TEAM HEALTH HOLDINGS INC. - FORM 10-Q

Attached files

file	filename
EX-10.2 - AMENDED AND RESTATED COMMITMENT LETTER - TEAM HEALTH HOLDINGS INC.	tmh-exhibit_102amendedcomm.htm
EX-31.1 - CERTIFICATION BY MIKE SNOW FOR TEAM HEALTH HOLDINGS, INC - SECTION 302 - TEAM HEALTH HOLDINGS INC.	tmh-exhibit_3119302015x10q.htm
EX-32.2 - CERTIFICATION BY DAVID JONES FOR TEAM HEALTH HOLDINGS, INC. - SECTION 906 - TEAM HEALTH HOLDINGS INC.	tmh-exhibit_3229302015x10q.htm
EX-32.1 - CERTIFICATION BY MIKE SNOW FOR TEAM HEALTH HOLDINGS, INC. - SECTION 906 - TEAM HEALTH HOLDINGS INC.	tmh-exhibit_3219302015x10q.htm
EX-10.3 - AMENDMENT NO. 1 TO THE AMENDED AND RESTATED CREDIT AGREEMENT - TEAM HEALTH HOLDINGS INC.	tmh-exhibit_103amendmentno1.htm
EX-31.2 - CERTIFICATION BY DAVID JONES FOR TEAM HEALTH HOLDINGS, INC. - SECTION 302 - TEAM HEALTH HOLDINGS INC.	tmh-exhibit_3129302015x10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended September 30, 2015



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from to

Commission File Number 001-34583

Team Health Holdings, Inc.

(Exact name of registrant as specified in its charter)



Delaware	36-4276525
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

265 Brookview Centre Way

Suite 400

Knoxville, Tennessee 37919

(865) 693-1000

(Address, zip code, and telephone number, including area code, of registrant’s principal executive office)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 and 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	x	Accelerated filer	¨
Non-accelerated filer	¨ (Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of October 30, 2015, there were outstanding 72,583,573 shares of common stock of Team Health Holdings, Inc., with a par value of $0.01.

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FORWARD LOOKING STATEMENTS

Statements made in this Form 10-Q that are not historical facts and that reflect the current view of Team Health Holdings, Inc. (the Company) about future events and financial performance are hereby identified as “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Some of these statements can be identified by terms and phrases such as “anticipate,” “believe,” “intend,” “estimate,” “expect,” “continue,” “could,” “should,” “may,” “plan,” “project,” “predict” and similar expressions. The Company cautions readers of this Form 10-Q that such “forward looking statements,” including without limitation, those relating to the Company’s future business prospects, the pending IPC Healthcare, Inc. acquisition, revenue, working capital, professional liability expense, liquidity, capital needs, interest costs and income, wherever they occur in this Form 10-Q or in other statements attributable to the Company, are necessarily estimates reflecting the judgment of the Company’s senior management and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the “forward looking statements.” Factors that could cause our actual results to differ materially from those expressed or implied in such forward-looking statements include, but are not limited to:


•	the current U.S. and global economic conditions;


•	the current U.S. and state healthcare reform legislative initiatives;


•	the effect and interpretation of current or future government regulation of the healthcare industry, and our ability to comply with these regulations;


•	our exposure to billing investigations and audits by private payors and federal and state authorities, as well as auditing contractors for governmental programs;


•	our exposure to professional liability lawsuits;


•	the adequacy of our insurance reserves;


•	our reliance on reimbursements by third-party payors, as well as payments by individuals;


•	change in rates or methods of government payments for our services;


•	the general level of emergency department patient volumes at our clients’ facilities;


•	our exposure to the financial risks associated with fee for service contracts;


•	our ability to timely or accurately bill for services;


•	our ability to timely enroll healthcare professionals in the Medicare program;


•	a reclassification of independent contractor physicians by tax authorities;


•	the concentration of a significant number of our programs in certain states, particularly Florida and Tennessee;


•	any loss of or failure to renew contracts within the Military Health System Program, which are subject to a competitive bidding process;


•	our exposure to litigation;


•	fluctuations in our quarterly operating results, which could affect our ability to raise new capital for our business;


•	effect on our revenues if we experience a net loss of contracts;


•	our ability to accurately assess the costs we will incur under new contracts;


•	our ability to find suitable acquisition candidates or successfully integrate completed acquisitions, including our pending acquisition of IPC Healthcare, Inc.;


•	our ability to implement our business strategy and manage our growth effectively;


•	our future capital needs and ability to raise capital when needed;


•	our ability to successfully recruit and retain qualified healthcare professionals;


•	enforceability of our non-competition and non-solicitation contractual arrangements with some affiliated physicians and professional corporations;


•	the high level of competition in our industry;


•	our dependence on numerous complex information systems and our ability to maintain these systems or implement new systems or any disruptions in our information systems;


•	our ability to protect our proprietary technology and services;


•	our loss of key personnel and/or ability to attract and retain highly qualified personnel;


•	our ability to comply with privacy regulations regarding the use and disclosure of patient information;


•	our ability to comply with federal or state anti-kickback laws;


•	our ability to comply with federal and state physician self-referral laws and regulations or issuance of additional legislative restrictions;

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•	changes in existing laws or regulations, adverse judicial or administrative interpretations of these laws and regulations or enactment of new legislation;


•	changes in accounting standards, rules and interpretations or inaccurate estimates or assumptions in the application of accounting policies and the impact on our financial statements;


•	our exposure to a loss of contracts with our physicians or termination of relationships with our affiliated professional corporations in order to comply with antitrust laws;


•	our substantial indebtedness and ability to incur substantially more debt;


•	our ability to generate sufficient cash to service our debt;


•	restrictive covenants in our debt agreements, which may restrict our ability to pursue our business strategies and our ability to comply with them;


•	our ability to complete the acquisition of IPC Healthcare, Inc. within the anticipated timeframe and to realize the expected benefits of the acquisition; and


•	the risk that the proposed IPC Healthcare, Inc. acquisition disrupts current plans and operations and disrupts our relationship with payors, physicians and other healthcare professionals.

For a more detailed discussion of these factors, see the information under the caption “Risk Factors” herein and in the Company’s most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein and in the Company’s most recent Annual Report on Form 10-K.

The Company’s forward-looking statements speak only as of the date of this report or as of the date they are made. The Company disclaims any intent or obligation to update any “forward looking statement” made in this Form 10-Q to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.

TEAM HEALTH HOLDINGS, INC.

QUARTERLY REPORT FOR THE NINE MONTHS

ENDED SEPTEMBER 30, 2015

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		Page
Part I. Financial Information
Item 1.	Financial Statements (Unaudited)	5
	Consolidated Balance Sheets—December 31, 2014 and September 30, 2015	5
	Consolidated Statements of Comprehensive Earnings—Three Months Ended September 30, 2014 and 2015	6
	Consolidated Statements of Comprehensive Earnings—Nine Months Ended September 30, 2014 and 2015	7
	Consolidated Statements of Cash Flows—Nine Months Ended September 30, 2014 and 2015	8
	Notes to Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45
Item 4.	Controls and Procedures	45

Part II. Other Information
Item 1.	Legal Proceedings	46
Item 1A.	Risk Factors	46
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 3.	Defaults Upon Senior Securities	47
Item 4.	Mine Safety Disclosures	47
Item 5.	Other Information	47
Item 6.	Exhibits	48
Signatures		49

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PART I. FINANCIAL INFORMATION



Item 1.	Financial Statements

TEAM HEALTH HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS



	December 31, 2014			September 30, 2015
	(Unaudited) (In thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	20,094		$	18,194
Accounts receivable, less allowance for uncollectibles of $409,851 and $558,488 in 2014 and 2015, respectively	500,633			577,291
Prepaid expenses and other current assets	46,469			56,902
Receivables under insured programs	23,623			19,514
Income tax receivable	8,935			—
Total current assets	599,754			671,901
Insurance subsidiaries' and other investments	112,946			97,492
Property and equipment, net	62,117			74,939
Other intangibles, net	341,194			326,959
Goodwill	724,979			800,583
Deferred income taxes	21,113			39,694
Receivables under insured programs	50,625			72,959
Other	61,994			59,652
	$	1,974,722		$	2,144,179
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	40,616		$	48,886
Accrued compensation and physician payable	283,033			283,288
Other accrued liabilities	153,137			127,331
Income tax payable	—			20,650
Current maturities of long-term debt	227,750			200,000
Deferred income taxes	38,272			31,511
Total current liabilities	742,808			711,666
Long-term debt, less current maturities	577,500			555,000
Other non-current liabilities	231,778			308,105
Shareholders’ equity:
Common stock, ($0.01 par value; 100,000 shares authorized, 71,283 and 72,502 shares issued and outstanding at December 31, 2014 and September 30, 2015, respectively)	713			725
Additional paid-in capital	696,996			750,089
Accumulated deficit	(278,855		)	(186,424		)
Accumulated other comprehensive earnings	1,695			1,325
Team Health Holdings, Inc. shareholders’ equity	420,549			565,715
Noncontrolling interests	2,087			3,693
Total shareholders' equity including noncontrolling interests	422,636			569,408
	$	1,974,722		$	2,144,179

See accompanying notes to consolidated financial statements.

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TEAM HEALTH HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS



	Three Months Ended September 30,
	2014		2015
	(Unaudited) (In thousands, except per share data)
Net revenue before provision for uncollectibles	$	1,223,104	$	1,525,409
Provision for uncollectibles	510,863		626,228
Net revenue	712,241		899,181
Cost of services rendered (exclusive of depreciation and amortization shown separately below)
Professional service expenses	546,346		707,871
Professional liability costs	29,564		27,474
General and administrative expenses (includes contingent purchase and other acquisition compensation expense of $3,086 and $(3,530) in 2014 and 2015, respectively)	61,643		67,066
Other (income) expenses, net	292		2,137
Depreciation	5,826		6,290
Amortization	12,991		20,633
Interest expense, net	3,921		5,572
Transaction costs	3,107		3,869
Earnings before income taxes	48,551		58,269
Provision for income taxes	20,895		22,837
Net earnings	27,656		35,432
Net earnings (loss) attributable to noncontrolling interests	70		(10		)
Net earnings attributable to Team Health Holdings, Inc.	$	27,586	$	35,442

Net earnings per share of Team Health Holdings, Inc.
Basic	$	0.39	$	0.49
Diluted	$	0.38	$	0.48
Weighted average shares outstanding
Basic	70,627		72,361
Diluted	72,331		73,687

Other comprehensive earnings (loss), net of tax:
Net change in fair value of investments, net of tax of $89 and $124 for 2014 and 2015, respectively	165		230
Comprehensive earnings	27,821		35,662
Comprehensive earnings (loss) attributable to noncontrolling interests	70		(10		)
Comprehensive earnings attributable to Team Health Holdings, Inc.	$	27,751	$	35,672

See accompanying notes to consolidated financial statements.

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TEAM HEALTH HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS



	Nine Months Ended September 30,
	2014			2015
	(Unaudited) (In thousands, except per share data)
Net revenue before provision for uncollectibles	$	3,493,892		$	4,390,682
Provision for uncollectibles	1,464,931			1,773,062
Net revenue	2,028,961			2,617,620
Cost of services rendered (exclusive of depreciation and amortization shown separately below)
Professional service expenses	1,557,696			2,058,876
Professional liability costs	73,482			81,371
General and administrative expenses (includes contingent purchase and other acquisition compensation expense of $22,483 and $12,230 in 2014 and 2015, respectively)	195,842			219,214
Other (income) expenses, net	(3,457		)	(182		)
Depreciation	15,315			17,423
Amortization	35,203			62,085
Interest expense, net	10,758			14,132
Transaction costs	5,734			7,170
Earnings before income taxes	138,388			157,531
Provision for income taxes	56,542			65,178
Net earnings	81,846			92,353
Net earnings (loss) attributable to noncontrolling interests	212			(78		)
Net earnings attributable to Team Health Holdings, Inc.	$	81,634		$	92,431

Net earnings per share of Team Health Holdings, Inc.
Basic	$	1.16		$	1.29
Diluted	$	1.13		$	1.26
Weighted average shares outstanding
Basic	70,209			71,900
Diluted	71,955			73,351

Other comprehensive earnings (loss), net of tax:
Net change in fair value of investments, net of tax of $663 and $(213) for 2014 and 2015, respectively	1,228			(370		)
Comprehensive earnings	83,074			91,983
Comprehensive earnings (loss) attributable to noncontrolling interests	212			(78		)
Comprehensive earnings attributable to Team Health Holdings, Inc.	$	82,862		$	92,061

See accompanying notes to consolidated financial statements.

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TEAM HEALTH HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS



	Nine Months Ended September 30,
	2014			2015
	(Unaudited) (In thousands)
Operating Activities
Net earnings	$	81,846		$	92,353
Adjustments to reconcile net earnings:
Depreciation	15,315			17,423
Amortization	35,203			62,085
Amortization of deferred financing costs	758			2,142
Equity based compensation expense	12,693			13,197
Provision for uncollectibles	1,464,931			1,773,062
Deferred income taxes	(21,367		)	(34,140		)
Gain on sale of investments and other assets	(2,349		)	(1,879		)
Equity in joint venture income	(3,124		)	(2,856		)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable	(1,515,378		)	(1,846,532		)
Prepaids and other assets	(1,467		)	(9,774		)
Income tax accounts	1,414			29,585
Accounts payable	7,831			8,624
Accrued compensation and physician payable	13,694			2,439
Contingent purchase liabilities	(1,283		)	(13		)
Other accrued liabilities	712			(3,034		)
Professional liability reserves	17,287			29,261
Net cash provided by operating activities	106,716			131,943
Investing Activities
Purchases of property and equipment	(16,783		)	(31,123		)
Sale of property and equipment	2,776			225
Cash paid for acquisitions, net	(347,154		)	(116,314		)
Proceeds from the sale of investments	—			7,332
Net proceeds from disposition of assets held for sale	—			964
Purchases of investments at insurance subsidiaries	(68,527		)	(67,887		)
Proceeds from investments at insurance subsidiaries	61,314			79,422
Net cash used in investing activities	(368,374		)	(127,381		)
Financing Activities
Payments on long-term debt	(12,188		)	(11,250		)
Proceeds from revolving credit facility	316,100			950,500
Payments on revolving credit facility	(88,700		)	(989,500		)
Payments of financing costs	(1,146		)	—
Contributions from noncontrolling interests	262			1,683
Distributions to noncontrolling interests	(122		)	—
Proceeds from the issuance of common stock under stock purchase plans	1,903			3,445
Proceeds from exercise of stock options	15,510			23,185
Tax benefit from exercise of stock options	11,347			15,475
Net cash provided by (used in) financing activities	242,966			(6,462		)
Net decrease in cash and cash equivalents	(18,692		)	(1,900		)
Cash and cash equivalents, beginning of period	32,331			20,094
Cash and cash equivalents, end of period	$	13,639		$	18,194
Supplemental cash flow information:
Interest paid	$	11,708		$	13,619
Taxes paid	$	65,525		$	52,120

See accompanying notes to consolidated financial statements.

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TEAM HEALTH HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Organization and Basis of Presentation

The accompanying unaudited consolidated financial statements include the accounts of Team Health Holdings, Inc. (the Company) its subsidiaries and its affiliates, including its affiliated medical groups, and have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) for interim financial reporting, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements.

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring items) necessary for a fair presentation of results for the interim periods presented. The results of operations for any interim period are not necessarily indicative of results for the full year. The consolidated balance sheet of the Company at December 31, 2014 has been derived from the audited financial statements at that date, but does not include all of the information and disclosures required by U.S. GAAP for complete financial statements. These financial statements and the notes thereto should be read in conjunction with the December 31, 2014 audited consolidated financial statements and the notes thereto included in our annual report on Form 10-K for fiscal year 2014 filed with the Securities and Exchange Commission (the SEC).

The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the accompanying consolidated financial statements and notes. Actual results could differ from those estimates. Certain amounts for the prior year have been reclassified to conform to the current year’s presentation.

Note 2. Recently Adopted and Recently Issued Accounting Guidance

Changes to U.S. GAAP are established by the Financial Accounting Standards Board (FASB) in the form of accounting standards updates (ASU’s) to the FASB’s Accounting Standards Codification. The Company considers the applicability and impact of all ASU’s. ASU’s not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on the Company's consolidated financial position or results of operations.

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers," which establishes a comprehensive revenue recognition standard for virtually all industries under U.S. GAAP. The standard is effective for public entities for annual and interim periods beginning after December 15, 2017, with early adoption permitted for annual and interim periods beginning after December 15, 2016. We have not yet determined the effects, if any, that adoption of this new accounting standard may have on the Company's consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, "Presentation of Financial Statements—Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern," which requires management to evaluate, in connection with preparing financial statements for each annual and interim reporting period, whether there are conditions or events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable) and provide related disclosures. ASU No. 2014-15 is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. Early adoption is permitted. The adoption of this standard's update is not expected to impact the Company's consolidated financial statements.

