HCA Healthcare, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements This quarterly report on Form 10-Q includes certain disclosures which contain “forward-looking statements” within the meaning of the federal securities laws, which involve risks and uncertainties. Forward-looking statements include statements regarding expected share-based compensation expense, expected capital expenditures and expected net claim payments and all other statements that do not relate solely to historical or current facts, and can be identified by the use of words like “may,” “believe,” “will,” “expect,” “project,” “estimate,” “anticipate,” “plan,” “initiative” or “continue.” These forward-looking statements are based on our current plans and expectations and are subject to a number of known and unknown uncertainties and risks, many of which are beyond our control, which could significantly affect current plans and expectations and our future financial position and results of operations. These factors include, but are not limited to, (1) developments related to COVID-19, including, without limitation, related to the length and severity of the pandemic; the volume of canceled or rescheduled procedures and the volume of COVID-19 patients cared for across our health systems; measures we are taking to respond to the COVID-19 pandemic; the impact of government and administrative regulation and stimulus (including the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, the Paycheck Protection Program and Health Care Enhancement (“PPPHCE”) Act and other enacted legislation); changes in revenues due to declining patient volumes, changes in payor mix and deteriorating macroeconomic conditions (including increases in uninsured and underinsured patients); potential increased expenses related to labor, supply chain or other expenditures; workforce disruptions; supply shortages and disruptions; and the timing and availability of effective medical treatments and vaccines, (2) the impact of our substantial indebtedness and the ability to refinance such indebtedness on acceptable terms, as well as risks associated with disruptions in the financial markets and the business of financial institutions as the result of the COVID-19 pandemic which could impact us from a financial perspective, (3) the impact of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the “Affordable Care Act”), including the effects of court challenges to, any repeal of, or changes to, the Affordable Care Act or additional changes to its implementation, the possible enactment of additional federal or state health care reforms and possible changes to other federal, state or local laws or regulations affecting the health care industry, including single-payer proposals (often referred to as “Medicare for All”), and also including any such laws or governmental regulations which are adopted in response to the COVID-19 pandemic, (4) the effects related to the continued implementation of the sequestration spending reductions required under the Budget Control Act of 2011, and related legislation extending these reductions, and the potential for future deficit reduction legislation that may alter these spending reductions, which include cuts to Medicare payments, or create additional spending reductions, (5) increases in the amount and risk of collectability of uninsured accounts and deductibles and copayment amounts for insured accounts, (6) the ability to achieve operating and financial targets, and attain expected levels of patient volumes and control the costs of providing services, (7) possible changes in Medicare, Medicaid and other state programs, including Medicaid supplemental payment programs or Medicaid waiver programs, that may impact reimbursements to health care providers and insurers and the size of the uninsured or underinsured population, (8) the highly competitive nature of the health care business, (9) changes in service mix, revenue mix and surgical volumes, including potential declines in the population covered under third-party payer agreements, the ability to enter into and renew third-party payer provider agreements on acceptable terms and the impact of consumer-driven health plans and physician utilization trends and practices, (10) the efforts of health insurers, health care providers, large employer groups and others to contain health care costs, (11) the outcome of our continuing efforts to monitor, maintain and comply with appropriate laws, regulations, policies and procedures, (12) increases in wages and the ability to attract and retain qualified management and personnel, including affiliated physicians, nurses and medical and technical support personnel, (13) the availability and terms of capital to fund the expansion of our business and improvements to our existing facilities, (14) changes in accounting practices, (15) changes in general economic conditions nationally and regionally in our markets, including economic and business conditions (and the impact thereof on the financial markets and banking industry) resulting from the COVID-19 pandemic, (16) the emergence of and 21 Table of Contents ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Forward-Looking Statements (continued) effects related to other pandemics, epidemics and infectious diseases, (17) future divestitures which may result in charges and possible impairments of long-lived assets, (18) changes in business strategy or development plans, (19) delays in receiving payments for services provided, (20) the outcome of pending and any future tax audits, disputes and litigation associated with our tax positions, (21) potential adverse impact of known and unknown government investigations, litigation and other claims that may be made against us, (22) the impact of potential cybersecurity incidents or security breaches, (23) our ongoing ability to demonstrate meaningful use of certified electronic health record (“EHR”) technology and the impact of interoperability requirements, (24) the impact of natural disasters, such as hurricanes and floods, or similar events beyond our control, (25) changes in the U.S. federal, state, or foreign tax laws including interpretive guidance that may be issued by taxing authorities or other standard setting bodies, and (26) other risk factors described in our annual report on Form 10-K for the year ended December 31, 2019, our quarterly report on Form 10-Q for the quarter ended March 31, 2020 and our other filings with the Securities and Exchange Commission. As a consequence, current plans, anticipated actions and future financial position and results of operations may differ from those expressed in any forward-looking statements made by or on behalf of HCA. You are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in this report, which forward-looking statements reflect management’s views only as of the date of this report. We undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise. COVID-19 Pandemic and CARES Act Funding On March 11, 2020, the World Health Organization designated COVID-19 as a global pandemic. Patient volumes and the related revenues for most of our services were significantly impacted in the last two weeks of the first quarter of 2020 and continued to be impacted in the second quarter of 2020 as various policies were implemented by federal, state and local governments in response to the COVID-19 pandemic that have caused many people to remain at home