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
Our business consists of our Hospital Operations and Services (“Hospital Operations”) segment and our Ambulatory Care segment. 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, 2024, our subsidiaries operated 49 hospitals serving primarily urban and suburban communities in eight states. Our Hospital Operations segment also included 135 outpatient facilities at December 31, 2024, including urgent care centers (each, a “UCC”), imaging centers, off-campus hospital emergency departments 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 518 ambulatory surgery centers (each, an “ASC”), 375 of which are consolidated, and 25 surgical hospitals, seven of which are consolidated, in 37 states at December 31, 2024. 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; pain management; otolaryngology (ear, nose and throat); ophthalmology; and urology.
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 includes the results of all facilities operated during any portion of the periods presented, and it reflects the performance of those facilities only for the time periods in which we operated them. 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 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, which includes facilities we operated for the entirety of the periods presented. For the years ended December 31, 2024 and 2023, information presented on a same-hospital basis includes the results of our same 47 hospitals and those outpatient centers we operated throughout 2024 and 2023, and excludes the results of: (1) our Westover Hills Baptist Hospital, the new acute care hospital we opened in Texas in July 2024; (2) three hospitals located in South Carolina and certain related operations (the “SC Hospitals”) we sold in January 2024; (3) four hospitals and certain related operations located in Orange County and Los Angeles County, California (the “OCLA CA Hospitals”) we sold in March 2024; (4) two hospitals and certain related operations located in San Luis Obispo County, California (the “Central CA Hospitals”), which we also sold in March 2024; (5) the five hospitals and certain related operations located in Alabama we divested in September 2024 (the “AL Hospitals”); (6) a rehabilitation hospital in El Paso, Texas, in which we acquired a majority ownership interest in September 2024; (7) 56 UCCs we acquired ownership interests in through the formation of a joint venture with NextCare, Inc. in December 2023; and (8) businesses classified as discontinued operations for accounting purposes during those periods, along with other ancillary facilities acquired or divested during the reporting periods that have a limited financial or operational impact. 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.
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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.
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.
Our Ambulatory Care segment reports growth data on a same-facility systemwide basis, which includes both consolidated and unconsolidated facilities held at the end of the period, as well as facilities acquired during the period on a pro forma basis as if owned for the full period. Divested facilities are generally excluded; however, management may include facilities sold near the end of the period when, in its judgment, their inclusion provides financial statement users with a better understanding of the segment's performance. This approach offers insights into the performance of our current portfolio by excluding variations from facility acquisitions or dispositions. Although we do not record the revenues of unconsolidated facilities, this information is important for understanding the financial performance of our Ambulatory Care segment, as these revenues form the basis for calculating management services revenues and equity in earnings of unconsolidated affiliates. Additionally, this presentation enhances comparability across periods.
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 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
OPERATING ENVIRONMENT AND TRENDS
Industry Trends and Healthcare Policy Changes—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 with respect to healthcare spending; (2) patient volumes are shifting from inpatient to outpatient settings due to technological advances 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 legislative and regulatory uncertainty. Changes in federal or state healthcare laws,
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regulations, funding policies or reimbursement practices, especially those involving reductions to government payment rates or access to insurance coverage, could have a significant impact on our future revenues and expenses.
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. 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 essential workers. Our recruitment and retention efforts drove a reduction in contract labor expense during the year ended December 31, 2024 as compared to 2023, such that our contract labor costs are now in line with historical levels.
We also depend on the general labor pool of available 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, state‐mandated minimum wage increases in California became effective for healthcare workers in October 2024, with further annual increases anticipated through 2028. The current and expected future increases will result in higher compensation costs for certain of our employees and vendors.
Economic Conditions and Other Impacts—Our business has been impacted by inflation and its effects on salaries, wages and benefits, as well as other costs. 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 specialty building systems 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 and cost pressures across our various expense categories may continue or worsen in the future, whether due to geopolitical conflicts, trade tensions, export control rules, tariffs, macro-economic conditions, climate change, weather events or other issues yet to emerge.
STRATEGIES
Expanding Our Ambulatory Care Segment—We continue to focus on opportunities to expand our Ambulatory Care segment through acquisitions, organic growth in our physician relationships and service lines, 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 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 year ended December 31, 2024, we acquired ownership interests in 54 ASCs and one surgical hospital in which we did not have a previous investment, increased our ownership interest in seven ASCs sufficient to consolidate them and opened 14 de novo ASCs.
Driving Growth in Our Hospital Operations Segment—We remain committed to better positioning our hospitals and competing more effectively in the ever‐evolving healthcare environment by focusing on driving performance through operational effectiveness, 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. We believe our efforts in these areas improve the quality of care we deliver and enhance growth.
In 2024, we continued to pursue advantageous opportunities to grow our portfolio of hospitals and other healthcare facilities. In July, we opened the newly constructed, 92-bed Westover Hills Baptist Hospital in San Antonio, and, in September, we acquired a majority ownership interest in a 36-bed rehabilitation hospital in El Paso. In addition, we continued construction in 2024 on a new medical campus located in Port St. Lucie, which will include the 54‐bed Florida Coast Surgical Hospital, as well as medical office space. We expect to complete construction of the Port St. Lucie medical campus in late 2025.
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 toward higher-return investments across our business, enhance cash flow generation or reduce our debt, among other things. To that end, we divested the SC Hospitals, OCLA CA Hospitals, Central CA Hospitals and AL Hospitals (collectively, the “Divested Hospitals”) in 2024.
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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 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.
Recent advancements in technology and applications in healthcare, including Generative AI, are enabling our operations to accelerate the adoption of artificial intelligence (“AI”) enabled tools in areas such as clinical care coordination, medical documentation, revenue cycle management and administrative services. When used responsibility, we believe AI has the potential to enhance our business processes and support efficient delivery of high‐quality care.
Improving Profitability—We continue to focus on growing patient volumes and effective cost management as a means to improve profitability. We 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 further integration of enterprise‐wide centralized support functions, outsourcing additional functions unrelated to direct patient care, supply chain management, and reducing clinical and vendor contract variation.
Managing Our Capital Structure—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, 2024. In addition, the maturity dates of our notes are staggered from 2027 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. During the three months ended March 31, 2024, we redeemed all $2.100 billion aggregate principal amount outstanding of our 4.875% senior secured first lien notes due 2026 (the “2026 Senior Secured First Lien Notes”) in advance of their maturity date.
In July 2024, our board of directors authorized the repurchase of up to $1.500 billion of our common stock through a new share repurchase program that has no expiration date. 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. This 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. At December 31, 2024, there was $1.376 billion available under this program for future repurchases.
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
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) 49 61 (12) (1)
Average length of stay (days) 4.90 5.06 (3.2) %
Utilization of licensed beds 50.5 % 48.7 % 1.8 % (1)
Ambulatory Care:
Total consolidated facilities (at end of period) 382 330 52 (1)
Total admissions decreased by 18,872, or 13.8%, total surgeries decreased by 18,015, or 20.7%, and total emergency department visits decreased by 116,434, or 17.5%, in the three months ended December 31, 2024 compared to the three months ended December 31, 2023. The decreases in our volumes were primarily related to the sales of the Divested Hospitals. Excluding the impact of these divestitures, total admissions increased by 6,415, or 5.7%, total surgeries increased by 432, or 0.6%, and total emergency department visits decreased by 12,082, or 2.6%, during the three months ended December 31, 2024 compared to the same period in 2023.
The increase in our Ambulatory Care segment’s total consolidated cases of 14.3% in the three months ended December 31, 2024, as compared to the same period in 2023, was primarily attributable to incremental case volume from our newly acquired ASCs, net of the impact of the closure and deconsolidation of certain facilities, as well as same‐facility case growth.