In February 2015, the FASB issued ASU No. 2015-02, "Consolidation: Amendments to the Consolidation Analysis," which amends the criteria for determining which entities are considered variable interest entities (VIEs), amends the criteria for determining if a service provider possesses a variable interest in a VIE, and ends the deferral granted to investment companies for application of the VIE consolidation model. ASU No. 2015-02 is effective for public entities for annual and interim reporting periods beginning after December 15, 2015 and early adoption is permitted. We have not yet determined the effects, if any, that adoption of this new accounting standard may have on the Company's consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs," which changes the presentation of debt issuance costs in financial statements. ASU No. 2015-03 requires an entity to present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs

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will continue to be reported as interest expense. ASU No. 2015-03 is effective for annual reporting periods beginning after December 15, 2015. Early adoption is permitted. The new guidance will be applied retrospectively to each prior period presented. The Company is currently in the process of evaluating the impact of adoption of the ASU on its consolidated balance sheets.

In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments, which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. ASU 2015-16 is effective for annual reporting periods after December 15, 2015, and interim periods within those fiscal years. The new guidance will be applied prospectively. Early adoption is permitted and the Company chose to do so effective September 30, 2015.

Note 3. Acquisitions and Contingent Purchase Obligations

Acquisitions

During the nine months ended September 30, 2015, the Company paid a total of $116.3 million related to acquisitions including $113.0 million for the operations of six businesses acquired during the period. These acquisitions consist of the following:



Acquired Operations	Date Acquired	Business Service Line
Brookhaven Anesthesia Associates	August 2015	Anesthesiology
Princeton Emergency Physicians	May 2015	Emergency Medicine
Professional Anesthesia Service	May 2015	Anesthesiology
Ruby Crest Emergency Medicine	February 2015	Emergency Medicine
Capital Emergency Associates	February 2015	Emergency/Hospital Medicine
EOS Medical Group	January 2015	Emergency Medicine

These acquisitions have expanded the Company’s presence in emergency medicine, hospital medicine and anesthesia staffing in those respective markets. The results of operations of the acquired businesses have been included in the Company’s consolidated financial statements beginning on the acquisition date. The consolidated Statement of Comprehensive Earnings for the three and nine months ended September 30, 2015 includes revenue of $44.0 million and $94.1 million, respectively, related to acquisitions completed in 2015.

The purchase price for these acquisitions was allocated, based on management’s estimates, in accordance with ASC Topic 805, “Business Combinations” (ASC 805). The Company’s purchase price allocation for business combinations completed during recent periods is preliminary and may be subject to revision as additional information about the fair value of acquired working capital becomes available. Additional information, which existed as of the acquisition date but at that time was unknown to the Company, may become known to the Company during the remainder of the measurement period, a period not to exceed 12 months from the acquisition date. Adjustments in the purchase price allocation may require a recasting of the amounts allocated to goodwill retroactive to the period in which the acquisition occurred. The purchase price for the acquisitions completed during the nine months ended September 30, 2015 was allocated as shown in the table below (in thousands):

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Accounts receivable	$	3,188
Prepaid expenses and other current assets	5
Other intangibles (consisting of physician and hospital agreements)	47,851
Goodwill (of which $37.9 million is tax deductible)	75,100
Accounts payable	(456		)
Accrued compensation and physician payable	(484		)
Other accrued liabilities	(205		)
Deferred income taxes	(9,933		)
Contingent purchase liabilities	(2,057		)

Consideration paid for 2015 acquisitions, net of cash and cash equivalents of $83	113,009
Additional consideration paid for previous acquisitions	3,305
Total cash paid for acquisitions	$	116,314

During 2015, factors became known that resulted in changes to the purchase price allocation of assets and liabilities, existing at the date of acquisition, related to certain acquisitions completed during 2014. These changes resulted in an increase to accrued liabilities of $1.9 million, and a net decrease in deferred tax liabilities of $0.9 million, resulting in a net increase to goodwill of $1.0 million.

The following unaudited pro forma information combines the consolidated results of operations of the Company and the historical financial results of the acquisitions completed during 2014 and 2015 as if the transactions had occurred on January 1, 2014 (in thousands, except for per share data):



	Nine Months Ended September 30,
	2014		2015
Net revenue	$	2,262,950	$	2,647,096
Net earnings attributable to Team Health Holdings, Inc.	96,121		93,790
Net earnings per share of Team Health Holdings, Inc.
Basic	$	1.37	$	1.30
Diluted	$	1.34	$	1.28
Weighted average shares outstanding:
Basic	70,209		71,900
Diluted	71,955		73,351

The pro forma results are based on estimates and assumptions, which the Company believes are reasonable and do not necessarily represent results that would have occurred if the acquisitions had taken place at the beginning of the periods, nor are they indicative of the future results of these combined operations.

IPC Transaction

On August 4, 2015, the Company and its wholly owned subsidiary Intrepid Merger Sub, Inc. (Merger Sub) entered into an Agreement and Plan of Merger with IPC Healthcare, Inc., a Delaware corporation (IPC), providing for the acquisition of IPC by the Company (the IPC Transaction). Subject to the terms and conditions of the Merger Agreement, Merger Sub will be merged with and into IPC (the Merger), with IPC surviving the Merger as a wholly owned subsidiary of the Company. The merger consideration provided in the Merger Agreement (as further described below) is $80.25 per share of IPC common stock in cash, or approximately $1.6 billion in enterprise value. The Company has entered into a debt commitment letter with certain lenders (see Debt Commitment Letter below) in connection with the financing of the acquisition.

At the effective time of the Merger, each share of IPC common stock issued and outstanding immediately prior to the effective time (other than shares (i) owned by the Company or Merger Sub, (ii) held in treasury by IPC or (iii) owned by stockholders who have perfected and not withdrawn a demand for appraisal under Delaware law) will be automatically canceled and converted into the right to receive $80.25 in cash, without interest.

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Consummation of the Merger is subject to customary conditions, including without limitation (i) requisite approval of IPC’s stockholders, (ii) there being no law or order temporary, preliminary or permanent prohibiting the consummation of the merger, (iii) subject to specified materiality standards, the accuracy of the representations and warranties of the other party, and (iv) compliance by the other party in all material respects with its covenants.

The Merger Agreement contains certain termination rights for the Company and IPC. Upon termination of the Merger Agreement, under specified circumstances, IPC will be required to pay the Company a termination fee of $47.0 million.

Debt Commitment Letter

On August 25, 2015, in connection with entering into the Merger Agreement, the Company and Team Health, Inc. (the Borrower) entered into an amended and restated debt commitment letter (as amended, the Debt Commitment Letter) with Citigroup Global Markets Inc. (Citi) and the other lenders party thereto (the Lenders), pursuant to which, subject to the conditions set forth therein, Citi and the Lenders have committed to provide either (a) (1) a senior secured tranche B term loan facility in an aggregate principal amount of $965.0 million (the New Tranche B Facility) to be obtained pursuant to an amendment and restatement of the Borrower’s existing credit agreement (the Existing Credit Agreement) for the Borrower’s existing senior secured credit facilities (the Existing Credit Facilities) and (2) senior unsecured increasing rate term loans under a new senior unsecured bridge facility of $545.0 million (the New Senior Bridge Facility), or (b) in the event that the amendments to the Existing Credit Agreement were not obtained in order to permit the incurrence of loans under the New Tranche B Facility and the New Senior Bridge Facility and the consummation of the IPC Acquisition, to refinance the Existing Credit Facilities into new facilities consisting of (1) (x) a senior secured revolving credit facility in an aggregate principal amount not to exceed $650.0 million, (y) a senior secured tranche A term loan facility in an aggregate principal amount not to exceed $588.75 million and (z) the New Tranche B Facility and (2) the New Senior Bridge Facility (collectively, the Facilities).

On October 2, 2015 the Borrower and certain of the lenders under the Existing Credit Facilities entered into an amendment to the Existing Credit Agreement (the First Amendment). The First Amendment allows for the amendment and restatement of the Existing Credit Agreement to permit the New Tranche B Facility in an aggregate principal amount not to exceed $1.15 billion on the date on which the IPC Acquisition is consummated and amends the Existing Credit Agreement to (a) permit the incurrence of the notes offered hereunder and the New Senior Bridge Facility in an aggregate principal amount not to exceed $1.00 billion, provided that the aggregate principal amount of the notes and any loans made under the New Tranche B Facility and New Senior Bridge Facility cannot exceed $1.95 billion and (b) to effect such other changes as contemplated therein. In connection with Merger and related transactions, the Company expects to enter into an amended and restated credit agreement. The proceeds of the Debt Financing will be used to partially finance the aggregate Merger Consideration, repay or redeem the existing indebtedness of IPC other than certain letters of credit that are permitted to remain outstanding, pay costs and expenses related to the Merger and finance the ongoing working capital and other general corporate purposes of the Company, after consummation of the Merger.

Citi and certain of its affiliates may have engaged in, and may in the future engage in, investment banking and other commercial dealings in the ordinary course of business with the Company. They have received, or may in the future receive, customary fees and commissions for these transactions.

Subsequent Acquisitions

In October 2015, the Company completed the acquisition of the operations of an emergency staffing business located in Nevada. This acquisition will add approximately 370,000 patient visits annually to the Company's existing emergency medicine staffing operations. The Company is still in the process of completing the purchase price allocation for this acquisition.

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Contingent Purchase Obligations

In accordance with ASC 805, when contingent payments are tied to continuing employment, such amounts are recognized ratably over the defined performance period as compensation expense which is included as a component of general and administrative expense (and parenthetically disclosed with other acquisition-related compensation expense) in the Company's results of operations. The payment of contingent purchase obligations tied to continuing employment is included as a component of operating cash flows. When contingent payments are not tied to continuing employment, such amounts are recognized as a contingent purchase liability at the acquisition date.

As of September 30, 2015, the Company estimates it may have to pay $49.4 million (including $6.0 million related to transactions completed during 2015) in future contingent payments for acquisitions made prior to September 30, 2015, based upon the current projected performance of the acquired operations of which $24.1 million is recorded as a liability in other liabilities and other non-current liabilities on the Company’s consolidated balance sheet. The remaining estimated liability of $25.2 million will be recorded as contingent purchase compensation expense over the remaining performance periods. The current estimate of future contingent payments could increase or decrease depending upon the actual performance of the acquisition over the respective performance periods. These payments will be made should the acquired operations achieve the financial targets or certain contract terms as agreed to in the respective acquisition agreements, including the requirements for continuing employment. When measured on a recurring basis, this liability is considered Level 3 in the fair value hierarchy due to the use of unobservable inputs to measure fair value.

The contingent purchase and other acquisition compensation expense recognized for the nine months ended September 30, 2014 and 2015 was $22.5 million and $12.2 million, respectively. Included in the expense recognized in 2014 and 2015 is $0.2 million and $0.8 million, respectively, related to acquisition related payments made to non-owners of the acquired operations.

The changes to the Company’s accumulated contingent purchase liability for the nine months ended September 30, 2015 are as follows (in thousands):



Contingent purchase liability at December 31, 2014	$	23,584
Payments	(14,145		)
Contingent purchase and other acquisition compensation expense recognized	12,230
Contingent purchase liability recognized at acquisition date	2,472
Contingent purchase liability at September 30, 2015	$	24,141

Estimated unrecognized contingent purchase compensation expense as of September 30, 2015 is as follows (in thousands):



For the remainder of the year ended December 31, 2015	$	5,533
For the year ended December 31, 2016	16,960
For the year ended December 31, 2017	2,683
For the year ended December 31, 2018	52
For the year ended December 31, 2019	14
	$	25,242

In the nine months ended September 30, 2014 and 2015, the Company recognized transaction costs of $5.7 million and $7.2 million, respectively, which related to external costs associated with due diligence and acquisition activity.

Note 4. Fair Value Measurements

The Company applies the provisions of FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” (ASC Topic 820), in determining the fair value of its financial assets and liabilities. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements.

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ASC Topic 820 prioritizes the inputs used in measuring fair value into the following hierarchy:



Level 1	Quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2	Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable;

Level 3	Unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing.

The following table provides information on those assets and liabilities the Company currently measures at fair value on a recurring basis as of December 31, 2014 and September 30, 2015 (in thousands):



	Carrying Amount in Consolidated Balance Sheet December 31, 2014		Fair Value December 31, 2014		Fair Value Level 1		Fair Value Level 2		Fair Value Level 3
Investments of insurance subsidiaries:
Money market funds	$	18,577	$	18,577	$	18,577	$	—	$	—
U. S. Treasury securities	1,003		1,003		—		1,003		—
Municipal bonds	83,694		83,694		—		83,694		—
Mutual funds	3,228		3,228		—		3,228		—
Private investments	6,444		6,444		—		—		6,444
Total investments of insurance subsidiaries	$	112,946	$	112,946	$	18,577	$	87,925	$	6,444
Supplemental employee retirement plan investments:
Mutual funds	$	37,237	$	37,237	$	—	$	37,237	$	—



	Carrying Amount in Consolidated Balance Sheet September 30, 2015		Fair Value September 30, 2015		Fair Value Level 1		Fair Value Level 2		Fair Value Level 3
Investments of insurance subsidiaries:
Money market funds	$	3,957	$	3,957	$	3,957	$	—	$	—
Municipal bonds	88,321		88,321		—		88,321		—
Mutual funds	68		68		—		68		—
Corporate bonds	2,101		2,101		—		2,101		—
Private investments	3,045		3,045		—		—		3,045
Total investments of insurance subsidiaries	$	97,492	$	97,492	$	3,957	$	90,490	$	3,045
Supplemental employee retirement plan investments:
Mutual funds	$	41,942	$	41,942	$	—	$	41,942	$	—

The Company’s insurance subsidiaries investments are valued using market prices on active markets (Level 1) and less active markets (Level 2), in addition to using alternative information when market data is not available (Level 3). Level 1 investment valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 investment valuations are obtained from readily available pricing sources for comparable investment or identical investments in less active markets. The fair values of the Company’s supplemental employee retirement investments are based on quoted prices. Level 3 investment valuations require significant management judgment and are based on transaction price, company performance, and market conditions. For the nine months ended September 30, 2015 there were no transfers between Levels 1, 2 or 3. See Note 5 for more information regarding the Company’s investments.

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The Company classified its municipal bonds, mutual funds, and corporate bonds within Level 2 because these securities were valued based on quoted prices in markets that are less active, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency.

The Company classified its private investments within Level 3 because active market pricing is not readily available and, as such, we use net asset values as an estimate of fair value as a practical expedient. The valuation of non-public private equity investments requires significant management judgment due to the absence of observable quoted market prices, inherent lack of liquidity, and the long-term nature of such assets. These investments are valued initially based upon transaction price. In determining valuation adjustments resulting from the investment review process, emphasis is placed on current company performance and market conditions.

In addition to the preceding disclosures prescribed by the provisions of FASB ASC Topic 820, ASC Topic 825 “Financial Instruments” requires the disclosure of the estimated fair value of financial instruments. The Company’s short term financial instruments include cash and cash equivalents, accounts receivable, and accounts payable. The carrying value of the short term financial instruments approximates the fair value due to their short term nature. These financial instruments have no stated maturities or the financial instruments have short term maturities that approximate market.

The fair value of the Company's debt is estimated using quoted market prices when available. When quoted market prices are not available, fair value is estimated based on current market interest rates for debt with similar maturities (Level 2). At September 30, 2015, the estimated fair value of the Company’s outstanding debt was $741.9 million compared to a carrying value of $755.0 million.

Note 5. Investments

Investments are primarily comprised of securities held by the Company and its captive insurance subsidiaries and by the Company in connection with its participant directed supplemental employee retirement plan. Investments held by the Company and its captive insurance subsidiaries are classified as available-for-sale securities. The unrealized gains or losses of investments held by the Company and its captive insurance subsidiaries are included in accumulated other comprehensive earnings as a separate component of shareholders’ equity, unless the decline in value is deemed to be other-than-temporary and the Company does not have the intent and ability to hold such securities until their full cost can be recovered, in which case such securities are written down to fair value and the loss is charged to current period earnings.

The investments held by the Company in connection with its participant directed supplemental employee retirement plan are classified as trading securities; therefore, changes in fair value associated with these investments are recognized as a component of earnings.

