INTRODUCTION TO MANAGEMENT’S DISCUSSION AND ANALYSIS
The purpose of this section, Management's Discussion and Analysis of Financial
Condition and Results of Operations ("MD&A"), is to provide a narrative
explanation of our financial statements that enables investors to better
understand our business, to enhance our overall financial disclosures, to
provide 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 Segment
•Results of Operations
•Liquidity and Capital Resources
•Recently Issued Accounting Standards
•Critical Accounting Estimates
Our business consists of our Hospital Operations and other ("Hospital
Operations") segment, our Ambulatory Care segment and our Conifer segment. Our
Hospital Operations segment is comprised of acute care and specialty hospitals,
imaging centers, ancillary outpatient facilities, microhospitals and physician
practices. At December 31, 2022 , our subsidiaries operated 61 hospitals serving
primarily urban and suburban communities in nine states, including Piedmont
Medical Center Fort Mill ("PMC Fort Mill "), the new acute care hospital we
opened in South Carolina in September 2022 . Our Hospital Operations segment also
included 109 outpatient centers at December 31, 2022 , the majority of which are
providerbased and freestanding imaging centers, offcampus hospital emergency
departments and micro-hospitals, and providerbased ambulatory surgery centers
(each, an "ASC").
Our Ambulatory Care segment, through our USPI Holding Company, Inc. subsidiary
("USPI"), held ownership interests in 442 ASCs (300 consolidated) and
24 surgical hospitals (eight consolidated) in 35 states at December 31, 2022 .
USPI's facilities offer a range of procedures and service lines, including,
among other specialties: orthopedics, total joint replacement, and spinal and
other musculoskeletal procedures; gastroenterology; and urology. At the
beginning of 2022, we owned approximately 95% of USPI, and Baylor University
Medical Center ("Baylor") owned approximately 5%. Effective June 30, 2022 , we
purchased all of the shares in USPI that Baylor held on that date for
$406 million , which increased our ownership interest in USPI's voting shares
from 95% to 100%. See Note 18 to the accompanying Consolidated Financial
Statements and the Liquidity and Capital Resources section of MD&A for
additional information about this transaction.
Our Conifer segment provides revenue cycle management and valuebased care
services to hospitals, health systems, physician practices, employers and other
clients through our Conifer Holdings, Inc. subsidiary ("Conifer"). At
December 31, 2022 , Conifer provided services to approximately 660 Tenet and
nonTenet hospitals and other clients nationwide. Almost all of the services
comprising the operations of our Conifer segment are provided by Conifer Health
Solutions, LLC , in which we own an interest of approximately 76%, or by one of
its direct or indirect wholly owned subsidiaries.
Unless otherwise indicated, all financial and statistical information included
in MD&A relates to our continuing operations, with dollar amounts expressed in
millions (except peradjustedadmission and peradjustedpatientday amounts).
Continuing operations information includes, with respect to our Hospital
Operations segment, the results of our same 60 hospitals operated throughout the
years ended December 31, 2022 and 2021, as well as the results of
(1) PMC Fort Mill , which we opened in September 2022 , (2) the five Miami -area
hospitals and certain related operations (the "Miami Hospitals") we sold in
August 2021 , (3) nearly 50 urgent care centers held in our Hospital Operations
segment until their sale in April 2021 and (4) 24 imaging centers following
their transfer from our Ambulatory Care segment to our Hospital Operations
segment in April 2021 . Continuing operations information for our Ambulatory Care
segment includes the results of 40 urgent care centers held in this segment
until their sale and the results of 24 imaging centers until their transfer to
our Hospital Operations segment, both of which occurred in April 2021 .
Continuing operations information excludes the results of our hospitals and
other businesses classified as discontinued operations for accounting purposes.
We believe this information is useful to investors because it includes the
operations of all facilities in continuing operations for the entire time that
we owned and operated them during the relevant period. In addition, continuing
operations information reflects the impact of the addition or disposition of
individual hospitals and other operations on our volumes, revenues and expenses.
We present certain metrics as a percentage of
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net operating revenues because a significant portion of our operating expenses are variable. In addition, we present certain metrics on a peradjustedadmission and peradjustedpatientday basis to show trends other than volume. In certain cases, information presented in MD&A for our Hospital Operations segment is described as presented on a samehospital basis, which includes the results of our same 60 hospitals operated throughout the years endedDecember 31, 2022 and 2021, and excludes the results ofPMC Fort Mill , theMiami Hospitals, all of the urgent care centers we sold inApril 2021 , the 24 imaging centers transferred from our Ambulatory Care segment to our Hospital Operations segment inApril 2021 , and our discontinued operations. We present samehospital data because we believe it provides investors with useful information regarding the performance of our current portfolio of hospitals and other operations that are comparable for the periods presented. Furthermore, samehospital 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.
MANAGEMENT OVERVIEW
RECENT DEVELOPMENTS
Agreement toDivest San Ramon Regional Medical Center-In January 2023 , we entered into a definitive agreement to sell our 51% ownership interest inSan Ramon Regional Medical Center and related operations toJohn Muir Health . We expect the transaction to be completed in 2023, subject to regulatory approvals and customary closing conditions.
OPERATING ENVIRONMENT AND TRENDS
Ongoing Impact of the COVID-19 Pandemic-In 2022, the COVID19 pandemic continued to adversely impact our operations, as well as our patients, communities and employees, to varying degrees. As described in greater detail throughout MD&A, ongoing waves of COVID19 infections, changes in COVIDrelated patient acuity and broad economic factors resulting from the pandemic affected our patient volumes, service mix, revenue mix, operating expenses and net operating revenues. Various federal legislative actions, including additional funding for thePublic Health and Social Services Emergency Fund ("PRF"), mitigated some of the adverse financial impacts of the COVID19 pandemic on our business. In the years endedDecember 31, 2022 and 2021, we received cash payments from the PRF and state and local grant programs totaling$196 million and$215 million , respectively, including$37 million received during 2021 by our unconsolidated affiliates for whom we provide cash management services. We recognized$194 million and$191 million from these funds as grant income during the years endedDecember 31, 2022 and 2021, respectively. In addition, we recognized$14 million in equity in earnings of unconsolidated affiliates in the accompanying Consolidated Statement of Operations during the year endedDecember 31, 2021 from grant funds. Furthermore, throughout the pandemic, we have taken, and we continue to take, various actions to increase our liquidity and mitigate the impact of reductions in our patient volumes and changes in our service mix and revenue mix. As described in further detail in the Liquidity and Capital Resources section of MD&A, we issued new senior unsecured notes and senior secured first lien notes, redeemed existing senior unsecured notes and senior secured first lien notes, including those with the highest interest rate of all of our longterm debt, and amended our senior secured revolving credit facility (as amended to date, the "Credit Agreement"). We also decreased our employee headcount throughout the organization at the outset of the COVID19 pandemic, and we deferred certain operating expenses that were not expected to impact our response to the pandemic. In addition, we reduced certain variable costs across the enterprise. Together with government relief packages, we believe these actions supported our ability to provide essential patient services during the initial uncertainty caused by the COVID19 pandemic and continue to do so. The ultimate extent and scope of the pandemic and its future impact on our business remain unknown. For information about risks and uncertainties related to COVID19 that could affect our results of operations, financial condition and cash flows, see the Risk Factors section in Part I of this report. 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 a limited availability of experienced medical support personnel nationwide, which drives up the wages and benefits required to recruit and retain employees. In particular, like others in the healthcare industry, we continue to experience a shortage of advanced practice providers and criticalcare nurses in certain disciplines and geographic areas. The COVID19 pandemic exacerbated this shortage as more employees chose to retire early, leave the workforce or take travel assignments. In addition, theCenters for Disease Control and Prevention has released data indicating that the 202223 influenza season has thus far been more acute than in prior years compounded by concurrent 34
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COVID19 surges and increases in other respiratory viral infections. In some
areas, the increased demand for care of patients with COVID19, influenza and
other respiratory viruses in our hospitals, as well as the direct impact of
these illnesses on physicians, employees and their families, have put a strain
on our resources and staff. Over the past several years, we have had to rely on
higher-cost temporary and contract labor, which we compete with other healthcare
providers to secure, and pay premiums above standard compensation for essential
workers. In general, compensation rates typically rise when overall case rates
and hospitalizations increase, whether due to COVID, flu or other illnesses.
We also depend on the available labor pool of semiskilled and unskilled workers
in each of 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.
Supply-Chain Disruptions-Throughout the pandemic, we have experienced
significant price increases in medical supplies, particularly for personal
protective equipment ("PPE"), and we have encountered supply-chain disruptions,
including shortages and delays. In addition, our Ambulatory Care segment has
been impacted by shipment delays in construction materials and capital equipment
with respect to its de novo facility development efforts, which are a key part
of our portfolio expansion strategy.
Inflation and Other General Economic Conditions-Our business has been impacted
by the rise in inflation and its effects on elective procedures, wages and
costs. Other economic factors, including unemployment rates and consumer
spending, affect our service mix, revenue mix and patient volumes. Business
closings and layoffs in the areas we operate may lead to increases in the
uninsured and underinsured populations and adversely affect demand for our
services, as well as the ability of patients to pay for services. Any increase
in the amount of or deterioration in the collectability of patient accounts
receivable could adversely affect our cash flows and results of operations.
Cybersecurity Incident-In April 2022 , we experienced a cybersecurity incident
that temporarily disrupted a subset of our acute care operations and involved
the exfiltration of certain confidential company and patient information (the
"Cybersecurity Incident"). During this time, our hospitals remained operational
and continued to deliver patient care safely and effectively, utilizing
wellestablished backup processes. We immediately suspended user access to
impacted information technology applications, executed extensive cybersecurity
protection protocols, and took steps to restrict further unauthorized activity.
Following the restoration of impacted information technology operations, we took
additional measures to protect patient, employee and other data, as appropriate,
in response to the Cybersecurity Incident.
Disruption from the Cybersecurity Incident placed pressure on our Hospital
Operations segment's volumes and earnings, particularly in April and May 2022 .
We estimate that the Cybersecurity Incident had an adverse pretax impact of
approximately $100 million . This estimate includes the costs to remediate the
issues, lost revenues from the associated business interruption and other
related expenses. We have insurance coverage and have filed a claim within our
policy limits for these losses. We are unable to predict or control the timing
or amount of insurance recoveries.
Industry Trends-We believe that several key trends are continuing to shape the
demand for healthcare services: (1) consumers, employers and insurers are
actively seeking lowercost solutions and better value as they focus more on
healthcare spending; (2) patient volumes are shifting from inpatient to
outpatient settings due to technological advancements and demand for care that
is more convenient, affordable and accessible; (3) the growing aging population
requires greater chronic disease management and higheracuity treatment; and
(4) consolidation continues across the entire healthcare sector. Furthermore,
the healthcare industry, in general, and the acute care hospital business, in
particular, continue to be subject to significant regulatory uncertainty.
Changes in federal or state healthcare laws, regulations, funding policies or
reimbursement practices, especially those involving reductions to government
payment rates, could have a significant impact on our future revenues and
operations.
STRATEGIES
Expanding Our Ambulatory Care Segment-We continue to focus on opportunities to
expand our Ambulatory Care segment through acquisitions, organic growth,
construction of new outpatient centers and strategic partnerships. We believe
USPI's ASCs and surgical hospitals offer many advantages to patients and
physicians, including greater affordability, predictability, flexibility and
convenience. Moreover, due in part to advancements in surgical techniques,
medical technology 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.
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During the years endedDecember 31, 2022 and 2021, we invested$264 million and$1.315 billion , respectively, to acquire ownership interests in new ASCs, increase our ownership interests in existing facilities and invest in de novo facilities. InDecember 2021 , USPI entered into a joint venture and development agreement withSurgCenter Development ("SCD") under which USPI has the exclusive option to partner with affiliates of SCD on the future development of a minimum target of 50 de novo ASCs throughDecember 2026 . InJuly 2022 , USPI formed a joint venture withUnited Urology Group ("UUG") and acquired ownership interests in 22 ASCs (three of which were then in development). Including these UUG facilities, during the year endedDecember 31, 2022 , we added 37 fully operational ASCs to our portfolio through acquisitions of majority and minority ownership interests and opened 15 de novo facilities, including two ASCs acquired from UUG while in the development stage. Also during 2022, we increased our ownership interests in 23 ASCs, which allowed us to consolidate their financial results. Driving Growth in Our Hospital Systems-We remain committed to better positioning our hospital systems and competing more effectively in the everevolving healthcare environment by focusing on driving performance through operational effectiveness, increasing capital efficiency and margins, investing in our physician enterprise, particularly our specialist network, enhancing patient and physician satisfaction, growing our higherdemand and higheracuity clinical service lines (including outpatient lines), expanding patient and physician access, and optimizing our portfolio of assets. Over the past several years, we have undertaken enterprisewide cost-efficiency measures, and we continue to transition certain support operations to ourGlobal Business Center ("GBC") inthe Philippines . We incurred restructuring charges in conjunction with these initiatives in the year endedDecember 31, 2022 , and we could incur additional restructuring charges in the future. We regularly review the marginal costs of providing certain services, and we use analytics to manage our operations and make staffing decisions. We also exit service lines, businesses and markets that we believe are no longer a core part of our longterm growth and synergy strategies. InApril 2021 , we divested the majority of our urgent care centers operated under the MedPost and CareSpot brands by our Hospital Operations and Ambulatory Care segments. In addition, we completed the sale of the Miami Hospitals inAugust 2021 . We intend to further refine our portfolio of hospitals and other healthcare facilities when we believe such refinements will help us improve profitability, allocate capital more effectively in areas where we have a stronger presence, deploy proceeds on higherreturn investments across our business, enhance cash flow generation, reduce our debt and lower our ratio of debttoAdjusted EBITDA. We also seek advantageous opportunities to grow our portfolio of hospitals and other healthcare facilities. InSeptember 2022 , we openedPMC Fort Mill , a new acute care hospital located inSouth Carolina . This 100bed facility includes an emergency department, multispecialty operating rooms, an intensive care unit, and labor and delivery rooms. Improving the Customer Care Experience-As consumers continue to become more engaged in managing their health, we recognize that understanding what matters most to them and earning their loyalty is imperative to our success. As such, we have enhanced our focus on treating our patients as traditional customers by: (1) establishing networks of physicians and facilities that provide convenient access to services across the care continuum; (2) expanding service lines aligned with growing community demand, including a focus on aging and chronic disease patients; (3) offering greater affordability and predictability, including simplified registration and discharge procedures, particularly in our outpatient centers; (4) improving our culture of service; and (5) creating health and benefit programs, patient education and health literacy materials that are customized to the needs of the communities we serve. Through these efforts, we intend to improve the customer care experience in every part of our operations. Driving Conifer's Growth-Conifer serves approximately 660 Tenet and nonTenet hospitals and other clients nationwide. In addition to providing revenue cycle management services to health systems and physicians, Conifer provides support to both providers and selfinsured employers seeking assistance with clinical integration, financial risk management and population health management. We believe that our success in growing Conifer and increasing its profitability depends in part on our success in executing the following strategies: (1) attracting hospitals and other healthcare providers that currently handle their revenue cycle management processes internally as new clients; (2) generating new client relationships through opportunities from USPI and Tenet's acute care hospital acquisition and divestiture activities; (3) expanding revenue cycle management and valuebased care service offerings through organic development and small acquisitions; (4) leveraging data from tens of millions of patient interactions for continued enhancement of the valuebased care environment to drive competitive differentiation; and (5) maximizing opportunities through automation and offshoring to improve the effectiveness and efficiency of Conifer's services. Improving Profitability-We continue to focus on growing patient volumes and effective cost management as a means to improve profitability. Our inpatient admissions have been constrained in recent years by the pandemic, increased competition, utilization pressure by managed care organizations, new delivery models that are designed to lower the utilization of acute care hospital services, the effects of higher patient copays, coinsurance amounts and deductibles, changing consumer 36
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behavior, and adverse economic conditions and demographic trends in certain areas where we operate. Our business has also been impacted by the rise in inflation and its effects on elective procedures, wages and costs. However, we also believe that emphasis on higherdemand 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 enterprisewide centralized support functions, outsourcing additional functions unrelated to direct patient care, and reducing clinical and vendor contract variation. Reducing Our Leverage Over Time-All of our longterm debt has a fixed rate of interest, except for outstanding borrowings, if any, under our Credit Agreement, and the maturity dates of our notes are staggered from 2024 through 2031. We believe that our capital structure helps to minimize the nearterm impact of increased interest rates, and the staggered maturities of our debt allow us to retire or refinance our debt over time. It remains our longterm objective to reduce our debt and lower our ratio of debttoAdjusted EBITDA, primarily through more efficient capital allocation and Adjusted EBITDA growth, which should lower our refinancing risk. During the year endedDecember 31, 2022 , we redeemed or repurchased$2.597 billion aggregate principal amount of our senior secured first lien and senior unsecured notes in advance of their maturity dates. We financed these transactions using a substantial portion of the proceeds from our issuance of$2.000 billion aggregate principal amount of 6.125% senior secured first lien notes due 2030 (the "2030 Senior Secured First Lien Notes") and cash on hand. Repurchasing Stock-InOctober 2022 , our board of directors authorized the repurchase of up to$1 billion of our common stock through a share repurchase program. Repurchases will be made in accordance with applicable securities laws and may be made at management's discretion from time to time in open-market or privately negotiated transactions, subject to market conditions and other factors. The share repurchase program does not obligate us to acquire any particular amount of common stock, and it may be suspended for periods or discontinued at any time before its scheduled expiration date ofDecember 31, 2024 . We paid approximately$250 million to repurchase a total of 5,888,841 shares during the period from the commencement of the program throughDecember 31, 2022 , or an average of$42.45 per share. Our ability to execute on our strategies and respond to the aforementioned trends in the current operating environment is subject to numerous risks and uncertainties, all of which may cause actual results to be materially different from expectations. For information about risks and uncertainties that could affect our results of operations, see the ForwardLooking Statements and Risk Factors sections in Part I of this report. 37
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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
2022 2021 (Decrease)
Hospital Operations – hospitals and related outpatient
facilities:
Number of hospitals (at end of period)
61 60 1 (1) Total admissions 135,151 133,809 1.0 % Adjusted admissions(2) 249,489 241,008 3.5 % Paying admissions (excludes charity and uninsured) 128,505 127,092 1.1 % Charity and uninsured admissions 6,646 6,717 (1.1) % Admissions through emergency department 102,163 99,772 2.4 % Emergency department visits, outpatient 583,457 531,737 9.7 % Total emergency department visits 685,620 631,509 8.6 % Total surgeries 86,613 88,504 (2.1) % Patient days - total 704,073 713,947 (1.4) % Adjusted patient days(2) 1,250,797 1,253,882 (0.2) % Average length of stay (days) 5.21 5.34 (2.4) % Average licensed beds 15,472 15,379 0.6 % Utilization of licensed beds(3) 49.5 % 50.5 % (1.0) % (1) Total visits 1,413,064 1,451,683 (2.7) % Paying visits (excludes charity and uninsured) 1,327,738 1,364,789 (2.7) % Charity and uninsured visits 85,326 86,894 (1.8) % Ambulatory Care: Total consolidated facilities (at end of period) 308 257 51 (1) Total consolidated cases 363,551 308,402 17.9 %
(1) The change is the difference between the 2022 and 2021 amounts shown.
