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 give context to the analysis of our financial information, 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 and Services Segment
•Results of Operations
•Liquidity and Capital Resources
•Recently Issued Accounting Standards
•Critical Accounting Estimates
At December 31, 2022, our business was organized into three separate reporting segments: Hospital Operations and other, Ambulatory Care and Conifer. During the three months ended December 31, 2023, we combined our Hospital Operations and other and Conifer segments into a single reporting segment named Hospital Operations and Services (“Hospital Operations”). This change was made to reflect recent updates to the organizational and management structure of our Conifer and Hospital Operations and other segments. All prior‐period data presented in this report has been adjusted to conform to our new reporting segment structure.
Our Hospital Operations segment is comprised of our acute care and specialty hospitals, a network of employed physicians and ancillary outpatient facilities. At December 31, 2023, our subsidiaries operated 61 hospitals serving primarily urban and suburban communities in nine states. Our Hospital Operations segment also included 164 outpatient facilities at December 31, 2023, including imaging centers, urgent care centers (each, a “UCC”), ancillary emergency facilities and micro‐hospitals. In addition, our Hospital Operations segment provides revenue cycle management and value-based care services to hospitals, health systems, physician practices, employers and other clients through our Conifer Health Solutions, LLC joint venture.
Our Ambulatory Care segment, through our USPI Holding Company, Inc. subsidiary (“USPI”), held ownership interests in 461 ambulatory surgery centers (each, an “ASC”) (322 consolidated) and 24 surgical hospitals (eight consolidated) in 35 states at December 31, 2023. USPI’s facilities offer a range of procedures and service lines, including, among other specialties: orthopedics, total joint replacement, and spinal and other musculoskeletal procedures; gastroenterology; and urology. At the beginning of 2022, we owned approximately 95% of the voting shares of USPI, and Baylor University Medical Center (“Baylor”) owned approximately 5%. Effective June 30, 2022, we purchased all of the shares in USPI that Baylor held on that date for $406 million, which increased our ownership interest in USPI’s voting shares from 95% to 100%. See Note 18 to the accompanying Consolidated Financial Statements and the Liquidity and Capital Resources section of MD&A for additional information about this transaction.
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 admission and per adjusted patient day amounts). Continuing operations information excludes the results of our hospitals and other businesses classified as discontinued operations for accounting purposes. We believe this presentation is useful to investors because it includes the operations of all facilities in continuing operations for the entire time that we owned and operated them during the relevant period. In addition, continuing operations information reflects the impact of the addition or disposition of individual hospitals and other operations on our volumes, revenues and expenses.
In certain cases, information presented in MD&A for our Hospital Operations segment is described as presented on a same‐hospital basis. We present same‐hospital data because we believe it provides investors with useful information regarding the performance of our current portfolio of hospitals and other operations that are comparable for the periods presented. Furthermore, same‐hospital data may more clearly reflect recent trends we are experiencing with respect to volumes, revenues and expenses exclusive of variations caused by the addition or disposition of individual hospitals and other operations. Because
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information presented on a same-hospital basis includes only those facilities operated throughout both periods, it will include a different mix of facilities depending upon the periods under comparison.
We present certain metrics as a percentage of net operating revenues because a significant portion of our operating expenses are variable, and we present certain metrics on a per adjusted admission and per adjusted patient day basis to show trends other than volume.
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, including Adjusted EBITDA (as defined below), in this report and 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. 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 also present certain operational metrics and statistics in order to provide additional insight into our operational performance efficiency and to help investors better understand management’s view and strategic focus. We define these operational metrics and statistics as follows:
Adjusted admissions—represents actual admissions in the period adjusted to include outpatient services provided by facilities in our Hospital Operations segment by multiplying actual admissions by the sum of gross inpatient revenues and outpatient revenues and dividing the result by gross inpatient revenues;
Adjusted patient days—represents actual patient days in the period adjusted to include outpatient services provided by facilities in our Hospital Operations segment by multiplying actual patient days by the sum of gross inpatient revenues and outpatient revenues and dividing the result by gross inpatient revenues; and
Utilization of licensed beds—represents patient days divided by the number of days in the period divided by average licensed beds.
MANAGEMENT OVERVIEW
RECENT DEVELOPMENTS
Divestiture of Three South Carolina Hospitals—In January 2024, we completed the previously announced sale of three hospitals located in South Carolina and certain related operations (the “SC Hospitals”). We received pre‐tax proceeds of approximately $2.400 billion from this sale.
Definitive Agreement to Sell Four California Hospitals—Also in January 2024, we entered into a definitive agreement for the sale of four hospitals and certain related operations located in Orange County and Los Angeles County, California (the “OCLA Hospitals”). The transaction is expected to be completed by early 2024, subject to customary regulatory approvals, clearances and closing conditions.
OPERATING ENVIRONMENT AND TRENDS
Staffing and Labor Trends—We compete with other healthcare providers in recruiting and retaining qualified personnel responsible for the operation of our facilities. There is 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 shortages of advanced practice providers and critical‐care nurses in certain disciplines and geographic areas. The COVID‐19 pandemic exacerbated these shortages as more employees chose to retire early, leave the workforce or take travel assignments. Over the past several years, we have had to rely on higher-cost contract labor, which we compete with other healthcare providers to secure, and pay premiums above standard compensation for
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essential workers. Although we continue to incur a higher level of contract labor expense than we have historically, our recruitment and retention efforts drove a reduction in this expense during the year ended December 31, 2023 as compared to 2022.
We also depend on the available labor pool of semi‐skilled and unskilled workers in the areas where we operate. In some of our communities, employers across various industries have increased their minimum wage, which has created more competition and, in some cases, higher labor costs for this sector of employees. Furthermore, we expect that state‐mandated minimum wage increases in California will result in an increase in compensation costs for certain of our employees and vendors beginning in 2024.
Inflation and Other General Economic Conditions—Our business has been impacted by the rise in inflation and its effects on salaries, wages and benefits, as well as other costs. Additional economic factors, including unemployment rates and consumer spending, affect our patient volumes, service mix and revenue mix. Business closings and layoffs in the areas we operate may lead to increases in the uninsured and underinsured populations and adversely affect demand for our services, as well as the ability of patients to pay for services. Any significant deterioration in the collectability of patient accounts receivable could adversely affect our cash flows and results of operations.
Medical supply prices remain high due to current economic conditions and other factors. In addition, our Ambulatory Care segment continues to be impacted by shipment delays in construction materials and capital equipment with respect to its de novo facility development efforts, which are a key part of our portfolio expansion strategy. In general, supply chain operational challenges may continue or worsen in the future, whether due to geopolitical conflicts, inflationary pressures and the recessionary environment, climate change, weather events or other issues yet to emerge.
Industry Trends—We believe that several key trends are 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. Furthermore, the healthcare industry, in general, and the acute care hospital business, in particular, continue to be subject to significant regulatory uncertainty. Changes in federal or state healthcare laws, regulations, funding policies or reimbursement practices, especially those involving reductions to government payment rates, could have a significant impact on our future revenues and expenses.
Ongoing Impact of the COVID-19 Pandemic—Variations in the prevalence of COVID‐19 infections and related patient acuity continued to adversely impact our patient volumes, service mix, revenue mix, operating expenses and net operating revenues in the affected areas during the year ended December 31, 2023. Due to the regional nature of surges, some areas within our network faced heightened challenges while others were able to operate under more normalized conditions. Despite these challenges, we experienced strong patient volume growth overall in our Hospital Operations and Ambulatory Care segments during the year ended December 31, 2023, which we attribute in part to patient care deferred in prior years due to the COVID-19 pandemic.
We have taken a number of actions over the past several years to increase our liquidity and mitigate the impact of fluctuations in our patient volumes and in our service and revenue mix. Moreover, various federal legislative actions, including additional funding for the Public Health and Social Services Emergency Fund (collectively, the “COVID Acts”), during the public health emergency that began in January 2020 mitigated some of the adverse financial impacts of the COVID‐19 pandemic on our business. During the years ended December 31, 2023 and 2022, we received cash payments from COVID‐19 relief programs totaling $10 million and $196 million, respectively, and recognized grant income of $16 million and $194 million, respectively. The public health emergency for the COVID‐19 pandemic ended on May 11, 2023.
We cannot predict the future course and impacts of COVID-19, or the potential emergence and effects of a future pandemic, epidemic or outbreak of an infectious disease, on our operations, financial condition or liquidity. For information about related risks and uncertainties, see the Risk Factors section in Part I of this report.
STRATEGIES
Expanding Our Ambulatory Care Segment—We continue to focus on opportunities to expand our Ambulatory Care segment through acquisitions, organic growth, construction of new outpatient centers and strategic partnerships. 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 surgical techniques, medical technology
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and anesthesia, as well as 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 over time. Historically, our outpatient services have generated significantly higher margins for us than inpatient services.
During the years ended December 31, 2023 and 2022, we invested $172 million and $264 million, respectively, to acquire ownership interests in new ASCs, increase our ownership interests in existing facilities and invest in de novo facilities. During the year ended December 31, 2023, we acquired controlling ownership interests in 20 ASCs in which we did not have a previous investment, and we opened nine de novo ASCs. We also continue to prioritize increasing our investment in our unconsolidated facilities. During the year ended December 31, 2023, we acquired controlling ownership interests in 11 previously unconsolidated ASCs, allowing us to consolidate their financial results.
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‐efficiency measures, and we continue to transition certain support operations to our Global Business Center (“GBC”) in the Philippines. We incurred restructuring charges in conjunction with these initiatives in the year ended December 31, 2023, and we could incur additional restructuring charges in the future.
