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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.

 

 

 

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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

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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	)

 

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		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

 

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		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

 

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		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.

 

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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.

 

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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

 

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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

 

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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	)

 

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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	)

 

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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	)

 

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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	)

 

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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	)

 

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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	)

 

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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	)

 

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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	)

 

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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

 

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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

 

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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;

 

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•

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.

 

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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.

 

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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	%

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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	%)
Net earnings (loss)			(26,562	)			(3.3	%)			2,452				0.4	%			(44,129	)			(1.8	%)			7,526				0.4	%
Net earnings attributable to non-controlling interests			(2,037	)			(0.2	%)			(4,164	)			(0.6	%)			(7,440	)			(0.3	%)			(9,214	)			(0.4	%)
Net loss attributable to IASIS Healthcare LLC		$	(28,599	)			(3.5	%)		$	(1,712	)			(0.2	%)		$	(51,569	)			(2.1	%)		$	(1,688	)			(0.1	%)

 

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Acute Care Operations

The following table and discussion sets forth, for the periods presented, the results of our acute care operations expressed in dollar terms and as a percentage of total acute care 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
Acute care revenue
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				99.1	%			474,933				99.1	%			1,478,201				99.1	%			1,410,361				99.1	%
Revenue between segments (1)			4,399				0.9	%			4,520				0.9	%			12,857				0.9	%			12,356				0.9	%
Total acute care revenue			493,701				100.0	%			479,453				100.0	%			1,491,058				100.0	%			1,422,717				100.0	%
Costs and expenses
Salaries and benefits			225,057				45.6	%			215,625				45.0	%			686,767				46.1	%			656,791				46.2	%
Supplies			83,614				16.9	%			81,341				17.0	%			251,951				16.9	%			241,230				17.0	%
Rentals and leases			20,282				4.1	%			18,542				3.9	%			61,651				4.1	%			54,899				3.9	%
Other operating expenses			117,805				23.9	%			110,930				23.1	%			360,607				24.2	%			307,868				21.6	%
Medicare and Medicaid EHR incentives			(1,267	)			(0.3	%)			(2,035	)			(0.4	%)			(1,757	)			(0.1	%)			(7,685	)			(0.5	%)
Interest expense, net			32,828				6.6	%			31,905				6.7	%			99,471				6.7	%			96,122				6.8	%
Depreciation and amortization			25,042				5.1	%			25,180				5.3	%			75,777				5.1	%			67,264				4.7	%
Management fees			1,250				0.3	%			1,250				0.3	%			3,750				0.3	%			3,750				0.3	%
Total costs and expenses			504,611				102.2	%			482,738				100.7	%			1,538,217				103.2	%			1,420,239				99.8	%
Earnings (loss) from continuing operations before gain (loss) on disposal of assets and income taxes			(10,910	)			(2.2	%)			(3,285	)			(0.7	%)			(47,159	)			(3.2	%)			2,478				0.2	%
Gain (loss) on disposal of assets, net			248				0.0	%			20				0.0	%			973				0.1	%			(434	)			(0.0	%)
Earnings (loss) from continuing operations before income taxes		$	(10,662	)			(2.2	%)		$	(3,265	)			(0.7	%)		$	(46,186	)			(3.1	%)		$	2,044				0.1	%

 

(1)	Revenue between segments is eliminated in our consolidated results.

 

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Quarters Ended June 30, 2016 and 2015

Total acute care revenue — Total acute care revenue for the quarter ended June 30, 2016, was $493.7 million, an increase of $14.2 million or 3.0% compared to $479.5 million in the same prior year quarter. The increase in total acute care revenue during the quarter ended June 30, 2016, is comprised primarily of an increase in adjusted admissions of 1.6% and an increase in net patient revenue per adjusted admission of 1.1%, both compared to the same prior year quarter.

The provision for bad debts for the quarter ended June 30, 2016, was $94.3 million, an increase of $6.2 million or 7.0% compared to $88.1 million in the same prior year quarter. The increase in the provision for bad debts is due primarily 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.

Net adjustments to estimated third-party payor settlements, also known as prior year contractuals, resulted in an increase in total acute care revenue for the quarters ended June 30, 2016 and 2015, of $0.6 million and $1.9 million, respectively.

