Earnings Presentation Third Quarter 2017

Transcription

1 Earnings Presentation Third Quarter 2017

2 Forward Looking Statements & Non-GAAP Financial Measures Except as otherwise indicated or unless the context otherwise requires, all references in this presentation to we, our, us, QHC, the Company or Quorum Health refer to Quorum Health Corporation and its subsidiaries. Forward-Looking Statements This presentation may contain certain forward-looking statements within the meaning the safe-harbor provisions of the Private Securities Litigation Reform Act of Forward-looking statements include all statements that do not relate solely to historical or current facts, including, but not limited to, statements regarding projections, future operations, financial results, cash flows, costs and cost management initiatives, capital structure management, growth rates and operational and strategic initiatives, and can also be identified by the use of words such as may, will, projects, expects, anticipates, intends, plans, believes, estimates, continues, thinks, and words or phrases of similar meaning. These forward-looking statements speak only as of the date hereof and are based on our current plans and expectations and are subject to a number of known and unknown risks, uncertainties and other factors, many of which difficult or impossible to predict and may be beyond our control. These risks and uncertainties are described under headings such as Risk Factors in our Annual Report on Form 10-K for the year ended December 31, and other filings with the Securities and Exchange Commission (the "SEC"). As a consequence, current plans, anticipated actions and future financial position and results of operations may differ materially from any future results or performance expressed or implied in any forward-looking statements in today s presentation. Given these uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. We undertake no obligation to revise or update any of these statements, or to make any other forward looking statements, whether as a result of new information, future events or otherwise. Non-GAAP Financial Measures This presentation may include certain financial information defined as non-gaap financial measures by the Securities and Exchange Commission. These measures may be different from non-gaap financial measures used by other companies and should not be considered in isolation or as a substitute for net income, operating income, cash flows from operating, investing or financing activities or any other measure calculated in accordance with U.S. GAAP. A reconciliation of these non-gaap measurements to the nearest comparable GAAP measure is available at the end of this presentation. 1

3 Key Initiatives to Improve Operations Improve Volume in Core Assets Our 24 Continuing Hospitals had increases of 1.3% in admissions and 3.2% in adjusted admissions in Q317. Refine Portfolio / Reduce Debt Seven non-strategic hospitals divested. APA and LOIs represent additional ~$155 million in proceeds. Paid down $44 million of debt. Increase Case Mix Index Six consecutive quarters of increases in same facility Medicare CMI with Q317 at Add Physicians for Expanded and Enhanced Services A 17% increase YTD of commenced physicians. Commenced 27 YTD in priority specialties. Excel in Quality and Patient Experience Consistent improvement in both areas. Reduced Serious Safety Events 93% from April 2013 baseline. Control Costs Achieved initial goals with reduction of ~300 productive FTEs by end of Q317. Enhance Profitability of QHR A 630 bps improvement in margins to 27.7%, Q317 vs. FY16. 2

4 Adjusted EBITDA ($ in millions) Adjusted EBITDA Adjusted EBITDA, Adjusted for 6 Divestitures Adjusted EBITDA, Adjusted for 14 Divestitures $132 $151 $138 $93 $106 $110 $47 $32 8.6% 6.5% 8.1% 6.0% % Margin $ % $37 7.5% 10.1% 7.1% % Margin $ % $35 9.2% 12.0% 9.5% % Margin Q3 Q YTD YTD 2017 Q3 Q YTD YTD 2017 Q3 Q YTD YTD 2017 See Slide 32 for reconciliation of Adjusted EBITDA and Adjusted EBITDA, Adjusted for Divestitures and Potential Divestitures to net income (loss), the most directly comparable U.S. GAAP financial measure. Adjusted EBITDA, Adjusted for 6 Divestitures excludes the effect of the negative or positive EBITDA of hospitals divested during the period from our spin-off through September 30, 2017, which includes Barrow, Sandhills, Cherokee, Trinity, Sunbury, and Lock Haven. Adjusted EBITDA, Adjusted for 14 Divestitures excludes the effect of the negative or positive EBITDA of the 6 divested hospitals previously referenced and 8 additional hospitals we intend to divest. 3

