Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended March 31, 2017

OR

 

☐	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: 333-117362

 

 

IASIS HEALTHCARE LLC

(Exact name of registrant as specified in its charter)

 

 

 

DELAWARE		20-1150104
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
DOVER CENTRE 117 SEABOARD LANE, BUILDING E FRANKLIN, TENNESSEE		37067
(Address of principal executive offices)		(Zip Code)

(615) 844-2747

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 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  ☐    NO  ☒

(Note: As a voluntary filer not subject to the filing requirements of Sections 13 or 15(d) of the Exchange Act, the registrant has filed all reports pursuant to Section 13 or 15(d) of the Exchange Act during the preceding 12 months as if it were subject to such filing requirements.)

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  ☒    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. (Check one):

 

Large accelerated filer		☐		Accelerated filer		☐
Non-accelerated filer		☒		Smaller reporting company		☐
Emerging growth company		☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ☐    NO  ☒

As of May 12, 2017, 100% of the registrant’s common interests outstanding (all of which are privately owned and are not traded on any public market) were owned by IASIS Healthcare Corporation, its sole member.

 

 

 

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TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION			3
Item 1. Financial Statements			3
Item  2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			36
Item 3. Quantitative and Qualitative Disclosures about Market Risk			56
Item 4. Controls and Procedures			56
PART II. OTHER INFORMATION			57
Item 1. Legal Proceedings			57
Item 1A. Risk Factors			57
Item 6. Exhibits			57
Signatures			58

 

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PART I.

FINANCIAL INFORMATION

 

Item 1.

Financial Statements

IASIS HEALTHCARE LLC

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In Thousands)

 

		March 31,				September 30,
		2017				2016
ASSETS
Cash and cash equivalents		$	320,916			$	345,685
Accounts receivable, net			368,613				342,368
Inventories			68,467				65,042
Prepaid expenses and other current assets			151,996				143,048
Total current assets			909,992				896,143
Property and equipment, net			938,121				939,784
Goodwill			777,344				767,659
Other intangible assets, net			14,916				16,601
Other assets, net			48,561				49,283
Total assets		$	2,688,934			$	2,669,470
LIABILITIES AND EQUITY
Accounts payable		$	142,056			$	143,415
Salaries and benefits payable			54,561				47,464
Accrued interest payable			27,046				27,831
Medical claims payable			195,525				167,024
Other accrued expenses and current liabilities			129,784				138,996
Current portion of long-term debt, capital leases and other long-term obligations, net			17,556				18,086
Total current liabilities			566,528				542,816
Long-term debt, capital leases and other long-term obligations, net			1,823,468				1,830,840
Deferred income taxes			92,362				91,633
Other long-term liabilities			93,507				90,295
Non-controlling interests with redemption rights			120,777				120,809
Member’s deficit			(27,407	)			(23,247	)
Non-controlling interests			19,699				16,324
Total deficit			(7,708	)			(6,923	)
Total liabilities and equity		$	2,688,934			$	2,669,470

See accompanying notes.

 

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IASIS HEALTHCARE LLC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In Thousands)

 

		Quarter Ended March 31,								Six Months Ended March 31,
		2017				2016				2017				2016
Revenues
Acute care revenue before provision for bad debts		$	600,080			$	598,194			$	1,202,257			$	1,179,595
Less: Provision for bad debts			(95,825	)			(98,881	)			(198,813	)			(190,696	)
Acute care revenue			504,255				499,313				1,003,444				988,899
Premium, service and other revenue			338,791				321,974				679,483				635,236
Total revenue			843,046				821,287				1,682,927				1,624,135
Costs and expenses
Salaries and benefits (includes stock-based compensation of $1,286, $1,737, $2,341 and $3,344, respectively)			256,018				252,269				511,081				497,127
Supplies			86,850				84,113				176,379				168,964
Medical claims			275,335				268,030				551,389				534,737
Rentals and leases			22,234				21,968				44,036				43,300
Other operating expenses			141,835				148,137				279,340				277,887
Medicare and Medicaid EHR incentives			(34	)			(48	)			(805	)			(490	)
Interest expense, net			31,915				34,033				61,660				66,643
Depreciation and amortization			26,100				27,057				52,497				53,250
Management fees			1,250				1,250				2,500				2,500
Total costs and expenses			841,503				836,809				1,678,077				1,643,918
Earnings (loss) from continuing operations before gain on disposal of assets and income taxes			1,543				(15,522	)			4,850				(19,783	)
Gain on disposal of assets, net			628				237				933				725
Earnings (loss) from continuing operations before income taxes			2,171				(15,285	)			5,783				(19,058	)
Income tax expense (benefit)			897				(4,885	)			2,272				(5,377	)
Net earnings (loss) from continuing operations			1,274				(10,400	)			3,511				(13,681	)
Earnings (loss) from discontinued operations, net of income taxes			(762	)			167				(848	)			(3,886	)
Net earnings (loss)			512				(10,233	)			2,663				(17,567	)
Net earnings attributable to non-controlling interests			(3,725	)			(2,602	)			(7,626	)			(5,403	)
Net loss attributable to IASIS Healthcare LLC		$	(3,213	)		$	(12,835	)		$	(4,963	)		$	(22,970	)

See accompanying notes.

 

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IASIS HEALTHCARE LLC

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)

(In Thousands)

 

		Quarter Ended March 31,								Year Ended March 31,
		2017				2016				2017				2016
Net earnings (loss)		$	512			$	(10,233	)		$	2,663			$	(17,567	)
Other comprehensive income
Change in fair value of highly effective interest rate hedges			—				487				—				976
Other comprehensive income before income taxes			—				487				—				976
Change in income tax expense			—				(178	)			—				(356	)
Other comprehensive income, net of income taxes			—				309				—				620
Comprehensive income (loss)			512				(9,924	)			2,663				(16,947	)
Net earnings attributable to non-controlling interests			(3,725	)			(2,602	)			(7,626	)			(5,403	)
Comprehensive loss attributable to IASIS Healthcare LLC		$	(3,213	)		$	(12,526	)		$	(4,963	)		$	(22,350	)

See accompanying notes.

 

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IASIS HEALTHCARE LLC

CONDENSED CONSOLIDATED STATEMENT OF EQUITY (UNAUDITED)

(In Thousands)

 

		Non-controlling Interests with Redemption Rights				Member’s Equity				Non-controlling Interests				Total Equity
Balance at September 30, 2016		$	120,809			$	(23,247	)		$	16,324			$	(6,923	)
Net earnings (loss)			4,728				(4,963	)			2,898				(2,065	)
Distributions to non-controlling interests			(4,913	)			—				—				—
Purchase of non-controlling interests			(169	)			—				—				—
Stock-based compensation			—				2,341				—				2,341
Other			(1,458	)			242				477				719
Adjustment to redemption value of non-controlling interests with redemption rights			1,780				(1,780	)			—				(1,780	)
Balance at March 31, 2017		$	120,777			$	(27,407	)		$	19,699			$	(7,708	)

See accompanying notes.

 

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IASIS HEALTHCARE LLC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In Thousands)

 

		Six Months Ended March 31,
		2017				2016
Cash flows from operating activities
Net earnings (loss)		$	2,663			$	(17,567	)
Adjustments to reconcile net earnings (loss) to net cash used in operating activities:
Depreciation and amortization			52,497				53,250
Amortization of loan costs			3,869				4,012
Amortization of deferred gain on sale-leaseback transaction			(1,248	)			(1,248	)
Change in physician minimum revenue guarantees			1,724				2,050
Stock-based compensation			2,341				3,344
Deferred income taxes			1,149				(8,512	)
Gain on disposal of assets, net			(933	)			(725	)
Loss from discontinued operations, net			848				3,886
Changes in operating assets and liabilities, net of the effect of acquisitions and dispositions:
Accounts receivable, net			(26,334	)			(24,684	)
Inventories, prepaid expenses and other current assets			(13,254	)			30,091
Accounts payable, other accrued expenses and other accrued liabilities			27,776				34,155
Net cash provided by operating activities — continuing operations			51,098				78,052
Net cash provided by (used in) operating activities — discontinued operations			(855	)			637
Net cash provided by operating activities			50,243				78,689
Cash flows from investing activities
Purchases of property and equipment			(44,798	)			(62,050	)
Cash paid for acquisitions, net			(14,318	)			(8,180	)
Proceeds from sale of assets			68				166
Change in other assets, net			381				399
Net cash used in investing activities			(58,667	)			(69,665	)
Cash flows from financing activities
Payment of long-term debt, capital leases and other long-term obligations			(11,268	)			(8,288	)
Payment of debt financing costs			—				(5,179	)
Distributions to non-controlling interests			(4,908	)			(5,563	)
Cash paid for the repurchase of non-controlling interests			(169	)			(960	)
Net cash used in financing activities			(16,345	)			(19,990	)
Change in cash and cash equivalents			(24,769	)			(10,966	)
Cash and cash equivalents at beginning of period			345,685				378,513
Cash and cash equivalents at end of period		$	320,916			$	367,547
Supplemental disclosure of cash flow information:
Cash paid for interest		$	61,949			$	60,258
Cash received from income taxes, net		$	(477	)		$	(11,411	)
Supplemental disclosure of non-cash information:
Financing obligation related to integrated clinical and revenue cycle systems conversion			—			$	23,409

See accompanying notes.

 

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IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. ORGANIZATION AND BASIS OF PRESENTATION

Organization

The unaudited condensed consolidated financial statements as of and for the quarters and six months ended March 31, 2017 and 2016, reflect the financial position, results of operations and cash flows of IASIS Healthcare LLC (“IASIS” or the “Company”). The Company’s sole member and parent company is IASIS Healthcare Corporation (“Holdings” or “IAS”).

IASIS provides high quality affordable healthcare services primarily in higher growth markets. At March 31, 2017, we owned or leased 17 acute care hospital facilities and one behavioral health hospital facility with a total of 3,600 licensed beds, several outpatient service facilities and 141 physician clinics.

IASIS’ continuing operations are in various regions including:

 

•

Salt Lake City, Utah;

 

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Phoenix, Arizona;

 

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six cities in Texas, including Houston and San Antonio; and

 

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West Monroe, Louisiana.

The Company also owns and operates a managed care organization and insurer that manages healthcare services for more than 676,700 members through Health Choice Arizona, Inc. and related entities (“Health Choice” or the “Plan”), which includes multiple health plans, accountable care networks and managed care solutions. The Plan is headquartered in Phoenix, Arizona, with offices in Tampa, Florida and Salt Lake City, Utah.

The unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial reporting and in accordance with Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The condensed consolidated balance sheet of the Company at September 30, 2016, has been derived from the audited consolidated financial statements at that date, but does not include all of the information and notes required by GAAP for complete financial statements. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2016, which was filed with the U.S. Securities and Exchange Commission (the “SEC”) on December 21, 2016.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all material 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 or any other future periods.

Principles of Consolidation

The unaudited condensed consolidated financial statements include the consolidated financial position and consolidated results of operations of the Company and its affiliates, which are controlled by the Company through the Company’s direct or indirect ownership of a majority interest and rights granted to the Company through certain variable interests. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the accompanying unaudited condensed consolidated financial statements and notes. Actual results could differ from those estimates.

General and Administrative

The majority of the Company’s expenses are “cost of revenue” items. Costs that could be classified as “general and administrative” by the Company include the IASIS corporate office costs (excluding stock-based compensation costs), which were $21.5 million and $13.5 million for the quarters ended March 31, 2017 and 2016, respectively, and $39.0 million and $24.5 million for the six months ended March 31, 2017 and 2016, respectively.

 

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Cash and Cash Equivalents

The Company considers highly liquid investments with original maturities of three months or less to be cash equivalents. The Company maintains its cash and cash equivalent balances primarily with high credit quality financial institutions. The Company manages its credit exposure by placing its investments in U.S. Treasury securities or other high quality securities, and by periodically evaluating the relative credit standing of the financial institution.

Stock-Based Compensation

Although IASIS has no stock option plan, or outstanding stock options or other equity awards, the Company, through its parent, IAS, grants stock options for a fixed number of common shares and restricted stock units (“RSUs”) to its employees. The Company accounts for these stock-based incentive awards under the measurement and recognition provisions of Accounting Standards Codification (“ASC”) 718, Compensation—Stock Compensation (“ASC 718”). Accordingly, the Company applies the fair value recognition provisions requiring all share-based payments to employees, including grants of employee stock options and RSUs, to be measured based on the grant-date fair value of the awards, with the resulting expense recognized in the income statement. In accordance with the provisions of ASC 718, the Company uses the Black-Scholes-Merton valuation model in determining the fair value of its share-based payments. Compensation cost for time-vested options and RSUs will generally be amortized on a straight-line basis over the requisite service periods of the awards, generally equal to the awards’ vesting periods, while compensation cost for options with market-based conditions are recognized on a graded schedule generally over the awards’ vesting periods.

Fair Value of Financial Instruments

The Company applies the provisions of ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), which provides a single definition of fair value, establishes a framework for measuring fair value, and expands disclosures concerning fair value measurements. The Company applies these provisions to the valuation and disclosure of certain financial instruments. ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: (i) Level 1, which is defined as quoted prices in active markets that can be accessed at the measurement date; (ii) Level 2, which is defined as inputs other than quoted prices in active markets that are observable, either directly or indirectly; and (iii) Level 3, which is defined as unobservable inputs resulting from the existence of little or no market data, therefore potentially requiring an entity to develop its own assumptions.

Cash and cash equivalents, accounts receivable, inventories, prepaid expenses and other current assets, accounts payable, salaries and benefits payable, accrued interest, medical claims payable, and other accrued expenses and current liabilities are reflected in the accompanying consolidated financial statements at amounts that approximate fair value because of the short-term nature of these instruments. The fair value of the Company’s capital leases and other long-term financing obligations also approximate their carrying value as they bear interest at current market rates.

The carrying value and fair value of the Company’s senior secured term loan facility and its 8.375% senior notes due 2019 (the “Senior Notes”) as of March 31, 2017 and September 30, 2016, were as follows (in thousands):

 

		Carrying Amount								Fair Value
		March 31, 2017				September 30, 2016				March 31, 2017				September 30, 2016
Senior secured term loan facility		$	963,469			$	968,138			$	967,280			$	959,004
Senior Notes			848,300				847,916				832,902				771,284

The estimated fair value of the Company’s senior secured term loan facility and its Senior Notes were based upon quoted market prices at that date and are categorized as Level 2 within the fair value hierarchy.

 

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Discontinued Operations

In accordance with the provisions of ASC 360, Property, Plant and Equipment (“ASC 360”), the Company has presented the operating results, financial position and cash flows of its previously disposed facilities as discontinued operations, net of income taxes, in the accompanying consolidated financial statements. Such reporting relates to disposals of components meeting the criteria for discontinued operations reporting prior to October 1, 2015, the effective date of Accounting Standards update (“ASU”) No. 2014-08, “Presentation of Financial Statements and Property, Plant and Equipment — Reporting Discontinued Operations and Disclosures of Components of an Entity”. ASU 2014-08 changed the criteria for reporting discontinued operations.

Recent Accounting Pronouncements

Newly Adopted

In February 2015, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2015-02, “Consolidation”. ASU No. 2015-02 includes amendments that are intended to improve targeted areas of consolidation for legal entities including reducing the number of consolidation models from four to two and simplifying the FASB ASC. The provisions of ASU No. 2015-02 are effective for annual periods beginning after December 15, 2015. The amendments may be applied retrospectively in previously issued financial statements for one or more years with a cumulative effect adjustment to retained earnings as of the beginning of the first year restated. The Company’s adoption of ASU No. 2015-02 did not have an impact on its consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs”, which requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The guidance in the new standard is limited to the presentation of debt issuance costs. The recognition and measurement guidance for debt issuance costs are not affected by ASU No. 2015-03. The amendments in this update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The Company adopted ASU No. 2015-03 as of September 30, 2016, which resulted in the presentation of its debt issuance cost within long term debt.

Recently Issued

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”, which outlines a single comprehensive model for recognizing revenue and supersedes most existing revenue recognition guidance, including guidance specific to the healthcare industry. In addition, ASU No. 2014-09 will require new and enhanced disclosures. Companies can adopt the new standard either using the full retrospective approach, a modified retrospective approach with practical expedients, or a cumulative effect upon adoption approach. ASU No. 2014-09 was originally scheduled to become effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, and early adoption was not permitted. In July 2015, the FASB decided that a deferral was necessary to provide companies adequate time to effectively implement the new standard. The FASB deferred the effective date by one year, but will permit entities to adopt one year earlier if they so choose. The Company is currently evaluating the effect of the new revenue recognition guidance and intends to adopt such guidance as of October 1, 2018.

In February 2016, the FASB issued ASU 2016-02, “Leases”, which requires lessees to recognize lease assets and lease liabilities on the balance sheet, including leases previously classified as operating. In addition, ASU 2016-02 implements changes to the lease classification criteria for lessors and eliminates portions of the previous real estate leasing guidance. ASU 2016-02 will become effective for fiscal years beginning after December 15, 2018, and early adoption is permitted. The Company is currently evaluating the effect of the new lease accounting guidance, and believes the primary effect of adopting the new standard will be to record assets and obligations for current operating leases. The Company intends to adopt such guidance as of October 1, 2019.

In March 2016, the FASB issued ASU 2016-09 “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”, which affects all entities that issue share-based payment awards to their employees. ASU 2016-09 simplifies the accounting for share-based payment transactions, including the income tax consequences and classification on the balance sheet and statement of cash flows. Portions of the guidance will only impact non-public entities. ASU 2016-09 will become effective for fiscal years beginning after December 15, 2016, and early adoption is permitted. The Company is currently evaluating the effect of the new share-based payment accounting guidance.