From time to time, we also capitalize on opportunities to 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 and reduce our debt, among other things. In November 2023, we entered into a definitive agreement to sell the SC Hospitals, and that transaction closed on January 31, 2024. We received pre‐tax proceeds of approximately $2.400 billion from this sale. Also in January 2024, we entered into a definitive agreement for the sale of the OCLA Hospitals; the transaction is expected to be completed by early 2024, subject to customary regulatory approvals, clearances and closing conditions.
We also seek advantageous opportunities to grow our portfolio of hospitals and other healthcare facilities. In September 2022, we opened Piedmont Medical Center Fort Mill (“PMC Fort Mill Hospital”), a new acute care hospital located in South Carolina. This 100‐bed facility includes an emergency department, multi‐specialty operating rooms, an intensive care unit, and labor and delivery rooms. In addition, we broke ground on a new medical campus located in the Westover Hills area of San Antonio, Texas, in 2022. The campus, which is currently on schedule for completion in mid‐2024, is expected to include a 104‐bed acute care hospital, an ASC and medical office space. During 2023, we broke ground on a new medical campus located in Port St. Lucie, Florida, that is expected to include a 54‐bed hospital, as well as medical office space. We expect to complete construction of the Port St. Lucie medical campus in late 2025. Also, in December 2023, we completed a joint venture transaction with NextCare, Inc. (“NextCare”) and certain of its affiliates. Through this transaction, we acquired ownership interests in 56 fully operational UCCs and one telehealth center in Arizona.
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.
Improving Profitability—We continue to focus on growing patient volumes and effective cost management as a means to improve profitability. Our inpatient admissions have been constrained in recent years by the COVID‐19 pandemic, 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 areas where we operate. Our business has also been impacted by the rise in inflation and its effects on salaries, wages, benefits and other costs. 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 pursue new opportunities to enhance efficiency, including
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further integration of enterprise‐wide centralized support functions, outsourcing additional functions unrelated to direct patient care, and reducing clinical and vendor contract variation.
Reducing Our Leverage Over Time—All of our long‐term debt has a fixed rate of interest, except for outstanding borrowings under our senior secured revolving credit facility (as amended to date, the “Credit Agreement”), of which we had none at December 31, 2023. In addition, the maturity dates of our notes are staggered from 2026 through 2031. We believe that our capital structure helps to minimize the near‐term impact of increased interest rates, and the staggered maturities of our debt allow us to retire or refinance our debt over time. 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.
In May 2023, we issued $1.350 billion aggregate principal amount of 6.750% senior secured first lien notes, which will mature in May 2031 (the “2031 Senior Secured First Lien Notes”). We used the proceeds from this issuance, together with cash on hand, to finance the redemption of all $589 million aggregate principal amount then-outstanding of our 4.625% senior secured first lien notes due September 2024 (the “September 2024 Senior Secured First Lien Notes”) and all $756 million aggregate principal amount then-outstanding of our 4.625% senior secured first line notes due July 2024 (the “July 2024 Senior Secured First Lien Notes”) in May and June 2023, respectively.
Repurchasing Stock—In October 2022, our board of directors authorized the repurchase of up to $1 billion of our common stock through a share repurchase program. Repurchases will be made in accordance with applicable securities laws and may be made at management’s discretion from time to time in open-market or privately negotiated transactions, subject to market conditions and other factors. The share repurchase program does not obligate us to acquire any particular amount of common stock, and it may be suspended for periods or discontinued at any time before its scheduled expiration date of December 31, 2024. We paid approximately $200 million to repurchase a total of 3,112 thousand shares during the year ended December 31, 2023, or an average of $64.27 per share, and we paid approximately $250 million to repurchase a total of 5,889 thousand shares during the year ended December 31, 2022, or an average of $42.45 per share.
Our ability to execute on our strategies and respond to the aforementioned trends in the current operating environment is subject to numerous 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.
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RECENT RESULTS OF OPERATIONS
For the purpose of comparing our results of operations for the three months ended December 31, 2023 and 2022, continuing operations information for our Hospital Operations segment includes the results of our same 60 hospitals operated throughout the three‐month periods in 2023 and 2022, as well as the results of our PMC Fort Mill Hospital, and excludes the results of our hospitals and other businesses classified as discontinued operations for accounting purposes during those periods.
The following table presents selected operating statistics for our Hospital Operations and Ambulatory Care segments on a continuing operations basis:
Three Months Ended December 31, Increase(Decrease)
Hospital Operations – hospitals and related outpatient facilities:
Number of hospitals (at end of period) 61 61 — (1)
Paying admissions (excludes charity and uninsured) 130,573 128,505 1.6 %
Charity and uninsured admissions 6,283 6,646 (5.5) %
Average length of stay (days) 5.06 5.21 (2.9) %
Utilization of licensed beds 48.7 % 49.5 % (0.8) % (1)
Ambulatory Care:
Total consolidated facilities (at end of period) 330 308 22 (1)
(1) The change is the difference between the 2023 and 2022 amounts presented.
Total admissions increased by 1,705, or 1.3%, total surgeries increased by 295, or 0.3%, and total emergency department visits decreased by 20,650, or 3.0%, in the three months ended December 31, 2023 compared to the three months ended December 31, 2022. The increase in our Ambulatory Care segment’s total consolidated cases of 14.5% in the three months ended December 31, 2023, as compared to the same period in 2022, was primarily attributable to incremental case volume from our recently acquired ASCs and same‐facility case growth, partially offset by the impact of the closure and deconsolidation of certain facilities.
The following table presents net operating revenues by segment on a continuing operations basis:
Three Months Ended December 31, Increase(Decrease)
Consolidated net operating revenues increased by $389 million, or 7.8%, in the three months ended December 31, 2023 compared to the same period in 2022. The increase of $245 million, or 6.0%, in our Hospital Operations segment’s net operating revenues during the 2023 period was primarily due to a more favorable payer mix, negotiated commercial rate increases, higher patient volumes and acuity, and favorable Medicaid supplemental revenue adjustments totaling $52 million. Net operating revenues in our Ambulatory Care segment increased by $144 million, or 15.4%, in the three months ended December 31, 2023 compared to the same period in 2022. This change was primarily driven by our recently acquired ASCs, an increase in case volume and higher net revenue per case, partially offset by the impact of the closure and
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deconsolidation of certain facilities. During the three months ended December 31, 2023 and 2022, we recognized grant income of $2 million and $40 million, respectively, which amounts are not included in net operating revenues.
Our accounts receivable days outstanding (“AR Days”) from continuing operations were 55.4 days and 58.3 days at December 31, 2023 and 2022, respectively. Our AR Days target is 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 and excludes our California provider fee revenues.
The following table provides information about selected operating expenses by segment on a continuing operations basis:
Three Months Ended December 31, Increase(Decrease)
Hospital Operations:
Salaries, wages and benefits $ 2,060 $ 2,087 (1.3) %
Ambulatory Care:
Salaries, wages and benefits $ 255 $ 219 16.4 %
Total:
Rent/lease expense(1):
Hospital Operations $ 70 $ 71 (1.4) %
(1) Included in other operating expenses.
The following table provides information about our Hospital Operations segment’s selected operating expenses per adjusted admission on a continuing operations basis:
Three Months Ended December 31, Increase(Decrease)
Hospital Operations:
Salaries, wages and benefits per adjusted admission $ 8,234 $ 8,364 (1.6) %
Other operating expenses per adjusted admission 4,197 3,653 14.9 %
Salaries, wages and benefits expense for our Hospital Operations segment decreased $27 million, or 1.3%, in the three months ended December 31, 2023 compared to the same period in 2022. This decrease was primarily attributable to lower contract labor expense in the three months ended December 31, 2023, partially offset by increased employee benefits expense, higher recruiting and retention costs, and merit increases for certain of our employees. On a per‐adjusted‐admission basis, Hospital Operations salaries, wages and benefits expense decreased 1.6% in the three months ended December 31, 2023 compared to the three months ended December 31, 2022.
Supplies expense for our Hospital Operations segment increased $35 million, or 5.7%, during the three months ended December 31, 2023 compared to the three months ended December 31, 2022. This increase was driven by higher patient volumes and acuity, as well as the impact of general market conditions on prices for supplies. On a per‐adjusted‐admission
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basis, supplies expense increased 5.5% in the three months ended December 31, 2023 compared to the three months ended December 31, 2022 due to the aforementioned factors.
Other operating expenses for our Hospital Operations segment increased $143 million, or 15.7%, in the three months ended December 31, 2023 compared to the same period in 2022. The change was primarily attributable to an increase of $40 million in medical fees and higher malpractice expense of $18 million in the 2023 period. On a per‐adjusted‐admission basis, other operating expenses in the three months ended December 31, 2023 increased 14.9% compared to the three months ended December 31, 2022, primarily due to the factors described above.
LIQUIDITY AND CAPITAL RESOURCES OVERVIEW
Cash and cash equivalents were $1.228 billion at December 31, 2023 compared to $1.054 billion at September 30, 2023.
Significant cash flow items in the three months ended December 31, 2023 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 $1.197 billion;
•Interest payments of $293 million;
•Capital expenditures of $208 million;
•$169 million of distributions paid to noncontrolling interests;
•Payments of $114 million for purchases of businesses or joint ventures; and
•$110 million of payments to purchase 1,626 thousand shares of our common stock under our share repurchase program.
Net cash provided by operating activities was $2.374 billion in the year ended December 31, 2023 compared to $1.083 billion in the year ended December 31, 2022. Key factors contributing to the change between 2023 and 2022 included the following:
•No Medicare advances recouped or repaid in the year ended December 31, 2023 compared to $880 million recouped or repaid during 2022;
•A $128 million payment of payroll taxes deferred pursuant to COVID-19 legislation in 2022 compared to none in 2023;
•$10 million of cash received from pandemic-related grant programs during 2023 compared to $196 million received in 2022;
•Income tax payments that were $82 million higher in 2023 than in 2022;
•$60 million less in payments related to restructuring charges, acquisition‐related costs, and litigation costs and settlements in 2023; 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).
