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, the length and severity of the pandemic and the spread of virus strains with new epidemiological characteristics; 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, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act, the Paycheck Protection Program and Health Care Enhancement Act, the Consolidated Appropriations Act, 2021, the American Rescue Plan Act of 2021 and other enacted and potential future legislation); changes in revenues due to declining patient volumes, changes in payer 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, availability and adoption 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 proposals to expand coverage of federally-funded insurance programs as an alternative to private insurance or establish a single-payer system (such reforms 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 implementation of sequestration spending reductions required under the Budget Control Act of 2011, related legislation extending these reductions, and those required under the Pay-As-You-Go Act of 2010 (“PAYGO Act”) as a result of the federal budget deficit impact of the American Rescue Plan Act of 2021, 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 18 Table of Contents ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Forward-Looking Statements (continued) 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 economy, financial markets and banking 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, 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 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 of 2020 and have continued to be impacted as various policies were implemented by federal, state and local governments in response to the COVID-19 pandemic, and the public remains wary of real or perceived opportunities for exposure to the virus. 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. Because of these uncertainties, we cannot estimate how long or to what extent the pandemic will impact our operations. First Quarter 2021 Operations Summary Revenues increased to $13.977 billion in the first quarter of 2021 from $12.861 billion in the first quarter of 2020. Net income attributable to HCA Healthcare, Inc. totaled $1.423 billion, or $4.14 per diluted share, for the quarter ended March 31, 2021, compared to $581 million, or $1.69 per diluted share, for the quarter ended March 31, 2020. First quarter results for 2020 include losses on retirement of debt of $295 million, or $0.66 per diluted share, and gains on sales of facilities of $7 million, or $0.02 per diluted share. Our revenues for the quarter ended March 31, 2020 include $55 million, or $0.12 per diluted share, related to the settlement of Medicare outlier calculations for prior periods. Our provisions for income taxes for the first quarters of 2021 and 2020 included tax benefits of $74 million, or $0.22 per diluted share, and $53 million, or $0.15 per diluted share, respectively, related to employee equity award settlements. All “per diluted share” disclosures are based upon amounts net of the applicable income taxes. Revenues increased 8.7% on a consolidated basis and 9.0% on a same facility basis for the quarter ended March 31, 2021, compared to the quarter ended March 31, 2020. The increase in consolidated revenues can be primarily attributed to the net impact of a 16.1% increase in revenue per equivalent admission offset by a 6.4% decline in equivalent admissions. The same facility revenues increase primarily resulted from the net impact of a 19 Table of Contents ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) First Quarter 2021 Operations Summary (continued) 16.6% increase in same facility revenue per equivalent admission offset by a 6.5% decline in same facility equivalent admissions. During the quarter ended March 31, 2021, consolidated admissions and same facility admissions declined 4.1% and 4.2%, respectively, compared to the quarter ended March 31, 2020. Surgeries declined 0.7% on a consolidated basis and declined 0.6% on a same facility basis during the quarter ended March 31, 2021, compared to the quarter ended March 31, 2020. Emergency department visits declined 18.7% and 18.4% on a consolidated basis and on a same facility basis, respectively, during the quarter ended March 31, 2021, compared to the quarter ended March 31, 2020. Consolidated and same facility uninsured admissions declined 15.8% and 15.7%, respectively, for the quarter ended March 31, 2021, compared to the quarter ended March 31, 2020. Cash flows from operating activities increased $613 million, from $1.375 billion for the first quarter of 2020 to $1.988 billion for the first quarter of 2021. The increase in cash provided by operating activities was primarily related to the net effect of an increase in net income, excluding gains on sales of facilities and losses on retirement of debt, of $659 million and an increase related to income taxes of $218 million, offset by negative changes in working capital of $311 million, primarily related to an increase in accounts receivable. 