HCA 10-Q Quarter ended March 31, 2018

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, 2018

Or

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

For the transition period from                    to

Commission file number 1-11239

HCA Healthcare, Inc.

(Exact name of registrant as specified in its charter)

Delaware		27-3865930
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
One Park Plaza Nashville, Tennessee		37203
(Address of principal executive offices)		(Zip Code)

(615) 344-9551

(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  ☐

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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		☐
Non-accelerated filer		☐  (Do not check if a smaller reporting company)		Smaller reporting company		☐
Emerging growth company		☐

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

Class of Common Stock		Outstanding at April 30, 2018
Voting common stock, $.01 par value		349,299,200 shares

HCA HEALTHCARE, INC.

Form 10-Q

March 31, 2018

				Page of Form 10-Q
Part I.		Financial Information
Item 1.		Financial Statements (Unaudited):
		Condensed Consolidated Income Statements — for the quarters ended March 31, 2018 and 2017			2
		Condensed Consolidated Comprehensive Income Statements — for the quarters ended March 31, 2018 and 2017			3
		Condensed Consolidated Balance Sheets — March 31, 2018 and December 31, 2017			4
		Condensed Consolidated Statements of Cash Flows — for the quarters ended March 31, 2018 and 2017			5
		Notes to Condensed Consolidated Financial Statements			6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			25
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			38
Item 4.		Controls and Procedures			38
Part II.		Other Information
Item 1.		Legal Proceedings			38
Item 1A.		Risk Factors			38
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			39
Item 6.		Exhibits			40
Signatures					41

1

HCA HEALTHCARE, INC.

CONDENSED CONSOLIDATED INCOME STATEMENTS

FOR THE QUARTERS ENDED MARCH 31, 2018 AND 2017

Unaudited

(Dollars in millions, except per share amounts)

		2018				2017
Revenues		$	11,423			$	10,623
Salaries and benefits			5,289				4,901
Supplies			1,915				1,797
Other operating expenses			2,110				1,930
Equity in earnings of affiliates			(9	)			(10	)
Depreciation and amortization			553				521
Interest expense			431				419
Gains on sales of facilities			(405	)			(1	)
			9,884				9,557
Income before income taxes			1,539				1,066
Provision for income taxes			257				289
Net income			1,282				777
Net income attributable to noncontrolling interests			138				118
Net income attributable to HCA Healthcare, Inc.		$	1,144			$	659
Per share data:
Basic earnings per share		$	3.26			$	1.78
Diluted earnings per share		$	3.18			$	1.74
Cash dividends declared per share		$	0.35			$	—
Shares used in earnings per share calculations (in millions):
Basic			350.850				370.289
Diluted			359.749				379.980

See accompanying notes.

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HCA HEALTHCARE, INC.

CONDENSED CONSOLIDATED COMPREHENSIVE INCOME STATEMENTS

FOR THE QUARTERS ENDED MARCH 31, 2018 AND 2017

Unaudited

(Dollars in millions)

		2018				2017
Net income		$	1,282			$	777
Other comprehensive income (loss) before taxes:
Foreign currency translation			54				10
Unrealized gains (losses) on available-for-sale securities			(5	)			3
Defined benefit plans			—				—
Pension costs included in salaries and benefits			5				5
			5				5
Change in fair value of derivative financial instruments			35				3
Interest costs included in interest expense			—				7
			35				10
Other comprehensive income before taxes			89				28
Income taxes related to other comprehensive income items			8				10
Other comprehensive income			81				18
Comprehensive income			1,363				795
Comprehensive income attributable to noncontrolling interests			138				118
Comprehensive income attributable to HCA Healthcare, Inc.		$	1,225			$	677

See accompanying notes.

