreement generally requires the insurer to reimburse an insured patient for healthcare expenses after those expenses have been incurred by the patient, subject to policy conditions and exclusions. Unlike an HMO member, a patient with indemnity insurance is free to control his or her utilization of healthcare and selection of healthcare providers.
Legislative Changes
As more fully described in Item 1, Business — Healthcare Regulation and Licensing, of Part I of this report, the No Surprises Act (“NSA”) and the rules promulgated thereunder went into effect on January 1, 2022. The NSA is intended to address unexpected gaps in insurance coverage that result in “surprise medical bills” when patients unknowingly obtain medical services from physicians and other providers outside their health insurance network, including certain emergency services, anesthesiology services and air ambulance transportation. At this time, we are unable to assess the effect that the NSA or regulations relating to the NSA might have on our business, financial position, results of operations or cash flows.
UNINSURED PATIENTS
Uninsured patients are patients who do not qualify for government programs payments, such as Medicare and Medicaid, do not have some form of private insurance and, therefore, are responsible for their own medical bills. A significant number of our uninsured patients are admitted through our hospitals’ emergency departments and often require high‐acuity treatment that is more costly to provide and, therefore, results in higher billings, which are the least collectible of all accounts.
Self‐pay accounts receivable, which include amounts due from uninsured patients, as well as co‐pays, co‐insurance amounts and deductibles owed to us by patients with insurance, pose significant collectability problems. At both December 31, 2021 and 2020, approximately 4% of our net accounts receivable for our Hospital Operations segment was self‐pay. Further, a significant portion of our implicit price concessions relates to self‐pay amounts. We provide revenue cycle management services through Conifer, which is subject to various statutes and regulations regarding consumer protection in areas including finance, debt collection and credit reporting activities. For additional information, see Item 1, Business — Regulations Affecting Conifer’s Operations, of Part I of this report.
Conifer has performed systematic analyses to focus our attention on the drivers of bad debt expense for each hospital. While emergency department use is the primary contributor to our implicit price concessions in the aggregate, this is not the case at all hospitals. As a result, we have increased our focus on targeted initiatives that concentrate on non‐emergency department patients as well. These initiatives are intended to promote process efficiencies in collecting self‐pay accounts, as well as co‐pay, co‐insurance and deductible amounts owed to us by patients with insurance, that we deem highly collectible. We leverage a statistical‐based collections model that aligns our operational capacity to maximize our collections performance. We are dedicated to modifying and refining our processes as needed, enhancing our technology and improving staff training throughout the revenue cycle process in an effort to increase collections and reduce accounts receivable.
Over the longer term, several other initiatives we have previously announced should also help address the challenges associated with serving uninsured patients. For example, our Compact with Uninsured Patients (“Compact”) is designed to offer managed care‐style discounts to certain uninsured patients, which enables us to offer lower rates to those patients who historically had been charged standard gross charges. Under the Compact, the discount offered to uninsured patients is recognized as a contractual allowance, which reduces net operating revenues at the time the self‐pay accounts are recorded. The uninsured patient accounts, net of contractual allowances recorded, are further reduced to their net realizable value through implicit price concessions based on historical collection trends for self‐pay accounts and other factors that affect the estimation process. We also provide financial assistance through our charity and uninsured discount programs to uninsured patients who are unable to pay for the healthcare services they receive. Our policy is not to pursue collection of amounts determined to qualify for financial assistance; therefore, we do not report these amounts in net operating revenues. Most states include an estimate of the cost of charity care in the determination of a hospital’s eligibility for Medicaid DSH payments. These payments
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are intended to mitigate our cost of uncompensated care. Some states have also developed provider fee or other supplemental payment programs to mitigate the shortfall of Medicaid reimbursement compared to the cost of caring for Medicaid patients.
The initial expansion of health insurance coverage under the Affordable Care Act resulted in an increase in the number of patients using our facilities with either health insurance exchange or government healthcare insurance program coverage. However, we continue to have to provide uninsured discounts and charity care due to the failure of states to expand Medicaid coverage and for persons living in the country who are not permitted to enroll in a health insurance exchange or government healthcare insurance program.
The following table shows our estimated costs (based on selected operating expenses, which include salaries, wages and benefits, supplies and other operating expenses and which exclude the costs of our now-divested health plan businesses) of caring for our uninsured and charity patients:
Years Ended December 31,
Estimated costs for:
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2021 COMPARED TO THE YEAR ENDED DECEMBER 31, 2020
The following tables summarize our consolidated net operating revenues, operating expenses and operating income from continuing operations, both in dollar amounts and as percentages of net operating revenues, for the years ended December 31, 2021 and 2020. We present metrics as a percentage of net operating revenues because a significant portion of our costs are variable.
Years Ended December 31, Increase(Decrease)
Net operating revenues:
Inter-segment eliminations (482) (528) 46
Equity in earnings of unconsolidated affiliates 218 169 49
Operating expenses:
Depreciation and amortization 855 857 (2)
Impairment and restructuring charges, and acquisition-related costs 85 290 (205)
Litigation and investigation costs 116 44 72
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Years Ended December 31, Increase(Decrease)
Net operating revenues 100.0 % 100.0 % — %
Grant income 1.0 % 5.0 % (4.0) %
Equity in earnings of unconsolidated affiliates 1.1 % 1.0 % 0.1 %
Operating expenses:
Salaries, wages and benefits 45.6 % 47.8 % (2.2) %
Other operating expenses, net 21.6 % 23.4 % (1.8) %
Depreciation and amortization 4.4 % 4.9 % (0.5) %
Litigation and investigation costs 0.6 % 0.2 % 0.4 %
The following tables present our net operating revenues, operating expenses and operating income from continuing operations, both in dollar amounts and as percentages of net operating revenues, by reportable segment for the years ended December 31, 2021 and 2020:
Hospital Operations Ambulatory Care Conifer
Equity in earnings of unconsolidated affiliates 25 193 —
Operating expenses:
Depreciation and amortization 722 95 38
Impairment and restructuring charges, and acquisition-related costs 39 27 19
Litigation and investigation costs 100 14 2
Net gains on sales, consolidation and deconsolidation of facilities (411) (34) —
Hospital Operations Ambulatory Care Conifer
Grant income 0.9 % 1.8 % — %
Equity in earnings of unconsolidated affiliates 0.2 % 7.1 % — %
Operating expenses:
Salaries, wages and benefits 48.5 % 25.4 % 53.4 %
Other operating expenses, net 23.2 % 14.3 % 18.2 %
Depreciation and amortization 4.7 % 3.5 % 3.0 %
Litigation and investigation costs 0.6 % 0.5 % 0.2 %
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Hospital Operations Ambulatory Care Conifer
Equity in earnings of unconsolidated affiliates 6 163 —
Operating expenses:
Depreciation and amortization 739 81 37
Impairment and restructuring charges, and acquisition-related costs 187 57 46
Litigation and investigation costs 33 6 5
Hospital Operations Ambulatory Care Conifer
Grant income 5.8 % 2.8 % — %
Equity in earnings of unconsolidated affiliates — % 7.9 % — %
Operating expenses:
Salaries, wages and benefits 50.0 % 29.4 % 51.5 %
Other operating expenses, net 24.7 % 16.7 % 20.2 %
Depreciation and amortization 5.2 % 3.9 % 2.8 %
Litigation and investigation costs 0.2 % 0.3 % 0.4 %
Total net operating revenues increased by $1.845 billion, or 10.5%, for the year ended December 31, 2021 compared to the year ended December 31, 2020. Hospital Operations net operating revenues, net of inter‐segment eliminations, increased by $1.238 billion, or 8.7%, for the year ended December 31, 2021 compared to 2020, primarily due to increased patient volumes, higher patient acuity, a more favorable payer mix and improved terms of our managed care contracts, partially offset by the sale of our former Miami Hospitals in August 2021.