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. Revenues increased 8.7% from $12.861 billion in the first quarter of 2020 to $13.977 billion in the first quarter of 2021. Our revenues are based upon the estimated amounts we expect to be entitled to receive from patients and third-party payers. Estimates of contractual adjustments 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. 20 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) 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 ended March 31, 2021 and 2020 are summarized in the following table (dollars in millions): 2021 Ratio 2020 Ratio Medicare $ 2,559 18.3 % $ 2,743 21.3 % Managed Medicare 2,053 14.7 1,826 14.2 Medicaid 527 3.8 414 3.2 Managed Medicaid 725 5.2 666 5.2 Managed care and insurers 6,885 49.1 6,645 51.6 International (managed care and insurers) 333 2.4 292 2.3 Other 895 6.5 275 2.2 Revenues $ 13,977 100.0 % $ 12,861 100.0 % Consolidated and same facility revenue per equivalent admission increased 16.1% and 16.6%, respectively, in the first quarter of 2021, compared to the first quarter of 2020. Consolidated and same facility equivalent admissions declined 6.4% and 6.5%, respectively, in the first quarter of 2021, compared to the first quarter of 2020. Consolidated and same facility outpatient surgeries increased 2.2% and 2.3%, respectively, in the first quarter of 2021, compared to the first quarter of 2020. Consolidated and same facility inpatient surgeries declined 5.6% and 5.4%, respectively, in the first quarter of 2021, compared to the first quarter of 2020. Consolidated and same facility emergency department visits declined 18.7% and 18.4%, respectively, in the first quarter of 2021, compared to the first quarter of 2020. Our revenues increased, although our patient volumes declined, during the first quarter of 2021 compared to the first quarter of 2020 due to favorable changes in payer mix and higher acuity levels for patients treated during the first quarter of 2021, which resulted in an increase in revenue per equivalent admission. We believe these trends have been impacted by the effect of the pandemic on our operations, including the patients diagnosed with COVID-19. 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 ended March 31, 2021 and 2020 follows (dollars in millions): 2021 2020 Patient care costs (salaries and benefits, supplies, other operating expenses and depreciation and amortization) $ 11,643 $ 11,342 Cost-to-charges ratio (patient care costs as percentage of gross patient charges) 11.4 % 11.9 % Total uncompensated care $ 6,821 $ 7,873 Multiply by the cost-to-charges ratio 11.4 % 11.9 % Estimated cost of total uncompensated care $ 778 $ 937 Same facility uninsured admissions declined by 6,564 admissions, or 15.7%, in the first quarter of 2021 compared to the first quarter of 2020. Same facility uninsured admissions in 2020, compared to 2019, declined 9.1% in the fourth quarter, declined 14.2% in the third quarter, declined 10.0% in the second quarter, and increased 7.1% in the first quarter. The declines in the first quarter of 2021, compared to the first quarter of 2020, and the last three quarters of 2020, compared to the last three quarters of 2019, were primarily due to the reimbursement received, as 21 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) provided for under the Families First Coronavirus Response Act and subsequent legislation, for uninsured patients diagnosed with COVID-19 and the resulting classification of those patients as an insured admission, as well as general declines in patient volumes resulting from the pandemic’s impact on our operations. The approximate percentages of our admissions related to Medicare, managed Medicare, Medicaid, managed Medicaid, managed care and insurers and the uninsured for the quarters ended March 31, 2021 and 2020 are set forth in the following table. 2021 2020 Medicare 24 % 27 % Managed Medicare 22 20 Medicaid 5 5 Managed Medicaid 12 12 Managed care and insurers 30 28 Uninsured 7 8 100 % 100 % The approximate percentages of our inpatient revenues related to Medicare, managed Medicare, Medicaid, managed Medicaid, managed care and insurers for the quarters ended March 31, 2021 and 2020 are set forth in the following table. 2021 2020 Medicare 24 % 29 % Managed Medicare 17 16 Medicaid 5 4 Managed Medicaid 6 5 Managed care and insurers 48 46 100 % 100 % At March 31, 2021, we had 92 hospitals in the states of Texas and Florida. During the quarter ended March 31, 2021, 56% of our admissions and 49% of our revenues were generated by these hospitals. Uninsured admissions in Texas and Florida represented 73% of our uninsured admissions during the quarter ended March 31, 2021. 