In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments,” which clarifies the classification of certain cash receipts and cash payments on the statement of cash flows. ASU 2016-15 is effective retrospectively for fiscal years beginning after December 15, 2017, including interim periods within those years. Early adoption is permitted. The Company is currently evaluating the impact this new guidance may have on its consolidated cash flows.

 

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In January 2017, the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other”, which simplifies the subsequent measurement of goodwill for public companies by eliminating step two from the goodwill impairment test. Under the new model, an entity should perform its test for impairment by comparing the fair value of a reporting unit with its carrying amount, and recognize any excess as an impairment charge. The provisions of ASU 2017-04 are effective for fiscal years beginning after December 15, 2019, and early adoption is permitted. The Company is currently evaluating the effect of the new guidance.

2. REVENUE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

Acute Care Revenue and Accounts Receivable

The Company’s healthcare facilities have entered into agreements with third-party payors, including government programs (Medicare, Medicaid and TRICARE), managed care health plans, including Medicare and Medicaid managed care health plans, commercial insurance companies and employers under which the facilities are paid based upon established charges, the cost of providing services, predetermined rates per diagnosis, fixed per diem rates or discounts from established charges. Additionally, the Company offers discounts through its uninsured discount program to all uninsured patients receiving healthcare services who do not qualify for assistance under state Medicaid, other federal or state assistance plans, or charity care.

In the ordinary course of business, the Company provides care without charge to patients who are financially unable to pay for the healthcare services they receive. Because the Company does not pursue collection of amounts determined to qualify as charity care, they are not reported in acute care revenue. Accordingly, the Company records revenue deductions for patient accounts that meet its guidelines for charity care. The Company provides charity care to patients with income levels below 200% of the federal poverty level (“FPL”). Additionally, at all of the Company’s hospitals, a sliding scale of reduced rates is offered to uninsured patients who are not covered through federal, state or private insurance, with incomes between 200% and 400% of the FPL.

Acute care revenue is reported at the estimated net realizable amounts from third-party payors and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and are adjusted, if necessary, in future periods when final settlements are determined. The Company also records a provision for bad debts related to uninsured accounts, as well as co-insurance

and deductible balances due from insured patients, to reflect its self-pay accounts receivable at the estimated amounts expected to be collected. The sources of the Company’s hospital net patient revenue by payor before its provision for bad debts are summarized as follows:

 

		Quarter Ended March 31,								Six Months Ended March 31,
		2017				2016				2017				2016
Medicare			19.2	%			18.2	%			18.7	%			18.9	%
Managed Medicare			12.4				10.3				11.8				10.4
Medicaid and managed Medicaid			9.8				11.9				9.8				12.4
Managed care and other			42.7				44.3				44.2				43.4
Self-pay			15.9				15.3				15.5				14.9
Total			100.0	%			100.0	%			100.0	%			100.0	%

Allowance for Doubtful Accounts

The provision for bad debts and the associated allowance for doubtful accounts relate primarily to amounts due directly from patients. The Company does not pursue collection of amounts related to patients who qualify for charity care under the Company’s guidelines; therefore, charity care accounts are deducted from gross revenue and are not included in the provision for bad debts.

The Company’s estimation of its allowance for doubtful accounts is based primarily upon the type and age of the patient accounts receivable and the effectiveness of related collection efforts. The Company’s policy is to reserve a portion of all self-pay receivables, including amounts due from the uninsured and amounts related to co-payments and deductibles, as these charges are recorded. The Company monitors accounts receivable balances and the effectiveness of reserve policies on a regular basis and reviews various analytics to support the basis for its estimates. These efforts primarily consist of reviewing the following:

 

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Cash collections as a percentage of net patient revenue less bad debts;

 

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Changes in the aging and payor mix of accounts receivable, including increased focus on accounts due from the uninsured and accounts that represent co-payments and deductibles due from patients;

 

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Revenue and volume trends by payor, particularly the self-pay components;

 

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Trending of days revenue in accounts receivable;

 

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Various allowance coverage statistics; and

 

•

Historical write-off and collection experience using a hindsight or look-back approach.

At March 31, 2017 and September 30, 2016, the Company’s net self-pay receivables, including amounts due from uninsured patients and co-payment and deductible amounts due from insured patients, were $285.7 million and $279.1 million, respectively. At March 31, 2017 and September 30, 2016, the Company’s allowance for doubtful accounts was $229.8 million and $221.4 million, respectively.

Premium, Service and Other Revenue

Health Choice is the Company’s managed care organization and insurer that serves health plan enrollees in Arizona and Utah. The Plan derives most of its revenue through a contract in Arizona with the Arizona Health Care Cost Containment System (“AHCCCS”) to provide specified health services to qualified Medicaid enrollees through contracted providers. AHCCCS is the state agency that administers Arizona’s Medicaid program.

Effective October 1, 2013, Health Choice entered into a contract with AHCCCS with an initial term of three years, and two one-year renewal options at the discretion of AHCCCS. The contract is terminable without cause on 90 days’ written notice or for cause upon written notice if the Company fails to comply with any term or condition of the contract or fails to take corrective action as required to comply with the terms of the contract. Additionally, AHCCCS can terminate the contract in the event of the unavailability of state or federal funding.

Health Choice also provides coverage as a Medicare Advantage Prescription Drug (“MAPD”) Special Needs Plan (“SNP”) provider pursuant to a contract with the Centers for Medicare and Medicaid Services (“CMS”). The SNP allows Health Choice to offer Medicare and Part D drug benefit coverage for new and existing dual-eligible members (i.e. those that are eligible for Medicare and Medicaid). The contract with CMS includes successive one-year renewal options at the discretion of CMS and is terminable without cause on 90 days’ written notice or for cause upon written notice if the Company fails to comply with any term or condition of the contract or fails to take corrective action as required to comply with the terms of the contract.

In Arizona and surrounding states, the Plan subcontracts with hospitals, physicians and other medical providers to provide services to its Medicaid and Medicare enrollees in Apache, Coconino, Gila, Maricopa, Mohave, Navajo, Pima and Pinal counties, regardless of the actual costs incurred to provide these services.

Effective October 1, 2015, Health Choice’s joint venture, Health Choice Integrated Care LLC (“HCIC”) entered into a contract with AHCCCS to operate an integrated acute and behavioral health plan in Northern Arizona. The contract has an initial term of three years and includes two additional two-year renewal options that can be exercised at the discretion of AHCCCS. The contract is terminable by AHCCCS following HCIC’s failure to carry out a material contract term, condition or obligation. As of March 31, 2017, HCIC provided standalone behavioral health benefits to 228,600 plan members, which includes 62,300 Navajo Nation plan members that also receive health plan services through a state of Arizona Tribal Regional Behavioral Health Authority.

On January 1, 2017, Health Choice exited the Arizona marketplace exchange. The Company’s decision to exit the exchange was driven by the instability of the Health Reform marketplace, uncertainty and lack of funding around government premium stabilization programs, and the overall nature of the related regulatory environment.

Health Choice’s health plan contracts require the arrangement of healthcare services for enrolled patients in exchange for fixed monthly premiums, based upon negotiated per capita member rates. Capitation payments received by Health Choice are recognized as revenue in the month that members are entitled to healthcare services. Premium revenue includes adjustments to revenue related to the program settlement process for the Arizona managed Medicaid plan under the related state contract. This program settlement process reconciles estimated amounts due to or from the state based on the actual premium revenue and medical costs and contractually mandated limits on profits and losses. Although estimates of future program settlement amounts are recorded in current periods, the program settlement process typically occurs in the 18 months post-plan year, when actual (rather than projected) claims and member eligibility data become available and a net settlement amount is either due to or from the state. Adjustments to the estimates of future program settlement amounts are recorded as a component of premium revenue.

Health Choice is party to a contract with a large national insurer to provide management and administrative services to Medicaid enrollees in two separate geographic areas in the state of Florida. Under this contract, which covered 97,600 Medicaid enrollees as of March 31, 2017, Health Choice receives an administrative fee based upon the number of members served. The contract had an initial term of one year, with automatic annual renewal options that also provide each party with termination options.

 

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The sources of Health Choice’s premium, service and other revenue by major product line are summarized as follows:

 

		Quarter Ended March 31,								Six Months Ended March 31,
		2017				2016				2017				2016
Medicaid and Exchange plans			88.6	%			87.4	%			88.3	%			86.9	%
MAPD SNP			9.9				9.7				9.4				9.8
Service and other			1.5				2.9				2.3				3.3
Total			100.0	%			100.0	%			100.0	%			100.0	%

3. LONG-TERM DEBT, CAPITAL LEASES AND OTHER LONG-TERM OBLIGATIONS

Long-term debt, capital leases and other long-term obligations consist of the following (in thousands):

 

		March 31, 2017				September 30, 2016
Senior secured term loan facility		$	963,469			$	968,138
Senior Notes			848,300				847,916
Capital leases and other long-term obligations			37,493				43,685
Deferred issuance costs			(8,238	)			(10,813	)
			1,841,024				1,848,926
Less current maturities			17,556				18,086
		$	1,823,468			$	1,830,840

As of March 31, 2017 and September 30, 2016, the senior secured term loan facility balance reflects an original issue discount (“OID”) of $0.8 million and $1.2 million, respectively, which is net of accumulated amortization of $4.3 million and $3.9 million, respectively. The Senior Notes balance reflects an OID of $1.6 million and $1.9 million, respectively, which is net of accumulated amortization of $4.5 million and $4.2 million, respectively.

As of March 31, 2017 and September 30, 2016, reflecting the adoption of ASU No. 2015-03, deferred issuance costs associated with the senior secured term loans totaled $2.7 million and $3.9 million, respectively, and deferred issuance costs associated with the Senior Notes totaled $5.5 million and $6.9 million, respectively. These deferred issuance costs are amortized to interest expense over the term of their respective agreements.

As of March 31, 2017 and September 30, 2016, capital leases and other long-term obligations includes financing obligations totaling $19.9 million and $20.5 million, respectively, resulting from the Company’s sale-leaseback transactions. Additionally, as of March 31, 2017 and September 30, 2016, capital leases and other long-term obligations includes a financing obligation totaling $13.9 million and $16.2 million, respectively, related to the Company’s current conversion to a new integrated clinical and revenue cycle system.

 

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Senior Secured Credit Facilities

Amended Term Loan Facility

The Company is party to a senior credit agreement (the “Amended and Restated Credit Agreement”) with Wilmington Trust, National Association, as administrative agent, which provides for a $1.025 billion senior secured term loan facility maturing in May 2018 (the “Term Loan Facility”). Principal under the Term Loan Facility is due in equal quarterly installments in an aggregate annual amount equal to 1% of the principal amount of $1.007 billion outstanding as of the effective date, February 20, 2013, with the remaining balance due upon maturity of the Term Loan Facility.

Borrowings under the Term Loan Facility bear interest at a rate per annum equal to, at the Company’s option, either (1) a base rate determined by reference to the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate (determined by reference to The Wall Street Journal) and (c) a one-month LIBOR rate, subject to a floor of 1.25%, plus 1.00%, in each case, plus a margin of 2.25% per annum or (2) the LIBOR rate for the interest period relevant to such borrowing, subject to a floor of 1.25%, plus a margin of 3.25% per annum.

The Term Loan Facility is unconditionally guaranteed by IAS and certain subsidiaries of the Company (collectively, the “Subsidiary Guarantors”; IAS and the Subsidiary Guarantors, the “Guarantors”) and is required to be guaranteed by all future material wholly-owned subsidiaries of the Company, subject to certain exceptions. All obligations under the Amended and Restated Credit Agreement are secured, subject to certain exceptions, by substantially all of the Company’s assets and the assets of the Guarantors, including (1) a pledge of 100% of the equity interests of the Company and the equity interests held by the Company and the Subsidiary Guarantors, subject to certain exceptions, (2) mortgage liens on all of the Company’s material real property and that of the Guarantors and (3) all proceeds of the foregoing.

The Amended and Restated Credit Agreement requires the Company to mandatorily prepay borrowings under the Term Loan Facility with net cash proceeds of certain asset dispositions, following certain casualty events, following certain borrowings or debt issuances and from a percentage of annual excess cash flow.

The Amended and Restated Credit Agreement contains certain restrictive covenants, including, among other things: (1) limitations on the incurrence of debt and liens; (2) limitations on investments other than, among other exceptions, certain acquisitions that meet certain conditions; (3) limitations on the sale of assets outside of the ordinary course of business; (4) limitations on dividends and distributions; and (5) limitations on transactions with affiliates, in each case, subject to certain exceptions. The Amended and Restated Credit Agreement also contains certain customary events of default, including, without limitation, a failure to make payments under the Term Loan Facility, cross-defaults, certain bankruptcy events and certain change of control events.

Term Loan Amendment

On May 4, 2017, the Company, Holdings, certain of their subsidiaries, the lenders party thereto, JPMorgan Chase Bank, N.A., as the Additional Term B-3 Lender (as defined therein), Wilmington Trust, National Association, as administrative agent, and the other agents named therein entered into an Amendment No. 4 to the Amended and Restated Credit Agreement (“Term Amendment No. 4”). Pursuant to Term Amendment No. 4, all of the then-outstanding term loans under the Amended and Restated Credit Agreement were refinanced with term loans (the “Term B-3 Loans”) maturing on February 17, 2021, subject to, if earlier, a springing maturity date of 91 days prior to the maturity date of the Senior Notes if any of the Senior Notes remains outstanding as of such date. The interest rate margins applicable to the Term B-3 Loans are 4.00%, for LIBOR-based loans, and 3.00%, for base rate loans, with a LIBOR floor of 1.25%. Term Amendment No. 4 also provides for a soft call prepayment premium applicable to certain repricing transactions involving the outstanding Term B-3 Loans. The soft call premium equals 1% of the amount of the Term B-3 Loans that are subject to certain repricing transactions occurring on or prior to May 4, 2018. Upon completion of Amendment No. 4, the outstanding term loan balance was $864.2 million, which reflected a $100.0 million pay down to certain holders.

In addition, certain of the baskets available to the Company under the negative covenants in its Amended and Restated Credit Agreement are suspended under the Amended and Restated Credit Agreement until such time, if any, as the Company has consummated a qualifying underwritten public offering and achieved a specified total gross leverage ratio.

Revolving Credit Facility

The Company is party to a revolving credit agreement (the “Revolving Credit Agreement”) with JPMorgan Chase Bank, N.A. (“JPMorgan”), as administrative agent, which provides for a $207.4 million senior secured revolving credit facility, of which up to $125.0 million may be utilized for the issuance of letters of credit (the “Revolving Credit Facility”). The Revolving Credit Facility matures in February 2021 (the “Stated Revolver Maturity Date”), provided that, if prior to the Stated Revolver Maturity Date, (x) any loans are outstanding under the Term Loan Facility on the date that is 91 days prior to the maturity date under the Term Loan Facility (such date, the “Springing Term Maturity Date”) or (y) any notes are outstanding under the Company’s indenture, dated as of May 3, 2011, by and among IASIS, IAS and The Bank of New York Mellon Trust Company, N.A., as Trustee, relating to the Company’s 8.375% Senior Notes due 2019 (the “Indenture”), on the date that is 91 days prior to the maturity date under the Indenture (such date, the “Springing Notes Maturity Date”), then the maturity date will automatically become the earlier of the Springing Term Maturity Date or the Springing Notes Maturity Date.

 

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The Revolving Credit Agreement provides the Company with the right to request additional commitments under the Revolving Credit Facility without the consent of the lenders thereunder, subject to a cap on aggregate commitments of $300.0 million, a pro forma senior secured net leverage ratio (as defined in the Revolving Credit Agreement) of less than or equal to 3.75 to 1.00 and customary conditions precedent.

The Revolving Credit Facility does not require installment payments prior to maturity.

Borrowings under the Revolving Credit Facility bear interest at a rate per annum equal to, at the Company’s option, either (1) a base rate determined by reference to the highest of (a) the prime rate of JPMorgan, (2) the federal funds rate plus 0.50% and (3) a LIBOR rate subject to certain adjustments plus 1.00%, in each case, plus a margin of 2.50% per annum or (2) the LIBOR rate for the interest period relevant to such borrowing, plus a margin of 3.50% per annum. In addition to paying interest on outstanding principal under the Revolving Credit Facility, the Company is required to pay a commitment fee on the unutilized commitments under the Revolving Credit Facility, as well as pay customary letter of credit fees and agency fees.

The Revolving Credit Facility is unconditionally guaranteed by the Guarantors and is required to be guaranteed by all future material wholly-owned subsidiaries of the Company, subject to certain exceptions. All obligations under the Revolving Credit Agreement are secured, subject to certain exceptions, by substantially all of the Company’s assets and the assets of the Guarantors, including (1) a pledge of 100% of the equity interests of the Company and the equity interests held by the Company and the Subsidiary Guarantors, subject to certain exceptions, (2) mortgage liens on all of the Company’s material real property and that of the Guarantors and (3) all proceeds of the foregoing.

The Revolving Credit Agreement contains restrictive covenants and events of default substantially similar to the restrictive covenants and events of default in the Amended and Restated Credit Agreement; provided, that under the Revolving Credit Agreement, the Company is required to maintain, on a quarterly basis, a maximum senior secured gross leverage ratio (as defined in the Revolving Credit Agreement). In addition, certain of the baskets available to the Company under the negative covenants in the Amended and Restated Credit Agreement are suspended under the Revolving Credit Agreement until such time, if any, as the Company has consummated a qualifying underwritten public offering and achieved a specified total gross leverage ratio (as defined in the Revolving Credit Agreement).

