Q U O R U M H E A L T H C O R P O R A T I O N 2 0 1 7 A N N U A L R E P O R T
LETTER TO OUR SHAREHOLDERS
Dear Fellow Shareholder,
As the CEO of Quorum Health, I am happy to report to you on our second year of operations. Our strategic vision
of being the premier non-urban healthcare provider with a market leading portfolio of hospitals that stay focused
on quality, service and community engagement has never been more important. Our vision to improve the health
of every community we serve is shared by our entire leadership team.
During 2017, we worked diligently to deliver on our key strategic goals,
which include: 1) Refining our portfolio of hospitals while reducing our debt;
2) Expand ing the breadth of services at our facilities; 3) Attracting new provid-
ers to our community hospitals; 4) Encouraging a culture of quality; and
5) Growing Quorum Health Resources as a management and consulting
company for non-urban hospitals.
E X PA NDING THE BRE A DTH OF SERV ICES AT OUR FACILITIES,
AT TR AC TING NE W PH YSICI A NS TO OUR COMMUNIT Y HOSPITA L S
A ND ENCOUR AGING A CULTURE OF QUA LIT Y
Quorum Health is a non-urban healthcare provider, where the local hospital
is often the sole or primary provider of healthcare services in the community.
The challenge is to attract local residents to these hospitals rather than hospi-
tals in larger nearby cities for services. Our strategy to increase utilization by
local residents focuses on the following:
Expanding the breadth of services at our facilities. Since our launch,
senior management has worked closely with hospital leadership to craft
market-specific strategies to address needs within the communities we serve.
With this effort, we are targeting four specialties: orthopedics, general surgery,
gastroenterology, and cardiology. Over the course of 2017, we successfully
added 25 physicians in these targeted specialties within our core markets.
We also invested capital in outpatient access points, including the addition of
four urgent care centers and three imaging centers. We expanded ICU services
into five new markets and opened two new catheterization labs in New Mexico
and Arkansas. Most recently, in January of 2018, we launched a Rural Health
Medicare Shared Savings Program in 20 of our markets as part of our strategy
to become the healthcare provider of choice within our markets. Looking further
into 2018, we anticipate the implementation of a tele-medicine program in several
markets focused on tele-cardiology, tele-critical care and tele-psychiatry. We
are pleased with the strategic direction for both the communities and the
company in the year ahead.
Attracting new providers to our community hospitals. To grow higher
acuity services and to address the medically-underserved nature of our markets,
we are aggressively recruiting new providers. During 2017, 71 physicians com-
menced practice in core markets, along with 33 advanced practitioners. We
will continue to recruit, however, at a slower rate compared to 2017.
Encouraging a culture of quality. A strong hospital attracts patients
through its reputation for quality care. To monitor progress across the Company,
we have developed a proprietary Quality Dashboard to measure key metrics
that contribute to a hospital’s overall quality. Using this tool as a guide, we
have seen a 5.5% improvement in quality results from the third quarter of
2016. In addition, our hospitals achieved a 92% reduction in their Serious
Safety Event Rate measured from the 2013 baseline.
REFINING OUR POR TFOLIO OF HOSPITA L S, W HILE REDUCING
OUR DEB T
The plan for long-term success requires generating strong revenue and mar-
gin growth in our core business, while improving financial stability. We plan to
achieve these results by:
Divesting non-core assets. As we have noted since the time of the Company’s
launch, our portfolio has included hospitals that we identified for possible
divestiture. These hospitals have represented some of our lowest financial
performers. Through March 31, 2018, we have divested a total of nine hospi-
tals and are continually evaluating additional divestitures that we believe
could strengthen our enterprise as a whole.
Reducing our debt. We began operations with substantial indebtedness and
have since made great strides in reducing our debt. As part of this strategy, we
have used the proceeds from the nine divested hospitals to reduce our debt
by over $45 million. Going forward, we are committed to the continued
reduction of our debt through the strategic sale of financially underperform-
ing hospitals.
Improving financial performance of core hospitals. Our core hospitals
have the potential for margin improvement driven largely by increasing services
and physician coverage. We have invested heavily in our core hospitals and
are beginning to see positive results from these efforts, as demonstrated by
positive growth in volumes during the last three quarters. This is a testament
to the physicians and staff who are committed to improving care and expanding
services to their communities.
In summary, Quorum Health has taken positive steps in becoming a leading
non-urban healthcare company and we remain focused on achieving future
strategic goals. I remain enthusiastic about the company’s future and thank
all of our physicians, nurses and team members for the hard work and dedica-
tion they have shown in working toward our common goals.
Sincerely,
THOMAS D. MILLER
President and Chief Executive Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(cid:1)
(cid:1)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number
001-37550
QUORUM HEALTH CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
State or other jurisdiction of
incorporation or organization
47-4725208
I.R.S. Employer Identification No.
1573 Mallory Lane Brentwood, Tennessee
Address of principal executive offices
37027
Zip code
Registrant’s telephone number, including area code
(615) 221-1400
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.0001 par value per share
Name of each exchange on which registered
New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:1) No (cid:1)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes (cid:1) No (cid:1)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes (cid:1) No (cid:1)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes (cid:1) No (cid:1)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be
contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any
amendment to the Form 10-K. (cid:1)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the
Exchange Act.
Large accelerated filer (cid:1)
Non-accelerated filer (cid:1) (Do not check is a smaller reporting company)
Emerging growth company (cid:1)
Accelerated filer (cid:1)
Smaller reporting company (cid:1)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. (cid:1)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes (cid:1) No (cid:1)
The aggregate market value of the common stock (“Common Stock”) held on June 30, 2017 by non-affiliates of the Registrant was approximately $118.3 million
(based on the June 30, 2017 closing price of common stock of $4.15 per share as reported on the New York Stock Exchange). For purposes of this calculation only,
shares held by non-affiliates excludes only those shares beneficially owned by the registrant’s executive officers, directors and stockholders owning 10% or more of the
Company’s outstanding common stock. The registrant has no non-voting common stock outstanding. As of March 12, 2018, there were 30,201,415 shares outstanding
of the registrant’s Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for its 2018 Annual Meeting of Stockholders are incorporated by reference into Part III hereof.
QUORUM HEALTH CORPORATION
Annual Report on Form 10-K
Table of Contents
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART I
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions and Director Independence
Principal Accounting Fees and Services
PART IV
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Item 16
Signatures
Financial Statements and Supplementary Data
Exhibits and Financial Statement Schedules
Form 10-K Summary
Page
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51
54
105
105
106
106
107
108
108
108
108
108
109
112
113
F-1
Item 1. Business
Overview
PART 1
The principal business of Quorum Health Corporation and its subsidiaries is to provide hospital and outpatient healthcare services
in our markets across the United States. As of December 31, 2017, we owned or leased a diversified portfolio of 31 hospitals in rural
and mid-sized markets, which are located in 15 states and have a total of 2,979 licensed beds. In addition, through Quorum Health
Resources LLC (“QHR”), our wholly-owned subsidiary, we provide a wide range of hospital management advisory and healthcare
consulting services. Over 95% of our net operating revenues for the year ended December 31, 2017 were attributable to our hospital
operations business and the remainder related to our hospital management advisory and healthcare consulting services business. Our
company became an independent, publicly-traded company on April 29, 2016 upon the spin-off (“Spin-off”) of 38 hospitals, their
affiliated facilities and QHR from Community Health Systems, Inc. (“CHS” or “Parent” when referring to the carve-out period prior
to April 29, 2016). The terms of the spin-off and related financing transactions, including the transition services agreements between
us and CHS, are described below in the section entitled “The Spin-off.”
As used in this report, the terms (“QHC,” “Company,” “we,” “our,” and “us”) refer to Quorum Health Corporation and its
subsidiaries. Quorum Health Corporation is a Delaware corporation that was incorporated in 2015 to facilitate our Spin-off from
Community Health Systems, Inc., as described below. All references within this Annual Report on Form 10-K to our financial
statements, financial data and operating data refer to such data on a consolidated and combined basis unless otherwise noted. For a
definition of consolidated and combined basis, see “Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations — Results of Operations.”
For the year ended December 31, 2017, we generated total net operating revenues of $2.1 billion, loss from operations of $12.1
million, loss before income taxes of $134.2 million, net loss of $112.4 million, net cash provided by operating activities of $67.0
million, Adjusted EBITDA of $141.8 million, Adjusted EBITDA, Adjusted for Divestitures of $162.5 million and Adjusted EBITDA,
Adjusted for Potential Divestitures of $170.8 million. For information regarding why the Company believes Adjusted EBITDA,
Adjusted EBITDA, Adjusted for Divestitures and Adjusted EBITDA, Adjusted for Potential Divestitures present useful information to
investors and for a reconciliation of Adjusted EBITDA, Adjusted EBITDA, Adjusted for Divestitures and Adjusted EBITDA,
Adjusted for Potential Divestitures to net income (loss) attributable to Quorum Health Corporation, the most directly comparable
financial measure under United States generally accepted accounting principles (“U.S. GAAP” or “GAAP”), see “Item 6 — Selected
Financial Data.” Our loss before income taxes was impacted by: (1) $47.3 million of impairment related to our hospital operations
business, consisting of $45.4 million of impairment to long-lived assets and $1.9 million of impairment to goodwill; (2) $65.3 million
of net operating losses from the hospitals that we divested (the “divestitures group”) or have targeted for divestiture (the “potential
divestitures group”), which collectively includes two hospitals divested in December 2016, five hospitals divested in 2017 and an
additional seven hospitals that we intend to divest or close in the next twelve to twenty-four months; and (3) $122.1 of interest
expense and $125.8 million of cash interest payments made on our indebtedness.
We generate patient revenues from the healthcare services we provide at our hospitals and affiliated outpatient facilities. Our
hospital services include general and acute care, emergency room, general and specialty surgery, critical care, internal medicine,
obstetrics, diagnostic services, psychiatric and rehabilitation services. We also generate revenues from the outpatient healthcare
services we provide at both our hospitals and affiliated outpatient service facilities, including physician practices, urgent care centers,
imaging centers and surgery centers, which are located in the same and immediately surrounding communities as our hospitals. We
prioritize building and maintaining a strong presence in the communities where we operate hospitals in collaboration with the local
residents, business leaders and governmental agencies. We continuously seek to improve our market share in each community by
building patient loyalty to both our hospitals and physicians and by maintaining a strong reputation for quality of patient care. We are
the sole provider of general and acute hospital healthcare services in 20 of our markets, which we generally define as the county where
our hospital resides, which means we typically have less direct competition from other hospital companies for our hospital services.
Some of our hospitals are located in markets that are adjacent to highly populated areas where the population, available workforce and
demand for healthcare services are likely to continue to grow. Such factors could increase the demand for healthcare services from our
facilities due to the close proximity of our hospitals and outpatient services facilities to these neighboring markets.
We generate non-patient revenues from our hospital management advisory and healthcare consulting services business. QHR is a
leading provider of hospital management advisory and healthcare consulting services in the United States. The clients of QHR are
hospitals that are not affiliated with our hospital operations business that enter into contracts with us to receive these non-patient
services. As of December 31, 2017, QHR had contracts to provide management advisory services to 85 hospital clients located in 31
states with a total of approximately 5,200 licensed beds. During the year ended December 31, 2017, QHR also provided consulting
and other support services to approximately 98 hospital clients located in 36 states with a total of approximately 5,000 licensed beds.
By managing and consulting with non-affiliated hospitals that are often located in similar markets as our owned and leased hospitals,
we hope to benefit from the opportunity to build relationships and partnerships in these communities and to enhance our knowledge of
overall U.S. market conditions beyond the markets in which we currently operate hospitals. In addition to our non-patient revenues
from our QHR business, we generate other non-patient revenues, primarily from rental income and hospital cafeteria sales.
2
The Spin-off
On April 29, 2016, CHS completed the Spin-off of 38 hospitals, including their affiliated outpatient facilities, and QHR to form
Quorum Health Corporation through the distribution of 100% of QHC common stock to CHS stockholders of record on April 22,
2016 (the “Record Date”). Each CHS stockholder received a distribution of one share of QHC common stock for every four shares of
CHS common stock held as of the Record Date, plus cash in lieu of fractional shares. QHC common stock began trading on the New
York Stock Exchange (“NYSE”) under the ticker symbol “QHC” on May 2, 2016.
In connection with the Spin-off, we issued $400 million in aggregate principal amount of 11.625% Senior Notes due 2023 (the
“Senior Notes”) on April 22, 2016 and entered into a credit agreement on April 29, 2016, consisting of an $880 million senior secured
term loan facility (the “Term Loan Facility”) and a $100 million senior secured revolving credit facility (the “Revolving Credit
Facility”), or on a combined basis referred to as the “Senior Credit Facility.” In addition, we entered into a $125 million senior secured
asset-based revolving credit facility (“the ABL Credit Facility”). The net offering proceeds of the Senior Notes, together with the net
borrowings under the Term Loan Facility, were used to make a $1.2 billion payment from QHC to CHS and to pay our transaction and
financing fees and expenses.
In connection with the Spin-off, certain agreements were established by CHS that govern and continue to govern matters related
to the Spin-off. These agreements include, among others, a Separation and Distribution Agreement, a Tax Matters Agreement and an
Employee Matters Agreement. Various transition services agreements were established by CHS that define services to be provided by
CHS to QHC. The transition services agreements generally have five-year terms and include, among others, the provision for services
related to information technology, payroll processing, certain human resources functions, patient eligibility screening, billing,
collections and other revenue management services.
Pursuant to the terms of the Separation and Distribution Agreement, CHS made a non-cash capital contribution of $530.6 million
and transferred $13.5 million of cash to us on the Spin-off date. The cash transfer consisted of an agreed upon $20.0 million for the
initial funding of our working capital, reduced by $6.5 million for the difference in estimated and actual financing fees and expenses
incurred at the closing of the Spin-off.
The following table contains a summary of the major transactions to effect the Spin-off of QHC as a newly formed, independent
company (dollars in thousands):
Long-Term
Debt
Due to
Parent, Net
Common Stock
Additional
Paid-in
Amount Capital
Parent's
Equity
Shares
Balance at April 29, 2016 (prior to the Spin-off)
$
24,179 $ 1,813,836
— $
— $
— $ 3,137
Borrowings of long-term debt, net of debt issuance
discounts
Payments of debt issuance costs
Cash proceeds paid to Parent
Transfer of liabilities from Parent
Net deferred income tax liability resulting from the
Spin-off
Non-cash capital contribution from Parent
Distribution of common stock
Distribution of restricted stock awards
Balance at April 29, 2016 (after the Spin-off)
1,255,464
(29,146 )
—
—
— (1,217,336 )
(22,292 )
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$ 1,250,497 $
(46,783 )
(527,425 )
—
—
— 27,719,645
692,409
—
— 28,412,054 $
—
—
— 530,562
(3 )
3
—
—
3 $ 530,559 $
—
(3,137 )
—
—
—
3
The following table contains a summary of the sources and uses of cash directly related to our separation from CHS (in
thousands):
Sources of cash:
Term Loan Facility, maturing 2022
Senior Notes, maturing 2023
Cash transfer from CHS for initial funding of working capital, less adjustments
Total sources of cash
Uses of cash:
Payment to CHS for the businesses
Payments of debt issuance costs
Reduction in debt proceeds for debt issuance discounts
Transaction costs related to the Spin-off, as recorded in the statements of income
Total uses of cash
Net cash inflow
Our Hospital Operations Business
$
$
880,000
400,000
13,454
1,293,454
(1,217,336 )
(29,146 )
(24,536 )
(21,825 )
(1,292,843 )
611
Our hospitals and their affiliated outpatient service facilities generate revenues by providing a broad range of general and acute
inpatient and outpatient healthcare services to patients living in or traveling to the communities in which we are located. Each of our
hospitals has a corporate board of directors, a board of trustees, or both (in all cases, the “hospital board”), which include members
from the local community and the hospital’s medical staff. The hospital board oversees the operations of the hospital and is
responsible for matters such as establishing and monitoring policies related to medical, professional and ethical practices at the
hospital and also ensuring these practices conform to U.S. healthcare industry standards and regulatory requirements. Each of our
hospitals has an active quality assurance program to monitor patient safety and quality of care standards at the hospital and its
affiliated outpatient service facilities and to meet accreditation and other federal and state regulatory requirements. Our hospitals
conduct patient satisfaction surveys and engage in other quality of care assessment activities that are reviewed and monitored by our
senior and hospital management teams on a continuing basis as part of our initiatives to maintain a high-quality reputation in each of
the communities we serve.
The U.S. healthcare industry has been trending in recent years toward treatment of an increasing number of medical conditions in
outpatient settings. We provide outpatient healthcare services at both our hospitals and their affiliated facilities, including physician
practices, urgent care centers, imaging centers and surgery centers which we own or lease that are located in the same and
immediately surrounding communities as our hospitals. For the years ended December 31, 2017, 2016 and 2015, outpatient healthcare
services represented 55.0%, 55.4% and 56.8%, respectively, of our net patient revenues, before the provision for bad debts.
Our Hospital Management Advisory and Healthcare Consulting Services Business
In addition to the healthcare services provided through our hospitals and their affiliated outpatient service facilities, we also
operate QHR, a leader in hospital management advisory and healthcare consulting services.
As of December 31, 2017, QHR had contracts to provide management advisory services to 85 hospital clients located in 31 states
with a total of approximately 5,200 licensed beds. In some cases, we are engaged under these contracts to provide experienced
hospital management professionals that are employees of our company to serve as the chief executive officer and chief financial
officer for the hospital client on an interim or permanent basis. As part of the services we provide, our hospital clients receive
operations support from QHR corporate and regional management teams. This service benefits our hospital clients as a result of the
broader experience of our QHR corporate and regional management teams in providing services to hospitals of all sizes in diverse
markets throughout the United States.
Our hospital management advisory contracts generally have terms of three to five years. QHR generates revenues from its
management advisory contracts by charging a management advisory fee for its services, which is typically a fixed fee charge agreed
upon by QHR and the hospital client’s board of directors and is typically not a calculation based on the hospital client’s revenues or
other operating measures. As specified in the terms of each management advisory contract, QHR is not responsible for hospital
licensure, physician credentialing, professional and general liability insurance coverage, capital investments or other functions of the
hospital client. These functions are normally the responsibility of a hospital’s board of directors or board of trustees. QHR is also not
responsible for funding any hospital operating expenses for its hospital clients. In its capacity as a provider of management advisory
services to hospitals, QHR is not considered a healthcare provider for hospital licensure and certificate of need purposes.
QHR has a nationally recognized consulting services division and promotes healthcare consulting services to hospital clients that
do not receive services from its management advisory services business. QHR generates revenues from its consulting contracts by
charging a consulting fee for its services based on the nature, scope and timeline of the services defined for each specific contract.
During the year ended December 31, 2017, QHR had contracts during some or all of the year to provide healthcare consulting and
4
other support services to approximately 98 hospitals in 36 states with a total of approximately 5,000 licensed beds. QHR provides
consulting services to support a variety of the operational needs hospitals may face including, among others, assistance with revenue
and accounts receivable management, electronic health records (“EHR”) management, patient flow management and regulatory
compliance management. QHR also provides consulting services to large, sophisticated medical institutions that contract with us to
provide hospital-related advice on specific topics.
QHR’s primary services include:
• Hospital Management Advisory and Operations Support. QHR provides hospital and other healthcare organization
clients with operational, financial and strategic guidance, as well as interim senior level management when needed.
• Hospital Group Purchasing. QHR offers group purchasing services to hospitals and other healthcare organizations
through its Quorum Purchasing Advantage Program. Through this program, hospital and other healthcare organization
clients can enter into a contract with QHR to buy discounted medical supplies, medical equipment, pharmaceuticals and
other products and services from the same group purchasing organization used by us for our hospital operations business.
QHR also assists with managing its clients’ supply chain for such purchases when needed.
• Online Solutions for Hospitals. QHR offers a suite of web-based applications and software tools through its Vantage
App Suite that are designed to support hospital and other healthcare organization clients in their efforts to improve
operating and financial performance. These web-based tools are available through online subscriptions and include,
among others, applications for measuring productivity, managing medical and drug supply costs, reviewing operating
results against benchmark targets for performance and maintaining compliance contracts.
• Education Programs. The Quorum Learning Institute educates healthcare leaders, professionals and other medical staff
each year, from trustees and senior level management executives to department managers and other staff. It offers
programs through national conferences, classroom courses, webinars and online resources. The Quorum Learning
Institute programs address current issues in healthcare and provide technical training courses for new and advancing
healthcare professionals and medical staff.
Business Strategy
Our business strategy includes divesting underperforming hospitals, reducing our debt, refining our portfolio to a more
sustainable group of hospitals with higher operating margins and increasing our market share in the each of the communities we serve.
We intend to grow our revenues and operating margins by expanding specialty care and outpatient service lines at each of our
hospitals, primarily by recruiting talented physicians and medical staff. We continuously aim to manage our operating costs, primarily
through the efficient management of staffing, medical specialist costs and medical supply inventory levels, with a continued focus on
enhancing patient safety and quality of care. In addition, our business strategy includes investing capital in renovations, expansion,
medical-related technology and equipment at our existing healthcare facilities and also in acquiring new healthcare facilities.
As part of our efforts to accomplish these goals, we operate our healthcare facilities in accordance with the following strategic
objectives:
•
•
•
•
•
•
improve our financial results by pursuing the sale or closure of underperforming hospitals;
refine our portfolio to include high-quality, profitable hospitals and outpatient service facilities;
expand the breadth and capacity of the specialty care service lines and outpatient services we offer;
enhance patient safety, quality of care and satisfaction at our healthcare facilities;
improve the operating and financial performance of our hospital and clinical operations business; and
grow our revenues through selective acquisitions.
Improve our Financial Results by Pursuing the Sale or Closure of Underperforming Hospitals
We perform an ongoing strategic review of our hospitals based upon an analysis of financial performance, current competitive
conditions, market demographic and economic trends and capital allocation requirements to assess our overall portfolio of hospitals.
As part of this strategy, we engage in initiatives to divest or close underperforming hospitals and outpatient service facilities which, in
turn, we believe will allow us to reduce our corporate indebtedness and refine our hospital portfolio to become a sustainable group of
hospitals and outpatient service facilities with higher operating margins. We will continue to pursue divestiture or closure
opportunities that align with this strategy. Our strategic review process is ongoing and we have targeted additional hospitals for
divestiture with the intent of utilizing all net proceeds to pay down our secured debt. We intend to divest or close these hospitals in the
next twelve to twenty-four months. For a discussion of our recent divestitures and closure activities, see “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations — Overview – Recent Divestiture Activity.”
5
Refine our Portfolio to Include High-Quality, Profitable Hospitals and Outpatient Service Facilities
We are refining our portfolio of hospitals and outpatient service facilities, primarily by divesting underperforming businesses,
with the goal of improving market share in each of the communities we serve. We are the sole provider of general and acute hospital
healthcare services for 20 of our markets, which we generally define as the county where our hospital resides. We monitor the unique
aspects of the individual communities we serve and utilize hospital-specific operating and marketing strategies to achieve our goals
and benefit these communities. By focusing on building strong community, physician and employee relationships and by establishing
strong local market leadership teams at our hospitals and outpatient service facilities, we believe we can enhance our delivery of high-
quality healthcare services and improve operating performance at our hospitals and outpatient service facilities. We have local
management leadership teams at each of our hospitals and additionally have local physician and clinical leadership groups in each of
our markets. We aim to achieve a high level of presence and involvement in the communities we serve and to further our development
of good relationships with local residents, business leaders and governmental agencies. We empower our individual hospital
management teams to develop comprehensive strategic plans that position their respective hospitals to meet the unique healthcare
needs of their local community and to look for opportunities to grow market share through selective acquisitions or the opening of
new outpatient service facilities, including physician practices. We believe we have developed a reputation for partnering with the
local communities of our hospitals to grow both the specialty care service lines and medical technology available to patients.
Expand the Breadth and Capacity of the Specialty Care Service Lines and Outpatient Services We Offer
Each of our markets has unique healthcare needs and gaps in available specialty care service lines and we assess these needs on
an ongoing basis to prioritize our recruitment efforts. We are focused on the execution of effective primary care and specialty care
physician retention and recruitment programs, and additionally non-physician recruitment and retention programs, at each of our
hospitals for the purpose of building and maintaining the confidence of community residents in the stability and breadth of medical
treatment available to them locally through our healthcare facilities. We invest capital in new and existing specialty care service lines
and medical technology at our hospitals to continuously improve and enhance the quality of care experienced by our patients and with
the intent of reducing the potential migration of our patients and local community residents to competing in-market and out-of-market
providers. We also invest capital to expand our outpatient service line offerings. We believe this widens the catchment area for our
hospitals and is consistent with prevailing market drivers in the U.S. healthcare industry, including patient preference for a convenient
medical treatment facility, physician preference toward the increased efficiency of utilizing non-hospital settings when available, and
both patient and third-party payor preferences toward the typically lower cost of care in outpatient settings. In particular, we are
targeting four specialties, which are orthopedics, general surgery, gastroenterology and non-invasive cardiology. We anticipate the
addition of these services will bolster utilization and increase acuity of our services, as measured by case mix index and net revenues
per adjusted admission.
Enhance Patient Safety, Quality of Care and Satisfaction at our Healthcare Facilities
Clinical quality is a high priority for us. We have various programs that support our hospitals and outpatient service facilities to
continuously improve the safety, quality of care and satisfaction of patients receiving services from us. As an example, we maintain
active safety and quality training programs for our senior hospital management, chief nursing officers, quality control directors,
physicians and other medical staff at our healthcare facilities. We also have programs that focus on sharing information among our
hospital management teams to align best practices in medical treatment, operations and regulatory compliance. We seek to provide our
hospitals with the infrastructure and technological capability to deliver high-quality care to patients. We believe measurements of
patient, physician, medical staff and employee satisfaction provide important insight for our hospital leadership teams into the quality
of care being administered to patients. Each of our hospitals conducts patient, physician, medical staff and employee satisfaction
surveys to identify methods and opportunities for improving patient safety, quality of care and satisfaction. In addition, we have
standardized many of our processes for documenting compliance with accreditation requirements and clinical best practices that have
positive track records in leading to improved patient experiences at our healthcare facilities. For example, we established a baseline at
each of our hospitals in April 2013 for monitoring the Serious Safety Event Rate. As of September 30, 2017, we have reported 92%
fewer serious safety events in comparison to our baseline in 2013.
Improve the Operating and Financial Performance of our Hospital and Clinical Operations Business
We intend to improve the operating and financial performance at each of our hospitals and outpatient service facilities through
frequent and ongoing evaluation of our operations, focusing on hospital-specific strategic initiatives, growing revenues by expanding
specialty care and outpatient service line offerings, controlling operating costs and aligning incentive compensation with operating and
financial performance to reward our hospital management teams. In general, we believe our opportunities for improving operating and
financial performance are hospital-specific and we intend to provide our hospital management teams with the autonomy to develop an
operating and marketing strategy tailored to the individual community they serve. Our strategic initiatives and operating cost control
efforts include tasks such as continuously focusing on revenue cycle management and collections, adhering to established protocols
related to medical supplies utilization, monitoring medical staffing levels and reducing contract labor usage. We believe these efforts,
in combination with other initiatives aimed at improving our operating and financial performance, should lead to improved cash flow
generation for us in the future.
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Grow our Revenues through Selective Acquisitions
As part of our business strategy, once we have completed our divestiture program and paid down a sufficient amount of debt to
reduce our leverage, we will seek attractive hospital acquisition opportunities meeting the following criteria:
•
•
•
•
located in cities and counties with stable, growing populations and positive economic trends;
currently operate as tax-exempt (not-for-profit) hospitals;
present opportunities for capacity and service line expansion; and
align with our goals for improving overall operating and financial performance.
We also seek to acquire selective outpatient service facilities, primarily physician practices, located in the same and immediately
surrounding communities as our existing hospitals and will invest capital into building new outpatient service facilities when needed.
We believe these strategic in-market initiatives will further strengthen our community relationships and benefit our patients and the
community residents through increased availability of local specialty care and outpatient service lines.
Competition
The U.S. healthcare industry is highly competitive. We face competition from other healthcare providers for patients. We utilize
both employee and non-employee physicians at our hospitals and outpatient service facilities. Our non-employee physicians, in most
cases, also provide services at healthcare facilities not owned by us. We seek to attract patients to our facilities by maintaining a
reputation for high quality of care and patient satisfaction, providing convenient inpatient and outpatient settings for the delivery of
healthcare services, and ensuring that we invest in technologically advanced medical equipment. Our ability to effectively compete for
patients is impacted by commercial and managed care payor programs that influence patient choice by offering health insurance plans
that restrict patient choice of provider. For example, plans with narrow network structures restrict the number of participating in-
network provider plans and plans with tiered network structures impose higher cost-sharing obligations on patients who obtain
services from providers in a disfavored tier.
We are the sole provider of general and acute hospital healthcare services in 20 of our markets, which we generally define as the
county where our hospital resides, which means we typically have less direct competition for our hospital services. Our hospitals face
competition from out-of-market hospitals, including hospitals in urban areas that may have more comprehensive specialty care service
lines, more advanced medical equipment and technology, more extensive medical research capabilities and resources or greater access
to medical education programs. Patients in the markets where we operate hospitals may travel to out-of-market hospitals to seek
medical treatment for a variety of reasons including, but not limited to, the need for services we do not offer or as a result of a
physician referral. Patients who seek medical treatment from an out-of-market hospital may subsequently shift their preferences to that
hospital for future healthcare services. We also face competition from other specialty care providers, including outpatient surgery,
orthopedic, oncology and diagnostic centers that are not affiliated with us. Our hospitals and many of the hospitals with whom we
compete engage in physician alignment strategies, which may include employing physicians, acquiring physician practice groups, and
participating in Accountable Care Organizations (“ACOs”) and, to the extent permitted by law, physician ownership of healthcare
facilities. Consolidation within the payor industry, vertical integration efforts among payors and healthcare providers, and cost-
reduction strategies implemented by large employer groups and their affiliates may also affect our competitive position.
In our markets where we are not the sole provider of general and acute hospital healthcare services, our primary competitor is
generally a not-for-profit hospital. Not-for-profit hospitals are typically owned by tax-supported governmental agencies or not-for-
profit entities that are financially supported by endowments and charitable contributions. Not-for-profit hospitals do not pay income or
property taxes and are able to make capital investments without paying sales tax. These financial advantages may better position such
hospitals to maintain more modern and technologically upgraded healthcare facilities and equipment and to offer more specialized
healthcare services than those available at our hospitals. Recent consolidations of not-for-profit hospital entities may intensify
competitive pressures.
The trend toward increasing clinical transparency and value-based purchasing within the U.S. healthcare industry may have an
adverse impact on our competitive position and patient admissions volumes in ways that we are unable to predict. For example, the
Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively,
the “Affordable Care Act”), requires hospitals to publish or make available to the public their standard charges for healthcare services.
In addition, Centers for Medicare & Medicaid Services (“CMS”) publicizes on its Hospital Compare website certain data submitted by
hospitals in connection with Medicare reimbursement claims, which includes individual hospital performance data related to quality of
care measures and patient satisfaction surveys.
Our Competitive Strengths
In the rural and mid-sized markets where we operate, we believe we have strengths in our hospital operations that differentiate us
from our competitors, including our commitment and ability to respond to the demand for better access to high-quality patient care,
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improved patient experience through the entire treatment and billing process and continuous improvement in clinical quality. We
believe our competitive strengths are summarized as follows:
•
•
•
•
strong presence in the communities we serve;
geographically diversified hospital portfolio;
track record of continuous improvement in clinical quality, safety and patient experience; and
dedicated and experienced management teams.
Strong Presence in the Communities We Serve
Our hospitals are the sole providers of general and acute hospital healthcare services in most of the markets we serve throughout
the United States. These communities rely on our hospitals for access to quality healthcare services, as well as to make a positive
societal and economic impact in their regions. Our hospitals are dedicated to providing local employment opportunities, engaging in
local sponsorships and offering community health education through lecture programs, health fairs and screening events.
Geographically Diversified Hospital Portfolio
We have a geographically diversified portfolio, which as of December 31, 2017 included 31 hospitals located across 15 states.
Many of our hospitals operate in markets experiencing population growth. We believe our existing hospital portfolio is geographically
well-positioned to adapt to ongoing changes in the U.S. healthcare industry and to respond to individual community needs related to
healthcare services. Additionally, as part of our business strategy and to enhance our long-term growth, we are actively engaged in
refining our hospital portfolio and reducing our leverage, primarily by divesting underperforming hospitals.
Track Record of Continuous Improvement in Clinical Quality, Safety and Patient Experience
We are committed to providing a high-quality and cost-effective healthcare experience for patients in collaboration with our
physicians, medical staff and third-party payors. We have continued to see a reduction in our Serious Safety Events, as last reported
through September 30, 2017, with a 92% reduction from our 2013 baseline. Our hospitals continually strive to achieve clinical
excellence designations, such as Chest Pain Center accreditation by the Society of Cardiovascular Patient Care and Primary Stroke
Center accreditation by The Joint Commission.
Dedicated and Experienced Management Teams
Our dedicated senior management team has significant public company and hospital operations experience, including a proven
track record of acquiring and integrating hospitals. We believe the breadth of healthcare industry expertise and experience from both
our senior management team and the management teams at each of our hospitals will drive our long-term growth.
U.S. Healthcare Industry
Overview
According to CMS, total U.S. healthcare expenditures in 2016 grew by 4.3% to approximately $3.3 trillion and are projected to
have grown 4.6% in 2017 to approximately $3.5 trillion. The CMS projections, published in February of 2018, indicate that total U.S.
healthcare spending will grow at an average annual rate of 5.6% for 2018 through 2026, exceeding $5.7 trillion by 2026 and
accounting for approximately 19.7% of the total U.S. gross domestic product. CMS expects healthcare spending to be largely
influenced by changes in economic conditions and demographics as well as increasing prices for medical goods and services. The
CMS projections are typically published once per year and are not updated to reflect interim changes. For example, the projections do
not take into account the possibility of further modifications to, or repeal of, the Affordable Care Act.
Hospital care, the category within the U.S. healthcare industry in which we classify our hospital operations business, is the largest
category of U.S. healthcare expenditures. The hospital care category is broadly defined to include services provided at acute care,
rehabilitation and psychiatric healthcare facilities that are owned by the government or investors or that operate as not-for-profit
facilities. CMS defines the hospital care category to include all services provided by hospitals to patients. Services include room and
board, ancillary charges, services of employed physicians, inpatient pharmacy, hospital-based nursing home, home health care and any
other service billed by hospitals in the United States for patient care. In 2017, hospital care expenditures are projected to have grown
4.6%, amounting to over $1.1 trillion. CMS estimates that the hospital services category will amount to nearly $1.2 trillion in 2018
and projects growth in this category at an average of 5.6% annually from 2018 through 2026. According to the American Hospital
Association, as of January 2018, there are approximately 4,840 community hospitals in the United States and approximately 1,825 of
these hospitals are located in rural communities, which are the primary markets in which we operate hospitals.
Demographic Trends
According to the U.S. Census Bureau, in 2015, the U.S. population included approximately 47.8 million people living in the
United States age 65 or older, comprising 14.9% of the total U.S. population. By 2030, the U.S. Census Bureau predicts the number of
people age 65 or older living in the United States will increase to approximately 74.1 million, or 20.6% of the total U.S. population.
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Due to increasing life expectancy, people living in the United States age 85 or older is also expected to increase from approximately
6.3 million in 2015 to 9.1 million by 2030. The increase in life expectancy is expected to increase the demand for healthcare services
and, as importantly, the demand for more innovative means of delivering healthcare services.
Based on U.S. Census Bureau data compiled by us for the specific markets in which we operate hospitals, the number of people
living in our service areas grew 0.4% from 2010 to 2017 and is expected to grow 1.4% from 2017 to 2022. The national average
population growth is 5.3% and 3.8% for these respective periods. The number of people age 65 or older living in our service areas
grew 18.8% from 2010 to 2017 and is expected to grow 35.8% from 2017 to 2022. The national average population growth for people
age 65 or older is 24.9% and 17.5% for these respective periods. The number of people age 65 or older living in our service areas
comprised 15.8% of the total population in our service areas in 2017 and is expected to comprise 18.1% of the total population in
these same service areas by 2022. The number of people age 65 or older living in the United States is 16.3% and 19.1% for these
respective periods. On a similar basis, the number of people age 85 or older in our service areas grew 15.2% from 2010 to 2017 and is
expected to grow 14.6% from 2017 to 2022. The national average population growth for people age 85 or older is 15.2% and 5.7% for
these respective periods. The number of people age 85 or older living in our service areas comprised 1.9% of the total population in
our service areas in 2017 and is expected to comprise 2.0% of the total population in these same service areas by 2022. The number of
people age 85 or older living in the United States is 2.0% and 2.2% for these respective periods.
Hospital Consolidation Trends
Various sectors of the U.S. healthcare industry are experiencing consolidation activity. We believe that consolidation activity in
the hospital care category will continue to be a trend of the U.S. healthcare industry in the future. Reasons for this consolidation
activity generally include the following:
•
•
•
•
desire to enhance the quality of care and breadth of local healthcare service lines available in communities;
need for additional recruitment of specialty care and primary care physicians or other medical staff;
general economies of scale, such as those that can be achieved through contracting for medical and drug supply purchase
agreements and professional and general liability insurance coverage as a combined hospital system;
increasing market share in the communities they serve
• mitigating risks associated with ongoing changes in reimbursement rates available from both governmental and non-
governmental third-party payors;
•
•
changes to healthcare reimbursement payment models that more closely tie reimbursement rates to the cost-effective
delivery of patient services and the quality of care administered to patients; and
other ongoing regulatory changes within the U.S. healthcare industry.
Hospital companies are acquiring an increasing number of physician practices and other outpatient service facilities as part of
their physician alignment strategies to position themselves for readmissions, payment bundling and other payment restructuring
models. Similarly, commercial and non-governmental managed care third-party payors have been consolidating and, in some cases,
acquiring complementary service providers in an effort to offer more competitive programs.
Payment Trends
In recent years, the Affordable Care Act and the consolidation activity within the U.S. healthcare industry, among other factors,
have resulted in higher deductible and co-payment requirements due from patients, which in turn have increased financial risk for
hospitals. The amount of uncollectible patient account balances is expected to increase in response to rising medical prices and to
greater financial burden on insured patients. These increases have been partially offset by the reduction in costs associated with
previously uninsured patients benefiting from Medicaid expansion due to the Affordable Care Act. However, it is unclear whether
these effects will continue due to uncertainty regarding the future of the Affordable Care Act and other health reform initiatives.
Outpatient Services Trends
In recent years, hospitals have experienced an increase in the percentage of total revenues associated with outpatient healthcare
services. This shift in revenues is primarily attributable to advances in medical technology, which have permitted more procedures to
be performed in an outpatient setting. In addition, increased pressure from the Medicare and Medicaid programs, commercial health
insurance companies and managed care plans to reduce the number of days a patient stays in the hospital has also contributed to the
increase in outpatient healthcare services. Patients and third-party payors have been seeking lower cost service settings through
outpatient service facilities on an increasing basis as the number of outpatient service facilities and the types of services available
through outpatient service facilities increase. Certain third-party payors are imposing limitations and adjusting coverage of inpatient
services for types of services currently available in outpatient settings. Further, recent changes to Medicare policy affecting the
reimbursement methodology for certain items and services provided by off-campus provider-based hospital departments have
generally resulted in reduced payment rates for hospital outpatient settings. For the years ended December 31, 2017, 2016 and 2015,
outpatient healthcare services represented 55.0%, 55.4% and 56.8%, respectively, of our net patient revenues, before the provision for
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bad debts. We expect the percentage of total revenues attributable to outpatient healthcare services will increase in the future and will,
in turn, inhibit the growth of inpatient admissions at our hospitals.
Health Insurance Coverage Trends
The Affordable Care Act, as currently structured, mandates that substantially all U.S. citizens maintain health insurance coverage,
while expanding access to coverage through a combination of private sector health insurance reforms and public program expansion.
In recent years, most of the states that have experienced the greatest reductions in rates of uninsured individuals have been those that
expanded Medicaid coverage and established healthcare insurance exchanges at the state level. However, CMS has indicated that it
intends to increase state flexibility in the administration of Medicaid programs, including allowing states to condition Medicaid
enrollment on work or other community engagement. Further, there is considerable uncertainty regarding the future of the Affordable
Care Act, making it difficult to predict future trends in health insurance coverage. The presidential administration and certain members
of Congress have stated their intent to repeal or make significant changes to the Affordable Care Act, its implementation or its
interpretation. In 2017, Congress eliminated the financial penalties associated with the individual mandate, effective January 1, 2019,
which may impact the number of individuals who elect to purchase health insurance. In addition, the president signed an executive
order directing agencies to relax limits on certain health plans, potentially allowing for fewer plans that adhere to specific Affordable
Care Act coverage mandates. Several private health insurers have limited their participation in or withdrawn from the healthcare
insurance exchanges, and the presidential administration has taken steps, including ending cost-sharing subsidies that were previously
available to insurers, which may threaten the long-term viability of those marketplaces. Government efforts to change, alter the
implementation of, or repeal the Affordable Care Act, or otherwise influence financial and delivery systems within the healthcare
industry, may have an adverse effect on our business, results of operations, cash flow, capital resources and liquidity.
Revenues
We generate revenues by providing healthcare services at our hospitals and affiliated outpatient service facilities to patients
seeking medical treatment. Hospital revenues depend on, among other factors, inpatient occupancy and acuity levels, the volume of
outpatient procedures and the charges and negotiated reimbursement rates for the healthcare services provided. Our primary sources of
payment for patient healthcare services are third-party payors, including the Medicare and Medicaid programs, Medicare and
Medicaid managed care programs, commercial insurance companies, other managed care programs, workers’ compensation carriers
and employers. Self-pay revenues are the portion of our revenues generated from providing healthcare services to patients who do not
have health insurance coverage as well as the patient responsibility portion of charges that are not covered for an individual by a
health insurance program or plan. We generate revenues related to our QHR business when hospital management advisory and
healthcare consulting services are provided. We report these revenues at their net realizable value. We generate other non-patient
revenue primarily from rental income and hospital cafeteria sales.
Amounts we collect for medical treatment of patients covered by Medicare, Medicaid and non-governmental third-party payors
are generally less than our standard billing rates. Our standard charges and reimbursement rates for routine inpatient services vary
significantly depending on the type of medical procedure performed and the geographical location of the hospital. Differences in our
standard billing rates and the amounts we expect to collect from third-party payors are classified as contractual allowances. The
reimbursements we ultimately receive as payments for services are determined for each patient instance of care, based on the
contractual terms we negotiate with third-party payors or based on federal and state regulations related to governmental healthcare
programs. Our contractual allowances are impacted by the timing and ability of CHS to monitor the classification and collection of our
patient accounts receivable. Billings and collections are outsourced to CHS under the transition services agreements that were put in
place by CHS in connection with the Spin-off. See Note 16 — Related Party Transactions in the accompanying financial statements
for additional information on these agreements. Except for emergency department services, our policy is to determine the payment
methodology with patients prior to when the services are performed. Self-pay and other payor discounts are incentives offered to
uninsured or underinsured patients or other payors to reduce their costs of healthcare services.
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The following table provides a summary of our net operating revenues, before the provision for bad debts, for the years ended
December 31, 2017, 2016 and 2015, by payor source (dollars in thousands):
Medicare
Medicaid
Managed care and commercial
Self-pay
Non-patient
2017
$ Amount
% of
Total
Year Ended December 31,
2016
2015
$ Amount
% of
Total
$ Amount
% of
Total
$ 656,843
425,943
921,503
226,043
97,323
28.2 %
18.3 %
39.6 %
9.7 %
4.2 %
$ 673,074
446,273
952,535
242,095
105,076
27.8 % $ 656,799
18.4 % 443,479
39.4 % 984,480
10.1 % 247,234
4.3 % 113,866
26.9 %
18.1 %
40.3 %
10.0 %
4.7 %
Total net operating revenues, before the provision for
bad debts
$ 2,327,655
100.0 %
$ 2,419,053
100.0 % $ 2,445,858
100.0 %
The table above includes an $11.4 million change in estimate we recorded as of December 31, 2016 to reduce the net realizable
value of patient accounts receivable due to increasing delays associated with collections on accounts receivable under the Illinois
Medicaid program. This change in estimate impacted contractual allowances associated with Medicaid revenues. In addition, net
operating revenues, before the provision for bad debts, declined $135.8 million in 2017 compared to the same period in 2016 due to
the seven hospitals that have been divested by the Company.
For the years ending December 31, 2017, 2016 and 2015, Medicare revenues related to Medicare Advantage Plans were $186.7
million, $170.4 million and $146.9 million, respectively, or 28.4%, 25.3% and 22.4% as a percentage of total Medicare revenues,
respectively.
Charity Care
In the ordinary course of business, we provide services to patients who are financially unable to pay for care. The related charges
for those patients who are financially unable to pay that otherwise do not qualify for reimbursement from a governmental program are
classified as charity care. We determine amounts that qualify for charity care primarily based on the patient’s household income
relative to the poverty level guidelines established by the federal government. Our policy is not to pursue collections for such
amounts; therefore, the related charges are recorded in operating revenues at the standard billing rates and fully offset in contractual
allowances in the same period.
Provision for Bad Debts
To provide for accounts receivable that could become uncollectible in the future, we establish an allowance for doubtful accounts
to reduce the carrying value of our receivables to their estimated net realizable value. The primary uncertainty in collectability of our
revenues relates to uninsured patients and the patient financial responsibility portion of payments due from insured patients.
Collections are impacted by the economic ability of patients to pay, the effectiveness of CHS’ collection efforts pursuant to the
transition services agreements, and our own collection efforts. Significant changes in payor mix, CHS’ business office operations,
economic conditions, or trends in federal and state governmental healthcare coverage, among other things, could affect our collection
levels and are considered in our estimate of the allowance for doubtful accounts. See “Item 1. Business — Agreements with CHS
Related to the Spin-off” for additional information on the transition services agreements.
We have an established process to determine the adequacy of our allowance for doubtful accounts that relies on a number of
analytical tools and benchmarks. No single statistic or measurement determines the adequacy of the allowance for doubtful accounts.
Some of the analytical tools we utilize include, but are not limited to, monitoring historical cash collections experience, revenue trends
by payor classification and days revenue outstanding.
During the fourth quarter of 2017, we analyzed our self-pay patient accounts receivable at a more comprehensive and
disaggregated level and refined our estimate of the collectability of the portion of self-pay accounts receivable related to insured
patients, primarily co-pays and deductibles. Our analysis also included an evaluation of patient accounts receivable retained in the
divestitures of six of our seven divested hospitals. As a result of these efforts, we recorded a change in estimate of $21.0 million to
reduce the net realizable value of patient accounts receivable, which negatively impacted the provision for bad debts in our statement
of income for the year ended December 31, 2017.
As of December 31, 2016, we recorded a change in estimate of $11.4 million to reduce the net realizable value of our patient
accounts receivable, which negatively impacted the provision for bad debts in our statement of income for the year ended December
31, 2016. This change in estimate related to our assessment of the collectability of our managed care and commercial accounts
receivable aged greater than one year based on a review of historical cash collections for these accounts.
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Reimbursement under Governmental Healthcare Programs
We receive payments for a substantial portion of our revenues from the Medicare and Medicaid programs, including Medicare
managed care plans, known as Medicare Advantage Plans, and the Medicaid managed care plans. Medicare is a federal program that
provides health insurance benefits to individuals age 65 and older, some disabled individuals and individuals with end-stage renal
disease. Medicaid is a federal and state funded program, administered at the state level, which provides health insurance benefits and
subsidies to individuals who are unable to afford to pay for healthcare services or health insurance on their own. All of our hospitals
are certified as providers under the Medicare and Medicaid programs.
The payments we receive under the Medicare and Medicaid programs are generally significantly less than the standard charges at
our hospitals for the healthcare services provided. Furthermore, reimbursement payments under federally-funded healthcare programs
are subject to across-the-board spending cuts to the federal budget imposed by the Budget Control Act of 2011. These sequestration
cuts, as they are known, require reductions in reimbursement rates through federal fiscal year 2027. The Affordable Care Act, as
currently structured, also imposes significant reductions on Medicare and Medicaid reimbursement rates. The federal government
updates reimbursement rates annually. Legislation or regulation may result in payment reductions in the Medicare or Medicaid
programs that could negatively impact our business. Our ability to operate our hospitals and affiliated healthcare facilities successfully
in the future may depend, in large part, on our ability to adapt to the ongoing regulatory changes in the Medicare and Medicaid
programs. See “Item 1. Business — U.S. Healthcare Industry” for statistical information on U.S. population trends.
Medicare Reimbursement
Under the Medicare program, we are paid for inpatient and outpatient healthcare services provided to qualifying Medicare
beneficiaries at our hospitals and other healthcare facilities. Medicare is funded by the federal government under a series of individual
programs. For example, the Part A program covers hospital, skilled nursing facility, home health and hospice care services and the
Part B program covers physician services, preventive care, durable medical equipment, hospital outpatient services, laboratory tests, x-
rays, mental health care and some home health and ambulance services. Medicare Advantage Plans, which is the customary term for
the Part C program, are administered by private third-party payors that contract with the Medicare program to provide Medicare Part
A and Part B benefits to participants. They include plans organized as health management organizations (“HMOs”), preferred provider
organizations (“PPOs”), private fee-for-service plans, special needs plans and Medicare medical savings account plans. We are paid
directly by the third-party payor that administers a Medicare Advantage Plan for the healthcare services we provide to patients
enrolled in one of these plans. The regulations governing reimbursement under the Medicare program also generally apply to
Medicare Advantage Plans.
Inpatient Medicare Reimbursement. Reimbursement rates for inpatient acute care services provided to Medicare beneficiaries
are generally determined based on a prospective payment system. Under the inpatient prospective payment system (“IPPS”), our
hospitals are paid a predetermined amount based on the patient’s diagnosis. Specifically, each discharge is assigned to a medical
severity diagnosis-related group (“MS-DRG”) based upon the patient’s course of medical treatment during the relevant inpatient stay.
The base MS-DRG payment rate does not consider the actual costs incurred by an individual hospital in providing a particular
inpatient service. Each MS-DRG is assigned a relative weight that reflects the average amount of resources, as determined on a
national basis, that are needed to treat a patient with that particular diagnosis compared to the amount of hospital resources that are
needed to treat the average Medicare inpatient stay. The IPPS payment for each discharge is based on two national standardized base
payment rates, one that covers hospital operating expenses and the other that covers hospital capital costs. The base MS-DRG
payment rate for operating expenses is adjusted by a wage index to reflect geographical differences in labor costs. While a hospital
generally does not receive additional reimbursement beyond the MS-DRG payment, hospitals may qualify for an “outlier” payment
when a patient’s medical treatment costs are extraordinarily high and exceed a specified regulatory threshold.
CMS adjusts the MS-DRG payment rates annually, using the “market basket index” to account for changes to the costs of goods
and services purchased by hospitals. For federal fiscal year 2018, which began on October 1, 2017, CMS increased the reimbursement
rate by approximately 1.2% for hospitals that successfully report the quality measures of the Hospital Inpatient Quality Reporting
(“IQR”) Program and are meaningful EHR users. This rate increase accounts for a projected market basket update of 2.7%, positively
adjusted by 0.46% in accordance with the 21st Century Cures Act and negatively adjusted by the following percentage points: 0.6 for
the multi-factor productivity measure, a 0.75 as required by the Affordable Care Act, and 0.6 to remove the effects of prior
adjustments related to the two midnight rule. Hospitals that do not successfully report quality data under the IQR Program are subject
to a 25% reduction of the market basket update. Hospitals that are not meaningful EHR users are subject to an additional 75%
reduction of the market basket update. Based on our current portfolio, we estimate that these rate changes will increase inpatient
Medicare reimbursement by $2.2 million in 2018.
The DRG payment rates are also adjusted pursuant to provisions of the Affordable Care Act that promote value-based purchasing,
linking payments to quality and efficiency. For example, hospitals that meet or exceed defined quality performance standards receive
greater reimbursement, while hospitals that do not satisfy the quality performance standards may receive reduced Medicare inpatient
hospital payments. The amount collected from the reductions is pooled and used to fund the payments that reward hospitals based on a
set of quality measures that have been linked to improved clinical processes of care and patient satisfaction. CMS scores each hospital
on its achievement relative to other hospitals and improvement relative to that hospital’s own past performance. Similarly, hospitals
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that experience “excess readmissions” for conditions designated by CMS within 30 days of the patient’s date of discharge receive
inpatient payments reduced by an amount determined by comparing that hospital’s readmission performance to a risk-adjusted
national average. In addition, CMS incentivizes hospitals to improve Hospital Acquired Condition (“HAC”) rates by reducing total
inpatient Medicare payments by 1% for hospitals that rank among the lowest-performing 25% with respect to HACs.
Outpatient Medicare Reimbursement. CMS reimburses hospital outpatient services (and certain Medicare Part B services
furnished to hospital inpatients without Part A coverage) under the hospital outpatient prospective payment system (“OPPS”). Other
items and services, such as physical, occupational and speech therapies, durable medical equipment, and clinical diagnostic laboratory
services, are reimbursed pursuant to fee schedules.
Hospital outpatient services paid under the OPPS are grouped into ambulatory payment classifications (“APCs”). Services for
each APC are similar clinically and in terms of the resources they require. CMS has established a payment rate for each APC, and it
updates these rates annually on a calendar year basis. For calendar year 2018, CMS issued a final rule that it estimates will result in a
1.4% payment increase for hospitals paid under the OPPS. This reflects a market basket increase of 2.7%, with a positive 0.6
percentage point multi-factor productivity adjustment and the 0.75 percentage point reduction required by the Affordable Care Act,
along with other policy changes. For calendar year 2018, these policy changes include an adjustment applicable to all providers that is
intended to offset the projected payment reductions under the 340B Drug Pricing Program so that the 340B Program changes are
implemented in a budget neutral manner. There are legal challenges to the 340B Program payment reductions and CMS has indicated
that it may revisit these policy changes in the future. In addition to these broad OPPS-wide adjustments, hospitals that fail to meet
quality data reporting requirements are subject to a 2.0 percentage point reduction to the market basket update. Based on our current
portfolio, we estimate that the cumulative changes to OPPS payments will increase our outpatient Medicare reimbursement by $3.1
million in 2018.
CMS has implemented a site-neutral Medicare reimbursement policy that limits reimbursement under the OPPS for items and
services that are provided at certain off-campus outpatient provider-based departments (“off-campus OPBDs”) of hospitals. Items and
services that are subject to the policy are reimbursed under the Medicare Physician Fee Schedule (“MPFS”). However, the site-neutral
payment policy does not apply to items and services rendered in a dedicated emergency department or at off-campus OPBDs that are
located within 250 yards of a remote location of a hospital, or to grandfathered off-campus OPBDs, which include those that were
billing Medicare for outpatient hospital services prior to November 2, 2015.
Medicare Bundled Payments. The Center for Medicare & Medicaid Innovation, which is part of CMS, works to identify,
develop, test and encourage the adoption of new methods of delivering and paying for healthcare services that create savings under the
Medicare and Medicaid programs, while maintaining or improving quality of care. Some of the current and proposed initiatives
involve bundled payments, which link payments to participating providers for services provided during an episode of care. Generally,
providers participating in a bundled payment arrangement agree to receive one payment for services provided to patients for certain
medical conditions or during each episode of care. In contrast to the traditional fee-for-service model, bundled payments are intended
to align incentives for providers, encouraging more effective and efficient care.
Participation in bundled payment programs is generally voluntary, but CMS requires hospitals located in certain geographic areas
to participate in the Comprehensive Care for Joint Replacement (“CJR”) model, a mandatory bundled payment initiative focused on
knee and hip replacements. We operate one hospital within the geographical areas currently being tested. CMS has indicated that it is
developing more bundled payment models. Our experience to date with the CJR model has not materially impacted our overall
financial statements.
Medicare-Dependent Hospital Program. The Medicare program also makes reimbursement rate adjustments under a Medicare-
Dependent Hospital program that applies to low admission volume hospitals, referred to as rural extenders, to ensure hospital access
for rural Medicare beneficiaries. The budget bill signed into law in February 2018 extended the Medicare-Dependent Hospital
program through federal fiscal year 2019. If future legislation is not passed to further extend the Medicare-Dependent Hospital
program, we could experience a reduction in our net operating revenues at certain of our hospitals that currently qualify for
participation in this program.
Medicare Physician Services Payments. Physician services provided to Medicare patients are reimbursed based on the MPFS,
which is adjusted annually. Under MACRA, the MPFS reimbursement rate will increase 0.5% each calendar year through 2019.
MACRA also established the Quality Payment Program (“QPP”), a payment methodology intended to reward high-quality patient
care. Beginning in 2017, physicians and certain other healthcare clinicians are required to participate in the QPP through one of two
tracks. Under both tracks, performance data collected in 2017 will affect Medicare payments in 2019 and performance data collected
in 2018 will affect payments in 2020. CMS expects to transition increasing financial risk to providers as the QPP evolves. The
Advanced Alternative Payment Model (“APM”) track makes incentive payments available for participation in specific innovative
payment models approved by CMS, such as certain ACO models or a Medicare Shared Savings Program. Providers may earn a 5%
Medicare incentive payment between 2019 and 2024 and will be exempt from reporting requirements and payment adjustments
imposed under the Merit-Based Incentive Payment System (“MIPS”) if the provider has sufficient participation (based on percentage
of payments or patients) in an Advanced APM. Alternatively, providers may participate in the MIPS track. Providers who choose the
MIPS track initially will be subject to a performance-based reimbursement rate increase or decrease of up to 4% of the provider’s
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Medicare payments based on their performance with respect to clinical quality, resource use, clinical improvement activities and
meaningful use of EHR. The adjustment percentage will increase incrementally, up to 9%, by 2022. MIPS will consolidate
components of three previously established incentive programs: the Physician Quality Reporting System, the Physician Value-Based
Payment Modifier, and the Medicare EHR Incentive Program.
Medicare Disproportionate Share Hospital Payments. In addition to making payments related to specific patient services,
Medicare provides financial support to hospitals that treat a disproportionately large number of low-income patients. These
Disproportionate Share Hospital (“DSH”) payments are determined annually based on statistical information required by the
Department of Health and Human Services (“HHS”) and are paid as a percentage addition to MS-DRG payments. The Affordable
Care Act reduced Medicare DSH payments to 25% of the amount they otherwise would have been absent the law. The remaining 75%
of the amount that would have been paid is earmarked for an uncompensated care payment pool that is adjusted each year by a
formula that reflects reductions in the U.S. uninsured population that is under 65 years of age. Thus, the greater the rate of coverage
for the previously uninsured population, the more the Medicare uncompensated care pool will be reduced. Each eligible hospital is
then paid, out of the uncompensated care pool, an amount based upon its estimated cost of providing uncompensated care. The IPPS
final rules for federal fiscal years 2018 and 2017 established the uncompensated care amounts to be distributed to qualifying hospitals
in these years as nearly $6.8 billion and $6.0 billion, respectively. Medicare DSH payments received in the aggregate by our hospitals
for 2017, 2016 and 2015 were approximately $8.9 million, $9.0 million and $9.4 million, respectively. We estimate the amount to be
received for 2018 to be approximately $10.3 million.
Medicare Administrative Contractors. CMS competitively bids the Medicare fiscal intermediary and Medicare carrier functions
to Medicare Administrative Contractors (“MACs”) in 12 defined jurisdictions. Each MAC is geographically assigned and serves both
Medicare Part A and Part B providers within its given jurisdiction. In connection with past consolidation efforts, CMS gave chain
providers the option of having all hospitals use one home office MAC. Although we elected to use one MAC, CMS has not yet
transitioned all of our hospitals to one MAC and has not provided a clear timeline for doing so. MAC transitions impact Medicare
claims processing, which could delay reimbursement payments and adversely affect our cash flow. MAC transitions may also be
prompted by the periodic re-soliciting by CMS of MAC bids in a jurisdiction.
Medicaid Reimbursement
Medicaid programs are funded jointly by the federal and state governments and administered by the states to provide healthcare
benefits to certain low-income individuals. Most state Medicaid payments are made under a prospective payment system or under
programs that negotiate payment levels with individual hospitals. Amounts received under the Medicaid programs are often
significantly less than the hospital’s standard charges for the services provided. State Medicaid agencies may also fund Medicaid
Managed Care Plans, which are administered by managed care organizations (“MCOs”). The MCOs receive a set per member per
month payment for their administrative services from the applicable state Medicaid agency. We are paid directly by the MCO for the
healthcare services we provide to patients enrolled in one of these plans. The regulations that govern the reimbursement rates of the
Medicaid programs also generally apply to Medicaid managed care plans.
The Affordable Care Act requires states to expand Medicaid coverage by adjusting eligibility requirements such as income
thresholds. A number of states have opted out of the Medicaid expansion provisions, which they may do without losing federal
funding. Eight of the 15 states in which we operate hospitals have expanded coverage under their state Medicaid programs. For the
year ended December 31, 2017, our hospitals and affiliated outpatient service facilities located in these eight states generated 75.2% of
our total net patient revenues, before the provision for bad debts, excluding our divested hospitals and affiliated outpatient services
facilities. However, there is uncertainty regarding the future of the Affordable Care Act, including its Medicaid expansion provisions.
In addition, budget pressures have prompted many states to consider reducing Medicaid funding, as Medicaid is often the state’s
largest program. Some states have adopted or are considering legislation intended to reduce coverage, increase enrollment in managed
care programs or otherwise finance the system. Several states use, or have applied to use, waivers granted by CMS to implement
expansion, impose different eligibility or enrollment restrictions, or otherwise implement programs that vary from federal standards.
CMS has indicated that it intends to increase state flexibility in the administration of Medicaid programs, including approving waivers
that allow states to condition enrollment on work or other community engagement. However, the Affordable Care Act, as enacted,
requires that states maintain certain eligibility standards for children until October 1, 2019. The Affordable Care Act also prohibits the
use of federal funds under the Medicaid program to reimburse providers for medical services provided to patients to treat HACs. We
can provide no assurance that reductions to Medicaid funding will not have a material adverse effect on our results of operations or
cash flows.
Medicaid Disproportionate Share Hospital and Supplemental Payments. Currently, most states, including 14 of the 15 states we
operating in, utilize supplemental payment programs, including disproportionate share hospital (“DSH”) programs, for the purpose of
providing additional payments for services to providers, such as our hospitals, to offset a portion of the cost of providing care to
Medicaid and indigent patients. These programs are designed with input from CMS and funded with a combination of federal and
state resources, including, in certain states, taxes, fees or other program costs (collectively, “provider taxes”) levied on the providers
participating in the programs. Hospitals that provide care to a disproportionately high number of low-income patients may receive
Medicaid DSH payments. The federal government distributes federal Medicaid DSH funds to each state based on a statutory formula.
States then distribute the DSH funding among qualifying hospitals, as determined in each state. States have broad discretion to define
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which hospitals qualify for Medicaid DSH payments and the amount of such payments. Under the budget bill signed into law in
February 2018, Medicaid DSH funding will be reduced by $4 billion in federal fiscal year 2020 and by $8 billion per year in federal
fiscal years 2021 through 2025. In addition to DSH payments, some states operate programs that provide for supplemental payments
to bridge the gap between hospital operating costs and Medicare reimbursement. Various federal policy changes are focused on
limiting the use of other types of supplemental payments. For example, CMS began limiting “pass-through payments” to Medicaid
managed care plans in 2016 and will ultimately prohibit such payments by 2027.
We recognize the reimbursement payments due to us from state supplemental payment programs in the periods amounts are
estimable and revenue collection is reasonably assured. These amounts are recorded in operating revenues as favorable contractual
allowances and the costs we incur under these programs are recorded as other operating expenses.
The following table shows the portion of our Medicaid reimbursements attributable to state supplemental payment programs (in
thousands):
Medicaid revenues
Provider taxes and other expenses
Reimbursements attributable to state supplemental payment programs, net of
expenses
Year Ended December 31,
2016
2015
2017
$ 211,448
75,388
$ 220,389
76,616
$ 211,696
75,929
$ 136,060
$ 143,773
$ 135,767
Reimbursements attributable to state supplemental payment programs related to hospitals that have been divested decreased $1.3
million for the year ended December 31, 2017 compared to the year ended December 31, 2016.
The following table provides a summary of the amounts due from and to attributable to state supplemental payment programs (in
thousands):
December 31,
2017
2016
Due from state supplemental payment programs
$
79,819 $
92,359
Due to state supplemental payment programs
$
14,542 $
9,171
Several states in which we operate face budgetary challenges that have resulted, and likely will continue to result, in reduced
Medicaid funding levels to hospitals and other providers. Continuing pressure on state budgets and other factors could result in future
reductions to Medicaid payments, payment delays or additional provider taxes being assessed on hospitals participating in these
programs.
The following table shows the portion of our Medicaid reimbursements by state attributable to state supplemental payment
programs (in thousands):
Illinois
California
Arkansas
New Mexico
Texas
All Other
2017
Year Ended December 31,
2016
2015
$
82,152 $
25,121
6,789
6,403
4,148
11,447
$
80,243
36,604
6,602
6,926
2,458
10,940
75,533
33,515
7,208
5,691
1,222
12,598
Net reimbursements attributable to state supplemental payment programs,
net of expenses
$
136,060 $
143,773 $
135,767
The California Department of Health Care Services implemented the Hospital Quality Assurance Fee (“HQAF”) program,
imposing a fee on certain general and acute care California hospitals. Revenues generated from these fees provide funding for the non-
federal supplemental payments to California hospitals that serve California’s Medicaid (“Medi-Cal”) and uninsured patients. Under
this program we recognized $22.0 million, $34.4 million and $31.5 million of operating revenues, net of provider taxes, for the years
ended December 31, 2017, 2016 and 2015, respectively.
Electronic Health Records Incentive Payments
Pursuant to the Health Information Technology for Economic and Clinical Health Act (“HITECH”), MACRA and other laws,
HHS has established Medicare and Medicaid incentive programs to encourage hospitals and healthcare professionals to adopt EHR
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technology. Eligible hospitals can receive Medicaid incentive payments for their adoption and meaningful use of certified EHR
technology. These payments are available for a maximum period of five or six years, depending on the program. Eligible hospitals that
fail to demonstrate meaningful use of certified EHR technology, and have not applied for a hardship, are subject to payment
reductions. Under the OPP, eligible healthcare professionals are also subject to positive or negative payment adjustments based, in
part, on their use of EHR technology. EHR incentive payments paid to our hospitals are subject to audit and potential recoupment if it
is determined that the applicable meaningful use standards were not met and are also subject to retrospective adjustment because the
cost report data upon which the incentive payments are based are further subject to audit.
Although we believe that our hospitals are currently in compliance with the meaningful use standards, there can be no
assurance that all of our hospitals will remain in compliance and therefore not be subject to the HITECH penalty provisions. We incur
both capital expenditures and operating expenses in connection with the implementation of EHR technology initiatives. The amount
and timing of these expenditures does not directly correlate with the timing of the receipt of EHR payments or the recognition of EHR
incentives as earned. We record EHR incentives in our statements of income as a reduction to our operating costs and expenses. As we
move toward the full implementation of certified EHR technology in accordance with all three phases of the program, our EHR
incentives are declining and will ultimately end. For the years ended December 31, 2017, 2016 and 2015, our EHR incentives earned
were $4.7 million, $11.5 million and $25.8 million, respectively. Excluding payment adjustments under the OPP, we anticipate that
we will earn approximately $1.5 million of EHR incentives in 2018.
TRICARE
TRICARE is the U.S. Department of Defense’s healthcare program for members of the armed forces. Under the TRICARE
program, hospitals and other healthcare providers are reimbursed for healthcare services provided to qualifying patients using an
inpatient DRG-based payment system and an outpatient prospective payment system similar to those used to make reimbursement
payments under the Medicare program.
Reimbursement under Non-Governmental Plans and Programs
Managed Care and Commercial Plans
In addition to governmental healthcare reimbursement programs, we are paid for a portion of the healthcare services we provide
to patients by private third-party payors, including commercial health insurance companies, HMOs, PPOs, other managed care
companies, workers’ compensation carriers and employers. Patients are generally not responsible for any difference between the
standard charges for our services and the contracted payment amounts that we receive from non-government third-party payors, but
are responsible for the portions of the payment for services that are not covered by programs or plans under contract. These amounts
generally consist of the deductibles and co-payment obligations of their coverage. The deductible and co-payment obligations due
from patients, which we include in the self-pay payor category, have increased in recent years in response to the increasing numbers of
individuals and employers who purchase insurance plans with high deductibles and high co-payments.
Commercial health insurance companies, HMOs, PPOs and other managed care companies generally attempt to manage their
costs by seeking discounted fee structures or fixed fee charge arrangements with providers to reduce their payouts below the
provider’s standard charges or the charges initially billed to them. They also utilize other strategies, such as narrowing the provider
options in their networks, to restrict the pool of providers that insured patients may utilize under their coverage. Consolidation within
the payor industry, including vertical integration efforts involving payors and healthcare providers, and cost-reduction strategies
imposed by large employer groups and their affiliates may increase these challenges. To remain competitive, we actively engage in the
negotiation of discounts or fixed fee charge arrangements with commercial health insurance and other private managed care
companies. The negotiated discounts and fixed fee charge arrangements are typically less than the reductions in reimbursement rates
imposed on us by governmental payors. If an increasing number of private third-party payors succeed in negotiating discounted or
fixed fee structures with us or if we are unable to negotiate acceptable contractual terms with these payors and therefore do not
participate in some or all of the commercial health insurance and managed care networks in our markets, our results of operations or
cash flows may be adversely impacted. There can be no assurance that we will retain our existing reimbursement payment
arrangements with private third-party payors with whom we currently do business or that these third-party payors will not attempt to
further reduce the reimbursement payments they ultimately pay to us for our services in the future.
Under current law, commercial health insurance companies that participate on the Exchanges, which were established pursuant to
the Affordable Care Act, are required to offer a set of minimum coverage benefits and a minimum number of levels of plans that vary
depending on the percentage of total premium costs to be paid by the insured individual. Our hospitals participate in the provider
networks of various insurers offering plan options on the Exchanges. However, in 2017, the president signed an executive order
directing agencies to relax limits on certain health plans, potentially permitting the sale of short-term health insurance plans and
coverage that does not meet the Affordable Care Act’s minimum requirements. In addition, several insurers have withdrawn from or
limited their participation in the Exchanges, which may threaten the long-term viability of those marketplaces.
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Accountable Care Organizations
With the aim of reducing healthcare costs by improving quality and operational efficiency, ACOs are gaining traction in both the
public and private sectors of the U.S. healthcare industry. An ACO is a network of providers, including hospitals, physicians and other
designated healthcare-related professionals, which work together to invest in infrastructure and redesign delivery processes to achieve
high quality and efficiency in the delivery of healthcare services. ACOs are intended to produce savings as a result of improved
quality and operational efficiency initiatives. Pursuant to the Affordable Care Act, HHS established a Medicare Shared Savings
Program that seeks to promote accountability through the creation of ACOs. Medicare-approved ACOs that achieve quality
performance standards established by HHS are eligible to share in a portion of the amounts saved by the Medicare program. HHS has
significant discretion in determining key elements of ACO programs. Certain waivers are available from fraud and abuse laws for
ACOs.
Healthcare Reform
Over the last decade, the U.S. Congress and certain state legislatures have passed a large number of laws and regulations intended
to result in major changes to the U.S. healthcare system. The most prominent of these reform efforts, the Affordable Care Act, affects
how healthcare services are covered, delivered, and reimbursed.
As currently structured, the Affordable Care Act mandates that substantially all U.S. citizens maintain health insurance coverage
and expands access to health insurance coverage through a combination of public program expansion and private sector health
insurance reforms. However, the future of the Affordable Care Act is uncertain, as the presidential administration and certain members
of Congress have stated their intent to repeal or make significant changes to the Affordable Care Act, its implementation or its
interpretation. In 2017, Congress eliminated the penalty associated with the individual mandate, effective January 2019, which may
impact the number of individuals who elect to purchase health insurance. In addition, a presidential executive order directs agencies to
minimize “economic and regulatory burdens” of the Affordable Care Act.
Some provisions of the Affordable Care Act have benefited our business, while others have increased our operating costs and
reduced the reimbursement we receive under the Medicare and Medicaid programs. These changes include the requirement that large
employers offer health insurance coverage to full-time employees, reductions to the Medicare annual market basket update for federal
fiscal years 2010 through 2019, a productivity offset to the Medicare market basket update, and reductions to disproportionate share
hospital payments.
It is difficult to predict the full impact of the Affordable Care Act due to a number of factors, including clarifications and
modifications resulting from executive orders, the rule-making process, the outcome of court challenges, the development of agency
guidance, unknowns related to state Medicaid program expansion and changes within the health insurance industry, the number of
individuals who elect to purchase health insurance coverage, and budgetary issues at federal and state levels. The impact on the
healthcare industry and timing of any potential repeal of or further changes to the Affordable Care Act and any alternative provisions
is unknown. It is difficult to predict the nature and success of future financial or delivery system reforms.
California 2017-2019 Hospital Quality Assurance Fee Program
The HQAF program provides funding for supplemental payments to hospitals that serve Medi-Cal and uninsured patients.
Revenues generated from fees assessed on certain general and acute care California hospitals fund the non-federal supplemental
payments to California’s safety-net hospitals while drawing down federal matching funds that are issued as supplemental payments to
hospitals for care of Medi-Cal patients. In November 2016, California voters approved a state constitutional amendment measure that
extends indefinitely the statute that imposes fees on California hospitals seeking federal matching funds.
The fourth phase of the HQAF program expired on December 31, 2016. The California Department of Health Care Services
(“DHCS”) submitted the Phase V HQAF program package to CMS on March 30, 2017 for approval of the overall program structure
and the fees or provider tax rates for the program period January 1, 2017 through June 30, 2019, and the fee-for-service inpatient and
outpatient upper payments limits (“UPL”) for each of the state fiscal years in the period January 1, 2017 through June 30, 2019. CMS
issued formal approval of Phase V HQAF on December 15, 2017. The approvals include the inpatient and outpatient fee-for-service
supplemental payments and the overall tax structure. The California Hospital Association will work with the DHCS to develop an
implementation schedule and update the draft model to reflect the CMS-approved amounts. However, CMS has not yet issued a
decision on the managed care components of the Phase V HQAF program and, therefore, the payment amounts in the draft model are
preliminary. Furthermore, the supplemental Medi-Cal managed care payments made through the new directed payment mechanism
have been estimated using inpatient utilization data publicly reported to the California Office of Statewide Health Planning and
Development for the fiscal year ending in 2015. However, in actuality, the directed payments will be made for inpatient and outpatient
services provided to in-network patients during the current state fiscal year.
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According to the California Hospital Association, the rate packages will be submitted to CMS for approval on a state fiscal year
basis, with tentative submission dates as follows:
• Under the traditional “pass-through” methodology, which represents the historical utilization:
- For the short state fiscal year period January 1, 2017 through June 30, 2017, the package should be submitted by
May 15, 2018.
- For the state fiscal year July 1, 2017 through June 30, 2018, the package should be submitted by May 31, 2018.
- For the final state fiscal year in the program period of July 1, 2018 through June 30, 2019, the package should be
submitted by October 31, 2018.
• Under the new “directed” payment methodology, which is subject to current utilization;
- For the state fiscal year July 1, 2017 through June 30, 2018, the package should be submitted by May 31, 2018.
- For the final state fiscal year in the program period of July 1, 2018 through June 30, 2019, the package should be
submitted by October 31, 2018.
CMS has indicated that going forward it will only approve one fiscal year at a time for the UPL amounts using data that is no
older than two years. Of the total supplemental payments received by all hospitals, our portion represents 0.50%. We are estimating
that our net impact over the 30 month period will be $56.8 million. While uncertainties regarding the timing and amount of payment
under the HQAF program exist, our estimates of cash collections at this time, including previous programs, will be $38.5 million in
2018, $20.0 million in 2019 and $13.3 million in 2020. On October 16, 2017, we received $30.9 million in cash for the 2015-2016
fiscal year program period.
Illinois 2018 Hospital Assessment Program Redesign
The Illinois Hospital Assessment program provides funding for supplemental payments to hospitals that serve Medicaid and
uninsured patients. Revenues generated from fees assessed on certain general and acute care Illinois hospitals draw down federal
matching funds that are issued as supplemental payments to hospitals for care of Medicaid patients. The existing program is set to
expire on June 30, 2018. State legislation is currently being proposed to authorize a similar but modified program with an effective
date of July 1, 2018. The “new” program must be approved by CMS. The “new” program is being redesigned to meet certain CMS
requirements which have been expressed in the past and are believed to be critical for CMS approval going forward. CMS has
communicated that future program approvals must include updated base year data and require more funds to be paid through claims
rather than supplemental monthly or quarterly lump sum payments.
• Updated Base year data - The current program uses base rate data from 2005. The “new” program will use base rate data
from 2015.
• More funds to be paid through claims – The “new” program would require a greater percentage of funds to hospitals to
be delivered at the paid claims level rather than through lump sum payments.
According to the hospital association, the total funding available to all hospitals in the new program will approximate the old
program. There will, however, be “winners” and “losers” based on updated base year data and changes designed to allocate funding
toward hospitals with safety net status or higher levels of Medicaid utilization. The most recent models provided by the hospital
association show our hospital payments being reduced by $7.7 million annually.
Other Government Laws and Regulations
Licensure, Certifications and Accreditations
Hospitals and other healthcare providers are subject to laws and regulations regarding licensing, certification or accreditation, and
may be subject to periodic inspection by federal, state and local governmental agencies evaluating compliance and performance with
such requirements. In addition, healthcare providers participating in the Medicare and Medicaid programs are subject to extensive
regulatory requirements in order to continue to qualify for participation in these programs.
Regulations imposed on healthcare facilities for licensure, certification and accreditation address compliance areas such as the
following:
•
•
•
•
•
the adequacy of medical care, equipment and staff;
operating policies and procedures;
billing and coding for services, including classifying the acuity level of care provided;
proper handling of reimbursement overpayments;
preparing and filing of Medicare and Medicaid annual cost reports;
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•
relationships between referral sources and recipients;
• maintaining adequate compliance records;
•
utilization reviews of services provided at our facilities;
•
•
•
•
standard charges for patient services;
compliance with building codes;
environmental protection; and
patient privacy and security.
Failure to comply with applicable licensure, certification, and accreditation standards may result in criminal penalties, civil
sanctions, loss of operating licenses, or restrictions on our ability to participate in certain government programs. All of our hospitals
and other healthcare facilities are currently licensed under appropriate state laws and are qualified to participate in both federal and
state Medicare and Medicaid programs.
Fraud and Abuse Provisions
Federal and state governments have enacted various laws intended to prevent and reduce healthcare fraud and abuse, which
continue to be a top enforcement priority. Violations of these laws may result in criminal or civil penalties, including exclusion from
the Medicare and Medicaid programs. Civil monetary penalties are updated annually based on changes to the consumer price index
and were recently increased under the Bipartisan Budget Act of 2018.
Federal False Claims Act
The federal False Claims Act (“FCA”) prohibits knowingly making false claims or statements to the U.S. government, including
submitting false claims for reimbursement under government programs. The FCA broadly defines the term “knowingly.” Although
simple negligence does not give rise to liability under the FCA, submitting a claim with reckless disregard to its truth or falsity may
constitute “knowingly” submitting a false claim and result in liability. The FCA can be used to prosecute fraud involving issues such
as coding errors, billing for services not provided, and submitting false cost reports. Its reach extends to payments involving federal
funds in connection with the Exchanges created under the Affordable Care Act. Violations of other statutes, such as the Stark Law,
can serve as a basis for liability under the FCA.
Among the potential bases for liability under the FCA are knowingly and improperly avoiding repayment of an overpayment
received from the government and knowingly failing to report and return an overpayment within 60 days of identifying the
overpayment or by the date a corresponding annual cost report is due, whichever is later. Overpayments are deemed to have been
“identified” when a provider has, or should have, through reasonable diligence determined that a reimbursement overpayment was
received and quantified such overpayment.
A provider that is determined to be liable under the FCA is required to pay three times the actual damages sustained by the federal
government, plus a substantial mandatory civil penalty for each separate false claim. These penalties will be updated annually based
on changes to the consumer price index. Settlements entered into prior to litigation usually involve a less severe calculation of
damages. The FCA also contains “qui tam” or whistleblower provisions, which allow private individuals to file a complaint or
otherwise report actions alleging the defrauding of the federal government by a provider. If the federal government intervenes, the
individual that filed the initial complaint may share in any settlement or judgment. If the federal government does not intervene in the
action, the whistleblower plaintiff may pursue its allegation independently and may receive a larger share of any settlement or
judgment. When a private individual brings a qui tam action under the FCA, the defendant generally is not made aware of the lawsuit
until the federal government commences its own investigation or determines whether it will intervene.
Any provider that receives at least $5 million annually in Medicaid reimbursement payments is required to distribute and make
available to all employees, contractors and any other agents detailed information about its policies related to false claims, false
statements and whistleblower protection under certain federal laws, including the FCA, and similar state laws.
Federal Anti-Kickback Statute
The Federal Anti-Kickback Statute (“Anti-Kickback Statute”), a subsection of the Social Security Act, makes it a felony to
knowingly and willfully offer, pay, solicit, or receive remuneration, directly or indirectly, in order to induce patient referrals or
business that is reimbursable under any federal healthcare program. Violations under the Anti-Kickback Statute may result in
exclusion from federal healthcare programs and the imposing of criminal and civil fines, including the payment of damages up to three
times the total dollar amount involved. The civil monetary penalties are updated annually based on changes to the consumer price
index. Further, submission of a claim for services or items generated in violation of the Anti-Kickback Statute constitutes a false claim
under the FCA.
