UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

☒ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2020

OR

☐ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from               to               

Commission File Number 1-7293

_________________________________________

TENET HEALTHCARE CORPORATION

(Exact name of Registrant as specified in its charter)

_________________________________________

Nevada	95-2557091
(State of Incorporation)	(IRS Employer Identification No.)

14201 Dallas Parkway

Dallas, TX 75254

(Address of principal executive offices, including zip code)

(469) 893-2200

(Registrant’s telephone number, including area code)

_________________________________________

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading symbol	Name of each exchange on which registered
Common stock,	$0.05 par value	THC	New York Stock Exchange
6.875% Senior Notes due 2031		THC31	New York Stock Exchange

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, and (2) has been subject to such filing requirements for the past 90 days.   Yes x 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 during the preceding 12 months.   Yes x 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 (each as defined in Exchange Act Rule 12b-2).

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

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 Exchange Act Rule 12b-2).   Yes ☐ No x

At April 30, 2020, there were 104,715,188 shares of the Registrant’s common stock outstanding.

TENET HEALTHCARE CORPORATION

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Financial Statements	1
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	55
Item 4.	Controls and Procedures	55
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	56
Item 1A.	Risk Factors	56
Item 6.	Exhibits	57

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TENET HEALTHCARE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

Dollars in Millions

(Unaudited)

	March 31,			December 31,
	2020			2019
ASSETS
Current assets:
Cash and cash equivalents	$	613		$	262
Accounts receivable	2,722			2,743
Inventories of supplies, at cost	324			310
Income tax receivable	18			10
Assets held for sale	394			387
Other current assets	1,317			1,369
Total current assets	5,388			5,081
Investments and other assets	2,467			2,369
Deferred income taxes	263			183
Property and equipment, at cost, less accumulated depreciation and amortization ($5,622 at March 31, 2020 and $5,498 at December 31, 2019)	6,786			6,878
Goodwill	7,308			7,252
Other intangible assets, at cost, less accumulated amortization ($1,130 at March 31, 2020 and $1,092 at December 31, 2019)	1,611			1,602
Total assets	$	23,823		$	23,365
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt	$	165		$	171
Accounts payable	1,079			1,204
Accrued compensation and benefits	788			877
Professional and general liability reserves	279			330
Accrued interest payable	306			245
Liabilities held for sale	49			44
Other current liabilities	1,429			1,334
Total current liabilities	4,095			4,205
Long-term debt, net of current portion	15,082			14,580
Professional and general liability reserves	638			635
Defined benefit plan obligations	547			560
Deferred income taxes	27			27
Other long-term liabilities	1,405			1,415
Total liabilities	21,794			21,422
Commitments and contingencies
Redeemable noncontrolling interests in equity of consolidated subsidiaries	1,526			1,506
Equity:
Shareholders’ equity:
Common stock, $0.05 par value; authorized 262,500,000 shares; 152,870,875 shares issued at March 31, 2020 and 152,540,815 shares issued at December 31, 2019	7			7
Additional paid-in capital	4,739			4,760
Accumulated other comprehensive loss	(256		)	(257		)
Accumulated deficit	(2,434		)	(2,513		)
Common stock in treasury, at cost, 48,342,502 shares at March 31, 2020 and 48,344,195 shares at December 31, 2019	(2,414		)	(2,414		)
Total shareholders’ deficit	(358		)	(417		)
Noncontrolling interests	861			854
Total equity	503			437
Total liabilities and equity	$	23,823		$	23,365

See accompanying Notes to Condensed Consolidated Financial Statements.

