MANAGEMENT OVERVIEW

TRENDS AND STRATEGIES

The healthcare industry, in general, and the acute care hospital business, in 
particular, have been experiencing significant regulatory uncertainty based, in 
large part, on administrative, legislative and judicial efforts to 
significantly modify or repeal and potentially replace the Patient Protection 
and Affordable Care Act, as amended by the Health Care and Education 
Reconciliation Act of 2010 (“Affordable Care Act” or “ACA”). It is difficult to 
predict the full impact of regulatory uncertainty on our future revenues and 
operations. In addition, we believe that several key trends are shaping the 
demand for healthcare services: (1) consumers, employers and insurers are 
actively seeking lower-cost solutions and better value as they focus more on 
healthcare spending; (2) patient volumes are shifting from inpatient to 
outpatient settings due to technological advancements and demand for care that 
is more convenient, affordable and accessible; (3) the growing aging population 
requires greater chronic disease management and higher-acuity treatment; and 
(4) consolidation continues across the entire healthcare sector.

Driving Growth in Our Hospital Systems—We are committed to better positioning 
our hospital systems and competing more effectively in the ever-evolving 
healthcare environment. We are focused on improving operational effectiveness, 
increasing capital efficiency and margins, investing in our physician 
enterprise, particularly our specialist network, enhancing physician and 
patient satisfaction, growing our higher-acuity inpatient service lines, 
expanding patient access points, and exiting service lines, businesses and 
markets that we believe are no longer a core part of our long-term growth 
strategy. We have undertaken enterprise-wide cost reduction initiatives, 
comprised primarily of workforce reductions (including streamlining corporate 
overhead and centralized support functions), the renegotiation of contracts 
with suppliers and vendors, and the consolidation of office locations. In 
conjunction with these initiatives, we incurred restructuring charges related 
to employee severance payments of $38 million in the nine months ended 
September 30, 2019, and we expect to incur additional such restructuring 
charges in the remainder of 2019.

Improving the Customer Care Experience—As consumers continue to become more 
engaged in managing their health, we recognize that understanding what matters 
most to them and earning their loyalty is imperative to our success. As such, 
we have enhanced our focus on treating our patients as traditional customers 
by: (1) establishing networks of physicians and facilities that provide 
convenient access to services across the care continuum; (2) expanding service 
lines aligned with growing community demand, including a focus on aging and 
chronic disease patients; (3) offering greater affordability and 
predictability, including simplified admissions and discharge procedures, 
particularly in our outpatient centers; (4) improving our culture of service; 
and (5) creating health and benefit programs, patient education and health 
literacy materials that are customized to the needs of the communities we 
serve. Through these efforts, we intend to improve the customer care experience 
in every part of our operations.

Expansion of Our Ambulatory Care Segment—We remain focused on opportunities to 
expand our Ambulatory Care segment through organic growth, building new 
outpatient centers, corporate development activities and strategic 
partnerships. We believe USPI’s surgery centers and surgical hospitals offer 
many advantages to patients and physicians, including greater affordability, 
predictability, flexibility and convenience. Moreover, due in part to 
advancements in medical technology, and due to the lower cost structure and 
greater efficiencies that are attainable at a specialized outpatient site, we 
believe the volume and complexity of surgical cases performed in an outpatient 
setting will continue to increase. In addition, we have continued to grow our 
imaging and urgent care businesses through USPI to reflect our broader 
strategies to (1) offer more services to patients, (2) broaden the capabilities 
we offer to healthcare systems and physicians, and (3) expand into 
faster-growing, less capital intensive, higher-margin businesses. Historically, 
our outpatient services have generated significantly higher margins for us than 
inpatient services.

Driving Conifer’s Growth While Pursuing a Tax-free Spin-off—We previously 
announced a number of actions to support our goals of improving financial 
performance and enhancing shareholder value, including the exploration of 
strategic alternatives for Conifer. In July 2019, we announced our intention to 
pursue a tax-free spin-off of Conifer as a separate, independent, publicly 
traded company. Completion of the proposed spin-off is subject to a number of 
conditions, including, among others, assurance that the separation will be 
tax-free for U.S. federal income tax purposes, execution of a restructured 
services agreement between Conifer and Tenet, finalization of Conifer’s capital 
structure, the effectiveness of appropriate filings with the Securities and 
Exchange Commission, and final approval from our Board of Directors. We are 
targeting to complete the separation by the end of the second quarter of 2021; 
however, there can be no assurance regarding the timeframe for completing the 
spin-off, the allocation of assets and liabilities between Tenet and Conifer, 
that the other conditions of the spin-off will be met, or that the spin-off 
will be completed at all.

Conifer serves approximately 670 Tenet and non-Tenet hospital and other clients 
nationwide. In addition to providing revenue cycle management services to 
healthcare systems and physicians, Conifer provides support to both providers 
and self-insured employers seeking assistance with clinical integration, 
financial risk management and population health management. Conifer remains 
focused on driving growth by continuing to market and expand its revenue cycle 
management and value-based care solutions businesses.

Improving Profitability—We are focused on growing patient volumes and effective 
cost management as a means to improve profitability. We believe our inpatient 
admissions have been constrained in recent years by increased competition, 
utilization pressure by managed care organizations, new delivery models that 
are designed to lower the utilization of acute care hospital services, the 
effects of higher patient co-pays, co-insurance amounts and deductibles, 
changing consumer behavior, and adverse economic conditions and demographic 
trends in certain of our markets. However, we also believe that emphasis on 
higher-demand clinical service lines (including outpatient services), focus on 
expanding our ambulatory care business, cultivation of our culture of service, 
participation in Medicare Advantage health plans that are experiencing higher 
growth rates than traditional Medicare plans, and contracting strategies that 
create shared value with payers should help us grow our patient volumes over 
time. In 2019, we are continuing to explore new opportunities to enhance 
efficiency, including further integration of enterprise-wide centralized 
support functions, outsourcing certain functions unrelated to direct patient 
care, and reducing clinical and vendor contract variation.

Reducing Our Leverage—All of our outstanding long-term debt has a fixed rate of 
interest, except for outstanding borrowings under our revolving credit 
facility, and the maturity dates of our notes are staggered from 2022 through 
2031. Although we believe that our capital structure minimizes the near-term 
impact of increased interest rates, and the staggered maturities of our debt 
allow us to refinance our debt over time, it is nonetheless our long-term 
objective to reduce our debt and lower our ratio of debt-to-Adjusted EBITDA, 
primarily through more efficient capital allocation and Adjusted EBITDA growth, 
which should lower our refinancing risk and increase the potential for us to 
continue to use lower rate secured debt to refinance portions of our higher 
rate unsecured debt.

Our ability to execute on our strategies and respond to the aforementioned 
trends is subject to a number of risks and uncertainties that may cause actual 
results to be materially different from expectations. For information about 
risks and uncertainties that could affect our results of operations, see the 
Risk Factors section in Part II of this report and the Forward-Looking 
Statements and Risk Factors sections in Part I of our Annual Report on Form 
10-K for the year ended December 31, 2018 (“Annual Report”).

RESULTS OF OPERATIONS—OVERVIEW


Continuing Operations Three Months Ended September 30,

Utilization of licensed beds represents patient days divided by number of days 
in the period divided by average licensed beds.

Total admissions increased by 1,803, or 1.1%, in the three months ended 
September 30, 2019 compared to the three months ended September 30, 2018, and 
total surgeries decreased by 1,358, or 1.3%, in the 2019 period compared to the 
2018 period. Our emergency department visits decreased 1.8% in the three months 
ended September 30, 2019 compared to the same period in the prior year. Our 
volumes from continuing operations in the three months ended September 30, 2019 
compared to the three months ended September 30, 2018 were negatively affected 
by the sale of three Chicago-area hospitals and affiliated operations effective 
January 28, 2019. Our Ambulatory Care total cases increased 6.3% in the three 
months ended September 30, 2019 compared to the 2018 period despite the 
negative impact of the sale of Aspen effective August 17, 2018.

Continuing Operations Three Months Ended September 30, Revenues

Net operating revenues increased by $79 million, or 1.8%, in the three months 
ended September 30, 2019 compared to the same period in 2018, primarily due to 
increased volumes and acuity, and improved managed care pricing.

Our accounts receivable days outstanding (“AR Days”) from continuing operations 
were 59.6 days at September 30, 2019 and 56.5 days at December 31, 2018, 
compared to our target of less than 55 days. This calculation includes our 
Hospital Operations and other contract assets, and excludes (i) two 
Philadelphia-area hospitals, which we divested effective January 11, 2018, (ii) 
MacNeal Hospital, which we divested effective March 1, 2018, (iii) Des Peres 
Hospital, which we divested effective May 1, 2018, (iv) three Chicago-area 
hospitals, which we divested effective January 28, 2019, and (v) our California 
provider fee revenues.


Continuing Operations Three Months Ended September 30,

Calculation excludes the expenses from our health plan businesses. Adjusted 
patient admissions represents actual patient admissions adjusted to include 
outpatient services provided by facilities in our Hospital Operations and other 
segment by multiplying actual patient admissions by the sum of gross inpatient 
revenues and outpatient revenues and dividing the results by gross inpatient 
revenues.

Salaries, wages and benefits per adjusted patient admission increased 5.1% in 
the three months ended September 30, 2019 compared to the same period in 2018. 
This change was primarily due to annual merit increases for certain of our 
employees, a greater number of employed physicians and increased incentive 
compensation expense, partially offset by lower health benefits costs and the 
impact of previously announced workforce reductions as part of our 
enterprise-wide cost reduction initiatives in the three months ended September 
30, 2019 compared to the three months ended September 30, 2018. Additionally, a 
one-day strike by union nurses that impacted 12 of our hospitals caused a 
one-time increase to contract labor costs this quarter.

Supplies expense per adjusted patient admission increased 4.5% in the three 
months ended September 30, 2019 compared to the three months ended September 
30, 2018. The change in supplies expense was primarily attributable to growth 
in our higher acuity supply-intensive surgical services, partially offset by 
the impact of the group-purchasing strategies and supplies-management services 
we utilize to reduce costs.

Other operating expenses per adjusted patient admission decreased by 4.3% in 
the three months ended September 30, 2019 compared to the prior-year period. 
This decrease was primarily due to lower medical fees, including decreased 
claim expenses relating to our risk contracting business in California, and 
lower malpractice expense, partially offset by the impact of gains on asset 
sales in the 2018 period primarily related to the sale of an equity method 
investment. The 2019 period also included an unfavorable adjustment of 
approximately $7 million from a 25 basis point decrease in the interest rate 
used to estimate the discounted present value of projected future malpractice 
liabilities compared to a favorable adjustment of approximately $5 million from 
a 20 basis point increase in the interest rate in the 2018 period.

