qhc-10q_20190930.htm

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

As of November 6, 2019, there were 32,916,020 shares outstanding of the registrant’s Common Stock.

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018

Net operating revenues	$	419,900		$	460,507		$	1,304,875		$	1,419,959
Operating costs and expenses:
Salaries and benefits		215,457			226,237			653,943			705,868
Supplies		47,818			48,949			149,405			160,732
Other operating expenses		139,671			143,716			383,414			440,910
Depreciation and amortization		15,028			16,612			44,167			52,015
Lease costs and rent		11,121			11,661			34,279			35,551
Electronic health records incentives		(17	)		(31	)		592			(617	)
Legal, professional and settlement costs		5,191			1,519			6,480			10,349
Impairment of long-lived assets and goodwill		8,010			32,438			42,820			72,198
Loss (gain) on sale of hospitals, net		1,206			805			2,346			8,927
Loss on closure of hospitals, net		18,414			1,111			18,414			18,195
Total operating costs and expenses		461,899			483,017			1,335,860			1,504,128
Income (loss) from operations		(41,999	)		(22,510	)		(30,985	)		(84,169	)
Interest expense, net		33,056			32,450			98,904			95,307
Income (loss) before income taxes		(75,055	)		(54,960	)		(129,889	)		(179,476	)
Provision for (benefit from) income taxes		137			(1,074	)		386			(1,162	)
Net income (loss)		(75,192	)		(53,886	)		(130,275	)		(178,314	)
Less: Net income (loss) attributable to noncontrolling interests		736			54			1,532			1,200
Net income (loss) attributable to Quorum Health Corporation	$	(75,928	)	$	(53,940	)	$	(131,807	)	$	(179,514	)

Earnings (loss) per share attributable to Quorum Health Corporation stockholders:
Basic and diluted	$	(2.52	)	$	(1.85	)	$	(4.41	)	$	(6.21	)
Weighted-average shares outstanding:
Basic and diluted		30,178,229			29,215,823			29,875,196			28,891,363

	September 30,			December 31,
	2019			2018

ASSETS
Current assets:
Cash and cash equivalents	$	44,431		$	3,203
Patient accounts receivable		283,701			322,608
Inventories		39,324			45,646
Prepaid expenses		20,412			19,683
Due from third-party payors		26,449			63,443
Other current assets		33,643			36,405
Total current assets		447,960			490,988
Property and equipment, net		485,495			559,438
Goodwill		391,701			401,073
Intangible assets, net		47,807			48,289
Operating lease right-of-use assets		78,606			—
Other long-term assets		70,199			74,306
Total assets	$	1,521,768		$	1,574,094

LIABILITIES AND EQUITY
Current liabilities:
Current maturities of long-term debt	$	1,646		$	1,697
Current portion of operating lease liabilities		24,835			—
Accounts payable		153,645			143,917
Accrued liabilities:
Accrued salaries and benefits		68,273			76,908
Accrued interest		33,580			10,024
Due to third-party payors		41,998			45,852
Other current liabilities		46,623			43,336
Total current liabilities		370,600			321,734
Long-term debt		1,195,407			1,191,777
Long-term operating lease liabilities		56,346			—
Deferred income tax liabilities, net		7,049			6,736
Other long-term liabilities		93,454			126,499
Total liabilities		1,722,856			1,646,746
Redeemable noncontrolling interests		2,278			2,278
Equity:
Quorum Health Corporation stockholders' equity (deficit):
Preferred stock, $0.0001 par value per share, 100,000,000 shares authorized, none issued		—			—
Common stock, $0.0001 par value per share, 300,000,000 shares authorized; 32,908,366 shares issued and outstanding at September 30, 2019, and 31,521,398 shares issued and outstanding at December 31, 2018		3			3
Additional paid-in capital		561,081			557,309
Accumulated other comprehensive income (loss)		905			759
Accumulated deficit		(780,999	)		(648,464	)
Total Quorum Health Corporation stockholders' equity (deficit)		(219,010	)		(90,393	)
Nonredeemable noncontrolling interests		15,644			15,463
Total equity (deficit)		(203,366	)		(74,930	)
Total liabilities and equity	$	1,521,768		$	1,574,094

				Quorum Health Corporation Stockholders' Equity
												Accumulated
	Redeemable								Additional			Other					Nonredeemable			Total
	Noncontrolling			Common Stock					Paid-in			Comprehensive		Accumulated			Noncontrolling			Equity
	Interests			Shares			Amount		Capital			Income (Loss)		Deficit			Interests			(Deficit)

Balance at December 31, 2018	$	2,278			31,521,398		$	3	$	557,309		$	759	$	(648,464	)	$	15,463		$	(74,930	)
Comprehensive income (loss)		(74	)		—			—		—			49		(39,006	)		474			(38,483	)
Adoption of ASC Topic 842		—			—			—		—			—		(728	)		—			(728	)
Stock-based compensation expense		—			5,000			—		1,770			—		—			—			1,770
Cancellation of restricted stock awards for payroll tax withholdings on vested shares		—			(231,729	)		—		(461	)		—		—			—			(461	)
Cash distributions to noncontrolling investors		(46	)		—			—		—			—		—			(1,177	)		(1,177	)
Adjustments to redemption values of redeemable noncontrolling interests		120			—			—		(120	)		—		—			—			(120	)
Balance at March 31, 2019		2,278			31,294,669			3		558,498			808		(688,198	)		14,760			(114,129	)
Comprehensive income (loss)		(101	)		—			—		—			48		(16,873	)		497			(16,328	)
Stock-based compensation expense		—			1,684,346			—		1,194			—		—			—			1,194
Cancellation of restricted stock awards for payroll tax withholdings on vested shares		—			(52,326	)		—		(103	)		—		—			—			(103	)
Cash distributions to noncontrolling investors		(1	)		—			—		—			—		—			(332	)		(332	)
Adjustments to redemption values of redeemable noncontrolling interests		102			—			—		(102	)		—		—			—			(102	)
Balance at June 30, 2019		2,278			32,926,689			3		559,487			856		(705,071	)		14,925			(129,800	)
Comprehensive income (loss)		17			—			—		—			49		(75,928	)		719			(75,160	)
Stock-based compensation expense		—			—			—		1,744			—		—			—			1,744
Cancellation of restricted stock awards for payroll tax withholdings on vested shares		—			(18,323	)		—		(24	)		—		—			—			(24	)
Cash distributions to noncontrolling investors		(143	)		—			—		—			—		—			—			—
Adjustments to redemption values of redeemable noncontrolling interests		126			—			—		(126	)		—		—			—			(126	)
Balance at September 30, 2019	$	2,278			32,908,366		$	3	$	561,081		$	905	$	(780,999	)	$	15,644		$	(203,366	)

				Quorum Health Corporation Stockholders' Equity
												Accumulated
	Redeemable								Additional			Other						Nonredeemable			Total
	Noncontrolling			Common Stock					Paid-in			Comprehensive			Accumulated			Noncontrolling			Equity
	Interests			Shares			Amount		Capital			Income (Loss)			Deficit			Interests			(Deficit)

Balance at December 31, 2017	$	2,325			30,294,895		$	3	$	549,610		$	(1,956	)	$	(448,216	)	$	13,969		$	113,410
Comprehensive income (loss)		(121	)		—			—		—			114			(98,968	)		602			(98,252	)
Stock-based compensation expense		—			979,817			—		2,464			—			—			—			2,464
Cancellation of restricted stock awards for payroll tax withholdings on vested shares		—			(112,221	)		—		(634	)		—			—			—			(634	)
Cash distributions to noncontrolling investors		(62	)		—			—		—			—			—			(741	)		(741	)
Adjustments to redemption values of redeemable noncontrolling interests		174			—			—		(174	)		—			—			—			(174	)
Balance at March 31, 2018		2,316			31,162,491			3		551,266			(1,842	)		(547,184	)		13,830			16,073
Comprehensive income (loss)		(217	)		—			—		—			(189	)		(26,606	)		882			(25,913	)
Stock-based compensation expense		—			—			—		2,756			—			—			—			2,756
Cancellation of restricted stock awards for payroll tax withholdings on vested shares		—			(263,781	)		—		(1,309	)		—			—			—			(1,309	)
Adjustments to redemption values of redeemable noncontrolling interests		202			—			—		(202	)		—			—			—			(202	)
Balance at June 30, 2018		2,301			30,898,710			3		552,511			(2,031	)		(573,790	)		14,712			(8,595	)
Comprehensive income (loss)		(377	)		—			—		—			114			(53,940	)		431			(53,395	)
Stock-based compensation expense		—			636,890			—		2,766			—			—			—			2,766
Cancellation of restricted stock awards for payroll tax withholdings on vested shares		—			(7,715	)		—		(36	)		—			—			—			(36	)
Cash distributions to noncontrolling investors		(39	)		—			—		—			—			—			(639	)		(639	)
Adjustments to redemption values of redeemable noncontrolling interests		394			—			—		(394	)		—			—			—			(394	)
Balance at September 30, 2018	$	2,279			31,527,885		$	3	$	554,847		$	(1,917	)	$	(627,730	)	$	14,504		$	(60,293	)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018

Cash flows from operating activities:
Net income (loss)	$	(75,192	)	$	(53,886	)	$	(130,275	)	$	(178,314	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		15,028			16,612			44,167			52,015
Non-cash interest expense, net		2,306			1,860			6,625			6,394
Provision for (benefit from) deferred income taxes		71			(1,129	)		192			(1,104	)
Stock-based compensation expense		1,744			2,766			4,708			7,986
Impairment of long-lived assets and goodwill		8,010			32,438			42,820			72,198
Loss (gain) on sale of hospitals, net		1,206			805			2,346			8,927
Non-cash portion of loss (gain) on hospital closures		11,781			—			11,781			6,394
Changes in reserves for self-insurance claims, net of payments		(119	)		4,623			(25,922	)		15,003
Other non-cash expense (income), net		3,237			380			1,414			387
Changes in operating assets and liabilities, net of acquisitions and divestitures:
Patient accounts receivable		8,166			9,206			26,946			30,280
Due from and due to third-party payors, net		10,120			8,344			7,858			29,322
Inventories, prepaid expenses and other current assets		5,726			(7,353	)		5,494			(7,582	)
Accounts payable and accrued liabilities		44,793			12,108			36,009			2,394
Long-term assets and liabilities, net		(11,721	)		1,560			(11,323	)		(1,365	)
Net cash provided by (used in) operating activities		25,156			28,334			22,840			42,935

Cash flows from investing activities:
Capital expenditures for property and equipment		(7,720	)		(9,576	)		(25,831	)		(34,895	)
Capital expenditures for software		(1,843	)		(483	)		(5,360	)		(1,527	)
Acquisitions, net of cash acquired		(76	)		(63	)		(531	)		(121	)
Proceeds from the sale of hospitals		40,992			—			52,733			39,170
Other investing activities, net		3,643			10			3,260			259
Net cash provided by (used in) investing activities		34,996			(10,112	)		24,271			2,886

Cash flows from financing activities:
Borrowings under revolving credit facilities		138,000			121,000			465,000			368,000
Repayments under revolving credit facilities		(155,000	)		(135,000	)		(454,000	)		(368,000	)
Borrowings of long-term debt		—			90			186			157
Repayments of long-term debt		(445	)		(354	)		(14,408	)		(31,801	)
Payments of debt issuance costs		—			—			—			(2,268	)
Payments on purchase contracts		(374	)		—			(374	)		—
Cancellation of restricted stock awards for payroll tax withholdings on vested shares		(24	)		(36	)		(588	)		(1,979	)
Cash distributions to noncontrolling investors		(143	)		(678	)		(1,699	)		(1,481	)
Net cash provided by (used in) financing activities		(17,986	)		(14,978	)		(5,883	)		(37,372	)

Net change in cash, cash equivalents and restricted cash		42,166			3,244			41,228			8,449
Cash, cash equivalents and restricted cash at beginning of period		2,265			10,822			3,203			5,617
Cash, cash equivalents and restricted cash at end of period	$	44,431		$	14,066		$	44,431		$	14,066

Supplemental cash flow information:
Interest payments, net	$	7,663		$	18,702		$	68,724		$	77,413
Income tax payments, net		—			46			189			533

On April 29, 2016, Community Health Systems, Inc. (“CHS”) completed the spin-off of 38 hospitals, including their affiliated facilities, and Quorum Health Resources, LLC to form Quorum Health Corporation through the distribution of 100% of the common stock of QHC to CHS stockholders of record as of the close of business on April 22, 2016 (the “Spin-off”). The principal business of Quorum Health Corporation, a Delaware corporation, and its subsidiaries (collectively, “QHC” or the “Company”) is to provide hospital and outpatient healthcare services in its markets across the United States. As of September 30, 2019, the Company owned or leased a diversified portfolio of 24 hospitals in rural and mid-sized markets, which are located in 14 states and have a total of 2,038 licensed beds. The Company provides outpatient healthcare services through its hospitals and affiliated facilities, including urgent care centers, diagnostic and imaging centers, physician clinics and surgery centers. The Company’s wholly-owned subsidiary, Quorum Health Resources, LLC (“QHR”), provides hospital management advisory and healthcare consulting services to non-affiliated hospitals located throughout the United States. Over 95% of the Company’s net operating revenues are attributable to its hospital operations business.

The condensed consolidated financial statements and accompanying notes of the Company presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP” or “GAAP”). In the opinion of the Company’s management, the condensed consolidated financial information presented herein includes all adjustments necessary to present fairly the results of operations, financial position and cash flows of the Company for the interim periods presented. Results of operations for interim periods should not be considered indicative of the results of operations expected for the full year ending December 31, 2019. Certain information and disclosures have been condensed or omitted as presented herein and as permitted by the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim period presentation. The Company’s management believes the financial statements and disclosures presented herein are adequate in order to make the information presented not misleading. The condensed consolidated financial statements should be read in conjunction with the consolidated and combined financial statements and accompanying notes thereto for the year ended December 31, 2018, contained in the Company’s Annual Report on Form 10-K filed with the SEC on March 12, 2019 (the “2018 Annual Report on Form 10-K”).

The Company’s financial statements have been prepared under the assumption that it will continue as a going concern. In accordance with Accounting Standards Codification (“ASC”) 205-40, Presentation of Financial Statements — Going Concern, management concluded that there were probable conditions or events that raised substantial doubt about the Company’s ability to continue as a going concern due to the fact that the Company’s maximum Secured Net Leverage Ratio permitted under the credit agreement (the “CS Agreement”), among the Company, the lenders party thereto and Credit Suisse AG, Cayman Islands Branch, as administrative agent and collateral agent, is reduced to 4.50 from 5.00 in the first quarter of 2020. The measurement date for the Company’s required compliance with the Secured Net Leverage Ratio is as of the last day of each fiscal quarter. The Company is in compliance with its financial covenants as of September 30, 2019. Management’s evaluation of the Company’s ability to comply with the Secured Net Leverage Ratio for the one year period following the date these financial statements are issued included, but was not limited to, consideration of the following factors:

Secured Net Leverage has occurred on or before September 30, 2019, and therefore the results remain uncertain. As such, substantial doubt about the Company’s ability to continue as a going concern has not been alleviated as of September 30, 2019.

The condensed consolidated financial statements include the accounts of the Company and its subsidiaries in which it holds either a direct or indirect ownership of a majority voting interest. Investments in less-than-wholly-owned consolidated subsidiaries of QHC are presented separately in the equity component of the Company’s consolidated balance sheets to distinguish between the interests of QHC and the interests of the noncontrolling investors. Revenues and expenses from these subsidiaries are included in the respective individual line items of the Company’s consolidated statements of income, and net income is presented both in total and separately to distinguish the amounts attributable to the Company and the amounts attributable to the interests of the noncontrolling investors. Noncontrolling interests that are redeemable or may become redeemable at a fixed or determinable price at the option of the holder or upon the occurrence of an event outside of the control of the Company, are presented in mezzanine equity in the Company’s consolidated balance sheets. Intercompany transactions and accounts of the Company are eliminated in consolidation.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company’s consolidated financial statements and accompanying notes. Actual results could differ from those estimates under different assumptions or conditions.

The Company reports revenues from patient services at its hospitals and affiliated facilities at the amount that reflects the consideration to which the Company expects to be entitled in exchange for providing patient care. These amounts are due from patients, governmental programs and third-party payors such as Medicare, Medicaid, health maintenance organizations, preferred provider organizations, private insurers and others, and include variable consideration for retroactive revenue adjustments due to settlements of audits, reviews and investigations. Generally, the Company bills the patient and third-party payors several days after the services are performed or the patient is discharged. Revenue is recognized as the performance obligations are satisfied. Billings and collections were outsourced to CHS under a transition services agreement that was entered into in connection with the Spin-off through September 30, 2019. See Note 16 — Related Party Transactions for additional information on this agreement. On May 8, 2019, the Company entered into an agreement with R1 RCM to receive end-to-end revenue cycle management services. The agreement with R1 RCM has, among other things, allowed for the Company to transition its billing and collection services from CHS to R1 RCM. In July 2019, R1 RCM began providing limited services to the Company, such as status review on aged accounts receivable and insurance denials. Effective October 1, 2019, the Company transitioned its billing and collection services from CHS to R1 RCM.

Performance obligations are determined based on the nature of the services provided by the Company. Revenue for performance obligations satisfied over time is recognized based on actual charges incurred in relation to total expected (or actual) charges for services anticipated to be provided. The Company believes that this method provides a faithful depiction of the transfer of services over the term of the performance obligation based on the inputs needed to satisfy the obligation. Generally, performance obligations satisfied over time relate to patients in the Company’s hospitals receiving inpatient acute care services. The Company measures the performance obligation from admission into the hospital to the point when it is no longer required to provide services to that patient, which is generally at the time of discharge. Revenue for performance obligations satisfied at a point in time is recognized when goods or services are provided, and the Company does not believe it is required to provide additional goods or services to the patient.

Because all of its performance obligations relate to contracts with a duration of less than one year, the Company has elected to apply the optional exemption provided in ASC 606-10-50-14(a) and, therefore, is not required to disclose the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period. The unsatisfied or partially unsatisfied performance obligations referred to above are primarily related to inpatient acute care services at the end of the reporting period. The performance obligations for these contracts are generally completed when the patient is discharged, which generally occurs within days or weeks following the end of the reporting period.

The Company determines the transaction price based on standard billing rates for goods and services provided, reduced by contractual adjustments provided to third-party payors, discounts provided to uninsured patients and patient responsibility after insurance in accordance with the Company’s policy, and/or implicit price concessions provided to uninsured patients and patient responsibility after insurance. The Company determines its estimates of contractual adjustments and discounts based on contractual

agreements, its discount policies and historical experience. The Company determines its estimate of implicit price concessions based on its historical collection experience with this class of patients.

The Company recognizes revenues related to its QHR business when either the performance obligation has been satisfied or over time as the hospital management advisory and healthcare consulting services are provided and reports these revenues at the amount expected to be collected from the non-affiliated hospital clients of QHR.

The primary sources of payment for patient healthcare services are third-party payors, including federal and state agencies administering the Medicare and Medicaid programs, other governmental agencies, managed care health plans, commercial insurance companies, workers’ compensation carriers and employers. Self-pay revenues are the portion of patient service revenues derived from patients who do not have health insurance coverage and the patient responsibility portion of services that are not covered by health insurance plans. Non-patient revenues primarily include revenues from QHR’s hospital management advisory and healthcare consulting services business, rental income and hospital cafeteria sales.

The following table provides a summary of net operating revenues by payor source (dollars in thousands):

	Three Months Ended September 30,
	2019					2018
	$ Amount		% of Total			$ Amount		% of Total

Medicare	$	121,812		29.0	%	$	123,788		26.9	%
Medicaid		86,280		20.5	%		97,803		21.2	%
Managed care and commercial plans		168,050		40.0	%		185,493		40.3	%
Self-pay and self-pay after insurance		25,410		6.1	%		33,647		7.3	%
Non-patient		18,348		4.4	%		19,776		4.3	%
Total net operating revenues	$	419,900		100.0	%	$	460,507		100.0	%


	Nine Months Ended September 30,
	2019					2018
	$ Amount		% of Total			$ Amount		% of Total

Medicare	$	370,743		28.4	%	$	398,477		28.1	%
Medicaid		264,998		20.3	%		270,047		19.0	%
Managed care and commercial plans		516,783		39.6	%		560,445		39.5	%
Self-pay and self-pay after insurance		95,081		7.3	%		125,619		8.8	%
Non-patient		57,270		4.4	%		65,371		4.6	%
Total net operating revenues	$	1,304,875		100.0	%	$	1,419,959		100.0	%

Agreements with third-party payors typically provide for payments at amounts less than standard billing rates. A summary of the payment arrangements with major third-party payors follows:

Government programs, including Medicare and Medicaid programs, which represent a large portion of the Company’s operating revenues, are highly complex programs to administer and are subject to interpretation of federal and state-specific reimbursement

rates, new legislation and final cost report settlements. As a result of investigations by governmental agencies, various health care organizations have received requests for information and notices regarding alleged noncompliance with those laws and regulations. In some instances, these investigations have resulted in organizations entering into significant settlement agreements or findings of criminal and civil liability. Compliance with such laws and regulations may be subject to future government review and interpretation as well as significant regulatory action, including fines, penalties, and potential exclusion from the related programs. There can be no assurance that regulatory authorities will not challenge the Company’s compliance with these laws and regulations, and it is not possible to determine the impact (if any) such claims or penalties could have on the Company.

Contractual adjustments, or differences in standard billing rates and the payments derived from contractual terms with governmental and non-governmental third-party payors, are recorded based on management’s best estimates in the period in which services are performed and a payment methodology is established with the patient. Recorded estimates for past contractual adjustments are subject to change, in large part, due to ongoing contract negotiations and regulation changes, which are typical in the U.S. healthcare industry. Revisions to estimates are recorded as contractual adjustments in the periods in which they become known and may be subject to further revisions. In addition, the contracts the Company has with commercial insurance payors may provide for retroactive audit and review of claims. Self-pay and other payor discounts are incentives offered by the Company to uninsured or underinsured patients and other payors to reduce their costs of healthcare services. Subsequent changes in estimates for third-party payors that are determined to be the result of an adverse change in a payor’s ability to pay are recorded as bad debt expense. Bad debt expense for the three months and nine months ended September 30, 2019 and 2018 was not material and is included in other operating expenses in the Company’s consolidated statements of income. Billing and collections were outsourced to CHS under a transition services agreement that was put in place by CHS in connection with the Spin-off through September 30, 2019. On May 8, 2019, the Company entered into an agreement with R1 RCM to receive end-to-end revenue cycle management services. The agreement with R1 RCM has, among other things, allowed for the Company to transition its billing and collection services from CHS to R1 RCM. In July 2019, R1 RCM began providing limited services to the Company, such as status review on aged accounts receivable and insurance denials. Effective October 1, 2019, the Company transitioned its billing and collection services from CHS to R1 RCM.

Cost report settlements under reimbursement programs with Medicare, Medicaid and other managed care plans for retroactive adjustments due to audits, reviews or investigations are considered variable consideration and are included in the determination of the estimated transaction price for providing patient care. These settlements are estimated based on the terms of the payment agreement with the payor, correspondence from the payor and the Company’s historical experience, including an assessment to ensure that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the retroactive adjustment is subsequently resolved. Estimated settlements are adjusted in future periods as new information becomes available, or as years are settled or are no longer subject to such audits, reviews, and investigations. Previous program reimbursements and final cost report settlements are included in due from and due to third-party payors in the consolidated balance sheets. Net adjustments arising from a change in the transaction price for estimated cost report settlements favorably (unfavorably) impacted net operating revenues by $0.2 million and $(0.5) million during the three months ended September 30, 2019 and 2018, respectively and by $2.3 million and $(0.4) million during the nine months ended September 30, 2019 and 2018, respectively.

Currently, several states have established supplemental payment programs, including disproportionate share programs, for the purpose of providing reimbursement to providers to offset a portion of the cost of providing care to Medicaid and indigent patients. These programs are designed with input from CMS and are funded with a combination of federal and state resources, including, in certain instances, taxes, fees or other program expenses (collectively, “provider taxes”) levied on the providers. The receivables and payables associated with these programs are included in due from and due to third-party payors in the consolidated balance sheets.

The following table provides a summary of the components of amounts due from and due to third-party payors, as presented in the consolidated balance sheets (in thousands):

After a state supplemental payment program is approved and fully authorized by the appropriate state legislative or governmental agency, the Company recognizes the revenue and related expenses based on the terms of each program in the period in which the amounts are estimable and revenue collection is reasonably assured. The revenues earned by the Company under these programs are included in net operating revenues and the expenses associated with these programs are included in other operating expenses in the consolidated statements of income.

The following table provides a summary of the portion of Medicaid reimbursements included in the consolidated statements of income that are attributable to state supplemental payment programs (in thousands):

The California Department of Health Care Services administers the Hospital Quality Assurance Fee (“HQAF”) program, imposing a fee on certain general and acute care California hospitals. Revenues generated from these fees provide funding for the non-federal supplemental payments to California hospitals that serve California’s Medi-Cal and uninsured patients. The current phase of the HQAF program expired on June 30, 2019 and the next phase of the program, Phase VI, began July 1, 2019 and is expected to be a 30 month program. Due to insufficient modeling and other statistical information as of September 30, 2019, the Company has not recognized revenue under Phase VI of the HQAF program. In future quarters as more information becomes available, the Company will reassess its ability to estimate revenue under Phase VI of the HQAF program. Upon consideration of the additional information, revenue will be recognized under ASC 606 when uncertainty of a future revenue reversal is subsequently resolved. Under the HQAF program, the Company recognized $8.7 million of Medicaid revenues and $0.1 million of provider taxes for the three months ended September 30, 2018. Under the HQAF program, the Company recognized $16.0 million of Medicaid revenues and $4.4 million of provider taxes for the nine months ended September 30, 2019, and $24.4 million of Medicaid revenues and $4.4 million of provider taxes for the nine months ended September 30, 2018. On September 30, 2019, the Company sold Watsonville Community Hospital. The Company recognized $7.3 million and $14.4 million of Medicaid revenues, net of provider taxes, for the nine months ended September 30, 2019 and 2018, respectively, related to Watsonville.

The Company recognized $2.0 million of Medicaid revenues for the three months ended September 30, 2019 and $5.9 million of Medicaid revenues in the nine months ended September 30, 2019 related to the sale of Illinois property tax credits. The Company recognized $7.3 million of Medicaid revenues related to the sale of Illinois property tax credits in the three and nine months ended September 30, 2018 as the revenues for the full year 2018 were recognized in the third quarter of 2018.