TENET HEALTHCARE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Dollars in Millions, Except Per-Share Amounts

(Unaudited) 

	Three Months Ended March 31,
	2020			2019
Net operating revenues	$	4,520		$	4,545
Equity in earnings of unconsolidated affiliates	28			34
Operating expenses:
Salaries, wages and benefits	2,187			2,151
Supplies	763			741
Other operating expenses, net	1,013			1,065
Depreciation and amortization	203			208
Impairment and restructuring charges, and acquisition-related costs	55			19
Litigation and investigation costs	2			13
Net losses (gains) on sales, consolidation and deconsolidation of facilities	(2		)	1
Operating income	327			381
Interest expense	(243		)	(251		)
Other non-operating income, net	1			1
Loss from early extinguishment of debt	—			(47		)
Income from continuing operations, before income taxes	85			84
Income tax benefit (expense)	75			(20		)
Income from continuing operations, before discontinued operations	160			64
Discontinued operations:
Income (loss) from operations	(1		)	10
Income tax expense	—			(2		)
Income (loss) from discontinued operations	(1		)	8
Net income	159			72
Less: Net income available to noncontrolling interests	66			84
Net income available (loss attributable) to Tenet Healthcare Corporation common shareholders	$	93		$	(12	)
Amounts available (attributable) to Tenet Healthcare Corporation common shareholders
Income (loss) from continuing operations, net of tax	$	94		$	(20	)
Income (loss) from discontinued operations, net of tax	(1		)	8
Net income available (loss attributable) to Tenet Healthcare Corporation common shareholders	$	93		$	(12	)
Earnings (loss) per share available (attributable) to Tenet Healthcare Corporation common shareholders:
Basic
Continuing operations	$	0.90		$	(0.19	)
Discontinued operations	(0.01		)	0.08
	$	0.89		$	(0.11	)
Diluted
Continuing operations	$	0.89		$	(0.19	)
Discontinued operations	(0.01		)	0.08
	$	0.88		$	(0.11	)
Weighted average shares and dilutive securities outstanding (in thousands):
Basic	104,353			102,788
Diluted	105,733			102,788

See accompanying Notes to Condensed Consolidated Financial Statements.

2

TENET HEALTHCARE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME

Dollars in Millions

(Unaudited)

	Three Months Ended March 31,
	2020			2019
Net income	$	159		$	72
Other comprehensive income:
Amortization of net actuarial loss included in other non-operating expense, net	2			3
Unrealized gains (losses) on debt securities held as available-for-sale	1			—
Other comprehensive income before income taxes	3			3
Income tax expense related to items of other comprehensive income	(2		)	(1		)
Total other comprehensive income, net of tax	1			2
Comprehensive net income	160			74
Less: Comprehensive income attributable to noncontrolling interests	66			84
Comprehensive income available (loss attributable) to Tenet Healthcare Corporation common shareholders	$	94		$	(10	)

See accompanying Notes to Condensed Consolidated Financial Statements.

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TENET HEALTHCARE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Dollars in Millions

(Unaudited)