LIQUIDITY AND CAPITAL RESOURCES OVERVIEW

Cash and cash equivalents were $314 million at September 30, 2019 compared to 
$249 million at June 30, 2019.

Significant cash flow items in the three months ended September 30, 2019 
included:


•

Net cash provided by operating activities before interest, taxes, discontinued 
operations and restructuring charges, acquisition-related costs, and litigation 
costs and settlements of $700 million;


•

Payments for restructuring charges, acquisition-related costs, and litigation 
costs and settlements of $56 million;


•

Capital expenditures of $156 million;


•

Proceeds from sales of marketable securities, long-term investments and other 
assets of $43 million;


•

Interest payments of $221 million;


•

Purchases of businesses or joint venture interests of $10 million;


•

Debt issuance costs of $45 million;


•

$600 million of proceeds from the issuance of $600 million aggregate principal 
amount of 4.625% senior secured first lien notes due 2024;


34 Table of Contents


•

$2.1 billion of proceeds from the issuance of $2.1 billion aggregate principal 
amount of 4.875% senior secured first lien notes due 2026;


•

$1.5 billion of proceeds from the issuance of $1.5 billion aggregate principal 
amount of 5.125% senior secured first lien notes due 2027;


•

$509 million of payments to purchase $500 million aggregate principal amount of 
our outstanding 4.750% senior secured first lien notes due 2020;


•

$1.87 billion of payments to purchase $1.8 billion aggregate principal amount 
of our outstanding 6.000% senior secured first lien notes due 2020;


•

$880 million of payments to purchase $850 million aggregate principal amount of 
our outstanding 4.500% senior secured first lien notes due 2021;


•

$1.099 billion of payments to purchase $1.05 billion aggregate principal amount 
of our outstanding 4.375% senior secured first lien notes due 2021; and


•

$79 million of distributions paid to noncontrolling interests.

Net cash provided by operating activities was $713 million in the nine months 
ended September 30, 2019 compared to $799 million in the nine months ended 
September 30, 2018. Key factors contributing to the change between the 2019 and 
2018 periods include the following:


•

The impact of an increase in AR Days outstanding;


•

Decreased cash receipts of $50 million related to the California provider fee 
program;


•

Increased payments for restructuring charges, acquisition-related costs, and 
litigation costs and settlements of $23 million; and


•

The timing of other working capital items.


SOURCES OF REVENUE FOR OUR HOSPITAL OPERATIONS AND OTHER SEGMENT

We earn revenues for patient services from a variety of sources, primarily 
managed care payers and the federal Medicare program, as well as state Medicaid 
programs, indemnity-based health insurance companies and uninsured patients 
(that is, patients who do not have health insurance and are not covered by some 
other form of third-party arrangement).

GOVERNMENT PROGRAMS

The Centers for Medicare and Medicaid Services (“CMS”), an agency of the U.S. 
Department of Health and Human Services (“HHS”), is the single largest payer of 
healthcare services in the United States. Approximately 60 million individuals 
rely on healthcare benefits through Medicare, and approximately 72 million 
individuals are enrolled in Medicaid and the Children’s Health Insurance 
Program (“CHIP”). These three programs are authorized by federal law and 
administered by CMS. Medicare is a federally funded health insurance program 
primarily for individuals 65 years of age and older, as well as some younger 
people with certain disabilities and conditions, and is provided without regard 
to income or assets. Medicaid is co-administered by the states and is jointly 
funded by the federal government and state governments. Medicaid is the 
nation’s main public health insurance program for people with low incomes and 
is the largest source of health coverage in the United States. The CHIP, which 
is also co-administered by the states and jointly funded, provides health 
coverage to children in families with incomes too high to qualify for Medicaid, 
but too low to afford private coverage. Unlike Medicaid, the CHIP is limited in 
duration and requires the enactment of reauthorizing legislation. During the 
three months ended March 31, 2018, separate pieces of legislation were enacted 
extending CHIP funding for a total of 10 years from federal fiscal year (“FFY”) 
2018 (which began on October 1, 2017) through FFY 2027.

Medicare

Medicare offers its beneficiaries different ways to obtain their medical 
benefits. One option, the Original Medicare Plan (which includes “Part A” and 
“Part B”), is a fee-for-service payment system. The other option, called 
Medicare Advantage (sometimes called “Part C” or “MA Plans”), includes health 
maintenance organizations (“HMOs”), preferred provider organizations (“PPOs”), 
private fee-for-service Medicare special needs plans and Medicare medical 
savings account plans. The major components of our net patient service revenues 
from continuing operations of the hospitals and related outpatient facilities 
in our Hospital Operations and other segment for services provided to patients 
enrolled in the Original Medicare Plan for the three and nine months ended 
September 30, 2019 and 2018 are set forth in the following table:

The other revenue category includes Medicare Direct Graduate Medical Education 
and Indirect Medical Education (“IME”) revenues, IME revenues earned by our 
children’s hospitals (one of which we divested in 2018) under the Children’s 
Hospitals Graduate Medical Education Payment Program administered by the Health 
Resources and Services Administration of HHS, inpatient psychiatric units, 
inpatient rehabilitation units, other revenue adjustments, and adjustments to 
the estimates for current and prior-year cost reports and related valuation 
allowances.

A general description of the types of payments we receive for services provided 
to patients enrolled in the Original Medicare Plan is provided in our Annual 
Report. Recent regulatory and legislative updates to the terms of these payment 
systems and their estimated effect on our revenues can be found under 
“Regulatory and Legislative Changes” below.

Medicaid

Medicaid programs and the corresponding reimbursement methodologies vary from 
state to state and from year to year. Estimated revenues under various state 
Medicaid programs, including state-funded Medicaid managed care programs, 
constituted approximately 18.6% and 19.9% of total net patient service revenues 
less implicit price concessions of our acute care hospitals and related 
outpatient facilities for the nine months ended September 30, 2019 and 2018, 
respectively. We also receive disproportionate share hospital (“DSH”) and other 
supplemental revenues under various state Medicaid programs. For the nine 
months ended September 30, 2019 and 2018, our total Medicaid revenues 
attributable to DSH and other supplemental revenues were approximately $604 
million and $651 million, respectively. The 2019 period included $197 million 
related the Michigan provider fee program, $187 million from the California 
provider fee program, $112 million related to Medicaid DSH programs in multiple 
states, $93 million related to the Texas 1115 waiver program, and $15 million 
from a number of other state and local programs.

Several states in which we operate continue to face budgetary challenges that 
have resulted, and likely will continue to result, in reduced Medicaid funding 
levels to hospitals and other providers. Because most states must operate with 
balanced budgets, and the Medicaid program is generally a significant portion 
of a state’s budget, states can be expected to adopt or consider adopting 
future legislation designed to reduce or not increase their Medicaid 
expenditures. In addition, some states delay issuing Medicaid payments to 
providers to manage state expenditures. As an alternative means of funding 
provider payments, many of the states in which we operate have adopted provider 
fee programs or received waivers under Section 1115 of the Social Security Act. 
Under a Medicaid waiver, the federal government waives certain Medicaid 
requirements, thereby giving states flexibility in the operation of their 
Medicaid program to allow states to test new approaches and demonstration 
projects to improve care. Generally the Section 1115 waivers are approved for a 
period of five years with an option to extend the waiver for three additional 
years. Continuing pressure on state budgets and other factors could result in 
future reductions to Medicaid payments, payment delays or additional taxes on 
hospitals.

Because we cannot predict what actions the federal government or the states may 
take under existing legislation and future legislation to address budget gaps, 
deficits, Medicaid expansion, provider fee programs or Medicaid Section 1115 
waivers, we are unable to assess the effect that any such legislation might 
have on our business, but the impact on our future financial position, results 
of operations or cash flows could be material.

Medicaid and Managed Medicaid net patient service revenues from continuing 
operations recognized by the hospitals and related outpatient facilities in our 
Hospital Operations and other segment from Medicaid-related programs in the 
states in which our facilities are (or were, as the case may be) located, as 
well as from Medicaid programs in neighboring states, for the nine months ended 
September 30, 2019 and 2018 are set forth in the following table. These 
revenues are presented net of provider assessments, which are reported as an 
offset reduction to fee-for-service Medicaid revenue.

Medicaid and Managed Medicaid revenues comprised 46% and 54%, respectively, of 
our Medicaid-related net patient service revenues from continuing operations 
recognized by the hospitals and related outpatient facilities in our Hospital 
Operations and other segment for both the nine months ended September 30, 2019 
and 2018.

Regulatory and Legislative Changes

Material updates to the information set forth in our Annual Report about the 
Medicare and Medicaid payment systems are provided below.

Payment and Policy Changes to the Medicare Inpatient Prospective Payment 
Systems

Under Medicare law, CMS is required to annually update certain rules governing 
the inpatient prospective payment systems (“IPPS”). The updates generally 
become effective October 1, the beginning of the federal fiscal year. In August 
2019, CMS issued the final Changes to the Hospital Inpatient Prospective 
Payment Systems for Acute Care Hospitals and Fiscal Year 2020 Rates (“August 
2019 Rule”) and, in October 2019, CMS issued a notice (“October 2019 Correction 
Notice”) correcting minor errors in the August 2019 Rule. The August 2019 Rule 
and the October 2019 Correction Notice are collectively referred to as the 
“Final IPPS Rule”. The Final IPPS Rule includes the following payment and 
policy changes:


•

A market basket increase of 3.0% for Medicare severity-adjusted 
diagnosis-related group (“MS-DRG”) operating payments for hospitals reporting 
specified quality measure data and that are meaningful users of electronic 
health record technology; CMS also finalized certain adjustments to the 3.0% 
market basket increase that result in a net operating payment update of 3.1% 
(before budget neutrality adjustments), including:


•

A multifactor productivity reduction required by the ACA of 0.4%; and


•

A 0.5% increase required under the Medicare Access and CHIP Reauthorization Act 
of 2015;


•

Updates to the three factors used to determine the amount and distribution of 
Medicare uncompensated care disproportionate share (“UC-DSH”) payments; in 
addition to adjusting the UC-DSH amounts, CMS will base the distribution of the 
FFY 2020 UC-DSH amounts on uncompensated care costs reported by hospitals in 
the 2015 cost reports, which reflects changes to the calculation of a 
hospital’s share of the UC-DSH amounts by: (1) removing low income days; and 
(2) using a single year of uncompensated care cost in lieu of the three-year 
averaging methodology used in recent years;


•

A 0.64% net increase in the capital federal MS-DRG rate;


•

An increase in the cost outlier threshold from $25,769 to $26,552; and


•

Changes in the calculation of the wage index areas that include:


•

Increasing the wage index for hospitals with a wage index below the 25th 
percentile and applying a uniform budget neutrality factor to the IPPS base 
rates to offset the estimated increase in IPPS payments to hospitals with wage 
index values below the 25th percentile;


•

A refinement to the calculation of the “rural floor” wage index; and


•

A one-year stop-loss transition for a hospital that experiences a decline of 
greater than 5% in its wage index.