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 $138 million and $115 million during the first quarters of 2021 and 2020, 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 22 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) 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 operating data. Operating Results Summary The following is a comparative summary of results of operations for the quarters ended March 31, 2021 and 2020 (dollars in millions): 2021 2020 Amount Ratio Amount Ratio Revenues $ 13,977 100.0 $ 12,861 100.0 Salaries and benefits 6,301 45.1 6,118 47.6 Supplies 2,224 15.9 2,123 16.5 Other operating expenses 2,421 17.4 2,427 18.9 Equity in earnings of affiliates (21 ) (0.2 ) (7 ) (0.1 ) Depreciation and amortization 697 5.0 674 5.3 Interest expense 384 2.7 428 3.3 Gains on sales of facilities (2 ) — (7 ) (0.1 ) Losses on retirement of debt — — 295 2.3 12,004 85.9 12,051 93.7 Income before income taxes 1,973 14.1 810 6.3 Provision for income taxes 393 2.8 112 0.9 Net income 1,580 11.3 698 5.4 Net income attributable to noncontrolling interests 157 1.1 117 0.9 Net income attributable to HCA Healthcare, Inc. $ 1,423 10.2 $ 581 4.5 % changes from prior year: Revenues 8.7 % 2.7 % Income before income taxes 143.6 (44.5 ) Net income attributable to HCA Healthcare, Inc. 145.0 (44.1 ) Admissions(a) (4.1 ) 1.0 Equivalent admissions(b) (6.4 ) (0.1 ) Revenue per equivalent admission 16.1 2.9 Same facility % changes from prior year(c): Revenues 9.0 1.2 Admissions(a) (4.2 ) 0.6 Equivalent admissions(b) (6.5 ) (0.4 ) Revenue per equivalent admission 16.6 1.6 (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. 23 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) (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. Quarters Ended March 31, 2021 and 2020 Revenues increased to $13.977 billion in the first quarter of 2021 from $12.861 billion in the first quarter of 2020. Net income attributable to HCA Healthcare, Inc. totaled $1.423 billion, or $4.14 per diluted share, for the quarter ended March 31, 2021, compared to $581 million, or $1.69 per diluted share, for the quarter ended March 31, 2020. First quarter results for 2020 include losses on retirement of debt of $295 million, or $0.66 per diluted share, and gains on sales of facilities of $7 million, or $0.02 per diluted share. Our revenues for the quarter ended March 31, 2020 include $55 million, or $0.12 per diluted share, related to the settlement of Medicare outlier calculations for prior periods. Our provisions for income taxes for the first quarters of 2021 and 2020 included tax benefits of $74 million, or $0.22 per diluted share, and $53 million, or $0.15 per diluted share, respectively, related to employee equity award settlements. All “per diluted share” disclosures are based upon amounts net of the applicable income taxes. Revenues increased 8.7% on a consolidated basis and 9.0% on a same facility basis for the quarter ended March 31, 2021, compared to the quarter ended March 31, 2020. The increase in consolidated revenues can be primarily attributed to the net impact of a 16.1% increase in revenue per equivalent admission offset by a 6.4% decline in equivalent admissions. The same facility revenues increase primarily resulted from the net impact of a 16.6% increase in same facility revenue per equivalent admission offset by a 6.5% decline in same facility equivalent admissions. Salaries and benefits, as a percentage of revenues, were 45.1% in the first quarter of 2021 and 47.6% in the first quarter of 2020. Salaries and benefits per equivalent admission increased 10.0% in the first quarter of 2021 compared to the first quarter of 2020. Same facility labor rate increases averaged 6.1% for the first quarter of 2021 compared to the first quarter of 2020. Supplies, as a percentage of revenues, were 15.9% in the first quarter of 2021 and 16.5% in the first quarter of 2020. Supply costs per equivalent admission increased 11.9% in the first quarter of 2021 compared to the first quarter of 2020. Supply costs per equivalent admission increased 7.0% for medical devices, 21.0% for pharmacy supplies and 12.0% for general medical and surgical items in the first quarter of 2021 compared to the first quarter of 2020. Other operating expenses, as a percentage of revenues, were 17.4% in the first quarter of 2021 and 18.9% in the first quarter of 2020. 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 $134 million and $140 million for the first quarters of 2021 and 2020, respectively. Equity in earnings of affiliates was $21 million and $7 million in the first quarters of 2021 and 2020, respectively. 24 Table of Contents ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Results of Operations (continued) Quarters Ended March 31, 2021 and 2020 (continued) Depreciation and amortization increased $23 million, from $674 million in the first quarter of 2020 to $697 million in the first quarter of 2021. The increase in depreciation relates primarily to capital expenditures at our existing facilities. Interest expense was $384 million in the first quarter of 2021 and $428 million in the first quarter of 2020. Our average debt balance was $31.019 billion for the first quarter of 2021 compared to $34.136 billion for the first quarter of 2020. The average effective interest rate for our long-term debt was 5.0% for both of the quarters ended March 31, 2021 and 2020. During the first quarters of 2021 and 2020, we recorded gains on sales of facilities of $2 million and $7 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 