	Three Months Ended March 31,
	2020			2019
Net income	$	159		$	72
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	203			208
Deferred income tax (benefit) expense	(79		)	22
Stock-based compensation expense	13			11
Impairment and restructuring charges, and acquisition-related costs	55			19
Litigation and investigation costs	2			13
Net losses (gains) on sales, consolidation and deconsolidation of facilities	(2		)	1
Loss from early extinguishment of debt	—			47
Equity in earnings of unconsolidated affiliates, net of distributions received	(11		)	3
Amortization of debt discount and debt issuance costs	10			11
Pre-tax loss (income) from discontinued operations	1			(10		)
Other items, net	2			(7		)
Changes in cash from operating assets and liabilities:
Accounts receivable	14			(158		)
Inventories and other current assets	23			(115		)
Income taxes	2			9
Accounts payable, accrued expenses and other current liabilities	(144		)	(119		)
Other long-term liabilities	(51		)	37
Payments for restructuring charges, acquisition-related costs, and litigation costs and settlements	(68		)	(32		)
Net cash used in operating activities from discontinued operations, excluding income taxes	—			(2		)
Net cash provided by operating activities	129			10
Cash flows from investing activities:
Purchases of property and equipment — continuing operations	(182		)	(192		)
Purchases of businesses or joint venture interests, net of cash acquired	(55		)	(2		)
Proceeds from sales of facilities and other assets — continuing operations	11			41
Proceeds from sales of facilities and other assets — discontinued operations	—			17
Proceeds from sales of marketable securities, long-term investments and other assets	10			4
Purchases of marketable securities and equity investments	(4		)	(4		)
Other long-term assets	(2		)	(2		)
Other items, net	18			(1		)
Net cash used in investing activities	(204		)	(139		)
Cash flows from financing activities:
Repayments of borrowings under credit facility	(240		)	(495		)
Proceeds from borrowings under credit facility	740			685
Repayments of other borrowings	(48		)	(1,620		)
Proceeds from other borrowings	7			1,507
Debt issuance costs	(1		)	(18		)
Distributions paid to noncontrolling interests	(76		)	(74		)
Proceeds from sale of noncontrolling interests	2			4
Purchases of noncontrolling interests	—			(3		)
Proceeds from exercise of stock options and employee stock purchase plan	2			1
Other items, net	40			(17		)
Net cash provided by (used in) financing activities	426			(30		)
Net increase (decrease) in cash and cash equivalents	351			(159		)
Cash and cash equivalents at beginning of period	262			411
Cash and cash equivalents at end of period	$	613		$	252
Supplemental disclosures:
Interest paid, net of capitalized interest	$	(172	)	$	(158	)
Income tax (payments) refunds, net	$	(3	)	$	9

See accompanying Notes to Condensed Consolidated Financial Statements.

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TENET HEALTHCARE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

NOTE 1. BASIS OF PRESENTATION

Description of Business and Basis of Presentation

Tenet Healthcare Corporation (together with our subsidiaries, referred to herein as “Tenet,” “we” or “us”) is a diversified healthcare services company headquartered in Dallas, Texas. Through an expansive care network that includes USPI Holding Company, Inc. (“USPI”), at March 31, 2020, we operated 65 hospitals and approximately 510 other healthcare facilities, including surgical hospitals, ambulatory surgery centers, urgent care and imaging centers, and other care sites and clinics. We also operate Conifer Health Solutions, LLC through our Conifer Holdings, Inc. (“Conifer”) subsidiary, which provides revenue cycle management and value-based care services to hospitals, healthcare systems, physician practices, employers and other customers.

This quarterly report supplements our Annual Report on Form 10-K for the year ended December 31, 2019 (“Annual Report”). As permitted by the Securities and Exchange Commission for interim reporting, we have omitted certain notes and disclosures that substantially duplicate those in our Annual Report. For further information, refer to the audited Consolidated Financial Statements and notes included in our Annual Report. Unless otherwise indicated, all financial and statistical data included in these notes to our Condensed Consolidated Financial Statements relate to our continuing operations, with dollar amounts expressed in millions (except per-share amounts).

Effective January 1, 2020, we adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments—Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”) using the modified retrospective transition approach as of the period of adoption. Upon adoption of ASU 2016-13 on January 1, 2020, we recorded a cumulative effect adjustment to increase accumulated deficit by $14 million.

Certain prior-year amounts have been reclassified to conform to the current year presentation. In the accompanying Condensed Consolidated Statements of Operations, electronic health record incentives have been reclassified to other operating expenses, net, as they are no longer significant enough to present separately. In the accompanying Condensed Consolidated Statements of Cash Flows, purchases of marketable securities have been reclassified from other items, net within cash flows from investing activities to purchases of marketable securities and equity investments. Additionally, our financial statements and corresponding footnotes for prior periods have been recast to reflect retrospective application of the change in accounting principle discussed in the Professional and General Liability Reserves section of this note.