and forced the closure of or limitations on certain businesses, as well as suspended elective surgical procedures by health care facilities. While some of these restrictions have been eased across the U.S. and most states have lifted moratoriums on non-emergent procedures, some restrictions remain in place, and some state and local governments are re-imposing certain restrictions due to increasing rates of COVID-19 cases. While consolidated patient volumes and revenues experienced gradual improvement beginning in the latter part of April and continuing through the end of the quarter, we are unable to predict the future impact of the pandemic on our operations. Our pandemic response plan has multiple facets and continues to evolve as the pandemic unfolds. We have taken precautionary steps to enhance our operational and financial flexibility, and react to the risks the COVID-19 pandemic presents to our business, including the following: • Implemented certain cost reduction initiatives; • Suspended our authorized share repurchase program; • Suspended our quarterly dividend program; • Reduced certain planned projects and capital expenditures; • During March 2020, executed a new $2 billion 364-day term loan facility (which was undrawn at June 30, 2020) to supplement our existing credit facilities; and • During the second quarter of 2020, we received approximately $4.4 billion of accelerated Medicare payments and approximately $1.4 billion in general and targeted Provider Relief Fund distributions, both as provided for under the CARES Act. 22 Table of Contents ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) COVID-19 Pandemic and CARES Act Funding (continued) We believe the extent of the COVID-19 pandemic’s adverse impact on our operating results and financial condition has been and will continue to be driven by many factors, most of which are beyond our control and ability to forecast. Such factors include, but are not limited to, the scope and duration of stay-at-home practices and business closures and restrictions, government-imposed or recommended suspensions of elective procedures, continued declines in patient volumes for an indeterminable length of time, increases in the number of uninsured and underinsured patients as a result of higher sustained rates of unemployment, incremental expenses required for supplies and personal protective equipment, and changes in professional and general liability exposure. Because of these and other uncertainties, we cannot estimate the length or severity of the impact of the pandemic on our business. Decreases in cash flows and results of operations may have an impact on the inputs and assumptions used in significant accounting estimates, including estimated implicit price concessions related to uninsured patient accounts, professional and general liability reserves, and potential impairments of goodwill and long-lived assets. Second Quarter 2020 Operations Summary Revenues declined to $11.068 billion in the second quarter of 2020 from $12.602 billion in the second quarter of 2019. Net income attributable to HCA Healthcare, Inc. totaled $1.079 billion, or $3.16 per diluted share, for the quarter ended June 30, 2020, compared to $783 million, or $2.25 per diluted share, for the quarter ended June 30, 2019. Second quarter results for 2020 include $822 million ($590 million net of tax), or $1.73 per diluted share, of government stimulus income related to general distribution funds and $60 million, or $0.13 per diluted share, of employee retention payroll tax credits, as provided for by the CARES Act. Second quarter results for 2020 also include losses on sales of facilities of $27 million, or $0.07 per diluted share, and second quarter results for 2019 include gains on sales of facilities of $18 million, or $0.04 per diluted share. All “per diluted share” disclosures are based upon amounts net of the applicable income taxes. Shares used for diluted earnings per share were 341.599 million shares for the quarter ended June 30, 2020 and 348.373 million shares for the quarter ended June 30, 2019. During 2019 and the first six months of 2020, we repurchased 7.949 million shares and 3.287 million shares of our common stock, respectively. Due to the COVID-19 pandemic, patient volumes and the related revenues for most of our services, particularly elective surgical procedures, were significantly impacted in April as various COVID-19 stay-at-home and business closure policies were implemented by federal, state and local governments. Patient volumes gradually improved in the latter part of April and continuing through the end of the quarter as the states began to re-open and allow for non-emergent procedures. Revenues declined 12.2% on a consolidated basis and declined 12.1% on a same facility basis for the quarter ended June 30, 2020, compared to the quarter ended June 30, 2019. The decline in consolidated revenues can be primarily attributed to the net impact of a 20.0% decline in equivalent admissions offset by a 9.7% increase in revenue per equivalent admission. The same facility revenues decline primarily resulted from the net impact of a 20.1% decline in same facility equivalent admissions offset by a 10.0% increase in same facility revenue per equivalent admission. During the quarter ended June 30, 2020, consolidated admissions and same facility admissions declined 12.6% and 12.8%, respectively, compared to the quarter ended June 30, 2019. Surgeries declined 26.5% on both a consolidated basis and on a same facility basis during the quarter ended June 30, 2020, compared to the quarter ended June 30, 2019. Emergency department visits declined 32.7% and 32.9% on a consolidated basis and on a same facility basis, respectively, during the quarter ended June 30, 2020, compared to the quarter ended June 30, 2019. Consolidated and same facility uninsured admissions declined 10.8% and 10.0%, respectively, for the quarter ended June 30, 2020, compared to the quarter ended June 30, 2019. 23 Table of Contents ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Second Quarter 2020 Operations Summary (continued) Cash flows from operating activities increased $6.726 billion, from $1.997 billion for the second quarter of 2019 to $8.723 billion for the second quarter of 2020. The increase in cash provided by operating activities was primarily related to the combined effect of the receipt of $4.999 billion related to unapplied accelerated Medicare payments and unrecognized general and targeted distributions as provided for in the CARES Act, positive changes in working capital of $787 million, primarily from the collection of patient accounts receivable, increases related to the deferral of income taxes of $593 million and an increase in net income, excluding losses (gains) on sales of facilities, of $327 million. Results of Operations Revenue/Volume Trends Our revenues generally relate to contracts with patients in which our performance obligations are to provide health care services to the patients. Revenues are recorded during the period our obligations to provide health care services are satisfied. Our performance obligations for inpatient services are generally satisfied over periods that average approximately five days, and revenues are recognized based on charges incurred in relation to total expected charges. Our performance obligations for outpatient services are generally satisfied over a period of less than