21.7% and 16.2% for the first quarters of 2021 and 2020, 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 quarters of 2021 and 2020 included tax benefits of $74 million and $53 million, respectively, related to employee equity award settlements. Excluding the effect of these adjustments, the effective tax rate for the first quarters of 2021 and 2020 would have been 25.7% and 23.8%, respectively. Net income attributable to noncontrolling interests increased from $117 million for the first quarter of 2020 to $157 million for the first quarter of 2021. The increase in net income attributable to noncontrolling interests related primarily to the operations of two of our Texas markets. Liquidity and Capital Resources Cash provided by operating activities totaled $1.988 billion in the first quarter of 2021 compared to $1.375 billion in the first quarter of 2020. The $613 million increase in cash provided by operating activities, in the first quarter of 2021 compared to the first quarter of 2020, related primarily to the net effect of an increase in net income, excluding gains on sales of facilities and losses on retirement of debt, of $659 million and an increase related to income taxes of $218 million, offset by negative changes in working capital of $311 million, primarily related to an increase in accounts receivable. The net combination of interest payments and net income tax refunds in the first quarters of 2021 and 2020 totaled $362 million and $459 million, respectively. Working capital totaled $3.394 billion at March 31, 2021 and $3.629 billion at December 31, 2020. Cash used in investing activities was $649 million in the first quarter of 2021 compared to $1.145 billion in the first quarter of 2020. Acquisitions of hospitals and health care entities declined from $328 million in the first quarter of 2020 to $22 million in the first quarter of 2021. Excluding acquisitions, capital expenditures were $654 million in the first quarter of 2021 and $853 million in the first quarter of 2020. Planned capital expenditures are expected to approximate $3.7 billion in 2021. At March 31, 2021, 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. 25 Table of Contents ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources (continued) Cash used in financing activities totaled $2.104 billion in the first quarter of 2021 compared to $109 million in the first quarter of 2020. During the first quarter of 2021, net cash flows used in financing activities included a net increase of $33 million in our indebtedness, payment of dividends of $169 million, repurchase of common stock of $1.527 billion and distributions to noncontrolling interests of $234 million. During the first quarter of 2020, net cash flows used in financing activities included an increase of $813 million from net borrowings on our revolving credit facilities and refinancing activity, payment of dividends of $152 million, repurchase of common stock of $441 million, distributions to noncontrolling interests of $154 million and payment of debt issuance costs of $34 million. We are a highly leveraged company with significant debt service requirements. Our debt totaled $31.072 billion at March 31, 2021. Our interest expense was $384 million for the first quarter of 2021 and $428 million for the first quarter of 2020. In addition to cash flows from operations, available sources of capital include amounts available under our senior secured credit facilities ($5.590 billion an d $5.140 b illion available as of March 31, 2021 and April 29, 2021, respectively) and anticipated access to public and private debt markets. Investments of our insurance subsidiaries, held to maintain statutory equity levels and to provide liquidity to pay claims, totaled $501 million and $504 million at March 31, 2021 and December 31, 2020, respectively. An insurance subsidiary maintained net reserves for professional liability risks of $148 million and $188 million at March 31, 2021 and December 31, 2020, respectively. Our facilities are insured by a 100% owned insurance subsidiary for losses up to $75 million per occurrence; however, this coverage is generally subject, in most cases, to a $15 million per occurrence self-insured retention. Additionally, the insurance subsidiary has entered into reinsurance contracts providing reimbursement for a certain portion of losses in excess of self-insured retentions. Net reserves for the self-insured professional liability risks retained were $1.816 billion and $1.736 billion at March 31, 2021 and December 31, 2020, respectively. Claims payments, net of reinsurance recoveries, during the next 12 months are expected to approximate $463 million. We estimate that approximately $422 million of the expected net claim payments during the next 12 months will relate to claims subject to the self-insured retention. 