Ambulatory Care net operating revenues increased by $646 million, or 31.2%, for the year ended December 31, 2021 compared to 2020. The change was primarily due to an increase from acquisitions of $476 million and same-facility growth of $307 million, which was attributable to the impact of higher patient volumes and acuity, incremental revenue from new service lines and negotiated commercial rate increases. These impacts were partially offset by a decrease of $137 million due to the sale of the Ambulatory Care segment’s urgent care centers and the transfer of its imaging centers to the Hospital Operations segment.
Conifer net operating revenues decreased by $39 million, or 3.0%, for the year ended December 31, 2021 compared to 2020. Conifer revenues from third-party customers, which revenues are not eliminated in consolidation, increased $7 million, or 0.9%, for the year ended December 31, 2021 compared to 2020.
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The following table shows selected operating expenses of our three reportable operating segments. Information for our Hospital Operations segment is presented on a same‐hospital basis, whereas information presented for our Ambulatory Care and Conifer segments is presented on a continuing operations basis.
Years Ended December 31, Increase(Decrease)
Hospital Operations — Same-Hospital:
Ambulatory Care:
Salaries, wages and benefits $ 690 $ 609 13.3 %
Conifer:
Salaries, wages and benefits $ 677 $ 673 0.6 %
Rent/lease expense(1):
(1) Included in other operating expenses.
RESULTS OF OPERATIONS BY SEGMENT
Our operations are reported in three segments:
•Hospital Operations, which is comprised of our acute care and specialty hospitals, imaging centers, ancillary outpatient facilities, micro‐hospitals and physician practices;
•Our Ambulatory Care segment is comprised of USPI’s ASCs and surgical hospitals; and
•Conifer, which provides revenue cycle management and value‐based care services to hospitals, health systems, physician practices, employers and other clients.
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Hospital Operations Segment
The following tables show operating statistics of our continuing operations hospitals and related outpatient facilities on a same‐hospital basis, unless otherwise indicated:
Same-Hospital Increase(Decrease)
Years Ended December 31,
Admissions, Patient Days and Surgeries 2021 2020
Number of hospitals (at end of period) 60 60 — (1)
Paying admissions (excludes charity and uninsured) 518,515 518,042 0.1 %
Paying admissions as a percentage of total admissions 94.7 % 94.4 % 0.3 % (1)
Average length of stay (days) 5.27 5.10 3.3 %
Utilization of licensed beds(3) 51.4 % 49.5 % 1.9 % (1)
(1) The change is the difference between 2021 and 2020 amounts shown.
Same-Hospital
Years Ended December 31, Increase(Decrease)
Paying visits as a percentage of total visits 93.3 % 93.2 % 0.1 % (1)
(1) The change is the difference between 2021 and 2020 amounts shown.
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Same-Hospital
Years Ended December 31, Increase(Decrease)
Selected revenue data – hospitals and related outpatient facilities:
Net patient service revenue per adjusted patient day(1)(2) $ 2,800 $ 2,688 4.2 %
(1) Revenues are net of implicit price concessions.
Same-Hospital
Years Ended December 31, Increase(Decrease)
Total Segment Selected Operating Expenses 2021 2020
Supplies as a percentage of net operating revenues 17.1 % 17.7 % (0.6) % (1)
(1) The change is the difference between 2021 and 2020 amounts shown.
Revenues
Same‐hospital net operating revenues increased $1.496 billion, or 11.3%, during the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily due to increased patient and surgical volumes, higher patient acuity, a more favorable payer mix and negotiated commercial rate increases. Our Hospital Operations segment also recognized grant income from federal, state and local grants totaling $142 million and $823 million in the years ended December 31, 2021 and 2020, respectively, which is not included in net operating revenues. Same‐hospital admissions during the year ended December 31, 2021 were consistent with the year ended December 31, 2020, while outpatient visits increased 15.7% and same‐hospital adjusted admissions increased 2.4% year‐over‐year.
The following table shows the consolidated net accounts receivable by payer at December 31, 2021 and 2020:
December 31,
Net cost report settlements receivable and valuation allowances 33 34
Self-pay uninsured 21 32
Self-pay balance after insurance 70 74
Estimated future recoveries 137 156
Total discontinued operations — 1
Collection of accounts receivable has been a key area of focus, particularly over the past several years. At December 31, 2021, our Hospital Operations segment collection rate on self‐pay accounts was approximately 26.5%. Our self‐pay collection rate includes payments made by patients, including co‐pays, co‐insurance amounts and deductibles paid by patients with insurance. Based on our accounts receivable from uninsured patients and co‐pays, co‐insurance amounts and deductibles owed to us by patients with insurance at December 31, 2021, a 10% decrease or increase in our self‐pay collection rate, or approximately 3%, which we believe could be a reasonably likely change, would result in an unfavorable or favorable adjustment to patient accounts receivable of approximately $9 million. There are various factors that can impact collection trends, such as changes in the economy, which in turn have an impact on unemployment rates and the number of uninsured and
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underinsured patients, the volume of patients through our emergency departments, the increased burden of co‐pays and deductibles to be made by patients with insurance, and business practices related to collection efforts. These factors, many of which have been affected by the COVID‐19 pandemic, continuously change and can have an impact on collection trends and our estimation process.
