filings.toolsItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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The selected financial data and the accompanying consolidated financial statements present certain information with respect to the financial position, results of operations and cash flows of HCA Healthcare, Inc. which should be read in conjunction with the following discussion and analysis. The terms “HCA,” “Company,” “we,” “our,” or “us,” as used herein, refer to HCA Healthcare, Inc. and its affiliates. The term “affiliates” means direct and indirect subsidiaries of HCA Healthcare, Inc. and partnerships and joint ventures in which such subsidiaries are partners.
Forward-Looking Statements
This annual report on Form 10-K includes certain disclosures which contain “forward-looking statements.” Forward-looking statements include statements regarding expected share-based compensation expense, expected capital expenditures, expected dividends, expected net claim payments and all other statements that do not relate solely to historical or current facts, and can be identified by the use of words like “may,” “believe,” “will,” “expect,” “project,” “estimate,” “anticipate,” “plan,” “initiative” or “continue.” These forward-looking statements are based on our current plans and expectations and are subject to a number of known and unknown uncertainties and risks, many of which are beyond our control, which could significantly affect current plans and expectations and our future financial position and results of operations. These factors include, but are not limited to (1) the impact of our substantial indebtedness and the ability to refinance such indebtedness on acceptable terms, (2) the impact of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the “Health Reform Law”), including the effects of court challenges to, any repeal of, or changes to, the Health Reform Law or changes to its implementation, the possible enactment of additional federal or state health care reforms and possible changes to other federal, state or local laws or regulations affecting the health care industry, (3) the effects related to the continued implementation of the sequestration spending reductions required under the Budget Control Act of 2011, and related legislation extending these reductions, and the potential for future deficit reduction legislation that may alter these spending reductions, which include cuts to Medicare payments, or create additional spending reductions, (4) increases in the amount and risk of collectability of uninsured accounts and deductibles and copayment amounts for insured accounts, (5) the ability to achieve operating and financial targets, and attain expected levels of patient volumes and control the costs of providing services, (6) possible changes in Medicare, Medicaid and other state programs, including Medicaid supplemental payment programs or Medicaid waiver programs, that may impact reimbursements to health care providers and insurers and the size of the uninsured or underinsured population, (7) the highly competitive nature of the health care business, (8) changes in service mix, revenue mix and surgical volumes, including potential declines in the population covered under third-party payer agreements, the ability to enter into and renew third-party payer provider agreements on acceptable terms and the impact of consumer-driven health plans and physician utilization trends and practices, (9) the efforts of health insurers, health care providers, large employer groups and others to contain health care costs, (10) the outcome of our continuing efforts to monitor, maintain and comply with appropriate laws, regulations, policies and procedures, (11) increases in wages and the ability to attract and retain qualified management and personnel, including affiliated physicians, nurses and medical and technical support personnel, (12) the availability and terms of capital to fund the expansion of our business and improvements to our existing facilities, (13) changes in accounting practices, (14) changes in general economic conditions nationally and regionally in our markets, (15) the emergence and effects related to infectious diseases, (16) future divestitures which may result in charges and possible impairments of long-lived assets, (17) changes in business strategy or development plans, (18) delays in receiving payments for services provided, (19) the outcome of pending and any future tax audits, disputes and litigation associated with our tax positions, (20) potential adverse impact of known and unknown government investigations, litigation and other claims that may be made against us, (21) the impact of potential
Table of Contents
Index to Financial Statements
HCA HEALTHCARE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Forward-Looking Statements (continued)
cybersecurity incidents or security breaches, (22) our ongoing ability to demonstrate meaningful use of certified electronic health record (“EHR”) technology, (23) the impact of natural disasters, such as hurricanes and floods, or similar events beyond our control, (24) the effects of the 2017 Tax Cuts and Jobs Act (the “Tax Act”), including potential legislation or interpretive guidance that may be issued by federal and state taxing authorities or other standard-setting bodies, and (25) other risk factors described in this annual report on Form 10-K. As a consequence, current plans, anticipated actions and future financial position and results of operations may differ from those expressed in any forward-looking statements made by or on behalf of HCA. You are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in this report.
2018 Operations Summary
Net income attributable to HCA Healthcare, Inc. totaled $3.787 billion, or $10.66 per diluted share, for 2018, compared to $2.216 billion, or $5.95 per diluted share, for 2017. The 2018 results include net gains on sales of facilities of $428 million, or $0.91 per diluted share, and losses on retirement of debt of $9 million, or $0.02 per diluted share. The 2017 results include net gains on sales of facilities of $8 million, or $0.01 per diluted share, and losses on retirement of debt of $39 million, or $0.06 per diluted share. The 2018 results include a reduction in our provision for income taxes of $551 million, or $1.55 per diluted share, on net income attributable to HCA Healthcare, Inc., excluding gains on sales of facilities and losses on retirement of debt, related to the impact of the Tax Act, $484 million due to a reduction in the effective tax rate and $67 million for the remeasurement of certain of our deferred tax assets and liabilities for which we were unable to record reasonable estimates in 2017. The 2017 results include an increase in the provision for income taxes of $301 million, or $0.81 per diluted share, related to the remeasurement of our deferred tax assets and liabilities due to the enactment of the Tax Act. During 2018, we recorded a reduction to the provision for professional liability risks of $70 million, or $0.15 per diluted share. During 2018, we recorded additional expenses and losses of revenues estimated at approximately $31 million, or $0.07 per diluted share, associated with the impact of hurricane Michael on our Florida facilities. During 2017, we recorded additional expenses and losses of revenues estimated at approximately $140 million, or $0.24 per diluted share, associated with the impact of hurricanes Harvey and Irma on our Texas, Florida, Georgia and South Carolina facilities. Both of these amounts are prior to any insurance recoveries. During 2018, we recorded a benefit of $49 million, or $0.11 per diluted share, from an insurance recovery related to hurricane Harvey business interruption losses incurred during 2017, and we recorded a reduction to the provision for income taxes of $28 million, or $0.08 per diluted share, for tax credits related to certain 2017 hurricane-related expenses. Our provisions for income taxes for 2018 and 2017 included tax benefits of $124 million, or $0.35 per diluted share, and $82 million, or $0.22 per diluted share, respectively, related to employee equity award settlements. All “per diluted share” disclosures are based upon amounts net of the applicable income taxes. Shares used for diluted earnings per share were 355.303 million shares and 372.221 million shares for the years ended December 31, 2018 and 2017, respectively. During 2018 and 2017, we repurchased 14.070 million and 25.092 million shares, respectively, of our common stock.
Revenues increased to $46.677 billion for 2018 from $43.614 billion for 2017. Revenues increased 7.0% and 6.5%, respectively, on a consolidated basis and on a same facility basis for 2018, compared to 2017. The consolidated revenues increase can be primarily attributed to the combined impact of a 2.8% increase in revenue per equivalent admission and a 4.1% increase in equivalent admissions. The same facility revenues increase resulted primarily from a 3.9% increase in same facility revenue per equivalent admission and a 2.5% increase in same facility equivalent admissions.
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Index to Financial Statements
HCA HEALTHCARE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
2018 Operations Summary (continued)
During 2018, consolidated admissions increased 3.5% and same facility admissions increased 2.5%, compared to 2017. Inpatient surgical volumes increased 1.5% on a consolidated basis and increased 0.8% on a same facility basis during 2018, compared to 2017. Outpatient surgical volumes increased 3.2% on a consolidated basis and increased 1.8% on a same facility basis during 2018, compared to 2017. Emergency room visits increased 1.6% on a consolidated basis and increased 0.1% on a same facility basis during 2018, compared to 2017.
Total uncompensated care increased $3.337 billion for 2018, compared to 2017. Total uncompensated care as a percentage of the sum of revenues and total uncompensated care was 36.4% for 2018, compared to 34.9% for 2017. Same facility uninsured admissions increased 8.5% and same facility uninsured emergency room visits increased 3.8% for 2018, compared to 2017. Same facility uninsured admissions increased 5.9% and same facility uninsured emergency room visits increased 2.4% for 2017, compared to 2016.
Interest expense totaled $1.755 billion for 2018, compared to $1.690 billion for 2017. The $65 million increase in interest expense for 2018 was due to the increase in the average debt balance.