one day. The contractual relationships with patients, in most cases, also involve a third-party payer (Medicare, Medicaid, managed care health plans and commercial insurance companies, including plans offered through the health insurance exchanges) and the transaction prices for the services provided are dependent upon the terms provided by (Medicare and Medicaid) or negotiated with (managed care health plans and commercial insurance companies) the third-party payers. The payment arrangements with third-party payers for the services we provide to the related patients typically specify payments at amounts less than our standard charges. Medicare generally pays for inpatient and outpatient services at prospectively determined rates based on clinical, diagnostic and other factors. Services provided to patients having Medicaid coverage are generally paid at prospectively determined rates per discharge, per identified service or per covered member. Agreements with commercial insurance carriers, managed care and preferred provider organizations generally provide for payments based upon predetermined rates per diagnosis, per diem rates or discounted fee-for-service rates. Management continually reviews the contractual estimation process to consider and incorporate updates to laws and regulations and the frequent changes in managed care contractual terms resulting from contract renegotiations and renewals. 24 Table of Contents ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Results of Operations (continued) Revenue/Volume Trends (continued) Revenues declined 12.2% from $12.602 billion in the second quarter of 2019 to $11.068 billion in the second quarter of 2020. Our revenues are based upon the estimated amounts we expect to be entitled to receive from patients and third-party payers. Estimates of contractual allowances under managed care and commercial insurance plans are based upon the payment terms specified in the related contractual agreements. Revenues related to uninsured patients and uninsured copayment and deductible amounts for patients who have health care coverage may have discounts applied (uninsured discounts and contractual discounts). We also record estimated implicit price concessions (based primarily on historical collection experience) related to uninsured accounts to record self-pay revenues at the estimated amounts we expect to collect. Patients treated at our hospitals for non-elective care, who have income at or below 400% of the federal poverty level, are eligible for charity care. Because we do not pursue collection of amounts determined to qualify as charity care, they are not reported in revenues. Our revenues by primary third-party payer classification and other (including uninsured patients) for the quarters and six months ended June 30, 2020 and 2019 are summarized in the following table (dollars in millions): Quarter 2020 Ratio 2019 Ratio Medicare $ 2,272 20.5 % $ 2,635 20.9 % Managed Medicare 1,488 13.4 1,595 12.7 Medicaid 564 5.1 416 3.3 Managed Medicaid 531 4.8 554 4.4 Managed care and insurers 5,631 50.9 6,425 50.9 International (managed care and insurers) 239 2.2 284 2.3 Other 343 3.1 693 5.5 Revenues $ 11,068 100.0 % $ 12,602 100.0 % Six Months 2020 Ratio 2019 Ratio Medicare $ 5,015 21.0 % $ 5,405 21.5 % Managed Medicare 3,314 13.8 3,184 12.7 Medicaid 978 4.1 763 3.0 Managed Medicaid 1,197 5.0 1,167 4.6 Managed care and insurers 12,276 51.4 12,851 51.1 International (managed care and insurers) 531 2.2 581 2.3 Other 618 2.5 1,168 4.8 Revenues $ 23,929 100.0 % $ 25,119 100.0 % Consolidated and same facility revenue per equivalent admission increased 9.7% and 10.0%, respectively, in the second quarter of 2020, compared to the second quarter of 2019. Consolidated and same facility equivalent admissions declined 20.0% and 20.1%, respectively, in the second quarter of 2020, compared to the second quarter of 2019. Consolidated and same facility outpatient surgeries both declined 32.6% in the second quarter of 2020, compared to the second quarter of 2019. Consolidated and same facility inpatient surgeries declined 15.6% and 15.7%, respectively, in the second quarter of 2020, compared to the second quarter of 2019. Consolidated and same facility emergency department visits declined 32.7% and 32.9%, respectively, in the second quarter of 2020, compared to the second quarter of 2019. 25 Table of Contents ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Results of Operations (continued) Revenue/Volume Trends (continued) To quantify the total impact of the trends related to uninsured patient accounts, we believe it is beneficial to view total uncompensated care, which is comprised of charity care, uninsured discounts and implicit price concessions. A summary of the estimated cost of total uncompensated care for the quarters and six months ended June 30, 2020 and 2019 follows (dollars in millions): Quarter Six Months 2020 2019 2020 2019 Patient care costs (salaries and benefits, supplies, other operating expenses and depreciation and amortization) $ 9,916 $ 10,953 $ 21,258 $ 21,559 Cost-to-charges ratio (patient care costs as percentage of gross patient charges) 12.6 % 12.2 % 12.2 % 12.0 % Total uncompensated care $ 6,729 $ 7,695 $ 14,602 $ 14,780 Multiply by the cost-to-charges ratio 12.6 % 12.2 % 12.2 % 12.0 % Estimated cost of total uncompensated care $ 844 $ 938 $ 1,781 $ 1,774 Same facility uninsured admissions declined by 4,264 admissions, or 10.0%, in the second quarter of 2020 compared to the second quarter of 2019. Same facility uninsured admissions increased 7.1%, in the first quarter of 2020 compared to the first quarter of 2019. Same facility uninsured admissions in 2019, compared to 2018, increased 6.8% in the fourth quarter, increased 2.1% in the third quarter, increased 5.1% in the second quarter, and were flat in the first quarter. The approximate percentages of our admissions related to Medicare, managed Medicare, Medicaid, managed Medicaid, managed care and insurers and the uninsured for the quarters and six months ended June 30, 2020 and 2019 are set forth in the following table. Quarter Six Months 2020 2019 2020 2019 Medicare 25 % 29 % 26 % 29 % Managed Medicare 19 18 20 19 Medicaid 6 5 6 5 Managed Medicaid 12 12 12 12 Managed care and insurers 29 27 28 27 Uninsured 9 9 8 8 100 % 100 % 100 % 100 % 26 Table of Contents ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Results of Operations (continued) Revenue/Volume Trends (continued) The approximate percentages of our inpatient revenues related to Medicare, managed Medicare, Medicaid, managed Medicaid, managed care and insurers for the quarters and six months ended June 30, 2020 and 2019 are set forth in the following table. Quarter Six Months 2020 2019 2020 2019 Medicare 26 % 28 % 28 % 29 % Managed Medicare 15 15 15 14 Medicaid 7 5 6 4 Managed Medicaid 6 5 6 5 Managed care and insurers 46 47 45 48 100 % 100 % 100 % 100 % At June 30, 2020, we had 91 hospitals in the states of Texas and Florida. During the second quarter of 2020, 56% of our admissions and 49% of our revenues were generated by these hospitals. Uninsured admissions in Texas and Florida represented 74% of our uninsured admissions during the second quarter of 2020. We receive a significant portion of our revenues from government health programs, principally Medicare and Medicaid, which are highly regulated and subject to frequent and substantial changes. In December 2017, the