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The following table presents the sources of net patient service revenues for our hospitals and related outpatient facilities, expressed as percentages of net patient service revenues from all sources on a continuing operations basis:
Years Ended December 31,
Indemnity and other 4.1 % 4.8 % 4.8 %
(1) Includes Medicare and Medicaid managed care programs.
Revenues related to the Texas Comprehensive Hospital Increase Reimbursement Program (“CHIRP”) are presented in managed care net patient service revenues in the table above. Amounts we were assessed to support CHIRP following its approval in 2022 were presented in Medicaid revenues in prior periods, but have been reclassified to managed care revenues to conform to the current‐year presentation in the same payer group as the revenues to more clearly reflect the results of our participation in this program. Assessments to support CHIRP totaled $126 million and $123 million during the years ended December 31, 2023 and 2022, respectively.
Our payer mix on an admissions basis for our hospitals, expressed as a percentage of total admissions from all sources on a continuing operations basis, is presented below:
Years Ended December 31,
Charity and uninsured 4.5 % 4.9 % 5.8 %
Indemnity and other 3.3 % 3.2 % 3.2 %
(1) Includes Medicare and Medicaid managed care programs.
Our hospitals and outpatient facilities are subject to various factors that affect our service mix, revenue mix and patient volumes and, thereby, impact our net patient service revenues and results of operations. These factors include, among others, changes in federal, state and local healthcare and business regulations; changes in general, economic conditions nationally and regionally, including inflation; the number of uninsured and underinsured individuals in local communities treated at our hospitals; disease hotspots and seasonal cycles of illness; climate and weather conditions; physician recruitment, satisfaction, retention and attrition; advances in technology and treatments that reduce length of stay or permit procedures to be performed in an outpatient rather than an inpatient setting; local healthcare competitors; utilization pressure by managed care organizations, as well as managed care contract negotiations or terminations; performance data on quality measures and patient satisfaction, as well as standard charges for services; any unfavorable publicity about us, or our joint venture partners, that impacts our relationships with physicians and patients; and changing consumer behavior, including with respect to the timing of elective procedures.
GOVERNMENT PROGRAMS
The Centers for Medicare & Medicaid Services (“CMS”) is an agency of the U.S. Department of Health and Human Services (“HHS”) that administers a number of government programs authorized by federal law; it is the single largest payer of healthcare services in the United States. 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 Children’s Health Insurance Program (“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”) 2029.
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Healthcare Reform
The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (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 41 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 on March 9, 2024.
The Affordable Care Act 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 Affordable Care Act 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 Affordable Care Act have been partially offset by increased revenues from providing care to previously uninsured individuals.
We cannot predict whether or how the Affordable Care Act may be modified, amended or implemented in the future. If future modifications or interpretations result in significantly fewer individuals having 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. We are also unable to predict the potential impacts on our business of other healthcare-related reform efforts at the federal and state levels. Some initiatives, requirements and proposals may have a positive effect on our business, while others may increase our operating costs, negatively impact our patient volumes, case mix and revenue mix, adversely affect the reimbursement we receive for our services or require us to expend resources to modify certain aspects of our operations. Legislative and executive branch efforts related to healthcare reform could result in increased prices for consumers purchasing health insurance coverage, impact our competitive position, and affect our relationships with insurers and patients.
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 $2.383 billion, $2.369 billion and $2.615 billion for the years ended December 31, 2023, 2022 and 2021, 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 more costly 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 Affordable Care Act 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 Affordable Care Act 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, 2023, 52 of our hospitals 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 (Part C) days used in the DSH calculation as set forth in the Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2005 Rates. In June 2023, CMS issued a Final Action on the Treatment of Medicare Part C Days in the Calculation of a Hospital’s Medicare Disproportionate Patient Percentage, which finalized CMS’ August 2020 proposed rule to include Medicare Advantage days in the Medicare fraction for all discharges prior to October 1, 2013. CMS expects no associated effect on payments given that prior payments were made in accordance with this policy. We are not able to predict whether CMS’s final action will be the subject of further or new legal challenges nor are we able to predict the outcome of those challenges, if any, or of pending appeals; 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, 2023, 32 of our hospitals were affiliated with academic institutions and were eligible to receive such payments.
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IPPS Quality Adjustments—The Affordable Care Act also authorizes quality adjustments to Medicare IPPS payments under the following programs:
•Value‐Based Purchasing (“VBP”) Program – 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 (“HAC”) 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, which CMS updates annually, are generally based on a hospital’s performance from prior periods.
Hospital Outpatient Prospective Payment System
Under the outpatient prospective payment system (“OPPS”), 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, 2023, 18 of our hospitals 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, 2023, we operated one freestanding IRF, and 14 of our acute care hospitals 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 we consider the necessity of recording a valuation allowance based on historical settlement results. 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, if necessary, based on the method 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 2023 Medicare FFS improper payment rate for the program is approximately 7.38%. The 2023 error rate for Hospital IPPS payments is approximately 3.4%. 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 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 an 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 continue to invest in the maintenance and utilization of certified EHR systems for our hospitals and employed physicians. Failure 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 19.1%, 19.4% and 18.7% of the total net patient service revenues of our hospitals and related outpatient facilities for the years ended December 31, 2023, 2022 and 2021, respectively. We also receive DSH and other supplemental revenues under various state Medicaid programs. For the years ended December 31, 2023, 2022 and 2021, our total Medicaid revenues attributable to DSH and other supplemental revenues were approximately $929 million, $767 million and $915 million, respectively.
Several states in which we operate continue to face budgetary challenges that have 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 where 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 where we operate could also materially impact our Medicaid funding levels.
Total Medicaid and Medicaid managed care 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, 2023, 2022 and 2021 were $2.776 billion, $2.692 billion and $2.760 billion, respectively. During the year ended December 31, 2023, Medicaid and Medicaid managed care revenues comprised 44% and 56%, respectively, of our Medicaid‐related net patient service revenues from continuing operations recognized by the hospitals and related outpatient facilities in our Hospital
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Operations segment. All Medicaid and Medicaid managed care patient service revenues are presented net of provider taxes or assessments paid by our hospitals.
Because we cannot predict what actions the federal government or the states may take under existing or future legislation and/or regulatory changes to address budget gaps, deficits, Medicaid expansion, Medicaid eligibility redeterminations, provider fee programs, state‐directed payment programs or Medicaid Section 1115 waivers, we are unable to assess the effect that any such legislation or regulatory action might have on our business; however, the impact on our future financial position, results of operations or cash flows could be material.
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. Any of these factors 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 by governmental payers are reduced, if the scope of services covered by governmental payers is limited, or if we or one or more of our 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 Medicare inpatient FFS payment rates for hospitals reimbursed under the IPPS annually. The updates generally become effective October 1, the beginning of the FFY. In August 2023, CMS issued final changes to the Hospital Inpatient Prospective Payment Systems for Acute Care Hospitals and Fiscal Year 2024 Rates (“Final IPPS Rule”). The Final IPPS Rule includes the following payment and policy changes, among others:
•A market basket increase of 3.3% for MS‐DRG operating payments for hospitals reporting specified quality measure data and that are meaningful users of EHR technology; CMS also finalized a 0.2% multifactor productivity reduction required by the Affordable Care Act, that results in a net operating payment update of 3.1% before budget neutrality adjustments;
•An increase in the cost outlier threshold from $38,859 to $42,750;
•A 4.14% net increase in the capital federal MS‐DRG rate;
•Updates to the three factors used to determine the amount and distribution of Medicare UC‐DSH Amounts; and
•The inclusion of certain rural reclassified hospitals with geographically rural hospitals in the calculation of the rural wage index and the calculation of the wage index floor for urban hospitals in the same state.
According to CMS, the combined impact of the payment and policy changes in the Final IPPS Rule for operating costs will yield an average 3.1% increase in Medicare operating MS‐DRG FFS payments for hospitals in urban areas and an average 3.8% increase in such payments for proprietary hospitals in FFY 2024. We estimate that all of the final payment and policy changes affecting operating MS‐DRG and UC‐DSH Amounts will result in a 4.0% increase in our annual Medicare FFS IPPS payments, which yields an estimated increase of approximately $64 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 estimate of the impact of the payment and policy changes.
Payment and Policy Changes to the Medicare Outpatient Prospective Payment and Ambulatory Surgery Center Payment Systems—In November 2023, CMS released the final policy changes and payment rates for the Hospital Outpatient Prospective Payment System and Ambulatory Surgical Center Payment System for calendar year (“CY”) 2024 (“Final OPPS/ASC Rule”). The Final OPPS/ASC Rule includes the following payment and policy changes, among others:
•An estimated net increase of 3.1% for the OPPS rates based on a market basket increase of 3.3%, reduced by a multifactor productivity adjustment required by the Affordable Care Act of 0.2%; and
•A 3.1% increase to the Ambulatory Surgical Center payment rates.
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CMS projects that the combined impact of the payment and policy changes in the Final OPPS/ASC Rule will yield an average 3.2% increase in Medicare FFS OPPS payments for hospitals in urban areas and an average 4.6% increase in Medicare FFS OPPS payments for proprietary hospitals. The projected annual impact of the payment and policy changes in the Final OPPS/ASC Rule is an increase to Medicare FFS hospital outpatient revenues of approximately $29 million, or 5.17%, for the facilities in our Hospital Operations segment and $16 million, or 2.64% for USPI’s ASCs and surgical hospitals. 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 final payment and policy changes.