According to CMS, the combined impact of the payment and policy changes in the 
Final IPPS Rule for operating costs will yield an average 2.8% increase in 
Medicare operating MS-DRG fee-for-service (“FFS”) payments for hospitals in 
large urban areas (populations over one million), and an average 2.8% increase 
in operating MS-DRG FFS payments for proprietary hospitals in FFY 2020. We 
estimate that all of the payment and policy changes affecting operating MS-DRG 
payments, including those affecting Medicare UC-DSH amounts, will result in an 
estimated 1.4% increase in our annual Medicare FFS IPPS payments, which yields 
an estimated increase of approximately $28 million. Because of the uncertainty 
associated with various factors that may influence our future IPPS payments by 
individual hospital, including legislative, regulatory or legal actions, 
admission volumes, length of stay and case mix, we cannot provide any 
assurances regarding our estimate of the impact of the payment and policy 
changes.

Payment and Policy Changes to the Medicare Outpatient Prospective Payment and 
Ambulatory Surgery Center Payment Systems

On November 1, 2019, CMS released policy changes and payment rates for the 
Hospital Outpatient Prospective Payment System (“OPPS”) and Ambulatory Surgical 
Center (“ASC”) Payment System for calendar year (“CY”) 2020 (“Final OPPS/ASC 
Rule”). The Final OPPS/ASC Rule includes the following payment and policy 
changes:


•

An estimated net increase of 2.6% for the OPPS rates based on an estimated 
market basket increase of 3.0% reduced by a multifactor productivity adjustment 
required by the ACA of 0.4%;


•

A continuation of the reduced payment amount for separately payable drugs 
acquired with a discount under CMS’ 340B program (“340B Drugs”) equal to a rate 
of average sales price (“ASP”) minus 22.5%. CMS is also soliciting comments on 
alternative payment policies for 340B Drugs, as well as the appropriate remedy 
for CYs 2018 and 2019. CMS recently announced its intent to conduct a 340B 
hospital survey to collect drug acquisition cost data for CY 2018 and 2019. 
Such data may be used in setting the future Medicare payment amount for drugs 
acquired by 340B, and may be used to devise a remedy for prior years in the 
event that CMS does not prevail on appeal in the pending litigation discussed 
in greater detail below;


•

A prior authorization process for five categories of services; and


•

A 2.6% increase to the ASC payment rates.


•

In the CY 2020 Proposed OPPS/ASC Rule, CMS proposed a policy that would require 
hospitals to post negotiated prices for certain services. CMS recently 
announced that it has separated the proposal from the CY 2020 OPPS rulemaking 
and that the agency intends to respond to public comments on the proposed 
policies in a forthcoming final rule.

CMS projects that the combined impact of the payment and policy changes in the 
Final OPPS/ASC Rule will yield an average 1.3% increase in Medicare FFS OPPS 
payments for all hospitals, an average 1.2% increase in Medicare FFS OPPS 
payments for hospitals in large urban areas (populations over one million), and 
an average 2.1% increase in Medicare FFS OPPS payments for proprietary 
hospitals. Based on CMS’ estimates, the projected annual impact of the payment 
and policy changes in the Final OPPS/ASC Rule on our hospitals is an increase 
to Medicare FFS hospital outpatient revenues of approximately $10 million, 
which represents an increase of approximately 1.7%. Because of the uncertainty 
associated with various factors that may influence our future OPPS payments, 
including legislative or legal actions, volumes and case mix, we cannot provide 
any assurances regarding our estimate of the impact of the payment and policy 
changes.

Payment and Policy Changes to the Medicare Physician Fee Schedule

On November 1, 2019, CMS issued a final rule that includes updates to payment 
policies, payment rates, quality provisions and other policies for services 
reimbursed under the Medicare Physician Fee Schedule (“MPFS”) for CY 2020. With 
the budget neutrality adjustment to account for changes in the relative value 
units required by law, the final MPFS conversion factor for 2020 will increase 
by approximately 0.14%. CMS estimates that the impact of the payment and policy 
changes in the final rule will result in no change in aggregate FFS MPFS 
payments across all specialties.


Medicaid DSH Reductions

On September 23, 2019, CMS issued a final rule for calculating the $4 billion 
in reductions to state Medicaid DSH allotments for FFY 2020 and the $8 billion 
for each subsequent year through 2025 required under current law. On September 
27, 2019, the President signed the Continuing Appropriations Act, 2020 and the 
Health Extenders Act of 2020 that funds the federal government through November 
21, 2019 and delayed through November 21, 2019 the FFY 2020 Medicaid DSH 
reduction that otherwise would have begun on October 1, 2019. We are unable to 
predict what legislative action, if any, Congress will ultimately take with 
respect to a further delay in the Medicaid DSH reductions and/or DSH allotment 
policies. If no further legislative action is taken, we expect our Medicaid DSH 
revenues to decrease by $11 million in the three months ending December 31, 
2019 and continue at that level in each subsequent quarter until further 
reductions are required under existing law.

Significant Litigation

340B Litigation

The 340B program allows certain hospitals (i.e., only nonprofit organizations 
with specific federal designations and/or funding) to purchase separately 
payable drugs at discounted rates from drug manufacturers. In the final rule 
regarding OPPS payment and policy changes for CY 2018, CMS reduced the payment 
for 340B Drugs from ASP plus 6% to ASP minus 22.5% and made a corresponding 
budget-neutral increase to payments to all hospitals for other drugs and 
services reimbursed under the OPPS (the “340B Payment Adjustment”). In the 
final rule regarding OPPS payment and policy changes for CY 2019 (“CY 2019 OPPS 
Final Rule”), CMS continued the 340B Payment Adjustment. Certain hospital 
associations and hospitals commenced litigation challenging CMS’ authority to 
impose the 340B Payment Adjustment for CYs 2018 and 2019. During the three 
months ended June 30, 2019, the U.S. District Court for the District of 
Columbia (the “District Court”) held that the adoption of the 340B Payment 
Adjustment in the CY 2019 OPPS Final Rule exceeded CMS’ statutory authority. 
This holding followed the District Court’s December 2018 conclusion that HHS 
exceeded its statutory authority in reducing the CY 2018 OPPS for the 340B 
Payment Adjustment. The District Court did not grant a permanent injunction to 
the 340B Payment Adjustment, nor did it vacate the 2018 and 2019 rules. Also 
during the three months ended June 30, 2019, the District Court issued a 
Memorandum Opinion granting HHS’ motion for entry of final judgment, thus 
allowing HHS to proceed with a pending appeal of the District Court’s rulings 
at the U.S. Court of Appeals for the District of Columbia Circuit (the “Circuit 
Court”). We cannot predict the ultimate outcome of the 340B litigation; 
however, CMS’ remedy and/or an unfavorable outcome of the litigation could have 
an adverse effect on the Company’s net revenues and cash flows.

Medicare Disproportionate Share Hospital Litigation

Medicare makes additional payments to hospitals that treat a disproportionately 
high share of low-income patients, Prior to October 1, 2013, DSH payments were 
based on each hospital’s low income utilization for each payment year (the 
“Pre-ACA DSH Formula”). In the final rule regarding IPPS payment and policy 
changes for FFY 2005, CMS revised its policy on the calculation of one of the 
ratios used in the Pre-ACA DSH Formula. A group of hospitals challenged the 
policy change claiming that CMS failed to provide adequate notice and a comment 
period. The District Court vacated the rule. CMS appealed the ruling, and the 
Circuit Court affirmed the District Court’s decision. Since then, CMS has 
continued to use the vacated policy and was again met with legal challenges. In 
2019, the U.S. Supreme Court (“SCOTUS”) upheld the Circuit Court’s decision 
that CMS’ continued use of the vacated policy is not legal. Although the SCOTUS 
decision applies only to the 2012 ratios for the plaintiff hospitals, it 
establishes a precedent that we believe will result in a favorable outcome in 
our pending Medicare DSH appeals for years 2005-2013; however, we cannot 
predict the timing or outcome of our appeals or when and how CMS will implement 
the SCOTUS decision. A favorable outcome of our DSH appeals could have a 
material impact on our future revenues and cash flows.


PRIVATE INSURANCE

Managed Care

We currently have thousands of managed care contracts with various HMOs and 
PPOs. HMOs generally maintain a full-service healthcare delivery network 
comprised of physician, hospital, pharmacy and ancillary service providers that 
HMO members must access through an assigned “primary care” physician. The 
member’s care is then managed by his or her primary care physician and other 
network providers in accordance with the HMO’s quality assurance and 
utilization review guidelines so that appropriate healthcare can be efficiently 
delivered in the most cost-effective manner. HMOs typically provide reduced 
benefits or reimbursement (or none at all) to their members who use 
non-contracted healthcare providers for non-emergency care.

PPOs generally offer limited benefits to members who use non-contracted 
healthcare providers. PPO members who use contracted healthcare providers 
receive a preferred benefit, typically in the form of lower co-pays, 
co-insurance or deductibles. As employers and employees have demanded more 
choice, managed care plans have developed hybrid products that combine elements 
of both HMO and PPO plans, including high-deductible healthcare plans that may 
have limited benefits, but cost the employee less in premiums.

The amount of our managed care net patient service revenues, including Medicare 
and Medicaid managed care programs, from our hospitals and related outpatient 
facilities during the nine months ended September 30, 2019 and 2018 was $7.041 
billion and $6.869 billion, respectively. Our top ten managed care payers 
generated 62% of our managed care net patient service revenues for the nine 
months ended September 30, 2019. National payers generated 43% of our managed 
care net patient service revenues for the nine months ended September 30, 2019. 
The remainder comes from regional or local payers. At September 30, 2019 and 
December 31, 2018, 62% and 61%, respectively, of our net accounts receivable 
for our Hospital Operations and other segment were due from managed care 
payers.

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. We believe it is reasonably likely for there to be 
an approximately 3% increase or decrease in the estimated contractual 
allowances related to managed care plans. Based on reserves at September 30, 
2019, a 3% increase or decrease in the estimated contractual allowance would 
impact the estimated reserves by approximately $15 million. Some of the factors 
that can contribute to changes in the contractual allowance estimates include: 
(1) changes in reimbursement levels for procedures, supplies and drugs when 
threshold levels are triggered; (2) changes in reimbursement levels when 
stop-loss or outlier limits are reached; (3) changes in the admission status of 
a patient due to physician orders subsequent to initial diagnosis or testing; 
(4) final coding of in-house and discharged-not-final-billed patients that 
change reimbursement levels; (5) secondary benefits determined after primary 
insurance payments; and (6) reclassification of patients among insurance plans 
with different coverage and payment levels. 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 expect managed care governmental admissions to continue to increase as a 
percentage of total managed care admissions over the near term. However, the 
managed Medicare and Medicaid insurance plans typically generate lower yields 
than commercial managed care plans, which have been experiencing an improved 
pricing trend. Although we have benefited from solid year-over-year aggregate 
managed care pricing improvements for several years, we have seen these 
improvements moderate in recent years, and we believe the moderation could 
continue in future years. In the nine months ended September 30, 2019, our 
commercial managed care net inpatient revenue per admission from the hospitals 
and related outpatient facilities in our Hospital Operations and other segment 
was approximately 99% higher than our aggregate yield on a per admission basis 
from government payers, including managed Medicare and Medicaid insurance 
plans.


