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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended March 31, 2021

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 001-15925

COMMUNITY HEALTH SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

13-3893191

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

 

 

4000 Meridian Boulevard

Franklin, Tennessee

37067

(Zip Code)

(Address of principal executive offices)

 

 

615-465-7000

(Registrant’s telephone number)

 

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $.01 par value

CYH

New York Stock Exchange

 

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

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

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

 

Large accelerated filer  

Accelerated filer 

Smaller reporting company 

 

 

 

Non-accelerated filer 

 

Emerging growth company

 

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

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

As of April 23, 2021, there were outstanding 132,139,544 shares of the Registrant’s Common Stock, $0.01 par value.

 

 


 

Community Health Systems, Inc.

Form 10-Q

For the Three Months Ended March 31, 2021

 

 

 

 

 

 

 

 

Part I.

 

Financial Information

 

Page

 

 

 

 

 

 

 

 

 

Item 1.

 

Financial Statements:

 

 

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of  (Loss) Income – Three Months Ended March 31, 2021 and March 31, 2020 (Unaudited)

 

2

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive (Loss) Income - Three Months Ended March 31, 2021 and March 31, 2020 (Unaudited)

 

3

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets – March 31, 2021 and December 31, 2020 (Unaudited)

 

4

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows – Three Months Ended March 31, 2021 and March 31, 2020 (Unaudited)

 

5

 

 

 

 

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

6

 

 

 

 

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

24

 

 

 

 

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

45

 

 

 

 

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

45

 

 

 

 

 

 

 

Part II.

 

Other Information

 

 

 

 

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

46

 

 

 

 

 

 

 

 

 

Item 1A.

 

Risk Factors

 

48

 

 

 

 

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

48

 

 

 

 

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

48

 

 

 

 

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

48

 

 

 

 

 

 

 

 

 

Item 5.

 

Other Information

 

48

 

 

 

 

 

 

 

 

 

Item 6.

 

Exhibits

 

49

 

 

 

 

 

 

 

Signatures

 

50

 

 


 

 

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF (LOSS) INCOME

(In millions, except share and per share data)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2021

 

 

2020

 

Net operating revenues

 

$

3,013

 

 

$

3,025

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

Salaries and benefits

 

 

1,303

 

 

 

1,408

 

Supplies

 

 

491

 

 

 

498

 

Other operating expenses

 

 

738

 

 

 

737

 

Government and other legal settlements and related costs

 

 

 

 

 

2

 

Lease cost and rent

 

 

78

 

 

 

81

 

Pandemic relief funds

 

 

(82

)

 

 

 

Depreciation and amortization

 

 

138

 

 

 

144

 

Impairment and (gain) loss on sale of businesses, net

 

 

21

 

 

 

45

 

Total operating costs and expenses

 

 

2,687

 

 

 

2,915

 

Income from operations

 

 

326

 

 

 

110

 

Interest expense, net

 

 

231

 

 

 

262

 

Loss from early extinguishment of debt

 

 

71

 

 

 

4

 

Equity in earnings of unconsolidated affiliates

 

 

(10

)

 

 

(7

)

Income (loss) before income taxes

 

 

34

 

 

 

(149

)

Provision for (benefit from) income taxes

 

 

69

 

 

 

(183

)

Net (loss) income

 

 

(35

)

 

 

34

 

Less: Net income attributable to noncontrolling interests

 

 

29

 

 

 

16

 

Net (loss) income attributable to Community Health Systems,

   Inc. stockholders

 

$

(64

)

 

$

18

 

(Loss) earnings per share attributable to Community Health

   Systems, Inc. common stockholders:

 

 

 

 

 

 

 

 

Basic

 

$

(0.51

)

 

$

0.15

 

Diluted

 

$

(0.51

)

 

$

0.15

 

Weighted-average number of shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

125,753,278

 

 

 

114,301,519

 

Diluted

 

 

125,753,278

 

 

 

114,379,331

 

 

See accompanying notes to the condensed consolidated financial statements.


