Attached files

file filename
EX-32 - EXHIBIT 32 - TENET HEALTHCARE CORPthc-20180630ex32.htm
EX-31.(B) - EXHIBIT 31.(B) - TENET HEALTHCARE CORPthc-20180630ex31b.htm
EX-31.(A) - EXHIBIT 31.(A) - TENET HEALTHCARE CORPthc-20180630ex31a.htm
EX-10.(B) - EXHIBIT 10.(B) - TENET HEALTHCARE CORPthc-20180630ex10b.htm
EX-10.(A) - EXHIBIT 10.(A) - TENET HEALTHCARE CORPthc-20180630ex10a.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 June 30, 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 x No ¨
 
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months.   Yes x 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 x
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 x

At July 31, 2018, there were 102,397,428 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)
 
 
June 30,
 
December 31,
 
 
2018
 
2017
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
403

 
$
611

Accounts receivable (less allowance for doubtful accounts of $898 at December 31, 2017)
 
2,483

 
2,616

Inventories of supplies, at cost
 
298

 
289

Income tax receivable
 
28

 
5

Assets held for sale
 
452

 
1,017

Other current assets
 
1,041

 
1,035

Total current assets 
 
4,705

 
5,573

Investments and other assets
 
1,416

 
1,543

Deferred income taxes
 
348

 
455

Property and equipment, at cost, less accumulated depreciation and amortization
($5,018 at June 30, 2018 and $4,739 at December 31, 2017)
 
6,863

 
7,030

Goodwill
 
7,218

 
7,018

Other intangible assets, at cost, less accumulated amortization
($964 at June 30, 2018 and $883 at December 31, 2017)
 
1,793

 
1,766

Total assets 
 
$
22,343

 
$
23,385

LIABILITIES AND EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Current portion of long-term debt
 
$
663

 
$
146

Accounts payable
 
1,047

 
1,175

Accrued compensation and benefits
 
711

 
848

Professional and general liability reserves
 
230

 
200

Accrued interest payable
 
243

 
256

Liabilities held for sale
 
393

 
480

Other current liabilities
 
1,067

 
1,227

Total current liabilities 
 
4,354

 
4,332

Long-term debt, net of current portion
 
14,204

 
14,791

Professional and general liability reserves
 
630

 
654

Defined benefit plan obligations
 
515

 
536

Deferred income taxes
 
36

 
36

Other long-term liabilities
 
599

 
631

Total liabilities 
 
20,338

 
20,980

Commitments and contingencies
 


 


Redeemable noncontrolling interests in equity of consolidated subsidiaries
 
1,429

 
1,866

Equity:
 
 
 
 
Shareholders’ equity:
 
 
 
 
Common stock, $0.05 par value; authorized 262,500,000 shares; 150,698,821 shares issued at
June 30, 2018 and 149,384,952 shares issued at December 31, 2017
 
7

 
7

Additional paid-in capital
 
4,722

 
4,859

Accumulated other comprehensive loss
 
(243
)
 
(204
)
Accumulated deficit
 
(2,222
)
 
(2,390
)
Common stock in treasury, at cost, 48,397,605 shares at June 30, 2018
and 48,413,169 shares at December 31, 2017
 
(2,418
)
 
(2,419
)
Total shareholders’ equity (deficit)
 
(154
)
 
(147
)
Noncontrolling interests 
 
730

 
686

Total equity 
 
576

 
539

Total liabilities and equity 
 
$
22,343

 
$
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 June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Net operating revenues:
 
 
 
 
 
 
 
 
Net operating revenues before provision for doubtful accounts
 


 
$
5,173

 


 
$
10,369

Less: Provision for doubtful accounts
 


 
371

 


 
754

Net operating revenues 
 
$
4,506

 
4,802

 
9,205

 
9,615

Equity in earnings of unconsolidated affiliates
 
39

 
28

 
64

 
57

Operating expenses:
 
 
 
 
 
 
 
 
Salaries, wages and benefits
 
2,135

 
2,346

 
4,362

 
4,726

Supplies
 
748

 
780

 
1,522

 
1,545

Other operating expenses, net
 
1,027

 
1,159

 
2,087

 
2,346

Electronic health record incentives
 

 
(6
)
 
(1
)
 
(7
)
Depreciation and amortization
 
194

 
222

 
398

 
443

Impairment and restructuring charges, and acquisition-related costs
 
30

 
41

 
77

 
74

Litigation and investigation costs
 
13

 
1

 
19

 
6

Net gains on sales, consolidation and deconsolidation of facilities
 
(8
)
 