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At December 31, 2014 and September 30, 2015, amortized cost basis and aggregate fair value of the Company’s available-for-sale securities by investment type were as follows (in thousands):



	Cost Basis		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
December 31, 2014
Money market funds	$	18,577	$	—	$	—		$	18,577
U. S. Treasury securities	1,003		—		—			1,003
Municipal bonds	81,120		2,619		(45		)	83,694
Mutual funds	3,228		—		—			3,228
Private investments	6,464		—		(20		)	6,444
	$	110,392	$	2,619	$	(65	)	$	112,946
September 30, 2015
Money market funds	$	3,957	$	—	$	—		$	3,957
Municipal bonds	86,432		2,290		(401		)	88,321
Mutual funds	68		—		—			68
Private Investments	2,999		46		—			3,045
Corporate bonds	2,086		16		(1		)	2,101
	$	95,542	$	2,352	$	(402	)	$	97,492

At December 31, 2014 and September 30, 2015, the amortized cost basis and aggregate fair value of the Company’s available-for-sale securities by contractual maturities were as follows (in thousands):



	Cost Basis		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
December 31, 2014
Due in less than one year	$	25,186	$	88	$	—		$	25,274
Due after one year through five years	53,735		1,676		(45		)	55,366
Due after five years through ten years	19,859		801		—			20,660
Due after ten years	1,920		54		—			1,974
Total	$	100,700	$	2,619	$	(45	)	$	103,274
September 30, 2015
Due in less than one year	$	9,987	$	40	$	(48	)	$	9,979
Due after one year through five years	54,841		1,519		(129		)	56,231
Due after five years through ten years	25,732		718		(112		)	26,338
Due after ten years	1,915		29		(113		)	1,831
Total	$	92,475	$	2,306	$	(402	)	$	94,379

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A summary of the Company’s temporarily impaired available-for-sale investment securities as of December 31, 2014 and September 30, 2015 follows (in thousands):



	Impaired Less Than 12 Months						Impaired Over 12 Months					Total
	Fair Value		Unrealized Losses				Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
December 31, 2014
U.S. Treasury securities	$	1,003	$	—		^(a)	$	—	$	—		$	1,003	$	—
Municipal bonds	4,498		(12		)		2,725		(33		)	7,223		(45		)
Private investments	1,414		(20		)		—		—			1,414		(20		)
Total investment	$	6,915	$	(32	)		$	2,725	$	(33	)	$	9,640	$	(65	)
September 30, 2015
Municipal bonds	$	16,221	$	(240	)		$	1,917	$	(161	)	$	18,138	$	(401	)
Corporate bonds	1,087		(1		)		—		—			1,087		(1		)
Total investment	$	17,308	$	(241	)		$	1,917	$	(161	)	$	19,225	$	(402	)

(a) Unrealized loss is less than $1,000.

The unrealized losses resulted from changes in market interest rates, not from changes in the probability of contractual cash flows. Because the Company has the ability and intent to hold the investments until a recovery of carrying value and full collection of the amounts due according to the contractual terms of the investments is expected, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2015.

During the nine months ended September 30, 2015, the Company recorded a gain of approximately $0.1 million on the sale of specifically identified investments.

As of September 30, 2015, and December 31, 2014, the investments related to the participant directed supplemental employee retirement plan totaled $41.9 million and $37.2 million, respectively, and are included in other assets in the accompanying consolidated balance sheets. The net trading gains on those investments for the nine months ended on September 30, 2014 and September 30, 2015 that were still held by the Company as of September 30, 2014 and September 30, 2015 are as follows (in thousands):



	2014			2015
Net gains and (losses) recognized during the nine months ended September 30, 2014 and 2015, respectively on trading securities	$	(414	)	$	(1,467	)
Less: Net gains (losses) recognized during the period on trading securities sold during the nine months ended September 30, 2014 and 2015, respectively	19			(35		)
Unrealized gains and (losses) recognized on trading securities still held at September 30, 2014 and 2015, respectively	$	(433	)	$	(1,432	)

During the first quarter of 2015, the Company sold its investment in a provider of hospital-based telemedicine consultations previously recorded in other assets on the consolidated balance sheet and accounted for as a cost method investment. In connection with the sale, the Company received proceeds of $4.0 million. This sale resulted in a gain of $2.0 million that was recorded in other (income) expenses, net in the results of the Company's operations.

Note 6. Net Revenue

Net revenue consists of fee for service revenue, contract revenue and other revenue. The Company’s net revenue is principally derived from the provision of healthcare staffing services to patients within healthcare facilities and is recorded in the period the services are rendered. Under the fee for service arrangements, the Company bills patients for services provided and receives payment from patients or their third-party payors. Fee for service revenue reflects gross fee for service charges less contractual allowances and policy discounts, where applicable. Contractual adjustments represent the Company’s estimate of discounts and other adjustments to be recognized from gross fee for service charges under contractual payment arrangements, primarily with commercial, managed care and governmental payment plans such as Medicare and Medicaid when the Company’s providers participate in such plans. Contractual adjustments are not reflected in self-pay fee for service revenue. Contract revenue represents revenue generated under contracts in which the Company provides physician and other

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healthcare staffing and administrative services in return for a contractually negotiated fee. Contract revenue consists primarily of billings based on hours of healthcare staffing provided at agreed-to hourly rates, monthly contractual rates, or certain operational or financial metrics. Revenue in such cases is recognized as the hours are worked by the Company’s affiliated staff and contractors or as metrics are realized. Other revenue consists primarily of revenue from management and billing services provided to outside parties. Revenue is recognized for such services pursuant to the terms of the contracts with customers. The Company also records a provision for uncollectible accounts based primarily on historical collection experience to record accounts receivables at the estimated amounts expected to be collected.

Net revenue for the three and nine months ended September 30, 2014 and 2015 consisted of the following (in thousands):



	Three Months Ended September 30,										Nine Months Ended September 30,
	2014					2015					2014					2015
Medicare	$	131,562		18.5	%	$	183,120		20.4	%	$	384,570		19.0	%	$	530,047		20.2	%
Medicaid	130,368			18.3		166,015			18.5		356,043			17.5		476,151			18.2
Commercial and managed care	340,183			47.8		462,652			51.5		948,437			46.7		1,322,652			50.5
Self-pay	414,317			58.2		496,910			55.3		1,198,063			59.0		1,405,252			53.7
Other	21,703			3.0		21,576			2.4		63,813			3.1		61,777			2.4
Unbilled	14,140			2.0		2,369			0.3		23,231			1.1		15,979			0.6
Net fee for service revenue before provision for uncollectibles	1,052,273			147.7		1,332,642			148.2		2,974,157			146.6		3,811,858			145.6
Contract revenue before provision for uncollectibles	161,278			22.7		182,631			20.3		489,323			24.1		549,998			21.0
Other	9,553			1.3		10,136			1.1		30,412			1.5		28,826			1.1
Net revenue before provision for uncollectibles	1,223,104			171.7		1,525,409			169.6		3,493,892			172.2		4,390,682			167.7
Provision for uncollectibles	(510,863		)	(71.7	)	(626,228		)	(69.6	)	(1,464,931		)	(72.2	)	(1,773,062		)	(67.7	)
Net revenue	$	712,241		100.0	%	$	899,181		100.0	%	$	2,028,961		100.0	%	$	2,617,620		100.0	%

The Company employs several methodologies for determining its allowance for uncollectibles depending on the nature of the net revenue before provision for uncollectibles recognized. The Company initially determines gross revenue for its fee for service patient visits based upon established fee schedule prices. Such gross revenue is reduced for estimated contractual allowances for those patient visits covered by contractual insurance arrangements to result in estimated net revenue before provision for uncollectibles. Net revenue before provision for uncollectibles is then reduced for management’s estimate of uncollectible amounts. Fee for service net revenue represents estimated cash to be collected from such patient visits and is net of management’s estimate of account balances estimated to be uncollectible. The provision for uncollectible fee for service patient visits is based on historical experience resulting from approximately fifteen million annual fee for service patient visits. The significant volume of patient visits and the terms of thousands of commercial and managed care contracts and the various reimbursement policies relating to governmental healthcare programs do not make it feasible to evaluate fee for service accounts receivable on a specific account basis. Fee for service accounts receivable collection estimates are reviewed on a quarterly basis for each fee for service contract by period of accounts receivable origination. Such reviews include the use of historical cash collection percentages by contract adjusted for the lapse of time since the date of the patient visit. In addition, when actual collection percentages differ from expected results, on a contract by contract basis, supplemental detailed reviews of the outstanding accounts receivable balances may be performed by the Company’s billing operations to determine whether there are facts and circumstances existing that may cause a different conclusion as to the estimate of the collectibility of that contract’s accounts receivable from the estimate resulting from using the historical collection experience. Contract-related net revenue is billed based on the terms of the contract at amounts expected to be collected. Such billings are typically submitted on a monthly basis and aged trial balances are prepared. Allowances for estimated uncollectible amounts related to such contract billings are made based upon periodic reviews of specific accounts and invoices once it is concluded that such amounts are not likely to be collected. Approximately 99% of the Company’s allowance for doubtful accounts is related to receivables for fee for service patient visits. The principal exposure for uncollectible fee for service visits is centered in self-pay patients and, to a lesser extent, for co-payments and deductibles from patients with insurance. While the Company does not specifically allocate the allowance for doubtful accounts to individual accounts or specific payor classifications, the portion of the allowance associated with fee for service charges as of September 30, 2015 was equal to approximately 93% of outstanding self-pay fee for service patient accounts. The methodologies employed to compute allowances for doubtful accounts were unchanged between 2014 and 2015.

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Note 7. Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill during the year ended December 31, 2014 and the nine months ended September 30, 2015 were as follows (in thousands):



Goodwill	$	572,890
Accumulated impairment loss	(144,579		)
Additions through 2014 acquisitions	296,668
Balance, December 31, 2014	$	724,979
Goodwill	$	869,558
Accumulated impairment loss	(144,579		)
Additions through 2014 acquisitions	1,024
Additions through 2015 acquisitions	75,100
Change in goodwill attributable to the sale of outsourced medical coding practice	(520		)
Balance, September 30, 2015	$	800,583

The following is a summary of intangible assets and related amortization as of December 31, 2014 and September 30, 2015 (in thousands):



	Gross Carrying Amount		Accumulated Amortization
As of December 31, 2014:
Contracts	$	455,247	$	(126,191	)
Other	19,350		(7,212		)
Total	$	474,597	$	(133,403	)
As of September 30, 2015:
Contracts	$	472,204	$	(156,934	)
Other	20,360		(8,671		)
Total	$	492,564	$	(165,605	)
Aggregate amortization expense:
For the nine months ended September 30, 2015			$	62,085
Estimated amortization expense:
For the remainder of the year ended December 31, 2015			$	20,651
For the year ended December 31, 2016			80,232
For the year ended December 31, 2017			74,395
For the year ended December 31, 2018			62,103
For the year ended December 31, 2019			53,314
For the years ended December 31, 2020 and thereafter			36,264

Intangible assets are amortized over their estimated life, which is approximately three to six years. As of September 30, 2015, the weighted average remaining amortization period for intangible assets was 3.9 years.

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Note 8. Long-Term Debt

Long-term debt as of September 30, 2015 consisted of the following (in thousands):



Term Loan A Facility	$	585,000
Revolving Credit Facility	170,000
	755,000
Less current portion	(200,000		)
	$	555,000

As of September 30, 2015, the Company's senior secured credit facilities (Credit Facility) consist of a $600.0 million term loan facility (Term Loan A Facility) and a $650.0 million revolving credit facility (Revolving Credit Facility). These facilities have a maturity date of October 2, 2019. The maturity dates under the Credit Facility are subject to extension with lender consent according to the terms of the agreement.

The interest rate on any outstanding Revolving Credit Facility borrowings and Term A Loan Facility borrowings, and the commitment fee applicable to undrawn revolving commitments, is priced off a grid based upon the Company’s first lien net leverage ratio and is currently LIBOR + 1.75% in the case of revolving credit borrowings under the Revolving Credit Facility and Term A Loan Facility and 0.30% in the case of unused revolving commitments. The weighted average interest rate for the nine months ended September 30, 2015 was 1.94% for amounts outstanding under the Term A Loan Facility.

The Company had $170.0 million of borrowings outstanding under the Revolving Credit Facility as of September 30, 2015, and the Company had $6.4 million of standby letters of credit outstanding against the Revolving Credit Facility commitment.

The Credit Facility agreement contains both affirmative and negative covenants, including limitations on the Company’s ability to incur additional indebtedness, sell material assets, retire, redeem or otherwise reacquire its capital stock, acquire the capital stock or assets of another business and pay dividends, and requires the Company to comply with a maximum total leverage ratio, tested quarterly. At September 30, 2015, the Company was in compliance with all covenants under the senior credit facility agreement. The Credit Facility is secured by substantially all of the Company’s U. S. subsidiaries’ assets.

Aggregate annual maturities of long-term debt as of September 30, 2015 are as follows (in thousands):



2015 (includes amounts outstanding under the revolving credit facility)	$	200,000
2016	45,000
2017	60,000
2018	45,000
2019	405,000

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Note 9. Professional Liability Insurance

The Company’s professional liability loss reserves included in other accrued liabilities and other non-current liabilities in the accompanying consolidated balance sheets consisted of the following (in thousands):



	December 31, 2014		September 30, 2015
Estimated losses under self-insured programs	$	190,117	$	219,376
Estimated losses under commercial insurance programs	74,248		92,473
	264,365		311,849
Less estimated payable within one year	82,735		71,936
	$	181,630	$	239,913

The changes to the Company’s estimated losses under self-insured programs as of September 30, 2015 were as follows (in thousands):



Balance, December 31, 2014	$	190,117
Reserves related to current period	55,652
Payments for current period reserves	(1,229		)
Payments for prior period reserves	(25,164		)
Balance, September 30, 2015	$	219,376

The Company provides for its estimated professional liability losses through a combination of self-insurance and commercial insurance programs. Losses under commercial insurance programs in excess of the limit of coverage remain as a self-insured obligation of the Company. A portion of the professional liability loss risks being provided for through self-insurance (claims-made basis) are transferred to and funded into captive insurance companies. The accounts of the captive insurance companies are fully consolidated with those of the other operations of the Company in the accompanying consolidated financial statements.

The self-insurance components of our risk management program include reserves for future claims incurred but not reported (IBNR). As of December 31, 2014, of the $190.1 million of estimated losses under self-insured programs, approximately $117.3 million represented an estimate of IBNR claims and expenses and additional loss development, with the remaining $72.8 million representing specific case reserves. Of the specific case reserves as of December 31, 2014, $1.9 million represented case reserves that had settled but not yet funded, and $70.9 million reflected unsettled case reserves.

As of September 30, 2015, of the $219.4 million of estimated losses under self-insurance programs, approximately $134.8 million represented an estimate of IBNR claims and expenses and additional loss development, with the remaining $84.6 million representing specific case reserves. Of the specific case reserves as of September 30, 2015, $1.9 million represented case reserves that had been settled but not yet funded, and $82.7 million reflected unsettled case reserves.

The Company’s provisions for losses under its self-insurance components are estimated using the results of periodic actuarial studies. Such actuarial studies include numerous underlying estimates and assumptions, including assumptions as to future claim losses, the severity and frequency of such projected losses, loss development factors and others. The Company’s provisions for losses under its self-insured components are subject to subsequent adjustment should future actuarial projected results for such periods indicate projected losses greater or less than previously projected.

The Company’s most recent actuarial valuation was completed in October 2015. Based on the results of the actuarial study completed in October 2015, management determined no additional change was necessary in the consolidated reserves for professional liability losses during the third quarter of 2015 related to prior year loss estimates. The discount rate on professional liability reserves was 1.2% at September 30, 2015 compared to 1.1% at December 31, 2014.

Note 10. Contingencies

Litigation

We are currently a party to various legal proceedings arising in the ordinary course of business. The legal proceedings we are involved in from time to time include lawsuits, claims, audits and investigations, including those arising out of services

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provided, personal injury claims, professional liability claims, our billing, collection and marketing practices, employment disputes and contractual claims, and seek monetary and other relief, including statutory damages and penalties. While we currently believe that the ultimate outcome of such proceedings, individually and in the aggregate, will not have a material adverse effect on our financial position or overall trends in results of operations, litigation is subject to inherent uncertainties. If an unfavorable ruling were to occur, there exists the possibility of a material adverse impact on our net earnings in the period in which the ruling occurs. The estimate of the potential impact from such legal proceedings on our financial position or overall results of operations could change in the future.

On September 3, 2013, the Company received a subpoena from the U.S. Department of Health and Human Services Office of Inspector General. The subpoena requests copies of certain documents that are primarily related to the Company’s services at hospitals that are affiliated with Health Management Associates, Inc. (HMA) and any of HMA’s affiliates. The Company is cooperating with the government in its investigation.