Generally, patients who are covered by third-party payors are responsible for related co-pays and deductibles, which vary in amount. The Company also provides services to uninsured patients, and offers those uninsured patients a discount, either by policy or law, from the Company’s standard billing rates. The Company estimates the transaction price for patients with co-pays and

deductibles and for uninsured patients based on historical collection experience and current market conditions. The initial estimate of the transaction price is determined by reducing the Company’s standard charges by any contractual adjustments, discounts, and implicit price concessions. Subsequent changes to the estimate of the transaction price, if any, are generally recorded as an adjustment to patient service revenue in the period of the change.

In the ordinary course of business, the Company provides services to patients who are financially unable to pay for hospital care. The related charges for those patients who are financially unable to pay that otherwise do not qualify for reimbursement from a governmental program are classified as charity care. The Company determines amounts that qualify for charity care primarily based on the patient’s household income relative to the poverty level guidelines established by the federal government. The Company’s policy is to not pursue collections for such amounts. The related charges which are recorded in operating revenues at the standard billing rates and fully offset in contractual allowances were $7.5 million and $7.6 million for the three months ended September 30, 2019 and 2018, respectively, and $19.8 million and $26.9 million for the nine months ended September 30, 2019 and 2018, respectively.

Substantially all of the Company’s receivables are related to providing healthcare services to patients at its hospitals and affiliated outpatient facilities.

For self-pay and self-pay after insurance receivables, the Company estimates the implicit price concession by reserving a percentage of all self-pay and self-pay after insurance accounts receivable without regard to aging category. The estimate of the implicit price concession is based on a model that considers historical cash collections, expected recoveries and any anticipated changes in trends. The Company’s ability to estimate the implicit price concessions is not significantly impacted by the aging of accounts receivable, as management believes that substantially all of the risk exists at the point in time such accounts are identified as self-pay. Significant changes in payor mix, CHS’s and R1 RCM’s business office operations, including their efforts in collecting the Company’s accounts receivables, economic conditions, or trends in federal and state governmental healthcare coverage, among others, could affect the Company’s estimates of implicit price concessions for self-pay and self-pay after insurance accounts receivable. The Company continually reviews its overall estimate of implicit price concessions by monitoring historical cash collections as a percentage of trailing net operating revenues, as well as by analyzing current period net operating revenues and admissions by payor classification, aged accounts receivable by payor, days revenue outstanding, the composition of self-pay receivables between pure self-pay patients and the patient responsibility portion of third-party insured receivables, and the impact of recent divestitures.

Collections are impacted by the economic ability of patients to pay, the effectiveness of the Company’s billing and collection efforts, which are outsourced to a third party, including their current policies on billings, accounts receivable payor classification and collections. Our results are also affected by third party collection agencies and by the ability of the Company to further attempt collection efforts. Billings and collections were outsourced to CHS under a transition services agreement that was established with the Spin-off through September 30, 2019. See Note 16 — Related Party Transactions for additional information on the CHS TSA agreement. On May 8, 2019, the Company entered into an agreement with R1 RCM to receive end-to-end revenue cycle management services. The agreement with R1 RCM has, among other things, allowed for the Company to transition its billing and collection services from CHS to R1 RCM. In July 2019, R1 RCM began providing limited services to the Company, such as status review on aged accounts receivable and insurance denials. Effective October 1, 2019, the Company transitioned its billing and collection services from CHS to R1 RCM.

The Company has elected the practical expedient allowed under Financial Accounting Standards Board’s (“FASB”) ASC Topic 606 and does not adjust the promised amount of consideration from patients and third-party payors for the effects of a significant financing component due to the Company’s expectation that the period between the time the service is provided to a patient and the time that the patient or a third-party payor pays for that service will be one year or less. However, the Company does, in certain instances, enter into payment agreements with patients that allow payments in excess of one year. For those cases, the financing component is not deemed to be significant to the contract.

The Company has applied the practical expedient provided by FASB ASC Topic 340 and all incremental customer contract acquisition costs are expensed as incurred, as the amortization period of the asset that the Company otherwise would have recognized is one year or less in duration.

The Company grants unsecured credit to its patients, most of whom reside in the service area of the Company’s hospitals and affiliated outpatient facilities and are insured under third-party payor agreements. Because of the economic diversity of the Company’s markets and non-governmental third-party payors, Medicare receivables are a significant concentration of credit risk. Accounts

receivable, net of contractual adjustments, from Medicare were $51.7 million and $58.2 million, or 18.2% and 18.0% of total patient accounts receivable as of September 30, 2019 and December 31, 2018, respectively. Additionally, the Company believes Illinois Medicaid represents a significant concentration of credit risk to the Company due to the fiscal problems in the state of Illinois that affect the timing and extent of payments due to providers, which are administered by the state of Illinois under the Medicaid program. The Company’s accounts receivable, net of contractual adjustments, from Illinois Medicaid were $20.1 million and $24.5 million, or 7.1% and 7.6% of total patient accounts receivable as of September 30, 2019 and December 31, 2018, respectively. The Company also believes California state supplemental program receivables represent a significant concentration of credit risk due to the timing and extent of the receivables. The Company’s state supplemental program receivables from California Medicaid were $5.2 million and $37.8 million, or 19.8% and 59.6% of total due from third-party payors, as of September 30, 2019 and December 31, 2018, respectively. The decline in the program receivables from California Medicaid are due to the sale of Watsonville Community Hospital on September 30, 2019. See Note 3 — Divestitures for additional information on the sale of Watsonville Community Hospital.

The Company’s revenues are particularly sensitive to regulatory and economic changes in certain states where the Company generates significant revenues. Accordingly, any changes in the current demographic, economic, competitive or regulatory conditions in certain states in which revenues are significant could have an adverse effect on the Company’s results of operations, financial condition or cash flows. Changes to the Medicaid and other government-managed payor programs in these states, including reductions in reimbursement rates or delays in reimbursement payments under state supplemental payment or other programs, could also have a similar adverse effect.

The following table provides a summary of the states in which the Company generates more than 5% of its total net patient revenues as determined in the most recent period (dollars in thousands):

The following table provides a summary of the major components of other operating expenses (in thousands):

The Company records costs associated with the transition services agreements and other ancillary agreements with CHS in accordance with the terms of these agreements. These costs, which primarily include the costs of providing information technology, patient billing and collections and payroll services, are included in “Transition services agreements” in the table above. See Note 16 — Related Party Transactions for additional information on the transition services agreements with CHS.

So Note 17 — Commitments and Contingencies — Insurance Reserves for additional information related to our insurance reserves and related expenses.

Substantially all of the Company’s operating costs and expenses are “cost of revenues” items. Operating expenses that could be classified as general and administrative by the Company are costs related to corporate office functions, including, but not limited to tax, treasury, audit, risk management, legal and human resources. These costs are primarily salaries and benefits expenses associated with these corporate office functions. General and administrative costs of the Company were $13.7 million and $14.2 million during the three months ended September 30, 2019 and 2018, respectively, and $35.7 million and $49.1 million during the nine months ended September 30, 2019 and 2018, respectively. General and administrative costs of the Company include executive severance costs at the corporate office of $1.3 million and $1.6 million during the three months ended September 30, 2019 and 2018, respectively, and $1.3 million and $6.2 million during the nine months ended September 30, 2019 and 2018, respectively.

Legal, professional and settlement costs in the Company’s consolidated statements of income primarily include legal costs and related settlements, if any, associated with arbitration, regulatory claims, government investigations into reimbursement payments, strategic iniatives and other litigation matters.

Loss (gain) on sale of hospitals, net is the loss (gain) incurred by the Company’s divestiture of hospitals and outpatient facilities. It is calculated as the difference between the consideration received from the sale and the carrying values of the associated net assets sold at the date of sale, less certain incremental direct selling costs.

Loss on closure of hospitals, net relates to costs incurred by the Company for closure of hospitals and outpatient facilities, and includes severance, loss on disposal of property and equipment, write-down of assets, legal costs, contract termination fees and other costs incurred by the Company related to the closure.

The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying values of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the provision for (benefit from) income taxes in the consolidated statements of income in the period that includes the enactment date. The Company assesses the likelihood that deferred tax assets will be recovered from future taxable income. To the extent the Company believes that recovery is not likely, a valuation allowance is established. To the extent the Company establishes a valuation allowance or increases this allowance, the related expense is included in the provision for (benefit from) income taxes in the consolidated statements of income. The Company classifies interest and penalties, if any, related to its tax positions as a component of provision for (benefit from) income taxes.

Cash includes cash on hand and cash with banks. Cash equivalents are short-term, highly liquid investments with a maturity of three months or less from the date acquired that are subject to an insignificant risk of change in value.

Restricted cash consists of cash held in escrow accounts to secure the Company’s indemnification obligations under purchase agreements related to the sale of hospitals.

Other current assets consist of the current portion of the receivables from CHS related to professional and general liability and workers’ compensation liability insurance reserves that were indemnified by CHS in connection with the Spin-off, non-patient accounts receivable primarily related to QHR and other miscellaneous current assets.

Purchases of property and equipment are recorded at cost. Property and equipment acquired in a business combination are recorded at estimated fair value. Routine maintenance and repairs are expensed as incurred. Expenditures that increase capacities or extend useful lives are capitalized. The Company capitalizes interest related to financing of major capital additions with the respective asset. Depreciation is recognized using the straight-line method over the estimated useful life of an asset. The Company depreciates land improvements over 3 to 20 years, buildings and improvements over 5 to 40 years, and equipment and fixtures over 3 to 18 years. The Company also leases certain facilities and equipment under capital lease obligations. These assets are amortized on a straight-line basis over the lesser of the lease term or the remaining useful life of the asset. Property and equipment assets that are held for sale are not depreciated.

In February 2016, the FASB issued a new accounting standard, ASC Topic 842, related to leases to increase transparency and comparability among organizations by requiring the recognition of right-of-use (“ROU”) assets and lease liabilities on the balance sheet. Most significant among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. Under the new standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The Company adopted ASC Topic 842 effective January 1, 2019 using the modified retrospective transition approach as of the period of adoption. The Company’s financial statements prior to January 1, 2019 were not modified for the application of the new lease standard. Upon adoption of ASC Topic 842, the Company recognized $93.7 million of ROU assets and $95.6 million of lease liabilities associated with operating leases. The accounting for capital leases remained substantially unchanged. In addition, the Company recognized a $0.7 million cumulative effect adjustment that increased accumulated deficit in its consolidated balance sheet at January 1, 2019.

The Company determines if an arrangement is a lease at inception of the contract. Operating leases are included in operating lease ROU assets, current portion of operating lease liabilities, and long-term operating lease liabilities in the consolidated balance sheets. Finance leases are included in property and equipment, current portion of long-term debt, and long-term debt in the consolidated balance sheets.

ROU assets represent the Company’s right to use underlying assets for the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the leases. ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses an estimated incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of lease payments. The Company uses the implicit rate when readily determinable.

The Company enters into operating leases for real estate, medical office buildings, other administrative offices, as well as medical and office equipment. The Company’s finance leases consist primarily of the Corporate office and other long-term building leases. The Company’s real estate leases typically have initial lease terms of 5 to 10 years, and equipment leases typically have an initial term of 3 years.

The Company’s real estate leases may include one or more options to renew, with renewals extending the lease term for an additional 5 to 10 years. The exercise of lease renewal options is at the Company’s sole discretion. In general, the Company does not consider renewal options to be reasonably likely to be exercised, therefore renewal options are generally not recognized as part of the ROU assets and lease liabilities. Lease costs for lease payments are recognized on a straight-line basis over the lease term, unless there is a transfer of title or purchase option reasonably certain to be exercised. The Company does not record operating leases with an initial term of 12 months or less (“short-term leases”) in the consolidated balance sheets.

Certain of the Company’s lease agreements contain both lease and non-lease components, which are generally accounted for separately. For certain equipment leases, such as medical devices, the lease and non-lease components are accounted for as a single lease component. Additionally, for certain equipment leases containing multiple assets, we apply a portfolio approach to account for the assets as one leased asset.

The Company’s hospital operations and QHR’s management advisory and healthcare consulting services operations meet the criteria for classification and separate reporting units for goodwill. Goodwill was initially determined for QHC’s hospital operations reporting unit based on a relative fair value approach as of September 30, 2013 (CHS’s goodwill impairment testing date). Additional

goodwill was allocated on a similar basis for four hospitals acquired by CHS in 2014 that were included in the group of hospitals spun-off to QHC. For the QHR reporting unit, goodwill was allocated based on the amount recorded by CHS at the time of its acquisition in 2007. All subsequent goodwill generated from hospital, physician practice or other ancillary business acquisitions is recorded at fair value at the time of acquisition and is tested for impairment at least annually.

The Company’s intangible assets primarily consist of purchase and development costs of software for internal use and contract-based intangible assets, including physician guarantee contracts, medical licenses, hospital management contracts, non-compete agreements and certificates of need. There are no expected residual values related to the Company’s intangible assets. Capitalized software costs are generally amortized over three years, except for software costs for significant system conversions, which are amortized over 8 to 10 years. Capitalized software costs that are in the development stage are not amortized until the related projects are complete. Assets related to physician guarantee contracts, hospital management contracts, non-compete agreements and certificates of need are amortized over the life of the individual contracts. Intangible assets held for sale are not amortized.

The Company is in the process of transitioning its information technology services from the IT TSA with CHS. As such, the Company has entered into various cloud computing arrangements related to the Company’s information technology infrastructure, such as financial reporting and budgeting, payroll, compliance and revenue management services. The Company capitalizes certain costs associated with cloud computing arrangements, including, among other items, employee compensation and related benefits and third party consulting costs that are part of the application development stage. These costs are included in other long-term assets on the consolidated balance sheet and are amortized over the period of the hosting service contract which is generally 5 years. The Company reviews the amounts capitalized for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be recoverable. As of September 30, 2019, the Company has capitalized $1.5 million of implementation costs related to the implementation of cloud computing arrangements.

Whenever an event occurs or changes in circumstances indicate that the carrying values of certain long-lived assets may be impaired, the Company projects the undiscounted cash flows expected to be generated by these assets. If the projections indicate that the carrying values are not expected to be recovered, such amounts are reduced to their estimated fair value based on a quoted market price, if available, or an estimated fair value based on valuation techniques available in the circumstances.

Goodwill arising from business combinations is not amortized. Goodwill is evaluated for impairment at the same time every year and when an event occurs or circumstances change that, more likely than not, reduce the fair value of the reporting unit below its carrying value. There is a two-step method for determining goodwill impairment. Step one is to compare the fair value of the reporting unit with the unit’s carrying value, including goodwill. If this test indicates the fair value is less than the carrying value, then step two is required to compare the implied fair value of the reporting unit’s goodwill with the carrying value of the reporting unit’s goodwill. The Company performs its annual testing of impairment for goodwill in the fourth quarter of each year. The fair value of the Company’s reporting units is estimated using both a discounted cash flow model as well as a multiple model based on earnings before interest, taxes, depreciation and amortization. The cash flow forecasts are adjusted by an appropriate discount rate based on the Company’s best estimate of a market participant’s weighted-average cost of capital. Both models are based on the Company’s best estimate of future revenues and operating costs and are reconciled to the Company’s consolidated market capitalization, with consideration of the amount a potential acquirer would be required to pay, in the form of a control premium, in order to gain sufficient ownership to set policies, direct operations and control management decisions of the Company.

See Note 2 — Impairment of Long-Lived Assets and Goodwill for additional information related to impairment recorded in the consolidated statements of income.

Other long-term assets consist of the long-term portion of the receivables from CHS related to professional and general liability and workers’ compensation liability insurance reserves that were indemnified by CHS in connection with the Spin-off, as well as deferred compensation plan assets, notes receivable, deposits, investments in unconsolidated subsidiaries and other miscellaneous long-term assets.

Other current liabilities consist of the current portion of professional and general liability insurance reserves, including the portion indemnified by CHS in connection with the Spin-off, as well as property tax accruals, legal accruals, physician guarantees and other miscellaneous current liabilities.

Professional and General Liability Insurance and Workers’ Compensation Liability Insurance Reserves

As part of the business of owning and operating hospitals, the Company is subject to legal actions alleging liability on its part. To mitigate a portion of these risks, the Company maintains insurance exceeding a self-insured retention level for these types of claims. The Company’s self-insurance reserves reflect the current estimate of all outstanding losses, including incurred but not reported losses, based on actuarial calculations as of period end. The loss estimates included in the actuarial calculations may change in the future based on updated facts and circumstances, including the Company’s claims experience post Spin-off. The Company’s insurance expense includes the actuarially determined estimates of losses for the current year, including claims incurred but not reported, the change in the estimates of losses for prior years based upon actual claims development experience as compared to prior actuarial projections, the insurance premiums for losses in excess of the Company’s self-insured retention levels, the administrative costs of the insurance programs, and interest expense related to the discounted portion of the liability. The Company’s reserves for professional and general liability and workers’ compensation liability claims are based on semi-annual actuarial calculations, which are discounted to present value and consider historical claims data, demographic factors, severity factors and other actuarial assumptions. The reserves for self-insured claims are discounted based on the Company’s risk-free interest rate that corresponds to the period when the self-insured claims are incurred and projected to be paid.

See Note 17 — Commitments and Contingencies for information related to the portion of the Company’s insurance reserves for professional and general liability and workers’ compensation liability that are indemnified by CHS.

The Company is self-insured for substantially all of the medical benefits of its employees. The Company maintains a liability for its current estimate of incurred but not reported employee health claims based on historical claims data provided by third-party administrators. The undiscounted reserve for self-insured employee health benefits was $8.2 million and $10.4 million as of September 30, 2019 and December 31, 2018, respectively, and is included in accrued salaries and benefits in the consolidated balance sheets. Expense each period is based on the actual claims received during the period plus the impact of any adjustment to the liability for incurred but not reported employee health claims.

The Company’s consolidated financial statements include all assets, liabilities, revenues and expenses of less than 100% owned entities that it controls. Certain of the Company’s consolidated subsidiaries have noncontrolling physician ownership interests with redemption features that require the Company to deliver cash upon the occurrence of certain events outside its control, such as the retirement, death, or disability of a physician-owner. The carrying amount of redeemable noncontrolling interests is recognized in the Company’s consolidated balance sheets at the greater of: (1) the initial carrying amount of these investments, increased or decreased for the noncontrolling interests' share of cumulative net income (loss), net of cumulative amounts distributed to the noncontrolling interest partners, if any, or (2) the redemption value of the investments held by the noncontrolling interest partners.

The Company reports separately from other assets in the consolidated balance sheet those assets that meet the criteria for classification as held for sale. Generally, assets that meet the criteria include those for which the carrying amount will be settled principally through a sale transaction rather than through continuing use. The asset must be available for immediate sale in its present condition, subject to usual or customary terms, and the sale must be probable to occur in the next 12 months. Similarly, the liabilities of a disposal group are classified as held for sale upon meeting these criteria. Immediately following classification as held for sale, the Company remeasures these assets and liabilities and adjusts the value to the lesser of the carrying amount or fair value less costs to sell. The assets and liabilities classified as held for sale are no longer depreciated or amortized into expense. The carrying values of assets classified as held for sale are reported net of impairment in the consolidated balance sheets.

The Company issues restricted stock awards to key employees and directors and recognizes stock-based compensation expense over each of the restricted stock award’s requisite service periods based on the estimated grant date fair value of each restricted stock award. See Note 14 — Stock-Based Compensation for additional information related to stock-based compensation.

The Company maintains various benefit plans, including defined contribution plans, deferred compensation plans, a supplemental executive retirement plan and a defined benefit plan, for which certain of the Company’s subsidiaries are the plan sponsors. The rights and obligations of these plans were transferred from CHS to the Company, pursuant to the Separation and Distribution Agreement, which was entered into with CHS in connection with the Spin-off which governed or continue to govern the allocation of employees, assets and liabilities that were transferred to QHC from CHS. Benefits costs are recorded as salaries and benefits expenses in the consolidated statements of income. The cumulative liability for these benefit costs is recorded in other long-term liabilities in the consolidated balance sheets.

The Company recognizes the unfunded liability of its defined benefit plan in other long-term liabilities in the consolidated balance sheets. Unrecognized gains (losses) and prior service credits (costs) are recorded as changes in other comprehensive income (loss). The measurement date of the plan’s assets and liabilities coincides with the Company’s year end. The Company’s pension benefit obligation is measured using actuarial calculations that incorporate discount rates, rate of compensation increases and expected long-term returns on plan assets. The calculations additionally consider expectations related to the retirement age and mortality of plan participants. The Company records pension benefit costs related to all of its plans as salaries and benefits expenses in the consolidated statements of income.

The Company utilizes the U.S. GAAP fair value hierarchy to measure the fair value of its financial instruments. The fair value hierarchy distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumption about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

The inputs used to measure fair value are classified into the following fair value hierarchy:

The principal business of the Company is to provide healthcare services at its hospitals and outpatient service facilities. The Company’s only other line of business is the hospital management advisory and healthcare consulting services it provides through QHR. The Company has determined that its hospital operations business and QHR business meets the criteria for separate segment reporting. The Company’s corporate functions have been reported in the all other reportable segment. See Note 13 — Segments for additional information related to the Company’s segment reporting.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles — Goodwill and Other — Internal Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, to provide guidance on the accounting for implementation costs incurred in a cloud computing arrangement that is accounted for as a service contract. This ASU requires entities to account for such costs consistent with the guidance on capitalizing costs associated with developing or obtaining internal-use software. The ASU is effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. The Company adopted ASU No. 2018-15 on January 1, 2019 on a prospective basis. There was no material impact on the Company’s consolidated financial position and results of operations as a result of adoption of ASU No. 2018-15 as of January 1, 2019. As of September 30, 2019, the Company has capitalized $1.5 million of implementation costs related to the implementation of cloud computing arrangements which are included in other long-term

assets on the consolidated balance sheet. As the Company’s transitions from the TSAs with CHS, the Company will incur additional material costs associated with cloud computing arrangements.

In February 2018, the FASB issued ASU No. 2018-02, Income Statement — Reporting Comprehensive Income, which allows for reclassification from accumulated other comprehensive income to retained earnings of the stranded tax effects in accumulated other comprehensive income resulting from the enactment of the comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”) and corresponding accounting treatment recorded in the fourth quarter of 2017. The Company adopted ASU No. 2018-02 on January 1, 2019. The adoption of ASU No. 2018-02 did not have a significant impact on the Company’s consolidated balance sheet.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles — Goodwill and Other: Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill impairment by eliminating step two from the goodwill impairment test. This ASU instead permits an entity to recognize goodwill impairment as the excess of a reporting unit’s carrying value over the estimated fair value of the reporting unit, to the extent this amount does not exceed the carrying amount of goodwill. The new guidance continues to allow an entity to perform a qualitative assessment of goodwill impairment indicators in lieu of a quantitative assessment in certain situations. The ASU is effective for annual and interim reporting periods beginning after December 15, 2019, with early adoption permitted. The Company currently does not expect ASU No. 2017-04 to have a material impact on its consolidated results of operations and financial position.

During the three months ended September 30, 2019, the Company evaluated the fair value of hospitals intended for divestiture. In connection with this evaluation, the Company recognized long-lived asset impairment of $8.0 million during the three months ended September 30, 2019, which consisted of $7.4 million of property and equipment and $0.6 million of capitalized software costs.

During the three months ended June 30, 2019, the Company evaluated the fair value of hospitals intended for divestiture. In connection with this evaluation, the Company recognized long-lived asset and goodwill impairment of $26.0 million during the three months ended June 30, 2019, which consisted of $15.3 million of property and equipment, $4.2 million of capitalized software costs and $6.5 million of goodwill.

During the three months ended March 31, 2019, the Company evaluated the fair value of hospitals intended for divestiture. In connection with this evaluation, the Company recognized long-lived asset impairment of $8.9 million during the three months ended March 31, 2019, which consisted of $8.4 million of property and equipment and $0.5 million of capitalized software costs.

During the three months ended September 30, 2018, the Company evaluated the fair value of hospitals intended for divestiture. In connection with this evaluation, the Company recognized long-lived asset impairment of $32.4 million during the three months ended September 30, 2018, which consisted of $31.5 million of property and equipment and $0.9 million of capitalized software costs.

During the three months ended June 30, 2018, the Company evaluated the fair value of hospitals intended for divestiture. In connection with this evaluation, the Company determined that there were no indicators of impairment as of June 30, 2018.

During the three months ended March 31, 2018, the Company evaluated the fair value of hospitals intended for divestiture. In connection with this evaluation, the Company recognized long-lived asset impairment of $39.8 million during the three months ended March 31, 2018, which consisted of $34.7 million of property and equipment and $5.1 million of capitalized software costs.

On September 30, 2019, the Company sold 106-bed Watsonville Community Hospital and its affiliated entities (“Watsonville”), located in Watsonville, California, for proceeds of $46.0 million. Total proceeds include a $5.0 million note receivable which is included in other long-term assets on the consolidated balance sheet. For the three months ended September 30, 2019 and 2018, the Company’s operating results included pre-tax income (losses) of $(7.9) million and $3.3 million, respectively, related to Watsonville, and pre-tax income (losses) of $(10.3) million and $2.0 million for the nine months ended September 30, 2019 and 2018, respectively. In addition to the above, the Company recorded a $1.1 million loss on sale of Watsonville in the nine months ended September 30, 2019.

On September 30, 2019, the Company ceased operations at 314-bed MetroSouth Medical Center and its affiliated entities (“MetroSouth”), located in Blue Island, Illinois. For the three months ended September 30, 2019 and 2018, the Company’s operating results included pre-tax losses of $22.6 million and $3.9 million, respectively, related to MetroSouth, and pre-tax losses of $25.8 million and $5.7 million for the nine months ended September 30, 2019 and 2018, respectively. Included in the pre-tax loss for the nine months ended September 30, 2019 was $18.4 million of closure costs related to the closure of MetroSouth. These costs include $11.8 million of non-cash losses associated with the disposal or write down of assets that have no future value to the Company, $4.7 million of severance and salary continuation costs and $1.9 million of other costs and fees related to the termination of contracts and other miscellaneous costs. The Company anticipates that in the remainder of 2019 it will incur costs, beyond those already incurred, of approximately $3.0 million to $5.0 million. In addition, beyond 2019, the Company is obligated to maintain patient health records for approximately 25 years with an estimated annual cost of $0.2 million and may incur additional costs to maintain the existing facilities until such time the facility is sold with an estimated annual cost of $1.0 million.

On April 12, 2019, the Company sold 146-bed Scenic Mountain Medical Center and its affiliated entities (“Scenic Mountain”), located in Big Spring, Texas, for proceeds of $11.7 million. For the three months ended September 30, 2019 and 2018, the Company’s operating results included pre-tax losses of $2.3 million and $1.4 million, respectively, related to Scenic Mountain, and pre-tax losses of $6.4 million and $1.5 million for the nine months ended September 30, 2019 and 2018, respectively. In addition to the above, the Company recorded a $1.1 million loss on sale of Scenic Mountain in the nine months ended September 30, 2019, which includes a write-off of allocated goodwill of $3.3 million.

