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 and terms of government and administrative regulation and stimulus (including the Families First Coronavirus Response Act (“FFCRA”), the Coronavirus Aid, Relief and Economic Security (“CARES”) Act, the Paycheck Protection Program and Health Care Enhancement 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 20 ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements (continued) industry) resulting from the COVID-19 pandemic, (16) the emergence of and 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 June 30, 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 during the latter portion of the first quarter and the first half of the second quarter and have continued to be impacted into the third 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 many 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 we are unable to predict the future impact of the pandemic on our operations. During the nine months ended September 30, 2020, we received $4.449 billion of accelerated Medicare payments and $1.674 billion in general and targeted distributions from the Provider Relief Fund (net of amounts returned), both as provided for and established under the CARES Act. The Provider Relief Fund distributions were accounted for as government grants, and recognized on a systematic and rational basis as other income, once there is reasonable assurance that the applicable terms and conditions required to retain the funds will be met. Based on our analysis of the compliance and reporting requirements of the Provider Relief Fund and the impact of the pandemic on our operating results from the beginning of the pandemic in March through June 30, 2020, we recognized $822 million related to the general distribution funds during the quarter ended June 30, 2020. During the quarter ended September 30, 2020, we continued to evaluate our operating results and gave consideration to the updated reporting guidelines issued in September by the U.S. Department of Health and Human Services that significantly changed the measurement of Provider Relief Fund distributions providers are able to retain. Based on our assessment of the likelihood of meeting the applicable terms and conditions of the Provider Relief Fund, during the quarter ended September 30, 2020 we reversed the $822 million of government stimulus income recognized during the quarter ended June 30, 2020. On October 8, 2020, we announced our 21 ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COVID-19 Pandemic and CARES Act Funding (continued) decision to return, or repay early, all of our share of the Provider Relief Fund distributions of approximately $1.6 billion and the approximately $4.4 billion of Medicare accelerated payments. The total accelerated Medicare payments and Provider Relief Fund distributions received are recorded under the caption “government stimulus refund liability” in our condensed consolidated balance sheet at September 30, 2020. We believe the extent of the COVID-19 pandemic’s 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, 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. If we incur declines in cash flows and results of operations, such declines could 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. During the third quarter of 2020, we believe COVID-19 cases at our hospitals contributed to an increase in patient acuity and had a positive impact on our average reimbursement per case. However, the impact of COVID-19 in future periods may vary and could adversely impact our results of operations. Third Quarter 2020 Operations Summary Revenues increased to $13.311 billion in the third quarter of 2020 from $12.694 billion in the third quarter of 2019. Net income attributable to HCA Healthcare, Inc. totaled $668 million, or $1.95 per diluted share, for the quarter ended September 30, 2020, compared to $612 million, or $1.76 per diluted share, for the quarter ended September 30, 2019. Third quarter results for 2020 include the reversal of $822 million, or $1.72 per diluted share, of government stimulus income recorded in the second quarter of 2020 related to general distribution funds from the Provider Relief Fund established by the CARES Act. Third quarter results for 2020 also include gains on sales of facilities of $14 million, or $0.03 per diluted share. Third quarter results for 2019 include losses on retirement of debt of $211 million, or $0.47 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 343.346 million shares for the quarter ended September 