(2) Adjusted admissions/patient days represents actual admissions/patient days adjusted to
include outpatient services provided by facilities in our Hospital Operations segment by
multiplying actual admissions/patient days by the sum of gross inpatient revenues and
outpatient revenues and dividing the results by gross inpatient revenues.
(3) Utilization of licensed beds represents patient days divided by number of days in the
period divided by average licensed beds.
Total admissions increased by 1,342, or 1.0% in the three months endedDecember 31, 2022 compared to the three months endedDecember 31, 2021 , primarily due to elevated volumes of influenza cases and the opening of our newPMC Fort Mill hospital inSeptember 2022 . Also during the 2022 period, total emergency department visits increased by 8.6%, due in part to the same factors. Total surgeries decreased by 1,891, or 2.1%, during the threemonth period in 2022 compared to the same period in 2021. The increase in our Ambulatory Care segment's total consolidated cases of 17.9% in the three months endedDecember 31, 2022 , as compared to the same period in 2021, is primarily attributable to incremental case volume from our recently acquired ASCs. The following table presents net operating revenues by segment on a continuing operations basis: Three Months Ended December 31, Increase 2022 2021 (Decrease) Net operating revenues: Hospital Operations prior to inter-segment eliminations$ 3,840 $ 3,910 (1.8) % Ambulatory Care 933 742 25.7 % Conifer 326 324 0.6 % Inter-segment eliminations (109) (120) (9.2) % Total$ 4,990 $ 4,856 2.8 % Consolidated net operating revenues increased by$134 million , or 2.8%, in the three months endedDecember 31, 2022 compared to the same period in 2021. Our Hospital Operations segment's net operating revenues prior to intersegment eliminations for the threemonth period in 2022 decreased$70 million , or 1.8%, compared to the same period in 2021. This decrease was primarily due to lower COVID-related patient volumes and acuity, lower surgical volumes and a shorter average length of patient stay, partially offset by higher adjusted admissions and improved pricing yield. Net operating 38
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revenues in our Ambulatory Care segment increased$191 million , or 25.7%, in the three months endedDecember 31, 2022 compared to the three months endedDecember 31, 2021 . This increase was mainly driven by our recently acquired ASCs, improved case volumes, incremental revenue from new service lines and negotiated commercial rate increases. Conifer's revenues, net of intersegment eliminations, increased$13 million , or 6.4%, during the three months endedDecember 31, 2022 compared to the same period in 2021, primarily due to contractual rate increases and new business expansion. During the three months endedDecember 31, 2022 and 2021, we recognized grant income of$40 million and$138 million , respectively, which amounts are not included in net operating revenues. Our accounts receivable days outstanding ("AR Days") from continuing operations were 58.3 days and 57.0 days atDecember 31, 2022 and 2021, respectively. Our AR Days target is less than 55 days. AR Days are calculated as our accounts receivable from continuing operations on the last date in the quarter divided by our net operating revenues from continuing operations for the quarter ended on that date divided by the number of days in the quarter. This calculation includes our Hospital Operations segment's contract assets. The AR Days calculation excludes (1) urgent care centers operated under the MedPost and CareSpot brands, which we divested inApril 2021 , (2) the Miami Hospitals, which we sold inAugust 2021 , and (3) ourCalifornia provider fee revenues.
The following table provides information about selected operating expenses by
segment on a continuing operations basis:
Three Months Ended December 31, Increase
2022 2021 (Decrease)
Hospital Operations:
Salaries, wages and benefits $ 1,914 $ 1,841 4.0 %
Supplies 612 649 (5.7) %
Other operating expenses 847 875 (3.2) %
Total $ 3,373 $ 3,365 0.2 %
Ambulatory Care:
Salaries, wages and benefits $ 219 $ 178 23.0 %
Supplies 247 188 31.4 %
Other operating expenses 123 94 30.9 %
Total $ 589 $ 460 28.0 %
Conifer:
Salaries, wages and benefits $ 173 $ 169 2.4 %
Supplies 1 1 - %
Other operating expenses 62 60 3.3 %
Total $ 236 $ 230 2.6 %
Total:
Salaries, wages and benefits $ 2,306 $ 2,188 5.4 %
Supplies 860 838 2.6 %
Other operating expenses 1,032 1,029 0.3 %
Total $ 4,198 $ 4,055 3.5 %
Rent/lease expense(1):
Hospital Operations $ 69 $ 71 (2.8) %
Ambulatory Care 31 25 24.0 %
Conifer 2 2 - %
Total $ 102 $ 98 4.1 %
(1) Included in other operating expenses.
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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
2022 2021 (Decrease)
Hospital Operations:
Salaries, wages and benefits per adjusted admission(1) $ 7,670 $ 7,634 0.5 %
Supplies per adjusted admission(1) 2,447 2,692 (9.1) %
Other operating expenses per adjusted admission(1) 3,407 3,632 (6.2) %
Total per adjusted admission $ 13,524 $ 13,958 (3.1) %
(1) Adjusted admissions represents actual admissions 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 results by gross inpatient revenues.
Salaries, wages and benefits expense for our Hospital Operations segment increased$73 million , or 4.0%, in the three months endedDecember 31, 2022 compared to the same period in 2021. This increase was primarily attributable to higher contract labor and premium pay costs due to the pandemic, and annual merit increases for certain of our employees. These factors were partially offset by lower employee benefit costs and our continued focus on costefficiency measures. On a peradjustedadmission basis, Hospital Operations salaries, wages and benefits expense increased 0.5% in the three months endedDecember 31, 2022 compared to the three months endedDecember 31, 2021 . Supplies expense for our Hospital Operations segment decreased$37 million , or 5.7%, during the three months endedDecember 31, 2022 compared to the three months endedDecember 31, 2021 . This decrease was primarily attributable to lower COVID-related patient volumes and acuity, decreased surgical volumes and our costefficiency measures. These factors were partially offset by increased costs for certain supplies due to the COVID-19 pandemic, the impact of general market conditions and inflation. On a peradjustedadmission basis, supplies expense decreased 9.1% in the three months endedDecember 31, 2022 compared to the three months endedDecember 31, 2021 due to the aforementioned factors. Other operating expenses for our Hospital Operations segment decreased$28 million , or 3.2%, in the three months endedDecember 31, 2022 compared to the same period in 2021. This decrease was primarily due to decreased costs associated with funding indigent care services by certain of our hospitals (which costs were substantially offset by reduced net patient revenues) and lower malpractice expense. On a peradjustedadmission basis, other operating expenses in the three months endedDecember 31, 2022 decreased 6.2% compared to the three months endedDecember 31, 2021 , primarily due to the factors described above, as well as increased adjusted admissions that reduce this cost metric due to various fixed costs in other operating expenses.
LIQUIDITY AND CAPITAL RESOURCES OVERVIEW
Cash and cash equivalents were
Significant cash flow items in the three months ended
included:
•Net cash provided by operating activities before interest, taxes, discontinued operations, impairment and restructuring charges, and acquisitionrelated costs, and litigation costs and settlements of$738 million , including$41 million received from federal and state grants, and a$128 million payment of payroll taxes deferred during 2020;
•Capital expenditures of
•Interest payments of
•$128 million of distributions paid to noncontrolling interests;
•Payments totaling
costs, and litigation costs and settlements;
•Purchases of noncontrolling interests of
•Purchases of marketable securities and equity investments of
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•Debt payments of$65 million , including an aggregate total of$24 million cash to retire portions of our 4.625% senior secured first lien notes due inJuly 2024 (our "July 2024 Senior Secured First Lien Notes") andSeptember 2024 (our "September 2024 Senior Secured First Lien Notes"); and
•$250 million of payments to purchase nearly six million shares of our common
stock under the share repurchase program.
Net cash provided by operating activities was$1.083 billion in the year endedDecember 31, 2022 compared to$1.568 billion in the year endedDecember 31, 2021 . Key factors contributing to the change between 2022 and 2021 include the following:
•$880 million of Medicare advances recouped or repaid in the year ended
•$196 million of cash received from pandemic-related grant programs in 2022
compared to
•Lower interest payments of
•Higher income tax payments of
•An increase of
acquisitionrelated costs, and litigation costs and settlements in 2022; 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, indemnitybased health insurance companies and uninsured patients.
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:
Years Ended December 31,
2022 2021 2020
Medicare 17.1 % 17.7 % 19.8 %
Medicaid 6.8 % 8.5 % 7.9 %
Managed care(1) 70.3 % 67.7 % 66.3 %
Uninsured 1.0 % 1.3 % 1.2 %
Indemnity and other 4.8 % 4.8 % 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, is presented below:
Years Ended December 31,
2022 2021 2020
Medicare 20.7 % 20.8 % 22.8 %
Medicaid 5.4 % 5.8 % 6.2 %
Managed care(1) 65.8 % 64.4 % 61.8 %
Charity and uninsured 4.9 % 5.8 % 6.3 %
Indemnity and other 3.2 % 3.2 % 2.9 %
(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 healthcare regulations; the business
environment, economic conditions (including inflationary pressures) and
demographics of local communities in which we operate; the number of uninsured
and underinsured individuals in local communities treated at our hospitals;
seasonal cycles of illness; climate and weather conditions; physician
recruitment, satisfaction, retention and attrition; advances in technology and
treatments that reduce length of stay; local healthcare
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competitors; utilization pressure by managed care organizations, as well as managed care contract negotiations or terminations; hospital performance data on quality measures and patient satisfaction, as well as standard charges for services; any unfavorable publicity about us, or our joint venture partners, that impacts our relationships with physicians and patients; and changing consumer behavior, including with respect to the timing of elective procedures.
GOVERNMENT PROGRAMS
TheCenters for Medicare & Medicaid Services ("CMS") is an agency of theU.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 inthe 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 coadministered by the states and is jointly funded by the federal government and state governments. Medicaid is the nation's main public health insurance program for people with low incomes and is the largest source of health coverage inthe United States . TheChildren's Health Insurance Program ("CHIP"), which is also coadministered 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.
Healthcare Reform
The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (the "Affordable Care Act"), extended health coverage to millions of uninsured legalU.S. residents through a combination of private sector health insurance reforms and public program expansion. The expansion of Medicaid in 39 states (including four of the nine states in which we operate acute care hospitals) and theDistrict of Columbia is currently financed through:
•negative “productivity adjustments” to the annual market basket updates, which
began in 2011 and do not expire under current law; and
•reductions to Medicare and Medicaid disproportionate share hospital ("DSH")
payments, which began for Medicare payments in FFY 2014 and, under current law,
are scheduled to commence for Medicaid payments in FFY 2024.
The Affordable Care Act also includes measures designed to promote quality and
cost efficiency in healthcare delivery and provisions intended to strengthen
fraud and abuse enforcement.
The initial expansion of health insurance coverage under the Affordable Care Act
resulted in an increase in the number of patients using our facilities with
either private or public program coverage and a decrease in uninsured and
charity care admissions. Although a substantial portion of our patient volumes
and, as a result, our revenues has historically been derived from government
healthcare programs, reductions to our reimbursement under the Medicare and
Medicaid programs as a result of the Affordable Care Act have been partially
offset by increased revenues from providing care to previously uninsured
individuals.
There is ongoing uncertainty with respect to the ultimate net effect of the
Affordable Care Act due to the potential for continued changes in the law's
implementation and how government agencies and courts interpret it. Moreover, we
cannot predict what future action, if any, Congress might take to amend the
Affordable Care Act. If future modifications or interpretations result in
significantly fewer individuals having private or public health coverage, we
likely will experience decreased patient volumes, reduced revenues and an
increase in uncompensated care, which would adversely affect our results of
operations and cash flows. There is also uncertainty regarding the potential
impact of other healthcare-related reform efforts at the federal and state
levels. Some reforms may have a positive effect on our business, while others
may increase our operating costs, adversely affect the reimbursement we receive
or require us to modify certain aspects of our operations. Legislative and
executive branch efforts related to healthcare reform could result in increased
prices for consumers purchasing health insurance coverage, impact our
competitive position, and affect our relationships with insurers and patients.
Medicare
Medicare offers its beneficiaries different ways to obtain their medical
benefits. One option, the Original Medicare Plan (which includes "Part A" and
"Part B"), is a feeforservice ("FFS") payment system. The other option, called
Medicare Advantage (sometimes called "Part C" or "MA Plans"), includes health
maintenance organizations ("HMOs"), preferred provider organizations ("PPOs"),
private FFS Medicare special needs plans and Medicare medical savings account
plans. Our total net patient service revenues from continuing operations of the
hospitals and related outpatient facilities in our Hospital
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Operations segment for services provided to patients enrolled in the Original Medicare Plan were$2.369 billion ,$2.615 billion and$2.695 billion for the years endedDecember 31, 2022 , 2021 and 2020, respectively. A general description of the types of payments we receive for services provided to patients enrolled in the Original Medicare Plan is provided below. Recent regulatory and legislative updates to the terms of these payment systems and their estimated effect on our revenues can be found under "Regulatory and Legislative Changes" below.
Acute Care Hospital Inpatient Prospective Payment System
Medicare Severity-Adjusted Diagnosis-Related Group Payments-Sections 1886(d) and
1886(g) of the Social Security Act set forth a system of payments for the
operating and capital costs of inpatient acute care hospital admissions based on
a prospective payment system ("PPS"). Under the inpatient prospective payment
systems ("IPPS"), Medicare payments for hospital inpatient operating services
are made at predetermined rates for each hospital discharge. Discharges are
classified according to a system of Medicare severityadjusted diagnosisrelated
groups ("MSDRGs"), which categorize patients with similar clinical
characteristics that are expected to require similar amounts of hospital
resources. CMS assigns to each MSDRG a relative weight that represents the
average resources required to treat cases in that particular MSDRG, relative to
the average resources used to treat cases in all MSDRGs.