2


 

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(In millions)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2021

 

 

2020

 

Net (loss) income

 

$

(35

)

 

$

34

 

Other comprehensive (loss) income, net of income taxes:

 

 

 

 

 

 

 

 

Net change in fair value of available-for-sale debt securities,

   net of tax

 

 

(3

)

 

 

2

 

Other comprehensive (loss) income

 

 

(3

)

 

 

2

 

Comprehensive (loss) income

 

 

(38

)

 

 

36

 

Less: Comprehensive income attributable to noncontrolling

   interests

 

 

29

 

 

 

16

 

Comprehensive (loss) income attributable to Community Health

   Systems, Inc. stockholders

 

$

(67

)

 

$

20

 

 

See accompanying notes to the condensed consolidated financial statements.


3


 

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except share data)

(Unaudited)

 

 

 

March 31,

2021

 

 

December 31,

2020

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,251

 

 

$

1,676

 

Patient accounts receivable

 

 

1,961

 

 

 

1,927

 

Supplies

 

 

336

 

 

 

335

 

Prepaid income taxes

 

 

50

 

 

 

50

 

Prepaid expenses and taxes

 

 

190

 

 

 

184

 

Other current assets

 

 

316

 

 

 

338

 

Total current assets

 

 

4,104

 

 

 

4,510

 

Property and equipment

 

 

9,396

 

 

 

9,352

 

Less accumulated depreciation and amortization

 

 

(4,091

)

 

 

(4,030

)

Property and equipment, net

 

 

5,305

 

 

 

5,322

 

Goodwill

 

 

4,219

 

 

 

4,219

 

Deferred income taxes

 

 

59

 

 

 

59

 

Other assets, net

 

 

1,905

 

 

 

1,896

 

Total assets

 

$

15,592

 

 

$

16,006

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current maturities of long-term debt

 

$

20

 

 

$

123

 

Current operating lease liabilities

 

 

131

 

 

 

142

 

Accounts payable

 

 

730

 

 

 

783

 

Accrued liabilities:

 

 

 

 

 

 

 

 

Employee compensation

 

 

667

 

 

 

637

 

Accrued interest

 

 

159

 

 

 

150

 

Other

 

 

1,003

 

 

 

980

 

Total current liabilities

 

 

2,710

 

 

 

2,815

 

Long-term debt

 

 

11,897

 

 

 

12,093

 

Deferred income taxes

 

 

96

 

 

 

29

 

Long-term operating lease liabilities

 

 

528

 

 

 

524

 

Other long-term liabilities

 

 

1,475

 

 

 

1,599

 

Total liabilities

 

 

16,706

 

 

 

17,060

 

Redeemable noncontrolling interests in equity of consolidated subsidiaries

 

 

481

 

 

 

484

 

STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

Community Health Systems, Inc. stockholders’ deficit:

 

 

 

 

 

 

 

 

Preferred stock, $.01 par value per share, 100,000,000 shares authorized; none issued

 

 

 

 

 

 

Common stock, $.01 par value per share, 300,000,000 shares authorized;

   132,147,878 shares issued and outstanding at March 31, 2021, and 129,612,117

   shares issued and outstanding at December 31, 2020

 

 

1

 

 

 

1

 

Additional paid-in capital

 

 

2,105

 

 

 

2,094

 

Accumulated other comprehensive loss

 

 

(16

)

 

 

(13

)

Accumulated deficit

 

 

(3,771

)

 

 

(3,707

)

Total Community Health Systems, Inc. stockholders’ deficit

 

 

(1,681

)

 

 

(1,625

)

Noncontrolling interests in equity of consolidated subsidiaries

 

 

86

 

 

 

87

 

Total stockholders’ deficit

 

 

(1,595

)

 

 

(1,538

)

Total liabilities and stockholders’ deficit

 

$

15,592

 

 

$

16,006

 

 

See accompanying notes to the condensed consolidated financial statements.


