Attached files

file filename
EX-31.2 - EX-31.2 - IASIS Healthcare LLCd214801dex312.htm
EX-31.1 - EX-31.1 - IASIS Healthcare LLCd214801dex311.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2016

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: 333-117362

 

 

IASIS HEALTHCARE LLC

(Exact name of registrant as specified in its charter)

 

 

 

DELAWARE   20-1150104

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

DOVER CENTRE

117 SEABOARD LANE, BUILDING E

FRANKLIN, TENNESSEE

  37067
(Address of principal executive offices)   (Zip Code)

(615) 844-2747

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

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  x

(Note: As a voluntary filer not subject to the filing requirements of Sections 13 or 15(d) of the Exchange Act, the registrant has filed all reports pursuant to Section 13 or 15(d) of the Exchange Act during the preceding 12 months as if it were subject to such filing requirements.)

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    YES  x    NO  ¨

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

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x

As of August 15, 2016, 100% of the registrant’s common interests outstanding (all of which are privately owned and are not traded on any public market) were owned by IASIS Healthcare Corporation, its sole member.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

     3   

Item 1. Financial Statements

     3   

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

     35   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     53   

Item 4. Controls and Procedures

     54   

PART II. OTHER INFORMATION

     54   

Item 1. Legal Proceedings

     54   

Item 1A. Risk Factors

     54   

Item 6. Exhibits

     54   

Signatures

     55   

 

2


Table of Contents

PART I.

FINANCIAL INFORMATION

 

Item 1. Financial Statements

IASIS HEALTHCARE LLC

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands)

 

     June 30,
2016
     September 30,
2015
 
     (unaudited)         
ASSETS      

Cash and cash equivalents

   $ 318,163       $ 378,513   

Accounts receivable, net

     344,448         317,729   

Inventories

     63,758         62,593   

Deferred income taxes

     —           2,645   

Prepaid expenses and other current assets

     159,456         200,555   
  

 

 

    

 

 

 

Total current assets

     885,825         962,035   

Property and equipment, net

     937,395         894,766   

Goodwill

     821,432         821,339   

Other intangible assets, net

     17,369         19,896   

Other assets, net

     60,327         55,596   
  

 

 

    

 

 

 

Total assets

   $ 2,722,348       $ 2,753,632   
  

 

 

    

 

 

 
LIABILITIES AND EQUITY      

Accounts payable

   $ 128,758       $ 131,152   

Salaries and benefits payable

     60,093         80,833   

Accrued interest payable

     10,028         26,896   

Medical claims payable

     167,435         104,296   

Other accrued expenses and current liabilities

     107,469         98,324   

Current portion of long-term debt, capital leases and other long-term obligations

     23,917         11,816   
  

 

 

    

 

 

 

Total current liabilities

     497,700         453,317   

Long-term debt, capital leases and other long-term obligations

     1,838,205         1,842,714   

Deferred income taxes

     97,693         118,477   

Other long-term liabilities

     94,788         95,553   

Non-controlling interests with redemption rights

     113,511         114,922   

Member’s equity

     65,501         117,847   

Non-controlling interests

     14,950         10,802   
  

 

 

    

 

 

 

Total equity

     80,451         128,649   
  

 

 

    

 

 

 

Total liabilities and equity

   $ 2,722,348       $ 2,753,632   
  

 

 

    

 

 

 

See accompanying notes.

 

3


Table of Contents

IASIS HEALTHCARE LLC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In Thousands)

 

     Quarter Ended
June 30,
    Nine Months Ended
June 30,
 
     2016     2015     2016     2015  

Revenues

        

Acute care revenue before provision for bad debts

   $ 583,595      $ 563,030      $ 1,763,190      $ 1,668,536   

Less: Provision for bad debts

     (94,293     (88,097     (284,989     (258,175
  

 

 

   

 

 

   

 

 

   

 

 

 

Acute care revenue

     489,302        474,933        1,478,201        1,410,361   

Premium, service and other revenue

     324,681        211,361        959,917        642,298   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     813,983        686,294        2,438,118        2,052,659   

Costs and expenses

        

Salaries and benefits (includes stock-based compensation of $1,877, $1,231, $5,221 and $4,937, respectively)

     244,923        228,899        742,050        697,098   

Supplies

     83,895        81,505        252,859        241,696   

Medical claims

     303,330        172,475        838,067        524,506   

Rentals and leases

     21,281        19,258        64,581        57,055   

Other operating expenses

     136,120        124,395        414,007        351,362   

Medicare and Medicaid EHR incentives

     (1,267     (2,035     (1,757     (7,685

Interest expense, net

     32,828        31,905        99,471        96,122   

Depreciation and amortization

     26,482        26,276        79,732        70,462   

Management fees

     1,250        1,250        3,750        3,750   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     848,842        683,928        2,492,760        2,034,366   

Earnings (loss) from continuing operations before gain (loss) on disposal of assets and income taxes

     (34,859     2,366        (54,642     18,293   

Gain (loss) on disposal of assets, net

     248        20        973        (434
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) from continuing operations before income taxes

     (34,611     2,386        (53,669     17,859   

Income tax expense (benefit)

     (7,584     1,018        (12,961     8,111   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) from continuing operations

     (27,027     1,368        (40,708     9,748   

Earnings (loss) from discontinued operations, net of income taxes

     465        1,084        (3,421     (2,222
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss)

     (26,562     2,452        (44,129     7,526   

Net earnings attributable to non-controlling interests

     (2,037     (4,164     (7,440     (9,214
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to IASIS Healthcare LLC

   $ (28,599   $ (1,712   $ (51,569   $ (1,688
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

4


Table of Contents

IASIS HEALTHCARE LLC

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(In Thousands)

 

     Quarter Ended
June 30,
    Nine Months Ended
June 30,
 
     2016     2015     2016     2015  

Net earnings (loss)

   $ (26,562   $ 2,452      $ (44,129   $ 7,526   

Other comprehensive income

        

Change in fair value of highly effective interest rate hedges

     494        573        1,470        1,318   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income before income taxes

     494        573        1,470        1,318   

Change in income tax expense

     (181     (209     (537     (482
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net of income taxes

     313        364        933        836   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

     (26,249     2,816        (43,196     8,362   

Net earnings attributable to non-controlling interests

     (2,037     (4,164     (7,440     (9,214
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss attributable to IASIS Healthcare LLC

   $ (28,286   $ (1,348   $ (50,636   $ (852
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

5


Table of Contents

IASIS HEALTHCARE LLC

CONDENSED CONSOLIDATED STATEMENT OF EQUITY (UNAUDITED)

(In Thousands)

 

     Non-controlling
Interests with
Redemption
Rights
    Member’s
Equity
    Non-
controlling
Interests
     Total Equity  
 

Balance at September 30, 2015

   $ 114,922      $ 117,847      $ 10,802       $ 128,649   

Net earnings (loss)

     3,292        (51,569     4,148         (47,421

Distributions to non-controlling interests

     (8,005     —          —           —     

Repurchase of non-controlling interests

     (1,411     —          —           —     

Stock-based compensation

     —          5,221        —           5,221   

Other comprehensive income

     —          933        —           933   

Other

     (2,218     —          —           —     

Adjustment to redemption value of non-controlling interests with redemption rights

     6,931        (6,931     —           (6,931
  

 

 

   

 

 

   

 

 

    

 

 

 

Balance at June 30, 2016

   $ 113,511      $ 65,501      $ 14,950       $ 80,451   
  

 

 

   

 

 

   

 

 

    

 

 

 

See accompanying notes.

 

6


Table of Contents

IASIS HEALTHCARE LLC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In Thousands)

 

     Nine Months Ended
June 30,
 
     2016     2015  

Cash flows from operating activities

    

Net earnings (loss)

   $ (44,129   $ 7,526   

Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:

    

Depreciation and amortization

     79,732        70,462   

Amortization of loan costs

     5,947        5,913   

Amortization of deferred gain on sale-leaseback transaction

     (1,872     (1,872

Change in physician minimum revenue guarantees

     2,609        2,852   

Stock-based compensation

     5,221        4,937   

Deferred income taxes

     (16,694     5,935   

Loss (gain) on disposal of assets, net

     (973     434   

Loss from discontinued operations, net

     3,421        2,222   

Changes in operating assets and liabilities, net of the effect of acquisitions and dispositions:

    

Accounts receivable, net

     (26,718     (18,106

Inventories, prepaid expenses and other current assets

     35,954        (15,278

Accounts payable, other accrued expenses and other accrued liabilities

     28,957        (7,936
  

 

 

   

 

 

 

Net cash provided by operating activities — continuing operations

     71,455        57,089   

Net cash provided by operating activities — discontinued operations

     2,368        2,919   
  

 

 

   

 

 

 

Net cash provided by operating activities

     73,823        60,008   
  

 

 

   

 

 

 

Cash flows from investing activities

    

Purchases of property and equipment

     (94,678     (106,604

Cash paid for acquisitions, net

     (2,311     (11,324

Cash received (paid) related to divestiture

     (5,869     42,633   

Proceeds from sale of assets

     643        350   

Change in other assets, net

     (425     (1,141
  

 

 

   

 

 

 

Net cash used in investing activities — continuing operations

     (102,640     (76,086

Net cash used in investing activities — discontinued operations

     —          (341
  

 

 

   

 

 

 

Net cash used in investing activities

     (102,640     (76,427
  

 

 

   

 

 

 

Cash flows from financing activities

    

Payment of long-term debt, capital leases and other long-term obligations

     (16,938     (9,801

Payment of debt financing costs

     (5,179     —     

Distributions to non-controlling interests

     (8,005     (6,306

Cash paid for the repurchase of non-controlling interests

     (1,411     (1,018
  

 

 

   

 

 

 

Net cash used in financing activities — continuing operations

     (31,533     (17,125

Net cash used in financing activities — discontinued operations

     —          (6
  

 

 

   

 

 

 

Net cash used in financing activities

     (31,533     (17,131
  

 

 

   

 

 

 

Change in cash and cash equivalents

     (60,350     (33,550

Cash and cash equivalents at beginning of period

     378,513        341,180   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 318,163      $ 307,630   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid for interest

   $ 110,394      $ 111,847   
  

 

 

   

 

 

 

Cash paid for (received from) income taxes, net

   $ (9,261   $ 14,875   
  

 

 

   

 

 

 

Supplemental disclosure of non-cash information:

    

Financing obligation related to integrated clinical and revenue cycle system conversion

   $ 23,409      $ —     
  

 

 

   

 

 

 

See accompanying notes.

 

7


Table of Contents

IASIS HEALTHCARE LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. ORGANIZATION AND BASIS OF PRESENTATION

Organization

The unaudited condensed consolidated financial statements as of and for the quarters and nine months ended June 30, 2016 and 2015, reflect the financial position, results of operations and cash flows of IASIS Healthcare LLC (“IASIS” or the “Company”). The Company’s sole member and parent company is IASIS Healthcare Corporation (“Holdings” or “IAS”).

IASIS provides high quality affordable healthcare services primarily in higher growth markets. At June 30, 2016, we owned or leased 17 acute care hospital facilities and one behavioral health hospital facility with a total of 3,661 licensed beds, several outpatient service facilities and 146 physician clinics.

IASIS’ continuing operations are in various regions including:

 

    Salt Lake City, Utah;

 

    Phoenix, Arizona;

 

    six cities in Texas, including Houston, San Antonio and Odessa; and

 

    West Monroe, Louisiana.

The Company also owns and operates a managed care organization and insurer that manages healthcare services for 665,700 members through Health Choice Arizona, Inc. and related entities (“Health Choice” or the “Plan”), which includes multiple health plans, accountable care networks and managed care solutions. The Plan is headquartered in Phoenix, Arizona, with offices in Tampa, Florida and Salt Lake City, Utah.

The unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial reporting and in accordance with Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The condensed consolidated balance sheet of the Company at September 30, 2015, has been derived from the audited consolidated financial statements at that date, but does not include all of the information and notes required by GAAP for complete financial statements. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2015, which was filed with the U.S. Securities and Exchange Commission (the “SEC”) on December 22, 2015.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all material adjustments (consisting of normal recurring items) necessary for a fair presentation of results for the interim periods presented. The results of operations for any interim period are not necessarily indicative of results for the full year or any other future periods.

Principles of Consolidation

The unaudited condensed consolidated financial statements include the consolidated financial position and consolidated results of operations of the Company and its affiliates, which are controlled by the Company through the Company’s direct or indirect ownership of a majority interest and rights granted to the Company through certain variable interests. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the accompanying unaudited condensed consolidated financial statements and notes. Actual results could differ from those estimates.

General and Administrative

The majority of the Company’s expenses are “cost of revenue” items. Costs that could be classified as “general and administrative” by the Company include the IASIS corporate office costs (excluding stock-based compensation costs), which were $11.5 million and $16.2 million for the quarters ended June 30, 2016 and 2015, respectively, and $36.1 million and $43.7 million for the nine months ended June 30, 2016 and 2015, respectively.

 

8


Table of Contents

Cash and Cash Equivalents

The Company considers highly liquid investments with original maturities of three months or less to be cash equivalents. The Company maintains its cash and cash equivalent balances primarily with high credit quality financial institutions. The Company manages its credit exposure by placing its investments in U.S. Treasury securities or other high quality securities, and by periodically evaluating the relative credit standing of the financial institution.

As discussed in Note 3, cash generated from certain asset dispositions may be subject to prepayment requirements under our senior credit agreement and indenture.

Stock-Based Compensation

Although IASIS has no stock option plan, or outstanding stock options or other equity awards, the Company, through its parent, IAS, grants stock options for a fixed number of common shares and restricted stock units (“RSUs”) to its employees. The Company accounts for these stock-based incentive awards under the measurement and recognition provisions of Accounting Standards Codification (“ASC”) 718, Compensation—Stock Compensation (“ASC 718”). Accordingly, the Company applies the fair value recognition provisions requiring all share-based payments to employees, including grants of employee stock options and RSUs, to be measured based on the grant-date fair value of the awards, with the resulting expense recognized in the income statement. In accordance with the provisions of ASC 718, the Company uses the Black-Scholes-Merton valuation model in determining the fair value of its share-based payments. Compensation cost for time-vested options and RSUs will generally be amortized on a straight-line basis over the requisite service periods of the awards, generally equal to the awards’ vesting periods, while compensation cost for options with market-based conditions are recognized on a graded schedule generally over the awards’ vesting periods.