Payment pressure from managed care payers also affects the collectability of our accounts receivable. We typically experience ongoing managed care payment delays and disputes; however, we continue to work with these payers to obtain adequate and timely reimbursement for our services. Our estimated Hospital Operations segment collection rate from managed care payers was approximately 96.6% at December 31, 2021.
We manage our implicit price concessions using hospital‐specific goals and benchmarks such as (1) total cash collections, (2) point‐of‐service cash collections, (3) AR Days and (4) accounts receivable by aging category. The following tables present the approximate aging by payer of our net accounts receivable from the continuing operations of our Hospital Operations segment of $2.363 billion and $2.348 billion at December 31, 2021 and 2020, respectively, excluding cost report settlements receivable and valuation allowances of $33 million and $34 million, respectively, at December 31, 2021 and 2020:
Medicare Medicaid ManagedCare Indemnity,Self-Payand Other Total
Conifer continues to implement revenue cycle initiatives to improve our cash flow. These initiatives are focused on standardizing and improving patient access processes, including pre‐registration, registration, verification of eligibility and benefits, liability identification and collections at point‐of‐service, and financial counseling. These initiatives are intended to reduce denials, improve service levels to patients and increase the quality of accounts that end up in accounts receivable. Although we continue to focus on improving our methodology for evaluating the collectability of our accounts receivable, we may incur future charges if there are unfavorable changes in the trends affecting the net realizable value of our accounts receivable.
At December 31, 2021, we had a cumulative total of patient account assignments to Conifer of $1.932 billion related to our continuing operations. These accounts have already been written off and are not included in our receivables; however, an estimate of future recoveries from all the accounts assigned to Conifer is determined based on our historical experience and recorded in accounts receivable.
Patient advocates from Conifer’s Eligibility and Enrollment Services program (“EES”) screen patients in the hospital to determine whether those patients meet eligibility requirements for financial assistance programs. They also expedite the process of applying for these government programs. Receivables from patients who are potentially eligible for Medicaid are classified as Medicaid pending, under the EES, net of appropriate implicit price concessions. Based on recent trends, approximately 97% of all accounts in the EES are ultimately approved for benefits under a government program, such as Medicaid.
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The following table shows the approximate amount of accounts receivable in the EES still awaiting determination of eligibility under a government program at December 31, 2021 and 2020 by aging category:
December 31,
Salaries, Wages and Benefits
Same‐hospital salaries, wages and benefits increased $542 million, or 8.1%, in the year ended December 31, 2021 compared to 2020. This increase was primarily attributable to higher patient volumes, increased contract labor costs, increased overtime expense, annual merit increases for certain of our employees and higher incentive compensation. Same‐hospital salaries, wages and benefits as a percentage of net operating revenues decreased by 150 basis points to 48.9% in the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily due higher patient acuity and cost-reduction measures, including the use of labor management tools as volumes fluctuate. Salaries, wages and benefits expense for the year ended December 31, 2021 and 2020 included stock‐based compensation expense of $41 million and $28 million, respectively.
Supplies
Same‐hospital supplies expense increased $179 million, or 7.6%, in the year ended December 31, 2021 compared to 2020. The increase was primarily due to higher patient volumes, the increased cost of certain supplies as a result of the COVID‐19 pandemic and growth in our higher‐acuity, supply‐intensive surgical services. Same‐hospital supplies expense as a percentage of net operating revenues decreased by 60 basis points to 17.1% in the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily due to the growth of our higher-margin services and our cost-efficiency measures.
The COVID‐19 pandemic has created supply‐chain disruptions, including shortages and delays, as well as significant price increases in medical supplies, particularly for PPE. We strive to control supplies expense through product standardization, consistent contract terms and end‐to‐end contract management, improved utilization, bulk purchases, focused spending with a smaller number of vendors and operational improvements. The items of current cost‐reduction focus include cardiac stents and pacemakers, orthopedics, implants and high‐cost pharmaceuticals.
Other Operating Expenses, Net
Same‐hospital other operating expenses increased by $146 million, or 4.5%, in the year ended December 31, 2021 compared to 2020. Same‐hospital other operating expenses as a percentage of net operating revenues decreased by 140 basis points to 22.9% in the year ended December 31, 2021 compared to 24.3% in the year ended December 31, 2020, primarily due to higher patient volumes and the growth of our net operating revenues. The changes in other operating expenses included:
•increased malpractice expense of $60 million;
•increased rent and lease expense of $22 million;
•increased collection fees of $19 million;
•increased software costs of $17 million;
•increased repair and maintenance costs of $17 million; and
•a gain on sale and leaseback of a medical office building of $12 million, which was classified as a reduction of other operating expenses, net.
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AmbulatoryCareSegment
Our Ambulatory Care segment is comprised of USPI’s ASCs and surgical hospitals. USPI operates its surgical facilities in partnership with local physicians and, in many of these facilities, a health system partner. We hold an ownership interest in each facility, with each being operated through a separate legal entity in most cases. USPI operates facilities on a day‐to‐day basis through management services contracts. Our sources of earnings from each facility consist of:
•management and administrative services revenues, computed as a percentage of each facility’s net revenues (often net of implicit price concessions); and
•our share of each facility’s net income (loss), which is computed by multiplying the facility’s net income (loss) times the percentage of each facility’s equity interests owned by USPI.
Our role as an owner and day‐to‐day manager provides us with significant influence over the operations of each facility. For many of the facilities our Ambulatory Care segment operates (166 of 423 facilities at December 31, 2021), this influence does not represent control of the facility, so we account for our investment in the facility under the equity method for an unconsolidated affiliate. USPI controls 257of the facilities our Ambulatory Care segment operates, and we account for these investments as consolidated subsidiaries. Our net earnings from a facility are the same under either method, but the classification of those earnings differs. For consolidated subsidiaries, our financial statements reflect 100% of the revenues and expenses of the subsidiaries, after the elimination of intercompany amounts. The net profit attributable to owners other than USPI is classified within net income available to noncontrolling interests.