Indemnity

An indemnity-based agreement generally requires the insurer to reimburse an 
insured patient for healthcare expenses after those expenses have been incurred 
by the patient, subject to policy conditions and exclusions. Unlike an HMO 
member, a patient with indemnity insurance is free to control his or her 
utilization of healthcare and selection of healthcare providers.

UNINSURED PATIENTS

Uninsured patients are patients who do not qualify for government programs 
payments, such as Medicare and Medicaid, do not have some form of private 
insurance and, therefore, are responsible for their own medical bills. A 
significant number of our uninsured patients are admitted through our 
hospitals’ emergency departments and often require high-acuity treatment that 
is more costly to provide and, therefore, results in higher billings, which are 
the least collectible of all accounts.

Self-pay accounts receivable, which include amounts due from uninsured 
patients, as well as co-pays, co-insurance amounts and deductibles owed to us 
by patients with insurance, pose significant collectability problems. At 
September 30, 2019 and December 31, 2018, approximately 5% and 6%, 
respectively, of our net accounts receivable for our Hospital Operations and 
other segment was self-pay. Further, a significant portion of our implicit 
price concessions relates to self-pay amounts. We provide revenue cycle 
management services through Conifer, which is subject to various statutes and 
regulations regarding consumer protection in areas including finance, debt 
collection and credit reporting activities. For additional information, see 
Item 1, Business — Regulations Affecting Conifer’s Operations, of Part I of our 
Annual Report.

Conifer has performed systematic analyses to focus our attention on the drivers 
of bad debt expense for each hospital. While emergency department use is the 
primary contributor to our implicit price concessions in the aggregate, this is 
not the case at all hospitals. As a result, we have increased our focus on 
targeted initiatives that concentrate on non-emergency department patients as 
well. These initiatives are intended to promote process efficiencies in 
collecting self-pay accounts, as well as co-pay, co-insurance and deductible 
amounts owed to us by patients with insurance, that we deem highly collectible. 
We leverage a statistical-based collections model that aligns our operational 
capacity to maximize our collections performance. We are dedicated to modifying 
and refining our processes as needed, enhancing our technology and improving 
staff training throughout the revenue cycle process in an effort to increase 
collections and reduce accounts receivable.

Over the longer term, several other initiatives we have previously announced 
should also help address this challenge. For example, our Compact with 
Uninsured Patients (“Compact”) is designed to offer managed care-style 
discounts to certain uninsured patients, which enables us to offer lower rates 
to those patients who historically had been charged standard gross charges. 
Under the Compact, the discount offered to 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 through implicit price concessions based on historical collection trends 
for self-pay accounts and other factors that affect the estimation process.

We also provide financial assistance through our charity and uninsured discount 
programs to uninsured patients who are unable to pay for the healthcare 
services they receive. Our policy is not to pursue collection of amounts 
determined to qualify for financial assistance; 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 DSH payments. These payments are intended to mitigate our cost of 
uncompensated care. Some states have also developed provider fee or other 
supplemental payment programs to mitigate the shortfall of Medicaid 
reimbursement compared to the cost of caring for Medicaid patients.


RESULTS OF OPERATIONS


Nine Months Ended September 30,


Total net operating revenues increased by $79 million, or 1.8%, and decreased 
by $21 million, or 0.2%, for the three and nine months ended September 30, 
2019, respectively, compared to the three and nine months ended September 30, 
2018, respectively. Hospital Operations and other net operating revenues 
increased by $94 million and $105 million, or 2.6% and 1.0%, for the three and 
nine months ended September 30, 2019, respectively, compared to the three and 
nine months ended September 30, 2018, respectively, primarily due to improved 
inpatient volumes, increased acuity and improved managed care pricing. 
Ambulatory Care net operating revenues increased by $20 million, or 4.0%, and 
decreased by $5 million, or 0.3%, for the three and nine months ended September 
30, 2019, respectively, compared to the three and nine months ended September 
30, 2018, respectively. The change in 2019 revenues for the three month period 
was driven by an increase in same-facility net operating revenues of $34 
million and an increase from acquisitions of $22 million, partially offset by a 
$21 million decrease due to the sale of Aspen and a decrease of $15 million due 
to the deconsolidation of a facility. The change in 2019 revenues for the nine 
month period was driven by a decrease of $117 million due to the sale of Aspen 
and a decrease of $46 million due to the deconsolidation of a facility, 
partially offset by an increase in same-facility net operating revenues of $82 
million and an increase from acquisitions of $76 million. Conifer net operating 
revenues decreased by $35 million and $121 million, or 9.4% and 10.4%, for the 
three and nine months ended September 30, 2019, respectively, compared to the 
three and nine months ended September 30, 2018, respectively. Conifer revenues 
from third-party customers, which are not eliminated in consolidation, 
decreased $29 million and $113 million, or 12.9% and 15.7%, for the three and 
nine months ended September 30, 2019, respectively, compared to the three and 
nine months ended September 30, 2018, respectively.

Nine Months Ended September 30, Selected Operating Expenses


RESULTS OF OPERATIONS BY SEGMENT

Our operations are reported in three segments:

•

Hospital Operations and other, which is comprised of our acute care and 
specialty hospitals, ancillary outpatient facilities, urgent care centers, 
microhospitals and physician practices.

•

Ambulatory Care, which is comprised of USPI’s ambulatory surgery centers, 
urgent care centers, imaging centers and surgical hospitals (and also included 
nine facilities in the United Kingdom until we divested Aspen effective August 
17, 2018).

•

Conifer, which provides revenue cycle management and value-based care services 
to hospitals, health systems, physician practices, employers and other 
customers.

Hospital Operations and Other Segment

The following tables show operating statistics of our continuing operations 
hospitals and related outpatient facilities on a same-hospital basis, unless 
otherwise indicated, which includes the results of our same 65 hospitals 
operated throughout the nine months ended September 30, 2019 and 2018. Our 
same-hospital information excludes the results of two Philadelphia-area 
hospitals, which we divested effective January 11, 2018, MacNeal Hospital, 
which we divested effective March 1, 2018, Des Peres Hospital, which we 
divested effective May 1, 2018, and three Chicago-area hospitals, which we 
divested effective January 28, 2019.

Nine Months Ended September 30, Admissions, Patient Days and Surgeries

Same-Hospital Continuing Operations

Adjusted patient admissions/days represents actual patient admissions/days 
adjusted to include outpatient services provided by facilities in our Hospital 
Operations and other segment by multiplying actual patient admissions/days by 
the sum of gross inpatient revenues and outpatient revenues and dividing the 
results by gross inpatient revenues.

Revenues

Same-hospital net operating revenues increased $186 million, or 5.3%, during 
the three months ended September 30, 2019 compared to the three months ended 
September 30, 2018, primarily due to improved volumes, a favorable change in 
payer mix, increased acuity and improved terms of our managed care contracts. 
Same-hospital admissions increased 3.6% in the three months ended September 30, 
2019 compared to the same period in 2018. Same-hospital outpatient visits 
increased 1.6% in the three months ended September 30, 2019 compared to the 
prior-year period.

Same-hospital net operating revenues increased $480 million, or 4.5%, during 
the nine months ended September 30, 2019 compared to the nine months ended 
September 30, 2018, primarily due to improved volumes, a favorable change in 
payer mix, increased acuity and improved terms of our managed care contracts. 
Same-hospital admissions increased 2.2% in the nine months ended September 30, 
2019 compared to the same period in 2018. Same-hospital outpatient visits 
increased 0.3% in the nine months ended September 30, 2019 compared to the 
prior-year period.

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 certain unbilled accounts, as well as 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. Estimated 
uncollectable amounts are generally considered implicit price concessions that 
are a direct reduction to patient accounts receivable rather than allowance for 
doubtful accounts. 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 in the accompanying Condensed Consolidated Balance Sheet at September 
30, 2019.

Collection of accounts receivable has been a key area of focus, particularly 
over the past several years. At September 30, 2019, our Hospital Operations and 
other segment collection rate on self-pay accounts was approximately 23.0%. Our 
self-pay collection rate includes payments made by patients, including co-pays, 
co-insurance amounts and deductibles paid by patients with insurance. Based on 
our accounts receivable from uninsured patients and co-pays, co-insurance 
amounts and deductibles owed to us by patients with insurance at September 30, 
2019, a 10% decrease or increase in our self-pay collection rate, or 
approximately 2%, which we believe could be a reasonably likely change, would 
result in an unfavorable or favorable adjustment to patient accounts receivable 
of approximately $10 million. 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 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.

Payment pressure from managed care payers also affects the collectability of 
our accounts receivable. We typically experience ongoing managed care payment 
delays and disputes; however, we continue to work with these payers to obtain 
adequate and timely reimbursement for our services. Our estimated Hospital 
Operations and other segment collection rate from managed care payers was 
approximately 98.1% at September 30, 2019.

We manage our implicit price concessions using hospital-specific goals and 
benchmarks such as (1) total cash collections, (2) point-of-service cash 
collections, (3) AR Days and (4) accounts receivable by aging category. The 
following tables present the approximate aging by payer of our net accounts 
receivable from the continuing operations of our Hospital Operations and other 
segment of $2.540 billion and $2.384 billion at September 30, 2019 and December 
31, 2018, respectively, excluding cost report settlements receivable and 
valuation allowances of $38 million and $18 million, respectively, at September 
30, 2019 and December 31, 2018:

Conifer continues to implement revenue cycle initiatives to improve our cash 
flow. These initiatives are focused on standardizing and improving patient 
access processes, including pre-registration, registration, verification of 
eligibility and benefits, liability identification and collections at 
point-of-service, and financial counseling. These initiatives are intended to 
reduce denials, improve service levels to patients and increase the quality of 
accounts that end up in accounts receivable. Although we continue to focus on 
improving our methodology for evaluating the collectability of our accounts 
receivable, we may incur future charges if there are unfavorable changes in the 
trends affecting the net realizable value of our accounts receivable.