The base payment amount for the operating component of the MSDRG payment is
comprised of an average standardized amount that is divided into a laborrelated
share and a nonlabor-related share. Both the laborrelated 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 MSDRG, and the base payments are multiplied by the relative weight
of the MSDRG assigned. The MSDRG 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 MSDRG; 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 MSDRG. To
qualify for a cost outlier payment, a hospital's billed charges, adjusted to
cost, must exceed the payment rate for the MSDRG 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 costtocharge
ratio that is typically based on the hospital's most recently filed cost report.
Generally, if the computed cost exceeds the sum of the MSDRG 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
MSDRG payments ("Outlier Percentage"). The Outlier Percentage is determined by
dividing total outlier payments by the sum of MSDRG 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 lowincome patients.
Prior to October 1, 2013 , DSH payments were based on each hospital's low income
utilization for each payment year (the "PreACA 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 PreACA 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
"UCDSH Amount"). The UCDSH 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 PreACA DSH Formula, adjusted for
changes in the percentage of individuals that are uninsured. Generally, the
factors used to calculate and distribute UCDSH 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, 2022 , 51 of
our acute care 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 days used in the DSH calculation as set forth in the Changes
to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2005
Rates. We are unable to predict what action the Secretary of HHS might take with
respect to the DSH calculation for prior periods in this regard or the outcome
of the litigation; however, a favorable outcome of our DSH appeals could have a
material impact on our future revenues and cash flows.
Direct Graduate and Indirect Medical Education Payments-The Medicare program
provides additional reimbursement to approved teaching hospitals for the
increased expenses incurred by such institutions. This additional reimbursement,
which is subject to certain limits, including intern and resident full-time
equivalent ("FTE") limits, is made in the form of Direct Graduate Medical
Education ("DGME") and Indirect Medical Education ("IME") payments. As of
December 31, 2022 , 30 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:
•ValueBased Purchasing ("VBP") Program - Under the VBP program, IPPS operating
payments to hospitals are reduced by 2% to fund valuebased 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 MSDRG payments; and
•HospitalAcquired Conditions ("HAC") Reduction Program - Under this program,
overall inpatient payments are reduced by 1% for hospitals in the worst
performing quartile of riskadjusted quality measures for reasonable preventable
hospitalacquired conditions.
These adjustments, which CMS updates annually, are generally based on a
hospital’s performance from prior periods.
Hospital Outpatient Prospective Payment System
Under the outpatient prospective payment system ("OPPS"), hospital outpatient
services, except for certain services that are reimbursed on a separate fee
schedule, are classified into groups called ambulatory payment classifications
("APCs"). Services in each APC are similar clinically and in terms of the
resources they require, and a payment rate is established for each APC.
Depending on the services provided, hospitals may be paid for more than one APC
for an encounter. CMS annually updates the APCs and the rates paid for each APC.
Inpatient Psychiatric Facility Prospective Payment System
The inpatient psychiatric facility (“IPF”) prospective payment system
(“IPF-PPS”) applies to psychiatric hospitals and psychiatric units located
within acute care hospitals that have been designated as exempt from the
hospital inpatient prospective payment system. The IPF-PPS is based on
prospectively determined perdiem rates and includes an outlier policy that
authorizes additional payments for extraordinarily costly cases. As of
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 (“IRFPPS”). Payments under the IRFPPS are made on a per-discharge
basis. The IRFPPS uses federal prospective payment rates across distinct
casemix groups established by a patient classification system. As of
hospitals operated IRF units.
Physician and Other Health Professional Services Payment System
Medicare uses a fee schedule to pay for physician and other health professional
services based on a list of services and their payment rates referred to as the
Medicare Physician Fee Schedule ("MPFS"). In determining payment rates for each
service, CMS considers the amount of clinician work required to provide a
service, expenses related to maintaining a practice and professional liability
insurance costs. These three factors are adjusted for variation in the input
prices in different markets, and the sum is multiplied by the fee schedule's
conversion factor (average payment amount) to produce a total payment amount.
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Cost Reports
The final determination of certain Medicare payments to our hospitals, such as DSH, DGME, IME and bad debt expense, are retrospectively determined based on our hospitals' cost reports. The final determination of these payments often takes many years to resolve because of audits by the program representatives, providers' rights of appeal, and the application of numerous technical reimbursement provisions. For filed cost reports, we adjust the accrual for estimated cost report settlements based on those cost reports and subsequent activity, and we record a valuation allowance against those cost reports based on historical settlement trends. The accrual for estimated cost report settlements for periods for which a cost report is yet to be filed is recorded based on estimates of what we expect to report on the filed cost reports and a corresponding valuation allowance is recorded as previously described. Cost reports must generally be filed within five months after the end of the annual cost report reporting period. After the cost report is filed, the accrual and corresponding valuation allowance may need to be adjusted.
Medicare Claims Reviews
HHS estimates that the overall 2022 Medicare FFS improper payment rate for the program is approximately 7.46%. The 2022 error rate for Hospital IPPS payments is approximately 3%. 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 ofMedicare 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 postpayment 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 forEconomic 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 statetostate and from yeartoyear. Estimated revenues under various state Medicaid programs, including statefunded Medicaid managed care programs, constituted approximately 19.4%, 18.7% and 17.8% of the total net patient service revenues of our acute care hospitals and related outpatient facilities for the years endedDecember 31, 2022 , 2021 and 2020, respectively. We also receive DSH and other supplemental revenues under various state Medicaid programs. For the years endedDecember 31, 2022 , 2021 and 2020, our total Medicaid revenues attributable to DSH and other supplemental revenues were approximately$644 million ,$915 million and$754 million , respectively. The decrease between 2022 and 2021 was primarily attributable to changes in Medicaid program payments inCalifornia ,Florida ,Michigan andTexas . ForTexas , we recognized$123 million of assessments to support the Texas Comprehensive Hospital Increase Reimbursement Program ("CHIRP") following its approval in 2022. During the year endedDecember 31, 2022 , we also recognized$245 million of revenue related to CHIRP that is included in 45
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Managed Medicaid revenue rather than the DSH and other supplemental revenues
classification due to the structure of the program.
Even prior to the COVID-19 pandemic, several states in which we operate faced budgetary challenges that resulted in reduced Medicaid funding levels to hospitals and other providers. Because most states must operate with balanced budgets, and the Medicaid program is generally a significant portion of a state's budget, states can be expected to adopt or consider adopting future legislation designed to reduce or not increase their Medicaid expenditures. In addition, some states delay issuing Medicaid payments to providers to manage state expenditures. As an alternative means of funding provider payments, many of the states in which we operate have adopted supplemental payment programs authorized under the Social Security Act. Continuing pressure on state budgets and other factors, including legislative and regulatory changes, could result in future reductions to Medicaid payments, payment delays or changes to Medicaid supplemental payment programs. Federal government denials or delayed approvals of waiver applications or extension requests by the states in which we operate could materially impact our Medicaid funding levels. Total Medicaid and Managed Medicaid net patient service revenues from continuing operations recognized by the hospitals and related outpatient facilities in our Hospital Operations segment for the years endedDecember 31, 2022 , 2021 and 2020 were$2.692 billion ,$2.760 billion and$2.427 billion , respectively. During the year endedDecember 31, 2022 , Medicaid and Managed Medicaid revenues comprised 35% and 65%, respectively, of our Medicaidrelated net patient service revenues from continuing operations recognized by the hospitals and related outpatient facilities in our Hospital Operations segment. All Medicaid and Managed Medicaid patient service revenues are presented net of provider taxes or assessments paid by our hospitals, which are reported as an offset reduction to FFS Medicaid revenue. 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, provider fee programs or Medicaid Section 1115 waivers, we are unable to assess the effect that any such legislation or regulatory action might have on our business; however, the impact on our future financial position, results of operations or cash flows could be material.
Regulatory and Legislative Changes
The Medicare and Medicaid programs are subject to: statutory and regulatory changes, administrative and judicial rulings, interpretations and determinations concerning patient eligibility requirements, funding levels and the method of calculating reimbursements, among other things; requirements for utilization review; and federal and state funding restrictions. Any of these factors could materially increase or decrease payments from these government programs in the future, as well as affect the cost of providing services to our patients and the timing of payments to our facilities. We are unable to predict the effect of future government healthcare funding policy changes on our operations. If the rates paid by governmental payers are reduced, if the scope of services covered by governmental payers is limited, or if we or one or more of our hospitals are excluded from participation in the Medicare or Medicaid program or any other government healthcare program, there could be a material adverse effect on our business, financial condition, results of operations or cash flows. Recent regulatory and legislative updates to the Medicare and Medicaid payment systems, as well as other government programs impacting our business, are provided below. Payment and Policy Changes to the Medicare Inpatient Prospective Payment Systems-Section 1886(d) of the Social Security Act requires CMS to update Medicare inpatient FFS payment rates for hospitals reimbursed under the IPPS annually. The updates generally become effectiveOctober 1 , the beginning of the FFY. InAugust 2022 , CMS issued final changes to the Hospital Inpatient Prospective Payment Systems for Acute Care Hospitals and Fiscal Year 2023 Rates ("Final IPPS Rule"). The Final IPPS Rule includes the following payment and policy changes, among others: •A market basket increase of 4.1% for MSDRG operating payments for hospitals reporting specified quality measure data and that are meaningful users of EHR technology; CMS also finalized a 0.3% multifactor productivity reduction required by the Affordable Care Act and a 0.5% increase required by the Medicare Access and CHIP Reauthorization Act of 2015 that together result in a net operating payment update of 4.3% before budget neutrality adjustments; •Updates to the hospital VBP and HAC programs for FFY 2023 due to the impact of the COVID-19 public health emergency, including: the implementation of a special scoring methodology for the VBP program that results in each hospital receiving a valuebased incentive payment amount equal to the 2% reduction to its operating standardized amount; and suppression of all measures in the HAC reduction program resulting in no hospitals being penalized for FFY 2023;
•An increase in the cost outlier threshold from
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•A 2.37% net increase in the capital federal MSDRG rate; and
•Updates to the three factors used to determine the amount and distribution of
Medicare UCDSH Amounts.
According to CMS, the combined impact of the payment and policy changes in the Final IPPS Rule for operating costs will yield an average 2.6% increase in Medicare operating MSDRG FFS payments for hospitals in urban areas and an average 3.3% increase in such payments for proprietary hospitals in FFY 2023. We estimate that all of the final payment and policy changes affecting operating MSDRG and UCDSH Amounts should result in a 3.7% increase in our annual Medicare FFS IPPS payments, which yields an estimated increase of approximately$55 million . Because of the uncertainty associated with various factors that may influence our future IPPS payments by individual hospital, including legislative, regulatory or legal actions, admission volumes, length of stay and case mix, we cannot provide any assurances regarding our estimate of the impact of the payment and policy changes. Payment and Policy Changes to the Medicare Outpatient Prospective Payment and Ambulatory Surgery Center Payment Systems-InNovember 2022 , CMS released the final policy changes and payment rates for the Hospital Outpatient Prospective Payment System and Ambulatory Surgical Center Payment System for calendar year ("CY") 2023 ("Final OPPS/ASC Rule"). The Final OPPS/ASC Rule includes the following payment and policy changes, among others: •An estimated net increase of 3.8% for the OPPS rates based on a market basket increase of 4.1%, reduced by a multifactor productivity adjustment required by the Affordable Care Act of 0.3%; •Removal of 11 services from the Inpatient Only List (which is the list of procedures that must be performed on an inpatient basis) after determining such services meet established criteria for removal; •Establishment of an exemption for rural Sole Community Hospitals from the site-neutral Medicare reduced payment rate for clinic visits furnished in exempt off-campus, provider-based departments and payment for such visits at the full OPPS rate; and
•A 3.8% increase to the Ambulatory Surgical Center payment rates.
In addition, the Final OPPS/ASC Rule made certain changes to CMS' 340B program,
which 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 budgetneutral 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 2023 Final OPPS/ASC Rule affirms
that CMS is now applying the default rate, generally ASP plus 6%, to 340B Drugs
and biologicals, and it has removed the 340B Payment Adjustment made in 2018. In
January 2023 , the U.S. District Court for the District of Columbia issued an
opinion remanding the case to HHS to determine the remediation for the prior
years' underpayments. Before the issuance of this opinion, CMS had indicated
that it is still evaluating how to apply the Supreme Court ruling to the cost
years 2018 through 2022, and it expects to address the remedy for those cost
years in a separate rulemaking that will be published prior to the CY 2024
proposed rule regarding OPPS payment and policy changes.
CMS projects that the combined impact of the payment and policy changes in the
Final OPPS/ASC Rule will yield an average 4.9% increase in Medicare FFS OPPS
payments for hospitals in urban areas and an average 1.3% increase in Medicare
FFS OPPS payments for proprietary hospitals. The projected annual impact of the
payment and policy changes in the Final OPPS/ASC Rule on our hospitals is an
increase to Medicare FFS hospital outpatient revenues of approximately
$9 million , which represents an increase of approximately 1.5%.
Because of the uncertainty associated with various factors that may influence
our future OPPS payments, including legislative or legal actions, volumes and
case mix, we cannot provide any assurances regarding our estimate of the impact
of the final payment and policy changes. In addition, it remains unclear at this
time how CMS will finance any retroactive payments for 340B payments that were
previously withheld given that the original policy was budgetneutral and HHS
already redistributed the savings. We cannot predict the remedy that will be
imposed, the timing thereof, or what further actions CMS or Congress might take
with respect to the 340B program; however, it is possible that reversal of the
340B Payment Adjustment could have an adverse effect on our future net operating
revenues and cash flows.
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Payment and Policy Changes to the Medicare Physician Fee Schedule-InNovember 2022 , CMS released the CY 2023 Medicare Physician Fee Schedule ("MPFS") Final Rule ("MPFS Final Rule"). The MPFS Final Rule includes updates to payment policies, payment rates and other provisions for services reimbursed under the MPFS fromJanuary 1 through December 31, 2023 . Under the MPFS Final Rule, the CY 2023 conversion factor, which is the base rate that is used to convert relative units into payment rates, was reduced from$34.61 to$33.06 , due in part to the expiration of the one-time 3% payment increase provided for in CY 2022 by the Protecting Medicare and American Farmers from Sequester Cuts Act (the "Sequester Cuts Act"), which was signed into law inDecember 2021 , as well as budget neutrality rules. However, theDecember 2022 enactment of the Consolidated Appropriations Act, 2023 ("CAA, 2023") provided a 2.5% positive adjustment to the MPFS CY 2023 conversion factor, resulting in a CY 2023 conversion factor of$33.89 . We estimate the impact of the MPFS Final Rule in conjunction with the positive adjustment from the CAA, 2023 should result in a reduction of approximately$4 million to our FFS MPFS revenues. Because of the uncertainty associated with various factors that may influence our future MPFS payments, including legislative, regulatory or legal actions, volumes and case mix, we cannot provide any assurances regarding our estimate of the impact of the final payment and policy changes.