Although the Condensed Consolidated Financial Statements and related notes within this document are unaudited, we believe all adjustments considered necessary for a fair presentation have been included and are of a normal recurring nature. In preparing our financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”), we are required to make estimates and assumptions that affect the amounts reported in our Condensed Consolidated Financial Statements and these accompanying notes. We regularly evaluate the accounting policies and estimates we use. In general, we base the estimates on historical experience and on assumptions that we believe to be reasonable given the particular circumstances in which we operate. Actual results may vary from those estimates. Financial and statistical information we report to other regulatory agencies may be prepared on a basis other than GAAP or using different assumptions or reporting periods and, therefore, may vary from amounts presented herein. Although we make every effort to ensure that the information we report to those agencies is accurate, complete and consistent with applicable reporting guidelines, we cannot be responsible for the accuracy of the information they make available to the public.

Operating results for the three month period ended March 31, 2020 are not necessarily indicative of the results that may be expected for the full year. Reasons for this include, but are not limited to: the impact of the novel coronavirus pandemic on our operations, business, financial condition and cash flows; overall revenue and cost trends, particularly the timing and magnitude of price changes; fluctuations in contractual allowances and cost report settlements and valuation allowances; managed care contract negotiations, settlements or terminations and payer consolidations; trends in patient accounts receivable collectability and associated implicit price concessions; fluctuations in interest rates; levels of malpractice insurance expense and settlement trends; impairment of long-lived assets and goodwill; restructuring charges; losses, costs and insurance recoveries related to natural disasters and other weather-related occurrences; litigation and investigation costs; acquisitions and dispositions of facilities and other assets; gains (losses) on sales, consolidation and deconsolidation of facilities; income tax rates and deferred tax asset valuation allowance activity; changes in estimates of accruals for annual incentive compensation; the timing and amounts of stock option and restricted stock unit grants to employees and directors; gains (losses) from early

5

extinguishment of debt; and changes in occupancy levels and patient volumes. Factors that affect service mix, revenue mix, patient volumes and, thereby, the results of operations at our hospitals and related healthcare facilities include, but are not limited to: changes in federal, state and local healthcare and business regulations, including mandated closures and other operating restrictions; the business environment, economic conditions and demographics of local communities in which we operate; the number of uninsured and underinsured individuals in local communities treated at our hospitals; disease hotspots and seasonal cycles of illness; climate and weather conditions; physician recruitment, satisfaction, retention and attrition; advances in technology and treatments that reduce length of stay; local healthcare competitors; utilization pressure by managed care organizations, as well as managed care contract negotiations or terminations; hospital performance data on quality measures and patient satisfaction, as well as standard charges for services; any unfavorable publicity about us, or our joint venture partners, that impacts our relationships with physicians and patients; and changing consumer behavior, including with respect to the timing of elective procedures. These considerations apply to year-to-year comparisons as well.

Professional and General Liability Reserves

We accrue for estimated professional and general liability claims when they are probable and can be reasonably estimated. The accrual, which includes an estimate for incurred but not reported claims, is updated each quarter based on a model of projected payments using case-specific facts and circumstances and our historical loss reporting, development and settlement patterns. To the extent that subsequent claims information varies from our estimates, the liability is adjusted in the period such information becomes available. Malpractice expense is presented within other operating expenses in the accompanying Condensed Consolidated Statements of Operations.

In the three months ended March 31, 2020, we changed our method of accounting for our estimated professional and general liability claims. Under the new method of accounting, the liabilities are reported on an undiscounted basis whereas, previously, the liabilities were reported on a discounted basis. We believe that the undiscounted presentation is preferable because it simplifies the accounting for the liabilities, thereby increasing understandability of our financial results and financial condition, is consistent with the manner in which management evaluates our business, and results in an accounting method and financial statement presentation that is consistent with our key peers.

Accordingly, our financial statements and corresponding footnotes for the respective prior periods have been recast to reflect retrospective application of the change in accounting principle. We recorded the cumulative effect for the change in accounting principle as an increase of $44 million to accumulated deficit as of January 1, 2017. This change increased our accumulated deficit by $46 million, $56 million and $63 million at December 31, 2019, March 31, 2019 and December 31, 2018, respectively.