At September 30, 2019, we had a cumulative total of patient account assignments 
to Conifer of approximately $2.7 billion related to our continuing operations. 
These accounts have already been written off and are not included in our 
receivables or in the allowance for doubtful accounts; however, an estimate of 
future recoveries from all the accounts assigned to Conifer is determined based 
on our historical experience and recorded in accounts receivable.

Patient advocates from Conifer’s Medicaid Eligibility Program (“MEP”) 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. Receivables from patients who are 
potentially eligible for Medicaid are classified as Medicaid pending, under the 
MEP, with appropriate contractual allowances recorded. Based on recent trends, 
approximately 96% of all accounts in the MEP are ultimately approved for 
benefits under a government program, such as Medicaid. The following table 
shows the approximate amount of accounts receivable in the MEP still awaiting 
determination of eligibility under a government program at September 30, 2019 
and December 31, 2018 by aging category for the hospitals currently in the 
program:

Salaries, Wages and Benefits

Same-hospital salaries, wages and benefits as a percentage of net operating 
revenues increased by 130 basis points to 49.6% in the three months ended 
September 30, 2019 compared to the same period in 2018. The change was 
primarily due to annual merit increases for certain of our employees, a greater 
number of employed physicians and increased incentive compensation expense, 
partially offset by lower health benefits costs and the impact of previously 
announced workforce reductions as part of our enterprise-wide cost reduction 
initiatives. Additionally, a one-day strike by union nurses that impacted 12 of 
our hospitals caused a one-time increase to contract labor costs this quarter. 
Salaries, wages and benefits expense for the three months ended September 30, 
2019 and 2018 included stock-based compensation expense of $8 million and $7 
million, respectively.

Same-hospital salaries, wages and benefits as a percentage of net operating 
revenues increased by 50 basis points to 49.1% in the nine months ended 
September 30, 2019 compared to the same period in 2018. The change was 
primarily due to annual merit increases for certain of our employees, increased 
workers’ compensation costs as a result of favorable experience in the 
prior-year period and increased incentive compensation expense, partially 
offset by lower health benefits costs and the impact of previously announced 
workforce reductions as part of our enterprise-wide cost reduction initiatives. 
Salaries, wages and benefits expense for the nine months ended September 30, 
2019 and 2018 included stock-based compensation expense of $24 million and $20 
million, respectively.

Supplies

Same-hospital supplies expense as a percentage of net operating revenues 
increased by 40 basis points to 17.6% in the three months ended September 30, 
2019 compared to the same period in 2018. Same-hospital supplies expense as a 
percentage of net operating revenues decreased by 10 basis points to 17.4% in 
the nine months ended September 30, 2019 compared to the same period in 2018. 
Supplies expense was impacted by the benefits of the group-purchasing 
strategies and supplies-management services we utilize to reduce costs offset 
by increased costs from certain higher acuity supply-intensive surgical 
services.

We strive to control supplies expense through product standardization, 
consistent contract terms and end-to-end contract management, improved 
utilization, bulk purchases, focused spending with a smaller number of vendors 
and operational improvements. The items of current cost reduction focus 
continue to be cardiac stents and pacemakers, orthopedics, implants, and 
high-cost pharmaceuticals.

Other Operating Expenses, Net

Same-hospital other operating expenses as a percentage of net operating 
revenues decreased by 120 basis points to 24.0% in the three months ended 
September 30, 2019 compared to 25.2% in the same period in 2018 primarily due 
to the effect of higher volumes on operating leverage due to certain fixed 
costs. Same-hospital other operating expenses increased by $3 million, or 0.3%, 
for the three months ended September 30, 2019 compared to the three months 
ended September 30, 2018. The changes in other operating expenses included:


•

increased medical fees of $24 million; and


•

gains on asset sales of $19 million in the 2018 period primarily related to the 
sale of an equity method investment, partially offset by


•

decreased claim expenses of $22 million related to our risk contracting 
business in California; and


•

decreased malpractice expense of $12 million.

Same-hospital malpractice expense in the 2019 period included an unfavorable 
adjustment of approximately $7 million from a 25 basis point decrease in the 
interest rate used to estimate the discounted present value of projected future 
malpractice liabilities. In the 2018 period, we recognized a favorable 
adjustment of approximately $5 million from a 20 basis point increase in the 
discounted present value of projected future malpractice liabilities.

Same-hospital other operating expenses as a percentage of net operating 
revenues increased by 80 basis points to 24.4% in the nine months ended 
September 30, 2019 compared to 23.6% in the same period in 2018. Same-hospital 
other operating expenses increased by $199 million, or 8.0%, for the nine 
months ended September 30, 2019 compared to the nine months ended September 30, 
2018. The changes in other operating expenses included:


•

increased malpractice expense of $35 million;


•

increased medical fees of $66 million;


•

increased software costs of $20 million; and


•

gains on asset sales of $18 million in the 2018 period primarily related to the 
sale of an equity method investment.


Same-hospital malpractice expense in the 2019 period included an unfavorable 
adjustment of approximately $24 million from a 97 basis point decrease in the 
interest rate used to estimate the discounted present value of projected future 
malpractice liabilities. In the 2018 period, we recognized a favorable 
adjustment of approximately $18 million from a 68 basis point increase in the 
discounted present value of projected future malpractice liabilities.

Ambulatory Care Segment

Our Ambulatory Care segment is comprised of USPI’s ambulatory surgery centers, 
urgent care centers, imaging centers and surgical hospitals. Our Ambulatory 
Care segment also included nine facilities in the United Kingdom until we 
divested Aspen effective August 17, 2018. USPI operates its surgical facilities 
in partnership with local physicians and, in many of these facilities, a 
healthcare system partner. We hold an ownership interest in each facility, with 
each being operated through a separate legal entity in most cases. USPI 
operates facilities on a day-to-day basis through management services 
contracts. Our sources of earnings from each facility consist of:

•

management services revenues, computed as a percentage of each facility’s net 
revenues (often net of implicit price concessions); and

•

our share of each facility’s net income (loss), which is computed by 
multiplying the facility’s net income (loss) times the percentage of each 
facility’s equity interests owned by USPI.

Our role as an owner and day-to-day manager provides us with significant 
influence over the operations of each facility. For many of the facilities our 
Ambulatory Care segment operates (111 of 348 facilities at September 30, 2019), 
this influence does not represent control of the facility, so we account for 
our investment in the facility under the equity method for an unconsolidated 
affiliate. USPI controls 237 of the facilities our Ambulatory Care segment 
operates, and we account for these investments as consolidated subsidiaries. 
Our net earnings from a facility are the same under either method, but the 
classification of those earnings differs. For consolidated subsidiaries, our 
financial statements reflect 100% of the revenues and expenses of the 
subsidiaries, after the elimination of intercompany amounts. The net profit 
attributable to owners other than USPI is classified within “net income 
available to noncontrolling interests.”

For unconsolidated affiliates, our consolidated statements of operations 
reflect our earnings in two line items:


•

equity in earnings of unconsolidated affiliates—our share of the net income 
(loss) of each facility, which is based on the facility’s net income (loss) and 
the percentage of the facility’s outstanding equity interests owned by USPI; 
and


•

management and administrative services revenues, which is included in our net 
operating revenues—income we earn in exchange for managing the day-to-day 
operations of each facility, usually quantified as a percentage of each 
facility’s net revenues less implicit price concessions.

Our Ambulatory Care segment operating income is driven by the performance of 
all facilities USPI operates and by USPI’s ownership interests in those 
facilities, but our individual revenue and expense line items contain only 
consolidated businesses, which represent 68% of those facilities. This 
translates to trends in consolidated operating income that often do not 
correspond with changes in consolidated revenues and expenses, which is why we 
disclose certain statistical and financial data on a pro forma systemwide basis 
that includes both consolidated and unconsolidated (equity method) facilities.

Results of Operations

Our Ambulatory Care net operating revenues increased by $20 million, or 4.0% 
during the three months ended September 30, 2019 as compared to the three 
months ended September 30, 2018. The change was driven by an increase in 
same-facility net operating revenues of $34 million and an increase from 
acquisitions of $22 million, partially offset by a decrease of $21 million due 
to the sale of Aspen and a decrease of $15 million due to the deconsolidation 
of a facility for the three month period. Our Ambulatory Care net operating 
revenues decreased by $5 million, or 0.3% during the nine months ended 
September 30, 2019 as compared to the nine months ended September 30, 2018. The 
change was driven by a decrease of $117 million due to the sale of Aspen and a 
decrease of $46 million due to the deconsolidation of a facility, partially 
offset by an increase in same-facility net operating revenues of $82 million 
and an increase from acquisitions of $76 million for the nine month period.

Salaries, wages and benefits expense remained the same during the three months 
ended September 30, 2019 as compared to the three months ended September 30, 
2018. Salaries, wages and benefits expense was impacted by a decrease of $8 
million due to the sale of Aspen and a decrease of $4 million due to the 
deconsolidation of a facility, which were offset by an increase in 
same-facility salaries, wages and benefits expense of $5 million and an 
increase from acquisitions of $7 million for the three month period. Salaries, 
wages and benefits expense decreased by $17 million, or 3.5% during the nine 
months ended September 30, 2019 as compared to the nine months ended September 
30, 2018. The change was driven by a decrease of $44 million due to the sale of 
Aspen and a decrease of $12 million due to the deconsolidation of a facility, 
partially offset by an increase in same-facility salaries, wages and benefits 
expense of $19 million and an increase from acquisitions of $20 million for the 
nine month period.

Supplies expense increased by $5 million, or 4.8%, during the three months 
ended September 30, 2019 as compared to the three months ended September 30, 
2018. The change was driven by an increase in same-facility supplies expense of 
$7 million and an increase from acquisitions of $6 million, partially offset by 
a decrease of $4 million due to the sale of Aspen and a decrease of $4 million 
due to the deconsolidation of a facility for the three month period. Supplies 
expense remained the same for the nine months ended September 30, 2019 as 
compared to the nine months ended September 30, 2018. Supplies expense was 
impacted by a decrease of $25 million due to the sale of Aspen and a decrease 
of $12 million due to the deconsolidation of a facility, which were offset by 
an increase in same-facility supplies expense of $19 million and an increase 
from acquisitions of $18 million for the nine month period.

Other operating expenses decreased by $2 million, or 2.3%, during the three 
months ended September 30, 2019 as compared to the three months ended September 
30, 2018. The change was driven by a decrease of $6 million due to the sale of 
Aspen and a decrease of $3 million due to the deconsolidation of a facility, 
partially offset by an increase in same-facility other operating expenses of $3 
million and an increase from acquisitions of $4 million for the three month 
period. Other operating expenses decreased by $21 million, or 7.6%, during the 
nine months ended September 30, 2019 as compared to the nine months ended 
September 30, 2018. The change was driven by a decrease of $32 million due to 
the sale of Aspen and a decrease of $9 million due to the deconsolidation of a 
facility, partially offset by an increase in same-facility other operating 
expenses of $7 million and an increase from acquisitions of $13 million for the 
nine month period.