Cash flows from operating activities increased $1.335 billion, from $5.426 billion for 2017 to $6.761 billion for 2018. The increase in cash flows from operating activities was primarily related to the increase in net income, excluding gains on sales of facilities, of $1.226 billion.
Business Strategy
We are committed to providing the communities we serve with high quality, cost-effective health care while growing our business and creating long-term value for our stockholders. To achieve these objectives, we align our efforts around the following growth agenda:
Grow Our Presence in Existing Markets. We believe we are well positioned in a number of large and growing markets that will allow us the opportunity to generate long-term, attractive growth through the expansion of our presence in these markets. We plan to continue recruiting and strategically collaborating with the physician community and developing comprehensive service lines such as cardiology, neurology, oncology, orthopedics and women’s services. Additional components of our growth strategy include providing access and convenience through developing various outpatient facilities, including, but not limited to surgery centers, urgent care clinics, freestanding emergency care facilities and imaging centers.
Achieve Industry-Leading Performance in Clinical and Satisfaction Measures. Achieving high levels of patient safety, patient satisfaction and clinical quality are central goals of our business model. To achieve these goals, we have implemented a number of initiatives including infection reduction initiatives, hospitalist programs, advanced health information technology and evidence-based medicine programs. We routinely analyze operational practices from our best-performing hospitals to identify ways to implement organization-wide performance improvements and reduce clinical variation. We believe these initiatives will continue to improve patient care, help us achieve cost efficiencies and favorably position us in an environment where our constituents are increasingly focused on quality, efficacy and efficiency.
Recruit and Employ Physicians to Meet the Needs for High Quality Health Services. We depend on the quality and dedication of the health care providers and other team members who serve at our facilities. We believe a critical component of our growth strategy is our ability to successfully recruit and strategically collaborate with physicians and other professionals to provide high quality care. We attract and retain physicians
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Index to Financial Statements
HCA HEALTHCARE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Business Strategy (continued)
by providing high quality, convenient facilities with advanced technology, by expanding our specialty services and by building our outpatient operations. We believe our continued investment in the employment, recruitment and retention of physicians will improve the quality of care at our facilities.
Continue to Leverage Our Scale and Market Positions to Grow the Company. We believe there is significant opportunity to continue to grow our company by fully leveraging the scale and scope of our organization. We continue to invest in initiatives such as care navigators, clinical data exchange and centralized patient transfer operations, which will enable us to improve coordination of care and patient retention across our markets. We believe our centrally managed business processes and ability to leverage cost-saving practices across our extensive network will enable us to continue to manage costs effectively. We continue to invest in our Parallon subsidiary group to leverage key components of our support infrastructure, including revenue cycle management, health care group purchasing, supply chain management and staffing functions.
Pursue a Disciplined Development Strategy. We continue to believe there are significant growth opportunities in our markets. We will continue to provide financial and operational resources to analyze and develop our in-market opportunities. To complement our in-market growth agenda, we intend to focus on selectively developing and acquiring new hospitals, outpatient facilities and other health care service providers. We believe the challenges faced by the hospital industry may continue to spur consolidation and we believe our size, scale, national presence and access to capital will position us well to participate in any such consolidation.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities and the reported amounts of revenues and expenses. Our estimates are based on historical experience and various other assumptions we believe are reasonable under the circumstances. We evaluate our estimates on an ongoing basis and make changes to the estimates and related disclosures as experience develops or new information becomes known. Actual results may differ from these estimates.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenues
Revenues are recorded during the period the health care services are provided, based upon the estimated amounts due from payers. Estimates of contractual allowances under managed care health plans are based upon the payment terms specified in the related contractual agreements. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. The estimated reimbursement amounts are made on a payer-specific basis and are recorded based on the best information available regarding management’s interpretation of the applicable laws, regulations and contract terms. Management continually reviews the contractual estimation process to consider and incorporate updates to laws and regulations and the frequent changes in managed care contractual terms resulting from contract renegotiations and renewals. We have
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Index to Financial Statements
HCA HEALTHCARE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Critical Accounting Policies and Estimates (continued)
Revenues (continued)
invested significant resources to refine and improve our billing systems and the information system data used to make contractual allowance estimates. We have developed standardized calculation processes and related employee training programs to improve the utility of our patient accounting systems.
The Emergency Medical Treatment and Labor Act (“EMTALA”) requires any hospital participating in the Medicare program to conduct an appropriate medical screening examination of every person who presents to the hospital’s emergency room for treatment and, if the individual is suffering from an emergency medical condition, to either stabilize the condition or make an appropriate transfer of the individual to a facility able to handle the condition. The obligation to screen and stabilize emergency medical conditions exists regardless of an individual’s ability to pay for treatment. Federal and state laws and regulations, including but not limited to EMTALA, require, and our commitment to providing quality patient care encourages, the provision of services to patients who are financially unable to pay for the health care services they receive.
Prior to November 2017, patients treated at hospitals for non-elective care, who have income at or below 200% of the federal poverty level, were eligible for charity care. During November 2017, we expanded our charity policy to include patients who have income above 200%, but at or below 400%, of the federal poverty level and we limit the patient responsibility amounts for these patients to a percentage of their annual household income, computed on a sliding scale based upon their annual income and the applicable percentage of the federal poverty level. The federal poverty level is established by the federal government and is based on income and family size. Because we do not pursue collection of amounts determined to qualify as charity care, they are not reported in revenues. We provide discounts to uninsured patients who do not qualify for Medicaid or charity care. In implementing the uninsured discount policy, we may first attempt to provide assistance to uninsured patients to help determine whether they may qualify for Medicaid, other federal or state assistance, or charity care. If an uninsured patient does not qualify for these programs, the uninsured discount is applied.
Due to the complexities involved in the classification and documentation of health care services authorized and provided, the estimation of revenues earned and the related reimbursement are often subject to interpretations that could result in payments that are different from our estimates. Adjustments to estimated Medicare and Medicaid reimbursement amounts and disproportionate-share funds, which resulted in net increases to revenues, related primarily to cost reports filed during the respective year were $29 million, $41 million and $31 million in 2018, 2017 and 2016, respectively. The adjustments to estimated reimbursement amounts, which resulted in net increases to revenues, related primarily to cost reports filed during previous years were $51 million, $56 million and $90 million in 2018, 2017 and 2016, respectively. We expect adjustments during the next 12 months related to Medicare and Medicaid cost report filings and settlements will result in increases to revenues generally similar to the amounts recorded during these years.
The collection of outstanding receivables for Medicare, Medicaid, managed care payers, other third-party payers and patients is our primary source of cash and is critical to our operating performance. The primary collection risks relate to uninsured patient accounts, including patient accounts for which the primary insurance carrier has paid the amounts covered by the applicable agreement, but patient responsibility amounts (deductibles and copayments) remain outstanding. Implicit price concessions relate primarily to amounts due directly from patients. Estimated implicit price concessions are recorded for all uninsured accounts, regardless of the aging of those accounts. Accounts are written off when all reasonable internal and external collection efforts have been performed.
Table of Contents
Index to Financial Statements
HCA HEALTHCARE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Critical Accounting Policies and Estimates (continued)
Revenues (continued)
The estimates for implicit price concessions are based upon management’s assessment of historical writeoffs and expected net collections, business and economic conditions, trends in federal, state and private employer health care coverage and other collection indicators. Management relies on the results of detailed reviews of historical writeoffs and collections at facilities that represent a majority of our revenues and accounts receivable (the “hindsight analysis”) as a primary source of information in estimating the collectability of our accounts receivable. We perform the hindsight analysis quarterly, utilizing rolling twelve-months accounts receivable collection and writeoff data. We believe our quarterly updates to the estimated implicit price concession amounts at each of our hospital facilities provide reasonable estimates of our revenues and valuations of our accounts receivable. These routine, quarterly changes in estimates have not resulted in material adjustments to the valuations of our accounts receivable or period-to-period comparisons of our results of operations. At December 31, 2018 and December 31, 2017, estimated implicit price concessions of $6.280 billion and $5.488 billion, respectively, had been recorded as reductions to our accounts receivable balances to enable us to record our revenues and accounts receivable at the estimated amounts we expect to collect.