3

HCA HEALTHCARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

Unaudited

(Dollars in millions)

		March 31, 2018				December 31, 2017
ASSETS
Current assets:
Cash and cash equivalents		$	1,086			$	732
Accounts receivable			6,332				6,501
Inventories			1,677				1,573
Other			1,296				1,171
			10,391				9,977
Property and equipment, at cost			40,308				40,084
Accumulated depreciation			(22,184	)			(22,189	)
			18,124				17,895
Investments of insurance subsidiaries			417				418
Investments in and advances to affiliates			231				199
Goodwill and other intangible assets			7,471				7,394
Other			665				710
		$	37,299			$	36,593
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable		$	2,538			$	2,606
Accrued salaries			1,238				1,369
Other accrued expenses			2,005				1,983
Long-term debt due within one year			1,697				200
			7,478				6,158
Long-term debt, less net debt issuance costs of $158 and $164			31,594				32,858
Professional liability risks			1,244				1,198
Income taxes and other liabilities			1,417				1,374
Stockholders’ deficit:
Common stock $0.01 par; authorized 1,800,000,000 shares; outstanding 350,987,500 shares in 2018 and 350,091,600 shares in 2017			4				4
Accumulated other comprehensive loss			(197	)			(278	)
Retained deficit			(6,051	)			(6,532	)
Stockholders’ deficit attributable to HCA Healthcare, Inc.			(6,244	)			(6,806	)
Noncontrolling interests			1,810				1,811
			(4,434	)			(4,995	)
		$	37,299			$	36,593

See accompanying notes.

4

HCA HEALTHCARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE QUARTERS ENDED MARCH 31, 2018 AND 2017

Unaudited

(Dollars in millions)

		2018				2017
Cash flows from operating activities:
Net income		$	1,282			$	777
Adjustments to reconcile net income to net cash provided by operating activities:
Increase (decrease) in cash from operating assets and liabilities:
Accounts receivable			(4	)			168
Inventories and other assets			(218	)			3
Accounts payable and accrued expenses			(246	)			(591	)
Depreciation and amortization			553				521
Income taxes			246				292
Gains on sales of facilities			(405	)			(1	)
Amortization of debt issuance costs			8				8
Share-based compensation			60				73
Other			24				30
Net cash provided by operating activities			1,300				1,280
Cash flows from investing activities:
Purchase of property and equipment			(694	)			(571	)
Acquisition of hospitals and health care entities			(379	)			(90	)
Disposal of hospitals and health care entities			767				4
Change in investments			11				(19	)
Other			(40	)			7
Net cash used in investing activities			(335	)			(669	)
Cash flows from financing activities:
Net change in revolving bank credit facilities			270				160
Repayment of long-term debt			(50	)			(43	)
Distributions to noncontrolling interests			(92	)			(145	)
Payment of debt issuance costs			(2	)			(2	)
Payment of cash dividends			(123	)			—
Repurchases of common stock			(423	)			(424	)
Other			(191	)			(50	)
Net cash used in financing activities			(611	)			(504	)
Change in cash and cash equivalents			354				107
Cash and cash equivalents at beginning of period			732				646
Cash and cash equivalents at end of period		$	1,086			$	753
Interest payments		$	549			$	540
Income tax payments (refunds), net		$	11			$	(3	)

See accompanying notes.

5

HCA HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Reporting Entity

HCA Healthcare, Inc. is a holding company whose affiliates own and operate hospitals and related health care entities. The term “affiliates” includes direct and indirect subsidiaries of HCA Healthcare, Inc. and partnerships and joint ventures in which such subsidiaries are partners. At March 31, 2018, these affiliates owned and operated 178 hospitals, 120 freestanding surgery centers and provided extensive outpatient and ancillary services. HCA Healthcare, Inc.’s facilities are located in 20 states and England. The terms “Company,” “HCA,” “we,” “our” or “us,” as used herein and unless otherwise stated or indicated by context, refer to HCA Healthcare, Inc. and its affiliates. The terms “facilities” or “hospitals” refer to entities owned and operated by affiliates of HCA and the term “employees” refers to employees of affiliates of HCA.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal and recurring nature.

The majority of our expenses are “costs of revenues” items. Costs that could be classified as general and administrative would include our corporate office costs, which were $81 million and $82 million for the quarters ended March 31, 2018 and 2017, respectively. Operating results for the quarter ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. For further information, refer to the consolidated financial statements and footnotes thereto included in our annual report on Form 10-K for the year ended December 31, 2017.