4


 

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2021

 

 

2020

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(35

)

 

$

34

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

138

 

 

 

144

 

Deferred income taxes

 

 

68

 

 

 

(184

)

Government and other legal settlements and related costs

 

 

 

 

 

2

 

Stock-based compensation expense

 

 

8

 

 

 

2

 

Impairment and (gain) loss on sale of businesses, net

 

 

21

 

 

 

45

 

Loss from early extinguishment of debt

 

 

71

 

 

 

4

 

Other non-cash expenses, net

 

 

(40

)

 

 

49

 

Changes in operating assets and liabilities, net of effects of acquisitions and divestitures:

 

 

 

 

 

 

 

 

Patient accounts receivable

 

 

(34

)

 

 

158

 

Supplies, prepaid expenses and other current assets

 

 

(2

)

 

 

(53

)

Repayment/derecognition of Medicare accelerated payments

 

 

(18

)

 

 

 

Accounts payable, accrued liabilities and income taxes

 

 

(23

)

 

 

(78

)

Other

 

 

(53

)

 

 

(66

)

Net cash provided by operating activities

 

 

101

 

 

 

57

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Acquisitions of facilities and other related businesses

 

 

(4

)

 

 

 

Purchases of property and equipment

 

 

(105

)

 

 

(99

)

Proceeds from disposition of hospitals and other ancillary operations

 

 

6

 

 

 

2

 

Proceeds from sale of property and equipment

 

 

2

 

 

 

 

Purchases of available-for-sale debt securities and equity securities

 

 

(22

)

 

 

(17

)

Proceeds from sales of available-for-sale debt securities and equity securities

 

 

26

 

 

 

21

 

Increase in other investments

 

 

(23

)

 

 

(16

)

Net cash used in investing activities

 

 

(120

)

 

 

(109

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Repurchase of restricted stock shares for payroll tax withholding requirements

 

 

(5

)

 

 

(1

)

Deferred financing costs and other debt-related costs

 

 

(220

)

 

 

(32

)

Redemption of noncontrolling investments in joint ventures

 

 

 

 

 

(2

)

Distributions to noncontrolling investors in joint ventures

 

 

(21

)

 

 

(30

)

Proceeds from sale-lease back

 

 

 

 

 

2

 

Other borrowings

 

 

3

 

 

 

14

 

Issuance of long-term debt

 

 

2,870

 

 

 

1,462

 

Proceeds from ABL Facility

 

 

 

 

 

540

 

Repayments of long-term indebtedness

 

 

(3,033

)

 

 

(1,871

)

Net cash (used in) provided by financing activities

 

 

(406

)

 

 

82

 

Net change in cash and cash equivalents

 

 

(425

)

 

 

30

 

Cash and cash equivalents at beginning of period

 

 

1,676

 

 

 

216

 

Cash and cash equivalents at end of period

 

$

1,251

 

 

$

246

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Interest payments

 

$

(203

)

 

$

(264

)

Income tax (payments) refunds, net

 

$

 

 

$

2

 

 

See accompanying notes to the condensed consolidated financial statements.

 

 

5


 

 

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

1.  BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES 

The unaudited condensed consolidated financial statements of Community Health Systems, Inc. (the “Parent” or “Parent Company”) and its subsidiaries (the “Company”) as of March 31, 2021 and December 31, 2020 and for the three-month periods ended March 31, 2021 and 2020, have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). In the opinion of management, such information contains all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for such periods. All intercompany transactions and balances have been eliminated. The results of operations for the three months ended March 31, 2021, are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2021. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements. Actual results could differ from these estimates under different assumptions or conditions.

Certain information and disclosures normally included in the notes to the consolidated financial statements have been condensed or omitted as permitted by the rules and regulations of the Securities and Exchange Commission (the “SEC”). The Company believes the disclosures are adequate to make the information presented not misleading. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2020, contained in the Company’s Annual Report on Form 10-K filed with the SEC on February 18, 2021 (“2020 Form 10-K”).

Noncontrolling interests in less-than-wholly-owned consolidated subsidiaries of the Parent are presented as a component of total equity on the condensed consolidated balance sheets to distinguish between the interests of the Parent Company and the interests of the noncontrolling owners. Noncontrolling interests that are redeemable or may become redeemable at a fixed or determinable price at the option of the holder or upon the occurrence of an event outside of the control of the Company are presented in mezzanine equity on the condensed consolidated balance sheets.

Substantially all of the Company’s operating costs and expenses are “cost of revenue” items. Operating costs that could be classified as general and administrative by the Company include the Company’s corporate office costs at its Franklin, Tennessee office, which were $60 million and $37 million for the three months ended March 31, 2021 and 2020, respectively. Operating costs during the three months ended March 31, 2021 reflect increased stock compensation and annual cash incentive compensation compared to the three months ended March 31, 2020.