Centers for Medicare & Medicaid Services (“CMS”) announced that it will phase out federal matching funds for Designated State Health Programs under waivers granted under Section 1115 of the Social Security Act. Texas currently operates its Healthcare Transformation and Quality Improvement Program pursuant to a Medicaid waiver. In December 2017, CMS approved an extension of this waiver through September 30, 2022, but indicated that it will phase out some of the federal funding. Our Texas Medicaid revenues included Medicaid supplemental payments of $186 million and $106 million during the second quarters of 2020 and 2019, respectively, and $301 million and $214 million during the first six months of 2020 and 2019, respectively. In addition, we receive supplemental payments in several other states. We are aware these supplemental payment programs are currently being reviewed by certain state agencies and some states have made requests to CMS to replace their existing supplemental payment programs. It is possible these reviews and requests will result in the restructuring of such supplemental payment programs and could result in the payment programs being reduced or eliminated. Because deliberations about these programs are ongoing, we are unable to estimate the financial impact the program structure modifications, if any, may have on our results of operations. Key Performance Indicators We present certain metrics and statistical information that management uses when assessing our results of operations. We believe this information is useful to investors as it provides insight to how management evaluates operational performance and trends between reporting periods. Information on how these metrics and statistical information are defined is provided in the following tables summarizing operating results and statistical data. 27 Table of Contents ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Results of Operations (continued) Operating Results Summary The following is a comparative summary of results of operations for the quarters and six months ended June 30, 2020 and 2019 (dollars in millions): Quarter 2020 2019 Amount Ratio Amount Ratio Revenues $ 11,068 100.0 $ 12,602 100.0 Salaries and benefits 5,330 48.2 5,837 46.3 Supplies 1,748 15.8 2,118 16.8 Other operating expenses 2,147 19.3 2,362 18.8 Government stimulus income (822 ) (7.4 ) — — Equity in earnings of affiliates (1 ) — (8 ) (0.1 ) Depreciation and amortization 691 6.3 636 5.0 Interest expense 388 3.5 477 3.8 Losses (gains) on sales of facilities 27 0.2 (18 ) (0.1 ) 9,508 85.9 11,404 90.5 Income before income taxes 1,560 14.1 1,198 9.5 Provision for income taxes 344 3.1 271 2.1 Net income 1,216 11.0 927 7.4 Net income attributable to noncontrolling interests 137 1.2 144 1.2 Net income attributable to HCA Healthcare, Inc. $ 1,079 9.8 $ 783 6.2 % changes from prior year: Revenues (12.2 )% 9.3 % Income before income taxes 30.3 (3.2 ) Net income attributable to HCA Healthcare, Inc. 37.9 (4.5 ) Admissions(a) (12.6 ) 4.8 Equivalent admissions(b) (20.0 ) 6.2 Revenue per equivalent admission 9.7 3.0 Same facility % changes from prior year(c): Revenues ( 12.1 ) 4.3 Admissions(a) (12.8 ) 2.1 Equivalent admissions(b) (20.1 ) 2.6 Revenue per equivalent admission 10.0 1.7 28 Table of Contents ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Results of Operations (continued) Operating Results Summary (continued) Six Months 2020 2019 Amount Ratio Amount Ratio Revenues $ 23,929 100.0 $ 25,119 100.0 Salaries and benefits 11,448 47.8 11,484 45.7 Supplies 3,871 16.2 4,159 16.6 Other operating expenses 4,574 19.1 4,661 18.6 Government stimulus income (822 ) (3.4 ) — — Equity in earnings of affiliates (8 ) — (19 ) (0.1 ) Depreciation and amortization 1,365 5.7 1,255 5.0 Interest expense 816 3.4 938 3.7 Losses (gains) on sales of facilities 20 0.1 (17 ) (0.1 ) Losses on retirement of debt 295 1.2 — — 21,559 90.1 22,461 89.4 Income before income taxes 2,370 9.9 2,658 10.6 Provision for income taxes 456 1.9 550 2.2 Net income 1,914 8.0 2,108 8.4 Net income attributable to noncontrolling interests 254 1.1 286 1.1 Net income attributable to HCA Healthcare, Inc. $ 1,660 6.9 $ 1,822 7.3 % changes from prior year: Revenues (4.7 )% 9.4 % Income before income taxes (10.8 ) (4.3 ) Net income attributable to HCA Healthcare, Inc. (8.9 ) (7.2 ) Admissions(a) (5.8 ) 3.9 Equivalent admissions(b) (10.1 ) 5.5 Revenue per equivalent admission 6.0 3.8 Same facility % changes from prior year(c): Revenues (5.5 ) 5.4 Admissions(a) (6.0 ) 1.6 Equivalent admissions(b) (10.2 ) 2.3 Revenue per equivalent admission 5.3 3.0 (a) Represents the total number of patients admitted to our hospitals and is used by management and certain investors as a general measure of inpatient volume. (b) Equivalent admissions are used by management and certain investors as a general measure of combined inpatient and outpatient volume. Equivalent admissions are computed by multiplying admissions (inpatient volume) by the sum of gross inpatient revenues and gross outpatient revenues and then dividing the resulting amount by gross inpatient revenues. The equivalent admissions computation “equates” outpatient revenues to the volume measure (admissions) used to measure inpatient volume, resulting in a general measure of combined inpatient and outpatient volume. (c) Same facility information excludes the operations of hospitals and their related facilities which were either acquired or divested during the current and prior period. 29 Table of Contents ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Results of Operations (continued) Quarters Ended June 30, 2020 and 2019 Revenues declined to $11.068 billion in the second quarter of 2020 from $12.602 billion in the second quarter of 2019. Net income attributable to HCA Healthcare, Inc. totaled $1.079 billion, or $3.16 per diluted share, for the quarter ended June 30, 2020, compared to $783 million, or $2.25 per diluted share, for the quarter ended June 30, 2019. Second quarter results for 2020 include $822 million ($590 million net of tax), or $1.73 per diluted share, of government stimulus income related to general distribution funds and $60 million, or $0.13 per diluted share, of employee retention payroll tax credits, as provided for by the CARES Act. Second quarter results for 2020 also include losses on sales of facilities of $27 million, or $0.07 per diluted share, and second quarter results for 2019 include gains on sales of facilities of $18 million, or $0.04 per diluted share. All “per diluted share” disclosures are based upon amounts net of the applicable income taxes. Shares used for diluted earnings per share were 341.599 million shares for the quarter ended June 30, 2020 and 348.373 million shares for the quarter ended June 30, 2019. During 2019 and the first six months of 2020, we repurchased 7.949 million shares and 3.287 million shares of our common stock, respectively. Due to the COVID-19 pandemic, patient volumes and the related revenues for most of our services, particularly elective surgical procedures, were significantly impacted in April as various COVID-19 stay-at-home and business closure policies and other restrictions were implemented by federal, state and local governments. Patient volumes gradually improved beginning in the latter part of April and continuing through the end of the quarter as the states began to re-open and allow for non-emergent procedures. Revenues