On August 14, 2015, a purported shareholder of IPC filed a complaint in the Delaware Court of Chancery captioned Smukler v. IPC Healthcare, Inc., et al. (Case No. 11392-CB), on behalf of a purported class of IPC shareholders. The lawsuit names IPC, each of its current directors, the Company, and Sub as defendants. The lawsuit alleges that the individual defendants breached their fiduciary duties by, among other things, failing to take appropriate steps to maximize the value of IPC to its shareholders, failing to value IPC properly, and taking steps to avoid competitive bidding by alternate potential acquirers. The lawsuit also alleges that IPC, the Company, and Sub aided and abetted those alleged breaches of fiduciary duties by the individual defendants. The lawsuit seeks, among other things, certification of the action as a class action; injunctive relief enjoining the merger; an accounting of all damages purportedly suffered by the plaintiff and the class including rescissory damages in favor of the plaintiff and the class; and the fees and costs associated with the litigation. On August 18, 2015, an additional lawsuit was filed in the Delaware Court of Chancery, asserting similar claims and allegations to those in the Smukler lawsuit and seeking similar relief on behalf of the same putative class. Crescente v. Singer, et al. (Case No. 11405-CB).

Additionally, on August 19, 2015, a lawsuit was filed in the Superior Court for the State of California in Los Angeles County. Khemthong v. IPC Healthcare Networks, Inc., et al. (No. BC 591953). The lawsuit asserted similar claims and allegations to those in the Smukler lawsuit and sought similar relief on behalf of the same putative class. On August 27, 2015, the plaintiff filed a request for voluntary dismissal of the suit without prejudice, and on August 28, 2015, the court entered an order granting that request.

By Order dated September 11, 2015 (the Consolidation Order), the Smukler and Crescente actions were consolidated, and all further litigation relating to or arising out of the merger were directed to be consolidated with such actions under the caption In re IPC Healthcare, Inc. Stockholders Litigation, C.A. No. 11392-CB (the “Consolidated Action”). On September 17, 2015, an action captioned Spencer v. IPC Healthcare, Inc., C.A. No. 11516-CB, was filed in the Delaware Court of Chancery. Under the Consolidation Order, such action is required to be consolidated with the previously-filed actions. On September 18, 2015, a Verified Consolidated Class Action Complaint was filed in the Consolidated Action. On October 2, 2015, the defendants moved to dismiss the operative complaint.

Healthcare Regulatory Matters

Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. Compliance with such laws and regulations can be subject to future governmental review and interpretation as well as significant regulatory action. From time to time, governmental regulatory agencies conduct inquiries and audits of the Company’s practices. It is the Company’s current practice and future intent to cooperate fully with such inquiries.

In addition to laws and regulations governing the Medicare and Medicaid programs, there are a number of federal and state laws and regulations governing such matters as the corporate practice of medicine and fee splitting arrangements, anti-kickback statutes, physician self-referral laws, false or fraudulent claims filing and patient privacy requirements. The failure to comply with any of such laws or regulations could have an adverse impact on our operations and financial results. It is management’s belief that the Company is in substantial compliance in all material respects with such laws and regulations.

Healthcare Reform

The Patient Protection and Affordable Care Act (the PPACA), signed into law on March 23, 2010, as amended by the Health Care and Education Reconciliation Act of 2010 on March 30, 2010, collectively referred to as the Healthcare Reform Laws, significantly affect the U.S. healthcare system by increasing access to health insurance benefits for the uninsured and underinsured populations, among other changes. On June 28, 2012, the U.S. Supreme Court (the Supreme Court) upheld the constitutionality of the requirement in the PPACA that individuals maintain health insurance or pay a penalty (the individual mandate) under Congress's taxing power. The Supreme Court upheld the PPACA provision expanding Medicaid eligibility to new populations as constitutional, but only so long as the expansion of the Medicaid program is optional for the states. States that choose not to expand their Medicaid programs to newly eligible populations in the PPACA can only lose the new federal

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Medicaid funding in the PPACA but not their eligibility for existing federal Medicaid matching payments. We continue to monitor those states that remain undecided or, in certain instances, involved in ongoing internal dialogue on whether or not the state will elect to expand its Medicaid program’s eligibility. In addition, on June 25, 2015, the Supreme Court upheld the provision of tax credits and federal subsidies to individuals who purchase health insurance through a federally-facilitated exchange.

Additional challenges to the Healthcare Reform Laws could further impact the implementation of these laws. While the ultimate impact of these laws and implementing regulations will not be known until all provisions are fully implemented, the Company believes that some of their provisions will likely yield positive results, such as increasing access to health benefits for the uninsured and underinsured populations. Since the implementation of increased access to health benefits through the expansion of Medicaid programs and through exchange enrollment beginning in 2014, we have realized a decline in the percentage of self-pay visits by our consolidated fee for service volume and an increase in the percentage of Medicaid visits that we believe is a result of healthcare reform. Other provisions, however, such as Medicare payment reforms and reductions that could reduce provider payments, may have an adverse effect on the reimbursement rates the Company receives for services provided by affiliated healthcare professionals.

Note 11. Share-based Compensation

Stock Incentive Plan

In May 2013, the Company's shareholders approved the Team Health Holdings, Inc. Amended and Restated 2009 Stock Incentive Plan (the Stock Plan) that amended the 2009 Stock Incentive Plan.

Purpose. The purpose of the Stock Plan is to aid in recruiting and retaining key employees, directors, consultants, and other service providers of outstanding ability and to motivate those employees, directors, consultants, and other service providers to exert their best efforts on behalf of the Company and its affiliates by providing incentives through the granting of options, stock appreciation rights and other stock-based awards.

Shares Subject to the Plan. The Stock Plan provides that the total number of shares of common stock that may be issued is 15,100,000, of which approximately 2,426,000 are available to grant as of September 30, 2015. Shares of the Company’s common stock covered by awards that terminate or lapse without the payment of consideration may be granted again under the Stock Plan.

The following table summarizes the status of options under the Stock Plan as of September 30, 2015:



	Shares (in thousands)		Weighted Average Exercise Price		Aggregate Intrinsic Value (in thousands)		Weighted Average Remaining Life in Years
Outstanding at beginning of year	4,239		$	24.41	$	140,433	6.4
Granted	510		61.35
Exercised	(1,144	)	20.05		45,916
Expired or forfeited	(19	)	37.24
Outstanding at end of period	3,586		$	30.98	$	86,433	6.0
Exercisable at end of period	2,143		$	21.40	$	69,923	5.4

Intrinsic value is the amount by which the stock price as of September 30, 2015 exceeds the exercise price of the options. The Company granted 510,000 options during the nine months ended September 30, 2015. The fair value of the options granted in 2015 was based on the grant date fair value as calculated by the Black-Scholes option pricing formula with the following assumptions: risk-free interest rate of 1.6%, implied volatility of 33.8% and an expected life of the options of 5.25 years. The weighted average estimated fair value of options granted during 2015 was $20.27. As of September 30, 2015, the Company had approximately $15.4 million of unrecognized compensation expense, net of estimated forfeitures related to unvested options, which will be recognized over the remaining requisite service period.

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Equity based compensation expense and the resulting tax benefits were as follows (in thousands):



	Nine Months Ended September 30,
	2014		2015
Stock options	$	8,623	$	7,212
Restricted awards	4,035		5,923
Stock purchase plan	35		62
Total equity based compensation expense	$	12,693	$	13,197
Tax benefit of equity based compensation expense	$	4,887	$	5,081

Restricted awards are grants of restricted stock and grants of restricted stock units that are not vested (Restricted Awards). The Company granted 185,000 shares of Restricted Awards in 2015. The Company had $19.4 million of expense remaining to be recognized over the requisite service period for Restricted Awards at September 30, 2015. The Restricted Awards generally vest annually over a three to four-year period from the initial grant date for the grants made to the independent board members and management.

A summary of changes in total outstanding unvested restricted awards for the nine months ended September 30, 2015 is as follows (in thousands):



	Restricted Stock		Restricted Units		Total
Outstanding at beginning of year	161		317		478
Granted	—		185		185
Vested	(57	)	(39	)	(96	)
Forfeited and expired	(2	)	(2	)	(4	)
Outstanding at September 30, 2015	102		461		563

Stock Purchase Plans

In May 2010, the Company’s Board of Directors (the Board) adopted the 2010 Employee Stock Purchase Plan (ESPP) and the 2010 Nonqualified Stock Purchase Plan (NQSPP).

The ESPP provides for the issuance of up to 600,000 shares to the Company’s employees. All eligible employees are granted identical rights to purchase common stock in each Board authorized offering under the ESPP. Rights granted pursuant to any offering under the ESPP terminate immediately upon cessation of an employee’s employment for any reason. In general, an employee may reduce his or her contribution or withdraw from participation in an offering at any time during the purchase period for such offering. Employees receive a 5% discount on shares purchased under the ESPP. Rights granted under the plan are not transferable and may be exercised only by the person to whom such rights are granted. Offerings occur every six months in April and October. As of September 30, 2015, contributions under the ESPP totaled $2.5 million. In October 2015, approximately 47,000 shares of the Company’s common stock were issued to plan participants.

The NQSPP provides for the issuance of up to 800,000 shares to our independent contractors. All eligible contractors are granted identical rights to purchase common stock in each Board authorized offering under the NQSPP. Rights granted pursuant to any offering under the NQSPP terminate immediately upon cessation of a contractor’s relationship with the Company for any reason. In general, a contractor may reduce his or her contribution or withdraw from participation in an offering at any time during the purchase period for such offering. Contractors receive a 5% discount on shares purchased under the NQSPP. Rights granted under the NQSPP are not transferable and may be exercised only by the person to whom such rights are granted. Offerings occur every six months in April and October. As of September 30, 2015, contributions under the NQSPP totaled $1.2 million. In October 2015, approximately 23,000 shares of the Company’s common stock were issued to plan participants.

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Note 12. Earnings Per Share

The Company computes basic earnings per share using the weighted average number of shares outstanding. The Company computes diluted earnings per share using the weighted average number of shares outstanding plus the dilutive effect of outstanding stock options, restricted awards, and stock purchase plans. The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2015		2014		2015
Net earnings attributable to Team Health Holdings, Inc. (numerator for basic and diluted earnings per share)	$	27,586	$	35,442	$	81,634	$	92,431
Denominator:
Weighted average shares outstanding	70,627		72,361		70,209		71,900
Effect of dilutive securities:
Stock options	1,524		1,086		1,517		1,176
Restricted awards	178		237		227		272
Stock purchase plans	2		3		2		3
Shares used for diluted earnings per share	72,331		73,687		71,955		73,351
Basic net earnings per share of Team Health Holdings, Inc.	$	0.39	$	0.49	$	1.16	$	1.29
Diluted net earnings per share of Team Health Holdings, Inc.	$	0.38	$	0.48	$	1.13	$	1.26
Securities excluded from diluted earnings per share of Team Health Holdings, Inc. because they were antidilutive:
Stock options	488		519		793		258
Restricted awards	—		—		—		—

Note 13. Noncontrolling Interests in Consolidated Entity

The Company is party to two joint venture arrangements. The joint ventures provide administrative management and billing services to certain existing and planned urgent care clinics the Company and joint venture partners operate. The consolidated financial statements include all assets, liabilities, revenues and expenses of the less than 100% owned entity that the Company controls. Accordingly, the Company has recorded noncontrolling interests in the earnings and equity of this entity. In connection with these arrangements, the Company received joint venture contributions of $1.7 million during the nine months ended September 30, 2015.

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Note 14. Accumulated Other Comprehensive Earnings (Loss)

The changes in accumulated other comprehensive earnings (loss) related to available-for-sale securities were as follows (in thousands):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2015			2014			2015
Balance at beginning of period	$	1,510		$	1,095		$	447		$	1,695

Other comprehensive earnings:
Net unrealized gain (loss)	317			451			2,024			(436		)
Tax (expense) benefit	(89		)	(124		)	(663		)	213
Total other comprehensive earnings before reclassifications, net of tax	228			327			1,361			(223		)
Net amount reclassified to earnings(1)	(63		)	(97		)	(133		)	(147		)
Tax benefit (expense)(2)	—			—			—			—
Total amount reclassified from accumulated other comprehensive earnings, net of tax(3)	(63		)	(97		)	(133		)	(147		)
Total other comprehensive earnings (loss)	165			230			1,228			(370		)

Balance at end of period	$	1,675		$	1,325		$	1,675		$	1,325


(1)	This amount was included in Other (income) expenses on the accompanying Consolidated Statement of Comprehensive Earnings.


(2)	These amounts were included in Provision for income taxes on the accompanying Consolidated Statement of Comprehensive Earnings.


(3)	A positive amount indicates a corresponding charge to earnings and a negative amount indicates a corresponding benefit to earnings.

Note 15. Segment Reporting

The Company provides services through ten operating segments which are aggregated into two reportable segments, Healthcare Staffing and Other Services. The Healthcare Staffing segment, which is an aggregation of emergency medicine, anesthesia, specialty surgery and locums staffing, provides comprehensive healthcare service programs to users and providers of healthcare services on a fee for service as well as a cost plus or contract basis. The Other Services segment is an aggregation of hospital medicine, military and government healthcare staffing, clinical services, nurse call center operations, After Hours Pediatrics as well as billing, collection and consulting services that provides a range of other comprehensive healthcare services. The operating segments included in the Other Services reportable segment, while similar in the types of services provided by those operating segments included in the Healthcare Staffing segment, do not meet the aggregation criteria prescribed by the segment reporting guidance nor do they meet the quantitative thresholds that would require a separate presentation.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Segment amounts disclosed are prior to any elimination entries made in consolidation, except in the case of net revenue, where intercompany charges have been eliminated. Certain corporate expenses are not allocated to the segments. These unallocated expenses are corporate expenses, net interest expense, depreciation and amortization, transaction costs and income taxes. The Company evaluates segment performance based on profit and loss before the aforementioned expenses.

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The following table presents financial information for each reportable segment. Depreciation, amortization, management fee and other expenses separately identified in the consolidated statements of operations are included as a reduction to the respective segments’ operating earnings for each period below (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2015		2014		2015
Net Revenue:
Healthcare Services	$	596,205	$	754,919	$	1,681,463	$	2,181,777
Other Services	116,036		144,262		347,498		435,843
	$	712,241	$	899,181	$	2,028,961	$	2,617,620
Operating Earnings:
Healthcare Services	$	34,104	$	41,290	$	90,916	$	90,627
Other Services	6,350		3,919		22,017		23,401
General Corporate	12,018		18,632		36,213		57,635
	$	52,472	$	63,841	$	149,146	$	171,663
Reconciliation of Operating Earnings to Net Earnings:
Operating earnings	$	52,472	$	63,841	$	149,146	$	171,663
Interest expense, net	3,921		5,572		10,758		14,132
Provision for income taxes	20,895		22,837		56,542		65,178
Net earnings	$	27,656	$	35,432	$	81,846	$	92,353

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Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

We believe we are one of the largest suppliers of outsourced healthcare professional staffing and administrative services to hospitals and other healthcare providers in the United States, based upon revenues and patient visits. Our regional operating models also include comprehensive programs for inpatient care, anesthesiology, inpatient specialty care, pediatrics and other healthcare services, principally within hospital departments and other healthcare treatment facilities. We have historically focused, however, primarily on providing outsourced services to hospital emergency departments, or EDs, which accounts for the majority of our net revenue.

Factors and Trends that Affect Our Results of Operations

In reading our financial statements, you should be aware of the following factors and trends we believe are important in understanding our financial performance.

General Economic Conditions

Any lingering effects of the recent economic conditions may adversely impact our ability to collect for the services we provide as higher unemployment and reductions in commercial managed care and governmental healthcare enrollment may also increase the number of uninsured and underinsured patients seeking healthcare at one of our staffed EDs or other clinical facilities. We could be negatively affected if the federal government or the states reduce funding of Medicare, Medicaid and other federal and state healthcare programs in response to increasing deficits in their budgets. Also, patient volume trends in our staffed hospital clinical departments could be adversely affected as individuals potentially defer or forgo seeking care in such departments due to the loss or reduction of coverage previously available to such individuals under commercial insurance or governmental healthcare programs.

Healthcare Reform

In 2010, the President of the United States (U.S.) and the U.S. Congress enacted significant reforms to the U.S. healthcare system. The Healthcare Reform Laws significantly affect the U.S. healthcare system by increasing access to health insurance benefits for the uninsured and underinsured populations, among other changes. On June 28, 2012, the U.S. Supreme Court, upheld the constitutionality of the requirement in the PPACA that individuals maintain health insurance or pay a penalty (the individual mandate) under Congress's taxing power. Additionally, the U.S. Supreme Court held in the same ruling that states were not obligated to expand their Medicaid programs as stipulated in the PPACA to eligible recipients based solely on income. Consequently, each state retained the option whether to choose to expand their Medicaid roles. In addition, on June 25, 2015, the Supreme Court upheld the provision of tax credits and federal subsidies to individuals who purchase health insurance through a federally-facilitated exchange.

The Healthcare Reform Laws triggered numerous changes to the U.S. healthcare system, some of which have already gone into effect, including the individual mandate that went into effect on January 1, 2014, and some of which have been delayed until 2015 and beyond, including the requirement that employers provide health insurance to their employees or pay a per employee fine (the employer mandate). Additional challenges to the Healthcare Reform Laws could further impact the implementation of these laws. Additionally, recent changes in the controlling party in Congress could lead to revisions to the Healthcare Reform Laws in 2015 or subsequent years, affect how the law is implemented, or change the law’s impact on insurance coverage rates across the country.