The following tables present the effects of the change in accounting principle to our financial statements:

Condensed Consolidated Balance Sheets:

	Prior to Change in Accounting Principle			Effect of Change in Accounting Principle			As Reported
At March 31, 2020:
Deferred income taxes	$	259		$	4		$	263
Professional and general liability reserves	$	622		$	16		$	638
Other long-term liabilities	$	1,402		$	3		$	1,405
Accumulated deficit	$	(2,419	)	$	(15	)	$	(2,434	)

	As Reported			Effect of Change in Accounting Principle			As Adjusted
At December 31, 2019:
Deferred income taxes	$	169		$	14		$	183
Professional and general liability reserves	$	585		$	50		$	635
Other long-term liabilities	$	1,405		$	10		$	1,415
Accumulated deficit	$	(2,467	)	$	(46	)	$	(2,513	)

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Condensed Consolidated Statements of Operations (in millions, except for per-share amounts):

	Prior to Change in Accounting Principle		Effect of Change in Accounting Principle			As Reported
Three months ended March 31, 2020:
Salaries, wages and benefits	$	2,194	$	(7	)	$	2,187
Other operating expenses, net	$	1,047	$	(34	)	$	1,013
Operating income	$	286	$	41		$	327
Income tax benefit	$	85	$	(10	)	$	75
Net income	$	128	$	31		$	159
Net income from continuing operations available to Tenet Healthcare Corporation common shareholders	$	63	$	31		$	94
Earnings per share available to Tenet Healthcare Corporation common shareholders from continuing operations:
Basic	$	0.60	$	0.30		$	0.90
Diluted	$	0.60	$	0.29		$	0.89

	As Reported			Effect of Change in Accounting Principle			As Adjusted
Three months ended March 31, 2019:
Salaries, wages and benefits	$	2,153		$	(2	)	$	2,151
Other operating expenses, net	$	1,073		$	(8	)	$	1,065
Operating income	$	371		$	10		$	381
Income tax expense	$	(17	)	$	(3	)	$	(20	)
Net income	$	65		$	7		$	72
Net loss from continuing operations attributable to Tenet Healthcare Corporation common shareholders	$	(27	)	$	7		$	(20	)
Loss per share attributable to Tenet Healthcare Corporation common shareholders from continuing operations:
Basic	$	(0.26	)	$	0.07		$	(0.19	)
Diluted	$	(0.26	)	$	0.07		$	(0.19	)

Condensed Consolidated Statements of Cash Flows:

	Prior to Change in Accounting Principle			Effect of Change in Accounting Principle			As Reported
Three months ended March 31, 2020:
Net income	$	128		$	31		$	159
Deferred income tax benefit	$	(89	)	$	10		$	(79	)
Accounts payable, accrued expenses and other current liabilities	$	(103	)	$	(41	)	$	(144	)
Net cash provided by operating activities	$	129		$	—		$	129

	As Reported			Effect of Change in Accounting Principle			As Adjusted
Three months ended March 31, 2019:
Net income	$	65		$	7		$	72
Deferred income tax expense	$	19		$	3		$	22
Accounts payable, accrued expenses and other current liabilities	$	(109	)	$	(10	)	$	(119	)
Net cash provided by operating activities	$	10		$	—		$	10

Net Operating Revenues

We recognize net operating revenues in the period in which we satisfy our performance obligations under contracts by transferring services to our customers. Net operating revenues are recognized in the amounts we expect to be entitled to, which are the transaction prices allocated for the distinct services. Net operating revenues for our Hospital Operations and other

7

(“Hospital Operations”) and Ambulatory Care segments primarily consist of net patient service revenues, principally for patients covered by Medicare, Medicaid, managed care and other health plans, as well as certain uninsured patients under our Compact with Uninsured Patients (“Compact”) and other uninsured discount and charity programs. Net operating revenues for our Conifer segment primarily consist of revenues from providing revenue cycle management services to healthcare systems, as well as individual hospitals, physician practices, self-insured organizations, health plans and other entities.