Fair Value of Financial Instruments

The Company applies the provisions of ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), which provides a single definition of fair value, establishes a framework for measuring fair value, and requires certain disclosures concerning fair value measurements. The Company applies these provisions to the valuation and disclosure of certain financial instruments. ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: (i) Level 1, which is defined as quoted prices in active markets that can be accessed at the measurement date; (ii) Level 2, which is defined as inputs other than quoted prices in active markets that are observable, either directly or indirectly; and (iii) Level 3, which is defined as unobservable inputs resulting from the existence of little or no market data, therefore potentially requiring an entity to develop its own assumptions.

Cash and cash equivalents, accounts receivable, inventories, prepaid expenses and other current assets, accounts payable, salaries and benefits payable, accrued interest, medical claims payable, and other accrued expenses and current liabilities are reflected in the accompanying consolidated financial statements at amounts that approximate fair value because of the short-term nature of these instruments. The fair value of the Company’s capital leases and other long-term financing obligations also approximate their carrying value as they bear interest at current market rates.

The carrying value and fair value of the Company’s senior secured term loan facility and its 8.375% senior notes due 2019 (the “Senior Notes”) as of June 30, 2016 and September 30, 2015, were as follows (in thousands):

 

     Carrying Amount      Fair Value  
     June 30,
2016
     September 30,
2015
     June 30,
2016
     September 30,
2015
 

Senior secured term loan facility

   $ 970,473       $ 977,477       $ 970,601       $ 980,592   

Senior Notes

     847,723         847,147         818,029         875,397   

The estimated fair value of the Company’s senior secured term loan facility and its Senior Notes were based upon quoted market prices at that date and are categorized as Level 2 within the fair value hierarchy.

 

9


Table of Contents

Discontinued Operations

In accordance with the provisions of ASC 360, Property, Plant and Equipment (“ASC 360”), the Company has presented the operating results, financial position and cash flows of its previously disposed facilities as discontinued operations, net of income taxes, in the accompanying unaudited condensed consolidated financial statements.

The following table provides the components of discontinued operations (in thousands):

 

     Quarter Ended
June 30,
     Nine Months Ended
June 30,
 
     2016      2015      2016      2015  

Acute care revenue less provision for bad debts

   $ 354       $ (374    $ (57    $ 29,489   

Earnings (loss) before income taxes

     631         1,609         (5,351      (5,264

Income tax expense (benefit) from discontinued operations

     166         525         (1,930      (3,042
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings (loss) from discontinued operations, net of income taxes

   $ 465       $ 1,084       $ (3,421    $ (2,222
  

 

 

    

 

 

    

 

 

    

 

 

 

Effective January 23, 2015, the Company completed the sale of its Nevada operations. The aggregate proceeds from the sale were $36.1 million (net of final working capital settlement), which resulted in a loss on the sale of assets totaling $13.5 million. Of this loss, $0.4 million and $7.5 million was recognized in the years ended September 30, 2015 and 2014, respectively. During the quarter and nine months ended June 30, 2016, the Company recognized an additional $0.3 million gain and $5.6 million loss, respectively, related to the settlement of net working capital. The settlements are included in discontinued operations in the accompanying unaudited condensed consolidated statement of operations.

On October 1, 2015, the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2014-08, “Presentation of Financial Statements and Property, Plant, and Equipment—Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”. Among other provisions and in addition to expanded disclosures, ASU No. 2014-08 changes the definition of what components of an entity qualify for discontinued operations treatment and reporting from a reportable segment, operating segment, reporting unit, subsidiary or asset group to only those components of an entity that represent a strategic shift that has, or will have, a major effect on an entity’s operations and financial results. Additionally, ASU No. 2014-08 requires disclosure about a disposal of an individually significant component of an entity that does not qualify for discontinued operations presentation in the financial statements, including the pretax profit or loss attributable to the component of an entity for the period in which it is disposed of or is classified as held for sale. The disclosure of this information is required for all of the same periods that are included in the entity’s results of operations for the periods presented. The provisions of ASU No. 2014-08 are effective prospectively for all disposals or classifications as held for sale components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. The Company’s adoption of ASU No. 2014-08 did not have an impact on its unaudited condensed consolidated financial statements.

Recent Accounting Pronouncements

Newly Adopted

In November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes”. Under ASU No. 2015-17, organizations that present a classified balance sheet are required to prospectively classify all deferred taxes as noncurrent assets or noncurrent liabilities. The provisions of ASU No. 2015-17 are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for all entities as of the beginning of an interim or annual reporting period. The Company has early adopted ASU No. 2015-17, and accordingly, all deferred taxes are classified as noncurrent liabilities in the Company’s accompanying unaudited condensed consolidated balance sheet at June 30, 2016.

Recently Issued

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”, which outlines a single comprehensive model for recognizing revenue and supersedes most existing revenue recognition guidance, including guidance specific to the healthcare industry. In addition, ASU No. 2014-09 will require new and enhanced disclosures. Companies can adopt the new standard either using the full retrospective approach, a modified retrospective approach with practical expedients, or a cumulative effect upon adoption approach. ASU No. 2014-09 was originally scheduled to become effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, and early adoption was not permitted. In July 2015, the FASB decided that a deferral was necessary to provide companies adequate time to effectively implement the new standard. The FASB deferred the effective date by one year, but will permit entities to adopt one year earlier if they so choose. The Company is currently evaluating the effect of the new revenue recognition guidance.

 

10


Table of Contents

In February 2015, the FASB issued ASU No. 2015-2, “Consolidation”. ASU No. 2015-2 includes amendments that are intended to improve targeted areas of consolidation for legal entities including reducing the number of consolidation models from four to two and simplifying the FASB ASC. The provisions of ASU No. 2015-2 are effective for annual periods beginning after December 15, 2015. The amendments may be applied retrospectively in previously issued financial statements for one or more years with a cumulative effect adjustment to retained earnings as of the beginning of the first year restated. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of ASU No. 2015-2 will have on its financial position, results of operation, cash flows and financial disclosures.

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs”, which requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The guidance in the new standard is limited to the presentation of debt issuance costs. The recognition and measurement guidance for debt issuance costs are not affected by ASU No. 2015-03. The amendments in this update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The Company is currently evaluating the impact that the adoption of ASU No. 2015-03 will have on its financial position, cash flows and financial disclosures.

In February 2016, the FASB issued ASU 2016-02, “Leases”, which requires lessees to recognize lease assets and lease liabilities on the balance sheet, including leases previously classified as operating. In addition, ASU 2016-02 implements changes to the lease classification criteria for lessors and eliminates portions of the previous real estate leasing guidance. ASU 2016-02 will become effective for fiscal years beginning after December 15, 2018, and early adoption is permitted. The Company is currently evaluating the effect of the new lease accounting guidance, and believes the primary effect of adopting the new standard will be to record assets and obligations for current operating leases.

In March 2016, the FASB issued ASU 2016-09 “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”, which affects all entities that issue share-based payment awards to their employees. ASU 2016-09 simplifies the accounting for share-based payment transactions, including the income tax consequences and classification on the balance sheet and statement of cash flows. Portions of the guidance will only impact non-public entities. ASU 2016-09 will become effective for fiscal years beginning after December 15, 2016, and early adoption is permitted. The Company is currently evaluating the effect of the new share-based payment accounting guidance.

2. REVENUE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

Acute Care Revenue and Accounts Receivable

The Company’s healthcare facilities have entered into agreements with third-party payors, including government programs (Medicare, Medicaid and TRICARE), managed care health plans, including Medicare and Medicaid managed care health plans, commercial insurance companies and employers under which the facilities are paid based upon established charges, the cost of providing services, predetermined rates per diagnosis, fixed per diem rates or discounts from established charges. Additionally, the Company offers discounts through its uninsured discount program to all uninsured patients receiving healthcare services who do not qualify for assistance under state Medicaid, other federal or state assistance plans, or charity care.

In the ordinary course of business, the Company provides care without charge to patients who are financially unable to pay for the healthcare services they receive. Because the Company does not pursue collection of amounts determined to qualify as charity care, they are not reported in acute care revenue. Accordingly, the Company records revenue deductions for patient accounts that meet its guidelines for charity care. The Company provides charity care to patients with income levels below 200% of the federal poverty level (“FPL”). Additionally, at all of the Company’s hospitals, a sliding scale of reduced rates is offered to uninsured patients who are not covered through federal, state or private insurance, with incomes between 200% and 400% of the FPL.

Acute care revenue is reported at the estimated net realizable amounts from third-party payors and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and are adjusted, if necessary, in future periods when final settlements are determined. The Company also records a provision for bad debts related to uninsured accounts, as well as co-insurance

 

11


Table of Contents

and deductible balances due from insured patients, to reflect its self-pay accounts receivable at the estimated amounts expected to be collected. The sources of the Company’s hospital net patient revenue by payor before its provision for bad debts are summarized as follows:

 

     Quarter Ended
June 30,
    Nine Months Ended
June 30,
 
     2016     2015     2016     2015  

Medicare

     18.3     19.0     18.7     19.8

Managed Medicare

     10.4        10.2        10.4        10.3   

Medicaid and managed Medicaid

     12.1        12.3        12.3        12.6   

Managed care and other

     43.8        43.7        43.5        42.6   

Self-pay

     15.4        14.8        15.1        14.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100.0     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Allowance For Doubtful Accounts

The provision for bad debts and the associated allowance for doubtful accounts relate primarily to amounts due directly from patients. The Company does not pursue collection of amounts related to patients who qualify for charity care under the Company’s guidelines; therefore, charity care accounts are deducted from gross revenue and are not included in the provision for bad debts.

The Company’s estimation of its allowance for doubtful accounts is based primarily upon the type and age of the patient accounts receivable and the effectiveness of related collection efforts. The Company’s policy is to reserve a portion of all self-pay receivables, including amounts due from the uninsured and amounts related to co-payments and deductibles, as these charges are recorded. The Company monitors accounts receivable balances and the effectiveness of reserve policies on a regular basis and reviews various analytics to support the basis for its estimates. These efforts primarily consist of reviewing the following:

 

    Cash collections as a percentage of net patient revenue less bad debts;

 

    Changes in the aging and payor mix of accounts receivable, including increased focus on accounts due from the uninsured and accounts that represent co-payments and deductibles due from patients;

 

    Revenue and volume trends by payor, particularly the self-pay components;

 

    Trending of days revenue in accounts receivable;

 

    Various allowance coverage statistics; and

 

    Historical write-off and collection experience using a hindsight or look-back approach.

At June 30, 2016 and September 30, 2015, the Company’s net self-pay receivables, including amounts due from uninsured patients and co-payment and deductible amounts due from insured patients, were $274.4 million and $276.7 million, respectively. At June 30, 2016 and September 30, 2015, the Company’s allowance for doubtful accounts was $216.2 million and $210.1 million, respectively.

Premium, Service and Other Revenue

Health Choice is the Company’s managed care organization and insurer that manages healthcare services for enrollees in Arizona, Utah and Florida. The Plan derives most of its revenue through a contract in Arizona with the Arizona Health Care Cost Containment System (“AHCCCS”) to provide specified health services to qualified Medicaid enrollees through contracted providers. AHCCCS is the state agency that administers Arizona’s Medicaid program.

Effective October 1, 2013, Health Choice entered into a contract with AHCCCS with an initial term of three years, and two one-year renewal options at the discretion of AHCCCS. The contract is terminable without cause on 90 days’ written notice or for cause upon written notice if the Company fails to comply with any term or condition of the contract or fails to take corrective action as required to comply with the terms of the contract. Additionally, AHCCCS can terminate the contract in the event of the unavailability of state or federal funding. As of June 30, 2016, Health Choice provided healthcare benefits to 246,900 plan members in the Arizona Medicaid program.

Health Choice also provides coverage as a Medicare Advantage Prescription Drug (“MAPD”) Special Needs Plan (“SNP”) provider pursuant to a contract with the Centers for Medicare and Medicaid Services (“CMS”). The SNP allows Health Choice to offer Medicare and Part D drug benefit coverage for new and existing dual-eligible members (i.e. those that are eligible for Medicare and Medicaid). The contract with CMS includes successive one-year renewal options at the discretion of CMS and is terminable without cause on 90 days’ written notice or for cause upon written notice if the Company fails to comply with any term or condition of the contract or fails to take corrective action as required to comply with the terms of the contract. As of June 30, 2016, Health Choice provided healthcare benefits to 9,500 plan members in its MAPD SNP.

 

12


Table of Contents

In Arizona and surrounding states, the Plan subcontracts with hospitals, physicians and other medical providers to provide services to its Medicaid and Medicare enrollees in Apache, Coconino, Gila, Maricopa, Mohave, Navajo, Pima and Pinal counties, regardless of the actual costs incurred to provide these services.

Effective October 1, 2015, Health Choice’s joint venture, Health Choice Integrated Care LLC (“HCIC”) entered into a contract with the Arizona Department of Health Services (“ADHS”) to operate an integrated acute and behavioral health plan in Northern Arizona. The contract has an initial term of three years and includes two additional two-year renewal options that can be exercised at the discretion of ADHS. The contract is terminable by ADHS following HCIC’s failure to carry out a material contract term, condition or obligation. As of June 30, 2016, HCIC provided standalone behavioral health benefits to 226,900 plan members.

The Plan’s contracts require the arrangement of healthcare services for enrolled patients in exchange for fixed monthly premiums, based upon negotiated per capita member rates. Capitation payments received by Health Choice are recognized as revenue in the month that members are entitled to healthcare services. Premium revenue includes adjustments to revenue related to the program settlement process for the Arizona managed Medicaid plan under the related state contract. This program settlement process reconciles estimated amounts due to or from the state based on the actual premium revenue and medical costs and contractually mandated limits on profits and losses. Although estimates of future program settlement amounts are recorded in current periods, the program settlement process typically occurs 18 months post-plan year, when actual (rather than projected) claims and member eligibility data become available and a net settlement amount is either due to or from the state. Adjustments to the estimates of program settlement amounts are recorded as a component of premium revenue.

