UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

          

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Form 10-Q

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Commission file number: 000-51251

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LifePoint Health, Inc.

(Exact Name of Registrant as Specified in its Charter)







(615) 920-7000

(Registrant’s Telephone Number, Including Area Code)



Not Applicable

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





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



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



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





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



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



As of July 20, 2018, the number of outstanding shares of the registrant’s Common Stock was 38,725,509.



 

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LifePoint Health, Inc.



TABLE OF CONTENTS







PART I - FINANCIAL INFORMATION







PART II - OTHER INFORMATION





 

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PART I – FINANCIAL INFORMATION



Item 1.  Financial Statements.



LIFEPOINT HEALTH, INC.



CONDENSED CONSOLIDATED STATEMENTS OF INCOME

Unaudited

(In millions, except per share amounts)





 





 

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LIFEPOINT HEALTH, INC.



CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in millions, except per share amounts)





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LIFEPOINT HEALTH, INC.



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

(In Millions)





 

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LIFEPOINT HEALTH, INC.



CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

For the Six Months Ended June 30, 2018

Unaudited

(In Millions)





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Note 1. Organization, Basis of Presentation and Recently Issued Accounting Standards

Organization

LifePoint Health, Inc., a Delaware corporation, acting through its subsidiaries, owns and operates community hospitals, regional health systems, physician practices, outpatient centers, and post-acute facilities in 22 states throughout the United States (“U.S.”). Unless the context otherwise indicates, LifePoint Health, Inc. and its subsidiaries are referred to herein as “LifePoint” or the “Company.”

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, and disclosures considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

Additionally, the accompanying unaudited condensed consolidated financial statements include the accounts of the Company and all subsidiaries and entities controlled by the Company through its direct or indirect ownership of a majority interest and exclusive rights granted to the Company as the sole general partner or controlling member of such entities, including Duke LifePoint Healthcare, a joint venture between LifePoint and a wholly-controlled affiliate of Duke University Health System, Inc., and the Regional Health Network of Kentucky and Southern Indiana, a joint venture between LifePoint and Norton Healthcare, Inc.  Furthermore, the Company consolidates any entities for which it receives the majority of the entity’s expected returns or is at risk for the majority of the entity’s expected losses based upon its investment or financial interest in the entity.  All significant intercompany accounts and transactions within the Company have been eliminated in consolidation.

Adoption of Recently Issued Accounting Standards

ASC 606-10, “Revenue from Contracts with Customers”



Effective January 1, 2018, the Company adopted the provisions of Accounting Standards Codification (“ASC”) 606-10, “Revenue from Contracts with Customers” (“ASC 606-10”), which supersedes most existing revenue recognition guidance, including industry-specific healthcare guidance, by applying the full retrospective method for all periods presented.  ASC 606-10 provides for a single comprehensive principles-based standard for the recognition of revenue across all industries through the application of the following five-step process:



Step 1: Identify the contract(s) with a customer.

Step 2: Identify the performance obligations in the contract.

Step 3: Determine the transaction price.

Step 4: Allocate the transaction price to the performance obligations in the contract.

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.



The adoption of the provisions of ASC 606-10 had no impact on the Company’s current or historical financial position, results of operations or cash flows.  Additionally, management does not anticipate that the provisions of ASC 606-10 will have an impact on the amount or timing of when the Company recognizes revenue prospectively.  However, in accordance with ASC 606-10, the Company now recognizes the majority of its previously reported provision for doubtful accounts, primarily related to its self-pay patient population, as a direct reduction to revenues as an implicit pricing concession, instead of separately as a discrete deduction to arrive at revenue, and the related presentation of the allowance for doubtful accounts has been eliminated for all periods presented.  The Company’s revenue recognition and accounts receivable policies are more fully described in Note 2.

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SAB 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act”



The Company is applying the guidance in accordance with Staff Accounting Bulletin 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act”, when accounting for the enactment-date effects of the Tax Cuts and Jobs Act (the “Tax Act”).  As of June 30, 2018, the Company has not completed its accounting for all of the tax effects of the Tax Act, and the Company did not make any adjustments to the provisional amounts that it recorded at December 31, 2017 during the six months ended June 30, 2018.  As the Company completes its analysis of the Tax Act, including the collection of data and interpretation of any additional guidance issued by the U.S. Treasury Department, the Internal Revenue Service, and other standard-setting bodies, it may make adjustments to the provisional amounts.  Those adjustments may materially impact the Company’s provision for income taxes in the period in which the adjustments are made.



Accounting Standards Not Yet Adopted



ASU 2016-2, “Leases”



In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-2 “Leases” (“ASU 2016-2”).  ASU 2016-2 requires the rights and obligations arising from lease contracts, including existing and new arrangements, to be recognized as assets and liabilities on the balance sheet.  ASU 2016-2 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those years.  Early adoption is permitted. The Company anticipates that the adoption of ASU 2016-2 will result in an increase in both total assets and total liabilities reflected in the Company’s balance sheets. The Company is still evaluating the impact that the adoption of this standard will have on its policies, procedures, financial disclosures, and control framework.



