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EX-32 - EXHIBIT 32 - TENET HEALTHCARE CORPthc-20180331ex32.htm
EX-31.B - EXHIBIT 31.B - TENET HEALTHCARE CORPthc-20180331ex31b.htm
EX-31.A - EXHIBIT 31.A - TENET HEALTHCARE CORPthc-20180331ex31a.htm
EX-10 - EXHIBIT 10 - TENET HEALTHCARE CORPthc-20180331ex10c.htm


 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
Form 10-Q
 
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2018
 
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 1-7293
 
_________________________________________
 
TENET HEALTHCARE CORPORATION
(Exact name of Registrant as specified in its charter)
 
_________________________________________

Nevada
(State of Incorporation)
95-2557091
(IRS Employer Identification No.)

1445 Ross Avenue, Suite 1400
Dallas, TX 75202
(Address of principal executive offices, including zip code)
 
(469) 893-2200
(Registrant’s telephone number, including area code)
 
_________________________________________
 
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, and (2) has been subject to such filing requirements for the past 90 days.   Yes ☒ No ☐
 
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months.   Yes ☒ No ☐
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company (each as defined in Exchange Act Rule 12b-2).
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 Exchange Act Rule 12b-2).   Yes ☐ No ☒

At April 25, 2018, there were 102,050,769 shares of the Registrant’s common stock, $0.05 par value, outstanding.
 



TENET HEALTHCARE CORPORATION
TABLE OF CONTENTS


i


PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
Dollars in Millions
(Unaudited)
 
 
March 31,
 
December 31,
 
 
2018
 
2017
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
974

 
$
611

Accounts receivable (less allowance for doubtful accounts of $898 at December 31, 2017)
 
2,519

 
2,616

Inventories of supplies, at cost
 
294

 
289

Income tax receivable
 
20

 
5

Assets held for sale
 
599

 
1,017

Other current assets
 
1,228

 
1,035

Total current assets 
 
5,634

 
5,573

Investments and other assets
 
1,433

 
1,543

Deferred income taxes
 
383

 
455

Property and equipment, at cost, less accumulated depreciation and amortization
($4,879 at March 31, 2018 and $4,739 at December 31, 2017)
 
6,906

 
7,030

Goodwill
 
7,036

 
7,018

Other intangible assets, at cost, less accumulated amortization
($920 at March 31, 2018 and $883 at December 31, 2017)
 
1,792

 
1,766

Total assets 
 
$
23,184

 
$
23,385

LIABILITIES AND EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Current portion of long-term debt
 
$
666

 
$
146

Accounts payable
 
1,059

 
1,175

Accrued compensation and benefits
 
708

 
848

Professional and general liability reserves
 
222

 
200

Accrued interest payable
 
332

 
256

Liabilities held for sale
 
406

 
480

Other current liabilities
 
1,168

 
1,227

Total current liabilities 
 
4,561

 
4,332

Long-term debt, net of current portion
 
14,223

 
14,791

Professional and general liability reserves
 
651

 
654

Defined benefit plan obligations
 
528

 
536

Deferred income taxes
 
36

 
36

Other long-term liabilities
 
627

 
631

Total liabilities 
 
20,626

 
20,980

Commitments and contingencies
 


 


Redeemable noncontrolling interests in equity of consolidated subsidiaries
 
1,942

 
1,866

Equity:
 
 
 
 
Shareholders’ equity:
 
 
 
 
Common stock, $0.05 par value; authorized 262,500,000 shares; 150,391,400 shares issued at March 31, 2018 and 149,384,952 shares issued at December 31, 2017
 
7

 
7

Additional paid-in capital
 
4,833

 
4,859

Accumulated other comprehensive loss
 
(239
)
 
(204
)
Accumulated deficit
 
(2,248
)
 
(2,390
)
Common stock in treasury, at cost, 48,402,616 shares at March 31, 2018
and 48,413,169 shares at December 31, 2017
 
(2,418
)
 
(2,419
)
Total shareholders’ equity (deficit)
 
(65
)
 
(147
)
Noncontrolling interests 
 
681

 
686

Total equity 
 
616

 
539

Total liabilities and equity 
 
$
23,184

 
$
23,385

See accompanying Notes to Condensed Consolidated Financial Statements.



TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Dollars in Millions, Except Per-Share Amounts
(Unaudited) 
 
 
Three Months Ended March 31,
 
 
2018
 
2017
Net operating revenues:
 
 
 
 
Net operating revenues before provision for doubtful accounts
 


 
$
5,196

Less: Provision for doubtful accounts
 


 
383

Net operating revenues 
 
$
4,699

 
4,813

Equity in earnings of unconsolidated affiliates
 
25

 
29

Operating expenses:
 
 
 
 
Salaries, wages and benefits
 
2,227

 
2,380

Supplies
 
774

 
765

Other operating expenses, net
 
1,060

 
1,187

Electronic health record incentives
 
(1
)
 
(1
)
Depreciation and amortization
 
204

 
221

Impairment and restructuring charges, and acquisition-related costs
 
47

 
33

Litigation and investigation costs
 
6

 
5

Gains on sales, consolidation and deconsolidation of facilities
 
(110
)
 
(15
)
Operating income 
 
517

 
267

Interest expense
 
(255
)
 
(258
)
Other non-operating expense, net
 
(1
)
 
(5
)
Loss from early extinguishment of debt
 
(1
)
 

Income from continuing operations, before income taxes 
 
260

 
4

Income tax benefit (expense)
 
(70
)
 
33

Income from continuing operations, before discontinued operations 
 
190

 
37

Discontinued operations:
 
 
 
 
Income (loss) from operations
 
1

 
(2
)
Income tax benefit (expense)
 

 
1

Income (loss) from discontinued operations 
 
1

 
(1
)
Net income
 
191

 
36

Less: Net income attributable to noncontrolling interests
 
92

 
89

Net income available (loss attributable) to Tenet Healthcare Corporation common
shareholders
 
 
$
99

 
$
(53
)
Amounts available (attributable) to Tenet Healthcare Corporation common shareholders
 
 
 
 
Income (loss) from continuing operations, net of tax
 
$
98

 
$
(52
)
Income (loss) from discontinued operations, net of tax
 
1

 
(1
)
Net income available (loss attributable) to Tenet Healthcare Corporation common
shareholders
 
 
$
99

 
$
(53
)
Earnings (loss) per share available (attributable) to Tenet Healthcare Corporation common shareholders:
 
 
 
 
Basic
 
 
 
 
Continuing operations
 
$
0.97

 
$
(0.52
)
Discontinued operations
 
0.01

 
(0.01
)
 
 
$
0.98

 
$
(0.53
)
Diluted
 
 
 
 
Continuing operations
 
$
0.95

 
$
(0.52
)
Discontinued operations
 
0.01

 
(0.01
)
 
 
$
0.96

 
$
(0.53
)
Weighted average shares and dilutive securities outstanding (in thousands):
 
 
 
 
Basic
 
101,392

 
100,000

Diluted
 
102,656

 
100,000


See accompanying Notes to Condensed Consolidated Financial Statements.


2


TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME
Dollars in Millions
(Unaudited)
 
 
 
Three Months Ended March 31,
 
 
2018
 
2017
Net income
 
$
191

 
$
36

Other comprehensive income:
 
 
 
 
Amortization of net actuarial loss included in other non-operating expense, net
 
4

 
4

Unrealized gains on securities held as available-for-sale
 

 
2

Foreign currency translation adjustments
 
6

 
3

Other comprehensive income before income taxes
 
10

 
9

Income tax expense related to items of other comprehensive income
 
(2
)
 
(6
)
Total other comprehensive income, net of tax
 
8

 
3

Comprehensive net income
 
199

 
39

Less: Comprehensive income attributable to noncontrolling interests 
 
92

 
89

Comprehensive income available (loss attributable) to Tenet Healthcare Corporation common shareholders 
 
$
107

 
$
(50
)

See accompanying Notes to Condensed Consolidated Financial Statements.


3


TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in Millions
(Unaudited)
 
 
Three Months Ended
March 31,
 
 
2018
 
2017
Net income
 
$
191

 
$
36

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
204

 
221

Provision for doubtful accounts
 

 
383

Deferred income tax expense (benefit)
 
70

 

Stock-based compensation expense
 
9

 
13

Impairment and restructuring charges, and acquisition-related costs
 
47

 
33

Litigation and investigation costs
 
6

 
5

Gains on sales, consolidation and deconsolidation of facilities
 
(110
)
 
(15
)
Loss from early extinguishment of debt
 
1

 

Equity in earnings of unconsolidated affiliates, net of distributions received
 
9

 
4

Amortization of debt discount and debt issuance costs
 
11

 
11

Pre-tax loss (income) from discontinued operations
 
(1
)
 
2

Other items, net
 
(1
)
 
(2
)
Changes in cash from operating assets and liabilities:
 
 

 
 

Accounts receivable
 
(66
)
 
(446
)
Inventories and other current assets
 
(41
)
 
132

Income taxes
 

 
(34
)
Accounts payable, accrued expenses and other current liabilities
 
(183
)
 
(161
)
Other long-term liabilities
 
1

 
26

Payments for restructuring charges, acquisition-related costs, and litigation costs and settlements 
 
(33
)
 
(24
)
Net cash provided by (used in) operating activities from discontinued operations, excluding income taxes
 
(1
)
 
2

Net cash provided by operating activities 
 
113

 
186

Cash flows from investing activities:
 
 

 
 

Purchases of property and equipment — continuing operations
 
(143
)
 
(198
)
Purchases of businesses or joint venture interests, net of cash acquired
 
(16
)
 
(6
)
Proceeds from sales of facilities and other assets
 
425

 
20

Proceeds from sales of marketable securities, long-term investments and other assets
 
134

 
9

Purchases of equity investments
 
(30
)
 
(1
)
Other long-term assets
 
7

 
(12
)
Other items, net
 
(4
)
 
(1
)
Net cash provided by (used in) investing activities
 
373

 
(189
)
Cash flows from financing activities:
 
 

 
 

Repayments of borrowings under credit facility
 

 

Proceeds from borrowings under credit facility
 

 

Repayments of other borrowings
 
(91
)
 
(89
)
Proceeds from other borrowings
 
7

 
6

Debt issuance costs
 

 
(2
)
Distributions paid to noncontrolling interests
 
(64
)
 
(63
)
Proceeds from sales of noncontrolling interests
 
5

 
10

Purchases of noncontrolling interests
 
(9
)
 

Proceeds from exercise of stock options and employee stock purchase plan
 
9

 
2

Other items, net
 
20

 
(5
)
Net cash used in financing activities
 
(123
)
 
(141
)
Net increase (decrease) in cash and cash equivalents
 
363

 
(144
)
Cash and cash equivalents at beginning of period
 
611

 
716

Cash and cash equivalents at end of period 
 
$
974

 
$
572

Supplemental disclosures:
 
 

 
 

Interest paid, net of capitalized interest
 
$
(169
)
 
$
(130
)
Income tax refunds (payments), net
 
$
1

 
$
(1
)
 
See accompanying Notes to Condensed Consolidated Financial Statements.