declined 12.2%, primarily due to the net impact of revenue per equivalent admission growth of 9.7% and a 20.0% decline in equivalent admissions for the second quarter of 2020 compared to the second quarter of 2019. Salaries and benefits, as a percentage of revenues, were 48.2% in the second quarter of 2020 and 46.3% in the second quarter of 2019. Salaries and benefits per equivalent admission increased 14.1% in the second quarter of 2020 compared to the second quarter of 2019. Same facility labor rate increases averaged 0.3% for the second quarter of 2020 compared to the second quarter of 2019. Supplies, as a percentage of revenues, were 15.8% in the second quarter of 2020 and 16.8% in the second quarter of 2019. Supply costs per equivalent admission increased 3.2% in the second quarter of 2020 compared to the second quarter of 2019. Supply costs per equivalent admission increased 2.3% for pharmacy supplies and 5.6% for general medical and surgical items and declined 0.2% for medical devices in the second quarter of 2020 compared to the second quarter of 2019. Other operating expenses, as a percentage of revenues, were 19.3% in the second quarter of 2020 and 18.8% in the second quarter of 2019. Other operating expenses is primarily comprised of contract services, professional fees, repairs and maintenance, rents and leases, utilities, insurance (including professional liability insurance) and nonincome taxes. Provisions for losses related to professional liability risks were $139 million and $133 million for the second quarters of 2020 and 2019, respectively. During the second quarter of 2020, we recorded $822 million ($590 million net of tax) of government stimulus income related to general distribution funds received from the Provider Relief Fund established by the CARES Act. Equity in earnings of affiliates was $1 million and $8 million in the second quarters of 2020 and 2019, respectively. 30 Table of Contents ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Results of Operations (continued) Quarters Ended June 30, 2020 and 2019 (continued) Depreciation and amortization increased $55 million, from $636 million in the second quarter of 2019 to $691 million in the second quarter of 2020. The increase in depreciation relates primarily to capital expenditures at our existing facilities. Interest expense was $388 million in the second quarter of 2020 and $477 million in the second quarter of 2019. Our average debt balance was $31.921 billion for the second quarter of 2020 compared to $35.079 billion for the second quarter of 2019. The average effective interest rate for our long-term debt declined to 4.9% for the quarter ended June 30, 2020 from 5.5% for the quarter ended June 30, 2019. During the second quarters of 2020 and 2019, we recorded losses on sales of facilities of $27 million and gains on sales of facilities of $18 million, respectively. The effective tax rates were 24.2% and 25.7% for the second quarters of 2020 and 2019, respectively. The effective tax rate computations exclude net income attributable to noncontrolling interests as it relates to consolidated partnerships. Net income attributable to noncontrolling interests declined from $144 million for the second quarter of 2019 to $137 million for the second quarter of 2020. The decline in net income attributable to noncontrolling interests related primarily to the operations of our surgery center partnerships. Six Months Ended June 30, 2020 and 2019 Revenues declined to $23.929 billion in the first six months of 2020 from $25.119 billion in the first six months of 2019. Net income attributable to HCA Healthcare, Inc. totaled $1.660 billion, or $4.84 per diluted share, for the first six months ended June 30, 2020, compared to $1.822 billion, or $5.22 per diluted share, for the first six months ended June 30, 2019. Results for the first six months of 2020 included $822 million ($590 million net of tax), or $1.72 per diluted share, of government stimulus income related to general distribution funds and $60 million, or $0.13 per diluted share, of employee retention payroll tax credits, as provided for by the CARES Act. Results for the first six months of 2020 also included losses on retirement of debt of $295 million, or $0.66 per diluted share, and losses on sales of facilities of $20 million, or $0.06 per diluted share. Results for the first six months of 2019 included gains on sales of facilities of $17 million, or $0.04 per diluted share, respectively. Revenues for the first six months of 2020 and 2019, respectively, include $55 million, or $0.12 per diluted share, related to the settlement of Medicare outlier calculations for prior periods and $86 million, or $0.19 per diluted share, related to the resolution of transaction price differences regarding certain out-of-network services performed in prior periods. All “per diluted share” disclosures are based upon amounts net of the applicable income taxes. Shares used for diluted earnings per share were 342.848 million shares for the six months ended June 30, 2020 and 349.334 million shares for the six months ended June 30, 2019. During 2019 and the first six months of 2020, we repurchased 7.949 million shares and 3.287 million shares of our common stock, respectively. Due to the COVID-19 pandemic, patient volumes and the related revenues for most of our services, particularly elective surgical procedures, were significantly impacted in the last two weeks of the first quarter and continued to be impacted through the second quarter as various COVID-19 stay-at-home and business closure policies and other restrictions were implemented by federal, state and local governments. Patient volumes gradually improved beginning in the latter part of April and continuing through the end of the quarter as the states began to re-open and allow for non-emergent procedures. Revenues declined 4.7% due primarily to the net impact of revenue per equivalent admission growth of 6.0% and a 10.1% decline in equivalent admissions for the first six months of 2020 compared to the first six months of 2019. 31 Table of Contents ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Results of Operations (continued) Six Months Ended June 30, 2020 and 2019 (continued) Salaries and benefits, as a percentage of revenues, were 47.8% in the first six months of 2020 and 45.7% in the first six months of 2019. Salaries and benefits per equivalent admission increased 10.9% in the first six months of 2020 compared to the first six months of 2019. Same facility labor rate increases averaged 1.5% for the first six months of 2020 compared to the first six months of 2019. Supplies, as a percentage of revenues, were 16.2% in the first six months of 2020 and 16.6% in the first six months of 2019. Supply costs per equivalent admission increased 3.5% in the first six months of 2020 compared to the first six months of 2019. Supply costs per equivalent admission increased 1.6% for medical devices, 0.9% for pharmacy supplies and 5.9% for general medical and surgical items in the first six months of 2020 compared to the first six months of 2019. Other operating expenses, as a percentage of revenues, were 19.1% in the first six months of 2020 and 18.6% in the first six months of 2019. Other operating expenses is primarily comprised of contract services, professional fees, repairs and maintenance, rents and leases, utilities, insurance (including professional liability