(23
)
 
(118
)
 
(38
)
Operating income 
 
406

 
310

 
923

 
577

Interest expense
 
(254
)
 
(260
)
 
(509
)
 
(518
)
Other non-operating expense, net
 
(1
)
 
(5
)
 
(2
)
 
(10
)
Loss from early extinguishment of debt
 
(1
)
 
(26
)
 
(2
)
 
(26
)
Income from continuing operations, before income taxes 
 
150

 
19

 
410

 
23

Income tax benefit (expense)
 
(44
)
 
12

 
(114
)
 
45

Income from continuing operations, before discontinued operations 
 
106

 
31

 
296

 
68

Discontinued operations:
 
 
 
 
 
 
 
 
Income from operations
 
2

 
2

 
3

 

Income tax expense
 

 
(1
)
 

 

Income from discontinued operations 
 
2

 
1

 
3

 

Net income
 
108

 
32

 
299

 
68

Less: Net income available to noncontrolling interests
 
82

 
87

 
174

 
176

Net income available (loss attributable) to Tenet Healthcare Corporation common shareholders 
 
$
26

 
$
(55
)
 
$
125

 
$
(108
)
Amounts available (attributable) to Tenet Healthcare Corporation
common shareholders
 
 
 
 
 
 
 
 
Income (loss) from continuing operations, net of tax
 
$
24

 
$
(56
)
 
$
122

 
$
(108
)
Income from discontinued operations, net of tax
 
2

 
1

 
3

 

Net income available (loss attributable) to Tenet Healthcare Corporation common shareholders 
 
$
26

 
$
(55
)
 
$
125

 
$
(108
)
Earnings (loss) per share available (attributable) to Tenet Healthcare Corporation common shareholders:
 
 
 
 
 
 
 
 
Basic
 
 
 
 
 
 
 
 
Continuing operations
 
$
0.23

 
$
(0.56
)
 
$
1.20

 
$
(1.08
)
Discontinued operations
 
0.02

 
0.01

 
0.03

 

 
 
$
0.25

 
$
(0.55
)
 
$
1.23

 
$
(1.08
)
Diluted
 
 
 
 
 
 
 
 
Continuing operations
 
$
0.23

 
$
(0.56
)
 
$
1.18

 
$
(1.08
)
Discontinued operations
 
0.02

 
0.01

 
0.03

 

 
 
$
0.25

 
$
(0.55
)
 
$
1.21

 
$
(1.08
)
Weighted average shares and dilutive securities outstanding (in thousands):
 
 
 
 
 
 
 
 
Basic
 
102,147

 
100,612

 
101,770

 
100,306

Diluted
 
104,177

 
100,612

 
103,416

 
100,306


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 June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Net income
 
$
108

 
$
32

 
$
299

 
$
68

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

 
4

 
8

 
8

Unrealized gains on securities held as available-for-sale
 

 
1

 

 
3

Foreign currency translation adjustments
 
(9
)
 
6

 
(3
)
 
9

Other comprehensive income (loss) before income taxes
 
(5
)
 
11

 
5

 
20

Income tax benefit (expense) related to items of other comprehensive income
 
1

 
2

 
(1
)
 
(4
)
Total other comprehensive income (loss), net of tax
 
(4
)
 
13

 
4

 
16

Comprehensive net income
 
104

 
45

 
303

 
84

Less: Comprehensive income available to noncontrolling interests 
 
82

 
87

 
174

 
176

Comprehensive income available (loss attributable) to
Tenet Healthcare Corporation common shareholders
 
 
$
22

 
$
(42
)
 
$
129

 
$
(92
)

See accompanying Notes to Condensed Consolidated Financial Statements.