Revolving Credit Agreement Amendment

On May 4, 2017, the Company, Holdings, the lenders party to the Revolving Credit Agreement as of such date and the Revolver Agent entered into an amendment to the Revolving Credit Agreement (“Revolver Amendment No. 1”). Pursuant to Revolver Amendment No. 1, the Revolving Credit Facility matures in February 2021 (the “Stated Revolver Maturity Date”), provided that, if prior to the Stated Revolver Maturity Date, (x) any loans are outstanding under the Term Loan Facility on the date that is 91 days prior to the maturity date of at least $100 million of loans under the Term Loan Facility (such date, the “Springing Term Maturity Date”) or (y) any notes are outstanding under the Indenture on the date that is 91 days prior to the maturity date under the Indenture (such date, the “Springing Notes Maturity Date”), then the maturity date will automatically become the earlier of the Springing Term Maturity Date or the Springing Notes Maturity Date.

8.375% Senior Notes due 2019

The Company, together with its wholly owned subsidiary IASIS Capital Corporation (together, the “Issuers”), issued $850.0 million aggregate principal amount of Senior Notes, which mature on May 15, 2019, pursuant to the Indenture. The Indenture provides that the Senior Notes are general unsecured, senior obligations of the Issuers, and initially will be unconditionally guaranteed on a senior unsecured basis by certain of the Company’s subsidiaries.

At March 31, 2017, the outstanding principal balance of the Senior Notes was $849.9 million. The Senior Notes bear interest at a rate of 8.375% per annum, payable semi-annually, in cash in arrears, on May 15 and November 15 of each year.

The Issuers may redeem the Senior Notes, in whole or in part, at any time, at a price equal to 102.094% of the aggregate principal amount of the Senior Notes plus accrued and unpaid interest and special interest, if any, to but excluding the redemption date. Each subsequent year the redemption price declines 2.094 percentage points until 2017, at which point and thereafter the redemption price is equal to 100% of the aggregate principal amount of the Senior Notes plus accrued and unpaid interest and special interest, if any, to but excluding the redemption date.

The Indenture contains covenants that limit the Company’s (and its restricted subsidiaries’) ability to, among other things: (1) incur additional indebtedness or liens or issue disqualified stock or preferred stock; (2) pay dividends or make other distributions on, redeem or repurchase the Company’s capital stock; (3) sell certain assets; (4) make certain loans and investments; (5) enter into certain transactions with affiliates; (6) impose restrictions on the ability of a subsidiary to pay dividends or make payments or distributions to the Company and its restricted subsidiaries; and (7) consolidate, merge or sell all or substantially all of the Company’s assets. These covenants are subject to a number of important limitations and exceptions.

The Indenture also provides for events of default, which, if any of them occurs, may permit or, in certain circumstances, require the principal, premium, if any, interest and any other monetary obligations on all the then outstanding Senior Notes to be due and payable immediately. If the Company experiences certain kinds of changes of control, it must offer to purchase the Senior Notes at 101% of their principal amount, plus accrued and unpaid interest and special interest, if any, to but excluding the repurchase date. Under certain circumstances, the Company will have the ability to make certain payments to facilitate a change of control transaction and to provide for the assumption of the Senior Notes by a new parent company resulting from such change of control transaction. If such change of control transaction is facilitated, the Issuers will be released from all obligations under the Indenture and the Issuers and the trustee will execute a supplemental indenture effectuating such assumption and release.

 

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4. GOODWILL

The following table presents the changes, if any, in the carrying amount of goodwill (in thousands):

 

		Acute Care				Health Choice				Total
Balance at September 30, 2016		$	761,731			$	5,928			$	767,659
Acquisition of imaging center			9,099				—				9,099
Adjustments related to acquisitions			586				—				586
Balance at March 31, 2017		$	771,416			$	5,928			$	777,344

 

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5. INCOME TAXES

For the quarter ended March 31, 2017, the Company recorded an income tax expense of $0.9 million, resulting in an effective tax rate of 41.3%, compared to income tax benefit of $4.9 million, for an effective tax rate of (32.0%) in the prior year quarter. For the six months ended March 31, 2017, the Company recorded an income tax expense of $2.3 million, for an effective tax rate of 39.3%, compared to income tax benefit of $5.4 million, for an effective tax rate of (28.2%) in the prior year period. The change in the effective tax rate was primarily attributable to (1) a decrease in the nondeductible health insurer fee, and (2) an increase in the valuation allowance against deferred tax assets, and (3) an increase in net earnings from continuing operations, which altered the rate impact of nondeductible expenses, noncontrolling interests, and state income taxes including the Texas Margins tax.

6. COMMITMENTS AND CONTINGENCIES

Acute Care Revenue

The calculation of appropriate payments from the Medicare and Medicaid programs, including supplemental Medicaid reimbursement, as well as terms governing agreements with other third-party payors are complex and subject to interpretation. Final determination of amounts earned under the Medicare and Medicaid programs often occurs subsequent to the year in which services are rendered because of audits by the programs, rights of appeal and the application of numerous technical provisions. In the opinion of management, adequate provision has been made for adjustments that may result from such routine audits and appeals.

Professional, General and Workers’ Compensation Liability Risks

The Company is subject to claims and legal actions incidental to the Company’s business, including claims relating to patient treatment and personal injuries. To cover these types of claims and actions, the Company maintains professional and general liability insurance in excess of self-insured retentions through a commercial insurance carrier in amounts that the Company believes to be sufficient for its operations, although, potentially, some claims may exceed the scope of coverage in effect. Plaintiffs in these matters may request punitive or other damages that may not be covered by insurance. The Company is currently not a party to any proceedings that, in the Company’s opinion, would have a material adverse effect on the Company’s business, financial condition or results of operations. The Company expenses an estimate of the costs it expects to incur under the self-insured retention exposure for professional and general liability claims using historical claims data, demographic factors, severity factors, current incident logs and other actuarial analysis. At March 31, 2017 and September 30, 2016, the Company’s professional and general liability accrual for asserted and unasserted claims totaled $59.5 million and $54.2 million, respectively, with the current portion totaling $17.4 million at both periods.

The Company is subject to claims and legal actions in the ordinary course of business relative to workers’ compensation matters. To cover these types of claims, the Company maintains workers’ compensation insurance coverage with a self-insured retention. The Company accrues the costs of workers’ compensation claims based upon estimates derived from its claims experience.

Health Choice

Health Choice has entered into capitated contracts whereby the Plan provides healthcare services in exchange for fixed periodic and supplemental payments from AHCCCS, ADHS and CMS. These services are provided regardless of the actual costs incurred to provide these services. The Plan receives reinsurance and other supplemental payments from AHCCCS to cover certain costs of healthcare services that exceed certain thresholds. The Company believes the capitated payments, together with reinsurance and other supplemental payments are sufficient to pay for the services Health Choice is obligated to deliver. As of March 31, 2017, the Company has provided performance guaranties in the form of a letter of credit totaling $72.0 million for the benefit of AHCCCS, a surety bond for the benefit of ADHS totaling $21.3 million and a demand note totaling $12.0 million for the benefit of CMS to support its obligations under the Health Choice contracts to provide and pay for the related healthcare services. The amount of these performance guaranties are generally based in part upon the membership in the Plan and the related capitation revenue paid to Health Choice.

 

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Acquisitions

The Company has acquired and in the future may choose to acquire businesses with prior operating histories. Such businesses may have unknown or contingent liabilities, including liabilities for failure to comply with healthcare laws and regulations, such as billing and reimbursement, fraud and abuse and similar anti-referral laws. Although the Company has procedures designed to conform business practices to its policies following the completion of any acquisition, there can be no assurance that the Company will not become liable for previous activities of prior owners that may later be asserted to be improper by private plaintiffs or government agencies. Although the Company generally seeks to obtain indemnification from prospective sellers covering such matters, there can be no assurance that any such matter will be covered by indemnification, or if covered, that such indemnification will be adequate to cover potential losses and fines.

Other

On January 14, 2016, CMS entered into a Systems Improvement Agreement (“SIA”) with St. Joseph Medical Center (“SJMC”) located in Houston, Texas. The SIA acted to stay the scheduled termination of SJMC’s Medicare Provider Agreement, which resulted from the hospital’s alleged failure to comply with certain Medicare program conditions of participation. As required by the terms of the SIA, the Company retained an independent consultant to assist it in developing and implementing a corrective action plan. The original term of the SIA was eighteen months. In April 2017, CMS and SJMC amended the SIA to extend it by three-and-a-half months. The SIA is now scheduled to expire sixty days after CMS provides SJMC with written findings following a full certification survey, which survey may occur sometime between July 1, 2017 and October 31, 2017.

 

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7. SEGMENT INFORMATION

The Company’s reportable operating segments consist of (1) acute care hospitals and related healthcare businesses, collectively and (2) Health Choice. The following is a financial summary by business segment for the periods indicated (in thousands):

 

		For the Quarter Ended March, 2017
		Acute Care				Health Choice				Eliminations				Consolidated
Acute care revenue before provision for bad debts		$	600,080			$	—			$	—			$	600,080
Less: Provision for bad debts			(95,825	)			—				—				(95,825	)
Acute care revenue			504,255				—				—				504,255
Premium, service and other revenue			—				338,791				—				338,791
Revenue between segments			4,976				—				(4,976	)			—
Total revenue			509,231				338,791				(4,976	)			843,046
Salaries and benefits (excludes stock-based compensation)			233,658				21,074				—				254,732
Supplies			86,760				90				—				86,850
Medical claims			—				280,311				(4,976	)			275,335
Rentals and leases			21,196				1,038				—				22,234
Other operating expenses			127,212				14,623				—				141,835
Medicare and Medicaid EHR incentives			(34	)			—				—				(34	)
Adjusted EBITDA(1)			40,439				21,655				—				62,094
Interest expense, net			31,915				—				—				31,915
Depreciation and amortization			24,766				1,334				—				26,100
Stock-based compensation			1,286				—				—				1,286
Management fees			1,250				—				—				1,250
Earnings (loss) from continuing operations before gain on disposal of assets and income taxes			(18,778	)			20,321				—				1,543
Gain on disposal of assets, net			628				—				—				628
Earnings (loss) from continuing operations before income taxes		$	(18,150	)		$	20,321			$	—			$	2,171

 

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		For the Quarter Ended March 31, 2016
		Acute Care				Health Choice				Eliminations				Consolidated
Acute care revenue before provision for bad debts		$	598,194			$	—			$	—			$	598,194
Less: Provision for bad debts			(98,881	)			—				—				(98,881	)
Acute care revenue			499,313				—				—				499,313
Premium, service and other revenue			—				321,974				—				321,974
Revenue between segments			4,499				—				(4,499	)			—
Total revenue			503,812				321,974				(4,499	)			821,287
Salaries and benefits (excludes stock-based compensation)			232,018				18,514				—				250,532
Supplies			83,864				249				—				84,113
Medical claims			—				272,529				(4,499	)			268,030
Rentals and leases			20,995				973				—				21,968
Other operating expenses			130,623				17,514				—				148,137
Medicare and Medicaid EHR incentives			(48	)			—				—				(48	)
Adjusted EBITDA(1)			36,360				12,195				—				48,555
Interest expense, net			34,033				—				—				34,033
Depreciation and amortization			25,706				1,351				—				27,057
Stock-based compensation			1,737				—				—				1,737
Management fees			1,250				—				—				1,250
Earnings (loss) from continuing operations before gain on disposal of assets and income taxes			(26,366	)			10,844				—				(15,522	)
Gain on disposal of assets, net			237				—				—				237
Earnings (loss) from continuing operations before income taxes		$	(26,129	)		$	10,844			$	—			$	(15,285	)

 

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		For the Six Months Ended March 31, 2017
		Acute Care				Health Choice				Eliminations				Consolidated
Acute care revenue before provision for bad debts		$	1,202,257			$	—			$	—			$	1,202,257
Less: Provision for bad debts			(198,813	)			—				—				(198,813	)
Acute care revenue			1,003,444				—				—				1,003,444
Premium, service and other revenue			—				679,483				—				679,483
Revenue between segments			10,089				—				(10,089	)			—
Total revenue			1,013,533				679,483				(10,089	)			1,682,927
Salaries and benefits (excludes stock-based compensation)			466,253				42,487				—				508,740
Supplies			176,155				224				—				176,379
Medical claims			—				561,478				(10,089	)			551,389
Rentals and leases			41,989				2,047				—				44,036
Other operating expenses			245,432				33,908				—				279,340
Medicare and Medicaid EHR incentives			(805	)			—				—				(805	)
Adjusted EBITDA(1)			84,509				39,339				—				123,848
Interest expense, net			61,660				—				—				61,660
Depreciation and amortization			49,763				2,734				—				52,497
Stock-based compensation			2,341				—				—				2,341
Management fees			2,500				—				—				2,500
Earnings (loss) from continuing operations before gain (loss) on disposal of assets and income taxes			(31,755	)			36,605				—				4,850
Gain (loss) on disposal of assets, net			933				—				—				933
Earnings (loss) from continuing operations before income taxes		$	(30,822	)		$	36,605			$	—			$	5,783
Segment assets		$	2,162,555			$	526,379							$	2,688,934
Capital expenditures		$	43,753			$	1,045							$	44,798
Goodwill		$	771,417			$	5,927							$	777,344

 

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		For the Six Months Ended March 31, 2016
		Acute Care				Health Choice				Eliminations				Consolidated
Acute care revenue before provision for bad debts		$	1,179,595			$	—			$	—			$	1,179,595
Less: Provision for bad debts			(190,696	)			—				—				(190,696	)
Acute care revenue			988,899				—				—				988,899
Premium, service and other revenue			—				635,236				—				635,236
Revenue between segments			8,458				—				(8,458	)			—
Total revenue			997,357				635,236				(8,458	)			1,624,135
Salaries and benefits (excludes stock-based compensation)			458,366				35,417				—				493,783
Supplies			168,337				627				—				168,964
Medical claims			—				543,195				(8,458	)			534,737
Rentals and leases			41,369				1,931				—				43,300
Other operating expenses			242,802				35,085				—				277,887
Medicare and Medicaid EHR incentives			(490	)			—				—				(490	)
Adjusted EBITDA(1)			86,973				18,981				—				105,954
Interest expense, net			66,643				—				—				66,643
Depreciation and amortization			50,735				2,515				—				53,250
Stock-based compensation			3,344				—				—				3,344
Management fees			2,500				—				—				2,500
Earnings (loss) from continuing operations before gain on disposal of assets and income taxes			(36,249	)			16,466				—				(19,783	)
Gain on disposal of assets, net			725				—				—				725
Earnings (loss) from continuing operations before income taxes		$	(35,524	)		$	16,466			$	—			$	(19,058	)
Segment assets		$	2,310,669			$	461,342							$	2,772,011
Capital expenditures		$	61,585			$	465							$	62,050
Goodwill		$	815,582			$	5,757							$	821,339

 

(1)

Adjusted EBITDA represents net earnings (loss) from continuing operations before net interest expense, income tax expense (benefit), depreciation and amortization, stock-based compensation, gain (loss) on disposal of assets and management fees. Management fees represent monitoring and advisory fees paid to management companies affiliated with TPG and JLL. Management routinely calculates and communicates adjusted EBITDA and believes that it is useful to investors because it is commonly used as an analytical indicator within the healthcare industry to evaluate performance, allocate resources and measure leverage capacity and debt service ability. In addition, the Company uses adjusted EBITDA as a measure of performance for its business segments and for incentive compensation purposes. Adjusted EBITDA should not be considered as a measure of financial performance under GAAP, and the items excluded from adjusted EBITDA are significant components in understanding and assessing financial performance. Adjusted EBITDA should not be considered in isolation or as an alternative to net earnings, cash flows generated by operating, investing, or financing activities or other financial statement data presented in the unaudited condensed consolidated financial statements as an indicator of financial performance or liquidity. Adjusted EBITDA, as presented, differs from “adjusted EBITDA” as defined under the Company’s Senior Secured Credit Facilities and may not be comparable to similarly titled measures of other companies.

 

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8. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION

The Senior Notes described in Note 3 are fully and unconditionally guaranteed on a joint and several basis by all of the Company’s existing 100% owned existing domestic subsidiaries, other than certain non-guarantor subsidiaries, which include Health Choice. In addition, the Senior Notes are not guaranteed by the Company’s non-wholly owned subsidiaries. The guarantees are subject to customary release provisions set forth in the Indenture for the Senior Notes.

Summarized condensed consolidating balance sheets at March 31, 2017 and September 30, 2016, condensed consolidating statements of operations for the quarters and six months ended March 31, 2017 and 2016, condensed consolidating statements of comprehensive income (loss) for the quarters and six months ended March 31, 2017 and 2016, and condensed consolidating statements of cash flows for the six months ended March 31, 2017 and 2016, for the Company, segregating the parent company issuer, the subsidiary guarantors, the subsidiary non-guarantors and eliminations, are found below.