30, 2020 and 347.487 million shares for the quarter ended September 30, 2019. During 2019 and the first nine 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 were significantly impacted during the latter portion of the first quarter and the first half of the second quarter and have continued to be impacted into the third 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. Revenues increased 4.9% on a consolidated basis and 4.5% on a same facility basis for the quarter ended September 30, 2020, compared to the quarter ended September 30, 2019. The increase in consolidated revenues can be primarily attributed to the net impact of a 15.3% increase in revenue per equivalent admission offset by a 9.1% decline in equivalent admissions. The same facility revenues increase primarily resulted from the net impact of a 14.8% increase in same facility revenue per equivalent admission offset by a 9.0% decline in same facility equivalent admissions. 22 ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Third Quarter 2020 Operations Summary (continued) During the quarter ended September 30, 2020, consolidated admissions and same facility admissions declined 3.9% and 3.8%, respectively, compared to the quarter ended September 30, 2019. Surgeries declined 6.7% on a consolidated basis and declined 6.5% on a same facility basis during the quarter ended September 30, 2020, compared to the quarter ended September 30, 2019. Emergency department visits declined 20.1% and 20.3% on a consolidated basis and on a same facility basis, respectively, during the quarter ended September 30, 2020, compared to the quarter ended September 30, 2019. Consolidated and same facility uninsured admissions declined 12.7% and 14.2%, respectively, for the quarter ended September 30, 2020, compared to the quarter ended September 30, 2019. Cash flows from operating activities increased $591 million, from $2.126 billion for the third quarter of 2019 to $2.717 billion for the third quarter of 2020. The increase in cash provided by operating activities was primarily related to the net effect of an increase in net income, excluding the government stimulus income reversal, gains on sales of facilities and losses on retirement of debt, of $488 million, receipt of an additional $302 million in Provider Relief Funds, and positive changes in working capital of $277 million, primarily from the increase in accounts payable and accrued expenses, offset by declines related to income taxes of $486 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. 23 ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Results of Operations (continued) Revenue/Volume Trends (continued) Revenues increased 4.9% from $12.694 billion in the third quarter of 2019 to $13.311 billion in the third 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 nine months ended September 30, 2020 and 2019 are summarized in the following table (dollars in millions): Quarter 2020 Ratio 2019 Ratio Medicare $ 2,603 19.6 % $ 2,592 20.4 % Managed Medicare 1,760 13.2 1,615 12.7 Medicaid 445 3.3 361 2.8 Managed Medicaid 707 5.3 641 5.0 Managed care and insurers 6,752 50.7 6,554 51.7 International (managed care and insurers) 307 2.3 282 2.2 Other 737 5.6 649 5.2 Revenues $ 13,311 100.0 % $ 12,694 100.0 % Nine Months 2020 Ratio 2019 Ratio Medicare $ 7,618 20.5 % $ 7,997 21.2 % Managed Medicare 5,074 13.6 4,799 12.7 Medicaid 1,423 3.8 1,124 3.0 Managed Medicaid 1,904 5.1 1,808 4.8 Managed care and insurers 19,028 51.0 19,405 51.1 International (managed care and insurers) 838 2.3 863 2.3 Other 1,355 3.7 1,817 4.9 Revenues $ 37,240 100.0 % $ 37,813 100.0 % Consolidated and same facility revenue per equivalent admission increased 15.3% and 14.8%, respectively, in the third quarter of 2020, compared to the third quarter of 2019. Consolidated and same facility equivalent admissions declined 9.1% and 9.0%, respectively, in the third quarter of 2020, compared to the third quarter of 2019. Consolidated and same facility outpatient surgeries declined 6.7% and 6.3%, respectively, in the third quarter of 2020, compared to the third quarter of 2019. Consolidated and same facility inpatient surgeries both declined 6.8% in the third quarter of 2020, compared to the third quarter of 2019. Consolidated and same facility emergency department visits declined 20.1% and 20.3%, respectively, in the third quarter of 2020, compared to the third quarter of 2019. 