To quantify the total impact of and trends related to uninsured accounts, we believe it is beneficial to view total uncompensated care, which is comprised of charity care, uninsured discounts and implicit price concessions. A summary of the estimated cost of total uncompensated care for the years ended December 31, follows (dollars in millions):
| 2018 | 2017 | 2016 | ||||||||||
| Patient care costs (salaries and benefits, supplies, other operating expenses and depreciation and amortization) | $ | 40,035 | $ | 37,557 | $ | 35,304 | ||||||
| Cost-to-charges ratio (patient care costs as percentage of gross patient charges) | 12.4 | % | 12.9 | % | 13.5 | % | ||||||
| Total uncompensated care | $ | 26,757 | $ | 23,420 | $ | 20,455 | ||||||
| Multiply by the cost-to-charges ratio | 12.4 | % | 12.9 | % | 13.5 | % | ||||||
| Estimated cost of total uncompensated care | $ | 3,318 | $ | 3,021 | $ | 2,761 | ||||||
Total uncompensated care as a percentage of the sum of revenues and total uncompensated care was 36.4% for 2018, 34.9% for 2017 and 33.0% for 2016. Days revenues in accounts receivable were 51 days, 52 days and 50 days at December 31, 2018, 2017 and 2016, respectively. Management expects a continuation of the challenges related to the collection of the patient due accounts. Adverse changes in the percentage of our patients having adequate health care coverage, increases in patient responsibility amounts under certain health care coverages, general economic conditions, patient accounting service center operations, payer mix, or trends in federal, state, and private employer health care coverage could affect the collection of accounts receivable, cash flows and results of operations.
Professional Liability Claims
We, along with virtually all health care providers, operate in an environment with professional liability risks. Our facilities are insured by our 100% owned insurance subsidiary for losses up to $50 million per occurrence, subject, in most cases, to a $15 million per occurrence self-insured retention. The insurance subsidiary has obtained reinsurance for professional liability risks generally above a retention level of
Table of Contents
Index to Financial Statements
HCA HEALTHCARE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Critical Accounting Policies and Estimates (continued)
Professional Liability Claims (continued)
$25 million per occurrence. We purchase excess insurance on a claims-made basis for losses in excess of $50 million per occurrence. Provisions for losses related to professional liability risks were $447 million, $466 million and $430 million for the years ended December 31, 2018, 2017 and 2016, respectively. During 2018, we recorded a reduction to the provision for professional liability risks of $70 million due to the receipt of updated actuarial information.
Reserves for professional liability risks represent the estimated ultimate cost of all reported and unreported losses incurred through the respective consolidated balance sheet dates. The estimated ultimate cost includes estimates of direct expenses and fees paid to outside counsel and experts, but does not include the general overhead costs of our insurance subsidiary or corporate office. Individual case reserves are established based upon the particular circumstances of each reported claim and represent our estimates of the future costs that will be paid on reported claims. Case reserves are reduced as claim payments are made and are adjusted upward or downward as our estimates regarding the amounts of future losses are revised. Once the case reserves for known claims are determined, information is stratified by loss layers and retentions, accident years, reported years, and geographic location of our hospitals. Several actuarial methods are employed to utilize this data to produce estimates of ultimate losses and reserves for incurred but not reported claims, including: paid and incurred extrapolation methods utilizing paid and incurred loss development to estimate ultimate losses; frequency and severity methods utilizing paid and incurred claims development to estimate ultimate average frequency (number of claims) and ultimate average severity (cost per claim); and Bornhuetter-Ferguson methods which add expected development to actual paid or incurred experience to estimate ultimate losses. These methods use our company-specific historical claims data and other information. Company-specific claim reporting and payment data collected over an approximate 20-year period is used in our reserve estimation process. This company-specific data includes information regarding our business, including historical paid losses and loss adjustment expenses, historical and current case loss reserves, actual and projected hospital statistical data, professional liability retentions for each policy year, geographic information and other data.
Reserves and provisions for professional liability risks are based upon actuarially determined estimates. The estimated reserve ranges, net of amounts receivable under reinsurance contracts, were $1.514 billion to $1.814 billion at December 31, 2018 and $1.456 billion to $1.743 billion at December 31, 2017. Our estimated reserves for professional liability claims may change significantly if future claims differ from expected trends. We perform sensitivity analyses which model the volatility of key actuarial assumptions and monitor our reserves for adequacy relative to all our assumptions in the aggregate. Based on our analysis, we believe the estimated professional liability reserve ranges represent the reasonably likely outcomes for ultimate losses. We consider the number and severity of claims to be the most significant assumptions in estimating reserves for professional liabilities. A 2.5% change in the expected frequency trend could be reasonably likely and would increase the reserve estimate by $31 million or reduce the reserve estimate by $29 million. A 2.5% change in the expected claim severity trend could be reasonably likely and would increase the reserve estimate by $110 million or reduce the reserve estimate by $101 million. We believe adequate reserves have been recorded for our professional liability claims; however, due to the complexity of the claims, the extended period of time to resolve the claims and the wide range of potential outcomes, our ultimate liability for professional liability claims could change by more than the estimated sensitivity amounts and could change materially from our current estimates.
The reserves for professional liability risks cover approximately 2,200 and 2,500 individual claims at December 31, 2018 and 2017, respectively, and estimates for unreported potential claims. The time period required to resolve these claims can vary depending upon the jurisdiction and whether the claim is settled or litigated. The average time period between the occurrence and final resolution for our professional liability
Table of Contents
Index to Financial Statements
HCA HEALTHCARE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Critical Accounting Policies and Estimates (continued)
Professional Liability Claims (continued)
claims is approximately four years, although the facts and circumstances of each individual claim can result in an occurrence-to-resolution timeframe that varies from this average. The estimation of the timing of payments beyond a year can vary significantly.
Reserves for professional liability risks were $1.741 billion and $1.627 billion at December 31, 2018 and 2017, respectively. The current portion of these reserves, $466 million and $429 million at December 31, 2018 and 2017, respectively, is included in “other accrued expenses.” Obligations covered by reinsurance and excess insurance contracts are included in the reserves for professional liability risks, as we remain liable to the extent reinsurers and excess insurance carriers do not meet their obligations. Reserves for professional liability risks (net of $50 million and $24 million receivable under reinsurance and excess insurance contracts at December 31, 2018 and 2017, respectively) were $1.692 billion and $1.603 billion at December 31, 2018 and 2017, respectively. The estimated total net reserves for professional liability risks at December 31, 2018 and 2017 are comprised of $703 million and $751 million, respectively, of case reserves for known claims and $989 million and $852 million, respectively, of reserves for incurred but not reported claims.
Changes in our professional liability reserves, net of reinsurance recoverable, for the years ended December 31, are summarized in the following table (dollars in millions):
| 2018 | 2017 | 2016 | ||||||||||
| Net reserves for professional liability claims, January 1 | $ | 1,603 | $ | 1,494 | $ | 1,421 | ||||||
| Provision for current year claims | 486 | 467 | 428 | |||||||||
| Unfavorable (favorable) development related to prior years’ claims | (39 | ) | (1 | ) | 2 | |||||||
| Total provision | 447 | 466 | 430 | |||||||||
| Payments for current year claims | 3 | 7 | 9 | |||||||||
| Payments for prior years’ claims | 355 | 350 | 348 | |||||||||
| Total claim payments | 358 | 357 | 357 | |||||||||
| Net reserves for professional liability claims, December 31 | $ | 1,692 | $ | 1,603 | $ | 1,494 | ||||||
Income Taxes
We calculate our provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized by identifying the temporary differences that arise from the recognition of items in different periods for tax and accounting purposes. Deferred tax assets generally represent the tax effects of amounts expensed in our income statement for which tax deductions will be claimed in future periods. Interest and penalties payable to taxing authorities are included as a component of our provision for income taxes. We have elected to treat taxes incurred on global intangible low-taxed income as a period expense.
Although we believe we have properly reported taxable income and paid taxes in accordance with applicable laws, federal, state or foreign taxing authorities may challenge our tax positions upon audit. Significant judgment is required in determining and assessing the impact of uncertain tax positions. We report a liability for unrecognized tax benefits from uncertain tax positions taken or expected to be taken in our income tax returns. During each reporting period, we assess the facts and circumstances related to uncertain tax positions. If the realization of unrecognized tax benefits is deemed probable based upon new facts and circumstances, the estimated liability and the provision for income taxes are reduced in the current period. Final audit results may vary from our estimates.