Final Rule on the Remedy for the 340B-Acquired Drug Payment Policy for Calendar Years 2018-2022—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 CY 2018 final rule regarding OPPS payment and policy changes, CMS reduced the payment for 340B Drugs from the average sales price (“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”). CMS retained the same 340B Payment Adjustment in the final rules regarding OPPS payment and policy changes for CYs 2019 through 2022. Certain hospital associations and hospitals commenced litigation challenging CMS’ authority to impose the 340B Payment Adjustment for CYs 2018, 2019 and 2020. Following the initial court decisions and a series of appeals, the U.S. Supreme Court (the “Supreme Court”) unanimously ruled in June 2022 that the decision to impose the 340B Payment Adjustment in CYs 2018 and 2019 was unlawful, and the case was remanded to the lower courts to determine the appropriate remedy. In response to the Supreme Court’s decision, the final rules regarding OPPS payment and policy changes for CY 2023 affirmed that CMS was now applying the default rate, generally ASP plus 6%, to 340B Drugs and biologicals, and it had removed the 340B Payment Adjustment made in 2018. In January 2023, the U.S. District Court for the District of Columbia issued an opinion remanding the case to HHS to determine the remediation for the prior years’ underpayments. In response, CMS released the Hospital Outpatient Prospective Payment System: Remedy for 340B-Acquired Drugs Payment Policy for Calendar Years 2018-2022 Final Rule in November 2023. The final rule provides for a one-time lump sum remedy payment to each 340B Hospital that received a cut in 340B Drug payments from 2018 through 2022 (to which CMS will not apply interest). Due to budget neutrality requirements, CMS also proposed a reduction to future non‐drug item and service payments through an adjustment to the OPPS conversion factor by minus 0.5% starting in CY 2026 until the full amount is offset (which CMS estimates will take 16 years). We estimate this adjustment will result in a reduction of less than $10 million annually to our acute care and surgical hospital revenue.
Payment and Policy Changes to the MPFS—In November 2023, CMS released the CY 2024 Medicare Physician Fee Schedule Final Rule (“MPFS Final Rule”). The MPFS Final Rule includes updates to payment policies, payment rates and other provisions for services reimbursed under theMPFS from January 1 through December 31, 2024. Under the MPFS Final Rule, the CY 2024 conversion factor, which is the base rate that is used to convert relative units into payment rates, was reduced from $33.89 to $32.74, a decrease of 3.4%, due to budget neutrality rules and the adjustment provided for in the Consolidated Appropriations Act, 2023 (“CAA, 2023”). The CAA, 2023 provided for a 2.5% positive adjustment to the MPFS CY 2023 conversion factor and a 1.25% positive adjustment to the CY 2024 conversion factor, resulting in a 1.25% decrease in the CY 2024 conversion factor from the CY 2023 conversion factor. We estimate the impact of the MPFS Final Rule will result in a reduction of approximately $6 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 final payment and policy changes.
The COVID Acts—Provided below is a brief overview of certain provisions of the COVID Acts that impacted our business in the years ended December 31, 2023, 2022 and 2021. With the expiration of the public health emergency on May 11, 2023, and the subsequent unwinding of federal flexibilities and funding, there is no assurance or expectation that we will continue to receive or remain eligible for significant funding or assistance under the COVID Acts or similar measures in the future.
Funding for the Public Health and Social Services Emergency Fund—The COVID Acts authorized $178 billion in payments to be distributed to providers through the Public Health and Social Services Emergency Fund (“PRF”). To receive 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.
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During the years ended December 31, 2023, 2022 and 2021, our Hospital Operations and Ambulatory Care segments combined recognized $1 million, $138 million and $176 million, respectively, of PRF grant income associated with lost revenues and COVID‐related costs. We recognized an additional $14 million of PRF grant income from our unconsolidated affiliates during the year ended December 31, 2021. Our Hospital Operations and Ambulatory Care segments combined also recognized $15 million, $56 million and $15 million of grant income from state and local grant programs during the years ended December 31, 2023, 2022 and 2021, 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, 2023, 2022 and 2021. We did not have any remaining deferred grant payment funds at December 31, 2023, but had $7 million of deferred grant payment funds at December 31, 2022. This amount was recorded in other current liabilities in the accompanying Consolidated Balance Sheets for 2022.
Medicare and Medicaid Payment Policy Changes—The COVID Acts also alleviated some of the financial strain on hospitals, physicians, other healthcare providers and states through a series of Medicare and Medicaid payment policy changes, 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 Protecting Medicare and American Farmers from Sequester Cuts Act (the “Sequester Cuts Act”) extended the 2% Medicare sequestration moratorium through March 31, 2022 and adjusted the sequestration to 1% for the period April 1, 2022 through June 30, 2022. Because further legislation was not passed, the full 2% reduction was restored effective July 1, 2022. The impact of the Sequester Cuts Act on our operations was an increase of approximately $39 million of revenues in the six months ended June 30, 2022, after which the sequestration was fully reinstated.
•The COVID Acts instituted a 20% increase in the Medicare MS‐DRG payment for COVID-19 hospital admissions through the public health emergency period, which expired May 11, 2023.
•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 $8 billion of DSH reductions were delayed until March 8, 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 the Consolidated Appropriations Act, 2021, providers could retain the accelerated payments for one year from the date of receipt before CMS commenced recoupment. 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 years ended December 31, 2023, 2022 or 2021. All advances received by our hospitals and other providers were either repaid or recouped during the years ended December 31, 2022 and 2021.
•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 became available to states effective January 1, 2020. The CAA, 2023 provided for the phase-down of this enhanced FMAP as follows: 6.2% through the first quarter of 2023; 5.0% through the second quarter of 2023; 2.5% through the third quarter of 2023; and 1.5% through the last quarter of 2023. The increased support ended entirely as of January 1, 2024.
In addition, the COVID Acts established an incentive for states that had 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 so long as the states kept people continuously enrolled during the COVID‐19 public health emergency. This continuous enrollment condition ended on March 31, 2023 and, on April 1, 2023, states were permitted to begin eligibility redeterminations on their Medicaid populations and disenroll individuals no longer eligible.
Funding for Uninsured Individuals—The COVID Acts provided 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 could also be used to reimburse providers for COVID‐19 vaccine administration to uninsured individuals. This program stopped accepting reimbursement claims for the testing and treatment of uninsured individuals on March 22, 2022, and stopped accepting claims for vaccine administration to uninsured individuals on April 5, 2022. Because it was discontinued in 2022, we did not recognize any revenue under this program in 2023. We recognized net operating revenues totaling $20 million and $91 million related to this program in the accompanying Consolidated Statements of Operations for the years ended December 31, 2022 and 2021, respectively.
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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 were 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, and the remainder was repaid in December 2022.
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 practice 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. In April 2021, CMS extended the CJR model through December 31, 2024.
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, 2023, 2022 and 2021 was $10.248 billion, $9.607 billion and $9.985 billion, respectively. Our top 10 managed care payers generated 65% of our managed care net patient service revenues for the year ended December 31, 2023. During the same period, national payers generated 45% of our managed care net patient service revenues; the remainder came from regional or local payers. At December 31, 2023 and 2022, 68% and 66%, respectively, of our Hospital Operations segment’s net accounts receivable 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
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approximately 3% increase or decrease in the estimated contractual allowances related to managed care plans. Based on reserves at December 31, 2023, a 3% increase or decrease in the estimated contractual allowance would impact the estimated reserves by approximately $25 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 during the years ended December 31, 2023, 2022 or 2021. 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.
We expect managed care governmental admissions to continue to increase as a percentage of total managed care admissions over the near term. However, Medicare and Medicaid managed care 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, subject to incremental pricing improvements to address inflationary pressures. In the year ended December 31, 2023, our commercial managed care net inpatient revenue per admission from the hospitals in our Hospital Operations segment was approximately 86% higher than our aggregate yield on a per-admission basis from government payers, including Medicare and Medicaid managed care programs.
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
The No Surprises Act (“NSA”) established federal protections, which became effective on January 1, 2022, against balance billing for patients who obtain medical services from physicians and other providers not chosen by the patient and outside of the patient’s health insurance network. Providers that violate these surprise billing prohibitions may be subject to state enforcement action or federal civil monetary penalties. Among other things, the NSA limits the amount an insured patient will pay for (1) out-of-network emergency care (provided in hospital emergency departments and freestanding emergency facilities), and (2) scheduled out-of-network services (such as radiology, pathology and anesthesiology) at an in-network facility when the patient hasn’t been notified or provided consent. The NSA also prohibits insurers from assigning higher deductibles (and other cost-sharing charges) to patients for out-of-network care than they do for in-network care without patient notification and consent.
Under the NSA, insurers and providers are given the opportunity to resolve disputed out‐of‐network reimbursement through negotiation and an independent dispute resolution (“IDR”) process, unless state law specifies a different approach. The IDR process has been utilized far more than anticipated, and there is currently a backlog of claims pending determination. Moreover, provider groups have been successful in challenging certain IDR-related provisions of the regulations promulgated under the NSA, claiming the regulations unfairly favor insurers in the determination of appropriate reimbursement amounts. We cannot predict the ultimate impact of this or any future litigation nor can we predict any future regulatory changes. In addition, we are unable to fully assess the ultimate impact of the NSA on our business at this time; however, based on our experience to this point, we believe that compliance with the provisions of the NSA will not have a material adverse effect on our financial condition, 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.
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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 December 31, 2023 and 2022, 4% and 5%, respectively, of our Hospital Operations segment’s net accounts receivable was self‐pay. Further, a significant portion of our implicit price concessions relates to self‐pay amounts.