For unconsolidated affiliates, our statements of operations reflect our earnings in two line items:
•equity in earnings of unconsolidated affiliates—our share of the net income (loss) of each facility, which is based on the facility’s net income (loss) and the percentage of the facility’s outstanding equity interests owned by USPI; and
•management and administrative services revenues, which is included in our net operating revenues—income we earn in exchange for managing the day‐to‐day operations of each facility, usually quantified as a percentage of each facility’s net revenues less implicit price concessions.
Our Ambulatory Care segment operating income is driven by the performance of all facilities USPI operates and by USPI’s ownership interests in those facilities, but our individual revenue and expense line items contain only consolidated businesses, which represent 61% of those facilities. This translates to trends in consolidated operating income that often do not correspond with changes in consolidated revenues and expenses, which is why we disclose certain statistical and financial data on a pro forma systemwide basis that includes both consolidated and unconsolidated (equity method) facilities.
Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020
The following table summarizes certain statements of operations items for the periods indicated:
Years Ended December 31, Increase (Decrease)
Ambulatory Care Results of Operations 2021 2020
Equity in earnings of unconsolidated affiliates $ 193 $ 163 18.4 %
Salaries, wages and benefits $ 690 $ 609 13.3 %
Other operating expenses, net $ 389 $ 349 11.5 %
Revenues
Our Ambulatory Care net operating revenues increased by $646 million, or 31.2%, during the year ended December 31, 2021 compared to 2020. The change was driven by an increase from acquisitions of $476 million, as well as an increase in same‐facility net operating revenues of $307 million, which was attributable to the impact of higher patient volumes and acuity, incremental revenue from new service lines and negotiated commercial rate increases. These impacts were partially offset by a decrease of $137 million, due primarily to the sale of USPI’s urgent care centers and the transfer of imaging centers to the Hospital Operations segment. Our Ambulatory Care segment also recognized grant income from federal grants totaling
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$49 million and $59 million during the years ended December 31, 2021 and 2020, respectively, which is not included in net operating revenues.
Salaries, Wages and Benefits
Salaries, wages and benefits expense increased by $81 million, or 13.3%, during the year ended December 31, 2021 compared to 2020. Salaries, wages and benefits expense was impacted by an increase from acquisitions of $79 million and an increase in same‐facility salaries, wages and benefits expense of $57 million due primarily to higher surgical patient volumes. These increases were partially offset by a decrease of $55 million due to the sale of USPI’s urgent care centers, the transfer of imaging centers to the Hospital Operations segment and the deconsolidation of a facility. Salaries, wages and benefits expense as a percentage of net operating revenues decreased 400 basis points during the year ended December 31, 2021 compared to 2020. This decrease was primarily attributable to higher surgical patient volumes and acuity, as well as staffing alignment and cost-reduction measures. Salaries, wages and benefits expense for the years ended December 31, 2021 and 2020 included stock‐based compensation expense of $13 million and $14 million, respectively.
Supplies
Supplies expense increased by $216 million, or 46.2%, during the year ended December 31, 2021 compared to 2020. The change was driven by an increase from acquisitions of $143 million, as well as an increase in same‐facility supplies expense of $82 million due primarily to an increase in surgical cases at our consolidated centers, higher costs driven by the higher level of patient acuity, and higher pricing of certain supplies as a result of the COVID‐19 pandemic, partially offset by a decrease of $9 million due to the sale of USPI’s urgent care centers, the transfer of imaging centers to the Hospital Operations segment and the deconsolidation of a facility. Supplies expense as a percentage of net operating revenues increased 260 basis points from 22.6% in the year ended December 31, 2020 to 25.2% in the year ended December 31, 2021. This change was driven by an increase in higher‐acuity, supply‐intensive surgeries and higher pricing of certain supplies as a result of the COVID‐19 pandemic.
Other Operating Expenses, Net
Other operating expenses increased by $40 million, or 11.5%, during the year ended December 31, 2021 compared to 2020. The change was driven by an increase from acquisitions of $52 million, as well as an increase in same‐facility other operating expenses of $27 million, partially offset by a decrease of $39 million due to the sale of USPI’s urgent care centers and the transfer of imaging centers to the Hospital Operations segment. Other operating expenses, net as a percentage of net operating revenues decreased from 16.7% during the year ended December 31, 2020 to 14.3% for 2021, primarily due to higher patient volumes, an increase in our net operating revenues and our cost-efficiency measures.
Facility Growth
The following table summarizes the changes in our same‐facility revenue year‐over‐year on a pro forma systemwide basis, which includes both consolidated and unconsolidated (equity method) facilities. While we do not record the revenues of unconsolidated facilities, we believe this information is important in understanding the financial performance of our Ambulatory Care segment because these revenues are the basis for calculating our management services revenues and, together with the expenses of our unconsolidated facilities, are the basis for our equity in earnings of unconsolidated affiliates.
Ambulatory Care Facility Growth Year Ended December 31, 2021
Net revenues 14.5%
Net revenue per case (1.0)%
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Joint Ventures with Health System Partners
USPI’s business model is to jointly own its facilities with local physicians and, in many of these facilities, a not‐for‐profit health system partner. Accordingly, as of December 31, 2021, the majority of facilities in our Ambulatory Care segment are operated in this model.
The table below summarizes the amounts we paid to acquire various ownership interests in ambulatory care facilities in the periods indicated:
Years Ended December 31, Increase (Decrease)
Type of Ownership Interests Acquired 2021 2020
Noncontrolling interests 79 24 55
The table below provides information about the ownership structure of the facilities our Ambulatory Care segment operated at December 31, 2021:
Ambulatory Care Facilities December 31, 2021
Ownership Structure:
With a health system partner 196
Without a health system partner 227
Total facilities operated 423
The table below reflects changes in the number of facilities operated during the year ended December 31, 2021:
Ambulatory Care Facilities Year Ended December 31, 2021
Acquisitions 91
De novo 4
Dispositions/Mergers (68)
Total increase in number of facilities operated 27
Through our transaction with SCD in December 2021, we acquired majority ownership interests in six SCD Centers and minority ownership interests in 80 SCD Centers, along with other related ambulatory support services, for a cash payment of $1.048 billion. Since that initial closing, we have separately made offers, and continue to make offers in an ongoing process, to acquire a portion of the equity interests in certain of the SCD Centers from the physician owners for consideration of up to approximately $250 million; before the end of 2021, we had completed purchases of physician equity resulting in the consolidation in our financial statements of an additional 10 SCD Centers for aggregate payments of $77 million. At December 31, 2021, we held controlling interests in 15 SCD Centers and noncontrolling interests in 57 SCD Centers. The remaining 14 SCD Centers were acquired in the development stage and, therefore, are not included in total acquisitions in the table above. We cannot reasonably predict how many additional physician owners will accept our offers to acquire a portion of their equity, nor the timing or amount of any related payments. We will consolidate in our financial statements the results of the centers in which USPI acquires a majority ownership position.