ASU 2018-2, “Income Statement – Reporting Comprehensive Income”



In January 2018, the FASB issued ASU 2018-2, “Income Statement – Reporting Comprehensive Income (Topic 220)” (“ASU 2018-2”), which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded income tax effects resulting from the Tax Act.  ASU 2018-2 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those years.  Early adoption is permitted.  The Company has not determined whether or not it will adopt ASU 2018-2, but the Company does not anticipate that the adoption of this standard would have a significant impact on its balance sheet. 



Note 2. Revenue Recognition and Accounts Receivable



Revenue from Contracts with Customers



Overview



The Company recognizes revenues in the period in which performance obligations are satisfied. Generally, the Company bills patients and third-party payers several days after the services are performed or the patient is discharged. Accounts receivable primarily consist of amounts due from third-party payers and patients. The Company’s ability to collect outstanding accounts receivable is critical to its results of operations and cash flows.  Amounts the Company receives for treatment of patients covered by governmental programs and third-party payers such as Medicare, Medicaid, health maintenance organizations (“HMOs”), preferred provider organizations (“PPOs”) and private insurers as well as directly from patients are subject to contractual adjustments, discounts and implicit price concessions.  Accordingly, the revenue and accounts receivable reported in the Company’s condensed consolidated financial statements are recorded at the net consideration to which the Company expects to be entitled to in exchange for providing patient care. 

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The majority of the Company’s performance obligations are satisfied over time for the delivery of patient care in both outpatient and inpatient settings.  Revenue for performance obligations satisfied over time is recognized based on actual charges incurred in relation to total expected charges for services anticipated to be provided.  The Company believes that this method provides a faithful depiction of the transfer of services over the term of the performance obligation based on the remaining services needed to satisfy the obligation. Generally, unsatisfied or partially unsatisfied performance obligations at the end of the reporting period are related to patients admitted to the Company’s hospitals that have not yet been discharged.  The performance obligations for these patients are typically satisfied when the patients are discharged, which generally occurs within a matter of days of admission.  Patients are generally billed when discharged, though they may be billed on an interim basis for longer stays. Accordingly, because all of the Company’s performance obligations are part of a contract that is expected to have a duration of one year or less, the Company has elected to apply the exemption provided by ASC 606-10 to not disclose the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied as of period end.



Subsequent adjustments that are determined to be the result of an adverse change in the patient’s or the payer’s ability to pay are recognized as bad debt expense.  With the adoption of ASC 606-10, bad debt expense is included under the caption “Other operating expenses, net” in the accompanying condensed consolidated statements of income, instead of separately as a deduction to arrive at revenue.  Bad debt expense for the three and six months ended June 30, 2018 and 2017 was not material for the Company. 



Contractual Discounts

The Company derives a significant portion of its revenues from Medicare, Medicaid and other payers that receive discounts from the Company’s established billing rates. The Company must estimate the total amount of these discounts to prepare its condensed consolidated financial statements. The Medicare and Medicaid regulations and various managed care contracts under which these discounts must be calculated are complex and are subject to interpretation and adjustment. The Company estimates contractual discounts on a payer-specific basis given its interpretation of the applicable regulations or contract terms. These interpretations sometimes result in payments that differ from the Company’s estimates. Additionally, updated regulations and contract renegotiations occur frequently, necessitating regular review and assessment of the estimation process by management. Subsequent changes in estimates for contractual discounts are reflected as an adjustment to revenues in the period of the change.  Medicare, Medicaid and other discounted payer accounts receivables are written off after they have been final settled with the payer.

Cost Report Settlements

Cost report settlements under reimbursement agreements with Medicare, Medicaid and certain other payers for retroactive 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.  These settlements are estimated based on the payment terms of the reimbursement agreement with the payer, correspondence from the payer, and the Company’s historical experience.  Estimated settlements are adjusted in future periods as final settlements are determined.  There is a reasonable possibility that recorded estimates will change by a material amount in the near term.  Net adjustments arising from a change in the transaction price for estimated settlements under reimbursement agreements resulted in increases to revenues of $1.4 million and $14.3  million during the three months ended June 30, 2018 and 2017, respectively, and $9.9 million and $21.1 million for the six months ended June 30, 2018 and 2017, respectively.

The net cost report settlements due from the Company at June 30, 2018 were $3.2 million and are included under the caption “Other current liabilities” in the accompanying unaudited condensed consolidated balance sheet.  The net cost report settlements due to the Company at December 31, 2017 were $2.7 million and are included under the caption “Accounts receivable” in the accompanying unaudited condensed consolidated balance sheet.  The Company’s management believes that adequate provisions have been made for adjustments that may result from final determination of amounts earned under these programs consistent with the constraints that are required by ASC 606-10.

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Self-Pay Revenues

Self-pay revenues are derived from patients who do not have any form of healthcare coverage as well as from patients with third party healthcare coverage related to the patient responsibility portion, including deductibles and co-payments.  The Company evaluates these patients, after the patient’s medical condition is determined to be stable, for their ability to pay based upon federal and state poverty guidelines, qualifications for Medicaid or other governmental assistance programs.  The Company estimates the transaction price for self-pay patients and the patient responsibility portion using a number of analytical tools, benchmarks and market conditions. No single statistic or measurement determines the transaction price for these patients.  Some of the analytical tools that the Company utilizes include, but are not limited to, historical cash collection experience, revenue trends by payer classification and revenue days in accounts receivable. 