The following table provides a summary of the components of property and equipment (in thousands):

Depreciation expense was $10.9 million and $12.4 million for the three months ended September 30, 2019 and 2018, respectively, and $32.1 million and $37.6 million for the nine months ended September 30, 2019 and 2018, respectively. See Note 5 — Goodwill and Intangible Assets for information on amortization expense recorded for property and equipment held under finance lease obligations. See Note 7 — Leases for information on ROU assets held under finance lease obligations.

Purchases of property and equipment accrued in accounts payable were $4.8 million and $4.9 million as of September 30, 2019 and December 31, 2018, respectively.

Goodwill related to the Company’s hospital operations reporting unit was $358.3 million and $367.8 million as of September 30, 2019 and December 31, 2018, respectively. Goodwill related to the hospital management advisory and healthcare consulting services reporting unit was $33.3 million at both September 30, 2019 and December 31, 2018. Total accumulated goodwill impairment losses were $133.5 million and $126.9 million as of September 30, 2019 and December 31, 2018, respectively.

The following table provides a summary of the components of intangible assets (in thousands):

	September 30, 2019
			Accumulated			Net Book
	Cost		Amortization			Value

Finite-lived intangible assets:
Capitalized software costs	$	140,361	$	(104,793	)	$	35,568
Physician guarantee contracts		3,269		(1,468	)		1,801
Other finite-lived intangible assets		43,212		(37,900	)		5,312
Total finite-lived intangible assets, net		186,842		(144,161	)		42,681
Indefinite-lives intangible assets:
Tradenames		4,000		—			4,000
Licenses and other indefinite-lived intangible assets		1,126		—			1,126
Total indefinite-lived intangible assets		5,126		—			5,126
Total intangible assets	$	191,968	$	(144,161	)	$	47,807

	December 31, 2018
			Accumulated			Net Book
	Cost		Amortization			Value

Finite-lived intangible assets:
Capitalized software costs	$	145,795	$	(111,658	)	$	34,137
Physician guarantee contracts		5,008		(2,679	)		2,329
Other finite-lived intangible assets		43,221		(36,512	)		6,709
Total finite-lived intangible assets, net		194,024		(150,849	)		43,175
Indefinite-lives intangible assets:
Tradenames		4,000		—			4,000
Licenses and other indefinite-lived intangible assets		1,114		—			1,114
Total indefinite-lived intangible assets		5,114		—			5,114
Total intangible assets	$	199,138	$	(150,849	)	$	48,289

As of September 30, 2019, the Company had $10.6 million of capitalized software costs that are currently in the development stage. Amortization of these costs will begin once the software projects are complete and ready for their intended use.

The following table provides a summary of the components of amortization expense (in thousands):

As of September 30, 2019, the weighted-average remaining amortization period of the Company’s intangible assets subject to amortization, except for capitalized software costs and physician guarantee contracts, was approximately 2.8 years.

The following table provides a summary of the components of long-term debt (in thousands):

In connection with the Spin-off, on April 29, 2016, the Company entered into the CS Agreement. On April 11, 2017, the Company executed an agreement with its Senior Credit Facility lenders to amend certain provisions of its Senior Credit Facility (the “CS Amendment”), as described below. On March 14, 2018, the Company executed a second agreement with its Senior Credit Facility lenders to amend certain provisions of its Senior Credit Facility (the “CS Second Amendment”), as described below.

The CS Agreement initially provided for an $880 million senior secured term loan facility (the “Term Loan Facility”) and a $100 million senior secured revolving credit facility (the “Revolving Credit Facility” and, together with the Term Loan Facility, the “Senior Credit Facility”). The Term Loan Facility was issued at a discount of $17.6 million, or 98% of par value, and has a maturity date of April 29, 2022, subject to customary acceleration events and repayment, extension or refinancing. The Revolving Credit Facility has a maturity date of April 29, 2021, subject to certain customary acceleration events and repayment, extension or refinancing. The CS Amendment reduced the Revolving Credit Facility’s capacity from $100 million to $87.5 million until December 31, 2017, at which time the capacity decreased to $75.0 million. The CS Second Amendment further reduced the Revolving Credit Facility’s capacity to $62.5 million through maturity, effective with the execution of the amendment on March 14, 2018.

through maturity, among other provisions. In addition, the CS Amendment raised the minimum Secured Net Leverage Ratio required for the Company to remain in compliance for certain periods, and also changed the calculation of compliance for specified periods. The CS Second Amendment, which was executed on March 14, 2018, amended the Secured Net Leverage Ratio for the period July 1, 2017 through maturity. As of September 30, 2019, the Company had a Secured Net Leverage Ratio of 4.49 to 1.00 implying additional borrowing capacity of $89.6 million as of September 30, 2019.

After giving effect to the CS Amendment and the CS Second Amendment, the maximum Secured Net Leverage Ratio permitted under the CS Agreement, as determined based on 12 month trailing Consolidated EBITDA measured as of the last day of each fiscal quarter and as defined in the CS Agreement follows:

In addition to amending the calculation of the Secured Net Leverage Ratio and the Maximum Secured Net Leverage Ratio, the CS Amendment and the CS Second Amendment also affected other terms of the CS Agreement as follows:

Prior to the CS Amendment, interest under the Term Loan Facility accrued, at the option of the Company, at adjusted LIBOR, subject to statutory reserves and a floor of 1% plus 5.75%, or the alternate base rate plus 4.75%. Following the CS Amendment, interest under the Term Loan Facility accrues, at the option of the Company, at adjusted LIBOR, subject to statutory reserves and a floor of 1% plus 6.75%, or the alternate base rate plus 5.75%. The effective interest rate on the Term Loan Facility was 9.50% as of September 30, 2019. Interest on outstanding borrowings under the Revolving Credit Facility accrues, at the option of the Company, at adjusted LIBOR, subject to statutory reserves and a floor of 0% plus 2.75%, or the alternate base rate plus 1.75%, and remains unchanged under the CS Amendment and the CS Second Amendment.

Borrowings from the Revolving Credit Facility are used for working capital and general corporate purposes. As of September 30, 2019, the Company had no borrowings outstanding on the Revolving Credit Facility and had $15.2 million of letters of credit outstanding that were primarily related to the self-insured retention levels of professional and general liability and workers’ compensation liability insurance as security for the payment of claims. As of September 30, 2019, the Company had borrowing capacity under its Revolving Credit Facility of $47.3 million subject to the restraint of the overall borrowing capacity calculated by the Secured Net Leverage Ratio.

In connection with the Spin-off, on April 29, 2016, the Company entered into an ABL Credit Agreement (the “UBS Agreement,” and together with the CS Agreement, collectively, the “Credit Agreements”), among the Company, the lenders party thereto and UBS AG, Stamford Branch (“UBS”), as administrative agent and collateral agent. On April 11, 2017, we executed an amendment to the UBS Agreement with its lender party thereto, which aligned the provisions of the UBS Agreement with the CS Amendment. The UBS Agreement provides for a $125 million senior secured asset-based revolving credit facility (the “ABL Credit Facility”). The available borrowings from the ABL Credit Facility, which are based on eligible patient accounts receivable, are used for working capital and general corporate purposes. As of September 30, 2019, the Company had $25.0 million of borrowings outstanding on the ABL Credit Facility and borrowing capacity of $77.0 million subject to the restraint of the overall borrowing capacity calculated by the Secured Net Leverage Ratio.

immediately preceding the date of determination. The applicable margin ranges from 1.75% to 2.25% for LIBOR advances and from 0.75% to 1.25% for base rate advances.

The ABL Credit Facility has a “Covenant Trigger Event” definition that requires the Company to maintain excess availability under the ABL Credit Facility equal to or greater than the greater of (i) $12.5 million and (ii) 10% of the aggregate commitments under the ABL Credit Facility. If a Covenant Trigger Event occurs, then the Company is required to maintain a minimum Consolidated Fixed Charge Ratio of 1.10 to 1.00 until such time that a Covenant Trigger Event is no longer continuing. In addition, if excess availability under the ABL Credit Facility were to fall below the greater of (i) 12.5% of the aggregate commitments under the ABL Credit Facility and (ii) $15.0 million, then a “Cash Dominion Event” would be triggered upon which the lenders could assume control of the Company’s cash.

In addition to the specific covenants described above, the Credit Agreements contain customary negative covenants which limit the Company’s ability to, among other things, incur additional indebtedness, create liens, make investments, transfer assets, merge or acquire assets, and make restricted payments, including dividends, distributions and specified payments on other indebtedness. They include customary events of default, including payment defaults, material breaches of representations and warranties, covenant defaults, default on other material indebtedness, customary Employee Retirement Income Security Act (“ERISA”) events of default, bankruptcy and insolvency, material judgments, invalidity of liens on collateral, change of control or cessation of business. The Credit Agreements also contain customary affirmative covenants and representations and warranties.

On April 22, 2016, QHC issued $400 million aggregate principal amount of 11.625% Senior Notes due 2023, pursuant to the Indenture. The Senior Notes were issued at a discount of $6.9 million, or 1.734%, in a private placement and are senior unsecured obligations of the Company guaranteed on a senior basis by certain of the Company’s subsidiaries (the “Guarantors”). The Senior Notes mature on April 15, 2023 and bear interest at a rate of 11.625% per annum, payable semi-annually in arrears on April 15 and October 15 of each year, beginning on October 15, 2016. Interest on the Senior Notes accrues from the date of original issuance and is calculated on the basis of a 360-day year comprised of twelve 30-day months. The effective interest rate on the Senior Notes was 12.49% as of September 30, 2019.

The Indenture contains covenants that, among other things, limit the ability of the Company and certain of its subsidiaries to incur or guarantee additional indebtedness, pay dividends or make other restricted payments, make certain investments, create or incur certain liens, sell assets and subsidiary stock, transfer all or substantially all of its assets or enter into merger or consolidation transactions.

On May 17, 2017, the Company exchanged the 11.625% Senior Notes due 2023 (the “Initial Notes”) in the aggregate principal amount of $400 million, which were not registered under the Securities Act of 1933, as amended (the “Securities Act”), for a like principal amount of 11.625% Senior Notes due 2023 (the “Exchange Notes”), which have been registered under the Securities Act. The Initial Notes were substantially identical to the Exchange Notes, except that the Exchange Notes are registered under the Securities Act and are not subject to the transfer restrictions and certain registration rights agreement provisions applicable to the Initial Notes.

On and after April 15, 2019, the Company is entitled, at its option, to redeem all or a portion of the Senior Notes upon not less than 30 nor more than 60 days’ notice, at the following redemption prices specified in the table below, plus accrued and unpaid interest, if any, to the redemption date. The redemption prices are expressed as a percentage of the principal amount on the redemption date. Holders of record on the relevant record date have the right to receive interest due on the relevant interest payment date. In addition, prior to April 15, 2019, the Company could have redeemed some or all of the Senior Notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, plus a “make whole” premium, as set forth in the Indenture. The Company was entitled to redeem up to 35% of the aggregate principal amount of the Senior Notes until April 15, 2019 with the net proceeds from certain equity offerings at the redemption price set forth in the Indenture.

The following table provides a summary of the redemption periods and prices related to the Senior Notes:

The following table provides a summary of unamortized debt issuance costs and discounts (in thousands):

The Company’s debt arising from finance lease obligations primarily relates to its corporate office in Brentwood, Tennessee. As of September 30, 2019 and December 31, 2018, this finance lease obligation was $16.5 million and $17.2 million, respectively. The remainder of the Company’s finance lease obligations relate to property and equipment at its hospitals and corporate office. Other debt consists of physician loans and miscellaneous notes payable to banks.

The following table provides a summary of debt maturities for the next five years and thereafter (in thousands):

The following table provides a summary of the components of interest expense, net (in thousands):

The Company has operating and finance leases for its corporate office, certain of its hospitals, medical office buildings, medical equipment and office equipment.

The following table provides a summary of the components of lease costs and rent (in thousands):

The following table provides supplemental balance sheet information related to finance leases (in thousands):

The following table provides supplemental cash flow information related to leases (in thousands):

The following table provides the weighted-average lease terms and discount rates used for the Company’s operating and finance leases:

The following table provides a summary of lease liability maturities for the next five years and thereafter (in thousands):

As previously disclosed in the Company’s 2018 Annual Report on Form 10-K, which followed the lease accounting standard prior to the adoption of ASC Topic 842 (ASC Topic 840), future commitments related to non-cancellable operating and capital leases for each for the next five years and thereafter as of December 31, 2018 were as follows (in thousands):

The following table provides a summary of the components of other long-term assets (in thousands):

The following table provides a summary of the components of other long-term liabilities (in thousands):

See Note 17 — Commitments and Contingencies for additional information about the Company’s insurance reserves and Note 15 — Benefit Plans for additional information about the Company’s benefit plan liabilities.

The carrying amounts of the Company’s cash and cash equivalents, patient accounts receivable, amounts due from and due to third-party payors, restricted cash and accounts payable approximate their fair values due to the short-term maturity of these financial instruments.

The Company recorded impairment related to long-lived assets and goodwill during the three and nine months ended September 30, 2019 and 2018. See Note 2 — Impairment of Long-Lived Assets and Goodwill for additional information on these impairments.

The assessment of fair value was based on Level 3 inputs, as the valuation methodologies used to determine impairment were based on internal projections and unobservable inputs. The portion of the impairment related to hospital assets held for sale was determined based on Level 2 inputs, as the valuation methodologies used to determine impairment considered letters of intent received on these hospitals.

The following table provides a summary of the carrying amounts and estimated fair values of the Company’s long-term debt (in thousands):

The Company considers its long-term debt instruments to be measured based on Level 2 inputs. Information about the valuation methodologies used in the determination of the fair values for the Company’s long-term debt instruments follows:

Authorized capital shares of the Company include 400,000,000 shares of capital stock consisting of 300,000,000 shares of common stock and 100,000,000 shares of preferred stock. Each of the aforementioned classes of capital stock has a par value of $0.0001 per share.

Shares of preferred stock, none of which were outstanding as of September 30, 2019 or December 31, 2018, may be issued in one or more series having such rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences as determined by the Board of Directors, subject to limitations prescribed by Delaware law and by the Company’s amended and restated certificate of incorporation.

As of September 30, 2019 and December 31, 2018, the Company had 32,908,366 shares and 31,521,398 shares, respectively, of common stock issued and outstanding. Holders of the Company’s common stock are entitled to one vote for each share held of record on all matters for which stockholders may vote. Holders of the Company’s common stock do not have cumulative voting rights in the election of directors. There are no preemptive rights, conversion, redemption or sinking fund provisions applicable to the common stock. In the event of liquidation, dissolution or winding up, holders of common stock are entitled to share ratably in the assets available for distribution. Delaware law prohibits the Company from paying any dividends unless it has capital surplus or net profits available for this purpose. In addition, the Company’s Credit Agreements and the Indenture impose restrictions on its ability to pay dividends.

The Company and its subsidiaries are subject to U.S. federal income tax and income tax of multiple state and local jurisdictions. The Company provides for income taxes based on the enacted tax laws and rates in jurisdictions in which it conducts its operations.

On December 22, 2017, the Tax Act was signed into law, resulting in significant changes from previous law. The most notable change was a reduction of the U.S. corporate income tax rate from 35% to 21% for corporations effective January 1, 2018. The Tax

Act also provides for other changes which include limitations on the deductibility of interest expense, an increased limitation on the deductibility of executive compensation, and acceleration of depreciation for certain assets placed in service after September 27, 2017. As permitted by SEC Staff Accounting Bulletin 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act, the Company recorded provisional estimates in its 2017 financial statements for the effects of the Tax Act. The Company recorded a total income tax benefit of $24.0 million as of December 31, 2017 for the estimated impact of the Tax Act using current available information and technical guidance on the interpretations of the Tax Act. The total tax benefit of $24.0 million was comprised of a tax benefit of $10.9 million from the reduction of the Company’s net deferred tax liabilities measured at the new 21% tax rate, and a $13.1 million tax benefit for the reduction in valuation allowance attributable to the net realizability of deferred tax assets. The Company completed its analysis of the Tax Act during 2018 and has included its effects in the consolidated financial statements. Adjustments made during 2018 for the finalization of our analysis were not material to the Company’s consolidated financial statements.

One key aspect of the Tax Act that impacts the Company is the limitation on the deductibility of interest expense. The Tax Act provides that net interest expense is limited to 30% of Adjusted Taxable Income (“ATI”). ATI is defined as taxable income computed without regard to deductions for (1) business interest expense and income, (2) net operating losses allowable under Internal Revenue Code Section 172, and (3) depreciation, amortization, or depletion (for years beginning before January 1, 2022). The Company has calculated an estimated excess interest expense of approximately $91.2 million for 2018 which may be carried forward for an indefinite number of years.

The Company’s effective tax rates were (0.2)% and 2.0% for the three months ended September 30, 2019 and 2018, respectively, and (0.3)% and 0.6% for the nine months ended September 30, 2019 and 2018, respectively. The Company’s deferred income tax liabilities, net were $7.0 million as of September 30, 2019, compared to $6.7 million as of December 31, 2018, a $0.3 million increase. This increase was a result of an increase in deferred tax liabilities during the period due to tax deductible amortization on indefinite-lived intangibles including goodwill and the reclassification of refundable alternative minimum tax (“AMT”) credit, net of book impairments and disposals of certain indefinite-lived intangible assets.

In the ordinary course of business, there is inherent uncertainty in quantifying the Company’s income tax positions. The Company assesses its income tax positions and records income tax benefits for all tax years subject to examination based on management’s evaluation of the facts, circumstances, and information available at the reporting date. The Company is not aware of any unrecognized income tax benefits; therefore, it has not recorded any such amounts for the three and nine months ended September 30, 2019 and 2018.

The following table provides a summary of the computation of basic and diluted earnings (loss) per share (in thousands, except earnings per share and shares):

Due to the net losses attributable to Quorum Health Corporation in the three and nine months ended September 30, 2019 and 2018, no incremental shares were included in diluted earnings (loss) per share for these periods because the net effect of the shares would be anti-dilutive.

The Company’s operations consist of two distinct operating segments, its hospital operations business and its hospital management advisory and healthcare consulting services business. The hospital operations segment includes the operations of the Company’s owned and leased hospitals and their affiliated outpatient facilities that provide inpatient and outpatient healthcare services. The hospital management advisory and healthcare consulting services segment includes the operations of QHR. Both segments meet the criteria to be classified as a separate reportable segment. The financial information for the Company’s corporate functions has been reported in the tables below as part of the all other reportable segment.

The following tables provide a summary of financial information related to the Company’s reportable segments (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018

Net operating revenues:
Hospital operations	$	404,101		$	442,802		$	1,256,872		$	1,363,628
QHR operations		15,711			16,937			45,742			55,145
All other		88			768			2,261			1,186
Total net operating revenues	$	419,900		$	460,507		$	1,304,875		$	1,419,959

Adjusted EBITDA:
Hospital operations	$	18,261		$	39,137		$	88,338		$	109,455
QHR operations		5,310			4,715			13,517			13,518
All other		(9,883	)		(9,710	)		(34,107	)		(34,088	)
Total Adjusted EBITDA	$	13,688		$	34,142		$	67,748		$	88,885

The following table provides a reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable U.S. GAAP financial measure (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018

Net income (loss)	$	(75,192	)	$	(53,886	)	$	(130,275	)	$	(178,314	)
Interest expense, net		33,056			32,450			98,904			95,307
Provision for (benefit from) income taxes		137			(1,074	)		386			(1,162	)
Depreciation and amortization		15,028			16,612			44,167			52,015
EBITDA		(26,971	)		(5,898	)		13,182			(32,154	)
Legal, professional and settlement costs		5,191			1,519			6,480			10,349
Impairment of long-lived assets and goodwill		8,010			32,438			42,820			72,198
Loss (gain) on sale of hospitals, net		1,206			805			2,346			8,927
Loss on closure of hospitals, net		18,414			1,111			18,414			18,195
Transition of transition services agreements		6,445			2,445			8,421			3,682
Change in actuarial estimates		—			—			(26,880	)		—
Headcount reductions and executive severance		1,393			1,722			2,965			7,688
Adjusted EBITDA	$	13,688		$	34,142		$	67,748		$	88,885

On April 1, 2016, the Company adopted the Quorum Health Corporation 2016 Stock Award Plan (“2016 Stock Award Plan”). The Company filed a Registration Statement on Form S-8 on April 29, 2016 to register 4,700,000 shares of QHC common stock that may be issued under the 2016 Stock Award Plan. On February 14, 2019, the Company adopted the Quorum Health Corporation Amended and Restated 2016 Stock Award Plan (the “Amended and Restated 2016 Stock Award Plan”), which was approved by the Company’s stockholders on May 31, 2019. The Company filed a Registration Statement on Form S-8 on February 14, 2019 to register an additional 3,700,000 shares of QHC common stock that may be issued under the Amended and Restated 2016 Stock Award Plan.

On December 17, 2018, the Company adopted the Quorum Health Corporation 2018 Restricted Stock Plan (the “2018 Stock Plan”) effective December 18, 2018, which was approved by the Company’s stockholders on May 31, 2019. The Company filed a Registration Statement on Form S-8 on December 18, 2018 to register 625,000 shares of QHC common stock that may be issued under the 2018 Stock Plan.

As defined in the Separation and Distribution Agreement, QHC and CHS employees who held CHS restricted stock awards on April 22, 2016 (the “Record Date”) received QHC restricted stock awards for the number of whole shares, rounded down, of QHC common stock that they would have received as a shareholder of CHS as if the underlying CHS stock were unrestricted on the Record Date, except, that with respect to a portion of CHS restricted stock awards granted to any QHC employees on March 1, 2016 that were cancelled and forfeited on the Spin-off date. The QHC restricted stock awards received by QHC and CHS employees in connection with the Spin-off vest on the same terms as the CHS restricted stock awards to which they relate, through the continued service by such employees with their respective employer. CHS restricted stock awards were adjusted by increasing the number of shares of CHS stock subject to restricted stock awards by an amount of whole shares, rounded down, necessary to preserve the intrinsic value of such awards at the Spin-off date. QHC did not issue any stock options as part of the distribution of shares to holders of CHS stock options in connection with the Spin-off.

The following table provides a summary of the activity related to unvested QHC restricted stock awards held by QHC and CHS employees during the nine months ended September 30, 2019 that were distributed in the Spin-off (in shares):

The following table provides a summary of the activity related to unvested restricted stock awards during the nine months ended September 30, 2019 that were granted to QHC employees subsequent to the Spin-off:

During the nine months ended September 30, 2019, the Company granted 125,000 performance-based restricted stock awards to certain of its executive officers. If the performance-based objectives are attained in accordance with the targets set forth in the performance-based restricted stock award agreements, the restrictions on the restricted stock awards will lapse on February 14, 2021. In addition, the Company granted 1,260,000 time-based restricted stock awards to certain of its executive officers and other employees in which the restrictions will lapse in equal installments on each of the first three anniversaries of February 14, 2019. In addition, the

Company granted 304,346 time-based restricted stock or restricted stock unit awards to its non-employee directors in which the restrictions will lapse on February 14, 2020.

The following table provides a summary of stock-based compensation expense for the periods subsequent to the Spin-off (in thousands):

Stock-based compensation expense is recognized as a component of salaries and benefits expenses in the consolidated statements of income. As of September 30, 2019, the Company had unrecognized stock-based compensation expense of $5.8 million related to restricted stock awards.

The Quorum Health Retirement Savings Plan (the “Retirement Savings Plan”) is a defined contribution plan, which was established on January 1, 2016 by CHS in anticipation of the Spin-off. Prior to the Spin-off, the cumulative liability for these benefit costs was recorded in Due to Parent, net. The assets and liabilities under this plan were transferred to QHC in connection with the Spin-off. The Retirement Savings Plan covers the majority of the employees at the Company’s subsidiaries. The Company has other minor defined contribution plans at certain of its hospitals that cover employees under the terms of these individual plans. Total expenses to the Company under all defined contribution plans were $0.5 million and $3.8 million for the three months ended September 30, 2019 and 2018, respectively, and $1.3 million and $8.1 million for the nine months ended September 30, 2019 and 2018, respectively. The benefit costs associated with these defined contribution plans are recorded as salaries and benefits expenses in the consolidated statements of income.

On August 18, 2016, the Compensation Committee of the Board of Directors adopted the Executive Nonqualified Excess Plan Adoption Agreement (the “Adoption Agreement”) and the Executive Nonqualified Excess Plan Document (the “Plan Document”), that together, the Adoption Agreement names as the QHCCS, LLC Nonqualified Deferred Compensation Plan (the “NQDCP”). The NQDCP is an unfunded, nonqualified deferred compensation plan that provides deferred compensation benefits for a select group of management, highly compensated employees and independent contractors of the Company’s wholly-owned subsidiary, QHCCS, LLC, a Delaware limited liability company (“QHCCS”), including the Company’s named executive officers. The NQDCP permits participants to defer a portion of their annual base salary, service bonus and performance-based compensation, as well as up to 100% of their incentive compensation in any calendar year. In addition to participant deferrals, QHCCS, and/or its affiliates may make discretionary credits to participants’ accounts for any year. As of September 30, 2019, the assets and liabilities under this plan were $15.4 million and $16.7 million, respectively. As of December 31, 2018, the assets and liabilities under this plan were $15.0 million and $16.2 million, respectively. The assets and liabilities under this plan are included in other long-term assets and other long-term liabilities, respectively, in the consolidated balance sheet.

On April 1, 2016, the Board adopted the Quorum Health Corporation Supplemental Executive Retirement Plan (the “Original SERP Plan”). Pursuant to the Employee Matters Agreement between the Company and CHS, the Company assumed the liabilities for all obligations under the Original SERP Plan as of April 29, 2016, the Spin-off date, which related to QHC employees, as defined in the Employee Matters Agreement. In addition, as defined by the Employee Matters Agreement, no additional benefits were to accrue

under the Original SERP Plan following the Spin-off and no assets were transferred to the Company related to the Original SERP Plan. The accrued benefit liability transferred to the Company for the Original SERP Plan was $6.0 million.

On May 24, 2016, the Board approved the Company’s Amended and Restated Supplemental Executive Retirement Plan (the “Amended and Restated SERP”), in order to accrue additional benefits with respect to QHC Employees who otherwise qualify as “Participants” under the Amended and Restated SERP. The Amended and Restated SERP is a noncontributory non-qualified deferred compensation plan under Section 409A of the Internal Revenue Code. The benefit costs under the Amended and Restated SERP were $0.2 million and $0.3 million for the three months ended September 30, 2019 and 2018, respectively, and $0.7 million and $0.9 million for the nine months ended September 30, 2019 and 2018, respectively, and are included in salaries and benefits expenses in the consolidated statements of income.