insurance) and nonincome taxes. Provisions for losses related to professional liability risks were $279 million and $269 million for the first six months of 2020 and 2019, respectively. During the first six months of 2020, we recorded $822 million ($590 million net of tax) of government stimulus income related to general distribution funds received from the Provider Relief Fund established by the CARES Act. Equity in earnings of affiliates was $8 million and $19 million in the first six months of 2020 and 2019, respectively. Depreciation and amortization increased $110 million, from $1.255 billion in the first six months of 2019 to $1.365 billion in the first six months of 2020. The increase in depreciation relates to both acquired facilities and increased capital expenditures at our existing facilities. Interest expense was $816 million in the first six months of 2020 and $938 million in the first six months of 2019. Our average debt balance was $32.766 billion for the first six months of 2020 compared to $34.520 billion for the first six months of 2019. The average effective interest rate for our long-term debt declined to 5.0% for the six months ended June 30, 2020 from 5.5% for the six months ended June 30, 2019. During the first six months of 2020 and 2019, we recorded net losses on sales of facilities of $20 million and gains on sales of facilities of $17 million, respectively. During February 2020, we issued $2.700 billion aggregate principal amount of 3.50% senior unsecured notes due 2030. During March 2020, we used the net proceeds for the redemption of all $1.000 billion outstanding aggregate principal amount of HCA Healthcare, Inc.’s 6.25% senior notes due 2021 and, together with available funds, for the redemption of all $2.000 billion outstanding aggregate principal amount of HCA Inc.’s 7.50% senior notes due 2022. The pretax loss on retirement of debt was $295 million. The effective tax rates were 21.6% and 23.2% for the first six months of 2020 and 2019, respectively. The effective tax rate computations exclude net income attributable to noncontrolling interests as it relates to consolidated partnerships. Our provisions for income taxes for the first six months of 2020 and 2019 included tax benefits of $54 million and $53 million, respectively, related to employee equity award settlements. Excluding the effect of these adjustments, the effective tax rate for the first six months of 2020 and 2019 would have been 24.1% and 25.4%, respectively. 32 Table of Contents ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Results of Operations (continued) Six Months Ended June 30, 2020 and 2019 (continued) Net income attributable to noncontrolling interests declined from $286 million for the first six months of 2019 to $254 million for the first six months of 2020. The decline in net income attributable to noncontrolling interests related primarily to the operations of our surgery center partnerships. Liquidity and Capital Resources Cash provided by operating activities totaled $10.098 billion in the first six months of 2020 compared to $2.971 billion in the first six months of 2019. The $7.127 billion increase in cash provided by operating activities in the first six months of 2020 compared to the first six months of 2019, related primarily to the combined effect of the receipt of $4.999 billion related to the unapplied accelerated Medicare payments and unrecognized general and targeted distributions as provided for in the CARES Act, positive changes in working capital of $1.465 billion, primarily from the collection of patient accounts receivable, and an increase related to the deferral of income taxes of $445 million. The net combination of interest payments and net tax refunds in the first six months of 2020 was $838 million, and the combined interest payments and net tax payments in the first six months of 2019 was $1.433 billion. Interest payments decreased in 2020 due to lower average debt balances, and net tax payments decreased as quarterly estimated income tax payments were deferred until July 2020 by the IRS in response to the COVID-19 pandemic. Working capital totaled $1.175 billion at June 30, 2020 and $3.439 billion at December 31, 2019. The $2.264 billion decline in working capital is primarily related to the net effect of an increase in cash and cash equivalents of $4.017 billion, offset by a decline in accounts receivable of $1.241 billion and an increase in contract liabilities-deferred revenues of $4.999 billion. Cash used in investing activities was $1.953 billion in the first six months of 2020 compared to $3.113 billion in the first six months of 2019. Acquisitions of hospitals and health care entities declined from $1.504 billion in the first six months of 2019 (which included the acquisition of a seven-hospital health system in North Carolina) to $346 million in the first six months of 2020. Excluding acquisitions, capital expenditures were $1.598 billion in the first six months of 2020 and $1.745 billion in the first six months of 2019. Planned capital expenditures are expected to approximate $2.8 billion to $3.0 billion in 2020. At June 30, 2020, there were projects under construction which had estimated additional costs to complete and equip over the next five years of approximately $3.0 billion. We expect to finance capital expenditures with internally generated and borrowed funds. Cash used in financing activities totaled $4.116 billion in the first six months of 2020 compared to cash provided by financing activities of $2.070 billion in the first six months of 2019. During the first six months of 2020, net cash flows used in financing activities included a net decline of $3.144 billion in our indebtedness, payments of dividends of $153 million, repurchases of common stock of $441 million, distributions to noncontrolling interests of $199 million and payments of debt issuance costs of $35 million. During the first six months of 2019, net cash flows provided by financing activities included a net increase of $3.313 billion in our indebtedness, payment of dividends of $278 million, repurchases of common stock of $520 million, distributions to noncontrolling interests of $247 million and payments of debt issuance costs of $63 million. In response to the risks the COVID-19 pandemic presents to our business, we have suspended our share repurchase and quarterly dividend programs and reduced certain planned projects and capital expenditures. We expect to evaluate resumption of these programs at a future date. 33 Table of Contents ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources (continued) We are a highly leveraged company with significant debt service requirements. Our debt totaled $30.942 billion at June 30, 2020. Our interest expense was $816 million for the first six months of 2020 and $938 million for the first six months of 2019. In addition to cash flows from operations, available sources of capital include amounts available under our senior secured credit facilities ($7.718 billion available as of both June 30, 2020 and July 28, 2020, respectively) and anticipated access to public and private debt markets. During February 2020, we issued $2.700 billion aggregate principal amount of 3.50% senior notes due 2030. During March 2020, we used the net proceeds for the redemption of all $1.000 billion outstanding aggregate principal amount of HCA Healthcare, Inc.’s 6.25% senior notes due 2021 and, together