The HHS Office of Inspector General (“OIG”) is responsible for identifying and investigating fraud and abuse activities in federal
healthcare programs. As part of its duties, the OIG provides guidance to healthcare providers by identifying types of activities that
could violate the Anti-Kickback Statute. The OIG has published regulations that set forth “safe harbors” protecting certain payment
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and business practices, outlining activities and business relationships that are deemed not to violate the Anti-Kickback Statute. The
failure of a particular activity to comply with the safe harbor regulations does not necessarily mean that the activity violates the Anti-
Kickback Statute; however, such failure may lead to increased scrutiny by the OIG or other governmental enforcement agencies.
The OIG has identified the following incentive arrangements as potential violations of the Anti-Kickback Statute:
•
•
•
•
•
•
•
•
•
•
•
•
payment of any incentive by a hospital to a physician when the physician makes a patient referral to the hospital or to a
healthcare facility that benefits the hospital;
provision of free or significantly discounted office space or equipment to physicians to entice them to locate in close
proximity to the hospital;
provision of free or significantly discounted billing, nursing or other medical and administrative staffing services;
provision of free training for a physician or a physician’s medical and office staff, including management and laboratory
training, but excluding compliance training;
provision of guarantees that provide that if a physician’s income falls below a predetermined level, the hospital will pay
the remainder to them;
provision of low-interest or interest-free loans, or loans that may be forgiven if a physician refers patients to the hospital;
payment of the costs of a physician’s travel and expenses for conferences;
payment for services to a physician, in which such services require few, if any, substantive duties to be performed by the
physician or that are in excess of the fair market value of the services rendered;
coverage of a physician on the hospital’s group health insurance plan at an inappropriately low cost to the physician;
purchases from a physician made by a hospital for goods and services at prices in excess of their fair market value;
rental of space in physician offices at prices below fair market value; or
engaging in relationships with physician-owned entities, often referred to as physician-owned distributorships (“PODs”),
which derive revenues from the sale or arrangement for sale of implantable medical devices whereby the physician
orders such medical devices and then uses them for their own patients in surgeries or procedures performed at the
hospital or other outpatient service facility.
We have a variety of financial arrangements with physicians who refer patients to our hospitals. Physicians own interests in some
of our facilities. Physicians may also own our stock. We have contracts with physicians providing for a variety of financial
arrangements, including employment contracts, leases, management agreements and professional service agreements. We provide
financial incentives to recruit physicians to relocate to communities served by our hospitals. These incentives include relocation
packages, reimbursement for certain direct expenses, income guarantees and, in some cases, loans. Although we strive to comply with
the Anti-Kickback Statute, taking into account available guidance from the OIG including the “safe harbor” regulations, we cannot
make assurances that the OIG or other regulatory agencies may not determine that our actions are in violation. If that happens, we
could be subject to criminal and civil penalties or may become excluded from eligibility to participate in Medicare, Medicaid, or other
government healthcare programs.
The Stark Law
The Social Security Act also includes a provision commonly known as the “Stark Law.” This law prohibits physicians from
referring Medicare and Medicaid patients to healthcare entities in which they or any of their immediate family members have
ownership interests or other financial arrangements if the entity provides certain “designated health services.” These types of referrals
are commonly known as “self-referrals.” The Stark Law also prohibits entities that provide designated health services reimbursable by
Medicare or Medicaid from billing these programs for any items or services that result from a prohibited referral and requires the
entities to refund amounts received for items or services provided pursuant to the prohibited referral. “Designated health services”
include inpatient and outpatient hospital services.
Sanctions for violating the Stark Law include denial of reimbursement payments under federal healthcare programs, substantial
civil monetary penalties and exclusion from participation in federal healthcare programs. In addition, the Stark Law provides for a
penalty of up to $161,692 for engaging in activities intended to circumvent the Stark Law prohibitions. These civil monetary penalties
are updated annually based on changes to the consumer price index.
There are ownership and compensation arrangement exceptions to the self-referral prohibitions under the Stark Law. For
example, one exception allows a physician to refer patients to a healthcare entity in which the physician has an ownership interest if
such entity is located in a rural area, as defined under the Stark Law. There are also exceptions for many of the customary financial
arrangements between physicians and healthcare entities, including employment contracts, leases and recruitment agreements. From
time to time, the federal government has issued regulations that interpret the provisions included in the Stark Law.
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Another Stark Law exception, known as the “whole hospital” exception, allows a physician to make a referral to a hospital if the
physician owns an interest in the entire hospital, as opposed to an ownership interest in a department of the hospital. A hospital is
considered to be physician-owned if any physician, or an immediate family member of a physician, holds stock, debt or other types of
investment arrangements in the hospital or in any owner of the hospital, excluding physician ownership through publicly traded
securities that meet certain conditions. CMS regulations impose various restrictions and disclosure requirements on physician-owned
hospitals. Physician-owned hospitals must disclose their physician ownership in writing to patients and must make a list of their
physician owners available upon request to the public. Each physician owner who is a member of a physician-owned hospital’s
medical staff must agree, as a condition of their inclusion on the medical staff and their admitting privileges at the hospital, to disclose
in writing to all patients whom they refer to the hospital their ownership interest, or an immediate family members’ ownership interest,
in the hospital. Failure to comply with the physician-ownership regulations may result in the hospital’s loss of eligibility to participate
in the Medicare program.
The Affordable Care Act narrowed the “whole hospital” exception to the Stark Law. Although existing physician investments in a
whole hospital may continue under a “grandfather” clause if the arrangement satisfies certain requirements and restrictions, physicians
are prohibited, from the time the Affordable Care Act became effective, from increasing the aggregate percentage of their ownership
in the hospital. In addition, the Affordable Care Act restricts the ability of existing physician-owned hospitals to expand the capacity
of their aggregate licensed beds, operating rooms and procedure rooms.
Other Fraud and Abuse Laws
Under various federal laws and regulations, any individual or entity that knowingly and willfully defrauds or attempts to defraud a
healthcare benefit program, including both governmental and private healthcare programs and plans, may be subject to fines,
imprisonment or both. The Civil Monetary Penalties Law (“CMP Law”) imposes substantial civil penalties on providers that, for
example, knowingly present or cause to be presented a claim for services not provided as claimed, offer remuneration to influence a
Medicare or Medicaid beneficiary’s selection of a healthcare provider, or bill Medicare amounts that are substantially in excess of a
provider’s usual charges. Notably, the CMP Law requires a lower burden of proof than some other fraud and abuse laws. Criminal and
civil penalties may be imposed for a number of other prohibited activities, including engaging in certain gainsharing arrangements or
contracting with an individual or entity known to be excluded from a federal healthcare program.
Federal enforcement officials have the ability to exclude from federal healthcare programs any investors, officers, and managing
employees associated with business entities that have committed healthcare fraud, even if those individuals had no knowledge of the
fraud.
State Laws
A number of states, including states in which we operate hospitals, have adopted their own false claims provisions as well as their
own whistleblower provisions whereby a private individual or entity may file a civil lawsuit in a state court. Federal laws provide an
incentive to states to enact false claims laws at the state level that are comparable to the FCA.
In addition, many states in which we operate have adopted laws similar to the Anti-Kickback Statute that prohibit payments to
physicians in exchange for referrals. Many states have also passed self-referral legislation similar to the Stark Law, prohibiting the
referral of patients to entities with which the physician has a financial relationship. Often these state laws are broad in scope and may
apply regardless of the source of payor for the healthcare services provided. These statutes at the state level typically include criminal
and civil penalties, as well as loss of licensure, for violations. There is little precedent for the interpretation or enforcement of these
state laws.
Program Integrity
CMS contracts with third parties to promote the integrity of the Medicare program through review of quality concerns and
detection efforts to identify improper reimbursement payments. Most non-governmental managed care programs require similar
utilization reviews. Quality Improvement Organizations (“QIOs”), for example, are groups of physicians and other healthcare quality
experts that work on behalf of CMS to ensure that Medicare pays only for the delivery of healthcare goods and services to Medicare
beneficiaries that are considered reasonable and necessary courses of treatment and that are provided in the most appropriate setting.
Among other responsibilities, QIOs are tasked with conducting short stay inpatient hospital reviews to evaluate compliance with the
two midnight rule. Providers that exhibit persistent noncompliance with Medicare payment policies may be referred by a QIO to a
Recovery Audit Contractor.
Under the Recovery Audit Contractor (“RAC”) program, CMS contracts with third parties nationwide to conduct post-payment
reviews to detect and correct improper payments in the Medicare program, as required by statute. RACs review claims submitted to
Medicare for billing compliance, including correct coding and medical necessity. Compensation for RACs is on a contingency basis,
based upon the amount of overpayments and underpayments identified, if any. CMS recently reduced the number of claims that RACs
may audit by limiting the number of records that RACs may request from hospitals based on each provider’s claim denial rate for the
previous year.
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The RAC program’s scope also includes Medicaid claims. States may coordinate with Medicaid RACs regarding recoupment of
overpayments and refer suspected fraud and abuse to appropriate law enforcement agencies. Under the Medicaid Integrity Program,
CMS employs private contractors, referred to as Medicaid Integrity Contractors (“MICs”) to perform reviews and post-payment audits
of Medicaid claims to identify potential overpayments. MICs are assigned to five geographic jurisdictions within the United States.
Besides MICs, other approved contractors and state Medicaid agencies have increased their review activities of Medicaid payments.
We maintain policies and procedures to respond to RAC requests and payment denials. Payment recoveries resulting from RAC
reviews and denials are appealable, and we pursue reversal of adverse determinations at appropriate appeal levels. Depending upon the
growth of RAC programs and our success in appealing claims, our results of operations and cash flows could be negatively impacted.
Currently, there are significant delays in the assignment of new Medicare appeals to Administrative Law Judges. According to the
Office of Medicare Hearings and Appeals, the average processing time in fiscal year 2017 was approximately three years. To ease the
backlog of appeals, CMS has announced two new settlement initiatives.
Annual Cost Reports
Hospitals participating in the Medicare, Medicaid and TRICARE programs are required to meet specified financial reporting
requirements. Federal and, where applicable, state regulations require submission of annual cost reports identifying medical costs and
expenses associated with the services provided by each hospital to Medicare beneficiaries and Medicaid recipients.
Annual cost reports required under the Medicare and some Medicaid programs are subject to routine governmental audits. These
audits may result in adjustments to the amounts ultimately determined to be due to us under these reimbursement programs.
Finalization of these audits often takes several years. Providers can appeal any final determination made in connection with an audit.
MS-DRG outlier payments have been and continue to be a subject of CMS audit and adjustment. The OIG is also actively engaged in
audits and investigations into alleged abuses of the MS-DRG outlier payment system. For the years ended December 31, 2017, 2016
and 2015, we recorded net favorable (unfavorable) contractual allowance adjustments in net operating revenues of $2.0 million, $(5.8)
million and $(15.1) million, respectively, related to previous program reimbursement estimates and final cost report settlements. The
2015 amounts were impacted by an $11.1 million Illinois cost report settlement which was recorded as a favorable adjustment in 2014
and an unfavorable adjustment in 2015 upon its reversal in the second quarter due to contract negotiations that were finalized in that
quarter.
HIPAA Administrative Simplification and Privacy and Security Requirements
The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) Administrative Simplification provisions and their
implementing regulations require the use of uniform electronic data transmission standards and code sets for certain healthcare claims
and transactions submitted or received electronically. These provisions are intended to encourage electronic commerce in the U.S.
healthcare industry. HHS is in the process of adopting standards for additional electronic transactions and establishing operating rules
to promote uniformity in the implementation of each standardized electronic transaction.
HIPAA, as amended by the HITECH Act, and implementing regulations extensively regulate the use, disclosure, confidentiality,
availability and integrity of individually identifiable health information, known as “protected health information,” and provide for a
number of individual rights with respect to such information. These requirements apply to health plans and most health care providers,
which are known as “covered entities.” Vendors, known as “business associates,” that handle protected health information, on behalf
of covered entities must also comply with most HIPAA requirements. A covered entity may be subject to penalties as a result of a
business associate violating HIPAA, if the business associate is found to be an agent of the covered entity. In order to comply with
HIPAA, covered entities must, among other things, maintain privacy and security policies, train workforce members, maintain
physical, administrative, and technical safeguards, enter into confidentiality agreements with business associates, and permit
individuals to access and amend their protected health information. In addition, covered entities must report breaches of unsecured
(unencrypted) protected health information to affected individuals without unreasonable delay, but not to exceed 60 calendar days
from the discovery date of the breach. Notification must also be made to HHS and, in certain cases involving large breaches, to the
media. HHS is required to report on its website a list of all covered entities that report a breach involving more than 500 individuals.
All non-permitted uses or disclosures are presumed to be breaches unless the covered entity or business associate can demonstrate that
there is a low probability that the information has been compromised.
HIPAA violations may result in criminal penalties and substantial civil penalties per violation. These civil penalties are subject to
annual updates to reflect changes to the consumer price index. State attorneys general are authorized to bring civil actions seeking
either injunction or damages up to $25,000 for violations of the same requirement in a calendar year in response to HIPAA violations
that affect their state residents. HHS has the discretion in many cases to resolve HIPAA violations through informal means without the
imposition of penalties. However, HHS is required to impose penalties for violations resulting from willful neglect and can and has
imposed significant penalties. HHS also conducts compliance audits, which could lead to further compliance reviews or to
enforcement actions.
Our healthcare facilities continue to remain subject to other applicable federal or state laws that are more restrictive than the
HIPAA privacy and security regulations, which could result in additional penalties. For example, the Federal Trade Commission uses
its consumer protection authority to initiate enforcement actions against entities whose inadequate data security programs may expose
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consumers to fraud, identity theft and privacy intrusions, including the security programs of entities subject to HIPAA regulation.
Various state laws and regulations require entities that maintain individually identifiable information (even if not health-related) to
report data breaches to affected individuals and, in some cases, state regulators. In connection with our corporate compliance program,
we have implemented a comprehensive set of privacy and security policies and procedures. We expect compliance with HIPAA and
other privacy and security standards to continue to impose significant costs on our hospitals and operations.
State Certificate of Need Laws
In some states where we operate hospitals and outpatient service facilities, the construction or expansion of healthcare facilities,
the acquisition of healthcare facilities, the transfer or change of ownership related to healthcare facilities and the addition of new
licensed beds or healthcare service lines at healthcare facilities may be subject to review, prior approval or notification with a state
regulatory agency under a certificate of need (“CON”) program. Such laws are generally in place for the reviewing state regulatory
agency to determine the public need for additional or expanded healthcare facilities and services in a specific market. As of December
31, 2017, we operated 23 hospitals in 10 states that have adopted CON programs. See “Item 2. Properties” for a table that denotes the
states where we operate hospitals in which CON programs are present. The failure to provide required notification and obtain
necessary approval in states having a CON program can result in the inability to expand, acquire or change ownership related to
healthcare facilities in a particular market. Violations of these state laws may result in the imposition of civil sanctions or the
revocation of a hospital’s licenses.
Not-for-Profit Hospital Conversion Legislation
Many states, including some where we have hospitals and others where we may in the future acquire hospitals, have adopted
legislation regarding the sale or other disposition of hospitals operated by not-for-profit entities. In other states that do not have
specific legislation, the attorneys general have demonstrated an interest in these transactions under their general obligations to protect
charitable assets from waste. These legislative and administrative efforts primarily focus on the appropriate valuation of the assets
divested and the use of the proceeds from the sale by the not-for-profit seller. These reviews and, in some instances, approval
processes can add additional time to the closing of a hospital acquisition. There can be no assurance that future actions at a state level
will not seriously delay or even prevent our ability to acquire not-for-profit hospitals. If these activities are widespread, they could
limit our ability to acquire hospitals in general.
Corporate Practice of Medicine and Fee-Splitting
Some states have adopted laws that prohibit unlicensed individuals or business entities from employing physicians. Some states
also have adopted laws that prohibit unlicensed individuals or business entities from making direct or indirect payments to physicians
or that prohibit these parties from engaging in fee-splitting arrangements. Physicians that violate these laws are subject to sanctions,
including loss of licensure, civil and criminal penalties and rescission of business arrangements. Laws, such as these, vary from state
to state, are often vague and have seldom been interpreted by the courts or state regulatory agencies. We structure our arrangements
with employed physicians to comply with the state laws where we operate. We can give no assurance that governmental agencies
responsible for enforcing these laws will not assert that we are in violation of these laws. These laws could also be interpreted by the
courts in a manner inconsistent with our interpretations. See “—Employees and Medical Staff — Physicians” below for additional
information on our employed physicians.
Emergency Medical Treatment and Active Labor Act
All of our hospitals are subject to the Emergency Medical Treatment and Active Labor Act (“EMTALA”). This federal law
requires any hospital that participates in the Medicare program to conduct an appropriate medical screening examination of every
individual that enters the hospital’s emergency department seeking treatment and, if the patient is suffering from an emergency
medical condition, including active labor, requires the hospital to either stabilize the patient’s condition or make an appropriate
transfer of the patient to another healthcare facility that can handle the condition. The obligation of the hospital to examine and
stabilize emergency medical conditions or otherwise make an appropriate transfer of the patient to another suitable healthcare facility
exists regardless of a patient’s ability to pay for treatment. Outpatient service facilities that lack emergency departments or otherwise
do not treat emergency medical conditions are not generally subject to EMTALA; however, they are required to have policies and
procedures that address the handling of situations in which an individual presents at their facility seeking emergency medical
treatment, such as transferring the patient to the closest hospital with an emergency department. There are severe penalties under
EMTALA if a hospital fails to screen or appropriately stabilize or transfer a patient or if the hospital delays appropriate treatment in
order to first inquire about the patient’s ability to pay, including exclusion from participation in the Medicare program and civil
monetary penalties. These penalties are updated annually based on changes to the consumer price index. In addition to these penalties,
a harmed patient, the patient’s family or a medical facility that suffers a financial loss as a direct result of another participating
hospital’s violation of the law can bring a civil lawsuit against that other hospital.
Medical Malpractice Tort Law Reform
Laws related to medical malpractice liability have historically been maintained at the state level. All states have laws governing
medical malpractice liability lawsuits. Almost all states have eliminated joint and several liability in medical malpractice lawsuits and
many states have established caps on the damage awards or attorney fees permissible in such lawsuits. Recently, many states have
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introduced legislation to address medical malpractice tort reform. Proposed solutions include enacting limits on non-economic
damages, malpractice insurance reform and gathering lawsuit claims data from malpractice insurance companies and the courts for the
purpose of assessing the connection between malpractice settlements and premium rates. Medical malpractice reform legislation has
also been proposed, but not adopted, at the federal level that could preempt additional state legislation in this area.
Environmental Regulation
Our hospitals and outpatient service facilities are subject to various federal, state and local laws and regulations governing the use,
discharge and disposal of hazardous materials, including medical and pharmaceutical waste products. Our compliance costs related to
environmental laws are not significant and we do not anticipate that these costs will become material to us in the future.
Supply Contracts
We purchase medical supplies, equipment, pharmaceuticals and certain other items under an agreement with a group purchasing
organization (“GPO”) that covers all of our hospitals and their affiliated outpatient service facilities. By participating in a group
purchasing organization, we believe that we can procure items at more competitively priced rates than we would pay for similar items
without such agreement. In addition, we provide a service opportunity to our QHR hospital clients to contract with us for purchases
that we make on their behalf under the terms of our agreement with this group purchasing organization.
Agreements with CHS Related to the Spin-off
In connection with the Spin-off and effective as of the Spin-off date, we entered into certain agreements with CHS that at the time
of Spin-off governed the allocation to us of various assets, employees, liabilities and obligations (including investments, property,
employee benefits and tax-related assets and liabilities) that were previously part of CHS. In addition, these agreements govern certain
relationships and activities between us and CHS for a definitive period of time after the Spin-off date, as specified by each individual
agreement.
A summary of these agreements follows:
•
Separation and Distribution Agreement. This agreement governed the principal actions of both QHC and CHS that
needed to be taken to effect the Spin-off. It sets forth other agreements that govern certain aspects of our relationship
with CHS following the Spin-off.
• Tax Matters Agreement. This agreement governs respective rights, responsibilities and obligations of QHC and CHS
after the Spin-off with respect to deferred tax liabilities and benefits, tax attributes, tax contests and other tax sharing
regarding U.S. federal, state and local income taxes, other tax matters and related tax returns.
• Employee Matters Agreement. This agreement governs certain compensation and employee benefit obligations with
respect to the employees and non-employee directors of QHC and CHS. It also allocated liabilities and responsibilities
relating to employment matters, employee compensation, employee benefit plans and other related matters as of the
Spin-off date.
In addition to the agreements referenced above, we entered into certain transition services agreements and other ancillary
agreements with CHS defining agreed upon services, as specified by each agreement, to be provided by CHS to us commencing on the
Spin-off date. The agreements generally have terms of five years.
A summary of the major transition services agreements follows:
• Shared Services Centers Transition Services Agreement. This agreement defines services to be provided by CHS related
to billing and collections utilizing CHS shared services centers. Services include, but are not limited to, billing and
receivables management, statement processing, denials management, cash posting, patient customer service, and credit
balance and other account research. In addition, it provides for patient pre-arrival services, including pre-registration,
insurance verification, scheduling and charge estimates. Fees are based on a percentage of cash collections each month.
• Computer and Data Processing Transition Services Agreement. This agreement defines services to be provided by CHS
for information technology infrastructure, support and maintenance. Services include, but are not limited to, operational
support for various applications, oversight, maintenance and information technology support services, such as helpdesk,
product support, network monitoring, data center operations, service ticket management and vendor relations. Fees are
based on both a fixed charge for labor costs, as well as direct charges for all third-party vendor contracts entered into by
CHS on QHC’s behalf.
• Receivables Collection Agreement (“PASI”). This agreement defines services to be provided by CHS’ wholly-owned
subsidiary, PASI, which currently serves as a third-party collection agency to us related to accounts receivable
collections of both active and bad debt accounts of QHC hospitals, including both receivables that existed as of the Spin-
off date and those that have occurred during the operating period since the Spin-off date. Services include, but are not
limited to, self-pay collections, insurance follow-up, collection letters and calls, payment arrangements, payment posting,
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dispute resolution and credit balance research. Fees are based on the type of service and are calculated based on a
percentage of recoveries.
• Billing and Collection Agreement (“PPSI”). This agreement defines services to be provided by CHS related to
collections of certain accounts receivable generated from our outpatient healthcare services, predominately physician
clinics. Services include, but are not limited to, self-pay collections, insurance follow-up, collection letters and calls,
payment arrangements, payment posting, dispute resolution and credit balance research. Fees are based on the type of
service and are calculated based on a percentage of recoveries.
• Employee Service Center Agreement. This agreement defines services to be provided by CHS related to payroll
processing and human resources information systems (“HRIS”) support. Fees are based on a fixed charge per employee
headcount per month.
• Eligibility Screening Services Agreement. This agreement defines services to be provided by CHS for financial and
program criteria screening related to Medicaid or other program eligibility for pure self-pay patients. Fees are based on a
fixed charge for each hospital receiving services.
We recorded total expenses under transition services agreements with CHS following the Spin-off combined with the allocations
from CHS for these same services prior to the Spin-off of $63.5 million, $66.4 million and $60.2 million for the years ended
December 31, 2017, 2016, and 2015, respectively. We are disputing in arbitration, among other issues and actions, certain charges and
lack of performance of various obligations under the transition services agreements with CHS. For additional information, see “Item 3.
Legal Proceedings.”
Compliance Program
We recognize that our compliance with laws and regulations impacting our business depends on individual employee actions as
well as company-wide operations. We adopted a compliance program following the Spin-off for our entire business (the “Compliance
Program”). Our Compliance Program focuses on aligning compliance responsibilities with operational functions and is intended to
reinforce our company-wide commitment to operate strictly in accordance with the laws and regulations that govern our business. Our
hospital and corporate office management teams manage and oversee compliance among the employees within our hospitals and
outpatient services facilities, QHR and all other departments within our company.
Our Compliance Program contains the following requirements, among others:
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oversight of management at all levels;
a written code of conduct (the “Code of Conduct”);
policies and procedures that address specific risk areas;
employee education and training programs;
an internal system available to employees and affiliates to report concerns;
auditing and monitoring programs; and
policies related to the enforcement of the Compliance Program.
In addition to the above, our Compliance Program includes policies and procedures related to the interpretation and
implementation of the HIPAA standards for privacy and security. It also includes procedures specific to claims preparation and
submission, including procedures for coding, billing and annual cost reports. It addresses policies related to financial arrangements
with physicians and other referral sources, compliance with the FCA, the Anti-Kickback Statute and the Stark Law. The program
includes policies specific to our compliance with EMTALA related to the treatment of hospital emergency room patients regardless of
their ability to pay. We plan to continuously review our Compliance Program and to make necessary updates or changes to be
compliant with new laws and regulations or industry standards impacting our business.
Our written Code of Conduct applies to all persons and businesses associated with our company, including directors, officers,
employees and consultants. We have a confidential disclosure program to enhance the statement of ethical responsibility expected of
our employees and all business associates with whom we work, including our accounting, financial reporting and asset management
departments. Our Code of Conduct is posted on our website at www.quorumhealth.com.
Corporate Integrity Agreement
On August 4, 2014, CHS became subject to the terms of a five-year Corporate Integrity Agreement (“CIA”) with the OIG arising
from a civil settlement with the U.S. Department of Justice, other federal agencies and identified relators that concluded previously
announced investigations and litigation related to short stay admissions through emergency departments at certain of their affiliated
hospitals. The OIG has required us to be bound by the terms of the CHS CIA commencing on the Spin-off date and applying to us for
the remainder of the five-year compliance term required of CHS, which terminates on August 4, 2019.
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The compliance measures and the reporting and auditing requirements contained in the CIA include:
•
continuing the duties and activities of the Corporate Compliance Officer, Corporate Compliance Work Group, and
Facility Compliance Officers and committees;
• maintaining a written Code of Conduct, which sets forth our commitment to full compliance with all statutes,
regulations, and guidelines applicable to federal healthcare programs;
• maintaining written policies and procedures addressing matters included in our Compliance Program, including
adherence to medical necessity and admissions standards for inpatient hospital stays;
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continuing general compliance training;
providing specific training for employees and affiliates handling our billing, case management and clinical
documentation;
engaging an independent third party to perform an annual review of our compliance with the CIA;
continuing the Confidential Disclosure Program and hotline to enable employees or others to disclose issues or questions
regarding possible inappropriate policies or behavior;
continuing the screening program to ensure that we do not hire or engage employees or contractors who are ineligible
persons for federal healthcare programs;
reporting any material deficiency which resulted in an overpayment to us by a federal healthcare program; and
submitting annual reports to the OIG which describe in detail the operations of the corporate Compliance Program.
A material, uncorrected violation of the CIA could lead to our suspension or disbarment from participation in Medicare, Medicaid
and other federal and state healthcare programs. In addition, we are subject to possible civil penalties if we fail to substantially comply
with the terms of the CIA, including stipulated penalties ranging from $1,000 to $2,500 per day. We are also subject to a stipulated
penalty of $50,000 for each false certification by us or any individual or entity on behalf of us in connection with reports required
under the CIA. The CIA increases the amount of information we are required to provide to the federal government regarding our
healthcare practices and our compliance with federal regulations. We believe that we are currently operating our business in
compliance with the CIA and are unaware of any historical actions on our part that could represent a violation under the terms of the
CIA.
Insurance Reserves
Workers’ Compensation and Professional and General Liability Insurance Reserve
As part of the business of owning and operating hospitals, we are subject to legal actions alleging liability on our part. To mitigate
a portion of this risk, we maintain insurance exceeding a self-insured retention level for these types of claims. Our self-insurance
reserves reflect the current estimate of all outstanding losses, including incurred but not reported losses, based on actuarial calculations
as of period end. The loss estimates included in the actuarial calculations may change in the future due to updated facts and
circumstances. Insurance expense in the statements of income includes the actuarially determined estimates for losses in the current
year, including claims incurred but not reported, the changes in estimates for losses in prior years based on actual claims development
experience as compared to prior actuarial projections, the insurance premiums for losses related to policies obtained to cover amounts
in excess of our self-insured retention levels, the administrative costs of the insurance programs, and interest expense related to the
discounted portions of these liabilities. Our reserves for workers’ compensation and professional and general liability claims are based
on semi-annual actuarial calculations, which are discounted to present value and consider historical claims data, demographic factors,
severity factors and other actuarial assumptions. The liabilities for self-insured claims are discounted based on our risk-free interest
rate that corresponds to the period when the self-insured claims are incurred and projected to be paid.
A portion of our reserves for workers’ compensation and professional and general liability claims included on our balance sheets
relates to incurred but not reported claims prior to the Spin-off. These claims were fully indemnified by CHS under the terms of the
Separation and Distribution Agreement. As a result, we have a corresponding receivable from CHS related to these claims on our
balance sheets. For the years ended December 31, 2017 and 2016, we had total liabilities of $126.1 million and $116.0 million related
to insurance for professional and general liabilities and workers’ compensation liability, respectively, of which $83.4 million and
$98.1 million, respectively, were the indemnified portions for which we have offsetting receivables from CHS.
Under our current insurance arrangements, our self-insured retention level for professional and general liability claims is $5
million per claim. Additionally, we maintain a $0.5 million per claim, high deductible program for workers’ compensation. We
maintain a separate insurance arrangement for professional and general liability related to QHR, due to the differing nature of this
business. The self-insured retention level for QHR is $6 million for professional and general liability insurance.
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Employee Health Benefits
We are self-insured for substantially all of the medical benefits of our employees. We maintain a liability for our current estimate
of incurred but not reported employee health claims based on historical claims data provided by third-party administrators. The
undiscounted reserve for self-insured employee health benefits was $8.8 million and $11.0 million as of December 31, 2017 and 2016,
respectively. Expense each period is based on the actual claims received during the period plus any adjustment to the liability for
incurred but not reported employee health claims.
There can be no assurance that our future cash flows will be adequate to cover the self-insured portion of professional and general
liability, workers’ compensation and medical claims in the future. If we are required to make payments for claims that exceed the
estimated losses we have reserved, our results of operations, financial condition and cash flows could be adversely impacted in the
future.
Employees and Medical Staff
Employees
As of December 31, 2017, we had approximately 13,000 employees, including approximately 3,500 part-time employees. We are
subject to various federal and state laws that regulate wages, hours, benefits and other terms and conditions relating to employment.
We maintain a number of different employee benefit plans.
Physicians
Our hospitals are staffed by licensed physicians, including both employed physicians and physicians who are not employees of
our hospitals. Our ability to generate revenues from our hospital operations business is impacted by the number, quality and specialty
area of practice of physicians providing healthcare services at our facilities, and additionally the scheduling and admitting of patients
by these physicians. As of December 31, 2017, we had approximately 329 employed physicians at our hospitals and affiliated
outpatient service facilities. Some physicians provide services in our healthcare facilities pursuant to a contract with us. These
contracts generally describe the types of healthcare services that the physician is contracted to perform, establish the duties and
obligations of the physician, require certain performance criteria be met by the physician and fix the compensation arrangements for
the services performed by the physician. Any licensed physician may apply to be accepted to the medical staff of any of our hospitals,
but the hospital’s medical staff and the board of directors of the hospital, in accordance with established credentialing criteria, must
approve the physician’s acceptance to the medical staff. Members of the medical staffs of our hospitals often also serve on the medical
staffs of other hospitals that we do not own and may terminate their affiliation with one of our hospitals at any time. It is essential to
our hospital operations business that we attract an appropriate number of quality physicians in the specialty care service areas required
to support our hospital operations business and that we maintain good relationships with our physicians. In some of our markets,
physician recruitment and retention are affected by a shortage of physicians in certain desired specialty care service areas and are
affected by the difficulty that physicians can experience in obtaining affordable malpractice insurance.
Unions and Labor Relations
As of December 31, 2017, we had approximately 2,400 employees, including approximately 980 part-time employees, at our
eight hospitals represented by labor unions. We consider our employee relations to be good and have not experienced any work
stoppages that had a material adverse impact on our business or results of operations.
Availability of Information
We file certain reports with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports
on Form 8-K. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street,
N.E., Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC
at 1-800-SEC-0330. We are an electronic filer, and the SEC maintains an Internet site at www.sec.gov that contains our reports, proxy
and information statements and other information we file electronically. Our website is www.quorumhealth.com. We make available
free of charge on this website under “Investor Relations — SEC Filings” our annual reports on Form 10-K, quarterly reports on Form
10-Q, and current reports on Form 8-K and any amendments to such reports filed or furnished as soon as reasonably practicable after
we electronically file or furnish such reports to the SEC. Our website and the information contained therein or linked thereto are not
intended to be incorporated into this Annual Report on Form 10-K.
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Item 1A. Risk Factors
Our company faces a variety of risks. Many of these risks are beyond our control and could cause our actual operating results and
financial performance to be materially different from our expectations. Some of these risks are described below, including risks related
to our business, the Spin-off, the U.S. healthcare industry, laws and regulations governing our industry, the securities markets and
ownership of our common stock. Others risk factors, such as those related to our markets, operations, liquidity and interest rates, are
described elsewhere in this Annual Report on Form 10-K, such as in “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.” If any of the events or circumstances described in any of the following risk factors or those
contained elsewhere in this Annual Report on Form 10-K occur, our business, results of operations, financial condition or cash flows
could be materially and adversely affected, the trading price of our common stock could decline, and our shareholders could lose all or
part of their investment. Furthermore, our actual operating and financial results may differ materially from those predicted in any
forward-looking statements we make in any public disclosures, including those summarized in “Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations.”
Risks Related to Our Business and Industry
We have substantial indebtedness, which could adversely affect our ability to refinance our existing indebtedness, raise
additional capital, finance operations and capital expenditures, pursue desirable business opportunities or successfully operate our
business in the future.
As of December 31, 2017, our total debt, excluding unamortized debt issuance costs and discounts, was $1.3 billion.
Our overall leverage, terms of our financing arrangements and debt service obligations could have important consequences to us,
including the following:
•
•
•
•
•
•
limits our ability to obtain additional financing for working capital and capital expenditures, to fund growth or to fund
general corporate purposes, even when necessary for us to maintain adequate liquidity, particularly if any ratings
assigned to our debt securities by rating agencies were revised downward;
subjects us to higher levels of indebtedness than our competitors, which may cause a competitive disadvantage and may
reduce our flexibility in responding to increased competition;
requires us to dedicate a substantial portion of our operating cash flow to make interest payments on our debt, thereby
limiting the availability of our operating cash flow to fund future investments, capital expenditures, working capital,
business activities, financial obligations and other general corporate expenditures;
limits our ability to refinance our indebtedness on terms acceptable to us or at all;
limits our flexibility to plan for and adjust to changing business and market conditions in the industry in which we
operate, and increase our vulnerability to adverse economic and industry conditions and governmental regulations; and
result in the market value of our stock being more volatile, potentially resulting in larger investment gains or losses for
our shareholders, than the market value of the common stock of other companies that have a relatively smaller amount of
indebtedness.
Our ability to meet expenses and debt service obligations will depend on our future performance, which will be affected by
financial, business, economic and other factors, including potential changes in patient preferences, the success of responding to
changing payment models, the success in negotiating the termination of certain agreements with CHS and regulatory issues and
pressure from competitors. If we do not generate enough cash to pay our debt service obligations, we may be required to refinance all
or part of our existing debt, sell our assets, borrow more money or raise equity. We may be limited in our ability to pursue any of these
options, if at all, in an instance of need, and any proceeds we receive may not be adequate to meet our debt service obligations as due.
Our senior credit facilities bear interest at variable rates. If market interest rates increase, this variable rate debt will create higher
debt service requirements from us, which could adversely affect our available cash flow.
The agreements governing our debt, including our credit facilities and the indenture governing our Senior Notes, contain
various covenants that impose restrictions on us that may affect our ability to operate our business.
The agreements and indenture governing our credit facilities and Senior Notes contain covenants that, among other things, limit
our ability to:
•
•
•
borrow money or guarantee debt;
create liens on our assets;
pay dividends or make distributions on, or redeem or repurchase our common stock;
• make specified types of investments and acquisitions;
•
enter into agreements restricting our subsidiaries’ ability to pay dividends;
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•
•
•
enter into new lines of business;
engage in transactions with affiliates; and
sell assets or merge with other companies.
In addition, our credit facility contains restrictive covenants and requires us to maintain specified financial ratios and satisfy other
financial condition tests. Our ability to meet these restrictive covenants and financial ratios and tests may be affected by events beyond
our control, and we cannot assure you that we will meet those tests.
These restrictions on our ability to operate our business could harm our business by, among other things, limiting our ability to
take advantage of financing, merger and acquisition and other corporate opportunities.
Various risks, uncertainties and events beyond our control could affect our ability to comply with these covenants. Failure to
comply with any of the covenants in our existing or future financing agreements could result in a default under those agreements and
under other agreements containing cross-default provisions.
A default would permit lenders to accelerate the maturity of the debt under these agreements and to foreclose upon any collateral
securing the debt. Under these circumstances, we might not have sufficient funds or other resources to satisfy all of our obligations,
including our obligations under the Senior Notes. In addition, the limitations imposed by financing agreements on our ability to incur
additional debt and to take other actions might significantly impair our ability to obtain other financing.
Our financial statements have been prepared under the assumption that we will continue as a going concern.
On December 31, 2016, the Company adopted FASB’s ASU No. 2014-15, Presentation of Financial Statements — Going
Concern, which requires management to evaluate if there are conditions or events that raise substantial doubt about an entity’s ability
to continue as a going concern. On April 11, 2017, we amended our Senior Credit Facility (the “CS Amendment”) to, among other
things, raise the maximum Secured Net Leverage Ratio (as defined in our credit agreement (“CS Agreement”), among us, the lenders
party thereto and Credit Suisse AG, Cayman Islands Branch (“Credit Suisse”), as administrative agent and collateral agent) to 4.75x
from 4.25x for the period July 1, 2017 to December 31, 2018 (which was previously 4.25x for the period July 1, 2017 to June 30,
2018), at which point it was to drop to 4.00x for the remainder of the agreement. On March 14, 2018, we amended our Senior Credit
Facility (the “CS Second Amendment”) to, among other things, raise the maximum Secured Net Leverage Ratio to 4.75x for the
period July 1, 2017 to July 30, 2018 and 5.00x for the period July 1, 2018 through December 31, 2019, at which point it will drop to
4.50x for the remainder of the agreement. Management has concluded that the CS Amendment and the CS Second Amendment
alleviate any substantial doubt about our ability to continue as a going concern for the one year period following the issuance of the
financial statements for the year ended December 31, 2017. However, we cannot predict, with certainty, the outcome of our actions.
Our ability to fund capital requirements, service our existing debt and comply with our debt covenants will depend on our future
operating performance and will be impacted by financial, business, economic, regulatory and other factors. If we do not generate
enough cash to pay our debt service obligations or our operating performance does not comply with our amended debt covenants, we
may be required to refinance all or part of our existing indebtedness, sell assets, borrow additional money or raise equity. Breach of
covenants included in our debt agreements, which could result in the lenders demanding payment of the unpaid principal and interest
balances, would have an adverse effect upon our business and would likely require us to do any or all of the following: seek to
renegotiate these debt arrangements with the lenders, seek waivers from the lenders, or seek to raise additional capital and increase
revenues. If such negotiations and capital raising attempts proved unsuccessful, we may be required to seek protection from creditors
through bankruptcy proceedings.
If we are unable to complete divestitures or closures that are currently contemplated, our results of operations and financial
condition could be adversely affected.
As noted above, we have been implementing a portfolio refinement strategy by divesting underperforming hospitals and
outpatient service facilities. In addition, on January 5, 2018 the Company announced the planned closure of Affinity Medical Center in
Massillon, Ohio. Generally, we believe these divestitures and closures will allow us to reduce our corporate indebtedness and refine
our hospital portfolio to a sustainable group of hospitals and outpatient service facilities with higher operating margins. However,
there is no assurance that these contemplated divestitures or closures will be completed, will be completed within our contemplated
timeframe, or will be completed on terms favorable to us or on terms sufficient to allow us to achieve our strategy. Additionally, the
results of operations for these hospitals we plan to divest and the potential gains or losses on the sales of these businesses may
adversely affect our profitability. Moreover, we may incur asset impairment charges related to divestitures or closures that reduce our
profitability.
In addition, after entering into a definitive agreement, we may be subject to the satisfaction of pre-closing conditions as well as
necessary regulatory and governmental approvals, which, if not satisfied or obtained, may prevent us from completing the sale.
Divestitures or closures may also involve continued financial exposure related to the divested business, such as through indemnities or
retained obligations, that present risk to us.
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Our planned divestiture and closure activities may present financial, managerial, and operational risks. Those risks include
diversion of management attention from improving existing operations; additional restructuring charges and the related impact from
separating personnel, renegotiating contracts, and restructuring financial and other systems; adverse effects on existing business
relationships with patients and third-party payors; and the potential that the collectability of any patient accounts receivable retained
from any divested hospital may be adversely impacted. Any of these factors could adversely affect our financial condition and results
of operations.
If reimbursement rates paid by federal or state healthcare programs or commercial insurance and other managed care payors
are reduced, if we are unable to maintain favorable contract terms with payors or comply with our payor contract obligations, if
insured individuals move to insurance programs or plans with greater coverage exclusions or narrower networks, or if insurance
coverage is otherwise restricted, our net operating revenues may decline.
Our net patient revenues, before the provision for bad debts, from the Medicare and Medicaid programs, including Medicare and
Medicaid managed care plans, were 46.5%, 46.3% and 45.0% for the years ended December 31, 2017, 2016 and 2015, respectively,
and were 39.6%, 39.4% and 40.3% from managed care and commercial payors for these respective periods. Healthcare expenditures
continue to increase and state governments continue to face budgetary shortfalls. Driven by these financial factors and ongoing health
reform efforts, federal and state governments have made, and continue to make, significant changes in the Medicare and Medicaid
programs, including reductions in reimbursement payment levels and reductions to payments made to providers under state
supplemental payment programs. Some of these changes have already decreased, and could further decrease in the future, the amount
of payments we receive for our services.
In addition, governmental and commercial payors, as well as other third parties from whom we receive payment for our services,
attempt to control healthcare costs by, for example, requiring hospitals to discount payments for their services in exchange for
exclusive or preferred participation in their benefit plan networks, restricting coverage through utilization reviews, reducing coverage
of inpatient services and shifting coverage of care to outpatient settings when possible, requiring prior authorizations for non-
emergency services and implementing alternative payment models. The ability of commercial payors to control healthcare costs using
these measures may be enhanced by the increasing consolidation of private health insurance companies and managed care companies
and vertical integration of health insurers with healthcare providers. Cost-reduction strategies by large employer groups and their
affiliates may also limit our ability to negotiate favorable terms in our contracts and otherwise intensify competitive pressure.
Furthermore, our contracts with payors require us to comply with a number of terms related to the provision of services and billing for
services. If we are unable to negotiate increased reimbursement rates, maintain existing reimbursement rates or other favorable
contract terms, effectively respond to payor cost controls or comply with the terms of our payor contracts, the payments we receive for
our services may be reduced or we may be involved in disputes with payors and experience payment denials, both prospectively and
retroactively.
In recent years, the percentage of the population with health insurance has increased, driven primarily by various provisions of the
Affordable Care Act, including the requirement that individuals purchase health insurance or pay a penalty. However, in 2017,
Congress eliminated the financial penalty associated with the individual mandate, effective January 1, 2019. This change may result in
fewer individuals electing to purchase health insurance. In addition, the president signed an executive order directing agencies to relax
limits on certain health plans, potentially allowing for fewer plans that adhere to specific Affordable Care Act coverage mandates.
Further, individuals are increasingly enrolling in high-deductible health plans, which tend to have lower reimbursement rates for
providers along with higher co-payments and deductibles due from the patient in comparison to traditional plans. These plans,
sometimes referred to as consumer directed plans, may even exclude our hospitals and employed physicians from coverage.
Changes to Medicaid supplemental payment programs may adversely affect our revenues, results of operations and cash flows.
Medicaid state supplemental payments to providers are separate from and in addition to those made under a state’s standard
Medicaid program. For example, federal law requires state Medicaid programs to make DSH payments to hospitals that serve
significant numbers of Medicaid and uninsured patients. The Affordable Care Act and subsequent legislation provide for reductions in
Medicaid DSH payments. Under the budget bill signed into law in February 2018, Medicaid DSH payments will be reduced by $4
billion in 2020 and by $8 billion per year from 2021 through 2025. Reductions in Medicaid DSH payments and the funding of similar
programs could have an adverse effect on our revenues and results of operations.
Supplemental payment programs are being reviewed by certain state agencies, and some states have made or may make waiver
requests to CMS to replace existing supplemental payment programs. These reviews and waiver requests may result in restructuring of
such programs and could cause reductions in or elimination of the payments. In December 2017, CMS announced that it will phase
out funding for Designated State Health Programs under Medicaid waivers granted pursuant to section 1115 of the Social Security
Act. The Texas Healthcare Transformation and Quality Improvement Program is an example of such a waiver. The program offsets
some costs of providing uncompensated care and incentivizes delivery system reform under a waiver granted by CMS. In December
2017, CMS has approved an extension of the Texas Medicaid waiver through September 30, 2022, but indicated that it will phase out
the federal funding related to delivery system reform, eliminating those federal payments beginning October 1, 2021. In addition,
Texas will not receive any federal financial participation for uncompensated care pool payments until CMS approves revised
uncompensated care protocol policies for the state.
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In December 2017, CMS approved Phase V of California’s HQAF program, with a program period of January 1, 2017, through
June 30, 2019. The HQAF program provides funding for supplemental payments to hospitals that serve Medi-Cal and uninsured
patients. The supplemental payments are funded in part by the federal government. The CMS approval process can be lengthy and, in
some cases, the state must seek approval each fiscal year. In addition, changes to the Medi-Cal program may affect the availability of
funding for supplemental payments.
As a result of the increase in reviews of claims filed for Medicare and Medicaid reimbursements, we may experience delayed
payments or incur additional costs and may be required to repay amounts already paid to us under these programs.
We are subject to routine post-payment inquiries, investigations and audits of the claims we submit to Medicare and Medicaid for
reimbursement for our healthcare services provided to covered patients. The number and parameters of claims subject to these post-
payment reviews may increase as a result of federal and state governmental healthcare cost-containment initiatives, including
enhanced medical necessity reviews for Medicare patients admitted as inpatients to hospitals for certain procedures. Furthermore,
CMS contracts with RACs to perform post-payment targeted review process that employs data analysis techniques in order to identify
Medicare and Medicaid claims most likely to contain overpayments, such as incorrectly coded services, short stay admissions,
incorrect payment amounts, non-covered services and duplicate payments. The claims review strategies used by RACs generally
include a review of high dollar claims, including inpatient hospital claims. As a result, a large majority of the total payment
adjustments determined by RACs relate to hospital claims. In addition, CMS employs MICs to perform post-payment audits of
Medicaid claims to identify potential overpayments. State Medicaid agencies and other private third-party contractors have also
increased their review activities. Third-party audits or investigations of Medicare or Medicaid claims could result in increases or
decreases in our revenues to be recognized in periods subsequent to when the related healthcare services were performed, which could
have an adverse effect on our results of operations.
Payment recoveries resulting from post-payment reviews and denials are appealable. However, there are significant delays in the
assignment of new Medicare appeals to Administrative Law Judges. According to the Office of Medicare Hearings and Appeals, the
average processing time in fiscal year 2017 was over three years. Depending upon the growth of RAC programs and our success in
appealing claims, our results of operations and cash flows could be negatively impacted.
A material portion of our revenues are concentrated in a single state which makes us particularly sensitive to regulatory and
economic changes in that state.
Our revenues are particularly sensitive to regulatory and economic changes in the state of Illinois where we generate a significant
portion of our patient revenues. We currently operate nine hospitals in Illinois, which collectively accounted for 37.2%, 35.1% and
35.3% of our net patient revenues, before the provision for bad debts, for the years ended December 31, 2017, 2016 and 2015,
respectively. Our accounts receivable due from Illinois continue to be delayed due to state budgetary and funding pressures.
Accordingly, any change in the current demographic, economic, competitive or regulatory conditions in this state could have an
adverse effect on our business, results of operations, financial condition and cash flows. Recently, Illinois announced the 2018 launch
of HealthChoice Illinois, an expansion of its Medicaid managed care program to all counties in the state. Changes to the state
Medicaid and other governmental payor programs in Illinois, including reductions in reimbursement rates or delays in timing of
reimbursement payments, could also have an adverse effect on our business, results of operations, financial condition and cash flows.
We are unable to predict the ultimate impact of healthcare reform initiatives, including the Affordable Care Act, and our
business may be adversely affected if the Affordable Care Act is repealed entirely or if provisions benefitting our operations are
significantly modified.
In recent years, the U.S. Congress and certain state legislatures have introduced and passed a large number of proposals and
legislation designed to make major changes in the healthcare system, including changes that increased access to health insurance. The
most prominent of these efforts, the Affordable Care Act, affects how healthcare services are covered, delivered, and reimbursed. As
currently structured, the Affordable Care Act, expands health insurance coverage through a combination of public program expansion
and private sector health insurance reforms, reduces Medicare reimbursement to hospitals, and promotes value-based purchasing.
There are currently several public and private initiatives that aim to transition payment models from passive volume-based
reimbursement to models that are tied to the quality and value of services. We are limited in our ability to reduce the direct costs of
providing care to patients. We are unable to predict the nature and success of future financial or delivery system reforms, whether such
reforms are implemented by government or other industry participants, such as private payors and large employer groups, or the
potential impact of such changes to our operations.
The Trump administration and certain members of Congress have stated their intent to repeal or make significant changes to the
Affordable Care Act, its implementation and/or its interpretation. For example, in 2017, Congress eliminated the financial penalty
associated with the individual mandate, effective January 1, 2019, which may result in fewer individuals electing to purchase health
insurance. In addition, a presidential executive order has been signed that directs agencies to minimize “economic and regulatory
burdens” of the Affordable Care Act. CMS administrators have indicated that they intend to grant states additional flexibility in the
administration of state Medicaid programs, including by expanding the scope of waivers under which states may impose different
eligibility or enrollment restrictions or otherwise implement programs that vary from federal standards. There is uncertainty regarding
whether, when, and how the Affordable Care Act will be further changed, what alternative provisions, if any, will be enacted, the
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timing of enactment and implementation of alternative provisions, and the impact of alternative provisions on providers as well as
other healthcare industry participants. Further, Congress could eliminate or alter provisions beneficial to us while leaving in place
provisions reducing our reimbursement. Efforts to repeal or change the Affordable Care Act or implement other initiatives intended to
reform healthcare delivery and financial systems may have an adverse effect on our business, results of operations, cash flow, capital
resources and liquidity.
If we experience growth in self-pay revenues, or if we experience deterioration in the collectability of patient responsibility
accounts, our results of operations, financial condition and cash flows could be adversely affected.
The primary uncertainty in collectability of our revenues relates to uninsured patients and the patient financial responsibility
portion of payments due from insured patients. Collections on account balances are impacted by the economic ability of patients to
pay, the effectiveness of CHS’ collection efforts pursuant to our transition services agreements with them, and our own collection
efforts. Significant changes in payor mix, centralized business office operations, in-market or overall U.S. economic conditions, or
new and changing laws and regulations related to federal and state governmental healthcare coverage, among other things, could
adversely impact our estimates of accounts receivable collectability. See “Item 1. Business — Agreements with CHS Related to the
Spin-off” for additional information on the transition services agreements.
In recent years, our self-pay revenues have decreased, primarily due to the insurance expansion provisions of the Affordable Care
Act. In particular, we have experienced increasing numbers of individuals covered by Medicaid or commercial insurance plans.
However, efforts to repeal or revise the Affordable Care Act have caused uncertainty with regard to the future of this statute and its
effects on the size of the uninsured population of U.S. citizens. In 2017, Congress eliminated the financial penalty associated with the
individual mandate, effective January 1, 2019. This may result in fewer individuals electing to purchase health insurance. There is also
uncertainty regarding the number and identity of states that will ultimately expand their Medicaid programs, and on what terms. These
factors, among others, make it difficult to predict changes to the percentage of our revenues comprised of self-pay revenues.
Moreover, we may be adversely affected by growth in the patient financial responsibility portion of payments for services or
other conditions or restrictions associated with governmental and non-governmental healthcare plans and programs. Individuals are
increasingly using healthcare savings accounts and participating in more narrow or tiered network programs. Our ability to improve
collections of our patient accounts (as well as the ability of those collecting patient accounts of our behalf) may be limited by
statutory, regulatory and investigatory initiatives, including private lawsuits directed at hospital charges and collection practices for
uninsured and underinsured patients. In addition, a deterioration of economic conditions in the United States could lead to higher
levels of uninsured patients, result in higher levels of patients covered by lower-paying governmental programs, result in fiscal
uncertainties related to both governmental and non-governmental payors and could limit the economic ability of patients to make
payments for which they are responsible. If we experience growth in self-pay revenues volume or deterioration in collectability of
patient accounts, our results of operations, financial condition and cash flows could be adversely affected.
If we are unable to effectively compete for patients, local residents in the markets where we operate hospitals may choose to
use other hospitals and healthcare providers for medical treatment.
The U.S. healthcare industry is highly competitive among hospitals and other healthcare providers for patients and physician
affiliations. We are the sole provider of general and acute hospital healthcare services in 20 of our markets, which we generally define
as the county where our hospital is located, which means we typically have less direct competition for our hospital services. Our
hospitals face competition for patients from out-of-market hospitals, including hospitals in urban areas that may have more
comprehensive specialty care service lines, more advanced medical equipment and technology, more extensive medical research
capabilities and greater access to medical education programs. Patients who receive medical treatment from an out-of-market hospital
may subsequently shift their preferences to that hospital for future healthcare services. We also face competition from other specialty
care providers, including outpatient surgery, orthopedic, oncology and diagnostic centers that are not affiliated with us. Our hospitals
and many of the hospitals with which we compete engage in physician alignment strategies, which may include employing physicians,
acquiring physician practice groups, participating in ACOs and, to the extent permitted by law, physician ownership of healthcare
facilities.
We face competition from municipal and not-for-profit hospitals. In our markets where we are not the sole provider of general
and acute hospital healthcare services, our primary competitor is generally a not-for-profit hospital. Not-for-profit hospitals are
typically owned by tax-supported governmental agencies or not-for-profit entities which are financially supported by endowments and
charitable contributions. Not-for-profit hospitals do not pay income or property taxes and can make capital investments without paying
sales tax. These financial advantages may better position such hospitals to maintain more modern and technologically upgraded
facilities and equipment and to offer more specialized services than those available at our hospitals. If our competitors are better able
to attract patients with these offerings, we may experience an overall decline in our patient volumes and operating revenues. Recent
consolidations of not-for-profit hospital entities may intensify this competitive pressure.
Our ability to effectively compete for patients is impacted by commercial and managed care payor programs that influence patient
choice related to both physicians and hospitals by offering health insurance plans that restrict patient choice of provider. For example,
plans with narrow network structures restrict the number of participating in-network provider plans with tiered network structures
impose higher cost-sharing obligations on patients that obtain services from providers in a disfavored tier. If we are unable to
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participate in plan networks or favorable tiers or are otherwise unable retain or maintain favorable contracts with health plans, our
patient volumes may decrease and our revenues may be reduced. In addition, healthcare industry participants are increasingly pursuing
alignment initiatives, such as the proposed acquisition of Aetna by CVS Health. Integration among insurers and providers and cost-
reduction strategies by large employer groups and their affiliates may shift costs, accelerate further change, and impact our ability to
compete in ways that are difficult to predict.
Trends toward increasing clinical transparency and value-based purchasing may have an adverse impact on our competitive
position and patient volumes. The CMS Hospital Compare website makes available to the public certain data that hospitals submit in
connection with Medicare reimbursement claims, including performance data related to quality measures and patient satisfaction
surveys. In addition, hospitals are required to publish their standard charges for healthcare items and services or their policy for
allowing the public to review a list of their standard charges for healthcare services. If any of our hospitals achieve poor results on
quality of care measures or patient satisfaction surveys, if our results are lower than the results of our competitors, or if our standard
charges are higher than our competitors, we may attract fewer patients.
We expect these competitive trends to continue. If we are unable to compete effectively with other healthcare providers, local
residents may seek healthcare services from providers other than our hospitals and affiliated outpatient service facilities.
A significant decline in operating results or other indicators of impairment at one or more of our facilities, including
outpatient ancillary affiliated entities, could result in a material, non-cash charge to earnings to impair the value of long-lived
assets.
Our operations are capital intensive and require significant investment in long-lived assets, including property, equipment,
software and other long-lived intangible assets. If one of our hospitals or other healthcare facilities experiences declining operating
results or is adversely impacted by one or more of the risk factors related to our business, we may not be able to recover the carrying
value of those assets through our future operating cash flows. On an ongoing basis, we evaluate whether changes in future
undiscounted cash flows reflect any potential impairment in the fair value of our long-lived assets. For the years ended December 31,
2017, 2016 and 2015, we recorded impairment of $47.3 million, $166.9 million and $13.0 million because of declining operating
results and projections of future cash flows at certain of our hospitals. See Note 3 — Impairment of Long-Lived Assets and Goodwill
in the accompanying financial statements.
If the fair value of one or both of our reporting units declines, it could result in a material, non-cash charge to earnings from
impairment of our goodwill.
The testing of goodwill for impairment requires us to make significant estimates about our future performance and cash flows, as
well as other assumptions related to our cost of capital and other factors impacting our fair value models. Future estimates of fair value
could be adversely affected if the actual outcome of one or more of these assumptions changes materially in the future, including
lower than expected hospital patient volumes, reduced reimbursement or increased operating costs. On an ongoing basis, we evaluate
whether the carrying value of our goodwill is impaired when events or changes in circumstances indicate that such carrying value may
not be recoverable.
For the year ended December 31, 2017, we recorded $1.9 million of impairment to goodwill related to certain hospitals we
classified as held for sale or sold during 2017. For the year ended December 31, 2016, we recorded a total of $125.0 million of
impairment to the goodwill associated with our hospital operations reporting unit. The fiscal year 2016 impairment charge consisted of
two components, a $5.0 million write-down of goodwill related to certain hospitals that we reclassified as held for sale in the second
quarter of 2016 and $120.0 million of goodwill impairment resulting from a step two goodwill impairment evaluation as a result of
certain indicators of impairment. The primary indicators were our declining market capitalization, as compared to the carrying value
of equity, and a decrease in estimated future earnings.
If competition decreases our ability to acquire additional hospitals on favorable terms, we may be unable to execute our
acquisition strategy.
An important part of our long-term business strategy is to acquire additional hospitals. However, not-for-profit hospital systems
and other for-profit hospital companies generally attempt to acquire the same type of hospitals as we do. Some of our competitors for
acquisitions have greater financial resources than we have. Furthermore, some hospitals are sold through an auction process, which
may result in higher purchase prices than we believe are reasonable. Therefore, we may not be able to acquire additional hospitals on
terms favorable to us.
If we fail to improve the financial and operating performance of acquired and existing hospitals, we may be unable to achieve
our growth strategy.
Some of our existing hospitals are experiencing lower operating margins than other hospitals in our portfolio. While we do not
intend to acquire hospitals that are not accretive to our net operating revenues, it is possible that one or more hospitals we acquire may
have lower operating margins than we do or have incurred operating losses prior to the time we acquire them. We may occasionally
experience delays in improving the operating margins or effectively integrating the operations of acquired hospitals. In the future, if
we are unable to improve the operating margins of these existing hospitals or any acquired hospitals, operate them profitably or
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effectively integrate their operations, as applicable, we may be unable to achieve our growth strategy. To the extent that our operating
margins were to decline as a result of financial and operating performance at our hospitals, we could be unable to comply with the
covenants contained in our credit agreements or be limited or precluded from obtaining future borrowings by the terms of our credit
agreements and the indenture governing our Senior Notes.
The failure or downsizing of large employers, or the closure of manufacturing or other major facilities in our markets, could
have a disproportionate impact on our hospitals.
The economies in the markets in which most of our hospitals operate are often dependent on a small number of large employers,
especially manufacturing or other major facilities. These employers often provide income and health insurance for a
disproportionately large number of community residents who may depend on our hospitals and outpatient service facilities for their
medical care. The failure of one or more large employers, or the closure or substantial reduction in the number of individuals
employed at manufacturing or other facilities located in or near the markets in which we operate hospitals, could cause affected
residents to move elsewhere for employment or lose insurance coverage that was otherwise available to them. The occurrence of these
events may cause a reduction in our revenues and adversely impact our results of operations.
We are subject to a variety of operational, legal and financial risks associated with outsourcing functions to third parties.
We have outsourced to CHS, through various transition services agreements, certain services including, among others, services
related to patient eligibility screening, billing, accounts receivable collections and other revenue management services and support, as
well as information technology, payroll processing and other human resources functions. We take steps to monitor and regulate the
performance of any parties in which we delegate services; however, the transition services agreements with CHS were executed in
connection with the Spin-off, based upon certain business and financial assumptions. To the extent that any of the transition services
agreements are determined not to benefit us in their current form, our ability to renegotiate, rescind or reform any or all of the
agreements may be limited or non-existent, and our business could be adversely affected.
Arrangements with third-party service providers may make our operations vulnerable if these vendors fail to satisfy their
obligations to us as a result of their performance, changes in their own operations, financial condition or other matters outside of our
control. We may also face legal, financial or reputational harm for the actions or omissions of such providers, and we may not have
effective recourse against the providers. Effective management, development and implementation of our outsourcing strategies are
important to our business strategy. If there are delays or difficulties in enhancing business processes or our third-party service
providers do not perform, we may not be able to fully realize on a timely basis the economic and other benefits of the outsourcing
services or other relationships we enter into with key vendors, which could result in substantial costs, divert management’s attention
from other strategic activities, negatively affect employee morale or create other operational or financial problems for us. Terminating
or transitioning arrangements with key vendors, including the transition services agreements with CHS, could result in additional costs
and a risk of operational problems, delays in collections from payors, potential errors and possible control issues during the
termination and transition processes, any of which could adversely affect our business, results of operations, financial condition and
cash flows.
The failure to obtain our medical supplies and drugs at favorable prices could cause our operating results to be adversely
affected.
In connection with the Spin-off, we renegotiated and entered into a separate participation agreement with the group purchasing
organization (“GPO”) that we used prior to the Spin-off date. GPOs attempt to obtain favorable pricing on medical supplies and drugs
with manufacturers and vendors, sometimes by negotiating exclusive supply arrangements in exchange for discounts. To the extent
these exclusive supply arrangements are challenged or deemed unenforceable, we could incur higher costs than anticipated for our
medical supplies obtained through the GPO. Also, there can be no assurance that our arrangement with the GPO will provide the
expected discounts on a long-term basis. Furthermore, costs of medical supplies and drugs may continue to increase due to market
pressure from pharmaceutical companies and new product drug releases. Higher costs could cause our operating results to be
adversely affected.
A pandemic, epidemic or outbreak of an infectious disease in the markets in which we operate hospitals, or which otherwise
impacts our healthcare facilities, could adversely impact our business.
If a pandemic, epidemic, outbreak of an infectious disease or other public health crisis were to affect any or all of the markets in
which we operate hospitals, our business and results of operations could be adversely affected. Such a crisis could diminish the
public’s trust in healthcare facilities, especially hospitals that fail to accurately or timely diagnose or that are treating or have treated
patients affected by contagious diseases. If any of our healthcare facilities were involved in treating patients for such a contagious
disease, other patients might cancel elective procedures or fail to seek needed care from our healthcare facilities. Further, a pandemic
might adversely impact our business by causing a temporary shutdown or diversion of patients, by disrupting or delaying production
and delivery of materials and products in the supply chain or by causing staffing shortages in our healthcare facilities. Although we
have disaster plans in place and operate pursuant to infectious disease protocols, the potential impact of a pandemic, epidemic or
outbreak of an infectious disease, with respect to our markets or our healthcare facilities is difficult to predict and could adversely
impact our business.
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Our performance depends on our ability to recruit and retain quality physicians.
Although we employ some physicians, physicians are often not employees of the healthcare facilities at which they practice. The
success of our healthcare facilities depends in part on the number and quality of the physicians on the medical staffs of our hospitals
and other healthcare facilities, our ability to employ or contract with quality physicians, the admitting and utilization practices of
employed and non-employee physicians, maintaining good relations with physicians and controlling costs related to the employment
of physicians. In many of the markets we serve, many physicians have admitting privileges at other healthcare facilities in addition to
our healthcare facilities. Such physicians may terminate their affiliation or employment with our healthcare facilities at any time. If we
are unable to provide adequate supporting medical staff or technologically advanced medical equipment and facilities that meet the
needs or expectations of those physicians and their patients, they may be discouraged from referring patients to our facilities,
admissions may decrease and our operating performance may decline.
Our labor costs could be adversely affected by competition for medical staff, a shortage of experienced nurses and labor union
activity.
In addition to our physicians, the operations of our healthcare facilities are dependent on the efforts, abilities and experience of
our hospital management teams and other medical staff, such as nurses, pharmacists and lab technicians. We compete with other
healthcare providers in recruiting and retaining qualified management and medical staff responsible for the daily operations of our
healthcare facilities. In some markets across the United States, the availability of nurses and other medical support personnel has been
a significant operating issue for healthcare providers. We may be required to enhance wages and benefits to recruit and retain nurses
and other medical support personnel or to hire more expensive temporary or contract medical staff. In addition, some states have, and
others could adopt, mandatory nurse-staffing ratios or could reduce mandatory nurse-staffing ratios already in place. State-mandated
nurse-staffing ratios could significantly affect labor costs and have an adverse impact on revenues at hospitals where admissions must
be limited in order to meet the required ratios.
As of December 31, 2017, we had approximately 2,400 employees, including approximately 980 part-time employees, at our
eight hospitals represented by labor unions. Increased or ongoing labor union activity is another factor that could adversely affect our
labor costs or otherwise adversely impact us. To the extent a significant portion of our employee base unionizes, our labor costs could
increase significantly. In addition, when negotiating collective bargaining agreements with unions, whether such agreements are
renewals or first contracts, there is the possibility that strikes could occur during the negotiation process, and our continued operations
during any strike periods could increase our labor costs and otherwise adversely impact our business and results of operations.
If our labor costs increase, we may not be able to raise the standard charges for our healthcare services to offset these increased
costs. Additionally, a significant portion of our revenues are subject to fixed reimbursement rates, which constrains our ability to pass
along the impact of these increased costs to the patient or other third-party payors. In the event we are not effective at recruiting and
retaining qualified hospital management, nurses and other medical staff, or we are unable to control our labor costs in relation to
certain events and circumstances, the increase in our labor costs could have an adverse effect on our results of operations.
Our hospitals and other healthcare facilities may be negatively impacted by severe weather, earthquakes and other factors
beyond our control, which could restrict patient access to care or cause one or more of our facilities to close temporarily.
The results of operations of our hospitals and outpatient service facilities may be adversely impacted by severe weather
conditions, including earthquakes, hurricanes and widespread winter storms, or other factors beyond our control that could cause
disruption to patient scheduling or displacement of our patients, employees, physicians and clinical staff, and may force certain of our
facilities to close temporarily. In certain geographic areas, we have a concentration of hospitals and outpatient service facilities that
may be simultaneously affected by adverse weather conditions or events. These types of disruptions due to severe weather could have
an adverse effect on our business, results of operations, financial condition and cash flows.
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If our adoption and utilization of electronic health record systems fails to satisfy CMS standards, our results of operations
could be adversely affected.
Under the HITECH Act, MACRA and other laws, HHS has established Medicare and Medicaid incentive programs to encourage
hospitals and healthcare professionals to adopt EHR technology. Eligible hospitals can receive Medicaid incentive payments for their
adoption and meaningful use of certified EHR technology; Medicare incentive payments are no longer available. Eligible hospitals
that fail to demonstrate meaningful use are subject to Medicare payment reductions. Under the OPP, eligible healthcare professionals
are also subject to positive or negative payment adjustments based, in part, on their use of EHR technology. If our hospitals and
healthcare professionals are unable to properly adopt, maintain, and utilize certified EHR technology, we will not be eligible to
receive incentive payments and we could be subject to penalties that may have an adverse effect on our results of operations.
Excluding payment adjustments under the OPP, we expect our EHR incentive payments earned will be approximately $1.5 million for
2018.
If there are delays in regulatory updates by governmental agencies to federal and state healthcare programs, we may
experience increased volatility in our operating results as such delays may result in a timing difference between when such
program revenues are earned and when they become known or estimable for purposes of accounting recognition.
Our net patient revenues, before the provision for bad debts, from the Medicare and Medicaid programs, including Medicare and
Medicaid managed care plans, were 46.5%, 46.3% and 45.0% for the years ended December 31, 2017, 2016 and 2015, respectively.
The reimbursement payments related to these programs are subject to ongoing legislative and regulatory changes that can have a
significant impact on our operating results. When delays occur in the passage of legislation, funding authorizations or the
implementation of regulations, we could experience material increases or decreases in our revenues to be recognized in periods
subsequent to when the related healthcare services were performed. For the years ended December 31, 2017, 2016 and 2015, we
recorded net favorable (unfavorable) contractual allowance adjustments in net operating revenues of $2.0 million, $(5.8) million and
$(15.1) million, respectively, related to previous program reimbursement estimates and final cost report settlements. The volatility in
the timing of recognition as revenues of adjustments to reimbursement payments under these programs could have an adverse effect
on our results of operations, financial position and cash flows.
Controls designed by third-party payors to reduce utilization of inpatient services may reduce our revenues.
Over the last several years, third-party payors, including both governmental and non-governmental payors, have instituted
policies and procedures to substantially reduce or limit coverage of inpatient healthcare services. Payors have implemented controls
and procedures designed to monitor and reduce patient admissions and lengths of stay, commonly referred to as “utilization review,”
which have impacted and are expected to continue to impact inpatient admission volumes at our hospitals. Federal laws contain
numerous provisions designed to ensure that services rendered by hospitals to Medicare and Medicaid patients meet professionally
recognized standards and are medically necessary and that claims for reimbursement are properly filed. Inpatient utilization, average
lengths of stay and hospital occupancy rates continue to be negatively affected by payor-required pre-admission authorization
requirements, payor-required post-admission utilization reviews and payor pressure to maximize outpatient and alternative delivery
options for healthcare services for less acutely ill patients. Significant limits on the scope of services reimbursed and on
reimbursement rates by governmental and non-governmental third-party payors could have an adverse effect on our revenues and
results of operations.
If we fail to comply with the extensive laws and governmental regulations that apply to the U.S. healthcare industry, including
anti-fraud and abuse laws, we could suffer penalties or be required to make significant changes to our operations.
The U.S. healthcare industry is governed by extensive laws and regulations at the federal, state and local government levels.
These laws and regulations include standards that address, among other issues, the following:
•
•
•
•
•
•
the adequacy of medical care, equipment, personnel, and operating policies and procedures;
billing and coding for services;
proper handling of overpayments;
classification of levels of care provided;
preparing and filing of cost reports;
relationships with referral sources and referral recipients;
• maintenance of adequate records;
•
compliance with building codes;
•
•
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environmental protection;
privacy and security; and
debt collection and communications with patients and consumers.
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Examples of these laws include, but are not limited to, HIPAA, the Stark Law, the Anti-Kickback Statute, the False Claims Act,
EMTALA and similar state laws. If we fail to comply with applicable laws and regulations, we could suffer civil sanctions and
criminal penalties, including the loss of our operating licenses and our ability to participate in the Medicare, Medicaid and other
federal and state healthcare programs. There are heightened coordinated civil and criminal enforcement efforts by both federal and
state governmental agencies relating to the U.S. healthcare industry. Recent enforcement actions have focused on financial
arrangements between hospitals and physicians, billing for services without adequately documenting medical necessity and billing for
services outside the coverage guidelines for such services. Specific to our hospitals, we have received inquiries and subpoenas from
various governmental agencies regarding these and other matters, and we are also subject to various claims and lawsuits relating to
such matters. See “Item 3. Legal Proceedings” for a further discussion of these matters.
In the future, evolving interpretations or enforcement of the laws and regulations applicable to the U.S. healthcare industry could
subject our current practices to allegations of impropriety or illegality or could require us to make changes to our healthcare facilities,
equipment, personnel, healthcare service offerings, capital expenditure programs and operating expenses.
We could be subject to increased monetary penalties and other sanctions, including exclusion from federal healthcare
programs, if we fail to comply with the terms of the Corporate Integrity Agreement.
On August 4, 2014, CHS became subject to the terms of a five-year CIA with the OIG arising from a civil settlement with the
DOJ, other federal agencies and identified relators that concluded previously announced investigations and litigation related to short
stay admissions through emergency departments at certain of their hospitals. The OIG has required us to be bound by the terms of the
CHS CIA commencing on the Spin-off date and applying to us for the remainder of the five-year compliance term required of CHS,
which terminates on August 4, 2019. See “Item 3. Legal Proceedings” for additional information on the terms of the CIA.
Material, uncorrected violations of the CIA could lead to our suspension or exclusion from participation in Medicare, Medicaid
and other federal and state healthcare programs and subject us to repayment obligations. In addition, we are subject to possible civil
penalties for failure to substantially comply with the terms of the CIA, including stipulated penalties ranging between $1,000 and
$2,500 per day. We are also subject to a stipulated penalty of $50,000 for each false certification made by us or on our behalf,
pursuant to the reporting provisions of the CIA. The CIA increases the amount of information we must provide to the federal
government regarding our practices at our healthcare facilities and our compliance with federal regulations. The reports we provide in
connection with the CIA could result in greater scrutiny by other regulatory agencies.
We may be adversely affected by consolidation among health insurers and other industry participants.
In recent years, a number of private health insurers have merged or increased efforts to consolidate with other non-governmental
payors. Insurers are also increasingly pursuing alignment initiatives with healthcare providers, such as the proposed acquisition of
Aetna by CVS. Consolidation within the health insurance industry may result in insurers having increased negotiating leverage and
competitive advantages, such as greater access to performance and pricing data. In addition, the trend within the U.S. healthcare
industry toward value-based purchasing programs could be accelerated if the large private health insurance companies, including those
engaging in consolidation activity, find these programs to be financially beneficial. Other industry participants, such as large employer
groups and their affiliates, may intensify competitive pressure and affect the industry in ways that are difficult to predict.
These trends result, in part, from health care reform efforts, including the medical loss ratio (“MLR”) requirements. The MLR
represents the percentage of premiums used to pay patient medical claims and used for programs or activities that improve the quality
of patient care. Under the Affordable Care Act, health insurance payors that do not meet minimum MLR requirements must pay
premium rebates on group and individual health insurance plan products and, for certain Medicare program products, may be subject
to additional penalties. Our ability to negotiate prices and favorable terms with health insurance providers could be negatively
impacted by their efforts to satisfy the MLR requirements. We cannot predict whether we will be able to negotiate favorable terms and
otherwise respond effectively to the impact of increased consolidation within the payor industry or vertical integration efforts.
We may from time to time become the subject of legal, regulatory and governmental proceedings that, if resolved unfavorably,
could have an adverse effect on us, and we may be subject to other loss contingencies, both known and unknown.
We may from time to time become a party to various legal, regulatory and governmental proceedings and other related matters.
Those proceedings include, among other things, governmental investigations. In addition, we may become subject to other loss
contingencies, both known and unknown, which may relate to past, present and future facts, events, circumstances and occurrences.
Addressing any investigations, lawsuits or other claims may distract management and divert resources, even if we ultimately prevail.
Should an unfavorable outcome occur in some or all of any such current or future legal, regulatory or governmental proceedings or
other such loss contingencies, or if successful claims and other actions are brought against us in the future, there could be an adverse
impact on our results of operations, financial position and cash flows.
For example, on October 25, 2017, a shareholder (R2 Investments LDC) filed an action in the Circuit Court of Williamson
County, Tennessee against us and certain of our officers and directors and CHS and certain its officers and directors. The complaint
alleges that the defendants violated the Tennessee Securities Act and common law by, among other things, making alleged false
and/or misleading statements and failing to disclose certain information regarding aspects of our business, operations and financial
condition. Plaintiff is seeking recessionary, compensatory, and punitive damages. Defending ourselves against these allegations or
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other shareholder activities, activism or lawsuits and any related publicity could potentially entail significant costs and could require
significant attention from our management. We are unable to predict the outcome of this matter. However, it is reasonably possible
that we may incur a loss in connection with this matter. We are unable to reasonably estimate the amount or range of such reasonably
possible loss. Under some circumstances, any losses incurred in connection with adverse outcomes in this matter could be material.
Governmental investigations, as well as qui tam lawsuits, may lead to significant fines, penalties, settlements or other sanctions,
including exclusion from federal and state healthcare programs. Settlements of lawsuits involving Medicare and Medicaid issues
routinely require both monetary payments and corporate integrity agreements, each of which could have an adverse effect on our
business, results of operations, financial position and cash flows. While CHS has agreed to indemnify us for certain liabilities relating
to outcomes or events occurring prior to the closing of the Spin-off, we cannot guarantee that any such legal proceedings or loss
contingencies will be covered by such indemnities or that CHS will fully indemnify us thereunder. See “Item 3. Legal Proceedings”
for additional information on legal proceedings to which we are subject.
We could be subject to substantial uninsured liabilities or increased insurance costs as a result of significant legal actions.
Physicians, hospitals and other healthcare providers have become subject to an increasing number of legal actions alleging
malpractice and other liability claims or legal theories. Even in states that have imposed caps on damage awards, plaintiffs are seeking
recoveries under new theories of liability that might not be subject to the caps on damages. Many of these actions involve large claims
and significant costs for legal defense. To protect us from the vulnerability to the potentially significant costs arising from these
claims, we maintain claims-made professional and general liability insurance coverage in excess of those amounts for which we are
self-insured. We believe the insurance coverage we maintain is sufficient to cover potential losses of our operations. Our insurance
coverage, however, may not continue to be available in the future at a reasonable cost for us to maintain adequate levels of insurance.
Additionally, our insurance coverage does not cover all claims against us, such as fines, penalties, or other damage and legal expense
payments resulting from qui tam lawsuits. We cannot predict the outcome of current or future legal actions against us or the effect that
judgments or settlements in such matters may have on us or on our insurance costs. Additionally, all professional and general liability
insurance we purchase is subject to policy limitations. If the aggregate limit of any of our professional and general liability policies is
exhausted, in whole or in part, it could deplete or reduce the limits available to pay any other material claims applicable to that policy
period. Furthermore, one or more of our insurance carriers could become insolvent and unable to fulfill its or their obligations to
defend, pay or reimburse us when those obligations become due. In that case, or if payments of claims exceed our estimates or are not
covered by our insurance, it could have an adverse effect on our business, financial condition or results of operations. Although CHS
has agreed to indemnify us for certain legal proceedings and our loss contingencies relating to outcomes or events occurring prior to
the closing of the Spin-off, we cannot guarantee that any such legal proceedings or loss contingencies will be covered by such
indemnities or that CHS will fully indemnify us thereunder.
Our operations could be impaired by a failure of our information systems.
The operation of our information systems is critical to our business operations. We entered into various transition services
agreements with CHS that define agreed upon services to be provided by CHS to us. The transition services agreements generally
have terms of five years and include, among others, services related to information technology, payroll processing, certain human
resources functions, patient eligibility screening, billing, collections and other revenue management services. The majority of our
information systems are managed by CHS under the terms of these agreements. In general, information systems may be vulnerable to
damage from a variety of sources, including telecommunications or network failures, human acts and natural disasters. We believe
that CHS takes precautionary measures to prevent problems that could affect our business operations as a result of failure or disruption
to their information systems. It is possible that we may be impacted by information system failures. The occurrence of any information
system failures could result in interruptions, delays, loss or corruption of data and cessations or interruptions in the availability of
these systems. All of these events or circumstances, among others, could have an adverse effect on our business, results of operations,
financial position and cash flows, and they could harm our business reputation.
A cyber-attack or security breach could result in the compromise of our facilities, confidential patient data or critical systems
and give rise to potential harm to patients, remediation and other expenses, expose us to liability under HIPAA, consumer
protection laws, common law or other legal theories, subject us to litigation and federal and state governmental inquiries, damage
our reputation, and otherwise be disruptive to our business.
We rely extensively on our computer systems to manage clinical and financial data, to communicate with our patients, payors,
vendors and other third parties, and to summarize and analyze our operating results. We have made significant investments in
technology to protect our systems and information from cyber-security risks. During the second quarter of 2014, the computer network
of CHS was the target of an external, criminal cyber-attack in which the attacker successfully copied and transferred certain data
outside CHS. This data included certain non-medical patient identification data (such as patient names, addresses, birthdates,
telephone numbers and social security numbers) considered protected under HIPAA, but did not include patient credit card, medical or
clinical information. The remediation efforts in response to the attack included continued development and enhancement of our
controls, processes and practices designed to protect our systems, computers, software, data and networks from attack, damage or
unauthorized access.
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We have implemented security measures to protect the confidentiality, integrity and availability of this data and the systems and
devices that store and transmit such data. We utilize current security technologies, and our defenses are monitored and routinely tested
internally and by external parties. Despite these efforts, threats from malicious persons and groups, new vulnerabilities and advanced
new attacks against information systems create risk of cyber-security incidents. There can be no assurance that we, or our third-party
vendors, will not be subject to cyber-attacks or security breaches in the future. Such attacks or breaches could impact the integrity,
availability or privacy of protected patient medical data or other information subject to privacy laws or disrupt our information
technology systems, medical devices or business, including our ability to provide various healthcare services. Additionally, growing
cyber-security threats related to the use of ransomware and other malicious software threaten the access and utilization of critical
information technology and data. As a result, cyber-security and the continued development and enhancement of our controls, process
and practices designed to protect our information systems and data from attack, damage or unauthorized access remain a priority for
us. Our ability to recover from a ransomware or other cyber-attack is dependent on these practices, including successful backup
systems and other recovery procedures. As cyber-threats continue to evolve, we may be required to invest in significant additional
resources to continue to modify or enhance our protective measures or to investigate and remediate any information security
vulnerabilities. If we are subject to cyber-attacks or security breaches in the future, this could result in harm to patients; business
interruptions and delays; the loss, misappropriation, corruption or unauthorized access of data; litigation and potential liability under
privacy, security and consumer protection laws or other applicable laws; reputational damage and federal and state governmental
inquiries, any of which could have an adverse effect on our business, results of operations, financial position and cash flows.