The long-term portion of the benefit liability for the Amended and Restated SERP was $3.7 million and $3.1 million as of September 30, 2019 and December 31, 2018, respectively, and is included in other long-term liabilities in the consolidated balance sheets. There was no current portion of the benefit liability as of September 30, 2019 and December 31, 2018.

On September 16, 2016, the Board adopted the Quorum Health Corporation Director’s Fees Deferral Plan (the “Director’s Plan”). Pursuant to the Director’s Plan, members of the Board may elect to defer and accumulate fees and stock units, including retainer fees and fees for attendance at Board meetings and Board committees. Under this plan, a director may elect that all or any specified portion of the director’s fees to be earned during a calendar year be credited to a director’s cash account and/or a director’s stock unit account maintained on the individual director’s behalf in lieu of payment. Payment of amounts credited to a director’s cash account and stock unit account will be made upon a payment commencement event, as defined in the Director’s Plan, in accordance with the payment method elected by each director, either in lump sum or in a number of annual installments, not to exceed 15 installments. The Director’s Plan covers directors of the Board not employed by the Company or any of its subsidiaries. Pursuant to the Director’s Plan, the Company registered and made available for issuance under the Director’s Plan a maximum of 150,000 shares of QHC common stock. On February 14, 2019, the Board adopted the Quorum Health Corporation Amended and Restated Director’s Fees Deferral Plan to allow directors to defer and accumulate the equity portion of their director compensation to a restricted stock unit account. As of September 30, 2019, 93,409 restricted stock units have been accrued under the Director’s Plan in lieu of director cash compensation.

The Company provides benefits to employees at one of its hospitals through a defined benefit plan (the “Pension Plan”). The Pension Plan provides benefits to covered individuals satisfying certain age and service requirements. Employer contributions to the Pension Plan are made by the Company in accordance with the minimum funding requirements of ERISA. Benefit costs related to the Pension Plan were $0.1 million for both the three months ended September 30, 2019 and 2018 and $0.2 million for both the nine months ended September 30, 2019 and 2018. The Company recognizes the unfunded liability of the Pension Plan in other long-term liabilities in the consolidated balance sheets. Unrecognized gains (losses) and prior service credits (costs) are recorded as other comprehensive income (loss). Effective September 30, 2019, the Pension Plan’s accrued benefit liability was transferred to the new owners as part of the sale of Watsonville. Therefore, there was no accrued benefit liability for the Pension Plan as of September 30, 2019. The accrued benefit liability for the Pension Plan was $1.2 million at December 31, 2018.

CHS was a related party to QHC prior to the Spin-off. The agreements between QHC and CHS as of and subsequent to the Spin-off are described below.

In connection with the Spin-off and effective as of April 29, 2016, the Company entered into certain agreements with CHS that allocated between the Company and CHS the various assets, employees, liabilities and obligations (including investments, property, employee benefits and tax-related assets and liabilities) that were previously part of CHS. In addition, these agreements govern certain relationships between, and activities of, the Company and CHS for a definitive period of time after the Spin-off, as specified by each individual agreement.

In addition to the agreements referenced above, the Company entered into certain transition services agreements and other ancillary agreements with CHS, as described below, defining agreed upon services to be provided by CHS to certain or all QHC hospitals, as determined by each agreement, commencing on the Spin-off date. Certain of these agreements have been terminated as described below. The remaining agreements have terms through April 2021, unless early termination is mutually agreed upon by both parties.

A summary of the major provisions of the transition services agreements follows:

The total expenses recorded by the Company under the transition services agreements with CHS were $11.6 million and $14.1 million for the three months ended September 30, 2019 and 2018, respectively, and $26.6 million and $43.3 million for the nine months ended September 30, 2019 and 2018, respectively.

The Company is a party to various legal, regulatory and governmental proceedings incidental to its business. Based on current knowledge, management does not believe that loss contingencies arising from pending legal, regulatory and governmental proceedings, including the matters described herein, will have a material adverse effect on the operating results, financial position or liquidity of the Company. However, in light of the inherent uncertainties involved in these matters, some of which are beyond the Company’s control, and the very large or indeterminate damages sought in some of these matters, an adverse outcome in one or more of these matters could be material to the Company’s consolidated financial position, results of operations or cash flows for any particular reporting period.

In connection with the Spin-off, CHS agreed to indemnify QHC for certain liabilities relating to outcomes or events occurring prior to the closing of the Spin-off, including (i) certain claims and proceedings known to be outstanding on or prior to the closing date of the Spin-off and (ii) certain claims, proceedings and investigations by governmental authorities or private plaintiffs related to activities occurring at or related to the Company’s healthcare facilities prior to the closing date of the Spin-off, but only to the extent, in the case of clause (ii), that such claims are covered by insurance policies maintained by CHS, including professional and general liability and workers’ compensation liability. In this regard, CHS will continue to be responsible for certain Health Management Associates, Inc. legal matters covered by its contingent value rights agreement that relate to the portion of CHS’s business now held by QHC. Notwithstanding the foregoing, CHS is not indemnifying QHC in respect of any claims or proceedings arising out of, or related to, the business operations of QHR at any time or QHC’s compliance with the Corporate Integrity Agreement (“CIA”) with the United States Department of Health and Human Services Office of the Inspector General (“OIG”). Subsequent to the Spin-off, the OIG entered into an “Assumption of CIA Liability Letter” with the Company reiterating the applicability of the CIA to certain of the Company’s hospitals, although the OIG declined to enter into a separate agreement with the Company.

With respect to all legal, regulatory and governmental proceedings, the Company considers the likelihood of a negative outcome. If the Company determines the likelihood of a negative outcome with respect to any such matter is probable and the amount of the loss can be reasonably estimated, the Company records an accrual for the estimated amount of loss. If the likelihood of a negative outcome with respect to material matters is reasonably possible and the Company is able to determine an estimate of the amount of possible loss or a range of loss, whether in excess of a related accrued liability or where there is no accrued liability, the Company discloses the estimate of the amount of possible loss or range of loss. However, the Company is unable to estimate an amount of possible loss or range of loss in some instances based on the significant uncertainties involved in, or the preliminary nature of, certain legal, regulatory and governmental matters.

As part of the business of owning and operating hospitals, the Company is subject to potential professional and general liability and workers’ compensation liability claims or other legal actions alleging liability on its part. The Company is also subject to similar liabilities related to its QHR business.

Prior to the Spin-off, CHS provided professional and general liability insurance and workers’ compensation liability insurance to QHC and indemnified QHC from losses under these insurance arrangements related to the hospital operations business assumed by QHC in the Spin-off. The liabilities for claims prior to the Spin-off and related to QHC’s hospital operations business are determined based on an actuarial study of QHC’s operations and historical claims experience at its hospitals, including during the period of ownership by CHS. Corresponding receivables from CHS are established to reflect the indemnification by CHS for each of these liabilities for claims that related to events and circumstances that occurred prior to the Spin-off.

After the Spin-off, QHC entered into its own professional and general liability insurance and workers’ compensation liability insurance arrangements to mitigate the risk for claims exceeding its self-insured retention levels. The Company maintains a self-insured retention level for professional and general liability claims of $5 million per claim and maintains a $0.5 million per claim, high deductible program for workers’ compensation liability claims. Due to the differing nature of its business, the Company maintains separate insurance arrangements for professional and general liability claims related to its subsidiary, QHR. The self-insured retention level for QHR is $6 million for professional and general liability insurance.

The following table provides a summary of the Company’s insurance reserves related to professional and general liability and workers’ compensation liability, distinguished between those indemnified by CHS and those related to the Company’s own risks (in thousands):

	September 30, 2019
	Current		Long-Term		Current		Long-Term
	Receivable		Receivable		Liability		Liability

Professional and general liability:
Insurance reserves indemnified by CHS, Inc.	$	12,357	$	22,678	$	12,357	$	22,678
All other self-insurance reserves		—		—		4,782		25,905
Total insurance reserves for professional and general liability		12,357		22,678		17,139		48,583
Workers' compensation liability:
Insurance reserves indemnified by CHS, Inc.		1,152		11,223		1,152		11,223
All other self-insurance reserves		—		—		1,886		4,388
Total insurance reserves for workers' compensation liability		1,152		11,223		3,038		15,611
Total self-insurance reserves	$	13,509	$	33,901	$	20,177	$	64,194

	December 31, 2018
	Current		Long-Term		Current		Long-Term
	Receivable		Receivable		Liability		Liability

Professional and general liability:
Insurance reserves indemnified by CHS, Inc.	$	20,200	$	34,535	$	20,200	$	34,535
All other self-insurance reserves		—		—		5,195		48,293
Total insurance reserves for professional and general liability		20,200		34,535		25,395		82,828
Workers' compensation liability:
Insurance reserves indemnified by CHS, Inc.		1,412		12,118		1,412		12,118
All other self-insurance reserves		—		—		2,525		4,701
Total insurance reserves for workers' compensation liability		1,412		12,118		3,937		16,819
Total self-insurance reserves	$	21,612	$	46,653	$	29,332	$	99,647

The receivables from CHS are included in other current assets and other long-term assets in the consolidated balance sheets. The liability for the current portion of professional and general liability claims is included in other current liabilities, while the current portion of the liability for workers’ compensation claims is included in accrued salaries and benefits. The long-term portions of both claims liabilities are included in other long-term liabilities.

The professional and general liability reserves as of September 30, 2019 included a reduction of $26.9 million related to prior periods resulting from the Company’s most recent actuarial analysis utilizing updated data through April 30, 2019. Factors contributing to the change in estimate include the use of valuation techniques that place more emphasis on the Company’s claims subsequent to the Spin-off compared to historical trends, as well as more reliance on industry trend factors. The reduction in the frequency and severity of the Company’s claims is the result of internal initiatives in the areas of patient safety, risk management, and claims management, as well as external factors such as tort reform in certain key states.

The Company has substantially completed construction of a new patient tower and expanded surgical capacity at McKenzie – Willamette Medical Center, its hospital in Springfield, Oregon. During the three months ended September 30, 2019, the Company did not incur costs related to this project. During the three months ended September 30, 2018, the Company incurred costs of $3.6 million related to this project. During the nine months ended September 30, 2019 and 2018, the Company incurred costs of $2.4 million and $14.3 million, respectively, related to this project. As of September 30, 2019, the Company has incurred a total of $103.2 million of costs for this project, of which $103.0 million has been placed into service as of September 30, 2019. The total estimated cost of this project, including equipment costs, is estimated to be approximately $105.0 million. The Company’s anticipated remaining costs on the project in 2019 are $1.8 million.

The Company currently utilizes MEDHOST INC.’s (“Medhost”) software through its IT TSA with CHS. In connection with the Company’s planned transition from the Computer and Data Processing Transition Services Agreement (or “IT TSA”) with CHS, the Company entered into an agreement with Medhost to deploy Medhost’s Electronic Health Record management platform. This agreement includes software license and service fees. The implementation of the Medhost software is expected to be completed by the end of the first quarter of 2021. As of September 30, 2019, the Company has capitalized $10.3 million of costs related to the implementation of the Medhost software, which are included in intangible assets, net on the consolidated balance sheet. The total additional cost of this project, including software licenses and implementation fees, are estimated to be approximately $37.4 million.

In addition, the Company has entered into various cloud computing arrangements related to the transition of the Company’s information technology infrastructure, such as financial reporting and budgeting, payroll, compliance and revenue management services. As of September 30, 2019, the Company has capitalized $1.5 million of implementation costs related to these cloud computing arrangements, which are included in other long-term assets on the consolidated balance sheet. The total additional costs of these arrangements, including hosting and implementation fees, are estimated to be approximately $2.2 million.

The Company will incur additional costs to establish the remainder of its information technology systems which includes additional information technology infrastructure costs, among other things. As of September 30, 2019, the Company has capitalized $4.4 million of information technology infrastructure costs and estimates additional costs of contracts incurred to date to be approximately $13.8 million. The Company expects the transition from CHS to be completed by the end of the first quarter of 2021. Upon completion, the Company does not anticipate a significant change in its operating costs related to information technology.

On September 11, 2019, the Company entered into an agreement with CHS to terminate the Shared Service Centers Transition Services Agreement, effective October 1, 2019. As part of this termination agreement, the Company agreed to pay an early termination fee of $1.7 million which was paid in September 2019 and wind down costs of approximately $2.6 million which will be paid in the fourth quarter of 2019. These services were replaced by R1 RCM and the Company believes that through this partnership, it will achieve cost savings and improve net patient revenues through improvements in operational effectiveness and efficiencies.

In October 2019, the Company utilized proceeds from divestitures to pay down $39.3 million of principal on the Company’s Term Loan Facility.

The Senior Notes are senior unsecured obligations of the Company guaranteed on a senior basis by certain of its existing and subsequently acquired or organized 100% owned domestic subsidiaries (the “Guarantors”). The Senior Notes are fully and unconditionally guaranteed on a joint and several basis, with exceptions considered customary for such guarantees, limited to the release of the guarantee when a subsidiary guarantor’s capital stock is sold, or when a sale of all of the subsidiary guarantor’s assets used in operations occurs.

The condensed consolidating financial statements have been prepared and presented in accordance with SEC Regulation S-X Rule 3-10 “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered.” The accounting policies used in the preparation of this financial information are consistent with the accompanying condensed consolidated financial statements of the Company, except as follows:

The Company’s intercompany activity consists primarily of daily cash transfers, the allocation of certain expenses and expenditures paid by the parent issuer on behalf of its subsidiaries, and the push down of investment in its subsidiaries. The parent issuer’s investment in its subsidiaries reflects the activity since the Spin-off. Likewise, the parent issuer’s equity in earnings of unconsolidated affiliates represents the Company’s earnings since the Spin-off.

	Parent Issuer			Other Guarantors			Non- Guarantors			Eliminations			Consolidated

Net operating revenues	$	—		$	309,686		$	110,214		$	—		$	419,900
Operating costs and expenses:
Salaries and benefits		—			144,241			71,216			—			215,457
Supplies		—			31,244			16,574			—			47,818
Other operating expenses		98			113,909			25,664			—			139,671
Depreciation and amortization		—			11,268			3,760			—			15,028
Lease costs and rent		—			6,250			4,871			—			11,121
Electronic health records incentives		—			—			(17	)		—			(17	)
Legal, professional and settlement costs		—			5,174			17			—			5,191
Impairment of long-lived assets and goodwill		—			8,010			—			—			8,010
Loss (gain) on sale of hospitals, net		—			1,206			—			—			1,206
Loss on closure of hospitals, net		—			18,414			—			—			18,414
Total operating costs and expenses		98			339,716			122,085			—			461,899
Income (loss) from operations		(98	)		(30,030	)		(11,871	)		—			(41,999	)
Interest expense, net		32,531			541			(16	)		—			33,056
Equity in earnings of affiliates		43,088			(2,753	)		—			(40,335	)		—
Income (loss) before income taxes		(75,717	)		(27,818	)		(11,855	)		40,335			(75,055	)
Provision for (benefit from) income taxes		211			(51	)		(23	)		—			137
Net income (loss)		(75,928	)		(27,767	)		(11,832	)		40,335			(75,192	)
Less: Net income (loss) attributable to noncontrolling interests		—			—			736			—			736
Net income (loss) attributable to Quorum Health Corporation	$	(75,928	)	$	(27,767	)	$	(12,568	)	$	40,335		$	(75,928	)

	Parent Issuer			Other Guarantors			Non- Guarantors			Eliminations			Consolidated

Net operating revenues	$	—		$	356,986		$	103,521		$	—		$	460,507
Operating costs and expenses:
Salaries and benefits		—			154,547			71,690			—			226,237
Supplies		—			35,237			13,712			—			48,949
Other operating expenses		—			115,994			27,722			—			143,716
Depreciation and amortization		—			12,431			4,181			—			16,612
Rent		—			6,580			5,081			—			11,661
Electronic health records incentives		—			14			(45	)		—			(31	)
Legal, professional and settlement costs		—			1,399			120			—			1,519
Impairment of long-lived assets and goodwill		—			32,438			—			—			32,438
Loss (gain) on sale of hospitals, net		—			805			—			—			805
Loss on closure of hospitals, net		—			1,111			—			—			1,111
Total operating costs and expenses		—			360,556			122,461			—			483,017
Income (loss) from operations		—			(3,570	)		(18,940	)		—			(22,510	)
Interest expense, net		32,204			245			1			—			32,450
Equity in earnings of affiliates		22,932			(2,483	)		—			(20,449	)		—
Income (loss) before income taxes		(55,136	)		(1,332	)		(18,941	)		20,449			(54,960	)
Provision for (benefit from) income taxes		(1,196	)		8			114			—			(1,074	)
Net income (loss)		(53,940	)		(1,340	)		(19,055	)		20,449			(53,886	)
Less: Net income (loss) attributable to noncontrolling interests		—			—			54			—			54
Net income (loss) attributable to Quorum Health Corporation	$	(53,940	)	$	(1,340	)	$	(19,109	)	$	20,449		$	(53,940	)

	Parent Issuer			Other Guarantors			Non- Guarantors			Eliminations			Consolidated

Net operating revenues	$	—		$	984,133		$	320,742		$	—		$	1,304,875
Operating costs and expenses:
Salaries and benefits		—			442,224			211,719			—			653,943
Supplies		—			101,532			47,873			—			149,405
Other operating expenses		114			314,673			68,627			—			383,414
Depreciation and amortization		—			33,803			10,364			—			44,167
Lease costs and rent		—			19,640			14,639			—			34,279
Electronic health records incentives		—			599			(7	)		—			592
Legal, professional and settlement costs		—			6,388			92			—			6,480
Impairment of long-lived assets and goodwill		—			42,820			—			—			42,820
Loss (gain) on sale of hospitals, net		—			2,351			(5	)		—			2,346
Loss on closure of hospitals, net		—			18,414			—			—			18,414
Total operating costs and expenses		114			982,444			353,302			—			1,335,860
Income (loss) from operations		(114	)		1,689			(32,560	)		—			(30,985	)
Interest expense, net		98,195			800			(91	)		—			98,904
Equity in earnings of affiliates		33,124			(5,838	)		—			(27,286	)		—
Income (loss) before income taxes		(131,433	)		6,727			(32,469	)		27,286			(129,889	)
Provision for (benefit from) income taxes		374			132			(120	)		—			386
Net income (loss)		(131,807	)		6,595			(32,349	)		27,286			(130,275	)
Less: Net income (loss) attributable to noncontrolling interests		—			—			1,532			—			1,532
Net income (loss) attributable to Quorum Health Corporation	$	(131,807	)	$	6,595		$	(33,881	)	$	27,286		$	(131,807	)

	Parent Issuer			Other Guarantors			Non- Guarantors			Eliminations			Consolidated

Net operating revenues	$	—		$	1,091,781		$	328,178		$	—		$	1,419,959
Operating costs and expenses:
Salaries and benefits		—			484,728			221,140			—			705,868
Supplies		—			114,678			46,054			—			160,732
Other operating expenses		1,897			355,090			83,923			—			440,910
Depreciation and amortization		—			40,956			11,059			—			52,015
Rent		—			20,464			15,087			—			35,551
Electronic health records incentives		—			(416	)		(201	)		—			(617	)
Legal, professional and settlement costs		—			10,229			120			—			10,349
Impairment of long-lived assets and goodwill		—			70,398			1,800			—			72,198
Loss (gain) on sale of hospitals, net		—			8,933			(6	)		—			8,927
Loss on closure of hospitals, net		—			18,195			—			—			18,195
Total operating costs and expenses		1,897			1,123,255			378,976			—			1,504,128
Income (loss) from operations		(1,897	)		(31,474	)		(50,798	)		—			(84,169	)
Interest expense, net		96,612			(1,303	)		(2	)		—			95,307
Equity in earnings of affiliates		81,849			38,348			—			(120,197	)		—
Income (loss) before income taxes		(180,358	)		(68,519	)		(50,796	)		120,197			(179,476	)
Provision for (benefit from) income taxes		(844	)		(412	)		94			—			(1,162	)
Net income (loss)		(179,514	)		(68,107	)		(50,890	)		120,197			(178,314	)
Less: Net income (loss) attributable to noncontrolling interests		—			—			1,200			—			1,200
Net income (loss) attributable to Quorum Health Corporation	$	(179,514	)	$	(68,107	)	$	(52,090	)	$	120,197		$	(179,514	)

	Parent Issuer			Other Guarantors			Non- Guarantors			Eliminations			Consolidated

ASSETS
Current assets:
Cash and cash equivalents	$	41,173		$	2,096		$	1,162		$	—		$	44,431
Patient accounts receivable		—			199,091			84,610			—			283,701
Inventories		—			30,354			8,970			—			39,324
Prepaid expenses		—			15,114			5,298			—			20,412
Due from third-party payors		—			20,713			5,736			—			26,449
Other current assets		2,183			21,504			9,956			—			33,643
Total current assets		43,356			288,872			115,732			—			447,960
Intercompany receivable		3			856,771			448,116			(1,304,890	)		—
Property and equipment, net		—			348,088			137,407			—			485,495
Goodwill		—			225,628			166,073			—			391,701
Intangible assets, net		—			43,338			4,469			—			47,807
Operating lease right-of-use assets		—			44,872			33,734			—			78,606
Other long-term assets		—			53,025			17,174			—			70,199
Net investment in subsidiaries		1,398,752			—			—			(1,398,752	)		—
Total assets	$	1,442,111		$	1,860,594		$	922,705		$	(2,703,642	)	$	1,521,768
LIABILITIES AND EQUITY
Current liabilities:
Current maturities of long-term debt	$	—		$	1,504		$	142		$	—		$	1,646
Current portion of operating lease liabilities		—			16,399			8,436			—			24,835
Accounts payable		80			126,998			26,567			—			153,645
Accrued liabilities:
Accrued salaries and benefits		—			43,577			24,696			—			68,273
Accrued interest		33,580			—			—			—			33,580
Due to third-party payors		—			34,656			7,342			—			41,998
Other current liabilities		—			31,431			15,192			—			46,623
Total current liabilities		33,660			254,565			82,375			—			370,600
Long-term debt		1,174,021			21,270			116			—			1,195,407
Long-term operating lease liabilities		—			29,644			26,702			—			56,346
Intercompany payable		446,391			448,119			410,380			(1,304,890	)		—
Deferred income tax liabilities, net		7,049			—			—			—			7,049
Other long-term liabilities		—			181,975			24,488			(113,009	)		93,454
Total liabilities		1,661,121			935,573			544,061			(1,417,899	)		1,722,856
Redeemable noncontrolling interests		—			—			2,278			—			2,278
Equity:
Quorum Health Corporation stockholders' equity (deficit):
Preferred stock		—			—			—			—			—
Common stock		3			—			—			—			3
Additional paid-in capital		561,081			1,049,547			718,668			(1,768,215	)		561,081
Accumulated other comprehensive income (loss)		905			943			(38	)		(905	)		905
Accumulated deficit		(780,999	)		(125,469	)		(357,908	)		483,377			(780,999	)
Total Quorum Health Corporation stockholders' equity (deficit)		(219,010	)		925,021			360,722			(1,285,743	)		(219,010	)
Nonredeemable noncontrolling interests		—			—			15,644			—			15,644
Total equity (deficit)		(219,010	)		925,021			376,366			(1,285,743	)		(203,366	)
Total liabilities and equity	$	1,442,111		$	1,860,594		$	922,705		$	(2,703,642	)	$	1,521,768

	Parent Issuer			Other Guarantors			Non- Guarantors			Eliminations			Consolidated

ASSETS
Current assets:
Cash and cash equivalents	$	1,209		$	1,457		$	537		$	—		$	3,203
Patient accounts receivable		—			260,339			62,269			—			322,608
Inventories		—			36,349			9,297			—			45,646
Prepaid expenses		33			15,269			4,381			—			19,683
Due from third-party payors		—			57,049			6,394			—			63,443
Other current assets		314			23,714			12,377			—			36,405
Total current assets		1,556			394,177			95,255			—			490,988
Intercompany receivable		3			661,887			303,059			(964,949	)		—
Property and equipment, net		—			419,292			140,146			—			559,438
Goodwill		—			235,418			165,655			—			401,073
Intangible assets, net		—			43,575			4,714			—			48,289
Other long-term assets		—			57,047			17,259			—			74,306
Net investment in subsidiaries		1,428,675			—			—			(1,428,675	)		—
Total assets	$	1,430,234		$	1,811,396		$	726,088		$	(2,393,624	)	$	1,574,094
LIABILITIES AND EQUITY
Current liabilities:
Current maturities of long-term debt	$	-		$	1,557		$	140		$	—		$	1,697
Accounts payable		121			122,999			20,797			—			143,917
Accrued liabilities:
Accrued salaries and benefits		—			55,780			21,128			—			76,908
Accrued interest		10,024			—			—			—			10,024
Due to third-party payors		—			38,560			7,292			—			45,852
Other current liabilities		248			28,713			14,375			—			43,336
Total current liabilities		10,393			247,609			63,732			—			321,734
Long-term debt		1,169,214			22,370			193			—			1,191,777
Intercompany payable		334,284			303,063			327,602			(964,949	)		—
Deferred income tax liabilities, net		6,736			—			—			—			6,736
Other long-term liabilities		—			212,240			33,106			(118,847	)		126,499
Total liabilities		1,520,627			785,282			424,633			(1,083,796	)		1,646,746
Redeemable noncontrolling interests		—			—			2,278			—			2,278
Equity:
Quorum Health Corporation stockholders' equity:
Preferred stock		—			—			—			—			—
Common stock		3			—			—			—			3
Additional paid-in capital		557,309			1,183,608			580,824			(1,764,432	)		557,309
Accumulated other comprehensive income (loss)		759			759			—			(759	)		759
Accumulated deficit		(648,464	)		(158,253	)		(297,110	)		455,363			(648,464	)
Total Quorum Health Corporation stockholders' equity (deficit)		(90,393	)		1,026,114			283,714			(1,309,828	)		(90,393	)
Nonredeemable noncontrolling interests		—			—			15,463			—			15,463
Total equity (deficit)		(90,393	)		1,026,114			299,177			(1,309,828	)		(74,930	)
Total liabilities and equity	$	1,430,234		$	1,811,396		$	726,088		$	(2,393,624	)	$	1,574,094

	Parent Issuer			Other Guarantors			Non- Guarantors			Eliminations			Consolidated

Net cash provided by (used in) operating activities	$	(70,067	)	$	135,677		$	(42,770	)	$	—		$	22,840