Salaries and benefits — Salaries and benefits expense for the quarter ended June 30, 2016, was $225.1 million, or 45.6% of total acute care revenue, compared to $215.6 million, or 45.0% of total acute care revenue in the same prior year quarter. Excluding the impact of stock-based compensation, salaries and benefits expense as a percentage of total acute care revenue was 45.2% for the quarter ended June 30, 2016, compared to 44.7% in the same prior year quarter. Our salaries and benefits expense as a percentage of total acute care revenue for the quarter ended June 30, 2016, has been negatively impacted by additional staffing and labor-related costs associated with our systems improvement efforts at our Houston hospital.

Other operating expenses — Other operating expenses for the quarter ended June 30, 2016, were $117.8 million, or 23.9% of total acute care revenue, compared to $110.9 million, or 23.1% of total acute care revenue in the same prior year quarter. Other operating expenses during the quarter ended June 30, 2016, were impacted by $2.1 million of costs related to our systems improvement efforts at our Houston hospital. Additionally, other operating expenses during the quarter ended June 30, 2016, have been impacted by $1.3 million of costs related to our ongoing clinical and revenue cycle system conversion, as well as an increase in certain legal and advisory related fees.

Nine Months Ended June 30, 2016 and 2015

Total acute care revenue — Total acute care revenue for the nine months ended June 30, 2016, was $1.5 billion, an increase of $0.1 billion or 4.8% compared to $1.4 billion in the same prior year period. The increase in total acute care revenue is comprised primarily of an increase in adjusted admissions of 1.8% and an increase in net patient revenue per adjusted admission of 2.7%, both compared to the same prior year period.

The provision for bad debts for the nine months ended June 30, 2016, was $285.0 million, an increase of $26.8 million or 10.4% compared to $258.2 million in the same prior year period. The increase in the provision for bad debts is due primarily 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.

Net adjustments to estimated third-party payor settlements, also known as prior year contractuals, resulted in an increase in total acute care revenue for the nine months ended June 30, 2016 and 2015, of $2.9 million and $4.0 million, respectively.

Salaries and benefits — Salaries and benefits expense for the nine months ended June 30, 2016, was $686.8 million, or 46.1% of total acute care revenue, compared to $656.8 million, or 46.2% of total acute care revenue in the same prior year period. Excluding the impact of stock-based compensation, salaries and benefits expense as a percentage of total acute care revenue was 45.7% for the nine months ended June 30, 2016, compared to 45.8% in the same prior year period. Our salaries and benefits expense as a percentage of total acute care revenue for the nine months ended June 30, 2016, has been negatively impacted by additional staffing and labor-related costs associated with our systems improvement efforts at our Houston hospital.

 

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Other operating expenses — Other operating expenses for the nine months ended June 30, 2016, were $360.6 million, or 24.2% of total acute care revenue, compared to $307.9 million, or 21.6% of total acute care revenue in the same prior year period. Other operating expenses were adversely impacted during the nine months ended June 30, 2016, by the unfavorable development of a small number of prior year professional liability claims totaling $11.9 million, while the same prior year period included favorable development totaling $4.1 million associated with our professional liability reserves related to prior years. Additionally, other operating expenses during the nine months ended June 30, 2016, were impacted by $6.9 million of costs related to our systems improvement efforts at our Houston hospital, $3.7 million of costs related to our ongoing clinical and revenue cycle system conversion and an increase in certain legal and advisory related fees.

 

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Managed Care Operations

The following table and discussion sets forth, for the periods presented, the results of our managed care operations expressed in dollar terms and as a percentage of premium, service and other 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
Premium, service and other revenue
Premium revenue		$	313,507				96.6	%		$	202,486				95.8	%		$	927,966				96.7	%		$	614,110				95.6	%
Service and other revenue			11,174				3.4	%			8,875				4.2	%			31,951				3.3	%			28,188				4.4	%
Premium, service and other revenue			324,681				100.0	%			211,361				100.0	%			959,917				100.0	%			642,298				100.0	%
Costs and expenses
Salaries and benefits			19,866				6.1	%			13,274				6.3	%			55,283				5.8	%			40,307				6.3	%
Supplies			281				0.1	%			164				0.1	%			908				0.1	%			466				0.1	%
Medical claims (1)			307,729				94.8	%			176,995				83.7	%			850,924				88.6	%			536,862				83.6	%
Rentals and leases			999				0.3	%			716				0.3	%			2,930				0.3	%			2,156				0.3	%
Other operating expenses			18,315				5.6	%			13,465				6.4	%			53,400				5.6	%			43,494				6.8	%
Depreciation and amortization			1,440				0.4	%			1,096				0.5	%			3,955				0.4	%			3,198				0.5	%
Total costs and expenses			348,630				107.4	%			205,710				97.3	%			967,400				100.8	%			626,483				97.5	%
Earnings (loss) before income taxes		$	(23,949	)			(7.4	)%		$	5,651				2.7	%		$	(7,483	)			(0.8	)%		$	15,815				2.5	%

 

(1)	Medical claims paid to our hospitals of $4.4 million and $4.5 million for the quarters ended June 30, 2016 and 2015, respectively, and $12.9 million and $12.4 million for the nine months ended June 30, 2016 and 2015, respectively, are eliminated in our consolidated results.