24 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 nine months ended September 30, 2020 and 2019 follows (dollars in millions): Quarter Nine Months 2020 2019 2020 2019 Patient care costs (salaries and benefits, supplies, other operating expenses and depreciation and amortization) $ 11,170 $ 11,060 $ 32,428 $ 32,619 Cost-to-charges ratio (patient care costs as percentage of gross patient charges) 12.0 % 12.3 % 12.1 % 12.1 % Total uncompensated care $ 7,023 $ 7,923 $ 21,625 $ 22,703 Multiply by the cost-to-charges ratio 12.0 % 12.3 % 12.1 % 12.1 % Estimated cost of total uncompensated care $ 843 $ 975 $ 2,617 $ 2,747 Same facility uninsured admissions declined by 6,492 admissions, or 14.2%, in the third quarter of 2020 compared to the third quarter of 2019, primarily due to the reimbursement received as provided for under the FFCRA and subsequent legislation for uninsured patients diagnosed with COVID-19, and the resulting classification of those patients as an insured admission. Same facility uninsured admissions declined 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 nine months ended September 30, 2020 and 2019 are set forth in the following table. Quarter Nine Months 2020 2019 2020 2019 Medicare 25 % 28 % 26 % 29 % Managed Medicare 19 18 19 19 Medicaid 5 5 6 5 Managed Medicaid 13 12 12 12 Managed care and insurers 30 28 29 27 Uninsured 8 9 8 8 100 % 100 % 100 % 100 % 25 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 nine months ended September 30, 2020 and 2019 are set forth in the following table. Quarter Nine Months 2020 2019 2020 2019 Medicare 25 % 28 % 27 % 28 % Managed Medicare 15 14 15 15 Medicaid 5 4 5 4 Managed Medicaid 6 6 6 5 Managed care and insurers 49 47 47 47 Uninsured — 1 — 1 100 % 100 % 100 % 100 % At September 30, 2020, we had 91 hospitals in the states of Texas and Florida. During the third quarter of 2020, 55% of our admissions and 49% of our revenues were generated by these hospitals. Uninsured admissions in Texas and Florida represented 71% of our uninsured admissions during the third 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 $154 million and $103 million during the third quarters of 2020 and 2019, respectively, and $455 million and $317 million during the first nine 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. 26 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 nine months ended September 30, 2020 and 2019 (dollars in millions): Quarter 2020 2019 Amount Ratio Amount Ratio Revenues $ 13,311 100.0 $ 12,694 100.0 Salaries and benefits 6,097 45.8 5,971 47.0 Supplies 2,128 16.0 2,090 16.5 Other operating expenses 2,251 16.9 2,352 18.5 Government stimulus income reversal 822 6.2 — — Equity in earnings of affiliates (40 ) (0.3 ) (4 ) — Depreciation and amortization 694 5.2 647 5.1 Interest expense 385 2.9 448 3.5 Gains on sales of facilities (14 ) ( 0.1 ) — — Losses on retirement of debt — — 211 1.7 12,323 92.6 11,715 92.3 Income before income taxes 988 7.4 979 7.7 Provision for income taxes 209 1.5 215 1.7 Net income 779 5.9 764 6.0 Net income attributable to noncontrolling interests 111 0.9 152 1.2 Net income attributable to HCA Healthcare, Inc. $ 668 5.0 $ 612 4.8 % changes from prior year: Revenues 4.9 % 10.9 % Income before income taxes 0.9 (8.4 ) Net income attributable to HCA Healthcare, Inc. 9.0 (19.3 ) Admissions(a) (3.9 ) 5.9 Equivalent admissions(b) (9.1 ) 7.5 Revenue per equivalent admission 15.3 3.1 Same facility % changes from prior year(c): Revenues 4.5 6.3 Admissions(a) (3.8 ) 3.2 Equivalent admissions(b) (9.0 ) 4.2 Revenue per equivalent admission 14.8 2.0 27 ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Results of Operations (continued) Operating Results Summary (continued) Nine Months 2020 2019 Amount Ratio Amount Ratio Revenues $ 37,240 100.0 $ 37,813 100.0 Salaries and benefits 17,545 47.1 17,455 46.2 Supplies 5,999 16.1 6,249 16.5 Other operating expenses 6,825 18.3 7,013 18.6 Equity in earnings of affiliates (48 ) (0.1 ) (23 ) (0.1 ) Depreciation and amortization 2,059 5.6 1,902 4.9 Interest expense 1,201 3.2 1,386 3.7 Losses (gains) on sales of facilities 6 — (17 ) — Losses on retirement of debt 295 0.8 211 0.6 33,882 91.0 34,176 90.4 Income before income taxes 3,358 9.0 3,637 9.6 Provision for income taxes 665 1.8 765 2.0 Net income 2,693 7.2 2,872 7.6 Net income attributable to noncontrolling interests 365 0.9 438 1.2 Net income attributable to HCA Healthcare, Inc. $ 2,328 6.3 $ 2,434 6.4 % changes from prior year: Revenues (1.5 )% 9.9 % Income before income taxes (7.7 ) (5.4 ) Net income attributable to HCA Healthcare, Inc. (4.4 ) (10.6 ) Admissions(a) (5.1 ) 4.6 Equivalent admissions(b) (9.8 ) 6.2 Revenue per equivalent admission 9.1 3.5 Same facility % changes from prior year(c): Revenues (2.1 ) 5.7 Admissions(a) (5.3 ) 2.1 Equivalent admissions(b) (9.9 ) 3.0 Revenue per equivalent admission 8.6 2.6 (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. 