Cash flows from investing activities:
Capital expenditures for property and equipment		—			(18,833	)		(6,998	)		—			(25,831	)
Capital expenditures for software		—			(4,759	)		(601	)		—			(5,360	)
Acquisitions, net of cash acquired		—			—			(531	)		—			(531	)
Proceeds from the sale of hospitals		—			52,733			—			—			52,733
Other investing activities, net		—			260			3,000			—			3,260
Changes in intercompany balances with affiliates, net		—			(162,395	)		—			162,395			—
Net cash provided by (used in) investing activities		—			(132,994	)		(5,130	)		162,395			24,271

Cash flows from financing activities:
Borrowings under revolving credit facilities		465,000			—			—			—			465,000
Repayments under revolving credit facilities		(454,000	)		—			—			—			(454,000	)
Borrowings of long-term debt		—			161			25			—			186
Repayments of long-term debt		(13,065	)		(1,243	)		(100	)		—			(14,408	)
Payments on purchase contracts		—			(374	)		—			—			(374	)
Cancellation of restricted stock awards for payroll tax withholdings on vested shares		—			(588	)		—			—			(588	)
Cash distributions to noncontrolling investors		—			—			(1,699	)		—			(1,699	)
Changes in intercompany balances with affiliates, net		112,096			—			50,299			(162,395	)		—
Net cash provided by (used in) financing activities		110,031			(2,044	)		48,525			(162,395	)		(5,883	)

Net change in cash and cash equivalents		39,964			639			625			—			41,228
Cash and cash equivalents at beginning of period		1,209			1,457			537			—			3,203
Cash and cash equivalents at end of period	$	41,173		$	2,096		$	1,162		$	—		$	44,431

	Parent Issuer			Other Guarantors			Non- Guarantors			Eliminations			Consolidated

Net cash provided by (used in) operating activities	$	(80,781	)	$	124,538		$	(822	)	$	—		$	42,935

Cash flows from investing activities:
Capital expenditures for property and equipment		—			(21,193	)		(13,702	)		—			(34,895	)
Capital expenditures for software		—			(1,400	)		(127	)		—			(1,527	)
Acquisitions, net of cash acquired		—			(42	)		(79	)		—			(121	)
Proceeds from the sale of hospitals		—			39,384			(214	)		—			39,170
Other investing activities, net		—			190			69			—			259
Changes in intercompany balances with affiliates, net		—			(137,364	)		—			137,364			—
Net cash provided by (used in) investing activities		—			(120,425	)		(14,053	)		137,364			2,886

Cash flows from financing activities:
Borrowings under revolving credit facilities		368,000			—			—			—			368,000
Repayments under revolving credit facilities		(368,000	)		—			—			—			(368,000	)
Borrowings of long-term debt		—			102			55			—			157
Repayments of long-term debt		(30,463	)		(1,182	)		(156	)		—			(31,801	)
Payments of debt issuance costs		(2,268	)		—			—			—			(2,268	)
Cancellation of restricted stock awards for payroll tax withholdings on vested shares		—			(1,979	)		—			—			(1,979	)
Cash distributions to noncontrolling investors		—			—			(1,481	)		—			(1,481	)
Changes in intercompany balances with affiliates, net		112,682			—			24,682			(137,364	)		—
Net cash provided by (used in) financing activities		79,951			(3,059	)		23,100			(137,364	)		(37,372	)

Net change in cash, cash equivalents and restricted cash		(830	)		1,054			8,225			—			8,449
Cash, cash equivalents and restricted cash at beginning of period		1,051			4,222			344			—			5,617
Cash, cash equivalents and restricted cash at end of period	$	221		$	5,276		$	8,569		$	—		$	14,066

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion of our financial condition, results of operations and cash flows, together with the unaudited condensed consolidated financial statements and the accompanying notes included in this Quarterly Report on Form 10-Q, as well as the audited consolidated and combined financial statements and accompanying notes, and additionally the sections entitled “Business” and “Risk Factors,” included in our Annual Report on Form 10-K filed with the SEC on March 12, 2019 (the “2018 Annual Report on Form 10-K”). The financial information discussed below and included in our 2018 Annual Report on Form 10-K may not necessarily reflect what our results of operations, financial position and cash flows may be in the future. Except as otherwise indicated or unless the context otherwise requires, all references in this Quarterly Report on Form 10-Q to “we,” “our,” “us,” “QHC” and the “Company” refer to the consolidated business operations of the hospitals and Quorum Health Resources, LLC (“QHR”) that CHS spun off to Quorum Health Corporation on April 29, 2016 (the “Spin-off”). Additionally, all references to “CHS” and “Parent” refer to Community Health Systems, Inc. and its consolidated subsidiaries. References to our financial statements and financial outlook are on a consolidated basis unless otherwise noted.

Some of the matters discussed in this Quarterly Report on Form 10-Q include forward-looking statements. Statements that are predictive in nature, that depend upon or refer to future events or conditions or that include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” “thinks,” and similar expressions are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results and performance to be materially different from any future results or performance expressed or implied by these forward-looking statements.

Although we believe that these forward-looking statements are based upon reasonable assumptions, these assumptions are inherently subject to significant regulatory, economic and competitive uncertainties and contingencies, which are difficult or impossible to predict accurately and may be beyond our control. Accordingly, we cannot give any assurance that our expectations will in fact occur and caution that actual results may differ materially from those in the forward-looking statements. Given these uncertainties, prospective investors are cautioned not to place undue reliance on these forward-looking statements. These forward-

looking statements are made as of the date of this filing. We undertake no obligation to revise or update any forward-looking statements, or to make any other forward-looking statements, whether as a result of new information, future events or otherwise.

As of September 30, 2019, we owned or leased a diversified portfolio of 24 hospitals in rural and mid-sized markets, which are located in 14 states and have a total of 2,038 licensed beds. Our hospitals provide a broad range of hospital and outpatient healthcare services, including general and acute care, emergency room, general and specialty surgery, critical care, internal medicine, diagnostic services, obstetrics, psychiatric and rehabilitation services. For our hospital operations business, we are paid for our services by governmental agencies, commercial insurers and directly by the patients we serve. We also operate QHR, a leading hospital management advisory and healthcare consulting services business. For our hospital management advisory and healthcare consulting services business, we are paid by the non-affiliated hospitals utilizing our services. Over 95% of our net operating revenues are attributable to our hospital operations business.

We perform an ongoing strategic review of our hospitals based upon an analysis of financial performance, current competitive conditions, market demographic and economic trends and capital allocation requirements. As part of this strategy, we intend to continue to divest or close underperforming hospitals and outpatient service facilities which, in turn, will allow us to reduce our corporate indebtedness and refine our hospital portfolio to a sustainable group of hospitals and outpatient service facilities with higher operating margins. We are pursuing divestiture or closure opportunities that align with this strategy. Since the Spin-off, we have divested or closed 14 of the 38 hospitals we originally acquired from CHS. Our strategic review process is ongoing and we have targeted additional hospitals for divestiture with the intention of utilizing substantially all net proceeds to pay down our secured debt. For a discussion of our recent divestiture activities, see below section entitled “Recent Divestiture Activity.”

Our net operating revenues for the three months ended September 30, 2019 decreased $40.6 million to $419.9 million, compared to $460.5 million for the three months ended September 30, 2018, an 8.8% decrease. The $40.6 million decrease was primarily attributable to a $29.9 million decrease in net operating revenues resulting from the hospitals sold or closed during or since the prior period, a $2.0 million reduction in same-facility revenues from the California HQAF program, a $4.2 million reduction in same-facility Illinois property tax credits and a $4.3 million decrease in same-facility rate and acuity. The $4.3 million decrease in rate primarily results from a decline in collectability on self-pay accounts receivable attributable to a disruption in collection efforts resulting from the transition of our revenue cycle services, partially offset by increases in acuity and an improvement in payor mix. The reduction in revenues from the California HQAF program is due to the fact that we have not recognized revenue under Phase VI of the program, which began July 1, 2019, due to insufficient modeling and other statistical information as of September 30, 2019. In future quarters as more information becomes available, we will reassess our ability to estimate revenue under Phase VI of the HQAF program. During the current year we recognized the Illinois property tax credits pro-rata over the nine months ended September 30, 2019, while in the prior year we recognized the entire amount of $7.3 million during the three months ended September 30, 2018. Loss from operations for the three months ended September 30, 2019 was $42.0 million, compared to $22.5 million for the three months ended September 30, 2018. Loss from operations in the 2019 period was negatively impacted by a $13.9 million reduction in the California HQAF program and the Illinois property tax credits, $18.4 million of closure costs related to the closure of MetroSouth, $5.2 million of additional legal, professional and settlement costs and $8.0 million of impairment charges. Our operating results for the three months ended September 30, 2019 reflect a 13.2% decrease in total admissions and a 7.6% decrease in total adjusted admissions compared to the same period in 2018. Same-facility admissions decreased 5.9% and same-facility adjusted admissions increased 0.2% for the three months ended September 30, 2019 compared to the same period in 2018. The decrease in same-facility admissions was impacted by lower volumes resulting from the closure of underperforming service lines at certain of our facilities during the second quarter of 2019. Additionally, the decrease was due to lower surgical admissions in the 2019 period resulting from physician turnover.

Our net operating revenues for the nine months ended September 30, 2019 decreased $115.1 million to $1,304.9 million, compared to $1,420.0 million for the nine months ended September 30, 2018, a 8.1% decrease. The $115.1 million decrease was primarily attributable to an $84.0 million decrease in net operating revenues resulting from the hospitals sold or closed during or since the prior period, a $1.5 million reduction in same-facility revenues from the California HQAF program, a $1.0 million reduction in

same-facility Illinois property tax credits, and a $31.4 million reduction in same-facility volume, offset by a combined $9.0 million increase in same-facility rate and acuity. The change in rate and acuity was primarily a result of a decline in collectability on self-pay accounts receivable attributable to a disruption in collection efforts resulting from the transition of our revenue cycle services that was offset by increases in overall rates, acuity and an improvement in payor mix. Loss from operations for the nine months ended September 30, 2019 was $31.0 million, compared to $84.2 million for the nine months ended September 30, 2018. Loss from operations in the 2018 period was negatively impacted by an additional $29.4 million of impairment charges and $6.6 million related to losses on the sale of hospitals. Our operating results for the nine months ended September 30, 2019 reflect a 12.4% decrease in total admissions and a 9.4% decrease in total adjusted admissions compared to the same period in 2018. Same-facility admissions decreased 6.2% and same-facility adjusted admissions decreased 2.9% for the nine months ended September 30, 2019 compared to the same period in 2018. The decrease in same-facility admissions and adjusted admissions was primarily a result of our initiatives, which were implemented in the second quarter of 2018, to discontinue underperforming patient service lines and to terminate unfavorable payor and physician contracts. The decrease was also impacted by lower volumes resulting from the closure of underperforming service lines at certain of our facilities during the second quarter of 2019 and lower surgical admissions in the 2019 period resulting from physician turnover.

On September 30, 2019, we sold 106-bed Watsonville Community Hospital and its affiliated entities (“Watsonville”), located in Watsonville, California, for proceeds of $46.0 million. Total proceeds include a $5.0 million note receivable which is included in long-term assets on the consolidated balance sheet. For the three months ended September 30, 2019 and 2018, our operating results included pre-tax income (losses) of $(7.9) million and $3.3 million, respectively, related to Watsonville, and pre-tax income (losses) of $(10.3) million and $2.0 million for the nine months ended September 30, 2019 and 2018, respectively. In addition to the above, we recorded a $1.1 million loss on sale of Watsonville in the nine months ended September 30, 2019.

On September 30, 2019, we ceased operations at 314-bed MetroSouth Medical Center and its affiliated entities (“MetroSouth”), located in Blue Island, Illinois. For the three months ended September 30, 2019 and 2018, our operating results included pre-tax losses of $22.6 million and $3.9 million, respectively, related to MetroSouth, and pre-tax losses of $25.8 million and $5.7 million for the nine months ended September 30, 2019 and 2018, respectively. Included in the pre-tax loss for the nine months ended September 30, 2019 was $18.4 million of closure costs related to the closure of MetroSouth. These costs include $11.8 million of non-cash losses associated with the disposal or write down of assets that have no future value to us, $4.7 million of severance and salary continuation costs and $1.9 million of other costs and fees related to the termination of contracts and other miscellaneous costs. We anticipate that in the remainder of 2019 we will incur costs, beyond those already incurred, of approximately $3.0 million to $5.0 million. In addition, beyond 2019, we are obligated to maintain patient health records for approximately 25 years with an estimated annual cost of $0.2 million and may incur additional costs to maintain the existing facilities until such time the facility is sold with an estimated annual cost of $1.0 million.

On April 12, 2019, we sold 146-bed Scenic Mountain Medical Center and its affiliated entities (“Scenic Mountain”), located in Big Spring, Texas, for proceeds of $11.7 million. For the three months ended September 30, 2019 and 2018, our operating results included pre-tax losses of $2.3 million and $1.4 million, respectively, related to Scenic Mountain, and pre-tax losses of $6.4 million and $1.5 million for the nine months ended September 30, 2019 and 2018, respectively. In addition to the above, we recorded a $1.1 million loss on sale of Scenic Mountain in the nine months ended September 30, 2019, which includes a write-off of allocated goodwill of $3.3 million.

The healthcare industry in the United States remains subject to continuing regulatory and market uncertainty due to recent reforms and reform proposals. The current presidential administration and certain members of Congress have sought to repeal or make significant changes to the Affordable Care Act. In addition, governmental agencies and courts have narrowed the scope of the law’s reforms through subsequent interpretation. Courts and government agencies could eliminate provisions of the Affordable Care Act that are beneficial to us and leave in effect provisions that reduce our reimbursement. In addition, government and private payors’ efforts to fundamentally change the finance and delivery of health care may have an adverse effect on our business, results of operations, cash flow and liquidity. For example, certain members of Congress have proposed measures that would expand government-sponsored coverage of healthcare expenses, including single-payor proposals. Other industry groups, such as large employers and private payors and their affiliates, have also proposed reforms to the structure of private health insurance.

The HQAF program provides funding for supplemental payments to hospitals that serve Medi-Cal and uninsured patients. Revenues generated from fees assessed on certain general and acute care California hospitals fund the non-federal supplemental payments to California’s safety-net hospitals while drawing down federal matching funds that are issued as supplemental payments to hospitals for care of Medi-Cal patients. In November 2016, California voters approved a state constitutional amendment measure that extends indefinitely the statute that imposes fees on California hospitals seeking federal matching funds.

The fourth phase of the HQAF program expired on December 31, 2016. The California Department of Health Care Services (“DHCS”) submitted the Phase V HQAF program package to CMS on March 30, 2017 for approval of the overall program structure and the fees or provider tax rates for the program period January 1, 2017 through June 30, 2019, and the fee-for-service inpatient and outpatient upper payments limits (“UPL”) for each of the state fiscal years in the period January 1, 2017 through June 30, 2019. CMS issued formal approval of Phase V HQAF on December 15, 2017. The approvals included the inpatient and outpatient fee-for-service supplemental payments and the overall tax structure. However, CMS has not yet issued a decision on the managed care components of the Phase V HQAF program and, therefore, the payment amounts in the draft model are not finalized. In addition, the supplemental Medi-Cal managed care payments made through the new directed payment mechanism have been estimated using inpatient utilization data publicly reported to the California Office of Statewide Health Planning and Development for the fiscal year ending in 2015. However, the directed payments will be made for inpatient and outpatient services provided to in-network patients during the current state fiscal year. Phase V of California’s HQAF program expired on June 30, 2019 and the next phase of the program, Phase VI, began July 1, 2019 and is expected to be a 30 month program. Due to insufficient modeling and other statistical information as of September 30, 2019, we have not recognized revenue under Phase VI of the HQAF program. In future quarters as more information becomes available, we will reassess our ability to estimate revenue under Phase VI of the HQAF program. We cannot provide any assurances of the amount of revenues our hospitals may receive from the next phase of the HQAF program, the timing of the related cash flows, or that the program will be approved at all.

Of the total supplemental payments received by all hospitals, our portion represents 0.16%. We are estimating that our net impact for Phase V over the 30-month period, January 1, 2017 through June 30, 2019, will be $17.9 million. While uncertainties regarding the timing and amount of payments under the HQAF program exist, our estimates of future cash collections at this time, net of any provider taxes, including those related to previous programs, are $1.2 million in 2019, $2.6 million in 2020 and $0.9 million in 2021. These estimates take into consideration the sale of Watsonville, which was sold on September 30, 2019.

Medicare makes additional payments to hospitals that treat a disproportionately high share of low-income patients, Prior to October 1, 2013, disproportionate share hospital (“DSH”) payments were based on each hospital’s low income utilization for each payment year (the “Pre-ACA DSH Formula”). In the final rule regarding IPPS payment and policy changes for FFY 2005, CMS revised its policy on the calculation of one of the ratios used in the Pre-ACA DSH Formula. The revised policy included Medicare Advantage patients in the utilization of Original Medicare Plan patients. A group of hospitals challenged the policy change claiming that CMS failed to provide adequate notice and a comment period prior to promulgating a DSH rate calculation methodology change. In June 2019, the U.S. Supreme Court ruled in Azar v. Allina Health Services that CMS failed to comply with statutory notice and comment rulemaking procedures before announcing the policy change related to Medicare DSH payments. The case was remanded to the lower district court which ordered CMS to go back and review its policy. Presently, CMS is reviewing its policy and is expected to formalize through formal notice and comment rulemaking in the future. It is unknown but anticipated that CMS may attempt to formalize its old policy and make it retroactive. This would likely lead to further legal challenges. The outcome of this case is still unknown but a favorable outcome could have a material positive impact on our future revenues and cash flows.

Our hospital operations business is highly regulated. We are required to comply with extensive, complicated and overlapping governmental laws and regulations at the federal, state and local levels. These laws and regulations govern almost every aspect of how our hospitals conduct their operations, including the service lines that must be offered for licensure as an acute care hospital, restrictions related to employing physicians, and requirements applicable to eligibility and payment structures under the Medicare and Medicaid programs. The failure to comply with these laws and regulations can result in severe penalties, up to and including criminal prosecution, civil sanctions, and the loss of our ability to qualify for participation in the Medicare and Medicaid programs.

Rules, regulations and laws imposed on the U.S. healthcare industry are subject to ongoing and frequent changes, including with little or no notice and often are interpreted and applied differently by various regulatory agencies with authority to enforce such requirements. Each change or conflicting interpretation may require us to make changes at our hospitals and other healthcare facilities related to factors such as space usage, equipment, technology, staffing and service lines. We may also be required to revise or implement new operating policies and procedures to remediate existing policies and procedures that were previously believed to be compliant. The cost of compliance with governmental laws and regulations is a significant component of our overall operating costs. Furthermore, these costs have been rising in recent years due to new regulatory requirements and increasing enforcement provisions. Management anticipates that compliance costs will continue to grow in the foreseeable future. The U.S. healthcare industry has seen a number of ongoing investigations related to patient referrals, physician recruiting and employment practices, cost reporting and billing practices, medical necessity of inpatient admissions, physician office leasing, laboratory and home healthcare services, physician ownership of hospitals and other healthcare providers, and joint ventures involving hospitals and physicians. Hospitals continue to be one of the primary focus areas of the Office of Inspector General (“OIG”), Department of Justice (“DOJ”) and other governmental fraud and abuse regulatory authorities and programs.

Our financial statements have been prepared under the assumption that QHC will continue as a going concern. We have historical net losses and our maximum Secured Net Leverage Ratio, as permitted under the credit agreement (the “CS Agreement”), by and among us, the lenders party thereto and Credit Suisse AG, Cayman Islands Branch, as administrative agent and collateral agent, will reduce to 4.50 from 5.00 as of January 1, 2020. See “— Liquidity and Capital Resources — Financial Outlook” for additional information regarding factors impacting our future earnings projections and management’s plans which, as of September 30, 2019, do not alleviate substantial doubt about our ability to continue as a going concern.

We generate revenues by providing healthcare services at our hospitals and affiliated outpatient service facilities to patients seeking medical treatment. Hospital revenues depend on, among other factors, inpatient occupancy and acuity levels, the volume of outpatient procedures and the charges and negotiated reimbursement rates for the healthcare services provided. Our primary sources of payment for patient healthcare services are third-party payors, including the Medicare and Medicaid programs, Medicare and Medicaid managed care programs, commercial insurance companies, other managed care programs, workers’ compensation carriers and employers. Self-pay revenues are the portion of our revenues generated from providing healthcare services to patients who do not have health insurance coverage as well as the patient responsibility portion of charges that are not covered for an individual by a health insurance program or plan. We generate revenues related to our QHR business when hospital management advisory and healthcare consulting services are provided. We generate other non-patient revenues primarily from rental income and hospital cafeteria sales.

Amounts we collect for medical treatment of patients covered by Medicare, Medicaid and non-governmental third-party payors are generally less than our standard billing rates. Our standard charges and reimbursement rates for routine inpatient services vary significantly depending on the type of medical procedure performed and the geographical location of the hospital. Differences in our standard billing rates and the amounts we expect to collect from third-party payors are classified as contractual adjustments. The reimbursements we ultimately receive as payments for services are determined for each patient instance of care, based on the contractual terms we negotiate with third-party payors or based on federal and state regulations related to governmental healthcare programs. Except for emergency department services, our policy is to determine the payment methodology with patients prior to when the services are performed. Self-pay and other payor discounts are incentives offered to uninsured or underinsured patients or other payors to reduce their costs of healthcare services. Billings and collections were outsourced to CHS under a TSA that was put in place by CHS in connection with the Spin-off through September 30, 2019. Our contractual adjustments were impacted by the timing and ability of CHS to monitor the classification and collection of our patient accounts receivable. See Note 16 — Related Party Transactions in the accompanying consolidated financial statements for additional information on this agreement. On May 8, 2019, we entered into an agreement with R1 RCM to receive end-to-end revenue cycle management services. The agreement with R1 RCM has, among other things, allowed for us to transition our billing and collection services from CHS to R1 RCM. In July 2019, R1 RCM began providing limited services to us, such as status review on aged accounts receivable and insurance denials. Effective October 1, 2019, we transitioned our billing and collection services from CHS to R1 RCM.

The following table provides a summary of our net operating revenues for the three and nine months ended September 30, 2019 and 2018 by payor source (dollars in thousands):

	Three Months Ended September 30,
	2019					2018
	$ Amount		% of Total			$ Amount		% of Total

Medicare	$	121,812		29.0	%	$	123,788		26.9	%
Medicaid		86,280		20.5	%		97,803		21.2	%
Managed care and commercial		168,050		40.0	%		185,493		40.3	%
Self-pay and self-pay after insurance		25,410		6.1	%		33,647		7.3	%
Non-patient		18,348		4.4	%		19,776		4.3	%
Total net operating revenues	$	419,900		100.0	%	$	460,507		100.0	%


	Nine Months Ended September 30,
	2019					2018
	$ Amount		% of Total			$ Amount		% of Total

Medicare	$	370,743		28.4	%	$	398,477		28.1	%
Medicaid		264,998		20.3	%		270,047		19.0	%
Managed care and commercial		516,783		39.6	%		560,445		39.5	%
Self-pay and self-pay after insurance		95,081		7.3	%		125,619		8.8	%
Non-patient		57,270		4.4	%		65,371		4.6	%
Total net operating revenues	$	1,304,875		100.0	%	$	1,419,959		100.0	%

In the ordinary course of business, we provide services to patients who are financially unable to pay for hospital care. The related charges for those patients who are financially unable to pay that otherwise do not qualify for reimbursement from a governmental program are classified as charity care. We determine amounts that qualify for charity care primarily based on the patient’s household income relative to the poverty level guidelines established by the federal government. Our policy is not to pursue collections for such amounts; therefore, the related charges are recorded in operating revenues at the standard billing rates and fully offset in contractual adjustments in the same period.

In February 2016, the FASB issued a new accounting standard, Accounting Standards Codification (“ASC”) Topic 842, related to leases to increase transparency and comparability among organizations by requiring the recognition of right-of-use (“ROU”) assets and lease liabilities on the balance sheet. Most significant among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. Under the new standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. We adopted ASC Topic 842 effective January 1, 2019 using the modified retrospective transition approach as of the period of adoption. Our financial statements prior to January 1, 2019 were not modified for the application of the new lease standard. Upon adoption of ASC Topic 842, we recognized $93.7 million of ROU assets and $95.6 million of lease liabilities associated with operating leases. The accounting for capital leases remained substantially unchanged. In addition, we recognized a $0.7 million cumulative effect adjustment that increased accumulated deficit in our consolidated balance sheet at January 1, 2019.

The preparation of financial statements in accordance with U.S. GAAP requires us to make estimates and judgments that affect the reported amounts and related disclosures. Actual results may differ from these estimates under different assumptions or conditions. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. The critical accounting estimates and judgments presented below are not intended to be a comprehensive list of all our accounting policies that require estimates but are limited to those that involve a higher degree of judgment and complexity. We believe the current assumptions and other considerations used to estimate amounts in our financial statements are appropriate. If actual results differ from these assumptions and considerations, the resulting impact could have a material adverse effect on our results of operations and financial condition.

Our estimates of our patient revenues due from third-party payors are highly complex and include interpretations of governmental regulations and payor-specific contractual agreements that are frequently changing. The Medicare and Medicaid programs, which are the payor sources for a major portion of our patient revenues, are subject to interpretation of federal and state-specific reimbursement rates, new or changing legislation and final cost report settlements. Contractual adjustments are recorded in the period services are performed and the patient’s method of payment is verified. Estimates for contractual adjustments are subject to change, in large part, due to ongoing contract negotiations and regulatory changes, which is typical in the U.S. healthcare industry. Revisions to estimates for contractual adjustments are recorded in the periods in which they become known and may be subject to further revisions.

We use a third-party automated contractual adjustments system to calculate our contractual adjustments each month. Contractual adjustments are calculated utilizing historical paid claims data by payor source. The key assumptions used by the system to calculate the current period estimated contractual adjustments are derived on a payor-specific basis from the estimated contractual reimbursement percentage and historical paid claims data. The automated contractual adjustments system does not include patient account level information, as it estimates an average contractual adjustment for each payor source. Actual reimbursement payments we receive from third-party payors could be different from the amounts we estimated and recorded. If the actual contractual reimbursement percentages by payor source differed by 1% from our estimated contractual reimbursement percentages, our net loss for the nine months ended September 30, 2019 would have changed by $13.4 million. If we applied a 1% differential to our patient accounts receivable due from governmental, managed care and commercial third-party payors as of September 30, 2019, patient accounts receivable would have changed by $13.4 million.