Quarters Ended June 30, 2016 and 2015

Premium revenue — Premium revenue was $313.5 million for the quarter ended June 30, 2016, an increase of $111.0 million or 54.8%, compared to $202.5 million in the same prior year quarter. The increase in premium revenue was driven by the addition of HCIC, our Northern Arizona joint venture, which became effective on October 1, 2015, as well as membership growth in our other health plan product lines. As of June 30, 2016, total lives served across all health plans increased 70.7%, compared to the same prior year quarter. Excluding HCIC, total health plan lives increased 12.5% as of June 30, 2016, when compared to the same prior year period. Premium revenue was negatively impacted by an unfavorable risk adjustment transfer settlement of $8.9 million related to our Arizona marketplace exchange product, which we have notified Arizona regulators that we will exit effective January 1, 2017.

Service and other revenue — Service and other revenue was $11.2 million for the quarter ended June 30, 2016, compared to $8.9 million in the same prior year quarter.

Salaries and benefits — Salaries and benefits expense for the quarter ended June 30, 2016, was $19.9 million, or 6.1% of premium, service and other revenue, compared to $13.3 million, or 6.3% of premium, service and other revenue in the same prior year quarter.

Medical claims — Medical claims expense was $307.7 million for the quarter ended June 30, 2016, compared to $177.0 million in the same prior year quarter, an increase of $130.7 million. Medical claims expense as a percentage of premium revenue, or medical loss ratio (“MLR”), related to our health plan products was 98.2% for the quarter ended June 30, 2016, compared to 87.4% in the same prior year quarter. Excluding the impact of the Arizona marketplace exchange product, our MLR was 95.9% for the quarter ended June 30, 2016, compared to 87.9% in the same prior year quarter. The remaining increase in MLR was driven primarily by the impact of rising pharmacy costs, particularly related to high-cost specialty drugs, and increased medical costs primarily associated with increased acuity levels for certain higher cost enrollment groups, as well as growth in new members with higher medical costs.

 

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Other operating expenses — Other operating expenses for the quarter ended June 30, 2016, were $18.3 million, or 5.6% of premium, service and other revenue, compared to $13.5 million, or 6.4% of premium, service and other revenue in the same prior year quarter. The decrease in other operating expenses as a percentage of premium, service and other revenue is due primarily to leveraging the growth in membership and premium revenue, along with the implementation of initiatives to reduce costs, including professional and consulting fees.

Nine Months Ended June 30, 2016 and 2015

Premium revenue — Premium revenue was $928.0 million for the nine months ended June 30, 2016, an increase of $313.9 million or 51.1%, compared to $614.1 million in the same prior year period. The increase in premium revenue was driven by the addition of HCIC, our Northern Arizona joint venture, which became effective on October 1, 2015, as well as membership growth in our other health plan product lines. Excluding HCIC, total health plan lives increased 12.5% as of June 30, 2016, when compared to the same prior year period. Premium revenue was negatively impacted by an unfavorable risk adjustment transfer settlement of $8.9 million related to our Arizona marketplace exchange, which we have notified Arizona regulators that we will exit effective January 1, 2017.

Service and other revenue — Service and other revenue was $32.0 million for the nine months ended June 30, 2016, compared to $28.2 million in the same prior year period.

Salaries and benefits — Salaries and benefits expense for the nine months ended June 30, 2016, was $55.3 million, or 5.8% of premium, service and other revenue, compared to $40.3 million, or 6.3% of premium, service and other revenue in the same prior year period.