The Coronavirus Aid, Relief, and Economic Security Act of 2020 and Related
Legislation
Several pieces of legislation (the "COVID Acts") that include funding and other provisions to mitigate the economic effects of the COVID19 pandemic have been signed into law sinceMarch 2020 . Provided below is a brief overview of certain provisions of the COVID Acts that have impacted our business and that may continue to impact our business to varying degrees in 2023. With the recent announcement that the public health emergency will end onMay 11, 2023 , and the subsequent unwinding of federal flexibilities and funding, there is no assurance or expectation that we will continue to receive or remain eligible for significant funding or assistance under the COVID Acts or similar measures in the future. Funding for the Public Health and Social Services Emergency Fund-The COVID Acts authorized$178 billion in payments to be distributed to providers through the PRF. To receive distributions, providers are required to agree to certain terms and conditions, including, among other things, that the funds are being used for lost revenues and unreimbursed COVIDrelated costs as defined by HHS, and that the providers will not seek collection of outofpocket payments from a COVID19 patient that are greater than what the patient would have otherwise been required to pay if the care had been provided by an in-network provider. All recipients of PRF payments are required to comply with the reporting requirements described in the terms and conditions and as determined by HHS. InJanuary 2021 , HHS released updated reporting requirements that include lost revenues, expenses attributable to COVID-19 and non-financial information. The updated reporting requirements reflect certain provisions of the Consolidated Appropriations Act, 2021 and Other Extensions Act ("Consolidated Appropriations Act") affecting the calculation of lost revenues, as well as the distribution of PRF funds among subsidiaries in a hospital system. Furthermore, HHS has indicated that it will be closely monitoring and, along with theU.S. Office of Inspector General , auditing providers to ensure that recipients comply with the terms and conditions of relief programs and to prevent fraud and abuse. All providers will be subject to civil and criminal penalties for any deliberate omissions, misrepresentations or falsifications of any information given to HHS. PRF funds not utilized by the established deadlines, generally 12 to 18 months after receipt of the grant funds, will be recouped by HHS. Except for certain immaterial PRF payments we returned to HHS, we have formally accepted PRF payments issued to our providers and the terms and conditions associated with those payments, and we have complied with the reporting requirements. During the years endedDecember 31, 2022 , 2021 and 2020, our Hospital Operations and Ambulatory Care segments combined recognized approximately$138 million ,$176 million and$868 million , respectively, of PRF grant income associated with lost revenues and COVIDrelated costs. We recognized an additional$14 million and$17 million of PRF grant income from our unconsolidated affiliates during 2021 and 2020, respectively. Our Hospital Operations and Ambulatory Care segments combined also recognized$56 million ,$15 million and$14 million of grant income from state and local grant programs during the years endedDecember 31, 2022 , 2021 and 2020, respectively. Grant income recognized by our Hospital Operations and Ambulatory Care segments is presented in grant income, and grant income recognized through our unconsolidated affiliates is presented in equity in earnings of unconsolidated affiliates, in each case in the accompanying Consolidated Statements of Operations for the years endedDecember 31, 2022 , 2021 and 2020. AtDecember 31, 2022 and 2021, we had remaining deferred grant payment balances of$7 million and$5 million , respectively, which amounts were recorded in other current liabilities in the accompanying Consolidated Balance Sheets for those periods. We cannot predict whether additional distributions of grant funds will be authorized, and we cannot provide any assurances regarding the amount of grant income, if any, to be recognized in the future. 48
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Medicare and Medicaid Payment Policy Changes-The COVID Acts have also alleviated some of the financial strain on hospitals, physicians, other healthcare providers and states through a series of Medicare and Medicaid payment policy changes, as described below: •The CMS 2% sequestration reduction on Medicare FFS and Medicare Advantage payments to hospitals, physicians and other providers was suspended effectiveMay 1, 2020 throughDecember 31, 2021 . The Sequester Cuts Act extended the 2% Medicare sequestration moratorium throughMarch 31, 2022 and adjusted the sequestration to 1% for the periodApril 1, 2022 throughJune 30, 2022 . Because further legislation was not passed, the full 2% reduction was restored effectiveJuly 1, 2022 . The impact of the Sequester Cuts Act on our operations was an increase of approximately$39 million of revenues in the six months endedJune 30, 2022 , after which the sequestration was fully reinstated.
•The COVID Acts instituted a 20% increase in the Medicare MSDRG payment for
COVID-19 hospital admissions for the duration of the public health emergency.
•The COVID Acts initially eliminated the scheduled nationwide reduction of$4 billion in federal Medicaid DSH allotments in FFY 2020 mandated by the Affordable Care Act and decreased the FFY 2021 DSH reduction from$8 billion to$4 billion effectiveDecember 1, 2020 . Subsequently, the FFY 2021 DSH reduction was eliminated entirely and the remaining$8 billion of DSH reductions were delayed until FFY 2024. •The COVID Acts expanded the Medicare accelerated payment program, which provides prepayment of claims to providers in certain circumstances, such as national emergencies or natural disasters. Under the Consolidated Appropriations Act, providers could retain the accelerated payments for one year from the date of receipt before CMS commenced recoupment. During the year endedDecember 31, 2020 , our hospitals and other providers applied for and received approximately$1.5 billion of accelerated payments. No additional accelerated payment funds were applied for or received in the years endedDecember 31, 2022 and 2021. All advances received by our hospitals and other providers were either repaid or recouped during the years endedDecember 31, 2022 and 2021. •A 6.2% increase in the Federal Medical Assistance Percentage ("FMAP") matching funds was instituted to help states respond to the COVID19 pandemic. The additional funds became available to states effectiveJanuary 1, 2020 , and they were expected to remain available through the quarter in which the public health emergency period ends, provided that states met certain conditions. In addition, the COVID Acts established an incentive for states that had not already done so to expand Medicaid by temporarily increasing each such respective state's FMAP for their base program by five percentage points for two years. The COVID Acts included a requirement that state Medicaid programs keep people continuously enrolled through the end of the month in which the COVID19 public health emergency ends in exchange for the temporary increase to the FMAP. Under the CAA, 2023, the Medicaid continuous enrollment condition and the receipt of the temporary FMAP increase will no longer be tied to the continuation of the public health emergency. EffectiveMarch 31, 2023 , the continuous enrollment condition will end and, onApril 1, 2023 , states can begin eligibility redeterminations on their Medicaid populations and the disenrollment of individuals no longer eligible. In addition, the CAA, 2023 provides for the phase-down of the 6.2% enhanced FMAP as follows: 6.2% through the first quarter of 2023; 5.0% through the second quarter of 2023; 2.5% through the third quarter of 2023; and 1.5% through the last quarter of 2023. The increased support will end entirely as ofJanuary 1, 2024 . Because of the uncertainty associated with various factors that may influence our future Medicare and Medicaid payments, including future legislative, legal or regulatory actions, or changes in volumes and case mix, there is a risk that actual payments received under, or the ultimate impact of, these programs will differ materially from our expectations. Funding for Uninsured Individuals-The COVID Acts provided claims reimbursement to healthcare providers generally at Medicare rates for testing uninsured individuals for COVID19 and treating uninsured individuals with a COVID19 diagnosis. A portion of the funding could also be used to reimburse providers for COVID19 vaccine administration to uninsured individuals. We recognized net operating revenues totaling$20 million ,$91 million and$40 million related to this program in the accompanying Consolidated Statements of Operations for the years endedDecember 31, 2022 , 2021 and 2020, respectively. This program stopped accepting reimbursement claims for the testing and treatment of uninsured individuals onMarch 22, 2022 , and stopped accepting claims for vaccine administration to uninsured individuals onApril 5, 2022 . Tax Changes-BeginningMarch 27, 2020 , all employers were able to elect to defer payment of the 6.2% employerSocial Security tax throughDecember 31, 2020 . Deferred tax amounts were required to be paid in equal amounts over two years, with payments due inDecember 2021 andDecember 2022 . During the year endedDecember 31, 2020 , we deferredSocial Security tax payments totaling$275 million pursuant to this COVID Acts provision. InDecember 2021 , we repaid half of the outstanding deferredSocial Security tax payments, and the remainder was repaid inDecember 2022 . 49
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CMS Innovation Models
The CMS Innovation Center develops and tests innovative payment and service delivery models that have the potential to reduce Medicare, Medicaid or CHIP expenditures while preserving or enhancing the quality of care for beneficiaries.Congress has defined - both through the Affordable Care Act and previous legislation - a number of specific demonstrations for CMS to conduct, including bundled payment models. Generally, the bundled payment models hold hospitals financially accountable for the quality and costs for an entire episode of care for a specific diagnosis or procedure from the date of the hospital admission or inpatient procedure through 90 days postdischarge, including services not provided by the hospital, such as physician, inpatient rehabilitation, skilled nursing and home health care. Provider participation in some of these models is voluntary; for example, 19 hospitals in our Hospital Operations segment and three surgical hospitals in our Ambulatory Care segment participate in the CMS Bundled Payments for Care Improvement Advanced ("BPCIA") program that became effectiveOctober 1, 2018 , and USPI also holds the CMS contract for one physician group practice participating in the BPCIA program. Participation in certain other bundled payment arrangements is mandatory for providers located in randomly selected geographic locations. Under the mandatory models, hospitals are eligible to receive incentive payments or will be subject to payment reductions within certain corridors based on their performance against quality and spending criteria. In 2015, CMS finalized a fiveyear bundled payment model (that was subsequently extended for an additional three years), called the Comprehensive Care for Joint Replacement ("CJR") model, which includes hip and knee replacements, as well as other major leg procedures. Eleven hospitals in our Hospital Operations segment and four surgical hospitals in our Ambulatory Care segment currently participate in the CJR model.
PRIVATE INSURANCE
Managed Care
We currently have thousands of managed care contracts with various HMOs and PPOs. HMOs generally maintain a fullservice 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 costeffective manner. HMOs typically provide reduced benefits or reimbursement (or none at all) to their members who use noncontracted healthcare providers for nonemergency care. PPOs generally offer limited benefits to members who use noncontracted healthcare providers. PPO members who use contracted healthcare providers receive a preferred benefit, typically in the form of lower copays, coinsurance 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 highdeductible 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 endedDecember 31, 2022 , 2021 and 2020 was$9.730 billion ,$9.985 billion and$9.022 billion , respectively. Our top 10 managed care payers generated 62% of our managed care net patient service revenues for the year endedDecember 31, 2022 . In 2022, national payers generated 44% of our managed care net patient service revenues; the remainder came from regional or local payers. AtDecember 31, 2022 and 2021, 66% and 67%, respectively, of our net accounts receivable for our Hospital Operations segment were due from managed care payers. Revenues under managed care plans are based primarily on payment terms involving predetermined rates per diagnosis, perdiem 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 patientbypatient 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 atDecember 31, 2022 , a 3% increase or decrease in the estimated contractual allowance would impact the estimated reserves by approximately$18 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 stoploss 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 inhouse and dischargednotfinalbilled 50
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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 endedDecember 31, 2022 , 2021 or 2020. In addition, on a corporatewide basis, we do not record any general provision for adjustments to estimated contractual allowances for managed care plans. Managed care accounts, net of contractual allowances recorded, are further reduced to their net realizable value through implicit price concessions based on historical collection trends for these payers and other factors that affect the estimation process. We expect managed care governmental admissions to continue to increase as a percentage of total managed care admissions over the near term. However, the managed Medicare and Medicaid insurance plans typically generate lower yields than commercial managed care plans, which have been experiencing an improved pricing trend. Although we have benefited from solid yearoveryear aggregate managed care pricing improvements for some time, we have seen these improvements moderate in recent years, and we believe this moderation could continue into the future, subject to incremental pricing improvements to address inflationary pressures. In the year endedDecember 31, 2022 , our commercial managed care net inpatient revenue per admission from the hospitals in our Hospital Operations segment was approximately 81% higher than our aggregate yield on a per-admission basis from government payers, including managed Medicare and Medicaid insurance plans. Indemnity At bothDecember 31, 2022 and 2021, 4.8% of our net patient service revenues for our hospitals and related outpatient facilities were derived from indemnitybased health plans. An indemnitybased agreement generally requires the insurer to reimburse an insured patient for healthcare expenses after those expenses have been incurred by the patient, subject to policy conditions and exclusions. Unlike an HMO member, a patient with indemnity insurance is free to control his or her utilization of healthcare and selection of healthcare providers.
Legislative Changes
The No Surprises Act ("NSA") established federal protections, which became
effective on January 1, 2022 , against balance billing for patients who obtain
medical services from physicians and other providers not chosen by the patient
and outside of the patient's health insurance network. Providers that violate
these surprise billing prohibitions may be subject to state enforcement action
or federal civil monetary penalties. Among other things, the NSA limits the
amount an insured patient will pay for (1) out-of-network emergency care
(provided in hospital emergency departments and freestanding emergency
facilities), and (2) scheduled out-of-network services (such as radiology,
pathology and anesthesiology) at an in-network facility when the patient hasn't
been notified or provided consent. The NSA also prohibits insurers from
assigning higher deductibles (and other cost-sharing charges) to patients for
out-of-network care than they do for in-network care without patient
notification and consent.
Under the NSA , insurers and providers are given the opportunity to resolve
disputed outofnetwork 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 highacuity treatment that is more
costly to provide and, therefore, results in higher billings, which are the
least collectible of all accounts.
Selfpay accounts receivable, which include amounts due from uninsured patients, as well as copays, coinsurance amounts and deductibles owed to us by patients with insurance, pose significant collectability problems. AtDecember 31, 2022 and 2021, 5% and 4%, respectively, of our net accounts receivable for our Hospital Operations segment was selfpay. Further, a significant portion of our implicit price concessions relates to selfpay amounts. 51
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We provide revenue cycle management services through Conifer, which is subject
to various statutes and regulations regarding consumer protection in areas
including finance, debt collection and credit reporting activities. For
additional information, see Item 1, Business - Regulations Affecting Conifer's
Operations, of Part I of this report. Conifer has performed systematic analyses
to focus our attention on the drivers of bad debt expense for each hospital.
While emergency department use is the primary contributor to our implicit price
concessions in the aggregate, this is not the case at all hospitals. As a
result, we have increased our focus on targeted initiatives that concentrate on
nonemergency department patients as well. These initiatives are intended to
promote process efficiencies in collecting selfpay accounts, as well as copay,
coinsurance and deductible amounts owed to us by patients with insurance, that
we deem highly collectible. We leverage a statisticalbased collections model
that aligns our operational capacity to maximize our collections performance. We
are dedicated to modifying and refining our processes as needed, enhancing our
technology and improving staff training throughout the revenue cycle process in
an effort to increase collections and reduce accounts receivable.
Over the longer term, several other initiatives we have previously announced
should also help address the challenges associated with serving uninsured
patients. For example, our Compact with Uninsured Patients ("Compact") is
designed to offer managed carestyle 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 selfpay 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 selfpay accounts and other factors that affect
the estimation process. We also provide financial assistance through our charity
and uninsured discount programs to uninsured patients who are unable to pay for
the healthcare services they receive. Our policy is not to pursue collection of
amounts determined to qualify for financial assistance; therefore, we do not
report these amounts in net operating revenues. Most states include an estimate
of the cost of charity care in the determination of a hospital's eligibility for
Medicaid DSH payments. These payments are intended to mitigate our cost of
uncompensated care. Some states have also developed provider fee or other
supplemental payment programs to mitigate the shortfall of Medicaid
reimbursement compared to the cost of caring for Medicaid patients.
The initial expansion of health insurance coverage under the Affordable Care Act
resulted in an increase in the number of patients using our facilities with
either private or public program coverage and a decrease in uninsured and
charity care admissions, along with reductions in Medicare and Medicaid
reimbursement to healthcare providers, including us. However, we continue to
have 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,
2022 2021 2020
Estimated costs for:
Uninsured patients $ 537 $ 650 $ 617
Charity care patients 83 97 147
Total $ 620 $ 747 $ 764
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RESULTS OF OPERATIONS FOR THE YEAR ENDED
YEAR ENDED
The following tables present our consolidated net operating revenues, operating
expenses and operating income, both in dollar amounts and as percentages of net
operating revenues, on a continuing operations basis:
Years Ended December 31, Increase
2022 2021 (Decrease)
Net operating revenues:
Hospital Operations $ 15,061 $ 15,982 $ (921)
Ambulatory Care 3,248 2,718 530
Conifer 1,316 1,267 49
Inter-segment eliminations (451) (482) 31
Net operating revenues 19,174 19,485 (311)
Grant income 194 191 3
Equity in earnings of unconsolidated affiliates 216 218 (2)
Operating expenses:
Salaries, wages and benefits 8,844 8,878 (34)
Supplies 3,273 3,328 (55)
Other operating expenses, net 3,998 4,206 (208)
Depreciation and amortization 841 855 (14)
Impairment and restructuring charges, and acquisition-related
costs
226 85 141 Litigation and investigation costs 70 116 (46) Net gains on sales, consolidation and deconsolidation of facilities (1) (445) 444 Operating income$ 2,333 $ 2,871 $ (538) Years Ended December 31, Increase 2022 2021 (Decrease) Net operating revenues 100.0 % 100.0 % - % Grant income 1.0 % 1.0 % - % Equity in earnings of unconsolidated affiliates 1.1 % 1.1 % - % Operating expenses: Salaries, wages and benefits 46.1 % 45.6 % 0.5 % Supplies 17.0 % 17.1 % (0.1) % Other operating expenses, net 20.8 % 21.6 % (0.8) % Depreciation and amortization 4.4 % 4.4 % - %
Impairment and restructuring charges, and acquisition-related
costs
1.2 % 0.4 % 0.8 %
Litigation and investigation costs 0.4 % 0.6 % (0.2) %
Net gains on sales, consolidation and deconsolidation of
facilities - % (2.3) % 2.3 %
Operating income 12.2 % 14.7 % (2.5) %
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The following tables present our net operating revenues, operating expenses and
operating income, both in dollar amounts and as percentages of net operating
revenues, by operating segment on a continuing operations basis:
Year Ended December 31, 2022 Year Ended December 31, 2021
Hospital Operations Ambulatory Care Conifer Hospital Operations Ambulatory Care Conifer
Net operating revenues $ 14,610 $ 3,248 $ 1,316 $ 15,500 $ 2,718 $ 1,267
Grant income 190 4 - 142 49 -
Equity in earnings of unconsolidated
affiliates 10 206 - 25 193 -
Operating expenses:
Salaries, wages and benefits 7,333 822 689 7,511 690 677
Supplies 2,398 871 4 2,640 684 4
Other operating expenses, net 3,302 438 258 3,586 389 231
Depreciation and amortization 692 112 37 722 95 38
Impairment and restructuring charges, and
acquisition-related costs 180 21 25 39 27 19
Litigation and investigation costs 53 3 14 100 14 2
Net gains on sales, consolidation and
deconsolidation of facilities (1) - - (411) (34) -
Operating income $ 853 $ 1,191 $ 289 $ 1,480 $ 1,095 $ 296
Year Ended December 31, 2022 Year Ended December 31, 2021
Hospital
Hospital Operations Ambulatory Care Conifer Operations Ambulatory Care Conifer
Net operating revenues 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Grant income 1.3 % 0.1 % - % 0.9 % 1.8 % - %
Equity in earnings of unconsolidated
affiliates 0.1 % 6.3 % - % 0.2 % 7.1 % - %
Operating expenses:
Salaries, wages and benefits 50.2 % 25.3 % 52.4 % 48.5 % 25.4 % 53.4 %
Supplies 16.4 % 26.8 % 0.3 % 17.0 % 25.2 % 0.3 %
Other operating expenses, net 22.7 % 13.5 % 19.5 % 23.2 % 14.3 % 18.2 %
Depreciation and amortization 4.7 % 3.4 % 2.8 % 4.7 % 3.5 % 3.0 %
Impairment and restructuring charges, and
acquisition-related costs 1.2 % 0.6 % 1.9 % 0.3 % 1.0 % 1.5 %
Litigation and investigation costs 0.4 % 0.1 % 1.1 % 0.6 % 0.5 % 0.2 %
Net gains on sales, consolidation and
deconsolidation of facilities - % - % - % (2.7) % (1.3) % - %
Operating income 5.8 % 36.7 % 22.0 % 9.5 % 40.3 % 23.4 %
Consolidated net operating revenues decreased by $311 million , or 1.6%, for the
year ended December 31, 2022 compared to the year ended December 31, 2021 .