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 decreased by $307 million, or 5.7%, in the three months ended December 31, 2024 compared to the same period in 2023. The decrease of $489 million, or 11.4%, in our Hospital Operations segment’s net operating revenues for the three‐month period in 2024 compared to the same period in 2023 was primarily due to the sales of the Divested Hospitals. Excluding the effect of these sales, net operating revenues during the three months ended December 31, 2024 increased by $232 million, or 6.5%, compared to the three months ended December 31, 2023. This increase was attributable to the positive impact of a more favorable payer mix, higher patient admissions and acuity, growth in our Medicaid supplemental revenue, and negotiated commercial rate increases.
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Net operating revenues in our Ambulatory Care segment increased by $182 million, or 16.9%, in the three months ended December 31, 2024 compared to the same period in 2023. This change was primarily driven by our newly acquired ASCs, net of the impact of the closure and deconsolidation of certain facilities, as well as an increase in case volume and higher net revenue per case in the 2024 period.
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:
Ambulatory Care:
Salaries, wages and benefits $ 306 $ 255 20.0 %
Total:
Salaries, wages and benefits $ 2,094 $ 2,315 (9.5) %
Rent/lease expense(1):
Hospital Operations $ 56 $ 70 (20.0) %
(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)
Salaries, wages and benefits per adjusted admission $ 8,401 $ 8,234 2.0 %
Other operating expenses per adjusted admission 4,289 4,197 2.2 %
Salaries, wages and benefits expense for our Hospital Operations segment decreased by $272 million, or 13.2%, in the three months ended December 31, 2024 compared to the same period in 2023. This change was primarily attributable to the sales of the Divested Hospitals. After excluding the effects of these divestitures, salaries, wages and benefits expense for our Hospital Operations segment increased by $64 million, or 3.7%, during the three-month period in 2024 as compared to the same period in 2023. This increase was the result of annual merit increases for certain of our employees and increased employee benefits costs, partially offset by decreases in contract labor and premium pay and lower incentive compensation.
On a per adjusted admission basis, salaries, wages and benefits expense in our Hospital Operations segment increased by 2.0% in the three months ended December 31, 2024 compared to the three months ended December 31, 2023. Excluding the impact of the sales of the Divested Hospitals, salaries, wages and benefits expense per adjusted admission during the three months ended December 31, 2024 did not change significantly from the same period in 2023.
Supplies expense for our Hospital Operations segment decreased by $48 million, or 7.4%, during the three months ended December 31, 2024 compared to the three months ended December 31, 2023, primarily due to the sales of the Divested Hospitals. Excluding the impact of these sales, supplies expense increased by $64 million, or 11.9%, during the three months ended December 31, 2024 as compared to the same period in 2023. This increase was primarily due to higher patient
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admissions and acuity, partially offset by our cost‐efficiency measures, which include product standardization, contract management, improved utilization, bulk purchases, focused spending and operational improvements, among others.
On a per adjusted admission basis, supplies expense increased by 9.1% in the three months ended December 31, 2024 compared to the three months ended December 31, 2023. Excluding the impact of the sales of the Divested Hospitals, supplies expense per adjusted admission increased 8.1% during the three‐month period in 2024 as compared to the same period in 2023. This increase was primarily attributable to the factors discussed above.
Other operating expenses for our Hospital Operations segment decreased by $141 million, or 13.4%, in the three months ended December 31, 2024 compared to the same period in 2023, primarily due to the sales of the Divested Hospitals. Excluding the effect of these divestitures, other operating expenses increased by $48 million, or 5.5%, during the three‐month period in 2024. The changes in other operating expenses during the three months ended December 31, 2024 included:
•a $25 million increase in medical fees;
•indigent care expense that was $8 million higher;
•a $6 million increase in legal and consulting fees; and
•a decrease of $27 million in malpractice expense.
On a per adjusted admission basis, other operating expenses during the three months ended December 31, 2024 increased by 2.2% compared to the same period in 2023. Excluding the impact of the sales of the Divested Hospitals, other operating expenses per adjusted admission increased by 1.9%.
LIQUIDITY AND CAPITAL RESOURCES OVERVIEW
Cash and cash equivalents were $3.019 billion at December 31, 2024 compared to $4.094 billion at September 30, 2024.
Significant cash flow items in the three months ended December 31, 2024 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 $962 million;
•Income tax payments totaling $963 million;
•Capital expenditures of $330 million;
•Interest payments of $296 million;
•$185 million of distributions paid to noncontrolling interests; and
•Repayments of advances received from managed care payers totaling $150 million.
Net cash provided by operating activities was $2.047 billion in the year ended December 31, 2024 compared to $2.374 billion in the year ended December 31, 2023. Key factors contributing to the change between 2024 and 2023 included the following:
•An increase in net income before interest, taxes, depreciation and amortization, impairment and restructuring charges, acquisition‐related costs, litigation costs and settlements, loss from early extinguishment of debt, other non-operating income or expense, and net gains on sales, consolidation and deconsolidation of facilities of $454 million;
•Income tax payments that were $1.028 billion higher in 2024 than in 2023;
•Lower interest payments of $31 million; 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 3.7 % 4.1 % 4.8 %
(1) Includes Medicare and Medicaid managed care programs.
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 % 4.5 % 4.9 %
Indemnity and other 3.6 % 3.3 % 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 and state statutes, regulations and executive orders that effect the healthcare industry directly or indirectly, particularly those impacting government healthcare funding; changes in general economic conditions, including inflation, whether due to geopolitical conflicts, trade tensions, export control rules, tariffs or other factors; the number of uninsured and underinsured individuals in local communities treated at our hospitals; cybersecurity incidents, including those targeting our vendors, and other unanticipated information technology outages; 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 pricing 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 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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Potential Changes in Healthcare Policy
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 40 states (including four of the eight 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 April 1, 2025.
The 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.
Over the past several years, various laws and regulations lengthened the enrollment period, expanded income eligibility, and reduced premium caps for subsidies for individuals purchasing Affordable Care Act coverage through state and federal marketplaces – all of which led to increased enrollment numbers, particularly in states that have not expanded Medicaid. Certain of these provisions are set to expire at the end of 2025; if they are not extended, it could result in significant increases in premiums, potentially leading to decreased enrollment and a corresponding rise in the uninsured or a shift of individuals from commercial coverage to government program coverage beginning in 2026. In such a case, we could experience decreased patient volumes, reduced revenues and an increase in uncompensated care, which would adversely affect our results of operations and cash flows. We cannot predict whether or how the new Congress may extend or modify provisions of or relating to the Affordable Care Act or other laws affecting the healthcare industry generally, nor can we predict how the new administration will influence, promulgate or implement rules, regulations or executive orders that affect the healthcare industry directly or indirectly. We may also experience potential impacts on our business, in ways we cannot anticipate, from healthcare‐related policy changes at the state level. Some federal and state changes, initiatives and requirements could, among other things, negatively impact our patient volumes, case mix and revenue mix, increase our operating costs, adversely affect the reimbursement we receive for our services, impact our competitive position or require us to expend resources to modify certain aspects of our operations.
More specifically, we are also unable to predict the effect of future government healthcare funding policy changes on our business. The Medicare and Medicaid programs are subject to:
•statutory and regulatory changes, administrative and judicial rulings, executive orders, interpretations and determinations concerning 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. If the rates paid by governmental payers are reduced, if the scope of services covered by governmental payers is limited, if eligibility or enrollment is further restricted, if there are changes to align payment rates for certain procedures across various care settings, 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.
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 operation of the hospitals and related outpatient facilities in our Hospital Operations
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segment for services provided to patients enrolled in the Original Medicare Plan were $2.132 billion, $2.383 billion and $2.369 billion for the years ended December 31, 2024, 2023 and 2022, 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 “Recent Regulatory and Legislative Updates” 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.
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, 2024, 40 of our hospitals qualified for Medicare DSH payments.