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 paid cash totaling approximately $73 million for these acquisitions. The ASC acquired in Arizona and one of the Florida centers are jointly owned with a health system partner and physicians. The remaining nine ASCs are jointly owned with physicians. During 2021, we obtained a controlling interest in three surgical hospitals in Arizona in which we previously owned a noncontrolling interest for $13 million. We own one of the hospitals with a health system partner and the remaining two hospitals with a health system and physician partners.
In addition to the those acquired through the SCD acquisition, we acquired noncontrolling interests in four ASCs in Florida, two ASCs in North Carolina, and one each in New Mexico and Texas during the year ended December 31, 2021. We paid cash totaling approximately $79 million for these acquisitions. Following our initial investment, we purchased additional ownership interests in two of the ASCs in Florida for $8 million and subsequently consolidated them. We own the ASC
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acquired in New Mexico and one of the ASCs acquired in North Carolina jointly with a health system and physician partners, and the remaining six centers are jointly owned with physicians.
We also regularly engage in the purchase of equity interests with respect to our investments in unconsolidated affiliates and consolidated facilities that do not result in a change in control. These transactions are primarily the acquisitions of equity interests in ASCs and the investment of additional cash in facilities that need capital for new acquisitions, new construction or other business growth opportunities. During the year ended December 31, 2021, we invested approximately $17 million in such transactions.
During the year ended December 31, 2021, we transferred all 24 imaging centers held in our Ambulatory Care segment to our Hospital Operations segment, divested 40 urgent care centers and sold a portion of our ownership in two ASCs in which we previously had a controlling interest to a health system for approximately $12 million, resulting in the deconsolidation of those facilities.
ConiferSegment
Revenues
Our Conifer segment generated net operating revenues of $1.267 billion and $1.306 billion during the years ended December 31, 2021 and 2020, respectively. The decline in Conifer’s net operating revenues of $39 million, or 3.0%, was primarily due to the revised terms in the Amended RCM Agreement, partially offset by client volume improvement in 2021 compared to 2020, as well as new business expansion. Conifer revenues from third‐party customers, which revenues are not eliminated in consolidation, increased $7 million, or 0.9%, for the year ended December 31, 2021 compared to 2020. The increase was primarily driven by the transition of the Miami Hospitals sold in August 2021 to a third‐party customer and new business expansion, partially offset by expected client attrition.
The Amended RCM Agreement updated certain terms and conditions related to the revenue cycle management services Conifer provides to Tenet hospitals. Conifer’s contract with Tenet represented 38.0% of the net operating revenues Conifer recognized in the year ended December 31, 2021.
Salaries, Wages and Benefits
Salaries, wages and benefits expense for Conifer increased $4 million, or 0.6%, in the year ended December 31, 2021 compared to 2020. Salaries, wages and benefits expense included stock‐based compensation expense of $2 million in both 2021 and 2020.
Other Operating Expenses, Net
Other operating expenses for Conifer decreased $32 million, or 12.2%, in the year ended December 31, 2021 compared to 2020. This decrease was attributable to reduced pass-through costs associated with the Amended RCM Agreement and a reduction of legal expenses.
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Consolidated
Impairment and Restructuring Charges, and Acquisition-Related Costs
The following table provides information about our impairment and restructuring charges, and acquisition‐related costs:
Years Ended December 31,
Consolidated:
Impairment charges $ 8 $ 92
Restructuring charges 57 184
Acquisition-related costs 20 14
By segment:
Hospital Operations $ 39 $ 187
Ambulatory Care 27 57
Impairment charges for the year ended December 31, 2021 were comprised of $5 million from our Ambulatory Care segment, primarily related to the impairment of certain management contract intangible assets, and $3 million from our Conifer segment. Restructuring charges during the year ended December 31, 2021 consisted of $14 million of employee severance costs, $19 million related to the transition of various administrative functions to our GBC and $24 million of other restructuring costs. Acquisition‐related costs consisted of $20 million of transaction costs for the year ended December 31, 2021.
Impairment charges during the year ended December 31, 2020 primarily included $76 million for the write‐down of hospital buildings to their estimated fair values in one of our markets, which assets are part of our Hospital Operations segment. Material adverse trends in our estimates of future undiscounted cash flows of the hospitals indicated the aggregate carrying value of the hospitals’ long‐lived assets was not recoverable from the estimated future cash flows. We believe the most significant factors contributing to the adverse financial trends included 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. As a result, we updated the estimate of the fair value of the hospitals’ long-lived assets and compared it to the aggregate carrying value of those assets. Because the fair value estimates were lower than the aggregate carrying value of the long-lived assets, an impairment charge was recorded for the difference in the amounts. The aggregate carrying value of the hospitals’ assets held and used for which impairment charges were recorded was $483 million at December 31, 2020. We also recorded $16 million of other impairment charges. For additional discussion see Note 6 to the accompanying Consolidated Financial Statements.
Restructuring charges for the year ended December 31, 2020 consisted of $65 million of employee severance costs, $50 million related to the transitioning of various administrative functions to our GBC, $23 million of charges due to the termination of the USPI management equity plan, $14 million of contract and lease termination fees, and $32 million of other restructuring costs. Acquisition‐related costs consisted of $14 million of transaction costs for the year ended December 31, 2020.
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.
Litigation and Investigation Costs
Litigation and investigation costs for the years ended December 31, 2021 and 2020 were $116 million and $44 million, respectively, primarily related to costs associated with legal proceedings and governmental investigations. See Note 17 to the accompanying Consolidated Financial Statements for additional information.
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Net Gains on Sales, Consolidation and Deconsolidation of Facilities
During the year ended December 31, 2021, we recorded net gains on sales, consolidation and deconsolidation of facilities of $445 million, primarily comprised of a gain of $406 million related to the sale of the Miami Hospitals in August 2021, a gain of $14 million related to the sale of the majority of our urgent care centers in April 2021, net gains of $22 million related to consolidation changes of certain USPI businesses due to ownership changes and net gains of $3 million related to other activity.