The revenues associated with self-pay patients are reported at the net amount that the Company expects to collect.  Because the Company provides care to patients regardless of their ability to pay, the Company has determined that the differences between the amounts it bills based on gross or discounted charges and the amounts the Company expects to collect represent implicit price concessions.  The final amount that will be received from the patient is not known at the date of service, and the Company accounts for this variable consideration in accordance with the provisions of ASC 606-10.  Self-pay accounts receivable are written off after collection efforts have been followed in accordance with the Company’s policies. 



Charity Care



The Company provides care without charge to certain patients that qualify under the local charity care policy of each of its hospitals. The Company estimates that its costs of care provided under its charity care programs approximated $5.5 million and $6.7  million for the three months ended June 30, 2018 and 2017, respectively, and $10.8 million and $13.6 million for the six months ended June 30, 2018 and 2017, respectively.  The Company does not report a charity care patient’s charges in revenues as it is the Company’s policy not to pursue collection of amounts related to these patients, and therefore contracts with these patients do not exist.



The Company’s management estimates its costs of care provided under its charity care programs utilizing a calculated ratio of costs to gross charges multiplied by the Company’s gross charity care charges provided.  The Company’s gross charity care charges include only services provided to patients who are unable to pay and qualify under the Company’s local charity care policies.  To the extent the Company receives reimbursement through the various governmental assistance programs in which it participates to subsidize its care of indigent patients, the Company does not include these patients’ charges in its cost of care provided under its charity care program. 

Financing Component

 

The Company has elected to apply the practical expedient permitted under ASC 606-10 and does not adjust the estimated amount of consideration from patients and third-party payers for the effects of a significant financing component because the Company expects that the period between the time the service is provided to a patient and the time that the patient or a third-party payer pays for that service will be one year or less.



Rental Income



The Company leases certain real estate assets it owns to unrelated third parties, primarily medical office buildings to non-employed physicians. The Company recognizes rental income for these operating lease arrangements in which the Company is the lessor on a straight-line basis over the lease term in accordance with ASC 840-10, “Leases”. 



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Concentration of Revenues



The Company’s revenues by source, as well as approximate percentages of revenues, were as follows for the three and six months ended June 30, 2018 and 2017 (in millions):



During the three months ended June 30, 2018 and 2017, approximately 50.8% and 51.7%, respectively, of the Company’s revenues related to patients participating in the Medicare and Medicaid programs, collectively.  During the six months ended June 30, 2018 and 2017, approximately 51.2% and 52.6%, respectively, of the Company’s revenues related to patients participating in the Medicare and Medicaid programs, collectively.    The Company’s management recognizes that revenues and receivables from government agencies are significant to the Company’s operations, but it does not believe that there are significant credit risks associated with these government agencies. The Company’s management does not believe that there are any other significant concentrations of revenues from any particular payer that would subject the Company to any significant credit risks in the collection of its accounts receivable.

The Company’s revenues by primary service type and approximate percentages of revenues were as follows for the three and six months ended June 30, 2018 and 2017 (in millions):









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The Company’s revenues are particularly sensitive to regulatory and economic changes in certain states where the Company generates significant revenues. The following is an analysis by state of revenues as a percentage of the Company’s total revenues for those states in which the Company generated significant revenues for the three and six months ended June 30, 2018 and 2017:





Any changes in the current demographic, economic, competitive or regulatory conditions, or to Medicaid programs, in the above-mentioned states could have an adverse effect on the Company’s revenues or results of operations.

Certain changes have been made to the Company’s classification of historical sources of revenues and revenue concentration by state to reflect the Company’s adoption of ASC 606-10. 

Note 3. General and Administrative Costs

The majority of the Company’s expenses are “cost of revenue” items. Costs that could be classified as “general and administrative” by the Company would include its health support center overhead costs, which were $52.4 million and $56.9 million for the three months ended June 30, 2018 and 2017, respectively, and $111.6 million and $118.7 million for the six months ended June 30, 2018 and 2017, respectively.



Note 4. Fair Value of Financial Instruments

In accordance with ASC 825-10, “Financial Instruments” and ASC 820-10, “Fair Value Measurements and Disclosures” (“ASC 820-10”), the fair value of the Company’s financial instruments are further described as follows.

Cash and Cash Equivalents, Accounts Receivable and Accounts Payable

The carrying amounts reported in the accompanying unaudited condensed consolidated balance sheets for cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short-term maturity of these instruments.

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Long-Term Debt

The carrying amounts and fair values of the Company’s senior secured term loan facility (the “Term Facility”) and senior secured revolving credit facility (the “Revolving Facility”)  under its senior secured credit agreement with, among others, Citibank, N.A. as administrative agent, and the lenders party thereto (the “Senior Credit Agreement”),  5.5% unsecured senior notes due December 1, 2021 (the “5.5% Senior Notes”), 5.875% unsecured senior notes due December 1, 2023 (the “5.875% Senior Notes”) and 5.375% unsecured senior notes due May 1, 2024 (the “5.375% Senior Notes”), excluding unamortized debt issuance costs and premium, as of June 30, 2018 and December 31, 2017 were as follows (in millions):



The fair values of the Company’s long-term debt instruments were estimated based on the average bid and ask price as determined using published rates and categorized as Level 2 within the fair value hierarchy in accordance with ASC 820-10.  