The sources of Health Choice’s premium, service and other revenue by major product line are summarized as follows:

 

     Quarter Ended
June 30,
    Nine Months Ended
June 30,
 
     2016     2015     2016     2015  

Medicaid and Exchange plans

     86.6     83.6     86.8     82.4

MAPD SNP

     10.0        12.2        9.9        13.2   

Service and other

     3.4        4.2        3.3        4.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100.0     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

   

 

 

 

3. LONG-TERM DEBT, CAPITAL LEASES AND OTHER LONG-TERM OBLIGATIONS

Long-term debt, capital leases and other long-term obligations consist of the following (in thousands):

 

     June 30,
2016
     September 30,
2015
 

Senior secured term loan facility

   $ 970,473       $ 977,477   

Senior Notes

     847,723         847,147   

Capital leases and other long-term obligations

     43,926         29,906   
  

 

 

    

 

 

 
     1,862,122         1,854,530   

Less current maturities

     23,917         11,816   
  

 

 

    

 

 

 
   $ 1,838,205       $ 1,842,714   
  

 

 

    

 

 

 

As of June 30, 2016 and September 30, 2015, the senior secured term loan facility balance reflects an original issue discount (“OID”) of $1.3 million and $1.9 million, respectively, which is net of accumulated amortization of $3.8 million and $3.2 million, respectively, and the Senior Notes balance reflects an OID of $2.2 million and $2.7 million, respectively, which is net of accumulated amortization of $3.9 million and $3.4 million, respectively.

As of June 30, 2016 and September 30, 2015, capital leases and other long-term obligations include financing obligations totaling $20.8 million and $21.7 million, respectively, resulting from the Company’s sale-leaseback transactions. Additionally, as of June 30, 2016, capital leases and other long-term obligations includes a financing obligation totaling $15.4 million related to the Company’s ongoing conversion to a new integrated clinical and revenue cycle system.

 

13


Table of Contents

Senior Secured Credit Facilities

Amended Term Loan Facility

The Company is party to a senior credit agreement (the “Amended and Restated Credit Agreement”) with Wilmington Trust, National Association, as administrative agent, which provides for a $1.025 billion senior secured term loan facility maturing in May 2018 (the “Term Loan Facility”). Principal under the Term Loan Facility is due in equal quarterly installments in an aggregate annual amount equal to 1% of the principal amount of $1.007 billion outstanding as of the effective date, February 20, 2013, of a repricing amendment, with the remaining balance due upon maturity of the Term Loan Facility.

Borrowings under the Term Loan Facility bear interest at a rate per annum equal to, at the Company’s option, either (1) a base rate determined by reference to the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate (determined by reference to The Wall Street Journal) and (c) a one-month LIBOR rate, subject to a floor of 1.25%, plus 1.00%, in each case, plus a margin of 2.25% per annum or (2) the LIBOR rate for the interest period relevant to such borrowing, subject to a floor of 1.25%, plus a margin of 3.25% per annum.

The Term Loan Facility is unconditionally guaranteed by IAS and certain subsidiaries of the Company (collectively, the “Subsidiary Guarantors”; IAS and the Subsidiary Guarantors, the “Guarantors”) and is required to be guaranteed by all future material wholly-owned subsidiaries of the Company, subject to certain exceptions. All obligations under the Amended and Restated Credit Agreement are secured, subject to certain exceptions, by substantially all of the Company’s assets and the assets of the Guarantors, including (1) a pledge of 100% of the equity interests of the Company and the equity interests held by the Company and the Subsidiary Guarantors, subject to certain exceptions, (2) mortgage liens on all of the Company’s material real property and that of the Guarantors and (3) all proceeds of the foregoing.

The Amended and Restated Credit Agreement requires the Company to mandatorily prepay borrowings under the Term Loan Facility with net cash proceeds of certain asset dispositions, following certain casualty events, following certain borrowings or debt issuances and from a percentage of annual excess cash flow.

The Amended and Restated Credit Agreement contains certain restrictive covenants, including, among other things: (1) limitations on the incurrence of debt and liens; (2) limitations on investments other than, among other exceptions, certain acquisitions that meet certain conditions; (3) limitations on the sale of assets outside of the ordinary course of business; (4) limitations on dividends and distributions; and (5) limitations on transactions with affiliates, in each case, subject to certain exceptions. The Amended and Restated Credit Agreement also contains certain customary events of default, including, without limitation, a failure to make payments under the Term Loan Facility, cross-defaults, certain bankruptcy events and certain change of control events.

Revolving Credit Facility

The Company is party to a revolving credit agreement (the “Revolving Credit Agreement”) with JPMorgan Chase Bank, N.A. (“JPMorgan”), as administrative agent, which provides for a $207.4 million senior secured revolving credit facility, of which up to $125.0 million may be utilized for the issuance of letters of credit (the “Revolving Credit Facility”). The Revolving Credit Facility matures in February 2021 (the “Stated Revolver Maturity Date”), provided that, if prior to the Stated Revolver Maturity Date, (x) any loans are outstanding under the Term Loan Facility on the date that is 91 days prior to the maturity date under the Term Loan Facility (such date, the “Springing Term Maturity Date”) or (y) any notes are outstanding under the Company’s indenture, dated as of May 3, 2011, by and among IASIS, IAS and The Bank of New York Mellon Trust Company, N.A., as Trustee, relating to the Company’s 8.375% Senior Notes due 2019 (the “Indenture”), on the date that is 91 days prior to the maturity date under the Indenture (such date, the “Springing Notes Maturity Date”), then the maturity date will automatically become the earlier of the Springing Term Maturity Date or the Springing Notes Maturity Date.

The Revolving Credit Agreement provides the Company with the right to request additional commitments under the Revolving Credit Facility without the consent of the lenders thereunder, subject to a cap on aggregate commitments of $300.0 million, a pro forma senior secured net leverage ratio (as defined in the Revolving Credit Agreement) of less than or equal to 3.75 to 1.00 and customary conditions precedent.

The Revolving Credit Facility does not require installment payments prior to maturity.

Borrowings under the Revolving Credit Facility bear interest at a rate per annum equal to, at the Company’s option, either (1) a base rate determined by reference to the highest of (a) the prime rate of JPMorgan, (2) the federal funds rate plus 0.50% and (3) a LIBOR rate subject to certain adjustments plus 1.00%, in each case, plus a margin of 2.50% per annum or (2) the LIBOR rate for the interest period relevant to such borrowing, plus a margin of 3.50% per annum. In addition to paying interest on outstanding principal under the Revolving Credit Facility, the Company is required to pay a commitment fee on the unutilized commitments under the Revolving Credit Facility, as well as pay customary letter of credit fees and agency fees.

 

14


Table of Contents

The Revolving Credit Facility is unconditionally guaranteed by the Guarantors and is required to be guaranteed by all future material wholly-owned subsidiaries of the Company, subject to certain exceptions. All obligations under the Revolving Credit Agreement are secured, subject to certain exceptions, by substantially all of the Company’s assets and the assets of the Guarantors, including (1) a pledge of 100% of the equity interests of the Company and the equity interests held by the Company and the Subsidiary Guarantors, subject to certain exceptions, (2) mortgage liens on all of the Company’s material real property and that of the Guarantors and (3) all proceeds of the foregoing.

The Revolving Credit Agreement contains restrictive covenants and events of default substantially similar to the restrictive covenants and events of default in the Amended and Restated Credit Agreement; provided, that under the Revolving Credit Agreement, the Company is required to maintain, on a quarterly basis, a maximum senior secured gross leverage ratio (as defined in the Revolving Credit Agreement). In addition, certain of the baskets available to the Company under the negative covenants in the Amended and Restated Credit Agreement are suspended under the Revolving Credit Agreement until such time, if any, as the Company has consummated a qualifying underwritten public offering and achieved a specified total gross leverage ratio (as defined in the Revolving Credit Agreement).

8.375% Senior Notes due 2019

The Company, together with its wholly owned subsidiary IASIS Capital Corporation (together, the “Issuers”), issued $850.0 million aggregate principal amount of Senior Notes, which mature on May 15, 2019, pursuant to the Indenture. The Indenture provides that the Senior Notes are general unsecured, senior obligations of the Issuers, and initially will be unconditionally guaranteed on a senior unsecured basis by certain of the Company’s subsidiaries.

At June 30, 2016, the outstanding principal balance of the Senior Notes was $849.9 million. The Senior Notes bear interest at a rate of 8.375% per annum, payable semi-annually, in cash in arrears, on May 15 and November 15 of each year.

The Issuers may redeem the Senior Notes, in whole or in part, at any time, at a price equal to 102.094% of the aggregate principal amount of the Senior Notes plus accrued and unpaid interest and special interest, if any, to but excluding the redemption date. On May 15, 2017, the redemption price declines 2.094 percentage points, at which point and thereafter the redemption price is equal to 100% of the aggregate principal amount of the Senior Notes plus accrued and unpaid interest and special interest, if any, to but excluding the redemption date.

The Indenture contains covenants that limit the Company’s (and its restricted subsidiaries’) ability to, among other things: (1) incur additional indebtedness or liens or issue disqualified stock or preferred stock; (2) pay dividends or make other distributions on, redeem or repurchase the Company’s capital stock; (3) sell certain assets; (4) make certain loans and investments; (5) enter into certain transactions with affiliates; (6) impose restrictions on the ability of a subsidiary to pay dividends or make payments or distributions to the Company and its restricted subsidiaries; and (7) consolidate, merge or sell all or substantially all of the Company’s assets. These covenants are subject to a number of important limitations and exceptions.

The Indenture also provides for events of default, which, if any of them occurs, may permit or, in certain circumstances, require the principal, premium, if any, interest and any other monetary obligations on all the then outstanding Senior Notes to be due and payable immediately. If the Company experiences certain kinds of changes of control, it must offer to purchase the Senior Notes at 101% of their principal amount, plus accrued and unpaid interest and special interest, if any, to but excluding the repurchase date. Under certain circumstances, the Company will have the ability to make certain payments to facilitate a change of control transaction and to provide for the assumption of the Senior Notes by a new parent company resulting from such change of control transaction. If such change of control transaction is facilitated, the Issuers will be released from all obligations under the Indenture and the Issuers and the trustee will execute a supplemental indenture effectuating such assumption and release.

 

15


Table of Contents

4. GOODWILL

The following table presents the changes, if any, in the carrying amount of goodwill (in thousands):

 

     Acute
Care
     Health
Choice
     Total  

Balance at September 30, 2015

   $ 815,582       $ 5,757       $ 821,339   

Adjustments

     93         —          93   
  

 

 

    

 

 

    

 

 

 

Balance at June 30, 2016

   $ 815,675       $ 5,757       $ 821,432   
  

 

 

    

 

 

    

 

 

 

5. ACCUMULATED OTHER COMPREHENSIVE LOSS

The components of accumulated other comprehensive loss, net of income taxes, are as follows (in thousands):

 

     June 30,
2016
     September 30,
2015
 

Fair value of interest rate hedges

   $ (500    $ (1,970

Income tax benefit

     311         848   
  

 

 

    

 

 

 

Accumulated other comprehensive loss

   $ (189    $ (1,122
  

 

 

    

 

 

 

6. INCOME TAXES

For the quarter ended June 30, 2016, the Company recorded an income tax benefit of $7.6 million, resulting in an effective tax rate of 21.9%, compared to income tax expense of $1.0 million, for an effective tax rate of 42.7% in the prior year quarter. For the nine months ended June 30, 2016, the Company recorded an income tax benefit of $13.0 million, for an effective tax rate of 24.1%, compared to income tax expense of $8.1 million, for an effective tax rate of 45.4% in the prior year period. The change in the effective tax rate was primarily attributable to (1) the decrease in net earnings from continuing operations, which altered the rate impact of non-deductible expenses, non-controlling interests, and state income taxes including the Texas margins tax, and (2) an increase in the valuation allowance against deferred tax assets. The Company recorded an increase to its valuation allowance of $3.0 million and $3.7 million for the quarter and nine months ended June 30, 2016, respectively, compared to $0.1 million and $0.2 million in the same prior year periods.

7. COMMITMENTS AND CONTINGENCIES

Acute Care Revenue

The calculation of appropriate payments from the Medicare and Medicaid programs, including supplemental Medicaid reimbursement, as well as terms governing agreements with other third-party payors are complex and subject to interpretation. Final determination of amounts earned under the Medicare and Medicaid programs often occurs subsequent to the year in which services are rendered because of audits by the programs, rights of appeal and the application of numerous technical provisions. In the opinion of management, adequate provision has been made for adjustments that may result from such routine audits and appeals.

Professional, General and Workers’ Compensation Liability Risks

The Company is subject to claims and legal actions incidental to the Company’s business, including claims relating to patient treatment and personal injuries. To cover these types of claims and actions, the Company maintains professional and general liability insurance in excess of self-insured retentions through a commercial insurance carrier in amounts that the Company believes to be sufficient for its operations, although, potentially, some claims may exceed the scope of coverage in effect. Plaintiffs in these matters may request punitive or other damages that may not be covered by insurance. The Company is currently not a party to any proceedings that, in the Company’s opinion, would have a material adverse effect on the Company’s business, financial condition or results of operations. The Company expenses an estimate of the costs it expects to incur under the self-insured retention exposure for professional and general liability claims using historical claims data, demographic factors, severity factors, current incident logs and other actuarial analysis. At June 30, 2016 and September 30, 2015, the Company’s professional and general liability accrual for asserted and unasserted claims totaled $53.7 million and $52.7 million, respectively, with the current portion totaling $15.0 million at both periods. The semi-annual valuations from the Company’s independent actuary for professional and general liability losses resulted in changes related to estimates for prior years that impacted professional and general liability expense with an increase of $11.9 million during the nine months ended June 30, 2016, and a decrease of $4.1 million during the nine months ended June 30, 2015.

 

16


Table of Contents

The Company is subject to claims and legal actions in the ordinary course of business relative to workers’ compensation matters. To cover these types of claims, the Company maintains workers’ compensation insurance coverage with a self-insured retention. The Company accrues the costs of workers’ compensation claims based upon estimates derived from its claims experience.