During the year ended December 31, 2020, we recorded net gains on sales, consolidation and deconsolidation of facilities of $14 million, primarily comprised of aggregate gains of $15 million related to consolidation changes of certain USPI businesses due to ownership changes and a gain of $7 million related to post‐closing adjustments on the 2017 sale of facilities in the Houston area, partially offset by a loss of $5 million related to post‐closing adjustments on the 2019 sale of three of our hospitals in the Chicago area and a loss of $3 million related to post‐closing adjustments on the 2018 sale of MacNeal Hospital.
Interest Expense
Interest expense for the year ended December 31, 2021 was $923 million compared to $1.003 billion for the year ended December 31, 2020, primarily due to the early redemption of all $1.410 billion aggregate principal amount outstanding of our 5.125% senior secured second lien notes due 2025 (the “2025 Senior Secured Second Lien Notes”) in June 2021 and early retirement of all $478 million aggregate principal amount outstanding of our 7.000% senior unsecured notes due 2025 (“2025 Senior Unsecured Notes”) in March 2021.
Loss from Early Extinguishment of Debt
Loss from early extinguishment of debt was $74 million for the year ended December 31, 2021 and consisted of aggregate losses incurred from the redemption of our 4.625% senior secured first lien notes due 2024 (“2024 Senior Secured First Lien Notes”) in September 2021, the redemption of our 2025 Senior Secured Second Lien Notes in June 2021 and the retirement of our 2025 Senior Unsecured Notes in March 2021, all in advance of their respective maturity dates. See Note 8to the accompanying Consolidated Financial Statements for additional information.
Loss from early extinguishment of debt was $316 million for the year ended December 31, 2020 and consisted of an aggregate loss of $320 million from the redemption and purchase of our 8.125% senior unsecured notes due 2022, partially offset by $4 million of gains on the extinguishment of mortgage notes.
Income Tax Expense
During the year ended December 31, 2021, we recorded income tax expense of $411 million in continuing operations on pre‐tax income of $1.888 billion compared to an income tax benefit of $97 million in continuing operations on pre‐tax income of $671 million during the year ended December 31, 2020.
The reconciliation between the amount of recorded income tax expense (benefit) and the amount calculated at the statutory federal tax rate is shown in the following table:
Years Ended December 31,
Tax expense at statutory federal rate of 21% $ 396 $ 141
State income taxes, net of federal income tax benefit 77 33
Expired state net operating losses, net of federal income tax benefit — 1
Tax benefit attributable to noncontrolling interests (114) (75)
Nondeductible goodwill 35 —
Nondeductible executive compensation 8 6
Nondeductible litigation costs 1 —
Expired charitable contribution carryforward — 1
Stock-based compensation tax benefits (5) (2)
Changes in valuation allowance 2 (226)
Other items 3 10
Income tax expense (benefit) $ 411 $ (97)
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As a result of the change in the business interest expense disallowance rules under the COVID Acts, we recorded an income tax benefit of $88 million during the year ended December 31, 2020 to decrease the valuation allowance for interest expense and carryforwards due to the additional deduction of interest expense. In September 2020, we filed an application with the Internal Revenue Services (“IRS”) to change our method of accounting for certain capitalized costs on our 2019 tax return. This change in tax accounting method resulted in additional interest expense being allowed on our 2019 and 2020 tax returns. We reduced our valuation allowance by an additional $126 million in the year ended December 31, 2020 related to the change in tax accounting method. Charitable contribution carryforward and state valuation allowance changes resulted in an additional $12 million decrease for the year ended December 31, 2020.
Net Income Available to Noncontrolling Interests
Net income available to noncontrolling interests was $562 million for the year ended December 31, 2021 compared to $369 million for the year ended December 31, 2020. Net income available to noncontrolling interests in 2021 was comprised of $448 million of income related to our Ambulatory Care segment, $69 million of income related to our Conifer segment and $45 million of income related to our Hospital Operations segment. Of the portion related to our Ambulatory Care segment, $21 million of income was related to the minority interests in USPI.
ADDITIONAL SUPPLEMENTAL NON-GAAP DISCLOSURES
The financial information provided throughout this report, including our Consolidated Financial Statements and the notes thereto, has been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). However, we use certain non‐GAAP financial measures defined below in communications with investors, analysts, rating agencies, banks and others to assist such parties in understanding the impact of various items on our financial statements, some of which are recurring or involve cash payments. We use this information in our analysis of the performance of our business, excluding items we do not consider relevant to the performance of our continuing operations. In addition, we use these measures to define certain performance targets under our compensation programs.
“Adjusted EBITDA” is a non‐GAAP measure we define as net income available (loss attributable) to Tenet Healthcare Corporation common shareholders before (1) the cumulative effect of changes in accounting principle, (2) net loss attributable (income available) to noncontrolling interests, (3) income (loss) from discontinued operations, net of tax, (4) income tax benefit (expense), (5) gain (loss) from early extinguishment of debt, (6) other non‐operating income (expense), net, (7) interest expense, (8) litigation and investigation (costs) benefit, net of insurance recoveries, (9) net gains (losses) on sales, consolidation and deconsolidation of facilities, (10) impairment and restructuring charges and acquisition‐related costs, (11) depreciation and amortization, and (12) income (loss) from divested and closed businesses (i.e., health plan businesses). Litigation and investigation costs do not include ordinary course of business malpractice and other litigation and related expense.
We believe the foregoing non‐GAAP measure is useful to investors and analysts because it presents additional information about our financial performance. Investors, analysts, company management and our board of directors utilize this non‐GAAP measure, in addition to GAAP measures, to track our financial and operating performance and compare that performance to peer companies, which utilize similar non‐GAAP measures in their presentations. The human resources committee of our board of directors also uses certain non‐GAAP measures to evaluate management’s performance for the purpose of determining incentive compensation. We believe that Adjusted EBITDA is a useful measure, in part, because certain investors and analysts use both historical and projected Adjusted EBITDA, in addition to GAAP and other non‐GAAP measures, as factors in determining the estimated fair value of shares of our common stock. Company management also regularly reviews the Adjusted EBITDA performance for each operating segment. We do not use Adjusted EBITDA to measure liquidity, but instead to measure operating performance. The non‐GAAP Adjusted EBITDA measure we utilize may not be comparable to similarly titled measures reported by other companies. Because this measure excludes many items that are included in our financial statements, it does not provide a complete measure of our operating performance. Accordingly, investors are encouraged to use GAAP measures when evaluating our financial performance.