Note 5. Other Non-Operating Gains and Losses

Louisiana Market Divestitures

In March 2018, the Company entered into definitive agreements to sell the assets of Mercy Regional Medical Center (“Mercy”) located in Ville Platte, Louisiana, Acadian Medical Center (“Acadian”), which is a campus of Mercy located in Eunice, Louisiana, and Minden Medical Center (“Minden”) located in Minden, Louisiana.  The Company anticipates these sales will be completed during the third quarter of 2018.  



Included in the Company’s consolidated results of operations for the three months ended June 30, 2018 and 2017 are net operating losses before income taxes attributable to these three hospitals of $0.5 million and $2.0 million, respectively. Additionally, included in the Company’s consolidated results of operations for the six months ended June 30, 2018 and 2017 are net operating losses before income taxes attributable to these three hospitals of $1.7 million and $3.4 million, respectively. 



The Company has recorded both an asset and a liability of $26.9 million and $4.3 million, respectively, related to the assets and liabilities held for sale in connection with these transactions included under the captions “Other current assets” and “Other current liabilities” in the accompanying unaudited condensed consolidated balance sheet as of June 30, 2018.



During the six months ended June 30, 2018, the Company recognized impairment losses in the aggregate of $74.3 million, $58.2 million net of income taxes, or $1.47 loss per diluted share, primarily in connection with the Company’s entry into definitive agreements to sell the assets of Mercy, Acadian and Minden, which is included under the caption “Other non-operating (gains) losses, net” in the accompanying unaudited condensed consolidated statement of income for the six months ended June 30, 2018.  The impairment losses include the write-down of property, equipment, allocated goodwill and certain other assets to their estimated fair values.



In-Home Healthcare Partnership

Effective January 1, 2017, the Company entered into a joint venture agreement with a wholly-owned subsidiary of LHC Group, Inc. (“LHC”) to form In-Home Healthcare Partnership (“IHHP”), the purpose of which is to own and operate the Company’s home health agencies and hospices and certain of LHC’s home health agencies and hospices, leveraging the combined expertise of the Company and LHC to enhance home health and hospice services in the communities served by the Company’s hospitals.  The Company accounts for its ownership interest in IHHP as an equity method investment in accordance with ASC 323-10, “Investments – Equity Method and Joint Ventures”. 

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Throughout 2017, ownership and management of 19 of the Company’s home health agencies and 10 of the Company’s hospices were transferred to IHHP over the course of three phases.  Additionally, effective February 2, 2018, ownership and management of one remaining home health agency was transferred to IHHP in a fourth and final phase (“Phase IV”).  In connection with Phase IV, the Company transferred assets primarily comprised of accounts receivable and allocated goodwill in exchange for cash, and recognized a gain of approximately $1.6 million, $1.2 net of income taxes, or $0.03 earnings per diluted share, which is included under the caption “Other non-operating (gains) losses, net” in the accompanying unaudited condensed consolidated statement of income for the six months ended June 30, 2018.

Gain on Sale of Ancillary Rehabilitation Facility

During the three months ended June 30, 2018, the Company recognized a net gain of $3.2 million, $2.4 million net of income taxes, or $0.06 earnings per diluted share, primarily attributable to the sale of an ancillary rehabilitation facility at one of our hospital campuses.



Note 6. Redeemable Noncontrolling Interests



Certain of the Company’s joint venture partners’ noncontrolling interests include redemption features that cause these interests not to meet the requirements for classification as equity in accordance with ASC 480-10-S99-3, “Distinguishing Liabilities from Equity”. Redemption features related to these interests could require the Company to deliver cash, if exercised.  Accordingly, these redeemable noncontrolling interests are classified in the mezzanine section of the Company’s accompanying unaudited condensed consolidated balance sheets under the caption “Redeemable noncontrolling interests”. 



Effective June 1, 2018, the Company purchased its joint venture partner’s 20% noncontrolling interest in Fauquier Health (“Fauquier”), a 97 bed hospital and 113 bed long-term care facility located in Warrenton, Virginia, for approximately $49.9 million.  The total transaction price includes the estimated fair value of the joint venture partner’s 20% interest in Fauquier in addition to undistributed earnings allocable to the joint venture partner as of the transaction date.    As a result of this transaction,  Fauquier became a wholly-owned subsidiary of the Company.



The following table presents the changes in the Company’s redeemable noncontrolling interests, which are included in the accompanying unaudited condensed consolidated balance sheets at June 30, 2018 and December 31, 2017 (in millions):









Note 7. Goodwill and Intangible Assets 

Goodwill

The Company accounts for its acquisitions in accordance with ASC 805-10, “Business Combinations” using the acquisition method of accounting. Goodwill represents the excess of the cost of an acquired entity over the net amounts assigned to assets acquired and liabilities assumed. In accordance with ASC 350-10, “Intangibles — Goodwill and Other” goodwill and intangible assets with indefinite lives are reviewed by the Company at least annually for impairment. The Company’s business comprises a single reporting unit for impairment test purposes. For the purposes of these analyses, the Company’s estimates of fair value are based on a combination of the income approach, which estimates the fair value of the Company based on its future discounted cash flows, and the market approach, which estimates the fair value of the Company based on comparable market prices. The Company performed its most recent annual impairment test as of October 1, 2017 and did not incur an impairment charge.