28 ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Results of Operations (continued) Quarters Ended September 30, 2020 and 2019 Revenues increased to $13.311 billion in the third quarter of 2020 from $12.694 billion in the third quarter of 2019. Net income attributable to HCA Healthcare, Inc. totaled $668 million, or $1.95 per diluted share, for the quarter ended September 30, 2020, compared to $612 million, or $1.76 per diluted share, for the quarter ended September 30, 2019. Third quarter results for 2020 include the reversal of $822 million, or $1.72 per diluted share, of government stimulus income previously recorded in the second quarter of 2020 related to general distribution funds from the Provider Relief Fund established by the CARES Act. Third quarter results for 2020 also include gains on sales of facilities of $14 million, or $0.03 per diluted share. Third quarter results for 2019 include losses on retirement of debt of $211 million, or $0.47 per diluted share. Due to the COVID-19 pandemic, patient volumes and the related revenues for most of our services were significantly impacted during the latter portion of the first quarter and the first half of the second quarter and have continued to be impacted into the third 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. During the third quarter of 2020, we believe COVID-19 cases at our hospitals contributed to an increase in patient acuity and had a positive impact on our average reimbursement per case. However, the impact of COVID-19 in future periods may vary and could adversely impact our results of operations. Revenues increased 4.9% on a consolidated basis and 4.5% on a same facility basis for the quarter ended September 30, 2020, compared to the quarter ended September 30, 2019. The increase in consolidated revenues can be primarily attributed to the net impact of a 15.3% increase in revenue per equivalent admission offset by a 9.1% decline in equivalent admissions. The same facility revenues increase primarily resulted from the net impact of a 14.8% increase in same facility revenue per equivalent admission offset by a 9.0% decline in same facility equivalent admissions offset. Salaries and benefits, as a percentage of revenues, were 45.8% in the third quarter of 2020 and 47.0% in the third quarter of 2019. Salaries and benefits per equivalent admission increased 12.3% in the third quarter of 2020 compared to the third quarter of 2019. Same facility labor rate increases averaged 5.2% for the third quarter of 2020 compared to the third quarter of 2019. Due to the COVID-19 pandemic, during the second quarter of 2020 we suspended annual merit increases and implemented temporary salary reductions. During the third quarter of 2020, we revised these compensation decisions and recorded $102 million, or $0.23 per diluted share, of additional compensation expense. Supplies, as a percentage of revenues, were 16.0% in the third quarter of 2020 and 16.5% in the third quarter of 2019. Supply costs per equivalent admission increased 11.9% in the third quarter of 2020 compared to the third quarter of 2019. Supply costs per equivalent admission increased 9.9% for medical devices, 14.0% for pharmacy supplies and 12.5% for general medical and surgical items in the third quarter of 2020 compared to the third quarter of 2019. Other operating expenses, as a percentage of revenues, were 16.9% in the third quarter of 2020 and 18.5% in the third 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 $26 million and $89 million for the third quarters of 2020 and 2019, respectively. During the third quarters of 2020 and 2019, we recorded reductions of $112 million, or $0.25 per diluted share, and $50 million, or $0.11 per diluted share, respectively, to our provision for professional liability risks related to the receipt of updated actuarial information. During the third quarter of 2020, we recorded the reversal of $822 million of government stimulus income previously recorded in the second quarter of 2020 related to general distribution funds received from the Provider Relief Fund established by the CARES Act. 29 ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Results of Operations (continued) Quarters Ended September 30, 2020 and 2019 (continued) Equity in earnings of affiliates was $40 million and $4 