Hospital Operations net operating revenues, net of intersegment eliminations,
decreased by $890 million , or 5.7%, for the year ended December 31, 2022
compared to 2021, primarily due to the loss of revenues from the Miami Hospitals
we sold in August 2021 , lower overall patient volumes, and decreased
COVID-related volumes and acuity during 2022, partially offset by negotiated
commercial rate increases. Our Hospital Operations segment also recognized grant
income from federal, state and local grants totaling $190 million and
$142 million during the years ended December 31, 2022 and 2021, respectively,
which is not included in net operating revenues.
Ambulatory Care net operating revenues increased by $530 million , or 19.5%, for
the year ended December 31, 2022 compared to 2021. The change was primarily due
to an increase from acquisitions of $453 million and same-facility growth of
$146 million , which was attributable to the impact of higher patient volumes,
incremental revenue from new service lines and negotiated commercial rate
increases. These impacts were partially offset by $69 million of lower revenues
compared to the prioryear period due to the sale of the Ambulatory Care
segment's urgent care centers and the transfer of its imaging centers to the
Hospital Operations segment in April 2021 . Our Ambulatory Care segment also
recognized grant income from federal grants totaling $4 million and $49 million
during the years ended December 31, 2022 and 2021, respectively, which is not
included in net operating revenues.
Conifer net operating revenues increased by $49 million , or 3.9%, for the year
ended December 31, 2022 compared to 2021. Conifer revenues from thirdparty
clients, which revenues are not eliminated in consolidation, increased
$80 million , or 10.2%, for the year ended December 31, 2022 compared to 2021.
These increases were primarily due to contractual rate increases and new
business expansion.
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RESULTS OF OPERATIONS BY SEGMENT
Our operations are reported in three segments:
•Hospital Operations, which is comprised of acute care and specialty hospitals, imaging centers, ancillary outpatient facilities, microhospitals and physician practices;
•Ambulatory Care, which is comprised of USPI’s ASCs and surgical hospitals; and
•Conifer, which provides revenue cycle management and valuebased care services
to hospitals, health systems, physician practices, employers and other clients.
Hospital Operations Segment
The following tables present operating statistics, revenues and expenses of our
hospitals and related outpatient facilities on a samehospital basis, unless
otherwise indicated:
Same-Hospital
Years Ended December 31, Increase
Admissions, Patient Days and Surgeries 2022 2021 (Decrease)
Number of hospitals (at end of period) 60 60 - (1)
Total admissions 523,326 547,754 (4.5) %
Adjusted admissions(2) 962,029 973,552 (1.2) %
Paying admissions (excludes charity and uninsured) 497,990 518,515 (4.0) %
Charity and uninsured admissions 25,336 29,239 (13.3) %
Admissions through emergency department 395,309 409,440 (3.5) %
Paying admissions as a percentage of total admissions 95.2 % 94.7 % 0.5 %
(1)
Charity and uninsured admissions as a percentage of total admissions
4.8 % 5.3 % (0.5) %
(1)
Emergency department admissions as a percentage of total admissions
75.5 % 74.7 % 0.8 % (1) Surgeries - inpatient 134,382 141,469 (5.0) % Surgeries - outpatient 209,896 216,011 (2.8) % Total surgeries 344,278 357,480 (3.7) % Patient days - total 2,747,643 2,888,928 (4.9) % Adjusted patient days(2) 4,883,616 5,016,029 (2.6) % Average length of stay (days) 5.25 5.27 (0.4) % Licensed beds (at end of period) 15,372 15,379 - % Average licensed beds 15,381 15,396 (0.1) % Utilization of licensed beds(3) 48.9 % 51.4 % (2.5) % (1)
(1) The change is the difference between 2022 and 2021 amounts shown.
(2) Adjusted admissions/patient days represents actual admissions/patient days adjusted to
include outpatient services provided by facilities in our Hospital Operations segment by
multiplying actual admissions/patient days by the sum of gross inpatient revenues and
outpatient revenues and dividing the results by gross inpatient revenues.
Utilization of licensed beds represents patient days divided by number of days in the
(3) period divided by average licensed beds.
Same-Hospital
Years Ended December 31, Increase
Outpatient Visits 2022 2021 (Decrease)
Total visits 5,063,852 5,319,994 (4.8) %
Paying visits (excludes charity and uninsured) 4,752,208 4,964,084 (4.3) %
Charity and uninsured visits 311,644 355,910 (12.4) %
Emergency department visits 2,166,242 2,034,405 6.5 %
Surgery visits 209,896 216,011 (2.8) %
Paying visits as a percentage of total visits 93.8 % 93.3 % 0.5 % (1)
Charity and uninsured visits as a percentage of total visits 6.2 % 6.7 % (0.5) % (1)
(1) The change is the difference between 2022 and 2021 amounts shown.
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Same-Hospital
Years Ended December 31, Increase
Revenues 2022 2021 (Decrease)
Total segment net operating revenues $ 14,464 $ 14,768 (2.1) %
Selected revenue data – hospitals and related outpatient
facilities:
Net patient service revenues
$ 13,703 $ 14,043 (2.4) %
Net patient service revenue per adjusted admission(1)
(1.2) %
Net patient service revenue per adjusted patient day(1)
0.2 %
(1) Adjusted admissions/patient days represents actual admissions/patient days adjusted to
include outpatient services provided by facilities in our Hospital Operations segment by
multiplying actual admissions/patient days by the sum of gross inpatient revenues and
outpatient revenues and dividing the results by gross inpatient revenues.
Same-Hospital
Years Ended December 31, Increase
Selected Operating Expenses 2022 2021 (Decrease)
Salaries, wages and benefits $ 7,282 $ 7,227 0.8 %
Supplies 2,385 2,532 (5.8) %
Other operating expenses 3,239 3,375 (4.0) %
$ 12,906 $ 13,134 (1.7) %
Same-Hospital
Years Ended December 31,
Selected Operating Expenses as a Percentage of Net Increase
Operating Revenues 2022 2021 (Decrease)
Salaries, wages and benefits 50.3 % 48.9 % 1.4 % (1)
Supplies 16.5 % 17.1 % (0.6) % (1)
Other operating expenses 22.4 % 22.9 % (0.5) % (1)
(1) The change is the difference between 2022 and 2021 amounts shown.
Revenues
Samehospital net operating revenues decreased$304 million , or 2.1%, during the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 . This decrease was due in part to lower overall patient volumes, decreased COVIDrelated volumes and acuity, and the adverse impact of the Cybersecurity Incident on patient volumes, partially offset by negotiated commercial rate increases. Our Hospital Operations segment also recognized grant income from federal, state and local grants totaling$190 million and$142 million in the years endedDecember 31, 2022 and 2021, respectively, which is not included in net operating revenues. Samehospital admissions and outpatient visits decreased by 4.5% and 4.8%, respectively, in the year endedDecember 31, 2022 compared to 2021, primarily due to the factors described above. The following table presents our consolidated net accounts receivable by payer: December 31, 2022 2021 Medicare$ 166 $ 155 Medicaid 44 47 Net cost report settlements receivable and valuation allowances 48 33 Managed care 1,661 1,602 Self-pay uninsured 35 21 Self-pay balance after insurance 92 70 Estimated future recoveries 149 137 Other payers 315 331 Total Hospital Operations 2,510 2,396 Ambulatory Care 433 374 Accounts receivable, net$ 2,943 $ 2,770 The collection of accounts receivable is a key area of focus for our business. AtDecember 31, 2022 , our Hospital Operations segment collection rate on selfpay accounts was approximately 29.5%. Our selfpay collection rate includes payments made by patients, including copays, coinsurance amounts and deductibles paid by patients with insurance. Based on our accounts receivable from uninsured patients and copays, coinsurance amounts and deductibles owed to us by patients with insurance atDecember 31, 2022 , a 10% decrease or increase in our selfpay collection rate, or approximately 3.0%, which we 56
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believe could be a reasonably likely change, would result in an unfavorable or favorable adjustment to patient accounts receivable of approximately$11 million . There are various factors that can impact collection trends, such as changes in the economy and inflation, which in turn have an impact on unemployment rates and the number of uninsured and underinsured patients, the volume of patients through our emergency departments, the increased burden of copays and deductibles to be made by patients with insurance, and business practices related to collection efforts. These factors, many of which have been affected by the pandemic, continuously change and can have an impact on collection trends and our estimation process. We also typically experience ongoing managed care payment delays and disputes; however, we continue to work with these payers to obtain adequate and timely reimbursement for our services. Our estimated Hospital Operations segment collection rate from managed care payers was approximately 95.7% atDecember 31, 2022 . We manage our implicit price concessions using hospitalspecific goals and benchmarks such as (1) total cash collections, (2) pointofservice cash collections, (3) AR Days and (4) accounts receivable by aging category. The following tables present the approximate aging by payer of our net accounts receivable from the continuing operations of our Hospital Operations segment of$2.462 billion and$2.363 billion atDecember 31, 2022 and 2021, respectively, excluding cost report settlements receivable and valuation allowances of$48 million and$33 million , respectively, atDecember 31, 2022 and 2021: Indemnity, Managed Self-Pay Medicare Medicaid Care and Other Total AtDecember 31, 2022 : 0-60 days 90 % 34 % 56 % 22 % 50 % 61-120 days 5 % 28 % 16 % 15 % 15 % 121-180 days 2 % 16 % 9 % 7 % 9 % Over 180 days 3 % 22 % 19 % 56 % 26 % Total 100 % 100 % 100 % 100 % 100 % AtDecember 31, 2021 : 0-60 days 93 % 35 % 57 % 22 % 52 % 61-120 days 4 % 31 % 18 % 14 % 16 % 121-180 days 1 % 14 % 10 % 9 % 9 % Over 180 days 2 % 20 % 15 % 55 % 23 % Total 100 % 100 % 100 % 100 % 100 % Conifer continues to implement revenue cycle initiatives intended to improve our cash flow. These initiatives are focused on standardizing and improving patient access processes, including preregistration, registration, verification of eligibility and benefits, liability identification and collections at pointofservice, 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 Conifer's Eligibility and Enrollment Services program ("EES") screen patients in the hospital to determine whether those patients meet eligibility requirements for financial assistance programs. They also expedite the process of applying for these government programs. Receivables from patients who are potentially eligible for Medicaid are classified as Medicaid pending, under the EES, net of appropriate implicit price concessions. Based on recent trends, approximately 97% of all accounts in the EES are ultimately approved for benefits under a government program, such as Medicaid. The following table presents the approximate amount of accounts receivable in the EES still awaiting determination of eligibility under a government program atDecember 31, 2022 and 2021 by aging category: December 31, 2022 2021 0-60 days$ 79 $ 87 61-120 days 18 17 121-180 days 3 4 Over 180 days 6 7 Total$ 106 $ 115 57
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Salaries, Wages and Benefits
Samehospital salaries, wages and benefits expense increased$55 million , or 0.8%, in the year endedDecember 31, 2022 compared to 2021. This increase was primarily attributable to higher contract labor and premium pay costs due to the pandemic, and annual merit increases for certain of our employees, all of which were partially offset by lower incentive compensation and employee benefit costs, as well as our continued focus on costefficiency measures. Samehospital salaries, wages and benefits expense as a percentage of net operating revenues increased by 140 basis points to 50.3% in the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 . This increase was primarily due to the impact of higher contract labor and premium pay costs, decreased patient volumes, and the Cybersecurity Incident on our patient revenues during the 2022 period. Salaries, wages and benefits expense for the years endedDecember 31, 2022 and 2021 included stockbased compensation expense of$43 million and$41 million , respectively.
Supplies
Samehospital supplies expense decreased$147 million , or 5.8%, in the year endedDecember 31, 2022 compared to 2021. The decrease was primarily attributable to lower overall patient volumes, reduced COVIDrelated volumes and acuity, and our costefficiency measures, partially offset by the increased cost of certain supplies as a result of the COVID19 pandemic, the impact of general market conditions and inflation. Samehospital supplies expense as a percentage of net operating revenues decreased by 60 basis points to 16.5% in the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 , primarily due to the factors described above. The pandemic created supplychain disruptions, including shortages and delays, as well as significant price increases in medical supplies. During the year endedDecember 31, 2022 , general market conditions and inflation also increased the cost of medical supplies. We strive to control supplies expense through product standardization, consistent contract terms and endtoend contract management, improved utilization, bulk purchases, focused spending with a smaller number of vendors and operational improvements. The items of current costreduction focus include cardiac stents and pacemakers, orthopedics, implants and highcost pharmaceuticals.
Other Operating Expenses, Net
Samehospital other operating expenses decreased by$136 million , or 4.0%, in the year endedDecember 31, 2022 compared to 2021. Samehospital other operating expenses as a percentage of net operating revenues decreased by 50 basis points to 22.4% in the year endedDecember 31, 2022 compared to 22.9% in the year endedDecember 31, 2021 , primarily due to the net gains from the sale of assets noted below. The changes in other operating expenses included:
•an increase in gains from the sale of assets of
classified as a reduction of other operating expenses, net; and
•decreased malpractice expense of
For the years ended
Hospital Operations segment included
respectively, of rent expense.
Ambulatory Care Segment
Our Ambulatory Care segment is comprised of USPI's ASCs and surgical hospitals. USPI operates its surgical facilities in partnership with local physicians and, in many of these facilities, a health system partner. We hold an ownership interest in each facility, with each being operated through a separate legal entity in most cases. USPI operates facilities on a daytoday 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, 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 daytoday 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 (158 of 466 facilities atDecember 31, 2022 ), this influence does not represent control of the facility, so we account for our investment in the facility under the equity method for an unconsolidated affiliate. USPI controls 308 of the facilities our Ambulatory Care segment operates, and we account for these investments as consolidated subsidiaries. Our net earnings from a facility are the same under either method, but the classification of those earnings differs. For consolidated subsidiaries, our financial statements reflect 58
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100% of the revenues and expenses of the subsidiaries, after the elimination of intercompany amounts. The net profit attributable to owners other than USPI is classified within net income available (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 daytoday
operations of each facility, usually quantified as a percentage of each
facility’s net revenues.