The industry trend toward value-based purchasing may negatively impact our revenues.
The trend toward value-based purchasing of healthcare services is gaining momentum across the U.S. healthcare industry among
both governmental and commercial payors. Generally, value-based purchasing initiatives tie reimbursement payments to the quality
and efficiency of patient care. For example, hospitals that fall into the lowest-performing 25% of national risk-adjusted HAC rates for
all hospitals in the previous year are subject to a 1% reduction in their total Medicare reimbursement payments. Further, hospitals do
not receive Medicare reimbursement payments for care related to HACs. In addition, HHS reduces Medicare inpatient hospital
reimbursement payments for all discharges by a required percentage, set at 2% for federal fiscal year 2017 and for subsequent years,
and pools the amount collected from these reductions to fund payments to reward hospitals that meet or exceed certain quality
performance standards. Hospitals are also required to report certain quality data to receive full reimbursement updates under both the
Medicare and Medicaid programs.
HHS has indicated that it is particularly focused on tying Medicare payments to quality or value through alternative payment
models, which generally aim to make providers attentive to the quality and cost of care they deliver to patients. Examples of
alternative payment models include ACOs and bundled payment arrangements. While participation in bundled payment programs is
voluntary, CMS has indicated that it is developing more bundled payment models, although it is unclear whether they will
successfully lead to increased coordination of care and cost containment. It is possible that the adoption of alternative payment models
will decrease the aggregate reimbursements under federal and state healthcare programs.
Several of the largest commercial insurance payors in the United States have also expressed the intent to increase reliance on
value-based purchasing. Furthermore, many large commercial insurance payors require hospitals to report quality data, and several
commercial payors do not reimburse hospitals for certain preventable adverse events.
We expect value-based purchasing programs, including programs that condition reimbursement rates on patient outcome
measures, to become more common and to involve a higher percentage of reimbursement payment amounts under both governmental
and non-governmental programs and plans. We are unable at this time to predict how this trend will affect our results of operations,
but it could negatively impact our revenues, operating costs, or both.
Certificate of need laws and regulations regarding licenses, ownership and operation may impair our future expansion or
divestiture opportunities in some states. In states without certificate of need laws, our providers may face lower barriers to entry,
but could also face increased competition from other providers.
Some states require prior approval for the purchase, construction and expansion of healthcare facilities based on the state’s
determination of need for additional or expanded healthcare facilities or services. In addition, certain states in which we operate
hospitals require a CON for, among other things, capital expenditures exceeding a prescribed amount and changes in bed capacity or
healthcare service lines. We may not be able to obtain CONs required for expansion activities that we want to pursue in the future. In
addition, we are required to maintain one or more licenses in all of the states in which we operate hospitals. If we fail to obtain a
required CON or license, our ability to operate or expand our operations in those states could be negatively impacted. Furthermore, if
a CON or other prior approval upon which we relied to invest in construction of a replacement or expanded healthcare facility were to
be revoked or lost through an appeal process, we may not be able to recover the value of our investment.
Some states in which we operate do not require CONs for the purchase, construction and expansion of healthcare facilities or
services. Additionally, from time to time, states with existing requirements may repeal or limit the scope of their CON programs for
future entry. In these cases, our competing healthcare providers could face lower barriers to entry and expansion into certain states
where we operate hospitals. We could face decreased market share and revenues if competing healthcare providers are able to
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purchase, construct or expand healthcare facilities, without being subject to regulatory approval, into markets that are in close
proximity to those in which we operate hospitals.
If we acquire hospitals with unknown or contingent liabilities, we could become liable for material obligations.
Hospitals that we acquire may have unknown or contingent liabilities, including liabilities for failure to comply with healthcare
laws and regulations. Although we plan to generally seek indemnification from sellers covering these matters, we may nevertheless
have material liabilities for past activities of acquired hospitals.
State efforts to regulate the sale of hospitals operated by municipal or not-for-profit entities could prevent us from acquiring
these types of hospitals and executing on our business strategy.
Many states have adopted legislation regarding the sale or other disposition of hospitals operated by municipalities or not-for-
profit entities. In some states that do not have specific legislation, the attorneys general have demonstrated an interest in these
transactions under their general obligation to protect the use of charitable assets. These legislative and administrative efforts focus
primarily on the appropriate valuation of the assets divested and the use of the proceeds of the sale by the non-profit seller. The review
and, in some instances, approval processes can add additional time to the closing of a hospital acquisition. In addition, future state
actions could delay or even prevent our ability to acquire these types of hospitals.
Quorum Health Resources, while subject to various risk factors affecting its hospital industry clients, is subject to additional
risks related to its unique business model.
The various risk factors stated herein that could result in adverse impacts on the results of operations of our hospitals could
similarly affect the hospital and other healthcare clients of our QHR business. Any negative impact on our QHR clients could result in
defaults under or terminations of one or more of our contracts, or could result in our inability to attract new management advisory and
consulting business. Furthermore, QHR could be subject to allegations of mismanagement, as well as assertions of participation in
incidents of alleged malpractice in its position as a management advisor to certain hospital clients. It is possible that resolutions of
these actions could require settlements from us that exceed the revenues received from the related hospital client, and this could have a
negative impact on our results of operations, financial position and cash flows.
Changes in tax laws or their interpretations, or becoming subject to additional federal, state or local taxes, could negatively
affect our business, financial condition and results of operations.
We are subject to extensive tax liabilities, including federal and state taxes such as excise, sales/use, payroll, franchise,
withholding, and ad valorem taxes. Changes in tax laws or their interpretations could decrease the amount of revenues we receive, the
value of any tax loss carryforwards and tax credits recorded on our balance sheet and the amount of our cash flow, and have a material
adverse impact on our business, financial condition and results of operations. Some of our tax liabilities are subject to periodic audits
by the respective taxing authority which could increase our tax liabilities. If we are required to pay additional taxes, our costs would
increase and our net income would be reduced, which could have a material adverse effect on our business, financial condition and
results of operations.
On December 22, 2017, President Trump signed into law H.R.1, originally known as the “Tax Cuts and Jobs Act,” which includes
significant changes to the taxation of business entities. These changes include, among others, a reduction in the corporate income tax
rate. We continue to examine the impact this tax reform legislation may have on our business. Notwithstanding the reduction in the
corporate income tax rate, the overall impact of this tax reform is uncertain, and our business and financial condition could be
adversely affected.
We have identified a material weakness in our internal control over financial reporting which, if not remediated, could
adversely affect our ability to report our financial condition, results of operations or cash flows accurately and on a timely basis.
Any future material weakness or deficiencies in our internal control over financial reporting could harm stockholder and business
confidence in our financial reporting and, as a result, adversely affect our reputation, business or stock price.
We identified a deficiency related to the controls intended to properly document and review on a timely basis our analysis of
self-pay patient accounts receivable at a more comprehensive and disaggregated level which included uninsured and insured, primarily
co-pays and deductibles, self-pay accounts receivable related to our adoption of Financial Accounting Standards Board’s Accounting
Standards Update (“ASU”) 2014-09 “Revenue from Contracts with Customers.” As described under “Item 9A - Controls and
Procedures,” we have concluded that the deficiency constitutes a material weakness in our internal control over financial reporting
and, as a result, internal control over financial reporting was not effective as of December 31, 2017.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is
a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented
or detected on a timely basis. Although we have developed and are implementing a plan to remediate this material weakness as
described under “Item 9A - Controls and Procedures” and believe, based on our evaluation to date, that this material weakness will be
remediated during 2018, we cannot assure you that this will occur within the contemplated timeframe. Moreover, we cannot assure
you that we will not identify additional material weaknesses in our internal control over financial reporting in the future. If we are
unable to remediate the material weakness, our ability to record, process and report financial information accurately, and to prepare
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financial statements within the time periods specified by the rules and forms of the Securities and Exchange Commission, could be
adversely affected. The occurrence of or failure to remediate the material weakness may adversely affect our reputation and business
and the market price of our common stock and any other securities we may issue.
We cannot be certain that, in the future, additional material weaknesses or deficiencies will not exist or otherwise be discovered.
If our efforts to address the remaining material weakness identified above are not successful, or if an additional material weakness or
deficiency occurs, such weakness or deficiency could result in misstatements in our results of operations, restatements of our financial
statements, a decline in the price of our common stock and stockholder confidence or other material effects on our business,
reputation, results of operations, financial condition or liquidity.
Risks Related to the Spin-Off and Our Operations as an Independent Publicly Traded Company
The utilization of our federal income tax loss carryforwards may be subject to certain limitations.
As of December 31, 2017, we had a federal net operating loss (“NOL”) carryforward of approximately $125 million on a pre-tax
basis available to offset future taxable income and have recorded a full valuation allowance on these federal NOL carryforwards. Any
NOL arising in a taxable year ending before January 1, 2018 may only be carried forward for 20 taxable years following the taxable
year of such loss. Any NOL arising in a taxable year ending on or after January 1, 2018 can be carried forward indefinitely. In
addition, any NOL deduction with respect to an NOL arising in a taxable year beginning after December 31, 2017 is limited to 80% of
our taxable income in the year in which deduction is taken.
Section 382 of the Internal Revenue Code (“Code”) also imposes an annual limitation on the amount of a company’s taxable
income that may be offset by the NOL carryforwards if it experiences an “ownership change” as defined in Section 382 of the Code.
An ownership change occurs when a company’s “5-percent shareholders,” as defined in Section 382 of the Code, collectively increase
their ownership in a company by more than 50 percentage points, by value, over a rolling three-year period. This is different from a
change in beneficial ownership under applicable securities laws. These ownership changes include purchases of common stock under
share repurchase programs, a company’s offering of its stock, the purchase or sale of company stock by 5-percent shareholders, or the
issuance or exercise of rights to acquire company stock. If an ownership change occurs, our ability to use the NOL carryforwards to
offset future taxable income will be subject to an annual limitation and will depend on the amount of taxable income we generate in
future periods. There is no assurance that we will be able to fully utilize the NOL carryforwards. We have recorded a full valuation
allowance related to the amount of the NOL carryforwards that may not be realized.
The utilization of our state income tax loss carryforwards could be limited if we do not realize profits from our hospital
operations to adequately offset these losses in the applicable states where they exist.
As of December 31, 2017, we had state income tax loss carryforwards of approximately $668 million. We expect to be able to
realize a small amount of our NOL carryforwards in certain states prior to their expiration. In other states where we hope to improve
our financial performance through selective profitable acquisitions of hospitals or, when needed, the divestiture of underperforming
hospitals, we cannot make assurances that we will be able to fully realize the tax benefit associated with these state NOL
carryforwards. As a result, we have recorded a valuation allowance to offset all or a portion of the deferred tax asset created by the
NOL carryforwards in those states. We could be required to record additional valuation allowance related to our state NOL
carryforwards based upon our operating results in the future, which could adversely impact our results of operations.
The Spin-off may expose us to potential liabilities arising out of state and federal fraudulent conveyance laws and legal
distribution requirements.
The Spin-off could be challenged under various state and federal fraudulent conveyance laws. An unpaid creditor or an entity
vested with the power of such creditor (such as a trustee or debtor-in-possession in a bankruptcy) could claim that the Spin-off left
CHS insolvent or with unreasonably small capital or that CHS intended or believed it would incur debts beyond its ability to pay such
debts as they mature and that CHS did not receive fair consideration or reasonably equivalent value in the Spin-off. If a court were to
agree with such a plaintiff, then such court could void the Spin-off as a fraudulent transfer and could impose a number of different
remedies, including without limitation, returning our assets or your shares in our company to CHS, voiding our liens and claims
against CHS, or providing CHS with a claim for money damages against us in an amount equal to the difference between the
consideration received by CHS and the fair market value of our company at the time of the Spin-off.
The measure of insolvency for purposes of the fraudulent conveyance laws varies depending on which jurisdiction’s law is
applied. Generally, however, an entity would be considered insolvent if either the fair saleable value of its assets is less than the
amount of its liabilities (including the probable amount of contingent liabilities), or it is unlikely to be able to pay its liabilities as they
become due. No assurance can be given as to what standard a court would apply to determine insolvency or that a court would
determine that CHS was solvent at the time of or after giving effect to the Spin-off, including the distribution of our common stock.
Under the Separation and Distribution Agreement with CHS, from and after the Spin-off, we are responsible for the debts,
liabilities and other obligations related to our business. Although we do not expect to be liable for any of these or other obligations not
expressly assumed by us pursuant to the Separation and Distribution Agreement, it is possible that we could be required to assume
responsibility for certain obligations retained by CHS should CHS fail to pay or perform its retained obligations.
41
Risks Related to Our Common Stock
Anti-takeover provisions in our organizational documents could delay or prevent a change in control.
Certain provisions of our amended and restated certificate of incorporation and our amended and restated bylaws may delay or
prevent a merger or acquisition that a stockholder may consider favorable. For example, our amended and restated certificate of
incorporation and our amended and restated bylaws, among other things, authorize our Board of Directors (the “Board”) to issue one
or more series of preferred stock, prohibit our shareholders from calling a special meeting of shareholders and provide that Delaware
is the sole and exclusive forum for certain types of legal proceedings initiated by our shareholders. These provisions may also
discourage acquisition proposals or delay or prevent a change in control, which could harm our stock price. In addition, we are subject
to Section 203 of the Delaware General Corporation Law which may have an anti-takeover effect with respect to transactions not
approved in advance by our Board, including discouraging takeover attempts that could have resulted in a premium over the market
price for shares of our common stock.
Under the Tax Matters Agreement, we are required not to enter into any transaction involving an acquisition of our common
stock, issuance of our common stock or any other transaction or, to the extent we have the right to prohibit it, to permit any such
transaction, that could cause the distribution of our common stock to CHS shareholders to be taxable. We also agreed to indemnify
CHS for any tax resulting from any such transactions. Generally, CHS will recognize taxable gain on the distribution of our common
stock if there are one or more acquisitions or issuances of our common stock, directly or indirectly, representing 50% or more,
measured by vote or value, of our then-outstanding common stock, and the acquisition or issuance is deemed to be part of a plan or
series of related transactions that include the distribution of common stock to CHS shareholders. Any such shares of our common
stock acquired, directly or indirectly, within two years before or after the Spin-off date, with exceptions, including public trading by
less-than-5% shareholders and certain compensatory stock issuances, will generally be presumed to be part of such a plan unless that
presumption is rebutted. As a result, our obligations may discourage, delay or prevent a change of control of our company.
We do not plan to pay dividends on our common stock, and our indebtedness could limit our ability to pay dividends in the
future.
We do not currently plan to pay a regular dividend on our common stock. The declaration of any future cash dividends and, if
declared, the amount of any such dividends will be subject to our financial condition, earnings, capital requirements, financial
covenants and other contractual restrictions and to the discretion of our Board. Our Board may take into account such matters as
general business conditions, industry practice, our financial condition and performance, our future prospects, our cash needs and
capital investment plans, income tax consequences, applicable law and such other factors as our Board may deem relevant. There can
be no assurance that we will pay a dividend in the future or continue to pay any dividend if we do commence the payment of
dividends.
The percentage ownership in our common stock of each shareholder may become diluted in the future.
As with any public company, the percentage ownership of our company held by an individual shareholder may become diluted
because of equity issuances for acquisitions, capital market transactions or equity awards, which we may grant to officers, directors
and certain of our employees. From time to time, we will issue additional options or other stock-based awards to our employees under
our employee benefits plans. Such awards will have a dilutive effect on our earnings per share, which could adversely affect the
market price of our common stock.
In addition, our amended and restated certificate of incorporation authorizes us to issue, without the approval of our shareholders,
one or more classes or series of preferred stock having such designation, powers, preferences and relative, participating, optional and
other special rights, including preferences over our common stock respecting dividends and distributions, as our Board generally may
determine. The terms of one or more classes or series of preferred stock could dilute the voting power or reduce the value of our
common stock. For example, we could grant the holders of preferred stock the right to elect some number of our directors in all events
or on the happening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or
liquidation preferences we could assign to holders of preferred stock could affect the residual value of the common stock.
Item 1B. Unresolved Staff Comments
None.
42
Item 2.
Properties
Corporate Office
Our corporate office is located in Brentwood, Tennessee, which is a suburb of Nashville, and our address is 1573 Mallory Lane,
Brentwood, TN 37027. We occupy one building that consists of approximately 87,000 square feet of leased office space. QHR, our
hospital management advisory and healthcare consulting services business, is also located in the same building. We account for the
corporate office lease as a capital lease obligation. The term of the lease, including all term extensions, expires in 2038.
Hospitals
A summary of information about our hospitals as of December 31, 2017 follows:
State / Hospital
Alabama (12)
City
Licensed Beds (1)
Ownership Type
DeKalb Regional Medical Center (13) (14)
Arkansas (12)
Forrest City Medical Center (13) (14)
Helena Regional Medical Center (13) (14)
Barstow Community Hospital (13) (14)
Watsonville Community Hospital
Fannin Regional Hospital (13)
Clearview Regional Medical Center (13)
California
Georgia (12)
Illinois (12)
Union County Hospital (5) (13)
MetroSouth Medical Center
Galesburg Cottage Hospital
Gateway Regional Medical Center
Heartland Regional Medical Center
Crossroads Community Hospital
Red Bud Regional Hospital (5) (13)
Vista Medical Center East
Vista Medical Center West (7)
Kentucky (12)
Kentucky River Medical Center (13) (14)
Three Rivers Medical Center (13) (14)
Paul B. Hall Regional Medical Center (13)
Nevada (12)
New Mexico
Mesa View Regional Hospital (5) (13)
Mimbres Memorial Hospital (5) (13)
Alta Vista Regional Hospital (13) (14)
North Carolina (12)
Martin General Hospital (13)
Ohio (12)
Fort Payne
Forrest City
Helena
Barstow
Watsonville
Blue Ridge
Monroe
Anna
Blue Island
Galesburg
Granite City
Marion
Mt. Vernon
Red Bud
Waukegan
Waukegan
Jackson
Louisa
Paintsville
Mesquite
Deming
Las Vegas
Williamston
134
Owned
118
155
30
106
50
77
25
314
173
338
98
47
25
229
70
55
90
72
25
25
54
49
Leased
Leased
Owned
Owned
Joint Venture
Owned
Leased
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Leased
Owned
Joint Venture
Owned
Owned
Owned
Leased
Affinity Medical Center
Oregon (12)
Massillon
156
Owned
McKenzie - Willamette Medical Center
Springfield
113
Joint Venture
43
(2)
(3)
(4)
(6)
(8)
(9)
(10)
(11)
State / Hospital
City
Licensed Beds (1)
Ownership Type
Tennessee (12)
Henderson County Community Hospital (13)
McKenzie Regional Hospital
Texas
Big Bend Regional Medical Center (5) (13)
Scenic Mountain Medical Center (13) (14)
Utah
Mountain West Medical Center (13)
Wyoming
Evanston Regional Hospital (13) (14)
Total number of licensed beds at December 31, 2017
Total number of hospitals at December 31, 2017
Lexington
McKenzie
Alpine
Big Spring
Tooele
Evanston
45
45
Owned
Owned
25
150
Owned
Owned
44
Owned
Owned
42
2,979
31
(1) Licensed beds are defined as the number of beds for which the appropriate state agency licenses a hospital, regardless of whether the
beds are actually available for patient use.
(2) Prepaid lease expiring on February 28, 2046.
(3) Prepaid lease expiring on January 1, 2025.
(4) We hold a 98.21% majority ownership, as determined on December 31, 2017.
(5) Designated by CMS as a critical access hospital.
(6) Prepaid lease expiring on October 31, 2036.
(7) Includes psychiatric and rehabilitation licensed beds.
(8) Operating lease obligation expiring on June 30, 2022.
(9) We hold a 97.08% majority ownership, as determined on December 31, 2017.
(10) Prepaid lease expiring on October 31, 2028.
(11) We hold a 92.24% majority ownership, as determined on December 31, 2017.
(12) Represents a state with CON laws.
(13) Represents sole community provider hospital, which is defined as the sole community provider within the county our hospital resides.
(14) Represents a hospital considered a sole community hospital, as defined by Medicare regulations.
44
Item 3. Legal Proceedings
We are subject to lawsuits and other legal matters arising in the ordinary course of our business, including claims of damages for
personal injuries, medical malpractice, breach of hospital management contracts, breach of other contracts, wrongful restriction of or
interference with physicians’ staffing privileges and other employment-related claims. In certain of these claims, plaintiffs request
payment for damages, including punitive damages that may not be covered by our insurance policies.
Healthcare facilities are also subject to the regulation and oversight of various federal and state governmental agencies. The
healthcare industry has seen numerous ongoing investigations related to compliance and billing practices and hospitals, in particular,
continue to be the subject of governmental fraud and abuse programs and a primary enforcement target for the OIG and DOJ. From
time to time, we detect issues of non-compliance with federal healthcare laws pertaining to claims submission and reimbursement
payment practices or financial relationships with physicians. We avail ourselves of various mechanisms to address potential
overpayments arising out of these issues, including repayment of claims, rebilling of claims, and participation in voluntary disclosure
protocols offered by CMS and the OIG. Participating in voluntary repayment of claims and voluntary disclosure protocols can have
the potential for significant settlement obligations or even enforcement action. Additionally, under the federal False Claims Act,
private parties have the right to bring qui tam, or “whistleblower,” suits against healthcare facilities that submit false claims for
payments to, or improperly retain overpayments from, governmental payors. Some states have adopted similar state whistleblower and
false claims provisions. Qui tam or “whistleblower” actions initiated under the civil False Claims Act may be pending but placed
under seal by the court to comply with the False Claims Act’s requirements for filing such suits. As a result, they could lead to
proceedings without our knowledge. Certain of our healthcare facilities have received, and from time to time other healthcare facilities
may receive, inquiries or subpoenas from fiscal intermediaries or federal and state agencies. Any proceedings against us may involve
potentially substantial settlement amounts, as well as the possibility of civil, criminal, or administrative fines, penalties or other
sanctions which could be material. Settlements of suits involving Medicare and Medicaid issues routinely require both monetary
payments as well as corporate integrity agreements from the offending healthcare company. Depending on how the underlying
conduct is interpreted by the inquiring or investigating federal or state agency, the resolution could have a material adverse effect on
our results of operations, financial position and cash flows.
In connection with the Spin-off, CHS agreed to indemnify us for certain liabilities relating to outcomes or events occurring prior
to the closing of the Spin-off, including (i) certain claims and proceedings known to be outstanding on or prior to the Spin-off and (ii)
certain claims, proceedings and investigations by governmental authorities or private plaintiffs related to activities occurring at or
related to our healthcare facilities prior to the closing date of the Spin-off , but only to the extent, in the case of clause (ii), that such
claims are covered by insurance policies maintained by CHS, including professional and general liability and workers’ compensation
liability. In this regard, CHS will continue to be responsible for certain Health Management Associates, Inc. legal matters covered by
its contingent value rights agreement that relate to the portion of CHS’s business now held by us. Notwithstanding the foregoing, CHS
is not indemnifying us in respect of any claims or proceedings arising out of, or related to, the business operations of QHR at any time
or our compliance with the CIA with the OIG. Subsequent to the Spin-off, the OIG entered into an “Assumption of CIA Liability
Letter” with us reiterating the applicability of the CIA to certain of our hospitals, although the OIG declined to enter into a separate
agreement with us.
We do not control and cannot predict with certainty the progress or final outcome of discussions with government agencies,
investigations and legal proceedings against us. Therefore, the final amounts paid to resolve such matters, claims and obligations
could be material and could materially differ from amounts currently recorded, if any. Any such changes in our estimates or any
adverse judgments could materially adversely impact our future results of operations, financial position and cash flows.
We have included a discussion of specific legal proceedings below, some of which may not be required to be disclosed in this Part
I, Item 3 under SEC rules due to the nature of our business; however, we believe that the discussion of these open legal matters may
provide useful information to security holders or the other readers of this Annual Report on Form 10-K. The proceedings discussed
below do not include claims and lawsuits covered by professional and general liability or employment practices insurance and risk
retention programs. The legal matters referenced below are also discussed in Note 19 — Commitments and Contingencies in the
accompanying financial statements.
With respect to all legal, regulatory and governmental proceedings, we consider the likelihood of a negative outcome. If we
determine the likelihood of a negative outcome with respect to any such matter is probable and the amount of the loss can be
reasonably estimated, we record an accrual for the estimated amount of loss for the expected outcome of the matter. If the likelihood
of a negative outcome with respect to material matters is reasonably possible and we are able to determine an estimate of the amount
of possible loss or a range of loss, whether in excess of a related accrued liability or where there is no accrued liability, we disclose the
estimate of the amount of possible loss or range of loss. However, we are unable to estimate an amount of possible loss or range of
loss in some instances based on the significant uncertainties involved in, or the preliminary nature of, certain legal, regulatory and
governmental matters.
Government Investigations
• Tooele, Utah — Physician Compensation. On May 5, 2016, our hospital in Tooele, Utah received a Civil Investigative
Demand (“CID”) from the Office of the United States Attorney in Salt Lake City, Utah concerning allegations that the
45
hospital and clinic corporation submitted or caused to be submitted false claims to the government for services referred
by physicians with whom the hospital and clinic had inappropriate financial relationships, which allegedly violated
federal law. The CID requested records and documentation concerning physician compensation. Because this matter
remains at a preliminary stage, there are not sufficient facts available to assess what the outcome may be or to determine
any estimate of the amount of loss or range of loss. We are fully cooperating with this investigation.
• Blue Island, Illinois — Patient Status. On October 9, 2015, our hospital in Blue Island, Illinois received a CID from the
Office of the United States Attorney in Chicago, Illinois concerning allegations of upcoding observation and other
outpatient services and improperly falsifying inpatient admission orders. To date, the hospital has produced a significant
amount of documents in response to requests for emails, medical records, and documentation concerning status change
from observation to inpatient, and the government has taken CID testimony from former hospital employees. We are
unable to predict the outcome of this investigation. However, it is reasonably possible that we may incur a loss in
connection with this investigation. We are unable to reasonably estimate the amount or range of such reasonably possible
loss given that the investigation is still ongoing. Under some circumstances, losses incurred in connection with an
adverse resolution in this investigation could be material. We are fully cooperating with this investigation.
Commercial Litigation and Other Lawsuits
• Arbitration with Community Health Systems, Inc. On August 4, 2017, we received a demand for arbitration from CHS
seeking payment of certain amounts withheld by us pursuant to two transition services agreements. We contend that the
amounts are not payable to CHS and were not properly billed by CHS under the agreements. The matter is pending
before the American Arbitration Association. CHS seeks payment of approximately $9.0 million relating to two of the
transition services agreements. We intend to vigorously contest the charges as not payable to CHS under the transition
services agreements and have made a counterclaim for substantial damages we believe we have suffered as a result of the
transition services agreements and other actions taken by CHS in connection with the Spin-off. The matter is at a
preliminary stage and we cannot assess the likelihood of a material adverse outcome at this time. The arbitration has
been scheduled for June 18-29, 2018. A decision is expected by early August 2018.
• Zwick Partners LP and Aparna Rao, Individually and On Behalf of All Others Similarly Situated v. Quorum Health
Corporation, Community Health Systems, Inc., Wayne T. Smith, W. Larry Cash, Thomas D. Miller and Michael J.
Culotta. On September 9, 2016, a shareholder filed a purported class action in the United States District Court for the
Middle District of Tennessee against QHC and certain of our officers. The Amended Complaint, filed on September 13,
2017, purports to be brought on behalf of a class consisting of all persons (other than defendants) who purchased or
otherwise acquired securities of QHC between May 2, 2016 and August 10, 2016 and alleges that we and certain of our
officers violated federal securities laws, including Sections 10(b) and/or 20(a) of the Securities Exchange Act of 1934
and Rule 10b-5 promulgated thereunder, by making alleged false and/or misleading statements and failing to disclose
certain information regarding aspects of our business, operations and compliance policies. On April 17, 2017, Plaintiff
filed a Second Amended Complaint adding additional defendants, Community Health Systems, Inc., Wayne T. Smith
and W. Larry Cash. On June 23, 2017, we filed a motion to dismiss, which Plaintiffs opposed on August 22, 2017. We
are vigorously defending ourselves in this matter. We are unable to predict the outcome of this matter. However, it is
reasonably possible that we may incur a loss in connection with this matter. We are unable to reasonably estimate the
amount or range of such reasonably possible loss because the motion to dismiss is still pending and discovery is stayed
pending resolution of the motion to dismiss. Under some circumstances, losses incurred in connection with adverse
outcomes in this matter could be material.
• United Tort Claimants v. Quorum Health Resources, LLC (U.S. Bankruptcy Court for the District of New Mexico);
Douthitt - Dugger, et al. v. Quorum Health Resources, LLC (Bernalillo County, New Mexico District Court). Plaintiffs
in these cases underwent surgical procedures at Gerald Champion Regional Medical Center in New Mexico that they
contend were experimental and performed by an unqualified doctor. Their lawsuits, originally filed starting on June 11,
2010, against the doctors, QHR and the hospital are pending in state court and in federal bankruptcy court in New
Mexico. In 2012, QHR resolved plaintiffs’ claims for QHR’s liability exceeding insurance limits, and for liability not
covered by insurance, for $5.1 million through a partial settlement agreement. Pursuant to this settlement agreement, the
bankruptcy court has held that QHR is entitled to have language in any judgment entered in favor of the plaintiffs
limiting enforcement to available insurance and not from QHR’s assets. Litigation of plaintiffs’ claims against QHR has
continued, and the trial of the claims of most of the plaintiffs is proceeding in phases in a bankruptcy court bench trial.
On December 23, 2016, during the liability phase, the bankruptcy court ruled that QHR was 16.5% at fault for plaintiffs’
injuries. The plaintiffs have made attempts to assert new allegations against QHR in an effort to increase the percentage
of liability attributed to QHR, but the bankruptcy court has ruled against the plaintiffs as to each attempt. On January 24,
2018, the New Mexico state court ruled that collateral estoppel applies as to all rulings issued by the bankruptcy court in
these matters, which includes the percentage of liability. As a result of the rulings in both courts, all that remains to be
determined is the amount of damages sustained, if any, by the individual plaintiffs. The bankruptcy court has heard
evidence regarding damages as to four of the plaintiffs and issued an opinion setting forth its findings January 30, 2018.
46
Additional trials will be set in the bankruptcy court to hear evidence as to the remaining plaintiffs in that action. A jury
will hear evidence as to the damages asserted by the plaintiffs in state court beginning November 26, 2018. QHR’s
insurer, Lexington Insurance Company, is providing a defense in these cases, subject to a reservation of rights.
Lexington has sued QHR in Williamson County, Tennessee seeking a declaration that plaintiffs’ claims and at least some
portion of the cost of defending QHR are not covered by Lexington. (Lexington Insurance Company v. Quorum Health
Resources, LLC, et al. (Williamson County, Tennessee Chancery Court)). No trial date has been set for Lexington’s
claim against QHR with respect to insurance coverage, which QHR also is vigorously defending. The Tennessee court
has ruled that Lexington is not entitled to reimbursement of defense costs. Lexington is seeking appellate review of this
ruling. We are unable to predict the outcome of this matter. However, it is reasonably possible that we may incur a loss
in connection with this matter. We are unable to reasonably estimate the amount or range of such reasonably possible
loss because the proceedings with respect to the merits of the New Mexico state court action, the availability and extent
of insurance coverage and damages are not sufficiently advanced. Under some circumstances, losses incurred in
connection with adverse outcomes in this matter could be material.
• R2 Investments, LDC v. Quorum Health Corporation, Community Health Systems, Inc., Wayne T. Smith, W. Larry
Cash, Thomas D. Miller, Michael J. Culotta, John A. Clerico, James S. Ely, III, John A. Fry, William Norris Jennings,
Julia B. North, H. Mitchell Watson, Jr. and H. James Williams. On October 25, 2017, a shareholder filed an action in the
Circuit Court of Williamson County, Tennessee against us and certain of our officers and directors and CHS and certain
its officers and directors. The complaint alleges that the defendants violated the Tennessee Securities Act and common
law by, among other things, making alleged false and/or misleading statements and failing to disclose certain information
regarding aspects of our business, operations and financial condition. Plaintiff is seeking rescissionary, compensatory,
and punitive damages. We filed a motion to dismiss the action on January 16, 2018. We are vigorously defending
ourselves in this matter. Given the early stage of this matter, there are not sufficient facts available to reasonably assess
the potential outcome of this matter or reasonably assess any estimate of the amount or range of any potential outcome.
Corporate Integrity Agreement
On August 4, 2014, CHS became subject to the terms of a five-year CIA with the OIG arising from a civil settlement with the
U.S. Department of Justice, other federal agencies and identified relators that concluded previously announced investigations and
litigation related to short stay admissions through emergency departments at certain of their affiliated hospitals. The OIG has required
us to be bound by the terms of the CHS CIA commencing on the Spin-off date and applying to us for the remainder of the five-year
compliance term required of CHS, which terminates on August 4, 2019.
The compliance measures and the reporting and auditing requirements contained in the CIA include:
•
continuing the duties and activities of the Corporate Compliance Officer, Corporate Compliance Work Group, and
Facility Compliance Officers and committees;
• maintaining a written Code of Conduct, which sets forth our commitment to full compliance with all statutes,
regulations, and guidelines applicable to federal healthcare programs;
• maintaining written policies and procedures addressing matters included in our Compliance Program, including
adherence to medical necessity and admissions standards for inpatient hospital stays;
•
•
•
•
•
•
•
continuing general compliance training;
providing specific training for employees and affiliates handling our billing, case management and clinical
documentation;
engaging an independent third party to perform an annual review of our compliance with the CIA;
continuing the Confidential Disclosure Program and hotline to enable employees or others to disclose issues or questions
regarding possible inappropriate policies or behavior;
continuing the screening program to ensure that we do not hire or engage employees or contractors who are ineligible
persons for federal healthcare programs;
reporting any material deficiency which resulted in an overpayment to us by a federal healthcare program; and
submitting annual reports to the OIG which describe in detail the operations of the corporate Compliance Program.
A material, uncorrected violation of the CIA could lead to our suspension or disbarment from participation in Medicare, Medicaid
and other federal and state healthcare programs. In addition, we are subject to possible civil penalties if we fail to substantially comply
with the terms of the CIA, including stipulated penalties ranging from $1,000 to $2,500 per day. We are also subject to a stipulated
penalty of $50,000 for each false certification by us or any individual or entity on behalf of us in connection with reports required
under the CIA. The CIA increases the amount of information we are required to provide to the federal government regarding our
healthcare practices and our compliance with federal regulations. We believe that we are currently operating our business in
47
compliance with the CIA and are unaware of any historical actions on our part that could represent a violation under the terms of the
CIA.
Item 4. Mine Safety Disclosures
Not applicable.
48
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information for Common Stock
Our common stock is listed on the NYSE under the symbol “QHC”. Since May 2, 2016, our common stock has been trading on
the NYSE. The following table sets forth, in the periods indicated, the high and low sales prices per share of our common stock as
reported by the NYSE:
Year Ended December 31, 2017
First quarter
Second quarter
Third quarter
Fourth quarter
Year Ended December 31, 2016
May 2, 2016 through June 30, 2016
Third quarter
Fourth quarter
High
Low
$
$
9.45 $
5.57
5.18
7.24
13.52 $
11.59
8.24
5.12
2.54
2.91
3.85
8.82
4.12
3.75
On March 12, 2018, the last reported sales price for our common stock on the NYSE was $6.23 per share.
Stockholders
As of March 12, 2018, there were 149 holders of record of shares of our common stock.
Dividends
We have never declared or paid cash dividends on our common stock. We intend to retain future earnings to finance the growth
and development of our business and, accordingly, do not currently intend to declare or pay any cash dividends on our common stock.
Our Board will evaluate our future results of operations, financial condition and capital requirements in determining whether to
declare or pay cash dividends. Delaware law prohibits us from paying any dividends unless we have capital surplus or net profits
available for this purpose. In addition, we are restricted by the terms of our existing indebtedness, including our Credit Agreements (as
defined herein) and Senior Notes, on our ability to pay dividends.
Stock Performance
The graph below compares the quarterly percentage change of cumulative total stockholder return on our common stock with (1)
the cumulative total return of a broad equity market index, the Russell 2000 Index (the “Broad Index”) and (2) the cumulative total
return of a published industry index, the S&P Health Care Facilities Index (the “Industry Index”). The graph begins on May 2, 2016,
the first day of trading of our common stock. The comparison assumes the investment of $100 on such date in each of our common
stock, the Broad Index and the Industry Index and assumes the re-investment of all dividends, if any.
49
The following table presents the corresponding data for the periods shown in the graph:
Quorum Health Corporation
Russell 2000
S&P 500 Healthcare Facilities
Quorum Health Corporation
Russell 2000
S&P 500 Healthcare Facilities
$
$
May 2,
2016
June 30,
2016
September 30,
2016
December 31,
2016
100.00 $
100.00
100.00
81.88 $
100.96
96.51
47.94 $
109.71
92.70
55.58
118.95
87.17
March 31,
2017
June 30,
2017
September 30,
2017
December 31,
2017
41.59 $
121.47
103.93
31.73 $
124.05
101.88
39.60 $
130.67
92.87
47.71
134.59
100.22
Recent Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table sets forth certain information with respect to purchases made by us of our own common stock during the
three months ended December 31, 2017:
Period
October 1, 2017 - October 31, 2017
November 1, 2017 - November 30, 2017
December 1, 2017 - December 31, 2017
Total
Total Number
of Shares
Purchased (1)
Weighted-
Average Price
Paid per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
Maximum Number
of Shares that May
Yet be Purchased
Under the Plans
or Programs
or Programs
1,058 $
—
—
1,058
5.38
—
—
5.38
—
—
—
—
—
—
—
—
(1) Includes shares acquired by us of our own common stock in connection with the satisfaction of tax withholding obligations on vested
restricted stock.
50
Item 6. Selected Financial Data
We have set forth in the tables below selected financial data that has been derived from our audited consolidated and combined
financial statements as of and for the years ended December 31, 2017, 2016, 2015, 2014 and 2013. These financial statements may not
necessarily be indicative of our results of operations, financial position and cash flows that would have occurred if we operated on a
stand-alone basis during the entirety of the periods presented herein.
Consolidated and combined is used to define our financial statements for the reported periods presented herein. Our financial
statements include amounts and disclosures related to the stand-alone financial statements and accounting records of QHC after the
Spin-off (“consolidated”) in combination with amounts and disclosures that have been derived from the consolidated financial
statements and accounting records of CHS for the periods prior to the completion of the Spin-off on April 29, 2016 (“combined”).
You should read the information below in conjunction with “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and “Item 8. Financial Statements and Supplementary Data” that are included in this Annual
Report on Form 10-K. Certain prior period amounts have been reclassified to conform to the current presentation. Certain information
in the table entitled “Other Financial and Operating Data” is derived from our consolidated and combined operations and is unaudited
(dollars in thousands, except earnings per share):
2017
Year Ended December 31,
2015
2014
2016
2013
Statements of income data:
Operating revenues, net of contractual allowances and
discounts
Provision for bad debts
Net operating revenues
Operating costs and expenses:
Salaries and benefits
Supplies
Other operating expenses
Depreciation and amortization
Rent
Electronic health records incentives earned
Legal, professional and settlement costs
Impairment of long-lived assets and goodwill
Loss (gain) on sale of hospitals, net
Transaction costs related to the Spin-off
Total operating costs and expenses
Income (loss) from operations
Interest expense, net
Income (loss) before income taxes
Provision for (benefit from) income taxes
Net income (loss)
Less: Net income (loss) attributable to noncontrolling
interests
Net income (loss) attributable to Quorum Health
Corporation
Earnings (loss) per share attributable to Quorum
Health Corporation stockholders:
$ 2,327,655
255,485
2,072,170
$ 2,419,053
280,586
2,138,467
$ 2,445,858
258,520
2,187,338
$ 2,410,002
264,502
2,145,500
$ 2,235,437
287,822
1,947,615
1,034,797
250,523
623,063
82,155
50,230
(4,745 )
6,001
47,281
(5,243 )
253
2,084,315
1,057,119
258,639
645,802
117,288
49,883
(11,482 )
7,342
291,870
2,150
5,488
2,424,099
(12,145 )
122,077
(134,222 )
(21,865 )
(112,357 )
(285,632 )
113,440
(399,072 )
(53,875 )
(345,197 )
1,016,696
249,792
634,233
128,001
48,729
(25,779 )
—
13,000
—
16,337
2,081,009
106,329
98,290
8,039
3,304
4,735
1,012,618
244,590
619,808
127,593
48,319
(44,660 )
30,374
1,000
—
—
2,039,642
105,858
92,926
12,932
5,579
7,353
957,086
226,561
557,783
106,557
43,092
(34,026 )
20,544
8,000
—
—
1,885,597
62,018
99,465
(37,447 )
(12,102 )
(25,345 )
1,833
2,491
3,398
(448 )
(1,323 )
$
(114,190 ) $
(347,688 ) $
1,337
$
7,801
$
(24,022 )
Basic and diluted
$
(4.06 ) $
(12.24 ) $
0.05
$
0.27
$
(0.85 )
Weighted-average shares outstanding:
Basic and diluted
28,113,566
28,413,247
28,412,054
28,412,054
28,412,054
51
2017
2016
December 31,
2015
2014
2013
Balance sheets data:
Cash and cash equivalents
Patient accounts receivable, net
Property and equipment, net
Total assets
Long-term debt, including current maturities and Due
to Parent, net
Other long-term liabilities, including deferred income
taxes
Total liabilities
Redeemable noncontrolling interests
Total equity
$
5,617
343,145
675,279
1,828,841
$
25,455
380,685
733,900
1,994,370
$
1,106
390,890
880,249
2,294,856
$
2,559
374,252
913,312
2,368,439
$
873
314,016
871,637
2,062,525
1,213,890
1,246,825
1,824,323
1,781,360
1,535,677
145,728
1,713,106
2,325
113,410
140,470
1,771,994
6,807
215,569
149,171
2,269,955
8,958
15,943
214,581
2,358,159
2,362
7,918
194,236
2,052,214
3,131
7,180
Statements of cash flow data:
Cash flows from operating activities
Cash flows from investing activities
Cash flows from financing activities
Net change in cash and cash equivalents
Other financial and operating data (unaudited):
Net inpatient revenues, before the provision for bad
debts
Net outpatient revenues, before the provision for bad
debts
Adjusted EBITDA (1)
Adjusted EBITDA, Adjusted for Divestitures (1)
Number of licensed beds at end of period (2)
Admissions (3)
Adjusted admissions (4)
Emergency room visits (5)
Medicare case mix index (6)
2017
Year Ended December 31,
2015
2014
2016
2013
$
$
66,970 $
(38,267 )
(48,541 )
(19,838 ) $
81,086 $
(73,146 )
16,409
24,349 $
43,044 $
42,889 $
(78,592 ) (272,098 )
34,250 230,740
1,686 $
(1,453 ) $
90,114
(129,473 )
38,875
(484 )
$ 1,003,104
$ 1,033,065
$ 1,008,139
$ 1,058,572
$ 982,669
$ 1,280,912
$ 1,237,625
$ 1,227,228
$ 1,132,448
$ 1,323,853
$ 141,845 $ 162,922 $ 263,667 $ 264,825 $ 197,119
$ 162,482 $ 196,028 $ 270,074 $ 266,229 $ 196,701
3,390
97,686
212,557
575,850
1.34
3,582
98,378
240,841
730,021
1.34
3,635
101,217
236,228
685,530
1.33
3,459
95,313
235,263
726,155
1.38
2,979
88,504
217,583
660,246
1.43
(1) EBITDA is a non-GAAP financial measure that consists of net income (loss) before interest, income taxes, depreciation and
amortization. Adjusted EBITDA, also a non-GAAP financial measure, is EBITDA adjusted to add back the effect of certain legal,
professional and settlement costs, impairment of long-lived assets and goodwill, net loss (gain) on sale of hospitals, transaction costs
related to the Spin-off, post-spin headcount reductions and change in estimate related to collectability of patient accounts receivable.
We use Adjusted EBITDA as a measure of financial performance. Adjusted EBITDA is a key measure used by our management to
assess the operating performance of our hospital operations business and to make decisions on the allocation of resources.
Additionally, management utilizes Adjusted EBITDA in assessing our consolidated results of operations and in comparing our results
of operations between periods. Adjusted EBITDA, Adjusted for Divestitures, also a non-GAAP financial measure, is further
retrospectively adjusted to exclude the effect of EBITDA of hospitals divested. We present Adjusted EBITDA and Adjusted EBITDA,
Adjusted for Divestitures because management believes these measures provide investors and other users of our financial statements
with additional information about how management assesses the results of operations.
Adjusted EBITDA and Adjusted EBITDA, Adjusted for Divestitures are not measurements of financial performance under U.S.
GAAP. These calculations should not be considered in isolation or as a substitute for net income, operating income or any other
measure calculated in accordance with U.S. GAAP. The items excluded from Adjusted EBITDA and Adjusted EBITDA, Adjusted for
Divestitures are significant components in understanding and evaluating the Company’s financial performance. Management believes
such adjustments are appropriate, as the magnitude and frequency of such items can vary significantly and are not related to the
assessment of normal operating performance. Additionally, our calculation of Adjusted EBITDA and Adjusted EBITDA, Adjusted for
Divestitures may not be comparable to similarly titled measures reported by other companies.
Our Credit Agreements use Adjusted EBITDA Adjusted for Divestitures, subject to further permitted adjustments, for certain financial
covenants. Management believes that it is useful to present Adjusted EBITDA and Adjusted EBITDA, Adjusted for Divestitures
because these measures, as defined, provide investors with additional information about our ability to incur and service debt and make
capital expenditures.
52
The following table reconciles Adjusted EBITDA and Adjusted EBITDA, Adjusted for Divestitures, each as defined above, to net
income (loss), the most directly comparable U.S. GAAP financial measure, as derived directly from our consolidated and combined
financial statements for the respective periods (in thousands):
2017
Year Ended December 31,
2015
2014
2016
2013
Adjusted EBITDA components (unaudited):
Net income (loss)
Interest expense, net
Provision for (benefit from) income taxes
Depreciation and amortization
EBITDA
Legal, professional and settlement costs
Impairment of long-lived assets and goodwill
Loss (gain) on sale of hospitals, net
Transaction costs related to the Spin-off
Post-spin headcount reductions
Change in estimate related to collectability of patient
accounts receivable
Adjusted EBITDA
Negative (Positive) EBITDA of divested hospitals
Adjusted EBITDA, Adjusted for Divestitures
$ (112,357 )
122,077
(21,865 )
82,155
70,010
6,001
47,281
(5,243 )
253
2,543
$ (345,197 )
113,440
(53,875 )
117,288
(168,344 )
7,342
291,870
2,150
5,488
1,617
$
4,735
98,290
3,304
128,001
234,330
—
13,000
—
16,337
—
$
7,353
92,926
5,579
127,593
233,451
30,374
1,000
—
—
—
$
(25,345 )
99,465
(12,102 )
106,557
168,575
20,544
8,000
—
—
—
21,000
141,845
20,637
$ 162,482
22,799
162,922
33,106
$ 196,028
—
263,667
6,407
$ 270,074
—
264,825
1,404
$ 266,229
—
197,119
(418 )
$ 196,701
(2) Licensed beds are the number of beds for which the appropriate state agency licenses a hospital regardless of whether the beds are
actually available for patient use.
(3) Admissions represent the number of patients admitted for inpatient services.
(4) Adjusted admissions are computed by multiplying admissions by gross patient revenues and then dividing that number by gross
inpatient revenues.
(5) Emergency room visits represent the number of patients registered and treated in our emergency rooms.
(6) Medicare case mix index is a relative value assigned to a diagnosis-related group of patients that is used in determining the allocation
of resources necessary to treat the patients in that group. Medicare case mix index is calculated as the average case mix index for all
Medicare admissions during the period.
53
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion of our results of operations, financial condition and cash flows, together with the
audited consolidated and combined financial statements and the accompanying notes included in this Annual Report on Form 10-K.
The financial information discussed may not necessarily reflect what our results of operations, financial position and cash flows would
have been if we were a stand-alone company for the entirety of the periods presented herein or what our results of operations, financial
condition and cash flows may be in the future.
All references to our financial statements, results of operations, financial condition, financial position, cash flows, liquidity,
indebtedness and our business refer to the results of QHC derived from the audited consolidated and combined financial statements
and the accompanying notes included in “Item 8. Financial Statements and Supplementary Data.” All references to our financial
outlook refer to the anticipated unaudited consolidated results of QHC derived from management’s best estimate as of the date of
filing of this Annual Report on Form 10-K.
Forward Looking Statements
Some of the matters discussed in this Annual Report on Form 10-K include forward-looking statements. Statements that are
predictive in nature, that depend upon or refer to future events or conditions or that include words such as “expects,” “anticipates,”
“intends,” “plans,” “believes,” “estimates,” “thinks,” and similar expressions are forward-looking statements. These statements
involve known and unknown risks, uncertainties and other factors that may cause our actual results and performance to be materially
different from any future results or performance expressed or implied by these forward-looking statements.
These factors include, but are not limited to, the following:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
general economic and business conditions, both nationally and in the regions in which we operate;
risks associated with our substantial indebtedness, leverage and debt service obligations, including our ability to comply
with our debt covenants, including our senior credit facility, as amended;
our ability to successfully make acquisitions or complete divestitures and the timing thereof, our ability to complete any
such acquisitions or divestitures on desired terms or at all, and our ability to realize the intended benefits from any such
acquisitions or divestitures;
changes in reimbursement methodologies and rates paid by federal or state healthcare programs, including Medicare and
Medicaid, or commercial payors, and the timeliness of reimbursement payments, including delays in certain states in
which we operate;
the extent to which regulatory and economic changes occur in Illinois, where a material portion of our revenues are
concentrated;
demographic changes;
the impact of changes made to the Affordable Care Act, the potential for repeal or additional changes to the Affordable
Care Act, its implementation or its interpretation, as well as changes in other federal, state or local laws or regulations
affecting the healthcare industry;
increases in the amount and risk of collectability of patient accounts receivable, including lower collectability levels
which may result from, among other things, self-pay growth and difficulties in collecting payments for which patients
are responsible, including co-pays and deductibles;
competition;
changes in medical or other technology;
any potential impairments in the carrying values of long-lived assets and goodwill or the shortening of the useful lives of
long-lived assets;
the impact of certain outsourcing functions, and the ability of CHS, as provider of our billing and collection services
pursuant to the transition services agreements, to timely and appropriately bill and collect;
our ability to manage effectively our arrangements with third-party vendors for key non-clinical business functions and
services;
the ability to achieve operating and financial targets and to control the costs of providing services if patient volumes are
lower than expected;
the effects related to outbreaks of infectious diseases;
our ability to attract and retain, at reasonable employment costs, qualified personnel, key management, physicians,
nurses and other healthcare workers;
54
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
increases in wages as a result of inflation or competition for highly technical positions and rising medical supply and
drug costs due to market pressure from pharmaceutical companies and new product releases;
the impact of seasonal or severe weather conditions or earthquakes;
our ongoing ability to demonstrate meaningful use of certified EHR technology and recognize income for the related
Medicare or Medicaid incentive payments, to the extent such payments have not expired;
the efforts of healthcare insurers, providers, large employer groups and others to contain healthcare costs, including the
trend toward treatment of patients in less acute or specialty healthcare settings and the increased emphasis on value-
based purchasing;
the failure to comply with governmental regulations;
our ability, where appropriate, to enter into, maintain and comply with provider arrangements with payors and the terms
of these arrangements, which may be impacted by the increasing consolidation of health insurers and managed care
companies and vertical integration efforts involving payors and healthcare providers;
the potential adverse impact of known and unknown government investigations, internal investigations, audits, and
federal and state false claims act litigation and other legal proceedings, including the shareholder and creditor litigations
against our company and certain of our officers and threats of litigation, as well as the significant costs and attention
from management required to address such matters;
liabilities and other claims asserted against us, including self-insured malpractice claims;
the impact of cyber-attacks or security breaches;
our ability to utilize our income tax loss carryforwards and risks associated with the Tax Cuts and Jobs Act of 2017;
our ability to maintain certain accreditations at our existing facilities and any future facilities we may acquire;
the success and long-term viability of healthcare insurance exchanges and potential changes to the beneficiary
enrollment process;
the extent to which states support or implement changes to Medicaid programs, utilize healthcare insurance exchanges or
alter the provision of healthcare to state residents through regulation or otherwise;
the timing and amount of cash flows related to the California HQAF Program, as well as the potential for retroactive
adjustments for prior year payments;
the effects related to the continued implementation of the sequestration spending reductions and the potential for future
deficit reduction legislation;
changes in U.S. generally accepted accounting principles, including the impacts of adopting newly issued accounting
standards;
the availability and terms of capital to fund acquisitions, replacement facilities or other capital expenditures;
our ability to obtain adequate levels of professional and general liability and workers’ compensation liability insurance;
and
the risk factors included in “Item 1A. Risk Factors.”
Although we believe that these forward-looking statements are based upon reasonable assumptions, these assumptions are
inherently subject to significant regulatory, economic and competitive uncertainties and contingencies, which are difficult or
impossible to predict accurately and may be beyond our control. Accordingly, we cannot give any assurance that our expectations will
in fact occur and caution that actual results may differ materially from those in the forward-looking statements. Given these
uncertainties, prospective investors are cautioned not to place undue reliance on these forward-looking statements. These forward-
looking statements are made as of the date of this filing. We undertake no obligation to revise or update any forward-looking
statements, or to make any other forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
As of December 31, 2017, we owned or leased a diversified portfolio of 31 hospitals in rural and mid-sized markets, which are
located in 15 states and have a total of 2,979 licensed beds. Our hospitals provide a broad range of hospital and outpatient healthcare
services, including general and acute care, emergency room, general and specialty surgery, critical care, internal medicine, obstetrics,
diagnostic services, psychiatric and rehabilitation services. For our hospital operations business, we are paid for our services by
governmental agencies, private insurers and directly by the patients we serve. We also operate QHR, a leading hospital management
advisory and healthcare consulting services business. For our hospital management advisory and healthcare consulting services
business, we are paid by the non-affiliated hospitals utilizing our services. Over 95% of our net operating revenues are attributable to
our hospital operations business.
55
We perform an ongoing strategic review of our hospitals based on an analysis of financial performance, current competitive
conditions, expected demographic trends, joint venture opportunities and capital allocation requirements. We are actively engaging in
initiatives to divest underperforming hospitals, reduce our debt and refine our portfolio to a more sustainable group of hospitals with
higher operating margins, among others. In 2016, we sold two hospitals and their affiliated entities for combined proceeds of $13.8
million. In 2017, we sold five hospitals and their affiliated entities for combined proceeds of $32.1 million. We have targeted an
additional seven hospitals that we intend to divest or close within twelve to twenty-four months. We continually evaluate other
hospitals for potential divestiture which could result in changes to the hospitals included in this group in future periods. The seven
targeted potential divestiture hospitals had net operating income (losses) of $(40.7) million, $(17.7) million and $(20.7) million for the
years ended December 31, 2017, 2016 and 2015, respectively.
We refer to the seven hospitals that we have divested through December 31, 2017 as the Divestitures Group, the seven remaining
hospitals targeted for divestiture as the Potential Divestitures Group and the remaining twenty-four hospitals that we operate as the
Continuing Hospitals Group. We believe that a discussion of our operating results that distinguishes between those hospitals that
management does not foresee as being part of our ongoing hospital operations business and those hospitals that will become our core
hospital operations business, and available to service our debt obligations into the future, is meaningful to our stockholders, investors
and other users of our financial statements. See “— Overview — Recent Divestiture Activity” below for additional information on our
divestitures activities. These hospital groups are also further defined in “— Results of Operations” below.
On March 1, 2018, we sold 70-bed Vista Medical Center West and its affiliated facilities, located in Waukegan, Illinois, for
proceeds of $1.2 million.
We have a definitive agreement to sell another hospital in the Potential Divestitures Group, 77-bed Clearview Regional Medical
Center and its affiliated facilities, located in Monroe, Georgia. We currently anticipate completing the sale of this hospital in the first
quarter of 2018.
On January 5, 2018, we announced plans to close Affinity Medical Center (“Affinity”) in Massillon, Ohio. Subsequent to January
5, 2018, our affiliates entered into an agreement with the City of Massillon related to the closure whereby all of the owned real
property and a substantial majority of the related tangible assets located at the hospital will be transferred to the City of Massillon in
exchange for nominal consideration and the assumption of certain ongoing real property lease obligations and equipment lease
obligations. Operations ceased on February 11, 2018 and we currently anticipate the asset transfer to the City of Massillon will be
completed by the end of the first quarter of 2018. We recorded $16.1 million and $20.2 million of impairment to property, equipment
and capitalized software costs of Affinity during the years ended December 31, 2017 and 2016 respectively.
Our strategic review process is ongoing and we may be unable to divest or realize proceeds from the sale or closure of any or all
hospitals we consider for divestiture. We may also be subject to impairment charges in the future as a result of our ongoing strategic
review process.
2017 Financial Overview
Our net operating revenues for the year ended December 31, 2017 decreased $66.3 million to $2,072.2 million compared to
$2,138.5 million for the year ended December 31, 2016, a 3.1% decrease. Net operating revenues decreased $108.8 million related to
the Divestitures Group. Excluding the Divestitures Group, net operating revenues increased $42.5 million for the year ended
December 31, 2017 compared to the same period in 2016, primarily due to favorable volume and payor rate variances. Net loss
attributable to Quorum Health Corporation for the years ended December 31, 2017 were $(114.2) million compared to $(347.7)
million for the same period in 2016. The 2017 period included long-lived asset and goodwill impairment of $47.3 million related to
hospitals held for sale or identified for divestiture, $21.0 million reduction in net operating revenues as a result of a change in estimate
related to the collectability of patient accounts receivable, $0.3 million in transaction costs related to the Spin-off and a net gain of
$5.2 million on the sale of hospitals. The 2016 period included $291.9 million of impairment related to our hospital operations
business, consisting of $166.9 million of impairment to long-lived assets, $125.0 million of impairment to goodwill, $5.4 million of
transaction costs related to the Spin-off, a net loss of $2.2 million on the sale of hospitals and a $22.8 million reduction in net
operating revenues as a result of a change in estimate related to the collectability of patient accounts receivable. On a same-facility
basis, our operating results for the year ended December 31, 2017 reflect a 0.5% decrease in admissions and a 0.4% increase in
adjusted admissions compared to the same period in 2016. Excluding the Divestitures Group and Potential Divestitures Group,
admissions and adjustment admissions increased 0.9% and 2.2% respectively, for these same periods.
56
2017 Impairment
The following table provides a summary of the impairment recorded during the year ended December 31, 2017 (in thousands):
Property
and
Equipment
Capitalized
Software
Costs
Medicare
Licenses
Total
Long-
Lived
Assets
Goodwill
Total
Goodwill
and
Long-
Lived
Assets
First quarter of 2017 impairment:
Held for sale assets
Held for use assets
Total impairment recorded in first quarter of 2017
Second quarter of 2017 impairment:
Held for sale assets
Held for use assets
Total impairment recorded in second quarter of 2017
Third quarter of 2017 impairment:
Held for sale assets
Held for use assets
Total impairment recorded in third quarter of 2017
Fourth quarter of 2017 impairment:
Held for sale assets
Held for use assets
Total impairment recorded in fourth quarter of 2017
Total impairment recorded for the year ended December
31, 2017
$
$ 1,102
—
1,102
830
—
830
$ —
—
—
$ 1,932
—
1,932
$ 1,368
—
1,368
$ 3,300
—
3,300
12,852
—
12,852
48
—
48
—
—
—
12,900
—
12,900
—
—
—
12,900
—
12,900
284
3,399
3,683
16
461
477
—
540
540
300
4,400
4,700
561
—
561
861
4,400
5,261
390
23,346
23,736
—
2,084
2,084
—
—
—
390
25,430
25,820
—
—
—
390
25,430
25,820
$ 41,373
$ 3,439
$
540
$ 45,352
$ 1,929
$ 47,281
During the three months ended December 31, 2017, we evaluated the fair value of hospitals classified as held for sale and
evaluated other hospitals intended for potential divestiture. In connection with this evaluation, we recognized long-lived asset
impairment of $25.8 million during the three months ended December 31, 2017, which consisted of $23.7 million of property and
equipment and $2.1 million of intangible assets impairment. During the three months ended September 30, 2017, we evaluated the fair
value of hospitals classified as held for sale and evaluated other hospitals intended for potential divestiture. In connection with this
evaluation, we recognized long-lived asset and goodwill impairment of $5.3 million during the three months ended September 30,
2017, which consisted of $3.7 million of property and equipment, $1.0 million of intangible assets and $0.6 million of goodwill
impairment. During the three months ended June 30, 2017, we recognized $12.9 million of impairment to property and equipment of
certain hospitals in our Potential Divestitures Group for which we have received letters of intent. During the three months ended
March 31, 2017, management made a decision to classify certain additional hospitals as held for sale. In connection with this decision,
we evaluated the estimated relative fair value of the hospitals classified as held for sale in relation to the overall fair value of the
hospital operations reporting unit utilizing a September 30, 2016 measurement date, which was the measurement date of our most
recent annual goodwill impairment analysis, and recognized $3.3 million of impairment to long-lived assets and goodwill during the
three months ended March 31, 2017, which consisted of $1.1 million of property and equipment, $0.8 million of intangible assets and
$1.4 million of goodwill impairment.
57
2016 Impairment
The following table provides a summary of the impairment recorded during the year ended December 31, 2016 subsequent to the
Spin-off (in thousands):
Property Capitalized
Total
Long-
Software Medicare Lived
Licenses Assets
and
Equipment Costs
Total
Goodwill
and
Long-
Lived
Goodwill Assets
Second quarter of 2016 impairment:
Held for sale assets
Held for use assets
Preliminary step two goodwill impairment estimate
Total impairment recorded in second quarter of 2016
$ 9,789
31,200
—
40,989
$ 4,411
—
—
4,411
$ —
—
—
—
$ 14,200
31,200
—
45,400
$ 5,000
—
200,000
205,000
$ 19,200
31,200
200,000
250,400
Fourth quarter of 2016 impairment:
Final step two goodwill impairment and long-lived asset
analysis using September 30, 2016 measurement date:
Held for sale assets
Held for use assets
1,386
70,470
14
10,830
—
—
1,400
81,300
—
(80,000 )
1,400
1,300
Further decline in held for use assets using December 31,
2016 measurement date
Total impairment recorded in fourth quarter of 2016
Total impairment recorded for the year ended December
31, 2016
32,723
104,579
3,677
14,521
2,370
2,370
38,770
121,470
—
38,770
(80,000 ) 41,470
$ 145,568
$ 18,932
$ 2,370
$ 166,870
$ 125,000
$ 291,870
During the second quarter of 2016 and subsequent to the Spin-off, management made a decision to classify certain hospitals as
held for sale and evaluate other hospitals for potential divestiture. As a result, we analyzed the long-lived assets of all of our hospitals
to test for impairment and recorded $45.4 million of long-lived asset impairment in this quarter. In addition, we evaluated the
estimated relative fair value of the hospitals we classified as held for sale in relation to the overall fair value of our hospital operations
reporting unit utilizing a September 30, 2015 measurement date, which was the measurement date of our most recent annual goodwill
impairment analysis, and recognized $5.0 million of goodwill impairment in this quarter. In this same quarter, we identified certain
indicators of goodwill impairment related to our hospital operations reporting unit and concluded that such indicators necessitated an
interim goodwill impairment evaluation. The primary indicators were our declining market capitalization, as compared to the carrying
value of equity, and a decrease in estimated future earnings of our hospital operations reporting unit. We performed a calculation of
the overall fair value of this reporting unit in step one of the impairment test and concluded that the carrying value of the hospital
operations reporting unit as of June 30, 2016 exceeded its estimated fair value. We performed a preliminary step two calculation of
goodwill impairment to determine the implied fair value of goodwill of the hospital operations reporting unit in a hypothetical
purchase price allocation. Based on this preliminary analysis, we estimated and recorded additional goodwill impairment of $200
million in the second quarter of 2016.
For step two goodwill impairment testing, we engaged a professional valuation firm to perform a hypothetical purchase price
valuation of each of our hospitals utilizing a September 30, 2016 measurement date. The results of the third-party valuation, which
was completed in the fourth quarter of 2016, indicated that the carrying values of certain of our individual hospitals exceeded their fair
values. Considering these results to be an indicator of potential impairment and to assess whether any additional impairment of long-
lived assets existed, we utilized a September 30, 2016 measurement date and the same professional valuation firm to perform an
analysis of undiscounted cash flows for each hospital in which an indicator of impairment was identified. Based on the results of these
analyses, we recorded impairment of $82.7 million related to long-lived assets at certain of our hospitals and a downward adjustment
to our previously recorded goodwill impairment estimate of $80.0 million in the fourth quarter of 2016. Our final assessment of
goodwill impairment took into consideration the impairment adjustments to the carrying values of the hospital long-lived assets. The
net impact to our financial statements was $2.7 million of additional impairment in the fourth quarter of 2016 beyond the initial
estimate of $200 million recorded as the preliminary step-two calculation in the second quarter of 2016.
In addition to the above, we experienced a decline in operating results at several of our hospitals in the fourth quarter of 2016.
This led management to perform additional testing for impairment using a December 31, 2016 measurement date. As a result of this
analysis, we recorded additional impairment of $38.8 million related to held for use assets in the fourth quarter of 2016. The carrying
values of long-lived assets, including those classified as held for sale, are reported in our balance sheet net of impairment as of
December 31, 2016.
58
The Spin-off
On April 29, 2016, CHS completed the Spin-off of 38 hospitals, including their affiliated outpatient facilities, and QHR to form
Quorum Health Corporation through the distribution of 100% of QHC common stock to CHS stockholders of record on April 22,
2016 (the “Record Date”). Each CHS stockholder received a distribution of one share of QHC common stock for every four shares of
CHS common stock held as of the Record Date, plus cash in lieu of fractional shares. Our common stock began trading on the New
York Stock Exchange (“NYSE”) under the ticker symbol “QHC” on May 2, 2016.
In connection with the Spin-off, we issued $400 million in aggregate principal amount of 11.625% Senior Notes due 2023 (the
“Senior Notes”) on April 22, 2016 and entered into a credit agreement on April 29, 2016, consisting of an $880 million senior secured
term loan facility (the “Term Loan Facility”) and a $100 million senior secured revolving credit facility (the “Revolving Credit
Facility”), or on a combined basis referred to as the “Senior Credit Facility.” In addition, we entered into a $125 million senior secured
asset-based revolving credit facility. The net offering proceeds of the Senior Notes, together with the net borrowings under the Term
Loan Facility, were used to make a $1.2 billion payment from QHC to CHS and to pay our transaction and financing fees and
expenses.
In connection with the Spin-off, certain agreements were established by CHS that govern and continue to govern matters related
to the Spin-off. These agreements include, among others, a Separation and Distribution Agreement, a Tax Matters Agreement and an
Employee Matters Agreement. Various transition services agreements were established by CHS that define agreed upon services to be
provided by CHS to QHC. The transition services agreements generally have five-year terms and include, among others, the provision
for services related to information technology, payroll processing, certain human resources functions, patient eligibility screening,
billing, collections and other revenue management services.
Pursuant to the terms of the Separation and Distribution Agreement, CHS made a non-cash capital contribution of $530.6 million
and transferred $13.5 million of cash to us on the Spin-off date. The cash transfer consisted of an agreed upon $20.0 million for the
initial funding of our working capital, reduced by $6.5 million for the difference in estimated and actual financing fees and expenses
incurred at the closing of the Spin-off.
The following table contains a summary of the major transactions to effect the Spin-off of QHC as a newly formed, independent
company (dollars in thousands):
Long-Term
Debt
Due to
Parent, Net
Common Stock
Additional
Paid-in
Amount Capital
Parent's
Equity
Shares
Balance at April 29, 2016 (prior to the Spin-off)
$
24,179 $ 1,813,836
— $
— $
— $ 3,137
Borrowings of long-term debt, net of debt issuance
discounts
Payments of debt issuance costs
Cash proceeds paid to Parent
Transfer of liabilities from Parent
Net deferred income tax liability resulting from the
Spin-off
Non-cash capital contribution from Parent
Distribution of common stock
Distribution of restricted stock awards
Balance at April 29, 2016 (after the Spin-off)
1,255,464
(29,146 )
—
—
— (1,217,336 )
(22,292 )
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$ 1,250,497 $
(46,783 )
(527,425 )
—
—
— 27,719,645
692,409
—
— 28,412,054 $
—
—
— 530,562
(3 )
3
—
—
3 $ 530,559 $
—
(3,137 )
—
—
—
59
The following table provides a summary of the sources and uses of cash directly related to our separation from CHS (in
thousands):
Sources of cash:
Term Loan Facility, maturing 2022
Senior Notes, maturing 2023
Cash transfer from CHS for initial funding of working capital, less adjustments
Total sources of cash
Uses of cash:
Payment to CHS for the businesses
Payments of debt issuance costs
Reduction in debt proceeds for debt issuance discounts
Transaction costs related to the Spin-off, as recorded in the statements of income
Total uses of cash
Net cash inflow
Agreements with CHS Related to the Spin-off
$
$
880,000
400,000
13,454
1,293,454
(1,217,336 )
(29,146 )
(24,536 )
(21,825 )
(1,292,843 )
611
In connection with the Spin-off and effective as of the Spin-off date, we entered into certain agreements with CHS that at the time
of Spin-off governed the allocation to us of various assets, employees, liabilities and obligations (including investments, property,
employee benefits and tax-related assets and liabilities) that were previously part of CHS. In addition, these agreements govern certain
relationships and activities between QHC and CHS for a definitive period of time after the Spin-off date, as specified by each
individual agreement.
A summary of these agreements follows:
•
Separation and Distribution Agreement. This agreement governed the principal actions of both QHC and CHS that
needed to be taken to effect the Spin-off. It sets forth other agreements that govern certain aspects of our relationship
with CHS following the Spin-off.
• Tax Matters Agreement. This agreement governs respective rights, responsibilities and obligations of QHC and CHS
after the Spin-off with respect to deferred tax liabilities and benefits, tax attributes, tax contests and other tax sharing
regarding U.S. federal, state and local income taxes, other tax matters and related tax returns.
• Employee Matters Agreement. This agreement governs certain compensation and employee benefit obligations with
respect to the employees and non-employee directors of QHC and CHS. It also allocated liabilities and responsibilities
relating to employment matters, employee compensation, employee benefit plans and other related matters as of the
Spin-off date.
In addition to the agreements referenced above, we entered into certain transition services agreements and other ancillary
agreements with CHS defining agreed upon services, as specified by each agreement, to be provided by CHS to us commencing on the
Spin-off date. The agreements generally have terms of five years.
A summary of the major transition services agreements follows:
• Shared Services Centers Transition Services Agreement. This agreement defines services to be provided by CHS related
to billing and collections utilizing CHS shared services centers. Services include, but are not limited to, billing and
receivables management, statement processing, denials management, cash posting, patient customer service, and credit
balance and other account research. In addition, it provides for patient pre-arrival services, including pre-registration,
insurance verification, scheduling and charge estimates. Fees are based on a percentage of cash collections each month.
• Computer and Data Processing Transition Services Agreement. This agreement defines services to be provided by CHS
for information technology infrastructure, support and maintenance. Services include, but are not limited to, operational
support for various applications, oversight, maintenance and information technology support services, such as helpdesk,
product support, network monitoring, data center operations, service ticket management and vendor relations. Fees are
based on both a fixed charge for labor costs, as well as direct charges for all third-party vendor contracts entered into by
CHS on QHC’s behalf.
• Receivables Collection Agreement (“PASI”). This agreement defines services to be provided by CHS’ wholly-owned
subsidiary, PASI, which currently serves as a third-party collection agency to us related to accounts receivable
collections of both active and bad debt accounts of QHC hospitals, including both receivables that existed as of the Spin-
off date and those that have occurred during the operating period since the Spin-off date. Services include, but are not
limited to, self-pay collections, insurance follow-up, collection letters and calls, payment arrangements, payment posting,
dispute resolution and credit balance research. Fees are based on the type of service and are calculated based on a
percentage of recoveries.
60
• Billing and Collection Agreement (“PPSI”). This agreement defines services to be provided by CHS related to
collections of certain accounts receivable generated from our outpatient healthcare services, predominately physician
clinics. Services include, but are not limited to, self-pay collections, insurance follow-up, collection letters and calls,
payment arrangements, payment posting, dispute resolution and credit balance research. Fees are based on the type of
service and are calculated based on a percentage of recoveries.
• Employee Service Center Agreement. This agreement defines services to be provided by CHS related to payroll
processing and human resources information systems (“HRIS”) support. Fees are based on a fixed charge per employee
headcount per month.
• Eligibility Screening Services Agreement. This agreement defines services to be provided by CHS for financial and
program criteria screening related to Medicaid or other program eligibility for pure self-pay patients. Fees are based on a
fixed charge for each hospital receiving services.
We recorded total expenses under transition services agreements with CHS following the Spin-off combined with the allocations
from CHS for these same services prior to the Spin-off of $63.5 million, $66.4 million, and $60.2 million for the years ended
December 31, 2017, 2016 and 2015, respectively.
We are currently engaged in preliminary discussions with CHS related to the transition of certain of our transition services
agreements related to billing and collections and eligibility screening services. We are seeking to bring these services in-house;
however, we are unable to provide any assurances as to the timing of such an agreement or whether such agreement will be reached.
Recent Divestiture Activity
On March 1, 2018, we sold 70-bed Vista Medical Center West and its affiliated facilities (“Vista West”), located in Waukegan,
Illinois, for proceeds of $1.2 million. For the years ended December 31, 2017, 2016 and 2015, our operating results included pre-tax
gains (losses) of $(2.3) million, $4.9 million, and $5.7 million respectively, related to Vista West. In addition to the above, we
recorded $11.1 million and $4.1 million to property, equipment and capitalized software costs of Vista West during the years ended
December 31, 2017 and 2016, respectively. We do not expect the loss on sale of this hospital will be material, after consideration of
the impairment recorded.
On February 1, 2018, we announced that we had entered into a definitive agreement to sell 77-bed Clearview Regional Medical
Center and its affiliated facilities (“Clearview’), located in Monroe, Georgia. We currently anticipate completing the sale of this
hospital by the end of the first quarter of 2018. We recorded $1.2 million of impairment to Medicare licenses of Clearview during the
year ended December 31, 2016.
On January 5, 2018, we announced plans to close Affinity Medical Center (“Affinity”), located in Massillon, Ohio. Subsequent to
January 5, 2018, our affiliates entered into an agreement with the City of Massillon related to the closure whereby all of the owned
real property and a substantial majority of the related tangible assets located at the hospital will be transferred to the City of Massillon
in exchange for nominal consideration and the assumption of certain ongoing real property lease obligations and equipment lease
obligations. Operations ceased on February 11, 2018 and we currently anticipate that the asset transfer to the City of Massillon will be
completed by the end of the first quarter of 2018. We recorded $16.1 million and $20.2 million of impairment to property, equipment
and capitalized software costs of Affinity during the years ended December 31, 2017 and 2016 respectively.
On October 31, 2017, we sold 72-bed L.V. Stabler Memorial Hospital and its affiliated facilities (“L.V. Stabler”), located in
Greenville, Alabama, for proceeds of $2.8 million. For the years ended December 31, 2017, 2016 and 2015, our operating results
included pre-tax losses of $4.8 million, $5.8 million and $5.0 million, respectively, related to L.V. Stabler. In addition to the above,
we recorded less than $0.1 million loss on the sale for the year ended December 31, 2017. We also recorded impairment to property,
equipment and capitalized software costs of $2.5 million and $2.9 million of related to L.V. Stabler in the years ended December 31,
2017 and 2016, respectively. We recorded a total of $5.4 million of impairment to property, equipment and capitalized software costs
of L.V. Stabler in the years ended 2016 and 2017.
On September 30, 2017, we sold 70-bed Sunbury Community Hospital and its affiliated facilities (“Sunbury”), located in
Sunbury, Pennsylvania, and 47-bed Lock Haven Hospital and its affiliated facilities (“Lock Haven”) located in Lock Haven,
Pennsylvania, for combined proceeds of $9.1 million. For the years ended December 31, 2017, 2016 and 2015, our operating results
included pre-tax losses of $8.4 million, $12.9 million and $18.7 million, respectively, related to Sunbury and Lock Haven on a
combined basis. In addition to the above, we recorded a $0.1 million loss on the sale for the year ended December 31, 2017. We also
recorded impairment to property, equipment and capitalized software costs of $1.9 million, $12.7 million and $3.0 million related to
Sunbury and Lock Haven during the years ended December 31, 2017, 2016 and 2015, respectively. We recorded a total of $26.6
million of impairment to property, equipment and capitalized software costs of Sunbury and Lock Haven from January 1, 2012 to
December 31, 2017.
On June 30, 2017, we sold 231-bed Trinity Hospital of Augusta and its affiliated facilities (“Trinity”), located in Augusta,
Georgia, for $15.9 million. For the years ended December 31, 2017, 2016 and 2015, our operating results included pre-tax losses of
$9.7 million, $9.5 million and $2.9 million, respectively, related to Trinity. In addition to the above, we recorded a $5.2 million gain
61
on the sale for the year ended December 31, 2017 and remitted $1.2 million of proceeds to the joint venture partners. We also recorded
impairment to property, equipment and capitalized software costs of $33.9 million related to Trinity during the year ended December
31, 2016.
On March 31, 2017, we sold 60-bed Cherokee Medical Center and its affiliated facilities (“Cherokee”), located in Centre,
Alabama, for $4.3 million. For the years ended December 31, 2017, 2016 and 2015, our operating results included pre-tax losses of
$1.0 million, $5.0 million and $5.3 million, respectively, related to Cherokee. In addition to the above, we recorded a $0.2 million gain
on the sale in the year ended December 31, 2017. We also recorded impairment to property, equipment and capitalized software costs
of $3.9 million and $2.0 million related to Cherokee during the years ended December 31, 2016 and 2015, respectively. We have
recorded a total of $6.9 million of impairment to property, equipment and capitalized software costs of Cherokee from January 1, 2012
to December 31, 2017.
On December 31, 2016, we sold 56-bed Barrow Regional Medical Center and its affiliated facilities (“Barrow”), located in
Winder, Georgia, for $6.6 million. For the years ended December 31, 2017, 2016 and 2015, our operating results included pre-tax
losses of $1.4 million, $14.5 million and $6.2 million, respectively, related to Barrow. In addition to the above, we recorded a $1.2
million net loss on the sale in the year ended December 31, 2016. We also recorded impairment to property, equipment and capitalized
software costs of $4.0 million related to Barrow during the year ended December 31, 2016.
On December 1, 2016, we sold 64-bed Sandhills Regional Medical Center and its affiliated facilities (“Sandhills”), located in
Hamlet, North Carolina, for $7.2 million. For the years ended December 31, 2017, 2016 and 2015, our operating results included a
pre-tax losses of $0.2 million, $6.9 million and $2.0 million, respectively, related to Sandhills. In addition to the above, we recorded a
$1.0 million net loss on the sale in the year ended December 31, 2016. The Company also recorded impairment to property, equipment
and capitalized software costs of $4.8 million related to Sandhills during the year ended December 31, 2016.
Healthcare Reform
The Affordable Care Act, as currently structured, mandates that substantially all U.S. citizens maintain health insurance coverage,
while expanding access to coverage through a combination of private sector health insurance reforms and public program expansion.
However, there is considerable uncertainty with regard to the future of the Affordable Care Act, as the presidential administration and
certain members of Congress have expressed their intent to repeal or make significant changes to the law, its implementation and its
interpretation. For example, in 2017, Congress eliminated the financial penalties associated with the individual mandate, effective
January 1, 2019, which may result in fewer individuals electing to purchase health insurance. In addition, several private health
insurers have withdrawn from or limited their participation in the healthcare insurance exchanges, and the presidential administration
has taken steps, including ending cost-sharing subsidies that were previously available to insurers, which may threaten the long-term
viability of those marketplaces. Healthcare reform initiatives, including efforts to change, alter the implementation of, or repeal the
Affordable Care Act, may have an adverse effect on our business, results of operations, financial position, cash flow, capital resources
and liquidity.
Other Government Regulations
Our hospital operations business is highly regulated. We are required to comply with extensive, complicated and overlapping
governmental laws and regulations at the federal, state and local levels. These laws and regulations govern every aspect of how our
hospitals conduct their operations, including the service lines that must be offered for licensure as an acute care hospital, restrictions
related to employing physicians, and requirements applicable to eligibility and payment structures under the Medicare and Medicaid
programs. The failure to comply with these laws and regulations can result in severe penalties including criminal penalties, civil
sanctions, and the loss of our ability to qualify for participation in the Medicare and Medicaid programs.
Rules, regulations and laws imposed on the U.S. healthcare industry are subject to ongoing and frequent changes with little or no
notice and are often interpreted and applied differently by various regulatory agencies with authority to enforce such requirements.
Each change or conflicting interpretation may require us to make changes at our hospitals and other healthcare facilities related to
aspects such as space usage, equipment, technology, staffing and service lines. We may also be required to revise or implement
operating policies and procedures that were previously believed to be compliant. The cost of compliance with governmental laws and
regulations is a significant component of our overall operating costs. Furthermore, these costs have been rising in recent years due to
new regulatory requirements and increasing enforcement provisions. Management anticipates that compliance costs will continue to
grow in the foreseeable future. The U.S. healthcare industry has seen a number of ongoing investigations related to patient referrals,
physician recruiting and employment practices, cost reporting and billing practices, medical necessity of inpatient admissions,
physician office leasing, laboratory and home healthcare services, physician ownership of hospitals and other healthcare providers,
and joint ventures involving hospitals and physicians. Hospitals continue to be one of the primary focus areas of the OIG, DOJ and
other governmental fraud and abuse regulatory authorities and programs.