4


TENET HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

NOTE 1. BASIS OF PRESENTATION
 
Description of Business and Basis of Presentation
 
Tenet Healthcare Corporation (together with our subsidiaries, referred to herein as “Tenet,” “we” or “us”) is a diversified healthcare services company. At March 31, 2018, we operated 69 hospitals, 21 surgical hospitals and over 460 outpatient centers in the United States, as well as nine facilities in the United Kingdom, through our subsidiaries, partnerships and joint ventures, including USPI Holding Company, Inc. (“USPI joint venture”). Our Conifer Holdings, Inc. (“Conifer”) subsidiary provides healthcare business process services in the areas of hospital and physician revenue cycle management and value-based care solutions to healthcare systems, as well as individual hospitals, physician practices, self-insured organizations, health plans and other entities.
 
This quarterly report supplements our Annual Report on Form 10-K for the year ended December 31, 2017 (“Annual Report”). As permitted by the Securities and Exchange Commission for interim reporting, we have omitted certain notes and disclosures that substantially duplicate those in our Annual Report. For further information, refer to the audited Consolidated Financial Statements and notes included in our Annual Report. Unless otherwise indicated, all financial and statistical data included in these notes to our Condensed Consolidated Financial Statements relate to our continuing operations, with dollar amounts expressed in millions (except per-share amounts).
 
Effective January 1, 2018, we adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”) using a modified retrospective method of application to all contracts existing on January 1, 2018. The core principle of the guidance in ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. For our Hospital Operations and other and Ambulatory Care segments, the adoption of ASU 2014-09 resulted in changes to our presentation for and disclosure of revenue primarily related to uninsured or underinsured patients. Prior to the adoption of ASU 2014-09, a significant portion of our provision for doubtful accounts related to self-pay patients, as well as co-pays, co-insurance amounts and deductibles owed to us by patients with insurance. Under ASU 2014-09, the estimated uncollectable amounts due from these patients are generally considered implicit price concessions that are a direct reduction to net operating revenues, with a corresponding material reduction in the amounts presented separately as provision for doubtful accounts. For the three months ended March 31, 2018, we recorded approximately $347 million of implicit price concessions as a direct reduction of net operating revenues that would have been recorded as provision for doubtful accounts prior to the adoption of ASU 2014-09. At March 31, 2018, we recorded $600 million as a direct reduction of accounts receivable that would have been reflected as allowance for doubtful accounts prior to the adoption of ASU 2014-09. At January 1, 2018, we reclassified $171 million of revenues related to patients who were still receiving inpatient care in our facilities at that date from accounts receivable, less allowance for doubtful accounts, to contract assets, which are included in other current assets in the accompanying Condensed Consolidated Balance Sheet at March 31, 2018. The adoption of ASU 2014-09 also resulted in changes to our presentation and disclosure of customer contract assets and liabilities and the assessment of variable consideration under customer contracts, which are further discussed in Note 3.

Also effective January 1, 2018, we early adopted ASU 2018-02, “Income Statement-Reporting Comprehensive Income
(Topic 220)” (“ASU 2018-02”), which allows a reclassification from accumulated other comprehensive income to retained
earnings for stranded income tax effects resulting from the Tax Cuts and Jobs Act (the “Tax Act”) and requires certain disclosures about stranded income tax effects. We applied the amendments in ASU 2018-02 in the period of adoption, resulting in a reclassification of $36 million of stranded income tax effects from accumulated other comprehensive loss to accumulated deficit in the three months ended March 31, 2018.

In addition, we adopted ASU 2016-01, “Financial Instruments-Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”) effective January 1, 2018, which supersedes the guidance to classify equity securities with readily determinable fair values into different categories (that is, trading or available-for-sale) and require equity securities (including other ownership interests, such as partnerships, unincorporated joint ventures and limited liability companies) to be measured at fair value with changes in the fair value recognized through net income. Upon adoption of ASU 2016-01 on January 1, 2018, we recorded a cumulative effect adjustment to decrease accumulated deficit by approximately $7 million of unrealized gains on equity securities.


5


Also effective January 1, 2018, we adopted ASU 2016-15, “Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments” and ASU 2016-18, “Statement of Cash Flows (Topic 230) Restricted Cash,” both of which were applied using a retrospective transition method to each period presented. The adoption of these standards did not have any effect on our statements of cash flows.

Although the Condensed Consolidated Financial Statements and related notes within this document are unaudited, we believe all adjustments considered necessary for a fair presentation have been included and are of a normal recurring nature. In preparing our financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”), we are required to make estimates and assumptions that affect the amounts reported in our Condensed Consolidated Financial Statements and these accompanying notes. We regularly evaluate the accounting policies and estimates we use. In general, we base the estimates on historical experience and on assumptions that we believe to be reasonable given the particular circumstances in which we operate. Actual results may vary from those estimates. Financial and statistical information we report to other regulatory agencies may be prepared on a basis other than GAAP or using different assumptions or reporting periods and, therefore, may vary from amounts presented herein. Although we make every effort to ensure that the information we report to those agencies is accurate, complete and consistent with applicable reporting guidelines, we cannot be responsible for the accuracy of the information they make available to the public.
 
Operating results for the three month period ended March 31, 2018 are not necessarily indicative of the results that may be expected for the full year. Reasons for this include, but are not limited to: overall revenue and cost trends, particularly the timing and magnitude of price changes; fluctuations in contractual allowances and cost report settlements and valuation allowances; managed care contract negotiations, settlements or terminations and payer consolidations; changes in Medicare and Medicaid regulations; Medicaid and other supplemental funding levels set by the states in which we operate; the timing of approval by the Centers for Medicare and Medicaid Services of Medicaid provider fee revenue programs; trends in patient accounts receivable collectability and associated implicit price concessions; fluctuations in interest rates; levels of malpractice insurance expense and settlement trends; impairment of long-lived assets and goodwill; restructuring charges; losses, costs and insurance recoveries related to natural disasters and other weather-related occurrences; litigation and investigation costs; acquisitions and dispositions of facilities and other assets; gains (losses) on sales, consolidation and deconsolidation of facilities; income tax rates and deferred tax asset valuation allowance activity; changes in estimates of accruals for annual incentive compensation; the timing and amounts of stock option and restricted stock unit grants to employees and directors; gains or losses from early extinguishment of debt; and changes in occupancy levels and patient volumes. Factors that affect patient volumes and, thereby, the results of operations at our hospitals and related healthcare facilities include, but are not limited to: changes in federal and state healthcare regulations; the business environment, economic conditions and demographics of local communities in which we operate; the number of uninsured and underinsured individuals in local communities treated at our hospitals; seasonal cycles of illness; climate and weather conditions; physician recruitment, retention and attrition; advances in technology and treatments that reduce length of stay; local healthcare competitors; managed care contract negotiations or terminations; the number of patients with high-deductible health insurance plans; hospital performance data on quality measures and patient satisfaction, as well as standard charges for our services; any unfavorable publicity about us, or our joint venture partners, that impacts our relationships with physicians and patients; and the timing of elective procedures. These considerations apply to year-to-year comparisons as well.
 
Translation of Foreign Currencies
 
The accounts of European Surgical Partners Limited (“Aspen”) were measured in its local currency (the pound sterling) and then translated into U.S. dollars. All assets and liabilities were translated using the current rate of exchange at the balance sheet date. Results of operations were translated using the average rates prevailing throughout the period of operations. Translation gains or losses resulting from changes in exchange rates are accumulated in shareholders’ equity.
 
Net Operating Revenues
 
ASU 2014-09 was issued to clarify the principles for recognizing revenue, to remove inconsistencies and weaknesses in revenue recognition requirements, and to provide a more robust framework for addressing revenue issues. Our adoption of ASU 2014-09 was accomplished using a modified retrospective method of application, and our accounting policies related to revenues were revised accordingly effective January 1, 2018, as discussed below.

We recognize net operating revenues in the period in which we satisfy our performance obligations under contracts by transferring our services to our customers. Net operating revenues are recognized in the amounts to which we expect to be entitled, which are the transaction prices allocated to the distinct services. Net operating revenues for our Hospital Operations and other and Ambulatory Care segments primarily consist of net patient service revenues, principally for patients covered by Medicare, Medicaid, managed care and other health plans, as well as certain uninsured patients under our Compact with

6


Uninsured Patients (“Compact”) and other uninsured discount and charity programs. Net operating revenues for our Conifer segment primarily consist of revenues from providing revenue cycle management services to healthcare systems, as well as individual hospitals, physician practices, self-insured organizations, health plans and other entities.

Net Patient Service Revenues—We report net patient service revenues at the amounts that reflect the consideration to which we expect to be entitled in exchange for providing patient care. These amounts are due from patients, third-party payers (including managed care payers and government programs) and others, and they include variable consideration for retroactive revenue adjustments due to settlement of audits, reviews and investigations. Generally, we bill our patients and third-party payers several days after the services are performed or shortly after discharge. Revenues are recognized as performance obligations are satisfied.

We determine performance obligations based on the nature of the services we provide. We recognize revenues for performance obligations satisfied over time based on actual charges incurred in relation to total expected charges. We believe that this method provides a faithful depiction of the transfer of services over the term of performance obligations based on the inputs needed to satisfy the obligations. Generally, performance obligations satisfied over time relate to patients in our hospitals receiving inpatient acute care services. We measure performance obligations from admission to the point when there are no further services required for the patient, which is generally the time of discharge. We recognize revenues for performance obligations satisfied at a point in time, which generally relate to patents receiving outpatient services, when: (1) services are provided; and (2) we do not believe the patient requires additional services.

Because our patient service performance obligations relate to contracts with a duration of less than one year, we have elected to apply the optional exemption provided in FASB Accounting Standards Codification (“ASC”) 606-10-50-14(a) and, therefore, we are not required to disclose the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period. The unsatisfied or partially unsatisfied performance obligations referred to above are primarily related to inpatient acute care services at the end of the reporting period. The performance obligations for these contracts are generally completed when the patients are discharged, which generally occurs within days or weeks of the end of the reporting period.