 

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IASIS Healthcare LLC

Condensed Consolidating Balance Sheet

March 31, 2017 (unaudited)

(In thousands)

 

		Parent Issuer				Subsidiary Guarantors				Subsidiary Non-Guarantors				Eliminations				Condensed Consolidated
Assets
Current assets
Cash and cash equivalents		$	—			$	231,127			$	89,789			$	—			$	320,916
Accounts receivable, net			—				56,970				311,643				—				368,613
Inventories			—				17,097				51,370				—				68,467
Prepaid expenses and other current assets			—				48,462				103,534				—				151,996
Total current assets			—				353,656				556,336				—				909,992
Property and equipment, net			—				338,548				599,573				—				938,121
Intercompany			—				(205,736	)			205,736				—				—
Net investment in and advances to subsidiaries			1,886,039				—				—				(1,886,039	)			—
Goodwill			5,240				39,097				733,007				—				777,344
Other intangible assets, net			—				7,416				7,500				—				14,916
Other assets, net			4,253				31,831				12,477				—				48,561
Total assets		$	1,895,532			$	564,812			$	2,114,629			$	(1,886,039	)		$	2,688,934
																			—
Liabilities and Equity
Current liabilities
Accounts payable		$	—			$	53,883			$	88,173			$	—			$	142,056
Salaries and benefits payable			—				24,739				29,822				—				54,561
Accrued interest payable			27,046				(3,218	)			3,218				—				27,046
Medical claims payable			—				—				195,525				—				195,525
Other accrued expenses and current liabilities			—				56,018				73,766				—				129,784
Current portion of long-term debt, capital leases and other long-term obligations, net			10,071				7,485				28,902				(28,902	)			17,556
Total current liabilities			37,117				138,907				419,406				(28,902	)			566,528
Long-term debt, capital leases and other long-term obligations, net			1,793,460				30,008				592,269				(592,269	)			1,823,468
Deferred income taxes			92,362				—				—				—				92,362
Other long-term liabilities			—				92,506				1,001				—				93,507
Total liabilities			1,922,939				261,421				1,012,676				(621,171	)			2,575,865
Non-controlling interests with redemption rights			—				120,777				—				—				120,777
Equity
Member’s equity (deficit)			(27,407	)			173,764				1,091,104				(1,264,868	)			(27,407	)
Non-controlling interests			—				8,850				10,849				—				19,699
Total equity (deficit)			(27,407	)			182,614				1,101,953				(1,264,868	)			(7,708	)
Total liabilities and equity		$	1,895,532			$	564,812			$	2,114,629			$	(1,886,039	)		$	2,688,934

 

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IASIS Healthcare LLC

Condensed Consolidating Balance Sheet

September 30, 2016

(In thousands)

 

		Parent Issuer				Subsidiary Guarantors				Subsidiary Non-Guarantors				Eliminations				Condensed Consolidated
Assets
Current assets
Cash and cash equivalents		$	—			$	258,811			$	86,874			$	—			$	345,685
Accounts receivable, net			—				53,502				288,866				—				342,368
Inventories			—				15,268				49,774				—				65,042
Prepaid expenses and other current assets			—				33,286				109,762				—				143,048
Total current assets			—				360,867				535,276				—				896,143
Property and equipment, net			—				323,373				616,411				—				939,784
Intercompany			—				(230,667	)			230,667				—				—
Net investment in and advances to subsidiaries			1,891,422				—				—				(1,891,422	)			—
Goodwill			5,240				32,072				730,347				—				767,659
Other intangible assets, net			—				7,601				9,000				—				16,601
Other assets, net			4,796				28,347				16,140				—				49,283
Total assets		$	1,901,458			$	521,593			$	2,137,841			$	(1,891,422	)		$	2,669,470
Liabilities and Equity
Current liabilities
Accounts payable		$	—			$	49,925			$	93,490			$	—			$	143,415
Salaries and benefits payable			—				19,738				27,726				—				47,464
Accrued interest payable			27,831				(3,220	)			3,220				—				27,831
Medical claims payable			—				—				167,024				—				167,024
Other accrued expenses and current liabilities			—				56,376				82,620				—				138,996
Current portion of long-term debt, capital leases and other long-term obligations, net			10,071				8,015				29,075				(29,075	)			18,086
Total current liabilities			37,902				130,834				403,155				(29,075	)			542,816
Long-term debt, capital leases and other long-term obligations, net			1,795,170				35,670				611,424				(611,424	)			1,830,840
Deferred income taxes			91,633				—				—				—				91,633
Other long-term liabilities			—				89,285				1,010				—				90,295
Total liabilities			1,924,705				255,789				1,015,589				(640,499	)			2,555,584
Non-controlling interests with redemption rights			—				120,809				—				—				120,809
Equity
Member’s equity			(23,247	)			136,613				1,114,310				(1,250,923	)			(23,247	)
Non-controlling interests			—				8,382				7,942				—				16,324
Total equity			(23,247	)			144,995				1,122,252				(1,250,923	)			(6,923	)
Total liabilities and equity		$	1,901,458			$	521,593			$	2,137,841			$	(1,891,422	)		$	2,669,470

 

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IASIS Healthcare LLC

Condensed Consolidating Statement of Operations

For the Quarter Ended March 31, 2017 (unaudited)

(In thousands)

 

		Parent Issuer				Subsidiary Guarantors				Subsidiary Non-Guarantors				Eliminations				Condensed Consolidated
Revenues
Acute care revenue before provision for bad debts		$	—			$	128,258			$	476,798			$	(4,976	)		$	600,080
Less: Provision for bad debts			—				(9,693	)			(86,132	)			—				(95,825	)
Acute care revenue			—				118,565				390,666				(4,976	)			504,255
Premium, service and other revenue			—				—				338,791				—				338,791
Total revenue			—				118,565				729,457				(4,976	)			843,046
Costs and expenses
Salaries and benefits			1,286				83,274				171,458				—				256,018
Supplies			—				20,469				66,381				—				86,850
Medical claims			—				—				280,311				(4,976	)			275,335
Rentals and leases			—				5,729				16,505				—				22,234
Other operating expenses			—				37,329				104,506				—				141,835
Medicare and Medicaid EHR incentives			—				(55	)			21				—				(34	)
Interest expense, net			31,915				—				12,598				(12,598	)			31,915
Depreciation and amortization			—				8,849				17,251				—				26,100
Management fees			1,250				(8,085	)			8,085				—				1,250
Equity in earnings of affiliates			(19,127	)			—				—				19,127				—
Total costs and expenses			15,324				147,510				677,116				1,553				841,503
Earnings (loss) from continuing operations before gain on disposal of assets and income taxes			(15,324	)			(28,945	)			52,341				(6,529	)			1,543
Gains on disposal of assets, net			—				596				32				—				628
Earnings (loss) from continuing operations before income taxes			(15,324	)			(28,349	)			52,373				(6,529	)			2,171
Income tax expense			897				—				—				—				897
Net earnings (loss) from continuing operations			(16,221	)			(28,349	)			52,373				(6,529	)			1,274
Gain (loss) from discontinued operations, net of income taxes			410				(1,172	)			—				—				(762	)
Net earnings (loss)			(15,811	)			(29,521	)			52,373				(6,529	)			512
Net earnings attributable to non-controlling interests			—				(2,165	)			(1,560	)			—				(3,725	)
Net earnings (loss) attributable to IASIS Healthcare LLC		$	(15,811	)		$	(31,686	)		$	50,813			$	(6,529	)		$	(3,213	)

 

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IASIS Healthcare LLC

Condensed Consolidating Statement of Operations

For the Quarter Ended March 31, 2016 (unaudited)

(In thousands)

 

		Parent Issuer				Subsidiary Guarantors				Subsidiary Non-Guarantors				Eliminations				Condensed Consolidated
Revenues
Acute care revenue before provision for bad debts		$	—			$	135,637			$	467,056			$	(4,499	)		$	598,194
Less: Provision for bad debts			—				(10,971	)			(87,910	)			—				(98,881	)
Acute care revenue			—				124,666				379,146				(4,499	)			499,313
Premium, service and other revenue			—				—				321,974				—				321,974
Total revenue			—				124,666				701,120				(4,499	)			821,287
Costs and expenses
Salaries and benefits			1,737				80,630				169,902				—				252,269
Supplies			—				20,856				63,257				—				84,113
Medical claims			—				—				272,529				(4,499	)			268,030
Rentals and leases			—				5,423				16,545				—				21,968
Other operating expenses			—				39,752				108,385				—				148,137
Medicare and Medicaid EHR incentives			—				(433	)			385				—				(48	)
Interest expense, net			34,033				—				12,306				(12,306	)			34,033
Depreciation and amortization			—				9,820				17,237				—				27,057
Management fees			1,250				(7,736	)			7,736				—				1,250
Equity in earnings of affiliates			(7,097	)			—				—				7,097				—
Total costs and expenses			29,923				148,312				668,282				(9,708	)			836,809
Earnings (loss) from continuing operations before gain (loss) on disposal of assets and income taxes			(29,923	)			(23,646	)			32,838				5,209				(15,522	)
Gain (loss) on disposal of assets, net			—				(95	)			332				—				237
Earnings (loss) from continuing operations before income taxes			(29,923	)			(23,741	)			33,170				5,209				(15,285	)
Income tax benefit			(4,885	)			—				—				—				(4,885	)
Net earnings (loss) from continuing operations			(25,038	)			(23,741	)			33,170				5,209				(10,400	)
Earnings (loss) from discontinued operations, net of income taxes			(103	)			270				—				—				167
Net earnings (loss)			(25,141	)			(23,471	)			33,170				5,209				(10,233	)
Net earnings attributable to non-controlling interests			—				(2,602	)			—				—				(2,602	)
Net earnings (loss) attributable to IASIS Healthcare LLC		$	(25,141	)		$	(26,073	)		$	33,170			$	5,209			$	(12,835	)

 

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IASIS Healthcare LLC

Condensed Consolidating Statement of Operations

For the Six Months Ended March 31, 2017 (unaudited)

(In thousands)

 

		Parent Issuer				Subsidiary Guarantors				Subsidiary Non-Guarantors				Eliminations				Condensed Consolidated
Revenues
Acute care revenue before provision for bad debts		$	—			$	263,266			$	949,080			$	(10,089	)		$	1,202,257
Less: Provision for bad debts			—				(25,641	)			(173,172	)			—				(198,813	)
Acute care revenue			—				237,625				775,908				(10,089	)			1,003,444
Premium, service and other revenue			—				—				679,483				—				679,483
Total revenues			—				237,625				1,455,391				(10,089	)			1,682,927
Costs and expenses
Salaries and benefits			2,341				166,926				341,814				—				511,081
Supplies			—				42,994				133,385				—				176,379
Medical claims			—				—				561,478				(10,089	)			551,389
Rentals and leases			—				10,921				33,115				—				44,036
Other operating expenses			—				66,587				212,753				—				279,340
Medicare and Medicaid EHR incentives			—				(55	)			(750	)			—				(805	)
Interest expense, net			61,660				—				22,399				(22,399	)			61,660
Depreciation and amortization			—				17,927				34,570				—				52,497
Management fees			2,500				(16,242	)			16,242				—				2,500
Equity in earnings of affiliates			(40,954	)			—				—				40,954				—
Total costs and expenses			25,547				289,058				1,355,006				8,466				1,678,077
Earnings (loss) from continuing operations before gain on disposal of assets and income taxes			(25,547	)			(51,433	)			100,385				(18,555	)			4,850
Gain on disposal of assets, net			—				899				34				—				933
Earnings (loss) from continuing operations before income taxes			(25,547	)			(50,534	)			100,419				(18,555	)			5,783
Income tax expense			2,272				—				—				—				2,272
Net earnings (loss) from continuing operations			(27,819	)			(50,534	)			100,419				(18,555	)			3,511
Earnings (loss) from discontinued operations, net of income taxes			457				(1,305	)			—				—				(848	)
Net earnings (loss)			(27,362	)			(51,839	)			100,419				(18,555	)			2,663
Net earnings attributable to non-controlling interests			—				(4,718	)			(2,908	)			—				(7,626	)
Net earnings (loss) attributable to IASIS Healthcare LLC		$	(27,362	)		$	(56,557	)		$	97,511			$	(18,555	)		$	(4,963	)

 

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IASIS Healthcare LLC

Condensed Consolidating Statement of Operations

For the Six Months Ended March 31, 2016 (unaudited)

(In thousands)

 

		Parent Issuer				Subsidiary Guarantors				Subsidiary Non-Guarantors				Eliminations				Condensed Consolidated
Revenue
Acute care revenue before provision for bad debts		$	—			$	266,208			$	921,845			$	(8,458	)		$	1,179,595
Less: Provision for bad debts			—				(25,689	)			(165,007	)			—				(190,696	)
Acute care revenue			—				240,519				756,838				(8,458	)			988,899
Premium, service and other revenue			—				—				635,236				—				635,236
Total revenue			—				240,519				1,392,074				(8,458	)			1,624,135
Costs and expenses
Salaries and benefits			3,344				160,163				333,620				—				497,127
Supplies			—				41,712				127,252				—				168,964
Medical claims			—				—				543,195				(8,458	)			534,737
Rentals and leases			—				10,534				32,766				—				43,300
Other operating expenses			—				63,226				214,661				—				277,887
Medicare and Medicaid EHR incentives			—				(499	)			9				—				(490	)
Interest expense, net			66,643				—				22,586				(22,586	)			66,643
Depreciation and amortization			—				19,348				33,902				—				53,250
Management fees			2,500				(15,698	)			15,698				—				2,500
Equity in earnings of affiliates			(17,672	)			—				—				17,672				—
Total costs and expenses			54,815				278,786				1,323,689				(13,372	)			1,643,918
Earnings (loss) from continuing operations before gain on disposal of assets and income taxes			(54,815	)			(38,267	)			68,385				4,914				(19,783	)
Gain on disposal of assets, net			—				358				367				—				725
Earnings (loss) from continuing operations before income taxes			(54,815	)			(37,909	)			68,752				4,914				(19,058	)
Income tax expense (benefit)			(7,163	)			—				1,786				—				(5,377	)
Net earnings (loss) from continuing operations			(47,652	)			(37,909	)			66,966				4,914				(13,681	)
Earnings (loss) from discontinued operations, net of income taxes			2,096				(5,982	)			—				—				(3,886	)
Net earnings (loss)			(45,556	)			(43,891	)			66,966				4,914				(17,567	)
Net earnings attributable to non-controlling interests			—				(5,403	)			—				—				(5,403	)
Net earnings (loss) attributable to IASIS Healthcare LLC		$	(45,556	)		$	(49,294	)		$	66,966			$	4,914			$	(22,970	)

 

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IASIS Healthcare LLC

Condensed Consolidating Statement of Comprehensive Income (Loss)

For the Quarter Ended March 31, 2017 (unaudited)

(In thousands)

 

		Parent Issuer				Subsidiary Guarantors				Subsidiary Non-Guarantors				Eliminations				Condensed Consolidated
Net earnings (loss)		$	(15,811	)		$	(29,521	)		$	52,373			$	(6,529	)		$	512
Other comprehensive income
Change in fair value of highly effective interest rate hedges			—				—				—				—				—
Other comprehensive income before income taxes			—				—				—				—				—
Change in income tax expense			—				—				—				—				—
Other comprehensive income, net of income taxes			—				—				—				—				—
Comprehensive income (loss)			(15,811	)			(29,521	)			52,373				(6,529	)			512
Net earnings attributable to non-controlling interests			—				(2,165	)			(1,560	)			—				(3,725	)
Comprehensive income (loss) attributable to IASIS Healthcare LLC		$	(15,811	)		$	(31,686	)		$	50,813			$	(6,529	)		$	(3,213	)

 

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IASIS Healthcare LLC

Condensed Consolidating Statement of Comprehensive Income (Loss)

For the Quarter Ended March 31, 2016 (unaudited)

(In thousands)

 

		Parent Issuer				Subsidiary Guarantors				Subsidiary Non-Guarantors				Eliminations				Condensed Consolidated
Net earnings (loss)		$	(25,141	)		$	(23,471	)		$	33,170			$	5,209			$	(10,233	)
Other comprehensive income
Change in fair value of highly effective interest rate hedges			487				—				—				—				487
Other comprehensive loss before income taxes			487				—				—				—				487
Change in income tax benefit			(178	)			—				—				—				(178	)
Other comprehensive income, net of income taxes			309				—				—				—				309
Comprehensive income (loss)			(24,832	)			(23,471	)			33,170				5,209				(9,924	)
Net earnings attributable to non-controlling interests			—				(2,602	)			—				—				(2,602	)
Comprehensive income (loss) attributable to IASIS Healthcare LLC		$	(24,832	)		$	(26,073	)		$	33,170			$	5,209			$	(12,526	)

 

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IASIS Healthcare LLC

Condensed Consolidating Statement of Comprehensive Income (Loss)

For the Six Months Ended March 31, 2017 (unaudited)

(In thousands)

 

		Parent Issuer				Subsidiary Guarantors				Subsidiary Non-Guarantors				Eliminations				Condensed Consolidated
Net earnings (loss)		$	(27,362	)		$	(51,839	)		$	100,419			$	(18,555	)		$	2,663
Other comprehensive income
Change in fair value of highly effective interest rate hedges			—				—				—				—				—
Other comprehensive income before income taxes			—				—				—				—				—
Change in income tax benefit			—				—				—				—				—
Other comprehensive income, net of income taxes			—				—				—				—				—
Comprehensive income (loss)			(27,362	)			(51,839	)			100,419				(18,555	)			2,663
Net earnings attributable to non-controlling interests			—				(4,718	)			(2,908	)			—				(7,626	)
Comprehensive income (loss) attributable to IASIS Healthcare LLC		$	(27,362	)		$	(56,557	)		$	97,511			$	(18,555	)		$	(4,963	)

 

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IASIS Healthcare LLC

Condensed Consolidating Statement of Comprehensive Income (Loss)

For the Six Months Ended March 31, 2016 (unaudited)

(In thousands)

 

		Parent Issuer				Subsidiary Guarantors				Subsidiary Non-Guarantors				Eliminations				Condensed Consolidated
Net earnings (loss)		$	(45,556	)		$	(43,891	)		$	66,966			$	4,914			$	(17,567	)
Other comprehensive income
Change in fair value of highly effective interest rate hedges			976				—				—				—				976
Other comprehensive income before income taxes			976				—				—				—				976
Change in income tax benefit			(356	)			—				—				—				(356	)
Other comprehensive income, net of income taxes			620				—				—				—				620
Comprehensive income (loss)			(44,936	)			(43,891	)			66,966				4,914				(16,947	)
Net earnings attributable to non-controlling interests			—				(5,403	)			—				—				(5,403	)
Comprehensive income (loss) attributable to IASIS Healthcare LLC		$	(44,936	)		$	(49,294	)		$	66,966			$	4,914			$	(22,350	)

 

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IASIS Healthcare LLC

Condensed Consolidating Statement of Cash Flows

For the Six Months Ended March 31, 2017 (unaudited)