Cost report settlements under reimbursement programs with Medicare, Medicaid and other managed care plans are estimated and recorded in the period patient services are performed, and any revisions to estimates of previous program reimbursements are recorded in subsequent periods until the final cost report settlements are determined. We account for cost report settlements in contractual adjustments in our consolidated statements of income and recognize these amounts as due from and due to third-party payors on our consolidated balance sheets. Contractual adjustments related to previous program reimbursements and final cost report settlements favorably (unfavorably) impacted net operating revenues by $0.2 million and $(0.5) million during the three months ended September 30, 2019 and 2018, respectively, and by $2.3 million and $(0.4) million during the nine months ended September 30, 2019 and 2018, respectively.

Several states have established supplemental payment programs, including disproportionate share programs, for the purpose of providing reimbursement to providers to offset a portion of the cost of providing care to Medicaid and indigent patients. The amounts due to us under such programs are included in due from third-party payors on our balance sheets. Some of these programs have participation costs, referred to as fees or provider taxes. We record these costs in due to third-party payors on our consolidated balance sheets. After a state supplemental program is approved and fully authorized, we recognize the reimbursement payments due to us from these programs in the periods the amounts are estimable and revenue collection is reasonably assured. We record the revenues as favorable contractual adjustments in our net operating revenues and the related provider taxes as other operating expenses in our statements of income.

The following table shows the portion of our Medicaid reimbursements attributable to state supplemental payment programs for the three and nine months ended September 30, 2019 and 2018 (in thousands):

The California Department of Health Care Services administers the HQAF program, imposing a fee on certain general and acute care California hospitals. Revenues generated from these fees provide funding for the non-federal supplemental payments to California hospitals that serve California’s Medi-Cal and uninsured patients. The current phase of the HQAF program expired on June 30, 2019 and the next phase of the program, Phase VI, began July 1, 2019 and is expected to be a 30 month program. Due to insufficient modeling and other statistical information as of September 30, 2019, we have not recognized revenue under Phase VI of the HQAF program. In future quarters as more information becomes available, we will reassess our ability to estimate revenue under Phase VI of the HQAF program. Upon consideration of the additional information, revenue will be recognized under ASC 606 when uncertainty of a future revenue reversal is subsequently resolved. Under the HQAF program, we recognized $8.7 million of Medicaid revenues and $0.1 million of provider taxes for the three months ended September 30, 2018. Under the HQAF program, we recognized $16.0 million of Medicaid revenues and $4.4 million of provider taxes for the nine months ended September 30, 2019, and $24.4 million of Medicaid revenues and $4.4 million of provider taxes for the nine months ended September 30, 2018. On September

30, 2019, we sold Watsonville Community Hospital. We recognized $7.3 million and $14.4 million of Medicaid revenues, net of provider taxes, for the nine months ended September 30, 2019 and 2018, respectively, related to Watsonville.

In addition, we recognized $2.0 million and $5.9 million of Medicaid revenues for the three and nine months ended September 30, 2019, respectively, related to the sale of Illinois property tax credits. We recognized $7.3 million of Medicaid revenues related to the sale of Illinois property tax credits in the three and nine months ended September 30, 2018 as the amount for the full year 2018 was recognized in the third quarter of 2018.

The following table provides a summary of the components of amounts due from and due to third-party payors (in thousands):

Substantially all of our accounts receivable are related to providing healthcare services to patients at our hospitals and affiliated outpatient facilities. Collection of these accounts receivable is our primary source of cash and is critical to our operating performance. Our primary collection risks relate to uninsured patients and the patient financial responsibility portion of payments due from insured patients, generally co-pays and deductibles. Our policy is to verify the health insurance coverage of a patient prior to the procedure date for all medical treatment scheduled in advance. We do not verify insurance coverage in advance of treatment for walk-in and emergency room patients.

Collections are impacted by the economic ability of patients to pay and the effectiveness of our billing and collection efforts, which are outsourced to a third party, including their current policies on billings, accounts receivable payor classifications and collections. Our results are also affected by the effectiveness of third party collection agencies and our own efforts to further attempt collection. As previously stated, billings and certain collections were outsourced to CHS under a transition services agreement that was put in place with the Spin-off through September 30, 2019. Effective October 1, 2019, we transitioned our billing and collection services from CHS to R1 RCM. See Note 16 — Related Party Transactions in the accompanying consolidated financial statements for additional information on the CHS TSA agreement. Significant changes in payor mix, centralized business office operations, including outsourced efforts in collecting our accounts receivables, economic conditions or trends in federal and state governmental healthcare coverage, among other things, could affect our collection levels.

Our policy is to write off gross accounts receivable if the balance is under $10.00 or when such amounts are placed with outside secondary collection agencies. We believe this policy accurately reflects the likelihood of recovery consistent with our ongoing collection efforts and is consistent with practices within the U.S. healthcare industry. We had $513.9 million and $486.8 million of past due patient account balances at September 30, 2019 and December 31, 2018, respectively, being pursued by secondary collection agencies. Effective October 1, 2018, by mutual agreement of both companies, each of the parties’ obligations under the PASI transition services agreement to the other were terminated. We replaced the services provided by CHS by utilizing external service providers and internal resources. We expect to collect less than 3%, net of estimated collection fees, of the amounts being pursued by these secondary collection agencies. These amounts have been written-off and they are not included in accounts receivable in our consolidated balance sheets. Any amounts collected are recognized as revenue upon receipt.

For self-pay receivables, the total amount of contractual adjustments, discounts and implicit price concessions that reduced these receivables to their net carrying value was $628.0 million and $575.6 million as of September 30, 2019 and December 31, 2018, respectively. If our actual collection percentage differed by 1% from our estimated collection percentage as a result of a change in recoveries, our net loss for the nine months ended September 30, 2019 would have changed by $6.9 million.

Days revenue outstanding related to patients accounts receivable, excluding amounts recorded as due to or due from third-party payors, was 63 days and 64 days as of September 30, 2019 and December 31, 2018, respectively.

Whenever an event occurs or changes in circumstances indicate that the carrying values of certain long-lived assets may be impaired, we project the undiscounted cash flows expected to be generated by those assets. If the projections indicate that the carrying values are not expected to be recovered, the assets are reduced to their estimated fair value based on a quoted market price, if available, or an estimated value based on valuation techniques available in the circumstances.

Our hospital operations and hospital management advisory and healthcare consulting services operations meet the criteria to be classified as reporting units for goodwill. Goodwill is evaluated for impairment annually at the same time every year and when an event occurs or circumstances change that, more likely than not, reduce the fair value of a reporting unit below its carrying value. There is a two-step method for determining goodwill impairment. Step one is to compare the fair value of the reporting unit with the unit’s carrying amount, including goodwill. If this test indicates the fair value is less than the carrying value, then step two is required. Step two is to compare the implied fair value of the reporting unit’s goodwill with the carrying value of the reporting unit’s goodwill. When an indicator of potential impairment is identified in interim periods, we evaluate goodwill for impairment at such date.

We perform our annual goodwill impairment evaluation in the fourth quarter of each year. For our annual evaluation, we estimate the fair value of each of our reporting units utilizing two modeling approaches, a discounted cash flow model and an earnings multiple model. The discounted cash flow model applies a discount rate to our cash flow forecasts that is based on our best estimate of a market participant’s weighted-average cost of capital. The earnings multiple model applies a market supported multiple to EBITDA. Both models are based on our best estimate of future revenues and operating costs and expenses as of the testing date. Additionally, the results of both models are reconciled to our consolidated market capitalization, which considers the amount a potential buyer would be required to pay, in the form of a control premium, to gain sufficient ownership to set policies, direct operations and control management decisions of our company.

During the three months ended September 30, 2019, we evaluated the fair value of hospitals intended for divestiture and recognized long-lived asset impairment of $8.0 million during the three months ended September 30, 2019, which consisted of $7.4 million of property and equipment and $0.6 million of capitalized software costs.

During the three months ended June 30, 2019, we evaluated the fair value of hospitals intended for divestiture and recognized long-lived asset and goodwill impairment of $26.0 million, which consist of $15.3 million of property and equipment, $4.2 million of capitalized software costs and $6.5 million of goodwill.

During the three months ended March 31, 2019, we evaluated the fair value of hospitals intended for divestiture and recognized long-lived asset impairment of $8.9 million, which consists of $8.4 million of property and equipment and $0.5 million of capitalized software costs.

During the three months ended September 30, 2018, we evaluated the fair value of hospitals intended for divestiture and recognized long-lived asset impairment of $32.4 million, which consists of $31.5 million of property and equipment and $0.9 million of capitalized software costs.

During the three months ended June 30, 2018, we evaluated the fair value of hospitals intended for divestiture and determined that there were no indicators of impairment.

During the three months ended March 31, 2018, we evaluated the fair value of hospitals intended for divestiture and recognized long-lived asset impairment of $39.8 million, which consists of $34.7 million of property and equipment and $5.1 million of capitalized software costs.

Professional and General Liability Insurance and Workers’ Compensation Liability Insurance Reserves

As part of the business of owning and operating hospitals, we are subject to legal actions alleging liability on our part. To mitigate a portion of this risk, we maintain insurance exceeding a self-insured retention level for these types of claims. Our self-insurance reserves reflect the current estimate of all outstanding losses, including incurred but not reported losses, based on actuarial calculations as of period end. The loss estimates included in the actuarial calculations may change in the future due to updated facts and circumstances, including our claims experience post Spin-off. Insurance expense in the income statements include the actuarially determined estimates for losses in the current year, including claims incurred but not reported, the changes in estimates for losses in prior years based on actual claims development experience as compared to prior actuarial projections, the insurance premiums for losses related to policies obtained to cover amounts in excess of our self-insured retention levels, the administrative costs of the insurance programs, and interest expense related to the discounted portions of these liabilities. Our reserves for professional and general liability and workers’ compensation liability claims are based on semi-annual actuarial calculations, which are discounted to present value and consider historical claims data, demographic factors, severity factors and other actuarial assumptions. The liabilities for self-insured claims are discounted based on our risk-free interest rate that corresponds to the period when the self-insured claims are incurred and projected to be paid.

The professional and general liability reserves as of September 30, 2019 included a reduction of $26.9 million related to prior periods resulting from our most recent actuarial analysis utilizing updated data through April 30, 2019. Factors contributing to the

change in estimate include the use of valuation techniques that place more emphasis on our claims subsequent to the Spin-off compared to historical trends, as well as more reliance on industry trend factors. The reduction in the frequency and severity of our claims is the result of internal initiatives in the areas of patient safety, risk management, and claims management, as well as external factors such as tort reform in certain key states.

A portion of our reserves for workers’ compensation and professional and general liability claims included on our balance sheets relates to reserved claims and incurred but not reported claims prior to the Spin-off. These claims were fully indemnified by CHS under the terms of the Separation and Distribution Agreement. As a result, we have a corresponding receivable from CHS related to these claims on our consolidated balance sheets. See Note 17 — Commitments and Contingencies in our accompanying consolidated financial statements for a table that summarizes the receivables and liabilities associated with our workers’ compensation liability and professional and general liability claims as of September 30, 2019 and December 31, 2018.

The breadth of our operations and the complexity of tax regulations require assessments of uncertainties and judgments in estimating the amount of income taxes that we will ultimately pay. The amount of final income taxes ultimately paid by us is dependent upon many factors, including negotiations with taxing authorities in various jurisdictions, outcomes of tax litigation and resolution of disputes arising from federal and state tax audits in the normal course of business.

We calculate our provision for income taxes and account for income taxes using the asset and liability method. Under this method, deferred income taxes are recorded to represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred income taxes during the year. Deferred income taxes result from differences between the financial and tax basis of our assets and liabilities and are adjusted for changes in tax rates and the enactment of new or amended tax laws.

Under the asset and liability method, valuation allowances are recorded to reduce deferred income tax assets when it is more likely than not that a tax benefit will not be realized. We assess the realization of our deferred tax assets to determine whether an income tax valuation allowance is required. Based on all available evidence, both positive and negative, and the weight of that evidence to the extent such evidence can be objectively verified, we determine whether it is more likely than not that all or a portion of the deferred tax assets will be realized. The main factors that we consider include:

In the ordinary course of business, there is inherent uncertainty in quantifying our income tax positions. We assess our income tax positions and record deferred income tax benefits for all tax years subject to examination based upon management’s evaluation of the facts, circumstances and information available at the reporting date about the ability to realize the benefit of the deferred tax assets or tax positions. For those tax positions where it is more likely than not that a future tax benefit will be sustained, our policy is to record the largest amount of income tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that an income tax benefit will not be sustained in the future, we do not recognize a deferred tax benefit in our financial statements. We record interest and penalties, net of any applicable tax benefit, related to income taxes, if any, as a component of the provision for income taxes when applicable.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles — Goodwill and Other — Internal Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, to provide guidance on the accounting for implementation costs incurred in a cloud computing arrangement that is accounted for as a service contract. This ASU requires entities to account for such costs consistent with the guidance on capitalizing costs associated with developing or obtaining internal-use software. The ASU is effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. We adopted ASU No. 2018-15 on January 1, 2019 on a prospective basis. There was no material impact on our consolidated financial position and results of operations as a result of adoption of ASU No. 2018-15 as of January 1, 2019. As of September 30, 2019, we have capitalized $1.5 million of implementation costs related to the implementation of cloud computing arrangements which are included in other long-term assets on the consolidated balance sheet. As we transition from the TSAs with CHS, we will incur additional material costs associated with cloud computing arrangements.

In February 2018, the FASB issued ASU No. 2018-02, Income Statement — Reporting Comprehensive Income, which allows for reclassification from accumulated other comprehensive income to retained earnings of the stranded tax effects in accumulated other comprehensive income resulting from the enactment of the comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”) and corresponding accounting treatment recorded in the fourth quarter of 2017. We adopted ASU No. 2018-02 on January 1, 2019. The adoption of ASU No. 2018-02 did not have a significant impact on our consolidated balance sheet.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles — Goodwill and Other: Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill impairment by eliminating step two from the goodwill impairment test. This ASU instead permits an entity to recognize goodwill impairment as the excess of a reporting unit's carrying value over the estimated fair value of the reporting unit, to the extent this amount does not exceed the carrying amount of goodwill. The new guidance continues to allow an entity to perform a qualitative assessment of goodwill impairment indicators in lieu of a quantitative assessment in certain situations. The ASU is effective for annual and interim reporting periods beginning after December 15, 2019, with early adoption permitted. We currently do not expect ASU No. 2017-04 to have a material impact on our consolidated results of operations and financial position

We have summarized our results of operations, including certain financial and operating data for the three and nine months ended September 30, 2019 and 2018 on a comparative basis below. The definitions of certain terms used throughout the remainder of “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” follows:

Same-facility. Same-facility financial and operating data, as presented in the comparative discussions herein, excludes hospitals that were sold or closed prior to and as of the end of the current reporting period. Our same-facility operating results for the three and nine months ended September 30, 2019 and 2018, which are reported herein, have been adjusted to exclude the operating results of the following hospitals and their affiliated entities:

Divestitures Group. The divestitures group, as of September 30, 2019, includes all hospitals that had been sold or closed by us since the Spin-off through September 30, 2019 as shown in the table above. This group of hospitals has certain ongoing operations during the wind-down periods related to the assets and liabilities that were not part of the hospital sale, which typically includes patient accounts receivable, third-party receivables and accounts payable.

Licensed Beds. Licensed beds are the number of beds for which the appropriate state agency licenses a hospital, regardless of whether the beds are actually available for patient use.

Admissions. Admissions represent the number of patients admitted for inpatient services.

Adjusted Admissions. Adjusted admissions is computed by multiplying admissions by gross patient revenues and then dividing that number by gross inpatient revenues.

Surgeries. Surgeries represent the number of inpatient and outpatient surgeries.

Emergency room visits. Emergency room visits represent the number of patients registered and treated in our emergency rooms.

Medicare case mix index. Medicare case mix index is a relative value assigned to a diagnosis-related group of patients that is used in determining the allocation of resources necessary to treat the patients in that group. Medicare case mix index is calculated as the average case mix index for all Medicare admissions during the period.

Hospital operations man-hours per adjusted admission. Hospital operations man-hours per adjusted admission is calculated as total paid employed and contract labor hours at both our hospitals and affiliated outpatient facilities divided by adjusted admissions. It is used by management as a measurement of productivity.

Days revenue outstanding. Days revenue outstanding approximates the average collection period for patient accounts receivable. It is calculated by dividing net patient accounts receivable at the end of the period by average net operating revenues per day for the most recent three months. Net patient accounts receivable excludes the amounts reported as due from and to third-party payors related to final cost report settlements and state supplemental payment programs.

EBITDA. EBITDA is a non-GAAP financial measure that consists of net income (loss) before interest, income taxes, depreciation and amortization.

Adjusted EBITDA. Adjusted EBITDA, also a non-GAAP financial measure, is EBITDA adjusted to add back the effect of certain legal, professional and settlement costs, impairment of long-lived assets and goodwill, net gain (loss) on sale of hospitals, net loss on closure of hospitals, transition of TSAs, change in actuarial estimates, severance costs for post-spin headcount reductions and executive severance. Change in actuarial estimates refers to the previously discussed impact of a change in estimate for our professional and general liability reserves for periods prior to the current reporting period. We use Adjusted EBITDA as a measure of financial performance. Adjusted EBITDA is a key measure used by our management to assess the operating performance of our hospital operations business and to make decisions on the allocation of resources. Additionally, management uses Adjusted EBITDA in assessing our consolidated results of operations and in comparing our results of operations between periods.

Same-facility Adjusted EBITDA. Same-facility Adjusted EBITDA, also a non-GAAP financial measure, is further adjusted to exclude the effect of EBITDA of the divestitures group. We present Same-facility Adjusted EBITDA because management believes this measure provides investors and other users of our financial statements with additional information about how management assesses our results of operations. Same-facility Adjusted EBITDA was previously defined as Adjusted EBITDA, Adjusted for Divestitures in prior periods. There has been no change in how the financial measure is being calculated.

Three Months Ended September 30, 2019 Compared to Three Months Ended September 30, 2018

The following table provides a summary of our results of operations, both in dollars and as a percentage of net operating revenues (dollars in thousands):

	Three Months Ended September 30,
	2019						2018						2019 vs 2018
				% of						% of			$			Change
	$ Amount			Revenues			$ Amount			Revenues			Variance			in %

Net operating revenues	$	419,900			100.0	%	$	460,507			100.0	%	$	(40,607	)
Operating costs and expenses:
Salaries and benefits		215,457			51.3	%		226,237			49.1	%		(10,780	)		2.2	%
Supplies		47,818			11.4	%		48,949			10.6	%		(1,131	)		0.8	%
Other operating expenses		139,671			33.3	%		143,716			31.4	%		(4,045	)		1.9	%
Depreciation and amortization		15,028			3.6	%		16,612			3.6	%		(1,584	)		—	%
Lease costs and rent		11,121			2.6	%		11,661			2.5	%		(540	)		0.1	%
Electronic health records incentives		(17	)		—	%		(31	)		—	%		14			—	%
Legal, professional and settlement costs		5,191			1.2	%		1,519			0.3	%		3,672			0.9	%
Impairment of long-lived assets and goodwill		8,010			1.9	%		32,438			7.0	%		(24,428	)		(5.1	)%
Loss (gain) on sale of hospitals, net		1,206			0.3	%		805			0.2	%		401			0.1	%
Loss on closure of hospitals, net		18,414			4.4	%		1,111			0.2	%		17,303			4.2	%
Total operating costs and expenses		461,899			110.0	%		483,017			104.9	%		(21,118	)		5.1	%
Income (loss) from operations		(41,999	)		(10.0	)%		(22,510	)		(4.9	)%		(19,489	)		(5.1	)%
Interest expense, net		33,056			7.9	%		32,450			7.0	%		606			0.9	%
Income (loss) before income taxes		(75,055	)		(17.9	)%		(54,960	)		(11.9	)%		(20,095	)		(6.0	)%
Provision for (benefit from) income taxes		137			—	%		(1,074	)		(0.2	)%		1,211			0.2	%
Net income (loss)		(75,192	)		(17.9	)%		(53,886	)		(11.7	)%		(21,306	)		(6.2	)%
Less: Net income (loss) attributable to noncontrolling interests		736			0.2	%		54			—	%		682			0.2	%
Net income (loss) attributable to Quorum Health Corporation	$	(75,928	)		(18.1	)%	$	(53,940	)		(11.7	)%	$	(21,988	)		(6.4	)%

The following table reconciles Adjusted EBITDA and Same-facility Adjusted EBITDA to net income (loss), the most directly comparable U.S. GAAP financial measure (in thousands):

The following table provides information related to our net operating revenues (dollars in thousands, except per adjusted admission amounts):

	Three Months Ended September 30,
	2019		2018		$ Variance			% Variance

Consolidated:
Net patient revenues	$	401,552	$	440,731	$	(39,179	)		(8.9	)%
Non-patient revenues		18,348		19,776		(1,428	)		(7.2	)%
Total net operating revenues	$	419,900	$	460,507	$	(40,607	)		(8.8	)%
Net patient revenues per adjusted admission	$	9,541	$	9,679	$	(138	)		(1.4	)%
Net operating revenues per adjusted admission	$	9,977	$	10,113	$	(136	)		(1.3	)%

Same-facility:
Net patient revenues	$	360,684	$	369,904	$	(9,220	)		(2.5	)%
Non-patient revenues		17,950		19,432		(1,482	)		(7.6	)%
Total net operating revenues	$	378,634	$	389,336	$	(10,702	)		(2.7	)%
Net patient revenues per adjusted admission	$	9,595	$	9,864	$	(269	)		(2.7	)%
Net operating revenues per adjusted admission	$	10,073	$	10,382	$	(309	)		(3.0	)%

The following table provides information related to our net operating revenues by payor source (dollars in thousands):

	Three Months Ended September 30,
	2019					2018					2019 vs 2018
	$ Amount		% of Total			$ Amount		% of Total			$ Variance			Change in %

Consolidated:
Medicare	$	121,812		29.0	%	$	123,788		26.9	%	$	(1,976	)		2.1	%
Medicaid		86,280		20.5	%		97,803		21.2	%		(11,523	)		(0.7	)%
Managed care and commercial		168,050		40.0	%		185,493		40.3	%		(17,443	)		(0.3	)%
Self-pay and self-pay after insurance		25,410		6.1	%		33,647		7.3	%		(8,237	)		(1.2	)%
Non-patient		18,348		4.4	%		19,776		4.3	%		(1,428	)		0.1	%
Total net operating revenues	$	419,900		100.0	%	$	460,507		100.0	%	$	(40,607	)

Same-facility:
Medicare	$	108,256		28.6	%	$	103,087		26.5	%	$	5,169			2.1	%
Medicaid		75,516		19.9	%		75,410		19.4	%		106			0.5	%
Managed care and commercial		152,299		40.3	%		159,434		40.9	%		(7,135	)		(0.6	)%
Self-pay and self-pay after insurance		24,613		6.5	%		31,973		8.2	%		(7,360	)		(1.7	)%
Non-patient		17,950		4.7	%		19,432		5.0	%		(1,482	)		(0.3	)%
Total net operating revenues	$	378,634		100.0	%	$	389,336		100.0	%	$	(10,702	)

The following table provides information related to certain drivers of our net operating revenues:

	Three Months Ended September 30,
	2019		2018		Variance			% Variance

Consolidated:
Number of licensed beds at end of period		2,038		2,604		(566	)		(21.7	)%
Admissions		15,453		17,797		(2,344	)		(13.2	)%
Adjusted admissions		42,089		45,536		(3,447	)		(7.6	)%
Surgeries		16,883		17,927		(1,044	)		(5.8	)%
Emergency room visits		127,168		135,231		(8,063	)		(6.0	)%
Medicare case mix index		1.43		1.42		0.01			0.7	%

Same-facility:
Number of licensed beds at end of period		2,038		2,038		—			—	%
Admissions		13,337		14,175		(838	)		(5.9	)%
Adjusted admissions		37,590		37,500		90			0.2	%
Surgeries		14,712		14,860		(148	)		(1.0	)%
Emergency room visits		109,529		109,928		(399	)		(0.4	)%
Medicare case mix index		1.41		1.43		(0.02	)		(1.4	)%

Net operating revenues for the three months ended September 30, 2019 decreased $40.6 million compared to the three months ended September 30, 2018, consisting of a $39.2 million decrease in net patient revenues and a $1.4 million decrease in non-patient revenues. Our decrease in net patient revenues consisted of a $30.0 million decline related to the divestitures group and a $9.2 million decline related to our same-facility hospitals. Our net patient revenues do not include any revenues from the California HQAF program for the three months ended September 30, 2019 due to the fact that we have not recognized revenue under Phase VI of the program, which began July 1, 2019, due to insufficient modeling and other statistical information as of September 30, 2019. In future quarters as more information becomes available, we will reassess our ability to estimate revenue under Phase VI of the HQAF program. Same-facility net patient revenues for the three months ended September 30, 2018 included $2.0 million from this program. In addition, we recognized $1.6 million of same-facility Medicaid revenues related to the sale of Illinois property tax credits in the three months ended September 30, 2019 compared to $5.8 million in the three months ended September 30, 2018, a decrease of $4.2 million. Excluding the impact of the California HQAF and Illinois property tax credits, same-facility net patient revenues decreased by $3.0 million. The $3.0 million decrease in our same-facility net patient revenues was primarily due to a $0.8 million increase resulting from increased adjusted admissions and a $4.3 million decrease in same-facility rate and acuity. The $4.3 million decrease in rate primarily results from a decline in collectability on self-pay accounts receivable attributable to a disruption in collection efforts resulting from the transition of our revenue cycle services, partially offset by increases in acuity and an improvement in payor mix. On

a consolidated basis, admissions and adjusted admissions declined 13.2% and 7.6%, respectively, when comparing the third quarter of 2019 to the same period in 2018. On a same-facility basis, admissions and adjusted admissions increased (decreased) by (5.9)% and 0.2%, respectively, when comparing the same periods. The decrease in same-facility admissions was impacted by lower volumes resulting from the closure of underperforming service lines at certain of our facilities during the second quarter of 2019. Additionally, the decrease was due to lower surgical admissions in the 2019 period resulting from physician turnover.

The following table provides information related to our salaries and benefits expenses (dollars in thousands, except per adjusted admission amounts):

Salaries and benefits decreased $10.8 million for the three months ended September 30, 2019 compared to the three months ended September 30, 2018. The decrease in salaries and benefits of $10.8 was primarily due to a decline of $11.1 million related to the divestitures group.

The following table provides information related to our supplies expense (dollars in thousands, except per adjusted admissions amounts):

Supplies expense decreased $1.1 million for the three months ended September 30, 2019 compared to the three months ended September 30, 2018, which included a $3.7 million decline related to the divestitures group offset by a $2.6 million increase related to our same-facility hospitals. The $2.6 million increase in our same-facility hospitals was primarily due to an increase in general supplies and implant costs as a result of an increase in surgeries at some of our larger hospitals.