We determine the transaction price based on gross charges for services provided, reduced by contractual adjustments provided to third-party payers, discounts provided to uninsured patients in accordance with our Compact, and implicit price concessions provided primarily to uninsured patients. We determine our estimates of contractual adjustments and discounts based on contractual agreements, our discount policies and historical experience. We determine our estimate of implicit price concessions based on our historical collection experience with these classes of patients using a portfolio approach as a practical expedient to account for patient contracts as collective groups rather than individually. The financial statement effects of using this practical expedient are not materially different from an individual contract approach.

Gross charges are retail charges. They are not the same as actual pricing, and they generally do not reflect what a hospital is ultimately paid and, therefore, are not displayed in our consolidated statements of operations. Hospitals are typically paid amounts that are negotiated with insurance companies or are set by the government. Gross charges are used to calculate Medicare outlier payments and to determine certain elements of payment under managed care contracts (such as stop-loss payments). Because Medicare requires that a hospital’s gross charges be the same for all patients (regardless of payer category), gross charges are what hospitals charge all patients prior to the application of discounts and allowances. 

Revenues under the traditional fee-for-service Medicare and Medicaid programs are based primarily on prospective payment systems. Retrospectively determined cost-based revenues under these programs, which were more prevalent in earlier periods, and certain other payments, such as Indirect Medical Education, Direct Graduate Medical Education, disproportionate share hospital and bad debt expense reimbursement, which are based on our hospitals’ cost reports, are estimated using historical trends and current factors. Cost report settlements under these programs are subject to audit by Medicare and Medicaid auditors and administrative and judicial review, and it can take several years until final settlement of such matters is determined and completely resolved. Because the laws, regulations, instructions and rule interpretations governing Medicare and Medicaid reimbursement are complex and change frequently, the estimates recorded by us could change by material amounts.

We have a system and estimation process for recording Medicare net patient revenue and estimated cost report settlements. This results in us recording accruals to reflect the expected final settlements on our cost reports. For filed cost reports, we record the accrual based on those cost reports and subsequent activity, and record a valuation allowance against those cost reports based on historical settlement trends. The accrual for periods for which a cost report is yet to be filed is recorded based on estimates of what we expect to report on the filed cost reports, and a corresponding valuation allowance is

7


recorded as previously described. Cost reports generally must be filed within five months after the end of the annual cost reporting period. After the cost report is filed, the accrual and corresponding valuation allowance may need to be adjusted.

Settlements with third-party payers for retroactive revenue adjustments due to audits, reviews or investigations are considered variable consideration and are included in the determination of the estimated transaction price for providing patient care using the most likely outcome method. These settlements are estimated based on the terms of the payment agreement with the payer, correspondence from the payer and our historical settlement activity, including an assessment to ensure that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the retroactive adjustment is subsequently resolved. Estimated settlements are adjusted in future periods as adjustments become known (that is, new information becomes available), or as years are settled or are no longer subject to such audits, reviews and investigations.

Revenues under managed care plans are based primarily on payment terms involving predetermined rates per diagnosis, per-diem rates, discounted fee-for-service rates and/or other similar contractual arrangements. These revenues are also subject to review and possible audit by the payers, which can take several years before they are completely resolved. The payers are billed for patient services on an individual patient basis. An individual patient’s bill is subject to adjustment on a patient-by-patient basis in the ordinary course of business by the payers following their review and adjudication of each particular bill. We estimate the discounts for contractual allowances at the individual hospital level utilizing billing data on an individual patient basis. At the end of each month, on an individual hospital basis, we estimate our expected reimbursement for patients of managed care plans based on the applicable contract terms. Contractual allowance estimates are periodically reviewed for accuracy by taking into consideration known contract terms, as well as payment history. We believe our estimation and review process enables us to identify instances on a timely basis where such estimates need to be revised. We do not believe there were any adjustments to estimates of patient bills that were material to our revenues. In addition, on a corporate-wide basis, we do not record any general provision for adjustments to estimated contractual allowances for managed care plans. Managed care accounts, net of contractual allowances recorded, are further reduced to their net realizable value through implicit price concessions based on historical collection trends for these payers and other factors that affect the estimation process.

We know of no claims, disputes or unsettled matters with any payer that would materially affect our revenues for which we have not adequately provided in the accompanying Condensed Consolidated Financial Statements.

Generally, patients who are covered by third-party payers are responsible for related co-pays, co-insurance and deductibles, which vary in amount. We also provide services to uninsured patients and offer uninsured patients a discount from standard charges. We estimate the transaction price for patients with co-pays, co-insurance and deductibles and for those who are uninsured based on historical collection experience and current market conditions. Under our Compact and other uninsured discount programs, the discount offered to certain uninsured patients is recognized as a contractual allowance, which reduces net operating revenues at the time the self-pay accounts are recorded. The uninsured patient accounts, net of contractual allowances recorded, are further reduced to their net realizable value at the time they are recorded through implicit price concessions based on historical collection trends for self-pay accounts and other factors that affect the estimation process. There are various factors that can impact collection trends, such as changes in the economy, which in turn have an impact on
unemployment rates and the number of uninsured and underinsured patients, the volume of patients through our emergency
departments, the increased burden of co-pays, co-insurance amounts and deductibles to be made by patients with insurance, and business practices related to collection efforts. These factors continuously change and can have an impact on collection trends and our estimation process. Subsequent changes to the estimate of the transaction price are generally recorded as adjustments to net patient revenues in the period of the change.

We have provided implicit price concessions, primarily to uninsured patients and patients with co-pays, co-insurance and deductibles. The implicit price concessions included in estimating the transaction price represent the difference between amounts billed to patients and the amounts we expect to collect based on our collection history with similar patients. Although outcomes vary, our policy is to attempt to collect amounts due from patients, including co-pays, co-insurance and deductibles due from patients with insurance, at the time of service while complying with all federal and state statutes and regulations, including, but not limited to, the Emergency Medical Treatment and Active Labor Act (“EMTALA”). Generally, as required by EMTALA, patients may not be denied emergency treatment due to inability to pay. Therefore, services, including the legally required medical screening examination and stabilization of the patient, are performed without delaying to obtain insurance information. In non-emergency circumstances or for elective procedures and services, it is our policy to verify insurance prior to a patient being treated; however, there are various exceptions that can occur. Such exceptions can include, for example, instances where (1) we are unable to obtain verification because the patient’s insurance company was unable to be reached or contacted, (2) a determination is made that a patient may be eligible for benefits under various government programs, such as Medicaid or Victims of Crime, and it takes several days or weeks before qualification for such benefits is confirmed or denied, and (3) under physician orders we provide services to patients that require immediate treatment.

8



We also provide charity care to patients who are financially unable to pay for the healthcare services they receive. Most patients who qualify for charity care are charged a per-diem amount for services received, subject to a cap. Except for the per-diem amounts, our policy is not to pursue collection of amounts determined to qualify as charity care; therefore, we do not report these amounts in net operating revenues. Patient advocates from Conifer’s Medical Eligibility Program screen patients in the hospital to determine whether those patients meet eligibility requirements for financial assistance programs. They also expedite the process of applying for these government programs.

Conifer Revenues—Our Conifer segment recognizes revenue from its contracts when Conifer’s performance obligations are satisfied, which is generally as services are rendered. Revenue is recognized in an amount that reflects the consideration to which Conifer expects to be entitled.

At contract inception, Conifer assesses the services specified in its contracts with customers and identifies a performance obligation for each distinct contracted service. Conifer identifies the performance obligations and considers all the services provided under the contract. Conifer generally considers the following distinct services as separate performance obligations:
revenue cycle management services;
value-based care services;
patient communication and engagement services;
consulting services; and
other client-defined projects.
Conifer’s contracts generally consist of fixed-price, volume-based or contingency-based fees. Conifer’s long-term contracts typically provide for Conifer to deliver recurring monthly services over a multi-year period. The contracts are typically priced such that Conifer’s monthly fee to its customer represents the value obtained by the customer in the month for those services. Such multi-year service contracts may have upfront fees related to transition or integration work performed by Conifer to set up the delivery for the ongoing services. Such transition or integration work typically does not result in a separately identifiable obligation; thus, the fees and expenses related to such work are deferred and recognized over the life of the related contractual service period. Revenue for fixed-priced contracts is typically recognized at the time of billing unless evidence suggests that the revenue is earned or Conifer’s obligations are fulfilled in a different pattern. Revenue for volume-based contracts is typically recognized as the services are being performed at the contractually billable rate, which is generally a percentage of collections or a percentage of client net patient revenue.

Cash and Cash Equivalents
 
We treat highly liquid investments with original maturities of three months or less as cash equivalents. Cash and cash equivalents were approximately $974 million and $611 million at March 31, 2018 and December 31, 2017, respectively. At March 31, 2018 and December 31, 2017, our book overdrafts were approximately $244 million and $311 million, respectively, which were classified as accounts payable.
 
At March 31, 2018 and December 31, 2017, approximately $187 million and $179 million, respectively, of total cash and cash equivalents in the accompanying Condensed Consolidated Balance Sheets were intended for the operations of our captive insurance subsidiaries, and approximately $32 million and $30 million, respectively, of total cash and cash equivalents in the accompanying Condensed Consolidated Balance Sheets were intended for the operations of our health plan-related businesses.
 
Also at March 31, 2018 and December 31, 2017, we had $72 million and $117 million, respectively, of property and equipment purchases accrued for items received but not yet paid. Of these amounts, $52 million and $79 million, respectively, were included in accounts payable.
 
During the three months ended March 31, 2018 and 2017, we entered into non-cancellable capital leases of approximately $20 million and $34 million, respectively, primarily for equipment.
 

9


Other Intangible Assets
 
The following tables provide information regarding other intangible assets, which are included in the accompanying Condensed Consolidated Balance Sheets at March 31, 2018 and December 31, 2017: 
 
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Book
Value
At March 31, 2018:
 
 
 
 
 
 
Capitalized software costs
 
$
1,644

 
$
(784
)
 
$
860

Trade names
 
102

 

 
102

Contracts
 
860

 
(64
)
 
796

Other
 
106

 
(72
)
 
34

Total 
 
$
2,712

 
$
(920
)
 
$
1,792

 
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
 Net Book
Value
At December 31, 2017:
 
 
 
 
 
 
Capitalized software costs
 
$
1,582

 
$
(754
)
 
$
828

Trade names
 
102

 

 
102

Contracts
 
859

 
(60
)
 
799

Other
 
106

 
(69
)
 
37

Total 
 
$
2,649

 
$
(883
)
 
$
1,766

 
Estimated future amortization of intangibles with finite useful lives at March 31, 2018 is as follows: 
 
 
 
 
Nine Months
Ending
 
Years Ending
 
Later Years
 
 
 
 
December 31,
 
 
 
Total
 
2018
 
2019
 
2020
 
2021
 
2022
 
Amortization of intangible assets
 
$
1,125

 
$
113

 
$
148

 
$
122

 
$
103

 
$
92

 
$
547

 
We recognized amortization expense of $41 million and $42 million in the accompanying Condensed Consolidated Statements of Operations for the three months ended March 31, 2018 and 2017, respectively.
 