5 Adjusted EBITDA Trended EBITDA Impact of Divestitures (in 000s) Q1 Q2 Q3 Q4 YE Q Q Q EBITDA $ 52,248 $ (227,792) $ 45,729 $ (38,529) $ (168,344) $ 23,146 $ 20,224 $ 23,855 Legal, professional and settlement costs 241 5, ,166 7, ,934 2,050 Impairment of long-lived assets and goodwill - 250,400-41, ,870 3,300 12,900 5,261 Loss/(gain) on sale of hospitals ,150 2,150 (870) (4,321) 79 Transaction costs related to Spin-off 3,735 1, , Post spin headcount reductions ,617 1,617-1, Change in estimate of NRV of AR ,799 22, Adjusted EBITDA $ 56,224 $ 29,232 $ 46,749 $ 30,717 $ 162,922 $ 26,142 $ 34,430 $ 32,268 6 Hospitals Divested - Negative EBITDA 4,685 6,760 7,023 12,106 30,574 2,241 6,652 4,670 Adjusted EBITDA, Adjusted for 6 Divestitures $ 60,909 $ 35,992 $ 53,772 $ 42,823 $ 193,496 $ 28,383 $ 41,082 $ 36,938 8 Potential Divestitures - Negative EBITDA (EBITDA) (5,965) 999 (7,874) 3,642 (9,198) 5,553 (174) (1,761) Adjusted EBITDA, Adjusted for 14 Divestitures $ 54,944 $ 36,991 $ 45,898 $ 46,465 $ 184,298 $ 33,936 $ 40,908 $ 35,177 See Slide 32 for reconciliation of Adjusted EBITDA, Adjusted EBITDA, Adjusted for Divestitures, and Adjusted EBITDA, Adjusted for Potential Divestitures to net income (loss), the most directly comparable U.S. GAAP financial measure. 4

6 Divestiture Program Completed 2 hospitals divested Q4 1 hospital divested Q hospital divested Q hospitals divested Q hospital divested Q Targeting $200+ million of proceeds to reduce secured debt Divestitures Definitive Agreements Letters of Intent Other 1 hospital One expected to be sold in early 2018 (subject to CON approval process) 3 hospitals Expected to be sold in 2018 Continual evaluation of additional hospitals with negative and low-single digit EBITDA margins $46 million received to date $44 million of proceeds used to pay down Term Loan $155 million expected proceeds from current APA and LOI hospitals 5

7 Divestiture Program ($ in millions) Date Sale Proceeds Previously Received Total Paid 12/7/16 Sandhills $7.2 $7.2 Full Proceeds 1/4/17 Barrow $6.6 $6.6 Full Proceeds 4/6/17 Cherokee $4.3 $4.3 Full Proceeds Term Loan Paydown Proceeds Applied 7/10/17 Trinity $15.9 $4.2 Partial Proceeds/Lenders Declined Full 10/6/17 Lock Haven & Sunbury $9.1 $2.3 Partial Proceeds/Lenders Declined Full 10/13/17 $6.0 Previous Proceeds / QHC Option 10/23/17 $9.0 Previous Proceeds / QHC Option 11/6/17 LV Stabler $2.8 $0.9 Partial Proceeds/Lenders Declined Full 11/9/17 $4.0 Previous Proceeds / QHC Option Total $45.8 $44.7 Total Paid Includes $44.4 Principal and $0.3 Interest As of November 9, 2017, the Term Loan balance is $831.2 million. 6

8 Adding Physicians for Local Access to Care Physician Commencements Q YTD YTD Employed Providers 362 Physicians 168 Mid-levels Medicare Case Mix Same Facility +3.6% All-Payor CMI for Q increased 1.8% 7

9 Hospital Group Physicians Employed and Active Status Physicians 24 Continuing Hospitals 1,435 1,669 1,715 1,837 1,842 1,827 1, Q Q Q Q Q Q Q317 Employed Active Staff Active Staff includes employed physicians on active status. 8

10 Capital Expenditures Springfield, Oregon Expansion Project McKenzie-Willamette New patient tower Expanding surgical and ER capacity Completion expected late 2018 Project Costs ($ in millions) $80 $105 $27 $31 YTD YTD Total Costs To-Date Total Estimated Project 9