62
Basis of Presentation
Prior to our separation from CHS, QHC did not operate as a separate company and stand-alone financial statements were not
historically prepared; however, QHC was comprised of certain stand-alone legal entities for which discrete financial information was
available under CHS’ ownership. Our accompanying financial statements include amounts and disclosures for QHC that have been
derived from the consolidated financial statements and accounting records of CHS for the periods prior to the Spin-off in combination
with the amounts and disclosures related to the stand-alone financial statements and accounting records of QHC after the Spin-off. See
Note 18 — Related Party Transactions in the accompanying financial statements for additional information on the carve-out of
financial information from CHS.
The statements of income for the years ended December 31, 2016 and 2015, as presented herein, include expense allocations for
certain corporate functions provided by CHS to QHC for the periods prior to the Spin-off, including, but not limited to, executive and
divisional management, employee benefits administration, treasury, accounting, risk management, audit, legal, procurement, human
resources, information technology support and other administrative support services. These expenses were allocated to QHC based on
direct usage or benefit where identifiable, with the remainder allocated to QHC using ratios based on revenues, expenses or licensed
beds. Following the Spin-off, we began performing corporate functions using internal resources or purchased services, certain of
which are being provided by CHS pursuant to the transition services agreements and other ancillary agreements.
For the periods prior to the Spin-off, CHS used a centralized approach to cash management and to finance its operations, which
included the operations of QHC. For these periods, cash and cash equivalents were swept to the CHS corporate accounts and
transactions between QHC and CHS were accounted for through Due to Parent, net. This liability to CHS was settled in full on the
transaction date, in part by a cash payment to CHS of $1.2 billion funded with net proceeds from the debt issuances that occurred in
connection with the Spin-off. The remainder of the liability was extinguished and reclassified as a capital contribution to QHC. See
Note 11 — Equity in the accompanying financial statements for additional information on the equity established in connection with
the Spin-off. Following the Spin-off, we established our own depository and disbursement cash accounts with various banks and use a
centralized approach to cash management.
Revenues
We generate revenues by providing healthcare services at our hospitals and affiliated outpatient service facilities to patients
seeking medical treatment. Hospital revenues depend on, among other factors, inpatient occupancy and acuity levels, the volume of
outpatient procedures and the charges and negotiated reimbursement rates for the healthcare services provided. Our primary sources of
payment for patient healthcare services are third-party payors, including the Medicare and Medicaid programs, Medicare and
Medicaid managed care programs, commercial insurance companies, other managed care programs, workers’ compensation carriers
and employers. Self-pay revenues are the portion of our revenues generated from providing healthcare services to patients who do not
have health insurance coverage as well as the patient responsibility portion of charges that are not covered for an individual by a
health insurance program or plan. We generate revenues related to our QHR business when hospital management advisory and
healthcare consulting services are provided. We report these revenues at their net realizable value. We generate other non-patient
revenues primarily from rental income and hospital cafeteria sales.
Amounts we collect for medical treatment of patients covered by Medicare, Medicaid and non-governmental third-party payors
are generally less than our standard billing rates. Our standard charges and reimbursement rates for routine inpatient services vary
significantly depending on the type of medical procedure performed and the geographical location of the hospital. Differences in our
standard billing rates and the amounts we expect to collect from third-party payors are classified as contractual allowances. The
reimbursements we ultimately receive as payments for services are determined for each patient instance of care, based on the
contractual terms we negotiate with third-party payors or based on federal and state regulations related to governmental healthcare
programs. Our contractual allowances are impacted by the timing and ability of CHS to monitor the classification and collection of our
patient accounts receivable. Billings and collections are outsourced to CHS under the transition services agreements that were put in
place by CHS in connection with the Spin-off. See Note 18 — Related Party Transactions in the accompanying financial statements
for additional information on these agreements. Except for emergency department services, our policy is to determine the payment
methodology with patients prior to when the services are performed. Self-pay and other payor discounts are incentives offered to
uninsured or underinsured patients or other payors to reduce their costs of healthcare services.
63
A summary of our net operating revenues, before the provision for bad debts, by payor source follows (dollars in thousands):
Medicare
Medicaid
Managed care and commercial
Self-pay
Non-patient
2017
$ Amount
% of
Total
Year Ended December 31,
2016
2015
$ Amount
% of
Total
$ Amount
% of
Total
$ 656,843
425,943
921,503
226,043
97,323
28.2 %
18.3 %
39.6 %
9.7 %
4.2 %
$ 673,074
446,273
952,535
242,095
105,076
27.8 % $ 656,799
18.4 % 443,479
39.4 % 984,480
10.1 % 247,234
4.3 % 113,866
26.9 %
18.1 %
40.3 %
10.0 %
4.7 %
Total net operating revenues, before the provision for
bad debts
$ 2,327,655
100.0 %
$ 2,419,053
100.0 % $ 2,445,858
100.0 %
The table above includes an $11.4 million change in estimate we recorded as of December 31, 2016 to reduce the net realizable
value of patient accounts receivable due to increasing delays associated with collections on accounts receivable under the Illinois
Medicaid program. This change in estimate negatively impacted contractual allowances associated with Medicaid revenues. In
addition, net operating revenues, before the provision for bad debts, declined $135.8 million in the year ended December 31, 2017
compared to the same period in 2016 due to the seven hospitals we have divested.
For the years ended December 31, 2017, 2016 and 2015, Medicare revenues related to Medicare Advantage Plans were $186.7
million, $170.4 million and $146.9 million, respectively, or 28.4%, 25.3% and 22.4% as a percentage of total Medicare revenues,
respectively.
Charity Care
In the ordinary course of business, we provide services to patients who are financially unable to pay for hospital care. The related
charges for those patients who are financially unable to pay that otherwise do not qualify for reimbursement from a governmental
program are classified as charity care. We determine amounts that qualify for charity care primarily based on the patient’s household
income relative to the poverty level guidelines established by the federal government. Our policy is not to pursue collections for such
amounts; therefore, the related charges are recorded in operating revenues at the standard billing rates and fully offset in contractual
allowances in the same period.
Electronic Health Record Incentive Payments
Pursuant to the HITECH Act, MACRA and other laws, HHS has established Medicare and Medicaid incentive programs to
encourage hospitals and healthcare professionals to adopt certified EHR technology. Eligible hospitals that demonstrate meaningful
use of certified EHR technology can receive incentive payments, while hospitals that fail to do so are subject to payment reductions.
We incur both capital expenditures and operating expenses in connection with the implementation of EHR technology initiatives. The
amount and timing of these expenditures does not directly correlate with the timing of the receipt of EHR payments or the recognition
of EHR incentives as earned. We record EHR incentives in our statements of income as a reduction to our operating costs and
expenses. As we move toward our full implementation of certified EHR technology, our EHR incentives are declining and will
ultimately end. For the years ended December 31, 2017, 2016 and 2015, our EHR incentives earned were $4.7 million, $11.5 million
and $25.8 million, respectively. We anticipate that we will earn approximately $1.5 million of EHR incentives in 2018.
Critical Accounting Policies
The preparation of financial statements in accordance with U.S. GAAP requires us to make estimates and judgments that affect
the reported amounts and related disclosures. Actual results may differ from these estimates under different assumptions or conditions.
Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in
materially different results under different assumptions and conditions. The critical accounting estimates and judgments presented
below are not intended to be a comprehensive list of all our accounting policies that require estimates, but are limited to those that
involve a higher degree of judgment and complexity. We believe the current assumptions and other considerations used to estimate
amounts in our financial statements are appropriate. If actual results differ from these assumptions and considerations, the resulting
impact could have a material adverse effect on our results of operations and financial condition.
Third-Party Reimbursements and State Supplemental Payment Programs
Our estimate of the net realizable amount of our patient revenues due from third-party payors is subject to complexities, including
interpretations of governmental regulations and payor-specific contractual agreements that are frequently changing. The Medicare and
Medicaid programs, which are the payor sources for a major portion of our patient revenues, are highly complex programs and subject
to interpretation of federal and state-specific reimbursement rates, new or changing legislation and final cost report settlements.
64
Contractual allowances are recorded in the period services are performed and the patient’s method of payment is verified. Estimates
for contractual allowances are subject to change, in large part, due to ongoing contract negotiations and regulatory changes, which is
typical in the U.S. healthcare industry. Revisions to estimates for contractual allowances are recorded in the periods in which they
become known and may be subject to further revisions. All hospital contractual allowance calculations are reviewed on a monthly
basis by management to ensure reasonableness and accuracy.
We use a third-party automated contractual allowance system to calculate our contractual allowances each month. Contractual
allowances are calculated utilizing historical paid claims data by payor source, which is uploaded into the system each month. The key
assumptions used by the system to calculate the current period estimated contractual allowances are derived on a payor-specific basis
from the estimated contractual reimbursement percentage and historical paid claims data. The automated contractual allowance system
does not include patient account level information, as it estimates an average contractual allowance for each payor source. Due to the
complexities involved in the contractual allowance estimates, actual reimbursement payments we receive from third-party payors
could be different from the amounts we estimated and recorded. If the actual contractual reimbursement percentages by payor source
differed by 1% from our estimated contractual reimbursement percentages, our net loss for the year ended December 31, 2017 would
have changed by $14.9 million. If we applied a 1% differential to our patient accounts receivable due from governmental, managed
care and commercial third-party payors as of December 31, 2017, patient accounts receivable, net would have changed by $18.2
million.
Cost report settlements under reimbursement programs with Medicare, Medicaid and other managed care plans are estimated and
recorded in the period patient services are performed and any revisions to estimates of previous program reimbursements are recorded
in subsequent periods until the final cost report settlements are determined. We account for cost report settlements in contractual
allowances in our statements of income and record these amounts as due from and due to third-party payors on our balance sheets.
During the years ended December 31, 2017, 2016 and 2015, contractual allowance adjustments related to previous program
reimbursements and final cost report settlements favorably (unfavorably) impacted our net operating revenues by $2.0 million, $(5.8)
million and $(15.1) million, respectively. The 2015 amount included the unfavorable impact of an $11.1 million Illinois cost report
settlement in 2014 that was reversed in the second quarter of 2015 due to contract negotiations that were finalized in that quarter.
Exclusive of this adjustment, our net operating revenues were favorably (unfavorably) impacted by $(4.0) million in 2015 for all other
contractual allowance adjustments related to previous program reimbursements and final cost report settlements.
Several states utilize supplemental payment programs, including disproportionate share programs, for the purpose of providing
reimbursement to providers to offset a portion of the cost of providing care to Medicaid and indigent patients. The amounts due to us
under such programs are included in due from third-party payors on our balance sheets. Some of these programs have participation
costs, referred to as fees or provider taxes. We record these costs in due to third-party payors on our balance sheets. After a state
supplemental program is approved and fully authorized, we recognize the reimbursement payments due to us from state supplemental
payment programs in the periods amounts are estimable and revenue collection is reasonably assured. These amounts are recorded in
operating revenues as favorable contractual allowances and the costs we incur under these programs are recorded as other operating
expenses. We record the revenues as favorable contractual allowance adjustments in our net operating revenues and the related
provider taxes as other operating expenses in our statements of income.
The following table shows the portion of our Medicaid reimbursements attributable to state supplemental payment programs (in
thousands):
Medicaid revenues
Provider taxes and other expenses
Reimbursements attributable to state supplemental payment programs, net of
expenses
Year Ended December 31,
2016
2015
2017
$ 211,448
$ 220,389
75,388
76,616
$ 211,696
75,929
$ 136,060
$ 143,773
$ 135,767
The California Department of Health Care Services implemented the HQAF Program, imposing a fee on certain general and acute
care California hospitals. Revenues generated from these fees provide funding for the non-federal supplemental payments to
California hospitals that serve California’s Medi-Cal and uninsured patients. Under Phase IV of the program, covering the period from
January 2014 through December 2016, and Phase V of the program, covering the period from January 2017 through June 2019, we
recognized $22.0 million, $34.4 million and $31.5 million of operating revenues, net of provider taxes, for the years ended December
31, 2017, 2016 and 2015, respectively. Reimbursements attributable to state supplemental payment programs related to hospitals that
have been divested decreased $1.3 million for the year ended December 31, 2017 compared to the year ended December 31, 2016.
65
The following table provides a summary of the components of due from and due to third-party payors (in thousands):
Amounts due from third-party payors:
Previous program reimbursements and final cost report settlements
State supplemental payment programs
Total amounts due from third-party payors
Amounts due to third-party payors:
Previous program reimbursements and final cost report settlements
State supplemental payment programs
Total amounts due to third-party payors
Provision for Bad Debts and the Allowance for Doubtful Accounts
December 31,
2017
2016
$
$
$
$
$
17,383
79,819
97,202 $
23,876
92,359
116,235
$
33,163
14,542
47,705 $
33,366
9,171
42,537
The following table provides a summary of patient accounts receivable, before contractual allowances, discounts and the
allowance for doubtful accounts, by payor source (dollars in thousands):
December 31,
2017
2016
Amount
% of Total
Amount
% of Total
Third-parties
Self-pay
Total patient accounts receivable, gross
$ 1,796,852
596,863
$ 2,393,715
75.1 %
24.9 %
100.0 %
$ 1,930,103
656,373
$ 2,586,476
74.6 %
25.4 %
100.0 %
Substantially all of our accounts receivable are related to providing healthcare services to patients at our hospitals and outpatient
service facilities. Collection of these accounts receivable is our primary source of cash and is critical to our operating performance.
Our primary collection risks relate to uninsured patients and the patient financial responsibility portion of payments due from insured
patients, generally deductibles and co-payments. Our policy is to verify the health insurance coverage of a patient prior to the
procedure date for all medical treatment scheduled in advance. We do not verify insurance coverage in advance of treatment for walk-
in and emergency room patients.
We estimate our allowance for doubtful accounts by reserving a percentage of all self-pay patient receivables without regard to
aging category, based on collection history. The allowance percentage is based on a model that considers historical write-off activity
and is adjusted for expected recoveries and any anticipated changes in trends. Our ability to estimate the allowance for doubtful
accounts is not significantly impacted by the aging of accounts receivable as management believes that substantially all of the risk
exists at the point in time such accounts are identified as self-pay. For our insured receivables, which are non-self-pay receivables, we
estimate the allowance for doubtful accounts based on historical collection rates for the uncontractualized portion of all accounts aging
over 365 days from the date of patient discharge, reduced by an estimate for expected recoveries. Generally, these non-self-pay
accounts receivable aged over 365 days represent an immaterial percentage of our total patient accounts receivable on our balance
sheets. We believe that we collect substantially all of our third-party insured receivables, which include receivables from
governmental agencies.
During the fourth quarter of 2017, we analyzed our self-pay patient accounts receivable at a more comprehensive and
disaggregated level and refined our estimate of the collectability of the portion of self-pay accounts receivable related to insured
patients, primarily co-pays and deductibles. Our analysis also included an evaluation of patient accounts receivable retained in the
divestitures of six of our seven divested hospitals. As a result of these efforts, we recorded a change in estimate of $21.0 million to
reduce the net realizable value of patient accounts receivable, which negatively impacted the provision for bad debts in our statement
of income for the year ended December 31, 2017.
As of December 31, 2016, we recorded a change in estimate of $11.4 million to reduce the net realizable value of our patient
accounts receivable, which negatively impacted the provision for bad debts in our statement of income for the year ended December
31, 2016. This change in estimate related to our assessment of the collectability of our managed care and commercial accounts
receivable aged greater than one year based on a review of historical cash collections for these accounts.
Collections are impacted by the economic ability of patients to pay and the effectiveness of CHS’ billing and collection efforts,
including their current policies on billings, accounts receivable payor classifications, collections, and our own efforts to further
attempt collection. As previously stated, billings and collections are outsourced to CHS under the transition services agreements that
were put in place with the Spin-off. See Note 18 — Related Party Transactions in the accompanying financial statements for
additional information on these agreements. Significant changes in payor mix, centralized business office operations, including CHS’
66
efforts in collecting the Company’s accounts receivables, economic conditions or trends in federal and state governmental healthcare
coverage, among other things, could affect our collection levels and are considered in our estimate of the allowance for doubtful
accounts each period. We also continually review our overall allowance adequacy by monitoring historical cash collections
experience, revenue trends by payor classification and days revenue outstanding, the composition of self-pay receivables between pure
self-pay patients and the patient responsibility portion of third-party insured receivables, and the impact of recent acquisitions and
dispositions.
Our policy is to write off gross accounts receivable if the balance is under $10.00 or when such amounts are placed with outside
collection agencies. We believe this policy accurately reflects our ongoing collection efforts and is consistent with practices within the
U.S. healthcare industry. We had $474.3 million and $420.3 million of past due patient account balances at December 31, 2017 and
2016, respectively, being pursued by secondary collection agencies, excluding accounts being pursued by PASI under the transition
services agreement. We expect to collect less than 3%, net of estimated collection fees, of the amounts being pursued by these
secondary collection agencies. As these amounts have been written-off, they are not included in our gross accounts receivable or our
allowance for doubtful accounts. Collections of any account balances previously written off are recognized as a reduction to bad debt
expense when received. However, we take into consideration estimated collections of these future amounts written-off in evaluating
the reasonableness of our allowance for doubtful accounts.
For self-pay receivables, the total amount of contractual allowances, discounts and the allowance for doubtful accounts that
reduces these receivables to their net carrying value was $545.8 million and $571.7 million as of December 31, 2017 and 2016,
respectively. If our self-pay receivables being pursued by outside collection agencies were included in both gross self-pay receivables
and the allowance for doubtful accounts above, the allowance for doubtful accounts related to self-pay receivables as a percentage of
gross self-pay receivables would have been 94.5% and 92.1% at December 31, 2017 and 2016, respectively. If our actual collection
percentage differed by 1% from our estimated collection percentage as a result of a change in recoveries, our net loss for the year
ended December 31, 2017 would have changed $5.1 million. If we applied a 1% differential to our estimate of the allowance for
doubtful accounts related to self-pay receivables as of December 31, 2017, our patient accounts receivable, net would have changed by
$6.1 million.
Days revenue outstanding related to patient accounts receivable, excluding amounts recorded as due from and due to third-party
payors on our balance sheets, was 63 days and 68 days as of December 31, 2017 and 2016, respectively. In the fourth quarter of 2017,
we received $31 million of approximately $50 million of 2015 and 2016 outstanding amounts from the California HQAF program. In
this same quarter, we also received a total of $51 million of the approximate $65 million in arrears from Illinois Medicaid and state
employee patients. The portion of our allowance for doubtful accounts representing an adjustment for expected recoveries of self-pay
receivables aged over 365 days that have been placed with outside collection agencies was 4 days as of December 31, 2017.
Impairment of Long-Lived Assets and Goodwill
Whenever an event occurs or changes in circumstances indicate that the carrying values of certain long-lived assets may be
impaired, we project the undiscounted cash flows expected to be generated by those assets. If the projections indicate that the carrying
values are not expected to be recovered, the assets are reduced to their estimated fair value based on a quoted market price, if
available, or an estimated value based on valuation techniques available in the circumstances.
Our hospital operations and hospital management advisory and healthcare consulting services operations meet the criteria to be
classified as reporting units for goodwill. Goodwill is evaluated for impairment at the same time every year and when an event occurs
or circumstances change that, more likely than not, reduce the fair value of a reporting unit below its carrying value. There is a two-
step method for determining goodwill impairment. Step one is to compare the fair value of the reporting unit with the unit’s carrying
amount, including goodwill. If this test indicates the fair value is less than the carrying value, then step two is required. Step two is to
compare the implied fair value of the reporting unit’s goodwill with the carrying value of the reporting unit’s goodwill. When an
indicator of potential impairment is identified in interim periods, we evaluate goodwill for impairment at such date.
We perform our annual goodwill impairment evaluation in the fourth quarter of each year. For our annual evaluation, we estimate
the fair value of each of our reporting units utilizing two modeling approaches, a discounted cash flow model and an earnings multiple
model. The discounted cash flow model applies a discount rate to our cash flow forecasts that is based on our best estimate of our
weighted-average cost of capital. The earnings multiple model applies a market supported multiple to EBITDA. Both models are
based on our best estimate of future revenues and operating costs and expenses as of the testing date. Additionally, the results of both
models are reconciled to our consolidated market capitalization, which considers the amount a potential buyer would be required to
pay, in the form of a control premium, to gain sufficient ownership to set policies, direct operations and control management decisions
of our company.
During the years ended December 31, 2017, 2016 and 2015, we recorded impairment of $47.3 million, $291.9 million and $13.0
million, respectively. See “— Overview — 2017 Impairment and — 2016 Impairment” for a table and additional information on the
impairment recorded in these years.
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Workers’ Compensation and Professional and General Liability Insurance Reserve
As part of the business of owning and operating hospitals, we are subject to legal actions alleging liability on our part. To mitigate
a portion of this risk, we maintain insurance exceeding a self-insured retention level for these types of claims. Our self-insurance
reserves reflect the current estimate of all outstanding losses, including incurred but not reported losses, based on actuarial calculations
as of period end. The loss estimates included in the actuarial calculations may change in the future due to updated facts and
circumstances. Insurance expense in the statements of income includes the actuarially determined estimates for losses in the current
year, including claims incurred but not reported, the changes in estimates for losses in prior years based on actual claims development
experience as compared to prior actuarial projections, the insurance premiums for losses related to policies obtained to cover amounts
in excess of our self-insured retention levels, the administrative costs of the insurance programs, and interest expense related to the
discounted portions of these liabilities. Our reserves for workers’ compensation and professional and general liability claims are based
on semi-annual actuarial calculations, which are discounted to present value and consider historical claims data, demographic factors,
severity factors and other actuarial assumptions. The liabilities for self-insured claims are discounted based on our risk-free interest
rate that corresponds to the period when the self-insured claims are incurred and projected to be paid.
A portion of our reserves for workers’ compensation and professional and general liability claims included on our balance sheets
relates to incurred but not reported claims prior to the Spin-off. These claims were fully indemnified by CHS under the terms of the
Separation and Distribution Agreement. As a result, we have a corresponding receivable from CHS related to these claims on our
balance sheets. See Note 19 — Commitments and Contingencies — Insurance Reserves in the accompanying financial statements for
a table that summarizes the liabilities and receivables associated with our workers’ compensation and professional and general liability
claims as of December 31, 2017 and 2016.
Income Taxes
The breadth of our operations and the complexity of tax regulations require assessments of uncertainties and judgments in
estimating the amount of income taxes that we will ultimately pay. The amount of income taxes ultimately paid by us is dependent
upon many factors, including negotiations with taxing authorities in various jurisdictions, outcomes of tax litigation and resolution of
disputes arising from federal and state tax audits in the normal course of business.
We calculate our provision for income taxes and account for income taxes using the asset and liability method. Under this
method, deferred income taxes are recorded to represent the future tax consequences expected to occur when the reported amounts of
assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year
plus the change in deferred income taxes during the year. Deferred income taxes result from differences between the financial and tax
basis of our assets and liabilities and are adjusted for changes in tax rates and the enactment of new or amended tax laws.
Under the asset and liability method, valuation allowances are recorded to reduce deferred income tax assets when it is more
likely than not that a tax benefit will not be realized. We assess the realization of our deferred tax assets to determine whether an
income tax valuation allowance is required. Based on all available evidence, both positive and negative, and the weight of that
evidence to the extent such evidence can be objectively verified, we determine whether it is more likely than not that all or a portion of
the deferred tax assets will be realized.
The main factors that we consider include:
•
•
•
•
•
cumulative earnings or losses in recent years, adjusted for certain nonrecurring items;
expected earnings or losses in future years;
unsettled circumstances that, if unfavorably resolved, would adversely affect future operations and earnings levels;
the availability, or lack thereof, of taxable income in prior carryback periods that would limit realization of tax benefits;
and
the carryforward period associated with the deferred tax assets and liabilities.
In the ordinary course of business, there is inherent uncertainty in quantifying our income tax positions. We assess our income tax
positions and record deferred income tax benefits for all tax years subject to examination based upon management’s evaluation of the
facts, circumstances and information available at the reporting date about the ability to realize the benefit of the deferred tax assets or
tax positions. For those tax positions where it is more likely than not that a future tax benefit will be sustained, our policy is to record
the largest amount of income tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing
authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that an
income tax benefit will not be sustained in the future, we do not recognize a deferred tax benefit in our financial statements. We record
interest and penalties, net of any applicable tax benefit, related to income taxes, if any, as a component of the provision for income
taxes when applicable.
See Note 12 — Income Taxes in the accompanying financial statements for additional information on the use of the separate
return method of accounting for income taxes that we used during the carve-out period and for information on the projected impact of
the new tax laws.
68
New Accounting Pronouncements
In January 2017, the FASB issued ASU No. 2017-04, Intangibles — Goodwill and Other: Simplifying the Accounting for
Goodwill Impairment, which simplifies the accounting for goodwill impairment by eliminating step two from the goodwill
impairment test. This ASU instead permits an entity to recognize goodwill impairment as the excess of a reporting unit's carrying
value over the estimated fair value of the reporting unit, to the extent this amount does not exceed the carrying amount of goodwill.
The new guidance continues to allow an entity to perform a qualitative assessment of goodwill impairment indicators in lieu of a
quantitative assessment in certain situations. The ASU is effective for our annual and interim reporting periods beginning after
December 15, 2019, with early adoption permitted. We are currently evaluating the impact this guidance may have on our results of
operations, financial position and cash flows.
In March 2016, the FASB issued ASU No. 2016-09, Compensation — Stock Compensation, which was issued to simplify some
of the accounting guidance for share-based compensation. Among the areas impacted by the amendments in this ASU are the
accounting for income taxes related to share-based payments, accounting for forfeitures, classification of awards as equity or liabilities
and classification on the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2016, with early
adoption permitted. We adopted this ASU on January 1, 2017. The adoption of this ASU had no material impact on our results of
operations, financial position and cash flows.
In February 2016, the FASB issued ASU No. 2016-02, Leases, which amends the accounting for leases and requires the rights
and obligations arising from lease contracts, including existing and new arrangements, to be recognized as assets and labilities on the
balance sheet. Recognition of these assets and liabilities will have a material impact to our consolidated balance sheets upon adoption.
This ASU is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. Under ASU 2016-02, lessees
and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified
retrospective approach, which includes a number of optional practical expedients. We expect to adopt this ASU on January 1, 2019.
We are still evaluating the impact that the adoption of this standard will have on our policies, procedures, financial disclosures and
control framework. We are additionally evaluating any modifications to our leasing strategy in response to the requirements of this
standard.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which provides for a single
comprehensive principles-based model for the recognition of revenue across all industries using a five-step model to recognize
revenue from customer contracts. The new standard significantly expands disclosures about the nature, amount, timing, and
uncertainty of revenues and cash flows, as well as certain additional quantitative and qualitative disclosures. The standard is effective
for fiscal years beginning after December 15, 2017, with early adoption permitted for annual periods beginning after December 15,
2016, and permits the use of either a full or modified retrospective approach upon adoption. We adopted this ASU on January 1, 2018
using the modified retrospective approach and during the fourth quarter of 2017 completed our evaluation of the resulting impact on
our consolidated results of operations, financial position and cash flows. A significant portion of the adoption of this ASU was the
process of evaluating the characteristics of patient accounts receivable portfolios to ensure that when evaluated under the new standard
it would result in a materially consistent revenue amount for such portfolios as if each patient account was evaluated on a contract-by-
contract basis. A component of this evaluation was the estimation of what portion of an insured patient’s account will ultimately be
due from the patient as a co-payment or deductible and of that amount what will ultimately be collectible. We updated our processes
to accommodate this estimate and recorded a change in estimate to increase our allowance for doubtful accounts at December 31,
2017, which is further discussed above in our critical accounting policies on accounts receivable and allowance for doubtful accounts.
We completed our evaluation of the impact on our results of operations as of the fourth quarter 2017 and we do not expect the
adoption of this ASU to have a material impact on our consolidated results of operations on a prospective basis, other than the impact
of the presentation of the income statement, as the provision for bad debts will be recorded as a direct reduction to revenues and will
not be presented as a separate line item.
Results of Operations
We have summarized our results of operations, including certain financial and operating data, for the years ended December 31,
2017, 2016 and 2015, for the three months ended December 31, 2017 and 2016 and for the sequential quarters ended December 31,
2017 and September 30, 2017 on a comparative basis below. The definitions of certain terms used throughout the remainder of “Item
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” follows:
Consolidated and Combined. Our financial statements include amounts and disclosures related to the stand-alone financial
statements and accounting records of QHC after the Spin-off (“consolidated”) in combination with amounts and disclosures that have
been derived for the businesses comprising QHC from the consolidated financial statements and accounting records of CHS for the
periods prior to the completion of the Spin-off (“combined”). Any references to our financial statements, financial data and operating
data refer to our consolidated and combined financial statements unless otherwise noted.
Same-facility. Same-facility financial and operating data, as presented in the comparative discussions herein, excludes hospitals
that were sold prior to and as of the end of the current reporting period. Our same-facility operating results for the three months and
years ended December 31, 2017 and 2016 and the three months ended September 30, 2017, which are reported herein, have been
69
adjusted to exclude the operating results of Sandhills, Barrow, Cherokee, Trinity, Lock Haven, Sunbury and L.V. Stabler, which we
sold on December 1, 2016, December 31, 2016, March 31, 2017, June 30, 2017, September 30, 2017, September 30, 2017 and
October 31, 2017, respectively.
Continuing Hospitals Group. The Continuing Hospitals Group consists of twenty-four hospitals which we currently intend to
continue to operate as part of our core business.
Divestitures Group. The Divestitures Group, as of December 31, 2017, includes all hospitals that had been divested by us since
the Spin-off through December 31, 2017. The Divestitures Group includes Barrow, Sandhills, Cherokee, Trinity, Lock Haven,
Sunbury and L.V. Stabler. This group of hospitals has certain ongoing operations during the wind-down period related to the assets
and liabilities which were not part of the hospital sale, which typically include accounts receivable and third-party receivables and
payables.
Potential Divestitures Group. The Potential Divestitures Group, as of December 31, 2017, includes seven hospitals that
management has identified for potential divestiture over the next twelve to twenty-four month period. We continually evaluate other
hospitals for potential divestiture which could result in changes to the hospitals included in this group in future periods.
Licensed Beds. Licensed beds are the number of beds for which the appropriate state agency licenses a hospital, regardless of
whether the beds are actually available for patient use.
Admissions. Admissions represent the number of patients admitted for inpatient services.
Adjusted Admissions. Adjusted admissions is computed by multiplying admissions by gross patient revenues and then dividing
that number by gross inpatient revenues.
Emergency room visits. Emergency room visits represent the number of patients registered and treated in our emergency rooms.
Medicare case mix index. Medicare case mix index is a relative value assigned to a diagnosis-related group of patients that is
used in determining the allocation of resources necessary to treat the patients in that group. Medicare case mix index is calculated as
the average case mix index for all Medicare admissions during the period.
Hospital operations man-hours per adjusted admission. Hospital operations man-hours per adjusted admission is calculated as
total paid employed and contract labor hours at both our hospitals and affiliated outpatient facilities divided by adjusted admissions. It
is used by management as a measurement of productivity.
Days revenue outstanding. Days revenue outstanding approximates the average collection period for patient accounts receivable.
It is calculated by dividing net patient accounts receivable at the end of the period by average net operating revenues per day for the
most recent three months. Net patient accounts receivable excludes the amounts reported as due from and to third-party payors related
to final cost report settlements and state supplemental payment programs.
EBITDA. EBITDA is a non-GAAP financial measure that consists of net income (loss) before interest, income taxes,
depreciation and amortization.
Adjusted EBITDA. Adjusted EBITDA, also a non-GAAP financial measure, is EBITDA adjusted to add back the effect of certain
legal, professional and settlement costs, impairment of long-lived assets and goodwill, net gain (loss) on sale of hospitals, transaction
costs related to the Spin-off, post-spin headcount reductions and change in estimate related to collectability of patient accounts
receivable. We use Adjusted EBITDA as a measure of financial performance. Adjusted EBITDA is a key measure used by our
management to assess the operating performance of our hospital operations business and to make decisions on the allocation of
resources. Additionally, management utilizes Adjusted EBITDA in assessing our consolidated results of operations and in comparing
our results of operations between periods.
Adjusted EBITDA, Adjusted for Divestitures. Adjusted EBITDA, Adjusted for Divestitures, also a non-GAAP financial measure,
is further retrospectively adjusted to exclude the effect of positive or negative EBITDA of the Divestitures Group. We present
Adjusted EBITDA, Adjusted for Divestitures because management believes this measure provides investors and other users of our
financial statements with additional information about how management assesses the results of operations.
Adjusted EBITDA, Adjusted for Potential Divestitures. Adjusted EBITDA, Adjusted for Potential Divestitures, also a non-
GAAP financial measure, is Adjusted EBITDA, Adjusted for Divestitures, and further retrospectively adjusted to exclude the effect of
positive or negative EBITDA of the Potential Divestitures Group. We present Adjusted EBITDA, Adjusted for Potential Divestitures
because management believes this measure provides investors and other users of our financial statements with additional information
about how management assesses the results of operations.
70
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
A summary of our results of operations, both in dollars and as a percentage of net operating revenues, follows (dollars in
thousands):
2017
Year Ended December 31,
2016
Amount
% of
Revenues
Amount
% of
Revenues
2017 vs 2016
$
Variance
Change
in %
Operating revenues, net of contractual
allowances and discounts
Provision for bad debts
Net operating revenues
Operating costs and expenses:
Salaries and benefits
Supplies
Other operating expenses
Depreciation and amortization
Rent
Electronic health records incentives earned
Legal, professional and settlement costs
Impairment of long-lived assets and
goodwill
Loss (gain) on sale of hospitals, net
Transaction costs related to the Spin-off
Total operating costs and expenses
Income (loss) from operations
Interest expense, net
Income (loss) before income taxes
Provision for (benefit from) income taxes
Net income (loss)
Less: Net income (loss) attributable to
noncontrolling interests
Net income (loss) attributable to Quorum
Health Corporation
$ 2,327,655
255,485
2,072,170
$ 2,419,053
280,586
2,138,467
100.0 %
$ (91,398 )
(25,101 )
(66,297 )
(22,322 )
(22,739 )
(35,133 )
0.5 %
(8,116 ) — %
(0.2 )%
(1.5 )%
0.1 %
347
6,737
0.3 %
(1,341 ) — %
100.0 %
49.4 %
12.1 %
30.3 %
5.5 %
2.3 %
(0.5 )%
0.3 %
49.9 %
12.1 %
30.1 %
4.0 %
2.4 %
(0.2 )%
0.3 %
1,057,119
258,639
645,802
117,288
49,883
(11,482 )
7,342
2.3 %
(0.3 )%
— %
100.6 %
291,870
2,150
5,488
2,424,099
(0.6 )% (285,632 )
5.9 %
113,440
(6.5 )% (399,072 )
(53,875 )
(1.1 )%
(5.4 )% (345,197 )
13.6 %
0.1 %
0.3 %
113.4 %
(13.4 )%
5.3 %
(18.7 )%
(2.6 )%
(16.1 )%
(244,589 )
(7,393 )
(5,235 )
(339,784 )
273,487
8,637
264,850
32,010
232,840
(11.3 )%
(0.4 )%
(0.3 )%
(12.8 )%
12.8 %
0.6 %
12.2 %
1.5 %
10.7 %
1,034,797
250,523
623,063
82,155
50,230
(4,745 )
6,001
47,281
(5,243 )
253
2,084,315
(12,145 )
122,077
(134,222 )
(21,865 )
(112,357 )
1,833
0.1 %
2,491
0.2 %
(658 )
(0.1 )%
$ (114,190 )
(5.5 )% $ (347,688 )
(16.3 )%
$ 233,498
10.8 %
The following table reconciles Adjusted EBITDA, Adjusted EBITDA, Adjusted for Divestitures and Adjusted EBITDA, Adjusted
for Potential Divestitures to net income (loss), the most directly comparable U.S. GAAP financial measure (in thousands):
Net income (loss)
Interest expense, net
Provision for (benefit from) income taxes
Depreciation and amortization
EBITDA
Legal, professional and settlement costs
Impairment of long-lived assets and goodwill
Loss (gain) on sale of hospitals, net
Transaction costs related to the Spin-off
Post-spin headcount reductions
Change in estimate related to collectability of patient accounts receivable
Adjusted EBITDA
Negative EBITDA of divested hospitals
Adjusted EBITDA, Adjusted for Divestitures
Negative (Positive) EBITDA of potential divestitures
Adjusted EBITDA, Adjusted for Potential Divestitures
71
Year Ended December 31,
2017
2016
$
$
(112,357 )
122,077
(21,865 )
82,155
70,010
6,001
47,281
(5,243 )
253
2,543
21,000
141,845
20,637
162,482
8,337
170,819
$
$
(345,197 )
113,440
(53,875 )
117,288
(168,344 )
7,342
291,870
2,150
5,488
1,617
22,799
162,922
33,107
196,029
(8,232 )
187,797
Revenues
The following table provides information related to our net operating revenues (dollars in thousands, except per adjusted
admission amounts):
Consolidated and combined:
Net patient revenues, before the provision for bad debts
Provision for bad debts
Total net patient revenues
Non-patient revenues
Total net operating revenues
Net patient revenues per adjusted admission
Net operating revenues per adjusted admission
Same-facility:
Net patient revenues, before the provision for bad debts
Provision for bad debts
Total net patient revenues
Non-patient revenues
Total net operating revenues
Net patient revenues per adjusted admission
Net operating revenues per adjusted admission
Year Ended December 31,
2017
2016
$ Variance
% Variance
$ 2,230,332
255,485
1,974,847
97,323
$ 2,072,170
9,076
$
9,524
$
$ 2,313,977
280,586
2,033,391
105,076
$ 2,138,467
8,643
$
9,090
$
$ 2,133,099
231,392
1,901,707
96,015
$ 1,997,722
9,236
$
9,702
$
$ 2,080,948
227,511
1,853,437
102,073
$ 1,955,510
9,036
$
9,534
$
$
$
$
$
$
$
$
$
(83,645 )
(25,101 )
(58,544 )
(7,753 )
(66,297 )
433
434
52,151
3,881
48,270
(6,058 )
42,212
200
168
(3.6 )%
(8.9 )%
(2.9 )%
(7.4 )%
(3.1 )%
5.0 %
4.8 %
2.5 %
1.7 %
2.6 %
(5.9 )%
2.2 %
2.2 %
1.8 %
The following table provides information related to our net operating revenues, before the provision for bad debts, by payor
source (dollars in thousands):
Consolidated and combined:
Medicare
Medicaid
Managed care and commercial
Self-pay
Non-patient
2017
Year Ended December 31,
2016
2017 vs 2016
Amount
% of
Total
Amount
% of
Total
$
Variance
Change in
%
$ 656,843
425,943
921,503
226,043
97,323
28.2 %
18.3 %
39.6 %
9.7 %
4.2 %
$ 673,074
446,273
952,535
242,095
105,076
27.8 %
18.4 %
39.4 %
10.1 %
4.3 %
$ (16,231 )
(20,330 )
(31,032 )
(16,052 )
(7,753 )
0.4 %
(0.1 )%
0.2 %
(0.4 )%
(0.1 )%
Total net operating revenues, before the provision
for bad debts
$ 2,327,655
100.0 %
$ 2,419,053
100.0 %
$ (91,398 )
Same-facility:
Medicare
Medicaid
Managed care and commercial
Self-pay
Non-patient
$ 624,269
411,176
884,042
213,612
96,015
28.0 %
18.4 %
39.7 %
9.6 %
4.3 %
$ 600,590
416,904
868,219
195,235
102,073
27.5 %
19.1 %
39.8 %
8.9 %
4.7 %
$ 23,679
(5,728 )
15,823
18,377
(6,058 )
0.5 %
(0.7 )%
(0.1 )%
0.7 %
(0.4 )%
Total net operating revenues, before the provision
for bad debts
$ 2,229,114
100.0 %
$ 2,183,021
100.0 %
$ 46,093
72
The following table provides information on certain drivers of our net operating revenues:
Consolidated and combined:
Number of licensed beds at end of period
Admissions
Adjusted admissions
Emergency room visits
Medicare case mix index
Same-facility:
Number of licensed beds at end of period
Admissions
Adjusted admissions
Emergency room visits
Medicare case mix index
Year Ended December 31,
2017
2016
$ Variance
% Variance
2,979
88,504
217,583
660,246
1.43
2,979
84,459
205,905
622,049
1.43
3,459
95,313
235,263
726,155
1.38
2,979
84,905
205,110
631,346
1.39
(480 )
(6,809 )
(17,680 )
(65,909 )
0.05
—
(446 )
795
(9,297 )
0.04
(13.9 )%
(7.1 )%
(7.5 )%
(9.1 )%
3.6 %
— %
(0.5 )%
0.4 %
(1.5 )%
2.9 %
Net operating revenues for the year ended December 31, 2017 decreased $66.3 million compared to the year ended December 31,
2016, consisting of a $58.5 million decrease in net patient revenues and a $7.8 million decrease in non-patient revenues. Our 2016 net
patient revenues, before the provision for bad debts, included an $11.4 million negative impact to contractual allowances resulting
from the change in estimate described below. Excluding this impact, net patient revenues, before the provision for bad debts decreased
$72.2 million, or 3.5%, consisting of a $135.8 million decline from the Divestitures Group, a $16.0 million decline in the Potential
Divestitures Group and a $56.8 million increase in the Continuing Hospitals Group. The Continuing Hospitals Group included a $36.3
million increase from volumes, and a $20.5 million increase from payor rates, partially offset by a $15.4 million decrease in net
operating revenues related to the California HQAF program. On a consolidated basis, admissions and adjusted admissions declined
7.1% and 7.5%, respectively, when comparing 2017 to 2016. For the Continuing Hospitals Group, admissions and adjusted
admissions increased 0.9% and 2.2%, respectively, when comparing 2017 to 2016. Non-patient revenues decreased $7.8 million when
comparing 2017 to 2016, primarily related to our hospital management advisory and healthcare consulting services business.
As of December 31, 2016, we recorded a change in estimate of $11.4 million to reduce the net realizable value of our patient
accounts receivable, which negatively impacted contractual allowances in our statement of income for the year ended December 31,
2016. This change in estimate related to increasing delays associated with collections on accounts receivable under the Illinois
Medicaid program.
Provision for Bad Debts
The provision for bad debts decreased $25.1 million for the year ended December 31, 2017 compared to the year ended December
31, 2016, primarily due to a $28.7 million decrease related to the Divestitures Group.
During the fourth quarter of 2017, we analyzed our self-pay patient accounts receivable at a more comprehensive and
disaggregated level and refined our estimate of the collectability of the portion of self-pay accounts receivable related to insured
patients, primarily co-pays and deductibles. Our analysis also included an evaluation of patient accounts receivable retained in the
divestitures of six of our seven divested hospitals. As a result of these efforts, we recorded a change in estimate of $21.0 million to
reduce the net realizable value of patient accounts receivable, which negatively impacted the provision for bad debts in our statement
of income for the year ended December 31, 2017.
As of December 31, 2016, we recorded a change in estimate of $11.4 million to reduce the net realizable value of our patient
accounts receivable, which negatively impacted the provision for bad debts in our statement of income for the year ended December
31, 2016. This change in estimate related to our assessment of the collectability of our managed care and commercial accounts
receivable aged greater than one year based on a review of historical cash collections for these accounts.
73
Salaries and Benefits
The following table provides information related to our salaries and benefits expenses (dollars in thousands, except per adjusted
admission amounts):
Year Ended December 31,
2017
2016
$ Variance
% Variance
Salaries and benefits
Hospital operations salaries and benefits
Hospital operations salaries and benefits per adjusted admission
Hospital operations man-hours per adjusted admission
$ 1,034,797
942,237
$
4,330
$
106.0
$ 1,057,119
968,868
$
4,118
$
104.7
$
$
$
(22,322 )
(26,631 )
212
1.3
(2.1 )%
(2.7 )%
5.2 %
1.3 %
Salaries and benefits decreased $22.3 million for the year ended December 31, 2017 compared to the year ended December 31,
2016. Salaries and benefits declined $60.4 million related to the Divestitures Group and $1.7 million related to the Potential
Divestitures Group. These declines were offset by an increase of $35.8 million in salaries and benefits of the Continuing Hospitals
Group primarily resulting from increased salaries at our clinics due to physician recruitment efforts and an increase in corporate
salaries of $13.1 million as we had a full year of corporate salaries in 2017 compared to eight months in 2016. For the four months in
2016 prior to the Spin-off, management fees were allocated to QHC for corporate functions of CHS and were included in other
operating expenses. The increase in corporate salaries and benefits as a result of the Spin-off was partially offset by a reduction in
corporate and QHR salaries and benefits in 2017 due to headcount reductions in November 2016 and May 2017. Included in salaries
and benefits expenses related to corporate functions were $10.0 million and $7.4 million of stock-based compensation for the years
ended December 31, 2017 and 2016, respectively.
Supplies
The following table provides information related to our supplies expense (dollars in thousands, except per adjusted admission
amounts):
Year Ended December 31,
2017
2016
$ Variance
% Variance
Supplies
Supplies per adjusted admission
$
$
250,523
1,151
$
$
258,639
1,099
$
$
(8,116 )
52
(3.1 )%
4.7 %
Supplies expense decreased $8.1 million for the year ended December 31, 2017 compared to the year ended December 31, 2016.
Supplies expense declined $14.7 million related to the Divestitures Group and $3.1 million related to the Potential Divestitures Group.
Supplies expense of the Continuing Hospitals Group increased $9.9 million, primarily due to an increase in adjusted admissions of
2.2% for 2017 compared to 2016 which resulted from increased implant costs.
Other Operating Expenses
The following table provides information related to our other operating expenses (dollars in thousands):
2017
% of
Total
Amount
Year Ended December 31,
2016
% of
Total
Amount
2017 vs 2016
$
Change
Variance
in %
Purchased services
Taxes and insurance
Medical specialist fees
Transition services agreements and allocations
from Parent
Repairs and maintenance
Utilities
Management fees from Parent
Other miscellaneous operating expenses
Total other operating expenses
$ 168,711
131,734
111,840
63,470
41,048
27,324
—
78,936
$ 623,063
27.1 %
21.1 %
18.0 %
$ 180,672
129,775
106,803
28.0 %
20.1 %
16.5 %
$ (11,961 )
1,959
5,037
10.2 %
6.6 %
4.4 %
— %
12.6 %
100.0 %
66,441
42,986
29,833
11,792
77,500
$ 645,802
10.3 %
6.7 %
4.6 %
1.8 %
12.0 %
100.0 %
(2,971 )
(1,938 )
(2,509 )
(11,792 )
1,436
$ (22,739 )
(0.9 )%
1.0 %
1.5 %
(0.1 )%
(0.1 )%
(0.2 )%
(1.8 )%
0.6 %
Other operating expenses decreased $22.7 million for the year ended December 31, 2017 compared to the year ended December
31, 2016. As a percentage of net operating revenues, other operating expenses were 29.9% and 30.3% in these respective years. Other
operating expenses declined $11.8 million related to management fees from Parent that existed in 2016 with no comparable other
operating expenses in 2017. The comparable costs are primarily included in salaries and benefits following the Spin-off. Other
74
operating expenses also declined $41.7 million related to the Divestitures Group, and increased $3.8 million related to the Potential
Divestitures Group and $20.5 million related to the Continuing Hospitals Group. The increase in the Potential Divestitures Group and
the Continuing Hospitals Group was primarily due to a $9.7 million increase in medical specialist fees resulting from contracts related
to emergency room services and subsidies to various third parties, including hospitalists and a $8.2 million increase in taxes and
insurance primarily related to $3.2 million of New Mexico gross receipts tax refunds received in 2016 with no comparable tax refund
in 2017. We are disputing in arbitration, among other issues and actions, certain charges and lack of performance of various
obligations under the transition services agreements with our former Parent.
Depreciation and Amortization
Depreciation and amortization expense decreased $35.1 million to $82.2 million for the year ended December 31, 2017 compared
to $117.3 million for the year ended December 31, 2016. Depreciation and amortization decreased $9.3 million related to the
Divestitures Group. In addition, depreciation and amortization is lower in 2017 when compared to 2016 due to impairment recorded in
2017 and 2016 reducing the asset bases of our long-lived assets and due to the discontinuation of depreciation and amortization related
to long-lived assets classified as held for sale.
Rent
Rent expense increased $0.3 million to $50.2 million for the year ended December 31, 2017 compared to $49.9 million for the
year ended December 31, 2016. As a percentage of net operating revenues, rent expense was 2.4% and 2.3% in these respective years.
Electronic Health Records Incentives Earned
Electronic health records incentives earned decreased $6.8 million to $4.7 million for the year ended December 31, 2017
compared to $11.5 million for the year ended December 31, 2016 primarily due to the decrease in activity as we move closer toward
full implementation of EHR. See Note 2 — Basis of Presentation and Significant Accounting Policies — Revenues in the
accompanying financial statements for additional information on EHR.
Legal, Professional and Settlement Costs
Legal, professional and settlement costs decreased $1.3 million to $6.0 million for the year ended December 31, 2017 compared
to $7.3 million for the year ended December 31, 2016. Our costs in 2017 primarily related to investigation costs incurred by our Board
related to litigation related to the Spin-off and the costs in 2016 primarily related to a QHR legal claim. See Note 19 — Commitments
and Contingencies in the accompanying financial statements for additional information on legal matters.
Impairment of Long-Lived Assets and Goodwill
For the year ended December 31, 2017, we recognized $47.3 million of impairment to long-lived assets and goodwill. In the first
quarter of 2017, we classified certain additional hospitals as held for sale. As part of this process, we evaluated the estimated relative
fair value of all our hospitals classified as held for sale in relation to the overall fair value of our hospital operations reporting unit
utilizing a September 30, 2016 measurement date, which was the measurement date of our most recent annual goodwill impairment
analysis. In the first quarter of 2017, we recorded impairment totaling $3.3 million, consisting of $1.1 million related to property and
equipment, $0.8 million related to capitalized software costs and $1.4 million related to goodwill. In the second quarter of 2017, we
recognized $12.9 million of impairment to long-lived assets of certain hospitals which we have identified as potential divestiture
candidates and for which we have received letters of intent. In the third quarter of 2017, we recognized $5.3 million of impairment to
long-lived assets and goodwill of certain hospitals which we have identified as potential divestiture candidates and for which we have
received letters of intent, consisting of $3.7 million related to property and equipment and $0.6 million related to goodwill. In the
fourth quarter of 2017, we recognized $25.8 million of impairment to long-lived assets and goodwill of potential divestiture
candidates, consisting of $23.7 million related to property and equipment and $2.1 million related to capitalized software costs. See
“— Overview — 2017 Impairment” for a table and additional information on the impairment recorded in 2017.
For the year ended December 31, 2016, we recognized $291.9 million of impairment to long-lived assets and goodwill, consisting
of $145.6 million to property and equipment, $18.9 million to capitalized software costs, $2.4 million to medical license assets and
$125.0 million to goodwill. As a result of management’s decision in the second quarter following the Spin-off to divest certain
hospitals and evaluate additional hospitals for potential divestiture, we analyzed the long-lived assets of all of our hospitals to test for
impairment and additionally identified certain indicators of goodwill impairment related to our hospital operations reporting unit in
this quarter. We concluded that such indicators necessitated an interim goodwill impairment evaluation. As a result of all of the above,
we recorded impairment in the second quarter of 2016 of $41.0 million related to property and equipment, $4.4 million related to
capitalized software costs and $205.0 million related to goodwill, which included a preliminary step two goodwill impairment
estimate. In the fourth quarter of 2016, we revised our goodwill impairment estimate by recording a downward adjustment of $80
million, but recorded additional impairment of $71.9 million related to property and equipment and $10.8 million related to capitalized
software costs in connection with finalizing our step two goodwill impairment evaluation. Additionally, due to additional indicators of
impairment resulting from continued operating losses at certain of our hospitals in the second half of 2016, we recorded further
impairment of $32.7 million related to property and equipment, $3.7 million related to capitalized software costs and $2.4 million
75
related to medical licenses associated with our hospital operations business in the fourth quarter of 2017. See “— Overview — 2016
Impairment” for a table and additional information on the impairment recorded in 2016.
Loss (Gain) on Sale of Hospitals, Net
For the year ended December 31, 2017, we recognized a $5.2 million net gain on the sale of hospitals primarily related to the $5.3
million gain on the sale of Trinity in the second quarter of 2017. For the year ended December 31, 2016, we recorded a $2.2 million
net loss on the sale of two hospitals, consisting of $1.2 million related to Barrow and $1.0 million related to Sandhills. We are
committed to our business strategy, which includes actively engaging in initiatives, among others, to divest underperforming hospitals,
reduce our debt and refine our portfolio to a more sustainable group of hospitals with higher operating margins. We have divested a
total of seven hospitals in 2017 and 2016. See Note 4 — Divestitures in the accompanying financial statements for additional
information on divestitures.
Interest Expense, Net
The following table provides information related to interest expense, net (in thousands):
Senior Credit Facility:
Revolving Credit Facility
Term Loan Facility
ABL Credit Facility
Senior Notes
Amortization of debt issuance costs and discounts
All other interest expense (income), net
Total interest expense, net, from long-term debt
Due to Parent, net
Total interest expense, net
Year Ended December 31,
2017
2016
$ Variance
% Variance
$
$
528
66,111
1,854
46,516
8,949
(1,881 )
122,077
—
122,077
$
$
330
40,719
342
32,166
4,918
(849 )
77,626
35,814
113,440
$
$
198
25,392
1,512
14,350
4,031
(1,032 )
44,451
(35,814 )
8,637
60.0 %
62.4 %
442.1 %
44.6 %
82.0 %
121.6 %
57.3 %
(100.0 )%
7.6 %
Interest expense, net increased $8.6 million for the year ended December 31, 2017 compared to the year ended December 31,
2016. Following the Spin-off, interest expense is calculated based on the terms of our Credit Agreements and Senior Notes. The
effective interest rates for our Term Loan Facility and Senior Notes were approximately 8.8% and 12.9%, respectively, at December
31, 2017 and 7.7% and 12.5%, respectively, at December 31, 2016. Our Senior Credit Facility was amended on April 11, 2017, which
increased the interest rate terms on our Term Loan Facility. Additionally, for the four month period in 2016 prior to the Spin-off, we
were charged interest on the amounts due to CHS at various rates ranging from 4% to 7%. Interest computations on this indebtedness
were based on the outstanding balance of Due to Parent, net at the end of each month. This debt with CHS was extinguished on April
29, 2016. See “Liquidity and Capital Resources” below and Note 7 — Long-Term Debt in the accompanying financial statements for
additional information on our indebtedness.
Provision for (Benefit from) Income Taxes
The following table reconciles the differences between the statutory federal income tax rate and our effective tax rate (dollars in
thousands):
Year Ended December 31,
2017
2016
2017 vs 2016
Amount
% of
Total
Amount
% of
Total
$ Variance
Change
in %
Provision for (benefit from) income taxes at statutory
federal tax rate
State income taxes, net of federal income tax benefit
Net (income) loss attributable to noncontrolling
interests
Non-deductible goodwill and Spin-off costs
Change in valuation allowance (pre Tax Act)
Change in rate due to Tax Act
Change in valuation allowance due to Tax Act
All other items
Total provision for (benefit from) income taxes and
effective tax rate
$ (46,978 )
(6,137 )
35.0 %
4.6 %
$ (139,685 )
(47,749 )
35.0 %
12.0 %
$ 92,707
41,612
— %
(7.4 )%
(641 )
535
53,470
(10,934 )
(13,121 )
1,941
0.5 %
(0.4 )%
(39.8 )%
8.1 %
9.8 %
(1.5 )%
(872 )
36,009
—
94,745
—
3,677
0.2 %
(9.0 )%
— %
(23.7 )%
— %
(1.0 )%
231
(35,474 )
53,470
(105,679 )
(13,121 )
(1,736 )
0.3 %
8.6 %
(39.8 )%
31.8 %
9.8 %
(0.5 )%
$ (21,865 )
16.3 %
$ (53,875 )
13.5 %
$ 32,010
2.8 %
76
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law. The Tax Act includes a number of
changes to existing U.S. tax laws that impact us, most notably a reduction of the U.S. corporate tax rate from 35% to 21% for tax years
after December 31, 2017. As a direct result of changes in tax law due to the passage of the Tax Act, we recorded a total tax benefit of
$24.0 million during 2017 which is composed of two amounts: a tax benefit of $10.9 million in deferred income tax expense for the
net change in our deferred tax liabilities at the new 21% tax rate, and a $13.1 million tax benefit in deferred income tax expense for
the reduction in valuation allowance attributable to the change in net realizability of deferred tax assets. The Tax Act also provides for
acceleration of depreciation for certain assets placed into service after September 27, 2017, as well as prospective changes beginning
in 2018. These prospective changes include an increased limitation on the deductibility of executive compensation, a limitation on the
deductibility of interest expense, new rules surrounding meals and entertainment expense and fines and penalties. Also, while net
operating losses generated in the future may by carried forward indefinitely under the new law, there is a limitation on the amount that
may be used in any given year. The Tax Act may also have an impact on projected future taxable income that could further affect
valuation allowance considerations. In addition to the federal law, we await guidance from the states in which we file on how
components of the Tax Act may be treated in these jurisdictions. Those adjustments may materially impact our provision for (benefit
from) income taxes in the period in which the adjustments are made.
The benefit from income taxes was $21.9 million and $53.9 million for the years ended December 31, 2017 and 2016,
respectively. Our effective tax rates were 16.3% and 13.5% for these respective periods. The increase in our effective tax rate in 2017
when compared to 2016 was primarily due to the Tax Act which provided for the recognition of a deferred tax benefit on both the
release of valuation allowance related to certain deferred tax assets not previously expected to be realized in addition to statutory rate
reduction from 35% to 21%.
Net Income (Loss) Attributable to Noncontrolling Interests
Net income (loss) attributable to noncontrolling interests was $1.8 million and $2.5 million for the years ended December 31,
2017 and 2016, respectively. As a percentage of net operating revenues, net income (loss) attributable to noncontrolling interests was
0.1% and 0.2% in these respective years. Our noncontrolling interest partnership associated with Trinity was dissolved in connection
with the sale of this hospital in the second quarter of 2017.
77
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
A summary of our results of operations, both in dollars and as a percentage of net operating revenues, follows (dollars in
thousands):
2016
Year Ended December 31,
2015
Amount
% of
Revenues
Amount
% of
Revenues
2016 vs 2015
$
Variance
Change
in %
Operating revenues, net of contractual
allowances and discounts
Provision for bad debts
Net operating revenues
Operating costs and expenses:
Salaries and benefits
Supplies
Other operating expenses
Depreciation and amortization
Rent
Electronic health records incentives earned
Legal, professional and settlement costs
Impairment of long-lived assets and
goodwill
Loss (gain) on sale of hospitals, net
Transaction costs related to the Spin-off
Total operating costs and expenses
Income (loss) from operations
Interest expense, net
Income (loss) before income taxes
Provision for (benefit from) income taxes
Net income (loss)
Less: Net income (loss) attributable to
noncontrolling interests
Net income (loss) attributable to Quorum
Health Corporation
$ 2,419,053
280,586
2,138,467
$ 2,445,858
258,520
2,187,338
100.0 %
100.0 %
$ (26,805 )
22,066
(48,871 )
1,057,119
258,639
645,802
117,288
49,883
(11,482 )
7,342
291,870
2,150
5,488
2,424,099
(285,632 )
113,440
(399,072 )
(53,875 )
(345,197 )
49.4 %
12.1 %
30.3 %
5.5 %
2.3 %
(0.5 )%
0.3 %
1,016,696
249,792
634,233
128,001
48,729
(25,779 )
—
13.6 %
13,000
0.1 %
—
0.3 %
16,337
2,081,009
113.4 %
(13.4 )% 106,329
98,290
8,039
3,304
4,735
5.3 %
(18.7 )%
(2.6 )%
(16.1 )%
46.5 %
11.4 %
29.0 %
5.9 %
2.2 %
(1.2 )%
— %
40,423
8,847
11,569
(10,713 )
1,154
14,297
7,342
0.6 %
— %
0.7 %
95.1 %
4.9 %
4.5 %
0.4 %
0.2 %
0.2 %
278,870
2,150
(10,849 )
343,090
(391,961 )
15,150
(407,111 )
(57,179 )
(349,932 )
2.9 %
0.7 %
1.3 %
(0.4 )%
0.1 %
0.7 %
0.3 %
13.0 %
0.1 %
(0.4 )%
18.3 %
(18.3 )%
0.8 %
(19.1 )%
(2.8 )%
(16.3 )%
2,491
0.2 %
3,398
0.1 %
(907 )
0.1 %
$ (347,688 )
(16.3 )% $
1,337
0.1 %
$ (349,025 )
(16.4 )%
The following table reconciles Adjusted EBITDA, Adjusted EBITDA, Adjusted for Divestitures and Adjusted EBITDA, Adjusted
for Potential Divestitures, to net income (loss), the most directly comparable U.S. GAAP financial measure (in thousands):
Net income (loss)
Interest expense, net
Provision for (benefit from) income taxes
Depreciation and amortization
EBITDA
Legal, professional and settlement costs
Impairment of long-lived assets and goodwill
Loss (gain) on sale of hospitals, net
Transaction costs related to the Spin-off
Post-spin headcount reductions
Change in estimate related to collectability of patient accounts receivable
Adjusted EBITDA
Negative EBITDA of divested hospitals
Adjusted EBITDA, Adjusted for Divestitures
Negative (Positive) EBITDA of potential divestitures
Adjusted EBITDA, Adjusted for Potential Divestitures
78
Year Ended December 31,
2016
2015
$
$
(345,197 )
113,440
(53,875 )
117,288
(168,344 )
7,342
291,870
2,150
5,488
1,617
22,799
162,922
33,107
196,029
(8,232 )
187,797
$
$
4,735
98,290
3,304
128,001
234,330
—
13,000
—
16,337
—
—
263,667
6,407
270,074
(5,637 )
264,437
Revenues
The following table provides information on our net operating revenues (dollars in thousands, except per adjusted admission
amounts):
Consolidated and combined:
Net patient revenues, before the provision for bad debts
Provision for bad debts
Total net patient revenues
Non-patient revenues
Total net operating revenues
Net patient revenues per adjusted admission
Net operating revenues per adjusted admission
Same-facility:
Net patient revenues, before the provision for bad debts
Provision for bad debts
Total net patient revenues
Non-patient revenues
Total net operating revenues
Net patient revenues per adjusted admission
Net operating revenues per adjusted admission
Year Ended December 31,
2016
2015
$ Variance
% Variance
$ 2,313,977
280,586
2,033,391
105,076
$ 2,138,467
8,643
$
9,090
$
$ 2,331,992
258,520
2,073,472
113,866
$ 2,187,338
8,609
$
9,082
$
$ 2,080,948
227,511
1,853,437
102,073
$ 1,955,510
9,036
$
9,534
$
$ 2,077,447
205,379
1,872,068
110,898
$ 1,982,966
9,004
$
9,537
$
$
$
$
$
$
$
$
$
(18,015 )
22,066
(40,081 )
(8,790 )
(48,871 )
34
8
3,501
22,132
(18,631 )
(8,825 )
(27,456 )
32
(3 )
(0.8 )%
8.5 %
(1.9 )%
(7.7 )%
(2.2 )%
0.4 %
0.1 %
0.2 %
10.8 %
(1.0 )%
(8.0 )%
(1.4 )%
0.4 %
— %
The following table provides information related to our net operating revenues, before the provision for bad debts, by payor
source (dollars in thousands):
Consolidated and combined:
Medicare
Medicaid
Managed care and commercial
Self-pay
Non-patient
2016
Year Ended December 31,
2015
2016 vs 2015
Amount
% of
Total
Amount
% of
Total
$
Variance
Change in
%
$ 673,074
446,273
952,535
242,095
105,076
27.8 %
18.4 %
39.4 %
10.1 %
4.3 %
$ 656,799
443,479
984,480
247,234
113,866
26.9 %
18.1 %
40.3 %
10.0 %
4.7 %
$ 16,275
2,794
(31,945 )
(5,139 )
(8,790 )
0.9 %
0.3 %
(0.9 )%
0.1 %
(0.4 )%
Total net operating revenues, before the provision
for bad debts
$ 2,419,053
100.0 %
$ 2,445,858
100.0 %
$ (26,805 )
Same-facility:
Medicare
Medicaid
Managed care and commercial
Self-pay
Non-patient
$ 600,590
416,904
868,219
195,235
102,073
27.5 %
19.1 %
39.8 %
8.9 %
4.7 %
$ 579,351
412,211
886,602
199,283
110,898
26.5 %
18.8 %
40.5 %
9.1 %
5.1 %
$ 21,239
4,693
(18,383 )
(4,048 )
(8,825 )
1.0 %
0.3 %
(0.7 )%
(0.2 )%
(0.4 )%
Total net operating revenues, before the provision
for bad debts
$ 2,183,021
100.0 %
$ 2,188,345
100.0 %
$ (5,324 )
79
The following table provides information on certain drivers of our net operating revenues:
Consolidated and combined:
Number of licensed beds at end of period
Admissions
Adjusted admissions
Emergency room visits
Medicare case mix index
Same-facility:
Number of licensed beds at end of period
Admissions
Adjusted admissions
Emergency room visits
Medicare case mix index
Year Ended December 31,
2016
2015
$ Variance
% Variance
3,459
95,313
235,263
726,155
1.38
2,979
84,905
205,110
631,346
1.39
3,582
98,378
240,841
730,021
1.34
2,984
86,810
207,918
630,259
1.36
(123 )
(3,065 )
(5,578 )
(3,866 )
0.04
(5 )
(1,905 )
(2,808 )
1,087
0.03
(3.4 )%
(3.1 )%
(2.3 )%
(0.5 )%
3.0 %
(0.2 )%
(2.2 )%
(1.4 )%
0.2 %
2.5 %
Net operating revenues for the year ended December 31, 2016 decreased $48.9 million compared to the year ended December 31,
2015, consisting of a $40.1 million decrease in net patient revenues and an $8.8 million decrease in non-patient revenues. Our 2016
net patient revenues, before the provision for bad debts, included an $11.4 million negative impact to contractual allowances resulting
from the change in estimate described below. In addition, our net patient revenues in 2015 were unfavorably impacted by an $11.1
million Illinois cost report settlement reversal that was initially recorded as a favorable adjustment to contractual allowances in 2014
and then reversed in 2015 due to contract negotiations finalized in the second quarter of 2015. Excluding both of these impacts, net
patient revenues, before the provision for bad debts, decreased $17.7 million, or 0.8%, in 2016 when compared to 2015 consisting of a
$21.5 million decline from the Divestitures Group and a $3.8 million increase in the Potential Divestitures Group. Net patient
revenues, before the provision for bad debts, of the Continuing Hospitals Group decreased $0.1 million, consisting of an $18.3 million
decrease from volumes, offset by an $18.2 million increase from payor rates. On a consolidated basis, admissions and adjusted
admissions declined 3.1% and 2.3%, respectively, for the year ended December 31, 2016 compared to the year ended December 31,
2015. For the Continuing Hospitals Group, admissions and adjusted admissions decreased 2.6% and 1.3%, respectively, in 2016 when
compared to 2015.
As of December 31, 2016, we recorded a change in estimate of $11.4 million to reduce the net realizable value of our patient
accounts receivable, which negatively impacted contractual allowances in our statement of income for the year ended December 31,
2016. This change in estimate related to increasing delays associated with collections on accounts receivable under the Illinois
Medicaid program.
Non-patient revenues decreased $8.8 million in 2016 compared to 2015, consisting of $5.0 million related to our hospital
management advisory and healthcare consulting services business due to fewer management advisory and consulting services
contracts in 2016 when compared to 2015 and $3.8 million of other income. We had other income of $2.2 million related to the
receivables facility with CHS in 2015 with no comparable income in 2016. Our hospitals were removed from the CHS receivables
facility in November 2015.
Provision for Bad Debts
The provision for bad debts increased $22.1 million for the year ended December 31, 2016 compared to the year ended December
31, 2015, primarily due to the $11.4 million change in estimate recorded as of December 31, 2016, which negatively impacted the
provision for bad debts in our statement of income for the year ended December 31, 2016. This change in estimate related to our
assessment of the collectability of our managed care and commercial accounts receivable aged greater than one year based on a review
of historical cash collections for these accounts. The provision for bad debts decreased $0.1 million related to the Divestitures Group.
The remaining increase was due to a decline in the collectability of self-pay accounts receivable indicated by the most recent hindsight
model.
80
Salaries and Benefits
The following table provides information related to our salaries and benefits expenses (dollars in thousands, except per adjusted
admission amounts):
2016
2015
$ Variance
% Variance
Year Ended December 31,
Salaries and benefits
Hospital operations salaries and benefits
Hospital operations salaries and benefits per adjusted admission
Hospital operations man-hours per adjusted admission
$ 1,057,119
968,868
$
4,118
$
104.7
$ 1,016,696
959,495
$
3,984
$
103.2
$
$
$
40,423
9,373
134
1.5
4.0 %
1.0 %
3.4 %
1.5 %
Salaries and benefits increased $40.4 million for the year ended December 31, 2016 compared to the year ended December 31,
2015, primarily due to $29.2 million of corporate salaries and benefits in the eight month period following the Spin-off, which
included $7.4 million of stock-based compensation. Prior to the Spin-off, management fees were allocated to QHC for corporate
functions of CHS and were included in other operating expenses. Salaries and benefits declined $0.9 million related to the Divestitures
Group, declined $2.2 million related to the Potential Divestitures Group and increased $9.6 million related to the Continuing Hospitals
Group. The increase in the Continuing Hospitals Group primarily related to increased costs related to our self-insurance health claims
and costs related to our clinic operations as a result of our physician recruiting efforts.
Supplies
The following table provides information related to our supplies expense (dollars in thousands, except per adjusted admission
amounts):
2016
Year Ended December 31,
2015
$ Variance
% Variance
Supplies
Supplies per adjusted admission
$
$
258,639
1,099
$
$
249,792
1,037
$
$
8,847
62
3.5 %
6.0 %
Supplies expense increased $8.8 million for the year ended December 31, 2016 compared to the year ended December 31, 2015.
Supplies expense increased $0.7 million related to the Divestitures Group, declined $0.8 million related to the Potential Divestitures
Group and increased $8.8 million related to the Continuing Hospitals Group. The increase in the Continuing Hospitals Group was
primarily due to the renegotiated contract with our group purchasing organization following the Spin-off, which resulted in a reduction
in rebates and administrative fee reimbursements of $5.3 million in 2016 when compared to 2015.
Other Operating Expenses
The following table provides information related to our other operating expenses (dollars in thousands):
2016
% of
Total
Amount
Year Ended December 31,
2015
% of
Total
Amount
2016 vs 2015
$
Change
Variance
in %
Purchased services
Taxes and insurance
Medical specialist fees
Transition services agreements and allocations
from Parent
Repairs and maintenance
Utilities
Management fees from Parent
Other miscellaneous operating expenses
Total other operating expenses
$ 180,672
129,775
106,803
66,441
42,986
29,833
11,792
77,500
$ 645,802
28.0 %
20.1 %
16.5 %
$ 176,758
124,635
85,042
$
27.9 %
19.7 %
13.4 %
3,914
5,140
21,761
10.3 %
6.7 %
4.6 %
1.8 %
12.0 %
100.0 %
60,166
45,945
29,856
36,466
75,365
$ 634,233
9.5 %
7.2 %
4.7 %
5.7 %
11.9 %
100.0 %
6,275
(2,959 )
(23 )
(24,674 )
2,135
$ 11,569
0.1 %
0.4 %
3.1 %
0.8 %
(0.5 )%
(0.1 )%
(3.9 )%
0.1 %
Other operating expenses increased $11.6 million for the year ended December 31, 2016 compared to the year ended December
31, 2015. As a percentage of net operating revenues, other operating expenses were 30.2% and 29.0% in these respective years. Other
operating expenses increased $3.2 million related to the Divestitures Group, increased $3.5 million related to the Potential Divestitures
Group and increased $11.3 million related to the Continuing Hospitals Group. Medical specialist fees increased in 2016 when
compared to 2015 as a result of the renegotiated contracts related to emergency room services and subsidies to various third parties,
including hospitalists. Taxes and insurance increased primarily due to a reduction in property tax credits in 2016 when compared to
2015. In 2016, we had $8.0 million of Illinois income tax credits and $3.2 million of New Mexico gross receipts tax refunds, which
81
compared to $13.1 million of Illinois income tax credits in 2015. In 2016, we incurred $0.9 million of expenses associated with New
Mexico gross receipts tax refunds that were included in purchased services with no comparable fees in 2015. Management fees from
Parent, which primarily consisted of costs for corporate salaries and benefits allocated from CHS, decreased in 2016 as it only
includes the four months prior to the Spin-off. We entered into transition services agreements with CHS that were initiated on the
Spin-off date and are comparable shared services to those received by us from CHS prior to the Spin-off. When comparing 2016 to
2015, our costs associated with the transition services agreements were $6.3 million higher than the comparable allocated costs from
CHS.
Depreciation and Amortization
Depreciation and amortization expense decreased $10.7 million to $117.3 million for the year ended December 31, 2016
compared to $128.0 million for the year ended December 31, 2015. The decrease in depreciation and amortization was primarily due
to $45.4 million of impairment to long-lived assets and the reclassification of certain property, equipment and capitalized software
costs to held for sale as of June 30, 2016, which reduced depreciation and amortization in the second half of 2016. See “— Overview
— 2016 Impairment” for a table and additional information on the impairment recorded in 2016.
Rent
Rent expense increased $1.2 million to $49.9 million for the year ended December 31, 2016 compared to $48.7 million for the
year ended December 31, 2015. As a percentage of net operating revenues, rent expense was 2.3% and 2.2% in these respective years.
Electronic Health Records Incentives Earned
Electronic health records incentives earned decreased $14.3 million to $11.5 million for the year ended December 31, 2016
compared to $25.8 million for the year ended December 31, 2015 primarily due to the decrease in activity as we move closer toward
full implementation of EHR. See Note 2 — Basis of Presentation and Significant Accounting Policies — Revenues in the
accompanying financial statements for additional information on EHR.
Legal, Professional and Settlement Costs
Legal, professional and settlement costs of $7.3 million for the year ended December 31, 2016 primarily related to $4.6 million of
costs associated with a QHR legal matter and $1.9 million of costs primarily associated with litigation related to the Spin-off. We did
not have any comparable costs in 2015. See Note 19 — Commitments and Contingencies — Commercial Litigations and Other
Lawsuits in the accompanying financial statements for additional information on our legal matters.
Impairment of Long-Lived Assets and Goodwill
During the year ended December 31, 2016, we recognized $291.9 million of impairment to long-lived assets and goodwill,
consisting of $145.6 million to property and equipment, $18.9 million to capitalized software costs, $2.4 million to medical license
assets and $125.0 million to goodwill.
During the second quarter following the Spin-off, we made the decision to classify certain hospitals as held for sale and evaluate
other hospitals for potential divestiture. Due to the increase in net operating losses associated with these hospitals, we analyzed the
long-lived assets of all of our hospitals to test for impairment and recorded $45.4 million of long-lived asset impairment in this
quarter. In addition, we evaluated the estimated relative fair value of the hospitals classified as held for sale in relation to the overall
fair value of the hospital operations reporting unit utilizing a September 30, 2015 measurement date, which was the measurement date
of our most recent annual goodwill impairment analysis, and recognized $5.0 million of goodwill impairment in this quarter. In this
same quarter, we identified certain indicators of goodwill impairment related to the hospital operations reporting unit and concluded
that such indicators necessitated an interim goodwill impairment evaluation. The primary indicators were declining market
capitalization, as compared to the carrying value of equity, and a decrease in estimated future earnings of the hospital operations
reporting unit. We performed a calculation of the overall fair value of this reporting unit in step one of the impairment test and
concluded that the carrying value of our hospital operations reporting unit as of June 30, 2016 exceeded the estimated fair value. We
performed a preliminary step two calculation of goodwill impairment to determine the implied fair value of goodwill of the hospital
operations reporting unit in a hypothetical purchase price allocation. Based on this preliminary analysis, we estimated and recorded
additional goodwill impairment of $200 million in the second quarter of 2016.
For step two goodwill impairment testing, we engaged a professional valuation firm to perform a hypothetical purchase price
valuation of each of our hospitals utilizing a September 30, 2016 measurement date. The results of the third-party valuation, which
were completed in the fourth quarter of 2016, indicated that the carrying values of certain of our individual hospitals exceeded their
fair values. Considering these results to be an indicator of potential impairment and to assess whether any additional impairment of
long-lived assets existed, we utilized a September 30, 2016 measurement date to perform an analysis of undiscounted cash flows for
each hospital in which an indicator of impairment was identified. Based on the results of these analyses, we recorded impairment of
$82.7 million related to long-lived assets at certain hospitals and a downward adjustment to our previously recorded goodwill
impairment estimate of $80 million in the fourth quarter of 2016. The net impact to our financial statements was $2.7 million of
additional impairment in the fourth quarter of 2016 beyond the initial estimate of $200 million estimate recorded as the preliminary
step-two calculation in the second quarter of 2016.
82
In addition to the above, we experienced a decline in operating results at several hospitals in the fourth quarter of 2016. This led
management to perform additional testing for impairment using a December 31, 2016 measurement date. As a result of this analysis,
we recorded additional impairment of $38.8 million related to long-lived assets in the fourth quarter of 2016. See “— Overview —
2016 Impairment” for a table and additional information on the impairment recorded in 2016.
During the year ended December 31, 2015, we recognized impairment of $13.0 million to reduce the carrying values of certain
long-lived assets at seven of our hospitals to their estimated fair values. The impairment for 2015 was identified because of declining
operating results and projections of future cash flows at these hospitals, which were caused by competitive and operational challenges
specific to the markets in which these hospitals operate.
Loss (Gain) on Sale of Hospitals, Net
During the year ended December 31, 2016, we recorded a $2.2 million net loss on the sale of two hospitals, consisting of $1.2
million related to Barrow and $1.0 million related to Sandhills. We had no comparable hospital sales in 2015. We are committed to
our business strategy, which includes actively engaging in initiatives, among others, to divest underperforming hospitals, reduce our
debt and refine our portfolio to a more sustainable group of hospitals with higher operating margins. See Note 4 — Divestitures in the
accompanying financial statements for additional information on the sales of these hospitals, which both occurred in the month of
December 2016.
Interest Expense, Net
The following table provides information related to interest expense, net (in thousands):
Senior Credit Facility:
Revolving Credit Facility
Term Loan Facility
ABL Credit Facility
Senior Notes
Amortization of debt issuance costs and discounts
All other interest expense (income), net
Total interest expense, net, from long-term debt
Due to Parent, net
Total interest expense, net
Year Ended December 31,
2016
2015
$ Variance
% Variance
$
$
330
40,719
342
32,166
4,918
(849 )
77,626
35,814
113,440
$
$
—
—
—
—
—
283
283
98,007
98,290
$
$
330
40,719
342
32,166
4,918
(1,132 )
77,343
(62,193 )
15,150
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
(400.0 )%
27,329.7 %
(63.5 )%
15.4 %
Interest expense, net increased $15.2 million for the year ended December 31, 2016 compared to the year ended December 31,
2015 primarily due to the new debt structure put in place in connection with the Spin-off. Interest expense for the period following the
Spin-off is calculated based on the terms of the Credit Agreements and Senior Notes. The effective interest rates for our Term Loan
Facility and Senior Notes were approximately 7.7% and 12.5%, respectively, at December 31, 2016. Prior to the Spin-off, we were
charged interest on our indebtedness with CHS at various rates ranging from 4% to 7%. Interest computations on this indebtedness
were based on the outstanding balance of Due to Parent, net at the end of each month. This debt with CHS was extinguished on April
29, 2016, the Spin-off date. See Note 7 — Long-Term Debt in the accompanying financial statements for additional information on
our indebtedness.
83
Provision for (Benefit from) Income Taxes
The following table reconciles the differences between the statutory federal income tax rate and our effective tax rate (dollars in
thousands):
Year Ended December 31,
2016
2015
2016 vs 2015
Amount
% of
Total
Amount
% of
Total
$ Variance
Change
in %
Provision for (benefit from) income taxes at statutory
federal tax rate
State income taxes, net of federal income tax benefit
Net (income) loss attributable to noncontrolling
interests
Non-deductible goodwill and Spin-off costs
Change in valuation allowance
All other
Total provision for (benefit from) income taxes and
effective tax rate
$ (139,685 )
(47,749 )
35.0 %
12.0 %
$ 2,814
(171 )
35.0 %
(2.1 )%
$ (142,499 )
(47,578 )
— %
14.1 %
(872 )
36,009
94,745
3,677
0.2 %
(9.0 )%
(23.7 )%
(1.0 )%
(1,189 )
—
1,459
391
(14.8 )%
— %
18.2 %
4.8 %
317
36,009
93,286
3,286
15.0 %
(9.0 )%
(41.9 )%
(5.8 )%
$ (53,875 )
13.5 %
$ 3,304
41.1 %
$ (57,179 )
(27.6 )%
Our income tax benefit was $53.9 million for the year ended December 31, 2016 and our income tax expense was $3.3 million for
the year ended December 31, 2015. Our effective tax rates were 13.5% and 41.1% for these respective years. The decrease in our
effective tax rate in 2016 when compared to 2015 was primarily due to our 2016 pre-tax loss, recording a valuation allowance against
deferred tax assets that are not more likely than not to be recognized, which we initiated in the fourth quarter of 2016, and the
additional impact in 2016 of a greater proportion of non-deductible expenses relative to our pre-tax loss. These non-deductible
expenses were primarily the non-deductible portions of our goodwill impairment and Spin-off costs. See Note 12 — Income Taxes in
the accompanying financial statements.