While the ultimate impact of the Healthcare Reform Laws and implementing regulations will not be known until all provisions are fully implemented, we believe that some of their provisions will likely yield positive results, such as increasing access to health benefits for the uninsured and underinsured populations. Since the implementation of increased access to health benefits through the expansion of Medicaid programs and through exchange enrollment beginning in 2014, we have realized a decline in the percentage of self-pay visits by our consolidated fee for service volume and an increase in the percentage of Medicaid visits that we believe is a result of healthcare reform. Other provisions, however, such as Medicare payment reforms and reductions that could reduce provider payments, may have an adverse effect on the reimbursement rates we receive for services provided by affiliated healthcare professionals.

Medicare and Medicaid Payments for Physician Services

The Centers for Medicaid and Medicare Services (CMS) reimburses for our services to Medicare beneficiaries based upon the rates in the Medicare Physician Fee Schedule (MPFS), which were updated each year based on the Sustainable Growth Rate (SGR) formula enacted under the Balanced Budget Act of 1997. Many private payors use the MPFS to determine their own reimbursement rates. The application of the SGR formula to the MPFS yielded negative updates every year

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beginning in 2002, although CMS was able to take administrative steps to avoid a reduction in 2003 and Congress took a series of legislative actions to prevent reductions each year from 2004 through March 31, 2015.

On April 14, 2015, Congress enacted legislation that permanently repeals the SGR formula, and provides for annual updates of 0.5% for a 5-year period (starting July 1, 2015 through the end of 2019). Starting in 2020, through the end of 2025, there will be no annual updates to the payment rates but physicians will have the opportunity to receive additional payment adjustments through the Merit-Based Incentive Payment System (MIPS), which is an incentive-based payment program that rewards quality performance related to four assessment categories: quality of care measures, resource use, meaningful use of electronic health records, and clinical practice improvement activities. Physicians will receive a positive or negative payment adjustment based on how their composite performance score for each of the four assessment categories compared to the performance threshold. Negative payment adjustments are capped at 4% in 2019, increasing up to 9% in 2022. Positive payment adjustments can reach up to a maximum of three times the annual cap for negative payment adjustments in a particular year. Additional incentive payments will be available for “exceptional performers”. Alternatively, physicians who receive a significant share of their revenue through participation in alternative payment models (APMs) that involve risk of financial losses and a quality measurement component will receive a 5% bonus each year from 2019 through 2024. These physicians are excluded from participation in the MIPS. In 2026 and subsequent years, annual updates will differ based on whether a physician is participating in an APM that meets certain criteria. Physicians participating in qualifying APMs will receive a 0.75% update, and all other physicians will receive a 0.25% update. APMs include models being tested by the Center for Medicare and Medicaid Innovation (other than health care innovation awards), the Medicare Shared Savings Program, under the Health Care Quality Demonstration Program, and other demonstrations required by Federal law. In addition to these changes to the Medicare physician payment system, the law also extends funding for the Children’s Health Insurance Program (CHIP). The CHIP program, which covers more than 8 million children and pregnant women in families that earn income above Medicaid eligibility levels, is currently authorized through 2019. Funding for the program has been extended for two years, through fiscal year 2017.

In November 2014, CMS released the 2015 MPFS Final Rule. Included in the final rule were changes in reimbursement that are overall budget neutral, but redistribute payments between different medical specialties. We estimate that the final rule will increase 2015 reimbursement rates to emergency medicine providers by approximately 1% and will not change reimbursement rates to anesthesia providers. These reimbursement rates do not take into account the additional 0.5% update that went into effect on July 1, 2015. We estimate a total increase of approximately $4.2 million in our 2015 ED fee for service revenue from these 2015 updates.

In July 2015, CMS released the proposed rule to update the 2016 MPFS. This is the first proposed regulatory update to the MPFS since the SGR formula was repealed in April 2015. The proposed 2016 MPFS rule is not final and is subject to comment and revision; however, if implemented, we estimate that reimbursement rates for emergency medicine and anesthesia providers , recognizing the previously authorized additional 0.5% update to the conversion factor offset against a slightly reduced adjustment to the respective specialties' Practice Expense (PE) Relative Value Units (RVUs), will stay the same in 2016 as compared to 2015.

The PPACA provided Medicare bonus payments to primary care physicians and general surgeons practicing in health professional shortage areas as well as increased Medicaid payments for primary care services furnished by certain physicians at the Medicare rates in 2013 and 2014. A limited number of the Company’s providers qualified for the increased Medicaid parity payments in certain states in 2013 and 2014. For the nine months ended September 30, 2014 and September 30, 2015, we recognized $27.7 million and $2.0 million, respectively, of estimated net revenue from the Medicaid parity program. Congress failed to extend federal funding for the enhanced Medicaid payments, as the federal program known as the Medicaid Primary Care Rate Increase Program under Section 1202 of the PPACA expired on December 31, 2014. The Medicaid parity program revenue recognized in 2015 is related to changes in estimated revenue from 2014 services and the election by certain states to extend elements of the Medicaid parity program on a state funded basis for a limited period of time.

Any future reductions in amounts paid by government programs for physician services or changes in methods or regulations governing payment amounts or practices could cause our revenues to decline and we may not be able to offset reduced operating margins through cost reductions, increased volume or otherwise.

Budget Control Act's Medicare Sequestration

In August 2011, Congress enacted the Budget Control Act, which committed the U.S. government to significantly reduce the federal deficit over ten years. The Budget Control Act established caps on discretionary spending through 2021. It also established a Joint Committee of Congress (Joint Committee) that was responsible for identifying an additional $1.5 trillion in deficit reductions. The Joint Committee was unable to identify the additional deficit reductions by the deadline, thereby triggering a second provision of the Budget Control Act called “sequestration.” Sequestration calls for automatic spending cuts of $1.2 trillion over a nine-year period, beginning January 2, 2013, split between defense and non-defense programs, including spending cuts to Medicare programs averaging 2%.

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On January 2, 2013, President Obama signed the American Taxpayor Relief Act of 2012 into law. This legislation delayed the sequestration cuts that would have reduced Medicare payments by 2% until March 1, 2013. Since Congress and the White House failed to act by March 1, 2013, across-the-board cuts to Medicare payments took effect for Medicare services furnished on or after April 1, 2013. The Bipartisan Budget Act of 2013 enacted on December 26, 2013 provides limited relief from sequestration cuts for certain defense and non-defense spending for fiscal years 2014 and 2015, but the 2% cuts in Medicare reimbursement will continue in 2015 unless additional Congressional action is taken. Further, the Bipartisan Budget Act extended sequestration for mandatory programs, including Medicare, for another two years, and Congressional action in February 2014 further extended the sequestration cuts for an additional year through 2024.

Bundled Payments for Care Improvement (BPCI) Program

BPCI is an initiative sponsored by CMS that is designed to allow organizations to enter into payment arrangements that include financial and performance accountability for certain episodes of care. The objective of the BPCI program initiative is to achieve higher quality, more coordinated care at a lower cost to Medicare. The BPCI program is comprised of four broadly defined models of care, which link payments for multiple services beneficiaries receive during an episode of care. The various models of care cover both acute care hospital stays as well as post-acute care. The Company expects to participate primarily in Model 2: Retrospective Acute Care Hospital Stay plus Post-Acute Care.

The Company has contracted with Remedy BPCI Partners, who is serving as a convening organization that brings together multiple health care providers to participate in BPCI. The Company will be participating in Phase II of the BPCI program beginning July 1, 2015. Currently, fifteen of the Company’s provider groups (TINs) are participating in the BPCI program in several different geographic locations, but the Company has reserved the right to expand the number of TINs as appropriate. During the first year of participation in the BPCI program, the Company does not anticipate any material financial impact. The potential financial impact in subsequent years is dependent on the Company’s ability to meet the specific goals and objectives of the BPCI program.

Military and Government Healthcare Staffing

We are a provider of healthcare professionals serving patients eligible to receive care in government treatment facilities nationwide administered by the Department of Defense and beneficiaries of other government agencies in their respective clinical locations. Our revenues derived from military and government facility healthcare staffing totaled $87.9 million and $81.8 million for the nine months ended September 30, 2014 and 2015, respectively. Of these revenues, $54.0 million and $47.2 million for the nine months ended September 30, 2014 and 2015, respectively, are generated from contracts that are subject to a competitive bidding process which primarily takes place during the third quarter of each year. A portion of the contracts awarded during the third quarter of 2014 have or will expire during 2015 and were subject to a competitive rebidding and award process. We were successful in retaining existing business and winning new bids in the estimated annualized amount of $111.4 million following the completion of the bidding process as of October 1, 2015. This included $23.8 million awarded under one-year contracts. All contracts, including contracts with renewal options, can be terminated by the government at any time without notice. The outcome of any rebidding and award process is uncertain and we may not be awarded new contracts. Our contracts with renewal options may not be so renewed and the government may exercise its rights to terminate the contracts.

In addition, over the last several years the process of awarding military and government facility healthcare staffing contracts has developed a bias toward intentionally awarding certain contracts to qualified small and minority owned businesses. Although we participate in such small and minority owned business awards to the extent we can serve as a sub-contractor, our revenues from these arrangements are limited compared to a contract award we retain through the regular competitive bidding process. Approximately 27.6% and 26.5% of our military staffing revenue for each of the nine months ended September 30, 2014 and 2015, respectively, was derived through sub-contracting agreements with small business prime contractors.

2014 and 2015 Acquisition Activity

In 2014 and continuing into 2015, the Company realized an increase in the number of acquisitions and the total expenditures in support of acquisitions when compared to prior years. During the year ended December 31, 2014, the Company acquired the operations of fifteen businesses for total net cash proceeds of $556.2 million. As of September 30, 2015, the Company paid a total of $116.3 million related to acquisitions including $113.0 million for the operations of six businesses acquired during the period. If appropriate acquisition opportunities continue to present themselves to the Company it will be able to sustain its current pace of acquisitions. However, given the inherent uncertainty in being presented appropriate acquisition opportunities, the Company might not continue acquisitions at the same pace.

On August 4, 2015, the Company entered into an Agreement and Plan of Merger with IPC Healthcare, Inc. (IPC), providing for the acquisition of IPC by the Company (the IPC Transaction). The merger consideration provided in the Merger

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Agreement is $80.25 per share of IPC common stock in cash, or approximately $1.6 billion in enterprise value. The Company has entered into a debt commitment letter with certain lenders in connection with the financing of the acquisition.

A special meeting of IPC's stockholders is scheduled to be held on November 16, 2015 to vote upon the adoption of the merger Agreement. There is no assurance that the conditions to the Merger will be satisfied or that the Merger will close on this date or at all. See Note 3 of the accompanying consolidated financial statements for a discussion of the Company's acquisition activity.

Critical Accounting Policies and Estimates

The consolidated financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States, which requires us to make estimates and assumptions. Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of the Company’s consolidated financial statements.

There have been no material changes to these critical accounting policies or their application during the nine months ended September 30, 2015.

Revenue Recognition

Net Revenue Before Provision for Uncollectibles. Net revenue before provision for uncollectibles consist of fee for service revenue, contract revenue and other revenue. Net revenue before provision for uncollectibles are recorded in the period services are rendered. Our net revenue before provision for uncollectibles are principally derived from the provision of healthcare staffing services to patients within healthcare facilities. The form of billing and related risk of collection for such services may vary by customer. The following is a summary of the principal forms of our billing arrangements and how net revenue before provision for uncollectibles are recognized for each.

A significant portion (approximately 87% of our net revenue before provision for uncollectibles for the nine months ended September 30, 2015 and 85% for the year ended December 31, 2014) resulted from fee for service patient visits. Fee for service revenue represents revenue earned under contracts in which we bill and collect the professional component of charges for medical services rendered by our contracted and employed physicians. Under the fee for service arrangements, we bill patients for services provided and receive payment from patients or their third-party payors. Fee for service revenue is reported net of contractual allowances and policy discounts. All services provided are expected to result in cash flows and are therefore reflected as net revenue before provision for uncollectibles in the financial statements. Fee for service revenue is recognized in the period that the services are rendered to specific patients and reduced immediately for the estimated impact of contractual allowances in the case of those patients having third-party payor coverage. The recognition of net revenue before provision for uncollectibles (gross charges less contractual allowances) from such visits is dependent on such factors as proper completion of medical charts following a patient visit, the forwarding of such charts to one of our billing centers for medical coding and entering into our billing systems and the verification of each patient’s submission or representation at the time services are rendered as to the payor(s) responsible for payment of such services. Net revenue before provision for uncollectibles is recorded based on the information known at the time of entering such information into our billing systems as well as an estimate of the net revenue before provision for uncollectibles associated with medical charts for a given service period that have not yet been processed into our billing systems. The above factors and estimates are subject to change. For example, patient payor information may change following an initial attempt to bill for services due to a change in payor status. Such changes in payor status have an impact on recorded net revenue before provision for uncollectibles due to differing payors being subject to different contractual allowance amounts. Such changes in net revenue before provision for uncollectibles are recognized in the period that such changes in the payor become known. Similarly, the actual volume of medical charts not processed into our billing systems may be different from the amounts estimated. Such differences in net revenue before provision for uncollectibles are adjusted the following month based on actual chart volumes processed.

Contract revenue represents revenue generated under contracts in which we provide physician and other healthcare staffing and administrative services in return for a contractually negotiated fee. In these contractual arrangements we are the principal in the transaction and therefore recognize contract revenue on a gross basis. Contract revenue consists primarily of billings based on hours of healthcare staffing provided at agreed upon hourly rates. Revenue in such cases is recognized as the hours worked by our staff and contractors. Additionally, contract revenue includes supplemental revenue from hospitals where we may have a fee for service contract arrangement. Contract revenue for the supplemental billing in such cases is recognized based on the terms of each individual contract. Such contract terms generally either provide for a fixed monthly dollar amount or a variable amount based upon measurable monthly activity, such as hours staffed, patient visits or actual patient collections compared to a minimum activity threshold. Such supplemental revenues based on variable arrangements are usually contractually fixed on a monthly, quarterly or annual calculation basis considering the variable factors negotiated in each such

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arrangement. Such supplemental revenues are recognized as revenue in the period when such amounts are determined to be fixed and therefore contractually obligated as payable by the customer under the terms of the respective agreement.

Other revenue consists primarily of revenue from management and billing services provided to outside parties. Revenue is recognized for such services pursuant to the terms of the contracts with customers. Generally, such contracts consist of fixed monthly amounts with revenue recognized in the month services are rendered or as hourly consulting fees recognized as revenue as hours worked in accordance with such arrangements. Additionally, we derive a portion of our revenues from providing billing services that are contingent upon the collection of third-party physician billings by us on behalf of such customers. Revenues are not considered earned and therefore not recognized as revenue until actual cash collections are achieved in accordance with the contractual arrangements for such services.

Net Revenue. Net revenue reflects management’s estimate of billed amounts to be ultimately collected. Management, in estimating the amounts to be collected resulting from approximately fifteen million annual fee for service patient visits and procedures, considers such factors as prior contract collection experience, current period changes in payor mix and patient acuity indicators, reimbursement rate trends in governmental and private sector insurance programs, resolution of overprovision account balances, the estimated impact of billing system effectiveness improvement initiatives, and trends in collections from self-pay patients and external collection agencies. In developing our estimate of collections per visit or procedure, we consider the amount of outstanding gross accounts receivable by period of service and by payor class, but do not use an accounts receivable aging schedule to establish estimated collection valuations. Individual estimates of net revenue by contractual location are monitored and refreshed each month as cash receipts are applied to existing accounts receivable and other current trends that have an impact upon the estimated collections per visit are observed. Such estimates are substantially formulaic in nature. In the ordinary course of business we experience changes in our initial estimates of net revenue during the year following commencement of services. Such provisions and any subsequent changes in estimates may result in adjustments to our operating results with a corresponding adjustment to our accounts receivable allowance for uncollectibles on our balance sheet. Differences between amounts ultimately realized and the initial estimates of net revenue have historically not been material.

The table below summarizes our approximate payor mix as a percentage of consolidated fee for service volume for the periods indicated:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2015		2014		2015
Payor:
Medicare	24.7	%	25.5	%	24.9	%	25.5	%
Medicaid	29.6		31.2		28.7		31.3
Commercial and managed care	26.6		26.1		26.6		26.4
Self-pay	17.3		16.0		18.0		15.5
Other	1.8		1.2		1.8		1.3
Total	100.0	%	100.0	%	100.0	%	100.0	%

Estimated net revenue derived from commercial and managed care plans was approximately 41% in the nine months ended September 30, 2015 and 39% in 2014. Estimated net revenue derived from the Medicare program was approximately 19% of total net revenue in the nine months ended September 30, 2015 and 17% in 2014. Estimated net revenue derived from the Medicaid program was approximately 11% of total net revenue in both the nine months ended September 30, 2015 and 2014. In addition, net revenue derived from within the Military Health System, which is the U.S. military’s dependent healthcare program, and other government agencies was approximately 3% in the nine months ended September 30, 2015 and 4% in 2014.