Facility Growth

The following table summarizes the changes in our same-facility revenue 
year-over-year on a pro forma systemwide basis, which includes both 
consolidated and unconsolidated (equity method) facilities. While we do not 
record the revenues of unconsolidated facilities, we believe this information 
is important in understanding the financial performance of our Ambulatory Care 
segment because these revenues are the basis for calculating our management 
services revenues and, together with the expenses of our unconsolidated 
facilities, are the basis for our equity in earnings of unconsolidated 
affiliates.

Joint Ventures with Healthcare System Partners

USPI’s business model is to jointly own its facilities with local physicians 
and, in many of these facilities, a not-for-profit healthcare system partner. 
Accordingly, as of September 30, 2019, the majority of facilities in our 
Ambulatory Care segment are operated in this model.

Ambulatory Care Facilities

During the nine months ended September 30, 2019, we acquired controlling 
interests in two multi-specialty surgery centers in Virginia, multi-specialty 
surgery centers in Florida, Tennessee and Colorado and a single-specialty 
endoscopy center in Florida. We paid cash totaling approximately $15 million 
for these acquisitions. We also acquired a controlling interest in three 
multi-specialty surgery centers located in California and a single-specialty 
endoscopy center in Tennessee, in which we already had an equity method 
investment, for cash totaling $4 million. All of these acquired facilities are 
jointly owned with local physicians and a healthcare system partner is an owner 
in all of the facilities except the two facilities in Florida. During the nine 
months ended September 30, 2019, we acquired noncontrolling interests in two 
multi-specialty surgery centers and a single-specialty endoscopy center, all of 
which are located in New Jersey. We paid cash totaling approximately $11 
million for these ownership interests. All three of these facilities are 
jointly owned with local physicians and a healthcare system partner.

We also regularly engage in the purchase of equity interests with respect to 
our investments in unconsolidated affiliates and consolidated facilities that 
do not result in a change of control. These transactions are primarily the 
acquisitions of equity interests in ambulatory care facilities and the 
investment of additional cash in facilities that need capital for acquisitions, 
new construction or other business growth opportunities. During the nine months 
ended September 30, 2019, we invested approximately $9 million in such 
transactions.

Conifer Segment

Our Conifer segment generated net operating revenues of $336 million and $371 
million during the three months ended September 30, 2019 and 2018, 
respectively, and $1.040 billion and $1.161 billion during the nine months 
ended September 30, 2019 and 2018, respectively, a portion of which was 
eliminated in consolidation as described in Note 19 to the accompanying 
Condensed Consolidated Financial Statements. Conifer revenues from third-party 
customers, which are not eliminated in consolidation, decreased $29 million and 
$113 million, or 12.9% and 15.7%, for the three and nine months ended September 
30, 2019, respectively, compared to the three and nine months ended September 
30, 2018. Conifer revenues from third-party customers were negatively impacted 
by contract terminations related to the sales of customer hospitals in the 2019 
periods compared to the 2018 periods, as well as $17 million in contract 
termination payments received in the nine months ended September 30, 2018.

Salaries, wages and benefits expense for Conifer decreased $33 million, or 
15.5%, in the three months ended September 30, 2019 compared to the three 
months ended September 30, 2018, and decreased $100 million, or 15.3%, in the 
nine months ended September 30, 2019 compared to the nine months ended 
September 30, 2018, in both cases primarily due to the impact of contract 
terminations and previously announced workforce reductions as part of our 
enterprise-wide cost reduction initiatives.

Other operating expenses for Conifer decreased $11 million, or 14.5%, in the 
three months ended September 30, 2019 compared to the three months ended 
September 30, 2018, and decreased $42 million, or 17.9%, in the nine months 
ended September 30, 2019 compared to the nine months ended September 30, 2018, 
in both cases primarily due to the impact of contract terminations and our 
enterprise-wide cost reduction initiatives.

Consolidated

Impairment and Restructuring Charges, and Acquisition-Related Costs

During the three months ended September 30, 2019, we recorded impairment and 
restructuring charges and acquisition-related costs of $46 million, consisting 
of $2 million of impairment charges, $43 million of restructuring charges and 
$1 million of acquisition-related costs. Restructuring charges consisted of $20 
million of employee severance costs, $1 million of contract and lease 
termination fees, and $22 million of other restructuring costs. 
Acquisition-related costs consisted of $1 million of transaction costs. Our 
impairment and restructuring charges and acquisition-related costs for the 
three months ended September 30, 2019 were comprised of $22 million from our 
Hospital Operations and other segment, $7 million from our Ambulatory Care 
segment and $17 million from our Conifer segment.

During the three months ended September 30, 2018, we recorded impairment and 
restructuring charges and acquisition-related costs of $46 million, consisting 
of $6 million of impairment charges, $35 million of restructuring charges and 
$5 million of acquisition-related costs. Impairment charges consisted primarily 
of $5 million of charges to write-down assets held for sale to their estimated 
fair value, less estimated costs to sell, for Aspen and $1 million of other 
impairment charges. Restructuring charges consisted of $21 million of employee 
severance costs, $5 million of contract and lease termination fees, and $9 
million of other restructuring costs. Acquisition-related costs consisted of $3 
million of transaction costs and $2 million of acquisition integration charges. 
Our impairment and restructuring charges and acquisition-related costs for the 
three months ended September 30, 2018 were comprised of $23 million from our 
Hospital Operations and other segment, $13 million from our Ambulatory Care 
segment and $10 million from our Conifer segment.

During the nine months ended September 30, 2019, we recorded impairment and 
restructuring charges and acquisition-related costs of $101 million, consisting 
of $7 million of impairment charges, $90 million of restructuring charges and 
$4 million of acquisition-related costs. Restructuring charges consisted of $38 
million of employee severance costs, $3 million of contract and lease 
termination fees, and $49 million of other restructuring costs. 
Acquisition-related costs consisted of $4 million of transaction costs. Our 
impairment and restructuring charges and acquisition-related costs for the nine 
months ended September 30, 2019 were comprised of $58 million from our Hospital 
Operations and other segment, $12 million from our Ambulatory Care segment and 
$31 million from our Conifer segment.

During the nine months ended September 30, 2018, we recorded impairment and 
restructuring charges and acquisition-related costs of $123 million, consisting 
of $29 million of impairment charges, $82 million of restructuring charges and 
$12 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 Chicago-area 
facilities, $9 million of charges to write-down assets held for sale to their 
estimated fair value, less estimated costs to sell, for Aspen and $3 million of 
other impairment charges. Restructuring charges consisted of $47 million of 
employee severance costs, $10 million of contract and lease termination fees, 
and $25 million of other restructuring costs. Acquisition-related costs 
consisted of $8 million of transaction costs and $4 million of acquisition 
integration charges. Our impairment and restructuring charges and 
acquisition-related costs for the nine months ended September 30, 2018 were 
comprised of $81 million from our Hospital Operations and other segment, $20 
million from our Ambulatory Care segment and $22 million from our Conifer 
segment.

Litigation and Investigation Costs

Litigation and investigation costs for the three months ended September 30, 
2019 and 2018 were $84 million and $9 million, respectively. Litigation and 
investigation costs for the 2019 period included accruals related to the 
matters discussed in Note 13 to the accompanying Condensed Consolidated 
Financial Statements. Litigation and investigation costs for the nine months 
ended September 30, 2019 and 2018 were $115 million and $28 million, 
respectively.

Net Losses (Gains) on Sales, Consolidation and Deconsolidation of Facilities

During the three months ended September 30, 2019, we recorded net losses on 
sales, consolidation and deconsolidation of facilities of approximately $1 
million, primarily related to consolidation changes of certain USPI businesses 
due to ownership changes.

During the three months ended September 30, 2018, we recorded net losses on 
sales, consolidation and deconsolidation of facilities of approximately $7 
million, primarily due to a post-closing adjustment to the gain on the sale of 
MacNeal Hospital.

During the nine months ended September 30, 2019, we recorded net losses on 
sales, consolidation and deconsolidation of facilities of approximately $3 
million, primarily comprised of a $6 million loss on the sale of our 
Chicago-area facilities, partially offset by $2 million of gains related to 
consolidation changes of certain USPI businesses due to ownership changes, as 
well as post-closing adjustments on several other recent divestitures.

During the nine months ended September 30, 2018, we recorded net gains on 
sales, consolidation and deconsolidation of facilities of approximately $111 
million, primarily comprised of gains of $88 million from the sale of MacNeal 
Hospital and other operations affiliated with the hospital in the Chicago area, 
$13 million from the sales of our minority interests in four North Texas 
hospitals and $12 million from the sale of Des Peres Hospital, physician 
practices and other hospital-affiliated operations in St. Louis, Missouri.

Interest Expense

Interest expense for the three months ended September 30, 2019 was $244 million 
compared to $249 million for the same period in 2018. Interest expense for the 
nine months ended September 30, 2019 was $742 million compared to $758 million 
for the same period in 2018.

Loss From Early Extinguishment of Debt

Loss from early extinguishment of debt was $180 million and $227 million for 
the three and nine months ended September 30, 2019, respectively. In 2018, 
there was no loss from early extinguishment of debt for the three months ended 
September 30, 2018, and the loss from early extinguishment of debt for the nine 
months ended September 30, 2018 was $2 million. The increases in the 2019 
periods were due to the debt transactions described in Note 7 to the 
accompanying Condensed Consolidated Financial Statements.

Income Tax Expense

During the three months ended September 30, 2019, we recorded income tax 
expense of $20 million in continuing operations on pre-tax loss of $133 million 
compared to income tax expense of $6 million on pre-tax income of $71 million 
during the three months ended September 30, 2018. During the nine months ended 
September 30, 2019, we recorded income tax expense of $67 million in continuing 
operations on pre-tax income of $81 million compared to income tax expense of 
$120 million on pre-tax income of $481 million during the nine months ended 
September 30, 2018.

Net Income Available to Noncontrolling Interests

Net income available to noncontrolling interests was $80 million for the three 
months ended September 30, 2019 compared to $74 million for the three months 
ended September 30, 2018. Net income available (loss attributable) to 
noncontrolling interests for the three months ended September 30, 2019 was 
comprised of $(8) million related to our Hospital Operations and other segment, 
$73 million related to our Ambulatory Care segment and $15 million related to 
our Conifer segment. Of the portion related to our Ambulatory Care segment, 
there was none related to the minority interests in USPI.

Net income available to noncontrolling interests was $259 million for the nine 
months ended September 30, 2019 compared to $248 million for the nine months 
ended September 30, 2018. Net income available (loss attributable) to 
noncontrolling interests for the nine months ended September 30, 2019 was 
comprised of $(16) million related to our Hospital Operations and other 
segment, $219 million related to our Ambulatory Care segment and $56 million 
related to our Conifer segment. Of the portion related to our Ambulatory Care 
segment, $6 million was related to the minority interests in USPI.