Table of Contents
Index to Financial Statements
HCA HEALTHCARE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Results of Operations
Revenue/Volume Trends
Our revenues depend upon inpatient occupancy levels, the ancillary services and therapy programs ordered by physicians and provided to patients, the volume of outpatient procedures and the charge and negotiated payment rates for such services. Gross charges typically do not reflect what our facilities are actually paid. Our facilities have entered into agreements with third-party payers, including government programs and managed care health plans, under which the facilities are paid based upon the cost of providing services, predetermined rates per diagnosis, fixed per diem rates or discounts from gross charges. We do not pursue collection of amounts related to patients who meet our guidelines to qualify for charity care; therefore, they are not reported in revenues. We provide discounts to uninsured patients who do not qualify for Medicaid or charity care.
Revenues increased 7.0% to $46.677 billion for 2018 from $43.614 billion for 2017 and increased 5.1% for 2017 from $41.490 billion for 2016. The increase in revenues in 2018 can be primarily attributed to the combined impact of a 2.8% increase in revenue per equivalent admission and a 4.1% increase in equivalent admissions compared to the prior year. The increase in revenues in 2017 can be attributed to the combined impact of a 2.1% increase in revenue per equivalent admission and a 3.0% increase in equivalent admissions compared to the prior year.
Same facility revenues increased 6.5% for the year ended December 31, 2018 compared to the year ended December 31, 2017 and increased 3.8% for the year ended December 31, 2017 compared to the year ended December 31, 2016. The 6.5% increase for 2018 can be primarily attributed to the combined impact of a 3.9% increase in same facility revenue per equivalent admission and a 2.5% increase in same facility equivalent admissions. The 3.8% increase for 2017 can be primarily attributed to the combined impact of a 2.2% increase in same facility revenue per equivalent admission and a 1.5% increase in same facility equivalent admissions.
Consolidated admissions increased 3.5% during 2018 compared to 2017 and increased 2.4% during 2017 compared to 2016. Consolidated surgeries increased 2.6% during 2018 compared to 2017 and increased 0.8% during 2017 compared to 2016. Consolidated emergency room visits increased 1.6% during 2018 compared to 2017 and increased 2.9% during 2017 compared to 2016.
Same facility admissions increased 2.5% during 2018 compared to 2017 and increased 1.1% during 2017 compared to 2016. Same facility surgeries increased 1.4% during 2018 compared to 2017 and declined 0.7% during 2017 compared to 2016. Same facility emergency room visits increased 0.1% during 2018 compared to 2017 and increased 1.4% during 2017 compared to 2016.
Same facility uninsured emergency room visits increased 3.8% and same facility uninsured admissions increased 8.5% during 2018 compared to 2017. Same facility uninsured emergency room visits increased 2.4% and same facility uninsured admissions increased 5.9% during 2017 compared to 2016.
Table of Contents
Index to Financial Statements
HCA HEALTHCARE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Results of Operations (continued)
Revenue/Volume Trends (continued)
The approximate percentages of our admissions related to Medicare, managed Medicare, Medicaid, managed Medicaid, managed care and insurers and the uninsured for the years ended December 31, 2018, 2017 and 2016 are set forth below.
| Years Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Medicare | 30 | % | 30 | % | 31 | % | ||||||
| Managed Medicare | 17 | 16 | 15 | |||||||||
| Medicaid | 5 | 6 | 6 | |||||||||
| Managed Medicaid | 12 | 12 | 12 | |||||||||
| Managed care and insurers | 28 | 28 | 29 | |||||||||
| Uninsured | 8 | 8 | 7 | |||||||||
| 100 | % | 100 | % | 100 | % | |||||||
The approximate percentages of our inpatient revenues related to Medicare, managed Medicare, Medicaid, managed Medicaid, managed care plans and insurers for the years ended December 31, 2018, 2017 and 2016 are set forth below.
| Years Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Medicare | 28 | % | 28 | % | 28 | % | ||||||
| Managed Medicare | 14 | 13 | 12 | |||||||||
| Medicaid | 4 | 5 | 5 | |||||||||
| Managed Medicaid | 6 | 5 | 6 | |||||||||
| Managed care and insurers | 48 | 49 | 49 | |||||||||
| 100 | % | 100 | % | 100 | % | |||||||
At December 31, 2018, we owned and operated 45 hospitals and 32 surgery centers in the state of Florida. Our Florida facilities’ revenues totaled $10.892 billion, $10.168 billion and $9.522 billion for the years ended December 31, 2018, 2017 and 2016, respectively. At December 31, 2018, we owned and operated 47 hospitals and 29 surgery centers in the state of Texas. Our Texas facilities’ revenues totaled $12.023 billion, $10.634 billion and $9.898 billion for the years ended December 31, 2018, 2017 and 2016, respectively. During 2018, 2017 and 2016, 57%, 56% and 56% of our admissions and 49%, 48% and 47%, respectively, of our revenues were generated by our Florida and Texas facilities. Uninsured admissions in Florida and Texas represented 70%, 70% and 69% of our uninsured admissions during 2018, 2017 and 2016, respectively.
We receive a significant portion of our revenues from government health programs, principally Medicare and Medicaid, which are highly regulated and subject to frequent and substantial changes. In December 2017, the Centers for Medicare & Medicaid Services (“CMS”) announced that it will phase out federal matching funds for Designated State Health Programs under waivers granted under section 1115 of the Social Security Act. Texas currently operates its Healthcare Transformation and Quality Improvement Program pursuant to a Medicaid waiver. In December 2017, CMS approved an extension of this waiver through September 30, 2022, but indicated that it will phase out some of the federal funding. Our Texas Medicaid revenues included Medicaid supplemental waiver payments of $450 million, $351 million and $370 million during 2018, 2017 and 2016, respectively.
Table of Contents
Index to Financial Statements
HCA HEALTHCARE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Results of Operations (continued)
Revenue/Volume Trends (continued)
In addition, we receive supplemental payments in several other states. We are aware these supplemental payment programs are currently being reviewed by certain state agencies and some states have made waiver requests to CMS to replace their existing supplemental payment programs. It is possible these reviews and waiver requests will result in the restructuring of such supplemental payment programs and could result in the payment programs being reduced or eliminated. Because deliberations about these programs are ongoing, we are unable to estimate the financial impact the program structure modifications, if any, may have on our results of operations.