Investments in Debt and Equity Securities

Prior to the adoption of ASU 2016-01 on January 1, 2018, we classified investments in debt and equity securities as either available-for-sale, held-to-maturity or as part of a trading portfolio. At December 31, 2017, we had no significant investments in securities classified as either held-to-maturity or trading. We carried securities classified as available-for-sale at fair value. We reported their unrealized gains and losses, net of taxes, as accumulated other comprehensive income (loss) unless we determined that a loss was other-than-temporary, at which point we would record a loss in our consolidated statements of operations. We included realized gains or losses in our consolidated statements of operations based on the specific identification method.

Subsequent to the adoption of ASU 2016-01 on January 1, 2018, we classify investments in debt securities as either available-for-sale, held-to-maturity or as part of a trading portfolio, but these classifications are no longer applicable to equity securities. At March 31, 2018, we had no significant investments in debt securities classified as either held-to-maturity or trading. We carry debt securities classified as available-for-sale at fair value. We report their unrealized gains and losses, net of taxes, as accumulated other comprehensive income (loss) unless we determine that a loss is other-than-temporary, at which point we would record a loss in our consolidated statements of operations. We carry equity securities at fair value, and we report their unrealized gains and losses in other non-operating expense, net in our consolidated statements of operations. We include realized gains or losses in our consolidated statements of operations based on the specific identification method.

Investments in Unconsolidated Affiliates
We control 230 of the facilities within our Ambulatory Care segment and, therefore, consolidate their results. We account for many of the facilities our Ambulatory Care segment operates (108 of 338 at March 31, 2018), as well as additional facilities in which our Hospital Operations and other segment holds ownership interests, under the equity method as investments in unconsolidated affiliates and report only our share of net income attributable to the investee as equity in earnings of unconsolidated affiliates in the accompanying Condensed Consolidated Statements of Operations. Summarized financial

10


information for the equity method investees within our Ambulatory Care segment is included in the following table, as well as summarized financial information for the four North Texas hospitals in which we held minority interests that were operated by our Hospital Operations and other segment through the divestiture of these investments effective March 1, 2018. We recorded a gain of approximately $13 million in the three months ended March 31, 2018 due to the sales of our minority interests in these hospitals. For investments acquired during the reported periods, amounts reflect 100% of the investee’s results beginning on the date of our acquisition of the investment.
 
 
Three Months Ended March 31,
 
 
2018
 
2017
Net operating revenues
 
$
574

 
$
584

Net income
 
$
116

 
$
115

Net income attributable to the investees
 
$
71

 
$
76


NOTE 2. ACCOUNTS RECEIVABLE
 
The principal components of accounts receivable are shown in the table below: 
 
 
March 31, 2018
 
December 31, 2017
Continuing operations:
 
 

 
 

Patient accounts receivable
 
$
2,400

 
$
3,376

Allowance for doubtful accounts
 

 
(898
)
Estimated future recoveries
 
127

 
132

Net cost reports and settlements payable and valuation allowances
 
(10
)
 
4

 
 
2,517

 
2,614

Discontinued operations
 
2

 
2

Accounts receivable
 
$
2,519

 
$
2,616

 
Accounts that are pursued for collection through Conifer’s business offices are maintained on our hospitals’ books and reflected in patient accounts receivable. For patient accounts receivable resulting from revenue recognized prior to January 1, 2018, an allowance for doubtful accounts was established to reduce the carrying value of such receivables to their estimated net realizable value. Generally, we estimated this allowance based on the aging of our accounts receivable by hospital, our historical collection experience by hospital and for each type of payer, and other relevant factors. At December 31, 2017, our allowance for doubtful accounts was 26.6% of our patient accounts receivable. Under the provisions of ASC 2014-09, which we adopted effective January 1, 2018, when we have an unconditional right to payment, subject only to the passage of time, the right is treated as a receivable. Patient accounts receivable, including billed accounts and unbilled accounts for which we have the unconditional right to payment, and estimated amounts due from third-party payers for retroactive adjustments, are receivables if our right to consideration is unconditional and only the passage of time is required before payment of that consideration is due. For patient accounts receivable subsequent to our adoption of ASU 2014-09 on January 1, 2018, the estimated uncollectable amounts are generally considered implicit price concessions that are a direct reduction to patient accounts receivable rather than allowance for doubtful accounts.
 
We also provide charity care to patients who are unable to pay for the healthcare services they receive. Most patients who qualify for charity care are charged a per-diem amount for services received, subject to a cap. Except for the per-diem amounts, our policy is not to pursue collection of amounts determined to qualify as charity care; therefore, we do not report these amounts in net operating revenues. Most states include an estimate of the cost of charity care in the determination of a hospital’s eligibility for Medicaid disproportionate share hospital (“DSH”) payments. These payments are intended to mitigate our cost of uncompensated care, as well as reduced Medicaid funding levels. The table below shows our estimated costs (based on selected operating expenses, which include salaries, wages and benefits, supplies and other operating expenses and which exclude the costs of our health plan businesses) of caring for our self-pay patients and charity care patients, as well as revenues attributable to Medicaid DSH and other supplemental revenues we recognized in three months ended March 31, 2018 and 2017:
 
 
Three Months Ended
March 31,
 
 
 
2018
 
2017
 
Estimated costs for:
 
 

 
 

 
Self-pay patients
 
$
146

 
$
160

 
Charity care patients
 
35

 
30

 
Total
 
$
181

 
$
190

 
Medicaid DSH and other supplemental revenues
 
$
220

 
$
158

 
 
    

11


At March 31, 2018, we had approximately $317 million and $273 million of receivables recorded in other current assets and investments and other assets, respectively, and approximately $94 million and $63 million of payables recorded in other current liabilities and other long-term liabilities, respectively, in the accompanying Condensed Consolidated Balance Sheet related to California’s provider fee program. At December 31, 2017, we had approximately $312 million and $266 million of receivables recorded in other current assets and investments and other assets, respectively, and approximately $159 million and $49 million recorded in other current liabilities and other long-term liabilities, respectively, in the accompanying Condensed Consolidated Balance Sheet related to California’s provider fee program.
 
NOTE 3. CONTRACT BALANCES

Hospital Operations and Other Segment
    
Under the provisions of ASU 2014-09, which we adopted effective January 1, 2018, amounts related to services provided to patients for which we have not billed and that do not meet the conditions of unconditional right to payment at the end of the reporting period are contract assets. For our Hospital Operations and other segment, our contract assets consist primarily of services that we have provided to patients who are still receiving inpatient care in our facilities at the end of the reporting period. Our Hospital Operations and other segment’s contract assets are included in other current assets on the accompanying Condensed Consolidated Balance Sheet at March 31, 2018. The opening and closing balances of contract assets for our Hospital Operations and other segment are as follows:
 
 
Contract Assets
January 1, 2018
 
$
171

March 31, 2018
 
158

Increase/(decrease)
 
$
(13
)
 
 
 
January 1, 2017
 
$

March 31, 2017
 

Increase/(decrease)
 
$


The increase in the contract asset balances from the three months ended March 31, 2018 compared to the three months ended March 31, 2017 is due to the implementation of ASU 2014-09 effective January 1, 2018 using a modified retrospective method of application. Prior to January 1, 2018, amounts related to services provided to patients for which we had not billed were included in accounts receivable, less allowance for doubtful accounts, on our consolidated balance sheets. Approximately 89% of our Hospital Operations and other segment’s contract assets meet the conditions for unconditional right to payment and are reclassified to patient receivables within 90 days.

Conifer Segment

Conifer enters into contracts with customers to sell revenue cycle management and other services, such as value-based care, consulting and project services. The payment terms and conditions in our customer contracts vary. In some cases, customers are invoiced in advance and (for other than fixed price fee arrangements) a true-up to actual fee is included on a subsequent invoice. In other cases, payment is due in arrears. In addition, some contracts contain performance incentives, penalties and other forms of variable consideration. When the timing of Conifer’s delivery of services is different from the timing of payments made by the customers, Conifer recognizes either unbilled revenue (performance precedes contractual right to invoice the customer) or deferred revenue (customer payment precedes Conifer service performance). In the table below, customers that prepay prior to obtaining control/benefit of the service are represented by deferred contract revenue until the performance obligations are satisfied. Unbilled revenue represents arrangements in which Conifer has provided services to and the customer has obtained control/benefit of services prior to the contractual invoice date. Contracts with payment in arrears are recognized as receivables in the month the service is performed.
    

12


The opening and closing balances of Conifer’s receivables, contract asset, and current and long-term contract liabilities are as follows:
 
 
 
 
 
 
Contract Liability-
 
Contract Liability-
 
 
 
 
Contract Asset-
 
Current
 
Long-Term
 
 
Receivables
 
Unbilled Revenue
 
Deferred Revenue
 
Deferred Revenue
January 1, 2018
 
$
89

 
$
10

 
$
80

 
$
21

March 31, 2018
 
99

 
10

 
78

 
29

Increase/(decrease)
 
$
10

 
$

 
$
(2
)
 
$
8

 
 
 
 
 
 
 
 
 
January 1, 2017
 
$
67

 
$
8

 
$
76

 
$
26

March 31, 2017
 
112

 
6

 
79

 
25

Increase/(decrease)
 
$
45

 
$
(2
)
 
$
3

 
$
(1
)
The difference between the opening and closing balances of Conifer’s contract assets and contract liabilities are primarily related to prepayments for those customers who are billed in advance, changes in estimates related to metric-based services, and up front integration services that are typically not distinct, and are, therefore, recognized over the performance obligation period to which they relate. Our Conifer segment’s receivables and contract assets are reported as part of other current assets in our accompanying Condensed Consolidated Balance Sheets, and our Conifer segment’s current and long-term contract liabilities are reported as part of other current liabilities and other long-term liabilities, respectively, in our accompanying Condensed Consolidated Balance Sheets.