11 Improving Patient Safety and Quality of Care QHC Executive Quality Dashboard Developed To Facilitate Continuous Improvement Quality Measurement Categories CMS Five Star Rating (publicly reported on Hospital Compare) Mortality (CMS data and risk-adjusted all cause mortality rates) Safety (Serious Safety Event Rate, falls, HAIs, and others) Efficiency of Care (LOS, readmissions, ED flow, and others) Process of Care (inpatient and outpatient core measures) Patient Experience (CMS HCAHPS rating and internal HCAHPS measures) Q217 vs. Q316 Baseline Nursing Excellence (added in 2017) Consistent Reduction of Serious Safety Events (36%) (48%) (58%) (63%) (65%) (70%) (72%) (71%) (73%) (76%) (80%) (86%) (92%) (93%) Q114 Q214 Q314 Q414 Q115 Q215 Q315 Q415 Q116 Q216 Q316 Q416 Q117 Q217 Note: Represents reduction % since establishing baseline in April Source: Health Performance Improvement. 10

12 California Provider Tax Program California Hospital Quality Assurance Fee Program QHC operates two hospitals in California Watsonville and Barstow (in millions) YE 2017 Estimated Gross Program Revenues $ 28.8 Provider Taxes (7.1) (Included in Other Operating Expenses) Total $ 21.6 Q1 Q2 Q3 Q4 YE Actual Gross Program Revenues $ 11.0 $ 11.3 $ 11.5 $ 11.5 $ 45.3 Provider Taxes (2.7) (2.7) (2.7) (2.8) (10.9) (Included in Other Operating Expenses) Total $ 8.3 $ 8.6 $ 8.8 $ 8.7 $ 34.4 Received $30.9 million cash payment for fiscal year program in mid-october Cash collection estimates, including previous programs: $35.0 million in 2018, $19.9 million in 2019, $15.5 million in 2020 See Slides 29 and 30 for more information on the California Hospital Quality Assurance Fee Program. 11

13 Hospital Group Financial Results ( in millions) Consolidated Net Operating Revenues Q116 Q216 Q316 Q416 Q117 Q217 Q317 Continuing - 24 Divestiture - 8 Divested Consolidated Adjusted EBITDA (4.7) (1.0) (6.8) (7.0) (3.6) (2.2) (5.6) (12.1) (6.7) (4.7) Q116 Q216 Q316 Q416 Q117 Q217 Q317 Continuing - 24 Divestiture - 8 Divested The Continuing 24 group includes results of QHR and Corporate. 12

14 Net Patient Revenues (before Bad Debts) ($ in millions) Consolidated Same Facility Continuing 24 $588 $534 $536 $521 $406 $400 Q3 Q Q3 Q Q3 Q Change Q from Q3 Excluding Q3 HQAF Revenues of $11.5 Million Net Patient Revenues for Q do not include any revenues from the California HQAF program due to pending approval by CMS. The third quarter includes $11.5 million from this program. See slide 11 for more information on HQAF revenues. 13

15 Hospital Group Volume Admissions 16,210 15,455 15,489 15,374 16,111 15,682 15,698 Adjusted Admissions 38,765 38,626 38,915 37,962 38,863 39,617 40,161 6,202 5,844 5,706 5,681 5,883 5,516 5,457 13,953 13,467 13,567 13,124 13,470 12,836 12,683 2,580 2,319 2,308 2,145 1,662 1, ,413 7,338 7,196 6,411 4,701 3,271 1,611 Q116 Q216 Q316 Q416 Q117 Q217 Q317 Continuing - 24 Divestiture - 8 Divested ER Visits 122, , , , , , ,147 Q116 Q216 Q316 Q416 Q117 Q217 Q317 Continuing - 24 Divestiture - 8 Divested Surgeries 16,355 16,249 16,653 16,308 16,040 16,903 16,595 7,039 7,706 7,278 7,527 7,048 7,358 6,533 40,933 39,639 40,633 38,182 40,508 38,175 38,190 21,325 21,232 21,558 19,383 13,091 10,698 5,649 3,892 3,939 3,936 3,736 2,860 2,693 1,040 Q116 Q216 Q316 Q416 Q117 Q217 Q317 Continuing - 24 Divestiture - 8 Divested Q116 Q216 Q316 Q416 Q117 Q217 Q317 Continuing - 24 Divestiture - 8 Divested 14