Operating Results Summary
The following are comparative summaries of operating results for the years ended December 31, 2018, 2017 and 2016 (dollars in millions):
| 2018 | 2017 | 2016 | ||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
| Revenues | $ | 46,677 | 100.0 | $ | 43,614 | 100.0 | $ | 41,490 | 100.0 | |||||||||||||||
| Salaries and benefits | 21,425 | 45.9 | 20,059 | 46.0 | 18,897 | 45.5 | ||||||||||||||||||
| Supplies | 7,724 | 16.5 | 7,316 | 16.8 | 6,933 | 16.7 | ||||||||||||||||||
| Other operating expenses | 8,608 | 18.5 | 8,051 | 18.4 | 7,496 | 18.1 | ||||||||||||||||||
| Equity in earnings of affiliates | (29 | ) | (0.1 | ) | (45 | ) | (0.1 | ) | (54 | ) | (0.1 | ) | ||||||||||||
| Depreciation and amortization | 2,278 | 4.9 | 2,131 | 4.9 | 1,966 | 4.8 | ||||||||||||||||||
| Interest expense | 1,755 | 3.8 | 1,690 | 3.9 | 1,707 | 4.1 | ||||||||||||||||||
| Gain on sales of facilities | (428 | ) | (0.9 | ) | (8 | ) | — | (23 | ) | (0.1 | ) | |||||||||||||
| Losses on retirement of debt | 9 | — | 39 | 0.1 | 4 | — | ||||||||||||||||||
| Legal claim benefits | — | — | — | — | (246 | ) | (0.6 | ) | ||||||||||||||||
| 41,342 | 88.6 | 39,233 | 90.0 | 36,680 | 88.4 | |||||||||||||||||||
| Income before income taxes | 5,335 | 11.4 | 4,381 | 10.0 | 4,810 | 11.6 | ||||||||||||||||||
| Provision for income taxes | 946 | 2.0 | 1,638 | 3.7 | 1,378 | 3.3 | ||||||||||||||||||
| Net income | 4,389 | 9.4 | 2,743 | 6.3 | 3,432 | 8.3 | ||||||||||||||||||
| Net income attributable to noncontrolling interests | 602 | 1.3 | 527 | 1.2 | 542 | 1.3 | ||||||||||||||||||
| Net income attributable to HCA Healthcare, Inc. | $ | 3,787 | 8.1 | $ | 2,216 | 5.1 | $ | 2,890 | 7.0 | |||||||||||||||
| % changes from prior year: | ||||||||||||||||||||||||
| Revenues | 7.0 | % | 5.1 | % | 4.6 | % | ||||||||||||||||||
| Income before income taxes | 21.8 | (8.9 | ) | 21.6 | ||||||||||||||||||||
| Net income attributable to HCA Healthcare, Inc. | 70.9 | (23.3 | ) | 35.8 | ||||||||||||||||||||
| Admissions(a) | 3.5 | 2.4 | 1.2 | |||||||||||||||||||||
| Equivalent admissions(b) | 4.1 | 3.0 | 2.2 | |||||||||||||||||||||
| Revenue per equivalent admission | 2.8 | 2.1 | 2.3 | |||||||||||||||||||||
| Same facility % changes from prior year(c): | ||||||||||||||||||||||||
| Revenues | 6.5 | 3.8 | 4.1 | |||||||||||||||||||||
| Admissions(a) | 2.5 | 1.1 | 1.1 | |||||||||||||||||||||
| Equivalent admissions(b) | 2.5 | 1.5 | 1.9 | |||||||||||||||||||||
| Revenue per equivalent admission | 3.9 | 2.2 | 2.2 |
| (a) | Represents the total number of patients admitted to our hospitals and is used by management and certain investors as a general measure of inpatient volume. |
|---|
| (b) | Equivalent admissions are used by management and certain investors as a general measure of combined inpatient and outpatient volume. Equivalent admissions are computed by multiplying admissions (inpatient volume) by the sum of gross inpatient revenue and gross outpatient revenue and then dividing the resulting amount by gross inpatient revenue. The equivalent admissions computation “equates” outpatient revenue to the volume measure (admissions) used to measure inpatient volume, resulting in a general measure of combined inpatient and outpatient volume. |
|---|
| (c) | Same facility information excludes the operations of hospitals and their related facilities that were either acquired, divested or removed from service during the current and prior year. |
|---|
Table of Contents
Index to Financial Statements
HCA HEALTHCARE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Results of Operations (continued)
Years Ended December 31, 2018 and 2017
Net income attributable to HCA Healthcare, Inc. totaled $3.787 billion, or $10.66 per diluted share, for 2018, compared to $2.216 billion, or $5.95 per diluted share, for 2017. The 2018 results include net gains on sales of facilities of $428 million, or $0.91 per diluted share, and losses on retirement of debt of $9 million, or $0.02 per diluted share. The 2017 results include net gains on sales of facilities of $8 million, or $0.01 per diluted share, and losses on retirement of debt of $39 million, or $0.06 per diluted share. The 2018 results include a reduction in provision for income taxes of $551 million, or $1.55 per diluted share, on net income attributable to HCA Healthcare, Inc., excluding gains on sales of facilities and losses on retirement of debt, related to the impact of tax rate changes and the remeasurement of certain of our deferred tax assets and liabilities for which we were unable to record reasonable estimates in 2017 related to the Tax Act. The 2017 results include an increase in provision for income taxes of $301 million, or $0.81 per diluted share, related to the remeasurement of our deferred tax assets and liabilities due to the enactment of the Tax Act. During 2018, we recorded a reduction to the provision for professional liability risks of $70 million, or $0.15 per diluted share. During 2018, we recorded additional expenses and losses of revenues estimated at approximately $31 million, or $0.07 per diluted share, associated with the impact of hurricane Michael on our Florida facilities. During 2017, we recorded additional expenses and losses of revenues estimated at approximately $140 million, or $0.24 per diluted share, associated with the impact of hurricanes Harvey and Irma on our Texas, Florida, Georgia and South Carolina facilities. Both of these amounts are prior to any insurance recoveries. During 2018, we recorded a benefit of $49 million, or $0.11 per diluted share, from an insurance recovery related to hurricane Harvey business interruption losses incurred during 2017, and we recorded a reduction to the provision for income taxes of $28 million, or $0.08 per diluted share, for tax credits related to certain 2017 hurricane-related expenses. Our provisions for income taxes for 2018 and 2017 included tax benefits of $124 million, or $0.35 per diluted share, and $82 million, or $0.22 per diluted share, respectively, related to employee equity award settlements. All “per diluted share” disclosures are based upon amounts net of the applicable income taxes. Shares used for diluted earnings per share were 355.303 million shares and 372.221 million shares for the years ended December 31, 2018 and 2017, respectively. During 2018 and 2017, we repurchased 14.070 million and 25.092 million shares, respectively, of our common stock.
During 2018, consolidated admissions increased 3.5% and same facility admissions increased 2.5% compared to 2017. Consolidated inpatient surgeries increased 1.5% and same facility inpatient surgeries increased 0.8% during 2018 compared to 2017. Consolidated outpatient surgeries increased 3.2%, and same facility outpatient surgeries increased 1.8% during 2018 compared to 2017. Emergency room visits increased 1.6% on a consolidated basis and increased 0.1% on a same facility basis during 2018 compared to 2017.
Revenues increased 7.0% to $46.677 billion for 2018 from $43.614 billion for 2017. The increase in revenues was primarily due to the combined impact of a 2.8% increase in revenue per equivalent admission and a 4.1% increase in equivalent admissions compared to 2017. Same facility revenues increased 6.5% due primarily to the combined impact of a 3.9% increase in same facility revenue per equivalent admission and a 2.5% increase in same facility equivalent admissions compared to 2017.
Salaries and benefits, as a percentage of revenues, were 45.9% in 2018 and 46.0% in 2017. Salaries and benefits per equivalent admission increased 2.6% in 2018 compared to 2017. Same facility labor rate increases averaged 3.4% for 2018 compared to 2017. Share-based compensation expense was $268 million in 2018 and $270 million in 2017.
Supplies, as a percentage of revenues, were 16.5% in 2018 and 16.8% in 2017. Supply costs per equivalent admission increased 1.4% in 2018 compared to 2017. Supply costs per equivalent admission increased 3.6% for
Table of Contents
Index to Financial Statements
HCA HEALTHCARE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Results of Operations (continued)
Years Ended December 31, 2018 and 2017 (continued)
medical devices and 1.2% for general medical and surgical items, and declined 1.5% for pharmacy supplies in 2018 compared to 2017.
Other operating expenses, as a percentage of revenues, was 18.5% in 2018 and 18.4% in 2017. Other operating expenses are primarily comprised of contract services, professional fees, repairs and maintenance, rents and leases, utilities, insurance (including professional liability insurance) and nonincome taxes. Provisions for losses related to professional liability risks were $447 million and $466 million for 2018 and 2017, respectively.
Equity in earnings of affiliates was $29 million for 2018 and $45 million for 2017.
Depreciation and amortization, as a percentage of revenues, was 4.9% each in 2018 and 2017. Depreciation expense was $2.262 billion for 2018 and $2.111 billion for 2017.
Interest expense increased to $1.755 billion for 2018 from $1.690 billion for 2017. The increase in interest expense was due to an increase in the average debt balance. Our average debt balance was $33.065 billion for 2018 compared to $32.082 billion for 2017. The average interest rate for our long-term debt was 5.3% for both 2018 and 2017.
Net gains on sales of facilities were $428 million and $8 million, respectively, for 2018 and 2017. The net gains on sales of facilities for 2018 related primarily to the sale of the two hospital facilities in our Oklahoma market. The net gains on sales of facilities for 2017 related to sales of real estate and other investments.
During 2018, we issued $2.000 billion aggregate principal amount of senior notes comprised of $1.000 billion aggregate principal amount of 5.375% notes due 2026 and $1.000 billion aggregate principal amount of 5.625% notes due 2028. We used the net proceeds for general corporate purposes, including funding the purchase of a hospital, and the redemption of all $1.500 billion aggregate principal amount of our existing 3.750% senior secured notes maturing in March 2019. The pretax loss on retirement of debt was $9 million. During 2017, we issued $1.500 billion aggregate principal amount of 5.500% senior secured notes due 2047. We used the net proceeds for general corporate purposes, including funding the purchase of certain hospital acquisitions, and the redemption of all $500 million aggregate principal amount of our existing 8.000% senior notes maturing in October 2018. The pretax loss on retirement of debt was $39 million.