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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, 2024, 29 of our hospitals were affiliated with academic institutions and were eligible to receive such payments.
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 and are generally based on a hospital’s performance from prior periods, can have an adverse impact on our IPPS operating payments.
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.
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.
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,
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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 MACs, 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.
Medicare Claims Reviews
HHS estimates that the overall 2024 Medicare FFS improper payment rate for the program is approximately 7.66%. The 2024 error rate for Hospital IPPS payments is approximately 3.90%. 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 20.4%, 19.1% and 19.4% of the total net patient service revenues of our hospitals and related outpatient facilities for the years ended December 31, 2024, 2023 and 2022, respectively. We also receive DSH and other supplemental revenues under various state Medicaid programs. For the years ended December 31, 2024, 2023 and 2022, our total Medicaid revenues attributable to DSH and other supplemental revenues were approximately $1.161 billion, $929 million and $767 million, respectively.
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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 recognized by the hospitals and related outpatient facilities in our Hospital Operations segment for the years ended December 31, 2024, 2023 and 2022 were $2.845 billion, $2.776 billion and $2.692 billion, respectively. During the year ended December 31, 2024, Medicaid and Medicaid managed care revenues comprised 50.6% and 49.4%, respectively, of our Medicaid‐related net patient service revenues recognized by the hospitals and related outpatient facilities in our Hospital 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.
Recent Regulatory and Legislative Updates
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 2024, CMS issued final changes to the Hospital Inpatient Prospective Payment Systems for Acute Care Hospitals and Fiscal Year 2025 Rates (“Final IPPS Rule”). In the Final IPPS Rule, CMS deferred taking immediate action on its low wage index hospital policy in light of the U.S. Court of Appeals for the DC Circuit’s decision in Bridgeport Hospital v. Becerra. In September 2024, CMS issued an interim final action with comment period (“IFC”) to implement revisions to the FFY 2025 Medicare wage index values, establish a transitional payment exception for low wage hospitals, and make conforming changes to the FFY 2025 IPPS payment rates following the court decision. The Final IPPS Rule and IFC include the following payment and policy changes, among others:
•A market basket increase of 3.4% for MS‐DRG operating payments for hospitals reporting specified quality measure data and that are meaningful users of EHR technology; CMS also finalized a 0.5% multifactor productivity reduction required by the Affordable Care Act that results in a net operating payment update of 2.9% before budget neutrality adjustments;
•An increase in the cost outlier threshold from $42,750 to $46,217;
•A 1.65% 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;
•An increase to the performance-based scoring threshold for eligible hospitals and critical access hospitals reporting under the Medicare Promoting Interoperability Program from 60 points to 70 points beginning with the EHR reporting period in calendar year (“CY”) 2025;
•An update to the hospital labor market area delineation based on the Office of Management and Budget Bulletin No. 23-01; and
•Implementation of the Transforming Episode Accountability Model (“TEAM”), which will begin January 1, 2026 and end December 31, 2030 for certain episodic categories. TEAM will be mandatory, with limited exceptions, for all hospitals located within the CMS selected Core-Based Statistical Areas (“CBSAs”). Nine of our acute care hospitals and one surgical hospital are included in the CBSAs.
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According to CMS, the combined impact of the payment and policy changes in the Final IPPS Rule and IFC for operating costs will yield an average 2.9% increase in Medicare operating MS‐DRG FFS payments for hospitals in urban areas and an average 3.3% increase in such payments for proprietary hospitals in FFY 2025. We estimate that all of the final payment and policy changes affecting operating MS‐DRG and UC‐DSH Amounts will result in a 2.8% increase in our annual Medicare FFS IPPS payments, which would yield an estimated increase of approximately $36 million in 2025. Because of the uncertainty associated with various factors that may influence our future IPPS payments by individual hospital, including legislative, regulatory or legal actions, admission volumes, length of stay and case mix, we cannot provide any assurances regarding our estimates of the final 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 2024, CMS released the final policy changes and payment rates for the Hospital Outpatient Prospective Payment System and Ambulatory Surgical Center Payment System for CY 2025 (“Final OPPS/ASC Rule”). The Final OPPS/ASC Rule includes the following payment and policy changes, among others:
•An estimated net increase of 2.9% for the OPPS rates based on a market basket increase of 3.4%, reduced by a multifactor productivity adjustment required by the Affordable Care Act of 0.5%; and
•A 2.9% increase to the Ambulatory Surgical Center payment rates.
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 4.9% increase in Medicare FFS OPPS payments for proprietary hospitals. The projected CY 2025 impact of the payment and policy changes in the Final OPPS/ASC Rule is an increase to Medicare FFS hospital outpatient revenues of approximately $21 million, or 4.32%, for the facilities in our Hospital Operations segment and $20 million, or 2.87%, 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 estimates 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. To address the remediation for the prior years’ underpayments, 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 implemented 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 2024, CMS released the CY 2025 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, 2025. Under the MPFS Final Rule, the CY 2025 conversion factor, which is the base rate that is used to convert relative units into payment rates, was reduced from $33.29 to $32.35, a decrease of 2.82%. We estimate the impact of the MPFS Final Rule will result in a reduction of approximately $5 million to our 2025 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.
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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, 2024, 2023 and 2022 was $9.809 billion, $10.248 billion and $9.607 billion, respectively. Our top 10 managed care payers generated 71% of our managed care net patient service revenues for the year ended December 31, 2024. During the same period, national payers generated 48% of our managed care net patient service revenues; the remainder came from regional or local payers. At both December 31, 2024 and 2023, 68% 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 approximately 3% increase or decrease in the estimated contractual allowances related to managed care plans. Based on reserves at December 31, 2024, a 3% increase or decrease in the estimated contractual allowance would impact the estimated reserves by approximately $29 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, 2024, 2023 or 2022. 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.
In recent years, managed care governmental admissions have increased as a percentage of total managed care admissions. However, in year ended December 31, 2024, admissions growth from commercial managed care plans was greater than the growth in admissions from Medicare and Medicaid managed care programs. Commercial managed care plans typically generate higher yields than managed care governmental insurance plans. In the year ended December 31, 2024, our commercial managed care net inpatient revenue per admission from the hospitals in our Hospital Operations segment was approximately 67% higher than our aggregate yield on a per-admission basis from government payers, including Medicare and Medicaid managed care programs. Although we have benefited from 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.
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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.
The No Surprises Act
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.
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, 2024 and 2023, 5% and 4%, respectively, of our Hospital Operations segment’s accounts receivable was self‐pay. Further, a significant portion of our implicit price concessions relates to self‐pay amounts. The revenue cycle management services we provide are subject to various statutes and regulations regarding consumer protection in areas including finance, debt collection and credit reporting activities.
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 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.
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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 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.
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, 2024 COMPARED TO THE YEAR ENDED DECEMBER 31, 2023
The following table presents 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 260 228 32
Operating expenses:
Depreciation and amortization 818 870 (52)
Impairment and restructuring charges, and acquisition-related costs 102 137 (35)
Litigation and investigation costs 35 47 (12)
Net operating revenues 100.0 % 100.0 % — %
Grant income — % 0.1 % (0.1) %
Equity in earnings of unconsolidated affiliates 1.3 % 1.1 % 0.2 %
Operating expenses:
Salaries, wages and benefits 42.6 % 44.5 % (1.9) %
Other operating expenses, net 21.7 % 22.0 % (0.3) %
Depreciation and amortization 4.0 % 4.2 % (0.2) %
Litigation and investigation costs 0.2 % 0.2 % — %
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The following table presents 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 10 250 10 218
Operating expenses:
Impairment and restructuring charges, and acquisition-related costs 51 51 78 59
Litigation and investigation costs 30 5 34 13
Grant income 0.1 % — % 0.1 % — %
Equity in earnings of unconsolidated affiliates 0.1 % 5.5 % 0.1 % 5.6 %
Operating expenses:
Depreciation and amortization 4.2 % 3.0 % 4.5 % 3.1 %
Litigation and investigation costs 0.2 % 0.1 % 0.2 % 0.3 %
Consolidated net operating revenues increased by $117 million, or 0.6%, for the year ended December 31, 2024 compared to the year ended December 31, 2023. Our Hospital Operations segment’s net operating revenues decreased by $552 million, or 3.3%, for the year ended December 31, 2024 as compared to 2023. Excluding the impact of the sales of the Divested Hospitals, net operating revenues in our Hospital Operations segment increased $1.127 billion, or 8.1%, during the year ended December 31, 2024 compared to the year ended December 31, 2023. This increase was driven by a more favorable payer mix, higher patient volumes and acuity, growth in our Medicaid supplemental revenue and negotiated commercial rate increases.