Net Income (Loss) Attributable to Noncontrolling Interests
Net income (loss) attributable to noncontrolling interests decreased $0.9 million to $2.5 million for the year ended December 31,
2016 compared to $3.4 million for the year ended December 31, 2015. As a percentage of net operating revenues, net income (loss)
attributable to noncontrolling interests was 0.2% and 0.1% in these respective years.
84
Three Months Ended December 31, 2017 Compared to Three Months Ended December 31, 2016 (Unaudited)
A summary of our operating results, both in dollars and as a percentage of net operating revenues, follows (dollars in thousands):
Three Months Ended December 31,
2017
% of
Revenues
Amount
2016
% of
Revenues
Amount
2017 vs 2016
$
Variance
Change
$ 596,648
81,566
515,082
253,106
63,932
156,669
18,714
13,599
(229 )
(518 )
$ 593,855
78,615
515,240
100.0 %
49.1 %
12.4 %
30.5 %
3.6 %
2.6 %
— %
(0.1 )%
268,559
66,829
163,276
26,434
11,966
(1,691 )
1,166
25,820
(131 )
49
531,011
5.0 %
— %
— %
103.1 %
41,470
2,150
44
580,203
(15,929 )
31,873
(47,802 )
(21,779 )
(26,023 )
(3.1 )%
6.2 %
(9.3 )%
(4.2 )%
(5.1 )%
(64,963 )
28,684
(93,647 )
(3,555 )
(90,092 )
$ 2,793
2,951
(158 )
(15,453 )
(2,897 )
(6,607 )
(7,720 )
1,633
1,462
(1,684 )
(15,650 )
(2,281 )
5
(49,192 )
49,034
3,189
45,845
(18,224 )
64,069
100.0 %
52.1 %
13.0 %
31.8 %
5.1 %
2.3 %
(0.3 )%
0.2 %
8.0 %
0.4 %
— %
112.6 %
(12.6 )%
5.6 %
(18.2 )%
(0.7 )%
(17.5 )%
in %
(3.0 )%
(0.6 )%
(1.3 )%
(1.5 )%
0.3 %
0.3 %
(0.3 )%
(3.0 )%
(0.4 )%
— %
(9.5 )%
9.5 %
0.6 %
8.9 %
(3.5 )%
12.4 %
Operating revenues, net of contractual
allowances and discounts
Provision for bad debts
Net operating revenues
Operating costs and expenses:
Salaries and benefits
Supplies
Other operating expenses
Depreciation and amortization
Rent
Electronic health records incentives earned
Legal, professional and settlement costs
Impairment of long-lived assets and
goodwill
Loss (gain) on sale of hospitals, net
Transaction costs related to the Spin-off
Total operating costs and expenses
Income (loss) from operations
Interest expense, net
Income (loss) before income taxes
Provision for (benefit from) income taxes
Net income (loss)
Less: Net income (loss) attributable to
noncontrolling interests
Net income (loss) attributable to Quorum
Health Corporation
785
0.1 %
574
0.1 %
211
— %
$ (26,808 )
(5.2 )% $ (90,666 )
(17.6 )%
$ 63,858
12.4 %
The following table reconciles Adjusted EBITDA, Adjusted EBITDA, Adjusted for Divestitures and Adjusted EBITDA, Adjusted
for Potential Divestitures to net income (loss), the most directly comparable U.S. GAAP financial measure (in thousands):
$
Net income (loss)
Interest expense, net
Provision for (benefit from) income taxes
Depreciation and amortization
EBITDA
Legal, professional and settlement costs
Impairment of long-lived assets and goodwill
Loss (gain) on sale of hospitals, net
Transaction costs related to the Spin-off
Post-spin headcount reductions
Change in estimate related to collectability of patient accounts receivable
Adjusted EBITDA
Negative EBITDA of divested hospitals
Adjusted EBITDA, Adjusted for Divestitures
Negative EBITDA of potential divestitures
Adjusted EBITDA, Adjusted for Potential Divestitures
$
Three Months Ended December 31,
2017
2016
(26,023 )
31,873
(21,779 )
18,714
2,785
(518 )
25,820
(131 )
49
—
21,000
49,005
5,144
54,149
3,114
57,263
$
$
(90,092 )
28,684
(3,555 )
26,434
(38,529 )
1,166
41,470
2,150
44
1,617
22,799
30,717
13,140
43,857
2,102
45,959
85
Revenues
The following table provides information on our net operating revenues (dollars in thousands, except per adjusted admission
amounts):
Consolidated and combined:
Net patient revenues, before the provision for bad debts
Provision for bad debts
Total net patient revenues
Non-patient revenues
Total net operating revenues
Net patient revenues per adjusted admission
Net operating revenues per adjusted admission
Same-facility:
Net patient revenues, before the provision for bad debts
Provision for bad debts
Total net patient revenues
Non-patient revenues
Total net operating revenues
Net patient revenues per adjusted admission
Net operating revenues per adjusted admission
Three Months Ended December 31,
2017
2016
$ Variance
% Variance
$
$
$
$
$
$
$
$
572,038
81,566
490,472
24,610
515,082
9,657
10,142
570,947
75,204
495,743
24,484
520,227
9,801
10,285
$
$
$
$
$
$
$
$
567,767
78,615
489,152
26,088
515,240
8,551
9,007
514,383
63,638
450,745
25,138
475,883
8,963
9,463
$
$
$
$
$
$
$
$
4,271
2,951
1,320
(1,478 )
(158 )
1,106
1,135
56,564
11,566
44,998
(654 )
44,344
838
822
0.8 %
3.8 %
0.3 %
(5.7 )%
— %
12.9 %
12.6 %
11.0 %
18.2 %
10.0 %
(2.6 )%
9.3 %
9.3 %
8.7 %
The following table provides information related to our net operating revenues, before the provision for bad debts, by payor
source (dollars in thousands):
2017
Three Months Ended December 31,
2016
2017 vs 2016
Amount
% of
Total
Amount
% of
Total
$
Variance
Change in
%
Consolidated and combined:
Medicare
Medicaid
Managed care and commercial
Self-pay
Non-patient
$ 154,096
127,363
237,861
52,718
24,610
25.8 %
21.3 %
39.9 %
8.9 %
4.1 %
$ 167,238
104,243
238,195
58,091
26,088
28.2 %
17.6 %
40.1 %
9.7 %
4.4 %
$ (13,142 )
23,120
(334 )
(5,373 )
(1,478 )
Total net operating revenues, before the provision
for bad debts
$ 596,648
100.0 %
$ 593,855
100.0 %
$ 2,793
Same-facility:
Medicare
Medicaid
Managed care and commercial
Self-pay
Non-patient
$ 153,736
127,941
236,769
52,501
24,484
25.8 %
21.5 %
39.8 %
8.8 %
4.1 %
$ 150,695
98,865
217,858
46,965
25,138
27.9 %
18.3 %
40.4 %
8.7 %
4.7 %
$ 3,041
29,076
18,911
5,536
(654 )
(2.4 )%
3.7 %
(0.2 )%
(0.8 )%
(0.3 )%
(2.1 )%
3.2 %
(0.6 )%
0.1 %
(0.6 )%
Total net operating revenues, before the provision
for bad debts
$ 595,431
100.0 %
$ 539,521
100.0 %
$ 55,910
The table above includes $29.9 million of revenues from the California HQAF program in the 2017 period, of which $22.5
million related to the first three quarters of 2017, and an $11.4 million change in estimate in the 2016 period which impacted
contractual allowances. Both of these items impacted Medicaid revenues.
86
The following table provides information on certain drivers of our net operating revenues:
Consolidated and combined:
Number of licensed beds at end of period
Admissions
Adjusted admissions
Emergency room visits
Medicare case mix index
Same-facility:
Number of licensed beds at end of period
Admissions
Adjusted admissions
Emergency room visits
Medicare case mix index
Three Months Ended December 31,
2017
2016
$ Variance
% Variance
2,979
20,932
50,788
155,746
1.45
2,979
20,864
50,583
154,874
1.45
3,459
23,200
57,202
174,754
1.41
2,979
20,788
50,290
152,620
1.39
(480 )
(2,268 )
(6,414 )
(19,008 )
0.04
—
76
293
2,254
0.06
(13.9 )%
(9.8 )%
(11.2 )%
(10.9 )%
2.8 %
— %
0.4 %
0.6 %
1.5 %
4.3 %
Net operating revenues for the three months ended December 31, 2017 decreased $0.2 million compared to the three months
ended December 31, 2016, consisting of a $1.3 million increase in net patient revenues, partially offset by a $1.5 million decrease in
non-patient revenues. Our net patient revenues, before the provision for bad debts, increased $4.3 million, or 0.8%, consisting of a
$52.3 million decline in the Divestitures Group, an $8.0 million decline in the Potential Divestitures Group and a $64.6 million
increase in the Continuing Hospitals Group. Our net patient revenues, before the provision for bad debts, of the Continuing Hospitals
Group include $29.9 million of revenues from the California HQAF program in 2017 as the program approval process by CMS for the
2017-2019 period was completed in the fourth quarter of 2017, of which $22.5 million related to the first three quarters of 2017.
Excluding both the California HQAF revenues of $22.5 million in the 2017 period related to the first three quarters of 2017 and the
change in estimate of $11.4 million in the 2016 period, which impacted contractual allowances as described below, net patient
revenues of the Continuing Hospitals Group increased $30.7 million, consisting of a $15.5 million increase from volumes and a $15.2
million increase from payor rates. Excluding these same items, net patient revenues per adjusted admission for the Continuing
Hospitals Group would have increased 3.8%. On a consolidated basis, admissions and adjusted admissions declined 9.8% and 11.2%,
respectively, when comparing the fourth quarter of 2017 to the same period in 2016. For the Continuing Hospitals Group, admissions
and adjusted admissions increased 3.4% and 3.7%, respectively, when comparing the fourth quarter of 2017 to the same period in
2016.
As of December 31, 2016, we recorded a change in estimate of $11.4 million to reduce the net realizable value of our patient
accounts receivable, which negatively impacted contractual allowances in our statement of income for the year ended December 31,
2016. This change in estimate related to increasing delays associated with collections on accounts receivable under the Illinois
Medicaid program.
Non-patient revenues decreased $1.5 million for the three months ended December 31, 2017 compared to the 2016 period,
primarily related to our hospital management advisory and healthcare consulting services business.
Provision for Bad Debts
The provision for bad debts increased $3.0 million for the three months ended December 31, 2017 compared to the three months
ended December 31, 2016. The provision for bad debts decreased $8.3 million related to the Divestitures Group, offset by an increase
of $6.2 million related to the Potential Divestitures Group and an increase of $5.1 million related to the Continuing Hospitals Group.
During the fourth quarter of 2017, we analyzed our self-pay patient accounts receivable at a more comprehensive and
disaggregated level and refined our estimate of the collectability of the portion of self-pay accounts receivable related to insured
patients, primarily co-pays and deductibles. Our analysis also included an evaluation of patient accounts receivable retained in the
divestitures of six of our seven divested hospitals. As a result of these efforts, we recorded a change in estimate of $21.0 million to
reduce the net realizable value of patient accounts receivable, which negatively impacted the provision for bad debts in our statement
of income for the three months ended December 31, 2017.
As of December 31, 2016, we recorded a change in estimate of $11.4 million to reduce the net realizable value of our patient
accounts receivable, which negatively impacted the provision for bad debts in our statement of income for the three months ended
December 31, 2016. This change in estimate related to our assessment of the collectability of our managed care and commercial
accounts receivable aged greater than one year based on a review of historical cash collections for these accounts.
87
Salaries and Benefits
The following table provides information related to our salaries and benefits expenses (dollars in thousands, except per adjusted
admission amounts):
Three Months Ended December 31,
2017
2016
$ Variance
% Variance
Salaries and benefits
Hospital operations salaries and benefits
Hospital operations salaries and benefits per adjusted admission
Hospital operations man-hours per adjusted admission
$
$
$
253,106
230,987
4,548
108.6
$
$
$
268,559
242,745
4,244
108.2
$
$
$
(15,453 )
(11,758 )
304
0.4
(5.8 )%
(4.8 )%
7.2 %
0.4 %
Salaries and benefits decreased $15.5 million for the three months ended December 31, 2017 compared to the three months ended
December 31, 2016. Salaries and benefits declined $25.3 million related to the Divestitures Group, $1.5 million related to the Potential
Divestitures Group and $4.2 million related to corporate and QHR salaries and benefits, which the latter was due to headcount
reductions in November 2016 and May 2017. Included in salaries and benefits expenses related to corporate functions were $2.3
million and $2.8 million of stock-based compensation for the three months ended December 31, 2017 and 2016, respectively. These
declines were offset by an increase of $15.6 million in salaries and benefits of the Continuing Hospitals Group primarily resulting
from increased salaries at our clinics due to physician recruitment efforts.
Supplies
The following table provides information related to our supplies expense (dollars in thousands, except per adjusted admission
amounts):
Three Months Ended December 31,
2017
2016
$ Variance
% Variance
Supplies
Supplies per adjusted admission
$
$
63,932
1,259
$
$
66,829
1,168
$
$
(2,897 )
91
(4.3 )%
7.8 %
Supplies expense decreased $2.9 million for the three months ended December 31, 2017 compared to the three months ended
December 31, 2016. Supplies expense declined $6.9 million related to the Divestitures Group and $1.3 million related to the Potential
Divestitures Group. Supplies expense of the Continuing Hospitals Group increased $5.4 million, primarily due to an increase in
adjusted admissions of 3.7% for the three months ended December 31, 2017 compared to the same period in 2016, which resulted in
an increase in implant costs as a result of increased orthopedic surgeries.
Other Operating Expenses
The following table provides information related to our other operating expenses (dollars in thousands):
2017
% of
Total
Amount
Three Months Ended December 31,
2016
% of
Total
Amount
2017 vs 2016
$
Change
Variance
Purchased services
Taxes and insurance
Medical specialist fees
Transition services agreements
Repairs and maintenance
Utilities
Other miscellaneous operating expenses
Total other operating expenses
$ 38,556
38,952
27,235
15,734
9,680
6,079
20,433
$ 156,669
24.6 %
24.9 %
17.4 %
10.0 %
6.2 %
3.9 %
13.0 %
100.0 %
$ 47,356
35,518
29,460
14,249
11,410
7,307
17,976
$ 163,276
29.0 %
21.8 %
18.0 %
8.7 %
7.0 %
4.5 %
11.0 %
100.0 %
$
$
(8,800 )
3,434
(2,225 )
1,485
(1,730 )
(1,228 )
2,457
(6,607 )
Other operating expenses decreased $6.6 million for the three months ended December 31, 2017 compared to the three months
ended December 31, 2016. As a percentage of net operating revenues, other operating expenses were 29.3% and 31.8% in these
respective periods. Other operating expenses declined $17.3 million related to the Divestitures Group and $0.7 million related to the
Potential Divestitures Group, partially offset by a $10.8 million increase related to the Continuing Hospitals Group. The increase in
the Continuing Hospitals Group was primarily due to a $7.9 million increase in provider taxes associated with the California HQAF
program, which was approved in the fourth quarter of 2017 for the 2017-2019 program period resulting in a full year of provider taxes
being recognized in the fourth quarter of 2017 compared to one quarter in the 2016 period. We are disputing in arbitration, among
88
in %
(4.4 )%
3.1 %
(0.6 )%
1.3 %
(0.8 )%
(0.6 )%
2.0 %
other issues and actions, certain charges and lack of performance of various obligations under the transition services agreements with
our former Parent.
Depreciation and Amortization
Depreciation and amortization expense decreased $7.7 million to $18.7 million for the three months ended December 31, 2017
compared to $26.4 million for the three months ended December 31, 2016. This decrease was primarily due to the overall reduction in
our long-lived assets due to divestitures, impairment charges reducing the asset bases of our long-lived assets and the discontinuation
of depreciation and amortization related to long-lived assets upon being reclassified as held for sale.
Rent
Rent expense increased $1.6 million to $13.6 million for the three months ended December 31, 2017 compared to $12.0 million
for the three months ended December 31, 2016. The increase was primarily due to the recognition of a $0.9 million charge related to
leased space we are no longer able to sub-lease and therefore have recognized the remaining portion of the lease obligation as rent
expense in the 2017 period. As a percentage of net operating revenues, rent expense was 2.6% and 2.3% for these respective periods.
Electronic Health Records Incentives Earned
Electronic health records incentives earned decreased $1.5 million to $0.2 million for the three months ended December 31, 2017
compared to $1.7 million for the three months ended December 31, 2016 primarily due to the decrease in activity as we move closer
toward full implementation of EHR. See Note 2 — Basis of Presentation and Significant Accounting Policies — Electronic Health
Records Incentives Earned in the accompanying financial statements for additional information on EHR.
Legal, Professional and Settlement Costs
Legal, professional and settlement costs for the three months ended December 31, 2017 included an adjustment to our prior
quarter’s expenses for various costs that were determined to be covered under our existing insurance policies. The net result of this
adjustment was a credit of $(0.5) million of legal, professional and settlement costs for the three months ended December 31, 2017.
For the three months ended December 31, 2016, legal, professional and settlement costs were $1.2 million and primarily related to the
shareholder class action lawsuit and costs associated with our dispute in arbitration, among other issues and actions, of certain charges
and lack of performance of various obligations under the transition services agreements with our former Parent.
Impairment of Long-Lived Assets and Goodwill
During the three months ended December 31, 2017, we recognized $25.8 million of impairment to long-lived assets including
$23.7 million of property and equipment and $2.1 million of capitalized software costs related to certain hospitals which we have
identified as potential divestiture candidates and for which we have received letters of intent.
During the three months ended December 31, 2016, we recognized $41.5 million of impairment to long-lived assets and goodwill.
This included a revision to our goodwill impairment estimate initially recorded in the second quarter of 2016, which was a downward
adjustment of $80 million. This amount was offset by impairment of $71.9 million related to property and equipment and $10.8
million related to capitalized software costs in connection with finalizing our step two goodwill impairment evaluation. Additionally,
due to additional indicators of impairment resulting from continued operating losses at certain of our hospitals in the second half of
2016, we recorded further impairment of $32.7 million related to property and equipment, $3.7 million related to capitalized software
costs and $2.4 million related to medical licenses associated with our hospital operations business in the fourth quarter of 2016.
See “Overview — 2017 Impairment and — 2016 Impairment” for a table and additional information on the impairment recorded
in 2017 and 2016.
Loss (Gain) on Sale of Hospitals, Net
During the three months ended December 31, 2017, we recognized a $0.1 million gain on the sale of hospitals, net primarily
related to the sale of L.V. Stabler. During the three months ended December 31, 2016, we recognized a $2.2 million loss on the sale of
hospitals, net consisting of a $1.2 million loss related to the sale of Barrow and a $1.0 million loss related to the sale of Sandhills. See
Note 4 — Divestitures in the accompanying financial statements for additional information on divestitures.
89
Interest Expense, Net
The following table provides information related to interest expense, net (in thousands):
Senior Credit Facility:
Revolving Credit Facility
Term Loan Facility
ABL Credit Facility
Senior Notes
Amortization of debt issuance costs and discounts
All other interest expense (income), net
Total interest expense, net
Three Months Ended December 31,
2017
2016
$ Variance
% Variance
$
$
99
17,316
347
11,630
2,678
(197 )
31,873
$
$
121
15,108
140
11,626
2,035
(346 )
28,684
$
$
(22 )
2,208
207
4
643
149
3,189
(18.2 )%
14.6 %
147.9 %
0.0 %
31.6 %
(43.1 )%
11.1 %
Interest expense, net increased $3.2 million to $31.9 million for the three months ended December 31, 2017 compared to $28.7
million for the three months ended December 31, 2016. Following the Spin-off, interest expense is calculated based on the terms of
our Credit Agreements and Senior Notes. The effective interest rates for our Term Loan Facility and Senior Notes were approximately
8.8% and 12.5%, respectively, at December 31, 2017 and 7.7% and 12.5%, respectively, at December 31, 2016. Our Senior Credit
Facility was amended on April 11, 2017, which increased the interest rate terms on our Term Loan Facility. See Liquidity and Capital
Resources below and Note 7 — Long-Term Debt in the accompanying financial statements for additional information on our
indebtedness.
Provision for (Benefit from) Income Taxes
On December 22, 2017, the Tax Act was signed into law. The Tax Act includes a number of changes to existing U.S. tax laws that
impact us, most notably a reduction of the U.S. corporate tax rate from 35% to 21% for tax years after December 31, 2017. As a direct
result of changes in tax law due to the passage of the Tax Act, we recorded a total tax benefit of $24.0 million during 2017 which is
composed of two amounts: a tax benefit of $10.9 million in deferred income tax expense for the net change in our deferred tax
liabilities at the new 21% tax rate, and a $13.1 million tax benefit in deferred income tax expense for the reduction in valuation
allowance attributable to the change in net realizability of deferred tax assets. The Tax Act also provides for acceleration of
depreciation for certain assets placed into service after September 27, 2017, as well as prospective changes beginning in 2018. These
prospective changes include an increased limitation on the deductibility of executive compensation, a limitation on the deductibility of
interest expense, new rules surrounding meals and entertainment expense and fines and penalties. Also, while net operating losses
generated in the future may by carried forward indefinitely under the new law, there is a limitation on the amount that may be used in
any given year. The Tax Act may also have an impact on projected future taxable income that could further affect valuation allowance
considerations. In addition to the federal law, we await guidance from the states in which we file on how components of the Tax Act
may be treated in these jurisdictions. Those adjustments may materially impact our provision for (benefit from) income taxes in the
period in which the adjustments are made.
The benefit from income taxes was $21.8 million for the three months ended December 31, 2017 and $3.6 million for the three
months ended December 31, 2016. Our effective tax rates were 45.6% and 3.8% for these respective periods. The increase in our
effective tax rate for the fourth quarter of 2017 when compared to the same 2016 period was primarily due to the Tax Act which
provided for the recognition of a deferred tax benefit on both the release of valuation allowance related to certain deferred tax assets
not previously expected to be realized in addition to the statutory rate reduction from 35% to 21%.
Net Income (Loss) Attributable to Noncontrolling Interests
Net income (loss) attributable to noncontrolling interests was $0.8 million and $0.6 million in the three months ended December
31, 2017 and 2016, respectively. As a percentage of net operating revenues, it was relatively flat, or 0.1% in both periods.
90
Three Months Ended December 31, 2017 Compared to Three Months Ended September 30, 2017 (Unaudited)
A summary of our operating results, both in dollars and as a percentage of net operating revenues, follows (dollars in thousands):
Three Months Ended
December 31, 2017
% of
Revenues
Amount
September 30, 2017
% of
Revenues
Amount
Fourth Quarter vs Third
Quarter
$
Variance
Change
$ 596,648
81,566
515,082
253,106
63,932
156,669
18,714
13,599
(229 )
(518 )
$ 557,847
58,545
499,302
100.0 %
251,780
58,657
145,357
20,735
12,377
49.1 %
12.4 %
30.5 %
3.6 %
2.6 %
— %
(0.1 )%
(287 )
2,050
25,820
(131 )
49
531,011
5.0 %
— %
— %
103.1 %
(15,929 )
31,873
(47,802 )
(21,779 )
(26,023 )
(3.1 )%
6.2 %
(9.3 )%
(4.2 )%
(5.1 )%
5,261
79
173
496,182
3,120
32,216
(29,096 )
(542 )
(28,554 )
$ 38,801
23,021
15,780
1,326
5,275
11,312
(2,021 )
1,222
58
(2,568 )
20,559
(210 )
(124 )
34,829
(19,049 )
(343 )
(18,706 )
(21,237 )
2,531
100.0 %
50.4 %
11.7 %
29.2 %
4.2 %
2.5 %
(0.1 )%
0.4 %
1.1 %
— %
— %
99.4 %
0.6 %
6.4 %
(5.8 )%
(0.1 )%
(5.7 )%
in %
(1.3 )%
0.7 %
1.3 %
(0.6 )%
0.1 %
0.1 %
(0.5 )%
3.9 %
— %
— %
3.7 %
(3.7 )%
(0.2 )%
(3.5 )%
(4.1 )%
0.6 %
Operating revenues, net of contractual
allowances and discounts
Provision for bad debts
Net operating revenues
Operating costs and expenses:
Salaries and benefits
Supplies
Other operating expenses
Depreciation and amortization
Rent
Electronic health records incentives earned
Legal, professional and settlement costs
Impairment of long-lived assets and
goodwill
Loss (gain) on sale of hospitals, net
Transaction costs related to the Spin-off
Total operating costs and expenses
Income (loss) from operations
Interest expense, net
Income (loss) before income taxes
Provision for (benefit from) income taxes
Net income (loss)
Less: Net income (loss) attributable to
noncontrolling interests
Net income (loss) attributable to Quorum
Health Corporation
785
0.1 %
637
0.1 %
148
— %
$ (26,808 )
(5.2 )% $ (29,191 )
(5.8 )%
$ 2,383
0.6 %
The following table reconciles Adjusted EBITDA, Adjusted EBITDA, Adjusted for Divestitures and Adjusted EBITDA, Adjusted
for Potential Divestitures to net income (loss), the most directly comparable U.S. GAAP financial measure (in thousands):
Net income (loss)
Interest expense, net
Provision for (benefit from) income taxes
Depreciation and amortization
EBITDA
Legal, professional and settlement costs
Impairment of long-lived assets and goodwill
Loss (gain) on sale of hospitals, net
Transaction costs related to the Spin-off
Post-spin headcount reductions
Change in estimate related to collectability of patient accounts receivable
Adjusted EBITDA
Negative EBITDA of divested hospitals
Adjusted EBITDA, Adjusted for Divestitures
Negative (Positive) EBITDA of potential divestitures
Adjusted EBITDA, Adjusted for Potential Divestitures
91
Three Months Ended
December 31, 2017
September 30, 2017
$
$
(26,023 )
31,873
(21,779 )
18,714
2,785
(518 )
25,820
(131 )
49
—
21,000
49,005
5,144
54,149
3,114
57,263
$
$
(28,554 )
32,216
(542 )
20,735
23,855
2,050
5,261
79
173
850
—
32,268
5,242
37,510
(420 )
37,090
Revenues
The following table provides information on our net operating revenues (dollars in thousands, except per adjusted admission
amounts):
Consolidated and combined:
Net patient revenues, before the provision for bad debts
Provision for bad debts
Total net patient revenues
Non-patient revenues
Total net operating revenues
Net patient revenues per adjusted admission
Net operating revenues per adjusted admission
Same-facility:
Net patient revenues, before the provision for bad debts
Provision for bad debts
Total net patient revenues
Non-patient revenues
Total net operating revenues
Net patient revenues per adjusted admission
Net operating revenues per adjusted admission
Three Months Ended
December 31,
2017
September 30,
2017
$ Variance
% Variance
$
$
$
$
$
$
$
$
572,038
81,566
490,472
24,610
515,082
9,657
10,142
570,947
75,204
495,743
24,484
520,227
9,801
10,285
$
$
$
$
$
$
$
$
534,430
58,545
475,885
23,417
499,302
8,756
9,187
514,761
53,370
461,391
23,201
484,592
8,859
9,305
$
$
$
$
$
$
$
$
37,608
23,021
14,587
1,193
15,780
901
955
56,186
21,834
34,352
1,283
35,635
942
980
7.0 %
39.3 %
3.1 %
5.1 %
3.2 %
10.3 %
10.4 %
10.9 %
40.9 %
7.4 %
5.5 %
7.4 %
10.6 %
10.5 %
The following table provides information related to our net operating revenues, before the provision for bad debts, by payor
source (dollars in thousands):
Three Months Ended
December 31, 2017
% of
Total
Amount
September 30, 2017
% of
Total
Amount
Fourth Quarter vs Third
Quarter
$
Variance
Change in
%
Consolidated and combined:
Medicare
Medicaid
Managed care and commercial
Self-pay
Non-patient
$ 154,096
127,363
237,861
52,718
24,610
25.8 %
21.3 %
39.9 %
8.9 %
4.1 %
$ 167,287
94,571
213,637
58,935
23,417
30.0 %
17.0 %
38.3 %
10.6 %
4.1 %
$ (13,191 )
32,792
24,224
(6,217 )
1,193
Total net operating revenues, before the provision
for bad debts
$ 596,648
100.0 %
$ 557,847
100.0 %
$ 38,801
Same-facility:
Medicare
Medicaid
Managed care and commercial
Self-pay
Non-patient
$ 153,736
127,941
236,769
52,501
24,484
25.8 %
21.5 %
39.8 %
8.8 %
4.1 %
$ 160,734
91,006
207,309
55,712
23,201
29.9 %
16.9 %
38.5 %
10.4 %
4.3 %
$ (6,998 )
36,935
29,460
(3,211 )
1,283
Total net operating revenues, before the provision
for bad debts
$ 595,431
100.0 %
$ 537,962
100.0 %
$ 57,469
(4.2 )%
4.3 %
1.6 %
(1.7 )%
— %
(4.1 )%
4.6 %
1.3 %
(1.6 )%
(0.2 )%
92
The following table provides information on certain drivers of our net operating revenues:
Consolidated and combined:
Number of licensed beds at end of period
Admissions
Adjusted admissions
Emergency room visits
Medicare case mix index
Same-facility:
Number of licensed beds at end of period
Admissions
Adjusted admissions
Emergency room visits
Medicare case mix index
Three Months Ended
December 31,
2017
September 30,
2017
$ Variance
% Variance
2,979
20,932
50,788
155,746
1.45
2,979
20,864
50,583
154,874
1.45
3,051
21,646
54,350
163,986
1.43
2,979
20,908
52,079
155,798
1.44
(72 )
(714 )
(3,562 )
(8,240 )
0.02
—
(44 )
(1,496 )
(924 )
0.01
(2.4 )%
(3.3 )%
(6.6 )%
(5.0 )%
1.4 %
— %
(0.2 )%
(2.9 )%
(0.6 )%
0.7 %
Net operating revenues increased $15.8 million for the three months ended December 31, 2017 compared to the three months
ended September 30, 2017, consisting of a $14.6 million increase in net patient revenues and a $1.2 million increase in non-patient
revenues. Our net patient revenues, before the provision for bad debts, increased $37.6 million, or 7.0%, consisting of an $18.6 million
decline in the Divestitures Group, a $1.6 million increase in the Potential Divestitures Group and a $54.6 million increase in the
Continuing Hospitals Group. The increase in the Continuing Hospitals Group was impacted by CMS’ approval of the California
HQAF 2017-2019 program period which occurred in the fourth quarter of 2017 and resulted in a full year of program revenues being
recognized in the fourth quarter of 2017 with no comparable revenues in the third quarter. The total HQAF program revenues
recognized in the fourth quarter of 2017 were $29.9 million, which included $22.5 million related to the first three quarters of 2017.
Excluding the impact of the California HQAF revenues of $29.9 million, net patient revenues, before the provision for bad debts,
related to the Continuing Hospitals Group increased $24.7 million consisting of a $35.8 million increase from payor rates, partially
offset by an $11.1 million decrease from volumes. Excluding the impact of the California HQAF program, consolidated net patient
revenues per adjusted admission would have increased 8.5%. For the Continuing Hospitals Group, admissions and adjusted
admissions increased 0.9% and decreased 2.6%, respectively, for the fourth quarter of 2017 compared to the third quarter of 2017.
Provision for Bad Debts
The provision for bad debts increased $23.0 million for the three months ended December 31, 2017 compared to the three months
ended September 30, 2017, primarily due to the change in estimate, which is further described below. The provision for bad debts
increased $1.5 million related to the Divestitures Group, increased $9.9 million related to the Potential Divestitures Group and
increased $11.6 million related to the Continuing Hospitals Group.
During the fourth quarter of 2017, we analyzed our self-pay patient accounts receivable at a more comprehensive and
disaggregated level and refined our estimate of the collectability of the portion of self-pay accounts receivable related to insured
patients, primarily co-pays and deductibles. Our analysis also included an evaluation of patient accounts receivable retained in the
divestitures of six of our seven divested hospitals. As a result of these efforts, we recorded a change in estimate of $21.0 million to
reduce the net realizable value of patient accounts receivable, which negatively impacted the provision for bad debts in our statement
of income for the three months ended December 31, 2017.
Salaries and Benefits
The following table provides information related to our salaries and benefits expenses (dollars in thousands, except per adjusted
admission amounts):
Three Months Ended
December 31,
2017
September 30,
2017
$ Variance
% Variance
Salaries and benefits
Hospital operations salaries and benefits
Hospital operations salaries and benefits per adjusted admission
Hospital operations man-hours per adjusted admission
$
$
$
253,106
230,987
4,548
108.6
$
$
$
251,780
229,410
4,221
106.3
$
$
$
1,326
1,577
327
2.3
0.5 %
0.7 %
7.7 %
2.2 %
Salaries and benefits were $253.1 million for the three months ended December 31, 2017 compared to $251.8 million for the three
months ended September 30, 2017. Salaries and benefits declined $8.7 million related to the Divestitures Group which was offset by
93
an increase of $1.6 million related to the Potential Divestitures Group and an increase of $8.6 million related to the Continuing
Hospitals Group. The increase in the Continuing Hospitals Group was primarily the result of an increase in self-insured health claims
for the three months ended December 31, 2017 compared to the three months ended September 30, 2017.
Supplies
The following table provides information related to our supplies expense (dollars in thousands, except per adjusted admission
amounts):
Three Months Ended
December 31,
2017
September 30,
2017
$ Variance
% Variance
Supplies
Supplies per adjusted admission
$
$
63,932
1,259
$
$
58,657
1,079
$
$
5,275
180
9.0 %
16.7 %
Supplies expense increased $5.3 million for the three months ended December 31, 2017 compared to the three months ended
September 30, 2017. Supplies expense declined $1.8 million related to the Divestitures Group, offset by increases of $2.2 million
related to the Potential Divestitures Group and $4.9 million related to the Continuing Hospitals Group. These increases were primarily
due to increases in surgeries of 3.1% and 4.4% related to the Potential Divestitures Group and Continuing Hospitals Group,
respectively, which increased implant costs. In addition, we incurred increased costs of $0.8 million in relation to inventory
adjustments during the three months ended December 31, 2017 primarily due to adjustments for obsolete inventory.
Other Operating Expenses
The following table provides information related to our other operating expenses (dollars in thousands):
Three Months Ended
December 31, 2017
% of
Total
Amount
September 30, 2017
% of
Total
Amount
Fourth Quarter vs Third
Quarter
$
Change
Variance
in %
Purchased services
Taxes and insurance
Medical specialist fees
Transition services agreements
Repairs and maintenance
Utilities
Other miscellaneous operating expenses
Total other operating expenses
$ 38,556
38,952
27,235
15,734
9,680
6,079
20,433
$ 156,669
24.6 %
24.9 %
17.4 %
10.0 %
6.2 %
3.9 %
13.0 %
100.0 %
$ 40,716
24,929
27,254
15,468
10,166
7,853
18,971
$ 145,357
28.0 %
17.2 %
18.7 %
10.6 %
7.0 %
5.4 %
13.1 %
100.0 %
$
(2,160 )
14,023
(19 )
266
(486 )
(1,774 )
1,462
$ 11,312
(3.4 )%
7.7 %
(1.3 )%
(0.6 )%
(0.8 )%
(1.5 )%
(0.1 )%
Other operating expenses increased 11.3 million for the three months ended December 31, 2017 compared to the three months
ended September 30, 2017. As a percentage of net operating revenues, other operating expenses were 29.3% and 29.2% in these
respective periods. Other operating expenses declined $6.5 million related to the Divestitures Group, increased $1.7 million related to
the Potential Divestitures Group and increased $14.7 million related to the Continuing Hospitals Group. This increase in the
Continuing Hospitals Group was primarily due to $7.9 million of provider taxes recorded in the fourth quarter of 2017 related to the
full year for the California HQAF program that was approved by CMS in the fourth quarter of 2017, of which only $2.0 million
related to the fourth quarter. In addition, we recognized $7.8 million of Illinois income tax credits for the three months ended
September 30, 2017 with no comparable reduction in expense for the three months ended December 31, 2017. We are disputing in
arbitration, among other issues and actions, certain charges and lack of performance of various obligations under the transition
services agreements with our former Parent.
Depreciation and Amortization
Depreciation and amortization expense decreased $2.0 million to $18.7 million for the three months ended December 31, 2017
compared to $20.7 million for the three months ended September 30, 2017. We placed in service a portion of the capital expenditures
for our new patient tower and expanded surgical capacity at McKenzie-Willamette Medical Center. This increase to depreciation was
offset by lower depreciation and amortization resulting from our divestitures, impairment and assets classified as held for sale.
Rent
Rent expense increased $1.2 million to $13.6 million for the three months ended December 31, 2017 compared to $12.4 million
for the three months ended September 30, 2017. As a percentage of net operating revenues, rent expense was 2.6% and 2.5% for these
respective periods.
94
Electronic Health Records Incentives Earned
Electronic health records incentives earned were $0.2 million and $0.3 million for the three months ended December 31, 2017 and
September 30, 2017, respectively. Our activity is decreasing as we move closer toward full implementation of EHR.
Legal, Professional and Settlement Costs
Legal, professional and settlement costs decreased $2.6 million to $(0.5) million for the three months ended December 31, 2017
compared to $2.1 million for the three months ended September 30, 2017. Legal, professional and settlement costs for the three
months ended December 31, 2017 included an adjustment to our prior quarter’s expenses for various costs that were determined to be
covered under our existing insurance policies. The net result of this adjustment resulted in a credit of $(0.5) million of legal,
professional and settlement costs for the three months ended December 31, 2017. These costs in each period primarily related to the
shareholder class action lawsuit and costs associated with our dispute in arbitration, among other issues and actions, of certain charges
and lack of performance of various obligations under the transition services agreements with our former Parent.
Impairment of Long-Lived Assets and Goodwill
We recognized impairment to long-lived assets and goodwill of $25.8 million and $5.3 million for the three months ended
December 31, 2017 and September 30, 2017, respectively, related to hospitals in our Potential Divestitures Group, as previously
discussed.
Loss (Gain) on Sale of Hospitals, Net
For the three months ended December 31, 2017, we recognized a $0.1 million gain on the sale of hospitals, net primarily related
to the sale of L.V. Stabler. For the three months ended September 30, 2017, we recognized a $0.1 million loss on the sale of hospitals,
net primarily related to the combined sale of Lock Haven and Sunbury. See Note 4 — Divestitures in the accompanying financial
statements for additional information on divestitures.
Interest Expense, Net
The following table provides information related to interest expense, net (in thousands):
Senior Credit Facility:
Revolving Credit Facility
Term Loan Facility
ABL Credit Facility
Senior Notes
Amortization of debt issuance costs and discounts
All other interest expense (income), net
Total interest expense, net
Three Months Ended
December 31,
2017
September 30,
2017
$ Variance
% Variance
$
$
99
17,316
347
11,630
2,678
(197 )
31,873
$
$
98
17,512
638
11,631
2,067
270
32,216
$
$
1
(196 )
(291 )
(1 )
611
(467 )
(343 )
1.0 %
(1.1 )%
(45.6 )%
— %
29.6 %
(173.0 )%
(1.1 )%
Interest expense, net was $31.9 million and $32.2 million for the three months ended for the three months ended December 31,
2017 and September 30, 2017, respectively. We paid down $22.2 million of our Term Loan Facility in the fourth quarter of 2017 with
proceeds from the sales of Lock Haven, Sunbury and L.V. Stabler.
Provision for (Benefit from) Income Taxes
On December 22, 2017, the Tax Act was signed into law. The Tax Act includes a number of changes to existing U.S. tax laws that
impact us, most notably a reduction of the U.S. corporate tax rate from 35% to 21% for tax years after December 31, 2017. As a direct
result of changes in tax law due to the passage of the Tax Act, we recorded a total tax benefit of $24.0 million during 2017 which is
composed of two amounts: a tax benefit of $10.9 million in deferred income tax expense for the net change in our deferred tax
liabilities at the new 21% tax rate, and a $13.1 million tax benefit in deferred income tax expense for the reduction in valuation
allowance attributable to the change in net realizability of deferred tax assets. The Tax Act also provides for acceleration of
depreciation for certain assets placed into service after September 27, 2017, as well as prospective changes beginning in 2018. These
prospective changes include an increased limitation on the deductibility of executive compensation, a limitation on the deductibility of
interest expense, new rules surrounding meals and entertainment expense and fines and penalties. Also, while net operating losses
generated in the future may by carried forward indefinitely under the new law, there is a limitation on the amount that may be used in
any given year. The Tax Act may also have an impact on projected future taxable income that could further affect valuation allowance
considerations. In addition to the federal law, we await guidance from the states in which we file on how components of the Tax Act
may be treated in these jurisdictions. Those adjustments may materially impact our provision for (benefit from) income taxes in the
period in which the adjustments are made.
95
The benefit from income taxes was $21.8 million for the three months ended December 31, 2017 and $0.5 million for the three
months ended September 30, 2017. Our effective tax rates were 45.6% and 1.9% for these respective periods. The increase in our
effective tax rate for the three months ended December 31, 2017 when compared to the three months ended September 30, 2017 was
due to the Tax Act which provided for the recognition of a deferred tax benefit on both the release of valuation allowance related to
certain deferred tax assets not previously expected to be realized in addition to statutory rate reduction from 35% to 21%.
Net Income (Loss) Attributable to Noncontrolling Interests
Net income (loss) attributable to noncontrolling interests was $0.8 million and $0.6 million for the three months ended December
31, 2017 and September 30, 2017, respectively. As a percentage of net operating revenues, it was relatively flat, or 0.1% in both
periods.
96
Quarterly Results of Operations for the Years Ended December 31, 2017 and 2016 (Unaudited)
The following tables summarize our quarterly results of operations and selected financial and operating data (dollars in thousands
except earnings (loss) per share and per adjusted admission amounts):
1st
2017 Quarters
2nd
3rd
4th
1st
2016 Quarters
2nd
3rd
4th
Statements of income data:
Operating revenues, net of
contractual allowances and
discounts
Provision for bad debts
Net operating revenues
Operating costs and expenses:
Salaries and benefits
Supplies
Other operating expenses
Depreciation and amortization
Rent
Electronic health records
incentives earned
Legal, professional and
settlement costs
Impairment of long-lived assets
and goodwill
Loss (gain) on sale of hospitals,
net
Transaction costs related to the
Spin-off
Total operating costs and
expenses
Income (loss) from operations
Interest expense, net
Income (loss) before income
taxes
Provision for (benefit from) income
taxes
Net income (loss)
Less: Net income (loss) attributable
to noncontrolling interests
Net income (loss) attributable
to Quorum Health Corporation $
Earnings (loss) per share
attributable to Quorum Health
Corporation stockholders:
$
587,945 $
60,305
527,640
585,215 $
55,069
530,146
557,847 $
58,545
499,302
596,648 $
81,566
515,082
614,484 $
64,933
549,551
598,163 $
68,426
529,737
612,551 $
68,612
543,939
593,855
78,615
515,240
264,602
63,822
163,424
22,120
12,102
265,309
64,112
157,613
20,586
12,152
251,780
58,657
145,357
20,735
12,377
253,106
63,932
156,669
18,714
13,599
256,862
63,661
164,463
31,157
12,549
264,886
64,136
163,185
31,463
12,545
266,812
64,013
154,878
28,234
12,823
268,559
66,829
163,276
26,434
11,966
(2,452 )
(1,777 )
(287 )
(229 )
(4,208 )
(4,247 )
(1,336 )
(1,691 )
535
3,934
2,050
(518 )
241
5,447
488
1,166
3,300
12,900
5,261
25,820
—
250,400
—
41,470
(870 )
(4,321 )
79
(131 )
—
—
—
2,150
31
—
173
49
3,735
1,177
532
44
526,614
1,026
27,530
530,508
(362 )
30,458
496,182
3,120
32,216
531,011
(15,929 )
31,873
528,460
21,091
27,452
788,992
(259,255 )
29,276
526,444
17,495
28,028
580,203
(64,963 )
28,684
(26,504 )
(30,820 )
(29,096 )
(47,802 )
(6,361 )
(288,531 )
(10,533 )
(93,647 )
701
(27,205 )
(245 )
(30,575 )
(542 )
(28,554 )
(21,779 )
(26,023 )
(1,674 )
(4,687 )
(44,565 )
(243,966 )
(4,081 )
(6,452 )
(3,555 )
(90,092 )
356
55
637
785
315
1,095
507
574
(27,561 ) $
(30,630 ) $
(29,191 ) $
(26,808 ) $
(5,002 ) $
(245,061 ) $
(6,959 ) $
(90,666 )
Basic and diluted
$
(0.99 ) $
(1.09 ) $
(1.03 ) $
(0.95 ) $
(0.18 ) $
(8.63 ) $
(0.24 ) $
(3.19 )
Weighted-average shares
outstanding:
Basic and diluted
27,800,597 28,145,215 28,245,833 28,248,527 28,412,054 28,412,720 28,413,532 28,416,801
97
1st
2017 Quarters
3rd
2nd
4th
1st
2016 Quarters
3rd
2nd
4th
Other financial and operating data:
Net patient revenues per adjusted admission
Net operating revenues per adjusted admission
Adjusted EBITDA
Adjusted EBITDA, Adjusted for Divestitures
Adjusted EBITDA, Adjusted for Potential Divestitures
Number of licensed beds at end of period
Admissions
Adjusted admissions
Emergency room visits
Medicare case mix index
$ 8,834 $ 9,099 $ 8,756 $ 9,657 $ 8,741 $ 8,520 $ 8,753 $ 8,551
$ 9,280 $ 9,529 $ 9,187 $ 10,142 $ 9,190 $ 8,987 $ 9,168 $ 9,007
$ 26,142 $ 34,430 $ 32,268 $ 49,005 $ 56,224 $ 29,232 $ 46,749 $ 30,717
$ 28,891 $ 41,932 $ 37,510 $ 54,149 $ 59,824 $ 37,483 $ 54,864 $ 43,857
$ 32,772 $ 43,694 $ 37,090 $ 57,263 $ 56,329 $ 39,330 $ 46,178 $ 45,959
3,459
23,656 22,270 21,646 20,932 24,992 23,618 23,503 23,200
56,860 55,634 54,350 50,788 59,801 58,942 59,333 57,202
172,939 167,575 163,986 155,746 184,934 182,301 184,166 174,754
1.41
2,979
3,577
3,578
3,051
3,579
3,399
3,168
1.45
1.37
1.37
1.43
1.38
1.39
1.43
The following table reconciles Adjusted EBITDA, Adjusted EBITDA, Adjusted for Divestitures and Adjusted EBITDA, Adjusted
for Potential Divestitures, as defined in “Item 6. Selected Financial Data”, to net income (loss) attributable to Quorum Health
Corporation, the most directly comparable U.S. GAAP financial measure, as derived directly from the our consolidated and combined
financial statements for the respective periods (in thousands):
1st
2017 Quarters
3rd
2nd
4th
1st
2016 Quarters
3rd
2nd
4th
Adjusted EBITDA components:
Net income (loss)
Interest expense, net
Provision for (benefit from) income taxes
Depreciation and amortization
EBITDA
Legal, professional and settlement costs
Impairment of long-lived assets and goodwill
Loss (gain) on sale of hospitals, net
Transaction costs related to the Spin-off
Post-spin headcount reductions
Change in estimate related to collectability of patient
accounts receivable
Adjusted EBITDA
Negative EBITDA of divested hospitals
Adjusted EBITDA, Adjusted for Divestitures
Negative (Positive) EBITDA of potential divestitures
Adjusted EBITDA, Adjusted for Potential Divestitures
Liquidity and Capital Resources
Financial Outlook
701
(245 )
$ (27,205 ) $ (30,575 ) $ (28,554 ) $ (26,023 ) $ (4,687 ) $ (243,966 ) $ (6,452 ) $ (90,092 )
27,530 30,458 32,216 31,873 27,452 29,276 28,028 28,684
(542 ) (21,779 ) (1,674 ) (44,565 ) (4,081 ) (3,555 )
22,120 20,586 20,735 18,714 31,157 31,463 28,234 26,434
23,146 20,224 23,855 2,785 52,248 (227,792 ) 45,729 (38,529 )
488 1,166
3,300 12,900 5,261 25,820 — 250,400 — 41,470
— — 2,150
532
44
— — 1,617
(870 ) (4,321 )
31
—
— 1,693
(131 ) —
49 3,735
— —
535 3,934 2,050
79
173
850
1,177
5,447
(518 )
241
—
—
— 21,000 —
— — 22,799
26,142 34,430 32,268 49,005 56,224 29,232 46,749 30,717
2,749 7,502 5,242 5,144 3,600
8,251 8,115 13,140
28,891 41,932 37,510 54,149 59,824 37,483 54,864 43,857
1,847 (8,686 ) 2,102
3,881 1,762
$ 32,772 $ 43,694 $ 37,090 $ 57,263 $ 56,329 $ 39,330 $ 46,178 $ 45,959
(420 ) 3,114 (3,495 )
Our primary sources of liquidity are cash flows from operations, proceeds from divestitures and available borrowing capacity
under our revolving credit facilities. We believe that these amounts will be adequate to service our existing debt and finance internal
growth and fund capital expenditures over the next 12 months and into the foreseeable future. Borrowings under our revolving credit
facilities are intended to be used for working capital, capital expenditures and general corporate purposes. Our cash flows are
negatively impacted by the significant amount of interest expense associated with the high debt leverage put in place to effect the
Spin-off. Interest payments were $125.8 million, $90.9 million and $98.3 million in the years ended December 31, 2017, 2016 and
2015, respectively. In addition, two states in which we operate, California and Illinois, are historically slow payors on their Medicaid
supplemental payment programs, and in the case of Illinois, the Medicaid managed care organizations and fee for service are also
programs in which state reimbursements are typically slow. In the fourth quarter of 2017, we received $31 million of approximately
$50 million of 2015 and 2016 outstanding amounts from the California HQAF program. In this same quarter, we also received a total
of $51 million of the approximate $65 million in arrears from Illinois Medicaid and state employee patients. As of December 31,
2017, receivables outstanding under the California and Illinois state supplemental programs were $48.4 million and $22.9 million,
respectively.
Our business strategy includes an ongoing strategic review of our hospitals based on analysis of financial performance, current
competitive conditions, expected demographic trends, joint venture opportunities, capital allocation requirements and specific state
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reimbursements and payment methodologies. As part of this strategy, we are actively engaging in initiatives, among others, to divest
underperforming hospitals, reduce our debt and refine our portfolio to a more sustainable group of hospitals with higher operating
margins. As of December 31, 2017, we had combined proceeds of $45.9 million from the sale of five hospitals in 2017 and two
hospitals in 2016, which have been used to pay down $44.4 million on our Term Loan Facility. We have targeted an additional seven
hospitals that we intend to divest or close in the next twelve to twenty-four months from December 31, 2017. Of the seven targeted
hospitals, we have closed one hospital in February 2018 and sold one hospital on March 1, 2018. See “— Overview — Business
Strategy Summary” above for additional information on our divestitures activities. For the year ended December 31, 2017, we
experienced net operating losses of $65.3 million from the fourteen hospitals in the Divestitures Group and the Potential Divestitures
Group.
On April 11, 2017, we executed the CS Amendment to, among other things, raise the maximum Secured Net Leverage Ratio, as
defined in the CS Agreement, to 4.75x from 4.25x for the period July 1, 2017 to December 31, 2018 (which was previously 4.25x for
the period July 1, 2017 to June 30, 2018), at which point it drops to 4.00x for the remainder of the agreement. On March 14, 2018, we
executed the CS Second Amendment with our Senior Credit Facility lenders to amend, among other things, the Secured Net Leverage
Ratio to 4.75x beginning July 1, 2017 through June 30, 2018 and 5.00x beginning July 1, 2018 through December 31, 2019, at which
point it drops to 4.50x for the remainder of the agreement. The CS Amendment and the CS Second Amendment also provide for
additional Consolidated EBITDA add backs under the covenant calculations for certain items. For additional details of the CS
Amendment, see “—Long-Term Debt” below. We are actively engaged in initiatives to divest underperforming hospitals and
outpatient service facilities, for which proceeds will be used to pay down the Term Loan under our Senior Credit Facility.
Statements of Cash Flows
Prior to the Spin-off, our cash activity was managed through Due to Parent, net under CHS’ cash management program and
interest on our indebtedness with CHS was accumulated in Due to Parent, net. Following the Spin-off, we own and manage our own
cash depository and disbursement bank accounts and have borrowing capacity, as well as principal and interest obligations, under our
new debt structure.
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
The following table provides a summary of our cash flows (in thousands):
2017
Year Ended December 31,
2016
$ Variance
% Variance
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
Net change in cash and cash equivalents
$
$
66,970
(38,267 )
(48,541 )
(19,838 )
$
$
81,086
(73,146 )
16,409
24,349
$
$
(14,116 )
34,879
(64,950 )
(44,187 )
(17.4 )%
47.7 %
(395.8 )%
Net cash provided by operating activities was $67.0 million for the year ended December 31, 2017 compared to $81.1 million for
the year ended December 31, 2016, a $14.1 million decrease. This decrease in cash flows from operating activities was primarily due
to interest payments on our indebtedness, which increased $34.9 million. In 2017, we made $125.8 million of interest payments,
primarily associated with our Term Loan Facility and Senior Notes, compared to $90.9 million in 2016. This amount was partially
offset by favorable cash collections related to patient accounts receivable. In the fourth quarter of 2017, we collected $31 million of
approximately $50 million related to 2015 and 2016 outstanding amounts from the California HQAF program and $51 million of
approximately $65 million related to past due receivables from Illinois Medicaid and state employee patients. We additionally
contracted with third-party companies and collected $13 million in the fourth quarter related to underpayments, denials and accounts
with no collection follow-up to supplement CHS collection efforts under the transition service agreements. All other changes in
operating assets and liabilities on a comparative basis for the years ended December 31, 2017 and 2016 were considered to be part of
our normal business operations.
Net cash used in investing activities was $38.3 million in the year ended December 31, 2017 compared to $73.1 million in the
year ended December 31, 2016, a $34.9 million decrease. This decrease in cash used in investing activities was primarily due to an
$18.4 million reduction in hospital capital expenditures and an increase of $18.3 million in proceeds from hospital divestitures. This
decrease in capital expenditures was due to an overall reduction in capital spending at our hospitals due to budgetary constraints, a
$4.4 million reduction in spending on the $105 million Springfield, Oregon hospital project and a $3.1 million reduction related to
divested hospitals. In total, we divested five hospitals in 2017 and two hospitals in 2016. These amounts were partially offset by $1.1
million of increased costs for acquisitions of ancillary outpatient businesses in 2017 when compared to 2016.
Net cash used in financing activities was $48.5 million in the year ended December 31, 2017 compared to net cash provided by
financing activities of $16.4 million in the year ended December 31, 2016, a $64.9 million decrease. In 2017, we paid down $37.3
million on our Term Loan Facility from proceeds of divestitures. We also paid $3.1 million of debt issuance costs associated with the
April 2017 amendment to our Senior Credit Facility and paid $3.9 million in distributions to noncontrolling interest partners. In 2016,
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we completed the financing transactions related to the Spin-off which resulted in cash inflow from borrowings under the Term Loan
Facility and Senior Notes of $1.3 billion, a cash settlement payment of $1.2 billion related to the Due to Parent liability with CHS and
cash outflow of $29.1 million for debt issuance costs related to the Spin-off financing transactions. Additionally, we paid $11.6
million on the Term Loan Facility, consisting of $7.2 million from the proceeds of the sale of Sandhills and $4.4 million in scheduled
payments, and $2.9 million in distributions to noncontrolling interest partners in 2016. We had a net cash inflow of $25.2 million
related to transactions with CHS which were processed through Due to Parent, net prior to the Spin-off with no comparable activity in
2017.
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
The following table provides a summary of our cash flows (in thousands):
2016
Year Ended December 31,
2015
$ Variance
% Variance
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
Net change in cash and cash equivalents
$
$
81,086
(73,146 )
16,409
24,349
$
$
42,889
(78,592 )
34,250
(1,453 )
$
$
38,197
5,446
(17,841 )
25,802
89.1 %
6.9 %
(52.1 )%
Net cash provided by operating activities was $81.1 million for the year ended December 31, 2016 compared to $42.9 million for
the year ended December 31, 2015, an increase of $38.2 million. Net cash provided by operating activities was impacted by a $97.9
million decrease in net income for 2016 when compared to 2015, exclusive of the non-cash items that we add back in each respective
year to calculate our operating cash flows. Net cash provided by operating activities was impacted by the fluctuations in certain
corporate allocations and other charges from CHS to us that were included in the computation of net income (loss), but settled as a
financing activity in the statement of cash flows for periods prior to April 29, 2016, the Spin-off date. In addition, net cash provided
by operating activities was impacted by a $136.1 million increase in the net change in operating assets and liabilities, exclusive of
acquisitions and divestitures activity, in 2016 when compared to 2015. The primary drivers of this increase related to the Spin-off,
including a $17.6 million increase in accounts payable, primarily due to our independent management of cash since the Spin-off date,
$19.9 million of accrued interest in 2016 with no comparable accrual in 2015 due to our new debt structure and $22.8 million of
increased allowances related to a change in estimate to reduce the carrying value of patient accounts receivable as of December 31,
2016. In 2015, we made $26.4 million of legal settlement payments. All other changes in operating assets and liabilities on a
comparative basis for the years ended December 31, 2016 and 2015 were considered to be part of our normal business operations.
Net cash used in investing activities decreased $5.4 million to $73.1 million for the year ended December 31, 2016 from $78.6
million in the year ended December 31, 2015. Our expenditures for property and equipment increased $20.5 million in 2016 when
compared to 2015. We incurred $38.5 million and $10.4 million of costs in 2016 and 2015, respectively, related to the patient tower
and expanded surgical capacity construction project at our Springfield, Oregon hospital, which was the primary driver of the increase
in capital expenditures in 2016. Cash proceeds from the sale of hospitals in 2016 related to Barrow and Sandhills. Payments for
acquisitions in 2015 of $8.0 million related to the purchase of ancillary businesses at our existing hospitals.
Net cash provided by financing activities was $16.4 million for the year ended December 31, 2016 compared to $34.3 million in
the year ended December 31, 2015. In connection with the Spin-off on April 29, 2016, we borrowed $880 million under the Term
Loan Facility and issued $400 million of Senior Notes, reduced by $24.5 million of issuance discounts related to this debt. We paid
$1.2 billion to CHS from the debt proceeds as part of the settlement of our Due to Parent, net liability with CHS. We made payments
on the Term Loan Facility of $11.6 million in 2016, which included a $7.2 million pay down utilizing the net proceeds of the Sandhills
divestiture. Our other debt payments primarily related to capital lease obligations, including the capital lease associated with our
corporate office in 2016. The decrease in Due to Parent, net in 2016 related to activity for the first four months of the year and then the
full settlement of this liability with CHS in connection with the Spin-off. The decrease of $224.8 million in the borrowings under the
receivables facility with CHS in 2015 was offset in the change in Due to Parent, net with a corresponding receivable. This decrease
also reflected the termination of our participation in CHS’ receivable facility program as of November 2015.
Capital Expenditures
Capital expenditures for property, equipment and software were $68.4 million, $87.2 million and $68.3 million for the years
ended December 31, 2017, 2016 and 2015, respectively. In addition, we had $6.8 million and $15.7 million of capital expenditures
related to property and equipment accrued in accounts payable at December 31, 2017 and 2016, respectively. Capital expenditures in
2017 decreased primarily due to budgetary constraints and partially due to our divestiture activity. Capital expenditures in 2016
increased primarily due to spending on the Springfield, Oregon project.
We are building a new patient tower and expanding the surgical capacity at McKenzie-Willamette Medical Center, our hospital in
Springfield, Oregon. We incurred costs of $34.1 million, $38.5 million and $10.4 million in the years ended December 31, 2017, 2016
and 2015, respectively, related to the project. As of December 31, 2017, we have incurred a total of $83.0 million of costs for this
100
project, of which $76.1 million was placed into service in the fourth quarter of 2017. The total estimated cost for this project,
including equipment costs, is estimated to be approximately $105 million. The project is expected to be completed in late 2018.
As of December 31, 2017, we have capital commitments related to certain other renovation projects that are expected to begin and
be completed in 2018. The total estimated costs for these projects is approximately $3.0 million.
Capital Resources
Net working capital was $220.8 million, $272.6 million and $334.0 million as of December 31, 2017, 2016 and 2015,
respectively. The $51.8 million decrease in net working capital in 2017 when compared to 2016 was primarily due to cash collections
related to patient accounts receivable, timing of interest payments on the Term Loan Facility and a decrease in discretionary benefits.
The $61.4 million decrease in net working capital for 2016 compared to 2015 primarily related to changes in cash management
following the Spin-off, which increased our liabilities for accounts payable and accrued interest, partially offset by an increase in cash.
In addition, we recorded a change in estimate to reduce the carrying value of patient accounts receivable and incurred liabilities related
to the establishment of self-insurance reserves related to employee medical benefits, professional and general liability claims and
workers’ compensation claims in 2016 with no comparable amounts in 2015. Prior to the Spin-off, our cash from operations was
swept to CHS through Due to Parent, net under their centralized cash management program.
Long-Term Debt
The following table provides a summary of activity related to our long-term debt (in thousands):
Year Ended December 31, 2017
Total
Debt at
Beginning
of Year
Assets
Acquired
Debt
Under
Issuance
Borrowings,
Excluding
Capital
Costs
Discounts Repayments Payments Amortization Leases
Total
Debt
at End
of Year
Senior Credit Facility:
Revolving Credit Facility, maturing
2021
Term Loan Facility, maturing 2022
ABL Credit Facility, maturing 2021
Senior Notes, maturing 2023
Unamortized debt issuance costs and
discounts
Capital lease obligations
Other debt
Total debt
$
868,419
— $ 39,000 $ (39,000 ) $ — $
—
— (37,261 )
—
— 469,000 (469,000 )
—
—
—
400,000
— $
—
—
—
— $
—
— 831,158
—
—
— 400,000
(48,764 )
25,588
1,582
— (3,119 )
—
—
1,246,825 508,376 (547,195 ) (3,119 )
—
—
376
(1,231 )
(703 )
8,949
—
—
8,949
(42,934 )
—
24,411
54
—
1,255
54 1,213,890
(1,855 )
54 $ 1,212,035
Less: Current maturities of long-term
debt
(5,683 )
Total long-term debt
$ 1,241,142 $ 508,376 $ (547,195 ) $ (3,119 ) $
8,949 $
The following table shows the results of the calculation of our total debt to total capitalization (dollars in thousands):
Total debt, excluding unamortized debt issuance costs and discounts
Total Quorum Health Corporation stockholders' equity
Total capitalization
Total debt to total capitalization
Year Ended
December 31,
2017
$
$
1,256,824
99,441
1,356,265
92.7 %
The following table provides a summary of our long-term debt, allocated between fixed and variable debt (dollars in thousands):
Fixed
Variable
Total debt, excluding unamortized debt issuance costs and discounts
101
December 31, 2017
Amount
% of Total
$
$
425,666
831,158
1,256,824
33.9 %
66.1 %
100.0 %
Senior Credit Facility
On April 29, 2016, we entered into a credit agreement, among us, the lenders party thereto and Credit Suisse AG, Cayman Islands
Branch, as administrative agent and collateral agent. On April 11, 2017, we executed an agreement with our Senior Credit Facility
lenders to amend certain provisions of our Senior Credit Facility, as described below.
The CS Agreement initially provided for an $880 million senior secured term loan facility and a $100 million senior secured
revolving credit facility. The Term Loan Facility was issued at a discount of $17.6 million, or 98% of par value, and has a maturity
date of April 29, 2022, subject to customary acceleration events and repayment, extension or refinancing. The Revolving Credit
Facility has a maturity date of April 29, 2021, subject to certain customary acceleration events and repayment, extension or
refinancing. The CS Amendment reduced the Revolving Credit Facility’s borrowing capacity from $100 million to $87.5 million until
December 31, 2017, at which time the borrowing capacity decreased to $75.0 million through maturity.
The CS Agreement contains customary covenants, including a maximum permitted Secured Net Leverage Ratio, as determined
based on 12 month trailing Consolidated EBITDA, as defined in the CS Agreement. On April 11, 2017, we executed the CS
Amendment with our Senior Credit Facility lenders to amend the calculation of the Secured Net Leverage Ratio beginning July 1,
2017 through maturity, among other provisions. The CS Second Amendment, which was executed on March 14, 2018, amended the
Secured Net Leverage Ratio for the period July 1, 2017 through maturity. As of December 31, 2017 and 2016, we had Secured Net
Leverage Ratios of 3.87 to 1.00 and 3.93 to 1.00, respectively, implying additional borrowing capacity of $193.3 million as of
December 31, 2017.
After giving effect to the CS Amendment and the CS Second Amendment, the maximum Secured Net Leverage Ratio permitted
under the CS Agreement, as determined based on 12 month trailing Consolidated EBITDA and as defined in the CS Agreement,
follows:
Period
Period from January 1, 2017 to June 30, 2017
Period from July 1, 2017 to June 30, 2018
Period from July 1, 2018 to December 31, 2019
Period from January 1, 2020 and thereafter
Maximum
Secured Net
Leverage Ratio
4.50 to 1.00
4.75 to 1.00
5.00 to 1.00
4.50 to 1.00
In addition to amending the calculation of the Secured Net Leverage Ratio and the Maximum Secured Net Leverage Ratio, the CS
Amendment and CS Second Amendment also affected other terms of the CS Agreement as follows:
• Through April 29, 2022, we are required to use asset sales proceeds to make mandatory redemptions under the Term
Loan Facility.
• Through December 31, 2018, we may request to exercise Incremental Term Loan Commitments, as defined in the CS
Agreement, only if the Secured Net Leverage Ratio, adjusted for the requested Incremental Term Loan borrowing, is
below 3.35 to 1.00. After December 31, 2018, we may request to exercise Incremental Term Loan Commitments for the
greater of $100 million or an amount which would produce a Secured Net Leverage Ratio of 3.35 to 1.00.
• Through December 31, 2018, we are allowed to incur Permitted Additional Debt, as defined in the CS Agreement, as
long as our Total Leverage Ratio, adjusted for the Permitted Additional Debt, is below 4.50 to 1.00. After December 31,
2018, we may incur Permitted Additional Debt, as long as our Total Leverage Ratio, adjusted for the Permitted
Additional Debt, is below 5.50 to 1.00.
Prior to the CS Amendment, interest under the Term Loan Facility accrued, at our option, at adjusted LIBOR, subject to statutory
reserves and a floor of 1% plus 5.75%, or the alternate base rate plus 4.75%. Following the CS Amendment, interest under the Term
Loan Facility accrues, at our option, at adjusted LIBOR, subject to statutory reserves and a floor of 1% plus 6.75%, or the alternate
base rate plus 5.75%. The effective interest rate on the Term Loan Facility was 8.8% as of December 31, 2017. Interest on outstanding
borrowings under the Revolving Credit Facility accrues, at our option, at adjusted LIBOR, subject to statutory reserves and a floor of
0% plus 2.75%, or the alternate base rate plus 1.75%, and remains unchanged under the CS Amendment. The CS Second Amendment
did not alter these provisions.
As of December 31, 2017, we had no borrowings outstanding on the Revolving Credit Facility and had $10.2 million of letters of
credit outstanding that were primarily related to the self-insured retention levels of professional and general liability and workers’
compensation liability insurance and represent security for the payment of claims. As of December 31, 2017, we had borrowing
capacity on our Revolving Credit Facility of $77.3 million.
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ABL Credit Facility
On April 29, 2016, we entered into an ABL Credit Agreement (the “UBS Agreement,” and together with the CS Agreement,
collectively, the “Credit Agreements”), among us, the lenders party thereto and UBS AG, Stamford Branch (“UBS”), as administrative
agent and collateral agent. The UBS Agreement provides for a $125 million senior secured asset-based revolving credit facility (the
“ABL Credit Facility”). As of December 31, 2017, we had no borrowings outstanding on the ABL Credit Facility and borrowing
capacity of $124 million.
On April 11, 2017, we executed an amendment to the UBS Agreement with its lender party thereto, which aligned the provisions
of the UBS Agreement with the CS Amendment. There were no changes to the USB Agreement that impact our interest or covenant
calculations associated with the ABL Credit Facility.
The ABL Credit Facility has a maturity date of April 29, 2021, subject to customary acceleration events and repayment, extension
or refinancing. Interest on outstanding borrowings under the ABL Credit Facility accrues, at our option, at a base rate or LIBOR,
subject to statutory reserves and a floor of 0%, except that all swingline borrowings will accrue interest based on the base rate, plus an
applicable margin determined by the average excess availability under the ABL Credit Facility for the fiscal quarter immediately
preceding the date of determination. The applicable margin ranges from 1.75% to 2.25% for LIBOR advances and from 0.75% to
1.25% for base rate advances.
The ABL Credit Facility has a “Covenant Trigger Event” definition that requires us to maintain excess availability under the ABL
Credit Facility equal to or greater than the greater of (i) $12.5 million and (ii) 10% of the aggregate commitments under the ABL
Credit Facility. If a Covenant Trigger Event occurs, then we are required to maintain a minimum Consolidated Fixed Charge Ratio of
1.10 to 1.00 until such time that a Covenant Trigger Event is no longer continuing. In addition, if excess availability under the ABL
Credit Facility were to fall below the greater of (i) 12.5% of the aggregate commitments under the ABL Credit Facility and (ii) $15.0
million, then a “Cash Dominion Event” would be triggered upon which the lenders could assume control of our cash.
Credit Agreement Covenants
In addition to the specific covenants described above, the Credit Agreements contain customary negative covenants, which limit
our ability to, among other things, incur additional indebtedness, create liens, make investments, transfer assets and merge or acquire
assets, and make restricted payments, including dividends, distributions, and specified payments on other indebtedness. They include
customary events of default, including payment defaults, material breaches of representations and warranties, covenant defaults,
default on other material indebtedness, customary Employee Retirement Income Security Act events of default, bankruptcy and
insolvency, material judgments, invalidity of liens on collateral, change of control or cessation of business. The Credit Agreements
also contain customary affirmative covenants and representations and warranties.
Senior Notes
On April 22, 2016, we issued $400 million aggregate principal amount of 11.625% Senior Notes due 2023, pursuant to the
Indenture. The Senior Notes were issued at a discount of $6.9 million, or 1.734%, in a private placement and are senior unsecured
obligations guaranteed on a senior basis by certain of our subsidiaries (the “Guarantors”). The Senior Notes mature on April 15, 2023
and bear interest at a rate of 11.625% per annum, payable semi-annually in arrears on April 15 and October 15 of each year, which
began on October 15, 2016. Interest on the Senior Notes accrues from the date of original issuance and is calculated on the basis of a
360-day year comprised of twelve 30-day months. The effective interest rate on the Senior Notes was 12.5% as of December 31, 2017.
The Indenture contains covenants that, among other things, limit our ability and certain of our subsidiaries’ ability to incur or
guarantee additional indebtedness, pay dividends or make other restricted payments, make certain investments, create or incur certain
liens, sell assets and subsidiary stock, transfer all or substantially all of our assets or enter into merger or consolidation transactions.
On May 17, 2017, we exchanged the 11.625% Senior Notes due 2023 (the “Initial Notes”) in the aggregate principal amount of
$400 million, which were not registered under the Securities Act of 1933, as amended (the “Securities Act”), for a like principal
amount of 11.625% Senior Notes due 2023 (the “Exchange Notes”), which have been registered under the Securities Act. The Initial
Notes were substantially identical to the Exchange Notes, except that the Exchange Notes are registered under the Securities Act and
are not subject to the transfer restrictions and certain registration rights agreement provisions applicable to the Initial Notes.
On and after April 15, 2019, we are entitled, at our option, to redeem all or a portion of the Senior Notes upon not less than 30 nor
more than 60 days’ notice, at the following redemption prices, plus accrued and unpaid interest, if any, to the redemption date. The
redemption prices are expressed as a percentage of the principal amount on the redemption date. Holders of record on the relevant
record date have the right to receive interest due on the relevant interest payment date. In addition, prior to April 15, 2019, we may
redeem some or all of the Senior Notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if
any, plus a “make whole” premium, as set forth in the Indenture. We are entitled to redeem up to 35% of the aggregate principal
amount of the Senior Notes until April 15, 2019 with the net proceeds from certain equity offerings at the redemption price set forth in
the Indenture.
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The following table provides a summary of the redemption periods and prices related to the Senior Notes:
Period
Period from April 15, 2019 to April 14, 2020
Period from April 15, 2020 to April 14, 2021
Period from April 15, 2021 to April 14, 2022
Period from April 15, 2022 to April 15, 2023
Debt Issuance Costs and Discounts
The following table provides a summary of debt issuance costs and discounts (in thousands):
Redemption
Prices
108.719 %
105.813 %
102.906 %
100.000 %
Debt issuance costs
Debt discounts
Total debt issuance costs and discounts
Less: Amortization of debt issuance costs and discounts
Total unamortized debt issuance costs and discounts
Capital Lease Obligations and Other Debt
December 31,
2017
2016
$
$
32,265
24,536
56,801
(13,867 )
42,934
$
$
29,146
24,536
53,682
(4,918 )
48,764
Our debt arising from capital lease obligations primarily relates to our corporate office in Brentwood, Tennessee. As of December
31, 2017, this capital lease obligation was $17.9 million. The remainder of our capital lease obligations primarily relate to property
and equipment at our hospitals and corporate office. Other debt consists of physician loans and miscellaneous notes payable to banks.
Contractual Obligations and Other Capital Commitments
The following table provides a summary of our contractual obligations and other commercial commitments as of December 31,
2017 and for the next five years and thereafter (in thousands):
Total
2018
Payments Due by Period
2019-2020
2021-2022
Thereafter
Debt obligations:
Term Loan Facility(1)
Senior Notes(1)
Capital lease obligations, net of imputed interest
Other debt
Total debt obligations
Operating lease obligations
Capital commitments (2)
Open purchase orders
$
$ 1,124,956
648,000
24,411
4,926
1,802,293
115,746
31,211
9,919
69,144
46,500
1,140
1,833
118,617
32,253
23,214
9,919
$ 138,288
93,000
2,572
2,620
236,480
45,241
5,075
—
$ 917,524
93,000
2,858
473
1,013,855
21,016
1,948
—
$
—
415,500
17,841
—
433,341
17,236
974
—
Total contractual obligations and other capital
commitments
$ 1,959,169
$ 184,003
$ 286,796
$ 1,036,819
$
451,551
(1) Contractual obligations on the Term Loan Facility and Senior Notes include both principal and interest. These amounts exclude our
unamortized debt issuance costs, and discounts. Estimates of interest payments assume that interest rates and borrowing spreads at
December 31, 2017 remain constant through maturity.
(2) We have future commitments of approximately $25.4 million related to certain hospital expansion and renovation projects, of which
approximately $22.4 million is the remaining commitment on the McKenzie-Willamette Medical Center project. In addition, pursuant
to the master lease agreement at our hospital in Helena, Arkansas, we have committed to make capital expenditures and improvements
at this hospital averaging a specified percentage of the hospital’s annual net operating revenues. We currently estimate that we will
make capital expenditures of approximately $1 million for each year of the remaining lease term, which extends through January 1,
2025. Both of these items have been included in the capital commitments line in the table above.
In connection with the Spin-off, we entered into certain agreements that were established by CHS to govern matters related to the
Spin-off. These agreements include, among others, a Separation and Distribution Agreement, a Tax Matters Agreement and an
Employee Matters Agreement. We also entered into various transition services agreements that were established by CHS and that
define agreed upon services to be provided by CHS to QHC. The transition services agreements generally have five year terms
expiring on April 29, 2021, and include, among others, the provision for services related to information technology, payroll
104
processing, certain human resources functions, patient eligibility screening, billing, collections and other revenue management
services. Our future cash obligations related to these agreements are based on certain fixed and variable factors, as defined by each
agreement, and include factors such as total cash collections, labor costs and employee headcount, which are used to determine the
fees charged to us under the agreements each period. See Note 18 — Related Party Transactions in the accompanying financial
statements for additional information on our agreements with CHS. The obligations associated with these agreements are not included
in the table above.
Off-Balance Sheet Arrangements
As of December 31, 2017, we had $10.2 million of letters of credit outstanding that were primarily related to the self-insured
retention level of professional and general liability insurance and workers’ compensation liability insurance as security for the
payment of claims.
As of December 31, 2017, we operate one hospital under an operating lease obligation for the land and building. We utilize the
same operating strategies to improve operations at this hospital as we do at those hospitals that we own or lease under capital lease
arrangements. The term of this hospital operating lease expires in June 2022, not including lease extension options. As of December
31, 2017, the total obligation for the remainder of this lease, not including lease extension options, was $12.8 million.
Redeemable and Non-Redeemable Noncontrolling Interests
Our financial statements include all assets, liabilities, revenues and expenses of less than 100% owned entities that we control.
Accordingly, we have recorded noncontrolling interests in the earnings and equity of such entities. Certain of our consolidated
subsidiaries have noncontrolling physician ownership interests with redemption features that require us to deliver cash upon the
occurrence of certain events outside our control, such as the retirement, death, or disability of a physician-owner. We record the
carrying amount of redeemable noncontrolling interests at the greater of: (1) the initial carrying amount increased or decreased for the
noncontrolling interests' share of cumulative net income (loss), net of cumulative amounts distributed, if any, or (2) the redemption
value. As of December 31, 2017, we had redeemable noncontrolling interests of $2.3 million and non-redeemable noncontrolling
interests of $14.0 million that are included in our balance sheet.
Inflation
The healthcare industry is labor intensive. Salaries, benefits and other labor-related costs increase during periods of inflation and
periods of labor shortages for nurses and other medical staff, which may differ depending on the geographic area in which a hospital is
located. In addition, the Affordable Care Act is subject to ongoing revisions and possible repeal and replacement, which may lead to
substantially higher costs to us related to providing employee medical benefits. We are also exposed to rising costs for medical
supplies and drugs due to inflationary pressures on our suppliers, including our group purchasing organization. We have implemented
cost control measures to monitor and manage the impact of rising operating costs and expenses on our operating margins, including,
among others, the reduction of costs in non-labor intensive categories. We cannot make assurances that we will be able to adequately
offset the impact that any future increases in labor costs, employee medical benefit costs or other operating costs and expenses may
have on our business which could adversely impact our operating margins in the future.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk associated with changes in interest rates on our variable rate long-term debt. In connection with the
Spin-off, on April 29, 2016, we entered into two credit agreements, the Senior Credit Facility and the ABL Credit Facility, that subject
us to variable interest rates. As of December 31, 2017, we had outstanding principal amount of debt, excluding unamortized debt
issuance costs and discounts, of $831.2 million which was subject to variable rates of interest. We had no borrowings outstanding on
the revolving credit facilities as of December 31, 2017. If the interest rate on our variable rate long-term debt outstanding as of
December 31, 2017, after taking into consideration the 1% floor on our Term Loan Facility, was 100 basis points higher for the year
ended December 31, 2017, the additional interest expense impacting net income (loss) would have been $(7.1) million, or $(0.25) per
basic and diluted share. We do not currently have any derivative or hedging arrangements, or other known exposures, to changes in
interest rates.
Item 8.
Financial and Supplementary Data
This information is included in this Annual Report on Form 10-K beginning at page F-1, which follows the signature page.
105
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of disclosure controls and procedures
Based on the evaluation of our disclosure controls and procedures (as defined in the Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, or the Exchange Act) required by Exchange Act Rules 13a-15(b) or 15d-15(b), our principal
executive officer and our principal financial officer have concluded that as of the end of the period covered by this report, our
disclosure controls and procedures were not effective as a result of the material weakness in our internal control over financial
reporting discussed below.
Notwithstanding the identified material weakness, management, including our CEO (principal executive officer) and CFO
(principal financial officer), believes that the consolidated financial statements included in this Annual Report on Form 10-K fairly
present in all material respects our financial condition, results of operations and cash flows as of and for the periods presented in
accordance with U.S. GAAP.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)
that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Material Weakness
We identified a deficiency in our internal control over financial reporting that is described in Management’s Annual Report on
Internal Control Over Financial Reporting. We have concluded that this deficiency constitutes a material weakness in our internal
control over financial reporting. Nonetheless, we have concluded that this material weakness does not require a change in the fourth
quarter or full year 2017 consolidated financial statements, nor does it require a restatement of or change in our consolidated financial
statements for any prior annual or interim period. We have developed a remediation plan for this material weakness, which is
described below.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management, including our principal executive officer and principal financial officer, is responsible for establishing and
maintaining adequate internal control over financial reporting. Our management conducted an evaluation of the effectiveness of our
internal control over financial reporting based on the framework and criteria established in Internal Control - Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its evaluation, our management
has concluded that our internal control over financial reporting was not effective as of December 31, 2017, due to the material
weakness in our internal control over financial reporting discussed below. A material weakness is a deficiency, or combination of
deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our
annual or interim financial statements will not be prevented or detected on a timely basis.
We identified a deficiency as it related to the controls intended to properly document and review on a timely basis our analysis of
self-pay patient accounts receivable at a more comprehensive and disaggregated level related to our adoption of ASU 2014-09
Revenue from Contracts with Customers. We have concluded that the deficiency constitutes a material weakness in our internal
control over financial reporting. There were no material errors in the financial results or balances identified as a result of the control
deficiency, and there was no restatement of prior period financial statements and no change in previously released financial results
were required as a result of this control deficiency.
The effectiveness of our internal control over financial reporting as of December 31, 2017 has been audited by Deloitte & Touche
LLP, an independent registered public accounting firm, as stated in their report which appears in Item 15(a) of this Annual Report on
Form 10-K.
Remediation Plan
We have begun implementing a remediation plan to address the control deficiency that led to the material weakness. The
remediation plan includes the following:
•
Strengthening our documentation for our self-pay and self-pay after insurance revenue as it relates to the adoption of ASC
2014-09, including obtaining additional resources as necessary to complete this documentation; and
106
•
•
Implementing specific procedures related to the disaggregated analysis of the estimated transaction price, as determined by
reducing our standard charges by any contractual allowances, discounts and implicit price concessions, related to our self-pay
and self-pay after insurance revenue that conforms to the requirements under ASC 2014-09; and
Implementing specific review procedures designed to enhance our controls over the preparation of the disaggregated
estimated transaction price, as determined by reducing our standard charges by any contractual allowances, discounts and
implicit price concessions, related to our self-pay and self-pay after insurance revenue.