16 Hospital Group Volume Hospital Groups Admissions Q116 Q216 Q316 Q416 Q117 Q217 Q Continuing (0.9%) (3.0%) (1.8%) (3.4%) (0.6%) 1.5% 1.3% 8 - Divestiture (2.5%) (1.9%) (3.9%) (1.6%) (5.1%) (5.6%) (4.4%) 32 - Total (1.3%) (2.7%) (2.3%) (2.9%) (1.9%) (0.5%) (0.2%) Adjusted Admissions Q116 Q216 Q316 Q416 Q117 Q217 Q Continuing 2.6% (1.6%) (2.2%) (2.9%) 0.3% 2.6% 3.2% 8 - Divestiture 0.2% (2.5%) (2.7%) (4.7%) (3.5%) (4.7%) (6.5%) 32 - Total 1.9% (1.8%) (2.2%) (3.5%) (0.7%) 0.7% 0.5% ER Visits Q116 Q216 Q316 Q416 Q117 Q217 Q Continuing 4.3% 0.0% (1.5%) (1.9%) (2.7%) (2.2%) (1.5%) 8 - Divestiture 6.2% (2.4%) (0.1%) (4.2%) (1.0%) (3.7%) (6.0%) 32 - Total 4.7% (0.6%) (1.1%) (2.5%) (2.3%) (2.6%) (2.6%) Surgeries Q116 Q216 Q316 Q416 Q117 Q217 Q Continuing (0.8%) (7.9%) (3.4%) (5.9%) (1.9%) 4.0% (0.3%) 8 - Divestiture (4.3%) 0.3% (3.6%) 1.0% 0.1% (4.5%) (10.2%) 32 - Total (1.9%) (5.4%) (3.4%) (3.8%) (1.3%) 1.3% (3.4%) 15

17 Payor Mix Same Facility Self-pay 10.6% Net Operating Revenues Before Bad Debt Non-patient 4.3% Medicaid 16.8% Non-patient Self-pay 4.3% 9.0% Medicare 26.4% Managed Care & Commercial 39.2% Medicaid 21.1% Q3 Medicare 29.9% Q Managed Care & Commercial 38.4% Non-patient 4.1% Self-pay 9.4% Medicare 27.6% Managed Care & Commercial 40.6% Q Medicaid 18.3% 16

18 Payor Mix - Hospital Group Non-patient Self-pay 5.4% 10.3% Net Operating Revenues Before Bad Debt Medicaid 16.4% Non-patient Self-pay 5.5% 8.6% Medicare 24.7% Managed Care & Commercial 39.9% Medicaid 21.3% Medicare 28.0% Managed Care & Commercial 39.9% 24 Continuing Q3 Self-pay 10.6% Non-patient 4.3% Medicaid 16.8% 24 Continuing Q Medicare 29.9% Managed Care & Commercial 38.4% 32 Same Facility Q

19 Impact of 1 Less Work Day in Quarter Same Facility Variance Volume BPS As Excluding Impact Impact Reported Impact Admissions (0.2%) 0.1% Adjusted Admissions % 0.9% ER Visits (65) (10) (2.6%) (2.7%) Surgeries (3.4%) (1.3%) 18

20 Operating Expenses Same Facility ($ in millions) Salaries and Benefits Supplies Other Operating Expenses $716 $743 $174 $176 $423 $432 $243 $ % 49.9% 47.9% 49.8% % Net Revenues $58 $ % 11.6% 11.6% 11.8% % Net Revenues $135 $ % 28.3% 28.3% 28.9% % Net Revenues Q3 Q317 vs. Q316 Q YTD YTD 2017 Increase of $7.9 million at the 24 continuing hospital group, primarily due to increased physician salaries as the number of employed physicians increased. Decreases in corporate and QHR from headcount reductions created a decrease of $3.0 million. Changes in employee benefit plans. Q3 Q317 vs. Q316 Q YTD YTD 2017 Increase of $1.3 million in implant costs as orthopedic surgeries increased. Q3 Q317 vs. Q316 Q YTD YTD 2017 Decrease in the California provider tax of $2.7 million. Increase of $2.3 million due to New Mexico gross receipts tax refund in. Increase in Medical Specialists fees of $1.0 million. 19