During the year ended December 31, 2024, net operating revenues in our Ambulatory Care segment increased by $669 million, or 17.3%, as compared to 2023. This growth was primarily attributable to incremental revenues from newly acquired ASCs, net of the impact of the closure and deconsolidation of certain facilities, increases in net revenue per case and higher patient acuity.
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.
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Hospital Operations Segment
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 2024 2023
Number of hospitals 47 47 — (1)
Paying admissions (excludes charity and uninsured) 439,671 419,929 4.7 %
Paying admissions as a percentage of total admissions 95.5 % 95.5 % — % (1)
Average length of stay (days) 4.99 5.09 (2.0) %
Utilization of licensed beds 50.9 % 49.8 % 1.1 % (1)
Same-Hospital Years Ended December 31, Increase(Decrease)
Paying visits as a percentage of total visits 94.1 % 94.4 % (0.3) % (1)
Same-Hospital Years Ended December 31, Increase(Decrease)
Selected revenue data – hospitals and related outpatient facilities:
Net patient service revenue per adjusted admission $ 15,397 $ 14,720 4.6 %
Net patient service revenue per adjusted patient day $ 3,207 $ 3,017 6.3 %
Same-Hospital Years Ended December 31, Increase(Decrease)
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Same-Hospital Years Ended December 31, Increase(Decrease) (1)
Selected Operating Expenses as a Percentage of Net Operating Revenues 2024 2023
Salaries, wages and benefits 47.5 % 49.4 % (1.9) %
Other operating expenses 23.4 % 23.5 % (0.1) %
Revenues
Same‐hospital net operating revenues increased by $987 million, or 7.1%, during the year ended December 31, 2024 compared to the previous year. This increase was attributable to the positive impact of a more favorable payer mix, higher patient volume and acuity, growth in our Medicaid supplemental revenue, and negotiated commercial rate increases.
The following table presents our consolidated net accounts receivable by payer:
December 31,
Net cost report settlements receivable and valuation allowances 6 47
Self-pay uninsured 29 35
Self-pay balance after insurance 69 71
Estimated future recoveries 144 148
Our accounts receivable days outstanding (“AR Days”) were 49.4 days and 55.4 days at December 31, 2024 and 2023, respectively. AR Days are calculated as our accounts receivable on the last date in the quarter divided by our net operating revenues 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 and activity related to our divested facilities.
The collection of accounts receivable is a key area of focus for our business. At December 31, 2024 and 2023, our Hospital Operations segment collection rate on self‐pay accounts was approximately 28% and 30%, 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, 2024, a 10% decrease or increase in our self‐pay collection rate, equivalent to a fluctuation of approximately 3 percentage points in the collection rate, which we believe could be a reasonably likely change, would result in an unfavorable or favorable adjustment to patient accounts receivable of approximately $10 million.
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% and 97% at December 31, 2024 and 2023, respectively.
Various factors can influence collection trends, including changes in the economy and inflation, which in turn impact unemployment rates and the number of uninsured and underinsured patients. Additional variables include the volume of patients through our emergency departments, the increased burden of co-pays and deductibles to be made by patients with insurance, successful cyberattacks against us or the third-party systems we interact with, and business practices related to collection efforts. These factors are dynamic and can affect collection trends and our estimation processes.
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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 of our Hospital Operations segment of $2.045 billion and $2.414 billion at December 31, 2024 and 2023, respectively. Cost report settlements receivable, net of payables and related valuation allowances, of $6 million and $47 million at December 31, 2024 and 2023, 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 $201 million, or 2.9%, in the year ended December 31, 2024 compared to the same period in 2023. This change was primarily attributable to annual merit increases for certain of our employees, as well as increases in employee benefits costs, incentive compensation expense, and recruiting and retention costs. These impacts were partially offset by lower contract labor and premium pay. As a percentage of net operating revenues, same‐hospital salaries, wages and benefits decreased by 190 basis points to 47.5% in the year ended December 31, 2024 compared to the year ended December 31, 2023. Salaries, wages and benefits expense for the years ended December 31, 2024 and 2023 included stock‐based compensation expense of $61 million and $46 million, respectively.
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Supplies
Same‐hospital supplies expense increased by $159 million, or 7.6%, in the year ended December 31, 2024 compared to 2023. This increase was driven by higher patient volumes and acuity, as well as the impact of general market conditions on the cost of medical supplies during 2024, partially offset by the cost‐efficiency measures discussed below. Same‐hospital supplies expense as a percentage of net operating revenues increased by 10 basis points to 15.2% in the year ended December 31, 2024 compared to the year ended December 31, 2023.
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 surgical devices, cardiovascular and orthopedic implants, and high‐cost pharmaceuticals.
Other Operating Expenses, Net
Same‐hospital other operating expenses increased by $210 million, or 6.4%, in the year ended December 31, 2024 compared to 2023. The changes in other operating expenses during the year ended December 31, 2024 included:
•an $86 million increase in medical fees;
•repair and maintenance costs that were $21 million higher;
•gains recognized during the 2023 period that were $19 million higher than in the 2024 period;
•a $19 million increase in indigent care costs; and
•$45 million less in malpractice expense.
Same‐hospital other operating expenses as a percentage of net operating revenues decreased by 10 basis points to 23.4% for the year December 31, 2024 compared to 23.5% for the year ended December 31, 2023. Same‐hospital other operating expenses for our Hospital Operations segment included $214 million and $220 million of lease expense for the years ended December 31, 2024 and 2023, 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 separate legal entities. 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 (161 of 543 facilities at December 31, 2024), 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 382of 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 whether it is consolidated or unconsolidated, 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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The following table presents selected revenue and expense information for our Ambulatory Care segment:
Years Ended December 31, Increase(Decrease)
Grant income $ — $ 1 (100.0) %
Equity in earnings of unconsolidated affiliates $ 250 $ 218 14.7 %
Other operating expenses, net $ 650 $ 531 22.4 %
Revenues
Our Ambulatory Care net operating revenues increased by $669 million, or 17.3%, during the year ended December 31, 2024 compared to 2023. The change was driven by (1) a $447 million increase from 2023 and 2024 acquisitions and purchases of controlling interests, partially offset by the impact of the sale or closure of certain facilities, and (2) a $222 million increase in same‐facility net operating revenues, which was attributable to improved case volume, incremental revenue from new service lines and negotiated commercial rate increases.
Salaries, Wages and Benefits
Salaries, wages and benefits expense increased by $173 million, or 17.9%, during the year ended December 31, 2024 compared to 2023. This change was driven by a $140 million increase from 2023 and 2024 acquisitions and purchases of controlling interests, partially offset by the impact of the sale or closure of certain facilities. A $33 million increase in same‐facility salaries, wages and benefits expense, due primarily to higher surgical case volumes, also contributed to the increase. Salaries, wages and benefits expense as a percentage of net operating revenues increased by 10 basis points from 25.0% in the year ended December 31, 2023 to 25.1% in the year ended December 31, 2024. Salaries, wages and benefits expense included stock‐based compensation expense of $6 million and $20 million in 2024 and 2023, respectively.