We perform systematic analyses to focus our attention on the drivers of implicit price concessions 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 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 private or public program coverage and a decrease in uninsured and charity care admissions, along with reductions in Medicare and Medicaid reimbursement to healthcare providers, including us. However, we continue to provide uninsured discounts and charity care due to the failure of certain 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.
As discussed above, the COVID Acts included a requirement that state Medicaid programs keep people continuously enrolled during the COVID‐19 public health emergency in exchange for a temporary increase to the FMAP. This continuous enrollment condition ended on March 31, 2023 and, on April 1, 2023, states were permitted to begin eligibility redeterminations on their Medicaid populations and disenroll individuals no longer eligible. The resulting volume of redeterminations has caused backlogs in the processing of new applications, which has increased the overall certification timeframe. We expect the certification timing will return to normal as these backlogs are resolved. Although we have not been materially adversely affected to date, any increase in the volume of uninsured patients could have an impact on our uncompensated care expense.
The following table presents our estimated costs (based on selected operating expenses, which include salaries, wages and benefits, supplies and other operating expenses) of caring for our uninsured and charity patients:
Years Ended December 31,
Estimated costs for:
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RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2023 COMPARED TO THE YEAR ENDED DECEMBER 31, 2022
For the purpose of comparing our results of operations for the years ended December 31, 2023 and 2022, continuing operations information for our Hospital Operations segment includes the results of our same 60 hospitals operated throughout 2023 and 2022, as well as the results of our PMC Fort Mill Hospital, and excludes the results of our hospitals and other businesses classified as discontinued operations for accounting purposes during those years.
The following tables present our consolidated net operating revenues, operating expenses and operating income, both in dollar amounts and as percentages of net operating revenues, on a continuing operations basis:
Years Ended December 31, Increase(Decrease)
Net operating revenues:
Equity in earnings of unconsolidated affiliates 228 216 12
Operating expenses:
Impairment and restructuring charges, and acquisition-related costs 137 226 (89)
Litigation and investigation costs 47 70 (23)
Net operating revenues 100.0 % 100.0 % — %
Grant income 0.1 % 1.0 % (0.9) %
Equity in earnings of unconsolidated affiliates 1.1 % 1.1 % — %
Operating expenses:
Salaries, wages and benefits 44.5 % 46.1 % (1.6) %
Other operating expenses, net 22.0 % 20.8 % 1.2 %
Depreciation and amortization 4.2 % 4.4 % (0.2) %
Litigation and investigation costs 0.2 % 0.4 % (0.2) %
Operating income 12.2 % 12.2 % — %
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The following tables present our net operating revenues, operating expenses and operating income, both in dollar amounts and as percentages of net operating revenues, by segment on a continuing operations basis:
Hospital Operations Ambulatory Care Hospital Operations Ambulatory Care
Equity in earnings of unconsolidated affiliates 10 218 10 206
Operating expenses:
Impairment and restructuring charges, and acquisition-related costs 78 59 205 21
Litigation and investigation costs 34 13 67 3
Net gains on sales, consolidation and deconsolidation of facilities — (23) (1) —
Grant income 0.1 % — % 1.2 % 0.1 %
Equity in earnings of unconsolidated affiliates 0.1 % 5.6 % 0.1 % 6.3 %
Operating expenses:
Depreciation and amortization 4.5 % 3.1 % 4.6 % 3.4 %
Litigation and investigation costs 0.2 % 0.3 % 0.3 % 0.1 %
Consolidated net operating revenues increased by $1.374 billion, or 7.2%, for the year ended December 31, 2023 compared to the year ended December 31, 2022. Our Hospital Operations segment’s net operating revenues increased by $757 million, or 4.8%, in 2023 compared to 2022. This increase was primarily driven by the opening of our PMC Fort Mill Hospital in September 2022, a more favorable payer mix, higher patient volumes and negotiated commercial rate increases during 2023, and the adverse impact of an April 2022 cybersecurity incident (the “Cybersecurity Incident”) on patient volumes. Our Hospital Operations segment also recognized income from federal and state grants totaling $15 million and $190 million in the years ended December 31, 2023 and 2022, respectively, which is not included in net operating revenues.
RESULTS OF OPERATIONS BY SEGMENT
Our operations are reported in two segments:
•Hospital Operations, which is comprised of our acute care and specialty hospitals, a network of employed physicians and ancillary outpatient facilities, as well as the revenue cycle management and value-based care services that we provide to hospitals, health systems, physician practices, employers and other clients; and
•Ambulatory Care, which is comprised of USPI’s ASCs and surgical hospitals.
Hospital Operations Segment
For the purpose of comparing our results of operations for the years ended December 31, 2023 and 2022, same‐hospital information includes the results of our same 60 hospitals operated throughout 2023 and 2022, and excludes the results of our PMC Fort Mill Hospital, as well as the results of our hospitals and other businesses classified as discontinued operations for accounting purposes during those years.
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The following tables present operating statistics, revenues and expenses of our hospitals and related outpatient facilities on a same‐hospital basis, unless otherwise indicated:
Same-Hospital Years Ended December 31, Increase(Decrease)
Admissions, Patient Days and Surgeries 2023 2022
Number of hospitals (at end of period) 60 60 — (1)
Paying admissions (excludes charity and uninsured) 510,978 497,990 2.6 %
Paying admissions as a percentage of total admissions 95.5 % 95.2 % 0.3 % (1)
Average length of stay (days) 5.12 5.25 (2.5) %
Utilization of licensed beds 48.8 % 48.9 % (0.1) % (1)
(1) The change is the difference between the 2023 and 2022 amounts presented.
Same-Hospital Years Ended December 31, Increase(Decrease)
Paying visits as a percentage of total visits 94.5 % 94.2 % 0.3 % (1)
(1) The change is the difference between the 2023 and 2022 amounts presented.
Same-Hospital Years Ended December 31, Increase(Decrease)
Selected revenue data – hospitals and related outpatient facilities:
Net patient service revenue per adjusted admission $ 14,664 $ 14,365 2.1 %
Net patient service revenue per adjusted patient day $ 2,985 $ 2,830 5.5 %
Same-Hospital Years Ended December 31, Increase(Decrease)
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Same-Hospital Years Ended December 31, Increase(Decrease)
Selected Operating Expenses as a Percentage of Net Operating Revenues 2023 2022
Salaries, wages and benefits 49.1 % 50.4 % (1.3) % (1)
Other operating expenses 23.8 % 22.3 % 1.5 % (1)
(1) The change is the difference between the 2023 and 2022 amounts presented.
Revenues
Same‐hospital net operating revenues increased by $694 million, or 4.4%, during the year ended December 31, 2023 compared to the previous year. This increase was primarily due to a more favorable payer mix, higher patient volumes and negotiated commercial rate increases during the 2023 period, as well as the adverse impact of the Cybersecurity Incident on patient volumes in 2022. Our Hospital Operations segment also recognized income from federal and state grants totaling $15 million and $190 million in the years ended December 31, 2023 and 2022, respectively, which is not included in net operating revenues.
The following table presents our consolidated net accounts receivable by payer:
December 31,
Net cost report settlements receivable and valuation allowances 47 48
Self-pay uninsured 35 35
Self-pay balance after insurance 71 92
Estimated future recoveries 148 149
The collection of accounts receivable is a key area of focus for our business. At December 31, 2023 and 2022, our Hospital Operations segment collection rate on self‐pay accounts was approximately 29.9% and 29.5%, respectively. 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, 2023, a 10% decrease or increase in our self‐pay collection rate, or approximately 3.0%, which we believe could be a reasonably likely change, would result in an unfavorable or favorable adjustment to patient accounts receivable of approximately $11 million. There are various factors that can impact collection trends, such as changes in the economy and inflation, which in turn have an impact on unemployment rates and the number of uninsured and 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 were affected by the pandemic, continuously change and can have an impact on collection trends and our estimation process.
We also 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 96.7% and 95.7% at December 31, 2023 and 2022, respectively.
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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 table presents the approximate aging by payer of our net accounts receivable from the continuing operations of our Hospital Operations segment of $2.414 billion and $2.462 billion at December 31, 2023 and 2022, respectively. Cost report settlements receivable, net of payables and related valuation allowances, of $47 million and $48 million at December 31, 2023 and 2022, respectively, are excluded from the table.
Medicare Medicaid ManagedCare Indemnity,Self-Payand Other Total
We continue to implement revenue cycle initiatives intended 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.
Patient advocates from our 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.
The following table presents the approximate amount of accounts receivable in the EES still awaiting determination of eligibility under a government program by aging category:
December 31,
Salaries, Wages and Benefits
Same‐hospital salaries, wages and benefits expense increased by $141 million, or 1.8%, in the year ended December 31, 2023 compared to 2022. This change was primarily attributable to increased employee benefits, recruiting and retention costs, higher incentive compensation expense, and merit increases for certain of our employees in 2023. These factors were partially offset by a decrease in contract labor expense. Same‐hospital salaries, wages and benefits expense as a percentage of net operating revenues decreased by 130 basis points to 49.1% in the year ended December 31, 2023 compared to the year ended December 31, 2022. Salaries, wages and benefits expense for the years ended December 31, 2023 and 2022 included stock‐based compensation expense of $46 million and $45 million, respectively.
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Supplies
Same‐hospital supplies expense increased by $134 million, or 5.6%, in the year ended December 31, 2023 compared to 2022. This increase was driven by higher patient and surgical volumes, as well as the impact of general market conditions on the cost of medical supplies during 2023, partially offset by the cost‐efficiency measures discussed below. Same‐hospital supplies expense as a percentage of net operating revenues increased by 20 basis points to 15.3% in the year ended December 31, 2023 compared to the year ended December 31, 2022.