The effective tax rates were 20.0% and 42.5% for 2018 and 2017, respectively. The effective tax rate computations exclude net income attributable to noncontrolling interests as it relates to consolidated partnerships. Our provision for income taxes for 2018 included $28 million of reductions for tax credits related to certain 2017 hurricane-related expenses. Our provision for income taxes for 2017 included $14 million related to reductions in interest expense (net of tax). Our provisions for income taxes for 2018 and 2017 included benefits of $67 million and increases of $301 million, respectively, related to the remeasurement of our deferred tax assets and liabilities due to the enactment of the Tax Act. Our provisions for income taxes for 2018 and 2017 also included tax benefits of $124 million and $82 million, respectively, related to employee equity award settlements. Excluding the effect of these adjustments, the effective tax rates for 2018 and 2017 would have been 24.6% and 37.2%, respectively.
Net income attributable to noncontrolling interests increased from $527 million for 2017 to $602 million for 2018. The increase in net income attributable to noncontrolling interests related primarily to joint ventures in two Texas markets.
Table of Contents
Index to Financial Statements
HCA HEALTHCARE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Results of Operations (continued)
Years Ended December 31, 2017 and 2016
Net income attributable to HCA Healthcare, Inc. totaled $2.216 billion, or $5.95 per diluted share, for 2017, compared to $2.890 billion, or $7.30 per diluted share, for 2016. Financial results for 2017 include additional expenses and losses of revenues estimated at approximately $140 million, or $0.24 per diluted share, associated with the impact of hurricanes Harvey and Irma on our Texas, Florida, Georgia and South Carolina facilities and an increase in provision for income taxes of $301 million, or $0.81 per diluted share, related to the revaluation of our deferred tax assets and liabilities due to the enactment of the Tax Act. The amount associated with the hurricanes is prior to any insurance recoveries. Financial results for 2017 also include tax benefits of $82 million, or $0.22 per diluted share, related to employee equity award settlements, net gains on sales of facilities of $8 million, or $0.01 per diluted share, and losses on retirement of debt of $39 million, or $0.06 per diluted share. Financial results for 2016 include tax benefits of $51 million, or $0.13 per diluted share, related to the resolution of federal income tax issues for our 2011 and 2012 tax years and $162 million, or $0.41 per diluted share, related to employee equity award settlements. Financial results for 2016 also include net gains on sales of facilities of $23 million, or $0.05 per diluted share, losses on retirement of debt of $4 million, or $0.01 per diluted share, and legal claim benefits of $246 million, or $0.39 per diluted share, related to the settlement of the Health Midwest litigation. All “per diluted share” disclosures are based upon amounts net of the applicable income taxes. Shares used for diluted earnings per share were 372.221 million shares and 395.851 million shares for the years ended December 31, 2017 and 2016, respectively. During 2017 and 2016, we repurchased 25.092 million and 36.325 million shares, respectively, of our common stock.
During 2017, consolidated admissions increased 2.4% and same facility admissions increased 1.1% compared to 2016. Consolidated inpatient surgeries increased 1.7% and same facility inpatient surgeries increased 0.3% during 2017 compared to 2016. Consolidated outpatient surgeries increased 0.3%, and same facility outpatient surgeries declined 1.3% during 2017 compared to 2016. Emergency room visits increased 2.9% on a consolidated basis and increased 1.4% on a same facility basis during 2017 compared to 2016.
Revenues increased 5.1% to $43.614 billion for 2017 from $41.490 billion for 2016. The increase in revenues was due to the combined impact of a 2.1% increase in revenue per equivalent admission and a 3.0% increase in equivalent admissions compared to 2016. Same facility revenues increased 3.8% due primarily to the combined impact of a 2.2% increase in same facility revenue per equivalent admission and a 1.5% increase in same facility equivalent admissions compared to 2016.
Salaries and benefits, as a percentage of revenues, were 46.0% in 2017 and 45.5% in 2016. Salaries and benefits per equivalent admission increased 3.1% in 2017 compared to 2016. Same facility labor rate increases averaged 3.0% for 2017 compared to 2016. Share-based compensation expense increased from $251 million in 2016 to $270 million in 2017.
Supplies, as a percentage of revenues, were 16.8% in 2017 and 16.7% in 2016. Supply costs per equivalent admission increased 2.5% in 2017 compared to 2016. Supply costs per equivalent admission increased 4.9% for medical devices, 0.3% for pharmacy supplies and 1.7% for general medical and surgical items in 2017 compared to 2016.
Other operating expenses, as a percentage of revenues, was 18.4% in 2017 and 18.1% in 2016. Other operating expenses are primarily comprised of contract services, professional fees, repairs and maintenance, rents and leases, utilities, insurance (including professional liability insurance) and nonincome taxes. Provisions for losses related to professional liability risks were $466 million and $430 million for 2017 and 2016, respectively.
Table of Contents
Index to Financial Statements
HCA HEALTHCARE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Results of Operations (continued)
Years Ended December 31, 2017 and 2016 (continued)
Equity in earnings of affiliates was $45 million for 2017 and $54 million for 2016.
Depreciation and amortization, as a percentage of revenues, was 4.9% in 2017 and 4.8% in 2016. Depreciation expense was $2.111 billion for 2017 and $1.946 billion for 2016.
Interest expense declined to $1.690 billion for 2017 from $1.707 billion for 2016. The decline in interest expense was due to a decline in the average interest rate. Our average debt balance was $32.082 billion for 2017 compared to $31.048 billion for 2016. The average interest rate for our long-term debt declined from 5.5% for 2016 to 5.3% for 2017.
Net gains on sales of facilities were $8 million and $23 million, respectively, for 2017 and 2016 and related to sales of real estate and other investments.
During 2017, we issued $1.500 billion aggregate principal amount of 5.500% senior secured notes due 2047. We used the net proceeds for general corporate purposes, including funding the purchase of certain hospitals, and the redemption of all $500 million aggregate principal amount of our existing 8.000% senior notes maturing in October 2018. The pretax loss on retirement of debt was $39 million. During 2016, we issued $1.200 billion aggregate principal amount of 4.500% senior secured notes due 2027. We used the net proceeds for general corporate purposes and to retire a portion of one of our senior secured term loans. We also entered into a joinder agreement to retire the remaining portion of this senior secured term loan using proceeds from a new $1.200 billion senior secured term loan facility maturing in February 2024. The pretax loss on retirement of debt was $4 million.
The effective tax rates were 42.5% and 32.3% for 2017 and 2016, respectively. The effective tax rate computations exclude net income attributable to noncontrolling interests as it relates to consolidated partnerships. Our provision for income taxes for 2017 included increases of $301 million related to the remeasurement of our deferred tax assets and liabilities due to the enactment of the Tax Act and $14 million related to reductions in interest expense (net of tax). Our provision for income taxes for 2017 and 2016 also included tax benefits of $82 million and $162 million, respectively, related to employee equity award settlements. Our provision for income taxes for 2016 also included tax benefits of $51 million primarily related to the resolution of federal income tax issues for our 2011 and 2012 tax years. Excluding the effect of these adjustments, the effective tax rates for 2017 and 2016 would have been 37.2% and 37.3%, respectively.
Net income attributable to noncontrolling interests declined from $542 million for 2016 to $527 million for 2017. The decline in net income attributable to noncontrolling interests related primarily to a joint venture in a Texas market.
Liquidity and Capital Resources
Our primary cash requirements are paying our operating expenses, servicing our debt, capital expenditures on our existing properties, acquisitions of hospitals and other health care entities, repurchases of our common stock, distributions to stockholders and distributions to noncontrolling interests. Our primary cash sources are cash flows from operating activities, issuances of debt and equity securities and dispositions of hospitals and other health care entities.