Accounts Receivable. As described above and below, we determine the estimated value of our accounts receivable based on estimated cash collection run rates of estimated future collections by contract for patient visits under our fee for service revenue. Accordingly, we are unable to report the payor mix composition on a dollar basis of its outstanding net accounts receivable. However, a 1% change in the estimated carrying value of our net fee for service patient accounts receivable before consideration of the allowance for uncollectible accounts at September 30, 2015 could have an after tax effect of approximately $6.3 million on our financial position and results of operations. Our days revenue outstanding at December 31, 2014 and September 30, 2015 were 59.0 days and 60.4 days, respectively. The number of days outstanding will fluctuate over time due to a number of factors including the timing of cash collections and valuation adjustments recorded during the period and increases

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in average revenue per day that are primarily attributed to an increase in gross charges and patient volumes and increased pricing with managed care plans. Our allowance for doubtful accounts totaled $558.5 million as of September 30, 2015.

Approximately 99% of our allowance for doubtful accounts is related to gross fees for fee for service patient visits. Our principal exposure for uncollectible fee for service visits is centered in self-pay patients and in co-payments and deductibles from patients with insurance. While we do not specifically allocate the allowance for doubtful accounts to individual accounts or specific payor classifications, the portion of the allowance associated with fee for service charges as of September 30, 2015 was equal to approximately 93% of outstanding self-pay fee for service patient accounts.

The majority of our fee for service patient visits are for the provision of emergency care in hospital settings. Due to federal government regulations governing the provision of such care, we are obligated to provide emergency care regardless of the patient’s ability to pay or whether or not the patient has insurance or other third-party coverage for the costs of the services rendered. While we attempt to obtain all relevant billing information at the time emergency care services are rendered, there are numerous patient encounters where such information is not available at time of discharge. In such cases where detailed billing information relative to insurance or other third-party coverage is not available at discharge, we attempt to obtain such information from the patient or client hospital billing record information subsequent to discharge to facilitate the collections process. Collections at the time of rendering such services (emergency room discharge as an example) are not significant. The primary responsibility for collection of fee for service accounts receivable resides within our internal billing operations. Once a claim has been submitted to a payor or an individual patient, employees within our billing operations are responsible for the follow-up collection efforts. The protocol for follow-up differs by payor classification. For self-pay patients, our billing system will automatically send a series of dunning letters on a prescribed time frame requesting payment or the provision of information reflecting that the balance due is covered by another payor, such as Medicare or a third-party insurance plan. Generally, the dunning cycle on a self-pay account will run from 90 to 120 days. At the end of this period, if no collections or additional information is obtained from the patient, the account is no longer considered an active account and is transferred to a collection agency. Upon transfer to a collection agency, the patient account is written-off as a bad debt. Any subsequent cash receipts on accounts previously written-off are recorded as a recovery. For non-self-pay accounts, billing personnel will follow-up and respond to any communication from payors such as requests for additional information or denials until collection of the account is obtained or other resolution has occurred. At the completion of our collection cycle, selected accounts may be transferred to collection agencies under a contingent collection basis. The projected value of future contingent collection proceeds expected to be collected over a multi-year period are considered in the estimation of our overall accounts receivable valuation. For contract accounts receivable, invoices for services are prepared in our various operating locations and mailed to our customers, generally on a monthly basis. Contract terms under such arrangements generally require payment within 30 days of receipt of the invoice. Outstanding invoices are periodically reviewed and operations personnel with responsibility for the customer relationship will contact the customer to follow-up on any delinquent invoices. Contract accounts receivable will be considered as bad debt and written-off based upon the individual circumstances of the customer situation after all collection efforts have been exhausted, including legal action if warranted, and it is the judgment of management that the account is not expected to be collected.

Methodology for Computing Allowance for Doubtful Accounts. We employ several methodologies for determining our allowance for doubtful accounts depending on the nature of the net revenue before provision for uncollectibles recognized. We initially determine gross revenue for our fee for service patient visits based upon established fee schedule prices. Such gross revenue is reduced for estimated contractual allowances for those patient visits covered by contractual insurance arrangements to result in net revenue before provision for uncollectibles. Net revenue before provision for uncollectibles is then reduced for our estimate of uncollectible amounts. Fee for service net revenue represents our estimated cash to be collected from such patient visits and is net of our estimate of account balances estimated to be uncollectible. The provision for uncollectible fee for service patient visits is based on historical experience resulting from approximately fifteen million annual fee for service patient visits. The significant volume of patient visits and the terms of thousands of commercial and managed care contracts and the various reimbursement policies relating to governmental healthcare programs do not make it feasible to evaluate fee for service accounts receivable on a specific account basis. Fee for service accounts receivable collection estimates are reviewed on a quarterly basis for each of our fee for service contracts by period of accounts receivable origination. Such reviews include the use of historical cash collection percentages by contract adjusted for the lapse of time since the date of the patient visit. In addition, when actual collection percentages differ from expected results, on a contract by contract basis, supplemental detailed reviews of the outstanding accounts receivable balances may be performed by our billing operations to determine whether there are facts and circumstances existing that may cause a different conclusion as to the estimate of the collectibility of that contract’s accounts receivable from the estimate resulting from using the historical collection experience. Contract-related net revenue is billed based on the terms of the contract at amounts expected to be collected. Such billings are typically submitted on a monthly basis and aged trial balances prepared. Allowances for estimated uncollectible amounts related to such contract billings are made based upon specific accounts and invoice periodic reviews once it is concluded that such amounts are not

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likely to be collected. The methodologies employed to compute allowances for doubtful accounts were unchanged between 2014 and 2015.

Insurance Reserves

The nature of our business is such that it is subject to professional liability claims and lawsuits. Historically, to mitigate a portion of this risk, we have maintained insurance for individual professional liability claims with per incident and annual aggregate limits per physician for all incidents. Prior to March 12, 2003, we obtained such insurance coverage from commercial insurance providers. Subsequent to March 11, 2003, we have provided for a significant portion of our professional liability loss exposures through the use of captive insurance subsidiaries and through greater utilization of self-insurance reserves. Since March 12, 2003, the most significant cost element within our professional liability program has consisted of the actuarial estimates of losses by occurrence period. In addition to the estimated actuarial losses, other costs that are considered by management in the estimation of professional liability costs include program costs such as brokerage fees, claims management expenses, program premiums and taxes, and other administrative costs of operating the program, such as the costs to operate the captive insurance subsidiaries. Net costs in any period reflect our estimate of net losses to be incurred in that period as well as any changes to our estimates of the reserves established for net losses of prior periods.

The accounts of the captive insurance subsidiaries are fully consolidated with those of our other operations in the accompanying financial statements.

The estimation of medical professional liability losses is inherently complex. Medical professional liability claims are typically resolved over an extended period of time, often as long as ten years or more. The combination of changing conditions and the extended time required for claim resolution results in a loss estimation process that requires actuarial skill and the application of judgment, and such estimates require periodic revision. A report of actuarial loss estimates is prepared at least semi-annually. Management’s estimate of our professional liability costs resulting from such actuarial studies is significantly influenced by assumptions and assessments regarding expectations of several factors. These factors include, but are not limited to: historical paid and incurred loss development trends; hours of exposure as measured by hours of physician and related professional staff services; trends in the frequency and severity of claims, which can differ significantly by jurisdiction due to the legislative and judicial climate in such jurisdictions; coverage limits of third-party insurance; the effectiveness of our claims management process; and the outcome of litigation. As a result of the variety of factors that must be considered by management, there is a risk that actual incurred losses may develop differently from estimates.

The underlying information that serves as the foundational basis for making our actuarial estimates of professional liability losses is our internal database of incurred professional liability losses. We have captured extensive professional liability loss data going back, in some cases, over twenty years, that is maintained and updated on an ongoing basis by our internal claims management personnel. Our database contains comprehensive incurred loss information for our existing operations as far back as fiscal year 1997 (reflecting the initial timeframe in which we migrated to a consolidated professional liability program concurrent with the consummation of several significant acquisitions), and, in addition, we possess additional loss data that predates 1997 dates of occurrence for certain of our operations. Loss information reflects both paid and reserved losses incurred when we were covered by outside commercial insurance programs as well as paid and reserved losses incurred under our self-insurance program. Because of the comprehensive nature of the loss data and our comfort with the completeness and reliability of the loss data, this is the information that is used in the development of our actuarial loss estimates. We believe this database is one of the largest repositories of physician professional liability loss information available in our industry and provides us and our actuarial consultants with sufficient data to develop reasonable estimates of the ultimate losses under our self-insurance program. In addition to the estimated losses, as part of the actuarial process, we obtain revised payment pattern assumptions that are based upon our historical loss and related claims payment experience. Such payment patterns reflect estimated cash outflows for aggregate incurred losses by period based upon the occurrence date of the loss as well as the report date of the loss. Although variances have been observed in the actuarial estimate of ultimate losses by occurrence period between actuarial studies, the estimated payment patterns have shown much more limited variability. We use these payment patterns to develop our estimate of the discounted reserve amounts. The relative consistency of the payment pattern estimates provides us with a foundation in which to develop a reasonable estimate of the discount value of the professional liability reserves based upon the most current estimate of ultimate losses to be paid and the reasonable likelihood of the related cash flows over the payment period. Our estimated loss reserves were discounted at 1.1% as of December 31, 2014 and 1.2% as of September 30, 2015, which was the current weighted average Treasury rate, over a 10 year period at December 31, 2014 and September 30, 2015, which reflects the risk free interest rate over the expected period of claims payments.

In establishing our initial reserves for a given loss period, management considers the results of the actuarial loss estimates for such periods as well as assumptions regarding loss retention levels and other program costs to be incurred. On a semi-annual basis, we will review our professional liability reserves considering not only the reserves and loss estimates associated with the current period, but also the reserves established in prior periods based upon revised actuarial loss estimates.

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The actuarial estimation process employed utilizes a frequency severity simulation model to estimate the ultimate cost of claims for each loss period. The results of the simulation model are then validated by a comparison to the results from several different actuarial methods (paid loss development, incurred loss development, incurred Bornhuetter-Ferguson method, paid Bornhuetter-Ferguson method) for reasonableness. Each method contains assumptions regarding the underlying claims process. Actuarial loss estimates at various confidence levels capture the variability in the loss estimates for process risk but assume that the underlying model and assumptions are correct. Adjustments to professional liability loss reserves will be made as needed to reflect revised assumptions and emerging trends and data. Any adjustments to reserves are reflected in the current operations. Due to the size of our reserve for professional liability losses, even a small percentage adjustment to these estimates can have a material effect on the results of operations for the period in which the adjustment is made. Given the number of factors considered in establishing the reserves for professional liability losses, it is neither practical nor meaningful to isolate a particular assumption or parameter of the process and calculate the impact of changing that single item. The actuarial reports provide a variety of loss estimates based upon statistical confidence levels reflecting the inherent uncertainty of the medical professional liability claims environment in which we operate. Initial year loss estimates are generally recorded using the actuarial expected loss estimate, but aggregate professional liability loss reserves may be carried at amounts in excess of the expected loss estimates provided by the actuarial reports due to the relatively short time period in which we have provided for our losses on a self-insured basis and the expectation that we believe additional adjustments to prior year estimates may occur as our reporting history and loss portfolio matures. In addition, we are subject to the risk of claims in excess of insured limits as well as unlimited aggregate risk of loss in certain loss periods. As our self-insurance program continues to mature and additional stability is noted in the loss development trends in the initial years of the program, we expect to continue to review and evaluate the carried level of reserves and make adjustments as needed.

Our most recent actuarial valuation was completed in October 2015. Based on the results of the semi-annual actuarial study completed during October 2015, management determined no additional change was necessary in our consolidated reserves for professional liability losses related to prior year loss estimates.

The following reflects the current reserves for professional liability costs as of September 30, 2015 (in millions) as well as the sensitivity of the reserve estimates at a 65%, 75% and 90% confidence level:



As reported	$	219.4
At 65% confidence level	$	223.7
At 75% confidence level	$	230.0
At 90% confidence level	$	244.8

It is not possible to quantify the amount of the change in our estimate of prior year losses (when required) by individual fiscal period due to the nature of the professional liability loss estimates that are provided to us on an occurrence period basis and the nature of the coverage that is obtained in the commercial insurance market which is generally underwritten on a claims made or report period basis. Even though we are self-insured for a significant portion of our risk, due to customer contracting requirements and state insurance regulations, we still, at times, must place coverage on a claims made or report period basis with commercial insurance carriers. In a limited number of markets, commercial coverage may be obtained on an occurrence basis. When evaluating the appropriate carrying level of our self-insured professional liability reserves, management considers the current estimates of occurrence period loss estimates as well as how such loss estimates and related future claims will interact with previous or current commercial insurance programs when projecting future cash flows. However, the complexity that is associated with multiple occurrence periods interacting with multiple report periods that contain risks and related reserves retained by us, as well as transferred to commercial insurance carriers, makes it impossible to allocate the change in prior year loss estimates to individual occurrence periods. Instead, we evaluate the future expected cash flows for all historical loss periods in the aggregate and compare such estimates to the current carrying value of our professional liability reserves. This process provides the basis for us to conclude that our reserves for professional liability losses are reasonable and properly stated. Management considers the results of actuarial studies when estimating the appropriate level of professional liability reserves and no adjustments to prior year loss estimates were made in periods where updated actuarial loss estimates were not available.

Due to the complexity of the actuarial estimation process, there are many factors, trends and assumptions that must be considered in the development of the actuarial loss estimates, and we are not able to quantify and disclose which specific elements are primarily contributing to changes in the revised loss estimates of historical occurrence periods when such adjustments may be recorded. However, we believe that our internal investments in enhanced risk management and claims management resources and initiatives, such as the employment of additional claims and litigation management personnel and practices, and an expansion of programs such as root cause loss analysis, early claim evaluation, and litigation support for

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insured providers have contributed to the generally stable trends in loss development estimates noted during the most recent periods.

Impairment of Intangible Assets

In assessing the recoverability of our intangibles, we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for these assets.

Results of Operations

The following discussion provides an analysis of our results of operations and should be read in conjunction with our unaudited consolidated financial statements. Net revenue is an estimate of future cash collections and as such it is a key measurement by which management evaluates performance of individual contracts as well as the Company as a whole. The following table sets forth the components of net earnings as a percentage of net revenue for the periods indicated:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2015		2014		2015
Net revenue	100.0	%	100.0	%	100.0	%	100.0	%
Professional service expenses	76.7		78.7		76.8		78.7
Professional liability costs	4.2		3.1		3.6		3.1
General and administrative expenses	8.7		7.5		9.7		8.4
Other (income) expenses, net	—		0.2		(0.2	)	—
Depreciation	0.8		0.7		0.8		0.7
Amortization	1.8		2.3		1.7		2.4
Interest expense, net	0.6		0.6		0.5		0.5
Transaction costs	0.4		0.4		0.3		0.3
Earnings before income taxes	6.8		6.5		6.8		6.0
Provision for income taxes	2.9		2.5		2.8		2.5
Net earnings	3.9	%	3.9	%	4.0	%	3.5	%
Net earnings (loss) attributable to noncontrolling interests	—	%	—	%	—	%	—	%
Net earnings attributable to Team Health Holdings, Inc.	3.9	%	3.9	%	4.0	%	3.5	%

Three Months Ended September 30, 2015 Compared to the Three Months Ended September 30, 2014

Net Revenue Before Provision for Uncollectibles. Net revenue before provision for uncollectibles in the three months ended September 30, 2015 increased $302.3 million, or 24.7%, to $1.53 billion from $1.22 billion in the three months ended September 30, 2014. The increase in net revenue before provision for uncollectibles resulted from increases in fee for service revenue of $280.4 million, contract revenue of $21.4 million and other revenue of $0.6 million. In the three months ended September 30, 2015, fee for service revenue was 87.4% of net revenue before provision for uncollectibles compared to 86.0% in the same period of 2014, contract revenue was 12.0% of net revenue before provision before uncollectibles compared to 13.2% in the same period of 2014 and other revenue was 0.7% and 0.8% in 2015 and 2014, respectively. The increase in fee for service revenue before provision for uncollectibles was primarily a result of a 28.7% increase in total fee for service visits between periods.