Net Patient Service Revenues—We report net patient service revenues at the amounts that reflect the consideration we expect to be entitled to in exchange for providing patient care. These amounts are due from patients, third-party payers (including managed care payers and government programs) and others, and they include variable consideration for retroactive revenue adjustments due to settlement of audits, reviews and investigations. Generally, we bill our patients and third-party payers several days after the services are performed or shortly after discharge. Revenues are recognized as performance obligations are satisfied.

Conifer Revenues—Our Conifer segment recognizes revenue from its contracts when Conifer’s performance obligations are satisfied, which is generally as services are rendered. Revenue is recognized in an amount that reflects the consideration to which Conifer expects to be entitled.

Cash and Cash Equivalents

We treat highly liquid investments with original maturities of three months or less as cash equivalents. Cash and cash equivalents were $613 million and $262 million at March 31, 2020 and December 31, 2019, respectively. At March 31, 2020 and December 31, 2019, our book overdrafts were $225 million and $246 million, respectively, which were classified as accounts payable.

At March 31, 2020 and December 31, 2019, $152 million and $176 million, respectively, of total cash and cash equivalents in the accompanying Condensed Consolidated Balance Sheets were intended for the operations of our captive insurance subsidiaries, and $2 million for both periods of total cash and cash equivalents in the accompanying Condensed Consolidated Balance Sheets were intended for the operations of our health plan-related businesses.

Also at March 31, 2020 and December 31, 2019, we had $65 million and $136 million, respectively, of property and equipment purchases accrued for items received but not yet paid. Of these amounts, $49 million and $119 million, respectively, were included in accounts payable.

During the three months ended March 31, 2020 and 2019, we recorded non-cancellable finance leases of $15 million and $36 million, respectively, and non-cancellable operating leases of $54 million and $28 million, respectively.

Other Intangible Assets

The following tables provide information regarding other intangible assets, which are included in the accompanying Condensed Consolidated Balance Sheets at March 31, 2020 and December 31, 2019: 

	Gross Carrying Amount		Accumulated Amortization			Net Book Value
At March 31, 2020:
Capitalized software costs	$	1,657	$	(948	)	$	709
Trade names	102		—			102
Contracts	877		(98		)	779
Other	105		(84		)	21
Total	$	2,741	$	(1,130	)	$	1,611

	Gross Carrying Amount		Accumulated Amortization			Net Book Value
At December 31, 2019:
Capitalized software costs	$	1,616	$	(912	)	$	704
Trade names	102		—			102
Contracts	869		(94		)	775
Other	107		(86		)	21
Total	$	2,694	$	(1,092	)	$	1,602

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Estimated future amortization of intangibles with finite useful lives at March 31, 2020 is as follows: 

			Nine Months Ending		Years Ending								Later Years
			December 31,
	Total		2020		2021		2022		2023		2024
Amortization of intangible assets	$	928	$	118	$	129	$	114	$	103	$	87	$	377

We recognized amortization expense of $41 million and $45 million in the accompanying Condensed Consolidated Statements of Operations for the three months ended March 31, 2020 and 2019, respectively.

Investments in Unconsolidated Affiliates

We control 244 of the facilities within our Ambulatory Care segment and, therefore, consolidate their results. We account for many of the facilities our Ambulatory Care segment operates (107 of 351 at March 31, 2020), as well as additional companies in which our Hospital Operations segment holds ownership interests, under the equity method as investments in unconsolidated affiliates and report only our share of net income as equity in earnings of unconsolidated affiliates in the accompanying Condensed Consolidated Statements of Operations. Summarized financial information for these equity method investees is included in the following table. For investments acquired during the reporting periods, amounts reflect 100% of the investee’s results beginning on the date of our acquisition of the investment.