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Intangible Assets



Summary of Intangible Assets



The following table provides information regarding the Company’s intangible assets, which are included in the accompanying unaudited condensed consolidated balance sheets at June 30, 2018 and December 31, 2017 (in millions):





Contract-Based Physician Minimum Revenue Guarantees



The Company has committed to provide certain financial assistance pursuant to recruiting agreements, or “physician minimum revenue guarantees,” with various physicians practicing in the communities it serves. In consideration for a physician relocating to one of its communities and agreeing to engage in private practice for the benefit of the respective community, the Company may advance certain amounts of money to a physician to assist in establishing his or her practice.



The Company accounts for its physician minimum revenue guarantees in accordance with the provisions of ASC 460-10, “Guarantees” (“ASC 460-10”). In accordance with ASC 460-10, the Company records a contract-based intangible asset and a related guarantee liability for new physician minimum revenue guarantees. The contract-based intangible asset is amortized over the period of the physician contract, which typically ranges from three to five years and is included as an expense under the caption “Other operating expenses, net” in the accompanying unaudited condensed consolidated statements of income.  The Company’s liability for contract-based physician minimum revenue guarantees was $9.9 million and $6.5 million as of June 30, 2018 and December 31, 2017, respectively. These amounts are included in the accompanying unaudited condensed consolidated balance sheets under the caption “Other current liabilities”.

Non-Competition Agreements

The Company has entered into non-competition agreements with certain physicians and other individuals which are amortized on a straight-line basis over the term of the agreements.

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Certificates of Need and Certificates of Need Exemptions



The construction of new facilities, the acquisition or expansion of existing facilities and the addition of new services and certain equipment at the Company’s facilities may be subject to state laws that require prior approval by state regulatory agencies. These certificate of need laws generally require that a state agency determine the public need and give approval prior to the construction or acquisition of facilities or the addition of new services. The Company has acquired facilities in certain states that have adopted certificate of need laws.  The Company has determined that these intangible assets have an indefinite useful life.

Licenses, Provider Numbers, Accreditations, Trade Names and Other

To operate certain of its facilities, including facilities acquired by the Company, the Company must obtain certain licenses, provider numbers and accreditations from federal, state and other accrediting agencies.  Additionally, the Company has acquired trade names in connection with certain acquisitions.  The Company has determined that these intangible assets have an indefinite useful life.



Note 8.  Common Stock in Treasury

The Company’s Board of Directors authorizes, from time to time, plans for the repurchase of outstanding shares of its common stock either in the open market or through privately negotiated transactions, subject to market conditions, regulatory constraints and other customary factors. The Company repurchased approximately 0.8 million and 0.3 million shares for an aggregate purchase price, including commissions, of $40.0 million and $20.4 million at an average purchase price of $48.35 and $64.32 per share during the six months ended June 30, 2018 and 2017, respectively.  As of June 30, 2018, the Company had remaining authority to repurchase approximately $190.0 million in shares through April 24, 2019 in accordance with a repurchase plan approved by the Company’s Board of Directors on October 24, 2017. The Company is not obligated to repurchase any specific number of shares under its repurchase plan.  The Company has designated the shares repurchased in accordance with its repurchase plans as treasury stock.

The Company redeems shares from employees for minimum statutory tax withholding purposes upon vesting of certain stock awards granted pursuant to the Company’s various stockholder approved stock-based compensation plans. The Company redeemed approximately  0.1 million shares vested under these plans during each of the six months ended June 30, 2018 and 2017 for aggregate purchase prices of approximately $2.9 million and $6.0 million, respectively. The Company has designated these shares as treasury stock. 

Note 9. Stock-Based Compensation 



Overview



The Company issues stock-based awards, including stock options and other stock-based awards (nonvested stock, restricted stock, restricted stock units and performance shares) to certain officers, employees and non-employee directors in accordance with the Company’s stockholder-approved Amended and Restated 2013 Long-Term Incentive Plan (the “LTIP”). The Company accounts for its stock-based awards in accordance with the provisions of ASC 718-10, “Compensation – Stock Compensation” (“ASC 718-10”), and accordingly recognizes compensation expense over each of the stock-based award’s requisite service period based on the estimated grant date fair value.

Notwithstanding the specific grant vesting requirements, award agreements under the LTIP may provide for accelerated vesting in certain circumstances.  Award agreements generally provide for full vesting upon the death or disability of the participant or upon a change in control or termination of employment.  Some award agreements also provide for partial or full vesting upon involuntary termination of employment, provided that if the award is performance-based then the accelerated vesting would occur only if the performance goals are attained.

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Stock Options

The Company granted options to purchase 496,781 and 885,122 shares of the Company’s common stock to certain officers and employees in accordance with the LTIP during the six months ended June 30, 2018 and 2017, respectively.  Options to purchase shares granted to the Company’s officers and employees in accordance with the LTIP were granted with an exercise price equal to the fair market value of the Company’s common stock on the day of grant, determined based on the closing price on the trading date immediately prior to the grant date. The options granted during the six months ended June 30, 2018 and 2017 become ratably exercisable beginning one year from the date of grant to either three or four years after the date of grant and expire ten years from the date of grant.