Provision for Uncollectibles. The provision for uncollectibles increased $115.4 million, or 22.6%, to $626.2 million in the three months ended September 30, 2015 from $510.9 million in the corresponding quarter in 2014. The provision for uncollectibles as a percentage of net revenue before provision for uncollectibles declined to 41.1% in the three months ended September 30, 2015 compared with 41.8% in the corresponding quarter of 2014. The provision for uncollectibles is primarily related to revenue generated under fee for service contracts that is not expected to be fully collected. The quarter over quarter increase in the provision for uncollectibles was due primarily to annual increases in gross fee schedules and increases in patient volumes and procedures. Changes in payor mix, particularly the level of self-pay fee for service visits, also have an impact on the provision for uncollectibles. For the three months ended September 30, 2015, self-pay fee for service visits were

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approximately 16.0% of the total fee for service visits compared to approximately 17.3% in the same quarter of 2014, which constrained the growth in the provision for uncollectibles between quarters.

Net Revenue. Net revenue in the three months ended September 30, 2015 increased $186.9 million, or 26.2%, to $899.2 million from $712.2 million in the three months ended September 30, 2014. Acquisitions contributed 19.2%, net sales growth contributed 4.4%, and same contract revenue contributed 2.7% of the increase in quarter over quarter growth in net revenue. Within the acquisitions category, new hospital contracting opportunities that were initially developed by our sales and marketing process contributed 4.7% of overall net revenue growth between quarters.

Total same contract revenue, which consists of contracts under management in both quarters, increased $19.0 million, or 2.9%, to $672.9 million in the three months ended September 30, 2015 compared to $653.9 million in the three months ended September 30, 2014. Fee for service volume increased 3.3%, which contributed 2.5% of same contract revenue growth between quarters. Increases in estimated collections on same contract fee for service visits provided a 0.6% increase in same contract revenue growth. The increase in estimated collections per visit was supported by increases in commercial and managed care reimbursement and improvements in prior year revenue estimates but was constrained by a reduction in Medicaid parity revenue and a decline in sequential payor mix benefit in the three months ended September 30, 2015. Contract and other revenue constrained same contract revenue growth by 0.2% between quarters. Acquisitions contributed $136.5 million of growth in net revenue and net new contract revenue increased $31.4 million between quarters. The benefit from Medicaid parity revenue recognized in the third quarter of 2015 was $0.2 million. The third quarter of 2014 reflects Medicaid parity revenue of $10.4 million, of which $9.8 million is same contract. The decline in total parity revenue between periods of $10.2 million constrained consolidated revenue growth by 1.4% while the decline in same contract Medicaid parity revenue constrained same contract revenue growth by 1.5% between quarters. Medicaid parity revenue was originally only legislated to cover two years, 2013 and 2014. The Medicaid parity revenue in 2015 is related to changes in estimated revenue from 2014 services and the election by certain states to extend elements of the Medicaid parity program on a state funded basis for a limited period of time.

We typically gain new contracts by replacing competitors at hospitals that currently outsource such services, obtaining new contracts from facilities that do not currently outsource and responding to contracting opportunities within the military healthcare system. Factors influencing new contracting opportunities include the depth and breadth of our service offerings, our reputation and experience, our ability to recruit and retain qualified clinicians, and pricing considerations when a subsidy or contract payment is required. Contracts are typically terminated due to economic considerations, a change in hospital administration or ownership, dissatisfaction with our service offerings or, primarily relating to our military staffing arrangements, at the end of the contract term.

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The components of net revenue include revenue from contracts that have been in effect for prior periods (same contracts) and from net, new and acquired contracts during the periods, as set forth in the table below:



	Three Months Ended September 30,
	2014		2015
	(in thousands)
Same contracts:
Fee for service revenue	$	504,193	$	524,203
Contract and other revenue	149,709		148,664
Total same contracts	653,902		672,867
New contracts, net of terminations:
Fee for service revenue	27,725		56,568
Contract and other revenue	19,167		21,769
Total new contracts, net of terminations	46,892		78,337
Acquired contracts:
Fee for service revenue	10,691		126,721
Contract and other revenue	756		21,256
Total acquired contracts	11,447		147,977
Consolidated:
Fee for service revenue	542,609		707,492
Contract and other revenue	169,632		191,689
Total net revenue	$	712,241	$	899,181

The following table reflects the visits and procedures included within fee for service revenues described in the table above:



	Three Months Ended September 30,
	2014	2015
	(in thousands)
Fee for service visits and procedures:
Same contracts	2,925	3,023
New and acquired contracts, net of terminations	197	994
Total fee for service visits and procedures	3,122	4,017

Professional Service Expenses. Professional service expenses, which include physician and provider costs, billing and collection expenses, and other professional expenses, totaled $707.9 million in the three months ended September 30, 2015 compared to $546.3 million in the three months ended September 30, 2014, an increase of $161.5 million, or 29.6%. This increase between quarters is primarily related to our acquisitions and new contracts and a 5.2% increase in same contract professional service expenses primarily associated with increases in provider compensation. Professional service expenses as a percentage of net revenue increased to 78.7% in the three months ended September 30, 2015 from 76.7% in the three months ended September 30, 2014.

Professional Liability Costs. Professional liability costs were $27.5 million in the three months ended September 30, 2015 compared to $29.6 million in the three months ended September 30, 2014, a decrease of $2.1 million or 7.1%. Professional liability costs for the three months ended September 30, 2014 included an increase in prior year professional liability loss reserves of $7.1 million. Excluding the prior year reserve adjustment in the three months ended September 30, 2014, professional liability costs increased $5.0 million, or 22.2%. The decrease was primarily attributed to an increase in provider hours including increases from acquisitions and new contracts and an increase in allocation rates between periods. Professional liability costs as a percentage of net revenue were 3.1% in the third quarter of 2015 and 4.2% in 2014. Excluding the prior year reserve adjustment in the three months ended September 30, 2014, professional liability costs as a percentage of net revenue were 3.2% in the third quarter of 2014.

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General and Administrative Expenses. General and administrative expenses increased $5.4 million, or 8.8%, to $67.1 million for the three months ended September 30, 2015 from $61.6 million in the three months ended September 30, 2014. General and administrative expenses included a credit to contingent purchase compensation expense of $3.5 million for the three months ended September 30, 2015 compared to $3.1 million of expense for the three months ended September 30, 2014. The credit in contingent purchase expense in the third quarter of 2015 is related to changes in our future contingent payment estimates due to certain acquisitions that are projected to fall short of operational or financial targets, resulting in a reduction of our previous estimate of contingent consideration payable at the end of the measurement period. In limited circumstances, the accrued contingent consideration is based on a multiple of earnings of the acquired practices during a specified measurement period and a moderate change in such projected earnings may result in a significant change to the estimated value of such previously projected contingent consideration liability during a reporting period. Excluding the contingent purchase compensation expense, general and administrative expense increased $12.0 million or 20.6%, to $70.6 million for the three months ended September 30, 2015 from $58.6 million in the three months ended September 30, 2014. The increase in general and administrative expenses was due primarily to the impact of acquisitions between periods. Total general and administrative expenses as a percentage of net revenue were 7.5% in the third quarter of 2015 and 8.7% in the same quarter in 2014. Excluding contingent purchase compensation expense, general and administrative expenses as a percentage of net revenue were 7.9% in the third quarter of 2015 compared to 8.2% in the third quarter of 2014.

Other (Income) Expenses, Net. In the three months ended September 30, 2015, we recognized other expense of $2.1 million compared to expense of $0.3 million in the same quarter in 2014. The expense recognized in 2015 is primarily related to the change in the fair value of assets related to our non-qualified deferred compensation plan. The expense recognized in 2014 is primarily related to the change in the fair value of assets related to our non-qualified deferred compensation plan.

Depreciation. Depreciation expense was $6.3 million in the three months ended September 30, 2015 compared to $5.8 million for the three months ended September 30, 2014. The increase of $0.5 million was primarily due to capital expenditures in 2015 and 2014.

Amortization. Amortization expense was $20.6 million in the three months ended September 30, 2015 compared to $13.0 million for the three months ended September 30, 2014. The increase of $7.6 million was primarily a result of an increase in other intangibles recognized in connection with our acquisitions in 2015 and 2014.

Net Interest Expense. Net interest expense increased $1.7 million to $5.6 million in the three months ended September 30, 2015 compared to $3.9 million in the corresponding quarter in 2014 primarily due to an increase in revolver borrowings due primarily to the funding of our acquisitions and an increase in the amortization of deferred financing costs partially offset by a reduction of interest from the repayment of the Term B Loan Facility in 2014.

Transaction Costs. Transaction costs were $3.9 million for the three months ended September 30, 2015 and $3.1 million for the three months ended September 30, 2014. These costs relate to advisory, legal, accounting and other fees incurred related to acquisition activity during the respective quarters. Of the total transactions costs in 2015, $2.6 million is associated with the IPC Healthcare transaction.

Earnings before Income Taxes. Earnings before income taxes in the three months ended September 30, 2015 were $58.3 million compared to $48.6 million in the three months ended September 30, 2014.

Provision for Income Taxes. The provision for income taxes was $22.8 million in the three months ended September 30, 2015 compared to $20.9 million in the three months ended September 30, 2014.

Net Earnings. Net earnings were $35.4 million in the three months ended September 30, 2015 compared to $27.7 million in the three months ended September 30, 2014.

Net Earnings (Loss) Attributable to Noncontrolling Interests. Earnings (loss) attributable to noncontrolling interests were a loss of $10,000 for the three months ended September 30, 2015 compared to earnings of $70,000 for the three months ended September 30, 2014.

Net Earnings Attributable to Team Health Holdings, Inc. Net earnings attributable to Team Health Holdings, Inc. were $35.4 million and $27.6 million for the three months ended September 30, 2015 and September 30, 2014, respectively.

Nine Months Ended September 30, 2015 Compared to the Nine Months Ended September 30, 2014

Net Revenue Before Provision for Uncollectibles. Net revenue before provision for uncollectibles in the nine months ended September 30, 2015 increased $896.8 million, or 25.7%, to $4.39 billion from $3.49 billion in the nine months ended

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September 30, 2014. The increase in net revenue before provision for uncollectibles resulted primarily from increases in fee for service revenue of $837.7 million and contract revenue of $60.7 million, partially offset by a decrease in other revenue of $1.6 million. In the nine months ended September 30, 2015, fee for service revenue was 86.8% of net revenue before provision for uncollectibles compared to 85.1% in the same period of 2014, contract revenue was 12.5% of net revenue before provision before uncollectibles compared to 14.0% in the same period of 2014 and other revenue was 0.7% in 2015 and 0.9% in 2014. The increase in fee for service revenue before provision for uncollectibles was primarily a result of a 33.4% increase in total fee for service visits and procedures. The increase in contract revenue was due primarily to the impact of new and acquired contracts.

Provision for Uncollectibles. The provision for uncollectibles increased $308.1 million or 21.0%, to $1.77 billion in the nine months ended September 30, 2015 from $1.46 billion in the corresponding period in 2014. The provision for uncollectibles as a percentage of net revenue before provision for uncollectibles declined to 40.4% in the nine months ended September 30, 2015 compared with 41.9% in the corresponding period of 2014. The provision for uncollectibles is primarily related to revenue generated under fee for service contracts that is not expected to be fully collected. The period-over-period increase in the provision for uncollectibles was due primarily to annual increases in gross fee schedules and increases in patient volumes and procedures. Changes in payor mix, particularly the level of self-pay fee for service visits, also have an impact on the provision for uncollectibles. For the nine months ended September 30, 2015, self-pay fee for service visits were approximately 15.5% of the total fee for service visits compared to approximately 18.0% in the same period of 2014, which constrained the growth in the provision for uncollectibles between periods.

Net Revenue. Net revenue in the nine months ended September 30, 2015 increased $588.7 million or 29.0%, to $2.62 billion from $2.03 billion in the nine months ended September 30, 2014. Acquisitions contributed 19.9%, net sales growth contributed 4.9%, and same contract revenue contributed 4.2% of the increase in period-over-period growth in net revenue. Within the acquisitions category, new hospital contracting opportunities that were initially developed by our sales and marketing process contributed 5.3% of overall net revenue growth between periods.

Total same contract revenue, which consists of contracts under management in both periods, increased $85.8 million, or 4.7%, to $1.90 billion in the nine months ended September 30, 2015 compared to $1.82 billion in the nine months ended September 30, 2014. Fee for service volume increases of 6.1% increased same contract revenue growth by 4.6%, while increases in same contract estimated collections on fee for service visits provided a 0.2% increase in same contract revenue growth between periods. The increase in the estimated collections per visit was constrained by a reduction in Medicaid parity revenue in the nine months ended September 30, 2015. Contract and other revenue constrained same contract revenue growth by 0.1% between periods. Acquisitions contributed $403.7 million of growth in net revenue and net new contract revenue increased $99.1 million between periods. The 2015 year to date benefit for Medicaid parity revenue recognized is $2.0 million, of which $0.2 million is same contract revenue. $27.7 million of Medicaid parity revenue was recognized in the nine months ended September 30, 2014, $25.6 million of which was same contract. Declines in Medicaid parity constrained consolidated revenue growth by 1.3% and same contract revenue growth 1.4% by between periods.

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	Nine Months Ended September 30,
	2014		2015
	(in thousands)
Same contracts:
Fee for service revenue	$	1,383,476	$	1,469,940
Contract and other revenue	434,253		433,613
Total same contracts	1,817,729		1,903,553
New contracts, net of terminations:
Fee for service revenue	92,328		193,259
Contract and other revenue	78,120		76,325
Total new contracts, net of terminations	170,448		269,584
Acquired contracts:
Fee for service revenue	38,321		380,276
Contract and other revenue	2,463		64,207
Total acquired contracts	40,784		444,483
Consolidated:
Fee for service revenue	1,514,125		2,043,475
Contract and other revenue	514,836		574,145
Total net revenue	$	2,028,961	$	2,617,620

The following table reflects the visits and procedures included within fee for service revenues described in the table above:



	Nine Months Ended September 30,
	2014	2015
	(in thousands)
Fee for service visits and procedures:
Same contracts	8,050	8,541
New and acquired contracts, net of terminations	824	3,296
Total fee for service visits and procedures	8,874	11,837

Professional Service Expenses. Professional service expenses, which include physician and provider costs, billing and collection expenses, and other professional expenses, totaled $2.06 billion in the nine months ended September 30, 2015 compared to $1.56 billion in the nine months ended September 30, 2014, an increase of $501.2 million, or 32.2%. This increase between periods is primarily related to our acquisitions and net new contract growth and a 6.4% increase in same contract professional service expenses primarily associated with increases in provider compensation. Professional service expenses as a percentage of net revenue increased to 78.7% in the nine months ended September 30, 2015 from 76.8% in the nine months ended September 30, 2014.

Professional Liability Costs. Professional liability costs were $81.4 million in the nine months ended September 30, 2015 compared to $73.5 million in the nine months ended September 30, 2014, an increase of $7.9 million or 10.7%. Professional liability costs for the nine months ended September 30, 2014 included an increase in prior year professional liability loss reserves of $7.1 million. Excluding the prior year reserve adjustment in 2014, professional liability costs increased $15.0 million, or 22.6%, between periods. The increase was primarily attributed to an increase in provider hours including increases from acquisitions and new contracts and an increase in allocation rates between periods. Professional liability costs as a percentage of net revenue were 3.1% in the nine months ended September 30, 2015 and 3.6% in the nine months ended September 30, 2014. Excluding the prior year revenue adjustments in 2014, professional liability costs as a percentage of net revenue were 3.3% in the nine months ended September 30, 2014.

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General and Administrative Expenses. General and administrative expenses increased $23.4 million or 11.9% to $219.2 million for the nine months ended September 30, 2015 from $195.8 million in the nine months ended September 30, 2014. General and administrative expenses included contingent purchase compensation expense of $12.2 million for the nine months ended September 30, 2015 compared to $22.5 million of expense for the nine months ended September 30, 2014. Excluding the contingent purchase compensation expense, general and administrative expense increased $33.6 million or 19.4%, to $207.0 million for the nine months ended September 30, 2015 from $173.4 million in the nine months ended September 30, 2014. The increase in general and administrative expenses was due primarily to acquisitions and growth in salaries and new positions, and increases in legal and professional fees between periods on a same contract basis. Total general and administrative expenses as a percentage of net revenue were 8.4% in the nine months ended September 30, 2015 and 9.7% in the nine months ended September 30, 2014. Excluding contingent purchase compensation expense, general and administrative expenses as a percentage of net revenue were 7.9% in the nine months ended September 30, 2015 compared to 8.5% in the nine months ended September 30, 2014.

Other (Income) Expenses, Net. In the nine months ended September 30, 2015, we recognized other income of $0.2 million compared to $3.5 million in the same period in 2014. The income recognized in 2015 is primarily related to the sale of our equity investment in a hospital-based telemedicine consultation provider and certain assets that were held for sale, partially offset by a loss on sale of assets related to our outsourced medical coding practice and a decline in the fair value of assets related to our non-qualified deferred compensation plan. In 2014 the income recognized includes a $2.3 million net gain on the sale and disposal of assets, including the sale of assets associated with our clinic operations and income related to the increase in the fair value of assets related to our non-qualified deferred compensation plan.