Revenues

In May 2014, the Financial Accounting Standards Board (“FASB”) issued a new standard related to revenue recognition. We adopted the new standard effective January 1, 2018, using the full retrospective method. The adoption of the new standard did not have an impact on our recognition of net revenues for any periods prior to adoption. The most significant impact of adopting the new standard is to the presentation of our consolidated income statements, where we no longer present the “Provision for doubtful accounts” as a separate line item and our “Revenues” are presented net of estimated implicit price concession revenue deductions. We also have eliminated the related presentation of “allowances for doubtful accounts” on our consolidated balance sheets as a result of the adoption of the new standard.

Our revenues generally relate to contracts with patients in which our performance obligations are to provide health care services to the patients. Revenues are recorded during the period our obligations to provide health care services are satisfied. Our performance obligations for inpatient services are generally satisfied over periods that average approximately five days, and revenues are recognized based on charges incurred in relation to total expected charges. Our performance obligations for outpatient services are generally satisfied over a period of less than one day. The contractual relationships with patients, in most cases, also involve a third-party payer (Medicare, Medicaid, managed care health plans and commercial insurance companies, including plans offered through the health insurance exchanges) and the transaction prices for the services provided are dependent upon the terms provided by (Medicare and Medicaid) or negotiated with (managed care health plans and commercial insurance companies) the third-party payers. The payment arrangements with third-party payers for the services

6

HCA HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1 — BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)

Revenues (continued)

we provide to the related patients typically specify payments at amounts less than our standard charges. Medicare generally pays for inpatient and outpatient services at prospectively determined rates based on clinical, diagnostic and other factors. Services provided to patients having Medicaid coverage are generally paid at prospectively determined rates per discharge, per identified service or per covered member. Agreements with commercial insurance carriers, managed care and preferred provider organizations generally provide for payments based upon predetermined rates per diagnosis, per diem rates or discounted fee-for-service rates. Management continually reviews the contractual estimation process to consider and incorporate updates to laws and regulations and the frequent changes in managed care contractual terms resulting from contract renegotiations and renewals.

Our revenues are based upon the estimated amounts we expect to be entitled to receive from patients and third-party payers. Estimates of contractual allowances under managed care and commercial insurance plans are based upon the payment terms specified in the related contractual agreements. Revenues related to uninsured patients and uninsured copayment and deductible amounts for patients who have health care coverage may have discounts applied (uninsured discounts and contractual discounts). We also record estimated implicit price concessions (based primarily on historical collection experience) related to uninsured accounts to record self-pay revenues at the estimated amounts we expect to collect. Our revenues from third-party payers and others (including uninsured patients) for the quarters ended March 31, 2018 and 2017 are summarized in the following table (dollars in millions):

		2018				Ratio				2017				Ratio
Medicare		$	2,524				22.1	%		$	2,361				22.2	%
Managed Medicare			1,399				12.3				1,183				11.1
Medicaid			281				2.5				294				2.8
Managed Medicaid			561				4.9				589				5.5
Managed care and insurers			6,062				53.1				5,623				52.9
International (managed care and insurers)			305				2.7				269				2.5
Other			291				2.4				304				3.0
Revenues		$	11,423				100.0	%		$	10,623				100.0	%

Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. As a result, there is at least a reasonable possibility recorded estimates will change by a material amount. Estimated reimbursement amounts are adjusted in subsequent periods as cost reports are prepared and filed and as final settlements are determined (in relation to certain government programs, primarily Medicare, this is generally referred to as the “cost report” filing and settlement process).

The Emergency Medical Treatment and Labor Act (“EMTALA”) requires any hospital participating in the Medicare program to conduct an appropriate medical screening examination of every person who presents to the hospital’s emergency room for treatment and, if the individual is suffering from an emergency medical condition, to either stabilize the condition or make an appropriate transfer of the individual to a facility able to handle the condition. The obligation to screen and stabilize emergency medical conditions exists regardless of an individual’s ability to pay for treatment. Federal and state laws and regulations require, and our commitment to providing quality patient care encourages, us to provide services to patients who are financially unable to pay for the health care services they receive. Prior to November 2017, patients treated at hospitals for non-elective care, who have income at or below 200% of the federal poverty level, were eligible for charity care. During November

7

HCA HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1 — BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)

Revenues (continued)

2017, we expanded our charity policy to include patients who have income above 200%, but at or below 400%, of the federal poverty level and we will limit the patient responsibility amounts for these patients to a percentage of their annual household income, computed on a sliding scale based upon their annual income and the applicable percentage of the federal poverty level. The federal poverty level is established by the federal government and is based on income and family size. Because we do not pursue collection of amounts determined to qualify as charity care, they are not reported in revenues. We provide discounts to uninsured patients who do not qualify for Medicaid or charity care. In implementing the uninsured discount policy, we may first attempt to provide assistance to uninsured patients to help determine whether they may qualify for Medicaid, other federal or state assistance, or charity care. If an uninsured patient does not qualify for these programs, the uninsured discount is applied.