We currently plan to have our enhanced review procedures and documentation standards in place and operating as of the first
quarter of 2018. Our goal is to remediate this material weakness by the end of 2018, subject to adequate opportunities to conclude,
through testing, that the enhanced control is operating effectively.
Item 9B. Other Information
On March 14, 2018, we executed the CS Second Amendment. For a description of the terms and conditions of the CS Second
Amendment, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and
Capital Resources.”
107
Item 10. Directors, Executive Officers and Corporate Governance
PART III
Information to be provided in Items 10, 11, 12, 13 and 14 of the Form 10-K and not otherwise included herein is incorporated by
reference to the definitive proxy statement for our 2018 Annual Meeting of Stockholders to be held on June 8, 2018, which will be
filed with the SEC within 120 days of the end of the Company’s fiscal year ended December 31, 2017.
Code of Conduct
Our Board expects its members, as well as our officers and employees, to act ethically at all times and to acknowledge in writing
their adherence to the policies comprising our Code of Conduct. A copy of the Code of Conduct is posted on the “About Us —
Corporate Governance” section of our internet website at www.quorumhealth.com/about-us/corporate-governance and is also
available in print, free of charge, by visiting or mailing a request to our corporate office located at 1573 Mallory Lane, Brentwood, TN
37027. We intend to disclose any amendments to our Code of Conduct and any waivers from a provision of our Code of Conduct, as
required by the SEC, on our website, in each case to the extent such amendment or waiver would otherwise require us to file a Current
Report on Form 8-K pursuant to Item 5.05 thereof.
Item 11. Executive Compensation
See Item 10.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
See Item 10.
Item 13. Certain Relationships and Related Transactions, and Director Independence
See Item 10.
Item 14. Principal Accountant Fees and Services
See Item 10.
108
Item 15. Exhibits, Financial Statement Schedules
(a) Index to Consolidated and Combined Financial Statements, Financial Statement Schedules and Exhibits
(1) Consolidated and Combined Financial Statements
PART IV
The consolidated financial statements required to be included in “Item 8. Financial Statements and Supplementary Data”
begin on page F-1 and are submitted as a separate section of this report.
(2) Consolidated and Combined Financial Statement Schedules
All schedules are omitted because they are not applicable or not required, or because the required information is included
in the consolidated financial statements section of this report, which begins on page F-1.
(3) Exhibits
No.
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
2.10
2.11
Description
Separation and Distribution Agreement, dated as of April 29, 2016, by and between Community Health
Systems, Inc. and Quorum Health Corporation (incorporated by reference to Exhibit 2.1 to the
Company’s Current Report on Form 8-K filed with the SEC on May 2, 2016) (File No. 001-37550).
Tax Matters Agreement, dated as of April 29, 2016, by and between Community Health Systems, Inc.
and Quorum Health Corporation (incorporated by reference to Exhibit 2.2 to the Company’s Current
Report on Form 8-K filed with the SEC on May 2, 2016) (File No. 001-37550).
Employee Matters Agreement, dated as of April 29, 2016, by and between Community Health Systems,
Inc. and Quorum Health Corporation (incorporated by reference to Exhibit 2.3 to the Company’s Current
Report on Form 8-K filed with the SEC on May 2, 2016) (File No. 001-37550).
Amendment to the Employee Matters Agreement, effective as of April 29, 2016, by and between
Community Health Systems, Inc. and Quorum Health Corporation (incorporated by reference to Exhibit
2.1 to the Company’s Report on Form 10-Q filed with the SEC on November 14, 2016) (File No. 001-
37550).
Computer and Data Processing Transition Services Agreement, dated as of April 29, 2016, by and
between CHSPSC, LLC and QHCCS, LLC (incorporated by reference to Exhibit 2.4 to the Company’s
Current Report on Form 8-K filed with the SEC on May 2, 2016) (File No. 001-37550).
Receivables Collection Agreement (PASI), dated as of April 29, 2016, by and between Professional
Account Services, Inc. and QHCCS, LLC (incorporated by reference to Exhibit 2.5 to the Company’s
Current Report on Form 8-K filed with the SEC on May 2, 2016) (File No. 001-37550).
Billing and Collection Agreement (PPSI), dated as of April 29, 2016, by and between Physician Practice
Support, LLC and QHCCS, LLC (incorporated by reference to Exhibit 2.6 to the Company’s Current
Report on Form 8-K filed with the SEC on May 2, 2016) (File No. 001-37550).
Eligibility Screening Services Agreement, dated as of April 29, 2016, by and between Eligibility
Screening Services, LLC and QHCCS, LLC (incorporated by reference to Exhibit 2.7 to the Company’s
Current Report on Form 8-K filed with the SEC on May 2, 2016) (File No. 001-37550).
Employee Service Center/HRIS Transition Services Agreement, dated as of April 29, 2016, by and
between CHSPSC, LLC and QHCCS, LLC (incorporated by reference to Exhibit 2.8 to the Company’s
Current Report on Form 8-K filed with the SEC on May 2, 2016) (File No. 001-37550).
Shared Services Center Transition Services Agreement, dated as of April 29, 2016, by and between
Revenue Cycle Service Center, LLC and QHCCS, LLC (incorporated by reference to Exhibit 2.9 to the
Company’s Current Report on Form 8-K filed with the SEC on May 2, 2016) (File No. 001-37550).
Supplemental Medicaid Program Services Agreement, dated as of April 29, 2016, by and between
CHSPSC, LLC and QHCCS, LLC (incorporated by reference to Exhibit 2.10 to the Company’s Current
Report on Form 8-K filed with the SEC on May 2, 2016) (File No. 001-37550).
109
No.
2.12
Description
Short-Term Transition Services Agreement, dated as of April 29, 2016, by and between CHSPSC, LLC
and QHCCS, LLC (incorporated by reference to Exhibit 2.11 to the Company’s Current Report on Form
8-K filed with the SEC on May 2, 2016) (File No. 001-37550).
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
10.1
10.2
10.3*
Amended and Restated Certificate of Incorporation of Quorum Health Corporation (incorporated by
reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-8 filed with the SEC on
April 29, 2016) (File No. 333-210993).
Amended and Restated Bylaws of Quorum Health Corporation (incorporated by reference to Exhibit 4.3
to the Company’s Registration Statement on Form S-8 filed with the SEC on April 29, 2016) (File No.
333-210993).
Indenture, dated as of April 22, 2016, by and between Quorum Health Corporation and Regions Bank, as
trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed
with the SEC on April 22, 2016) (File No. 001-37550).
Supplemental Indenture, dated as of April 29, 2016, by and among Quorum Health Corporation, the
guarantors party thereto and Regions Bank, as trustee (incorporated by reference to Exhibit 4.1 to the
Company’s Current Report on Form 8-K filed with the SEC on May 2, 2016) (File No. 001-37550).
Supplemental Indenture, dated as of December 28, 2016, by and among Quorum Health Corporation, the
guarantor party thereto and Regions Bank, as trustee (incorporated by reference to Exhibit 4.3 to the
Company’s Annual Report on Form 10-K filed with the SEC on April 12, 2017) (File No. 001-37550).
Registration Rights Agreement, dated as of April 22, 2016, by and between Quorum Health Corporation
and Credit Suisse Securities (USA) LLC, as representative of the initial purchasers (incorporated by
reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the SEC on April 22,
2016) (File No. 001-37550).
Registration Rights Agreement Joinder, dated as of April 29, 2016, by and between the guarantors party
thereto and Credit Suisse Securities (USA) LLC, as representative of the initial purchasers (incorporated
by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the SEC on May 2,
2016) (File No. 001-37550).
Registration Rights Agreement Joinder, dated as of December 28, 2016, by and between the guarantor
party thereto and Credit Suisse Securities (USA) LLC, as representative of the initial purchasers
(incorporated by reference to Exhibit 4.6 to the Company’s Annual Report on Form 10-K filed with the
SEC on April 12, 2017) (File No. 001-37550).
Form of 11.625% Senior Notes due 2023 (incorporated by reference to Exhibit A to Exhibit 4.1 to the
Company’s Current Report on Form 8-K filed with the SEC on April 22, 2016) (File No. 001-37550).
Credit Agreement, dated as of April 29, 2016, by and among Quorum Health Corporation, the lenders
party thereto and Credit Suisse AG, as Administrative Agent and Collateral Agent (incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on May 2,
2016) (File No. 001-37550).
Amendment No. 1, dated as of April 11, 2017, to the Credit Agreement, dated as of April 29, 2016,
among Quorum Health Corporation, the lenders party thereto and Credit Suisse AG, as Administrative
Agent and Collateral Agent (incorporated by reference to Exhibit 10.2 to the Company’s Annual Report
on Form 10-K filed with the SEC on April 12, 2017) (File No. 001-37550).
Amendment No. 2, dated as of March 14, 2018, to the Credit Agreement, dated as of April 29, 2106, as
amended by Amendment No. 1 to the Credit Agreement, dated as of April 11, 2017, among Quorum
Health Corporation, the lenders party thereto and Credit Suisse AG, as Administrative Agent and
Collateral Agent
110
No.
10.4
10.5
10.6†
10.7†
10.8†
10.9†
10.10†
10.11†
10.12†
10.13†
10.14†
10.15†
10.16†
10.17†
Description
ABL Credit Agreement, dated as of April 29, 2016, by and among Quorum Health Corporation, the
lenders party thereto and UBS AG, Stamford Branch, as Administrative Agent, Collateral Agent and
Swingline Lender (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form
8-K filed with the SEC on May 2, 2016) (File No. 001-37550).
Amendment No. 1, dated as of April 11, 2017, to the ABL Credit Agreement, dated as of April 29, 2016,
by and among Quorum Health Corporation, the lenders party thereto and UBS AG, Stamford Branch, as
Administrative Agent, Collateral Agent and Swingline Lender (incorporated by reference to Exhibit 10.4
to the Company’s Annual Report on Form 10-K filed with the SEC on April 12, 2017) (File No. 001-
37550).
Quorum Health Corporation 2016 Stock Award Plan (incorporated by reference to Exhibit 10.3 to the
Company’s Current Report on Form 8-K filed with the SEC on May 2, 2016) (File No. 001-37550).
Quorum Health Corporation Director’s Fees Deferral Plan, effective as of September 16, 2016
(incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-8 filed
with the SEC on September 20, 2016) (File No. 333-213717).
Form of Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.4 to the Company’s
Quarterly Report on Form 10-Q filed with the SEC on May 11, 2016) (File No. 001-37550).
Form of Director Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.2 to the
Company’s Current Report on Form 8-K filed with the SEC on May 6, 2016) (File No. 001-37550).
Form of Performance-Based Restricted Stock Award Agreement (incorporated by reference to Exhibit
10.1 to the Company’s Current Report on Form 8-K filed with the SEC on May 6, 2016) (File No. 001-
37550).
Quorum Health Corporation 2016 Employee Performance Incentive Plan (incorporated by reference to
Exhibit 10.5 to the Company’s Current Report on Form 8-K filed with the SEC on May 2, 2016) (File
No. 001-37550).
Quorum Health Corporation Supplemental Executive Retirement Plan (incorporated by reference to
Exhibit 10.6 to the Company’s Current Report on Form 8-K filed with the SEC on May 2, 2016) (File
No. 001-37550).
Change in Control Severance Agreement, dated December 31, 2008, by and among Community Health
Systems, Inc., CHSPSC, LLC (formerly Community Health Systems Professional Services Corporation)
and Thomas D. Miller (incorporated by reference to Exhibit 10.4 to Amendment No. 2 to the Company’s
Registration Statement on Form 10 filed with the SEC on November 20, 2015) (File No. 001-37550).
Change in Control Severance Agreement, dated December 31, 2008, by and among Community Health
Systems, Inc., CHSPSC, LLC (formerly Community Health Systems Professional Services Corporation)
and Martin D. Smith (incorporated by reference to Exhibit 10.5 to Amendment No. 2 to the Company’s
Registration Statement on Form 10 filed with the SEC on November 20, 2015) (File No. 001-37550).
Form of Indemnification Agreement for Directors and Executive Officers (incorporated by reference to
Exhibit 10.9 to the Company’s Current Report on Form 8-K filed with the SEC on May 2, 2016) (File
No. 001-37550).
Quorum Health Corporation Amended and Restated Supplemental Executive Retirement Plan
(incorporated by reference to Exhibit 10.12 to the Company’s Report on Form 10-Q filed with the SEC
on August 10, 2016) (File No. 001-37550).
QHCCS, LLC Nonqualified Deferred Compensation Plan, effective as of September 1, 2016
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the
SEC on August 18, 2016) (File No. 001-37550).
111
No.
10.18†
10.19†
12.1*
21.1*
23.1*
31.1*
31.2*
32.1**
32.2**
Description
QHCCS, LLC Nonqualified Deferred Compensation Plan Adoption Agreement, executed as of August
18, 2016 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed
with the SEC on August 18, 2016) (File No. 001-37550).
Form of Change in Control Severance Agreement by and between Quorum Health Corporation and
each of Michael Culotta, Shaheed Koury, R. Harold McCard, Jr. and Matthew Hayes (incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on
September 29, 2017) (File No. 001-37550).
Ratio of Earnings to Fixed Charges.
List of Subsidiaries of Quorum Health Corporation.
Consent of Deloitte & Touche LLP.
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*
XBRL Instance Document.
101.SCH*
XBRL Taxonomy Extension Schema.
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase.
101.DEF*
XBRL Taxonomy Extension Definition Linkbase.
101.LAB*
XBRL Taxonomy Extension Label Linkbase.
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase.
*
Filed herewith.
** Furnished herewith.
†
Indicates a management contract or compensation plan or arrangement.
Item 16. Form 10-K Summary
None.
112
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
Report to be signed on its behalf by the undersigned thereunto duly authorized.
SIGNATURES
QUORUM HEALTH CORPORATION
(Registrant)
By: /s/ Thomas D. Miller
Thomas D. Miller
President, Chief Executive Officer
and Director
(principal executive officer)
By: /s/ Michael J. Culotta
Michael J. Culotta
Executive Vice President
and Chief Financial Officer
(principal financial officer and
principal accounting officer)
By: /s/ Stanley E. Hunt
Stanley E. Hunt
Senior Vice President and Corporate Controller
Date: March 15, 2018
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following
persons on behalf of the registrant in the capacities and on the date indicated.
Name
/s/ William M. Gracey
William M. Gracey
/s/ Thomas D. Milller
Thomas D. Miller
/s/ Michael J. Culotta
Michael J. Culotta
/s/ James T. Breedlove
James T. Breedlove
/s/ Terry A. Rappuhn
Terry A. Rappuhn
/s/ Joseph A. Hastings, D.M.D
Joseph A. Hastings, D.M.D.
/s/ William S. Hussey
William S. Hussey
/s/ Barbara R. Paul, M.D.
Barbara R. Paul, M.D.
/s/ R. Lawrence Van Horn, Ph.D.
R. Lawrence Van Horn, Ph.D.
Title
Director
President, Chief Executive Officer and
Director
(principal executive officer)
Executive Vice-President and Chief
Financial Officer
(principal financial officer and
principal accounting officer)
Director
Director
Director
Director
Director
Director
113
Date
March 15, 2018
March 15, 2018
March 15, 2018
March 15, 2018
March 15, 2018
March 15, 2018
March 15, 2018
March 15, 2018
March 15, 2018
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QUORUM HEALTH CORPORATION
Index to the Consolidated and Combined Financial Statements
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
Consolidated and Combined Statements of Income (Loss) for the Years Ended December 31, 2017, 2016 and 2015
Consolidated and Combined Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2017,
2016 and 2015
Consolidated Balance Sheets as of December 31, 2017 and 2016
Consolidated and Combined Statements of Equity for the Years Ended December 31, 2017, 2016 and 2015
Consolidated and Combined Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and 2015
Notes to Consolidated and Combined Financial Statements
Page
F-2
F-3
F-4
F-5
F-6
F-7
F-8
F-9
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
Quorum Health Corporation
1573 Mallory Lane
Brentwood, Tennessee 37027
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Quorum Health Corporation and subsidiaries (the "Company") as of December
31, 2017, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). In our opinion, because of the effect of the material weakness identified below on the achievement of the
objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2017, based
on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
consolidated balance sheets and the related statements of income (loss), comprehensive income (loss), equity, and cash flows, as of and for the period
ended December 31, 2017 of the Company and our report dated March 15, 2018, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control
Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our
audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance
with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s
internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Material Weakness
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.
The following material weakness has been identified and included in management's assessment:
A material weakness has been identified related to the controls intended to properly document and review on a timely basis the Company’s
analysis of self-pay patient accounts receivable at a more comprehensive and disaggregated level related to the Company’s adoption of ASU
2014-09 Revenue from Contracts with Customers.
This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated
balance sheets and the related statements of income (loss), comprehensive income (loss), equity, and cash flows, as of and for the period ended
December 31, 2017, of the Company, and this report does not affect our report on such financial statements.
/s/ Deloitte & Touche LLP
Nashville, Tennessee
March 15, 2018
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
Quorum Health Corporation
1573 Mallory Lane
Brentwood, Tennessee 37027
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Quorum Health Corporation and subsidiaries (the "Company")
as of December 31, 2017 and 2016, the related consolidated statements of income (loss), comprehensive income (loss), equity, and
cash flows, for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the
"financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the
Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the
period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America. We
have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB),
the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control —
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report
dated March 15, 2018, expressed an adverse opinion on the Company's internal control over financial reporting because of a material
weakness.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the
Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to
be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or
fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due
to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
Nashville, Tennessee
March 15, 2018
We have served as the Company’s auditor since 2015.
F-3
QUORUM HEALTH CORPORATION
CONSOLIDATED AND COMBINED STATEMENTS OF INCOME (LOSS)
(In Thousands, Except Earnings per Share and Shares)
Operating revenues, net of contractual allowances and discounts
Provision for bad debts
Net operating revenues
Operating costs and expenses:
Salaries and benefits
Supplies
Other operating expenses
Depreciation and amortization
Rent
Electronic health records incentives earned
Legal, professional and settlement costs
Impairment of long-lived assets and goodwill
Loss (gain) on sale of hospitals, net
Transaction costs related to the Spin-off
Total operating costs and expenses
Income (loss) from operations
Interest expense, net
Income (loss) before income taxes
Provision for (benefit from) income taxes
Net income (loss)
2017
Year Ended December 31,
2016
2015
$
$
2,327,655
255,485
2,072,170
2,419,053
280,586
2,138,467
$
2,445,858
258,520
2,187,338
1,034,797
250,523
623,063
82,155
50,230
(4,745 )
6,001
47,281
(5,243 )
253
2,084,315
(12,145 )
122,077
(134,222 )
(21,865 )
(112,357 )
1,833
(114,190 )
$
1,057,119
258,639
645,802
117,288
49,883
(11,482 )
7,342
291,870
2,150
5,488
2,424,099
(285,632 )
113,440
(399,072 )
(53,875 )
(345,197 )
2,491
(347,688 )
$
1,016,696
249,792
634,233
128,001
48,729
(25,779 )
—
13,000
—
16,337
2,081,009
106,329
98,290
8,039
3,304
4,735
3,398
1,337
Less: Net income (loss) attributable to noncontrolling interests
Net income (loss) attributable to Quorum Health Corporation
$
Earnings (loss) per share attributable to Quorum Health Corporation
stockholders:
Basic and diluted
Weighted-average shares outstanding:
Basic and diluted
$
(4.06 )
$
(12.24 )
$
0.05
28,113,566
28,413,247
28,412,054
See accompanying notes
F-4
QUORUM HEALTH CORPORATION
CONSOLIDATED AND COMBINED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In Thousands)
Year Ended December 31,
2016
2015
2017
Net income (loss)
$
(112,357 )
$
(345,197 )
$
4,735
Amortization and recognition of unrecognized pension cost (credit)
components, net of income taxes
Comprehensive income (loss)
Less: Comprehensive income (loss) attributable to noncontrolling interests
Comprehensive income (loss) attributable to Quorum Health
Corporation
804
(111,553 )
1,833
(2,760 )
(347,957 )
2,491
—
4,735
3,398
$
(113,386 )
$
(350,448 )
$
1,337
See accompanying notes
F-5
QUORUM HEALTH CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Par Value per Share and Shares)
ASSETS
Current assets:
Cash and cash equivalents
Patient accounts receivable, net of allowance for doubtful accounts of $352,509 and
$360,796 at December 31, 2017 and 2016, respectively
Inventories
Prepaid expenses
Due from third-party payors
Current assets of hospitals held for sale
Other current assets
Total current assets
Property and equipment, at cost
Less: Accumulated depreciation and amortization
Total property and equipment, net
Goodwill
Intangible assets, net
Long-term assets of hospitals held for sale
Other long-term assets
Total assets
LIABILITIES AND EQUITY
Current liabilities:
Current maturities of long-term debt
Accounts payable
Accrued liabilities:
Accrued salaries and benefits
Accrued interest
Due to third-party payors
Current liabilities of hospitals held for sale
Other current liabilities
Total current liabilities
Long-term debt
Deferred income tax liabilities, net
Other long-term liabilities
Total liabilities
Redeemable noncontrolling interests
Commitments and Contingencies (Note 19)
Equity:
Quorum Health Corporation stockholders' equity:
Preferred stock, $0.0001 par value per share; 100,000,000 shares authorized; none issued
Common stock, $0.0001 par value per share; 300,000,000 shares authorized; 30,294,895
shares issued and outstanding at December 31, 2017 and 29,482,050 shares issued and
outstanding at December 31, 2016
Additional paid-in capital
Accumulated other comprehensive income (loss)
Accumulated deficit
Total Quorum Health Corporation stockholders' equity
Nonredeemable noncontrolling interests
Total equity
Total liabilities and equity
See accompanying notes
$
F-6
December 31,
2017
2016
$
5,617 $
25,455
$
$
343,145
53,459
21,167
97,202
8,112
47,440
576,142
1,405,184
(729,905 )
675,279
409,229
64,850
7,734
95,607
1,828,841 $
380,685
58,124
23,028
116,235
1,502
57,942
662,971
1,519,975
(786,075 )
733,900
416,833
84,982
6,851
88,833
1,994,370
1,855 $
171,250
5,683
169,684
77,803
10,466
47,705
2,577
43,687
355,343
1,212,035
7,774
137,954
1,713,106
2,325
98,803
19,915
42,537
492
53,268
390,382
1,241,142
31,474
108,996
1,771,994
6,807
—
—
3
549,610
(1,956 )
(448,216 )
99,441
13,969
113,410
1,828,841 $
3
537,911
(2,760 )
(334,026 )
201,128
14,441
215,569
1,994,370
QUORUM HEALTH CORPORATION
CONSOLIDATED AND COMBINED STATEMENTS OF EQUITY
(In Thousands, Except Shares)
Quorum Health Corporation
Stockholders' Equity
Redeemable
Noncontrolling
Interests
Common Stock
Shares
Additional
Paid-in
Amount Capital
Nonredeemable
Comprehensive Accumulated Parent's Noncontrolling
Loss
Deficit
Equity
Interests
Total
Equity
Accumulated
Other
$
Balances at December 31, 2014
Comprehensive income (loss)
Transfers to Parent (prior to the
Spin-off)
Cash distributions to noncontrolling
investors
Purchases of shares from
noncontrolling investors
Redemption of shares from
noncontrolling interests
Reclassifications of noncontrolling
interests
Adjustments to redemption values of
redeemable noncontrolling interests
Noncontrolling interest in acquired
entity
Balances at December 31, 2015
Comprehensive income (loss)
Transfers to Parent (prior to the
Spin-off)
Changes in equity related to the
Spin-off
Stock-based compensation expense
Cancellation of restricted stock
awards for payroll tax withholdings
on vested shares
Cash distributions to noncontrolling
investors
Purchases of shares from
noncontrolling investors
Reclassifications of noncontrolling
interests
Adjustments to redemption values of
redeemable noncontrolling interests
Noncontrolling interest in acquired
entity
Balances at December 31, 2016
Comprehensive income (loss)
Changes in equity related to the
Spin-off
Stock-based compensation expense
Cancellation of restricted stock
awards for payroll tax withholdings
on vested shares
Cash distributions to noncontrolling
investors
Reclassifications of noncontrolling
interests
Redemption of shares from
noncontrolling interests
Adjustments to redemption values of
redeemable noncontrolling interests
$
Balances at December 31, 2017
2,362
(170 )
— $ — $
— —
— $
—
—
— —
—
(499 )
— —
—
(543 )
— —
—
5,955
— —
—
(5 )
— —
—
142
— —
—
— $
—
—
—
—
—
—
—
— $ 3,109 $
— 1,337
4,809 $
3,568
7,918
4,905
— (1,337 )
—
(1,337 )
—
—
(1,124 )
(1,124 )
—
217
(85 )
132
—
—
5,586
5,586
—
—
5
5
—
(142 )
—
(142 )
1,716
8,958
(1,064 )
— —
— —
— —
—
—
—
—
—
—
—
— 3,184
(2,760 ) (334,026 ) (13,662 )
—
—
12,759 15,943
3,555 (346,893 )
—
— —
—
— 28,412,054
— 1,072,987 —
3 530,559
7,441
—
(2,991 ) —
(13 )
(386 )
— —
—
(102 )
— —
—
(609 )
— —
—
142
— —
(76 )
—
—
—
—
—
—
—
—
— 13,662
— 13,662
— (3,137 )
—
—
— 527,425
7,441
—
—
—
—
(13 )
—
—
(2,464 )
(2,464 )
—
19
(18 )
1
—
—
609
609
—
(66 )
—
(142 )
— —
(132 )
6,807 29,482,050
(1,218 )
— —
—
3 537,911
—
—
—
(2,760 ) (334,026 )
804 (114,190 )
— —
—
— 1,031,753 —
1,563
9,952
—
(218,908 ) —
(1,508 )
(42 )
— —
—
(363 )
— —
—
(3,402 )
— —
2,235
—
—
—
—
—
—
—
—
—
—
—
—
—
14,441 215,569
3,051 (110,335 )
—
—
1,563
9,952
—
—
—
—
—
(1,508 )
—
—
(3,809 )
(3,809 )
—
—
363
363
—
—
(77 )
2,158
543
— —
2,325 30,294,895 $
(543 )
3 $ 549,610 $
—
—
(1,956 ) $ (448,216 ) $ — $
—
—
(543 )
13,969 $ 113,410
See accompanying notes
F-7
QUORUM HEALTH CORPORATION
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(In Thousands)
Year Ended December 31,
2016
2015
2017
$
(112,357 ) $
(345,197 ) $
4,735
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization
Non-cash interest expense
Provision for (benefit from) deferred income taxes
Stock-based compensation expense
Impairment of long-lived assets and goodwill
Loss (gain) on sale of hospitals, net
Changes in reserves for self-insurance claims, net of payments
Changes in reserves for legal, professional and settlement costs, net of payments
Other non-cash expense (income), net
Changes in operating assets and liabilities, net of acquisitions and divestitures:
Patient accounts receivable, net
Due from and due to third-party payors, net
Inventories, prepaid expenses and other current assets
Accounts payable and accrued liabilities
Long-term assets and liabilities, net
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Capital expenditures for property and equipment
Capital expenditures for software
Acquisitions, net of cash acquired
Proceeds from the sale of hospitals
Proceeds from asset sales
Other investing activities
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Borrowings under revolving credit facilities
Repayments under revolving credit facilities
Borrowings of long-term debt
Repayments of long-term debt
Increase in Due to Parent, net
Increase (decrease) in receivables facility, net
Payments of debt issuance costs
Cash paid to Parent related to the Spin-off
Cancellation of restricted stock awards for payroll tax withholdings on vested
shares
Cash distributions to noncontrolling investors
Purchases of shares from noncontrolling investors
Net cash provided by (used in) financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental cash flow information:
Interest payments, net
Income tax payments, net (after the Spin-off)
Non-cash purchases of property and equipment under capital lease obligations
$
$
See accompanying notes
F-8
82,155
5,770
(22,137 )
9,952
47,281
(5,243 )
22,519
(3,651 )
190
29,091
24,201
673
(14,743 )
3,269
66,970
(61,530 )
(6,898 )
(1,920 )
32,081
—
—
(38,267 )
508,000
(508,000 )
376
(39,195 )
—
—
(3,119 )
—
(1,508 )
(3,851 )
(1,244 )
(48,541 )
(19,838 )
25,455
5,617 $
117,288
2,496
(56,339 )
7,441
291,870
2,150
27,994
3,651
(575 )
10,205
7,005
1,457
20,760
(9,120 )
81,086
(79,920 )
(7,269 )
(785 )
13,746
1,082
—
(73,146 )
50,000
(50,000 )
1,256,281
(15,222 )
24,796
—
(29,146 )
(1,217,336 )
(13 )
(2,850 )
(101 )
16,409
24,349
1,106
25,455 $
125,775 $
196
54
90,909 $
—
6,579
128,001
—
2,542
—
13,000
—
—
—
380
(16,639 )
(18,198 )
8,000
(78,944 )
12
42,889
(59,455 )
(8,845 )
(8,019 )
—
3,114
(5,387 )
(78,592 )
—
—
372
(1,563 )
262,775
(224,774 )
—
—
—
(1,623 )
(937 )
34,250
(1,453 )
2,559
1,106
98,290
—
15,448
QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
NOTE 1 — DESCRIPTION OF THE BUSINESS AND THE SPIN-OFF
Description of the Business
The principal business of Quorum Health Corporation, a Delaware corporation, and its subsidiaries (collectively, “QHC” or the
“Company”) is to provide hospital and outpatient healthcare services in its markets across the United States. As of December 31,
2017, the Company owned or leased a diversified portfolio of 31 hospitals in rural and mid-sized markets, which are located in 15
states and have a total of 2,979 licensed beds. The Company provides outpatient healthcare services through its hospitals and their
affiliated facilities, including urgent care centers, diagnostic and imaging centers, physician clinics and surgery centers. The
Company’s wholly-owned subsidiary, Quorum Health Resources, LLC (“QHR”), provides hospital management advisory and
healthcare consulting services to non-affiliated hospitals located throughout the United States. Over 95% of the Company’s net
operating revenues for each of the years ended December 31, 2017, 2016 and 2015 are attributable to its hospital operations business.
Description of the Spin-off
On April 29, 2016, Community Health Systems, Inc. (“CHS”, or “Parent” when referring to the carve-out period prior to April 29,
2016) completed the spin-off of 38 hospitals, including their affiliated facilities, and QHR to form Quorum Health Corporation
through the distribution of 100% of the common stock of QHC, issued at a par value of $0.0001 per share, to CHS stockholders of
record as of the close of business on April 22, 2016 (the “Record Date”) and cash proceeds to CHS of $1.2 billion (the “Spin-off”).
Each CHS stockholder received a distribution of one share of QHC common stock for every four shares of CHS common stock held as
of the Record Date plus cash in lieu of fractional shares. Quorum Health Corporation began trading on the New York Stock Exchange
(“NYSE”) under the ticker symbol “QHC” on May 2, 2016.
In connection with the Spin-off, QHC issued $400 million in aggregate principal amount of 11.625% Senior Notes due 2023 (the
“Senior Notes”) on April 22, 2016, pursuant to an indenture (the “Indenture”) by and between the Company and Regions Bank, as
Trustee. The Senior Notes were issued at a discount of $6.9 million, or 1.734%. The gross offering proceeds of the Senior Notes were
deposited into a segregated escrow account at the closing of the offering on April 22, 2016. On April 29, 2016, the Company entered
into a credit agreement (the “Senior Credit Facility”) consisting of an $880 million senior secured term loan facility (the “Term Loan
Facility”), which was issued at 98% of par value, or a discount of $17.6 million, and a $100 million senior secured revolving credit
facility (the “Revolving Credit Facility”). In addition, the Company entered into a $125 million senior secured asset-based revolving
credit facility (the “ABL Credit Facility”) on April 29, 2016. The net offering proceeds of the Senior Notes were released to QHC
from the escrow account on April 29, 2016. The net offering proceeds of the Senior Notes, together with the net borrowings under the
Term Loan Facility, were used to pay $1.2 billion of the cash proceeds to CHS, as mentioned above, and to pay the Company’s fees
and expenses related to the Spin-off. The cash proceeds paid to CHS were characterized as a one-time, tax-free cash distribution.
In connection with the Spin-off, QHC and CHS entered into a Separation and Distribution Agreement, a Tax Matters Agreement
and an Employee Matters Agreement on April 29, 2016, which, collectively, governed or continue to govern the allocation of
employees, assets and liabilities that were transferred to QHC from CHS, including but not limited to investments, working capital,
property and equipment, employee benefits and deferred tax assets and liabilities. In addition, QHC and CHS entered into various
transition services agreements and other ancillary agreements that govern certain relationships and activities of QHC and CHS for five
years following the Spin-off. See Note 18 — Related Party Transactions for additional information on the agreements that exist
between QHC and CHS after the Spin-off.
In connection with the Spin-off, CHS contributed $530.6 million of additional paid-in capital to QHC and made a $13.5 million
cash contribution to QHC, pursuant to the Separation and Distribution Agreement. This contribution consisted of $20.0 million of cash
contributed to fund a portion of QHC’s initial working capital, reduced by $6.5 million for the difference in estimated and actual
financing transaction fees related to the Spin-off.
F-9
QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
The following table provides a summary of the major transactions to effect the Spin-off of QHC as a newly formed, independent
company (dollars in thousands):
Balances at April 29, 2016 (prior to the Spin-off)
Borrowings of long-term debt, net of debt
issuance discounts
Payments of debt issuance costs
Cash proceeds paid to Parent
Transfer of liabilities from Parent
Net deferred income tax liability resulting from
the Spin-off
Non-cash capital contribution from Parent
Distribution of common stock
Distribution of restricted stock awards
Balances at April 29, 2016 (after the Spin-off)
Long-Term
Debt
Due to
Parent, Net
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Parent's
Equity
$
24,179 $ 1,813,836
— $
— $
— $
3,137
1,255,464
(29,146 )
—
—
— (1,217,336 )
(22,292 )
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$ 1,250,497 $
(46,783 )
(527,425 )
—
—
— 27,719,645
—
692,409
— 28,412,054 $
—
—
— 530,562
(3 )
3
—
—
3 $ 530,559 $
—
(3,137 )
—
—
—
NOTE 2 — BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated and combined financial statements and accompanying notes of the Company presented herein have been
prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP” or “GAAP”). In
the opinion of the Company’s management, the consolidated and combined financial information presented herein includes all
adjustments necessary to present fairly the results of operations, financial position and cash flows of the Company for the periods
presented.
Prior to its separation from CHS on April 29, 2016, QHC did not operate as a separate company and stand-alone financial
statements were not historically prepared; however, QHC was comprised of certain stand-alone legal entities for which discrete
financial information was available under CHS’ ownership. The accompanying consolidated and combined financial statements
include amounts and disclosures for QHC that have been derived from the consolidated financial statements and accounting records of
CHS for the periods prior to the Spin-off in combination with the amounts and disclosures related to the stand-alone financial
statements and accounting records of QHC after the Spin-off. The accompanying consolidated and combined financial statements may
not necessarily be indicative of the results of operations, financial position and cash flows of QHC in the future or those that would
have occurred had the Company operated on a stand-alone basis during the entirety of the periods presented herein. See Note 18 —
Related Party Transactions for additional information on the carve-out of financial information from CHS.
Principles of Consolidation and Combination
The consolidated and combined financial statements include the accounts of the Company and its subsidiaries in which it holds
either a direct or indirect ownership of a majority voting interest. Investments in less-than-wholly-owned consolidated subsidiaries of
QHC are presented separately in the equity component of the Company’s consolidated balance sheets to distinguish between the
interests of QHC and the interests of the noncontrolling investors. Revenues and expenses from these subsidiaries are included in the
respective individual line items of the Company’s consolidated and combined statements of income, and net income is presented both
in total and separately to distinguish the amounts attributable to the Company and the amounts attributable to the interests of the
noncontrolling investors. Noncontrolling interests that are redeemable, or may become redeemable at a fixed or determinable price at
the option of the holder or upon the occurrence of an event outside of the control of the Company, are presented in mezzanine equity
in the consolidated balance sheets.
Intercompany transactions and accounts of the Company are eliminated in consolidation. Additionally, all significant transactions
with CHS that occurred prior to the Spin-off have been included in the consolidated balance sheets within Due to Parent, net. This
liability to CHS was settled in the Spin-off.
F-10
QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions
that affect the amounts reported in the consolidated and combined financial statements and accompanying notes. Actual results could
differ from those estimates under different assumptions or conditions.
Reclassifications and Immaterial Restatements
Certain revisions have been made to the prior period balances as follows:
Beginning in 2017, the Company has reclassified and separately presented on the consolidated and combined statements of cash
flows the borrowings and repayments of the revolving credit facilities. Both items are included in cash flows from financing activities.
This restatement of the consolidated and combined statement of cash flows as of December 31, 2016 was considered immaterial and
had no effect on the Company’s results of operations or financial position as of December 31, 2016.
Beginning in 2017, the Company reclassified and separately presented in the notes to the consolidated and combined financial
statements the components of deferred income tax assets and liabilities based on their type of asset and liability. Previously, deferred
tax assets and liabilities were classified as either other current or other long-term assets or liabilities. The Company believes the
current presentation helps distinguish the types of deferred tax assets and liabilities.
Revenues and Accounts Receivable
Revenue Recognition
The Company recognizes revenues from patient services at its hospitals and affiliated facilities in the period services are
performed and reports these revenues at the net realizable amount expected to be collected from patients and third-party payors.
Billings and collections are outsourced to CHS under the transition services agreements that were entered into by CHS in connection
with the Spin-off. See Note 18 — Related Party Transactions for additional information on these agreements.
The amounts that are collected for patient services are generally less than established billing rates, or standard billing charges, due
to contractual agreements with third-party payors, governmental programs that require reduced billing rates, discounts offered as
incentives for payment, and a portion related to bad debts. The Company recognizes revenues related to its QHR business when
management advisory and consulting services are provided and reports these revenues at the net realizable amount expected to be
collected from the non-affiliated hospital clients of the Company’s QHR business.
The following table provides a summary of the components of net operating revenues, before the provision for bad debts (in
thousands):
Operating revenues
Less: Contractual allowances
Less: Discounts
Total net operating revenues, before the provision for bad debts
2017
Year Ended December 31,
2016
2015
$ 11,930,145
(9,173,711 )
(428,779 )
2,327,655
$
$ 12,104,580
(9,247,789 )
(437,738 )
2,419,053
$
$ 11,613,826
(8,795,674 )
(372,294 )
2,445,858
$
During the fourth quarter of 2017, the Company analyzed self-pay patient accounts receivable at a more comprehensive and
disaggregated level and refined its estimate of the collectability of the portion of self-pay accounts receivable related to insured
patients, primarily co-pays and deductibles. The Company’s analysis also included an evaluation of patient accounts receivable
retained in the divestitures of six of the Company’s seven divested hospitals. As a result of these efforts, the Company recorded a
change in estimate of $21.0 million to reduce the net realizable value of patient accounts receivable, which negatively impacted the
provision for bad debts in the consolidated and combined statement of income for the year ended December 31, 2017.
As of December 31, 2016, the Company recorded a change in estimate of $11.4 million to reduce the net realizable value of
patient accounts receivable, which negatively impacted the provision for bad debts in the statement of income for the year ended
December 31, 2016. This change in estimate related to an assessment of the collectability of managed care and commercial accounts
receivable aged greater than one year based on the Company’s review of historical cash collections for these accounts.
Payor Sources
The primary sources of payment for patient healthcare services are third-party payors, including federal and state agencies
administering the Medicare and Medicaid programs, other governmental agencies, managed care health plans, commercial insurance
companies, workers’ compensation carriers and employers. Self-pay revenues are the portion of patient service revenues derived from
F-11
QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
patients who do not have health insurance coverage and the patient responsibility portion of services that are not covered by health
insurance plans. Non-patient revenues primarily include revenues from QHR’s hospital management advisory and consulting services
business, rental income and hospital cafeteria sales.
The following table provides a summary of net operating revenues, before the provision for bad debts, by payor source (dollars in
thousands):
2017
$ Amount % of Total
Year Ended December 31,
2016
$ Amount % of Total
2015
$ Amount % of Total
Medicare
Medicaid
Managed care and commercial plans
Self-pay
Non-patient
$ 656,843
425,943
921,503
226,043
97,323
28.2 % $ 673,074
18.3 % 446,273
39.6 % 952,535
9.7 % 242,095
4.2 % 105,076
27.8 % $ 656,799
18.4 % 443,479
39.4 % 984,480
10.1 % 247,234
4.3 % 113,866
26.9 %
18.1 %
40.3 %
10.0 %
4.7 %
Total net operating revenues, before the provision
for bad debts
$ 2,327,655 100.0 % $ 2,419,053 100.0 % $ 2,445,858 100.0 %
The table above includes an $11.4 million change in estimate the Company recorded as of December 31, 2016 to reduce the net
realizable value of patient accounts receivable due to increasing delays associated with collections on accounts receivable under the
Illinois Medicaid program. This change in estimate impacted contractual allowances associated with Medicaid revenues.
For the years ended December 31, 2017, 2016 and 2015, Medicare revenues related to Medicare Advantage Programs were
$186.7 million, $170.4 million and $146.9 million, respectively.
Contractual Allowances and Discounts
The net realizable amount of patient service revenues due from third-party payors is subject to complexities and interpretations of
payor-specific contractual agreements and governmental regulations that are frequently changing. The Medicare and Medicaid
programs, which represent a large portion of the Company’s operating revenues, are highly complex programs to administer and are
subject to interpretation of federal and state-specific reimbursement rates, new legislation and final cost report settlements. Contractual
allowances, or differences in standard billing rates and the payments derived from contractual terms with governmental and non-
governmental third-party payors, are recorded based on management’s best estimates in the period in which services are performed
and a payment methodology is established with the patient. Recorded estimates for past contractual allowances are subject to change,
in large part, due to ongoing contract negotiations and regulation changes, which are typical in the U.S. healthcare industry. Revisions
to estimates are recorded as contractual allowance adjustments in the periods in which they become known and may be subject to
further revisions. Billing and collections are outsourced to CHS under the transition services agreements that were put in place by
CHS in connection with the Spin-off. The Company’s contractual allowances are impacted by the timing and ability of CHS to
monitor the classification and collection of our patient accounts receivable. Self-pay and other payor discounts are incentives offered
to uninsured or underinsured payors to reduce their costs of healthcare services.
Third-Party Program Reimbursements
Cost report settlements under reimbursement programs with Medicare, Medicaid and other managed care plans are estimated and
recorded in the period the related services are performed and are adjusted in future periods, as needed, until the final cost report
settlements are determined. Previous program reimbursements and final cost report settlements are included in due from and due to
third-party payors in the consolidated balance sheets. During the years ended December 31, 2017, 2016 and 2015, contractual
allowance adjustments related to previous program reimbursements and final cost report settlements favorably (unfavorably) impacted
net operating revenues by $2.0 million, $(5.8) million and $(15.1) million, respectively. The 2015 amount included the unfavorable
impact of an $11.1 million Illinois cost report settlement in 2014 that was reversed in the second quarter of 2015 due to contract
negotiations that were finalized in that quarter. Exclusive of this adjustment, net operating revenues were unfavorably impacted by
$4.0 million in the year ended December 31, 2015 for all other contractual allowance adjustments related to previous program
reimbursements and final cost report settlements.
Currently, several states utilize supplemental payment programs, including disproportionate share programs, for the purpose of
providing reimbursement to providers to offset a portion of the cost of providing care to Medicaid and indigent patients. These
programs are designed with input from CMS and are funded with a combination of federal and state resources, including, in certain
instances, taxes, fees or other program expenses (collectively, “provider taxes”) levied on the providers. The receivables and payables
associated with these programs are included in due from and due to third-party payors in the consolidated balance sheets.
F-12
QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
The following table provides a summary of the components of amounts due from and due to third-party payors, as presented in
the consolidated balance sheets (in thousands):
Amounts due from third-party payors:
Previous program reimbursements and final cost report settlements
State supplemental payment programs
Total amounts due from third-party payors
Amounts due to third-party payors:
Previous program reimbursements and final cost report settlements
State supplemental payment programs
Total amounts due to third-party payors
December 31,
2017
2016
$
$
$
$
17,383 $
79,819
97,202 $
23,876
92,359
116,235
33,163 $
14,542
47,705 $
33,366
9,171
42,537
After a state supplemental payment program is approved and fully authorized by the appropriate state legislative or governmental
agency, the Company recognizes the revenues and related expenses based on the terms of each program in the period in which
amounts are estimable and revenue collection is reasonably assured. The revenues earned by the Company under these programs are
included in net operating revenues and the expenses associated with these programs are included in other operating expenses in the
consolidated and combined statements of income.
The following table provides a summary of the portion of Medicaid reimbursements included in the consolidated and combined
statements of income that are attributable to state supplemental payment programs (in thousands):
2017
Year Ended December 31,
2016
2015
Medicaid revenues
Provider taxes and other expenses
$
211,448 $
75,388
220,389
$
76,616
211,696
75,929
Reimbursements attributable to state supplemental payment programs, net
of expenses
$
136,060 $
143,773 $
135,767
The California Department of Health Care Services implemented the HQAF Program, imposing a fee on certain general and acute
care California hospitals. Revenues generated from these fees provide funding for the non-federal supplemental payments to
California hospitals that serve California’s Medi-Cal and uninsured patients. Under Phase IV of the program, covering the period from
January 2014 through December 2016, and Phase V of the program, covering the period from January 2017 through June 2019, the
Company recognized $22.0 million, $34.4 million and $31.5 million of operating revenues, net of provider taxes, for the years ended
December 31, 2017, 2016 and 2015, respectively.
Charity Care
In the ordinary course of business, the Company provides services to patients who are financially unable to pay for hospital care.
The related charges for those patients who are financially unable to pay that otherwise do not qualify for reimbursement from a
governmental program are classified as charity care. The Company determines amounts that qualify for charity care primarily based
on the patient’s household income relative to the poverty level guidelines established by the federal government. The Company’s
policy is to not pursue collections for such amounts; therefore, the related charges are recorded in operating revenues at the standard
billing rates and fully offset in contractual allowances. The Company’s gross amounts of charity care revenues were $34.0 million,
$34.6 million and $30.4 million for the years ended December 31, 2017, 2016 and 2015, respectively.
The Company estimates the cost of providing charity care services utilizing a ratio of cost to gross charges and applying this ratio
to the gross charges associated with providing care to charity patients for the period. The estimated costs of providing charity care
services was $5.6 million, $5.7 million and $5.0 million for the years ended December 31, 2017, 2106 and 2015, respectively. To the
extent the Company receives reimbursement from any of the various governmental assistance programs to subsidize its care of
indigent patients, the Company excludes the charges for such patients from the cost of care provided under its charity care program.
Accounts Receivable and Allowance for Doubtful Accounts
Substantially all of the Company’s receivables are related to providing healthcare services to patients at its hospitals and affiliated
outpatient facilities.
F-13
QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
The following table provides a summary of the components of patient accounts receivable before contractual allowances,
discounts and allowance for doubtful accounts (dollars in thousands):
December 31,
2017
2016
$ Amount
% of Total
$ Amount
% of Total
Third-parties
Self-pay
Total patient accounts receivable, gross
$ 1,796,852
596,863
$ 2,393,715
75.1 %
24.9 %
100.0 %
$ 1,930,103
656,373
$ 2,586,476
74.6 %
25.4 %
100.0 %
Accounts receivable are reduced by an allowance for amounts that could become uncollectible in the future. Receivables from
third-parties include the non-self-pay receivables due to the Company from providers of governmental and non-governmental
programs and plans. For insured receivables, the Company estimates the allowance for doubtful accounts based on a model that
considers the uncontractualized portion of all accounts aging over 365 days from the date of patient discharge, reduced by an estimate
of recoveries. For self-pay receivables, the Company estimates the allowance for doubtful accounts by reserving a percentage of all
self-pay accounts receivable without regard to aging category. The allowance percentage is based on a model that considers historical
write-off activity and is adjusted for expected recoveries and any anticipated changes in trends. The Company’s ability to estimate the
allowance for doubtful accounts is not significantly impacted by the aging of accounts receivable, as management believes that
substantially all of the risk exists at the point in time such accounts are identified as self-pay.
Collections are impacted by the economic ability of patients to pay, the effectiveness of CHS’ billing and collection efforts,
including their current policies on collections, and the ability of the Company to further attempt collection efforts. Billings and
collections are outsourced to CHS under the transition services agreements that were established with the Spin-off. See Note 18 —
Related Party Transactions for additional information on these agreements. Significant changes in payor mix, CHS’s business office
operations, including the CHS shared services centers’ efforts in collecting the Company’s accounts receivables, economic conditions,
or trends in federal and state governmental healthcare coverage, among others, could affect the Company’s estimates of accounts
receivable collectability. The Company also continually reviews its overall allowance adequacy by monitoring historical cash
collections as a percentage of trailing net operating revenues after the provision for bad debts, as well as by analyzing current period
net operating revenues and admissions by payor classification, aged accounts receivable by payor, days revenue outstanding, the
composition of self-pay receivables between pure self-pay patients and the patient responsibility portion of third-party insured
receivables, and the impact of recent divestitures.
The following table provides a summary of the changes in the allowance for doubtful accounts (in thousands):
Balance at beginning of period
Provision for bad debts
Amounts written off, net of recoveries
Balance at end of period
2017
December 31,
2016
2015
$
$
$
360,796
255,485
(263,772 )
$
352,509
$
346,507
280,586
(266,297 )
$
360,796
341,527
258,520
(253,540 )
346,507
During the fourth quarter of 2017, the Company analyzed self-pay patient accounts receivable at a more comprehensive and
disaggregated level and refined its estimate of the collectability of the portion of self-pay accounts receivable related to insured
patients, primarily co-payments and deductibles. The Company’s analysis also included an evaluation of patient accounts receivable
retained in the divestitures of six of the Company’s seven divested hospitals. As a result of these efforts, the Company recorded a
change in estimate of $21.0 million to reduce the net realizable value of patient accounts receivable, which negatively impacted the
provision for bad debts in the consolidated and combined statement of income for the year ended December 31, 2017.
As of December 31, 2016, the Company recorded a change in estimate of $11.4 million to reduce the net realizable value of
patient accounts receivable, which negatively impacted the provision for bad debts in the consolidated and combined statement of
income for the year ended December 31, 2016. This change in estimate related to the Company’s assessment of the collectability of
managed care and commercial accounts receivable aged greater than one year based on the Company’s review of historical cash
collections for these accounts.
Concentration of Credit Risk
The Company grants unsecured credit to its patients, most of whom reside in the service area of the Company’s hospitals and
affiliated facilities and are insured under third-party payor agreements. Because of the economic diversity of the Company’s markets
F-14
QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
and non-governmental third-party payors, Medicare receivables are a significant concentration of credit risk. Accounts receivable, net
of contractual allowances, from Medicare were $70.4 million and $72.6 million, or 10.0% and 9.8% of total patient accounts
receivable, net as of December 31, 2017 and 2016, respectively. Additionally, the Company believes Illinois Medicaid represents a
concentration of credit risk to the Company due to the fiscal problems in the state of Illinois that affect the timing and extent of
payments due to providers which are administered by the state of Illinois under the Medicaid program. The Company’s accounts
receivable, net of contractual allowances, from Illinois Medicaid were $29.6 million and $34.8 million, or 4.2% and 4.7% of total
patient accounts receivable, net as of December 31, 2017 and 2016, respectively. The Company’s state supplemental program
receivables from Illinois Medicaid were $22.9 million and $16.6 million, or 23.5% and 14.3% of total due from third-party payors, as
of December 31, 2017 and 2016, respectively. The Company’s state supplemental program receivables from California Medicaid were
$48.4 million and $66.2 million, or 49.8% and 57.0% of total due from third-party payors, as of December 31, 2017 and 2016,
respectively.
The Company’s revenues are particularly sensitive to regulatory and economic changes in certain states where the Company
generates significant revenues. Accordingly, any changes in the current demographic, economic, competitive or regulatory conditions
in certain states in which revenues are significant could have an adverse effect on the Company’s results of operations, financial
condition or cash flows. Changes to the Medicaid and other government-managed payor programs in these states, including reductions
in reimbursement rates or delays in reimbursement payments under state supplemental payment or other programs, could also have a
similar adverse effect.
The following table provides a summary of the states in which the Company generates more than 5% of total net patient revenues,
before the provision for bad debts, as determined in each year (dollars in thousands):
Number of
Hospitals
at
December
31, 2017
Year Ended December 31,
2017
2016
2015
$ Amount
% of
Total
$ Amount
% of
Total
$ Amount
% of
Total
Illinois
Oregon
California
Georgia
Kentucky
Other Operating Expenses
9
1
2
2
3
$ 829,473
218,653
195,725
148,353
124,317
37.2 % $ 811,565
9.8 % 210,818
8.8 % 199,743
6.7 % 216,745
5.6 % 121,988
35.1 % $ 822,501
9.1 % 201,610
8.6 % 209,500
9.4 % 224,330
5.3 % 131,077
35.3 %
8.6 %
9.0 %
9.6 %
5.6 %
The following table provides a summary of the major components of other operating expenses (in thousands):
Purchased services
Taxes and insurance
Medical specialist fees
Transition services agreements and allocations from Parent
Repairs and maintenance
Utilities
Management fees from Parent
Other miscellaneous operating expenses
Total other operating expenses
2017
Year Ended December 31,
2016
2015
$
$
168,711
131,734
111,840
63,470
41,048
27,324
—
78,936
623,063
$
$
180,672
129,775
106,803
66,441
42,986
29,833
11,792
77,500
645,802
$
$
176,758
124,635
85,042
60,166
45,945
29,856
36,466
75,365
634,233
Following the Spin-off, the Company began recording costs associated with the transition services agreements and other ancillary
agreements with CHS in accordance with the terms of these agreements. These costs, which primarily include the costs of providing
information technology, patient billing and collections and payroll services, are included in “Transition services agreements and
allocations from Parent” in the table above. Amounts allocated to the Company by CHS for periods prior to the Spin-off are also
included in “Transition services agreements and allocations from Parent” in the table above.
F-15
QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
Prior to the Spin-off, QHC recorded a monthly corporate management fee from CHS that represented a portion of CHS’ corporate
office costs, and this fee was included in other operating expenses. Following the Spin-off, the costs for corporate office functions are
primarily included in salaries and benefits expenses in the consolidated and combined statements of income.
See Note 18 — Related Party Transactions for additional information on the allocated costs from CHS.
General and Administrative Costs
Substantially all of the Company’s operating costs and expenses are “cost of revenues” items. Operating expenses that could be
classified as general and administrative by the Company are costs related to corporate office functions, including, but not limited to
tax, treasury, audit, risk management, legal, investor relations and human resources. These costs are primarily salaries and benefits
expenses associated with these corporate office functions. General and administrative costs of the Company were $52.7 million, $55.2
million and $43.5 million during the years ended December 31, 2017, 2016 and 2015, respectively. Prior to the Spin-off, the majority
of these costs were allocations from CHS. See Note 18 — Related Party Transactions for additional information on the allocated costs
from CHS.
Electronic Health Records Incentives Earned
Pursuant to the Health Information Technology for Economic and Clinical Health Act (“HITECH”) and other laws, HHS has
established Medicare and Medicaid incentive programs to encourage adoption of Electronic Health Records (“EHR”) technology. The
Company is eligible to receive incentive payments under these programs for its eligible hospitals and physician clinics that
demonstrate meaningful use of certified EHR technology. EHR incentive payments paid to the Company are subject to audit and
potential recoupment if it is determined that the applicable meaningful use standards were not met. EHR incentive payments are also
subject to retrospective adjustment because the cost report data upon which the incentive payments are based are further subject to
audit.
The Company utilizes a gain contingency model to recognize EHR incentive payments. When the recognition criteria have been
fully met, the Company recognizes the income from EHR incentives payments as a part of operating costs and expenses in the
consolidated and combined statements of income. Medicaid EHR incentive payments are calculated based on prior period Medicare
cost report information available at the time when eligible hospitals demonstrate meaningful use of certified EHR technology.
Medicare EHR incentive payments are calculated when eligible hospitals demonstrate meaningful use of certified EHR technology
and the information for the applicable full Medicare cost report year used to determine the final incentive payment is available. In
some instances, the Company may receive estimated Medicare EHR incentive payments prior to when the Medicare cost report
information used to determine the final incentive payment is available. In these instances, recognition of the income from EHR
incentive payments is deferred until all recognition criteria are met. The Company recognizes receivables for EHR incentive payments
that have been earned, but are uncollected at period end, as other current assets in the consolidated balance sheets. The receivables are
adjusted for any known audit or retrospective adjustments related to prior periods. Deferred revenue from EHR incentive payments is
recorded in other current liabilities in the consolidated balance sheets.
The Company incurs both capital expenditures and operating expenses in connection with the implementation of EHR technology
initiatives. The amounts and timing of these expenditures does not directly correlate with the timing of the Company’s receipt or
recognition of EHR incentive payments as earned. As the Company completes its full implementation of certified EHR technology in
accordance with all three phases of the program, its EHR incentive payments will decline and ultimately end.
F-16
QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
The following table provides a summary of activity related to EHR incentives (in thousands):
2017
Year Ended December 31,
2016
2015
Electronic health records incentives receivable at beginning of period
$
Electronic health records incentives earned
Cash incentive payments received
Adjustments to receivable based on final cost report settlement or audit
Electronic health records incentives receivable at end of period
$
4,189 $
4,489
(5,796 )
(1,103 )
1,779 $
11,227 $
7,843
(13,808 )
(1,073 )
4,189 $
12,204
11,428
(10,084 )
(2,321 )
11,227
Deferred revenue related to electronic health records incentives at beginning
of period
$
Cash received and deferred during period
Recognition of deferred incentives as earned
Deferred revenue related to electronic health records incentives at end of
period
Total electronic health records incentives earned during period
Total cash incentive payments received during period
Legal, Professional and Settlement Costs
$
$
— $
— $
(256 )
256
(3,639 )
3,639
(14,351 )
—
14,351
— $
— $
—
4,745 $
6,052
11,482 $
17,447
25,779
10,084
Legal, professional and settlement costs in the consolidated and combined statements of income primarily include legal costs and
related settlements, if any, associated with regulatory claims, government investigations into reimbursement payments, claims
associated with QHR’s hospital management contracts and professional costs of projects approved by the Company’s Board of
Directors (the “Board”).
Loss (Gain) on Sale of Hospitals, Net
Loss (gain) on sale of hospitals, net is the loss (gain) incurred by the Company’s divestiture of hospitals and their related
outpatient facilities. It is calculated as the difference between the cash proceeds from the sale and the carrying values of the associated
net assets sold at the date of sale, less certain incremental direct selling costs.
Transaction Costs Related to the Spin-off
Transaction costs related to the Spin-off consists of QHC’s portion of the costs to effect the Spin-off and the costs associated with
forming a new company. These costs include audit, management advisory and consulting costs, investment advisory costs, legal
expenses and other miscellaneous costs.
Income Taxes
The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying values of
existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is recognized in the provision for (benefit from) income taxes in the
consolidated and combined statements of income in the period that includes the enactment date. The Company assesses the likelihood
that deferred tax assets will be recovered from future taxable income. To the extent the Company believes that recovery is not likely, a
valuation allowance is established. To the extent the Company establishes a valuation allowance or increases this allowance, the
related expense is included in the provision for (benefit from) income taxes in the consolidated and combined statements of income.
The Company classifies interest and penalties, if any, related to its tax positions as a component of provision for (benefit from) income
taxes. See Note 12 — Income Taxes for information on the separate return method of accounting for income taxes that was used by
the Company during the carve-out period.
Comprehensive Income (Loss)
The Company’s other comprehensive income (loss) consists of pension costs related to the Company’s defined benefit pension
plan at one of its hospitals and the Company’s supplemental employee retirement plan.
F-17
QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
Cash and Cash Equivalents
Cash includes cash on hand and cash with banks. Cash equivalents are short-term, highly liquid investments with a maturity of
three months or less from the date acquired that are subject to an insignificant risk of change in value.
Inventories
Inventories, primarily consisting of medical supplies and drugs, are stated at the lower of cost or market on a first-in, first-out
basis.
Other Current Assets
Other current assets consists of the current portion of the receivables from CHS related to professional and general liability and
workers’ compensation liability insurance reserves that were indemnified by CHS in connection with the Spin-off, non-patient
accounts receivable primarily related to QHR, receivables related to electronic health records incentives and other miscellaneous
current assets.
Property and Equipment
Purchases of property and equipment are recorded at cost. Property and equipment acquired in a business combination are
recorded at estimated fair value. Routine maintenance and repairs are expensed as incurred. Expenditures that increase capacities or
extend useful lives are capitalized. The Company capitalizes interest related to financing of major capital additions with the respective
asset. Depreciation is recognized using the straight-line method over the estimated useful life of an asset. The Company depreciates
land improvements over 3 to 20 years, buildings and improvements over 5 to 40 years, and equipment and fixtures over 3 to 18 years.
The Company also leases certain facilities and equipment under capital lease obligations. These assets are amortized on a straight-line
basis over the lesser of the lease term or the remaining useful life of the asset. Property and equipment assets that are held for sale are
not depreciated.
Goodwill
The Company’s hospital operations and QHR’s management advisory and healthcare consulting services operations meet the
criteria for classification as separate reporting units for goodwill. Goodwill was initially determined for QHC’s hospital operations
reporting unit based on a relative fair value approach as of September 30, 2013 (CHS’ goodwill impairment testing date). Additional
goodwill was allocated on a similar basis for four hospitals acquired by CHS in 2014 that were included in the group of hospitals
spun-off to QHC. For the QHR reporting unit, goodwill was allocated based on the amount recorded by CHS at the time of its
acquisition in 2007. All subsequent goodwill generated from hospital, physician practice or other ancillary business acquisitions is
recorded at fair value at the time of acquisition.
Intangible Assets
The Company’s intangible assets primarily consist of purchase and development costs of software for internal use and contract-
based intangible assets, including physician guarantee contracts, medical licenses, hospital management contracts, non-compete
agreements and certificates of need. There are no expected residual values related to the Company’s intangible assets. Capitalized
software costs are generally amortized over three years, except for software costs for significant system conversions, which are
amortized over 8 to 10 years. Costs incurred to renew certain contract-based intangibles, such as hospital management contracts and
certificates of need, are recognized as intangible assets and amortized over the respective renewal contract periods. Capitalized
software costs that are in the development stage are not amortized until the related projects are complete. Assets related to physician
guarantee contracts, hospital management contracts, non-compete agreements and certificates of need are amortized over the life of
the individual contracts. Intangible assets held for sale are not amortized.
Impairment of Long-Lived Assets and Goodwill
Whenever an event occurs or changes in circumstances indicate that the carrying values of certain long-lived assets may be
impaired, the Company projects the undiscounted cash flows expected to be generated by these assets. If the projections indicate that
the carrying values are not expected to be recovered, such amounts are reduced to their estimated fair value based on a quoted market
price, if available, or an estimated fair value based on valuation techniques available in the circumstances.
Goodwill arising from business combinations is not amortized. Goodwill is evaluated for impairment at the same time every year
and when an event occurs or circumstances change that, more likely than not, reduce the fair value of the reporting unit below its
carrying value. There is a two-step method for determining goodwill impairment. Step one is to compare the fair value of the reporting
unit with the unit’s carrying value, including goodwill. If this test indicates the fair value is less than the carrying value, then step two
F-18
QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
is required to compare the implied fair value of the reporting unit’s goodwill with the carrying value of the reporting unit’s goodwill.
The Company performs its annual testing for impairment of goodwill in the fourth quarter of each year. The fair value of the
Company’s reporting units is estimated using both a discounted cash flow model as well as a multiple model based on earnings before
interest, taxes, depreciation and amortization. The cash flow forecasts are adjusted by an appropriate discount rate based on the
Company’s best estimate of a market participant’s weighted-average cost of capital. Both models are based on the Company’s best
estimate of future revenues and operating costs and are reconciled to the Company’s consolidated market capitalization, with
consideration of the amount a potential acquirer would be required to pay, in the form of a control premium, in order to gain sufficient
ownership to set policies, direct operations and control management decisions of the Company.
See Note 3 — Impairment of Long-Lived Assets and Goodwill for additional information related to impairment recorded in the
consolidated and combined statements of income for the years ended December 31, 2017, 2016 and 2015.
Other Long-Term Assets
Other long-term assets consists of the long-term portion of the receivables from CHS related to professional and general liability
and workers’ compensation liability insurance reserves that were indemnified by CHS in connection with the Spin-off, as well as
deferred compensation plan assets, deposits, investments in unconsolidated subsidiaries and other miscellaneous long-term assets.
Other Current Liabilities
Other current liabilities consists of the current portion of professional and general liability insurance reserves, including the portion
indemnified by CHS in connection with the Spin-off, as well as property tax accruals, legal accruals, deferred revenue related to
electronic health records incentives, physician guarantees and other miscellaneous current liabilities.
Professional and General Liability and Workers’ Compensation Liability Insurance Reserves
As part of the business of owning and operating hospitals, the Company is subject to legal actions alleging liability on its part. To
mitigate a portion of these risks, the Company maintains insurance exceeding a self-insured retention level for these types of claims.
The Company’s self-insurance reserves reflect the current estimate of all outstanding losses, including incurred but not reported
losses, based on actuarial calculations as of period end. The loss estimates included in the actuarial calculations may change in the
future based on updated facts and circumstances. The Company’s insurance expense includes the actuarially determined estimates of
losses for the current year, including claims incurred but not reported, the change in the estimates of losses for prior years based upon
actual claims development experience as compared to prior actuarial projections, the insurance premiums for losses in excess of the
Company’s self-insured retention levels, the administrative costs of the insurance programs, and interest expense related to the
discounted portion of the liability. The Company’s reserves for professional and general liability and workers’ compensation liability
claims are based on semi-annual actuarial calculations, which are discounted to present value and consider historical claims data,
demographic factors, severity factors and other actuarial assumptions. The reserves for self-insured claims are discounted based on the
Company’s risk-free interest rate that corresponds to the period when the self-insured claims are incurred and projected to be paid.
See Note 19 — Commitments and Contingencies for information related to the portion of the Company’s insurance reserves for
professional and general liability and workers’ compensation liability and that are indemnified by CHS and the related accounting
treatment and presentation in the consolidated and combined financial statements.
Self-Insured Employee Health Benefits
The Company is self-insured for substantially all of the medical benefits of its employees. The Company maintains a liability for
its current estimate of incurred but not reported employee health claims based on historical claims data provided by third-party
administrators. The undiscounted reserve for self-insured employee health benefits was $8.8 million and $11.0 million as of December
31, 2017 and 2016, respectively, and is included in accrued salaries and benefits in the consolidated balance sheets. Expense each
period is based on the actual claims received during the period plus the impact of any adjustment to the liability for incurred but not
reported employee health claims.
Prior to the Spin-off, QHC was allocated employee health benefit expense as part of the monthly corporate overhead charges
allocated from CHS. The allocation was determined by CHS based on claims made by QHC employees during the period plus an
estimate for the change in liability related to QHC employee health claims incurred but not reported. The liability was included in Due
to Parent, net in the consolidated balance sheets, as the related employee health insurance policy was owned by CHS. Employee health
benefit expense is included in salaries and benefits expenses in the consolidated and combined statements of income for all periods.
See Note 18 — Related Party Transactions for additional information on corporate overhead costs allocated from CHS prior to the
Spin-off.
F-19
QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
Debt Issuance Costs and Discounts
The Company recognizes debt issuance costs as a reduction to the related debt liability on the consolidated balance sheet,
consistent with the accounting treatment for debt discounts. Amortization of debt issuance costs and debt discounts are each recorded
as non-cash interest expense over the life of the respective debt instrument.
Due to Parent, Net
Prior to the Spin-off, Due to Parent, net in the consolidated balance sheets represented the Company’s liability to CHS for the
accumulation of (1) CHS’ historical investment in QHC, (2) liabilities related to the cost allocations from CHS to QHC, (3) interest
charged by CHS on the monthly outstanding Due to Parent, net balance, (4) the net effect of transactions between CHS and QHC, and
(5) the net effect of cash transfers from QHC to CHS under CHS’ centralized cash management program. In connection with the Spin-
off, certain liabilities were transferred through Due to Parent, net to the Company, pursuant to the Separation and Distribution
Agreement, and the remaining balance was settled with cash and in the form of a non-cash capital contribution to the Company. See
Note 1 — Description of the Business and Spin-off and Note 18 — Related Party Transactions for additional information on the Spin-
off and related party transactions with CHS.
Redeemable and Non-Redeemable Noncontrolling Interests
The Company’s consolidated and combined financial statements include all assets, liabilities, revenues and expenses of less than
100% owned entities that it controls. Certain of the Company’s consolidated subsidiaries have noncontrolling physician ownership
interests with redemption features that require the Company to deliver cash upon the occurrence of certain events outside its control,
such as the retirement, death, or disability of a physician-owner. The carrying amount of redeemable noncontrolling interests is
recognized in the Company’s consolidated balance sheets at the greater of: (1) the initial carrying amount of these investments,
increased or decreased for the noncontrolling interests' share of cumulative net income (loss), net of cumulative amounts distributed to
the noncontrolling interest partners, if any, or (2) the redemption value of the investments held by the noncontrolling interest partners.
Assets and Liabilities of Hospitals Held for Sale
The Company reports separately from other assets in the consolidated balance sheets those assets that meet the criteria for
classification as held for sale. Generally, assets that meet the criteria include those for which the carrying amount will be settled
principally through a sale transaction rather than through continuing use. The asset must be available for immediate sale in its present
condition, subject to usual or customary terms, and the sale must be probable to occur in the next 12 months. Similarly, the liabilities
of a disposal group are classified as held for sale upon meeting these criteria. Immediately following classification as held for sale, the
Company remeasures these assets and liabilities and adjusts the value to the lesser of the carrying amount or fair value less costs to
sell. The assets and liabilities classified as held for sale are no longer depreciated or amortized into expense. The carrying values of
assets classified as held for sale are reported net of impairment in the consolidated balance sheets. See Note 3 — Impairment of Long-
Lived Assets and Goodwill for additional information on impairment recorded during the years ended December 31, 2017, 2016 and
2015.
Stock-Based Compensation
In connection with the Spin-off, the Company issued QHC restricted stock awards to all CHS restricted stock award holders as of
the Record Date. Each holder of CHS restricted stock awards received one QHC restricted stock award for every four CHS restricted
stock awards held. In addition, QHC employees that held CHS restricted stock awards were allowed to continue to hold the CHS
awards under the same terms and conditions that existed prior to the Spin-off, excluding certain shares granted on March 1, 2016 that
were canceled in connection with the Spin-off. The unrecognized compensation expense related to the vesting of the CHS restricted
stock awards held by QHC employees was transferred to QHC with the Spin-off. As a result, the Company is responsible for
recording stock-based compensation expense attributable to the unvested portion of CHS restricted stock awards held by QHC
employees and the unvested portion of all QHC restricted stock awards held by its employees, consisting of both QHC awards issued
on the Record Date and additional awards granted under the Quorum Health Corporation 2016 Stock Award Plan (the “2016 Stock
Award Plan”) following the Spin-off. See Note 16 — Stock-Based Compensation for additional information related to stock-based
compensation.
Benefit Plans
The Company maintains various benefit plans, including defined contribution plans, a defined benefit plan and a deferred
compensation plan, for which certain of the Company’s subsidiaries are the plan sponsors. The rights and obligations of these plans
were transferred from CHS to the Company, pursuant to the Separation and Distribution Agreement. Prior to the Spin-off, QHC was
allocated a portion of CHS’ benefit costs under its defined contribution plans. The allocation was based on specific identification for
F-20
QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
plans associated exclusively with QHC hospitals and on QHC’s proportional share of employees covered under all other applicable
plans. Benefits costs are recorded as salaries and benefits in the consolidated and combined statements of income for prior to and
subsequent to the Spin-off. The cumulative liability for these benefit costs, which were transferred to the Company in connection with
the Spin-off, is recorded in other long-term liabilities on the consolidated balance sheets. Prior to the Spin-off the cumulative liability
was recorded in Due to Parent, net in the consolidated balance sheets.
QHC recognizes the unfunded liability of its defined benefit plan in other long-term liabilities in the consolidated balance sheets.
Unrecognized gains (losses) and prior service credits (costs) are recorded as changes in other comprehensive income (loss). The
measurement date of the plan’s assets and liabilities coincides with the Company’s year end. The Company’s pension benefit
obligation is measured using actuarial calculations that incorporate discount rates, rate of compensation increases and expected long-
term returns on plan assets. The calculations additionally consider expectations related to the retirement age and mortality of plan
participants. The Company records pension benefit costs related to all of its plans as salaries and benefits expenses in the consolidated
and combined statements of income.
See Note 17 — Benefit Plans for additional information on the Company’s individual plans.
Fair Value of Financial Instruments
The Company utilizes the U.S. GAAP fair value hierarchy to measure the fair value of its financial instruments. The fair value
hierarchy distinguishes between market participant assumptions based on market data obtained from sources independent of the
reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumption
about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
The inputs used to measure fair value are classified into the following fair value hierarchy:
• Level 1 - Quoted market prices in active markets for identical assets and liabilities.
• Level 2 - Observable market-based inputs or unobservable inputs that are corroborated by market data.
• Level 3 - Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the
assets or liabilities. Level 3 includes values determined using pricing models, discounted cash flow methodologies or
similar techniques reflecting the Company’s own assumptions.
Segment Reporting
The principal business of the Company is to provide healthcare services at its hospitals and outpatient service facilities. The
Company’s only other line of business is the hospital management advisory and consulting services it provides through QHR. The
Company has determined that its hospital operations business and for QHR’s business meets the criteria for separate segment
reporting. The Company’s corporate functions have been reported in the all other reportable segment. See Note 15 — Segments.
New Accounting Pronouncements
In January 2017, the FASB issued ASU No. 2017-04, Intangibles — Goodwill and Other: Simplifying the Accounting for
Goodwill Impairment, which simplifies the accounting for goodwill impairment by eliminating step two from the goodwill
impairment test. This ASU instead permits an entity to recognize goodwill impairment as the excess of a reporting unit’s carrying
value over the estimated fair value of the reporting unit, to the extent this amount does not exceed the carrying amount of goodwill.
The new guidance continues to allow an entity to perform a qualitative assessment over goodwill impairment indicators in lieu of a
quantitative assessment in certain situations. The ASU is effective for the Company’s annual and interim reporting periods beginning
after December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact this guidance may have on
its consolidated and combined results of operations, financial position and cash flows.
In March 2016, the FASB issued ASU No. 2016-09, Compensation — Stock Compensation, which was issued to simplify some
of the accounting guidance for share-based compensation. Among the areas impacted by the amendments in this ASU are the
accounting for income taxes related to share-based payments, accounting for forfeitures, classification of awards as equity or liabilities
and classification on the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2016, with early
adoption permitted. The Company adopted this ASU on January 1, 2017. The adoption of this ASU had no material impact on the
Company’s consolidated and combined results of operations, financial position and cash flows.
In February 2016, the FASB issued ASU No. 2016-02, Leases, which amends the accounting for leases and requires the rights
and obligations arising from lease contracts, including existing and new arrangements, to be recognized as assets and labilities on the
balance sheet. Recognition of these assets and liabilities will have a material impact to the Company’s consolidated balance sheets
upon adoption. This ASU is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. Under ASU
F-21
QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
2016-02, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a
modified retrospective approach, which includes a number of optional practical expedients. The Company expects to adopt this ASU
on January 1, 2019. The Company is still evaluating the impact that the adoption of this standard will have on its policies, procedures,
financial disclosures, and control framework. The Company is additionally evaluating any modifications to its leasing strategy in
response to the requirements of this standard.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which provides for a single
comprehensive principles-based model for the recognition of revenue across all industries using a five-step model to recognize
revenue from customer contracts. The new standard significantly expands disclosures about the nature, amount, timing, and
uncertainty of revenues and cash flows, as well as certain additional quantitative and qualitative disclosures. The standard is effective
for fiscal years beginning after December 15, 2017, with early adoption permitted for annual periods beginning after December 15,
2016, and permits the use of either a full or modified retrospective approach upon adoption. The Company adopted this ASU on
January 1, 2018 using the modified retrospective approach and during the fourth quarter of 2017 completed its evaluation of the
resulting impact on its consolidated results of operations, financial position and cash flows. A significant portion of the adoption of
this ASU was the process of evaluating the characteristics of patient accounts receivable portfolios to ensure that when evaluated
under the new standard it would result in a materially consistent revenue amount for such portfolios as if each patient account was
evaluated on a contract-by-contract basis. A component of this evaluation was the estimation of what portion of an insured patient’s
account will ultimately be due from the patient as a co-payment or deductible and of that amount what will ultimately be collectible.
The Company updated its processes to accommodate this estimate and has recorded a change in estimate to increase the Company’s
allowance for doubtful accounts at December 31, 2017, which is further discussed above with respect to the Company’s accounting
policies on accounts receivable and allowance for doubtful accounts. The Company completed its evaluation of the impact on its
results of operations as of the fourth quarter 2017 and the Company does not expect the adoption of this ASU to have a material
impact on its consolidated results of operations on a prospective basis, other than the impact of the presentation of the income
statement, as the provision for bad debts will be recorded as a direct reduction to revenues and will not be presented as a separate line
item.
NOTE 3 — IMPAIRMENT OF LONG-LIVED ASSETS AND GOODWILL
2017 Impairment
During the three months ended December 31, 2017, the Company evaluated the fair value of hospitals classified as held for sale
and evaluated other hospitals intended for potential divestiture. In connection with this evaluation, the Company recognized long-lived
asset impairment of $25.8 million during the three months ended December 31, 2017, which consisted of $23.7 million of property
and equipment and $2.1 million of intangible assets impairment
During the three months ended September 30, 2017, the Company evaluated the fair value of hospitals classified as held for sale
and evaluated other hospitals intended for potential divestiture. In connection with this evaluation, the Company recognized long-lived
asset and goodwill impairment of $5.3 million during the three months ended September 30, 2017, which consisted of $3.7 million of
property and equipment, $1.0 million of intangible assets and $0.6 million of goodwill impairment.
During the three months ended June 30, 2017, the Company evaluated the fair value of hospitals classified as held for sale and
evaluated other hospitals intended for potential divestiture. In connection with this evaluation, the Company recognized $12.9 million
of impairment to property and equipment during the three months ended June 30, 2017.
During the three months ended March 31, 2017, management made a decision to classify certain additional hospitals as held for
sale. In connection with this decision, the Company evaluated the estimated relative fair value of the hospitals classified as held for
sale in relation to the overall fair value of the hospital operations reporting unit utilizing a September 30, 2016 measurement date,
which was the measurement date of the Company’s most recent annual goodwill impairment analysis. As a result, the Company
recognized long-lived asset and goodwill impairment of $3.3 million during the three months ended March 31, 2017, which consisted
of $1.1 million of property and equipment, $0.8 million of intangible assets and $1.4 million of goodwill impairment.
F-22
QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
2016 Impairment
During the second quarter of 2016, management made a decision to classify certain hospitals as held for sale and evaluate other
hospitals for potential divestiture. Due to the increase in net operating losses associated with these hospitals, the Company analyzed
the long-lived assets of all of its hospitals to test for impairment and recorded $45.4 million of long-lived asset impairment in this
quarter. In addition, the Company evaluated the estimated relative fair value of the hospitals classified as held for sale in relation to the
overall fair value of the hospital operations reporting unit utilizing a September 30, 2015 measurement date, which was the
measurement date of the Company’s most recent annual goodwill impairment analysis, and recognized $5.0 million of goodwill
impairment in this quarter. In this same quarter, management identified certain indicators of goodwill impairment related to the
hospital operations reporting unit and concluded that such indicators necessitated an interim goodwill impairment evaluation. The
primary indicators were declining market capitalization, as compared to the carrying value of equity, and a decrease in estimated
future earnings of the hospital operations reporting unit. The Company performed a calculation of the overall fair value of this
reporting unit in step one of the impairment test and concluded that the carrying value of its hospital operations reporting unit as of
June 30, 2016 exceeded the estimated fair value. The Company performed a preliminary step two calculation of goodwill impairment
to determine the implied fair value of goodwill of the hospital operations reporting unit in a hypothetical purchase price allocation.
Based on this preliminary analysis, the Company estimated and recorded additional goodwill impairment of $200 million in the
second quarter of 2016.
For step two goodwill impairment testing, the Company engaged a professional valuation firm to perform a hypothetical purchase
price valuation of each of its hospitals utilizing a September 30, 2016 measurement date. The results of the third-party valuation,
which was completed in the fourth quarter of 2016, indicated that the carrying values of certain of the Company’s individual hospitals
exceeded their fair values. Considering these results to be an indicator of potential impairment and to assess whether any additional
impairment of long-lived assets existed, the Company utilized a September 30, 2016 measurement date to perform an analysis of
undiscounted cash flows for each hospital in which an indicator of impairment was identified. Based on the results of these analyses,
the Company recorded impairment of $82.7 million related to long-lived assets at certain hospitals and a downward adjustment to its
previously recorded goodwill impairment estimate of $80 million in the fourth quarter of 2016. The net impact to the Company’s
consolidated and combined financial statements was $2.7 million of additional impairment in the fourth quarter of 2016 beyond the
initial estimate of $200 million estimate recorded as the preliminary step-two calculation in the second quarter of 2016.
In addition to the above, the Company experienced a decline in operating results at several hospitals in the fourth quarter of 2016.