(In thousands)

 

		Parent Issuer				Subsidiary Guarantors				Subsidiary Non-Guarantors				Eliminations				Condensed Consolidated
Cash flows from operating activities
Net earnings (loss)		$	(27,362	)		$	(51,839	)		$	100,419			$	(18,555	)		$	2,663
Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization			—				17,927				34,570				—				52,497
Amortization of loan costs			3,869				—				—				—				3,869
Amortization of deferred gain on sale-leaseback transaction			(1,248	)			—				—				—				(1,248	)
Change in physician minimum revenue guarantees			—				73				1,651				—				1,724
Stock-based compensation			2,341				—				—				—				2,341
Deferred income taxes			1,149				—				—				—				1,149
Loss on disposal of assets, net			—				(831	)			(102	)			—				(933	)
Loss from discontinued operations, net			(457	)			1,305				—				—				848
Equity in earnings of affiliates			(40,954	)			—				—				40,954				—
Changes in operating assets and liabilities, net of the effect of acquisitions and dispositions:
Accounts receivable, net			—				22,695				(49,029	)			—				(26,334	)
Inventories, prepaid expenses and other current assets			—				(68,469	)			55,215				—				(13,254	)
Accounts payable, other accrued expenses and other accrued liabilities			(785	)			32,614				(4,053	)			—				27,776
Net cash provided by (used in) operating activities — continuing operations			(63,447	)			(46,525	)			138,671				22,399				51,098
Net cash used in operating activities — discontinued operations			—				(855	)			—				—				(855	)
Net cash provided by (used in) operating activities			(63,447	)			(47,380	)			138,671				22,399				50,243
Cash flows from investing activities
Purchases of property and equipment			—				(28,646	)			(16,152	)			—				(44,798	)
Cash paid for acquisitions, net			—				(14,318	)			—				—				(14,318	)
Proceeds from sale of assets			—				18				50				—				68
Change in other assets, net			—				(3,326	)			3,707				—				381
Net cash used in investing activities			—				(46,272	)			(12,395	)			—				(58,667	)
Cash flows from financing activities
Payment of long-term debt, capital leases and other long-term obligations			(10,440	)			(632	)			(196	)			—				(11,268	)
Distributions to non-controlling interests			—				(2,670	)			(2,238	)			—				(4,908	)
Cash paid for the repurchase of non-controlling interests			—				(169	)			—				—				(169	)
Change in intercompany balances with affiliates, net			73,887				69,439				(120,927	)			(22,399	)			—
Net cash provided by (used in) financing activities			63,447				65,968				(123,361	)			(22,399	)			(16,345	)
Change in cash and cash equivalents			—				(27,684	)			2,915				—				(24,769	)
Cash and cash equivalents at beginning of period			—				258,811				86,874				—				345,685
Cash and cash equivalents at end of period		$	—			$	231,127			$	89,789			$	—			$	320,916

 

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IASIS Healthcare LLC

Condensed Consolidating Statement of Cash Flows

For the Six Months Ended March 31, 2016 (unaudited)

(In thousands)

 

		Parent Issuer				Subsidiary Guarantors				Subsidiary Non-Guarantors				Eliminations				Condensed Consolidated
Cash flows from operating activities
Net earnings (loss)		$	(45,556	)		$	(43,891	)		$	66,966			$	4,914			$	(17,567	)
Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization			—				19,348				33,902				—				53,250
Amortization of loan costs			4,012				—				—				—				4,012
Amortization of deferred gain on sale-leaseback transaction			(1,248	)			—				—				—				(1,248	)
Change in physician minimum revenue guarantees			—				50				2,000				—				2,050
Stock-based compensation			3,344				—				—				—				3,344
Deferred income taxes			(8,512	)			—				—				—				(8,512	)
Gain on disposal of assets, net			—				(358	)			(367	)			—				(725	)
Loss (earnings) from discontinued operations, net			(2,096	)			5,982				—				—				3,886
Equity in earnings of affiliates			(17,672	)			—				—				17,672				—
Changes in operating assets and liabilities, net of the effect of acquisitions and dispositions:
Accounts receivable, net			—				(6,899	)			(17,785	)			—				(24,684	)
Inventories, prepaid expenses and other current assets			—				3,012				27,079				—				30,091
Accounts payable, other accrued expenses and other accrued liabilities			(1,151	)			1,237				34,069				—				34,155
Net cash provided by (used in) operating activities — continuing operations			(68,879	)			(21,519	)			145,864				22,586				78,052
Net cash provided by operating activities — discontinued operations			—				637				—				—				637
Net cash provided by (used in) operating activities			(68,879	)			(20,882	)			145,864				22,586				78,689
Cash flows from investing activities
Purchases of property and equipment			—				(40,214	)			(21,836	)			—				(62,050	)
Cash paid for acquisitions, net			—				(5,869	)			(2,311	)			—				(8,180	)
Proceeds from sale of assets			—				121				45				—				166
Change in other assets, net			—				(1,434	)			1,833				—				399
Net cash used in investing activities			—				(47,396	)			(22,269	)			—				(69,665	)
Cash flows from financing activities
Payment of long-term debt, capital leases and other long-term obligations			(7,232	)			(364	)			(692	)			—				(8,288	)
Payment of debt financing costs			(5,179	)			—				—				—				(5,179	)
Distributions to non-controlling interests			—				—				(5,563	)			—				(5,563	)
Cash paid for the repurchase of non-controlling interests			—				—				(960	)			—				(960	)
Change in intercompany balances with affiliates, net			81,290				13,642				(72,346	)			(22,586	)			—
Net cash provided by (used in) financing activities			68,879				13,278				(79,561	)			(22,586	)			(19,990	)
Change in cash and cash equivalents			—				(55,000	)			44,034				—				(10,966	)
Cash and cash equivalents at beginning of period			—				340,052				38,461				—				378,513
Cash and cash equivalents at end of period		$	—			$	285,052			$	82,495			$	—			$	367,547

 

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements, the notes to our unaudited condensed consolidated financial statements and the other financial information appearing elsewhere in this Quarterly Report on Form 10-Q (this “Report”). Data for the quarters and six months ended March 31, 2017 and 2016, have been derived from our unaudited condensed consolidated financial statements. In this Report, unless otherwise stated or indicated by context, references to the “Company,” “IASIS,” “we,” “our” or “us” refer to IASIS Healthcare LLC and its affiliates. Unless the context otherwise implies, the term “affiliates” means direct and indirect subsidiaries of IASIS Healthcare LLC and partnerships and joint ventures in which such subsidiaries are partners. The terms “facilities” or “hospitals” refer to entities owned and operated by affiliates of IASIS and the term “employees” refers to employees of affiliates of IASIS. References herein to “IAS” are to IASIS Healthcare Corporation, our parent company.

FORWARD-LOOKING STATEMENTS

Our disclosure and analysis in this Report contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which involve risks and uncertainties. Forward-looking statements include all statements that do not relate solely to historical or current facts, and you can identify forward-looking statements because they contain words such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates,” “projects,” “continue,” “initiative,” or “anticipates” or similar expressions that concern our prospects, objectives, strategies, plans or intentions. These forward-looking statements are subject to risks and uncertainties that may change at any time, and, therefore, our actual results may differ materially from those expected. While we believe our assumptions are reasonable, these assumptions are inherently subject to significant regulatory, economic and competitive uncertainties and contingencies, which are difficult or impossible to predict accurately and may be beyond the control of the Company. These factors include, but are not limited to:

 

•

the effects related to implementation of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the “Health Reform Law”), the potential repeal or significant modifications of the Health Reform Law, its implementation and/or its interpretation which may result from following the 2016 federal elections, the possible enactment of additional federal or state healthcare reforms and the outcome of court challenges to such laws;

 

•

potential additional impacts of the 2016 federal elections and changes to federal, state, or local laws and regulations affecting the healthcare industry;

 

•

our Health Choice managed care business’ ability to effectively manage costs of care, maintain its governmental contracts and achieve its service line expansion strategies;

 

•

the effects of a shift in volume or payor mix from commercial managed care payors to self-pay and Medicaid;

 

•

increases in the amount, and risk of collectability, of uninsured accounts and deductibles and copayment amounts for insured accounts;

 

•

a reduction in or withholding of government-sponsored supplemental payments to our hospitals;

 

•

the effects of any inability to retain and negotiate reasonable contracts with managed care plans as a result of consolidation among managed care organizations or otherwise;

 

•

if insured patients switch from traditional commercial insurance plans to health insurance exchange (“Exchange”) plans;

 

•

industry trends towards value-based purchasing and narrow networks and related competitive challenges to our hospitals;

 

•

possible changes in the Medicare, Medicaid and other state programs, including Medicaid supplemental reimbursement programs or waiver programs, that may impact reimbursement to healthcare providers and insurers;

 

•

controls imposed by Medicare and third-party payors to reduce admissions and length of stay that negatively impact healthcare provider reimbursement;

 

•

competition to attract and retain quality physicians, nurses, technicians and other personnel;

 

•

the generally competitive nature of the healthcare industry;

 

•

the possibility of health pandemics and the related impacts on our operations and financial results;

 

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•

a failure of our information systems or breach of our cybersecurity protections;

 

•

the costs and operational challenges associated with information technology and medical equipment upgrades;

 

•

challenges associated with the implementation of electronic health records (“EHRs”) and coding systems;

 

•

compliance with extensive healthcare industry laws, regulations and investigations, including those with respect to patient privacy and physician-owned hospitals;

 

•

reliance upon services provided by third-party vendors;

 

•

the effects of local or national economic downturns on our business lines;

 

•

risks associated with our acquisition and development strategy, including liabilities assumed in acquisitions of facilities and physician practices and our need to effectively integrate acquired companies into our existing operations;

 

•

increased lease rates and amended lease terms at certain of our facilities in connection with sale-leaseback transactions;

 

•

risks associated with environmental, health and safety laws;

 

•

risks associated with labor laws;

 

•

potential adverse accounting impacts associated with goodwill carrying value;

 

•

our dependence upon the services of key executive management personnel;

 

•

our ability to maintain adequate internal controls over our financial and management systems;

 

•

risks related to our indebtedness and capital structure; and

 

•

other risk factors described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2016, filed with the SEC on December 21, 2016 (our “2016 Form 10-K”), and in our other public filings with the SEC.

Given these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. Any forward-looking statement that we make in this Report speaks only as of the date of such statement, and we undertake no obligation to update any forward-looking statements or to publicly announce the results of any revisions to any of those statements to reflect future events or developments. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless specifically expressed as such, and should only be viewed as historical data.

EXECUTIVE OVERVIEW

We are a healthcare services company delivering high-quality, cost-effective healthcare through a broad and differentiated set of capabilities and assets that includes acute care hospitals with related patient access points, and a diversified and growing managed care risk platform (“risk platform”). Our business model is centered on deploying our acute care expertise and risk platform, either separately or on an integrated basis to manage population health, integrate the delivery and payment of healthcare services and ultimately expand our total market opportunities within our existing and new geographic markets. Our business consists of two operating segments: (i) our acute care operations, which, as of March 31, 2017, included 17 acute care hospitals, one behavioral hospital and multiple other access points, including 141 physician clinics, multiple outpatient surgical units, imaging centers, and investments in urgent care centers and on-site employer-based clinics, and (ii) our managed care operations, comprised of our diversified and growing risk platform, Health Choice, which operates managed Medicaid and Medicare health plans, and a management services organization (“MSO”) that provides management and administrative services to third-party insurers, as well as accountable care networks in conjunction with our acute care facilities.

Acute Care Operations

As of March 31, 2017, we owned or leased 17 acute care hospital facilities and one behavioral health hospital facility with a total of 3,600 licensed beds, several outpatient service facilities and 141 physician clinics.

We operate our hospitals with a strong community focus by offering and developing healthcare services targeted to the needs of the markets we serve, promoting strong relationships with physicians and working with local managed care plans to develop quality and outcome driven, cost-efficient and innovative reimbursement models. Our major acute care geographic markets include Salt Lake City, Utah; Phoenix, Arizona; six cities in Texas, including Houston, San Antonio and Odessa; and West Monroe, Louisiana.

 

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Since our Company was founded in 1998, we believe we have developed a reputation for operating hospitals that deliver high quality care in our markets at rates that are often more affordable than many other hospitals in our markets with larger local market share than us. Our corporate and divisional infrastructure allows us to leverage savings in information technology services, revenue cycle, hospital supplies, and labor force costs.

Managed Care Operations

Health Choice, headquartered in Phoenix, Arizona, began providing managed Medicaid services under contract with the Arizona Health Care Cost Containment System (“AHCCCS”) in 1990, making it one of the nation’s first Medicaid managed care plans. Under our ownership beginning in 1999, Health Choice has evolved into a managed care organization and insurer which, while it has grown its core managed Medicaid business, has expanded to serve certain Medicare Advantage members and is utilizing its population health management expertise to offer MSO-related services to other payors. In collaboration with our hospitals and affiliated physicians in certain of our markets, Health Choice also manages accountable care provider networks.

Health Choice provides the Company with the ability to engage in innovative value-based purchasing initiatives and opportunities. Its leadership team has considerable experience in population health management, physician relations and network development. We believe Health Choice also deploys state of the art disease management and claims processing technology. In light of the current healthcare industry trends toward integrated delivery and clinical integration, we are seeking to use Health Choice’s expertise and technology in the management of the accountable care provider networks we offer to other health plans.

As of March 31, 2017, Health Choice’s related entities managed healthcare services for 676,700 covered lives through multiple health plans, accountable care networks, MSO-related services and other managed care solutions. These include 282,300 managed Medicaid lives served primarily through Health Choice’s core health plan business in Arizona, 228,600 plan members associated with Health Choice Integrated Care (“HCIC”), (which includes 62,300 Navajo Nation plan members that also receive health plan services through a state of Arizona Tribal Regional Behavioral Health Authority), 9,700 Medicare Advantage members eligible for both Medicare and Medicaid (“Duals”), 97,600 MSO lives and 85,800 lives attributed to our accountable care networks from multiple payors whose care is managed by our network providers, of which 27,300 lives are members in Health Choice’s managed Medicaid and Exchange plans.

Recent Developments

Health Choice Exits Arizona Marketplace Exchange Business. As of January 1, 2017, Health Choice exited the Arizona marketplace exchange. Our decision to exit the exchange was driven by the instability of the Health Reform marketplace, uncertainty and lack of funding around government premium stabilization programs and the overall nature of the related regulatory environment.

Utah Market Acquisitions. In January of 2017, we acquired the assets of two imaging centers in our Salt Lake market from a leading local radiology group. This followed our acquisition, in October 2016, of Riverwoods Surgery Center in Provo, Utah. These acquisitions continue our expansion in the Salt Lake market, which has included investments in a free-standing emergency department, urgent care centers, on-site care centers and other patient access points.

Term Loan Amendment. On May 4, 2017, we, Holdings, certain of our subsidiaries, the lenders party thereto, JPMorgan Chase Bank, N.A., as the Additional Term B-3 Lender (as defined therein), Wilmington Trust, National Association, as administrative agent, and the other agents named therein entered into an Amendment No. 4 to the Amended and Restated Credit Agreement (“Amendment No. 4”). Pursuant to Amendment No. 4, all of the then-outstanding term loans under the Amended and Restated Credit Agreement were refinanced with term loans (the “Term B-3 Loans”) maturing on February 17, 2021, subject to a springing maturity date of 91 days prior to the maturity date of the Senior Notes if any of the Senior Notes remains outstanding as of such date. The interest rate margins applicable to the Term B-3 Loans are 4.00%, for LIBOR-based loans, and 3.00%, for base rate loans, with a LIBOR floor of 1.25%. Amendment No. 4 also provides for a soft call prepayment premium applicable to certain repricing transactions involving the outstanding Term B-3 Loans. The soft call premium equals 1% of the amount of the Term B-3 Loans that are subject to certain repricing transactions occurring on or prior to May 4, 2018. Upon completion of Amendment No. 4, the outstanding term loan balance was $864.2 million, which reflected a $100.0 million pay down to certain holders.

Revolver Amendment. On May 4, 2017, we, Holdings, the lenders party to the Revolving Credit Agreement as of such date and the Revolver Agent entered into an amendment to the Revolving Credit Agreement (“Revolver Amendment No. 1”). Pursuant to Revolver Amendment No. 1, the Revolving Credit Facility matures in February 2021 (the “Stated Revolver Maturity Date”), provided that, if prior to the Stated Revolver Maturity Date, (x) any loans are outstanding under the Term Loan Facility on the date that is 91 days prior to the maturity date of at least $100 million of loans under the Term Loan Facility (such date, the “Springing Term Maturity Date”) or (y) any notes are outstanding under the Indenture on the date that is 91 days prior to the maturity date under the Indenture (such date, the “Springing Notes Maturity Date”), then the maturity date will automatically become the earlier of the Springing Term Maturity Date or the Springing Notes Maturity Date.

 

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Revenue and Volume Trends

Total revenue for the quarter ended March 31, 2017, increased 2.6% to $843.0 million, compared to $821.3 million in the same prior year quarter. Total revenue for the six months ended March 31, 2017, increased 3.6% to $1.68 billion, compared to $1.62 billion in the same prior year period. Total revenue is comprised of acute care revenue, which is recorded net of the provision for bad debts, and premium, service and other revenue. Acute care revenue contributed $4.9 million to the increase in total revenue for the quarter ended March 31, 2017, compared to the same prior year quarter, while premium, service and other revenue of our risk platform contributed $16.8 million to the increase in total revenue compared to the same prior year quarter. Acute care revenue contributed $14.5 million to the increase in total revenue for the six months ended March 31, 2017, compared to the same prior year period, while premium, service and other revenue of our risk platform contributed $44.2 million to the increase in total revenue compared to the same prior year period.