Table of Contents
Index to Financial Statements
HCA HEALTHCARE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (continued)
Cash provided by operating activities totaled $6.761 billion in 2018 compared to $5.426 billion in 2017 and $5.653 billion in 2016. The $1.335 billion increase in cash provided by operating activities for 2018, compared to 2017, was primarily related to the increase in net income, excluding gains on sales of facilities, of $1.226 billion. The $227 million decline in cash provided by operating activities for 2017, compared to 2016, was primarily related to the $689 million decline in net income, offset by increases related to depreciation and amortization of $165 million and income taxes of $310 million. Working capital totaled $2.644 billion at December 31, 2018 and $3.819 billion at December 31, 2017. The decline in working capital of $1.175 billion is primarily related to increases in other accrued expenses of $641 million and long-term debt due within one year of $588 million. Cash payments for interest and income taxes declined $289 million for 2018 compared to 2017 and declined $16 million for 2017 compared to 2016.
Cash used in investing activities was $3.901 billion, $4.279 billion and $3.240 billion in 2018, 2017 and 2016, respectively. Excluding acquisitions, capital expenditures were $3.573 billion in 2018, $3.015 billion in 2017 and $2.760 billion in 2016. We expended $1.253 billion, $1.212 billion and $576 million for acquisitions of hospitals and health care entities during 2018, 2017 and 2016, respectively. Planned capital expenditures are expected to approximate $3.7 billion in 2019. At December 31, 2018, there were projects under construction which had an estimated additional cost to complete and equip over the next five years of approximately $3.5 billion. We expect to finance capital expenditures with internally generated and borrowed funds. Cash received from disposals of hospitals and health care entities increased $783 million for 2018 compared to 2017 primarily related to the receipt of $758 million from the sale of the two hospitals in our Oklahoma market.
Cash used in financing activities totaled $3.075 billion in 2018, $1.061 billion in 2017 and $2.508 billion in 2016. During 2018, we had a net decline of $344 million in our indebtedness, paid cash dividends of $487 million and paid cash of $1.530 billion for repurchases of common stock. During 2017, we had a net increase of $1.509 billion in our indebtedness and paid cash of $2.051 billion for repurchases of common stock. During 2016, we had a net increase of $815 million in our indebtedness and paid cash of $2.751 billion for repurchases of common stock. During 2018, 2017 and 2016, we made distributions to noncontrolling interests of $441 million, $448 million and $434 million, respectively. We paid debt issuance costs of $25 million, $26 million and $40 million for 2018, 2017 and 2016, respectively.
We, or our affiliates, may in the future repurchase portions of our debt or equity securities, subject to certain limitations, from time to time in either the open market or through privately negotiated transactions, in accordance with applicable SEC and other legal requirements. The timing, prices, and sizes of purchases depend upon prevailing trading prices, general economic and market conditions, and other factors, including applicable securities laws. During January 2019, our Board of Directors authorized a share repurchase program for up to $2 billion of our outstanding common stock. At December 31, 2018, $272 million of share repurchase authorization remained available under the $2 billion share repurchase program authorized by our board of directors during October 2017. Funds for the repurchase of debt or equity securities have, and are expected to, come primarily from cash generated from operations and borrowed funds. On January 29, 2019, our Board of Directors declared a quarterly dividend of $0.40 per share on our common stock payable on March 29, 2019 to stockholders of record on March 1, 2019. During 2018, our Board of Directors declared four quarterly dividends of $0.35 per share, or $1.40 per share in the aggregate, on our common stock. The timing and amount of future cash dividends will vary based on a number of factors, including future capital requirements for strategic transactions, share repurchases and investing in our existing markets, the availability of financing on acceptable terms, debt service requirements, changes to applicable tax laws or corporate laws, changes to our business model and periodic determinations by our Board of Directors that cash dividends are in the best interest of stockholders and are in compliance with all applicable laws and agreements of the Company.
Table of Contents
Index to Financial Statements
HCA HEALTHCARE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (continued)
In addition to cash flows from operations, available sources of capital include amounts available under our senior secured credit facilities ($2.693 billion as of December 31, 2018 and $2.933 billion as of January 31, 2019) and anticipated access to public and private debt and equity markets.
Investments of our insurance subsidiaries, to maintain statutory equity and pay claims, totaled $409 million and $472 million at December 31, 2018 and 2017, respectively. The insurance subsidiary maintained net reserves for professional liability risks of $183 million and $194 million at December 31, 2018 and 2017, respectively. Our facilities are insured by our 100% owned insurance subsidiary for losses up to $50 million per occurrence; however, this coverage is subject, in most cases, to a $15 million per occurrence self-insured retention. Net reserves for the self-insured professional liability risks retained were $1.509 billion and $1.409 billion at December 31, 2018 and 2017, respectively. Claims payments, net of reinsurance recoveries, during the next 12 months are expected to approximate $456 million. We estimate that approximately $422 million of the expected net claim payments during the next 12 months will relate to claims subject to the self-insured retention.
Financing Activities
We are a highly leveraged company with significant debt service requirements. Our debt totaled $32.821 billion and $33.058 billion at December 31, 2018 and 2017, respectively. Our interest expense was $1.755 billion for 2018 and $1.690 billion for 2017.
During June 2017, we issued $1.500 billion aggregate principal amount of 5.500% senior secured notes due 2047. We used the net proceeds for general corporate purposes, including funding the purchase of certain hospital acquisitions, and the redemption, during July 2017, of all $500 million aggregate principal amount of our existing 8.000% senior notes maturing in October 2018.
During June 2017, we amended our senior secured revolving credit facilities by (i) increasing the commitments under the senior secured asset-based revolving credit facility to $3.750 billion, (ii) extending the maturity date of the revolving credit commitments to June 28, 2022, (iii) amending the incremental facility provisions to permit the incurrence of additional incremental credit facilities in an aggregate principal amount of $1.5 billion and (iv) providing that the commitment fee for unutilized commitments under the senior secured asset-based revolving credit facility shall be 0.250% per annum.
During March 2018, we entered into a joinder agreement to refinance our existing senior secured term B-8 loan credit facility maturing on February 15, 2024, repay a portion of our existing senior secured term B-9 loan credit facility maturing on March 18, 2023 and pay related fees and expenses with a new $1.500 billion senior secured term B-10 loan credit facility maturing on March 13, 2025. The senior secured term B-10 loan credit facility bears interest at LIBOR plus an applicable margin of 2.00% or a base rate plus an applicable margin of 1.00%, compared to applicable margins of 2.25% and 1.25%, respectively, under the senior secured term B-8 loan credit facility.
During March 2018, we also entered into an additional joinder agreement to refinance a portion of our existing senior secured term B-9 loan credit facility maturing on March 18, 2023 and pay related fees and expenses with a new approximately $1.166 billion senior secured term B-11 loan credit facility maturing on March 18, 2023. The senior secured term B-11 loan credit facility bears interest at LIBOR plus an applicable margin of 1.75% or a base rate plus an applicable margin of 0.75%, compared to applicable margins of 2.00% and 1.00%, respectively, under the senior secured term B-9 loan credit facility.
Table of Contents
Index to Financial Statements
HCA HEALTHCARE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (continued)
Financing Activities (continued)
During August 2018, we issued $2.000 billion aggregate principal amount of senior notes comprised of $1.000 billion aggregate principal amount of 5.375% notes due 2026 and $1.000 billion aggregate principal amount of 5.625% notes due 2028. We used the net proceeds for general corporate purposes, including funding the purchase of a hospital, and the redemption of all $1.500 billion aggregate principal amount of our existing 3.750% senior secured notes maturing in March 2019.
During January 2019, we issued $1.500 billion aggregate principal amount of senior notes comprised of $1.000 billion aggregate principal amount of 5.875% notes due 2029 and $500 million aggregate principal amount of 5.625% notes due 2028. We used the net proceeds to fund the purchase of a six-hospital health system located in western North Carolina.
Management believes that cash flows from operations, amounts available under our senior secured credit facilities and our anticipated access to public and private debt markets will be sufficient to meet expected liquidity needs during the next twelve months.