21 Impairment Charges Impairment of Long-lived Assets and Goodwill (In millions) Long-lived Assets Total Property Capitalized Total Goodwill ($ in millions) and Software Medicare Long-lived and Long- Equipment Costs Licenses Assets Goodwill lived Assets Impairment Held for Sale Assets $ 11.2 $ 4.4 $ - $ 15.6 $ 5.0 $ 20.6 Held for Use Assets Step Two Goodwill Impairment FY Impairment Charges $ $ 18.9 $ 2.4 $ $ $ Impairment Q Held for Sale Assets $ 1.1 $ 0.8 $ - $ 1.9 $ 1.4 $ 3.3 Q Held for Sale Assets $ 2.2 $ - $ - $ 2.2 $ - $ 2.2 Held for Use Assets Total Q $ 12.9 $ - $ - $ 12.9 $ - $ 12.9 Q Held for Sale Assets $ 0.3 $ - $ - $ 0.3 $ 0.6 $ 0.9 Held for Use Assets Total Q $ 3.7 $ 0.5 $ 0.5 $ 4.7 $ 0.6 $ 5.3 YTD 2017 Impairment Charges $ 17.7 $ 1.3 $ 0.5 $ 19.5 $ 2.0 $ 21.5 FY and YTD 2017 Impairment Charges $ $ 20.2 $ 2.9 $ $ $ As we continue to divest hospitals over next 12 to 15 months, it is likely we will incur further impairment charges based on the allocation of goodwill to those hospitals. Please see our Form 10-K for December 31,, for more information on FY impairment charges. 20

22 Cash Flow and Capital ($ in millions) Cash Flow from Operations Capital Expenditures Net Working Capital $61 $62 $57 $273 $291 $25 $10 $15 $1 ($0.4) Q3 Q YTD YTD 2017 Includes capital expenditures for software. Q3 Q YTD YTD Decrease in 2017 primarily due to interest payments on indebtedness and increase in DSOs, including Illinois AR. Capex related to Oregon project, equipment purchases, minor hospital renovations, and IT infrastructure. Increase due to decrease in current portion of LT debt from debt pay down, lower current liabilities and QHR legal settlement. 21

23 Impacts on 2017 Cash Flows At September 30, 2017 California HQAF Program We were owed $50 million from 2015 and. State of Illinois We are owed $65 million as it relates to Medicaid and state employee patients, some dating back over two years. Interest payments greater by $28 million due to a full nine months outstanding versus only five months last year. DSOs increased 6 days primarily due to the performance of the ultimate collection efforts and delays in collections for Illinois receivables. Each day represents approximately $5.4 million. The 6 day increase represents approximately $32.4 million. Medical Specialist Fees up over $9 million for the nine months of 2017 versus on a same-facility basis and $22 million for full year compared to Thus, up $31 million over seven quarters. Costs increased approximately $14 million due to higher number of employed physicians. Legal settlement relating to QHR of $4 million on non-indemnified claim prior to spin. 22

24 We Are Addressing Cash Flow Impacts California HQAF Program We received $30.9 million in mid-october. We expect to receive the remaining balance from the 2015 period late first quarter or early second quarter of State of Illinois The state has floated several billion dollars of bonds to fund payments owed. Our Springfield, Illinois office is working diligently to collect outstanding accounts. We expect to have more information on timing of payments in the next days. Interest payments We have and will continue to pay down our Term Loan as proceeds come in from our divestiture program. To date, we have paid down $44 million. Our APA and LOIs represent approximately another $155 million of proceeds. We will continue to divest assets that are not a strategic fit to reduce our debt. DSOs In addition to our efforts in Illinois discussed above, we are supplementing collection efforts with more personnel and other parties to collect on receivables. Our goal is to get ownership of this process so we can improve our collections. Medical Specialist Fees We are reviewing 100% of all contracts in all areas. Employed Physicians We are reviewing productivity and cash flow at all practices. 23