The amount of revenue Conifer recognized that was included in the opening current deferred revenue liability was $60 million in both of the three month periods ended March 31, 2018 and 2017. This revenue consists primarily of prepayments for those customers who are billed in advance, changes in estimates related to metric-based services, and up-front integration services that are recognized over the services period.

Contract Costs

We have elected to apply the practical expedient provided by FASB ASC 340-40-25-4 and expense as incurred the incremental customer contract acquisition costs for contracts in which the amortization period of the asset that we otherwise would have recognized is one year or less. However, incremental costs incurred to obtain and fulfill customer contracts for which the amortization period of the asset that we otherwise would have recognized is longer than one year, which consist primarily of Conifer deferred contract setup costs, are capitalized and amortized on a straight-line basis over the lesser of their estimated useful lives or the term of the related contract. During the three months ended March 31, 2018 and 2017, we recognized amortization expense of $3 million and $2 million, respectively. At March 31, 2018 and December 31, 2017, the unamortized customer contract costs were $34 million and $35 million, respectively, and are presented as part of investments and other assets in the accompanying Condensed Consolidated Balance Sheets.

NOTE 4. ASSETS AND LIABILITIES HELD FOR SALE
 
In the three months ended December 31, 2017, our hospital, physician practices and other hospital-affiliated
operations in St. Louis, Missouri met the criteria to be classified as held for sale in accordance with the guidance in the FASB’s
ASC 360, “Property, Plant and Equipment.” We classified $45 million of our St. Louis-area assets as “assets held for sale” in current assets and the related liabilities of $3 million as “liabilities held for sale” in current liabilities on the accompanying Condensed Consolidated Balance Sheet at March 31, 2018. These assets and liabilities, which are in our Hospital Operations and other segment, were recorded at the lower of their carrying amount or their fair value less estimated costs to sell. There was no impairment recorded for a write-down of assets held for sale to their estimated fair value, less estimated costs to sell, as a result of the planned divestiture of these assets.

Also in the three months ended December 31, 2017, three of our hospitals in the Chicago-area, as well as other
operations affiliated with the hospitals, met the criteria to be classified as held for sale. As a result, we classified these assets
totaling $113 million as “assets held for sale” in current assets and the related liabilities of $50 million as “liabilities held for
sale” in current liabilities on the accompanying Condensed Consolidated Balance Sheet at March 31, 2018. These assets and liabilities, which are in our Hospital Operations and other segment, were recorded at the lower of their carrying amount or their fair value less estimated costs to sell. We recorded impairment charges of $17 million and $73 million in the three months ended March 31, 2018 and December 31, 2017, respectively, for the write-down of assets held for sale to their estimated fair value, less estimated costs to sell, as a result of the planned divestiture of these assets.

13


In addition, certain assets and the related liabilities of our health plan in California were classified as held for sale in the three months ended December 31, 2017. We classified $11 million of assets as “assets held for sale” in current assets and the related liabilities of $12 million as “liabilities held for sale” in current liabilities on the accompanying Consolidated Balance Sheet at March 31, 2018 related to this health plan. These assets and liabilities, which are in our Hospital Operations and other
segment, were recorded at the lower of their carrying amount or their fair value less estimated costs to sell. There was no
impairment recorded for a write-down of assets held for sale to their estimated fair value, less estimated costs to sell, as a result
of the planned divestiture of this health plan.

In the three months ended September 30, 2017, our nine Aspen facilities in the United Kingdom met the criteria to be classified as held for sale. We classified $430 million of our United Kingdom assets as “assets held for sale” in current assets and the related liabilities of $341 million as “liabilities held for sale” in current liabilities on the accompanying Condensed Consolidated Balance Sheet at March 31, 2018. These assets and liabilities, which are in our Ambulatory Care segment, were recorded at the lower of their carrying amount or their fair value less estimated costs to sell. We recorded impairment charges in the three months ended September 30, 2017 related to this planned divestiture of $59 million for the write-down of assets held for sale to their estimated fair value, less estimated costs to sell.

Assets and liabilities classified as held for sale at March 31, 2018 were comprised of the following:
Accounts receivable
 
$
74

Other current assets
 
50

Investments and other long-term assets
 
2

Property and equipment
 
398

Other intangible assets
 
8

Goodwill
 
67

Current liabilities
 
(93
)
Long-term liabilities
 
(313
)
Net assets held for sale
 
$
193


In the three months ended September 30, 2017, we entered into a definitive agreement for the sale of our hospitals, physician practices and related assets in Philadelphia, Pennsylvania and the surrounding area. At that time, we recorded impairment charges of $235 million for the write-down of assets held for sale to their estimated fair value, less estimated costs to sell, as a result of this anticipated transaction. This transaction closed in the three months ended March 31, 2018, resulting in net pre-tax proceeds of $152.5 million in cash and a secured promissory note for $17.5 million.

Also in the three months ended September 30, 2017, MacNeal Hospital, which is located in a suburb of Chicago, as well as other operations affiliated with the hospital, met the criteria to be classified as held for sale. In the three months ended March 31, 2018, we completed the sale of MacNeal Hospital and other operations affiliated with the hospital. As a result of this transaction, we recorded a gain on sale of $98 million and received net pre-tax cash proceeds of $249 million in the three
months ended March 31, 2018.

The real estate related to Abrazo Maryvale Hospital in Arizona, which we closed in December 2017, was classified as held for sale in the three months ended December 31, 2017. The real estate was divested in the three months ended March 31, 2018, resulting in net pre-tax proceeds of $7 million.

The following table provides information on significant components of our business that have been recently disposed of or are classified as held for sale in the three months ended March 31, 2018:


14


 
 
Three Months Ended March 31,
 
 
2018
 
2017
Significant disposals:
 
 
 
 
Income (loss) from continuing operations, before income taxes 
 
 
 
 
   Houston
 
$

 
$
15

   Philadelphia
 
(9
)
 
(14
)
   MacNeal (includes a $98 million gain on sale in the 2018 period)
 
101

 
3

      Total
 
$
92

 
$
4

 
 
  
 
  
Significant planned divestitures classified as held for sale:
 
 
 
 
Income (loss) from continuing operations, before income taxes 
 
 
 
 
   Chicago-area (includes $17 million of impairment charges in the 2018 period)
 
$
(16
)
 
$
(4
)
   Aspen
 
3

 
(2
)
      Total
 
$
(13
)
 
$
(6
)

NOTE 5. IMPAIRMENT AND RESTRUCTURING CHARGES, AND ACQUISITION-RELATED COSTS
 
During the three months ended March 31, 2018, we recorded impairment and restructuring charges and acquisition-related costs of $47 million, consisting of $19 million of impairment charges, $25 million of restructuring charges and $3 million of acquisition-related costs. Impairment charges consisted primarily of $17 million of charges to write-down assets held for sale to their estimated fair value, less estimated costs to sell, for certain of our Chicago-area facilities. Restructuring charges consisted of $17 million of employee severance costs, $1 million of contract and lease termination fees, and $7 million of other restructuring costs. Acquisition-related costs consisted of $2 million of transaction costs and $1 million of acquisition integration charges. Our impairment and restructuring charges and acquisition-related costs for the three months ended March 31, 2018 were comprised of $41 million from our Hospital Operations and other segment, $1 million from our Ambulatory Care segment and $5 million from our Conifer segment.

During the three months ended March 31, 2017, we recorded impairment and restructuring charges and acquisition-related costs of $33 million primarily related to our Hospital Operations and other segment, consisting of $1 million of impairment charges, $24 million of restructuring charges and $8 million of acquisition-related costs. Impairment charges of $1 million were recorded to write-down intangible assets, and restructuring charges consisted of $16 million of employee severance costs, $6 million of contract and lease termination fees, and $2 million of other restructuring costs. Acquisition-related costs consisted of $2 million of transaction costs and $6 million of acquisition integration charges.
 
Our impairment tests presume stable, improving or, in some cases, declining operating results in our facilities, which are based on programs and initiatives being implemented that are designed to achieve the facility’s most recent projections. If these projections are not met, or if in the future negative trends occur that impact our future outlook, impairments of long-lived assets and goodwill may occur, and we may incur additional restructuring charges, which could be material.
 
At March 31, 2018, our continuing operations consisted of three reportable segments, Hospital Operations and other, Ambulatory Care and Conifer. Our segments are reporting units used to perform our goodwill impairment analysis.
 
We periodically incur costs to implement restructuring efforts for specific operations, which are recorded in our consolidated statements of operations as they are incurred. Our restructuring plans focus on various aspects of operations, including aligning our operations in the most strategic and cost-effective structure. Certain restructuring and acquisition-related costs are based on estimates. Changes in estimates are recognized as they occur.


15


NOTE 6. LONG-TERM DEBT AND LEASE OBLIGATIONS

The table below shows our long-term debt at March 31, 2018 and December 31, 2017:
 
 
March 31,
2018
 
December 31, 2017
Senior unsecured notes:
 
 

 
 

5.500% due 2019
 
$
500

 
$
500

6.750% due 2020
 
300

 
300

8.125% due 2022
 
2,800

 
2,800

6.750% due 2023
 
1,872

 
1,900

7.000% due 2025
 
478

 
500

6.875% due 2031
 
430

 
430

Senior secured first lien notes:
 
 

 
 

4.750% due 2020
 
500

 
500

6.000% due 2020
 
1,800

 
1,800

4.500% due 2021
 
850

 
850

4.375% due 2021
 
1,050

 
1,050

4.625% due 2024
 
1,870

 
1,870

Senior secured second lien notes:
 
 
 
 
7.500% due 2022
 
750

 
750

5.125% due 2025
 
1,410

 
1,410

Capital leases
 
417

 
431

Mortgage notes
 
80

 
77

Unamortized issue costs, note discounts and premiums
 
(218
)
 
(231
)
Total long-term debt 
 
14,889

 
14,937

Less current portion
 
666

 
146

Long-term debt, net of current portion 
 
$
14,223

 
$
14,791

 
Senior Secured and Senior Unsecured Notes

In March 2018, we purchased approximately $28 million aggregate principal amount of our 6.750% senior unsecured notes due 2023 and approximately $22 million aggregate principal amount of our 7.000% senior unsecured notes due 2025 for approximately $51 million, including approximately $1 million in accrued and unpaid interest through the dates of purchase. In connection with the purchase, we recorded a loss from early extinguishment of debt of approximately $1 million in the three months ended March 31, 2018, primarily related to the difference between the purchase price and the par value of the notes, as well as the write-off of associated unamortized issuance costs.
 