Throughout these notes to the unaudited condensed consolidated financial statements, Community Health Systems, Inc., and its consolidated subsidiaries are referred to on a collective basis as the “Company.” This drafting style is not meant to indicate that the publicly traded Parent or any particular subsidiary of the Parent owns or operates any asset, business, or property. The hospitals, operations and businesses described in this filing are owned and operated by distinct and indirect subsidiaries of Community Health Systems, Inc.

Revenue Recognition.   

Net Operating Revenues

Net operating revenues are recorded at the transaction price estimated by the Company to reflect the total consideration due from patients and third-party payors in exchange for providing goods and services in patient care. These services are considered to be a single performance obligation and have a duration of less than one year. Revenues are recorded as these goods and services are provided. The transaction price, which involves significant estimates, is determined based on the Company’s standard charges for the goods and services provided, with a reduction recorded for price concessions related to third party contractual arrangements as well as patient discounts and other patient price concessions. During both of the three month periods ended March 31, 2021 and 2020, the impact of changes to the inputs used to determine the transaction price was considered immaterial.

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COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - continued

 

Currently, several states utilize supplemental reimbursement programs for the purpose of providing reimbursement to providers that is not specifically tied to an individual’s care, some of which offsets a portion of the cost of providing care to Medicaid and indigent patients. These programs are designed with input from the Centers for Medicare & Medicaid Services (“CMS”) and are funded with a combination of state and federal resources, including, in certain instances, fees or taxes levied on the providers. Under these supplemental programs, the Company recognizes revenue and related expenses in the period in which amounts are estimable and collection is reasonably assured. Reimbursement under these programs is reflected in net operating revenues and fees, taxes or other program-related costs are reflected in other operating expenses.

The Company’s net operating revenues during the three months ended March 31, 2021 and 2020 have been presented in the following table based on an allocation of the estimated transaction price with the patient between the primary patient classification of insurance coverage (in millions):

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2021

 

 

2020

 

Medicare

 

$

693

 

 

$

756

 

Medicaid

 

 

391

 

 

 

407

 

Managed Care and other third-party payors

 

 

1,915

 

 

 

1,832

 

Self-pay

 

 

14

 

 

 

30

 

Total

 

$

3,013

 

 

$

3,025

 

 

Patient Accounts Receivable

Patient accounts receivable are recorded at net realizable value based on certain assumptions determined by each payor. For third-party payors including Medicare, Medicaid, and Managed Care, the net realizable value is based on the estimated contractual reimbursement percentage, which is based on current contract prices or historical paid claims data by payor. For self-pay accounts receivable, which includes patients who are uninsured and the patient responsibility portion for patients with insurance, the net realizable value is determined using estimates of historical collection experience without regard to aging category. These estimates are adjusted for estimated conversions of patient responsibility portions, expected recoveries and any anticipated changes in trends.  

Patient accounts receivable can be impacted by the effectiveness of the Company’s collection efforts. Additionally, significant changes in payor mix, business office operations, economic conditions or trends in federal and state governmental healthcare coverage could affect the net realizable value of accounts receivable. The Company also continually reviews the net realizable value of accounts receivable by monitoring historical cash collections as a percentage of trailing net operating revenues, as well as by analyzing current period net revenue and admissions by payor classification, days revenue outstanding, the composition of self-pay receivables between pure self-pay patients and the patient responsibility portion of third-party insured receivables, the impact of recent acquisitions and dispositions and the impact of current economic and other events.

Final settlements for some payors and programs are subject to adjustment based on administrative review and audit by third parties. As a result of these final settlements, the Company has recorded amounts due to third-party payors of $102 million and $98 million as of March 31, 2021 and December 31, 2020, respectively, and these amounts are included in accrued liabilities-other in the accompanying condensed consolidated balance sheets. Amounts due from third-party payors were $123 million and $136 million as of March 31, 2021 and December 31, 2020, respectively, and are included in other current assets in the accompanying condensed consolidated balance sheets. Substantially all Medicare and Medicaid cost reports are final settled through 2016.