Our Ambulatory Care segment operating income is driven by the performance of all facilities USPI operates and by USPI's ownership interests in those facilities, but our individual revenue and expense line items contain only consolidated businesses, which represent 66% of those facilities. This translates to trends in consolidated operating income that often do not correspond with changes in consolidated revenues and expenses, which is why we disclose certain statistical and financial data on a pro forma systemwide basis that includes both consolidated and unconsolidated (equity method) facilities. Our unconsolidated facilities received cash payments from the PRF during 2021, and we recognized grant income of$14 million from these funds; this income is included in equity in earnings of unconsolidated affiliates in the accompanying Consolidated Statement of Operations for the year endedDecember 31, 2021 . No additional grant income was recognized from our unconsolidated facilities during the year endedDecember 31, 2022 .
Year Ended
The following table presents selected revenue and expense information for our
Ambulatory Care segment:
Years Ended December 31, Increase
2022 2021 (Decrease)
Net operating revenues $ 3,248 $ 2,718 19.5 %
Grant income $ 4 $ 49 (91.8) %
Equity in earnings of unconsolidated affiliates $ 206 $ 193 6.7 %
Salaries, wages and benefits $ 822 $ 690 19.1 %
Supplies $ 871 $ 684 27.3 %
Other operating expenses, net $ 438 $ 389 12.6 %
Revenues
Our Ambulatory Care net operating revenues increased by $530 million , or 19.5%,
during the year ended December 31, 2022 compared to 2021. The change was driven
by an increase from acquisitions of $453 million , as well as an increase in
samefacility net operating revenues of $146 million , which was attributable to
the impact of improved case volumes, incremental revenue from new service lines
and negotiated commercial rate increases. These impacts were partially offset by
lower revenues of $69 million due primarily to the sale of USPI's urgent care
centers and the transfer of imaging centers to the Hospital Operations segment,
both in April 2021 . Our Ambulatory Care segment also recognized grant income
from federal grants totaling $4 million and $49 million during the years ended
December 31, 2022 and 2021, respectively, which is not included in net operating
revenues.
Salaries, Wages and Benefits
Salaries, wages and benefits expense increased by $132 million , or 19.1%, during
the year ended December 31, 2022 compared to 2021. Salaries, wages and benefits
expense was impacted by an increase from acquisitions of $121 million and an
increase in samefacility salaries, wages and benefits expense of $41 million
due primarily to higher surgical case volumes. These increases were partially
offset by a decrease of $30 million due primarily to the sale of USPI's urgent
care centers and the transfer of imaging centers to the Hospital Operations
segment. Salaries, wages and benefits expense as a percentage of net operating
revenues decreased 10 basis points during the year ended December 31, 2022
compared to 2021 and included stockbased compensation expense of $11 million
and $13 million , respectively.
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Supplies
Supplies expense increased by$187 million , or 27.3%, during the year endedDecember 31, 2022 compared to 2021. The change was driven by an increase from acquisitions of$161 million , as well as an increase in samefacility supplies expense of$32 million due primarily to an increase in surgical cases at our consolidated centers and higher pricing of certain supplies as a result of the pandemic, the impact of general market conditions and inflation. Supplies expense as a percentage of net operating revenues increased 160 basis points from 25.2% in the year endedDecember 31, 2021 to 26.8% in the year endedDecember 31, 2022 . This change was driven by an increase in higheracuity, supplyintensive surgeries and higher pricing of certain supplies.
Other Operating Expenses, Net
Other operating expenses increased by$49 million , or 12.6%, during the year endedDecember 31, 2022 compared to 2021. The change was primarily driven by an increase from acquisitions of$61 million , partially offset by a decrease of$18 million due primarily to the sale of USPI's urgent care centers and the transfer of imaging centers to the Hospital Operations segment. Other operating expenses, net as a percentage of net operating revenues decreased from 14.3% during the year endedDecember 31, 2021 to 13.5% for 2022. Other operating expenses for our Ambulatory Care segment included$115 million and$100 million of rent expense for the years endedDecember 31, 2022 and 2021, respectively.
Facility Growth
The following table summarizes the year-over-year changes in our samefacility
revenue and cases on a pro forma systemwide basis, which includes both
consolidated and unconsolidated (equity method) facilities. While we do not
record the revenues of unconsolidated facilities, we believe this information is
important in understanding the financial performance of our Ambulatory Care
segment because these revenues are the basis for calculating our management
services revenues and, together with the expenses of our unconsolidated
facilities, are the basis for our equity in earnings of unconsolidated
affiliates.
Year Ended December 31, 2022
Net revenues 4.6%
Cases 2.0%
Net revenue per case 2.5%
Joint Ventures with
USPI's business model is to jointly own its facilities with local physicians and, in many of these facilities, a health system partner. Accordingly, as ofDecember 31, 2022 , the majority of facilities in our Ambulatory Care segment were operated in this model.
The table below summarizes the amounts we paid to acquire various ownership
interests in ambulatory care facilities:
Years Ended December 31, Increase
2022 2021 (Decrease)
Controlling interests $ 234 $ 1,219 $ (985)
Noncontrolling interests 9 79 (70)
Equity investment in unconsolidated affiliates and
consolidated facilities 21 17 4
$ 264 $ 1,315 $ (1,051)
The table below provides information about the ownership structure of the
facilities operated by our Ambulatory Care segment:
December 31, 2022
With a health system partner 208
Without a health system partner 258
Total facilities operated 466
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The table below reflects the change in the number of facilities operated by our
Ambulatory Care segment since
Year Ended December 31, 2022
Acquisitions 37
De novo 15
Dispositions/Mergers (9)
Total increase in number of facilities operated
43
During the year endedDecember 31, 2022 , we acquired controlling interests in 30 fully operational ASCs, 16 of which are located inMaryland , four inFlorida , two in each ofArizona ,Colorado andTennessee , and four located in other states. All of these facilities are jointly owned with physicians, except one that is jointly owned with a health system partner and physicians. During 2022, we also acquired noncontrolling interests in seven ASCs, three of which are located inTexas , two inWashington and one in each ofCalifornia andNew Jersey . In total, we paid$178 million to acquire controlling and noncontrolling interests in these facilities. In addition, during the year endedDecember 31, 2022 , we paid an aggregate of$65 million to acquire controlling ownership interests in 23 previously unconsolidated ASCs located in 11 geographically diverse states. Following our acquisition of a controlling interest in one of these ASCs, we contributed our ownership interest in it to a joint venture in which we have a noncontrolling ownership interest. 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 endedDecember 31, 2022 , we invested approximately$21 million in such transactions.
Conifer Segment
The following table presents selected revenue and expense information for our
Conifer segment:
Years Ended December 31, Increase
2022 2021 (Decrease)
Revenue cycle and other services - Tenet $ 451 $ 482 (6.4) %
Revenue cycle and other services – other customers $ 865
$ 785 10.2 % Salaries, wages and benefits $ 689$ 677 1.8 % Supplies $ 4$ 4 - % Other operating expenses $ 258$ 231 11.7 % Revenues
Our Conifer segment’s operating revenues from third-party clients, which
revenues are not eliminated in consolidation, increased
for the year ended
primarily attributable to contractual rate increases and new business expansion.
Salaries, Wages and Benefits
Salaries, wages and benefits expense for Conifer increased$12 million , or 1.8%, in the year endedDecember 31, 2022 compared to 2021. Salaries, wages and benefits expense included stockbased compensation expense of$2 million in both 2022 and 2021. Other Operating Expenses, Net Other operating expenses for Conifer increased$27 million , or 11.7%, in the year endedDecember 31, 2022 compared to 2021. This increase was primarily due to new business expansion, higher vendor utilization and increased recruiting expenses in 2022. For both of the years endedDecember 31, 2022 and 2021, other operating expenses for our Conifer segment included$10 million of rent expense. 61
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Consolidated
Impairment and Restructuring Charges, and Acquisition-Related Costs
The following table presents information about our impairment and restructuring
charges, and acquisitionrelated costs:
Years Ended
2022 2021
Consolidated:
Impairment charges $ 94 $ 8
Restructuring charges 118 57
Acquisition-related costs 14 20
Total impairment and restructuring charges, and
acquisition-related costs $ 226 $ 85
By segment:
Hospital Operations $ 180 $ 39
Ambulatory Care 21 27
Conifer 25 19
Total impairment and restructuring charges, and
acquisition-related costs $
226
Impairment charges during the year endedDecember 31, 2022 included$82 million for the writedown of certain buildings and medical equipment located in one of our markets to their estimated fair values. Material adverse trends in our estimates of future undiscounted cash flows of the hospitals indicated the aggregate carrying value of the hospitals' longlived assets was not recoverable from their estimated future cash flows. We believe the most significant factors contributing to the adverse financial trends included decreased revenues and lower patient volumes due to the pandemic and competition, as well as higher labor costs as a result of the pandemic. As a result, we updated the estimate of the fair value of the hospitals' longlived assets and compared it to the aggregate carrying value of those assets. Because the fair value estimates were lower than the aggregate carrying value of the longlived assets, an impairment charge was recorded for the difference in the amounts. We also recorded$12 million of other impairment charges. For additional discussion, see Note 6 to the accompanying Consolidated Financial Statements. Impairment charges for the year endedDecember 31, 2022 were comprised of$86 million from our Hospital Operations segment,$6 million from our Ambulatory Care segment and$2 million from our Conifer segment. Restructuring charges for the year endedDecember 31, 2022 consisted of$27 million of employee severance costs,$16 million related to the transition of various administrative functions to our GBC,$32 million related to contract and lease termination fees, and$43 million of other restructuring costs. Acquisitionrelated costs during 2022 consisted entirely of transaction costs. Impairment charges for the year endedDecember 31, 2021 were comprised of$5 million from our Ambulatory Care segment, primarily related to the impairment of certain management contract intangible assets, and$3 million from our Conifer segment. Restructuring charges during the year endedDecember 31, 2021 consisted of$14 million of employee severance costs,$19 million related to the transition of various administrative functions to our GBC and$24 million of other restructuring costs. Acquisitionrelated costs during 2021 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 endedDecember 31, 2022 and 2021 were$70 million and$116 million , respectively. The decrease of$46 million , or 39.7%, in 2022 as compared to 2021 was primarily due to higher costs associated with legal proceedings and governmental investigations during 2021. See Note 17 to the accompanying Consolidated Financial Statements for additional information. 62
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During the year endedDecember 31, 2021 , we recorded net gains on sales, consolidation and deconsolidation of facilities of$445 million , primarily comprised of a gain of$406 million related to the sale of the Miami Hospitals inAugust 2021 , a gain of$14 million related to the sale of the majority of our urgent care centers inApril 2021 , net gains of$22 million related to consolidation changes of certain USPI businesses due to ownership changes and net gains of$3 million related to other activity.
Interest Expense
Interest expense for the year ended
to
Loss from Early Extinguishment of Debt
During the year endedDecember 31, 2022 , we incurred aggregate losses from the early extinguishment of debt of$109 million . These losses primarily related to the redemption in full of our 7.500% senior secured first lien notes due 2025 ("2025 Senior Secured First Lien Notes") inFebruary 2022 and open market purchases and the subsequent redemption in full of our 6.750% senior unsecured notes due 2023 (the "2023 Senior Unsecured Notes") during the six months endedJune 30, 2022 . During the year endedDecember 31, 2021 , we incurred aggregate losses from the early extinguishment of debt of$74 million . These losses related to the partial redemption of ourJuly 2024 Senior Secured First Lien Notes inSeptember 2021 , the redemption in full of our 5.125% senior secured second lien notes due 2025 (the "2025 Senior Secured Second Lien Notes") inJune 2021 and the retirement in full of our 7.000% senior unsecured notes due 2025 ("2025 Senior Unsecured Notes") inMarch 2021 .
In both 2022 and 2021, the net losses from early extinguishment of debt
primarily related to the difference between the purchase prices and the par
values of the notes, as well as the writeoff of associated unamortized issuance
costs.
Income Tax Expense During the year endedDecember 31, 2022 , we recorded income tax expense of$344 million in continuing operations on pretax income of$1.344 billion compared to income tax expense of$411 million in continuing operations on pretax income of$1.888 billion during the year endedDecember 31, 2021 .
A reconciliation between the amount of reported income tax expense and the
amount computed by multiplying income from continuing operations before income
taxes by the statutory federal tax rate is presented below:
Years Ended
2022 2021
Tax expense at statutory federal rate of 21% $ 282 $ 396
State income taxes, net of federal income tax benefit 64 77
Tax benefit attributable to noncontrolling interests (122) (114)
Nondeductible goodwill 1 35
Nondeductible executive compensation 10 8
Nondeductible litigation costs - 1
Stock-based compensation tax benefit (6) (5)
Changes in valuation allowance 120 2
Prior-year provision to return adjustments and other changes in
deferred taxes (12) 8
Other items 7 3
Income tax expense $ 344 $ 411
A change in the business interest expense disallowance rules took effect in
2022, resulting in a larger amount of interest disallowance compared to prior
years. During the year ended December 31, 2022 , the valuation allowance
increased by $120 million , including an increase of $123 million due to
limitations on the tax deductibility of interest expense, a decrease of $1
million due to the expiration or worthlessness of unutilized net operating loss
carryovers, and a decrease of $2 million due to changes in the expected
realizability of deferred tax assets. The balance in the valuation allowance as
of December 31, 2022 was $177 million . During the year ended December 31, 2021 ,
the valuation allowance increased by $2 million , including an increase of
$2 million due to limitations on the tax deductibility of interest expense, a
decrease of $2 million due to the expiration or worthlessness of unutilized
state net operating loss carryovers, and an increase of $2 million due to
changes in the
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expected realizability of deferred tax assets. The remaining balance in the
valuation allowance at
Net Income Available to Noncontrolling Interests
Net income available to noncontrolling interests was$590 million for the year endedDecember 31, 2022 compared to$562 million for the year endedDecember 31, 2021 . Net income available to noncontrolling interests in 2022 was comprised of$469 million related to our Ambulatory Care segment,$77 million related to our Conifer segment and$44 million related to our Hospital Operations segment. Of the portion related to our Ambulatory Care segment,$9 million related to the minority interest Baylor held in USPI untilJune 30, 2022 .
ADDITIONAL SUPPLEMENTAL NON-GAAP DISCLOSURES
The financial information provided throughout this report, including our Consolidated Financial Statements and the notes thereto, has been prepared in conformity with accounting principles generally accepted inthe United States of America ("GAAP"). However, we use certain nonGAAP financial measures defined below in communications with investors, analysts, rating agencies, banks and others to assist such parties in understanding the impact of various items on our financial statements, some of which are recurring or involve cash payments. We use this information in our analysis of the performance of our business, excluding items we do not consider relevant to the performance of our continuing operations. In addition, we use these measures to define certain performance targets under our compensation programs. "Adjusted EBITDA" is a nonGAAP measure we define as net income available (loss attributable) toTenet 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 nonoperating 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 acquisitionrelated costs, (11) depreciation and amortization, and (12) income (loss) from divested and closed businesses (i.e., health plan businesses). Litigation and investigation costs do not include ordinary course of business malpractice and other litigation and related expense. We believe the foregoing nonGAAP measure is useful to investors and analysts because it presents additional information about our financial performance. Investors, analysts, company management and our board of directors utilize this nonGAAP measure, in addition to GAAP measures, to track our financial and operating performance and compare that performance to peer companies, which utilize similar nonGAAP measures in their presentations. The human resources committee of our board of directors also uses certain nonGAAP 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 nonGAAP measures, as factors in determining the estimated fair value of shares of our common stock. Company management also regularly reviews the Adjusted EBITDA performance for each operating segment. We do not use Adjusted EBITDA to measure liquidity, but instead to measure operating performance. The nonGAAP 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. 64
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The following table presents the reconciliation of Adjusted EBITDA to net income
available to
comparable GAAP term):
Years Ended December 31,
2022 2021
Net income available to
$ 411 $ 914 Less: Net income available to noncontrolling interests (590) (562) Income (loss) from discontinued operations, net of tax 1 (1) Income from continuing operations 1,000 1,477 Income tax expense (344) (411) Loss from early extinguishment of debt (109) (74) Other non-operating income, net 10 14 Interest expense (890) (923) Operating income 2,333 2,871 Litigation and investigation costs (70) (116)
Net gains on sales, consolidation and deconsolidation of facilities
1 445
Impairment and restructuring charges, and acquisition-related costs
(226) (85) Depreciation and amortization (841) (855) Loss from divested and closed businesses - (1) Adjusted EBITDA$ 3,469 $ 3,483 Net operating revenues$ 19,174 $ 19,485
Net income available to
as a % of net operating revenues
2.1 % 4.7 % Adjusted EBITDA as a % of net operating revenues (Adjusted EBITDA margin) 18.1 % 17.9 %
RESULTS OF OPERATIONS FOR THE YEAR ENDED
YEAR ENDED
A discussion of the results of operations for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 can be found in our Annual Report on Form 10K for the year endedDecember 31, 2021 . 65
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LIQUIDITY AND CAPITAL RESOURCES
CASH REQUIREMENTS
Scheduled Contractual Obligations
Our obligations to make future cash payments under contracts are summarized in the table below, all as ofDecember 31, 2022 . Other than the repayment of long-term debt, we expect to use net cash generated from operating activities, cash on hand or borrowings under our Credit Agreement to satisfy the below obligations. Longterm debt maturities may be refinanced or repaid using net cash generated from operating activities or from the proceeds from sales of facilities. Years Ended December 31, Later Years Total 2023 2024 2025 2026 2027 (In Millions) Long-term debt(1)$ 19,318 $ 835 $ 2,179 $ 768 $ 2,807 $ 3,584 $ 9,145 Finance lease obligations(1) 325 110 80 39 14 7 75 Long-term non-cancelable operating leases 1,523 254 229 198 163 139 540 Academic teaching services 320 64 64 64 64 64 - Defined benefit plan obligations 468 23 23 23 23 23
353
Information technology contract services 332 203 119 2 2 2 4 Purchase orders 369 369 - - - - - Total$ 22,655 $ 1,858 $ 2,694 $ 1,094 $ 3,073 $ 3,819 $ 10,117
(1) Amounts include both principal and interest.