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 $406 million, or 11.5%, in the year ended December 31, 2023 compared to 2022. Other operating expenses for the year ended December 31, 2022 were reduced by net gains of $120 million primarily related to the sale of several medical office buildings and the sale of a portion of an interest in certain assets, whereas net gains recognized in 2023 were $21 million. The changes in other operating expenses during the year ended December 31, 2023 also included:
•$125 million more of medical fees;
•an increase of $89 million in malpractice expense;
•higher software costs of $35 million; and
•a $31 million increase in repair and maintenance costs.
Same‐hospital other operating expenses as a percentage of net operating revenues increased by 150 basis points to 23.8% in the year ended December 31, 2023 compared to 22.3% in the year ended December 31, 2022. Other operating expenses for our Hospital Operations segment included $278 million and $287 million of rent expense for the years ended December 31, 2023 and 2022, respectively.
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. In most cases, we hold ownership interests in the facilities and operate them through a separate legal entity. 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 from the facilities USPI operates through management services contracts, usually computed as a percentage of each facility’s net revenues; 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 holds an ownership interest in (155 of 485 facilities at December 31, 2023), this influence does not represent control of the facility, so we account for our investment in each of these facilities under the equity method for an unconsolidated affiliate. USPI controls 330of 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. The net profit attributable to owners other than USPI is classified within net income available (loss attributable) 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 computed as a percentage of each facility’s net revenues.
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Our Ambulatory Care segment’s 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 68% 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.
The following table presents selected revenue and expense information for our Ambulatory Care segment:
Years Ended December 31, Increase(Decrease)
Grant income $ 1 $ 4 (75.0) %
Equity in earnings of unconsolidated affiliates $ 218 $ 206 5.8 %
Salaries, wages and benefits $ 964 $ 822 17.3 %
Other operating expenses, net $ 531 $ 438 21.2 %
Revenues
Our Ambulatory Care net operating revenues increased by $617 million, or 19.0%, during the year ended December 31, 2023 compared to 2022. The change was driven by an increase from acquisitions of $355 million, as well as a $308 million increase in same‐facility net operating revenues, which was attributable to the impact of improved case volume, incremental revenue from new service lines and negotiated commercial rate increases. These impacts were partially offset by a decrease of $46 million in revenues due primarily to the sale or closure of facilities. Our Ambulatory Care segment also recognized income from federal grants totaling $1 million and $4 million during the years ended December 31, 2023 and 2022, respectively, which is not included in net operating revenues.
Salaries, Wages and Benefits
Salaries, wages and benefits expense increased by $142 million, or 17.3%, during the year ended December 31, 2023 compared to 2022. Salaries, wages and benefits expense was impacted by an increase from acquisitions of $76 million and an increase in same‐facility salaries, wages and benefits expense of $77 million due primarily to higher surgical case volumes. These increases were partially offset by a decrease of $11 million due primarily to the sale or closure of facilities. Salaries, wages and benefits expense as a percentage of net operating revenues decreased by 30 basis points from 25.3% in the year ended December 31, 2022 to 25.0% in the year ended December 31, 2023. Salaries, wages and benefits expense included stock‐based compensation expense of $20 million and $11 million for 2023 and 2022, respectively.
Supplies
Supplies expense increased by $174 million, or 20.0%, during the year ended December 31, 2023 compared to 2022. The change was driven by an increase from acquisitions of $103 million, as well as an increase in same‐facility supplies expense of $81 million due primarily to an increase in surgical cases at our consolidated centers and higher pricing of certain supplies as a result of the impact of general market conditions and inflation. These increases were partially offset by a decrease of $10 million primarily due to the sale or closure of facilities. Supplies expense as a percentage of net operating revenues increased by 20 basis points from 26.8% in the year ended December 31, 2022 to 27.0% in the year ended December 31, 2023.
Other Operating Expenses, Net
Other operating expenses increased by $93 million, or 21.2%, during the year ended December 31, 2023 compared to 2022. The change was primarily driven by an increase from acquisitions of $55 million, and an increase in same-facility other operating costs of $45 million, partially offset by a decrease of $7 million due primarily to the sale or closure of facilities. Other operating expenses, net as a percentage of net operating revenues increased from 13.5% for the year ended December 31, 2022 to 13.7% for 2023. Other operating expenses for our Ambulatory Care segment included $130 million and $115 million of rent expense for the years ended December 31, 2023 and 2022, respectively.
Facility Growth
The following table presents year-over-year changes in our same‐facility revenue and cases 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
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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.
Net revenues 9.2 %
Cases 5.6 %
Net revenue per case 3.4 %
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 health system partner. The table below provides information about the ownership structure of the facilities operated by our Ambulatory Care segment:
Owned with a health system partner 206
Owned without a health system partner 279
Facility Acquisitions and Investment
The table below presents the aggregate amounts we paid to acquire various ownership interests in ambulatory care facilities:
Years Ended December 31,
Controlling interests $ 149 $ 234
Noncontrolling interests 2 9
Equity investment in unconsolidated affiliates and consolidated facilities 21 21
The table below reflects the change in the number of facilities operated by our Ambulatory Care segment since December 31, 2022:
Acquisitions 21
De novo 9
Dispositions/Mergers (11)
Net increase in number of facilities operated 19
During the year ended December 31, 2023, we acquired controlling interests in 20 ASCs, six located in Ohio, three in Arizona, two in each of California, Florida and Texas, and one in each of five geographically diverse states. In addition, we acquired a noncontrolling interest in an ASC located in Texas in which we previously did not have an investment. Of these facilities, 19 are jointly owned with physicians, and two are jointly owned with a health system partner and physicians. During 2023, we also acquired controlling ownership interests in 11 previously unconsolidated ASCs. We paid an aggregate of $151 million to acquire ownership interests in all of the aforementioned facilities.
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, 2023, we invested approximately $21 million in such transactions.
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Consolidated
Impairment and Restructuring Charges, and Acquisition-Related Costs
The following table presents information about our impairment and restructuring charges, and acquisition‐related costs:
Years Ended December 31,
Consolidated:
Impairment charges $ 43 $ 94
Restructuring charges 79 118
Acquisition-related costs 15 14
By segment:
Hospital Operations $ 78 $ 205
Ambulatory Care 59 21
Impairment charges for the year ended December 31, 2023 were comprised of $42 million from our Ambulatory Care segment, primarily associated with the write‐down of certain equity method investments held by that segment, and $1 million from our Hospital Operations segment. Restructuring charges for the year ended December 31, 2023 consisted of $36 million of legal costs related to the sale of certain businesses, $15 million of employee severance costs, $12 million related to the transition of various administrative functions to our GBC, $10 million of contract and lease termination fees, and $6 million of other restructuring costs. Acquisition‐related costs during 2023 consisted entirely of transaction costs.
Impairment charges for the year ended December 31, 2022 included $82 million for the write‐down of certain buildings and medical equipment located in one of our markets to their estimated fair values. 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 their estimated future cash flows. We believe the most significant factors contributing to the adverse financial trends included decreased revenues and lower patient volumes due to the pandemic and competition, as well as higher labor costs because of the pandemic. 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. We also recorded $12 million of other impairment charges. For additional discussion, see Note6to the accompanying Consolidated Financial Statements. Impairment charges for the year ended December 31, 2022 were comprised of $88 million from our Hospital Operations segment and $6 million from our Ambulatory Care segment.
Restructuring charges for the year ended December 31, 2022 consisted of $27 million of employee severance costs, $16 million related to the transition of various administrative functions to our GBC, $32 million related to contract and lease termination fees, and $43 million of other restructuring costs. Acquisition‐related costs during 2022 consisted entirely of transaction costs.
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, 2023 and 2022 were $47 million and $70 million, respectively. See Note 17 to the accompanying Consolidated Financial Statements for additional information.
Net Gains on Sales, Consolidation and Deconsolidation of Facilities
We recognized a net gain of $23 million from the sale, consolidation and deconsolidation of facilities during the year ended December 31, 2023, which primarily arose from the consolidation of facilities by our Ambulatory Care segment. During the year ended December 31, 2022, we recognized a gain of $1 million.
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Interest Expense
Interest expense for the year ended December 31, 2023 was $901 million compared to $890 million for the year ended December 31, 2022.
Loss from Early Extinguishment of Debt
We recorded losses from the early extinguishment of debt totaling $11 million during the year ended December 31, 2023. These losses related to the redemption of all of the outstanding principal of our September 2024 Senior Secured First Lien Notes in May 2023 and our July 2024 Senior Secured First Lien Notes in June 2023, in each case in advance of the notes’ maturity dates.
During the year ended December 31, 2022, we incurred net losses from the early extinguishment of debt of $109 million. The net losses primarily related to the redemption in full of our 7.500% senior secured first lien notes due 2025 (“2025 Senior Secured First Lien Notes”) in February 2022 and open market purchases and the subsequent redemption in full of our 6.750% senior unsecured notes due 2023 (the “2023 Senior Unsecured Notes”) during the six months ended June 30, 2022.
In both 2023 and 2022, the losses from the early extinguishment of debt primarily related to the differences between the purchase or redemption prices and the par values of the notes, as well as the write‐off of associated unamortized issuance costs.
Income Tax Expense
During the year ended December 31, 2023, we recorded income tax expense of $306 million in continuing operations on pre‐tax income of $1.617 billion compared to income tax expense of $344 million in continuing operations on pre‐tax income of $1.344 billion during the year ended December 31, 2022.