Charity Care

In the ordinary course of business, the Company renders services to patients who are financially unable to pay for hospital care. The Company’s policy is to not pursue collections for such amounts; therefore, the related charges for those patients who are financially unable to pay and that otherwise do not qualify for reimbursement from a governmental program are not reported in net operating revenues, and are thus classified as charity care. The Company determines amounts that qualify for charity care based on the patient’s household income relative to the federal poverty level guidelines, as established by the federal government.  The Company updated its policy during the three months ended June 30, 2020 in a manner which increased the number of accounts qualifying for charity care. This resulted in an increase in charity care services during the three months ended March 31, 2021 compared to the three months ended March 31, 2020.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - continued

 

These charity care services are estimated to be $229 million and $166 million for the three months ended March 31, 2021 and 2020, respectively, representing the value (at the Company’s standard charges) of these charity care services that are excluded from net operating revenues. The estimated cost incurred by the Company to provide these charity care services to patients who are unable to pay was approximately $26 million and $19 million during the three months ended March 31, 2021 and 2020, respectively. The estimated cost of these charity care services was determined using a ratio of cost to gross charges and applying that ratio to the gross charges associated with providing care to charity patients for the period.

Accounting for the Impairment or Disposal of Long-Lived Assets.    During the three months ended March 31, 2021, the Company recorded a net loss on disposal of approximately $21 million, of which (i) approximately $27 million was recorded to adjust the carrying value of long-lived assets at several hospitals that were sold at a sales price below carrying value, (ii) approximately $2 million was recorded related to divestiture related expenses, and (iii) approximately $8 million of gain was recorded related to the disposal of the Company’s majority interest in a surgery center that was sold on January 1, 2021. Approximately $5 million of goodwill was allocated to facilities disposed of or held for sale during the three months ended March 31, 2021. During the three months ended March 31, 2020, the Company recorded a total combined net impairment charge and gain on disposal of approximately $45 million. An impairment charge of approximately $64 million was recorded primarily to adjust the carrying value of long-lived assets at several hospitals where the Company was in discussions with potential buyers for divestiture at a sales price that indicated a fair value below carrying value. The impairment charge was partially offset by a gain of approximately $19 million related to three hospitals sold on January 1, 2020. The Company will continue to evaluate the potential for impairment of the long-lived assets of underperforming hospitals as well as evaluate offers for potential sales. Based on such analysis, additional impairment charges may be recorded in the future.

COVID-19 Pandemic.

COVID-19, a disease caused by a novel strain of coronavirus, materially affected the Company’s results of operations during 2020 and continued to affect the Company’s results of operations during the three months ended March 31, 2021. Federal and state governments have passed legislation, promulgated regulations and taken other administrative actions intended to assist healthcare providers in providing care to COVID-19 and other patients during the public health emergency. Sources of relief include the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), which was enacted on March 27, 2020, the Paycheck Protection Program and Health Care Enhancement Act (the “PPPHCE Act”), which was enacted on April 24, 2020, the Consolidated Appropriations Act, 2021 (the “CAA”), which was enacted on December 27, 2020, and the American Rescue Plan Act of 2021 (the “ARPA”), which was enacted on March 11, 2021. Together, these stimulus laws authorize over $178 billion in funding to be distributed to hospitals and other healthcare providers through the Public Health and Social Services Emergency Fund (the “PHSSEF”). In addition to the relief funding, the CARES Act provided for an expansion of the Medicare Accelerated and Advance Payment Program whereby inpatient acute care hospitals and other eligible providers were able to request accelerated payment of up to 100% of their Medicare payment amount for a six-month period to be repaid through withholding of future Medicare fee-for-service payments. Various state and local programs also exist to provide relief, either independently or through distribution of monies received via the CARES Act and other enacted federal legislation. The Company’s accounting policies for the recognition of these stimulus monies are as follows:

Pandemic Relief Funds

Through March 31, 2021, the Company received approximately $708 million in payments through the PHSSEF and various state and local programs on a cumulative basis since their enactment, of which approximately $705 million was received during the year ended December 31, 2020 and the balance of which was received during the three months ended March 31, 2021. The recognition of amounts received is conditioned upon the provision of care for individuals with possible or actual cases of COVID-19 after January 31, 2020, certification that payment will be used to prevent, prepare for and respond to coronavirus and shall reimburse the recipient only for healthcare-related expenses or lost revenues, as defined by HHS, that are attributable to coronavirus, as well as receipt of the funds. Amounts are recognized as a reduction to operating costs and expenses only to the extent the Company is reasonably assured that underlying conditions have been met.