Medical claims — Medical claims expense was $850.9 million for the nine months ended June 30, 2016, compared to $536.9 million in the same prior year period, an increase of $314.1 million. Medical claims expense as a percentage of premium revenue, or MLR, related to our health plan products was 91.7% for the nine months ended June 30, 2016, compared to 87.4% in the same prior year period. Excluding the impact of the Arizona marketplace exchange product, our MLR was 91.1% for the nine months ended June 30, 2016, compared to 87.6% in the same prior year period. The remaining increase in MLR was driven primarily by the impact of rising pharmacy costs, particularly related to high-cost specialty drugs, and increased medical costs primarily associated with increased acuity levels for certain higher cost enrollment groups, as well as growth in new members with higher medical costs.

Other operating expenses — Other operating expenses for the nine months ended June 30, 2016, were $53.4 million, or 5.6% of premium, service and other revenue, compared to $43.5 million, or 6.8% of premium, service and other revenue in the same prior year period. The decrease in other operating expenses as a percentage of premium, service and other revenue is due primarily to leveraging the growth in membership and premium revenue, along with the implementation of initiatives to reduce costs, including professional and consulting fees.

 

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LIQUIDITY AND CAPITAL RESOURCES

Overview of Cash Flow Activities for the Nine Months Ended June 30, 2016 and 2015

Our cash flows are summarized as follows (in thousands):

 

		Nine Months Ended June 30,
		2016				2015
Cash flows from operating activities		$	73,823			$	60,008
Cash flows from investing activities		$	(102,640	)		$	(76,427	)
Cash flows from financing activities		$	(31,533	)		$	(17,131	)

Operating Activities

Cash flows provided by operating activities were $73.8 million for the nine months ended June 30, 2016, compared to cash flows provided by operating activities of $60.0 million in the same prior year period. Included in operating activities for the nine months ended June 30, 2016, was $4.2 million related to our ongoing conversion to a new integrated clinical and revenue cycle system. The increase in cash flows from operating activities is due primarily to the receipt of Texas supplemental Medicaid reimbursement on a more timely basis than we have experienced in previous periods.

At June 30, 2016, we had $388.1 million in net working capital, compared to $508.7 million at September 30, 2015. Net accounts receivable increased $26.7 million to $344.4 million at June 30, 2016, from $317.7 million at September 30, 2015.

Investing Activities

Cash flows used in investing activities were $102.6 million for the nine months ended June 30, 2016, compared to $76.4 million in the same prior year period, which included $42.6 million in proceeds from the sale of our Nevada operations in January 2015. Included in investing activities for the nine months ended June 30, 2016, was the impact of a final working capital settlement associated with the sale of our Nevada operations that resulted in a cash outflow totaling $5.6 million. Additionally, included in investing activities for the nine months ended June 30, 2016, was $17.0 million related to our ongoing conversion to a new integrated clinical and revenue cycle system.

Financing Activities

Cash flows used in financing activities were $31.5 million for the nine months ended June 30, 2016, compared to $17.1 million in the same prior year period. During the nine months ended June 30, 2016, we made financing obligation payments totaling $7.0 million related to our ongoing conversion to a new integrated clinical and revenue cycle system and $5.2 million in payments associated with the extension of our revolving credit facility in February 2016.

Capital Resources

As of June 30, 2016, we had the following debt arrangements:

 

•

up to $1.232 billion senior secured credit facilities; and

 

•

$849.9 million in 8.375% senior notes due 2019 (the “Senior Notes”).

At June 30, 2016, amounts outstanding under our senior secured credit facilities consisted of $971.8 million in term loans. In addition, we had $83.4 million in letters of credit outstanding under the revolving credit facility. The weighted average interest rate of outstanding borrowings under the senior secured credit facilities was 4.5% for both the quarter and nine months ended June 30, 2016, compared to 4.5% in the same prior year periods.

Amended Term Loan Facility

We are a 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 our 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

 

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

The Amended and Restated Credit Agreement requires us 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

We are a 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 our 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 our 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 us 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 our 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, we are 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.

The Revolving Credit Facility is unconditionally guaranteed by the Guarantors and is required to be guaranteed by all of our future material wholly-owned subsidiaries, subject to certain exceptions. All obligations under the Revolving Credit Agreement are secured, subject to certain exceptions, by substantially all of our assets and the assets of the Guarantors, including (1) a pledge of 100% of our equity interests and the equity interests held by us and the Subsidiary Guarantors, subject to certain exceptions, (2) mortgage liens on all of our 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, we are 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 us under the negative covenants in the Amended and

 

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Restated Credit Agreement are suspended under the Revolving Credit Agreement until such time, if any, as we have 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

We, together with our wholly owned subsidiary IASIS Capital Corporation (together, the “Issuers”) issued an $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 our 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, subject to compliance with certain conditions. 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 our (and our 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 our 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 us and our restricted subsidiaries; and (7) consolidate, merge or sell all or substantially all of our 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 we experience certain kinds of changes of control, we 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, we 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.