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 primary 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 guarantee d on an unsecured basis b y HCA Healthcare, Inc. The senior secured credit facilities and senior secured notes are fully and unconditionally guaranteed on a senior secured basis 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 a list of subsidiary guarantors, see Exhibit 22 to this quarterly report on Form 10-Q. The subsidiary guarantees rank senior in right of payment to all subordinated indebtedness of each subsidiary guarantor, equally in right of payment with all senior indebtedness of the subsidiary guarantors and are structurally subordinated in right of payment to all indebtedness and other liabilities of any nonguarantor subsidiaries of the subsidiary guarantors (other than indebtedness and liabilities owed to one of the subsidiary guarantors). The subsidiary guarantees are secured by first-priority liens on the subsidiary guarantors’ assets, 26 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 (continued) subject to certain exceptions, that secure our senior secured cash flow credit facility on a first-priority basis. The subsidiary guarantees are secured by second-priority liens on the subsidiary guarantors’ assets that secure our senior secured asset-based revolving credit facility on a first-priority basis and our senior secured cash flow credit facility on a second-priority basis. The subsidiary guarantees may be automatically and unconditionally released and discharged upon certain customary events, including in the event such guarantee is released under our senior secured credit facilities. The indentures governing the senior secured notes include a “savings clause” intended to limit each subsidiary guarantor’s obligations as necessary to prevent the guarantee from constituting a fraudulent conveyance under applicable law, which could reduce a subsidiary guarantor’s liability on its guarantee to zero. For further information regarding the 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, 2020. 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 quarter ended March 31, 2021 and year ended December 31, 2020 and the summarized balance sheet information at March 31, 2021 and December 31, 2020, for HCA Healthcare, Inc., HCA Inc. and the subsidiary guarantors (the Parent, Subsidiary Issuer and Subsidiary Guarantors) follow (dollars in millions): Quarter Ended March 31, 2021 and Year Ended December 31, 2020: Quarter March 31, 2021 Year December 31, 2020 Revenues $ 8,401 $ 31,040 Income before income taxes 1,479 4,016 Net income 1,168 3,172 Net income attributable to Parent, Subsidiary Issuer and Subsidiary Guarantors 1,148 3,091 At March 31, 2021 and December 31, 2020: March 31, 2021 December 31, 2020 Current assets $ 7,198 $ 7,442 Property and equipment, net 14,934 14,939 Goodwill and other intangible assets 5,762 5,763 Total noncurrent assets 21,801 21,771 Total assets 28,999 29,213 Current liabilities 5,178 5,316 Long-term debt, net 30,488 30,444 Intercompany balances 2,324 2,090 Income taxes and other liabilities 1,230 1,004 Total noncurrent liabilities 34,559 34,035 Stockholders’ deficit attributable to Parent, Subsidiary Issuer and Subsidiary Guarantors (10,845 ) (10,247 ) Noncontrolling interests 107 109 27 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 (continued) The first-priority liens securing the subsidiary guarantees discussed above include liens on (i) substantially all of the capital stock of substantially all wholly owned first-tier subsidiaries of HCA Inc. or of the subsidiary guarantors (but limited to 65% of the stock of any such wholly owned first-tier subsidiary that is a foreign subsidiary), subject to certain limited exceptions, and (ii) substantially all indebtedness owing to HCA Inc. or to the subsidiary guarantors, including any and all intercompany indebtedness owed by HCA Healthcare, Inc. or any subsidiary thereof to HCA Inc., or any subsidiary guarantor. For a list of affiliates whose securities are pledged as collateral for the senior secured notes, see Exhibit 22 to this quarterly report on Form 10-Q. Under the first lien intercreditor agreement, the administrative agent for the lenders under the cash flow credit facility, subject to the occurrence of certain events, has the exclusive right to direct foreclosures and take other actions with respect to these liens, and the trustee for the senior secured notes has no right to take any such actions. In certain circumstances, including upon certain events of default under the senior secured credit facilities and the senior secured notes, the collateral agent in respect of the cash flow credit facility and the senior secured notes could proceed against the collateral granted to it to secure such indebtedness, including the aforementioned pledged capital stock and pledged indebtedness, and require such collateral to be delivered to the collateral agent to the extent not already in its possession for purposes of perfecting the lien on such assets. For further information regarding the collateral, including events or circumstances that may require delivery of the collateral, refer to the applicable indentures, the first lien intercreditor agreement, the cash flow credit agreement and the pledge agreement that are filed as exhibits to our annual report on Form 10-K for the