25 Accounts Receivable Days Sales Outstanding (DSO) Analysis DSOs Hospital Non-Self Pay (excluding Illinois Medicaid > 45 days) Hospital Illinois Medicaid > 45 Days Hospital Self Pay Clinics and Other Entities Subtotal Accounts Receivable at CHS Owned Collection Agency Total Days Sales Outstanding Cherokee Medical Center was divested March 31, 2017, and is excluded in that period and going forward. 24

26 Debt Compliance Debt Covenant Ratios Sept. 30, 2017 June 30, 2017 March 31, 2017 Secured Net Leverage Ratio 4.24x 3.85x 3.83x Benchmark 4.75x 4.50x 4.50x Debt Cushion as % of EBITDA 11% 15% 15% Period Benchmarks: Ratio At June 30, x July 1, 2017 to December 31, x January 1, 2019 and Thereafter 4.00x 25

27 Adjusted EBITDA Reconciliation (in millions) 3rd Quarter Sequential Adjusted EBITDA, Adjusted for Divestitures (1) Q316 $53.8 Q217 $41.1 Potential Divestiture Hospital EBITDA Losses - 8 Hospitals (6.1) 1.6 Differences in Corporate Office Costs QHR 2.5 (0.9) Continuing 24 Hospitals: Net Operating Revenues 9.8 (12.4) California Hospital Quality Assurance Fee, Net (8.8) - Supply Costs (1.2) 0.8 Medical Specialist Fees Salaries and Contract Labor at Facilities, Including Clinics (8.0) (0.3) EHR Incentives (0.9) (0.3) Property Taxes and Insurance (4.4) (3.8) Illinois Income Tax Credit (0.2) 7.8 New Mexico Gross Receipts Tax Refund (2.3) - Other Adjusted EBITDA, Adjusted for Divestitures (1) Q317 $36.9 Q317 $36.9 (1) Reflects two hospitals sold in and four hospitals sold in

28 Guidance for 2017 ($ in millions) 2017 Guidance Net Operating Revenues $2,138 $2,055 $2,065 Adjusted EBITDA $163 $140 $150 (1) (2) Adjusted EBITDA, Adjusted for Divestitures $182 $160 $170 Guidance for 2017 gives effect to: California Hospital Quality Assurance Fee expected to be approximately $13 million less than Reduction in electronic health records incentives of approximately $7 million from amounts Includes approximately $11 to $13 million of non-cash stock-based compensation and other non-cash benefits expense and approximately $20 to $25 million of non-cash self-insurance expense No estimate for the effects of any changes to the Affordable Care Act (1) Reflects two hospitals sold in. (2) Reflects hospital divestitures as if divestitures happened on January 1, 2017, including LV Stabler, which was divested October 31,

29 QHC LISTED NYSE

30 California Hospital Quality Assurance Fee According to the California Hospital Association, the HQAF program provides funding for supplemental payments to hospitals that serve Medi-Cal and uninsured patients. Revenues generated from fees assessed on certain general and acute care California hospitals fund the non-federal supplemental payments to California s safety-net hospitals while drawing down federal matching funds that are issued as supplemental payments to hospitals for care of Medi-Cal patients. In November, California voters approved a state constitutional amendment measure that extends indefinitely the statute that imposes fees on California hospitals seeking federal matching funds. The fourth phase of the HQAF program, which began in January 2014 but was approved by CMS in late 2014, expired on December 31,. The California Department of Health Care Services ( DHCS ) submitted the Phase V hospital quality assurance fee program package on March 30, 2017 to the Centers for Medicare & Medicaid Services ( CMS ) for its review and approval of the overall program structure and the fees or provider tax rates for the program period January 1, 2017 through June 30, 2019, and the fee-for-service ( FFS ) inpatient and outpatient upper payments limits ( UPL ) for each of the state fiscal years in the period January 1, 2017 through June 30, CMS has not yet issued the required approvals for the Phase V program. According to the California Hospital Associate, the rate packages will be submitted to CMS for approval on a state fiscal year basis, with tentative submission dates as follows: Under the traditional pass-through methodology, which represents the historical utilization: For the short state fiscal year period January 1, 2017 through June 30, 2017, the package should be submitted by May 15, For the state fiscal year July 1, 2017 through June 30, 2018, the package should be submitted by May 31, For the final state fiscal year in the program period of July 1, 2018 through June 30, 2019, the package should be submitted by October 31, Under the new directed payment methodology, which is subject to current utilization; For the state fiscal year July 1, 2017 through June 30, 2018, the package should be submitted by May 31, For the final state fiscal year in the program period of July 1, 2018 through June 30, 2019, the package should be submitted by October 31, CMS review of managed care rates is expected to take at least six months. DHCS expects traditional pass-through payments to be paid to plans about 60 days after CMS approval, as they are lump sum payments based on historical utilization. The new directed payments will not be paid to the plans until approximately nine months after completions of each state fiscal year, because these lump sum payments will be based on current utilization gathered from the encounter data file. Therefore, DHCS must allow ample run-out time to gather the utilization data and calculate how much each hospital and health plan should receive. 29