This led management to perform additional testing for impairment using a December 31, 2016 measurement date. As a result of this
analysis, the Company recorded additional impairment of $38.8 million related to long-lived assets in the fourth quarter of 2016. The
carrying values of long-lived assets, including those classified as held for sale, are reported net of impairment in the consolidated
balance sheet as of December 31, 2016.
2015 Impairment
During the year ended December 31, 2015, the Company recorded impairment of $13.0 million to reduce the carrying values of
certain long-lived assets at seven of its hospitals to their estimated fair values. The impairment for 2015 was identified because of
declining operating results and projections of future cash flows at these hospitals, which were caused by competitive and operational
challenges specific to the markets in which these hospitals operate.
F-23
QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 —ACQUISITIONS AND DIVESTITURES
Acquisitions
During the years ended December 31, 2017, 2016 and 2015, the Company acquired operating assets and the related businesses of
certain physician practices, clinics and other ancillary businesses that operate within communities served by the Company’s hospitals.
Prior to the Spin-off, the Company was allocated the consideration paid for these facilities through Due to Parent, net.
The following table provides a summary of the combined purchase price allocation by year for the Company’s acquisitions (in
thousands):
Current assets
Property and equipment
Goodwill
Other long-term assets
Liabilities
Noncontrolling interests
Total consideration paid or allocated from CHS
$
$
2017
Year Ended December 31,
2016
2015
$
142
695
1,211
—
(128 )
—
1,920
$
(343 ) $
851
129
—
16
132
785 $
422
3,190
6,788
564
(1,229 )
(1,716 )
8,019
The table above includes adjustments to estimated amounts recognized, if any, that were recorded by the Company within the
measurement period from the date of the respective acquisition. In some cases, the adjustments may be negative.
Divestitures
Vista Medical Center West
On March 1, 2018, the Company sold 70-bed Vista Medical Center West and its affiliated facilities (“Vista West”), located
Waukegan, Illinois, for proceeds of $1.2 million. For the years ended December 31, 2017, 2016 and 2015, the Company’s operating
results included pre-tax gains (losses) of $(2.3) million, $4.9 million, and $5.7 million, respectively, related to Vista West. In addition,
the Company recorded impairment to property, equipment and capitalized software costs of $11.1 million and $4.1 million related to
Vista West during the years ended December 31, 2017 and 2016, respectively.
L.V. Stabler Memorial Hospital
On October 31, 2017, the Company sold 72-bed L.V. Stabler Memorial Hospital and its affiliated facilities (“L.V. Stabler”)
located in Greenville, Alabama for $2.8 million. For the years ended December 31, 2017, 2016 and 2015, the Company’s operating
results included pre-tax losses of $5.3 million, $4.0 million, and $0.7 million, respectively, related to L.V. Stabler. In addition to the
above, the Company recorded a loss on sale of less than $0.1 million in the year ended December 31, 2017. The Company also
recorded impairment to property, equipment and capitalized software costs of $2.5 million and $2.9 million related to L.V. Stabler in
the years ended December 31, 2017 and 2016, respectively.
Sunbury Community Hospital and Lock Haven Hospital
On September 30, 2017, the Company sold 70-bed Sunbury Community Hospital and its affiliated facilities (“Sunbury”),
located in Sunbury, Pennsylvania, and 47-bed Lock Haven Hospital and its affiliated facilities (“Lock Haven”), located in Lock
Haven, Pennsylvania, for combined proceeds of $9.1 million. For the years ended December 31, 2017, 2016 and 2015, the Company’s
operating results included pre-tax losses of $8.8 million, $9.4 million, and $8.7 million, respectively, related to Sunbury and Lock
Haven on a combined basis. In addition to the above, the Company recorded a $0.1 million loss on the sale in the year ended
December 31, 2017. The Company also recorded impairment to property, equipment and capitalized software costs of $1.9 million,
$12.7 million and $3.0 million of impairment to property, equipment and capitalized software costs related to Sunbury and Lock
Haven during the years ended December 31, 2017, 2016 and 2015, respectively. The Company also recorded impairment to property
and equipment of $3.0 million and $6.0 million for the years ended December 31, 2013 and 2012, respectively.
Trinity Hospital of Augusta
On June 30, 2017, the Company sold 231-bed Trinity Hospital of Augusta and its affiliated facilities (“Trinity”), located in
Augusta, Georgia, for $15.9 million. For the years ended December 31, 2017, 2016 and 2015, the Company’s operating results
included pre-tax losses of $9.7 million, $9.5 million and $2.8 million, respectively, related to Trinity. In addition to the above, the
Company recorded a $5.3 million gain on the sale in the year ended December 31, 2017. The Company also recorded impairment to
property, equipment and capitalized software costs of $33.9 million related to Trinity during the year ended December 31, 2016.
F-24
QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
As part of the sale of Trinity, the Company redeemed shares valued at $3.5 million from minority interest partners, which
included cash distributions of $1.2 million related to the dissolution of the partnership.
Cherokee Medical Center
On March 31, 2017, the Company sold 60-bed Cherokee Medical Center and its affiliated facilities (“Cherokee”), located in
Centre, Alabama, for $4.3 million. For the years ended December 31, 2017, 2016 and 2015, the Company’s operating results included
pre-tax losses of $1.0 million, $3.7 million and $1.6 million, respectively, related to Cherokee. In addition to the above, the Company
recorded a $0.2 million gain on the sale in the year ended December 31, 2017. The Company also recorded impairment to property,
equipment and capitalized software costs of $3.9 million and $2.0 million of Cherokee during the years ended December 31, 2016 and
2015, respectively. The Company also recorded impairment to property and equipment of $1.0 million for the year ended December
31, 2012.
Barrow Regional Medical Center
On December 31, 2016, the Company sold 56-bed Barrow Regional Medical Center and its affiliated facilities (“Barrow”),
located in Winder, Georgia, for $6.6 million. For the years ended December 31, 2017, 2016 and 2015, the Company’s operating
results included pre-tax losses of $2.4 million, $14.5 million and $6.2 million, respectively, related to Barrow. In addition to the
above, the Company recorded a $1.2 million net loss on the sale in the year ended December 31, 2016. The Company also recorded
impairment to property, equipment and capitalized software costs of $4.0 million related to Barrow during the year ended December
31, 2016.
Sandhills Regional Medical Center
On December 1, 2016, the Company sold 64-bed Sandhills Regional Medical Center and its affiliated facilities (“Sandhills”),
located in Hamlet, North Carolina, for $7.2 million. For the years ended December 31, 2017, 2016 and 2015, the Company’s operating
results included pre-tax losses of $0.2 million, $6.9 million and $2.0 million, respectively, related to Sandhills. In addition to the
above, the Company recorded a $1.0 million net loss on the sale in the year ended December 31, 2016. The Company also recorded
impairment to property, equipment and capitalized software costs of $4.8 million related to Sandhills during the year ended December
31, 2016.
NOTE 5 — PROPERTY AND EQUIPMENT
The following table provides a summary of the components of property and equipment (in thousands):
Property and equipment, at cost:
Land and improvements
Building and improvements
Equipment and fixtures
Construction in progress
Total property and equipment, at cost
Less: Accumulated depreciation and amortization
Total property and equipment, net
December 31,
2017
2016
$
$
70,731 $
790,619
529,150
14,684
1,405,184
(729,905 )
675,279 $
84,474
782,892
592,463
60,146
1,519,975
(786,075 )
733,900
Depreciation expense was $58.6 million, $83.0 million and $90.9 million for the years ended December 31, 2017, 2016 and 2015,
respectively. See Note 6 — Goodwill and Intangible Assets for information on amortization expense recorded for property and
equipment held under capital lease obligations. The total amount of assets held under capital lease obligations, at cost, was $29.2
million and $30.2 million at December 31, 2017 and 2016, respectively, and $25.6 million and $27.5 million, net of accumulated
amortization, at December 31, 2017 and 2016, respectively.
Purchases of property and equipment accrued in accounts payable were $6.8 million and $15.7 million as of December 31, 2017
and 2016, respectively.
See Note 3 — Impairment of Long-Lived Assets and Goodwill for information on impairment related to property and equipment
recorded in the consolidated and combined statements of income for the years ended December 31, 2017, 2016 and 2015.
F-25
QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6— GOODWILL AND INTANGIBLE ASSETS
Goodwill
The following table provides a summary of the changes in goodwill (in thousands):
Balance at beginning of period
Acquisitions
Divestitures
Reclass to held for sale
Impairment
Balance at end of period
December 31,
2017
2016
$
$
416,833
1,211
(5,293 )
(1,593 )
(1,929 )
409,229
$
$
541,704
129
—
—
(125,000 )
416,833
Goodwill related to the hospital operations reporting unit was $375.9 million and $383.5 million as of December 31, 2017 and
December 31, 2016, respectively. Goodwill related to the management advisory and consulting services reporting unit was $33.3
million at both December 31, 2017 and December 31, 2016. Goodwill related to divestitures was associated with the sale of Trinity
and Sunbury. See Note 4 — Divestitures for additional information on the divestitures of Trinity and Sunbury.
See Note 3 — Impairment of Long-Lived Assets and Goodwill for additional information on impairment to goodwill recorded by
the Company in 2017, 2016 and 2015.
Intangible Assets
The following table provides a summary of the components of intangible assets (in thousands):
Finite-lived intangible assets:
Capitalized software costs:
Cost
Accumulated amortization
Capitalized software costs, net
Physician guarantee contracts:
Cost
Accumulated amortization
Physician guarantee contracts, net
Other finite-lived intangible assets:
Cost
Accumulated amortization
Other finite-lived intangible assets, net
Total finite-lived intangible assets
Cost
Accumulated amortization
Total finite-lived intangible assets, net
Indefinite-lived intangible assets:
Tradenames
Medical licenses and other indefinite-lived intangible assets
Total indefinite-lived intangible assets
Total intangible assets:
Cost
Accumulated amortization
Total intangible assets, net
F-26
December 31,
2017
2016
$
$
159,449
(111,661 )
47,788
7,489
(4,290 )
3,199
43,376
(34,668 )
8,708
210,314
(150,618 )
59,696
4,000
1,154
5,154
215,468
(150,618 )
64,850
$
$
$
$
$
$
$
$
$
$
180,855
(118,391 )
62,464
11,355
(6,329 )
5,026
44,342
(33,059 )
11,283
236,552
(157,779 )
78,773
4,000
2,209
6,209
242,761
(157,779 )
84,982
QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
During the years ended December 31, 2017 and 2016, the Company recorded $3.4 million and $18.9 million, respectively, of
impairment related to capitalized software costs. See Note 3 — Impairment of Long-Lived Assets and Goodwill for additional
information on these impairment charges.
As of December 31, 2017, the Company had $0.7 million of capitalized software costs that are currently in the development stage.
Amortization of these costs will begin once the software projects are complete and ready for their intended use.
Amortization Expense
The following table provides a summary of the components of amortization expense (in thousands):
Amortization of finite-lived intangible assets:
Capitalized software costs
Physician guarantee contracts
Other finite-lived intangible assets
Total amortization expense related to finite-lived intangible assets
Amortization of leasehold improvements and property and equipment assets
held under capital lease obligations
Total amortization expense
2017
Year Ended December 31,
2016
2015
$
$
$
15,879
2,032
2,594
20,505
$
25,193
3,108
2,866
31,167
3,038
23,543
$
3,111
34,278
$
27,317
3,951
3,334
34,602
2,496
37,098
As of December 31, 2017, the weighted-average remaining amortization period of the Company’s intangible assets subject to
amortization, except for capitalized software costs and physician guarantee contracts, was approximately 4.6 years.
The following table provides a summary of estimated future amortization expense for the next five years and thereafter related to
intangible assets (in thousands):
2018
2019
2020
2021
2022
Thereafter
Total estimated future amortization expense
$
$
18,898
14,475
11,791
9,378
3,900
1,254
59,696
NOTE 7 — LONG-TERM DEBT
The following table provides a summary of the components of long-term debt (in thousands):
Senior Credit Facility:
Revolving Credit Facility, maturing 2021
Term Loan Facility, maturing 2022
ABL Credit Facility, maturing 2021
Senior Notes, maturing 2023
Unamortized debt issuance costs and discounts
Capital lease obligations
Other miscellaneous debt
Total debt
Less: Current maturities of long-term debt
Total long-term debt
December 31,
2017
2016
$
$
— $
831,158
—
400,000
(42,934 )
24,411
1,255
1,213,890
(1,855 )
1,212,035 $
—
868,419
—
400,000
(48,764 )
25,588
1,582
1,246,825
(5,683 )
1,241,142
In connection with the Spin-off, the Company entered into two credit agreements and issued senior notes. In addition, the
previous indebtedness with CHS, which was classified in the consolidated balance sheets as Due to Parent, net was fully settled in the
F-27
QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
Spin-off. See Note 1 — Description of the Business and Spin-off and Note 18 — Related Party Transactions for additional
information on the use of proceeds from the new debt instruments and the settlement of Due to Parent, net.
Senior Credit Facility
On April 29, 2016, the Company entered into a credit agreement (the “CS Agreement”), among the Company, the lenders party
thereto and Credit Suisse AG, Cayman Islands Branch (“Credit Suisse”), as administrative agent and collateral agent. On April 11,
2017, the Company executed an agreement with its Senior Credit Facility lenders to amend certain provisions of its Senior Credit
Facility (the “CS Amendment”), as described below. On March 14, 2018, the Company executed a second agreement with its Senior
Credit Facility lenders to amend certain provisions of its Senior Credit Facility (the “CS Second Amendment”), as described below.
The CS Agreement provides for an $880 million senior secured term loan facility (the “Term Loan Facility”) and a $100 million
senior secured revolving credit facility (the “Revolving Credit Facility” and, together with the Term Loan Facility, the “Senior Credit
Facility”). The Term Loan Facility was issued at a discount of $17.6 million, or 98% of par value, and has a maturity date of April 29,
2022, subject to customary acceleration events and repayment, extension or refinancing. The Revolving Credit Facility has a maturity
date of April 29, 2021, subject to certain customary acceleration events and repayment, extension or refinancing. The CS Amendment
reduced the Revolving Credit Facility’s capacity from $100 million to $87.5 million until December 31, 2017, at which time the
capacity decreased to $75.0 million through maturity. The CS Second Amendment reduced the Revolving Credit Facility’s capacity to
$62.5 million through maturity, effective with the amendment executed on March 14, 2018.
The CS Agreement contains customary covenants, including a maximum permitted Secured Net Leverage Ratio, as determined
based on 12 month trailing Consolidated EBITDA, as defined in the CS Agreement. On April 11, 2017, the Company executed the CS
Amendment with its Senior Credit Facility lenders to amend the calculation of the Secured Net Leverage Ratio beginning July 1, 2017
through maturity, among other provisions. In addition, the CS Amendment raised the minimum Secured Net Leverage Ratio required
for the Company to remain in compliance for certain periods, and also changed the calculation of compliance for specified periods.
The CS Second Amendment, which was executed on March 14, 2018, amended the Secured Net Leverage Ratio for the period July 1,
2017 through maturity. As of December 31, 2017 and 2016, the Company had a Secured Net Leverage Ratio of 3.87 to 1.00 and 3.93
to 1.00, respectively, implying additional borrowing capacity of $193.3 million as of December 31, 2017.
After giving effect to the CS Amendment and the CS Second Amendment, the maximum Secured Net Leverage Ratio permitted
under the CS Agreement, as determined based on 12 month trailing Consolidated EBITDA, which is defined in the CS Agreement,
follows:
Period
Period from January 1, 2017 to June 30, 2017
Period from July 1, 2017 to June 30, 2018
Period from July 1, 2018 to December 31, 2019
Period from January 1, 2020 and thereafter
Maximum
Secured Net
Leverage Ratio
4.50 to 1.00
4.75 to 1.00
5.00 to 1.00
4.50 to 1.00
In addition to amending the calculation of the Secured Net Leverage Ratio and the Maximum Secured Net Leverage Ratio, the CS
Amendment and the CS Second Amendment also affected other terms of the CS Agreement as follows:
• Through April 29, 2022, the Company is required to use asset sales proceeds to make mandatory redemptions under the
Term Loan Facility.
• Through December 31, 2018, the Company may request to exercise Incremental Term Loan Commitments, as defined in
the CS Agreement, only if the Secured Net Leverage Ratio, adjusted for the requested Incremental Term Loan
borrowing, is below 3.35 to 1.00. After December 31, 2018, the Company may request to exercise Incremental Term
Loan Commitments for the greater of $100 million or an amount which would produce a Secured Net Leverage Ratio of
3.35 to 1.00.
• Through December 31, 2018, the Company is allowed to incur Permitted Additional Debt, as defined in the CS
Agreement, only if the Total Leverage Ratio, adjusted for the Permitted Additional Debt, is below 4.50 to 1.00. After
December 31, 2018, the Company may incur Permitted Additional Debt so long as the Total Leverage Ratio, adjusted for
the Permitted Additional Debt, is below 5.50 to 1.00.
Prior to the CS Amendment, interest under the Term Loan Facility accrued, at the option of the Company, at adjusted LIBOR,
subject to statutory reserves and a floor of 1% plus 5.75%, or the alternate base rate plus 4.75%. Following the CS Amendment,
F-28
QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
interest under the Term Loan Facility accrues, at the option of the Company, at adjusted LIBOR, subject to statutory reserves and a
floor of 1% plus 6.75%, or the alternate base rate plus 5.75%. The effective interest rate on the Term Loan Facility was 8.77% as of
December 31, 2017. Interest on outstanding borrowings under the Revolving Credit Facility accrues, at the option of the Company, at
adjusted LIBOR, subject to statutory reserves and a floor of 0% plus 2.75%, or the alternate base rate plus 1.75%, and remains
unchanged under the CS Amendment. The CS Second Amendment did not alter these provisions.
Borrowings from the Revolving Credit Facility are used for working capital and general corporate purposes. As of December 31,
2017, the Company had no borrowings outstanding on the Revolving Credit Facility and had $10.2 million of letters of credit
outstanding that were primarily related to the self-insured retention levels of professional and general liability and workers’
compensation liability insurance as security for the payment of claims. As of December 31, 2017, the Company had borrowing
capacity under its Revolving Credit Facility of $77.3 million.
ABL Credit Facility
On April 29, 2016, the Company entered into an ABL Credit Agreement (the “UBS Agreement,” and together with the CS
Agreement, collectively, the “Credit Agreements”), among the Company, the lenders party thereto and UBS AG, Stamford Branch
(“UBS”), as administrative agent and collateral agent. The UBS Agreement provides for a $125 million senior secured asset-based
revolving credit facility (the “ABL Credit Facility”). The available borrowings from the ABL Credit Facility, which are based on
eligible patient accounts receivable, are used for working capital and general corporate purposes. As of December 31, 2017, the
Company had no borrowings outstanding on the ABL Credit Facility and borrowing capacity of $124 million.
On April 11, 2017, the Company executed an amendment to the UBS Agreement with its lender party thereto, which aligned the
provisions of the UBS Agreement with the CS Agreement. There were no changes to the UBS Agreement that impact the Company’s
current interest or covenant calculations associated with the ABL Credit Facility.
The ABL Credit Facility has a maturity date of April 29, 2021, subject to customary acceleration events and repayment, extension
or refinancing. Interest on outstanding borrowings under the ABL Credit Facility accrues, at the option of the Company, at a base rate
or LIBOR, subject to statutory reserves and a floor of 0%, except that all swingline borrowings will accrue interest based on the base
rate, plus an applicable margin determined by the average excess availability under the ABL Credit Facility for the fiscal quarter
immediately preceding the date of determination. The applicable margin ranges from 1.75% to 2.25% for LIBOR advances and from
0.75% to 1.25% for base rate advances.
The ABL Credit Facility has a “Covenant Trigger Event” definition that requires the Company to maintain excess availability
under the ABL Credit Facility equal to or greater than the greater of (i) $12.5 million and (ii) 10% of the aggregate commitments
under the ABL Credit Facility. If a Covenant Trigger Event occurs, then the Company is required to maintain a minimum
Consolidated Fixed Charge Ratio of 1.10 to 1.00 until such time that a Covenant Trigger Event is no longer continuing. In addition, if
excess availability under the ABL Credit Facility were to fall below the greater of (i) 12.5% of the aggregate commitments under the
ABL Credit Facility and (ii) $15.0 million, then a “Cash Dominion Event” would be triggered upon which the lenders could assume
control of the Company’s cash.
Credit Agreement Covenants
In addition to the specific covenants described above, the Credit Agreements contain customary negative covenants which limit
the Company’s ability to, among other things, incur additional indebtedness, create liens, make investments, transfer assets, merge or
acquire assets, and make restricted payments, including dividends, distributions and specified payments on other indebtedness. They
include customary events of default, including payment defaults, material breaches of representations and warranties, covenant
defaults, default on other material indebtedness, customary Employee Retirement Income Security Act (“ERISA”) events of default,
bankruptcy and insolvency, material judgments, invalidity of liens on collateral, change of control or cessation of business. The Credit
Agreements also contain customary affirmative covenants and representations and warranties.
Senior Notes
On April 22, 2016, QHC issued $400 million aggregate principal amount of 11.625% Senior Notes due 2023, pursuant to the
Indenture. The Senior Notes were issued at a discount of $6.9 million, or 1.734%, in a private placement and are senior unsecured
obligations of the Company guaranteed on a senior basis by certain of the Company’s subsidiaries (the “Guarantors”). The Senior
Notes mature on April 15, 2023 and bear interest at a rate of 11.625% per annum, payable semi-annually in arrears on April 15 and
October 15 of each year, beginning on October 15, 2016. Interest on the Senior Notes accrues from the date of original issuance and is
calculated on the basis of a 360-day year comprised of twelve 30-day months. The effective interest rate on the Senior Notes was
12.49% as of December 31, 2017.
F-29
QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
The Indenture contains covenants that, among other things, limit the ability of the Company and certain of its subsidiaries to incur
or guarantee additional indebtedness, pay dividends or make other restricted payments, make certain investments, create or incur
certain liens, sell assets and subsidiary stock, transfer all or substantially all of its assets or enter into merger or consolidation
transactions.
On May 17, 2017, the Company exchanged the 11.625% Senior Notes due 2023 (the “Initial Notes”) in the aggregate principal
amount of $400 million, which were not registered under the Securities Act of 1933, as amended (the “Securities Act”), for a like
principal amount of 11.625% Senior Notes due 2023 (the “Exchange Notes”), which have been registered under the Securities Act.
The Initial Notes were substantially identical to the Exchange Notes, except that the Exchange Notes are registered under the
Securities Act and are not subject to the transfer restrictions and certain registration rights agreement provisions applicable to the
Initial Notes.
On and after April 15, 2019, the Company is entitled, at its option, to redeem all or a portion of the Senior Notes upon not less
than 30 nor more than 60 days’ notice, at the following redemption prices specified in the table below, plus accrued and unpaid
interest, if any, to the redemption date. The redemption prices are expressed as a percentage of the principal amount on the redemption
date. Holders of record on the relevant record date have the right to receive interest due on the relevant interest payment date. In
addition, prior to April 15, 2019, the Company may redeem some or all of the Senior Notes at a price equal to 100% of the principal
amount thereof, plus accrued and unpaid interest, if any, plus a “make whole” premium, as set forth in the Indenture. The Company is
entitled to redeem up to 35% of the aggregate principal amount of the Senior Notes until April 15, 2019 with the net proceeds from
certain equity offerings at the redemption price set forth in the Indenture.
The following table provides a summary of the redemption periods and prices related to the Senior Notes:
Period
Period from April 15, 2019 to April 14, 2020
Period from April 15, 2020 to April 14, 2021
Period from April 15, 2021 to April 14, 2022
Period from April 15, 2022 to April 14, 2023
Debt Issuance Costs and Discounts
Redemption
Prices
108.719 %
105.813 %
102.906 %
100.000 %
The following table provides a summary of unamortized debt issuance costs and discounts (in thousands):
Debt issuance costs
Debt discounts
Total debt issuance costs and discounts at origination
Less: Amortization of debt issuance costs and discounts
Total unamortized debt issuance costs and discounts
Capital Lease Obligations and Other Debt
December 31,
2017
2016
$
$
32,265
24,536
56,801
(13,867 )
42,934
$
$
29,146
24,536
53,682
(4,918 )
48,764
The Company’s debt arising from capital lease obligations primarily relates to its corporate office in Brentwood, Tennessee. As of
December 31, 2017 and 2016, this capital lease obligation was $17.9 million and $18.7 million, respectively. The remainder of the
Company’s capital lease obligations relate to property and equipment at its hospitals and corporate office. Other debt consists of
physician loans and miscellaneous notes payable to banks.
F-30
QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
Debt Maturities
The following table provides a summary of debt maturities for each of the next five years and thereafter (in thousands):
2018
2019
2020
2021
2022
Thereafter
Total debt, excluding unamortized debt issuance costs and discounts
Interest Expense, Net
The following table provides a summary of the components of interest expense, net (in thousands):
$
$
1,855
1,486
1,517
3,329
830,796
417,841
1,256,824
Senior Credit Facility:
Revolving Credit Facility
Term Loan Facility
ABL Credit Facility
Senior Notes
Amortization of debt issuance costs and discounts
All other interest expense (income), net
Total interest expense, net, from long-term debt
Due to Parent, net
Total interest expense, net
2017
Year Ended December 31,
2016
2015
$
$
528 $
66,111
1,854
46,516
8,949
(1,881 )
122,077
—
122,077 $
330 $
40,719
342
32,166
4,918
(849 )
77,626
35,814
113,440
$
—
—
—
—
—
283
283
98,007
98,290
NOTE 8 — OTHER LONG-TERM ASSETS AND OTHER LONG-TERM LIABILITIES
The following table provides a summary of the major components of other long-term assets (in thousands):
Receivable for professional and general liability insurance reserves indemnified by CHS
Receivable for workers' compensation liability insurance reserves indemnified by CHS
Assets of Nonqualified Deferred Compensation Plan
Other miscellaneous long-term assets
Total other long-term assets
December 31,
2017
2016
$
$
44,377 $
14,545
23,052
13,633
95,607 $
59,652
15,958
69
13,154
88,833
The following table provides a summary of the components of other long-term liabilities (in thousands):
Professional and general liability insurance reserves
Workers' compensation liability insurance reserves
Benefit plan liabilities
Deferred rent
Other miscellaneous long-term liabilities
Total other long-term liabilities
December 31,
2017
2016
$
$
76,993 $
18,558
36,103
4,268
2,032
137,954 $
74,194
17,416
10,722
4,001
2,663
108,996
See Note 19 — Commitments and Contingencies for additional information about the Company’s insurance reserves and Note 17
— Benefit Plans for additional information about the Company’s benefit plan liabilities.
F-31
QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 — FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of the Company’s cash and cash equivalents, patient accounts receivable, amounts due from and due to third-
party payors, and accounts payable approximate their fair values due to the short-term maturity of these financial instruments.
The Company recorded impairment related to long-lived assets and goodwill during the years ended December 31, 2017 2016 and
2015. See Note 3 — Impairment of Long-Lived Assets and Goodwill for additional information on these impairments. The assessment
of fair value was based on Level 3 inputs, as the valuation methodologies used to determine impairment were based on internal
projections and unobservable inputs. The portion of the impairment related to hospital assets held for sale was determined based on
Level 2 inputs, as the valuation methodologies used to determine impairment considered letters of intent received on these hospitals.
The following table provides a summary of the carrying values and estimated fair values of the Company’s long-term debt (in
thousands):
Revolving Credit Facility
Term Loan Facility
ABL Credit Facility
Senior Notes
Other debt
Total long-term debt, excluding debt issuance costs and
discounts
December 31,
2017
2016
Carrying
Amount
Estimated
Fair Value
Carrying
Amount
Estimated
Fair Value
$
$
—
831,158
—
400,000
25,666
$
—
838,954
—
393,396
25,666
—
868,419
—
400,000
27,170
$
—
849,427
—
334,720
27,170
$ 1,256,824
$ 1,258,016
$ 1,295,589
$ 1,211,317
The Company considers its long-term debt instruments to be measured based on Level 2 inputs. Information about the valuation
methodologies used in the determination of the estimated fair values for the Company’s long-term debt instruments follows:
• Term Loan Facility. The estimated fair value is based on publicly available trading activity and supported with
information from the Company’s lending institutions regarding relevant pricing for trading activity.
• Senior Notes. The estimated fair value is based on the closing market price for these notes.
• All other debt. The carrying values of the Company’s other debt instruments, including the Revolving Credit Facility,
ABL Credit Facility, capital lease obligations, physician loans and miscellaneous notes payable to banks, approximate
their estimated fair values due to the nature of these obligations.
NOTE 10 — LEASES
The Company leases certain property and equipment under capital and operating lease agreements. The Company’s lease
commitments typically require the Company, as lessee, to pay maintenance, repairs, property taxes and insurance costs.
F-32
QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
The following table provides a summary of the Company’s commitments relating to non-cancellable operating and capital leases
for each of the next five years and thereafter (in thousands):
Year Ending December 31,
Operating (1)
Capital
2018
2019
2020
2021
2022
Thereafter
Total minimum future payments obligations
Less: Imputed interest
Total capital lease obligations
Less: Current portion of capital lease obligations
Total long-term capital lease obligations
$
$
$
32,253
25,568
19,673
12,722
8,294
17,236
115,746
$
2,531
2,552
2,590
2,628
2,332
20,707
33,340
(8,929 )
24,411
(1,140 )
23,271
(1) Minimum lease payments obligations have not been reduced by minimum sublease rentals due in the future of $5.2 million.
NOTE 11 — EQUITY
Preferred Stock
In connection with the Spin-off, the Company authorized 100,000,000 shares of preferred stock, par value of $0.0001 per share.
No shares have been issued as of December 31, 2017. The Board has the discretion, subject to limitations prescribed by Delaware law
and by its amended and restated certificate of incorporation, to determine the rights, preferences, privileges and restrictions, including
voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, of each series of preferred stock,
when and if issued.
Common Stock
In connection with the Spin-off, the Company authorized 300,000,000 shares of common stock, par value of $0.0001 per share,
and issued 28,412,054 shares of common stock on April 29, 2016 to CHS stockholders of record as of the Record Date, or April 22,
2016. The Company’s common stock began trading on the NYSE on May 2, 2016 under the ticker symbol “QHC.” As of December
31, 2017 and 2016, the Company had 30,294,895 shares and 29,482,050 shares, respectively, of common stock issued and
outstanding.
Holders of the Company’s common stock are entitled to one vote for each share held of record on all matters for which
stockholders may vote. Holders of the Company’s common stock do not have cumulative voting rights in the election of directors.
There are no preemptive rights, conversion, redemption or sinking fund provisions applicable to the common stock. In the event of
liquidation, dissolution or winding up, holders of common stock are entitled to share ratably in the assets available for distribution.
Delaware law prohibits the Company from paying any dividends unless it has capital surplus or net profits available for this purpose.
In addition, the Company’s Credit Agreements impose restrictions on its ability to pay dividends.
Additional Paid-in Capital
In connection with the Spin-off, the Company issued common stock, as described above, to CHS stockholders. In addition,
pursuant to the Separation and Distribution Agreement, CHS contributed capital of $530.6 million, in lieu of a cash settlement
payment, related to the remaining intercompany indebtedness with CHS and the Parent’s equity attributable to CHS. See Note 1 —
Description of the Business and Spin-off for additional information on the major transactions that occurred on April 29, 2016 to effect
the Spin-off.
Accumulated Deficit
Accumulated deficit of the Company, as shown in the consolidated balance sheets as of December 31, 2017 and 2016, represents
the Company’s cumulative net losses since the Spin-off. The cumulative earnings and losses of the Company prior to the Spin-off
were included in Due to Parent, net in the consolidated balance sheets prior to April 29, 2016.
F-33
QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
Parent’s Equity
Prior to the Spin-off, the purchase of shares from noncontrolling interest partners and the changes in valuation of redeemable
shares of noncontrolling interests investments were accounted for as Parent’s equity in the consolidated balance sheets. Parent’s equity
was reclassified as additional paid-in capital in connection with the Spin-off.
NOTE 12 — INCOME TAXES
The Company and its subsidiaries are subject to U.S. federal income tax and income taxes of multiple state and local jurisdictions.
The Company provides for income taxes based on enacted tax laws and tax rates in jurisdictions in which it conducts its operations.
Prior to the Spin-off, the Company was included in the consolidated federal, state and local income tax returns filed by CHS and
calculated income taxes for the purpose of carve-out financial statements using the “separate return method.” The Company deemed
the amounts that it would have paid to or received from the U.S. Internal Revenue Service and other jurisdictions, had QHC not been a
member of CHS’ consolidated tax group, to be immediately settled with CHS through Due to Parent, net in the consolidated balance
sheets. Since the Spin-off, the Company has been filing its own consolidated federal, state and local income tax returns.
The following table provides a summary of the components of the provision for (benefit from) income taxes (in thousands):
Current:
Federal
State
Total provision for (benefit from) current income taxes
Deferred:
Federal
State
Total provision for (benefit from) deferred income taxes
Total provision for (benefit from) income taxes
2017
Year Ended December 31,
2016
2015
$
$
$
—
271
271
$
—
530
530
(22,540 )
404
(22,136 )
(21,865 )
$
(51,177 )
(3,228 )
(54,405 )
(53,875 )
$
—
762
762
1,749
793
2,542
3,304
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law. The Tax Act includes a number of
changes to existing U.S. tax laws that impact the Company, most notably a reduction of the U.S. corporate tax rate from 35% to 21%
for tax years after December 31, 2017. As a direct result of changes in tax law due to the passage of the Tax Act, the Company
recorded a total tax benefit of $24.0 million during 2017 which is composed of two amounts: a tax benefit of $10.9 million in deferred
income tax expense for the net change in its deferred tax liabilities at the new 21% tax rate, and a $13.1 million tax benefit in deferred
income tax expense for the reduction in valuation allowance attributable to the change in net realizability of deferred tax assets. The
Tax Act also provides for acceleration of depreciation for certain assets placed into service after September 27, 2017, as well as
prospective changes beginning in 2018. These prospective changes include an increased limitation on the deductibility of executive
compensation, a limitation on the deductibility of interest expense, new rules surrounding meals and entertainment expense and fines
and penalties. Also, while net operating losses generated in the future may by carried forward indefinitely under the new law, there is
a limitation on the amount that may be used in any given year. The Tax Act may also have an impact on projected future taxable
income that could further affect valuation allowance considerations. In addition to the federal law, the Company awaits guidance from
the states in which it files on how components of the Tax Act may be treated in these jurisdictions.
The $24.0 million tax benefit represents what the Company believes is the impact of the Tax Act, the key components being the
re-measurement of deferred tax balances to the new corporate rate and reduction in valuation allowance as a result of anticipated
realizability of deferred tax assets due to the change in tax law. As the benefit is based on currently available information and
interpretations, which are continuing to evolve, the benefit should be considered provisional. The Company will continue to analyze
additional information and guidance related to the Tax Act as supplemental legislation, regulatory federal or state guidance, or
evolving technical interpretations become available. The final impacts may differ from the recorded amounts as of December 31,
2017, and the Company will continue to refine such amounts within the measurement period provided by Staff Accounting Bulletin
No. 118. The Company expects to complete the analysis by the end of 2018.
The following table reconciles the provision for (benefit from) income taxes utilizing the statutory federal income tax rate to the
Company’s effective income tax rate (dollars in thousands):
F-34
QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
2017
Year Ended December 31,
2016
Amount %
Amount
%
Amount
2015
%
Provision for (benefit from) income taxes at statutory
federal tax rate
State income taxes, net of federal income tax benefit
Net (income) loss attributable to noncontrolling
interests
Non-deductible goodwill and Spin-off costs
Change in valuation allowance (pre Tax Act)
Change in rate due to Tax Act
Change in valuation allowance due to Tax Act
All other items
Total provision for (benefit from) income taxes
and effective tax rate
$ (46,978 )
(6,137 )
35.0 %
4.6 %
$ (139,685 )
(47,749 )
35.0 %
12.0 %
$ 2,814
(171 )
35.0 %
(2.1 )%
(641 )
535
53,470
(10,934 )
(13,121 )
1,941
(872 )
0.5 %
(0.4 )% 36,009
(39.8 )% 94,745
—
—
3,677
8.1 %
9.8 %
(1.5 )%
0.2 %
(9.0 )%
(23.7 )%
— %
— %
(1.0 )%
(1,189 )
—
1,459
—
—
391
(14.8 )%
— %
18.2 %
— %
— %
4.8 %
$ (21,865 )
16.3 %
$ (53,875 )
13.5 %
$ 3,304
41.1 %
Deferred income taxes are determined based on the estimated future tax effects of differences between the financial statement
carrying values and tax bases of the Company’s assets and liabilities under the provisions of the enacted tax laws.
The following table provides a summary of the components of deferred income tax assets and liabilities (in thousands):
Net operating loss and credit carryforwards
Property and equipment
Prepaid expenses
Goodwill and intangible assets
Investments in unconsolidated affiliates
Accounts receivable
Accrued compensation and recruiting accruals
Other accruals
Deferred compensation
Debt issuance costs
Insurance and settlement reserves
Total deferred income tax assets and liabilities, before valuation
allowance
Valuation allowance
Total deferred income tax assets and liabilities
Total deferred income tax liabilities, net
December 31,
2017
2016
Assets
Liabilities
Assets
Liabilities
$
83,879
2,039
—
—
140
4,928
8,743
175
9,160
—
31,322
140,386
(116,780 )
23,606
$
$
$
$
—
1,416
2,836
18,544
—
—
828
—
—
7,756
—
31,380
—
31,380
7,774
$
72,195
—
—
—
298
1,532
14,968
251
10,208
—
39,112
138,564
(114,216 )
24,348
$
$
$
$
—
10,447
6,874
27,193
—
10,290
965
—
—
53
—
55,822
—
55,822
31,474
As of December 31, 2017, the Company had federal net operating loss carryforwards of approximately $125 million, which will
begin expiring in 2035. The Company also had state net operating loss carryforwards of approximately $668 million, which expire
from 2018 to 2037. In addition, the Company has $0.5 million of refundable alternative minimum tax credit carryforwards and $0.4
million of Texas credit carryforwards which expire in 2027. The Company has concluded that it is not more likely than not that it will
realize the benefit of its deferred tax assets, and as a result, has recognized a valuation allowance of $116.8 million. With respect to
the deferred tax liabilities pertaining to goodwill and intangible assets, as included in the table above, goodwill purchased in
connection with certain business acquisitions is amortizable for income tax reporting purposes. However, for financial reporting
purposes, there is no corresponding amortization allowed with respect to such purchased goodwill. As the Company does not expect to
realize its state deferred tax assets, it has not recognized the corresponding federal tax benefit, and as such, the amounts presented
above for the years ended December 31, 2017 and 2016 do not include the federal tax benefit.
The Company’s valuation allowance increased $2.6 million during the year ended December 31, 2017 from $114.2 million to
$116.8 million. This net increase was comprised of several factors. Prior to any consideration for any changes resulting from the
effects of the Tax Act, the Company recorded an increase in its valuation allowance of $53.4 million through deferred tax expense to
F-35
QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
offset additional deferred tax assets generated during the year resulting from the Company’s 2017 net operating loss. The Company
recorded this valuation allowance because it has concluded that it is not more likely than not that it will realize the benefits of its
deferred tax assets. In addition, the Company recorded a deferred tax benefit for a decrease of $37.7 million in its valuation allowance
to offset a decrease in its deferred tax assets for the same amount to account for the Tax Act’s reduction in the federal tax rate from
35% to 21%. The Company also recorded an income tax benefit through a reduction in its valuation allowance of $13.1 million to
account for the change in net realizability of deferred tax assets since the Tax Act has made the net operating loss carryforward period
indefinite and has limited the amount of net operating loss usage to 80% of taxable income starting in 2018.
In the ordinary course of business, there is inherent uncertainty in quantifying the Company’s income tax positions. The Company
assesses its income tax positions and records tax benefits for all tax years subject to examination based on management’s evaluation of
the facts, circumstances, and information available at the reporting date. The Company is not aware of any unrecognized tax benefits;
and therefore has not recorded any such amounts for the years ended December 31, 2017, 2016 and 2015. The Company classified
interest and penalties, if any, related to its tax positions as a component of the provision for (benefit from) income taxes in the
consolidated and combined statements of income.
NOTE 13 — EARNINGS PER SHARE
The following table provides a summary of the computation of basic and diluted earnings (loss) per share (in thousands, except
earnings per share and shares):
2017
Year Ended December 31,
2016
2015
Numerator:
Net income (loss)
Less: Net income (loss) attributable to noncontrolling interests
Net income (loss) attributable to Quorum Health Corporation
$
$
(112,357 ) $
1,833
(114,190 ) $
(345,197 ) $
2,491
(347,688 ) $
4,735
3,398
1,337
Denominator:
Weighted-average shares outstanding - basic and diluted
28,113,566
28,413,247
28,412,054
Earnings (loss) per share attributable to Quorum Health Corporation
stockholders - basic and diluted
$
(4.06 ) $
(12.24 ) $
0.05
For comparative purposes, the Company used 28,412,054 shares as the number of basic and diluted shares outstanding for all
periods prior to the Spin-off in calculating basic and diluted earnings (loss) per share. This number of shares represents the number of
shares issued on the Spin-off date. Due to the net loss attributable to Quorum Health Corporation for the years ended December 31,
2017 and 2016, no incremental shares were included in diluted earnings (loss) per share for these periods because the net effect of the
shares would be anti-dilutive. No incremental shares were considered for any periods prior to the Spin-off.
NOTE 14 — ADDITIONAL CASH FLOW INFORMATION
During the years ended December 31, 2017 and 2016, the Company reclassified certain assets and liabilities as held for sale,
which are included as separate line items in the consolidated balance sheets as of December 31, 2017 and 2016. In addition, the
Company recorded certain opening balance sheet adjustments in the second and fourth quarters of the year ended December 31, 2016,
which included non-cash components that were primarily transfers of assets and liabilities from CHS to effect the Spin-off. See Note 1
— Description of the Business and Spin-off for additional information on the Spin-off.
NOTE 15 — SEGMENTS
The Company’s operations consist of two distinct operating segments, its hospital operations business and its hospital
management advisory and healthcare consulting services business. The hospital operations segment includes the operations of the
Company’s owned and leased hospitals and their affiliated outpatient facilities that provide inpatient and outpatient healthcare
services. The hospital management advisory and healthcare consulting services segment includes the operations of QHR. Both
segments meet the criteria to be classified as a separate reportable segment. The financial information for the Company’s corporate
functions has been reported in the tables below as part of the all other reportable segment.
F-36
QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
Prior to the Spin-off, the Company included management fees allocated from Parent in the operating expenses of the hospital
operations segment. Following the Spin-off, the Company began presenting general and administrative costs for corporate functions in
the operating expenses of the all other reportable segment.
The following tables provide a summary of financial information related to the Company’s reportable segments (in thousands):
Net operating revenues:
Hospital operations
QHR operations
All other
Total net operating revenues
Adjusted EBITDA:
Hospital operations
QHR operations
All other
Total Adjusted EBITDA
Assets:
Hospital operations
QHR operations
All other
Total assets
2017
Year Ended December 31,
2016
2015
$
$
$
$
1,987,973
80,863
3,334
2,072,170
175,597
20,599
(54,351 )
141,845
$
$
$
$
2,052,751
85,533
183
2,138,467
184,000
16,980
(38,058 )
162,922
$
$
$
$
2,096,831
90,507
—
2,187,338
249,375
14,246
46
263,667
December 31,
2017
2016
$
$
1,687,576
61,752
79,513
1,828,841
$
$
1,802,121
75,113
117,136
1,994,370
The following table provides a reconciliation of Adjusted EBITDA to net income (loss), its most directly comparable U.S. GAAP
financial measure (in thousands):
Adjusted EBITDA
$
Interest expense, net
(Provision for) benefit from income taxes
Depreciation and amortization
Legal, professional and settlement costs
Impairment of long-lived assets and goodwill
Loss (gain) on sale of hospitals, net
Transaction costs related to the Spin-off
Post-spin headcount reductions
Change in estimate related to collectability of patient accounts
receivable
Net income (loss)
2017
Year Ended December 31,
2016
2015
$
141,845
(122,077 )
21,865
(82,155 )
(6,001 )
(47,281 )
5,243
(253 )
(2,543 )
$
162,922
(113,440 )
53,875
(117,288 )
(7,342 )
(291,870 )
(2,150 )
(5,488 )
(1,617 )
263,667
(98,290 )
(3,304 )
(128,001 )
—
(13,000 )
—
(16,337 )
—
(21,000 )
(112,357 )
$
(22,799 )
(345,197 )
$
$
—
4,735
NOTE 16 — STOCK-BASED COMPENSATION
On April 1, 2016, the Company adopted the Quorum Health Corporation 2016 Stock Award Plan (the “2016 Stock Award Plan”).
The Company filed a Registration Statement on Form S-8 on April 29, 2016 to register 4,700,000 shares of QHC common stock that
may be issued under the plan.
As defined in the Separation and Distribution Agreement, QHC and CHS employees who held CHS restricted stock awards on
the Record Date received QHC restricted stock awards for the number of whole shares, rounded down, of QHC common stock that
F-37
QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
they would have received as a shareholder of CHS as if the underlying CHS stock were unrestricted on the Record Date, except, that
with respect to a portion of CHS restricted stock awards granted to any QHC employees on March 1, 2016 that were cancelled and
forfeited on the Spin-off date. The QHC restricted stock awards received by QHC and CHS employees in connection with the Spin-off
vest on the same terms as the CHS restricted stock awards to which they relate, through the continued service by such employees with
their respective employer. CHS restricted stock awards were adjusted by increasing the number of shares of CHS stock subject to
restricted stock awards by an amount of whole shares, rounded down, necessary to preserve the intrinsic value of such awards at the
Spin-off date. QHC did not issue any stock options as part of the distribution of shares to holders of CHS stock options in connection
with the Spin-off.
The following table provides a summary of the activity related to unvested QHC restricted stock awards held by QHC and CHS
employees from the Spin-off date through December 31, 2017 (in shares):
Unvested restricted stock awards at Spin-off date
Vested
Forfeited
Unvested restricted stock awards at December 31, 2016
Vested
Forfeited
Unvested restricted stock awards at December 31, 2017
QHC Employees
QHC Awards Distributed in Spin-off
CHS Employees
Total
54,321
(1,317 )
(542 )
52,462
(34,131 )
(14,174 )
4,157
638,088
(6,098 )
(10,465 )
621,525
(204,858 )
(153,944 )
262,723
692,409
(7,415 )
(11,007 )
673,987
(238,989 )
(168,118 )
266,880
The following table provides a summary of the activity related to unvested restricted stock awards granted subsequent to the Spin-
off:
Unvested restricted stock awards at Spin-off date
Granted
Vested
Forfeited
Unvested restricted stock awards at December 31, 2016
Granted
Vested
Forfeited
Unvested restricted stock awards at December 31, 2017
QHC Awards Granted
Subsequent to Spin-off
Weighted-
Average
Grant Date
Fair Value
Per Share
—
12.77
—
—
12.77
7.54
12.77
10.90
9.58
Shares
— $
1,081,005
—
—
1,081,005
1,142,571
(282,582 )
(161,506 )
1,779,488 $
During the year ended December 31, 2017, the Company granted 230,000 performance-based restricted stock awards to certain of
its executive officers. If the performance-based objectives are attained in accordance with the targets set forth in the performance-
based restricted stock award agreement, the restrictions on the restricted stock awards will lapse on the second anniversary of the grant
date. In addition, the Company granted 720,000 time-based restricted stock awards which will lapse in equal installments on each of
the first three anniversaries of the grant date. In addition, the Company granted 192,571 time-based restricted stock awards to its non-
employee directors which will lapse on February 22, 2018.
During the year ended December 31, 2016, the Company granted 460,000 performance-based restricted stock awards to certain of
its executive officers. The performance-based objectives set forth in the performance-based restricted stock award agreement were
achieved; therefore, the restrictions on the restricted stock awards will lapse in equal installments on each of the first three
anniversaries of the grant date. In addition, the Company granted 551,005 time-based restricted stock awards of which 445,000 will
lapse in equal installments on each of the first three anniversaries of the grant date and 106,005 will lapse in equal installments on the
second and third anniversaries of the grant date. In addition, the Company granted 70,000 time-based restricted stock to its non-
employee directors which will lapse on the first anniversary of the grant date.
F-38
QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
Following the Spin-off, the Company began recording stock-based compensation expense related to the vesting of QHC restricted
stock awards issued to QHC employees on the Spin-off date, CHS restricted stock awards held by QHC employees on the Spin-off
date, and all restricted stock awards granted by QHC after the Spin-off. Stock-based compensation expense is recognized as a
component of salaries and benefits expense in the consolidated and combined statements of income. Prior to the Spin-off, an estimated
portion of CHS’ stock-based compensation expense was allocated to QHC through the monthly corporate management fee from CHS,
which was recorded in other operating expenses in the consolidated and combined statements of income, and therefore is not included
in stock-based compensation expense in the table below. The estimated costs allocated to QHC from CHS for stock-based
compensation related to QHC’s employees were $2.3 million and $7.0 million for the years ended December 31, 2016 and 2015,
respectively.
The following table provides a summary of stock-based compensation expense for the periods subsequent to the Spin-off (in
thousands):
2017
Year Ended December 31,
2016
2015
Stock-based compensation resulting from the Spin-off
Stock-based compensation related to grants following the Spin-off
Total stock-based compensation expense
$
$
2,225
7,727
9,952
$
$
3,089
4,352
7,441
$
$
—
—
—
As of December 31, 2017, the Company had unrecognized stock-based compensation expense of $0.4 million related to the
outstanding unvested QHC and CHS restricted stock awards held by QHC employees as of the Spin-off date and $9.8 million of
unrecognized stock-based compensation expense related to QHC restricted stock awards that were granted subsequent to the Spin-off.
NOTE 17 — BENEFIT PLANS
The Company maintains various benefit plans, including defined contribution plans, a defined benefit plan and deferred
compensation plans, of which certain of the Company’s subsidiaries are the plan sponsors. The rights and obligations of certain of
these plans were transferred from CHS in connection with the Spin-off, pursuant to the Separation and Distribution Agreement.
Defined Contribution Plans
The Quorum Health Retirement Savings Plan (the “Retirement Savings Plan”) is a defined contribution plan, which was
established on January 1, 2016 by CHS in anticipation of the Spin-off. Prior to the Spin-off, the cumulative liability for these benefit
costs was recorded in Due to Parent, net. The assets and liabilities under this plan were transferred to QHC in connection with the
Spin-off. The Retirement Savings Plan covers the majority of the employees at the Company’s subsidiaries. The Company has other
minor defined contribution plans at certain of its hospitals that cover employees under the terms of these individual plans. Total
expenses to the Company under all defined contribution plans was $1.2 million, $13.6 million and $13.0 million for the years ended
December 31, 2017, 2016 and 2015, respectively. The benefit costs associated with the Retirement Savings Plan are recorded as
salaries and benefits expense in the consolidated and combined statements of income.
Deferred Compensation Plans
Prior to the Spin-off, certain of the Company’s employees participated in CHS’ unfunded deferred compensation plans. Under
these CHS plans, participants were allowed to defer receipt of a portion of their compensation. The election period for those
employees continued under the CHS plan through December 31, 2016. In January 2017, CHS transferred the assets and liabilities
attributable to QHC employees under these plans to QHC and they were rolled into a new plan established by QHC, as described
below. The assets and liabilities transferred in January 2017 were of $22.9 million and $23.9 million, respectively.
On August 18, 2016, the Compensation Committee of the Board of Directors adopted the Executive Nonqualified Excess Plan
Adoption Agreement (the “Adoption Agreement”) and the Executive Nonqualified Excess Plan Document (the “Plan Document”),
that together, the Adoption Agreement names as the QHCCS, LLC Nonqualified Deferred Compensation Plan (the “NQDCP”). The
NQDCP is an unfunded, nonqualified deferred compensation plan that provides deferred compensation benefits for a select group of
management, highly compensated employees and independent contractors of the Company’s wholly-owned subsidiary, QHCCS, LLC,
a Delaware limited liability company (“QHCCS”), including the Company’s named executive officers. The NQDCP permits
participants to defer a portion of their annual base salary, service bonus and performance-based compensation, as well as up to 100%
of their incentive compensation in any calendar year. In addition to participant deferrals, QHCCS, and/or its affiliates may make
discretionary credits to participants’ accounts for any year. As of December 31, 2017, the assets and liabilities under this plan were
$23.1 million and $24.3 million, respectively, and are included in other long-term assets and other long-term liabilities in the
consolidated balance sheet.
F-39
QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
Supplemental Executive Retirement Plans
On April 1, 2016, the Board adopted the Quorum Health Corporation Supplemental Executive Retirement Plan (the “Original
SERP Plan”). Pursuant to the Employee Matters Agreement between the Company and CHS, the Company assumed the liabilities for
all obligations under the Original SERP Plan as of April 29, 2016, the Spin-off date, which related to QHC employees, as defined in
the Employee Matters Agreement. In addition, as defined by the Employee Matters Agreement, no additional benefits were to accrue
under the Original SERP Plan following the Spin-off and no assets were transferred to the Company related to the Original SERP
Plan. The accrued benefit liability transferred to the Company for the Original SERP Plan was $6.0 million.
On May 24, 2016, the Board, upon recommendation of the Compensation Committee, approved the Company’s Amended and
Restated Supplemental Executive Retirement Plan (the “Amended and Restated SERP”), in order to accrue additional benefits with
respect to QHC employees who otherwise qualify as “Participants” under the Amended and Restated SERP. The Amended and
Restated SERP is a noncontributory non-qualified deferred compensation plan under Section 409A of the Internal Revenue Code. The
Company uses a December 31 measurement date for the benefit obligations and a January 1 measurement date for the net periodic
benefit costs of the Amended and Restated SERP. The benefit obligations under this plan were unfunded as of December 31, 2017.
The following table provides a summary of the components of net periodic benefit costs (in thousands):
Service cost
Interest cost
Amortizations:
Prior service cost (credit)
Net (gain) loss
Total net periodic benefit cost
2017
Year Ended December 31,
2016
2015
$
$
1,347 $
299
396
3
2,045 $
1,270 $
237
268
12
1,787 $
—
—
—
—
—
The following table provides a summary of the weighted-average assumptions used by the Company to determine its net periodic
benefit costs:
Discount rate
Rate of compensation increase
2017
Year Ended December 31,
2016
2015
3.6 %
2.0 %
3.2 %
3.0 %
— %
— %
The following table provides a summary of the changes recognized in other comprehensive income (loss) (in thousands):
2017
December 31,
2016
2015
Prior service cost (credit)
Net loss (gain) arising during period
Amounts recognized as a component of net periodic benefit cost:
Amortization or curtailment recognition of prior service (cost) credit
Amortization or settlement recognition of net gain (loss)
Total recognized in other comprehensive loss (income)
$
$
— $
(146 )
(396 )
(3 )
(545 ) $
2,949 $
14
(264 )
(3 )
2,696 $
—
—
—
—
—
The estimated prior service cost that will be amortized from accumulated other comprehensive income (loss) into net periodic
benefit cost for the year ended December 31, 2018 is $0.3 million. The estimated actuarial loss that will be amortized or recognized
from accumulated other comprehensive income into net periodic benefit cost is minimal.
F-40
QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
The following table provides a summary of the changes in the benefit obligation (in thousands):
Benefit obligation at beginning of period
Benefit obligation transferred from the Spin-off
Service cost
Interest cost
Plan amendments
Benefits paid
Actuarial (gain) loss
Benefit obligation at end of period
December 31,
2017
2016
$
$
9,434 $
—
1,347
299
—
(2,275 )
(146 )
8,659 $
—
5,964
1,270
190
2,921
—
(911 )
9,434
As of December 31, 2017, the long-term portion of the Company’s benefit obligation liability was $8.7 million and there was no
current portion of the benefit obligation liability. As of December 31, 2016, the current and long-term portions of the Company’s
benefit obligation liability were $2.3 million and $7.1 million, respectively. The current portion is recognized as a component of
accrued salaries and benefits and the long-term portion is recognized as a component of other long-term liabilities in the consolidated
balance sheets. The accumulated benefit obligation at December 31, 2017 was $5.2 million.
The following table provides a summary of the weighted-average assumptions used by the Company to determine its benefit
obligation:
Discount rate
Rate of compensation increase
December 31,
2017
2016
3.3 %
2.0 %
3.6 %
2.0 %
The following table provides a summary of the expected future benefit payments for each of the next five years and the five years
thereafter (in thousands):
2018
2019
2020
2021
2022
Five years thereafter
Total expected future benefit payments
Director’s Fees Deferral Plan
$
$
—
—
—
948
—
10,448
11,396
On September 16, 2016, the Board adopted the Quorum Health Corporation Director’s Fees Deferral Plan (the “Director’s Plan”).
Pursuant to the Director’s Plan, members of the Board may elect to defer and accumulate fees, including retainer fees and fees for
attendance at Board meetings and Board committees. Under this plan, a director may elect that all or any specified portion of the
director’s fees to be earned during a calendar year be credited to a director’s cash account and/or a director’s stock unit account
maintained on the individual director’s behalf in lieu of payment. Payment of amounts credited to a director’s cash account and stock
unit account will be made upon a payment commencement event, as defined in the Director’s Plan, in accordance with the payment
method elected by each director, either in lump sum or in a number of annual installments, not to exceed 15 installments. The
Director’s Plan covers directors of the Board not employed by the Company or any of its subsidiaries. Pursuant to the Director’s Plan,
the Company registered and made available for issuance under the Director’s Plan a maximum of 150,000 shares of QHC common
stock.
Defined Benefit Pension Plan
The Company provides benefits to employees at one of its hospitals through a defined benefit plan (the “Pension Plan”). The
Pension Plan provides benefits to covered individuals satisfying certain age and service requirements. Employer contributions to the
Pension Plan are made by the Company in accordance with the minimum funding requirements of ERISA. The Company expects to
make contributions to the Pension Plan for the full year 2018 of $0.4 million. The Company uses a December 31 measurement date for
the benefit obligations and a January 1 measurement date for the net periodic benefit costs of the Pension Plan. Variances from
F-41
QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
actuarially assumed rates result in increases or decreases in the benefit obligation, net periodic benefit cost and funding requirements
in future periods. The weighted-average assumptions used for determining the net periodic benefit costs for the year ended December
31, 2017 were a discount rate of 3.6%, an annual salary increase of 3.5% and an expected long-term rate of return on assets of 6.25%.
The weighted-average assumptions used for determining the net periodic benefit costs for the year ended December 31, 2016 were a
discount rate of 3.75%, an annual salary increase of 3.0% and an expected long-term rate of return on assets of 7.0%. Net periodic
benefits costs related to the Pension Plan were $0.1 million, $0.3 million and $0.3 million for the years ended December 31, 2017,
2016 and 2015, respectively. QHC recognizes the unfunded liability of the Pension Plan in other long-term liabilities in the
consolidated balance sheets. Unrecognized gains (losses) and prior service credits (costs) are recorded as other comprehensive income
(loss). The accrued benefit obligation liability for the Pension Plan was $0.8 million and $1.1 million at December 31, 2017 and 2016,
respectively.
NOTE 18 — RELATED PARTY TRANSACTIONS
CHS was a related party to QHC prior to the Spin-off. The significant transactions and balances with CHS prior to the Spin-off
and the agreements between QHC and CHS as of and subsequent to the Spin-off are described below.
Carve-Out from Parent
Prior to the Spin-off, QHC did not operate as a separate company and stand-alone financial statements were not prepared.
Historically, QHC was managed and operated in the normal course of business with all other hospitals and affiliates of CHS.
Accordingly, for the purposes of the carve-out financial statements related to the Spin-off, a combined opening balance sheet for the
QHC hospitals and QHR was established. The combined opening balance sheet included the assets and liabilities of QHC hospitals
and QHR, as reported by CHS, and a net liability to CHS, referred to as Due to Parent, net, for the net investment held by CHS related
to its contribution of these net assets. The operating results of the QHC hospitals and QHR prior to the Spin-off were derived from the
CHS operating results for these entities. In addition, certain corporate overhead costs were allocated to QHC from CHS during the
carve-out period for the purpose of estimating QHC’s share of these expenses.
Allocated Costs from CHS during the Carve-Out Period
CHS allocated costs to QHC during the carve-out period for a portion of its corporate overhead costs and any other costs related
to QHC hospitals and QHR that were paid by CHS or covered by an agreement, policy or contract owned by CHS.
The following table provides a summary of the allocated costs to QHC from CHS for the periods prior to the Spin-off (in
thousands):
Insurance costs
Management fees from Parent
All other allocated costs
Total related party operating costs and expenses
Year Ended December 31,
2016
2015
$
$
44,246
11,792
25,021
81,059
$
$
134,290
36,466
72,262
243,018
The allocation of insurance costs from CHS primarily included costs for self-insurance estimates and third-party policies related
to employee health benefits, professional and general liability and workers’ compensation liability coverage. Insurance costs were
primarily allocated to QHC based on claims history of the QHC hospitals, as determined on an individual hospital level. Corporate
management fees were allocated to QHC for certain corporate functions of CHS, including services such as, among others, executive
and divisional management, treasury, accounting, risk management, legal, procurement, human resources, information technology
support and other administrative support services. These corporate overhead costs were allocated to QHC using a ratio based on the
number of licensed beds at each QHC hospital in proportion to CHS’ total licensed beds. This methodology used was comparable to
how CHS allocated corporate overhead costs to all of its hospitals through a management fee charge that eliminates in consolidation.
All other allocated costs in the table above include any other costs allocated to QHC hospitals or QHR that were not part of
management fees. These costs were allocated to QHC using ratios based on revenues, expenses or licensed beds. If possible,
allocations were made on a specific identification basis.
Following the Spin-off, the Company began performing corporate functions using internal resources or purchased services,
certain of which are being provided by CHS pursuant to the transition services agreements and other ancillary agreements. See the
section “Agreements with CHS Related to the Spin-off” below.
F-42
QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
Due to Parent, Net
Prior to the Spin-off, Due to Parent, net in the consolidated balance sheets represented the Company’s cumulative liability to CHS
for the net assets of QHC hospitals and QHR, as well as an allocation of costs for corporate functions. See Note 1 — Description of
the Business and Spin-off and Note 2 — Basis of Presentation and Significant Accounting Policies — Due to Parent, net for additional
information on the types of transactions settled through Due to Parent, net during the carve-out period and the transactions that
occurred to settle this liability in connection with the Spin-off.
During the carve-out period, QHC was charged interest on a monthly basis by CHS on the amount of Due to Parent, net
outstanding at the end of each month. Interest rates were variable and ranged from 4% to 7% during the carve-out period. Interest
expense incurred on Due to Parent, net was recorded as an increase in the Due to Parent, net liability and was deemed settled each
month. The total amount of related party interest expense arising from the liability with CHS was $35.8 million and $98.0 million for
the years ended December 31, 2016 and 2015, respectively.
Agreements with CHS Related to the Spin-off
In connection with the Spin-off and effective as of April 29, 2016, the Company entered into certain agreements with CHS that
allocated between the Company and CHS the various assets, employees, liabilities and obligations (including investments, property,
employee benefits and tax-related assets and liabilities) that were previously part of CHS. In addition, these agreements govern certain
relationships between, and activities of, the Company and CHS for a definitive period of time after the Spin-off, as specified by each
individual agreement.
The agreements were as follows:
• Separation and Distribution Agreement. This agreement governed the principal actions of both the Company and CHS
that needed to be taken in connection with the Spin-off. It also sets forth other agreements that govern certain aspects of
the Company’s relationship with CHS following the Spin-off.
• Tax Matters Agreement. This agreement governs respective rights, responsibilities and obligations of the Company and
CHS after the Spin-off with respect to deferred tax liabilities and benefits, tax attributes, tax contests and other tax
sharing regarding U.S. federal, state and local income taxes, other tax matters and related tax returns.
• Employee Matters Agreement. This agreement governs certain compensation and employee benefit obligations with
respect to the current and former employees and non-employee directors of both the Company and CHS. It also allocated
liabilities and responsibilities relating to employment matters, employee compensation, employee benefit plans and
programs as of the Spin-off date.
In addition to the agreements referenced above, the Company entered into certain transition services agreements and other
ancillary agreements with CHS defining agreed upon services to be provided by CHS to certain or all QHC hospitals, as determined
by each agreement, commencing on the Spin-off date. The agreements generally have terms of five years.
A summary of the major provisions of the transition services agreements follows:
• Shared Services Centers Transition Services Agreement. This agreement defines services to be provided by CHS related
to billing and collections utilizing CHS shared services centers. Services include, but are not limited to, billing and
receivables management, statement processing, denials management, cash posting, patient customer service, and credit
balance and other account research. In addition, it provides for patient pre-arrival services, including pre-registration,
insurance verification, scheduling and charge estimates. Fees are based on a percentage of cash collections each month.
• Computer and Data Processing Transition Services Agreement. This agreement defines services to be provided by CHS
for information technology infrastructure, support and maintenance. Services include, but are not limited to, operational
support for various applications, oversight, maintenance and information technology support services, such as helpdesk,
product support, network monitoring, data center operations, service ticket management and vendor relations. Fees are
based on both a fixed charge for labor costs, as well as direct charges for all third-party vendor contracts entered into by
CHS on QHC’s behalf.
• Receivables Collection Agreement (“PASI”). This agreement defines services to be provided by CHS’ wholly-owned
subsidiary, PASI, which currently serves as a third-party collection agency to QHC related to accounts receivable
collections of both active and bad debt accounts of QHC hospitals, including both receivables that existed as of the Spin-
off date and those that have occurred since the Spin-off date. Services include, but are not limited to, self-pay collections,
insurance follow-up, collection letters and calls, payment arrangements, payment posting, dispute resolution and credit
balance research. Fees are based on the type of service and are calculated based on a percentage of recoveries.
F-43
QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
• Billing and Collection Agreement (“PPSI”). This agreement defines services to be provided by CHS related to
collections of accounts receivable generated by the Company’s affiliated outpatient healthcare facilities. Services
include, but are not limited to, self-pay collections, insurance follow-up, collection letters and calls, payment
arrangements, payment posting, dispute resolution and credit balance research. Fees are based on the type of service and
are calculated based on a percentage of recoveries.
• Employee Service Center Agreement. This agreement defines services to be provided by CHS related to payroll
processing and human resources information systems support. Fees are based on a fixed charge per employee headcount
per month.
• Eligibility Screening Services Agreement. This agreement defines services to be provided by CHS for financial and
program criteria screening related to Medicaid or other program eligibility for pure self-pay patients. Fees are based on a
fixed charge for each hospital receiving services.
The total expenses recorded by the Company under transition services agreements with CHS following the Spin-off were $63.5
million and $44.7 million for the years ended December 31, 2017 and 2016, respectively. The total expenses recorded by the
Company under transition services agreements with CHS following the Spin-off combined with the allocations from CHS for these
same services prior to the Spin-off were $63.5 million and $66.4 million for the year ended December 31, 2017 and 2016,
respectively. Allocations from CHS for these services were $60.2 million for the year ended December 31, 2015. The Company is
disputing in arbitration, among other issues and actions, certain charges and lack of performance of various obligations under the
transition services agreements with CHS.
NOTE 19 — COMMITMENTS AND CONTINGENCIES
Legal Matters
The Company is a party to various legal, regulatory and governmental proceedings incidental to its business. Based on current
knowledge, management does not believe that loss contingencies arising from pending legal, regulatory and governmental
proceedings, including the matters described herein, will have a material adverse effect on the operating results, financial position or
liquidity of the Company. However, in light of the inherent uncertainties involved in these matters, some of which are beyond the
Company’s control, and the very large or indeterminate damages sought in some of these matters, an adverse outcome in one or more
of these matters could be material to the Company’s results of operations or cash flows for any particular reporting period.
In connection with the Spin-off, CHS agreed to indemnify QHC for certain liabilities relating to outcomes or events occurring
prior to the closing of the Spin-off, including (i) certain claims and proceedings known to be outstanding on or prior to the closing date
of the Spin-off and (ii) certain claims, proceedings and investigations by governmental authorities or private plaintiffs related to
activities occurring at or related to the Company’s healthcare facilities prior to the closing date of the Spin-off, but only to the extent,
in the case of clause (ii), that such claims are covered by insurance policies maintained by CHS, including professional and general
liability and workers’ compensation liability. In this regard, CHS will continue to be responsible for certain Health Management
Associates, Inc. legal matters covered by its contingent value rights agreement that relate to the portion of CHS’ business now held by
QHC. Notwithstanding the foregoing, CHS is not indemnifying QHC in respect of any claims or proceedings arising out of, or related
to, the business operations of QHR at any time or its compliance with the Corporate Integrity Agreement (“CIA”) with the United
States Department of Health and Human Services Office of the Inspector General (“OIG”). Subsequent to the Spin-off, the OIG
entered into an “Assumption of CIA Liability Letter” with the Company reiterating the applicability of the CIA to certain of the
Company’s hospitals, although the OIG declined to enter into a separate agreement with the Company.
With respect to all legal, regulatory and governmental proceedings, the Company considers the likelihood of a negative outcome.
If the Company determines the likelihood of a negative outcome with respect to any such matter is probable and the amount of the loss
can be reasonably estimated, the Company records an accrual for the estimated amount of loss for the expected outcome of the matter.
If the likelihood of a negative outcome with respect to material matters is reasonably possible and the Company is able to determine
an estimate of the amount of possible loss or a range of loss, whether in excess of a related accrued liability or where there is no
accrued liability, the Company discloses the estimate of the amount of possible loss or range of loss. However, the Company is unable
to estimate an amount of possible loss or range of loss in some instances based on the significant uncertainties involved in, or the
preliminary nature of, certain legal, regulatory and governmental matters.
Government Investigations
• Tooele, Utah — Physician Compensation. On May 5, 2016, the Company’s hospital in Tooele, Utah received a Civil
Investigative Demand (“CID”) from the Office of the United States Attorney in Salt Lake City, Utah concerning
allegations that the hospital and clinic corporation submitted or caused to be submitted false claims to the government for
services referred by physicians with whom the hospital and clinic had inappropriate financial relationships, which
F-44
QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
allegedly violated federal law. The CID requested records and documentation concerning physician compensation.
Because this matter remains at a preliminary stage, there are not sufficient facts available for the Company to assess what
the outcome may be or to determine any estimate of the amount of loss or range of loss. The Company is fully
cooperating with this investigation.
• Blue Island, Illinois — Patient Status. On October 9, 2015, the Company’s hospital in Blue Island, Illinois received a
CID from the Office of the United States Attorney in Chicago, Illinois concerning allegations of upcoding observation
and other outpatient services and improperly falsifying inpatient admission orders. To date, the hospital has produced a
significant amount of documents in response to requests for emails, medical records and documentation concerning
status change from observation to inpatient, and the government has taken CID testimony from former hospital
employees. The Company is unable to predict the outcome of this investigation. However, it is reasonably possible that
the Company may incur a loss in connection with this investigation. The Company is unable to reasonably estimate the
amount or range of such reasonably possible loss given that the investigation is still ongoing. Under some circumstances,
losses incurred in connection with an adverse resolution in this investigation could be material. The Company is fully
cooperating with this investigation.
Commercial Litigation and Other Lawsuits
• Arbitration with Community Health Systems, Inc. On August 4, 2017, the Company received a demand for arbitration
from CHS seeking payment of certain amounts the Company has withheld pursuant to two transition services
agreements. The Company contends that the amounts are not payable to CHS and were not properly billed by CHS under
the agreements. The matter is pending before the American Arbitration Association. CHS seeks payment of
approximately $9.0 million relating to two of the transition service agreements. The Company intends to vigorously
contest the charges as not payable to CHS under the transition service agreements and has made a counterclaim for
substantial damages the Company believes it has suffered as a result of the transition service agreements and other
actions taken by CHS in connection with the Spin-off. The matter is at a preliminary stage and the Company cannot
assess the likelihood of a material adverse outcome at this time. The arbitration has been scheduled for June 18-29, 2018.
A decision is expected by early August 2018.
• Zwick Partners LP and Aparna Rao, Individually and On Behalf of All Others Similarly Situated v. Quorum Health
Corporation, Community Health Systems, Inc., Wayne T. Smith, W. Larry Cash, Thomas D. Miller and Michael J.
Culotta. On September 9, 2016, a shareholder filed a purported class action in the United States District Court for the
Middle District of Tennessee against the Company and certain of its officers. The Amended Complaint, filed on
September 13, 2017, purports to be brought on behalf of a class consisting of all persons (other than defendants) who
purchased or otherwise acquired securities of the Company between May 2, 2016 and August 10, 2016 and alleges that
the Company and certain of its officers violated federal securities laws, including Sections 10(b) and/or 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, by making alleged false and/or misleading
statements and failing to disclose certain information regarding aspects of the Company’s business, operations and
compliance policies. On April 17, 2017, Plaintiff filed a Second Amended Complaint adding additional defendants,
Community Health Systems, Inc., Wayne T. Smith and W. Larry Cash. On June 23, 2017, the Company filed a motion to
dismiss, which Plaintiffs opposed on August 22, 2017. The Company is vigorously defending itself in this matter. The
Company is unable to predict the outcome of this matter. However, it is reasonably possible that the Company may incur
a loss in connection with this matter. The Company is unable to reasonably estimate the amount or range of such
reasonably possible loss because the motion to dismiss is still pending and discovery is stayed pending resolution of the
motion to dismiss. Under some circumstances, losses incurred in connection with adverse outcomes in this matter could
be material.
• United Tort Claimants v. Quorum Health Resources, LLC (U.S. Bankruptcy Court for the District of New Mexico);
Douthitt - Dugger, et al. v. Quorum Health Resources, LLC (Bernalillo County, New Mexico District Court). Plaintiffs
in these cases underwent surgical procedures at Gerald Champion Regional Medical Center in New Mexico that they
contend were experimental and performed by an unqualified doctor. Their lawsuits, originally filed starting on June 11,
2010 against the doctors, QHR and the hospital are pending in state court and in federal bankruptcy court in New
Mexico. In 2012, QHR resolved plaintiffs’ claims for QHR’s liability exceeding insurance limits, and for liability not
covered by insurance, for $5.1 million through a partial settlement agreement. Pursuant to this settlement agreement, the
bankruptcy court has held that QHR is entitled to have language in any judgment entered in favor of the plaintiffs
limiting enforcement to available insurance and not from QHR’s assets. Litigation of plaintiffs’ claims against QHR has
continued, and the trial of the claims of most of the plaintiffs is proceeding in phases in a bankruptcy court bench trial.
On December 23, 2016, during the liability phase, the bankruptcy court ruled that QHR was 16.5% at fault for plaintiffs’
injuries. The plaintiffs have made attempts to assert new allegations against QHR in an effort to increase the percentage
F-45
QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
of liability attributed to QHR, but the bankruptcy court has ruled against the plaintiffs as to each attempt. On January 24,
2018, the New Mexico state court ruled that collateral estoppel applies as to all rulings issued by the bankruptcy court in
these matters, which includes the percentage of liability. As a result of the rulings in both courts, all that remains to be
determined is the amount of damages sustained, if any, by the individual plaintiffs. The bankruptcy court has heard
evidence regarding damages as to four of the plaintiffs and issued an opinion setting forth its findings January 30, 2018.
Additional trials will be set in the bankruptcy court to hear evidence as to the remaining plaintiffs in that action. A jury
will hear evidence as to the damages asserted by the plaintiffs in state court beginning November 26, 2018. QHR’s
insurer, Lexington Insurance Company, is providing a defense in these cases, subject to a reservation of rights.
Lexington has sued QHR in Williamson County, Tennessee seeking a declaration that plaintiffs’ claims and at least some
portion of the cost of defending QHR are not covered by Lexington. (Lexington Insurance Company v. Quorum Health
Resources, LLC, et al. (Williamson County, Tennessee Chancery Court)). No trial date has been set for Lexington’s
claim against QHR with respect to insurance coverage, which QHR also is vigorously defending. The Tennessee court
has ruled that Lexington is not entitled to reimbursement of defense costs. Lexington is seeking appellate review of this
ruling. The Company is unable to predict the outcome of this matter. However, it is reasonably possible that the
Company may incur a loss in connection with this matter. The Company is unable to reasonably estimate the amount or
range of such reasonably possible loss because the proceedings with respect to the merits of the New Mexico state court
action, the availability and extent of insurance coverage and damages are not sufficiently advanced. Under some
circumstances, losses incurred in connection with adverse outcomes in this matter could be material.
• R2 Investments, LDC v. Quorum Health Corporation, Community Health Systems, Inc., Wayne T. Smith, W. Larry
Cash, Thomas D. Miller, Michael J. Culotta, John A. Clerico, James S. Ely, III, John A. Fry, William Norris Jennings,
Julia B. North, H. Mitchell Watson, Jr. and H. James Williams. On October 25, 2017, a shareholder filed an action in the
Circuit Court of Williamson County, Tennessee against the Company and certain of its officers and directors and CHS
and certain of its officers and directors. The complaint alleges that the defendants violated the Tennessee Securities Act
and common law by, among other things, making alleged false and/or misleading statements and failing to disclose
certain information regarding aspects of the Company’s business, operations and financial condition. Plaintiff is seeking
rescissionary, compensatory and punitive damages. The Company filed a motion to dismiss the action on January 16,
2018. The Company is vigorously defending itself in this matter. Given the early stage of this matter, there are not
sufficient facts available to reasonably assess the potential outcome of this matter or reasonably assess any estimate of
the amount or range of any potential outcome.
Insurance Reserves
As part of the business of owning and operating hospitals, the Company is subject to potential professional and general liability
and workers’ compensation liability claims or other legal actions alleging liability on its part. The Company is also subject to similar
liabilities related to its QHR business.
Prior to the Spin-off, CHS provided professional and general liability insurance and workers’ compensation liability insurance to
QHC and indemnified QHC from losses under these insurance arrangements related to the hospital operations business assumed by
QHC in the Spin-off. The liabilities for claims prior to the Spin-off and related to QHC’s hospital operations business are determined
based on an actuarial study of QHC’s operations and historical claims experience at its hospitals, including during the period of
ownership by CHS. Corresponding receivables from CHS are established to reflect the indemnification by CHS for each of these
liabilities for claims that related to events and circumstances that occurred prior to the Spin-off date.
After the Spin-off, QHC entered into its own professional and general liability insurance and workers’ compensation liability
insurance arrangements to mitigate the risk for claims exceeding its self-insured retention levels. The Company maintains a self-
insured retention level for professional and general liability claims of $5 million per claim and maintains a $0.5 million per claim,
high deductible program for workers’ compensation liability claims. Due to the differing nature of its business, the Company
maintains separate insurance arrangements for professional and general liability claims related to its subsidiary, QHR. The self-insured
retention level for QHR is $6 million for professional and general liability claims.
F-46
QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
The following table provides a summary of the Company’s insurance reserves related to professional and general liability and
workers’ compensation liability, distinguished between those indemnified by CHS and those related to the Company’s own risks (in
thousands):
Current
Receivable
Long-Term
Receivable
Current
Liability
Long-Term
Liability
December 31, 2017
Professional and general liability:
Insurance reserves indemnified by CHS, Inc.
All other self-insurance reserves
$
Total insurance reserves for professional and general liability
Workers' compensation liability:
Insurance reserves indemnified by CHS, Inc.
All other self-insurance reserves
Total insurance reserves for workers' compensation liability
Total self-insurance reserves
$
21,465
—
21,465
3,032
—
3,032
24,497
$
$
44,377
—
44,377
14,545
—
14,545
58,922
$
$
21,465
2,883
24,348
3,032
3,120
6,152
30,500
$
$
44,377
32,616
76,993
14,545
4,013
18,558
95,551
Current
Receivable
Long-Term
Receivable
Current
Liability
Long-Term
Liability
December 31, 2016
Professional and general liability:
Insurance reserves indemnified by CHS, Inc.
All other self-insurance reserves
Total insurance reserves for professional and general liability
Workers' compensation liability:
Insurance reserves indemnified by CHS, Inc.
All other self-insurance reserves
Total insurance reserves for workers' compensation liability
Total self-insurance reserves
$
$
17,580
—
17,580
4,863
—
4,863
22,443
$
$
59,652
—
59,652
15,958
—
15,958
75,610
$
$
17,580
230
17,810
4,863
1,736
6,599
24,409
$
$
59,652
14,542
74,194
15,958
1,458
17,416
91,610
For the years ended December 31, 2017 and 2016, the net present value of the projected payments for professional and general
liability claims related to the Company’s self-insurance risks was discounted using a weighted-average risk-free rate of 2.0% in both
years. The Company’s estimated liability for these claims was $35.5 million and $14.7 million as of December 31, 2017 and 2016,
respectively. The estimated undiscounted claims liability was $39.2 million and $16.4 million as of December 31, 2017 and 2016,
respectively. For the years ended December 31, 2017 and 2016, the net present value of the projected payments for professional and
general liability claims indemnified by CHS was discounted using a weighted-average risk-free rate of 1.9% and 1.5%, respectively.
The estimated undiscounted liability for these claims was $71.7 million and $86.6 million as of December 31, 2017 and 2016,
respectively.
For the years ended December 31, 2017 and 2016, the net present value of the projected payments for workers’ compensation
liability claims related to the Company’s self-insurance risks was discounted using a weighted-average risk-free rate of 2.0%. The
Company’s estimated liability for these claims was $7.1 million and $3.2 million as of December 31, 2017 and 2016, respectively.
The estimated undiscounted liability for these claims was $7.4 million and $3.5 million as of December 31, 2017 and 2016,
respectively.