The collection of outstanding receivables for Medicare, Medicaid, managed care payers, other third-party payers and patients is our primary source of cash and is critical to our operating performance. The primary collection risks relate to uninsured patient accounts, including patient accounts for which the primary insurance carrier has paid the amounts covered by the applicable agreement, but patient responsibility amounts (deductibles and copayments) remain outstanding. Implicit price concessions relate primarily to amounts due directly from patients. Estimated implicit price concessions are recorded for all uninsured accounts, regardless of the aging of those accounts. Accounts are written off when all reasonable internal and external collection efforts have been performed.

The estimates for implicit price concessions are based upon management’s assessment of historical writeoffs and expected net collections, business and economic conditions, trends in federal, state and private employer health care coverage and other collection indicators. Management relies on the results of detailed reviews of historical writeoffs and collections at facilities that represent a majority of our revenues and accounts receivable (the “hindsight analysis”) as a primary source of information in estimating the collectability of our accounts receivable. We perform the hindsight analysis quarterly, utilizing rolling twelve-months accounts receivable collection and writeoff data. We believe our quarterly updates to the estimated implicit price concession amounts at each of our hospital facilities provide reasonable estimates of our revenues and valuations of our accounts receivable. These routine, quarterly changes in estimates have not resulted in material adjustments to the valuations of our accounts receivable or period-to-period comparisons of our results of operations. At March 31, 2018 and 2017, estimated implicit price concessions of $5.312 billion and $4.880 billion had been recorded as reductions to our revenues and accounts receivable balances to enable us to record our revenues and accounts receivable at the estimated amounts we expect to collect.

8

HCA HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1 — BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)

Revenues (continued)

To quantify the total impact of the trends related to uninsured accounts, we believe it is beneficial to view total uncompensated care, which is comprised of charity care, uninsured discounts and implicit price concessions. A summary of the estimated cost of total uncompensated care for the quarters ended March 31, 2018 and 2017 follows (dollars in millions):

		2018				2017
Patient care costs (salaries and benefits, supplies, other operating expenses and depreciation and amortization)		$	9,867			$	9,149
Cost-to-charges ratio (patient care costs as percentage of gross patient charges)			12.4	%			12.8	%
Total uncompensated care		$	6,252			$	5,327
Multiply by the cost-to-charges ratio			12.4	%			12.8	%
Estimated cost of total uncompensated care		$	775			$	682

Total uncompensated care as a percentage of the sum of revenues and total uncompensated care was 35.4% and 33.4% for the quarters ended March 31, 2018 and 2017, respectively. The total uncompensated care amounts include charity care of $1.879 billion and $1.086 billion, and the related estimated costs of charity care were $233 million and $139 million for the quarters ended March 31, 2018 and 2017, respectively.

Recent Pronouncements

In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases (“ASU 2016-02”), which requires lessees to recognize assets and liabilities for most leases. ASU 2016-02 is effective for public business entities for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. We are continuing to evaluate the provisions of ASU 2016-02 (and related developments) to determine how our financial statements will be affected, and we believe the primary effect of adopting the new standard will be to record right-of-use assets and obligations for our leases currently classified as operating leases.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation.

NOTE 2 — ACQUISITIONS AND DISPOSITIONS

During the quarter ended March 31, 2018, we paid $360 million to acquire a hospital facility and $19 million to acquire other nonhospital health care entities. During the quarter ended March 31, 2017, we paid $90 million to acquire other nonhospital health care entities.