Depreciation. Depreciation expense was $17.4 million in the nine months ended September 30, 2015 compared to $15.3 million for the nine months ended September 30, 2014. The increase of $2.1 million was primarily due to capital expenditures in 2015 and 2014.

Amortization. Amortization expense was $62.1 million in the nine months ended September 30, 2015 compared to $35.2 million for the nine months ended September 30, 2014. The increase of $26.9 million was primarily a result of an increase in other intangibles recognized in connection with our acquisitions in 2015 and 2014.

Net Interest Expense. Net interest expense increased $3.4 million to $14.1 million in the nine months ended September 30, 2015, compared to $10.8 million in the corresponding period in 2014, primarily due to increased revolver borrowings between periods and an increase in the amortization of deferred financing costs partially offset by a reduction of interest from the repayment of the Term B Loan facility in 2014.

Transaction Costs. Transaction costs were $7.2 million for the nine months ended September 30, 2015 and $5.7 million for the nine months ended September 30, 2014. These costs relate to advisory, legal, accounting and other fees incurred related to acquisition activity during the respective periods. Of the total transaction costs in 2015, $2.6 million is associated with the IPC Healthcare transaction.

Earnings before Income Taxes. Earnings before income taxes in the nine months ended September 30, 2015 were $157.5 million compared to $138.4 million in the nine months ended September 30, 2014.

Provision for Income Taxes. The provision for income taxes was $65.2 million in the nine months ended September 30, 2015 compared to $56.5 million in the nine months ended September 30, 2014.

Net Earnings. Net earnings were $92.4 million in the nine months ended September 30, 2015 compared to $81.8 million in the nine months ended September 30, 2014.

Net (Loss) Earnings Attributable to Noncontrolling Interests. Earnings (loss) attributable to noncontrolling interests were a loss of $0.1 million for the nine months ended September 30, 2015 and earnings of $0.2 million in the nine months ended September 30, 2014.

Net Earnings Attributable to Team Health Holdings, Inc. Net earnings attributable to Team Health Holdings, Inc. were $92.4 million and $81.6 million for the nine months ended September 30, 2015 and September 30, 2014, respectively.

Liquidity and Capital Resources

Our principal ongoing uses of cash are to meet working capital requirements, to fund debt obligations and to finance our capital expenditures and acquisitions. We believe that our cash needs, other than for significant acquisitions, will continue to be met through the use of existing available cash, cash flows derived from future operating results and borrowings under our senior secured revolving credit facility.

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Cash flow provided by operations for the nine months ended September 30, 2015 was $131.9 million compared to $106.7 million in the same period in 2014. Included in operating cash flow were contingent purchase price payments of $12.2 million in the nine months ended September 30, 2015 and $21.9 million in the same period in 2014. Excluding the impact of the contingent purchase payments, the operating cash flows in 2015 were $144.2 million compared to $128.7 million in 2014. Operating cash flow in the first nine months of 2015 reflects an increased level of profitability when compared to the prior year. Cash used in investing activities in the nine months ended September 30, 2015 was $127.4 million compared to $368.4 million in the same period of 2014. The $241.0 million decrease in cash used in investing activities was principally due to a decrease in cash used for acquisitions between periods. Cash used in financing activities in the nine months ended September 30, 2015 was $6.5 million compared to cash provided of $243.0 million in the nine months ended September 30, 2014. The change in financing activities between periods was primarily related to reduced net revolver drawings, offset by an increase in proceeds from stock option exercises and the related tax benefit.

We spent $31.1 million in the first nine months of 2015 and $16.8 million in the first nine months of 2014 on capital expenditures. These expenditures were primarily for billing and information technology investments and related development projects along with projects in support of operational initiatives.

As of September 30, 2015, we had cash and cash equivalents of approximately $18.2 million and total outstanding debt of $755.0 million. There were no known liquidity restrictions or impairments on our cash and cash equivalents as of September 30, 2015. The outstanding debt as of September 30, 2015 includes borrowings under our revolving credit facility in the amount of $170.0 million incurred primarily to fund our recently completed acquisitions. As of September 30, 2015, we had $480.0 million of available borrowings under our revolving credit facilities (without giving effect to $6.4 million of undrawn letters of credit). See Note 8 of the accompanying consolidated financial statements for a discussion of our indebtedness.

The senior credit facility agreement contains both affirmative and negative covenants, including limitations on our ability to incur additional indebtedness, sell material assets, retire, redeem or otherwise reacquire our capital stock, acquire the capital stock or assets of another business and pay dividends, and requires us to comply with a maximum first lien net leverage ratio, tested quarterly. At September 30, 2015, we were in compliance with all covenants under the senior credit facility agreement. The senior credit facility is secured by substantially all of our U.S. subsidiaries’ assets.

Subject to any contractual restrictions, the Company and its subsidiaries, affiliates or significant shareholders may, from time to time, in their sole discretion, purchase, repay, redeem or retire any of the Company’s outstanding equity securities in privately negotiated or open market transactions, by tender offer or otherwise.

We have historically been an acquirer of other physician staffing businesses and related interests. For the nine months ended September 30, 2015, total net cash used in acquisitions, including contingent payments, was $128.6 million. As of September 30, 2015, we estimate future contingent payment obligations to be approximately $49.4 million for acquisitions made prior to September 30, 2015, which we expect to fund over a period of three years. $24.1 million was recorded as a liability on our balance sheet as of September 30, 2015, while the remaining estimated liability of $25.2 million will be recorded as contingent purchase and other acquisition compensation expense over the remaining performance period. See Note 3 of the accompanying consolidated financial statements for a discussion of our acquisitions and related contingent obligations.

We are currently in discussions with certain physician staffing businesses regarding potential acquisition opportunities. If we consummate any of these potential acquisitions, we would expect to fund such acquisitions using our existing cash, through borrowings under our revolving credit facility, or through the issuance of additional debt or equity. See Note 3 of the accompanying consolidated financial statements for a discussion of the Company's acquisition activity and related contingent purchase obligations, including discussion of the IPC Transaction.

Effective March 12, 2003, we began providing for professional liability risks in part through captive insurance companies. Prior to such date, we insured such risks principally through the commercial insurance market. The change in the professional liability insurance program initially resulted in increased cash flow due to the retention of cash formerly paid out in the form of insurance premiums to a commercial insurance company coupled with a long period (typically 2-4 years or longer on average) before cash payout of such losses occurs. A portion of such cash retained is retained within our captive insurance companies and therefore is not immediately available for general corporate purposes. Investments held by the Company and our captive insurance subsidiaries are carried at fair market value. As of September 30, 2015, these investments totaled approximately $97.5 million, including a $2.0 million net unrealized gain. See Note 5 of the accompanying consolidated financial statements for a discussion of the investments held by the Company and our captive insurance subsidiaries.

Effective June 1, 2014, we renewed our fronting carrier program with a commercial insurance carrier through May 31, 2016. In June 2015, we paid cash premiums of approximately $15.8 million to the commercial insurance carrier. For the nine months ended September 30, 2015, we funded approximately $16.7 million of premiums to our captive insurance subsidiaries.

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We present Adjusted EBITDA as a supplemental measure of our performance. We define Adjusted EBITDA as net earnings attributable to Team Health Holdings, Inc. before interest expense, taxes, depreciation and amortization, as further adjusted to exclude the non-cash items and the other adjustments shown in the table below. We present Adjusted EBITDA because we believe it assists investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance.

Adjusted EBITDA is not a measurement of financial performance or liquidity under generally accepted accounting principles. In evaluating our performance as measured by Adjusted EBITDA, management recognizes and considers the limitations of this measure. Adjusted EBITDA does not reflect certain cash expenses that we are obligated to make, and although depreciation and amortizations are non-cash charges, assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements. In addition, other companies in our industry may calculate Adjusted EBITDA differently than we do or may not calculate it at all, limiting its usefulness as a comparative measure. Because of these limitations, Adjusted EBITDA should not be considered in isolation or as a substitute for net earnings, operating income, cash flows from operating, investing or financing activities, or any other measure calculated in accordance with generally accepted accounting principles.

The following table sets forth a reconciliation of net earnings attributable to Team Health Holdings, Inc. to Adjusted EBITDA:



	Three Months Ended September 30,					Nine Months Ended September 30,
	2014		2015			2014			2015
	(in thousands)
Net earnings attributable to Team Health Holdings, Inc.	$	27,586	$	35,442		$	81,634		$	92,431
Interest expense, net	3,921		5,572			10,758			14,132
Provision for income taxes	20,895		22,837			56,542			65,178
Depreciation	5,826		6,290			15,315			17,423
Amortization	12,991		20,633			35,203			62,085
Other (income) expenses, net^(a)	292		2,137			(3,457		)	(182		)
Contingent purchase and other acquisition compensation expense^(b)	3,086		(3,530		)	22,483			12,230
Transaction costs^(c)	3,107		3,869			5,734			7,170
Equity based compensation expense^(d)	3,345		3,985			12,693			13,197
Insurance subsidiaries interest income	503		535			1,501			1,558
Professional liability loss reserve adjustments associated with prior years	7,088		—			7,088			—
Severance and other charges	381		3,343			1,563			4,590
Adjusted EBITDA	$	89,021	$	101,113		$	247,057		$	289,812


(a)	Reflects gain or loss on sale of assets, realized gains on investments, and changes in fair value of investments associated with the Company’s non-qualified retirement plan.


(b)	Reflects expense recognized for historical and estimated future contingent payments and other compensation expense associated with acquisitions.


(c)	Reflects expenses associated with accounting, legal, due diligence and other transaction fees related to acquisition activity, including costs associated with the IPC Healthcare transaction of $2.6 million.


(d)	Reflects costs related to equity awards granted under the Team Health Holdings, Inc. 2009 Amended and Restated Stock Incentive Plan and the 2010 Nonqualified Stock Purchase Plan.

Inflation

We do not believe that general inflation in the U.S. economy has had a material impact on our financial position or results of operations.

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Seasonality

Historically, our revenues and operating results have reflected minimal seasonal variation due to the significance of revenues derived from patient visits to emergency departments, which are generally open on a year-round basis, and also due to our geographic diversification. Revenue from our non-emergency department staffing lines is dependent on a healthcare facility being open during selected time periods. Revenue in such instances will fluctuate depending upon such factors as the number of holidays in the period.

Recently Issued Accounting Standards

See Note 2 of the notes to the consolidated financial statements for a discussion of recently issued accounting standards.



Item 3.	Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to market risk related to changes in interest rates. The Company does not use derivative financial instruments for speculative or trading purposes.

The Company’s earnings are affected by changes in short-term interest rates as a result of its borrowings under its term loan facility.

At September 30, 2015, the fair value of the Company’s total debt was approximately $741.9 million, which had a carrying value of $755.0 million, all of which was variable debt. If the market interest rates for the Company’s variable rate borrowings had averaged 1% more subsequent to December 31, 2014, the Company’s interest expense would have increased, and earnings before income taxes would have decreased, by approximately $6.2 million for the nine months ended September 30, 2015. This analysis does not consider the effects of the reduced level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management could take actions in an attempt to further mitigate its exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in the Company’s financial structure.



Item 4.	Controls and Procedures

We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act), that are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving desired objectives. As of September 30, 2015, we conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Executive Vice President and Chief Financial Officer concluded that as of September 30, 2015, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting: There were no changes in our internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three months ended September 30, 2015 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION



Item 1.	Legal Proceedings

There have been no material changes to the risk factors set forth in Item 3. to Part I of our annual report on Form 10-K for the year ended December 31, 2014, except as discussed in Note 10 of our in this quarterly report on Form 10-Q.



Item 1A.	Risk Factors

For a discussion of our potential risks and uncertainties, please see “Risk Factors” in Part 1, Item 1A of our annual report on Form 10-K for the year ended December 31, 2014, filed with the Securities and Exchange Commission on February 10, 2015. In addition, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Factors and Trends that Affect Our Results of Operations” herein and the 2014 Form 10-K. In addition to the risk factors disclosed in Part 1, Item 1A of the 2014 Form 10-K, the following are certain risk factors associated with the IPC Transaction:

Risk Factors Relating to the IPC Transaction

We may be unable to successfully integrate IPC’s operations or to realize targeted cost savings, revenues or other benefits of the IPC Transaction.

We face numerous risks and challenges to successful integration of IPC, including the following:


•	the potential for unexpected costs, delays and challenges that may arise in integrating IPC into our existing business;


•	limitations on our ability to realize the expected cost savings and synergies from the IPC Transaction;


•	challenges related to integrating IPC’s operations that has a management team and a company culture that differs from our own;


•	challenges related to the integration of businesses that operate in new geographic areas, including difficulties in identifying and gaining access to customers in new markets;


•	difficulties of managing operations outside of our existing core business, which may require development of additional skills and competencies; and


•	discovery of previously unknown liabilities in connection with the IPC Transaction, including, among other things, the qui tam whistleblower action and the Florida Medicaid temporary reimbursement suspension.

We will incur significant transaction and acquisition-related costs in connection with the IPC Transaction.

We expect to incur significant costs associated with the IPC Transaction and combining the operations of the two companies, including costs to achieve targeted cost-savings. The substantial majority of the expenses resulting from the IPC Transaction will be composed of transaction costs related to the IPC Transaction, systems consolidation costs, and business integration and employment-related costs, including costs for severance, retention and other restructuring. We may also incur transaction fees and costs related to formulating integration plans. Additional unanticipated costs may be incurred in the integration of the two companies’ businesses. Although we expect that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, should allow us to offset incremental transaction and acquisition-related costs over time, this net benefit may not be achieved in the near term, or at all.



Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds

None.

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Item 3.	Defaults upon Senior Securities

None.



Item 4.	Mine Safety Disclosures

Not Applicable.



Item 5.	Other Information

None.

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Item 6.	Exhibits



2.1			Agreement and Plan of Merger dated as of August 4, 2015, by and among Team Health Holdings, Inc., Intrepid Merger Sub, Inc. and IPC Healthcare, Inc. (incorporated by reference to Exhibit 2.1 of the Current Report on Form 8-K, filed on August 4, 2015: File No. 001-34573)

3.1			Certificate of Incorporation of Team Health Holdings, Inc. (incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K, filed on December 18, 2009: File No. 001-34583)

3.2			Amended and Restated By-laws of Team Health Holdings, Inc. (incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K, filed on April 18, 2013: File No. 001-34583)

10.1			Debt Commitment letter dated as of August 4, 2015 by and among Team Health Holdings, Inc., Team Health, Inc. and Citigroup Global Markets, Inc., Citibank N.A., Citigroup USA, Inc., Citicorp North America, Inc. (incorporated by reference to Exhibit 2.1 of the Current Report on Form 8-K, filed on August 4, 2015: File No. 001-34573)

10.2			Amended and Restated Debt Commitment letter dated as of August 25, 2015 by and among Team Health Holdings, Inc., Team Health, Inc. and Citigroup Global Markets, Inc., Citibank N.A., Citigroup USA, Inc., Citicorp North America, Inc.

10.3			Amendment No. 1, dated as of October 2, 2015, among Team Health, Inc., the Company, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent and as swing line lender to the Amended and Restated Credit Agreement, dated as of October 2, 2014, among Team Health, Inc., the Company, the lenders party thereto from time to time and the other agents party thereto.

31.1			Certification by Michael D. Snow for Team Health Holdings, Inc. dated November 3, 2015 as required by Section 302 of the Sarbanes-Oxley Act of 2002. (filed herewith)

31.2			Certification by David P. Jones for Team Health Holdings, Inc. dated November 3, 2015 as required by Section 302 of the Sarbanes-Oxley Act of 2002. (filed herewith)

32.1			Certification by Michael D. Snow for Team Health Holdings, Inc. dated November 3, 2015 as required by Section 906 of the Sarbanes-Oxley Act of 2002. (filed herewith)

32.2			Certification by David P. Jones for Team Health Holdings, Inc. dated November 3, 2015 as required by Section 906 of the Sarbanes-Oxley Act of 2002. (filed herewith)

101			The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at September 30, 2015 and December 31, 2014, (ii) Consolidated Statement of Comprehensive Earnings for the three and nine months ended September 30, 2015 and 2014, (iii) Consolidated Statement of Cash Flows for the nine months ended September 30, 2015 and 2014, and (iv) Notes to Consolidated Financial Statements.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	TEAM HEALTH HOLDINGS, INC.

November 3, 2015	/S/ MICHAEL D. SNOW
	Michael D. Snow President and Chief Executive Officer

November 3, 2015	/S/ DAVID P. JONES
	David P. Jones Executive Vice President and Chief Financial Officer

TEAM HEALTH HOLDINGS INC. - FORM 10-Q - November 3, 2015

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TEAM HEALTH HOLDINGS INC. Reports