Health Choice

Health Choice has entered into capitated contracts whereby the Plan provides healthcare services in exchange for fixed periodic and supplemental payments from AHCCCS, ADHS and CMS. These services are provided regardless of the actual costs incurred to provide these services. The Plan receives reinsurance and other supplemental payments from AHCCCS to cover certain costs of healthcare services that exceed certain thresholds. The Company believes the capitated payments, together with reinsurance and other supplemental payments are sufficient to pay for the services Health Choice is obligated to deliver. As of June 30, 2016, the Company has provided performance guaranties in the form of a letter of credit totaling $60.0 million for the benefit of AHCCCS, a surety bond for the benefit of ADHS totaling $20.8 million and a demand note totaling $12.0 million for the benefit of CMS to support its obligations under the Health Choice contracts to provide and pay for the related healthcare services. The amount of these performance guaranties are generally based in part upon the membership in the Plan and the related capitation revenue paid to Health Choice.

Acquisitions

The Company has acquired and in the future may choose to acquire businesses with prior operating histories. Such businesses may have unknown or contingent liabilities, including liabilities for failure to comply with healthcare laws and regulations, such as billing and reimbursement, fraud and abuse and similar anti-referral laws. Although the Company has procedures designed to conform business practices to its policies following the completion of any acquisition, there can be no assurance that the Company will not become liable for previous activities of prior owners that may later be asserted to be improper by private plaintiffs or government agencies. Although the Company generally seeks to obtain indemnification from prospective sellers covering such matters, there can be no assurance that any such matter will be covered by indemnification, or if covered, that such indemnification will be adequate to cover potential losses and fines.

Other

On January 14, 2016, CMS entered into a Systems Improvement Agreement (“SIA”), with the Company’s Houston hospital, St. Joseph Medical Center (“SJMC”). CMS agreed to stay the scheduled termination of SJMC’s Medicare Provider Agreement during the pendency of the SIA, an action which resulted from surveys of the hospital that identified alleged failures to comply with certain Medicare program conditions of participation. As required by the terms of the SIA, the Company retained an independent consultant who conducted a comprehensive review, including analysis of the hospital’s current operations, and developed a remediation plan, which was submitted to and approved by CMS in June 2016. The SIA is scheduled to expire in July 2017, following an on-site survey by CMS, provided that SJMC demonstrates compliance with the Medicare conditions of participation for hospitals.

 

17


Table of Contents

8. SEGMENT INFORMATION

The Company’s reportable operating segments consist of (1) acute care hospitals and related healthcare businesses, collectively and (2) Health Choice. The following is a financial summary by business segment for the periods indicated (in thousands):

 

                                                                   
     For the Quarter Ended June 30, 2016  
     Acute Care      Health Choice      Eliminations      Consolidated  

Acute care revenue before provision for bad debts

   $ 583,595       $ —         $ —         $ 583,595   

Less: Provision for bad debts

     (94,293      —           —           (94,293
  

 

 

    

 

 

    

 

 

    

 

 

 

Acute care revenue

     489,302         —           —           489,302   

Premium, service and other revenue

     —           324,681         —           324,681   

Revenue between segments

     4,399         —           (4,399      —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

     493,701         324,681         (4,399      813,983   

Salaries and benefits (excludes stock-based compensation)

     223,180         19,866         —           243,046   

Supplies

     83,614         281         —           83,895   

Medical claims

     —           307,729         (4,399      303,330   

Rentals and leases

     20,282         999         —           21,281   

Other operating expenses

     117,805         18,315         —           136,120   

Medicare and Medicaid EHR incentives

     (1,267      —           —           (1,267
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA(1)

     50,087         (22,509      —           27,578   

Interest expense, net

     32,828         —           —           32,828   

Depreciation and amortization

     25,042         1,440         —           26,482   

Stock-based compensation

     1,877         —           —           1,877   

Management fees

     1,250         —           —           1,250   
  

 

 

    

 

 

    

 

 

    

 

 

 

Loss from continuing operations before gain on disposal of assets and income taxes

     (10,910      (23,949      —           (34,859

Gain on disposal of assets, net

     248         —           —           248   
  

 

 

    

 

 

    

 

 

    

 

 

 

Loss from continuing operations before income taxes

   $ (10,662    $ (23,949    $ —         $ (34,611
  

 

 

    

 

 

    

 

 

    

 

 

 

 

18


Table of Contents
                                                                   
     For the Quarter Ended June 30, 2015  
     Acute Care      Health Choice      Eliminations      Consolidated  

Acute care revenue before provision for bad debts

   $ 563,030       $ —        $ —        $ 563,030   

Less: Provision for bad debts

     (88,097      —          —          (88,097
  

 

 

    

 

 

    

 

 

    

 

 

 

Acute care revenue

     474,933         —          —          474,933   

Premium, service and other revenue

     —          211,361         —          211,361   

Revenue between segments

     4,520         —          (4,520      —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

     479,453         211,361         (4,520      686,294   

Salaries and benefits (excludes stock-based compensation)

     214,394         13,274         —          227,668   

Supplies

     81,341         164         —          81,505   

Medical claims

     —          176,995         (4,520      172,475   

Rentals and leases

     18,542         716         —          19,258   

Other operating expenses

     110,930         13,465         —          124,395   

Medicare and Medicaid EHR incentives

     (2,035      —          —          (2,035
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA(1)

     56,281         6,747         —          63,028   

Interest expense, net

     31,905         —          —          31,905   

Depreciation and amortization

     25,180         1,096         —          26,276   

Stock-based compensation

     1,231         —          —          1,231   

Management fees

     1,250         —          —          1,250   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings (loss) from continuing operations before gain on disposal of assets and income taxes

     (3,285      5,651         —          2,366   

Gain on disposal of assets, net

     20         —          —          20   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings (loss) from continuing operations before income taxes

   $ (3,265    $ 5,651       $ —        $ 2,386   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

19


Table of Contents
                                                                   
     For the Nine Months Ended June 30, 2016  
     Acute Care      Health Choice      Eliminations      Consolidated  

Acute care revenue before provision for bad debts

   $ 1,763,190       $ —        $ —        $ 1,763,190   

Less: Provision for bad debts

     (284,989      —          —          (284,989
  

 

 

    

 

 

    

 

 

    

 

 

 

Acute care revenue

     1,478,201         —          —          1,478,201   

Premium, service and other revenue

     —          959,917         —          959,917   

Revenue between segments

     12,857         —          (12,857      —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

     1,491,058         959,917         (12,857      2,438,118   

Salaries and benefits (excludes stock-based compensation)

     681,546         55,283         —          736,829   

Supplies

     251,951         908         —          252,859   

Medical claims

     —          850,924         (12,857      838,067   

Rentals and leases

     61,651         2,930         —          64,581   

Other operating expenses

     360,607         53,400         —          414,007   

Medicare and Medicaid EHR incentives

     (1,757      —          —          (1,757
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA(1)

     137,060         (3,528      —          133,532   

Interest expense, net

     99,471         —          —          99,471   

Depreciation and amortization

     75,777         3,955         —          79,732   

Stock-based compensation

     5,221         —          —          5,221   

Management fees

     3,750         —          —          3,750   
  

 

 

    

 

 

    

 

 

    

 

 

 

Loss from continuing operations before gain on disposal of assets and income taxes

     (47,159      (7,483      —          (54,642

Gain on disposal of assets, net

     973         —          —          973   
  

 

 

    

 

 

    

 

 

    

 

 

 

Loss from continuing operations before income taxes

   $ (46,186    $ (7,483    $ —        $ (53,669
  

 

 

    

 

 

    

 

 

    

 

 

 

Segment assets

   $ 2,248,819       $ 473,529          $ 2,722,348   
  

 

 

    

 

 

       

 

 

 

Capital expenditures

   $ 93,023       $ 1,655          $ 94,678   
  

 

 

    

 

 

       

 

 

 

Goodwill

   $ 815,675       $ 5,757          $ 821,432   
  

 

 

    

 

 

       

 

 

 

 

20


Table of Contents
                                                                   
     For the Nine Months Ended June 30, 2015  
     Acute Care      Health Choice      Eliminations      Consolidated  

Acute care revenue before provision for bad debts

   $ 1,668,536       $ —        $ —        $ 1,668,536   

Less: Provision for bad debts

     (258,175      —          —          (258,175
  

 

 

    

 

 

    

 

 

    

 

 

 

Acute care revenue

     1,410,361         —          —          1,410,361   

Premium, service and other revenue

     —          642,298         —          642,298   

Revenue between segments

     12,356         —          (12,356      —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

     1,422,717         642,298         (12,356      2,052,659   

Salaries and benefits (excludes stock-based compensation)

     651,854         40,307         —          692,161   

Supplies

     241,230         466         —          241,696   

Medical claims

     —          536,862         (12,356      524,506   

Rentals and leases

     54,899         2,156         —          57,055   

Other operating expenses

     307,868         43,494         —          351,362   

Medicare and Medicaid EHR incentives

     (7,685      —          —          (7,685
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA(1)

     174,551         19,013         —          193,564   

Interest expense, net

     96,122         —          —          96,122   

Depreciation and amortization

     67,264         3,198         —          70,462   

Stock-based compensation

     4,937         —          —          4,937   

Management fees

     3,750         —          —          3,750   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings from continuing operations before loss on disposal of assets and income taxes

     2,478         15,815         —          18,293   

Loss on disposal of assets, net

     (434      —          —          (434
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings from continuing operations before income taxes

   $ 2,044       $ 15,815       $ —        $ 17,859   
  

 

 

    

 

 

    

 

 

    

 

 

 

Segment assets

   $ 2,286,227       $ 398,752          $ 2,684,979   
  

 

 

    

 

 

       

 

 

 

Capital expenditures

   $ 104,853       $ 1,751          $ 106,604   
  

 

 

    

 

 

       

 

 

 

Goodwill

   $ 814,744       $ 5,757          $ 820,501   
  

 

 

    

 

 

       

 

 

 

 

(1) Adjusted EBITDA represents net earnings (loss) from continuing operations before net interest expense, income tax expense (benefit), depreciation and amortization, stock-based compensation, gain (loss) on disposal of assets and management fees. Management fees represent monitoring and advisory fees paid to management companies affiliated with TPG and JLL. Management routinely calculates and communicates adjusted EBITDA and believes that it is useful to investors because it is commonly used as an analytical indicator within the healthcare industry to evaluate performance, allocate resources and measure leverage capacity and debt service ability. In addition, the Company uses adjusted EBITDA as a measure of performance for its business segments and for incentive compensation purposes. Adjusted EBITDA should not be considered as a measure of financial performance under GAAP, and the items excluded from adjusted EBITDA are significant components in understanding and assessing financial performance. Adjusted EBITDA should not be considered in isolation or as an alternative to net earnings, cash flows generated by operating, investing, or financing activities or other financial statement data presented in the unaudited condensed consolidated financial statements as an indicator of financial performance or liquidity. Adjusted EBITDA, as presented, differs from “adjusted EBITDA” as defined under the Company’s senior secured credit facilities and may not be comparable to similarly titled measures of other companies.

 

21


Table of Contents

9. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION

The Senior Notes described in Note 3 are fully and unconditionally guaranteed on a joint and several basis by all of the Company’s existing 100% owned existing domestic subsidiaries, other than certain non-guarantor subsidiaries, which include Health Choice. In addition, the Senior Notes are not guaranteed by the Company’s non-wholly owned subsidiaries. The guarantees are subject to customary release provisions set forth in the Indenture for the Senior Notes.

Summarized condensed consolidating balance sheets at June 30, 2016 and September 30, 2015, condensed consolidating statements of operations for the quarters and nine months ended June 30, 2016 and 2015, condensed consolidating statements of comprehensive income (loss) for the quarters and nine months ended June 30, 2016 and 2015, and condensed consolidating statements of cash flows for the nine months ended June 30, 2016 and 2015, for the Company, segregating the parent company issuer, the subsidiary guarantors, the subsidiary non-guarantors and eliminations, are found below.

 

22


Table of Contents

IASIS Healthcare LLC

Condensed Consolidating Balance Sheet

June 30, 2016 (unaudited)

(In thousands)

 

     Parent Issuer      Subsidiary
Guarantors
    Subsidiary
Non-Guarantors
     Eliminations     Condensed
Consolidated
 
Assets             

Current assets

            

Cash and cash equivalents

   $ —         $ 226,843      $ 91,320       $ —        $ 318,163   

Accounts receivable, net

     —           60,455        283,993         —          344,448   

Inventories

     —           15,018        48,740         —          63,758   

Prepaid expenses and other current assets

     —           34,723        124,733         —          159,456   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total current assets

     —           337,039        548,786         —          885,825   

Property and equipment, net

     —           319,411        617,984         —          937,395   

Intercompany

     —           (211,403     211,403         —          —     

Net investment in and advances to subsidiaries

     1,966,855         —          —           (1,966,855     —     

Goodwill

     7,407         83,848        730,177         —          821,432   

Other intangible assets, net

     —           7,619        9,750         —          17,369   

Other assets, net

     17,157         28,309        14,861         —          60,327   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total assets

   $ 1,991,419       $ 564,823      $ 2,132,961       $ (1,966,855   $ 2,722,348   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
Liabilities and Equity             

Current liabilities

            

Accounts payable

   $ —         $ 39,152      $ 89,606       $ —        $ 128,758   

Salaries and benefits payable

     —           23,654        36,439         —          60,093   

Accrued interest payable

     10,028         (3,218     3,218         —          10,028   

Medical claims payable

     —           —          167,435         —          167,435   

Other accrued expenses and current liabilities

     —           56,366        51,103         —          107,469   

Current portion of long-term debt, capital leases and other long-term obligations

     10,071         13,846        29,087         (29,087     23,917   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total current liabilities

     20,099         129,800        376,888         (29,087     497,700   

Long-term debt, capital leases and other long-term obligations

     1,808,126         30,079        619,666         (619,666     1,838,205   

Deferred income taxes

     97,693         —          —           —          97,693   

Other long-term liabilities

     —           93,773        1,015         —          94,788   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities

     1,925,918         253,652        997,569         (648,753     2,528,386   

Non-controlling interests with redemption rights

     —           113,511        —           —          113,511   

Equity

            