A reconciliation between the amount of reported income tax expense and the amount computed by multiplying income from continuing operations before income taxes by the statutory federal tax rate is presented below:
Years Ended December 31,
Tax expense at statutory federal rate of 21% $ 340 $ 282
State income taxes, net of federal income tax benefit 70 64
Tax benefit attributable to noncontrolling interests (147) (122)
Nondeductible goodwill — 1
Nondeductible executive compensation 6 10
Stock-based compensation tax benefit (2) (6)
Changes in valuation allowance 71 120
Other items (3) 7
During the year ended December 31, 2023, the valuation allowance increased by $71 million, including an increase of $73 million due to limitations on the tax deductibility of interest expense and a decrease of $2 million due to changes in the expected realizability of deferred tax assets. The balance in the valuation allowance as of December 31, 2023 was $248 million.
A change in the business interest expense disallowance rules took effect in 2022, resulting in a larger amount of interest disallowance compared to prior years. During the year ended December 31, 2022, the valuation allowance increased by $120 million, including an increase of $123 million due to limitations on the tax deductibility of interest expense, a decrease of $1 million due to the expiration or worthlessness of unutilized net operating loss carryovers, and a decrease of $2 million due to changes in the expected realizability of deferred tax assets. The balance in the valuation allowance as of December 31, 2022 was $177 million.
Net Income Available to Noncontrolling Interests
Net income available to noncontrolling interests was $700 million for the year ended December 31, 2023 compared to $590 million for the year ended December 31, 2022. Net income available to noncontrolling interests in 2023 was comprised of $586 million related to our Ambulatory Care segment and $114 million related to our Hospital Operations segment.
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ADDITIONAL SUPPLEMENTAL NON-GAAP DISCLOSURES
As noted in the introduction to MD&A, we use certain non‐GAAP financial measures, including Adjusted EBITDA, in this report and 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. We believe Adjusted EBITDA 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 reporting 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.
The following table presents the reconciliation of Adjusted EBITDA to net income available to Tenet Healthcare Corporation common shareholders (the most comparable GAAP term):
Years Ended December 31,
Less:
Net income available to noncontrolling interests (700) (590)
Income from discontinued operations, net of tax — 1
Income from continuing operations 1,311 1,000
Loss from early extinguishment of debt (11) (109)
Other non-operating income, net 19 10
Litigation and investigation costs (47) (70)
Net gains on sales, consolidation and deconsolidation of facilities 23 1
Impairment and restructuring charges, and acquisition-related costs (137) (226)
Depreciation and amortization (870) (841)
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2022 COMPARED TO THE YEAR ENDED DECEMBER 31, 2021
A complete discussion of our results of operations for the year ended December 31, 2022 compared to the year ended December 31, 2021 can be found in our Annual Report on Form 10-K for the year ended December 31, 2022. The discussion below is limited to data that was adjusted to conform to our new reporting segment structure.
For the purpose of comparing our results of operations for the years ended December 31, 2022 and 2021, continuing operations information includes, with respect to our Hospital Operations segment, the results of our same 60 hospitals operated throughout 2022 and 2021, as well as the results of (1) our PMC Fort Mill Hospital, (2) five Miami-area hospitals and certain related operations (the “Miami Hospitals”) prior to their divestiture in August 2021, (3) nearly 50 UCCs held in our Hospital Operations segment until their sale in April 2021 and (4) 24 imaging centers following their transfer from our Ambulatory Care
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segment to our Hospital Operations segment in April 2021. Continuing operations excludes the results of our hospitals and other businesses classified as discontinued operations for accounting purposes during 2022 and 2021.
The following tables present our net operating revenues, operating expenses and operating income, both in dollar amounts and as percentages of net operating revenues, by segment on a continuing operations basis:
Hospital Operations Ambulatory Care Hospital Operations Ambulatory Care
Equity in earnings of unconsolidated affiliates 10 206 25 193
Operating expenses:
Impairment and restructuring charges, and acquisition-related costs 205 21 58 27
Litigation and investigation costs 67 3 102 14
Equity in earnings of unconsolidated affiliates 0.1 % 6.3 % 0.1 % 7.1 %
Operating expenses:
Depreciation and amortization 4.6 % 3.4 % 4.5 % 3.5 %
Litigation and investigation costs 0.3 % 0.1 % 0.6 % 0.5 %
Consolidated net operating revenues decreased by $311 million, or 1.6%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. Our Hospital Operations net operating revenues decreased by $841 million, or 5.0%, in 2022 compared to 2021, primarily due to the loss of revenues from the sale of the Miami Hospitals, lower overall patient volumes, and decreased COVID‐related volumes and acuity during 2022, partially offset by negotiated commercial rate increases. Our Hospital Operations segment also recognized income from federal, state and local grants totaling $190 million and $142 million during the years ended December 31, 2022 and 2021, respectively, which is not included in net operating revenues.
RESULTS OF OPERATIONS BY SEGMENT
Hospital Operations Segment
For the purpose of comparing our results of operations for the years ended December 31, 2022 and 2021, same‐hospital information includes the results of our same 60 hospitals operated throughout 2022 and 2021, and excludes the results of (1) our PMC Fort Mill Hospital, (2) the Miami Hospitals, (3) all of the UCCs we sold in April 2021, (4) the 24 imaging centers transferred from our Ambulatory Care segment to our Hospital Operations segment in April 2021, and (5) the results of our hospitals and other businesses classified as discontinued operations for accounting purposes during 2022 and 2021.
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The following tables present operating statistics, revenues and expenses of our hospitals and related outpatient facilities on a same‐hospital basis, unless otherwise indicated:
Same-Hospital Years Ended December 31, Increase(Decrease)
Admissions, Patient Days and Surgeries 2022 2021
Number of hospitals (at end of period) 60 60 — (1)
Paying admissions (excludes charity and uninsured) 497,990 518,515 (4.0) %
Paying admissions as a percentage of total admissions 95.2 % 94.7 % 0.5 % (1)
Average length of stay (days) 5.25 5.27 (0.4) %
Utilization of licensed beds 48.9 % 51.4 % (2.5) % (1)
(1) The change is the difference between the 2022 and 2021 amounts presented.
Same-Hospital Years Ended December 31, Increase(Decrease)
Paying visits as a percentage of total visits 93.8 % 93.3 % 0.5 % (1)
(1) The change is the difference between the 2022 and 2021 amounts presented.
Same-Hospital Years Ended December 31, Increase(Decrease)
Total segment net operating revenues $ 15,329 $ 15,553 (1.4) %
Selected revenue data – hospitals and related outpatient facilities:
Net patient service revenue per adjusted admission $ 14,244 $ 14,424 (1.2) %
Net patient service revenue per adjusted patient day $ 2,806 $ 2,800 0.2 %
Same-Hospital Years Ended December 31, Increase(Decrease)
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Same-Hospital Years Ended December 31, Increase(Decrease)
Selected Operating Expenses as a Percentage of Net Operating Revenues 2022 2021
Salaries, wages and benefits 52.0 % 50.8 % 1.2 % (1)
Other operating expenses 22.8 % 23.2 % (0.4) % (1)
(1) The change is the difference between the 2022 and 2021 amounts presented.
Revenues
Same-hospital net operating revenues decreased by $224 million, or 1.4%, during the year ended December 31, 2022 compared to the year ended December 31, 2021. This decrease was due in part to lower overall patient volumes, decreased COVID-related volumes and acuity, and the adverse impact of the Cybersecurity Incident on patient volumes in 2022. These factors were partially offset by commercial rate increases negotiated with our managed care payers and an increase in revenue from our revenue management services attributable to contractual rate increases and new business expansion. Our Hospital Operations segment also recognized income from federal, state and local grants totaling $190 million and $142 million in the years ended December 31, 2022 and 2021, respectively, which is not included in net operating revenues. Same-hospital admissions and outpatient visits decreased by 4.5% and 4.8%, respectively, in the year ended December 31, 2022 compared to 2021, primarily due to the factors described above.
The following table presents our consolidated net accounts receivable by payer:
December 31,
Net cost report settlements receivable and valuation allowances 48 33
Self-pay uninsured 35 21
Self-pay balance after insurance 92 70
Estimated future recoveries 149 137
At December 31, 2022 and 2021, our Hospital Operations segment estimated collection rate was 29.5% and 26.5%, respectively, on self‐pay accounts and 95.7% and 96.6%, respectively, from managed care payers.
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The following table presents the approximate aging by payer of our net accounts receivable from the continuing operations of our Hospital Operations segment of $2.462 billion and $2.363 billion at December 31, 2022 and 2021, respectively. Cost report settlements receivable and valuation allowances of $48 million and $33 million at December 31, 2022 and 2021, respectively, are excluded from the table.
Medicare Medicaid ManagedCare Indemnity,Self-Payand Other Total
The following table presents the approximate amount of accounts receivable in the EES still awaiting determination of eligibility under a government program by aging category:
December 31,
Salaries, Wages and Benefits
Same‐hospital salaries, wages and benefits expense increased by $67 million, or 0.8%, in the year ended December 31, 2022 compared to 2021. This increase was primarily attributable to higher contract labor and premium pay costs due to the pandemic, and annual merit increases for certain of our employees, all of which were partially offset by lower incentive compensation and employee benefit costs, as well as our continued focus on cost‐efficiency measures. Same‐hospital salaries, wages and benefits expense as a percentage of net operating revenues increased by 120 basis points to 52.0% in the year ended December 31, 2022 compared to the year ended December 31, 2021. This increase was primarily due to the impact of higher contract labor and premium pay costs, decreased patient volumes, and the effect of the Cybersecurity Incident on our patient revenues during 2022. Salaries, wages and benefits expense for the years ended December 31, 2022 and 2021 included stock‐based compensation expense of $45 million and $43 million, respectively.