million in the third quarters of 2020 and 2019, respectively. Depreciation and amortization increased $47 million, from $647 million in the third quarter of 2019 to $694 million in the third quarter of 2020. The increase in depreciation relates primarily to capital expenditures at our existing facilities. Interest expense was $385 million in the third quarter of 2020 and $448 million in the third quarter of 2019. Our average debt balance was $30.952 billion for the third quarter of 2020 compared to $34.693 billion for the third quarter of 2019. The average effective interest rate for our long-term debt declined to 4.9% for the quarter ended September 30, 2020 from 5.1% for the quarter ended September 30, 2019. During the third quarter of 2020, we recorded gains on sales of facilities of $14 million. During June 2019, we issued $5.000 billion aggregate principal amount of senior secured notes comprised of $2.000 billion aggregate principal amount of 4 1/8% notes due 2029, $1.000 billion aggregate principal amount of 5 1/8% notes due 2039 and $2.000 billion aggregate principal amount of 5 1/4% notes due 2049. During July 2019, we redeemed all $600 million outstanding aggregate principal amount of 4.250% senior secured notes due 2019, all $3.000 billion outstanding aggregate principal amount of 6.500% senior secured notes due 2020 and all $1.350 billion outstanding aggregate principal amount of 5.875% senior secured notes due 2022. The pretax loss on retirement of debt for these redemptions was $211 million. The effective tax rates were 23.8% and 26.0% for the third 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 $152 million for the third quarter of 2019 to $111 million for the third quarter of 2020. The decline in net income attributable to noncontrolling interests related primarily to the government stimulus income reversal for certain joint ventures. Nine Months Ended September 30, 2020 and 2019 Revenues declined to $37.240 billion in the first nine months of 2020 from $37.813 billion in the first nine months of 2019. Net income attributable to HCA Healthcare, Inc. totaled $2.328 billion, or $6.79 per diluted share, for the nine months ended September 30, 2020, compared to $2.434 billion, or $6.98 per diluted share, for the nine months ended September 30, 2019. Results for the first nine months of 2020 included $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 nine months of 2020 also included losses on sales of facilities of $6 million, or $0.03 per diluted share, and losses on retirement of debt of $295 million, or $0.66 per diluted share. Results for the first nine months of 2019 included gains on sales of facilities of $17 million, or $0.04 per diluted share, and losses on retirement of debt of $211 million, or $0.47 per diluted share. Revenues for the first nine 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 343.014 million shares for the nine months ended September 30, 2020 and 348.712 million shares for the nine months ended September 30, 2019. 30 ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Results of Operations (continued) Nine Months Ended September 30, 2020 and 2019 (continued) Due to the COVID-19 pandemic, patient volumes and the related revenues for most of our services were significantly impacted during the latter portion of the first quarter and the first half of the second quarter and have continued to be impacted into the third 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. During the third quarter of 2020, we believe COVID-19 cases at our hospitals contributed to an increase in patient acuity and had a positive impact on our average reimbursement per case. However, the impact of COVID-19 in future periods may vary and could adversely impact our results of operations. Revenues declined 1.5% on a consolidated basis and 2.1% on a same facility basis for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019. The decline in consolidated revenues can be primarily attributed to the net impact of a 9.8% decline in equivalent admissions offset by a 9.1% increase in revenue per equivalent admission. The same facility revenues decline primarily resulted from the net impact of a 9.9% decline in same facility equivalent admissions offset by an 8.6% increase in same facility revenue per equivalent admission. Salaries and benefits, as a percentage of revenues, were 47.1% in the first nine months of 2020 and 46.2% in the first nine months of 2019. Salaries and benefits per equivalent admission increased 11.4% in the first nine months of 2020 compared