During the quarter ended March 31, 2018, we received proceeds of $758 million and recognized a net pretax gain of $376 million related to the sale of the two hospital facilities in our Oklahoma market. During the quarter ended March 31, 2018, we also received proceeds of $9 million and recognized a net pretax gain of $29 million related to sales of real estate and other investments. During the quarter ended March 31, 2017, we received proceeds of $4 million and recognized a net pretax gain of $1 million related to sales of real estate and other investments.

9

HCA HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 3 — INCOME TAXES

Our provision for income taxes for the quarters ended March 31, 2018 and 2017, was $257 million and $289 million, respectively, and the effective tax rates were 18.4% and 30.4%, respectively. The reduction in the effective tax rate was primarily related to the estimated impact of tax rate changes under the 2017 Tax Cuts and Jobs Act (the “Tax Act”). Our provision for income taxes for the quarters ended March 31, 2018 and 2017 included tax benefits of $92 million and $67 million, respectively, related to the settlement of employee equity awards. The Tax Act was enacted on December 22, 2017, and it significantly revised U.S. corporate income taxes, including lowering the federal statutory corporate tax rate from 35% to 21% beginning in 2018. Due to the complexity and uncertainty regarding numerous provisions of the Tax Act, we have not completed our accounting for its effects. However, we have made reasonable estimates and recorded provisional amounts in our financial statements as of March 31, 2018.

As we complete our analysis of the Tax Act, we may make adjustments to the provisional amounts and record additional amounts for those federal, state, and foreign tax assets and liabilities for which we were unable to make reasonable estimates as of March 31, 2018. Any adjustments or additional amounts recorded may materially impact our provision for income taxes and effective tax rate in the periods in which they are made.

Our liability for unrecognized tax benefits was $446 million, including accrued interest of $48 million, as of March 31, 2018 ($439 million and $44 million, respectively, as of December 31, 2017). Unrecognized tax benefits of $152 million ($145 million as of December 31, 2017) would affect the effective rate, if recognized.

We are subject to examination by federal, state and foreign taxing authorities. Depending on the resolution of any federal, state and foreign tax disputes, the completion of examinations by federal, state or foreign taxing authorities, or the expiration of statutes of limitation for specific taxing jurisdictions, we believe it is reasonably possible that our liability for unrecognized tax benefits may significantly increase or decrease within the next 12 months. However, we are currently unable to estimate the range of any possible change.

NOTE 4 — EARNINGS PER SHARE

We compute basic earnings per share using the weighted average number of common shares outstanding. We compute diluted earnings per share using the weighted average number of common shares outstanding, plus the dilutive effect of outstanding equity awards and potential shares, computed using the treasury stock method.

The following table sets forth the computation of basic and diluted earnings per share for the quarters ended March 31, 2018 and 2017 (dollars and shares in millions, except per share amounts):

		2018				2017
Net income attributable to HCA Healthcare, Inc.		$	1,144			$	659
Weighted average common shares outstanding			350.850				370.289
Effect of dilutive incremental shares			8.899				9.691
Shares used for diluted earnings per share			359.749				379.980
Earnings per share:
Basic earnings per share		$	3.26			$	1.78
Diluted earnings per share		$	3.18			$	1.74

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HCA HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 5 — INVESTMENTS OF INSURANCE SUBSIDIARIES

A summary of our insurance subsidiaries’ investments at March 31, 2018 and December 31, 2017 follows (dollars in millions):

		March 31, 2018
		Amortized Cost				Unrealized Amounts								Fair Value
						Gains				Losses
Debt securities		$	251			$	5			$	—			$	256
Money market funds and other			205				—				—				205
		$	456			$	5			$	—				461
Amounts classified as current assets															(44	)
Investment carrying value														$	417

		December 31, 2017
		Amortized Cost				Unrealized Amounts								Fair Value
						Gains				Losses
Debt securities		$	361			$	10			$	—			$	371
Money market funds and other			101				—				—				101
		$	462			$	10			$	—				472
Amounts classified as current assets															(54	)
Investment carrying value														$	418

At March 31, 2018 and December 31, 2017, the investments of our insurance subsidiaries were classified as “available-for-sale.” Changes in temporary unrealized gains and losses are recorded as adjustments to other comprehensive income (loss).