The Company’s assessment of whether the terms and conditions for amounts received are reasonably assured of having been met is updated each reporting period and considers, among other things, the requirements set forth in the CARES Act and CAA, all applicable frequently asked questions and other interpretive guidance issued by HHS, including the Post-Payment Notice of Reporting Requirements issued on January 15, 2021, and the Company’s expenses incurred attributable to the coronavirus and its results of operations during such period as compared to the Company’s 2020 budget. The HHS guidance, specifically the various Post-Payment Notice of Reporting Requirements notices and frequently asked questions, set forth the allowable methods for quantifying eligible healthcare related expenses and lost revenues. Only healthcare related expenses attributable to coronavirus that another source has not reimbursed and is not obligated to reimburse are eligible to be claimed. The use of funds calculation takes into account expenses

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COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - continued

 

attributable to each respective entity, which for the Company primarily relate to incremental labor and supply costs, as well as lost revenues. During the year ended December 31, 2020, pandemic relief funds of approximately $601 million were recognized as a reduction of operating costs and expenses up to the amount which the Company was reasonably assured that it could or would choose to comply with conditions underlying amounts received. This included the allocation of general fund distributions among subsidiaries according to total unreimbursed losses but not the allocation of targeted fund distributions due to significant uncertainties as to the meaning and interpretation of conditions specific to the allocation of such targeted distribution payments, as previously disclosed. During the three months ended March 31, 2021, the Company’s assessment of uncertainties associated with the allocation of targeted distribution payments was updated for additional facts and circumstances in the period. On the basis of this updated assessment, the Company is reasonably assured that underlying conditions for the allocation of targeted distribution payments can and have been met as of March 31, 2021. During the three months ended March 31, 2021, pandemic relief funds of approximately $82 million were recognized as a reduction of operating costs and expenses on the basis of expenses incurred in the period attributable to the coronavirus, the Company’s results of operations during such period as compared to the Company’s 2020 budget for the same period and the allocation of targeted distribution payments to various subsidiaries as noted above. Amounts recognized are denoted by the caption “pandemic relief funds” within the condensed consolidated statements of (loss) income.

Amounts received through the PHSSEF or state and local programs that have not yet been recognized as a reduction to operating costs and expenses or otherwise have not been refunded to HHS or the various state and local agencies as of March 31, 2021, primarily relate to previously divested entities and certain targeted distribution payments for which satisfaction of the underlying terms and conditions is not reasonably assured of being met as of March 31, 2021. Such amounts are reflected within accrued liabilities-other in the condensed consolidated balance sheet. Such unrecognized amounts may either be returned to HHS in one or more future periods when a procedure for doing so is established by HHS or may be recognized as a reduction in operating costs and expenses in future periods if the underlying conditions for recognition are reasonably assured of having been met. HHS’ interpretation of the underlying terms and conditions of such PHSSEF payments, including auditing and reporting requirements, continues to evolve. Additional guidance or new and amended interpretations of existing guidance on the terms and conditions of such PHSSEF payments may result in changes in the Company’s estimate of amounts for which the terms and conditions are reasonably assured of being met, and any such changes may be material. Additionally, any such changes may result in the Company’s inability to recognize additional PHSSEF payments or may result in the derecognition of amounts previously recognized, which (in any such case) may be material.

Medicare Accelerated Payments

Medicare accelerated payments of approximately $1.2 billion were received by the Company in April 2020. No additional Medicare accelerated payments have been received by the Company since such time, including during the three months ended March 31, 2021. Approximately $18 million and $77 million of amounts previously received were repaid to CMS or assumed by buyers related to hospitals the Company divested during the three months ended March 31, 2021 and year ended December 31, 2020, respectively. Payments under the Medicare Accelerated and Advance Payment Program are advances that must be repaid. Effective October 1, 2020, the program was amended such that providers are required to repay accelerated payments beginning one year after the payment was issued. After such one-year period, Medicare payments owed to providers will be recouped according to the repayment terms. The repayment terms specify that for the first 11 months after repayment begins, repayment will occur through an automatic recoupment of 25% of Medicare payments otherwise owed to the provider. At the end of the eleven-month period, recoupment will increase to 50% for six months. At the end of the six months (or 29 months from the receipt of the initial accelerated payment), Medicare will issue a letter for full repayment of any remaining balance, as applicable. In such event, if payment is not received within 30 days, interest will accrue at the annual percentage rate of four percent (4%) from the date the letter was issued, and will be assessed for each full 30-day period that the balance remains unpaid. As of March 31, 2021, approximately $546 million of Medicare accelerated payments are reflected within accrued liabilities-other in the condensed consolidated balance sheet while the remaining approximately $517 million is included within other long-term liabilities. The Company’s estimate of the current liability is a function of historical cash receipts from Medicare and the repayment terms set forth above. In April 2021, CMS began recouping Medicare accelerated payments previously received by the Company.