Member’s equity

     65,501         189,274        1,128,828         (1,318,102     65,501   

Non-controlling interests

     —           8,386        6,564         —          14,950   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total equity

     65,501         197,660        1,135,392         (1,318,102     80,451   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 1,991,419       $ 564,823      $ 2,132,961       $ (1,966,855   $ 2,722,348   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

23


Table of Contents

IASIS Healthcare LLC

Condensed Consolidating Balance Sheet

September 30, 2015

(In thousands)

 

     Parent Issuer      Subsidiary
Guarantors
    Subsidiary
Non-Guarantors
     Eliminations     Condensed
Consolidated
 
Assets             

Current assets

            

Cash and cash equivalents

   $ —        $ 340,052      $ 38,461       $ —       $ 378,513   

Accounts receivable, net

     —          55,370        262,359         —         317,729   

Inventories

     —          14,829        47,764         —         62,593   

Deferred income taxes

     2,645         —         —          —         2,645   

Prepaid expenses and other current assets

     —          48,914        151,641         —         200,555   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total current assets

     2,645         459,165        500,225         —         962,035   

Property and equipment, net

     —          258,788        635,978         —         894,766   

Intercompany

     —          (199,017     199,017         —         —    

Net investment in and advances to subsidiaries

     2,061,270         —         —          (2,061,270     —    

Goodwill

     7,407         66,566        747,366         —         821,339   

Other intangible assets, net

     —          7,896        12,000         —         19,896   

Other assets, net

     16,683         22,670        16,243         —         55,596   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total assets

   $ 2,088,005       $ 616,068      $ 2,110,829       $ (2,061,270   $ 2,753,632   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Liabilities and Equity

            

Current liabilities

            

Accounts payable

   $ —        $ 44,820      $ 86,332       $ —       $ 131,152   

Salaries and benefits payable

     —          36,858        43,975         —         80,833   

Accrued interest payable

     26,896         (3,223     3,223         —         26,896   

Medical claims payable

     —          —         104,296         —         104,296   

Other accrued expenses and current liabilities

     —          44,498        53,826         —         98,324   

Current portion of long-term debt, capital leases and other long-term obligations

     10,071         1,745        22,286         (22,286     11,816   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total current liabilities

     36,967         124,698        313,938         (22,286     453,317   

Long-term debt, capital leases and other long-term obligations

     1,814,714         28,000        631,663         (631,663     1,842,714   

Deferred income taxes

     118,477         —         —          —         118,477   

Other long-term liabilities

     —          94,526        1,027         —         95,553   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities

     1,970,158         247,224        946,628         (653,949     2,510,061   

Non-controlling interests with redemption rights

     —          114,922        —          —         114,922   

Equity

            

Member’s equity

     117,847         245,520        1,161,801         (1,407,321     117,847   

Non-controlling interests

     —          8,402        2,400         —         10,802   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total equity

     117,847         253,922        1,164,201         (1,407,321     128,649   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 2,088,005       $ 616,068      $ 2,110,829       $ (2,061,270   $ 2,753,632   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

24


Table of Contents

IASIS Healthcare LLC

Condensed Consolidating Statement of Operations

For the Quarter Ended June 30, 2016 (unaudited)

(In thousands)

 

     Parent Issuer     Subsidiary
Guarantors
    Subsidiary
Non-Guarantors
    Eliminations     Condensed
Consolidated
 

Revenues

          

Acute care revenue before provision for bad debts

   $ —        $ 134,410      $ 453,584      $ (4,399   $ 583,595   

Less: Provision for bad debts

     —          (13,298     (80,995     —          (94,293
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Acute care revenue

     —          121,112        372,589        (4,399     489,302   

Premium, service and other revenue

     —          —          324,681        —          324,681   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     —          121,112        697,270        (4,399     813,983   

Costs and expenses

          

Salaries and benefits

     1,877        76,493        166,553        —          244,923   

Supplies

     —          20,972        62,923        —          83,895   

Medical claims

     —          —          307,729        (4,399     303,330   

Rentals and leases

     —          5,124        16,157        —          21,281   

Other operating expenses

     —          21,800        114,320        —          136,120   

Medicare and Medicaid EHR incentives

     —          (346     (921     —          (1,267

Interest expense, net

     32,828        —          12,204        (12,204     32,828   

Depreciation and amortization

     —          9,607        16,875        —          26,482   

Management fees

     1,250        (7,863     7,863        —          1,250   

Equity in earnings of affiliates

     12,266        —          —          (12,266     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     48,221        125,787        703,703        (28,869     848,842   

Earnings (loss) from continuing operations before gain on disposal of assets and income taxes

     (48,221     (4,675     (6,433     24,470        (34,859

Gain on disposal of assets, net

     —          246        2        —          248   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) from continuing operations before income taxes

     (48,221     (4,429     (6,431     24,470        (34,611

Income tax benefit

     (7,584     —          —          —          (7,584
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) from continuing operations

     (40,637     (4,429     (6,431     24,470        (27,027

Earnings (loss) from discontinued operations, net of income taxes

     (166     631        —          —          465   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss)

     (40,803     (3,798     (6,431     24,470        (26,562

Net earnings attributable to non-controlling interests

     —          (2,037     —          —          (2,037
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) attributable to IASIS Healthcare LLC

   $ (40,803   $ (5,835   $ (6,431   $ 24,470      $ (28,599
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

25


Table of Contents

IASIS Healthcare LLC

Condensed Consolidating Statement of Operations

For the Quarter Ended June 30, 2015 (unaudited)

(In thousands)

 

     Parent Issuer     Subsidiary
Guarantors
    Subsidiary
Non-Guarantors
    Eliminations     Condensed
Consolidated
 

Revenues

          

Acute care revenue before provision for bad debts

   $ —       $ 131,058      $ 436,492      $ (4,520   $ 563,030   

Less: Provision for bad debts

     —         (14,638     (73,459     —         (88,097
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Acute care revenue

     —         116,420        363,033        (4,520     474,933   

Premium, service and other revenue

     —         —         211,361        —         211,361   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     —         116,420        574,394        (4,520     686,294   

Costs and expenses

          

Salaries and benefits

     1,231        77,061        150,607        —         228,899   

Supplies

     —         20,750        60,755        —         81,505   

Medical claims

     —         —         176,995        (4,520     172,475   

Rentals and leases

     —         5,843        13,415        —         19,258   

Other operating expenses

     —         27,912        96,483        —         124,395   

Medicare and Medicaid EHR incentives

     —         (651     (1,384     —         (2,035

Interest expense, net

     31,905        —         11,644        (11,644     31,905   

Depreciation and amortization

     —         11,415        14,861        —         26,276   

Management fees

     1,250        (9,132     9,132        —         1,250   

Equity in earnings of affiliates

     (22,573     —         —         22,573        —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     11,813        133,198        532,508        6,409        683,928   

Earnings (loss) from continuing operations before gain on disposal of assets and income taxes

     (11,813     (16,778     41,886        (10,929     2,366   

Gain on disposal of assets, net

     —         7        13        —         20   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) from continuing operations before income taxes

     (11,813     (16,771     41,899        (10,929     2,386   

Income tax expense

     1,018        —         —         —         1,018   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) from continuing operations

     (12,831     (16,771     41,899        (10,929     1,368   

Earnings (loss) from discontinued operations, net of income taxes

     (525     1,609        —         —         1,084   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss)

     (13,356     (15,162     41,899        (10,929     2,452   

Net earnings attributable to non-controlling interests

     —         (4,164     —         —         (4,164
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) attributable to IASIS Healthcare LLC

   $ (13,356   $ (19,326   $ 41,899      $ (10,929   $ (1,712
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

26


Table of Contents

IASIS Healthcare LLC

Condensed Consolidating Statement of Operations

For the Nine Months Ended June 30, 2016 (unaudited)

(In thousands)

 

     Parent Issuer     Subsidiary
Guarantors
    Subsidiary
Non-Guarantors
    Eliminations     Condensed
Consolidated
 

Revenues

          

Acute care revenue before provision for bad debts

   $ —        $ 400,618      $ 1,375,429      $ (12,857   $ 1,763,190   

Less: Provision for bad debts

     —          (38,987     (246,002     —          (284,989
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Acute care revenue

     —          361,631        1,129,427        (12,857     1,478,201   

Premium, service and other revenue

     —          —          959,917        —          959,917   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     —          361,631        2,089,344        (12,857     2,438,118   

Costs and expenses

          

Salaries and benefits

     5,221        236,656        500,173        —          742,050   

Supplies

     —          62,684        190,175        —          252,859   

Medical claims

     —          —          850,924        (12,857     838,067   

Rentals and leases

     —          15,658        48,923        —          64,581   

Other operating expenses

     —          85,026        328,981        —          414,007   

Medicare and Medicaid EHR incentives

     —          (845     (912     —          (1,757

Interest expense, net

     99,471        —          34,790        (34,790     99,471   

Depreciation and amortization

     —          28,955        50,777        —          79,732   

Management fees

     3,750        (23,561     23,561        —          3,750   

Equity in earnings of affiliates

     (5,406     —          —          5,406        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     103,036        404,573        2,027,392        (42,241     2,492,760   

Earnings (loss) from continuing operations before gain on disposal of assets and income taxes

     (103,036     (42,942     61,952        29,384        (54,642

Gain on disposal of assets, net

     —          604        369        —          973   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) from continuing operations before income taxes

     (103,036     (42,338     62,321        29,384        (53,669

Income tax expense (benefit)

     (14,747     —          1,786        —          (12,961
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) from continuing operations

     (88,289     (42,338     60,535        29,384        (40,708

Earnings (loss) from discontinued operations, net of income taxes

     1,930        (5,351     —          —          (3,421
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss)

     (86,359     (47,689     60,535        29,384        (44,129

Net earnings attributable to non-controlling interests

     —          (7,440     —          —          (7,440
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) attributable to IASIS Healthcare LLC

   $ (86,359   $ (55,129   $ 60,535      $ 29,384      $ (51,569
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

27


Table of Contents

IASIS Healthcare LLC

Condensed Consolidating Statement of Operations

For the Nine Months Ended June 30, 2015 (unaudited)

(in thousands)

 

     Parent Issuer     Subsidiary
Guarantors
    Subsidiary
Non-Guarantors
    Eliminations     Condensed
Consolidated
 

Revenues

          

Acute care revenue before provision for bad debts

   $ —       $ 385,815      $ 1,295,077      $ (12,356   $ 1,668,536   

Less: Provision for bad debts

     —         (38,766     (219,409     —         (258,175
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Acute care revenue

     —         347,049        1,075,668        (12,356     1,410,361   

Premium, service and other revenue

     —         —         642,298        —         642,298   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     —         347,049        1,717,966        (12,356     2,052,659   

Costs and expenses

          

Salaries and benefits

     4,937        236,135        456,026        —         697,098   

Supplies

     —         58,561        183,135        —         241,696   

Medical claims

     —         —         536,862        (12,356     524,506   

Rentals and leases

     —         18,179        38,876        —         57,055   

Other operating expenses

     —         67,251        284,111        —         351,362   

Medicare and Medicaid EHR incentives

     —         (2,115     (5,570     —         (7,685

Interest expense, net

     96,122        —         35,866        (35,866     96,122   

Depreciation and amortization

     —         25,828        44,634        —         70,462   

Management fees

     3,750        (27,079     27,079        —         3,750   

Equity in earnings of affiliates

     (72,324     —         —         72,324        —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     32,485        376,760        1,601,019        24,102        2,034,366   

Earnings (loss) from continuing operations before gain (loss) on disposal of assets and income taxes

     (32,485     (29,711     116,947        (36,458     18,293   

Gain (loss) on disposal of assets, net

     —         (519     85        —         (434
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) from continuing operations before income taxes

     (32,485     (30,230     117,032        (36,458     17,859   

Income tax expense

     8,111        —         —         —         8,111   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) from continuing operations

     (40,596     (30,230     117,032        (36,458     9,748   

Earnings (loss) from discontinued operations, net of income taxes

     3,042        (5,264     —         —         (2,222
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss)

     (37,554     (35,494     117,032        (36,458     7,526   

Net earnings attributable to non-controlling interests

     —         (9,214     —         —         (9,214
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) attributable to IASIS Healthcare LLC

   $ (37,554   $ (44,708   $ 117,032      $ (36,458   $ (1,688
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

28


Table of Contents

IASIS Healthcare LLC

Condensed Consolidating Statement of Comprehensive Income (Loss)

For the Quarter Ended June 30, 2016 (unaudited)

(In thousands)

 

     Parent Issuer     Subsidiary
Guarantors
    Subsidiary
Non-Guarantors
    Eliminations      Condensed
Consolidated
 

Net earnings (loss)

   $ (40,803   $ (3,798   $ (6,431   $ 24,470       $ (26,562

Other comprehensive income

           

Change in fair value of highly effective interest rate hedges

     494        —          —          —           494   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Other comprehensive income before income taxes

     494        —          —          —           494   

Change in income tax expense

     (181     —          —          —           (181
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Other comprehensive income, net of income taxes

     313        —          —          —           313   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Comprehensive income (loss)

     (40,490     (3,798     (6,431     24,470         (26,249

Net earnings attributable to non-controlling interests

     —          (2,037     —          —           (2,037
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Comprehensive income (loss) attributable to IASIS Healthcare LLC

   $ (40,490   $ (5,835   $ (6,431   $ 24,470       $ (28,286
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

29


Table of Contents

IASIS Healthcare LLC

Condensed Consolidating Statement of Comprehensive Income (Loss)

For the Quarter Ended June 30, 2015 (unaudited)

(In thousands)

 

     Parent Issuer     Subsidiary
Guarantors
    Subsidiary
Non-Guarantors
     Eliminations     Condensed
Consolidated
 

Net earnings (loss)

   $ (13,356   $ (15,162   $ 41,899       $ (10,929   $ 2,452   

Other comprehensive income

           

Change in fair value of highly effective interest rate hedges

     573        —         —          —         573   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Other comprehensive income before income taxes

     573        —         —          —         573   

Change in income tax expense

     (209     —         —          —         (209
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Other comprehensive income, net of income taxes

     364        —         —          —         364   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income (loss)