The Company estimated the fair value of stock options granted using a binomial lattice option valuation model and a single option award approach.  The Company uses a binomial lattice option valuation model because it considers characteristics of fair value option pricing, such as an option’s contractual term and the probability of exercise before the end of the contractual term.  In addition, the complications surrounding the expected term of an option are material, as indicated in ASC 718-10.  Given the Company’s relatively large pool of unexercised options, the Company believes a binomial lattice option valuation model that specifically addresses this fact and models a full term of exercises is the most appropriate and reliable means of valuing its stock options.   The Company is amortizing the fair value on a straight-line basis over the requisite service period of the awards, which is the vesting period of three or four years.  The stock options vest at either 33.3% or 25.0% on each grant anniversary date over three or four years of continued employment, respectively.

The following table shows the weighted average assumptions the Company used to develop the fair value estimates under its lattice option valuation models and the resulting estimates of weighted-average fair value per share of stock options granted during the six months ended June 30, 2018 and 2017:





The total intrinsic value of stock options exercised during the six months ended June 30, 2018 and 2017 was $1.1 million and $9.6 million, respectively. The Company received $1.7 million and $15.3 million in cash from stock option exercises during the six months ended June 30, 2018 and 2017, respectively. The actual tax benefit realized for the tax deductions from stock option exercises was $0.2 million and $2.0 million for the six months ended June 30, 2018 and 2017, respectively.

As of June 30, 2018, there was $20.8 million of total estimated unrecognized compensation cost related to stock option compensation arrangements. Total estimated unrecognized compensation cost will be adjusted for future changes in estimated forfeitures. The Company expects to recognize that cost over a weighted average period of 1.7 years.

Other Stock-Based Awards

The Company granted  309,511 and  141,882 restricted stock units to certain officers, employees and non-employee directors in accordance with the LTIP during the six months ended June 30, 2018 and 2017, respectively. Vesting and payment of these restricted stock units are generally subject to continuing service of the employee or non-employee director over the ratable vesting periods beginning one year from the date of grant to either three or four years after the date of grant, or cliff-vesting periods one year from the date of grant.  The fair values of these restricted stock units were determined based on the closing price of the Company’s common stock on the trading date immediately prior to the grant date. 

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During the six months ended June 30, 2018 and 2017,  the Company granted 272,671 and 144,535 targeted performance-based restricted stock units, respectively, that vest subject to the achievement of performance and market conditions.   In addition to the achievement of the performance and market conditions, these performance-based restricted stock units are generally subject to the continuing service of the employee over cliff-vesting periods of three or four years from the grant date.

The performance condition for the targeted performance-based restricted stock units granted during each of the six months ended June 30, 2018 and 2017 is based on the Company’s average level of achievement of annually established targets for diluted earnings per share over a three year performance measurement period.   Additionally, the number of shares payable under certain of the targeted performance-based restricted stock units granted during each of the six months ended June 30, 2018 and 2017 are based, in part, on the Company’s three-year annualized total shareholder return relative to a peer group, Standard and Poor’s Global Industry Classification Standard’s Sub-Industry:  Health Care Facilities with over $500.0 million in revenues or its equivalent.  For these restricted stock units, the number of shares payable at the end of the vesting periods ranges from 0% to 200% of the targeted units based on the Company’s actual performance results compared to the targets. For the restricted stock units not subject to the Company’s total shareholder return,  the number of shares payable at the end of the vesting periods ranges from 50% to 150% of the targeted units based on the Company’s actual performance results compared to the targets.

The fair value of these restricted stock units was determined based on a combination, where applicable, of the closing price of the Company’s common stock on the trading date immediately prior to the grant date for units subject to performance conditions, or at its Monte-Carlo simulation value for units subject to market conditions.  The Company recognizes compensation expense for the portion of the targeted performance-based restricted stock units subject to market conditions even if the condition is never satisfied.  However, if the performance conditions are not met for the portion of the targeted performance-based restricted stock units subject to such performance conditions, no compensation expense will be recognized, and any previously recognized compensation expense will be reversed.

As of June 30, 2018, there was $31.8 million of total estimated unrecognized compensation cost related to other stock-based awards. Total estimated unrecognized compensation cost will be adjusted for future changes in estimated forfeitures. The Company expects to recognize that cost over a weighted average period of 2.6 years.

The following table summarizes the Company’s total stock-based compensation expense as well as the total recognized tax benefits related thereto for the three and six months ended June 30, 2018 and 2017 (in millions):



     The Company did not capitalize any stock-based compensation cost during the six months ended June 30, 2018 or 2017.  As of June 30, 2018, there was $52.6 million of total estimated unrecognized compensation cost related to all of the Company’s stock-based compensation arrangements. Total estimated unrecognized compensation cost may be adjusted for future changes in estimated forfeitures. The Company expects to recognize that cost over a weighted-average period of  2.2 years.



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Note 10. Commitments and Contingencies 

Legal Proceedings and General Liability Claims 

Healthcare facilities are, from time to time, subject to claims and suits arising in the ordinary course of business, including claims for damages for personal injuries, medical malpractice, breach of contracts, wrongful restriction of or interference with physicians’ staff privileges and employment related claims. In certain of these actions, plaintiffs request payment for damages, including punitive damages that may not be covered by insurance.