2.  ACCOUNTING FOR STOCK-BASED COMPENSATION 

Stock-based compensation awards have been granted under the Community Health Systems, Inc. Amended and Restated 2009 Stock Option and Award Plan, which was amended and restated as of March 20, 2020 and approved by the Company’s stockholders at the annual meeting of stockholders held on May 12, 2020 (the “2009 Plan”). In addition, at the annual meeting of stockholders to be held on May 11, 2021 (the “2021 Annual Meeting”), the Company’s stockholders will be voting on whether or not to approve the further amendment and restatement of the 2009 Plan (the “Amended 2009 Plan”) which was approved by the Board of Directors on March 17, 2021.  

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COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - continued

 

The 2009 Plan provides for the grant of incentive stock options intended to qualify under Section 422 of the IRC and for the grant of stock options which do not so qualify, stock appreciation rights, restricted stock, restricted stock units, performance-based shares or units and other share awards. Persons eligible to receive grants under the 2009 Plan include the Company’s directors, officers, employees and consultants. To date, all options granted under the 2009 Plan have been “nonqualified” stock options for tax purposes. Generally, these options vest in one-third increments on each of the first three anniversaries of the award date and have a 10-year contractual term. As of March 31, 2021, 4,435,134 shares of unissued common stock were reserved for future grants under the 2009 Plan. In addition, if the Amended 2009 Plan is approved by the Company’s stockholders at the 2021 Annual Meeting, 8,000,000 additional shares of unissued common stock will be reserved for future grants under the Amended 2009 Plan.

The exercise price of all options granted under the 2009 Plan is equal to the fair value of the Company’s common stock on the option grant date. 

The following table reflects the impact of total compensation expense related to stock-based equity plans on the reported operating results for the respective periods (in millions):

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2021

 

 

2020

 

Effect on income (loss) before income taxes

 

$

(8

)

 

$

(2

)

Effect on net (loss) income

 

$

(6

)

 

$

(1

)

 

At March 31, 2021, $38 million of unrecognized stock-based compensation expense related to outstanding unvested stock options, restricted stock and restricted stock units (the terms of which are summarized below) was expected to be recognized over a weighted-average period of 29 months. Of that amount, $6 million relates to outstanding unvested stock options expected to be recognized over a weighted-average period of 30 months and $32 million relates to outstanding unvested restricted stock and restricted stock units expected to be recognized over a weighted-average period of 29 months. There were no modifications to awards during the three months ended March 31, 2021 and 2020.

The fair value of stock options was estimated using the Black Scholes option pricing model with the following assumptions and weighted-average fair values during the three months ended March 31, 2021 and 2020:

 

 

 

Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

Expected volatility

 

84.3% - 88.9%

 

 

 

73.5

%

Expected dividends

 

 

 

 

 

 

Expected term

 

3 - 6 years

 

 

6 years

 

Risk-free interest rate

 

0.3% - 0.9%

 

 

 

1.0

%

 

In determining the expected term, the Company examined concentrations of option holdings and historical patterns of option exercises and forfeitures, as well as forward-looking factors, in an effort to determine if there were any discernable employee populations. From this analysis, the Company identified two primary employee populations, one consisting of certain senior executives and the other consisting of substantially all other recipients.

The expected volatility rate was estimated based on historical volatility. In determining expected volatility, the Company also reviewed the market-based implied volatility of actively traded options of its common stock and determined that historical volatility utilized to estimate the expected volatility rate did not differ significantly from the implied volatility.