Supplies
Supplies expense increased by $142 million, or 13.6%, during the year ended December 31, 2024 compared to 2023. The change was driven by $78 million increase from 2023 and 2024 acquisitions and purchases of controlling interests, partially offset by the impact of the sale or closure of certain facilities. An increase of $64 million in same‐facility supplies expense, 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, also contributed to this change. Supplies expense as a percentage of net operating revenues decreased by 80 basis points from 27.0% in the year ended December 31, 2023 to 26.2% in the year ended December 31, 2024.
Other Operating Expenses, Net
Other operating expenses increased by $119 million, or 22.4%, during the year ended December 31, 2024 compared to 2023. The change was primarily driven by (1) an $82 million increase from 2023 and 2024 acquisitions and purchases of controlling interests, partially offset by the impact of the sale or closure of certain facilities, and (2) a $37 million increase in same-facility other operating costs. Other operating expenses as a percentage of net operating revenues increased from 13.7% for the year ended December 31, 2023 to 14.3% for 2024. Other operating expenses for our Ambulatory Care segment included $159 million and $130 million of lease expense for the years ended December 31, 2024 and 2023, respectively.
Facility Growth
The following table presents the year-over-year changes in our revenue and cases on a same‐facility systemwide basis:
Net revenues 7.8 %
Cases 0.3 %
Net revenue per case 7.4 %
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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,
Purchases of controlling interests $ 553 $ 149
Purchases of noncontrolling interests 1 2
The table below reflects the change in the number of facilities operated by our Ambulatory Care segment since December 31, 2023:
Acquisitions 55
Dispositions/Mergers (22)
Net increase in number of facilities operated 47
During the year ended December 31, 2024, we acquired controlling ownership interests in 52 ASCs, as well as noncontrolling ownership interests in two ASCs and one surgical hospital. Prior to these transactions, we did not have a prior investment in these facilities. In addition, we acquired controlling ownership interests in seven previously unconsolidated ASCs. We paid an aggregate of $554 million to acquire all of the aforementioned ownership interests during the year ended December 31, 2024.
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, 2024, we invested approximately $25 million in such transactions.
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 $ 7 $ 43
Restructuring charges 56 79
Acquisition-related costs 39 15
By segment:
Hospital Operations $ 51 $ 78
Ambulatory Care 51 59
During the year ended December 31, 2024, restructuring charges consisted of $17 million of legal costs related to the sale of certain businesses, $12 million of contract and lease termination fees, $11 million of employee severance costs, $9 million related to the transition of various administrative functions to our Global Business Center (“GBC”) in the Philippines and $7 million of other restructuring costs. Impairment charges for the year ended December 31, 2024 primarily related to the write-down of certain intangible assets held by our Ambulatory Care segment to their estimated fair value.
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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. 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.
Acquisition‐related costs during both 2024 and 2023 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, 2024 and 2023 were $35 million and $47 million, respectively. See Note 17 to the accompanying Consolidated Financial Statements for additional information.
Net Gains on Sales, Consolidation and Deconsolidation of Facilities
We recorded gains from the sale, consolidation and deconsolidation of facilities totaling $2.916 billion during the year ended December 31, 2024. Activity during 2024 primarily consisted of aggregate gains recognized from the sales of the Divested Hospitals, as well as facilities sold, consolidated and deconsolidated by our Ambulatory Care segment.
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.
Interest Expense
Interest expense declined from $901 million in the year ended December 31, 2023 to $826 million in the year ended December 31, 2024. This decrease was primarily driven by the debt extinguishments described below.
Loss from Early Extinguishment of Debt
During the year ended December 31, 2024, we recorded losses of $8 million related to the redemption of our 2026 Senior Secured First Lien Notes in advance of the notes’ maturity date. This loss derived from the write-off of unamortized issuance costs associated with these notes.
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 4.625% senior secured first lien notes due July 2024 and our 4.625% senior secured first lien notes due September 2024, in each case in advance of the notes’ maturity dates, and derived from differences between the redemption price and the par value of the respective notes, as well as the write‐off of associated unamortized issuance costs.
Income Tax Expense
During the year ended December 31, 2024, we recorded income tax expense of $1.184 billion on pre‐tax income of $5.248 billion compared to income tax expense of $306 million on pre‐tax income of $1.617 billion during the year ended December 31, 2023.
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A reconciliation between the amount of reported income tax expense and the amount computed by multiplying income before income taxes by the statutory federal tax rate is presented below:
Years Ended December 31,
Tax expense at statutory federal rate of 21% $ 1,102 $ 340
State income taxes, net of federal income tax benefit 288 70
Tax benefit attributable to noncontrolling interests (181) (147)
Nondeductible goodwill 161 —
Nondeductible executive compensation 7 6
Stock-based compensation tax benefit (9) (2)
Changes in valuation allowance (182) 71
Other items (1) (3)
During the year ended December 31, 2024, the valuation allowance decreased by $90 million, including a decrease of $180 million primarily for utilization of interest expense carryforwards due to gains from sales of facilities, an increase of $92 million due to an acquisition, 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, 2024 was $158 million. 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.
Net Income Available to Noncontrolling Interests
Net income available to noncontrolling interests consisted of the following during the periods indicated:
Years Ended December 31,
Hospital Operations $ 150 $ 114
Total net income available to noncontrolling interests $ 864 $ 700
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.
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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 (864) (700)
Loss from early extinguishment of debt (8) (11)
Other non-operating income, net 126 19
Litigation and investigation costs (35) (47)
Net gains on sales, consolidation and deconsolidation of facilities 2,916 23
Impairment and restructuring charges, and acquisition-related costs (102) (137)
Depreciation and amortization (818) (870)
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2023 COMPARED TO THE YEAR ENDED DECEMBER 31, 2022
A discussion of our results of operations for the year ended December 31, 2023 compared to the year ended December 31, 2022 can be found in our Annual Report on Form 10-K for the year ended December 31, 2023.
LIQUIDITY AND CAPITAL RESOURCES
CASH REQUIREMENTS
Scheduled Contractual Obligations
Our obligations to make future cash payments under scheduled contractual obligations are summarized in the table below, all as of December 31, 2024. Other than with respect to the repayment of long-term debt, we expect to use net cash generated from operating activities or cash on hand to satisfy the below obligations. We also have the ability to use borrowings under our Credit Agreement. 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 404 404 — — — — —
(1) Amounts include both principal and interest.
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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. Our borrowing availability is based on a specified percentage of eligible inventory and accounts receivable. At December 31, 2024, we had no cash borrowings outstanding under the Credit Agreement, and we had less than $1 million of standby letters of credit outstanding.
At December 31, 2024, we had outstanding senior unsecured notes and senior secured notes with an aggregate principal balance of $12.662 billion, the maturity dates of which are staggered from 2027 through 2031. In March 2024, we redeemed all $2.100 billion aggregate principal amount outstanding of our 2026 Senior Secured First Lien Notes in advance of their maturity date. We paid $2.100 billion using cash on hand to redeem the notes. In connection with the redemption, we recorded a loss from early extinguishment of debt of $8 million in the three months ended March 31, 2024, primarily related to the write-off of associated unamortized issuance costs.
At December 31, 2024, 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 2.54x. We anticipate this ratio will fluctuate from quarter to quarter based on earnings performance, the timing of tax payments and other factors, which could include the potential use of our Credit Agreement as a source of liquidity or the entry 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 effectively managing our cost and capital structures. To that end, 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 manage our leverage and capital structure 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 $851 million, $882 million and $848 million in the years ended December 31, 2024, 2023 and 2022, respectively. For the year ending December 31, 2025, we expect annual interest payments to be approximately $770 million to $780 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, 2024, we had fixed payment obligations of $1.598 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 $404 million at December 31, 2024, 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, 2024, the
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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 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. Drawings under any letter of credit issued under the LC Facility accrue interest if not reimbursed within three business days. At December 31, 2024, we had $106 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, 2024, the maximum potential amount of future payments under these guarantees was $303 million, of which $213 million were recorded in the accompanying Consolidated Balance Sheet at December 31, 2024. The timing and amount of future payments under these guarantees is uncertain.