31 California Hospital Quality Assurance Fee As with every iteration of the hospital quality assurance fee program, there are numerous new issues to resolve. Since the program s inception, FFS payments have been estimated for each program period using a consistent methodology and trending approach. CMS has approved the FFS payments developed with this methodology and made federal payments to the state of California. Now, CMS requires that DHCS retrospectively reconcile the estimated UPL for a state fiscal year to the actual UPL, beginning with fiscal years and -2017, even though those years have already been approved and paid. The reconciliation process requires states to recalculate the UPL using data that is no older than two years. CMS, in its review of those years, is questioning the approach used to estimate the amounts and the method to trend the amounts forward. This has two major implications. First, CMS will not review the 2017 hospital quality assurance fee program UPL amounts until the reconciliation is resolved. Second, there is a risk of the hospital quality assurance fee program having paid too much in supplemental payments in the last program than what reconciled UPL would support. The amount of overpayment is estimated at $1 billion, but potentially more if CMS further changes the methodology. This means that hospitals may have received more in the prior program than what CMS now says was allowed, and the negative amount would shift to the new program period. There is however, more money owed to hospitals in the prior program that has been approved by CMS but not yet paid to DHCS to hospitals. For state fiscal years and , CMS recently approved an enhanced federal match for FFS expansion population, totaling about $680 million for the years approved. DHCS is retaining these funds to offset the reconciliation of the UPL overpayments to hospitals. In addition to the $680 million that CMS approved, the and fiscal year amounts are expected to potentially result in full coverage of the UPL overpayment. CMS has indicated that going forward it will only approve one fiscal year at a time for the UPL amounts using data that is no older than two years. Of the total payments received for all hospitals, our portion only represents 0.55% of the total payments. We are still estimating that our net impact over the 30 month period will be $55.3 million. While uncertainties regarding the timing and amount of payment under the HQAF program exist, our estimates of cash collections at this time, including previous programs, will be $35.0 million in 2018, $19.9 million in 2019 and $15.5 million in On October 16, 2017, we received $30.9 million in cash for the fiscal year program period. Program Period Covered QHC Net Benefit ($m) Submitted to CMS CMS Approval Months to Approve HQAF I 4/1/09 12/31/10 $10.3m 6/29/ /8/ HQAF II 1/1/11 6/30/11 $4.3m 3/29/ /29/ HQAF III 7/1/11 12/31/13 $31.5m 9/20/2011 6/22/ HQAF IV 1/1/14 12/31/16 $91.1m 3/28/ /23/ HQAF V 1/1/17 6/30/19 $55.3m 3/31/2017 Expected 12/31/