The expected term computation is based on historical exercise and cancellation patterns and forward-looking factors, where present, for each population identified. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant. The pre-vesting forfeiture rate is based on historical rates and forward-looking factors for each population identified. The Company adjusts the estimated forfeiture rate to its actual experience.

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COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - continued

 

Options outstanding and exercisable under the 2009 Plan as of March 31, 2021, and changes during the three-month period following December 31, 2020, was as follows (in millions, except share and per share data):

 

 

 

 

 

 

 

 

 

 

 

Weighted-

 

Aggregate

 

 

 

 

 

 

 

Weighted-

 

 

Average

 

Intrinsic

 

 

 

 

 

 

 

Average

 

 

Remaining

 

Value as of

 

 

 

 

 

 

 

Exercise

 

 

Contractual

 

March 31,

 

 

 

Shares

 

 

Price

 

 

Term

 

2021

 

Outstanding at December 31, 2020

 

 

1,817,525

 

 

 

8.77

 

 

 

 

 

 

 

Granted

 

 

749,250

 

 

 

8.81

 

 

 

 

 

 

 

Exercised

 

 

(65,165

)

 

 

4.97

 

 

 

 

 

 

 

Forfeited and cancelled

 

 

(173,189

)

 

 

34.66

 

 

 

 

 

 

 

Outstanding at March 31, 2021

 

 

2,328,421

 

 

$

6.96

 

 

8.6 years

 

$

16

 

Exercisable at March 31, 2021

 

 

753,496

 

 

$

7.36

 

 

7.3 years

 

$

6

 

 

The weighted-average grant date fair value of stock options granted during the three months ended March 31, 2021 and 2020 was $6.22 and $3.17, respectively. The aggregate intrinsic value (calculated as the number of in-the-money stock options multiplied by the difference between the Company’s closing stock price on the last trading day of the reporting period ($13.52) and the exercise price of the respective stock options) in the table above represents the amount that would have been received by the option holders had all option holders exercised their options on March 31, 2021. This amount changes based on the market value of the Company’s common stock. The aggregate intrinsic value of options exercised during the three months ended March 31, 2021 was less than $1 million. There were no options exercised during the three months ended March 31, 2020. The aggregate intrinsic value of options vested and expected to vest approximates that of the outstanding options. 

The Company has awarded restricted stock under the 2009 Plan to employees of certain subsidiaries. With respect to time-based vesting restricted stock that has been awarded under the 2009 Plan, the restrictions on these shares have generally lapsed in one-third increments on each of the first three anniversaries of the award date. In addition, certain of the restricted stock awards granted to the Company’s senior executives have contained performance objectives required to be met in addition to any time-based vesting requirements. If the applicable performance objectives are not attained, these awards will be forfeited in their entirety. For performance-based awards, the performance objectives are measured cumulatively over a three-year period. If the applicable target performance objective is met at the end of the three-year period, then the restricted stock award subject to such performance objective will vest in full on the third anniversary of the award date. Additionally, for these performance-based awards, based on the level of achievement for the applicable performance objective within the parameters specified in the award agreement, the number of shares to be issued in connection with the vesting of the award may be adjusted to decrease or increase the number of shares specified in the original award. Notwithstanding the above-mentioned performance objectives and vesting requirements, the restrictions with respect to restricted stock granted under the 2009 Plan may lapse earlier in the event of death, disability or termination of employment by the Company for any reason other than for cause of the holder of the restricted stock, or change in control of the Company. On March 1, 2021, restricted stock awards subject to performance objectives granted on March 1, 2018 vested at 200% of the shares originally granted based on the Company’s cumulative performance compared to objectives for the 2018-2020 performance period. Restricted stock awards subject to performance objectives that have not yet been satisfied are not considered outstanding for purposes of determining earnings per share unless the performance objectives have been satisfied on the basis of results through the end of each respective reporting period.

Restricted stock outstanding under the 2009 Plan as of March 31, 2021, and changes during the three-month period following December 31, 2020, was as follows:

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

Average Grant

 

 

 

Shares

 

 

Date Fair Value

 

Unvested at December 31, 2020

 

 

4,555,735

 

 

$

4.84

 

Granted

 

 

2,829,250

 

 

 

7.97

 

Vested

 

 

(2,264,992

)

 

 

4.70

 

Forfeited

 

 

(37,334

)

 

 

4.94

 

Unvested at March 31, 2021