3


TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in Millions
(Unaudited)
 
 
Six Months Ended
June 30,
 
 
2018
 
2017
Net income
 
$
299

 
$
68

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
398

 
443

Provision for doubtful accounts
 

 
754

Deferred income tax expense (benefit)
 
108

 
(81
)
Stock-based compensation expense
 
20

 
29

Impairment and restructuring charges, and acquisition-related costs
 
77

 
74

Litigation and investigation costs
 
19

 
6

Net gains on sales, consolidation and deconsolidation of facilities
 
(118
)
 
(38
)
Loss from early extinguishment of debt
 
2

 
26

Equity in earnings of unconsolidated affiliates, net of distributions received
 
10

 
4

Amortization of debt discount and debt issuance costs
 
22

 
22

Pre-tax income from discontinued operations
 
(3
)
 

Other items, net
 
(1
)
 
(25
)
Changes in cash from operating assets and liabilities:
 
 

 
 

Accounts receivable
 
(13
)
 
(673
)
Inventories and other current assets
 
144

 
160

Income taxes
 
(18
)
 
(7
)
Accounts payable, accrued expenses and other current liabilities
 
(371
)
 
(345
)
Other long-term liabilities
 
(48
)
 
48

Payments for restructuring charges, acquisition-related costs, and litigation costs and settlements 
 
(63
)
 
(62
)
Net cash used in operating activities from discontinued operations, excluding income taxes
 
(3
)
 
(2
)
Net cash provided by operating activities 
 
461

 
401

Cash flows from investing activities:
 
 

 
 

Purchases of property and equipment — continuing operations
 
(268
)
 
(348
)
Purchases of businesses or joint venture interests, net of cash acquired
 
(89
)
 
(26
)
Proceeds from sales of facilities and other assets
 
481

 
74

Proceeds from sales of marketable securities, long-term investments and other assets
 
143

 
16

Purchases of equity investments
 
(37
)
 
(2
)
Other long-term assets
 
3

 
(12
)
Other items, net
 
(8
)
 
(10
)
Net cash provided by (used in) investing activities
 
225

 
(308
)
Cash flows from financing activities:
 
 

 
 

Repayments of borrowings under credit facility
 
(360
)
 
(100
)
Proceeds from borrowings under credit facility
 
360

 
100

Repayments of other borrowings
 
(161
)
 
(1,029
)
Proceeds from other borrowings
 
14

 
837

Debt issuance costs
 

 
(29
)
Distributions paid to noncontrolling interests
 
(140
)
 
(123
)
Proceeds from sales of noncontrolling interests
 
7

 
14

Purchases of noncontrolling interests
 
(642
)
 
(5
)
Proceeds from exercise of stock options and employee stock purchase plan
 
14

 
3

Other items, net
 
14

 
(2
)
Net cash used in financing activities
 
(894
)
 
(334
)
Net decrease in cash and cash equivalents
 
(208
)
 
(241
)
Cash and cash equivalents at beginning of period
 
611

 
716

Cash and cash equivalents at end of period 
 
$
403

 
$
475

Supplemental disclosures:
 
 

 
 

Interest paid, net of capitalized interest
 
$
(501
)
 
$
(468
)
Income tax payments, net
 
$
(21
)
 
$
(44
)
 
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 June 30, 2018, we operated 68 hospitals, 21 surgical hospitals and approximately 470 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”). 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 six months ended June 30, 2018, we recorded approximately $713 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 June 30, 2018, we recorded $420 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 June 30, 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 and six month periods ended June 30, 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 patients 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 we record could change by material amounts.

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

7



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 $403 million and $611 million at June 30, 2018 and December 31, 2017, respectively. At June 30, 2018 and December 31, 2017, our book overdrafts were approximately $256 million and $311 million, respectively, which were classified as accounts payable.
 
At June 30, 2018 and December 31, 2017, approximately $175 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 $43 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 June 30, 2018 and December 31, 2017, we had $76 million and $117 million, respectively, of property and equipment purchases accrued for items received but not yet paid. Of these amounts, $55 million and $79 million, respectively, were included in accounts payable.
 
During the six months ended June 30, 2018 and 2017, we entered into non-cancellable capital leases of approximately $50 million and $43 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 June 30, 2018 and December 31, 2017: 
 
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Book
Value
At June 30, 2018:
 
 
 
 
 
 
Capitalized software costs
 
$
1,688

 
$
(822
)
 
$
866

Trade names
 
102

 

 
102

Contracts
 
861

 
(68
)
 
793

Other
 
106

 
(74
)
 
32

Total 
 
$
2,757

 
$
(964
)
 
$
1,793

 
 
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 June 30, 2018 is as follows: 
 
 
 
 
Six Months
Ending
 
Years Ending
 
Later Years
 
 
 
 
December 31,
 
 
 