The following table provides information related to our other operating expenses (dollars in thousands):

Other operating expenses decreased $4.0 million for the three months ended September 30, 2019 compared to the three months ended September 30, 2018. The decrease in other operating expenses was primarily due to a decline of $4.2 million related to the divestitures group.

Depreciation and amortization expense decreased $1.6 million during the three months ended September 30, 2019 compared to the three months ended September 30, 2018. This decrease was primarily due to the overall reduction in our long-lived assets due to the divestiture or closure of four hospitals in 2018 and one hospital in the second quarter of 2019 and due to impairment charges which occurred subsequent to the third quarter of 2018.

Lease costs and rent expense increased $0.5 million during the three months ended September 30, 2019 compared to the three months ended September 30, 2018. The types of costs included in lease costs and rent expense are the same for both periods. We adopted ASC Topic 842 as of January 1, 2019 and have made additional disclosures about our lease arrangements. See Note 7 — Leases in the accompanying consolidated financial statements for additional information on our leases.

Legal, professional and settlement costs increased $3.7 million for the three months ended September 30, 2019 compared to the three months ended September 30, 2018. The increase relates primarily to legal settlements related to employee matters and legal costs associated with strategic initiatives. See Note 17 — Commitments and Contingencies in the accompanying consolidated financial statements for additional information on these matters.

For the three months ended September 30, 2019, we recognized $8.0 million of impairment to long-lived assets and goodwill of certain hospitals which we have identified as potential divestiture candidates. For the three months ended September 30, 2018, we recognized $32.4 million of impairment to long-lived assets and goodwill of certain hospitals which we have identified as potential divestiture candidates or for which we had received letters of intent.

We recognized a $1.2 million loss on the sale of hospitals, net for the three months ended September 30, 2019, primarily related to the sale of Watsonville. We recognized a $0.8 million loss on the sale of hospitals, net for the three months ended September 30, 2018, primarily related to the sale of McKenzie.

For the three months ended September 30, 2019, we recognized an $18.4 million loss on closure of hospitals, net related to the closure of MetroSouth. We ceased operations at this hospital on September 30, 2019 but will have certain continuing closure costs primarily related to the regulatory requirements for maintaining patient records.

For the three months ended September 30, 2018, we recognized an $1.1 million loss on closure of hospitals, net related to the closure of Affinity. We ceased operations at this hospital on February 11, 2018 but will have certain continuing closure costs primarily related to the regulatory requirements for maintaining patient records. These continuing costs are not considered material and are included in other operating expenses in the consolidated statements of income.

The following table provides information related to interest expense, net (dollars in thousands):

Interest expense, net increased $0.6 million for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 primarily due to the increase in our outstanding balances with the ABL Credit Facility and the reduction of interest income due to a decline in past due accounts receivable from the State of Illinois. See Liquidity and Capital Resources below and Note 6 — Long-Term Debt in the accompanying consolidated financial statements for additional information on our indebtedness.

The provision for income taxes was $0.1 million for the three months ended September 30, 2019 compared to a benefit from income taxes of $1.1 million for the three months ended September 30, 2018. Our effective tax rates were (0.2)% and 2.0% for the three months ended September 30, 2019 and 2018, respectively. The decrease in the effective tax rate for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 is the result of an increase in tax expense related to tax

amortization of indefinite-lived intangibles in the current period compared to an income tax benefit derived from book impairments exceeding tax amortization of indefinite-lived intangibles in the prior period.

Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018

The following table provides a summary of our results of operations, both in dollars and as a percentage of net operating revenues (dollars in thousands):

	Nine Months Ended September 30,
	2019						2018						2019 vs 2018
				% of						% of			$			Change
	$ Amount			Revenues			$ Amount			Revenues			Variance			in %

Net operating revenues	$	1,304,875			100.0	%	$	1,419,959			100.0	%		(115,084	)
Operating costs and expenses:
Salaries and benefits		653,943			50.1	%		705,868			49.7	%		(51,925	)		0.4	%
Supplies		149,405			11.4	%		160,732			11.3	%		(11,327	)		0.1	%
Other operating expenses		383,414			29.5	%		440,910			31.0	%		(57,496	)		(1.5	)%
Depreciation and amortization		44,167			3.4	%		52,015			3.7	%		(7,848	)		(0.3	)%
Lease costs and rent		34,279			2.6	%		35,551			2.5	%		(1,272	)		0.1	%
Electronic health records incentives earned		592			—	%		(617	)		—	%		1,209			—	%
Legal, professional and settlement costs		6,480			0.5	%		10,349			0.7	%		(3,869	)		(0.2	)%
Impairment of long-lived assets and goodwill		42,820			3.3	%		72,198			5.1	%		(29,378	)		(1.8	)%
Loss (gain) on sale of hospitals, net		2,346			0.2	%		8,927			0.6	%		(6,581	)		(0.4	)%
Loss on closure of hospitals, net		18,414			1.4	%		18,195			1.3	%		219			0.1	%
Total operating costs and expenses		1,335,860			102.4	%		1,504,128			105.9	%		(168,268	)		(3.5	)%
Income (loss) from operations		(30,985	)		(2.4	)%		(84,169	)		(5.9	)%		53,184			3.5	%
Interest expense, net		98,904			7.6	%		95,307			6.7	%		3,597			0.9	%
Income (loss) before income taxes		(129,889	)		(10.0	)%		(179,476	)		(12.6	)%		49,587			2.6	%
Provision for (benefit from) income taxes		386			—	%		(1,162	)		—	%		1,548			—	%
Net income (loss)		(130,275	)		(10.0	)%		(178,314	)		(12.6	)%		48,039			2.6	%
Less: Net income (loss) attributable to noncontrolling interests		1,532			0.1	%		1,200			—	%		332			0.1	%
Net income (loss) attributable to Quorum Health Corporation	$	(131,807	)		(10.1	)%	$	(179,514	)		(12.6	)%	$	47,707			2.5	%

The following table reconciles Adjusted EBITDA and Same-facility Adjusted EBITDA to net income (loss), the most directly comparable U.S. GAAP financial measure (in thousands):

The following table provides information related to our net operating revenues (dollars in thousands, except per adjusted admission amounts):

	Nine Months Ended September 30,
	2019		2018		$ Variance			% Variance

Consolidated:
Net patient revenues	$	1,247,605	$	1,354,588	$	(106,983	)		(7.9	)%
Non-patient revenues		57,270		65,371		(8,101	)		(12.4	)%
Total net operating revenues	$	1,304,875	$	1,419,959	$	(115,084	)		(8.1	)%
Net patient revenues per adjusted admission	$	9,822	$	9,656	$	166			1.7	%
Net operating revenues per adjusted admission	$	10,272	$	10,122	$	150			1.5	%

Same-facility:
Net patient revenues	$	1,079,321	$	1,104,199	$	(24,878	)		(2.3	)%
Non-patient revenues		56,013		62,239		(6,226	)		(10.0	)%
Total net operating revenues	$	1,135,334	$	1,166,438	$	(31,104	)		(2.7	)%
Net patient revenues per adjusted admission	$	9,817	$	9,755	$	62			0.6	%
Net operating revenues per adjusted admission	$	10,327	$	10,305	$	22			0.2	%

The following table provides information related to our net operating revenues by payor source (dollars in thousands):

	Nine Months Ended September 30,
	2019					2018					2019 vs 2018
	$ Amount		% of Total			$ Amount		% of Total			$ Variance			Change in %

Consolidated:
Medicare	$	370,743		28.4	%	$	398,477		28.1	%	$	(27,734	)		0.3	%
Medicaid		264,998		20.3	%		270,047		19.0	%		(5,049	)		1.3	%
Managed care and commercial		516,783		39.6	%		560,445		39.5	%		(43,662	)		0.1	%
Self-pay and self-pay after insurance		95,081		7.3	%		125,619		8.8	%		(30,538	)		(1.5	)%
Non-patient		57,270		4.4	%		65,371		4.6	%		(8,101	)		(0.2	)%
Total net operating revenues	$	1,304,875		100.0	%	$	1,419,959		100.0	%	$	(115,084	)

Same-facility:
Medicare	$	319,427		28.1	%	$	325,674		27.9	%	$	(6,247	)		0.2	%
Medicaid		216,111		19.0	%		201,785		17.3	%		14,326			1.7	%
Managed care and commercial		458,892		40.6	%		471,749		40.5	%		(12,857	)		0.1	%
Self-pay and self-pay after insurance		84,890		7.5	%		104,991		9.0	%		(20,101	)		(1.5	)%
Non-patient		56,014		4.8	%		62,239		5.3	%		(6,225	)		(0.5	)%
Total net operating revenues	$	1,135,334		100.0	%	$	1,166,438		100.0	%	$	(31,104	)

The following table provides information related to certain drivers of our net operating revenues:

	Nine Months Ended September 30,
	2019		2018		$ Variance			% Variance

Consolidated:
Number of licensed beds at end of period		2,038		2,604		(566	)		(21.7	)%
Admissions		49,562		56,546		(6,984	)		(12.4	)%
Adjusted admissions		127,027		140,282		(13,255	)		(9.4	)%
Surgeries		51,515		57,628		(6,113	)		(10.6	)%
Emergency room visits		387,724		424,417		(36,693	)		(8.6	)%
Medicare case mix index		1.45		1.43		0.02			1.4	%

Same-facility:
Number of licensed beds at end of period		2,038		2,038		—			—	%
Admissions		41,310		44,052		(2,742	)		(6.2	)%
Adjusted admissions		109,939		113,193		(3,254	)		(2.9	)%
Surgeries		43,967		45,867		(1,900	)		(4.1	)%
Emergency room visits		324,915		333,445		(8,530	)		(2.6	)%
Medicare case mix index		1.44		1.43		0.01			0.7	%

Net operating revenues for the nine months ended September 30, 2019 decreased $115.1 million compared to the nine months ended September 30, 2018, consisting of a $107.0 million decrease in net patient revenues and an $8.1 million decrease in non-patient revenues. Our decrease in net patient revenues consisted of an $82.1 million decline related to the divestitures group and a $24.9 million decline related to our same-facility hospitals. We recognized $4.3 million of same-facility revenues from the California HQAF program during the nine months ended September 30, 2019 compared to $5.8 million in the nine months ended September 30, 2018, respectively. The $1.5 million decrease is related to the fact that we have not recognized revenue under Phase VI of the program which begins July 1, 2019 due to insufficient modeling and other statistical information as of September 30, 2019. In future quarters as more information becomes available, we will reassess our ability to estimate revenue under Phase VI of the HQAF program. In addition, we recognized $4.8 million of Medicaid revenues related to the sale of Illinois property tax credits in the nine months ended September 30, 2019 compared to $5.8 million in the nine months ended September 30, 2018, a decrease of $1.0 million. Excluding the impact of the California HQAF and Illinois property tax credits, same-facility net patient revenues decreased by $22.4 million. The $22.4 million decline was primarily due to a $31.4 million decrease resulting from lower admissions and surgical volume, offset by a combined $9.0 million increase in rate and acuity. The change in rate and acuity was primarily a result of a decline in collectability on self-pay accounts receivable attributable to a disruption in collection efforts resulting from the transition of our revenue cycle services that was offset by increases in overall rates, acuity and an improvement in payor mix. On a consolidated basis, admissions and adjusted admissions declined 12.4% and 9.4%, respectively, when comparing the nine months ended September 30, 2019 to the same period in 2018. On a same-facility basis, admissions and adjusted admissions decreased 6.2% and 2.9%, respectively, when comparing these same periods. The decrease in same-facility admissions and adjusted admissions was primarily a result of our initiatives, which were implemented in the third quarter of 2018, to discontinue underperforming patient service lines and to terminate unfavorable payor and physician contracts. The decrease was also impacted by lower volumes resulting from the closure of underperforming service lines at certain of our facilities during the third quarter of 2019. Additionally, the decrease was due to lower surgical admissions in the 2019 period resulting from physician turnover.

The following table provides information related to our salaries and benefits expenses (dollars in thousands, except per adjusted admission amounts):

Salaries and benefits decreased $51.9 million for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018. Salaries and benefits declined $34.4 million related to the divestitures group and $17.5 million related to same-facility salaries and benefits. The same-facility decrease of $17.5 million was primarily related to a reduction in same-facility

admissions of 6.2% and the termination of physician contracts as part of our cost savings initiatives implemented in the third quarter of 2018.

The following table provides information related to our supplies expense (dollars in thousands, except per adjusted admissions amounts):

Supplies expense decreased $11.3 million for the nine months ended September 30, 2019 when compared to the nine months ended September 30, 2018, which included a $10.7 million decline related to the divestitures group and a $0.6 million decline related to our same-facility hospitals.

The following table provides information related to our other operating expenses (dollars in thousands):

Other operating expenses decreased $57.5 million for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018. Other operating expenses declined $33.8 million related to the divestitures group and declined $23.7 million related to our same-facility hospitals. The decrease in same-facility other operating costs was primarily due to a $23.5 million reduction in professional and general liability reserves relating to prior periods resulting from our most recent actuarial analysis utilizing updated data through April 30, 2019. Factors contributing to the change in estimate include the use of valuation techniques that place more emphasis on our claims subsequent to the Spin-off compared to historical trends, as well as more reliance on industry trend factors. The reduction in the frequency and severity of our claims is the result of internal initiatives in the areas of patient safety, risk management, and claims management, as well as external factors such as tort reform in certain key states.

Depreciation and amortization expense decreased $7.8 million during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018. This decrease was primarily due to the overall reduction in our long-lived assets due to the divestiture or closure of four hospitals in 2018 and to impairment charges since the prior year comparable period.

Lease costs and rent expense decreased $1.3 million during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 primarily related to the divestitures group. The types of costs included in lease costs and rent expense are the same for both periods. We adopted ASC Topic 842 as of January 1, 2019 and have made additional disclosures about our lease arrangements. See Note 7 — Leases in the accompanying consolidated financial statements for additional information on our leases.

Legal, professional and settlement costs decreased $3.9 million for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018. The decrease relates primarily to the reduction in legal costs associated with the arbitration with CHS. We incurred significant costs associated with the arbitration in the nine months ended September 30, 2018 that we did not incur in the nine months ended September 30, 2019 as the case was settled on January 3, 2019.

For the nine months ended September 30, 2019, we recognized $42.8 million of impairment to long-lived assets and goodwill of certain hospitals which we have identified as potential divestiture candidates. For the nine months ended September 30, 2018, we recognized $72.2 million of impairment to long-lived assets and goodwill of certain hospitals which we identified as potential divestiture candidates or for which we had received letters of intent.

We recognized a $2.3 million loss on the sale of hospitals, net in the nine months ended September 30, 2019 primarily related to the sale of Scenic Mountain and Watsonville. We recognized an $8.9 million loss on the sale of hospitals, net in the nine months ended September 30, 2018 primarily related to the sale of Clearview.

For the nine months ended September 30, 2019, we recognized an $18.4 million loss on closure of hospitals, net related to the closure of MetroSouth. We ceased operations at this hospital on September 30, 2019 but will have certain continuing closure costs primarily related to the regulatory requirements for maintaining patient records.

For the nine months ended September 30, 2018, we recognized an $18.2 million loss on closure of hospitals, net related to the closure of Affinity. We ceased operations at this hospital on February 11, 2018 but will have certain continuing closure costs primarily related to the regulatory requirements for maintaining patient records. These continuing costs are not considered material and are included in other operating expenses in the consolidated statements of income.

The following table provides information related to interest expense, net (dollars in thousands):

Interest expense, net increased $3.6 million for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 primarily due to the increased interest rate on our Term Loan Facility and the reduction of interest income due to a decline in past due accounts receivable from the State of Illinois. See Liquidity and Capital Resources below and Note 6 — Long-Term Debt in the accompanying consolidated financial statements for additional information on our indebtedness.

The provision for income taxes was $0.4 million for the nine months ended September 30, 2019 compared to a benefit from income taxes of $1.2 million for the nine months ended September 30, 2018. Our effective tax rates were (0.3)% and 0.6% for the nine months ended September 30, 2019 and 2018, respectively. The decrease in the effective tax rate for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 is the result of an increase in tax expense related to tax amortization of indefinite-lived intangibles in the current period compared to an income tax benefit derived from book impairments exceeding tax amortization of indefinite-lived intangibles in the prior period.

Our primary sources of liquidity are cash flows from operations, proceeds from divestitures and available borrowing capacity under our revolving credit facilities. Borrowings under our revolving credit facilities are intended to be used for working capital, capital expenditures and general corporate purposes. Our cash flows are negatively impacted by the significant amount of interest expense associated with the high debt leverage put in place to affect the Spin-off. Interest payments were $7.7 million and $18.7 million for the three months ended September 30, 2019 and 2018, respectively. In addition, one state in which we operate, California, is historically slow making payments for their Medicaid supplemental payment programs. As of September 30, 2019, receivables outstanding under the California state supplemental programs were $5.2 million.

We perform an ongoing strategic review of our hospitals based upon an analysis of financial performance, current competitive conditions, market demographic and economic trends and capital allocation requirements. As part of this strategy, we engage in initiatives to divest or close underperforming hospitals and outpatient service facilities which, in turn, allows us to reduce our corporate indebtedness and refine our hospital portfolio to become a sustainable group of hospitals and outpatient service facilities with higher operating margins. To date, we have received combined cash proceeds of $139.8 million from the sale of land and two hospitals in 2019, three hospitals in 2018, five hospitals in 2017 and two hospitals in 2016, which has been used to pay down $137.3 million on our Term Loan Facility. Our strategic review process is ongoing, and we have targeted additional hospitals for divestiture or closure with the intention of utilizing substantially all net proceeds to pay down our secured debt.

Our financial statements have been prepared under the assumption that we will continue as a going concern. In accordance with ASC 205-40, Presentation of Financial Statements — Going Concern, management concluded that there were probable conditions or events that raised substantial doubt about our ability to continue as a going concern due to the fact that our maximum Secured Net Leverage Ratio permitted under the CS Agreement is reduced to 4.50 from 5.00 in the first quarter of 2020. The measurement date for our required compliance with the Secured Net Leverage Ratio is as of the last day of each fiscal quarter. We are in compliance with our financial covenants as of September 30, 2019. Management’s evaluation of our ability to comply with the Secured Net Leverage Ratio for the one year period following the date these financial statements are issued included, but was not limited to, consideration of the following factors:

Management’s plans in relation to costs savings and improvement in net patient revenues have been initiated, documented and approved as indicated above. No formal documentation or approval of management’s intention to modify our maximum Secured Net Leverage has occurred on or before September 30, 2019, and therefore the results remain uncertain. As such, substantial doubt about our ability to continue as a going concern has not been alleviated as of September 30, 2019.

Three Months Ended September 30, 2019 Compared to Three Months Ended September 30, 2018

Net cash provided by operating activities was $25.2 million for the three months ended September 30, 2019 compared to net cash provided by operating activities of $28.3 million for the three months ended September 30, 2018, a $3.2 million decrease. In the 2018 period, net cash flows from operating activities were favorably impacted by $5.9 million in HQAF payments received during the three months ended September 30, 2018. In the 2019 period, net cash flows from operating activities were favorably impacted by $4.4 million in HQAF payments received during the three months ended September 30, 2019, offset by $6.6 million in cash costs related to the closure of MetroSouth. All other changes in operating assets and liabilities on a comparative basis for the three months ended September 30, 2019 and 2018 were considered to be part of our normal business operations.

Net cash provided by investing activities was $35.0 million for the three months ended September 30, 2019 compared to net cash used in investing activities of $10.1 million for the three months ended September 30, 2018, an $45.1 million increase. This increase was primarily driven by $39.9 million of cash proceeds from the sale of Watsonville received in the third quarter of 2019.

Net cash used in financing activities was $18.0 million for the three months ended September 30, 2019, compared to net cash used in financing activities of $15.0 million for the three months ended September 30, 2018, a $3.0 million decrease. This decrease was primarily due to a $3.0 million decrease in our net borrowings under revolving credit facilities in the 2019 period compared to the 2018 period.

Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018

Net cash provided by operating activities was $22.8 million for the nine months ended September 30, 2019 compared to net cash provided by operating activities of $42.9 million for the nine months ended September 30, 2018, a $20.1 million decrease. In the 2018 period, net cash flows from operating activities were favorably impacted by $38.7 million in HQAF payments received during the nine months ended September 30, 2018, partially offset by $11.8 million in cash cost related to the closure of Affinity. In the 2019 period, net cash flows from operating activities were favorably impacted by $26.6 million in HQAF payments during the nine months ended September 30, 2019, which were partially offset by $6.6 million in cash costs related to the closure of MetroSouth. All other changes in operating assets and liabilities on a comparative basis for the nine months ended September 30, 2019 and 2018 were considered to be part of our normal business operations.

Net cash provided by investing activities was $24.3 million for the nine months ended September 30, 2019 compared to net cash provided by investing activities of $2.9 million for the nine months ended September 30, 2018, a $21.4 million increase. Capital expenditures for property and equipment decreased $9.1 million, primarily due to reduced spending on the new patient tower and expanded surgical capacity project at our hospital in Springfield, Oregon as it is substantially complete. Capital expenditures for software increased $3.8 million, primarily due to investments in a standalone information system infrastructure. In the 2018 period, net cash provided by investing activities included $39.2 million of proceeds from the sales of Clearview and Vista West. In the 2019 period, net cash provided by investing activities included $52.7 million of proceeds from the sales of Scenic Mountain and Watsonville.

Net cash used in financing activities was $5.9 million for the nine months ended September 30, 2019 compared to net cash used in financing activities of $37.4 million for the nine months ended September 30, 2018, a $31.5 million increase. This increase was primarily due to an $11.0 million increase in our net borrowings under revolving credit facilities in the 2019 period compared to the 2018 period and a $17.4 million reduction in repayments of our Term Loan Facility due to the timing of the sale of hospitals.

Capital expenditures for property, equipment and software were $31.2 million and $36.4 million for the nine months ended September 30, 2019 and 2018, respectively. In addition, we had $4.8 million and $3.0 million of capital expenditures related to property and equipment accrued in accounts payable at September 30, 2019 and 2018, respectively. Our capital expenditures primarily consist of purchases of medical equipment, renovations at our hospitals and investments in a standalone information system infrastructure.

Our construction project on a new patient tower and expanded surgery capacity at our hospital in Springfield, Oregon is substantially complete. During the three months ended September 30, 2019, we did not incur costs related to this project. During the three months ended September 30, 2018, we incurred costs of $3.6 million related to this project. During the nine months ended September 30, 2019 and 2018, we incurred costs of $2.4 million and $14.3 million, respectively, related to this project. As of September 30, 2019, we have incurred a total of $103.2 million of costs for this project, of which $103.0 million has been placed into service as of September 30, 2019. The total estimated cost of this project, including equipment costs, is estimated to be approximately $105.0 million. We anticipate the remaining costs on the project in 2019 are $1.8 million.

We currently utilize MEDHOST INC.’s (“Medhost”) software through our IT TSA with CHS. In connection with our planned transition from the Computer and Data Processing Transition Services Agreement (or “IT TSA”) with CHS, we entered into an agreement with Medhost to deploy Medhost’s Electronic Health Record management platform. This agreement includes both software license and service fees. The implementation of the Medhost software is expected to be completed by the end of the first quarter of 2021. As of September 30, 2019, we have capitalized $10.3 million of costs related to the implementation of the Medhost software, which are included in intangible assets, net on the consolidated balance sheet.

In addition, we have entered into various cloud computing arrangements related to the transition of our information technology infrastructure, such as financial reporting and budgeting, payroll compliance and revenue management services. As of September 30, 2019, we capitalized $1.5 million of implementation costs related to these cloud computing arrangements, which are included in other long-term assets on the consolidated balance sheet.

We will incur additional costs to establish the remainder of our information technology systems which includes additional information technology infrastructure costs, among other things. As of September 30, 2019, we have capitalized $4.4 million of information technology infrastructure costs. We expect the transition from CHS to be completed by the end of the first quarter of 2021. Upon completion, we do not anticipate a significant change in our operating costs related to information technology.

The following table provides a summary of our contractual obligations under our information technology agreements as of September 30, 2019 and for the next five years and thereafter (in thousands):

Our net working capital was $77.4 million and $169.3 million as of September 30, 2019 and December 31, 2018, respectively, a $91.9 million decrease. This decrease in net working capital was partially due to the adoption of ASC Topic 842 as of January 1, 2019, which resulted in $24.8 million of current operating lease liabilities as of September 30, 2019 with no comparable amounts at December 31, 2018. Additionally, accrued interest increased $23.6 million primarily due to the timing of payments related to the senior notes and partially due to an election made during the third quarter of 2019 to set the term loan to three month LIBOR rather than one month LIBOR with the interest payment due during the fourth quarter of 2019. Net working capital decreased approximately $33.9 million related to two divestitures and one closure in 2019 which was offset by the $39.9 million in cash received for the sale of Watsonville on September 30, 2019. All other changes in net working capital were part of our normal business operations.

The following table provides a summary of activity related to our long-term debt (in thousands):

	Nine Months Ended September 30, 2019
									Assets
	Total								Acquired				Total
	Debt at								Under				Debt
	Beginning								Capital				at End
	of Period			Borrowings		Repayments			Leases		Amortization		of Period

Senior Credit Facility:
Revolving Credit Facility, maturing 2021	$	—		$	—	$	—		$	—	$	—	$	—
Term Loan Facility, maturing 2022		790,751			—		(13,065	)		—		—		777,686
ABL Credit Facility, maturing 2021		14,000			465,000		(454,000	)		—		—		25,000
Senior Notes, maturing 2023		400,000			—		—			—		—		400,000
Unamortized debt issuance costs and discounts		(35,537	)		—		—			—		6,872		(28,665	)
Finance lease obligations		23,386			—		(1,017	)		205		—		22,574
Other debt		874			186		(602	)		—		—		458
Total debt		1,193,474			465,186		(468,684	)		205		6,872		1,197,053
Less: Current maturities of long-term debt		(1,697	)											(1,646	)
Total long-term debt	$	1,191,777		$	465,186	$	(468,684	)	$	205	$	6,872	$	1,195,407

The following table provides a summary of our long-term debt, allocated between fixed and variable debt (dollars in thousands):

In connection with the Spin-off, on April 29, 2016 we entered into the CS Agreement. On April 11, 2017, we executed an agreement with our Senior Credit Facility lenders to amend certain provisions of our Senior Credit Facility (the “CS Amendment”), as described below. On March 14, 2018, we executed a second agreement with our Senior Credit Facility lenders to amend certain provisions of our Senior Credit Facility (the “CS Second Amendment”), as described below.