to the first nine months of 2019. Same facility labor rate increases averaged 2.8% for the first nine months of 2020 compared to the first nine months of 2019. Supplies, as a percentage of revenues, were 16.1% in the first nine months of 2020 and 16.5% in the first nine months of 2019. Supply costs per equivalent admission increased 6.4% in the first nine months of 2020 compared to the first nine months of 2019. Supply costs per equivalent admission increased 4.5% for medical devices, 5.2% for pharmacy supplies and 8.1% for general medical and surgical items in the first nine months of 2020 compared to the first nine months of 2019. Other operating expenses, as a percentage of revenues, were 18.3% in the first nine months of 2020 and 18.6% in the first nine 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 $305 million and $358 million for the first nine months of 2020 and 2019, respectively. During the first nine months of 2020 and 2019, we recorded reductions of $112 million, or $0.25 per diluted share, and $50 million, or $0.11 per diluted share, respectively, to our provision for professional liability risks related to the receipt of updated actuarial information. Equity in earnings of affiliates was $48 million and $23 million in the first nine months of 2020 and 2019, respectively. Depreciation and amortization increased $157 million, from $1.902 billion in the first nine months of 2019 to $2.059 billion in the first nine months of 2020. The increase in depreciation relates primarily capital expenditures at our existing facilities. Interest expense was $1.201 billion in the first nine months of 2020 and $1.386 billion in the first nine months of 2019. Our average debt balance was $32.223 billion for the first nine months of 2020 compared to $34.422 billion for the first nine months of 2019. The average effective interest rate for our long-term debt declined to 5.0% for the nine months ended September 30, 2020 from 5.4% for the nine months ended September 30, 2019. 31 ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Results of Operations (continued) Nine Months Ended September 30, 2020 and 2019 (continued) During the first nine months of 2020 and 2019, we recorded losses on sales of facilities of $6 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. During June 2019, we issued $5.000 billion aggregate principal amount of senior secured notes comprised of $2.000 billion aggregate principal amount of 4 1/8% notes due 2029, $1.000 billion aggregate principal amount of 5 1/8% notes due 2039 and $2.000 billion aggregate principal amount of 5 1/4% notes due 2049. During July 2019, we redeemed all $600 million outstanding aggregate principal amount of 4.250% senior secured notes due 2019, all $3.000 billion outstanding aggregate principal amount of 6.500% senior secured notes due 2020 and all $1.350 billion outstanding aggregate principal amount of 5.875% senior secured notes due 2022. The pretax loss on retirement of debt for these redemptions was $211 million. The effective tax rates were 22.2% and 23.9% for the first nine 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 nine months of 2020 and 2019 included tax benefits of $59 million and $56 million, respectively, related to employee equity award settlements. Excluding the effect of these adjustments, the effective tax rate for the first nine months of 2020 and 2019 would have been 24.2% and 25.7%, respectively. Net income attributable to noncontrolling interests declined from $438 million for the first nine months of 2019 to $365 million for the first nine months of 2020. The decline in net income attributable to noncontrolling interests related primarily to the operations of joint ventures in two of our Texas markets and our surgery center partnerships. Liquidity and Capital Resources Cash provided by operating activities totaled $12.815 billion in the first nine months of 2020 compared to $5.097 billion in the first nine months of 2019. The $7.718 billion increase in cash provided by operating activities in the first nine months of 2020 compared to the first nine months of 2019, related primarily to the combined effect of the receipt of $6.123 billion related to unapplied accelerated Medicare payments and Provider Relief Funds as provided for in the CARES Act, and positive changes in working capital of $1.742 billion, primarily from the collection of patient accounts receivable. On October 8, 2020, we announced our decision to return, or repay early, all of our share of the Provider Relief Fund distributions of approximately $1.6 billion and the approximately $4.4 billion of Medicare accelerated payments that have been received under the CARES Act. The repayment of these funds will be recorded as a reduction to our cash flows from operating activities. Our cash flows from operating activities of $12.815 billion for the nine months ended September 30, 2020 includes this approximately $6 billion of funds that we have announced we will repay, and the exclusion of the impact of these cash flows would reduce our cash flows provided by operating activities for the first nine months of 2020 to $6.815 billion. 