Total
 
2018
 
2019
 
2020
 
2021
 
2022
 
Amortization of intangible assets
 
$
1,125

 
$
78

 
$
154

 
$
126

 
$
108

 
$
97

 
$
562

 
We recognized amortization expense of $89 million and $81 million in the accompanying Condensed Consolidated Statements of Operations for the six months ended June 30, 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 June 30, 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 232 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 (110 of 342 at June 30, 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 available 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 six months ended June 30, 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
June 30,
 
Six Months Ended
June 30,
 
 
2018
 
2017
 
2018
 
2017
Net operating revenues
 
$
547

 
$
600

 
$
1,121

 
$
1,184

Net income
 
$
132

 
$
118

 
$
248

 
$
233

Net income available to the investees
 
$
89

 
$
73

 
$
160

 
$
149


NOTE 2. ACCOUNTS RECEIVABLE
 
The principal components of accounts receivable are shown in the table below: 
 
 
June 30, 2018
 
December 31, 2017
Continuing operations:
 
 

 
 

Patient accounts receivable
 
$
2,370

 
$
3,376

Allowance for doubtful accounts
 

 
(898
)
Estimated future recoveries
 
110

 
132

Net cost reports and settlements payable and valuation allowances
 
1

 
4

 
 
2,481

 
2,614

Discontinued operations
 
2

 
2

Accounts receivable
 
$
2,483

 
$
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 following table 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 the three and six months ended June 30, 2018 and 2017:

11


 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2018
 
2017
 
2018
 
2017
Estimated costs for:
 
 

 
 

 
 

 
 

Self-pay patients
 
$
159

 
$
160

 
$
305

 
$
320

Charity care patients
 
28

 
33

 
63

 
63

Total
 
$
187

 
$
193

 
$
368

 
$
383

Medicaid DSH and other supplemental revenues
 
$
198

 
$
164

 
$
418

 
$
322

 
    
At June 30, 2018, we had approximately $167 million and $259 million of receivables recorded in other current assets and investments and other assets, respectively, and approximately $59 million and $54 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 June 30, 2018. The opening and closing balances of contract assets for our Hospital Operations and other segment are as follows:
 
 
2018
 
2017
January 1,
 
$
171

 
$

June 30,
 
136

 

Increase/(decrease)
 
$
(35
)
 
$


The increase in the contract asset balances from the six months ended June 30, 2018 compared to the six months ended June 30, 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 following table, 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

June 30, 2018
 
90

 
11

 
78

 
21

Increase/(decrease)
 
$
1

 
$
1

 
$
(2
)
 
$

 
 
 
 
 
 
 
 
 
January 1, 2017
 
$
67

 
$
8

 
$
76

 
$
26

June 30, 2017
 
105

 
8

 
85

 
24

Increase/(decrease)
 
$
38

 
$

 
$
9

 
$
(2
)
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 in the six months ended June 30, 2018 and 2017 that was included in the opening current deferred revenue liability was $66 million and $62 million, respectively. 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 June 30, 2018 and 2017, we recognized amortization expense of $3 million and $2 million, respectively. During the six months ended June 30, 2018 and 2017, we recognized amortization expense of $6 million and $4 million, respectively. At June 30, 2018 and December 31, 2017, the unamortized customer contract costs were $32 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, 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 $53 million as “liabilities held for sale” in current liabilities on the accompanying Condensed Consolidated Balance Sheet at June 30, 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 the assets held for sale to their estimated fair value, less estimated costs to sell, as a result of the planned divestiture of these assets. On July 18, 2018, we announced the signing of a definitive agreement for the sale of these hospitals and hospital-affiliated operations.

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 $13 million of assets as “assets held for sale” in current assets and the related liabilities of $21 million as “liabilities held for sale” in current liabilities on the accompanying Consolidated Balance Sheet at June 30, 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.

13



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 $326 million of our United Kingdom assets as “assets held for sale” in current assets and the related liabilities of $319 million as “liabilities held for sale” in current liabilities on the accompanying Condensed Consolidated Balance Sheet at June 30, 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 related to this planned divestiture in the three months ended June 30, 2018 and September 30, 2017 of $4 million and $59 million, respectively, 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 June 30, 2018 were comprised of the following:
Accounts receivable
 
$
71

Other current assets
 
50

Investments and other long-term assets
 
2

Property and equipment
 
322

Goodwill
 
7

Current liabilities
 
(103
)
Long-term liabilities
 
(290
)
Net assets held for sale
 
$
59


In the three months ended June 30, 2018, we completed the sale of our hospital, physician practices and other hospital-affiliated operations in St. Louis, Missouri; these assets met the criteria to be classified as held for sale in the three months ended December 31, 2017. As a result of this transaction, we recorded a gain on sale of approximately $12 million and received net pre-tax cash proceeds of $54 million in the three months ended June 30, 2018.