with available funds, for the redemption of all $2.000 billion outstanding aggregate principal amount of HCA Inc.’s 7.50% senior notes due 2022. In response to the risks the COVID-19 pandemic presents to our business, during March 2020, we entered into a credit agreement that provides for a 364-day secured term loan facility for an aggregate principal amount of up to $2.000 billion. The facility will mature in March 2021. If drawn, amounts outstanding under the credit agreement will bear interest at either (i) the LIBOR rate plus 2.50% or (ii) an alternate base rate as defined in the credit agreement. As of June 30, 2020 and July 28, 2020, there were no amounts outstanding nor draw notices pending under the facility. During the second quarter of 2020, we requested accelerated Medicare payments as provided for in the CARES Act, which allows for eligible health care facilities to request up to six months of advance Medicare payments for acute care hospitals or up to three months of advance Medicare payments for other health care providers. After 120 days past receipt of the advance payments (beginning in August 2020), claims for services provided to Medicare beneficiaries will be applied against the advance payment balance. Any unapplied advance payment amounts must be paid in full within one year from receipt of the advance payments for acute care hospitals and within 210 days for other health care providers. During the second quarter of 2020, we also received approximately $1.4 billion in general and targeted distributions from the CARES Act Provider Relief Fund, and in July 2020 we received approximately $300 million in targeted distributions. These distributions from the Provider Relief Fund will not be subject to repayment, provided we are able to attest to and comply with the terms and conditions of the funding. Investments of our insurance subsidiaries, held to maintain statutory equity levels and to provide liquidity to pay claims, totaled $469 million and $462 million at June 30, 2020 and December 31, 2019, respectively. An insurance subsidiary maintained net reserves for professional liability risks of $181 million and $175 million at June 30, 2020 and December 31, 2019, respectively. Our facilities are insured by a 100% owned insurance subsidiary for losses up to $50 million per occurrence; however, this coverage is generally subject, in most cases, to a $15 million per occurrence self-insured retention. Net reserves for the self-insured professional liability risks retained were $1.744 billion and $1.606 billion at June 30, 2020 and December 31, 2019, respectively. Claims payments, net of reinsurance recoveries, during the next 12 months are expected to approximate $477 million. We estimate that approximately $427 million of the expected net claim payments during the next 12 months will relate to claims subject to the self-insured retention. Considering the actions discussed above to respond to the uncertainty arising from the COVID-19 pandemic and provide additional financial flexibility, management believes that cash flows from operations, amounts available under our senior secured credit facilities and our anticipated access to public and private debt markets will be sufficient to meet expected liquidity needs during the next 12 months. 34 Table of Contents ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources (continued) Summarized Financial Information HCA Inc., a direct wholly-owned subsidiary of HCA Healthcare, Inc., is the obligor under a substantial portion of our indebtedness, including our senior secured credit facilities, senior secured notes and senior unsecured notes. The senior secured notes and senior unsecured notes issued by HCA Inc. are fully and unconditionally guaranteed by HCA Healthcare, Inc. The senior secured credit facilities and senior secured notes are fully and unconditionally guaranteed, subject to customary release provisions, by substantially all existing and future, direct and indirect, 100% owned material domestic subsidiaries that are “Unrestricted Subsidiaries” under our Indenture dated December 16, 1993 (except for certain special purpose subsidiaries that only guarantee and pledge their assets under our senior secured asset-based revolving credit facility). For further information regarding such guarantees, refer to the applicable indentures that are filed as exhibits to our annual report on Form 10-K for the year ended December 31, 2019. Summarized financial information is presented on a combined basis and transactions between the combining entities have been eliminated. Financial information for nonguarantor entities has been excluded. The summarized operating results information for the six months ended June 30, 2020 and year ended December 31, 2019 and the summarized balance sheet information at June 30, 2020 and December 31, 2019, for HCA Healthcare, Inc., HCA Inc. and the subsidiary guarantors (the Parent, Subsidiary Issuer and Subsidiary Guarantors) follow (dollars in millions): Six Months Ended June 30, 2020 and Year Ended December 31, 2019: Six Months June 30, 2020 Year December 31, 2019 Revenues $ 14,425 $ 29,220 Income before income taxes 1,801 3,912 Net income 1,425 2,993 Net income attributable to Parent, Subsidiary Issuer and Subsidiary Guarantors 1,392 2,902 At June 30, 2020 and December 31, 2019: June 30, 2020 December 31, 2019 Current assets $ 9,122 $ 6,090 Property and equipment, net 14,896 13,418 Goodwill and other intangible assets 5,807 5,743 Total noncurrent assets 21,696 19,977 Total assets 30,818 26,067 Current liabilities 8,341 4,504 Long-term debt, net 30,449 33,227 Intercompany balances 2,739 (53 ) Income taxes and other liabilities 862 879 Total noncurrent liabilities 34,502 34,398 Stockholders’ deficit attributable to Parent, Subsidiary Issuer and Subsidiary Guarantors (12,125 ) (12,941 ) Noncontrolling interests 100 106 35 Table of Contents ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources (continued) Market Risk We are exposed to market risk related to changes in market values of securities. The investments in our 100% owned insurance subsidiaries were $469 million at June 30, 2020. These investments are carried at fair value, with changes in unrealized gains and losses that are not credit-related being recorded as adjustments to other comprehensive income. At June 30, 2020, we had a net unrealized gain of $30 million on the insurance subsidiaries’ investments. We are exposed to market risk related to market illiquidity. Investments in debt and equity securities of our 100% owned insurance subsidiaries could be impaired by the inability to access the capital markets. Should the 100% owned insurance subsidiaries require significant amounts of cash in excess of normal cash requirements to pay claims and other expenses on short notice, we may have difficulty selling these investments in a timely manner or be forced to sell them at a price less than what we might otherwise have been able to in a normal market environment. We may be required to recognize credit-related impairments on our investment securities in future periods should issuers default on interest payments or should the fair market valuations of the securities deteriorate due to ratings downgrades or other issue-specific factors. We are also exposed to market risk related to changes in interest rates, and we periodically enter into interest rate swap agreements to manage our