In addition, healthcare facilities are subject to the regulation and oversight of various state and federal governmental agencies. Further, under the federal False Claims Act, private parties have the right to bring qui tam, or “whistleblower,” suits against healthcare facilities that submit false claims for payments to, or improperly retain identified overpayments from, governmental payers. Some states have adopted similar state whistleblower and false claims provisions. These qui tam or “whistleblower” actions initiated under the civil False Claims Act may be pending but placed under seal by the court to comply with the False Claims Act’s requirements for filing such suits. As a result, they could be proceeding without the Company’s knowledge. If a provider is found to be liable under the federal False Claims Act, the provider may be required to pay up to three times the actual damages sustained by the government plus mandatory civil monetary penalties of between $11,181 to $22,363 for each separate false claim, subject to annual adjustment for inflation.



Although the healthcare industry has seen numerous ongoing investigations related to compliance and billing practices, hospitals, in particular, continue to be a primary enforcement target for the Office of Inspector General (“OIG”), the Department of Justice  (“DOJ”) and other governmental agencies and fraud and abuse programs. Certain of the Company’s individual facilities have received, and from time to time, other facilities may receive, inquiries or subpoenas from Medicare Administrative Contractors, and federal and state agencies. Any proceedings against the Company may involve potentially substantial amounts as well as the possibility of civil, criminal, or administrative fines, penalties, or other sanctions, which could be material. Settlements of suits involving Medicare and Medicaid issues routinely require both monetary payments as well as corporate integrity agreements. Depending on whether the underlying conduct in these or future inquiries or investigations could be considered systemic, their resolution could have a material adverse effect on the Company’s financial position, results of operations and liquidity.



The Company does not control and cannot predict with certainty the progress or final outcome of discussions with government agencies, investigations and legal proceedings against the Company.  Therefore, the final amounts paid to resolve such matters, claims and obligations could be material and could materially differ from amounts currently recorded, if any.  Any such changes in the Company’s estimates or any adverse judgments could materially adversely impact the Company’s future results of operations and cash flows.



On September 16, 2013, the Company and two of its affiliated hospitals, Vaughan Regional Medical Center, located in Selma, Alabama, and Raleigh General Hospital, located in Raleigh, West Virginia, made a voluntary self-disclosure to the Civil Division of the DOJ. The voluntary self-disclosures related to concerns regarding the clinical appropriateness of certain interventional cardiology procedures conducted by one physician in each of these hospitals’ cardiac catheterization laboratories. The Company cooperated with the government in its investigations of the voluntary self-disclosure and provided additional documentation, as requested. The Company believes that the government’s investigations are now closed.   Following reviews by independent interventional cardiologists, the Company notified patients of these two physicians who may have received an unnecessary procedure of such fact.

The Company and/or Vaughan Regional Medical Center and several of the Company’s subsidiaries, as well as Dr. Seydi V. Aksut and certain parties unaffiliated with the Company, were named defendants in 26 individual lawsuits filed since December 2014 in the Circuit Court of Dallas County, Alabama, alleging that patients at Vaughan Regional Medical Center underwent improper interventional cardiology procedures.  These lawsuits, as they pertain to entities affiliated with the Company, were settled and dismissed in February 2017.

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Two putative class action lawsuits were filed in the Circuit Court of Dallas County, Alabama.  The first putative class action lawsuit, filed in November 2014, sought certification of a class consisting of all Alabama citizens who underwent an invasive cardiology procedure at any Company-owned Alabama hospital and who received notice regarding the medical necessity of that procedure.  The Company reached an agreement in principle to settle this lawsuit, and on August 14, 2017, the Court entered an order certifying this class for settlement purposes only and granted the parties’ motion for preliminary approval of settlement.  A fairness hearing to determine whether the settlement was fair, reasonable, and adequate, and whether it should be approved by the Court, was conducted on November 8, 2017, at which time the settlement was approved. The Court’s order approving settlement became final and non-appealable on January 2, 2018.

The second putative class action lawsuit, filed in February 2015 , sought certification of a class of individuals that underwent an interventional cardiology procedure that was not medically necessary and performed by Dr. Aksut, and asserted, among other claims, claims under the Racketeer Influenced and Corrupt Organizations Act (“RICO”).  In March 2015, the Company removed the second class action to the U.S. District Court in Mobile, Alabama which dismissed with prejudice the RICO claims and refused to exercise jurisdiction over the remaining state law claims, and the lawsuit was remanded for further proceedings.  In July 2017, this lawsuit was settled and dismissed as it pertained to entities affiliated with the Company.



Additionally, the Company and two of its subsidiaries, including Raleigh General Hospital, as well as Dr. Kenneth Glaser, have been named in 82 individual lawsuits filed in the circuit court of Raleigh County, West Virginia.  Additionally, three patients had notified Raleigh General Hospital of their claims and intent to file a lawsuit.  These lawsuits and claims alleged that patients at Raleigh General Hospital underwent unnecessary interventional cardiology procedures.  In January 2017, all parties to these lawsuits and claims entered into settlement agreements settling all claims against the Company, its subsidiaries, Raleigh General Hospital and Dr. Kenneth Glaser.  Following these settlements, two additional lawsuits were filed against the same parties alleging the same claims.  These two lawsuits were settled in March 2017.  In February 2017, the Company received a notice of a threatened claim with respect to a putative class action lawsuit in the Circuit Court of Raleigh County, West Virginia against it, two of its subsidiaries, Raleigh General Hospital and Dr. Glaser, alleging that patients at Raleigh General Hospital underwent medically unnecessary interventional cardiology procedures and seeking to certify a class of such patients.  The threatened claims seek compensatory and punitive damages, costs, attorneys’ fees and other available damages.