Professional and General Liability Obligations—At December 31, 2024, the current and long‐term professional and general liability reserves included in our Consolidated Balance Sheet were $238 million and $900 million, respectively, and the current and long‐term workers’ compensation reserves included in our Consolidated Balance Sheet were $28 million and $96 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 that Baylor University Medical Center (“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, 2024, we had a liability of $68 million recorded in other current 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, 2024.
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 at least $250 million annually in ambulatory business acquisitions and de novo facilities. Capital expenditures were $931 million, $751 million and $762 million in the years ended December 31, 2024, 2023 and 2022, respectively. We anticipate that our capital expenditures for the year ending December 31, 2025 will total approximately $700 million to $800 million, including $127 million that was accrued as a liability at December 31, 2024.
In July 2024, we opened the newly constructed, 92‐bed Westover Hills Baptist Hospital in San Antonio. In addition, we continued construction in 2024 on a new medical campus located in Port St. Lucie, which will include the 54‐bed Florida Coast Surgical Hospital, as well as medical office space. We expect to complete construction in late 2025, and we estimate total costs will amount to $191 million over the project period.
By the beginning of 2030, all hospitals in California providing acute care services must meet standards that are intended to ensure that they remain intact and capable of continued operation following an earthquake. We began analyzing the nonstructural performance category (“NPC”) seismic requirements for our hospitals in California in 2022 and completed the analysis in 2023. This analysis, which identified the NPC work required to be completed in future years to bring our hospitals in
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compliance with the building requirements by the 2030 deadline, was submitted to the State for review at the end of 2023. Since that time, we have sold six California hospitals.
We have initiated the design phase for the structural performance category improvements required by the 2030 deadline. These efforts will be specific to each facility and will involve material testing activities. The results of this engineering and architectural work, in combination with the previously identified NPC requirements, will inform our budgeting and planning processes. At this time, we are unable to estimate the cost of this work.
Income Taxes—Income tax payments, net of tax refunds, were $1.271 billion and $243 million in the years ended December 31, 2024 and 2023, respectively. Of the income tax payments made during the year ended December 31, 2024, $855 million was attributable to income tax obligations arising from our sales of the Divested Hospitals. At December 31, 2024, our carryforwards available to offset future taxable income consisted of: (1) federal net operating loss (“NOL”) carryforwards of approximately $260 million pre‐tax, $139 million of which expires in 2026 to 2037 and $121 million of which has no expiration date, for which the associated deferred tax benefit net of valuation allowance is $2 million; (2) capital loss carryforwards of $8 million, which have no deferred tax benefit net of valuation allowance; and (3) state NOL carryforwards of approximately $3.299 billion expiring in 2025 through 2044 for which the associated deferred tax benefit, net of valuation allowance and federal tax impact, is $23 million.
Most of the federal net operating loss carryforwards and capital loss carryforwards are subject to separate return limitation year restrictions under the Internal Revenue Code and may be utilized only to offset taxable income of certain entities. Our ability to utilize NOL carryforwards to reduce future taxable income may be limited under Section 382 of the Internal Revenue Code if certain ownership changes in our company occur during a rolling three‐year period. These ownership changes include purchases of common stock under share repurchase programs, the offering of stock by us, the purchase or sale of our stock by 5% shareholders, as defined in the Treasury regulations, or the issuance or exercise of rights to acquire our stock. If such ownership changes by 5% shareholders result in aggregate increases that exceed 50 percentage points during the three‐year period, then Section 382 imposes an annual limitation on the amount of our taxable income that may be offset by the NOL carryforwards or tax credit carryforwards at the time of ownership change.
Periodic examinations of our tax returns by the IRS or other taxing authorities could result in the payment of additional taxes. The IRS has completed audits of our tax returns for all tax years ended on or before December 31, 2007. All disputed issues with respect to these audits have been resolved and all related tax assessments (including interest) have been paid. Our tax returns for years ended after December 31, 2007 and USPI’s tax returns for years ended after December 31, 2020 remain subject to audit by the IRS.
The Inflation Reduction Act of 2022 (the “Tax Act”) was enacted in August 2022. Among other things, the Tax Act implemented a corporate alternative minimum tax (“CAMT”) of 15% on book income of certain large corporations, a 1% excise tax on net stock repurchases and several tax incentives to promote clean energy. The provision pertaining to an excise tax on corporate stock repurchases imposes a nondeductible 1% excise tax on publicly traded corporations for the net value of certain stock that any such corporation repurchases. The value of the repurchases subject to the tax is reduced by the value of any stock the corporation issued during the tax year, including stock issued or provided to employees. The CAMT imposes a minimum tax on net income adjusted for certain items prescribed by the Tax Act. Both the CAMT and the excise tax provisions of the Tax Act are effective for tax years beginning after December 31, 2022. We expect to be subject to the CAMT; however, we currently do not expect any material impact.
SOURCES AND USES OF CASH
Our liquidity for the year ended December 31, 2024 was primarily derived from net cash provided by operating activities, cash on hand and proceeds received from the sales of the Divested Hospitals. Our primary source of operating cash is the collection of accounts receivable. As such, our operating cash flow is impacted by levels of cash collections, as well as levels of implicit price concessions, due to shifts in payer mix and other factors. Our Credit Agreement provides additional liquidity to manage fluctuations in operating cash caused by these factors. We had $3.019 billion of cash and cash equivalents on hand at December 31, 2024 to fund our operations and capital expenditures, as well as funds available under our Credit Agreement.
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Net cash provided by operating activities was $2.047 billion in the year ended December 31, 2024 compared to $2.374 billion in the year ended December 31, 2023. Key factors contributing to the change between 2024 and 2023 included the following:
•An increase in net income before interest, taxes, depreciation and amortization, impairment and restructuring charges, acquisition‐related costs, litigation costs and settlements, loss from early extinguishment of debt, other non-operating income or expense, and net gains on sales, consolidation and deconsolidation of facilities of $454 million;
•Income tax payments that were $1.028 billion higher in 2024 than in 2023;
•Lower interest payments of $31 million; and
•The timing of other working capital items.
Net cash provided by investing activities was $3.429 billion for the year ended December 31, 2024 as compared to net cash used of $969 million for the year ended December 31, 2023. Cash received from the sales of facilities and other assets was $4.910 billion higher during the 2024 period, primarily consisting of proceeds from the sales of the Divested Hospitals. These cash receipts were partially offset by increased payments of $347 million for purchases of businesses or joint venture interests, primarily due to our Ambulatory Care segment’s acquisition activity, and increased capital expenditures of $180 million during the year ended December 31, 2024.
Net cash used in financing activities was $3.685 billion and $1.035 billion in the years ended December 31, 2024 and 2023, respectively. The primary factors contributing to the change between the 2024 and 2023 periods were: (1) the 2023 period included proceeds from the issuance of $1.350 billion aggregate principal amount of our 6.750% senior secured first lien notes due May 2031; (2) higher long-term debt payments of $701 million during the year ended December 31, 2024, including the redemption of all $2.100 billion aggregate principal amount then outstanding of our 2026 Senior Secured First Lien Notes; (3) payments totaling $672 million to repurchase 5,595 thousand shares of our common stock under our share repurchase programs during the 2024 period; and (4) the receipt of advances, net of repayments, totaling $32 million from managed care payers during the year ended December 31, 2024.