exposure to these fluctuations. Our interest rate swap agreements involve the exchange of fixed and variable rate interest payments between two parties, based on common notional principal amounts and maturity dates. The notional amounts of the swap agreements represent balances used to calculate the exchange of cash flows and are not our assets or liabilities. Our credit risk related to these agreements is considered low because the swap agreements are with creditworthy financial institutions. The interest payments under these agreements are settled on a net basis. These derivatives have been recognized in the financial statements at their respective fair values. Changes in the fair value of these derivatives, which are designated as cash flow hedges, are included in other comprehensive income. With respect to our interest-bearing liabilities, approximately $1.198 billion of long-term debt at June 30, 2020 was subject to variable rates of interest, while the remaining balance in long-term debt of $29.744 billion at June 30, 2020 was subject to fixed rates of interest. Both the general level of interest rates and, for the senior secured credit facilities, our leverage affect our variable interest rates. Our variable debt is comprised primarily of amounts outstanding under the senior secured credit facilities. Borrowings under the senior secured credit facilities bear interest at a rate equal to an applicable margin plus, at our option, either (a) a base rate determined by reference to the higher of (1) the federal funds rate plus 0.50% or (2) the prime rate of Bank of America or (b) a LIBOR rate for the currency of such borrowing for the relevant interest period. The applicable margin for borrowings under the senior secured credit facilities may fluctuate according to a leverage ratio. The average effective interest rate for our long-term debt was 5.0% and 5.5% for the six months ended June 30, 2020 and 2019, respectively. The estimated fair value of our total long-term debt was $34.000 billion at June 30, 2020. The estimates of fair value are based upon the quoted market prices for the same or similar issues of long-term debt with the same maturities. Based on a hypothetical 1% increase in variable interest rates, the potential annualized reduction to future pretax earnings would be approximately $12 million. To mitigate the impact of fluctuations in interest rates, we generally target a portion of our debt portfolio to be maintained at fixed rates. We are exposed to currency translation risk related to our foreign operations. We currently do not consider the market risk related to foreign currency translation to be material to our consolidated financial statements or our liquidity. 36 Table of Contents ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Tax Examinations The Internal Revenue Service was conducting an examination of the Company’s 2016, 2017 and 2018 federal income tax returns at June 30, 2020. We are also subject to examination by state and foreign taxing authorities. Management believes HCA Healthcare, Inc. and its predecessors, subsidiaries and affiliates properly reported taxable income and paid taxes in accordance with applicable laws and agreements established with IRS, state and foreign taxing authorities and final resolution of any disputes will not have a material, adverse effect on our results of operations or financial position. However, if payments due upon final resolution of any issues exceed our recorded estimates, such resolutions could have a material, adverse effect on our results of operations or financial position. Operating Data 2020 2019 Number of hospitals in operation at: March 31 186 185 June 30 186 184 September 30 184 December 31 184 Number of freestanding outpatient surgical centers in operation at: March 31 123 124 June 30 122 125 September 30 125 December 31 123 Licensed hospital beds at(a): March 31 49,357 48,455 June 30 49,403 48,483 September 30 48,588 December 31 49,035 Weighted average licensed beds(b): Quarter: First 49,160 48,036 Second 49,358 48,429 Third 48,535 Fourth 48,911 Year 48,480 Average daily census(c): Quarter: First 28,822 28,966 Second 24,844 27,808 Third 27,502 Fourth 28,274 Year 28,134 Admissions(d): Quarter: First 528,244 523,196 Second 452,992 518,253 Third 527,284 Fourth 540,194 Year 2,108,927 37 Table of Contents ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Operating Data (continued) 2020 2019 Equivalent admissions(e): Quarter: First 889,035 889,956 Second 723,136 903,419 Third 918,964 Fourth 933,996 Year 3,646,335 Average length of stay (days)(f): Quarter: First 5.0 5.0 Second 5.0 4.9 Third 4.8 Fourth 4.8 Year 4.9 Emergency room visits(g): Quarter: First 2,264,707 2,287,440 Second 1,516,116 2,253,337 Third 2,269,364 Fourth 2,350,988 Year 9,161,129 Outpatient surgeries(h): Quarter: First 226,319 240,846 Second 170,911 253,441 Third 249,177 Fourth 266,483 Year 1,009,947 Inpatient surgeries(i): Quarter: First 135,145 137,363 Second 118,591 140,473 Third 143,215 Fourth 145,584 Year 566,635 Days revenues in accounts receivable(j): Quarter: First 49 53 Second 50 52 Third 52 Fourth 50 Outpatient revenues as a % of patient revenues(k): Quarter: First 37 % 38 % Second 32 % 39 % Third 39 % Fourth 39 % Year 39 % 38 Table of Contents ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Operating Data (continued) (a) Licensed beds are those beds for which a facility has been granted approval to operate from the applicable state licensing agency. (b) Represents the average number of licensed beds, weighted based on periods owned. (c) Represents the average number of patients in our hospital beds each day. (d) Represents the total number of patients admitted to our hospitals and is used by management and certain investors as a general measure of inpatient volume. (e) Equivalent admissions are used by management and certain investors as a general measure of combined inpatient and outpatient volume. Equivalent admissions are computed by multiplying admissions (inpatient volume) by the sum of gross inpatient revenues and gross outpatient revenues and then dividing the resulting amount by gross inpatient revenues. The equivalent admissions computation “equates” outpatient revenues to the volume measure (admissions) used to measure inpatient volume resulting in a general measure of combined inpatient and outpatient volume. (f) Represents the average number of days admitted patients stay in our hospitals. (g) Represents the number of patients treated in our emergency rooms. (h) Represents the number of surgeries performed on patients who were not admitted to our hospitals. Pain management and endoscopy procedures are not included in outpatient surgeries. (i) Represents the number of surgeries performed on patients who have been admitted to our hospitals. Pain management and endoscopy procedures are not included in inpatient surgeries. (j) Revenues per day is calculated by dividing revenues for the quarter by the days in the quarter. Days revenues in accounts receivable is then calculated as accounts receivable at the end of the quarter divided by revenues per day. (k) Represents the percentage of patient revenues related to patients who are not admitted to our hospitals. 39 Table of Contents ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information called for by this item is provided under the caption “Market Risk” under Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”