	Three Months Ended March 31,
	2020		2019
Net operating revenues	$	566	$	568
Net income	$	109	$	150
Net income available to the investees	$	69	$	106

NOTE 2. ACCOUNTS RECEIVABLE

The principal components of accounts receivable are shown in the table below: 

	March 31, 2020		December 31, 2019
Continuing operations:
Patient accounts receivable	$	2,521	$	2,567
Estimated future recoveries	163		162
Net cost reports and settlements receivable and valuation allowances	37		12
	2,721		2,741
Discontinued operations	1		2
Accounts receivable, net	$	2,722	$	2,743

Accounts that are pursued for collection through Conifer’s business offices are maintained on our hospitals’ books and reflected in patient accounts receivable. Patient accounts receivable, including billed accounts and certain unbilled accounts, as well as estimated amounts due from third-party payers for retroactive adjustments, are recognized as receivables if our right to consideration is unconditional and only the passage of time is required before payment of that consideration is due. Estimated uncollectable amounts are generally considered implicit price concessions that are a direct reduction to patient accounts receivable rather than allowance for doubtful accounts.

We had $257 million and $284 million of receivables recorded in other current assets and investments and other assets, respectively, and $126 million and $65 million of payables recorded in other current liabilities and other long-term liabilities, respectively, in the accompanying Condensed Consolidated Balance Sheet at March 31, 2020 related to California’s provider fee program. We had $316 million and $213 million of receivables recorded in other current assets and investments and other assets, respectively, and $115 million and $57 million of payables recorded in other current liabilities and other long-term liabilities, respectively, in the accompanying Condensed Consolidated Balance Sheet at December 31, 2019 related to California’s provider fee program.

We also provide financial assistance through our charity and uninsured discount programs to uninsured patients who are unable to pay for the healthcare services they receive. Our policy is not to pursue collection of amounts determined to qualify for financial assistance; therefore, we do not report these amounts in net operating revenues. Most states include an estimate of the cost of charity care in the determination of a hospital’s eligibility for Medicaid disproportionate share hospital

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(“DSH”) payments. These payments are intended to mitigate our cost of uncompensated care. Some states have also developed provider fee or other supplemental payment programs to mitigate the shortfall of Medicaid reimbursement compared to the cost of caring for Medicaid patients.

The following table shows our estimated costs (based on selected operating expenses, which include salaries, wages and benefits, supplies and other operating expenses) of caring for our uninsured and charity patients in the three months ended March 31, 2020 and 2019:

	Three Months Ended March 31,
	2020		2019
Estimated costs for:
Uninsured patients	$	156	$	158
Charity care patients	40		34
Total	$	196	$	192

 

NOTE 3. CONTRACT BALANCES

Hospital Operations Segment

Amounts related to services provided to patients for which we have not billed and that do not meet the conditions of unconditional right to payment at the end of the reporting period are contract assets. For our Hospital Operations segment, our contract assets consist primarily of services that we have provided to patients who are still receiving inpatient care in our facilities at the end of the reporting period. Our Hospital Operations segment’s contract assets are included in other current assets in the accompanying Condensed Consolidated Balance Sheet at March 31, 2020. The opening and closing balances of contract assets for our Hospital Operations segment are as follows:

December 31, 2019	$	170
March 31, 2020	151
Increase/(decrease)	$	(19	)

December 31, 2018	$	169
March 31, 2019	166
Increase/(decrease)	$	(3	)

Approximately 85% of our Hospital Operations segment’s contract assets meet the conditions for unconditional right to payment and are reclassified to patient receivables within 90 days.

Conifer Segment

Conifer enters into contracts with customers to sell revenue cycle management and other services, such as value-based care, consulting and project services. The payment terms and conditions in our customer contracts vary. In some cases, customers are invoiced in advance and (for other than fixed-price fee arrangements) a true-up to the actual fee is included on a subsequent invoice. In other cases, payment is due in arrears. In addition, some contracts contain performance incentives, penalties and other forms of variable consideration. When the timing of Conifer’s delivery of services is different from the timing of payments made by the customers, Conifer recognizes either unbilled revenue (performance precedes contractual right to invoice the customer) or deferred revenue (customer payment precedes Conifer service performance). In the following table, customers that prepay prior to obtaining control/benefit of the service are represented by deferred contract revenue until the performance obligations are satisfied. Unbilled revenue represents arrangements in which Conifer has provided services to and the customer has obtained control/benefit of services prior to the contractual invoice date. Contracts with payment in arrears are recognized as receivables in the month the service is performed.