32 Unaudited Supplemental Information Non-GAAP Financial Measures EBITDA is a non-gaap financial measure that consists of net income (loss) before interest, income taxes, depreciation and amortization. Adjusted EBITDA, also a non-gaap financial measure, is EBITDA adjusted to add back the effect of certain legal, professional and settlement costs, impairment of long-lived assets and goodwill, net loss (gain) on sale of hospitals, transaction costs related to the Spin-off, severance costs for post-spin headcount reductions and the change in estimate as of December 31, related to collectability of patient accounts receivable. The Company uses Adjusted EBITDA as a measure of financial performance. Adjusted EBITDA is a key measure used by the Company s management to assess the operating performance of its hospital operations business and to make decisions on the allocation of resources. Additionally, management utilizes Adjusted EBITDA in assessing the Company s consolidated results of operations and in comparing the Company s results of operations between periods. Adjusted EBITDA, Adjusted for Divestitures, also a non-gaap financial measure, is further retrospectively adjusted to exclude the effect of EBITDA of hospitals divested in and Adjusted EBITDA, Adjusted for Potential Divestitures, also a non-gaap financial measure, is further adjusted to exclude the effect of EBITDA of hospitals candidates the Company intends to divest. The Company presents Adjusted EBITDA, Adjusted EBITDA, Adjusted for Divestitures, and Adjusted EBITDA, Adjusted for Potential Divestitures because it believes these measures provide investors and other users of the Company s financial statements with additional information about how the Company s management assesses its results of operations. Adjusted EBITDA, Adjusted EBITDA, Adjusted for Divestitures, and Adjusted EBITDA, Adjusted for Potential Divestitures are not measurements of financial performance under U.S. GAAP. These calculations should not be considered in isolation or as a substitute for net income, operating income or any other measure calculated in accordance with U.S. GAAP. The items excluded from Adjusted EBITDA, Adjusted EBITDA, Adjusted for Divestitures and Adjusted EBITDA, Adjusted for Potential Divestitures are significant components in understanding and evaluating the Company s financial performance. The Company believes such adjustments are appropriate, as the magnitude and frequency of such items can vary significantly and are not related to the assessment of normal operating performance. Additionally, the Company s calculation of Adjusted EBITDA, Adjusted EBITDA, Adjusted for Divestitures and Adjusted EBITDA, Adjusted for Potential Divestitures may not be comparable to similarly titled measures reported by other companies. Our credit agreements use Adjusted EBITDA, Adjusted for Divestitures, subject to further permitted adjustments, for certain financial covenants. Management believes that it is useful to present Adjusted EBITDA and Adjusted EBITDA, Adjusted for Divestitures because these measures, as defined, provide investors with additional information about our ability to incur and service debt and make capital expenditures. 31

33 Unaudited Supplemental Information The following table reconciles Adjusted EBITDA, Adjusted EBITDA, Adjusted for Divestitures and Adjusted EBITDA, Adjusted for Potential Divestitures to net income (loss), the most directly comparable U.S. GAAP financial measure (in thousands): Quarters Ended Year Ended Quarters Ended 3/31/ 6/30/ 9/30/ 12/31/ 12/31/ 3/31/2017 6/30/2017 9/30/2017 Net loss $ (4,687) $ (243,966) $ (6,452) $ (90,092) $ (345,197) $ (27,205) $ (30,575) $ (28,554) Interest expense, net 27,452 29,276 28,028 28, ,440 27,530 30,458 32,216 Provision for (benefit from) income taxes (1,674) (44,565) (4,081) (3,555) (53,875) 701 (245) (542) Depreciation and amortization 31,157 31,463 28,234 26, ,288 22,120 20,586 20,735 EBITDA 52,248 (227,792) 45,729 (38,529) (168,344) 23,146 20,224 23,855 Legal, professional and settlement costs 241 5, ,166 7, ,934 2,050 Impairment of long-lived assets and goodw ill - 250,400-41, ,870 3,300 12,900 5,261 Loss (gain) on sale of hospitals, net ,150 2,150 (870) (4,321) 79 Transaction costs related to the Spin-off 3,735 1, , Post-spin headcount reductions ,617 1,617-1, Estimate for collectability of patient accounts receivable ,799 22, Adjusted EBITDA $ 56,224 $ 29,232 $ 46,749 $ 30,717 $ 162,922 $ 26,142 $ 34,430 $ 32,268 Negative EBITDA of divested hospitals 4,685 6,760 7,023 12,106 30,574 2,241 6,652 4,670 Adjusted EBITDA, Adjusted for Divestitures $ 60,909 $ 35,992 $ 53,772 $ 42,823 $ 193,496 $ 28,383 $ 41,082 $ 36,938 Negative EBITDA (EBITDA) of potential divestitures (5,965) 999 (7,874) 3,642 (9,198) 5,553 (174) (1,761) Adjusted EBITDA, Adjusted for Potential Divestitures $ 54,944 $ 36,991 $ 45,898 $ 46,465 $ 184,298 $ 33,936 $ 40,908 $ 35,177 32