Long-term Debt-Our Credit Agreement provides for revolving loans in an aggregate principal amount of up to$1.500 billion , subject to borrowing availability, with a$200 million subfacility for standby letters of credit. InMarch 2022 , we amended our Credit Agreement to, among other things, (1) decrease the aggregate revolving credit commitments from the previous maximum of$1.900 billion to$1.500 billion , (2) extend the Credit Agreement's maturity date toMarch 2027 and (3) replace the London Interbank Offered Rate ("LIBOR") with the Term Secured Overnight Financing Rate ("SOFR") and Daily Simple SOFR (each, as defined in the Credit Agreement) as the reference interest rate. AtDecember 31, 2022 , we had no cash borrowings outstanding under the Credit Agreement and less than$1 million of standby letters of credit outstanding. AtDecember 31, 2022 , we had outstanding senior unsecured and senior secured notes ("Senior Notes") with an aggregate principal balance of$14.757 billion . The Senior Notes generally require semiannual interest payments and have maturity dates ranging from 2024 through 2031. Any outstanding principal and accrued but unpaid interest is due upon maturity.
We consummated the following transactions affecting our Senior Notes in the year
ended
•During the three months endedDecember 31, 2022 , we paid$13 million from cash on hand to repurchase$14 million of the aggregate principal amount then outstanding of ourJuly 2024 Senior Secured First Lien Notes in advance of their maturity date through multiple openmarket transactions. •Also during the three months endedDecember 31, 2022 , we paid$11 million from cash on hand to repurchase$11 million of the aggregate principal amount then outstanding of ourSeptember 2024 Senior Secured First Lien Notes in advance of their maturity date through multiple openmarket transactions. •InJune 2022 , we issued$2.000 billion aggregate principal amount of our 2030 Senior Secured First Lien Notes. We pay interest on these notes semiannually in arrears onJune 15 andDecember 15 of each year, which payments commended onDecember 15, 2022 . As further discussed below, we used a substantial portion of the issuance proceeds from the 2030 Senior Secured First Lien Notes, after payment of fees and expenses, to finance the redemption of our 2023 Senior Unsecured Notes. •Through a series of openmarket transactions during the six months endedJune 30, 2022 , we repurchased$124 million aggregate principal amount outstanding of our 2023 Senior Unsecured Notes using cash on hand. Following the issuance of our 2030 Senior Secured First Lien Notes inJune 2022 , we used a substantial portion of the proceeds to redeem the thenremaining$1.748 billion aggregate principal outstanding of the 2023 Senior Unsecured Notes in advance of their maturity date. In total, we paid$1.933 billion during the six months endedJune 30, 2022 to retire our 2023 Senior Unsecured Notes in full and recorded aggregate losses from early extinguishment of debt of$71 million . 66
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•InFebruary 2022 , we paid$730 million from cash on hand to redeem all$700 million aggregate principal amount outstanding of our 2025 Senior Secured First Lien Notes in advance of their maturity date. In connection with the redemption, we recorded a loss from early extinguishment of debt of$38 million in the three months endedMarch 31, 2022 . AtDecember 31, 2022 , using the last 12 months of Adjusted EBITDA, our ratio of total longterm debt, net of cash and cash equivalent balances, to Adjusted EBITDA was 4.1x. We anticipate this ratio will fluctuate from quarter to quarter based on earnings performance and other factors, including the use of our Credit Agreement as a source of liquidity and acquisitions that involve the assumption of longterm debt. We seek to manage this ratio and increase the efficiency of our balance sheet by following our business plan and managing our cost structure, including through possible asset divestitures, and through other changes in our capital structure. As part of our longterm objective to manage our capital structure, we continue to evaluate opportunities to retire, purchase, redeem and refinance outstanding debt subject to prevailing market conditions, our liquidity requirements, operating results, contractual restrictions and other factors. Our ability to achieve our leverage and capital structure objectives is subject to numerous risks and uncertainties, many of which are described in the ForwardLooking Statements and Risk Factors sections in Part I of this report. Interest payments, net of capitalized interest, were$848 million ,$937 million and$962 million in the years endedDecember 31, 2022 , 2021 and 2020, respectively. For the year endingDecember 31, 2023 , we expect annual interest payments to be approximately$835 million to$845 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 longterm debt obligations.
Lease Obligations-We have operating lease agreements primarily for real estate, including offcampus 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 ofDecember 31, 2022 , we had fixed payment obligations of$1.517 billion under noncancellable 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, nonqualified defined benefit plans that provide supplemental retirement benefits to certain of our current and former executives. These plans are unfunded, and plan obligations are paid from our working capital. We also maintain a frozen, qualified defined benefit plan that benefits certain of our current and former employees inDetroit . See Note 10 to the accompanying Consolidated Financial Statements for additional information about our defined benefit plans. Information Technology Contracts-We enter into various noncancellable 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 cybersecurityrelated software and services.
Purchase Orders-We had outstanding shortterm purchase commitments of
million
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. AtDecember 31, 2022 , the undiscounted aggregate future estimated payments related to these obligations was$184 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 selfinsured retentions under certain of our professional and general liability insurance programs. The amount of 67
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collateral required is primarily dependent upon the level of claims activity and our creditworthiness. The insurers require the collateral in case we are unable to meet our obligations to claimants within the deductible or selfinsured 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. AtDecember 31, 2022 , we had$116 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. AtDecember 31, 2022 , the maximum potential amount of future payments under these guarantees was$266 million , of which$168 million were recorded in the accompanying Consolidated Balance Sheet atDecember 31, 2022 . The timing and amount of future payments under these guarantees is uncertain. Professional and General Liability Obligations-AtDecember 31, 2022 , the current and longterm professional and general liability reserves included in our Consolidated Balance Sheet were$255 million and$790 million , respectively, and the current and longterm workers' compensation reserves included in our Consolidated Balance Sheet were$45 million and$93 million , respectively. The timing of professional and general liability payments is uncertain as such payments depend on several factors, including the nature of claims and when they are received.Baylor Put /Call Agreement-As further discussed in Note 18 to the accompanying Consolidated Financial Statements, we had a put/call agreement (the "Baylor Put /Call Agreement") with respect to the 5% ownership interest Baylor held in USPI untilJune 30, 2022 . The Baylor Put/Call Agreement gave Baylor the option to annually put up to one-third of its total shares in USPI (the "Baylor Shares") over a period of three years beginning in 2021. We had the right to call the difference between the number of shares Baylor put each year and the maximum number of shares it could have put. In each of 2021 and 2022, we notified Baylor of our intention to exercise our call option to purchase 33.3% of the Baylor Shares for that year (66.6% in total). InJune 2022 , we entered into an agreement with Baylor (the "Share Purchase Agreement") to complete the purchase of the Baylor Shares we called in 2021 and 2022 and to accelerate the acquisition of the remainingBaylor Shares eligible to be put/called in 2023. Under the terms of the Share Purchase Agreement, we agreed to pay Baylor$406 million to buy its entire 5% voting interest in USPI. We paid$11 million upon execution of the Share Purchase Agreement and are obligated to make additional non-interest bearing monthly payments of approximately$11 million , which payments commenced inAugust 2022 . AtDecember 31, 2022 , we had liabilities of$135 million recorded in other current liabilities and$190 million in other long-term liabilities in the accompanying Consolidated Balance Sheet for the purchase of these shares. Investment in the SCD Centers-USPI continues to make offers in an ongoing process to acquire a portion of the equity interests in certain of the ASCs acquired from SCD inDecember 2021 from the physician owners for consideration of up to approximately$250 million . During the year endedDecember 31, 2022 , we made aggregate payments of$58 million to acquire controlling interests in 18 of these ASCs. We cannot reasonably predict how many additional physician owners will accept our offers to acquire a portion of their equity, nor the timing or amount of any remaining payments. SCD Development Agreement-InDecember 2021 , USPI and SCD's principals entered into a joint venture and development agreement under which USPI has the exclusive option to partner with affiliates of SCD on the future development of a minimum target of 50 de novo ASCs throughDecember 2026 . The timing and amount of payments related to the development of these facilities is currently unknown.
Other than the obligations described above, we had no offbalance 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
Other Cash Requirements
Capital Expenditures-Our capital expenditures primarily relate to the expansion and renovation of existing facilities (including amounts to comply with applicable laws and regulations), surgical hospital expansion focused on higher acuity services, equipment and information systems additions and replacements, introduction of new medical technologies (including robotics), design and construction of new facilities, and various other capital improvements. We continue to implement our portfolio diversification strategy into ambulatory surgery and have a baseline intention to invest$250 million annually in 68
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ambulatory business acquisitions and de novo facilities. Capital expenditures were$762 million ,$658 million and$540 million in the years endedDecember 31, 2022 , 2021 and 2020, respectively. We anticipate that our capital expenditures for continuing operations for the year endingDecember 31, 2023 will total approximately$625 million to$675 million , including$196 million that was accrued as a liability atDecember 31, 2022 . We completed the construction of and openedPMC Fort Mill to patients during the year endedDecember 31, 2022 . This 100bed facility includes an emergency department, multispecialty operating rooms, an intensive care unit, and labor and delivery rooms. In addition, we broke ground in 2022 on a new healthcare campus in theWestover Hills area ofSan Antonio, Texas , which campus will include a hospital, ASC and medical office space. We expect construction of theWestover Hills facilities will cost approximately$230 million over the construction period. By the beginning of 2030, all hospitals inCalifornia providing acute care services must meet standards that are intended to ensure that they remain intact and capable of continued operation following an earthquake. During 2022, we began planning for the nonstructural performance category ("NPC") seismic requirements for our hospitals inCalifornia , which we expect to complete by the end of 2023 for review by the State. This analysis will clarify the NPC work required to be completed in future years to bring our hospitals in compliance with the building requirements by the 2030 deadline, and the results of the NPC planning will inform more detailed design and cost estimates after we receive State feedback. We will also determine any additional structural category performance ("SCP") work, with required design and construction work in both categories coordinated. At this time, we are unable to reasonably estimate the amount of NPC and SCP work our hospitals will require or the potential cost to retrofit them. The additional NPC work required will not change the timing or general nature of our ongoing or currently planned NPC or SCP work on our buildings. Income Taxes-Income tax payments, net of tax refunds, were$161 million and$92 million in the years endedDecember 31, 2022 and 2021, respectively. AtDecember 31, 2022 , our carryforwards available to offset future taxable income consisted of (1) federal net operating loss ("NOL") carryforwards of approximately$100 million pretax,$40 million of which expires in 2024 to 2037 and$60 million of which has no expiration date, (2) charitable contribution carryforwards of approximately$45 million expiring in 2025 through 2027 and (3) state NOL carryforwards of approximately$3.106 billion expiring in 2023 through 2042 for which the associated deferred tax benefit, net of valuation allowance and federal tax impact, is$42 million . 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 threeyear 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 theTreasury 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 threeyear 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 theIRS or other taxing authorities could result in the payment of additional taxes. TheIRS has completed audits of our tax returns for all tax years ended on or beforeDecember 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 afterDecember 31, 2007 and USPI's tax returns for years ended afterDecember 31, 2018 remain subject to audit by theIRS . The Inflation Reduction Act of 2022 (the "Tax Act") was enacted inAugust 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 afterDecember 31, 2022 . We are awaiting the publication of additional guidance related to the CAMT to fully assess its applicability and potential impact on our Consolidated Financial Statements. 69
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SOURCES AND USES OF CASH
Our liquidity for the year endedDecember 31, 2022 was primarily derived from net cash provided by operating activities and cash on hand. During 2022, we also received$196 million of supplemental funds from federal and state grants provided under COVID-19 relief legislation. We had$858 million of cash and cash equivalents on hand atDecember 31, 2022 to fund our operations and capital expenditures, and our borrowing availability under our Credit Agreement was$1.500 billion based on our borrowing base calculation atDecember 31, 2022 . 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. Net cash provided by operating activities was$1.083 billion in the year endedDecember 31, 2022 compared to$1.568 billion in the year endedDecember 31, 2021 . Key factors contributing to the change between 2022 and 2021 include the following:
•$880 million of Medicare advances recouped or repaid in the year ended
•$196 million of cash received from pandemic-related grant programs in 2022
compared to
•Lower interest payments of
•Higher income tax payments of
•An increase of
acquisitionrelated costs, and litigation costs and settlements in 2022; and
•The timing of other working capital items.
Net cash used in investing activities totaled$808 million for the year endedDecember 31, 2022 compared to$714 million for the year endedDecember 31, 2021 . Proceeds from the sale of facilities and other assets were$1.038 billion lower during 2022 as compared to 2021, primarily due to the sale of the majority of our urgent care centers inApril 2021 and the sale of the Miami Hospitals inAugust 2021 , and capital expenditures were$104 million higher in 2022 as compared to 2021. These amounts were substantially offset by a decrease of$986 million in cash used to purchase businesses during 2022. In addition to the proceeds from the sales noted above, investing activity during the year endedDecember 31, 2021 included purchases of businesses totaling$1.220 billion , primarily related to USPI's acquisition activity. In addition, capital expenditures increased by$118 million and purchases of equity interests increased$64 million during 2021, as compared to the year endedDecember 31, 2020 . We used net cash of$1.781 billion and$936 million for financing activities during the years endedDecember 31, 2022 and 2021, respectively. Financing activity during the year endedDecember 31, 2022 included aggregate payments against our borrowings of$2.851 billion , the majority of which was used to retire$2.597 billion aggregate principal amount outstanding of our Senior Notes in advance of their maturity dates, and payments totaling$250 million under our stock repurchase program to reacquire nearly six million shares of our common stock. In addition, distributions to noncontrolling interest holders increased$137 million during 2022 as compared to 2021, partially due to distributions of the proceeds from the sale of several medical office buildings to minority interest holders totaling$61 million in 2022. The aforementioned payments were partially offset by the proceeds received from the issuance of our 2030 Senior Secured First Lien Notes during the year endedDecember 31, 2022 . Financing activity during the year endedDecember 31, 2021 included proceeds from our issuance of$2.850 billion aggregate principal amount of Senior Notes. We used a portion of these proceeds, together with the proceeds from our sale of theMiami Hospitals and cash on hand, to redeem and retire$2.988 billion aggregate principal amount of our then-outstanding Senior Notes during 2021. Financing activity in 2021 also included the receipt of$37 million of grant funds by our Ambulatory Care segment's unconsolidated affiliates and their repayment of$104 million of Medicare advances. Additionally, we paid total distributions to noncontrolling interest holders of$423 million during the year endedDecember 31, 2021 . We have several structured payables arrangements that are a part of our strategy to make our procurement processes more efficient and cost effective. AtDecember 31, 2022 , we were paying approximately 6,300 vendors under these programs, with an annual charge volume of approximately$1.3 billion . We do not expect these programs to result in any significant changes to our liquidity. 70
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We record our equity securities and our debt securities classified as availableforsale 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 such that they will materially impact our financial condition, results of operations or cash flows.