ADDITIONAL SUPPLEMENTAL NON-GAAP DISCLOSURES

The financial information provided throughout this report, including our 
Condensed Consolidated Financial Statements and the notes thereto, has been 
prepared in conformity with accounting principles generally accepted in the 
United States of America (“GAAP”). However, we use certain non-GAAP financial 
measures defined below in communications with investors, analysts, rating 
agencies, banks and others to assist such parties in understanding the impact 
of various items on our financial statements, some of which are recurring or 
involve cash payments. We use this information in our analysis of the 
performance of our business, excluding items we do not consider relevant to the 
performance of our continuing operations. In addition, we use these measures to 
define certain performance targets under our compensation programs.

“Adjusted EBITDA” is a non-GAAP measure defined by the Company as net income 
available (loss attributable) to Tenet Healthcare Corporation common 
shareholders before (1) the cumulative effect of changes in accounting 
principle, (2) net loss attributable (income available) to noncontrolling 
interests, (3) income (loss) from discontinued operations, (4) income tax 
benefit (expense), (5) gain (loss) from early extinguishment of debt, (6) other 
non-operating expense, net, (7) interest expense, (8) litigation and 
investigation (costs) benefit, net of insurance recoveries, (9) net gains 
(losses) on sales, consolidation and deconsolidation of facilities, (10) 
impairment and restructuring charges and acquisition-related costs, (11) 
depreciation and amortization, and (12) income (loss) from divested operations 
and closed businesses (i.e., our health plan businesses). Litigation and 
investigation costs do not include ordinary course of business malpractice and 
other litigation and related expense.

The Company believes the foregoing non-GAAP measure is useful to investors and 
analysts because it presents additional information about the Company’s 
financial performance. Investors, analysts, Company management and the 
Company’s board of directors utilize this non-GAAP measure, in addition to GAAP 
measures, to track the Company’s financial and operating performance and 
compare the Company’s performance to peer companies, which utilize similar 
non-GAAP measures in their presentations. The human resources committee of the 
Company’s board of directors also uses certain non-GAAP measures to evaluate 
management’s performance for the purpose of determining incentive compensation. 
The Company believes that Adjusted EBITDA is a useful measure, in part, because 
certain investors and analysts use both historical and projected Adjusted 
EBITDA, in addition to GAAP and other non-GAAP measures, as factors in 
determining the estimated fair value of shares of the Company’s common stock. 
Company management also regularly reviews the Adjusted EBITDA performance for 
each operating segment. The Company does not use Adjusted EBITDA to measure 
liquidity, but instead to measure operating performance. The non-GAAP Adjusted 
EBITDA measure the Company utilizes may not be comparable to similarly titled 
measures reported by other companies. Because this measure excludes many items 
that are included in our financial statements, it does not provide a complete 
measure of our operating performance. Accordingly, investors are encouraged to 
use GAAP measures when evaluating the Company’s financial performance.


LIQUIDITY AND CAPITAL RESOURCES

CASH REQUIREMENTS

There have been no material changes to our obligations to make future cash 
payments under contracts, such as debt and lease agreements, and under 
contingent commitments, such as standby letters of credit and minimum revenue 
guarantees, as disclosed in our Annual Report, except for additional lease 
obligations and the long-term debt transactions disclosed in Notes 6 and 7, 
respectively, to our accompanying Condensed Consolidated Financial Statements, 
as well as the extension of our contract with a vendor for information 
technology services and systems from July 2022 until September 2024 at an 
annual obligation of $150 million.

As part of our long-term objective to manage our capital structure, we may from 
time to time seek to retire, purchase, redeem or refinance some of our 
outstanding debt or equity securities subject to prevailing market conditions, 
our liquidity requirements, contractual restrictions and other factors. These 
actions are part of our strategy to manage our leverage and capital structure 
over time, which is dependent on our total amount of debt, our cash and our 
operating results. We continue to seek further initiatives to increase the 
efficiency of our balance sheet by generating incremental cash, including by 
means of the sale of underutilized or inefficient assets.

At September 30, 2019, using the last 12 months of Adjusted EBITDA, our ratio 
of total long-term debt, net of cash and cash equivalent balances, to Adjusted 
EBITDA was 5.69x. We anticipate this ratio will fluctuate from quarter to 
quarter based on earnings performance and other factors, including the use of 
our revolving credit facility as a source of liquidity and acquisitions that 
involve the assumption of long-term debt. We intend to manage this ratio by 
following our business plan, managing our cost structure, possible asset 
divestitures and through other changes in our capital structure, including, if 
appropriate, the issuance of equity or convertible securities. Our ability to 
achieve our leverage and capital structure objectives is subject to numerous 
risks and uncertainties, many of which are described in the Risk Factors 
section in Part II of this report and the Forward-Looking Statements and Risk 
Factors sections in Part I of our Annual Report.

Our capital expenditures primarily relate to the expansion and renovation of 
existing facilities (including amounts to comply with applicable laws and 
regulations), equipment and information systems additions and replacements, 
introduction of new medical technologies, design and construction of new 
buildings, and various other capital improvements, as well as commitments to 
make capital expenditures in connection with acquisitions of businesses. 
Capital expenditures were $492 million and $404 million in the nine months 
ended September 30, 2019 and 2018, respectively. We anticipate that our capital 
expenditures for continuing operations for the year ending December 31, 2019 
will total approximately $650 million to $700 million, including $135 million 
that was accrued as a liability at December 31, 2018.

Interest payments, net of capitalized interest, were $705 million and $652 
million in the nine months ended September 30, 2019 and 2018, respectively.

Income tax payments, net of tax refunds, were approximately $18 million in the 
nine months ended September 30, 2019 compared to $24 million in the nine months 
ended September 30, 2018.

SOURCES AND USES OF CASH

Our liquidity for the nine months ended September 30, 2019 was primarily 
derived from net cash provided by operating activities, cash on hand and 
borrowings under our revolving credit facility. We had approximately $314 
million of cash and cash equivalents on hand at September 30, 2019 to fund our 
operations and capital expenditures, and our borrowing availability under our 
credit facility was $1.2 billion based on our borrowing base calculation at 
September 30, 2019.

Our primary source of operating cash is the collection of accounts receivable. 
As such, our operating cash flow is impacted by levels of cash collections, as 
well as levels of implicit price concessions, due to shifts in payer mix and 
other factors.

Net cash provided by operating activities was $713 million in the nine months 
ended September 30, 2019 compared to $799 million in the nine months ended 
September 30, 2018. Key factors contributing to the change between the 2019 and 
2018 periods include the following:

•

The impact of an increase in AR Days outstanding;


•

Decreased cash receipts of $50 million related to the California provider fee 
program;


•

Increased payments for restructuring charges, acquisition-related costs, and 
litigation costs and settlements of $23 million; and


•

The timing of other working capital items.

Net cash used in investing activities was $426 million for the nine months 
ended September 30, 2019 compared to net cash provided by investing activities 
of $120 million for the nine months ended September 30, 2018. The primary 
reason for the decrease was proceeds from sales of facilities and other assets 
of $44 million in the 2019 period when we completed the sale of three hospitals 
and hospital-affiliated operations in the Chicago area compared to proceeds 
from sales of facilities and other assets of $498 million in the 2018 period 
when we completed the sale of hospitals, physician practices and related assets 
in the Philadelphia area, the sale of MacNeal Hospital and other operations 
affiliated with the hospital in the Chicago area, and the sale of Des Peres 
Hospital in St. Louis. There was also a decrease in proceeds from sales of 
marketable securities, long-term investments and other assets of $113 million 
in the 2019 period compared to the 2018 period primarily due to the sales of 
our minority interests in four North Texas hospitals in the 2018 period. 
Capital expenditures were $492 million and $404 million in the nine months 
ended September 30, 2019 and 2018, respectively.

Net cash used in financing activities was $384 million and $1.03 billion for 
the nine months ended September 30, 2019 and 2018, respectively. The 2019 
amount included net borrowings under our credit facility of $275 million and 
$63 million of cash paid for debt issuance costs related to the debt 
transactions described in Note 7 to our accompanying Condensed Consolidated 
Financial Statements. The 2018 amount included $643 million related to 
purchases of noncontrolling interests, primarily our purchase of an additional 
15% ownership interest in USPI and to settle the adjustment to the price we 
paid in 2017 based on actual 2017 financial results of USPI. The 2018 amount 
also included our purchase of approximately $68 million aggregate principal 
amount of our 6.875% senior unsecured notes due 2031, 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.

We record our equity securities and our debt securities classified as 
available-for-sale at fair market value. The majority of our investments are 
valued based on quoted market prices or other observable inputs. We have no 
investments that we expect will be negatively affected by the current economic 
conditions such that they will materially impact our financial condition, 
results of operations or cash flows.

DEBT INSTRUMENTS, GUARANTEES AND RELATED COVENANTS

Senior Secured and Senior Unsecured Note Refinancing Transactions. On August 
26, 2019, we sold $600 million aggregate principal amount of 4.625% senior 
secured first lien notes, which will mature on September 1, 2024 (the “2024 
Senior Secured First Lien Notes”), $2.1 billion aggregate principal amount of 
4.875% senior secured first lien notes, which will mature on January 1, 2026 
(the “2026 Senior Secured First Lien Notes”) and $1.5 billion aggregate 
principal amount of 5.125% senior secured first lien notes, which will mature 
on November 1, 2027 (the “2027 Senior Secured First Lien Notes”). We will pay 
interest on the 2024 Senior Secured First Lien Notes semi-annually in arrears 
on March 1 and September 1 of each year, which payments will commence on March 
1, 2020. We will pay interest on the 2026 Senior Secured First Lien Notes 
semi-annually in arrears on January 1 and July 1 of each year, which payments 
will commence on January 1, 2020. We will pay interest on the 2027 Senior 
Secured First Lien Notes semi-annually in arrears on May 1 and November 1 of 
each year, which payments will commence on May 1, 2020. The proceeds from the 
sales of these notes were used, after payment of fees and expenses, together 
with cash on hand and borrowings under our senior secured revolving credit 
facility, to fund the redemptions of all $500 million aggregate principal 
amount of our outstanding 4.750% senior secured first lien notes due 2020, all 
$1.8 billion aggregate principal amount of our outstanding 6.000% senior 
secured first lien notes due 2020, all $850 million aggregate principal amount 
of our outstanding 4.500% senior secured first lien notes due 2021 and all 
$1.05 billion aggregate principal amount of our outstanding 4.375% senior 
secured first lien notes due 2021. In connection with the redemptions, we 
recorded a loss from early extinguishment of debt of approximately $180 million 
in the three months ended September 30, 2019, primarily related to the 
difference between the redemption prices and the par values of the notes, as 
well as the write-off of the associated unamortized issuance costs.