32 ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources (continued) Interest payments and net income tax payments in the first nine months of 2020 and 2019 totaled $2.009 billion and $2.206 billion, respectively. Working capital totaled $1.887 billion at September 30, 2020 and $3.439 billion at December 31, 2019. The $1.552 billion decline in working capital is primarily related to a decline in accounts receivable of $947 million and a $365 million increase in accounts payable. Cash used in investing activities was $2.483 billion in the first nine months of 2020 compared to $4.375 billion in the first nine months of 2019. Acquisitions of hospitals and health care entities declined from $1.592 billion in the first nine months of 2019 (which included the acquisition of a seven-hospital health system in North Carolina) to $380 million in the first nine months of 2020. Excluding acquisitions, capital expenditures were $2.087 billion in the first nine months of 2020 and $2.884 billion in the first nine months of 2019. Planned capital expenditures are expected to approximate $3.0 billion in 2020. At September 30, 2020, there were projects under construction which had estimated additional costs to complete and equip over the next five years of approximately $3.1 billion. We expect to finance capital expenditures with internally generated and borrowed funds. Cash used in financing activities totaled $4.361 billion in the first nine months of 2020 compared to $661 million in the first nine months of 2019. During the first nine months of 2020, net cash flows used in financing activities included a net decline of $3.183 billion in our indebtedness, payments of dividends of $153 million, repurchases of common stock of $441 million, distributions to noncontrolling interests of $393 million and payments of debt issuance costs of $35 million. During the first nine months of 2019, net cash flows used in financing activities included a net increase of $1.132 billion in our indebtedness, payment of dividends of $414 million, repurchases of common stock of $759 million, distributions to noncontrolling interests of $404 million and payments of debt issuance costs of $71 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. We are a highly leveraged company with significant debt service requirements. Our debt totaled $30.964 billion at September 30, 2020. Our interest expense was $1.201 billion for the first nine months of 2020 and $1.386 billion for the first nine months of 2019. In addition to cash flows from operations, available sources of capital include amounts available under our senior secured credit facilities ($7.710 billion available as of both September 30, 2020 and October 26, 2020) 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 September 30, 2020 and October 29, 2020, there were no amounts outstanding nor draw notices pending under the facility. 33 ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources (continued) During the nine months ended September 30, 2020, we received $4.449 billion of accelerated Medicare payments and $1.674 billion in general and targeted distributions from the Provider Relief Fund (net of amounts returned), both as provided for and established under the CARES Act. On October 8, 2020, we announced our decision to return, or repay early, all of our share of the Provider Relief Fund distributions of approximately $1.6 billion and the approximately $4.4 billion of Medicare accelerated payments. We expect to repay the entire amount using available cash and future cash flows from operations. Investments of our insurance subsidiaries, held to maintain statutory equity levels and to provide liquidity to pay claims, totaled $486 million and $462 million at September 30, 2020 and December 31, 2019, respectively. An insurance subsidiary maintained net reserves for professional liability risks of $187 million and $175 million at September 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 $1.702 billion and $1.606 billion at September 30, 2020 and December 31, 2019, respectively. Claims payments, net of reinsurance recoveries, during the next 12 months are expected to approximate $487 million. We estimate that approximately $440 million of the expected net claim payments during the next 12 months will relate to claims subject to the self-insured retention. 