Physician Recruiting Commitments
As part of its physician recruitment strategy, the Company provides income guarantee agreements to certain physicians who agree
to relocate to its communities and commit to remain in practice there for a period of time. Under such agreements, the Company is
required to make payments to a physician in excess of the amount earned as income by the physician in his or her practice, up to the
amount of the income guarantee. The income guarantee period over which the Company agrees to subsidize a physician’s income is
typically one year and the commitment period over which the physician agrees to practice in the designated community is typically
three years. Under the terms of the agreements, such payments are recoverable by the Company from physicians who do not fulfill
their commitment periods. As of December 31, 2017 and 2016, the Company had physician guarantee contract liabilities of $0.2
million and $1.6 million, respectively, which were included in other current liabilities in the consolidated balance sheets. At December
F-47
QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
31, 2017, the maximum potential amount of future payments under these guarantees in excess of the liabilities recorded was $0.4
million.
Construction and Capital Commitments
McKenzie - Willamette Medical Center Project. The Company is building a new patient tower and expanding surgical capacity at
McKenzie – Willamette Medical Center, its hospital in Springfield, Oregon. During the years ended December 31, 2017, 2016 and
2015, the Company incurred costs of $34.1 million, $38.5 million and $10.4 million, respectively, related to this project. As of
December 31, 2017, the Company had incurred a total of $83.0 million of costs for this project, of which $76.1 million has been
placed into service as of December 31, 2017. The total estimated cost of this project, including equipment costs, is estimated to be
approximately $105 million. The project is expected to be completed in late 2018.
Helena Regional Medical Center Master Lease. Pursuant to the lease agreement at the Company’s hospital in Helena, Arkansas,
the Company has committed to make capital expenditures and improvements at this hospital averaging a specified percentage of the
hospital’s annual net operating revenues. The Company estimates that it will make capital expenditures of approximately $1 million
for each year of the remaining lease term, which extends through January 1, 2025.
Other Renovation Projects. The Company has committed to certain other renovation projects at one of its hospitals that are
expected to begin and be completed in 2018. The total estimated costs for these projects is approximately $4.7 million.
Commitments Related to the Spin-off
On April 29, 2016, the Company entered into certain agreements with CHS that allocated between QHC and CHS the various
assets, employees, liabilities and obligations (including investments, property, employee benefits and tax-related assets and liabilities)
that comprise the separate companies and governed or continue to govern certain relationships between, and activities of, QHC and
CHS for a period of time after the Spin-off. In addition to these agreements, QHC entered into certain transition services agreements
and other ancillary agreements with CHS defining agreed upon services to be provided by CHS to certain or all QHC hospitals, as
determined by each agreement. The agreements generally have terms of five years. See Note 18 — Related Party Transactions for
additional information on the Company’s agreements with CHS.
NOTE 20 — SUBSEQUENT EVENTS
On March 14, 2018, the Company executed an agreement with its lenders pursuant to its Senior Credit Facility to amend the
calculation of the Secured Net Leverage Ratio beginning July 1, 2017 through maturity, among other provisions. See Note 7 — Long-
term Debt for additional information on the Company’s Senior Credit Facility and the terms of the amendment
On March 1, 2018, the Company sold 70-bed Vista Medical Center West and its affiliated facilities (“Vista West”), located in
Waukegan, Illinois, for proceeds of $1.2 million. For the years ended December 31, 2017, 2016 and 2015, the Company’s operating
results included pre-tax gains (losses) of $(2.3) million, $4.9 million, and $5.7 million respectively, related to Vista West. In addition
to the above, the Company recorded $11.1 million and $4.1 million of impairment to property, equipment and capitalized software
costs of Vista West during the years ended December 31, 2017 and 2016, respectively. The Company does not expect the loss on sale
of this hospital will be material, after consideration of the impairment recorded.
On February 1, 2018, the Company announced that it had entered into a definitive agreement to sell 77-bed Clearview Regional
Medical Center and its affiliated facilities (“Clearview”), located in Monroe, Georgia. The definitive agreement covers the hospital
and its affiliated outpatient facilities. The Company currently anticipates completing the sale of this hospital by the end of the first
quarter of 2018. The Company recorded $1.2 million of impairment to Medicare licenses of Clearview during the year ended
December 31, 2016.
On January 5, 2018, the Company announced plans to close Affinity Medical Center (“Affinity”) in Massillon, Ohio.
Subsequent to January 5, 2018, the Company’s affiliates entered into an agreement with the City of Massillon related to the closure
whereby all of the owned real property and a substantial majority of the related tangible assets located at the hospital will be
transferred to the City of Massillon in exchange for nominal consideration and the assumption of certain ongoing real property lease
obligations and equipment lease obligations. Operations ceased on February 11, 2018 and the Company currently anticipates the asset
transfer to the City of Massillon will be completed by the end of the first quarter of 2018. The Company recorded $16.1 million and
$20.2 million of impairment related to property, equipment and capitalized software costs of Affinity during the years ended
December 31, 2017 and 2016 respectively. The Company expects to complete its assessment of the closure of Affinity by the end of
the first quarter, including any potential impacts on the Company’s results of operations, financial position and cash flows.
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QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 21 — QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table provides a summary of the Company’s quarterly operating results for the years ended December 31, 2017 and
2016 (in thousands, except earnings per share and shares):
2017 Quarters
1st
2nd
3rd
4th
Net operating revenues
$
527,640 $
530,146 $
499,302 $
515,082
Net income (loss)
Less: Net income (loss) attributable to noncontrolling interests
Net income (loss) attributable to Quorum Health Corporation
$
$
(27,205 )
356
(27,561 ) $
(30,575 )
55
(30,630 ) $
(28,554 )
637
(29,191 ) $
(26,023 )
785
(26,808 )
Earnings (loss) per share attributable to Quorum Health Corporation
stockholders:
Basic and diluted
Weighted-average common shares outstanding:
Basic and diluted
$
(0.99 ) $
(1.09 ) $
(1.03 ) $
(0.95 )
27,800,597 28,145,215 28,245,833 28,248,527
2016 Quarters
1st
2nd
3rd
4th
Net operating revenues
$
549,551 $
529,737 $
543,939 $
515,240
Net income (loss)
Less: Net income (loss) attributable to noncontrolling interests
Net income (loss) attributable to Quorum Health Corporation
$
(4,687 )
315
(5,002 ) $
(243,966 )
1,095
(245,061 ) $
(6,452 )
507
(6,959 ) $
(90,092 )
574
(90,666 )
Earnings (loss) per share attributable to Quorum Health Corporation
stockholders:
Basic and diluted
Weighted-average common shares outstanding:
Basic and diluted
$
(0.18 ) $
(8.63 ) $
(0.24 ) $
(3.19 )
28,412,054 28,412,720 28,413,532 28,416,801
Net income (loss) for each quarter in the year ended December 31, 2017 included the impact of impairment recorded for long-
lived assets and goodwill. See Note 3 — Impairment of Long-lived Assets and Goodwill.
Net income (loss) for the fourth quarter of 2017 additionally includes the impact of California HQAF of $22.0 million of
operating revenues, net of provider taxes. The amount recognized in the fourth quarter included the impact for the entire year as the
Company was unable to recognize the impact of the California HQAF program until the fourth quarter, after the program received
regulatory approval. See Note 2 — Basis of Presentation and Significant Accounting Policies — Revenues and Accounts Receivable.
Net income (loss) for the second and fourth quarters in the year ended December 31, 2016 included the impact of impairment
recorded for long-lived assets and goodwill. See Note 3 — Impairment of Long-lived Assets and Goodwill.
Net income (loss) for the fourth quarters of 2017 and 2016 additionally included the impact of the change in estimate related to
collectability of patient accounts receivable. See Note 2 — Basis of Presentation and Significant Accounting Policies — Revenues and
Accounts Receivable.
F-49
QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 22 — GUARANTOR AND NON-GUARANTOR SUPPLEMENTAL INFORMATION
The Senior Notes are senior unsecured obligations of the Company guaranteed on a senior basis by certain of its existing and
subsequently acquired or organized 100% owned domestic subsidiaries (the “Guarantors”). The Senior Notes are fully and
unconditionally guaranteed on a joint and several basis, with exceptions considered customary for such guarantees, limited to the
release of the guarantee when a subsidiary guarantor’s capital stock is sold, or when a sale of all of the subsidiary guarantor’s assets
used in operations occurs.
The condensed consolidating and combining financial statements have been prepared and presented in accordance with SEC
Regulation S-X Rule 3-10 “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered.”
The accounting policies used in the preparation of this financial information are consistent with those elsewhere in these
consolidated and combined financial statements of the Company, except as noted below:
•
Intercompany receivables and payables are presented gross in the supplemental condensed consolidating balance sheets.
• Due to Parent and Due from Parent are presented gross in the supplemental condensed consolidating balance sheets.
•
Investments in consolidated subsidiaries, as well as guarantor subsidiaries’ investments in non-guarantor subsidiaries, are
presented under the equity method of accounting with the related investments presented within the line items net
investment in subsidiaries and other long-term liabilities in the supplemental condensed consolidating balance sheets.
• The provision for (benefit from) income taxes is allocated from the parent issuer to the income producing operations
(other guarantors and non-guarantors) through stockholders’ equity. As this approach represents an allocation, the
provision for (benefit from) income tax allocation is considered non-cash for statement of cash flow purposes.
Following the Spin-off, the Company’s intercompany activity consists primarily of daily cash transfers, the allocation of certain
expenses and expenditures paid by the parent issuer on behalf of its subsidiaries, and the push down of investment in its subsidiaries.
The parent issuer’s investment in its subsidiaries reflects the activity of the period beginning April 29, 2016 through December 31,
2017. Likewise, the parent issuer’s equity in earnings of unconsolidated affiliates represents the Company’s earnings for the same
post-spin period.
F-50
QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
Condensed Consolidating and Combining Statement of Income (Loss)
Year Ended December 31, 2017
(In Thousands)
Operating revenues, net of contractual allowances and
discounts
Provision for bad debts
$
Net operating revenues
Operating costs and expenses:
Salaries and benefits
Supplies
Other operating expenses
Depreciation and amortization
Rent
Electronic health records incentives earned
Legal, professional and settlement costs
Impairment of long-lived assets and goodwill
Loss (gain) on sale of hospitals, net
Transaction costs related to the Spin-off
Total operating costs and expenses
Income (loss) from operations
Interest expense, net
Equity in earnings of affiliates
Income (loss) before income taxes
Provision for (benefit from) income taxes
Net income (loss)
Less: Net income (loss) attributable to noncontrolling
interests
Net income (loss) attributable to Quorum Health
Corporation
Parent
Issuer
Other
Guarantors
Non-
Guarantors
Eliminations
Consolidated
— $
—
—
1,815,355 $
215,021
1,600,334
512,300 $
40,464
471,836
— $
—
—
2,327,655
255,485
2,072,170
—
—
3,002
—
—
—
—
—
—
—
3,002
(3,002 )
124,060
15,291
(142,353 )
(28,163 )
(114,190 )
715,713
182,172
504,809
68,770
29,923
(3,681 )
6,001
47,281
—
195
1,551,183
49,151
(2,054 )
29,673
21,532
(3,508 )
25,040
319,084
68,351
115,252
13,385
20,307
(1,064 )
—
—
(5,243 )
58
530,130
(58,294 )
71
—
(58,365 )
9,806
(68,171 )
—
—
—
—
—
—
—
—
—
—
—
—
—
(44,964 )
44,964
—
44,964
1,034,797
250,523
623,063
82,155
50,230
(4,745 )
6,001
47,281
(5,243 )
253
2,084,315
(12,145 )
122,077
—
(134,222 )
(21,865 )
(112,357 )
—
—
1,833
—
1,833
$
(114,190 ) $
25,040 $
(70,004 ) $
44,964 $
(114,190 )
F-51
QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
Condensed Consolidating and Combining Statement of Income (Loss)
Year Ended December 31, 2016
(In Thousands)
Operating revenues, net of contractual allowances and
discounts
Provision for bad debts
$
Net operating revenues
Operating costs and expenses:
Salaries and benefits
Supplies
Other operating expenses
Depreciation and amortization
Rent
Electronic health records incentives earned
Legal, professional and settlement costs
Impairment of long-lived assets and goodwill
Loss (gain) on sale of hospitals, net
Transaction costs related to the Spin-off
Total operating costs and expenses
Income (loss) from operations
Interest expense, net
Equity in earnings of affiliates
Income (loss) before income taxes
Provision for (benefit from) income taxes
Net income (loss)
Less: Net income (loss) attributable to noncontrolling
interests
Net income (loss) attributable to Quorum Health
Corporation
Parent
Issuer
Other
Guarantors
Non-
Guarantors
Eliminations
Consolidated
— $
—
—
1,811,586 $
211,921
1,599,665
607,467 $
68,665
538,802
— $
—
—
2,419,053
280,586
2,138,467
—
—
—
—
—
—
—
—
—
—
—
—
78,266
258,078
(336,344 )
(2,318 )
(334,026 )
715,925
180,098
505,778
97,318
27,741
(8,948 )
7,342
242,685
—
4,105
1,772,044
(172,379 )
32,541
58,605
(263,525 )
(35,576 )
(227,949 )
341,194
78,541
140,024
19,970
22,142
(2,534 )
—
49,185
2,150
1,383
652,055
(113,253 )
2,633
—
(115,886 )
(15,981 )
(99,905 )
—
—
—
—
—
—
—
—
—
—
—
—
—
(316,683 )
316,683
—
316,683
1,057,119
258,639
645,802
117,288
49,883
(11,482 )
7,342
291,870
2,150
5,488
2,424,099
(285,632 )
113,440
—
(399,072 )
(53,875 )
(345,197 )
—
—
2,491
—
2,491
$
(334,026 ) $
(227,949 ) $
(102,396 ) $
316,683 $
(347,688 )
F-52
QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
Condensed Consolidating and Combining Statement of Income (Loss)
Year Ended December 31, 2015
(In Thousands)
Parent
Issuer
Other
Guarantors
Non-
Guarantors
Eliminations
Consolidated
Operating revenues, net of contractual allowances and
discounts
Provision for bad debts
$
Net operating revenues
Operating costs and expenses:
Salaries and benefits
Supplies
Other operating expenses
Depreciation and amortization
Rent
Electronic health records incentives earned
Impairment of long-lived assets
Transaction costs related to the Spin-off
Total operating costs and expenses
Income (loss) from operations
Interest expense, net
Equity in earnings of affiliates
Income (loss) before income taxes
Provision for (benefit from) income taxes
Net income (loss)
Less: Net income (loss) attributable to noncontrolling
interests
Net income (loss) attributable to Quorum Health
Corporation
$
— $
—
—
1,833,226 $
204,968
1,628,258
612,632 $
53,552
559,080
— $
—
—
2,445,858
258,520
2,187,338
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
687,596
177,421
507,514
105,320
27,871
(21,001 )
13,000
12,161
1,509,882
118,376
86,363
(16,857 )
48,870
16,904
31,966
329,100
72,371
126,719
22,681
20,858
(4,778 )
—
4,176
571,127
(12,047 )
11,927
—
(23,974 )
(13,600 )
(10,374 )
—
—
—
—
—
—
—
—
—
—
—
16,857
(16,857 )
—
(16,857 )
1,016,696
249,792
634,233
128,001
48,729
(25,779 )
13,000
16,337
2,081,009
106,329
98,290
—
8,039
3,304
4,735
—
(621 )
4,019
—
3,398
— $
32,587 $
(14,393 ) $
(16,857 ) $
1,337
F-53
QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
Condensed Consolidating and Combining Statement of Comprehensive Income (Loss)
Year Ended December 31, 2017
(In Thousands)
Parent
Issuer
Other
Guarantors
Non-
Guarantors Eliminations Consolidated
Net income (loss)
$ (114,190 )
$
25,040
$
(68,171 )
$
44,964
$ (112,357 )
Amortization and recognition of unrecognized pension cost
components, net of income taxes
Comprehensive income (loss)
Less: Comprehensive income (loss) attributable to noncontrolling
interests
Comprehensive income (loss) attributable to Quorum Health
Corporation
804
(113,386 )
804
25,844
—
(68,171 )
(804 )
44,160
804
(111,553 )
—
—
1,833
—
1,833
$ (113,386 )
$
25,844
$
(70,004 )
$
44,160
$ (113,386 )
F-54
QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
Condensed Consolidating and Combining Statement of Comprehensive Income (Loss)
Year Ended December 31, 2016
(In Thousands)
Parent
Issuer
Other
Guarantors
Non-
Guarantors Eliminations Consolidated
Net income (loss)
$ (334,026 )
$ (227,949 )
$
(99,905 )
$ 316,683
$ (345,197 )
Amortization and recognition of unrecognized pension cost
components, net of income taxes
Comprehensive income (loss)
Less: Comprehensive income (loss) attributable to noncontrolling
interests
Comprehensive income (loss) attributable to Quorum Health
Corporation
(2,760 )
(336,786 )
(2,760 )
(230,709 )
—
(99,905 )
2,760
319,443
(2,760 )
(347,957 )
—
—
2,491
—
2,491
$ (336,786 )
$ (230,709 )
$ (102,396 )
$ 319,443
$ (350,448 )
F-55
QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
Condensed Consolidating and Combining Statement of Comprehensive Income (Loss)
Year Ended December 31, 2015
(In Thousands)
Parent
Issuer
Other
Guarantors
Non-
Guarantors Eliminations Consolidated
Net income (loss)
$
—
$
31,966
$
(10,374 )
$
(16,857 )
$
4,735
Amortization and recognition of unrecognized pension cost
components, net of income taxes
Comprehensive income (loss)
Less: Comprehensive income (loss) attributable to noncontrolling
interests
Comprehensive income (loss) attributable to Quorum Health
Corporation
$
—
—
—
—
31,966
—
(10,374 )
—
(16,857 )
—
4,735
(621 )
4,019
—
3,398
—
$
32,587
$
(14,393 )
$
(16,857 )
$
1,337
F-56
QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
Condensed Consolidating Balance Sheet
December 31, 2017
(In Thousands)
Parent
Issuer
Other
Guarantors
Non-
Guarantors
Eliminations
Consolidated
ASSETS
Current assets:
Cash and cash equivalents
Patient accounts receivable, net of allowance for doubtful
accounts
Inventories
Prepaid expenses
Due from third-party payors
Current assets of hospitals held for sale
Other current assets
Total current assets
Intercompany receivable
Property and equipment, net
Goodwill
Intangible assets, net
Long-term assets of hospitals held for sale
Other long-term assets
Net investment in subsidiaries
Total assets
LIABILITIES AND EQUITY
Current liabilities:
Current maturities of long-term debt
Accounts payable
Accrued liabilities:
Accrued salaries and benefits
Accrued interest
Due to third-party payors
Current liabilities of hospitals held for sale
Other current liabilities
Total current liabilities
Long-term debt
Intercompany payable
Deferred income tax liabilities, net
Other long-term liabilities
Total liabilities
Redeemable noncontrolling interests
Equity:
Quorum Health Corporation stockholders' equity:
Preferred stock
Common stock
Additional paid-in capital
Accumulated other comprehensive income (loss)
Accumulated deficit
Total Quorum Health Corporation stockholders'
equity
Nonredeemable noncontrolling interests
Total equity
Total liabilities and equity
$
1,051
$
4,222
$
344
$
—
$
5,617
$
$
—
—
33
—
—
—
1,084
3
—
—
—
—
—
1,488,021
1,489,108
—
132
$
$
—
10,466
—
—
516
11,114
1,188,224
182,555
7,774
—
1,389,667
—
—
3
549,610
(1,956 )
(448,216 )
262,690
43,276
16,980
93,323
8,112
32,867
461,470
402,817
543,073
243,618
58,240
7,730
74,918
—
1,791,866
1,434
146,193
$
$
56,522
—
46,381
2,577
30,664
283,771
23,809
173,341
—
195,132
676,053
—
80,455
10,183
4,154
3,879
—
14,573
113,588
172,098
132,206
165,611
6,610
4
20,689
—
610,806
421
24,925
$
$
21,281
—
1,324
—
12,507
60,458
2
219,022
—
31,100
310,582
2,325
—
—
—
—
—
—
—
(574,918 )
—
—
—
—
—
(1,488,021 )
(2,062,939 )
—
—
$
$
—
—
—
—
—
—
—
(574,918 )
—
(88,278 )
(663,196 )
—
—
—
1,291,581
(1,956 )
(173,812 )
—
—
471,767
—
(187,837 )
—
—
(1,763,348 )
1,956
361,649
343,145
53,459
21,167
97,202
8,112
47,440
576,142
—
675,279
409,229
64,850
7,734
95,607
—
1,828,841
1,855
171,250
77,803
10,466
47,705
2,577
43,687
355,343
1,212,035
—
7,774
137,954
1,713,106
2,325
—
3
549,610
(1,956 )
(448,216 )
99,441
—
99,441
1,489,108
$
1,115,813
—
1,115,813
1,791,866
$
$
283,930
13,969
297,899
610,806
$
(1,399,743 )
—
(1,399,743 )
(2,062,939 )
$
99,441
13,969
113,410
1,828,841
F-57
QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
Condensed Consolidating Balance Sheet
December 31, 2016
(In Thousands)
Parent
Issuer
Other
Guarantors
Non-
Guarantors
Eliminations
Consolidated
ASSETS
Current assets:
Cash and cash equivalents
Patient accounts receivable, net of allowance for doubtful
accounts
Inventories
Prepaid expenses
Due from third-party payors
Current assets of hospitals held for sale
Other current assets
Total current assets
Intercompany receivable
Property and equipment, net
Goodwill
Intangible assets, net
Long-term assets of hospitals held for sale
Other long-term assets
Net investment in subsidiaries
Total assets
LIABILITIES AND EQUITY
Current liabilities:
Current maturities of long-term debt
Accounts payable
Accrued liabilities:
Accrued salaries and benefits
Accrued interest
Due to third-party payors
Current liabilities of hospitals held for sale
Other current liabilities
Total current liabilities
Long-term debt
Intercompany payable
Deferred income tax liabilities, net
Other long-term liabilities
Total liabilities
Redeemable noncontrolling interests
Equity:
Quorum Health Corporation stockholders' equity:
Preferred stock
Common stock
Additional paid-in capital
Accumulated other comprehensive income (loss)
Accumulated deficit
Total Quorum Health Corporation stockholders'
equity
Nonredeemable noncontrolling interests
Total equity
Total liabilities and equity
$
21,609
$
3,498
$
348
$
—
$
25,455
103,530
11,806
5,154
6,442
—
16,269
143,549
84,827
109,443
164,400
11,578
—
15,866
—
529,663
304
22,005
$
$
28,907
—
1,942
—
7,266
60,424
407
90,286
—
22,651
173,768
6,807
—
—
412,705
—
(78,058 )
334,647
14,441
349,088
529,663
—
—
—
—
—
—
—
(210,865 )
—
—
—
—
—
(1,485,213 )
(1,696,078 )
—
—
$
$
—
—
—
—
—
—
—
(210,865 )
—
(58,605 )
(269,470 )
—
—
—
(1,746,052 )
2,760
316,684
380,685
58,124
23,028
116,235
1,502
57,942
662,971
—
733,900
416,833
84,982
6,851
88,833
—
1,994,370
5,683
169,684
98,803
19,915
42,537
492
53,268
390,382
1,241,142
—
31,474
108,996
1,771,994
6,807
—
3
537,911
(2,760 )
(334,026 )
(1,426,608 )
—
(1,426,608 )
(1,696,078 )
$
201,128
14,441
215,569
1,994,370
$
$
$
—
—
—
—
—
—
21,609
3
—
—
—
—
—
1,485,213
1,506,825
3,819
158
$
$
—
19,915
—
—
—
23,892
1,215,836
34,495
31,474
—
1,305,697
—
—
3
537,911
(2,760 )
(334,026 )
277,155
46,318
17,874
109,793
1,502
41,673
497,813
126,035
624,457
252,433
73,404
6,851
72,967
—
1,653,960
1,560
147,521
$
$
69,896
—
40,595
492
46,002
306,066
24,899
86,084
—
144,950
561,999
—
—
—
1,333,347
(2,760 )
(238,626 )
201,128
—
201,128
1,506,825
$
1,091,961
—
1,091,961
1,653,960
$
$
F-58
QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
Condensed Consolidating and Combining Statement of Cash Flows
Year Ended December 31, 2017
(In Thousands)
Parent
Issuer
Other
Guarantors
Non-
Guarantors Eliminations Consolidated
Net cash provided by (used in) operating activities
$
(121,079 ) $
206,248 $
(18,199 ) $
— $
66,970
Cash flows from investing activities:
Capital expenditures for property and equipment
Capital expenditures for software
Acquisitions, net of cash acquired
Proceeds from the sale of hospitals
Changes in intercompany balances with affiliates, net
Net cash provided by (used in) investing activities
—
—
—
—
—
—
(24,777 )
(6,090 )
(29 )
11,925
(183,829 )
(202,800 )
(36,753 )
(808 )
(1,891 )
20,156
—
(19,296 )
—
—
—
—
183,829
183,829
(61,530 )
(6,898 )
(1,920 )
32,081
—
(38,267 )
Cash flows from financing activities:
Borrowings under revolving credit facilities
Repayments under revolving credit facilities
Borrowings of long-term debt
Repayments of long-term debt
Payments of debt issuance costs
Cancellation of restricted stock awards for payroll tax withholdings
on vested shares
Cash distributions to noncontrolling investors
Purchases of shares from noncontrolling investors
Changes in intercompany balances with affiliates, net
Net cash provided by (used in) financing activities
508,000
(508,000 )
—
(37,261 )
(3,119 )
—
—
—
140,901
100,521
—
—
376
(1,592 )
—
(1,508 )
—
—
—
(2,724 )
—
—
—
(342 )
—
—
—
—
—
—
508,000
(508,000 )
376
(39,195 )
(3,119 )
—
(3,851 )
(1,244 )
42,928
37,491
—
—
—
(183,829 )
(183,829 )
(1,508 )
(3,851 )
(1,244 )
—
(48,541 )
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
(20,558 )
21,609
1,051 $
$
724
3,498
4,222 $
(4 )
348
344 $
—
—
— $
(19,838 )
25,455
5,617
F-59
QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
Condensed Consolidating and Combining Statement of Cash Flows
Year Ended December 31, 2016
(In Thousands)
Parent
Issuer
Other
Guarantors
Non-
Guarantors Eliminations Consolidated
Net cash provided by (used in) operating activities
$
(66,266 ) $
173,382 $
(26,030 ) $
— $
81,086
Cash flows from investing activities:
Capital expenditures for property and equipment
Capital expenditures for software
Acquisitions, net of cash acquired
Proceeds from the sale of hospitals
Proceeds from asset sales
Changes in intercompany balances with affiliates, net
Net cash provided by (used in) investing activities
Cash flows from financing activities:
—
—
—
—
—
—
—
(73,327 )
(3,854 )
(549 )
—
1,498
(116,674 )
(192,906 )
(6,593 )
(3,415 )
(236 )
13,746
(416 )
—
3,086
—
—
—
—
—
116,674
116,674
(79,920 )
(7,269 )
(785 )
13,746
1,082
—
(73,146 )
Borrowings under revolving credit facilities
Repayments under revolving credit facilities
Borrowings of long-term debt
Repayments of long-term debt
Increase (decrease) in Due to Parent, net
Payments of debt issuance costs
Cash paid to Parent related to the Spin-off
Cancellation of restricted stock awards for payroll tax withholdings
on vested shares
Cash distributions to noncontrolling investors
Purchases of shares from noncontrolling investors
Changes in intercompany balances with affiliates, net
Net cash provided by (used in) financing activities
50,000
(50,000 )
1,255,464
(11,581 )
—
(29,146 )
(1,217,336 )
—
—
—
90,474
87,875
—
—
740
(3,025 )
24,796
—
—
(13 )
—
—
—
22,498
—
—
77
(616 )
—
—
—
50,000
—
—
(50,000 )
— 1,256,281
(15,222 )
—
24,796
—
—
(29,146 )
— (1,217,336 )
—
(2,850 )
(101 )
26,200
22,710
—
—
—
(116,674 )
(116,674 )
(13 )
(2,850 )
(101 )
—
16,409
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
21,609
—
21,609 $
2,974
524
3,498 $
$
(234 )
582
348 $
—
—
— $
24,349
1,106
25,455
F-60
QUORUM HEALTH CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
Condensed Consolidating and Combining Statement of Cash Flows
Year Ended December 31, 2015
(In Thousands)
Parent
Issuer
Other
Guarantors
Non-
Guarantors Eliminations Consolidated
Net cash provided by (used in) operating activities
$
— $
87,313 $
(44,424 ) $
— $
42,889
Cash flows from investing activities:
Capital expenditures for property and equipment
Capital expenditures for software
Acquisitions, net of cash acquired
Proceeds from asset sales
Other investing activities
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Borrowings of long-term debt
Repayments of long-term debt
Increase (decrease) in Due to Parent, net
Increase (decrease) in receivables facility, net
Cash distributions to noncontrolling investors
Purchases of shares from noncontrolling investors
Net cash provided by (used in) financing activities
—
—
—
—
—
—
(37,321 )
(6,935 )
(3,467 )
3,114
(1,416 )
(46,025 )
(22,134 )
(1,910 )
(4,552 )
—
(3,971 )
(32,567 )
—
—
—
—
—
—
—
217
(1,043 )
152,971
(194,835 )
—
(526 )
(43,216 )
155
(520 )
109,804
(29,939 )
(1,623 )
(411 )
77,466
—
—
—
—
—
—
(59,455 )
(8,845 )
(8,019 )
3,114
(5,387 )
(78,592 )
—
—
—
—
—
—
—
372
(1,563 )
262,775
(224,774 )
(1,623 )
(937 )
34,250
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
—
—
— $
(1,928 )
2,452
524 $
475
107
582 $
—
—
— $
(1,453 )
2,559
1,106
$
F-61
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EXHIBIT 10.3
AMENDMENT NO. 2 dated as of March 14, 2018 (this “Amendment”), to the CREDIT
AGREEMENT dated as of April 29, 2016, as amended by Amendment No. 1 to the Credit
Agreement, dated as of April 11, 2017 (as amended, supplemented or otherwise modified
the “Credit Agreement”), among QUORUM HEALTH
through
CORPORATION, a Delaware corporation (the “Borrower”), the lenders party thereto (the
“Lenders”) and CREDIT SUISSE AG, CAYMAN ISLANDS BRANCH, as administrative
agent (in such capacity, the “Administrative Agent”) and as collateral agent for the Lenders.
the date hereof,
PRELIMINARY STATEMENT
A. Pursuant to the Credit Agreement, the Lenders have extended, and have agreed
to extend, credit to the Borrower.
B. The Borrower and the Lenders desire that certain provisions of the Credit
Agreement be amended as provided herein.
C. The Borrower and the Subsidiary Guarantors are party to one or more of the
Security Documents, pursuant to which, among other things, the Subsidiary Guarantors
Guaranteed the Obligations of the Borrower under the Credit Agreement and provided
security therefor.
Accordingly, in consideration of the mutual agreements herein contained and for
other good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
SECTION 1. Defined Terms. Capitalized terms used but not otherwise defined
herein (including the preliminary statement hereto) shall have the meanings assigned thereto in
the Credit Agreement. The provisions of Section 1.02 of the Credit Agreement are hereby
incorporated by reference herein, mutatis mutandis.
SECTION 2. Amendments to the Credit Agreement. Subject to the satisfaction
of the conditions set forth in Section 4 hereof, the Credit Agreement is hereby amended as
follows, effective as of the Amendment No. 2 Effective Date (as defined below):
(a) Section 1.01 is hereby amended by adding the following defined terms in the
appropriate alphabetical order:
“Amendment No. 2” shall mean that certain Amendment No. 2, dated as of the
Amendment No. 2 Effective Date among the Borrower, the Lenders party thereto
and the Administrative Agent.
“Amendment No. 2 Disclosure Schedule” shall mean the Disclosure Schedule
delivered to the Administrative Agent on the Amendment No. 2 Effective Date in
connection with Amendment No. 2 to this Agreement.
“Amendment No. 2 Effective Date” shall mean March 14, 2018.
“TSA” shall have the meaning assigned to such term in the definition of
Consolidated EBITDA.
“TSA Settlement” shall mean any settlement of the pending dispute before the
American Arbitration Association commenced on August 4, 2017 by CHS against
the Borrower and its Subsidiaries with respect to payments under the transition
services agreements by and between CHS and the Borrower and its Subsidiaries.
(b) The definition of “Applicable Percentage” in Section 1.01 of the Credit
Agreement is hereby amended and restated in its entirety as follows:
“Applicable Percentage” shall mean, for any day, (a) with respect to the
Revolving Credit Commitment Fee, 0.50% per annum (the “Revolving Credit
Commitment Fee Rate”), (b) with respect to any Eurodollar Term Loan or ABR
Term Loan, (i) on or prior to the date that is 18 months after the Amendment No.
1 Effective Date, 6.75% per annum and 5.75% per annum, respectively, and (ii)
following the date that is 18 months after the Amendment No. 1 Effective Date,
the applicable percentage set forth below under the caption “Eurodollar Spread—
Term Loans” or “ABR Spread—Term Loans”, as the case may be and (c) with
respect to any Eurodollar Revolving Loan and ABR Revolving Loan, 2.75% per
annum and 1.75% per annum, respectively.
Secured Net Leverage
Ratio
Eurodollar Spread—Term
Loans
ABR Spread—Term Loans
Category 1
> 3.50 to 1.00
Category 2
≤ 3.50 to 1.00 and
> 3.25 to 1.00
Category 3
≤ 3.25 to 1.00
6.75%
6.25%
6.00%
5.75%
5.25%
5.00%
Each change in the Applicable Percentage resulting from a change in the Secured
Net Leverage Ratio shall be effective with respect to all applicable Loans
outstanding on and after the date of delivery to the Administrative Agent of the
financial statements and certificates required by Section 5.04(a) or (b) and
Section 5.04(c), respectively, indicating such change until the date immediately
preceding the next date of delivery of such financial statements and certificates
indicating another such change. Notwithstanding the foregoing, from and after
the date that is 18 months after the Amendment No. 1 Effective Date, subject to
the immediately succeeding sentence, the Secured Net Leverage Ratio shall be
determined on the basis of the financial statements and certificates most recently
delivered pursuant to Section 5.04(a) or (b) and Section 5.04(c), respectively,
prior to such date, and the Applicable Percentage resulting from such Secured Net
2
Leverage Ratio shall be effective until any such change is required pursuant to the
immediately preceding sentence. In addition, at any time during which the
Borrower has failed to deliver the financial statements and certificates required by
Section 5.04(a) or (b) and Section 5.04(c), respectively (until the time of the
delivery thereof), the Secured Net Leverage Ratio shall be deemed to be in
Category 1 for purposes of determining the Applicable Percentage.
(c) The definition of “Asset Sale Reinvestment Trigger Date” in Section 1.01 of
the Credit Agreement is hereby deleted in its entirety.
(d) The definition of “Consolidated EBITDA” in Section 1.01 of the Credit
Agreement is hereby amended and restated in its entirety as follows:
“Consolidated EBITDA” shall mean, for any period, Consolidated Net Income
for such period plus (a) without duplication and (except in the case of
clauses (a)(x), (a)(xiii), (a)(xiv), (a)(xv) and (a)(xvi)(B) below) to the extent
deducted (and not added back) in determining such Consolidated Net Income, the
sum of:
(i) interest expense (net of interest income), including amortization and
write offs of debt discount and debt issuance costs and commissions,
discounts and other fees and charges associated with (x) letters of credit,
(y) obtaining or unwinding Hedging Agreements or (z) surety bonds for
financing activities, in each case for such period,
(ii) provision for taxes based on income, profits or capital and franchise
taxes and gross receipts taxes, including Federal, foreign, state, franchise,
excise and similar taxes and foreign withholding taxes paid or accrued
during such period, including any penalties and interest relating to any tax
examinations for such period,
(iii) depreciation and amortization expenses including acceleration thereof
and including the amortization of the increase in inventory resulting from
the application of Statement of Financial Accounting Standards No. 141
(“FASB 141”) for transactions contemplated hereby, including Permitted
Acquisitions, for such period,
(iv) non-cash compensation expenses arising from the sale of Equity
Interests, the granting of options to purchase Equity Interests, the granting
of appreciation rights in respect of Equity Interests and similar
arrangements for such period,
(v) the excess of the expense in respect of post-retirement benefits and
post-employment benefits accrued under Statement of Financial
Accounting Standards No. 106 (“FASB 106”) and Statement of Financial
Accounting Standards No. 112 (“FASB 112”) over the cash expense in
3
respect of such post-retirement benefits and post-employment benefits for
such period,
(vi) minority interest (to the extent distributions are not required to be
made and are not made in respect thereof),
(vii) upfront fees or charges arising from any Permitted Receivables
Transaction for such period, and any other amounts for such period
comparable to or in the nature of interest under any Permitted Receivables
Transaction, and losses on dispositions of Receivables and related assets
in connection with any Permitted Receivables Transaction for such period,
(viii) fees and expenses for such period incurred or paid in connection
with the Transactions,
(ix) to the extent covered by insurance and actually reimbursed, or, so long
as the Borrower has made a determination that such amount is reasonably
likely to be reimbursed by the insurer and only to the extent that such
amount is (A) not denied by the applicable carrier in writing within
180 days and (B) in fact reimbursed within 365 days of the date of the
relevant event (with a deduction for any amount so added back to the
extent not so reimbursed within such 365 days), expenses with respect to
liability or casualty events,
(x) proceeds of received business interruption insurance,
(xi) any fees and expenses incurred during such period in connection with
any acquisition, investment, recapitalization, asset disposition, facility
closure, issuance or repayment of debt, issuance of Equity Interests,
Permitted Receivables Transaction, refinancing transaction or amendment
or other modification of any debt instrument (in each case, including any
such transaction undertaken but not completed),
(xii) any (w) severance costs, relocation costs, integration and facilities
opening costs, signing costs, signing bonuses, retention or completion
bonuses and transition costs incurred during such period, (x) cash
restructuring related or nonrecurring cash merger costs and expenses
incurred during such period as a result of any acquisition, investment,
recapitalization, or asset disposition or facility closure permitted
hereunder; provided, that the aggregate amount added to or included in
Consolidated EBITDA pursuant to this subclause (x) for any period of
four consecutive fiscal quarters shall not exceed an amount equal to 20%
of Consolidated EBITDA, calculated prior to giving effect to any amounts
added to or included in Consolidated EBITDA pursuant to this subclause
(x) and prior to giving effect to any additions to Consolidated EBITDA in
respect of synergies for such period pursuant to Section 1.03(c), (y) other
nonrecurring cash losses and charges for such period and (z) fees,
4
expenses and charges incurred during such period in respect of litigation
(including legal fees) against the Borrower or any of its Subsidiaries,
(xiii) (A) solely with respect to the fiscal period ending on December 31,
2017, an amount equal to $2,324,000 in respect of anticipated cost savings
under the TSA (as defined below); provided that such amount shall not be
included in the determination of Consolidated EBITDA for any fiscal
period other than the four fiscal quarter period ending on December 31,
2017, and (B) solely with respect to the fiscal periods ending on
September 30, 2018, December 31, 2018, March 31, 2019, June 30, 2019,
September 30, 2019 and December 31, 2019, an amount equal to the cost
savings and synergies (net of continuing associated expenses) that are
reasonably identifiable, reasonably supportable, are expected to have a
continuing impact and have been realized or are reasonably expected to be
realized during the applicable fiscal quarter as a result of the expected
transition of services under the Billing and Collection Agreement dated as
of the Closing Date among CHS and its subsidiaries and the Borrower and
its Subsidiaries (the “TSA”) (which cost savings and synergies shall be
calculated on a pro forma basis as if such Billing and Collection
Agreement had been transitioned as of July 1, 2018); provided that all
such adjustments shall be set forth in a reasonably detailed certificate of a
Financial Officer of the Borrower; provided further that irrespective of the
amount of such cost savings and synergies actually identified with respect
to any fiscal quarter, such amount shall be deemed to be not be less than
(i) for the four fiscal quarter period ending September 30, 2018, $500,000,
(ii) for the four quarter period ending December 31, 2018, $2,800,000,
(iii) for the four quarter period ending March 31, 2019, $5,900,000,
(iv) for the four quarter period ending June 30, 2019, $9,300,000, (v) for
the four quarter period ending September 30, 2019, $12,400,000 and
(vi) for the four quarter period ending December 31, 2019, $13,600,000;
provided further that, for the avoidance of doubt, (x) the applicable
amount added to Consolidated EBITDA in respect of any four quarter
period shall be included in the calculation of Consolidated EBITDA solely
for such four quarter period (i.e., the amount added for the four quarter
period ending December 31, 2018, shall not be included in the
determination of Consolidated EBITDA for the four quarter periods
ending March 31, 2019, June 30, 2019, September 30, 2019, and
December 31, 2019) and (y) no such amounts shall be included in the
determination of Consolidated EBITDA for any period ending after
December 31, 2019 (other than cost savings and synergies actually
realized),
(xiv) for each four quarter period commencing with the four quarter period
ending September 30, 2019 through the four quarter period ending June
30, 2020, an aggregate amount equal to $22,000,000 in respect of the
California Hospital Quality Assurance Fee program (net of any amounts
received or accrued and otherwise already reflected in the determination of
5
Consolidated EBITDA in respect of the California Hospital Quality
Assurance Fee program); provided that if any Hospital located or
operating in California is closed, sold, transferred, leased or otherwise
disposed of after the Amendment No. 2 Effective Date, the amount
permitted to be added back pursuant to this subclause (xiv) shall be
reduced on a proportionate basis by amount of the anticipated California
Hospital Quality Assurance Fee expected to be received in respect of such
Hospital(s) in relation to all Hospitals as of such date as determined in
good faith by the Borrower;
(xv) solely with respect to (1) the four fiscal quarter period ending on
December 31, 2017, with respect to each Hospital set forth on the
Amendment No. 1 Disclosure Schedule that has been designated by the
Borrower in good faith as Held for Sale and notified to the Administrative
Agent and (2) the four fiscal quarter periods ending on March 31, 2018,
June 30, 2018, September 30, 2018, December 31, 2018, and March 31,
2019, with respect to each Hospital set forth on the Amendment No. 2
Disclosure Schedule that has been designated by the Borrower in good
faith as Held for Sale and notified to the Administrative Agent, an amount
equal to the amount set forth on each respective schedule for each such
Hospital; provided that (A) no amount shall be added pursuant to this
clause (xv) with respect to any Hospital that has actually been sold, closed
or otherwise disposed of prior to the end of such period and (B) no amount
shall be added pursuant to this clause (xv) for any fiscal quarter ending
after December 31, 2017 with respect to any Hospital for more than five
consecutive four fiscal quarter periods ending after December 31, 2017
(i.e. if the amount for a specified Hospital is included for the four fiscal
quarter period ended March 31, 2018, it may not be included for any four
fiscal quarter period ended after March 31, 2019); provided, further,
however, that with respect to any Hospital for which an amount is
included in Consolidated EBITDA pursuant to this clause (xv) for five
consecutive fiscal quarters ending after December 31, 2017, if such
Hospital is closed, sold, transferred, leased or otherwise disposed of after
the end of the immediately subsequent fiscal quarter but prior to the date
on which a compliance certificate for such fiscal quarter is delivered
pursuant to Section 5.04(c), then such Hospital shall be deemed to have
been closed, sold, transferred, leased or otherwise disposed of as of the
last day of such fiscal quarter for purposes of Section 1.03 (i.e., if an
amount is included in Consolidated EBITDA pursuant to this clause (XV)
for five fiscal quarters ending March 31, 2019, and such Hospital is
closed, sold, transferred, leased or otherwise disposed of between June 30,
2019 and the date on which the compliance certificate is delivered for the
fiscal quarter ended June 30, 2019, such Hospital will be deemed to have
been closed, sold, transferred, leased or otherwise disposed of as of June
30, 2019), and
6
(xvi) (A) any other non-cash charges, write-downs, expenses, losses or
items (including, but not limited to, medical malpractice and workers
compensation reserves and similar reserves) reducing such Consolidated
Net Income during such period including any impairment charges or the
impact of purchase accounting and including, for avoidance of any doubt,
all non-cash charges (including charges to write down accounts receivable
to net realizable value) associated with hospitals that have been sold,
closed or otherwise disposed of and (B) the $27,711,000 charge to patient
accounts receivable recorded in the fiscal quarter ended December 31,
2017, which, for the avoidance of doubt, shall only be included in periods
that include the fiscal period ended December 31, 2017; provided that
(1) if any non-cash charge or other item referred to in this clause (xvi)
represents an accrual or reserve for potential cash items in any future
period, the cash payment in respect thereof in such future period shall be
subtracted from Consolidated EBITDA in such future period to such
extent paid and (2) except as set forth in clause (B) above, such non-cash
charges, write-downs, expenses, losses or items may only be added back
pursuant to this clause (xvi) to the extent reflected as a cost or expense on
the Borrower’s Condensed Consolidated and Combined Statements of
Income (Loss), and minus
(b) without duplication, (i) non-recurring gains (including any non-cash gains as a
result of the consummation of any Offer) and (ii) all cash payments made during
such period on account of reserves, restructuring charges and other non-cash
charges added to Consolidated Net Income pursuant to clause (a)(xvi) (other than
any such non-cash charges that if originally paid in cash and so not taken as non-
cash charges would have been added to Consolidated Net Income above pursuant
to clause (a)(xii)) in a previous period.
Notwithstanding anything to the contrary set forth above, but subject to any
adjustment set forth above with respect to any transactions occurring after the
Amendment No. 2 Effective Date, Consolidated EBITDA shall be deemed to be
$44,143,000, $50,999,000 and $50,209,000 for the fiscal quarters ended March
31, 2017, June 30, 2017 and September 30, 2017, respectively as may be adjusted
on a Pro Forma Basis, without duplication. For the avoidance of doubt, the
aforementioned amounts include any and all applicable addbacks permitted by
Amendment No. 1 and Amendment No. 2, subject to the foregoing sentence.
(e) The definition of “Net Cash Proceeds” in Section 1.01 of the Credit
Agreement is hereby amended and restated in its entirety as follows:
“Net Cash Proceeds” shall mean (a) with respect to any Asset Sale (other than
Receivables sold in a Permitted Receivables Transaction), the aggregate cash
proceeds received in respect of such Asset Sale (including, for the avoidance of
doubt, any deferred amounts), and any cash payments received in respect of
promissory notes or other non-cash consideration delivered in respect of such
Asset Sale, net of (without duplication) (i) the reasonable expenses (including
7
legal fees and brokers’ and underwriters’ commissions paid to third parties which
are not Subsidiaries or Affiliates of the Borrower) incurred in effecting such Asset
Sale, (ii) any taxes reasonably attributable to such Asset Sale and, in the case of
an Asset Sale in a foreign jurisdiction, any taxes reasonably attributable to the
repatriation of the proceeds of such Asset Sale reasonably estimated by the
Borrower to be actually payable, (iii) any amounts payable to a Governmental
Authority triggered as a result of any such Asset Sale, (iv) any Indebtedness or
Contractual Obligation of the Borrower and the Subsidiaries (other than the
Loans, other Obligations and any Other Senior Secured Debt) required to be paid
or retained in connection with such Asset Sale or to the extent such Indebtedness
is required to be repaid because the asset sold is removed from a borrowing base
supporting such Indebtedness and (v) the aggregate amount of reserves required
in the reasonable judgment of the Borrower or the applicable Subsidiary to be
maintained on the books of the Borrower or such Subsidiary in order to pay
contingent liabilities with respect to such Asset Sale (so long as amounts deducted
from aggregate proceeds pursuant to this clause (v) and not actually paid by the
Borrower or any of the Subsidiaries in liquidation of such contingent liabilities
shall be deemed to be Net Cash Proceeds received at such time as such contingent
liabilities shall cease to be obligations of the Borrower or any of the Subsidiaries);
(b) with respect to any issuance or incurrence of Indebtedness (other than
Indebtedness incurred pursuant to any Receivables Transaction), the cash
proceeds thereof, net of all taxes and customary fees, commissions, costs and
other expenses incurred in connection therewith; and (c) with respect to any sale
of Receivables in a Receivables Transaction, the initial cash proceeds thereof (and
any subsequent cash proceeds therefrom to the extent resulting from an increase
in the Receivables Transaction Amount above the highest previous Receivables
Transaction Amount balance), in each case received by the applicable originators
net of all taxes and customary fees, commissions, costs and other expenses
incurred in connection therewith.
(f) Section 2.09(c) of the Credit Agreement is hereby amended and restated in its
entirety as follows:
(c) On the Amendment No. 2 Effective Date, without any further action of any
party hereto and to the extent not previously reduced pursuant to Section 2.09(b),
the Revolving Credit Commitments of the Revolving Credit Lenders will be
reduced, on a pro rata basis among such Revolving Credit Lenders, to an
aggregate total of $62,500,000. If, after giving effect to such reduction of the
Revolving Credit Commitments on the Amendment No. 2 Effective Date, the
Aggregate Revolving Credit Exposure would exceed the Total Revolving Credit
Commitment, then the Borrower shall, on such date, repay or prepay Revolving
Credit Borrowings and, after the Revolving Credit Borrowings shall have been
repaid or prepaid in full, replace or cause to be canceled (or make other
arrangements satisfactory to the Administrative Agent and the Issuing Banks with
respect to) Letters of Credit in an amount sufficient to eliminate such excess.
8
(g) Section 2.12(d) of the Credit Agreement is hereby amended and restated in its
entirety as follows:
(d) If, prior to the date that is 24 months after the Amendment No. 1 Effective
Date, (i) the Borrower prepays all or any portion of the Term Loans out of the
proceeds of a substantially concurrent issuance or incurrence of broadly
syndicated term loans secured by the Collateral on a pari passu basis with the
Term Loans and the Effective Yield of such secured term loan financing is less
than the Effective Yield of the Term Loans so prepaid or (ii) a Term Lender must
assign its Term Loans pursuant to Section 2.21 as a result of its failure to consent
to an amendment that would reduce the Effective Yield then in effect with respect
to such Term Loans then in each case the aggregate principal amount so prepaid
or assigned will be subject to a fee payable by the Borrower, in each case equal to
the Specified Percentage of the principal amount thereof; provided that the
primary purpose of such prepayment or amendment was to reduce the Effective
Yield applicable to the Term Loans; provided, further, that this Section 2.12(d)
shall not apply to any prepayment of the Term Loans upon the occurrence of a
Change in Control.
For purposes of this Section 2.12(d), the “Specified Percentage” shall mean, for
any date prior to the date that is 18 months after the Amendment No. 1 Effective
Date, 2.0%, and for any date that is on or after the date that is 18 months after the
Amendment No. 1 Effective Date and prior to the date that is 24 months after the
Amendment No. 1 Effective Date, 1.0%.
(h) Section 2.13(b) of the Credit Agreement is hereby amended and restated in its
entirety as follows:
(b) (i) Not later than the fifth Business Day after the receipt of Net Cash Proceeds
in respect of any Asset Sale (other than, for the avoidance of doubt, sales of
Receivables in a Permitted Receivables Transaction), the Borrower shall apply
100% of such Net Cash Proceeds received (and not yet used to prepay Term
Loans pursuant to this Section 2.13(b)) to prepay outstanding Term Loans in
accordance with Section 2.13(g) and (ii) not later than the fifth Business Day after
the receipt of any “net cash proceeds” in respect of the TSA Settlement (with “net
cash proceeds”, for purposes of this clause (ii) to be defined as the aggregate cash
proceeds received in respect of the TSA Settlement (including, for the avoidance
of doubt, any deferred amounts) and any cash payments received in respect of
promissory notes or other non-cash consideration delivered in respect of the TSA
Settlement, net of (without duplication) (A) the reasonable expenses (including
legal fees and brokers’ and underwriters’ commissions paid to third parties which
are not Subsidiaries or Affiliates of the Borrower) incurred in effecting the TSA
Settlement, (B) any taxes reasonably attributable to the TSA Settlement, (C) any
transition costs reasonably attributable to the transition of the TSA and
duplicative costs in connection with such transition, as determined by the
Borrower in good faith and (D) any amounts payable to a Governmental
Authority triggered as a result of the TSA Settlement), the Borrower shall apply
9
100% of such net cash proceeds received (and not yet used to prepay Term Loans
pursuant to this Section 2.13(b)) to prepay outstanding Term Loans in accordance
with Section 2.13(g).
(i) Section 2.13(f) of the Credit Agreement is hereby amended and restated in its
entirety as follows:
(f) Notwithstanding the foregoing, any Term Lender may elect, by written notice
delivered to the Administrative Agent not later than 5:00 p.m. New York City
time one Business Day after the date of such Lender’s receipt of notice regarding
such prepayment (or, if different, at the time and in the manner otherwise
specified by the Administrative Agent in such notice of prepayment), to decline
all (but not less than all) of any mandatory prepayment of its Term Loans
pursuant to this Section 2.13 (such declined amounts, the “Declined Proceeds”).
To the extent Term Lenders elect to decline their pro rata shares of such Declined
Proceeds, 67% of such Declined Proceeds shall be allocated pro rata among the
Term Lenders who did not elect to decline the mandatory prepayment of its Term
Loans and the remaining 33% of such Declined Proceeds shall be (x) used to
make an optional prepayment of Term Loans or (y) if the Borrower desires to use
such Declined Proceeds to repay or repurchase Senior Notes, on the 90th day after
the initial date on which such Declined Proceeds were received (or if such day is
not a Business Day, the immediately subsequent Business Day), reoffered to all
Term Lenders to prepay Term Loans on a ratable basis pursuant to procedures
reasonably acceptable to the Administrative Agent and to the extent any such
Declined Proceeds are further declined by Term Lenders, such Declined Proceeds
shall, within 90 days after such Declined Proceeds are further declined, be applied
by the Borrower to repay or repurchase Senior Notes (and to the extent not so
used, shall, within 90 days after such Declined Proceeds are further declined, be
applied to make an optional prepayment of Term Loans); provided that if all Term
Lenders elect to decline all of any mandatory prepayment of its Term Loans, the
Borrower shall apply 100% of such Declined Proceeds to repay or prepay
Indebtedness, which may include optional prepayments of Term Loans and the
repayment or repurchase of Senior Notes.
(j) Section 6.01(x) is hereby amended and restated in its entirety as follows:
(x) (1) Other Junior Secured Debt of Loan Parties, provided that, at the time of
incurrence of such Other Junior Secured Debt, (A) after giving effect thereto and
to the use of the proceeds thereof, no Default or Event of Default shall have
occurred and be continuing and (B) (x) after giving pro forma effect thereto and to
the use of proceeds thereof, the Secured Net Leverage Ratio shall not be greater
than 3.35 to 1.00 or (y) 100% of the Net Cash Proceeds thereof are used to prepay
then-outstanding Term Loans pursuant to Section 2.12 and (2) Other Junior
Secured Debt of Loan Parties that refinances or replaces any existing Other Junior
Secured Debt of Loan Parties; provided that the principal amount of such Other
Junior Secured Debt is not increased (except by an amount not to exceed (x) the
amount of unpaid accrued interest and premium on the existing Other Junior
10
Secured Debt so refinanced or replaced, plus (y) other reasonable amounts paid
and fees and expenses incurred in connection with such refinancing or
replacement plus unused commitments); provided further that in each case (x)
neither the final maturity nor the weighted average life to maturity of such Other
Junior Secured Debt is shorter than the applicable Other Junior Secured Debt
being refinanced or replaced or Term Loans being prepaid and (y) no Other Junior
Secured Debt of Loan Parties incurred pursuant to this Section 6.01(x) shall have
a final maturity earlier than the Latest Term Loan Maturity Date as of the time
such Other Junior Secured Debt is incurred.; and
(k) Section 6.05(b)(x) of the Credit Agreement is hereby amended and restated in
its entirety as follows:
(x) a disposition of assets, whether of real or personal property, by the Borrower
or any Subsidiary (whether of real or personal property), including to any
Governmental Authority, in connection with the closure of a Hospital; or
(l) Section 6.06(a)(vii) of the Credit Agreement is hereby amended and restated
in its entirety as follows:
(vii) so long as (A) no Event of Default or Default shall have occurred and be
continuing or would result therefrom and (B) at the time of and after giving effect
thereto, the Total Leverage Ratio shall not be greater than 3.00 to 1.00, the
Borrower may make other Restricted Payments in an amount not to exceed the
Available Amount at the time such Restricted Payment is made;
(m) Section 6.06(a)(v) of the Credit Agreement is hereby deleted in its entirety
and replaced with “[reserved]”;
(n) Section 6.06(a)(ix) of the Credit Agreement is hereby deleted in its entirety
and replaced with “[reserved]”;
(o) Section 6.09(b) of the Credit Agreement is hereby amended by:
(i) replacing the text “4.90 to 1.00” with “3.00 to 1.00” in subclause (iii)(B)
thereof; and
(ii) replacing the text in the second proviso with “provided further, however,
that for purposes of this Section 6.09(b), until January 1, 2019, the Senior
Notes shall be deemed to constitute subordinated Indebtedness, except that
notwithstanding anything to the contrary herein, (x) the Senior Notes may
be extended, renewed, refinanced or replaced with the proceeds of
Indebtedness permitted to be incurred pursuant to Section 6.01 and (y) the
Borrower may use the Available Declined Proceeds Amount, if any, to
repay or repurchase Senior Notes.”
(p) Section 6.13 (Maximum Secured Net Leverage Ratio) of Credit Agreement is
hereby amended by replacing in its entirety the chart contained therein with the following:
11
Period
July 1, 2017 through June 30, 2018
July 1, 2018 through December 31, 2019
Thereafter
Ratio
4.75 to 1.00
5.00 to 1.00
4.50 to 1.00
SECTION 3. Representations and Warranties. To induce the other parties hereto
to enter into this Amendment, the Borrower and each Subsidiary Guarantor represents and
warrants to the Administrative Agent and each of the Lenders that:
(a) The representations and warranties set forth in Article III of the Credit
Agreement and in each other Loan Document are true and correct (A) in the case of the
representations and warranties qualified as to materiality, in all respects and (B) otherwise, in all
material respects, in each case on and as of the Amendment No. 2 Effective Date as though made
on and as of such date, except to the extent that such representations and warranties expressly
relate to an earlier date.
(b) No Default or Event of Default has occurred and is continuing after giving
effect to this Amendment.
(c) None of the Security Documents in effect on the Amendment No. 2 Effective
Date will be rendered invalid, non-binding or unenforceable against any Loan Party as a result of
this Amendment. The Guarantees created under such Security Documents will continue to
guarantee the Obligations to the same extent as they guaranteed the Obligations immediately
prior to the Amendment No. 2 Effective Date. The Liens created under such Security
Documents will continue to secure the Obligations, and will continue to be perfected, in each
case, to the same extent as they secured the Obligations or were perfected immediately prior to
the Amendment No. 2 Effective Date.
SECTION 4. Effectiveness. This Amendment shall become effective on and as
of the date on which each of the following conditions precedent is satisfied (such date, the
“Amendment No. 2 Effective Date”):
(a) The Administrative Agent shall have received duly executed and delivered
counterparts of this Amendment that, when taken together, bear the signatures of the Borrower,
each Subsidiary Guarantor and the Required Lenders.
(b) The Administrative Agent shall have received a certificate, dated the
Amendment No. 2 Effective Date and signed by a Financial Officer of the Borrower, confirming
compliance with the conditions precedent set forth in paragraphs (b) and (c) of Section 4.01 of
the Credit Agreement as if the transactions under this Amendment were a Credit Event.
(c) The Administrative Agent shall have received payment from the Borrower,
for the account of each Lender that shall have unconditionally and irrevocably delivered to the
Administrative Agent (or its counsel) its executed signature page to this Amendment at or prior
to 5:00 p.m., New York City time, on March 13, 2018 (each, a “Consenting Lender”), an
amendment fee in an amount equal to 0.25% of the aggregate outstanding principal amount of
such Consenting Lender’s Term Loans and the aggregate amount of such Consenting Lender’s
12
Revolving Credit Commitments (whether drawn or undrawn), as the case may be, in each case as
of the Amendment No. 2 Effective Date after giving effect to this Amendment and any
commitment reductions in connection herewith. Such fees shall be payable in immediately
available funds and, once paid, shall not be refundable in whole or in part.
(d) The Administrative Agent shall have received all fees and other amounts due
and payable on or prior to the Amendment No. 2 Effective Date, including, to the extent invoiced
at least two Business Days prior to the Amendment No. 2 Effective Date, reimbursement or
payment of all out-of-pocket expenses required to be reimbursed or paid by the Borrower in
connection with the transactions contemplated hereby or under any other Loan Document.
The Administrative Agent shall notify the Borrower and the Lenders of the
Amendment No. 2 Effective Date and such notice shall be conclusive and binding.
SECTION 5. Effect of this Amendment. Except as expressly set forth herein,
this Amendment shall not by implication or otherwise limit, impair, constitute a waiver of, or
otherwise affect the rights and remedies of the Administrative Agent, the Lenders or any other
Secured Party under the Credit Agreement or any other Loan Document, and shall not alter,
modify, amend or in any way affect any of the terms, conditions, obligations, covenants or
agreements contained in the Credit Agreement or any other Loan Document, all of which are
ratified and affirmed in all respects and shall continue in full force and effect. Nothing herein
shall be deemed to entitle any Loan Party to a consent to, or a waiver, amendment, modification
or other change of, any of the terms, conditions, obligations, covenants or agreements contained
in the Credit Agreement or any other Loan Document in similar or different circumstances. This
Amendment shall apply and be effective only with respect to the provisions of the Credit
Agreement specifically referred to herein.
(a) From and after the Amendment No. 2 Effective Date, any reference to the
Credit Agreement shall mean the Credit Agreement as modified by this Amendment.
(b) This Amendment shall constitute a “Loan Document” for all purposes of the
Credit Agreement and the other Loan Documents.
(c) Each of the parties hereto acknowledge and agree, for the avoidance of doubt,
that, from and after the Amendment No. 2 Effective Date, the Applicable Percentage for all
purposes of the Credit Agreement shall be determined in accordance with the provisions of the
Credit Agreement as amended hereby and that for any day prior to the Amendment No. 2
Effective Date the Applicable Percentage shall be determined in accordance with the Credit
Agreement prior to giving effect to this Amendment.
SECTION 6. Reaffirmation; Further Assurances. Each of the Borrower and each
of the Subsidiary Guarantors identified on the signature pages hereto (collectively, the Borrower
and such Subsidiary Guarantors, the “Reaffirming Loan Parties”) hereby acknowledges that it
expects to receive substantial direct and indirect benefits as a result of this Amendment and the
transactions contemplated hereby. Each Reaffirming Loan Party hereby consents to this
Amendment and the transactions contemplated hereby, and hereby confirms its respective
guarantees, pledges and grants of security interests, as applicable, under each of the Loan
13
Documents to which it is party, and agrees that, notwithstanding the effectiveness of this
Amendment and the transactions contemplated hereby, such guarantees, pledges and grants of
security interests shall continue to be in full force and effect and shall accrue to the benefit of the
Secured Parties.
SECTION 7. Expenses. The Borrower agrees to reimburse the Administrative
Agent for its reasonable out-of-pocket expenses in connection with the Loan Documents
(including the preparation of this Amendment), including the reasonable fees, charges and
disbursements of Cravath, Swaine & Moore LLP.
SECTION 8. Counterparts. This Amendment may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which together shall constitute
one and the same instrument. Delivery by electronic transmission (e.g., “pdf”) of an executed
counterpart of a signature page to this Amendment shall be effective as delivery of an original
executed counterpart of this Amendment, and, once delivered, may not be withdrawn or revoked
unless this Amendment fails to become effective in accordance with its terms on or prior to May
5, 2018.
SECTION 9. No Novation. This Amendment shall not extinguish the obligations
for the payment of money outstanding under the Credit Agreement or discharge or release the
Lien or priority of any Loan Document or any other security therefor or any guarantee thereof.
Nothing herein contained shall be construed as a substitution or novation of the Obligations
outstanding under the Credit Agreement or instruments guaranteeing or securing the same, which
shall remain in full force and effect, except as modified hereby or by instruments executed
concurrently herewith. Nothing expressed or implied in this Amendment or any other document
contemplated hereby shall be construed as a release or other discharge of the Borrower under the
Credit Agreement or any Loan Party under any other Loan Document from any of its obligations
and liabilities thereunder. The Credit Agreement and each of the other Loan Documents shall
remain in full force and effect, until and except as modified hereby or thereby in connection
herewith or therewith.
SECTION 10. Governing Law. (a) THIS AMENDMENT SHALL BE
CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE
STATE OF NEW YORK.
(b) EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST
EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL
BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT
OF OR RELATING TO THIS AMENDMENT OR THE TRANSACTIONS CONTEMPLATED
HEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY).
EACH PARTY HERETO (I) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR
ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR
OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF
LITIGATION,
FOREGOING WAIVER AND
(II) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN
INDUCED TO ENTER INTO THIS AMENDMENT BY, AMONG OTHER THINGS, THE
MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.
ENFORCE
SEEK
THE
TO
14
SECTION 11. Headings. Section headings used herein are for convenience of
reference only, are not part of this Amendment and are not to affect the construction of, or be
taken into consideration in interpreting, this Amendment.
[Remainder of page intentionally left blank]
15
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed by their respective authorized officers as of the date first above written.
CREDIT SUISSE AG, CAYMAN
ISLANDS BRANCH, as a Lender and
as Administrative Agent,
By:
/s/ John Toronto
Name: John Toronto
Title: Authorized Signatory
By:
/s/ Warrant Van Heyst
Name: Warrant Van Heyst
Title: Authorized Signatory
[Signature Page to Amendment No. 2 to the Credit Agreement]
QUORUM HEALTH CORPORATION,
By:
/s/ Lee C. Fleck
Name: Lee C. Fleck
Title: Vice President Finance and
Treasurer
[Signature Page to Amendment No. 2 to the Credit Agreement]
ANNA HOSPITAL CORPORATION
BIG BEND HOSPITAL CORPORATION
BIG SPRING HOSPITAL CORPORATION
BLUE ISLAND HOSPITAL COMPANY, LLC
BLUE ISLAND ILLINOIS HOLDINGS, LLC
BLUE RIDGE GEORGIA HOLDINGS COMPANY, LLC
CSRA HOLDINGS, LLC
DEMING HOSPITAL CORPORATION
DHSC, LLC
EVANSTON HOSPITAL CORPORATION
FORREST CITY ARKANSAS HOSPITAL COMPANY,
LLC
FORREST CITY HOSPITAL CORPORATION
FORT PAYNE HOSPITAL CORPORATION
GALESBURG HOSPITAL CORPORATION
GRANITE CITY HOSPITAL CORPORATION
GRANITE CITY ILLINOIS HOSPITAL COMPANY, LLC
HOSPITAL OF BARSTOW, INC.
HOSPITAL OF LOUISA, INC.
JACKSON HOSPITAL CORPORATION
LEXINGTON HOSPITAL CORPORATION
MARION HOSPITAL CORPORATION
MASSILLON COMMUNITY HEALTH SYSTEM LLC
MASSILLON HEALTH SYSTEM LLC
MASSILLON HOLDINGS, LLC
MCKENZIE TENNESSEE HOSPITAL COMPANY, LLC
MMC OF NEVADA, LLC
MONROE HMA, LLC
MWMC HOLDINGS, LLC
NATIONAL HEALTHCARE OF MT. VERNON, INC.
PHILLIPS HOSPITAL CORPORATION
QHC CALIFORNIA HOLDINGS, LLC
QHG OF MASSILLON, INC.
QUORUM HEALTH INVESTMENT COMPANY, LLC
QUORUM HEALTH RESOURCES, LLC
RED BUD HOSPITAL CORPORATION
RED BUD ILLINOIS HOSPITAL COMPANY, LLC
SAN MIGUEL HOSPITAL CORPORATION
TOOELE HOSPITAL CORPORATION
TRIAD OF OREGON, LLC
WATSONVILLE HOSPITAL CORPORATION
WAUKEGAN HOSPITAL CORPORATION
WAUKEGAN ILLINOIS HOSPITAL COMPANY, LLC
WILLIAMSTON HOSPITAL CORPORATION
By:
/s/ Lee C. Fleck
Name: Lee C. Fleck
Title: Vice President Finance and Treasurer
[Signature Page to Amendment No. 2 to the Credit Agreement]
STATEMENT OF COMPUTATION OF EARNINGS TO FIXED CHARGES
(Dollars in Thousands)
Exhibit 12.1
Earnings
Income (loss) before income taxes
Interest and amortization of deferred financing
costs
Implicit rental interest expense
Total earnings
Fixed Charges
Interest and amortization of deferred financing
costs
Capitalized interest
Implicit rental interest expense
Total fixed charges
Year ended December 31,
2017
2016
2015
2014
2013
$ (134,222 ) $ (399,072 ) $ 8,039 $ 12,932 $ (37,447 )
122,077 113,440 98,290 92,926 99,465
12,558 12,471 12,182 12,080 10,773
413 $ (273,161 ) $ 118,511 $ 117,938 $ 72,791
$
3,422
$ 122,077 $ 113,440 $ 98,290 $ 92,926 $ 99,465
861
12,558 12,471 12,182 12,080 10,773
$ 138,057 $ 128,316 $ 110,972 $ 105,716 $ 111,099
2,405
710
500
Ratio of earnings to fixed charges
0.00 x
*
1.07 x
1.12 x
0.66
* For the year ended December 31, 2016, earnings were insufficient to cover fixed charges by approximately $401.4 million.
Quorum Health Corporation
SUBSIDIARY LISTING
(*) Majority position held in an entity with physicians, non-profit entities or both
Exhibit 21.1
Alfaro, Ltd. (NV)
Ambulance Services of Forrest City, LLC (AR)
Ambulance Services of Lexington, Inc. (TN)
Ambulance Services of McKenzie, Inc. (TN)
Ambulance Services of Tooele, LLC (DE)
Anna Clinic Corp (IL)
Anna Hospital Corporation (IL)
Barrow Health Ventures, Inc. (GA)
Barstow Healthcare Management, Inc. (CA)
Barstow Primary Care Clinic (CA)
Big Bend Hospital Corporation (TX)
Big Spring Hospital Corporation (TX)
Blue Island Clinic Company, LLC (DE)
Blue Island HBP Medical Group, LLC (DE)
Blue Island Hospital Company, LLC (DE)
Blue Island Illinois Holdings, LLC (DE)
Blue Ridge Georgia Holdings, LLC (DE)
Blue Ridge Georgia Hospital Company, LLC* (DE)
Central Alabama Physician Services, Inc. (AL)
CHS Utah Holdings, LLC (DE)
Clinton Hospital Corporation (PA)
Coastal Health Partners (CA)
Cottage Rehabilitation and Sports Medicine, L.L.C. (IL)
Crossroads Physician Corp. (IL)
CSRA Holdings, LLC (DE)
Deming Clinic Corporation (NM)
Deming Hospital Corporation (NM)
Deming Nursing Home Company, LLC (DE)
DHSC, LLC (DE)
Doctors Hospital Physician Services, LLC (DE)
Edwardsville Ambulatory Surgery Center, L.L.C. (IL)
Evanston Clinic Corp. (WY)
Evanston Hospital Corporation (WY)
Fannin Regional Orthopaedic Center, Inc. (GA)
Forrest City (AR) Hospital Company, LLC (AR)
Forrest City Clinic Company, LLC (AR)
Forrest City Hospital Company, LLC (AR)
Fort Payne Clinic Corp. (AL)
Fort Payne Hospital Corporation (AL)
Fort Payne RHC Corp. (AL)
Galesburg Hospital Corporation (IL)
Galesburg Professional Services, LLC (DE)
Gateway Malpractice Assistance Fund, Inc. (IL)
Georgia HMA Physician Management, LLC (GA)
Granite City ASC Investment Company, LLC (IL)
Granite City Clinic Corp. (IL)
Granite City HBP Corp. (DE)
Granite City Hospital Corporation (IL)
Granite City Illinois Hospital Company, LLC (IL)
Granite City Orthopedic Physicians Company, LLC (IL)
Granite City Physicians Corp. (IL)
Hamlet H.M.A., LLC (NC)
Hamlet HMA Physician Management, LLC (NC)
Hamlet HMA PPM, LLC (NC)
d/b/a Union County Hospital
d/b/a Big Bend Regional Medical Center
d/b/a Scenic Mountain Medical Center
d/b/a MetroSouth Medical Center
d/b/a Fannin Regional Hospital
d/b/a Lock Haven Hospital
d/b/a Mimbres Memorial Hospital
d/b/a Affinity Medical Center
d/b/a Evanston Regional Hospital
d/b/a Forrest City Medical Center
d/b/a DeKalb Regional Medical Center
d/b/a Galesburg Cottage Hospital
d/b/a Gateway Regional Medical Center
d/b/a Henderson County Community Hospital
d/b/a Heartland Regional Medical Center
d/b/a Barstow Community Hospital
d/b/a Three Rivers Medical Center
Haven Clinton Medical Associates, LLC (DE)
Heartland Rural Healthcare, LLC (IL)
Hidden Valley Medical Center, Inc. (GA)
Hospital of Barstow, Inc. (DE)
Hospital of Louisa, Inc. (KY)
In-Home Medical Equipment Supplies and Services, Inc. (IL)
Jackson Hospital Corporation (KY)
Jackson Physician Corp.(KY)
Kentucky River HBP, LLC (DE)
Kentucky River Physician Corporation (KY)
King City Physician Company, LLC (DE)
Knox Clinic Corp. (IL)
Lexington Clinic Corp. (TN)
Lexington Family Physicians, LLC (DE)
Lexington Hospital Corporation (TN)
Lindenhurst Illinois Hospital Company, LLC (IL)
Lindenhurst Surgery Center, LLC (DE)
Lock Haven Clinic Company, LLC (DE)
Marion Hospital Corporation (IL)
McKenzie Clinic Corp. (TN)
McKenzie Physician Services, LLC (DE)
McKenzie Tennessee Hospital Company, LLC (DE)
d/b/a McKenzie Regional Hospital
McKenzie-Willamette Regional Medical Center Associates, LLC (DE) d/b/a Mc-Kenzie-William Medical Center
Memorial Management, Inc. (IL)
Mesa View Physical Rehabilitation, LLC (NV)
Mesa View PT, LLC (DE)
Mesquite Clinic Management Company, LLC (DE)
MMC of Nevada, LLC (DE)
MWMC Holdings, LLC (DE)
National Healthcare of Mt. Vernon, Inc. (DE)
National Imaging of Carterville, LLC (DE)
National Imaging of Mount Vernon, LLC (DE)
Ohani, LLC (DE)
Our Healthy Circle (TN)
Paintsville HMA Physician Management, LLC (KY)
Paintsville Hospital Company, LLC (KY)
Phillips Clinic Corp. (AR)
Phillips Hospital Corporation (AR)
QHC Blue Island Urgent Care Holdings, LLC (DE)
QHC California Holdings, LLC (DE)
QHC HIM Shared Services, LLC (DE)
QHCCS, LLC (DE)
QHG of Massillon, Inc. (OH)
QHR Development, LLC (DE)
QHR Healthcare Affiliates, LLC (DE)
QHR Intensive Resources, LLC (DE)
QHR International, LLC (DE)
Quorum Health Corporation (DE)
Quorum Health Foundation, Inc. (FL)
Quorum Health Investment Company, LLC (DE)
Quorum Health Resources, LLC (DE)
Quorum Purchasing Advantage, LLC (DE)
Quorum Solutions, LLC (DE)
Red Bud Clinic Corp. (IL)
Red Bud Hospital Corporation (IL)
Red Bud Illinois Hospital Company, LLC (IL)
Red Bud Physician Group, LLC (DE)
Red Bud Regional Clinic Company, LLC (DE)
River to River Heart Group, LLC (IL)
San Miguel Clinic Corp. (NM)
San Miguel Hospital Corporation (NM)
d/b/a Red Bud Regional Hospital
d/b/a Alta Vista Regional Hospital
d/b/a Mesa View Regional Hospital
d/b/a Crossroad Community Hospital
d/b/a Paul B. Hall Regional Medical Center
d/b/a Helena Regional Medical Center
SMMC Medical Group (TX)
Southern Illinois Medical Care Associates, LLC (IL)
Springfield Oregon Holdings, LLC (DE)
Three Rivers Medical Clinics, Inc. (KY)
Tooele Clinic Corp. (UT)
Tooele Hospital Corporation (UT)
Triad of Oregon, LLC (DE)
Watsonville Healthcare Management, LLC (DE)
Watsonville Hospital Corporation (DE)
Waukegan Clinic Corp. (IL)
Waukegan Hospital Corporation (IL)
Waukegan Illinois Hospital Company, LLC (IL)
Williamston Clinic Corp. (NC)
Williamston HBP Services, LLC (DE)
Williamston Hospital Corporation (NC)
Winder HMA, LLC (GA)
d/b/a Martin General Hospital
d/b/a Vista Medical Center East;
Vista Medical Center West
d/b/a Mountain West Medical Center
d/b/a Watsonville Community Hospital
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23.1
We consent to the incorporation by reference in Registration Statement Nos. 333-210993, 333-213198 and 333-213717 on Form
S-8 of our reports dated March 15, 2018, relating to the financial statements of Quorum Health Corporation, and the effectiveness of
Quorum Health Corporation's internal control over financial reporting, appearing in this Annual Report on Form 10-K of Quorum
Health Corporation for the year ended December 31, 2017.
/s/ Deloitte & Touche LLP
Nashville, Tennessee
March 15, 2018
Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Thomas D. Miller, certify that:
1. I have reviewed this Annual Report on Form 10-K of Quorum Health Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors:
a) all significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: March 15, 2018
/s/ Thomas D. Miller
Thomas D. Miller
President, Chief Executive Officer
and Director
Exhibit 31.2
CERTIFICATION PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Michael J. Culotta, certify that:
1. I have reviewed this Annual Report on Form 10-K of Quorum Health Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors:
a) all significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: March 15, 2018
/s/ Michael J. Culotta
Michael J. Culotta
Executive Vice President and
Chief Financial Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Quorum Health Corporation (the “Company”) on Form 10-K for the
period ended December 31, 2017, as filed with the Securities and Exchange Commission on the date hereof (the
“Report”), I, Thomas D. Miller, President, Chief Executive Officer and Director of the Company, certify, pursuant
to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange
Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company.
/s/ Thomas D. Miller
Thomas D. Miller
President, Chief Executive Officer
and Director
March 15, 2018
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Quorum Health Corporation (the “Company”) on Form 10-K for the
period ended December 31, 2017, as filed with the Securities and Exchange Commission on the date hereof (the
“Report”), I, Michael J. Culotta, Executive Vice President and Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange
Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company.
March 15, 2018
/s/ Michael J. Culotta
Michael J. Culotta
Executive Vice President and
Chief Financial Officer
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DIRECTORS & SENIOR LEADERSHIP
Directors
William M. Gracey
Former President and Chief Executive Officer
Blue Cross and Blue Shield of Tennessee Inc.
James T. Breedlove
Former Senior Vice President, General Counsel
and Corporate Secretary
Praxair, Inc.
Terry Allison Rappuhn
Board member of Akorn, Inc.
and Genesis Healthcare
Joseph A. Hastings, D.M.D.
Private Practice Orthodontist
Thomas D. Miller
President and Chief Executive Officer
Quorum Health Corporation
William S. Hussey
Former Division President—
Division VI Operations
Community Health Systems
Barbara R. Paul, M.D.
Advisor to Morgan Samuels, board member
of Natus Medical, Inc. and former
Senior Vice President and Chief Medical Officer
Community Health Systems
R. Lawrence Van Horn, Ph.D.
Associate Professor of Management
and Faculty Director
Owen School of Management
Vanderbilt University
Senior Management Team
Thomas D. Miller
President, Chief Executive Officer
and Director
Michael J. Culotta
Executive Vice President and
Chief Financial Officer
Corporate Information
Transfer Agent and Registrar
American Stock Transfer & Trust Co., LLC
Operations Center
6201 15th Avenue
Brooklyn, NY 11219
800-937-5449
www.astfinancial.com
Independent Auditors
Deloitte & Touche LLP
Nashville, TN
Corporate Headquarters
1573 Mallory Lane, Suite 100
Brentwood, TN 37027
615-221-1400
Martin D. Smith
Executive Vice President of Operations
James Matthew Hayes
Senior Vice President of Operations
Shaheed Koury, M.D.
Senior Vice President and
Chief Medical Officer
R. Harold McCard, Jr.
Senior Vice President, General Counsel
and Assistant Secretary
This Annual Report contains forward looking state-
ments made pursuant to the “safe-harbor” provi-
sions of the Private Securities Litigation Reform
Act of 1995. Important factors that could cause our
actual results to differ materially from the results
contemplated by the forward looking statements
are contained in our Annual Report on Form 10-K
filed with the Securities and Exchange Commission
(SEC) and are included with this Annual Report and
in subsequent filings with the SEC.
Form 10-K / Investor Contact
A copy of the Company’s Annual Report on
Form 10-K, filed with the Securities and Exchange
Commission (SEC), may be obtained from the
Company at no charge. Requests for the Annual
Report on Form 10-K and other investor infor-
mation should be directed to Investor Relations
at the Company’s corporate office or at
www.quorumhealth.com.
Common Stock Information
The Common Stock of Quorum Health Corporation
is listed on the New York Stock Exchange (NYSE)
under the symbol “QHC.”
Annual Meeting of Shareholders
Hilton Garden Inn
9150 Carothers Parkway
Franklin, TN 37067
Friday, June 8, 2018
8:00 a.m. CST
This Annual Report contains statements regarding results and facts pertaining to the Company as of December 31, 2017. Material changes to these results and
facts since December 31, 2017 can be found in filings with the Securities and Exchange Commission (SEC) or in press releases found on the Company’s website.
Annual Report Design by Curran & Connors, Inc. / www.curran-connors.com
OUR HOSPITALS
I M P R OV I N G H E A LT H I N E V E RY
C O M M U N I T Y W E S E RV E
QHC Hospital
QHR Managed Hospital
31
H O S P I TA L S
15
S TAT E S
At December 31, 2017
~90
M A N A G E D
H O S P I TA L S
AT Q H R
Quorum Health Corporation • 1573 Mallory Lane, Suite 100 • Brentwood, TN 37027 • 615-221-1400 • www.quorumhealth.com