In the three months ended March 31, 2018, we completed the sale of MacNeal Hospital, which is located in a suburb of Chicago, and other operations affiliated with the hospital; these assets met the criteria to be classified as held for sale in the three months ended September 30, 2017. As a result of this transaction, we recorded a gain on sale of $95 million and received net pre-tax cash proceeds of $249 million in the six months ended June 30, 2018.

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

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 January 2018, resulting in net pre-tax proceeds of $152.5 million in cash and a secured promissory note for $17.5 million in the six months ended June 30, 2018.

The following table provides information on significant components of our business that have been disposed of since June 30, 2017 or are classified as held for sale at June 30, 2018:

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Significant disposals:
 
 
 
 
 
 
 
 
Income (loss) from continuing operations, before income taxes 
 
 
 
 
 
 
 
 
   Houston
 
$

 
$
13

 
$

 
$
28

   Philadelphia
 
(2
)
 
2

 
(11
)
 
(12
)
   MacNeal (includes a $95 million gain on sale in the 2018 period)
 
(4
)
 
15

 
97

 
18

      Total
 
$
(6
)
 
$
30

 
$
86

 
$
34

 
 
  
 
  
 
 
 
 
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)
 
$
1

 
$
1

 
$
(15
)
 
$
(3
)
   Aspen
 
(3
)
 
(4
)
 

 
(6
)
      Total
 
$
(2
)
 
$
(3
)
 
$
(15
)
 
$
(9
)

14



NOTE 5. IMPAIRMENT AND RESTRUCTURING CHARGES, AND ACQUISITION-RELATED COSTS
 
During the six months ended June 30, 2018, we recorded impairment and restructuring charges and acquisition-related costs of $77 million, consisting of $23 million of impairment charges, $47 million of restructuring charges and $7 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, $4 million of charges to write-down assets held for sale to their estimated fair value, less estimated costs to sell, for Aspen and $2 million of other impairment charges. Restructuring charges consisted of $26 million of employee severance costs, $5 million of contract and lease termination fees, and $16 million of other restructuring costs. Acquisition-related costs consisted of $5 million of transaction costs and $2 million of acquisition integration charges. Our impairment and restructuring charges and acquisition-related costs for the six months ended June 30, 2018 were comprised of $58 million from our Hospital Operations and other segment, $7 million from our Ambulatory Care segment and $12 million from our Conifer segment.

During the six months ended June 30, 2017, we recorded impairment and restructuring charges and acquisition-related costs of $74 million primarily related to our Hospital Operations and other segment, consisting of $17 million of impairment charges, $44 million of restructuring charges and $13 million of acquisition-related costs. Impairment charges consisted primarily of an approximately $15 million impairment of two equity method investments and $2 million to write-down intangible assets. Restructuring charges consisted of $30 million of employee severance costs, $7 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 $11 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 June 30, 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 June 30, 2018 and December 31, 2017:
 
 
June 30,
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
 
400

 
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
 
78

 
77

Unamortized issue costs, note discounts and premiums
 
(208
)
 
(231
)
Total long-term debt 
 
14,867

 
14,937

Less current portion
 
663

 
146

Long-term debt, net of current portion 
 
$
14,204

 
$
14,791

 
Senior Secured and Senior Unsecured Notes

In May 2018, we purchased approximately $30 million aggregate principal amount of our 6.875% senior unsecured notes due 2031 for approximately $28 million. In connection with the purchase, we recorded a loss from early extinguishment of debt of approximately $1 million in the three months ended June 30, 2018, primarily related to the write-off of associated unamortized note discount and issuance costs, partially offset by the difference between the purchase price and the par value of the 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 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 June 30, 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 June 30, 2018.
 

16


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.

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 June 30, 2018, we had approximately $96 million of standby letters of credit outstanding under the LC Facility.
 
NOTE 7. GUARANTEES
 
At June 30, 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 $179 million. We had a total liability of $136 million recorded for these guarantees included in other current liabilities at June 30, 2018.
 