Supplies
Same‐hospital supplies expense decreased by $147 million, or 5.8%, in the year ended December 31, 2022 compared to 2021. The decrease was primarily attributable to lower overall patient volumes, reduced COVID‐related volumes and acuity, and our cost‐efficiency measures, partially offset by the increased cost of certain supplies as a result of the COVID‐19 pandemic, the impact of general market conditions and inflation. Same‐hospital supplies expense as a percentage of net operating revenues decreased by 70 basis points to 15.6% in the year ended December 31, 2022 compared to the year ended December 31, 2021, primarily due to the factors described above.
We continued to experience supply‐chain disruptions, including shortages and delays, as well as significant price increases in medical supplies created by the pandemic during the year ended December 31, 2022. In addition, general market conditions and inflation also increased the cost of medical supplies during 2022. The items of cost‐reduction focus during the year ended December 31, 2022 included cardiac stents and pacemakers, orthopedics, implants and high-cost pharmaceuticals.
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Other Operating Expenses, Net
Same‐hospital other operating expenses decreased by $109 million, or 3.0%, in the year ended December 31, 2022 compared to 2021. Same‐hospital other operating expenses as a percentage of net operating revenues decreased by 40 basis points to 22.8% in the year ended December 31, 2022 compared to 23.2% in the year ended December 31, 2021, primarily due to the net gains from the sale of assets noted below. The changes in other operating expenses included:
•an increase in gains from the sale of assets of $102 million, which were classified as a reduction of other operating expenses, net; and
•decreased malpractice expense of $51 million.
For the years ended December 31, 2022 and 2021, other operating expenses for our Hospital Operations segment included $283 million and $290 million, respectively, of rent expense.
Consolidated
Impairment and Restructuring Charges, and Acquisition-Related Costs
The following table presents information about our impairment and restructuring charges, and acquisition‐related costs:
Years Ended December 31,
Consolidated:
Impairment charges $ 94 $ 8
Restructuring charges 118 57
Acquisition-related costs 14 20
By segment:
Hospital Operations $ 205 $ 58
Ambulatory Care 21 27
Impairment charges for the year ended December 31, 2022 included $82 million for the write‐down of certain buildings and medical equipment located in one of our markets to their estimated fair values. 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 their estimated future cash flows. We believe the most significant factors contributing to the adverse financial trends included decreased revenues and lower patient volumes due to the pandemic and competition, as well as higher labor costs because of the pandemic. 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. We also recorded $12 million of other impairment charges. For additional discussion, see Note6to the accompanying Consolidated Financial Statements. Impairment charges for the year ended December 31, 2022 were comprised of $88 million from our Hospital Operations segment and $6 million from our Ambulatory Care segment.
Restructuring charges for the year ended December 31, 2022 consisted of $27 million of employee severance costs, $16 million related to the transition of various administrative functions to our GBC, $32 million related to contract and lease termination fees, and $43 million of other restructuring costs. Acquisition‐related costs during 2022 consisted entirely of transaction costs.
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 Hospital Operations 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 during 2021 consisted entirely of transaction costs.
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Net Income Available to Noncontrolling Interests
Net income available to noncontrolling interests was $590 million for the year ended December 31, 2022 compared to $562 million for the year ended December 31, 2021. Net income available to noncontrolling interests in 2022 was comprised of $469 million related to our Ambulatory Care segment and $121 million related to our Hospital Operations segment. Of the portion related to our Ambulatory Care segment, $9 million related to the minority interest Baylor held in USPI until June 30, 2022.
LIQUIDITY AND CAPITAL RESOURCES
CASH REQUIREMENTS
Scheduled Contractual Obligations
Our obligations to make future cash payments for scheduled contractual obligations are summarized in the table below, all as of December 31, 2023. 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 Credit Agreement 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, Thereafter
(In Millions)
Purchase orders 386 386 — — — — —
(1) Amounts include both principal and interest.
Long-term Debt—Our Credit Agreement, which has a scheduled maturity date of March 16, 2027, provides for revolving loans in an aggregate principal amount of up to $1.500 billion with a $200 million subfacility for standby letters of credit. Outstanding revolving loans accrue interest depending on the type of loan at either (a) a base rate plus an applicable margin ranging from 0.25% to 0.75% per annum or (b) the Term Secured Overnight Financing Rate (“SOFR”), Daily Simple SOFR or the Euro Interbank Offered Rate (EURIBOR) (each, as defined in the Credit Agreement) plus an applicable margin ranging from 1.25% to 1.75% per annum and (in the case of Term SOFR and Daily Simple SOFR only) a credit spread adjustment of 0.10%, in each case based on available credit. An unused commitment fee payable on the undrawn portion of the revolving loans ranges from 0.25% to 0.375% per annum based on available credit. Our borrowing availability is based on a specified percentage of eligible inventory and accounts receivable, including self‐pay accounts. At December 31, 2023, we had no cash borrowings outstanding under the Credit Agreement, and we had less than $1 million of standby letters of credit outstanding. Based on our eligible receivables, $1.500 billion was available for borrowing under the Credit Agreement at December 31, 2023.
At December 31, 2023, we had outstanding senior unsecured notes and senior secured notes with an aggregate principal balance of $14.762 billion. We completed the following transactions related to our senior secured notes in the year ended December 31, 2023:
•In May 2023, we issued $1.350 billion aggregate principal amount of our 2031 Senior Secured First Lien Notes, which will mature on May 15, 2031. We pay interest on the 2031 Senior Secured First Lien Notes semi-annually in arrears on May 15 and November 15 of each year, which payments commenced on November 15, 2023. We used the issuance proceeds, together with cash on hand, to finance the redemption of our September 2024 Senior Secured First Lien Notes and our July 2024 Senior Secured First Lien Notes, as described below.
•Also in May 2023, we paid $596 million using a portion of the proceeds from the issuance of our 2031 Senior Secured First Lien Notes to redeem all $589 million aggregate principal amount outstanding of our September 2024 Senior Secured First Lien Notes in advance of their maturity date.
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•In June 2023, we used the remaining proceeds from the issuance of our 2031 Senior Secured First Lien Notes along with cash on hand to redeem all $756 million aggregate principal amount outstanding of our July 2024 Senior Secured First Lien Notes in advance of their maturity date.
At December 31, 2023, 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 3.89x. We anticipate this ratio will fluctuate from quarter to quarter based on earnings performance and other factors, including in the event we use our Credit Agreement as a source of liquidity or enter into 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 currently planned and potential future 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. 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 $882 million, $848 million and $937 million in the years ended December 31, 2023, 2022 and 2021, respectively. For the year ending December 31, 2024, we expect annual interest payments to be approximately $850 million to $860 million.
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, 2023, we had fixed payment obligations of $1.415 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.
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 Plan 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 for certain of our current and former employees in Detroit. See Note 10 to the accompanying Consolidated Financial Statements for additional information about our defined benefit plans.
Information Technology Services 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 $386 million at December 31, 2023, 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, 2023, the undiscounted aggregate future estimated payments related to these obligations was $206 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
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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 to date, the “LC Facility”) that provides for the issuance, from time to time, of standby and documentary letters of credit in an aggregate principal amount of up to $200 million. We amended the LC Facility in September 2023 to, among other things, (1) extend the scheduled maturity date from September 12, 2024 to March 16, 2027, and (2) replace the London Interbank Offered Rate (LIBOR) with Term SOFR as the reference interest rate. The LC Facility is subject to an effective maximum secured debt covenant of 4.25 to 1.00. At December 31, 2023, we had $111 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, 2023, the maximum potential amount of future payments under these guarantees was $444 million, of which $295 million were recorded in the accompanying Consolidated Balance Sheet at December 31, 2023. The timing and amount of future payments under these guarantees is uncertain.
Professional and General Liability Obligations—At December 31, 2023, the current and long‐term professional and general liability reserves included in our Consolidated Balance Sheet were $254 million and $792 million, respectively, and the current and long‐term workers’ compensation reserves included in our Consolidated Balance Sheet were $30 million and $99 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 Note Payable—We entered into an agreement in June 2022 to purchase the 5% voting ownership interest in USPI Baylor held at that time. Under the share purchase agreement, we are obligated to make non-interest-bearing monthly payments of approximately $11 million through June 2025. At December 31, 2023, we had liabilities of $135 million recorded in other current liabilities and $63 million in other long-term liabilities in the accompanying Consolidated Balance Sheet for the remaining obligation.
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, 2023.
Other Cash Requirements
Capital Expenditures—Our capital expenditures primarily relate to the expansion and renovation of existing facilities (including amounts to comply with applicable laws and regulations), surgical hospital expansion focused on higher acuity services, equipment and information systems additions and replacements, introduction of new medical technologies (including robotics), design and construction of new facilities, and various other capital improvements. We continue to implement our portfolio diversification strategy into ambulatory surgery and have a baseline intention to invest $250 million annually in ambulatory business acquisitions and de novo facilities. Capital expenditures were $751 million, $762 million and $658 million in the years ended December 31, 2023, 2022 and 2021, respectively. We anticipate that our capital expenditures for continuing operations for the year ending December 31, 2024 will total approximately $775 million to $875 million, including $154 million that was accrued as a liability at December 31, 2023.
We continued construction of a new medical campus located in the Westover Hills area of San Antonio, Texas, in 2023. The campus is expected to include a 104‐bed acute care hospital, an ASC and medical office space. The project is currently on schedule for completion in mid‐2024; we expect it will cost approximately $235 million. During 2023, we also broke ground on a new medical campus located in Port St. Lucie, Florida, that is expected to include a 54‐bed hospital, as well as medical office space. We expect the Port St. Lucie campus to be complete in late 2025 and that it will cost approximately $187 million over the construction period.