Credit Agreement
 
We have a senior secured revolving credit facility (as amended, the “Credit Agreement”) that provides, subject to borrowing availability, for revolving loans in an aggregate principal amount of up to $1 billion, with a $300 million subfacility for standby letters of credit. Obligations under the Credit Agreement, which has a scheduled maturity date of December 4, 2020, are guaranteed by substantially all of our domestic wholly owned hospital subsidiaries and are secured by a first-priority lien on the accounts receivable owned by us and the subsidiary guarantors. Outstanding revolving loans accrue interest at a base rate plus a margin ranging from 0.25% to 0.75% per annum or the London Interbank Offered Rate plus a margin ranging from 1.25% to 1.75% per annum, in each case based on available credit. An unused commitment fee payable on the undrawn portion of the revolving loans ranges from 0.25% to 0.375% per annum based on available credit. Our borrowing availability is based on a specified percentage of eligible accounts receivable, including self-pay accounts. At March 31, 2018, we had no cash borrowings outstanding under the Credit Agreement, and we had approximately $2 million of standby letters of credit outstanding. Based on our eligible receivables, approximately $998 million was available for borrowing under the Credit Agreement at March 31, 2018.
 
Letter of Credit Facility
 
We have a letter of credit facility (as amended, the “LC Facility”) that provides for the issuance of standby and documentary letters of credit, from time to time, in an aggregate principal amount of up to $180 million (subject to increase to up to $200 million). The maturity date of the LC Facility is March 7, 2021. Obligations under the LC Facility are guaranteed and secured by a first-priority pledge of the capital stock and other ownership interests of certain of our wholly owned domestic hospital subsidiaries on an equal ranking basis with our senior secured first lien notes.

16



Drawings under any letter of credit issued under the LC Facility that we have not reimbursed within three business days after notice thereof will accrue interest at a base rate plus a margin equal to 0.50% per annum. An unused commitment fee is payable at an initial rate of 0.25% per annum with a step up to 0.375% per annum should our secured-debt-to-EBITDA ratio equal or exceed 3.00 to 1.00 at the end of any fiscal quarter. A fee on the aggregate outstanding amount of issued but undrawn letters of credit will accrue at a rate of 1.50% per annum. An issuance fee equal to 0.125% per annum of the aggregate face amount of each outstanding letter of credit is payable to the account of the issuer of the related letter of credit. At March 31, 2018, we had approximately $100 million of standby letters of credit outstanding under the LC Facility.
 
NOTE 7. GUARANTEES
 
At March 31, 2018, the maximum potential amount of future payments under our income guarantees to certain physicians who agree to relocate and revenue collection guarantees to hospital-based physician groups providing certain services at our hospitals was $192 million. We had a total liability of $156 million recorded for these guarantees included in other current liabilities at March 31, 2018.
 
At March 31, 2018, we also had issued guarantees of the indebtedness and other obligations of our investees to third parties, the maximum potential amount of future payments under which was approximately $23 million. Of the total, $19 million relates to the obligations of consolidated subsidiaries, which obligations are recorded in the accompanying Condensed Consolidated Balance Sheet at March 31, 2018.
 
NOTE 8. EMPLOYEE BENEFIT PLANS
 
In recent years, we have granted both options and restricted stock units to certain of our employees. Options have an exercise price equal to the fair market value of the shares on the date of grant and generally expire 10 years from the date of grant. A restricted stock unit is a contractual right to receive one share of our common stock or the equivalent value in cash in the future. Typically, options and time-based restricted stock units vest one-third on each of the first three anniversary dates of the grant; however, certain special retention awards may have different vesting terms. In addition, we grant performance-based options and performance-based restricted stock units that vest subject to the achievement of specified performance goals within a specified time frame. At March 31, 2018, assuming outstanding performance-based restricted stock units and options for which performance has not yet been determined will achieve target performance, approximately 5.4 million shares of common stock were available under our 2008 Stock Incentive Plan for future stock option grants and other equity incentive awards, including restricted stock units (approximately 4.2 million shares remain available if we assume maximum performance for outstanding performance-based restricted stock units and options for which performance has not yet been determined).
 
Our Condensed Consolidated Statements of Operations for the three months ended March 31, 2018 and 2017 include $9 million and $10 million, respectively, of pre-tax compensation costs related to our stock-based compensation arrangements.
 
Stock Options
 
The following table summarizes stock option activity during the three months ended March 31, 2018:
 
 
Options
 
Weighted Average
Exercise Price
Per Share
 
Aggregate
Intrinsic Value
 
Weighted Average
Remaining Life
 
 
 
 
 
 
(In Millions)
 
 
Outstanding at December 31, 2017
 
2,564,822

 
$
20.35

 
 
 
 
Granted
 
604,012

 
20.60

 
 
 
 
Exercised
 
(443,204
)
 
18.86

 
 
 
 
Forfeited/Expired
 
(298,831
)
 
36.29

 
 
 
 
Outstanding at March 31, 2018
 
2,426,799

 
$
18.72

 
$
13

 
7.1 years
Vested and expected to vest at March 31, 2018
 
2,426,799

 
$
18.72

 
$
13

 
7.1 years
Exercisable at March 31, 2018
 
535,906

 
$
17.92

 
$
3

 
2.8 years

There were 443,204 and 5,525 stock options exercised during the three months ended March 31, 2018 and 2017, respectively, with aggregate intrinsic values of approximately $1 million and less than $1 million, respectively.
 
At March 31, 2018, there were $9 million of total unrecognized compensation costs related to stock options. These costs are expected to be recognized over a weighted average period of 2.3 years.
 

17


In the three months ended March 31, 2018, we granted an aggregate of 604,012 stock options under our 2008 Stock Incentive Plan to certain of our senior officers. The stock options will all vest on the third anniversary of the grant date, subject to achieving a closing stock price of at least $25.75 (a 25% premium above the February 28, 2018 grant-date closing stock price of $20.60) for at least 20 consecutive trading days within three years of the grant date, and will expire on the tenth anniversary of the grant date. In the three months ended March 31, 2017, we granted an aggregate of 987,781 stock options under our 2008 Stock Incentive Plan to certain of our senior officers. The stock options will all vest on the third anniversary of the grant date, subject to achieving a closing stock price of at least $23.74 (a 25% premium above the March 1, 2017 grant-date closing stock price of $18.99) for at least 20 consecutive trading days within three years of the grant date, and will expire on the tenth anniversary of the grant date.
 
The weighted average estimated fair value of stock options we granted in the three months ended March 31, 2018 and 2017 was $8.83 and $8.52 per share, respectively. These fair values were calculated based on each grant date, using a Monte Carlo simulation with the following assumptions:
 
 
Three Months Ended March 31,
 
 
2018
 
2017
Expected volatility
 
46%
 
49%
Expected dividend yield
 
0%
 
0%
Expected life
 
6.2 years
 
6.2 years
Expected forfeiture rate
 
0%
 
0%
Risk-free interest rate
 
2.72%
 
2.15%
 
The expected volatility used in 2018 for the Monte Carlo simulation incorporates historical volatility based on an analysis of historical prices of our stock. The expected volatility reflects the historical volatility for a duration consistent with the contractual life of the options; it does not consider the implied volatility from open-market exchanged options due to the limited trading activity and the transient nature of factors impacting our stock price volatility. The expected volatility used in 2017 for the Monte Carlo simulation incorporated historical and implied share-price volatility and was based on an analysis of historical prices of our stock and open-market exchanged options. The expected volatility reflected the historical volatility for a duration consistent with the contractual life of the options, as well as the volatility implied by the trading of options to purchase our stock on open-market exchanges. The historical share-price volatility for 2018 excludes the movements in our stock price for the period from August 15, 2017 through November 30, 2017 due to the departure of certain board members and officers, as well as reports that we were exploring a potential sale of the company. The historical share-price volatility for 2017 excludes the movements in our stock price on two dates (April 8, 2011 and April 11, 2011) with unusual volatility due to an unsolicited acquisition proposal. The expected life of options granted is derived from Tenet’s historical stock option exercise behavior, adjusted for the exercisable period (i.e., from the third anniversary through the tenth anniversary of the grant date). The risk-free interest rates are based on zero-coupon United States Treasury yields in effect at the date of grant consistent with the expected exercise time frames.
 
The following table summarizes information about our outstanding stock options at March 31, 2018:
 
 
Options Outstanding
 
Options Exercisable
Range of Exercise Prices 
 
Number of
Options
 
Weighted Average
Remaining
Contractual Life
 
Weighted Average
Exercise Price
 
Number of
Options
 
Weighted Average
Exercise Price
$0.00 to $4.569 
 
124,332

 
0.9 years
 
$
4.56

 
124,332

 
$
4.56

$4.57 to $19.759
 
1,292,315

 
7.5 years
 
18.18

 
5,434

 
18.99

$19.76 to $25.080
 
1,010,152

 
7.3 years
 
21.16

 
406,140

 
22.00

 
 
2,426,799

 
7.1 years
 
$
18.72

 
535,906

 
$
17.92



18


Restricted Stock Units
 
The following table summarizes restricted stock unit activity during the three months ended March 31, 2018
 
 
Restricted Stock
Units
 
Weighted Average Grant
Date Fair Value Per Unit
Unvested at December 31, 2017
 
2,253,988

 
$
35.20

Granted
 
578,831

 
22.43

Vested
 
(689,648
)
 
35.62

Forfeited
 
(80,543
)
 
42.01

Unvested at March 31, 2018
 
2,062,628

 
$
31.21

 
In the three months ended March 31, 2018, we granted 578,831 restricted stock units, of which 274,682 will vest and be settled ratably over a three-year period from the grant date, 288,660 will vest and be settled ratably over a two-year period from the grant date, and 9,421 will vest and be settled on the third anniversary of the grant date. The vesting of the remaining 6,068 restricted stock units is contingent on our achievement of specified performance goals for the years 2018 to 2020. Provided the goals are achieved, the performance-based restricted stock units will vest and settle on the third anniversary of the grant date. The actual number of performance-based restricted stock units that could vest will range from 0% to 200% of the 6,068 units granted, depending on our level of achievement with respect to the performance goals.
 
At March 31, 2018, there were $29 million of total unrecognized compensation costs related to restricted stock units. These costs are expected to be recognized over a weighted average period of 1.9 years.
 
Employee Retirement Plans
 
In both of the three-month periods ended March 31, 2018 and 2017, we recognized (i) service cost related to one of our frozen nonqualified defined benefit pension plans of approximately $1 million in salaries, wages and benefits expense, and (ii) other components of net periodic pension cost and net periodic postretirement benefit cost related to our frozen qualified and nonqualified defined benefit plans of approximately $4 million and $7 million, respectively, in other non-operating expense, net, in the accompanying Condensed Consolidated Statements of Operations.
 