Acute Care Revenue

Acute care revenue is comprised of net patient revenue and other revenue. A large percentage of our hospitals’ net patient revenue consists of fixed payment, discounted sources, including Medicare, Medicaid and managed care organizations. Reimbursement for Medicare and Medicaid services are often fixed regardless of the cost incurred or the level of services provided. Similarly, a greater percentage of the managed care companies we contract with reimburse providers on a fixed payment basis regardless of the costs incurred or the level of services provided. Net patient revenue is reported net of discounts and contractual adjustments. The contractual adjustments principally result from differences between the hospitals’ established charges and payment rates under Medicare, Medicaid and various managed care plans. Additionally, discounts and contractual adjustments result from our uninsured discount and charity care programs. Acute care revenue is reported net of the provision for bad debts. Other revenue includes medical office building rental income and other miscellaneous revenue.

For the quarter ended March 31, 2017, admissions and adjusted admissions increased 1.0%, both compared to the same prior year quarter. For the six months ended March 31, 2017, admissions increased 0.7% and adjusted admissions increased 0.3%, both compared to the same prior year period.

For the quarter and six months ended March 31, 2017, total surgeries increased 6.7% and 4.8%, respectively, compared to the same prior year periods.

The following table provides the sources of our hospitals’ gross patient revenue by payor before discounts, contractual adjustments and the provision for bad debt:

 

		Quarter Ended March 31,								Six Months Ended March 31,
		2017				2016				2017				2016
Medicare			25.7	%			25.3	%			25.4	%			26.4	%
Managed Medicare			18.3				15.3				17.4				15.6
Medicaid and managed Medicaid			19.8				21.5				20.1				21.2
Managed care and other			30.9				32.6				31.9				31.7
Self-pay			5.3				5.3				5.2				5.1
Total			100.0	%			100.0	%			100.0	%			100.0	%

 

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The following table provides the sources of our hospitals’ net patient revenue by payor before the provision for bad debts:

 

		Quarter Ended March 31,								Six Months Ended March 31,
		2017				2016				2017				2016
Medicare			19.2	%			18.2	%			18.7	%			18.9	%
Managed Medicare			12.4				10.3				11.8				10.4
Medicaid and managed Medicaid			9.8				11.9				9.8				12.4
Managed care and other			42.7				44.3				44.2				43.4
Self-pay			15.9				15.3				15.5				14.9
Total			100.0	%			100.0	%			100.0	%			100.0	%

See “Item 1 — Business — Sources of Revenue — Acute Care Revenue” and “Item 1 — Business — Government Regulation and Other Factors” included in our 2016 Form 10-K for a description of the types of payments we receive for services provided to patients enrolled in the traditional Medicare plan, managed Medicare plans, Medicaid plans, managed Medicaid plans and managed care plans. In those sections, we also discussed the unique reimbursement features of the traditional Medicare plan, including the annual Medicare regulatory updates published by CMS that impact reimbursement rates for services provided under the plan. The future potential impact to reimbursement for certain of these payors under the Health Reform Law is also discussed in such Annual Report on Form 10-K.

Premium, Service and Other Revenue

Premium, service and other revenue generated by our managed care operations represented 40.2% and 40.4% of our total revenue for the quarter and six months ended March 31, 2017, respectively, compared to 39.2% and 39.1% in the same prior year periods. The increase in the percentage of revenue derived from our managed care operations was due primarily to a 3.1% rate increase at our Arizona Medicaid program, as well as a 5.2% increase in total lives served, excluding our Arizona marketplace exchange business, which we exited as of January 1, 2017.

Health Choice contracts with state Medicaid programs in Arizona and Utah to provide specified health services to qualified Medicaid enrollees through contracted healthcare providers. Most of its premium revenue is derived through its contracts with AHCCCS, the state agency that administers Arizona’s Medicaid program. These contracts require Health Choice to arrange for healthcare services for enrolled Medicaid patients in exchange for fixed monthly premiums, based upon negotiated per capita member rates, and supplemental payments from AHCCCS. Premium revenue includes adjustments to revenue related to the program settlement process for the Arizona managed Medicaid plan under the related state contract. This program settlement process reconciles estimated amounts due to or from the state based on contractually mandated limits on profits and losses. Although estimates of future program settlement amounts are recorded in current periods, the program settlement process typically occurs 18 months post-plan year, when actual (rather than projected) claims and member eligibility data become available and a net settlement amount is determined either due to or from the state. Adjustments to the estimates of future program settlement amounts are recorded as a component of premium revenue.

Health Choice also contracts with CMS to provide coverage as a Medicare Advantage Prescription Drug (“MAPD”) Special Needs Plan (“SNPs”). This contract allows Health Choice to offer Medicare and Part D drug benefit coverage to new and existing dual-eligible members (i.e., those that are eligible for Medicare and Medicaid). In accordance with CMS regulations, SNPs are now expected to meet additional requirements, including requirements relating to model of care, cost-sharing, disclosure of information and reporting of quality measures.

 

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Industry Trends and Other Items Impacting Our Company

The following section discusses updates to trends discussed in our 2016 Form 10-K that we believe are significant factors in our current and/or future operating results and cash flows. Certain of these trends apply to the entire acute care hospital industry, while others may apply to us more specifically. These trends could be short-term in nature or could require long-term attention and resources. While these trends may involve certain factors that are outside of our control, the extent to which these trends affect our hospitals and health plan operations and our ability to manage the impact of these trends play vital roles in our current and future success. In many cases, we are unable to predict what impact, if any, these trends will have on us.

Healthcare Reform

In recent years, Congress and certain state governments have passed a large number of laws and regulations intended to result in major changes within the healthcare system. The Health Reform Law, the most prominent of these efforts, changed how healthcare services are covered, delivered and reimbursed through expanded health insurance coverage, reduced growth in Medicare program spending and the establishment of programs that tie reimbursement to care quality and value. However, there is substantial uncertainty regarding the ongoing effects of the Health Reform Law because of the results of the 2016 federal elections, which will likely result in the repeal of, or significant changes to, the Health Reform Law, its implementation or its interpretation. For example, President Donald Trump has signed an executive order that directs agencies to minimize “economic and regulatory burdens” of the Health Reform Law, although it is unclear how this will be implemented. It is difficult to predict when or how the Health Reform Law may be changed, what alternative provisions, if any, will be enacted, the timing of the implementation of any alternative provisions and the impact of alternative provision on providers and other healthcare industry participants. Since the implementation of the Health Reform Law began, as a result of significant pay-for items, including reductions in Medicaid disproportionate share payments, Medicare reimbursement rate reductions, and provider tax assessments in the state of Arizona, we have not seen significant benefit to our earnings. However, while we are unable to predict the full impact of any potential modification or repeal of the Health Reform Law or the implementation thereof on our acute care operations business and/or our managed care operation business, if the Health Reform Law is repealed or significantly modified, such repeal or modification could have a materially adverse impact on our business strategies, prospects, operation results or financial condition.

State Medicaid Budgets

In recent years, the states in which we operate have experienced budget constraints as a result of increased costs and lower than expected tax collections. Health and human services programs, including Medicaid and similar programs, represent a significant portion of state budgets. The states in which we operate responded to these budget concerns by decreasing funding for Medicaid and other healthcare programs or by making structural changes that resulted in a reduction in hospital reimbursement, as well as by imposing more restrictive Medicaid eligibility requirements. In addition, many states have received waivers from CMS in order to implement or expand managed Medicaid programs.

Texas

The Texas legislature and the Texas Health and Human Services Commission (“THHSC”) recommended expanding Medicaid managed care enrollment in the state, and in December 2011, CMS approved a five-year Medicaid waiver, since extended through March 31, 2017, that: (1) allows Texas to expand its Medicaid managed care program while preserving hospital funding; (2) provides incentive payments for improvements in healthcare delivery; and (3) directs more funding to hospitals that serve large numbers of uninsured patients. All of our acute care hospitals in Texas currently receive supplemental Medicaid reimbursement, including reimbursement from programs for participating private hospitals that enter into indigent care affiliation agreements with public hospitals or county governments in the state of Texas. Under the CMS-approved programs, affiliated hospitals, including our Texas hospitals, have expanded the community healthcare safety net by providing indigent healthcare services. Revenue recognized under these Texas private supplemental Medicaid reimbursement programs, including amounts recognized under the Texas Medicaid Disproportionate Share Hospital program (“Texas Medicaid DSH”) for the quarters and six months ended March 31, 2017 and 2016, respectively, was $21.2 million and $47.3 million, respectively, compared to $30.0 million and $58.5 million in the same prior year periods. Under the Medicaid waiver, funds are distributed to participating hospitals based upon both the costs associated with providing care to individuals without third party coverage and the investment made to support coordinating care and quality improvements that transform the local communities’ care delivery systems. The responsibility to coordinate and develop plans that address the concerns of the local delivery care systems, including improved access, quality, cost effectiveness and coordination is controlled primarily by public hospitals or local government entities that serve the surrounding geographic areas. Complexities of the underlying methodologies in determining the funding for the state’s Medicaid supplemental reimbursement programs, along with a lack of sufficient resources at the THHSC to administer the programs, have historically resulted in a delay in related reimbursements. As of March 31, 2017 and September 30, 2016, we had $23.9 million and $29.4 million, respectively, in receivables due to our Texas hospitals in connection with these supplemental reimbursement programs, which includes $0.2 million and $3.6 million, respectively, of amounts due under Texas Medicaid DSH.

 

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Arizona

Effective January 1, 2014, Arizona expanded its Medicaid program under the Health Reform Law, which includes increased eligibility for adults, children and pregnant women, and the restoration of eligibility to childless adults that had previously been eliminated. As a result of the Medicaid expansion and of the Plan’s increase in total coverage area under its most recent AHCCCS contract, enrollment under Health Choice’s Medicaid product line increased 7.0% for the quarter ended March 31, 2017, compared to the same prior year quarter. In addition, in connection with the expanded Medicaid coverage, the state implemented a provider assessment to fund a portion of the expanded eligibility related to the childless adult population. During the quarter and six months ended March 31, 2017, we incurred $2.2 million and $4.5 million, respectively, in provider fee assessments compared to $2.1 million and $4.3 million in the same prior year periods.

Further, while the Arizona legislature approved an expansion of Medicaid in 2013 which became effective on January 1, 2014, a lawsuit filed by several state lawmakers has challenged the legality of a provider fee assessed to all providers and used to help pay for Arizona’s Medicaid expansion. On August 26, 2015, the Arizona State Superior Court upheld the legality of the provider fee, thus preserving the existing funding for Medicaid expansion in Arizona. The plaintiffs are appealing this decision. A successful appeal, invalidating the provider fee used to help fund Arizona’s Medicaid expansion, may result in the loss of certain funding for the state’s Medicaid program, which could potentially result in changes that restrict eligibility and increase the number of uninsured individuals, therefore, adversely affecting our operations in Arizona.

Uncompensated Care

Uncompensated care represents discounts provided to the uninsured, bad debts and charity care, associated with the acute care services we deliver to the communities we serve. During the quarter and six months ended March 31, 2017, our uncompensated care as a percentage of acute care revenue was 20.5% and 21.0%, respectively, compared to 20.8% and 20.5% in the same prior year periods. During the quarter ended March 31, 2017, our self-pay admissions represented 6.2% of our total admissions, compared to 6.1% in the same prior year quarter. During the six months ended March 31, 2017, our self-pay admissions represented 6.1% of our total admissions, compared to 6.2% in the same prior year period.

If we were to experience continued growth in uninsured and under-insured volume and revenue, our uncompensated care may continue to increase and our results of operations would continue to be adversely affected.

The percentages of our insured and uninsured net hospital receivables are summarized as follows:

 

		March 31, 2017				September 30, 2016
Insured receivables			82.7	%			81.2	%
Uninsured receivables			17.3	%			18.8
Total			100.0	%			100.0	%

The percentages of hospital net receivables in summarized aging categories are as follows:

 

		March 31, 2017				September 30, 2016
0 to 90 days			66.0	%			63.3	%
91 to 180 days			16.8	%			19.0
Over 180 days			17.2	%			17.7
Total			100.0	%			100.0	%

 

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Regulatory Matter

On January 14, 2016, CMS entered into a Systems Improvement Agreement (“SIA”) with St. Joseph Medical Center (“SJMC”) located in Houston, Texas. The SIA acted to stay the scheduled termination of SJMC’s Medicare Provider Agreement, which resulted from the hospital’s alleged failure to comply with certain Medicare program conditions of participation. As required by the terms of the SIA, the Company retained an independent consultant to assist it in developing and implementing a corrective action plan. The original term of the SIA was eighteen months. In April 2017, CMS and SJMC amended the SIA to extend it by three-and-a-half months. The SIA is now scheduled to expire sixty days after CMS provides SJMC with written findings following a full certification survey, which survey may occur sometime between July 1, 2017 and October 31, 2017.

Critical Accounting Policies and Estimates

A summary of significant accounting policies is disclosed in Note 2 to the consolidated financial statements included in our 2016 Form 10-K. Our critical accounting policies are further described under the caption “Critical Accounting Policies and Estimates” in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2016 Form 10-K. There have been no changes in the nature of our critical accounting policies or the application of those policies since September 30, 2016.

 

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SELECTED OPERATING DATA

The following table sets forth certain unaudited operating data from continuing operations for each of the periods presented.

 

		Quarter Ended March 31,								Six Months Ended March 31,
		2017				2016				2017				2016
Acute care operations (1)
Number of hospital facilities at end of period			18				18				18				18
Licensed beds at end of period			3,600				3,600				3,600				3,600
Average length of stay (days) (2)			5.0				5.0				5.0				4.9
Occupancy rates (average beds in service)			49.3	%			49.2	%			48.3	%			47.8	%
Admissions (3)			26,206				25,948				51,751				51,408
Adjusted admissions (4)			49,075				48,606				97,560				97,304
Patient days (5)			129,753				130,108				257,071				253,996
Adjusted patient days (4)			242,982				243,722				484,623				480,760
Surgeries			17,511				16,413				36,171				34,524
Emergency room visits			109,969				111,012				213,916				216,359
Net patient revenue per adjusted admission (6)		$	10,185			$	10,186			$	10,201			$	10,076
Outpatient revenue as a % of gross patient revenue			46.6	%			46.6	%			47.0	%			47.2	%
Managed care operations
Health plan lives (7)			520,600				512,600				520,600				512,600
MSO lives (8)			97,600				96,600				97,600				96,600
Accountable care network lives (9)			58,500				47,000				58,500				47,000
Total lives			676,700				656,200				676,700				656,200
Medical loss ratio (10)			84.0	%			87.2	%			84.6	%			88.4	%

 

(1)	Includes St. Luke’s Behavioral Hospital in Phoenix, Arizona.

(2)	Represents the average number of days that a patient stayed in our hospitals.

(3)	Represents the total number of patients admitted to our hospitals that qualify for inpatient status. Management and investors use this number as a general measure of inpatient volume.

(4)	Adjusted admissions and adjusted patient days are general measures of combined inpatient and outpatient volume. We compute adjusted admissions (or adjusted patient days) by multiplying admissions/patient days by gross patient revenue and then dividing that number by gross inpatient revenue.

(5)	Represents the number of days our beds were occupied by inpatients over the period.

(6)	Includes the impact of the provision for bad debts as a component of revenue.

(7)	Represents total lives enrolled across all health plan product lines.

(8)	Represents lives served by Health Choice’s MSO that provides management and administrative services to a large national insurer’s Medicaid plan members in the Tampa and “panhandle” regions of Florida.

(9)

Represents attributed health plan member lives from other third-party payors for which Health Choice Preferred accountable care networks manage medical care and participating providers and Health Choice share associated financial risks. This excludes 27,300 and 51,300 attributed Health Choice plan member lives as of March 31, 2017 and 2016, respectively.

(10)	Represents medical claims expense as a percentage of premium revenue, including claims paid to our hospitals.

 

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RESULTS OF OPERATIONS SUMMARY

Consolidated

The following table sets forth, for the periods presented, the results of our consolidated operations expressed in dollar terms and as a percentage of total revenue. Such information has been derived from our unaudited condensed consolidated statements of operations.