At June 30, 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 $25 million. Of the total, $18 million relates to the obligations of consolidated subsidiaries, which obligations are recorded in the accompanying Condensed Consolidated Balance Sheet at June 30, 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 June 30, 2018, assuming outstanding performance-based restricted stock units and options for which performance has not yet been determined will achieve target performance, approximately 5.2 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 4.0 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 six months ended June 30, 2018 and 2017 include $20 million and $29 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 six months ended June 30, 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
 
635,196

 
21.33

 
 
 
 
Exercised
 
(581,120
)
 
18.69

 
 
 
 
Forfeited/Expired
 
(299,581
)
 
36.21

 
 
 
 
Outstanding at June 30, 2018
 
2,319,317

 
$
18.99

 
$
34

 
7.2 years
Vested and expected to vest at June 30, 2018
 
2,319,317

 
$
18.99

 
$
34

 
7.2 years
Exercisable at June 30, 2018
 
397,240

 
$
17.88

 
$
6

 
2.9 years

17



There were 581,120 and 11,175 stock options exercised during the six months ended June 30, 2018 and 2017, respectively, with aggregate intrinsic values of approximately $3 million and less than $1 million, respectively.
 
At June 30, 2018, there were $8 million of total unrecognized compensation costs related to stock options. These costs are expected to be recognized over a weighted average period of 2.2 years.

In the three months ended June 30, 2018, we granted new senior officers 31,184 performance-based stock options. The options will all vest on the third anniversary of the grant date, subject to achieving a closing stock price of at least $44.29 (a 25% premium above the May 31, 2018 grant-date closing stock price of $35.43) 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, 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 because, in the three months ended June 30, 2018, the requirement that our stock close at a 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 was met; these options 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 because, in the three months ended June 30, 2018, the requirement that our stock close at a 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 was met; these options will expire on the tenth anniversary of the grant date.
 
The weighted average estimated fair value of stock options we granted in the six months ended June 30, 2018 and 2017 was $9.16 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:
 
 
Six Months Ended June 30,
 
 
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.
 

18


The following table summarizes information about our outstanding stock options at June 30, 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 
 
105,934

 
0.7 years
 
$
4.56

 
105,934

 
$
4.56

$4.57 to $19.759
 
1,292,315

 
7.2 years
 
18.18

 
5,434

 
18.99

$19.76 to $35.430
 
921,068

 
7.8 years
 
21.78

 
285,872

 
22.79

 
 
2,319,317

 
7.2 years
 
$
18.99

 
397,240

 
$
17.88


Restricted Stock Units
 
The following table summarizes restricted stock unit activity during the six months ended June 30, 2018
 
 
Restricted Stock
Units
 
Weighted Average Grant
Date Fair Value Per Unit
Unvested at December 31, 2017
 
2,253,988

 
$
35.20

Granted
 
730,577

 
24.68

Vested
 
(812,166
)
 
34.76

Forfeited
 
(96,597
)
 
41.77

Unvested at June 30, 2018
 
2,075,802

 
$
31.37

 
In the six months ended June 30, 2018, we granted 730,577 restricted stock units, of which 288,325 will vest and be settled ratably over a three-year period from the grant date, 339,806 will vest and be settled ratably over a two-year period from the grant date, and 26,356 will vest and be settled on the third anniversary of the grant date. In addition, in May 2018, we made an annual grant of 54,198 restricted stock units to our non-employee directors for the 2018-2019 board service year, which units vested immediately and will settle in shares of our common stock on the third anniversary of the date of the grant. Because the board of directors appointed two new members in May 2018, we made initial grants totaling 3,670 restricted stock units to these directors, as well as prorated annual grants totaling 12,154 restricted stock units. Both the initial grants and the annual grants vested immediately, however the initial grants will not settle until the directors’ separation from the Board, while the annual grants settle on the third anniversary of the grant date. In addition, we granted 6,068 performance-based restricted stock units to certain of our senior officers; the vesting of these 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 June 30, 2018, there were $27 million of total unrecognized compensation costs related to restricted stock units. These costs are expected to be recognized over a weighted average period of 1.8 years.
 
Employee Retirement Plans
 
In the six-month periods ended June 30, 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 for both periods, 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 $8 million and $14 million, respectively, in other non-operating expense, net, in the accompanying Condensed Consolidated Statements of Operations.
 