NOTE 9. EQUITY

Rights Agreement

Effective March 5, 2018, our board of directors terminated the short-term rights plan, implemented on August 31, 2017, that was designed to protect our net operating loss carryforwards. The rights plan, which was previously scheduled to expire following the conclusion of our 2018 annual meeting of shareholders, was terminated based on the reduced value of the rights plan following recent tax law changes and an increase in our stock price since the rights plan was adopted, as well as shareholder feedback.

19



Changes in Shareholders’ Equity

The following table shows the changes in consolidated equity during the three months ended March 31, 2018 and 2017 (dollars in millions, share amounts in thousands):
 
 
Tenet Healthcare Corporation Shareholders’ Equity
 
 
 
 
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Loss
 
Accumulated
Deficit
 
Treasury
Stock
 
Noncontrolling
Interests
 
Total Equity
 
 
Shares
Outstanding
 
Issued Par
Amount
 
 
 
 
 
 
Balances at December 31, 2017
 
100,972

 
$
7

 
$
4,859

 
$
(204
)
 
$
(2,390
)
 
$
(2,419
)
 
$
686

 
$
539

Net income
 

 

 

 

 
99

 

 
31

 
130

Distributions paid to noncontrolling interests
 

 

 

 

 

 

 
(34
)
 
(34
)
Other comprehensive income
 

 

 

 
8

 

 

 

 
8

Accretion of redeemable noncontrolling interests
 

 

 
(37
)
 

 

 

 

 
(37
)
Purchases (sales) of businesses and noncontrolling interests
 

 

 
(4
)
 

 

 

 
(2
)
 
(6
)
Cumulative effect of accounting change
 

 

 

 
(43
)
 
43

 

 

 

Stock-based compensation expense, tax benefit and issuance of common stock
 
1,017

 

 
15

 

 

 
1

 

 
16

Balances at March 31, 2018
 
101,989

 
$
7

 
$
4,833

 
$
(239
)
 
$
(2,248
)
 
$
(2,418
)
 
$
681

 
$
616

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at December 31, 2016
 
99,686

 
$
7

 
$
4,827

 
$
(258
)
 
$
(1,742
)
 
$
(2,417
)
 
$
665

 
$
1,082

Net income (loss)
 

 

 

 

 
(53
)
 

 
36

 
(17
)
Distributions paid to noncontrolling interests
 

 

 

 

 

 

 
(36
)
 
(36
)
Other comprehensive income
 

 

 

 
3

 

 

 

 
3

Purchases (sales) of businesses and noncontrolling interests
 

 

 
4

 

 

 

 
(1
)
 
3

Cumulative effect of accounting change
 

 

 

 

 
56

 

 

 
56

Stock-based compensation expense and issuance of common stock
 
735

 

 
3

 

 

 

 

 
3

Balances at March 31, 2017
 
100,421

 
$
7

 
$
4,834

 
$
(255
)
 
$
(1,739
)
 
$
(2,417
)
 
$
664

 
$
1,094

 
Our noncontrolling interests balances at March 31, 2018 and December 31, 2017 were comprised of $68 million and $64 million, respectively, from our Hospital Operations and other segment, and $613 million and $622 million, respectively, from our Ambulatory Care segment. Our net income attributable to noncontrolling interests for the three months ended March 31, 2018 and 2017 in the table above were comprised of $2 million and $6 million, respectively, from our Hospital Operations and other segment, and $29 million and $30 million, respectively, from our Ambulatory Care segment.
 
NOTE 10. NET OPERATING REVENUES

Net operating revenues for our Hospital Operations and other and Ambulatory Care segments primarily consist of net patient service revenues, principally for patients covered by Medicare, Medicaid, managed care and other health plans, as well as certain uninsured patients under our Compact and other uninsured discount and charity programs. Net operating revenues for our Conifer segment primarily consist of revenues from providing revenue cycle management services to healthcare systems, as well as individual hospitals, physician practices, self-insured organizations, health plans and other entities.
        

20


The table below shows our sources of net operating revenues from continuing operations:
 
 
Three Months Ended
March 31,
 
 
 
2018
 
2017
 
Hospital Operations and other:
 
 

 
 

 
Net patient service revenues less provision for doubtful accounts from hospitals and related outpatient facilities
 
 
 
 
 
Medicare
 
$
782

 
$
862

 
Medicaid
 
321

 
275

 
Managed care
 
2,368

 
2,433

 
Self-pay
 
37

 
13

 
Indemnity and other
 
135

 
145

 
Total
 
3,643

 
3,728

 
Physician practices net patient service revenues less provision for doubtful accounts
 
161

 
178

 
Net patient service revenues less provision for doubtful accounts
 
3,804

 
3,906

 
Health plans
 
6

 
65

 
Revenue from other sources
 
137

 
144

 
Hospital Operations and other total prior to inter-segment eliminations
 
3,947

 
4,115

 
Ambulatory Care
 
498

 
455

 
Conifer
 
404

 
402

 
Inter-segment eliminations
 
(150
)
 
(159
)
 
Net operating revenues
 
$
4,699

 
$
4,813

 

Adjustments for prior-year cost reports and related valuation allowances, principally related to Medicare and Medicaid, increased revenues in the three month periods ended March 31, 2018 and 2017 by $2 million and $12 million, respectively. Estimated cost report settlements and valuation allowances are included in accounts receivable in the accompanying Condensed Consolidated Balance Sheets (see Note 2). We believe that we have made adequate provision for any adjustments that may result from final determination of amounts earned under all the above arrangements with Medicare and Medicaid.

The table below shows the composition of net operating revenues for our Ambulatory Care segment:
 
 
Three Months Ended
March 31,
 
 
 
2018
 
2017
 
Net patient service revenues less provision for doubtful accounts
 
$
469

 
$
428

 
Management fees
 
23

 
21

 
Revenue from other sources
 
6

 
6

 
Net operating revenues
 
$
498

 
$
455

 

The table below shows the composition of net operating revenues for our Conifer segment:
 
 
Three Months Ended
March 31,
 
 
 
2018
 
2017
 
Revenue cycle services – Tenet
 
$
144

 
$
147

 
Revenue cycle services – other customers
 
232

 
224

 
Other services – Tenet
 
6

 
12

 
Other services – other customers
 
22

 
19

 
Net operating revenues
 
$
404

 
$
402

 

Other services represent approximately 7% of Conifer’s revenue and include services such as value-based care, consulting and project services.
Performance Obligations

The following table includes Conifer’s revenue that is expected to be recognized in the future related to performance obligations that are unsatisfied, or partially unsatisfied, at the end of the reporting period. The amounts in the table primarily consist of revenue cycle management fixed fees, which are typically recognized ratably as the performance obligation is satisfied. The estimated revenue does not include volume or contingency based contracts, performance incentives, penalties or other variable consideration that is considered constrained. Conifer’s contract with Catholic Health Initiatives (“CHI”), a

21


minority interest owner of Conifer Health Solutions, LLC, represents the majority of the fixed fee revenue related to remaining performance obligations. Conifer’s contract term with CHI ends in 2032.
 
 
 
 
Nine Months
Ending
 
Years Ending
 
Later Years
 
 
 
 
December 31,
 
 
 
Total
 
2018
 
2019
 
2020
 
2021
 
2022
 
Performance obligations
 
$
8,378

 
$
496

 
$
659

 
$
652

 
$
603

 
$
574

 
$
5,394


NOTE 11. PROPERTY AND PROFESSIONAL AND GENERAL LIABILITY INSURANCE
 
Property Insurance
 
We have property, business interruption and related insurance coverage to mitigate the financial impact of catastrophic events or perils that is subject to deductible provisions based on the terms of the policies. These policies are on an occurrence basis. For the policy periods April 1, 2017 through March 31, 2018 and April 1, 2018 through March 31, 2019, we have coverage totaling $850 million per occurrence, after deductibles and exclusions, with annual aggregate sub-limits of $100 million for floods, $200 million for earthquakes and a per-occurrence sub-limit of $200 million for named windstorms with no annual aggregate. With respect to fires and other perils, excluding floods, earthquakes and named windstorms, the total $850 million limit of coverage per occurrence applies. Deductibles are 5% of insured values up to a maximum of $25 million for California earthquakes, floods and wind-related claims, and 2% of insured values for New Madrid fault earthquakes, with a maximum per claim deductible of $25 million. Floods and certain other covered losses, including fires and other perils, have a minimum deductible of $1 million.
 
Professional and General Liability Reserves
 
At March 31, 2018 and December 31, 2017, the aggregate current and long-term professional and general liability reserves in our accompanying Condensed Consolidated Balance Sheets were approximately $873 million and $854 million, respectively. These reserves include the reserves recorded by our captive insurance subsidiaries and our self-insured retention reserves recorded based on modeled estimates for the portion of our professional and general liability risks, including incurred but not reported claims, for which we do not have insurance coverage. We estimated the reserves for losses and related expenses using expected loss-reporting patterns discounted to their present value under a risk-free rate approach using a Federal Reserve seven-year maturity rate of 2.68% at March 31, 2018 and 2.33% at December 31, 2017.
 
If the aggregate limit of any of our professional and general liability policies is exhausted, in whole or in part, it could deplete or reduce the limits available to pay any other material claims applicable to that policy period.
 
Included in other operating expenses, net, in the accompanying Condensed Consolidated Statements of Operations is malpractice expense of $83 million and $70 million for the three months ended March 31, 2018 and 2017, respectively.
 
NOTE 12. CLAIMS AND LAWSUITS
 
We operate in a highly regulated and litigious industry. Healthcare companies are subject to numerous investigations by various governmental agencies. Further, private parties have the right to bring qui tam or “whistleblower” lawsuits against companies that allegedly submit false claims for payments to, or improperly retain overpayments from, the government and, in some states, private payers. We and our subsidiaries have received inquiries in recent years from government agencies, and we may receive similar inquiries in future periods. We are also subject to class action lawsuits, employment-related claims and other legal actions in the ordinary course of business. Some of these actions may involve large demands, as well as substantial defense costs. We cannot predict the outcome of current or future legal actions against us or the effect that judgments or settlements in such matters may have on us.

We are also subject to a non-prosecution agreement, as described in our Annual Report. If we fail to comply with this agreement, we could be subject to criminal prosecution, substantial penalties and exclusion from participation in federal healthcare programs, any of which could adversely impact our business, financial condition, results of operations or cash flows.