DEBT INSTRUMENTS, GUARANTEES AND RELATED COVENANTS
Credit Agreement-AtDecember 31, 2022 , 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. InApril 2021 , we amended the Credit Agreement to, among other things, extend the duration of previous amendments that raised the aggregate revolving credit commitments from$1.500 billion to$1.900 billion , subject to borrowing availability. InMarch 2022 , we amended the revolving credit facility again to, among other things, (1) decrease the previous maximum aggregate revolving credit commitments from$1.900 billion to$1.500 billion , subject to borrowing availability, (2) extend the scheduled maturity date fromSeptember 2024 toMarch 2027 and (3) replace LIBOR with Term SOFR and Daily Simple SOFR (each, as defined in the Credit Agreement) as the reference interest rate. Obligations under the Credit Agreement are guaranteed by substantially all of our domestic wholly owned hospital subsidiaries and are secured by a firstpriority lien on the eligible inventory and accounts receivable owned by us and the subsidiary guarantors, including receivables for Medicaid supplemental payments. AtDecember 31, 2022 , we had no cash borrowings outstanding under the Credit Agreement, and we had less than$1 million of standby letters of credit outstanding. We were in compliance with all covenants and conditions in our Credit Agreement and, based on our eligible receivables,$1.500 billion was available for borrowing atDecember 31, 2022 . See Note 8 to the accompanying Consolidated Financial Statements for additional information about our Credit Agreement. Letter of Credit Facility-Our LC Facility provides for the issuance of standby and documentary letters of credit, from time to time, in an aggregate principal amount of up to$200 million and matures inSeptember 2024 . Obligations under the LC Facility are guaranteed and secured by a firstpriority pledge of the capital stock and other ownership interests of certain of our wholly owned domestic hospital subsidiaries on an equalranking basis with our senior secured first lien notes. AtDecember 31, 2022 ,$116 million of standby letters of credit were outstanding, and we were in compliance with all covenants and conditions in our LC Facility. Senior Secured Note Issuances and Debt Refinancing Transactions-A detailed discussion of our debt transactions during the year endedDecember 31, 2022 is provided in the Cash Requirements subsection above. In the aggregate, we recognized a net loss from the early extinguishment of debt of$109 million in the year endedDecember 31, 2022 related to our retirement of certain Senior Notes prior to their scheduled maturity dates. This loss was primarily related to the difference between the purchase prices and the par values of the notes we retired, as well as the writeoff of unamortized issuance costs associated with them. LIQUIDITY We continue to experience negative impacts of the pandemic on our business to varying degrees. Surges of COVID19 at various points throughout 2022 caused periodic spikes in COVID admissions at our hospitals and resulted in increased case cancellations in our Ambulatory Care segment. Throughout the pandemic, we have experienced significant price increases in medical supplies, particularly for personal protective equipment, and we have encountered supply-chain disruptions, including shortages and delays. In addition, our Ambulatory Care segment has been impacted by shipment delays in construction materials and capital equipment with respect to its de novo facility development efforts, which are a key part of our portfolio expansion strategy. The pandemic also exacerbated previously existing workforce shortages - and, thereby, competition for qualified candidates - as more employees chose to retire early, leave the workforce or take travel assignments. Over the past several years, we have had to rely on highercost temporary and contract labor, which we compete with other healthcare providers to secure, and pay premiums above standard compensation for essential workers. We have been required, and we may in the future be required, to temporarily reduce overall operating capacity or suspend certain services at individual facilities due to staffing constraints and other COVID19related factors. Broad economic factors resulting from the pandemic, including higher inflation, increased unemployment rates in certain areas where we operate and reduced consumer spending, have impacted, and are continuing to impact, our service mix, revenue mix and patient volumes. Business closings and layoffs in the areas we operate may lead to increases in the uninsured and underinsured populations and adversely affect demand for our services, as well as the ability of patients to pay for services. Any increase in the amount of or deterioration in the collectability of patient accounts receivable could adversely affect our cash flows and results of operations. If general economic conditions deteriorate or remain uncertain for an extended period of time, our liquidity and ability to repay our outstanding debt may be impacted. 71
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We have taken, and continue to take, various actions to increase our liquidity and mitigate the impact of reductions in our patient volumes and changes in our service mix and revenue mix. These actions included the sale and redemption of various senior unsecured notes and senior secured notes, which eliminated any significant debt maturities untilJuly 2024 and will reduce our future annual cash interest expense payments. In addition, we have continued cost-efficiency measures, as well as necessary cost reductions, to substantially offset incremental costs, including temporary staffing and premium pay, as well as higher supply costs for PPE. We have also sought to compensate for the pandemic's disruption of our patient volumes and service mix by growing our services for which demand has been more resilient, including our higheracuity service lines. While the length of time that will be required for our hospital patient volumes and mix to return to pre-pandemic levels is unknown, especially demand for loweracuity services, we believe demand for our higheracuity service lines will continue to grow over time. We believe our actions, together with government relief packages, supported our ability to provide essential patient services during the initial uncertainty caused by the pandemic and continue to do so.
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.
Our cash on hand fluctuates daytoday 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 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 should be adequate to meet our current cash needs. These sources of liquidity, in combination with any potential future debt incurrence, should also be 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 by 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 any costs associated with legal proceedings and government investigations. We do not rely on commercial paper or other short-term financing arrangements nor do we enter 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 under our Credit Agreement.
RECENTLY ISSUED ACCOUNTING STANDARDS
See Note 24 to the accompanying Consolidated Financial Statements for a
discussion of recently issued accounting standards.
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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 longlived 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, thirdparty 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 thirdparty
payers several days after the services are performed or shortly after discharge.
Revenues are recognized as performance obligations are satisfied.
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 thirdparty 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 with these classes of patients 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.
Revenues under the traditional FFS Medicare and Medicaid programs are based
primarily on prospective payment systems. Retrospectively determined costbased
revenues under these programs, which were more prevalent in earlier periods, and
certain other payments, such as IME, DGME, DSH and bad debt expense
reimbursement, which are based on our hospitals' cost reports, are estimated
using historical trends and current factors. Cost report settlements under these
programs are subject to audit by Medicare and Medicaid auditors and
administrative and judicial review, and it can take several years until final
settlement of such matters is determined and completely resolved. 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.
We have a system and estimation process for recording Medicare net patient
service revenue and estimated cost report settlements. As a result, we record
accruals to reflect the expected final settlements on our cost reports. For
filed cost reports, we record the accrual based on those cost reports and
subsequent activity and record a valuation allowance against those cost reports
based on historical settlement trends. The accrual for periods for which a cost
report is yet to be filed is recorded based on estimates of what we expect to
report on the filed cost reports, and a corresponding valuation allowance is
recorded as
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previously described. Cost reports generally must be filed within five months
after the end of the annual cost reporting period. After the cost report is
filed, the accrual and corresponding valuation allowance may need to be
adjusted.
Revenues under managed care plans are based primarily on payment terms involving predetermined rates per diagnosis, perdiem 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 patientbypatient 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 atDecember 31, 2022 , a 3% increase or decrease in the estimated contractual allowance would impact the estimated reserves by approximately$18 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 stoploss 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 inhouse and dischargednotfinalbilled 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 endedDecember 31, 2022 . In addition, on a corporatewide 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 thirdparty payers are responsible for related copays, coinsurance 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 copays, coinsurance and deductibles and for those who are uninsured based on historical collection experience and current market conditions. Under our Compact and other uninsured discount programs, the discount offered to certain uninsured patients is recognized as a contractual allowance, which reduces net operating revenues at the time the selfpay 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 selfpay accounts and other factors that affect the estimation process. There are various factors that can impact collection trends, such as: changes in the economy, which in turn have an impact on unemployment rates and the number of uninsured and underinsured patients; the volume of patients through our emergency departments; the increased burden of copays, coinsurance amounts and deductibles to be made by patients with insurance; and business practices related to collection efforts. These factors continuously change and can have an impact on collection trends and our estimation process. Subsequent changes to the estimate of the transaction price are generally recorded as adjustments to net patient service revenues in the period of the change. We record implicit price concessions, primarily related to uninsured patients and patients with copays, coinsurance 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 copays, coinsurance 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 nonemergency 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. 74
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Based on our accounts receivable from uninsured patients and co-pays, co-insurance amounts and deductibles owed to us by patients with insurance atDecember 31, 2022 , a 10% increase or decrease in our selfpay collection rate, or approximately 3%, which we believe could be a reasonably likely change, would result in a favorable or unfavorable adjustment to patient accounts receivable of approximately$11 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 atDecember 31, 2022 , a 500 basis point increase in our frequency trend would increase the estimated reserves by$36 million , and a 500 basis point decrease in our frequency trend would decrease the estimated reserves by$27 million . A 500 basis point increase in our severity trend would increase the estimated reserves by$206 million , and a 500 basis point decrease in our severity trend would decrease the estimated reserves by$130 million . In addition, because of the complexity of the claims, the extended period of time to settle the claims and the wide range of potential outcomes, our ultimate liability for professional and general liability claims could change materially from our current estimates. The table below shows the case reserves and incurred but not reported and loss development reserves: December 31, 2022 2021 Case reserves$ 343 $ 387
Incurred but not reported and loss development reserves 702 658
Total reserves
$ 1,045 $ 1,045 Several actuarial methods, including the incurred, paid loss development and BornhuetterFerguson 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. 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 atDecember 31, 2022 and 2021 representing unsettled claims was approximately 95% and 98%, respectively. 75
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The following table, which includes both our continuing and discontinued
operations, presents the amount of our accruals for professional and general
liability claims and the corresponding activity therein:
Years Ended
2022 2021
Accrual for professional and general liability claims, beginning of
the year
$ 1,045 $ 978 Less losses recoverable from re-insurance and excess insurance carriers (38) (50) Expense related to(1): Current year 173 200 Prior years 74 131 Total incurred loss and loss expense 247 331 Paid claims and expenses related to: Current year (7) (13) Prior years (249) (239) Total paid claims and expenses (256) (252)
Plus losses recoverable from re-insurance and excess insurance
carriers
47 38
Accrual for professional and general liability claims, end of year $
1,045$ 1,045
(1)Total malpractice expense for continuing operations, including premiums for
insured coverage and recoveries from third parties, was
IMPAIRMENT OF LONG-LIVED ASSETS
We evaluate our longlived 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. If the estimated future undiscounted cash flows 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 thirdparty 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 longlived 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 thirdparty 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, 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 and 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 rulemaking or from budgetary challenges of states in which we operate;
•how the hospitals and ambulatory centers are operated in the future;
•the nature of the ultimate disposition of the assets; and
•macro-economic conditions such as inflation, GDP growth and unforeseen
technological advancements.
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During the year endedDecember 31, 2022 , we recorded$94 million of impairment charges, of which$82 million related to the impairment of certain buildings and medical equipment located in one of our markets. Of the total impairment charges recognized for the year endedDecember 31, 2022 ,$86 million related to our Hospital Operations segment,$6 million related to our Ambulatory Care segment and$2 million related to our Conifer segment. During the year endedDecember 31, 2021 , we recorded$8 million of impairment charges, primarily related to the writedown of certain indefinite-lived management contracts within our Ambulatory Care segment to their estimated fair values. Of the total impairment charges recognized for the year endedDecember 31, 2021 ,$5 million related to our Ambulatory Care segment and$3 million related to our Conifer segment. In our most recent impairment analysis as ofDecember 31, 2022 , we had two asset groups, including three and five hospitals and related operations, respectively, with carrying values of$219 million and$478 million , respectively, whose estimated undiscounted future cash flows exceeded their respective carrying value by approximately 129% and 134%, respectively. The individual estimated undiscounted future cash flows of these longlived asset groups may not be considered to be substantially in excess of cash flows necessary to recover the respective carrying value of their long-lived assets. Future adverse trends that necessitate changes in the estimates of the undiscounted future cash flows of either asset group could result in the estimated undiscounted future cash flows being less than the respective carrying value of the longlived assets, which would require a fair value assessment of the affected asset group, and if the fair value amount is less than the carrying value of the asset group's longlived assets, material impairment charges could result.
IMPAIRMENT OF GOODWILL
Goodwill represents the excess of purchase price over the net estimated fair value of identifiable assets acquired and liabilities assumed in a business combination.Goodwill is determined to have an indefinite useful life and is not amortized, but is instead subject to impairment tests performed at least annually, or when events occur that would more likely than not reduce the fair value of the reporting unit below its carrying amount. For goodwill, we assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Further testing is required only if we determine, based on the qualitative assessment, that it is more likely than not that a reporting unit's fair value is less than its carrying value. Otherwise, no further impairment testing is required. If we determine the carrying value of goodwill is impaired, or if the carrying value of a business that is to be sold or otherwise disposed of exceeds its fair value, we reduce the carrying value, including any allocated goodwill, to fair value, with any impairment not to exceed the carrying amount of goodwill. Any impairment would be recognized as a charge to income from operations and a reduction in the carrying value of goodwill. AtDecember 31, 2022 , our business included three reportable segments - Hospital Operations, Ambulatory Care and Conifer. Our reportable segments are reporting units used to perform our goodwill impairment analysis, and goodwill is accordingly assigned to these reporting segments. We completed our annual impairment tests for goodwill as ofOctober 1, 2022 . The allocated goodwill balances related to our Hospital Operations, Ambulatory Care and Conifer segments were$2.806 billion ,$6.712 billion and$605 million , respectively, atDecember 31, 2022 . We performed a separate qualitative analysis for our reporting units and, in each case, concluded it was more likely than not that the fair value of each reporting unit exceeded its respective carrying value. Factors considered in these analyses included recent and estimated future operating trends derived from macroeconomic conditions, industry conditions and other factors specific to each reporting segment.
ACCOUNTING FOR INCOME TAXES
We account for income taxes using the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Income tax receivables and liabilities and deferred tax assets and liabilities are recognized based on the amounts that more likely than not will be sustained upon ultimate settlement with taxing authorities.
Developing our provision for income taxes and analysis of uncertain tax
positions requires significant judgment and knowledge of federal and state
income tax laws, regulations and strategies, including the determination of
deferred tax assets and liabilities and, if necessary, any valuation allowances
that may be required for deferred tax assets.
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We assess the realization of our deferred tax assets to determine whether an income tax valuation allowance is required. Based on all available evidence, both positive and negative, and the weight of that evidence to the extent such evidence can be objectively verified, we determine whether it is more likely than not that all or a portion of the deferred tax assets will be realized. The main factors that we consider include:
•Cumulative profits/losses in recent years, adjusted for certain nonrecurring
items;
•Income/losses expected in future years;
•Unsettled circumstances that, if unfavorably resolved, would adversely affect
future operations and profit levels;
•The availability, or lack thereof, of taxable income in prior carryback periods
that would limit realization of tax benefits; and
•The carryforward period associated with the deferred tax assets and
liabilities.
During the year endedDecember 31, 2022 , the valuation allowance increased by$120 million , including an increase of$123 million due to limitations on the tax deductibility of interest expense, a decrease of$1 million due to the expiration or worthlessness of unutilized net operating loss carryovers, and a decrease of$2 million due to changes in the expected realizability of deferred tax assets. The balance in the valuation allowance as ofDecember 31, 2022 was$177 million . During the year endedDecember 31, 2021 , the valuation allowance increased by$2 million , including an increase of$2 million due to limitations on the tax deductibility of interest expense, a decrease of$2 million due to the expiration or worthlessness of unutilized state net operating loss carryovers, and an increase of$2 million due to changes in the expected realizability of deferred tax assets. The remaining balance in the valuation allowance atDecember 31, 2021 was$57 million . Deferred tax assets relating to interest expense limitations under Internal Revenue Code Section 163(j) have a full valuation allowance because the interest expense carryovers are not expected to be utilized in the foreseeable future. We consider many factors when evaluating our uncertain tax positions, and such judgments are subject to periodic review. Tax benefits associated with uncertain tax positions are recognized in the period in which one of the following conditions is satisfied: (1) the more likely than not recognition threshold is satisfied; (2) the position is ultimately settled through negotiation or litigation; or (3) the statute of limitations for the taxing authority to examine and challenge the position has expired. Tax benefits associated with an uncertain tax position are derecognized in the period in which the more likely than not recognition threshold is no longer satisfied. While we believe we have adequately provided for our income tax receivables or liabilities and our deferred tax assets or liabilities, adverse determinations by taxing authorities or changes in tax laws and regulations could have a material adverse effect on our consolidated financial position, results of operations or cash flows.
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