     (12,992     (15,162     41,899         (10,929     2,816   

Net earnings attributable to non-controlling interests

     —         (4,164     —          —         (4,164
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income (loss) attributable to IASIS Healthcare LLC

   $ (12,992   $ (19,326   $ 41,899       $ (10,929   $ (1,348
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

30


Table of Contents

IASIS Healthcare LLC

Condensed Consolidating Statement of Comprehensive Income (Loss)

For the Nine Months Ended June 30, 2016 (unaudited)

(In thousands)

 

     Parent Issuer     Subsidiary
Guarantors
    Subsidiary
Non-Guarantors
     Eliminations      Condensed
Consolidated
 

Net earnings (loss)

   $ (86,359   $ (47,689   $ 60,535       $ 29,384       $ (44,129

Other comprehensive income

            

Change in fair value of highly effective interest rate hedges

     1,470        —          —           —           1,470   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Other comprehensive income before income taxes

     1,470        —          —           —           1,470   

Change in income tax expense

     (537     —          —           —           (537
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Other comprehensive income, net of income taxes

     933        —          —           —           933   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Comprehensive income (loss)

     (85,426     (47,689     60,535         29,384         (43,196

Net earnings attributable to non-controlling interests

     —          (7,440     —           —           (7,440
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Comprehensive income (loss) attributable to IASIS Healthcare LLC

   $ (85,426   $ (55,129   $ 60,535       $ 29,384       $ (50,636
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

31


Table of Contents

IASIS Healthcare LLC

Condensed Consolidating Statement of Comprehensive Income (Loss)

For the Nine Months Ended June 30, 2015 (unaudited)

(In thousands)

 

     Parent Issuer     Subsidiary
Guarantors
    Subsidiary
Non-Guarantors
     Eliminations     Condensed
Consolidated
 

Net earnings (loss)

   $ (37,554   $ (35,494   $ 117,032       $ (36,458   $ 7,526   

Other comprehensive income

           

Change in fair value of highly effective interest rate hedges

     1,318        —         —          —         1,318   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Other comprehensive income before income taxes

     1,318        —         —          —         1,318   

Change in income tax expense

     (482     —         —          —         (482
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Other comprehensive income, net of income taxes

     836        —         —          —         836   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income (loss)

     (36,718     (35,494     117,032         (36,458     8,362   

Net earnings attributable to non-controlling interests

     —         (9,214     —          —         (9,214
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income (loss) attributable to IASIS Healthcare LLC

   $ (36,718   $ (44,708   $ 117,032       $ (36,458   $ (852
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

32


Table of Contents

IASIS Healthcare LLC

Condensed Consolidating Statement of Cash Flows

For the Nine Months Ended June 30, 2016 (unaudited)

(In thousands)

 

     Parent Issuer     Subsidiary
Guarantors
    Subsidiary
Non-Guarantors
    Eliminations     Condensed
Consolidated
 

Cash flows from operating activities

          

Net earnings (loss)

   $ (86,359   $ (47,689   $ 60,535      $ 29,384      $ (44,129

Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities:

          

Depreciation and amortization

     —          28,955        50,777        —          79,732   

Amortization of loan costs

     5,947        —          —          —          5,947   

Amortization of deferred gain on sale-leaseback transaction

     (1,872     —          —          —          (1,872

Change in physician minimum revenue guarantees

     —          63        2,546        —          2,609   

Stock-based compensation

     5,221        —          —          —          5,221   

Deferred income taxes

     (16,694     —          —          —          (16,694

Gain on disposal of assets, net

     —          (604     (369     —          (973

Loss (earnings) from discontinued operations, net

     (1,930     5,351        —          —          3,421   

Equity in earnings of affiliates

     (5,406     —          —          5,406        —     

Changes in operating assets and liabilities, net of the effect of acquisitions and dispositions:

          

Accounts receivable, net

     —          (5,085     (21,633     —          (26,718

Inventories, prepaid expenses and other current assets

     —          10,003        25,951        —          35,954   

Accounts payable, other accrued expenses and other accrued liabilities

     (18,838     (9,243     57,038        —          28,957   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities — continuing operations

     (119,931     (18,249     174,845        34,790        71,455   

Net cash provided by operating activities — discontinued operations

     —          2,368        —          —          2,368   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (119,931     (15,881     174,845        34,790        73,823   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities

          

Purchases of property and equipment

     —          (63,145     (31,533     —          (94,678

Cash paid for acquisitions, net

     —          —          (2,311     —          (2,311

Cash paid related to divestitures

     —          (5,869     —          —          (5,869

Proceeds from sale of assets

     —          596        47        —          643   

Change in other assets, net

     —          (1,807     1,382        —          (425
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     —          (70,225     (32,415     —          (102,640
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities

          

Payment of long-term debt, capital leases and other long-term obligations

     (15,341     (744     (853     —          (16,938

Payment of debt financing costs

     (5,179     —          —          —          (5,179

Distributions to non-controlling interests

     —          —          (8,005     —          (8,005

Cash paid for the repurchase of non-controlling interests

     —          —          (1,411     —          (1,411

Change in intercompany balances with affiliates, net

     140,451        (26,359     (79,302     (34,790     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     119,931        (27,103     (89,571     (34,790     (31,533
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in cash and cash equivalents

     —          (113,209     52,859        —          (60,350

Cash and cash equivalents at beginning of period

     —          340,052        38,461        —          378,513   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ —        $ 226,843      $ 91,320      $ —        $ 318,163   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

33


Table of Contents

IASIS Healthcare LLC

Condensed Consolidating Statement of Cash Flows

For the Nine Months Ended June 30, 2015 (unaudited)

(In thousands)

 

     Parent Issuer     Subsidiary
Guarantors
    Subsidiary
Non-Guarantors
    Eliminations     Condensed
Consolidated
 

Cash flows from operating activities

          

Net earnings (loss)

   $ (37,554   $ (35,494   $ 117,032      $ (36,458   $ 7,526   

Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities:

          

Depreciation and amortization

     —         25,828        44,634        —         70,462   

Amortization of loan costs

     5,913        —         —         —         5,913   

Amortization of deferred gain on sale-leaseback transaction

     (1,872     —         —         —         (1,872

Change in physician minimum revenue guarantees

     —         147        2,705        —         2,852   

Stock-based compensation

     4,937        —         —         —         4,937   

Deferred income taxes

     5,935        —         —         —         5,935   

Loss (gain) on disposal of assets, net

     —         519        (85     —         434   

Loss (earnings) from discontinued operations, net

     (3,042     5,264        —         —         2,222   

Equity in earnings of affiliates

     (72,324     —         —         72,324        —    

Changes in operating assets and liabilities, net of the effect of acquisitions and dispositions:

          

Accounts receivable, net

     —         1,735        (19,841     —         (18,106

Inventories, prepaid expenses and other current assets

     —         (19,658     4,380        —         (15,278

Accounts payable, other accrued expenses and other accrued liabilities

     (20,463     (6,994     19,521        —         (7,936
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities — continuing operations

     (118,470     (28,653     168,346        35,866        57,089   

Net cash provided by operating activities — discontinued operations

     —         2,919        —         —         2,919   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (118,470     (25,734     168,346        35,866        60,008   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities

          

Purchases of property and equipment

     —         (56,063     (50,541     —         (106,604

Cash paid for acquisitions, net

     —         (1,280     (10,044     —         (11,324

Cash received related to divestiture

     —         42,633        —         —         42,633   

Proceeds from sale of assets

     —         256        94        —         350   

Change in other assets, net

     —         (155     (986     —         (1,141
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities — continuing operations

     —         (14,609     (61,477     —         (76,086

Net cash used in investing activities — discontinued operations

     —         (341     —         —         (341
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     —         (14,950     (61,477     —         (76,427
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities

          

Payment of long-term debt, capital leases and other long-term obligations

     (7,652     (469     (1,680     —         (9,801

Distributions to non-controlling interests

     —         (6,306     —         —         (6,306

Cash paid for the repurchase of non-controlling interests

     —         (1,153     135        —         (1,018

Change in intercompany balances with affiliates, net

     126,122        (3,464     (86,792     (35,866     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities — continuing operations

     118,470        (11,392     (88,337     (35,866     (17,125

Net cash used in financing activities — discontinued operations

     —         (6     —         —         (6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     118,470        (11,398     (88,337     (35,866     (17,131
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in cash and cash equivalents

     —         (52,082     18,532        —         (33,550

Cash and cash equivalents at beginning of period

     —         325,555        15,625        —         341,180   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ —       $ 273,473      $ 34,157      $ —       $ 307,630   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

34


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

The following discussion and analysis of financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements, the notes to our unaudited condensed consolidated financial statements and the other financial information appearing elsewhere in this Quarterly Report on Form 10-Q (this “Report”). Data for the quarters and nine months ended June 30, 2016 and 2015, have been derived from our unaudited condensed consolidated financial statements. In this Report, unless otherwise stated or indicated by context, references to the “Company,” “IASIS,” “we,” “our” or “us” refer to IASIS Healthcare LLC and its affiliates. Unless the context otherwise implies, the term “affiliates” means direct and indirect subsidiaries of IASIS Healthcare LLC and partnerships and joint ventures in which such subsidiaries are partners. The terms “facilities” or “hospitals” refer to entities owned and operated by affiliates of IASIS and the term “employees” refers to employees of affiliates of IASIS. References herein to “IAS” are to IASIS Healthcare Corporation, our parent company.

FORWARD-LOOKING STATEMENTS

Our disclosure and analysis in this Report contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which involve risks and uncertainties. Forward-looking statements include all statements that do not relate solely to historical or current facts, and you can identify forward-looking statements because they contain words such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates,” “projects,” “continue,” “initiative,” or “anticipates” or similar expressions that concern our prospects, objectives, strategies, plans or intentions. These forward-looking statements are subject to risks and uncertainties that may change at any time, and, therefore, our actual results may differ materially from those expected. While we believe our assumptions are reasonable, 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 the control of the Company. These factors include, but are not limited to:

 

    the effects of changes in governmental healthcare programs, principally Medicare, Medicaid and other federal healthcare programs and Medicaid supplemental or waiver programs, including limitations or reductions of levels of payments that our hospitals receive under such programs;

 

    the effects related to implementation or possible amendment of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the “Health Reform Law”), the possible enactment of additional federal or state healthcare reforms and the outcome of court challenges to such laws and other federal, state or local laws or regulations affecting the healthcare industry;

 

    the ability of Health Choice Arizona, Inc. and related entities (“Health Choice” or the “Plan”), our managed care business, to effectively manage costs of care, maintain its governmental contracts and achieve its service line expansion strategies;

 

    the effects of a shift in volume or payor mix from commercial managed care payors to self-pay and Medicaid;

 

    increases in the amount, and risk of collectability, of uninsured accounts and deductibles and copayment amounts for insured accounts;

 

    a reduction in or withholding of government-sponsored supplemental payments to our hospitals;

 

    the effects of any inability to retain and negotiate reasonable contracts with managed care plans or if insured patients switch from traditional commercial insurance plans to health insurance exchange (“Exchange”) plans;

 

    consolidation among managed care organizations, which may reduce our ability to negotiate favorable contracts with such payors;

 

    industry trends towards value-based purchasing and narrow networks and related competitive challenges to our hospitals;

 

    controls imposed by Medicare and third-party payors to reduce admissions and length of stay, which negatively impact healthcare provider reimbursement;

 

    competition to attract and retain quality physicians, nurses, technicians and other personnel;

 

    the generally competitive nature of the healthcare industry;

 

    the possibility of health pandemics and the related impacts on our operations and financial results;

 

    a failure of our information systems or breach of our cybersecurity protections;

 

    the costs and operational challenges associated with information technology and medical equipment upgrades;

 

    challenges associated with the implementation of electronic health records (“EHRs”) and coding systems;

 

35


Table of Contents
    compliance with extensive healthcare industry laws, regulations and investigations, including those with respect to patient privacy and physician-owned hospitals;

 

    reliance upon services provided by third-party vendors;

 

    the effects of local or national economic downturns on our business lines;

 

    risks associated with our acquisition and development strategy, including liabilities assumed in acquisitions of facilities and physician practices and our need to effectively integrate acquired companies into our existing operations;

 

    increased lease rates and amended lease terms at certain of our facilities in connection with sale-leaseback transactions;

 

    risks associated with environmental, health and safety laws;

 

    risks associated with labor laws;

 

    potential adverse accounting impacts associated with goodwill carrying value;

 

    our dependence upon the services of key executive management personnel;

 

    our ability to maintain adequate internal controls over our financial and management systems;

 

    risks related to our indebtedness and capital structure; and

 

    other risk factors described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2015, filed with the Securities and Exchange Commission (the “SEC”) on December 22, 2015 (our “2015 Form 10-K”), and in our other public filings with the SEC.

Given these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. Any forward-looking statement that we make in this Report speaks only as of the date of such statement, and we undertake no obligation to update any forward-looking statements or to publicly announce the results of any revisions to any of those statements to reflect future events or developments. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless specifically expressed as such, and should only be viewed as historical data.

EXECUTIVE OVERVIEW

We are a healthcare services company delivering high-quality, cost-effective healthcare through a broad and differentiated set of capabilities and assets that includes acute care hospitals with related patient access points, and a diversified and growing managed care risk platform (“risk platform”). Our business model is centered on deploying our acute care expertise and risk platform, either separately or on an integrated basis to manage population health, integrate the delivery and payment of healthcare services and ultimately expand our total market opportunities within our existing and new geographic markets. Our business consists of two operating segments: (i) our acute care operations, which, as of June 30, 2016, included 17 acute care hospitals, one behavioral hospital and multiple other access points, including 146 physician clinics, multiple outpatient surgical units, imaging centers, and investments in urgent care centers and on-site employer-based clinics, and (ii) our managed care operations, comprised of our diversified and growing risk platform, Health Choice, which operates managed Medicaid and Medicare health plans, an Exchange plan and a management services organization (“MSO”) that provides management and administrative services to third-party insurers, as well as accountable care networks in conjunction with our acute care facilities.

Acute Care Operations

As of June 30, 2016, we owned or leased 17 acute care hospital facilities and one behavioral health hospital facility with a total of 3,661 licensed beds, several outpatient service facilities and 146 physician clinics.