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The following table shows the reconciliation of Adjusted EBITDA to net income available to Tenet Healthcare Corporation common shareholders (the most comparable GAAP term) for the years ended December 31, 2021 and 2020:
Years Ended December 31,
Less: Net income available to noncontrolling interests (562) (369)
Loss from discontinued operations, net of tax (1) —
Income from continuing operations 1,477 768
Income tax benefit (expense) (411) 97
Loss from early extinguishment of debt (74) (316)
Other non-operating income, net 14 1
Litigation and investigation costs (116) (44)
Net gains on sales, consolidation and deconsolidation of facilities 445 14
Impairment and restructuring charges, and acquisition-related costs (85) (290)
Depreciation and amortization (855) (857)
Less: Net operating revenues from health plans — 21
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2020 COMPARED TO THE YEAR ENDED DECEMBER 31, 2019
A discussion of the results of operations for the year ended December 31, 2020 compared to the year ended December 31, 2019 can be found in our Annual Report on Form 10‐K for the year ended December 31, 2020.
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LIQUIDITY AND CAPITAL RESOURCES
CASH REQUIREMENTS
Scheduled Contractual Obligations
Our obligations to make future cash payments under contracts are summarized in the table below, all as of December 31, 2021. Other than the repayment of long-term debt, we expect to use net cash generated from operating activities, cash on hand or borrowings under our revolving credit facility to satisfy the below obligations. Long‐term debt maturities may be refinanced or repaid using net cash generated from operating activities or from the proceeds from sales of facilities.
Total Years Ended December 31, Later Years
(In Millions)
Medicare accelerated payment program 880 880 — — — — —
Purchase orders 335 335 — — — — —
(1) Amounts include both principal and interest.
Long-term Debt—We have a senior secured revolving credit facility (as amended to date, the “Credit Agreement”) that provides for revolving loans in an aggregate principal amount of up to $1.900 billion with a $200 million subfacility for standby letters of credit. Any amounts outstanding under the Credit Agreement are due upon the facility’s maturity in September 2024. At December 31, 2021, we had no cash borrowings outstanding under the Credit Agreement and less than $1 million of standby letters of credit outstanding.
At December 31, 2021, we had outstanding senior unsecured and senior secured notes (“Senior Notes”) with an aggregate principal balance of $15.354 billion. The Senior Notes generally require semi‐annual interest payments and have maturity dates ranging from 2023 through 2031. Any outstanding principal and accrued but unpaid interest is due upon maturity.
We consummated the following transactions affecting our long‐term commitments in the year ended December 31, 2021:
•In December 2021, we issued $1.450 billion aggregate principal amount of our 2030 Senior Secured First Lien Notes. We will pay interest on these notes semi‐annually in arrears on January 15 and July 15 of each year, commencing in July 2022. We used the net proceeds from the issuance of the 2030 Senior Secured First Lien Notes, after payment of fees and expenses, to finance the acquisition of the SCD Centers in December 2021 and for general corporate purposes.
•In September 2021, we redeemed approximately $1.100 billion of the then‐outstanding $1.870 billion aggregate principal amount of our 2024 Senior Secured First Lien Notes in advance of their maturity date. We paid $1.113 billion to redeem the notes, which was primarily funded with the proceeds from the sale of the Miami Hospitals in August 2021. In connection with the redemption, we recorded a loss from early extinguishment of debt of $20 million in the three months ended September 30, 2021, primarily related to the difference between the purchase price and the par value of the notes, as well as the write‐off of associated unamortized issuance costs.
•In June 2021, we issued $1.400 billion aggregate principal amount of our 2029 Senior Secured First Lien Notes. We pay interest on the 2029 Senior Secured First Lien Notes semi‐annually in arrears on June 1 and December 1 of each year, which payments commenced in December 2021. The proceeds from the sale of the 2029 Senior Secured First Lien Notes were used, after payment of fees and expenses, together with cash on hand, to finance the redemption of all $1.410 billion aggregate principal amount then outstanding of our 2025 Senior Secured Second Lien Notes in advance of their maturity date for approximately $1.428 billion. In connection with the redemption, we recorded a loss from early extinguishment of debt of approximately $31 million in the three
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months ended June 30, 2021, primarily related to the difference between the purchase price and the par value of the 2025 Senior Secured Second Lien Notes, as well as the write‐off of associated unamortized issuance costs.
•In March 2021, we retired all $478 million aggregate principal amount outstanding of our 2025 Senior Unsecured Notes in advance of their maturity date. We paid approximately $495 million from cash on hand to retire the notes. In connection with the retirement, we recorded a loss from early extinguishment of debt of $23 million in the three months ended March 31, 2021, primarily related to the difference between the purchase price and the par value of the notes, as well as the write‐off of associated unamortized issuance costs.
At December 31, 2021, using the last 12 months of Adjusted EBITDA, our ratio of total long‐term debt, net of cash and cash equivalent balances, to Adjusted EBITDA was 3.81x, or 4.07x if adjusted to include outstanding obligations arising from cash advances received from Medicare pursuant to the COVID Acts. We anticipate this ratio will fluctuate from quarter to quarter based on earnings performance and other factors, including the use of our revolving credit facility as a source of liquidity and acquisitions that involve the assumption of long‐term debt. We seek to manage this ratio and increase the efficiency of our balance sheet by following our business plan and managing our cost structure, including through possible asset divestitures, and through other changes in our capital structure. As part of our long‐term objective to manage our capital structure, we continue to evaluate opportunities to retire, purchase, redeem and refinance outstanding debt subject to prevailing market conditions, our liquidity requirements, operating results, contractual restrictions and other factors. In the year ending December 31, 2023 and beyond, we may also consider share repurchases depending on market conditions and other investment opportunities. Our ability to achieve our leverage and capital structure objectives is subject to numerous risks and uncertainties, many of which are described in the Forward‐Looking Statements and Risk Factors sections in Part I of this report.
Interest payments, net of capitalized interest, were $937 million, $962 million and $946 million in the years ended December 31, 2021, 2020 and 2019, respectively. For the year ending December 31, 2022, we expect annual interest payments to be approximately $850 million to $860 million.
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. We expect this transaction will lower our annual cash interest payments by approximately $53 million, which savings are reflected in the expected annual interest payments above.