Scheduled maturities of investments in debt securities at March 31, 2018 were as follows (dollars in millions):

		Amortized Cost				Fair Value
Due in one year or less		$	29			$	29
Due after one year through five years			34				35
Due after five years through ten years			166				170
Due after ten years			22				22
		$	251			$	256

The average expected maturity of the investments in debt securities at March 31, 2018 was 4.8 years, compared to the average scheduled maturity of 6.4 years. Expected and scheduled maturities may differ because the issuers of certain securities have the right to call, prepay or otherwise redeem such obligations prior to their scheduled maturity date.

11

HCA HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 6 — FINANCIAL INSTRUMENTS

Interest Rate Swap Agreements

We have entered into interest rate swap agreements to manage our exposure to fluctuations in interest rates. These swap agreements involve the exchange of fixed and variable rate interest payments between two parties based on common notional principal amounts and maturity dates. Pay-fixed interest rate swaps effectively convert variable rate obligations to fixed interest rate obligations. The interest payments under these agreements are settled on a net basis. The net interest payments, based on the notional amounts in these agreements, generally match the timing of the related liabilities for the interest rate swap agreements which have been designated as cash flow hedges. The notional amounts of the swap agreements represent amounts used to calculate the exchange of cash flows and are not our assets or liabilities. Our credit risk related to these agreements is considered low because the swap agreements are with creditworthy financial institutions.

The following table sets forth our interest rate swap agreements, which have been designated as cash flow hedges, at March 31, 2018 (dollars in millions):

		Notional Amount				Maturity Date				Fair Value
Pay-fixed interest rate swaps		$	2,000				December 2021			$	74
Pay-fixed interest rate swaps			500				December 2022				11

During the next 12 months, we estimate $14 million will be reclassified from other comprehensive income (“OCI”) and will reduce interest expense.

Derivatives — Results of Operations

The following table presents the effect of our interest rate swaps on our results of operations for the quarter ended March 31, 2018 (dollars in millions):

Derivatives in Cash Flow Hedging Relationships		Amount of Gain Recognized in OCI on Derivatives, Net of  Tax
Interest rate swaps		$	27

NOTE 7 — ASSETS AND LIABILITIES MEASURED AT FAIR VALUE

Accounting Standards Codification 820, Fair Value Measurements and Disclosures (“ASC 820”) emphasizes fair value is a market-based measurement, and fair value measurements should be determined based on the assumptions market participants would use in pricing assets or liabilities. ASC 820 utilizes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any,

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NOTE 7 — ASSETS AND LIABILITIES MEASURED AT FAIR VALUE (continued)

related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment.

Cash Traded Investments

Our cash traded investments are generally classified within Level 1 or Level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency.

Derivative Financial Instruments

We have entered into interest rate swap agreements to manage our exposure to fluctuations in interest rates. The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. We incorporate credit valuation adjustments to reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements of these instruments.

Although we determined the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties. We assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions, and at March 31, 2018 and December 31, 2017, we determined the credit valuation adjustments were not significant to the overall valuation of our derivatives.

The following tables summarize our assets measured at fair value on a recurring basis as of March 31, 2018 and December 31, 2017, aggregated by the level in the fair value hierarchy within which those measurements fall (dollars in millions):

		March 31, 2018
						Fair Value Measurements Using
		Fair Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Assets:
Investments of insurance subsidiaries:
Debt securities		$	256			$	—			$	256			$	—
Money market funds and other			205				205				—				—
Investments of insurance subsidiaries			461				205				256				—
Less amounts classified as current assets			(44	)			(44	)			—				—
		$	417				161			$	256			$	—
Interest rate swaps (Other)		$	85			$	—			$	85			$	—

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NOTE 7 — ASSETS AND LIABILITIES MEASURED AT FAIR VALUE (continued)

Derivative Financial Instruments (continued)

		December 31, 2017
						Fair Value Measurements Using
		Fair Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Assets:
Investments of insurance subsidiaries:
Debt securities		$	371			$	—			$	371			$	—
Money market funds and other			101				101				—				—
Investments of insurance subsidiaries			472				101				371				—
Less amounts classified as current assets			(54	)			(54	)			—				—
		$	418			$	47			$	371			$	—
Interest rate swaps (Other)		$	50			$	—			$	50			$	—

The estimated fair value of our long-term debt was $34.084 billion and $34.689 billion at March 31, 2018 and December 31, 2017, respectively, compared to carrying amounts, excluding net debt issuance costs, aggregating $33.449 billion and $33.222 billion, respectively. The estimates of fair value are generally based upon the quoted market prices or quoted market prices for similar issues of long-term debt with the same maturities.