Table of Contents
Index to Financial Statements
HCA HEALTHCARE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Contractual Obligations and Off-Balance Sheet Arrangements
As of December 31, 2018, maturities of contractual obligations and other commercial commitments are presented in the table below (dollars in millions):
| Payments Due by Period | ||||||||||||||||||||
| Contractual Obligations(a) | Total | Current | 2-3 Years | 4-5 Years | After 5 Years | |||||||||||||||
| Long-term debt including interest, excluding the senior secured credit facilities(b) | $ | 36,936 | $ | 2,215 | $ | 6,699 | $ | 8,039 | $ | 19,983 | ||||||||||
| Loans outstanding under the senior secured credit facilities, including interest(b) | 7,333 | 207 | 1,342 | 4,333 | 1,451 | |||||||||||||||
| Professional liability claims(c) | 1,741 | 466 | 711 | 342 | 222 | |||||||||||||||
| Operating leases(d) | 2,244 | 320 | 560 | 357 | 1,007 | |||||||||||||||
| Purchase and other obligations(d) | 28 | 21 | 4 | 2 | 1 | |||||||||||||||
| Total contractual obligations | $ | 48,282 | $ | 3,229 | $ | 9,316 | $ | 13,073 | $ | 22,664 | ||||||||||
| Commitment Expiration by Period | ||||||||||||||||||||
| Other Commercial Commitments Not Recorded on the Consolidated Balance Sheet | Total | Current | 2-3 Years | 4-5 Years | After 5 Years | |||||||||||||||
| Surety bonds(e) | $ | 72 | $ | 71 | $ | 1 | $ | — | $ | — | ||||||||||
| Letters of credit(e) | 17 | 17 | — | — | — | |||||||||||||||
| Physician commitments(f) | 35 | 25 | 10 | — | — | |||||||||||||||
| Total commercial commitments | $ | 124 | $ | 113 | $ | 11 | $ | — | $ | — | ||||||||||
| (a) | We have not included obligations related to unrecognized tax benefits of $435 million at December 31, 2018, as we cannot reasonably estimate the timing or amounts of cash payments, if any, at this time. |
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| (b) | Estimates of interest payments assume that interest rates and borrowing spreads at December 31, 2018, remain constant during the period presented. |
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| (c) | The estimation of the timing of payments for professional liability claims beyond a year can vary significantly. The time period required to resolve these claims can vary depending upon the jurisdiction and whether the claim is settled or litigated. |
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| (d) | Amounts relate to future operating lease obligations, purchase obligations and other obligations and are not recorded in our consolidated balance sheet. Amounts also include physician commitments that are recorded in our consolidated balance sheet. |
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| (e) | Amounts relate primarily to instances in which we have agreed to indemnify various commercial insurers and lenders who have provided surety bonds and letters of credit to cover damages for legal cases which were awarded to plaintiffs by the courts, Medicaid provider bonds, and utility and construction deposits. |
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| (f) | In consideration for physicians relocating to the communities in which our hospitals are located and agreeing to engage in private practice for the benefit of the respective communities, we make advances to physicians, normally over a period of one year, to assist in establishing the physicians’ practices. The actual amount of these commitments to be advanced often depends upon the financial results of the physicians’ private practice during the recruitment agreement payment period. The physician commitments reflected were based on our maximum exposure on effective agreements at December 31, 2018. |
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Market Risk
We are exposed to market risk related to changes in market values of securities. The investments in our 100% owned insurance subsidiaries were $409 million at December 31, 2018. These investments are carried at
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Index to Financial Statements
HCA HEALTHCARE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Market Risk (continued)
fair value, with changes in unrealized gains and losses being recorded as adjustments to other comprehensive income. At December 31, 2018, we had a net unrealized gain of $3 million on the insurance subsidiaries’ investment securities.
We are exposed to market risk related to market illiquidity. Investments in debt and equity securities of our 100% owned insurance subsidiaries could be impaired by the inability to access the capital markets. Should the 100% owned insurance subsidiaries require significant amounts of cash in excess of normal cash requirements to pay claims and other expenses on short notice, we may have difficulty selling these investments in a timely manner or be forced to sell them at a price less than what we might otherwise have been able to in a normal market environment. We may be required to recognize other-than-temporary impairments on our investment securities in future periods should issuers default on interest payments or should the fair market valuations of the securities deteriorate due to ratings downgrades or other issue-specific factors.
We are also exposed to market risk related to changes in interest rates, and we periodically enter into interest rate swap agreements to manage our exposure to these fluctuations. Our interest rate swap agreements involve the exchange of fixed and variable rate interest payments between two parties, based on common notional principal amounts and maturity dates. The notional amounts of the swap agreements represent balances used to calculate the exchange of cash flows and are not our assets or liabilities. Our credit risk related to these agreements is considered low because the swap agreements are with creditworthy financial institutions. The interest payments under these agreements are settled on a net basis. These derivatives have been recognized in the financial statements at their respective fair values. Changes in the fair value of these derivatives, which are designated as cash flow hedges, are included in other comprehensive income.
With respect to our interest-bearing liabilities, approximately $4.341 billion of long-term debt at December 31, 2018 was subject to variable rates of interest, while the remaining balance in long-term debt of $28.480 billion at December 31, 2018 was subject to fixed rates of interest. Both the general level of interest rates and, for the senior secured credit facilities, our leverage affect our variable interest rates. Our variable debt is comprised primarily of amounts outstanding under the senior secured credit facilities. Borrowings under the senior secured credit facilities bear interest at a rate equal to an applicable margin plus, at our option, either (a) a base rate determined by reference to the higher of (1) the federal funds rate plus 0.50% and (2) the prime rate of Bank of America or (b) a LIBOR rate for the currency of such borrowing for the relevant interest period. The applicable margin for borrowings under the senior secured credit facilities may fluctuate according to a leverage ratio. The average effective interest rate for our long-term debt was 5.3% for both 2018 and 2017.
The estimated fair value of our total long-term debt was $32.887 billion at December 31, 2018. The estimates of fair value are based upon the quoted market prices for the same or similar issues of long-term debt with the same maturities. Based on a hypothetical 1% increase in interest rates, the potential annualized reduction to future pretax earnings would be approximately $43 million. To mitigate the impact of fluctuations in interest rates, we generally target a majority of our debt portfolio to be maintained at fixed rates.
We are exposed to currency translation risk related to our foreign operations. We currently do not consider the market risk related to foreign currency translation to be material to our consolidated financial statements or our liquidity.
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Index to Financial Statements
HCA HEALTHCARE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Market Risk (continued)
Financial Instruments
Derivative financial instruments are employed to manage risks, including interest rate exposures, and are not used for trading or speculative purposes. We recognize derivative instruments, such as interest rate swap agreements, in the consolidated balance sheets at fair value. Changes in the fair value of derivatives are recognized periodically either in earnings or in stockholders’ equity, as a component of other comprehensive income, depending on whether the derivative financial instrument qualifies for hedge accounting, and if so, whether it qualifies as a fair value hedge or a cash flow hedge. Gains and losses on derivatives designated as cash flow hedges, to the extent they are effective, are recorded in other comprehensive income, and subsequently reclassified to earnings to offset the impact of the hedged items when they occur.
The net interest paid or received on interest rate swaps is recognized as interest expense. Gains and losses resulting from the early termination of interest rate swap agreements are deferred and amortized as adjustments to expense over the remaining period of the debt originally covered by the terminated swap.
Effects of Inflation and Changing Prices
Various federal, state and local laws have been enacted that, in certain cases, limit our ability to increase prices. Revenues for general, acute care hospital services rendered to Medicare patients are established under the federal government’s prospective payment system. Total fee-for-service Medicare revenues were 21.1%, 21.3% and 21.0% of our revenues for 2018, 2017 and 2016, respectively.
Management believes hospital industry operating margins have been, and may continue to be, under significant pressure because of changes in payer and service mix and growth in operating expenses in excess of the increase in prospective payments under the Medicare program. In addition, as a result of increasing regulatory and competitive pressures, our ability to maintain operating margins through price increases to non-Medicare patients is limited.
Tax Examinations
During 2016, the IRS completed its examination, resolving all outstanding federal income tax issues for our 2011 and 2012 tax years. We are subject to examination by the IRS for tax years after 2014 as well as by state and foreign taxing authorities.
Management believes HCA Healthcare, Inc., its predecessors and affiliates properly reported taxable income and paid taxes in accordance with applicable laws and agreements established with the IRS, state and foreign taxing authorities and final resolution of any disputes will not have a material, adverse effect on our results of operations or financial position. However, if payments due upon final resolution of any issues exceed our recorded estimates, such resolutions could have a material, adverse effect on our results of operations or financial position.
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Index to Financial Statements
Previous: Item 6. Selected Financial Data · Next: Item 7A. Quantitative and Qualitative Disclosures about Market Risk