Future maturities of our long-term debt obligations are summarized in the table above. See Note 8 to the accompanying Consolidated Financial Statements for additional information about our long‐term debt obligations.
Lease Obligations—We have operating lease agreements primarily for real estate, including off‐campus outpatient facilities, medical office buildings, and corporate and other administrative offices, as well as for medical office equipment. Our finance leases are primarily for medical equipment and information technology and telecommunications assets. As of December 31, 2021, we had fixed payment obligations of $1.407 billion under non‐cancellable lease agreements. Future payments due in connection with our operating and finance leases, including imputed interest, are summarized in the table above. Additional information about our lease commitments is provided in Note 7 to the accompanying Consolidated Financial Statements.
Medicare Accelerated Payment Program—As further discussed in Note 1 to the accompanying Consolidated Financial Statements, we received advance payments from the Medicare accelerated payment program following its expansion under the COVID Acts. As of December 31, 2021, we had a liability of $880 million related to advances received under the Medicare accelerated payment program that will be recouped during the year ending December 31, 2022 through reductions of our Medicare claims payments.
Academic Teaching Services—We enter into contracts for academic teaching services with university and physician groups to support graduate medical education. These agreements contain various rights and termination provisions.
Defined Benefit Obligations—We maintain three frozen, non‐qualified defined benefit plans that provide supplemental retirement benefits to certain of our current and former executives. These plans are unfunded, and plan obligations are paid from our working capital. We also maintain a frozen, qualified defined benefit plan that benefits certain of our employees in Detroit. See Note 10 to the accompanying Consolidated Financial Statements for additional information about our defined benefit plans.
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Information Technology Contracts—We enter into various non‐cancellable contracts for information technology services and licenses as a normal part of our business. These contracts generally relate to information technology infrastructure support and services, software licenses for certain operational and administrative systems, and cybersecurity‐related software and services.
Purchase Orders—We had outstanding short‐term purchase commitments of $335 million at December 31, 2021, which we expect to pay within 12 months.
Other Contractual Obligations
Asset Retirement Obligations—Asset retirement obligations represent the estimated costs to perform environmental remediation work, which we are legally obligated to complete, at certain of our facilities upon their retirement. This work could include asbestos abatement, the removal of underground storage tanks and other similar activities. At December 31, 2021, the undiscounted aggregate future estimated payments related to these obligations was $185 million. We are unable to predict the timing of these payments due to the uncertainty and long timeframes inherent in these obligations.
Standby Letters of Credit—Standby letters of credit are required principally by our insurers and various states to collateralize our workers’ compensation programs pursuant to statutory requirements and as security to collateralize the deductible and self‐insured retentions under certain of our professional and general liability insurance programs. The amount of collateral required is primarily dependent upon the level of claims activity and our creditworthiness. The insurers require the collateral in case we are unable to meet our obligations to claimants within the deductible or self‐insured retention layers.
We have a letter of credit facility (as amended, the “LC Facility”) that provides for the issuance of standby and documentary letters of credit. The aggregate principal amount of letters of credit that from time to time may be issued under the LC Facility is $200 million. Drawings under any letter of credit issued under the LC Facility accrue interest if not reimbursed within three business days. At December 31, 2021, we had $139 million of standby letters of credit outstanding under the LC Facility. The timing of reimbursement payments is uncertain, as we cannot foresee when, or if, a standby letter of credit will be drawn upon.
Guarantees—Our guarantees include minimum revenue guarantees, primarily related to physicians under relocation agreements and physician groups that provide services at our hospitals, as well as operating lease guarantees. At December 31, 2021, the maximum potential amount of future payments under these guarantees was $216 million, of which $116 million were recorded in the accompanying Consolidated Balance Sheet at December 31, 2021. The timing and amount of future payments under these guarantees is uncertain.
Professional and General Liability Obligations—At December 31, 2021, the current and long‐term professional and general liability reserves included in our Consolidated Balance Sheet were $254 million and $791 million, respectively, and the current and long‐term workers’ compensation reserves included in our Consolidated Balance Sheet were $43 million and $107 million, respectively. The timing of professional and general liability payments is uncertain as such payments depend on several factors, including the nature of claims and when they are received.
Baylor Put/Call Agreement—As further discussed in Note 18 to the accompanying Consolidated Financial Statements, we have a put/call agreement with Baylor with respect to Baylor’s 5% ownership 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 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. The carrying value of the redeemable noncontrolling interests in USPI that are subject to the Baylor Put/Call Agreement was $258 million at December 31, 2021.
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 addition, 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.
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SCD Development Agreement—In November 2021, 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. The timing and amount of payments related to the development of these facilities is currently unknown.
Investment in the SCD Centers—Beginning in December 2021, USPI made offers, and it continues to make offers in an ongoing process, to acquire a portion of the equity interests in certain of the SCD Centers from the physician owners for consideration of up to approximately $250 million. Before the end of 2021, we made aggregate payments of $77 million to acquire majority ownership interests in 10 SCD Centers. We cannot reasonably predict how many additional physician owners will accept our offers to acquire a portion of their equity, nor the timing or amount of any remaining payments. We expect to fund these payments using cash on hand.
Other than the obligations described above, we had no off‐balance sheet arrangements that may have a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources at December 31, 2021.
Other Cash Requirements
Our capital expenditures primarily relate to the expansion and renovation of existing facilities (including amounts to comply with applicable laws and regulations), equipment and information systems additions and replacements, introduction of new medical technologies, design and construction of new buildings, and various other capital improvements, as well as commitments to make capital expenditures in connection with acquisitions of businesses. Capital expenditures were $658 million, $540 million and $670 million in the years ended December 31, 2021, 2020 and 2019, respectively. We anticipate that our capital expenditures for continuing operations for the year ending December 31, 2022 will total approximately $725 million to $775 million, including $95 million that was accrued as a liability at December 31, 2021.
As previously reported, we are building a 100‐bed acute‐care hospital and a medical office building in Fort Mill, South Carolina, which we expect to open in August 2022. We expect construction of the Fort Mill campus will cost approximately $150 million over the construction period, of which $51 million was expended as of December 31, 2021. In San Antonio, we are planning to break ground on a new healthcare campus in Westover Hills in 2022, inclusive of a hospital, ASC and medical office space. We expect construction of the Westover Hills facilities will cost approximately $260 million over the construction period.