 

		Quarter Ended								Quarter Ended								Six Months Ended								Six Months Ended
		March 31, 2017								March 31, 2016								March 31, 2017								March 31, 2016
($ in thousands):		Amount				%				Amount				%				Amount				%				Amount				%
Revenue
Acute care revenue before provision for bad debts		$	600,080							$	598,194							$	1,202,257							$	1,179,595
Less: Provision for bad debts			(95,825	)							(98,881	)							(198,813	)							(190,696	)
Acute care revenue			504,255				59.8	%			499,313				60.8	%			1,003,444				59.6	%			988,899				60.9	%
Premium, service and other revenue			338,791				40.2	%			321,974				39.2	%			679,483				40.4	%			635,236				39.1	%
Total revenue			843,046				100.0	%			821,287				100.0	%			1,682,927				100.0	%			1,624,135				100.0	%
Costs and expenses
Salaries and benefits			256,018				30.4	%			252,269				30.7	%			511,081				30.4	%			497,127				30.6	%
Supplies			86,850				10.3	%			84,113				10.2	%			176,379				10.5	%			168,964				10.4	%
Medical claims			275,335				32.7	%			268,030				32.6	%			551,389				32.8	%			534,737				32.9	%
Rentals and leases			22,234				2.6	%			21,968				2.7	%			44,036				2.6	%			43,300				2.7	%
Other operating expenses			141,835				16.8	%			148,137				18.1	%			279,340				16.6	%			277,887				17.1	%
Medicare and Medicaid EHR incentives			(34	)			(0.0	%)			(48	)			(0.0	%)			(805	)			(0.0	%)			(490	)			(0.0	%)
Interest expense, net			31,915				3.8	%			34,033				4.1	%			61,660				3.7	%			66,643				4.1	%
Depreciation and amortization			26,100				3.1	%			27,057				3.3	%			52,497				3.0	%			53,250				3.2	%
Management fees			1,250				0.1	%			1,250				0.2	%			2,500				0.1	%			2,500				0.2	%
Total and expenses			841,503				99.8	%			836,809				101.9	%			1,678,077				99.7	%			1,643,918				101.2	%
Earnings (loss) from continuing operations
before gain (loss) on disposal of assets and income taxes			1,543				0.2	%			(15,522	)			(1.9	%)			4,850				0.3	%			(19,783	)			(1.2	%)
Gain on disposal of assets, net			628				0.1	%			237				0.0	%			933				0.0	%			725				0.0	%
Earnings (loss) from continuing operations before income taxes			2,171				0.3	%			(15,285	)			(1.9	%)			5,783				0.3	%			(19,058	)			(1.2	%)
Income tax expense (benefit)			897				0.1	%			(4,885	)			(0.6	%)			2,272				0.1	%			(5,377	)			(0.3	%)
Net earnings (loss) from continuing operations			1,274				0.2	%			(10,400	)			(1.3	%)			3,511				0.2	%			(13,681	)			(0.9	%)
Earnings (loss) from discontinued operations, net of income taxes			(762	)			(0.1	%)			167				0.0	%			(848	)			(0.0	%)			(3,886	)			(0.2	%)
Net earnings (loss)			512				0.1	%			(10,233	)			(1.3	%)			2,663				0.2	%			(17,567	)			(1.1	%)
Net earnings attributable to non-controlling interests			(3,725	)			(0.3	%)			(2,602	)			(0.3	%)			(7,626	)			(0.5	%)			(5,403	)			(0.3	%)
Net loss attributable to IASIS Healthcare LLC		$	(3,213	)			(0.4	%)		$	(12,835	)			(1.6	%)		$	(4,963	)			(0.3	%)		$	(22,970	)			(1.4	%)

 

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Acute Care Operations

The following table and discussion sets forth, for the periods presented, the results of our acute care operations expressed in dollar terms and as a percentage of total acute care revenue. Such information has been derived from our unaudited condensed consolidated statements of operations.

 

		Quarter Ended								Quarter Ended								Six Months Ended								Six Months Ended
		March 31, 2017								March 31, 2016								March 31, 2017								March 31, 2016
($ in thousands):		Amount				%				Amount				%				Amount				%				Amount				%
Acute care revenue
Acute care revenue before provision for bad debts		$	600,080							$	598,194							$	1,202,257							$	1,179,595
Less: Provision for bad debts			(95,825	)							(98,881	)							(198,813	)							(190,696	)
Acute care revenue			504,255				99.0	%			499,313				99.1	%			1,003,444				99.0	%			988,899				99.2	%
Revenue between segments (1)			4,976				1.0	%			4,499				0.9	%			10,089				1.0	%			8,458				0.8	%
Total acute care revenue			509,231				100.0	%			503,812				100.0	%			1,013,533				100.0	%			997,357				100.0	%
Costs and expenses
Salaries and benefits			234,944				46.1	%			233,755				46.4	%			468,594				46.2	%			461,710				46.3	%
Supplies			86,760				17.0	%			83,864				16.6	%			176,155				17.4	%			168,337				16.9	%
Rentals and leases			21,196				4.2	%			20,995				4.2	%			41,989				4.1	%			41,369				4.1	%
Other operating expenses			127,212				25.0	%			130,623				25.9	%			245,432				24.2	%			242,802				24.3	%
Medicare and Medicaid EHR incentives			(34	)			(0.0	%)			(48	)			(0.0	%)			(805	)			(0.1	%)			(490	)			(0.0	%)
Interest expense, net			31,915				6.3	%			34,033				6.8	%			61,660				6.1	%			66,643				6.7	%
Depreciation and amortization			24,766				4.9	%			25,706				5.1	%			49,763				5.0	%			50,735				5.0	%
Management fees			1,250				0.2	%			1,250				0.2	%			2,500				0.2	%			2,500				0.3	%
Total costs and expenses			528,009				103.7	%			530,178				105.2	%			1,045,288				103.1	%			1,033,606				103.6	%
Loss from continuing operations before gain on disposal of assets and income taxes			(18,778	)			(3.7	%)			(26,366	)			(5.2	%)			(31,755	)			(3.1	%)			(36,249	)			(3.6	%)
Gain on disposal of assets, net			628				0.1	%			237				0.0	%			933				0.1	%			725				0.1	%
Loss from continuing operations before income taxes		$	(18,150	)			(3.6	%)		$	(26,129	)			(5.2	%)		$	(30,822	)			(3.0	%)		$	(35,524	)			(3.5	%)

 

(1)	Revenue between segments is eliminated in our consolidated results.

 

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Quarters Ended March 31, 2017 and 2016

Total acute care revenue — Total acute care revenue for the quarter ended March 31, 2017, was $509.2 million, an increase of $5.4 million or 1.1% compared to $503.8 million in the same prior year quarter. The increase in total acute care revenue during the quarter ended March 31, 2016, is comprised primarily of an increase in adjusted admissions of 1.0%, compared to the same prior year quarter.

The provision for bad debts for the quarter ended March 31, 2017, was $95.8 million, a decrease of $3.1 million or 3.1% compared to $98.9 million in the same prior year quarter.

Net adjustments to estimated third-party payor settlements, also known as prior year contractuals, resulted in a decrease in total acute care revenue for the quarter ended March 31, 2017 of $0.2 million, and an increase in total acute care revenue for the quarter ended March 31, 2016 of $1.1 million.

Salaries and benefits — Salaries and benefits expense for the quarter ended March 31, 2017, was $234.9 million, or 46.1% of total acute care revenue, compared to $233.8 million, or 46.4% of total acute care revenue in the same prior year quarter. Excluding the impact of stock-based compensation, salaries and benefits expense as a percentage of total acute care revenue was 45.9% for the quarter ended March 31, 2017, compared to 46.1% in the same prior year quarter.

Supplies — Supplies expense for the quarter ended March 31, 2017, was $86.8 million, or 17.0% of total acute care revenue, compared to $83.9 million, or 16.6% of total acute care revenue in the same prior year quarter. The increase in supplies expense as a percentage of total acute care revenue is primarily attributable to an increase in the utilization of higher cost implants and other supplies associated with the growth in certain orthopedic surgical procedures, as well as an increase in specialty pharmacy costs.

Other operating expenses — Other operating expenses for the quarter ended March 31, 2017, were $127.2 million, or 25.0% of total acute care revenue, compared to $130.6 million, or 25.9% of total acute care revenue in the same prior year quarter. Other operating expenses during the quarters ended March 31, 2017 and 2016, were impacted by $1.0 million and $2.0 million, respectively, of costs related to our systems improvement efforts at our Houston hospital. In addition, other operating expenses were negatively impacted by $5.4 million and $11.9 million in unfavorable development of prior period professional liability claims for the quarter ended March 31, 2017 and 2016, respectively.

 

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Six Months Ended March 31, 2017 and 2016

Total acute care revenue — Total acute care revenue for the six months ended March 31, 2017, was $1.0 billion, an increase of $16.2 million or 1.6% compared to $997.4 million in the same prior year period. The increase in total acute care revenue is comprised primarily of an increase in adjusted admissions of 0.3% and an increase in net patient revenue per adjusted admission of 1.2%.

The provision for bad debts for the six months ended March 31, 2017, was $198.8 million, an increase of $8.1 million or 4.3% compared to $190.7 million in the same prior year period. The increase in the provision for bad debts is due primarily to the growth of Exchange and managed care plans with higher deductibles and co-pays and the decrease in collections of such higher patient related balances, as well as an increase in the acuity levels of the uninsured patients treated in our emergency room.

Net adjustments to estimated third-party payor settlements, also known as prior year contractuals, resulted in an increase in total acute care revenue for the six months ended March 31, 2017 and 2016, of $1.2 million and $2.3 million, respectively.

Salaries and benefits — Salaries and benefits expense for the six months ended March 31, 2017, was $468.6 million, or 46.2% of total acute care revenue, compared to $461.7 million, or 46.3% of total acute care revenue in the same prior year period. Excluding the impact of stock-based compensation, salaries and benefits expense as a percentage of total acute care revenue was 46.0% for both the six months ended March 31, 2017 and March 31, 2016.

Supplies — Supplies expense for the six months ended March 31, 2017, was $176.2 million, or 17.4% of total acute care revenue, compared to $168.3 million, or 16.9% of total acute care revenue in the same prior year period. The increase in supplies expense as a percentage of total acute care revenue is primarily attributable to an increase in the utilization of high cost implants and other supplies associated with the growth in certain orthopedic surgical procedures.

Other operating expenses — Other operating expenses for the six months ended March 31, 2017, were $245.4 million, or 24.2% of total acute care revenue, compared to $242.8 million, or 24.3% of total acute care revenue in the same prior year period.

 

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Managed Care Operations

The following table and discussion sets forth, for the periods presented, the results of our managed care operations expressed in dollar terms and as a percentage of premium, service and other revenue. Such information has been derived from our unaudited condensed consolidated statements of operations.

 

		Quarter Ended								Quarter Ended								Six Months Ended								Six Months Ended
		March 31, 2017								March 31, 2016								March 31, 2017								March 31, 2016
($ in thousands):		Amount				%				Amount				%				Amount				%				Amount				%
Premium, service and other revenue
Premium revenue		$	333,427				98.4	%		$	312,394				96.9	%		$	663,624				97.7	%		$	614,459				96.7	%
Service and other revenue			5,364				1.6	%			9,580				3.1	%			15,859				2.3	%			20,777				3.3	%
Premium, service and other revenue			338,791				100.0	%			321,974				100.0	%			679,483				100.0	%			635,236				100.0	%
Costs and expenses
Salaries and benefits			21,074				6.2	%			18,514				5.8	%			42,487				6.3	%			35,417				5.6	%
Supplies			90				0.0	%			249				0.1	%			224				0.0	%			627				0.1	%
Medical claims (1)			280,311				82.7	%			272,529				84.6	%			561,478				82.6	%			543,195				85.5	%
Rentals and leases			1,038				0.3	%			973				0.3	%			2,047				0.3	%			1,931				0.3	%
Other operating expenses			14,623				4.4	%			17,514				5.4	%			33,908				5.0	%			35,085				5.5	%
Depreciation and amortization			1,334				0.4	%			1,351				0.4	%			2,734				0.4	%			2,515				0.4	%
Total costs and expenses			318,470				94.0	%			311,130				96.6	%			642,878				94.6	%			618,770				97.4	%
Earnings before income taxes		$	20,321				6.0	%		$	10,844				3.4	%		$	36,605				5.4	%		$	16,466				2.6	%

 

(1)	Medical claims paid to our hospitals of $5.0 million and $4.5 million for the quarters ended March 31, 2017 and 2016, respectively, and $10.1 million and $8.5 million for the six months ended March 31, 2017 and 2016, respectively, are eliminated in our consolidated results.

Quarters Ended March 31, 2017 and 2016

Premium revenue — Premium revenue was $333.4 million for the quarter ended March 31, 2017, an increase of $21.0 million or 6.7%, compared to $312.4 million in the same prior year quarter. The increase in premium revenue was driven primarily by a 3.1% capitation rate increase at our Arizona Medicaid plan, effective October 1, 2016, as well as a 5.2% growth in associated total covered lives, excluding our Arizona marketplace exchange business, which we exited effective January 1, 2017.

Salaries and benefits — Salaries and benefits expense for the quarter ended March 31, 2017, was $21.1 million, or 6.2% of premium, service and other revenue, compared to $18.5 million, or 5.9% of premium, service and other revenue in the same prior year quarter.

Medical claims — Medical claims expense was $280.3 million for the quarter ended March 31, 2017, compared to $272.5 million in the same prior year quarter. Medical claims expense as a percentage of premium revenue, or medical loss ratio (“MLR”), related to our health plan products was 84.0% for the quarter ended March 31, 2017, compared to 87.2% in the same prior year quarter. The improvement in our MLR is a result of a 3.1% rate increase at our Arizona Medicaid plan effective October 1, 2016 as well as from operational improvements implemented during the fourth quarter of our fiscal 2016 and favorable medical claims development.

Other operating expenses — Other operating expenses for the quarter ended March 31, 2017, were $14.6 million, or 4.4% of premium, service and other revenue, compared to $17.5 million, or 5.4% of premium, service and other revenue in the same prior year quarter.

 

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Six Months Ended March 31, 2017 and 2016

Premium revenue — Premium revenue was $663.6 million for the six months ended March 31, 2017, an increase of $49.1 million or 8.0%, compared to $614.5 million in the same prior year period. The increase in premium revenue was driven primarily by a 3.1% capitation rate increase at our Arizona Medicaid plan, effective October 1, 2016, as well as a 5.2% growth in associated total covered lives, excluding our Arizona marketplace exchange business, which we exited effective January 1, 2017.

Salaries and benefits — Salaries and benefits expense for the six months ended March 31, 2017, was $42.5 million, or 6.3% of premium, service and other revenue, compared to $35.4 million, or 5.6% of premium, service and other revenue in the same prior year period.

Medical claims — Medical claims expense was $561.5 million for the six months ended March 31, 2017, compared to $543.2 million in the same prior year period. Medical claims expense as a percentage of premium revenue, or MLR, related to our health plan products was 84.6% for the six months ended March 31, 2017, compared to 88.4% in the same prior year period. The improvement in our MLR is a result of a 3.1% rate increase at our Arizona Medicaid plan effective October 1, 2016 as well as from operational improvements implemented during the fourth quarter of our fiscal 2016 and favorable medical claims development.

Other operating expenses — Other operating expenses for the six months ended March 31, 2017, were $33.9 million, or 5.0% of premium, service and other revenue, compared to $35.1 million, or 5.5% of premium, service and other revenue in the same prior year period.

 

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LIQUIDITY AND CAPITAL RESOURCES

Overview of Cash Flow Activities for the Six Months Ended March 31, 2017 and 2016

Our cash flows are summarized as follows (in thousands):

 

		Six Months Ended March 31,
		2017				2016
Cash flows from operating activities		$	50,243			$	78,689
Cash flows from investing activities		$	(58,667	)		$	(69,665	)
Cash flows from financing activities		$	(16,345	)		$	(19,990	)

Operating Activities

Cash flows provided by operating activities were $50.2 million for the six months ended March 31, 2017, compared to cash flows provided by operating activities of $78.7 million in the same prior year period. The decline in operating cash flows for the first six months ended March 31, 2017 compared to the same prior year period, is due to the timing of funds related to certain Medicaid supplemental reimbursement programs and an increase in operating expenses associated with our conversion to a new clinical and revenue cycle system. Additionally, the prior year six months ended March 31, 2016, was positively impacted by the receipt of income tax refunds.

At March 31, 2017, we had $343.5 million in net working capital, compared to $353.3 million at September 30, 2016. Net accounts receivable increased $26.2 million to $368.6 million at March 31, 2017, from $342.4 million at September 30, 2016.

Investing Activities

Cash flows used in investing activities were $58.7 million for the six months ended March 31, 2017, compared to $69.7 million in the same prior year period. Included in investing activities for the six months ended March 31, 2016, was the impact of a final working capital settlement associated with the sale of our Nevada operations that resulted in a cash outflow totaling $5.9 million.

Financing Activities

Cash flows used in financing activities were $16.3 million for the six months ended March 31, 2017, compared to $20.0 million in the same prior year period. Distributions to non-controlling interests were $4.9 million for the six months ended March 31, 2017, compared to $5.6 million in the same prior year period. During six months ended March 31, 2017, we made finance obligation payments totaling $5.0 million related to our current conversion to a new integrated clinical and revenue cycle system.

Capital Resources

As of March 31, 2017, we had the following debt arrangements:

 

•

up to $1.232 billion senior secured credit facilities; and

 

•

$849.9 million in 8.375% senior notes due 2019(the “Senior Notes”).

At March 31, 2017, amounts outstanding under our Senior Secured Credit Facilities consisted of $964.3 million in term loans. In addition, we had $94.4 million in letters of credit outstanding under the revolving credit facility. The weighted average interest rate of outstanding borrowings under the senior secured credit facilities was 4.5% for both the quarter and six months ended March 31, 2017.

Amended Term Loan Facility

We are a party to a senior credit agreement (the “Amended and Restated Credit Agreement”), dated as of May 3, 2011 (as amended) with Wilmington Trust, National Association, as administrative agent, which provides for a $864.2 million senior secured term loan facility (the “Term Loan Facility”) maturing in February 2021 (the “Stated Term Maturity Date”), provided that, if prior to the Stated Term Maturity Date, any notes are outstanding under the Company’s indenture, dated as of May 3, 2011, by and among IASIS, IAS and The Bank of New York Mellon Trust Company, N.A., as Trustee, relating to the Company’s 8.375% Senior Notes due 2019 (the “Indenture”), on the date that is 91 days prior to the maturity date under the Indenture (such date, the “Springing Notes Maturity Date”), then the maturity date will automatically become the Springing Notes Maturity Date. The Term Loan Facility is subject to amortization in equal quarterly installments in an aggregate annual amount equal to 1% of the principal amount of $864.2 million, with the remaining balance due upon maturity of the Term Loan Facility.

 

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Borrowings under the Term Loan Facility bear interest at a rate per annum equal to, at the Company’s option, either (1) a base rate determined by reference to the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate (determined by reference to The Wall Street Journal) and (c) a one-month LIBOR rate, subject to a floor of 1.25%, plus 1.00%, in each case, plus a margin of 3.00% per annum or (2) the LIBOR rate for the interest period relevant to such borrowing, subject to a floor of 1.25%, plus a margin of 4.00% per annum.