We operate our hospitals with a strong community focus by offering and developing healthcare services targeted to the needs of the markets we serve, promoting strong relationships with physicians and working with local managed care plans to develop quality and outcome driven, cost-efficient and innovative reimbursement models. Our major acute care geographic markets include Salt Lake City, Utah; Phoenix, Arizona; six cities in Texas, including Houston, San Antonio and Odessa; and West Monroe, Louisiana.

Since our Company was founded in 1998, we believe we have developed a reputation for operating hospitals that deliver high quality care in our markets at rates that are often more affordable than many other hospitals in our markets with larger local market share than us. Our corporate and divisional infrastructure allows us to leverage savings in information technology services, revenue cycle, hospital supplies, and labor force costs.

 

36


Table of Contents

Managed Care Operations

Health Choice, headquartered in Phoenix, Arizona, began providing managed Medicaid services under contract with the Arizona Health Care Cost Containment System (“AHCCCS”) in 1990, making it one of the nation’s first Medicaid managed care plans. Under our ownership beginning in 1999, Health Choice has evolved into a managed care organization and insurer which, while it has grown its core managed Medicaid business, has expanded to serve certain Medicare Advantage and Exchange members and is utilizing its population health management expertise to offer MSO-related services to other external parties. In collaboration with our hospitals and affiliated physicians in certain of our markets, Health Choice also manages accountable care networks.

Health Choice represents one of our Company’s key strategic assets, which we believe provides the Company with the ability to engage in innovative value-based purchasing initiatives and opportunities. Its leadership team has considerable experience in population health management, physician relations and network development. We believe Health Choice also deploys state of the art disease management and claims processing technology. In light of the current healthcare industry trends toward integrated delivery and clinical integration, we are seeking to use Health Choice’s expertise and technology in the management of the accountable care networks we offer to other health plans.

Effective October 1, 2015, Health Choice’s joint venture, Health Choice Integrated Care LLC (“HCIC”) entered into a contract with the Arizona Department of Health Services (“ADHS”). The contract has an initial term of three years and includes two additional two-year renewal options that can be exercised at the discretion of ADHS. The contract is terminable by ADHS following HCIC’s failure to carry out a material contract term, condition or obligation.

As of June 30, 2016, Health Choice’s related entities managed healthcare services for 665,700 covered lives through multiple health plans, accountable care networks, MSO-related services and other managed care solutions. These include 264,700 managed Medicaid lives served primarily through Health Choice’s core health plan business in Arizona, 226,900 HCIC plan members, 9,500 Medicare Advantage members eligible for both Medicare and Medicaid (“Duals”), 12,200 Exchange lives, 99,300 MSO lives and 80,400 lives attributed to our accountable care networks from multiple payors whose care is managed by our network providers, of which 27,300 lives are members in Health Choice’s managed Medicaid and Exchange plans.

Recent Developments

Health Choice to Exit Arizona Marketplace Exchange Business. As of January 1, 2017, Health Choice will be exiting the Arizona marketplace exchange. Our decision to exit the exchange was driven by the instability of the Health Reform marketplace, uncertainty and lack of funding around government premium stabilization programs, and the overall nature of the related regulatory environment. During the quarter and nine months ended June 30, 2016, our managed care division incurred losses related to its Arizona marketplace exchange product totaling $8.8 million and $8.1 million, respectively, compared to income of $0.5 million and $0.2 million in the same prior year periods. Included in these losses for the quarter and nine months ended June 30, 2016, are $8.9 million of losses related to risk adjustment transfer settlements resulting from CMS’ final risk scoring.

Health Choice Integrated Behavioral Health Joint Venture. On October 1, 2015, Health Choice, together with the Northern Arizona Behavioral Health Authority (“NARBHA”), its joint venture partner, began operating an integrated acute and behavioral health plan in Northern Arizona. As of June 30, 2016, the joint venture, HCIC provided standalone behavioral health benefits for 226,900 plan members. We believe that, in the future, states other than Arizona may adopt this model of integration of acute and behavioral health benefits under one managed care organization, such as HCIC. Health Choice owns 52% of the joint venture and NARBHA owns the remaining 48%.

Regulatory Matter. On January 14, 2016, CMS entered into a Systems Improvement Agreement (“SIA”), with our Houston hospital, St. Joseph Medical Center (“SJMC”). CMS agreed to stay the scheduled termination of SJMC’s Medicare Provider Agreement during the pendency of the SIA, an action which resulted from surveys of the hospital that identified alleged failures to comply with certain Medicare program conditions of participation. As required by the terms of the SIA, we have retained an independent consultant who conducted a comprehensive review, including analysis of the hospital’s current operations, and developed a remediation plan, which was submitted to and approved by CMS in June 2016. The SIA is scheduled to expire in July 2017, following an on-site survey by CMS, provided that SJMC demonstrates compliance with the Medicare conditions of participation for hospitals. During the quarter and nine months ended June 30, 2016, we have incurred $2.1 million and $6.9 million, respectively, of costs related to the SIA process and operational related improvements.

 

37


Table of Contents

Revenue and Volume Trends

Total revenue for the quarter ended June 30, 2016, increased 18.6% to $814.0 million, compared to $686.3 million in the same prior year quarter. Total revenue for the nine months ended June 30, 2016, increased 18.8% to $2.44 billion, compared to $2.05 billion in the same prior year period. Total revenue is comprised of acute care revenue, which is recorded net of the provision for bad debts, and premium, service and other revenue. Acute care revenue contributed $14.4 million to the increase in total revenue for the quarter ended June 30, 2016, compared to the same prior year quarter, while premium, service and other revenue in our managed care operations contributed $113.3 million to the increase in total revenue compared to the same prior year quarter. Acute care revenue contributed $67.8 million to the increase in total revenue for the nine months ended June 30, 2016, compared to the same prior year period, while premium, service and other revenue in our managed care operations contributed $317.6 million to the increase in total revenue compared to the same prior year period.

Acute Care Revenue

Acute care revenue is comprised of net patient revenue and other revenue. A large percentage of our hospitals’ net patient revenue consists of fixed payment, discounted sources, including Medicare, Medicaid and managed care organizations. Reimbursement for Medicare and Medicaid services are often fixed regardless of the cost incurred or the level of services provided. Similarly, a greater percentage of the managed care companies we contract with reimburse providers on a fixed payment basis regardless of the costs incurred or the level of services provided. Net patient revenue is reported net of discounts and contractual adjustments. The contractual adjustments principally result from differences between the hospitals’ established charges and payment rates under Medicare, Medicaid and various managed care plans. Additionally, discounts and contractual adjustments result from our uninsured discount and charity care programs. Acute care revenue is reported net of the provision for bad debts. Other revenue includes medical office building rental income and other miscellaneous revenue.

For the quarter ended June 30, 2016, admissions increased 0.4% and adjusted admissions increased 1.6%, both compared to the same prior year quarter. Excluding volume at our Houston hospital, for the quarter ended June 30, 2016, admissions increased 1.3% and adjusted admissions increased 2.4%, both compared to the same prior year quarter. For the nine months ended June 30, 2016, admissions decreased 0.2% and adjusted admissions increased 1.8%, both compared to the same prior year period. Excluding volume at our Houston hospital, for the nine months ended June 30, 2016, admissions increased 1.4% and adjusted admissions increased 3.0%, both compared to the same prior year period. For the quarter ended June 30, 2016, our volumes were impacted by an increase in surgeries of 4.6% compared to the same prior year quarter. For the nine months ended June 30, 2016, our volumes were impacted by an increase in surgeries of 5.5% compared to the same prior year period.

The following table provides the sources of our hospitals’ gross patient revenue by payor before discounts, contractual adjustments and the provision for bad debt:

 

     Quarter Ended
June 30,
    Nine Months Ended
June 30,
 
     2016     2015     2016     2015  

Medicare

     26.2     26.0     26.3     26.8

Managed Medicare

     15.8        15.4        15.6        15.2   

Medicaid and managed Medicaid

     20.8        21.1        21.1        21.5   

Managed care and other

     31.9        32.3        31.8        31.2   

Self-pay

     5.3        5.2        5.2        5.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100.0     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

   

 

 

 

 

38


Table of Contents

The following table provides the sources of our hospitals’ net patient revenue by payor before the provision for bad debts:

 

     Quarter Ended
June 30,
    Nine Months Ended
June 30,
 
     2016     2015     2016     2015  

Medicare

     18.3     19.0     18.7     19.8

Managed Medicare

     10.4        10.2        10.4        10.3   

Medicaid and managed Medicaid

     12.1        12.3        12.3        12.6   

Managed care and other

     43.8        43.7        43.5        42.6   

Self-pay

     15.4        14.8        15.1        14.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100.0     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Net patient revenue per adjusted admission, which includes the impact of the provision for bad debts, increased 1.1% and 2.7%, respectively, for the quarter and nine months ended June 30, 2016, both compared to the same prior year periods.

See “Item 1 — Business — Sources of Revenue — Acute Care Revenue” and “Item 1 — Business — Government Regulation and Other Factors” included in our 2015 Form 10-K for a description of the types of payments we receive for services provided to patients enrolled in the traditional Medicare plan, managed Medicare plans, Medicaid plans, managed Medicaid plans and managed care plans. In those sections, we also discussed the unique reimbursement features of the traditional Medicare plan, including the annual Medicare regulatory updates published by CMS that impact reimbursement rates for services provided under the plan. The future potential impact to reimbursement for certain of these payors under the Health Reform Law is also discussed in such Annual Report on Form 10-K.

Premium, Service and Other Revenue

Premium, service and other revenue generated by our managed care operations represented 39.9% and 39.4% of our total revenue for the quarter and nine months ended June 30, 2016, respectively, compared to 30.8% and 31.3% in the same prior year periods. The increase in the percentage of revenue derived from our managed care operations was due primarily to a 70.7% increase in total lives served across all product lines, which included the addition of 226,900 new members served by HCIC, our joint venture providing integrated acute and behavioral health benefits primarily to the people of Northern Arizona. In addition, lives in our Exchange plan increased to 12,200 at June 30, 2016, compared to 6,300 members at June 30, 2015.

Health Choice contracts with state Medicaid programs in Arizona and Utah to provide specified health services to qualified Medicaid enrollees through contracted healthcare providers. Most of its premium revenue is derived through a contract with AHCCCS, the state agency that administers Arizona’s Medicaid program. The contract requires Health Choice to arrange for healthcare services for enrolled Medicaid patients in exchange for fixed monthly premiums, based upon negotiated per capita member rates, and supplemental payments from AHCCCS. Premium revenue includes adjustments to revenue related to the program settlement process for the Arizona managed Medicaid plan under the related state contract. This program settlement process reconciles estimated amounts due to or from the state based on contractually mandated limits on profits and losses. Although estimates of future program settlement amounts are recorded in current periods, the program settlement process typically occurs 18 months post-plan year, when actual (rather than projected) claims and member eligibility data become available and a net settlement amount is determined either due to or from the state. Adjustments to the estimates of future program settlement amounts are recorded as a component of premium revenue. During the nine months ended June 30, 2016, we recognized $3.9 million in reductions to premium revenue associated with the final settlement of certain amounts related to the previous contract years, compared to an increase in premium revenue of $1.1 million during both the quarter and nine months ended June 30, 2015.

Health Choice also contracts with CMS to provide coverage as a Medicare Advantage Prescription Drug (“MAPD”) Special Needs Plan (“Plan”). This contract allows Health Choice to offer Medicare and Part D drug benefit coverage to new and existing dual-eligible members (i.e., those that are eligible for Medicare and Medicaid). In accordance with CMS regulations, SNPs are now expected to meet additional requirements, including requirements relating to model of care, cost-sharing, disclosure of information and reporting of quality measures.

One notable provision of the Health Reform Law is the annual health insurer fee (“HIF”) that applies to most health plans, including commercial health plans and Medicaid managed care plans like Health Choice. While characterized as a “fee” in the text of the Health Reform Law, the intent of Congress was to impose a broad based health insurance industry excise tax, with the understanding that the tax could be passed on to consumers, most likely through higher commercial insurance premiums. However, because Medicaid is a government-funded program, Medicaid health plans have no alternative but to look to their respective state partners for payment to offset the impact of this tax. Arizona has agreed to reimburse all of the managed Medicaid plans, for the economic impact of this fee. In addition to the reimbursement of the fee, the state of Arizona has agreed to reimburse insurers for the impact resulting from these fees being treated as non-deductible for income tax purposes. For the quarter and nine months ended June 30, 2016, we recognized expense for the HIF totaling $4.1 million and $11.5 million, respectively, compared to $2.9 million and $8.8 million in the same prior year periods. This expense was offset by expected reimbursement from the state of Arizona of $5.8 million and $15.5 million, respectively, compared to $3.9 million and $11.5 million in the same prior year periods. As a result of the Consolidated Appropriations Act of 2016, health insurers have been provided a moratorium on the payment of the HIF for calendar year 2017.

 

39


Table of Contents

Other Industry Items Impacting Our Company

The following section discusses updates to trends discussed in our 2015 Form 10-K that we believe are significant factors in our current and/or future operating results and cash flows. Certain of these trends apply to the entire acute care hospital and managed care industries, while others may apply to us more specifically. These trends could be short-term in nature or could require long-term attention and resources. While these trends may involve certain factors that are outside of our control, the extent to which these trends affect our hospitals and health plan operations and our ability to manage the impact of these trends play vital roles in our current and future success. In many cases, we are unable to predict what impact, if any, these trends will have on us.

State Medicaid Budgets

In recent years, the states in which we operate have experienced budget constraints as a result of increased costs and lower than expected tax collections. Health and human services programs, including Medicaid and similar programs, represent a significant portion of state budgets. The states in which we operate responded to these budget concerns by decreasing funding for Medicaid and other healthcare programs or by making structural changes that resulted in a reduction in hospital reimbursement, as well as by imposing more restrictive Medicaid eligibility requirements. In addition, many states have received waivers from CMS in order to implement or expand managed Medicaid programs.