We record accruals for estimated losses relating to claims and lawsuits when available information indicates that a loss is probable and we can reasonably estimate the amount of the loss or a range of loss. Significant judgment is required in both the determination of the probability of a loss and the determination as to whether a loss is reasonably estimable. These determinations are updated at least quarterly and are adjusted to reflect the effects of negotiations, settlements, rulings, advice of legal counsel and technical experts, and other information and events pertaining to a particular matter. If a loss on a material

22


matter is reasonably possible and estimable, we disclose an estimate of the loss or a range of loss. In cases where we have not disclosed an estimate, we have concluded that the loss is either not reasonably possible or the loss, or a range of loss, is not reasonably estimable, based on available information.

Shareholder Derivative Litigation
 
In January 2017, the Dallas County District Court consolidated two previously disclosed shareholder derivative lawsuits filed by purported shareholders of the Company’s common stock on behalf of the Company against current and former officers and directors into a single matter captioned In re Tenet Healthcare Corporation Shareholder Derivative Litigation. The plaintiffs filed a consolidated shareholder derivative petition in February 2017. (A separate shareholder derivative lawsuit, captioned Horwitz, derivatively on behalf of Tenet Healthcare Corporation, was filed in January 2017 in the U.S. District Court for the Northern District of Texas; however, on January 19, 2018, the plaintiff in the Horwitz matter voluntarily dismissed his case.) The consolidated shareholder derivative petition alleges that false or misleading statements or omissions concerning the Company’s financial performance and compliance policies, specifically with respect to the previously disclosed civil qui tam litigation and parallel criminal investigation of the Company and certain of its subsidiaries (together, the “Clinica de la Mama matters”), caused the price of the Company’s common stock to be artificially inflated. In addition, the plaintiffs allege that the defendants violated GAAP by failing to disclose an estimate of the possible loss or a range of loss related to the Clinica de la Mama matters. The plaintiffs claim that they did not make demand on the Company’s board of directors to bring the lawsuit because such a demand would have been futile. In May 2017, the judge in the consolidated shareholder derivative litigation entered an order staying that matter pending the final resolution of the previously disclosed consolidated securities litigation that was ultimately dismissed in December 2017. The Company intends to vigorously defend against the allegations in the remaining purported shareholder derivative lawsuit.
 
Antitrust Class Action Lawsuit Filed by Registered Nurses in San Antonio
 
In Maderazo, et al. v. VHS San Antonio Partners, L.P. d/b/a Baptist Health Systems, et al., filed in June 2006 in the U.S. District Court for the Western District of Texas, a purported class of registered nurses employed by three unaffiliated San Antonio-area hospital systems allege those hospital systems, including our Baptist Health System, and other unidentified San Antonio regional hospitals violated Section §1 of the federal Sherman Act by conspiring to depress nurses’ compensation and exchanging compensation-related information among themselves in a manner that reduced competition and suppressed the wages paid to such nurses. The suit seeks unspecified damages (subject to trebling under federal law), interest, costs and attorneys’ fees. The case was stayed from 2008 through mid-2015. At this time, we are awaiting the court’s ruling on class certification and will continue to vigorously defend ourselves against the plaintiffs’ allegations. It remains impossible at this time to predict the outcome of these proceedings with any certainty; however, we believe that the ultimate resolution of this matter will not have a material effect on our business, financial condition or results of operations.
 
Ordinary Course Matters
 
We are also subject to other claims and lawsuits arising in the ordinary course of business, including potential claims related to, among other things, the care and treatment provided at our hospitals and outpatient facilities, the application of various federal and state labor laws, tax audits and other matters. Although the results of these claims and lawsuits cannot be predicted with certainty, we believe that the ultimate resolution of these ordinary course claims and lawsuits will not have a material effect on our business or financial condition.

New claims or inquiries may be initiated against us from time to time. These matters could (1) require us to pay substantial damages or amounts in judgments or settlements, which, individually or in the aggregate, could exceed amounts, if any, that may be recovered under our insurance policies where coverage applies and is available, (2) cause us to incur substantial expenses, (3) require significant time and attention from our management, and (4) cause us to close or sell hospitals or otherwise modify the way we conduct business.
 

23


The table below presents reconciliations of the beginning and ending liability balances in connection with legal settlements and related costs recorded during the three months ended March 31, 2018 and 2017
 
 
Balances at
Beginning
of Period
 
Litigation and
Investigation
Costs
 
Cash
Payments
 
Balances at
End of
Period
Three Months Ended March 31, 2018
 
 
 
 
 
 
 
 
Continuing operations
 
$
12

 
$
6

 
$
(7
)
 
$
11

Discontinued operations
 

 

 

 

 
 
$
12

 
$
6

 
$
(7
)
 
$
11

Three Months Ended March 31, 2017
 
 
 
 
 
 
 
 
Continuing operations
 
$
12

 
$
5

 
$

 
$
17

Discontinued operations
 

 

 

 

 
 
$
12

 
$
5

 
$

 
$
17

 
For the three months ended March 31, 2018 and 2017, we recorded costs of $6 million and $5 million, respectively, in continuing operations in connection with significant legal proceedings and governmental investigations.

NOTE 13. REDEEMABLE NONCONTROLLING INTERESTS IN EQUITY OF CONSOLIDATED SUBSIDIARIES
 
As previously disclosed, as part of the formation of our USPI joint venture in 2015, we entered into a put/call agreement (the “Put/Call Agreement”) with respect to the equity interests in the joint venture held by our joint venture partners. In January 2016, Welsh, Carson, Anderson & Stowe (“WCAS”), on behalf of our joint venture partners, delivered a put notice for the minimum number of shares they were required to put to us in 2016 according to the Put/Call Agreement. In April 2016, we paid approximately $127 million to purchase those shares, which increased our ownership interest in the USPI joint venture to approximately 56.3%. On May 1, 2017, we amended and restated the Put/Call Agreement to provide for, among other things, the acceleration of our acquisition of certain shares of our USPI joint venture. On July 3, 2017, we paid approximately $716 million for the purchase of 23.7% of our USPI joint venture, which increased our ownership interest to 80.0%, as well as the final adjustment to the 2016 purchase price. The purchase price for these additional shares was subject to adjustment for actual 2017 financial results in accordance with the terms of the Put/Call Agreement. See Note 20 for additional information about the subsequent settlement of this adjustment.
 
The following table shows the changes in redeemable noncontrolling interests in equity of consolidated subsidiaries during the three months ended March 31, 2018 and 2017:
 
 
Three Months Ended
March 31,
 
 
2018
 
2017
Balances at beginning of period 
 
$
1,866

 
$
2,393

Net income
 
61

 
53

Distributions paid to noncontrolling interests
 
(30
)
 
(27
)
Purchase accounting adjustments
 

 
11

Accretion of redeemable noncontrolling interests
 
37

 

Purchases and sales of businesses and noncontrolling interests, net
 
8

 

Balances at end of period 
 
$
1,942

 
$
2,430

 
The following tables show the composition by segment of our redeemable noncontrolling interests balances at March 31, 2018 and December 31, 2017, as well as our net income attributable to redeemable noncontrolling interests for the three months ended March 31, 2018 and 2017:
 
 
March 31, 2018
 
December 31, 2017
Hospital Operations and other
 
$
526

 
$
519

Ambulatory Care
 
1,186

 
1,137

Conifer
 
230

 
210

Redeemable noncontrolling interests
 
$
1,942

 
$
1,866


24


 
 
Three Months Ended
March 31,
 
 
2018
 
2017
Hospital Operations and other
 
$
6

 
$
4

Ambulatory Care
 
35

 
35

Conifer
 
20

 
14

Net income attributable to redeemable noncontrolling interests
 
$
61

 
$
53


NOTE 14. INCOME TAXES
 
During the three months ended March 31, 2018, we recorded income tax expense of $70 million in continuing operations on pre-tax income of $260 million compared to an income tax benefit of $33 million on pre-tax income of $4 million during the three months ended March 31, 2017. Our provision for income taxes during interim reporting periods is calculated by applying an estimate of the annual effective tax rate for the full year to “ordinary” income or loss (pre-tax income or loss excluding unusual or infrequently occurring discrete items) for the reporting period. In calculating “ordinary” income, non-taxable income or loss attributable to non-controlling interests has been deducted from pre-tax income or loss in the determination of the annualized effective tax rate used to calculate income taxes for the quarter. The reconciliation between the amount of recorded income tax expense (benefit) and the amount calculated at the statutory federal tax rate is shown in the following table:
 
Three Months Ended
March 31,
 
2018
 
2017
Tax expense at statutory federal rate of 21% (35% for 2017)
$
55

 
$
1

State income taxes, net of federal income tax benefit
10

 
(7
)
Tax benefit attributable to noncontrolling interests
(18
)
 
(26
)
Nondeductible goodwill
5

 

Change in tax contingency reserves, including interest

 
(2
)
Stock-based compensation
4

 
8

Change in valuation allowance-interest expense limitation
12

 

Other items
2

 
(7
)
Income tax expense (benefit)
$
70

 
$
(33
)
 
During the three months ended March 31, 2018, there were no adjustments to our estimated liabilities for uncertain tax positions. The total amount of unrecognized tax benefits at March 31, 2018 was $46 million, of which $44 million, if recognized, would impact our effective tax rate and income tax expense (benefit) from continuing operations. 
 
Our practice is to recognize interest and penalties related to income tax matters in income tax expense in our consolidated statements of operations. Total accrued interest and penalties on unrecognized tax benefits at March 31, 2018 were $3 million, all of which related to continuing operations.
 
At March 31, 2018, approximately $1 million of unrecognized federal and state tax benefits, as well as reserves for interest and penalties, may decrease in the next 12 months as a result of the settlement of audits, the filing of amended tax returns or the expiration of statutes of limitations.
 

25


NOTE 15. EARNINGS (LOSS) PER COMMON SHARE
 
The following table is a reconciliation of the numerators and denominators of our basic and diluted earnings (loss) per common share calculations for our continuing operations for three months ended March 31, 2018 and 2017. Net income available (loss attributable) to our common shareholders is expressed in millions and weighted average shares are expressed in thousands.
 
 
Net Income Available (Loss Attributable)
to Common
Shareholders
(Numerator)
 
Weighted
Average Shares
(Denominator)
 
Per-Share
Amount
Three Months Ended March 31, 2018
 
 

 
 

 
 

Net income available to Tenet Healthcare Corporation common shareholders
for basic loss per share
 
$
98

 
101,392

 
$
0.97

Effect of dilutive stock options, restricted stock units and deferred compensation units
 

 
1,264

 
(0.02
)
Net income available to Tenet Healthcare Corporation common shareholders for diluted loss per share
 
$
98

 
102,656
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