We record our equity securities and our debt securities classified as available‐for‐sale at fair market value. The majority of our investments are valued based on quoted market prices or other observable inputs. We have no investments that we expect will be negatively affected by the current economic conditions and materially impact our financial condition, results of operations or cash flows.
DEBT INSTRUMENTS, GUARANTEES AND RELATED COVENANTS
Credit Agreement—At December 31, 2024, our Credit Agreement provided for revolving loans in an aggregate principal amount of up to $1.500 billion with a $200 million subfacility for standby letters of credit. At December 31, 2024, 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 and inventory, $1.327 billion was available for borrowing under the Credit Agreement at December 31, 2024. The difference between the maximum available revolving loans under the Credit Agreement and the actual borrowing capacity as of December 31, 2024 is due to a reduction in eligible receivables and inventory following the sales of the SC Hospitals, OCLA CA Hospitals and Central CA Hospitals. We were in compliance with all covenants and conditions in our Credit Agreement at December 31, 2024.
Letter of Credit Facility—Our LC Facility 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. At December 31, 2024, we were in compliance with all covenants and conditions in the LC Facility, and we had $106 million of standby letters of credit outstanding thereunder.
Senior Unsecured Notes and Senior Secured Notes—A detailed discussion of our debt transactions during the year ended December 31, 2024 is provided under the Cash Requirements subsection above. In aggregate, we recognized a loss from the early extinguishment of debt of $8 million in the year ended December 31, 2024 related to the redemption of our 2026 Senior Secured First Lien Notes in advance of their maturity date. This loss derived from the write-off of unamortized issuance costs associated with these notes.
LIQUIDITY
From time to time, we expect to engage in additional capital markets, bank credit and other financing activities depending on our needs and financing alternatives available at that time. We believe our existing debt agreements provide flexibility for future secured or unsecured borrowings.
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Our cash on hand fluctuates day‐to‐day throughout the year based on the timing and levels of routine cash receipts and disbursements, including our book overdrafts, and required cash disbursements, such as interest payments and income tax payments. These fluctuations can result in material intra-quarter net operating and investing uses of cash that have caused, and in the future may cause, us to use our Credit Agreement as a source of liquidity. We believe that existing cash and cash equivalents on hand, borrowing availability under our Credit Agreement and anticipated future cash provided by our operating activities are adequate to meet our current cash needs. These sources of liquidity, in combination with any potential future debt incurrence, are adequate to finance planned capital expenditures, payments on the current portion of our long-term debt, payments to current and former joint venture partners, including those related to our share purchase agreement with Baylor, and other presently known operating needs.
Long-term liquidity for debt service and other purposes will be dependent on the amount of cash provided by operating activities and, subject to favorable market and other conditions, the successful completion of future borrowings and potential refinancings. However, our cash requirements could be materially affected by the use of cash in acquisitions of businesses, repurchases of securities, the exercise of put rights or other exit options by our joint venture partners, and contractual or regulatory commitments to fund capital expenditures in, or intercompany borrowings to, businesses we own. In addition, liquidity could be adversely affected should there be a deterioration in our results of operations, including our ability to generate sufficient cash from operations, as well as by the various risks and uncertainties discussed in this section and the Risk Factors section in Part I of this report, including changes in federal and state statutes, regulations and executive orders that effect the healthcare industry directly or indirectly, particularly those impacting government healthcare funding, and significant costs associated with legal proceedings and government investigations.
We have not relied on commercial paper or other short-term financing arrangements or entered into repurchase agreements or other short-term financing arrangements not otherwise reported in our balance sheet. In addition, we do not have significant exposure to floating interest rates given that all of our current long-term indebtedness has fixed rates of interest except for borrowings, if any, under our Credit Agreement.
RECENTLY ISSUED ACCOUNTING STANDARDS
See Note 24 to the accompanying Consolidated Financial Statements for a discussion of recently issued and recently adopted accounting standards.
CRITICAL ACCOUNTING ESTIMATES
In preparing our Consolidated Financial Statements in conformity with GAAP, we must use estimates and assumptions that affect the amounts reported in our Consolidated Financial Statements and accompanying notes. We regularly evaluate the accounting policies and estimates we use. In general, we base the estimates on historical experience and on assumptions that we believe to be reasonable, given the particular circumstances in which we operate. Actual results may vary from those estimates.
We consider our critical accounting estimates to be those that (1) involve significant judgments and uncertainties, (2) require estimates that are more difficult for management to determine, and (3) may produce materially different outcomes under different conditions or when using different assumptions.
Our critical accounting estimates cover the following areas:
•Recognition of net operating revenues, including contractual allowances and implicit price concessions;
•Accruals for general and professional liability risks;
•Impairment of long‐lived assets;
•Impairment of goodwill; and
•Accounting for income taxes.
REVENUE RECOGNITION
We report net patient service revenues at the amounts that reflect the consideration we expect to be entitled to in exchange for providing patient care. These amounts are due from patients, third‐party payers (including managed care payers and government programs) and others, and they include variable consideration for retroactive revenue adjustments due to settlement of audits, reviews and investigations. Generally, we bill our patients and third‐party payers several days after the services are performed or shortly after discharge. Revenues are recognized as performance obligations are satisfied.
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We determine performance obligations based on the nature of the services we provide. We recognize revenues for performance obligations satisfied over time based on actual charges incurred in relation to total expected charges. We believe that this method provides a faithful depiction of the transfer of services over the term of performance obligations based on the inputs needed to satisfy the obligations. Generally, performance obligations satisfied over time relate to patients in our hospitals receiving inpatient acute care services. We measure performance obligations from admission to the point when there are no further services required for the patient, which is generally the time of discharge. We recognize revenues for performance obligations satisfied at a point in time, which generally relate to patients receiving outpatient services, when (1) services are provided, and (2) we do not believe the patient requires additional services.
We determine the transaction price based on gross charges for services provided, reduced by contractual adjustments recognized for third‐party payers, discounts provided to uninsured patients in accordance with our Compact, and estimated implicit price concessions related primarily to uninsured patients. We determine our estimates of contractual adjustments and discounts based on contractual agreements, our discount policies and historical experience. We determine our estimate of implicit price concessions based on our historical collection experience using a portfolio approach as a practical expedient to account for patient contracts as collective groups rather than individually. The financial statement effects of using this practical expedient are not materially different from an individual contract approach.
The final determination of certain FFS Medicare and Medicaid program payments to our hospitals, such as DSH, DGME, IME and bad debt expense reimbursement, 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. We therefore record accruals to reflect the expected final settlements on our cost reports. 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. In addition, because the laws, regulations, instructions and rule interpretations governing Medicare and Medicaid reimbursement are complex and change frequently, the estimates we record could change by material amounts.
Revenues under managed care plans are based primarily on payment terms involving predetermined rates per diagnosis, per‐diem rates, discounted FFS rates and/or other similar contractual arrangements. These revenues are also subject to review and possible audit by the payers, which can take several years before they are completely resolved. The payers are billed for patient services on an individual patient basis. An individual patient’s bill is subject to adjustment on a patient‐by‐patient basis in the ordinary course of business by the payers following their review and adjudication of each particular bill. We estimate the discounts for contractual allowances at the individual hospital level utilizing billing data on an individual patient basis. At the end of each month, on an individual hospital basis, we estimate our expected reimbursement for patients of managed care plans based on the applicable contract terms. We believe it is reasonably likely for there to be an approximately 3% increase or decrease in the estimated contractual allowances related to managed care plans. Based on reserves at December 31, 2024, a 3% increase or decrease in the estimated contractual allowance would impact the estimated reserves by approximately $29 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 year ended December 31, 2024. 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.