Texas

Currently, Texas is operating under a five-year Medicaid Transformation Waiver that: (1) allows Texas to expand its Medicaid managed care program while preserving hospital funding; (2) provides incentive payments for improvements in healthcare delivery; and (3) directs more funding to hospitals that serve large numbers of uninsured patients. CMS has agreed to extend the Texas waiver program and maintain its current funding through December 2017. We cannot predict whether the Texas Medicaid waiver program will be further extended or continue in its current form, nor can we guarantee that revenues recognized from the program will not decrease.

All of our acute care hospitals in Texas currently receive supplemental Medicaid reimbursement, including reimbursement from programs for participating private hospitals that enter into indigent care affiliation agreements with public hospitals or county governments in the state of Texas. Under the CMS-approved programs, affiliated hospitals, including our Texas hospitals, have expanded the community healthcare safety net by providing indigent healthcare services. Revenue recognized under these Texas private supplemental Medicaid reimbursement programs, including amounts recognized under the Texas Medicaid Disproportionate Share Hospital program (“Texas Medicaid DSH”) for the quarters and nine months ended June 30, 2016 and 2015, respectively, was $24.9 million and $83.4 million, respectively, compared to $29.5 million and $79.9 million in the same prior year periods. Under the Medicaid waiver, funds are distributed to participating hospitals based upon both the costs associated with providing care to individuals without third party coverage and the investment made to support coordinating care and quality improvements that transform the local communities’ care delivery systems. The responsibility to coordinate and develop plans that address the concerns of the local delivery care systems, including improved access, quality, cost effectiveness and coordination is controlled primarily by public hospitals or local government entities that serve the surrounding geographic areas. Complexities of the underlying methodologies in determining the funding for the state’s Medicaid supplemental reimbursement programs, along with a lack of sufficient resources at the Texas Health and Human Services Commission to administer the programs, has historically resulted in delays related to reimbursements. However, during 2016, timing of reimbursement under these programs has improved. As of June 30, 2016 and September 30, 2015, we had $41.6 million and $77.6 million, respectively, in receivables due to our Texas hospitals in connection with these supplemental reimbursement programs, which includes $2.7 million of deferred revenue at June 30, 2016 and a $20.2 million receivable, respectively, of amounts related to Texas Medicaid DSH.

 

40


Table of Contents

Arizona

Effective January 1, 2014, Arizona expanded its Medicaid program under the Health Reform Law, which includes increased eligibility for adults, children and pregnant women, and the restoration of eligibility to childless adults that had previously been eliminated. As a result of the Medicaid expansion and of the Plan’s increase in total coverage area under its most recent AHCCCS contract, enrollment under Health Choice’s Medicaid product line continues to increase, as reflected by an 8.4% increase as of June 30, 2016, compared to the same prior year period. This increase in enrollment is mostly attributable to certain higher cost risk groups, including childless adults, and new members with higher cost conditions. In addition, in connection with the expanded Medicaid coverage, the state implemented a provider assessment to fund a portion of the expanded eligibility related to the childless adult population. During the quarter and nine months ended June 30, 2016, we incurred $2.1 million and $6.4 million, respectively, in provider fee assessments, compared to $2.9 million and $7.2 million in the same prior year periods.

Further, while the Arizona Medicaid expansion became effective on January 1, 2014, a lawsuit filed by several state lawmakers has challenged the legality of a provider fee assessed to all providers and used to help pay for Arizona’s Medicaid expansion. On August 26, 2015, the Arizona State Superior Court upheld the legality of the provider fee, thus preserving the existing funding for Medicaid expansion in Arizona. The plaintiffs are appealing this decision. A successful appeal, invalidating the provider fee used to help fund Arizona’s Medicaid expansion, may result in the loss of certain funding for the state’s Medicaid program, which could potentially result in changes that restrict eligibility and increase the number of uninsured individuals, therefore, adversely affecting both our acute care and managed care operations in Arizona.

Arizona’s Medicaid expansion and Health Choice’s related increase in enrolled members and premium revenue, followed a period of several years during which AHCCCS tightened Medicaid eligibility standards in Arizona and decreased capitation rates paid to managed Medicaid contractors, reflecting state government budgetary pressures and a struggling state economy. While the expansion of Arizona’s Medicaid program has positively impacted both our acute care and managed care operations, this has been partially mitigated by the cost associated with the provider fee assessments.

Louisiana

On June 1, 2016, the state of Louisiana enacted an expansion of its Medicaid program under the Health Reform Law. Under the expansion program, residents with incomes up to 138% of the federal poverty level will be eligible for enrollment, with coverage effective July 1, 2016. The state expects approximately 375,000 people to enroll as a result of the expanded Medicaid program. While we anticipate that our Louisiana hospital will benefit from the expanded Medicaid program, we are unable to predict the outcome or its impact on the results of our operations.

Uncompensated Care

While the overall amount of uncompensated care, including discounts to the uninsured, bad debts and charity care, we deliver to the communities we serve has declined since the implementation of the Health Reform Law, we have recently experienced increases in uncompensated care in the quarter and nine months ended June 30, 2016, as a result of the factors set forth below. During the quarter and nine months ended June 30, 2016, our uncompensated care as a percentage of acute care revenue was 20.8% and 20.6%, respectively, compared to 20.3% and 20.4% in the same prior year periods. We believe that the increase in uncompensated care during the quarter ended June 30, 2016, is due, in large part, to an increase in self-pay admissions, along with the growth of Exchange and managed care plans with higher deductibles and co-pays and the decrease in collections of such higher patient related balances. Additionally, while we continue to experience reductions in Medicare DSH reimbursement in connection with funding for the Health Reform Law, states such as Texas have not expanded coverage under its Medicaid program. As a result, we believe we will continue to experience higher levels of uncompensated care in our Texas markets until the state implements meaningful Medicaid expansion. During the quarter ended June 30, 2016, our self-pay admissions represented 6.2% of our total admissions, compared to 5.9% in the same prior year quarter. During the nine months ended June 30, 2016, our self-pay admissions represented 6.2% of our total admissions, compared to 6.0% in the same prior year period.

If we were to experience continued growth in uninsured and under-insured volume and revenue, our uncompensated care may continue to increase and our results of operations would continue to be adversely affected.

 

41


Table of Contents

The percentages of our insured and uninsured net hospital receivables are summarized as follows:

 

                                                 
     June 30,
2016
    September 30,
2015
 

Insured receivables

     81.1     77.0

Uninsured receivables

     18.9     23.0
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

The percentages of hospital net receivables in summarized aging categories are as follows:

 

                                                 
     June 30,
2016
    September 30,
2015
 

0 to 90 days

     62.6     63.0

91 to 180 days

     19.5     19.1

Over 180 days

     17.9     17.9
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

Two Midnight Rule

In 2013, CMS issued the “two midnight rule,” which revised its longstanding guidance to hospitals and physicians relating to when hospital inpatient admissions are deemed to be reasonable and necessary for payment under Medicare Part A. Under the two midnight rule, in addition to services that are designated as inpatient-only, surgical procedures, diagnostic tests and other treatments provided to Medicare beneficiaries are only payable as inpatient services under Medicare Part A when there is a reasonable expectation that the hospital care is medically necessary and will be required across two midnights, absent unusual circumstances. Stays expected to need fewer than two midnights of hospital care may be payable under Medicare Part A on a case-by-case basis. Quality Improvement Organizations (“QIO”) conduct post-payment reviews of short inpatient stays and refer claim denials to Medicare Administrative Contractors for payment adjustments. In May 2016, CMS temporarily suspended QIO reviews of short inpatient stays to improve standardization of the review process. After CMS authorizes QIOs to resume their reviews, QIOs may refer hospitals to Recovery Audit Contractors based on patterns such as high rates of claims denial after medical review or failure to improve after QIO educational intervention.

The increased scrutiny regarding short-stay admissions by Medicare and other payors has contributed, in part, to the decline in 1-day stays and the increase in observation patients experienced during the last two years. However, we cannot predict the impact on reimbursement of any changes or clarifications by CMS to the two midnight rule or its enforcement, whether by CMS or Congress. Further, there have been several challenges to the two midnight rule, primarily with regard to implementation of the rule itself and payment adjustments associated with the rule.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

A summary of significant accounting policies is disclosed in Note 2 to the consolidated financial statements included in our 2015 Form 10-K. Our critical accounting policies are further described under the caption “Critical Accounting Policies and Estimates” in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2015 Form 10-K. There have been no changes in the nature of our critical accounting policies or the application of those policies since September 30, 2015.

 

42


Table of Contents

SELECTED OPERATING DATA

The following table sets forth certain unaudited operating data from continuing operations for each of the periods presented.

 

     Quarter Ended
June 30,
    Nine Months Ended
June 30,
 
     2016     2015     2016     2015  

Acute care operations (1)

        

Number of hospital facilities at end of period

     18        17        18        17   

Licensed beds at end of period

     3,661        3,644        3,661        3,644   

Average length of stay (days) (2)

     5.0        4.9        5.0        5.0   

Occupancy rates (average beds in service)

     47.3     47.1     47.6     49.3

Admissions (3)

     25,062        24,961        76,470        76,643   

Adjusted admissions (4)

     48,876        48,127        146,171        143,616   

Patient days (5)

     124,878        122,793        378,874        383,983   

Adjusted patient days (4)

     243,538        236,756        724,213        719,518   

Surgeries

     17,285        16,525        51,809        49,107   

Emergency room visits

     107,409        108,380        323,768        324,325   

Net patient revenue per adjusted admission (6)

   $ 9,918      $ 9,808      $ 10,024      $ 9,757   

Outpatient revenue as a % of gross patient revenue

     48.7     48.1     47.7     46.6

Managed care operations

        

Health plan lives (7)

     513,300        260,200        513,300        260,200   

MSO lives (8)

     99,300        97,700        99,300        97,700   

Accountable care network lives (9)

     53,100        32,000        53,100        32,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total lives

     665,700        389,900        665,700        389,900   

Medical loss ratio (10)

     98.2     87.4     91.7     87.4

 

(1) Excludes the impact of our Nevada operations, which are reflected in discontinued operations. Includes St. Luke’s Behavioral Hospital in Phoenix, Arizona.
(2) Represents the average number of days that a patient stayed in our hospitals.
(3) Represents the total number of patients admitted to our hospitals that qualify for inpatient status. Management and investors use this number as a general measure of inpatient volume.
(4) Adjusted admissions and adjusted patient days are general measures of combined inpatient and outpatient volume. We compute adjusted admissions (or adjusted patient days) by multiplying admissions/patient days by gross patient revenue and then dividing that number by gross inpatient revenue.
(5) Represents the number of days our beds were occupied by inpatients over the period.
(6) Includes the impact of the provision for bad debts as a component of revenue.
(7) Represents total lives enrolled across all health plan product lines.
(8) Represents lives served by Health Choice’s MSO that provides management and administrative services to a large national insurer’s Medicaid plan members in the Tampa and “panhandle” regions of Florida.
(9) Represents attributed health plan member lives from other third-party payors for which Health Choice Preferred accountable care networks manage medical care and participating providers and Health Choice share associated financial risks. This excludes 27,300 and 42,900 attributed Health Choice plan member lives as of June 30, 2016 and 2015, respectively.
(10) Represents medical claims expense as a percentage of premium revenue, including claims paid to our hospitals.

 

43


Table of Contents

RESULTS OF OPERATIONS SUMMARY

Consolidated

The following table sets forth, for the periods presented, the results of our consolidated operations expressed in dollar terms and as a percentage of total revenue. Such information has been derived from our unaudited condensed consolidated statements of operations.

 

    Quarter Ended
June 30, 2016
    Quarter Ended
June 30, 2015
    Nine Months Ended
June 30, 2016
    Nine Months Ended
June 30, 2015
 

($ in thousands):

  Amount     Percentage     Amount     Percentage     Amount     Percentage     Amount     Percentage  

Revenues

               

Acute care revenue before provision for bad debts

  $ 583,595        $ 563,030        $ 1,763,190        $ 1,668,536     

Less: Provision for bad debts

    (94,293       (88,097       (284,989       (258,175  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Acute care revenue

    489,302        60.1     474,933        69.2     1,478,201        60.6     1,410,361        68.7

Premium, service and other revenue

    324,681        39.9     211,361        30.8     959,917        39.4     642,298        31.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    813,983        100.0     686,294        100.0     2,438,118        100.0     2,052,659        100.0

Costs and expenses

               

Salaries and benefits

    244,923        30.1     228,899        33.4     742,050        30.4     697,098        34.0

Supplies

    83,895        10.3     81,505        11.9     252,859        10.4     241,696        11.8

Medical claims

    303,330        37.3     172,475        25.1     838,067        34.4     524,506        25.6

Rentals and leases

    21,281        2.6     19,258        2.8     64,581        2.6     57,055        2.8

Other operating expenses

    136,120        16.7     124,395        18.1     414,007        17.0     351,362        17.1

Medicare and Medicaid EHR incentives

    (1,267     (0.2 %)      (2,035     (0.3 %)      (1,757     (0.1 %)      (7,685     (0.4 %) 

Interest expense, net

    32,828        4.0     31,905        4.6     99,471        4.1     96,122        4.7

Depreciation and amortization

    26,482        3.3     26,276        3.8     79,732        3.3     70,462        3.4

Management fees

    1,250        0.2     1,250        0.2     3,750        0.2     3,750        0.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

    848,842        104.3     683,928        99.7     2,492,760        102.2     2,034,366        99.1

Earnings (loss) from continuing operations before gain (loss) on disposal of assets and income taxes

    (34,859     (4.3 %)      2,366        0.3     (54,642     (2.2 %)      18,293        0.9

Gain (loss) on disposal of assets, net

    248        0.0     20        0.0     973        0.0     (434     (0.0 %) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) from continuing operations before income taxes

    (34,611     (4.3 %)      2,386        0.3     (53,669     (2.2 %)      17,859        0.9

Income tax expense (benefit)

    (7,584     (1.0 %)      1,018        0.1     (12,961     (0.5 %)      8,111        0.4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) from continuing operations

    (27,027     (3.3 %)      1,368        0.2     (40,708     (1.7 %)      9,748        0.5

Earnings (loss) from discontinued operations, net of income taxes

    465        0.0     1,084        0.2     (3,421     (0.1 %)      (2,222     (0.1 %)