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The opening and closing balances of Conifer’s receivables, contract asset, and current and long-term contract liabilities are as follows:

							Contract Liability –		Contract Liability –
				Contract Asset –			Current		Long-Term
	Receivables			Unbilled Revenue			Deferred Revenue		Deferred Revenue
December 31, 2019	$	26		$	11		$	61	$	18
March 31, 2020	23			7			61		17
Increase/(decrease)	$	(3	)	$	(4	)	$	—	$	(1	)
December 31, 2018	$	42		$	11		$	61	$	20
March 31, 2019	90			11			64		20
Increase/(decrease)	$	48		$	—		$	3	$	—

The difference between the opening and closing balances of Conifer’s contract assets and contract liabilities are primarily related to prepayments for those customers who are billed in advance, changes in estimates related to metric-based services, and up-front integration services that are typically not distinct and are, therefore, recognized over the performance obligation period to which they relate. Our Conifer segment’s receivables and contract assets are reported as part of other current assets in our accompanying Condensed Consolidated Balance Sheets, and our Conifer segment’s current and long-term contract liabilities are reported as part of other current liabilities and other long-term liabilities, respectively, in our accompanying Condensed Consolidated Balance Sheets.

The amount of revenue Conifer recognized in the three months ended March 31, 2020 and 2019 that was included in the opening current deferred revenue liability was $54 million and $49 million, respectively. This revenue consists primarily of prepayments for those customers who are billed in advance, changes in estimates related to metric-based services, and up-front integration services that are recognized over the services period.

Contract Costs

We have elected to apply the practical expedient provided by FASB Accounting Standards Codification (“ASC”) 340-40-25-4 and expense as incurred the incremental customer contract acquisition costs for contracts in which the amortization period of the asset is one year or less. However, incremental costs incurred to obtain and fulfill customer contracts for which the amortization period of the asset is longer than one year, which consist primarily of Conifer deferred contract setup costs, are capitalized and amortized on a straight-line basis over the lesser of their estimated useful lives or the term of the related contract. In both of the three months ended March 31, 2020 and 2019, we recognized amortization expense of $1 million. At both March 31, 2020 and December 31, 2019, the unamortized customer contract costs were $25 million, and are presented as investments and other assets in the accompanying Condensed Consolidated Balance Sheets.

NOTE 4. ASSETS AND LIABILITIES HELD FOR SALE 

In the three months ended December 31, 2019, two of our hospitals and other operations in the Memphis area met the criteria to be classified as held for sale. As a result, we have classified these assets totaling $394 million as “assets held for sale” in current assets and the related liabilities of $49 million as “liabilities held for sale” in current liabilities in the accompanying Condensed Consolidated Balance Sheet at March 31, 2020.     

Assets and liabilities classified as held for sale at March 31, 2020 were comprised of the following:

Accounts receivable	$	108
Other current assets	26
Investments and other long-term assets	6
Property and equipment	189
Other intangible assets	23
Goodwill	42
Current liabilities	(41		)
Long-term liabilities	(8		)
Net assets held for sale	$	345

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The following table provides information on significant components of our business that have been recently disposed of or are classified as held for sale at March 31, 2020:

	Three Months Ended March 31,
	2020			2019
Significant disposals:
Income (loss) from continuing operations, before income taxes
Chicago area (includes a $6 million loss and a $7 million loss on sale in the 2020 and 2019 periods, respectively)	$	(3	)	$	(12	)
Total	$	(3	)	$	(12	)