Credit Ratings

The table below summarizes our corporate rating, as well as our credit ratings for the senior secured credit facilities and Senior Notes as of the date of this Report:

 

		Moody’s		Standard & Poor’s
Corporate credit		B2		B
Senior secured term loan facility		Ba3		B
Senior Notes		Caa1		CCC+
Outlook		Stable		Stable

Other

We executed interest rate swaps with Citibank, N.A. (“Citibank”) and Barclays Bank PLC (“Barclays”), as counterparties, with notional amounts totaling $350.0 million, of which $50.0 million expired on September 30, 2014 and $100.0 million expired on September 30, 2015. The remaining agreement was effective March 28, 2013 and expires September 30, 2016. Under the remaining agreement, we are required to make quarterly fixed rate payments to our counterparty at an annual rate of 2.2%. The counterparty is obligated to make quarterly floating rate payments to us based on the three-month LIBOR rate, subject to a floor of 1.25%.

Capital Expenditures

We plan to finance our proposed capital expenditures with cash generated from operations, borrowings under our senior secured credit facilities and other capital sources that may become available. We continue to expect our capital expenditures for fiscal 2016 to be between $120.0 million to $125.0 million, approximately $30.0 million in hardware and software costs related to the ongoing conversion to our new clinical and revenue information system.

 

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Liquidity

We rely on cash generated from our operations as our primary source of liquidity, as well as available credit facilities, project and bank financings and the issuance of long-term debt. From time to time, we have also utilized operating lease transactions that are sometimes referred to as off-balance sheet arrangements. We expect that our future funding for working capital needs, capital expenditures, long-term debt repayments and other financing activities will continue to be provided from some or all of these sources. Each of our existing and projected sources of cash is impacted by operational and financial risks that influence the overall amount of cash generated and the capital available to us. For example, cash generated by our business operations may be impacted by, among other things, economic downturns, federal and state budget initiatives, weather-related catastrophes and adverse industry conditions. Our future liquidity will be impacted by our ability to access capital markets, which may be restricted due to our credit ratings, general market conditions, leverage capacity and by existing or future debt agreements. For a further discussion of risks that can impact our liquidity, see Item 1A, “Risk Factors” in our 2015 Form 10-K.

Including available cash at June 30, 2016, we have available liquidity as follows (in millions):

 

Cash and cash equivalents		$	318.2
Available capacity under our senior secured revolving credit facility			124.0
Net available liquidity at June 30, 2016		$	442.2

Net available liquidity assumes 100% participation from all lenders currently committed under our Revolving Credit Facility. In addition to our available liquidity, we expect to generate sufficient operating cash flows in fiscal 2016. We also intend to utilize proceeds from our financing activities as needed.

Based upon our current and anticipated level of operations, we believe we have sufficient liquidity to meet our cash requirements over the short-term (next 12 months) and over the next two years. In evaluating the sufficiency of our liquidity for the short-term, we considered the expected cash flow to be generated by our operations, cash on hand and the available borrowings under our senior secured credit facilities, compared to our anticipated cash requirements for debt service, working capital, capital expenditures and the payment of taxes, as well as funding requirements for long-term liabilities.

We are unable at this time to extend our evaluation of the sufficiency of our liquidity beyond two years. In addition, we cannot assure you that our operating performance will generate sufficient cash flow from operations or that future borrowings will be available under our senior secured credit facilities, or otherwise, to enable us to grow our business, service our indebtedness, or make anticipated capital expenditures and tax payments. For more information, see Item 1A. “Risk Factors” in our 2015 Form 10-K.

We and our subsidiaries, affiliates, IAS and/or significant stockholders of IAS may from time to time seek to retire or purchase our outstanding debt (including publicly issued debt) through cash purchases and/or exchanges, in open market purchases, privately negotiated transactions, by tender offer or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

One element of our business strategy is to selectively pursue acquisitions and strategic alliances in existing and new markets. Any acquisitions or strategic alliances may result in the incurrence, or assumption by us, of additional indebtedness. We continually assess our capital needs and may seek additional financing, including debt or equity as considered necessary to fund capital expenditures and potential acquisitions or for other corporate purposes. Our future operating performance and our ability to service or refinance our debt will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control. For more information, see Item 1A. “Risk Factors” in our 2015 Form 10-K.