NOTE 8 — LONG-TERM DEBT

A summary of long-term debt at March 31, 2018 and December 31, 2017, including related interest rates at March 31, 2018, follows (dollars in millions):

		March 31, 2018				December 31, 2017
Senior secured asset-based revolving credit facility (effective interest rate of 3.3%)		$	3,750			$	3,680
Senior secured revolving credit facility (effective interest rate of 3.4%)			200				—
Senior secured term loan facilities (effective interest rate of 3.5%)			3,873				3,891
Senior secured notes (effective interest rate of 5.4%)			15,300				15,300
Other senior secured debt (effective interest rate of 5.8%)			574				599
Senior secured debt			23,697				23,470
Senior unsecured notes (effective interest rate of 6.4%)			9,752				9,752
Net debt issuance costs			(158	)			(164	)
Total debt (average life of 6.6 years, rates averaging 5.2%)			33,291				33,058
Less amounts due within one year			1,697				200
		$	31,594			$	32,858

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NOTE 9 — CONTINGENCIES

We operate in a highly regulated and litigious industry. As a result, various lawsuits, claims and legal and regulatory proceedings have been and can be expected to be instituted or asserted against us. We are also subject to claims and suits arising in the ordinary course of business, including claims for personal injuries or wrongful restriction of, or interference with, physicians’ staff privileges. In certain of these actions the claimants may seek punitive damages against us which may not be covered by insurance. We are also subject to claims by various taxing authorities for additional taxes and related interest and penalties. The resolution of any such lawsuits, claims or legal and regulatory proceedings could have a material, adverse effect on our results of operations, financial position or liquidity.

Health care companies are subject to numerous investigations by various governmental agencies. Under the federal False Claims Act, private parties have the right to bring qui tam , or “whistleblower,” suits against companies that submit false claims for payments to, or improperly retain overpayments from, the government. Some states have adopted similar state whistleblower and false claims provisions. Certain of our individual facilities have received, and from time to time, other facilities may receive, government inquiries from, and may be subject to investigation by, federal and state agencies. Depending on whether the underlying conduct in these or future inquiries or investigations could be considered systemic, their resolution could have a material, adverse effect on our results of operations, financial position or liquidity.

NOTE 10 — CAPITAL STRUCTURE

The changes in stockholders’ deficit, including changes in stockholders’ deficit attributable to HCA Healthcare, Inc. and changes in equity attributable to noncontrolling interests, are as follows (dollars and shares in millions):

		Equity (Deficit) Attributable to HCA Healthcare, Inc.																				Equity Attributable to Noncontrolling Interests				Total
		Common Stock								Capital in Excess of Par Value				Accumulated Other Comprehensive Loss				Retained Deficit
		Shares				Par Value
Balances at December 31, 2017			350.092			$	4			$	—			$	(278	)		$	(6,532	)		$	1,811			$	(4,995	)
Comprehensive income			—				—				—				81				1,144				138				1,363
Repurchase of common stock			(4.370	)			—				—				—				(423	)			—				(423	)
Dividends and distributions			—				—				—				—				(126	)			(92	)			(218	)
Share-based benefit plans			5.265				—				—				—				(114	)			—				(114	)
Dispositions of entities with noncontrolling interests			—				—				—				—				—				(53	)			(53	)
Other			—				—				—				—				—				6				6
Balances at March 31, 2018			350.987			$	4			$	—			$	(197	)		$	(6,051	)		$	1,810			$	(4,434	)

During the quarter ended March 31, 2018, we repurchased 4.370 million shares of our common stock at an average price of $96.80 per share through market purchases pursuant to the $2.0 billion share repurchase program authorized during October 2017. At March 31, 2018, we had $1.379 billion of repurchase authorization available under the October 2017 authorization. On January 30, 2018, our Board of Directors initiated and declared a quarterly dividend of $0.35 per share on our common stock. Dividends were paid on March 30, 2018 to stockholders of record on March 1, 2018.

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