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. 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. 34 ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources (continued) Summarized Financial Information (continued) 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 nine months ended September 30, 2020 and year ended December 31, 2019 and the summarized balance sheet information at September 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): Nine Months Ended September 30, 2020 and Year Ended December 31, 2019: Nine Months September 30, 2020 Year December 31, 2019 Revenues $ 22,406 $ 29,220 Income before income taxes 2,642 3,912 Net income 2,071 2,993 Net income attributable to Parent, Subsidiary Issuer and Subsidiary Guarantors 2,017 2,902 At September 30, 2020 and December 31, 2019: September 30, 2020 December 31, 2019 Current assets $ 11,252 $ 6,090 Property and equipment, net 14,795 13,418 Goodwill and other intangible assets 5,777 5,743 Total noncurrent assets 21,640 19,977 Total assets 32,892 26,067 Current liabilities 9,528 4,504 Long-term debt, net 30,457 33,227 Intercompany balances 2,901 (53 ) Income taxes and other liabilities 799 879 Total noncurrent liabilities 34,654 34,398 Stockholders’ deficit attributable to Parent, Subsidiary Issuer and Subsidiary Guarantors (11,392 ) (12,941 ) Noncontrolling interests 102 106 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 $486 million at September 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 September 30, 2020, we had a net unrealized gain of $31 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 35 ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources (continued) Market Risk (continued) 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 $1.185 billion of long-term debt at September 30, 2020 was subject to variable rates of interest, while the remaining balance in long-term debt of $29.779 billion at September 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 5.4% for the nine months ended September 30, 2020 and 2019, respectively. The estimated fair value of our total long-term debt was $34.739 billion at September 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. Tax Examinations The Internal Revenue Service was conducting an examination of the Company’s 2016, 2017 and 2018 federal income tax returns at September 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. 36 ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Operating Data 2020 2019 Number of hospitals in operation at: March 31 186 185 June 30 186 184 September 30 187 184 December 31 184 Number of freestanding outpatient surgical centers in operation at: March 31 123 124 June 30 122 125 September 30 121 125 December 31 123 Licensed hospital beds at(a): March 31 49,357 48,455 June 30 49,403 48,483 September 30 49,473 48,588 December 31 49,035 Weighted average licensed beds(b): Quarter: First 49,160 48,036 Second 49,358 48,429 Third 49,479 48,535 Fourth 48,911 Year 48,480 Average daily census(c): Quarter: First 28,822 28,966 Second 24,844 27,808 Third 28,186 27,502 Fourth 28,274 Year 28,134 Admissions(d): Quarter: First 528,244 523,196 Second 452,992 518,253 Third 506,756 527,284 Fourth 540,194 Year 2,108,927 Equivalent admissions(e): Quarter: First 889,035 889,956 Second 723,136 903,419 Third 835,576 918,964 Fourth 933,996 Year 3,646,335 37 ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Operating Data (continued) 2020 2019 Average length of stay (days)(f): Quarter: First 5.0 5.0 Second 5.0 4.9 Third 5.1 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 1,813,661 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 232,493 249,177 Fourth 266,483 Year 1,009,947 Inpatient surgeries(i): Quarter: First 135,145 137,363 Second 118,591 140,473 Third 133,492 143,215 Fourth 145,584 Year 566,635 Days revenues in accounts receivable(j): Quarter: First 49 53 Second 50 52 Third 44 52 Fourth 50 Outpatient revenues as a % of patient revenues(k): Quarter: First 37 % 38 % Second 32 % 39 % Third 36 % 39 % Fourth 39 % Year 39 % 38 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 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.”