19


NOTE 9. EQUITY

Changes in Shareholders’ Equity

The following table shows the changes in consolidated equity during the six months ended June 30, 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
 

 

 

 

 
125

 

 
73

 
198

Distributions paid to noncontrolling interests
 

 

 

 

 

 

 
(72
)
 
(72
)
Other comprehensive income
 

 

 

 
4

 

 

 

 
4

Accretion of redeemable noncontrolling interests
 

 

 
(160
)
 

 

 

 

 
(160
)
Purchases (sales) of businesses and noncontrolling interests
 

 

 
(6
)
 

 

 

 
43

 
37

Cumulative effect of accounting change
 

 

 

 
(43
)
 
43

 

 

 

Stock-based compensation expense, tax benefit and issuance of common stock
 
1,329

 

 
29

 

 

 
1

 

 
30

Balances at June 30, 2018
 
102,301

 
$
7

 
$
4,722

 
$
(243
)
 
$
(2,222
)
 
$
(2,418
)
 
$
730

 
$
576

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at December 31, 2016
 
99,686

 
$
7

 
$
4,827

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

 
$
1,082

Net income (loss)
 

 

 

 

 
(108
)
 

 
71

 
(37
)
Distributions paid to noncontrolling interests
 

 

 

 

 

 

 
(65
)
 
(65
)
Other comprehensive income
 

 

 

 
16

 

 

 

 
16

Accretion of redeemable noncontrolling interests
 

 

 
(29
)
 

 

 

 

 
(29
)
Purchases (sales) of businesses and noncontrolling interests
 

 

 
(4
)
 

 

 

 
11

 
7

Cumulative effect of accounting change
 

 

 

 

 
56

 

 

 
56

Stock-based compensation expense and issuance of common stock
 
1,024

 

 
25

 

 

 

 

 
25

Balances at June 30, 2017
 
100,710

 
$
7

 
$
4,819

 
$
(242
)
 
$
(1,794
)
 
$
(2,417
)
 
$
682

 
$
1,055

 
Our noncontrolling interests balances at June 30, 2018 and December 31, 2017 were comprised of $65 million and $64 million, respectively, from our Hospital Operations and other segment, and $665 million and $622 million, respectively, from our Ambulatory Care segment. Our net income available to noncontrolling interests for the six months ended June 30, 2018 and 2017 in the table above were comprised of $4 million and $9 million, respectively, from our Hospital Operations and other segment, and $69 million and $62 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
June 30,
 
Six Months Ended
June 30,
 
 
2018
 
2017
 
2018
 
2017
Hospital Operations and other:
 
 

 
 

 
 
 
 
Net patient service revenues less provision for doubtful accounts from hospitals and related outpatient facilities
 
 
 
 
 
 
 
 
Medicare
 
$
701

 
$
820

 
$
1,483

 
$
1,682

Medicaid
 
314

 
279

 
635

 
554

Managed care
 
2,273

 
2,451

 
4,641

 
4,884

Self-pay
 
8

 
18

 
45

 
31

Indemnity and other
 
147

 
151

 
282

 
296

Total
 
3,443

 
3,719

 
7,086

 
7,447

Physician practices revenues less provision for doubtful accounts
 
270

 
271

 
545

 
540

Health plans
 

 
25

 
6

 
90

Revenue from other sources
 
20

 
70

 
43

 
123

Hospital Operations and other total prior to inter-segment eliminations
 
3,733

 
4,085

 
7,680

 
8,200

Ambulatory Care
 
531

 
472

 
1,029

 
927

Conifer
 
386

 
400

 
790

 
802

Inter-segment eliminations
 
(144
)
 
(155
)
 
(294
)
 
(314
)
Net operating revenues
 
$
4,506

 
$
4,802

 
$
9,205

 
$
9,615


Adjustments for prior-year cost reports and related valuation allowances, principally related to Medicare and Medicaid, increased revenues in the six month periods ended June 30, 2018 and 2017 by $11 million and $29 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
June 30,
 
Six Months Ended
June 30,
 
 
2018
 
2017
 
2018
 
2017
Net patient service revenues less provision for doubtful accounts
 
$
500

 
$
443

 
$
969

 
$
871

Management fees
 
23

 
23

 
46

 
44

Revenue from other sources
 
8

 
6

 
14

 
12

Net operating revenues
 
$
531

 
$
472

 
$
1,029

 
$
927


The table below shows the composition of net operating revenues for our Conifer segment:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2018
 
2017
 
2018
 
2017
Revenue cycle services – Tenet
 
$
139

 
$
145

 
$
283

 
$
292

Revenue cycle services – other customers
 
220

 
221

 
452

 
445