The Term Loan Facility also provides for a soft call prepayment premium applicable to certain repricing transactions involving the term loans outstanding after giving effect to Amendment No. 4 (the “Term B-3 Loans”). The soft call premium equals 1% of the amount of the Term B-3 Loans that are subject to certain repricing transactions occurring on or prior to May 4, 2018.

The Term Loan Facility is unconditionally guaranteed by IAS and certain of our subsidiaries (collectively, the “Subsidiary Guarantors”; IAS and the Subsidiary Guarantors, the “Guarantors”) and is required to be guaranteed by all of our future material wholly-owned subsidiaries, subject to certain exceptions. All obligations under the Amended and Restated Credit Agreement are secured, subject to certain exceptions, by substantially all of our assets and the assets of the Guarantors, including (1) a pledge of 100% of our equity interests and the equity interests held by us and the Subsidiary Guarantors, subject to certain exceptions, (2) mortgage liens on all of our material real property and that of the Guarantors and (3) all proceeds of the foregoing.

The Amended and Restated Credit Agreement requires us to mandatorily prepay borrowings under the Term Loan Facility with net cash proceeds of certain asset dispositions, following certain casualty events, following certain borrowings or debt issuances and from a percentage of annual excess cash flow.

The Amended and Restated Credit Agreement contains certain restrictive covenants, including, among other things: (1) limitations on the incurrence of debt and liens; (2) limitations on investments other than, among other exceptions, certain acquisitions that meet certain conditions; (3) limitations on the sale of assets outside of the ordinary course of business; (4) limitations on dividends and distributions; and (5) limitations on transactions with affiliates, in each case, subject to certain exceptions. The Amended and Restated Credit Agreement also contains certain customary events of default, including, without limitation, a failure to make payments under the Term Loan Facility, cross-defaults, certain bankruptcy events and certain change of control events. In addition, certain of the baskets available to us under the negative covenants in our Amended and Restated Credit Agreement are suspended under the Amended and Restated Credit Agreement until such time, if any, as we have consummated a qualifying underwritten public offering and achieved a specified total gross leverage ratio.

Revolving Credit Facility

We are a party to a revolving credit agreement (the “Revolving Credit Agreement”), dated as of February 17, 2016 (as amended), with JPMorgan Chase Bank, N.A. (“JPMorgan”), as administrative agent, which provides for a $207.4 million senior secured revolving credit facility, of which up to $125.0 million may be utilized for the issuance of letters of credit (the “Revolving Credit Facility”). The Revolving Credit Facility matures in February 2021 (the “Stated Revolver Maturity Date”), provided that, if prior to the Stated Revolver Maturity Date, (x) any loans are outstanding under the Term Loan Facility on the date that is 91 days prior to the maturity date of at least $100 million of loans under the Term Loan Facility (such date, the “Springing Term Maturity Date”) or (y) any notes are outstanding under the Indenture, on the date that is 91 days prior to the maturity date under the Indenture (such date, the “Springing Notes Maturity Date”), then the maturity date will automatically become the earlier of the Springing Term Maturity Date or the Springing Notes Maturity Date

The Revolving Credit Agreement provides us with the right to request additional commitments under the Revolving Credit Facility without the consent of the lenders thereunder, subject to a cap on aggregate commitments of $300.0 million, a pro forma senior secured net leverage ratio (as defined in the Revolving Credit Agreement) of less than or equal to 3.75 to 1.00 and customary conditions precedent.

The Revolving Credit Facility does not require installment payments prior to maturity.

 

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Borrowings under the Revolving Credit Facility bear interest at a rate per annum equal to, at our option, either (1) a base rate determined by reference to the highest of (a) the prime rate of JPMorgan, (2) the federal funds rate plus 0.50% and (3) a LIBOR rate subject to certain adjustments plus 1.00%, in each case, plus a margin of 2.50% per annum or (2) the LIBOR rate for the interest period relevant to such borrowing, plus a margin of 3.50% per annum. In addition to paying interest on outstanding principal under the Revolving Credit Facility, we are required to pay a commitment fee on the unutilized commitments under the Revolving Credit Facility, as well as pay customary letter of credit fees and agency fees.

The Revolving Credit Facility is unconditionally guaranteed by the Guarantors and is required to be guaranteed by all of our future material wholly-owned subsidiaries, subject to certain exceptions. All obligations under the Revolving Credit Agreement are secured, subject to certain exceptions, by substantially all of our assets and the assets of the Guarantors, including (1) a pledge of 100% of our equity interests and the equity interests held by us and the Subsidiary Guarantors, subject to certain exceptions, (2) mortgage liens on all of our material real property and that of the Guarantors and (3) all proceeds of the foregoing.

The Revolving Credit Agreement contains restrictive covenants and events of default substantially similar to the restrictive covenants and events of default in the Amended and Restated Credit Agreement; provided, that under the Revolving Credit Agreement, we are required to maintain, on a quarterly basis, a maximum senior secured gross leverage ratio (as defined in the Revolving Credit Agreement). In addition, certain of the baskets available to us under the negative covenants in the Amended and Restated Credit Agreement are suspended under the Revolving Credit Agreement until such time, if any, as we have consummated a qualifying underwritten public offering and achieved a specified total gross leverage ratio (as defined in the Revolving Credit Agreement).

 

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8.375% Senior Notes due 2019

We, together with our wholly owned subsidiary IASIS Capital Corporation (together, the “Issuers”) issued an $850.0 million aggregate principal amount of Senior Notes, which mature on May 15, 2019, pursuant to the Indenture. The Indenture provides that the Senior Notes are general unsecured, senior obligations of the Issuers, and initially will be unconditionally guaranteed on a senior unsecured basis by certain of our subsidiaries.

At March 31, 2017, the outstanding principal balance of the Senior Notes was $849.9 million. The Senior Notes bear interest at a rate of 8.375% per annum, payable semi-annually, in cash in arrears, on May 15 and November 15 of each year.

The Issuers may redeem the Senior Notes in whole or in part, at any time at a price equal to 102.094% of the aggregate principal amount of the Senior Notes plus accrued and unpaid interest and special interest, if any, to but excluding the redemption date, subject to compliance with certain conditions. Each subsequent year the redemption price declines 2.094 percentage points until 2017, at which point and thereafter the redemption price is equal to 100% of the aggregate principal amount of the Senior Notes plus accrued and unpaid interest and special interest, if any, to but excluding the redemption date.

The Indenture contains covenants that limit our (and our restricted subsidiaries’) ability to, among other things: (1) incur additional indebtedness or liens or issue disqualified stock or preferred stock; (2) pay dividends or make other distributions on, redeem or repurchase our capital stock; (3) sell certain assets; (4) make certain loans and investments; (5) enter into certain transactions with affiliates; (6) impose restrictions on the ability of a subsidiary to pay dividends or make payments or distributions to us and our restricted subsidiaries; and (7) consolidate, merge or sell all or substantially all of our assets. These covenants are subject to a number of important limitations and exceptions.

The Indenture also provides for events of default, which, if any of them occurs, may permit or, in certain circumstances, require the principal, premium, if any, interest and any other monetary obligations on all the then outstanding Senior Notes to be due and payable immediately. If we experience certain kinds of changes of control, we must offer to purchase the Senior Notes at 101% of their principal amount, plus accrued and unpaid interest and special interest, if any, to but excluding the repurchase date. Under certain circumstances, we will have the ability to make certain payments to facilitate a change of control transaction and to provide for the assumption of the Senior Notes by a new parent company resulting from such change of control transaction. If such change of control transaction is facilitated, the Issuers will be released from all obligations under the Indenture and the Issuers and the trustee will execute a supplemental indenture effectuating such assumption and release.

Credit Ratings

The table below summarizes our corporate rating, as well as our credit ratings for the Senior Secured Credit Facilities and Senior Notes as of the date of this Report:

 

		Moody’s		Standard & Poor’s
Corporate credit		B2		B
Senior secured term loan facility		Ba3		B
Senior Notes		Caa1		CCC+
Outlook		Negative		Negative

Capital Expenditures

We plan to finance our proposed capital expenditures with cash generated from operations, borrowings under our Senior Secured Credit Facilities and other capital sources that may become available. We continue to expect our capital expenditures for fiscal 2017 to be between $145.0 million to $155.0 million, including $37.0 million to $42.0 million in hardware and software costs related to the conversion to our new clinical and revenue information system.

 

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Liquidity

We rely on cash generated from our operations as our primary source of liquidity, as well as available credit facilities, project and bank financings and the issuance of long-term debt. From time to time, we have also utilized operating lease transactions that are sometimes referred to as off-balance sheet arrangements. We expect that our future funding for working capital needs, capital expenditures, long-term debt repayments and other financing activities will continue to be provided from some or all of these sources. Each of our existing and projected sources of cash is impacted by operational and financial risks that influence the overall amount of cash generated and the capital available to us. For example, cash generated by our business operations may be impacted by, among other things, economic downturns, federal and state budget initiatives, weather-related catastrophes and adverse industry conditions. Our future liquidity will be impacted by our ability to access capital markets, which may be restricted due to our credit ratings, general market conditions, leverage capacity and by existing or future debt agreements. For a further discussion of risks that can impact our liquidity, see Item 1A, “Risk Factors” in our 2016 Form 10-K.

Including available cash at March 31, 2017, we have available liquidity as follows (in millions):

 

Cash and cash equivalents		$	320.9
Available capacity under our senior secured revolving credit facility			113.0
Net available liquidity at March 31, 2017		$	433.9

Net available liquidity assumes 100% participation from all lenders currently committed under our Revolving Credit Facility. In addition to our available liquidity, we expect to generate sufficient operating cash flows in fiscal 2017. We also intend to utilize proceeds from our financing activities as needed.

The Amended and Restated Credit Agreement requires us to prepay borrowings under the senior secured term loan facility with net cash proceeds of certain asset dispositions unless such proceeds are reinvested within 12 months in existing facilities or 24 months in a greenfield construction project (36 months if there is a binding commitment for such investment within such 12 or 24 month periods). The Indenture similarly requires us to make prepayments with net cash proceeds of certain asset dispositions unless such proceeds have been either reinvested or used to prepay our obligations under the Term Loan Facility within 365 days (an additional 180 days exists if there is a binding commitment for such investment).

Based upon our current and anticipated level of operations, we believe we have sufficient liquidity to meet our cash requirements over the short-term (next 12 months) and over the next two years. In evaluating the sufficiency of our liquidity for the short-term, we considered the expected cash flow to be generated by our operations, cash on hand and the available borrowings under our Senior Secured Credit Facilities, compared to our anticipated cash requirements for debt service, working capital, capital expenditures and the payment of taxes, as well as funding requirements for long-term liabilities.

We are unable at this time to extend our evaluation of the sufficiency of our liquidity beyond two years. In addition, we cannot assure you that our operating performance will generate sufficient cash flow from operations or that future borrowings will be available under our Senior Secured Credit Facilities, or otherwise, to enable us to grow our business, service our indebtedness, or make anticipated capital expenditures and tax payments. For more information, see Item 1A. “Risk Factors” in our 2016 Form 10-K.

We and our subsidiaries, affiliates, IAS and/or significant stockholders of IAS may from time to time seek to retire or purchase our outstanding debt (including publicly issued debt) through cash purchases and/or exchanges, in open market purchases, privately negotiated transactions, by tender offer or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

One element of our business strategy is to selectively pursue acquisitions and strategic alliances in existing and new markets. Any acquisitions or strategic alliances may result in the incurrence, or assumption by us, of additional indebtedness. We continually assess our capital needs and may seek additional financing, including debt or equity as considered necessary to fund capital expenditures and potential acquisitions or for other corporate purposes. Our future operating performance and our ability to service or refinance our debt will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control. For more information, see Item 1A. “Risk Factors” in our 2016 Form 10-K.

We do not have any relationships with unconsolidated entities or financial partnerships, such entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Accordingly, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

 

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Seasonality

The patient volumes and total revenue of our healthcare operations are subject to seasonal variations and generally are greater during the quarter ended March 31 than other quarters. These seasonal variations are caused by a number of factors, including seasonal cycles of illness, climate and weather conditions in our markets, vacation patterns of both patients and physicians and other factors relating to the timing of elective procedures.

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

We are subject to market risk from exposure to changes in interest rates based on our financing, investing and cash management activities. We do not, however, hold or issue financial instruments or derivatives for trading or speculative purposes. At March 31, 2017, the following components of our Senior Secured Credit Facilities bear interest at variable rates at specified margins above either the agent bank’s alternate base rate or the LIBOR rate: (i) a $1.025 billion, seven-year term loan; and (ii) a $207.4 million revolving credit facility. As of March 31, 2017, we had outstanding variable rate debt of $964.3 million.

While changes in the alternate base rate or the LIBOR rate would affect the cost of funds borrowed in the future, we believe the effect, if any, of reasonably possible near-term changes in interest rates on our remaining variable rate debt or our consolidated financial position, results of operations or cash flows would not be material. Holding other variables constant, including levels of indebtedness, a 0.125% increase in current interest rates would have no estimated impact on pre-tax earnings and cash flows for the next 12 month period given the 1.25% LIBOR floor that exists in our Term Loan Facility, and given that we currently have no outstanding borrowings under our Revolving Credit Facility.

We currently believe we have adequate liquidity to fund operations during the near term through the generation of operating cash flows, cash on hand and access to our Revolving Credit Facility. Our ability to borrow funds under our Revolving Credit Facility is subject to, among other things, the financial viability of the participating financial institutions. While we do not anticipate any of our current lenders defaulting on their obligations, we are unable to provide assurance that any particular lender will not default at a future date.

 

Item 4.

Controls and Procedures

Evaluations of Disclosure Controls and Procedures

Under the supervision and with the participation of our management team, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of March 31, 2017. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2017.

Changes in Internal Control Over Financial Reporting

During the quarter ended March 31, 2017, there has been no change in our internal controls over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

None.

 

Item 1A.

Risk Factors

Reference is made to the factors set forth under the caption “Forward-Looking Statements” in Part I, Item 2 of this Form 10-Q and other risk factors disclosed in our 2016 Form 10-K, which are incorporated herein by reference. There have not been any material changes to the risk factors previously disclosed in our 2016 Form 10-K.

 

Item 6.

Exhibits

 

(a)	List of Exhibits:

Exhibits: See the Index to Exhibits at the end of this report, which is incorporated herein by reference.

 

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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.

 

				IASIS HEALTHCARE LLC
Date: May 12, 2017				By:		/s/ John M. Doyle
						John M. Doyle
						Chief Financial Officer

 

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EXHIBIT INDEX

 

Exhibit No.		Description
10.1		Amendment No. 3, dated as of February 17, 2016, among IASIS Healthcare LLC, IASIS Healthcare Corporation, the lenders party thereto, Bank of America, N.A., as administrative agent and Wilmington Trust, National Association, as successor administrative agent, and attached thereto as Exhibit A, the Amended and Restated Credit Agreement, dated as of May 3, 2011 as amended as of February 17, 2016, among IASIS Healthcare LLC, IASIS Healthcare Corporation, Wilmington Trust, National Association, as administrative agent and collateral agent, and each lender from time to time party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the SEC on February 22, 2016 (Comm. File No. 333-117362)).
10.2		Revolving Credit Agreement, dated as of February 17, 2016, among IASIS Healthcare LLC, IASIS Healthcare Corporation, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent, swing line lender and L/C Issuer (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed with the SEC on February 22, 2016 (Comm. File No. 333-117362)).
10.3		Amendment No. 4, dated as of May 4, 2017, among IASIS Healthcare LLC, IASIS Healthcare Corporation and the other guarantors party thereto, the lenders party thereto, Wilmington Trust, National Association, as administrative agent, and JPMorgan Chase Bank, N.A., as the Additional Term B-3 Lender (as defined therein) and attached thereto as Exhibit A, the Amended and Restated Credit Agreement, dated as of May 3, 2011 as amended as of May 4, 2017, among IASIS Healthcare LLC, IASIS Healthcare Corporation, Wilmington Trust, National Association, as administrative agent and collateral agent, and each lender from time to time party thereto (incorporated by reference to Exhibit [10.1] to the Company’s Current Report on Form 8-K, filed with the SEC on May [5], 2017 (Comm. File No. [        ])).
10.4		Amendment No. 1, dated as of May 4, 2017, among IASIS Healthcare LLC, IASIS Healthcare Corporation and the other guarantors party thereto, the lenders as of the date thereof and JPMorgan Chase Bank, N.A., as administrative agent, and attached thereto as Exhibit A, the Revolving Credit Agreement, dated as of February 17, 2016 as amended as of May 4, 2017, among IASIS Healthcare LLC, IASIS Healthcare Corporation, JPMorgan Chase Bank, N.A., as administrative agent, swing line lender and L/C Issuer and each lender from time to time party thereto (incorporated by reference to Exhibit [10.2] to the Company’s Current Report on Form 8-K, filed with the SEC on May [5], 2017 (Comm. File No. [        ])).
31.1		Certification of Principal Executive Officer pursuant to Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Principal Financial Officer pursuant to Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
101		The following financial information from our quarterly report on Form 10-Q for the quarter ended March 31, 2017, filed with the SEC on May 16, 2016, formatted in Extensible Business Reporting Language (XBRL): (i) the condensed consolidated balance sheets at March 31, 2017 and September 30, 2016, (ii) the condensed consolidated statements of operations for the quarters and six months ended March 31, 2017 and 2016, (iii) the condensed consolidated statements of comprehensive income (loss) for the quarters and six months ended March 31, 2017 and 2016, (iv) the condensed consolidated statement of equity, (v) the condensed consolidated statements of cash flows for the six months ended March 31, 2017 and 2016, and (vi) the notes to the condensed consolidated financial statements (tagged as blocks of text). (1)

 

(1)

The XBRL related information in Exhibit 101 to this quarterly report on Form 10-Q shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.

 

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