The CS Agreement initially provided for an $880 million senior secured term loan facility (the “Term Loan Facility”) and a $100 million senior secured revolving credit facility (the “Revolving Credit Facility” and, together with the Term Loan Facility, the “Senior Credit Facility”). The Term Loan Facility was issued at a discount of $17.6 million, or 98% of par value, and has a maturity date of April 29, 2022, subject to customary acceleration events and repayment, extension or refinancing. The Revolving Credit Facility has a maturity date of April 29, 2021, subject to certain customary acceleration events and repayment, extension or refinancing. The CS Amendment reduced the Revolving Credit Facility’s borrowing capacity from $100 million to $87.5 million until December 31, 2017, at which time the borrowing capacity decreased to $75.0 million. The CS Second Amendment further reduced the Revolving Credit Facility’s capacity to $62.5 million through maturity, effective with the amendment executed on March 14, 2018.

The CS Agreement contains customary covenants, including a maximum permitted Secured Net Leverage Ratio, as determined based on 12 month trailing Consolidated EBITDA, as defined in the CS Agreement. On April 11, 2017, we executed the CS Amendment with our Senior Credit Facility lenders to amend the calculation of the Secured Net Leverage Ratio beginning July 1, 2017 through maturity, among other provisions. In addition, the CS Amendment raised the minimum Secured Net Leverage Ratio required for the Company to remain in compliance for certain periods, and also changed the calculation of compliance for specified periods. The CS Second Amendment, which was executed on March 14, 2018, amended the Secured Net Leverage Ratio for the period July 1, 2017 through maturity. As of September 30, 2019, we had a Secured Net Leverage Ratio of 4.49 to 1.00 implying additional borrowing capacity of $89.6 million as of September 30, 2019.

In addition to amending the calculation of the Secured Net Leverage Ratio and the Maximum Secured Net Leverage Ratio, the CS Amendment and CS Second Amendment also affected other terms of the CS Agreement as follows:

Prior to the CS Amendment, interest under the Term Loan Facility accrued, at our option, at adjusted LIBOR, subject to statutory reserves and a floor of 1% plus 5.75%, or the alternate base rate plus 4.75%. Following the CS Amendment, interest under the Term Loan Facility accrues, at our option, at adjusted LIBOR, subject to statutory reserves and a floor of 1% plus 6.75%, or the alternate base rate plus 5.75%. The effective interest rate on the Term Loan Facility was 9.50% as of September 30, 2019. Interest on outstanding borrowings under the Revolving Credit Facility accrues, at our option, at adjusted LIBOR, subject to statutory reserves and a floor of 0% plus 2.75%, or the alternate base rate plus 1.75%, and remains unchanged under the CS Amendment and the CS Second Amendment.

Borrowings from the Revolving Credit Facility are used for working capital and general corporate purposes. As of September 30, 2019, we had no borrowings outstanding on the Revolving Credit Facility and had $15.2 million of letters of credit outstanding that were primarily related to the self-insured retention levels of professional and general liability and workers’ compensation liability insurance and as security for the payment of claims. As of September 30, 2019, we had borrowing capacity under our Revolving Credit Facility of $47.3 million subject to the restraint of the overall borrowing capacity calculated by the Secured Net Leverage Ratio.

The ABL Credit Facility has a maturity date of April 29, 2021, subject to customary acceleration events and repayment, extension or refinancing. Interest on outstanding borrowings under the ABL Credit Facility accrues, at our option, at a base rate or LIBOR, subject to statutory reserves and a floor of 0%, except that all swingline borrowings will accrue interest based on the base rate, plus an applicable margin determined by the average excess availability under the ABL Credit Facility for the fiscal quarter immediately preceding the date of determination. The applicable margin ranges from 1.75% to 2.25% for LIBOR advances and from 0.75% to 1.25% for base rate advances. As of September 30, 2019, we had $25.0 million of borrowings outstanding under the ABL Credit Facility and borrowing capacity of $77.0 million subject to the restraint of the overall borrowing capacity calculated by the Secured Net Leverage Ratio.

The ABL Credit Facility has a “Covenant Trigger Event” definition that requires us to maintain excess availability under the ABL Credit Facility equal to or greater than the greater of (i) $12.5 million and (ii) 10% of the aggregate commitments under the ABL Credit Facility. If a Covenant Trigger Event occurs, then we are required to maintain a minimum Consolidated Fixed Charge Ratio of 1.10 to 1.00 until such time that a Covenant Trigger Event is no longer continuing. In addition, if excess availability under the ABL Credit Facility were to fall below the greater of (i) 12.5% of the aggregate commitments under the ABL Credit Facility and (ii) $15.0 million, then a “Cash Dominion Event” would be triggered upon which the lenders could assume control of our cash.

In addition to the specific covenants described above, the Credit Agreements contain customary negative covenants, which limit our ability to, among other things, incur additional indebtedness, create liens, make investments, transfer assets and merge or acquire assets, and make restricted payments, including dividends, distributions, and specified payments on other indebtedness. They include customary events of default, including payment defaults, material breaches of representations and warranties, covenant defaults, default on other material indebtedness, customary Employee Retirement Income Security Act events of default, bankruptcy and insolvency, material judgments, invalidity of liens on collateral, change of control or cessation of business. The Credit Agreements also contain customary affirmative covenants and representations and warranties.

On April 22, 2016, we issued $400 million aggregate principal amount of 11.625% Senior Notes due 2023, pursuant to the Indenture. The Senior Notes were issued at a discount of $6.9 million, or 1.734%, in a private placement and are senior unsecured obligations guaranteed on a senior basis by certain of our subsidiaries (the “Guarantors”). The Senior Notes mature on April 15, 2023 and bear interest at a rate of 11.625% per annum, payable semi-annually in arrears on April 15 and October 15 of each year, beginning on October 15, 2016. Interest on the Senior Notes accrues from the date of original issuance and is calculated on the basis of a 360-day year comprised of twelve 30-day months. The effective interest rate on the Senior Notes was 12.49% as of September 30, 2019.

The Indenture contains covenants that, among other things, limit our ability and certain of our subsidiaries’ ability to incur or guarantee additional indebtedness, pay dividends or make other restricted payments, make certain investments, create or incur certain liens, sell assets and subsidiary stock, transfer all or substantially all of our assets or enter into merger or consolidation transactions.

On May 17, 2017, we exchanged the 11.625% Senior Notes due 2023 (the “Initial Notes”) in the aggregate principal amount of $400 million, which were not registered under the Securities Act of 1933, as amended (the “Securities Act”), for a like principal amount of 11.625% Senior Notes due 2023 (the “Exchange Notes”), which have been registered under the Securities Act. The Initial Notes were substantially identical to the Exchange Notes, except that the Exchange Notes are registered under the Securities Act and are not subject to the transfer restrictions and certain registration rights agreement provisions applicable to the Initial Notes.

On and after April 15, 2019, we are entitled, at our option, to redeem all or a portion of the Senior Notes upon not less than 30 nor more than 60 days’ notice, at the following redemption prices specified in the table below, plus accrued and unpaid interest, if any, to the redemption date. The redemption prices are expressed as a percentage of the principal amount on the redemption date. Holders of record on the relevant record date have the right to receive interest due on the relevant interest payment date. In addition, prior to April 15, 2019, we could have redeemed some or all of the Senior Notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, plus a “make whole” premium, as set forth in the Indenture. We were entitled to redeem up to 35% of the aggregate principal amount of the Senior Notes until April 15, 2019 with the net proceeds from certain equity offerings at the redemption price set forth in the Indenture.

The following table provides a summary of the redemption periods and prices related to the Senior Notes:

The following table provides a summary of unamortized debt issuance costs and discounts (in thousands):

Our debt arising from finance lease obligations primarily relates to our corporate office in Brentwood, Tennessee. As of September 30, 2019 and December 31, 2018, this finance lease obligation was $16.5 million and $17.2 million, respectively. The remainder of our finance lease obligations relate to property and equipment at our hospitals and corporate office. Other debt consists of physician loans and miscellaneous notes payable to banks.

The following table provides a summary of our debt maturities for the next five years and thereafter (in thousands):

Our financial statements include all assets, liabilities, revenues and expenses of less than 100% owned entities that we control. Accordingly, we have recorded noncontrolling interests in the earnings and equity of such entities. Certain of our consolidated subsidiaries have noncontrolling physician ownership interests with redemption features that require us to deliver cash upon the occurrence of certain events outside our control, such as the retirement, death, or disability of a physician-owner. We record the carrying amount of redeemable noncontrolling interests at the greater of: (1) the initial carrying amount increased or decreased for the noncontrolling interests' share of cumulative net income (loss), net of cumulative amounts distributed, if any, or (2) the redemption value. As of September 30, 2019, we had redeemable noncontrolling interests of $2.3 million and non-redeemable noncontrolling interests of $15.6 million that are included in our consolidated balance sheets.

We are exposed to market risk associated with changes in interest rates on our variable rate long-term debt. In connection with the Spin-off, on April 29, 2016, we entered into two credit agreements, the Senior Credit Facility and the ABL Credit Facility, that subject us to variable interest rates tied to LIBOR or a base rate. As of September 30, 2019, we had outstanding principal amount of debt, excluding unamortized debt issuance costs and discounts, of $802.7 million subject to variable rates of interest, which included $25.0 million of borrowings outstanding under revolving credit facilities as of September 30, 2019. If the interest rate on our variable rate long-term debt outstanding as of September 30, 2019, after taking into consideration the 1% floor on our Term Loan Facility, was 100

basis points higher for the nine months ended September 30, 2019, the additional interest expense impacting net income (loss) would have been $6.1 million, or $(0.20) per basic and diluted share. We do not currently have any derivative or hedging arrangements, or other known exposures, to changes in interest rates.

The chief executive of the United Kingdom Financial Conduct Authority, or the "FCA", which regulates LIBOR, announced in July 2017 that the FCA intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The Federal Reserve Bank of New York has published the Secured Overnight Financing Rate (SOFR) as an alternative to LIBOR and is a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities. Due to the uncertainty surrounding the future of LIBOR, it is expected that a transition away from the widespread use of LIBOR to alternative benchmark rates will occur by the end of 2021. The ABL Credit Facility expires in April 2021, prior to the transition from LIBOR, therefore any new agreements will no longer utilize LIBOR. In the event that LIBOR is no longer available, or we have not amended our Senior Credit Facility, the Senior Credit Facility has an alternative rate of interest based on the greatest of the Prime Rate and the Federal Funds Effective Rate. If the alternative rate of interest was used for the nine months ended September 30, 2019, we would have incurred additional interest expense of $11.7 million.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective (at the reasonable assurance level) to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There have been no changes in our internal control over financial reporting during the three months ended September 30, 2019 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

We are subject to lawsuits and other legal matters arising in the ordinary course of our business, including claims of damages for personal injuries, medical malpractice, breach of hospital management contracts, breach of other contracts, wrongful restriction of or interference with physicians’ staffing privileges and other employment-related claims. In certain of these claims, plaintiffs request payment for damages, including punitive damages that may not be covered by our insurance policies.

Healthcare facilities also are subject to the regulation and oversight of various federal and state governmental agencies. The healthcare industry has seen numerous ongoing investigations related to compliance and billing practices and hospitals, in particular, continue to be the subject of governmental fraud and abuse programs and a primary enforcement target for the OIG and DOJ. We regularly monitor and from time to time, we detect issues of non-compliance with federal healthcare laws pertaining to claims submission and reimbursement payment practices or financial relationships with physicians. We avail ourselves of various mechanisms to address potential overpayments arising out of these issues, including repayment of claims, rebilling of claims, and participation in voluntary disclosure protocols offered by CMS and the OIG. Participating in voluntary repayment of claims and voluntary disclosure protocols can have the potential for significant settlement obligations or even enforcement action. Additionally, under the federal False Claims Act, private parties have the right to bring qui tam, or “whistleblower,” suits against healthcare facilities that submit false claims for payments to, or improperly retain overpayments from, governmental payors. Some states have adopted similar state whistleblower and false claims provisions. Qui tam or “whistleblower” actions initiated under the civil False Claims Act may be pending but placed under seal by the court to comply with the False Claims Act’s requirements for filing such suits. As a result, they could lead to proceedings without our knowledge. Certain of our healthcare facilities have received, and from time to time other healthcare facilities may receive, inquiries or subpoenas from fiscal intermediaries or federal and state agencies. Any proceedings against us may involve potentially substantial settlement amounts, as well as the possibility of civil, criminal, or administrative fines, penalties or other sanctions which could be material. Settlements of suits involving Medicare and Medicaid issues routinely require both monetary payments as well as corporate integrity agreements from the offending healthcare company. Depending on how the underlying conduct is interpreted by the inquiring or investigating federal or state agency, the resolution could have a material adverse effect on our results of operations, financial position and cash flows.

In connection with the Spin-off, CHS agreed to indemnify us for certain liabilities relating to outcomes or events occurring prior to the closing of the Spin-off, including (i) certain claims and proceedings known to be outstanding on or prior to the Spin-off and (ii) certain claims, proceedings and investigations by governmental authorities or private plaintiffs related to activities occurring at or related to our healthcare facilities prior to the closing date of the Spin-off, but only to the extent, in the case of clause (ii), that such claims are covered by insurance policies maintained by CHS, including professional and general liability and workers’ compensation liability. In this regard, CHS will continue to be responsible for certain Health Management Associates, Inc. legal matters covered by its contingent value rights agreement that relate to the portion of CHS’s business now held by us. Notwithstanding the foregoing, CHS is not indemnifying us in respect of any claims or proceedings arising out of, or related to, the business operations of QHR at any time or our compliance with the Corporate Integrity Agreement (“CIA”) between CHS and the OIG. Subsequent to the Spin-off, the OIG entered into an “Assumption of CIA Liability Letter” with us reiterating the applicability of the CIA to certain of our hospitals, although the OIG declined to enter into a separate agreement with us.

We do not control and cannot predict with certainty the progress or final outcome of discussions with government agencies, investigations and legal proceedings against us. Therefore, the final amounts paid to resolve such matters, claims and obligations could be material and could materially differ from amounts currently recorded, if any. Any such changes in our estimates or any adverse judgments could materially adversely impact our future results of operations, financial position and cash flows.

We have included a discussion of specific legal proceedings below, some of which may not be required to be disclosed in this Part II, Item 1 under SEC rules due to the nature of our business; however, we believe that the discussion of these legal matters may provide useful information to security holders or the other readers of this Quarterly Report on Form 10-Q. The proceedings discussed below do not include claims and lawsuits covered by professional and general liability or employment practices insurance and risk retention programs. The legal matters referenced below are also discussed in Note 17 — Commitments and Contingencies in the accompanying financial statements.

With respect to all legal, regulatory and governmental proceedings, we consider the likelihood of a negative outcome. If we determine the likelihood of a negative outcome with respect to any such matter is probable and the amount of the loss can be reasonably estimated, we record an accrual for the estimated amount of loss. If the likelihood of a negative outcome with respect to material matters is reasonably possible and we are able to determine an estimate of the amount of possible loss or a range of loss, whether in excess of a related accrued liability or where there is no accrued liability, we disclose the estimate of the amount of possible loss or range of loss. However, we are unable to estimate an amount of possible loss or range of loss in some instances based on the significant uncertainties involved in, or the preliminary nature of, certain legal, regulatory and governmental matters.

On July 28, 2014, CHS became subject to the terms of a five-year Corporate Integrity Agreement (“CIA”) with the Department of Health and Human Services Office of Inspector General (“OIG”) arising from a civil settlement with the U.S. Department of Justice, other federal agencies and identified relators that concluded previously announced investigations and litigation related to short stay admissions through emergency departments at certain of their affiliated hospitals. The OIG has required us to be bound by the terms of the CHS CIA commencing on the Spin-off date and applying to us for the remainder of the five-year compliance term required of CHS, which terminated on July 27, 2019.

We believe that we operated our business in compliance with the CIA and are unaware of any historical actions on our part that could represent a violation under the terms of the CIA. We submitted our fifth annual report to the OIG on August 15, 2019. The OIG will review the report and request any additional information they deem necessary. Once the OIG is satisfied with the additional information received, we believe the OIG will likely communicate a final letter of closure of the CIA. For further details on this agreement see “Item 1. Business — Corporate Integrity Agreement” in the 2018 Annual Report on Form 10-K.

Except as set forth below, there have been no material changes to the risk factors discussed in the 2018 Annual Report on Form 10-K.

Our financial statements have been prepared under the assumption that we will continue as a going concern.

Our financial statements have been prepared under the assumption that we will continue as a going concern. However, in light of the reduction in the maximum Secured Net Leverage Ratio permitted under the CS Agreement to 4.50 from 5.00 in the first quarter of 2020, management concluded that there were probable conditions or events that raised substantial doubt about our ability to continue as a going concern. Management’s evaluation of our ability to comply with the Secured Net Leverage Ratio for the one-year period following the date our financial statements are issued included, but was not limited to, consideration of the following factors: management’s intention to enter into discussions with our lenders to modify our Secured Net Leverage Ratio, our partnership with R1 RCM, the opportunity for additional divestitures, and management’s plan to reduce corporate and operating costs over the next twelve months. No formal documentation or approval of management’s intention to modify our maximum Secured Net Leverage has occurred on or before September 30, 2019, and therefore the results remain uncertain. As such, substantial doubt about our ability to continue as a going concern has not been alleviated as of September 30, 2019.

We cannot predict with certainty whether our efforts will allow us to comply with our Secured Net Leverage Ratio, achieve cost savings and improve net patient revenues. Our ability to fund capital requirements, service our existing debt and comply with our debt covenants will depend on our future operating performance and will be impacted by financial, business, economic, regulatory and other factors. If we do not generate enough cash to pay our debt service obligations or our operating performance does not comply with our debt covenants, we may be required to refinance all or part of our existing indebtedness, sell assets, borrow additional money or raise equity. Breach of covenants included in our debt agreements, which could result in the lenders demanding payment of the unpaid principal and interest balances, would have a material adverse effect upon our business and would likely require us to do any or all of the following: seek to renegotiate these debt arrangements with the lenders, seek waivers from the lenders, or seek to raise additional capital and increase revenues. If such negotiations and capital raising attempts proved unsuccessful, we may be required to seek protection from creditors through bankruptcy proceedings.

The following table provides the information with respect to purchases made by us of shares of our common stock during each of the months during the three-month period ended September 30, 2019:

⁽¹⁾ Represents shares of common stock surrendered to us by certain employees to satisfy tax withholding obligations in connection with the vesting of restricted stock previously awarded to such employees under our Amended and Restated 2016 Stock Award Plan.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.


Delaware		47-4725208
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1573 Mallory Lane Brentwood, Tennessee		37027
(Address of principal executive offices)		(Zip code)


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.0001 par value per share	QHC	New York Stock Exchange


Large accelerated filer ☐	Accelerated filer ☑
Non-accelerated filer ☐	Smaller reporting company ☑
Emerging growth company ☐

	September 30,		December 31,
	2019		2018

Amounts due from third-party payors:
Previous program reimbursements and final cost report settlements	$	11,410	$	14,374
State supplemental payment programs		15,039		49,069
Total amounts due from third-party payors	$	26,449	$	63,443

Amounts due to third-party payors:
Previous program reimbursements and final cost report settlements	$	36,886	$	32,174
State supplemental payment programs		5,112		13,678
Total amounts due to third-party payors	$	41,998	$	45,852

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018

Medicaid state supplemental payment program revenues	$	37,217	$	57,555	$	132,496	$	158,186
Provider taxes and other expenses		15,415		19,131		53,008		55,326
Reimbursements attributable to state supplemental payment programs, net of expenses	$	21,802	$	38,424	$	79,488	$	102,860

			Page
PART I – FINANCIAL INFORMATION
	Item 1.	Financial Statements	1
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	51
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	78
	Item 4.	Controls and Procedures	79
PART II – OTHER INFORMATION
	Item 1.	Legal Proceedings	80
	Item 1A.	Risk Factors	83
	Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	83
	Item 6.	Exhibits	84
Signatures			85

	Number of	Nine Months Ended September 30,
	Hospitals at	2019					2018
	September 30, 2019	$ Amount		% of Total			$ Amount		% of Total

Illinois	7	$	496,671		39.8	%	$	554,909		41.0	%
Oregon	1		178,442		14.3	%		172,319		12.7	%
California	1		126,892		10.2	%		136,357		10.1	%
Kentucky	3		84,835		6.8	%		87,935		6.5	%

	Nine Months Ended
	September 30, 2019

Balance at beginning of period	$	401,073
Acquisitions		418
Divestitures		(3,300	)
Impairment		(6,490	)
Balance at end of period	$	391,701

		Maximum
		Secured Net
Period		Leverage Ratio

Period from July 1, 2018 to December 31, 2019		5.00 to 1.00
Period from January 1, 2020 and thereafter		4.50 to 1.00

	Redemption
Period	Prices

Period from April 15, 2019 to April 14, 2020		108.719	%
Period from April 15, 2020 to April 14, 2021		105.813	%
Period from April 15, 2021 to April 14, 2022		102.906	%
Period from April 15, 2022 to April 14, 2023		100.000	%

	September 30, 2019

Remainder of 2019	$	413
2020		1,641
2021		26,629
2022		779,133
2023		401,348
Thereafter		16,554
Total debt, excluding unamortized debt issuance costs and discounts	$	1,225,718

	Three Months Ended		Nine Months Ended
	September 30, 2019		September 30, 2019

Operating lease costs:
Operating lease cost	$	8,838	$	27,040
Variable lease cost		655		1,954
Short-term rent expense		1,628		5,285
Total operating lease costs	$	11,121	$	34,279

Finance lease costs:
Amortization of right-of-use assets	$	389	$	1,167
Interest on lease liabilities		380		1,138
Total finance lease costs	$	769	$	2,305

	Balance Sheet Classification	September 30, 2019

Finance Leases:
Finance lease ROU assets	Property and equipment	$	29,358
Accumulated amortization	Accumulated depreciation and amortization		6,922
Current finance lease liabilities	Current maturities of long-term debt		1,369
Long-term finance lease liabilities	Long-term debt		21,205

	September 30, 2019

Weighted-average remaining lease term (years):
Operating leases		5.0
Finance leases		7.4

Weighted-average discount rate:
Operating leases		10.3	%
Finance leases		6.2	%

	Operating			Finance
	Leases			Leases

Remainder of 2019	$	7,424		$	659
2020		30,611			2,645
2021		21,412			2,670
2022		13,400			2,367
2023		7,914			6,997
Thereafter		24,901			13,723
Total lease payments		105,662			29,061
Less: Imputed interest		(24,481	)		(6,487	)
Total lease obligations		81,181			22,574
Less: Current portion		(24,835	)		(1,369	)
Total long-term lease obligations	$	56,346		$	21,205

	Operating		Finance
	Leases⁽¹⁾		Leases

2019	$	34,885	$	2,549
2020		29,609		2,587
2021		20,098		2,625
2022		12,932		2,328
2023		7,588		6,974
Thereafter		26,469		13,716
Total minimum future payments obligations	$	131,581		30,779
Less: Imputed interest				(7,393	)
Total capital lease obligations				23,386
Less: Current portion of capital lease obligations				(1,304	)
Total long-term capital lease obligations			$	22,082

	September 30, 2019				December 31, 2018
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value

Revolving Credit Facility	$	—	$	—	$	—	$	—
Term Loan Facility		777,686		766,511		790,751		784,821
ABL Credit Facility		25,000		25,000		14,000		14,000
Senior Notes		400,000		363,780		400,000		382,984
Other debt		23,032		23,032		24,260		24,260
Total debt, excluding unamortized debt issuance costs and discounts	$	1,225,718	$	1,178,323	$	1,229,011	$	1,206,065

	QHC Awards Distributed in Spin-off

Unvested restricted stock awards at December 31, 2018		80,350
Vested		(61,150	)
Forfeited		(19,200	)
Unvested restricted stock awards at September 30, 2019		—

	QHC Awards Granted
	Subsequent to Spin-off
				Weighted-
				Average
				Grant Date
				Fair Value
	Shares			Per Share

Unvested restricted stock awards at December 31, 2018		2,207,117		$	7.04
Granted		1,689,346			1.76
Vested		(889,892	)		7.72
Forfeited		(283,178	)		8.53
Unvested restricted stock awards at September 30, 2019		2,723,393		$	3.39

	Hospitals Divested as of September 30, 2019
Hospital	Licensed Beds	Disposition	Divestiture Date

Sandhills Regional Medical Center ("Sandhills")	64	Sold	December 1, 2016
Barrow Regional Medical Center ("Barrow")	56	Sold	December 31, 2016
Cherokee Medical Center ("Cherokee")	60	Sold	March 31, 2017
Trinity Hospital of Augusta ("Trinity")	231	Sold	June 30, 2017
Lock Haven Hospital ("Lock Haven")	47	Sold	September 30, 2017
Sunbury Community Hospital ("Sunbury")	70	Sold	September 30, 2017
L.V. Stabler Memorial Hospital ("L.V. Stabler")	72	Sold	October 31, 2017
Affinity Medical Center ("Affinity")	156	Closed	February 11, 2018
Vista Medical Center West ("Vista West")	70	Sold	March 1, 2018
Clearview Regional Medical Center ("Clearview")	77	Sold	March 31, 2018
McKenzie Regional Hospital ("McKenzie")	45	Sold	September 30, 2018
Scenic Mountain Medical Center ("Scenic Mountain")	146	Sold	April 12, 2019
Watsonville Community Hospital ("Watsonville")	106	Sold	September 30, 2019
MetroSouth Medical Center ("MetroSouth")	314	Closed	September 30, 2019

	Payments Due by Period
	Total		Remainder 2019		2020-2021		2022-2023		Thereafter

Information technology commitments:
Medhost software commitments		37,435		3,907		19,785		9,497		4,246
Cloud computing commitments		2,217		58		2,159		—		—
Hardware and other IT infrastructure commitments		13,811		9,726		4,085		—
Total information technology commitments	$	53,463	$	13,691	$	21,944	$	9,497	$	4,246

No.		Description

10.1*†		Amendment No. 1 to Employment Agreement by and between Quorum Health Corporation and Robert H. Fish

31.1*		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1**		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2**		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS*		XBRL Instance Document.

101.SCH*		XBRL Taxonomy Extension Schema.

101.CAL*		XBRL Taxonomy Extension Calculation Linkbase.

101.DEF*		XBRL Taxonomy Extension Definition Linkbase.

101.LAB*		XBRL Taxonomy Extension Label Linkbase.

101.PRE*		XBRL Taxonomy Extension Presentation Linkbase.

QUORUM HEALTH CORPORATION (Registrant)

By:		/s/ Robert H. Fish
		Robert H. Fish
		President and Chief Executive Officer
		(principal executive officer)

By:		/s/ Alfred Lumsdaine
		Alfred Lumsdaine
		Executive Vice President and
		Chief Financial Officer
		(principal financial officer)

By:		/s/ Glenn A. Hargreaves
		Glenn A. Hargreaves
		Senior Vice President and Chief Accounting Officer (principal accounting officer)