Generally, patients who are covered by third‐party payers are responsible for related co‐pays, co‐insurance and deductibles, which vary in amount. We also provide services to uninsured patients and offer uninsured patients a discount from standard charges. We estimate the transaction price for patients with co‐pays, co‐insurance and deductibles and for those who are uninsured based on historical collection experience and current market conditions. Under our Compact and other uninsured
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discount programs, the discount offered to certain 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 at the time they are recorded through implicit price concessions based on historical collection trends for self‐pay accounts and other factors that affect the estimation process.
We record implicit price concessions, primarily related to uninsured patients and patients with co‐pays, co‐insurance and deductibles. The implicit price concessions included in estimating the transaction price represent the difference between amounts billed to patients and the amounts we expect to collect based on our collection history with similar patients. Although outcomes vary, our policy is to attempt to collect amounts due from patients, including co‐pays, co‐insurance and deductibles due from patients with insurance, at the time of service while complying with all federal and state statutes and regulations, including, but not limited to, the Emergency Medical Treatment and Active Labor Act (“EMTALA”). Generally, as required by EMTALA, patients may not be denied emergency treatment due to inability to pay. Therefore, services, including the legally required medical screening examination and stabilization of the patient, are performed without delaying to obtain insurance information. In non‐emergency circumstances or for elective procedures and services, it is our policy to verify insurance prior to a patient being treated; however, there are various exceptions that can occur. Such exceptions can include, for example, instances where (1) we are unable to obtain verification because the patient’s insurance company was unable to be reached or contacted, (2) a determination is made that a patient may be eligible for benefits under various government programs, such as Medicaid or Victims of Crime, and it takes several days or weeks before qualification for such benefits is confirmed or denied, and (3) under physician orders we provide services to patients that require immediate treatment.
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, 2024, a 10% increase or decrease in our self‐pay collection rate, equivalent to a fluctuation of approximately 3 percentage points in the collection rate, which we believe could be a reasonably likely change, would result in a favorable or unfavorable adjustment to patient accounts receivable of approximately $10 million.
ACCRUALS FOR GENERAL AND PROFESSIONAL LIABILITY RISKS
We accrue for estimated professional and general liability claims, to the extent not covered by insurance, when they are probable and can be reasonably estimated. We maintain reserves, which are based on modeled estimates for the portion of our professional liability risks, including incurred but not reported claims, to the extent we do not have insurance coverage. Our liability consists of estimates established based upon calculations using several factors, including the number of expected claims, estimates of losses for these claims based on recent and historical settlement amounts, estimates of incurred but not reported claims based on historical experience and the timing of historical payments. We consider the number of expected claims and average cost per claim to be the most significant assumptions in estimating accruals for general and professional liabilities. Our liabilities are adjusted for new claims information in the period such information becomes known. Malpractice expense is recorded within other operating expenses in our consolidated statements of operations.
Our estimated reserves for professional and general liability claims will change significantly if future trends differ from projected trends. We believe it is reasonably likely for there to be a 500‐basis point increase or decrease in our frequency or severity trend. Based on our reserves and other information at December 31, 2024, a 500‐basis point increase in our frequency trend would increase the estimated reserves by $58 million, and a 500‐basis point decrease in our frequency trend would decrease the estimated reserves by $45 million. A 500‐basis point increase in our severity trend would increase the estimated reserves by $190 million, and a 500‐basis point decrease in our severity trend would decrease the estimated reserves by $144 million. In addition, because of the complexity of the claims, the extended period of time to settle the claims and the wide range of potential outcomes, our ultimate liability for professional and general liability claims could change materially from our current estimates.
The table below shows the case reserves and incurred but not reported and loss development reserves:
December 31,
Incurred but not reported and loss development reserves 819 776
Several actuarial methods, including the incurred, paid loss development and Bornhuetter‐Ferguson methods, are applied to our historical loss data to produce estimates of ultimate expected losses and the resulting incurred but not reported and loss development reserves. These methods use our specific historical claims data related to paid losses and loss adjustment expenses, historical and current case reserves, reported and closed claim counts, and a variety of hospital census information.
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These analyses are considered in our determination of our estimate of the professional liability claims, including the incurred but not reported and loss development reserve estimates. The determination of our estimates involves subjective judgment and could result in material changes to our estimates in future periods if our actual experience is materially different than our assumptions.
Malpractice claims generally take up to five years to settle from the time of the initial reporting of the occurrence to the settlement payment. Accordingly, the percentage of reserves at December 31, 2024 and 2023 representing unsettled claims was approximately 98% and 99%, respectively.
The following table presents the amount of our accruals for professional and general liability claims and the corresponding activity therein:
Years Ended December 31,
Expense related to(1):
Total incurred loss and loss expense 295 348
Paid claims and expenses related to:
Current year (8) (6)
Total paid claims and expenses (203) (324)
Plus losses recoverable from re-insurance and excess insurance carriers 24 24
(1)Total malpractice expense, including premiums for insured coverage and recoveries from third parties, was $309 million and $369 million in the years ended December 31, 2024 and 2023, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
We evaluate our long‐lived assets for possible impairment annually or whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable from estimated future undiscounted cash flows (“UDCF”). If the estimated future UDCF are less than the carrying value of the asset group, we calculate the amount of an impairment charge only if the carrying value of the asset group exceeds the fair value. For purposes of impairment testing, all asset groups are evaluated at a level below that of the reporting unit, and their carrying values do not include any allocations of goodwill. The fair values of assets are estimated based on third‐party appraisals, established market values of comparable assets or internally developed estimates of future net cash flows expected to result from the use and ultimate disposition of those assets. The estimates of these future net cash flows are based on assumptions and projections we believe to be reasonable and supportable. Estimates require our subjective judgments and take into account assumptions about revenue and expense growth rates, operating margins and recoverable disposition values, based on industry and operating factors. These assumptions may vary by type of asset group and presume stable, improving or, in some cases, declining results, depending on their circumstances. If the presumed level of performance does not occur as expected, impairment may result.
We report long‐lived assets to be disposed of at the lower of their carrying amounts or fair values less costs to sell. In such circumstances, our estimates of fair value are based on third‐party appraisals, established market prices for comparable assets or internally developed estimates of future net cash flows.
Fair value estimates can change by material amounts in subsequent periods. Many factors and assumptions can impact the estimates, including the following risks:
•future financial results, which can be impacted by: volumes of insured patients and declines in commercial managed care patients; terms of managed care payer arrangements; healthcare policy changes; our ability to collect amounts due from uninsured and managed care payers; loss of volumes as a result of competition; physician recruitment and retention; and our ability to manage costs, such as labor costs, which can be adversely impacted by labor shortages, inflationary pressure on wages, minimum wage increases and labor union activity;
•changes in payments from governmental healthcare programs and in government regulations, such as reductions to Medicare and Medicaid payment rates resulting from government legislation or rule‐making or from budgetary challenges of states where we operate;
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•how the facilities are operated in the future;
•the impact of future technological advancements on our business;
•the nature of the ultimate disposition of the assets; and
•macro-economic conditions, such as inflation and gross domestic product (GDP) growth.
During the years ended December 31, 2024, 2023 and 2022, we recorded impairment charges totaling $7 million, $43 million and $94 million, respectively. We recognized impairment charges related to our Hospital Operations segment of $1 million in both of the years ended December 31, 2024 and 2023, and $88 million in the year ended December 31, 2022. During the years ended December 31, 2024, 2023 and 2022, impairment charges totaling $6 million, $42 million and $6 million, respectively, related to our Ambulatory Care segment. Impairment charges during the year ended December 31, 2024 primarily related to the write-down of certain intangible assets held by our Ambulatory Care segment to their estimated fair value. Impairment charges during the year ended December 31, 2023 were primarily related to the write‐down of our investment in certain equity method investments held by our Ambulatory Care segment. During the year ended December 31, 2022, $82 million of the total charges were related to the impairment of certain buildings and medical equipment located in one of our markets.
IMPAIRMENT OF GOODWILL