Seasonality

The patient volumes and total revenue of our healthcare operations are subject to seasonal variations and generally are greater during the quarter ended March 31 than other quarters. These seasonal variations are caused by a number of factors, including seasonal cycles of illness, climate and weather conditions in our markets, vacation patterns of both patients and physicians and other factors relating to the timing of elective procedures.

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

We are subject to market risk from exposure to changes in interest rates based on our financing, investing and cash management activities. We do not, however, hold or issue financial instruments or derivatives for trading or speculative purposes. At June 30, 2016,

 

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the following components of our senior secured credit facilities bear interest at variable rates at specified margins above either the agent bank’s alternate base rate or the LIBOR rate: (i) a $1.025 billion, seven-year term loan; and (ii) a $207.4 million revolving credit facility. As of June 30, 2016, we had outstanding variable rate debt of $971.8 million.

We have managed our market exposure to changes in interest rates by implementing a comprehensive interest rate hedging strategy that includes converting variable rate debt to fixed rate debt. We have previously executed interest rate swaps for non-trading and non-speculative purposes with Citibank and Barclays, as counterparties, with notional amounts totaling $350.0 million, of which $50.0 million expired on September 30, 2014 and $100.0 million expired on September 30, 2015. The remaining agreement was effective March 28, 2013 and expires September 30, 2016, and has an annual rate of 2.2%. Our interest rate hedging agreement exposes us to credit risk in the event of non-performance by our counterparty, Citibank. However, we do not anticipate non-performance by our counterparty.

Although changes in the alternate base rate or the LIBOR rate would affect the cost of funds borrowed in the future, we believe the effect, if any, of reasonably possible near-term changes in interest rates on our remaining variable rate debt or our consolidated financial position, results of operations or cash flows would not be material. Holding other variables constant, including levels of indebtedness, a 0.125% increase in current interest rates would have no estimated impact on pre-tax earnings and cash flows for the next 12 month period given the 1.25% LIBOR floor that exists in our Term Loan Facility.

We currently believe we have adequate liquidity to fund operations during the near term through the generation of operating cash flows, cash on hand and access to our Revolving Credit Facility. Our ability to borrow funds under our Revolving Credit Facility is subject to, among other things, the financial viability of the participating financial institutions. While we do not anticipate any of our current lenders defaulting on their obligations, we are unable to provide assurance that any particular lender will not default at a future date.

 

Item 4.

Controls and Procedures

Evaluations of Disclosure Controls and Procedures

Under the supervision and with the participation of our management team, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of June 30, 2016. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2016.

Changes in Internal Control Over Financial Reporting

During the quarter ended June 30, 2016, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

None.

 

Item 1A.

Risk Factors

Reference is made to the factors set forth under the caption “Forward-Looking Statements” in Part I, Item 2 of this Form 10-Q and other risk factors disclosed in our 2015 Form 10-K, which are incorporated herein by reference. There have not been any material changes to the risk factors previously disclosed in our 2015 Form 10-K.

 

Item 6.

Exhibits

 

(a)	List of Exhibits:

Exhibits: See the Index to Exhibits at the end of this report, which is incorporated herein by reference.

 

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SIGNATURES

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

 

				IASIS HEALTHCARE LLC
Date: August 15, 2016				By:		/s/ John M. Doyle
						John M. Doyle
						Chief Financial Officer

 

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EXHIBIT INDEX

 

Exhibit No.		Description
31.1		Certification of Principal Executive Officer pursuant to Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Principal Financial Officer pursuant to Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
101		The following financial information from our quarterly report on Form 10-Q for the quarter ended June 30, 2016, filed with the SEC on August 15, 2016, formatted in Extensible Business Reporting Language (XBRL): (i) the condensed consolidated balance sheets at June 30, 2016 and September 30, 2015, (ii) the condensed consolidated statements of operations for the quarters and nine months ended June 30, 2016 and 2015, (iii) the condensed consolidated statements of comprehensive income (loss) for the quarters and nine months ended June 30, 2016 and 2015, (iv) the condensed consolidated statement of equity, (v) the condensed consolidated statements of cash flows for the nine months ended June 30, 2016 and 2015, and (vi) the notes to the condensed consolidated financial statements (tagged as blocks of text). (1)

 

(1)

The XBRL related information in Exhibit 101 to this quarterly report on Form 10-Q shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.

 

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