year ended December 31, 2020. There is no trading market for any of HCA Healthcare, Inc.’s affiliates whose securities are pledged as collateral for the senior secured notes. Rule 13-02 of Regulation S-X requires the presentation of summarized financial information of the combined affiliates whose securities are pledged as collateral for the senior secured notes unless such information is not material. The rule provides that such information is not material if the assets, liabilities and results of operations of the combined affiliates whose securities are pledged as collateral are not materially different than the corresponding amounts presented in the consolidated financial statements of the Registrant. Healthtrust, Inc. — The Hospital Company (“Healthtrust”) is the first-tier subsidiary of HCA Inc., and the common stock of Healthtrust is pledged as collateral for the senior secured notes. Due to the corporate structure relationship of HCA Healthcare, Inc. and Healthtrust, all of HCA Healthcare, Inc.’s operating subsidiaries, including all other affiliates whose securities are pledged as collateral for the senior secured notes, are also subsidiaries of Healthtrust. The corporate structure relationship, combined with the application of push-down accounting in Healthtrust’s consolidated financial statements related to HCA Healthcare Inc.’s debt and financial instruments, mean that the assets, liabilities and results of operations of Healthtrust (and, therefore, of the combined affiliates whose securities are pledged as collateral for the senior secured notes) are not materially different than the corresponding amounts presented in the financial statements of HCA Healthcare, Inc. As a result, summarized financial information of affiliates whose securities are pledged as collateral for the senior secured notes is not required to be presented under Rule 13-02. Market Risk We are exposed to market risk related to changes in market values of securities. The investment securities held by our insurance subsidiaries were recorded at $501 million at March 31, 2021. 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 March 31, 2021, we had a net unrealized gain of $21 million on the insurance subsidiaries’ investments. 28 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 (continued) We are exposed to market risk related to market illiquidity. Investment securities held by our insurance subsidiaries could be impaired by the inability to access the capital markets. Should the 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 $1.238 billion of long-term debt at March 31, 2021 was subject to variable rates of interest, while the remaining balance in long-term debt of $29.834 billion at March 31, 2021 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% for both of the quarters ended March 31, 2021 and 2020. The estimated fair value of our total long-term debt was $34.872 billion at March 31, 2021. 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 March 31, 2021. 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, 29 Table of Contents ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Tax Examinations (continued) 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 2021 2020 Number of hospitals in operation at: March 31 186 186 June 30 186 September 30 187 December 31 185 Number of freestanding outpatient surgical centers in operation at: March 31 121 123 June 30 122 September 30 121 December 31 121 Licensed hospital beds at(a): March 31 49,561 49,357 June 30 49,403 September 30 49,473 December 31 49,265 Weighted average licensed beds in service(b): Quarter: First 42,363 42,177 Second 42,309 Third 42,426 Fourth 42,072 Year 42,246 Average daily census(c): Quarter: First 29,678 28,822 Second 24,844 Third 28,186 Fourth 29,065 Year 27,734 Admissions(d): Quarter: First 506,380 528,244 Second 452,992 Third 506,756 Fourth 521,917 Year 2,009,909 Equivalent admissions(e): Quarter: First 832,489 889,035 Second 723,136 Third 835,576 Fourth 864,583 Year 3,312,330 30 Table of Contents ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Operating Data (continued) 2021 2020 Average length of stay (days)(f): Quarter: First 5.3 5.0 Second 5.0 Third 5.1 Fourth 5.1 Year 5.1 Emergency room visits(g): Quarter: First 1,841,778 2,264,707 Second 1,516,116 Third 1,813,661 Fourth 1,855,823 Year 7,450,307 Outpatient surgeries(h): Quarter: First 231,228 226,319 Second 170,911 Third 232,493 Fourth 252,760 Year 882,483 Inpatient surgeries(i): Quarter: First 127,590 135,145 Second 118,591 Third 133,492 Fourth 135,157 Year 522,385 Days revenues in accounts receivable(j): Quarter: First 48 49 Second 50 Third 44 Fourth 45 Outpatient revenues as a % of patient revenues(k): Quarter: First 36 % 37 % Second 32 % Third 36 % Fourth 35 % Year 35 % (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 in service, 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. 31 Table of Contents ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Operating Data (continued) (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. 32 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.”