On February 5, 2019, we sold $1.5 billion aggregate principal amount of 6.250% 
senior secured second lien notes, which will mature on February 1, 2027 (the 
“2027 Senior Secured Second Lien Notes”). We will pay interest on the 2027 
Senior Secured Second Lien Notes semi-annually in arrears on February 1 and 
August 1 of each year, which payments commenced on August 1, 2019. The proceeds 
from the sale of the 2027 Senior Secured Second Lien Notes were used, after 
payment of fees and expenses, together with cash on hand and borrowings under 
our senior secured revolving credit facility, to fund the redemption of all 
$300 million aggregate principal amount of our outstanding 6.750% senior notes 
due 2020 and all $750 million aggregate principal amount of our outstanding 
7.500% senior secured second lien notes due 2022, as well as the repayment upon 
maturity of all $468 million aggregate principal amount of our outstanding 
5.500% senior unsecured notes due March 1, 2019. In connection with the 
redemptions, we recorded a loss from early extinguishment of debt of 
approximately $47 million in the three months ended March 31, 2019, primarily 
related to the difference between the redemption prices and the par values of 
the notes, as well as the write-off of the associated unamortized issuance 
costs. Credit Agreement. We amended our senior secured revolving credit 
facility in September 2019 (as amended, the “Credit Agreement”) to provide, 
subject to borrowing availability, for revolving loans in an aggregate 
principal amount of up to $1.5 billion (from a previous limit of $1.0 billion), 
with a $200 million subfacility for standby letters of credit. Obligations 
under the Credit Agreement, which now has a scheduled maturity date of 
September 12, 2024, are guaranteed by substantially all of our domestic wholly 
owned hospital subsidiaries and are secured by a first-priority lien on the 
eligible inventory and accounts receivable owned by us and the subsidiary 
guarantors, including receivables for Medicaid supplemental payments as of the 
most recent amendment. At September 30, 2019, we were in compliance with all 
covenants and conditions in our Credit Agreement. At September 30, 2019, we had 
$275 million of cash borrowings outstanding under the Credit Agreement subject 
to a weighted average interest rate of 3.45%, and we had $1 million of standby 
letters of credit outstanding. Based on our eligible receivables, $1.2 billion 
was available for borrowing under the Credit Agreement at September 30, 2019.

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. At September 30, 2019, we were in compliance with all covenants and 
conditions in our LC Facility. At September 30, 2019, we had $92 million of 
standby letters of credit outstanding under the LC Facility.

LIQUIDITY

From time to time, we expect to engage in additional capital markets, bank 
credit and other financing activities depending on our needs and financing 
alternatives available at that time. We believe our existing debt agreements 
provide flexibility for future secured or unsecured borrowings.

Our cash on hand fluctuates day-to-day throughout the year based on the timing 
and levels of routine cash receipts and disbursements, including our book 
overdrafts, and required cash disbursements, such as interest and income tax 
payments. These fluctuations result in material intra-quarter net operating and 
investing uses of cash that have caused, and in the future could cause, us to 
use our Credit Agreement as a source of liquidity. We believe that existing 
cash and cash equivalents on hand, availability under our Credit Agreement, 
anticipated future cash provided by operating activities, and our investments 
in marketable securities of our captive insurance companies classified as 
noncurrent investments in our balance sheet should be adequate to meet our 
current cash needs. These sources of liquidity, in combination with any 
potential future debt incurrence, should also be adequate to finance planned 
capital expenditures, payments on the current portion of our long-term debt, 
payments to joint venture partners, including those related to put and call 
arrangements, and other presently known operating needs.

Long-term liquidity for debt service and other purposes will be dependent on 
the amount of cash provided by operating activities and, subject to favorable 
market and other conditions, the successful completion of future borrowings and 
potential refinancings. However, our cash requirements could be materially 
affected by the use of cash in acquisitions of businesses, repurchases of 
securities, the exercise of put rights or other exit options by our joint 
venture partners, and contractual commitments to fund capital expenditures in, 
or intercompany borrowings to, businesses we own. In addition, liquidity could 
be adversely affected by a deterioration in our results of operations, 
including our ability to generate sufficient cash from operations, as well as 
by the various risks and uncertainties discussed in this section and other 
sections of this report and in our Annual Report, including any costs 
associated with legal proceedings and government investigations.

We do not rely on commercial paper or other short-term financing arrangements 
nor do we enter into repurchase agreements or other short-term financing 
arrangements not otherwise reported in our period-end balance sheets. In 
addition, we do not have significant exposure to floating interest rates given 
that all of our current long-term indebtedness has fixed rates of interest 
except for borrowings under our Credit Agreement.

OFF-BALANCE SHEET ARRANGEMENTS

We have no off-balance sheet arrangements that may have a current or future 
material effect on our financial condition, revenues or expenses, results of 
operations, liquidity, capital expenditures or capital resources, except for 
$131 million of standby letters of credit outstanding and guarantees at 
September 30, 2019.

We have no affiliation with partnerships, trusts or other entities (sometimes 
referred to as “special-purpose” or “variable-interest” entities) whose purpose 
is to facilitate off-balance sheet financial transactions or similar 
arrangements by us. As a result, we have no exposure to the financing, 
liquidity, market or credit risks associated with such entities.

We do not hold or issue derivative instruments for trading purposes and are not 
a party to any instruments with leverage or prepayment features.

LEGAL PROCEEDINGS Because we provide healthcare services in a highly regulated 
industry, we have been and expect to continue to be party to various lawsuits, 
claims and regulatory investigations from time to time.

RISK FACTORS

We cannot provide any assurances that we will be successful in completing the 
proposed spin-off of Conifer or in divesting assets in non-core markets.

We cannot predict the outcome of the process we have begun to pursue a tax-free 
spin-off of Conifer. We cannot provide any assurances regarding the timeframe 
for completing the spin-off, the allocation of assets and liabilities between 
Tenet and Conifer, that the other conditions of the spin-off will be met, or 
that the spin-off will be completed at all. We also continue to exit service 
lines, businesses and markets that we believe are no longer strategic to our 
long-term growth. To that end, since January 1, 2018, we divested 11 hospitals 
in the United States, as well as all of our operations in the United Kingdom. 
We cannot provide any assurances that completed, planned or future divestitures 
or other strategic transactions will achieve their business goals or the cost 
and service synergies we expect.

With respect to all proposed divestitures of assets or businesses, we may fail 
to obtain applicable regulatory approvals for such divestitures, including any 
approval that may be required under our non-prosecution agreement, as described 
in our Annual Report. Moreover, we may encounter difficulties in finding 
acquirers or alternative exit strategies on terms that are favorable to us, 
which could delay the receipt of anticipated proceeds necessary for us to 
complete our planned strategic objectives. In addition, our divestiture 
activities have required, and may in the future require, us to retain 
significant pre-closing liabilities, recognize impairment charges or agree to 
contractual restrictions that limit our ability to reenter the applicable 
market, which may be material. Furthermore, our divestiture or other corporate 
development activities (including the planned spin-off of Conifer) may present 
financial and operational risks, including (1) the diversion of management 
attention from existing core businesses, (2) adverse effects (including a 
deterioration in the related asset or business and, in Conifer’s case, the loss 
of existing clients and the difficulties associated with securing new clients) 
from the announcement of the planned or potential activity, and (3) the 
challenges associated with separating personnel and financial and other 
systems.

A spin-off of Conifer could adversely affect our earnings and cash flows.

Conifer contributes a significant portion of the Company’s earnings and cash 
flows. We have begun to pursue a tax-free spin-off of Conifer. Although there 
can be no assurance that this process will result in a consummated transaction, 
any separation of all or a portion of Conifer’s business could adversely affect 
our earnings and cash flows.

Conifer operates in a highly competitive industry, and its current or future 
competitors may be able to compete more effectively than Conifer does, which 
could have a material adverse effect on Conifer’s margins, growth rate and 
market share.

As we have begun to pursue a spin-off of Conifer, we are continuing to market 
Conifer’s revenue cycle management, patient communications and engagement 
services, and value-based care solutions businesses. The announcement of our 
plans to spin off Conifer may have an adverse impact on Conifer’s ability to 
secure new clients. There can be no assurance that Conifer will be successful 
in generating new client relationships, including with respect to hospitals we 
or Conifer’s other clients sell, as the respective buyers of such hospitals may 
not continue to use Conifer’s services or, if they do, they may not do so under 
the same contractual terms. The market for Conifer’s solutions is highly 
competitive, and we expect competition may intensify in the future. Conifer 
faces competition from existing participants and new entrants to the revenue 
cycle management market, as well as from the staffs of hospitals and other 
healthcare providers who handle these processes internally. In addition, 
electronic medical record software vendors may expand into services offerings 
that compete with Conifer. To be successful, Conifer must respond more quickly 
and effectively than its competitors to new or changing opportunities, 
technologies, standards, regulations and client requirements. Moreover, 
existing or new competitors may introduce technologies or services that render

Conifer’s technologies or services obsolete or less marketable. Even if 
Conifer’s technologies and services are more effective than the offerings of 
its competitors, current or potential clients might prefer competitive 
technologies or services to Conifer’s technologies and services. Furthermore, 
increased competition has resulted and may continue to result in pricing 
pressures, which could negatively impact Conifer’s margins, growth rate or 
market share.

Despite current indebtedness levels, we may be able to incur substantially more 
debt or otherwise increase our leverage. This could further exacerbate the 
risks described above.

We have the ability to incur additional indebtedness in the future, subject to 
the restrictions contained in our senior secured revolving credit facility (as 
amended, the “Credit Agreement”), our letter of credit facility (as amended, 
the “LC Facility”) and the indentures governing our outstanding notes. We may 
decide to incur additional secured or unsecured debt in the future to finance 
our operations and any judgments or settlements or for other business purposes. 
Similarly, if we complete the proposed spin-off of Conifer or continue to sell 
assets and do not use the proceeds to repay debt, this could further increase 
our financial leverage.

Our Credit Agreement provides for revolving loans in an aggregate principal 
amount of up to $1.5 billion, with a $200 million subfacility for standby 
letters of credit. Based on our eligible receivables, $1.2 billion was 
available for borrowing under the Credit Agreement at September 30, 2019. Our 
LC Facility provides for the issuance of standby and documentary letters of 
credit in an aggregate principal amount of up to $180 million (subject to 
increase to up to $200 million). At September 30, 2019, we had $275 million of 
cash borrowings outstanding under the Credit Agreement, and we had $93 million 
of standby letters of credit outstanding in the aggregate under the Credit 
Agreement and the LC Facility. If new indebtedness is added or our leverage 
increases, the related risks that we now face could intensify.