The settlements described above were accomplished within the amounts previously accrued for loss contingencies for cardiology-related lawsuits. Additional claims with respect to these matters, including claims involving patients to whom the Company did not send notice, may be asserted against the Company or the hospitals.    Any present or future claims that are ultimately successful could result in the Company and/or the hospitals being found liable, and such liability could be material.    The Company accrues an estimate for a contingent liability when losses are both probable and reasonably estimable.  The Company reviews its accruals each quarter and adjusts them to reflect the impact of developments, advice of legal counsel and other information pertaining to a particular matter.

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Capital Expenditure Commitments

The Company is reconfiguring some of its facilities to more effectively accommodate patient services and to provide for a greater variety of services. The Company has incurred approximately $341.6 million in costs related to uncompleted projects as of June 30, 2018, which is included under the caption “Construction in progress” in the accompanying unaudited condensed consolidated balance sheet. At June 30, 2018, these uncompleted projects had an estimated cost to complete of approximately $359.7 million. The estimated timeframe for completion of these projects generally ranges from less than one year up to three years.  Additionally, the Company is subject to annual capital expenditure commitments in connection with several of its facilities.  As part of the Company’s current acquisition strategy, management expects capital expenditure commitments to be a component of future acquisitions.  At June 30, 2018, the Company estimated its total remaining capital expenditure commitments, including commitments for routine projects, to be approximately $1,229.2 million, which generally have remaining terms of four to eight years.

Marquette Replacement Facility



In December 2015, the Company acquired a parcel of land in Marquette, Michigan, and in May 2016, began constructing a replacement hospital for the existing Marquette General Hospital (“Marquette General”).  The Company anticipates that it will continue to operate the existing hospital campus until such point that the replacement hospital is ready for its intended use.  The Company currently expects that the construction of the replacement hospital will conclude in early 2019.   The assets associated with Marquette General are currently recorded at their estimated fair value as measured under ASC 820-10, using estimated future net cash flows expected to be generated by market participants.  The estimate of fair value is subject to change as a result of negotiations with interested parties, regulatory approvals, or changes in market conditions.



Acquisitions



The Company has historically acquired businesses with prior operating histories. Acquired businesses may have unknown or contingent liabilities, including liabilities for failure to comply with healthcare laws and regulations, medical and general professional liabilities, workers compensation liabilities, previous tax liabilities and unacceptable business practices. Although the Company institutes policies designed to conform practices to its standards following completion of acquisitions, there can be no assurance that the Company will not become liable for past activities that may later be asserted to be improper by private plaintiffs or government agencies. Although the Company generally seeks to obtain indemnification from prospective sellers covering such matters, there can be no assurance that any such matter will be covered by indemnification, or if covered, that such indemnification will be adequate to cover potential losses and fines.   





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Note 11. Guarantor and Non-Guarantor Supplementary Information



The 5.5% Senior Notes, 5.875% Senior Notes and 5.375% Senior Notes are jointly and severally guaranteed on an unsecured senior basis by substantially all of the Company’s existing subsidiaries that guarantee the Company’s Senior Credit Agreement. The guarantors are 100% owned by the Company. Additionally, the guarantees are full and unconditional and are subject to customary release provisions as set forth in the agreements for the 5.5% Senior Notes, 5.875% Senior Notes and 5.375% Senior Notes.



The condensed consolidating financial information for the parent issuer, 100% owned guarantor subsidiaries, non-guarantor subsidiaries, certain eliminations and the Company is presented below for the three and six months ended June 30, 2018 and 2017 and as of June 30, 2018 and December 31, 2017. 



LIFEPOINT HEALTH, INC.
Condensed Consolidating Statements of Income
For the Three Months Ended June 30, 2018

(In millions)







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LIFEPOINT HEALTH, INC.
Condensed Consolidating Statements of Income
For the Three Months Ended June 30, 2017

(In millions)







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LIFEPOINT HEALTH, INC.
Condensed Consolidating Statements of Income
For the Six Months Ended June 30, 2018

(In millions)







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LIFEPOINT HEALTH, INC.
Condensed Consolidating Statements of Income
For the Six Months Ended June 30, 2017

(In millions)







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LIFEPOINT HEALTH, INC.
Condensed Consolidating Balance Sheets
June 30, 2018

(In millions)  





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LIFEPOINT HEALTH, INC.
Condensed Consolidating Balance Sheets
December 31, 2017

(In millions)



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LIFEPOINT HEALTH, INC.
Condensed Consolidating Statements of Cash Flows
For the Three Months Ended June 30, 2018

(In millions)













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LIFEPOINT HEALTH, INC.
Condensed Consolidating Statements of Cash Flows
For the Three Months Ended June 30, 2017

(In millions)



























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LIFEPOINT HEALTH, INC.
Condensed Consolidating Statements of Cash Flows
For the Six Months Ended June 30, 2018

(In millions)































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LIFEPOINT HEALTH, INC.
Condensed Consolidating Statements of Cash Flows

For the Six Months Ended June 30, 2017

(In millions)